Brokers Digest: Local Equities – EITA Resources Bhd, Aeon Credit Service (M) Bhd, Sports Toto Bhd, Coastal Contracts Bhd

Resources EITA Bhd

Target price: 92 senses TO ADD

CGS-CIMB RESEARCH (OCT 3): We believe that EITA may have been undervalued as investors may have overlooked its intrinsic value and business model.

The stock has fallen 15% year-to-date despite the group’s 9MFY22 core net profit improving 10.5% year-on-year. Its forward valuation over 12 months therefore fell from six times on December 31, 2021 to 4.9 times on September 23, 2022.

We believe that one of the main reasons why this counter did not receive a fair rating is the lack of institutional presence, with only 3% of its shares held by institutions.

Certainly, the low institutional participation could be due to its low liquidity. Still, the stock could appeal to investors looking for small-cap companies that offer steady earnings growth, as it posted steady earnings despite 2020/21 lockdowns and generated an average dividend yield of 4. 2% over the past five years.

Elevator manufacturing and servicing is a lucrative business due to strong cash generation from recurring customers. It also does not require much capital investment as the business depends on its manpower and engineering capabilities. Although EITA is a relatively new player, it has made inroads in other Southeast Asian countries and even in the Middle East. The group also has expertise in other electrical engineering businesses, such as the construction of pipelines and electrical substations. With Southeast Asia rapidly modernizing, we believe it would be easier for other budding elevator manufacturers looking to venture into the region to acquire an already established competitor. In our opinion, EITA fits the bill for an acquisition target.

Our target price of 92 sen values ​​the stock at just a CY23F PER of nine times, which is 70% below the historical weighted average of global EITA peers. The target PER is above its average PER of 6.4 times over the last five years to reflect its EPS CAGR of 5.9%. Downside risk: the manufacturing segment continues to weigh on earnings.

Aeon (M) Bhd Credit Service

Target price: RM16.95 SURPASS

RESEARCH KENANGA (3 OCTOBER): We maintain our “outperformance” call but reduce our target price from RM17.20 to RM16.95 on slightly more conservative cost of credit data after the analyst briefing. We still believe the group could generate sustainable earnings as it balances slightly more conservative quality expectations with steady expansion of its funding portfolios. Meanwhile, the group’s digital banking rollout schedule looks promising, reported to be ahead of Bank Negara Malaysia’s target.

We reduced our FY23 earnings by 8% taking into account higher credit costs (to 3% from 2.5%) against a possible increase in B40 defaults resulting from inflationary pressures. That said, our FY23 funding growth forecast of 9% is below the group’s 10% target, but is fairly reflected in year-to-date performance. Meanwhile, our FY24 numbers are relatively flat.

Compared to conventional banking institutions, Aeon Credit shows an ROE above 20%, but with more moderate dividend yields (4% to 5%). We continue to expect sentiment for the stock to improve with subsequent updates as an indicator of better gross domestic product output and with its Islamic digital banking license allowing it to deliver new value propositions to investors. clients. The risks associated with our call include: (i) lower than expected receivables growth, (ii) extension of the moratorium, (iii) higher than expected impairment losses and (iv) lower than expected reversals.

Sports Toto Bhd

Target price: RM2.43 TO BUY

HONG LEONG INVESTMENT BANK RESEARCH (OCT 4): With the current market volatility and a growing risk of recession, Sports Toto stands out thanks to its stable results profile supported by its resilient business segments.

Its two business segments – numerical forecast operator (NFO) and luxury car dealership – are relatively resilient in a recessionary environment.

Additionally, we expect the group’s dividend payout to normalize in FY23, supported by: (i) the recovery of NFO activity, (ii) the absence of a prosperity tax and ( (iii) the absence of major capital expenditures. We estimate the FY23 DPS at 14 sen, which translates to an attractive yield of 8.2%.

Illegal NFOs continue to be the biggest threat to legal NFOs, with the market size for the former estimated to be around twice the size of the latter. Illegal operators had taken advantage of the closure of NFOs during the movement control order to expand their online operations and offer 4D games in other countries such as Singapore and Cambodia. The estimated tax revenue loss to the government due to illegal operators is around RM5 billion per year.

Legal NPOs, including Sports Toto, are in active discussion with the Ministry of Finance to allow them to go online. We believe that the Ministry of Finance is well aware of the loss of tax revenue for illegal operators and therefore going online will be an imminent path for legal NFOs in due course.

Coastal Contracts Bhd

Target price: RM2.60 TO BUY

TA TITLES (OCT 4): Key takeaways from our recent meeting with Coastal management include: (i) payment collection for the EMC Papan engineering, procurement and construction (EPC) contract is expected to accelerate and amounting to a hefty sum of US$196 million (RM910 million) in 1HFY23, (ii) Coastal’s ongoing bids for Pemex projects (award dates: as of 4Q2022) include a oil as well as a gas conditioning plant in Ixachi, (iii) the shareholder loan provided by Coastal to finance the construction of Perdiz could be settled by October, thanks to strong operating cash flow from the plant, (iv) at this point, management’s preferred mode of financing for new upcoming projects is debt financing, and (v) management is comfortable leveraging up to net debt of 0.5 to 0.6 times.

Currently, the group’s balance sheet remains healthy, with net debt at 0.2 times and cash at RM223 million. The group’s liquidity is expected to improve further in the short term following the receipt of large payments for the EMC Papan EPC contract.

We think valuations and earnings are poised for a reassessment if the group secures another major project. The potential for the latter in the short to medium term includes a third gas conditioning plant in Ixachi, a new jack-up gas compression service unit or a new oil processing plant for Pemex.

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