News  On Monday, 13th January 2014, Naim Holdings Bhd (Naim) announced that it had recently disposed 15m or 2.7% equity interest in Dayang Enterprise (OP; TP: RM6.15) in the open market for an aggregate gross sale proceed of RM84.0m.

 The proceeds from the disposal will be utilised for Naim’s working capital requirement.  Post-disposal, Naim’s interest in Dayang is reduced to 30.93% from 33.63%.

Comments  We are not entirely surprised with the news as the management did mention previously that they will dispose Dayang “when the price is right”. Naim sold the stock at RM5.60/share; i.e. at 3% and 9% discount to Dayang’s latest closing price and Kenanga Research’s fair value of RM6.15, respectively.

 Despite the slight discount, we are still positive on the Naim’s move to dispose some of Dayang’s shares as (i) this realized part of its excellent investment on Dayang. On average, Naim’s cost of investment on Dayang is only RM184m or RM0.77/share but currently its investment is worth about RM1.1b or RM5.79/share, an appreciation of circa 652% (excluding dividends), (ii) Naim’s balance sheet (gearing to improve to 0.38x from 0.4x) and cash flow will improve due to the cash proceeds.

 Naim’s net gain from the disposal is estimated at RM62m or RM26.2 sen and it will be a one-off gain in FY14.

 We do not rule out the possibilities that Naim will further dispose its Dayang stake in the foreseeable future.

Outlook  Naim’s earnings prospect remains bright in the foreseeable future as Naim managed to secure RM665m new contracts in FY13, exceeding our assumption of only RM500m. We estimated that its outstanding orderbook stands at RM1.3b which could last until 2016.

 Naim is also one of the prominent Sarawak players that will continue to ride on the Sarawak growth story coming from infrastructure spending for the SCORE project. It is one of the capable contractors and a prime property developer in the state.

Forecast  Minor adjustments to our core FY14 and FY15 earnings forecasts by -1.9% and -1.4% to reflect the reduced stake in its associate, Dayang. Post-disposal, Dayang still contributes significantly to the Group, accounting for about 40% to total Naim’s PBT.

Rating Maintain OUTPERFORM

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

Valuation  Target Price adjusted to RM4.47 from RM4.50 based on a SoP-based valuation after the disposal and balance sheet updates. At RM4.47, the implied forward-PER stood at 7.5x, in line with small-cap peers average.

Risks to Our Call (i) slower-than-expected property sales, (ii) delays in construction projects, (iii) rising building material prices.

Source: Kenanga