Eng Kah Corporation - OUTPERFORM - 25 May 2012

Period    1Q12

Actual vs.  Expectations

 The 1Q12 net profit (NP) achieved of RM2.9m was far below our full year NP forecast of RM21.5m (making up only 14%) as we have factored in the contribution from its JV with Cosway in China for 2H12.

 The NP also came in below the street’s estimate of RM18.8m (15%).   

Dividends   No dividend was announced during the quarter.

Note that the company has proposed a 1-for-10 bonus issue together with a 1-for-10 free warrants issue last month. 

Key Result Highlights

 Revenue declined 6% YoY due mainly to a more stringent credit sales control policy set by the company and also because the higher growth registered in the previous 1Q11 came from a new MNC client from Australia then.

 PBT dropped by 13% YoY as additional costs were incurred for product trial runs and product testing for potential new regional clients after the Thai flood last year as well as quality control costs incurred pertaining to new product development for clients. 

 NP meanwhile declined 14% YoY from the lower PBT above and also due to a slightly higher tax bracket in the quarter.

 Despite the lower revenue on a QoQ basis (-5% QoQ), Engkah registered a much better NP this quarter as compared to 4Q11 (+16% QoQ). This is due to the higher operating costs incurred in 4Q11 due to expenses spent for new product developments then as well as marketing expenditures incurred for new opportunities in China and Indonesia.

Outlook   We are still positive on Eng Kah’s prospect as its sales to multinational companies (MNC) are still growing together with its existing and new potential clients. We also understand from management that there will be a delay in the contribution from its China’s JV. However, we still believe that the overall company’s prospect remains bright as it rides on the strong potential  of Cosway and its MNC clients.  

Change to Forecasts

 The slower sales growth in 1Q12 has dragged down the year-to-date performance, which has only reached 13.5% of our forecast. As a result, we are revising down our earnings estimates by 25%-24% for FY12-13E to RM16.2m-RM19.80m (from RM21.5m-RM26.3m previously) by deferring the contributions from the China JV one year later to FY13.

 Rating MAINTAIN OUTPERFORM

Valuation    Given the cut in our earnings estimates above, we have also downgraded our TP to RM4.05 (previously RM4.34) based 12.5x Fwd PER over the FY13 EPS of 32.4sen.

Risks   Risk to our call is a slowdown in the global economic, which would cut down the purchasing power of consumers.

Source: Kenanga