MIDF Sector Research

Author: sectoranalyst   |   Latest post: Tue, 22 Oct 2019, 9:13 AM


Axis REIT - 3QFY19 CNI Dragged by Higher Expenses

Author: sectoranalyst   |  Publish date: Tue, 22 Oct 2019, 9:13 AM


  • Earnings missed expectations
  • 9MFY19 CNI improved by 1% to RM81.8m while revenue jumped by 12%
  • Earnings for FY19F/FY20F adjusted by -1.6% and -1.5%
  • Maintain NEUTRAL with an adjusted TP of RM1.82 (previously RM1.84)

Earnings missed expectations. Axis REIT’s cumulative results for its first nine months missed estimates at 67% of our full year forecast and 68% of consensus’. An interim dividend of 2.35 sen was announced, bringing year-to-date DPS to 7.06 sen. The negative deviation during the quarter can be attributed to higher than expected property and nonproperty expenses.

9MFY19 CNI improved by 1% to RM81.8m while revenue jumped by 12%. The increase in revenue on-year can be attributed to the addition of new properties during the period that include Axis Mega Distribution Centre, which started rental contribution on 1 June 2018, Axis Aerotech Centre @ Subang that started on 16 December 2018 and three newly acquired properties since end of 3QFY18. Year-to-date, a rental reversion of 3% has been recognized, which offset the loss of rental from Axis Industrial Facility @ Rawang as the tenant has redelivered vacant possession in July 2019. Despite the increase in revenue, CNI rose only marginally by 1% due to property expenses that was up by 8.1% to RM22.6m, non-property expenses that added 5.2% to RM16.9m and Islamic financing cost that jumped 9.9% to RM36.6m.

3QFY19 earnings fell 12%yoy to RMRM26.2m despite a 3% addition in revenue. The lower earnings on-year can be attributed to non-property expenses that increased by 10.8% as well as other property expenses that increased by 19.4% to RM6.5m. Sequentially, revenue declined by 1%qoq partially due to the loss of rental income from Axis Industrial Facility @ Rawang while CNI dropped by 10% from 2QFY19.

Earnings for FY19F/FY20F adjusted by -1.6% and -1.5% to RM120m and RM129m respectively in view of the lower than expected cumulative CNI. We now assume higher property expenses.

Maintain NEUTRAL with revised TP of RM1.82 (from RM1.84). Our adjusted TP is in line with the revision to our earnings estimates. Our required rate of return is maintained at 7.5%. Dividend yield for Axis is estimated at 5.1%. While we like Axis for its stable recurring income, we believe that the unit price upside is limited at this juncture

Source: MIDF Research - 22 Oct 2019

Labels: AXREIT
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KKB - It's Time to Shine

Author: sectoranalyst   |  Publish date: Tue, 22 Oct 2019, 9:11 AM


  • KKB Engineering has successfully clinched several awards, carrying a sum of RM60.9m
  • Package 3A and 3B are mainly construction contracts, with the former to run immediately (October 2019) until completion in December 2020
  • KKB’s new replenishment in 2019 currently stands at RM277.4m
  • We upgrade to BUY with TP adjusted to RM1.52


KKB Engineering has successfully clinched several awards, carrying a sum of RM60.9m. The main job comprises construction and completion of water supply project, covering the area from Kota Samarahan to Sebuyau. The two packages won were dubbed Package 3A and Package 3B, which we believe to form part of the Water Grid Project Phase 1. In the same announcement, KKB has also received orders for the additional supply for MSCL Pipes and Specials, placed by Laras Jaya Engineering, Cipta Wawasan Maju and Cityon Development.

Duration of contract. Package 3A and 3B are mainly construction contracts, with the former to run immediately (October 2019) until completion in December 2020. Meanwhile, the latter will take a slightly extended period of 16 months (compared to package 3A; 14 months) to run from end October 2019 until February 2021. Meanwhile, the supply orders are to be delivered in stages within the 1H2020.

