10 stocks to watch
INARI AMERTRON
Inari is an outsourced semiconductor assembly and test (OSAT) service provider for radio frequency (RF), fibre-optic transceivers, optoelectronic, sensors and custom integrated circuit (IC) technologies.
The company has done tremendously well since its IPO in mid- 2011, growing its revenue from RM181 million in the financial year ended June 30, 2012 (FY2012), to RM1,153 million in FY2019. Net profit increased from RM20 million to RM192 million over the same period (see Chart 1). As a result, its market capitalisation has ballooned from RM126 million (IPO) to over RM5.4 billion currently, or equivalent to a CAGR of 60%.
Inari, which derives about half of its revenue from providing OSAT services for RF chips, will benefit from the imminent rollout of 5G mobile networks globally in the coming years.
The deployment of 5G networks is expected to increase demand for RF chips due to several reasons.
Firstly, 5G is designed to cater for a large number of connected devices and precipitate the mass adoption of IoT. For instance, 5G standards require a minimum connection density of one million devices for every square kilometre — 16 times larger than the 60,680 devices supported under the 4G LPWA standard.
Secondly, there will be more base stations deployed to achieve the same coverage. For example, 4G networks have a density of 8 to 10 base stations per square kilometre while 5G requires 40 to 50 base stations for the same area and coverage.
Lastly, the increased complexity of 5G networks means higher RF content per connected device.
In short, the long- term outlook for RF chip demand is positive. Coupled with a stellar management track record thus far, we believe Inari will be a beneficiary of this next generation wireless cellular technology, which is a secular trend that will grow for years to come.
DIALOG GROUP
Dialog is one of the very few oil and gas companies that have performed well in the past decade. Its revenue grew at a CAGR of 8.6%, from RM1.14 billion in the financial year ended June 30, 2010 (FY2010), to RM2.39 billion in FY2019. Net profit too has increased every year, expanding at a CAGR of 18.3% on average, from RM118 million in FY2010 to RM536 million in FY2019 (see Chart 2).
Safe to say, this was no easy feat in view of the highly volatile oil prices during this period.
The impressive results achieved by Dialog were largely due to the terminal projects in Pengerang, a brainchild of its executive chairman, Ngau Boon Keat.
He envisioned a deepwater storage terminal in Malaysia that can emulate the success of Singapore’s Jurong Island in developing Malaysia’s petrochemical industry. With that in mind, Dialog went on a search for a location with sufficient water depth. It finally received approval from the Johor government to develop an independent deepwater petroleum terminal in Pengerang in October 2010.
Since then, Dialog has linked up with multiple strategic partners such as Vopak, the Johor government and Petroliam Nasional (Petronas) to develop the first two phases of the Pengerang deepwater terminals.
Dialog generates income from the terminals in three ways.
First, it profits from the initial construction by being the engineering, procurement, construction and commissioning (EPCC) contractor. Then, after the terminals commence operations, Dialog generates recurring income from its share of profits from the terminal operations. And lastly, it provides maintenance services to the terminals.
Dialog has utilised about 400 acres of its land for Phases 1 and 2 of the Pengerang terminals and its fabrication workshop. It recently broke ground for Phase 3 of the development, which covers 300 acres. There are 500 acres of land remaining for future development.
Demand for petrochemicals in Asean is expected to grow in tandem with consumption, driven by its rising population and per capita income. Dialog is well positioned to benefit from this anticipated growth in the petrochemical industry.
JHM CONSOLIDATION
JHM is an original equipment manufacturer (OEM) for LED lights used in the automotive industry. This business segment contributed some 70% to its total revenue in 2018.
The LED business has been in a strong upward trend in the last few years. The company’s revenue grew from RM71 million in 2014 to RM265 million in 2018, equivalent to a CAGR of 39%. Thanks to the robust top- line growth, JHM saw its loss of RM1 million reverse into a net profit of RM36 million over the same period (see Chart 3).
As a result, its market capitalisation has risen exponentially, from RM15 million in December 2014 to RM931 million currently.
