Naim Holdings. What a bargain. Outshone by Dayang associate

Transcription

1 Equity Malaysia Real Estate 31 January 2013 Buy Price RM1.86 Target price RM3.60 (from RM4.50) Market data Bloomberg code Performance 1M 3M 12M Absolute (%) 2 (9) (5) Rel market (%) 5 (7) (11) Jan 11 Jan 12 Jan 13 NHB MK KLCI NHB MK No. of shares (m) Market cap (RMm) week high/low (RM) 2.36 / 1.68 Avg daily turnover (RMm) 0.7 KLCI (pts) 1,627.7 Source: Bloomberg Valuation Target price (RM) 3.60 Methodology Gordon growth Key assumptions ROE = 11.3% COE = 11.2% g = 3% Implied FY13 PE (x) 9.2 Implied FY13 PBV (x) 1.0 Implied FY13 Yield (%) 3.6 Naim Holdings What a bargain We believe Naim Holdings distressed valuations of 4.7x FY13F PE and 0.5x PB are unwarranted on the back of improving prospects and earnings recovery. Given the stock s significant underperformance, the market value of its Dayang stake is now more than its entire market capitalisation. Maintain Buy. Financial Highlights Year to Dec (RMm) FY10A FY11A FY12F FY13F FY14F Revenue Pre-tax profit Normalised net profit Normalised EPS (RM) EPS growth (%) 15.1 (59.7) Gross DPS (sen) PE (x) ROE (%) Gross yield (%) P/B (x) Unduly distressed Naim s share price has increased a mere 5% ytd and is still 51% below its previous peak of RM3.80 in February The dismal share price performance was largely due to the sharp 60% yoy fall in FY11 earnings to RM39m, in our view. While 9M12 earnings have recovered strongly to RM76m, which is close to FY10 s peak earnings of RM98m, share price is far from an all-time high. Furthermore, in a relatively worst case scenario, assuming that earnings fall back to FY11 levels, valuations will be 11.8x PE and 0.6x PB. From another perspective, just reflecting associate contributions from Dayang which we project to average RM41m over FY13-14F, valuations will range from x PE at current levels. Hence, we believe most negatives have been priced in. Outshone by Dayang associate In contrast with Dayang s share price increasing by 27% from 2011, Naim has declined 45%. At the current price of RM1.86, its Dayang stake is valued at RM2.02 per share while Naim s residual businesses are prescribed a negative value by the market. In other words, its associate stake is now worth more than Naim s whole market capitalisation. We opine that such mispricing is unjustified given that Naim is one of the largest property developers in Sarawak with a strong track record in construction projects in the state as well. Maintain Buy Source: Bloomberg Analyst Diana Teo diana@kaf.com.my The stock trades at 4.7x one-year rolling forward PE and 0.5x PB, which are significantly below one standard deviation of its historical mean of 10.4x PE and 1.3x PB respectively. Given the pickup in property sales and construction order book coupled with relatively stable earnings from Dayang, such distressed valuations appear unjustified. It is also one of the cheapest stocks among the property, construction and oil & gas sectors in our coverage. We have taken a more cautious stance, cutting earnings by 11-24% over FY12-13F. Even so, our lowered target price of RM3.60 (from RM4.50) still implies 94% upside. Produced by KAF-Seagroatt & Campbell Securities Sdn Bhd Important disclosures can be found in the Disclosure Appendix