KKB’s new replenishment in 2019 currently stands at RM277.4m which is already ahead of our expectation at RM250m this year. As of last reported, we believe that KKB’s outstanding orders amounted to RM0.7b, which is enough to keep it busy until FY21. The bulk of that orders was derived from PBH Sarawak job, which was awarded in July 17. With tenders still ongoing, we will not be surprised if KKB achieved to hit RM300m mark of new orders this year.

The termination on Pan Borneo PDP was seen as a minor setback. Despite the risk, management sees this situation as manageable with construction work to progress as usual. While we note that works would likely continue with no major interruptions, we have made some adjustment to our progress work assumptions (to be conservative). Accordingly, we revised down our earnings for FY19 and FY20 by -6% and -6% respectively.

According to a news source, KKB’s Ocean Might has bid for three contracts for fabrication of offshore structures worth about RM355m. We believe that the outcomes will likely be known by early 1Q20, taking into account that bids were submitted in 3Q19. Two of the bids were for EPCC of fixed offshore structures and the third was a sub-contract package. Previously, Ocean Might was awarded and completed on time four fabrication contracts for offshore structures worth about RM250m between 2014 and 2017. The most recent completion was for Petronas D18 Phase 2, which was delivered ten days ahead of time. Being one of the two companies in Sarawak awarded frame agreement by Petronas, its track record in the segment is recognized. Building a market share in this segment (Oil & Gas Offshore Facilities Construction and Major Onshore Fabrication) is not a stroll in the park, but KKB’s Ocean Might has proven that its move is turning fruitful.

We upgrade our call to BUY, with TP adjusted to RM1.52, implying PER of 21x on FY20 EPS. Despite our revision in earnings, the TP we accorded is pegged to a higher PBV of 1.2x (+1 STD of 1-year average) that is reflective of (1) the group’s growth prospect in the Oil & Gas Engineering segment, (2) recovery in earnings margin, and (3) niche expertise to benefit from the state’s long-term master plan. KKB’s position is at an advantage to benefit from the recent federal allocation in Budget 2020, with a large chunk being channeled for Sarawak Water Supply Project. As a sole water pipe manufacturer in Sarawak with track record in construction works, the facets of KKB’s expertise are well set to be tapped. Meanwhile, the group’s entry into the oil and gas segment should not be overlooked, as it continues to strengthen its track record as well as market share. Central to this is the milestones achieved thus far which would help to support its longterm growth. From a valuation perspective, we think that the current share price presents an attractive entry point. Downside risks to our call are (1) slower than expected progress billings, (2) surprise contraction in margin, and (3) slowdown of job flows.


Source: MIDF Research - 22 Oct 2019

Labels: KKB
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AirAsia X - Capacity Management Continues

Author: sectoranalyst   |  Publish date: Mon, 21 Oct 2019, 10:32 AM


  • Decline in ASK outpaced the drop in RPK in 3QFY19 amidst ongoing capacity management
  • Load factor in 3QFY19 remains strong at 81.0%
  • Additional flight frequencies was insufficient to boost overall capacity
  • AAX Thailand saw a 77.0% drop in load factor due to new routes in Japan
  • Earnings estimates revised to take into account of change in Brent crude price, USD/MYR and lower capacity growth
  • Maintain NEUTRAL with a revised TP of RM0.17 per share


3QFY19 preliminary ASK and RPK took a breather. In 3QFY19, AirAsia X’s ASK declined by -3%yoy outpaced the -2%yoy dip in RPK. This was due to seasonal capacity management which saw the total capacity (-3%yoy) declined more than the number of passengers carried (-2%yoy). The destinations involved were Sapporo and Taipei in response to weaker demand during the leanest season of the year for these routes. As such, AAX’s load factor remained reasonable at 81.0%, +1ppts higher than a year ago.

