This article first appeared in Capital, The Edge Malaysia Weekly on May 17, 2022 - May 23, 2022
Target price: 95 sen BUY
TA SECURITIES (May 9): We like CJ Century and concur with management that all the stars are aligned for the company to prosper in FY22 to FY24, from the latest confluence of major global events and improving business conditions in the logistics industry to tremendous growth opportunities after the completion of a restructuring exercise at the company level.
We project a record core profit of RM29.9 million, RM35.4 million and RM44.4 million for FY22, FY23 and FY24 respectively, representing an earnings growth of 49%, 18% and 25%. Essentially, we believe the growth will be driven mainly by favourable freight rates and increasing freight volume, along with additional warehousing space that more than offset the rise in freight costs and wages.
CJ Century is adopting a well-balanced property, plant & equipment/net gearing approach compared with its peers, Tiong Nam and Swift Haulage, which have aggressively geared up for investment in warehouses and transport vehicles.
Looking forward, we expect its property, plant & equipment/gearing position to move up to meet its expansion plans (the company is expanding its warehousing space by one million sq ft by 2024). We understand from management that the company has an informal debt policy of not exceeding a net gearing ratio of one time. This implies ample debt headroom to expedite its expansion plans.
CJ Century owns a fleet of 130 vehicles, warehousing space of two million sq ft, production lines with assembling capacity of 300,000 sets of TVs and air conditioners respectively, which are among some of the core assets to support its operations and future earnings. To finance this asset-heavy business model, the company uses mainly long-term bank borrowings. As at December 2021, it had a relatively strong balance sheet, with a comfortable net gearing ratio of 0.3 times.
The company does not have a formal dividend policy. For FY17/18, it declared 38% and 30% of earnings respectively as dividends. However, we understand that the company is contemplating a formal sustained dividend policy that will support its future capital expenditure needs.
We believe our sector PER of 16 times and CJ Century’s fair value are justifiable as the structural change caused by the supply chain disruption, robust demand outlook post-Covid-19 pandemic and support from CJ Group are imperative in supporting a sector rerating and CJ Century’s future profitability.
Target price: RM1.15 ADD
CGS-CIMB RESEARCH (May 9): Taliworks announced at end-April the completion of the acquisition of four solar projects with a total acquisition value of RM144 million, to be funded largely by internal cash. The four solar projects have a combined power generating capacity of 19MW (located in the vicinity of Kuala Lumpur International Airport, each with 13 years remaining on a 21-year renewable energy power purchase agreement). This acquisition is earnings accretive, supported by a base case of combined post-M&A Ebitda of RM22 million (60-70% Ebitda margin) at 100% stake.
On the contract outlook front, we expect water tenders to regain momentum in the coming months, which could provide more job flow upside following the RM896 million in total wins from the Sg Rasau water supply scheme in December 2021. We understand that the remaining package 1 tender (worth RM2 billion, 700 million litres per day capacity) of the Rasau project, for which Taliworks is among the four shortlisted candidates, will be finalised by 2Q2022. The award will be announced by mid-2022 as it is a priority project in Selangor. We raise FY22-24 EPS by 6.2-6.5% as we factor in the estimated recurring earnings from the solar ventures.
Target price: RM1.97 HOLD
HLIB RESEARCH (May 10): Kossan anticipates glove prices to bottom out in 2Q2022 and begin to rebound in 2H2022, supported by cost inflation. Also, the utilisation rate could potentially recover to 75-80% in 2H2022 (from 70% currently) following the completion of inventory drawdown activities by glove buyers.
While the outlook for glove makers seems to be gradually improving, we believe they are not entirely out of the woods yet, given persisting inflationary cost pressures. No doubt the ability to raise prices will slightly ease some margin pressure, but we are also of the view that it will remain challenging for manufacturers to entirely pass on the cost increase, considering the massive glove supply in the market. We keep our FY22 earnings forecast largely unchanged, but raise our FY23-24 forecasts by 12-14% as we factor in the positives into our projections.
Minimal impact is expected from the implementation of the prosperity tax, as the earnings generated by the group is spread across four subsidiaries. The earnings for each entity are not expected to significantly exceed the RM100 million threshold.
Target price: RM1.44 HOLD
MAYBANK IB RESEARCH (May 10): Globetronics’ management has alluded that the tax incentives currently in place for the group’s sensor division from its “pioneer status” classification will expire on June 30. To recap, the group had successfully applied for and received approval from the Malaysian Investment Development Authority (Mida) in 2017 for an extension of the division’s pioneer status for a further five years. As a result, its effective tax rate from FY17 to FY21 ranged from 2.3% to 8.5%, significantly lower than the Malaysian statutory tax rate of 24%.
We have increased its effective tax rate for FY22-24 to 9-18% and slashed our EPS estimates by 8-21%. Despite the undemanding valuations, we downgrade Globetronics to “hold” and lower our target price to RM1.44, pegged to an FY23 PER of 20 times.
Despite the expiry of the division’s pioneer status next month, the group still has unabsorbed/carried forward capital allowances that are expected to partially shield its overall tax exposure for FY22. Separately, Mida has granted the group additional investment tax allowances and a subsidy grant for any capex investment incurred by its new product platforms, though these incentives are not expected to be significant.
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