Tune Protect 'buy', KLK 'hold', Gabungan AQRS 'buy', PECCA 'buy'

By Affin Hwang Capital

Buy (maintain)

Target price: RM1.57

TUNE Protect Group’s first quarter 2017 net profit of RM11.9mil came in at 16.1% and 13.4% of Affin Hwang Capital’s and consensus estimates.

While the research house said it expected a weaker first half for 2017, the results were nonetheless underwhelming due to the continued adverse effect from the “Opt in” regulatory changes to its travel segment, higher claims from the motor franchise business and lower investment income.

“These are, however, partially offset by a one-off release of Malaysian Motor Insurance Pool (MMIP) reserves of RM4.7mil,” it said.

The research house said Tune Protect’s travel segment continued to be adversely hit by the “Opt in” regulatory changes.

“However, we note that the decline in the number of policies issued has stabilised during the quarter while the company will start the travel insurance bundling for AirAsia’s selected customer segments such as the Premium Flex, Premium Flatbed, etc starting end-May.

“Moreover, we note that the customer pool for its partner airlines is still expanding at a healthy pace and this should eventually translate into better travel policy sales.”

For the general insurance segment, Affin Hwang said the company planned to manage its claim costs through better workshop arrangements.

Noteworthy is that Tune Protect has announced a collaboration with AirAsia for further data integration between the two companies, which would allow Tune Protect to leverage on AirAsia’s data and digital team to digitise its insurance operations and improve the customer experience.

“While we note that it is unlikely to materially impact the Tune Protect’s financials in the short term, we are nevertheless positive on the move which will further strengthen their working relationship and cross-selling capabilities,” said Affin Hwang.

“Despite forecasting a potentially better travel segment performance and lower claims from the general insurance segment, we are expecting Tune Protect’s net profit to bottom in the second quarter of 2017 in the absence of the release in actuarial reserves, before a sequential rebound in the coming quarters.”

Kuala Lumpur Kepong Bhd

By CIMB Research


Target price: RM27.15

KUALA Lumpur Kepong Bhd’s (KLK) core net profit grew 24% year-on-year to RM652mil in the first half of financial year ending Sept 30, 2017 (1HFY17) as higher plantation earnings more than offset weaker manufacturing contributions.

CIMB Research said the earnings growth was in line with expectations, at 57% of the research house expectation and 55% of Bloomberg consensus full-year forecasts.

However, during the period KLK’s net profit fell 33% due to the absence of RM486mil gain from the sale of plantation land to an associate.

CIMB noted that higher prices and output lift plantation contributions. KLK’s plantation earnings before interest and taxes (EBIT) grew 264%/100% yoy in 2Q/1HFY17 to RM364mil/RM786mil as higher selling prices for palm products and increased fresh fruit bunches (FFB) output more than offset net unrealised forex translation loss on loans advanced to Indonesian companies of RM3.8mil in 2Q.

In the second quarter, average crude palm oil (CPO) and palm kernel prices rose 36% and 76% yoy, to RM2,999 and RM3,111 per tonne, respectively.

KLK’s FFB output rose 18%/7% yoy in 2Q/1HFY17 as FFB yields recovered from the El Nino impact.

However, KLK’s manufacturing EBIT fell by 38%/56% yoy in 2Q/1HFY17 despite stronger revenue. This was due mainly to the increasing costs of raw material.

CIMB said that KLK’s profit would have been weaker if not for an unrealised gain from derivative contracts of RM33.2mil in 2QFY17.

It added that KLK’s achievement is broadly in line with the industry. KLK’s average CPO price for the quarter was at RM2,999 per tonne, which is lower than Malaysian Palm Oil Board’s average of RM3,152 per tonne mainly to lower average selling price achieved by its Indonesian estates.

The weaker downstream performance by KLK was similar to that of its peer, IOI Corp and both attributed this to weaker oleochemical margins.

