Highlights

JF Apex Research Highlights

Author: kltrader   |   Latest post: Tue, 12 Nov 2019, 4:52 PM

 

Industrial Production Index (IPI) – September 2019 Soothing 3Q19

Author: kltrader   |  Publish date: Tue, 12 Nov 2019, 4:52 PM


Below expectation – Malaysia’s Industrial Production Index (IPI) in Sept’19 eased to +1.7% y-o-y as compared to +1.9% y-o-y during Aug’19. The result was below our in house and market forecast of +2.0% yoy and +1.8% y-o-y respectively. The moderate production growth during this period was due to slower production in Manufacturing and Mining outputs despite higher Electricity output. However, despite slower IPI production, Malaysia’s manufacturing Purchasing Managers’ Index (PMI) increased to 47.9 during Sept’19 (vs Aug’19: 47.4) following higher new orders, led by improvement in sales to existing customers. During 3Q19, IPI grew +1.6% y-o-y as compared to +4.0% y-o-y in 2Q19 due to subdued production in Manufacturing and Electricity outputs amid contraction in Mining output.

Soft production of both export and domestic-oriented outputs – Manufacturing output which constitutes 68.3% of total production, grew moderately to +2.5% y-o-y in Sept’19 from +3.6% y-o-y in the prior month. Export-oriented products were buoyed by higher production of Woods products, furniture, paper products & printing (+5.8% y-o-y vs Aug’19: +5.6% y-o-y), thanks to higher production in wood and cork. Nevertheless, other outputs were slower such as Textiles, wearing apparel, leather & footwear (+4.0% y-o-y vs Aug’19: +6.0% y-o-y), due to a drop in textiles and wearing apparel productions. Moreover, E&E product production was flat to +0.8% y-o-y (vs Aug’19: +3.1% y-o-y) following minor production in computer, electronics & optical products and machinery & equipment. Besides, production of Petroleum, chemical, rubber & plastic products also eased to +2.1% y-o-y (vs Aug’19: 3.0 y-o-y) following slower production in most of the sub-items. Domestic-oriented production was aided by Transport equipment & other manufacturers which rose to +6.3% y-o-y (vs Aug’19: +5.9% y-o-y) following massive production in other transport equipment as well as motor vehicles, trailers & semi-trailers. However, production growth in Non-metallic mineral products and Food beverages and tobacco products declined to +3.8% y-o-y and +1.5% y-o-y respectively (vs Aug’19: +4.1% y-o-y and +2.4% y-o-y) due to slower basic metals and beverages production.

Electricity production soared but Mining output still in the red – Electricity production soared to +4.9% y-o-y during Sept’19 from a minor growth of +0.3% y-o-y during Aug’19. However, Mining production remains in the red with -1.6% y-o-y growths as compared to -3.9% y-o-y during previous month. Subdued production of mining outputs was due to contraction of crude oil (-4.7% y-o-y vs Aug’19:- 9.5% y-o-y) amid moderate production in natural gas (+1.1% y-o-y vs Aug’19: +1.2% y-o-y).

Manufacturing sub-sectors’ sales trend lower – Manufacturing sales grew +2.9% y-o-y in Sept’19 as compared to +4.7% y-o-y in Aug’19 as most of the sub-sectors saw lower sales such as E&E products (+7.4% y-o-y vs Aug’19: +7.8% y-o-y), Textiles, wearing apparel, leather & footwear (+5.4% y-o-y vs Aug’19: +6.6% y-o-y), Petroleum, chemical, rubber & plastic (+1.4% y-o-y vs Aug’19: +4.1% y-o-y), Nonmetallic mineral products (+6.4% y-o-y vs Aug’19: +6.6% y-o-y), and E&E products (+1.3% y-o-y vs Aug’19: +3.6% y-o-y). Slower E&E products sales were in line with global semiconductor sales reported by Semiconductor Industry Association (SIA) which declined 16.6% y-o-y but improved +3.4% m-o-m. Global semiconductor sales had reported contraction since early this year and we expect global semiconductor sales to remain subdued for the rest of the year. However, sales of Woods products, furniture, paper products and Transport equipment & other manufacturers were higher during this period which up +4.9% y-o-y and +9.1% y-o-y respectively during this period (vs Aug’19: +4.5% y-o-y and +7.2% y-o-y).

