Review

• Signature International’s (Signature) 1QFY20 results sprang a negative surprise with a net loss of RM1.56mn, which was way below our full-year profit forecast of RM11.3mn. The variance was largely due lower-thanexpected progress billing.

• Excluding a disposal gain and other exceptional items of RM0.4mn, Signature’s 1QFY20 core loss of RM1.56mn compared to core profit of RM1.26mn a year ago was underpinned by a significant drop in revenue, which decline 40.1% YoY to RM24.4mn. This was the lowest quarterly revenue recorded by the group since 2QFY13. According to announcement, the decline in revenue was mainly due to lower project revenue.

• Despite poor 1QFY20 earnings, Signature’s balance sheet remained strong with a total net cash expanded to RM24.8mn (cash + FD + ST investment) versus a net debt of RM11.8mn as at 1QFY19. Its current assets were 2.2x larger than its current liabilities, suggesting a low level of liquidity risk for FY20.

Impact

• We slash our FY20 earnings projections by 65.7% after revising our project revenue assumptions lower by 50% to RM60.1mn. However, our FY21-22 earnings projections are largely unchanged.

Outlook

• According to management, the decline in project revenue was due to delay in site possessions for those new projects secured recently. Based on current project milestones, site possessions can only be expected in Dec-19, indicating that the slow work progress may continue into 2QFY20. However, the group has replenished its order book to RM184mn, from RM150mn in August last year.

• Looking forward, we expect the group’s quarterly revenue to recover to RM40-50mn levels from 3QFY20 onwards. Also, project margins are expected to increase on the back of: 1) completion of low-margin projects last year; 2) change in supply chain started a year ago; 3) cost rationalisation exercise initiated in FY18.

Valuation

• Ascribing the same FY20 P/NTA ratio of 0.8x, we reduce Signature’s target price to RM0.57sen (from RM0.60/share previously). We continue to like Signature for its: 1) strong brand name; 2) solid financial standings with net cash of RM24.8mn; 3) asset monetisation opportunity from future sale of Bandar Enstek land, which has a carrying value of app. RM61mn or 25sen/share. Maintain Buy.

Source: TA Research - 22 Nov 2019