09 May 2017 Small Cap Highlight Signature International Berhad Cooking up better growth ahead INVESTMENT HIGHLIGHTS Orderbook of RM220m Facility expansion to cater for more value-added products Tapping into regional markets for growth Not rated with FV of RM1.16 based on FY18F PER of 11x Business Overview: Signature International Bhd (Signature) designs, produces, markets and distributes kitchen systems under its flagship brand Signature Kitchen and mass market brand Kubiq. The company was established in year 1994 and listed in year 2008. RETURN STATS Price (8 May 2017) Fair Value Expected Share Price Return Non-rated Fair Value (FV): RM1.16 RM1.03 RM1.16 12.6% Expected Dividend Yield 4.4% Expected Total Return +17.0% Investment theses: 1. Orderbook of RM220m. Signature derives 70% of its sales from projects and the remaining is made up of retail sales. Media report mentioned that the Company has RM220m unbilled orderbook as of end-february and this is higher than FY16 s RM150m. Moreover, it takes part in tendering processes actively and is bidding for close to RM500m worth of jobs. It counts the country s first-tier developers as its clients. 2. Facility expansion to cater for more value-added processes. Signature is increasing its gross floor space in Kota Damansara from 98,043 sq ft to 164,043 sq ft. Out of the new floor space, 10,000 sq ft is office space and 56,000 sq ft is for its warehouse and production floor. Separately, it will increase its aluminium and glass fabrication production at its Meru site. 3. Fine-tuning marketing strategies to stay on the top. Signature is a market leader of premium kitchen systems in the local market. In FY16, it sells 99% of its products locally while the remaining is exported. It has tied up with financial institutions to provide loans to buyers and plans to expand its overseas sales through the local project dealers in those countries. 4. Strong balance sheet. The company s gearing was at a healthy 0.04x as at end-2016. That gives room for investments and growth opportunities. Valuation: We ascribe a fair value of RM1.16 on Signature based on 11x PER of FY18F EPS of 10.52 sen. There is no other listed kitchen system maker like Signature in Malaysia that commands a strong branding. The 11x ascribed is a slight discount to FBM Small Cap forward PER of 12x. STOCK INFO KLCI 1,768.15 Bursa / Bloomberg 7246/ SIGN MK Board / Sector Main/ Consumer Syariah Compliant Yes Issued shares (m) 229.10 Par Value (RM) 0.25 Market cap. (RM m) 235.97 Price over NA 1.51 52-wk price Range RM0.78-RM1.07 Beta (against KLCI) 0.58 3-mth Avg Daily Vol 1.05m 3-mth Avg Daily Value RM1.01m Major Shareholders (%) Tan Kee Choong 25.53 Chooi Yoey Sun 25.38 RHB Asset Management 6.27 is a unit of MIDF AMANAH INVESTMENT BANK Kindly refer to the last page of this publication for important disclosures
2 INVESTMENT STATISTICS FYE June FY14 FY15 FY16 FY17F FY18F Revenue (RM m) 178.74 273.49 196.77 212.51 246.51 Pretax Profit (RM m) 25.49 46.94 61.99 22.93 32.32 Net Profit (RM m) 19.23 33.60 47.79 17.43 24.56 EPS (sen) 8.38 14.88 21.65 7.46 10.52 EPS growth (%) 287.43 77.55 45.51-65.53 40.95 Core EBIT 32.68 48.73 15.12 26.93 36.82 Core EBIT growth (%) 187.46 49.13-68.98 78.15 36.72 PER (x) 12.29 6.92 4.76 13.80 9.79 Net Dividend (sen) 1.50 10.00 12.00 3.5 4.5 Dividend yield (%) 1.46 9.71 11.65 3.41 4.39 Source: Company, MIDF Research DAILY PRICE CHART Source: Bloomberg Ng Bei Shan ng.bs@midf.com.my 03-2173 8461
3 INVESTMENT THESIS Core EBIT to grow strongly in FY17F and FY18F. Signature s core EBIT peaked at RM48.73m in FY15 and fell by 69% to RM15.12m in FY16. We expect its core EBIT to surge by 78% due to orders that have been pushed back from FY16 into FY17 on top of new sales. Meanwhile, its FY18 earnings is backed by a much stronger orderbook of RM220m as at end-february compared to RM150m in FY16. We also think that property developers could sweeten their offerings by giving free kitchen systems to home buyers amid the soft real estate market. That will provide more demand from property developers who want to remain competitive in capturing home sales. With that and coupled with its plans to increase export sales, we think a further growth its core EBIT could grow by another 36% in FY18. Exhibit 1: The correlation between unbilled orders and revenue 300 Unbille d orders (RM 'm) 250 200 150 100 50 Order as of results announcement Revenue trend 0 2014 2015 2016 Source: MIDF Research, company Tenderbook in the range of RM400m to RM500m. On top of the RM220m orderbook it has secured, the company actively bids for new projects. The company s clients include first-tier developers in Malaysia. It is also tendering for Battersea Power Station project phase 3 in London. Revenue from projects made up 70-75% of its overall revenue in recent years. We expect projects to continue to contribute to the bulk of its income going forward although it will also grow its retail market concurrently. Increasing its export sales. To cushion the weakness from local project sales, the company plans to increase its presence in the overseas markets. It will be done through the appointment of local project dealers in those respective countries. The company has exported to other countries in the past but they did the installation on their own. Going forward, management plans to change the strategy to appoint project dealers in those countries to get projects as they have the contacts and know-how of the regulations. We believe that such collaborations will reduce execution risk while helping Signature to expand accordingly. Its main export markets are Cambodia, Vietnam, Indonesia, Papua New Guinea, Singapore and Thailand. All in, it has presence in 25 countries and 15 showrooms abroad. We think the company will be able to increase its export sales as it has completed more than 60 projects overseas over the years.