Moving forward, the adoption rate of LED lighting in new vehicles is expected to increase. Mid-range vehicles will gradually
switch to LED headlights as they become increasingly affordable. LED headlights are more efficient and have longer life spans. Additionally, they enable new features such as the turning on or off of selected areas of the headlight to direct drivers’ attention to hazards on the road or to prevent blinding drivers of oncoming cars. These additional features will enhance road safety.
JHM is also venturing into the aerospace sector, which has relatively high barriers to entry and strong demand visibility for the future. Although this segment has yet to make material contribution, we believe it has the potential to be a key driver of growth in the years ahead — once JHM proves its capabilities and establishes a track record, much as it has done as an LED OEM in the past decade.
HARTALEGA HOLDINGS
Hartalega requires little introduction to local investors. It is the world’s largest producer of nitrile gloves. The company also prides itself on being an OEM with the world’s fastest and most efficient production lines.
Hartalega was the first in the world to invent lightweight nitrile gloves back in 2005, which led to demand shifting from latex to nitrile gloves globally. Unlike traditional latex gloves, Hartalega’s innovative nitrile gloves cause fewer skin allergic reactions and have since become the glove of choice for hospitals.
For the financial year ended March 2019, Hartalega produced about 28.5 billion pieces of gloves. Sales to the US made up half of the company’s revenue, followed by Europe and Asia.
Not one to rest on its laurels, the company continues to innovate and evolve with technology.
In July 2019, Hartalega announced that it is allocating RM745 million in capital expenditure to boost the adoption of Industry 4.0 technologies over the next three years. This will allow the company to ramp up production from 34 billion pieces of gloves to 42 billion annually.
Hartalega’s investment in R&D has paid off with the creation of the world’s first non-leaching anti-microbial gloves, which the company expects to set a new standard for gloves. It targets to obtain FDA approval by 2H2020. The gloves are expected to start contributing positively in the near future.
Growth in both revenue and net profit has been commendable. Revenue grew at a CAGR of 19.4% while net profit increased at a CAGR of 13.7% between FY2010 and FY2019.
We believe Hartalega will continue to grow in the future as glove consumption is expected to rise by 8% annually. Management plans to grow capacity, organically, by about 10% per annum for the next three years.
SAM ENGINEERING & EQUIPMENT (M)
SAM specialises in precision machining, equipment integration and automation solutions for the aerospace and equipment industries.
The equipment division provides system integration services to global multinational companies in the hard disk drive, solar, semiconductor and LED industries — including in-house machining, sheet metal fabrication and surface treatment processes.
SAM also offers unique engineering solutions in the design and development of customised factory automation and materials handling equipment integration with vision inspection systems.
The aerospace segment specialises in precision machining for niche products with complex geometry such as aero-engine casing, fan casing, turbine casing and structural parts for aerospace applications that are made of aluminium alloys and other hard/tough materials such as stainless steel, titanium and nickel-based alloys.
Aerospace currently accounts for 60% of total revenue. This is expected to grow to 80% in the future, supported by strong demand for aircraft and the current backlog.
Airbus’ Global Market Forecast 2018-2037 report estimates that over the next 20 years, 37,390 new passenger and freight aircraft will be needed. Of these, 10,850 are to replace old aircraft and the remaining 26,540 new aircraft to cater for rising demand.
SAM’s aerospace division is currently manufacturing parts for aircraft with the highest backlog and demand. Most of the models are in the early stages of their life cycles. There is an average order backlog of seven to nine years for Boeing and Airbus aircraft, providing good earnings visibility for parts supply chain players such as SAM.
Meanwhile, demand for data storage is expanding, from consumers, enterprises and public clouds, as global data collected continues to grow. According to International Data Corp (IDC), the world’s data is expected to grow from 33 zettabytes in 2018 to 175 zettabytes in 2025.
Hence, we are optimistic that
SAM’s equipment division will benefit from this rising demand for cost-efficient storage devices — manufacturers of these storage devices will require machinery with greater efficiency and precision.
SAM is currently trading at a trailing P/E ratio of 13 times, which is relatively low for a defensive, high barrier to entry industry. Its dividend yield of 3.7% is also attractive, on top of its capital gain prospects. The company has low gearing of 20%, which is supportive of further investments in both the aerospace and equipment divisions.
