FY16 Core Net Loss (CNL) of RM20.1m came in worse off compared to our FY16 CNL estimates of RM11.7m and consensus CNP of RM16.9m. The negative deviation stemmed from lower-than-expected billings from their construction and property segment. As expected, no dividends were declared. We lower FY17E earnings by 13% and introduce FY18 earnings of RM42.6m. Downgrade to UP (from MP) with a lower SoP-derived TP of RM1.38 (from RM1.65).

A disappointing year. FY16 Core Net Loss (CNL) of RM20.1m was worse off compared to our estimate of RM11.7m and consensus of RM16.9m. This is due to lower-than-expected billings from their construction and property segment. As expected, no dividends were declared in FY16. 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. NAIM registered FY16 CNL of RM20.1m vis-�-vis CNP of RM2.2m back in FY15 due to: (i) 39% decrease in top-line from lower construction billings (-44%) caused by delays (i.e. KPJ Miri, Tanjung Manis Housing), (ii) associate Dayang registering 68% dip in contribution, and (iii) higher finance cost (+50%). QoQ, it also registered core net loss (CNL) of RM2.5m in 4Q16 compared to CNP of RM7.5m in 3Q16 due to: (i) additional acceleration costs incurred from delayed projects sinking it to the red, and (ii) higher financing costs (+40%).

A weak year. 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. In FY16, NAIM secured RM1.1b of contracts (Pan Borneo WPC4) below our RM1.4b target. We expect project flows to remain slow for the year, targeting only RM300m replenishment in FY17. Meanwhile, we expect construction activity to pick up from their JV entity with GAMUDA when billings from Pan Borneo starts to kick in.

Property outlook. Meanwhile, NAIM?s FY16 property sales of RM112m was slightly below expectations accounting for 93% of our target of RM120m. Currently, property unbilled sales stand at c.RM100m providing c.1.0 year visibility.

Downgrade in FY17E earnings. Post results, we lower our FY17E earnings by 13% to RM37.5m after factoring for: (i) lower contributions from DAYANG post earnings reduction from in-house estimates', and (ii) lower property and construction billings after tweaking for lower replenishments in FY16. Meanwhile, we introduce our FY18E earnings of RM42.6m. While FY17E CNP of RM37.5m may appear 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 to PBT (35% of PBT), and (ii) 70:30 JV (Naim: Gamuda) contributions of RM14m PBT (27% of PBT) for Pan Borneo contract.

Downgrade to UP. We downgrade NAIM from MP to UNDERPERFORM post reduction in our SoP-derived TP to RM1.38 (from RM1.65) after factoring for the lower earnings from DAYANG and NAIM?s construction and property segment. We believe our downgrade is fair considering NAIM has consistently displayed volatile earnings/losses, especially within their construction segment, likely due to the numerous delays in executing its on-going projects. We also note that our TP implies FY17E PER of 8.7x, which is at the lower end of our targeted PER range of 9-13x for small-mid cap contractors.

Source: Kenanga Research - 24 Feb 2017