Average stage length remained flat. Flight frequencies were increased to Gold Coast, Sydney and Melbourne to cater for increased demand following the term holidays in Australia. However, this was insufficient to boost overall capacity, causing AAX’s average stage length to remain flat on a yearly basis in 3QFY19. Meanwhile, we expect some benefits of AAX’s prudent hedging policy to be realised in 3QFY19 following the average -13.0%yoy drop in the Singapore jet kerosene price during the same quarter, effectively bringing the Singapore jet kerosene price lower by -12.0%yoy on average for 9MFY19.

AirAsia X Thailand faces blip in load factor. For AAX Thailand, the +32.0%yoy increase in passenger carried in 3QFY19 was underpinned by additional seat capacity and inauguration of fifth destination in Japan, Fukuoka in July 2019. Nevertheless, the ASK grew at a faster pace of +48%yoy due to higher capacity, leading to a decline of 10ppts in load factor to reach 77% in 3QFY19.

Earnings estimates. We are imputing a lower jet fuel estimates as our Brent Crude oil estimate for FY19 has been lowered from USD63pb (previously USD70pb). Nonetheless, the effect of lower estimated fuel expenses is moderated by a higher USD/MYR rate of 4.15 (previously 4.08). In addition, we have also taken into account of a lower growth in capacity amidst its ongoing network rationalisation exercises in its key markets. As a result, we are now forecasting a slight loss of –RM8.1m for FY19 and lower earnings forecast of RM45.6m for FY20. We expect FY20 to see support from the ancillary segment, i.e. WIFI onboard and Teleport.

Target Price. We revised our target price to RM0.17 per share (from RM0.19 previously) following the adjustment in earnings. Our TP is derived via pegging our FY20F EPS of 1.10sen to a target PER of 15.0x, which is the average PER of global low cost carrier peers.

Maintain NEUTRAL. The lower PSC of RM50 for international departures ASEAN will deliver additional boost to the current travelling trend. Notwithstanding this, we believe the ongoing capacity deployment will remain a headwind for the rest of FY19. This is in addition to the adoption of MFRS 16 will be a hurdle as the majority of AAX’s fleet are leased, with gains from lower amount of interest to be realized beyond the fifth year of the lease term. On a bright note, we expect AAX’s ‘Teleport.social’, a platform enabling sellers on social media to integrate with Teleport’s logistics infrastructure to realise full year benefit in FY20. All in, we maintain our NEUTRAL call with a revised TP of RM0.17 per share.

Source: MIDF Research - 21 Oct 2019

Labels: AAX
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DiGi - Sustaining Its Competitive Edge

Author: sectoranalyst   |  Publish date: Mon, 21 Oct 2019, 10:30 AM


  • 3Q19 normalised earnings of RM360.1m was mainly impacted by higher depreciation and amortisation charges
  • This lead to cumulative 9M19 normalised earnings of RM1,091.8m (-6.0%yoy), in-line with our expectation
  • Higher 9M19 capex of RM548m (+20.4%yoy) to bolster the 4G network experience and digital connectivity
  • Cumulative 9M19 dividend of 13.8sen on track to meet full year FY19 dividend estimates
  • Maintain NEUTRAL with an unchanged TP of RM4.93

Resilient revenue. Digi.Com Bhd’s (Digi) 3Q19 normalised earnings amounted to RM360.1m which represents a decline of -7.4%yoy. The decrease was primarily attributable to a combination of higher depreciation and amortization (+50.9%yoy) and higher finance cost (+86.6%yoy). Meanwhile, 3Q19 revenue declined marginally to RM1.6b (-2.3%yoy) in view of lower voice revenue (-22.5%yoy).

Within expectations. Cumulatively, 9M19 normalised earnings came in at RM1,091.8m (-6.0%yoy), tracking the -4.9%yoy contraction in revenue to RM4,613.3m. All in, Digi’s 9M19 financial performance came in within ours and consensus expectations, making up 73.8% and 72.9% of full year FY19 earnings respectively.

