Highlights

TA Sector Research

Author: sectoranalyst   |   Latest post: Thu, 21 Nov 2019, 3:55 PM

 

N2N Connect Berhad - Higher-Than-Expected Margins in 3QFY19

Author: sectoranalyst   |  Publish date: Thu, 21 Nov 2019, 3:55 PM


Review

N2N’s 9MFY19 core net profit of RM11.1mn (-22.3%) came above our estimates at 80.3%. The surprise on the upside was due to the higher-thanexpected margins achieved in 3QFY19 on the back of lower operating expenses which drove EBITDA margins to expand 9.0pp QoQ and 2.1pp YoY to 30.4%.

YoY. 9MFY19’s revenue and core net profit declined 1.7% and 22.3% to RM78.9mn and RM11.1mn respectively. Earnings fell at a faster pace mainly due to: 1) a lower mix of one-time implementation charges which generally fetch higher margins, and 2) the one-off expenses incurred in 2QFY19 for: i) the settlement of a lawsuit (RM0.6mn), and ii) the exercise to harmonise products in Hong Kong and Malaysia (RM0.7mn).

QoQ, 3QFY19’s core net profit surged 130.6% to RM4.7mn mainly due to lower operating expenses in part due to the absence of the aforementioned one-off expenses incurred in 2QFY19. Revenue however declined 2.7% to RM25.5mn mainly on lower transaction-based fees.

Impact

To reflect the higher-than-expected margins, we have raised our margin assumptions across FY19/FY20/FY21 by ~1pp and as a result, our earnings estimates for the corresponding period are raised by 7.1%/6.6%/6.0%.

Outlook

Despite N2N’s weak 9MFY19 numbers, we remain positive on its near-tomedium term prospects with growth opportunities present from: 1) market share gains for its trading platform across its key markets in Asia (Hong Kong, Indonesia, Malaysia, Philippines, Singapore, Thailand, & Vietnam), and 2) the replacement of brokerages aging legacy back office settlement systems.

We believe that more brokerages and investment banks will be allured by N2N’s trading platform which has just started to feature enriched cross border trading capabilities via its Asia e-Broker and Asia Trading Hub platforms. The platforms were recently launched in Malaysia on 7 November 2019 and will soon be available for customers in Hong Kong and Singapore.

Meanwhile, we do not expect the political unrest in Hong Kong (~50% of N2N’s revenue) to weigh on the group’s financial performance as the business model there is based on a license and rental model whereby revenue is mainly fixed comprising of one-off software license fees and fees from the rental of terminals, or in other words, its revenue is independent of trade volumes.


Valuation & Recommendation

After raising our earnings estimates, we arrive at a higher TP of RM0.83/share (previously RM0.77) for N2N, pegged to 25.0x CY20 EPS which is -1SD to the stock’s 3-year mean. Also, with the increased risk reward potential, we upgrade our recommendation from Hold to Buy. Key risks include poor demand for new system implementation


Source: TA Research - 21 Nov 2019

Labels: N2N
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Sunway Construction Group Berhad - A Slow 3Q19

Author: sectoranalyst   |  Publish date: Wed, 20 Nov 2019, 5:03 PM


Results Review

  • SUNCON’s 9M19 net profit of RM97.7mn came in below expectations, accounting for 68.8% and 68.9% of our and consensus full-year estimates. The variance was mainly due to slower-than-expected progress of works. Majority of existing jobs are still in initial stages while LRT3 package was delayed due to cost optimisation by the client.
  • For 9M19, both the overall revenue and net profit declined by 21.3% and 9.5% to RM1282.8mn and RM97.7mn respectively as construction division reported lower top line (-22.9%) and PATAMI (-6.6%). Meanwhile, precast division sank into minor loss of RM0.3mn from a PATAMI of RM3.0mn recorded in 9M18, mainly dragged by old projects with slim margins.
  • QoQ, while the overall revenue was 8.5% lower at RM402.6mn, the lowest quarterly revenue since 4Q16, 3Q19 net profit was marginally higher by 0.9% at RM33.5mn, thanks to lower taxation (-69.2%). The precast division returned to a minor loss of RM0.3mn at PATAMI level.

