Results

2QFY13 core net profit of RM61.2m (-38.7% qoq and +187.3% yoy) took 1H to RM161.1m (+19.5% yoy), below expectations or accounted for 40.5% of HLIB and 39.5% of consensus forecasts.

Deviations

Mainly due to the plantation division arising from double whammy of lower CPO price achieved and lower production.

Dividend

Single-tier dividend of 7.5 sen (vs. 7.5 sen). Ex and payment dates are 11 and 30 Sep respectively. This is a payout of 126.7% or higher than the official dividend policy of 70%.

Highlights

2Q revenue contraction mainly due to the plantation division which suffered from lower average CPO price achieved and lower production. Lower volume of the manufacturing & trading division and lower concession volume of the pharmaceutical division were the other factors. These more than offset higher revenue from the heavy industry (LCS project) and property divisions.

2Q profit mainly dragged by losses at the plantation division and lower pharmaceutical contribution (higher overheads and provisions). Nevertheless, the heavy industry division remained in the black, complemented by higher contribution by the property and finance (Affin) divisions.

1H core profit growth was mainly underpinned by the significant improvement in profitability of the heavy industry division (higher LCS project progress billings and absence of legacy shipbuilding costs), the property division (higher progress billings and sale of corporate lot) and Affin (provision write-back). Nevertheless, these were partly dragged by lower contribution from the plantation division (lower CPO price and production), the pharmaceutical division (amortization of Novation agreement as well as provisions in 2Q).

Risk

Lower than expected revenue contributions from different divisions and/or margins falling short of expectations as well as relatively high gearing and dilution from potential cash call.

Forecasts

FY13 lowered by 9.5% mainly to reflect the lower-thanexpected average CPO price achieved.

Rating

BUY

Positives – Still undervalued, privatization of Boustead REIT and subsequently list the plantation division could unlock vallues, relatively high and quarterly net dividend yield, decent earnings growth and market yet to fully appreciate the hidden values.

Negatives – Relatively high gearing and complicated group as well as quarterly fluctuation in earnings.

Valuation

Target price maintained at RM6.61 or 10% discount to estimated SOP (based on FY14 numbers) of RM7.34.

Source: Hong Leong Investment Bank Research- 22 Aug 2013