PRG HOLDINGS BHD. Results Report. MERCURY SECURITIES SDN BHD ( w) Hold/Market Perform 2Q/FY16 RESULTS RECOMMENDATION MAIN MARKET [7168/PRG]

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1 MERCURY SECURITIES SDN BHD ( w) (A Participating Organisation of Bursa Malaysia Securities Berhad) PRG HOLDINGS BHD [7168/PRG] Results Report 29 August, 2016 MAIN MARKET INDUSTRIAL PRODUCTS Hold/Market Perform # PRG was f.k.a. Furniweb Industrial Products Bhd 2Q/FY16 RESULTS Market Price (RM) : 1.23 Target Price (RM) : 1.25 Potential Upside (%) : 1.6 Q2 results within expectations For 2Q/FY16 (quarter ended 3 0 th June 2016), PRG s results were generally within our earlier expectations. PRG s 2Q/FY16 revenue of RM33.2 million and NPATMI of RM1.6 million were both higher y-o-y versus the corresponding 2Q/FY15. Better y-o-y performance Group revenue was boosted by a positive performance from both its long-running Manufacturing Division and its relatively new Property Development & Construction Division, via profit recognition from the Picasso Residence development project. The group s Manufacturing business segment benefited from both better sales volumes and economies of scale. Nevertheless, there was lower y-o-y contribution from the group s construction project in Ipoh (Perak). Comparing q-o-q versus the preceding 1Q/FY16, PRG s revenue and NPATMI were both higher, by 7.1% and 2.8%, respectively. The increase in revenue and earnings during the quarter was mainly arising from better contributions from its Manufacturing business segment. RECOMMENDATION Based on our forecast of PRG s FY16 Book Value/Share and an estimated P/BV of 1.5 times, we set a FY16-end Target Price (TP) of RM1.25 (representing a Hold Call), approximate to the market price on the date of this report. Our TP for PRG reflects a P/E of 27.9 times over its FY16F Earnings /Share. KEY DATA 52w High (RM) : w Low (RM) : 0.56 Market Cap (RM mil) : Issued Shares (mil) : FY16 P/E (times) : 27.4 FY16 P/BV (times) : 1.5 FY16 Div yield (%) : 0.8 MAJOR SHAREHOLDER(S) Dato Lua Choon Han # Wee Cheng Kwan, Alex # : 16.2% : 10.2% Dato Ng Yan Cheng : 9.7% Pacific Vintage SB : 8.0% Wang Jing : 6.1% Cheah Eng Chuan, : 5.3% Jimmy # # on PRG s Board of Directors Prepared by: ~ Research Team

