By CIMB Research
Target Price: RM2.25
CIMB Research has maintained its “add” call on DRB-Hicom Bhd, on the prospects of an imminent collaboration with a foreign strategic partner for its wholly-owned Proton Holdings Bhd.
However, the research house said that failure to determine a foreign strategic partner for Proton and a deterioration in the car manufacturing company’s earnings would pose downside risks for DRB-Hicom moving forward.
Following its visit to DRB-Hicom’s automotive assembly plants, automotive university and defence vehicle assembly plant in Pekan, Pahang, CIMB Research noted that the automotive manufacturing and defence vehicle assembly capabilities are important to DRB-Hicom’s automotive division, as they contributed positive operating profit to the automotive division in financial year 2016 (FY16).
“We were also encouraged to see DRB-Hicom expanding its automotive ecosystem, with the aim of transforming DRB-Hicom Automotive Complex into a self-sustaining regional automotive centre with state-of-the-art technology,” said CIMB Research in a note.
The research house noted that DRB-Hicom’s HICOM Automotive Manufacturers Malaysia’s (HAMM) automotive assembly plant is undergoing expansion. The facility specialises in the assembly of foreign marques and commercial vehicles.
To note, HAMM recently completed the construction of a new RM230mil paint shop, which is expected to boost the production capacity for Volkswagen models to 50,000 units per annum. At present, the production capacity stands at 25,000 units per year.
CIMB Research also said that the DRB-HICOM Defence Technologies Sdn Bhd (DEFTECH) is negatively affected, following a tighter government defence budget allocation.
“DEFTECH carries out contract assembly of defence vehicles. It was awarded a RM7.55bil contract in February 2011 to supply a total of 257 units of AV-8 armoured wheeled vehicles to the Malaysian Army for the period of 2014 to 2020.
“We estimate that DEFTECH has only completed approximately 26% of the AV-8 project as at end-FY16.
“This was partly due to the tightening in the government’s defence budget allocation,” stated the research house.
KOSSAN RUBBER INDUSTRIES BHD
By UOB Kay Hian Research
Target price: RM6.72
Glovemaker Kossan Rubber Industries Bhd’s overall revenue for the first quarter of financial year 2017 (Q1’17) is projected to increase between 8% and 13% on a quarter-on-quarter (q-o-q) basis, on the back of higher glove sales volume and further margin expansion. Its core earnings are also expected to improve in the same period.
UOB Kay Hian Research said that the improvement in Q1’17 core earnings were expected due to restoration in Kossan Rubber’s production volume, following the completion of major refurbishment works at its two older facilities.
“We expect mid- to high-single-digit q-o-q earnings growth underpinned by higher glove sales volume contribution, arising from a recovery in utilisation rates to more than 80% at two older plants following the completion of major refurbishment works last quarter. Prior to the completion in Q3’16, utilisation rate ranged between 75-76%.
“Apart from that, q-o-q margin expansion on firmer glove average selling price and a more favourable exchange rate US dollar-ringgit exchange rate in Q1’17, support our projection for a better earnings growth,” said the research house in a note.
UOB Kay Hian Research also said that Kossan Rubber is expected to deliver a 4-5% qoq sales volume growth, amid the absence of new production capacity coming on-stream in Q1’17. This is following the full restoration of glove production volume at its two older plants.
With regard to Kossan Rubber’s expansion plans, the research house noted that the management has guided that it will now focus on restoring capacity growth in the second half of 2017, following the completion of refurbishment works at two older plants.
To note, the construction of a new plant with an annual production capacity of three billion pieces has been scheduled for completion in June 2017.
“Kossan Rubber’s four-year expansion plan entails the construction of four factories. The expansion plans would add an estimated total production capacity of 18-20 billion glove pieces per annum to the group upon full-commissioning in 2020,” said UOB Kay Hian Research.
The research house upgraded its “buy” recommendation on Kossan Rubber and maintained the target price at RM6.72.
KIMLUN CORP BHD
By Hong Leong Investment Bank Research
Target price: RM2.27
Engineering and construction firm Kimlun Corp Bhd’s bottom line could decline in its financial year 2017 (FY17), driven by downward normalisation in construction margins and timing gap for its manufacturing division.
Hong Leong Investment Bank (HLIB) Research said that the decline in earnings was anticipated, despite the record profit registered in the last financial period.
“While Kimlun posted record profits in FY16 of RM82mil, this could potentially stage a decline in FY17. We maintain our hold rating on Kimlun in view of the potential earnings decline that is expected this year,” said HLIB Research in a note.
The research house stated that Kimlun’s management targets to achieve new job wins of approximately RM600mil-700mil for FY17.
It further added that should the engineering and construction firm manage to secure chunky jobs moving forward, it would pose a positive upside on the company’s performance.
Worth to be noted, Kimlun has been invited to bid for two viaduct packages in the RM9bil worth Light Rail Transit 3 (LRT3) project.
Recently, Kimlun announced that its 40% joint-venture, JBB Kimlun, has secured a RM263mil contract from Astata Padu Sdn Bhd which involves the construction of an one block office complex for Johor Bahru city council in Plentong, Johor.
The contract which is Kimlun’s first job win for the year, is estimated to be completed by October 2019.
While Kimlun’s scope of work in the contract amounts to RM105mil based on its 40% share in the joint-venture, HLIB Research indicated that it does not discount the possibility of Kimlun undertaking a larger chunk of the job at the working level.
“As its year-to-date job wins of RM105mil is still within our full year assumption of RM700mil, we maintain our earnings forecast for Kimlun.
“The engineering and construction firm’s orderbook is also at healthy level. As of end-FY16, Kimlun’s orderbook stood at RM1.9bil, comprising RM1.7bil for construction and RM260mil for manufacturing segments. This translates to an overall cover of 2.1 times on FY16 revenue which is healthy considering the relatively fast turnaround nature of its jobs,” said HLIB Research.
QL RESOURCES BHD
By Affin Hwang Capital Research
Target price: RM5.56
Affin Hwang Capital Research initiated its coverage on QL Resources Bhd with a “buy” recommendation and a target price of RM5.56, as the research house is positive on the integrated livestock farming company’s prospects moving forward.
“We like QL Resources as a diversified consumer play, given its ability to weather through tough times, its foray into the attractive downstream segment and strong management team,” said the research house in a note.
QL Resources is a diversified entity, operating in three different segments namely integrated-livestock farming, marine-product manufacturing and palm-oil activities.
While the integrated-livestock farming segment contributes approximately 60% of QL Resources’ top line in financial year 2016 (FY16), 65% of its earnings came from its marine-product manufacturing business.
Affin Hwang Capital Research said that earnings contribution from QL Resources’ plantation assets could be boosted as the plantation matures, which would increase the fresh-fruit bunch (FFB) production.
“QL Resources owns plantation estates in Sabah and Indonesia, of which the latter is still at a relatively young age.
“Coupled with the better crude palm oil pricing compared to the previous year, we forecast this segment’s profit before tax to grow by a 42% compound annual growth rate over the period of FY16-19,” said the research unit.
QL Resources has seen solid earnings growth since its initial public offering in 2000, weathering through the global financial crisis in 2008-2009.
Its revenue and earnings have grown at compound annual growth rates of 13% and 18%, respectively, over the period of FY02-16.
With regard to the franchise agreement signed by QL Resources and Family Mart last year to operate convenience stores in Malaysia, Affin Hwang Capital Research said that marine-product manufacturing segment will benefit QL Resources as this could potentially lead to regional distribution of surimi-based products.
“We believe that the convenience store segment will break even in FY22 and turn profit-making in FY23,” said the research house.