2 What a bargain We believe Naim Holdings offers investors a value play in three exciting sectors: property, construction and oil and gas. Valuations are at an all-time low, close to the levels seen in , despite significant earnings recovery and better prospects now. Unduly distressed Naim s share price has increased 7% in 2012 and 5% ytd. This is still 51% below its previous peak in February 2011 when its share price was RM3.80. Understandably, part of the reason for the sharp fall in share price, in our view, was due to disappointing normalised earnings at a mere RM39m in FY11 compared to RM98m in FY10. This was largely attributable to lower property sales in FY10 leading to lower progress billings in FY11 and delays in project approvals which have since been resolved, according to management. The construction division was also marred by the lack of major new contracts secured, increased costs, project delays and design modification issues, among others. The saving grace was its oil & gas division, through its 34% associate, Dayang Enterprise, which contributed about RM28m to Naim s net profit in FY11. Chart 1 : Naim Holding s lacklustre share price performance RM Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan Naim KLCI Source: Bloomberg However, 9M12 earnings have recovered to RM76m mainly due to improved performance by its property and construction divisions. Property sales rebounded to RM219m in FY11, an increase of 51% yoy. As at 9M12, property sales stand at RM224m while unbilled sales amount to RM219m. This translates to 1.9x FY11 property development revenue. Naim s outstanding construction order book stands at RM1.1bn as at 1 October 2012, largely boosted by two MRT project awards in 2012 which are MRT Package S4 (RM157m) and MRT Package S2 (RM205m). Despite the improving prospects, its share price performance remains lacklustre. We conservatively forecast full year FY12F earnings of RM96m, and expect FY13F earnings to grow by 2% to RM98m and a further 6% in FY14F to RM104m (See Looking Ahead section for further details). 2

3 Chart 2 : Naim Holding s annual earnings trend 120 RMm F 2013F 2014F Outshone by Dayang While Naim s share price has declined by 45% from 2011, Dayang s share price has appreciated by 27% over the same period. Chart 3 : Dayang s share price performance relative to Naim Holdings Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Naim Dayang Following Naim s significant underperformance, the value prescribed by the market to its residual businesses upon stripping out the market value of 34% stake in Dayang, has deteriorated sharply (Table 1). To illustrate, on 1 January 2011, based on Naim s share price of RM3.37, its Dayang stake was valued at RM1.35 per share while the group s residual businesses, mainly property and construction divisions, were valued at RM2.02 per share. At current share price of RM1.86, its Dayang stake is valued at RM2.02 per share while the residual businesses are prescribed a negative value by the market. In other words, its associate stake is now worth more than the whole market capitalisation of Naim Holdings. Such mispricing appears unjustified given that Naim is one of the largest property developers in Sarawak with a strong track record in construction projects in the state to boot. 3

4 Table 1 : Naim s residual business ascribed negative value by the market RMm 1-Jan-11 Current (25 Jan 2013) Naim Holding s market capitalisation (A) Less: market value of Dayang (34% stake) (B) (338) (479) Residual value (A minus B) 505 (38) No of shares Per share value - Dayang stake (RM) (C) Per share value - Residual business (RM) (D) 2.02 (0.16) Naim s share price (RM) (C plus D) Source: Bloomberg, KAF Cheap on all accounts From a valuation perspective, the stock trades at 4.7x one-year rolling forward PE, which is lower than one standard deviation below its 10-year historical mean of 10.4x. Chart 4 : One-year rolling forward PE Sep-03 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 One year rolling forward PE Historical mean +1 std deviation -1 std deviation Similarly, on a one-year rolling forward PB, it trades at 0.5x, which is lower than one standard deviation below historical mean of 1.3x. Chart 5 : One-year rolling forward PB Sep-03 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 One year rolling forward PE Historical mean +1 std deviation -1 std deviation Given the pickup in property sales and construction order book coupled with stable earnings from its Dayang associate, we do not think such distressed valuations are justified. Relative to other property players in our coverage, Naim is the cheapest stock trading at 4.7x FY13F PE compared 4

