This article first appeared in Capital, The Edge Malaysia Weekly on October 7, 2024 - October 13, 2024

OVERWEIGHT

KENANGA RESEARCH (OCT 2): The KL Energy Index (Bursa) has corrected by 15.5% from its recent peak of 1,001.5 in May 2024, largely in line with the movement in Brent crude prices, which are down by 12.3% from their short-term peak of US$86.5 per barrel. In our view, this sell-down is overdone, as the earnings outlook for the majority of the component companies remains highly robust for both 2024 and 2025, particularly for upstream service providers. To illustrate, the Bursa Malaysia Energy Index has declined 14% from the recent peak, which is lower than the fall in Brent crude prices of 21% off its 2024 year-to-date peak. However, if we exclude the top three companies with larger weighting due to more stable business nature (Dialog Group Bhd [KL:DIALOG], Yinson Holdings Bhd [KL:YINSON] and Bumi Armada Bhd [KL:ARMADA]) of midstream and FPSOs, the next three names with major weightings in the index (Dayang Enterprise Holdings Bhd [KL:DAYANG], Keyfield International Bhd [KL:KEYFIELD] and Hibiscus Petroleum Bhd [KL:HIBISCS]) dropped by 22% on average. We believe this is unjustified, given that a 21% decline in oil prices does not necessarily translate into a 21% decline in capex by oil and gas producers. Consistent with our view on Brent crude, we believe the macro environment still supports a ramp-up in upstream capex spending overall. The KL Energy Index is now trading at 8.5 times two-year forward PER, which is below the five-year average PER of approximately 14 times. We believe this discount to the average PER is unwarranted, given that the sector’s fundamentals remain on an upward trend heading into 2025. In addition, we believe sector fundamentals remain largely intact for 2025 as the supply of upstream service providers are already insufficient to meet increasing demands from Petronas and other oil producers in Malaysia. Petronas has maintained a cautious approach to spending amid macroeconomic uncertainties, committing to preserving value through cost rationalisation and value-focused investments. With its operating cash flows intact and an approved dividend of RM32 billion for FY24 (compared with RM40 billion in FY23), we believe the group can still ramp up its domestic investments, even if it underspends on its RM60 billion annual capex target. The new energy capex is expected to remain manageable at 18%, while foreign capex, particularly for the Canada LNG project, is expected to enter its final phase by the end of FY24.

Target price: 81 sen BUY

RHB RESEARCH (OCT 1): We visited Maru Café’s first store during its grand opening (at Intercontinental Hotel Kuala Lumpur) to gauge public reception of this new outlet. While neutral on this venture due to muted near-term earnings impact, it opens a new avenue for the long-term growth of Mynews Holdings Bhd (KL:MYNEWS) and allows it to capitalise on the growing demand for coffee and fresh food. Mynews currently trades at an attractive valuation of 15.9 times FY25F (October), with the worst likely behind and supported by sustainable earnings recovery. Moving forward, management has identified five locations for expansion over the next four to five months, with some outlets planned to be located beside Mynews stores to enhance brand visibility. Given the low capex required and the cautious rollout to gauge market reception, we do not anticipate significant gestation losses from this venture. With Maru Café’s food produced by Mynews’ food processing centre (FPC), the planned opening of 100 new outlets in FY25 (60% Mynews, 40% CU) is expected to further boost the FPC’s utilisation rate through higher volumes.

The consolidation of management teams for Mynews and CU has helped narrow CU’s losses by leveraging their combined scale — resulting in stronger bargaining power with suppliers and boosting sales through an improved product assortment. It aims to expand to the East Coast. We expect CU to break even by FY24 and contribute to profit in FY25.

We make no changes to our earnings forecasts and DCF-derived target price (TP) of 81 sen (inclusive of 2% ESG premium). Our TP implies 20.2 times FY25F PER, which is -1SD from its pre-pandemic mean.

Target price: RM10.25 BUY

CIMB SECURITIES (OCT 2): MISC Bhd (KL:MISC) signed a letter of intent with Petronas LNG Sdn Bhd for long-term contracts involving two newbuild liquefied natural gas (LNG) carriers, with a 15-year duration starting in 2027. However, details such as contract value, capacity and specifications, as well as the exact commencement date were not disclosed.

Additionally, MISC has come to an agreement with Petronas for: i) the early termination of three existing steam LNG carrier time charters (Seri Ayu, Seri Angkasa and Seri Begawan — Seri AAB) and for them to be redelivered on its 20th anniversary in 2027/28, with MISC receiving compensation for the early termination, and ii) the extension of time charters for two existing LNG carriers (Seri Alam and Seri Amanah — Seri AA) from their current contracts’ expiration in 2025 and 2026 until March 31, 2028. With the latest contract, MISC now has 19 LNG carriers under construction. Four of these vessels are scheduled for delivery in 2025, 13 in 2026, and the most recent two by 2027. Notably, 11 of these LNG carriers are earmarked for charter by Qatar Energy. Meanwhile, our SOP-based TP will be reduced by only 1.1%, after taking into account: i) the two newbuild LNG carriers , ii) Seri AA charter hire extensions, assuming the same DCR, and iii) five-year time charters for Seri AAB, starting 2027/28 at an unchanged DCR prior to the termination. We are maintaining our earnings forecasts, DCF-based TP of RM10.25 and “buy” rating for now, pending further details from the management.

Target price: RM1.96 BUY

MAYBANK IB RESEARCH (OCT 2): We visited the 404-acre Quantum Edge business park (QEBP) of Eco World Development Group Bhd (KL:ECOWLD) in Kulai, Johor last week. QEBP targets digital and high-tech players in AI, cloud computing, high-tech manufacturing and R&D. We are impressed by its strategic location — six-minute drive from Kulai toll and 25 minutes from Sedenak toll, and the availability of Tenaga Nasional Bhd pylons on the site, which serves as an attractive pull factor for data centre (DC) developments. Preliminary approvals for power and water supply are required before finalising any land deals with DC players. We understand that QEBP has secured sufficient power and water supply. The QEBP site works are progressing well, with 40% of overall earthworks completed to date. Infrastructure works are expected to commence by the end of 2024 once earthworks are completed. With secured land deals with Microsoft (123 acres; RM402.3 million or RM75 psf) and Princeton Digital Group (57 acres; RM224 million or RM90 psf), QEBP will start contributing to earnings from FY25E onwards. The project accounts for 28%/11% of our FY25E/26E pretax profit.

EcoWorld is actively negotiating with DC players and could secure one to two DC land sales for its Eco Business Park V and QEBP by end-2024/25. We fine-tune our FY25/26E earnings forecasts by +0.7%/+2.4% to factor in change in work billing assumptions for QEBP. Our FY24E property sales assumption is unchanged at RM3.9 billion. We raise FY25-26E earnings forecasts by +1% to +2%. Our TP is unchanged at RM1.96 (on an unchanged 1.1x FY25E P/B).

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