Kenanga Research & Investment

Author: kiasutrader   |   Latest post: Fri, 30 Oct 2020, 10:09 AM


Daily technical highlights – (D&O, ESCERAM)

Author: kiasutrader   |  Publish date: Fri, 30 Oct 2020, 10:09 AM

D&O (Trading Buy)

• D&O primarily manufactures LED for the global automotive market which are sold to countries like China, Europe, USA, Japan, Korea and India.

• Being a trusted supplier of automotive LED lighting of global car brands, D&O’s is on a structural growth trajectory given the rising number of LEDs per vehicle.

• Also, with the gradual global shift from internal combustion engines to battery powered electric motor in vehicles, we note that the adoption of LEDs will be even more pronounced given the low battery consumption of LED lights allowing for longer travel distances for electrical vehicles.

• While 1HFY20 recorded dismal earnings of RM4.6m due to the MCO, consensus is expecting 2HFY20 to come in way stronger and register full year FY20E earnings of RM31.2m as a result of stronger orders delivery owing to the pent up demand from China and Europe car sales.

• Technically, the stock had broken out from an ascending triangle pattern on the 20th of October (last week) and is currently going through a mini pullback towards 2 support levels namely the 9day EMA and previous resistance-turn-support of RM1.13 providing an opportunistic entry.

• We think there is a high chance for the stock to continue its uptrend and break to an all-time high. Our immediate target is pegged at RM1.30 (+13%) while our stop loss is placed at RM1.06 (-8% downside)

Esceram (Trading Buy)

• Esceram manufactures ceramic hand formers (another term for mould) which is used within a glove production line.

• With the increased production of gloves coupled with the rising number of new glove entrants amidst this global pandemic, we understand there is a strong demand of hand formers leading to a shortage within the market.

• We believe this would indirectly benefit Esceram through higher sale prices of formers for the foreseeable future. Case in point, Esceram’s recent 1QFY21 (May YE) results recorded is the highest ever revenue and bottom line of RM11.9m (+36% YoY) and RM3.2m (+320% YoY) since its listing in 2005.

• We note that hand formers can typically last 1-2 years but is susceptible to breakages every month. Hence, glove manufacturers will always need additional replacements for backups.

• Technically, Esceram has seen a sharp sell down over the past 2 weeks and we believe the current levels warrants a relief rebound – especially when the last closing price is hovering at 2 crucial support levels: (i) 50SMA and (ii) previous resistance turn support of RM0.60.

• Also, Esceram has been respecting the 50SMA well and has rebounded off this level 5x over the past 1.5 months. Hence, we see a strong case for a rebound play.

• Our target is pegged at the immediate overhead resistance of RM0.69 (R1: +15% upside) while stop loss is at RM0.54 (-10% downside)

Source: Kenanga Research - 30 Oct 2020

Labels: ESCERAM, D&O
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Sunway Construction Group - Exceeds Replenishment Targets

Author: kiasutrader   |  Publish date: Fri, 30 Oct 2020, 10:07 AM

Suncon surprisingly announced new contracts worth RM333m, bringing YTD contracts won to RM2.3b, exceeding our/management’s FY20E replenishment of RM2.0b. Post these wins, we increase our replenishment target to RM2.5b but deferred billings recognition for certain delayed projects kept our earnings forecasts unchanged. Maintain OP with unchanged TP of RM2.45.

New jobs in the bag. Suncon has announced four new contracts worth RM333m comprising: (i) a 32-km highway in India from Meensurutti to Chidambarm worth RM315m awarded by National Highway Authority of India, and (ii) three rooftop solar projects worth RM18m at F&N’s factories in Karak, Shah Alam and Pulau Indah. The Indian highway is commencing in 2QCY21 with expected completion is within 24 months while the other three solar projects will be completed in 12 months.

Second Indian highway contract in FY20. This is Suncon’s second Indian highway project won this year under the Hybrid Annuity Model whereby 40% payment (of RM315m) will be made during the construction period while the remaining 60% will be made during the 15-year concession/maintenance period under a fixed annuity model – hence, no traffic risks involved.

Delayed commencement for its first Indian highway project. The RM508m Indian highway project won in Mar 2020 that was supposed to start construction in Oct 2020 had deferred commencement to 2QCY21 as the client has not completed the land acquisitions to allow Suncon to start works. Unlike this newly secured project with completed land acquisitions, construction will be able to commence soon.

Exceeded target. Overall, we are positive on the new contracts as they bring cumulative contracts won to-date to RM2.319b, exceeding our/management’s FY20 replenishment target of RM2.0b by 16%. Current outstanding order-book stand at c.RM6.0b providing a robust revenue cover of 3x.

For the remainder of FY20, management is no longer expecting any new contracts. That said, we raise our replenishment target to RM2.5b (from RM2.0b) to cater for any unexpected wins like these four new contracts. New wins could possibly come from their precast segment or more solar projects.

