We remain concerned on Fima Corp’s short to medium term outlook. The company’s P/E has de-rated c. 21% (from the peak of approx. 11.2x to 8.8x). The multiple de-rating is driven the combination of decline in share price and better net income contribution in the latest quarterly result (which failed to bring excitement to the share price).
The ongoing litigation with Indonesian government over the plantation rights poses uncertainty on Fima Corp’s outlook. According to The Star, the planted area affected represents c. 30% of Fima’s oil palm planted area in Indonesia. Assuming Fima Corp loses the lawsuit, our best ‘guestimation’ is that the top line will be affected by 8% to 9% (holding everything constant). Fima Corp did not give an estimation hence this is an event we will be paying close attention to.
On the positive side, recent research published by MIDF has a positive outlook for plantation sector driven by stronger USD which is said to benefit CPO prices as it appears cheaper compared to soybean oil (as soybean oil is priced in USD). MIDF expects the USD will strengthen the demand for CPO and palm oil stockpile to drop below the critical level. However, RHB Research maintained their Neutral rating on Plantation sector. MIDF projected the average CPO price would be RM 2,725 vs. RHB’s projection of RM 2,500. The increase in CPO prices inevitably is positive to the company but partially offset with the litigation which may result in lower market sentiment. The cash flow profile of Oil Palm segment is weakened by its high capital expenditure.
On the security printing, we are neutral on the medium-term outlook due to the potential threat from digitalization which may weaken the earnings visibility. And the company has the intention to place greater weight on plantation segment in the future. Historically speaking, security printing division has higher profit margins compared to plantation (refer to equity research report for more detail).
We are under the impression that the market finds Fima Corp’s decent dividend yield and currently trading at support attractive. Our analysis showed that the dividend coverage had reduced significantly together with net income. Its free cash flow is quite volatile and often weakened by negative swings in working capital for a prolonged period. While the net income (comparing FY 16 with FY 12) reduced by 30.4%, the management increased dividend distribution by 47.6%. There seems to be a disconnection between the profit generation and shareholder’s return (in terms of dividend income). Of course, as a shareholder, any increase in dividend is always welcome.
As discussed previously, P/E de-rated around 21% despite posting a strong quarterly result.
We valued the company using DDM, but our base case scenario did not take into account the potential withdrawal of plantation rights in Indonesia which we believe is too early to assess. Should this event be materialised, we will need to revise the target price. Currently, we have a target price of RM 1.70 which implies a downside risk of 16.7% (current price: RM 2.04). We maintained a SELL rating on the stock as we believe the dividend earnings do not justify the current share price (please refer to our equity research report for valuation assumptions and method).
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