This article first appeared in The Edge Malaysia Weekly on January 9, 2023 - January 15, 2023

Gamuda is well liked for its strong management and diversified interests in engineering and construction, property development and infrastructure concessions.

After completing the disposal of its four highway concessions last October, Gamuda announced a number of acquisitions, with analysts saying more deals could be expected.

In October, the group was awarded a RM2.13 billion contract to construct an underground rail track and commuter station in Taiwan, with a local partner. In December, it inked a deal to buy 30% of ERS Energy Sdn Bhd — a solar engineering, procurement, construction and commissioning player — for RM200 million. In the same month, it said its Australian joint venture was awarded a RM3 billion road transport project by the New South Wales government.

Just last week, Gamuda announced the acquisition of eight parcels of freehold land, measuring a total of 532 acres, in Rawang, Selangor, for RM360 million. It has plans for a mixed-use development with a gross development value of RM3.3 billion over 10 years.

Gamuda now sits on an outstanding order book of RM16 billion and has a target of RM20 billion to RM25 billion over the next 1½ years.

Kenanga Investment Bank Bhd said in a Jan 4 report: “With a strengthened balance sheet fresh off its toll highways disposals, Gamuda is currently embarking on an acquisition phase to replace the lost toll contributions and to enhance its return on equity. Post-acquisition of these new land parcels, its net gearing will increase slightly to 0.16 times (from 0.13 times), still well below its self-imposed net gearing ceiling of 0.70 times.”

The brokerage has an “outperform” call on the stock, with a target price of RM5.15 — the highest among 15 research houses with “buy” calls. There are also three “hold” calls and one “sell”.

The consensus target price of RM4.35 gives the counter an upside of 14.5% from last Thursday’s close of RM3.80.

Despite the headwinds faced by the technology sector, analysts remain positive on Inari’s prospects, primarily due to its exposure to the radio frequency (RF) chip segment.

Inari — the biggest tech stock by market capitalisation on Bursa Malaysia — has fallen 32.8% since hitting a peak of RM4.02 a year ago. It is also the country’s largest outsourced semiconductor assembly and test player.

CGS-CIMB Research estimated in a Dec 16 report that the utilisation rate of 75%-80% for Inari’s RF division in the first quarter ended Sept 30, 2022 (1QFY2023) is expected to rise to 80%-85% in 2QFY2023, underpinned by a better sales mix with newer-generation models that will require a longer testing period due to higher RF content value; seasonal pick-up in demand ahead of the holiday period; and positive guidance from key customer Broadcom, which is a key component supplier to consumer electronics giant Apple Inc.

Inari’s management is bullish on its RF growth outlook in FY2024 on the back of content value growth and new design wins, such as RF double-sided moulding system-in-package assembly for next-generation smartphones.

The consensus earnings forecasts tracked by Bloomberg show higher net profits of RM399.47 million and RM450.47 million for FY2023 and FY2024 respectively, against RM391.19 million for FY2022. In 1QFY2023, Inari posted a stable net profit of RM106.25 million as the favourable foreign exchange movements offset the lower loading volume.

Trading at a forward 12-month price-earnings ratio (PER) of 24.8 times, there are 13 “buy” calls, seven “hold” recommendations and one “sell” call on the stock. The consensus target price of RM3.15 represents an upside of 16.7% from last Thursday’s closing price of RM2.70. BIMB Securities has the highest target price at RM3.75.

Although the share price of the brewery has gone up 16% over the past year, there could still be more upside as Chinese tourists return to Malaysia and Singapore. Carlsberg has a presence in Singapore via its wholly-owned Carlsberg Singapore Pte Ltd and 51%-held MayBev Pte Ltd.

Hong Leong Investment Bank (HLIB) Research noted in a Dec 22 report that even though there is no major football event this year, brewers are still expected to post year-on-year earnings growth due to the absence of the one-off prosperity tax imposed last year, a full-year reflection of the increase in average selling prices and the continued recovery in tourist arrivals. It sees China’s reopening in 2023 as a key catalyst for brewers as Chinese tourists accounted for 11.9% of tourist arrivals in 2019.

