This article first appeared in Capital, The Edge Malaysia Weekly on August 12, 2024 - August 18, 2024

CGS INTERNATIONAL (AUG 5): We initiate coverage on SD Guthrie (KL:SDG) with an “add” rating and SOP-based target price of RM5.20, equivalent to 23.6 times 2025F PER, which is below its five-year historical mean. Our “add” rating is supported by our projections of a fresh fruit bunch (FFB) yield recovery, stable to high crude palm oil (CPO) prices, and lower production costs. We believe the current valuation is reasonable in the light of the strong recovery in net profit that we project over the next two years.

We expect 5% y-o-y FFB production growth for 2024 to 2025F. For 2024F, the growth is driven primarily by strong double-digit recovery from its Malaysian estates, following the filling of vacant harvester positions and ongoing rehabilitation activities. However, this will be partially offset by declines at its Indonesia and Papua New Guinea estates due to weather challenges. As for 2025F, we believe production growth will come on the back of better FFB yields at its Indonesia estates as they recover from the El Niño impact while FFB yields for its Malaysia estates should return to normal after the completion of rehabilitation works and sufficient skilled labour.

We are positive on SD Guthrie’s net profit growth outlook on the back of our average CPO price forecast of RM4,000 per tonne for 2024F and 2025F (2023: RM3,810) and improving yields. We expect a net profit CAGR of 53% for 2023 to 2025F on the back of production growth from FFB yield improvements and high CPO prices. Every 5% increase in CPO price will lift SD Guthrie’s net profit by 23% for FY25F, based on our sensitivity analysis.

We think rerating catalysts could come from: (i) monetisation plan from its non-strategic/non-core assets (especially rubber land) with an annual proceeds target of RM500 million to RM700 million, which may lead to higher dividend payouts; and (ii) expansion into solar energy, with SD Guthrie investing in three sites under the Fifth Large Scale Solar programme (LSS5) and aiming for 1gw of renewable power capacity, with a potential investment of RM2.5 billion.

Management has earmarked 1,500 to 1,700ha (representing less than 1% of its total land bank in Malaysia) of less productive agricultural land for future renewable energy (RE) plant-ups. SD Guthrie is targeting an internal rate of return of 8% to 9% and 13% to 14% for its solar projects, based on 100% equity and 80/20 debt/equity funding, respectively. 

If SD Guthrie wins the upcoming bidding in the LSS5 programme, and can commence construction shortly after, we expect the solar farm to be completed by 2025 to 2026F. Based on our back-of-the-envelope calculation, the solar project could contribute RM100 million to RM150 million per annum to SD Guthrie’s Ebitda.

Target price: RM6.75 OUTPERFORM

KENANGA RESEARCH (AUG 5): PIE (KL:PIE) is poised for a stronger 2QFY24 as integrated circuit supply shortage from Customer A would have eased, while its production output ramps up using additional floor space from Plant 5. Meanwhile, its new server customer is on track for pilot production in 4QFY24. It is also engaging with a potential customer that could result in contracts with attractive margins.

Concurrently, PIE has planned for further floor space extension at the rear of Plant 5, increasing its size by about 70% to around 170,000 sq ft to meet future demand. Combined with the existing space allocated to Customer A in Plant 3 (about 80,000 sq ft and fully utilised), this represents a threefold increase in floor space to about 250,000 sq ft.

We keep our target price of RM6.75 based on FY25F EPS pegged to an unchanged PER of 23.5 times, in line with artificial intelligence-related peers. 

Target price: RM1.74 BUY

MAYBANK INVESTMENT BANK (AUG 6): AEON’s ­(KL:AEON) 2Q24 retail segment sales are expected to be seasonally softer q-o-q in the absence of festivities to drive sales volume. Having said that, we understand that sales momentum has improved across all categories (foodline, softline and hardline) m-o-m since the withdrawals of Employees Provident Fund Account 3 began on May 12. To supplement this, AEON has remained steadfast in rolling out various store promotional campaigns to capitalise on its 40th anniversary and draw higher footfall to its stores in an otherwise historically quiet quarter.

The group’s targeted mall occupancy rate in FY24 remains at 94%, with an expected rental renewal rate of 90% and rental reversion rate of 9% to 10%. AEON’s store and shopping mall facelift exercises are also on track, with the completion of AEON IOI Puchong renovations by end-August 2024, while the AEON Bukit Indah and AEON Tebrau City facelifts will be concluded by 4Q24. Note that AEON typically enjoys a 15% to 20% y-o-y uplift in sales from its newly rejuvenated malls.

Target price: RM3.28 BUY

HONG LEONG INVESTMENT BANK (AUG 6): Notion VTec’s (KL:NOTION) 9MFY24 core net profit of RM39 million (+>100%) was a beat, thanks to a stronger-than-expected Ebitda margin. Aided by the favourable foreign exchange (forex), 9MFY24 top line gained 36% to RM341 million as the higher contributions from hard disk drive, automotive and energy management systems were more than sufficient to negate the weakness in camera/industrial. In 3QFY24, earnings improved from a loss of RM3 million in 3QFY23 to RM19 million attributable to a higher Ebitda margin, lower depreciation and amortisation and lower effective corporate tax rate.

After three consecutive quarters of robust growth in FY24, Notion anticipates 4QFY24 to progress at a moderate pace in view of the volatility of forex. Stabilised earnings will allow Notion to position and prepare for further expansion in FY25. The group is confident that FY24 will set a new benchmark for both revenue and profit, marking a record year. Maintain “buy” with unchanged target price of RM3.28, pegged to 30 times mid-CY26F fully diluted earnings. 

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