Eng Kah's FY12 earnings of RM13.0m were slightly below expectations, accounting for about 93.1%/92.1% of our and street forecasts. The company declared a final single-tier dividend of 7.5 sen, representing a total dividend of 22.5 sen or a dividend yield of 6.8% for FY12. We are revising our FY13 revenue and net earnings estimates downwards by 25.6% and 14.9% respectively. All in, we continue to like Eng Kah for  its  strong  balance  sheet,  impressive  dividend  payout,  and  efforts  to  strengthen  its  clientele  base  by  focusing  on  MNC  jobs,  albeit  its China venture might take a longer gestation period. Following our earnings adjustment, we are trimming our FV to RM3.65, pegged to its 5-year average PER of 17x.   
 
Flat FY12 bottomline. Eng Kah reported a relatively flat bottom-line of RM13.0m (+1.6% y-o-y) despite an 11.8% drop in revenue to RM84.3m, mainly due to changes in its business model with one of its customers. Previously, Eng Kah purchased materials on behalf of its customer and billed the latter after re-packaging them into customised-size products. Now, it only acts as an intermediate for re-packaging without the need to commit itself for more working capital after it stopped managing customer's inventory. In turn, it charges the customer for a re-packaging fee (lower selling price), thus causing its top-line to decline. On the other  hand, both  personal care and household segments reported lower revenue  contribution  in  FY12,  at  RM73.6m  (-13.2%  y-o-y)  and  RM12.5m  (-7.3%  y-o-y)  respectively.  Nevertheless,  PBT  margins  generally improved. The personal care segment recorded a higher PBT margin of 19.2% versus 16.2% in FY11, while its household segment registered a PBT  margin  of  8.6%  in  FY12,  up from FY11's  7.6%.  The group's 4QFY12  results  were generally  lower  q-o-q,  weighed  down  by  changes  in  its product mix, its slower-than-expected China venture, as well as stringent credit control policy. Its FY12 net earnings sank 27.4% to RM2.8m, on the back of a 20.9% decrease in revenue to RM16.6m.

Generous  payout.  The  company  proposed  a  final  single-tier  dividend  of  7.5  sen,  bringing  total  dividend  to  22.5  sen  for  FY12.  The  dividend payout is generous despite the enlarged share capital upon the completion of its corporate exercise last year. We expect the company to keep its quarterly dividend payout with a total dividend of 22.5sen for FY13, translating into a decent dividend yield of 6.8%.

Maintained  BUY,  RM3.65  FV.  Eng Kah's  strategy  to  focus  on  MNC  customers  is  slowly  in  place.  The  group  had  delivered  its  first  batch  of products  to  one  of  the  MNCs  in  January  2013.  Two  of  the  MNCs  have  conducted  manufacturing  process  auditing  on  Eng  Kah  2-3  times.  The company's  balance  sheet  remains  solid,  with  net  cash  per  share  of  26.8sen  per  share.  We  are  revising  our  FY13  revenue  and  net  earnings revised downwards  by 25.6% and 14.9%, to reflect a change in its business model with its customer and a lower contribution from its China venture  respectively.  While  we  still  like  Eng  Kah  for  its  strong  balance  sheet,  impressive  dividend  payout,  and  its  efforts  to  strengthen  its clientele  base,  however,  it  might  take  a  longer  gestation  period  for  its  China  venture.  With  our  lower  forecasts,  we  are  trimming  our  FV  to RM3.65, pegged to its 5-year average PE of 17x. Maintain BUY.

Source: OSK