Expecting minor IPI growth in 2019 –– We expect IPI to expand moderately in 2019 as we reckon small growths in most of the sub-sectors, in tandem with slowing global economic growth. We believe manufacturing production will remain as the main contributor to IPI, albeit at a slower pace. As such, we retain our IPI forecast of +2.8% y-o-y for 2019 (vs 2018: +3.0%). However, we opine that prevailing trade war between the US and China could derail the global trade thus affecting our IPI performance.

Source: JF Apex Securities Research - 12 Nov 2019

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Hai-O Enterprise Berhad - a Watershed Year

Author: kltrader   |  Publish date: Tue, 12 Nov 2019, 4:49 PM


What’s new

  • Neutral outlook. We met Hai-O’s management recently and came back feeling neutral about the Group’s future prospects. Management remains conservative about current year outlook and pinning hopes that earnings will be better for 2HFY20. The Group believes contribution from Multi Level Marketing (MLM) segment will be slightly better banking on introduction of few new products, mainly focusing on small-ticket items as well as implementation of cost optimisation strategy.

Comment

  • Better 2QFY20. To recap, the Group’s revenue and earnings during FY19 were tepid, down 28.9% yoy and 36.6% yoy respectively due to lower contribution from MLM division coupled with higher marketing and branding costs. On its recent financial results (1QFY20), Hai-O reported a net profit of RM7.7m, declining 22.7% qoq and 29.6% yoy. Similarly, the Group recorded lower quarterly revenue of RM66.1m, -5.5% qoq and -17.5% yoy. The disappointing results were due to lower sales generated from MLM division coupled with reduction in A&P subsidy incomes. Moving forward, we envisage 2QFY20 result to perform better than 1QFY20 following end of major festive season (which is normally lead to slow-down in business activities pursuant to fasting month and Hari Raya festival) coupled with launch of new products.
  • More new products under MLM to boost recurring income – MLM division has been experienced a challenging results during FY19 due to domestic and global uncertainties such as re-introduction of sales and services tax (SST), tepid consumer sentiment as a result of rising cost of living. Numbers of membership has been depleted to c.100k as of to date (as compared to FY19: c.150k). Still, the Group is able to maintain its active membership of about 30%-40%. Despite expecting a marginal drop in recruitment of new members, the Group will continue to reward its current members with variety of rewards and incentives such as trip to overseas, cash rebates, monthly bonus and others. Notably, this business segment is mainly driven by its Food & Beverages and Health supplements & Nutrition food (c.80%). The Group is sanguine on introducing more small ticket items to boost its recurring income and hence the overall earnings going forwards.
  • Exports of bird nest product to strengthen Wholesale division – Currently, Wholesale division supplies to more than 100 wholesalers and 2,000 retailers such as Chinese medical halls, restaurants, supermarkets and pharmacies in Malaysia which include Chinese medicated tonic and other health and wellness products. The Group’s current strategy is to focus on non-alcoholic products such as food and beverage products (i.e. Medetop coconut oil, herbal beverages, canned food and ready-to-drink bird’s nest) instead of alcoholic products (i.e. cooking wine, health tonic, tea and wine). In the previous financial results, the Group successfully obtained approval from the Chinese government to export bird nest products there. The bird nest products are produced locally. Management believes the expansion plans in China will help to bolster the Group’s business expansion.
     
