Valuation / Recommendation

We have a SUBSCRIBE recommendation on Yew Lee Pacific Group Berhad with a target price of RM0.33 based on FY23F EPS of 2.3 sen and a PE of 14.4x which is a 40% discount to the industrial sector 5-year average PE. We like Yew Lee for its strong market presence in Malaysia’s industrial brush industry, and vast geographical footprint across Asia. The target price represents a potential return of 18.0% over the IPO price.

Investment Insights

Strong market presence. Yew Lee is one of the largest players in Malaysia’s industrial brush industry, commanding a market share of 12.4% of the RM254.5m industry size in Malaysia as of 2021. As of FYE 2021, the manufacturing segment contributes 70.3% to the company’s revenue. To expand its revenue and to further strengthen its market share, the company plans to expand the range of industrial brushes to cater to specific manufacturing needs of other end-customers from the quarry, semiconductor, and glass making sector.

We think that with the expansion plans online, the company is well-positioned to expand its presence locally on the backdrop of a growing Malaysian industrial brush industry which is projected by Protégé Associates to grow at a 5-year CAGR of 9.6% from 2022 to 2026.

Vast geographical footprint in the Asian market. Yew Lee also has a vast geographical footprint in the Asian market, supplying industrial brushes, industrial hardware, and machinery part to markets such as Thailand and Indonesia via Yew Lee Thailand and Yew Lee Indonesia. As of FYE 2021, oversea sales contribute more than 15% to the group’s revenue.

Less labour intensive. To reduce the dependency on manual labour and reduce overhead costs, the company plans to increase automation levels of its manufacturing process by acquiring additional automated equipment and machineries. This will increase the automation of its manufacturing process and improve operating capacity of the manufacturing process for its industrial brushes by approximately 1.19 million pieces of industrial brushes per annum.

Experienced management team. The company has an experienced management team spearheaded by MD Mr Ang Lee Leong who has more than 36 years of experience in the industrial hardware and industrial brushes industry.

Risk factors. (1) Fluctuation of raw material prices. (2) .

Source: Mercury Securities Research - 20 May 2022

Valuation / Recommendation

Results were within expectations, achieving 27.2% and 29.9% of our full year revenue and profit forecasts for FY22 due to higher contributions from the distribution segment.

We maintain a BUY recommendation on QES Group Bhd with a revised TP of RM0.650 based on FY23F EPS 3.3 sen and peers average PE of 19.6x. We like the stock due to its attractive growth prospects, strong presence in the Asean region, and stable recurring income.

Investment Highlights

Distribution business recorded an increase in revenue of 33.3% yoy mainly due to an increase in product, materials, spares, and service respectively.

Manufacturing business recorded a 19.2% decrease in revenue yoy due to lower invoice revenue of inspection and handling equipment to semiconductor customers, in addition to supply chain and delivery issues.

The group has an order book of RM110m as of Apr 2022 which is expected to provide earnings visibility for the next 3 to 6 months.

Factory expansion. The company has completed the renovation of its Hicom- Glenmarie new factory at Shah Alam, running at 60% utilisation rate. We expect the factory to be fully utilised by end of FY22. The new factory has an overall space of 81,000 sq ft, an increase from 39,000 sq ft, where 35,000 sq ft is allocated for manufacturing. With the increased space, the company is able to increase its capacity from 50-80 machines to approximately 80-100 machines a year.

The company is also building another new factory in Batu Kawan, Penang to leverage on the existing matured supply chain within Penang. The factory will have a manufacturing space of approximately 100,000 sq ft to house a combined QES Mechatronics, QES Vision, AETM (JV between Applied Engineering Inc, USA (70%) and QES Group (30%)), and QES Distribution Penang operations. Construction of the factory is expected to begin from 2H22 onwards.

Stable recurring income and strong financial position. The company has a consistent annual recurring income of approximately RM40m via the maintenance and service of large equipment installed base which contributes approximately 25% to group revenue. Cash balance remain strong above RM71.4m as of 1Q22, in addition to a consistent net cash position since FY20.

Risk factor. Key risks include material supply chain disruption, and slower- than-expected contract flows.

