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TA Sector Research

Author: sectoranalyst   |   Latest post: Tue, 1 Sep 2020, 8:52 PM

 

Elsoft Research Berhad - Weak 1HFY20 Within Expectations

Author: sectoranalyst   |  Publish date: Tue, 1 Sep 2020, 8:52 PM


Review

  • Stripping off exceptional items comprising mainly loss on disposal of other investments amounting to RM1.3mn, Elsoft’s 1HFY20 core net profit of RM2.5mn (-75.6%) accounted for 15.6% of our full-year estimates. We deem results to be within expectation as we expect the group to see improvements in 2HFY20 alongside the ease of the movement control order (MCO) and fulfilment of order backlog from 1HFY20.
  • YoY. 1HFY20’s core net profit sank 75.6% to RM2.5mn as revenue declined 62.3% to RM8.5mn mainly on lower demand for automated test equipment (ATE) and delayed delivery to customers abroad amid travel restrictions to contain the COVID-19 pandemic.
  • QoQ. 2QFY20’s revenue fell mildly 1.5% to RM4.2mn also due to the aforementioned reasons. However, core net profit dropped more rapidly 43.6% to RM0.9mn due to higher share of loss in associate.
  • Elsoft declared a 2nd interim dividend of 0.25sen (2QFY19: 1.00sen), bringing 1HFY20’s to 0.50sen (1HFY19: 2.00sen). Despite its weak performance, we remain comfortable on the group’s dividend paying capacity, which is backed by its strong net cash position (including other investments) that stood at RM61.7mn or 9.2sen/share (-1.6% QoQ, -2.4% YoY) as at end-2QFY20.

Impact

  • We maintain our earnings estimates.

Outlook

  • We expect Elsoft to see muted earnings in FY20 mainly due to disruptions to its operations during the MCO in Malaysia and lockdowns abroad. That said, we expect the group to deliver improved earnings in 2HFY20, driven by the order backlog from 1HFY20. Notwithstanding, we remain sanguine on the group’s prospects underpinned by continued research and development in its core areas, namely automotive and smart devices. Its upcoming series of ATE include automotive headlamp tester catered to multibeam headlamps and smart devices LED flash tester designed for the next evolution of smartphone flash module.

Valuation & Recommendation

  • In all, we maintain our Hold recommendation on Elsoft with an unchanged TP of RM0.70 based on a PE multiple of 17.0x against CY21 EPS. Key risks include: i) prolonged COVID-19 pandemic, ii) single customer concentration, and iii) poor acceptance of new products.

Source: TA Research - 1 Sept 2020

Labels: ELSOFT
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N2N Connect Berhad- Results Boosted by Increased Trading Activity

Author: sectoranalyst   |  Publish date: Wed, 26 Aug 2020, 4:38 PM


Review

  • N2N’s 1HFY20 core net profit of RM9.6mn (+48.3% YoY) came above our full-year estimates at 63.3%. The surprise on the upside was due to strongerthan-expected transaction fees derived in 2QFY20 on the back of increased trading volume on Malaysia’s bourse (i.e., Bursa Malaysia).
  • YoY. 1HFY20’s core net profit jumped 48.3% to RM9.6mn, driven by higher revenue and lower opex. Revenue grew 2.6% to RM54.8mn mainly on higher equipment rental and higher transaction fees on the back of increased trading volume on Bursa Malaysia.
  • QoQ. 2QFY20’s core net profit surged 66.5% to RM6.0mn mainly due to the aforementioned increase in transaction fees coupled with lower opex. The flow through of incremental transaction fees led PBT margin to expand 10.4pp to 28.4%.
  • Meanwhile, N2N’s remained on strong financial footing with a net cash position including other investments of RM131.9mn or 19.3sen/share (-2.2% QoQ, +3.5% YoY) as at end-2QFY20.

