Results

• 1H17 turnover of RM1,136.3m (+4.1% yoy) translated into core net profit of RM31.7m (-10.0% yoy), accounting for 51% of ours and streets estimates. We deem this to be inline.

Dividends

• Declared second interim dividend of 4.0 sen per share (2Q16: 5 sen) which goes ex on 29th Aug.

Highlights

• YTD: Revenue growth of 4.1% yoy (RM1,136.3m) was due to higher offtake in 1Q17 offset by lower contributions from manufacturing in 2Q17 resulting in PBT to decline 21% yoy to RM37.9m.
• Yoy: 2Q17 revenue declined (-2.6% yoy) to RM518m due to lower offtake from the government hospitals and the private sector due to seasonality and from lower contributions from the manufacturing segment. PBT declined by 53% to RM10m.
• Qoq: The revenue decline (-16.2%) was mainly attributed to lower offtake during the period under review in Malaysia and Indonesia on the back of seasonality (Hari Raya/ Lebaran) and the disruption in the manufacturing segment. PBT declined 63.5% due to the same factor as mentioned above.
• Logistics and distribution segment saw a decline in revenue of 27.3% yoy to RM784m. However, PBT rebounded from a loss of -RM4m in SPLY to a profit of RM4m owing to improved orders from the concession in 1Q17 and the lower amortization costs after the group’s revision of its amortization. This reflects the management’s confidence in securing the concession business for a further 10 years post 2019.
• Manufacturing activities weakened in 2Q17 with revenue declining to RM93.6m (-54% yoy) on the back of a one off closure of certain production lines for preparatory works to facilitate the commercialization of new products that were approved ahead of schedule. Subsequently, PBT declined by 39.6% yoy to RM34.3m. The production lines have since resumed operations since the month of June.
• Indonesian division recorded a PBT of RM1.5 YTD (1H16: - RM0.6m). The return to black was due to the product rationalization exercise and lower finance cost post restructuring of Indonesia’s financing facilities .
• We continue to expect the group to grow its private sector and Indonesia business in FY17 offset by lower orders from the concession.

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.

Rating

• Despite its monopoly in the government concession business, we expect near term headwinds driven by lower orders and higher finance cost to drag earnings. Maintain HOLD.

Valuation

• We reiterate our TP of RM4.29 based on unchanged FY18 P/E multiple of 15.7x.

Source: Hong Leong Investment Bank Research - 17 Aug 2017