Lower 2Q pre-tax losses for Nextnation

by **Cals** Mon 30 Dec 2013, 11:55

Business & Markets 2013

Written by TA Securities Research

Monday, 30 December 2013 10:02

Nextnation Communication Bhd
(Dec 27, RM8.5 sen)
Maintain sell at nine sen with a target price of seven sen: Nextnation’s first half ended Oct 31 of financial year 2014 (1HFY14) core net profit of RM2.7million (-1% year-on-year [y-o-y]) was within expectations, accounting for 60% of our full-year estimate. Its second quarter (2Q) of FY14 top line (+8.4% quarter-on-quarter [q-o-q]) was stronger on a sequential basis due to total sales having more than doubled from the previous quarter (108% q-o-q) at both its Malaysian and overseas operations.

Correspondingly, 1HFY14 revenue surged 52% y-o-y due to the strong sequential rebound in the top line. However, top line growth did not flow through to the bottom line (-1% y-o-y) due to higher depreciation that caused pre-tax margins to contract to 6% (1HFY13: 8%).

Although its overseas operations remained loss-making, pre-tax losses had narrowed significantly to RM48,000 in 2QFY14 (1QFY14: RM160,000). We believe this was due to profit being propped up by its high-margin US$22.5 million (RM74.02 million) outsource contract with PT Inovisi Infracom Tbk.

We maintain our earnings estimates as we expect Nextnation’s 2HFY14 to be weaker due to upfront costs required for its start-up projects. We await further development on its new ventures including: (i) property development; (ii) data centre management; (iii) coal trading in Indonesia; and (iv) investment management.

We are not perturbed by the delay in the implementation of these ventures as it will enable Nextnation to accumulate cash from its existing core IT operations to beef up its balance sheet in anticipation of substantial upfront capital expenditure for the new projects.

Maintain “sell” on Nextnation with unchanged target price of seven sen based on 0.5 times FY14 price-to-book. The successful execution of its new property project in Cyberjaya will be a near term rerating catalyst.

Nextnation expects to generate gross development profit of approximately RM70 million from this mixed development. Spread over the project’s tenure of 11 years, it implies potential boost of RM6.4 million per annum in gross profits for the group. — TA Securities Research, Dec 27