2 OUTLOOK/CORPORATE UPDATES IMF global outlook Brexit factor In its July 2016 World Economic Outlook, the International Monetary Fund (IMF) has forecasted world economic growth at 3.1% (lowered from 3.2%) for 2016 and 3.4% (from 3.5%) to This was largely due to the foreseen impact from the expected implementation of Brexit, following the results of the 23 rd June 2016 referendum in the United Kingdom (UK). The UK is expected to endure slower economic growth than before. With Brexit, there will be uncertainties, on the fronts of economy, trade, foreign investment, financial markets and even on the political front. In terms of world trade volume, the IMF has forecasted growth of 2.7% (from 3.1%) for 2016 and 3.9% (from 3.8%) for According to the IMF, global growth will be aided by the weakness in oil prices and the ease of financing in some countries, but risks do abound from the volatile foreign exchange rates and financial markets, uncertainty over US Federal Reserve s next move and weak commodity prices. The y-o-y recovery in advanced economies is expected to be modest, while activity in emerging market and developing economies is still projected to be slow, primarily reflecting weaker prospects for some large emerging market economies and oil-exporting countries. In an environment of weak commodity prices, reduced capital flows to emerging markets and pressure on their currencies, and increasing financial market volatility, downside risks to the outlook appear to be raised, particularly for emerging market and developing economies. Manufacturing Cautious Outlook We remain generally cautious on PRG s manufacturing business performance. This is due to the lacklustre demand situation across a number of regions (e.g. Europe and Japan), coupled with pressures on labour wages, utilities rates and raw material prices. Additionally, the end of Quantitative Easing (QE) by the US Federal Reserve does impact global business sentiment and trade levels, to a certain extent. We are also concerned about the level of US Dollar (USD) versus Ringgit volatility, which may impact PRG s level of profits. The group derives a substantial portion of its manufacturing revenues in US Dollars. While a strong USD is good for the group in terms of translation of revenues into Ringgit terms, a strong USD may affect demand by customers in other countries. Meanwhile, the group would continue to improve on its operational efficiency, implement cost-cutting and also invest in human resource development. Approximately 80% of PRG s industrial products are manufactured for the export markets, to areas as far as Europe, the Americas and Africa. Europe and the US are key markets for the group. Apparently, sales to Russia were affected by trade sanctions imposed on Russia. The group s management plans to continue focusing on its export markets (both developed and emerging economies) for volume growth despite facing price competition. PRG is making efforts to strengthen its distribution network in export markets. Meanwhile, the strength of the group s exports would depend largely on the growth of the respective economies. Potential benefits from TPPA Back in 2010, the group had taken the decision to invest in a new 3-storey factory cum warehouse at the wholly owned subsidiary, Premier Elastic Webbing & Accessories (Vietnam) Co Ltd ( PEWA ), in order to position the group to capture the potential market growth (the group is targeting the furniture and textiles sector) once the preferential treatment of trade is approved by the Trans-Pacific Partnership Agreement (TPPA) and also once global economies recover fully. 2

3 There are potential benefits from TPPA for countries with lower-labour costs. The earlier signatorycountries of TPPA are the U.S., Chile, Peru, Australia, New Zealand, Singapore, Brunei, Malaysia and Vietnam. Subsequently Japan, Mexico and Canada have joined. Malaysia s negotiations for its TPPA terms have generally progressed well. The TPPA will advocate the gradual elimination of import taxes on textiles and apparel products within member countries and this will greatly benefit PRG. Other countries are also said to be interested in joining the TPPA grouping, including Taiwan, South Korea, Thailand, the Philippines, Laos, Cambodia, Colombia, Costa Rica, Indonesia, Bangladesh, India and even China. However, there are competing or overlapping international trade agreements such as the Regional Comprehensive Economic Partnership (RCEP) that was initiated by ASEAN. The group s Webbing, Yarn & Furniture Component ( Webbing ) business segment were affected by the sluggish demand from some overseas markets. Margins for the Webbing segment were squeezed due to price competition (particularly from competitors in China and India). The group had to reduce its margins in order to defend its market share. The volatility of the Ringgit against the US Dollar also impacts earnings. The Rubber Strips & Fabrics segment is now profitable at the PBT level. The improved performance was due to the better sales volume (enhanced by appointment as approved supplier to MNCs), stable rubber prices and a more efficient production level. Previously, the under-utilization of the group s production facilities in Vietnam was the reason for the continued losses in the segment. Malaysia s economy Prospects for PRG s domestic-based Property Development & Construction business segments are generally in tandem with Malaysia s economic growth. Malaysia recorded a 2Q/2016 GDP growth of 4.0%, according to Bank Negara Malaysia (BNM). BNM has reduced (on 13 th July 2016) its accommodative overnight policy rate (OPR) of 3.25% to 3.0%, while inflation (CPI) (July 2016) is at a meager 1.1%. Malaysia s July 2016 PMI stood at a lacklustre We nevertheless believe that there is still ample demand and need for affordable housing and infrastructure in Malaysia. Construction project in Ipoh To recap - in July 2014, PRG announced that its wholly-owned subsidiary, Valencia Glade Sdn Bhd (now known as Premier Construction Sdn Bhd), has in July 2014 accepted a Letter of Award for the construction and completion of 4 blocks of 9-Storey Apartment Type A, 1 block of 9-Storey Apartment Type A1, a 1-storey gymnasium and swimming Pool and other common facilities in Pasir Putih, Ipoh (project known as Treetops Residency). The contract is worth approximately RM50.15 million. This construction is now on-going and is expected to be completed any time soon, if not already. With the diversification of the PRG s principal activities to include property development as approved by its shareholders at the EGM held in April 2014, PRG had subsequently established a construction division to complement its property development activities. The construction division of the group currently operates under Premier Construction SB ( PCSB ) and is a registered Grade G7 contractor with Construction Industry Development Board of Malaysia (CIDB). The diversifica tion complements the group s existing business in property development and enables the group to undertake complementary activities in property development, construction and project management services. Picasso Residence in KL Back in December 2013, the group s wholly-owned subsidiary Premier Gesture S/B had proposed a 60:40 JV with Almaharta S/B for the development of a parcel of leasehold land along Jalan Jelatek (off Jalan Ampang), Kuala Lumpur. The JV company is named Premier De Muara S/B. The proposed residential development, named as The Picasso Residence, comprises 2 blocks of 38-storey condominium consisting of 472 units. The GDV for this project is estimated at close to RM600 million, with an estimated GP margin of 32% over its 4-year development period. The condominium project, 3

