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Monday, October 31, 2016

Stocks with Momentum: SKB Shutters Corp

SKB Shutters Corp Bhd (-ve)

Shares in SKB Shutters Corp Bhd (fundamental: 0.75/3, valuation: 0.9/3) triggered our momentum algorithm last Friday for the first time. It saw a total of 4,000 shares  traded that day, versus its 200-day average volume of 823.5 shares. The counter closed up 2.5 sen or 3.85% at 67.5 sen.
In April, SKB secured a US$10.8 million contract for the supply of racking solutions and automated storage and retrieval system (ASRS) for Hund Vuong Corp Ltd, one of the largest seafood processing and 
export groups in Vietnam.
The company also indicated it was expecting more business from the racking solutions and ASRS segment, going forward.
For the financial year ended June 30, 2016, the company reported a narrower net loss of RM423,000, compared with RM515,000 in the previous year, after a 9% increase in revenue to RM55.77 million.
SKB is trading at 0.34 times its net asset value. It did not pay dividends for the financial year ended June 30, 2015.

Stocks with Momentum: RGB International Bhd

RGB International Bhd (-ve)

Shares in RGB International Bhd (fundamental: 2.5/3, valuation: 1.8/3) saw some 54.6 million shares done last Friday, compared to its 200-day average volume of 6.91 million shares. It closed up 1 sen or 5% at 21 sen.
Since early October, RGB’s share price has been trending upward, gaining 4 sen or 23% since its close at 17 sen on Oct 4.
In its second quarter ended June 30, 2016, RGB reported a net profit of RM6.98 million, up 6% from RM6.56 million in the previous year’s corresponding quarter. Revenue gained 16% to RM58 million, from RM49.88 million.
Cumulatively, net profit for the first half of its financial year was 19% higher at RM12.91 million, compared with RM10.89 million in the previous year, while revenue climbed 29% year-on-year to RM114.09 million.
RGB’s price-to-net-asset-value stood at 1.51 times. It paid 1 sen per share in dividends for its financial year ended Dec 31, 2015.

Stocks with Momentum: Bio Osmo Bhd

Bio Osmo Bhd (+ve)

LAST Friday, shares in Bio Osmo Bhd (fundamental: 1.85/3, valuation: 0.3/3) triggered our momentum algorithm for the first time. The counter closed 1 sen or 20% higher at 6 sen, with a total volume of 5.1 million shares. Its 200-day average volume was 409,516.
The loss-making bottled water manufacturer recently completed its placement exercise to fund its diversification into hotel management business, via a subscription of a 75% stake in Intra Magnum Sdn Bhd (IMSB) for RM18.75 million. The balance 25% will be held by Impiana Sdn Bhd. IMSB is developing the Impiana Resort & Residences Cherating in Kuantan, and has entered into three hospitality management agreements with Impiana Cherating Sdn Bhd, Impiana Hotel Ipoh Sdn Bhd and Impiana Tioman Sdn Bhd.
Bio Osmo’s stock currently trades at 1.5 times its net book value. Bio Osmo did not pay dividends for the financial year ended Dec 31, 2014.

Thursday, October 27, 2016

Stocks with Momentum: Jerasia Capital Bhd

Jerasia Capital Bhd (+ve)

SHARES in Jerasia Capital Bhd (fundamental: 0.35/3, valuation: 1.1/3), which gained one sen or 1.49% to close at 68 sen yesterday, triggered our momentum algorithm for the first time this month.
One million shares were exchanged, compared with the stock’s 200-day average volume of 89,621.
The company’s share price has risen significantly since last week, jumping 16.5 sen or 32% to close at 67.5 sen on Oct 19, from its closing of 51 sen on Oct 18.
The jump triggered an unusual market activity query from the bourse regulator, though Jerasia said it wasn’t aware of the reason behind the sudden gain.
For the second quarter ended Sept 30, 2015 (2QFY16), the company’s net profit rose 32% y-o-y to RM1.28 million, as revenue rose 18% to RM94.92 million.
Jerasia is trading at 0.39 times its net book value.


Stocks with momentum: Cepatwawasan Group Bhd

Cepatwawasan Group Bhd (-ve)

SHARES in Cepatwawasan Group Bhd (fundamental: 0.7/3, valuation: 2/3), which triggered our momentum algorithm yesterday for the second time this year, closed up two sen or 2.55% at 80.5 sen.
It saw 1.28 million shares traded, versus its 200-day average volume of 120,745.
The oil palm planter’s share price spiked recently, after it announced a 187% jump in net profit to RM10.4 million for the third quarter ended Sept 30, 2016 (3QFY16), from RM3.62 million a year earlier, on higher sales volume and better crude palm oil and palm kernel prices. Revenue rose 8% year-on-year to RM79.08 million.
Subsequently, its shares gained 9.5 sen or 14% to close at 78.5 sen on Oct 21, from 69 sen on Oct 20.
Cepatwawasan is trading at 0.52 times its net book value.


