RHB – Assess The Impact of Project Cancellation

We always thought that the ECRL would be the first in line to be scrapped and never had the slightest fear that MRT3 would be scrapped. It seems though under Tun M’s leadership, anything could happen.

Anyway, here’s a report from RHB where the research house assesses the impact of project cancellation that would impact the local construction companies who got beaten down badly these few weeks.

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IPO – Mi Equipment

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Growth 8/10

Still a long way to go for semiconductor especially in Penang, we expect growth to remain robust in this region. As long as MNC from around the world are still standing in Penang’s Free Industrial Zone, we would be promised with continuous growth ahead.

Growth numbers are valued this high due to the development plans by the management using the IPO proceeds. With new plants coming up, we could see better contribution in revenue generation and earnings growth.

 

Industry 7/10

Much similar to growth as well, the industry has great prospects moving forward. The industry continues to improve on having smaller chips which demands new machines from this company in the future.

Financials (8/10)

Solid financials to look at with double digit margins and minimum debt level. We shaved 2 points off this category due to volatility in revenue. We believe that revenue projection seems to be hard although it had showed that this is a growing company.

We have to understand that this company isn’t making products for the end user for consumers. They are making products to the middle chain suppliers to produce goods that fit into the end product. If these middle chain suppliers do not upgrade due to reasons such as the slightest slowdown in demand, it would impact this company badly.

Moat 3/10

We see no real moat in this company as there are plenty who could come in and replace them with cheaper pricing. Machines like these pretty much see high competition one price, quality and efficiency.

Proceeds 8/10

Solid use of IPO funds for building development which helps to expand capacity.

Valuations 5/10

Only an average rating on the valuations. (see conclusion)

 

Conclusion

Suggest to subscribe as the IPO mainly puts the valuations cheaper than most of its peers. The likelihood of this IPO being oversubscribed would be high due to very little amount of shares offered from this listing.

But we think that one shouldn’t weigh too much on growth plans ahead from this company. With the money raise from IPO up to the 1st production that comes out from the two new plants, it would possible take more than a year for this to happen.

Sell on 1st day of listing if possible.

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Inari Amertron Growth Growth & More Growth

New Facilities

P13 – Completed
– To add 250 RF testers to its existing 970
– A 25% gain in capacity

P34 – Batu Kawan to be completed in September 2018
– LED facility for OSRAM

Segments

Iris Scanner – Falling shipments
– Implementation other than smartphones would be considered

Amertron – Philippines efficiency upgrade underway

Referencing from CIMB’s Report

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CIMB on Inari Amertron

Our top pick post election due to expectation of weakening ringgit reported its results yesterday. As expected, revenue should see a decline Q-o-Q but the profit remained solid.

As the report from CIMB tells us,

We learnt that the second phase expansion at P13 had recently been completed. The second phase could add another 250 RF testers, raising Inari’s capacity to 1,200 units. Following completion, P13B plant will be the largest plant in the group with a total manufacturing floor area of 340 sq ft. The group is in the midst of getting production equipment and it expects to start ramping up production from Jul onwards.

We think that indeed it is still a growing company. Expect the price to trade close or breach to its previous high of RM 2.50 (adjusted after bonus issue)

Have a look at the report!

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QL Resources – It’s Really Getting Expensive

We gave a buy recommendation for this company a long time ago (Aug 2016) and we held to it since then.

You can see our post from 2016 here.

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There really isn’t much to say rather than continuous revenue growth quarter over quarter. That is why you don’t see many follow up post other than the Family Mart review that we gave earlier. But it really gets a little tricky now.

With EPF and Amanah Saham scooping up the shares from the open market, it pushed the price up and so as the PE rising steeply. We bought in while it was trading at a PE of 28 but it turned to 42 at the current price.

Obviously the consumer sector gets a boost with GST being zero rated but this stock trades 2nd most expensive in valuations among the other big names with Nestle leading the way demanding the highest premium.

At the current price it is trading, we believe that a review is needed on what to come and either it is still worth holding past this quarter’s results which would probably be reported next week.

Revenue Growth

The revenue had grown close to RM 450 million in the over the past 2 years and we are still awaiting those growth numbers to translate into net profit. We believe that market had expected net profit to catch up with the revenue growth and paid a high premium for it.

