Courts Mammoth Berhad
THE company reported a lower net profit of RM14.98 million for the third quarter ended Dec 31, 2002, compared with RM21.34 million in the last comparable period. Turnover was also lower at RM152.09 million, from RM160.57 million previously.
Comment: Courts' annualised third quarter (financial year) FY2003 earnings came in 17.9 per cent and 23.4 per cent below market and our expectations, respectively. The initial boost in revenue from the five new stores opened in Q3FY02 was not repeated in Q3FY03 as only one store was opened in Q3FY03. The lower turnover led to poor overhead absorption and resulted in the 29.6 per cent year-on-year drop in earnings. We expect a softer Q4FY03 as Q3FY03 was boosted by the festive buying activities. In view of the poor performance thus far, we are slashing our FY03 earnings projection by another 14.4 per cent to RM50.7 million and FY04 by 18 per cent to RM58.2 million.
Recommendation: We are downgrading Courts from “market perform” to “underperform”. At RM2.81, Courts is trading at FY03-FY04 price earnings ratio (PER) of 16.4x and 13.9x, comparable to the consumer sector's 16x-17x and market average of 14x-16x, but above its historical average PER of 12.1x. The operating environment shall remain tough for Courts given the prevailing economic condition.
Ahmad Zaki Resources Berhad
IT reported a higher net profit of RM14.07 million for the financial year ended Dec 31, 2002, compared with RM11.48 million a year ago. Turnover nearly doubled to RM439.50 million, from RM234.04 million previously. The company also announced a two-for-five bonus issue and application for transfer to the Kuala Lumpur Stock Exchange main board.
Comment: The bonus issue was indeed a surprise, being the second in just over a year. Results-wise, the company posted a 60 per cent jump in pre-tax profit from the preceding quarter, which was plagued by labour shortages. The results came in 12 per cent above our expectations owing to stronger-than-expected margins.
The company is expected to commence work on the RM140 million Duta-Kuching upgrade soon. In the months ahead, we also expect the company to finalise details of its Subang-Kelana Link and Sekolah Integrasi (Ulu Terengganu) contracts, which altogether are worth about RM340 million. This focus on infrastructure-related construction, compared to the previous building orientation should lift Ahmad Zaki's margins to the 10 per cent level, up from 5 per cent last year.
Recommendation: Maintain buy. On the back of its outstanding order book of RM515 million and another RM340 million on the way, the company's 2003 earnings per share is expected to surge 23 per cent to 40 sen. This translates into just 7.4x PER, which we feel is a bargain for a well-managed construction company. Backed by its healthy balance sheet and strong cashflow, the company has raised net dividend by 40 per cent to 10.8 sen per share in 2002, offering an attractive yield of 3.6 per cent.
IT reported a net profit of RM58.56 million for the first half of the financial year ending June 30, 2003, compared with RM68.90 million in the last comparable period. Turnover was also lower at RM1.64 billion, compared with RM2.34 billion in the last corresponding period.
Comment: Its net profit for H1FY03 represents 68 per cent of our full-year forecast of RM86.7 million but exceeds the market consensus estimate of RM46.1 million. We believe earnings should be weaker in H2FY03 following the distribution of OYL shares on Nov 1, 2002. Its core building materials division, however, was affected by the labour shortage. With work at most construction sites now back to 80-90 per cent capacity, we believe demand for building materials will recover in H2FY03. Hence, we expect its core building materials divisions to see better performance going forward. Furthermore, a full six-month contribution from Southern Steel Bhd in H2FY03 will also boost its earnings.
Recommendation: Maintain buy. Although the building materials industry is seeing a slow recovery, Hume is well position to recover faster being an integrated building materials player with a niche market in building boards. Based on an 18 per cent discount to our estimated (revised net asset value) RNAV/share of RM3.65, our one-year price target for Hume is RM3.00. Our price target is supported by its (net tangible asset) NTA/share of RM3.09 as at Dec 31, 2002.