Naim a laggard despite SOGT win

Naim Holdings Bhd
(Sept 17, RM3.54)
Maintain buy at RM3.53 with target price RM5.10: Two weeks ago, the 70:30 Samsung-Naim JV announced that it had won the Sabah Oil and Gas Terminal (SOGT) contract worth US$766.4 million (RM2.44 billion). Located in Kimanis, the SOGT will serve as a hub for crude oil and natural gas processing from the oilfields off Sabah. We feel that investors have under-appreciated the significance of this recent win. Although the SOGT has boosted Naim’s order book by 70.8% to RM1.76 billion, the reaction to the award has been muted as its share price has risen by only 0.9% since the announcement.

Naim’s lacklustre share price movement could possibly be due to execution concerns related to the SOGT. While this is warranted given Naim’s minimal experience with O&G infrastructure, we draw comfort in knowing that the SOGT will be led by the JV’s majority partner, Samsung Engineering, which has significant experience in refineries, petrochemical plants and LNG plants. We also understand that Naim’s role will mainly centre on the SOGT’s support infrastructure (roads, bridges, earthworks, site offices and so on). For the portions in which Naim lacks a track record, subcontractors will be employed. Overall, management is guiding for gross margins of 15% from the job, while we are assuming 10% at the profit before tax level.

We see Naim as the best proxy to the Sarawak infrastructure theme play. Based on our tracking, the year-to-date (YTD) contracts in Sarawak awarded to listed contractors totalling RM1.26 billion are 33.2% higher year-on-year. We think that contracts in the state will accelerate moving closer to the state elections, which must be held sometime in early 2011. Despite securing more jobs than its closest peer Hock Seng Lee (Buy, TP: RM1.78) YTD, Naim’s share price has lagged behind by more than 20%.

Naim holds a Letter of Intent (LOI) for the RM1.3 billion Kuching flood mitigation project, in which it has a 50% stake. Phase 1 (RM149 million) has been completed and Phase 2 (RM200 million to RM250 million) could be awarded early next year. Naim also holds an LOI for an equipment supply contract to an education institution (RM100 million). There is also a resettlement village job (RM160 million) for residents affected by the Bengoh Dam. We gather that Naim could also be in the running for a UiTM campus in Sarawak via PFI.

We maintain our “buy” call with a TP of RM5.10. We make no changes to our forecast, which already incorporates the SOGT into our FY2011/12 earnings. While Naim’s earnings growth will be rather minimal this year at 2.7%, we expect FY2011 to be a stronger 29.4%, driven mainly by: (i) existing jobs gaining momentum; (ii) Fijian jobs moving from losses back into the black; and (iii) contributions from the SOGT. Our RM5.10 TP is based on: (i) 12 times FY2011 earnings ex-Dayang’s contribution, and (ii) 9 times its share of Dayang’s earnings. Excluding the SOGT, our FY2011/12 earnings would be cut by 7% to 10% and our TP reduced to RM4.71. Even under this scenario, there would be sufficient upside to warrant a “buy” rating on Naim. In view of the recent run-up in share prices of larger contractors, small cap names like Naim could be in favour next. — OSK Investment Research, Sept 17 sufficient upside to warrant a “buy” rating on naim. In view of the recent run-up in share prices of larger contractors, small cap names like Naim could be in favour next.-OSK Investment Research, Sept 17