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TA Sector Research

Author: sectoranalyst   |   Latest post: Thu, 27 Feb 2020, 3:31 PM

 

Elsoft Research Berhad - FY19’s Results in Line

Author: sectoranalyst   |  Publish date: Thu, 27 Feb 2020, 3:31 PM


Review

  • Elsoft’s FY19 core net profit of RM18.0mn (-54.1%) came within our full-year estimates at 98.5%.
  • YoY. FY19’s revenue and core net profit declined 57.1% and 54.1% to RM33.6mn and RM18.0mn. This was mainly due to lower demand for automated test equipment (ATE) from the smart devices and automotive segment alongside: i) the absence of significant upgrades to a major endcustomer’s smartphone flash module, ii) the slowdown in the global automotive market, and iii) the uncertainty on the trajectory of the trade war between the USA and China. Profitability however improved with EBITDA and core net profit margins up 2.8pp and 3.5pp to 54.8% and 53.7%, lifted by higher investment income.
  • QoQ. 4QFY19’s revenue and core net profit grew 28.9% and 49.5% to RM6.3mn and RM4.1mn, driven by the automotive segment as well as higher investment income.
  • Elsoft declared a 4th interim dividend of 0.5sen/share (4QFY18: 1.3sen/share). This brought FY19’s dividend to 3.0sen/share (FY18: 4.6sen/share) and represents a payout of 113.2%. We are comfortable with the group’s generous dividend payout as it is backed by its strong balance sheet with net cash position including other investments as at 4QFY19 at RM68.0mn or 10.0sen/share.

Impact

  • Our FY20/FY21 earnings estimates are revised by -0.4%/-0.2% to RM30.6mn/RM32.8mn upon imputing FY19 figures into our model. We also introduce our FY22 earnings estimates of RM35.1mn.

Outlook

  • We expect FY20 to be a better year for Elsoft, with our revenue and earnings growth forecast of 79.8% and 69.9% to be driven by its new series of automated test equipment catered to the smart devices (LED flash tester) and automotive (headlamp tester) segments. Meanwhile, there are also prospects from its medical devices segment which is currently focused on developing more cost effective, compact, and portable embedded controllers for peritoneal dialysis machines.

Valuation & Recommendation

  • In all, we maintain our Buy recommendation on Elsoft with a TP of RM0.89/share based on a PE of 19.0x, in line with the stock’s 5-year mean, against CY20 EPS. We like the group for its research & development capabilities, rich margins, and strong balance sheet. Key downside risks include single customer concentration and poor acceptance of new products.

Source: TA Research - 27 Feb 2020

Labels: ELSOFT
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Elsoft Research Berhad - Looking Forward to a Better Year

Author: sectoranalyst   |  Publish date: Fri, 7 Feb 2020, 9:36 AM


With headwinds from the trade war having subsided, we are now more convinced on Elsoft’s ability to deliver improved performance in FY20 and as such we ascribe a higher target PE of 19.0x (previously 15.0x), which is in line with its 5-year mean and correspondingly arrive at a higher TP of RM0.89/share (previously RM0.72/share). Alongside the improved risk reward potential, we also upgrade our recommendation from Sell to Buy. Drivers for the group include its new series of automated test equipment catered to the smart devices (LED flash tester) and automotive (headlamp tester) segments. Key downside risks include single customer concentration and poor acceptance of new products.

Expect 4QFY19 Results to Remain Weak

Elsoft is scheduled to release its 4QFY19 results towards end-February 2020. We expect the quarter’s results to remain weak with revenue and core net profit estimated to come in the range of RM7mn to RM11mn and RM3mn to RM5mn (supported by order book of RM11mn as at end-3QFY19). If so, this will represent the 4th consecutive quarter of top and bottom line decline on a YoY basis. To recap, akin to most peers in the semiconductor industry, 2019 was a challenging year for Elsoft. Its 9MFY19 revenue and core net profit declined 58.1% and 57.9% to RM27.3mn and RM13.9mn as: i) the absence of significant upgrades to a major end-customer’s smartphone flash module, ii) the slowdown in the global automotive market, and iii) the uncertainty on the trajectory of the trade war between the USA and China, altogether led to lower demand for the group’s automated test equipment with weakness observed across all segments including smart devices, automotive, and general lighting.

