1H16 Core Net Loss at RM127.5m, after excluding: (i) one-off gain on disposal of plantation land (RM132.9m), and (ii) one-off gain on disposal of an associate (RM198.9m), deviated from our full-year net profit forecast of RM62m. 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 pharmaceutical, plantations, and trading & industrial and heavy industries. We now forecast FY16E net loss of RM43m following the weak set of results. Correspondingly, our SoP target price is cut from RM1.87 to RM1.72 (as we apply a 35% discount to its SoP valuation due to the erratic earnings performance). Maintain UNDERPERFORM.

Key Result Highlights

QoQ, 2Q16 EBIT rose 79%, thanks to plantations (+45%) and trading & industrial division (+57%). The plantation division was helped by higher average prices of CPO (+10%) and PKO (+133%). Trading and industrials were boosted by better contribution from UAC Berhad and Boustead Petroleum Marketing. However, heavy industries suffered losses due to MHS Aviation, which posted a higher deficit mainly due to lower revenue. Pharmaceutical was hit by higher operating expenses and amortisation of the Pharmacy Information System (PHIS) system. This brings 2Q reported PATAMI to RM204.3m. Excluding: (i) gain from sale of properties (RM92.4m), and (ii) gain from disposal of an associate (RM198.3m), 2Q16 Core Net Loss widened to RM64.9m compared to a loss of RM56.1m in 1Q16. A 2nd single-tier interim DPS of 4.0 sen was announced bringing 1H16 to 9.0 sen which is within our expectation.

YoY, 1H16 core net losses were due largely to lower-than-expected contributions from pharmaceutical and property and further exacerbated by widening heavy industries losses. The pharmaceutical division was hit by higher operating expenses and amortisation of the Pharmacy Information System (PHIS) system. Heavy Industries division was mainly lower due to Boustead Naval Shipyard recording a higher deficit arising from downward revision of margin for LCS project, additional cost to completion for the restoration of KD Perantau as well as lack of new ship repair and shipbuilding projects.

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.

Forecast a CORE loss of RM42.7m compared to our earlier CORE net profit of RM62m following the weak set of results after taking into account lower contributions from plantations and trading & industrials.

Maintain UNDERPEPRFORM. Correspondingly, our SoP target price is cut from RM1.87 to RM1.72 (as we apply a 35% discount to its SoP valuation due to the erratic quarterly earnings).

Source: Kenanga Research - 25 Aug 2016