Eng Kah Corporation - 4Q12 results slightly below estimates

Period  4Q12/FY12

Actual vs. Expectations  The FY12 net profit (NP) of RM13.0m was slightly below the street’s estimate and our forecast of about RM14.1m, making up 92.9% of the street and our numbers.

Dividends  A final single tier dividend of 7.5 sen was proposed for FY12, bringing the total full year NDPS to 22.5sen (net dividend yield of 6.9%), which was above our forecast of 20.0 sen. We are expecting an adjusted DPS of 23.0 sen for FY13, which will translate to a yield of 7.0%.

Key Result Highlights  QoQ, the 4Q12 revenue decreased by 20.9% due mainly to the group’s strategy to institute a better working capital management as well as a more stringent credit control policy, resulting in lesser sales made. Meanwhile, the PBT margin was lower by 1.9 percentage points to 19.8% in 4Q12 due to the change in the product mix as well as higher operating expenses. Hence, the NP fell 27.4% in tandem with the drop in the PBT.

 YoY, the FY12 revenue declined 11.8% YoY due mainly to the reasons mentioned above. However, the FY12 NP rose slightly by 1.3% YoY on the back of lower interest and taxation expenses.

Outlook  The group has continued its efforts to secure new multinational companies (“MNC”) clients as well as strengthen its customer portfolio by securing more sustainable orders from the bigger MNCs.

 We remain cautiously optimistic on the company’s prospect on 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 have raised our FY13E operating cost forecast on likely higher administrative expenses, which in turn has led to a cut in our FY13 earnings estimate by 6.6%. Meanwhile, we are introducing our FY14E earnings forecast of RM16.3m. The rise in the group’s profits would be mainly supported by its higher sales activities.

Rating    Maintain MARKET PERFORM.

Valuation  Despite the earnings cut above, our TP has been revised up slightly to RM3.63 (from RM3.57 previously) due to a higher PER valuation of 16.5x (from 15.0x previously) used after adjusting for the stock’s latest running 5-year average PER.

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

Source: Kenanga