HLIB said brewers also benefit from lower raw material prices, and while they face the risk of slower demand, it expects beer to remain popular as it is “one of the cheapest alcoholic drinks in the market”.

CGS-CIMB Research takes a more muted tone in its Jan 3 report, saying that the return of Chinese tourists is expected to boost the top-line growth of consumer names, but this will be offset by rising operating costs and weakened consumer spending power. Nevertheless, it believes these factors have been priced into the sector’s valuation.

The consensus target prices for Carlsberg and Heineken Malaysia Bhd, as tracked by Bloomberg, are RM27.35 and RM29.85 respectively, which translate into an upside of between 19% and 21%.

In terms of dividends, Heineken offers a higher expected yield of 5.5% based on the median dividend per share in the FY2023 forecasts by analysts tracked by Bloomberg. Carlsberg’s expected dividend yield of 5% is lower but it is not too shabby.

Carlsberg is The Edge’s pick between the two brewers because of its exposure to the Singapore market.

Car sales are poised to remain strong in the first quarter of 2023 on the back of high order backlogs and robust deliveries, says PublicInvest Research analyst Denny Oh. However, the longer-term outlook for Malaysia’s automotive sector is mixed as total industry volume is likely to taper off once the sales and service tax-exempted bookings are exhausted by March, he notes in a Dec 9, 2022, report.

Notwithstanding the uncertainty, most analysts deem Bermaz Auto’s (BAuto) growth prospects exciting with new models lined up across all three of its marques in 2023. The group’s net profit for the first half ended Oct 31, 2022 (1HFY2023) came in at RM115.83 million, up 219% year on year (y-o-y), beating expectations. Revenue surged 86% y-o-y to RM1.5 billion.

According to RHB Research analyst Jim Lim Khai Xhiang, BAuto’s current order backlog remains healthy, with more than half of existing Mazda orders made after July 1, 2022, when purchases were no longer exempted from the sales and service tax. “We continue to like BAuto for its FY2024F yield of 7.5% and the growth of its Peugeot and Kia brands,” he says in a Dec 9, 2022, report.

In a Dec 29, 2022, report, Kenanga Research analyst Wan Mustaqim Wan Ab Aziz says he likes BAuto for its premium mid-market Mazda brand that offers the best of both worlds — products that appeal to the middle-income group and yet command superior margins over those of its peers in the mid-market segment; it is a beneficiary of the strengthening ringgit against the yen; and its attractive dividend yield of about 6%.

BAuto’s share price closed at RM2.05 last Thursday, having risen 26% over the past year. This translates into a market capitalisation of RM2.39 billion.

Bloomberg data shows that of the 14 analysts who cover BAuto, 10 had a “buy” call on the stock, three had a “hold” rating and one had a “sell”. The average target price of RM2.39 implies an upside potential of 17%.

The stocks of electronics manufacturing services (EMS) players have been battered since the outbreak of Covid-19 due to supply chain disruptions, labour issues and softer demand. While headwinds remain significant in 2023 amid recession fears, value has emerged among the players.

HLIB Research analyst Syifaa’ Mahsuri Ismail believes that V.S. Industry (VSI), as the biggest EMS player in Malaysia, will be able to weather the storm while searching for opportunities from the trade diversion from China.

VSI kicked off its new financial year ending July 31, 2023 (FY2023) on a strong footing. Its 1QFY2023 net profit of RM60.71 million was up 54% year on year (y-o-y), which came in within consensus full-year forecasts. Revenue rose 34% y-o-y to RM1.29 billion, mainly due to better sales to major customers.

Despite the risk of downward revision of orders from other customers in the light of recessionary fears, Syifaa’ says in a Dec 22, 2022, report that the order outlook from a major customer will be able to more than make up for the loss.

