Review

Signature International’s (Signature) 1QFY17 core profit of RM3.1mn accounted for only 13% of our full-year forecast and 9% of consensus. However, we consider the results within our expectation (but below consensus) as workflow is expected to pick up momentum in the remainder of FY17 following the surge in order book to RM215mn from RM150mn six months ago.

1QFY17 earnings declined by 31.4% to RM3.1mn owing to lower revenue (-4.6% YoY) and decline in PBT margin (4%-pts), stemming from slowdown in work progress. Note that the company secured several new jobs worth RM60mn six months ago and these jobs are yet to contribute to the bottomline in this quarter.

Despite weaker profit, the group’s balance sheet remained sound with net cash of RM47mn, which is equivalent to 23.7% of the company’s market capitalization. This huge cash pile would assure Signature to continue paying decent dividend in the future.

Impact

We fine-tune our FY17-19 earnings projections slightly higher by 0.03%- 1.7% after factoring in the audited FY16 earnings performance into our model.

Outlook

Looking forward, FY17 earnings visibility is well supported by its order book of RM215mn as at Sep-16. Coupled with job tenders of close to RM400mn, we project FY17 earnings to grow by 18% to RM28.7mn.

Recently, Signature announced that the sale and purchase agreement for the acquisition of 38.86 acres land within Techpark@Enstek for RM50.8mn has become unconditional in Nov-16. In other words, the company will take possession of the land soon. In our forecast, we have already factored in this land acquisition. We project the company to dispose of the land eventually to realise the gain from the surge in market value in recent years.

Future earnings catalysts include: 1) winning of kitchen and wardrobe contracts for Battersea development, 2) participation in Country Garden’s Danga Bay project, and 3) increase in project revenue from new market segment, i.e.: the mid-end property range which priced at RM400k to RM700k.

Recommendation

From valuation perspective, Signature is relatively undervalued. At a forward PE of 6.5x, the valuation has not factored in the excess cash (net cash of 20sen/share) that could be paid out as special dividend or used for share buyback. Pegging at target PE of 10x CY17 EPS, we maintain our target price at RM1.26. Maintain Buy on Signature with decent upside potential of 53%

Source: TA Research - 22 Nov 2016