Period  4Q13/ FY13

Actual vs. Expectations  ENGKAH reported 4Q13 net profit (NP) of RM2.0m (+19.5% QoQ, -27.9% YoY), which brought the FY13 NP to RM7.7m (-40.6% YoY). This was way below expectations, at just 92.8% of our full year estimate and 76.2% of the consensus number.

 The main reason for the earnings miss was a delay in profit recognition from an associate (30:70 JVC with Cosway China).

Dividends  As expected, a final single-tier dividend of 7.5 sen was declared, bringing the full year dividend to 22.5 sen (representing 9.0% net yield).

Key Result Highlights YoY, 4Q13 NP declined by 27.9% YoY despite the flattish revenue (+0.5% YoY). This was due to a change in product mix and higher operating cost which resulted in net margins shrinking by 4.9ppt (from 16.8% in 4Q12 to 11.9% in 4Q13).

 QoQ, revenue grew by 8.5% amid an increase in sales from the Personal care segment (+13.7%) which was more than sufficient to offset the lower turnover from the Household segment (+3.7%). The higher margins from the Personal care segment, combined with a lower effective tax rate led to NP rising 19.5% QoQ.

 For the full year, revenue declined by 22.9% YoY while NP plummeted 40.6% YoY. The lower revenue registered was due to cutback in orders from ENGKAH’s single 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 FY13 net margins contracted by 3.6ppt (from 15.4% in FY12 to 11.8% in FY13).

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) cutback in orders from its single largest customer, (ii) rising operating costs, (iii) slow progress in new store expansion by Cosway China (currently 150 outlets against the 10-year plan of 30k-50k outlets back in 2012), and (iv) delay in recognition of profits from its China operations.

Change to Forecasts No changes to our FY14E earnings.

Rating CEASING COVERAGE.

Valuation  We are ceasing coverage on ENGKAH due to our continuous UNDERPERFORM recommendations since June-2013 and we see no change in the medium-term. Our previous TP of RM2.28 was based on 15.0x 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