Quarterly Result (Malaysia) – Fima Corporation Berhad (Q2 FY17)

Last Traded Price RM 2.03
Previous Price* RM 2.18
Target Price* RM 1.70
Rating* SELL (Maintained)
Price to Earnings** 8.9x
Price to Cash Flow** 3.9x
Price to Book** 0.9x

* As of 14/10/16
** As of 08/12/16 (source: Morningstar)

Q2 result materially above our expectation, but we still maintained our SELL rating due to our expectation of unsustainable financial performance which may be hard to revert to the historical profit margins and cash flow generation. Fima Corp faces challenges from the litigation with Indonesian government which may result in weaker market sentiment. Although the outcome is too early to assess in our view, the market is very likely to be pessimistic about the outlook given the planted areas affected represents 30% of Indonesia Plantation areas.

Q2 results showed a positive swing in working capital which has resulted in better cash flow generation than expectation. However, removing the working capital elements, the company’s cash flow (as measured by fund from operations) is weakened from 51.5% to 44.6% (% of revenue). The decline is mainly due to the reduction in depreciation (leading to lower non-cash item adding back to the operating cash flow).  Nevertheless, the profit margins were improved (net profit margin increased from 15.6% to 16.6%, and SG&A expense has decreased from 17.1% to 13.4%) but marginally dragged down by higher effective tax rate from 24.8% to 28.3%.

We maintained a SELL rating on the company as we expect the downside risk is high. The sustainability of cash flow generation is constrained by the volatile CPO prices, high capex from the plantation segment and low-profit contribution from the property holding segment (profit generation is much lower than our required rate of return, potentially destroying the shareholder’s value).

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.
Valuation will be performed annually. The target price is as of 14/10/16  and is provided as a guide (we will perform valuation if we believe there are adverse changes which may result in inaccurate assumptions). Please refer to equity research report for more information and valuation meth
odology.

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