Impact

  • We raise FY20-22 revenue by 2-4% to reflect actual 2QFY20 results, factoring in the stronger-than-expected transaction fees. Correspondingly, our FY20-22 earnings are raised by 24-43%.
  • Also, with the brighter earnings prospects, we increase our dividend assumptions for FY20-22 from 2.0sen/share to 3.0sen/share which implies yield of 3.5% at current level.

Outlook

  • We remain sanguine on N2N’s FY20 performance thanks to its largely resilient business model with the bulk of its revenue recurring i.e., via rental and subscription fees derived from the provision of information service terminals and front office trading and back office system to brokerages and investment banks. The buoyant trading activity recently observed in its home market Malaysia would also bode well for its transaction-based revenue.
  • Besides, we opine that with brokerages and investment banks in Malaysia faced with the unprecedented surge in trading activity, many would also be keen on upgrading their platform and system, potentially benefitting N2N.
  • In the larger scheme of things, we continue to view growth opportunities for N2N in the near-to-medium term from its latest offering, the Asia Trading Hub (ATH) which has thus far been launched in Malaysia. To recap, the ATH which involves the connection of the group’s panel of over 100 brokerage across Asia via a single financial network is designed to offer end-users a more cost effective and seamless cross border trading experience, and thereby, higher operational efficiency for brokerages and investment banks.

Valuation

  • Following our earnings upgrade and ascribing a higher PE multiple of 28.0x (previously 24.0x) which is in line with the stock’s 3-year mean, we raise our TP for N2N to RM1.15 (previously RM0.80). And now with a more favourable risk reward potential, we upgrade our recommendation on the stock from Hold to Buy. Key downside risks include an unprecedented slowdown in trading activity, and poor demand for system upgrade and implementation.
  • We continue to like the group for its niche as the largest financial information and trading platform provider in Asia, decent earnings growth profile, and robust balance sheet. Note that the group is also in the midst of seeking approval from the relevant authorities for the transfer of its listing to the Main Market of Bursa Malaysia which would bode well for the stock’s marketability.

Source: TA Research - 26 Aug 2020

Labels: N2N
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N2N Connect Berhad- 1QFY20 Results In-Line

Author: sectoranalyst   |  Publish date: Fri, 29 May 2020, 5:09 PM


Review

  • N2N’s 1QFY20 core net profit of RM3.6mn (+103.7% QoQ, -19.3% YoY) came within our full-year estimates at 23.7%.
  • YoY. 1QFY20’s core net profit declined 19.3% to RM3.6mn mainly due to lower revenue, higher opex, and higher taxes. Revenue fell 3.6% to RM26.3mn on lower contributions from Hong Kong as protests in the country had led brokers to rationalise costs including reducing terminal subscriptions.
  • QoQ. 1QFY20’s core net profit surged 103.7%, driven by lower opex. Revenue however only improved marginally 0.1% to RM26.3mn as higher transaction-based revenue alongside the rise in trading activity were largely offset by lower one-time implementation fees.
  • Meanwhile, the group continues to possess a strong balance sheet with its net cash position (including other investments) at RM137.1mn or 21.1sen/share (+0.5% QoQ, -0.2% YoY) as at end-1QFY20.
  • N2N declared a 1st interim dividend of 1.0sen (1QFY19: 1.0sen).

Impact

  • We maintain our earnings estimates.

Outlook

  • Despite the challenging economic outlook due to the COVID-19 pandemic, we remain sanguine on N2N’s FY20 performance thanks to its largely resilient business model whereby the bulk of revenue are recurring (rental and subscription fees from the provision of information service terminals, front office trading and back office settlement systems) versus transactionbased (based on the volume of trades matched via its customers systems).
  • Meanwhile, while the group has seen downside to terminal subscriptions from efforts by customers to rationalise cost, we continue to view growth opportunities in the near-to-medium term underpinned by the roll out of its Asia Trading Hub (ATH). We expect the allure of the ATH, which offers endusers a more seamless and cost-effective cross border trading experience to allow the group to benefit from: i) increased volume-based fees, and ii) market share gains as other brokerages and investment banks recognise its capabilities.

