Aug 16, 2017

PWF – Breakout


pwf technical analysis

pwf dataPWF has formed a breakout- - pullback- - continuation pattern above the EMA60 level. The MACD Indicator has issued a BUY signal, while the RSI is above 50. Price may rally, targeting the RM1.14- - RM1.17 levels.

Support will be pegged around the RM1.01 level.

source: Malacca Securities Research – 16/08/2017

The Group is principally involved in the manufacture and sale of broiler feeds and in the farming of broiler chicks.

Aug 14, 2017

Malaysia - Steel Stocks and Sector

Steel- Maintain MARKET WEIGHT. Maintain HOLD for Ann Joo Resources. Prefer deep-value stock – Choo Bee Metal Industries. Potential beneficiary of various highway projects – Prestar Resources.
Local steel prices rebounded in Jul 17, echoing China’s steel price movement driven by capacity cuts as well as expectations of increased local demand. We believe that the improvement in ASP should be sustainable moving into 4Q17 as we expect steel demand to improve on mega infrastructure projects. Hence, 2H17 earnings could surprise on the upside after an unexciting 2Q17. Maintain MARKET WEIGHT.
steel stocks growthWHAT’S NEW
Steel prices rebounded in Jul 17. Based on the Ministry of International Trade and Industry (MITI) statistics, domestic steel bar prices for Jul 17 rebounded by 17.4% yoy and 7.8% mom to RM2,178/MT, mainly reflecting the surge in China steel prices. Although Jul 17 prices are still lower than 1Q17 prices (1Q17: RM2,233/MT), we believe that the mom surge will provide for a sector-wide earnings excitement. We also noticed that the price differential between local and China imported billets had widened by 2ppt in July, In Jun 17, China imported billets which were traded at a 20% premium which expanded to 23% in Jul 17.
China’s steel production in Jun 17 at an all-time high. Chinese millers have increased output to an all-time high since Mar 17. China’s steel production was still high in May (- 0.7% mom, +2.5% yoy). We understand that Chinese millers continued to ramp up production as the industry is still reporting healthy margins.
Expect strong earnings growth in 3Q17. Although 2Q17 is expected to have been unexciting (due to weak demand and soft steel prices), we believe that earnings in 3Q17 will surprise on the upside should ASP be sustainable. In addition, we expect steel demand to show a gradual recovery mainly starting from 3Q17 on the commencement of mega infrastructure projects such as MRT 2, LRT 3 and the ECRL.
MALAYSIA MEGA PROJECT ROLLOUTmalaysia mega projects roolout
Maintain MARKET WEIGHT. Despite a brighter sector outlook, we believe that the steel companies are already trading within a fair trading range, but prudent capital management could lift valuations. We like steel companies that have prudent capital management, particularly Ann Joo and Choo Bee which had dividend payout ratios of 45% and 43% respectively in their previous financial years. We also believe these companies could declare a bonus share issue ahead of changes to The Company Act 2016 which will abolish the concept of par value.
Maintain HOLD for Ann Joo Resources (AJR MK/HOLD/RM3.11/Target: RM3.30). Although we have a HOLD recommendation, we believe that share price for Ann Joo could be lifted from effective capital management. Ann Joo has a dividend policy of up to a 60% dividend payout ratio subject to future capital requirement. In 2016, Ann Joo distributed 45% of its earnings to shareholders which translates into a dividend yield of 4.8%. Entry price: RM3.00
Prefer deep-value stock – Choo Bee Metal Industries (CBEE MK/NOT RATED /RM1.97). Choo Bee could be a proxy to sustainable growth in the flat steel segment. We also like its prudent capital management as it has a 43% dividend payout ratio for 2016 which translated into dividend yield of 4.6%. It is also a net cash company with cash level representing 19% of its market cap. It is currently trades at 6.4x 12-months trailing PE.
