This article first appeared in Capital, The Edge Malaysia Weekly on October 17, 2022 - October 23, 2022

Target price: RM7.30 ADD

CGS-CIMB RESEARCH (OCT 7): The Malaysian Communications and Multimedia Commission (MCMC) published its Public Inquiry Report on the Review of Access Pricing on Oct 5, setting out its preliminary views and inviting feedback from interested parties by Nov 21. It will publish its final views by Dec 21, with the commission determination possibly in effect from Jan 1, 2023.

A major concern is the 2023 to 2025 proposed regulated access prices for Telekom Malaysia’s (TM) Layer 3 high-speed broadband (HSBB) network, which is a 41% to 52% lower service gateway compared with current levels. If implemented, it would be a negative surprise for TM as MCMC had seemed happy with the current retail fibre broadband prices and recognised the need to motivate infrastructure rollout.

However, it is possible for the final access price to be higher than proposed. In the 2017 review of access pricing, the final price was about 159% to 283% higher than the proposed rates. Also, MCMC is starting off this review with a set of proposed prices that are higher than those in 2017. TM believes there are cost justifications and will include these in its submission to support its view that regulated HSBB access prices should not be cut.

Based on the proposed rates, we estimate the wholesale cost for a new 100Mbps plan at RM69 to RM76 per month. Assuming a further 20% cost on top and a 10% profit margin, retail service providers could price a 100Mbps plan at RM90 to RM99 per month, 23% to 30% cheaper than TM’s current RM129 per month. In this case, we see TM giving free speed upgrades (like in 2018) rather than cutting prices.

We keep our “add” rating, earnings forecasts and DCF-based target price for TM, pending MCMC’s final determination. However, uncertainties from this and the general election by year end may suppress the share price in the near term. For now, TM remains our top Malaysian telco pick due to its healthy FY21 to FY24 forecast core EPS CAGR of 17.4%. A downside risk would be adverse regulatory developments.

Target price: RM36.20 BUY

RHB RESEARCH (OCT 12): We factor in the semiconductor market slowdown, global growth challenges, and our in-house bond yield expectations and foreign exchange (forex) assumptions, resulting in lower earnings forecasts and target prices.

The short-term weakness in China should be cushioned by healthy loading at its Ipoh plant and favourable foreign exchange. We continue to like Malaysian Pacific Industries’ (MPI) exposure to the automotive space and medium-term structural growth trajectory in advanced packaging technology such as the power module in silicon carbide packaging and gallium nitride.

FY22 saw another historical high, with record revenue of RM2.4 billion and core Patami of RM318.1 million (+23%) meeting expectations. The stronger bottom line was supported by higher demand across all product segments and margin expansion despite the higher effective tax rate as certain mature packages were not exempt from tax. Both higher operating leverage and favourable forex contributed to Ebitda margin improving to the 30% level from 27.4% in FY21.

Despite inflationary challenges and manpower and material shortages, FY23F earnings are expected to be sustained by healthy demand in the automotive and power management integrated circuit segments, including silicon carbide packaging, as well as the stronger US dollar trend, which is expected to boost MPI’s margin.

Target price: RM2.82 BUY

MIDF RESEARCH (OCT 12): Pintaras Jaya, through its wholly-owned subsidiary Pintary Foundations Pte Ltd, has secured crucial wins in Singapore that now bring its outstanding order book above the RM400 million mark. It won six new piling contracts worth S$59 million (RM192.2 million).

These projects commence in October, with contract periods ranging from three to 18 months. Note that this is normal in the nature of Pintaras Jaya’s business, which is piling and earthworks. The construction scene in Singapore is generally more competitive than in Malaysia, so we would be conservative in our profit margin expectations, which could be about 5%, giving the company a net profit of RM9.6 million from all six new projects.

Recall that for FY22 ended June 30, Pintaras Jaya’s construction revenue came in 20% higher at RM401.8 million but its PBT declined 13% to RM48 million, due to higher raw material prices, fuel and labour costs, and lower productivity.

Note that about 80% of the group’s construction revenue comes from its Singapore operations. Pintaras Jaya has a healthy outstanding order book of about RM430 million, which provides stable earnings visibility for FY23.

Target Price: RM6.65 MARKET PERFORM

KENANGA RESEARCH (OCT 12): We came away from a meeting with KESM realising that despite the current dampened market sentiment, the group is still committed to its capital expenditure (capex) plans, with another RM44 million investment allocated for new equipment in 1QFY23, adding to the RM100 million spent in FY22.

More than 90% of the capex will be used for its Malaysian operation, with the remaining going to its China plant in Tianjin. Commissioning of the new equipment will start in 2QFY23 with a further ramp-up in 2HFY23.

The scaling down of its electronic manufacturing services business segment is expected to be completed by 1QFY23 but there may still be unabsorbed labour costs (about RM2 million) before the burn-in and test business take in the additional headcount when commissioning of the new equipment starts in the subsequent quarter.

Operations in Tianjin continue to face adverse impact from the ongoing zero-Covid policy, which could potentially lead to lower utilisation q-o-q in 1QFY23. However, the group remains hopeful of a y-o-y improvement in FY23, although at a gradual pace. Risks to our call include expansion plans thwarted by a potential slowdown in automotive semiconductor demand and teething problems from retraining workers from its EMS segment to the burn-in segment.

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