Double digit growth in postpaid revenue… 3Q19 postpaid revenue improved by +10.4%yoy to RM666m. This was mainly due to healthy customers’ demand from Digi’s Phone Freedom 365, Digi postpaid family plans and entry level postpaid plans from prepaid conversions. As a result, the postpaid subscriber base grew to 2,993k (+9.6%yoy). At the same time, ARPU remained resilient at RM71.

...while prepaid revenue contracted at similar rate. On the contrary, 3Q19 prepaid revenue shrunk by -11.4%yoy to RM740m. This was mainly in view of mobile terminal rate reduction. Note that the prepaid internet revenue contribution improved to 55% of prepaid revenue, up from 48% as at 3Q18. However, the prepaid subscriber base dwindled by -8.1%yoy to 8,337k, while the ARPU reduced to RM29 from RM31 a year ago.

Capital expenditure (capex). Digi’s 3Q19 investment amounted to RM119m, leading to 9M19 capex of RM548m (+20.4%yoy). The investments were prioritised to optimised the 4G network quality with enhanced capacity through fibre network expansion to 9,200km an refarming of spectrum portfolio.

Dividend. Digi announced 2Q19 dividend of 4.5sen per share. This led to cumulative 9M19 dividend of 13.8sen per share, a slight decline from 14.8sen per share announced for 9M18. Nonetheless, this is still within our expectation, which constitutes 78.3% of our full year FY19 dividend estimates of 18.9sen.

Maintain NEUTRAL. We expect higher contribution from the pre-to-post conversion and B2B lead to better earnings visibility in comparison to prepaid. At present, the proportion of postpaid revenue as a percentage of total service revenue has improved further to 47.1% from 41.9% a year ago. Given the steady postpaid performance, we expect the contribution from postpaid to match that of prepaid by 2020. Meanwhile, we expect contribution from prepaid to disappoint further in 2H19 in view of the challenging market. This could potentially undermine the growth stemming from postpaid. Fortunately, we expect the discipline in cost management shown by the group to be able to partially uphold the group’s earning resiliency. Meanwhile, we view that the estimated dividend yield of at least four percent will keep investors to remain vested on the stock. All factors considered, we are maintaining our NEUTRAL recommendation on the stock.


Source: MIDF Research - 21 Oct 2019

Labels: DIGI
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LPI Capital - Combined Ratio Deteriorated Through Higher Claims

Author: sectoranalyst   |  Publish date: Wed, 16 Oct 2019, 9:09 AM


  • 9MFY19 normalised profit increased marginally by +1.2%yoy to RM232.6m which came in within our and consensus expectations
  • Continued top-line growth with 9MFY19 gross written premium (GWP) rose by +3.6%yoy to RM1.1bn
  • However, higher net claims incurred which grew by +20.0%yoy to -RM337.6m which dragged earning growth
  • Maintain NEUTRAL with an unchanged TP of RM16.20


Within expectations. LPI Capital’s (LPI) 9MFY19 normalised earnings grew marginally by +1.2%yoy to RM232.6m. This translated to about 70.3% and 70.0% of ours and consensus’ full year FY19 estimates. The uptick in net profit was mainly attributable to higher net earned premiums (NEP) which rose by +10.2%yoy to RM746.0m. However, the higher NEP was partially moderated by the +20.0%yoy jump in net claims incurred to -RM337.5m, resulting in slower earnings growth.

Top-line growth managed to stay positive. In 9MFY19, the group resiliently achieved a positive growth in GWP (+3.6%yoy) of RM1.1bn despite the overall declining trend in the general insurance industry. To put things in perspective, the industry posted a decline in GWP of - 1.7%yoy for 1HCY19. We are of the view that the group’s higher GWP was a result of the continued infrastructure projects and the strengthening of its distribution channels. Nonetheless, we opine that that the motor and fire liberalisation exercise continues to be putting downward pressure on premium price.

