• 9MFY15 earnings slightly below ours and consensus’ expectations.

• Earning supported by construction segment but cost transfer possible in upcoming quarters

• Trimmed our estimates by -10% to be defensive

• Hence, we maintain our BUY stance with an adjusted TP of RM0.40 per share

9MFY16 earnings slightly below expectation. VIHB’s 9MFY16 earnings of RM53.0m (+722%YoY) came slightly below with ours and consensus estimates. Its net profit accounted for 65.4% and 67.0% of ours and consensus’ full-year forecasts respectively. The slight deviation was due to higher mobilization cost from expanding orderbook.

Construction segment encouraging but higher cost beckons...The 9MFY16 earnings was on the back of construction revenue of RM253m which resulted from the transfer of its construction orderbook of RM3.5bn to its bottom line trickled by a stable net margin of 16.6%. Meanwhile Neata Aluminium continues to grow its margin from RM5.6m in 9MFY15 to RM28.5m in current period (+28%YoY). The surge in orderbook could also signify growing cost evidential from its cost of sales of RM226.6 (+776%YoY).

...hence our FYE16/FYE17 estimates fine tuned to reflect potential cost-transfer from surging orderbook. Having said that, we trim our revenue and earnings estimates for FYE16/FYE17 by -10% to reflect; (i) defensive stance from bearish market sentiments and (ii) recognition of costs to its construction backlog in upcoming quarters. We reckon that VIHB will experience an increase of 15% in its cost of sales in FYE16/FYE17 due to a potential surge in its orderbook in the form of mobilization, tender cost and performance bond. To balance our view, its peers in KLCon Index have also shown some degree of increase in cost of sales from the 3 factors mentioned.

Recommendation. We reaffirm our BUY recommendation with an adjusted TP of RM0.40 (from RM0.63) per share based on discounted cash flow (DCF) with WACC of 7.4% and share split.

Source: MIDF Research - 30 Nov 2016