Jan 16, 2017

Adenan Satem Passed Away: Sarawak-Based Stocks

Sarawak-based stocks held ground.

Adenan Satem passed away. Sarawak Chief Minister Tan Sri Adenan Satem, died yesterday at age 72 after just about three years in office. Perhaps his most notable political achievement, Tan Sri Adenan helped Malaysia's ruling coalition Barisan Nasional (BN) storm to a huge victory in the state polls last year, securing 72 out of 82 state seats.

Recap of Adenan Satem’s administration. Since assuming office back in 2014, Tan Sri Adenan has achieved a great deal under his ’45 Principles and Actions’. Tan Sri Adenan’s main principles were, among others, centered around reduction on electricity tariffs, rural transformation, Petronas commitments, forest management and the Pan Borneo Highway.
By-election soon… We expect a by-election to be held soon to fill the State seat previously held by Tan Sri Adenan Satem. Furthermore, we would also see the selection of a new Yang Dipertua of Parti Pesaka Bumiputera Bersatu (PBB) in Sarawak.

…with high probability of BN retaining the seat. There is a high chance for the BN to retain the seat given that Tanjung Datu state constituency has a high Malay and Melanau voter base which are traditionally strong PBB supporters. This is reflected in the economic manifesto of PBB that appeals to the said voter base. • Potential candidates as new Chief Minister. Based on our channel checks, there are two potential successors for Sarawak’s Chief Minister (CM). They are (i) Datuk Amar Abang Johari Tun Openg, Sarawak’s Deputy Chief Minister, and (ii) YB Datuk Amar Haji Awang Tengah Ali Hasan, Sarawak’s Minister of Industrial and Entrepreneur Development, Trade and Investment.

Most Sarawak-based stocks held ground… Yesterday, we initially anticipated Sarawak-based stocks to experience a kneejerk selling pressure pursuant to the news but, as it turned out, most of the stocks held ground.

Sarawak-based Stocks:
sarawak based stocks

…but anticipate market wariness until CM succession is clear. However, we believe that the market is still in the midst of factoring in the potential outcome from this news. Therefore, we anticipate the price performance of Sarawak-based stocks to remain wary until the CM succession is made known.

Expect no major change in state government policies. Talks on devolution of power from the federal government to the Sarawak government began in August 2015 by Tan Sri Adenan himself. Since the negotiation started, the following were achieved: (i) 13 areas had been returned to Sarawak that covers the law of joint committees (State and Federal) on the implementation and monitoring of projects under the concurrent list of the Housing Ministry and Tourism Ministry, and (ii) agreement to have 90% of teachers in Sarawak being Sarawakians. We opine that devolution of power will continue since the federal government is committed to meet the aspirations of Sarawak.

FBM KLCI year-end target. We reiterate our FBM KLCI 2017 year-end target of 1,830 points which equates to PER17 of 17.1x.

source: MIDf Research 12/1/2017

Jan 12, 2017

Malaysia’s Plantation – Maintain Market Weight


Malaysia’s Dec 16 palm oil inventory was higher than expected at 1.67m tonnes vs 2015’s 2.63m tonnes, but still reflected a decline of 36.8% yoy on the back of weaker production. In 2017, the market expects production to recover to 19.5m-20.0m tonnes and this will largely take place in 2H17. Average CPO price for 2017 is expected at RM2,600/tonne (2016: RM2,653) as production is likely to recover and inventory is expected to pile up in 2H17. Maintain MARKET WEIGHT.


malaysia palm oi data summary

End-Dec 16 palm oil inventory level at 1.67m tonnes. Palm oil inventory came in higher than market expectations at 1.67m tonnes in Dec 16 on the back of weaker-than- expected exports despite CPO production declining by a smaller 6.4% mom vs consensus forecast of -8.2% to -9.5% mom. Inventory level dropped 36.8% yoy, mainly due to weak production (-13.2% yoy) and weak palm oil imports (-45.0% yoy).

Malaysia’s CPO production for 2016 within our expectation. CPO production of 17.3m tonnes (-13.2% yoy) in 2016 was within our and market expectations of 17.0m-17.5m tonnes. CPO production is likely to stay weak in 1Q17 as it is a seasonally weak production period and the lagged impact from the drought has not tapered off yet. Thus, inventory is likely to stay low in the near term and this will support CPO prices. We expect Malaysia’s CPO production to pick up strongly in 2H17 on a yield recovery. The market is expecting Malaysia’s CPO production at 19m-20m tonnes for 2017.

