Kenanga Research & Investment

Author: kiasutrader   |   Latest post: Fri, 24 Sep 2021, 9:25 AM


Hock Seng Lee Bhd - Within Ours But Below Street

Author: kiasutrader   |  Publish date: Fri, 24 Sep 2021, 9:25 AM

1HFY21 CNP of RM17.9m (+55% YoY) came within our expectation but below consensus which may have underestimated the FMCO impact. Furthermore, the rebound in 2HFY21 will not be strong but gradual as the group still faces ongoing supply disruptions of raw materials and foreign labour. YTD, HSL has replenished RM200m worth of jobs, in line with our RM400m target. Maintain MP with an unchanged TP of RM0.95 anchored to 10x Fwd. PER.

Within our but below consensus expectations. 2QFY21 CNP of RM8.8m led 1HFY21 CNP to RM17.9m – within our expectation at 50% but below consensus’ at 41% as they may have underestimated the FMCO impact starting June 2021. Furthermore, 2HFY21 is unlikely to see a strong rebound despite the higher vaccinations as raw material and foreign labour supply disruptions which is more acute in East Malaysia will impede the group from achieving optimal productivity.

No dividends as expected as the group continue to preserve cash in light of the ongoing pandemic. That said, as of 2QFY21, the group sits on a comfortable net cash pile of RM270m (RM0.46/share; all time high). For FY21, we expect dividends to be dished out once in 4QFY21, instead of the typical bi-annual dividend distributions in 2Q and 4Q which were practiced prior to Covid-19.

Results’ highlights. QoQ, 2QFY21 CNP of RM8.8m came off 4% mainly due to lower revenue in its construction segment (-25%) due to a full lockdown in June (FMCO). YoY, 1HFY21 CNP of RM17.9m improved 55% as it rebounded from a low base in 1HFY20 which was affected by the initial phases of Covid-19 lockdowns which were more stringent.

Outlook. YTD, HSL has replenished RM200m worth of projects; inline against our replenishment target of RM400m. Current outstanding order-book of RM1.7b provides visibility for the next three years.

Keep earnings forecasts unchanged post 2QFY21 results. Maintain MARKET PERFORM with an unchanged TP of RM0.95 pegged to 10x FY22E PER. Our ascribed valuations are in line with our small-to-mid cap coverage range of 9-11x.

Risks to our call include: continued resurgence of Covid-19 cases leading to fresh lockdowns.

Source: Kenanga Research - 24 Sept 2021

Labels: HSL
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Redtone Digital Bhd - Beneficiary of 5G and JENDELA

Author: kiasutrader   |  Publish date: Fri, 24 Sep 2021, 9:23 AM


Redtone, a provider of telco services and managed telco network services, is poised to benefit from: (i) potential wins from the RM4.6b JENDELA tender, (ii) engineering and maintenance jobs from the 5G rollout, and (iii) 5G-enabled connectivity and digital services. Having previously won 25%- 70% of large-scale government contracts, Redtone is well positioned to win some of the RM4.6b JENDELA tender, in our view. We call for a “Trading Buy” with a fair value of RM0.61. Its current forward PER of 13x makes it a cheaper play on JENDELA and Malaysia’s 5G rollout, compared to the 20~35x PER of the traditional telcos. Our FY22E DPS of 1.8 sen also implies a decent yield of 3.7%.

Potential beneficiary of JENDELA Phase 1 tender. Redtone has tendered for all RM4.6b worth of contracts in the JENDELA Phase 1 tender, (winners to be announced in next 4 weeks). Historically, Redtone has won 25%-70% of large-scale government contracts, with MCMC’s 2017 Time-3 being the latest one. Although historically, the Group’s gross margin has been around 40%, any large-scale project will likely bring lower gross margins, potentially around 20%. However, the sheer size of the large-scale projects should still bring material EPS enhancement. Our modelling shows that in the scenarios where Redtone wins 10/25/50/70% of the contracts worth RM4.6b, they will have EPS enhancements of 22/56/112/157% from FY21 CNP, assuming any incremental revenue is spread across five years.

