|Last Traded Price||RM 0.155
|Target Price||RM 0.205
|Price to Earnings*||9.3x|
|Price to Book*||0.9x|
* As of 21/06/17 (Source: Morningstar)
1) Weaker revenue is largely within our estimation, but FY17 Q1 earnings slightly overperform.
FY17 Q1’s revenue accounts 24% of our full year forecast while gross profit and net income account 38% and 35.7% respectively. While revenue decreased 10% QoQ, the gross profit and net income grew by 4.5% and 4.7% on better margins on watches sales. Gross profit margin increased to 27.1% in FY17 Q1 from 23.3% in FY16 Q1 while net profit rose to 9% from 7.7%. Though the cash flow was negative, it was mainly due to working capital swings. Overall, Marco generated RM5.7million fund from operations vs. RM 4.1million in FY16 Q1.
2) Planning to diversify into property development.
Management has finally indicated their intention to expand into property development. It is, of course, positive given the relatively low correlation with its existing business and monetizing non-core assets. Marco is planning to use the industrial land in Setapak, Kuala Lumpur (2.5-acre land) to build condominium. We estimate that the project’s GDV could potentially value at above RM 300 million (though this is still early to determine).
The project of that size may result in utilisation of leverage to improve the cost of capital. Its current net cash position of RM 75.3 million and low capex requirement may support the project’s funding. However, execution will inevitably increase the risk profile and temporarily weaken its balance sheet (during the construction phase). Weak domestic housing environment and banks unwilling to lend are primary risk factors. Having said that, we are of the view that the diversification, overall, is positive.
3) Modest increase in leverage and slightly weakening in net cash position
The working capital swings have resulted in slightly higher leverage and reduced cash position. Net cash position was reduced by 9.4% to RM 75.3 million.
4) Reiterate BUY rating.
We make no changes to our DCF assumptions as we believe the financials are largely intact and no material adverse change to our forecast. Maintain the target price at RM 0.205 which suggests an upside potential of over 30%. The key risks to our BUY rating are weaker consumer sentiment and spending.
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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.