Naim’s 9M14  results  beat  our  expectations.  We  raise  our  earnings forecast  for  FY14  by  14%,  but  trim  FY15  by  4%  to  factor  in  reduced share of profits from an associate. We lower our TP by 4% to MYR4.88 (implying a  48% upside)  but retain our BUY call. Naim is a good proxy to  Sarawak’s  buoyant  economy,  backed  by  massive  infrastructure spending and investments in the oil & gas and heavy industrial sectors. 
 
Strong  9M14.  Naim’s 9M14  core  net  profit  of  MYR102.2m  (excluding MYR61.7m disposal gains) beat our expectations at 93% of our full-year forecast,  thanks  to  better-than-expected  property  margins.  Consensus estimates are not meaningful due to distortion arising from the inclusion of the lumpy disposal gains as operating profits by certain analysts.

Construction buoyant, property soft. Naim’s MYR1.5bn order backlog will underpin its construction profits over the next two years. Meanwhile, it only recorded MYR135m property sales in 9M14 (vis-à-vis MYR331m it achieved  for  full-year  FY13).  Its  unbilled  sales  currently  stand  at MYR170m (vis-à-vis MYR220m three months ago). While Naim expects recurring  sales  from  its  mature  townships  in  Miri  despite  cooling measures,  it  is  cautious  about  the  demand  for  its  high-rise  residential units and high-end commercial units in Kuching and Bintulu.

Forecasts. We raise our earnings forecast for FY14 by 14% to factor in better  property  profits, but  trim  FY15  by  4%  to reflect reduced  share  of profits  from  Dayang  Enterprise  (DEHB  MK,  BUY,  TP:  MYR3.73) following  a  recent  private  placement  of  new  shares  that diluted Naim’s stake in this hook-up and commissioning specialist to 29% from 30.9%.

Risks. These include: i)  annual construction job wins in FY14-16 falling short  of  our  assumption  of  MYR500m,  ii)  an  escalation  in  input  costs, and iii) weak demand for Naim’s property launches.

Maintain  BUY.  Naim  is  a  good  proxy  to  Sarawak’s buoyant economy, backed by massive infrastructure spending (such as the MYR27bn Pan-Borneo Highway) and investments in the oil and gas and heavy industrial sectors  under  the  Sarawak  Corridor  of  Renewable  Energy  (SCORE) blueprint.  It  also  piggybacks  on  the  high-growth  potential  of  Dayang Enterprise. We trim our TP by 4% to MYR4.88 (from MYR5.06) based on 10x revised FY15F EPS, in line with our 1-year forward target P/E for the construction sector of 10-16x.

Financial Exhibits

Financial Exhibits

SWOT Analysis

Company Profile

Naim Holdings is a Sarawak-based construction and property development company. It also owns a 29% stake in oil and gas company Dayang Enterprise.

Recommendation Chart

Source: RHB