Kawan Food 'add', Gas Malaysia 'market perform', Scientex 'hold'


On Friday, CIMB Research initiated a

Kawan Food Bhd

By CGSCIMB Research

Add

Target price: RM3.14

CGSCIMB Research continues to like Kawan Food Bhd’s defensive food and beverage (F&B) business, and believes its revenue growth will likely come from its new products such as “fresh frozen” breads.

The research house noted this is among the new products that the group would be producing at its Pulau Indah new factory, which is slated to begin commercial operations in July.

“The company indicated that almost all the required government approvals for its new factory have been secured and it is just waiting for a halal certification from Jakim,” it said in a note.

The total capital expenditure for Kawan Food’s new factory is about RM200mil, and the facilty has three to four times the roti paratha and chapati production capacity of its existing factory, it said.

The research house noted that the existing factory was already running at full capacity and the group had been unable to introduce other product varieties, as it could only focus on its best-selling products.

“With just the existing factory, Kawan would also be unable to launch new products for export,” it said.

On its new “fresh frozen” breads, the group has said they would be frozen immediately after production, for export and chilled at 10°C at the shops to ensure a shelf life of two weeks.

“Fresh frozen” products have been gaining popularity in the United States and Europe in the past few years, it noted.

The group plans to launch its own “fresh frozen” bread product in the United States in the third quarter of the year.

“We expect domestic demand for Kawan’s bread products to remain strong this year with zero-GST effective since June 1,” it added.

The research house maintained its EPS forecasts and target price on the group.

Gas Malaysia Bhd

By Kenanga Research

Market Perform

Target price: RM3.05

KENANGA Research has downgraded Gas Malaysia to “market perform” from “outperform” as it believes all positives have already been priced-in, following the stock’s 7% run in the past two weeks.

However, the research house remains positive on the group’s outlook for its steady volume growth coupled with the margin spread certainty.

“Therefore, any price weakness would offer buying opportunity,” the research house said.

The research house maintained its target price of RM3.05, adding that the “market perform” call was also supported by its decent yield of 3%-4%.

Risks to its downgraded call, it said, included stronger-than-expected sales volume and higher margin spread.

On Wednesday, Gas Malaysia announced that the government had approved the half-yearly natural gas base-tariff rate revision for non-power sectors in Peninsular Malaysia to RM31.92/mmbtu on average for July to December 2018 from RM30.90/mmbtu in the January to June 2018 period.

This is in line with the national rationalisation plan and Gas Cost Pass-through (GCPT) mechanism announced in Dec 2016.

“This is not a surprise to us as it is a scheduled half-yearly revision while the tariff revision has neutral impact to Gas Malaysia on a six-month lagged basis as it is a cost pass-through under the GCPT mechanism,” it said.

With the implementation of GCPT in January 2016, upward revisions in natural gas tariff are expected in the upcoming reviews until gas price reaches market price.

The research house said the group’s profitability would not be affected as its profit margin spread was determined under the incentive base regulation framework based on asset return of 7.5%, which is estimated between RM1.80/mmbtu and RM2.00/mmbtu currently.

“As such, any price hikes will have neutral impact to Gas Malaysia via GCPT adjustment,” it said.

Scientex Bhd

By TA Securities

Hold

Target price: RM7

TA Securities has slashed its FY18 and FY19 earnings projection for Scientex by 18.8% and 27.6% respectively to reflect the change in resin cost assumptions.

The research house said fossil fuel resins made up more than 50% of production cost of the Scientex group’s manufacturing division.

Although Scientex uses various types of polymers in its plastic packaging manufacturing division, the research house noted that it often used the price of global Low-Density Polyethylene (LDPE) to analyse the price trend of raw material cost.

The research house pointed out that the global price of LDPE resin had moved in line with the movement of global crude oil prices until the end of 2017 after which LDPE price dropped due to year-end non-market reduction deals.

Given the cut in earnings, the research house also downgraded the stock to “hold” from “buy”, with a lower target price of RM7 per share.

Industry experts believe that LDPE prices will continue to increase in line with increasing global demand and increasing crude oil prices.

The research house also projected Scientex’s Q3’FY18 earnings to be between RM60mil and RM70mil, driven by contributions from its resilient property segment, which is expected to be offset by the increase in cost of production due to higher resin prices.

Management had guided that the group would continue to focus on the affordable housing segment as the take-up rate had been between 90% and 100% in the past project launches.

The research house projected that the company would rake in property sales of RM794mil for FY18 and RM814mil for FY19.

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