Additionally, the labour and supply shortage situation has eased. “We foresee better earnings in the coming quarters from the ramp-up of its utilisation rate as the labour shortage has been remedied by the arrival of 3,700 foreign workers. At this juncture, we understand that supply chain and logistics issues are manageable as the group has stocked up on certain raw materials with a longer lead time,” she adds.

VSI’s share price closed at 90 sen last Thursday, down 33% over the past year. This translates into a market capitalisation of RM3.45 billion.

Bloomberg data shows that of the 11 analysts who cover the stock, six had a “buy” call, four had a “hold” and one “sell”. Their average target price of RM1.05 implies an upside potential of 17%.

Higher global crude oil prices over the past year have been a boon to the oil and gas (O&G) industry, especially oil producers.

Petra Energy is in a sweet spot to ride the upward momentum. For one, it was the only company under Petroliam Nasional Bhd’s (Petronas) risk service contracts (RSC), which were awarded for the exploration of marginal oil fields in mid-2012, that performed well.

The company has been operating and maintaining the Banang field since June 2020 and was given a 22-month extension recently by Petronas. The oilfield has been producing about 1.14 million barrels of oil since June 2020. Hence, it is expected to benefit if global crude oil prices remain elevated in 2023.

In 2021, the group clinched a job from Petroleum Sarawak Bhd (Petros) for the exploration, development and production of Block SK433 in Sarawak, which further reinforced its position in the upstream segment of the O&G industry.

Petra Energy has a strong balance sheet, sitting on net cash of RM113.2 million as at Sept 30, 2022, which is rare among local O&G players. Its cash position puts it on a strong footing to bid for O&G services jobs, which is starting to flow again.

The group is also in the fabrication and marine offshore sector. It owns three accommodation and work barges, four workboats, one anchor handling tug supply (AHTS) vessel and a mobile offshore production unit (MOPU).

It should be noted that Petra Energy is not covered by any brokerage and its shares lack trading liquidity.

The stock closed at 87.5 sen last Thursday, having risen about 11% year on year. This values the group at RM280 million.

Affin Bank was once perceived as a sleepy outfit and constantly had a string of “sell” calls by analysts. But that changed last year, driven by the improvement in its earnings and better cost management.

The bank has gone through some serious restructuring under the leadership of Datuk Wan Razly Abdullah Wan Ali, who took over as president and CEO in 2020. Under his leadership. Affin Bank has embarked on a three-year plan, dubbed AIM22, to transform into the country’s second-smallest bank.

Last year, Affin Bank sold its 63%-owned asset management subsidiary Affin Hwang Asset Management Bhd (AHAM), booking a gain of RM1 billion from the sale proceeds of RM1.42 billion. The bank plans to use the proceeds to expand its existing business, especially to strengthen its CASA (current accounts and savings accounts) initiatives and improve its capital ratios.

Despite a core loss in the third quarter ended Sept 30, 2022 (3QFY2022), CGS-CIMB Research remains bullish on Affin Bank, due to its high loan growth outlook, which was the strongest in the banking sector as at end-September, and improvement in asset quality.

The loss was due to the bank’s initiative to increase loan loss coverage (LLC) to meet its target of beyond 100% (from 77.1% at end-June 2022 to 108.8% at end-September 2022).

According to RHB Research, Affin Bank’s valuation appears undemanding with a price-to-book ratio of 0.47 times, which is the lowest among the Malaysian banks under its coverage, and on the back of a return on equity of 6% for FY2023. In a Nov 29 report, its analysts Nabil Thoo and Fiona Leong upgraded the stock from a “trading buy” to a “buy”, with a higher target price of RM2.80, on the back of improving asset quality and inclusion into the MSCI Global Small Cap Index.

According to a Bloomberg poll, there were four “buy” calls and three “hold” on Affin Bank. The consensus target price of RM2.37 gives the stock an upside of 17.3%.

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