Sern Kou Resources Bhd – A better than expected quarter
Executive Summary
•Our team’s analysis on Sern Kou Resources Bhd (SERNKOU) noted that a satisfactory Q4FY22 was posted in the past week. SERNKOU had achieved RM95.81 million in revenue which represents a 3.89% and 14.37% increase respectively.
•In FY22, SERNKOU had totalled a RM338.27 million in revenue, representing a growth of 4.17% on a year-on-year basis.
•We were surprised by the more-than-expected demand in the midstream processing and trading of wood business by the company for FY22 as compared to FY21, however, the profit were largely dragged by a slower downstream furniture contribution, which resulted in RM4.46 million net losses for FY22.
•SERNKOU’s management had shared the increase in demand for tropical wood in processing and trading of wood segment had boosted the performance of the company, the net results were cushioned by high sales volume despite volume products margin were achieved.
•According to a research report by FDMAsia, no new plantations projects were in place in 2022, and no new licenses are expected to be announced YTD in June 2022, we expect the lacklustre in supply will gradually ease the slowdown in demand.
•Albeit challenged by external factors, SERNKOU had delivered RM3.95 million in free cash flow for FY22, and with a war chest of RM54.35 million, we do not exclude a potential M&A exercise or expansion plan carried out by SERNKOU in the near term as their non-organic growth plan.
•We are upbeat on SERNKOU’s 1HFY23 recovery roadmap as offloading of furniture had seen to increase for the month of July and August according to our channel check.
Valuation & Recommendation
•We derive our profit forecast based on FY21 normalized earnings of RM17.91 million with an upside of 35-40% due to the gradual recovery and normalization of demand, as well as higher product margins moving ahead. We recommend BUY for SERNKOU with a target price of RM1.03 based on 35.03 forward PER, a discount of 5% based on the 5-years historical weighted average trading PER of the company.
•The key risk(s) to our recommendation includes a slower-than-expected recovery in earnings, supply chain glut due to Russia-Ukraine war, as well as unforeseen lockdown in the respectively countries that SERNKOU supply to.