Nov 6, 2017

Malaysia Budget 2018 and Stock Picks


Infra pump priming and consumer spending led 2018E GDP growth of 5.2%
Prime Minister Najib set an upbeat tone in 2018 Budget by forecasting 5.2% to 5.8% GDP growth. The pillars of 2018 GDP growth YoY are construction (+7.6%), services (+5.8%) and manufacturing (+5.3%). The winners of this budget are contractors (IJM & GAM), airport operator (MAHB), tourism (GENM) and consumer-centric proxies, such as Astro, telco and convenient stores (Bison). Outlook for tobacco players, such as ROTH, is gloomy as the government merely estimated excise duty collection growth of 4.5%.

Infra pump priming continues and Malaysia aims to create 3.3mn new jobs
The re-affirmation of key projects (MRT 3, High-Speed Rail, East Coast Railway, LRT) worth MYR175bn coupled with MYR6.5bn for rural development and plans to upgrade and expand airports, plus many to-be confirmed projects should keep Malaysia contractors busy until 2026. Besides the major players, we expect smaller contractors, such as Sunway Con, George Kent, AZRB, Muhibbah and WCT, to benefit too. The sector will support job creation.

Personal income tax cut to spur consumer discretionary spending
The 2ppt reduction in taxable income ranges from MYR20-70k should lift disposable income by MYR300-1000 against household income of MYR43k. Further, the infra projects’ estimated multiplier effect on CY18-20E on M2 by a magnitude of MYR2.5-5bn per year (+4-6% YoY) might have a positive impact on consumer discretionary proxies. The influx of foreign labour should benefit telco players in the prepaid market and convenient stores such as Bison.

Malaysia Budget 2018 Allocation:budget 2018 stock picks

Visit Malaysia 2020, to host APEC, WCIT and CHOGM
Budget forecasts a modest 28mn tourist arrivals (+5% vs. 2016) in 2018. But in 2020 Malaysia will host many world events, such as World Congress of IT and Commonwealth Heads of Government Meeting. The inbound and domestic tourism is expected to be buoyant and benefit Malaysia Airport (MAHB). The gaming tax collection is projected to rise by MYR340mn. Assuming no change to the gaming tax, this implies a 11% YoY growth or MYR2bn gross gaming revenue growth – a good read-through on Genting Malaysia (GENM).

Top picks: GENM, IJM, KLK and MAHB; remove ROTH

While illicit cigarette clamp-down has been successful (down 4ppt to 56%), the irrational price war initiated by PMI and JTI Malaysia should erode margins, leading us to remove ROTH from our top picks. The recent sell-down of GENM, in our view, has fully priced in the risk of Mashpee write-off, gaming tax hike and bad 3Q17 results. We remain highly convinced about its growth prospects. KL Kepong’s (KLK) valuable 6600 acre land bank (40km outside of KL City) should benefit from the growing economic development in the capital. Note the entire land bank is worth its current market cap. We also like MAHB for its
exposure to inbound and domestic traffic growth prospects. Moreover, it offers an option to Malaysia’s e-commerce logistics play via Alibaba’s investment.

Last, we add IJM into our top picks. IJM represents a strong proxy to China-led growth, using increased investment from China as a part of its strategic One Belt, One Road initiative and being one of the first beneficiaries of China’s ambitions in Malaysia via the Kuantan Port. The port now stands to be China’s gateway for raw and finished materials from Malaysia.

Valuation and risks
Genting Malaysia
Our target price for Genting Malaysia is based on sum-of-the-parts (SOTP) valuation comprising 20x 2017 P/E for domestic, UK and US gaming operations. While the pegged target is higher than the historical trend, we believe that it is justifiable given the growth is sustainable for next three years. We have pegged 1x historical PB to investment properties. Downside risks include the possibility of further controversial M&A activity, intensifying regional competition and regulatory tightening in operating and potential markets and lower-than-expected return for new investments in the US. Given the lack of clarity in operational data, profit forecast accuracy is thus at risk.

IJM Corporation
We value IJM based on SOTP. We value the construction segment based on a 16x FY19E P/E, in line with the industry average multiple, but also taking into account the growing order book. Meanwhile, we value the industry segment based on a 15x P/E, given the strengthening demand for building materials due to the increased infrastructure investment. We value the property development business using a DCF of its land bank, using a WACC of 6.8%, a 15% development margin and the infrastructure space using a WACC of 6.8%. IJM plantation and Scomi are valued based on market value. A 10% Holdco discount is assumed to arrive at our one-year forward TP. Key risks for IJM include: 1) Execution risk on its construction order book. We assume an average annual replenishment of c. S$3bn. An inability to secure or replenish its order book would be a downside risk. 2) A downturn in the property sector would have a significant impact on valuations, which accounts for 22% of our RNAV estimates. 3) A slower-than-expected ramp-up and expansion of Kuantan port; we forecast the port to reach capacity by 2020, and for the second phase to be completed by 2024. Delays in completion or ramp-up would affect valuations.

