- Established conglomerate backed by net cash position. GUH Holdings (GUH) is an established investment holdings corporation that has been around for 53 years. The group, through its subsidiaries, operates 3 cores divisions namely: (i) Electronic division, involved in the manufacturing of Printed Circuit Boards (PCB) in Penang and China (contributed c.34% to the group’s FY13 PBT), (ii) Property development & Oil palm cultivation (contributed c.34% to the group’s FY13 PBT), and (iii) Water and Power utilities (contributed 25% to the group’s FY13 PBT). Notably, the group has a net cash position of RM171m as of 1H14, which is at 54% of the group’s total market capitalization.

- Better products mix going forward in the Electronic division. Note that the profitability of its Electronic division has been on a downtrend for the past 5 years with FY13 PBT margin narrowing to c.6% (vs. mid-teens previously) due to the lacklustre PCB demand in its Penang division. The operations are mainly located in Penang and China where the former focuses more on the thinner-margin Audio segment while the latter involved in the higher-margin Home Appliances segment. Moving forward, management aims to improve its profitability with better product mix that focuses more on higher-margin Home Appliances segment. No additional capex is required as the machines are compatible for the other manufacturing jobs. We are expecting this segment to register FY14E/FY15E PBT of RM13.2m/RM14.5m (+2%/+10% YoY) respectively, contributing 38%/28% to the group’s FY14E/FY15E PBT.

- Property division could be the upcoming earnings driver. The existing mixed township development in Taman Bukit Kepayang, Seremban (with balance of 149 acres, GDV at RM1.08bn which is expected to last for 6 years) has earned itself the reputation of being a relatively well-known developer. Recently, GUH has forayed into the Penang property market with the acquisition of 46.2 acres of freehold development lands at Simpang Ampat through the acquisition of 99.5% of Million Crest (M) S/B in May 2014. On that, management is planning to develop a small township with GDV of c.RM200m on 1/3 of the land size as soon as 2015. Coupled with another mixed township development in Seremban worth c.RM210m GDV to be launched in late FY2014 (initial launching of RM53.1m GDV with current take up rate of 33% in less than 3 months), we expect the earnings from its property division to be the lion share contributor in FY2015 (c.48% to the group’s FY15E PBT, from c.17% in FY14E PBT) with PBT of RM6.0m/RM24.6m in FY14/FY15. In our sales assumption, we have assumed a take-up rate of 50%/30%/10% over three years for both its small township development in Penang starting from 2H15 and mixed development Seremban starting from FY15, a notion which is also shared by the management.

- Mixed bag in Utilities division. GUH aims to achieve a strong revenue growth of 29% YoY in FY14, underpinned by its ongoing contracts with municipal water supply authorities and privatised water supply companies in Malacca, Sarawak, Penang and Perak. As of 1H14, the division is still sitting on a strong unbilled amount of RM94.5m, which will recognize c.37% in both FY14 and FY15, at a GP margin in the mid-teens. Meanwhile, it is also actively tendering for a Myanmar project worth RM180m (30 months of construction period with a concession period of 50 years). Management expects this project to start contributing from FY17 onwards if materialise, with an expected similar GP margin to its current ongoing contracts. Meanwhile on the Power Generation division, while the earnings from its associate stake of 20% in the Independent Power Producer from Cambodia still on-track, the 18-years concession will expire in May 2015. Management noted that it is still in discussion in renewing the concession. Note that this IPP contributed c.18% to the group’s FY13 PBT. To be conservative, we have excluded the earnings contribution from this concession in 2H15 in which the forecast is c.RM4m PBT.

- Not Rated. All in, we are expecting the group to record NP of RM21.4m in FY14E (-30% YoY), before rebounding to RM36.9m in FY15E, should the main earnings driver in FY15E- property launches are on track (on the blue-sky scenario). On the flip side, should the launches are postponed or off-track, then it is back to the drawing board. Thus, we have yet to impute any fair value and rating for now, while waiting for more affirmation in its property division. At the current price of RM1.20, GUH is trading at a forward PER of 8.6x, which is close to its 3-year average forward PER which we think is fair as this is also in line with other established property players such as Matrix Concept and Tambun Indah, both trading at 6.9x and 7.3x of their respective forward PER.

Source: Kenanga