Result Note - Eng Kah - 27 Feb 2012

Stock Name: ENGKAH
Company Name: ENG KAH CORPORATION BHD

Research House: JUPITER

Price Call: BUY

Target Price: 4.04

ENG KAH CORPORATION BERHAD

4QFY11 Results
FY2011 result within expectation Eng Kah Corporation (EKC)'s FY11 results were within our estimates. Net profit of RM13.3m accounted for about 103% of our full year target whilst its revenue of RM95.6m clocked in for about 99% of our projection. The group reported a 10% increase in net profit despite a relatively flat full year revenue of RM95.6m, thanks to the change of product mix that is able to generate better margin as well as new products developed throughout the year and new customers secured in FY11.

On a yearly basis, 4Q revenue dipped 10% to RM25.0m. Net profit was also lower at RM2.5m. The
lower revenue was due to rescheduling of deliveries by some customers and stricter credit control policy implemented by the group. In addition, lower PBT margin of 11.8% compared to 15.4% in 4QFY10 was mainly due to additional cost incurred for product trial run and product testing as well as quality control for new product development. 4QFY11 revenue rose 13% QoQ on higher orders from new and existing customers. PBT was however lower at RM3.0m on higher R&D and marketing costs.

Higher than expected dividend The group proposed a final single-tier dividend of 7.5sen per share, which bring total dividend of 22.5sen, exceeded our forecast of 20sen per share for FY11. We view this as a positive surprise. Total dividend of 22.5sen represented an attractive dividend yield of 7.0%.

Fair value of RM4.04 We are introducing our FY13 forecast and keeping our BUY recommendation on Eng Kah with a higher fair value of RM4.04. We like Eng Kah on its strong position in the OEM industry for personal care and household products, sound fundamental (strong balance sheet and in net cash position) and attractive dividend payout.

Source:Jupiter Securities Research 27 February 2012

Eng Kah's valuation supported by its dividend yield

Stock Name: ENGKAH
Company Name: ENG KAH CORPORATION BHD

Research House: OSK

Price Call: BUY

Target Price: 4.25

Eng Kah Corp Bhd
(Nov 22, RM3.18)
Recommend buy at RM3.19 with target price of RM4.25: Eng Kah's business can be classified into five main categories:'' cosmetics, perfumery, toiletries, skincare and household products. The company derives more than 70% of its sales from perfumery, cosmetics and skincare products while toiletries and household products account for 14% and 16%. Notable brands in its stable include Sara Lee, Nutrimetics as well as some local home brands like Cosway.

Apart from producing more than 1,000 products for about 50 clients, including multinational companies (MNC), trading companies, multilevel marketing companies (MLM), supermarkets, retail chains and department stores, Eng Kah also develops new products and packaging designs for its existing clients. This distinguishes it from competitors and also gives it an edge in securing new contracts.

According to the Malaysian Cosmetics and Toiletries Industry Group (FMM-MCTIG), there are more than 50 small and medium local companies producing cosmetic and toiletry products. Eng Kah is considered one of the largest players in terms of size and product offerings. The industry is expected to grow by 10% to 15%, driven by: (i) a growing middle-aged population; (ii) the rapid increase in the number of skincare and healthcare centres; and (iii) the aggressive expansion of its customers' MLM businesses, which can boost the demand for cosmetics and toiletries products.

We project Eng Kah's earnings will grow by 20% to 30% in the next three years, fuelled by: (i) an enlarged customer base; (ii) a wider product range; and (iii) stronger contributions from its major contributor, Cosway, which is aggressively expanding its distribution channel.

In addition, short-term disruptions arising from the recent floods in Thailand, which is one of the major exporting countries for cosmetics and toiletries products, will also open up opportunities for Eng Kah to engage potential MNC.

Despite not having a dividend policy, the management has been generous in its dividend payout in the last five years, consistently paying out more than 90%. The low capital expenditure requirement for machinery has allowed the group to give out a large proportion of its earnings as dividends. Going forward, we expect the company to maintain its 80% to 90% dividend payout, which translates into a gross dividend yield of 7.1%, one of the highest dividend yields among small-cap stocks.

In a nutshell, we like Eng Kah because of its: (i) innovative and prudent management; (ii) very impressive dividend payout track record; and (iii) solid balance sheet. Eng Kah is now trading at 11 times FY12 price-earnings ratio, but we call a 'buy' on the stock as the valuation is well supported by its dividend yield. Net profit for FY12 is projected to grow organically at about 9% driven by its existing business. Our target price is derived by pegging a 5% FY12 single-tier dividend yield, which is in line with the average dividend yield for small-cap stocks. ' OSK Research, Nov 22


This article appeared in The Edge Financial Daily, November 23, 2011.