Period  2Q14/1H14

Actual vs. Expectations Boustead Holdings (Boustead) reported PATAMI of RM112m (-30% YoY) which came in below both our expectations and consensus. 1H14 net profit accounts for 29% of our and consensus full-year forecasts. The negative variance from our forecast is due to lower-than-expected contribution in its plantations industries and heavy industries.

Dividends  A second interim single tier DPS of 7.5 sen was declared. This brings its 1H14 total dividend to 15 sen which is inline with our expectation.

Key Result Highlights QoQ, the 2Q14 net profit came in at RM45.3m (-32% QoQ) due to the weaker contributions from Plantation and Pharmaceutical Divisions. The poor set of results was on account of lower sales volume and softer palm product prices. Average palm oil price realised for the current quarter of RM2,581 per MT was 2% weaker than the preceding quarter’s average of RM2,629 per MT. FFB crop of 245,821 MT was also 3% below the preceding quarter’s 253,108 MT. In the pharmaceutical division, the weaker results were due to a provision for obsolete and soon-to-expired stocks due to a slowdown in orders from the concession business.

 YoY, 1H14 PATAMI fell 30% due largely to lower contribution from property and heavy industries divisions. However, the star performer was the plantation division which was driven by higher average CPO of which outlook for the 2H14 looks less promising. According to the Australia Bureau of Meteorology (ABM) “the chance of El Niño developing in 2014 is approximately 50%, which remains significant at double the normal likelihood of an event”. This could mean limited upside for CPO prices as there is now less risk seen for a potential significant decline in palm oil production next year in line with lower probability for El Nino in 2H14.

Outlook  Boustead’s prospects are expected to be mixed.

 We expect the trading & manufacturing, and pharmaceutical divisions to show growth and deliver sustainable recurring incomes. The trading & manufacturing division’s growth will be underpinned by its captive market from Boustead Petroleum

Marketing Sdn Bhd, which conducts marketing and distribution of petroleum products under the BHPetrol retailing brand. Its pharmaceutical division is supported by Pharmaniaga Logistics’ government concession agreement.

 The plantation earnings meanwhile will hinge largely on CPO price movements since 91% of its plantation lands are already matured of which outlook over the medium -term looks less promising.

 For the property division, the earnings growth is likely to be flat in the absence of new large-scale property projects launching of late.

 The heavy industries division is expected to remain stable. However, we are uncertain whether there will be any potential future cost overruns for its legacy commercial projects.

Change to Forecasts  We are cutting our FY14E and FY15E net profit forecasts by 10% following the poor set of results after taking into account lower CPO assumption and lower-than-expected heavy industries division’s earnings.

Rating & Valuation  Maintain MARKET PERFORM. Correspondingly we have lowered our SoP target price from RM5.27 to RM5.01. At the current market price, the stock offers a total return of +3.4%. The saving grace is a 5.8% dividend yield.

Risks to Our Call  Further weakness in CPO prices and Delays in the delivery of LCSs and cost escalations.

Source: Kenanga