DUOPHARMA BIOTECH
Duopharma is a manufacturer, distributor, importer and exporter of pharmaceutical products and medicines, and Malaysia’s leading local pharmaceutical company in terms of volume sales.
Duopharma has a dedicated inhouse R&D facility to develop new products. Its pharmaceutical drug (ethical classic) division is experienced in manufacturing a wide range of generic drugs. We believe the company will be able to expand its generic product offering with more than 20 drugs facing patent expiration in 2019-2020.
New products such as Basalog One, Erysaa, Daclatasvir and Factor 8 have been introduced to the market and small initial contracts to supply to the government have been secured. These new medications have long product life cycles — patients are required to consume them daily to either treat or suppress symptoms — and should therefore, contribute to long-term revenue growth.
The company also has a prominent presence in the over-the-counter market with notable brands such as Champs, Proviton and Flavettes. A growing middle class and awareness of health will encourage consumption of consumer
healthcare products.
Just over half of Duopharma’s revenue comes from the public healthcare sector (government contracts) and the remaining from exports (7%) and local private sector (41%).
The company has proved that it is price-competitive and able to secure government contracts from a merit-based open tender system. The consumption of pharmaceuticals will grow in tandem with population growth as well as increased awareness and accessibility to healthcare.
Meanwhile, its stakes in PanGen Biotech Inc, a South Korean biopharmaceutical company, and SCM Lifescience, a South Korean stem cell firm, are in line with its strategy to diversify into biotherapeutics and high-value niche products. Regulations on stem cell in Malaysia will come into effect in 2021. These investments will be beneficial as South Korea is ahead in terms of biotech technologies and stem cell regulations.
NESTLÉ ( M)
Nestlé is a household brand name and the world’s largest manufacturer of processed and packaged food and beverages. Since expanding into Malaysia in 1912, the company has become the country’s trusted brand of choice for consumers. Some of its most popular products include Milo, Koko Krunch, Maggi, Nescafe and La Cremeria.
The company’s long history has proved that it can navigate — and has successfully navigated — recessions and still come out ahead. It is constantly improving on its operating efficiencies and cost management through the tightening of internal controls and better management of its supply chain and distribution channels. In tune with the changing times, it has embarked on marketing via digital platforms to better reach its targeted audiences.
Nestlé recently expanded its Chembong factory in Negeri Sembilan. The RM90 million facility will be the world’s largest Milo manufacturing site and is expected to increase the production capacity of the beverage by 30%.
We foresee steady, if not overly exciting, demand growth for the company for the foreseeable future. Sales expanded at a CAGR of 4%, on average, between 2010 and 2018. The bulk of its sales is derived from the domestic market. That said, exports account for about 22% of its total production — it sells to more than 50 countries.
For the longer term, we see enormous potential for Malaysia as Nestlé’s global halal hub. It is already the biggest halal producer in the Nestlé world. According to the State of the Islamic Economy Report 2018/2019 by Thomson Reuters and DinarStandard, a sum of US$1.3 trillion was spent on halal food globally in 2017.
MUHIBBAH ENGINEERING ( M)
Muhibbah has grown steadily over the years, since its founding in 1972, to become one of the leaders in marine construction. Today, the company specialises in the provision of engineering and construction services to various sectors and operates in three main segments — infrastructure construction and cranes, marine shipbuilding and repairs, and concessions.
Muhibbah has successfully undertaken high-profile projects around the world, with activities spanning over 12 countries (such as the Philippines, Singapore, China, Australia, Qatar, the US, Denmark, Germany and the UK) on five different continents.
The company’s expertise in marine engineering is a major growth driver, particularly in the development of the floating regasification unit. This innovation integrates the sea transport, storage and distribution module, reduces shipping time and requires lower capital expenditure and operating expenses compared with onshore terminals.
Looking ahead, Muhibbah is aiming to secure two potential airport contracts in Kedah and Penang with a combined value of RM2.8 billion, via the new private finance initiative (PFI).
Another of Muhibbah’s key earnings driver is its Cambodia airport concession. The concessionaire owns three Cambodian international airports — Phnom Penh International Airport, Siem Reap International Airport and Sihanouk International Airport. Recently, it won the bid for the concession rights for Cambodia’s international airports until 2040, in partnership with France’s concessionaire giant, Vinci.