  • Extensive sales campaign ahead for Retail division – Retail division, which mainly focuses on Traditional Chinese Medical (TCM) and Chinese physician consultation services, will continue to launch extensive sale promotions in order to expand their house brands products. Currently, the retail division has 57 outlets, including 7 franchises. Going forward, the Group expects to add one or two additional outlets in East Coast Malaysia, with the hope to have large presence in all of the states in Malaysia. Currently, the Group has two international standards manufacturing facilities which assemble for manufacturing of Halal and non-Halal products.
     
  • Minimal overseas contributions. Most of the revenue of the Group thus far are derived from local. The Group also has business ventures in other countries such as Indonesia and Brunei. However, the Group expects minor contributions from overseas MLM markets as the market shares are relatively small due to less established network and team leaders.

Earnings Outlook/Revision

  • We lift our earnings forecasts for FY20F and FY21F by 4.8% and 3.6% to RM43.7m and RM49.1m respectively, to account for higher sales assumptions for all segments.
  • Risks include: 1) Higher-than-expected operating expenses (i.e. higher marketing and branding expenses), 2) Lower than-expected domestic spending due to higher cost of living and 3) Depreciation of MYR against USD.

Valuation & Recommendation

  • Upgraded to HOLD from SELL with a higher target price of RM2.30 (previous target price of RM2.20) following our earnings upgraded. We believe market has discounted the prevailing earnings hiccup and share price is well supported by decent dividend yield of slightly over 4%. Our revised target price is based on P/E multiple of 15.8x FY20F EPS which is at its 3-year historical mean P/E.

Source: JF Apex Securities Research - 12 Nov 2019

Labels: HAIO
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Hai-O Enterprise Berhad - a Watershed Year

Author: kltrader   |  Publish date: Tue, 12 Nov 2019, 2:01 PM


What’s new

  • Neutral outlook. We met Hai-O’s management recently and came back feeling neutral about the Group’s future prospects. Management remains conservative about current year outlook and pinning hopes that earnings will be better for 2HFY20. The Group believes contribution from Multi Level Marketing (MLM) segment will be slightly better banking on introduction of few new products, mainly focusing on small-ticket items as well as implementation of cost optimisation strategy.

Comment

  • Better 2QFY20. To recap, the Group’s revenue and earnings during FY19 were tepid, down 28.9% yoy and 36.6% yoy respectively due to lower contribution from MLM division coupled with higher marketing and branding costs. On its recent financial results (1QFY20), Hai-O reported a net profit of RM7.7m, declining 22.7% qoq and 29.6% yoy. Similarly, the Group recorded lower quarterly revenue of RM66.1m, -5.5% qoq and -17.5% yoy. The disappointing results were due to lower sales generated from MLM division coupled with reduction in A&P subsidy incomes. Moving forward, we envisage 2QFY20 result to perform better than 1QFY20 following end of major festive season (which is normally lead to slow-down in business activities pursuant to fasting month and Hari Raya festival) coupled with launch of new products.
  • More new products under MLM to boost recurring income – MLM division has been experienced a challenging results during FY19 due to domestic and global uncertainties such as re-introduction of sales and services tax (SST), tepid consumer sentiment as a result of rising cost of living. Numbers of membership has been depleted to c.100k as of to date (as compared to FY19: c.150k). Still, the Group is able to maintain its active membership of about 30%-40%. Despite expecting a marginal drop in recruitment of new members, the Group will continue to reward its current members with variety of rewards and incentives such as trip to overseas, cash rebates, monthly bonus and others. Notably, this business segment is mainly driven by its Food & Beverages and Health supplements & Nutrition food (c.80%). The Group is sanguine on introducing more small ticket items to boost its recurring income and hence the overall earnings going forwards.
  • Exports of bird nest product to strengthen Wholesale division – Currently, Wholesale division supplies to more than 100 wholesalers and 2,000 retailers such as Chinese medical halls, restaurants, supermarkets and pharmacies in Malaysia which include Chinese medicated tonic and other health and wellness products. The Group’s current strategy is to focus on non-alcoholic products such as food and beverage products (i.e. Medetop coconut oil, herbal beverages, canned food and ready-to-drink bird’s nest) instead of alcoholic products (i.e. cooking wine, health tonic, tea and wine). In the previous financial results, the Group successfully obtained approval from the Chinese government to export bird nest products there. The bird nest products are produced locally. Management believes the expansion plans in China will help to bolster the Group’s business expansion.
     
