Highlights

Kenanga Research & Investment

Author: kiasutrader   |   Latest post: Mon, 27 May 2019, 9:40 AM

 

M’sian Pacific Industries - Deep Bargain with 6.4x Ex-Cash PER

Author: kiasutrader   |  Publish date: Mon, 27 May 2019, 9:40 AM


MPI’s 3Q19 CNP came in below expectations at RM17m (-35% YoY; -57% QoQ), bringing 9M19 CNP to RM98m (-5% YoY); at 63% of consensus FY19 estimate and 58% of ours. The disappointment was likely due to weaker-than-expected sales amid the US-China trade war and lower-than-expected GPM. Slash FY19-20E CNPs by 26-12% to RM126-158m. An interim dividend of 17.0 sen was declared during the quarter, within expectation. Maintain OP with a lower TP of RM12.10.

Below expectations. Malaysian Pacific Industries (MPI)’s 3Q19 core net profit (CNP) came in below expectations at RM17m (-35% YoY; - 57% QoQ), bringing 9M19 CNP to RM98m (-5% YoY). The cumulative CNP only accounted for 63% of consensus full-year estimate and 58% of ours. We attribute the earnings disappointment to weaker-than- expected sales amid the US-China trade war and lower-than-expected gross profit margin (GPM) of 17.3% in 9M19 (vs. our 18.0% assumption for FY19). On a brighter note, the group’s net cash position further strengthened to RM689m from RM677.2m in 2Q19. An interim dividend of 17.0 sen was declared during the quarter, bringing the cumulative dividends to 27.0 sen (9M18: 29.0 sen), within our expectation.

YoY, 9M19 CNP dipped 5.0% as revenue inched down 0.6%, led by the US with an 18% decline amid the trade war, but largely offset by 4% and 1% growth from Asia and the Europe, respectively. Meanwhile, the quicker pace of decline in the CNP is explained by higher contribution from the group’s 70%-owned subsidiary Carsem (M) Sdn Bhd, which resulted in higher minority interest. QoQ, CNP tumbled 57% as revenue contracted 17% with declines of 11-22% across the group’s three major regions, likely due to seasonality as well as weak consumer sentiment amid the trade war. While we have yet to obtain a detailed industry breakdown, we believe the revenue drop is attributable to unexciting smartphone sales given incremental features upgrade in recent models, which in turn reduces the demand for the group’s Quad Flat No-leads (QFN) packages and at the same time, Dynacraft’s lead frames. The larger drop at the bottom-line is explained by a drastic 8ppt dent in GPM to 12%, likely due to lower capacity utilisation.

A better portfolio to fuel growth. The group has embarked on a portfolio rationalisation exercise that entails weeding out low-margin products while switching focus to automotive sensors, including MEMS and packages used in data servers such as Cu-clip packages for power management chips. The said segments are likely to offer decent growth prospects given rising semiconductor content in automobiles and increasing data needs. In addition, the automotive space is likely to offer higher margins as cars are bigger ticket items, and the segment has a higher barrier to entry due to long and strict qualification processes.

Slash FY19-20E CNPs by 26-12% to RM126-158m as we tone down our revenue forecasts by 10-11% and GPM assumptions from 18% each to 16-17.5%.

Maintain OUTPERFORM with a lower Target Price of RM12.10 (from RM13.00) based on FY19E PER of 13.0x (rolled forward from FY19E), reflecting the group’s mid-cycle valuation. Despite the lackluster outlook for the near term, we still like MPI for its long-term mission to transform its portfolio into an automotive-centric one, a space which offers brighter growth prospects due to rising semiconductor content in automobiles. In addition, the stock is currently a deep bargain with ex-cash PER of 6.4x after considering its net cash position of RM689m as of 3Q19. Risks to our call are: (i) weaker-than- expected sales and margins, and (ii) unfavourable currency exchange rates.

