Brokers Digest: Local Equities - Gamuda Bhd, Hartalega Holdings Bhd, Berjaya Food Bhd, Magni-Tech Industries Bhd - The Edge Markets MY

Gamuda Bhd

Target price: RM4.15 BUY

HONG LEONG INVESTMENT BANK RESEARCH (DEC 14): We reinstate coverage on Gamuda with a “buy”. Its 38 sen per share special dividend to shareholders went ex on Dec 13, marking an end to its toll disposal chapter. The stock price has adjusted by a smaller quantum. The stock’s valuation looks attractive at FY23/24/25 PER of 12.8 times/11.3 times/9.9 times and PBV of 0.9 times despite still being in a contract up cycle.

We introduce FY23/FY24/FY25 core Patami forecasts of RM739.4 million/RM840.7 million/RM960.9 million. The expected decline in FY2023 core earnings (-8.3% year on year) is due to the disposal of its four highways. We expect earnings to recover from this trough as recently secured projects (RM11.6 billion and RM1.3 billion of contract wins in FY22 and FY23) enter a stronger recognition cycle, coupled with recognition of record high unbilled sales of RM6.2 billion.

We expect further order-book growth to be underpinned by opportunities in Australia and selective opportunities domestically. Our earnings forecasts suggest a slight dip in FY23 before rebounding in FY24-FY25, driven by a ramp-up of its RM15.3 billion order book and recognition of unbilled sales of RM6.2 billion. Key catalysts include contract wins. Risks include project delays, execution in new markets, prolonged elevated material prices, labour shortage and health of the property market.

Perhaps the most instrumental development towards securing its longer-term future is the successful penetration of the robust construction market in Australia. The firm has secured two projects, which are the Coffs Harbour Bypass (A$675 million; 50% stake) and Sydney Metro West tunnel (A$2.16 billion; 100%). Gamuda is currently in the running for the Suburban Rail Loop East tunnel packages, having lost out on the North-East Link road project. Historically, Gamuda has had a win rate of roughly 10%-20% in Australian project tenders, by our estimates.

We see Gamuda’s first major foray into Singapore railway construction through its Cross Island Line (Phase 1) Defu underground station and tunnels contract, secured in 2021, as key to enhancing its regional reputation, considering the intense global competition in the island nation. Overall, Gamuda’s fruitful regionalisation of its construction operations (about 78% of its order book) significantly reduces its reliance on Malaysia’s construction market, which is notorious for policy flip-flopping and facing declining fiscal headroom.

Hartalega Holdings Bhd

Target price: RM1.39 UNDERPERFORM

KENANGA RESEARCH (DEC 14): Hartalega is buying a 60-acre piece of land in Bukit Kayu Hitam, Kedah, from Northern Gateway Free Zone Sdn Bhd for RM54.3 million cash, or RM21 per sq ft (psf), and has earmarked the land for future expansion. However, due to the massive overcapacity in the global glove market currently, we believe the land is likely to sit idle over the next 12 to 18 months. While maintaining our forecasts, we cut our asset-based target price by 10% from RM1.54 and keep our “underperform” call.

This acquisition can be easily funded by its net cash of RM1.8 billion as at Sept 30. A quick check on online listings shows that asking prices for comparable land in the surrounding area range from RM15 to RM22 psf. We believe Hartalega is paying a fair price.

We are cautious on the stock as the massive overcapacity in the global glove market means that the low prices and depressed plant utilisation will likely persist over the next one to two years. Adding salt to the wound is the reluctance of customers to commit to sizeable orders and holding substantial stock on expectations of a further decline in prices.

Berjaya Food Bhd

Target price: RM1.50 BUY

MAYBANK INVESTMENT BANK RESEARCH (DEC 13): Berjaya is navigating through heavier cost pressures in FY23 with internal cost efficiencies and product price adjustments at Starbucks. With this, FY23 group operating margins may ease year on year, but strong sales momentum, driven by resilient demand, should keep its earnings on a positive trajectory in the near term. We maintain our call and target price.

The group is facing additional cost pressures arising from higher raw material prices and unfavourable US/Malaysia currency exchange. About 50% of raw materials are purchased in US dollars, while milk costs are in ringgit. To mitigate this, Berjaya has raised product prices for all its beverage items in Starbucks by RM1 per item, effective November, which translates to a 5%-10% increase in the average selling prices of permanent beverage products. On average, beverage sales contributed 67% to Starbucks’ revenue.

Berjaya’s outlook is positive based on its resilient product demand and unhindered ability to grow its store network amid weak consumer sentiment. That said, we believe its recent price adjustments will only partially buffer cost increases as it tries to strike a balance between maintaining consumer affordability and defending group operating margins.

Magni-Tech Industries Bhd

Target price: RM2.35 OUTPERFORM

PUBLICINVEST RESEARCH (DEC 13): Magni-Tech recorded a core net profit of RM25.1 million in the second quarter of the financial year ending April 30, 2023 (2QFY23), a sharp contrast to the core net loss of RM200,000 in 2QFY22, mainly due to the absence of Covid-19-related operational halts in Vietnam. 1HFY2023 core net profit of RM48.1 million was below our expectations, however, accounting for 43% of our full-year forecast.

We cut our earnings forecast for FY23-25 by an average of 12% to account for the weaker profit margins on rising operating cost (labour cost) and slower near-term earnings growth given rising inflationary pressures. Nevertheless, we are still positive on Magni-Tech’s long-term outlook, driven by the increase in consumer awareness towards health and well-being.

We expect Magni-Tech to post stronger earnings in 2HFY23, driven by demand for apparel, given the growing health and wellness awareness among consumers and further supported by the Fifa World Cup 2022. We think the company’s current valuation looks attractive as it is trading at a forward PER of about 6.5 times, near the -1SD (standard deviation) from its three-year historical average.

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