• FY16 Revenue missed our full year expectation of US$42.2mn by 17.8%
• FY16 Operating income missed our full year expectations of US$20.9mn by 45.9%
• FY16 Net income missed our full year expectation of US$mn20.56 by 44.0%
• 2 SG cents final dividend and 0.534 cents special dividends proposed with respective Y-o-Y growth of 11% and 32%
• We revise down our FY17e and FY18e revenue to US$39.9mn and US$46.1mn from previous forecast of US$49.5mn and US$55.8mn respectively. We maintain our “Buy” rating with a reduced discounted FCFE-derived TP of S$0.68 (from S$1.01). Cost of equity used remains unchanged at 9.8%. Our TP implies a 68% return from the last close price of S$0.41.

Results at a glance

Unexpected underperformance was due to several unfavorable factors, including one-off and recurring items.

The unsatisfactory 4Q16 results was mainly due to the top line downfall, mainly resulting from 52.5% Y-o-Y decrease in production volume to 4040.58 ounces (oz), and the fall was partially offset by the 17.4% Y-o-Y increase in average realized gold price to US$1283.29/oz. The two revenue drivers, production volume and gold price, are the performance instabilities that are not within CNMC’s control.

Firstly, gold price has been volatile. Fiscal or monetary policies launched by major economies or political events such as country leader elections could trigger gold price shock. Generally, gold has been viewed as an inflation hedge and safe heaven commodity.  Economic and political uncertainties are expected to persist in 2017. Whether Trump’s economic revitalisation can be achieved, whether tensions regarding South China Sea will be escalated, or whether European Union will approach to disintegration with Netherlands, France, and Germany election held one after another this year, will reinforce the market sentiment towards risk awareness.  Therefore, we still have a bullish view on gold price.

Secondly, production volume is decided by two factors, capacity and gold grade. The former is at the discretion of the management, who have been actively optimising it. While the latter is at the mercy of existing geological features, which can be prospected rather than transformed. At this moment, we think the substantial reduction in gold grade in 4Q16 could be temporary, since Sokor’s reserves are yet close to total depletion based on gauge from FY15 JORC report. Moving forward, we need to see the remaining quarters’ results to have a clear view on gold grade.

Thirdly, as our 9M16 results report had mentioned, the stop-work order generated opportunity cost that made CNMC miss 21 days’ operation. Besides, the c.RM20mn (US$5mn) expenditure of mining concession extension and large scale operation approval impacted the free cash flow. These are one-off events that should not be expected again.

Finally, operating expenses increased by 8% Y-o-Y to US$17.1mn in FY16, due mainly to upward adjustment of compensation package. Moreover, royalty and tribute fee rate was up from 5% to 10% since 4Q16. The rise in overhead costs is expected are recurring in the upcoming future.

Long-term fundamental is still sound

In terms of Pulai project, the management has not delivered new updates since last year.

The management shed some light of the future that they will focus on gold mining industry within the border in Malaysia. Rule of thumb for acquisitions is potential project’s commercial viability and synergy with current operation. Gold mining market in Malaysia is fragmented, according to the management, and CNMC has competitive advantages in low all-in cost operation together with know-how in mining industries, which are the merits that attract other miners to seek for cooperation. We believe that Pulai is just the start for CNMC to pursue inorganic growth, which is expected to materialise soon.

Revise down the valuation due to uncertainty of gold price and output volume, as well as expected increasing overhead costs

We revise down our FY17e and FY18e revenue forecast to US$39.9mn and US$46.1mn from previous forecast of US$49.5mn and US$55.8mn respectively. Consequently, our new net profit forecast of US$10.4mn and US$12.1mn for FY17e and FY18e respectively, are both 47% lower than our previous forecast.

Based on unchanged 9.8% cost of equity and discounted FCFE, we derive our updated TP of S$0.68 (previous: S$1.01). We maintain our “Buy” rating, which implies a 65.8% return from the last close price of S$0.41.