Translate This Page

Friday, March 25, 2016

Oil & Gas - Navigating the new O&G landscape

  • 2016 OTC Asia event. Yesterday, we attended the forum led by MIDA discussing the Malaysian O&G industry. The event, hosted by Y. Bhg. Datuk N. Rejendran (MIDA Deputy CEO, was joined by several speakers namely: Mr. Adif Zulkifli (SVP of Petronas Corporate Strategy), Mr. Maen Razouqi (Schlumberger VP & GM), Mr. Douglas Bruce Moody II (FMC GM) and Mr. Craig McMahon (Wood Mckenzie Asia Pacific Head of Research).
  • Readjustment to the new norm. In essence, most of the major players in the industry have accepted the new norm of low oil prices whereby exuberance is no longer tolerable and are taking multiple initiatives to optimize their cost structures. Petronas has launched Coral 2.0 initiative to save costs and improve efficiencies. Schlumberger, on the other hand, has looked at further optimization in its business involving reduction of Non Performing Time (NPT) through widening scope of work on per staff basis. This is in line with staff cuts, margin shrinkage and lower vessel demand observed in the overall market as oilfield operators look to be leaner in their operations.
  • More company consolidation needed? Calls for further consolidation in the O&G industry are echoed again by Petronas. To put it into perspective, there are 3000+ O&G companies registered in Malaysia while Norway, with similar production volume, has only 700+ registered companies, pointing to ample room for companies in Malaysia to consolidate. The question is whether consolidation will happen in Malaysian O&G industry in a big way. In our opinion, it is not expected to crystallize in a large scale as majority of the local market is controlled by 100+ players whereby the remaining companies consist of one-asset players or licensed shipbrokers, unattractive for a takeover especially in the current downturn.
  • Oil long-term fundamentals still intact. Wood Mckenzie is of the view that oil demand and supply picture would improve in the long run despite near term hiccups due to oversupply. From 2015 to 2025, the estimated shortfall of oil supply needed to cater for the growth in oil demand is expected to be at 9m bbls a day and significant oil inventory drawdown is expected in 2017. This is broadly in line with our view that oil prices are expected to be capped in the near term due to high oil inventory and resiliency of US shale oil production. More upside could only be seen in the longer term as the demand and supply gap narrows. NEUTRAL.


  • : Signs of oil prices bottoming giving further stability in the sector.

  • : Sharp rally in oil price could bring back the extra barrels of oil

  • Top pick: Mid to Small cap: KNM (RAPID exposure)

Source: Hong Leong Investment Bank Research, 25 March 2016

PublicInvest Research Headlines - 25 Mar 2016


US: Consumer comfort declines to match low for this year. Consumer confidence in the US fell last week to match the lowest level this year as Americans grew more pessimistic about the economy and the buying climate. The Bloomberg Consumer Comfort Index slipped to 43.6 in the period ended March 20 from 44.3 the prior week. The measures tracking current views of the economy and the buying climate both dropped to the lowest level since mid-Dec, while perceptions of personal finances rose to a five-month high. (Bloomberg)

US: Atlanta Fed downgrades 1Q GDP view to 1.4%. The US economy is on track to grow 1.4% in the 1Q following disappointing data on durables goods orders and home resales, the Atlanta Federal Reserve's GDPNow forecast model showed. That pace was weaker than the regional Fed's prior estimate of 1.9% on March 19, the Atlanta Fed said. (Reuters)

US: Jobless claims climbed less than forecast last week. Filings for US unemployment benefits last week rose less than economists forecast as the number of dismissals stayed consistent with a firm labor market. Initial jobless claims increased by 6,000 to 265,000 in the period ended March 19, a Labor Department report showed. (Bloomberg)

US: Orders for durable goods decline in broad-based slowdown. Orders for durable goods fell in Feb for the third time in four months, reflecting a broad-based slowdown that underscores lingering softness in US capital investment. Bookings for goods and materials meant to last at least three years declined 2.8% after a 4.2% gain that was less the previously reported, Commerce Department data showed. Bookings for non-military capital goods excluding aircraft dropped 1.8%, more than estimated. (Bloomberg)

EU: ECB loans banks SGD8.2bn as new long-term plan readied. The ECB handed EUR7.3bn (SGD8.2bn) to euro-area banks in the seventh round of a program aimed at boosting lending to companies and consumers, shortly before it starts a new and more generous plan. The take-up in the targeted longer-term refinancing operation compares with EUR18.3bn the ECB lent in a similar operation in Dec and EUR15.5bn handed out in Sept. Banks have now taken a total of EUR426bn since the first offer in 2014. (Bloomberg)

UK: Retail sales fall as cold weather curbs clothing demand. UK retail sales fell in Feb after surging the most in more than two years the previous month during post-Christmas sales. Clothing and shoes fell 0.4%, with poor weather delaying purchases of spring and summer attire, the Office for National Statistics said. (Bloomberg)

Japan: Inflation around zero for tenth month despite BOJ efforts. Prices in Japan didn’t rise in Feb, reinforcing just how far the nation remains from reaching the Bank of Japan’s 2% inflation goal. Japan’s consumer prices excluding fresh food didn’t budge for a second consecutive month, as forecast. Stripping out energy and food costs, the gauge rose 0.8% from last year, according to a statistics bureau report. (Bloomberg)

Singapore: Budget dominated by defense, education, heath. Singapore’s government will raise expenditure in fiscal 2016 by SGD5bn (USD3.7bn), or 7.3%, and still expects a surplus equivalent to 0.8% of GDP. The bulk of the budget goes to defense, education, health care and transport. The budget is aided by an increase in tax revenue to 14.4% of GDP and higher net investment returns contributions from state investment companies and institutions. (Bloomberg)