5G a near- and long-term catalyst. Redtone’s MTNS will benefit from Malaysia’s 5G rollout and continue driving growth regardless of whether it wins any JENDELA tenders. As 5G networks require a greater number of sites, Redtone should benefit from more engineering and maintenance jobs from Malaysia’s 5G rollout, which Digital Nasional Berhad (DNB) has tasked Ericsson to do. We gathered that Redtone is currently in discussions with Ericsson, with whom Redtone has previously worked with to roll out 4G networks. Thus, we wouldn’t be surprised if Redtone wins jobs from Ericsson for the 5G network rollout. Management has also indicated that they have sufficient in-house resources to fulfil both JENDELA and 5G related jobs. When the 5G network is available, Redtone’s telco services as well as its Industry Digital Services (IDS) will benefit as they can offer 5Genabled services. The former will be able to tap on the network to offer enterprise customers 5G connectivity services, such as 5G FWA. The latter, which currently offers data centre and cloud, virtual reality, e-Health, and smart farming services, could also leverage on 5G’s low-latency capabilities to offer new or enhanced services.

“Trading Buy” with a FV of RM0.61 on 16x PER to its FY22E EPS of 3.80 sen. Note that our earnings estimate doesn’t include earnings contributions from the JENDELA Phase 1 tender, and thus any wins from the tender presents room for upside surprise. The 16x PER is at +2SD of its 3-years historical average of 11.3x and comparable to the 17x PER we have ascribed its closest peer OCK. We believe that Redtone deserves the valuation premium given the numerous catalysts behind its business segments and its earnings growth of 20%/13% in FY22/FY23. Its current forward PER of 13x makes it a cheaper play to gain exposure to JENDELA and 5G relative to the traditional telcos, with PER ranging from 20x to 35x. While telco infrastructure players’ stocks have risen in recent days in anticipation of the announcement of the JENDELA tender winners in the coming four weeks, we are calling a “Trading Buy” and advocate investors/traders to accumulate on weakness, as Redtone’s potential JENDELA tender wins could continue fuelling excitement in the stock.

Business Segments & Outlook

Telecommunications Services

In this segment, Redtone services the government, enterprises and SMEs, by providing broadband and voice connectivity services. The revenues from this segment are relatively recurring and stable, given the essential nature of connectivity. That said, the segment was adversely affected by the Covid-19 induced lockdowns, as the work-from-home trend meant that many enterprises no longer needed voice/broadband connectivity in offices, especially the customers in the hospitality and leisure industries. It’s worth noting that there are no cash collection concerns, as (i) Redtone serves thousands of customers in this segment, spreading out any collection risks, and (ii) the services are provided on a subscription-based model, therefore any non-payment will result in a termination of the service provided. While this segment ranks second (behind MTNS) in terms of revenue contribution, it is the most profitable with operating margins ranging from 36% to 41% over the last three financial years, and thus makes up a sizeable chunk of its operating profit (62%~86% over the last 3 financial years). Moving forward, we expect this trend to continue as the margin for this segment should remain stable. The key catalysts driving this segment include: (i) 5G-enabled services and (ii) recovery in Covid-hit sectors such as hospitality and leisure.

Managed Telco Network Services (MTNS)

In this segment, Redtone provides engineering of telco infrastructure, and maintenance and support services. This segment stands to benefit from both JENDELA and Malaysia’s 5G rollout. The higher number of sites for the 5G network bodes well for Redtone as it benefits from more engineering works (in the installation of infrastructure for the 5G network), as well as more recurring revenues from the maintenance and support services. We gathered that Redtone is currently in discussions with Ericsson regarding the 5G rollout. Having worked with Ericsson to roll out 4G, we believe that Redtone should be able to secure 5G rollout jobs from Ericsson. Importantly, management has indicated that they have sufficient in-house resources to fulfil the JENDELA and 5G jobs. In the unlikely event that Redtone does not get any additional jobs for JENDELA and 5G, its current order-book of RM130m should be able to support its MTNS revenues for over the next two years. In terms of profitability, this segment has an operating margin ranging from the mid to high teens, ranking this segment second in terms of profit contribution within the group. Key catalysts driving this segment include: (i) JENDELA tender wins, (ii) 5G rollout jobs, (iii) 5G site maintenance jobs.

