Dolphin International downgraded to ‘sell’

Fair value: RM0.56

KENANGA Research has downgraded Dolphin International Bhd to a sell with a lower fair value of RM0.56, from RM0.78 previously, based on a 6.9 times forward price-toearnings ratio (PER) and financial year 2017 (FY17) estimate earnings per share (EPS) of 8.2 sen.

It said Dolphin’s FY15 reported RM2.9mil reported earnings made up only 8% of its forecast due to slower-then-expected completion of order book projects. This led to poor revenue recognition.

Dolphin’s three months 2016 sales of RM11.4mil was due to sinking crude palm oil (CPO) production resulting from droughts in mid-2015 and unfavourable IDR/MYR foreign exchange (forex) rates undermining forex translation from the group’s Indonesian contracts.

“We believe the unfavourable forex rates further compressed gross margins to 16.1% in the three months 2016 as larger projects are predominantly located in Indonesia.

“Overall, the recent quarter’s shaky performance barely scraped through with a net profit of about RM5,000 compared to RM3.1mil in the first quarter of 2015 and RM2.4mil in the fourth quarter of 2015,” said Kenanga.

While it expects a slowdown in CPO production in FY16, tracking close to its five-year low production levels, Kenanga also foresees further weakness in the group’s palm oil milling automation segment.

It reduced its annual order book replenishment assumptions from RM170mil to RM90mil due to the impact of CPO price and production.

Kenanga believed that its forward order book estimates was fair and in inline with the two-year historical average annual contract value.

“We slash our net earnings expectation for FY16 to RM16.1mil (-46.3% from RM30mil, previously). We also introduce our FY17 forecast earnings of RM13.1mil, weaker than FY16 forecasts by 18.6% on the back of a smaller outstanding order book in tow,” it added.

Kenanga opined that Dolphin appeared to be overvalued when compared to

CB Industrial Product Holding Bhd (CBIP), its industry peer.

It said the lower fair value for Dolphin was at a 30% discount to CBIP’s 9.8 times FY17 forecast forward PER.

HUAT LAI RESOURCES BHD by Affin Hwang Capital Not rated Target Price: NA

MAJOR integrated poultry company Huat Lai Resources Bhd’s operations span from the production of poultry feed, breeding of day-old chics, broilers, layering and also downstream processing of chickens.

For 2015, the Malacca-based company posted its strongest revenue at about RM1.5bil, while revenue has been on an uptrend since its listing in 2002.

Profitability, however, had been a little patchy, influenced by feed costs and market prices of both broiler and eggs.

The second largest broiler player and largest in terms of layering has intentions to beef up its broiler and layering capacity with planned capital expenditure of RM80mil to RM100mi over the next two years, which include a new farm and a hatchery.

This would raise its broiler capacity by 10 to 20% by third quarter of 2017, while layering capacity would be lifted by up to 15%.

Although Huat Lai has historically hedged its raw material positions three months forward, its near-term profitability would be impacted by the year=to-date increase in feedstock (corn and soya) costs

But prices of broilers have rised by about 30% from their recent lows. which should mitigate the cost increase.

Affin Hwang said at present, shares of Huat Lai was trading at a 2015 PER of 10 times, which is at a sharp discount to some of its smaller peers, who were trading at close to 30 times.

But this was spurred by interest in the sector by foreign parties like NH Food and Salim Group, according to management.

“Huat Lai’s vacant landbank of 1,400 acres, particularly a 330-acres plantation plot adjacent to the Malacca’s heavy industrial park.

“We think that the land value could comprise more than 60% of Huat Lai’s market capitalisation,” said Affin Hwang, adding that the company was heavily geared and in a net debt/equity position of 1.7 times, despite interest cover at 2.4 times.