This article first appeared in Capital, The Edge Malaysia Weekly on September 11, 2023 - September 17, 2023

Target price: RM1.20 OUTPERFORM

PUBLICINVEST RESEARCH (SEPT 5): S P Setia is expected to see better earnings in the coming quarters, supported by contributions from overseas operations and a stronger balance sheet. It expects to improve its net gearing gradually (0.55 times as at 2QFY23 to 0.5 times by end-FY23), underpinned by non-strategic land sales of about RM1 billion, completion of overseas projects (about RM1 billion) and unbilled sales, which stood at RM6.82 billion as at 2QFY23.

Going forward, we understand that the developer will continue to strengthen its balance sheet by unlocking the value of its investment assets (worth RM5 billion) and rightsizing its land bank (6,870 acres with an estimated gross development value [GDV] of RM126 billion). On a stronger footing, the group will embark on unveiling more new projects and townships which include Setia Federal Hill (GDV: RM20 billion, 52 acres) which could be jointly developed with strategic partners to alleviate capital commitment and expand marketing reach.

We maintain our “outperform” call on S P Setia but increase our target price from 95 sen after narrowing our discount from ~70% to ~60% (vis-à-vis the sector average of ~0.5 times NTA). We believe its target of 0.5 times net gearing is within reach, supported by the sale of non-strategic land bank and the delivery of overseas projects.

Consistent with its strategy to rightsize its massive land bank, the group thus far has disposed of two large tracts of land: one to Mah Sing Group Bhd (500 acres for RM392 million in June) and the other to a Scientex Bhd joint venture (959.7 acres for RM547.7 million). Combined, the two deals are expected to generate about RM940 million for the group, which we estimate is already sufficient to bring down its net gearing to about 0.5 times. In addition to these land deals, the group has about RM6.8 billion of unbilled sales, of which overseas projects totalling about RM1.1 billion are targeted to be delivered by end-2023.

The group has a myriad of investment assets worth RM5 billion, which include the luxury Shangri-la Melbourne, malls (Setia City Mall, Setia Walk and KL Eco City Mall), offices (Mercu 2 and Aspire Tower at KL Eco City), schools (Tenby schools at Eco Park, Eco Gardens and Eco Hill) and convention centres.

Target price: RM2.50 OUTPERFORM

KENANGA RESEARCH (SEPT 5): Power Root is stepping up its promotional efforts, expanding its product offerings and strengthening its brand visibility amid softening demand in the domestic market. In the Middle East, its sales should pick up as its distributors restock and after it overcomes some teething problems with a new distributor.

Domestically, the company is intensifying its marketing efforts, focusing on its under-promoted white coffee, Ah Huat Café, and has enlisted popular Malaysian entertainment figure Sean Lee as the brand ambassador. It also plans to introduce Jom Teh, a new mamak teh tarik variant, targeting the 3-in-1 premix tea market.

Power Root anticipates maintaining its gross profit margin at about 51% on the back of: (i) stable raw material prices, where coffee bean prices have been secured until March 2024 while creamer costs (mainly dairy-based) have been fixed until August 2024; and (ii) the absence of elevated inventory costs, thanks to its inventory reduction in recent months. The company will not significantly raise its dividend payout despite a strong net cash position of RM107 million. It aims to allocate RM20 million to capex over the next five years to expand its product line.

Target price: RM8.70 BUY

RHB RESEARCH (SEPT 5): We raise our target price from RM8.31. We continue to favour Malaysia Airports premised on the salient recovery of international tourism numbers from China and Turkiye. The Malaysian Aviation Commission’s Third Consultation Paper is expected to be published this month, which we believe will finally nail down the gazetted passenger service charges for Regulatory Period 1 (2024-2026).

Though it may be too ambitious to see a full recovery in FY23, recovery is undoubtedly underway for China’s outbound visitor market. We are positive that international tourism may improve further from 4Q23.

We expect Sabiha Gokcen International Airport’s international traffic momentum to sustain in 2H23, in view of the strong year-end seasonality factor and upcoming new airlines and routes. We adjust FY23 traffic assumptions to better reflect the upside potential from the Turkiye operations as previous assumptions were a tad conservative. We also revise Malaysia’s FY23 international passenger movements to 92.5 million from 99.9 million to reflect a slower recovery pace. We revise our FY23-25 earnings by -3%, +9% and +12% to account for the net effect of a delayed recovery from China and stronger international tourism movements in Turkiye going forward.

Target price: RM3.56 BUY

MAYBANK INVESTMENT BANK RESEARCH (SEPT 3): We expect 49%-owned Thai AirAsia X (TAAX) to contribute sizeable earnings going forward, thanks to its recently concluded debt rehabilitation (DR). The fare environment in Thailand is more favourable than in Malaysia and we expect it to remain as such in the near term. We raise FY23/FY24/FY25 core net profit for AAX by 7%/47%/41% and migrate our valuation basis to 2024 PER of six times from 2023 PER of 10 times, as well as raise our target price from RM3.01. The next catalyst is the lifting of its Practice Note 17 classification.

TAAX completed its DR on Aug 3. Unlike Malaysia’s AAX, it will not have to share its profit with creditors going forward. More importantly, the DR means that AAX will equity account for its share of TAAX’s net profit. This is significant because the latter has not contributed its profit to AAX since commencing operations in 2013. Note that for 6M23, TAAX’s core net profit of RM98.8 million was much higher than AAX’s RM8.7 million.

Our forecasts are premised on the eight Airbus A330s that TAAX currently has, but it plans to increase that number to 17 over the next five years, thus we believe we are being conservative in our estimates.

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