1 June 2015 Exports spur topline growth Results Note Tong Herr’s 1Q15 core earnings of RM7.3m (-12.7% yoy) came in within our expectation, accounting for 22% of our full year forecast. However, revenue grew by 19% yoy on stronger demand from Japan and the US. No change to earnings and TP to RM2.50. Maintain BUY. 1Q15 core earnings came in within our expectation In 1Q15, Although Tong Herr’s revenue grew by a modest 19% yoy while core net profit fell by 12.7% to RM7.3m as EBIT margin shrank by 3.4ppt yoy. However, core earnings is still within our expectation accounting for 22% of our full year forecast. No dividend was declared (1Q14: Nil) Tong Herr THR MK Sector: Building Materials RM2.15 @ 29 May 2015 BUY (maintain) Upside 14% Export to developed countries spurs revenue growth The strong revenue growth was attributed to both its stainless steel Price Target: RM2.50 fasteners segment (+26% yoy) and aluminium segment (+3% yoy). The Previous Target: RM2.50 stronger demand for its stainless steel products is in tandem with the improving economic outlook in the US. Demand from the US improved by 31% yoy, Japan by 59% yoy and from Germany at 4% growth. The aluminium segment, which is predominantly for domestic consumption grew by a modest 9% yoy. Mixed global outlook The group is highly export-dependent with more than 60% of its sales derived from the US and European markets. Prospects for stainless steel products globally however remain uncertain, especially in Europe. Although demand from Europe has shown some improvement from its trough, growth is still subdued. However, Tong Herr will benefit from the economic Price Performance improvement in the US. 1M Maintain BUY but with an unchanged target price of RM2.50 We make no changes to our FY15-17E forecast. Also unchanged is our target price of RM2.50, which is based on an unchanged 10x CY16 EPS. Maintain BUY. Tong Herr will benefit from the US economic upturn as well as the strengthening of the US$. Risk to our recommendation includes weaker-than-expected demand especially from the developed markets. Earnings & Valuation Summary FYE 31 Dec 2013 Revenue (RMm) 520.0 EBITDA (RMm) 45.0 Pretax profit (RMm) 30.8 Net profit (RMm) 17.8 EPS (sen) 14.0 PER (x) 15.7 Core net profit (RMm) 17.8 Core EPS (sen) 14.0 Core EPS growth (%) 21.6 Core PER (x) 15.7 Net DPS (sen) 5.0 Dividend Yield (%) 2.3 EV/EBITDA (x) 6.8 2014 601.4 75.1 52.4 34.1 26.7 8.2 34.1 26.7 91.1 8.2 6.0 2.7 3.8 Chg in EPS (%) Affin/Consensus (x) 2015E 635.1 74.3 56.2 34.3 26.9 8.2 34.3 26.9 0.7 8.2 6.0 2.7 3.3 2016E 669.5 76.8 56.8 34.2 26.8 8.2 34.2 26.8 -0.3 8.2 6.0 2.7 3.7 2017E 706.0 78.9 59.5 35.6 27.9 7.9 35.6 27.9 4.1 7.9 6.0 2.7 3.6 NA NA NA Absolute Rel to KLCI +0.0% +5.7% 3M +1.0% +4.7% 12M +1.0% +7.6% Stock Data Issued shares (m) Mkt cap (RMm)/(US$m) Avg daily vol - 6mth (m) 52-wk range (RM) Est free float BV per share (RM) P/BV (x) Net cash/ (debt) (RMm) (1Q15) ROE (2015F) Derivatives Shariah Compliant 126.4 271.8/73.8 0.0 1.88-2.44 27% 2.63 0.80 (38.25) 9.1% No Yes Key Shareholders All Star International Amanah Raya Trustee Capital Dynamics Asset 62.2% 3.7% 2.8% Source: Affin Hwang, Bloomberg Sharifah Farah (603) 2145 0327 [email protected] Source: Company, Affin Hwang estimates, Bloomberg Affin Hwang Investment Bank Bhd (14389-U) (Formerly known as HwangDBS Investment Bank Bhd) Page 1 of 3 1 June 2015 Fig 1: Results Comparison FYE 31 Dec (RMm) 1Q15 Revenue Op costs EBIT EBIT margin (%) Int expense Int and other income EI Associates Pretax profit Tax Tax rate (%) MI Net profit EPS (sen) Core net profit 158.8 QoQ % chg 5.9 YoY % chg 18.9 (146.8) 12.0 7.6 (0.5) 5.3 0.0 (2.4) 14.4 (3.3) 22.6 (3.8) 7.3 5.8 7.3 (0.2) 327.3 +5.7ppt (10.6) 222.0 nm nm 271.1 nm nm (446.7) 123.9 123.9 123.9 23.4 (17.8) (3.4 ppt) (2.2) 426.0 nm (531.4) (2.5) 7.9 nm 13.8 (12.7) (12.7) (12.7) Comment 1Q15: Stainless steel segment (+26%); aluminum segment (+3%) Improved efficiency and better cost management Total borrowings stood at RM169m (-12% yoy) Higher demand from US and Japan Free-tax rate benefits previously enjoyed has lapsed Inline; accounts for 22% of full year forecast Source: Affin Hwang, Company data Affin Hwang Investment Bank Bhd (14389-U) (Formerly known as HwangDBS Investment Bank Bhd) Page 2 of 3 1 June 2015 Equity Rating Structure and Definitions BUY Total return is expected to exceed +10% over a 12-month period