Highlights

Intelligent Research report

Author: intelligenttrade   |   Latest post: Thu, 14 Jan 2021, 5:27 PM

 

Panasonic Manufacturing Malaysia - Sustainable demand

Author: intelligenttrade   |  Publish date: Thu, 14 Jan 2021, 5:27 PM


Domestic demand has been robust at this juncture on the back of incoming CNY festive season and replenishment of inventories with the expectation of stricter lockdown measures. We expect sales to the Middle East to recover slowly due to easing trade sanctions. However, the increase in raw material prices might pose a risk of shrinking margins moving forward. Reiterate HOLD with unchanged TP of RM28.17 based on 17x PE multiple on mid-FY22 earnings. Despite the uncertainties, we reckon PMM can weather thru this storm supported by its balance sheet strength.

We attended PMM’s meeting and came away feeling neutral about the group’s near term prospects going forward.

Sales outlook. Management shared that domestic demand has been robust at this juncture on the back of incoming CNY festive season and replenishment of inventories with the expectation of stricter lockdown measures. Even with the reintroduction of MCO2.0, the manufacturing facilities are scheduled to operate without any production constraint as it falls under “essentials”. For export market, we expect sales to the Middle East to recover slowly on the back of easing trade sanctions with Presidentelect Biden’s victory. Middle East contribution account for 23% of the group 1HFY21 (from 17% in 1HFY20). Note that the products sold to the region are high-margin products (vacuum cleaners and home showers). For ASEAN region, export to Vietnam has been resilient thanks to the country’s successful containment of the pandemic. However, demand from Thailand is slowing down due to the rise in Covid-19 cases.

Higher raw material costs. With the current volatile market, PMM decided to absorb the increase in raw material prices (see Figure #1-5) in order to maintain the sales volume. Note that raw materials consist of c.65% of the group COGS.

Delay in plant expansion. The expansion of the new wing that was initially scheduled to be completed by end-2020 has been delayed due to the halt during MCO in March 2020. It is now expected to be ready by end-Feb 2021 and subsequently start production in Oct 2021 (3QFY22) after obtaining approval from the authority and installation of 17 new plastic injection machines. PMM intends to use the space to accommodate more in-house injection plastic moulding activities to reduce its reliance on outsourced supply (currently supplying 80% of the production). Once commenced, we expect the group to benefit from further cost savings from this initiative.

Associate turnaround. PMM recorded the highest contribution from associate company of RM6m in 2QFY21 (vs -RM1.1m in 2QFY20). This was on the back of the successful restructuring of the associate company in reducing its operating cost (shutting down of some service centre) and lowering administrative expenses (MSS exercise). Management expects the normalised contribution to hover around the same level moving forward.

Outlook. While we are encouraged by the healthy demand for its products, we err on the side of caution premised on the possible reduction in discretionary spending with the reintroduction of MCO. Additionally, we opine the increase prices in key commodities might pose a risk of shrinking margin moving forward.

Forecast. Unchanged as the Meeting Yielded No Major Surprises.

Maintain HOLD, with unchanged TP of RM28.17 based on 17x PE multiple on midFY22 earnings. Despite the uncertainties, we reckon PMM can weather thru this storm supported by its balance sheet strength of a net cash position of RM474.1m (or RM7.80 per share) as end of Sept 2020.

Source: Hong Leong Investment Bank Research - 14 Jan 2021

Labels: PANAMY
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Pecca Group - Again Covid-19 Cases

Author: intelligenttrade   |  Publish date: Tue, 29 Dec 2020, 4:36 PM


246 employees of Pecca have been tested positive for Covid-19 and Pecca has carried out sanitization works for all its premises and temporary suspended its operation from 21 Dec 2020 to 27 Dec 2020 (subject to approval from MOH). There will be short term negative impact to Pecca’s operations and profits. However, we still maintain BUY on Pecca with lower TP of RM1.68 (from RM1.75) based on unchanged PE 12x on adjusted lower CY21 profit, as we are not overly concern on the long term prospect of Pecca.

NEWSBREAK

Pecca has announced that 246 employees (out of total 597) have been tested positive for Covid-19 post a recent group wide testing for all employees and guards. Pecca is co-operating and working closely with the Ministry of Health (MOH) to implement the mitigating steps to contain the spread of COVID-19 at the premises, and safeguard the health of employees who may have been exposed to the virus. Sanitization works have been carried out on all the premises inclusive of office, production, hostel & cafeteria, while production has been temporary suspended from 21 Dec 2020 to 27 Dec 2020 (subject to approval from MOH).

HLIB’s VIEW

Short term negative impact. The positive cases of Covid-19 will affect the group’s operation in the short term due to production suspension and risk of limitation on production capacity once MOH approves for operation resumption. The group may need to incur higher production cost for increase in shifts/overtime (catch up the temporary loss of productions) in order to meet the current high demand (especially for Perodua production). Furthermore, we estimated the impact from loss of earnings and cost of testing for the group wide employees and sanitization works could be c. RM1-1.5m.

