This article first appeared in The Edge Financial Daily on May 2, 2017 - May 8, 2017

Hume Industries Bhd
(April 28, RM2.71)
Maintain buy call with a target price (TP) of RM4.15: Hume Industries Bhd reported a third quarter ended March 31, 2017 (3QFY17) revenue of RM158.5 million (down 4.4% quarter-on-quarter [q-o-q]; up 8.9% year-on-year [y-o-y]) and core net profit of RM300,000 (down 97.7% q-o-q), bringing its cumulative revenue to RM474.1 million (up 4.2% y-o-y) and core net profit to RM17.7 million (down 56.4%). Hume also declared a single-tier dividend of two sen which represents an annualised payout ratio of 41%.

It reported a razor-thin net margin (0.2% in 3QFY17 versus 5.6% in 2QFY17), mainly on the back of lower revenue (down 4.4% q-o-q), higher cost of goods sold (up 6% q-o-q) as well as higher finance cost (up 68% q-o-q).

Hume also recorded a significantly higher effective tax rate during the quarter (75%), compared with the previous quarter (23%), due to deferred tax adjustment. 

As we highlighted in our previous write-up, the industry is offering rebates as much as RM145 per tonne, which translated into a net selling price of RM215 per tonne in the first quarter of 2017 (1Q17). Massive rebates were given in early 2017, mainly due to weak demand, coupled with additional supply that came on stream (from YTL Cement, Lafarge Malaysia Bhd and Hume).

We reiterate our view that although the current operating environment is challenging, we remain hopeful that the cement industry will recover in the second half of 2017 (2H17), with the commencement of infrastructure and mega projects, coupled with the absence of capacity expansion.

We cut our FY17 earnings forecast by 48%. We have made further changes in our FY17 numbers as we now only assume contributions from the new plant to kick in the final quarter.

We maintain our FY18 to FY19 earnings forecasts as we believe that the turnaround for the industry will happen by 2H17.

We maintain a “buy” call and TP of RM4.15, based on 18 times 2018 forecast price-earnings ratio (PER), derived from the five-year average PER of Lafarge and Tasek Corp Bhd.

We are forecasting Hume to have a healthy equity value over earnings before interest, taxes, depreciation and amortisation of 10 times in FY18, higher than its peers (Lafarge: 11 times).

Its share price catalysts include the commencement of infrastructure and mega projects, and industry consolidation which could potentially ease the price war. — UOB Kay Hian Securities, April 28