SENFONG: Set for rebound

Malaysia’s leading rubber block manufacturer. Seng Fong Holdings Bhd (“SFH”) is primarily involved in processing cup lump and semi-processed rubber into SMR Grade and Premium Grade block rubber. The majority of the group’s rubber blocks are sold to tire manufacturers and rubber traders, which in turn supply these products to tire manufacturers. All of the group's sales were generated in export markets, such as China (45.5%), Hong Kong (26.6%), Singapore (26.9%) and others (1%).With three processing plants in Gemas, the group currently boasts an annual rubber block capacity of 190k MT.

Riding on China and India automotive market. With over 80% of the group’s sales generated from the China and India automotive markets, SFH is well-positioned to capitalize on the robust automotive outlook in these regions. In China, the total number of registered vehicles reached a record 329.1m units in 2023, with continued growth driven by steady domestic car sales, averaging around 25m annually over the past five years. In India, new automobile sales surpassed Japan for the first time in 2022, making it the third-largest auto market in the world. The country’s emergence as an economic powerhouse, coupled with its expanding middle class, will be key drivers for the continued growth of its automotive market. Additionally, the rapid growth in EV sales in these markets is set to accelerate tire wear and tear, boosting demand for rubber blocks.

Palatable valuation with attractive dividend yield. With all considered, we project SFH’s FY25/26/27 core net profit to increase by 18%/10%/8%, implying a respectable 3-year CAGR of 12.3%. At RM1.02, SFH is trading at an undemanding 10.5x FY25F P/E (-1SD below its 2-year average P/E of 12.7x and at a substantial 46% discount to the average P/E of Indian tire manufacturers at 19.7x), coupled with an attractive dividend yield of 5.7%. The combination of undemanding valuation and attractive dividend yield should cushion further downside, in our view.

Building a base. SFH is building a base near its solid support region of RM0.97-1.00 region, with grossly oversold indicators. A successful breakout above RM1.05 will spur the share price toward RM1.09-1.18-1.25 region. Cut loss at RM0.91.

Collection range: RM0.97-1.00-1.02

Upside targets: RM1.09-1.18-1.25

Cut loss: RM0.91

Source: Hong Leong Investment Bank Research - 12 Nov 2024