Looking Forward to a Better Year in FY20

Notwithstanding, we expect FY20 to be a better year for Elsoft with revenue and core net profit forecasted to grow 67.0% and 67.9% to RM60.3mn and RM30.7mn, driven by: i) its new series of automated test equipment catered to the smart devices (LED flash tester) and automotive (headlamp tester) segments, and ii) the improved sentiment on the global economic backdrop following the phase one trade deal between the USA and China, which could see customers move forward with earlier capex plans that were placed on the back burner.

We note that the group’s new series of automated test equipment are currently undergoing qualification by customers, and we view bright prospects for acceptance given their relevance to emerging trends i.e., with the smart devices segment’s LED flash tester designed for the next evolution of smartphone flash module, and the automotive segment’s headlamp tester catered to multibeam LED headlamps which are still in a nascent stage. Attesting to its research and development capabilities, note that both the smart devices and automotive segments were the group’s key drivers over the years as they consistently contributed to over 80% of revenue.

Medical Devices Segment, a Wildcard.

Meanwhile, we continue to see the medical devices segment as a wildcard. While contributions from the medical devices segment are smallish, which we estimate to be <5% of 9MFY19 revenue, we note that Elsoft is now improving on the first generation of embedded controllers for peritoneal dialysis machines it introduced in 2018. Peritoneal dialysis is an alternative to haemodialysis, which among others, offers patients of chronic kidney disease the advantage and convenience of having dialysis at home. We believe that alongside the prevalence of chronic kidney disease, the market potential for the group’s upcoming generation will increase as it is expected to be more cost effective, compact, and portable. From 2018 to 2025, Fortune Business Insights projects the peritoneal dialysis market to grow at a CAGR of 5.8% to US$5.0bn.

Impact

We make no changes to our earnings estimates.

Valuation and Recommendation

With headwinds from the trade war having subsided, we are now more convinced on Elsoft’s ability to deliver improved performance in FY20 and as such we ascribe a higher target PE of 19.0x (previously 15.0x), which is in line with its 5-year mean and correspondingly arrive at a higher TP of RM0.89/share (previously RM0.72/share). Alongside the improved risk reward potential, we also upgrade our recommendation from Sell to Buy. Key downside risks include single customer concentration and poor acceptance of new products.

Source: TA Research - 7 Feb 2020

Labels: ELSOFT
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Velesto Energy Bhd - Almost Full Fleet Utilization in 3Q19

Author: sectoranalyst   |  Publish date: Fri, 29 Nov 2019, 9:01 AM


Review

  • Velesto Energy Bhd (VEB)’s 9M19 core profit of RM23.5mn (9M18: RM47mn loss) trumped our expectations and but was within consensus’ – accounting for >100%/73% of full-year estimates. The outperformance versus our estimates was due to higher-than-expected contribution from the drilling fleet.
  • QoQ, profit jumped more than 3-fold mainly due to a surge in fleet utilization to 92% (2Q19: 74%). This was underpinned by: (1) NAGA 6 was deployed for a new long-term contract for Petronas Carigali in Jul-19, and (2) full 3-months contribution from NAGA 2, 3 & 5 in 3Q19 for contracts that commenced in May-19.
  • Additionally, 3Q19 results were boosted by deployment of a second Hydraulic Workover Unit (HWU) unit. The combination of the above factors more than compensated for sequentially higher depreciation and taxes.
  • Stellar 9M19 results were mainly driven by the Drilling segment on the back of: (1) improved fleet utilization of 77% (9M18: 66%), and (2) higher Daily Charter Rates (DCR). Recall that NAGA 2, 3, 5, & 6 (deployed: Mar-Jul 2019) secured long term contracts at higher DCR of 3%-12% (versus FY18).
  • Additionally, to a lesser extent, 9M19 profits were boosted by:- (1) higher utilization and DCRs from the HWU fleet, and (2) turnaround of the Oilfield Service (OFS) segment with pretax profit of RM1.4mn (9M18: RM7mn LBT). OFS’s losses in 9M18 were mainly attributed to a provision for retrenchment benefits (RM4.0mn).
  • The drivers above more than offset drag from higher depreciation, finance costs and taxes in 9M19. Depreciation inched up due to capitalization of Special Periodic Survey (SPS) costs (circa RM82mn).

