EG Industries 'hold', Berjaya Sports 'outperform', Icon Offshore 'sell', AirAsia 'reduce'

The MoU aligns with Teleport

EG Industries Bhd

By UOB Kay Hian

Rating: Hold (maintained)

Target price: RM0.50

THE electronics manufacturing services company has benefitted from the ongoing trade tensions between United States and China to secure new box-build contracts which the management believes could rake in about RM1.5bil in FY20.

UOB Kay Hian believes the new contracts could command a higher gross profit margin of around 6%, due to higher value-added processes. The group’s margin in financial year 2018 (FY18) was 5.1%.

Channel checks by the research house revealed that the new contracts are rendered by Chinese companies with end-customers based in the United States, and management only expects to see full contribution from the contracts in FY20.

EG also intends to spend around RM30mil, funded internally, in capital expenditure in FY19 and FY20 to purchase equipment and machineries for its newly-acquired production facilities in Sungai Petani to further support its vertical integration plan and new job wins. This would increase EG’s additional output by about 10 million units per annum or an additional 100% from its current capacity.

It also noted that some of EG’s existing box-build consumer electronics products have reached their end-of-life with an outstanding contract orderbook at RM200mil as of 1HFY19.

UOB Kay Hian maintains its hold call and the target price of RM0.50 on the back of better visibility on EG’s box-build venture following the contract wins and investment into the second plant.

It also cuts EG’s net profit forecasts by 11%, 4% and 16% respectively following the revision of printed circuit board assembly (PCBA) and box-build assumptions and the higher labour cost due to the minimum wage hike.

A temporary blip is also expected in the PCBA division as a major customer of EG planned to relocate its plant to Thailand. Contributions are expected to normalise in FY20 as the plant is expected to be next to EG’s Thailand factory.

Berjaya Sports Toto Bhd

By Kenanga Research

Rating: Outperform (maintained)

Target price: RM2.95

BERJAYA Sports Toto (BToto) is seen as the most attractive sin stocks with its remarkable year-to-date (YTD) gain of 25%, mainly due to improving ticket sales.

This is a turn of fortune after having been suppressed in the past five years due to declining ticket sales.

Kenanga Research said that even with strong gains, BToto is still a laggard as it is the cheapest among sin stocks with its highest dividend yield.

It is offering more than 6% yield against the rest at more than 3% and as such, BToto can be a sector catch-up play.

The research house noted that enforcement efforts to combat illegal operators were healthy for number forecast operators (NFO) as the size for the black market is easily one to times bigger than licensed NFO volumes.

BToto saw a fairly encouraging rise in ticket sales by 5%.

Kenanga Research maintains its outperform call on BToto with an upgraded target price of RM2.95. It also raised its terminal growth from 1% to 2%, similar to Magnum Bhd.Meanwhile, non-Sport Toto contributions, which amount to around less than 20% of the group’s pre-tax profit, are still small and volatile. Philippine-based Prime Gaming Management Corporation continues to receive lower rental income until a new contract is sorted out while earnings from UK-based super sport cars dealer HR Owen were fairly volatile given the auto sales value and the volatility of pound sterling risk.

The group’s 10.2% owned Vietnamese NFO firm Berjaya GTI is still in the red and is unlikely to be profitable in the near future given the infant NFO market there.

Icon Offshore Bhd

By Maybank IB Research

Rating: Sell (maintained)

Target price: RM0.08

THE largest offshore support vessel (OSV) provider in the country by fleet size is expected to remain in the red this year, on an average OSV utilisation rate of 60%.

Maybank IB Research has reiterated its sell call with a target price of RM0.08. Its earnings estimate for the company remain unchanged even though the domestic OSV market has improved on the back of Petronas’ Activity Outlook report.

Icon Offshore’s daily charter rate is at its historical trough and there is need to rise to reflect a cyclical recovery and to warrant a re-rating.

It needs to achieve a 62% utilisation rate just to be P&L break-even.

The research house said improvement in Icon Offshore’s OSV utilisation this year is a given, its main priority is to resolve its financial predicament.

Its net gearing level stood at 727% as at December 2018.

The proposed restructuring scheme is expected to be announced in 3Q19.

Maybank IB Research said the need to restructure takes precedence over any prospect of an earnings turnaround or fleet rejuvenation exercise.

AirAsia Group Bhd


Rating: Reduce (maintained)

Target price: RM1.50

HIGHER jet fuel prices which have traded up to US$80/bbl and the capitalisation of operating leases on aircraft are expected to squeeze AirAsia Group Bhd’s profitability.

The spot oil prices have exceeded CGS CIMB’s assumptions of US$75/bbl for FY19F.

The implementation of low-sulphur limits for marine fuels under the International Maritime Organisation 2020 rules may also cause a rise in jet fuel crack spreads, impacting airlines.

AirAsia is partially shielded by hedges covering 52% of its oil needs in FY19F with an effective exercise price of US$78/bbl of jet fuel and 40% of its oil needs in FY20F at US$60/bbl Brent.CGS CIMB said it also expects the airline to sell a further 25 planes to lessor Castlelake by 3Q19F after having sold 79 planes to lessor BBAM Ltd Partnership last year.

Together with other existing operating lease aircraft, AirAsia is expected to capitalise on RM11.8bil worth of borrowings related to the operating leases in FY19F, effectively bringing back to the balance sheet what had previously been off-balance sheet.

According to the research house, the impact would be to raise reported gross gearing of FY19% in FY18 to 198% on a proforma basis after MFRS 16.

It added that the overall impact to P&L earnings from the sale and leasebacks (SLB) is negative because AirAsia would have to pay for the lessors’ profit margin and provide for a higher level of maintenance charges based on lessors’ conditions for lease returns.

CGS CIMB’s original assumption had been for AirAsia to own half and the other half via SLB for FY19F to FY21F.

Since AirAsia will be growing its group fleet entirely through SLB, the research house lowered its FY20-21F core EPS estimates to RM0.14 and RM0.12 respectively and forecast higher gearing levels at 161% and 212%.

The squeeze in profitability will see experience greater operating leverage from unexpected changes in fuel prices, exchange rates, competitive dynamics and airport taxes and levies.

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