MIDF Sector Research

Author: sectoranalyst   |   Latest post: Wed, 28 Oct 2020, 10:51 AM


Globetronics Technology Berhad - Rebound in 3Q20 Earnings Post Pandemic

Author: sectoranalyst   |  Publish date: Wed, 28 Oct 2020, 10:51 AM


  • 3QFY02 normalised earnings improved by +337.9%qoq due to higher volume loading and return of full workforce
  • 9MFY20 normalised earnings amounted to RM32.3m (+10.4%yoy), supported by the South East Asia segment
  • Dividend payout could remain low in order to preserve cash to meet future capex commitment
  • Valuation is more expensive as compare to its peers who possess stronger earnings growth prospect
  • Upgrade to NEUTRAL with a revised TP of RM2.57

Slight improvement in quarterly earnings. Globetronics Technology Bhd (GTB) 3QFY20 normalised earnings remained resilient at RM18.7m (+2.6%yoy) as compared to RM18.2 achieved in 3QFY19. This was mainly driven by lower effective tax rate. Meanwhile, on a quarter-overquarter basis, the normalised earnings improved by more than three folds due to higher volume loadings as well as operation running at 100% workforce capacity. To recall, during the MCO, GTB’s operation was running at 50% workforce capacity.

Above expectation. Cumulatively, 9M20 normalised earnings amounted to RM32.3m, an improvement of +10.4%yoy. This was mainly supported by the +4.5%yoy increase in 9M20 revenue to RM164.4m. Note that revenue from the South East Asia segment has improved by +6.0%yoy to RM154.0m. However, the North America segment posted a -26.0%yoy contraction in revenue to RM8.4m. Nevertheless, we view that GTB’s 9M20 financial performance came in better than our expectation, although it accounts for 76.1% of FY20 full year earnings estimates. We expect the group to perform reasonably well in 4QFY20.

Impact. We are adjusting our FY20-22 earnings higher to RM51.2- 83.0m. This is due to our upward revision in our volume loadings assumption which also led to improvement in profit margin assumption.

Target price. While we expect the group’s outlook to improve, we view that the dividend payout would be capped as we view that there is more urgency to build a bigger cash reserve to meet their capex commitment. Given that future dividend payout would not reflect the group’s earnings outlook, we view that it would be more appropriate value the stock using PER valuation methodology as compared to dividend discount model (DDM) valuation methodology. Following our change in our earnings estimate as well as valuation methodology, we arrive at a new target price of RM2.57 (previously RM1.77). This is premised on pegging FY21 EPS of 9.9sen against the group’s two year historical average PER of 26x.

Upgrade to NEUTRAL. The group has made a strong earnings recovery post the pandemic as evident in its 3Q20 quarterly results. This has been better than we had anticipated. Moving forward, we expect a more consistent earnings growth. This would be mainly supported by the group’s new generation of smart sensors which include light, gesture and motion sensors. In addition, the recovery in automotive market would also lend a supported to the group’s LED business. Nevertheless, the earnings growth prospect of GTB would seem to be less enthusiastic as compared to its peers which we believe is more aggressive in expanding the business. This would also suggest at the group’s current valuation of approximately 40x is much more expensive as compared to its peers. In addition, we opine that dividend yield would only hover around 3% as we expect the group to increase its cash reserve to meet future capex commitment. All factors considered, we are upgrading our recommendation for GTB to NEUTRAL from sell previously.

Source: MIDF Research - 28 Oct 2020

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Al-`Aqar Healthcare REIT - Proposes Private Placement

Author: sectoranalyst   |  Publish date: Wed, 28 Oct 2020, 10:49 AM


  • Proposes private placement to raise RM50m
  • Proceeds from private placement mainly for repayment of borrowings
  • Minimal earnings impact from the proposed private placement
  • Earnings forecast maintained
  • Maintain Neutral with a revised TP of RM1.35

Proposes private placement to raise RM50m. Al-‘Aqar Healthcare REIT (Al-‘Aqar) proposes to undertake a private placement of up to 20% of its total number of units issued to raise gross proceeds of up to RM50m. The number of Al-‘Aqar units to be placed will be dependent on the issue price of placement shares which will be fixed at a later date.

