Analyst report


Eastern & Oriental Bhd

By AmInvestment Bank

Buy (maintained)

Fair value: RM2.01

EASTERN & Oriental (E&O) registered a core net profit of RM33.2mil in its first-half financial year 2019 (FY19), representing a 9.5% increase year-on-year (y-o-y).

This is contributed by revenue recognition from the higher percentage of work progress on the reclaimed land in Seri Tanjung Pinang (STP) 2A project and improved sales of completed properties in STP1, namely the Andaman condominiums.

Its first-half FY19 core net profit accounted for 31% and 28% of AmInvestment Bank analysts’ and consensus full-year estimates.

“Despite making up only 31% of our full-year forecast, we reckon this to be in line with expectation, as we see stronger earnings in the second half of FY19 with the progressive recognition of STP2A sale to KWAP,” it said.

The group achieved new sales of RM151mil, which is 0.8% higher y-o-y, contributed mainly by its projects in Penang (59%) while its unbilled sales of RM399.5mil (-RM462.9mil quarter-on-quarter or q-o-q) will be progressively recognised over the forecast FY19 and FY20.

According to AmInvestment, the company has no problem clearing its completed units, with inventory level down to RM262mil in the first half of FY19 from RM324.4mil in the fourth quarter of FY18.

Financial leverage is manageable, with net gearing of 0.39 times as compared with 0.61 times in the fourth quarter of FY18.

E&O is expected to launch two projects at premium locations in KL – Conlay Tower, Jalan Conlay (a high-rise residential with gross development value of RM900mil) and The Peak at Damansara Heights (landed residential with gross development value of RM278mil) in 2019.

The key highlight for E&O is the much anticipated STP2, a masterplan which will be phased over 15 to 20 years. STP2 will be divided into three phases – STP Phase 2A, Phase 2B and Phase 2C.

The first phase (253 acres) of reclamation works for STP2 is expected to be completed by early 2019. STP2A is projected to have a gross development value (GDV) of over RM17bil, which will take over 15 years to complete.

The initial phase of STP2A is targeted to be launched in mid-2019, with a GDV of about RM380mil (net saleable area of 350,000 sq ft), comprising 400 units of serviced apartments (600 to 1,200 sq ft at about RM850 per sq ft) and 16 to 20 retail lots.

Analysts expect STP2 to be a strong seller, given its attractive seafront-living concept and its location on a reclaimed island strategically located across the waters to the east of Gurney Drive and STP1. A call for “buy” is maintained with a fair value at RM2.01 on the expectation of a stronger second half.

Westports Holdings Bhd

By CGS CIMB

Add (no change)

Target price: RM4.72

WESTPORTS Holdings’ core net profit for the nine months of 2018 exceeded analysts’ previous full-year forecast by around 5% mainly as a result of stronger-than-expected volume growth.

Westports delivered a flat y-o-y core net profit in the third quarter of 2018, as the 14% y-o-y growth in volume was offset by higher depreciation expense arising from the commissioning of Container Terminal 8 (CT8) Phase 2 and CT9 Phase 1 in 2017, higher interest expense due to a sukuk drawdown of RM350mil last year, and higher effective tax rate arising from the expiration of the Investment Tax Allowance on Dec 31, 2017.

“Westports’ healthy performance in third-quarter 2018 shows that the company has decisively left behind the legacy issues of 2017 that had been carried over into its first-half 2018 results,” CGS CIMB said.

On the nine-month 2018 basis, core net profit declined 10.7% y-o-y due to the weaker y-o-y performance in the first half of 2018, which suffered the carry-over effects of the partial transfer of French shipbuilding firm CMA CGM’s and United Arab Shipping Co’s transhipment (t/s) volumes from Westports to Singapore in the second and third quarter of 2017.

The latter’s t/s volume losses were the result of the container shipping industry’s mergers and acquisitions in 2016-2017, which caused a major change in container shipping alliance structures that worked in favour of the port of Singapore at the expense of Westports.

The group’s third-quarter 2018 volume increase of 14% was a big improvement from first quarter’s 7.4% y-o-y drop and second quarter’s 1.1% growth.

Gateway rose an impressive 20.8% y-o-y, sustaining its double-digit run over the past five quarters, while t/s recovered 11.3% y-o-y against the declines of first to second quarter 2018.

