This article first appeared in Capital, The Edge Malaysia Weekly on August 30, 2021 - September 5, 2021

Target price: RM4.00 BUY

RHB Research (Aug 24): 1H21’s RM70.3 million (-30.6% y-o-y) earnings were within our but below street’s expectations. The weaker y-o-y performance was a result of margins compression owing to weaker demand from Covid-19’s impact and higher freight costs. We expect the situation to reverse in 2H21 on lower input costs and pent-up demand. We think the current below peers’ PER valuation remains attractive vis-à-vis its earnings base, diverse clientele and new ventures — on top of the recovery angle.

2Q21 core earnings of RM36.4 million contracted 36.1% y-o-y on weaker-than-expected margins and lower sales volumes. This was amid an environment of lack of market demand and shipment delays — core earnings improved 7.4% q-o-q thanks to the slight improvement in input costs. YTD core earnings were within our but below consensus’ expectations at 43% and 38% of full-year estimates — as we expect 2H to come in stronger. Overall, Ebitda improved q-o-q on upticks in Ebitda yield at RM1,006/tonne, thanks to lower input costs. However, it was still below the previous year’s level (2Q20: RM1,394/tonne, 1Q21: RM926/tonne).

We understand the lower margins in 1H21 were due to softer demand for cocoa butter products, with the then forward sales ratio affected by the challenging operating environment amid the living income differential (LID) and Covid-19 issues. Nevertheless, we expect Guan Chong’s earnings to improve in 2H21 on higher forward sales ratio, boosted by pent-up demand upon economic recovery. Furthermore, the sustained robust demand for cocoa powder and lower price trends for Ivory Coast cocoa beans over the past months should point to better 2H margins.

With the attractive valuation of 12 times FY22 PER, we believe investors should position themselves for the economic recovery in play and stronger 2H earnings for the world’s fourth-largest cocoa grinder. Additionally, the company’s various regional expansion plans and product offerings are the next growth catalysts.

Key downside risks are a sharp fluctuation in raw material prices and price wars owing to increased competition.

Target price: RM2.50 ADD

CGS-CIMB Research (Aug 24): MyEG’s 1H21 revenue rose 35.4% y-o-y due to: (i) higher contribution from new concession services for the Road Transport Department, such as online renewal of motorcycle insurance, road tax and driver’s licences; (ii) contribution from new commercial health-tech services, which include Covid-19 screening and quarantine management services; and (iii) higher online transaction volume processed from existing concession and commercial services as more users opt for online channels owing to the Covid-19 pandemic. Overall, MyEG’s net profit jumped 28.8% y-o-y to RM157 million in 1H21.

We expect stronger revenue from health-tech-related services in 2H21, driven by: (i) increasing MySafe Quarantine capacity from 800 to 2,000 rooms, as the group targets to have eight quarantine hotels by end-September; and (ii) potential commercialisation of the Zifivax Covid-19 vaccine in Malaysia and the Philippines. To recap, MyEG has signed a letter of intent to purchase 10 million doses of Zifivax vaccine for potential delivery in 3Q21. However, this will still be dependent upon the conditional vaccine approval from the National Pharmaceutical Regulatory Agency. Although the government has secured more than 70 million doses of Covid-19 vaccine under the National Covid-19 immunisation programme — enough to cover 130% of the entire population — we still see potential for the Zifivax vaccine to be used for third or booster doses, to contain transmissions due to Covid-19 variants.

Target price: RM0.74 HOLD

CGS-CIMB Research (Aug 23): InNature’s 1HFY21 core net profit of RM6.5 million (-4.9% y-o-y) came in below expectations, making up only 25.1% of our previous FY21F forecast. 1HFY21 revenue declined 4.2% y-o-y, mainly owing to weak footfall as a result of increased movement restrictions across all of its operating markets — Malaysia, Vietnam and Cambodia — in 2QFY21.

With the gradual reopening of the Malaysian economy in line with the National Recovery Plan, we expect sales for its Malaysian operations (75% of 1HFY21 revenue) to recover q-o-q in 3QFY21 as physical stores reopen. Nonetheless, we cut our FY21-FY23F EPS forecasts by 11.6% to 26.1% to account for the earnings miss and a gradual recovery.

As the share price has rallied 20% since our last update and has approached our target price, we downgrade our call from “add” to “hold”. We believe the expected recovery in sales from 3QFY21F has been priced in at current levels. Our new target price of 74 sen is based on an updated 18 times (from 16x) CY22 PER, in line with the weighted average CY22 PER of small-cap consumer discretionary names under our coverage.

Target price: RM3.02 OUTPERFORM

Kenanga Research (Aug 25): After our recent check with management, we maintain our bullish view on SCGM. Average selling prices (ASPs) are remaining elevated on resilient demand amid fluctuation in resin prices. Once our economy reopens, we expect the robust demand for SCGM’s products to remain, driven by continued desire for takeaways and heightened hygiene awareness.

We forecast SCGM’s CY21 average resin cost to be US$1,000/MT to US$1,100/MT (vs YTD average of US$1,200/MT). SCGM is maintaining its elevated ASPs due to recent fluctuation in resin prices.

SCGM has utilised 30% of its FY22 RM20 million capex. Management guided that their automation machines, which will be coming in 4QCY21, should help to relieve part of their labour shortage issue and the 60% workforce limit during the packaging progress. Moving forward, management will continue to purchase other machineries to increase capacity as the current utilisation rate is 75% to 80% (vs pre-MCO level of 65% to 75%), a level deemed as near-full capacity.

Based on FY22 EPS, the current share price implies a forward PER of 12 times, which we believe undervalues SCGM, given: (i) the continued robust demand for its high-margin products; and (ii) forthcoming capacity expansion for its plastic packaging segment.  

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.