KEY INVESTMENT HIGHLIGHTS

• Announced special dividend of additional 20% for 2QFY21 until 4QFY21

• Near-term prospects intact

• Employee welfare under scrutiny and time is required for substantial improvement

• Maintain BUY with an adjusted TP of RM8.29 from RM10.96

Announced special dividend of additional 20% for 2QFY21 till 4QFY21. Top Glove announced that it will be increasing its dividend payout ratio from its usual 50% to 70% for the next three quarters in view of its anticipated exemplary financial performance for FY2021 coupled with strong cash flow. We are positively surprised by the announcement as this is higher than the 56% payout ratio announced in December in conjunction with the release of its 1QFY21 results. We believe that Top Glove will still be able to fulfil its capital requirements even with the higher payout ratio considering its improving operating cash flow. Hence, we increase our DPS assumption to 69.0sen from 55.0sen previously. This translates into a dividend yield of 12.5% for FY21E. That said, we maintain our FY22F payout assumption of 50% and DPS of 22.0 sen, which implies a decent yield of 4.0%.

Near-term prospects intact. We notice that sentiment for the glove companies has turned negative, accompanied by the flurry of news revolving Covid-19 vaccines but channel checks reveal that demand for gloves remain strong with positive momentum for average selling prices. Delivery time for nitrile gloves are expected to be more than one year. All things considered, we believe that Top Glove is on track to deliver record results in FY21E.

Employee welfare under scrutiny and time is required to show substantial improvement. We acknowledge that considerations on environment, social and governance (ESG) weigh higher in sustainable investing. The past issues Top Glove encountered had somewhat dampened some of its ESG aspects and we opine that the company may need some time to rectify them. Among others, the company has committed to improving its employees’ accommodation by setting aside budget to purchase and/or build better housing for them.

Maintain BUY with an adjusted TP of RM8.29 (previously RM10.96). Our new TP is based on -0.5SD of 10-year PER mean of 18.9x as we take into consideration of the works that can be done to further improve its employee welfare. Our TP is pegged to an unchanged FY22F EPS of 43.8 sen. Since the correction of its share price, Top Glove is trading at a PER of 5.3x FY21E earnings and 12.5x FY22F earnings, which makes valuation attractive for a large cap. The sweetener is the bumper dividend for FY21E with an estimated yield of 12.5%.

Source: MIDF Research - 5 Jan 2021

KEY INVESTMENT HIGHLIGHTS

• Dispose its equity interest in AirAsia India

• AAIL stake is reduced to 16.33%

• We view this development positively as the transaction will help improve AAGB dire cash position

• Necessary to maintain level headedness on recovery expectation

• FY20-21F earnings estimate maintained

• Downgrade to SELL with unchanged TP of RM0.68 per share

Partial exit from India. Based on its recent announcement on Bursa Malaysia, AAGB through its subsidiary, Airasia Investment Limited (AAIL) has entered into a Share Purchase Agreement (SPA) to dispose its equity interest of 32.67% in AirAsia India (AAI). The transaction is between AAIL and Tata Sons Private Limited (Tata) for an approximate sum of RM152.8m (USD37.66m, USD/MYR:4.0515). The disposal is expected to be completed by the end of March 2021.

Remaining Stakes. AAI is a joint venture between Tata and AAIL (51:49). With the disposal of 32.67% equity interest, AAIL stake is reduced to 16.33% in the venture. Based on details disclosed, the remaining stake will be subject to a call option, exercisable by Tata at any time after the transaction is completed. Furthermore, there will also be a put option exercisable by AAIL in two tranches. The first tranche is exercisable from 1st March 2022 until 30th May 2022 and the second tranche is exercisable from 1st October 2022 to 31st December 2022. The total consideration for the remaining stake will be to an approximate sum of RM76.29m (USD18.83m).

Our take on the disposal. Similar to closure of AirAsia Japan, this announcement on AAI is long anticipated. AAI was never a profitable venture to the group and non-core market for AirAsia. We view this development positively as the transaction will help improve AAGB dire cash position. Management disclosed that the cash proceeds will be utilised as working capital in Q1 2021. Noteworthy to highlight, the group cash balances stood at RM618.2m, based on Q3FY20 result last November. With burn rate circa ~RM200.0m/month during 9M20, any additional cash generated will be a boon to the group.

