We met up with the management of Eng Kah yesterday to get an update on its business and came
back feeling positive on its outlook despite some hiccups seen in its
operations earlier this year. We believe a 10% YoY growth in its net profit is
achievable for the year on the back of lower one-off expenses in the 2H as
compared to the 1H. Meanwhile, we estimate a stronger 18% growth in its net
profit for FY13, to be mainly driven by likely improved sales from its existing
and new potential MNC clients. Our forecasts are hence kept unchanged. Given
the total return of 11.6%, we continue to reiterate our OUTPERFORM call on Eng
Kah with an ex-bonus TP of RM3.57, or RM4.02 on cum basis, based on a PER of
15.0x (being the 5-year average PER) over its FY13 earnings.
Slight decline in
1H12 results. To recap, the 1H12 revenue declined 3.5% YoY while the PBT
dropped by 14.3% YoY. We understand that the declines were mainly due to 1) a
more stringent credit sales control policy to certain customers and 2)
additional costs incurred for its China
operation (nonrevenue generated expenses) as well as product trial runs and
testing for some potential new regional high-profile clients. We understand
that this would be an exceptional high-cost year for the company together with
lower sales as management is cutting some sales to the smaller customers to restrategise
its overall sales focus. That said, we expect the revenue growth to grow
steadily again next year and thereafter.
Targeting new MNC
clients. The company has been strengthening its customer portfolio all this
while by securing sustainable orders from the bigger multinational companies
(“MNC”). For example, the company’s revenue and net profit growth of 16% and
13% last year was partially due to the increase in orders from an
Australia-based MNC, where its share of the group’s revenue rose from 3.6% in
2009 to 14.0% last year. Two new MNCs have also approached Eng Kah for product
testing this year. Hence, we believe the revenue growth will continue to be mainly
driven by its effort to secure new MNC clients.
An earnings jump next
year? Meanwhile, we expect its investment in the China’s operation, where
the company has a 30% share in a joint venture company with Cosway China (“CC”)
to undertake manufacturing activities for the former’s range of personal care
and household products for sale and supply to CC, to start contributing next
year. The profits will be accounted as other incomes in the P&L and will
improve the overall net profit margin of the company. At this juncture, we have
yet to factor in a full-fledged contribution
from CC as it is still pending the local authority approval to remit its
profits out from China. Nevertheless, we remain optimistic on the company’s
prospect as it will eventually ride on the strong potential growth of CC and
beat our current conservative forecast on its potential contribution to Eng
Kah.
Maintaining earnings
estimate. The company’s share price has recently been adjusted for the
company’s 1-for-10 bonus issue. The total outstanding shares have now increased
to 69.52m after the additional issue of 6.32m bonus shares. Meanwhile, the
6.32m free warrants (in conjunction with the bonus issue) will be listed soon
in a few days time on the local bourse as well after having gone ex-entitlement
on 21 Sept 2012. Given the company’s still bright prospects, we are maintaining
our earnings estimates of RM14.1-RM16.6m for FY12-13E respectively. Our
OUTPERFORM call on Eng Kah is maintained with an adjusted ex-bonus TP of RM3.57
or RM4.02 on cumbonus basis, based on the 5-year average PER of 15.0x over its
FY13 earnings.
Source: Kenanga
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