Impact

  • Following the weaker-than-expected results, we make adjustment to revenue recognition and margin assumptions for various projects. All in, earnings forecasts for FY19/FY20/FY21 were cut by 8.0%/6.4%/0.1% respectively.

Outlook

  • Its outstanding order book eased slightly from RM5.8bn a quarter ago to RM5.6bn, translating into 2.5x FY18 revenue. This could provide earnings visibility to the group for the next 2 to 3 years.
  • For 9M19, the group has secured RM1.7bn of new jobs, versus our order book replenishment assumption of RM2.0bn for FY19. Active tender outstanding is estimated at RM7.4bn.
  • To grow its business, the group is actively exploring opportunities in overseas markets. It now targets to secure overseas projects in Myanmar and India by 1H20 after tender exercises for these projects have been delayed by project owners.

Valuation

  • Maintain SELL on the stock with a lower target price of RM1.60, from RM1.71 previously, based on 14x CY20 earnings.

Source: TA Research - 20 Nov 2019

Labels: SUNCON
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Petronas Gas Berhad - Dragged by Turnaround at Kertih Air Separation Unit

Author: sectoranalyst   |  Publish date: Wed, 20 Nov 2019, 5:02 PM


Review

  • Petronas Gas Berhad’s (Pet Gas) 9M19 core profit of RM1.4bn (-6% YTD) was within our expectations and consensus’ - accounting for 73%/75% of full-year estimates respectively.
  • There were no surprises, as quarterly trends largely prevailed. YTD profit was mainly dragged by the Transportation segment due to: (1) lower tariffs under the 2019 Third Party Access (TPA) pilot period, and (2) higher opex.
  • To a lesser extent, YTD bottomline was also dragged by the Regasification and Utilities segments. The latter was underpinned by: (1) higher depreciation given that jetty facilities at Regasification Terminal Pengerang (RGTP) are now recognized under new accounting standards, (2) increased opex, (3) lower sales volumes following planned statutory turnaround at Kertih Air Separation Unit (KASU) in 3Q19, and (4) higher Utilities gas feedstock prices.
  • Additionally, higher taxes exacerbated YTD profit decline. This was due to (i) expiry of tax incentives for the Utilities segment, and (ii) RGTP tax incentives granted were recognized in 9M18.
  • The above more than offset YTD profit drivers in the form of:- (1) higher reservation charge for Gas Processing (GP) under the new 2nd term GP Agreement (start: Jan-19), (2) maiden contribution (start: Mar-19) from Pengerang Air Separation Unit (PASU), and (3) lower depreciation for GP assets.
  • Meanwhile, QoQ weakness was mainly attributed to: (1) KASU’s shutdown, and (2) lower contribution from PASU. Additionally, sequential gross profit from all other segments were also lower. Nevertheless, bottomline decline was partially mitigated by lower taxes.
  • Pet Gas declared 3rd interim DPS of 18 sen (3Q18: 18 sen), which brings 9M19 DPS to 50 sen (9M18: 50 sen).

Impact

  • Maintain earnings forecasts pending a results conference call later today.

Outlook & Valuation

  • We await details on actual 2020-22 Regulatory Period 1 (RP1) transportation and regasification tariffs. The latter will likely be revealed before end-2019. In particular, for transportation assets, we are concerned of sizeable earnings erosion via reduction in allowed asset return. This was evident from lower transportation TPA tariffs (16.4% reduction versus prior rates) during the 2019 pilot RP. Therefore, this may prelude lower rate of return (or WACC) for Pet Gas’ TPA assets in RP1.
  • Furthermore, valuation of regulated TPA assets will transition progressively from Optimized Replacement Costs (ORC) to Historical Cost (HC) by end of RP2 (estimate: 2024-26). Given that ORC translates to circa 3x of HC, this alludes potentially lower TPA asset base (assuming no new investments), and hence reduced income.
  • Given risk of earnings uncertainty, we prefer to hold back until regulatory clarity emerges. Maintain Sell on Pet Gas with unchanged target price (TP) of RM15.50 based on Sum-of-Parts (Figure 4).

