1H16 Core Net Loss (CNL) of RM25.2m missed our estimated FY16 CNP of RM26.4m underpinned on lower-than-expected construction billings coupled with higher-than-expected construction costs and interest expense. No dividends declared as expected. Post results, we cut FY16-17E earnings by 144-10%. Maintain UNDERPERFORM with a lower SoPderived TP of RM1.65 (previously RM1.83) implying FY17E Fwd PER of 9.0x.

Missed expectations again. NAIM’s 1H16 Core Net Loss of RM25.2m missed our estimated FY16 CNP of RM26.4m, underpinned by lower-thanexpected construction billings coupled with higher-than-expected construction cost and interest expense. We derived our CNL by reversing out: (i) claims of losses and expense from client, and (ii) the write-back for provisions of liquidated ascertained damaged (LAD) totalling RM15.5m.

Results Highlights. 1H16 CNL of RM25.2m decreased by 207% YoY stemming from: (i) 11% decrease in top line from slower construction billings, (ii) associate Dayang sinking into the red registering 133% dip in contributions, (iii) higher finance cost (+110%), and (iv) lower margins (- 6ppt) from higher construction costs due to delays in projects (i.e. KPJ Miri, Tanjung Manis Housing). 2Q16 CNL of RM11.3m narrowed RM2.6m QoQ on the back of improved associate contributions of RM1.4m vis-à-vis losses of RM8.8m in 1Q16. However, we note that property and construction billings were weaker QoQ having decreased 31% and 37%, respectively, underpinned by the delay in works explained above and lower property sales of RM21m vis-à-vis RM51m in 1Q16.

FY16 construction to remain weak. Despite having a healthy construction order book of c.RM2.1b, we remain cautious over NAIM’s construction division as it has been constantly displaying losses/inconsistent earnings. YTD, NAIM has secured RM1.1b of contracts (Pan Borneo WPC4) representing 80% of our RM1.4b replenishment target with a remainder of RM300m to be achieved. We believe NAIM’s construction division for the remainder of FY16 will remain weak from the on-going delays and will only start to pick up in FY17 when billings from Pan Borneo kicks in.

Weaker property sales expected. Meanwhile, NAIM’s property sales of RM72m met expectations representing 48% of our RM150m target. However, we note that 1H16 sales were supported by new launches in 1Q16 while we understand that management has no plans for further launches in 2H16 in view of the weak property market. In anticipation of the weaker sales from the lack of launches, we cut our in-house sales target by 20% to RM120m (from RM150m) with a remainder of RM48m to be achieved. Currently, property unbilled sales stand at c.RM110m providing around one-year visibility.

Earnings downgrade. We slash FY16-17E earnings by 144%-10% after factoring for: (i) slower construction billings, (ii) lower construction margins, (iii) higher interest expense, (iv) in-house earnings reduction for associate DAYANG and (iv) lower property sales of RM120m for FY16.

Maintain UNDERPERFORM. Post reduction in earnings, we lower NAIM’s SoP-derived TP to RM1.65 (previously RM1.83) with an unchanged UNDERPERFORM rating. Our TP implies FY17 PER of 9.0x, which is in line with our targeted PER range of 9-13x for small-mid cap contractors. While NAIM’s valuation is at the lower range of our targeted PER for smallmid cap contractors, we feel it is justifiable as NAIM has consistently displayed volatile earnings/losses, especially within their construction segment.

Source: Kenanga Research - 29 Aug 2016