Brokers Digest: Local Equities - Thong Guan Industries Bhd, Aurelius Technologies Bhd, Kelington Group Bhd, VS Industry Bhd

This article first appeared in Capital, The Edge Malaysia Weekly, on March 14, 2022 - March 20, 2022.
Brokers Digest: Local Equities - Thong Guan Industries Bhd, Aurelius Technologies Bhd, Kelington Group Bhd, VS Industry Bhd
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Thong Guan Industries Bhd

Target price: RM4.54 ADD

CGS-CIMB RESEARCH (MARCH 7): Thong Guan Industries (TGI) is mulling expanding to the US through a joint venture (JV). We are positive on this possible development because the company could make headway in the world’s biggest market for stretch film. TGI received an invitation from its distribution partners in the US to set up a JV to manufacture stretch film in the country’s mid-western region. TGI’s board has given its initial blessing to explore the possibility of setting up the JV, which is intended to cater solely for the US market.

According to TGI, the US uses about 1.2 million tonnes of stretch film a year. For comparison, the company’s overall production of stretch film in 2021 was only 78,000 tonnes. We are positive on this possible expansion news. Much of its revenue growth in FY16-FY20 came from its inroads into the Europe market, while sales to the US were only RM25.7 million in FY20 (or 2.7% of its total turnover). The group is still doubling its expansion capacity to reach RM2 billion turnover by FY26 (FY21: RM1.2 billion). TGI plans to install another production line for stretch film before end-1Q22 while the construction of its new courier bag production unit was completed at end-2021.

We note that this possible US endeavour should not strain its balance sheet. Its cash pile of RM292.9 million at end-December 2021 dwarfed its total borrowings of RM181.2 million — translating into RM111.7 million net cash, or 29.2 sen per share. Its interest coverage ratio was 67.5 times its FY21 Ebit of RM127.1 million, which gives it a lot of headroom to gear up if it sees fit. Apart from the growth story, our unchanged call on TGI is premised on its durability against rising inflationary pressure globally. It said it would raise its selling prices to combat the continuing rise in resin prices in FY22, as it did in FY21.

However, we need to be mindful that the Russia-Ukraine war could spawn unforeseen systemic risks to TGI’s sales demand, input costs and margins. We thus lower our target price from RM5.70, shaving our prescribed valuation to 2023 PER of 11.3 times.

 

Aurelius Technologies Bhd

Target price: RM1.92 BUY

MAYBANK INVESTMENT BANK RESEARCH (MARCH 7):  We initiate coverage on Aurelius with a “buy”. What sets the company apart from its peers is its venture up the value chain towards the manufacture of higher-value-added semiconductor components.

We project a strong two-year net profit CAGR of 50% for the financial year ending January 2022 (FY22) to FY24, led by a two-year revenue CAGR of 20%, and augmented by an expansion in overall gross profit margin from 11.4% in FY22 to 15.2% in FY24. We expect semiconductor components to account for 11% of group revenue by FY24, but a heftier 40% of group gross profit by then, owing to higher margins.

We deem Aurelius’ fair value pegged to CY2023 PER of 14 times. Our valuation multiple reflects a 10% premium to its CY23 market cap-weighted PER average of 12.6 times for its domestic and regional EMS (electronic manufacturing services) peers. We believe the premium is reasonable and justified as the company’s two-year core net profit CAGR (FY22-FY24) of 50% is significantly higher than the 10% of its blended peer average, while its low price-earnings growth of 0.5 times is attractive relative to the blended peer average of 1.3 times.

 

Kelington Group Bhd

Target price: RM1.70 BUY

RHB RESEARCH (MARCH 9): Kelington is on track for another bumper year. We see FY22 core earnings growing 40% (FY21: +108%), with billings reaching another milestone. We maintain our target price, premised on 32 times FY22 EPS with parity ESG adjustment based on our latest review. The sharp selldown owing to the prevailing risk-off sentiment is a good buying opportunity.

Its outstanding order book to date includes hook-up jobs from China’s largest wafer fab for five sites, where a formal award is pending. Excluding this, the roughly RM1.3 billion tender book comprised new hook-up jobs from Micron, Global Foundries and Siltronics, for which base-build projects were secured in FY21. As the incumbent in Singapore, Kelington is well placed to secure base build contracts for United Microelectronics Corp’s new US$5 billion 22/28 nanometre (nm) fab when the tender opens.

We have toned down FY22 by 5.2% after factoring a slight delay in the RM420 million (30% of order book) turnkey general contracting job for a global data storage player in Sarawak. FY23-FY24 core earnings are raised by 14% to 15% as we now assume higher order book replenishments.

 

VS Industry Bhd

Target price: RM1.60 BUY

UOB KAY HIAN RESEARCH (MARCH 9): VS is still being plagued by three main systemic issues — operational disruption from the Covid-19 outbreak, labour shortages and supply chain disruptions (component shortages, hence affecting its printed circuit board output). While the business environment remains challenging, its management noted that the interest in trade diversion remains strong with its existing customers looking to load more orders, while new customers are enquiring about potential collaboration.

We understand that the group has secured enough quota for its foreign workers to support its long-awaited aggressive growth, pending the reopening of borders. We understand that VS has appointed an independent third party, PwC, to review its labour practices for its present local workers, alongside migrant workers (less than 10% of total workers).

VS’ shares have dropped 39% YTD and are currently trading at FY23 ex-cash PER of 7.3 times. We believe its value proposition is even more attractive now owing to its two-year net profit CAGR of 19% (from FY21-FY23), it being on the verge of securing more contracts from the US-China trade diversion, and the reopening of borders.

 

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