Friday 21 Jun 2024
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This article first appeared in Capital, The Edge Malaysia Weekly on April 29, 2024 - May 5, 2024

Malaysia Smelting Corp Bhd

Target price: RM3.60 BUY

UOB KAY HIAN RESEARCH (APRIL 23): MSC is poised for significant growth in 2024 as London Metal Exchange (LME) tin prices have soared 43% year to date (YTD), mainly due to ongoing supply constraints. Additionally, earnings are supported by enhanced production output and improved margins from its new eco-friendly plant. Based on our sensitivity analysis, every US$1,000 (RM4,775) per tonne change in our tin price assumptions would affect earnings by 6%. We upgrade 2024/2025/2026 earnings by 16%/23%/22% respectively. We maintain our “buy” with a higher target price of RM3.60, from RM2.75.

We expect 1Q24 core earnings to come in at RM27 million to RM29 million (+91% to +95% quarter on quarter, -16% to -22% year on year) on the back of: (a) sequentially stronger 1Q24 average LME tin price of US$26,195 per tonne (versus 4Q23’s average price of US$24,705 per tonne); (b) similar cost structures; and (c) higher utilisation rate from TSL (top submerged lance) furnaces. We expect MSC to register full-year core earnings of RM1,653 million to RM1,827 million (+54% to +60% y-o-y) on the back of higher LME tin prices and cost saving from the closing down of the Butterworth plant.

Expect a stronger 2024, driven by enhanced production output in both the mining and smelting segments, alongside higher LME tin prices. MSC has increased its average daily mining output to about 10.3 tonnes per day (up from 9.5 tonnes per day in 2022). With the addition of a new mining area from Asas Baiduri Sdn Bhd, MSC is poised to surpass 12 tonnes per day to 13 tonnes per day, potentially boosting earnings by around 12% in the next two to three years. On the smelting side, we expect improved utilisation rates post-rebricking exercise in August 2023.

With full commission, MSC expects higher operational efficiency to boost its margin this year. As at end-December 2023, the Pulau Indah plant had reached 100% capacity. It has 50% higher capacity, yielding an additional 20,000 tonnes per year. The plant boasts production costs that are at least 20% lower than the old ones in Penang as it has better efficiency. Additionally, it requires 45% less labour cost. Higher average tin prices will help to partially offset the elevated production cost amid the ongoing inflation. The intermediates now stand at around 5,200 tonnes and it will take about two years to complete the smelting. This will help to boost earnings.

Dialog Group Bhd

Target price: RM2.60 BUY

MAYBANK INVESTMENT BANK RESEARCH (APRIL 21): We raise our FY24-FY26 core net profit forecasts by +4%/+4%/+1% for Dialog, mainly to account for an increase in our long-term independent tank terminal rates to S$6.30 (RM22)/m3/month (from S$5.70/m3/month). Coupled with rolling over our base year to FY25, our target price is lifted from RM2.43. We remain positive on Dialog’s operational/financial stability from its dedicated midstream tank terminal assets.

In 2QFY24, Dialog’s Ebit margin continued to improve to 14.2% (from 10% in 1QFY24) and we believe this was due to two key reasons: (i) higher tank terminal rates at S$6.50/m3/month; and (ii) gradual completion of its loss-making legacy downstream engineering, procurement, construction and commissioning (EPCC) contracts that were signed during the pandemic. However, 2QFY24 was impacted by the recognition of a non-cash deferred tax entry amounting to about RM20 million. As our checks have indicated that rates have remained stable at S$6-S$6.50/m3/month at a utilisation rate of 90% in 3QFY24, coupled with lower losses from its downstream segment, we expect another q-o-q earnings growth in its next reporting quarter. Developing Pengerang to its full potential remains a key catalyst for Dialog’s long-term growth.

Malakoff Corp Bhd

Target price: 75 sen BUY

TA SECURITIES (APRIL 22): Malakoff is expected to return to the black in 1QFY24 on the back of improvement in negative fuel margins. We forecast that the group will record a core profit of RM60 million-RM70 million in 1QFY24. Newcastle Coal prices have stabilised since June 2023, suggesting that the worst of negative fuel margins is over. The group currently offers an attractive dividend yield of 6.8% to 8.3% for FY24-FY26. Its 97.3%-owned Alam Flora Sdn Bhd is expected to continue contributing stable earnings for Malakoff.

Meanwhile, the short-term earnings boost would come from inorganic growth via the acquisition of a 49% stake in E-Idaman, which is targeted for completion by April 2024. E-Idaman is expected to contribute an additional 3% to 5% to the group’s bottom line for FY24 to FY26.

Malakoff’s assets in the Middle East may be at risk if there is widening conflict in the broader Gulf region. It has stakes in water desalination plants in Saudi Arabia, Oman and Bahrain. These assets, forecast to contribute about RM134 million to share of profit in FY24 (49% of FY24 core profit), may be impacted in the unlikely event that the war of flames engulfs these countries.

Alliance Bank Malaysia Bhd

Target price: RM4.10 BUY

HONG LEONG INVESTMENT BANK RESEARCH (APRIL 22): Even though its share price has done well YTD, we still find Alliance’s risk-reward profile continues to be tilted to the upside. We believe the bank is likely to post meaningful y-o-y earnings growth next quarter (but flattish sequentially).

However, the historical dividend payout ratio of 50% may be reviewed for capital preservation efforts. That said, we are not particularly deterred if this plays out as Alliance is focusing on current and future growth for just some potential short-term pain. We raise our target price from RM3.95.

Even with the prospect of higher net credit cost q-o-q, we reckon the better top-line outlook coupled with benign cost pressures should help to blunt the impact and result in flattish sequential earnings. Alliance has a high probability of posting y-o-y profit growth, backed by total income expansion and lower loan loss provisions. Overall, its gross impaired loans ratio could further improve q-o-q, supported by recoveries and an expanding credit base. In any case, we are comforted that its loan loss coverage stood at 90%, higher than the pre-pandemic level of 70% to 80%, while the percentage of 30+ days past due loans has stayed relatively stable for two consecutive quarters.


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