Maxis 'reduce', Gabungan AQRS 'buy', Eonmetal 'buy', AMMB 'outperform'


Maxis Bhd

By CGS CIMB

Reduce (Previously hold)

Target price: RM5.10

MAXIS’ third quarter of 2018 was largely in line with analysts’ consensus, with a 4% increase in earnings before interest, tax, depreciation and amortisation (EBITDA) quarter-on-quarter (q-o-q) on the back of higher service revenue and lower operating expenditure.

Its mobile service revenue grew 0.7% q-o-q, better than Digi’s -0.6% q-o-q, according to CGS CIMB. Postpaid grew a healthy revenue of 1.6% q-o-q on strong subscription growth.

Postpaid average revenue per user (Arpu) eased 1.1% q-o-q (-3.1% y-o-y), due to take-up of shared lines and entry level plans.

Prepaid revenue fell 0.4% q-o-q (-10.1% y-o-y), as subscribers continued to drop (-1.6% q-o-q) due to SIM consolidation, pre-to-postpaid migration and intense competition. Prepaid Arpu remained at RM42 q-o-q.

EBITDA margin on service revenue rose 1.6% pts q-o-q (-1.9% pts y-o-y) in the third quarter of 2018 to 51.7%.

This was mainly from lower traffic, commissions and other direct costs, as well as realised forex losses, which were partly offset by higher network and marketing costs.

“Despite decent nine-month 2019 results, Maxis kept its financial year 2018 (FY18) guidance for service revenue or EBITDA to decline mid and high single-digit due to U Mobile 3G RAN sharing termination, cost impact from the reintroduction of sales and service tax, broadband re-pricing and intense competition,” the brokerage said.

This implies a fourth quarter forecast EBITDA of only RM722mil-RM806mil, or a 23%-31% q-o-q drop.

“Hence, we have cut our forecast FY18-FY20 EBITDA 2.5%-8.5% and core earnings per share (EPS) by 4.6-14%. We now expect forecast FY18 EBITDA to fall 4.5%, which is still more optimistic than Maxis’ guidance and a steeper 8.5% in forecast FY19 due to the full-year impact from the above factors.”

The research house has downgraded Maxis from “hold” to “reduce” with a 11% lower discounted cashflow-based target price of RM5.10 after its earnings cut.

“Post-fourth quarter 2018 results, we expect consensus to cut their forecast FY19-FY20 EBITDA or core EPS estimates, which are now 7%-12% above our forecasts,” it said.

Maxis’ forecast FY19 enterprise value/operating free cashflow of 19.4 times is at a 31% premium over Asean telco average. The upside risks include better sales growth and cost control.

Gabungan AQRS Bhd

By Affin Hwang

Buy (Maintain)

Target price: RM1.64

GABUNGAN AQRS’ nine-month result was within market expectations but above Affin Hwang’s expectations.

Gabungan AQRS reported a net profit of RM52.6mil in the nine-month period, which comprises 73% of consensus full-year forecast of RM71.9mil and 85% of previous estimate of RM62.3mil.

Revenue jumped 48% year-on-year (y-o-y) to RM474mil in the nine-month period on higher construction revenue, partly offset by lower property development revenue (-62% y-o-y).

Pre-tax profit jumped 40% y-o-y to RM71.2mil in the nine-month period, mainly driven by higher construction pre-tax profit (+55% y-o-y) and lower net interest expense while its property division incurred a loss of RM6mil.

Gabungan AQRS’ high remaining order book of RM2.4bil comprising the SUKE, KotaSAS and LRT Line 3 (LRT3) projects will sustain construction earnings growth.

The company targets to secure another RM1.5bil worth of new contracts but has extended the timeline to mid-2019 from end-2018 due to the government’s review of infrastructure projects.

“We have upgraded core EPS by 5%-16% in FY18-FY20 estimates to reflect better construction pre-tax profit margins and lower dilutive impact from the new free Warrant B issued, while most of the Warrant A outstanding that expired this year were not exercised,” the research house said.

Construction pre-tax profit margin was high at 16.8% in the nine-month period as its projects move to more advance stage of construction.