Prospects in LSS4. We note that Suncon being the contractor, had assisted several clients to tender for the LSS4 Independent Power Producer (IPP) role. Suncon and the clients are eyeing for 30MW-sized projects that could amount to RM150m worth of construction works for Suncon. Tentatively, tender results should be out in 1QCY21.

No change to earnings forecasts. Despite raising our replenishment forecast, we also defer billings recognition for the delayed Indian highway project worth RM508m – keeping our FY20-21E forecasts unchanged.

Maintain OUTPERFORM with an unchanged SoP-derived TP of RM2.45 based on a construction PER of 18x (+1SD above its 5-year mean). We think our premium PER valuation is justified for Suncon vs other contractors given its low risks nature from a receivable, replenishment and execution perspectives – the three key risks that really matters to a contracto

Source: Kenanga Research - 30 Oct 2020

Labels: SUNCON
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Digi.com Bhd - Well Cushioned

Author: kiasutrader   |  Publish date: Fri, 30 Oct 2020, 10:06 AM

We came away from a conference call with Ms. Inger Folkesen, its CFO feeling reassured by DIGI’s near-term prospects. The group will continue to focus on value propositions while keeping network quality a priority to manoeuvre around industry headwinds. We believe the group’s low-based blended ARPU allows it to effectively address affordability concerns. Industry-leading dividend yields remain a plus amongst peers. Maintain OUTPERFORM and DCF driven TP of RM4.25 (WACC: 7.1%, TG: 1.5%).

Cautious but with reason. DIGI expressed the need for tighter credit quality checks amidst ongoing economic difficulties. That said, the approach adopted could be more fluid as to recommend different packages to prospective customers based on their financial standing. This alleviated our concerns that the group might not fully capitalise on a possible appetite for downtrading, particularly from its peers, given that affordability is a growing issue among consumers. Based of 2QFY20 numbers, DIGI’s blended ARPU stood at RM40/mth while its listed peers range from RM47/mth-RM57/mth.

Value comes first. DIGI has consciously decided against offering fully “unlimited” data offerings and instead focused on a selective unlimited access model on high usage apps (i.e. Youtube, Facebook, Instagram, Twitter) without speed limits. Giving selective access could yield the highest equity and experience for customers on apps which most users would be accessing anyway, which might otherwise result in less sticky customers.

New ventures to expand market presence. DIGI’s entry into the fibre broadband space has opened new opportunities for the group to expand revenue streams. Management had also previously expressed the idea of packaging and bundling high value propositions into single billings for customer convenience. We find this convergence to be a natural course of action for telcos to keep customers more attached to their brands. On another note, DIGI’s collaboration with SenHeng to introduce the co-branded PlusOne Connect prepaid sim cards could attract new users with the prospects of retail rewards, particularly repeat customers. If proven successful, we do not discount that further collaborations would develop in the market.

Post-update, we leave our FY20E/FY21E earnings unchanged. Ms. Inger believes that the group has learnt much from the March MCO and has better clarity in navigating around shifting business climates from further movement controls. Therefore, she believes that the updated earnings guidance should remain intact, which to recap are: (i)service revenue declining by a low-to medium single-digit percentage, and (ii) EBITDA declining by a medium-to high single-digit percentage.

Maintain OUTPERFORM and DCF-driven TP of RM4.25. Our TP (based on WACC: 7.1%, TG: 1.5%) implies an EV/Fwd. EBITDA of 12,0x against our FY21E earnings. We continue to believe that DIGI is best positioned to ride through the uncertainties brought by Covid-19 and any resultant movement controls going forward. Amongst the Big-3, DIGI could be the least susceptible to economic headwinds as it already garners the blended ARPUs. Coupled by the highest dividend yield potential, DIGI offers a solid safety net for those who have to stay invested.

Risks to our call include: (i) weaker-than-expected service revenue, (ii) stronger-than-expected OPEX, and (iii) stiffer competition

Source: Kenanga Research - 30 Oct 2020

Labels: DIGI
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CapitaLand M’sia Mall Trust - Below Expectations

Author: kiasutrader   |  Publish date: Fri, 30 Oct 2020, 10:06 AM

9MFY20 realised distributable income (RDI) of RM44.0m (- 55% YoY-Ytd) came in below our estimate (63%) but within consensus (71%) as we had expected a stronger pickup in 2HFY20 post the various MCOs. No dividends, as expected. Lower FY20-21E CNP by 17-8% to RM58-96m on expectations of weaker reversions going forward. Given the on-going pandemic, the Group will be prioritising occupancy over reversions. Maintain MARKET PERFORM but on a lower TP of RM0.565 (from RM0.625).

