1H18 Core Net Loss (CNL) came in at RM21.5m compared to our full-year forecast of RM160.3m. We consider the results to be within our expectation as the group is expected to continue seeing volatile quarters judging by past quarterly trend, swinging back and forth between profitability and losses. Its share price has fallen 30% since our Underperform call. As such, we upgrade it from UP to MP. SoP TP is lowered from RM2.20 to RM2.05.

1H18 Core Net Loss (CNL) came in at RM21.5m compared to our full-year forecast of RM160.3m. We consider the results to be within our expectation as the group is expected to continue seeing volatile quarters judging by past quarterly trend, swinging back and forth between profitability and losses. A 2nd interim DPS of 1.0 sen was declared, bringing 1H18 DPS to 3.5 sen which is within our expectation.

Result Highlights. QoQ, 2Q18 CNL came in at RM27.6m compared to core net profit of RM6m in 1Q18, largely dragged down by lower performance in Heavy Industries, Plantations and Pharmaceutical. The Plantation Division registered an operating loss of RM19.6m compared to a profit of RM8.8m in 1Q18 mainly due to weaker palm product prices, lower FFB production and higher expenditure. The Heavy Industries division incurred an operating loss of RM7.1m compared to a profit of RM7.2m in 1Q18 largely due to a lack of projects undertaken by BNS. Nevertheless, this was partly compensated by the higher share of profit in joint-ventures under BHIC. The Pharmaceutical division also posted reduced operating profit mainly due to lower contribution from concession business as well as higher operating expenses.

YoY, 1H18 CNL came in at RM21.5m compared to a profit of RM48.5m no thanks to weaker contributions from Plantation, Property and Heavy Industries divisions. The Plantation division revenue fell 17% due to lower palm product prices and FFB production. The Heavy Industries division also posted a lower revenue of RM340.8m (6M17: RM725.3 million) primarily due to slower progress of work for the Littoral Combat Ship (LCS), Littoral Mission Ship (LMS) and ship repair projects. The Property division’s revenue decreased by 13%, mainly as a result of lower contribution from property development activities in Taman Mutiara Rini, Johor and hotel operations.

Outlook. The group is expected to continue seeing volatile quarterly results judging by past several quarters’ volatile trend. A gain of RM115.9m is expected from the proposed sale of 138.89 hectares of land from Malakoff Estate, which is expected to complete in 3Q 2018. All in, we expect plantation earnings to anchor the 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.

Upgrade from UNDERPERFORM to MARKET PERFORM. The share price has fallen 28% since our Underperform call. As such, we upgrade it from UNDERPERFORM to MARKET PERFORM. Our SoP TP is lowered from RM2.20 to RM2.05 due to lowered target price attached to Affin Holdings (from RM2.70 to RM2.40).

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

Source: Kenanga Research - 30 Aug 2018