Period

2Q15/1H15

Actual vs. Expectations

1H15 core net profit (CNP) of RM36.5m came in within our expectation at 46% but below consensus’s expectation at 36%.

Dividends

None as expected.

Key Results Highlights

QoQ, 2Q15 revenue (RM243.2m) and CNP (RM23.1m) jumped by 50.5% and 72.4%, respectively, mainly due to: (i) higher progressive recognition from construction projects secured since 2014 (EBIT margin +1.5% to 12.2%), and (ii) higher contribution from South Africa investment (EBIT margin +5.6% to 40.6%).

YoY, 1H15 CNP rose 48.9% to RM36.5m, mainly attributable to increase in revenue by 69.5% due to higher construction billings. That said, the improvement in earnings is also well supported by the (i) improvement in construction EBIT margin (+0.7% to 11.6%), and (ii) higher EBIT margin from South Africa investment division (+13.1% to 38.2%). Note that construction segment contributes to c.74% of the group’s EBIT in 1H15, grew by 110.7% to RM39.7m.

Outlook

We reaffirm our positive view on the group’s construction division that the construction division should be able to sustain at least for the next three years, driven by government’s spending on infrastructure projects and development of affordable housing projects for the next five years under 11MP. Furthermore, the group’s current outstanding orderbook of RM1.75b should also be sustained by the implementation of affordable housing by private developers.

While its property division will be driven by its Wangsa 9 and Puchong Prima project, we expect the property segment to continue to grow, supported by its existing project, Wangsa 9 (GDV: RM680m) as well as upcoming project in Puchong Prima (GDV: RM1.5b),

We also expect stable earnings from South Africa land sales. Going forward, management expects this division to contribute more, at RM10.0-RM15.0m per annum driven by higher value land sales as well as plan to sell residential houses there. Additionally, the division’s unbilled sales of ZAR98.6m are expected to be recognised progressively by end-2015.

Change to Forecasts

FY15-16E CNP estimates remain unchanged at RM78.9m-99.8m, respectively.

Rating

Maintain OUTPERFORM

Valuation

Maintain OUTPERFORM with Target Price of RM2.35. Our TP implies 9.4x PER, which is relatively cheaper than that of small-mid cap contractors’ Fwd-PER range of 10- 14x. Given that the stock is still trading at single-digit valuation, i.e. FY16 PER of 7.0x, this offers potential total upside of 36.4%, including dividend yield of 2.6%.

Risks to Our Call

Lower-than-expected margins

Delay in construction works

Lower-than-expected orderbook replenishment

Lower-than-expected property sales

Source: Kenanga Research - 12 Aug 2015