♦ EI from acquisition of SCB. Total net profit of RM183.3m was due to negative goodwill amounting to RM175.4m arising from its acquisition of 84.1% equity interest in Silverstone Corporation Bhd (SCB) that was completed end-08. The Group has benefited from gains from the acquisition of SCB’s debts, dividend income from associates and foreign exchange.
♦ Notable improvement. Albeit slightly lower than expectation, the company’s profitability had improved significantly from a loss position (- RM8.7m) in FY08 attributable to 1) 4Q09 revenue increase of 16% qoq and 68% yoy arising from better demand on the back of improving sentiment and economic recovery; and 2) positive operating margins of 8.4% for FY09 from operating loss in FY08. The loss in FY08 was dragged by its tyre division, which has turned around after the acquisition of SCB.
♦ Outlook. SCB’s acquisition had brought a more positive outlook to the company. SCB is involved in the manufacturing and sale of tyres, sale and distribution of Suzuki motorcycles and motor vehicles, manufacturing of motorcycle parts and accessories. We expect demand for the tyre division to improve further in FY10 as we are anticipating better sales for motor vehicles, in line with our TIV projection growth of 6.4%. We expect relatively stable movement for rubber price in 2010, and this, in our view, could help to cushion inflationary pressure on course amid economic recovery. We also expect its building material division to benefit from the stimulus packages that have been rolled out locally and globally.
♦ Risks. The risks include: 1) lower-than-expected demand for the tyre and building materials businesses; and 2) lower-than-expected margins from higher raw material costs.
♦ Forecasts. In line with the management’s expectation of better performance in FY10, we have raised our FY10-11 revenue by 6-7% and expect operating margins to improve to 8% vs. our earlier expectation of
4-5% and 8.4% in FY09 on the back of improved business operating environment. Accordingly, our FY10-11 earnings forecasts were raised by 26-69%. We have also introduced our new FY12 forecasts.
♦ Investment case. Consequently, our fair value has been revised up to RM1.23 (from RM0.80/share) based on unchanged 7x CY10 EPS. Hence, we are upgrading our recommendation on the stock from Underperform to Outperform.
52wk Price Range (RM) 0.285-0.94
Major Shareholders: (%)
Amsteel Mills Sdn Bhd 58.2
Lion Industries Corp. Bhd 21.4
By RHBinvest
Analyst: Low Yee Huap, CFA
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