Period  1Q14

Actual vs. Expectations Naim’s 1QFY14 core net profit of RM28.1m came in broadly within expectations, making up 29% and 26% of our full-year forecast and consensus estimates. Our forecast core net profit excludes: (i) RM61.7m one-off disposal of partial interest in its associate, Dayang Enterprise (OP; TP: RM4.82) and (ii) deferred tax of RM6.0m.

Dividends  No dividend was declared in 1Q14.

Key Results Highlights QoQ, Despite revenue falling 24% due to slower recognition of property sales and construction billings, Naim’s 1Q14 core net profit returned to the black from net loss of RM17.7m (losses dragged by huge provision of RM48m) in 4Q13. The group’s construction division recovered from huge losses and in fact, the segment returned to normal EBIT margin of 8% in 1Q14.

 YoY, 1Q14 revenue rose 20% attributed largely to construction division. Naim had secured several jobs throughout the period which we believe have started to make good progress from 1Q14 onwards.

Outlook  The group’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 this year driven by Sarawak’s infrastructure spending within the SCORE project. Currently Naim has about RM1.0b outstanding orderbook which will keep them busy until 2016-2017.

Change to Forecasts Unchanged.

Rating Maintain OUTPERFORM

 The stock seems undervalued as it is currently trading at only 7.0x fwd PER on FY15 earnings against small-cap construction peers’ average fwd-PER of 8-10x. We like Naim as it is one of the direct beneficiaries to vibrant Sarawak’s growth story.

Valuation  We revised slightly higher our SoP-based Target Price (TP) to RM4.27 from RM4.15 previously after we roll-over Naim’s valuation benchmark to FY15. Our TP implies 8.8x fwd-PER, which is in line with small-cap peers’ average of 8-10x.

Risks to Our Call Failure to meet our yearly new contract assumptions

 Delays in construction projects

 Slower-than-expected property sales

 Rising building material prices.

Source: Kenanga