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Thursday, March 20, 2014

Handal Resources Bhd (Jupiter)

Briefing Note
Handal Resources Bhd

Period: 4QFY13 / FY14

Dividend: No dividend was declared for FY13. Dividend in FY12 amounted to 2 sen/share.

Actual versus expectations: No consensus was available but a lower net profit vis-à-vis FY12 was not within expectations.

Highlights: Handal registered a pretax of RM6.5m in FY13 vis-à-vis RM4.2m due to improved performance from its various divisions and FY12 was affected by provision for losses for certain projects. Profit after tax however was lower due to tax expenses arising from accounting for deferred tax for tax allowance enjoyed on the Intellectual Property Rights. Handal recognised RM2.1m of deferred tax.

1) Integrated crane business
The revenue of this business segment increased from RM53m to RM68.2m due to increased activities in crane maintenance but gross profit margin was lower (FY13:44%: FY12:46%) due to higher operation costs.

2) Fabrication of cranes business
Revenue was reduced from RM17.6m to RM7.84m and gross profit margin has marginally decreased due to higher operation cost.

3) Work over Project business
Revenue was reduced from RM10.7m to RM7.5m due to decrease in the work scope & activities. Similarly gross profit margin decreased due to higher operation cost. However, management expects business activities will resume during the first quarter of 2014.

4) Supply, fabrication & servicing industrial equipments & tank
Revenue increased from RM12.3m to RM14.9m due to increased work activities helping gross profit margin (FY13:18%: FY12:6%) improved.

5) Supply of telecommunication & broadcasting system business
Revenue decreased from RM384,000 to RM291,000 due to decrease in the work activities but gross profit margin improved (YE13:52% vs YE12:22%) due to lower staff costs.

Other updates
1. Telok Kalong fabrication yard is in the midst of applying for API certification (to enable the fabrication of cranes that complies with API standards). Target date to obtain certification is end of the year. Some repair and maintenance work that is carried out at Kemaman Supply base will be transferred to Telok Kalong to free up space for crane fabrication at the Supply Base.

2. Modular rig is still waiting for a charter. Rig is currently under assessment by Petronas Group Supply Chain Management, Petronas Carigali and other operators in the EOR (enhanced oil recovery) space. Management expressed confidence of getting the rig employed by year-end given more EOR projects will be carried out by Petronas or its RSCs (risk service contracts).

3. Handal is tendering for new crane orders in Indonesia and in Brunei, a crane maintenance job valued at RM20m. In Malaysia, Handal expressed confidence that more jobs will be forthcoming given Petronas capex program of RM300bn from 2011 – 2015.

4. Gering has improved to 0.4x, debtors turnover days is 121 while creditors turnover days is 91.

Recommendation & valuation
Handal is currently trading at 0.73x its net asset value and at 35.5x PER of its FY13 EPS of 1.3sen. Any upside to the share price will come via improvement in earnings prospects. The improved earnings will be via new orders i.e. both crane fabrication jobs and crane maintenance jobs. The main earning catalyst will be the employment of its modular rig, which can also set Handal on the road to owning more rigs.

We have a NON RATED rating on the stock for now.

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