We are upgrading Kumpulan Fima Berhad (KFima) to BUY from Hold with a higher target price of RM1.98, based on the DDM valuation methodology. Year-to-date, the group’s share price has appreciated by 6%. We believe there is still some upside potential in the share price. The group has been consistently paying healthy dividend yields of between 4.8% and 5.4% in the past five years. Looking forward, we expect the share price to be well supported by decent dividend yield and healthy balance sheet.

A Stock In Recovery Mode

In 2017, KFIMA’s share price declined by circa 8%. We attribute this to softer revenue from its manufacturing division due to the expiry and non-renewal of the passport contract. The contract to print the Malaysian passport booklets expired in 3QFY17 and the new job was awarded to Datasonic Group Bhd. Following the expiration of the supply contract, management guided that the group will realign its efforts to focus on establishing new strategic alliances by developing new products and solutions. We believe investors have already priced in all the negative news and the stock is now in recovery mode. Indeed, year-to-date, the group had experienced some 6% rise in its share price.

Indirect Beneficiary If Government Replaces Bank Notes

We believe KFIMA could be one of the indirect beneficiaries if the Malaysian government decides to replace currency notes to tackle corruption and address counterfeit notes. The group owns a 12.2% associates stake in Giesecke & Devrient (Malaysia) Sdn Bhd (G&D), which is principally involved in the printing and production of banknotes. We understand that (G&D) is Malaysia’s only banknote printing plant in Shah Alam. To recap, the group had experienced a loss from associates of approximately RM0.5mn in FY18, compared to a net profit of RM2.9mn in the prior year. However, we are now unable to ascertain the financial impact to the associate if the new currency notes contract materialise.

Offers One Of The Most Generous Dividend

KFIMA does not have a formal dividend policy. However, it has been paying healthy dividend yields of between 4.8% and 5.4% over the past five years. We note that the average dividend yield of all FBMKLCI companies are at approximately 2.7% currently. We expect the group to pay out DPS of 9 sen from FY19 to FY21, which is equivalent to a payout ratio of 58-70%. These dividends translate to yields of c. 5.4%. The group has healthy balance sheet with net cash amounting to RM201.9mn as at 31 March 2018.

FFB Yield Is Recovering

FFB yield is recovering and is expected to improve further. We expect FFB production growth to accelerate over the next three years, mainly due to new estates coming into maturity in Sarawak and Peninsular Malaysia. Meanwhile, the demand for storage is expected to improve slightly with the increase in palm oil stock level nationwide. The group is looking forward to securing longer term contracts with customers as well as opportunities to handle higher margin products.

Valuation

No change to our earnings forecast. However, we upgrade our DDM-based target price from RM1.65 to RM1.98, after reducing our market risk premium. We continue to like KFIMA due to its decent dividend yield and healthy balance sheet. In addition, the share price is attractive at current level. We upgrade KFIMA from Hold to BUY.

Source: TA Research - 30 Jul 2018