QL Resources 'underperform', BToto 'sell', Axis Reit 'hold'


QL Resources Bhd

By Kenanga Research

Underperform

Target price: RM3.90

IN financial year 2018 (FY18), the marine products manufacturing segment saw a 15% decline in profit before tax (PBT) despite a 3% expansion in sales.

Lower catch rates led to higher imports required to support surimi production.

As weather conditions are showing meaningful improvement, management is hopeful for better fishing yields that could return margins to healthier levels.

This could be further supported by the recently commissioned new surimi-plants in Hutan Melintang.

In FY17, PBT margins registered at 16.7% compared with 13.7% in FY18.

With the coming 2020 Tokyo Olympics, management mulls potential collaborations to support an anticipate surge in demand there, which could boost FY20.

Meanwhile, the group’s palm oil activities is expected to sustain with mature estate.

With its 60% prime age profile, the management is hopeful for a 15% growth in the fresh fruit bunch (FFB) yields.

Management anticipates crude palm oil (CPO) prices to trail between RM2,350 and RM2,450 per tonne for FY19.

This is in-line with Kenanga Research’s expectations of RM2,400 per tonne on average for 2018.

In the recent integrated lifestock farming results, the group’s Indonesian performance was dampened by poorer broiler contributions.

Going forward, management expects its other markets like East Malaysia and Vietnam to remain stable.

Hence, the expanded Vietnam poultry layer unit and feed mills are expected to contribute favourably to the group.

On the latest count, QL has opened 49 new FamilyMart stores, on track with FY18’s target. Management earmarks to open another 50 stores in FY19 towards their FY22 target of 300 stores.

The store chain is expected to become profitable in FY20 from an expected store base of 120 branches.

The underperform and target price RM3.90 valuation is based on an unchanged 29 times FY19 price-earnings ratio.

The ascribed valuation is in line with the group’s three-year mean, following a strong buying rally across the consumer space.

“While the group has strong fundamentals, we believe most of the positives may be already priced into its rich valuations.

“Furthermore, the low dividend prospects may cause yield-seeking investors to look elsewhere,” said Kenanga Research.

Berjaya Sports Toto Bhd

By Affin Hwang Capital

Sell (downgrade)

Target price: RM2.20

AFFIN Hwang Capital believes that Berjaya Sports Toto’s (BToto) revenue was cut by 2% under the previous GST regime as the company absorbed the cost instead of passing on to its customers.

The impact on BToto’s bottom line was more significant at around -20% a year.

“However, we are of the view that the new sales and service tax (SST) regime could still expand to include the number forecast operators (NFOs), as they contributed around RM150mil in GST, based on our estimates and this inclusion would also not have any direct impact on the consumer.

“Hence, the higher profitability is only likely to last for the three months (June to August) before SST is reintroduced in September,” said Affin Hwang Capital.

The research house added that the decline in NFOs’ revenue is a structural problem due to the more attractive payouts from the illegal operators, and believes the zero GST will help resolve the problem.

“We believe that operators could have tweaked the payout to pass on the impact of GST, but the widening of the current payout difference (against illegal operators), at around 28%, could cause a significant dip in revenue.

“Unless there is a step-up in enforcement, or an increase in payout (which we think is unlikely for now), the problem is likely to persist, in which case the NFOs might not be able to enjoy the full benefit of the improving consumer sentiment,” said Affin Hwang Capital.

As the research house is not expecting the benefits from the tax holiday to last beyond the three-month period, it is keeping the dividend discount model-based target price unchanged at RM2.20, but downgrading the call to Sell from Hold due to the recent run-up in the share price post the announcement.

Upside risks include no further taxes implemented on BST and increased enforcement on illegal betting operators.

AXIS REIT

By Maybank IB Research

Hold

Target price: RM1.55

AXIS REIT has proposed to acquire two industrial properties in Kawasan Perindustrian i-Park, Bandar Indahpura, Kulai, Johor for RM38.7mil cash from Axis AME IP Sdn Bhd.

Both properties comprise a single-storey detached factory with mezzanine office which are solely tenanted to Beyonics Precision Malaysian Sdn Bhd (10 years lease with 3+2 years renewal option – expiring in June 2027) and Oerlikon Balzers Coating Malaysia Sdn Bhd (seven years lease with seven years renewal option – expiring in April 2024).

Axis expects the deal to be completed in the third quarter of 2018.

Based on an aggregate annual rental income of RM2.8mil and estimated net property margin of 95% each, Maybank IB Research has derived a blended FY19 net property yield of 6.8%.

“This is higher than our estimated weighted average cost of capital of 5.3% (60:40 debt:equity capital structure and 4.6% cost of debt).

“We are slightly positive on the acquisitions which we estimate to be earnings per unit (EPU) and distribution per unit (DPU) enhancing.

“We are mildly positive on Axis’ proposed acquisition of two industrial properties in Johor,” said Maybank IB Research.

The purchases are estimated to be EPU/DPU accretive with an estimated 6.8% blended net property yield.

Maybank IB Research nudges up its FY18 to FY20 earnings forecasts by 0.2% to 1% per annum and consequently raise its dividend discount model based target price by 5 sen to RM1.55 (cost of equity: 7.9%).

The FY18, FY19, and FY20 earnings forecasts are also nudged up by 0.2%, 1%, and 1% respectively, expecting three months earnings impact in FY18.

The research house also expects Axis’ gross gearing to increase to 0.36 times from 0.35 times as at the end of the first quarter of 2018.

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