Period  4Q14/FY14

Actual vs. Expectations  FY14 core net profit (CNP) of RM98.1m came in below expectations, accounting for 80% of our, and consensus’, full-year estimates. (Refer overleaf).

 The negative variance was mainly due to: (i) unexpected losses in its construction division following RM33.4m provisions made for potential LAD and doubtful debts.

 Furthermore, the group only achieved RM200m property sales in FY14, short by 50% of our sales forecasts of RM400m.

Dividends  Below expectations. The group declared first interim dividend of 3.5 sen below our initial expectation of 7.5 sen.

Key Results Highlights  QoQ, although 4Q14 revenue increased by 18%, CNP declined significantly by 95% to RM2.0m from RM39.3m in 3Q14. The poor performance was due to the unexpected losses in its construction division. 4Q14 construction division posted operating losses of RM39.4m as the group made RM33.4m provisions for potential LAD charges and doubtful debts.

 Nevertheless, the group’s CNP manage to grow strongly YoY (return to black) and YTD (+143%) thanks to lower construction losses.

Outlook  We are now turning cautious on the group’s earnings outlook after seeing the group recording two consecutive years of losses in its construction division despite its fairly strong orderbook of >RM1.0b.

 As for its property division, management is adopting a cautious approach in 2015 due to the expectation of slowdown in the property market. In fact, the slowdown has already been felt given as its new sales has declined by 39.6% in FY14 to RM200m.

 Additionally, our in-house’s cautious view on O&G sector may not bode well for NAIM’s 29.1%-stake DAYANG (UP; TP: RM2.23).

Change to Forecasts  Due to cautious mode, we revised lower our FY15E earnings by 14.5% after: (i) adjusting our FY15E sales forecast to RM300m from RM500 previously, (ii) lowering construction margins to 3.0% from 6.0% previously following persistent losses in the division, and (iii) reflecting our in-house earnings cuts in DAYANG earnings forecasts. We also introduce our FY16E earnings of RM96.8m, representing 6.6% growth.

Rating Downgrade to UNDERPERFORM from OUTPERFORM

Valuation  Due to the higher earnings risks in both construction and property coupled with de-rating of DAYANG (refer our Dayang’s 4Q14 Results Note on 26th Feb 2015), we downgrade NAIM to UNDERPERFORM from OUTPERFORM previously.

 Post earnings revision, coupled with adjusting DAYANG’s valuation in tandem with our in-house recommendation, our TP is reduced by 8.3% to RM3.34 from RM3.62 previously. Our new TP implies FY15 PER of 8.7x, in line with small-cap peer’s PER range of 8-10x.

Risks to Our Call  Stronger-than-expected crude oil price

 Higher-than-expected property sales

 Higher-than-expected construction margins.

 Dayang’s above-than-expected earnings delivery 

Source: Kenanga