• FY20 earnings came below expectations due to lower revenue and profit margin

• FY20 dividend payout below expectations. We believe that the group is conserving cash for plant construction in the Philippines

• Cut FY21/22 earnings estimates by 8%/9%

• Maintain HOLD with lower TP of RM4.20

What’s New

4QFY20 earnings below expectations. Perstima (PER) reported 4QFY20 earnings of RM4.6m (-29% y-o-y, -27% qo-q). The y-o-y decline in earnings was mainly due to (1) lower revenue (-6% y-o-y), and (2) lower 4QFY20 gross profit (GP) margin of 4.4% (4QFY19: 5.5%, 3QFY20: 6.2%). This brings its full-year earnings to RM31m, which came in below our estimate of RM34m.

Malaysia operations – dragged by lower sales. For its Malaysia operations, the group reported an operating profit of RM4.8m for 4QFY20 (-40% y-o-y) on the back of lower revenue of RM123.2m (-14% y-o-y) and lower profit margin. We understand that the lower revenue was due to both lower sales volume and average selling price (ASP).

Vietnam operations – stabilising. For its Vietnam business, revenue improved by 2% y-o-y to RM71m due to both higher sales volume and ASP. Its operating profit rose by 56% y-o-y to RM2.6m. This was driven by both higher revenue and profit margins on a y-o-y basis.

Philippine operations – small start-up losses. The group registered its Philippines subsidiary in November 2018 and this entity incurred losses of RM0.4m for the quarter largely for rental and administration purposes. There was no revenue from the Philippines yet.

Dividend trail expectations. Although its net cash increased to RM92m (RM0.93/share) in 4QFY20 from RM68m (RM0.69/sen) in 3QFY20, the group only declared a final dividend per share (DPS) of 10 sen, implying a dividend payout ratio of 31%. This came in below our dividend payout expectation of 65%. We believe that the group is conserving its cash for the construction of a plant in the Philippines that is highlighted below. We have revised our FY21-22 dividend payout to 30% accordingly.

Outlook

Challenging environment. We expect the operating environment to remain challenging and competitive. The increased competition from overseas imports and volatility of the ringgit against the US dollar (USD) are expected to continue impacting the group’s growth and profitability.

Potential dilution to EPS. PER announced in early March that the group is going to undertake the following rights and bonus issues exercises:

1. A rights issue of 19,860,944 units of shares (20% of its existing share base) on the basis of one new share for every five shares held at an issue price and entitlement date to be determined later.

2. A bonus issue of 9,930,472 units of shares where the entitled shareholders and/or their renouncee(s) who subscribe to the rights shares shall be entitled to the proposed bonus issue on the basis of one bonus share for every two rights shares subscribed.

Assuming an indicative issue price of RM3.00, the group is expected to raise approximately RM59.6m. Some 92% of the proceeds raised (estimated RM54.8m) will be used to partially finance the electrolytic tinning and tin-free steel production line for the manufacturing plant in the Philippines. The remaining proceeds will be used for the purchase of raw materials and expenses for the proposals. The new plant has a manufacturing capacity of 200,000 MT per annum and is expected to be installed and fully commissioned by June 2021.

Given that the dates of PER’s corporate exercises are yet to be completed, we are maintaining our earnings estimates for now. Nonetheless, we wish to highlight that assuming the exercise is completed in September 2020, the potential dilution to PER’s FY21 and FY22 earnings per share (EPS) will be 10% and 20% respectively, not taking into account the earnings contribution from its new plant.

Cut earnings estimates by 8-9%. In view of the lower-thanexpected quarterly results reported and its persistently challenging outlook, we cut our FY21/22 earnings estimates by 8%/9% mainly to account for lower revenue and GP margin assumptions.

Valuation and Recommendation

Maintain HOLD with RM4.20 TP. Post earnings revisions, we maintain our HOLD recommendation for the group with a lower target price (TP) of RM4.20, upon rolling forward our valuation base to FY21. Our price-to-earnings (PE) target is pegged to 12x – close to its historical mean.

Source: Alliance Research - 24 Jun 2020