NHFATT ... Aug10

S&P Results Review & Earnings Outlook

- NHF’s 2Q10 results were broadly in line with our forecasts. Net profit for the quarter of MYR8.4 mln (+31.3% YoY and QoQ) brought cumulative 1H10 net profit to MYR14.8 mln (+23.5% YoY) that reached 50.5% of our 2010 estimate.

- Revenue for the period of MYR110.4 mln was 14.3% higher, on the back of higher trading and manufacturing revenue, reflecting the improvement in consumer sentiment and the overall domestic economy, in addition to increased export sales. Trading and
manufacturing revenues were 10.2% and 12.2% higher, respectively.

- EBIT margins for 1H10 improved to 15.2% from 14.6% in 1H09, driven by higher operating leverage and higher income from the sale of steel sheet scrap.

- Finance costs were within expectations but effective tax rates were lower than expected due to reinvestment allowances and the over provision of deferred tax for 2009.

- No dividends were declared in respect of the June quarter.

- We maintain our 2010 and 2011 profit estimates.


Recommendation & Investment Risks

- We maintain our Buy recommendation but lift our 12-month target price to MYR2.80 (from MYR2.60).

- Our target price is derived by ascribing a 7.0x (from 6.5x) target PER to 2011 earnings (unchanged) and adding the forecast net DPS. The target PER remains within the 6x-11x PER range of auto parts companies within our coverage with the higher target multiple reflecting higher peer valuations.

- Nonetheless, we still consider NHF to be an attractive investment given its undemanding valuations with 2011 PER at just 6.1x. NHF has traditionally enjoyed relatively inelastic demand given its focus on the replacement market and ability to consistently improve its competitiveness and operating efficiencies. NHF’s balance sheet remains under-leveraged with a net gearing of just 7.7% at end-June
2010. We also expect NHF to be able to comfortably pay a gross DPS of at least 11 sen (4.6% gross yield).

- We expect the market to re-rate NHF higher when it shows progress of consistently being able to develop new export markets to expand its scale of business.

- Risks to our recommendation and target price include unexpected increases in steel and plastic resin raw material prices, other operating costs and heightened competitive pressures in the marketplace.