Maintain HOLD

3QFY20 results were within our expectation where 9MFY20 core net profit was 84% of our FY20E, in anticipation of a seasonally slower 4QFY20. We maintain our FY20-22E earnings forecasts but lower our rolled-forward SOTP-TP by 10sen to MYR4.20. Maintain HOLD on balanced risk-reward - long-term redevelopment/revaluation of Atlan’s land assets and potential M&A activities, off-set by slow near-term growth.

Weaker Margins at All Segments

Excluding net one-off loss (i.e. forex loss, disposal gains, changes in fair value), 3QFY20 core net profit was only MYR8.7m (-24% YoY, +180% QoQ), taking 9MFY20 to MYR17.3m (-42% YoY). YoY, the duty free segment’s 3QFY20 pretax profit fell 25% to MYR12.6m due to weaker margins from: (i) the consolidation of Brands Connect, and (ii) DFI’s concentration on wholesale channel which generally entails lower margins despite having higher sales volume. Elsewhere, 3QFY20 earnings were also lowered by lower revenue and higher opex at the automotive (due to lower orders received, higher labour and raw material costs), and property and hospitality segments (on lower occupancy and rental rates).

Limited Prospects at Key Segment for Now

We remain cautious over Atlan’s key duty free segment’s near-term earnings outlook at this juncture, due to a challenging retailing environment, particularly at its airport and bordertown outlets. The duty free segment remains the largest contributor to Atlan’s FY20-22E topline at 74-75%.

Long-term Prospects Intact

We believe Atlan’s long-term prospects and value still lie within its land assets (i.e. Bukit Kayu Hitam land and Jalan Ampang high-rise) which have strong redevelopment/revaluation potentials. Meanwhile, Atlan’s balance sheet remains solid with end-3QFY20 net cash of MYR310m or MYR1.22/share to sustain dividend payouts and support potential M&As.

Lowered SOTP-based TP to MYR4.20

We lower our SOTP-TP by 10sen to MYR4.20 after rolling-forward our valuation for the duty free and automotive businesses to FY21E from FY20E on unchanged at 15x and 10x PERs respectively. Meanwhile, our new SOTP is also based on a lower net cash of MYR264.7m at end-FY21E (prev: MYR317.7m end-FY20E). We believe there is still major revaluation upside for Atlan’s land assets, namely its Bukit Kayu Hitam land. To recap, in 2010, DFZ Capital Bhd disposed of three parcels of land totalling 2.3m sqft (part of the Bukit Kayu Hitam land) for MYR8.6m or MYR3.74 psf, which was about 194% higher than its current net book value on a psf basis. Our SOTP has factored in only a conservative revaluation assumption of MYR2.50 psf.

Risk Statement

There are several risk factors for our earnings estimates, target price and rating for Atlan. Changes in sales volume, selling prices and operating expenses may lead to lower earnings for Atlan. Increasing competition and weak consumer sentiment are additional earnings risk factors.

Source: Maybank Research - 15 Jan 2020