Period     1Q13

Actual vs.  Expectations   The 1Q13 net profit (NP) of RM1.9m made up 11.9% and 12.2% of the street's full-year  estimate of RM15.8m and  our forecast of RM15.5m respectively. The seemingly low earnings is not a major concern as we expect the contribution from the group's JV with Cosway China to come in later in 2Q13-3Q13. As such, the results are deemed by us to be within our estimate.

Dividends    A first interim single tier dividend of 5.0 sen was declared. We are expecting a NDPS of 23.0 sen for FY13, which translates to a net yield of 7.2%.

Key Result Highlights      YoY, the 1Q13 revenue decreased by 27.3% mainly due to the lower sales orders being placed by the group's largest customer (Cosway). Meanwhile, the PBT margin has also declined by 1.8ppt from 16.7% in 1Q12 to 14.9% in 1Q13, which was attributed to a change in product mix as well as higher operating expenses (such as the implementation of the minimum wage policy and additional expenses incurred for upgrading the company’s SAP software system). As a result, NP fell by 35.4% in tandem with the drop in PBT.

  QoQ,  the 1Q13 revenue increased by 4.1%. However, the PBT margin declined by 5.0ppt from 19.8% in 4Q12 due to the higher operating expenses as mentioned above. This also resulted in a 32.3% drop in NP from RM2.8m in 4Q12.

Outlook    Going forward, the group will continue to strengthen its presence in the overseas markets, particularly the China market. The manufacturing plant under Engkah and Cosway China's 30:70 JVC is already operational and management guided that the group is in the process of setting up a subsidiary in China, which would allow Engkah to recognise its contribution from the JV with Cosway China as early as June/July.

  We remain cautiously optimistic on the company’s prospect on its China investment as it should eventually ride the strong growth potential of Cosway China (30k-50k outlets will be opened over the next 10 years), ultimately leading to higher earnings for Engkah. 

Change to Forecasts     We are maintaining our FY13-14E earnings forecasts of RM15.5m-RM16.3m.

Rating  Maintain MARKET PERFORM 

Valuation     We are maintaining our TP at RM3.63 based on an unchanged Fwd. PER valuation of 16.5x over the FY13 EPS of 22.2 sen or implying a 15.4x FY14 PER.

Risks    The main risk to our call is a slowdown in the global economy, which will cut the purchasing power of consumers.

Source: Kenanga