1H14 earnings within expectation. Yee Lee Corporation (YEELEE)’s 1H14 Core Net Profit* (CNP) of RM16.7m is within expectation as it makes up 49% of our estimate of RM34.0m. YoY, 1H14 CNP declined slightly by 8% to RM16.7m due to lower earnings from manufacturing division (PBT -14% to RM10.2m). We gather that the manufacturing division’s palm oil refinery and mill performance were affected by lower margins due to lower premium of palm olein against CPO prices.

Expecting better 2H14. Despite the short-term weakness, we expect 2H14 outlook to be better. As it is, manufacturing earnings should improve as the premium of palm olein against CPO prices has increased in 3Q14 to RM145/MT (against 2Q14’s RM133/MT). For trading division, we believe that its revenue should improve in view of higher demand seen before the implementation of Goods and Services Tax from 1-Apr-2015 onwards. Note that YEELEE’s trading division is focused on fast moving consumer goods (FMCG) such as cooking oil (under ‘Red Eagle’ and ‘Vesawit’ brand), mineral water (under ‘Spritzer’ brand), oral care products, household products and laundry products.

Balance sheet remained strong. YEELEE’s net gearing remained strong at 0.21x as of end-Jun 2014. Comparatively, this is the same as end-FY13 of also 0.21x but it has shown significant improvement against FY12 (0.30x) and FY11 (0.50x). We are positive on this as the low net gearing is positive in view of possible higher interest rate in 2015. Additionally, low net gearing enables YEELEE to continue its expansion plan without affecting its dividend payment capability.

Under appreciated jewel. YEELEE has a track record of 21 years 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. We also expect FY14-FY15 earnings to grow 8%-11% to RM34.0m-RM37.8m. In our view, YEELEE is undervalued as it is currently trading at historical PE of 7.6x or 57% discount to its peer average historical PE of 17.9x. In addition, YEELEE is trading below its book value of RM1.90. We believe that these discounts are not justified due to its growth prospect and strong profitability track record.

- Maintain Target Price of RM2.10. Our Target Price of RM2.10 is based on unchanged Fwd. PE to 11x to FY14E EPS of 19.1 sen. Overall, we expect potential total returns of 46.9% (Upside 44.8% and Dividend Yield of 2.1%) from here.

Source: Kenanga