20120801 Traders Spectrum - Naim Holdings

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Malaysia Equity Research PP 15211/04/2013(031974)                                                                               1 Aug 2012


          Sense & Response
          Naim Holdings Bhd                                                                         Trading Buy
          Attractive valuation

          ·   Strong earnings delivery could trigger a re-rating
          ·   Current share price implies its construction and property business is valued at 1.3x PE
          ·   Proxy to booming infrastructure spending in Sarawak, where it is a leading contractor
          Undemanding valuation. Naim, a Sarawak-based construction expert cum property developer, is currently trading at only
          5.8x FY12 and 4.9x FY13 EPS, based on consensus earnings estimates. And if we incorporate its 34%-owned associate,
          Dayang Enterprise’s RM1.1bn market value, Naim’s current share price implies that its construction and property business is
          valued at a mere 1.3x FY13 EPS. There is limited downside from current levels, premised on its attractive 6.6% yield (based
          on consensus’ 32% payout assumption) and high payout track record (ranging from 24% to 41%). It may be an even
          better bargain given that it is trading at only 0.5x FY13 P/BV.
          Low valuation unjustified                                             Declining share price – negatives priced in
                                Value  Value/     Remarks
                                       share                                     RM
                                                                                  6
                                RMm    RM
              Naim market cap    442.5    1.77                                    5

                                                                                  4
          (-) Dayang market      369.6     1.48 based on 34% stake
              value                                                               3

              Net worth           72.9     0.29                                   2


                                                                                  1
              Construction, &     55.0       0.22 Stripping out Dayang's
              property profit                     contribution from consensus     0
                                1.3x FY13 PE                                      Jan-07   Jan-08    Jan-09   Jan-10   Jan-11    Jan-12

              Source: Bloomberg, DBS Vickers
          Riding on booming infrastructure spending. Its construction order book stands at RM1.1bn (firm orders, mostly in Sarawak),
          which is more than enough to sustain three years earnings visibility given relatively low annual burn rate of RM250-300m.
          Its latest MRT contract win worth RM208m (announced on 31 Jul 2012) also underpins its competitiveness; it is the first East
          Malaysian contractor to be awarded one of the main packages of the MRT project. Future prospects remain bright with the
          development of the Sarawak Corridor of Renewable Energy (SCORE), in which Naim is poised to be one of the largest
          beneficiaries as the local champion.
          Encouraging property sales in Sarawak. Property sales remain robust in Sarawak supported by the booming O&G industry.
          Naim’s unbilled sales stand at RM176m and take-up for its new launches has been strong. Naim generated RM184m sales
          in FY11, the best since FY07. The strong sales performance will translate into sound financial results over the next two
          years.




Quah He Wei - 603–2711 2222 – hewei@hwangdbsvickers.com.my
Ed: SGC


Refer to important disclosures at the end of this report.
Sense & Response




Transforming into property developer. Naim will be positioning itself as a property developer rather than a construction
contractor given better margins in property development. While revenue contribution from both segments will remain
50:50 in the near term, Naim is targeting a 60:40 bias towards property development. Notable upcoming launches include
RM175m street mall at Bintulu Old Airport and RM130m mixed development in Miri.
Large tracts of undervalued land. The crown jewel is its large 2,620-acre land bank in and around three major cities in
Sarawak - Kuching, Miri and Bintulu. Those land may be developed into property projects worth RM9.5bn GDV. We
understand from the management that its land bank is carried at low holding costs, implying significant upside potential.
Cheap proxy to O&G business. Its 34%-owned associate, Dayang Enterprise, remains a major earnings contributor at 34%
of group earnings in 1Q12. Although there are concerns over Naim disposing its Dayang stake, we feel that is unlikely to
happen soon as Naim’s earnings will be severely eroded without Dayang’s contribution. In addition, the management is
optimistic of Dayang’s future prospects given its strong RM1.4bn order book providing long-term earnings visibility.
Earnings recovery on the horizon. The management also clarified that its poor FY11 financial performance -when earnings
dipped 52% to RM47m - was largely due to slow property launches and completion of several construction projects.
However, Naim has been more aggressive since 2H11, and that is reflected in strong 1Q12 earnings, which improved to
RM17m (vs RM5m in 4Q11 and RM12m in 1Q11). The persistent strong earnings delivery over the next few quarters could
trigger a re-rating of the stock. Meanwhile, its balance sheet remains strong with 17% net gearing (as at Mar12).


Uptick in Naim’s property sales in 2011                           Construction order book
   RMm
   300
                                                                  Construction order book          Completion Contract value (RMm)
   250                                                                                                        Total        Outstanding
                                                                  Affordable housing projects      Mar14            560.5       451.8
   200
                                                                  Sabah O&G Terminal               Feb14            244.4       119.8
   150
                                                                  Rehabilitation of Fiji Highway   Dec12            142.8        84.7
                                                                  Bengoh Dam Resettlement Scheme   Jan13            179.6        74.5
   100                                                            Complex Islam                    Sep12             94.6        28.4
                                                                  Murum Dam Resettlement Scheme    Aug13            197.2       197.2
    50
                                                                  Jalam Kampung Semadang/Bau       Aug13             67.7         3.3
     0                                                            MRT package S4                   2Q15             208.0       208.0
         2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011                                                  1,694.7      1,167.7
    Source: Company, DBS Vickers




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Sense & Response




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