UEM Edgenta, VS Industry, Oceancash, PIE Industrial, all 'buy'

UEM Edgenta Bhd

By MIDF Research

Buy (Maintained)

Target price: RM3.28

THE company’s healthcare segment showed encouraging improvement in terms of both revenue and net profit, registering high single digit increases of 7.9% and 6.8% year-over-year respectively.

This is coupled with net margin expansion for its healthcare concession business to 9.5%, from 8.2% in financial year (FY17) despite the concession rates being relatively unchanged for the past few agreements.

This is due to the company’s continuous effort in reducing costs associated with operating the concession business.

Meanwhile, the commercial healthcare segment remains robust despite registering a decline in margin to 8.5%, from 9.6% in FY17 due to intense competition in Singapore.

UEM Edgenta is due to renegotiate with the Ministry of Health (MoH) on among others, its concession rate in the second half of FY19.

While the renegotiation might signal a potential upward revision in its concession rate however, the group remains conservative as it reflects on the government’s current financial standing.

Going forward, the segment will continue to be driven by the ongoing cost optimization initiatives as well as potential new contracts to be secured in the commercial healthcare segment.

Additionally, the management revealed that it has finally fully converted its input-based contract (IBC) with PLUS Malaysia Bhd (PLUS) to a performance-based contract (PBC) which will begin in January 2019.

This entails an improvement in maintenance deliverables which would translates into cost savings for both Edgenta and PLUS.

“With the full-year implementation of PBC, we opine that further improvement in terms of margin which incorporates the full impact of the implementation of PBC will be more visible from FY19 onwards.

“As of FY18, the margin for the infra segment was recorded at 8.6% which is an increase from FY17’s margin of 7%,” said MIDF Research.

Despite the property and facility solution segment’s contribution to Edgenta’s topline and bottomline is only approximately 10% at this juncture, MIDF Research opined that this segment has a big growth potential given the increasing emphasis on environmental issues such as energy savings and reducing carbon emissions.

UEM Edgenta’s current work-in-hand value is estimated at RM13.4bil as of December 31, 2018 with various recognition periods.

The breakdown consists of 29% from healthcare services, 65% from infrastructure services, while the remaining 3.6% stems from consultancy.

VS Industry Bhd

By Maybank IB Research

BuyTarget price: RM1.25

In an impressive turnaround time after being notified of a production volume cut by a key customer back in November 2018, VS Industry (VSI) is able to secure a new contract to fill the void of its excess capacity.

VSI has entered into an agreement with Bissell International Trading Company to manufacture a certain Bissell homecare products on a boxbuild basis for three years, to be extended annually.

A search on Bissell shows that they are in the space of vacuum cleaners, specialising in carpet cleaning with exposure to commercial cleaning following the acquisition of Sanitaire in 2018.

At a revenue base of US$800mil in 2017, Bissell is the most popular brand in North America with an estimated market share of 20%.

“We understand that Bissell products are mainly built in China and this product transfer is a result of the US trade tariffs on China.

“VSI’s production for Bissell in Malaysia will be in a dedicated plant, likely the 120,000 sq ft plant acquired by VSI back in 2017.

“For this, we believe that this contract value could range from US$200mil to US$250mil per annum,” said Maybank IB Research.

The research house had previously imputed some job wins for FY20 and FY21 on a conservative gross profit margin of 10% to 11%.

It slightly raised gross profit margin to 12% considering better margins from this contract on a higher overall production scale for VSI.

“While we laud VSI’s swift action to secure this contract, there may be concerns on its existing clients.

“Nonetheless, we are comforted by VSI’s press statement which assures investors that its existing relationships with key clients remain strong, inferring that the former has a go-ahead to execute this new contract.

“VSI is eyeing more contract wins ahead; this could further catalyse earnings and re-rate the stock once again,” said Maybank IB Research.

