INVESTMENT MERIT

1Q14 results were within expectation. Yoong Onn Corporation Bhd’s (“YOCB”) 1Q14 net profit of RM5.23m is within expectation as it made up 23% of our FY14 full year forecast of RM22.98m. YoY, earnings grow at a stable rate of 3% as revenue increase of 11% is more than enough to cover the slight decline in operating profit margin. Looking ahead, we believe earnings should be better from 2Q14 onwards due to more festivals ahead such as Christmast in Dec-2013 and Chinese New Year in Jan-2014.

2.0 sen dividend announced. As expected, YOCB announced its FY13 final single tier dividend of 2.0 sen. (Ex-date: 2-Jan-2014) Although it is still subject to shareholders’ approval in the coming AGM on 11 Dec, we believe that it is likely to go through. With this, YOCB will be paying a total 4.0sen dividend in FY13 and this translates into good dividend yield of 4.6%. Going forward, we believe YOCB should be able to deliver a better dividend of 4.5 sen (dividend yield 5.2%) due to the expected earnings growth.

Expanding for long-term growth. We gather from media report that YOCB plans to increase its production capacity by 50% to 4,500 bedsheets a day by 2015. This is due to its planned expansion on the newly acquired land next to its current factory. We are positive on the news as this should bode well for YOCB mid to long-term growth.

Still undervalued. The company is currently trading at only 6.9x Historical PE (“HPE”) and this is at a 33% discount against its peers which trade at an average HPE of 10.3x. We believe the discounts are not justified due to its good earnings growth prospect and superior dividend yield. Lastly, YOCB is still trading below its latest book value of RM0.90.

Maintain Trading Buy with TP of RM1.01 based on a Fwd. PE of 7.0x on its FY14E EPS of 14.4 sen. Our 7.0x Fwd. PE is at 25% discount to FBM Small Cap Fwd. PE of 9.2x. The discount is applied due to its smaller market cap and lower liquidity. Overall, this represents total return of 21% (upside 16% and dividend yield 5%).

TECHNICALS

Resistance: RM0.90 (R1), RM0.95 (R2)

Support: RM0.85 (S1), RM0.0.80 (S2)

Comments: YOCB’s share price has entered a consolidation phase recently, and has now formed a bullish “Pennant” chart pattern. Should it break above the immediate resistance level at RM0.90, we believe that the stock could extend its gains towards RM1.10.    

BUSINESS OVERVIEW

YOCB is an investment holding company engages in the design, manufacture, distribution, retail and trading of home linen, homeware and bedding accessories in Malaysia. Some of the company’s key products brand are Diana, Novelle and Jean Perry. To market its product, the company operates 17 fully-owned retail outlets under the Home’s Harmony brand name; and 1 retail outlet fully-owned and managed through a dealer under the brand name of Home’s Warehouse. It also exports its products to Singapore, Taiwan, Australia, Brunei, Fiji, Indonesia, Japan, Mozambique, New Caledonia, Turkey, and Vietnam. The company was founded in 1966 and is headquartered in Nilai, Malaysia.

BUSINESS SEGMENT

Manufacturing: design and manufacturing of home linen and bedding accessories.

Distribution and trading: distribution and trading of home linen and homeware.

Retailing: retailing of home linen and homeware.

SWOT ANALYSIS

Strengths: Ability to capture demand from various consumer segment as it market its product in 14 brands.

Weaknesses: Small market cap.

Opportunities: Potential capacity expansion on its recently purchased land in Seremban, Negeri Sembilan.

Threats: Inflation pressure due to recent increase in petrol price may curb consumer spending in the near term.

Source: Kenanga