This article first appeared in Capital, The Edge Malaysia Weekly on August 29, 2022 - September 4, 2022

Target price: 90 sen HOLD

UOB KAY HIAN RESEARCH (AUG 22): Even though 1H22 core earnings of RM38.8 million accounted for 48% of our full-year forecast, we deem the results below expectations as we are now forecasting a weaker 2H22. This is mainly due to lower occupancy rates, as Quill Building 2 (QB2) and Wisma Technip are now both vacant.

Positively, net property income (NPI) margin for 1H22 remained stable at 78% (1H21: 77%). Key assets in KL Sentral remain intact (Menara Shell and Platinum Sentral), contributing over 50% to total revenue.

On a portfolio basis, occupancy rate declined from 86% to 78% (1Q22: 86%, 2Q21: 92%), due to non-renewals at QB2 and Wisma Technip. Total leases due for renewals for 2022 and 2023 account for 28% and 8% of total NLA respectively. Sentral successfully renewed 15% of the leases due in 1H22. Sentral’s weighted average lease expiry (WALE) is 3.53 years.

At 37%, the current gearing ratio remains healthy (on a par with peers), which allows it to tap into debt and equity markets for future acquisitions. The 50% gearing limit by the Securities Commission Malaysia will give Sentral debt headroom of about RM281 million to fund future acquisitions.

We cut earnings by 13% to 22% for 2022-24 as we remove the earnings contribution from QB2 and Wisma Technip. Expect earnings to be weaker from 3Q22 onwards as we do not foresee any immediate take-up of the buildings.

We downgrade Sentral to “hold” with a lower target price of 90 sen (from RM1), after our earnings adjustment. Our target price is based on a dividend discount model and implies a dividend yield of 7% for 2022. The 3.4 sen dividend declared for 1H22 translates into a 94% payout.

Target price: RM1.95 OUTPERFORM

KENANGA INVESTMENT BANK RESEARCH (AUG 24): Aeon’s 1HFY22 net profit beat expectations at 67% of our and 71% of consensus full-year estimates respectively. The variance against our forecast came largely from a stronger-than-expected rebound in sales as pandemic restrictions were lifted and international borders reopened. Its net profit more than doubled, thanks to a product mix that is skewed towards higher margin products and its cost-cutting initiatives starting to pay off.

We expect earnings momentum to sustain as consumers have resumed shopping in person as it offers the sound-and-sight experience that is unmatched by online shopping. Retail sales in general will also be bumped up by the arrival of tourists.

We raise our earnings forecasts by 24% for FY22F and by 17% for FY23F to reflect better retail margins, cost savings and stronger rental incomes. We increase our target price by 5% to RM1.95 based on 19 times FY23F PER (from RM1.85 based on 21 times PER). The lower multiple, to reflect higher earnings risk from high inflation eroding consumer spending power, is also more in line with the sector’s average forward PER.

Target price: RM2.68 ADD

CGS-CIMB SECURITIES RESEARCH (AUG 23): 1H22 core net profit rose 34.1% y-o-y to RM19.9 million, beating our forecast, owing to higher-than-expected export sales leading to better margins. The easing of shipping constraints also led to more export volume and higher demand from existing and new export clients.

Despite higher input prices and inflationary pressures (for labour, utilities and logistics), Kawan does not expect them to impact its 2H22F earnings (we expect a stronger 2H22F) as it is confident of mitigating the impact via higher economies of scale (higher production volume), better overall cost control and selling price hikes. It also expects to continue to benefit from higher competitiveness from a weaker ringgit versus the US dollar.

We raise our FY22-24F EPS to account for higher export sales. Our target price is raised to RM2.68 (20 times CY23F PER, in line with its five-year mean) while we keep our “add” call. We continue to like Kawan for its strong earnings prospects (three-year EPS CAGR of 18.5% in FY21-24F), the growing global prospects for frozen food, its strong brand name in the frozen bread market globally and its strong balance sheet (net cash of RM70 million at end-2Q22).

Fair value: RM3.72 BUY

AMINVESTMENT BANK RESEARCH (AUG 23): We remain upbeat on Inari’s fundamentals and outlook. We continue to ascribe a four-star ESG rating, which translates into a 3% premium to Inari’s fair value of RM3.72 that is pegged to an unchanged forward CY23F PER of 25 times.

In terms of the ongoing labour shortage that is affecting Malaysia’s electrical and electronics sector, Inari’s risk has been substantively mitigated by its early investment in automation. However, shortage of skilled workers such as engineers remains a persistent headwind. Despite a strong US customer base, management has no intention of setting up strategic partnerships for US expansion to take advantage of the US$53 billion subsidies under the US CHIPS Act, given that higher operating costs could negate any value accretion.

Long-term prospects stem from the resilience of its radio frequency (RF) earnings and margin due to higher chip complexity in 5G devices and its applications; strong net cash position of RM2 billion as at June 2022 (18% of market cap); and plans to enhance and diversify revenue streams via joint ventures in outsourced semiconductor assembly and test manufacturing operations in China.

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