Proceeds from private placement mainly for repayment of borrowings. From proceeds of up to RM50m from the proposed private placement, Al-‘Aqar earmarks RM30m which is equivalent to 60% of the total proceeds for repayment of Islamic financing. Gearing of Al-‘Aqar is expected to reduce marginally to 0.39x from net gearing level of 0.41x as of 2QFY20. Note that gearing of Al-‘Aqar increased in the recent years from net gearing of 0.37x in FY17 due to assets acquisitions which were financed by Islamic financing. Meanwhile, Al-‘Aqar earmarks RM15.3m from proceeds of private placement for future acquisitions while RM4m for capital expenditure.

Minimal earnings impact from the proposed private placement. Al-‘Aqar expects the repayment of the Islamic financing to result in cost savings of RM1.7m based on profit rate of 5.75% per annum. Earnings impact from the cost savings is expected to be minimal as we expect increase in FY21F earnings to be at ~3%. Nevertheless, earnings per unit (EPU) for FY21 is expected to be diluted by ~2.5% post private placement. Meanwhile, we make no changes to our earnings forecast pending completion of the private placement.

Maintain Neutral with a revised TP of RM1.35. We revise our TP for Al-‘Aqar to RM1.35 from RM1.42 as we reduce terminal growth rate assumption in our Dividend Discount Model (DDM) to 1.5% from 1.9% due to muted outlook for its healthcare assets. Earnings outlook for Al- ‘Aqar in FY20 is also expected to be dragged by rental assistance to hospital tenants due to adverse impact from Covid-19 pandemic. Hence, we maintain our Neutral call on Al-‘Aqar.

Source: MIDF Research - 28 Oct 2020

Labels: ALAQAR
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Bursa Malaysia Berhad - Main Beneficiary of a Trading Mania

Author: sectoranalyst   |  Publish date: Wed, 28 Oct 2020, 10:43 AM


  • Blew past our expectation
  • Strong PATAMI growth from higher trading revenue in 3QFY20
  • Trading interest increased especially from retail segment, a key driver to earnings
  • However, more of an exception rather than a “new” norm
  • Earnings forecast revised upwards for FY20/FY21/FY22
  • Positives priced in. Downgrade to NEUTRAL with revised TP of RM8.90 (from RM6.45)

Surpassed expectations. Bursa posted an even stronger quarter in 3QFY20. As a result, 9MFY20 PATAMI blew past our expectation for this year, reaching our full year estimate. The variance was due to our underestimation of the trading interest leading to higher than expected revenue growth.

Trading interest caused revenue strong growth. Bursa 9MFY20 PATAMI almost doubled following the performance of its 3QFY20 PATAMI where it more than doubled. Main driver was the strong revenue growth for both 9MFY20 and 3QFY20. Operating revenue in 9MFY20 grew +55.0%yoy as securities trading revenue grew +101%yoy. The higher securities trading revenue was due to higher trading interest especially coming from the retail segment. Average daily value OMT (ADV-OMT) rose +101%yoy to RM4.0b for 9MFY20, while the 3QFY20 ADV-OMT expanded +208%yoy and +52.0%qoq. Retail participation rate grew from 24% in 9MFY19 to 37% in 9MFY20.

Market capitalization fell on profit taking activities. Nevertheless, Bursa saw its market capitalization fell -2.1%yoy to RM1.64t as at 3QFY20. We believe that this was due to profit taking activities in September after the trading mania that ensued in the month of July and August. This is evident by the FBMKLCI registering a +0.3% change in the quarter.

Operating expenses well in check. Total operating expenses grew on a slower pace than revenue. It increased +10.6%yoy to RM199.4m. Amongst the contributor was a higher manpower cost which was due to higher provision of variable costs, increase IT maintenance and higher professional fees.

Potentially more volatility from increased uncertainty. We are not discounting that there could be more volatility to the market given the various uncertainties both domestically and externally, such as domestic politics and resurgence of Covid-19. This may bode well for its 4QFY20 earnings.

Earnings estimates. We are revising our FY20/FY21/FY22 earnings forecast upwards to RM336.8m/RM325.7m/RM302.1m to take into account the increase in trading interest.

Recommendation. We believe that the increase in trading interest this year is an exception rather than a “new” normal. However, we do believe that it will still carry onto next year. Having said that, we believe that it has already been priced in. Therefore, we downgrade our call to NEUTRAL (from TRADING BUY). We revised our TP to RM8.90 (from RM6.45). Our TP is based on pegging FY21 EPS to PER of 22x.