Impact

  • Maintain earnings estimates pending updates from management at today’s analyst briefing.

Outlook & Valuation

  • We expect full fleet utilization in 4Q19 except for SPS downtime for NAGA 3 and 7. Following completion of their SPS by end-19, both rigs will resume their existing contracts. Meanwhile, we expect NAGA 8 to undergo SPS in FY20,
  • Recall that 5 out of 7 rigs in VEB’s fleet are chartered out to Petronas Carigali on long term basis (up to 2Q 2022 – 2H23). Meanwhile, we believe there is high chance that the balance 2 rigs (expiry: 2H20) will secure new contracts or extensions. This is given high demand in both local and regional markets.
  • Domestically, Carigali requires more than 16-18 jack-ups in FY20, including 5 rigs chartered from VEB. Whereas locally-owned jack-ups merely amounted to 8 rigs (including Perisai’s rig). Recall that Carigali prioritizes local players for contract awards. Therefore, this implies demand far surpassing supply in the local jack-up market. Vice versa, VEB also prioritizes local contracts, given higher rates, cost efficiency and a reliable counter party in Petronas.
  • We believe VEB’s earnings still has room for growth, on the back of: (1) upside in DCRs, - for new projects and contract extensions, (2) higher HWU fleet deployment, and (3) interest savings from management’s intentions to progressively pre-pay loans.
  • Currently, 2 out of 4 HWU are chartered-out – which implies room for improvement. Additionally, upside risk lies in management’s intentions to charter out 3rd party rigs locally. Against this backdrop, we maintain Buy on VEB with unchanged target price (TP) of RM0.43 based on 13x CY20 EV/EBITDA.

Source: TA Research - 29 Nov 2019

Labels: VELESTO
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UMW Holdings Bhd - Trims Car Sales Target

Author: sectoranalyst   |  Publish date: Fri, 29 Nov 2019, 8:58 AM


Review

  • UMW Holdings Bhd (UMW)’s 9MFY19 results came in below expectations. Excluding all exceptional items, 9MFY19 core net profit increased by 6.0% YoY to RM205.6mn. This accounted for 49% and 54% of our and consensus’ full-year estimates, respectively. The deviation was mainly due to lower contribution from the Automotive division.
  • Automotive – 9MFY19 revenue decreased by 0.8% YoY due to lower sales unit. Toyota sold 47,608 units in 9MFY19 (-9.6% YoY) while Lexus registered lower sales of 543 units (-36.5% YoY). Meanwhile, it’s 38% associate, Perodua recorded a sales unit growth of 6.3% YoY to 178,754 units. As a result, PBT was slightly lower by 1.0% YoY to RM415.4mn.
  • Equipment – 9MFY19 revenue decreased by 5.5% YoY to RM1,080.1mn. PBT decreased by 14.1% YoY to RM108.4mn, dragged by lower revenue from both Heavy and Industrial Equipment sub-segments.
  • Manufacturing & Engineering (M&E) – This segment registered a PBT of RM30.9mn compared to RM12.1mn recorded last year. The commendable results were mainly underpinned by higher delivery of fan cases to Rolls-Royce and higher demand of Auto-components products.
  • The group has declared a special dividend of 4 sen/share for the quarter under review.

Impact

  • Earnings for FY19- FY21 have been adjusted lower by 8.3% - 27.9% after imputing a lower sales volume into our model. We now expect the group to register a sales volume growth of between 2% - 8% in FY19-FY21.

Outlook

  • Management has cut FY19 car sales target from 75k units to 72k units. The business remains competitive due to wider customers’ choice and prudent spending by both consumers and businesses.
  • The Equipment segment’s outlook remains challenging as demand in the construction, manufacturing, mining and logging sectors are likely to be sluggish for the rest of the year.
  • While for the manufacturing & engineering businesses, the demands for Auto-components and lubricant products are expected to remain stable over the near term.
  • Additionally, contribution from the aerospace division also expected to improve due to increase delivery of fan cases to Rolls-Royce for the remaining of the year and expected to be profitable in FY20.

