Period  3Q14/9M14

Actual vs. Expectations 9M14 core net profit of RM96.2m came in above expectations, accounting for 101% and 89% of our and consensus’, full-year estimates.

 The positive variance was mainly due to: (i) higher-thanexpected property segment’s EBIT margins of 31% vs ours of 22%, (ii) lower-than-expected effective tax rate of 11% against our assumption of 25%.

Dividends  None as expected.

Key Results Highlights QoQ, despite 3Q14 revenue growth was flat (-0.3%), core net profit rose by 37% driven mainly by: (i) higher property and construction divisions’ operating margins, (ii) higher associates income i.e. Dayang (+6.2%), and (iii) lower effective tax rate. Property division’ EBIT margins in 3Q14 improved significantly to 39% from 15% due to certain high-margin projects reaching substantial completion stage. As for construction division, margins improved to 4% from 3%, thanks to strong orderbook progress.

 YoY and YTD, 3Q14 and 9M14 net profit jumped significantly by 108% and 145%, respectively, due to low base effect from construction division. Recall, in 9M13, the group made operating losses of RM28.3m in the division ue to cost overruns in resettlement projects coupled with revision in contract value for Fiji Road Rehabilitation project.

Outlook  As at end-3Q14, the group has RM1.5b worth of unbilled orderbook which will keep them busy until 2020.

 As for the property division, as at end-3Q14, the group managed to achieve property sales of RM295m, 74% of our RM400m 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 Revised 29% higher our FY14E earnings forecasts after adjusting for higher-than-expected property margins and lower effective tax rate. Nonetheless, we maintain our FY15E earnings forecasts as we expect their property margins to normalize in FY15E onwards.

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 via a 31% stake.

Valuation  Maintain our SoP-based TP of RM4.18. 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.

 Dayang’s below-than-expected earnings delivery.

Source: Kenanga