Source: MIDF Research - 28 Oct 2020

Labels: BURSA
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CIMB Group Holdings Berhad - More Concerns Than Optimism

Author: sectoranalyst   |  Publish date: Wed, 28 Oct 2020, 10:40 AM


  • Visibility on asset quality is still low due to increased uncertainty
  • New “lockdowns” is a concern but impact will likely be less than before
  • Top line seems to have improved in 3QFY20
  • Goodwill write-off a possibility
  • Maintain FY20, FY21 and FY22 forecast  
  • Maintain NEUTRAL with unchanged TP of RM3.50

New concerns. The Group CFO gave us an update yesterday. Below are the key take away:

  • Visibility is still low in terms assessing its asset quality, especially the recent surge in Covid-19 cases and governments’ response
  • Provisions expected to remain elevated in 3QFY20
  • Top line for 3QFY20 looked decent. Plan to grow NOII at faster pace than NII for Forward23+ (F23+)

Still low visibility on asset quality. The management indicated that the visibility in terms on providing definitive guidance is still low. While it has been almost a month since the end of the loan moratorium in Malaysia, the current surge in Covid-19 pandemic domestically and globally results in a very fluid situation. The management is concern on governments’ response to this surge with possibility of renewed lockdowns. This will affect employment and businesses, which may lead to currently untroubled borrowers to require assistance.

It will not be the same situation as before. Nevertheless, we believe that there will not be a repeat of the situation in March and April this year, where we were in the Movement Control Order (MCO) and majority economic activities halted. Asset quality may deteriorate further from the “lockdowns” but we opine that it will be more limited, as the current Conditional Movement Control Order (CMCO) is less restrictive and more targeted.

Provisions will remain elevated. The management guided that provisions will remain elevated in 3QFY20. This will be due to forward looking adjustments as we had observed in the previous quarter. The management will include a management overlay to credit cost. Also, there will be “top up” provisions for legacy accounts in Indonesia and Singapore following from the surge in Covid-19 new cases globally. This is in line with our expectation but we expect it will slightly improve in 2HFY20 and FY21 due to absence of lumpy credit impairment seen in 1HFY20. Management is guiding a credit cost of 150bp to 200bp over the next two years

Overall NIM stable for 3QFY20. Overall, NIM for the Group seems stable for 3QFY20. In Malaysia, there could be an improvement on a sequential quarter basis. This is due to the fact that there will not be a repeat of the modification loss seen in 2QFY20. Also, the continued CASA growth and repricing of deposits from the OPR cuts will provide boost to NIM. Similarly, NIM in Thailand is stable while it is turning around in Singapore. However, NIM might face compression pressure in Indonesia as there is a lag effect to the rate cuts there and an underlying yield pressure.

NOII could come in higher. NOII could also see an improvement in 3QFY20. We understand that this will come from Treasury and Market operations. In the recently released F23+ plan by the Group, it is planning to grow NOII at a faster pace than NII on a CAGR basis. However, this does not entail taking unnecessary risk. We understand that it will be via strengthening the Treasury and Market operations in Singapore and Indonesia and focusing on growing its wealth management business.

Goodwill write-off a possibility. One possibility that the management is considering is the write-off of its goodwill. The goodwill had been accumulated through its acquisitions over the years. Given this, the Group may write-off its goodwill in stages. This could give an immediate uplift in ROE and increase the possibility of a higher dividend payout or removing its Dividend Reinvestment Scheme in later years.

No change in earnings forecast. We are maintaining our earnings forecast as the Group will be releasing its result next month.

Valuation and recommendation. We recognize the headwinds that the Group will be facing this year and next in light of the Covid-19 pandemic. We expect that credit cost might remain elevated up until 1HFY21 especially with low visibility on asset quality and resurgence in Covid-19 new cases. We will continue to monitor asset quality closely to see the impact post loan moratorium. However, we do believe that the Group will be facing current headwinds in the position of strength given the build-up of capital over the years. Moreover, we believe that since the Group is a Domestic Systemically Important Banks, it might be supported. Therefore, we maintain our call NEUTRAL with unchanged TP of RM3.50 based on pegging our FY21 BVPS to PBV of 0.6x. Although the expected total returns of the Group is more than 10% which should require us to upgrade our call, we are maintaining it at current juncture. This is due to our cautious stance in regards to the Group’s asset quality. We do not discount the possibility of revision in earnings forecast after the release of its 3QFY21 result which will lead to an adjustment to our TP.