KL Kepong
Our target price is based on a sum-of-the-parts valuation, as its earnings are derived from palm oil-based profit and the property development segment. On the earnings front, we apply a 17E 15x P/E (mean valuation). On the property front, we apply a 65% discount to RNAV given the long gestation on unlocking value from the large land bank. Key industry downside risks: a major downturn in CPO or soybean prices; Indonesia's government halts the biodiesel policy; environmental issues that might lead to a revocation of land bank; and a ban of CPO usage in certain countries. Key company downside risks: earnings-dilutive acquisitions; worse-than-expected production; and labour shortages.

Malaysia Airports Holding
We use a two-stage DCF methodology to value MAHB. The first stage is for the initial 10 years based on our financial forecast, and the second stage is from the 11th year to end-of-concession-life at a FCF growth rate of 2% (below IATA long-term growth forecast of 3.5%). Our WACC is 9.1%, with 4.6% rfr, 5.1% CoD, 23% tax rate, 6.5% erp, 1.2x beta, and 65% target d/e ratio. At our TP, FY17E EV/EBITDA would be 12x, lower than 13x Asian average. Risks: 1) PSC revenue based on the 2009 OA does not materialize; and 2) translation losses if the MYR appreciates and depreciates against the EUR and TRY, respectively.

source: Deutsche Bank Markets Research – 27/10/2017

Nov 1, 2017

Budget Malaysia 2018: Pockets Of Gratification

Clear Budget 2018 winners include ExcelForce (NR, alternative trading platform), Gamuda (BUY, MRT3) and potentially MRCB (EDL).

The ambitious Budget 2018 is the most robust in years (+6.5% in operating expenditure) and prudently targets a lower deficit (2.8%). Although largely market neutral as that in previous years, a few companies appear to be prominent beneficiaries. We introduce an indicative end-18 FBMKLCI target of 1,830. Key investment themes are exporters and mega infrastructure. Top Budget winners include Excel Force (NR), Gamuda (BUY) and MRCB (HOLD).

The ambitious and populist Budget 2018 is the most robust in years. Federal expenditure will rise 5.5% while the fiscal deficit will drop to 2.8% from 3.0%. However, achieving a 6.5% revenue growth target could be challenging, given that: a) 1H17 revenue has reached only 44% of Budget 2017’s original target (curiously, 2017 revenue target appeared to have been raised by 2.7% in the just-released 2017/18 Economic Report), b) Petronas’ 2018 dividend to the government (7% of the original Budget 17 revenue target) may be dampened by the expiry of a quarter of its LNG exports to Japan in Mar 18 and hence, which would presumably be renewed at significantly lower (market- driven) prices, and c) 2018 would have presumably less one-off benefits from the Inland Revenue’s overdrive against errant taxpayers.
Prominent measures include a) introduction of an alternative trading platform for the capital market, subject to regulatory approval, b) elimination of toll for the Eastern Dispersal Link (EDL) in Johor Baru, and c) various revelations on mega infrastructure projects, including the fast-tracking of MRT3. Meanwhile, other notable measures include a 2ppt reduction in the personal income tax band of RM20,000-70,000.
Mega infrastructure projects still in the limelight. Although Budget 2018’s allocation for net development expenditure is flat at RM45.4b, the Prime Minister revealed that: a) 5 of 35 packages of Sabah Pan Borneo Highway project have been awarded, with another 12 undergoing the tender process, b) fast-tracking of the completion of MRT3 to year 2025 (from 2027), c) construction works of the East Coast Rail Link to start in Jan 18, and d) abolishment of the EDL (Johor) toll.
budget 2018 top picks
Construction and building material companies continue to be our focus beneficiaries. A total of RM46b has been allocated for development expenditure (+0.2% yoy). The government reiterated the development of the next mega project, ECRL, in which construction should start in Jan 18. Also, it announced the earlier-than-expected completion target of MRT3 to 2025 (from 2027), which would bring forward contract awards to 2019 (from 2020). Other mega projects to be rolled out in 2018 include the Sabah portion of the Pan Borneo Expressway (RM13b) and the Central Spine Road (CSR, RM230m). Key beneficiaries for these projects include Gabungan AQRS, Gamuda, IJM Corporation, Sunway Construction, WCT, MRCB and WZ Satu (for CSR),

