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Thursday, December 31, 2015

Signature expected to get jobs for five projects

This article first appeared in The Edge Financial Daily, on December 31, 2015.

Signature International Bhd
(Dec 30, RM1.84) 

Reiterate buy but cut target price to RM2.55 (from RM3.16 previously): Management has a complete change of view about the market outlook for kitchen manufacturers for 2016.

Instead of a steady 2016 growth and possible slowdown in 2017 as previously guided, management foresees more challenges in 2016 and expects a strong recovery in 2017 now.

Note that Signature has predicted earlier that the slowdown in the property market in 2015 will affect its 2017 revenue, assuming a two-year time lag between project launch and award of kitchen contracts.

The change in predictions can be partly attributed to change in developers’ behaviour. Given the uncertain property market outlook, management indicated that developers are cautious about managing their profit growth trends. Instead of following the original work schedules, which may see a sharp contraction in 2017 profits, developers intend to smooth out the impact by recognising their current unbilled sales evenly between 2016 and 2017.

This will lead to job delays, which include kitchen works. However, we agree with management that the job delays could not persist or developers would fail to complete projects on time.

More importantly, long-term market dynamics are still intact as upmarket development will continue flourishing with increasing affluence of population and improvement in transportation infrastructure. This is expected to translate into higher demand for premium lifestyle products, ie designer homes, gated and guarded development, and bodes well for Signature.

Signature is expected to receive letters of awards for five projects worth RM30 million in the next few months. This will prop up its order book from RM138 million back to RM168 million. For Danga Bay Country Garden, we expect the decision-making for the project award to come in the first quarter of 2016 and this three-to six-month delay would potentially push some of the earnings to financial year 2017 (FY17).

As far as Battersea Phase 2 development is concerned, Signature has a good head start in clinching the kitchen works after submitting its proposal to the developer. The company has proposed the imported German-brand kitchen system for Battersea. According to our property analyst, there are 255 luxury apartments in the Battersea Phase 2 development. Assuming each kitchen system would cost RM100,000, we estimate Battersea’s kitchen contract could be worth RM25.5 million.

Signature had a healthy net gearing of 4.4% as at September. It also had investment properties worth RM36.6 million, which could strengthen its net debt position to net cash if it is able to sell all the investment properties. According to management, 70% of the investment properties have already completed and the company has appointed sales agents to sell these properties.

We believe the management would retain most of the disposal proceeds as cash than paying it out as special dividend to weather this challenging period. However, we reckon it would utilise some money for share buy-back after obtaining approval from shareholders recently. Note that the most recent share buy-back transaction occurred on Dec 15, when the company bought back 97,300 shares at prices ranging from RM1.89 to RM1.91.

We downgrade our FY16/FY17/FY18 earnings by 35.2%, 4.1% and 2.5% respectively after reducing FY16/FY17/FY18 total job wins by 23.8%, 0.3% and 6.5% respectively. We now assume Signature to secure new jobs worth RM108 million, RM206 million and RM205 million for FY16, FY17 and FY18 respectively. — TA Securities, Dec 30

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