Kumpulan Fima to have lower profit contribution from manufacturing division

KUCHING: Kumpulan Fima Bhd (Kumpulan Fima) is expected by analysts to have lower profit contribution from the manufacturing division, going forward.

According to the research arm of TA Securities Holdings Bhd (TA Research), this is due to the expiry of travel documents contract and stiff competition.

TA Research also noted that Kumpulan Fima’s manufacturing revenue is mainly derived from Government contracts.

“As such, there could be adverse impact to the group’s earnings should the Government decide to discontinue its service with Kumpulan Fima.

“Besides, security printing is also facing competition from the new digital technologies where many organisations are adopting digital document strategies to tighten access control and user restrictions.

“Besides, banks are becoming more and more digital centric and shifting towards information technology to automate their operations process.

“All these transition phases could affect Kumpulan Fima’s bottom line,” TA Research said.

That said, the research arm noted that this will be partly offset by higher profit from the plantation and food division.

On another note, TA Research expected fresh fruit bunch (FFB) production growth to be in the range of 14 per cent to 19 per cent in financial year 2018-2020 (FY18FY20).

“Naturally, most of the growth will come from its young estates in Miri,” the research arm said.

It assumed FY18, FY19 and FY20 average crude palm oil ( CPO) prices of RM2,700, RM2,800 and RM2,800 per tonne, respectively, for Kumpulan Fima.

Correspondingly, TA Research expected Kumpulan Fima’s group FY18 revenue to decrease by 4.6 per cent to RM522 million.

“While for FY19 and FY20, the revenue is expected to be RM559.8 million and RM607 million respectively,” the research arm said.

It added that estimated net profit stood at RM37.5 million, RM40.9 million and RM46.5 million for FY18, FY19 and FY20, respectively.

Overall, the group has been paying a consistent dividend in the last seven years and TA Research opined that this stock is very much a yield-play stock.

This prompted the research arm to use the dividend discount model (DDM) valuation approach to better reflect the market’s expectation on the stock.

TA Research thus derived a target price of RM1.89 per share for Kumpulan Fima, based on cost of equity of 8.5 per cent and the terminal growth rate of four per cent.

It noted that the target price translates into current year 2018 (CY18) implied price earnings ratio (PER) of 13-fold.

With total potential upside of 10.4 per cent, TA Research initiated coverage on Kumpulan Fima with a ‘hold’ recommendation.