MY ER Fima Corporation Berhad – Oct 2016

Stock Code 3107.KL
Investment Rating SELL
Current  Price RM 2.18
Target Price RM 1.70
Estimated Return -21.88%
Market Cap RM 526m (as of 14/10/16)

Company Profile:
Engage in printing of security and confidential documents such as travel documents, licenses and certificates (accounted c. 70% of the revenue). Circa 30% of the revenue is from oil palm production and processing. And small revenue contribution from property management and investment holding.

Investment Considerations:

1) Threat of digitalization and highly dependent on government contract weaken its attractiveness
Technological advancements might reduce the earnings visibility of the company in the long run (paper-based documents being replaced by mobile systems). Bank notes printing services, although, enjoys high barriers to entry, but the significant deterioration in operating efficiency makes the company less attractive. Large dependent on Malaysia government poses greater concentration risk as any unexpected event will be detrimental to the business.

2) Weak contribution from property management segment and greater uncertainty over the prices of CPO
The property management division’s assets were higher than that of printing and oil palm division but delivered the lowest profit (at a low single digit percentage) which significantly dragged down the ROE (see the report). The volatility of CPO prices also dragged down the profit generation and the division continues to consume higher cash in the form of capital expenditure (26% of sales in FY 2016), weakened its cash flow generation. Indeed, the free cash flow declined from RM 98m in FY 2011 to RM 46m in FY 2016. Despite the poor performance, the company is positively supported by net cash position (currently no debt). With cash of RM 183m in hand, which represents 34.7% of the market cap. RHB currently has a neutral outlook for plantation industry hence we believe there is a high probability that the oil palm segment will not contribute materially to the upcoming financial performance.

3) Weaker dividend coverage and significant deteriorated financial performance over time.
The investors might be attracted by the decent dividend yield of over 5.79%, but we believe that the dividend’s quality has reduced. The dividend coverage in FY 2011 was around 6.5x and reduced to 1.5x in FY 2016. The company is in a dilemma, cutting dividend (to retain higher cash) will send bad signal to the market while maintaining it (without a material improvement in financials) will reduce the net cash position. And the financial has deteriorated significantly. If the investors are investing based on the attractive dividend yield, they need to be aware that it might not be sustainable. We valued the company based on DDM and incorporated sensitivity analysis on the assumptions. We assigned a sell rating as the fair value of RM1.70 suggests a downside risk of 21.88%

Financial Summary FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 LTM
Price to Earnings 6.23x 7.54x 9.11x 6.47x 10.29x 9.92x
Price to Net Tangible Assets 1.08x 0.95x 1.27x 0.70x 0.97x 0.88x
Price to FCF 5.01x 16.17x 77.18x 22.34x 12.25x n.a
EV / EBITDA 2.20x 2.31x 3.81x 1.94x 3.79x 3.48x
Net Profit Margin (in %) 26.29% 20.29% 20.67% 15.95% 14.62% 15.16%
Free Cash Flow* RM’m 98.1 28.9 8.4 17.5 46.1 n.a

*High capex and material adverse movements in Capex resulted in low free cash flow generation during FY 2013 to FY 2015

Please click here for full investment research report.

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The opinions and views presented in this website and equity research reports are based on facts (which Yield Mountain believes to be reliable and correct) and subjective judgements. It is only for information purpose and does not consider the unique circumstances of the readers. It is not intended as an offer to buy or sell the securities discussed. All the information is based upon publicly available information. Whilst every effort is made to ensure the opinions and views are accurate, we are not auditors and do not independently verified every source used. Past performance is not necessarily an indicative of future performance and the contributors at Yield Mountain will not accept for any losses arising from information contained in this report. The contributors may form forward-looking views (projections and estimations) of the companies which may not necessarily be true. Market conditions and unforeseeable events may lead to materially different outcomes. Yield Mountain strongly recommends the readers to seek independent advice from their brokers to understand the investment risks arising from taking investment actions based on the Yield Mountain’s equity research.

The research was previously posted under the name of KapitalWise in October 2016 (http://kapitalwise.blogspot.co.uk/2016/10/equity-research-fima-corporation-berhad.html)

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