YGL ... Dec10

KENANGA RESEARCH

-  9MFY10 net profit of RM706,000 was higher than our loss expectations of RM1.9m as YGL rolled out their proprietary software solution packages which is gaining traction among its clients. The proprietary software has higher margins which aided the recovery to profits as gross margins are back above 30% which is the historical norm.

- YoY, 9M10 net profit grew from a net loss of RM1.05m to RM706,000 with improved operating margin as fixed cost is high given it is largely staff cost.

- QoQ, 3Q10 net profit of RM291,487 was 34% higher despite 14% lower revenue. This typifies the services industry where improvement in earnings and margin above the fixed cost would fall straight to the bottom line.

- Going forward, Asia Pacific region will turn positive in the next quarter as they have narrowed their operating loss to RM3,390 only while Malaysia is improving sharply given that corporations are increasing IT spend after the last two years of drought in spending.

- We are revising upwards the FY10 and FY11 net profit forecast to RM0.829m and RM1.064m from a net loss of RM1.9m and RM0.7m respectively. Given the 3 successive quarters of net profit, we are heartened by the improved profitability and margins.

- Maintain our HOLD with Target Price of 22 sen based on P/BV of 2x on FY11 BV of 11.1sen which we see as fair at this juncture. Although we are heartened that YGL managed to turn-around its net profit for 3 consecutive quarters growing high on each quarter, we believe it is still too early to turn bullish on the stock. Their healthy balance sheet