Result

• Results broadly in line with traditionally weak 2Q. SCH Group Berhad (SCH) recorded 2QFY17 net profit of RM0.1m, down 42.0% yoy and 75.0% qoq. Cumulatively, the Group achieved RM0.5m net profit in its 1HFY17, tumbling 61.5% yoy, which also accounted for 13% of our full year net profit estimates. Despite the huge shortfall, we believe SCH could chalk up better 2H to meet our FY17 earnings forecast as we have witnessed the strong sales rebound of quarry M&E in this quarter.

Comment

• Lower qoq and yoy. As expected, the weaker qoq results for SCH were due to seasonal factor as 2Q is traditionally affected by shorter operation days of quarry production pursuant to festive holidays during December till February. Meanwhile, the lackluster yoy results were due to forex loss incurred on the back of strengthening of USD against MYR, and higher financing costs following the drawdown of term loan despite higher revenue achieved. Notably, we have witnessed strong sales rebound of its major product, quarry M&E in 2QFY17, posting RM2.0m in sales, doubling yoy and tripling qoq.

• Feeble 1H. Despite its topline declining 13.5% yoy with lower sales of quarry M&E and spare parts, bottom line fell with greater magnitude, -61.5% yoy, mainly dragged down by higher proportionate cost of sales (GP margin dropped by 1.0ppt), coupled with forex loss and higher financing costs incurred in 2Q. Hence, the Group’s PBT margin fell by 6.2ppts to 4.2% in 1HFY17 from 10.4% in 1HFY16.

• Mild recovery seen in 2H and anticipating stronger FY18. The Group foresees sizeable orders flowing in during 2Q-3QCY17, underpinned by take-off of several mega infrastructure projects such as MRT2, LRT3, Pan Boneo Highway, DASH, SUKE, EKVE. Hence, it would lift the Group’s topline and bottom line starting 3Q/4QFY17 onwards with stronger earnings expected in FY18.

Earnings Outlook/Revision

• No change to our FY17 and FY18 earnings estimates.

Valuation & Recommendation

• Maintain HOLD with a higher target price of RM0.23 (from RM0.18) after applying higher target PER of 19x (previous 15x) on an unchanged FY18 fully diluted EPS of 1.23 sen. Our valuation is in the range of upcycle PE of small cap stocks in view of prevailing construction boom which is expected to benefit the quarry and mining sectors. However, we believe current share price has factored in the positives with valuation looks steep as it now trades at 1.7x P/B and 21.2x FY18 PE.

Source: JF Apex Securities Research - 26 Apr 2017