Review

• Signature International’s (Signature) 1HFY17 core profit of RM5.8mn was below expectations at 20% of our full-year forecast and 27% of consensus estimates. The variance was due to lower-than-expected margins for project revenue.

• 1HFY17 earnings remained lacklustre as job replenishment was slow in 1HFY16. Coupled with decline in PBT margin (-4.2% pts) due to higher import cost of white goods arising from ringgit weakening, 1HFY17 core profit declined by 42.2% YoY to RM5.8mn.

• Note that Signature secured significant contracts in 2HFY16 period (referring to Jan-June 2016), boosting its order book to RM215mn in June 2016 from RM150mn in Dec 2015. The contracts are currently in preparation stage, thus having little contribution in 1HFY17.

• Signature’s balance sheet remained in net cash position with cash surplus of RM47.1mn, representing 21% of the company’s market capitalization. In Jan-17, the company announced the completion of acquisitions of 5 parcels of land, measuring 38.86 acres within Techpark@Enstek, Seremban for RM50.8mn. This is expected to increase borrowings, thus reducing net cash, in the upcoming 3QFY17 results.

Impact

• We cut FY17/18/19 earnings projections by 22.5%/4.1%/3.6% respectively after reducing our gross margin assumptions to 26-28% for project revenue.

Outlook

• We understand from management that the order book had depleted to RM200mn as at Dec-16. For 2017, the property market is expected to remain lacklustre due the lack of new launches. This could pose a threat to the company in terms of job replenishment.

• Outside Malaysia, the tender for kitchen and wardrobe contract for Battersea project in the UK has not started. However, we remain positive on the chance of winning as we believe some jobs would be given to Malaysian players. In our order book replenishment assumptions, we assume the company to rake in RM194mn-RM215mn for FY17-19.

• Recently, Signature share price bottomed out at RM0.80 levels after the selling pressure from its major foreign shareholder, Value Partner, was neutralized by the group’s share buyback efforts. The share price rose to the current level of RM0.96. Note that from Nov-16 to Feb-17, Signature spent approximately RM2.3mn to buy back 2.7mn shares at prices ranging from RM0.80 to RM0.955. This has added to the group’s cumulative treasury shares of 7.1mn (3.2% of outstanding shares), which can be paid out as share dividend in the future

Recommendation

• We continue to like Signature for its undemanding valuation. Pegging a target PE of 10x CY17 EPS, we reiterate our Buy recommendation on Signature with revised target price of RM1.10/share (from RM1.26/share previously).

Source: TA Research - 21 Feb 2017