- Surpassed earnings expectations for FY13. Yee Lee Corporation (YEELEE)’s FY13 Core Net Profit* (CNP) of RM31.6m came in 7% above our estimate of RM29.4m due to better-than-expected margin. Note that FY13 EBIT margin came in at 6.3% which was higher than our estimate of 6.0%. We believe this could be explained by better-than-expected performance in its trading division which enjoyed higher sales of bottled water and other products portfolio with better profit margins coupled with effective control over advertisement and promotion spending.

- YoY, CNP surged 41% to RM31.6m as trading division PBT jumped 139% to RM10.6m due to reasons stated above. Besides that, the manufacturing division PBT also increased 28% to RM24.6m due to a turnaround in palm oil refinery and mill subdivision which enjoyed higher supply of FFB and sales of bulk oils coupled with better FOB olein margin over CPO price. Lastly, a taxexempt dividend of 3.0 sen was recommended but subject to the approval in the forthcoming Annual General Meeting.

- Stronger balance sheet. YEELEE’s net gearing has declined to 0.21x in FY13 and this is a significant improvement from 0.30x in FY12 and 0.50x in FY11. We are positive on this as the low net gearing level signals that the Company is now in a stronger position to expand its manufacturing division without affecting its dividend payment. Note that YEELEE has recently acquired a 2.1 acres piece of land in Rawang for RM11m which is targeted for expansion of its aerosol can sub-division (under the manufacturing division).

- Good prospects for FY14. We have increased our FY14E CNP by 7% after assuming higher EBIT margin of 6.3%. Our estimate is conservative as we have assumed similar level of EBIT margin as per FY13 level, although YEELEE has successfully increased its EBIT margin from 3.5% in FY11 and 4.5% in FY12. Overall, we expect FY14E CNP to grow by 6% to RM33.4m on anticipated 5% growth in revenue and lower interest cost as its debt level had been reduced in FY13.

- Underappreciated and undervalued jewel. YEELEE has an excellent 21 years track record of profitability since its listing in 1993. In addition, net profit has grown at 5-year CAGR of 13% historically to RM31.6m in FY13. Given its strong profitability track record, we believe that the market has severely undervalued YEELEE as it is trading at a surprisingly low historical PE of 7.8x or 47% discount to its peers’ average historical PE of 14.7x. In addition, YEELEE is trading at only 0.80x of its book value of RM1.82. We believe that these discounts are not justified due to its comparable growth prospect and strong earnings track record.

- Target Price increased to RM2.06 (from RM1.50 previously). We have increased our Fwd. PE to 11x (from 9x) and this is in line with the current FBM Small Cap Fwd. PE valuation which has experienced a positive rerating in the past one year. Our valuation base is rolled over to FY14E EPS of 18.7 sen. Overall, we expect a potential total return of 43% from current level.

Source: Kenanga