Period  1H13/2Q13

Actual vs. Expectations  Naim’s 1H13 core net profit of RM39.6m came in slightly below expectations, making up 35% and 34% of ours and street’s estimates. The negative variance was due to unexpected losses of RM25.6m in the construction division following: (i) revision of contract value in its Fiji Road Rehabilitation project by client following technical and contractual agreement and: (ii) higher-than-expected costs aggravated by the resettlement projects in Murum.

 Nonetheless, we do not see this as a major concern as: (i) those projects will be completed by this year; and (ii) management is undertaking measures to mitigate the loss (refer to overleaf).

Dividends  There was no dividend declared in 2Q13.

Key Results Highlights  QoQ, although revenue rose by 46%, Naim’s core net profit declined by 69% to RM9.4m due to the unexpected losses in the construction division. We understand that this was just a one-off item and it will not continue in the remainder quarters this year.

 YoY, net profit fell by 67% no thanks to construction division losses. Nonetheless, on a positive note, revenue and EBIT of its property division rose by 45% and 39% respectively thanks to higher sales recognition from its major on-going projects (i.e. Bandar Baru Permyjaya in Miri, Riveria in Kuching, and Desa Ilmu).

Outlook  We attended an analysts’ briefing yesterday and reaffirm our view on Naim’s strong fundamentals despite the hiccups on its construction division in 2Q13. In 1H13, Naim has successfully secured RM560m new contracts, which exceeded our orderbook assumption of RM500m this year. We will not be surprised if Naim could secure more new contracts in 2H13 as it is still actively pursuing new contracts in Sarawak. Meanwhile, the response of its Bintulu Paragon project (i.e. street mall and SOVO) has been very encouraging with estimated sales-to-date topping about RM87m (including bookings). Management updated that the property sales value for 1H13 remains strong at RM196m.

Change to Forecasts  While keeping our FY14 numbers, we cut our FY13 earnings by 15% to reflect the unexpected construction division losses.

Rating   Maintain OUTPERFORM

 We are maintaining our OUTPERFORM recommendation on Naim as we believe its fundamental remains intact proven by its ability to secure new projects of >RM500m since last year, supported by robust property sales, and strong associate Dayang, which has been supporting its bottom-line.

Valuation  Target Price is maintained at RM4.45 based on a SoPbased valuation. At RM4.45, the implied forward-PER stood at 8.7x, in line with our small-cap peers average.

Risks  (i) Slower-than-expected of property sales, (ii) Delays in construction projects; and (iii) rising building material costs.

Source: Kenanga