IHH (Neutral, TP: RM6.39): Unit acquires nursing home in Japan for RM39.3m. IHH Healthcare's 35.7%-owned subsidiary, Parkway Life Real Estate Investment Trust (Parkway Life REIT), entered into a silent partnership with Godo Kaisha Samurai 11 to acquire a nursing home facility in Japan for JPY1.1bn (RM39.3m). IHH said the purchase price for the property in Sapporo City, Hokkaido Prefecture, will be injected into Godo Kaisha by Parkway Life REIT's special purpose entity Parkway Life Japan4 Pte Ltd. (Financial Daily)

Comments: The investment cost of JPY1.1bn (RM39.3m) is considered small for the Group. Hence, in our view, the rationale is less about material contributions (PLife REIT contributed c.1.2% to IHH's FY15 revenue) but more on the synergy it brings to IHH in terms of aged care segment exposure, and tapping on the knowledge gained before applying the concept elsewhere. With c.26% of Japan's population aged above 60, aged care in the country has well been established, thus we believe the exposure would benefit IHH positively. Nonetheless, we're not ruling out the possibility of IHH testing the waters, as it had typically done previously with less familiar markets, before delving deeper into the region's aged care segment, after more insights and sufficient knowledge and understanding of the workings of nursing homes is gained by the Group.

YLI: Subsidiary wins RM97.3m Langat 2 pipe contract. YLI Holdings’ subsidiary Laksana Wibawa SB (LWSB) has been appointed to supply pipes, fittings and related products for the proposed development of the Langat 2 water treatment plant and water reticulation system in Selangor for a provisional sum of RM97.3m. The maker of pipes and waterworks-related products said its 51% owned LWSB entered into an agreement on this with the main contractor, Pembinaan Ikhasas-Merak SB, and purchaser Merpatih Trading SB. (StarBiz)

CAB Cakaran: Acquires land in Gurun for RM41m. CAB Cakaran Corp, through 51%-owned subsidiary CAB Amesist Biomass Generation SB (CABG), has acquired 35.04ha in Gurun, Kedah, for RM41.0m from oil palm plantation operator Dapat Damai SB to develop a biomass power generation plant that runs on chicken droppings. The property is subject to the existing category of land use of “agriculture”. (StarBiz)

Eco World: 1Q earnings at RM20.6m, YTD sales RM607m. Eco World Development Group recorded earnings of RM20.7m in the 1Q ended Jan 31, 2016 on the back of RM463.5m in revenue and is confident of achieving its RM4bn sales target in FY16 amid the soft property market. (StarBiz)

Selangor Properties: Slips into the red in 1Q on forex losses. Selangor Properties started off its current FYE Oct 31, 2016 (FY16) on the wrong foot, reporting a net loss of RM16.1m for the 1QFY16 as a stronger ringgit wreaked losses of RM24.9m in its investment holding division. (Financial Daily)

Superlon: 3Q profit jumps 46% on forex gains. Superlon Holdings, a producer of thermal insulation materials for air conditioners, enjoyed a 46.4% jump in its net profit for the 3QFY16 to RM4.3m, as a weaker ringgit in the quarter gave the company a favourable translation gain. The company has proposed a special dividend of 4sen a share. (Financial Daily)



The FBM KLCI might end lower again today as US and European stocks went into the Easter break on a negative note after a week in which expectations mounted that the Federal Reserve could raise interest rates more aggressively than previously thought. As such, dollar continue to regain some of the ground lost after the US central bank came out with a far more dovish policy statement following its March 16 policy meeting than market watchers had anticipated. In turn, that helped push prices for oil and other industrial commodities sharply lower, with both Brent and West Texas Intermediate crude slipping back below $40 a barrel and copper heading for its biggest weekly fall since mid-February. On Wall Street, US stocks ended five consecutive weeks of gains overnight, as a rally that carried shares to their highest levels of the year petered out during a holiday-shortened week. The Dow Jones Industrial Average added 13.14 points or less than 0.1% to 17,515.73, bringing its loss to 0.5% for the week. The S&P 500 lost 0.77 or less than 0.1% to 2,035.94, for a weekly fall of 0.7%. The Nasdaq Composite gained 4.64 or 0.1% to 4,773.50, shedding 0.5% for the week. Across the Atlantic, European stocks slumped for a fourth straight day, with Germany’s DAX 30 fell 1.7% to 9,851.35, France’s CAC 40 was pushed 2.1% lower to 4,329.68 and the U.K.’s FTSE 100 index dropped 1.5% to 6,106.48.

Back home, the FBM KLCI ended lower following an entire day of trading in the red, in tandem with the regional markets. Sectors ended in negative territory led by Construction which eased by -1.01%. At the closing bell, the bellwether index lost 9.02 points to 1,715.53 with 1.69bn shares changed hands valued at RM1.88bn. Asian shares also slipped after the US dollar strengthened against regional currencies. Performance-wise, the Shanghai Composite Index closed down 1.6%, Japan’s Nikkei Stock Average ended 0.6% lower, South Korea’s Kospi closed down 0.5%, and Australia’s S&P/ASX 200 finished down 1.1%. Elsewhere, Hong Kong’s Hang Seng Index ended down 1.3%. In China, stocks sank after Premier Li Keqiang said that the country was working to address volatility in its economy. He added that Beijing wouldn’t deliberately weaken the Yuan to boost exports. The Shanghai market pared losses after his speech but declined in the afternoon.