Liquidity needs. Recall that management indicated a conservative estimate that the group capital needs of between RM2-2.5b to tide them over comfortably until end of FY2021. In Malaysia, AAGB are securing commitments from Banks under Danajamin Prihatin Guarantee Schemes while their Philippines and Indonesia entities are currently in various stages of bank loan applications. There are talks on capital raising on equity market but so far nothing is concrete yet, except there is urgency to the exercise as management wanted to complete the bulk of fundraising by end of January 2021.

Outlook on aviation. We foresee that air travel demand will recover meaningfully, however, only at a portion of prepandemic level for FY21. With vaccines introduction and subsequent administrations are in the horizon, we believe that there is a light at the end of the tunnel for aviation players. Currently, with positive development on the vaccine fronts, the recovery narrative can be gauge with better clarity. Furthermore, with governments and businesses are more adept at managing the pitfalls of the virus, we believe punitive measures that hinder air travel will gradually be eased and potentially lifted (e.g. travel bubbles between countries, universal screening for air travelers, etc.)

Necessary to maintain level headedness on recovery expectation. On the other hand, we maintain our stance that safety is the paramount driver for sustainable recovery. Without it, demand for air travel will remain low, at least, not in the level that is sufficient to save the industry from further losses. Key considerations to our assumption are on the timing of vaccines approval, and of course successful and impactful administration of vaccines in large scale. We believe these two circumstances will predate a sustainable and meaningful recovery of air travel demand. We are hopeful on aviation recovery but maintain level headedness in assessing the viability of the recovery. Whilst the new course charted seemed conservative, we consider it as a precautionary and reasonable at a time when sentiment lifted the share prices of aviation players which may be excessive given uncertainty surrounding vaccines introductions and administrations.

Earnings forecast. We maintain our earnings forecast as we anticipated this development.

Target price. We are maintaining our target price at RM0.68 per share, pegged to 0.7x P/BV FY21F.

Downgrade to Sell. We believe the recent ascension of the share price might overshoot the valuation level that we deem fair for the company as of now. With potential rights issue exercise on the horizon, dilution to investors shareholdings seems inevitable. With that, we are downgrading our call on AAG to SELL from Neutral previously. We opine that although recovery for the aviation sector and air travel is expected to gradually take place in 2021, it remains an uphill battle for AAG given that it is struggling financially to remain afloat in the current pandemic-laden operating environment. Key risks to our call include, (i) faster-than- expected travel demand recovery, (ii) worsening pandemic, and (iii) stricter movement controls order imposed on air travels.

Source: MIDF Research - 31 Dec 2020

KEY INVESTMENT HIGHLIGHTS

• ICPT turns into a rebate position for 1H21 following drop in global fuel price

• ICPT rebate essentially funded by fuel cost savings, earnings neutral to Tenaga

• ‘Gap year’ approval by the Government is a positive; underpins near-term regulated earnings visibility

• Maintain BUY at unchanged TP of RM13.10

What’s new? The Imbalance Cost Pass Through (ICPT), which essentially reflects fuel and generation cost variations against RP2 parameters, has turned into a rebate position of 2sen/kwh for the 1H21 period (from a neutral position of 0sen/kwh in 2H20), following a drop in fuel prices during 2H20 (ICPT is determined on a 6-month retrospective basis). Reflecting the lower fuel price; average coal price stood at USD58.6/MT in 2H20 versus Regulatory Period 2 (RP2) benchmark coal price of USD75/MT (CIF Price), while power sector gas price stood at RM21/mmbtu vs. RP2 benchmark gas price of RM27.20/mmbtu. The ICPT rebate is essentially funded by these savings and is neutral to Tenaga’s earnings.

‘Gap-year’ in FY21F. The Government has also approved an extension of RP2 for FY21 (originally scheduled to run from Jan 2018 till Dec 2020). This means that the RP2 base tariff of 39.45sen/kwh will be maintained for another year. RP3 meanwhile, is shifted to FY22 instead (2022-2024) given the uncertain demand and global fuel price outlook following the pandemic. The one-year RP2 extension will allow Tenaga and the Energy Commission (EC) to better determine the starting base of demand and capex for RP3 as well to better forecast fuel prices to minimize huge fluctuations in the ICPT. Broadly, the extension of RP2 into FY21 is a positive for Tenaga as it underpins near-term regulated earnings visibility, which is estimated to account for ~80% of Tenaga’s overall group earnings.

