Highlight: Naim sitting on a cash pile

KUALA LUMPUR: The timing is good, if not perfect, should Naim Holdings Bhd divest its equity interest in Dayang Enterprise Holdings Bhd, which has won a slew of contracts from the Pan Malaysia hook-up and commissioning project.

Naim holds a 33.64% stake in Dayang, whose share price more than doubled to RM5.07 last Friday.

Based on a share price of RM5.07, Naim’s stake in Dayang is worth RM937.2 million, compared with the company’s market capitalisation of RM1.025 billion.

It has long been rumoured that the construction and property development company is looking at paring down its stake in Dayang to unlock the investment it made in 2007.

Naim acquired 45% equity interest in Dayang for RM87.87 million, before Dayang’s initial listing in April 2008.

However, it is believed that Naim only intends to divest part of its equity interest, not all the shares it owns in Dayang. Should such a divestment happen, it would help boost Naim’s cash pile.

As at March 31, the company’s cash balance stood at RM225.5 million against its total borrowings of RM350 million.

Naim’s share price has staged a strong rally since last month, surging to a five-year high of RM4.51 on May 29 from the low of RM2.32 at the beginning of May. It closed at RM4.33 last Friday. Analysts attributed the share price hike to the appreciation in value of its equity stake in Dayang.

RHB Research analyst Danny Chan said it makes sense for Naim to realise its gains in Dayang in order to fund land acquisitions for its property development business, although the outlook on Dayang remains positive.

“I think it may be a good idea to capitalise on Dayang’s strong equity price at this juncture to pare down the stake as the equity market is always uncertain.

“While it’s true that there is ample room for capital appreciation, the upside is fairly capped given that Dayang will be busy executing the large contracts.

“There is also operational risk that may result in weaker than expected earnings so if I were an investor whose investment has more than tripled, I may want to realise the profits and focus on core business,” he said.

Besides the equity stake in Dayang, the potential of Naim’s core businesses appears to have been overlooked, said Affin IB analyst Isaac Chow in a research report last month

“We believe investors have yet to fully appreciate the embedded value of Naim’s construction and property businesses which have been overshadowed by Dayang’s bullish prospects.

While the market value of its stake in Dayang may account for well over 90% of Naim’s enterprise value, the earnings contribution from Dayang had only accounted for 31% of Naim’s 2012 financial year (FY12) pre-tax profit, he said.

He pointed out that going forward, Naim’s property development business will be the largest contributor to earnings.

Currently Naim has 2,600 acres of land in Miri, Bintulu and Kuching in Sarawak, boasting an estimated gross development value (GDV) of RM9.5 billion. Key launches this year have an estimated GDV of RM900 million. Meanwhile, its construction division has an existing order book of RM1 billion.

“In our view, Naim’s property business has promising prospects – its FY12 property sales recovered by 73% from a blip in FY11 while the segment’s FY12 Ebit [earnings before interest and tax] of RM44.3 million was triple that of FY11,” Chow noted.

On its construction business, he said its maiden Klang Valley contract from MRT Corp Sdn Bhd, as well as the potential revival of Sarawak’s construction activities are likely to help sustain the profitability of Naim’s construction arm.

The company had secured a RM204.66 million contract to build elevated mass rapid transit (MRT) stations and undertake MRT-related jobs in Taman Industri Sungai Buloh, located at the Batu Tiga-Sungai Buloh Road; and PJU 5 and Dataran Sunway, both in Kota Damansara, Selangor.

According to RHB Research, Naim has guided that new construction contract wins of about RM500 million in FY13 are likely to come from “infrastructure works in Sarawak, particularly, road jobs”.

For the first quarter ended March 31, Naim’s net profit ballooned to RM41.9 million, or 17.37 sen per share, from RM16.85 million, or 6.79 sen per share, in the previous corresponding quarter.

Source: The Edge