Source: PublicInvest Research, 25 March 2016

Yinson Holdings - Results preview

Reiterate BUY and MYR4.35 SOP-based TP

4QFY1/16 results, due next week, are unlikely to spring any surprises. Operationally, the conversion of its FPSO Genesis is on schedule (which market has yet to fully appreciate the impact) and the planned sale of its non O&G operations will be concluded by 2HCY16. The expected 15sen special DPS (5% yield) is a short-term catalyst and Yinson stays in position to capitalise on the demand for new FPSO projects worldwide.

Results to meet our expectation

Yinson’s 4QFY1/16 results are expected to be out next week. We expect Yinson to post a core net profit of MYR40m-49m (-12%-28% QoQ; +7%+32% YoY) in 4QFY1/16. This would bring FY16 core earning to MYR172m-181m, within our forecasts but below consensus’ MYR193m. The FSO/FPSO operations continue to be the Group’s key earnings driver. We expect weaker earnings from OSV and its non O&G operations (trading & transport). We do not rule out a DPS for 4Q16, based on historical trend.

CY17: Delivery of FPSO Genesis, sale of non O&G ops

We expect FY17 to be a flattish earnings year as Yinson prepares for the delivery of its FPSO Genesis, which is on schedule for first oil production in CY17. We expect FPSO Genesis to contribute MYR50m (a 6-month impact) to Yinsons’s FY18 earnings. Meanwhile, the planned divestment of its non O&G operations is expected to be completed by 2HCY16. We expect shareholders to be rewarded with a special DPS of 15 sen from this transaction.

A steady cash generating entity soon …

Post sale of its non O&G biz, Yinson will generate steady cash flows from its FSO/FPSO operations, potentially turning it into a dividend play stock. A policy will likely be unveiled soon. We value Yinson’s: (i) FSO/ FPSO operations on NPV, (ii) ports operations on 1x book value and (iii) OSV, transport, trading & project management businesses on 8-10 PERs.

Source: Maybank Research, 25 March 2016

BJ Auto - Plant Visit To Inokom

Last week, we met with Berjaya Auto (BAuto)’s Director, Dato’ Francis Lee and also visited Inokom Corporation (Inokom) in Kulim, Kedah. Inokom is the contract manufacturer of various marques including Mazda vehicles. Currently, BAuto owned 29%-stake in Inokom. At Inokom, we were taken on a tour around the assembly facilities of Mazda vehicles. Key takeaways from the meeting are (i) opportunity to improve export market, and (ii) more room for growth in the Philippines market in the medium term. However, we cut our FY16-17 earnings forecast by 3%-6% due to the revision in our assumption for JPY currency rates. Nevertheless, we are still positive on BAuto as we believe it should perform better than its peers in terms of earnings growth due to a more superior margin, stable dividend payout and net cash position. Our Outperform call on BAuto is maintained at a revised target price of RM2.58 (previously RM2.65) pegged to 13x FY17F.
  • Opportunity to improve export market. Since June 2013, Mazda Malaysia (MMSB) has been exporting locally assembled CX5 model to Thailand. The target is to export more than half of the production to more overseas markets e.g. Iran, Philippine and Indonesia. Export will improve the economies of scale of CX5. With this >50% exports, yen exposure will be mitigated to a certain extent and help to improve margin. Currently the plant in Inokom is only operating at one working shift, with a production capacity of 20k units but it could do up to 30k units if it operates in two working shifts. We understand that Mazda Japan will invest USD20m in a new Mazda paint shop, which is expected to complete by end of this year. This would allow Mazda Malaysia to increase its production capacity to 40k units. The new paint shop is expected to also produce Mazda’s patented color of soul red and pearl white, which are currently only available for CBU units.
  • More room of growth in Philippines market. YTD 9MFY16 sales volume for Philippines was already at 3,500 units, hence we expect the sales volume of FY16F to exceed our expectations of 4,200 units by next quarter. Currently BAuto have 16 third party dealers for the 3S centres. By end of 2016, management expects to have an additional 2 new dealers. We understand that BAuto is in the process of buying a piece of land in Philippines, which is strategically located in between the ports and Metro Manila. The company plans to build a Pre-Delivery Inspection (PDI) and warehouse centre on the 3 hectares land, which might cost them about RM24m-25m. Currently it pays a rental to 3rd parties’ warehouses before distributing the vehicles to the dealers. Hence, it will be wise for them to have its own warehouse centre in the future to accommodate an increasing sales volume.

Source: PublicInvest Research, 25 March 2016

Gamuda - KVMRT 2 awards coming soon

Results in line

2QFY7/16 net profit of MYR160m (-12% YoY, -0.7% QoQ) brought 1HFY7/16 net profit to MYR321m (-13% YoY), accounting for 48%/51% of our/consensus full-year forecasts. KVMRT 2 major works are expected to be awarded soon and the underground works value could exceed earlier forecast. Further upside could come from other infrastructure projects win. Reiterate as TOP BUY at unchanged RNAV-TP of MYR5.65.

KVMRT 1 works at tail end

In 2QFY7/16, construction pretax profit (before FRS 11) was 8% QoQ lower (-37% YoY) as construction works recognition declined 32% QoQ (- 28% YoY) but partly offset by higher 2QFY7/16 construction pretax profit margin of 8.2% (+1.1ppt QoQ, -1.2ppt YoY). These higher margins were due to the higher portion of higher-margin underground works recognised.

Offset by stronger concession earnings

Property development pretax profit (before FRS 11) also fell 12% QoQ (- 9% YoY) due to slower property progress billings (-6% QoQ, -10% YoY) and property pretax profit margins were also 1.5ppt QoQ lower (+0.2ppt YoY) to 22.6%. The weaker construction and property earnings were partly offset by stronger water and tolled expressways pretax profit (before FRS 11) (+7% QoQ, +9% YoY) due to improved contribution from its India expressways after the additional maintenance cost incurred in 1QFY7/16.

