This article first appeared in The Edge Financial Daily, on November 16, 2015.

Only World Group Holdings Bhd
(Nov 13, RM2.77)
Maintain add with a higher target price (TP) of RM4.93: As expected, first quarter of financial year 2016 (1QFY16) earnings per share (EPS) only made up 12% of our full-year estimate as we expect second half of FY16 performance to be much stronger when Komtar opens post rejuvenation.

Revenue rose 11% quarter-on-quarter on the opening of Komtar restaurant 59Sixty, the banquet hall and corporate functions held at the Wet World theme parks. However, net profit was flat due to start-up costs at Komtar, in particular, new staff hires (to undergo training).

On a segmental basis, food service operation revenue rose 23% year-on-year (y-o-y) due to new Komtar contributions. However, amusement operation revenue fell 11% y-o-y due to a negative impact of the goods and services tax on water park visitation numbers. The proposed national minimum wage increase from RM900 to RM1,000 from mid-2016, as announced in Budget 2016, will not affect Only World Group Holdings Bhd (OWG) as all its workers (local and foreign) are being paid more than RM1,400 monthly.

The revitalised Komtar will be opened in two phases. Phase 1 (opening in mid-December) will consist of the express lifts and observation deck, including selected food and beverage (F&B) outlets. Phase 2 (opening in February 2016) will comprise the themed attractions on level 5 — Zodiac Park, I love Penang and Dinosaur Park.

OWG has applied for the Malaysian Industrial Development Authority investment tax allowance (ITA) under the tourism category. We believe that OWG stands a good chance of securing the ITA, which we understand would render Komtar’s earnings tax-free for about RM360 million worth of profits (every RM1 of capital expenditure qualifies for RM2 of net profit tax waiver). We reflect this accordingly in our new EPS forecasts. Our new effective tax rate estimates fall from 25% in FY15 to 12% in FY18.

We trim our FY16 to FY18 EPS by 1% to 2% to account for: i) higher interest costs arising from additional borrowings taken to fund the expanded space at Komtar; ii) higher depreciation costs, also arising from the expanded space at Komtar; and iii) lower effective tax rates from expected lower taxes due to the ITA. Our TP is raised as we roll over into calendar year 2017 (CY17). Our TP is still based on 22.5 times CY17 price-earnings ratio, the F&B sector’s average. OWG continues to be one of our high-conviction small-cap stock picks. — CIMB Research, Nov 12