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Singapore Investment

Recovery Stocks: Mixed returns for beneficiaries of ‘reopening’ play

THE recovery theme was well in play even before Malaysia began its transition to the endemic phase of Covid-19 on April 1 because markets traditionally move ahead of the economy and financial results by at least six months. Some stocks began to rally in the early part of the year as investors anticipated that they would benefit from the reopening of borders.

While some companies have continued to gain after the reopening of all economic sectors, profit-taking has had an effect on some stocks despite turning in a better financial performance year on year.

The runaway performer in this category is Berjaya Food Bhd (BFood), given the massive 137.21% gain in its share price year to date (YTD). Its annual net profit of RM122.7 million for the financial year ended June 30, 2022 (FY2022) was the highest since FY2015, driven by existing and newly opened Starbucks outlets, as well as the turnaround of its Kenny Rogers Roasters (KRR) restaurant chain. Based on Bloomberg data, the consensus target price for BFood is RM1.19, representing a 16.7% upside over its closing price of RM1.02 on Dec 16.

Other consumer stocks like ­7-Eleven Bhd, Kawan Food Bhd, Focus Point Holdings Bhd and Power Root Bhd have also delivered decent returns so far this year, rising between 7.3% and 66%.

BFood and Focus Point (up 35% YTD) are Hong Leong Investment Bank (HLIB) Research’s top picks in the consumer sector. The research house is positive on BFood’s Starbucks, which continues to grow via new outlet openings and higher sales from active promotions, while a leaner KRR store concept would enable the group to maintain profitability.

On Focus Point, it says the favourable outlook is premised on the continued focus on expanding both the optical and food and beverage (F&B) segments, in particular, new corporate clients in the latter segment, which is expected to contribute sizeable earnings to the group’s bottom line in the coming years.

CGS-CIMB Research highlights that demand for Power Root’s products will remain healthy, given the potential for consumer downtrading towards its products, as its premix products are priced more competitively than that of its peers and retail dine-in prices.

For Kawan Food, CGS-CIMB expects the sales momentum to continue in the last quarter of the year, driven by higher exports, easing labour shortages and margin expansion.

During the year in review, Perak Transit Bhd’s share price doubled on the back of stable earnings expansion, its growth attracting the attention of Datuk Eddie Ong Choo Meng. Having emerged as a substantial shareholder at the end of October with a 6.92% stake, he raised his shareholding to 8.753% on Dec 8.

To drive growth more aggressively, the Ipoh-based transport terminal and bus operator aims to replicate its recurring business model in other states in the longer term. Analysts project an upside of 24.6% based on the consensus target price of RM1.57 over Perak Transit’s closing price of RM1.26 in mid-December.

In the brewery sector, Heineken Malaysia Bhd and Carlsberg Brewery Malaysia Bhd appear set to climb further, notwithstanding the 21.4% and 15.74% YTD gains respectively in their share price, underpinned by their exposure to the normalisation of travel and tourism, says HLIB Research. In 2023, brewers are expected to post a y-o-y growth in earnings, supported by the absence of the one-off prosperity tax, the full-year reflection of a hike in average selling prices and continued recovery in tourist arrivals.

“While there is a risk of beer demand slowdown due to inflationary pressures, higher interest rates and softer economic growth in 2023, we expect beer to retain its inelastic properties — after all, it remains one of the cheapest alcoholic drinks on the market,” the research house said in a Dec 22 note.

In the first nine months of 2022, Heineken’s net profit surged 105.69% to RM308.19 million from RM149.83 million. Similarly, Carlsberg’s net earnings almost doubled to RM256.93 million from RM129.57 million.

Appearing less inelastic owing to higher input costs — especially freight charges and staff costs — is MR DIY (M) Bhd, whose share price has slipped 15.24% YTD. Though it managed to register a 13.3% rise in net profit to RM336.87 million for the first nine months of 2022, the home improvement products and mass merchandise player highlighted the need for pricing reviews to address continued input cost pressures.

An investor favourite for their dividend play, real estate investment trusts (REITs) have seen little change in their share price YTD. Sunway REIT managed to eke out a positive return of 2.84%, as its nine-month net property income ended September jumped 77.13% to RM354.05 million from RM199.88 million in the same period a year earlier, contributed by the retail and hotel segments. Although shares of Pavilion REIT and IGB REIT have dropped 1.6% and 1.82% YTD, they are supported by dividend yields of 6.63% and 6.02% respectively.

Banking stocks are seen as beneficiaries of improved economic activity, and the Bursa Malaysia Financial Services Index has climbed 6.7% YTD. Driven by strong interest income and low impairment losses, AMMB Holdings Bhd has enjoyed the biggest increase in share price of 32.81% YTD, followed by Hong Leong Bank Bhd (+10.85%), CIMB Group Holdings Bhd (+6.06%), Public Bank Bhd (+5.77%) and Malayan Banking Bhd (+4.94%).

Conglomerate Genting Bhd and its hospitality subsidiary Genting Malaysia Bhd (GenM) have not been able to sustain their gains in the first half of the year from a revival in global tourism. After reaching a high of RM5.34 on June 1, Genting’s share price retraced to below RM5 and is down RM4.5% YTD.

GenM has declined 4.37% over the same period. Last month, Genting and GenM hit lows of RM4.01 and RM2.40 respectively because of political uncertainties after the 15th general election, which resulted in a hung parliament before a unity government was formed.

The resumption of tourism and business activity has been a catalyst for the travel-related sector this year. Malaysia Airports Holdings Bhd’s net loss narrowed significantly to RM9.04 million in 3QFY2022 from RM58.15 million in 2QFY2022.

Despite the recovery in air travel, Capital A Bhd’s share price has slipped 24.68% YTD, as its Practice Note 17 status remains a concern for investors. To address that, Capital A has proposed to sell its aviation business to AirAsia X Bhd (AAX) in exchange for AAX shares.

Post-restructuring, Capital A will be a pure digital group with maintenance, repair and overhaul, logistics, digital and fintech businesses. Recently, Capital A also announced its foray into Cambodia, which marks the fifth Southeast Asian destination for the group after Malaysia, Indonesia, Thailand and the Philippines.

While the venture is deemed positive, Kenanga Research is of the view that it could take longer than expected before the expansion turns profitable. Financially, Capital A remained in the red with a wider net loss of RM901.31 million for 3QFY2022 against RM887 million a year earlier, impacted by a share of loss from associates and foreign exchange losses.

On the healthcare front, the shares of IHH Healthcare Bhd and KPJ Healthcare Bhd have flagged, posting negative returns of 20.98% and 11.71% YTD. Even so, HLIB expects the resilience in IHH’s patient volume growth to continue, underpinned by the opening of additional beds, shift in patient behaviour and growing foreign patient volumes.

For KPJ, CGS-CIMB foresees the core earnings per share for the last quarter of 2022 to wane quarter on quarter owing to the impact of the new KPJ Damansara Specialist Hospital 2’s gestation losses and continued cost pressures, which may offset the steady revenue growth elsewhere. However, a recovery may be seen in 2023 and 2024 should there be improvement in patient visitations, revenue intensity and associate earnings, coupled with a normalisation of the effective tax rate from 2023 onwards.

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