Earnings unchanged, maintain BUY

The value of KVMRT 2 underground works could exceed expectation and it could be awarded within one month. MMC-Gamuda is in a strong position to win the works. Additional job wins from KVLRT 3, Pan Borneo Sarawak Highway and Gemas-JB double track rail would provide further upside. However, this could be partly offset by lower property sales in FY16. Gamuda is our TOP BUY pick at unchanged RNAV-based MYR5.65 TP.

Source: Maybank Research, 25 March 2016

Sime Darby - Sukuk dilutes EPS marginally

Strengthens net gearing marginally nonetheless

The MYR2.2b Perpetual Sukuk will lower Sime’s proforma net gearing to 49% (from 51%, as at 31 Dec 2015) which fits well with its ongoing deleveraging initiatives. Given the higher cost of Sukuk at 5.65% pa vs existing weighted cost of debt of 3.4% pa, we expect marginal EPS dilutions. With no immediate catalyst in sight (except an El Nino induced CPO price rally), we keep Sime as a HOLD with an unchanged TP of MYR7.98 based on 18x FY17 PER peg.

Raised MYR2.2b Perpetual Sukuk at 5.65% yield

Sime has completed the first fund raising exercise under its Perpetual Subordinated Sukuk programme on 24 Mar 2016. The MYR2.2b Perpetual Non-call 10-year Subordinated Sukuk which offered a yield of 5.65% pa was over 1.8x oversubscribed. Said to be the largest perpetual Sukuk issuance globally by a non-bank, the MYR3b Sukuk programme has been assigned a rating of AA by MARC.

Marginal EPS dilution

Sime plans to use the cash proceeds largely to refinance its debt obligations. According to its annual report, Sime has a total of MYR8.2b debt (inclusive of MYR3.2b in revolving credit and trade facilities) due for repayment in FY16-17. Its weighted average cost of debt was 3.4% p.a in FY6/15. By our estimate, the Sukuk will result in lower share of profits to equity shareholders by MYR37m p.a, which will dilute our FY16/FY17/FY18 EPS forecasts by 0.5%/1.3%/1.2%.

Expect more deleveraging exercises

MARC has accorded a 50% equity credit on the Sukuk issuance. With this, Sime’s proforma net gearing will improve slightly to 49% (from 51%, as at 31 Dec 2015), which is still above its ideal target of 30-40%. In the meantime, Sime is also considering monetising some of its assets in Singapore and Australia before end-FY16 to raise MYR1.5b in cash. We are keeping our EPS forecasts unchanged for now. Sime is a HOLD.

Source: Maybank Research, 25 March 2016

Eco World Development - Profit and sales on track

Results track expectations

ECW’s 1QFY10/16 net profit (+>100% YoY) was within our expectation but slightly below consensus. 4MFY16 actual sales are on track to meet its own sales target of MYR3b (excluding the overseas projects pending the listing of its associate company) for FY16. Potential enbloc sales at Bukit Bintang City Centre (BBCC) will lower the overall project risk. We maintain earnings forecasts, MYR1.67 RNAV-TP and BUY rating.

Earnings driven by better margin and lower taxes

ECW’s 1QFY10/16 net profit was MYR20.7m (>+100% YoY, +5% QoQ) accounting for 21%/18% of our and consensus full-year estimates. The strong YoY earnings growth was mainly driven by better operating margin and lower tax charges. EBIT margin improved by 2ppt YoY and QoQ to 7.8% on lower administrative and marketing expenses. As at end-Jan 2016, ECW’s net gearing stood at 0.46x, from 0.37x at end-Oct 2015.

On track to meet its ambitious sales target

ECW has locked in MYR607.8m in property sales in 4MFY16, 20% of its MYR3b sales target (excluding ≈MYR1b sales from its overseas projects via associate company) for FY16 - on track. Sales should pick up strongly with the potential enbloc sale of retail spaces in BBCC. The enbloc sale will lower the overall project risk – a positive in view of stiff competition from upcoming projects such as TRX and Bandar Malaysia. ECW will softlaunch the service apartments and strata offices of BBCC by end-March 2016.

Maintaining earnings forecasts

Our sales assumption for FY16 is MYR2.8b, excluding the potential sales from its overseas projects via its associate company. Our MYR1.67 TP is based on an unchanged 40% discount to MYR2.79 RNAV. Unbilled sales stood at MYR4.4b at Jan 2016 (1.2x our FY16F revenue), providing medium-term earnings visibility.

Source: Maybank Research, 25 March 2016

Tuesday, March 22, 2016

Market Daily Report: FBM KLCI rises at the 11th hour

What a day for Bursa...another U-turn at the last minute.

FBM KLCI rose at the 11th hour today to close at 1,724.75 at 5pm. The KLCI erased losses after volatile trades earlier. Looking at Bursa, most of the export counters are being hit badly as the Ringgit seems to have find its footing.

FBM KLCI closed higher after reversing losses at the 11th hour

The ringgit strengthened to 4.0098 against the US dollar on crude oil gains.

The exchange rate had earlier reached its strongest intraday level at 3.9805.

In Asia, Japan’s Nikkei 225 was up 1.94%, while South Korea’s Kospi rose 0.35%. Hong Kong’s Hang Seng fell 0.08%.

Bursa Malaysia saw 2.42 billion shares, valued at RM2.88 billion, traded. There were 396 gainers against 473 decliners.