Valuation

  • UMW’s SOP valuation is revised lower to RM4.37/share after the earnings adjustments. The stock currently trading at CY20 P/E of 12.8x. Downgraded to SELL from Buy

Source: TA Research - 29 Nov 2019

Labels: UMW
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Star Media Group Berhad - Print Business Continues to Suffer

Author: sectoranalyst   |  Publish date: Fri, 29 Nov 2019, 8:55 AM


Review

  • Star’s 9MFY19 core net profit of RM5.4mn (-56.0%) accounted for 65.9% and 52.2% of ours and consensus full-year estimates respectively. We deem this to be within expectations as we expect a stronger 4QFY19 driven by higher adex spend during the year-end festivities.
  • YoY. 9MFY19’s revenue and core net profit declined 19.9% and 56.0% to RM239.9mn and RM5.4mn, dragged by the group’s core print as well as radio businesses which continued to suffer from declining adex on traditional mediums alongside the structural shift in media consumption to digital platforms. We note from the group’s results announcement that revenue from the digital business grew 15% but we believe contributions are smallish and not meaningful.
  • QoQ. Revenue grew 2.4% to RM79.6mn, driven by higher contributions from the radio and event and exhibition businesses. However, net profit fell 84.9% to RM0.3mn as the group’s core print business continued to suffer from declining adex and slipped into the red with a LBT of RM0.3mn. Meanwhile, the group remained in healthy financial standing with a robust net cash position of RM387.7mn or 52.5sen/share (11.5% QoQ, 24.5% YoY).

Impact

  • While 9MFY19’s results met our expectations, we take the opportunity to lower our FY20/FY21 forecasts on expectations for the challenging operating environment to prevail into the near-term. Citing Nielsen Media Research’s data, we observe that the decline in industry print adex has yet to bottom out with 9MFY19’s of -17.8% only a slight moderation from 9MFY18’s of -20.2%. In this regard, upon lowering our FY20/FY21 adex forecast by 10%, we cut our FY20/FY21 earnings estimates by 79.8%/76.1% to RM1.9mn/RM2.4mn.

Outlook

  • In the near-term, we expect Star to remain challenged by the on-going structural decline in traditional adex. That said, the downside risk could be cushioned by continued efforts to drive growth from the digital space. Among others, in addition to digital advertising and its OTT service dimsum, management also sees opportunities to monetise via the imminent introduction of a paywall on The Star Online.

Valuation & Recommendation

  • Following our earnings cut and pegging to a lower P/BV of 0.4x (previously 0.5x), we arrive at a lower TP of RM0.45/share (previously RM0.57/share). Reiterate Sell as we opine the stock lacks earnings catalyst at this juncture. Key upside risks include accretive M&A’s and the unlocking of asset value while key downside risks include an unprecedented decline in adex.

Source: TA Research - 29 Nov 2019

Labels: STAR
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Pesona Metro Holdings Berhad - Construction Margin Improves Further

Author: sectoranalyst   |  Publish date: Fri, 29 Nov 2019, 8:54 AM


Review

  • PESONA’s 9M19 net profit of RM15.1mn came in within our expectation, accounting for 68.8% of our full-year forecast.
  • 9M19 net profit surged 32.3% to RM15.1mn despite overall revenue was 3.0% lower at RM438.2mn. The better earnings came mainly from higher construction operating margin which improved by 1.3%-pts to 4.9%.
  • QoQ, net profit dropped 18.9% to RM5.3mn, in line with a 17.8% decline in the quarterly revenue to RM142.0mn. The immediate preceding quarter was boosted by higher contribution from the i-City mall project. While the overall net profit was lower on sequential basis, the construction operating margin improved further to 5.4%, the highest since 4Q17.

Impact

  • Maintain our FY19 to FY21 earnings forecasts.

Outlook

  • PESONA’s outstanding order book eased from RM1.9bn a quarter ago to RM1.7bn, which translates into 3.1xFY18 construction revenue. This is sufficient to provide earnings visibility to the group for the next 2 years.
  • The student hostel concession is expected to provide a stable recurring income stream to the group.

Valuation

  • No change to our target price of RM0.31, based on SOP valuation. Maintain Buy

Source: TA Research - 29 Nov 2019

Labels: PESONA
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