Management exclaimed in delight that “we have a situation now where job replenishment is faster than execution…”. This has reaffirmed our view that the delay in job award has reached a critical stage where any further delay may defer project handover and subject to liquidated damages. In view of this, Signature has been aggressively buying back its shares as the market has not entirely priced in the increasing job flows. Maintain Buy on Signature with an unchanged target price of RM1.10/share.

Winds of change

Unfavourable project timing in 1HFY17. One of the key culprits to disappointing 1HFY17 profit growth (-42.2% YoY) was the drop in revenue as project executions remained at snail-pace. For instance, one of the key projects in KLCC, which the company secured in July-16 with a contract sum of RM38mn, that involves kitchen installation works are still pending on completion of the building superstructure 5 months after the award. However, management is positive that the situation would change from 4QFY17 onwards with strong contract wins in recent months.

Further delaying may cause LAD. From January to February 2017, Signature secured 8 new contracts worth RM34mn. This has boosted its order book to RM220mn as at Feb-17 (vs RM200mn in Dec-16). Moreover, the company is close to secure 8 other new contracts worth RM40mn, pending formal awards in these few months. According to management, the delay in contract awards in 2016 when property developers slowing down the work progress to smooth out their future incomes would likely push more jobs to 2017-2018. The contract delay, in our opinion, has reached a critical stage where any further delay may defer project handover and subject to liquidated damages (LAD).

Housing supply mix tilted toward property >500,000/unit. Beyond 2018, we remain upbeat and continue expecting the favourable mix of housing supply in Malaysia to bode well for Signature. Note that the increased supply of residential properties priced above RM500,000/unit continued to outweigh affordable housing in Klang Valley, Penang and Johor in Malaysia (see Figure 1). This upmarket and luxury home segment is the typical target market for Signature, a premier kitchen player in Malaysia.

No significant progress in Battersea tender. As far as Battersea is concerned, there is no significant progress in terms of kitchen and wardrobe tenders for Phase 2 and Phase 3A. However, we remain confident that Signature would procure the kitchen and wardrobe contracts. Note that Battersea Phase 2 and Phase 3A are targeted for completion in period 4Q2019-3Q2020 and 4Q2020- 2Q21, respectively. It is still early to call for kitchen and wardrobe tenders, which would usually take place when the project is more than 50% completed.

Bandar Enstek land will be a long term investment

RPGT hinders potential land sale gains. For Bandar Enstek land, Signature took possession of the landbank, measuring 38.86 acres, in Nov-16. Recently, there was an offer to acquire a portion of the landbank from Signature for RM50psf. Based on the land cost of RM30psf, the company can easily rake in RM8.7mn gain from selling the portion of the land. However, the RPGT implication has impeded the sales transaction as the gain would be taxed at 30%.

Prefer outright land sales. As there is no immediate plan to expand its current capacity, management did not rule out the possibility of joint developing the land with another property developer. However, this will be the least preferred option that may overly expose the company to property slowdown in Malaysia. In our opinion, investors should consider the land merely an asset for sale over the long term (6-years from Nov-16), which may give rise to a one-off special dividend in the future.

Share price support

YTD, Signature share price advanced by 20%, thanks to Signature’s share buyback program, which neutralized the selling pressure from Value Partner. We believe the share buyback support is premised on the basis that the market has not fully factored in increasing job flow in the market this year. Looking at the group’s balance sheet, the company had sufficient cash and short-term investment of RM69.6mn (net cash RM47.2mn) as at Dec-16, which can be used for share buyback program. Note that YTD, Signature has bought back 5.1mn shares (2.1% of outstanding shares) at an average price of RM0.89, boosting the group’s cumulative treasury share to 11.2mn shares (4.7% of outstanding shares).

Forecast

We maintain our profit forecast.

Valuation

We reiterate our Buy recommendation on the stock with an unchanged target price of RM1.10 based on 10x CY17 EPS. At current price levels, we see little downside risk as the selling pressure from Value Partner has diminished after the fund management company disposed all its shares in Signature.

Source: TA Research - 30 Mar 2017