Fiamma up 4.3% after RHB says undervalued stock should trade higher

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KUALA LUMPUR (Sept 17): Fiamma Holdings Bhd gained as much as 4.27% to become one of the top gainers despite thin volume. The rise came after RHB Research Institute Sdn Bhd said the home appliances distributor-turned-property developer’s shares could have an upside of as much as 56.4%.

At 10:41 am, Fiamma gained four sen or 1.9% to RM2.15 with 477,600 shares changing hands. The stock had earlier risen nine sen to an intraday high of RM2.20.

RHB Research wrote in a report today Fiamma shares could be worth RM3.20 to RM3.30, based on sum-of-parts valuations.

RHB analyst Loong Kok Wen said using Monday’s closing price of RM2.11 and the research house’s projections for Fiamma’s earnings for the financial year ending September 30, 2015 (FY15), the company’s shares had been traded at an “undemanding” 6.2 times price-earnings valuation.

Loong, however, applied a price-earnings ratio 8.8 times for Fiamma’s distribution division, which is 30% higher compared to Khind Holdings Bhd’s 6.8 times. The premium is justified with Fiamma’s ability to achieve higher margins, according to Loong.

Some of Fiamma’s brands carried include Elba, Rubine, Faber, MEC, Tuscani, Haustern and EBAC Home, according to RHB’s note.

"We think Fiamma’s property angle is more interesting and will contribute a new phase of growth to the company.

“We believe the stock is undervalued given its i) resilient growth in the distribution business and earnings kicker from property development, ii) deep landbank value as land parcels were acquired many years ago, hence significant surplus in revised net asset value (RNAV), and  iii) high margins from both the distribution and property development businesses,” she said.

According to her, Fiamma’s property development division could reap gross margins of 30% to 35%, and she expects the trend to continue given the company’s land bank’s low book costs.

“The most significant contributor to RNAV is the 1.4-acre (0.6ha) in Jalan Yap Kwan Seng land, with a land cost of only RM631 per sf. The current market price for land parcels in the vicinity is already going at above RM3,000 per sf,” Loong said.

Loong noted that Fiamma’s property development business contributed about 25% to the group’s revenue.

A bonus share issue could be in the cards for Fiamma. Loong said the corporate exercise would bode well for the company's shares.

“We also think there is a scope for a bonus issue, considering its solid balance sheet and shareholders’ funds.

This could potentially enhance the liquidity of the stock,” she said.