Industry Digital Services (IDS)

We gathered from management that this is a complementary segment to its core business of telco services, as these are value-added services that customers can use in addition to Redtone’s connectivity services. For example, Redtone provides Cloud, Data Centre, VR, IoT (namely smart farming), and e-Healthcare services. Currently, this segment contributes only 2% to Redtone’s total revenue. Due to the complementary nature of this segment, we believe that this segment will likely grow in tandem with its telco services. Unlike the previous two segments, IDS has always been loss-making (on the operating level), as its staff and marketing costs have been weighing on its profitability. Even though its operating losses have been shrinking over the years (RM4.9m loss in FY18 vs. RM2.6m loss in FY21), we believe that this segment will likely continue to be loss making in the near-future, until the segment has reached a required level of scale to be profitable. Key catalysts driving this segment include: adoption of Cloud and data centre services.

JENDELA Phase 1 Tender

The Jalinan Digital Negara (JENDELA) plan is a government initiative aiming to enhance national digital connectivity and to prepare Malaysia for the 5G world. Phase 1 began in 2020 and will end in 2022, with its main goals being: (i) increase 4G coverage from 91.8% to 96.9%, (ii) increase mobile broadband speed from 25 Mbps to 35 Mbps, (iii) 83% premises nationwide to have access to gigabit speed of fixed broadband, and (iv) 3G sunset, upgrade of 4G and fiberisation. Phase 2 will likely begin in 2023 and targeted to end in 2025, with its main goals being: (i) 100% 4G coverage, (ii) 100 Mbps mobile speed, and (iii) full 5G deployment. The first phase of the JENDELA tender will cover the construction and setting up of 1,661 sites, which is more than 3x from the 500 sites planned for NFCP 2. The greater number of sites was driven by the need to expedite the resolution of Malaysia’s digital divide and to ensure a prompt 5G network rollout.

JENDELA Phase 1 is split into two parts, where the RM4.6b funding will be divided into 30% and 70% into Parts 1 and 2, respectively. Part 1 involves site acquisition and the installation of towers, and any interested licensee for Part 1 is required to hold a valid Network Facilities Provider (NFP) license. Part 2 involves the installation of network equipment, and requires the infrastructure provider to ensure interoperability with telcos’ networks to provide capacity for 2G and 4G services. Any interested licensee for Part 2 is required to hold both valid NFP and Network Services Provider (NSP) licenses. The nature of the licensing requirements makes Part 1 a more crowded and competitive space than Part 2. Redtone has both NFP and NSP licenses and is therefore eligible for both parts of the tender. While the winners of the tender were initially meant to be announced sometime in July/August, there has been a delay. That said, the Minister of Communications and Multimedia recently signalled that the winners will be announced over the next four weeks.

Cash-rich and cash generative business

Redtone has always had a healthy balance sheet, as it has been in a net cash position over the last five years, with its latest net cash position of RM83.6m continuing this healthy trend. Its latest cash balance of RM92.5m (or cash per share of RM0.12) also makes up a noteworthy 24% of its market cap. As a business with minimal capex requirements, shown by its annual capex intensity of <1%, along with annual capex of

Source: Kenanga Research - 24 Sept 2021

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Daily technical highlights – (REDTONE, GAMUDA)

Author: kiasutrader   |  Publish date: Fri, 24 Sep 2021, 9:09 AM

Redtone Digital Berhad (Trading Buy)

• After bottoming out at RM0.295 in November last year, REDTONE’s share price has been forming higher lows, indicating sustained buying interest at rising price levels.