HOLD Total return is expected to be between -5% and +10% over a 12-month period SELL Total return is expected to be below -5% over a 12-month period NOT RATED Affin Hwang Investment Bank Berhad does not provide research coverage or rating for this company. Report is intended as information only and not as a recommendation The total expected return is defined as the percentage upside/downside to our target price plus the net dividend yield over the next 12 months. OVERWEIGHT Industry, as defined by the analyst’s coverage universe, is expected to outperform the KLCI benchmark over the next 12 months NEUTRAL Industry, as defined by the analyst’s coverage universe, is expected to perform inline with the KLCI benchmark over the next 12 months UNDERWEIGHT Industry, as defined by the analyst’s coverage universe is expected to under-perform the KLCI benchmark over the next 12 months This report is intended for information purposes only and has been prepared by Affin Hwang Investment Bank Berhad (14389-U) (formerly known as HwangDBS Investment Bank Berhad) (“the Company”) based on sources believed to be reliable. However, such sources have not been independently verified by the Company, and as such the Company does not give any guarantee, representation or warranty (express or implied) as to the adequacy, accuracy, reliability or completeness of the information and/or opinion provided or rendered in this report. Facts, information, views and/or opinion presented in this report have not been reviewed by, may not reflect information known to, and may present a differing view expressed by other business units within the Company, including investment banking personnel. Reports issued by the Company, are prepared in accordance with the Company’s policies for managing conflicts of interest arising as a result of publication and distribution of investment research reports. Under no circumstances shall the Company, its associates and/or any person related to it be liable in any manner whatsoever for any consequences (including but are not limited to any direct, indirect or consequential losses, loss of profit and damages) arising from the use of or reliance on the information and/or opinion provided or rendered in this report. Any opinions or estimates in this report are that of the Company, as of this date and subject to change without prior notice. Under no circumstances shall this report be construed as an offer to sell or a solicitation of an offer to buy any securities. The Company and/or any of its directors and/or employees may have an interest in the securities mentioned therein. The Company may also make investment decisions or take proprietary positions that are inconsistent with the recommendations or views in this report. Comments and recommendations stated here rely on the individual opinions of the ones providing these comments and recommendations. These opinions may not fit to your financial status, risk and return preferences and hence an independent evaluation is essential. Investors are advised to independently evaluate particular investments and strategies and to seek independent financial, legal and other advice on the information and/or opinion contained in this report before investing or participating in any of the securities or investment strategies or transactions discussed in this report. Third-party data providers make no warranties or representations of any kind relating to the accuracy, completeness, or timeliness of the data they provide and shall not have liability for any damages of any kind relating to such data. The Company’s research, or any portion thereof may not be reprinted, sold or redistributed without the consent of the Company. The Company, is a participant of the Capital Market Development Fund-Bursa Research Scheme, and will receive compensation for the participation. This report is printed and published by: Affin Hwang Investment Bank Berhad (14389-U) (formerly known as HwangDBS Investment Bank Berhad) A Participating Organisation of Bursa Malaysia Securities Bhd Chulan Tower Branch, 3rd Floor, Chulan Tower, No 3, Jalan Conlay, 50450 Kuala Lumpur. www.affinhwang.com Email : [email protected] Tel : + 603 2143 8668 Fax : + 603 2145 3005 Affin Hwang Investment Bank Bhd (14389-U) (Formerly known as HwangDBS Investment Bank Bhd) Page 3 of 3
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