Brokers Digest: Local Equities: Solarvest Holdings Bhd, Press Metal Aluminium Holdings Bhd, Lee Swee Kiat Group Bhd

This article first appeared in Capital, The Edge Malaysia Weekly on April 22, 2024 – April 28, 2024

Banking

MARKET WEIGHT

UOB KAY HIAN RESEARCH (APRIL 15): As the five digital banks prepare to commence operations in the coming months, we anticipate a focus on deposit acquisition, potentially impacting sector net interest margins (NIM) slightly.

Bank Negara Malaysia granted digital banking licences to five entities (see Table 1). GX Bank has been officially launched, setting the bar high for deposit rates with a daily interest rate of 5% per annum and non-campaign rates at 3% per annum. In comparison, conventional banks are offering lower fixed deposit campaign rates of 3.6% to 4.1% for tenures of 3 to 12 months and non-campaign interest rates ranging from 2.65% to 2.7% for similar tenures (see Table 2).

Boost Bank and Aeon Bank are still in alpha testing mode, offering services exclusively to a select group of customers before a full launch. SEA-YTL and KAF digital banks have yet to launch their services.

As other digital banks commence full operations, we anticipate they will also offer competitive deposit interest rates calculated on a daily basis. This expectation is due to the importance of deposits in fuelling asset growth, particularly for new digital banks in their initial operational stages.

Asset thresholds will help to partially maintain some form of discipline. However, with digital banks required to maintain assets of less than RM3 billion and a minimum capital fund of RM100 million, the total potential deposit pool amounts to only RM14.5 billion, representing less than 1% of the total banking system’s deposit base. This limitation should help mitigate overly irrational competition for deposits among conventional banks.

Sector valuations have risen to a historical mean P/B of 1.1 times, which appears fair against the forecast ROE of 10% and earnings growth of only 6% versus our KLCI earnings growth assumption of 11%. This is primarily due to factors such as NIM remaining flattish with a slight downside risk; an anticipated slowdown in non-interest income growth; and an absence of material credit cost tailwinds. Overall, sector dividend yields are attractive (surpassing 5%) with stable asset quality. We maintain our MARKET WEIGHT recommendation for the sector.

Our top sector pick is CIMB Group (BUY, RM7.33 target price), closely followed by (defensive) Public Bank Bhd (BUY, RM5.10 target price). Our preference for CIMB is based on its high beta, having the highest foreign shareholding among the banks and strong ROE trajectory. These factors position the stock favourably to capitalise on a growing risk-on investment environment.

Solarvest Holdings Bhd

Target price: RM1.76 BUY

MAYBANK INVESTMENT BANK GROUP RESEARCH (APRIL 15): Solarvest proposed a private placement of up to 40.2 million new shares at an indicative issue price of RM1.41/share (a 9% discount from the closing price), raising approximately RM56.7 million primarily for capital expenditure required for its Corporate Green Power Programme (CGPP) and commercial and industrial (C&I) rooftop solar projects. Subject to required approvals, the proposed private placement is expected to be completed by 2QCY24 and will dilute our FY25/26E EPS estimates by -5.6% each.

We have yet to impute new income from the secured CGPP projects, pending finalised details. We understand that management is currently pursuing potential EPCC (engineering, procurement, construction and commissioning) project opportunities of around 443.4mw under the CGPP for order-book replenishment in 4QFY24. Solarvest has also secured potential local corporate power purchase agreements (PPAs) of about 110mw under Powervest and overseas projects of 23.5mw. We expect Solarvest to continue growing its order book, capitalising on 800mw CGPP projects as well as new renewable energy quotas for the 2GW Large Scale Solar 5 programme and the 500mw quota under the Net Energy Metering scheme.

Press Metal Aluminium Holdings Bhd

Target price: RM4.65 HOLD

HONG LEONG INVESTMENT BANK RESEARCH (APRIL 15): We expect 1Q24 core earnings to come in at RM330 million to RM350 million, representing 21% to 22% of our FY24 forecasts.

Alumina price rose 8% quarter-on-quarter (q-o-q) to RMB3,241 (RM2,140.74) per tonne in 1Q24, which may drag smelting margins but could be mitigated by a slightly better contribution from its associate PT Bintan via a higher alumina average selling price. Although the Main Japan Port (MJP) premium in 1Q24 still lags rising freight costs, it has likely caught up from 2Q24 as the MJP premium jumped 60% q-o-q to US$145 (RM693.50) per tonne in 2Q24.

Maintain our forecasts and HOLD call with a higher TP of RM4.65 (from RM4.38) based on 22.5 times rolled-over FY25 profits.

We like Press Metal due to its favourable cost structure, as the bulk of its energy costs are locked in via a 15- to 25-year PPA with Sarawak Energy, its solid track record as an investable aluminium proxy in Malaysia and its favourable ESG profile, as its smelters are hydro-powered. Nonetheless, its risk-reward profile is reasonably balanced, as the aluminium market remains unexciting at this juncture.

Lee Swee Kiat Group Bhd

Fair value: RM1.39 BUY

AMINVESTMENT BANK RESEARCH (APRIL 12): Average latex price spiked 24% in 1Q24 compared to 4Q23. Historically, a change in natural latex price will translate into a reverse direction in net profit margin in the quarter. However, LSK guided hedging measures have been implemented since late 2023. All in, the impact on 1QFY24F net margin will not be material. Thus, our FY24F-26F earnings are maintained for now. We expect latex prices to peak in May 2024, coinciding with the conclusion of winter.

Going into FY24F, we continue to favour LSK for being the largest natural latex mattress manufacturer in Malaysia, its expanding market share of natural latex mattresses versus domestic peers, recovering export markets and the recent introduction of a lower-priced A-series mattress that may benefit from increased demand in the price-sensitive affordable segment.

Maintain BUY with an unchanged fair value of RM1.39/share, based on 12.8 times FY24 P/E. The stock currently trades at a compelling eight times FY24F P/E, a 27% discount to the five-year median of 11 times while offering a 5% dividend yield. LSK has a healthy net cash position of RM18.4 million (12% of the market cap).

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