DIALOG GROUP BHD

Steady quarter but consensus needs to moderate lower

Investment Thesis

Dialog as a defensive, high-quality storage play over the long term combined with:

(i) likely upstream & plant maintenance revenues in the medium term,

(ii) steady storage demand over the longer term

(iii) potential for further expansion opportunities in Pengerang.

 

Valuation

DCF valuation of Dialog’s 30% stake in Kertih at a WACC of 6%, a DCF valuation of its 100% stake in Tanjung Langsat I, II & III at a WACC of 6%, and a DCF valuation of its stake in Pengerang at a WACC of 6%. Additional phases at 15x EV/EBITDA of potential capacity expansion assuming a 40% equity stake. FY21-22E average P/E of 20x to EPCC and plant maintenance and a FY21-22E average P/E of 20x to its catalyst handling and base oil divisions. LNG terminal equity investment of 25% stake (SPV3). Zero value for the upstream asset Bayan (~95% stake) and its 20% stake in PSCs D35, D21 and J4.

Downside Risks

1)a steep fall in oil prices

2) weaker-than-expected order wins and order execution success

3) delays at RAPID

4) capital calls.

 

Technical Analysis

Last Price: RM2.62

Resistance: RM3.2 (R1), RM3.4 (R2)

Cut loss: RM2.55

DIALOG GROUP BHD (TRADING BUY)

-After sliding from a high RM3.93 in mid Nov last year. (Double pattern was formed previously). Expect technical rebound soon.

-RSI showed oversold. Plus RSI is reversing from oversold zone. Positive stochastics crossover.

-Riding on the rebound strength. Resistance Target of RM3.2 (18% upside potential).

-Based on fundamental, DIALOG owns upstream field, retails petroleum to oil, gas and petrochemical industries. Dialog Group serves customers worldwide. Net profit RM 136.1m (+12% QoQ) in Q3 Mar 21.

 

 

KAWAN FOOD BERHAD

 

Kawan Food Berhad (Consumer F&B)

 Sales demand strong

Even though the factory closure but I expect 20% loss of sales in June. Operations are back to normal by with only allowed 60% workforce. Due to surges cases and uncertainty lockdown environment, frozen food demand remains strong and unaffected. Kawan sells various of pizza flavours and new Roti Chanai butter parathas have attract consumer to buy.

Besides that, average online sales is around RM100k per month and has grown by 30% yoy because of EMCO and improved e-commerce website. Expect earnings grow to 2 years CAGR of 15% from FY21 to FY23 which driven by innovations and improvement in demand in convenient food.

 

Temporarily closure

Kawan temporarily close its manufacturing in Pulau Indah, Klang starting from 14^th to 21th June 2021. The impact of closure for 1 week is small. (reduce 1% of production loss)

 

Delivery dates might delay.

The closure is expected to have minimal impact with less than 1% of annual production loss. In June output at Pulau Indah plant can be covered by Nantong in China factory aided by sufficient finished goods at warehouse for the continuity plan. The clients from US and the management are in the midst of discussion of new delivery dates for existing orders. Currently, Kawan is running 2 shift production and recommencement of its manufacturing activities. It plans to increase production by 1 additional day to make up for the shortfall.

 

Covid-19 favour Kawan’s products

Covid-19 has spread to 194.8m people over the world. It has become more difficult to manage, as the virus keep changing and new variant continues to ravage many countries. There are many countries lockdown due to cases increases. The impact changed people’s lifestyle to WFH also increase the demand for frozen food. According to American Frozen Food Institute data, sales in frozen food has surged by 18% in 2020. Frozen food requires less time to prepare and its convenience especially for working adults.

 

 

Sales Growth

The most popular frozen food product is paratha. Kawan has consistently improved it range of frozen food products with new innovations. ERP system at Pulau Indah plant to coordinate better production, resources, inventories and others. Kawan also use data analytics to forecast, produce, maintain products line up and minimize the loss of unpopular products according to the management.

North American (US and Canada) region holds 47% of its total export market sales, with sales improving by 10% in FY20 owning to the pandemic driven demand and distributor issues being resolved. Kawan export still has room to grow, company intends to tap into mainstream retail market whilst pursing uncovered region (Latin American, Chile and Mexico). Its ecommerce sales grew 668% in FY20, benefiting from ERP system integration with e-commerce solution. Management guided e-commerce sales to continue to record around RM100K per month driven by strong online shopping.

