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STOCKS ANALYSIS
Saturday, 20 Jan 2018

VINCENT LAU

Rakuten Trade Research vice-president

Stock pick: Straits Inter Logistics Bhd

image: https://cdn.thestar.com.my/Themes/img/chart.png

Share price: 28 sen

We are calling licenced bunkering company Straits Inter Logistics Bhd our top pick for 2018 following five quarters of consecutive profits and potential new business expansions.

More importantly, the company is entrepreneurally driven and the company is not just depending on organic growth.

As of Thursday, its first new potential mergers and acquisition has been announced. Straits has entered into a heads of agreement with Hong Kong bunkering company Banle Energy International Ltd to explore potential business cooperations.

We are also waiting for the company’s fourth quarter results that will be announced next month.

We first initiated coverage on Straits on Oct 9, with a target price of 31 sen based on 13 times price earnings ratio financial year ended Dec 31, 2018 (FY18).

Furthermore, with Straits’ having garnered a RM45mil bunkering contract in September, this gives more earnings visibility for 2018.

In September, Straits’ 51% owned subsidiary Selatan Bunker (M) Sdn Bhd won a RM45mil contract from Tumpuan Megah Development Sdn Bhd for bunkering services.

Meanwhile, Straits registered a net profit of RM631,000 for its third quarter of the financial year ending Dec 31, 2017, up from RM10,000 in the corresponding period last year.

Its revenue stood at RM32.9mil, compared to RM20.2mil a year ago.

For the nine-month financial year ending Dec 31, 2017, the company registered a revenue of RM82.9mil, which represents a 65% increase from RM50.3mil a year ago. Its net profit stood at RM1.8mil.



LEE CHUNG CHENG

JF Apex Securities head of research

Stock pick: Hai-O Enterprise Bhd
image: https://cdn.thestar.com.my/Themes/img/chart.png

Share price: RM5.09

Hai-O Enterprise Bhd remains a relatively undervalued wellness and multi-level marketing (MLM) company, despite its share price having almost doubled over the last one year.

The counter is our top pick for this year. We ascribe a target price of RM6.41 based on 17.5 times the company’s estimated earnings for the financial year (FY) ending April 30, 2019.

Among the reasons that we favour Hai-O is the group’s strong earnings growth trajectory, which is underpinned by its rising MLM members and launch of new lifestyle and beverage products.

We expect Hai-O’s earnings to grow 51% year-on-year (yoy) in FY2018 and 23% yoy in FY2019. In FY2017, the group saw its earnings grow 63% yoy.

Besides the positive earnings outlook, Hai-O also has a sturdy balance sheet, with a net cash position.

As at end-October last year, the group had cash and cash equivalents totalling RM93.75mil against short-term borrowings of only RM1.19mil.

In addition, Hai-O’s sales seem unfazed by prevailing high cost of living, as the group’s turnover has been fairly resilient. And it enjoys stable profit margin.

Hai-O’s net profit overtook that of its peer, Amway (Malaysia) Holdings Bhd, for the first time in history last year despite its revenue being half of the latter’s (Hai-O’s RM59.3mil for FY2017 versus Amway’s RM54.6mil for the financial year ended Dec 31, 2016).

Moving forward, we expect Hai-O to continue to chalk up better net earnings than Amway.

Currently, Hai-O is trading at 14 times forward price-earnings compared to Amway’s 19 times.

We envisage Hai-O’s valuation to play “catch up” with Amway as the former’s market capitalisation has exceeded the latter (RM1.5bil versus RM1.3bil). This is further warranted by its better profit margins and net earnings against Amway.

CHOO SWEE KEE

TA Investment Bhd chief investment officer

Stock pick: Kelington Group Bhd
image: https://cdn.thestar.com.my/Themes/img/chart.png

Share price: 80.5 sen

Kelington is a leading regional provider of ultra high purity (UHP) gas and chemical delivery solutions for the high technology industry. Barriers to entry are rather high in this industry as the provider needs to have a good safety track record and the trust of the clients.

We like the company as it has proven business with multinational clients such Intel, TSMC, Infineon, Q Cell, BASF and Petron. It is noted that China has a development plan that will last until year 2025 to invest heavily in the semi-onductor industry to increase manufacturing capacity of memory chips and integrated circuits.