Potential clawback of ADD. To recap, the retail segment suffered a loss of RM200m in 9M20 due to significantly higher allowance for doubtful debt (ADD), taken as a prudent measure in view of the pandemic’s potential impact on Tenaga’s customers. While ADD is provided for as part of Tenaga’s regulated cost, the amount is capped based on the pre-agreed RP2 parameters, and is much smaller relative to the actual amount that had to be taken. Tenaga has been in talks with the EC to renegotiate the levels of ADD allowable and for a clawback of the exceptionally high amount this year (perhaps via periodic regulatory adjustments). Though there is no specific mention of this so far, any development on this front should be a positive earnings catalyst for Tenaga.

Recommendation. Maintain BUY at unchanged DCF-based TP of RM13.10. Tenaga’s share price has retraced significantly by some 16% in the past 12 months and now trades at just 13x FY21F earnings, reflecting deep undervaluation, notwithstanding the persistent ESG valuation drag. Dividend yield of 4% (FY21F, assuming a conservative 50% payout) are reasonably attractive in the current low interest rate environment, underpinned by easing capex for domestic generation in the near-to-mid-term, which suggests base dividends of at least at the higher end of the group’s 30%-60% payout policy. Other catalysts: (1) RE expansion drive internationally with a target capacity of 8300MW by FY25F from 3390MW currently (2) Positive outcome from LSS4 bidding (3) Recovery in FY21F earnings from absence of unscheduled plant outages, BPE discounts and inflated ADD provisions, that were experienced in FY20F.

Source: MIDF Research - 24 Dec 2020

KEY INVESTMENT HIGHLIGHTS

• To recap, Superlon Holdings Berhad registered 1HY21 core net profit (CNP) of RM6.96m (-34.5%yoy).

• Virtual meeting with Superlon

• FY21 plans to strengthen the Group’s earnings

• Sanguine on Superlon’s prospect

• Upgrade to BUY with a unchanged target price of RM1.03

To recap, Superlon Holdings Berhad registered 1HY21 top-line of RM50.04m (-11.3%yoy). The decline in the headline was on the back of reduction in revenue contribution from the manufacturing division. It is worth noting that the contraction of the Group’s top-line was cushioned by (1) improved gross profit margin, (2) lower selling and distribution expenses, and (3) lower administration expenses offsetting by higher net exchange loss.

We had a virtual meeting with Superlon yesterday and the aim of the meeting is to understand Superlon’s outlook and plans moving forward as well as briefing on 2QFY21 financial results. Further details on the group’s plan were shared during the virtual meeting yesterday with Superlon. Below are some of the key takeaways:

Vietnam factory anticipated to continue deliver good operating results. We note that Superlon has diverted some of its order to Vietnam factory as at end of April FY20. As for now, the Group is planning to continue to divert its order to Vietnam factory due to uncertainties on Movement Control Order (MCO) in Malaysia. The factory in Vietnam is also expected to have enough semi-finished raw material from Malaysia to cater the customers’ demand. It is also worth noting that Superlon will continue to enjoy low tax rate due to the tax holiday in Vietnam. Other than that, we also gather that the Group has bought more copper pipes around mid this year as they already anticipated the increase in copper price moving forward as a result, this will help to increase the Group’s profit margin.

FY21 future plans to strengthen the Group’s earnings. Superlon has came out with a few future plans in FY21 in order to strengthen its earnings and one of it is to invest in replacement, new machinery & R&D Lab. The Group has allocated RM10m for these initiatives and expected to increase in production capacity by +2,000 tonnes for insulation and +500 tonnes for acoustic. On top of that, Superlon planning to expand the product application (non-HVAC applications and expand acoustic) as well as non- insulation sales (copper pipes and HVAC related product).

Sanguine on Superlon’s prospect. As for the local market, the Group sees (1) the opportunity in partnering its distribution network to secure more project orders, (2) expand trading business segment, and (3) possible improvement in the property market. On the other hand, for the export market, the Group is expected increase in Foreign Direct Investment in ASEAN due to the expect shift in supply chain to ASEAN Countries.

Impact to earnings. We leave our earnings forecasts unchanged as the virtual meeting yielded no surprises.

