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Naim Holdings Bhd
(Dec 1, RM3.15)
Maintain buy with adjusted target price (TP) of RM4.86:
Naim’s nine months of financial year 2014 (9MFY14) earnings outpaced expectations. Despite the smaller revenue than our estimate, Naim reported a strong 47.8% year-on-year (y-o-y) increase in earnings of RM102.2 million for 9MFY14. The jump in net profit was primarily boosted by the earnings of its associate, Dayang Enterprise Holdings Bhd (DEHB). Thus, after stripping a one-off disposal gain of RM61.7 million, cumulative earnings have outpaced ours and consensus expectations, accounting for 97% and 94% for full FY14 net profit forecast respectively.

For third quarter of FY14 (3QFY14), the property segment achieved a lower revenue of RM50.6 million (-15.1% y-o-y and -12.2% q-o-q) due to smaller contributions from completed projects whose development works have reached tail end. Nevertheless, the segment showed an improvement in its profit of RM19.9 million (+14% y-o-y and more than 100% q-o-q) with an expanded margin of 39.2% (+10 percentage points [ppts] y-o-y and +23.8 ppts q-o-q). The increase was due to certain high-margin existing projects being substantially completed during the period. With the upcoming goods and services tax of 6% and increase in number of property players in Kuching and Bintulu, we foresee challenging times ahead for its property sales in these two areas.

In 3QFY14, the segment’s earnings before interest and tax continued to record stronger numbers of RM8.9 million (>100% y-o-y and 49% q-o-q). The inspiring performance was due to improvement in the progress of its ongoing projects, particularly the construction of elevated stations for MRT Package S2 and S4 as well as Bukut road project, which has also helped the segment to return to the black in 9MFY14 from a loss of RM13.2 million in 9MFY13.

DEHB’s 3QFY14 earnings rose by 81.5% y-o-y to RM58 million, the strongest ever recorded. This was premised on strong revenue growth of 37.8% y-o-y to RM236.3 million. Generally, the stellar earnings were a result of higher value of work orders received and performed in the current quarter for new hook-up and commissioning contracts that were awarded in May 2013.

We remain optimistic about its earnings growth prospects backed by the following:

(i) Property sales to be supported by its property township, Bandar Baru Permyjaya which will cushion the challenges of its sales in Kuching and Bintulu. Property demand for Bandar Baru Permyjaya is likely to be sustained on the back of massive industrial jobs in Miri and Score projects as well as strategic accessibility to Brunei

(ii) Adding to its construction backlog of RM1.5 billion, we view Naim as the key beneficiary of Score projects, infrastructure works for impending implementation of hydroelectric dam projects in Sarawak and MRT line 2 packages.

(iii) DEHB’s order book is currently approximately RM4.5 billion which may last through to 2018 with tender book estimated at RM1 billion. Based on its tender book profile, the company is already set on preparing for the next stage of growth into the engineering, procurement, construction and commissioning segments of the oil and gas industry.

We have revised upwards our FY14 and FY15 earnings forecast by 24% and 12% respectively. We reaffirm our “buy” recommendation on Naim Holdings with a higher TP of RM4.86 to reflect the potential higher contribution from both earnings and valuation of DEHB. Naim Holdings is currently trading at a discount to its fully sum-of-parts RM6.95 per share. Applying the same 30% discount given its similar market cap size to Hock Seng Lee, we derive a value of RM4.86 per share, which implies an undemanding FY15 price earnings ratio of 8 times. — MIDF Research, Dec 1

Naim-02DEc2014_theedgemarkets

 

This article first appeared in The Edge Financial Daily, on December 2, 2014.

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