Tuesday 28 February 2012

TONGHER (FV RM2.28 - NEUTRAL) FY11 Results Review: Taxation Boost


Tong Herr Resources (THR) FY11 numbers came in marginally above our expectation, thanks to tax income in 4Q11. Full year revenue almost doubled due to full year contribution from its newly acquired aluminium extrusion business. While management have lined  up some expansion plans to raise the plant capacity and efficiency, we prefer to not incorporate any additional contribution yet as  poor economic backdrop in  the  Eurozone may dent prospect of its main stainless steel fastener market. With that, we are keeping our original estimates and NEUTRAL recommendation with fair value of RM2.28. We value THR based on 0.85x FY12 BV.

Earnings beat expectation.  THR’s 4Q results came in marginally higher than our expectation by posting net profit of RM8.4m for 4Q and make up RM36.9m for FY11. This was due to negative taxation of RM2.1m in 4Q11 artificially lifting its bottomline, without which the company net earnings are largely in line with our original estimates.  That aside, THR’s revenue in FY11 almost doubled that of preceding year, mainly contributed by the newly acquired aluminium subsidiaries. Again, we believe that their investment in aluminium extrusion has proven to be a successful investment as it helps to boost both THR’s top and bottomline.  

Expansion plans in the pipeline. THR board indicated in their result note that it is in the midst of finalizing its expansion plan for its fasteners segment in particular the Thailand plant. Besides, The company also has expansion plan for their aluminium extrusion business which we have stated in our previous report. All in, we see these as positive moves as the company is moving on to increase the capacity and efficiency to boost their earnings in the future. However, at this point we think that it is still too early to incorporate any potential upside in our valuation before more concrete details are provided. Separately, we believe that THR’s venture in Vietnam still remains challenging and  has yet to see any significant progression. We shall incorporate the potential upside into our valuation only when the plant commences operation.

Maintain NEUTRAL.  We are positive of THR solid balance sheet and potential future earnings from its expansion plans. However, the poor economic backdrop in Eurozone,which is the company main export destination, prompted us to be  cautious  of the company’s near term prospect. Having said that, we prefer to maintain our earnings estimates and keep our NEUTRAL recommendation with fair value of RM2.28 derived based on 0.85x FY12 BV.

Source: OSK188

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