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This article first appeared in The Edge Financial Daily on October 13, 2017

Signature International Bhd
(Oct 12, 84 sen)
Maintain hold with an unchanged target price (TP) of 91 sen:
On Wednesday, Signature International Bhd announced that the Employees Provident Fund (EPF) has become a major shareholder of the company with 11.6 million shares or a 5.07% stake. We believe EPF’s stake in Signature was acquired on its own and not via external fund managers.

This is a positive surprise to us and we see this as a long-term positive for the company. We believe EPF’s interest in Signature is driven by the former’s development of the major 2,330-acre (942.92ha) Kwasa Damansara (KD) project and it sees potential synergies with Signature. We believe Signature stands a good chance in being involved in the KD project in the near future.

Other than kitchen works, where Signature is the country’s largest player, the company is also involved in the distribution of white goods (air conditioners, refrigerators and stoves) and the manufacturing of aluminium and glass products. In addition, Signature has an internal interior outfit division. Signature could offer these services and more to EPF’s property development projects.

Signature’s current outstanding order book is strong at around RM280 million, compared with only RM200 million a few months ago. Many of its projects that were previously delayed are now being completed. This should ensure strong revenue growth for the company in the financial year ending June 30, 2018.

However, a strong order book may not translate into high profits. Rubber and rubber wood prices have remained stubbornly high over the past few months, and this could eat into Signature’s profit margins as most of its order book jobs were finalised before the spike in rubber wood prices at the end of the previous year.

We believe the company is also targeting to grow its revenue via the export market. To minimise project risk overseas, Signature only supplies raw materials to its export customers, who then carry out the installation on their own. Although the government has banned the export of rubberwood since July 1, this does not affect Signature as its products have been value-added and can be exported.

Signature’s share price has been trading sideways since 2015 between the 80 sen and RM1 levels. Unless its share price breaks out above the RM1 level, we believe the sideways trend will be sustained.

We maintain our earnings per share forecasts and TP, based on an unchanged 40% discount to sum-of-parts. The stock remains a “hold”, but we like Signature’s long-term potential with EPF as a major shareholder. Upside risks include strong export sales. Downside risks are continued weak domestic sales and high raw material costs. — CIMB Research, Oct 12


 

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