Results

1QFY14 core net profit of RM66.7m (-20% qoq and -33.2% yoy) accounted for 16.4% of HLIB and 15.6% consensus forecasts.

Deviations

Due to disappointing results from Affin and BHIC (please see separate reports dated 20 May and 9 May, respectively) as well as lower progress billings and absence of corporate lot sale from the property division.

Despite that, we expect strong earnings ahead due to better contributions from the heavy industry division (LCS project billings to pick up), property division (stronger progress billings (Jalan Cochrane contribution and potential sale of corporate lot) and sustained earnings from other divisions.

Dividend

Single-tier dividend of 7.5 sen (vs. 7.5 sen). Ex and payment dates are 12 and 30 Jun respectively. Despite 1QFY14 EPS of only 6.5 sen, it has retained dividend payout of 7.5 sen, above its official dividend payout policy of 70%.

Highlights

4Q revenue was weaker qoq and yoy due to lower contributions from heavy industry (partly from BHIC and lower work progress of LCS project), property (lower progress billings and absence of corporate lot sale) and Pharmaniaga. These were partly offset by higher contributions form plantation (higher CPO price but lower production) and trading & industrial (higher volume).

EBIT largely followed the above trends except reversal from Pharmaniaga (better efficiency, cost rationalization and lower provision for doubtful debts) and trading & industrial (affected by stockholding loss of BHPetrol).

Risk

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

Forecasts

FY14 and FY15 forecasts cut by 0.8% and 2.8%, respectively to reflect changes in forecasts for BHIC and Affin post their respective results releases.

Rating

BUY

Positives – Still undervalued, privatization of Boustead REIT and subsequently list the plantation division could unlock values, relatively high and quarterly net dividend yield, earnings sustainability 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 cut to RM6.66 (from RM6.82) based on unchanged 10% discount to estimated SOP of RM7.40 after incorporating our revised and lowered target prices for Affin and BHIC.

Source: Hong Leong Investment Bank Research - 27 May 2014