Kawan Food 'add', Al-Salam Reit 'hold', Tune Protect 'hold', Ta Ann 'buy'


Kawan Food has been in talks with foreign food and beverages (F&B) companies for it to produce products for sale outside Malaysia.

Kawan Food has been in talks with foreign food and beverages (F&B) companies for it to produce products for sale outside Malaysia.

KAWAN FOOD BHD

By CGS-CIMB

Add (maintain)

Target price: RM3.02

CGS-CIMB has a positive view on Kawan Food’s new factory in Pulau Indah, Selangor, saying that “we view this positively as the market recognises Kawan Food’s management and its product quality”.

Kawan Food has been in talks with foreign food and beverages (F&B) companies for it to produce products for sale outside Malaysia.

CGS-CIMB believes that Kawan Food could start OEM manufacturing for some foreign F&B companies from 2019 onwards, as exports form 60% of the group’s revenue.

After a delay of more than 18 months, the new factory (which will have a roti paratha and chapati production capacity triple that of its existing factory in Shah Alam) finally started commercial production in July.

Kawan Food is also adding a brand new production line, which has an output three times that of its existing line. The new line is still being commissioned and is slated to be completed in the next one to two months.

The old factory had been operating at full capacity over the past two years, resulting in flattish revenue for the group.

Kawan Food plans to start selling its snacks (mainly rice-based) in retail stores from the first quarter of 2019.

CGS CIMB said it has yet to assume potential earnings from this division.

The research firm maintains its forecasts and target price based on 2020 forecast price-earnings (P/E) of 17.5 times, which is at a 30% discount (previously 20%) to its 25 times P/E target for the F&B sector.

The larger discount is to reflect Kawan Food’s small market capitilisation.

“We like the stock as we anticipate 76% earnings per share growth in 2019, driven by higher export sales and strong US dollar/ringgit exchange rate, and that it trades at an attractive forecast 13.8 times 2019 P/E, below the sector’s average of 25.6 times,” analysts said.

Strong export revenue, especially from the US, is a potential re-rating catalyst, with the downside risks involving rise in raw material prices and weak export sales to the US.

AL-SALAM REIT

By Maybank IB Research

Hold

Target price (12 months): 85 sen

MAYBANK IB Research remains neutral on Al-Salam Real Estate Investment Trust ’s (REIT) near-term growth outlook as it expects Komtar JBCC’s rental income to remain flattish.

The cumulative nine-month period footfall at Komtar JBCC was largely stable year-on-year (y-o-y), despite marginal easing of nine-month 2018 tenant sales by -0.8% y-o-y.

Going into financial year 2019 (FY19), Al-Salam REIT expects flattish rental rate reversions at Komtar JBCC, which would support and sustain its high occupancy rate of 95%.

“In view of strong competition from surrounding and upcoming retail malls in Johor Baru (Paradigm Mall Johor Baru and Mid Valley Southkey Megamall), we maintain our cautious outlook on Komtar JBCC’s near-term rental income growth,” Maybank IB said.

Meanwhile, the acquisition of 22 QSR Brands (M) Holdings Bhd’s properties are still on track to be completed by early-2019.

Al-Salam REIT is also targeting another two assets (retail and office) to be acquired within the next three years. Including the 22 QSR’s properties, these three asset groups have an estimated aggregate value of RM500mil.

Following that, within 2021-2023, Al-Salam REIT is also eyeing two industrial properties – Pengerang Industrial Park and Muar Furniture – which are both owned by Johor Corp (Al-Salam REIT’s parent).

“Overall, we are upbeat on its asset pipeline as most of these assets are expected to be tenanted with long-term or triple net leases which, in turn, entails resilient rental income and low occupancy risks.

“However, we expect Al-Salam REIT to partly finance its acquisitions via equity as its end-third quarter 2018 gross gearing of 0.44 times only provides acquisition headroom of about RM134mil,” the brokerage said.

Maybank IB has maintained its estimates where Al-Salam REIT’s recurring earnings base would still be largely supported by QSR Properties, KFCH College and the recently-acquired Mydin Hypermarket Gong Badak, which provide steady rental income with rental step-ups.

TUNE PROTECT GROUP BHD

By UOBKayHian

Hold

Target price: RM0.63

TUNE Protect announced that it has completed a voluntary separation scheme (VSS) as part of its subsidiary Tune Insurance Malaysia’s transformation plan, in line with the group’s digital strategy.

The VSS will lead to a one-off cost of RM4mil to be recognised in the fourth quarter of 2018, with an estimated payback period of 12 to 13 months.

However, to ensure a smooth transition, staff members who have accepted the VSS will be released in phases from Dec 18, 2018 to Feb 19, 2019.

As such, the full RM4mil-per-annum cost-savings impact would only be felt in FY20, with the next financial year (FY19) cost savings coming in at RM3.3mil.

This should result in a 2.6% management expense cost savings for FY19 and 6% enhancement for UOB KayHian’s FY19 earnings forecast of RM50mil.

The brokerage has left Tune Protect’s earnings largely unchanged as it factors in higher marketing and digital cost spend, which largely offsets the cost savings from the VSS.

It has maintained its “hold” call with a lower target price of 63 sen as its analysts raise COE to 11.5% from 10% to factor in the group’s structural decline in the take-up rates of its non-bundled comprehensive travel policies, which forms a major portion of its earnings base.

The take-up rate for the group’s non-bundled comprehensive travel policies continued to decline from 7% in the second quarter to 6.5% in the third quarter.

“In addition, we noted that the group has benefitted from lumpy earnings boost in excess of RM10mil in FY18, which is unlikely to be recurring in FY19, placing downside risk to our FY19 earnings forecast,” the brokerage said.

TA ANN HOLDINGS BHD

By RHB Research

Buy (maintained)

Target price: RM2.40

RHB Research no longer believes that the previous price averages for 2019-2020 are achievable, given the magnitude of the recent crude palm oil (CPO) price decline.

“We have cut our 2019-2020 CPO price forecasts to RM2,2000 per tonne and RM2,400 per tonne (from RM2,500 per tonne).”

Given that around 93% of Tan Ann’s earnings for nine-month 2018 are derived from the plantation segment, RHB’s sensitivity analysis indicates the net profit will be affected by around 12%-15% in FY19-FY20 for every RM100-per-tonne change in CPO average selling price.

A report on Dec 5, 2018, which reported that all 21 Forest Management Units (FMUs) in Sarawak have to be certified by 2022 or timber companies could potentially have their timber licences revoked by the state government, left the brokerage neutral on the latest development.

“We believe this could potentially translate into a higher export quota over the longer term. However, this would negatively impact the short-term outlook for log production figures,” RHB said.

Ta Ann certified its Kapit FMU in July 2018. Management expects its Raplex FMU to be certified in 2019 and its Pasin and Borlin FMUs to be certified in 2020. This will translate into a total of around 379,000 ha of certified FMU areas.

RHB remains upbeat on the group’s timber division on the back of higher log average selling price, coupled with higher log export quota. It has maintained its export log forecasts of 81,200 cubic metres and 81,800 cubic metres for FY19 and FY20.

The brokerage has also updated its forecasts for lower contributions from the group’s 30.4% associate, Sarawak Plantation (SPB), post-revisions to its CPO price assumptions.