  • Extensive sales campaign ahead for Retail division – Retail division, which mainly focuses on Traditional Chinese Medical (TCM) and Chinese physician consultation services, will continue to launch extensive sale promotions in order to expand their house brands products. Currently, the retail division has 57 outlets, including 7 franchises. Going forward, the Group expects to add one or two additional outlets in East Coast Malaysia, with the hope to have large presence in all of the states in Malaysia. Currently, the Group has two international standards manufacturing facilities which assemble for manufacturing of Halal and non-Halal products.
     
  • Minimal overseas contributions. Most of the revenue of the Group thus far are derived from local. The Group also has business ventures in other countries such as Indonesia and Brunei. However, the Group expects minor contributions from overseas MLM markets as the market shares are relatively small due to less established network and team leaders.

Earnings Outlook/Revision

  • We lift our earnings forecasts for FY20F and FY21F by 4.8% and 3.6%% to RM43.7m and RM49.1m respectively, to account for higher sales assumptions for all segments.
  • Risks include: 1) Higher-than-expected operating expenses (i.e. higher marketing and branding expenses), 2) Lower than-expected domestic spending due to higher cost of living and 3) Depreciation of MYR against USD.

Valuation & Recommendation

  • Upgraded to HOLD from SELL with a higher target price of RM2.30 (previous target price of RM2.20) following our earnings upgraded. We believe market has discounted the prevailing earnings hiccup and share price is well supported by decent dividend yield of slightly over 4%. Our revised target price is based on P/E multiple of 15.8x FY20F EPS which is at its 3-year historical mean P/E.

Source: JF Apex Securities Research - 12 Nov 2019

Labels: HAIO
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Hartalega Holdings Berhad - Facing Short Term Headwinds

Author: kltrader   |  Publish date: Thu, 7 Nov 2019, 5:46 PM


Result

  • Hartalega reported a net profit of RM103.8mil for its 2QFY20 results. The quarterly net profit increased 10.4% QoQ but decreased 13.7% YoY. Meanwhile, the quarterly revenue stood at RM709.4m, rising 10.8% QoQ but falling marginally by 0.7% YoY.
  • Below consensus and in-house projection. Overall, 1HFY20 net profit accounts for RM198m or 44.0%/43.0% of ours/market full-year estimates.

Comments

  • Better QoQ performance. The Group’s revenue increased by 10.8% QoQ due to higher sales volume for the quarter. The higher QoQ sales volume resulted in increase of PBT by 12.9%. Furthermore, the Group was able to maintain stable PBT margin of 19.4% during this quarter against 19.0% in the preceding quarter.
  • Weaker YoY performance. Meanwhile, the Group’s revenue slid by 0.7% whilst PBT declined by 3.5% in tandem with lower average selling price and higher cost of natural gas for the quarter. We opine that the stiff competition and ample supply of nitrile gloves by competitors caused the Group to cut down selling price in order to protect market share. Likewise, the above mentioned reasons also dragged down the 1HFY20 net profit by 19.2%.
  • Slowing demand has sign of relenting. Hartalega ramped up the utilization rate from 76% in 1Q2020 to 85% in 2Q2020 indicates that the Group is coming back from the trough. Better demand for glove is underpinned by healthcare which is deemed non-cyclical industry, positive Sino-US trade war progression and interest rate cuts from global central banks.
  • Expansion plan is on track. Hartalega’s expansion plan is not standstill at this junction despite slowing demand for the products. Plant 6 targets to commission its 1st line in 1Q CY2020 and construction of Plant 7 has commenced and targets to commission its 1st line in 2HCY2020. Moving forward, we will see more diversified product mix by the Group in plant 7, catering to small orders and focusing more on specialty product, and will have an annual installed capacity of 3.4 billion pieces.
  • Stand out from biggest competitor. We believe glove industry is still in a fast growing stage but the disruption of macro headwinds halted Hartalega’s performance for a while. The Group is expected to benefit from the suspension of Generalized System of Preferences (GSP) to Thailand starting April 2020 with estimate RM800m value of gloves will be charged higher tariff upon exporting to the US. Moreover, the

