AUTOMOTIVE INDUSTRY : POSITIVE
MIDF RESEARCH (JUNE 21): The Department of Finance has announced that while the Sales and Services Tax (SST) exemption for car purchases will end as scheduled on June 30, reservations made up to that date will continue to be tax-exempt, provided check-ins are completed by March 2023. In our view, this is a win-win solution as it provides room to accommodate ongoing industry bookings, which have been affected by delays and component shortages, reducing the risk of order cancellations.
Overall, the decision is consistent with our view, which alluded to a phased withdrawal of SST leave. As this scenario has been factored into our projections, we are keeping our 2022 Total Industry Volume (TIV) unchanged at 575,000 units, which is at the lower end of the pre-pandemic range, to account for the shortage. continuous chips and potential intermittent supply. chain disturbances.
The latest year-to-date TIV headline of around 266,000 remains slightly above our expectations, accounting for 46% of our full-year guidance. This despite the seasonal weakness observed in May, which was impacted by the Hari Raya festivities and scheduled factory closures. Meanwhile, exceptional industry bookings of 264,000 equate to around five months of TIV, which roughly guarantees volumes through the end of the year, if successfully delivered.
That said, rising material costs and a weakening ringgit against the US dollar pose a potential risk to earnings for the sector. Industry players indicate the possibility of passing on these costs via price increases, although at this stage price increases remain selective. We anticipate that non-national cars will be better placed to pass on additional cost increases over national cars, given that the latter typically involve a price-sensitive customer profile.
While we are in the process of recalibrating our earnings forecast to take into account rising costs, at this stage we are leaving our “positive” position on the automotive sector unchanged in order to play on the recovery in domestic consumption. Bermaz Auto Bhd (“buy”, target price: RM2.20) and UMW Holdings Bhd (“buy”, target price: RM4.35) remain our top sector picks.
Fresh Farm Bhd
Target price: RM1.88 TO BUY
RHB INVESTMENT BANK (JUNE 21): Farm Fresh’s proposal to offer fresh dairy products was well received and led to a significant gain in market share. The company is embarking on a multi-pronged expansion plan to take advantage of the rising consumer sentiment, which we believe will lead to exciting earnings growth. With brand equity, a visionary management team and strong environmental, social and governance (ESG) credentials, we believe the counter deserves a valuation premium, given the lack of quality consumer staple stocks in the local market.
We initiate a hedge on Farm Fresh with a target price (TP) of RM1.88. Our TP implies a 2023 PER of 31 times, which represents a premium of around 24% over the valuation we attribute to the two brewers under our coverage, taking into account the Shariah compliance status of Farm Fresh, which allows it to respond to a more diversified clientele. shareholding, despite the brewers’ generous dividend payout ratios. The valuation is also a premium for Sharia-compliant competitors like Fraser & Neave Holdings Bhd and Dutch Lady Milk Industries Bhd, based on Farm Fresh’s much more exciting growth prospects and higher return on equity.
Kelington Group Bhd
Target price: RM1.90 SURPASS
KENANGA INVESTMENT BANK RESEARCH (JUNE 21): We maintain the profit guidance for FY2022 and FY2023 at RM44.2m and RM45m respectively. The Shanghai smelter’s employment price gives a positive indication that the lockdown measure has eased, which bodes well for the group’s employment growth in China.
We maintain our “outperforming” call option and our target price of RM1.90 on a FY2023 PER of 27 times. We continue to like the group for: (i) being a unique proxy for the front-end semiconductor space; (ii) its strong track record, which continues to attract large multinational clients; and (iii) its foray into the industrial gases segment, which has a high barrier to entry and very lucrative yield margins.
We believe our valuation is justified as the group continues to be the preferred supplier to China’s largest wafer foundry, while having a dominant presence in Malaysia and Singapore. Additionally, demand for its liquid carbon dioxide (LCO) remains high as its utilization rate stands at 70% and is on track to reach 80% by the end of 2022. Risks related to our appeal include : (i) slower revenue recognition due to the resurgence of Covid-19; (ii) slowdown in semiconductor sales; and (iii) delay in the ramp-up of the LCO.
Mega First Corp Bhd
Target price: RM4.74 SURPASS
PUBLIC INVESTMENT SEARCH (JUNE 21): We recently held a virtual briefing for Mega First Corp (MFCB), with several highlights shared by management. Despite growing cost pressures in the limestone and packaging sectors, management continues to seek new investment opportunities. We praise its credibility and its strong entrepreneurial drive, given its successes in the solar, packaging and oleochemical businesses in which it has recently ventured. Management has indicated its intention to play its role as an investor in these companies by sharing its orientations, its vision and the solidity of its balance sheet.
The group recently acquired a 28.83% stake in Melaka-based Integrated Smart Technology Sdn Bhd (IST), which is involved in the design and assembly of automated test machines for the semiconductor industry, for RM5.5 million, which values the acquisition at a bargain price PER of only twice. The remaining stake in IST belongs to its co-founders. The company is expected to generate a profit of approximately RM10 million per annum (approximately RM2.9 million for MFCB), based on an estimated annual sale of RM40-50 million.
We continue to rate MFCB with an “outperforming” call and a target price of RM4.74. The stock currently trades at an undemanding PER of just eight to nine times.