Eksons Corporation - Backed by cash
|Stock||:||EKSONS||Price Target||:||1.50|||||Price Call||:||BUY|
|Last Price||:||1.46|||||Upside/Downside||:||+0.04 (2.74%)|
Target RM1.50 (Stock Rating: HOLD)
At only 29% of our FY15 core net profit, Eksons's annualised 1HFY15 core net profit was below our expectation mainly due to weak plywood prices. But 1H15 net profit rose 230% due to EI gain from "The Atmosphere" land sale. We raise our FY15 EPS forecast to reflect the EI gain but cut FY16/17 EPS for the weak plywood price outlook. Our target price, based on an unchanged 20% discount to adjusted SOP/share, falls to RM1.50. The SOP discount reflects its small market capitalisation and tight trading liquidity. The stock remains a Hold. We advise switching to MyEG for exposure to the small-cap sector.
1H15 net profit up 230%
1H15 revenue rose 95% and net profit surged 230%. This was mainly due to RM51m net profit gain from "The Atmosphere" land sale (sold for RM140.3m cash). However, 1H15 core net profit was RM7m (-56% yoy) due to weak timber and property earnings. No interim DPS was declared, which was in line with our expectations. However, we are disappointed that the company did not reward shareholders with a special bonus using proceeds from "The Atmosphere" land sale. 2Q15 timber net profit came in at only RM3.2m (-43% qoq) due to higher log costs, while plywood prices remained flat.
Challenging market conditions
The outlook looks challenging for tropical plywood over the next few quarters. Japan, the world's largest importer of tropical plywood, is going through a soft patch. The country is in recession after the government raised sales tax from 5% to 8%. Domestic demand and housing starts are likely to be affected by Japan's weak economy. To make matters worse, the yen has depreciated against the US$ over the past few months. ¥-US$ was at 101 a few months ago compared to 117 currently. This could lead to slower plywood purchases by Japanese customers over the next few quarters.
The company's balance sheet is cash rich - RM137m net cash or RM0.83 net cash per share as at end-Sep. Cash currently contributes 57% of its share price. The company has indicated that it plans to use the cash to expand its property landbank, likely somewhere in the Klang Valley. With the completion of "The Atmosphere" project, the company is looking to launch a residential development project in Bukit Serdang, with a GDV of above RM100m.