D&O 'market perform', Suncon 'underweight', Spritzer 'market perform', Gamuda 'hold"


  • Business
  • Thursday, 13 Jun 2019

D&O Green Technologies Bhd

By Kenanga Research

Market perform

Target price: RM0.60

D&O Green Technologies Bhd stands to see an improvement in profits for the second quarter, but faces uncertainty in the second half of the year due to the trade war.

The adverse effect of the Worldwide Harmonised Light Vehicle Test Procedure (WLTP) regulation on the European passenger vehicle sales is believed to be mostly subsided, as evidenced by the slowing pace of decline in April 2019, which declined 0.4% year-on-year (y-o-y) compared to an 8.1% decline y-o-y in the previous seven months.

“In addition, we believe the group has been gaining market share in the automotive LED space lately, thanks in part to new interior applications - backlight unit (BLU) display used for infotainment systems.

“As such, we are sanguine that the group will post a commendable improvement in the second quarter FY19 earnings, both y-o-y and quarter-on-quarter (q-o-q),” said Kenanga Research.

However, management has toned down its revenue growth guidance for FY19 from 10% to 15%, to flat (in the worst-case scenario), as the second half of the year’s outlook remains ambiguous amid intensifying US-China trade war, which could affect consumer sentiment and affordability of passenger vehicles.

Nevertheless, Kenanga Research still expects to see an uptick in FY19 profit on a slight improvement in net profit margin, underpinned by better operational efficiency through lower headcount (reduced from 2,400 to 2,200, while maintaining output) and fully automating the visual inspection process (currently 25% labour dependent).

The group targets to shift its office to its new plant by November 2019 and subsequently convert the existing office to a manufacturing facility, which will likely be next year. Coupled with plans to increase manufacturing density, the facility conversion should free up enough floor space to double production capacity.

However, D&O did not provide any timeline as to when the group would expand production capacity in the existing plant, and any expansion will be on an as-needed basis.

SUNWAY CONSTRUCTION GROUP BHD

By AmInvestment Bank

Underweight (maintained)

Fair value: RM1.09

Sunway Construction is bracing itself for an extended lull period in the local construction sector, and it has acted on this belief by intensifying its pursuit of overseas construction jobs.

The company spoke of the discrepancy between the news flow on the revival of mega projects in Malaysia and the reality on the ground at present.

It said that there is still hardly any sizeable new public infrastructure project up for bidding in the open market currently.

It did not appear to be too excited over the RM44bil East Coast Rail Link project, of which details on the job scope or work packages available to local contractors are still lacking.

It will only be keen to participate in the project if higher value jobs such as piling, relocation of utilities and elevated structures are offered to the local contractors.

“Having said that, subject to the final investment decisions by the project owners, locally, Sunway Construction may bid for a high-rise commercial property project by parent Sunway Bhd, a public hospital project (as gathered from sources, in East Malaysia) and a superstructure job within the Kuala Lumpur City Centre enclave.

“We estimate that these jobs could be worth about RM200mil each,” said AmInvestment Bank.

Sunway Construction has stepped up its hunt for jobs outside Malaysia.

In India, it has reopened an office staffed with full-time engineers relocated from Malaysia.

The team is currently working on tenders for three toll-road projects worth about RM1bil each in India.

In Myanmar, Sunway Construction, via a joint venture with local conglomerate Capital Diamond Star Group, stands a good chance of winning a building job worth RM200mil to RM300mil for the maiden phase of a mixed project in Mandalay jointly developed by the conglomerate and a Singaporean real estate group.

SPRITZER BHD

By Kenanga Research

Market perform

Target price: RM2.40

In its recent first quarter results, the group chalked up a commendable 15% year-on-year sales growth, which was largely spurred by higher demand from the warmer weather and several water supply disruptions.

Moving into the second quarter, Kenanga Research gathered that the group managed to see relatively better numbers from its sales volume this recent fasting month.

“This prompted us to believe steady sales growth may be sustainable going forward, bolstered by the sturdy consumer sentiment seen in spite of the imposition of sales tax in January 2019, coupled with the group’s effective marketing strategies which have continued to capture local market share,” said Kenanga Research.

Despite the group’s effective cost rationalisation plans which helped to narrow losses in its trading segment, the research house believes that a breakeven might take a longer timeframe than expected, which should see its China operation continues swimming in the red at least for FY19. This is pinning on the competitive operating environment in Guangzhou, which will continue to act as a constant challenge to the group unless more aggressive marketing measures are taken.

The group’s current capacity stands at 700 million litres per annum, from the previous 600 million litres per annum, with its newly installed production line commencing in the second quarter of 2019.

Spritzer has in its pipeline plans to further enhance its Shah Alam drinking water plant entailing upgrading works for its reverse osmosis system, renovation of a small-scale fully-automated warehouse, and the addition of a new production line.

With an estimated capex of RM60mil, the enhancement should boost capacity by an additional 180 million litres per annum, serving as a long-term positive catalyst.

“In the near term, the group’s resilient sales performance is expected to be buoyed by softer prices seen for its raw material, at least for 1H19, which should keep its manufacturing segment’s processing margins fairly stable,” said Kenanga Research.

GAMUDA BHD

By Maybank IB Research

Hold

Target price: RM3.25

SRS Consortium, which is 60%-owned by Gamuda, has begun works on the Penang Transport Master Plan’s (PTMP) detailed design and the earliest expected first tenders for construction works could be in the first half of 2020.

Contract awards are expected by by end-2020 or early-2021.

However, financing has yet to be secured and Maybank IB Research awaits the formalisation of the project delivery partner (PDP).

Separately, it was reported that MMC-Gamuda have resubmitted an alternative proposal to revive the Klang Valley Mass Rapid Transit (KVMRT) 3 (Circle Line) with a lower cost by 50%, as compared to the original RM45bil.

“If KVMRT 3 is revived, optimistically, we believe tenders would only start in 2021, closer to the completion of KVMRT 2,” said Maybank IB Research.

Gamuda recorded property pre-sales of an estimated RM700mil in the third quarter of FY19, bringing its first nine months of FY19 presales to RM2bil.

This represented a decline of 23% year-on-year.

“Taking into account the timing of recognition of contribution from Gamuda Cove, we believe Gamuda’s presales for FY19 could hit RM3bil to RM3.5bil, short of its RM4bil target for FY19.

“Gamuda is keeping to their RM4bil target for now, but we believe the figure could be revised down during the upcoming results release,” said Maybank IB Research.

The research house’s FY19, FY20 and FY21 net profit are revised down by 2%, 3% and 3% to account for lower contributions from LDP and SPRINT as a result of revising down average daily traffic assumption and revising the tax rate for SPRINT in a recent results note for LITRAK.

The revision is also adjusted for lower contribution from Gamuda Water to factor in the lower bulk supply rates under the new SSP3 operation and maintenance (O&M) contract.

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