• Since the stock broke above the 125-day SMA in February this year, it has trod above the dynamic support line with recent swing lows finding support along the way, suggesting that the long-term uptrend is intact.

• The MACD indicator is also signalling that the upward momentum will likely continue in the near term.

• With the Heikin Ashi candles signalling strengthening momentum too, an anticipated upward movement in the share price could challenge our resistance levels of RM0.56 (R1; 14% upside potential) and RM0.60 (R2; 22% upside potential).

• We have pegged our stop loss at RM0.43 (or a 12% downside risk).

• Fundamentally speaking, REDTONE is a provider of telecommunications and digital infrastructure services, offering data, voice and managed telecommunications network services to the government, enterprises and SMEs.

• In FY June 21, it earned a net profit of RM25m (-21% YoY) mainly due to weaker contributions from the telco services segment, which was hit by loss of customers from the hospitality and leisure sectors. Kenanga’s research team has forecasted that the group will post net earnings of RM30m in FYE June 22 and RM34m in FYE June 23, which translate to forward PERs of 12.8x and 11.3x, respectively.

• Looking ahead, as a participant in the government-led RM4.6b JENDELA Phase 1 tender and having won a market share of 25-70% of previous large-scale government projects, REDTONE is well-positioned to secure at least some of the upcoming JENDELA contracts. Should REDTONE be among the winners of the tender, which will likely be announced in the next 4 weeks, this is expected to give the stock price a boost.

• Aside from JENDELA, REDTONE also stands to benefit from Malaysia’s 5G network rollout as it: (i) may clinch more engineering jobs for 5G sites, and (ii) can offer 5G-enabled connectivity services.

Gamuda Bhd (Trading Buy)

• GAMUDA is Malaysia’s leading engineering, infrastructure and property group.

• In FY July 20, GAMUDA achieved a core net profit of RM520m (-28% YoY). Looking ahead, consensus is expecting GAMUDA to achieve a net profit of RM489m (-6% YoY) in FY July 21, mainly due to lower construction and property progress billings, as well as weaker tolled highway traffic flows, before increasing to RM595m (+22% YoY) in FY July 22. These translate to forward PERs of 16x and 13x, respectively.

• With its FY July 21 results slated to be announced on September 29, we believe that the weaker earnings expectations have already been priced in as investors look ahead to a year of recovery.

• In terms of news flow, we believe that the Prime Minister’s tabling of the 12th Malaysia Plan (12MP) in Parliament next Monday (September 27) – which may mention a list of upcoming mega infrastructure projects to pump prime the economy – could give a boost to construction stocks such as GAMUDA. Thus, we think it is timely now for investors to accumulate its shares ahead of the 12MP announcement.

• Technically speaking, the stock has formed a lower low in mid-August, which hit a bottom at RM2.60. Since then, the stock has rallied as much as 24% in less than a month before correcting subsequently to form a higher low of RM2.95, thus signalling an end of the downtrend that began in April 2021.

• The strong price rally also broke above the 50-day SMA. And with the latest swing low sitting comfortably above the 50-day SMA, the stock could be resuming its uptrend ahead.

• In addition, the MACD indicator shows that the downward momentum from the recent correction is waning while the stochastic indicator is reversing from an oversold position.

• With the aforementioned bullish signals, an anticipated upward movement in the share price could potentially challenge our resistance levels of RM3.45 (R1; 12% upside potential) and RM3.59 (R2; 17% upside potential).

• We have pegged our stop loss at RM2.73 (or an 11% downside risk).

Source: Kenanga Research - 24 Sept 2021

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United Malacca - Above Expectations

Author: kiasutrader   |  Publish date: Fri, 24 Sep 2021, 9:05 AM

1QFY22 CNP of RM18.4m is above both our and consensus’ expectations at 45% each due to higher CPO prices. FFB output at 25% and absence of DPS are as expected. Looking ahead, we anticipate sequential earnings improvement in 2QFY22 (higher FFB output and CPO prices). Raise FY22-23E CNP by 56-12% on higher CPO prices. Maintain MP with a higher TP of RM5.25 @ FY22E PBV of 0.80x (mean). ESG score is 55%.