GAMUDA

CuttingFY21E earnings

 Our revisions mainly incorporate slower property progress billings at its Malaysian projects in 4Q and delay in recovery at its tolled highways. At its E&C ops, we maintain our MYR2b p.a. job win assumption pending an official award of the PSR Island A Phase 1 reclamation works (MYR4-4.5b)which are now expected to start in Aug 2021.Having suspended its1stand 2ndinterim dividends for FY21, the prospects of a dividend for FY21 are dim; we now expect zero DPS for FY21 (vs. 8sen previously)

Orderbook replenishment prospects

Outstanding E&C orderbook stood at MYR4.9b as of end-Apr2021 and this will  double  with  reclamation  works  and  turnkey  contract  for  the  PSR Island A Phase 1. Elsewhere, tender outcome for two Australian projects is expected by YE20, while KVMRT3 prospects remain positive although the tender call is expected to be slightly delayed due to changes in the project  scope. Elsewhere,  unbilled  property  sales  was  MYR4b  end-Apr 2021, having locked in MYR2.2b in pre-sales during 9MFY21 (+83% YoY)

Expect a weaker 4Q due to FMCO

Gamuda’s 9MFY21 net profit of MYR374m (-4% YoY) was in-line at 76%/ 69% of MKE/street’sFY21Eas3Q saw earnings (+15% QoQ)closing in to 2QFY20/pre-MCO  levels. That  said,  4Q  earnings  should  be  weaker  as works at all its property projects in Malaysia have halted since 1 Jun due to the FMCO, which has also affected traffic at its tolled highways.

Price Driven

1.Foreign  shareholding  level  fell  to  its  low  at 22%  (Aug 2015 till Aug 2016).

2.Post GE14 overhang on Malaysia construction stemming from i) review and cancellation of major infrastructure projects and ii) potential abolition of tolled highways. 

3.Potential revival of ECRL and sale of its tolled highways.

4.News on revival of Bandar Malaysia project (May 2019), followed by Minister of Finance (Inc.)'s proposed take-over of Gamuda's four tolled highways (Jun 2019).

5.Start of Movement Control Order (MCO) (18 Mar 2020).

6.Announcement (on 11 May 2021) of Gamuda's exclusion from MSCI Global Standard Indexes.

Engineering and Construction

a) Penang  South  Reclamation(PSR)  Island  A  Phase  1  reclamation  works (MYR4 to 4.5b) are  now expected  to commence in Aug  2021 vs. an earlier target  of end-Apr  2021due  to the requirement  to  submit  for  approval, its Environmental Management Plan (EMP). 

b) Remains optimistic on two other Australia projects which includes Sydney Metro West (one of two tunnels) and Western Sydney Airport Metro Link (tunnel & station boxes). Both projects have MYR5b each.

c) KVMRT3 prospects remain positive, although its roll out could be slightly delay due to changes in the project scope. Projects worth MYR22.5b to MYR 30b. 

Property Development 

 a) Property earnings normalized  in  3QFY21 as Celadon  City’s building  approval delays  have  been resolved(recall  that  the  delay  was largely due to  the  national  elections). Strong  progress  billings  at  Celadon  City  are  expected to  continue  into 4QFY21, offsetting weak billings at its Malaysian projects where works  have been suspended since 1 Jun 2021 due to the FMCO.

b) MYR2.2b  pre-sales  in 9MFY21  (+83%  YoY),with 2/3 contributed  by its overseas projects in Vietnam and Singapore. The top contributors, at 80% to pre-sales, were Celadon  City,  OLA, Gamuda  Gardens, Gamuda  City  and Horizon  Hills.  The  internal  MYR3.5b  pre-sales  target  for  FY21  is  unchanged (+61%  YoY)as  the  focus  remains  on  driving  sales at  its  Malaysian  projects during the FMCO while the prospects of its overseas projects remain positive.

c) Based on the property development, Gamuda cove is their biggest project now. 

On the other hand, things to consider is the tolled highway. As we know currently, Malaysia is having Emco in KL and Selangor area. Gamuda tolled highway includes KESAS, LDP, SPRINT and SMART. 

EMCO has totally impact on their tolled highway revenue. 

Scomnet

 Overview Supercomnet Technologies

A low cost but high quality supplier of medial devices

Scomnet manufactures and assembles wires and cables for various segments such as automative, medical devices, electrical appliances and consumer electronic. Scomnet acquisition of its Supercomal Medical Products (SMP) in 2018 has turned into a full fledged medical device manufacturer, which allow company to not only capitalize on the outsourcing trend of medical device manufacturing but also enjoy the steady growth expected of the medical device sector. (Expected CAGR 6% from 2019 to 2023).

