Friday 29 Mar 2024
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This article first appeared in Capital, The Edge Malaysia Weekly on August 16, 2021 - August 22, 2021

Sime Darby Plantation Bhd

Target price: RM5.05 BUY

HONG LEONG IB RESEARCH (AUG 11): The US Customs and Border Protection had on Dec 30, 2020, issued a withhold release order against Sime Darby Plantation Bhd (SDPL) to ban imports of palm oil from the latter, over allegations of forced labour in the production process. In March, SDPL appointed Impactt Ltd — an ethical trade consultant with specific expertise in detecting and remediating forced labour issues in company supply chains in line with the International Labour Organization’s (ILO) 11 indicators of forced labour — as a third-party assessor to its Expert Stakeholder Human Rights Assessment Commission. On July 15, SDPL dissolved the commission as it was unable to finish the assessment due to movement and travel restrictions (as a result of the Covid-19 pandemic) and the evaluation exercise was taken over by SDPL’s sustainability committee.

Management shares that it is trying to expedite the assessment in certain areas (particularly in Sabah and Sarawak, which have already transitioned from Phase 1), and is hopeful to complete it by early 2022. Upon completion of the assessment report by Impactt (which will consist of findings and recommendations), SDPL will then work with Impactt on a corrective action plan.

SDPL found several challenges in addressing ILO standards (which have been increasing over the past few years), and these include, among others, the remote location of its plantation estates, interpretation of recruitment costs and resetting certain culture standards (on a group-wide basis).

While the Roundtable on Sustainable Palm Oil’s (RSPO) principles and guidelines overlap with ILO indicators, management says SDPL is still in compliance with RSPO standards, as RSPO carries its own audit on SDPL’s practice. Besides, we understand that SDPL has been constantly engaging with its MNC customers on the progress and update on this matter, and they are either supportive or neutral on the latest progress. Management says the exercise would involve a cost of RM20 million to RM25 million arising from the assessment process (which includes costs arising from consultation and installation of passport lockers).

We maintain our “buy” rating with an unchanged SOP of RM5.05. At RM3.43, SDPL is trading at FY21-22 PER of 14.5 times and 19.8 times respectively.

 

Inari Amertron Bhd

Target price: RM4.80 OUTPERFORM

KENANGA RESEARCH (AUG 9): Despite the 2020 US smartphone nearing the tail-end of its annual flagship status (2QCY21 shipment unit: -20% q-o-q; +18% y-o-y), Inari still managed to log its best fourth-quarter earnings with a 15% jump in 4QFY21 core net profit (CNP) to RM85.4 million on a 5.4% growth in revenue to RM361.3 million. We believe this was supported by the early ramp-up of the 2021 US smartphone programme requested by its key customer to ensure that device supply is in time for its annual September launch event. More importantly, CNP grew at a larger quantum thanks to the group’s effort in optimising cost and labour allocation despite the ongoing lockdown restrictions.

Moving ahead into 1QFY22, we are eyeing a stronger quarter sequentially as the group fires on all cylinders for the 2021 US smartphone programme. In addition to the support for 5G connectivity, we believe the upcoming US smartphone to be launched this September may see its biggest upgrade yet that will immediately capture the attention of buyers at the first time hands-on device interaction. We maintain our “outperform” recommendation and higher target price of RM4.80 (previously RM4.60) based on FY22E PER of 40 times (+2SD to its three-year mean), justified by a super technology cycle driven by 5G.

 

Sunway Construction Group Bhd

Target price: RM1.81 BUY

RHB RESEARCH (AUG 11): The outcome of SunCon’s tenders will likely be known later this year, as signalled by management’s confidence about hitting the RM2 billion target. With the combined new contracts worth RM462 million already secured, potential new awards will serve as a positive catalyst in 2H21F. Very few local contractors enjoy this positive outlook, as they are burdened by Covid-19 restrictions. We believe SunCon’s current valuation — at a 13% discount to its five-year mean — is attractive.

Owing to Phase 1 of the National Recovery Plan (NRP), we believe SunCon will report a weaker q-o-q performance in 2Q21. This is following a period of low productivity during the quarter, as the group was only allowed to run its operations at 60% maximum capacity. On that note, we think it will likely report a 2Q21F net profit of RM22 million to RM25 million, implying a 26% decline q-o-q, but more than 100% y-o-y growth. Noting that most construction projects remain under Phase 1 of the NRP until today, the slowdown seen in 2Q21 will likely extend into 3Q21. Our target price is lowered after adjusting FY21-23F earnings by -12%, -7% and -1%. The adjustments are mainly on the prolonged operational constraints of Phase 1 of the NRP.

 

Uzma Bhd

Target price: 95 sen OUTPERFORM

PUBLICINVEST RESEARCH (AUG 11): Uzma reported that it has received a work order award from Petronas Carigali for the provision of a risk transfer incentive contract for idle well reactivation and production enhancement services for a Sabah asset. The contract worth about RM29 million is for a three-year period. We view this contract positively as it could lead to more opportunities in idle well reactivation in Malaysia. The outstanding order book is expected to remain healthy at above RM2 billion, providing earnings visibility up to FY24. Uzma’s financial year end is in June, hence this contract is assumed as its first win for FY22. Our target price is maintained at 95 sen, based on 10 times PER over CY22 EPS of 9.5 sen.

We maintain our earnings forecast, having assumed this contract as part of our replenishment assumption. Uzma will be announcing its 4QFY21 results tentatively on Aug 26. Given stricter adherence to SOPs, including the requirement of 14-day quarantine, we believe its profit margins would be affected as operational efficiency remains limited. That said, we have already imputed this drawback into our earnings forecast. Recap, its 9MFY21 earnings stood at RM20.1 million.

 

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