1st Half 2019 Outlook by Public Invest

A super packed 58 page report on the strategy that we are expecting for 2019.

Download this report and read during your free time!

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Thong Guan Time to Accumulate

We became very interested when Thong Guan (TGUAN) reported the highest revenue ever yesterday. Many aren’t that interested in growing revenue but focused more on profits, but to us, the revenue increase signifies an expansionary business rather than merely profits which can be caused by other externalities other than business expanding.

The share price is currently trading at 45% off from its historical high and we felt that this is a good correction. In fact, it seems though the bottom is likely here with a couple of prospects in place.

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Prospects Going Forward

Additional Production

A quick check on the quarterly report tells us that an additional stretch film production line would come in place in the fourth quarter of 2018. We would likely see a bigger revenue expansion to be reported for Q4 2018.

“An additional stretch film production line is expected to be commissioned during the fourth quarter. With the additional capacity coming on stream, the Group is optimistic to continue to growth its sales volume and revenue.”

– Prospects Q3 2018 Report

Although it is hard to tell if this turns into additional profit in the end, growth in getting the business larger is priority. Profit might not increase the same percentage but eventually, some efficiency management can be implemented to the factories and that can be a factor that improves profit margins.

Most businesses tend to see revenue rising and with a little cut here and there would eventually rise profits. We think that this might be the case this time around.

Resin Price Down

Plastic resins would be TGUAN’s primary raw material feed and we think that with the recent drop in resin price, the profit margin might improve somewhat similar to Q3 2017.

We do not have a HDPE historical chart and we represent the price changes for plastic resins with crude oil chart below.

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In reference to the chart above, margins created by TGUAN was high up to Q3 2017. Later, the margins started to decline badly from Q4 2017 up to this quarer itself. Evidently, the region shown in red is when oil sky rocket to $84.

Meanwhile from the start of October which is also the reporting period for Q4 2018, we begin to see price dips for crude oil. Resin prices would follow suit as HDPE it is a form of petrochemical product.

We expect margins to improve for Q4 2018 results which would be reported February next year.

Foreign Exchange Factor

With USD trading at 4.18 against ringgit today and stabilizing at this region. The profit for TGUAN would continue to stay strong due to foreign currency gains.

Although we felt that if a sudden drop in USD would turn this positive factor into a problem, we are confident that with China continuously lowering the value of RMB, Ringgit would continue to see this price against the dollar.

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Beating Q4 2017 is Easier

The market likes to compare the profit versus what it was one year ago. The Q4 2017 could be considered one of the lowest recorded in terms of Earnings Per Share.

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At only 2.24 cents EPS, a mere RM 5 million in net profit next year would have top it off easily. Coupling this with the expected rise in revenue from the new line of stretch film, we felt it can be achieved easily.

Conclusion

With so many factors pointing the prospect upwards, we felt that it is fair to be buying at current price. In addition to that, we felt that the share price has yet to move or react to the expected growth in the future.

Low liquidity is a concern for many but also an indication of a counter which isn’t covered by many. That explains the ‘no reaction’ from upcoming growth.

Inari Results Briefing Covered by CIMB

CIMB posted a report yesterday lowering the target price to RM1.90 from RM2.00. Post results briefing sees CIMB Research kind enough to publish something which many of us could not attend.

Among the key highlights

  • Positive earnings growth for FY 2019
  • Osram products to contribute 30% in FY 2018 increased to 50% in FY 2020
  • Flat utilisation for 1Q 2019 and same expectation for 2Q 2019
  • New products include mini LED, facial recognition chip and health sensor
  • New products to contribute in 2H 2019

Have a look at the latest report!

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Inari – All is Well!

We are definitely glued to our seats awaiting results knowing that it would be released somewhere this week. Last week’s massive drop breaching the RM 1.70 level was horrendous.

In fact as you all know, our previous recommendation for a buy call came in at RM 1.86 and as always, we would recommend again at RM 1.67 noting a 10% drop from the previous entry. Apparently the lowest point was also RM 1.67 which we end up not posting anything about a re-buy.

Financials

With such a major scare round the world where iPhone suppliers sees a huge drop such as Lumentum, we felt that this quarter’s results for INARI could be considered good with so much negativity in the market.

Revenue recovered although isn’t beating equivalent quarter this time around, we felt that it really shows some positive signs of business picking up. Revenue improved from Singapore which we felt all of that came from Broadcom. Note that revenue actually improved 5% QoQ although the news tomorrow would highlight a 12% decrease versus last year. 

Never forget, 2017 was the year of the iPhone X being introduced and considered revolutionary spiking sales. This year’s XS merely isn’t having a large improvement which would end up making consumers wait for the next big thing.

Dividend for this quarter is similar if we neglect the special dividend last quarter but net profit performance improved due to dollar factor compared to Q3 2018.

Cash generated is also strong with RM 108 million of cash generated from operations compared to the net profit of only RM 65 million.

Upcoming

Nothing much to look at where it is business as usual. Possible filling up of operations in the Batu Kawan plant might be key into improving the company’s revenue.