Source: Mercury Securities Research - 20 May 2022

Valuation / Recommendation

Results were within expectations, achieving 114.3% and 105.6% of our full year revenue and profit forecasts for FY22 due to higher local oil and gas demand, stable palm oil prices, robust export demand and higher product prices.

We revise our revenue and earnings estimates upwards by 15.9-16.5% and 7.9-8.0% for FY23F-FY24F on the premise of higher growth for its manufacturing and trading division moving forward. We maintain a BUY recommendation on Pantech Group Holdings Bhd with a revised TP of RM0.930 based on FY23F EPS 9.3 sen and PE of 10.0x in line with the 5- years average. We like the stock due to its attractive dividend yield, and cheap valuations.

Investment Highlights

Key catalyst was from the manufacturing and trading division, contributing 49% and 51% to total revenue for the current quarter. Trading operations were optimised, and deliveries to local oil and gas sector increased.

Manufacturing operations were optimised. Results were stronger due to better product mix, resulting in higher product price, to meet increased export demand supported by the reopening of the economy and waning impact from the Covid-19 pandemic. We notice that nickel, which is a major raw material utilised by Pantech had increased in price but the impact was partially offset by higher ASP.

Oil & Gas (O&G) sector a growth driver. Petronas had allocated 20% of planned capex over the next 5 years from FY22. This suggests a positive industry outlook, potentially adding tally to the Group’s current order book of RM450m. With more than 50% of the Group’s earnings derived from this sector, Pantech is in the right position to benefit from the capex cycle.

Expect higher contributions from the palm oil industry. Pantech supplies oil pipes, valves, and fittings (PVFs) to the palm oil industry. We think that more contracts could be secured from the palm oil industry on the back of strong palm oil prices. We expect contributions from this segment to the company’s revenue to increase to 20% for FY23, up 4% from FY21. With more than 30,000 stock keeping units (SKUs), the company is better positioned to meet rising customer demands.

Pantech currently has an attractive dividend yield above 3%, with low gearing below 10%.

Dividend. Dividend of 1 sen per share was declared on 3Q22, ex on 25th Feb 2022. (9M22 – 2.5 sen, 3Q21 – 0.5 sen, 9M21 – 1.3 sen)

Risk factor. Key risks include fluctuation of steel and nickel prices, labour shortage, and slower-than-expected contract flow.

Source: Mercury Securities Research - 28 Apr 2022

Initiate with a BUY and MYR0.80 TP

We initiate coverage on InNature with a BUY and MYR0.80 target price premised on 20x FY23E PER, with FY23 being an earnings recovery year, continuing on from FY22. We forecast a +60% YoY rebound in core net profit in FY22E, and a more gradual +16% in FY23E and +10% in FY24E as sales at its physical stores recover from the pandemic impact, and as it continues on its new store openings in Malaysia, Vietnam and Cambodia.

International border reopening as near-term driver

InNature has an extensive The Body Shop (TBS) store network in Malaysia (77 end-2021) and Vietnam (39), primely located in major shopping malls and high-streets; the brand also has an established online presence (since 2012). The full reopening of international borders should further help revive sales as inbound tourists return; TBS stores located in high tourist traffic areas had previously contributed c.15% to total revenue. Vietnam and Cambodia meanwhile are long-term growth drivers due to the former’s population size and their tourism offerings.

ESG across all levels of operations

Besides sustainability embedded in its products (natural + eco-friendly + sustainably sourced), InNature also integrates ESG into all levels of its operations. It aims for ‘net zero’ by 2030, in-line with its franchisor’s commitment. It has also been very visible on its ethical stance. In terms of diversity, 4 (out of 5, or 80%) of its Board members are women. The company’s Code of Conduct and Business Ethics was updated in Feb 2020.

Run-away costs, FX fluctuation are some key risks

High commodity prices have a knock-on effect on production and logistic costs. Run-away costs and high inflation will impact not just pricing for InNature’s products, the latter may also affect demand. The sourcing of its product inventories from the UK (denominated in GBP) and Brazil (in USD), alongside its operations in Vietnam and Cambodia mean that InNature is exposed to currency fluctuation which may impact product pricing and/or profit margins, and reporting currency FX losses/gains.