Maybank IB Research raised its streetlow FY20 and FY21 earnings by 33% and 29% to account for higher utilisation of VSI’s plants and slightly better margins.

With a more diversified customer portfolio and opportunities for another win in the near-term, we believe that VSI should trade at a smaller discount to the tech names within our coverage.

“We raise our target price-earnings ratio (PER) peg to 15.5 times, representing a narrower discount of 10%, lifting our target price to RM1.25.”

Oceancash Pacific Bhd

By Affin Hwang Capital

Buy (Maintained)

Target price: RM0.51

Oceancash’s 2018 core earnings tumbled 32% year-on-year (y-o-y) to RM6.7mil as its hygiene segment’s export sales recorded a sharp decline.

The impact was more heavily felt from Thailand, related to the discontinuation of orders from the second quarter of 2018 for a high-value yet highly-profitable product.

This was further aggravated by one-off non-cash charges, alongside production issues faced by the hygiene segment from Q2’18, which was only resolved in Q4’18.

The hygiene segment pre-tax profit margin shrunk six percentage points year-on-year to 5.1% in 2018.

Nevertheless, Oceancash’ management has acquired a new key foreign customer within the hygiene segment, and is in the latter stages of qualifying for another major customer.

“All in, we believe sales from the new foreign customer, alongside the potential new client, would begin contributing materially from the second half of 2019 and make up for the loss in hygiene sales – raising utilisation rates from 70% in 2018 to 75% – albeit margins would likely be lower.

“Following a full-year earnings contribution from its new clientele, we foresee that the hygiene segment’s earnings growth would similarly remain robust in 2020 and contribute to our projected group 29% y-o-y earnings per share (EPS) growth,” said Affin Hwang Capital.

The insulation segment fared well in 2018, with sales growth at 5.2% and profit before tax (PBT) margin at 2.7 percentage points expanding y-o-y, on higher contributions from the local (more than 50% utilisation rate) and Indonesian automotive markets (about 45% to 50% utilisation rate).

A stable outlook seen for the auto markets should remain supportive of Oceancash’s felts businesses in 2019.

Locally, the research house understands that Oceancash has been supplying felts for new models (Perodua Aruz, Toyota Vios/Yaris, etc) as well as existing low- to mid-end models such as Perodua Myvi/Axia and Proton Saga/Iriz, which incorporate more felt insulation.

This should buoy its local felt sales, as low- and mid-end models are expected to outperform the industry’s total industry volume (TIV) growth in 2019.


By Kenanga Research


Target price: RM1.90

PIE Industrial is unlikely to face issues with component shortages in the first half of 2019 as it has already stocked up for three months ahead, versus the usual practice of one to two months.

However, its management has cautioned the possibility of the issues resurfacing in the third quarter, should the adoption of 5G gains momentum. Kenanga Research believes that management would be more prepared this time, with better raw material management.

Due to a shift in a new customer’s supply chain motivated by the US-China trade war, the group has engaged the former and started its maiden telecommunication device with its first shipment completed, while its second shipment close behind.

Management expects contribution of its maiden telecommunication device to become meaningful by end of the third quarter of 2019. The group is currently working with its direct customer to develop a new audio-related accessory to be integrated into the aforementioned telecommunication device to be sold as a premium product.

“Apart from this, we have also gathered that another new customer has engaged the group to manufacture Printed Circuit Board Assembly (PCBA) for its white goods on a consignment basis. We are upbeat about the group’s medium-term prospects given the slew of new customers in the pipeline,” said Kenanga Research.

While Q1 2019 is likely to be a weaker quarter on seasonality and higher startup costs for its new products, the research house expects earnings to pick up in the second half of 2019 to make up for the shortfall. This is premised on seasonal ramp-up alongside higher allocation from its telecommunication customer, mass production of its new products (industrial printing and production and medical segment) with full-year earnings contribution in FY19, contribution from its maiden telecommunication device from end-Q3’19 onwards, as well as steady growth from its existing key customers.

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