Source: TA Research - 20 Nov 2019

Labels: PETGAS
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Petronas Gas Berhad - Aggressive on Expanding Ancillary Biz

Author: sectoranalyst   |  Publish date: Wed, 20 Nov 2019, 4:59 PM


Hungry for New Ancillary Businesses. Pet Gas is diversifying its ancillary business revenue streams to include: (1) LNG bunkering (target: 1Q20) at Regasification Terminal (RGT) Sungai Udang, (2) LNG truck loading (target: 2020) at RGT Pengerang (RGTP) and (3) RM150mn Nitrogen Gas Unit 3 at Kertih (target: 1Q21). Additionally, management hinted at a new LNG virtual pipeline track. These services will add to Pet Gas’ existing portfolio of ancillary services, which include: (1) Gassing Up Cooling Down (GUCD) for LNG carriers at RGTP (start: Apr-19), (2) Reloading at RGTP (start: Aug-19), and (3) steam contract (start: Apr-19). Contribution from these businesses are largely insignificant to Pet Gas at this juncture. However, management expects traction to accelerate following the full ramp-up of Petronas Chemicals’ RAPID complex in 4Q19-1Q20. We believe this would partially cushion earnings erosion (if any) from implementation of Third Party Access (TPA) tariffs in 2020.

4Q19 Sequential Recovery on the Cards. Management guided for a sequentially stronger 4Q19 on the back of: (1) recovery of operations at Kertih Air Separation Unit (ASU), (2) lower repair and maintenance (R&M) costs given a seasonally quiet 4Q, and (3) improved associate contribution from Pengerang Gas Solutions due to gradual ramp-up at RAPID, and (4) higher utilization at Kimanis IPP following completion of planned maintenance for a generation block. In particular, R&M activities were exceptionally higher in 3Q19 across all segments. Nevertheless, management expects this to normalize in 4Q19, and potentially reduce in 2020. Recall that Kertih ASU underwent a plant turnaround for approximately 30 days in 3Q19. This was a statutory exercise required by DOSH (Department Of Occupational Safety And Health) after every 3-year interval. Nevertheless, Pet Gas has requested DOSH to extend this maintenance period to 6 years moving forward.

Santong Fire No Big Deal. According to management, there was minimal financial and operational impact in relation to a minor fire incident in Jul-19. To recap, the latter occurred at one of the Group’s gas processing plants (GPP) at Paka, Terengganu. The fire was confined to one of the plant’s De-Methanizer Column equipment, and was completely extinguished after approximately 8-9 hours. Product deliveries to Pet Gas’ client remained intact due to the integrated operations of the GPP complex. Therefore, the Group is still able to exceed its performance incentive for 9M19.

Uncertainty is Unnerving, Whilst stock valuations are subdued, we are cautious of earnings downside risk emanating from implementation of TPA. In particular, this applies to gas transportation assets. Valuation methodology of these assets will transition progressively from Optimized Replacement Costs (ORC) to Historical Cost (HC) by end of RP2 (estimate: 2024-26). Given that ORC translates to circa 3x of HC, this implies potentially lower TPA asset base (assuming no new investments), and hence reduced earnings. Additionally, there is also a likelihood of a reduction in allowed asset returns to match that of Pet Gas’ other regulated peers. Given lingering uncertainty, we maintain Sell on Pet Gas with unchanged Sum-of-Parts target price of RM15.50.