Stocks with momentum: Versatile Creative Bhd

Versatile Creative Bhd (-ve)

SHARES in Versatile Creative Bhd (fundamental: 0/3, valuation: 0.55/3), which triggered our momentum algorithm yesterday, slipped one sen or 0.76% to RM1.31 after 2.61 million shares were done; in contrast, its 200-day average volume was only 445,508.5 shares.
In May, the loss-making company secured a contract to build a halal vaccine plant along with a pharmaceutical plant and research centre in Bandar Enstek Industrial Park, Negeri Sembilan, for US$69.3 million.
The contract was awarded by Oriental Mace Sdn Bhd, which is part of Oriental Mace Group that is led by Professor Dr Wong Kong Yew as chief executive officer.
On Aug 29, it was revealed that Wong had inked an agreement with Versatile executive chairman Datuk Lee Kwee Hiang to buy the latter’s 18.33% stake in Versatile at RM17.21 million or 80 sen per share.
Versatile is trading at 3.72 times its net book value. No dividends were paid out for the financial year ended March 31, 2016.


Monday, October 24, 2016

Najib chases ‘ultimate’ win as supporters get budget goodies

Malaysian Prime Minister Najib Razak has targeted budget spending at his coalition’s most loyal voters, seeking to limit any damage from more than a year of political turmoil as talk turns to a potential early election.

Najib Razak chases 'ultimate' win as supporters get budget goodies

The premier allocated more funds for his cash handout program to the poorest 40 percent of Malaysians, promised civil servants a bonus and introduced extra assistance for farmers. He pledged more roads, bridges and better electricity and water supply for rural regions, and sought to woo younger voters with discounts on outstanding student loans and access to cheap housing in urban areas.

After weathering funding scandals and attempts to topple him for a good part of his second term as premier, Najib must balance a slowing economy with keeping voters happy ahead of an election that could come as soon as March. While the opposition is fractured, it has sought to lure ethnic Malays from Najib’s coalition amid discontent at rising living costs and disillusionment over allegations of graft surrounding the premier.

Najib’s United Malays National Organisation leads the Barisan Nasional coalition, which has ruled since independence in 1957 with the support of ethnic Malays in the predominantly Islamic nation.

"As we approach the next general election, it is really difficult to say whether it will be smooth sailing for Najib," said Ahmad Martadha Mohamed, dean of the college of law, government and international studies at Universiti Utara Malaysia. "The budget aims at specific target groups that have been the main supporters of UMNO for a long time. Giving a lot of incentives to these people is crucial to ensure stable and continued support for UMNO and BN."

Tax Relief

While Najib’s term runs until mid-2018, some senior UMNO officials told Bloomberg News last month a vote could come as soon as March. Najib has been quick to deny media reports that cited him as ruling out an early election.

Speaking for more than two hours on Friday in a speech that took shots at his foes and praised allies for standing by him, Najib announced giveaways from tablets for 430,000 teachers to money for muezzins -- those who call Muslims to prayer -- and mosque caretakers. There was tax relief for working parents who enrolled preschoolers in early education classes and higher allowances for village heads. 

About 440,000 rubber tappers and smallholders will get so-called rainy season assistance for three months to supplement wages affected by bad weather between November and January. Many farmers are ethnic Malays.

"Najib is making sure every constituency gets their -- albeit tiny -- share of the pie, so that cumulative effect of all those albeit small amounts of vote switch will favor the incumbent government," said Oh Ei Sun, an analyst at the S. Rajaratnam School of International Studies in Singapore and Najib’s political secretary from 2009 to 2011.

At the last election in May 2013, BN lost the popular vote for the first time for its worst result yet. Najib on Friday made more overtures to ethnic Chinese and Indian voters who deserted the coalition then, providing funds for vernacular schools and loans to hawkers and small business owners from the minority groups. 

Still, he was unambiguous on who needed to be kept happy. UMNO has for decades propagated policies that provide favorable access to education, jobs and housing for Malays and indigenous people, known collectively as Bumiputeras.

"In a nutshell, the agenda of empowering Malays and Bumiputera will continuously be upheld," Najib said.

The premier needs a strong election win to dispel doubts on his ability to lead given scandals surrounding political donations and the finances of state fund 1Malaysia Development Bhd. Even as senior party figures publicly pledge support, some have privately expressed concern he will become a liability.

Some of the biggest initiatives were reserved for the civil service, which employs 1.6 million people, or about 11 percent of the labor force. Around 79 percent of the civil service was made up of Malays as of the end of 2014, and over 11 percent from indigenous Bumiputera groups.

To avoid "sleepless nights" for civil servants, Najib said they will get a special cash payment in early January, plus bigger loans for homes, motorcycles, computers and smartphones.

Opposition Walkout

Cabinet members denied it was an election budget, with Minister in the Prime Minister’s Department Abdul Rahman Dahlan saying it was an inclusive approach and "we do this every year." Sports Minister Khairy Jamaluddin added "we don’t know when the election is going to be."
Opposition lawmakers walked out during Najib’s budget speech after holding up placards referencing Malaysian Official 1, or MO1, a U.S. Department of Justice description of a politician who it said controlled accounts that got hundreds of millions of dollars in diverted funds from a state company. Najib has acknowledged funds went into his accounts before the 2013 election but said the money was a donation from the Saudi royal family and most was later returned.
"Who is MO1, that was not answered," said Lim Kit Siang, a leader of the opposition Democratic Action Party. "Corruption problems were not mentioned. The prime minister paints a pretty picture" but questions remain, he told reporters.
While Najib avoided mentioning election timing in the budget speech, he urged his coalition to stay united and "close ranks."
Malaysians "will continue to be safeguarded," he said. The Barisan Nasional government will have the "ultimate victory in the 14th General Election."

