UOB Kay Hian Research adds IJM Plantation, GentingM to Alpha list


  • Analyst Reports
  • Monday, 02 Dec 2019

UOB Kay Hian Research said GentingM's valuations were compelling, after two years of selldown due to gaming duty hike and RPT-linked acquisition of loss-making US-based Empire Resorts. GentingM currently trades at -one standard deviation EV/EBITDA of seven times.

KUALA LUMPUR: UOB Kay Hian Malaysia Research has added IJM Plantations (IJMP) and Genting Malaysia to its December 2019 alpha picks as it expects a listless month and not much window dressing.

It said on Monday due to the heightened domestic political (power handover issue) and policy risk, which have been thus far overwhelmingly business-unfriendly, its portfolio selection has become highly skewed towards companies which are driven by positive external developments.

“Nevertheless, we still foresee a small window of opportunity for a couple of stocks, ” it said.

UOB Kay Hian Research said IJMP was a good proxy for the surge in crude palm oil (CPO) prices which has yet to be fully appreciated by the moderate valuation recovery of the plantation sector.

As for GentingM's inclusion, while it is expecting event catalysts to emerge only in February next year and beyond (dividends in Feb 2020 results announcement period and opening of outdoor theme park in 3Q20), the share price’s recent retracement from a recent high provides an attractive entry point.

To recap, it said its December alpha picks are GentingM, MISC, MyEG, Scientex, VSI and Westports. It removed Tenaga Nasional.

“Within the portfolio, only MyEG and GENM are dependent on the domestic market conditions, and only MyEG is beholden to the PH administration’s actions (GENM has already been impacted by a big gaming duty hike).

“While the government’s various holdups (calling a bid for eVisa bid, securing separate G2G agreements with Bangladesh and Nepal for these governments to lift bans to allow Malaysia to source foreign workers from these countries) has been frustrating to MyEG’s shareholders, the option value for one of the many potential catalysts to soon materialise is too large to ignore.

“This includes a moderate catalyst relating to the rejuvenation of its foreign worker accommodation services, which is not beholden to any government decisions, ” it said.

GentingM

UOB Kay Hian Research said GentingM's valuations were compelling, after two years of selldown due to gaming duty hike and RPT-linked acquisition of loss-making US-based Empire Resorts. GentingM currently trades at -one standard deviation EV/EBITDA of seven times.

However, Empire’s recent EBITDA turnaround and significant prospective growth in 2020 should allay fears of excessive cash calls, and investor focus should slowly return to GENM’s generous dividend yield and the expected Fox outdoor theme park opening in 3Q20.

Share price catalyst

* Sustainable high dividend yield of 5.9% similar to 18 sen per share DPS in 2017 and 19 sen in 2018, taking into account that GENM’s capex cycle for its outdoor theme park construction is nearing completion.

* Opening of Fox outdoor theme park in 3Q20.

* Empire’s big improvement in EBITDA from 2020 onwards as guided in its filing with the US SEC.

IJM Plantations

Its Indonesia operation is now the main contributor, for the first time in IJMP’s history, as most of the oil palm trees will turn from young to prime age, bringing higher FFB yields.

However, for FY20, the financial performance would remain in the red due to higher operating cost to manage younger estates.

Share price catalyst

* Strong turnaround in FY21 on the back of better CPO prices and the stronger FFB production growth, mainly from their Indonesia estates (60% of total production).

* IJMP's earnings are highly leveraged to CPO prices. Furthermore, it is also one of the plantation stocks with highest beta to CPO price trend.

MISC

Despite having recently secured four LNG contracts at 15-18 year tenures (US$900mil value), MISC's project bids for all segments have appeared to have increased to more than US$6bil from the September guidance of more than US$4bil.

More contract newsflow are expected. By end-19, the research house expects new shuttle tanker awards given high demand, and MISC is amongst the four serious shuttle tanker players globally.

From 2020 onwards, there may be newsflow of LNG tanker contracts (as Qatar had launched its newbuild requirements of 80 vessels at US$15bil capex values), and FPSO/FSO as MISC is bidding for the US$2bil Mero-3 FPSO in Brazil.