GENP likely to have been a beneficiary of the CPO price uptrend in 4Q16.
Although 4Q16 saw across-the-board qoq production declines, we expect this would have been offset by the 13.0% qoq increase in CPO prices. This suggests that upstream players which are more involved in spot sales and registered smaller production declines are likely to report better qoq earnings for 4Q16. Within our coverage, we note Genting Plantations (GENP) and Sarawak Oil Palms (SOP) reported CPO prices which were tracking closer to Malaysian Palm Oil Board’s (MPOB) spot prices. This could have been due to most of GENP’s and SOP’s sales being spot sales. Of these two, GENP is likely to benefit from CPO prices rally as its 4Q16 FFB production was up 21.4% qoq, while SOP is likely to register lower qoq production.

plantation stocks comparison

Maintain MARKET WEIGHT. Among Malaysia small- to mid-caps, we like Kim Loong (KIML/BUY/Target: RM4.20) as its earnings growth is supported by: a) recovery in FFB production, b) good milling margins from recovery of its oil extraction rate, and c) extra income from value-add by-products. Kim Loong had recently announced a special DPS of 5 sen and this lifted its FY18 DPS outlook. We are assuming similar payout ratio of 75% for FY18, translating to dividend yield of 7%.

Production increased yoy after 11 months of decline. In Dec 16, CPO production dropped 6.4% mom, but registered its first yoy increase after 11 consecutive months of decline. The weaker production mom was mainly due to a seasonally low production period and harvesting activities being affected by rainfall. The yoy increase was supported by the recovery of FFB yield, where Peninsular Malaysia and Sarawak production increased 15.1% yoy and 7.0% yoy respectively in Dec 16. However, Sabah’s production still down mom and yoy mainly due the lagged impact from the two consecutive years of severe drought.

National FFB yield is stabilising.
Malaysia’s FFB yield of 1.36 tonnes/ha was above the lower end of the five-year range of 1.35 tonnes/ha (refer RHS chart) in Dec 16. Peninsular Malaysia’s FFB yield improved yoy to 1.38 tonne/ha in Dec 16 (+9.5% yoy), an indication of stabilising yields. However, Sabah’s/Sarawak’s FFB yields were still lower yoy and below the five-year range of 1.34 tonnes/ha. For 2016, Malaysia’s FFB yield declined to 15.91 tonnes/ha from 18.48 tonnes/ha in 2015. All in all, we expect FFB yield to stay low in 1H17 and normalise in 2H17.

Exports were down yoy in 2016
, mainly due to weaker exports to all key importing countries except Pakistan. India and China recorded the largest yoy decline in imports, down 23.5% and 20.9% in 2016. In Dec 16, exports to China decreased 27.0% mom, likely due to weak demand during the winter season. On the other hand, exports to India were up 25.4% mom on stock replenishment.

Average CPO price for 2016 beat our expectation.
Average CPO price increased 23.2% yoy to RM2,653/tonne in 2016, above our expectation of RM2,500/tonne. We reckon CPO prices are likely to stay high at RM2,800-3,300/tonne in 1Q17, supported by low inventory level and stable demand. Nevertheless, CPO prices are likely to trend down in 2H17 when production picks up. All in all, we are expecting CPO price to average at RM2,600/tonne for 2017. Although we reckon 2017’s average CPO price could come in higher than our expectation of RM2,600/tonne, we would like to keep to our assumption at this point, given that commodity prices are very volatile.

Timeline to implement B10 programme
. We gather the B10 programme is ready to be put into action and the key issue that caused the recent delay in B10 implementation was the huge price differential between crude oil prices and palm oil prices. During a sharp recovery in production which we expect would come in late-3Q17, the B10 programme would prevent a sharp decline in CPO prices.

Weather disruption. Agricultural production is impacted by extreme weather. Any negative impact from the weather would be positive to prices.

 We maintain our CPO price expectations of RM2,600/tonne for 2017 and RM2,500/tonne for 2018.

 Backtracking of biodiesel mandates in Indonesia and Malaysia.

source: UOBKayHian 11/1/2017

Jan 11, 2017

NYLEX - Technical Analysis

Stock Code: 4944


  • Target Price: RM0.610, RM0.630
  • Last closing price: RM0.560
  • Potential return: 8.9%, 12.5%
  • Support: RM0.540
  • Stop Loss: RM0.530

Possible for bottom fishing. Without creating new lower-low, the sharp retracement from high of RM0.725 made a halt and NYLEX’s share price is now supported above RM0.540. Both bullish RSI and MACD indicators signal reasonable entry level, with anticipation of continuous improvement in both momentum and trend in near term. Should resistance range within RM0.575 and RM0.585 be broken, it may continue to lift price higher to the next resistance level of RM0.610 and RM0.630, eventually.

