Cypark Resources Bhd
(July 3, RM2.63)
Downgrade to hold with a higher target price (TP) of RM2.70: Cypark Resources Bhd’s second quarter ended April 30, 2017 (2QFY17) core net profit fell 27% year-on-year (y-o-y) due mainly to the recognition of RM5.2 million employee share option scheme (Esos) expense in the quarter.
Excluding this, Cypark’s operating profit rose 7% y-o-y in 2QFY17 to RM23 million, driven mainly by environmental engineering (EE) performance. Its EE operating profit rose 27% y-o-y to RM15 million in the quarter. This more than offset the marginally weaker performance of all other divisions and lifted the group’s overall operating profit.
Cypark issued 23.1 million Esos options to its directors and employees at RM2.12 per share, which resulted in RM5.2 million of non-cash expense being recognised in 2QFY17. Based on Cypark’s existing Esos that runs from October 2015 to October 2020, the company is allowed to issue up to 15% of its initial paid-up capital. The 23.1 million Esos options issued represent about 9% of the initial paid-up capital.
While the Esos issuance is negative for Cypark’s earnings, we are positively surprised that its EE division’s external revenue registered a 37% growth in the first half of FY17 (1HFY17) and a 28% growth in 2QFY17. EE is the division that provides environment-related services, such as landfill closure and wastewater treatment. It is also the key earnings contributor for Cypark among its non-renewable energy (RE) businesses. In the financial year ended Oct 31, 2016 (FY16), EE contributed 87% of Cypark’s non-RE pre-tax profit.
The increase in the EE division’s external revenue eased concerns that Cypark’s EE earnings may drop drastically when it completes a key internal project — Cypark’s waste-to-energy (WTE) plant in Negeri Sembilan. Cypark’s EE division is a key contractor of the WTE plant that is scheduled to be completed by year end, and the EE division has been recognising construction profits related to the development of the WTE plant.
Based on our estimates, approximately 80% of Cypark’s EE pre-tax profit in FY16 was generated from internal projects. This is one of the key reasons we value Cypark’s non-RE division at only six times calendar year 2018 price-earnings ratio, a 50% discount to the construction sector’s average. The strong growth in external revenue suggests that Cypark has been able to win and redeploy its capacity for external jobs. As such, we raise our target multiple for its non-RE division to nine times, now based on a 25% discount to the construction sector’s average.
We continue to value Cypark’s non-RE division at a discount to its peers to mainly reflect its small size. The higher valuation of the division raises our sum-of-parts-based TP to RM2.70. Still, we downgrade the stock to “hold” as its share price is up 38% year to date. We believe this has fully reflected its long-term earnings growth potential. Key upside/downside risks to our call include better-/weaker-than-expected earnings from its EE division and the WTE plant in FY18. — CIMB Research, July 2
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| CYPARK (5184) - Cypark’s EE external revenue growth in 1H a positive surprise |
http://www.theedgemarkets.com/article/cyparks-ee-external-revenue-growth-1h-positive-surprise