Analysts forecast that there will be a record spending of more than US$60bil in the semicon industry in 2018 globally, on top of an expected US$50bil in 2017. It is likely that each

of such facilities will need UHP gas delivery system and Kelington is in a sweet spot to secure some of these contracts.

To complement its engineering business, the company has ventured into the supply of industrial gases, such ie nitrogen and carbon dioxide (CO2) in FY2018. The company provide on-site supply of nitrogen gas for the technology industry and other manufacturers.

It has signed a RM20mil 10-year contract to supply nitrogen gas to Hanwha Q Cells, one of the world’s largest manufacturers of solar cells and modules. We expect more such contracts to come in the near future.

It intends to build a 50,000 tonnes/year liquid CO2 plant in Terengganu with a feed-in supply from Petronas. The company expect to supply CO2 to meet the rising demand from the food and beverage industry with a potential revenue of RM1bn over the plant’s lifespan. CO2 is used to manufacture carbonated drinks and for food freezing.

Overall, we expect Kelington’s earnings to grow 20% to 30% annually over the next two years with growth from UHP engineering contracts in 2018 and industrial gas supply in 2019.

THOMAS YONG

Fortress Capital chief executive officer

Stock pick: Gamuda Bhd

image: https://cdn.thestar.com.my/Themes/img/chart.png

Share price: 5.07

GAMUDA Bhd’s share price had underperformed the KL Construction Index by 6% in 2017, mainly attributed to the lack of new contract wins during the year, with the last major wins being the MRT Line 2 Underground Package and Pan Borneo Highway Sarawak back in 2016.

This is further exacerbated by the unexpected announcement of a turnkey role (including financing) instead of a project delivery partner (PDP) role for the upcoming MRT Line 3, which ended Gamuda’s initial hope to secure the PDP role for the project.

However, in 2018, we believe that the Main Market-listed Gamuda stands to end its contract drought by securing large jobs from mega infrastructure projects that are to be rolled out progressively such as East Coast Rail Link (ECRL), High Speed Rail (HSR) and MRT Line 3. This expection is supported by the company’s leading expertise and track record in major infrastructure developments in Malaysia.

Apart from that, its long awaited SPLASH water concession asset sale could finally materialise after the election which is expected to be held in 1H18.

Moving forward, we expect the accelerated construction works for MRT Line 2 and Pan Borneo Highway Sarawak, stronger sales from Gamuda’s overseas property development projects and stable infrastructure concession income to alleviate market concerns on earnings delivery.

With valuation being relatively attractive after a disappointing performance in 2017, coupled with the above mentioned catalysts, we believe Gamuda’s valuation would catch up and outperform its peers in 2018.

MOHD REDZA ABDUL RAHMAN

MIDF Investment Bhd head of research

Stock pick: Muhibbah Engineering (M) Bhd

image: https://cdn.thestar.com.my/Themes/img/chart.png

Share price: RM3.21

Although Muhibbah’s recent operating margins were compressed to 7.7% (-28.7% y-o-y), we can dispel the negative undertone by looking at the contribution of its concession assets in Cambodia.

The three airports; Siem Reap, Sihanoukville and Phnom Penh contributes on average 30.24% of profit before tax for the past two years.

Muhibbah is backed by a total order book of RM2.1bil with an average backlog duration of 22 months or 1.7 times construction revenue cover.

Despite the trade blockade by Saudi-led coalition to Qatar, the project win from the latter is not entirely muted as in Oct 2017, Muhibbah won another award of RM59.1mil (through 49% joint venture) albeit lower than the previous award of RM438.1mil in January.

MIDF Research recommends four investment themes with the objectives of taking advantage of the pockets of opportunities from externally driven factors (e.g. exports and forex), extracting returns through arbitrage opportunities from fundamental vs. market disconnect and also safeguarding returns through domestic dividend play.

Its four themes are currencies play, exporters market expansion, velocity as an ally and dividend plays.

Read more at https://www.thestar.com.my/business/business-news/2018/01/20/from-the-fund-managers/#gYDIP7fPOWQDTd0V.99
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