5 to the sector s average of 13.6x. Furthermore, it also offers high dividend yield of 7% which is higher than the sector s average of 4.3%. While Naim does not have a fixed dividend policy, we have assumed a modest 25% dividend payout (historical average: 33% over FY04-FY11). Table 2 : Peer comparison with property sector Rec Price TP Mkt cap PER (x) Norm. EPS growth (%) P/B (x) ROE (%) Yield (%) RM RM RMm 2013F 2014F 2013F 2014F 2013F 2014F 2013F 2014F 2013F 2014F Naim Holdings Buy Eastern & Oriental Hold , IJM Land Hold , IGB Corp Buy , KLCC Property Hold , Mah Sing Buy , SP Setia Buy , Sunway Buy , Simple average Relative to the construction stocks under our coverage, it is the second cheapest after Muhibbah Engineering which trades at 3.7x FY13F PE and 0.5x PB. Nevertheless, it trades at a 65% discount to the construction sector s average FY13F PE of 13.5x and 58% discount on a PB basis. Table 3 : Peer comparison with construction sector Rec Price TP Mkt cap PER (x) Norm. EPS growth (%) P/B (x) ROE (%) Yield (%) RM RM RMm 2013F 2014F 2013F 2014F 2013F 2014F 2013F 2014F 2013F 2014F Naim Holdings Buy Gamuda Buy , IJM Corp Buy , MRCB Buy , Muhibbah Eng. Buy WCT Buy , Simple average Comparing to the Oil & Gas sector, Naim trades at a steep 74% discount to the sector s average FY13F PE of 18.3x and 81% discount on a PB basis. Table 4 : Peer comparison with Oil & Gas sector Rec Price TP Mkt cap PER (x) Norm. EPS growth (%) P/B (x) ROE (%) Yield (%) RM RM RMm 2013F 2014F 2013F 2014F 2013F 2014F 2013F 2014F 2013F 2014F Naim Holdings Buy Alam Maritim Buy Bumi Armada Hold , Dialog Buy , SapuraKencana Buy , Malaysia Marine Buy , Perdana Petroleum Buy Petronas Chemicals Buy , Petronas Dagangan Sell , Petronas Gas Sell , Wah Seong Buy , Simple average While we do not think that Naim should trade at a premium to the three sectors i.e. property, construction and oil & gas, given the size of the company and the concentration risks in Sarawak, such steep discounts are also unwarranted. Based on our revised target price of RM3.60, the implied FY13F PE and PB are 9.2x and 1x respectively. This is still below its historical mean of 10.4x PE and 1.3x PB. 5

6 In a relatively worst case scenario, assuming earnings fall to FY11 levels of RM39m, that would result in valuations of 11.8x PE and 0.6x PB. From another perspective, just reflecting its associate contributions from Dayang, which we project to average RM41m over FY13-14F, valuations would range from 11.3x to 11.6x PE at the current share price. Hence, we believe most negatives have been priced in. Maintain Buy In conclusion, we opine that such distressed valuations for Naim Holdings are unwarranted given the improving prospects and earnings recovery. Taking a more conservative stance, we have reduced our earnings forecast by 11% in FY12F to RM96m and 24% in FY13F to RM98m. We also introduce FY14F earnings of RM104m. Our forecasts are 3-12% below Bloomberg consensus. Consequent to our earnings revision, our target price (based on Gordon Growth model) falls to RM3.60 (from RM4.50) which assumes a sustainable ROE of 11.3%, cost of equity of 11.2% and a long term growth rate of 3%. 6

