Nestle 'sell', UEM Edgenta 'buy', Three-A 'outperform', construction 'overweight'


By Maybank IB Research

Sell (Prior: Hold)

Target price: RM105.20

NESTLE’S core net profit of RM139mil for the fourth quarter of financial year 2017 (FY17) brings FY17 core net profit to RM634mil.

The FY17 core net profit accounted for 99% and 96% of Maybank IB Research and consensus full year estimates respectively.

Nestle announced a final dividend per share of 135 sen for the quarter, taking FY17 dividend per share to RM2.75.

FY17 revenue growth of 4% was driven by both exports and domestic market.

The group’s topline growth was largely supported by volume and new launches.

While FY17 gross profit is weaker by 3% year-on-year (y-o-y) on higher raw material costs, pre-tax profit grew 6% y-o-y on better cost efficiencies and possibly lower advertising and promotion expenses.

Excluding one-offs such as forex gains, FY17 core net profit grew 6% y-o-y.

“Imputing the results and assuming higher gross profit margins for FY18 and FY19 at 38% and 38.5% mainly on lower raw material costs, we raise our earnings forecasts by 1.5% and 3.8% for FY18 and FY19.

“The recent softening price trends of raw materials such as Robusta, milk and stronger ringgit could help lift gross profit margins moving forward,” said Maybank IB Research.

Nestle imports 50% of its raw material requirement. Nestle now trades at 38.9 times FY19 price-earnings ratio (PER), 31% above its three-year mean of 29.7 times and at a premium to the consumer sector average of 23 times to 24 times FY19 PER.

While prospects remain positive, valuations are demanding following its share price gain of 18% year-to-date.

The research house now rates Nestle a “sell” but with a higher discounted cash flow target price is at RM105.20, mainly on adjusting its DCF parameters.


By MIDF Research

Buy (Maintain)

Target price: RM3.09

UEM Edgenta’s fourth quarter FY17 normalised earnings – excluding a one-off gain from the disposal of Opus International Consultants (OIC) of RM270.8mil, came in at RM54.1mil.

This brings its FY17 earnings to RM125.1mil which is within MIDF Research’s full-year earnings estimates at 99.4% but below consensus’ at 85%.

Revenue (excluding OIC portion) grew by 31.1% year-over-year (y-o-y) whilst normalised earnings grew by more than 100% y-o-y respectively. The higher revenue y-o-y during the quarter was mainly attributable to higher contribution from its healthcare service division which recorded an increase in revenue by RM451.5mil led by AIFS.

Meanwhile, its infrastructure services under Projek Penyelenggaraan Lebuhraya also recorded better revenue in FY17 against FY16 of RM80.6mil gain or an increase by 10.3%, mainly driven by higher civil and pavement works carried out on expressways and contribution from projects in Indonesia.

In addition, the contribution from its consultancy division has also steadily increased by 10.9% mainly due to the design and project management work in Sabah and project delivery consultancy work in Sarawak.

“We are maintaining our FY18 earnings forecasts for now pending its analyst briefing that will be held next week.

“Despite OIC ceasing being a part of Edgenta from FY18 onwards, we opine that the prospects for most of Edgenta’s business segments are brighter with less volatility in its earnings.

“In addition, we note that new acquisitions such as AIFS and KFM are starting to contribute more significantly to the group’s revenue,” said MIDF Research.


By Public Investment Bank


Target price: RM1.17

HIGHER fourth quarter FY17 (Q4FY17) revenue of 15.1% year-on-year (y-o-y) was reported on the back of higher sales volume across its geographical markets.

For FY17, Three-A’s group sales grew by 6.1% y-o-y, as “other countries” sales jumped 30.1% compared with FY16.

Malaysian sales were flat at -0.2% while Singapore’s was slower at -7.3%.

“Going forward, we are conservatively looking at a 4% to 6% growth in FY18 to FY20, on the back of overall diversity in product offerings and continuous investment in capacity expansion plans,” said Public Investment Bank.

As an ingredients producer, Three-A would benefit from steady growth in the food and beverage industry, acting as a feeder to the industry with its products being widely used in food processing, in raw materials or semi-finished goods needed for other food manufacturers to produce their finished goods.

Net profit for Q4FY17 and cumulative FY17 both increased in tandem with revenue growth. Operating, pre-tax and net margins for FY17 were consistent at 14.6%, 13.6% and 10.1% respectively, compared with 15.6%, 13.8% and 10% in FY16.

On top of favourable raw material prices and currency rates which has kept gross margin intact at 23%, Three-A’s increasing focus on higher margin products in addition to new product developments will continue to support margin levels.

The research house believes that the recent slump in share price has made Three-A attractive, considering the steady growth in sales and profits going forward.

“We think further weakness in Three-A’s share price is not justified as the group’s fundamentals remain intact.


By UOB Kay Hian

Overweight (Maintained)

UOB Kay Hian expects newsflow for the KL-Singapore High Speed Rail (HSR) to intensify over the following months.

The land acquisition is currently underway with expectations that the rail line will commence operations in late 2026.

The awarding of HSR works is divided into several key packages, including the project delivery partner (PDP) for construction works, the assets company (AssetCo), and the operating company (OpCo).

Thus far, only tenders for construction works have closed, while tenders for the AssetCo will close at end June this year.

The research house believes competition for the PDP role could be stiff, given the strong consortia.

Based on media reports, four parties have submitted their intention to secure the PDP role.

These include Gamuda-MRCB, YTL-SIPP, Naza Group-China Communications Construction Company and IJM-Sunway Construction-Jalinan-Maltimur.

“These joint ventures look strong, with the first two consortia having strong competitive advantage due to their experience and strong relationships with the authorities.

“In terms of contract flows, we expect physical works to be awarded by 2019 to ensure that the 2026 operational timeline is intact,” said UOB Kay Hian.

The research house prefers companies that are strong contenders for new jobs and have good track record in earnings delivery.

These include Gabungan AQRS, Gamuda and IJM Corp.

For the East Coast Rail Link, Gabungan AQRS, IJM Corp, Sunway Construction Group and Econpile Holdings could be key beneficiaries.

For the HSR, the Gamuda-MRCB and YTL-SIPP consortiums could be the key contenders to secure the project.

As for subcontracting works, various contractors could be key beneficiaries, particularly those that have undertaken MRT works and LRT3 jobs.

In addition, HSS Engineers could be a potential beneficiary of consulting works.

HSS is an engineering consultancy firm for urban infrastructure including highways and railways.

The research house said the company has benefited from the MRT Line 1 and MRT Line 2 projects.

The group is also undertaking consulting and supervision works for the ECRL.

UOB Kay Hian said its potential growth could come from the KL-HSR as well as a new venture in the water infrastructure consultancy business.