Source: Bloomberg

Malaysia's Budget 2017 [Overall view]

Malaysia's budget 2017 has been successfully tabled by Prime Minister Datuk Seri Najib Razak on last Friday. In the midst of a low oil price and weak external environment, economists have said that the Budget 2017 was one that hits the right note while maintaining fiscal discipline. 

The theme of the budget 2017: Accelerating growth, ensuring fiscal prudence, enhancing well-being of the Rakyat.

Prime Minister Najib presenting Budget 2017 last Friday

Here's a quick look on what Budget 2017 has to offer:
Operating Expenditure: RM214.8bil, Development Expenditure: RM46 bil
RM260.8 billion has been allocated for expenditure, representing an increase of 3.4% from previous year. According to some economists, the higher allocation for expenditure will help to drive the economy in 2017.

From the breakdown, we could see that RM214.8 billion is for operating expenditure (82%) as compared to only RM46 billion for development expenditure (18%).

This continues to be the weakness according to reports, as the leakages from budget allocation could be reduced further.  

Here are some of the forecasts for the economic growth in 2017, with a fiscal deficit target of 3.0% and 4 to 5% of GDP growth, assuming that the revenue is RM219.7 billion.

Forecast of Malaysia economy in 2017 


Here's a quick look on the operating expenditure of RM214.8 billion.
  • Fixed charges & Grants - RM103.9 billion
  • Emoluments - RM77.4 billion
  • Supplies & Services - RM32 billion
  • Others - RM816.6 million
  • Purchase of assets - RM691 million


Here's a quick look on the development expenditure of RM46 billion.
  • Economic sector - RM25.9 billion
  • Social sector - RM12.2 billion
  • Security sector - RM5.3 billion
  • General admin - RM2.5 billion
  • Contingencies - RM2 billion

Accelerating economic growth
  • Lower corporate tax rate. Reduce tax rate between 1 and 4 percentage points for companies with significant increase in taxable income for year of assessment 2017 and 2018.
  • Lower tax rates for SMEs. Reduce tax rate from 19% to 18% for SMEs with taxable income up to first RM500,000. 
  • Extend double taxation promotion on operating expenditure borne by anchor companies for the Vendor Development Programme until 31 December 2020.
  • Promote tourism with allocation of RM400 million for initiatives.
  • E-Visa to be extended to Balkan region and South Asia to help achieve target of 32 million tourist arrivals in 2017.
  • Allocation of RM1.2 billion for building village roads and RM4.5 billion allocated to maintain state roads. 
  • RM5k grant to taxi drivers to buy new vehicles.
  • Promote tourism with allocation of RM400 million for initiatives such as ecotourism measures and extension of investment tax allowance for new 4 & 5 start hotels.
  • Broadband prices to decline by up to 50% within the next 2 years.
  • Malaysian Communications and Multimedia Commission (MCMC) will provide RM1 billion to ensure the coverage and quality of broadband nationwide reaches up to 20 megabytes per second.
  • New East Coast Rail Line project costing RM55 billion to be implemented. Pan Borneo Highway project to be accelerated.
  • Allocation of RM100 million to restore East Coast railway line along Gua Musang – Tumpat that was destroyed during flood. 
  • Increase trip frequency of ETS for JB-Padang Besar route, RM1.1 billion allocation to buy more train sets up to 2019.
  • For ride-sharing drivers who don't own car, down payment can be made using BR1M, rebate RM4k to buy Proton Iriz.
  • Export promotion programmes to local SMEs by MATRADE, MIDA and SME Corp with allocation of RM130 million.
  • Allocation RM400 million will be allocated, among others for clean air and ecotourism initiatives.
  • Allocation RM800 million for upgrading community projects, bridges, drainages, markets - with priority for local G1 and G2 contractors.
  • Allocation RM495 million for flood mitigation projects.
  • Allocation RM732 million for supply clean water targeting 5,200 houses.
  • Introduction of Digital Free Zone, and MDEC allocated RM162 million to implement e-commerce digital programs.
  • Reconstruciton of Sandakan Power Station Project.
  • Allocation of RM200 million from Working Capital Guarantee Scheme fund for startups.
  • Boost export-oriented SMEs, provision 2% rebate on interest rates charged to SME borrowers under SJPP scheme. Rebate limited to accumulated funding of RM1 billion.
  • Allocation RM522 million for MIDA to promote investments in chemicals, electrical and electronics, and R&D activities.
  • Launch of new series discourse branded 2050 National Transformation (TN50) to span three decades to form calibre nation state. Aimed to kick-start yound diverse geenration of all races through national discourse.
Invigorating Capital Markets
  • Government Linked Companies to allocate RM3 billion fund to invest in Small-Mid cap stocks.
  • Capital Market Research Institute will set up Capital Market Development Fund with initial funding of RM75 million.
  • Income tax exemption for entities carrying out Islamic Banking and Takaful Business through the International Currency Business Unit (ICBU) in foreign currencies  and stamp duty exemption on instruments of such activities extended to YA 2020.
Measures to ease cost of living and enhance people's well being
  • Higher BR1M cash aid of 12.5%-20% with allocation of RM6.8 billion to benefit 7 million recipients.
  • Lifestyle tax relief up to RM2.5k yearly effective in 2017. Tax relief to be provided for purchase of reading materials, computers, sports equipment, smartphones, tablets, internet subscription and gym memberships.
  • Broadband prices to decline by up to 50% within the next 2 years.
  • No GST rate hike for 2017.
  • Public servants to receive a special assistance payment of RM500 and special RM250 payment for retirees in early 2017.
  • Allocation RM1.3vbillion for food production at competitive price. Encouraging development of dairy industry to reduce dependence on imported animal feed.
  • Introduce Social Security Organisation (SOCSO) for taxi drivers with income up to RM3k with grant of RM60 million.
  • School assistance totalling RM3.1 billion for meals, books, funds for improvement and maintenance of schools. Allocated RM7.4 billion for 20 public universities.
  • Discounts and incentives to encourage payment of PTPTN loans between Oct 2016 to Dec 2017.
  • Allocation RM424 million to assist senior citizens with RM300 monthly living allowance and pocket money. To benefit 120,000 senior citizens. Eight senior citizen centres to be established.
  • Book vouchers replaced with student debt cards worth RM250 for purchase of books, computer accessories and internet access to benefit 1.3 million students.
  • Allocation RM4.3 billion for scholarships in 2017 through various ministries.
  • Allocation RM40 million to reintroduce grant to registered Residence Association for improving security and maintenance.
  • Allocation RM12 billion building of police headquarters, procurement of vehicles and equipment. Create Sea Basing in East Coast Sabah and deployment of helicopter squadrons.
  • One-off increase of the existing RM500 incentive to RM1k to PRS contributors to encourage youth savings Minimum accumulated investment of RM1,000 during the two years.  Allocation of RM165 million will be provided.
  • Civil servant housing loans limit to increase to RM750k.
  • Build more units of 1Malaysia Civil Servans Housing (PPA1M) with selling price 20% below market prices.
  • Allocation of government land to build 30k homes worth RM150k-300k.
  • Build 10,000 houses in urban areas for rental to eligible youths with permanent job, rental up to 5yrs, below market rate.
  • Easy financing scheme to provide 90-100% financing for affordable housing (PR1MA) with lower loan rejection rate in collaboration with Maybank, CIMB, Ambank, RHB, EPF and BNM to be implemented on Jan 2017. Scheme will be limited to first time housebuyers for house purchase below RM300k.
  • Stamp duty exemption of 100% from 50% for first time home buyers for home purchases valued up to RM300k from Jan-17 to Dec-18
  • People Centric projects continued through Private Finance Initiative with allocation of RM 10 billion.