Source: Maybank Research - 7 Apr 2022

Bursa Malaysia Berhad has launched the Bursa Research Incentive Scheme (Bursa RISE) which aims to improve the trading velocity and corporate profile of participating public-listed companies (PLCs) through research coverage and marketing activities.

Carried out by licensed research houses, the programme’s goal is to create a better appreciation of their fundamentals, leading to better value recognition for the companies.

“Bursa RISE is an initiative in line with the evolving capital market landscape where investors seek greater stakeholder engagement and more transparent communication,” said Datuk Muhamad Umar Swift, Chief Executive Officer of Bursa
Malaysia. “With the increasing emphasis on sustainable practices, I believe Bursa RISE will help participating PLCs raise the bar in corporate governance, transparency, and disclosure through more frequent and meaningful stakeholder engagements.”

The programme also includes the Investor Relations (IR) and Public Relations (PR) Incentive Programme, which provides IR and PR support to participating PLCs to enable better engagement with their stakeholders, shareholders, the investment
community, the media, and the public more effectively.

The new incentive scheme complements and supports the PLC Transformation programme which has the objective of encouraging listed companies to be more transparent in their performance, allowing investors to gain better insight to facilitate informed investment decision making. Further data based on a study of a past research programme, has shown that velocity for participating companies had improved as a result of increased research and profiling.

“With greater engagement and marketing efforts, we expect investors to pay more attention to the participating PLCs,” added Datuk Muhamad Umar Swift. “All these programmes we have put in place are expected to improve corporate accessibility for participating PLCs, while generating positive outcomes for PLCs, and greater opportunities for investors and stakeholders.”

• Top Glove’s 2QFY22 net profit of MYR87.5m was below our and consensus full-year estimates. Management expects margin outlook to stay challenging on rising raw material costs, partially cushioned by better utilisation and efficiency rates.
• Top Glove remains cautious and has scaled back on its expansion plan. It has also put its Hong Kong listing plan on hold for now.
• We lower our FY22/23/24 earnings forecasts for Top Glove by -40% to -48%. Post earnings adjustments, our target price for Top Glove is lowered to MYR0.91 (on an unchanged 13x CY23 PER). Maintain SELL.

Top Glove's 2QFY22 Profit More Than Halved Y-o-y and Q-o-q

• Top Glove's 2QFY22 (Dec 2021 to Feb 2022) net profit of MYR87.5m (-97% y-o-y, -53% q-o-q) lifted 1HFY22 (Sep 2021 to Feb 2022) net profit to MYR273m (-95% y-o-y), accounting for just 30%/34% of our and consensus full-year estimates.
• We attribute the weaker-than-expected earnings performance to lower utilisation rate (60% vs our assumption of 75%) and higher-than-expected raw material costs. The sharp y-o-y decline in 1H22 earnings was due to lower ASP and utilisation rate as well as the inclusion of the prosperity tax.

Highlights From Top Glove's 2QFY22 Conference Call

• Despite the 16% q-o-q decline in blended ASP to US$27/k pcs, Top Glove's 2QFY22 revenue just declined by -9% q-o-q thanks to higher sales volume (+10% q-o-q) and better utilisation rate of 60% in 2QFY22 (from 50%+ in 1QFY22). Nevertheless, Top Glove's 2QFY22 net profit declined sharply mainly due to higher raw material costs. As a result, EBITDA margin was down -57ppt y-o-y and - 8ppt q-o-q to 13.3%.
• Top Glove expects sales and utilisation rate to improve in the coming quarters as customers’ restocking activities are gaining momentum. Higher utilisation (76% in Mar 22) and efficiency rates should help to cushion the impact from higher raw material prices.

Top Glove - Earnings Adjustments

• We lower our FY22/23/24 earnings forecasts for Top Glove by -44.7%/-40.4%/-47.7% to factor in:
  • lower utilisation rate of 66%/75%/75% (from 73%/80%/80%) for FY22/23/24,
  • higher electricity, gas and labour costs and
  • slower capacity expansion while maintaining our FY22/FY23/FY24 blended ASP of US$24/21/21 per k pcs.
• We have not factored in additional number of shares from its Hong Kong listing, which has been put on hold for now.