4 with units sized between sq feet (approximate price of RM psf), is expected to be completed by Photo taken from outside Picasso s construction site *Source: Our reconnaissance 1-into-2 Share Split in progress On 11 th May 2016, PRG had proposed a share split involving the subdivision of every 1 of its existing ordinary share of RM0.50 each into 2 ordinary shares of RM0.25 each on an entitlement date to be determined. The proposed share split will be able to enhance the marketability and trading liquidity of its ordinary shares. This proposal subsequently received shareholders approval at PRG s EGM on 25 th August PRG s shares will then trade ex-dividend on 8 th September JV/Proposed development in Sg Buloh On 19 th July 2016, PRG announced that Premier Gesture Sdn Bhd ( Premier Gesture ), a whollyowned subsidiary of PRG has entered into a Development Joint Venture Agreement ( DJVA ) with Baycity Park Sdn Bhd ( Baycity Park ) and Premier Baycity Sdn Bhd ( Premier Baycity or Joint Venture Company ) in relation to the proposed development of the Development Land; and Premier Gesture has also entered into a Shareholders Agreement with Baycity Park to set out the terms governing their relationship as shareholders in Premier Baycity in connection with the proposed development of the Development Land. The Development Land is a piece of 99-years leasehold-land known located in Seksyen U5, Mukim of Sungai Buloh, Daerah Petaling, Negeri Selangor with an area of 26,254 square metres (lease expiring on 16 th February 2105). Baycity Park is the registered proprietor of the Development Land. As per the valuation report by Raine & Horne International Zaki + Partners Sdn. Bhd., the market value of the Development Land is RM24 million. The Project will entail the construction, development and the completion of residential properties via a JV with Premier Baycity, the developer for the development of the Development Land in accordance with the development proposal, layout and development plan, pursuant to the terms of the DJVA ( Development JV agreement ). The Project is intended to consist of the development of residential properties on the Development Land measuring in aggregate an approximate 6.48 acres, along with related infrastructure and the necessary amenities. 4