For that, we think that INARI had been oversold due to all the negativity created from the iPhone production cuts. It should trade nearer to RM 2.00 which we think is fair.

CPO Kept Dropping? See Why…

CPO prices seems to be forming a double bottom and we really see some value for these counters.

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Output rise and demand fall is the key to this round’s price drop for CPO. CIMB’s report below projected that palm oil stocks would grow another 5% in this month itself.

Long term CPO target still above RM2,250 per tonne while currently we see only RM1,896 per tonne. But this doesn’t mean that upcoming months ahead, we will see some price rebound. The next few months would likely see low demand overall while supply/production remains at this level.

When CPO producers start to see losses, ie. HSPLANT, SIMEPLNT, GENP to follow into the red. It is likely that production would be cut. Until then, the one who sells the most wins even with the lowest margin.

We would update the profitability factor into production in the future! In the meantime, have a look at the statistics from CIMB.

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Time to Buy Sapura?

Straight forward we know what Sapura Energy is doing. The goods news of rights issue approval added with more and more selling of assets to pare down debt remains the key factor in turning the business around.

Obvious reasons are the major shareholders who are also the country’s key investment body wouldn’t want to bankrupt Sapura Energy as well as the big boss Tun M back in office, the son’s company should be a very supportive path by bodies like PNB.

We think that good news would continue to flow after rights issue. We expect the day rights goes ex will see the bottom for this counter and we think that it is time to be buying again. Up till then, we shall wait and see what’s coming for this company.

Note that this is still not a long term investment call but merely a trading position for less than 1 year of holding.

Could almost bet that a lot of assets would be sold to pare down debt and only strong assets would be held in the end.

Hold on to your bullet first, it is still not time to fire.

Meanwhile, have a look at this report by Maybank

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Opinion: How Would the Airport REIT Look Like?

There are definitely many ways that the government could split the structure of Malaysian Airports Holdings Berhad (MAHB) but with the government saying that it would be the first of its kind, we think that it is not as simple as divesting commercial floor space.

We think that they could actually ‘REIT’ real airport specific facilities such as runways, terminal buildings and cargo facility. These facilities are actually owned by the government and sort of provided to MAHB just to operate.

A Deep Dive into the Assets of MAHB

Ever wondered why the intangible assets of MAHB is so high?

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For MAHB, the biggest portion of asset lies in the intangible asset but why is it intangible? Does intangible really mean that they don’t quite own it? Let’s see…

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Extracted from the annual report, intangible assets come in the form of concession rights and terminal building, plant and infrastructure. It would seem odd as terminal building isn’t quite an intangible, but a very straight forward asset where could literally make money from it instantly.

A check further revealed how they define concession rights.

  1. MAHB signed operating agreement on 12 Feb 2009 for a 25-year period and likely to extend to 35 years ending 2069 with the government of Malaysia. The asset on concession rights up would be impaired as the time goes by up till the end of the agreement.
  2. Similar concession rights in Turkey’s airport

Due to their special agreement with the government, the concession rights asset is an allocation of penalty payment if any of the party terminates this agreement.

So as the contract nears the end the value becomes smaller. Obviously before the agreement ends a new agreement would be set out. Indeed, this is high value intangible asset as no other corporate body can operate an airport.

How about infrastructure considered as intangible asset?

Technically MAHB builds those terminal buildings, runways, etc are built by MAHB but it is still considered a public service infrastructure. MAHB doesn’t own those infrastructure as mainly some of the progression are funded by the government such as new terminal, runway extension, etc.

But MAHB is allowed to charge the public and make a profit with those assets. In the end, the government gets nothing from it except airport facilities for its people. That sure made it clear that it should always be in the intangible asset section.

This is why in order to liquidate some assets in return for cash, the government would try out the REIT structure to free up more cash to buff up the country’s cash pile.

New Airport REIT

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We think that the government would expect to withdraw the assets such as terminal building and infrastructure (column 2 of intangible assets) and inject it into a REIT. MAHB would continue to operate the airport and the current revenue generated by MAHB would be shared with the REIT.

Likely Revenue for the REIT

  • landing fees
  • parking fees
  • cargo facilities
  • airline hub fees
  • passenger service fee

Likely operating cost for the REIT paid to MAHB

  • security fees (auxiliary police hired by MAHB)
  • operations personnel (plane turnaround, control tower, engineering, etc)
  • maintenance

Specifically, all rental related revenue would go to the new REIT company while MAHB would be operator/manager for this REIT and receive a service fee. MAHB could still operate its other non airport related operations ie. duty free, agriculture and hotel.

Share Price Reaction

We see a massive drop in AIRPORT share price which we can justify because MAHB might lose its pricing power on what to charge for those facilities. We might also see the removal of those intangible assets which covers terminal buildings.

The government will sell its ownership of those ‘public infrastructure’ to investors and gain some cash for doing that. It is expected that the government can raise RM 4 billion cash from this event.

Following that, MAHB can make more solid profits rather than having to minus cost from amortization of terminal buildings. Furthermore, the new REIT can benefit investors especially our local retail investors and the government does have some cash to turn things around.