Source: Maybank Research - 10 Mar 2022

Valuation / Recommendation

We have a SUBSCRIBE recommendation on Farm Fresh Berhad with a target price of RM1.53 based on peers average PE of 28.8x and FY23F EPS of 5.3 sen.

We like Farm Fresh for its strong market presence in Malaysia’s dairy industry, local and regional expansion plans. The company has a dividend policy of 25%.

The target price represents a potential return of 13.3% over the IPO price.

Investment Insights

Strong market presence. Farm Fresh is one of the biggest and fastest growing players in Malaysia’s dairy industry. The company has a strong market presence across various dairy categories in Malaysia as of 9M21, commanding (1.) 42% market share in Chilled RTD Milk (54% in Chilled RTD Milk products manufactured with fresh milk), (2.) 10% in Ambient RTD Milk (48% in Ambient RTD Milk products manufactured with fresh milk), and (3.) 11% in Yoghurt. We think that the company is well-positioned to expand its presence locally on the backdrop of a growing Malaysian dairy industry which is projected by Frost & Sullivan to grow at a 5-year CAGR of 10%, 8%, 7% for the Chilled RTD Milk, Ambient RTD Milk, and Yoghurt industry from 2020 to 2025.

New dairy farm and integrated processing facility to spur growth. As at LPD, Farm Fresh is exploring with a company to utilise its existing land spanning 500- 1,000 acres for the establishment of an integrated dairy project, with the first heifer expected to arrive by 1Q24. The new farm is expected to have a capacity of 3,000 dairy cows, increasing the aggregate capacity by 25.4% to 14,834 dairy cows.

Completion of the new manufacturing hub is expected to increase total annual production capacity of finished chilled RTD products by 20.8m litres with the additional 2 filling and packaging lines.

Regional expansion. The company plans to increase production capabilities in Australia through the expansion of the Kyabram Facility, which will allow the Group to manufacture UHT/ambient products to serve as an export hub to the Asia- Pacific region. Expansion is expected to begin in 1H22 and production expected to commence in 2Q23. The company also seeks to expand its presence in Indonesia and the Philippines by establishing new production and distribution capabilities, which will increase total annual production capacity by approximately 20.8m litres of finish products. RTD milk segment in Indonesia and Philippines is expected to grow at a 5-year CAGR of 9.3% and 6.5% from 2020 to 2025 as forecasted by Frost & Sullivan.

Experienced management team. The company has an experienced management team spearheaded by managing director Mr Loi Tuan Ee who has more than 15 years of experience in the dairy industry.

Risk factors. (1) Fluctuation of feed prices. (2) Labour shortages. (3) Unexpected pandemics of infectious disease.

Source: Mercury Securities Research - 3 Mar 2022

Valuation / Recommendation

We have a SUBSCRIBE recommendation on Farm Fresh Berhad with a target price of RM1.53 based on peers average PE of 28.8x and FY23F EPS of 5.3 sen. We like Farm Fresh for its strong market presence in Malaysia’s dairy industry, local and regional expansion plans. The company has a dividend policy of 25%. The target price represents a potential return of 13.3% over the IPO price.

Investment Insights

Strong market presence. Farm Fresh is one of the biggest and fastest growing players in Malaysia’s dairy industry. The company has a strong market presence across various dairy categories in Malaysia as of 9M21, commanding (1.) 42% market share in Chilled RTD Milk (54% in Chilled RTD Milk products manufactured with fresh milk), (2.) 10% in Ambient RTD Milk (48% in Ambient RTD Milk products manufactured with fresh milk), and (3.) 11% in Yoghurt. We think that the company is well-positioned to expand its presence locally on the backdrop of a growing Malaysian dairy industry which is projected by Frost & Sullivan to grow at a 5-year CAGR of 10%, 8%, 7% for the Chilled RTD Milk, Ambient RTD Milk, and Yoghurt industry from 2020 to 2025.