We maintain our end-17 FBMKLCI target at 1,770, implying 15.6x 2018F PE, and introduce our indicative end-18 target of 1,830, which assumes a smaller premium to historical mean PE (+0.5SD vs 2017’s +0.7SD).
Themes and top picks. Market conditions still favour selected mid-caps. We continue to like mega infrastructure and (broadly) exporters. Top picks are Gamuda, Hong Leong Bank and Tenaga for large-caps, Ann Joo, Choo Bee, Ekovest, Gabungan AQRS , Globetronics , Hume Industries , Yong Tai and VS Industry . Genting Malaysia has also softened to attractive levels for longe- term investors. Clear Budget 2018 winners include ExcelForce (NR, alternative trading platform), Gamuda (BUY, MRT3) and potentially MRCB (EDL). Conversely, sentiment in Bursa (HOLD) will weaken as the alternative trading platform would compete against Bursa.
source: UOBKayHian – 30/10/2017

Oct 10, 2017

Malaysia Budget 2018 - Potential Beneficiaries

■ We expect Budget 2018, due to be tabled on 27 Oct, to be mildly positive for market.
■ The consumer sector is a likely beneficiary of social assistance from government.
■ Property developers could gain via push for affordable housing.
■ Technology companies could benefit from government plans to grow digital economy.
■ Sin taxes unlikely to be raised and contractors to benefit from infrastructure projects.

Preview of Budget 2018

We expect Budget 2018, due to be tabled on 27 Oct 2017, to be the last budget before the 14 th General Election (GE14) as the latter has to be called by Aug 2018. We are of the view that Budget 2018 will address key concerns of the population, without negating the government’s commitment to fiscal prudence.

Mildly positive for consumer sector
We expect Budget 2018 to lift social assistance and cash transfers to the civil service, lower income households, households employed in the agriculture sector, Felda settlers and army veterans, among others. The government may also look to ease the financial burdens of families and dependents via personal income tax reliefs. This may benefit the consumer companies under our coverage like Nestle, F&N, Kawan Food, CCK, QL Resources, Bison, Berjaya Food and 7-Eleven.

Property developers could benefit from push for affordable housing
We expect the government to address the lack of affordable housing supply by expediting the 1Malaysia People’s Housing Programme (PR1MA). Other potential measures include improving access to end-financing for affordable housing via the Rent-to-Own scheme to affordable non-PRIMA property developments, extension of full waiver of stamp duty for first time home buyers and setting up an agency to coordinate the provision of affordable housing. This may benefit Mah Sing, SP Setia, LBS Bina, Sime Darby and Lafarge.

Education and healthcare may benefit from higher allocations
Government allocations for education and healthcare may be boosted given its far- reaching benefits for broad population. We also expect education assistance (student debit card, schooling assistance programme) to be extended. This could benefit the pharmaceutical companies under our coverage like Pharmaniaga, YSP and Hovid. A higher education spend could benefit Sasbadi.

malaysia budget 2018
Beneficiaries of potential incentives to grow digital economy
We expect Budget 2018 to provide tax incentives, investment grants and capital allowances to assist in the development of an ecosystem for the digital economy, including the Digital Free Trade Zone (DFTZ), e-commerce, high tech manufacturing, robotics, automation, big data and artificial intelligence. This is likely to benefit companies in the manufacturing, logistic and technology sectors like Inari, DRB Hicom, Malaysia Airport and rubber glove players (Top Glove, Hartalega, Supermax, Kossan).

Construction to benefit from rollout of infrastructure projects
Contractors are expected to benefit from the pipeline of infrastructure/construction projects which we expect to be mentioned in the Budget 2018. New contracts which have not been awarded and are slated for implementation in 2018 include the East Coast Rail Link (ECRL), MRT 3 Circle Line, and KL–Singapore High Speed Rail (HSR). Potential beneficiaries under coverage include Gamuda, IJM Corp, YTL Corp, WCT and SunCon.

Status quo for sin taxes?
We are of the view that the government is unlikely to raise sin taxes for the tobacco, brewery and gaming sectors as further increase in taxes will only divert the trades to smugglers and underground operators. This will be neutral for gaming (Genting, Magnum and Berjaya Sports Toto), tobacco (BAT) and brewery stocks (Carlsberg and Heineken
Malaysia) under our coverage.

Mildly positive for market. Maintain KLCI target of 1,790pts
Overall, we expect Budget 2018 to be mildly positive for the market via boost in consumer sentiment. We maintain our KLCI target of 1,790pts (16x P/E) and top three picks.
beneficiaries budget 2018
source: CIM Research – 06/10/2017

Oct 5, 2017

Kenanga’s 4Q17 Top Picks

Top Bursa Malaysia Stock Picks 4Q17

On stock picks, we are fairly selective this round. We even ran a Model Portfolio Optimisation to have a better idea on potential performance of our new list of Top Picks as per their respective historical performance.