Above our expectation. 1QFY22 registered Core Net Profit (CNP) of RM18.4m (+141% QoQ; +15x) which is deemed above both our and consensus’ estimates at 45% each mainly due to higher CPO prices. FFB output of 99k MT (+1% YoY) coming in at 25% of our estimate and absence of dividends are within expectations.

Results’ highlight. YoY, 1QFY22 registered CNP of RM18.4m (+15x; from a low base) mainly due to: (i) higher CPO/PK prices (+62%/+91%), and (ii) higher FFB output (+1%). QoQ, 1QFY22 CNP rose (+141%) on the back of: (i) higher CPO prices (+9%), (ii) higher FFB output (+19%), and lower taxation (-29%).

Sequential boost expected with higher CPO price and seasonal production improvements (peak crop). MPOB’s QTD-2QFY22 CPO price is 9% QoQ higher. Historically over the past five years, 1QFY22 FFB output accounted for ~26% of full-year production. Based on Bursa announcements, its Malaysia FFB output has started to pick up in August 2021 (+8% QoQ) and we expect the trend to continue. We are keeping our FY22 FFB growth of ~7%.

Raise FY22-23E earnings by 56-12% on higher CPO price of RM3,700- 3,200/MT from (~RM3,000/MT previously).

Maintain MARKET PERFORM with a higher TP of RM5.25 (from RM5.20) based on FY22E PBV of 0.8x. The Fwd. PBV reflects mean valuation, while at current price, it implies FY22E PER of 26.0x (vs. peers’ 16-18x) which we think is already generous. ESG score is 55%.

Risks to our call are stronger/weaker-than-expected CPO prices and higher/lower-than-expected production costs.

Source: Kenanga Research - 24 Sep 2021

Labels: UMCCA
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Yinson Holdings - Stable 2QFY22 Results

Author: kiasutrader   |  Publish date: Fri, 24 Sep 2021, 9:02 AM

YINSON’s 2QFY22 results remain largely stable (flattish QoQ) – reflecting the minimal changes in its business throughout the quarter, with higher EPCIC contribution offset by higher finance costs. It recently entered into exclusive negotiations with Enauta for the Atlanta FPSO, with an official contract award expected in 1QCY22. Meanwhile, it is still in active bids for Limbayong and Pecan. Maintain OP, with TP of RM6.00.

1HFY22 earnings slightly below our expectations. 1HFY22 core net profit of RM234m came in slightly below our expectation at 43% of our full-year forecasts, as we may have overestimated YINSON’s EPCIC profit contribution. Nonetheless, we would like to emphasize that these EPCIC profits arose due to the adoption of finance lease accounting, and hence, are non-cash in nature and do not impact its fundamental valuations. That said, against consensus, 1HFY22 is deemed to be in line with expectations at 50% of earnings forecast. First interim dividend of 4.0 sen per share is also within expectations.

Stable results overall. QoQ, 2QFY22 core net profit of RM118m remains flattish (+2%) – reflecting the stability and minimal changes in its business throughout the quarter. Higher EPCIC revenue from the FPSO Anna Nery conversion was slightly offset by the higher finance costs. Cumulatively, 1HFY22 also saw little changes YoY. Higher revenue from EPCIC and commencement in FPSO Abigail-Joseph in October 2020 was largely offset by the increase in finance costs.