4 Fine-tuning marketing strategies to stay at the top. Meanwhile, Signature is fine-tuning its marketing strategies and offerings to serve its clients better. It is the leading brand for kitchen systems in Malaysia but there is lack of market information on its market share as the market is fragmented. Some of its planned strategies include: 1. Partnering with financial institutions to provide loans for retail customers To further strengthen its position in the local market, it has signed an agreement with Bank Rakyat to provide loans for retail customers such as civil servants. We view this initiative positively as kitchen systems are considered sizeable ticket items. With the ease of obtaining financial assistance, Signature could be able to lift its retail sales. Retail sales provide better margins to the company at ~30% compared to the low teens of project sales. 2. Opening new showrooms at strategic areas The company targets to open 10 more showrooms in strategic, high growth areas such as Melaka and Nilai. It will also look into each townships in the Klang Valley that is currently underserved with high development activities. The additional showrooms will allow it to have better reach to its retail customers while giving a boost to its brand name. For now, it has 20 showrooms nationwide, out of which, seven are under its own operations and 13 are under dealerships. 3. Upgrading IT services for customers convenience As part of Signature s ongoing efforts to provide great product and service experience to its clients, it upgrades its IT systems from time to time in order to capture customers request. The company is planning to develop a system that allows for customers to book installation dates through mobile devices among others. Facility expansion to cater for more value-added processes. Signature has the capacity to manufacture 10,000 kitchen sets per year. Its utilisation rate is 70% in one shift for retail customers. Currently, the company is embarking on its facility expansion. It is increasing its gross floor space in Kota Damansara from 98,043 sq ft to 164,043 sq ft. Out of the new floor space, 10,000 sq ft is office space and 56,000 sq ft is for its warehouse and production floor. Separately, it will increase its aluminium and glass fabrication production at its Meru site. The new semi-detached factory in Meru, Klang has a built-up of 10,694 sq ft. Overall, the new production facilities will further enhance Signature s product offerings. The value-added processes will enable the company to make kitchen systems with upto-date designs and products of higher value. FINANCIAL HIGHLIGHTS Stable gross profit margin in the range of 30%. The company has managed to keep its gross profit margin around 30%. We understand that the company sources for its most of its raw material locally. Hence, it is partially sheltered from foreign exchange rates fluctuation. Strong balance sheet. The company s gearing was at a healthy 0.04x as at end-2016. That gives room for investments and growth opportunities. Generous dividend payout. The company has paid 56% of its profits in FY16 and 68% in FY15. We expect a payout of 44% in FY18, which could translate into a decent yield of 4.6%.
5 RISKS Prolonged softness in the property market Weaker consumer sentiment Sudden hike in raw material prices VALUATION We ascribe a fair value of RM1.16 on Signature based on 11x PER of FY18F EPS of 10.52 sen. There is no other listed kitchen system maker like Signature in Malaysia that commands a strong branding. The 11x PE ascribed is a slight discount to FBM Small Cap s forward PER of 11x.
6 APPENDIX Signature s headquarter and showroom in Kota Damansara. One of the kitchen systems under the Signature brand. The company also sells imported kitchen systems from Europe. The company s wardrobe system. Expansion works at its Kota Damansara facility. The company organises activities such as baking classes for its retail customers.
7 is part of MIDF Amanah Investment Bank Berhad (23878 - 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 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.