CIMB maintained its “hold” call on KLK as the stock offers limited upside to its target price estimation.

It said that the target price of RM27.15 implied FY17 price-earnings ratio (PE) for KLK at its sum-of-part valuation of 25.1 times, which is in line with the group’s historical 5-year average forward PE.

CIMB expects that KLK share price to be supported by the group’s strategic estates land bank in Malaysia.

Gabungan AQRS Bhd

By AffinHwang Capital


Target price: RM1.62

GABUNGAN AQRS Bhd’s revenue rose strongly by 100% yoy and 85% qoq to RM159mil in first quarter ended March 31, 2017 (1Q17) mainly on higher property-development revenue from the sale of two land parcels.

Its profit before tax (PBT) rose 91% qoq and 4 times yoy to RM26mil on land-sale gains.

AffinHwang Capital said that Gabungan’s earnings contribution from new contracts worth RM1.5bil secured last year led to a construction PBT of RM8.6mil in 1Q17 compared to a loss of RM2.1mil in 1Q16.

Gabungan’s property development PBT increased 139% yoy to RM16.7mil in 1Q17 with the sale of The Contours Courtyard Villas and land in Dengkil to PR1MA and Kinrara Uptown to Ara Indah Development.

Gabungan’s construction order book of RM1.7bil and unbilled sales of RM145mil to contribute to earnings in FY17 to FY19.

The company is is also pushing to sell RM591mil of unsold units, mostly for The Peak condominium in Johor Baru. AffingHwang said it expects Gabungan’s order book growth prospects look good, as the company is pre-qualified to bid for LRT Line 3 packages and plans to tender for the Pan Borneo Highway Sabah and East Coast Rail Link packages.

The research house said that Gabungan aims to secure RM700mil to 1.bil of new contracts in 2017.

Gabungan’s One Jesselton project with a gross development value of RM1.8bil is due to launch in late 2017.

With slew of project in place, AffinHwang has increased Gabungan’s FY17 earnings per share (EPS) by 53% to reflect the land-sale gains.

It also raised its FY18to FY19 estimated EPS by 5% to 6% to factor in interest savings from debt repayment with land-sale proceeds and potential earnings from its 49%-owned pre-cast concrete manufacturing operation in Sabah, assuming it secures a supply contract worth RM800mil for the Pan Borneo Highway Sabah project which could contribute a PBT margin of 12% over seven years.

AffinHwang added that the correction in Gabungan’s share price is a buying opportunity.

It has maintained a “buy” call on Gabungan and raised its target price to RM1.62 based on 10% discount to realised net asset value.

Pecca Group Bhd

By Maybank Investment Bank Research


Target price: RM1.80

PECCA’S nine-month 2017 net profit of RM11.8mil, which met only 70% of Maybank Investment Bank (Maybank IB) Research’s full-year estimate, was in-line as it expects a stronger fourth quarter 2017 on the back of a recovery in car production by its clients (namely Perodua, Toyota and Nissan).

The research house said its forecasts remained.

“Maintain ‘buy’ on Pecca with an unchanged RM1.80 target price for an exposure to Perodua, especially for the Myvi model launch in the third quarter of 2017 and potential aviation contract win.”

The research house said the setback in Pecca’s automotive segment is temporary as it expected total industry production to recover in the fourth quarter of 2017 to support demand of mass-market models (such as the Perodua Axia FL and Bezza FL).

This is to be launched in time to capture demand in the upcoming Hari Raya festivity in end-June.

“The launch of a new Myvi, Perodua’s premium range model, in the second half of 2017 would also provide a growth angle for Pecca in 2018.

“Furthermore, a gradual recovery in the ringgit against the dollar is beneficial to Pecca whose leather costs are mostly denominated in dollar.”

Maybank IB Research also said new development on Pecca’s new aviation division could unlock the next engine of growth for Pecca.

“Our earnings forecasts have yet to incorporate contribution from the aviation segment.”


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