Furthermore, our revenue growth target by 2020 were estimated to be RM 700 million a year. RM 450 million growth over these two years showed that more than half of the target had been fulfilled. With two more years to go, the actual would actually breach our estimate earlier and re-value the stock price higher.

But Could Earnings Catch Up?

A quick dive into the gross margins. We compared gross margins and net margins two years ago versus last 4 reporting quarters

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Straight off from the table above, we can tell that gross margin as well as net margin declined by merely less than 1% while revenue grew 15% over the last 2 years.

Being very involved focusing on growing the revenue, increasing the efficiency of the new business segment might be neglected. New operations such as frozen products manufacturing, broiler and layer farms are likely the reason why we see lower margins overall.

We then take a look at the segments reported.

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That being said, we should still place some hopes that margins will catch up when the new operation facilities gets oiled up smoothing operations and efficiency.Except palm oil activities, the other two segments see a decline in margins reported which proven our earlier guess correctly. Normally, this is the common case for a business which sees a sudden growth in revenue.

Renewing Valuations

Assuming that in FY2020 we see another RM 350 million rise in revenue which translates to forward FY2020 EPS of RM 0.141, we are looking Forward PE of 18.38 at the current price versus the current PE of 42.

The gap between forward PE versus current is huge when we first evaluated this company. The stock was trading merely PE of 28 versus our forward PE estimate of 14 times earnings.

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To Sell or Hold?Things had really gone expensive over these two years and we really think that it get expensive. From our initiation which we thought to be expensive to higher valuations at the moment, it really sets us in a dilemma.

We think that we could still squeeze in one quarter before start liquidating our positions. This quarter’s report would include the month February which is Chinese New Year. We believe the CNY effect is big and makes it QL’s top month compared to any other.

Much similar to Nestle, which broke record revenue for Q1 2018 with RM 1.4 billion in revenue, we are betting on increased consumer spending for Q1 2018 as well for QL Resources.

Nestle Revenue
Q1 2018 1,429,670
Q4 2017 1,281,725
Q3 2017 1,323,253
Q2 2017 1,283,630
Q1 2017 1,371,882

We would maintain a HOLD if the revenue for Q1 2018 breaches all time high of RM 892 million. But we would immediately SELL at opening price if the revenue is below the the all time high.

Pentamaster – KWAP Entry a Good Sign

We think that the subdivision and bonus issue last November was done to increase the number of shares allowing KWAP to come in. Obviously without liquidity the stock gets a little volatile and most institutions do not like volatility on collection stage.

As we can see from the latest annual report, KWAP owns 11.6% of the company and we think that with the management luring KWAP’s interest into their company would be a value added in terms of stock pricing.

Somewhat like INARI few years ago, with the appearance of institutions such KWAP inside the shareholding structure, it pushed the stock price upwards demanding higher valuations. The simplest way to tell is that it trades at a PE higher than its peers.

Introduction of institutions at times see re-valuation for the stock itself making it somewhat more ‘valuable’ than a non-institution owned. That is why we can be ahead when institutions are buying smaller companies.

Rights Issue?

If we are KWAP, we would suggest a rights issue to increase the number of shares and probability of a dilution in case one might forgot to subscribe (it can happen to retail). Furthermore, newly acquired cash can be used for capital expenditure.

Once again we reference this to INARI’s case when KWAP came in and started acquiring in 2014. The rights issue were executed for the development of new factories but weirdly the company still has cash and paid out dividends the next quarter. Investors might be asking “why did you take money from us in the first place?”.

It could be that the actual cash realized from the growth in revenue exceed their forecast and expectation. But it is not common as well to see companies using rights issue to increase the share issue size allowing new investors to come in or increase the ownership by diluting their minority shareholders who are unaware.

What To Expect Now

Expect to see increased interest from institutions with more and more liquidity introduced to this counter. Not only we see KWAP but hopefully more institutions like EPF would take part in this counter as well.

We are not confident with the upcoming report as we believe the US dollars from the month of Jan 2018 to Mar 2018 would work negatively towards the company’s earnings report.

Nevertheless, if you do not care about temporary setback for pricing then the chart actually points to return higher as it broke its downward trending line when it hit RM2.40 a week ago.

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