Result

• Results above expectation. SCH Group Berhad (SCH) posted 4QFY17 net profit of RM0.6m, back into the black yoy but declined 14.3% qoq. For the full year of FY17, the Group achieved RM1.8m in net profit, increasing 12.5% yoy. The result exceeds our full year net profit estimate by 13% mainly attributable to better-than-expected PBT margin in relation to lower administrative and selling expenses.

Comment

• Better yoy but weaker qoq. The higher yoy results in 4QFY17 were underpinned by higher sales, mainly its quarry M&E and relatively low base in 4QFY16, which recorded net loss, as affected by higher cost of sales, administrative and marketing expenses. Meanwhile, the lower qoq results were dragged by softening revenue, as sales of asphalt mixing plant of RM5.7m was booked in 3QFY17, albeit higher sales for both of its core products, i.e. quarry M&E and quarry industrial products and spare parts, coupled with higher effective tax rate during this quarter (45.5% vs 30.0% in 3QFY17).

• Higher FY17. Overall, SCH managed to chalk up better full year results thanks to strong sales rebound by its quarry M&E during this quarter amid lower GP margin, -8.0ppts for its product sales and further aided by lower administrative and selling expenses.

• Brighter outlook. We witnessed the sign of earnings recovery as its main product, quarry M&E recorded a sales surge in this quarter, soaring four folds yoy and doubled qoq. Moving forward, we envisage the Group to deliver better FY18 earnings as more quarrying activities operations will be required to meet the demand for quarry based materials for use in major property development, construction and infrastructure projects. With the stabilisation of USD/MYR, we anticipate the quarry operators to re-embark on their capex. SCH could benefit from the take-off of several mega infrastructure projects such as MRT2, LRT3, Pan Boneo Highway, SUKE and upgrading road works from Klang Container Terminal – North Port as well as property projects particularly affordable housing segment with projects such as PR1MA and PPA1M. Also, the Group pins its hopes on new business venture, the sales of asphalt mixing plant, to further strengthen its current business.

• Scrap of plans to venture into downstream quarry segment. In a separate announcement, the Group has decided not to proceed with its MOUs in relation to the collaboration on the excavation works, and subsequent distribution and sale of quarry sand and other related deposits from flood mitigation ponds, namely the Bohol

Retention Pond, Wahyu Retention Ponds and Permaisuri Retention Pond in KL. Whilst we reckon that the Group may lose its opportunity to further diversify its income stream and any vertical expansion, there is no earnings impact to the Group as we have yet to impute any contributions from the deal.

Earnings Outlook/Revision

• No change to our net earnings forecasts for FY18F: RM2.8m (+55.1% yoy) and FY19F: RM34.0m (+21.7% yoy).

Valuation & Recommendation

• Maintain HOLD with an unchanged target price of RM0.20 due to its steep valuation. Our target price is pegged at 37x FY18F FD PE. We believe that current share price has factored in the better earnings outlook to a certain extent. However, any significant positive earnings surprise could prompt our earnings upgrade and hence lifting our valuation.

Source: JF Apex Securities Research - 23 Oct 2017