outlook of Thai export is challenging with the appreciation of Thai Baht against USD (YTD: +7%). The situation is likely to prolong which would exacerbate Thai export to the US in coming years. Hence, the gloomy outlook for Thai glove exports will indirectly benefit Malaysia which is the current largest glove exporting nation in the world.

Earnings Outlook/Revision

  • We decrease our FY20F net earnings forecast by 2.5% to RM444.7m for FY20F by lowering the utilization rate. However, we increase our FY21F net profit forecast by +1.3% to RM450.5m as we lift the sales volume given better demand.

Valuation & Recommendation

  • Maintain SELL with a higher target price of RM4.60 (previous target price of RM4.48) following higher P/E applied. Our revised target price is now pegged at 34.7x FY20F P/E of (from 30.5x previously). Our valuation is in line with its 5-year mean P/E of 34.7x as we believe the Group is in midst of recovering mode and market has discounted the prevailing headwinds.

Source: JF Apex Securities Research - 7 Nov 2019

Labels: HARTA
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HARTALEGA - Hartalega Holdings Berhad - Facing Short Term Headwinds

Author: kltrader   |  Publish date: Thu, 7 Nov 2019, 8:43 AM


Result

  • Hartalega reported a net profit of RM103.8mil for its 2QFY20 results. The quarterly net profit increased 10.4% QoQ but decreased 13.7% YoY. Meanwhile, the quarterly revenue stood at RM709.4m, rising 10.8% QoQ but falling marginally by 0.7% YoY.
  • Below consensus and in-house projection. Overall, 1HFY20 net profit accounts for RM198m or 44.0%/43.0% of ours/market full-year estimates.

Comments

  • Better QoQ performance. The Group’s revenue increased by 10.8% QoQ due to higher sales volume for the quarter. The higher QoQ sales volume resulted in increase of PBT by 12.9%. Furthermore, the Group was able to maintain stable PBT margin of 19.4% during this quarter against 19.0% in the preceding quarter.
  • Weaker YoY performance. Meanwhile, the Group’s revenue slid by 0.7% whilst PBT declined by 3.5% in tandem with lower average selling price and higher cost of natural gas for the quarter. We opine that the stiff competition and ample supply of nitrile gloves by competitors caused the Group to cut down selling price in order to protect market share. Likewise, the above mentioned reasons also dragged down the 1HFY20 net profit by 19.2%.
  • Slowing demand has sign of relenting. Hartalega ramped up the utilization rate from 76% in 1Q2020 to 85% in 2Q2020 indicates that the Group is coming back from the trough. Better demand for glove is underpinned by healthcare which is deemed non-cyclical industry, positive Sino-US trade war progression and interest rate cuts from global central banks.
  • Expansion plan is on track. Hartalega’s expansion plan is not standstill at this junction despite slowing demand for the products. Plant 6 targets to commission its 1st line in 1Q CY2020 and construction of Plant 7 has commenced and targets to commission its 1st line in 2HCY2020. Moving forward, we will see more diversified product mix by the Group in plant 7, catering to small orders and focusing more on specialty product, and will have an annual installed capacity of 3.4 billion pieces.
  • Stand out from biggest competitor. We believe glove industry is still in a fast growing stage but the disruption of macro headwinds halted Hartalega’s performance for a while. The Group is expected to benefit from the suspension of Generalized System of Preferences (GSP) to Thailand starting April 2020 with estimate RM800m value of gloves will be charged higher tariff upon exporting to the US. Moreover, the outlook of Thai export is challenging with the appreciation of Thai Baht against USD (YTD: +7%). The situation is likely to prolong which would exacerbate Thai export to the US in coming years. Hence, the gloomy outlook for Thai glove exports will indirectly benefit Malaysia which is the current largest glove exporting nation in the world.

