Brokers' Digest 921

Analysts are keeping their “buy” recommendations on Bumitama Agri (BAL), despite the Indonesian-based oil palm plantation operator missing consensus earnings estimates by a long way for FY2019 ended December.

For 4QFY2019, BAL reported earnings of 261.46 billion Indonesian rupiah ($26.5 million), some 26.1% higher than the corresponding quarter a year ago.

Stripping off foreign exchange gains and fair value gain on biological assets, 4QFY2019 core Patmi would have been 19% y-o-y lower at 185 billion rupiah.

This brought full-year earnings to just 686.31 billion rupiah for FY2019 – some 37.4% lower than FY2018 earnings of 1.10 trillion rupiah. Excluding one-off items, FY2019 core earnings were 23% below consensus full-year forecasts.

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While maintaining their “buy” calls, analysts from RHB Group Research, UOB Kay Hian and Maybank Kim Eng Research are cutting their earnings forecasts – and consequently, target prices – on the stock.

RHB and UOB have both slashed their target prices to 85 cents, from 95 cents and $1.00 respectively. Meanwhile, Maybank is trimming its target price marginally by two cents to 78 cents.

The brokerages are also cutting their FY2020 and FY2021 earnings estimates by between 6% and 18%.

See also: Maybank downgrades ComfortDelGro in contrarian call over Addison Lee acquisition worries

However, the analysts believe things might be looking up for BAL this year. For starters, they note that the management has guided that fresh fruit bunch (FFB) production growth may increase by up to 10% y-o-y in 2020.

“FY2020 should be a better year overall, with improved FFB output and higher crude palm oil (CPO) prices,” RHB’s Singapore research team said in a report on Feb 18. “With FFB output recovery being seen at its estates and higher CPO prices, as a pure upstream company, BAL will continue to benefit.”

However, UOB lead analyst Leow Huey Chuen is more conservative with the production growth predictions.

“We have pencilled in FFB production growth of 3% y-o-y, taking into consideration the potential stress on FFB yield due to the severe dryness in 2019,” Leow said in a Feb 19 report. “Based on our channel checks, dryness in Central Kalimantan in 2HFY2019 was more severe than that during the 2015 El Nino. Thus, we prefer to have a more conservative stance for our production expectation.”

The way Maybank analyst Ong Chee Ting sees it, BAL remains a “buy” for its “medium-term prospects” and “decent dividend yields of around 3-5%”. — By Stanislaus Jude Chan

Valuetronics Holdings

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Price targets:
76 cents DOWNGRADE NEUTRAL (RHB Group Research)
72 cents HOLD (CGS-CIMB Research)

Given the impact from the outbreak of the Covid-19 coronavirus, RHB Group Research has turned cautious on integrated electronics manufacturing services provider Valuetronics.

The brokerage lowered its FY2020 earnings forecast for the company by 8%, as it believes that there will likely be a “negative” impact on its earnings in 4QFY2020 ending March 31.

“We understand that the factory had closed a few days before the Lunar New Year and was supposed to resume production on the second week of February,” RHB analyst Jarick Seet wrote in a note dated Feb 18.

Seet has also downgraded the stock to a “neutral” rating from a “buy”, with a lower target price of 76 cents from 82 cents previously.

Valuetronics on Feb 19 announced that its factories in Huizhou in China’s Guangdong Province have resumed operations and production.

However, the group said that some of its workers have been unable to return to work as planned, due to the various administrative measures which have been implemented. For instance, transportation facilities in various provinces in China remain suspended or have limited service.

“It is expected that the China factories will experience delay in resuming their operations to a level before the Chinese New Year holidays and will have difficulties meeting originally planned product delivery schedules,” the group says in a statement.

As such, the reduced production days and temporary drop in production capacity could result in a drop in its revenue for 2HFY2020, it added. — By Jeffrey Tan

ComfortDelGro Corp

Price targets:
$2.26 DOWNGRADE HOLD (DBS Group Research)
$2.20 ACCUMULATE (Phillip Securities Research)
$2.60 OUTPERFORM (Credit Suisse Research)
$2.81 OUTPERFORM (Macquarie Global Research)
$2.15 HOLD (UOB Kay Hian Research)
$2.08 HOLD (CGS-CIMB Research)

Already seeing a drag from its taxi business, land transport operator ComfortDelGro (CDG) is expected to experience more headwinds amid the Covid-19 coronavirus outbreak in Singapore.