Hubline was in the top active list today while Scientex and Tenaga both lead the top gainer list. Panasonic Manufacturing (M) Bhd was the top loser for the day. 

Reuters reported Asian stocks seesawed on Tuesday, as hawkish comments from U.S. Federal Reserve officials clouded the monetary policy outlook in less than a week after Fed Chair Janet Yellen had set out a more cautious path to interest rate increases this year.

Monday, March 21, 2016

Market Daily Report: FBM KLCI made a U-turn to enter green

FBM KLCI closed 2.02 points higher

If you have been following the Bursa Malaysia, you would probably be disappointed almost the entire day until the closing. The FBM KLCI was basically heading south the entire day before it turns green during the closing period.

FBM KLCI rose 2.02 points or 0.1% after China's state margin lender resumed short-term loans and reduced borrowing cost for brokerages.

Investors take margin loans to invest in shares or funds.
At 5pm, the KLCI closed at 1,718.36 points. The index erased losses at the 11th hour, after falling to an intraday low at 1,707.11.
In China, the Shanghai Composite rose 2.15%, while Hong Kong's Hang Seng added 0.06%. Japanese share markets were closed for a public holiday.
Reuters reported that China financial stocks such as brokerages led indexes higher, with the CSI300 financial sub-index gaining 3.3%.
On Bursa Malaysia, 2.01 billion shares, worth RM2.05 billion, exchanged hands. Gainers outnumbered decliners at 442 to 436.
Top gainer was Nestle (M) Bhd, while Petronas Gas Bhd was the biggest decliner. Hubline was the most actively-traded stock.

Sunday, March 20, 2016

Malaysia Weekly Highlights

The Malaysian Insider (TMI) went offline

The Malaysian Insider
It's not like that we didn't see it coming. But one of the most popular independent news portal, The Malaysian Insider (TMI) went offline on March 15 despite its popularity but let's face it. Without the commercial support, it's impossible to see how TMI can go on its operation, especially when the Malaysian Communication and Multimedia Commission block its website. 

The Edge Media Group (TEMG) issued a statement, saying that TMI has run up to RM10 million of losses in the 20 months (since June 2014). 

A deal could not be reached with three external suitors, "all of whom have existing media businesses", as well as on an offer for a management buyout. This was made tougher after the MCMC's block order on TMI, although talks had started earlier. 

The closure of TMI saw 59 staff members, including its editor Jahabar Sadiq let go. 

In a statement, TEMG publisher and CEO Ho Kay Tat said on March 14, "The closure of TMI should serve as a reminder to those of us in the media industry as well as the public at large that good journalism cannot be sustained without commercial support. And when good journalism stops, society is the loser."

DR MAHATHIR: UMNO cannot wait for GE 14

Tun Dr Mahathir, the former prime minister of Malaysia, also the longest serving prime minister in the country has urged UMNO members to reject prime minister Datuk Seri Najib Tun Razak. 

"We can't wait for the 14th general election because Umno led by Najib will lose.
"Once Umno loses, it will not be able to recover," he said in the letter, which also appeared in his Chedet blog.
Dr Mahathir said Najib had made Umno his own and his leadership had only weakened the party.
He has quit Umno for the second time and teamed up with Opposition leaders to launch a Citizens' Declaration that, among other things, calls for Najib's ouster as prime minister.
MALAYSIA'S debt-to-GDP reached 54.4%, slightly below 55% self-imposed ceiling
The federal government's debt has reached RM630.5 billion or 54.4% of the country's gross domestic product (GDP) as at December 31, 2015.
This was only slightly below the self-imposed 55% ceiling. 
The Ministry of Finance said, "The government is committed to ensure that its debt does not exceed 55% of GDP. Fiscal consolidation plans will be continuously carried out to reduce the deficit level in phases. 
The ministry said that the government-guaranteed debt is mainly for infrastructure and development projects, stood at RM117.7 billion or 15.4% of GDP as at end-2015. 
Malaysia's Ultra-Rich Look Abroad 
In a report last week, about 26% of Malaysia's ultra-high-networth individuals are considering changing domiciles, the second highest rate globally after China's 32.1%. This was according to a report from the international property consultancy firm Knight Frank. 
During the launch of "The Wealth Report 2016", Sarkunan Subramanian, also the Knight Frank (M) Sdn Bhd managing director, said the leading contribution for such a high percentage was due to lack of opportunities in business and education. This was despite the numerous attempts by the government to improve these areas.
As at last year, there were 993 ultra-high-networth individuals in Malaysia, a drop of 15% from a year ago. In the report, those with US$30 million net worth and above are classified as the ultra-high-networth individuals.
British American Tobacco (M) Bhd will close its factory in Petaling Jaya and 230 people will be retrenched in the Group's restructuring attempt following the fall in sales as higher duties on tobacco products pushed more price-sensitive customers to illicit cigarettes. 
British American Tobacco
The margin was also squeezed as a result of the excise duty's hike, creating a challenging environment for BAT, thus requiring the company to restructure and transform its business. 
The company said the restructuring will involve "the sharpening of its commercial capabilities whilst optimizing the supply chain and transactional activities to ensure that BAT remains a competitive consumer-focused market leader."
Operations at the factory are targeted to cease by the second half of 2017 and the land on which it sits will be sold via open tender. 

Saturday, March 19, 2016

Wall Street Update: S&P 500 turns positive for 2016

Standard & Poor's 500 Index turns positive for 2016 in the wake of a dovish Federal Reserve that helped the gauge post its longest weekly winning streak since November.

