1Q16 CNL of RM13.9m was below our and consensus estimates due to unexpected losses from their 29.1% associate DAYANG coupled with higher-than-expected construction costs. No dividends declared as expected. FY16-17E earnings cut by 31- 7% to RM25.3-39.8m despite tweaking property margins higher after incorporating in-house earnings cut for DAYANG. Maintain UNDERPERFORM with a lower SoP-based TP of RM1.32 (previously RM1.56) after rolling our valuation base year to FY17 implying 8.1x FY17 PER.

Another round of let-down. The 1Q16 Core Net Loss (CNL) of RM13.9m was below our and consensus estimates. We derived our CNL by reversing out: (i) claims of losses and expense from a client and (ii) the write-back for provisions of liquidated ascertained damaged (LAD) totalling RM14.8m. The disappointment in earnings was due to unexpected losses from their 29.1% associate DAYANG coupled with higher-than-expected construction costs. No dividends were declared as expected.

Results Highlights. 1Q16 CNL of RM13.9m was down 188% YoY mainly due to their 29.1% associate DAYANG sinking into the red, recording a 176% dip in contributions coupled with construction cost overruns which we believe were from their Oil and Gas contracts. CNL narrowed RM5.1m QoQ vis-à-vis a CNL of RM 19.0m in 4Q15 on the back of 66% lower financing and stronger contributions from their property segment due to 43% higher property revenue as a result of improved work progress translating to RM9.3m of profits against previous loss of RM1.3m.

Bleak construction outlook. Despite having a healthy construction orderbook of RM1.0b, we remain cautious over NAIM’s construction division as it has been constantly displaying losses/inconsistent earnings for the past two years. While we understand that management has been selectively bidding for jobs with comfortable margin buffers (GP margins of >20%), we do not foresee their construction earnings to improve in the near term as these margin-enhanced jobs will likely to be felt from FY17 onwards. Our FY16E replenishment target stands at RM300m and they have yet to secure any contract to-date.

Property sales surprises. Meanwhile, NAIM’s property sales of RM51m exceeded expectations, making up 33% of our RM150m target. The sales were largely from the affordable segment and we understand that the outperformance in sales was achieved due to in-depth survey on the demand trend before launching. Currently, property unbilled sales stood at RM130m providing 1-year visibility. Nonetheless, we maintain our sales target in view of the challenging property outlook.

Earnings cut. After incorporating our in-house earnings cut for associate DAYANG while tweaking property margins higher from the recent quarter improvement, our FY16-17E CNP are further revised down 31% and 7%, respectively, to RM25.3m and RM39.8m.

Maintain UNDERPERFORM. We maintain our UNDERPERFORM call with a lower SoP-based TP of RM1.32 (previously RM1.56) post earnings cut and rolling our valuation base year forward to FY17E. Our TP implies FY17 PER of 8.1x which is slightly lower than our target PER range of 9-11x for small-mid cap contractors. We feel valuation is justifiable as NAIM has consistently displayed erratic earnings/losses, especially within their construction segment.

Source: Kenanga Research - 27 May 2016