SMRT : Buy the dip

SMRT’s share price has experienced 22.8% decline from its 52W high of RM1.40 to yesterday’s closing of RM1.08. With operations remaining on track, we believe the correction presents a good opportunity for investors to accumulate on the dip. We reiterate our optimism, expecting the group’s site deployment to chalk a linear growth in the next two quarters and thus, stronger QoQ earnings.

Strong earnings outlook from TNB. To date, we estimate that approximately 20.4k of TNB’s distribution substations have been connected by SMRT. Sources suggest that TNB’s site deployment in CY24 will surpass CY23, indicating higher YoY site deployment over the next two quarters. Ahead of this, we continue to see ample job potential coming from TNB as a significant portion of distribution substations in Peninsular Malaysia are still unconnected. Supporting this, the upcoming RP4 period could see TNB increasing its capex, leading to higher yearly site deployments.

Indonesia and Philippine operations to fare strongly. Apart from Tenaga, we highlight that SMRT’s overseas segment has gained strong traction with a promising growth trajectory ahead. Accounting for c.30% of FY24's top-line, this segment's growth will be anchored by favourable outlooks in PLN Indonesia and PAPI Philippines. Similar to Tenaga, most of Indonesia's distribution substations remain unconnected, resulting in a high SAIDI index. As Indonesia embarks on smart grid initiatives, connecting these substations is vital for enabling their functionalities. While precise figures for Indonesia's distribution substation count remain unavailable, given the country's sprawling archipelago landscape and landmass, which is 5.7 times larger than that of Malaysia, it stands to reason that Indonesia likely hosts a significantly higher number of distribution substations. Meanwhile, the group expects site deployment in PAPI to accelerate in the remaining months of CY24, aiming to reach 1k connected ATMs. Following this, SMRT could be well-positioned to negotiate opportunities for connecting PAPI’s remaining ATMs, as PAPI operates approximately 3k ATMs in the Philippines.

A rebound? With strong psychological support at RM1.00 expected to cushion further downside and indicators showing signs of recovery, SMRT could stage an oversold rebound toward the RM1.18-1.29-1.36 region. Cut loss at RM0.98.

Source: Hong Leong Investment Bank Research - 8 Oct 2024