Results

9M13 reported net profit of RM59.5m (-21.2%), accounted for 67.7% and 63.3% of consensus and our forecasts, respectively. We consider the results within expectations as we expect 4Q to come in much stronger on the back of higher project billing from the special purpose vehicle division.

Deviations

Largely in line.

Dividend

Proposed second interim single-tier DPS of 5 sen, bringing total DPS YTD to 10 sen.

Highlights

YTD. Despite revenue rising by 15.1% to RM429.9m, 9M13 net profit declined by 21.2% to RM59.5m mainly on the back of slightly lower contribution from the oil mill engineering division, higher expenses arising from plantation development works in Indonesia as well as lower associate and JV earnings (on the back of lower CPO prices), which altogether more than offset a strong surge in earnings contribution from the special purpose vehicle division.

QoQ. Despite revenue declining by 6.4% to RM136.1m (mainly on lower project billing at the oil mill engineering division), 3Q13 net profit increased by 16.6% to RM22m mainly on the back of a strong surge in earnings recognition at the special purpose vehicle division.

Moving forward, we remain positive on the company’s earnings prospects, underpinned by: (1) Still strong demand for palm oil mills; and (2) The recent RM138m ordered secured at the special purpose vehicle division, which will in turn buoy the division’s earnings.

Risks

• Sharp decline in oil mill engineering contracts; and
• Steep rise in raw material prices, in particular, steel plates.

Forecasts

2013-14 core net profit forecasts fine tuned by 4.3-4.7%, largely to account for lower earnings contribution assumption from its associates and JV.

Rating

BUY

Positives – (1) Proven track record; (2) Favourable demand outlook for palm oil mills; and (3) Strong balance sheet.

Negative – Low share liquidity.

Valuation

Despite our slightly lower earnings forecasts, SOP-derived TP raised by 3.8% to RM3.52 (see Figure 4) as we update its latest net cash position. Maintain BUY recommendation on the stock.

Source:Hong Leong Investment Bank Research - 22 Nov 2013