Outlook remains promising. YINSON recently entered into exclusive negotiations with Enauta for the Atlanta Phase 2 FPSO. We expect a formal contract award to materialise by 1QCY22, which will further boost YINSON’s order-book to ~USD12b consisting of 8 FPSOs. The group is also eyeing potential bidding opportunities in Vietnam and Angola, as well as secured pre-FEED contracts for two of Total’s projects in Angola and Suriname. These aside, YINSON is still in active bids projects in Limbayong, Sabah, and Pecan, Ghana. Meanwhile on a longer-term view, we highlight YINSON to be one of the more promising names within the local oil and gas space in terms of energy transition, with the group eyeing to achieve a total renewable energy capacity of 3-5GW in the coming years.

Maintain OUTPERFORM, unchanged SoP-TP of RM6.00. Post results, we trim our FY22E/FY23E earnings by 8%/5% as we lowered our EPCIC profit contribution assumptions. Note that our valuations have not taken into consideration any further new contract wins beyond the recently-awarded Atlanta FPSO.

Risks to our call include: (i) project execution risk, and (ii) weaker- than-expected margins, and (iii) unexpected contract termination.

Source: Kenanga Research - 24 Sep 2021

Labels: YINSON
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JHM Consolidation - Gradual Improvements

Author: kiasutrader   |  Publish date: Thu, 23 Sep 2021, 9:24 AM

JHM posted 2QFY21 CNP of RM6.3m (+69% QoQ; +56% YoY), bringing 1HFY21 CNP to RM10.0m (+80% YoY) after adjusting for unrealised forex gain and land sale worth RM8.3m. The results came in below expectations, representing only 24% of both our and consensus full-year estimates. We expect the negative impact of MCO 3.0 to linger in 3QFY21 due to multiple lockdowns. On the bright side, orders have remained intact and JHM has been able to operate at 100% workforce since Sept, fuelling expectation for 4QFY21 which is seasonally its best quarter. Maintain MARKET PERFORM and lower Target Price of RM1.90.

Below expectation. JHM recorded 2QFY21 CNP of RM6.3m (+69% QoQ; +56% YoY), bringing 1HFY21 CNP to RM10.0m (+80% YoY) after adjusting for unrealised forex gain and land sale worth RM8.3m. The results came in below expectations, representing only 24% each of our and consensus full-year estimates.

Results’ highlight. QoQ, 2QFY21 CNP jumped 69% to RM6.3m despite revenue inching 5.5% lower to RM69.3m thanks to the recognition of RM3.6m profit guarantee shortfall from its subsidiary, Mace Instrumentation Sdn Bhd. The slower revenue recognition was a result of a 16% decline in the industrial segment, offsetting the 2% increase from the automotive segment which made up 64% of the group’s revenue.

YoY, 2QFY21 CNP rose 56% on the back of a 44% jump in revenue. Cumulatively, 1HFY21 CNP surged 80% to RM10.0m while revenue rose 48% to RM142.6m.

Hinging on the final quarter. While the group posted improved financials, its performance is still below our expectation as we believe the group could have done better when compared to local peers. Looking into 3QFY21, we believe the impact of MCO 3.0 will linger as northern Malaysia saw worsening Covid-19 cases during the period, especially in Kedah where the group is operating. This has caused further lockdowns, resulting in unabsorbed costs arising from newly installed facilities and equipment pending the qualification stage that has yet to be cleared as the new customers were unable to travel to conduct the necessary audits. On a positive note, the group did not experience any cancellation with orders remaining intact. With a fully vaccinated workforce, the group has been operating at 100% capacity since Sept, fuelling expectation for the 4Q which is typically its best quarter.

Reduced FY21E/FY22E CNP by 42%/13% to RM27.5m/RM40.8m, to account for higher cost during the extended lockdown and deferred production timeline.

Maintain our MARKET PERFORM call with a lower Target Price of RM1.90. We roll-forward our earnings base to FY22E, pegged to an unchanged PER of 26x (+1SD to its 3-year mean).

Risks to our call include: (i) lower-than-expected sales, (ii) reduction in orders from its key customers, and (iii) unfavourable currency translations.

Source: Kenanga Research - 23 Sept 2021

Labels: JHM
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