MMC 'buy', MAHB 'add', Pantech 'buy', banking sector 'overweight'

  • Business
  • Friday, 26 Apr 2019

Affin Hwang Capital Research said an improving global economic outlook and relatively stronger commodity prices could set the stage for a further rebound in banking sector earnings this year.

MMC Corp BhdBy AllianceDBS Research

Rating: Buy

Target price: RM1.49

AllianceDBS Research is keeping a “buy” call on MMC Corp on the back of actively pursing the listing of its port business, MMC Ports as well as better earnings delivery.

“The current valuations of price-to-earnings ratio of 11 times for financial year 2020 forecast (FY20F) and price-to-book value of 0.3 times are attractive.

“We understand that the company is still actively pursuing the listing for MMC Ports but the timeline is less pressing given its efforts to restructure debt,” the research house noted.

However, its target price of RM1.49 is higher than consensus despite assigning a 40% discount to our sum-of-the-parts (SOP) value.

“We think this has priced in a holding company discount adequately and potential concerns over corporate governance issues,” AllianceDBS Research said.

Meanwhile, it believes that MMC Corp should get better recognition as an infrastructure proxy, while the listing of its port business is something to look forward to.

The market acknowledges the company’s position as a deep value conglomerate, while the pricing of its future assets through an initial public offering and better earnings delivery will be crucial to narrow the steep discount to SOP.

However, AllianceDBS Research noted the corporate governance and related party transactions pose the biggest risk for MMC given that Senai Airport Terminal Services Sdn Bhd purchase saw the share price tumbling in 2008.


Rating: Add

Target price: RM9.47

CIMB Research is maintaining an “Add” recommendation on Malaysia Airports Holdings Bhd (MAHB) because investors are likely to accumulate for medium-term upside once the new operating agreement (OA) and upcoming regulatory changes are finalised from financial year 2020 onwards.

Earlier this month, MAHB announced that the Malaysiaan cabinet approved the extension of MAHB’s concession to operate 39 airports in the country from 2034 to 2069.

MAHB is expected to sign the new OA with the government by June.

“We expect the user fee payments to the government to initially decline, and then no longer increase at a rate faster than revenue, as is the case currently.

“Also, while four new geographical airport clusters have been established to facilitate the entry of new, third-party private investors and financiers of airport development capex, we believe MAHB will continue to have the ‘right of first refusal’ on any airport capital expenditure,” CIMB Research said.

Moreover, MSCI would be increasing the weighting of China A shares into its indices progressively in May, Aug and November 2019 respectively, resulting in a potential reduction of Malaysia’s weighting.

Given that MAHB is a member of certain MSCI indices, CIMB Research said its share price may see some periodic sell-offs from May until November 2019.

“In our view, any sell-off is a good chance for investors to accumulate, as we expect MAHB to deliver strong earnings growth in FY20F due to upcoming regulatory changes, such as the regulatory asset base (RAB) framework,” it added.

Meanwhile, the research house also noted that Malaysian Aviation Commission (Mavcom) would likely announce decisions on the inputs to the RAB model for aero tariff determination by June, begin a shadow period from July, finalise the inputs by October, and begin official implementation by Jan 1, 2020.

However, MAHB is trying to convince Mavcom to give it more time to raise gearing levels, and to consider applying a higher WACC in the first cycle.

In its October 2018 paper, Mavcom considered using a real WACC of 7% (nominal WACC of 10%), resulting in a 16% rise in aero tariffs based on RM4bil of airport capex over the first three-year RAB cycle.

Moreover, Mavcom had proposed a price cap resulting in MAHB asking for an aero revenue floor to be in place, to protect it from black-swan events.

“Eventual introduction of dual-till RAB to drive earnings further. The introduction of dual-till RAB is at the earliest from Jan 1, 2023 (the start of the second RAB cycle), or from the third RAB cycle beginning Jan 1, 2026 as we assume.

“As the non-aero business wriggles free from regulatory constraints on ROIC, required aero tariffs should rise further, helping make MAHB’s Malaysia business even more profitable,” CIMB Research said.

Pantech Group Holdings BhdBy JF Apex Securities

Rating: Buy

Target price: 0.63

JF Apex Securities is keeping a ‘Buy’ call with an unchanged target price of 0.63 based on financial year 2020 (FY20) earnings per share forecast and price-to-earnings ratio of 9 times.

The research house believes that prospects are brighter as oil and gas companies are lifted by the recovery in oil prices.

“As a leading pipes, valves and fittings (PVF) company in the country, Pantech is in a strong position to benefit from increased activities in the upstream of the oil and gas industry,” it added.

Pantech’s FY19 net profit increased 4% year-on-year (y-o-y) to RM47.6mil on the back of a 1% revenue decline to RM609.2mil.

JF Apex Securities said the FY19 earnings achieved 90% of its full-year forecast of RM52.6mil while revenue accounted for 94% of its expectation.

The research house is maintaining its revenue and earnings per share forecasts for FY20 and FY21.

Pantech’s financial results in the fourth quarter of 2019 (4Q19) net profit rose 1% to RM11.5mil amid lower revenue as quarterly revenue decreased 5% to RM142.6mil.

In the quarter, its trading segment revenue rose 10% y-o-y to RM93.9mil while sales from the manufacturing division declined 25% to RM47.7mil.

This was due to suspension of export of carbon steel butt welded fittings to the US following a 183% anti-dumping tax imposed on Pantech.

“The management is using legal means to contest the US Department of Commerce’s

decision to impose the anti-dumping tax. Pantech could enjoy a favourable outcome if the decision is reversed,” JF Apex said.


Rating: Overweight

AMBANK Research is maintaining an “overweight” recommendation on the banking sector with the top picks of Maybank, RHB Bank and BIMB Holdings.

“External factors and the recent concerns on Malaysia dropping out of the global bond index have pushed valuations of large-cap banking stocks to new lows which are below those during the 2007 and 2008 financial crisis.

“We see values emerging for the larger capitalised banking stocks of Maybank, CIMB and Public Bank,” the research house said.

With the recent revival of the East Coast Rail Link and Bandar Malaysia projects, AmBank Research said the market risk premium would decline and improve investors’ sentiment.

“On the wider market concerns of Malaysia dropping out of the global bond index, we believe that there is still room for further consolidation on the bond market as well as improvement in market accessibility and macro fundamentals before the next reviewby the FTSE Russell in September 2019,” it added. For the local banking sector, return-on-equity ratio is at 10.6%, which is near the average of Singapore and Thai banks.

Moreover, AmBank Research said dividend yields of local banks are turning attractive compared with the regional countries aside from valuations.

“Dividend yields for banks in Malaysia on average are higher than that of Singapore, Indonesia and Thai banks at 4.5% and 4.8% for financial year 2019 (FY19) and FY20 respectively,” it added.

Given the market expectations of a 25 basis points cut of the overnight policy rate (OPR) in the second half of this year, AmBank Research noted that the impact would be minimal on banks’ earnings of 1% to 3%, while net interest margins could be impacted by 2 to 4 basis points.

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