Forecast. We Cut Our Earnings for FY21 by 5.1% to RM23.7m, While Maintaining FY22-23 Earnings.

Maintain BUY, TP: RM1.68. Maintain BUY recommendation on Pecca with lower TP of RM1.68 (from RM1.75) based on PE 12x on CY21 profit. Despite the short term negative impact, we are not overly concern on the long term prospects of Pecca.

Source: Hong Leong Investment Bank Research - 29 Dec 2020

Labels: PECCA
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Panasonic Manufacturing Malaysia - Positive Covid-19 cases

Author: intelligenttrade   |  Publish date: Mon, 28 Dec 2020, 4:28 PM


A total of 116 (c. 5%) of PMM’s factory workers have been tested positive. The group has decided to close both of its factories for three days (21-23 Dec) to allow the full disinfection of its facilities. We opine that the group may need to increase number of shifts/overtime thus incurring higher production cost in order to fulfil the demand moving forward. We cut our FY21 marginally lower by - 2% due to abovementioned reasons. Reiterate HOLD with lower TP of RM28.17 based on 17x PE multiple on mid-FY22 earnings. Despite the uncertainties, we reckon PMM can weather thru this storm supported by its balance sheet strength.

NEWSBREAK

PMM has announced that 116 of its employees have been tested positive for Covid-19. The Company has and will continue to adhere to the Covid-19 preventive standard operating procedures (SOPs) on a stringent basis. PMM is co-operating and working closely with the Ministry of Health (MOH) to implement the mitigating steps to contain the spread of Covid-19 at the premises, and safeguard the health of employees who may have been exposed to the virus.

HLIB’s VIEW

116 workers affected. From what we understand the screening was conducted on 19 Dec as part of precautionary measure with the rising cases across manufacturing facilities in Malaysia. The results came out on 20 Dec with 116 out of 2,137 (c. 5% of the workers) tested positive for Covid-19. From our channel checks, 45 are local workers (39%) while 71 are foreign workers (61%).

Three-day closure. As part of the precautionary measures, the group has decided to close both of its factories in Seksyen 15 and Seksyen 23, Shah Alam for three days (21-23 Dec) to allow the full disinfection of its facilities including the foreign workers’ accommodation. The management shared that the Covid-19 infection is widespread across all production department and the group is currently in discussion with MOH on the appropriate timing to resume production. We opine that these will affect the group’s operation in the short term due to production suspension and face the risk of limitation on production capacity once operation is resumed.

Financial impact. The group may need to increase the number of shifts/overtime thus incurring higher production cost in order to catch up the temporary loss of productions to fulfil the order demand moving forward. Furthermore, the group estimated the cost of sanitization works would be approximately RM35k.

Forecast. We cut our FY21 marginally lower by -2% taking into effect of the short term plants closure and higher operational cost as explained above.

Maintain HOLD, with lower TP of RM28.17 based on unchanged 17x PE multiple on mid-FY22 earnings. Despite the uncertainties, we reckon PMM can weather thru this storm supported by its balance sheet strength of a net cash position of RM474.1m (or RM7.80 per share) as end of Sept 2020.

Source: Hong Leong Investment Bank Research - 28 Dec 2020

Labels: PANAMY
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HeveaBoard - Better earnings coming

Author: intelligenttrade   |  Publish date: Wed, 23 Dec 2020, 4:29 PM


We met with Hevea and were encouraged by the group’s prospects going forward. The group has decent earning visibility, securing RTA orders up to April 2021. The demand for RTA and panel boards are strong due to WFH arrangements and the ASPs for the segments are at an attractive level. After accounting for higher particle boards ASP, we raise our FY20/21/22 forecasts by 32.0%/27.1%/29.4%. We maintain our TP at RM0.83. Maintain BUY.

We met with Hevea and were encouraged by the group’s prospects going forward.

Covid-19 – A silver lining for Hevea. Prior to MCO, Hevea was experiencing declining net profit margin (Figure #1). This was due to an oversupply in the panel board market as local manufacturers faced (i) stiff competition from regional players such as Thailand and Vietnam in addition to (ii) US-China trade war which caused an oversupply of particleboards in China due to its manufacturers diverting its US export to the local China market. However, the incidence of Covid-19 and subsequent rise in work-from-home (WFH) arrangements led to an increased in furniture purchases in key markets (i.e. higher furniture exports by Malaysia than pre-Covid levels; Figure #2). As a result, panel board manufacturers also experienced a secondary effect in the demand recovery for panel boards due to demand from the furniture makers. To recap, Hevea recorded a core net profit of RM8.1m in 3Q20 (vs. core net loss of - RM3.3m in 2Q20 and core net profit of RM3.2m in 3Q19).