Source: MIDF Research - 28 Oct 2020

Labels: CIMB
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Malaysia Marine & Heavy Engineering - Regaining Momentum Amidst Adversity

Author: sectoranalyst   |  Publish date: Wed, 28 Oct 2020, 10:35 AM


  • Malaysia Marine & Heavy Engineering (MHB) returned to black with a net profit of RM2.4m in 3QFY20
  • Earnings was supported by higher revenue recognition from heavy engineering’s on-going projects and absence of oneoff costs during the quarter
  • Marine segment returned to black during the quarter despite lower revenue and higher unabsorbed overhead cost
  • FY20-21F earnings maintained
  • Upgrade to TRADING BUY with an unchanged TP of RM0.37 per share

Returned to black, once again. Malaysia Marine and Heavy Engineering (MHB) returned to black with a net profit of RM2.4m in 3QFY20. This brings its 9MFY20 cumulative normalised loss to -RM89.1m which was within our but above consensus’ expectations. Comparing against 3QFY19, revenue climbed by +45.3%yoy meanwhile; earnings surged by >100%yoy during the quarter respectively. Similarly, on a quarterly sequential basis; revenue and earnings surged by >100.0%yoy. The improved performance during the quarter can be primarily attributed to higher revenue recognition from its heavy engineering segment as well as; the absence of the one-off costs such as: (i) costs associated with the management of Covid-19 worth RM90.0m and; (ii) impairment of RM300.0m which were fully incurred in 2QFY20.

Heavy Engineering. The Heavy Engineering segment revenue climbed by +77.3%yoy to RM270.9m during the quarter due to the higher revenue recognition from its the ongoing projects. The projects that contributed to higher revenue during the quarter were the Kasawari, Bekok, Bergading and Bokor. Consequently, the segment also recorded an operating profit of RM0.2m or an increase of >100%yoy following the progress on current ongoing projects and completion of several notable projects during the quarter such as: Bokor Phase 3 Re-Development CPP and Bergading MRU Module which have sailed away during the quarter.

Marine Repair & Conversion. Meanwhile, the marine segment recorded lower revenue of RM98.6m or a marginal contraction of - 2.9%yoy during the quarter. This was mainly attributable to lower number of vessels secured for dry-docking services on LPG vessels and conversion works done on vessels during the quarter following the slowdown in the world’s economy due to the Covid-19 pandemic. Consequently, it recorded lower operating profit vs 3QFY19 at RM1.2m or a contraction of -51.7%yoy due to higher unabsorbed overhead. That said, the segment returned to black during the quarter vs an operating loss of -RM30.0m in the preceding quarter.

Orderbook update. The company’s current orderbook as of end-September 2020 stands at RM2,497.2m (from RM2,598.4m previously in June 2020). Currently, >70% of the orderbook is attributable to the Kasawari Gas Development. Meanwhile, its tenderbook currently stands at RM12.26b with 79% of the tenders are for international projects with the remaining 21% are for local projects respectively.

Earnings revision. We are maintaining our FY20-21F earnings expectations at this juncture as we opine that MHB will be able to meet our earnings projections. That said, we have factored in our current projections; a slower recovery in earnings following the recent development of Covid-19 globally which is currently seeing newly infected cases elevating in some countries.

Target Price unchanged at RM0.37. We are making no changes to our TP of RM0.37 at this juncture. Our TP is premised on PER21 of 17x pegged to EPS21 of 2.2sen.

Upgrade to TRADING BUY. We are upgrading our recommendation on MHB to TRADING BUY (from NEUTRAL previously). We opine that the upgrade is timely given that we believe that the worst is over for the company and MHB’s earnings could potentially surprise on the upside in the near future despite the current challenging operating environment. This is as we are expecting MHB will stage gradual and steady recovery from 2HFY20 onwards to be driven by: (i) better revenue recognition from ongoing projects as progress of project increases (ii) and; completion of Dry Dock 3 which is expected to start contributing in terms of revenue in 1QFY21. While the current operating environment plagued by the COVID-19 pandemic has yet to show signs of abating – which could dampen its chances of securing new projects; we opine that MHB’s performance going forward will be more reliant on its effort in improving internal operational condition (i.e: cost optimisation etc) and maintaining uninterupted progress of its ongoing projects.

Source: MIDF Research - 28 Oct 2020

Labels: MHB
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Supermax Corporation Berhad - Growing Global Ambition

Author: sectoranalyst   |  Publish date: Wed, 28 Oct 2020, 10:33 AM


  • 1QFY21 earnings beat expectations
  • 1QFY21 net profit up by 98.3%qoq to RM793.5m
  • Still room for ASP growth
  • Plans to build plants overseas
  • Eyeing dual listing in Singapore
  • Maintain BUY with an unchanged TP RM13.83

1QFY21 earnings beat expectations. Supermax’s 1QFY21 core net earnings of RM793.5m came in above our and consensus’ expectations, making up 37.7% and 40.9% of our and consensus’ full year estimates respectively. The positive deviation can be attributed to its better than expected margin.