One of the greatest comeback in the history
The S&P 500 followed the Dow Jones Industrial Average to advance for the year, after a poor start to the year, with The Dow jumping by 12% in 24 days through Thursday, boosted by seven separate daily advances exceeding 1%. It's amazing given that 2016 has started with one of the worst performance so far but a stunning comeback with stocks pushing over the top as US Fed signaled a slower pace of interest-rate increase this week.

The S&P 500 added 0.4% to 2,049 and is now up 0.3% this year after falling as much as 11%.

According to a report from Bloomberg, Friday’s gains were braced by health-care companies, with the group on the way to ending the longest losing streak in two months. Banks were on pace to halt a three-day slide after also lagging a broader rally in the past two weeks.

The Dow average Thursday wiped out a year-to-date decline that swelled to as much as 10% in February. It’s the fastest that a retreat of that size or more has ever been reversed this early in a year, data compiled by Bloomberg show. 

The S&P 500 has climbed 1.3% this week, and is less than 4% away from a record set last May.

Energy and raw-materials have led the S&P 500 over the last five weeks. 

A tumble in the dollar Thursday brought on by a more dovish Fed helped push the two groups to three-month highs yesterday. 

Friday, March 18, 2016

Market Daily Report: FBM KLCI bullish after Fed's rate on hold and oil rally continue

FBM KLCI jumped 13.15 points to close at 1,716.34

The FBM KLCI saw a strong trading day today as the market jumped 13.15 points to close at its intraday high of 1,716.34. 

The uptrend was in line with the regional market after the US Fed decided to keep rate on hold. The decision, reached at a two-day Federal Open Market Committee (FOMC) meeting that begun on Tuesday, resulted in renewed investor confidence in emerging markets.

Across the regional market, Hong Kong's Hang Seng index was up 167.82 points or 0.82%, South Korea's KOSPI rose 4.13 points or 0.21%, and Singapore's Straits Times Index gained 15.07 points or 0.52%.

Japan's Nikkei 225, however, was down 211.57 points or 1.25% while the Stock Exchange of Thailand slipped 0.43 points or 0.03%.

According to Reuters, Asian shares edged higher on Friday as oil touched a 2016 high.

Today, FBM KLCI saw 2.03 billion shares, valued at RM2.98 billion, traded.

There were 538 gainers against 349 losers, while 317 counters were unchanged.

The day's top gainers were Panasonic Manufacturing Malaysia Bhd, Petronas Gas Bhd, Pos Malaysia Bhd, Malaysia Airports Holdings Bhd and Scientex Bhd.

Losers included Nestle (M) Bhd, BLD Plantation Bhd, Latitude Tree Holdings Bhd and Kossan Rubber Industries Bhd.

The most actively traded counter was SMTrack Bhd, with 77.64 million shares changing hands.

Brokers Report: Scientex Bhd - Come Onboard a Profit Expansion Ride

Maintain Buy with higher target price (TP) of RM13.05

Scientex Bhd

We are excited about Scientex’s multi-year expansion in its consumerpackaging division which would more than quadruple its initial capacityby the end of 2016 and drive a 3-year earnings CAGR of 35% in FY15-18F.Maintain BUY with a SOP-derived MYR13.05 TP (from MYR10.68, 13%upside) as we revise up our sales volume assumptions for its packagingdivision to account for a higher average utilisation rate of 80% for FY16

Fast and furious. Already the largest stretch film manufacturer in Asia andamongst the top three globally, Scientex is now embarking on a capacityexpansion spree to grow its consumer packaging capacity through a series ofacquisitions and organic expansions. We continue to highlight Scientex’simpressive feat in building up its consumer packaging to 146,400 tonnes byend-2016, from just 30,000 tonnes in 2014 (CAGR of +121%).

Exciting market opportunities. Scientex’s strategy to ramp up production ofits BOPP film capacity by ten-fold bears favourable market opportunities as thebulk of the supply catered for local demand is currently imported. We think thatthe demand for such film would be anchored by its wide application acrossthe F&B, electrical and electronics and pharmaceutical industries. Scientex’smaiden venture into the CPP film production would also allow it to cross-sell thenew product to its existing clientele due to the complementary nature of itsproducts.

Focus on affordable homes. While the property sector remains soft, we thinkthat management’s focus on affordable housing could help to anchor earnings,as demand for this segment is more resilient. For FY16, management hastargeted to launch around MYR600m worth of proj ects, which includes therollout of the first phase of development on its recently acquired land in Pulai,Johor. These affordable homes are estimated to range between MYR200,000-400,000 per unit.

Maintain BUY. We raise our forecast by 5-17% for FY16-18 to account for ahigher sales tonnage as we turn more confident on management’s guidance todeliver on the guided sales volume. We have also put in a place a higher RNAVdiscount of 40% (from 30%) to account for the softer property market in Johor.We raise our SOP-derived TP to MYR13.05, valuing its manufacturing segmentusing DCF (WACC: 8%, terminal growth:2%) and the property segment basedon a 40% discount to RNAV (from 30%) to account for the softer sentiment inthe property market.

Source: RHB Research Institute, 18 March 2016

Brokers Report: Hock Seng Lee Bhd - Sarawak heating up

Maintain buy, with a higher target price (TP) of RM2.40

Hock Seng Lee

Maintain BUY, with a raised TP of MYR2.40

HSL’s Kuching Centralised Sewerage Package 2 job win worth MYR750m is a positive surprise as the project value is higher than expected. We expect more construction jobs to be dished out in Sarawak as the state election looms closer. We raise our 2016 job win and EPS forecasts given the strong job wins todate. Reiterate BUY with a higher TP of MYR2.40 (+7%) on unchanged 12.5x 2017 PER.

