Results

2QFY14 core net profit of RM45.3m (-32.1% qoq and -26% yoy) took 1HFY14 to RM112m (-30.5% yoy) or accounted for 32.1% of HLIB and 28.8% consensus forecasts.

Deviations

Due to disappointing results from Affin and BHIC (please see separate reports dated 14 Aug and 18 Aug, respectively) as well as lower progress billings and absence of corporate lot sale from the property division.

Dividend

Single-tier dividend of 7.5 sen (vs. 7.5 sen). Ex and payment dates are 11 and 30 Sep respectively.

Despite 2QFY14 EPS of only 10.83 sen, it has declared dividend payout of 15 sen, above its official dividend payout policy of 70%. However, given weak earnings outlook, we are keeping our 70% assumption.

Highlights

1HFY14 results were impacted by lower contributions from the heavy industry (higher cost), property (lower progress billings and absence of corporate lot sale), manufacturing & trading (absence of land sale) and finance (lower NIM, higher provision and acquisition related costs) divisions. The weaker performance was further impacted by higher finance cost and higher effective tax rate.

Although we expect signing of the formal contract for the LCS project will accelerate billings of the heavy industry division and the property division to benefit from Jalan Cochrane contribution and potential sale of corporate lots, these will be offset by lower CPO price of the plantation division.

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 21% and 31%, respectively to reflect changes in forecasts for BHIC and Affin post their respective results releases as well as our new assumption of RM2,400/MT and RM2,300/MT CPO assumption for 2014 and 2015, respectively (vs previous assumption of RM2,700/MT for 2014-15.

Rating

BUY

Positives – Still undervalued given the deep embedded values of the group, relatively high and quarterly net dividend yield and market yet to fully appreciate the hidden values.

Negatives – Relatively high gearing and complicated group, quarterly fluctuation in earnings and weak near-term earnings outlook.

Valuation

Given the weak near-term earnings outlook, it will take more time to unlock the group’s deep value. Thus, we cut our target price to RM5.54 (from RM6.23) as we increase the holding company discount (to estimated SOP of RM6.92) to 20% (vs. 10% previously).

Source: Hong Leong Investment Bank Research - 26 Aug 2014