Period  2Q14/1H14

Actual vs. Expectations 1H14 net profit of RM56.9m came in broadly in line despite making up 59% of our full-year estimates. We opine that 2H14 would be slightly slower than 1H14 after seeing margins for both construction and property segments narrowing back to our estimates and we have assumed EBIT margins of 22% and 4% against 1H14’s 28% and 5%, respectively.

Dividends  None as expected.

Key Results Highlights QoQ, Naim’s 2Q14 net profit was flat at RM28.8m vs RM28.1m recorded in the preceding quarter. Both construction and property segments’ operating profits were down by 52% and 66%, respectively. As for the property division, the group has mainly completed its housing projects and hence lower billings. In addition, the property division’s operating margins was also substantially down to 15% from 38% which we believe was due to more low-cost housing being sold which generally commands low margins. Meanwhile, as for the construction division, there were revisions in profit margins for some substantially completed projects. The saving grace for Naim in 2Q14 was actually its 31% stake in Dayang Enterprise where its share of associate income rose by 61% to RM20m in 2Q14.

 YoY, core net profit rose significantly by 217% due to a low base effect. To recap, in 2Q13, the group reported very small net profit of RM9.1m, dragged down by losses in its construction division (refer our report dated 29^th August 2013).

 YTD, 1H14 net profit rose by 45% due to the above mentioned reason (low base effect).

Outlook  As at July 2014, the group has RM1.15b worth of unbilled orderbook which will keep them busy until 2016.

 As for the property division, as at end-2Q14, the group managed to achieve property sales of RM208m, 35% of our RM600m property sales forecast. We understand that Naim is aggressive in improving its take-up rates for their property products especially the high-rise condo in Kuching and Bintulu (Paragon).

Change to Forecasts While maintaining our FY14E earnings forecasts, we revised downwards our FY15E earnings forecast by 11.7% after toning down our FY14 and FY15 property sales forecast to RM400m from RM600m.

Rating Maintain OUTPERFORM  Besides being one of the prominent contractors in Sarawak, we view Naim as a cheap proxy to Dayang’s superb growth prospects. Dayang has consistently contributed about 40%-50% to Naim’s bottomline (PBT) every year thanks to its 31% stake in the former.

Valuation  Revise our SoP-based TP to RM4.18 from RM4.27 previously after the earnings cut. Our TP implies 9.8x fwd-

PER, 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