Affin Hwang has reiterated a “buy” call on Gabungan AQRS with the target price raised to RM1.64 from RM1.60, based on the same 30% discount on lifted revised net asset value (RNAV) per share of RM2.35 from RM2.30.

The key risks include slower order book replenishment and execution.

Eonmetall Group Bhd

By AmInvestment Bank

Buy (Maintained)

Target price: RM0.47

AMINVESTMENT has downgrade Eonmetall’s forecast FY18 earnings by 38% and its future value (FV) by 5% to 87 sen largely to reflect the company’s build-operate-own-transfer (BOOT) palm fibre oil extraction (PFOE) project.

Eonmetall, on Oct 4, entered into a BOOT arrangement with Felda Palm Industries, a 72%-owned subsidiary of FGV, that entails Eonmetall to construct, commission, operate and maintain a PFOE plant each alongside six Felda Palm’s existing palm oil mills on a profit-sharing basis over 10 years.

Upon successful implementation of these six PFOE plants, the same arrangement may be extended to another four palm oil mills owned by Felda Palm.

During a recent meeting with the research house, Eonmetall guided for the following:

> Profits from the fabrication of the first three plants are likely to be recognised in FY18, with the remaining three units in FY19;

> Profits from the operation of the plants are likely to start coming in from the first quarter of FY19, which is the first two units, and the second quarter of FY19 with another two units and the second half of FY19 with the last two units.

“We estimate that each plant will generate annual turnover of RM4.2mil (2,000 tonnes of residual palm oil recovered at an average crude palm oil price of RM2,100 per tonne) and profits of RM1mil after accounting for operating cost and depreciation,” it said.

In addition, the research house assumed that FGV would opt for working with Eonmetall on another four plants in FY20, as per the agreement.

AmInvestment Bank continues to like Eonmetall for the growing acceptance by palm oil millers in Malaysia and Indonesia for its solvent oil extraction plants.

Eonmetall enjoys good margins for these plants in the absence of competition, coupled with the in-sourcing of inputs (steel products and metalwork machinery) used in the fabrication of these plants.

According to the research firm, the next phase of growth for its solvent oil extraction plant business will come from the introduction of the concession model.

The model is attractive to palm oil mill owners as it requires minimal capital outlay from them as Eonmetall will fund the construction cost of the solvent oil extraction plant in exchange for profit sharing.

AmInvestment Bank has maintained its “buy” call on the counter.

AMMB Holdings Bhd

By Kenanga Research

Outperform

Target price: RM4.50

ANALYSTS expect loans for the first half of 2019 to be at least comparable to the first half of 2018, with loans to be underpinned by small and medium enterprises (SMEs), mid-corp and supported by the credit card space with costs likely to be lesser than expected.

A healthy pipeline indicates loans growth of around 6% y-o-y is achievable for FY19.

While concern of ongoing global trade friction is prevailing, risks for the domestic SME space might not be so prevalent, as both China and US might use other markets, including Malaysia, as intermediaries to bypass the tariffs imposed.

Thus, the management views that its SME’s growth will not be affected in the long run.

“We are positive on its steps to further protect its asset quality, moving ahead, especially in the mortgage space, given the resilient household likely undermined by the potential slowdown in the economy,” the research house said.

Kenanga Research said the group may have taken steps such as aiming for a lower loan-to-value (LTV) and shying away from borrowers whose income are less than RM4,000.

Though the gross incurred losses (GIL) for the first quarter of 2019 stood at 1.8%, analysts understand that RM600mil are real estate-related and spread over three different accounts.

However, steps are being taken to sell of these non-performing loans with sufficient buffer (two to three times) to recover these loans by end of FY19, which will reduce its GIL to 1.1%.

“We also expect that credit charge will be benign for FY19,” the research house said.

The management previously expected credit cost to normalise for FY19 and in fact, first quarter 2019 saw a credit recovery of 4 basis points (bps).

Kenanga Research understood that credit charge would be lower than the estimation of 20-30 bps due to proactive credit recoveries across the board with retail recurring and corporate episodic.

The brokerage makes no change to its estimated FY19 earnings of RM1.2bil as its assumptions are conservative enough, which is that loans are at around 6%, flattish net interest margins, credit charge of 20-30 bps, and return on equity at 7.1%.

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