Valuation

  • Upon rolling forward our base year valuation to CY21, we raise our TP for N2N to RM0.80 (previously RM0.65) based on a PE multiple of 24.0x (which is -1SD to the stock’s 3-year mean). However, we downgrade our recommendation on the stock from Buy to Hold due to the narrowed risk reward potential following its recent share price appreciation (+47.6% since our last company update report on 8 April 2020).

Source: TA Research - 29 May 2020

Labels: N2N
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Elsoft Research Berhad- Results Missed on Weaker-Than-Expected Demand

Author: sectoranalyst   |  Publish date: Wed, 27 May 2020, 5:42 PM


Review

  • Elsoft’s 1QFY20 core net profit of RM1.6mn (-47.6% QoQ, -62.9% YoY) came below our full-year estimates at 5.9%. Exceptional items stripped off mainly includes RM1.8mn loss on disposal of other investments.
  • The miss was mainly due to lower-than-expected demand for automated test equipment (ATE) and partly due to disruptions to production, delivery, and setup following the government’s mandated movement control order (MCO) amid the COVID-19 pandemic.
  • 1QFY20’s core net profit fell 47.6% QoQ and 62.9% YoY to RM1.6mn as revenue declined 31.8% QoQ and 57.8% YoY to RM4.3mn on lower demand for ATE and delayed overseas delivery and setup due to travel restrictions.
  • Elsoft declared a 1st interim dividend of 0.25sen (1QFY19: 1.00sen). The group’s dividend paying ability is comfortably backed by its strong balance sheet. Its net cash position (including other investments) as at end-1QFY20 stood at RM62.7mn or 9.4sen/share (-7.8% QoQ, -12.6% YoY).

Impact

  • We have lowered our FY20/FY21 earnings estimates by 41.4%/15.2% to RM16.3mn/RM27.7mn after cutting our sales assumptions by 41.0%/14.5%.

Outlook

  • While we were earlier optimistic for FY20 to be a better year for Elsoft, we now expect its performance to be muted YoY due to disruptions to operations (i.e., prolonged delivery, setup, qualification, and acceptance of its ATE by customers) posed by the COVID-19 pandemic. With the MCO extending into 2QFY20, we expect to see continued weakness during the quarter but with improvements in 2HFY20.
  • Notwithstanding, there remains prospects for the group from its new series of ATE as well as medical devices which if well received by customers would present upside to our forecasts and be a re-rating catalyst. Its new series of ATE include the smart devices segment’s LED flash tester designed for the next evolution of smartphone flash module and automotive segment’s headlamp tester catered to multibeam headlamps which are still in a nascent growth stage.

Valuation & Recommendation

  • Following the earnings downgrade and rolling forward our base year valuation to CY21 based on a PE multiple of 15.0x, our TP for Elsoft is lowered slightly to RM0.62 (previously RM0.63). And with the unfavourable risk reward potential at current levels, we downgrade our recommendation on Elsoft from Buy to Sell. Key risks include: i) prolonged COVID-19 pandemic, ii) single customer concentration, and iii) poor acceptance of new products.

Source: TA Research - 27 May 2020

Labels: ELSOFT
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N2N Connect Berhad - Business Largely Intact Amid COVID-19 Pandemic

Author: sectoranalyst   |  Publish date: Wed, 8 Apr 2020, 9:30 AM


We opine that the recent market-wide sell-off amid domestic political uncertainty and the COVID-19 pandemic has brought N2N down to attractive valuation levels. The stock is down 28.0% YTD and at current levels, is trading 19.0x against CY20 EPS, which is >1.5sd below its 3-year mean of 30.8x. Most importantly, amid the prevailing turmoil roiling the global economy and financial markets, we remain sanguine on N2N’s performance thanks to its business model whereby the bulk of the group’s revenue stream is largely recurring. In all, we maintain our Buy recommendation on N2N, albeit with a lower TP of RM0.65 (previously RM0.78) as we have cut our CY20 earnings to price in expectations for softer trading activity and lower one-time implementation fees amid the economic uncertainties posed by COVID-19.