1QFY21 net profit swelled by 1345.1%yoy to RM793.5m as revenue jumped by 79%yoy to RM1,352.5m. The surge in net profit can be attributed in its OBM model, which allows it to command higher margins through its own distribution channels. The model enables it to sell directly to end users and more so during the pandemic, hence making the higher profit margin. Other than selling medical gloves, the company also distributes other personal protective equipment (PPE) such as face masks and protective gowns, which had also garnered good margins. Income contribution from manufacturing is 65% while the remaining 35% is from distribution. For the product mix during the quarter, 68% is nitrile glove, 25% latex powder-free glove, 5% powder latex glove and 2% surgical glove.

Sequentially, 1QFY21 net profit almost double compared to 4QFY20 thanks to higher quarter-on-quarter average selling prices (ASPs) and even more lucrative margins due to better production efficiency and distribution margins for other PPE products. This was also boosted by additional capacity from its Block A lines in Plant 12, which added 2.2 billion pieces p.a. to its volume. The completion of Block B in Plant 12 is expected to add another 2.2 billion pieces p.a. by 4QCY20. In 1QFY21, it exports 58% of production under its own brand (versus 55% in 4QFY20 and 40% prior to the pandemic). Sales through independent distributors are 40% (vs 30% pre-pandemic) while OEM only accounted for 2% of sales compared to 5% in 4QFY20 and 30% pre-pandemic. This results in PATANCI margin expanding further by 15.7ppt to 58.7% in 1QFY21.

Still room for ASP growth. During the briefing post-results, management guided that the company is still in an oversold position and that there is still room for ASPs to increase in the coming quarters, albeit at a smaller percentage. The demand is also seen in capacity been taken up until end of 2021 compared to about mid of 2021 guided previously. It continues to receive 30% to 50% for deposits for the orders.

Capex of RM1.3b for 5 new plants in Malaysia and another USD550m (RM2.3b) for plants in US. The company has earmarked RM1.3b for Plant 13, 14, 15, 16 and 17 in Klang. The progress of the 5 new plants is at various stages with commissioning plans from 2021 to 2022. Currently, construction works are on-going at Plant 13 and 14. It targets to bring its capacity to 48.4 billion pieces by end of 2022 with the new plants. Meanwhile, it is also working with government agencies in the US to build factories there for the US market. It plans to allocate USD300m for the first phase and USD250m for the second phase. In the long-run, it targets to build a capacity of ~15 billion pieces of gloves for the US market, specifically supplying to the US government agencies and hospitals initially. Ultimately, its ambition is to capture ~10% of US market with US-made gloves from its production capacity there. The company is at the stage of identifying suitable sites for the plant in the US. Other than the US, it is also eyeing to build a plant in the UK with a budget of GBP50m (RM271.5m) and a targeted capacity of 220 million pieces of gloves per year. Meanwhile, it has started the commissioning of its Canadian face mask production and delivered a few million pieces to the Canadian government. We believe that its expansion plans can be supported by its strong balance sheet as net cash stood at RM2.1b as of endSeptember.

Eyeing dual listing in Singapore. The company is in the midst of appointing an investment bank (IB) for its plans to list on the Singapore stock exchange. It aims to raise funds for its future expansion plans, to widen its shareholders base and to expose its name to the global financial market. It expects to share more details after the announcement of the appointment of the IB. It targets to complete the exercise in 6 months upon the appointment.

Earnings forecast revised upwards. We revise our FY21F earnings forecast by +44.3% as we factor in higher margins due to its higher own-brand sales and higher sales from its distribution business. We maintain our FY22F earnings estimates for now.

Maintain BUY with an unchanged TP of RM13.83. We reiterate our BUY recommendation on Supermax as we believe that its prospects are still positive due to the high demand in gloves and potentially higher ASPs in the coming quarters. Its profit margins are also superior while operating cash flow is expected to remain strong. We also believe that it is a strong contender to be included in the KLCI in the upcoming review. Our TP of RM13.83 is based on 18.0x FY22F EPS of 13.3 sen. The 18.0x PER is based on its 10-year average.

Source: MIDF Research - 28 Oct 2020

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