Results

• 1Q17 turnover of RM618.3m (+6.1% qoq, +10.6% yoy) translated into core net profit of RM20.3m (+514.5% qoq, +1.6% yoy), which accounted for 34% and 33% of ours and streets estimates.

• We deem this to be broadly in line with expectations as we expect subsequent quarters to remain challenging.

Dividends

• Declared first interim dividend of 4.0 sen per share (1Q16: 4 sen).Ex-date 29 th May and Entitlement date 31 st May.

Highlights

• Yoy : 1Q17 revenue grew 10.6% yoy to RM618m due to better offtake from the concession business, higher demand from the group’s Indonesian operations and double digit growth in the private sector business. PBT grew to 4.7% to RM28m due to lower finance and amortization costs (attributed to the PHiS) partially offset by higher selling and distribution costs.

• Qoq: Revenue grew 6.1% on the back of improved orders from the concession, private sector and Indonesia. PBT grew more than fivefold to RM28m on the back of low base effect (lower offtake from the concession in 4Q16).

• Logistics and distribution segment saw a marked improvement with revenue growing 8.8% yoy to RM440m and PBT growing to RM2.2m vs. RM0.9m yoy owing to improved orders from the concession and private sector.

• Manufacturing activities stymied in 1Q17 as evidenced by the decline in manufacturing revenue (-68% yoy). PBT was flattish at RM26m yoy.

• Indonesian division turned a leaf yoy, turning profitable at the PBT level (1Q17: RM0.9m; 1Q16: RM-1m). Revenue grew c.15% on the back of stronger contributions post product rationalization exercise.

• We continue to expect the group to make further inroads into the private sector and Indonesia in FY17. Nonetheless, its bread and butter concession business is expected to remain pressured as the government adjusts its procurement methods.

Catalysts

• Catalysts for the stock arise from faster than anticipated penetration of the non-concession and private sectors domestically and reaching critical mass in its product offering and marketing in the Indonesian market.

Risks

• Apart from noncompliance to productions standards, contamination and patent disputes, near term risks to the stock arises mainly from lower offtake from the government and hiccups in their forays into the Indonesian market.

Forecasts

• Unchanged. We are staying prudent as we expect the tough domestic operating environment to persist on the back of expected lower offtake from the government.

• We introduce our FY19 numbers.

Rating

HOLD

• Despite its monopoly in the government concession business, we expect near term headwinds driven by lower orders and higher finance cost to drag earnings. Given the recent share price retracement, we upgrade the stock to a HOLD .

Valuation

• We reiterate our TP of RM4.29 based on FY18 P/E multiple of 15.7x, a premium to its International peers

Source: Hong Leong Investment Bank Research - 17 May 2017