9MFY20 realised distributable income (RDI) of RM44.0m came in below our estimate at 63% but within consensus’ at 71%, as we had imputed for a more significant pickup in 2H post the various MCO phases mostly in 2QFY20. No dividends, as expected.

Results’ highlight. YoY-Ytd, top-line was down by 24% on decline from all assets due to rental waivers and rebates given to non-essential tenants during the various MCO phases which were mostly in 2QFY20. All in, RDI declined by 55% despite lower operating cost (-8.8%) and expenditure (-13.9%). QoQ, top-line rebounded, up by 40% post the weak 2QFY20. As a result, RDI jumped to RM23.2m (>100%) from RM0.6m in 2QFY20. Group gearing remained stable at 0.34x which is below MREITs’ gearing limit of 0.60x.

Outlook. Due to the severity and uncertainty of the Covid-19 situation, the Group will be prioritising tenant assistance and cash preservation. Capex of RM20m each in FY20-21 is expected. The Group does not expect to utilise any additional rental assistance, but may assist tenants by way of lower reversions. Similar to most malls, we believe the Group will be prioritising occupancy over reversions. FY20 will see a large number of leases up for expiry at 43% of NLA, of which 50% has been renewed thus far at -10.7% reversion rates. We also expect 30% of leases to expire in FY21.

Lower FY20-21E CNP by 17-8% to RM58-96m on expectations of weaker reversions by end-FY20 and FY21 given the worsening Covid- 19 situation thus far, as we believe the Group would prefer to uphold healthy occupancy levels over reversions. As such, we lower rental reversions in FY20-21 to -13% / -5% (from -5% / +2%), while we expect occupancy of 85-90% (from 80-88%). FY20E/FY21E GDPU/NDPU of 2.8-4.6 sen / 2.5-4.2 sen imply gross yield of 4.5%/7.5% and net yield of 4.1%/6.8%.

Maintain MARKET PERFORM but on a lower Target Price of RM0.565 (from RM0.625). Our TP is based on a lower FY21E GDPU of 4.6 sen (from 5.1 sen) and a +5.4ppt spread (+2.0SD) to our 10-year MGS target of 2.8%. Our applied spread is the highest among retail MREITs under our coverage (+1.5ppt to +2.7ppt) given the weakness of CMMT’s asset profile from negative reversions and risk of weak occupancy. Furthermore, CMMT does not own any prime assets unlike its MREITs retail peers which would make it tougher to weather this pandemic while the concern of retail space oversupply still lingers.

Risks to our call include: (I) bond yield contraction/expansion, (ii) higher/lower-than-expected rental reversions, and (iii) higher/lower than-expected occupancy rates

Source: Kenanga Research - 30 Oct 2020

Labels: CMMT
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British American Tobacco(M) - Attractive Dividend Play

Author: kiasutrader   |  Publish date: Fri, 30 Oct 2020, 10:05 AM

9MFY20 CNP of RM183.1m (-26% YoY) came in above our expectation but within consensus, due to sustained Dunhill sales and growth from its VFM segment. Post-results, we bumped FY20E/FY21E earnings up by 9.8%/12.5%, and raised the stock to OUTPERFORM with a higher TP of RM11.05. While we note that the group’s outlook remains clouded by the raging illicit market, current valuations appear undemanding at 11.4x FY21E PER. Coupled with a generous dividend yield of c.8%, the stock serves as an attractive dividend play.

Beats our expectation, but within consensus. 9MFY20 core net profit (CNP) of RM183.1m (after accounting for RM14.0m restructuring expenses) came in above our expectation at 83%, but within consensus at 74%. The mismatch is likely due to stronger-than-expected revenue growth in 3QFY20, attributable to steady Dunhill sales coupled with its Value for Money (VFM) segment charting good progress. The declared dividend of 21.0 sen (YTD: 56.0 sen) is deemed to be within expectations.

Black market continues to haunt. YoY, 9MFY20 revenue continued to see a decline of 10%, mainly dampened by: (i) rampant illicit market volume at 70% (versus 69% in 9MFY19), (ii) persistent shrinkage in BAT product volume (-9%) due to the shift in demand towards illegal trades, as well as weaker duty-free sales amidst the Covid-19 travel restrictions. Subsequently, CNP fell by 26%, as core EBIT margin (- 2.9ppt) remains pressured by down-trading to lower-margin VFM products (i.e. Rothmans and KYO). The slimmer margin was slightly supported by the group’s cost rationalisation exercise, which led to a 5% fall in opex YoY.

Stronger QoQ. On the force of stronger BAT domestic volume (+14%) which outperformed the market volume growth (+7%), 3QFY20 revenue grew by 15%. While the industry growth was largely driven by sales normalisation post lockdown, BAT’s volume growth was attributed to sustained performances from its Premium segment (i.e. Dunhill) and stronger VFM segment, which were boosted by the new inclusion to the portfolio (i.e. KYO brand which was launched in June), nudging CNP to record a growth of 9%.