Source: Kenanga Research - 27 May 2019

Labels: MPI
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Dayang Enterprise Holdings - Contract Award From Roc Oil

Author: kiasutrader   |  Publish date: Mon, 27 May 2019, 9:37 AM


DAYANG was awarded a HUC contract for 4+1 years from Roc Oil, with the value estimated at c.RM150-200m. We are positive on the award, being an extension of a prior 1-year HUC contract. Further wins could still come from i-MCM awards in late-2019. While we like the company’s outstanding management, upcoming share-base dilution and recent lossmaking quarter could act as potential drags. Maintain UP and TP of RM0.80.

Contract from Roc Oil. Last week, DAYANG announced being awarded a contract by Roc Oil (Sarawak) Sdn Bhd for the provision of procurement, installation, hook-up and commissioning services for Roc Oil Siprod/Infill Drilling Campaign (2019-2023). The duration of the contract is for a primary 4-year period effective May-2019, with an option to extend for one additional year.

Positive on the contract announcement. While no contract value was included in the announcement, as the actual value would be dependent on work orders issued by Roc Oil, we estimate the value to be somewhere around the region of RM150-200m. Based on our understanding, we believe this contract should be an extension from a previous 1-year HUC contract from Roc Oil in 2018. Hence, we are undoubtedly positive on this new contract, as it not only signifies DAYANG’s competitiveness to secure new contracts, but also its quality work delivery resulting in client retention. We believe this contract should fetch roughly mid-teens EBIT margins.

Outlook moving forward. The contract award should lift its current order-book to slightly above RM3b. This contract aside, further contract awards could still come from possible partial wins in its I-MCM tenders from Petronas, with gross value estimated to be around RM4b, and award date expected to be late-2019. Meanwhile, the company had also recently announced its proposed debt restructuring, entailing; (i) a 1-for-10 rights issue, (ii) private placement of up to 10% of total issued shares, (iii) issuance of Sukuk of RM682.5m and subscription of PERDANA’s RCPS (refer to our report dated 21 May 2019 for further details). Overall, this is expected to reduce DAYANG’s net gearing to 0.66x (from 0.72x currently), as well as diluting its share base by ~20%. The exercises are expected to be completed by 4Q19, pending shareholders and authorities’ approvals.

Maintain UNDERPERFORM, with an unchanged TP of RM0.80, implying Forward PBV of 0.7x (in-line with 0.5SD below its 5-year mean) and Forward PER of 8x. While we like the company for its outstanding management and quality work delivery, being one of the most established and efficient players within the local offshore maintenance space, we still remain slightly wary given the upcoming share-base dilution, coupled with the recent loss-making quarterly results, which could act as potential drags. Nonetheless, we believe the size of the rights issue is much more palatable as compared to previous rights exercises in the oil and gas sector (e.g. SAPNRG, VELESTO), and hence, we do not expect an overly prolonged overhang, if any. Post-award, we made no changes to our FY19-20E earnings, as the contract is still within our replenishment assumption of RM1b (this being the first win for the year). Since our “take-profit” UNDERPERFORM call in March, the stock has retraced 46%. Overall, our calls on DAYANG for the past twelve months have yielded total returns of over 180% (includes both OUTPERFORM and UNDERPERFORM calls). Risks to our call include: (i) stronger-than-expected work orders, (ii) increase in lump-sums of variation orders, (iii) higher-than-expected vessel utilisation, and (iv) falling through of corporate restructuring exercise.

Source: Kenanga Research - 27 May 2019

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MISC Berhad - 1Q19 Up on Better Charter Rates

Author: kiasutrader   |  Publish date: Mon, 27 May 2019, 9:33 AM


The strong 51% YoY core earnings growth in 1Q19 beat our estimates slightly, driven by improvements in spot freight rates. Moving forward, we believe the group is likely to post better earnings this year, from last year’s low-base, underpinned by better spot rates coupled with expected turnaround in MHB. We also see little risk to its consistent dividend payout (4.6% yield) as operating cash flow remains stable. Maintain MP and TP of RM6.65.

Above our expectations. 1Q19 Core Profit of RM469.3m (arrived after stripping off gains from acquisitions/disposals) came in slightly above our expectation at 32% of our full-year forecast, helped by better-thanexpected petroleum shipping due to higher spot freight rates. However, the results were within consensus’ expectation at 28%. Dividend of 7.0 sen per share (flat YoY) is also within expectation.

