We  attended  Naim  Holding  (NAIM)’s  Analysts’  briefing  yesterday  and came  away  NEUTRAL  on  its  overall  prospects.  Key  highlights  of  the briefing are: (i) MRT project was the culprit for losses in its construction division last year, (ii) property market slowdown may be felt again this year  with  management  expecting  lower  sales,  (iii)  management  is targeting to secure RM200.0-300.0m worth of new contracts this year (vs RM500.0m  new  contracts  in  FY14)  backed  by  its  tenderbook  of RM500.0m-1.0b.  All  in,  we  cut  our  FY15-16E  earnings by  9.3%-4.8%  to reflect  the  expected  slowdown  in  its  property  sales as  well  as  lower expectations  on  new  contracts.  Post-earnings-revision,  our  TP  is revised to RM2.82 from RM3.34 previously. At this juncture, we believe the  negatives  are  already  in  the  share  price,  but  at  the  same time, we reckon  that  the  upside  potential  could  be  also  be  limited  due  to  the challenging  outlook,  especially  for  their  property  and  O&G  (Dayang) divisions. Nevertheless, NAIM’s share price had lost 18.4% to below our fair  value  after  posting  disappointing  results  recently.  Therefore,  we upgrade the stock to MARKET PERFORM from UNDERPERFORM.

Construction  division’s  losses  in  4Q14  were  due  to  MRT  project.  To recap, 4Q14 core net profit (CNP) came in below expectations mainly due to unexpected losses in its construction division. Management clarified that the losses were mainly due to provisions made (RM33.4m)for the MRT project following  potential  LAD  charges  coupled  with  cost  overruns.  Nonetheless, management  reassured  that  it  has  been  fully  provided  and  should  be normalized in FY15.

Orderbook stands at RM1.3b; targeting to secure RM200.0-300.0m new contracts  this  year. Management  updated  that  NAIM’s  running  orderbook currently  stands  at  RM1.3b  boosted  by  FY14  new  contracts  of  RM500.0m. YTD,  NAIM  has  secured  RM100.0m  worth  of  new  contracts  from  Tanjung Manis  housing  units  jobs.  In  total,  the  management  is  expecting  to  bag RM200.0-300.0m new jobs in FY15 backed by its tenderbook of RM500.0mRM1.0b.  We  believe  management’s  target  is  achievable  as  it  only  has  to achieve another RM100.0-200.0m worth of new jobs for the rest of the year.

Expecting slower sales in FY15.  To recap, NAIM secured RM200.7m new property  sales  in  FY14,  down  by  39.3%  from  RM330.9m in  FY13. Management clarified that  a slowdown  in  property  sales  have  started  to  be felt since last year and the trend is expected to continue into FY15. They also mentioned  that  it  is  holding  back  new  launches  in  FY15  and  focusing  on projects launched in FY14. Currently, they have about RM543.0m outstanding GDV launched in FY14 with on average 56.0% taken up. Hence, we estimate they would have about RM335.9m worth of remaining GDV left for FY15. All in,  management  expects  about  RM100.0-RM150.0m  new  sales  this  year, 50% lower than our initial forecasts of RM300.0m.

Revising  downward  forecasts. Conservatively,  due  to  the  cautious  mode shown  by  management,  we  are  lowering  our  earnings  forecasts  by  9.3%-4.8%  for  FY15-FY16  after:  (i)  lowering  our  property sales  forecasts  to RM150.0m  from  RM300.0m  previously,  and  (ii)  revising  lower  FY15E  new contracts assumption to RM300.0m from RM500.0m.

Negatives  priced  in,  but  upside  still  limited,  upgrade  to  MARKET PERFORM  with  new  TP  of  RM2.82.  Post-earnings-revision  coupled  with balance  sheet  updates,  we  revised  lower  our  Target  Price  to  RM2.82  from RM3.34  previously. We  noticed  that  since  our  last  downgrade  on  the  stock dated  27 th  February  2015  following  earnings  disappointment,  NAIM’s  share price fell by 18.4% and is now trading below our fair value. We believe the negatives are already reflected in the price, but at the same time we reckon that upside is also limited given the challenging outlook. As such we upgrade our  recommendation  to  MARKET  PERFORM  from  UNDERPERFORM previously.  Our  TP  of  RM2.82  implies  FY15E  PER  of  8.1x,  in  line  with  its peers’ range of 8.0-11.0x.

Source: Kenanga Research - 25 Mar 2015