Results

• 9M17 turnover of RM1.7bn (+6.5% yoy) translated into core PATAMI of RM41.0m (-17.0% yoy), accounted for 69% of ours and 68% streets estimates. We deem this to be below expectations.

Dividends

• Declared third interim dividend of 5.0 sen per share (3Q16: 4 sen). Ex 29 th Nov and Entitlement 4 th December.

Highlights

• YTD: Revenue grew by 6.5% yoy on the back of inroads into the private sector and double-digit growth from the Indonesian operations (+16.5% yoy). Core PATAMI declined 17% yoy due to reduced production from the manufacturing facilities in 2Q17 arising from preparatory works for new products and overall lower orders from the government.

• EBITDA margins declined 1.4ppts yoy to 6.4% from 7.8% as the group had to supplement the deficit in manufacturing products via trading, which increased its cost of sales.

• Yoy : 3Q17 revenue grew 12% yoy to RM575m. However, core PATAMI declined by 35% to RM9m due to lower offtake for the group’s in-house products, coupled with higher selling and distribution costs.

• Qoq: Revenue grew 11% qoq but PATAMI declined by 18% due to the same factors as mentioned above.

• Manufacturing revenue grew 32% qoq to RM81.6m from RM61.9m on the back of resumed operations from manufacturing whilst PBT margins gained 6.6ppts qoq. On a yoy perspective, despite revenue from this segment declining by 10%, PBT margins improved by 5.3ppts to 19.8% yoy on the back of an improved product mix.

• Indonesian division recorded a PBT of RM3m YTD (9M16: - RM3.0m). This turnaround was due to the product rationalization exercise and lower finance cost post restructuring of Indonesia’s financing facilities.

• Despite the 4Q historically accounting for the strongest quarter, we expect the tougher operating environment, higher cost of sales and loss of capacity in 2Q17 to drag FY17 earnings. We continue to expect the concession business to remain pressured as the government adjusts its procurement methods.

Catalysts

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

Risks

• Apart from non-compliance 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

• We lower our FY17-19 earnings by 12-15% as we impute a lower margin assumption from the concession business and an overall higher cost structure.

Rating

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

Valuation

• We reduce our TP to RM3.77 from RM4.29 post earnings revision. We take this opportunity to roll our valuation from FY18 to mid FY19. Our TP is based on mid FY19 earnings pegged to a P/E multiple of 15x, in line with the peers average.

Source: Hong Leong Investment Bank Research - 16 Nov 2017