Improved results overall. YoY, 1Q19 core profit jumped 51%, mainly helped by a recovery in its petroleum shipping, from losses last year, due to higher spot freight rates, while other segments remained relatively flat. Sequentially, core earnings improved 13% QoQ, mainly from a recovery in LNG shipping as two LNG vessels (namely Seri Balhaf and Seri Balqis) had commercial arrangements in 4Q18, which resulted in the vessels being idle during the quarter. Meanwhile, its petroleum shipping has also managed to see some growth QoQ, despite charter rates tapering off from the year-end winter months, due to improved operating margins from lower bunker costs.

Better earnings expected for the year. Overall, we believe the group is likely to record some earnings growth this year, from a low base last year, underpinned by: (i) an improvement in the tanker spot charter rates market, coupled with (ii) return to profitability in 66.5%-owned MHB, driven by an expected recovery in dry-docking activities. Meanwhile, the group is also striving to grow its offshore segment via various FPSO bids both locally and international – one of which includes the FPSO for Limbayong field (Malaysia), rumoured to be bidding in partnership with YINSON.

Maintain MARKET PERFORM, with an unchanged TP of RM6.65, pegged to 0.85x PBV at 1SD below its 5-year mean. Post-results, we raised our FY19-20E earnings by 10-12% as we factored in stronger petroleum shipping. Our numbers imply earnings growth of 21-10%, respectively. Meanwhile, we also see little risk to its consistent dividend payments, implying decent yields of 4.6%, as its operating cash flow still remains fairly stable. Overall, we believe the consistent dividend would help limit the share’s downside risks over the longer run.

Risks to our call include: (i) weaker-than-forecasted charter rates, (ii) stronger-than-expected MYR/USD exchange rates, (iii) lower-thanexpected number of operating vessels, and (iv) slowdown of global economy.

Source: Kenanga Research - 27 May 2019

Labels: MISC
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CJ Century Logistics Holdings - Unexpected 1Q19 Losses

Author: kiasutrader   |  Publish date: Mon, 27 May 2019, 9:32 AM


1Q19 plunged into unexpected losses of RM1.8m due to widening start-up costs and poorer total logistics business. While the company’s near-term outlook is set to remain clouded on persistent start-up losses and industry- wide margin compression, we expect upcoming quarters to see gradual recovery, on the back of better performances from procurement logistics business and total logistics business. Maintain UP with revised TP of RM0.370.

Surprising losses. CJCEN registered 1Q19 net loss of RM1.8m which came in below expectations, against ours and consensus’ full- year forecasts of RM9.4m and RM10.3m, respectively. The losses were largely due to widening expansion costs for its courier business coupled with weaker performances from its total logistics business. No dividend was announced, as expected.

Widening expansion costs. YoY, 1Q19 plummeted into losses of RM1.8m, from net profit of RM2.7m in 1Q18, largely dragged by: (i) thinning margins with operating margin falling 3.8 ppt to 0.3% as expansion costs widened for its courier business; with an addition of nearly 400 new workers over the year, and (ii) weaker total logistics business which saw EBIT plunged 52.6% to RM1.3m; dampened by weaker oil and gas segment with only 2 vessels employed for the quarter. This was despite a revenue jump of 37.1% to RM127.1m on the back of sturdier performance from its Procurement Logistics business (+88.6% YoY), helped by newly secured clients from Vietnam. Sequentially, losses in 1Q19 widened from RM0.2m in 4Q18 in spite of a 44.5% hike in revenue. Similarly, this was due to continual margin compression, which saw operating margin contracting 1.3 ppt from 1.6%, due to the aforementioned higher expansion costs and weaker performances from its total logistics business. Courier business continues to drag. With its parcel delivery business continuing to act as a dampener moving forward, earnings are expected to be largely buoyed by its procurement logistics business; until an eventual breakeven from its courier business can be expected, likely in FY21. We reiterate our view on its upcoming multi-storey warehouse in playing a crucial role in its courier business’ eventual success, with construction currently near completion and on-track to meet its expected operational commencement in 3Q19. The new warehouse is expected to boost capacity to 150k parcels/day from currently 10k parcels/day. While the company’s near-term outlook is set to remain clouded on persistent start-up losses and margin compression from intensified competition within the industry, we are expecting upcoming quarters to see gradual numbers recovery, on the back of improvements from its procurement logistics business and total logistics business. Maintain UNDERPERFORM, given its bleak outlook with little earnings catalyst at this juncture. Post-results, we cut FY19E-20E earnings by 16.7-15.6% after accounting for more conservative margins for its total logistics business and larger losses for its courier business. Our DCF- derived TP is also lowered to RM0.370 (from RM0.400 previously), implying 19x PER (in-line with its -1S.D. 3-year mean) based on: (i) 6.8% discount rate, and (ii) 1% terminal growth. Risks to our call are: (i) earlier-than-expected breakeven from courier business, and (iii) weaker-than-expected procurement logistics business.