Passenger traffic at Cambodia’s international airports increased to an all-time high of 10.6 million in 2018 (see Chart 4), following capacity upgrades. There is sufficient land bank in the expansion pipeline for an additional annual combined capacity of 40 million to 45 million passengers across the three airports. The airports represented US$2.7 billion or 17% of Cambodia’s total GDP in 2015, indicating the importance of the aviation industry to the country’s economic growth.
The stock’s valuation is attractive. Muhibbah is trading at nine times trailing 12-month earnings, coupled with a decent return on equity of 13.4% in 2018. Meanwhile, enterprise value (EV) to Ebitda is at 9.2 times and dividend yield stands at 3.1%.
QL RESOURCES
QL Resources is a homegrown success story, from its humble beginnings as a local feedstuff trader to a multinational agro- food corporation now. The company is constantly innovating and evolving, adapting to the changing business environment.
At present, the company operates in three distinct sectors — integrated livestock farming (ILF), marine products manufacturing (MPM) and palm oil activities (POA). QL is one of Asia’s leading egg producers and surimi manufacturers. It also owns and operates the convenience store chain FamilyMart.
This latest diversification links its upstream manufacturing operations to downstream retail.
To date, QL has 142 FamilyMart stores across the Klang Valley, Johor, Negeri Sembilan and Melaka. It targets to have 170 stores within the year. Given the rapid expansion, QL is in the midst of developing a second centralised kitchen with the capacity to supply up to 250 stores within the next two years.
Prospects for the MPM sector is upbeat. The company recently acquired a piece of land in Kota Belut to increase its aquaculture annual production capacity to 5,000 tonnes, from the current 2,000 tonnes, over the next few years.
QL also plans to further allocate about RM150 million over the next three years to expand its egg and poultry production across Malaysia, Indonesia and Vietnam. It is targeting production to hit 1.85 million eggs per day (currently 0.85 million). Expansion plans include the acquisition of land in Vietnam and increased broiler production in Sabah and Sarawak to 20 million per year by 2022 (currently 15 million).
Meanwhile, expectations for higher CPO prices in 2020 bode well for its POA segment. QL is taking on a green initiative by building a presence in the sustainable palm oil sector through biomass clean energy.
Overall, we are convinced of its management’s ability to continue to create value for shareholders. This partly explains its prevailing premium valuation — the stock is trading at a P/E ratio of 57 times trailing earnings and EV/Ebitda of more than 27 times.
WILLOWGLEN MSC
Willowglen is a technological solutions provider with 45 years of experience in catering for the utilities, oil and gas, infrastructure, commercial and residential management sectors.
The company is involved in system integration and provision of both in-house software and hardware to assist companies in data collection, management, security and surveillance of mission critical operations. Products and services provided include SCADA (supervisory control and data acquisition), IMS ( integrated monitoring system), ITS (intelligent transport system) and IIoT (industrial IoT).
Willowglen’s current main markets are Malaysia and Singapore, with the latter contributing 82.87% to total revenue in 2018. For the new decade, Asean will be the next growth area. The company is currently exploring expanding into the Vietnamese market, for smart building management and utilities management systems.
The company is well positioned to take advantage of the expected investments in the transport and utilities network as demand for mobility, connectivity and electricity increases in the region. We believe the Malaysian utility sector could also be a huge potential area of growth in the coming years, as utility companies look to upgrade their systems.
Willowglen’s track record, reputation and consistent investments in R&D have played an important role in its ability to secure recurring contracts from reputable clients from various countries for maintenance and upgrades.
Development in Willowglen’s AI unit is in line with the progression towards minimal human intervention in performance management applications and Industry 4.0 applications. Consistent investments in R&D enable continuous innovation and relevance to maintain its market leading position.
Willowglen’s business is highly scalable and we remain upbeat about its prospects considering the increasing need for performance monitoring as industries move towards centralised monitoring and management.
The company has a healthy balance sheet with a large net cash position to fund future projects and research. Net cash of RM83 million is equivalent to just under one-third of its current market capitalisation.