Friday, October 14, 2016

Brokers Report: Berjaya Food - Weak ringgit plagues Starbucks

SELL CALL with unchanged target price (TP) of RM1.55


  • As anticipated, revenue of BFood’s Starbucks Malaysia operations is growing steadily. However, Starbucks’ EBIT margin has been depressed due to the weakening of the MYR against the USD. This is due to BFood purchasing certain raw materials from Starbucks Corp (USA) such as coffee beans, frappuccino mix and syrup which are denominated in USD. These materials account for between 40-50% of Starbucks Malaysia’s COGS. Therefore, given the recent renewed MYR weakness to ~RM4.20/US$, Starbucks Malaysia’s margins will remain depressed. This effect is illustrated over the previous six quarters (Figure 1).
  • In FY17, BFood has closed one unprofitable KRR Indonesia restaurant and plans to continue to close loss-making outlets. Further closures of will reduce BFood’s effective tax rate as currently losses overseas cannot be offset back home in Malaysia, resulting in an inflated effective tax rate.
  • Ready to Drink (RTD) Starbucks coffee beverages have been rolled out and are available at various supermarkets and retail convenient stores at RM12 each. Starbucks is offering a voucher that entitles the holder to a free coffee with every purchase of RTD coffee to encourage sales. Selling of RTD beverages is expected to be loss making initially as BFood struggles with weak ringgit as the product is imported from USA.


  • Nandos superior brand name to KRR Malaysia threatens to take away more market share from a business unit that is already experiencing negative SSSG.
  • Further Ringgit depreciation against USD.


  • Unchanged


  • Starbucks Malaysia’s top line is growing as anticipated. However, the weak MYR against the USD has depressed margins and will continue to be so until a significant change in USD/MYR exchange rate. We keep estimates unchanged despite the recent weakening of the Ringgit as we have already priced in thinner margins for FY17.
  • KRR Indonesia operations are still loss making and time is required to close unprofitable stores.


  • TP is unchanged at RM1.55 but our call is downgraded from a Hold to aSell due to the recent rise in share price. Target price is derived from 25x PE of FY17 EPS.
  • Two factors could trigger rerating; 1) significant MYR appreciating against the USD which would reverse margin erosion of Starbucks Malaysia and 2) speedier turnaround/closure of loss-making KRR outlets in Indonesia.

