|Last Traded Price||RM 1.19|
|Previous Price*||RM 1.32|
|Target Price*||RM 1.43|
|Rating*||BUY (Upgrade from Neutral)|
|Price to Earnings**||8.4x|
|Price to Cash Flow**||5.7x|
|Price to Book**||1.3x|
* As of 19/09/16
** As of 12/12/16 (source: Morningstar)
Q2 result slightly above our expectation with improvements in cash flow generation. QoQ revenue and net profit increased 8.65% and 4.7% respectively. Better than expected cash flow generation (FFO and FCF rose by 17.87% and 9.07% respectively) despite being dragged down by higher capex and working capital.
Positively supported by the clean balance sheet and currently in net cash position with decent internal cash flow sufficient to support its operations. The recent weakness in the share price, in our view, provides a good opportunity to accumulate the shares of the company. We upgrade the rating from neutral to BUY. The target price (as of 19/09/16) of RM 1.43 implies an upside potential of 20%. We like this company because of its better performance in terms of cash flow generation, and profitability compares to its peers and solid liquidity.
However, the recent spike in oil price will add pressure to the company’s bottom line results following the announcement of oil producing countries (OPEC and non-OPEC) have agreed to cut production. As per our research, the power and fuel price represent circa 30% of the production cost of cement and concrete. Our base case estimation has priced into the potential weakness in both earnings and cash flow (to a large extent).
The key risks to our BUY call are:
1) material surge in oil price which leads to much lower cash flow generation than our base case scenario
2) any slowdown in housing market which could be further worsen by poor geographical diversification
3) heighten competitions which lead to diminishing profit margins
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 19/09/16 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 methodology.