Results

• 1HFY15 core net profit of RM21.6m (-80.7%) came in significantly below our expectation, accounted for only 11.4% of our full-year forecast.

Deviations

• Weaker-than-expected performance at Affin Holdings (on weaker-than-expected margin), weaker-than-expected performance at the heavy industries segment (arising from cost overruns on certain ship repair projects under Boustead Naval Shipyard), and higher-than-expected effective tax rate (38.5%; HLIB assumption: 25%).

Dividend

• Declared 2nd single-tier interim DPS of 5 sen (entitlement date: 18 Sep 2015; payment date: 30 Sep 2015), bringing DPS YTD to 10 sen. For the full-year, we are projecting total DPS of 18 sen, translating to a total dividend yield of 4.3%.

Highlights

• YTD… 1HFY15 core net profit declined by 80.7% to RM21.6m, mainly on the back of: (1) Weaker palm product prices (CPO: -15%; PK: -18.6%) and a 4% decline in FFB production, which have in turn dragged earnings at the plantation segment; (2) Losses at the heavy industries segment (arising from cost overrun on certain ship repair projects under Boustead Naval Shipyard); and (3) A 13.5ppts increase in effective tax rate.
• YoY… 2QFY15 core net profit plunged 90.6% to RM4.3m, and the weaker results were due mainly losses at the heavy industries segment (arising from cost overrun on certain ship repair projects under Boustead Naval Shipyard), which more than offset improved earnings at the plantation division and Affin Holdings.

Risk

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

Forecasts

• FY15-17 core net profit forecasts cut by 19.4-39.5%, largely to account for: (1) Lower earnings forecasts for Affin Holdings (see HLIB’s report on Affin Holdings dated 18 Aug 2015); (2) Lower earnings assumption at the heavy industries segment; and (3) Higher effective tax rate of 32% (to reflect the higher effective tax rate in 1HFY15).

Rating

HOLD

• 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

• SOP-derived TP cut by 8.3% to RM4.07 (at 20% holding company discount, see Figure 4), to reflect lower TP for Affin Holdings and latest market prices for Boustead Plant and BHIC. Maintain HOLD recommendation.

Source: Hong Leong Investment Bank Research - 25 Aug 2015