New dairy farm and integrated processing facility to spur growth. As at LPD, Farm Fresh is exploring with a company to utilise its existing land spanning 500- 1,000 acres for the establishment of an integrated dairy project, with the first heifer expected to arrive by 1Q24. The new farm is expected to have a capacity of 3,000 dairy cows, increasing the aggregate capacity by 25.4% to 14,834 dairy cows. Completion of the new manufacturing hub is expected to increase total annual production capacity of finished chilled RTD products by 20.8m litres with the additional 2 filling and packaging lines.

Regional expansion. The company plans to increase production capabilities in Australia through the expansion of the Kyabram Facility, which will allow the Group to manufacture UHT/ambient products to serve as an export hub to the AsiaPacific region. Expansion is expected to begin in 1H22 and production expected to commence in 2Q23. The company also seeks to expand its presence in Indonesia and the Philippines by establishing new production and distribution capabilities, which will increase total annual production capacity by approximately 20.8m litres of finish products. RTD milk segment in Indonesia and Philippines is expected to grow at a 5-year CAGR of 9.3% and 6.5% from 2020 to 2025 as forecasted by Frost & Sullivan.

Experienced management team. The company has an experienced management team spearheaded by managing director Mr Loi Tuan Ee who has more than 15 years of experience in the dairy industry.

Risk factors. (1) Fluctuation of feed prices. (2) Labour shortages. (3) Unexpected pandemics of infectious disease

Source: Mercury Research - 2 Mar 2022

Valuation / Recommendation

Results were within expectations, achieving 103.1% and 103.4% of our full year revenue and profit forecasts for FY21, driven by increased contributions from concession services, such as the (1) online renewal of (MIRT) and (CDL), (2) commercial services such as Covid-19 health screening and quarantine collection services (MySafeTravel and MySafeQ).

We maintain a BUY recommendation on MY E.G. Services Berhad over a TP of RM1.11 based on its FY23F EPS of 5.0 sen and PE of 22.1x, in line with the 2-year average.

Investment Highlights

Overall online transaction volumes increased for existing concession and commercial services due to more users opting to transact online amid the Covid-19 pandemic. Contributions from its road transport business increased due to higher online transactions overall for all services, contributing approximately 25-30% to FY21 revenue. At the end of 2021, the company commenced the pilot for automated driver testing which is expected to go live and be commercialised in April 2022.

We think that contributions from its new concession and commercial services will increase moving forward amid waning impact from the Covid-19 pandemic. Lower Covid-19 local cases will attract more inbound travel into Malaysia, driving demand for the company’s traveller testing and quarantine services, offsetting lower local demand for hotel quarantine services.

Assuming no repeat lockdowns, we expect travel-related testing, quarantine, and vaccine verification services to be the main drivers in the coming quarter.

Risk factor. Unexpected termination of concession contracts which may affect earnings visibility moving forward.

Source: Mercury Securities Research - 3 Mar 2022

Valuation / Recommendation

Results were within expectations, achieving 103.1% and 103.4% of our full year revenue and profit forecasts for FY21, driven by increased contributions from concession services, such as the (1) online renewal of (MIRT) and (CDL), (2) commercial services such as Covid-19 health screening and quarantine collection services (MySafeTravel and MySafeQ).

We maintain a BUY recommendation on MY E.G. Services Berhad over a TP of RM1.11 based on its FY23F EPS of 5.0 sen and PE of 22.1x, in line with the 2-year average.

Investment Highlights

Overall online transaction volumes increased for existing concession and commercial services due to more users opting to transact online amid the Covid-19 pandemic. Contributions from its road transport business increased due to higher online transactions overall for all services, contributing approximately 25-30% to FY21 revenue. At the end of 2021, the company commenced the pilot for automated driver testing which is expected to go live and be commercialised in April 2022.

We think that contributions from its new concession and commercial services will increase moving forward amid waning impact from the Covid-19 pandemic. Lower Covid-19 local cases will attract more inbound travel into Malaysia, driving demand for the company’s traveller testing and quarantine services, offsetting lower local demand for hotel quarantine services. Assuming no repeat lockdowns, we expect travel-related testing, quarantine, and vaccine verification services to be the main drivers in the coming quarter.

Risk factor. Unexpected termination of concession contracts which may affect earnings visibility moving forward.

Source: Mercury Research - 28 Feb 2022