Not out of the woods yet? While we note the group’s encouraging effort to capture the down-trading market share via the inclusion of KYO, the operating environment remains harsh for the group against the backdrop of a dwindling industry volume and poorer product mix, which could only lead to thinner margins. Weaker purchasing power caused by a Covid-19-disrupted economy may also very well exacerbate the issue of affordability, further diverting smokers to illicit cigarettes and vaping products. Therefore, we maintain our view that any meaningful earnings recovery would only materialise with a sustained clampdown on illegal cigarettes (which currently takes up c.70% of market share).

Post-results, we bumped our FY20E and FY21E earnings upwards by 9.8% and 12.5%, respectively, by pencilling in more generous assumption for product volumes growth. NDPS were also adjusted upwards accordingly to 80.0 sen and 82.0 sen, respectively, by maintaining a pay-out assumption of 94%.

Upgrade to OUTPERFORM with a higher TP of RM11.05 (from RM10.05) following the earnings upgrade. Our TP is based on an unchanged valuation of FY21E PER of 13.0x (closely in-line with -1SD over the 3-year mean). The current valuations appear undemanding @ 11.4x FY21E PER (close to -1.5SD), which may have abundantly priced in the depressed operating environment and lack of visible earnings prospect ahead. With that, the stock serves as an attractive dividend play, offering yield of c.8% which could offer some comfort amid the volatile market environment. Risks to our call include: (i) lower-than expected dividend pay-out and (ii) weaker-than-expected product volume.

Source: Kenanga Research - 30 Oct 2020

Labels: BAT
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US Presidential Election 2020- Biden leads Trump, dollar strength pencilled in post-election

Author: kiasutrader   |  Publish date: Fri, 30 Oct 2020, 10:04 AM


● Against the backdrop of a weakening growth recovery and a second wave of the COVID-19 pandemic, the outcome of the US presidential election on 3rd November will be ever more crucial.

● While the incumbent President Trump seeks to extend his current policies, his opponent, former Vice President Joe Biden proposes plans to increase taxation, government spending and environmental regulation. Both candidates will maintain a protectionist trade stance, but at differing degrees.

● Latest poll shows Biden is ahead of Trump in both national and swing states. However, we do not discount the possibility of Trump being re-elected given the US is practising an electoral college system which could undermine popular votes.

● A Biden win could generate improvement in the jobs market and the US fiscal position, bringing forth a more stable economy and boosting the USD in the long term.


The US 59th quadrennial presidential election on 3rd November would determine the state-level popular vote. Then, on 14th December, in line with the result of each state’s popular vote, the presidential electors would either vote into office a new president or re-elect the incumbent for a second four-year term. The candidate with at least 270 electoral votes (nationwide: 538 electors) wins the presidency.

- President Donald Trump of the Republican Party is defending his presidency with his re-election campaign themed

“Keep America Great” and “Promises Made, Promises Kept”. Running against him is the former Vice President Joe Biden of the Democratic Party, with a rallying call for unity amidst the most divided political environment in the US since the Civil War on a campaign slogan “Unite for a Better Future” and “Build Back Better”.

- From the latest polls’ result, this election could lead to the first defeat of an incumbent president in 28 years, which historically is a rare occurrence. It had only occurred five times in the last 100 years, with the Democrats toppling Republican presidents four of those times.

Election to be held against a backdrop of a weak economic recovery as the US continues to grapple with the COVID-19 pandemic.

- The final jobs report (Sep) ahead of the election suggests stalling labour market recovery, as evidenced by the smallest job creation (661k) in five months and the highest pre-election unemployment rate of 7.9%.

- Looking at jobs created by previous presidents in their first 44 months in office, Trump ranks the lowest, with 3.9m jobs lost between Jan-17 and Sep-20.

- While the massive job loss is due to the unprecedented pandemic, it still does taint the economic records of the Trump administration, as citizens argue that government has handled the pandemic poorly, with delayed and inadequate actions.

▪ The latest COVID-19 figures showed that new cases continued to climb in the US. According to data compiled by the Johns Hopkins University, the US recorded nearly 79,000 new cases on Wednesday, which was close to an all-time daily high reported last week. In total, the country has recorded nearly 8.9m confirmed COVID-19 cases, while the death toll stands at more than 227,000.

Policy Stance Comparison

President Trump seeks to continue his policies of lower taxation, trade protectionism and general deregulation. On the other hand, should Biden be elected, it is expected of him to reverse Trump’s policies on healthcare, environmental regulation and taxation. Biden is also in favour of substantially more government spending than Trump. Meanwhile, their trade policies are quite similarly aligned under a protectionist stance

Source: Kenanga Research - 30 Oct 2020

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