Brokers Digest: Local Equities – Bermaz Auto Bhd, Hiap Teck Venture Bhd, Top Glove Corp Bhd, Deleum Bhd

Bermaz Auto Bhd

Target price: RM2.36 BUY

MIDF RESEARCH (JULY 4): The local assembly of the Mazda CX-30 model is expected to commence in December. The completely knocked-down (CKD) CX-30 will be the third Mazda CKD model to be assembled in Malaysia after the CX-5 and CX-8. The CX-30 is currently one of the best-selling completely built-up (CBU) models for Bermaz Auto (BAuto), generating a volume of 666 units (6% of Mazda’s total industry volume [TIV]) in FY22. Given duty savings from the local assembly, we expect the CKD CX-30 to be priced meaningfully lower than the CBU variants. BAuto is targeting volumes of 4,000 to 4,500 per annum for the CKD CX-30, which could expand Mazda’s TIV by an estimated 19% annually. The introduction of the CKD CX-30 is also timely to buffer any potential demand weakness once sales and services tax-exempted bookings are exhausted by March 2023, in our opinion.

We raise our FY23/24 net profit by 3.4%/17.0% to factor in the CKD CX-30 variant. Our FY23F/24 Mazda TIV is raised to 13,400/14,300 (from 13,000/13,300 previously), implying a 12% year-on-year (y-o-y) growth in Mazda sales volume in FY23 and another 7% growth in FY24. Group-wide, we project volumes for BAuto’s Malaysian operations to grow 37% y-o-y in FY23 and 9% y-o-y in FY24 from the expansion of Mazda’s TIV and growth at Kia and Peugeot, driven by new model rollouts.

Margins are expected to improve in FY24 on higher CKD mix driven by the CKD CX-30’s full-year contribution. For Kia specifically, FY24 volumes are expected to be driven by another two new models (Sportage/Carens), of which one of these models could be slated for local assembly.

BAuto is morphing into a multi-brand auto conglomerate following its recent brand acquisitions, which is expected to drive above-industry volume growth throughout our forecast horizon. Coupled with: (1) undemanding valuation of 11 times and nine times FY23/24 PER, which is at a 25%-40% discount to the historical mean, (2) an expected earnings CAGR of +21% over our forecast horizon, (3) an attractive dividend yield (4.6%-5.8%), and (4) a strong return on equity of 21%-23%, we continue to advocate BAuto as our top sector pick.

Hiap Teck Venture Bhd

Target price: 52 sen BUY

HONG LEONG INVESTMENT BANK RESEARCH (JULY 4): Management shared that near-term earnings prospects will remain uncertain due to: (i) ongoing tension between Ukraine and Russia with sanctions imposed on Russia resulting in Russian steel products flooding the global market at low prices, while the European region is redirecting its coal demand from Russia to Asia. These have resulted in a mismatch between prices of steel and coking coal (the main source of energy in a blast furnace); (ii) growing recession fears resulting in cautious business and consumer sentiment; and (iii) weak construction activities domestically, which management expects to only improve from 2024 onwards.

We maintain our FY22 core net profit forecast, but cut our FY23 and FY24 forecasts by 18.8% and 18.2% respectively, mainly to account for a lower associate earnings assumption, arising from a narrower spread between prices of steel products and raw materials.

Despite the near-term earnings headwinds, we continue to like Hiap Teck for its: (i) favourable longer-term prospects (supported by its 27.3%-owned associate Eastern Steel’s major expansion plan and China’s policies to reform its steel sector, which will result in more stable profitability among steel players in the region), (ii) healthy balance sheet (net gearing of 0.17 times as at April 30), and (iii) commendable valuations.

Top Glove Corp Bhd

Target price: RM1 NEUTRAL

PUBLICINVEST RESEARCH (JULY 5): Although Top Glove’s share price has fallen by over 60% year to date and the counter is trading at pre-Covid-19 valuation, we remain cautious on the stock as we believe the company will continue to operate in a challenging business environment. This is mainly due to the imbalance in global demand and supply of gloves.

In a recent meeting with management, we understand that some of the new entrants have shut down their production facilities while others have deferred their expansion plan as global demand for gloves remains sluggish. Average selling prices (ASPs) also continue to fall, although at a slower rate of decline. Current utilisation rate is still low at 50%, which we believe could result in further margin erosion due to a lack of economies of scale. We have cut our FY23-24 earnings forecast by 7%-8% by assuming a lower utilisation rate and our target price has been subsequently revised to RM1.

On a brighter note, Top Glove is not facing any labour shortage issue as it is operating at a low utilisation rate. Having said that, it has received approval to bring in 2,000 foreign workers, but this is still largely dependent on whether there is a need to ramp up production.

Deleum Bhd

Target price: 96 sen BUY

MIDF RESEARCH (JULY 5): In consideration of Deleum’s resilient earnings over the last five years, coupled with a positive dividend payout and manageable gearing ratio, we initiate coverage on the counter with a “buy” recommendation and a target price of 96 sen per share. Our target price is based on pegging a PER of 12 times. At the current market price, the group is trading at a PER of 11 times. The group had been operating at an average PER of 15 times in the last five years.

From a book-value perspective, Deleum is trading at a P/B of 0.6 times, despite an average P/B of 1.0 times in the last five years. Hence, we believe that the stock may be undervalued and we opine that the group has the potential to trade at a higher valuation. This is based on the company’s: (i) resilient and stable financial performance, (ii) focus on growth and expansion to new markets, and (iii) investments in new product lines.

Deleum’s order book remains robust, with about RM2.2 billion worth of orders until at least CY23, as well as RM116 million worth of tenders.

Moving forward, we expect the group to work towards maintaining its payout ratio within 50%, which should provide investors with a dividend yield of over 3% by FY23-24.


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