Period  4Q13/FY13

Actual vs. Expectations FY13 core net profit of RM40.1m missed expectations, at only 53% and 46% of our forecast and consensus estimates. The negative variance was mainly due to the unexpected further operating losses of RM56.9m in its construction division in 4Q13. Cumulatively, the division registered operating losses of RM85.3m in FY13 due to: (i) substantial deterioration in the profit margins for the Fiji Road Rehabilitation project and resettlement projects (ii) substantial amount of provisions of about RM48m made for LAD, bad debts and potential obligations/liabilities. Excluding the provisions, the net profit would have met with our expectation.

 We expect its construction earnings to return to the black in FY14 as the management is committed to address the cost issues by implementing various proactive measures in regards to cost controls and efficiency and hence improving its construction margins.

Dividends  No dividend declared in 4Q13.

Key Results Highlights Naim registered net loss of RM18.0m in 4Q13 due to losses in the construction division. Naim made a provision of RM48m for LAD, bad debts and potential obligation/liabilities for its Fiji and resettlement projects.

Excluding the provisions, Naim’s net profit would have grown 60% QoQ to RM30m.

 YTD, net profit declined significantly by 53% dragged by losses and provisions in construction division. However, on a positive note, EBIT of its property division doubled to RM87.5m 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  Despite the disappointing FY13 results, Naim’s earnings prospect remains bright in the foreseeable future driven by SCORE. It is evident as it managed to secure RM665m worth of new contracts in FY13, higher than our RM500m assumption. We expect the momentum to continue in this year driven by Sarawak’s infrastructure spending within the SCORE project.

Change to Forecasts We cut our FY14 net profit forecasts by 25% as we revised downwards the construction margins. This is after taking a conservative view of the still-slightly higher costs than our previous forecasts for its construction division.

We also introduced our FY15 net profit of RM114.7m (+20% YoY).

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  Post-earnings revision, our Target Price for Naim is adjusted to RM4.15 (from RM4.47) based on a SoP based valuation. At RM4.15, the implied forward-PER is 10.3x in line with its 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