SCH Group Bhd
(April 24, 29.5 sen)
Maintain buy with an unchanged target price (TP) of 34 sen: SCH Group Bhd reported a net profit for the second quarter of the financial year ending  August (2QFY15) of RM600,000, double that of a year ago (after including one-off listing expenses  of RM1.2 million in 2QFY14) but down 86.7% quarter-on-quarter (q-o-q). Similarly, the group achieved RM13.3 million in revenue for 2Q, up 8.1% year-on-year (y-o-y)  but down 28.5% q-o-q.

SCH’s first half (1H) of FY15 net profit of RM5.1 million, which surged 59.4% y-o-y, was in line with our full year  estimate of RM9 million on the back of stronger revenue, up 12.7% y-o-y. This is again, after including RM1.9 million  one-off listing expenses for the first half of FY14 (1HFY14).

The group achieved lower q-o-q results mainly due to fewer operatiing days of quarry production, affected by long  festive holidays in December and February. In addition, the group registered lower profit before tax (PBT) due to  higher selling and distribution expenses coupled with costs incurred on the goods and services tax with PBT margin down  by 25.7 percentage points (ppt).

On a y-o-y basis, SCH achieved higher top line and bottom line growth for 2QFY15 and 1HFY15, thanks to higher sales of  machinery and favourable product mix, which we believe includes sales of reconditioned machinery, which commands superior margins, in 1QFY15. Overall for 1H, the supply of industrial products and spare parts contributed the most, at 57%, to group revenue, while the supply of machinery (new and reconditioned) contributed 36% to its top line.

There is no change to our earnings forecast (F). We estimate the group’s FY15F and FY16F forecast net earnings to perform  strongly, up 24.4% and 22.1% respectively on the back of higher revenue expected (FY15F: up 10.3%; FY16F: up 18.6%)  pursuant to a pickup in construction activities, especially on the rollout of the Pan-Borneo Highway, Klang Valley mass  rapid transit line 2 and light rail transit line 3  which would benefit the quarry industry substantially.

We maintain “buy” with an unchanged target price of 34 sen. Our TP is based on 13 times FY16F price-earnings ratio (PER),  which is at upcycle PER of small cap stocks in view of the anticipated booming construction and quarry industries. We  like the group for its: (i) best proxy to the construction boom; (ii) resilient business model, top line supported by  sizeable recurring income (supply of spare parts contributed 60% to 65% of revenue), with the bottom line boosted by  commendable margin (gross profit margin of 35% to 38%); (iii) earnings surprise for FY16F pursuant to the regional expansion  with potential penetration to the Cambodian market as we understand that SCH is in the process of forming a joint venture  with a local party to tap the quarry business there; (iv) attractive dividend yield of 6.7% (expect the group to declare  another one sen dividend in 2H to bring the full year dividend to two sen for FY15F); and (v) sturdy  net cash position. — JF Apex Securities Bhd, April 24

This article first appeared in The Edge Financial Daily, on April 27, 2015.