Company Notes 2017.12.08

SCGM Q2 FY2018 Results

The Group foresees the new Kulai factory targeted to be completed in the fourth quarter of current financial year ending 30 April 2018 will contribute positively to its future revenue and net profit following the expansion of its production capacity and installation of new production lines.

Cautious response to Top Glove buy

There is so much upside to the new deal in the making, considering the surgical gloves business offers higher margins due to its product quality, technology and the research and development involved in its production. It is also a market that has high barriers to entry that confront many glove players in a rapidly growing global healthcare industry.

“Our indicative US dollar cost of funding range from 2.5% to 3%, whereas ringgit borrowings cost is at 4.5% to 4.8%, a difference of around 1.5% – which translates to around RM19mil savings per annum,” he says. Therefore, a dollar loan will give us a perfect natural hedge, in the event of currency fluctuations. Ringgit borrowings, may result in mismatch due to the inflow of sales proceeds in dollars,” he elaborates.

“New expansions that has kicked off in the last few years will start generating cash and this will improve our cash flow in FY18. This will be more than sufficient to meet our organic expansion capex of around RM200mil to RM250mil.”


Kelington set to be lifted by gases

The contract, which involves on-site supply of nitrogen gas to a photovoltaic cell manufacturer in Malaysia, will provide a long-term revenue of about RM20mil over a period of ten years.

“We started our operations seventeen years ago to provide ultra high purity (UHP) gas delivery solutions to the electronics and semiconductor industry, which is still our mainstay business. Given our long-built experience and expertise in the field, it is relevant for us to penetrate the industrial gas segment in order to provide an end-to-end service. The venture into the industrial gas segment is a step in the right direction as it is synergistic with our existing core business. In fact, our clients consist of electronic manufacturers who utilise gases in their manufacturing processes.”

Kelington plans to invest up to RM60mil to build a carbon dioxide gas purification plant, which is anticipated to contribute revenue from FY19. “The new venture complements our existing project-based business model of providing engineering services which are usually completed within six to 12 months. In the coming years, demand for liquid carbon dioxide is expected to grow further on the back of rising demand in the food and beverages industry as well as the upcoming roll-out of large infrastructure and construction projects.”


More build-to-suit projects to come — Axis REIT

With limited “Grade A” assets in the market, allowing REITs to embark on build-to-suit projects will enable Axis REIT to create their own “Grade A” assets, said Leong, adding that the promoters of the REIT were previously “builders of industrial assets”. As REITs are only allowed to develop up to 15% of their portfolio, Leong said Axis REIT cannot proceed with redeveloping Phase 2 of the Axis PDI Centre as Phase 1 already takes up about 10% of their assets under management (AUM). Currently, the Phase 2 of Axis PDI Centre is still generating income as a storage yard for cars.

Over 12 years, the REIT’s portfolio has grown from five properties to 39 properties comprising 7.6 million sq ft and 132 tenants, with a total AUM of RM2.25 billion in size. “The yields for our property are pretty good. Overall our portfolio [yield] is almost 9% [per annum],” said Leong. The REIT is targeting to reach RM3 billion in AUM next year, and is looking at yield-accretive acquisitions. With the conclusion of a private placement two weeks ago that raised RM178.75 million, Leong said the exercise will enable Axis REIT to reduce their gearing to 29% from their current 36%. “[With] that, we will be able to allow more breathing space to provide a war chest for Axis REIT for growth next year,” said Leong.


Pensonic now at a crossroads, says CEO

“We have to allocate resources for future businesses to seek transformation in the next five to 10 years. Being in the home appliances segment, we missed out on the mobile phone and personal computer wave in the 1990s till 2000s. We want to make sure we don’t miss out on this digital age, particularly the IoT and wearables segment, which is why we have a consortium with some industry players to come up with a product or concept for the future.”

Pensonic has put together a team to focus on the e-commerce platform and is spending about RM500,000 for the infrastructure, Nelson said. Moving forward, its 700 retailers nationwide will also double up as pickup centres for customers, he said. On smart products, he said some 10 categories of appliances have been identified for value adding, where the group will incorporate the aspect of IoT into the products, which will take into account the evolving needs of customers.


Ajinomoto eyes 50% sales growth in two years

“Ajinomoto Thailand, Vietnam and Indonesia are already experienced in diversification, so Malaysia can leverage from their know-how when pursuing this,” Yamamoto said at a briefing on the group’s first half results yesterday.

This year’s performance, Yamamoto said, will be driven by strong sales from its consumer to business segment, supported by product diversification efforts and pricing strategy. But she cautioned that rising production cost could limit its near-term profit growth.

Saudi Arabia is a major export market for Ajinomoto, followed by the United-Arab Emirates and Oman, among other markets in the Middle-East.


GDex expects mid-teen growth in FY18 revenue, says MD

However, stiff competition and the group’s ambition to expand “aggressively” both domestically and regionally over the next few years are likely to add further pressure to the courier service provider’s margins, he said.

This will include allocating between RM30 million and RM50 million per annum for capital expenditure (capex) over the next two years to double its handling capacity, which currently stands at 120,000 parcels a day.

Outside Malaysia, the group only has a presence in Indonesia via its subscription to PT Satria Antaran Prima’s convertible bonds, which it has until 2021 to exercise. Although Teong foresees the local courier industry consolidating in the near future, he said GDex will focus on organic growth in Malaysia instead of considering further acquisitions.


