Velesto Energy ‘buy’, Gadang ‘buy’, Three-A ‘outperform’, Pentamaster ‘add’
VELESTO ENERGY BHD
By UOB KayHian
Buy
Target price: 35 sen
OPERATING seven jack-up (JU) rigs in Malaysian waters, Velesto is in a sweet spot, benefitting from a surge in Petronas’ yearly JU rig requirement from six to 10 and 16 to 19 for 2019 to 2021.
The only other local competitor is troubled entity, Perisai Petroleum, which owns one JU rig.
Many new contracts are awarded to foreign rigs and Velesto has secured six to seven year-to-date, including four long-term contracts.
UOB KayHian expects local JU rig demand to be largely reflected in the second half of 2019, implying more contract news flow for Velesto.
In line with global rig cost deflation, Velesto’s daily earnings before interest, tax, depreciation and amortisation (EBITDA) breakeven declined 70% from 2014 to US$30,000 in 2018.
Velesto has emerged leaner after a RM1.8bil rights issue and restructuring/impairments. Daily profit breakeven is estimated at less than US$60,000. In 2018, the daily profit breakeven was US$56,000.
“We expect Velesto to be profitable if utilisation exceeds 71%.
“Due to huge local rig demand and recovery in regional rig rates, we expect Velesto’s rates to increase to US$71,000 although offset by incremental depreciation on five-year special periodic surveys for two rigs per year,” said UOB KayHian.
The increases in rates and utilisation are positive, but utilisation is the bigger swing factor in Velesto’s fundamentals.
The research house expects utilisation to recover to about 78% for 2019.
Velesto’s contract mix has been increasingly long term with average tenure of one year, which is a positive as it may help reduce volatilities in future quarterly utilisation.
“In the past, Velesto’s long-term contracts contained negative earnings surprises due to non-work periods and terminations.
“Moving forward, we understand contractual terms for non-work periods under the new long-term contracts are becoming favourable and will help limit downside risks.
“We project utilisation for the first and second half of 2019 at 67% and 90%, respectively,” said UOB KayHian.
The first half of 2019 would be affected by monsoon, while an expected stronger second half assumes Velesto will secure another two rig contracts.
Thus, the research house expects a small RM9mil loss for the first half of 2019.
“Nevertheless, markets are well-guided and may look beyond a weak first-half 2019, as we expect strong profit of over RM45mil by second-half 2019.”
GADANG HOLDINGS BHD
By RHB Research
Buy
Target price: 95 sen
THE financial year ending May 31, 2019 (FY19) has been relatively uneventful for Gadang, as it secured new orders amounting to RM136mil as compared to RM475mil in FY18.
The new orders comprised two Tun Razak Exchange (TRX) packages and a fire fighting facility for Rapid Pengerang.
The group’s outstanding construction order book stood at RM1.3bil compared to RM1.6bil a year ago.
The management highlighted that it has been focusing on completing existing jobs to ride out the period of uncertainty.
It is noteworthy that the upcoming completion of the Rapid contract is in June, where Gadang has submitted a variation order that could be recognised in the first half of FY20, if approved.
Gadang also announced that it is forming a pre-bid consortium with DWL Resources Bhd and will take up a 10% stake in the company for RM18mil.
The group views this as a strategic move as it allows both companies to leverage on each other’s strength to improve their chances in tenders.
Additionally, Gadang noted its interest in participating in the pre-qualification tender for the East Coast Rail Link, as well as tenders for further TRX, Rapid and hospital projects in order to replenish its construction order book.
As for its property division, Gadang’s unbilled sales stood at RM93mil as at Feb 2019, down from RM134mil last year, with only one new launch in Dec 2018 – Putra Perdana which has a gross development value of RM173mil.
Gadang has also revised the joint-venture terms for its Capital City project in Johor Bahru, where it is the landowner.
The revised terms, if approved, could see the company realising RM100mil worth of contra properties as balance payment for its revised RM250mil entitlement sum.
THREE-A RESOURCES BHD
By Public Invest Research
Outperform
Target price: RM1.13
THREE-A Resources’ (3A) revenue for the first quarter of financial year 2019 remained unchanged year-on-year (y-o-y) at RM102.5mil while net profit of RM7.5mil improved by 20% y-o-y due to lower tapioca prices during the current quarter as compared to the corresponding quarter in FY18.
Sales in the local market slipped by 4% y-o-y.
Stronger export market sales has helped to offset the impact of weaker sales in Malaysia.
Revenue in Singapore and other countries grew by 24% and 4.6% y-o-y, respectively.
However, when compared to the immediate preceding quarter, revenue decreased by 14.8% mainly due to the lower sales volume.
Going forward, Public Invest Research is forecasting a 5% compound annual growth rate for FY19 to FY21, driven by diversification in product offerings and better sales contribution from the new maltodextrin production line.
Pre-tax profit for first-quarter of FY19 jumped 45.5% y-o-y, which was mainly attributed to lower raw material price levels compared to last year and higher average product selling prices.
On a year-to-date basis, global tapioca prices have been trending sideways thus leading to an improvement in operating margins.
“Nonetheless we are positive as we expect to see improvement in margins for FY19 in view of falling global tapioca prices, supported by better contribution from the third plant for maltodextrin, which will provide better economies of scale and cost optimisation.
“We are generally optimistic on 3A’s long-term prospects and continue to favour 3A due to its expertise and consistency in supplying varied types of high quality food and beverage ingredients, establishing strong rapport with large multinational corporations within the industry, stronger production capacity and expansion plans as well as continuous emphasis on research and development initiatives resulting in new product developments,” it said.
PENTAMASTER CORP BHD
By CGS-CIMB
Add
Target price: RM5.40
PENTAMASTER posted another record quarterly net profit in the first quarter of 2019, driven by higher sales delivery from automated manufacturing solution (AMS) and automated test equipment (ATE) divisions, which grew by 125% and 10% year-on-year (y-o-y), respectively.
Earnings before interest, tax, depreciation and amortisation (EBITDA) margin expanded by nearly 10 percentage points to 27% in the first quarter of 2019.
Overall, the group’s net profit rose 2.7 times y-o-y to RM19.6mil in the first quarter, as compared to RM7.3mil in the same quarter last year.
The group’s telecommunications segment registered 8.5% y-o-y revenue growth in the first quarter, driven by strong demand for smart-sensor test equipment and solutions to support rising smart-sensor proliferation in next-generation mobile devices.
The group expects the demand for smart sensor equipment to stay healthy for the rest of 2019.
In addition, automotive and consumer electronics registered positive sales growth, which helped to offset the decline in the semiconductor market.
Pentamaster has an outstanding order book of about RM252mil, based on purchase orders secured from its customers as at end-March 19. ATE segment made up nearly 90% of the outstanding order book, and AMS the remaining 10%.
The group expects to deliver the orders in the rest of 2019 and the first half of 2020.
“We expect Pentamaster to deliver 18% net profit compound annual growth rate in FY18 to FY21, driven by higher tester sales volume on the back of rising content volume for 3D-sensing applications in smartphones and stronger earnings growth from i-ARMS.
“This will be achieved on the back of rising demand for multi-layer ceramic capacitor or automotive applications.
“We also expect the group’s AMS portfolio to successfully penetrate the Chinese market,” said CGS-CIMB.
Source: TheStar