This article first appeared in Capital, The Edge Malaysia Weekly on December 9, 2024 - December 15, 2024

OVERWEIGHT

AmInvestment Bank Research (Dec 4): We have an “overweight” call on Malaysia’s technology sector. Being relatively unloved (compared to historical standards), coupled with reasonable valuations and still positive long-term structural prospects, we expect interest will return to the sector in 2025. Based on our fund manager’s radar, sector allocation to tech dipped to 10% in October, the lowest since we started tracking the data. At its peak, the number stood at 19%.

While there is value in the sector, we advise investors to be selective. High earnings expectations remain a key risk. We are of the view that the worst is over, but the ensuing recovery is likely to be more gradual. Hence, we like stocks with earnings certainty or those with relatively lower expectations. Within our coverage, VS Industry Bhd (KL:VS) fits the bill, with FY2025 and FY2026 growth secured by its expansion into the Philippines. Demand is backed by new orders secured from Customer X. Upside risk to demand in 2025 can come from an AI-driven smartphone replacement cycle or stronger-than-anticipated vehicle sales.

Meanwhile, prospects of heightened tariffs under a Donald Trump administration for the second time will spur supply chain realignment activities. He has already announced he will slap a 25% tariff on imports from Mexico and Canada, coupled with an additional 10% tariff on Chinese imports the day he is inaugurated as president. We expect to see more US reshoring activities as production is brought back to the US. Given its US customer base, Greatech Technology Bhd (KL:GREATEC) is a beneficiary of this as we expect customer capex plans to resume after stalling for the large part of 2024.

Bombed out stocks offer value, especially those with a good track record and clear vision. For investors with a longer-term investment horizon, we would advise bottom fishing for quality names. The past is typically a good predictor of the future. We like Malaysian tech companies that are entrepreneurially run and owned. Companies with a clear and long-term vision also appeal. Fitting this category, both Vitrox Corp Bhd (KL:VITROX) and Malaysian Pacific Industries (KL:MPI) are trading near their 2022 lows.

Target price: RM1.95 OUTPERFORM

Kenanga Research (Dec 4): Solarvest (KL:SLVEST) is acquiring a 30% stake in SIW Manufacturing Sdn Bhd from two non-related individuals, who respectively own 80% and 20% of SIW, for RM36 million cash. SIW is primarily engaged in the manufacturing of waste gas abatement machines and gas system-related modules and components for the semiconductor industry.

The acquisition comes with a net profit guarantee of RM14 million and RM16 million for FY24 and FY25 respectively, and the deal is expected to be finalised by Dec 31, 2024. The deal values the asset at 8.6 times and 7.5 times FY24 and FY25 PER based on the profit guarantee, which are at a discount to the forward PER of the manufacturing sector of 10 times. The acquisition will raise Solarvest’s net debt and gearing of RM91.4 million and 0.3 times as at end-2QFY25 to RM127.4 million and 0.4 times respectively, which are still highly manageable.

We view the acquisition positively as it will strengthen the group’s core renewable energy business by expanding its presence in complementary sectors with significant growth potential. The key synergy lies in leveraging SIW’s ESG-focused customer base and its unique value proposition through patented technologies.

Target price: RM4 ADD

CGS International (Dec 4): Spanning 200 acres, YTL Power’s (KL:YTLPOWR) green data centre (DC) park in Kulai, Johor, is currently designed to accommodate total IT load capacity of about 450mw (facility load about 600mw). The project is planned for phased development, initially set over a 10-year period. YTL Power has secured the required power supply for the entire 600mw facility load via electricity supply agreements with Tenaga Nasional Bhd (KL:TENAGA). Similarly, its water needs are fully supported by on-site water treatment plants.

We maintain “add” on YTL Power as we see an improved risk-reward trade-off following the 31% decline in share price from its May 2024 high. Securing offtakers for the AI DCs at attractive rates is a needed key rerating catalyst for YTL Power, in our view, while improved final determination by UK water services regulator Ofwat for subsidiary Wessex Water will help to reduce earnings uncertainty.

Since hitting an 11-month low on Nov 22, YTL Power’s share price has rebounded strongly, up 28% over the past week, hence we recommend accumulating on pullbacks. Downside risks include execution setbacks and market risks for DC projects as well as heavy capex for DCs and Wessex Water leading to increased gearing.

Target price: RM2.04 BUY

MIDF Research (Dec 4): Mah Sing Group Bhd (KL:MAHSING) announced that its wholly-owned subsidiary Loyal Sierra Development Sdn Bhd had entered into sale and purchase agreements with vendors for the proposed acquisition of 59.12 acres of freehold land in Mukim Pulai, Johor Bahru, for a total purchase consideration of RM62.98 million.

As Mah Sing has a few ongoing projects in Johor, namely Meridin East, M Minori and M Tiara, the land acquisition will allow it to ride on the strong demand for landed houses in Johor. Note that contribution from Johor projects to total new sales increased to 41% in 9MFY24 from 26% in FY23. 

Mah Sing intends to fund the land acquisition via a combination of internally generated funds and bank borrowings. Net gearing is expected to increase to 0.24 times from 0.22 times in 3QFY24.

We make no changes to our earnings forecast for FY24/25/26 and revise our target price for Mah Sing to RM2.04 from RM2.03 as we include realisable net added value (RNAV) contribution from M Tiara 3. We remain positive on Mah Sing as the land bank expansion in Johor will drive further new sales growth.

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