Share price catalyst

* Contract win newsflow over the higher bidding outlook of more than US$6bil worth of contracts across LNG, petroleum and offshore segments. We price in >RM1.20/share of new contract wins assumption.

* MISC should moderately benefit from the high levels of tanker rates, while the research house noted that global tanker peer P/B valuations had rerated over the past two months from 0.3-1 time to 0.6-1.3 times levels.

* Its 4Q19 results should reflect a strong performance; despite tanker rates having corrected from abnormally high levels in Oct 19, it is still above 4Q18 levels. Its four spot LNG vessels may benefit from higher rate upon renewals in mid-20.

My EG Services

A moderate catalyst which is not beholden to government decisions, MyEG is expected to soon rope in foreign investors to significantly jump-start its foreign worker accommodation business.

Exciting opportunities in Malaysia’s immigration space, with the initial kick-off to see potentially multi-billion ringgit contracts soon.

The research house remains bullish on MYEG clinching a sizeable e-government contract which would ensure a re-energised growth period for the company – most prominently being the visa project.

The foreign worker matching programme will see its full potential once the government finalises the MOU with the Bangladesh counterpart, which will greatly lift MyEG’s worker matching services. Malaysia has already implemented the MOUs on labour supply from Nepal and Myanmar.

Share price catalyst

* 3Q19 was the first quarter of core earnings growth since the country’s general elections in May 2018, thanks to the momentum from the matching services.

* The long awaited government tender exercise for the eVisa concession could materialise soon as next year is Visit Malaysia Year 2020.

* Malaysia to soon sign a bilateral agreement with Bangladesh.

Scientex

A beneficiary of trade diversion and ESG trend (aims to be a first mover for mono-layered flexible packaging as soon as FY20), Scientex appeals for its 16% 3-year earnings CAGR and fairly defensive earnings base.

Resin prices have come off 16% yoy due to the global increase in petrochemical refinery capacity and the US-China trade war.

The group is expected to partially benefit from low resin prices, particularly custom films which have a longer lead time of about three months as compared with stretch film’s 4-6 weeks. Based on our back-of-the-envelope calculations, a 1% drop in resin cost will translate into effective savings of 0.4%.

Higher utilisation rates across its various manufacturing plants are expected to reap better economies of scale on optimal utilisation.

The group intends to launch RM1.3b of new properties in FY20 (FY19: RM1.1b launched with about 80% take-up rate), driven by steady demand for affordable housing. More than 60% of its housing units are priced below RM200,000.

Share price catalyst

* FY20 net profit to rise 15% yoy, driven by: a) full-year contribution of newly acquired subsidiaries - Daibochi and MPP, b) persistently low raw material costs, and c) higher progress billings from the property segment (record high unbilled sales of RM780m as of 4QFY19).

* Upcoming quarter’s earnings could positively surprise as resin prices remain depressed.

VS Industry

With the latest assembly and PCBA jobs secured from MNC customers, VSI’s ability to secure new and meaningful contracts has once again been proven after its meaningful wins from BISSELL.

Share price catalyst

* The group is currently being engaged by a few MNC customers (from the US and China), with discussions of prospective contracts already at various stages of evaluation.

* Decent earnings recovery in FY20, anchored by new contracts from BISSELL and positive operational leverage.

Westports

Westports has recently raised its 2019 volume growth guidance from high single-digit to 12-15%, while it is working on securing the new concession for Westports 2 expansion (CT10-18).

Share price catalyst

Despite the ongoing trade war concern, management outperformed its previous guidance in 3Q19 container volume whereby ytd growth was 16%, and guided that the Oct 19 volume numbers are still showing a growth of around 15%. Management has updated its volume growth guidance to 12-15% for 2019.

Regardless of trade diversion effects, 2020 growth, especially in the high-yield gateway business, is expected to be anchored by the increasing and more sustainable demand of distribution centres located in Pulau Indah, one example being IKEA (September 2020 opening).

UOB Kay Hian Research had earlier upgraded its growth assumption to 15% (implying 2H19 growth of 13%).

“We have not priced in the new Westports 2 (CT10-18) expansion in our valuation though this could provide upside to long-term valuation once management concludes the concession terms and potential partnerships/funding structure sometime in 2020, ” it said.


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