1H17 PATAMI came in above expectation at RM63.5m compared to our full-year forecast of RM69m. The stronger- than-expected results were due to better-than-expected turnaround in the heavy industries division. The market consensus is unavailable as the stock is not widely tracked by analysts. Upgrade FY17E/FY18E net profits by 35%/27% to take into account the better-than-expected performance in heavy industries. Correspondingly, our sum-of-part TP is raised from RM2.09 to RM2.20. Reiterate UNDERPERFORM.

Key Result Highlights

QoQ, 2Q17 PATAMI of RM59.3m compared to RM4.2m 1Q17 was due mainly to the strong contribution from the Heavy Industries Division, which mitigated the weaker performance from the other divisions. Specifically, the Heavy Industries division returned to the black underpinned by: (i) higher progress billings for littoral combat ship, LMS and ship repair projects, recognition of revenue that was previously deferred, reversal of LAD for KD Kasturi, (ii) recognition of income from conditional approved variation orders for the Belum Topside project, and (iii) higher share of profit in joint venture companies. The better performance from heavy industries more than offset weaker performance from plantations and pharmaceuticals. Plantations division was hit by lower average prices for CPO and PK despite better volume from FFB crop (+10%). Pharmaceuticals division was dragged down by lower off-take from government hospitals and temporary closure of certain production lines for preparatory works to facilitate the commercialisation of new products, which resulted in lower production. A second single-tier interim DPS of 3.0 sen was declared bringing 1H17 DPS to 5.5 sen which is within expectation.

YoY, 1H17 the Group registered a reported pre-tax profit of RM233.4m, a 38% decrease compared with RM377.4m in 1H16 mainly due to gains realised on divestment of the Group’s associate company Jendela Hikmat and disposal of plantation land, amounting to RM209.5m and RM124.2m, respectively. This brings 1H17 PATAMI to RM63.5m boosted by better contribution from plantation and a turnaround to profitability in the heavy industries division compared to a core net loss of RM125.8m in 1H16 excluding gains from divestment of Jendela Hikmat (RM205.9m) and disposal of plantation land (RM124.2m).

Outlook. We expect plantation earnings to anchor bulk of earnings, and since 91% of its plantation estates are already matured, it will hinge largely on CPO price movements of which outlook over the short-term looks positive. Despite a surprising turnaround in the Heavy Industries division, however, we expect the outlook to remain volatile. We expect the trading & manufacturing as well as pharmaceutical divisions to show pedestrian growth and deliver sustainable recurring incomes. The trading & manufacturing division’s growth will be underpinned by captive market from Boustead Petroleum Marketing Sdn Bhd, which conducts marketing and distribution of petroleum products under the BHPetrol retailing brand. Its pharmaceutical division is supported by Pharmaniaga Logistics’ government concession agreement.

Upgrade FY17E/FY18E net profits by 35%/27% to take into account the better-than-expected performance in heavy industries.

Reiterate UNDERPEPRFORM. Correspondingly, out sum-of-part TP is raised from RM2.09 to RM2.20. Reiterate UNDERPERFORM.

Source: Kenanga Research - 05 Sep 2017