Largely Recurring Revenue Stream Provides Stability Amid Turmoil

Amid the prevailing turmoil roiling the global economy and financial markets, we remain sanguine on N2N’s performance thanks to its business model whereby the bulk of the group’s revenue stream is largely recurring (~79%) versus transactionbased (~19%). To recap, its recurring revenue mainly comprise the rental and subscription fees received for the provision of information service terminals, front office trading and back office settlement systems, and management network services, while transaction-based revenue is dependent on the volume of trades matched via its systems.

Trimmed Earnings Due to Envisaged Slowdown in the Economy

While N2N’s revenue stream is largely recurring in nature, we have trimmed our CY20 earnings estimates by 16.3% after lowering our sales assumption by 5.2% as we opine that the envisaged slowdown in the economy could see: i) softer trading activity, and ii) customers (i.e., brokerages and investment banks) defer plans to upgrade their systems. Note that the impact of the revenue revision to earnings is stronger as one-time implementation fees typically command higher margins.

Prepared for the Worst

Meanwhile, with the COVID-19 pandemic having led to the enforcement of containment measures across many parts of the world including Malaysia (via the movement control order) where N2N is headquartered, management reassured that the group’s operations across its markets in Asia have been on-going without any degradation in the level of customer service and support as its business continuity plans have taken into account the need to operate remotely. Note that it is important for the group to ensure the continuity of operations during this period as it is business as usual for its customers with the financial markets in their respective markets remaining open.

Source: TA Research - 8 Apr 2020

Labels: N2N
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Kumpulan Fima Berhad - Kumpulan Fima Berhad

Author: sectoranalyst   |  Publish date: Mon, 2 Mar 2020, 11:45 AM


Review

  • Kumpulan Fima Berhad (KFIMA)’s 9MFY20 results came in within expectation. Excluding the unrealised forex gains and other non-core items, 9MFY20 core net profit increased by 12.5% YoY to RM30.6mn. The improvement was mainly due to better product mix.
  • Manufacturing: 9MFY20 PBT decreased by 29.0% YoY to RM17.4mn on the back of lower revenue and higher inventories written down.
  • Plantation: 9MFY20 revenue increased by 2.5% YoY to RM82.8mn as a result of higher CPO production and prices. CPO sales volume increased by 9.9% YoY to 30k tonnes. The average selling price of CPO increased to RM2,003/tonne (+2.0% YoY). However, this division registered a LBT of RM4.7mn compared to a core PBT of RM9.2mn (exluded a write back of RM23.6mn), dragged by lower yield, higher operational cost and no CPKO sales for the first 3 quarters.
  • Bulking: Despite higher revenue, 9MFY20 PBT decreased by 14.5% YoY to RM27.9mn, mainly dragged by losses of biodiesel segment, which is in the process of optimising its biodiesel plant.
  • Food: This segment recorded a PBT of RM12.0mn in 9MFY20 (+34.4% YoY), backed by higher sales volume of tuna and mackerel products.
  • There was no dividend declared for the quarter under review.

Impact

  • No change to our earnings forecast.

Outlook

  • Management expects the Covic-19 to have some impact on the group operations and is currently assessing, monitoring and mitigating the impact on the outbreak and develop necessary action plans.
  • Meanwhile, we expect a weak 4Q due to lower contribution from the manufacturing, plantation and food division. We see some risk in the bulking business in the coming quarters as the Covid-19 outbreak may result in lower throughput across most product segments.

Valuation

  • We increase our cost of equity from 8.6% to 9.5%. As such, our DDM-driven TP of KFIMA has been adjusted lower to RM1.55 (previously RM1.83). We do not see much catalyst to drive KFIMA’ share price ahead and expect the group’s performance to remain weak in the coming quarters. As such, we are ceasing our coverage on KFIMA.

Source: TA Research - 2 Mar 2020

Labels: KFIMA
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