NIAM ... Dec10

KENANGA RESEARCH

9MFY10 above expectations

- Sterling set of interims. Naim’s 9MFY10 net profit of RM75.3m was above consensus estimates of RM91.6m (82%) and ours of RM88.6m (85%). Continuous completion of few construction projects, good sales in property division and stronger than expected contribution by Dayang were key catalysts for the stronger than expected numbers.

-  In 3Q10, Naim recognised higher progressive billings from its construction division as a few projects were completed. Total construction margin was 13.8% after closure of project with full recognition of profits from provisions made earlier. Naim’s outstanding order book of RM1.9b or almost 5x its FY09 construction revenue. This would help underpin earnings visibility for the group’s construction division over the next
three years.

-  Property division contributed sales of RM30.6m (vs 2Q of RM47.0mn). Gross margin was higher due to higher commercial property sales and recognition of unbilled sales with EBIT margin of 80%.

-  Dayang contributed RM9.7m to pretax profit during the quarter, a sharp jump of 85% vs. RM5.2m in 2Q10

-  We revise up our net profit estimates by 13% and 22% for FY10 and FY11 to RM103.2m and RM115.3m respectively as we assume higher construction pace and better construction margins.

-  Good news does not stop. Much of the focus has been on securing contracts in 2010. Including the SOGT job and latest Bengoh Dam resettlement works project, group’s effective new contracts secured so far is
already close to RM1.1b. The latest contract is will lift Naim’s outstanding order book to RM1.9b, 5x its FY09 construction revenue.

-  Positive outlook for Dayang. Significant amount of offshore topside structural maintenance contracts is expected to be open for tender in early 2011. There will be RM2.0b worth of expiring maintenance contracts up for renewals and Dayang is looking at bidding for these contracts. Earning rerating for Dayang is expected given its historical bidding success rate of 75%. It has a current tender book of RM540m and there is RM1.3b upcoming maintenance contracts tenders from Petronas .

-  Maintain BUY with a revised target price of RM4.50 applying a 11x adjusted FY11 EPS of 41.3 sen and a 40% discount to the top three construction companies average of 18.3x. Naim is trading below its 7-year
average of 11.1x forward PER.