1H17 core earnings of RM116.7m was broadly within our (40%) and consensus (38%) expectations as we expect stronger contribution from its new BOPP, Rawang and Ipoh plants in coming quarters. No dividends, as expected. We make no changes to FY17-18E NPs of RM292.3-347.3m. Maintain OUTPERFORM but increase TP to RM8.36 (from RM7.63) upon rolling forward our Sum-of- Parts valuation to FY18E.

1H17 core net profit of RM116.7m was broadly within our (40%) and consensus (38%) FY17E expectations as we expect stronger contributions from: (i) its BOPP plant (opened in Sept 2016) as it ramps up utilization in coming months, and (ii) expansions at the Rawang and Ipoh plants, which should contribute to a stronger in 2H17. No dividends declared, as expected.

Results highlight. YoY-Ytd, CNP declined by 11% on the back of weaker manufacturing EBIT (-30%) as margins slipped to 7% (from 10%) likely on commencement of new consumer product plants, as well as competitive pricing strategies to gain market share. This was coupled with higher financing cost (+25%) to fund working capital for expansion plans, and higher effective tax rates of 20% (vs. 19%). QoQ, CNP improved significantly by 25%, driven by strong top-line growth (+10%) from both segments; (i) manufacturing segment, as the BOPP plant continues to ramp up capacity and, (ii) property segment, on steady construction progress from existing projects, and marginally lower effective tax rates of 19% (from 20%).

Outlook. We expect the continued ramp-up of the BOPP plant as well as expansion in Rawang (to 60k MT/year) and Ipoh (to 24k MT/year) plants to contribute to a stronger 2H17. All in, we expect total capacity to increase to 304k MT/year by end FY17 (+6% YoY), while we expect sales tonnage to ramp up by c.18% YoY as plant utilisation increases throughout FY17. Long-term growth should be sustained by its new venture into the United States (due 2H18) and we are positive on this project as it will allow the company to penetrate a new market outside its existing major exposure in the Japanese market. Furthermore, we expect to see cost savings in its new plant from the anticipated ample supply of shale gas-based resin, as well as lower distribution costs in the American market. As for the property segment, the Group has launched 5 new projects worth RM190m in 2Q17, which includes maiden launches in Ipoh, mainly consisting of affordable properties. Note that we make no changes to our FY17-18E earnings estimates of RM292.3- 347.3m.

Maintain OUTPERFORM and further upgrade TP to RM8.36 (RM7.63) as we roll forward our Sum-of-Parts valuation to FY18E (from CY17E earnings). For the Manufacturing segment, we maintain an applied PER of 17.6x, while for the Property segment, we apply a PER of 4.0x which is in line with small-mid-cap property players during this slow market environment.

Risks to our call include; (i) higher-than-expected resin cost, (ii) weaker product demand from overseas, (iii) weaker-than-expected property sales, (iv) foreign currency risk from strengthening Ringgit, and (iv) new entrants/competition biting into its market share.

Source: Kenanga Research - 23 Mar 2017