Period 2Q12/1H12
Actual vs. Expectations
The 1H12 net profit (NP) of RM6.4m was slightly below the street’s estimate and our forecast of RM14.8m (making up 43.2%) and RM16.2m (39.5%) respectively.
Dividends A 5 sen dividend has been declared, amounting to a total dividend of 10 sen for the year. We are expecting another 12.5 sen for FY12, implying a total NDPS of 22.5 sen (similar to FY11) and a payout of 99% and high net dividend yield of 6.0%.
Key Result Highlights
YoY, the 1H12 revenue declined 3.5% due mainly to the continual implementation of a much stringent credit sales control policy by the company.
The PBT dropped by 14.3% YoY as additional costs were incurred for product trial runs and testing for potential new regional clients after the Thai flood last year as well as quality control cost incurred for newproduct development for clients. Margin was hurt especially in the personal care division (personal care PBT margin -1.7 ppt YoY from 20.5% in 1H11).
NP meanwhile declined 17.9% YoY due to the lower PBT above and from a slightly higher tax bracket.
QoQ, despite the lower revenue (-3.6% QoQ), Engkah registered a much better NP this quarter as compared to 1Q12 (+20.1% QoQ). This was mainly attributable to the more favourable product mix, which saw a higher margin recorded and also due to lower additional costs incurred for new product developments.
Outlook Given its improved QoQ performance, Eng Kah’s future prospect remains positive as its MNC sales are still growing together with its existing and new potential clients. We also understand that it has received the first order from a new MNC client, with manufacturing to start in 3Q12. However, the initial order will have a minimal impact in FY12E. We also gather that profit margin should gradually to improve in coming quarters.
Despite the delay in contribution from its China’s JV, we reckon that the overall company’s prospect remains bright as it continues to ride on the strong potential growth of Cosway and its MNC clients.
Change to Forecasts
Due to the lower margin in 1H12, we have trimmed our earnings by 13.0%-16.2% for FY12-13E to RM14.1mRM16.6m (from RM16.2m-RM19.80m previously) by increasing our operating cost estimate by ~3-4% and deferring the contribution from its China JV to 2H13.
Rating MAINTAIN OUTPERFORM
Valuation Inline with the cut in our earnings estimates above, we have revised down our TP slightly to RM4.02 based on 15.0x PER (12.5x previously), being the 5-year average PER, over its FY13 EPS of 26.8 sen (see overleaf for details).
Risks Risk to our call is a slowdown in the global economy, which would cut down the purchasing power of consumers.
Source: Kenanga
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