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This article first appeared in The Edge Financial Daily, on October 29, 2015.

 

SCH_Table_FD_29Oct15_theedgemarketsSCH Group Bhd
(Oct 28, 23 sen)
Downgrade to hold with a lower target price (TP) of 23 sen:
SCH Group Bhd reported a net loss of RM700,000 in the fourth quarter ended Aug 31, 2015 (4QFY15), from a net profit of RM1.9 million a year ago and RM2.1 million in the previous quarter. Similarly, quarterly revenue tumbled over 40% year-on-year (y-o-y) and quarter-on-quarter (q-o-q).

Cumulatively, SCH recorded FY15 core net profit of RM6.5 million, which was down sharply by 29.3% y-o-y (after including one-off listing expenses of RM1.9 million in FY14). The results were significantly below our full-year estimates due to an unexpected sales drop and allowance for slow-moving inventories incurred in the quarter.

SCH’s 4QFY15 top line slumped 42.5% y-o-y and 47% q-o-q, on the back of lower sales achieved for its two main products, quarry mechanicals and engineering (M&E) (-43% y-o-y and -67% q-o-q), as well as quarry industrial products and spare parts (-44% y-o-y and -31% q-o-q).

We believe the poor sales were mainly due to weak demand in relation to the implementation of the goods and services tax (GST) and the depreciation of the ringgit, as the group’s clients — quarry operators — are now required to pay higher prices for imported M&E, industrial products and spare parts. Worse still, the allowance for slow-moving inventories and a forex loss of nearly RM1 million dragged the group into the red.

Similarly, the group achieved lower FY15 net profit, down 29.3% as compared with FY14. Besides a lower revenue, which was down 8.9% y-o-y, the group also recorded higher administrative, selling and distribution and other expenses (+13.8% y-o-y), due to one-off legal expenses for loan facilities and the implementation of the GST incurred during the first nine months of FY15, the allowance for slow-moving inventories, and realised and unrealised forex losses. The immediate outlook remains challenging.

While we reckon that the higher expenses incurred for the year could be one-off items, SCH could face an uphill task to boost its sales in the immediate term amid the current challenging economic outlook.

We opine that the group will continue to chalk up unimpressive sales in the coming quarters, as affected by the implementation of the GST, high import costs faced by its local clients as a result of the weakening ringgit, and the prevailing cautious sentiment, which could hold back quarry operators’ capital expenditure spending.

The group declared a 0.5 sen per share final net dividend. This brings the total dividend per share for FY15 to 1.5 sen (a one sen interim dividend was declared and paid earlier this year), equivalent to a yield of 6.3%. However, this is lower than our earlier projection of two sen per share, which we believe is due to the shrinking earnings in 4QFY15.

We slash our net earnings forecast for FY16F (forecast) by a whopping 32% from RM10.9 million to RM7.4 million, after lowering our sales assumption and profit before tax margin. We also take this opportunity to introduce our FY17F net earnings forecast of RM8.8 million. Still, we envisage the group’s FY16F and FY17F core net earnings to grow positively by 13.2% and 20.2% respectively.

We downgrade our call on SCH to “hold” from “buy”, with a lower TP of 23 sen (previously 34 sen) following our earnings cut. Our revised TP is based on an unchanged 13 times FY16F price-earnings ratio, which is in an up-cycle for a small-cap stock, in view of the anticipated booming construction and quarry industries. — JF Apex Securities Bhd, Oct 28

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