Source: Kenanga Research - 27 May 2019

Labels: CJCEN
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P.I.E Industrial - Teething Troubles

Author: kiasutrader   |  Publish date: Mon, 27 May 2019, 9:28 AM


1Q19 CNP missed expectations stemming from seasonality and higher-than-expected start-up costs for its maiden telecommunication device as well as operational deleveraging. While 2Q19 should continue to see weakness on lower efficiency and seasonality, we expect earnings in 2H19 to improve on seasonal ramp-up and efficiency improvements. Cut FY19/20E CNP by 17%/14%. Maintain OUTPERFORM with a lower Target Price of RM1.55.

Slight Hiccup. While we are cognizant of 1Q being the weakest quarter seasonally, PIE’s CNP of RM0.5m (-97% QoQ; -47% YoY) was deemed below expectations regardless, amounting to only 1% of our/consensus’ full-year estimates. We believe this was mainly attributed to: (i) higher than-expected start-up costs for its maiden telecommunication device, and (ii) lower-than-expected operational efficiency in the initial manufacturing stage for its new product due to steep learning curve (which resulted in higher usage of raw materials). No dividend was declared, as expected as the group typically declares dividend after its 4Q results.

Results Highlight. YoY, despite 4% increase in 1Q19 revenue, CNP came in 47% weaker at RM0.5m (low base effect). The decline mainly stemmed from higher start-up costs for its maiden telecommunication device. This, coupled with low operational efficiency and higher effective tax rate (21.3ppts) caused CNP margin to compress to 0.4% (-0.3ppt).

QoQ, CNP declined 97% attributed to weak seasonality (sales decreased by 24%) and operational deleveraging which saw EBIT margin compression by 10.5ppts to 1.0% (similar to 1Q18, -10.3ppt).

Seasonal ramp-up in 2H19. While 2Q19 should continue to see weakness on seasonality and lower efficiency for its new products, we believe 2H19 should see: (i) seasonal ramp-up alongside higher allocation from its Telecommunication customer, and (ii) mass production of its new products (industrial printing & production and medical segment) with full-year earnings contribution. The abovementioned should be able to comfortably support our estimated 2-year revenue/CNP CAGR of 8%/6%, post revision.

Trim FY19-20E earnings by 17-14% to RM43.0-48.5m. To be on the conservative side, we have reduced FY19/20E CNP margin (-0.9ppt; - 0.6ppt) to 5.9%/6.3% to account for the gestation period for its new product and slightly trimmed our bullish sales assumption by 5% for FY19/20E, resulting in a cut of FY19/20E CNP of 17%/14%.

Maintain OUTPERFORM with a lower Target Price of RM1.55 (from RM1.90) based on 14.0x FY19E PER. Even after our steep earnings revision, we think that there is good value proposition at current price level, following its 18% share price correction and with its Forward PER at only 12.6x vs. peers’ 3-year average of 14x. Note that this is all against the backdrop of its (i) relatively higher NP margin, (ii) decent dividend yield of 3.5%, and (iii) having strong parentage support from Foxconn Technology Group.