Astro to invest RM100m in JV

“The JV will extend Astro’s online presence among the Malay-language audience, propel its combined monthly unique visitors to approximately 10 million, and is in line with its goal to build Nusantara and Islamic content verticals. In pursuit of our journey of reinvention, Astro is embracing change brought about by digital and mobile while staying true to our core as a consumer-first company. Regionally, we will forge complementary win-win partnerships, as well as identify strategic and opportunistic investments for our growth portfolio, as well as giving us a seat at the table to learn from value creators and disrupters of the future.”


Gamuda says construction supply chain ‘overstretched’

Local contractors may face cost pressures from a tightening supply chain in the years to come as mega infrastructure projects begin rolling out.

Though Gamuda has been touted as one of the biggest potential beneficiaries of the East Coast Rail Link (ECRL) project, Lin observed that “foreign funding usually comes with foreign participation”. “In an ironic sense, foreign participation can actually help ease the pressure on the [local] supply chain. But [these projects] will miss out on the benefits of localisation,” he said, adding that the government will have to weigh these factors in making any decision.


Acoustech exits audio business

“The disposal of the unprofitable audio segment will allow the group to focus on and utilise its resources solely for its core segment — property development. The divestment will eliminate any further erosion of the group’s profits that may result from the audio segment’s poor performance.”

“The proposed acquisition will allow the group to consolidate its supply channel and improve efficiency, resulting in longer-term cost savings and to ensure continuous supply of speaker units. By consolidating the supply chain, our group is expected to maintain better quality management and expand the future range of products that it can market to its customers. Currently, the board does not expect additional financial commitment to maintain FPT’s business. [However,] the management expects that further investments in FPT will help generate returns in the longer run through cost savings and faster turnaround for production requests. Therefore, Formosa Prosonic’s management expects FPT’s prospects to be favourable in the longer term based on the anticipated improvement in global demand for consumer electronic products.”

Move over tech. Here come Southeast Asia’s builders

With at least $323 billion in infrastructure spending in the pipeline in Southeast Asia and potentially more expected over the next few years, 2018 could well shape up as the year of builders’ stocks from Indonesia to the Philippines that have been the laggards in a broader market rally this year.

“Infrastructure has been under invested whether it’s clear water, clean air, energy, roads, ports, railways, education, health care — so there are tons of opportunities.”

Malaysia has allocated 210 billion ringgit ($51.6 billion) for projects in the 2018 budget of which 73 percent will go rail and public transport. About 55 billion ringgit allocated to East Coast Rail Link, 50 billion-60 billion ringgit given to Kuala Lumpur-Singapore High Speed Rail and 40 billion ringgit to phase 3 of the mass rapid transit system. Rail, affordable housing, roads and water infrastructure are major segments that will benefit from government’s spending next year, Sharizan Rosely, an analyst at CIMB wrote in a report dated Oct. 30. General election due by August 2018. Biggest construction companies: Gamuda Bhd., IJM Corp. Bhd., Sunway Construction Group Bhd., Malaysian Resources Corp. Bhd.


Klang Valley retail occupancy rate at 5-year low

“As of 3Q17 (third quarter of 2017), total retail stock in [the] Klang Valley stood at 61 million sq ft and estimated pipeline supply for those under construction is currently estimated at 16 million sq ft, comprising 23 projects. This implies an overall growth of 26% to current stock. In recent years, we have witnessed a mall closure in Petaling Jaya, and increasing occupancy stress, low footfall and retailers’ turnover, in some of the newer [and older] malls, matched by slower or worse, no rental growth and [an] increasing need to provide for tenants’ incentives.”

“Some of the newer malls have been struggling to establish market share that is getting more fragmentary and diminishing. “Construction of [the] mass rapid transit network has spurred a wave of transit-oriented developments, and more retail space supply can be expected along the train ride, resulting in overlapping catchments and intensified competition. It is and will continue to be very much impacted by the ongoing structural changes in the market, and not a normal supply-demand disequilibrium, that in the past could be resolved through the passage of time, rising affluence and population.”


Gas price hike to raise steel makers’ costs by RM200m a year

The average natural gas base tariff will be revised upwards by RM3.85 per MMBtu or 14.23% from RM26.46 per MMBtu to RM30.90 MMBtu for the non-power sector, including steel producers, in Peninsular Malaysia from Jan 1 to June 30, 2018. In addition to this, under the new gas cost pass-through (GCPT) mechanism, a surcharge of RM1.62 per MMBtu will apply to all tariff categories due to the higher liquefied natural gas price against the reference price in the base tariff during this period. This translates to an average effective tariff of RM32.52 per MMBtu across all categories, at an average increase of RM6.06 per MMBtu or 22.90%.


A lift for small developers

Smaller property developers will no longer need to just rely on bank financing to ease their cash flows. They can monetise upfront from the cash flows of their billings via a bond issue which potentially takes away businesses from banks.

“This will disrupt property financing in Malaysia, especially for bankers depending on businesses from small developers. Typically, developers need to wait for the three-year construction period before they are able to collect their portion of the development cash flows. For the smaller developers, liquidity is a huge issue.”


Ensure Chinese investments offer locals high-skilled jobs too

But to Wan Saiful, while MCKIP promises high-value investments and to grow the Malaysian economy, the immediate jobs created there have been mostly low-skilled construction jobs. Further, he thinks future jobs will likely be factory-based and that it is uncertain how locals can be transitioned into higher-level jobs once investors leave.

Likewise, he said tens of thousands of jobs have been created for locals in Africa via Chinese investments. “However, these have mostly been low-skilled,” he added. Citing a 2014 academic survey, he said among the 400 companies that invested in 40 African countries 80% to 97% were low-skilled roles which were occupied by locals.

Leave a Reply