5 VALUATION/CONCLUSION FY15 dividend paid out To recall, the group s BOD (Board of Directors) had proposed a final single tier dividend of 1 sen per ordinary share (1 sen DPS) for its FY15 ended 31 st December After shareholders approval, the stock traded ex-dividend on 9 th July 2016, while the dividend was paid out on 28 th July 2015 to entitled shareholders. For PRG s FY16, we have assumed that the same DPS will be proposed, though the dividend payout can be increased in tandem with any improvement in earnings. PRG s stock price (+32.3% YTD) has outperformed the KLCI (-0.8% YTD) in the year 2016 thus far. Market conditions have also been volatile during the past year. Nevertheless, as PRG is not a particularly large market-cap stock, this may put a dampener on its market visibility and trading volume. Maintain Hold Call Based on our forecast of PRG s FY16 BV/Share and an estimated P/BV of 1.5 times, we set a FY16- end Target Price (TP) of RM1.25 (representing a Hold Call), approximate to the market price on the date of this report. Our TP for PRG reflects a P/E of 27.9 times over its FY16F Earnings /Share. We hope and look forward to seeing stronger contributions from the group s Property & Construction segment. The domestic construction sector has been boosted by various infrastructure projects. Nevertheless, demand growth for the property sector has been curtailed by the tightening of bank lending guidelines set by Bank Negara Malaysia (BNM). Drawdowns for Property Development PRG has gone from a net cash to a net gearing position during its FY14, with its venture into property development and subsequent drawdown of borrowings. The group has reasonable P/BV valuations, while its ROE is improving y-o-y. Nevertheless, on the macro level concerns remain over its weak revenue and earnings growth (for its manufacturing division), amidst the cautious global business sentiment, and dismal export market environment. Management clarity With effect from 11 th April 2016, PRG s Group Managing Director Mr Cheah Eng Chuan (Jimmy) was re-designated to Managing Director Manufacturing. Dato Lua Choon Han is now PRG s Group Managing Director while Dato Steven Hooi remains the CEO for PRG s Property Development & Construction division. Risk factors In the industrial product manufacturing market, PRG faces possible routine risks such as slower global economic growth, weak product demand, foreign exchange fluctuations, volatile costs (oil and raw materials e.g. rubber and plastics), hike in labour costs and stiff competition from other global manufacturers. For the property development and construction sector, there are also risk factors, such as fluctuating demand, higher costs in labour and building materials, over-supply of certain housing segments, mismatch of property selling price versus buyer affordability, and regulatory measures by BNM and the federal government aimed at reducing speculation and high household debt levels. 5

6 FINANCIAL STATEMENTS 2Q/ 30 Jun 2Q16 2Q15 yoy % 1Q16 qoq% Revenue (RMm) EBIT (RMm) (28.8) NPATMI (RMm) EPS (sen) *NPATMI=net profit after tax 6M/ 30 Jun 1H/FY16 1H/FY15 yoy % Revenue (RMm) EBIT (RMm) NPATMI (RMm) EPS (sen) *NPATMI=net profit after tax P&L Analysis (RM mil) F FY end: Dec 31 Revenue Operating Profit Depreciation (3.4) (3.5) (6.3) (4.5) Interest Expenses (0.5) (0.9) (1.2) (1.4) Profit before Tax (PBT) Effective Tax Rate (%) Net Profit after Tax and MI Operating Margin (%) PBT Margin (%) NPATMI Margin (%) *2016 figures are our estimates 6

7 Ratios Analysis F Book Value/Share (RM) Earnings/Share (sen) Dividend/Share (sen) Dividend Payout Ratio (%) P/E Ratio (x) P/Book Value (x) Dividend Yield (%) ROE (%) Net Gearing (or Net Cash) (x) (0.02) *RM0.50 par value; 2013 per share figures adjusted for rights issue PRG: Share Price Source: Bursa CBRS disclaimer: This report has been prepared by Mercury Securities Sdn Bhd for purposes of CMDF-Bursa Research Scheme ("CBRS") administered by Bursa Malaysia Berhad and has been compensated to undertake the scheme. Mercury Securities Sdn Bhd has produced this report independent of any influence from CBRS or the subject company. For more information about CBRS and other research reports, please visit Bursa Malaysia s website at: 7

8 Recommendation Framework Buy/Outperform The stock s total return is expected to be +15% or better over the next 12 months. Neutral Sell/Underperform Trading Buy The stock s total return is expected to be within +/-15% over the next 12 months. The stock s total return is expected to be -15% or worse over the next 12 months. The stocks total return is expected to be 10% or better over the next 3 months Trading Sell The stock s total return is expected to be -10% or worse over the next 3 months. DISCLAIMER All information, views and advice are given in good faith but without legal responsibility. Mercury Securities Sdn. Bhd. or companies or individuals connected with it may have used research material before publication and may have positions in or may be materially interested in any stocks in the markets mentioned. For any enquiries, please contact us: L-7-2, No.2, Jalan Solaris, Solaris Mont Kiara, 50480, Kuala Lumpur Tel: mercurykl@mersec.com.my