KUALA LUMPUR: Kenanga research maintained underperform on Hua Yang Bhd with an unchanged target price of 33.5 sen as it deemed its 1Q20 core net profit of RM3.7mil broad in line with expectations.

While the net profit made up 45% and 35% of Kenanga's and consensus estimates, the research house said contribution from its associate Magna Prima Bhd is expected to drag down overall earnings in subsequent quarters.

Hua Yang's revenue rose 23% year-on-year, which drive core net profit higher by 261% amid a loss of about RM1mil from its associate.

"While there is an improvement in EBITDA margin from 10% to 15% due to lower administrative cost, the lower effective tax rate of 47% vs. 70% is also a major driver behind the improvement in earnings. 

"QoQ, EBIT grew 16%, underpinned by modest growth in revenue (+6%) coupled with improvements in margins on similar reasons above," said Kenanga.

Kenanga believes Hua Yang is on the right track as it continues to derive sales from Penang, Johor and the Klang Valley backed by unbilled sales of RM201.6mil with a year visibility.

"In terms of net gearing, it is down marginally from 0.68x to 0.67x and management remains optimistic of lowering it to the 0.5x level backed by certain projects that is close to completion," it said.