RTA division. This division is currently running at full capacity and has order book secured until March 2021. While Hevea has room to increase capacity from one of its factories, it will need ~300 more labourers to fill this up, which would increase output by 20%. However, due to government policy, intake of foreign labour is frozen until end of the year. To mitigate the ongoing issue in securing sufficient labour, Hevea has been embarking on automation efforts to increase output per worker.

Particleboard division. The ASP for particleboards started to come down on a gradual basis since the onset of the US-China trade war by 15-20% from its highest to lowest price due to supply surplus in the market, putting this segment’s margin under compression. Currently, ASP for particleboards are rebounding due to stronger demand and also due to cost-pass increase from freight cost and insurance. Hevea increased its particleboard ASP by ~3% in 3Q20 and ~5% in 4Q20. This price increase is moderate compared to its peers as Hevea would like to maintain its longterm relationship with its anchor customers. Hevea’s management noted that due to its long-term relationship with its customers, when the price came down for Hevea’s peers, the price did not drop as aggressively for Hevea. Hevea’s particleboard division now supplies more to the local market, which reduced its exposure to exchange rate and freight cost fluctuations. Currently, ~35% of particleboards are sold to Hevea’s own subsidiary, ~5-15% to the local market, while the remaining ~50-60% are exported (from 10% local market and 90% export previously).

Fungi cultivation division. Hevea was able to grow sales volumes for this division during the MCO period. Revenue in 3Q20 was RM0.6m compared to RM0.22m SPLY, a 178.7% YoY increase amid a low base. The revenue increase was boosted by better market penetration and strong sales in the hypermarkets. Losses before tax in 3Q20 narrowed to RM0.27m from RM0.60m SPLY. Management expects this segment to breakeven by 2Q21.

Outlook. We expect Hevea to post strong earnings in 4Q20 particularly in the RTA division due to Japanese New Year, as Hevea’s profitability typically peaks in 4Q. Going forward in 2021, the group also has decent earning visibility, securing RTA orders up to April 2021. In the near term, freight cost volatility and freight availability remain a challenge to the group.

Forecast. After accounting for higher particle boards ASP, we raise our FY20/21/22 forecasts by 32.0%/27.1%/29.4%.

Maintain BUY, TP: RM0.83. With production disruptions behind them and better RTA sales volumes expected from the WFH trend as well as Japanese new year coming up, we expect Hevea’s profitability to accelerate going forward. Our BUY call and TP of RM0.83 pegged to an unchanged 1.1x PB (pegged to 5-year average PB) is maintained.

Source: Hong Leong Investment Bank Research - 23 Dec 2020

Labels: HEVEA
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George Kent (Malaysia) - Metering saves the day

Author: intelligenttrade   |  Publish date: Tue, 22 Dec 2020, 4:15 PM


GKent’s 9MFY21 earnings of RM23.1m (-34%) were above ours but below consensus expectations. Core PATAMI decline was driven by lower contribution from construction partially offset by its resilient metering division. Estimated construction orderbook (ex-LRT3) amounts to c.RM210m (cover ratio: 1.0x). Raise FY21-23 earnings by 10-17%. Maintain SELL with higher TP of RM0.60 after pegging FY22 EPS to 6.6x PE multiple (-1SD below 3-year mean).

Above ours but below consensus. GKent reported 3QFY21 results with revenue of RM78.9m (+12.5% QoQ, +8.2% YoY) and core earnings of RM10.6m (+21.8% QoQ, +3.8% YoY). This brings 9MFY21 core earnings to RM23.1m, decreasing by -33.6% YoY. The core earnings accounted for 82.5% of our full year forecast (consensus: 62.8%), which is above ours but below consensus expectations.


Deviation. The stronger than expected results were driven by better than expected performance from the metering segment.

Dividends. No DPS were declared for the quarter (9MFY21: 1.0 sen; 9MFY20: 1.5 sen).

QoQ. Core earnings expanded by 21.8% to RM10.6m in 3QFY21 aided by strong recovery in its metering segment which saw revenue and PBT increasing by 55.5% and 92.7% respectively. This was mainly due to its gradual restoration of capacity to clear its backlog of orders. Partially offsetting the recovery was its construction segment where revenue and PBT declined by -23.1% and -10.7% respectively.

YoY. GKent’s earnings were marginally higher by 3.8% spurred higher by its metering division (Revenue: +49.5%) while construction struggled (Revenue: -26.0%). During the quarter, a higher effective tax rate of 34.2% (vs.3QFY20: 19.3%) also hampered earnings delivery.

YTD. Core earnings shrunk by -33.6% as performance was largely hit by various forms of MCO evidenced by its -25.7% decline in revenue. While metering operations were quick to normalise post-lockdown, its construction segment was disrupted by SOP measures which are still ongoing.