1.High Barrier of entry in the Medical Segment.

Because of the stringent qualification criteria in place (ie. by the US Food and Drug Administration and the CE Marketing certification for the European Economic Area (EEA), medical products tend to offer higher margins and supplier customer relationship tend to be stickier as well. Given the high economic moat, venture into medical field required high degree of qualification.

2. Leaning towards high margin medical business.

Scomnet has been posting record revenue and earnings after consolidating the remaining 80% stake in associate SMP in april 2018, as part of its efforts to diversify its revenue streams from the competitive wire and cable industry. I expect scomnet to register a topline 3 years CAGR of 31% from FY20 onwards, underpinned by orders from existing medical customers Edward Lifesciences and Ambu as well as new customers. Expect margins to improve going forward as product sakes mix skew towards medical devices. 

3. Key risks

a)Delay in FDA approval of new product launches. 

While Scomnet has earnings visibility up until 2022 owing to existing customers’ product launches, earnings growth is also contingent on new products being approved by regulators. Therefore, a delay in approval may halt SCT’s earnings momentum beyond FY22.

b)Automative chip shortage may affect scomnet automative segment. 

c)Rise in raw material prices such as copper and pvc. 

4. Valuation

Based on 1 year forward P/E multiple of 40x on FY22E EPS. Target 1 year forward PE of 40x is justifiable given that translates to a target PEG ratio of 0.75x, expect earnings to grow by 54% in FY22E. 

UWC

 Overview UWC 

Autonomous Vehicle (AV) exposure to provide impetus to growth

UWC is ramping up the production of testers for autonomous vehicle chips for the US based IDM with an interest in AV. Positive venture as customer's AV subsidiary is a leader in camera based Advanced Driving Assistance System for automotive and UWC opportunities within the emerging super trend of this. 

Pivot to semiconductor.

Shifting its product mix to higher margin semiconductor segment over the years. Not only capitalize on sector's structural growth but also its carrier a higher margin. Expect further improve in FY23 on product mix improvement and the increasing use of automation such as cobots and robotic arms. 

Leading American tech companies.

UWC is bound by customer confidentiality to not disclose the names of certain customers. We

abide by the same restrictions but would point out that its customers include leading semiconductor integrated device manufacturers (IDM) and equipment makers, who count the likes of Apple, TSMC, Samsung and Qualcomm among their major customers.

Exposure to multiple tech sleeves.

Involvement in semiconductor segment which includes AV, signal testers for 5G devices, logic IC in computing devices, test manipulators for logic and memory testing. 

Strong back end test equipment demand. 

Its memory testing client, who is one of the 2 major players in the semiconductor testing market focusing on SoC (system-on-a-chip) and memory test alongside Advantest should continue to fill UWC’s orderbook. Positive view on Advantest can serve as a read-through to the broader testing equipment sector. The team expects Advantest to register 11% topline CAGR between FY20-23E for its semiconductor tester segment. Capex forecast for 2021 is for a 35% growth in dynamic random access memory related investment (mainly for 5G and data center applications) and 21% growth in NAND-related investment. Expect this customer to contribute 15/12% of FY21/22E revenue.  

Leveraging on the global deployment of 5G.

One of the leading 5G test and measurement equipment players. Clients have leverage to the entire 5G ecosystem (both mm Wave frequencies and sub-6GHz) is still in nascent stages relative to building momentum of development of 5G equipment as well as expected momentum of 5G device deployments dedicated to service providers and the broad market of consumer devices, including smartphones. The venture contribute expect 11 or 12% of FY21/22E revenue. 

Positive on semiconductor cycle.

Semiconductor strength in 2021 is premised on a constructive demand environment for semiconductor led by an acceleration in data center spending, the doubling of 5G smartphone units to 525m units in 2021 alongside continued 5G infrastructure spending strength as well as gaming or PC demand to sustain from continued WFH demand. In 2021 continue strong year driven by strong growth in cloud spending and densification of 5G wireless networks. 

Summary 

An integrated engineering supporting services provider involved in box-building equipment for the semiconductor & medical sector, UWC stands out among other Malaysian boxbuild players playing their trade in consumer electronics, which offers a lower margin. Its business model allows it to capture emerging trends without the need for heavy capex (avg 10% of revenue), which is done at the customer level.