HAFARY HOLDINGS

UOBKayhian on 29 Jan 2014

VALUATION

• Maintain BUY but with a lower target price of S$0.305 (previously S$0.33).
• We maintained our net profit forecast for FY14 but lower our FY15 and FY16 profit forecasts by 3.9% and 9.3% respectively on the more cautious outlook. We rolled forward our valuation of Hafary’s building materials supply business and peg it at 14.2x 2015F PE (EPS of 2.16 S cents).
• Currently, Hafary is trading at an undemanding valuation of 8.9x 2015F PE with an attractive FY14F dividend yield of 6.5%, based on FY14F DPS of S$0.0125

FINANCIAL RESULTS

• Results in line with estimates. Hafary continued to see growth, with revenue up 15% yoy to S$48.9m (51% of our full-year forecast). Excluding the one-time gain on disposal of S$22.7m in 1HFY13, profit before tax fell S$0.57m (-10% yoy) to S$5.73m, which forms 53% of our full-year forecast.
• The decline in profitability was due mainly to the increase in depreciation from the addition in PPE, and an increase in other expenses. Gross margin was also lower at 38.6% (1HFY13: 41.6%) due to a higher mix of project sales.
• 1.0 S cent interim dividend declared. Based only on the interim dividend of S$0.01, this already translates to an attractive dividend yield of 5.3%.
• Growing momentum in a new market, Vietnam. During 1HFY14, Hafary saw a performance improvement in its associate company VCI, as the economic climate in Vietnam improved. VCI’s contribution increased by S$0.4m to S$0.5m 1HFY14.

OUR VIEW

• Stock implications. In the absence of a special dividend in FY14 (after a dividend bonanza of 5.25 S cents declared in FY13), we believe the recent weakness in price action could be attributed to investors cashing out after the stock went ex-dividend. Negative sentiment from a weaker property outlook is also likely to have been a drag on share price.
• Backlog of projects to support near-term earnings. While the tapering in HDB supply from 2014 is likely to hurt sentiment, the huge backlog of new residential units will support near-term earnings of Hafary. According to estimates by MND, more than 170,000 new residential units are expected to be completed in 2014-17.
• Lowered our FY15 and FY16 profit forecasts. On the back of the more cautious outlook, we lowered our FY15 and FY16 profit forecasts by 3.9% and 9.3% respectively. Further improvement in VCI may help partially offset the drop in local demand.