With 1Q16 Core Net Loss coming in at RM56.1m after excluding an one-off gain on disposal of plantation land amounting to RM34.6m, the quarter performance came in way below our fullyear net profit forecast of RM86.4m. The market consensus is unavailable as the stock is not widely tracked by analysts. The negative variance was due to lower-than-expected contributions from plantations, trading & industrial and heavy industries. A first single-tier interim DPS of 5.0 sen was announced, which is within our expectation. We downgrade FY16E net profit by 28%, following the weak set of results. Correspondingly, our SoP target price is cut from RM3.30 to RM2.58 (as we apply a 25% discount to its SoP valuation due to the erratic earnings performance). Maintain UNDERPERFORM.

Key Result Highlights

QoQ, 1Q16 EBIT rose to RM51.6m from RM10.4m in 4Q15, thanks to plantations (+22.5%), pharmaceuticals (+49.8%) and trading & industrial division (>100%). The plantation division was helped by higher average prices of CPO (+7.2%) and PK (+18.8%). Pharmaceuticals were boosted by lower advertising and promotion, including R&D costs. However, Heavy industries suffered losses due to LAD charges, additional project cost, as well as the impairment of chemical tankers and receivables. This brings 1Q reported loss to RM21.5m exacerbated by higher finance cost (+16%) and a higher effective tax rate (73%) despite recording a pre-tax profit to RM36.3m (-27% QoQ). Excluding RM34.6m gain form sale of plantation land, Core Net Loss widened to RM56.1m compared to a net profit of RM4.2m in 4Q15.

YoY, 1Q16 reported losses were due largely to lower-than-expected contributions from Plantation and Pharmaceutical and further exacerbated by widening Heavy Industries losses. The Plantation division was hit by a decline in FFB production and bearish palm product prices, which negated the gain on disposal of land. Heavy Industries division was mainly lower due to LAD charges, additional project cost as well as the impairment of chemical tankers and receivables. Pharmaceutical was hit by reduced Government orders and amortisation for the Pharmacy Information System during the year.

Outlook. We expect the Trading & Manufacturing as well as Pharmaceutical divisions to show pedestrian growth and deliver sustainable recurring incomes. The Trading & Manufacturing division’s growth will be underpinned by its captive market from Boustead Petroleum Marketing Sdn Bhd, which conducts marketing and distribution of petroleum products under the BHPetrol retailing brand. Its Pharmaceutical division is supported by Pharmaniaga Logistics’ government concession agreement. Plantation earnings, meanwhile, will hinge largely on CPO price movements since 91% of its plantation estates are already matured of which outlook over the medium-term looks less than promising. The Heavy Industries division, however, is expected to remain volatile.

Downgrade FY16E net profit by 28%, following the weak set of results after taking into account lower contributions from plantations, financials and trading & industrials. Maintain Underperform. Correspondingly, our SoP target price is cut from RM3.08 to RM2.58 (as we apply a 25% discount to its SoP valuation due to the erratic quarterly earnings). Maintain UNDERPERFORM.

Source: Kenanga Research - 26 May 2016