The gateway growth was courtesy of the zero consumption tax in Malaysia between June 1 and Sep 1, 2018, acceleration of shipments to China in order to try to preempt the US-China trade war and imports of polymer resin and plastic waste products from the US, which were diverted from China.

“Westports’ latest volume guidance has led us to raise our FY18 volume forecast from 9.07 million TEUs to 9.43 million TEUs, representing a growth of 4.5% y-o-y, in line with guidance of 2%-5%.

“We expect FY18 t/s volume of 6.09 million TEUs to fall only 2% y-o-y and gateway volume of 3.34 million TEUs to rise 19% y-o-y.

“This implies that fourth-quarter 2018 volumes could rise a healthy 12.2% y-o-y (10% t/s and 16.3% gateway).”

UEM Sunrise Bhd

By AllianceDBS Research

Buy

Target price: 85 sen

THE potential catalysts for UEM Sunrise’s share price, according to AllianceDBS, would be the stronger-than-expected property sales replenishment that will convince investors the inherent quality of its land bank.

More land disposals could also crystallise the deep value of its land bank and reward shareholders with dividends.

“Notwithstanding the weak sentiment towards Iskandar Malaysia’s properties, UEM Sunrise share price has plunged to an attractive level, at a mere 0.4 times price-to-book value and 0.25 times price-to-real net asset value that is unjustified, in our view,” AllianceDBS said.

UEM Sunrise’s vast land bank of 12,800 acres, of which 75% are in Johor, have been heavily discounted by the market which completely belies the real value of the land.

As 75% of UEM Sunrise’s land bank is located in Iskandar Malaysia due to its role as the master developer, a recovery in the sentiment towards the property market in the area will be the much needed catalyst for the company.

The group’s earnings visibility remains supported by its RM5bil unbilled sales, anchored by its Australian projects.

“Our earnings forecast is lower than consensus, probably due to our more conservative stance on the property market in Iskandar Malaysia.

“Strong sales replenishment is critical to sustain UEM Sunrise’s earnings momentum,” AllianceDBS said.

Therefore, the research house has upgraded UEM Sunrise to “buy” with a revised target price of 85 sen, given its compelling valuation.

Despite the weak sentiment in Johor, UEM Sunrise’s vast land bank at low cost will allow the group to launch more affordably-priced landed properties, which remain in demand.

Key risks to take into account would be that property prices there are also comparable to more matured areas (KL and Penang), which may not be sustainable.

Malaysian Pacific Industries BHD

By Kenanga Research

Outperform

Target price: RM13

ANALYSTS came away from a briefing feeling reassured of Malaysian Pacific Industries’ (MPI) FY19, which will see a 5% topline growth in US dollar terms despite the impact from the trade war.

“Post-portfolio rationalisation, most of the weak-margin products have been replaced with sensor-related packages, which explained the improving margins,” Kenanga Research said.

The group noted that automotive would continue to drive sales and earnings, alongside growing demand from servers (cloud computing-related chips).

“While there is no guidance on the immediate quarter (which we reckon that the quarterly performance should be flat on long festivities as well as year-end inventory adjustment), management also noted that its first half of 2019 could see higher US dollar growth of more than 5%, compared to its initial guidance of only 5%,” the research firm said.

The first quarter of 2019, in terms of US dollar, was up 2% q-o-q and 11% y-o-y, which bucked the industry’s weaker trend q-o-q.

The group attributed this to the higher ramp-up from its automotive sensor-related packages with additional boost from the fruition of rationalisation exercise.

Segmental-wise, improvement continued to be seen across all segments, with automotive electronics (19%) and industrial segments (16%) taking the leads.

Meanwhile, RM78mil of capital expenditure (capex) were ploughed to cater for more automated processes in its Ipoh plant.

Note that the capex spent this round is the highest over the past four quarters; with the amount equalling two quarters’ capex.

As of first-quarter 2019, the group’s net cash position has already reached RM644mil (or net cash of RM3.39 per share), the highest among regional and local outsourced semiconductor assembly and test companies (OSATs) peers.

While the group has no plans to give out extra dividends (which analysts reckon will be maintained at around 30% payout ratio), management noted its intention for further investment should there be any need, and is finding ways to expand its portfolio offerings, not discounting the possibility of mergers and acquisitions.

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