SMRT: Strong earnings in the making

Top picks in technology space. In our latest technology sector report, we have upgraded SMRT’s target price to RM2.28 (from RM1.38) as we roll forward our valuation year to FY25 and apply a higher P/E multiple of 30x (up from 25x). As one of our top picks in the technology space, we favour SMRT for its strategic position to capitalize SEA’s growing adoption of smart grid initiatives through its IoT business, particularly amid the rising share of renewable energy and the heightened focus on improving the SAIDI index. The group’s recent expansion into the Philippines through PAPI is also seen as a strategic entry into the country’s power sector, which faces challenges similar to those in Malaysia and Indonesia. By replicating its successful business model from Malaysia and Indonesia, SMRT is well-positioned to swiftly penetrate new markets. The expected proliferation of managed sites post-deployment is anticipated to contribute to steady growth in the group’s recurring income base. Additionally, SMRT serves as a proxy for addressing Malaysia’s non-revenue water issue, which is becoming increasingly critical due to the surge in water demand driven by the rapid influx of DCs.

Stronger earnings back to back? Historically, SMRT’s 3Q has been the weakest in its financial year due to fewer working days during the festival season. With operations returning to normal in 4Q24, the upcoming 4Q24 earnings announcement this month is highly likely to show stronger QoQ performance. Looking ahead, further growth is expected in 1QFY25-2QFY25, as utilities companies like Tenaga and PLN typically concentrate their capex spending during this period, leading to higher site deployments. Insights suggest that Tenaga’s site deployment for CY24 is projected to slightly exceed CY23, mirroring the rising trend in DA installations by Teanga. PLN, particularly in Jakarta, is also expected to gain momentum. Additionally, the group is optimistic about reaching 1k sites for the Philippines’ PAPI by 2QFY25, which will bolster its recurring income base. With these factors in play, SMRT is poised for sequential QoQ earnings growth over the next three quarters.
 
Set for advance further. After closing the gap between RM1.15 and RM1.20 on August 13th, SMRT is poised for further advancement toward the RM1.25-1.38-1.40 region, supported by improving indicators. Cut loss at RM0.98.

Collection range: RM1.08-1.10-1.14

Upside targets: RM1.25-1.38-1.40

Cut loss: RM0.99

Source: Hong Leong Investment Bank Research - 16 Aug 2024