Atlan Holdings Bhd
(July 15, RM4.20)
Maintain buy with a lower target price (TP) of RM5: For the first quarter ended Feb 29, 2020 (1QFY20) Atlan Holdings Bhd’s core net profit was below our estimate and met only 13% of our full-year forecast.

Earnings were largely dragged by heightened operating expenditure (opex) post-consolidation of Brand Connect Group.

On a positive note, Atlan declared its first net dividend per share of five sen.

We lower our financial year ending Feb 28, 2020 (FY20)/FY21/FY22 core net profit estimates by 19% to 20% and sum-of-parts-TP by 70 sen to RM5 to factor in the weaker duty free segment.

Nonetheless, we continue to like Atlan for its undervalued assets, strong balance sheet and mergers and acquisitions (M&A) potential.

Excluding one-off net gains of RM1.6 million (such as foreign exchange and fair value changes), 1QFY20 core net profit was RM5.5 million (-33% year-on-year [y-o-y], -13% q-o-q [quarter-on-quarter]). Core earnings were largely dragged by steeper opex at the duty-free segment (such as professional and transportation fees) post-consolidation of the newly-acquired Brand Connect Group, despite some y-o-y revenue increase.

This lowered the segment’s pre-tax profit margin by 3.1 percentage point y-o-y to 6.9%.

This, however, was partly cushioned by stronger automotive segment earnings due to higher orders from customers. In the long run, we remain positive on Atlan’s M&A growth potential supported by its strong balance sheet (net cash of RM244 million or 96 sen per share) and its undervalued land assets, namely Jalan Ampang, Kuala Lumpur, and Bukit Kayu Hitam in Kedah (we estimate a potential two-fold revaluation gain).

Atlan management has indicated it is looking at M&A opportunities particularly on acquiring company(s) that can supplement and grow its existing businesses.

We are positive on Atlan management’s ability to execute on its growth strategy (such as its partnership with Heinemann since 2016).

We believe Atlan’s weaker share price has reflected its soft earnings results and soft consumer sentiment in Malaysia and Thailand. Hence, duty-free earnings could recover once consumer spending improves. — Maybank IB Research, July 15