• Maintain NEUTRAL with new TP of MYR0.47 from MYR0.52, and -3% expected total return. 2QFY20 results are expected to be unsurprisingly weaker. Looking ahead, demand prospects for non-staples goods and real estate to quickly normalise to pre-pandemic levels are unlikely. However, this is likely to be partially offset by its mass market-focused product lines. As such, FY20F-22F earnings are lowered by 27%, 24% and 11%.

• Trading and services not expected to return to pre-pandemic levels so soon. This segment is expected to register lower QoQ and YoY bottomline of around 10% due to the Movement Control Order (MCO), which began in the final two weeks of Fiamma’s 2QFY20 (Sep). This negative impact was partially mitigated by seasonal demand boost during the Lunar New Year. As home appliances retailers are closed during the MCO, sales should largely come from hypermarkets and online platforms. Post MCO upliftment, we do not expect demand to quickly normalise to pre-pandemic levels as households are likely to prioritise spending on essential items instead on the back of challenging macroeconomic conditions.

• Property segment to see one-off gains from disposal of land. We view the deal to dispose the 18 parcels of land in Johor for a total consideration of MYR39.2m as positive. It is a fast and less risky way for Fiamma to unlock its land holding. The deal is expected to be concluded in this FY, and boost cash flow. On core operations, we believe new sales will be soft for 2Q and the coming quarters given weaker macroeconomic conditions. The overall take-up rate (including completed units) is unlikely to see significant improvement. On the bright side, its ongoing major project ie East Parc (GDV: MYR320m, > 80% completed, sub 40% take-up rate) is slated for completion in FY20. However, with no major new projects to be launched in the near term, cash flow support for this segment from the holding company will be significantly reduced. The segment’s debt level is likely to peak in FY20 and progressively reduce starting FY21.

• Earnings lowered. With the employment market under stress, we lower FY20-22 earnings forecast by 27%, 24%, and 11%. Our revised FY21F-22F earnings vs FY20F are anchored on the expectations that demand will gradually recover post COVID-19 and the possibility for a vaccine to emerge in the first half of 2021.

• Maintain NEUTRAL with lower TP of MYR0.47 as we rollover our valuation to FY21F (Figure 1).

• Risks to our call. Upside risks are faster-than-expected spending recovery, increase in sales of property inventory and better-than-expected margin. Downside risk is worse-than-expected macroeconomic conditions.

Source: RHB Securities Research - 12 May 2020