Maxis Bhd (Target price: RM4, UNDERPERFORM)
Digi.Com Bhd (Target price: RM3.80, UNDERPERFORM)
KENANGA RESEARCH (NOV 15): In an exclusive article on Nov 10, Reuters reported that “none of Malaysia’s major mobile carriers have agreed to use the government’s 5G network yet due to transparency and pricing issues”. Digital Nasional Bhd (DNB) refuted Reuters’ claim the very next day, saying that negotiations with mobile network operators (MNOs) are still ongoing. From our channel checks, we found that Reuters’ claim has some element of truth — thus far, the MNOs have yet to sign any agreements with DNB and requested “extensive revisions” to DNB’s pricing proposal. Furthermore, the timeline for commercial agreements to be struck has been postponed to early 2022, as opposed to the market’s expectations for end-2021. The prolonged negotiations signal that there are still large gaps between DNB’s proposals and what the MNOs are willing to accept. In our view, these are the early signs that the final terms may be unfavourable to the MNOs, which have no autonomy to build, own and operate their own 5G networks.
The current disagreements and lack of clarity on commercial terms and technical capabilities present great uncertainties, especially for the MNOs’ enterprise segment. As MNOs lack autonomy over the 5G network on which they will be offering their enterprise services, they do not have certainty and control over the network’s capabilities and quality of service (QoS), and thus may be unable to: (i) provide certain services; and (ii) guarantee a certain QoS, losing potential revenue. Furthermore, the MNOs fear that DNB may take longer than expected to deliver certain technical capabilities, especially when run by an entity with no competition. The lack of a clear pricing mechanism is causing further confusion, as the MNOs do not know if they would be able to pay a premium for DNB to expedite the development of certain network capabilities, which MNOs would have likely been able to promptly develop due to the profit incentive. As a result, we think the MNOs are not only withholding investment decisions but may also forgo certain enterprise services. In turn, these could potentially hurt the MNOs’ revenue growth from 5G use cases.
Inari Amertron Bhd
Target price: RM4.95 ADD
CGS-CIMB RESEARCH (NOV 15): We attended Inari Amertron’s virtual 1QFY6/22 post-results briefing, hosted by group CEO KC Lau. We learnt that Inari’s new system-on-module (SOM) assembly division at P55 is on track to begin production in 1QCY22. The SOM division is running a reliability testing process that could take up to 12 weeks before it can start production, but we are encouraged to learn Inari’s new customer is expediting the number of products qualified. We see the SOM division as a new growth driver for Inari to diversify and grow its exposure in the automotive segment. We expect Inari to utilise a portion of placement proceeds for the SOM division expansion from CY22F onwards.
The group is allocating RM100 million in capital expenditure for investment in new technology platforms and capacity expansion and value-added processes such as electromagnetic interference (EMI) shield coating for RF chips. The group recently added two new system-in-package (SiP) lines in October and November, which raised its total SiP assembly to 24 lines. In addition, Inari is also investing US$5.8 million (RM24.4 million) in a new double-sided moulding packaging platform that could be utilised in the next-generation RF chips in 22/23F.
Advancecon Holdings Bhd
Target price: 47 sen BUY
RHB RESEARCH INSTITUTE (NOV 16): Advancecon’s 3Q21 core net profit of RM1.5 million was below our estimates, mainly due to higher-than-expected taxes during the quarter. Nonetheless, the results marked a steep improvement from a 2Q21 core loss of RM1.8 million, following a broad resumption of works from August since the imposition of MCO 3.0. The finalised acquisition of Spring Energy Resources (SER), which comes with a RM6 million profit after tax guarantee for FY22 and FY23F, would provide a further boost to earnings come next year.
Post-results, we cut FY21F earnings by 52%, but raise FY22F and FY23F by 42% and 37% to factor in SER’s contribution. Advancecon’s outstanding order book stands at RM738 million, which includes the newly secured RM17 million East Coast Rail Link (ECRL) package in October for ground treatment works at Section 4 of the project. We keep our “buy” call with a revised TP of 47 sen. This comes after incorporating SER’s acquisition at cost, and enlarged share base post-private placement, in addition to a 4% ESG discount to our SOP fair value derivation. We like Advancecon for its ability to continually secure new jobs even amid the pandemic, which also bodes well for its subsequent job tender prospects.
ATA IMS Bhd
Target price: RM2.89 BUY
AMINVESTMENT BANK RESEARCH (NOV 15): We maintain our “buy” call but with a lowered fair value (FV) of RM2.89 per share (from RM3.34 previously). This is pegged to our revised FY23F forecast. ATA IMS’ PER of 18 times is unchanged based on its three-year historical average. There is no adjustment to our FV based on a three-star ESG rating as appraised by us. Our lower valuation stems from cuts to our earnings forecasts by 53% for FY22F, 14% for FY23F and 19% for FY24F to reflect the near-term manpower shortages the company faces, which has affected productivity and, in turn, lowered margins from diseconomies of scale. We are also reflecting a more conservative assumption for our FY24F revenue now to account for a potentially slower capacity expansion, following the recovery from its current labour crisis. We believe the situation will gradually ease as economies and borders around the world reopen.
We continue to like ATA IMS for its medium- to longer-term positive prospects arising from: (i) being the purest proxy to its main customer’s growth prospects; (ii) its efforts towards vertical integration; and (iii) customer diversification opportunities arising from the US-China trade war diversion, which supports the group’s modular expansion strategy.