“`html
| Investment Bank | TA SECURITIES |
|---|---|
| TP (Target Price) | RM0.25 (+25.0%) |
| Last Traded | RM0.20 |
| Recommendation |
A recent investment bank research report highlights a mixed financial performance for the half-year (IHFY26), with revenue growth tempered by currency headwinds impacting profitability. Despite these near-term pressures, the outlook remains positive, driven by significant strategic initiatives including the commissioning of a new manufacturing plant with substantial tax incentives and promising developments in the property sector.
Performance Review
For IHFY26, the company reported a 3.7% increase in revenue, primarily buoyed by robust volume growth and a stable average selling price. However, adjusted Profit Before Tax (PBT) saw a year-on-year decline of 3.1%. This profitability dip is largely attributed to the appreciation of the Ringgit against the Australian Dollar (AUD), which negatively impacted margins, given that approximately 30% of revenue is denominated in AUD. Analysis suggests that a 1% rise in the Ringgit’s value against the AUD could lead to a 2.3% reduction in earnings.
While currency strength presents challenges, it also offers advantages. The stronger Ringgit is expected to reduce the cost of machinery for the new Kulim East manufacturing plant, as RM100 million of the total RM270 million capital expenditure is denominated in USD. Additionally, anticipated cuts in US interest rates in 2026 are expected to lower interest payments on the USD-denominated loan secured for machinery purchases, partially offsetting the adverse currency impact on revenues. Management projects that margin pressure will persist through 2026 if the Ringgit remains robust.
Strategic Developments and Future Outlook
The company is actively pursuing several strategic initiatives designed to drive future growth. The new manufacturing plant in Kulim East is slated to commence operations in 1QFY27, following machinery delivery from China this month and subsequent on-site installation and trial runs. A key financial advantage for this new facility is a 5+5-year tax holiday, which will commence once production capacity reaches 30%, providing a significant buffer against potential currency-related earnings impacts.
In the property segment, the joint venture, Nexel Group, plans to launch Phase I of a serviced apartment project in Tanjung Malim, with an estimated Gross Development Value (GDV) of RM300 million. The recognition of the land sales gain for Tanjung Malim Phase I is now expected in FY28, a revision from the previous FY27 forecast. Furthermore, the company will submit a water concept plan to connect the water source to its Tanjung Malim project site, involving an investment of approximately RM5-6 million for piping. Demand in Tanjung Malim is projected to be robust, partly fueled by the establishment of a BYD plant in the area. The acquisition of 9.6 acres of freehold land in Kulim High-Tech Park has also become unconditional.
Considering these developments and updated currency forecasts, the investment bank has revised its earnings projections. FY26 and FY27 earnings forecasts have been trimmed by 5.9% and 36.5% respectively, primarily due to the stronger Ringgit against the AUD and a revised timeline for property contributions. Conversely, FY28 earnings projections have been raised by 24.2%, factoring in the delayed land sale gain recognition and the launch of the Tanjung Malim Phase 2 residential project (with an estimated GDV of RM600 million) in FY28.
Investment Recommendation
TA Securities maintains a ‘BUY’ recommendation, with a revised target price of RM0.25. This target price represents a significant upside of 25.0% from the last traded price of RM0.20. Despite current currency-induced headwinds, the firm believes the company’s strategic expansions, particularly the tax-exempt new manufacturing facility and the promising pipeline of property projects, are well-positioned to underpin strong future earnings growth.
“`
