This article first appeared in The Edge Financial Daily on February 22, 2018

Fima Corp Bhd
(Feb 21, RM2.04)
Maintain buy with an unchanged target price (TP) of RM2.60: Nine months of financial year 2018 (9MFY18) core net income (CNI) is below expectations. Fima Corp Bhd’s 9MFY18 CNI of RM32.2 million is below expectations as it makes up 57% of our full-year earnings estimate. CNI excludes RM1 million provision and other one-off items. As expected, no dividend was announced in the third quarter of the financial year.

Weaker-than-expected earnings in the “production of security and confidential documents” (PSCD) division: Note that the PSCD division’s profit before tax (PBT) declined by 60% year-on-year (y-o-y) to RM19.2 million as its revenue decreased 44% y-o-y to RM108.9 million (against our previous assumption of a 15% decline y-o-y for financial year 2018 [FY18]). The decline in revenue was mainly caused by expiration of the contract to supply certain travel documents.

The plantation division’s PBT surged by 95% y-o-y to RM32.5 million as its fresh fruit bunch (FFB) volume surged by 39% to 133,966 tonnes. This has more than offset the lower crude palm oil price of RM2,292 per tonne (down 9% y-o-y). The strong FFB volume growth was caused by the recovery from the El Nino which affected the production of FFB in the past.

Separately, Fima announced the completion of its acquisition of Java Plantations Sdn Bhd which holds an 80% stake in 1,331ha of leasehold plantation land in Jeli, Kelantan. We are long-term positive on the news as Fima’s total planted land bank will be increased by 18% and it is earnings-accretive from FY20 onwards. There is synergy to be realised as this land bank is located near Fima’s existing plantation estates in Gua Musang and Kuala Krai, Kelantan.

We have revised down our revenue and earnings assumptions for the PSCD division. As a result, our FY18 CNI forecast is cut by 29% to RM40.5 million. Our FY19 CNI forecast is lowered by 21% to RM50.3 million.

As we roll forward our valuation to FY19, our TP is based on a sum-of-parts valuation. Although we have reduced our earnings estimates, our TP is unchanged as we have rolled forward our valuation to FY19. We believe that Fima’s earnings growth should resume from FY19 onwards as it will be dominated by the plantation division. Its valuation is attractive at 9.6 times forward price-earnings ratio for FY19 and a high dividend yield of 6.3%. Its balance sheet is strong with a net cash position. We maintain “buy” with an unchanged TP of RM2.60. — MIDF Research, Feb 21