Eng Kah Corporation - 3Q12 in line, rating lowered after rally

Period    3Q12/9M12

Actual vs.  Expectations  The 9M12 net profit (NP) of RM10.2m was broadly in line with both the street’s estimate and our forecast of about RM14.1m, making up 72.3% of our number.

Dividends   Despite the higher share base after its recent corporate exercise, EngKah still maintained its generous 5 sen dividend per share pay-out for the quarter amounting to a total dividend of 13.9 sen for the year to date. We are expecting another 6.1 sen for FY12, implying a total NDPS of 20.0 sen (a net dividend yield of 5.7%).

Key Result Highlights  Best quarter for the year. Despite the lower revenue (-8.5% QoQ and -5.1% YoY), Engkah registered a better NP for the quarter, which rose 9.8% QoQ and 29.3% YoY, respectively. This was mainly attributable to a more favourable product mix as well as lower additional costs incurred for new product developments. In fact, this quarter has been its best performing quarter (in terms of earnings) for the year despite the declining sales number.

 Pretty flat YoY. The 9M12 revenue declined 4.0% YoY due mainly to the further strengthening of its working capital management and the continuous implementation of a much stringent credit sales control policy by the company. In line with the declining sales, the 9M12 NP also decreased 4.9% YoY due to lower earnings made during 1H12. This was mainly due to the additional costs incurred for product trial runs and testing for potential new regional clients, especially after the Thai flood event last year. 

Outlook   Strengthening clientele base. The company has continued its efforts to secure new multinational companies (“MNC”) clients as well as to strengthen its customer portfolio by securing sustainable orders from the bigger MNCs. We understand that Engkah had done product trial runs for two new MNCs this year and has successfully received the first small order from one of the new clients.  

 Additional growth. We remain cautiously optimistic on the company’s prospect for its investment in China (JV with Cosway China) as it should eventually ride on the strong potential growth of Cosway China, which should lead to higher earnings for Engkah.

Change to Forecasts

 We are maintaining our FY12-13E earnings forecasts of RM14.1m-RM16.6m.

Rating  Downgraded to MARKET PERFORM from OUTPERFORM due to the limited upside from our unchanged TP of RM3.57. 

Valuation    Our TP of RM3.57 is based on a PER of 15.0x (which is the 5-year average PER) over its FY13 earnings. 

Risks   The main risk to our call is a slowdown in the global economy, which would cut the purchasing power of consumers.

Source: Kenanga