Potential beneficiary of various highway projects – Prestar Resources Bhd (PRST MK/NOT RATED /RM1.25). Prestar could benefit from various highway projects where it has 50% market share in supplying guardrail for major highways in Malaysia. Currently, it is trading at 7.3x 12TTM PE and dividend yield of 1.6%. Traditionally, it has been rewarding shareholders with a 20% dividend payout ratio.
steel socks comparison
Local steel prices rebounded in Jul 17. According to MITI’s website, ASP for local steel bars rebounded by 17.4% yoy and 7.8% mom to RM2,178/MT. The strong rebound followed
the soft decline in Jun 17 prices (-2.5% mom) and is in sync with the surge in China steel prices which reached an all-time high since 2013. We also understand ASP for local flat steel products had also picked up in early-Aug 17, after flat growth in Jul 17. We believe that the increase in ASP should be sustainable moving into 2H17 as the price differential between local and China imported billets widened by 3ppt mom in Jul 17. In Jun 17, China imported billets which were traded at a 20% premium which expanded to 23% in Jul 17. The sustainaibility of local steel ASP will be supported by improved demand by 2H17, largely from various mega projects such as MRT2, LRT 3 as well as the east coast rail link (ECRL).
• China steel production at all time high. Steel production in China in the month of June recorded an all-time high 73.2m MT, up by 1.3% mom and 5.4% yoy. To recap, steel production jumped significantly due to reportedly healthy margins which encouraged Chinese millers to increase output. It is worth to note that China’s steel industry made a US$9.8b loss in 2015 but turned around in 2016 with a US$5.1b net profit. In addition, we also attribute the escalation in steel production in China to the closure of induction furnace mills (IF) in China. We gathered that the IF closures are expected to have a fundamental impact on the China steel industry as it could have resulted in a 60m-70m MT cut in production output as of end- Jun 17 (approximately 25-30% of China’s rebar production). Note that the demolition of IF mill is an add-on to China’s initial plan to reduce domestic steel production capacity by 100-150m MT within five years. Products of IF mills are highly criticised for not being environmental friendly (during production process); IF mills do not remove the impurities from scrap, which leads to the production of substandard steel products.
malaysia steel stocks
Sluggish 2Q17 earnings but 3Q17 should see a positive surprise. We reiterate our views that for long steel products, we might see a milder earnings growth in 2Q17 due to softer domestic ASP and persistently weak demand for steel products. To recap, domestic steel bar prices dropped 2.5% mom and 2.3% yoy to RM2,020/MT in Jun 17 while steel bar ASP for 2Q17 dropped 7.1% qoq and 4.0% yoy to RM2,075/MT. However, earnings could surprise on the upside in 3Q17 given the strong rebound in steel prices coupled with a gradual improvement in steel demand. On the other hand, for flat steel products, earnings in 2Q17 could be sustained as prices of hot-rolled coil have fallen 13.9% qoq to Rmb3,223.10/tonne. To recap, average domestic ASP for flat steel increased 30.0% qoq to RM3,000/MT in 1Q17 and subsequently declined by 6.7% to RM2,800/MT in 2Q17.
Prestar Resources as proxy to various highway projects. We recently met with flat steel producer, Prestar Resources Bhd. The company basically operates with two main divisions – a steel processing unit (ie coil centre and steel pipes) as well as a product manufacturing unit (ie material handling equipment and road furniture). We think that Prestar Resources could benefit from mega highway projects as it is the largest guardrail manufacturer in Malaysia with an estimated 50% market share. Prestar Resources also has a proven track record as it previously supplied guardrail for a few notable projects such as the Sepang F1 Race Track, Kesas Highway and East Coast Highway. The company does not have a dividend policy but traditionally has been rewarding shareholders with a 20% dividend payout ratio
source: UOBKayHian – 14/08/2017

