We
meet with Kumpulan FIMA recently and here are our 5 key takeaways:
1.
Mini conglomerate. Kumpulan FIMA is a mini conglomerate
with businesses in:
a.
Manufacturing
(RM54.3m PBT, 29% of Group) – manufacture and trading of security documents
mainly for the government
b.
Plantation
(RM47.2m, 26% PBT of Group) – mostly palm oil with small exposure to pineapple
(<5% of segment revenue contribution)
c.
Bulking
(RM34.7m PBT, 19% PBT of Group) - bulk handling and storage of various types of
liquid and semi-liquid products
d.
Food
(RM17.1m PBT, 9% of Group) – manufacture of canned fish (mackerel and tuna)
2.
Flattish outlook for manufacturing and bulking segment. Earnings from
manufacturing segment and bulking businesses is likely to be flattish going
forward as a result of lower margin arising from higher competition in the
market:
a.
Manufacturing
of security documents (bank notes, stamps and passports) is facing declining
demand as more governments switch to electronic payment and document
b.
Bulking
businesses revenue stream is not stable as the customer is secured for short
term basis (~ 3 months).
3.
Growth will like come from plantation and food segment:
a.
Plantation
– 6000 ha of its palm oil estate in Indonesia average age profile is only 7
years old, hence more FFB production is expected in the next 3 years. Another
5500 ha of its palm oil estate in Sarawak is still immature currently (2 years
old) but will provide long term growth from 2014 onwards as the tree mature.
b.
Food
– KFIMA owns a canned fish production plant in Papua New Guinea with capacity
of 30,000 mt per year. Previously, the idea is to utilize 100% of this capacity
for mackerel, which resulted in underutilization of about 35% - 40%. The
company is now switching 40% of its capacity to produce tuna which will
ultimately result in overall higher utilization of the plant.
4.
5% earnings growth. Overall, management guided for about
5% YoY earnings growth in both FY12E-FY13E, translating into FY12E-FY13E net
income of RM84.9m-RM89.2m.
5.
Target Price of RM2.54. By applying 7.5x Fwd
PE to FY13E EPS of 33.85 sen, our back of envelope Target Price for KFIMA is
RM2.70. We believe the single digit valuation is likely to sustain for KFIMA as
the Company is not expected to consolidate its listed subsidiary FIMACORP in
the short term. The mini conglomerate status with operations in 4 segments also
does not bode well as investors may prefer to invest in Companies with single
exposure to certain sector.
6.
Our
7.5x PE is based on the highest historical PE achieved for KFIMA is the last 5
years, based on Bloomberg estimate.
KFIMA
– Additional notes
-
Plantation: Group has 12kha of plantation oil palm.
Management first target is to bring total planted area to 20kha, looking more
of brownfields following issues faced in Indonesia.
-
Manufacturing:
Prints Stamps, travelling doc (passport) and bank notes. Expecting flattish
growth as more transactions are done thru email and MEPS.
-
Food: Tuna business just started last year. They
are still at the learning phrase to maximise the yield per fish. Chunks are
sold to Europe while flakes (remainder) are sold in local market. Chunks price
is USD6k while flake is USD2.5k. Hence yield is important. Management believes
earning could double for division in 2 years as they add another shift and work
24hours. Tuna exported to Europe country has a 24% exemption.
-
Others: Management is committed to a sustainable
dividend yoy. Apr-June earnings could be lower due to recognition for its
Indonesia plantation. Goods are exported by barges and in 2000MT hence assuming
1 or 2 barges earnings are not recognise it could impact the bottomline (timing
issue). Jul-Sept expect to see strong quarter as plantation normally peaks and
they have additional contracts for its printing business.
-
Conclusion: Trades at only 6.5xPE with 50% earnings in
relatively resilient business. However lacked earnings catalyst for next year
until Miri plantation fruition and Tuna business turns profitable. Unlikely to
bump up dividend given its CAPEX requirement of RM35mil pa for next 2 years.
Unlikely to trade at higher premium unless Analyst coverage is increased.