Review

• Excluding doubtful debt provisions and write-back (RM2.0mn) and other exceptional items, Signature International’s (Signature) FY19 core profit of RM5.1mn came in within our expectations at 100.4% of our full-year forecast.

• A turnaround in 4QFY19 core profit of RM2.0mn vs a core loss of RM0.5m can be attributed to cost-cutting initiatives where operating expenses have reduced 30.2% YoY, coupled with a 37.3% reduction in finance costs. These cost-cutting measures have effectively prop up earnings amid declines in revenue for the fourth consecutive quarters.

• On cumulative basis, FY19 earnings plunged 54.1% YoY to RM5.1mn. This was largely driven by slowdown in progress billing where revenue declined by 28.8% YoY and poor contract pricing. Having said that, balance sheet quality remained strong with net cash (cash + FD + ST investment) surging to RM19.2mn.

Impact

• We fine-tune our FY20-21 earnings projections by 1.5-0.9% after incorporating FY19 results into our forecasts.

Outlook

• The sequential rise in order book from RM150mn in June-19 (vs RM140mn in Mar-19) to RM188mn in Aug-19 indicates that the company has passed a key inflection point in securing new jobs and replenishing its order book. As such, we think the worst is over for Signature.

• We understand from management that the progress of securing overseas contracts has been intact. Early this year, the company invited 2 batches of local project managers in Vietnam visiting 2 of its completed projects in Malaysia. So, we believe Vietnam could be the next countries, after Cambodia, where Signature would secure its next overseas jobs.

Valuation

• We continue to like Signature for its: 1) strong brand name; 2) solid financial standings with net cash of RM19.2mn; 3) asset monetisation opportunity from future sale of Bandar Enstek land, which has a carrying value of app. RM61mn or 25sen/share. Ascribing a P/NTA of 0.8x FY20 NTA, we maintain our target price of RM0.60/share for the stock. Maintain Buy.

Source: TA Research - 3 Sept 2019