Risks to our call include: (i) slower-than-expected sales, (ii) loss of orders from its key customers, and (iii) adverse currency translations.

Source: Kenanga Research - 27 May 2019

Labels: PIE
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Kossan Rubber Industries - Solid 1Q19, Growth Powering Ahead

Author: kiasutrader   |  Publish date: Mon, 27 May 2019, 8:56 AM


1Q19 PATAMI of RM58.7m (-1.3% QoQ, +31.9% YoY) came in within expectations at 24%/25% of our/consensus fullyear forecasts. Subsequent earnings growth to be driven by Plant 16, 17 and 18. Volume sales from new capacity coupled with better efficiency from new plants are expected to offset any ASPs pressure. We roll forward our valuation from FY19E to FY20E. TP is raised from RM4.95 to RM5.25 based on 25.5x FY20E EPS. Reiterate OP.

1Q19 PATAMI of RM58.7m (-1.3% QoQ, +31.9% YoY) came in within expectations at 24%/25% of our/consensus full-year forecasts. No dividend was declared in this quarter as expected.

Key result highlights. QoQ, 1Q19 revenue fell 4.7% due to lower contribution from rubber gloves (-4.3%) on lower ASP (-7%) but negated by higher volume sales (+4.7%). The higher volume sales reflected the full-quarter contribution of new capacity from Plant 16 and 17. The Technical Rubber Product (TRP) division revenue decreased 7.4%, while PBT fell 19.5% due to lower deliveries and increase in raw material price (+8.2%). Overall, PBT margin expanded by 1.3ppt to 13.4% in 1Q19 compared to 12.1% in 4Q18 due to improved operational efficiencies from the new plants. This brings 1Q19 net profit to RM58.7m (-1.3% QoQ), dragged down by higher effective tax rate of 20.8% compared to 14.5% in 4Q18.

YoY, 1Q19 revenue rose 16% due to higher contribution from the Gloves division (+18.5%), underpinned by higher volume sales (+18.8%) which more than offset lower ASP (-3-5%). The TRP division’s revenue rose 7% while PBT soared 35% attributable to increased sales deliveries and sales of higher margin products. This brings 1Q19 PATAMI to RM58.7m (+31.9%) despite a higher effective tax rate of 20.8% compared to 14.6% in 1Q18.

Outlook. We are positive of earnings growth ahead since Plant 16,17,18 and 19 are expected to be fully taken up. We expect volume sales from new capacity coupled with better efficiency from new plants to offset any ASPs pressure. Looking ahead, Plant 16 and 17 are expected to anchor subsequent quarters’ earnings, which was fully commissioned in Aug 2018. It has an installed capacity of 3b pieces per annum and will focus on the Group’s patented Low Derma Technology gloves. The group has started commercial production of Plant 17 (1.5b pieces) in Nov 2018. Construction works for Plant 18 (2.5bn pieces) and Plant 19 (3.0bn pieces) are currently on track, with expected full commissioning by 3Q 2019 and 4Q 2019, respectively. Upon completion, these three new plants will add additional 7b pieces of gloves per annum, bringing the group’s total installed capacity to 35bn (+25%) pieces of gloves per year by end of FY2019. The next phase of expansion programme will be focused on Bidor, Perak, which is intended to accommodate the group’s expansion in a centralised location (i.e. an integrated glove manufacturing facility) over the medium and longer term. The Group expects the expansion, which is currently in the planning stage, to commence in 2020.

Maintain OUTPERFORM. We roll forward our valuation from FY19E to FY20E. TP is raised from RM4.95 to RM5.25 based on 25.5x FY20E EPS (+1.0SD above 5-year historical forward mean). We like Kossan because it is trading at an unwarranted 28% discount to peers’ PER average considering that its net profit growth is the highest at 23.7% compared to peers average at 12%.

Key risk to our call is slower-than-expected commissioning of the new plants.

Source: Kenanga Research - 27 May 2019

Labels: KOSSAN
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