Construction. We estimate GKent’s outstanding orderbook (ex-LRT3) amounts to c.RM210m which translates into cover ratio of 1.0x. On an YTD basis, revenue and PBT declined by -44.2% and -53.4% respectively owing to lockdowns and SOP measures. The segment also declined on a QoQ basis largely due to its thinning orderbook. LRT3 JV contribution saw no pick up with supplemental agreements still not finalised.

Manufacturing. Revenue and PBT increased by 6.2% and 45.3% respectively. Growth came largely on the back of resilient demand from overseas and local markets resulting in healthy utilisation rate of c.80% during the quarter. Domestically, its NRW meter orders (supplied to 600k homes across 6 states) will continue to sustain its metering performance.

Forecast. Increase FY21-23 earnings by 14.5/10.1/16.8% after factoring in stronger metering performance and recalibrating margin assumptions.

Maintain SELL, TP: RM0.60. While the results surprised on the upside, we remain concerned on its thinning orderbook and replenishment prospects. Maintain SELL with higher TP of RM0.60 after earnings adjustment. We think its target P/E multiple of 6.6x is warranted given its thin outstanding orderbook and cloudy job visibility.

Source: Hong Leong Investment Bank Research - 22 Dec 2020

Labels: GKENT
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Pecca Group - Expecting stronger 2QFY21

Author: intelligenttrade   |  Publish date: Tue, 8 Dec 2020, 4:17 PM


Post 1QFY21 briefing, we remain positive on Pecca’s strong earnings for upcoming 2QFY21 (leverage onto the strong TIV during SST exemption period). For subsequent quarters, we are expecting some slowdown in car demand, which will be partially cushioned by new model launches by major OEM clients i.e. Perodua D55L, Proton X50 and Mitsubishi Xpander. Pecca is also ramping up PPE manufacturing due to the current strong demand from both domestic and export markets. While we flag the concern of RPT involving the distribution of Pecca’s PPE products by its director’s private arm, management clarified it is based on an arm’s length agreement and Pecca will only focus on manufacturing. Maintain BUY recommendation with unchanged TP of RM1.75, based on PE 12x on CY21 profit.

1QFY21 earnings recap. 1QFY21 PATMI rebounded strongly by +216.7% QoQ to RM5.2m mainly driven by recovery of car seats production. On YoY basis, the growth was +11.9%, due to on-going cost cutting austerity measures (implemented since early 2020) as well as existing support of government wage subsidy program during the quarter.

Leather car seats. Management guided production rate has is at high of 11-12k sets/mth in 2QFY21 due to strong demand for new cars prior to the end of SST exemptions (31 Dec). For subsequent quarters, management expects production to match back pre-MCO levels at 10-11k sets/mth, driven by new launches by major OEM clients – Perodua D55L, Proton X50 and Mitsubishi Xpander. At the same time, Pecca’s export of leather cut pieces to China NJTC (Subaru) has also recovered in 2QFY21, post slowdown in 1QFY21 due to 2nd wave of Covid-19 in China.

New PPE. Since commencement in Aug, Pecca has ramped up the production of 3- ply mask to 20m/mth (240m/yr) and is now targeting for 50m/mth (600m/yr) in 3QFY21 (from initial target by end 2QFY21). Pecca is also diversifying its product range to lifestyle mask, 4-ply mask and N-95 mask to improve its margin. Touching on the “G of ESG” matters, we highlight the concern on related party transaction structure in which the distribution of Pecca’s PPE product is through the director’s private vehicle (Rentas Health, not part of Pecca). Nonetheless, management reassured that the transaction is based on an arm’s length agreement, as Pecca will only focus on manufacturing business.

M&A plan still on. Management updated that M&A exercise is progressing well and targets to make the necessary announcement soon. We expect Pecca to only conclude the M&A exercise in 2HFY21. To recap, the targeted M&A is related to the automotive sector. Management is likely to fund the acquisition via combination of internal fund (net cash RM78.0m as at end 1QFY21) and debt.

Aviation. The certification for EASA (European Aviation Safety Agency) license remains on hold due to Malaysia’s closed boarders as EASA auditors are unable to fly into Malaysia and carry out the necessary auditing. Eventually, the license will allow Pecca to penetrate into the lucrative market of aviation leather seats.

Forecast. Unchanged.

Maintain BUY, TP: RM1.75. Maintain BUY recommendation on Pecca with unchanged TP of RM1.75 based on PE 12x on CY21 profit. We are positive on Pecca’s leverage on the strong rebound in TIV during SST exemption period as well as the new PPE venture, promising strong earnings rebound and decent dividend of 8 sen/share (5.0% yield) in FY21.

Source: Hong Leong Investment Bank Research - 8 Dec 2020

Labels: PECCA
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