Upgrade to BUY from NEUTRAL with unchanged target price of RM1.03. We derive our target price by pegging a PER of 12.4x to its revised FY22EPS of 8.32sen per share. While we continue to remain cautious on the demand for its insulation products, we opine that Superlon should be able to overcome any short-term headwinds premised on its lower cost of material and production. Moving forward, the Group is planning to leverage and expand its current product application in order to achieve better financial performance. Furthermore, the recent drop in its share price present an opportunity for investors to accumulate. As such, we upgrade the stock to BUY (from NEUTRAL). The unchanged TP of RM1.03 implies expected total return of +21.5%

Source: MIDF Research - 23 Dec 2020

KEY INVESTMENT HIGHLIGHTS

• Sapura Energy’s recorded another quarterly profit for the FY21

• 3QFY21 earnings came in within expectations at RM17.5m despite -25.3% contraction in revenue year-over-year

• Earnings were boosted by healthy margins from E&C segment and leaner operations

• Orderbook remains robust and geographically welldiversified at RM12.5b as of 31 October 2020

• FY21-22F earnings maintained

• Maintain BUY with an unchanged TP of RM0.16 per share

Another quarterly profit as anticipated. Sapura Energy Bhd (SEB) reported its third consecutive quarterly net profit for the financial year in 3QFY21 with RM17.5m. This brings its 9MFY21 cumulative earnings to RM55.1m – which was within ours but above market’s full-year earnings expectations at 76% and >100% respectively. As we have previously highlighted, SEB’s earnings during the quarter were primarily driven by its Engineering and Construction (E&C) segment’s overall improving performance which saw the segment’s operating profit margin surging to 13.0% in 3QFY21 vs only 1.0% in 3QFY20.

Earnings grew despite contraction in revenue year-over-year. When compared against 3QFY20, revenue in 3QFY21 was lower by - 25.3%yoy primarily attributable to lesser project activities from its E&C segment which is in line with the progress of its ongoing projects. That said, its earnings improved by >100%yoy following better margins from the E&C segment. Similarly, on a quarterly sequential basis, revenue was higher by +9.0%qoq due to higher contribution from the E&C segment. However, earnings contracted by -27.5%qoq attributable to higher tax expense during the quarter.

Engineering & Construction. Segment revenue dipped by -24.9%yoy attributable to lower activity levels during the quarter which was partly due to the progress of ongoing projects which are mostly in early stages. That said, the segment’s operating profit surged by >800.0%yoy due to partly better margins recognised from the ongoing projects as well as; higher share of profit from joint ventures and associates. Furthermore, the segment also benefitted from the ongoing cost optimization initiatives that have been undertaken since early this FY. Consequently, segment’s operating profit margin also jumped to 13.0% in 3QFY21 vs only 1.0% in 3QFY20 and 10.6% in 1QFY21. Meanwhile, on a quarterly sequential basis, segment revenue grew by +15.8%qoq whilst operating profit grew by +28.5%qoq.

Drilling. Segment revenue contracted by -28.3%yoy at RM133.2m due to lower number of operating days for working rigs during the quarter. An average of 6 rigs was in operation during the quarter with technical utilization (uptime) of 99.9% - including Sapura Jaya rig which is currently idle after a force majeure was declared on it back in April. Consequently, the segment recorded a widening operating loss of -RM72.8m in 3QFY21 vs -RM48.2m 3QFY20.

Exploration and Production. The segment returned to the black with a profit before taxation of RM32.8m during the quarter vs -RM53.6m in 2QFY21. During the quarter, the segment reported its highest ever production output of 2.9Mmboe following the start-up of its SK408 Larak, Gorek and Bakong gas fields. This was as oppose to only 0.9Mmboe lifted in 3QFY20. That said, the higher output was offset by lower lifting price which only averaged at USD42.2/bbl vs USD65.2/bbl in 3QFY20.

Orderbook update. The group’s orderbook currently stands at RM12.5b (from RM13.3b in July 2020) with a cumulative contract wins of RM2.2b year-to-date. Out of these, approximately RM2.0b is expected to be recognised in FY21, RM5.5b in FY22 and RM5.0b from FY23 onwards respectively. Addionally, the company’s bid funnel remains healthy at a total of RM107.0b; a +16.3%qoq from RM92.0b in 2QFY21. Out of the RM107.0b bid funnel, RM38.3b of bids have been submitted and are currently in progress.

