Scientex 'buy', PPB 'hold', Prestariang 'sell', Hartalega 'outperform'


  • Analyst Reports
  • Thursday, 23 Jan 2020

Scientex Bhd

By UOB Kay Hian Research

Rating: Buy (maintained)

Target price: RM10.67

THE 7% share price retracement from Scientex’s recent peak provides an excellent opportunity to accumulate, according to UOB Kay Hian Research.

It expects a gradual recovery in the share price on the back of its strong management team and track record, which it believes will enable the group to deliver record annual results year after year.

The research house said market conditions remained favourable for the group to beat consensus earnings expectations, given that plastic resin prices are low, and that Scientex is the first mover in launching monolamination packaging in Malaysia for its manufacturing division.

In addition to this, its property division has high unbilled sales and strong take-up rates.

It noted that as a beneficiary of the rising environmental, social and governance trend, Scientex via its subsidiary Diabochi, was expanding its monolamination packaging production, which fits into the food and beverage manufacturing multinational corporations’ overarching packaging policy.

The group, it said, was expected to reap first-mover advantages, such as higher average selling prices and order volume.

The research house kept its earnings forecasts unchanged, expecting earnings to grow 15% in financial year (FY) 2020, supported by stronger utilisation rate across its manufacturing plants, the consolidation of its newly-acquired companies, apart from the strong unbilled sales and take-up rates in its property segment.

It noted that while oversupply persists in the property scene, Scientex will stand as an outlier and deliver an estimated three-year earnings compound annual growth rate of 12% in FY19-FY22.

This will be underpinned by its ability to keep prices low with over 60% of its affordable housing units priced at below RM200,000, and the fact that the majority of its land bank is located outside the Klang Valley – mainly in Johor, Perak and Melaka.

It said the group’s standardisation of designs, which enables it to launch projects within one year from the signing of the land sales and purchase agreement, and its ability to complete projects within 18 months were added positives.

Over 90% of Scientex’s properties are landed properties with about 80% take-up rate within the first few weeks of launch.

PPB Group Bhd

By Alliance DBS Research

Rating: Hold (from fully-valued)

Target price: RM16.95

ALLIANCE DBS Research expects PPB Group’s associate company Wilmar to fare better going forward and raised its valuation multiple for its tropical oil business, due to a better crude palm oil (CPO) price outlook.

It expects higher CPO prices this year partly due to the El-Nino phenomena as both Malaysia and Indonesia experienced El-Nino in the third quarter of 2019 (3Q19).

The research house noted that the trend had been quite consistent historically as periods of El-Nino were usually followed by an upward trend of CPO prices.

Despite the expectation of yield decreases from El-Nino, it believed that the impact of the increase in CPO prices would far outweigh the volume decreases.

It said Wilmar’s integrated business model will allow the company to deliver stable and improved earnings performance for its tropical oil business in times of higher palm oil prices, and forecasts Wilmar’s earnings to rebound by 13% year-on-year (y-o-y) to US$1.2bil in 2020, on stronger first half (1H) performance.

Earnings during 1H19 had been affected by the African swine flu and the US-China trade war.

The research house was also of the view that the market was undervaluing Wilmar’s China operations and the potential for its expansion into the consumer branded products segment.

The listing during the first quarter of FY20, and the potential special dividend that follows, it said, will be a short-term catalyst in 2020.

As for the film and exhibition business segment, the research house foresees flattish growth y-o-y as the segment has performed very well in 2018 and 2019.

It noted that the growth in profits for the film and distribution business would be premised upon Golden Screen Cinemas’ volume and quality of local content, which it believes will be similar to its performance in the first nine months of FY19.

Looking ahead, Alliance DBS Research believes its expected improvements for Wilmar will result in a higher fair value for PPB.

It said it preferred Wilmar compared to PPB, with Wilmar currently trading at a 30% discount to PPB’s price earnings ratio and at higher return on equity of 7.3% compared to PPB’s 5.3%.

Prestariang Bhd

By RHB Research

Rating: Sell (maintained)

Target price: 24 sen

RHB Research has reiterated its Sell call on Prestariang over concerns on the uncertain outlook of its core business, despite the potential upside from the prospective compensation on the terminated Sistem Kawalan Imigresen Nasional (SKIN) project.

It noted that Prestariang has proposed a private placement of up to 10% of the total issued shares and could potentially raise a total of RM19.3mil, based on the illustrative price of 40 sen.

Proceeds are meant for general working capital and debt repayment purposes. The research house said the group’s net gearing, post-exercise, is expected to lower to 0.36 times from the 0.47 times level, and could lift its FY20-FY22 earnings forecast by 2.8%-4%.

Nonetheless, it said, FY20-FY22 earnings per share (EPS) will be diluted by 5.5%-6.5%.

Although the private placement is expected to have a near-term dilution to its EPS, the research house said it understood that the exercise is necessary and part of the action plan to address the group’s going concern. Material uncertainty relating to its going concern had been highlighted in the independent auditors’ report in November 2019.

This was due primarily to the termination of the SKIN project by the government, which led to the group undertaking a legal suit against the government to recover the sums due.

Prestariang had originally secured the 15-year concession to design, deliver, continuously maintain and provide scheduled upgrades for a new and improved immigration and border control system SKIN, back in August 2017.

Then, in December 2018, Prestariang was informed of the Cabinet’s decision to terminate the project,

RHB Research said Prestariang’s management was confident of having sufficient working capital to meet its financial obligations alongside other strategy and action plans such as divestment of assets, cost cutting measures, as well as focus on ICT services and distribution business.

The research house left its forecasts unchanged pending the price fixing and completion of the private placement exercise.

Maintaining its Sell call and target price, it noted that key risks ahead were political factors and sooner or higher-than expected compensation from the government.

Hartalega Holdings Bhd

By Kenanga Research

Rating: Outperform (Maintained)

Target price: RM6.50

STRONG growth prospects for Hartalega are underpinned by an uptick in demand, with growing signs of a volume growth rebound.

With the lacklustre demand of the past 12 months behind it, the group is expected to see re-stocking activities ramped up, with the current outbreak of the Wuhan virus, Kenanga Research said.

The research house said it likes Hartalega for its “highly automated production processes” model, which it said was moving from “good” to “great” as they are head and shoulders above peers in terms of better margins and cost reduction management.

It also likes the company as it is constantly evolving via innovative products development, aside from its booming nitrile gloves segment.

Anticipating a third consecutive quarterly earnings improvement ahead, the research house noted tell-tale signs of pent-up demand for nitrile gloves based on the industry’s longer delivery lead times.

This, it said, pointed towards a better sequential quarter in the third quarter of financial year 2020 (3Q20).

Utilisation rate

Assuming a utilisation rate of above 90%, average selling prices of 9.6 sen/piece and a net margin of 15%, it expects Hartalega’s 3Q core profit after tax and minority interest of between RM113mil and RM120mil due to higher volumes sales and full quarter contribution from Plant 5.

Nevertheless, it said such results would be within its expectations as the research house was already anticipating better performance in subsequent quarters on the back of an uptick in demand.

It kept its financial year 2020 (FY20) and FY21 earnings forecasts unchanged.

The research house also expects demand for nitrile gloves to continue growing and grabbing market share from latex gloves.

From its ground checks, it said demand for nitrile gloves was picking up again and glovemakers’ new capacities were being swiftly taken up.

The application of higher standards of hygiene to rein in the outbreak of the new Wuhan virus, it added, was expected to help ramp up restocking activities.


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