Equity Research - OKA Corporation Berhad (7140.KL)

OKA Corporation Berhad (7140.KL)


OKA Corporation Berhad is a company incorporated in Malaysia and registered office is in Ipoh, Perak. It is listed on the Bursa Malaysia under the stock code 7140.



We have researched this company and believe that the upside potential of the stock is c. 9% based on discounted cash flow model. We have a neutral rating on this stock as we believe the huge surge in share price in recent months would make the investors to be cautious (and the target price is consistent with our investment ratings).


Please click here for the research report and make sure you read the investment research disclaimers at the end of the report.




Kind Regards and Happy Trading,

KapitalWise

Quarterly Result Commentary - Favelle Favco Berhad

Favco's quarterly results have mixture of both good and bad. Overall, we can see the management is making good progress with regards to profit generation (in terms of margin, not absolute) in a challenging environment. Here are some key takeaways:


Negatives:
- Comparing cumulative six months result with previous six months, the fund from operations decreased from RM 53.6m to RM 34.2m (margin decreased from approx. 27% to 21%). The free cash flow declined from RM 80m to RM 43.6m (margin decreased from approx. 40.3% to 26.2%). It is worth noted that the free cash flow generation of previous six months was boosted by positive change in working capital (60% higher than current six months) hence temporarily increase its free cash flow. Margin in double-digit range which is still significantly higher than its competitors.
- Order book declined from Q1 RM605m to RM571m (5.6% declined).
- Overall, the revenue declined was due to bad performance in foreign sales while partially offset by robust domestic demand.


Positives:

- Despite the revenue declined by c. 16%, Favco managed to increase its profit (+15% compared to Q2 15) due to 1) better control over operating expense (down from 86% to 84%), 2) better profit contribution from associates and 3) low effective tax rate (down from 39% to 28%). It is worth noted that looking at six months cumulative results (instead of comparing individual quarter), it is still 23% lower than previous six month.
- Given its already low leverage, Favco's management decided to reduce its leverage further. Debt decreased from RM64m to RM28 (56% decreased). The justification could be its high cash holding which management attempts to cut unnecessary bank borrowing.
- Despite the debt repayment, cash went up by 9% in its recent quarter, from RM334m to RM365m.





To summarise, the outlook for Favco is neutral (short term) but positive in the medium term as we believe negative factors might dominate the positives for a while and infrastructure spending may be evident in the coming months in under-developed countries (AIIB approved $500million loans in June 2016). We believe that it would facilitate the already weak global economy by boosting spending on necessary developments which cranes manufacturers and rental companies are expected to benefit from such demand.

We are of the opinion that its low relative valuation provides a good investment opportunity with good upside potential (to recap, our relative valuation only focus on discount on multiple while ignoring the potential multiple expansion. Hence the upside potential could be higher but we are being conservative in our estimation). It is currently trading at close to its support, low PE ratio of around 6x, high cash holdings and good dividend yield (which currently the firm has good dividend coverage, we would assess the sustainability in its upcoming financials and report whether there is material change).



Feel free to comment and contact me with any contradictory views.


Thanks and Happy Trading,



KapitalWise



Disclaimer: the views above are opinions based on facts and subjective judgements. We do not take any responsibility for any actions rely on the information discussed.

Quarterly Result Commentary - Kim Hin Industry Berhad

Since the release of Q2 2016 result, the market has been reacted negatively as expected but there is no sign of oversold at the moment. Checking through the quarterly report, here are some key takeaways:

Negatives:

- Kim Hin has tough time growing its bottom line as reflected by gross profit margin deteriorated from 34% to c. 30% in recent quarter which maybe associated with surge in fuel price. 

- Leverage, surprisingly, increased due to bank borrowings (increase by around RM20m) which is still within acceptable range. Debt / EBITDA increased from 0.2x to 0.63x (approximately) which is still consider low. We are of the opinion that leverage below 3x is acceptable.

- Most investors must have noticed that the negative movements in FX eroded much of its profit in previous quarter. But recent spike in MYR has made a small translation gain. FX movements still remain a factor which cannot be fully mitigate.

- Although we expect the Capex remains heightened in short to medium term, Q2 2016 showed that the increase in Capex is beyond our expectation. Further RM20m+ was spent in addition to the previous quarter's expenditure. With some funding coming from disposal of assets and bank debt. We remain optimistic that the Capex might payoff in the future with its expansion plan. Temporarily weakening cash flow metrics is not a major concern given its cash holding of RM59m against RM52m current liabilities and low leverage.

- Non core operating expense dragged its profit down which there was no break down or information. Nevertheless, we believe some costs are not recurring in nature due to its treatment under other expenses rather than in core expenses.

Positives:

- SG&A slightly reduced from 23.7% to 23.4% which reflects better operational efficiency. However, it is still far from offsetting the surge in cost of sales.

- Segment analysis shows that the company is very successfully growing its top line but not its bottom line. Noticeable growth in China, Australia and Vietnam but dragged down by sluggish domestic demand. 

- Bottom line result for Vietnam has been positive with loss narrowing. We believe that Vietnam unit is on track and as our expectation, it could be a profit contributor by 2017.

Overall, reduced margin combined with non operating expenses have reduced the bottom line result, our model has reflected weakening cash flow generation. To recap, we recognise the need to be pessimistic hence we have incorporated worst case scenario which shows that the value may be around RM1.50 (worst case). Outlook is positive due to its growth prospects (which at the moment, top line growth seems to be on track with disappointing bottom line result). However, we will continue to pay attention to its upcoming financials to look out for any material adverse change in cash flow generation and profit margins.



Feel free to comment and contact me with any contradictory views.


Thanks and Happy Trading,


KapitalWise



Disclaimer: the views above are opinions based on facts and subjective judgements. We do not take any responsibility for any actions rely on the information discussed.