Earnings Outlook/Revision

  • We decrease our FY20F net earnings forecast by 2.5% to RM444.7m for FY20F by lowering the utilization rate. However, we increase our FY21F net profit forecast by +1.3% to RM450.5m as we lift the sales volume given better demand.

Valuation & Recommendation

  • Maintain SELL with a higher target price of RM4.60 (previous target price of RM4.48) following higher P/E applied. Our revised target price is now pegged at 34.7x FY20F P/E of (from 30.5x previously). Our valuation is in line with its 5-year mean P/E of 34.7x as we believe the Group is in midst of recovering mode and market has discounted the prevailing headwinds.

Source: JF Apex Securities Research - 7 Nov 2019

Labels: HARTA
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SOLARVEST Holdings Berhad - Riding the Trend

Author: kltrader   |  Publish date: Wed, 6 Nov 2019, 5:26 PM


Investment Highlights

  • Pure solar energy proxy. - Solarvest generates revenue from Engineering, Procurement, Construction and Commissioning (96.0%), operations & maintenance (0.3%), and solar PV plant (1.4%). Its listing would present a good proxy to the solar and renewable energy industry.
  • Steady earnings growth – We expect net profit of RM11.2m (+1.2% YoY) and RM17m (+51.4% YoY) for FY20F and FY21F respectively.
  • Net cash position - Solarvest has a healthy balance sheet with a net cash position, high return of equity (35.0%), and strong shareholders fund (RM 31.7 mil).
  • Healthy order book – As of 31 Aug 2019, Solarvest’s orderbook stands at RM200.1m. In recent months, Solarvest was able to replenish its orderbook with commercial & industrial jobs when its Large Scale Solar Photovoltaic Plant (LSSPV) projects approach end phases. A diversified customer mix enables Solarvest to be occupied and utilize its available capacity at all times. Solarvest is set to benefit from the RM2 billion LSSPV 3 project, which will be tendered by the government in upcoming months, judging from its solid track records in LSSPV 1 & 2.
  • Favourable industry outlook. - Demand for solar PV system is anticipated to grow as the cost of global PV value chain pricing has been on a downtrend, allowing the market to enjoy low cost of solar PV system in this technology maturing cycle. The forecasted total installed capacity in Malaysia (MWp) expected to grow at a CAGR of 50% from 438 in 2018 to 3,322 in 2023.
  • Government initiatives to spur green energy - The government is increasing indigenous participation in the solar industry with many policies introduced such as the Green Investment Tax Allowance (GITA) and Green Income Tax Exemption (GITE) incentives until 2023 extension was tabled in Budget 2020, along with 70% income tax exemption of up to 10 years for

companies undertaking solar leasing activities, the Supply Agreement of Renewable Energy (SARE) programme, as well as the revised the Net Energy Metering (NEM).

Valuation & Recommendation

  • We derive a fair value of RM0.48 for Solarvest. Our valuation is based on 11x FY21F EPS which is in line with its peer average PER.

Key Risks

  • Unanticipated increases in project costs
  • High competition in the industry
  • Subject to potential defects liability claims and performance ratio guarantee
  • Solarvest might not maintain its pioneer status
  • Solarvest requires adequate financing in running operation

Source: JF Apex Securities Research - 6 Nov 2019

Labels: SOLAR
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