Aug 10, 2017

Technical Buy: YONGTAI

Yongtai Stock Code: 7066
Target Price RM1.47; RM1.60
Last closing price RM1.38
Potential return 6.5%, 15.9%
Support RM1.36
Stop Loss RM1.27
yongtai chart analysis
Possible for further upside. YONGTAI’s share price was retesting previous support level in the past few days. Putting “buy the dips” strategy into practice, easing RSI and MACD indicators currently signal reasonable entry level. Should the price then rebound, it may continue to lift price higher to the subsequent resistance levels of RM1.47 and RM1.60.

However, failure to hold onto support level of RM1.36 may indicate weakness in the share price and hence, a cut-loss signal.
source: Public Investment Bank – 10/08/2017

The principal activity of the Company is that of investment holding and the principal activities of the subsidiaries are trading and retailing of textile and garment products; manufacturing and dyeing of all types of fabric and related products; and property development.

Aug 7, 2017

Malaysia Strategy: Which Stocks Have Foreigners Been Buying?

Foreigners have returned in 2017.
Stocks with big change in foreign shareholdings and top stock ideas
● The latest release of fund flows data showed that foreign institutions added another RM0.4 bn (US$0.1 bn) to their holding in Malaysia in July 2017. We have now seen US$2 bn of net
foreign buying in Jan-July 2017. Foreign ownership of the market has recovered to 23.0%.
● Stocks which have seen the biggest increase in foreign shareholding (as a % of share capital) in 2017 so far are MAHB (+13.7 pp), GAM (+8 pp), MAY (+5.4pp), CIMB (+4.8 pp) and SIME (+2.7 pp). Foreigners reduced holdings in AirAsia (-9.6 pp), Karex (-3.0 pp), Tenaga (-2.4 pp), IOI (-0.5 pp) and TM (-0.5 pp).
● When comparing current foreign ownership levels with the post- GFC average, we find that foreign shareholding levels for MAHB, PBK, Tenaga, MAY and GENM are above post-GFC average. Stocks with foreign shareholding below post-GFC average include
Axiata, IJM, AirAsia, SP Setia, and CIMB.
● Stocks that are under-owned by foreigners where we have OUTPERFORM calls include CIMB, IJM, AirAsia and SP Setia. As for stocks that are over-owned by foreigners where we have UNDERPERFORM calls, we highlight Tenaga and Public.
Figure 1: Current foreign shareholding vs post-GFC averageforeign holding of malaysia stocks
Foreigners have returned in 2017
The latest release of fund flows data showed that foreign institutions added another RM0.4 bn (US$0.1 bn) to their holding in Malaysia in July 2017. Having seen consistent net foreign fund outflows over 2014-16 amounting to US$7.5 bn (RM29 bn), we have seen US$ 2bn of net foreign buying in Jan-July 2017. Foreign ownership of the market declined from a peak of 24.4% in 2012 to a low of 22.3% in Feb-17 but has recovered since then to 23.0%. However, foreign ownership remains below the levels recorded in 2012-15 prior to the emergence of news over 1MDB scandal (mid-2015).
Stocks with big change in foreign shareholdings
By value. Stocks which have benefitted most from foreign buying YTD in 2017 (ranked according to USD of net inflows) are MAY, CIMB, SIME, MAHB, Gamuda and Maxis. Meanwhile, foreigners have sold down their holdings in Tenaga, Air Asia IOI, TM and Karex.
Changes in foreign shareholding in stocks (% of share capital). Looking at movements in foreign shareholding (change in % ownership, pp), the stocks which have seen the biggest increase in foreign shareholding (as % of share capital) in 2017 so far are MAHB (+13.7 pp), GAM (+8 pp), MAY (+5.4 pp), CIMB (+4.8 pp) and SIME (+2.7 pp). On the other hand, foreigners reduced holdings in AirAsia (- 9.6 pp), Karex (-3.0 pp), Tenaga (-2.4 pp), IOI (-0.5 pp) and TM (-0.5 pp). Surprisingly, we have not seen a pickup in foreign shareholding in Genting Malaysia despite the improvement in earnings outlook and a marked pick-up in requests from foreign clients to visit Genting Highlands in recent months.
Deviation of foreign ownership from historical average. When comparing current foreign ownership levels with the post-GFC average, we find that foreign shareholding levels for MAHB, PBK, TNB, MAY and GENM are above post-GFC average. Stocks with foreign shareholding below the post-GFC average include Axiata, IJM, AirAsia, SP Setia, and CIMB.

Crowded trade and foreigners weightings
We now examine the percentage breakdown of foreigners' aggregate holdings in Malaysia into the various stocks and compare it with MSCI's prescribed weighting to gauge if foreigners are overweight or underweight on each stock.

OVERWEIGHT stock positions. Not surprisingly, this list is dominated by banks (Public, Maybank, CIMB), construction (Gamuda), high yield stocks (BAT, Astro) and PNB restructuring stocks (Maybank, SIME). Foreigners had a bigger overweight position on Tenaga in 2016 but have since trimmed to just a touch above MSCI weight. Top five stocks where foreigners' weighting is above MSCI weight are AirAsia, Genting Malaysia, Genting Bhd, BAT and CIMB.

UNDERWEIGHT stock positions. Again it is no surprise that this list comprises mostly sectors with bleak earnings outlook such as plantation stocks (IOI, KLK, FGV, Genting Plantation), oil and gas (Dialog, Sapura) and telecommunication stocks (Axiata, Maxis, DIGI).
We are somewhat surprised to see IJM in the list given the positive outlook for the construction business.

Top stock ideas

Stocks that are under-owned by foreigners – In this category, we highlight OUTPERFORM calls which are under-owned (either vs historical average or vs MSCI weight). Stocks that we like where foreign ownership is below the post-GFC average include CIMB, IJM, AirAsia and SP Setia. Incidentally, foreigners' estimated weighting on IJM is also below the prescribed MSCI weighting.