In terms of geographical distribution, 27% of the tenders in their bid funnel are located in the Middle East, 25% in Other Asia, 14% from South East Asia, 10% in Europe and Africa, 18% in the Americas whilst the remaining 6% from Malaysia. This we opine, addresses the concentration risk as well as; risk associated with specific regions. The bid funnel also incorporates SEB’s energy transition agenda whereby ~55% of its bid funnel are made up of gas development projects.

FY21-22F earnings maintained. We are making no changes to our FY21F earnings estimates as we opine that SEB is on track to meet our earnings projection. We are also maintaining our FY22F earnings at this juncture as we believe that all positives have been priced in for FY22.

Target price maintained at RM0.16. As we made no changes to our earnings for FY21-22F, we are also maintaining our target price at RM0.16 per share. Our target price is derived via a discounted cash flow (DCF) valuation model with a WACC of 7.6% and terminal growth of 3.1%.

Maintain BUY. Post earnings announcement, we are maintaining our BUY recommendation on SEB. We opine that while volatility surrounding its operating environment remains persistent and exacerbated by the Covid-19 pandemic developments, we anticipate that SEB will be able to sustain its current quarterly profits into FY22. This is following the: (i) ongoing cost optimization initiatives which will stretch into FY22 – with an approximately RM500m to be realized during the FY; (ii) stable movement of the crude oil price which would sustain current and encourage future work orders and; (iii) sustained margin (12-13%) from its E&C segment.

We also believe that earnings to be lifted in FY22 in-line with the gradual ramp up in E&C project execution milestones which will negate the impact of the compressed margins and competitive charter rates plaguing its drilling segment. Furthermore, as the utilization rate of its yard is currently at 50%, we opine that the segment has plenty of room to undertake more work orders in the future which will bode well for its earnings trajectory going forward.

We are also expecting better performance from its E&P segment in FY22 as its SK408 and SK310 production sharing contract (PSC) for Gorek, Larak and Bakong are expected to remain stable with increasing production going forward. It will also benefit from the recent recovery in oil price would result in higher lifting price for 4QFY21 and FY22 respectively. Additionally, with the SK408 Jerun UGSA key terms have finally been agreed upon with Petronas, it will finally allow SEB to put in their final FID into the project. Hence, Management expects the Jerun CPP award to be out by February 2021 and this will contribute positively to the Group’s earnings in FY22.

All in, we reiterate our view that SEB’s current share price presents a good opportunity to accumulate the shares given that: (i) oil price is expected to remain stable throughout CY21 between the USD48-53pb level which will benefit SEB’s E&P segment; (ii) it is well-positioned to potentially win more contracts given its width and depth of expertise in providing various oil and gas-related services and; (iii) it is currently trading at an attractive PER of 11.9x which is below its -1SD 5year average PER.

Source: MIDF Research - 22 Dec 2020

KEY INVESTMENT HIGHLIGHTS

• 1QFY21 normalised earnings fell -30.3%yoy to RM109.4m which came in within our expectation

• This mainly attributable to the lower domestic property earnings on slower progress billings (-40.0%yoy)

• Poised to be a major beneficiary of impending roll-out of mega shovel-ready public infra projects in Malaysia

• Major contracts worth over AUD10b to be potentially secured in Australia in FY21-22

• Solid outstanding order book of about RM6.1b which translates into earnings visibility for the next three years

• Maintain BUY with a revised target price at RM4.20

Within expectation. Gamuda Berhad’s 1QFY21 normalised earnings declined by -30.3%yoy to RM109.4m, primarily attributable to the sharp fall in property earnings by -80.0%yoy to RM9.9m. Nonetheless, the group’s earnings came in within our expectation, accounting for 18.5% of the full year estimates respectively as we are expecting stronger earnings recovery in coming quarters premised on higher progress billings at its construction and property sales. Meanwhile, the performance of the construction division remains a bright spot, being the least affected as construction activities are deemed as essential services.