Source: Hong Leong Investment Bank Research - 14 October 2016

Thursday, October 13, 2016

Brokers Report: N2N Connect Berhad - Synergistic Boost

Retain outperform recommendation with target price (TP) of RM1.08

The Group announced overnight that it has entered into a sales and purchase agreement with Reuters International Holding S.A.R.L. and Systex Capital Group Inc. for the acquisition of the entire equity interest in AFE Solutions Limited (AFE) for an initial purchase consideration of USD20.6m (RM85.3m), to be paid in sh. We are positive on the acquisition, and see the transaction as a value accretive and synergistic one, enabling the Group to fast track its regional expansion plans. We make no changes to our earnings estimates at this juncture until more milestones with regard to the conditions precedent are met (completion expected 1Q2017), though we would like to highlight a potential 30%-40% jump in forward earnings based on an average RM6.5m consolidation of AFE’s numbers. Our Outperform call is reaffirmed with a PE derived target price of RM1.08 premised on a 30x multiple to FY17 earnings per share of 3.60sen, the higher multiple justifiable in our view given the strong growth anticipated.
  • More on AFE. Incorporated in Hong Kong, the company is a financial data and trading solutions provider with presence in Hong Kong, Macau and Vietnam. Its group of companies offer customers, amongst which are stock brokerage firms, commercial banks, asset management companies and retail investors, a full suite of multi market and multi-instrument platforms for information, stock trading and settlement services. Though the AFE Group reported a RM714,000 loss for FY15, this comes as a result of equity-accounting a Thai associate’s RM7.47m share of losses, an entity which has been earmarked for disposal upon completion of the transaction, hence the absence of this drag going forward. Historical track record has been encouraging otherwise, a net profit of RM7.4m recorded in FY13, RM3.9m in FY14, RM6.7m (adjusted for the associate losses) in FY15 and RM2.4m up to May 2016.
  • Acquisition price based on an implied 8.5x price-earnings multiple is fair in our view, arrived at on the basis of AFE’s consolidated FY15 net profit of RM6.76m (adjusting for the associate’s share of losses), and cash holdings of about RM27.95m amongst others. With AFE, N2N is able to leverage on the former’s expertise in information solutions as well as its overseas customer base to complement its existing business and expand into new markets. Add to that the partnership with its 2 significant shareholders, primed to bear fruit through the development and rolling out of QUICK PRO in Japan and across Asia, the company’s growth potential is exciting. While the Group’s previously-healthy sh pile (c. RM112.5m as at 30 June 2016) will be markedly reduced, the company is still able to finance other value-enhancing M&A activities should any arise.

Source: PublicInvest Research - 13 Oct 2016

Brokers Report: Top Glove Corporation Berhad - Flattish Quarter

Retain Neutral call with lower target price (TP) of RM4.62

Top Glove’s FY16 results missed our and consensus estimates, making up only 93.0% and 95.9% full-year numbers respectively. FY16 revenue me in at RM2.9bn (+15.1% YoY), with earnings at RM361.1m (+28.9% YoY), mainly helped by the exceptionally high earnings in 1HFY16 on the back of a stronger USD and lower raw material prices. We are cautious on the group’s near term outlook owing to the absence of a USD-driven catalyst, mounting st pressures and persistent price competition. Our earnings estimates are lowered by 14.3% to 34.7% for FY17 onwards, accounting for adjustments to capacity projection, lower ASP assumption and higher operating costs. We maintain our Neutral call with a lower TP of RM4.62 based on a DCF valuation methodology. An 8.5 sen dividend was proposed this quarter, which translates into full year dividend yield of 2.9%.
  • Flattish QoQ. 4QFY16 revenue was RM722.1m (+7.4% QoQ, +1.8% YoY), with earnings at RM65.6m (+5.1% QoQ, -36.3% YoY). The QoQ increment came from a hike in ASP (6%-8% QoQ) and lower raw material prices (-3% QoQ), though partly offset the higher operating costs incurred in this quarter. Mounting st pressures are largely due to higher labour costs (+11%) from implementation of the minimum wage policy and the recent hike in natural gas prices (+6%).
  • Expansion updates. F27 in Lukut with 2.0bn pcs/annum capacity has been completed and commenced gradually since August 2016. It is targeted to be fully commercialized by December 2016. F6 in Phuket is delayed for another four months to December 2016, due to its construction design issues however. Construction of F30 has begun and is expected to be operational by April 2017 (previously targeted by February 2017). In addition, the group targets to further expand by an additional 6bn pcs/annum capacity through the recently- acquired factory in Klang, under two phases. We anticipate a slight slow- down in its expansion plans however given the prolonged pricing competition environment. We have not imputed the additional 6.0bn capacity into our capacity projection until further clarity from management.
  • Neutral ll. Our earnings estimates are lowered by 14.3%-34.7% for FY17 onwards, to account for lower ASP assumption, higher operating costs and adjustments to our capacity projection. As a result, our target price is lowered to RM4.62 (previously RM5.52). We are cautious on the group’s near term outlook owing to the absence of a USD-driven catalyst, mounting st pressures and persistent price competition.