Stocks that are over-owned by foreigners. In this category, we highlight UNDERPERFORM calls which are over-owned (either vs historical average or vs MSCI weight) where there could be potential catalysts that could trigger further selldown by foreign investors. We highlight Tenaga and Public as stocks where foreign ownership is above the post-GFC average and also foreigners' estimated weightings are above the MSCI weighting.
source: Credit Suisse – 04/08/2017

Jul 31, 2017

Sunway Attractive warrant

Attractive warrant with step-down mechanism

■ Sunway issued a circular with more details on the proposed bonus issue and free warrants. To recap, Sunway had proposed 4 bonus issue of shares for every 3 existing shares and 3 free warrants for every 10 existing shares. The above proposals were approved by Bursa on
24 July and EGM will be held on 30 August to secure shareholders’ approval.
■ Compared to ordinary free warrants, we opine that Sunway’s free warrants are attractive as the first-of-its-kind fixed annual step-down mechanism of RM0.07 will enhance the value of warrants.
■ For ordinary warrants, a dividend entitlement on the underlying mother share would reduce the value of the warrants. However, with the step-down mechanism (which is akin to a fixed adjustment of dividend payment to underlying), the value of warrant would be unaffected (if the quantum of step-down is equal to the dividend).
■ In the case of Sunway, given the annual step-down of RM0.07, the estimated value of the free warrant is RM0.62 (post-bonus issue adjustment) based on Binomial Option Pricing Model (see Figure #1), representing a premium of 34%. However, the estimated value of warrants could fetch as high as RM0.73 if based on our TP of RM5.04.

sunway 1  
■ Note that the step-down of 7 sen is higher than our projected dividends for FY18 and FY19 at 4.6 sen and 4.9 sen (post bonus issue adjustment) per share, respectively.
■ The higher quantum of step-down compared to dividend projection could further enhance valuation of the warrants.
■ We gather that while Sunway has no immediate plan to utilize the proceeds (~RM1.15bn assuming full conversion) from the conversion of warrants. Hence, any proceeds raised will be used for future working capital or deleveraging.

■ Prolonged downturn in property market;  
■ Execution risk

■ Unchanged

sunway 2

BUY, TP: RM5.04      
■ Sunway remains our Top Pick within the sector as we believe it should be rerated and trade closer to its peers such as IJM and Gamuda (refer to Figure #2) given its diversified income stream and declassification from property sector. At a P/E of 13.9x as compared to peers, we opine that it represents a deep value stock with potential assets unlocking and growing healthcare business which are underappreciated.

sunway 3

Our TP is unchanged at RM5.04 based on SOP derived valuation with a 10% holding discount (see Figure #3).

source: HLIB Research – 31/07/2017

FBM KLCI Climbing the Wall of Worry

Earnings recovery to resuscitate price momentum

FBM KLCI 2017 Year-end Target: 1,830 points

The FBM KLCI retreated from its YTD high of 1,796.75 points… Foreign investors were net buyers for 18- straight weeks from February 10 to June 9, the longest streak since 1H13.uring this period, as anticipated, the FBM KLCI broke above its nearly 2-year trading band and thenceforth moved on to chart an upward trajectory where it almost hit the 1,800 mark on June 16, crested at 1,796.75 points. Chart 1: 18 Straight Weeks of Foreign Inflow into Bursa Malaysia

Chart 1: 18 Straight Weeks of Foreign Inflow into Bursa Malaysia:Foreign Inflow into Bursa Malaysia

…as so-called premature eradicators trimmed their exposures… From being bottom feeders in late last year to bargain hunters earlier this year and on to become momentum players in the last quarter, some investors are presently deemed as premature eradicators as attested by the recent price pullback. As geopolitical factors took centre stage, the so called premature eradicators began reducing their exposures in Malaysia equities.

…arguably prompted by external geopolitical ‘noises’.
The tapering of foreign inflows saw the FBM KLCI retreated from its YTD high of 1,796.75 points to hover above 1,750 levels currently. Amongst the geopolitical ‘noises’ that have affected market sentiment are (i) disputes between Qatar and Arab nations, (ii) the test launch  of Intercontinental Ballistic Missile (ICBM) by North Korea, and (iii) Theresa May’s failure in securing the parliamentary majority in UK snap election.

We believe the market is still in the midst of climbing a wall of worry despite the recent tapering of  foreign flows. On this score, it is important to note that there has been no period of sustained selling so far (only  5 weeks of attrition in 2017).

Chart 2: Premature Eradicators – The mid-stage of a wall of worryPremature Eradicators

Hence the recent pullback is deemed as temporary. At the beginning of 2Q17, the FBM KLCI took a breather as it retraced to the 1,730 levels amid geopolitical risks, i.e. the US Navy headed towards North Korea waters due to concerns over its weapons program. As soon as the geopolitical noises faded, the FBM KLCI bounced back up to levels near 1,800 points. Likewise, we deem the current pullback to be temporary as the market fundamental underpinning is still positive. Above all, the market earnings recovery since mid-2016 to date
has been rather incessant is likely continuing.

