GHL 'add', Genting Plantations 'underperform', Malt liquor sector 'overweight'

GHL Systems Bhd

By CIMB Investment Bank

Add (No change)

Target price: RM1.15

GHL Systems Bhd (GHL) is targeting to deliver 5,000 to 6,000 transaction payment acquisition (TPA) merchants in Malaysia in 2016, after delivering nearly 3,000 merchants between April and December 2015.

CIMB Investment Bank thinks that the recently launched mobile AirPOS terminal in April will boost merchant acquisition activity, given that it does not require a monthly rental fee, which is attractive for potential merchants.

The research house sees GHL as an exciting play for Malaysian consumer migration towards e-payments as Malaysia has 43.3 million debit cards in circulation compared with 8.9 million credit cards.

According to the Malaysian central bank, total debit card transaction volume rose 31% in 2015 and value increased by 35% in the same year.

But its 90 million transaction volume and RM20bil (US$4.9bil) transaction value in 2015 were still much lower than credit card’s 359.6 million transaction volume and RM112.7bil (US$27.6bil) transaction value in 2015.

GHL started its TPA operation in the Philippines in May and is targeting to acquire 2,000 to 3,000 merchants this year.

“We expect GHL to enjoy higher share of merchant discount rates (MDR) in the Philippines of circa 70 to 80 basis points (bp) compared to 20 to 30bp in Malaysia due to less competition in the market.

“Nevertheless, we understand that GHL will bear higher risk in the Philippines given that it cannot collect deposits from the merchants, unlike in Malaysia,” said CIMB Investment Bank.

In addition, management expects 10% annual growth from e-Pay over the next three to five years, driven by growing transaction value from the conversion of physical card prepaid reload to paper-based from point-of-sales (POS) terminal.

The total value of e-pay transactions processed increased by 9.7%, from RM795.4mil (US$195.2m) in the first quarter of 2015 (Q1FY2015) to RM872.3mil (US$212.9mil) in Q1FY2016 due to an increase in merchant acceptance points from 24,900 to 29,900.

GHL’s earnings growth prospects are intact and the research house remains confident in its execution strategy despite teething issues.

CIMB Investment Bank expects GHL to show stronger earnings growth in the second half of 2016 driven by new merchant acquisition in Malaysia and the Philippines.

“We keep our Add call and RM1.15 target price, based on 24 times CY17 price-earnings ration, which is a 20% premium over the sector average of 20 times.

“Key risks to our view are increasing merchant acquisition costs and higher charge-off rates from non-performing merchants,” said CIMB Investment Bank.

Genting Plantations Bhd

By Kenanga Research


Target price: RM10.60

Genting Plantations Bhd (GENP) announced that its 74% indirect subsidiary, Palmindo Holdings Pte Ltd (Palmindo), has entered into conditional sale and purchase agreements with a related party, GPCC, for the purchase of two 95% owned subsidiaries in Indonesia with the rights to develop PT Agro Abadi Cemerlang (PT AAC)’s 8,100 hectares (ha) and PT Palma Agro Lestari Jaya (PT PALJ)’s 13,900 ha of plantation land in Kalimantan Barat, of which 3,900 ha in PT AAC are planted.

The cost of the acquisition is US$42.2mil (RM172.8mil), or US$34.6mil (RM141.7mil) for PT AAC, and US$7.6mil (RM31.2mil) for PT PALJ.

“We are not surprised by the move as management had already indicated that they were open to consider attractive plantation acquisitions. Valuations-wise, we believe the pricing is fair, as the cost per hectare of PT AAC of US$9,400 per planted hectare (RM38.6k per planted ha) is in line with the Indonesian average planted area cost of RM40,000 per planted ha,” said Kenanga Research.

Meanwhile, for the greenfield PT PALJ area, the cost per ha of US$576/ha (RM2,400/ha) is in line with the average greenfield cost of RM2,600/ha.

Note that the purchase price is subject to adjustment during the due diligence exercise, taking into consideration the size of land suitable for oil palm cultivation as well as all necessary licenses and permits.

“We are near-term neutral on the deal, as we gather that only 1,600 ha of the planted area is mature, hence immediate earnings contribution should be minimal.

“Long-term, we are more positive on acquisition of additional landbank, although with

GENP’s sizeable unplanted area of more than 100,000 ha, we believe that full use of the acquired land could be a long way off.

“Given GENP’s hefty cash pile of RM1.51bil as of the first quarter of 2016, we believe that GENP should be able to fund the transaction without any cash calls.

“However, we expect the acquisition to slightly increase FY2016 net gearing from 0.36 times to 0.40 times,” said Kenanga Research.

The research house maintains underperform with a target price of RM10.60 based on sum-of-parts with plantation target price-earnings ratio (P/E) unchanged at 26 times, in line with mean valuation on GENP’s three-year average P/E.

The valuation was deemed fair, as GENP’s young Indonesian area should contribute to long-term fresh fruit bunches (FFB) growth, despite headwinds from 2016 droughts slowing short term production prospects.

However, the underperform call was reiterated on GENP since Kenanga Research is concerned on its sizable Indonesian unplanted area, when recent government moratoriums on planting on peat area, including concessions, could lead to potential reduction in plantable area, especially in Kalimantan.

A lacklustre Johor property market outlook could also compound earnings risk.

Malt Liquor Sector

By AmInvestment Bank

Overweight (maintained)

AmInvestment Bank is maintaining its overweight stance on the malt liquor market (MLM) as it moves into the second half of 2016 with buys on both HEINEKEN MALAYSIA (Heineken), formerly known as Guinness Anchor Bhd and Carlsberg Brewery (M) (Carlsberg).

“Our positive view on the sector is underpinned by the sector’s defensive and resilient earnings profile as shown by the decent 3-year earnings compounded annual growth rate (CAGR) of 5% to 8% on the back of improving consumer confidence, stable margins supported by uptrading activities, improving product mixes and potential price increase in the second half, attractive dividend yields of about 6% and reduced regulatory risks moving forward,” said AmInvestment Bank.


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