PETRONAS DAGANGAN BHD
By CIMB Research
Target price: RM24.14
PETRONAS Dagangan Bhd (PDB) has an estimated 30% market share of the retail product distribution business and a 60% share of the commercial operations,, according to CIMB Research’s estimates.
It is backed by the domestic refineries of its parent company, Petroliam Nasional Bhd, which provides PDB with a steady and reliable source of products, which are distributed via pipeline and shipping tankers to PDB’s terminals and depots across the country, and to PDB’s 1,065 petrol stations via road tankers.
The Automatic Pricing Mechanism (APM) set by the government provides for a fixed per litre remuneration to both the retailer and dealer, hence their revenues are completely volume-driven.
PDB has one of the highest profit margins in the industry, a testament to its efforts in FY15-FY16 to reduce operating costs and lower inventories to just four to five days of sales.
Sales to commercial customers, on the other hand, are competitive based on market-driven pricing negotiations.
As a result, PDB makes a lower margin on its commercial business compared with its retail segment.
CIMB Research expects PDB’s volume and earnings growth of 1% to 2% per annum in financial year 2017 (FY17) to FY19 because of the maturity and high penetration of retail stations in the local context.
On March 30, the government permitted retailers and dealers to offer lower-than-official prices subject to obtaining regulatory approval.
This has caused concerns that the retail industry could see price competition for the first time in several decades.
“We think that retailers like Shell, BHPetrol, Petron or Caltex are unlikely to start a price war, because their pre-tax margins are very thin at just 1%-2% in calendar year 2015.
“PDB’s margins are more than double that, but PDB is unlikely to compete on price because it already has a large market share of retail volumes.
“Dealers could also offer discounts, but a discount of more than 2% could see their margins evaporate.
“In other words, we see limited financial incentive for any participant to engage in discounting,” said CIMB Research.
PDB’s status as a cash cow is unlikely to change in the foreseeable future, and the research house forecasts that it will pay 75% of its profits as dividends even if it can afford more.
CAHYA MATA SARAWAK BHD
By Maybank IB Research
Target price: RM4.70
CAHYA Mata Sarawak Bhd (CMS) continued its earnings recovery after incurring large forex losses at its 25%-owned OM Materials (OMS) in the first half of financial year 2016.
Moving into financial year 2017, earnings growth will be supported by contributions from the Pan Borneo Highway works which are expected to pick up in the second half of this year.
OMS remains a potential earnings wildcard. CMS’ cement and construction materials divisions remain major beneficiaries of the Pan Borneo Sarawak Highway and would support earnings into 2017 with physical works expected to accelerate in the second half.
Contribution from its RM1.36bil Pan Borneo Sarawak construction secured with Bina Puri (70:30 joint-venture) would help to offset the lower earnings from its 680km federal road concession ending in 2017.
Maybank IB gathered that discussions on the extension of this concession were already underway. OMS continues to ramp up operations.
Based on OM Holdings’ FY16 results announcement, OMS Ferrosilicon production continues to ramp up, achieving 126,000 tonnes per annum as its furnaces increase in utilisation. Additionally, the first of OM Materials’ six modified furnaces for manganese alloy production was fired up in mid-December 2016.
CMS expects the remaining five to be commissioned by 3Q17.
With the introduction of manganese alloy production in our forecasts, our FY18 earnings are tweaked upwards by 3%, assuming OMS to breakeven in FY18 and no change to FY17 forecasts.
Taking into account Lafarge’s normalised mean price-to-earnings ratio (PER) of 26 times, Maybank IB pegged CMS’ cement and construction materials to higher 23 times PER from 20 to 22 times.
After rolling forward its valuation base year to 2018, Maybank IB derived a higher sum-of-parts based target price of RM4.70.
There is potential upside to our earnings forecasts should OMS reach breakeven production faster than expected.
INARI AMERTRON BHD
By MIDF Research
Target price: RM2.29
IN its third quarter ended March 31, Inari recorded its first round of earnings contribution from the provision of iris-recognition components.
The production of the components started in February. For the quarter in-review, a total of 2.8 million units has been produced. With the ongoing capacity expansion for this segment, MIDF said it can see more meaningful contribution from this segment in 2018.
“Inari’s normalised profit margin widened to 16.1% for the nine-months ended March. We are expecting stable profit margin improvement in the near term. This is mainly premised on the group’s on-going initiatives to reduce operation and/or production costs.
“One of such initiative includes opting for local equipment providers. The group guided that such move can lead to double-digit reduction in costs which can be passed on to its customers.”
For the nine-months ended March 2017, the group’s capital expenditure amounted to RM70.4mil.
This represents a marginal increase of 1.7% year-on-year. Management is cautious in its capital spending in order to built-up its cash holdings. This can be utilise for future expansion and progressive dividend payment.
As at the third quarter of 2017, Inari’s cash reserve has increased significantly by 81.4% year-on-year to RM380.1mil.
MIDF said Inari’s strategic positioning within the semiconductor value chain has proven to be in favour of the group.
“The group’s various core business segments have been recording better financial performance due to healthier demand of its products.
“Premised on these positive factors, the share price has since appreciated by more than 30% on a year-to-date basis. As such, we view that the potential upside is rather limited at this juncture.”
CARLSBERG BREWERY MALAYSIA BHD
By Hong Leong Investment Bank Research
Target price: RM15.70
THE company’s first quarter 2017 revenue of RM502.6mil translated into profit after tax and minority interests (Patami) of RM67.4mil accounting for 28.7% of Hong Leong Investment Bank Research’s (HLIB) and 28.8% of consensus full year estimates, respectively.
HLIB said it considered this to be in line as historically first quarter Patami accounted for 27% to 30% of full year earnings.
Year-on-year, revenue grew 10.3% to RM502.6mil, driven by higher volumes in both Malaysia and Singapore and the duty-led price revision back in July 2016.
“Net profit grew 7% year-on-year to RM68.5mil due to higher sales and effective cost management, partially offset by the larger share of losses from Lion Brewery Plc.
Earnings before interest, taxes, depreciation and amortisation (Ebitda) margins expanded 0.86 percentage points year-on-year on the back of higher revenues and efficiencies across the value chain.
Quarter-on-quarter, revenue grew 15.6%, attributed to seasonality of the first quarter, driven by Chinese New Year (CNY) festivities in the period under review.
“Subsequently, net profit grew by 40.7% to RM68.5mil,” said HLIB.
It added that the larger share of losses of RM5.9mil from Lion Brewery is largely attributed to a one-off impairment on the Miller Brewery Ltd brands in Sri Lanka, which were acquired in 2014.
“This is coupled with minor operational losses as Lion Brewery is still to recuperate from the floods of 2016.
“On further guidance by management, the impairment is a one off, whilst Lion Brewery is expected to reach at a minimal, operational breakeven in 2017.
“Carlsberg’s drive to differentiate a portfolio staple (Green Label) in Carlsberg Smooth Draught continues to gain traction amongst drinkers and was well received in the off trade channels during the CNY festivities.”
HLIB said it continues to prefer Carlsberg in the weak ringgit environment as its exposure in Singapore would partially negate its weaker presence in the brewery sector domestically.