This article first appeared in The Edge Financial Daily, on May 18, 2016.

Signature International Bhd
(May 17, RM1.02)
Maintain add with an unchanged target price (TP) of RM2.02: The nine-month period ended March 31, 2016 (9MFY16) revenue was down 29% year-on-year (y-o-y) as orders could not sustain financial year ended June 30, 2015 (FY15) sales. 9MFY16 net profit was down a disappointing 52% y-o-y, mainly due to lower economies of scale as revenue declined. No interim dividend per share (DPS) was declared, in line with market and our expectations. However, we see signs of a recovery in FY17.

We cut FY16 earnings per share (EPS) by 17% to reflect its current weak order book. However, we maintain FY17/FY18 EPS, as we believe the worse is over for Signature. We think that 2017 should be a much better year for the company.

Group outstanding order book is around RM150 million and the company is bidding for some major projects. These include Country Garden Holdings Co Ltd’s Johor project (contract worth RM150 million) and the UK’s Battersea project Phases 2 and 3 (projects worth RM200 million). The company stands a good chance of securing both of these jobs over the next few months.

Signature announced that it just received RM80 million in cash from the sale of its 3.3 acres (1.33ha) of Kota Damansara industrial land to the Selangor government. The company still has 4.2 acres in Kota Damansara and will continue to maintain its operations and headquarters there. From the land sale, we believe the company could potentially offer up to RM30 million to RM40 million in special dividends, equivalent to 12.5 sen to 16.7 sen DPS to its shareholders, over the next few months. As at end of March, Signature was in a RM1 million net cash position.

Two years ago, Signature proposed to acquire 39 acres of industrial land in Bandar Baru Enstek, Seremban, which is close to the Kuala Lumpur International Airport, for RM50.8 million or RM30 per sq ft. The company could fund this land acquisition from the sale of the Kota Damansara land. We understand that the market value of the land doubled in the past year and management could either sell this land bank or develop it on its own. Funds from the land sale would be more than enough to buy this land. We have not included any potential earnings from this land.

We cut our FY16 EPS forecast, but maintain FY17/FY18 EPS. Our TP is unchanged at a 30% discount to our sum-of-parts valuation; the discount is to reflect its small-cap status. The stock remains an “add” and rerating catalysts could include securing major projects and potential special dividends in the near future. Accumulate on any price weakness in the stock. — CIMB Research, May 16