LCL Corporation - BUY - 27 Aug 2008

LCL Corporation - 1H08 net profit below expectations (Results Note)



Price: RM2.01

Target Price: RM3.90

Recommendation: BUY



· 1H08 net profit of RM17.0m was below expectations being 30% of our forecast and consensus of RM56.0m and RM54.5m respectively. The poorer results are due to delays by main contractors in local projects in handing over job sites to LCL. This in turn resulted in higher overheads, warehousing cost and financing cost. The strong contribution from projects in Dubai which makes up 80% of revenue with higher profit margin compensated for the domestic losses.

· All is not lost. However, LCL is pursuing to claim some compensation from the main contractors and project owners for the delay in site possession. The delays by main contractors could sometimes be deliberate in order to force project owners to renegotiate for higher building materials cost.

· YoY, 1H08 net profit was 64.2% higher on the back of higher progressive recognition of its key projects, namely Atlantis Hotel and Dubai Mall Hotel secured in 2Q06 and 3Q06. Better operating margins is a result of higher combination of Dubai projects and also completion of Atlantis where provision for contingencies was reversed.

· QoQ 2Q08 net profit was 30% lower arising from losses in Malaysia operations resulting in a 2% lower operating margin, and high finance cost.

· We are lowering FY08E and FY09E net profit forecast by 19% and 8% to RM45.3m and RM56.1m from RM56.0m and RM60.5m respectively assuming slower contracts billings and losses in Malaysian contracts.

· Orderbook of RM980m with RM650m remaining unbilled. LCL's track record for executing large projects on time is proven with Atlantis Hotel handed over and Dubai Mall Hotel in the process of handing over. LCL is currently well positioned and is bidding for more than RM1b worth of contracts.

· Maintain BUY with a lowered target price RM3.90 using the regional IFO companies' FY09 PER of 10x and FY09E EPS of 39.2sen. LCL trades attractively at 6.3x and 5.1x FY08E and FY09E PER respectively.