New Hoong Fatt Holdings Berhad One-stop automotive replacement parts seller

Transcription

1 05 April 2017 Small Cap Highlight New Hoong Fatt Holdings Berhad One-stop automotive replacement parts seller INVESTMENT HIGHLIGHTS Auto parts trader and maker with a good track record Strategic venture into other emerging markets Undemanding valuation and consistent dividends Not rated with FV of RM4.43 based on FY17F PER of 11x Business Overview: Established in 1977, New Hoong Fatt (NHF) started off as a trader of auto parts before it ventured into manufacturing of auto parts for local models and Japanese makes. Currently, it manufactures 1,000 types of plastic items and 2,000 metal items that include hood, door, fender, lamp grille and bumper for the replacement market. Besides serving the local market with a distribution channel of more than 1,000 wholesalers and retailers, it exports to more than 50 countries. Investment theses: 1. Good profit track record. NHF has been profitable since its listing in With the exception of FY14, its net profit margins for the past 10 years ranged from 9% to 14%. We expect the company s earnings to continue positive growth in FY17 and FY18 as the company starts to expand into new overseas markets. This is premised on growth in volume due to higher sales and expansion in its product offering to include parts for commercial vehicles and servicing products. 2. Strategic venture into other emerging markets. NHF s China and Indonesia trading units have started to contribute positively to the group. We expect contribution from Indonesia to grow further in the years to come due to the bigger automotive market there. In the past 10 years, cumulative total industry volume in Indonesia is 9.07mil as compared to 6.5mil in Malaysia. 3. Undemanding valuation. The stock is trading at a trailing PER of 9.6x, which is below other similar size auto parts companies that trade at an average of 14x. Its current share price of RM3.83 is a 30% discount to its NTA per share of RM Consistent dividends. Dividend payout in the past five years ranged from 35% to 75%. We expect the company to pay out 14.5 sen in FY17F and 15.0 sen in FY18F, which translate into decent yields of 3.78% and 3.92% respectively based on payout assumptions of 36% and 35%. Valuation: We ascribe a fair value of RM4.43 on NHF based on 11x PER of FY17F and EPS of sen. The 11x PER is a slight discount to two other auto parts peers, which trade at an average forward PER of 12.85x. RETURN STATS Price (4 April 2017) Fair Value Expected Share Price Return Non-rated Fair Value (FV): RM4.43 RM3.83 RM % Expected Dividend Yield 3.8% Expected Total Return +19.8% STOCK INFO KLCI 1, Bursa / Bloomberg Board / Sector Syariah Compliant 7060/ NHF MK Consumer Yes Issued shares (m) Par Value (RM) 1.00 Market cap. (RM m) Price over NA wk price Range RM2.6-RM3.93 Beta (against KLCI) mth Avg Daily Vol 0.02m 3-mth Avg Daily Value Major Shareholders (%) RM0.08m Kam Foong Keng 34.09% Wong Ah Moy 13.85% Yeoman Capital Management 6.86% Yeoman 3-Rights Value 6.75% is a unit of MIDF AMANAH INVESTMENT BANK Kindly refer to the last page of this publication for important disclosures

2 2 INVESTMENT STATISTICS FYE Dec FY14 FY15 FY16 FY17F FY18F Revenue (RM 'm) Gross Profit (RM 'm) Pretax Profit (RM 'm) PATAMI (RM 'm) EPS (sen) EPS growth (%) PER (x) DPS (sen) Dividend Yield (%) 3.13% 2.61% 3.66% 3.78% 3.92% Source: Company, MIDF Research DAILY PRICE CHART Source: Bloomberg Ng Bei Shan

3 3 INVESTMENT THESIS Good profit track record. For a company that was established in 1977 and been profitable every year since its listing in 1997, NHF has shown that it is resilient through the testing of time and economic cycles. In the past 10 years, with the exception of FY14, it was able to achieve net profit margin of 9% to 14%. We expect the company to grow at a three-year CAGR of 19% from FY15 to FY18F as the company starts to build new businesses and diversify through new markets and products. NHF has expanded its product offering to include replacement parts for commercial vehicles and more products for car servicing, which enables it to bundle the products for higher sales. Capturing and growing overseas markets. NHF is already exporting to more than 50 countries. Last year, the company started to embark on strengthening its core business so that it could further expand its overseas ventures, which has proved to be fruitful. In FY15, NHF derived 23% of its sales from exports and in FY16, it was grown to about 50%. Going forward, the company targets to grow export contribution to 70% with a special focus on the South American market. The continent contributed some 14% to its total export in FY15. It has expanded its footprint to Mexico, Peru, Brazil, Chile and Ecuador and targets to look for more opportunities in that region. ASEAN is its biggest export destination where it sells about 30% of its products to. Its China trading arm could also help to expand reach as NHF aims to rebuild Ampire to become a re-exporting centre. We believe that NHF will be able to gain a foothold in the new foreign markets as it position itself as a one-stop centre for mass market automotive parts. Indonesia a rising market. NHF s China and Indonesia trading units have started to contribute positively to the group. We expect contribution from Indonesia to grow further in the years to come due to the bigger automotive market there. In the past 10 years, cumulative total industry volume in Indonesia is 9.07mil as compared to 6.5mil in Malaysia. Management sees a huge opportunity in the Indonesian market in the near term due to the rising middle income class and a much faster increase in adoption of automobile. The company has bought a 80,000 sq ft warehouse in Jakarta and plans to further enlarge its presence in Indonesia once sales from the country exceeds RM20m p.a. Its current sales from Indonesia are estimated at RM10m. We believe that Indonesia will become an increasingly important market for NHF due to the market potential in the country, which potentially has an automotive market that is 40% bigger than Malaysia s. NHF s warehouse in Jakarta has also served as a good base for it to further grow its business by optimising lead time. Modernising its manufacturing plant. As the company eyes more markets and higher sales, it has also come up with a plan to automate its manufacturing processes over the next three years. The automated processes are expected to bring down operational costs for the company in the longer run as it hires less people. To kick start this initiative, the company has allocated an additional RM10m to RM15m on top of its regular annual maintenance expenses as its capital expenditure. Besides further cost cutting measures, it also plans to optimise its warehouse and distribution. We expect impact from this measure to be seen from FY19 onwards as the process will be done gradually over the next three years. We believe the company will be able to fund this mainly from its internally generated fund as its operating cash flow is expected to range from RM40m to RM50m, sufficient to cover the additional expenditure. Exhibit 1: Some of NHF s existing manufacturing facilities

