Period  3Q13/ 9M13

Actual vs. Expectations ENGKAH’s 3Q13 net profit (NP) of RM1.7m brought the 9M13 numbers to RM5.7m.

 Although the results were broadly inline with our estimates at 69% of full year forecast, it accounted for just 60% of the consensus’ number.

Dividends  A third interim single tier dividend of 5.0 sen was declared. We are expecting a NDPS of 22.5 sen for FY13, which translates to a net yield of 8.4%.

Key Result Highlights YoY, the 3Q13 revenue declined to RM15.4m (-26.7% YoY), while NP plunged to RM1.7m (-56.5%). Notably, revenue for the high margin personal care segment was 34.2% lower, while the household products segment also registered a 4.4% decline in revenue. Operating expenses were also higher during the quarter, with the combined impact being a 7.5ppt reduction in net margins to 10.8%.

 QoQ, 3Q13 revenue declined marginally by 2.0% as an improvement in revenue from the household products segment (+4.3%) was unable to offset the the 2.2% decline in revenue from the personal care segment. Note that the proportion of personal care segment accounted for 81% of Group revenue, while the household products segment contributed 19% to the topline. Furthermore, a change in product mix and a higher effective tax rate during the quarter was a double whammy for the Group, and this resulted in NP declining by 22.8% QoQ.

 On a YTD basis, 9M13 revenue declined to RM48.3m (-28.6%), which we believe was due to lower sales orders being from its largest customer. Taken in combination with a less favourable product mix and higher operating expenses with regards to: (i) implementation of the minimum wage policy and (ii) upgrading and maintenance charges pertaining to SAP software system, the 9M13 NP dropped by 44.2% to RM5.7m.

Outlook  While efforts are being made to diversify its clientele and secure more sustainable orders for the longer run, ENGKAH currently faces a string of challenges, which include: (i) a cutback in orders from its single largest customer, (ii) rising operating costs, and (iii) a delay in remitting the earnings from its JV with Cosway China.

Change to Forecasts   No changes to our FY13E and FY14E earnings forecast of RM8.3m and RM10.6m.

Rating Maintain UNDERPERFORM

Valuation  We maintain our TP of RM2.28 based on an unchanged Fwd. PER valuation of 15.0x (-0.5SD below its 5-year average PER) over the FY14 EPS of 15.2 sen.

Risks  Further cutbacks in sales orders from the Group's largest customer.

 Delays in recognising profit from associate.

Source: Kenanga