7 Looking ahead We have lowered our earnings estimates by 11-24% over FY12-13F to adopt a more conservative stance. Based on our projections, earnings will largely be driven by its property development division. Our revised target price of RM3.60 gives 94% upside. Being more cautious We have decreased normalised net profit estimates by 11% and 24% for FY12-13F to RM96m and RM98m respectively. We also introduce FY14F earnings of RM104m. The lower earnings forecast are mainly due to imputing lower construction margins coupled with higher interest costs and effective tax rates. Table 5 : Earnings revision Original Revised Change FY12F FY13F FY14F FY12F FY13F FY14F FY12F FY13F FY14F Turnover na % 6% na EBIT na % -26% na Pretax profit na % -24% na Net profit na % -24% na Based on our forecasts, Naim s earnings will largely be driven by the property division constituting about 45-48% over FY12-14F, followed by oil & gas division (associate contribution from Dayang) at 29-31% and construction at 24-26%. Chart 6 : Segmental breakdown of Naim s earnings 100% 80% 60% 40% 20% 0% FY12F FY13F FY14F -20% Property development Construction Oil & Gas Others We have assumed property sales averaging RM277m over FY12-14F, which will largely come from its flagship Bandar Baru Permyjaya (Miri), Riveria (Kuching) and its new venture at Bintulu situated at the old Bintulu airport (42 acres). Dubbed as the Bintulu Paragon, the new project s estimated GDV is RM2bn. It is a mixed development comprising commercial, residential, retail and hospitality over two phases. Phase 1 (GDV: RM900m) will comprise 37 and 39 storey condominium towers, 6 storey serviced and virtual offices (SOVO), 3 and 6 storey street malls and a hotel. Phase 2 features a shopping mall and an office tower (The Star, 9 January 2013). Phase 1 should be officially launched in February 2013, according to management. We believe the demand for these residential and commercial properties will be driven by the multiplier effect from SCORE (Sarawak Corridor of Renewable Energy) whereby Samalaju Industrial Park in Bintulu is one of the five major growth nodes. 7

8 Chart 7 : Naim Holding s property sales trend 350 RMm F 2013F 2014F As for the construction segment, we have included the two MRT project awards in 2012 in our forecast. These projects are expected to contribute from FY13 onwards. Outstanding construction order book stood at RM1.1bn as at 1 October We have assumed an order book replenishment of RM500m p.a. Table 6 : Outstanding construction order book (as at 1 Oct 2012) Project Outstanding contract value (RMm) Commencement Expected completion Affordable Housing Projects Aug 2007 Mar 2014 Sabah Oil & Gas Terminal 64.5 Aug 2010 Feb 2014 Rehabilitation & Maintenance of Fiji Highway 52.4 Mar 2010 Dec 2012 Bengoh Dam Resettlement Scheme 36.2 Oct 2010 Mar 2013 Complex Islam 8.8 Apr 2009 Oct 2012 Jalan Kampung Semadang / Bau 1.9 Jul 2009 Nov 2012 Murum Dam Resettlement Scheme Aug 2012 Aug ,089 units of low cost housing 2.5 Oct 2005 Sep 2013 Bengoh Dam Resettlement Scheme 15.9 Jun 2012 Jan 2013 Construction of Terbat / Pangkalan Amo / Tebedu Road 29.4 Jul 2012 Jan 2014 (Samarahan) Supply of equipment to ADTEC Center 72.7 Jul 2012 Jul 2013 MRT Package S4 (Construction of Elevated Stations) Jan 2013 Dec 2016 MRT Package S2 (Construction of Elevated Stations) Jun 2013 Dec 2016 Total 1,067.0 Source: Company For the oil & gas division, we have projected associate contribution of RM34m in FY12F, increasing to RM40m in FY13F and RM41m in FY14F. According to management, Dayang s outstanding order book as at February 2012 was RM1.4bn. We have assumed an order book replenishment of RM300m p.a. 8

9 Target price derivation Consequent to our earnings revision, our Gordon growth derived target price falls to RM3.60 from RM4.50. This assumes a sustainable ROE of 11.3% (versus historical average of 13.6% ROE over ), cost of equity of 11.2% and a long term growth rate of 3%. Despite the cut in target price, there is still 94% upside from the stock. Hence, we maintain our Buy rating. Table 7 : Assumptions for target price derivation Assumption Sustainable ROE 11.3% Cost of equity 11.2% Long term growth rate 3.0% Fair P/B (x) 1.0 Target price (RM)