4 4 New product offerings to further beef up its one-stop status. Besides growing new markets, NHF also plans to expand its product offering for the trading arm. It is adding auto parts for commercial vehicles to its stable. This year, the company has also identified aesthetic car lamps as a product type that it can expand and monetise upon. Previously, most of the lamps it manufactures are for the replacement market. We see this as a positive move as customers will find the working relationship with NHF even stickier. NHF will also have an improved advantage of bundling its products to sell to its customers. Currently, NHF makes and distributes 1,000 types of plastic items and 2,000 metal items. Exhibit 2: Some of NHF s products Source: Company Undemanding valuation. The stock is trading at a trailing PER of 9.6x, which is slightly below other similar size auto parts companies that trade at an average trailing PER of 14x. Its current share price of RM3.80 is a 31% discount to its NTA per share of RM4.96. FINANCIAL HIGHLIGHTS Consistent dividends. The company has been paying dividends above 10 sen per share steadily in the past ten years. Dividend payout in the past five years ranged from 35% to 75%. We expect the company to pay our 14.5 sen in FY17F and 15.0 sen in FY18F, which translate into decent yields of 3.78% and 3.92% respectively, assuming payouts of 36% and 35% respectively. Sturdy balance sheet. NHF s net gearing range from 0.02x to 0.03x in the past three years. We expect its balance sheet to remain healthy with a chance of turning into net cash as its operating cash flow remains strong at RM40m to RM50m. Decent profitability. NHF s ROE has ranged from 4% to 8%. We expect it to be 7% in FY17F. Its net profit margin has also stayed reasonable at 6% to 13% in the past three years. We expect profit margin to be 11% in FY17F due to slight cost pressure arising from higher raw material costs but we believe NHF will be able to pass on the costs to its customers if high raw material prices stay on for too long. RISKS Acceleration in the adoption of new technologies that will reduce the probability of accidents to very low levels. Steep hike in labour costs. About a-third of its employees are foreigners. Surge in raw material prices could pressure its margins but we believe that the company will be able to pass on the costs to its customers.

5 VALUATION We ascribe a fair value of RM4.43 on NHF based on 11x PER of FY17F. We estimate its FY17F EPS to be sen. The 11x is a slight discount to two of other auto parts peers which trade at an average forward PER of 12.85x. Peers Market Cap (RM m) Forward P/E Core Business Pecca Bhd Group Designs and manufactures car upholstery for car makers and the replacement markets. Pecca also manufactures other small automotive leather parts. APM Automotive Holdings Bhd Manufacturer of automotive parts like suspension, coil springs, car seats, electrical system and air-conditioning system mainly for the OEM market. Average Source: Bloomberg, MIDF Research 5

6 6 is part of MIDF Amanah Investment Bank Berhad ( X). (Bank Pelaburan) (A Participating Organisation of Bursa Malaysia Securities Berhad) DISCLOSURES AND DISCLAIMER This report has been prepared by MIDF AMANAH INVESTMENT BANK BERHAD (23878-X). It is for distribution only under such circumstances as may be permitted by applicable law. Readers should be fully aware that this report is for information purposes only. The opinions contained in this report are based on information obtained or derived from sources that we believe are reliable. MIDF AMANAH INVESTMENT BANK BERHAD makes no representation or warranty, expressed or implied, as to the accuracy, completeness or reliability of the information contained therein and it should not be relied upon as such. This report is not, and should not be construed as, an offer to buy or sell any securities or other financial instruments. The analysis contained herein is based on numerous assumptions. Different assumptions could result in materially different results. All opinions and estimates are subject to change without notice. The research analysts will initiate, update and cease coverage solely at the discretion of MIDF AMANAH INVESTMENT BANK BERHAD. The directors, employees and representatives of MIDF AMANAH INVESTMENT BANK BERHAD may have interest in any of the securities mentioned and may benefit from the information herein. Members of the MIDF Group and their affiliates may provide services to any company and affiliates of such companies whose securities are mentioned herein This document may not be reproduced, distributed or published in any form or for any purpose. MIDF AMANAH INVESTMENT BANK : GUIDE TO RECOMMENDATIONS STOCK RECOMMENDATIONS BUY TRADING BUY NEUTRAL SELL TRADING SELL Total return is expected to be >15% over the next 12 months. Stock price is expected to rise by >15% within 3-months after a Trading Buy rating has been assigned due to positive newsflow. Total return is expected to be between -15% and +15% over the next 12 months. Total return is expected to be <-15% over the next 12 months. Stock price is expected to fall by >15% within 3-months after a Trading Sell rating has been assigned due to negative newsflow. SECTOR RECOMMENDATIONS POSITIVE NEUTRAL NEGATIVE The sector is expected to outperform the overall market over the next 12 months. The sector is to perform in line with the overall market over the next 12 months. The sector is expected to underperform the overall market over the next 12 months.