Source: TA Research - 20 Nov 2019

Labels: PETGAS
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Kuala Lumpur Kepong Berhad - Better Outlook

Author: sectoranalyst   |  Publish date: Wed, 20 Nov 2019, 4:57 PM


Review

  • Excluding the forex impact and other non-core items, FY19 core profit declined by 24.2% YoY to RM602.1mn, accounting for 91% of our and consensus’ full-year estimate. Both plantation and manufacturing divisions posted weaker earnings on YoY basis.
  • Plantation: Despite higher FFB (+4.5% YoY) and CPO (+5.6% YoY) production, FY19 operating profit decreased by 52.3% YoY to RM400.4mn mainly due to increase in cost of production as well as weaker average selling prices of CPO (-17.6% YoY to RM1, 924/tonne) and palm kernel (- 38.5% YoY to RM1, 210/tonne).
  • Manufacturing: FY19 operating profit was slightly lower at RM434.6mn (-0.7% YoY) due to decrease in selling prices, margin erosion for exports to the European market.
  • Property: This segment recorded an operating profit of RM43.9mn (+25.5% YoY) in FY19 compared to RM35.0mn recorded last year. The higher profit was due to completion of high-margin projects.
  • According to announcement, a final dividend for FY19 will be declared at a later date (FY18: final dividend of 30 sen/share).

Impact

  • Earnings forecasts are revised upward for FY20 and FY21 by 25.6% and 32.5% after factoring in higher CPO price assumptions of RM2400/tonne and RM2,500/tonne for CY20 and CY21, respectively. Meanwhile, we also lower our FFB growth assumptions to be in line with management’s guidance.

Outlook

  • Management expects profit for FY20 to be higher due to stronger palm oil prices. The oleochemical division is expected to maintain its performance for FY20 with some additional capacities coming onstream. The higher contribution from the plantation segment is expected to offset lower margin for the manufacturing division.
  • We expect higher CPO prices for CY20 and CY21, underpinned by lower palm oil supply, firmer soybean oil prices and higher biodiesel mandates, which are expected to reduce palm oil stockpiles.

Valuation

  • We upgrade KLK’s TP to RM24.42 (previously RM19.16) based on 26x CY20 EPS. Wih the potential upside of 8.5%, we upgrade KLK from Sell to HOLD.
  • Potential re-rating catalysts for the stock include: i) stronger-than-expected FFB growth, ii) improvement in downstream margin, and iii) higher palm oil prices.

Source: TA Research - 20 Nov 2019

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Berjaya Sports Toto Berhad - No Major Surprises

Author: sectoranalyst   |  Publish date: Wed, 20 Nov 2019, 4:55 PM


Results Review

  • Berjaya Sports Toto’s (BJToto) 1QFY20 core profit accounted for 17.5% of our full-year forecast and 20.9% of consensus estimates. We consider this as within expectations after taking into consideration that ticket sales tend to be seasonally strong during Chinese New Year in January or February.
  • For comparison purpose, due to a change in financial year, we adjust 1Q and 4QFY19 earnings by blending previous year results ended April (see Table 3) to eliminate timing difference. Overall, BJToto’s 1QFY20 core earnings declined by 22.6% YoY due to 1) lesser draws of 42 times in 1QFY20 versus 46 times in the same period last year with 1 reduction in normal draw and 3 in special draw. 2) margin contraction in the car franchising segment as 1QFY19 earnings were boosted by the launch of new models with high margins.
  • In terms of balance sheet quality, 1QFY20 net gearing escalated to 0.96x (vs 0.87x as at Oct-18). However, the group has managed to refinance its short-term debts with long-term financing, resulting in improvement in current ratio to 1.3x (vs 0.8x as at Oct-18).
  • For this quarter, BJToto declared a first interim dividend of 4sen/share, similar to 2QFY19 ended Oct-18. This is in line with our dividend projections of 16sen/share for FY20.

Impact

  • No change to our FY20-21 earnings projections.

Outlook

  • In our opinion, the stern penalties introduced in Budget 2020 against illegal gamblers, which comprised a higher minimum mandatory penalty of RM100,000 and a minimum mandatory jail sentence of 6 months, could effectively curb black market activities in the NFO industry in Malaysia. We believe the penalties are big enough to stop gamblers from taking unnecessary risks for additional prizes.

Valuation

  • Maintain Buy with unchanged DDM-valuation of RM2.93/share based on unchanged discount rate of 10.6%.

Source: TA Research - 20 Nov 2019

Labels: BJTOTO
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