Higher-than-expected project value

HSL-led Kumpulan Nishimatsu-HSL Consortium (75% owned) has won the Kuching Centralised Sewerage: Package 2 (P2) from Sewerage Services Department of Sarawak worth MYR750m. This is 42% higher than P1’s MYR530m as P2 has a wider coverage. P2’s project value is also higher than expected, of MYR500m. The job scope covers construction and commissioning of a wastewater treatment plant and other related works. The works are expected to complete in 72 months by 2Q22.

More job awards in the pipeline

This latest win has lifted HSL’s outstanding orderbook significantly by 85% to MYR1.2b. Assuming a pretax profit margin of 15%, we forecast a net profit contribution of MYR63m (11.5sen EPS) into 2022. YTD job win amounts to MYR621m (vs. total win of MYR275m in 2015). More job awards from SCORE and Pan Borneo Highway Sarawak could be expected as we inch closer to Sarawak election expected to be held in Apr 2016. In the long run, HSL could continue to benefit from the whole Kuching sewerage project worth MYR4b that would be implemented in 8 phases.

Record job win in 2016?

Given its strong job wins todate, we raise our 2016 job win forecast to MYR1.6b (+23%) and subsequently raise our 2016/17/18 EPS forecasts by +1%/+15%/+13%. Our new TP is MYR2.40 (+7%) based on unchanged 12.5x 2017 PER. HSL could achieve record high annual job win in 2016 that would lead to another step up in earnings. Reiterate BUY.

Source: Maybank IB Research, 18 March 2016

Brokers Report: British American Tobacco (M) Bhd - Restructuring business operation

Maintain Hold with unchanged target price (TP) of RM55

Strategic decision

The cessation of BAT’s domestic manufacturing activity is a strategic decision to achieve a more sustainable business model. We estimate that the disposal of its factory land and M&E could fetch about MYR1.45/shr, partially offsetting one-off staff costs, which raises the prospect of a special dividend. Retain HOLD for now with an unchanged MYR55 DCF-TP.

To cease manufacturing activity

BAT has announced that it will cease its factory operations in Malaysia in stages and that the wind down will be completed by 2H17. Management cites higher production costs on lower legal volumes due to the high excise environment and rise in illicits. What is also the case, in our view, is that it is probably cheaper now, under AFTA, to source from other ASEAN countries, which is why BAT plans to source its tobacco products from other BAT factories regionally.

Disposal of manufacturing facility

The factory land in Sekysen 36, Bandar Petaling Jaya will be disposed by May 2016 by way of a public tender exercise. Assuming an average price of MYR353/sq ft (avg transacted prices from 2005-2013 in the vicinity), the land itself (c.47k sq m) could be worth about MYR175m or 61sen/shr. The BV was MYR57.5m end-2014. The machinery and equipment (M&E) will be sold to related parties under the BAT group. BV was MYR240.8m or 84sen/shr. Total proceeds could amount to MYR415m or MYR1.45/shr.

Maintaining forecasts for now

The manufacturing ops, by its own, could be just marginally profitable, which prompted this recent move, we think. Over the longer term, BAT is likely to see cost savings on lower admin expenses. Pending further clarity from management, our back of the envelope computation suggests that the savings could add up to 8-9% to net profit p.a.. In the near term, the group will have to contend with closure and redundancy costs (230 employees will be affected by the factory closure, out of total 845 end-2014). Our forecast are unchanged for now, as is our HOLD call and DCF-TP of MYR55.00 (WACC: 7.1%, LT-growth: 1.5%).

Source: Maybank IB Research, 18 March 2016

Thursday, March 17, 2016

Brokers Report: TRC Synergy - Eyeing More Jobs

Maintain Neutral with unchanged target price (TP) of RM0.39

TRC Synergy Bhd

TRC Synergy (TRC) revealed that it might potentially nail more jobs this year, potentially from the MRT2 and LRT3 rail links, Pan Borneo and other highways such as SUKE and DASH. Granted, the competition will be stiff with most contractors bidding for the same jobs. However, we believe the Group’s experience in working on the earlier phases of LRT/MRT could give it an added advantage. FY15 was quiet in terms of job replenishments with only RM176m worth secured. Separately, it announced that it has secured a contract worth RM88m yesterday for a sub-contract to develop the new Kuala Lumpur Air Traffic Control Centre at KLIA and other locations, which would increase its outstanding orderbook to RM1.2bn. As for property, its Ara Damansara mixed development project is confirmed to be deferred to end-2016, with the development order expected by 3QCY16. Elsewhere, its property development project worth RM293m secured back in December last year could be launched by 2H2016. Maintain Neutral and unchanged TP of RM0.39 pegged at c.8x FY17F EPS.

  • RM1.2bn Outstanding Orderbook. With the new job win, the Group’s current outstanding orderbook is c.RM1.2bn. Main on-going jobs are the Kelana Jaya LRT extension project, MRT1, and KL Eco City building contracts. We understand that its tender book, among others include the Pan Borneo Highway, LRT3, MRT2 and other highways such as SUKE and DASH. As for construction progress of its jobs, we understand that the LRT and MRT jobs are mostly completed with certificate of practical completion (CPC) pending for its LRT project. To recap, the LRT was contractually supposed to have been completed by July 2013 but subsequently revised to May 2015 due to site issues. Given TRC’s working relationship with Prasarana (client for LRT) and Gamuda-MMC (client for MRT 1), we believe it could potentially clinch a few big jobs this year. However, we rather err on the side of caution by assuming job replenishment rate of c.RM500m p.a. for now even though each package could easily exceed RM500m already. Its previous LRT job was worth RM950m, while the MRT 1’s combined contract value is already c.RM743m.