CDG on Feb 14 reported a 12.6% drop in earnings to $265.1 million for FY2019 ended December, on the back of higher operating costs, which included provision for impairment in its taxi business.

The group on Feb 13 announced a relief package in excess of $18 million that will be given to cabbies who have been hit by falling demand as a result of the coronavirus outbreak.

FY2019 revenue edged up by 2.6% to $3.9 billion, mainly due to $154.2 million in contribution from new acquisitions.

But, as managing director and group CEO Yang Ban Seng puts it: “I think things will get worse before they get better.”

DBS Group Research analyst Andy Sim said in a Feb 17 report: “While the impact from Covid-19 outbreak and taxi rental rebates were within expectations, the impairment provision on its taxi operations and dividend cut threw us off course. We trimmed our FY2020F/2021F earnings by 6%/5% and expect DPS to trail lower in FY2020F.” Sim adds: “We are making a quick U-turn on this ride which was foolhardy and truly regrettable.” He has downgraded CDG to “hold” from “buy”, and slashed his target price to $2.26 from $2.45.

While the impact from the coronavirus outbreak should be temporary, market watchers say the group’s dividend cut and muted growth outlook are likely to provide road-blocks for its share-price performance in the near term.

“Concerns of the negative impact from Covid-19 on CDG’s taxi and public transport businesses have lowered share price. Rising operating costs for public transport business – witnessed in 4QFY2019 – should drag Ebit margins lower, with taxi earnings also remaining weak,” says Shekhar Jaiswal, an analyst at RHB Group Research.

Meanwhile, Philip Securities’ head of research, Paul Chew, is more optimistic about CDG’s performance.

“Excluding the provisions, taxi Ebit jumped 36% in 4QFY2019 due to margin expansion,” he notes. “Earnings was surprisingly strong once we excluded the $27.3 million impairment provision on the taxi business.” — By Samantha Chiew

Hi-P

Price targets:
$1.00 SELL (Maybank Kim Eng Research)
$1.37 HOLD (DBS Group Research)
Maybank Kim Eng Research has reiterated its “sell” call on Hi-P International and slashed its target price to $1.00 – representing a potential 22% downside for the stock – after the group’s results for 4QFY2019 ended December fell short of the brokerage’s expectations.

The contract manufacturing services provider saw its earnings halved to $22.4 million during the quarter, while revenue fell 10.2% to $396.9 million on the back of pricing pressure and lower sales volumes for certain customers.

“Contrasting our expectations of an earnings recovery in FY2020E, Hi-P guided for net profit to be lower than FY2019. As such we lower FY2020FY2021E earnings per share (EPS) by 20-28%,” said lead analyst Lai Gene Lih in a Feb 18 report.

Lai adds that the increasingly competitive pricing and negative operating leverage also led to a 3.8 percentage point decline in Hi-P’s gross margin to 13.9%.

Looking ahead, Hi-P is expecting lower profit in FY2020, despite higher revenue. The way Lai sees it, this could be due primarily to a combination of persisting pricing pressure, in particular with the key wireless customer, as well as increased contributions from Keurig assembly projects, which yield lower margins.

Lai notes that the group should also brace itself for the effects of the Covid-19 outbreak.

“The guidance has also factored in management’s assessment of supply chain disruptions as a result of Covid-19. If the pricing environment results in unsustainable returns, competitors may cut back on capex,” says Lai.

“This may be a sign that could restore demand-supply balance, [and] in turn improve pricing. However, management currently views this to occur only in FY2021E at the earliest,” he adds.

Lai identifies some positive notes for Hi-P amid the virus outbreak that has sent most companies with operations in China into disarray.

For one, the group’s factories in China have gradually resumed operations following government-mandated closure from Feb 3 to 9.

The group had also prepared some buffer stock ahead of the Lunar New Year, which could limit the impact of shut operations throughout the extended holiday period.

