1Q18 core PATAMI came in at RM6m compared to our fullyear forecast of RM160.3m. We consider the results to be within our expectation on a seasonally slower quarter. The group is expected to continue seeing volatile quarters judging by the past quarterly trend, swinging back and forth between profitability and losses. Maintain UNDERPERFORM and sum-of-parts TP of RM2.20.

1Q18 core PATAMI came in within our expectation. 1Q18 core PATAMI came in at RM6m compared to our full-year forecast of RM160.3m. We consider the results to be within our expectation on a seasonally slower quarter. A first interim DPS of 2.5 sen was declared, which is within our expectation.

Result Highlights. QoQ, 1Q18 core PATAMI came in at RM6m compared to RM86.1m in 4Q17 (excluding gains from disposal of plantation land effectively amounting to RM318.6m from 57.42%-owned Boustead Plantations in 4Q17) largely dragged down by lower performance in Heavy Industries and Plantations. In 1Q18, Heavy Industries EBIT fell to RM7.2m compared to RM130.7m in 4Q17 due to the absence of compensation receivable from Joint Operating Partners for the settlement of termination of a Joint Operation contract with MHSA. Plantation was hit by lower CPO and PKO prices. Average CPO price and PKO prices were lower by 7% and 15%, respectively. However, Pharmaceutical came in higher due to increased demand from Government hospitals under the concession business segment as well as lower operating costs.

YoY, 1Q18 core PATAMI came in at RM6m compared to a loss of RM0.4m in 1Q17 thanks to better performance by the Heavy Industries Division and Pharmaceutical. The Heavy Industries division managed to turn around and registered a small EBIT of RM7.2m compared to an operating loss of RM31.1m driven by stronger contribution from Boustead Naval Shipyard (BNS) and Boustead Heavy Industries, thanks primarily to better share of profit from a joint venture, while BNS recorded a higher contribution as a result of lower operating costs. Pharmaceutical division’s better performance was driven due to increased contribution from the private sector business and continuous cost optimisation measures, although this was moderated by a lower contribution from the Indonesia segment. However, the turnaround was negated by lower plantations contribution due to lower average CPO (- 21%) and PKO (-32%) prices.

Outlook. The group is expected to continue seeing volatile quarterly results judging by the past several quarters trend, swinging back and forth between profitability and losses. A gain of RM115.9m is expected from the proposed sale of 138.89 hectares of land from Malakoff Estate and expected to complete in 3Q 2018. All in, 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 neutral. The Heavy Industries division remains volatile with quarterly earnings oscillating between profits and losses. We expect the trading & manufacturing as well as pharmaceutical divisions to show pedestrian growth and deliver sustainable recurring incomes.

Reiterate UNDERPEPRFORM. Maintain UNDERPERFORM and sumof-parts TP of RM2.20.

Risk to our call is higher-than-expected earnings at Heavy Industries.

Source: Kenanga Research - 1 Jun 2018