However, failure to hold at support level of RM0.540 may indicate weakness in the share price and hence, a cut-loss signal.

source: PublicInvest Research 11/1/2017

The Company is principally involved in investment holding and the manufacture and marketing of vinyl-coated fabrics calendered film and sheeting and other plastic products including geotextiles and prefabricated sub-soil drainage systems.

Jan 5, 2017

Malaysia Market: 2017 Outlook

Rogue forces awaken

● What keeps us awake at night? Answer: Ringgit. Bank Negara’s recent moves have elevated concerns on the Ringgit among foreign investors. We remain cautious beyond the short-term
recovery and expect USD/MYR to depreciate further.
● Foreign investors had been warming up to Malaysia but the Ringgit volatility has overshadowed the promising fundamentals. We see the macro outlook improving, with 2017 GDP rising to 4.5%. The 3Q results season was promising while valuations are more attractive, especially for smaller caps.
● What to watch out for in 2017? (1) General Elections. (2) Trump. (3) China is Malaysia’s white knight. (4) PNB reforms.
● Top picks: Tourism (GENM, GENT, AIRA, AAX); Construction (GAM, IJM); high growth small caps (PAD, KAREX, MYEG), BAB.

Top Outperform picks for 2017:top stock for 2017.

2017 Outlook—Rogue forces awaken
Malaysia underperformed by 10% in 2016, the third consecutive year of underperformance, driven partly by foreign outflows. The MYR depreciated by 4% against the USD. PM Najib strengthened his political position. Malaysia's consumer sentiment remains weak.

Figure 2: Foreign bond ownership of MGS is now at 48.4%, one of the highest, if not the highest in Asia:foreign bond ownership

What keeps us awake at night? Answer: Ringgit
Bank Negara’s recent moves to curb Ringgit volatility, by restricting trade on the NDF and exporters’ Ringgit conversion have elevated concerns on the Ringgit among foreign investors, rather than calm the markets. We remain cautious beyond the short-term recovery and expect USD/MYR to rise to 4.50 in 3 months and 4.55 in 12 months. High foreign bond ownership is a concern. Foreign investors hold 48% of MGS, with RM47 bn maturing in 2017 (+50% YoY). We also worry over the risk of a weight reduction in the GBEM Global Diversified index (9% weighting) if poor forex hedging liquidity persists.

Promising fundamentals amid Ringgit fears
Foreign investors had been warming up to Malaysia, but the Ringgit volatility has overshadowed the promising fundamentals.

Macro recovery. We expect GDP growth to rise to 4.5% in 2017 from 4.1% in 2016, and see the macro outlook improving due to the turn in the commodity price cycle. The rising oil price bodes well for sentiment on Malaysia.

A promising 3Q result season. After a good 2Q, the 3Q results season was even better—3Q16 net profit +12.7% YoY and +0.6% QoQ; sales +0.5% YoY and +0.1% QoQ; net profit margins +1.0 pp and flat QoQ. If the current trajectory continues, 2017 will see some earnings growth, after three consecutive years of earnings contraction.

David wins. Small caps are more attractive than big caps. KLCI P/Es are 15.5x in 2016 and 14.5x in 2017, far more expensive than the small cap index P/Es of 10.3x and 8.8x, and small cap EPS growth is superior at 148% and 17% in 2016 and 2017, respectively.

Valuations are more attractive than history.
MSCI Malaysia’s P/B of 1.6x is only 7% and 14% above GFC and AFC lows, respectively. This is the lowest the index has hit since GFC.

What to watch out for in 2017?

Malaysia’s 14th General Elections will need to be called before mid-2018. We believe it is later rather than sooner. The Malaysian stock market outperforms the region two to five months before the GE, and underperforms one month after.

A Trump administration is negative for the Ringgit and will result in a more decisive shift among Asian economies towards China. Malaysia is already leaning towards China.

China is Malaysia’s BFF. China's aggressive approach towards Malaysia was welcomed with open arms as China helped 1MDB out of its financial woes and Malaysia needs China’s funding to drive economic growth, but there is no such thing as a free lunch.

PNB reforms
. PNB’s new appointments—Wahid and Rahman—could herald reforms in PNB and its companies (key investments include Maybank, Sime, SPSB and UMWH).

Top picks in 2017

Tourism (GENM, GENT, AIRA, AAX); Construction (GAM, IJM); beaten down stock (BAB) and high growth small caps (PAD, KAREX, MYEG). Switch from PBK into CIMB; from MAXIS into TDC.

