Brokers Digest: Local Equities – DKSH Holdings (Malaysia) Bhd, SKP Resources Bhd, QL Resources Bhd, MyEG Services Bhd

DKSH Holdings (Malaysia) Bhd

Target price: RM6.20 ADD

CGS-CIMB RESEARCH (NOV 30): We believe DKSH’s lower Ebitda margin of 2.4% in 3Q21 (versus 2Q21: 3.1%) is transitory, owing to the fact that 3Q is a seasonally weaker quarter for the group post-Hari Raya season, which tends to fall in 2Q. On top of that, sales were affected by the Full Movement Control Order during the quarter (3Q21 group revenue declined 9.4% q-o-q), leading to lower economies of scale, particularly at its marketing and distribution (M&D) segment. As such, the Ebitda margin was mainly dragged by the M&D segment’s lower 3Q21 Ebit margin of 1.8% while the logistics segment remained stable at 1.6%.

We expect DKSH to record stronger results from 4Q21 onwards, mainly predicated on a few key drivers: strong recovery in sales of consumer goods post lifting of movement restrictions, coinciding with year-end festivities, which normally result in higher restocking activities for Christmas and Chinese New Year, leading to higher economies of scale; higher average selling prices (ASPs) for its in-house brands within the M&D segment (mainly Buttercup and SCS-branded products); favourable sales mix; as well as higher operating efficiencies from its ongoing internal efficiency project.

We gather that while DKSH’s in-house brands currently contribute slightly less than 10% of total group revenue (9M21: RM5.1 billion), they made a double-digit contribution to the bottom line (9M21: RM57.7 million). We also understand that higher input costs (vegetable oils, dairy milk, salt) for its in-house Buttercup and SCS products will be passed on to consumers by changing the packaging sizes for certain products, and raising ASPs in tandem with its competitors, which should not significantly affect demand as its customers are mostly in the higher-income bracket. These are expected to be implemented from 4Q21 through 1Q22.

We reaffirm DKSH’s strong earnings growth prospects with a three-year core EPS CAGR of 22% on the back of higher operating efficiencies to support margin expansion, and its defensive and expanding product portfolio will ride on the tailwinds of economic reopening.

SKP Resources Bhd

Target price: RM2.53 ADD

CGS-CIMB RESEARCH (NOV 29): SKP Resources reported a 24% y-o-y revenue decline in 2QFY22, owing to the 60% workforce capacity limitations for the two-month period of July to August 2021 set by the government.

Despite the limitations, the group’s Ebitda margin still expanded by 1.2% percentage points y-o-y to higher-than-pre-pandemic levels. We attribute this to higher contribution from its printed circuit board assembly (PCBA) operations in 2QFY22, in addition to prudent cost control and the optimisation of production.

We believe order flows from its key customers remain robust and project a strong ramp-up in production output going into 2HFY22. We gather that SKP continues to receive encouraging enquiries from its key customers and is in the midst of undergoing capacity expansion in anticipation of stronger order flows and new product model wins.

We raise our FY22-24 EPS forecasts to reflect better operating margins and stronger order flows for FY23-24.

We retain our “add” call on the stock, with a higher target price of RM2.53 as we roll over our valuation basis to 19 times CY23 PER. The premium is to take into consideration its strong order flow outlook and potential further margin expansion from higher contribution from its PCBA operations.

QL Resources Bhd

Target price: RM6.00 OUTPERFORM

KENANGA RESEARCH (NOV 30): 1HFY22 earnings came in below expectations on account of an exceptionally long low fish landing cycle and still-elevated feed costs. However, top line continued to be resilient and improved both y-o-y and q-o-q, given its diversified revenue base.

2HFY22 looks to be improving as the group’s earnings are expected to be anchored by its marine products manufacturing (MPM) segment (historically taking up 66% of group PBT), on the back of stable fish cycle, coupled with persistently robust sales momentum, especially from the frozen surimi-based products.

MPM activities are historically lower in 4Q of the financial year (due to monsoon) but we expect an improvement ahead, provided there is no further resurgence of the pandemic. The palm oil and clean energy segment should see a better 2H with operations and site installation resuming, coupled with a higher fresh fruit bunch production seasonally in 3Q. However, integrated livestock farming’s improvement will be offset by high feed costs.

While QL’s valuation appears rich at this level, we believe it is justified, premised on its resiliency and robust earnings growth potential from diversified revenue streams. Given the sharp price weakness, we upgrade its call to “outperform”.

MyEG Services Bhd

Target price: RM1.34 BUY

MAYBANK IB RESEARCH (NOV 30): MyEG’s 3Q21 core net profit came in at RM76 million, bringing 9M21 core net profit to RM235 million. 3Q21 margins showed resilience with core net profit margin recording 48% (2Q21: 51%, 3Q20: 51%).

We observe that MyEG maintains a healthy balance sheet, as its enlarged net cash position of RM225 million is significantly attributed to its equity fundraising (via a private placement exercise that was completed on Dec 17, 2020, amounting to RM216 million, at RM1.80 per share), largely to fund the development of foreign worker hostels; healthcare-related services; and the purchase of fixed assets and solutions for e-government concession services.

Looking ahead, we remain upbeat on further developments within MyEG’s blockchain-related services. Our earnings forecasts remain unchanged — we have conservatively assumed a non-renewal scenario for its Multimedia Super Corridor status in our earnings forecast period, although we opine it is likely to be extended.

Nonetheless, as MyEG operates in the software technology sector with robust innovation that is likely entitled to some research and development exemption, we have maintained the 20% to 24% effective tax rate assumption, without elevating it to the higher Cukai Makmur rate for FY22 for now.


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