INVESTMENT MERIT

We are issuing a “Trading Buy” on NHFATT with a FV of RM3.78 based on 10.0x PE on FY17E earnings. The group is expanding its export base for both its manufacturing and trading segments, making them less vulnerable to the discouraging automotive market sentiment in the country. Margins are also expected to stabilise as the group has moved away from the gestation costs incurred to develop overseas arms.

In the business of manufacturing and trading of replacement automotive parts. NHFATT is involved in the manufacturing of REM metal and plastic automotive body parts (primarily focusing on Japanese marques), such as bumpers, doors, fenders, grilles, hoods and lamps. The group also trades third-party automotive parts, accessories and service items, such as engine oils and lubricants. Production costs on the manufacturing segment are exposed to USD rate fluctuations, where c.50% of raw materials are imported. However, given that c.50% of total revenue from both segments are exported, the group is naturally hedged against the USD fluctuations besides being a net beneficiary of its strength.

YTD16 performance supported by overall improvement in sales.

NHFATT reported 9M16 sales of RM169.1m (+10% YoY), stemming from higher demand in both manufacturing and trading segments in both local and overseas markets. Favourable USD rates further boosted export returns. The top line growth carried on to PBT growth levels (+10% YoY) as operating margins were flattish compared to 9M15 due to less favourable product mixes and forex translations.

Positive outlook ahead, as the trading segment has turned from red to black. Profitability in the trading segment had been largely undermined by heavy resources being allocated to the establishment of its new overseas trading arms in Indonesiaand China during the gestation period up till present, however, the adverse impact has to a large extent lessened. In addition, addition, the group’s expansion into export markets proved to be fruitful, yielding stronger growth in unit sales as compared to the local market. This render the group’s earnings to be less vulnerable to the country’s discouraging sentiment in the automotive sector, at present moment. Furthermore, we expect net margins to improve as lesser operating expenses are being incurred by its established overseas arms. Considering the above, FY16 is projected to be the most profitable year since FY11, with 9M16 NP of RM20.5m already outperforming FY15 NP of RM19.3m as well as accounting for c.90% FY12 NP of RM22.8m. We forecast FY16 to record a topline of RM224.m (+8% YoY) with a NP of RM25.7m (+34% YoY). We further forecast continued growth in FY17 with revenue of RM231.7m (+3% YoY). In anticipation of better margins, FY17E is projected to record a NP of RM28.4m (+11% YoY). This is based on our average USD/MYR assumptions of: FY16E: MYR4.20/USD and FY17E: MYR4.15/USD.

Dividend-wise, management guided that no dividend pay-out policy has been established. However, we noted that the group has been paying dividends close to c.40% of its net profit (since 2011). Applying this as a conservative estimate, we expect to see dividend payments of 14.0sen/15.0 sen a share in FY16/FY17, which translates to dividend yields of 4.5%/4.8%.

Trading Buy with a fair value of RM3.78, ascribing at PER of 10.0x, with our FYE17 EPS of 37.8 sen. Our ascribed valuation is at a discount of our applied 12.0x PER to PECCA - NHFATT’s peer in the REM automotive parts market. We believe this discount is fair given: (i) PECCA’s stronger FY17E NP margin of c.15% vs. NHFATT’s c.12% for the same year, and (ii) PECCA’s higher FY17E PBV of 2.9x vs. NHFATT’s PBV of 0.7x. The ascribed valuation is also closely inline with the FBMSC’s 12 months Fwd. PER of 10.3x. Nonetheless, we favour this stock for its: (i) strong growth prospect (of 2-year NP CAGR of 21%), (ii) strong cash position, (iii) decent dividend yield, and (iv) potential export play stock for its status as a strong USD beneficiary.

Source: Kenanga Research - 1 Dec 2016