• Not just any home appliances distributor. Fiamma Holdings Bhd (FIAMMA) might not sound familiar compared to other household appliances distributors like Panasonic, Pensonic or Khind that carry a single brand name for all their products. FIAMMA is much more diversified as they carry a wider range of products and brands. Other than just home appliances, FIAMMA’s products include sanitary wares, bathroom accessories, home furniture & fittings and medical & healthcare products, which give them wider reach and better competitive edge in the market. Some of their home brands are also well established in the local market such as Elba, Faber, Rubine, MEC, Tuscani, Haustern, and Ebac Home. 
• Superior margins vis-à-vis peers.In terms of margins, FIAMMA’s doubledigit operating margin for its trading segment (home appliances) averaged out at 16.7% for the past two years, a lot more higher compared to its peers’ operating margin i.e. Panasonic, Pensonic, and Khind that averaged at the range of between 2.2% - 10.6%. We believe that its superior performance vis-à-vis its peers could be due to lower fixed overhead costs, and also product positioning whereby FIAMMA aims to sell more small ticket items i.e. electric kettle, rice cookers, induction cooker, table fan and etc. as these items command better margins, over big ticket items i.e. fridge, washing machines, and television. Its fixed overhead costs are much lower compared to its peers as FIAMMA outsourced all of its product manufacturing to China as the local production cost in Malaysia are not as competitive as China.
• Property division still small for now. Aside from its bread & butter business, FIAMMA also plans to grow its property development division. To date, FIAMMA has planned for two projects, located in Klang Valley with a collective GDV of RM900.0m i.e. Jalan Yap Kwan Seng (GDV: RM600.0m) and Bandar Manjalara (GDV: RM300.0m). In view of a subdued market, management intends to launch its Bandar Manjalara project first by the end of 2015, and the Jalan Yap Kwan Seng project in 2016. Its Bandar Manjalara project is targeted at the mid-range market with service apartment priced at the average range of RM550.0k-RM650.0k/unit, while its Jalan Yap Kwan Seng project is in the high-end segment, but the pricing is yet to be finalised. We believe its Bandar Manjalara project would garner a lot of buying interest given its close proximity to Desa Park City and Tesco, which is just walking distance away. At this juncture, investors need not to worry too much about this exposure as property development makes up c.20% of our FY15E earnings, while the main driver is still home appliances. 
• Healthy balance sheet. As of 2Q15, FIAMMA is still in a net cash position of RM23.2m or 16.0 sen/share prior to the completion of its land purchase in Sg. Besi (GDV: c.RM240m). Post the Sg. Besi land acquisition that amounts to RM48.9m, we expect its net gearing to come up to 0.06x which is still at a very comfortable range. Hence, FIAMMA should not have any funding issue in executing their existing project. For FY15-16E we are projecting net profits of RM36.3m (-12.3%, YoY) and RM40.5m (+11.6%, YoY), respectively.
• Not Rated. We fairly value FIAMMA at RM1.92 based on SoP; trading division at RM1.68 based on 9.0x FY15E PER, while its property division at RM0.23based on 5.0x FY15E PER. We are applying 9x FY15E PER for its trading division (13.0% higher than its peer, i.e. Khind of 8.2x), due to its superior double-digit net margin. The 5.0x price-earnings multiple applied to its FY15E property division earnings implies 35.0% discount to the smallmid- cap players’ average PER of 7.8x. That said, for its property division to be valued at only RM0.23, it implies a steep discount of 87.0% to its property RNAV of RM1.83.

Source: Kenanga Research - 16 Jul 2015