This article first appeared in Capital, The Edge Malaysia Weekly on January 17, 2022 - January 23, 2022

NEUTRAL

HONG LEONG INVESTMENT BANK RESEARCH (JAN 10): Domestic contract awards in 4Q21 totalled RM6.3 billion, up 54% quarter on quarter and 169% year on year. Last year saw stronger contributions from water, affordable housing, solar and road projects, while private jobs remained flattish.

Moving ahead, we cautiously expect to see gradually improving contract flows as Malaysia progressively enters the endemic stage. Our expectations are for a recovery in private sector opportunities and the ongoing rollout of existing projects like the East Coast Rail Link, Pan Borneo Highway Sabah and Sarawak, and Johor-Singapore Rapid Transit System to support job flows in 2022. We also look forward to the rollout of Sarawak Metro, which costs RM6 billion.

With the Home Ownership Campaign (HOC) and low interest rates having lifted property sales in 2021, we could see a ramp up in private sector contract awards, considering the repeated award delays in 2021. The downside to this though is the dampening of sentiment from: (i) HOC expiry, (ii) interest rate hikes and (iii) rollout delays due to high price of materials.

On the public sector side, higher development expenditure does bode well for the general tender environment even with new big-ticket projects missing. Implementation of existing mega projects should also continue to selectively present opportunities for contractors, but we do note that most packages under existing projects have been tendered out, thus there is limited impact on sector earnings prospects.

We retain our sector “neutral” weight as the fluidity of looming elections could weigh on sector sentiment with investors adopting a wait-and-see approach. Recent news flow on critical projects like the Mass Rapid Transit 3 (MRT3) has been encouraging but we remain cautious on timeline and overall sector earnings execution amid ongoing virus spread.

Within the mid-cap space, we prefer Sunway Construction Group Bhd due to its (i) strong balance sheet, (ii) extensive track record of infrastructure projects and (iii) strong support from its parent company. For the small-cap space, we like Kimlun Corp Bhd for its solid order book, decent job visibility and niche exposure to MRT3, alongside an attractive six times PER and 0.35 times P/B.

Target price: RM2.40 BUY

RHB RESEARCH (JAN 11): Management hosted an analyst briefing highlighting CTOS’ three-year strategic roadmap, and providing further clarity on the potential synergies, target market and solutions, following the proposed acquisition of Juris Technologies Group. In short, we are excited about the potential 20%-30% growth trajectory over the next two years, and the prospects of integrating its data and analytics solutions with the software and platform, to develop a new proposition in the new economy.

CTOS will continue to build on its data analytics, fraud and ID, and platform capabilities to solidify its leadership position. Secondly, it aims to broaden and deepen its data assets into a single big data platform, and move up the value chain to improve synergies and provide deep insights to clients. It will also provide an enhanced suite of solutions to existing and emerging verticals in digital transformation, platform, data consolidation and sharing, workflow automation, data driven analytics and insights-related solutions.

We cut FY21 earnings by 12% but raised FY22 and FY23 earnings by 3% and 1% after factoring in higher tax rates, pending approval of the pioneer status incentive extension, and incorporating the impact of proposed acquisitions and fundraising into our model.

Target price: 60 sen (Ex-target price: 56.5 sen) MARKET PERFORM

KENANGA RESEARCH (JAN 11): We were negatively surprised by Muhibbah’s proposed rights issue to raise RM120 million and use most of the proceeds to pare down debt, which is a poor allocation of capital in our view. This untimely rights announcement could also insinuate potential cash collection issues in the immediate term. While we have raised FY22 earnings by 6% to account for interest savings, we have downgraded our call to “market perform” from “outperform”.

We were completely caught off guard by such an exercise to pare down debts as Muhibbah’s: (i) net gearing has been trending down from its peak of 0.58 times in 4QFY19 and currently stands at a manageable level of 0.50 times, (ii) receivable turnover days have remained rather healthy by historical means at 292 days (versus five-year average of 279 days) and (iii) operating cash flows remain positive.

Furthermore, its declining outstanding order book in its infrastructure division, which stands at RM300 million, should technically translate into more cash upon project completion since no cash outlay is required for new project deployment. Also, the retention sums (typically 5% of contract value) to be received post-project completion should also mean healthier cash levels moving forward.

Target price: RM1.03 BUY

HONG LEONG INVESTMENT BANK RESEARCH (JAN 12): We understand that Focus Point’s sales rebounded strongly in December 2021 from corporate client utilisation and recovery in footfall traffic. The group is in the midst of ramping up its new optical concept store, dubbed “Anggun Optometrist”, to cater for the untapped mid- to high-end Malay market.

We gather that five locations have been secured for new outlets with a target to roll out 12 to 15 stores in FY22. Management expects the ticket size to be higher from this target market. The expansion in the optical business will enable the group to bargain for higher rebates from its key suppliers, which are mainly the established foreign brands.

F&B revenue is expected to expand further from higher corporate sales and stable contribution from the Komugi outlets. Its Central Kitchen 2 has received an ISO22000 certification and we are positive on the new development as this will open more doors to secure business with established players.

We remain confident about Focus Point’s scalable business model as we reckon that both its optical and F&B segments will be able to ramp up fully once operating conditions normalise.

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