• A safe haven with good track record and diversified earnings stream. KFIMA’s main businesses are derived from 4 major segments.

1. Manufacturing or production and trading of securi ty documents (contributed ~42% to average 5-year PBT) mainly for the government. Operations in this segment are handled via its 61% owned F IMACORP’s pri vatized subsidiary Percetakan Keselamatan Nasional S/B, Malaysia’s largest security printer and also the main printer of government security documents include travel documents (contributed 57% to FY16 revenue), licenses (contributed 32% to FY16 revenue) and other security and confidential documents (11%) for the local and overseas markets. Despite the expi ration of contract to supply certain travel documents in 3QFY17, KFIMA is cautiously optimistic to achieve average ~RM50m PBT in FY17-18, premised on its strong track record of collaboration with customers, its expertise in project management and excellent support service, product innovation and diversi fications as well as expanding into new markets in overseas.
    
2. Plantation division (contributed ~23% to average 5-year PBT). KFIMA currently owns over 29500 ha of oil palm land in Malaysia & Indonesia and over 12500 ha were planted (Indonesia 51%; Sarawak 37%; Peninsula12%). Almost 50% of the planted palms are prime trees ageing between 10-18 years while the rest are young trees 4-9 years (12%) and immature trees<4 yeas (38%).Overall, the group remains positive of better performance in the medium to long term, given the improving age profile resulting from the sizable area of new plantings and more areas moving into the production age, which is further supported by high yield and low cost of production as well as improving CPO prices.
    
3. Bulking division (contributed 29% to average 5-year PBT) operates 5 liquid bulk terminals of which three are located in North Port in Port Klang and two in Butterworth. Presently, these terminals have 271 tanks with a combined storage tank capacity of 275,190mt and can handle a wide range of liquid cargoes ranging from palm oil products to latex concentrates, oleochemicals to specialty oils, as wel l as industrial chemicals and technical fats. Occupancy rates remained strong in FY16 with average 83%.
    
4. Food division (~5% to average 5-year PBT), is involved in manufacturing and distribution of canned fish as well as food packaging. Presently, the division operates in Papua New Guinea (“PNG”) and Malaysia via its subsidiari es namely International Food Corporation Limited (“IFC”) and Fima Instanco Sdn Bhd (“F ISB”) respectively. KFIMA believes that this division is well positioned to deliver sustained positive results moving forward, driven by improving efficiencies and productivity, reduction in wastage, exploring exports markets and meas ure by PNG government’s initiati ves to protect local businesses from export dumping activities.

• Strong earnings visibility despite challenging operating environment. KFIMA’s earni ngs sustainability is backed by steady earnings from manufacturing and bulking divisions (FIG4). Moreover, in anticipation of better performance from plantation and food segments, management is cautiously optimistic to achieve average RM60-65m PBT in FY17-18. KFIMA is trading at undemanding valuations of 0.7x P/B and 8.8x FY17 P/E (supported by a 5.3% DY and netcash/share of RM0.77), which are 50% and 41% below 10-year average of P/B and P/E, respectively.

• Good proxy to dividend yield story. Ultra low interest rate and negative interest rates environment coupled with uninspi ring corporate earnings growth would have investors turning more defensive and hence make company like KFIMA, with growing dividend track record (FIG1 & 2) more appealing. Apart from strong net operating cash flow (average RM90m pa from FY12-16) generated from its resilient business segments, its solid netcash/share of RM0.77 (equivalent of 41% share price) also bodes well for KFIMA to declare higher dividend, potentially increasing from 9 sen in FY16 to 10-10.5sen in FY17-18 (translating into 5.3% to 5.5% yield).

• Uptrend intact with short to long term objectives at RM2.09-2.28. After plunging from a high of RM2.45 (1 Apr 2014) to a low of RM1.71 (26 Jan 16), KFIMA’s share price has been trendi ng upward and broke the long term downtrend line in late March 2016 to close at RM1.90 last Friday (after the 9 sen dividend ex-date was announced).

• In the wake of the positive breakouts above long term downtrend line (weekly chart) and recent 200-d SMA (near RM1.83), we expect share prices to trend higher towards immediate target at RM2.00 psychological barrier and RM2.09 (overhead resistance breakout objective) levels.

• A further decisive breach above RM2.09 levels will lift share prices higher towards RM2.16 (61.8% FR) and our long term objective of RM2.28 (76.4% FR). Key supports are RM1.83, 1.80 and RM1.76. Cut loss at RM1.73.

Source: Hong Leong Investment Bank Research - 1 Aug 2016