We are OVERWEIGHT Construction, Gaming, and Oil & Gas. We are UNDERWEIGHT Banks, Power, and Telco.

source: Credit Suisse 5/1/2017

Jan 3, 2017

Malaysia Strategy - 2017: A year of two halves

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■ Stronger-than-expected headwinds drag the KLCI lower in 2016, the third
■ consecutive year of declines.  We predict a challenging 1H17 for the market, followed by a stronger 2H17.
■ Top 1H17 themes are strong US$ play, pump priming and small-mid cap scheme. 
■ Preferred big cap picks for 2017 are Tenaga Nasional, Sime Darby and IJM Corp.
■ We maintain our KLCI target of 1,820 pts, based on 16x forward P/E.

FBM KLCI’s 2016 Main Events:klci main event 2016
What went wrong and right for us in 2016

We had predicted Malaysia would face numerous headwinds in 2016, including slower economic growth and an uncertain external environment. As expected, 2016 was less volatile compared to 2015. However, the headwinds (weaker corporate earnings, strong US$ and slower growth) turned out to be stronger than expected. These, coupled with two unexpected global events (Brexit and Trump’s victory), resulted in a YTD KLCI underperforming our expectations and declining for the third consecutive year in 2016.

2017 could be a year of two halves
We are projecting a challenging 1H17 as we expect consumer spending growth to remain weak ahead of the general elections (GE14). This, coupled with the 4% YTD fall in RM vs. US$ as well as uncertain global policies, could negatively affect sentiment and foreign investment. We expect some of the uncertainties hanging over the market to clear up in 2H17. Our predictions are premised on M&A activities picking up, higher commodity prices flowing through to the economy, a potential post-GE14 relief rally, and the ringgit rising towards its fair value of RM4.10/US$1.

Seven key themes for 2017
We have identified seven themes for 2017: 1) beneficiaries of US$ strength – rubber gloves and agribusiness companies; (2) pump priming and China investments – construction and infrastructure; (3) dividend yield play – utilities and banks; (4) tourism play – airlines and gaming; (5) GLC transformation – conglomerate; (6) small-mid cap research fund and scheme – small cap; (7) GE14 plays – GLC stocks.

Our top sector picks
Our top sector picks are utilities, construction and small caps. In line with our cautious view on the market for 1H17, we chose utilities for its defensive earnings, construction for potential jobs rollout and award of projects ahead of GE14, and small caps as potential beneficiaries of the launch of the small-mid cap research scheme.

Preferred stocks
Our top big cap picks are Tenaga Nasional for utilities exposure, IJM Corp for the construction sector, and Sime Darby for plantation and PNB transformation. Our top 3 smaller caps are MyEG for the foreign workers permit renewal windfall from the amnesty programme, Karex for its strong market positioning and US$ play, and Sasbadi for its defensive business with strong projected earnings growth from iL-Ace.

Maintain 1,820 KLCI target for end-2017
We reiterate our end-2017 KLCI target of 1,820 pts based on 16x P/E, which is in line with its three-year moving average. We believe the target is achievable as most of the bad news have been priced, in our view, judging from the low foreign shareholdings and the three consecutive years of declines. We project that market earnings will rebound by 10% in 2017.
 source: CIMB Research Dec 21

Dec 1, 2016

Banking Sector - 5 Preferred Banks

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Banks cutting loan growth projection
malaysia top banks■ Gross impaired loan ratio remained stable at 1.65% in Sep-Oct 16.
■ Loan growth recovered from 4.2% yoy in Sep 16 to 4.5% yoy in Oct 16.
■ We lower our projected loan growth for 2016 from 6-7% to 5.6% and introduce our
loan growth forecast of 5-6% for 2017.
■ Loan application rebounded strongly with a mom growth of 14.4% in Oct 16.
■ Stay Overweight on banks given the attractive valuations and better prospects in

Preference for the sector.
Stock-wise, we prefer the following banks for exposure to the sector:

BIMB Holdings – BIMB Holdings is our top pick among Malaysian banks as it will be the only beneficiary of EPF’s Simpanan Shariah, to be implemented in 2017 and would increase the inflow of Islamic funds. BIMB is the only listed pure Islamic bank in Malaysia.

The qualities of the stock are reflected by: (1) its unrivalled loan growth, (2) one of the best ROEs in the sector, (3) strong asset quality – one of the lowest gross impaired loan ratios among local banks, and (4) swift expansion of non-fund based income, primarily theTakaful income.

