LATITUD (7006) - Quarterly Result (Malaysia) – Latitude Tree Holdings (Q2 FY17)

LATITUD (7006) - Quarterly Result (Malaysia) – Latitude Tree Holdings (Q2 FY17)

Last Traded Price

RM 5.75
Previous Price* RM 5.00
Target Price RM 5.60 
Rating NEUTRAL (Maintained)
Est. Upside % -2.6%
Price to Earnings 7.85x
Price to Cash Flow** 7.78x
Price to Book 1.03x
* As of 04/12/16
** As of 23/02/17 (source: Morningstar)

Relatively stagnant quarterly result supported by FX gains. Revenue, gross profit and net profit decreased 1%, 4.8% and 12.2% respectively after the elimination of other income, reflecting lower order received. SG&A also climbed from 4.7% to 5.1%. Management explained that the decrease in profit margins is attributable to higher labour costs and certain raw materials. As pointed out in our previous research, we expect the FX translation gains to be materialised in this quarter (almost RM22m in the current quarter, which is equivalent to 68% of current quarter’s net income).

We went to check Tradingeconomics on the latest inflation and producer prices. It shows a quite pessimistic outlook. Inflation and producer prices pick up and has surged quite significantly which we believe is largely due to the rise in oil price as well as weak. We are unsure whether Latitude Tree can pass the costs to the consumers in emerging markets given the level of households income. 12% reduction in profit margin (excluding the FX gains) is quite worrying. Despite a sudden change in macroeconomic environment, we make no changes to our valuation assumptions based on the following reasons:
1) High exposure to the US hence revenue of emerging markets is insignificant.
2) The rising production costs might be offset by the FX gains (at least for short to medium term).
3) US consumers with higher purchasing power (thanks to stronger USD) might be indifferent to a small change in prices.

Cash and cash equivalents increased substantially from RM183.1m to RM227.3m on the back of positive net operating cash flow (+28.6%). Primarily due to a meaningful increase in trade payables (+12%). Disregard the working capital, the fund from operations (FFO) according to our calculation is approx. RM56.9m vs. RM 57.84 (Q2FY16), represents a reduction c. 2%. We view this quite positively as the decrease in accounting profit (at double-digit) only affect the underlying FFO slightly, reflecting strong cash flow conversion. Despite the strong cash flow profile, the company increased its borrowing by RM10.8m. Currently, the net cash position with sustainable leverage reflects above average liquidity and creditworthiness.

Net income for last twelve months is RM 71.1m (-2.4% compared to FY16), which translates into P/E of 7.85x, expanded from 6.7x since the previous review. Share price is trading at 1.03x of the book value. Overall, reasonably priced (although the peers are trading at higher multiples).

Our research shows that the US contributes 93% of Latitude Tree’s revenue which will affect the earnings visibility (assuming no material change). Emerging market is struggling to digest ‘America First’ policies, and any export-oriented stocks will, inevitably, be affected. In a more quantitative exercise, Nomura’s downside risk scenario include faster-fed rate hikes, USD appreciation and to make it more obvious, US Trade Protectionism. The former will undoubtedly benefit Latitude Tree, the latter not so much. We remain cautious on the outlook for the company given the uncertainty which is too early to assess with confident.

Unexcited quarterly result with no Like-for-Like growth, underlying financial performance is driven mainly by the FX gains. Maintain the target price at RM5.60 (make no adjustment to our valuation assumptions), which implies a downside risk of c. 3%, maintain a NEUTRAL rating on the stock.

Disclaimer: The views above are opinions based on facts and subjective judgements. Yield Mountain (including the contributors) does not take any responsibility (be in monetary or non-monetary) for any actions rely on the information discussed.

LATITUD (7006) - Quarterly Result (Malaysia) – Latitude Tree Holdings (Q2 FY17)