  • Property. True to our earlier suspicion, the Group’s Ara Damansara project will indeed be deferred, given current weak market conditions. We understand that it will only unveil the project earliest by 4QCY16. The initial launch date was originally slated for end-2015. The mixed development in Ara Damansara has a combined GDV in excess of RM1bn with first phase estimated to be c.RM300m. As indicated earlier, this project will be competitively priced (at c.RM600psf) and given its proximity to the LRT station; we believe the project should be well received. All told, our FY16F-17F are adjusted down marginally by -7%/-1% after some revenue billing adjustments.

Public Invest Research, 16 March 2016

Brokers Report: UMW Holdings Bhd - Risk of Further Selling Pressure

Maintained Sell with unchanged Target Price (TP) of RM5.50

Highlights/ Comments

  • UMW faces deteriorating market conditions for its automotive and O&G (including valued business) divisions.
  • 51% owned Toyota has set a lower target of 87k sales (including 2k sales from Lexus) for FY16 as compared to FY15’s 95.9k sales (including 2.1k sales from Lexus). New launches for 2016 are Hilux (2Q16), Innova (3Q16), Fortuner (3Q16) and upgraded Vios (launch date unconfirmed). With the expected lower sales volume and continued competitive market, margins are likely to stay weak (despite increased prices) in FY16 for high marketing and distribution costs as well as full year impact from weaker RM against US$ (FY16 to be RM4.10/US$ vs. FY15’s effective RM3.90/US$).
  • 38% owned Perodua is likely to perform weaker in FY16 (vs. circa RM410m in FY15) despite higher target of 216k sales (vs. FY15’s 213.3k sales), given lower revenue mix and full year impact from RM depreciation in FY16. Perodua is expected to launch new Sedan by 2H16 to boost sales.
  • The weak oil price at US$30-40/bbl has affected the profitability of 55.7% owned UMWOG and the O&G valued business, due to weak demand and pricing.
  • Concerns arise on dividend payments due to weaker cashflow from automotive division as well as potential UMW extending inter-company loan to UMWOG to restructure its short-term loan obligation of RM2.3bn (as at Dec 2015). Furthermore, UMW will have to start spending on its capex for new manufacturing plant (commence operation by 2017) for fan cases for Boeing 787. Total dividend for FY15 was 20sen (RM233.6m), near record low for the past 10 years.
  • Furthermore, UMWH is at risk of being removed from FBMKLCI list of 30 counters by next review in June 2016. At the current share price of RM6.73, UMW’s free float market capitalization is listed at 38th spot (lower than the minimum 36th spot). Lack of near term catalysts, UMW’s share price is unlikely to perform and climb above 36th spot.


  • Prolonged tightening of banks’ HP rules.
  • Slowdown in the Malaysian economy affecting car sales.
  • Global automotive supply chain disruption.
  • Appreciation of US$.
  • Plunge in crude oil price and slowdown in O&G exploration.


  • Unchanged.


  • 1) Control largest market share of Malaysia TIV with leading brand - Toyota, Lexus and Perodua; and 2) Investing into new business segment.
  • 1) Slump in crude oil prices affecting demand and charter rates for jack-up rigs; 2) Tightening of bank’s lending rules; and 3) Intense competition from rival automotive marques.


  • Maintained SELL with unchanged Target Price of RM5.50 based on SOP.

Source: Hong Leong Investment Bank Research, 16 March 2016

Brokers Report: Top Glove - Still a commendable quarter

Maintain buy with a lower target price (TP) of RM6.50

Top Glove

Remains the industry’s most profitable player

2QFY8/16 results were sequentially weaker but still solid, being Top Glove’s historically second most profitable quarter. For 3QFY8/16, we think earnings could be flattish QoQ as sales volume growth could compensate for the stronger MYR/USD and higher latex cost. We maintain our earnings forecasts and BUY call. However, given the volatility in external factors, we lower our target 2017 PER to 19x (+1SD to mean PER, from 25x) to derive our new TP of MYR6.50 (-22%).

Within expectations

2QFY8/16 core net profit was MYR105m (-15% QoQ, +87% YoY), bringing 6MFY8/16 core net profit to MYR228m (+118% YoY) - 57% of our and street’s full-year forecasts. The comparative preceeding quarter’s core net profit excludes gains from the disposal of US bonds. No dividend was declared, as expected.

Seasonally weaker; Margins remained strong

The weaker QoQ earnings was due lower revenue (-13% QoQ) as: (i) sales volume was seasonally softer (-3% QoQ); and (ii) ASPs were adjusted lower (-11% QoQ) to reflect the savings in USD/rubber price.
Nevertheless, its EBITDA margin remained strong at 22% (-0.4-ppt QoQ), due mainly to improved operational efficiency. Moreover, the gross margin for latex gloves (Top Glove’s key segment) has been stable at 23- 24%, compared to the contraction in margin for nitrile gloves (1-2-ppt QoQ), a result of rising nitrile glove competition.

3QFY8/16: Earnings to be flattish QoQ?

While USD/MYR has weakened 3% to 4.13 presently (from average 4.27 in 2QFY8/16) and latex cost has risen 16% to MYR4.11/kg (40% of latex glove production cost), we think the drag could be compensated by sales volume growth in 3QFY8/16. Traditionally, Top Glove’s 3Q sales volume had expanded 6-9% QoQ in FY8/12-15. Hence, we believe its 3QFY8/16 earnings could be flattish QoQ (but still a double-digit growth YoY). We maintain our EPS forecasts, which have imputed a softer 2HFY8/16.

Source: Maybank IB Research, 17 March 2016