Source: PublicInvest Research - 13 Oct 2016

Tuesday, October 11, 2016

Brokers Report: Sime Darby - Saizen REIT Back On Track

Retain neutral call with target price (TP) of RM7.15

Sime Darby (Sime) has entered into an implementation agreement with Japan Residential Asset Manager, the manager of Saizen REIT to acquire at least 25% of the enlarged Saizen REIT through a reverse takeover (RTO) after the expiry of framework agreement last week. There are some slight changes with regards to the shareholding and agreed prices compared to the previous agreement. The estimated market capitalization of Saizen REIT also revised up from RM900m to RM1.1bn. At this juncture, we maintain our Neutral call and TP (RM 7.15) pending the completion of recent proposed private placement and more guidance from management on the outlook of its plantation and industrial arms.
  • Salient details of the RTO. Under the new agreement, Sime indirect wholly-owned subsidiaries, Hasting Deering (Aus) Limited and Austchrome will dispose 20 industrial properties located in Queensland and the Northern Territory, Australia to Saizen REIT for a total consideration of AUD355.8m (RM1.1bn). Subsequently, those properties will be master leased back to Sime’s Australian subsidiaries for a total period of 16.7 years. Sime indirect wholly-owned subsidiary, Sime Darby Property Singapore Limited (SDPSL) will be issued new units at SGD0.03604/unit (RM0.11) in Saizen REIT and promissory note as part of the reverse takeover of Saizen REIT by Sime, which in turn will own at least 25% stake in the Singapore-listed REIT. In addition, Japan Residential Assets manager will also sell 80% interest in the Saizen REIT manager to SDPSL.
  • Background of Saizen REIT. Saizen REIT is a Singapore-based real estate investment trust (REIT) established since 2007 with the objective of investing into Japanese residential real estate assets. The company has a market capitalization of SGD34.7m (RM104m) as of yesterday. It used to manage 136 properties with a total value of SGD509m (RM1.5bn) over 14 Japanese ties. Following the completion of the disposal of Saizen REIT’s entire portfolio of real assets to Triangle TMK on 4 March 2016, Saizen REIT ceased to have any operating business and currently exists as a sh trust. Most of the proceeds from the disposal were paid out to unitholders via a special distribution. Its current cash level stands at SGD0.0987 per unit.
  • More than RM1.1bn industrial assets injection. It is believed that the properties to be injected are the assets drawn from Sime’s industrial arm, which markets and distributes Caterpillar equipment across Australia. There are a total of 20 industrial properties located across Australia with a total book value of more than RM1.1bn.
  • Timeline. The implementation agreement shall terminate if any of the conditions precedent is not fulfilled by 31 Jan 2017. KEY FINANCIAL SUMMARY Saizen REIT Back On Track Sime Darby (Sime) has entered into an implementation agreement with Japan Residential Asset Manager, the manager of Saizen REIT to acquire at least 25% of the enlarged Saizen REIT through a reverse takeover (RTO) after the expiry of framework agreement last week. There are some slight changes with regards to the shareholding and agreed prices compared to the previous agreement. The estimated market capitalization of Saizen REIT also revised up from RM900m to RM1.1bn. At this juncture, we maintain our Neutral call and TP pending the completion of recent proposed private placement and more guidance from management on the outlook of its plantation and industrial arms.

Source: PublicInvest Research - 11 Oct 2016

Brokers Report: Dagang NeXchange Bhd - Strong Profit Growth at Attractive Valuation

Dagang NeXchange valued at RM0.35 a share

Dagang NeXchange (DNeX), formerly known as Time Engineering, was primarily an information technology (IT) software solutions provider. In recent years, the group has however diversified into the energy sector with the acquisitions of companies involving in the oil & gas segment. Going forward, DNeX is expected to derive 50% of its earnings from IT & e-services and the remaining from energy-related businesses. For FY17F, bottomline is anticipated to grow by about 19%, excluding potential capex and maintenance jobs from the Vehicle Entry Permit (VEP) project. The key conncern for DNeX is the expiry of the exclusive agreement to operate the National Single Window (NSW) but management has made effort to widen its e-commerce services with the introduction of new initiatives that offer Business-to-Business software system. This should help to provide some mitigating effect from the loss of exclusivity beyond FY18F. Our base case scenario values DNeX at RM0.35 a share, based on SOTP valuation. This translates to a forward PER of 10x, which is undemanding, in our opinion.
  • E-services provider with exclusive agreement to operate the NSW. DNeX was assigned the role of exclusive operator of the NSW for trade facilitation by the Malaysian government in 1989. Hence, the group has over 25 years of experience in the development of Business-to Government trade facilitation and e-commerce in the country. However, the exclusive agreement will expire in two years. In its attempt to offset potential loss of income, DNeX has introduced new e-services initiatives to widen its sources of earnings. The group is also the contractor of VEP Phase 1 project at the Johor-Singapore border. It is also negotiating for the maintenance job that would provide a stable recurring income and the next capex job at the Malaysia-Thailand border.
  • Low entry st into the energy sector. In 2014, DNeX diversified into the energy sector by acquiring an equipment and service provider, OGPC. In the following year, it acquired a 30% stake in Ping Petroleum (Ping), which holds a 50% stake in four oil producing fields located in the UK Central North Sea called Anasuria Cluster. Both acquisitions were transacted at reasonably low pricing, in our view. In 1H16, DNeX has recognized negative goodwill amounting to RM81m for having to acquire undervalued asset (i.e. Anasuria Cluster).
  • Diversified earnings base. From FY16 onwards, with the completion of the oil & gas acquisitions, DNeX should derive 50% of its earnings from the energy sector and the remaining from IT & e-services. In our FY17 earnings forecast, we exclude the VEP Johor-Singapore maintenance job and the Malaysia-Thailand border capex works. We believe we have conservatively accounted for the Petronas umbrella contract in FY17F, assuming the bulk of the contribution to be recognized in FY18/19F (in line with our oil price outlook).

Source: PublicInvest Research - 10 Oct 2016

Brokers Report: Malaysia Airports Holdings - September Passenger Traffic Snapshot

Maintain outperform recommendation with unchanged target price (TP) of RM7.33

AIRPORT’s Malaysian passenger traffic growth of 4.4% YoYYTD came in above our 3.0% target while its Turkey passenger growth of 5.9% YoY-YTD was below our 10.0% target. Total September passenger number (including ISG) registered growth of 8.6% YoY mainly driven by its Malaysian operation. No changes to our FY16-17E core earnings for now as we look to review our growth estimates after the October passenger traffic stats. Maintain OUTPERFORM with unchanged TP of RM7.33.

