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Wednesday, March 25, 2015

Naim Holdings - In the Price

We attended Naim Holding (NAIM)’s Analysts’ briefing yesterday and came away NEUTRAL on its overall prospects. Key highlights of the briefing are: (i) MRT project was the culprit for losses in its construction division last year, (ii) property market slowdown may be felt again this year with management expecting lower sales, (iii) management is targeting to secure RM200.0-300.0m worth of new contracts this year (vs RM500.0m new contracts in FY14) backed by its tenderbook of RM500.0m-1.0b. All in, we cut our FY15-16E earnings by 9.3%-4.8% to reflect the expected slowdown in its property sales as well as lower expectations on new contracts. Post-earnings-revision, our TP is revised to RM2.82 from RM3.34 previously. At this juncture, we believe the negatives are already in the share price, but at the same time, we reckon that the upside potential could be also be limited due to the challenging outlook, especially for their property and O&G (Dayang) divisions. Nevertheless, NAIM’s share price had lost 18.4% to below our fair value after posting disappointing results recently. Therefore, we upgrade the stock to MARKET PERFORM from UNDERPERFORM.

Construction division’s losses in 4Q14 were due to MRT project. To recap, 4Q14 core net profit (CNP) came in below expectations mainly due to unexpected losses in its construction division. Management clarified that the losses were mainly due to provisions made (RM33.4m)for the MRT project following potential LAD charges coupled with cost overruns. Nonetheless, management reassured that it has been fully provided and should be normalized in FY15.

Orderbook stands at RM1.3b; targeting to secure RM200.0-300.0m new contracts this year. Management updated that NAIM’s running orderbook currently stands at RM1.3b boosted by FY14 new contracts of RM500.0m. YTD, NAIM has secured RM100.0m worth of new contracts from Tanjung Manis housing units jobs. In total, the management is expecting to bag RM200.0-300.0m new jobs in FY15 backed by its tenderbook of RM500.0mRM1.0b. We believe management’s target is achievable as it only has to achieve another RM100.0-200.0m worth of new jobs for the rest of the year.

Expecting slower sales in FY15. To recap, NAIM secured RM200.7m new property sales in FY14, down by 39.3% from RM330.9m in FY13. Management clarified that a slowdown in property sales have started to be felt since last year and the trend is expected to continue into FY15. They also mentioned that it is holding back new launches in FY15 and focusing on projects launched in FY14. Currently, they have about RM543.0m outstanding GDV launched in FY14 with on average 56.0% taken up. Hence, we estimate they would have about RM335.9m worth of remaining GDV left for FY15. All in, management expects about RM100.0-RM150.0m new sales this year, 50% lower than our initial forecasts of RM300.0m.

Revising downward forecasts. Conservatively, due to the cautious mode shown by management, we are lowering our earnings forecasts by 9.3%-4.8% for FY15-FY16 after: (i) lowering our property sales forecasts to RM150.0m from RM300.0m previously, and (ii) revising lower FY15E new contracts assumption to RM300.0m from RM500.0m.

Negatives priced in, but upside still limited, upgrade to MARKET PERFORM with new TP of RM2.82. Post-earnings-revision coupled with balance sheet updates, we revised lower our Target Price to RM2.82 from RM3.34 previously. We noticed that since our last downgrade on the stock dated 27 th February 2015 following earnings disappointment, NAIM’s share price fell by 18.4% and is now trading below our fair value. We believe the negatives are already reflected in the price, but at the same time we reckon that upside is also limited given the challenging outlook. As such we upgrade our recommendation to MARKET PERFORM from UNDERPERFORM previously. Our TP of RM2.82 implies FY15E PER of 8.1x, in line with its peers’ range of 8.0-11.0x.

Source: Kenanga Research - 25 Mar 2015

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