Signature International Bhd
(Sept 21, RM2.25)
Maintain buy with an unchanged target price (TP) of RM3.65: Signature’s share price retreated from RM2.36 to RM1.83 after the company released its fourth quarter financial year 2015 (4QFY15) results. Apparently, investors have emphasised the quarter-on-quarter (q-o-q) decline in 4QFY15 profit much more than the record profit the company made in FY15.

To recap, Signature’s quarterly core profit slid from the record level of RM13.4 million in 3QFY15 to RM2 million in 4QFY15, representing a decline of 84.9% q-o-q. On a full-year basis, the company’s core profit grew at 68.8% to the record level of RM33.1 million in FY15.

In our recent meeting with the company’s management, we understand the q-o-q drop in 4QFY15 earnings was due to a lower contribution from project revenue, as most of the kitchen works and billings were recognised in 3QFY15, which explained the strong 3QFY15 earnings, while other works in the order book have not reached the significant billing stage.

According to the management, looking at the current jobs progress flow of its RM160 million order book, Signature’s FY16 earnings would tend to be back-end loaded. Note that a typical kitchen project for housing development will usually be completed within six to nine months. As such, we project 80% of the current order book to be recognised in FY16 and the bulk of it will come in the second half of FY16.

Assuming Signature will achieve RM128 million or 80% of its order book in FY16, the revenue will be significantly lower than the RM190 million project revenue the company achieved in FY15. However, we are not overtly concerned as the company has a sizeable tender book of RM400 million, and we expect the company to chalk up RM235 million worth of kitchen works in FY16. Having said that, we expect the kitchen contract for the Country Garden project in Danga Bay, Iskandar, Johor to be awarded soon as the project is expected to be completed in 2016.

As far as retail sales are concerned, the company has managed to close several deals from developers in selling kitchen vouchers. According to the management, some developers had purchased kitchen vouchers worth over millions to give to its customers who purchased those unsold units from them. As such, future retail sales are expected to remain buoyant due to these vouchers sold.

According to the management, the company has sold RM15 million worth of vouchers to developers. Also, those customers who claim their kitchen sets with vouchers would usually end up paying some extra money more than the value of the vouchers for better designs and other accessories. In other words, the actual value that Signature could realise is higher than the face value of the vouchers.

We maintain Signature’s TP at RM3.65 per share, based on unchanged 10 times FY16 earnings per share.

We continue to like Signature given the favourable change in the property trend, such as the increase in upmarket housing supply, which bodes well for Signature as a premier kitchen player in the market. We maintain “buy” on Signature. — TA Securities, Sept 21

This article first appeared in The Edge Financial Daily, on September 22, 2015.