“However, we remain cautious on Hi-P as, for certain products, Hi-P is exposed to long supply chains that may currently be facing production bottlenecks as a result of Covid-19,” says Lai. — By Uma Devi

Genting Singapore

Price targets:
95 cents BUY (UOB Kay Hian Research)
85 cents NEUTRAL (RHB Group Research)
99 cents BUY (Maybank Kim Eng Research)
92 cents EQUAL WEIGHT/ATTRACTIVE (Morgan Stanley Research)
$1.05 NEUTRAL (Goldman Sachs Research)
80 cents UPGRADE NEUTRAL (JPMorgan Research)
$1.10 BUY (DBS Group Research)

Genting Singapore (GENS) might have passed up on the bid for Osaka integrated resort (IR) in Japan, but market watchers remain unfazed. After all, the way they see it, this allows GENS to focus on the Yokohama integrated report concession bid.

“We believe MGM was the stronger contender in the race for the Osaka IR, as it managed to secure a major local consortium partner – ORIX,” said Juliana Cai, an analyst at RHB Group Research, in a Feb 17 report.

“GENS is currently exploring the possibility of tying up with a local partner. During the last analyst’s briefing, management said it hoped to announce – by September to October 2020 – the securing of a consortium,” she adds. “We believe the ability to secure a strong partnership should improve GENS’ odds of winning a Japan IR bid.”

Meanwhile, Cai believes that Tokyo, which recently sought request-for-information, could also be a location GENS would be interested in, should the capital city be keen in pursuing a casino resort.

“We expect GENS to consider significantly improving its capital management should it fail to clinch the costly Japan IR concession bid,” said UOB Kay Hian lead analyst Vincent Khoo in a Feb 17 report. He notes that GENS had made a capex commitment of up to US$10 billion ($13.9 billion) for this project.

The group currently has net cash of $3.85 billion. Khoo believes this amount would mostly be “unencumbered” as the present operations can mostly fund the expansion of Resort World Sentosa, or RWS 2.0, which is expected to be completed in 2025.

RWS 2.0 will also likely enhance the group’s earnings in the coming years, he adds.

For now, however, RHB’s Cai believes GENS could face some near-term headwinds. “We expect some decline in share price amidst the disappointment from losing the Osaka IR race as well as earnings pressure from the Covid-19 outbreak,” she says. — By Samantha Chiew

Thai Beverage

Price targets:
92 cents UPGRADE BUY (RHB Group Research)
95 cents UPGRADE BUY (Phillip Securities Research)
$1.08 OVERWEIGHT/ATTRACTIVE (Morgan Stanley Research)
85 cents NEUTRAL (Credit Suisse Research)
$1.04 BUY (DBS Group Research)
90 cents HOLD (UOB Kay Hian Research)
90 cents ADD (CGS-CIMB Research)

Following a positive set of results in 1QFY2020 ended Dec 31, the outbreak of the Covid-19 coronavirus could well take the fizz out of Thai Beverage’s (ThaiBev) performance ahead.

This is on top of stiffer penalties imposed on drivers under the influence of alcohol in Vietnam recently.

However, that is not stopping analysts from upgrading their respective recommendations for the stock.

Phillip Securities Research has shifted to a “buy” call for the stock with a higher target price of 95 cents from 80 cents previously, while RHB Group Research has upgraded to a “buy” rating for the stock, albeit with a lower target price of 92 cents from 95 cents previously.

According to Phillip Securities, Thai farm income has been resilient especially with the support from the government. This is despite the brokerage’s initial concerns over consumer spending in Thailand.

ThaiBev’s spirit volumes have also been “healthy” as customers are purchasing the more premium and higher margin brown spirits, it adds.

“We are more positive on the outlook,” Phillips Securities’ head of research Paul Chew wrote in a note dated Feb 17.

Meanwhile, CGS-CIMB Research points out that ThaiBev’s domestic demand should stay resilient in 2QFY2020.

The brokerage notes the company is confident that the Thai government spending will continue at least until March and April this year.

“We still like [ThaiBev] for its longer term prospects,” CGS-CIMB analyst Cezzane See wrote in Feb 15 report.

However, if the Thai government spending does not continue, See reckons the company could face repercussions from the Covid-19 epidemic in 2HFY2020.

Furthermore, she warns that appetite for a potential spin-off of ThaiBev’s brewery business could wane, which may lead to delays for an IPO. — By Jeffrey Tan