RHB Bank – RHB Bank is an Add in our books given the potential re-rating catalysts of: (1) benefits from the implementation of its IGNITE 17 transformation programme, (2) attractive valuation, (3) cost savings from its career transition scheme materialising from FY16 onwards, (4) gains in market share by its investment banking unit, and (5) the drive for regional expansion in the longer term.

Maybank – We like Maybank for its size and well-diversified business portfolio. In Malaysia, it is ranked among the top three in almost all the key market segments, including trade finance, credit cards, investment banking and Islamic banking. Its geographical diversification, with exposure to underpenetrated markets, such as Indonesia and the Philippines, also helps to support its earnings growth in the longer term. The potential re-rating catalysts for the stock are: (1) benefits from the regionalisation of its businesses in various countries, (2) the recovery in earnings contribution from its Indonesia operations, and (3) potential regional expansion of its Islamic banking and insurance businesses in the longer term.

■  AMMB Holdings – We reiterate our Add recommendation on AMMB Holdings as we expect EPS growth to turn around from a 25.8% decline in FY3/16 to an increase of 3.3% in FY3/17. Other potential re-rating catalysts for the stock include: (1) attractive valuations (CY17F P/E of 9x and P/BV of 0.8x), and (2) enticing dividend yields of 4-5% in CY17F.

Affin Holdings – We still rate Affin an Add given its attractive valuations with CY17F P/E of 7.7x and P/BV of 0.5x. In addition, we are positive on the implementation of its Affinity transformation programme, which would yield positive results in the areas of fee income generation, operating efficiency as well as margins.
Management also has aggressive targets of increasing the bank’s ROE by 2-3% pts by 2020 and doubling the bank’s 2015 operating revenue by 2020. This reflects management’s commitments to significantly improve the financial performance of Affin Bank and also its positive views on the impact from the transformation programme.

source: CIMB Research – 01/12/16

Nov 30, 2016

Top Stocks Picks (By Sector) Based On Consensus Target Price

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Userguide: To complement the top down approach, Mercury Securities will be compiling the top three underpriced equities of the respective sectors based on the consensus target price premium over the current price on a weekly basis.consensus target priceFINANCE
Hong Leong Financial Group Bhd 14.96 (Closing Price)  17.50 (Target Price)  17.0% (Premium)

CIMB Group Holdings Bhd
4.66 (Closing Price)  5.07 (Target Price)  8.8% (Premium)

AMMB Holdings Bhd
4.19 (Closing Price)  4.45 (Target Price)  6.2% (Premium)

Eco World Development Group Bhd

1.36 (Closing Price)  1.64 (Target Price)  21.0% (Premium)

LBS Bina Group Bhd
1.71 (Closing Price)  2.08 (Target Price)  21.6% (Premium)

Mah Sing Group Bhd
1.52 (Closing Price)  1.74 (Target Price)  14.1% (Premium)

Hap Seng Plantations Holdings
2.46 (Closing Price)  2.61 (Target Price)  6.0% (Premium)

TSH Resources Bhd
1.93 (Closing Price)  2.02 (Target Price)  4.4% (Premium)

Kuala Lumpur Kepong Bhd 24.10 (Closing Price)  24.10(Target Price)   0.0% (Premium)
Kawan Food Bhd 3.79 (Closing Price)  5.56 (Target Price)  46.7% (Premium)

Heineken Malaysia Bhd
15.70 (Closing Price)  18.49 (Target Price)  17.8% (Premium)

British American Tobacco Malay
44.58 (Closing Price)  48.50 (Target Price)  8.8% (Premium)

VS Industry Bhd 1.41 (Closing Price)  1.70 (Target Price)  20.6% (Premium)

Ta Ann Holdings Bhd
3.77 (Closing Price)  4.42 (Target Price)  17.2% (Premium)

Wah Seong Corp Bhd
0.84 (Closing Price)  1.00 (Target Price)  19.8% (Premium)

Muhibbah Engineering M Bhd

2.19 (Closing Price)  2.99 (Target Price)  36.5% (Premium)

Malaysian Resources Corp Bhd
1.28 (Closing Price)  1.52 (Target Price)  18.7% (Premium)

Hock Seng LEE BHD 1.68 (Closing Price)  2.00 (Target Price) 19.0% (Premium)

Bumi Armada Bhd 0.55 (Closing Price)  0.83 (Target Price)  50.9% (Premium)

Yinson Holdings BHD 2.92 (Closing Price)  3.88 (Target Price)  32.9% (Premium)

Tiong NAM Logistics Holdings 1.61 (Closing Price)  2.07 (Target Price)  28.6% (Premium)

Source: Mercury Securities Research – 29/11/16