Kumpulan Fima Bhd
(July 8, RM1.74)
Downgrade to hold with an unchanged target price (TP) of RM1.89: Kumpulan Fima Bhd’s (KFima) share price has been on an uptrend since the beginning of the year, appreciating 12.5% year to date despite announcing a lower net profit for financial year 2019 (FY19). We believe the firmer share price is supported by its decent dividend yield and a healthy balance sheet. KFima is known for its generous dividend payouts with healthy dividend yields of between 4.7% and 5.3% in the past five years. However, we see a limited earnings growth across all of its business segments going forward. As such, we downgraded the stock to “hold” from our “buy” call with an unchanged TP of RM1.89.

 
We observed the group’s bulking business is performing well since the fourth quarter ended March 31, 2017 (4QFY17). According to the management, the edible oils, industrial chemicals and technical fats sub-segments’ throughput was the main driver of growth. High levels of crude palm oil (CPO) inventories have resulted in higher demand for bulk handling and storage services.

In FY19, this division became the largest profit contributor to the group with a profit before tax (PBT) of RM44.4 million or +78.2% year-on-year (y-o-y). This higher contribution helped to mitigate a decline in the plantation contributions. Going forward, we believe this segment may be impacted negatively by potentially low palm oil inventories in the region and the uncertainties from the trade tensions between China and the US, which could dampen the throughput.

Meanwhile, the plantation unit reported its first revenue contraction in FY19 after five consecutive years of growth. Revenue decreased 23% y-o-y to RM118.3 million for FY19, mainly dragged by a lower sales volume and selling prices of CPO and palm kernel. Take note that CPO sales volume has decreased 6.6% y-o-y to 47,000 tonnes, and average selling prices of CPO and palm kernel down 18% and 32% y-o-y to RM1,921 and RM3,015 per tonne respectively. Excluding the write-back of impairment loss on propety, plant and equipment, its PBT would have decreased 70.9% y-o-y to RM9.2 million.

As at end-FY19, the group had about 14,763.7ha of land planted, with about 61% of matured plantations. The anticipated low palm oil price may still affect the plantation sector’s performance going forward. We’re expecting a fresh fruit bunch production growth at 6.7% and the CPO price to increase to RM2,055 in FY20 from RM1,921 per tonne in FY19. However, higher palm planting and cultivation costs due to an increase in young matured areas may erode this division’s margin.

Manufacturing revenue has been dragged by a decrease in sales volume of certain travel documents — we believe it is the passport printing contract. We understand that security products have an average lifespan of five years, meaning the group would not be able to win back major contracts in the immediate term. Some new contracts have been secured, but still not generating enough to make up for the loss of the said contract.

KFima does not have a formal dividend policy. However, it has been consistently paying a dividend per share (DPS) of nine sen in the past four years. For FY20 to FY22, we expect the group to pay a DPS of nine sen, equivalent to a payout ratio of 60% to 81%, and translating into yields of about 5.3%. The group had a healthy balance sheet with a net cash of RM107 million as at end-FY19 to support the dividend payments.

We maintained KFima’s dividend discount model valuation at RM1.89 per share. The TP implies a forward 2020 price-earnings ratio of 15.2 times. We still like KFima for its decent dividend yield of 5.4% and a strong balance sheet. However, we see some downside risks to earnings growth. With a potential upside of less than 12%, we have downgraded KFima from a “buy” to “hold” rating. — TA Securities, July 8