To leverage on the rising trend of commodities, we pick ANNJOO (OP, TP: RM4.30) as one of our Top Picks. For Oil & Gas sector, we choose DIALOG (OP, TP: RM2.42). Apart from capitalising on better oil prices, the decision was also made based on the near completion of RAPID project. Moreover, the stock offers lower volatility as per our Model Portfolio Study.

kenanga 4q17 stock top picks
We also select BAUTO (OP, TP: RM2.40) as one of our Top Picks as we have upgraded the sector. Besides, with the new launching of car models, we could have already seen the worst in the latest quarterly numbers. We have also recently upgraded the rating and earnings estimates of TGUAN (OP, TP: RM5.67). The undemanding valuation of the stock provides ample room of upside from here. The same goes to AFFIN (OP, TP: RM3.00) as well. Despite the uncertainty over higher provision arising from the implementation of MFRS9, the undemanding valuations of 0.5x P/BV (vs. its 1-year historical average of 0.7x P/BV) could have already factored such concerns. We had also just initiated coverage on TAKAFUL (OP, TP: RM4.27) inspired by: (i) its undemanding valuation, which is trading at 2-year forward PER of 15x vs industry’s 17x as well as (ii) its reasonably good 2-year earnings CAGR of 14% (anchored by the growing demand for Takaful products, low penetration rates as well as government initiatives).

To leverage on potential Consumer consumption play ahead of Budget announcement, we have OLDTOWN (OP, TP: RM3.15), PARKSON (OP, TP: RM0.88) and SEM (OP, TP: RM1.70). Recall that PARKSON is also one of the Top Picks in the previous quarter based on the angle of “Deep-Value” play and potentially a “Turnaround” play as well.

PPB (OP, TP: RM18.90) is also selected as we have a more conservative view on crude palm oil (CPO) outlook. Our analyst reckon that CPO could trade at an average price of RM2,400/tonne for 2018 in contrast to the revised average CPO average of RM2,700 (from RM2,550 earlier) for 2017. The lower CPO should benefit downstream players like PPB.

As for exporters, despite the uncertainties over US interest rate direction, growth prospects for these players seem promising. Besides, our Modern Portfolio Study continues to suggest that continuous investment in export-oriented industries could achieve better return (of course with higher risk). Among the exporters, we choose HARTA (OP, TP: RM7.70), MPI (OP, TP: RM15.70) and PIE (OP, TP: RM2.87) as Top Picks for the quarter.

TENAGA (OP, TP: RM17.17), on the other hand, remains as our all-time favourite.

Alternative Picks from MidS Coverage

mids top picks

On a separate note, we also have three OUTPERFORM calls among MidS coverage that seem exciting and could also serve as alternatives to some of the Top Picks above. KESM (OP, TP: RM18.40) could be a replacement for MPI and PIE. PWROOT (OP, TP: RM2.70) can be an alternative investment to OLDTOWN. ULICORP (OP, TP: RM5.60); on the other hand, while it is not a direct comparable to ANNJOO as it is a downstream player, the company is likely to see stronger growth in coming quarters after the completion of its new plants. The company may not only benefit from capacity expansion, it will also benefit from the expansion of margin from its downstream business. We also believe its cost of production may not see much impact from hike in steel prices with its leading market position allowing pass-through of additional cost to end-clients.

source: Kenanga Research – 03/10/2017

Oct 4, 2017

Bursa’s New LEAP Market

Taking the first “LEAP”
■ The LEAP market is Bursa’s third market, after the Main and ACE markets.
■ Cloudaron will be the first company to list, with market cap of RM85m.
■ LEAP offers SMEs fund raising access, but limits participants to sophisticated
■ A strong share price performance by Cloudaron could attract more SMEs to list.

leapFirst listing on LEAP market on 3 Oct 2017
Bursa Malaysia’s new Leading Entrepreneur Accelerator Platform (LEAP) Market will see its first listing tomorrow, just slightly over two months after the Prime Minister launched it during Invest Malaysia KL. The LEAP Market is a new market offered by Bursa to provide SMEs with greater fund raising access and visibility via the capital market, though the market will only be accessible to sophisticated investors.

