If executed well, Bahvest is expected to stage an explosive 359% FY19-21 EPS CAGR surge to consensus FY21 EPS of 6.4sen (FY19 0.3sen), mainly driven by the booming mining business (replacing the weakening aquaculture operations amid intense competitions from China producers). Moreover, Bahvest is a direct proxy to the more promising gold outlook as investors are now returning to the traditional safe haven, thanks to the protracted US-China trade war, rising geopolitical tensions, heightened fears of a global downturn coupled with sliding bond yields amid growing expectations for a Fed rate cut in 2H19. Valuation is undemanding at 15.9x FY3/20 P/E, 69.5% lower than 2Y average of 52.1x. Technically, the stock is ripe for a downtrend resistance breakout near RM0.645, before advancing further towards RM0.665-0.74 zones.

From aquaculture to gold mining. Listed in 2005, Bahvest’s core business was the rearing of marine fish in Sabah and transportation of live fish to places like Hong Kong and South China. Management indicated in its 4Q19 results review that the group will continue to face economic challenges and uncertainties for its Aquaculture operations both domestically as well as globally due to the stiff competitions from China producers.

Sustainable gold mine. At end-2016, Bahvest’s Managing Director Datuk Lo Fui Ming injected his private mining business in Tawau (317.7 ha) into Bahvest for RM96m in return for 102.1m new Bahvest shares at RM0.94/share. In Aug 2018, the group commenced mining operations at Bukit Mantri after acquiring a 100% stake in Wullersdorf Resources in Jan 2017. Out of a total land size of 317.7ha, the group identified 28ha (only 8.8%) of land to begin mining operations and reported maiden gold production in Sep 2018 of 23.69kg, with monthly production reached as high as 76.8kg in Apr-2019 (Figure #2). The identified 28ha of mining area should sustain their earnings for more than 15 years, with the top 200 meter of hill surface itself containing total reserves of 207,000 troy ounces as indicated by the Joint Ore Reserves Committee (JORC) report, issued by Optiro, an independent mining consultant in West Perth, Australia. The sub-lease term on the mining land of 317.7ha runs until Sep 2048, which provides more than enough land resources for Bahvest to sustain their business for years to come.

Potential direct exposure to gold prices. In the local bourse, there are not many direct gold plays. Currently, most of the listed gold stocks are gold retailers like Poh Kong and Tomei Consolidated. With Bahvest starting commercial mining operations in Sep-18, management believes the company offers investors a possible direct exposure to gold prices. Outlook for gold price (Figure #3) remains promising on deteriorating global economic growth and plunging US bond yields amid expectations of further Fed rates cuts. Moreover, protracted US-China trade war has led to increased wild swings in global financial markets, which encourage demand for gold as investors seek to safe haven to preserve wealth.

Pending a downtrend channel breakout. After sliding 26.4% from 52-week high of RM0.74 (19 Mar) to a low of RM0.545 (18 Apr), Bahvest has been trending higher to end at RM0.62 on 4 June (24 May). With prices trading comfortably above major 100D SMA (near RM0.58) and 200D SMA (RM0.545), we expect a downtrend resistance breakout near RM0.645 soon from a grossly oversold position. A decisive breakout above RM0.645 will lift prices higher towards RM0.665 (61.8% FR) before reaching our LT objective at RM0.74. On the flip side, key supports are situated at RM0.58-0.60. Cut-loss at RM0.575.

Source: Hong Leong Investment Bank Research - 7 Jun 2019