Naim Holdings Bhd
(March 25, RM2.66)
Upgrade to market perform with target price of RM2.82: Naim Holdings’ core net profit for the fourth quarter ended December of financial year 2014 (4QFY14) came in below expectations, mainly due to unexpected losses in its construction division. Management clarified that the losses were largely due to provisions made for the mass rapid transit (MRT) project (RM33.4 million) following potential liquidated and ascertained damage charges coupled with cost overruns. Nonetheless, management reassured that they had been fully provided for and should be normalised in FY15.

Management updated that Naim’s running order book currently stands at RM1.3 billion boosted by new contracts in FY14 worth RM500 million. Year-to-date (YTD), Naim has secured RM100 million worth of new contracts from Tanjung Manis, Sarawak, housing unit jobs. In total, management expects to bag RM200 million to RM300 million in new jobs in FY15 backed by a tender book of RM500 million to RM1 billion. We believe management’s target is achievable as it only has to achieve another RM100 million to RM200 million worth of new jobs for the rest of the year.

To recap, Naim secured RM200.7 million in new property sales in FY14, down by 39.3% from RM330.9 million in FY13. Management clarified that a slowdown in property sales began to be felt last year and the trend is expected to continue into FY15. It said it is holding back new launches in FY15 and focusing on projects launched in FY14. Currently, Naim has about RM543 million in outstanding gross development value (GDV) of projects launched in FY14 with on average 56% taken up. Hence, we estimate it would have about RM335.9 million worth of remaining GDV left for FY15. All in, management expects about RM100 million to RM150 million in new sales this year, 50% lower than our initial forecasts of RM300 million.

Conservatively, due to the cautious mode shown by management, we are lowering our earnings forecasts by 9.3% to 4.8% for FY15/FY16 after: (i) lowering our property sales forecasts to RM150 million from RM300 million previously, and (ii) revising downwards our new contracts assumption for FY15E to RM300 million from RM500 million.

Post-earnings revision, coupled with balance sheet updates, we lower our target price to RM2.82 from RM3.34 previously. We notice that since our last downgrade on the stock dated Feb 27 this year following earnings disappointment, Naim’s share price has fallen by 18.4% and is now trading below our fair value. We believe the negatives are already reflected in the price, but at the same time we reckon that upside is also limited given the challenging outlook. As such we upgrade our recommendation to “market perform” from “underperform” previously. Our target price of RM2.82 implies FY15E price-earnings ratio of 8.1 times, in line with Naim’s peers’ range of eight to 11 times. — Kenanga Research,March 25

This article first appeared in The Edge Financial Daily, on March 26, 2015.