Regal International Group - Tayrona Financial Research 2018-08-23: Maintains Profitability Amidst Challenging Environment

Regal International Group - Tayrona Financial Research 2018-08-23: Maintains Profitability Amidst Challenging Environment REGAL INTERNATIONAL GROUP LTD. SGX:UV1

Regal International Group - Maintains Profitability Amidst Challenging Environment

General elections could have affected 2Q18 performance.

  • Regal International reported revenue and PATMI of RM18.06m and RM0.13m respectively for 2Q18. Both sales and profitability fell year-on-year.
  • We reckon that the lower revenue was due to the completion of certain projects in 2017 and, to some extent, the Malaysian General Election held on 9 May 2018. In the run-up to the Election and shortly after Pakatan Harapan’s victory, property buyers probably stayed on the side-lines to avoid exposure to political risk.

Expenses fell following cost reduction efforts.

  • To compensate for the lacklustre performance of 2Q18, Regal International further reduced costs with distribution and administrative expenses falling by a combined RM1.4m or 18.3% year-on-year. Share of profit from associates also turned positive, following marginal losses last year.
  • Regal International’s effective tax rate continued to be high at 61.4% of profit before tax.

~ ~ Where SG investors share

New measures may turnaround the situation.

  • A silver lining is that the Malaysian government may ease loan approvals for prospective home buyers under a new National Housing Policy to be announced in the next few months.
  • In addition, building materials and construction services may be exempted from the new Sales and Services Tax to be implemented in September. If implemented, these initiatives may spur demand and lower costs for developers. The recent removal of Goods and Services Tax may also spur some demand.

Long term outlook for Sarawak remains intact.

  • We are mindful of heightened macroeconomic risks currently, with reports of rising financial stress in emerging markets. That said, Sarawak looks set to enjoy more state revenue as the Federal government cedes more oil royalties to the state. 
  • According to reports, Sarawak will receive oil royalties of 5% of gross value while being entitled to additional royalties of 20% of net profit from state oil producing activities. Hence, we are somewhat more optimistic of Sarawak’s longer-term economic outlook than before.

More can be done to achieve re-rating of share price.

  • In this update, we revise our forecasts to factor in the results for 1H18. However, we leave our valuation unchanged at S$0.300, pending review in 3Q18 or 4Q18.
  • We reckon that Regal International’s results in 2H18 will be more reflective of conditions after the General Elections and it will be more appropriate to update our valuation later.
  • While we maintain our rating at Overweight, we continue to qualify our rating with a high-return and high-risk view. To achieve the return implied by our valuation of S$0.300, Regal International has to demonstrate positive sales growth and higher profitability, in line with the more positive outlook on Sarawak as a whole.
  • Other concerns include Regal International’s cash conversion ability which has been affected by longer receivables turnaround.

Liu Jinshu NRA Capital Research | Tayrona Financial 2018-08-23
SGX Stock Analyst Report OVERWEIGHT Maintain OVERWEIGHT 0.300 Same 0.300