Results

• 1HFY15 core net profit of RM39.8m (-10.4%) came in within expectations, accounted for 47.4% and 49.1% of market and our full-year forecasts.

Deviations

• Largely in line.

Dividend

• -

Highlights

• QoQ… 2QFY15 core net profit declined by 19.2% to RM17.8m, mainly on the back of: (1) Lower contribution from the SPV division (arising from the absence of lumpy project secured); (2) Higher losses at the upstream plantation division; and (3) Higher tax expense arising from the expiry of pioneer tax status at the palm oil engineering division since Mar-15.

• 1HFY15 core net profit declined by 10.4% to RM39.8m mainly on the back of lower earnings at the SPV division, JV losses (arising from weaker palm product prices), and higher tax expense (arising from the expiry of pioneer tax status at the palm oil engineering division since Mar-15), which altogether more than offset a 10.9% increase in PBT at the palm oil mill engineering division.

Risks

• Sharp increase in steel plate prices;
• Slowdown in demand for palm oil mills;
• Lower-than-expected FFB production and oil extraction rate at the JV and associate levels.
• Lower-than-expected dividend.

Forecasts

• Maintained.

Rating

BUY

Positives

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

Negatives

• (1) Low share liquidity; and (2) Bright demand prospects have already been priced-in.

Valuation

• Maintain SOP-derived TP of RM2.13 (see Figure 4), and we upgrade our recommendation on the stock from Hold to BUY as value has emerged following the recent selldown. Also, we note the earnings visibility at its palm oil mill engineering division and balance sheet (with net cash and net cash per share of RM155.9m and 30 sen, respectively). At current share price, the stock is trading at FY15-16 P/E of 11.6x and 10.3x respectively.

Source: Hong Leong Investment Bank Research - 19 Aug 2015