Niche players forecast to do well next year

PETALING JAYA: Manufacturing companies in niche segments will likely see better prospects moving forward.

AmInvestment Bank Research has an “overweight” call on the manufacturing sector with selective picks on stocks that have competitive advantages in niche segments.

Its top picks are Ancom Nylex Bhd with a fair value of RM1.43 and Lee Swee Kiat Group Bhd (LSK) with a fair value of RM1.21.

“We like Ancom as it is trading at a compelling calendar year 2024 (CY24) price-to-earnings (PE) of 10 times, which is an unjustified 52% discount to its five-year mean of 21 times.

“Ancom’s agrichemicals segment is expected to benefit from the trade diversion by multinational corporations from China to South-East Asia, shift in demand from expensive patented herbicides to cheaper generic versions and the commercialisation of Product T by January 2024,” the research house said.

It added that Ancom targets to commercialise Product T by January 2024, and S in financial year 2025 (FY25). Product T is currently selling at US$15 to US$17 per litre with Product S at US$40 per litre as compared to existing products (except Bromacil) with an average selling price in the low to mid-single-digit US$/unit.

Meanwhile, the research house picked LSK for its position as the largest natural latex mattress manufacturer in Malaysia, its expanding market share in the natural latex mattress industry and its collaboration in marketing the A-series mattress via rental-based business models and recovery in the export market.

“LSK currently trades at an undemanding CY24 PE of eight times, a 32% discount to its five-year median of 11.7 times,” it added.

AmInvestment Bank Research pointed out that LSK’s export demand recovered in the third quarter (3Q) of CY23 and will improve further.

“The export segment has been sluggish since 2022 due to the weak global economy. However, LSK registered a recovery in the export market in 3Q of CY23, especially from European customers.

“Consequently, the plant utilisation rate (PU) of the two latex foam plants increased to 60% in 3Q of CY23 from 45% in 2Q of CY23. We expect the PU to improve to 80% in 4Q of CY23 and CY24,” it added.

For the electronic manufacturing services (EMS) sector, the research house likes Cape EMS Bhd, which is expected to ride on multiple rising secular growth trends.

The trends include the adoption of 5G, evolution of digital payment eco-systems, Internet of Things, electric vehicles (EVs), and shift towards e-cigarettes from conventional alternatives.

“The EMS sector previously suffered from negative publicity of forced/unethical labour practices.

“However, we believe that local players are more cautious towards this issue and would pay attention to any potential breach.

“For instance, to ensure supply chain partners adhere to standards set by Malaysian labour laws and the International Labour Organisation, VS Industry Bhd (VSI) imposes an Ethical and Environmental Code of Conduct on its suppliers.

“The code of conduct outlines that suppliers must adhere to the minimum legal working age and policies on the prevention of forced labour.”

The research house expects VSI’s revenue and net profit in FY24 to be weaker year-on-year, as demand from key customers remains sluggish after VSI posted a lower-than-expected 1Q24 result.