SCH Group Berhad
Good proxy to the construction boom
The Group’s subsidiaries and branch
offices are strategically located in various states in Malaysia with
high quarry operations as well as Singapore. SCH Group Berhad has an
experienced servicing team to provide value added after-sales service to
their customers with immediate response time or a maximum of 24 hours
for outside Klang Valley. The Group has in-house expertise to
recondition Junjin CSM hydraulic crawler drills.
covered by JF Apex Securities
Investment Highlights
- SCH Group (SCH) is a well established quarry equipment & machinery and spare parts supplier in Malaysia, having more than 25 years of experience, capabilities and knowledge in the quarry industry. This under-researched counter deserves a re-rating given its strong fundamental, benefiting from a slew of infrastructure works (namely railway and highway projects to be kicked off locally) and its ambitious plan for regional expansion. We initiate coverage on SCH with a target price of RM0.34, based on 13x FY2016F PE. The stock could reward investors with 22% return (inclusive of its attractive dividend yield of 6.8%).
- Best proxy to the construction sector. We reckon that the Group would benefit from the booming domestic construction sector as it is closely tied with the quarrying industry. Take off of several high profile and sizeable infrastructure works, namely railway (KVMRT 2, LRT 3 and proposed HSR), highway projects (WCE, EKVE, Pan-Borneo highway) and RAPID in Pengerang could benefit SCH significantly. Our study indicates that the Group’s sales growth for the supply of spare parts segment is positively correlated to the GDP growth of the construction sector. Whilst sales growth for the supply of machineries segment is negatively correlated to the construction growth, we believe the inverse relationship is mainly due to capex spending on quarry machineries is traditionally ahead of the start of physical mining works to accommodate the demand of construction aggregate.
- Better thematic play on construction boom? Investors who aim for thematic and fundamental plays for take-off of infrastructure projects locally should look at SCH due to its impressive margins. We opine that topline growth of construction companies may not necessary translate into their bottomline growth and share price performance could be highly hinged on newsfllows. Construction companies could face the risk of margin squeeze as competitive bidding for the high-profile mega projects would hamper the contractors’ operating margins moving forward whilst building material players, namely cement and steel companies are now facing heightening competition and overcapacity issues.
- Topline supported by sizeable recurring income whilst bottomline boosted by commendable margin. The majority of SCH’s revenue is derived from supply of spare parts for industrial usage and machinery. We reckon that this segment of income contribution is more resilient and steadier due to wear-and-tear of quarry machinery & equipment which requires regular maintenance and service
- Better yoy results. On yoy basis, SCH achieved higher topline and bottomline growth for 2QFY15 and 1HFY15 thanks to higher sales of machineries and favourable product mix which we believe to include sales of reconditioned machineries that command superior margin in 1QFY15. Overall for 1H results, the business segment of supply of industrial products and spare parts contributed the most, i.e. 57% to the Group’s revenue whilst supply of machinery (new and reconditioned) contributed 36% to the Group’s topline. Meanwhile, SCH has been enjoying remarkable gross profit margin of 35-38% over the past few years thanks to its direct relationship with end customers and better product mix.
- Attractive dividend yield and sturdy balance sheet. While SCH does not maintain any dividend policy, we believe the Group will still reward shareholders handsomely. We envisage SCH to declare 2 sen dividend each for FY2015F and FY2016F, which are higher than 1 sen paid out in FY2014. Thus, this will translate into decent dividend yield of 6.8%. Currently, the Group is in net cash position.
- Earnings Outlook: We estimate the Group’s FY2015F and FY2016F net earnings to perform strongly, up 24.4% and 22.1% respectively on the back of higher revenue expected (FY15F: +10.0%; FY16F: +18.6%) and continuous margin expansion pursuant to pick up in construction activities. Target Price > RM 0.34
Everyone have the knowledge but do you have the WISDOM to apply the knowledge and invest?
This is not a buy call, invest at your own risk. Many thanks to JF Apex.
SCH (0161) - SCH - Construction Hidden Gem
http://klse.i3investor.com/blogs/SCH%20-%20Construction%20Hidden%20Gem/77889.jsp
