Full recovery likely delayed but imminent
? BST expects NFO sales to recover to 85-90%/100% of pre-pandemic levels by early-Feb 22/1QFY23 (current: >80%), led by improved spending power.
? HRO’s PBT may ease qoq in 2QFY22 on delayed deliveries, though demand stayed solid. PBT margins may fall from 4% now to 2-3% on higher staff cost.
? Reiterate Add with a higher DCF-based TP of RM2.40.
NFO sales could fully recover to pre-Covid-19 levels in 1QFY6/23
BST’s number forecast operation (NFO) sales have picked up sequentially to slightly above 80% of pre-Covid-19 (C19) levels as of mid-Jan 22 (mid-Nov/mid-Dec 21: 75-80%; mid-/end-Oct 21: 65-70%). Barring further NFO outlet closures, BST expects sales to rise further to 85-90% of pre-C19 levels during the Chinese New Year (1-2 Feb 2022), aided by seasonally stronger demand. Thereafter, it hopes sales will fully recover in 1QFY6/23, driven by a recovery in spending power and, to a lesser extent, return of migrant workers. Eleven special draws will be conducted in CY22F, fewer than CY21’s 22 draws but more than CY20’s and our current assumption of 8 draws. Meanwhile, BST said the earnings impact from the recent floods should be minimal as i) only five of its 680 NFO outlets were affected, and ii) its NFO equipment are insured.
HRO’s 2QFY22 earnings may ease qoq; margins to stay healthy
For H.R. Owen (HRO), we gather that 2QFY22 PBT may dip slightly qoq as the delivery of some cars to customers were delayed (to 3QFY22) by the seasonal/temporary closure of car manufacturing plants during the Dec 21 holiday season. Nonetheless, HRO’s sales orders have remained robust in 2QFY22, as international borders have not fully reopened and the affluent segment was still somewhat reluctant to travel amid Covid-19 concerns. Meanwhile, HRO’s high PBT margin of c.4% achieved in 3QFY21-1QFY22 may contract to c.2-3% going forward, as previously furloughed staff return to its workforce. However,
this is still higher vs. our margin assumption (slightly above 1% from FY23F onwards) and pre-C19 levels (1-2% in FY15-19), thanks to a leaner cost structure.
FY22F core EPS cut on deferred recovery, but FY23-24F’s raised
We cut FY22F core EPS by 8% to factor in the delayed recovery in NFO sales/draw to pre-C19 levels only in 1QFY23F (previous: 3QFY22F), partly offset by a higher special draws assumption of 11 from CY22F and reinstatement of contribution from Kedah NFO outlets (still operational). The latter two, coupled with a higher PBT margin projection of c.2% from FY23F for HRO, lead to FY23-24F core EPS being raised by 10-11%. Based on a 95% payout, FY22-24F DPS is cut to 11.3-17.9 sen (previously: 12.3-16.3 sen).
Reiterate Add with higher DCF-based TP of RM2.40 (WACC: 5.6%)
We raise BST’s TP as the earnings upgrades in the forecast years outweigh the cut for FY22F. Re-rating catalysts: full NFO sales recovery and better FY22-24F HRO earnings. BST’s FY23F adj. EV/EBITDA of 7.4x is 2.8 s.d. below its 14-year mean, with attractive FY22-24F yields of 6.0-9.6% p.a. Key downside risk: further Covid-19 waves.