YTD passenger traffic growth. Total passenger growth for Malaysian airports and ISG (Turkey) was up 4.4% and 5.9%YoY-YTD, respectively. While Malaysian passenger growth came in above our 3.0% target, ISG was below our 10.0% target. AIRPORT’s total September passenger numbers (including ISG) registered growth of 8.6% YoY mainly driven by its Malaysian operation due to an improved average load factor (+5.9ppt) and almost all airports in Malaysia recording positive growth.

Malaysian passenger traffic review. In September, AIRPORT’s passengers in Malaysia increased 12.3% YoY. International and domestic passengers were up 15.3% and 9.7%, respectively. The overall increase was mainly due to: (i) improved average load factor to 74.7% (+5.9ppt), (ii) 21 airlines recording double-digit YoY growth (+12% to +90%), and (iii) new foreign airlines operating in Sept 2016 (against Sept 2015).

Strongest YoY growth at KLIA Main for FY16. For September, KLIA Main registered a record growth of 35.2% YoY in FY16 with international and domestic passengers registering positive growth of 27.2% and 62.5%, respectively. The exceptional growth is due to Malaysia Airlines Bhd (MAB) regaining market share in the domestic and international front registering its first positive growth of 10% YoY in FY16 coupled with Malindo and Lion Air shifting operations from KLIA 2 to KLIA Main since 15th March 2016. YoY-YTD, KLIA Main showed improved growth of 6.5% (against previous month’s growth of -12.9% to +3.4%). Meanwhile, KLIA 2 showed negative growth of 0.9% YoY (International: +2.2%; Domestic: - 6.2%) due to passenger traffic moderating from Malindo and Lion Air shifting operations as explained.

Turkey operations showing slight recovery. ISG Airport’s September passenger numbers are seeing signs of recovery, registering a mild decline of 0.4% YoY versus the decline of 2.2% to 5.0% YoY from June to August since the bombing, military coup and declaration of state of emergency in Turkey. Its international growth declined 3.2% YoY, its domestic growth registered positive 1.1% growth YoY indicating slight glimpse of recovery since the string of negative events which shook Turkey.

Maintain OUTPERFORM. Despite ISG’s 5.9% growth coming in below our 10.0% target, we make no changes to our passenger growth assumption for ISG as we are banking on a stronger 4Q performance given it is a seasonally stronger quarter and recovery of ISG traffic as the impact from the negative news subsides. However, we look to review our growth estimates after the October passenger stats should ISG fail to show significant recovery. Maintain OUTPERFORM on AIRPORT with an unchanged TP of RM7.33 based on a 5-year +0.5SD FY17E PBV of 1.58x. We believe further upside to TP lies with: (i) extension of operating agreement, (ii) stronger traffic from the international front, and (iii) fasterthan-expected recovery from Turkey operations.

Source: Kenanga Research - 11 Oct 2016

Friday, October 7, 2016

Brokers Report: Tenaga Nasional Berhad - Site Visit to Kapar Energy Ventures (KEV)

Retain outperform recommendation with unchanged target price (TP) of RM15.55

We visited Kapar Energy Ventures (KEV) recently to have a better understanding on its overall operations, technical issues that are affecting the financial performance of the power plant and its recovery programmes.

The only power plant in Malaysia with triple fuel capability. KEV is located in Kapar, Selangor. 60% shareholding of this second generation Independent Power Producer (IPP) is held by Tenaga Nasional (TNB), while the balance 40% is held by Malakoff. KEV has a generating capacity of 2,420MW and is the only power plant in Malaysia with triple fuel capability, i.e. coal, gas and oil. The power plant was officially opened on 14 March 1987 and converted into an independent power producer (IPP) on 9 July 2004. It has four generating facilities (GF). Power Purchase Agreement (PPA) for GF1 to GF3 will expire in July 2029, while PPA for GF4 will end in July 2019.

Operational performances. KEV has been reporting losses due to multiple technical issues affecting the performance of its power plants. Among the technical issues at KEV are (i) general aging, (ii) siltation at the seawater intake which had caused breakdown to the cooling water pump, (iii) turbine vibration, (iv) defective structure, and (v) boiler tube leakages.

Turnaround plans. Management has engaged RWE, a reputable international engineering consulting company to assist with the plant’s turnaround plan. KEV is (i) reviewing and upgrading its maintenance, overhaul and engineering practices and guidelines to ensure plant’s equipment run efficiently, (ii) suspending suppliers with unreliable equipment and parts, (iii) proposing additional budget to the Board to expedite the rectification program, (iv) reviewing PPA every 3 years to reset rolling UOR to 0%. The first reset was in June 2016 for GF2 and GF3, and (v) proposing RULS interest rate adjustment from 15% to 8% to improve bottom-line. At this juncture, management is unable to ascertain when the plant will achieve its full turnaround.

Our view. The on-going initiatives taken by the management has managed to reduce the unplanned outages rate (UOR) for GF3 from c.45% in FY14 to 18% in FY15. During our visit at the end of September, UOR for GF3 has been further reduced to 6.25%, while UOR at GF1 and GF2 were at 4.5% and 1.25% respectively. We opine the plant’s earnings will continue to be negatively affected in the near term mainly due to higher repair and maintenance costs. Nevertheless, KEV losses are immaterial to TNB’s overall net profit. We maintain our Outperform call on TNB with an unchanged TP of RM15.55.

