We came away from NAIM’s lunch meeting yesterday feeling uninspired with its outlook. The major highlights during the meeting were: (i) progress of their MRT station works (RM412m), (ii) Pan Borneo tender prospects, and (iii) their property sales target of RM150m for FY16E. We are cautious on NAIM’s outlook given that the bulk of its earnings is from its associate stake in DAYANG, coupled with poor performance of its construction division. Hence, we slash our FY16E earnings by 23% to RM36.7m as we lowered our margin assumptions for its outstanding projects of RM1.0b, and introduce our FY17E CNP of RM41.7m. Our UNDERPERFORM call remains unchanged with a lower SoP-based Target Price of RM1.56.

No more MRT loss provisions. For 4Q15, NAIM has provisioned all potential losses from their MRT construction amounting to RM12.0m, which dragged their construction arm into losses. Cumulatively, all provisions made totalled to RM34.0m. However, we understand that NAIM has RM70.0m worth of variation order (VO) works for MRT that could potentially bring its construction division back into profitability. With 10% of works left (c.RM41m) for the MRT stations, NAIM will see completion latest by June- 16.

Selective tenders with higher margin buffers. After NAIM’s sour experience with MRT projects, they now plan to take up jobs with gross margins >20%. However, we note that margins enhancement will only be felt from FY17 onwards. Currently, NAIM has an outstanding orderbook of RM1.0b providing them visibility for another 2-3 years. Despite its sizeable orderbook of RM1.0b, we remain cautious on its construction division due to their relatively low GP margins of c.8-10% for remaining projects. In view of management’s cautious approach on its future project biddings, we lowered our FY16E orderbook replenishment to RM300m (previously RM400m).

Sales target of RM150m in FY16. For their property segment, NAIM targets 60% sales to be generated from the existing Miri development while the rest from Kuching and Bintulu. Management’s target remains conservative due to the high loan rejection rate of c.30% and the weak sentiment. In-line with the slowdown, management has resubmitted their development plans for higher plot ratio and smaller units targeting affordable home-buyers. Following this, we slashed our FY16e sales forecast from RM250m to RM150m.

Uncertainty over Pan Borneo tenders. Currently, NAIM has tendered for one package in Pan Borneo but disclosed that they are not confident in securing it due to other West Coast contractors bidding at much lower prices. However, they remain positive with the upcoming Pan Borneo project in the aspect of raw material supplies, as they would likely benefit from the supplying of raw materials from their existing two quarries with the one in Betong having c.5.0 million m3 capacity.

Maintain UNDERPERFORM. We rolled out our FY17E CNP of RM41.7m underpinned by: (i) a flat orderbook replenishment of RM300m, and (ii) sales target of RM150m. Post-meeting, we lower our SoP-based TP of RM1.56 (previously RM1.66) after cutting FY16E earnings by 22%. While we acknowledged that NAIM has a healthy outstanding orderbook of RM1.0b, we feel they need to focus on improving their margins delivery through better cost management, and be more conservative on their future biddings. Our TP implies a Fwd. FD FY16E PER of 10.1x, which is inline with our targeted PER for small mid cap contractors. 

Source: Kenanga Research - 3 Mar 2016