However, combined ratio deteriorated. LPI’s 9MFY19’s combined ratio worsens to 72.5% through an increase of +1.8ppts(yoy). This was primarily due to the rise in claims ratio by +3.6ppts(yoy) to 45.2%. Note that the higher claims ratio was predominantly caused by the jump in net claims incurred by +20.0%yoy to -RM337.5m. We postulate this was partially due to the group continues to retain more risks as reflected by the increase in retention ratio of +1.9ppts(yoy) to 66.8%. In addition, the medical and miscellaneous accident insurance are the main area of concern that contributed to higher claims. Consequently, this led to a slight decrease of -1.2%yoy in the underwriting profit to RM205.1m. Moving forward, we believe that an unfavourable claims environment and heightened competitive pricing pressure might continue to add pressure on claims ratio as well.

Source: MIDF Research - 16 Oct 2019

Labels: LPI
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GDEX - Expanding Regional Footprint One Country at a Time

Author: sectoranalyst   |  Publish date: Wed, 16 Oct 2019, 9:08 AM


  • GDEX to acquire 50% stake in Vietnamese logistics provider, Netco, for RM13.9m
  • Net cash position of GDEX to remain, post-acquisition
  • Netco’s decent network to serve as a good starting point
  • Footprint in Vietnam to be further solidified via GDEX’s 32.7%-owned associate, Web Bytes
  • Earnings estimates unchanged as we believe there will be a gestation period before delivering meaningful earnings
  • Maintain NEUTRAL with an unchanged TP of RM0.30 per share


Expanding its regional footprint one country at a time. GD Express Carrier Berhad (GDEX) has entered into a share sale and purchase agreement with 3 individuals, (i) Nguyen Duc The, (ii) Trieu Lan Huong, and (iii) Nguyen Duc Hau, to purchase 50% of the total enlarged issued share capital of Noi Bai Express and Trading Joint Stock Company (Netco) for VND76.7b (approximately RM13.9m). Netco is a company involved in the provision of courier and logistics services in Vietnam. This represents another corporate exercise undertaken by GDEX to expand its regional footprint in ASEAN after PT SAP Express in Indonesia.

Immaterial financial and earnings impact. Post-acquisition, GDEX will still remain in a net cash position of above RM200m. Therefore, we view this exercise as a strategic way to utilise its cash pile. Meanwhile, we gathered from the management that Netco is currently profit making albeit at an immaterial level to GDEX’s earnings and may go through a gestation period before delivering meaningful earnings. In terms of modus operandi, we opine that GDEX will implement the same method it applied to the 44.5%-owned PT SAP Express in Indonesia which is by providing business advisory as well as knowledge transfer with Netco. Recall in 1HCY19, PT SAP Express recorded a profit after tax of RM3.9m compared to a loss after tax of -RM0.6m in 1HCY18, indicating that GDEX’s interest and collaboration with PT SAP Express is bearing fruit.

Further solidification with Web Bytes. With Netco’s operations consisting of four hubs, 45 branches and 47 points of delivery, we believe that this will serve as a good starting point for GDEX to assimilate with the market dynamics of Vietnam’s logistics industry. In addition, GDEX’s 32.7%-owned associate, Web Bytes has already entered into Vietnam, enabling it to tap on Netco’s network to provide new retail solutions of mobile point-of-sale (POS) and self-service kiosks and vice versa. The population of Vietnam is around 96.5m people (compared to Malaysia of circa 32.1m people) will enable Web Bytes to have a better adoption rate due to the natural size of their retail chain stores which are larger than in Malaysia.

Earnings estimates. We are making no adjustments to our earnings forecasts for FY20 and FY21 as we opine that Necto will have to undergo a gestation period post acquisition before delivering meaningful earnings contribution to GDEX

Target price. We are maintaining our TP at RM0.30 per share. We value the company using a 2-stage discounted cash flow method (DCF) which assumes a WACC of 12.0% to reflect the risk from the ongoing intense competition driven by the growth in the Southeast Asian ecommerce industry which is expected to be worth USD102b by 2025.

Source: MIDF Research - 16 Oct 2019

Labels: GDEX
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