Source: PublicInvest Research - 07 Oct 2016

Brokers Report: SIME DARBY - Land Deals with Sister Co

Maintain Neutral call with target price (TP) of RM7.15

Sime Darby has proposed an asset disposal and acquisition with I&P Group S/B after finalizing the recent private placement at RM7.45/share, raising RM2.3bn. The first proposal is a disposal of 325.7ha freehold oil palm plantation land in Semenyih for RM428m followed by an acquisition of 768ha freehold oil palm plantation land in Kluang and Batu Pahat as well as a 70mt/hour mill for a combined amount of RM106m. We see good opportunities in unlocking the potential value in both deals, which is a collective effort from the company and its major shareholder. We maintain our Neutral call and TP of RM7.15.

Salient details of the transactions. Firstly, Sime Darby plans to divest 325ha (805 acres) in Semenyih to Petaling Garden for RM428m or RM12.20 psf. The acquirer is a wholly-owned subsidiary of I&P Group S/B, which in turn is a 54.99%-owned subsidiary of Permodalan Nasional Malaysia. Sime Darby is expected to reap a gain of RM295.7m (EPS of 4.7sen) on the disposal. On the second deal, the Group plans to acquire 768.5ha brownfield plantation land together with a 70mt/hour palm oil mill and other ancillary buildings in Kluang and Batu Pahat from Yong Peng Realty S/B and Perusahaan Minyak Sawit Bintang S/B for a total of RM106m or RM131,677ha. Both sellers are the indirect wholly-owned subsidiaries of I&P Group S/B.

Utilisation of proceeds. The proceeds derived from the proposed disposal will be used to fund property arm development projects over the next 2 years while the acquisition will be funded through internally generated funds. Both deals are expected to be completed by 1QFY18 and are not subject to the Sime Darby’s shareholder approvals.

Synergistic gains for both parties. Both deals involve its major shareholder, PNB, which owns 54.99% stake in I&P Group S/B and the parent company of AmanahRaya Trustee Berhad- Amanah Saham Bumiputera. The proposed acquisition of plantation land in Johor is located in close proximity to Sime Darby’s existing oil palm plantations in Johor Central, which should help generate higher productivity as well as cost savings to the Group. On the other hand, given the vibrant property development activities in Semenyih dominated by Eco World, SP Setia, Hua Yang, MKH and a few reputable property players, it will help unlock the potential value of its agriculture land in Semenyih, which can be converted into property land.

Source: PublicInvest Research - 07 Oct 2016

Wednesday, October 5, 2016

Brokers Report: MISC Bhd - Poised for stronger 2H

Maintain BUY call with target price (TP) of RM9.50


  • MISC announced that it has filed a Notice of Adjudication dated 23 Sep 2016 against Sabah Shell Petroleum Company Limited (“SSPC”) seeking resolution on contractual disputes covering claims for outstanding additional lease rates, payment for completed variation works and other associated costs amounting to approximately US$245m.
  • The above litigation would not post any negative impact to its earnings as the current lease contract terms for Gemusut-Kakap Semi-Floating Production Ltd (GKL) is maintained. In contrast, potential upside could be reaped by the group in the event of successful claim from the legal suit.
  • The group has also just taken delivery of Seri Camelia, LNG vessel built by Hyundai Heavy Industries, 1st of the 5 LNG vessels to be chartered to Petronas for the next 15 years. This is in line with our assumption of LNG vessel delivery in 3Q16 and 4Q16.
  • In the coming years, the group’s core earnings growth would be anchored by these 5 vessels with generation of recurring cash flow, in line with the group’s strategy to focus on assets that generate recurring cash flow. The remaining LNG assets are still under construction in Hyundai’s Korean shipyard and will be delivered to MISC group in a staggered basis.
  • Although LNG market is oversupplied globally with heavy vessel deliveries, MISC is prudent on its business model by not risking its money on speculative LNG newbuilds. The group would only commit into long-term LNG contracts with sufficient IRR on its investments, reducing risk of asset idling.
  • Whilst slightly weaker this year, the Petroleum division of the group is still sustainable given the limited fleet growth expected this year globally. Consolidation of remaining 50% stake of 6 Paramount Aframax tankers would help to lift Petroleum earnings in 2H16.
  • The Offshore business segment remains a stable contributor to the group with existing contracts still largely intact. We expect cash flow and earnings to remain sustainable in the medium term with higher GKL earnings to be recognized starting 2H16 post consolidation of remaining 49% stake in the asset.


  • Premature contract termination on LNG and Offshore contracts.
  • Further unexpected deterioration of tanker market Forecasts
  • Unchanged.


  • BUY
  • Recent weakness in Petroleum rates and negative impact from temporary suspension of Yemen LNG have already been priced in. We believe earnings have bottomed out and will recover from 2H16 as (i) more LNG contracts (5 new vessels) start kicking in with resumption of Yemen LNG contracts, and (ii) higher contribution from Offshore (GKL) and Petroleum post consolidation of remaining stakes in its respective businesses.


  • We maintain our SoP-driven TP at RM9.50 and BUY call on the stock.

Source: Hong Leong Investment Bank Research - 05 October 2016