|Last Traded Price||RM 5.00|
|Previous Price*||RM 5.00|
|Target Price||RM 5.60 (downgrade from RM 5.90)|
|Rating||NEUTRAL (downgrade from BUY)|
|Est. Upside %||12.0%|
|Price to Earnings**||6.7x|
|Price to Cash Flow**||5.7x|
|Price to Book**||1.0x|
* As of 05/11/16
** As of 04/12/16 (source: Morningstar)
Latitude Tree starts the first quarter with a disappointing result which deviates materially from our estimate due to sluggish trading performance across all business units. Since the last time we published our research, the USD/MYR has strengthened from 4.20 to 4.44 (+5.7%) which is another key consideration in valuation. As seen in the below FX chart, Q1 FY 17 (June – Sept) FX has not been excited. And the upward movements during the last couple months could potentially indicate the upcoming quarterly result may be dominated by large FX translation gains. Overall, nothing exciting in current quarter’s result.
Negative observations from the quarterly result:
1) Negative cash flow as reflected by the net operating cash flow and free cash flow. The huge negative swing in working capital (particularly in current assets despite a lower revenue growth) has consumed much of the operating cash flow.
2) All top and bottom line results were deteriorated significantly compared to Q1 FY 16
Revenue down by 6%
Gross Profit down by 8% (margin decreased from 16.3% to 15.9%)
Net Profit down by 25% (margin decreased from 12.9% to 10.3%)
SG&A Expense increased by 9%
Positive observation from the quarterly report:
1) Despite its poorer result mainly comparing with Q1 FY 16, revenue and profit before tax rose 17% and 25.5% respectively when compared to Q4 FY 16.
The result is much worse than our estimation, and we have adjusted our valuation accounting for the recent changes. Based on our research, we found the that the management expects the capital spending of around RM 55m in FY 17, challenging trading (due to intensified competitions, high labour and material costs) and target a dividend payout of 15% (we do not guarantee this information is correct, but we have made a reasonable assessment and deem as acceptable). Holding the relative valuation multiples constant, assigning 70/30 weight on the DCF and relative valuation (refer to the original equity research for further details), we believe the fair value is c. RM 5.60 accounting for the poor conditions which imply an upside potential of 12% (holding our long time estimation constant and mainly adjusted the FY 17 and FY 18 financials). We downgrade the BUY rating to NEUTRAL as we expect the high Capex and weak trading outlook resulted from intensified competition will have a material adverse impact on the valuation.
Despite our NEUTRAL call, as explain previously, coming quarterly result is expected to have A positive contribution from FX translation gains thanks to the strengthening in USD. However, the sales tend to slow after the Christmas and New Year. Unless the USD unexpectedly strengthened for prolonged period (perhaps due to interest rate hike or weaker MYR due to rising in domestic political risks), there will be little exciting catalysts. Its currently low relative valuation to the peers, perhaps, provide some comfort that there may be a scope for re-rating with a better than expected quarterly result.
Disclaimer: The views above are opinions based on facts and subjective judgements. Yield Mountain (including the contributors) does not take any responsibility (be in monetary or non-monetary) for any actions rely on the information discussed.
The valuation is provided as a guide as we perform the valuation annually. We have not taken into account the relative valuation and assume it is stable and do not have material adverse change.