Third market in Bursa Malaysia
The LEAP market is Bursa Malaysia’s third market after the Main and ACE markets. The Main market is mainly for established companies with track records to raise funds. The ACE Market which stands for ‘Access, Certainty, Efficiency’, formerly known as MESDAQ, is an alternative sponsor-driven market designed for companies with growth potential. The ACE Market was derived together with the unification of the Main and Second Board into the Main Market of Bursa Malaysia on 3 Aug 2009.

Cloudaron to be the first listing on the market
Singapore-based IT solution provider Cloudaron Group will become the first company to list on LEAP market. The group is issuing 50m new shares, representing 6.4% of the company’s enlarged share capital, at an issue price of 11sen for a total value of RM5.5m, ahead of the listing. It plans to use the funds raised for working capital and expansion of its business to Indonesia and the Philippines. Based on its IPO price, Cloudaron will have a market cap of RM85.3m.

Profitable company that generates bulk of revenue from Singapore
Cloudaron is controlled by its managing director and chief executive officer, Ong Chang Jeh, who owns a 34.3% stake, and chairman Datuk Larry Gan Nyap Liou, who holds an 8.1% stake. For FY3/17, Cloudaron posted a net profit of S$1.72m (RM5.2m), on revenue of S$22.9m (RM69.6m). The group generates 81% of its revenue in Singapore and has an orderbook of S$4.1m as at end-Jun 2017.

The advantages of LEAP market
The LEAP market offers small and medium enterprises (SMEs) in the early growth stages a way to raise funding through the capital market due to its less stringent listing requirements compared to the Main and ACE markets. Bursa Malaysia is the single approving authority for listing, which could accelerate the processing time to raise capital and list. The market could also serve as a feeder to the ACE or Main markets.

Potential challenges facing the LEAP market
The key challenges facing the LEAP market in our view, is liquidity, as the market is restricted to sophisticated investors, such as high net worth individuals that own assets of more than RM3m or with an annual income of more than RM300,000 or a combined RM400,000 for husband and wife, and corporate bodies with net assets of more than RM10m. This will reduce the number of investors that can participate in the market.

Figure 1: Number of companies listed on the Main and ACE marketnumber of company

Minimal impact on KLCI
A strong share price performance by Cloudaron tomorrow could attract more SMEs to list on LEAP and liven up the Malaysian stock market. However, it is not expected to have a major impact on the market, as the LEAP market is small relative to the combined market capitalisation of all the companies listed on the main and ACE markets of RM1.83tr. Maintain KLCI target of 1,790 points (16x P/E) and our top three picks continue to be Axiata, Tenaga and Gamuda.

source: CMB Research –  3/10.201

Oct 3, 2017

MUDAJYA: Recovering (technical)

MUDAJYA gained 4 sen (3.7%) yesterday to close at RM1.12, bucking the trend to stage a significant break-above from its downward consolidation trend since early-June. Coupled with positive uptrends in key indicators since its low on 11-Aug, yesterday’s move may potentially be indicative of a larger reversal play.

Another encouraging note is the weak trading volumes during its downtrend, as compared to strong volumes during its prior uptrend from Feb to May, thus suggesting more a positively biased sentiment as an underlying support for the share. From here, sustained momentum would see the share move towards its overhead resistances at RM1.19 (R1) and RM1.24 (R2). Conversely, a firm support can be found at its low of RM1.01 (S1).

mudajaya chart

source: Kenanga Research - 3/10/2017

The principal activity of the Company is that of investment holding. The principal activities of the subsidiary companies are civil engineering and building construction hire of plant and machinery manufacturing supplying and trading of construction related materials and housing project management and development.

Sep 20, 2017

E.A. TECHNIQUE – Breakout From Previous Resistance

EATECH’s share price rose an impressive 2.5 sen (5.8%) yesterday, closing at RM0.455 on the back of exceptionally healthy trading volume, with 5.2m shares exchanging hands - equivalent to around 2.6x of its daily average. Yesterday’s move can be interpreted as a breakout from its previous resistance of RM0.435-0.445, potentially signalling a reversal after its long downtrend since March. Likewise, a “Golden Crossover” had emerged between its 20-day and 50-day SMAs, with key-indicators also showing positive signs – MACD rising above zero and Signal line, while RSI continues its uptrend. We believe that combined, these are good indicatives of a move higher. From here, sustained followthrough should see the share having a clear path towards overhead resistances at RM0.49 (R1) and RM0.53 (R2). Conversely, a decisive break-below its aforementioned resistance-turned-support of RM0.435-0.445 (S1) is deemed as highly negative, with the share potentially capitulating back towards its low at RM0.35 (S2).


source: Kenanga Research - 20/09/2017

The Group are principally an owner and operator of marine vessels where the business is focused on marine transportation and offshore storage of O&G and the provision of port marine services.