9M16 Core Net Loss (CNL) of RM17.7m was in line with our forecast (CNL of RM11.7m) but missed consensus estimate of RM17.0m likely due to the lower-thanexpected construction billings. No dividends declared as expected. Make no changes to earnings. Post results, we upgrade NAIM to MARKET PERFORM from UP with unchanged SoP-derived TP of RM1.65 due to lower downside risk given the drop in share price (-40% YTD).

In line with expectations. 9M16 Core Net Loss (CNL) of RM17.7m is deemed in line with our FY16 CNL of RM11.7m but missed consensus CNP forecast of RM17.0m. The negative deviation against consensus is likely due to lower-than-expected construction billings coupled with higher-than-expected construction cost and interest expense. We derived our CNL after accounting for: (i) reversal of impairment loss, and (ii) write-back for provisions of liquidated ascertained damaged (LAD) totalling RM20.8m.

Results Highlights. 9M16 CNL of RM17.7m decreased by 183%

YoY stemming from: (i) 28% decrease in top line from lower construction billings (-44%) caused by delays (i.e. KPJ Miri, Tanjung Manis Housing), (ii) associate Dayang sinking into the red registering 94% dip in contributions, (iii) higher finance cost (+122%). 3Q16 CNP of RM7.5m improved against 2Q16’s CNL of RM11.3m on the back of improved associate contributions (six-fold) as associate DAYANG turned profitable QoQ coupled with a positive tax break of RM1.7m. However, we note that revenue dipped 48% due to weaker property (-34%) and construction billings (-62%) underpinned by the delay in works explained above and lower property sales of RM14m vis-à-vis RM21m in 2Q16.

FY16 construction to remain weak. Despite having a healthy construction order book of c.RM2.0b, we remain cautious over NAIM’s construction division as it has been consistently reporting 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.

Property outlook. Meanwhile, NAIM’s property sales of RM84m was within expectation accounting for 70% of our target of RM120m. Currently, property unbilled sales stand at c.RM100m providing c.1.0 year visibility.

Maintain earnings. We make no changes to our FY16-17 earnings forecasts. While FY17 CNP of RM43.3m might seem optimistic vs FY16 figures, we note that this is due to: (i) 29.1%-owned DAYANG (in-house estimates) which is expected to contribute c.RM23.5m PBT to NAIM, and (ii) 70:30 JV (Naim: Gamuda) contributions of RM13m PBT for their recently secured Pan Borneo contract.

Upgrade to MARKET PERFORM from UP. Given the drop in share price (-40% YTD), we upgrade NAIM from UP to MARKET PERFORM with unchanged SoP-derived TP of RM1.65 due to the lower downside risk. 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 valuation is at the lower range of our targeted PER for small-mid cap contractors, we feel it is justifiable as NAIM has consistently displayed volatile earnings/losses, especially within their construction segment.

Source: Kenanga Research - 25 Nov 2016