10 Income statement FYE Dec (RMm) 2010A 2011A 2012F 2013F 2014F Turnover EBITDA Depreciation (13.1) (16.3) (18.3) (20.5) (23.4) EBIT Net interest (3.8) (10.2) (13.8) (16.9) (17.3) Associates & jointly controlled entities Exceptional items Pretax profit Taxation (32.1) (9.0) (17.5) (21.5) (24.4) Profit after tax Minority interest (2.2) (1.4) Net profit Normalised net profit Balance sheet FYE Dec (RMm) 2010A 2011A 2012F 2013F 2014F Non-current assets Property, Plant and Equipment Investment in associates & JVs Land held for development Intangible assets Deferred tax assets Total non-current assets Current assets Inventories Property development costs Trade and other receivables Tax recoverable Deposits, cash and bank balances Total current assets Total assets 1, , , , ,619.5 Current liabilities Trade and other payables Short term borrowings Taxation Total current liabilities Financed by: Share capital Share premium Retained profits Treasury shares (34.7) (34.7) (34.7) (34.7) (34.7) Shareholders' funds Minority interest Borrowings Deferred tax liabilities Total Liabilities & Shareholders' Funds 1, , , , ,619.5

11 Cash flow statement FYE Dec (RMm) 2010A 2011A 2012F 2013F 2014F Cashflow from operations (CFO) Pretax profit Non-cash items (11.0) (39.2) (30.1) (26.3) (19.1) Net interest - - (13.8) (16.9) (17.3) Tax paid (38.7) (29.6) (17.5) (21.5) (24.4) Others Net change in working capital (36.7) 37.3 (92.5) (73.4) 26.5 CFO (26.4) (1.6) Cashflow from investing (CFI) Purchase of property, plant and equipment (Capex) (34.8) (31.4) (31.4) (50.3) (50.3) Others (15.8) (20.6) CFI (50.6) (52.0) (23.7) (41.3) (41.0) Cashflow from financing (CFF) Dividends paid (23.7) (23.7) (23.9) (24.3) (25.4) Others (26.2) CFF (49.9) (23.9) (24.3) (25.4) Net change in cash and cash equivalents (51.0) (74.0) (67.2) 45.1

12 Disclosure Appendix Recommendation structure Absolute performance, long term (fundamental) recommendation: The recommendation is based on implied upside/downside for the stock from the target price and only reflects capital appreciation. A Buy/Sell implies upside/downside of 10% or more and a Hold less than 10%. Performance parameters and horizon: Given the volatility of share prices and our pre-disposition not to change recommendations frequently, these performance parameters should be interpreted flexibly. Performance in this context only reflects capital appreciation and the horizon is 12 months. Market or sector view: This view is the responsibility of the strategy team and a relative call on the performance of the market/sector relative to the region. Overweight/Underweight implies upside/downside of 10% or more and Neutral implies less than 10% upside/downside. Target price: The target price is the level the stock should currently trade at if the market were to accept the analyst's view of the stock and if the necessary catalysts were in place to effect this change in perception within the performance horizon. In this way, therefore, the target price abstracts from the need to take a view on the market or sector. If it is felt that the catalysts are not fully in place to effect a re-rating of the stock to its warranted value, the target price will differ from 'fair' value. Disclaimer This report has been prepared solely for the information of clients of KAF Group of companies. It is meant for private circulation only, and shall not be reproduced, distributed or published either in part or otherwise without the prior written consent of KAF-Seagroatt & Campbell Securities Sdn Bhd. The information and opinions contained in this report have been compiled and arrived at based on information obtained from sources believed to be reliable and made in good faith. Such information has not been independently verified and no guarantee, representation or warranty, express or implied, is made by KAF-Seagroatt & Campbell Securities Sdn Bhd as to the accuracy, completeness or correctness of such information and opinion. Any recommendations referred to herein may involve significant risk and may not be suitable for all investors, who are expected to make their own investment decisions at their own risk. Descriptions of any company or companies or their securities are not intended to be complete and this report is not, and should not, be construed as an offer, or a solicitation of an offer, to buy or sell any securities or any other financial instruments. KAF-Seagroatt & Campbell Securities Sdn Bhd, their Directors, Representatives or Officers may have positions or an interest in any of the securities or any other financial instruments mentioned in this report. All opinions are solely of the author, and subject to change without notice. Dato' Ahmad Bin Kadis Managing Director KAF-Seagroatt & Campbell Securities Sdn Bhd ( U)