Fiamma Holdings Bhd (Fiamma) reported a 157% YoY increase in headline net profit to RM18.4m for 2QFY23 mainly due to fair value gain in quoted investment securities. However, after stripping out non-operating items, core net profit for the quarter was down 11.9% YoY due to weaker gross profit margin and higher operating expenses. Results are below our expectations, accounting for only  31.4% of our full-year estimates. We cut our earnings forecast by 20% as we anticipate softer domestic demand for white goods amid consumer sentiment weakened by tighter monetary conditions. Nevertheless, we believe the Group’s continuous focus on brand-building and promotional activities should be able to help cushion the impact of weaker consumer sentiment. We maintain our Neutral call on Fiamma though with a lower sum-of-parts derived target price of RM1.00 (previously RM1.13) following the earnings cut.

• 2QFY23 revenue increased by 56.7% YoY to RM125.1m, mainly due to higher contribution from its property development segment, driven by better sales of its completed units. Revenue from property development segment increased almost 7-fold to RM50.5m, representing about 40% of total revenue for the quarter. For trading and services segment, revenue grew  marginally by 1.5% to RM73.5m and contributed about 59% of total revenue  for this current quarter.

• 2QFY23 core net profit decreased by 11.9% YoY to RM6.3m, mainly due  to higher operating expenses and weaker margin from property development division as a result of more discounts offered to clear its current inventory of unsold properties. Blended gross profit margin for the quarter  fell to 21.8% compared to 31.0% for same quarter last year.

• Outlook. We remain cautious over Fiamma’s near-term outlook as we  foresee domestic demand remaining soft amid consumer sentiment weakened by tighter monetary conditions, and elevated inflationary pressures. However, the Group’s focus on brand-building, promotional activities and better product mix should be able to help cushion the impact somewhat. We remain positive over the Group’s long-term prospects however, underpinned by growing middle class and household income growth, which should lead to stronger consumer spending.

Source: PublicInvest Research - 26 May 2023