Potentially fast-tracked mega public infra projects could drive order book replenishment prospects. We believe the approval and impending roll-out of mega public infra projects (i.e. MRT3 and KL-SG HSR) as announced in Budget 2021 to pump prime the economy to benefit the group moving forward. With the expected completion of MRT2 by end-2022, we foresee that the MRT3 to be a low-hanging fruit project to be rolled-out earliest in the 2HCY21. To recall, MMC-Gamuda was appointed as the MRT2’s project delivery partner in October 2014, about three years before the completion of MRT1 in July 2017. The revival of the JB-SG RTS could also be a strong precursor for the KL-SG HSR project to likely have a favourable outcome in which the group is a strong contender given its reputation in public projects and sound balance sheet. Therefore, we are of the view that the group’s FY21 earnings to be a back-loaded year.

More contract wins could be coming from Australia. We gather that the contract award for “M6 Stage 1 Motorway project” worth about AUD2.6b in Sydney involving building a twin 4-km tunnels is expected to be announced in 1HCY21 in which the group is one of three bidders. We believe Gamuda has a higher likelihood of clinching the deal, premised on that it is the only contender with a local JV partner (BMD Constructions Pty Ltd) and its extensive experience in tunnelling projects such as the completed SMART tunnel project in Kuala Lumpur.

In addition, the group’s JV with a reputable construction company, Laing O’Rourke, has been shortlisted for the first stages of the AUD20b “Sydney Metro West Project”. We understand that the group’s JV is one of three bidders for the two tunnel packages under the project which could be awarded in 1HCY22. With the Australia government’s planned AUD100b infra spending over the next decade, we believe Gamuda’s overseas expansion efforts into Australia and revival of Malaysia’s mega infra developments would likely bode well to its order book and earnings momentum moving forward.

Property sales target on track. In 1QFY21, Gamuda’s property sales increased by +32.2%yoy to RM673.0m, of which two-thirds are mainly driven by overseas projects contributed by Gamuda City in Honoi and Celadon City in Ho Chin Minh. Nonetheless, a -40.0%yo lower progress billings caused by construction disruptions has resulted in lower PBT (Table 1). As a result, the division’s 1QFY21 PBT margin contracted to 4.2% from 12.1% previously. The management has projected new property sales worth of RM3.5b in FY21, almost about the same level in FY18, primarily predicated on its overseas segment from Hanoi, Ho Chi Minh City and Singapore contributing two-third of its overall sales.

Earnings estimates. We are revising our FY21 and FY22 earnings forecasts to RM603.0m and RM651.8m respectively. This is mainly premised on our expectancy of a potential roll-out of KVMRT3 and HSR mega infra projects in late CY21 given that the government aims to pump-prime the economy next year and possibly fast-track the implementation process. A faster-than-expected discovery of vaccine is anticipated to further aid an economic recovery and quicker resumption of business activities leading to the earnings recovery across all segments.

Target price. We are revising our TP to RM4.2 (previously RM3.81) by pegging a higher PER of 16.0x (previously 15.2x) to the group’s FY22 EPS of 26.3sen. Note that the target PER is about the group’s two-year historical high. We opine that the premium is justified given the group’s solid order book, encouraging prospects of job replenishment rate on overseas and domestic contracts for public infra projects, and a sound balance sheet.

Maintain BUY. We continue to expect that the group’s revenue and earnings prospects to post a relatively stronger recovery in coming quarters following the prompt resumption of construction and business activities and increased workforce capacity at work sites as seen during the CMCO period. The group’s construction division remains a bright spot as evidenced from the resiliency of the its 1QFY21 PBT margin at 7.2% vs 7.4% in prior corresponding period. On a longer-term horizon, the group’s prospect is well-supported by its strong outstanding order book of about RM6.1b which will provide earnings visibility over the next three years. Notably, we are of the view that Gamuda to be one of the stronger beneficiaries from the impending roll-out and revival of big-ticket infra projects such MRT3 and KL-SG HSR given its strong track record in MRT2 and other major public projects. Coupled with its focus for oversea expansion, we remain positive on the group’s job replenishment prospects to continue to be driven by its in-roads into Australia’s growing construction market. Given the stronger expectancy of potential positive news flow into FY21 on the broad construction sector and brighter order book replenishment prospects, we are ascribing a two-year historical high of PER to the group which is warranted at current juncture, in our view. All factors considered, we are maintaining our BUY recommendation on GAMUDA.

Source: MIDF Research - 22 Dec 2020