Highlights

• Historically, Boustead was regarded an undervalued play (given its rich embedded asset value), with attractive dividend yield.

• However, we believe it is unlikely for the group to crystalise its asset value in the near term, as the good performance of healthcare division (via 56.4%-owned Pharmaniaga) will be negated by: (1) Weak FFB production and palm product prices, which will continue to dragged earnings contribution at the plantation division (via 57.4% owned subsidiary Boustead Plantations); (2) Weak property sentiment and low loan applications and approval rate, which may continue to drag earnings at the property development division (despite management’s plan to launch its mixed development project in Cochrane by end-2015); and (3) Slower loans growth and weaker NIM, which will drag Affin’s earnings contribution to Boustead.

• Given the anticipated weaker contribution from most of its business segments (with the exception of Pharmaniaga); it is unlikely for Boustead to maintain its generous dividend payment. Post downward revision in our earnings forecasts, we estimate that Boustead’s total DPS in FY15 will decline to 18 sen/share (from 26 sen in FY14), assuming a higher dividend payout ratio of 98.5% (vis-àvis its historical average payout ratio of 90% for the past 3 years).

Risks

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

Forecasts

• We trimmed our FY15-16 net profit forecasts by 1.8% and 6.4% respectively, largely to account for slightly lower FFB yield assumption at the plantation division and lower EBIT assumption at the trading division.

Rating

HOLD

Negatives

• (1) Relatively high gearing and complicated group; (2) Quarterly fluctuation in earnings; and (3) Weak near-term earnings outlook.

Positives

• Still undervalued given the deep embedded values of the group.

Valuation

We cut our SOP-derived TP on the stock by 9.6% to RM4.44 (see Figure 1), largely to reflect: (1) Latest share prices of listed subsidiaries (Boustead Plantations and BHIC); (2) Lower earnings forecasts. Despite its deep embedded asset value, we believe the weak property sentiment, weak near-term prospects for Affin, as well as the uninspiring plantation earnings (arising from low FFB output and CPO prices) will stem Boustead from unlocking its true asset value. Hence, we downgraded the stock from Buy to HOLD.

Source: Hong Leong Investment Bank Research - 3 Jun 2015