Underpinned by continuing recovery in corporate earnings,… On that account, the (Bloomberg consensus) FBM KLCI earnings integer is estimated to grow by 7.1%yoy to 108.4 points in 2017 and to rise further by a projected 6.0%yoy to 114.9 points in 2018. It is also noteworthy that its 12-month trailing earnings integer now stands at 106.7 points.

Chart 3: FBM KLCI to be underpinned by continuing earnings recoveryearnings recovery
…further upward revisions in forward earnings estimates,…
Hence, at this juncture, the FBM KLCI earnings integer is estimated to increase by merely 1.7 points (from 106.7 to 108.4) during the remainder of this year. We can thus imply that the market is expecting the pace of earnings recovery to taper off fairly perceptibly in the months to come; a view which may be somewhat at odds with the expectation of a still upbeat macro performance going forward. On this score, as earlier foreseen (consensus 2017 earnings integer was at 106.6 in late June and has since been revised to 108.4 presently), we continue to believe there is a better than an even chance for the prevailing 2017 earnings estimate to be further tweaked upwards in the coming months.

…and supported by improving macro environment,…
On a macro level, optimism is rekindled by the consensus-beating output growth in major Asian economies such as China which is evident by its 6.9%yoy GDP growth in 2Q17. In addition, the outlook for Malaysia's economy remains sanguine with our in-house GDP growth estimate for this year being revised upward to 5.1% (from 4.9% earlier) supported by robust external performance and resilient domestic demand. Against the backdrop of improving macro environment, we foresee restricted downside risks (in terms of earnings and consequently price) to the equity market.

…the market is expected to regain upward thrust in the final trimester of the year. In gist, we foresee the FBM KLCI regaining its upward thrust in the final trimester of 2017 to be propelled by (i) continuing earnings recovery, (ii) further upward revisions in earnings expectations, and (iii) macro resilience. Having said the above, we remain mindful of intermittent cyclical price pullbacks that may take place as a result of transient situational
issues amid the ever-present noises surrounding the market.

We reiterate our FBM KLCI 2017 year-end target of 1,830 points. We reiterate our year-end 2017 FBM KLCI baseline target of 1,830 points which equates to PER17 of 16.9x and +1.0SD. On this score, the baseline  target valuations may further decline going forward in view of the potential upward revisions in earnings. Moreover, we maintain our lower and upper target range of 1,770 and 1,890 points respectively

source: MIDF Research – 27/07/2017

Jul 30, 2017

Invest Malaysia 2017

■ CIMB co-hosted Invest Malaysia 2017, which ran from 25-26 July 2017.
■ This year's event attracted some 900 fund managers with total assets under
management (AUM) of US$19.9tr, a significant rise from US$11tr in. 2016.
■ Participants in the plenary sessions were generally positive on Malaysia’s prospects.
■ We are positive on the push to improve corporate governance in Corporate Malaysia.
■ Maintain our end-2017 KLCI target of 1,790 points (based on 16x forward P/E).

Invest Malaysia 2017: "Malaysia at 60: Maximising Potential"
This flagship Malaysian corporate conference is now in its 13 th year. CIMB co-hosted this event for the sixth time. This year’s event attracted c.900 fund managers with total AUM of US$19.9tr, a significant rise from US$11tr in 2016, a sign of a revival in investor interest in Malaysia. It kicked off with a keynote address from Prime Minister Dato’ Sri Najib Tun Razak’s followed by five plenary sessions. We also hosted 48 companies from 10 sectors and organised a tour to the recently overhauled Genting Highlands.

highlighted company
Malaysia’s resilient fundamentals
Participants in the plenary sessions were generally positive about Malaysia’s outlook. Among measures unveiled by the government: 1) launch of the Leading Entrepreneur Accelerator Platform (LEAP) market, 2) plans to establish an integrity and governance unit at government-linked companies (GLCs) and state- or ministry-owned businesses, 3) plans for a single regulator for the property sector, 4) greater gender diversity, corporate governance in Corporate Malaysia, and 5) next-stage development push under TN50. Unlocking shareholder returns Government-linked investment companies (GLICs), which have sizeable exposure to domestic equities, are doubling down on efforts to improve shareholder returns among Malaysian corporates. Speakers from four GLICs (EPF, Khazanah, KWAP, and PNB) suggested higher total shareholder returns could be achieved through corporate action
higher dividends or share buybacks, investments in the fast-growing technology sector, stable returns from infrastructure-related investments, and better corporate governance.

Finding hidden gems

The key enablers of digital disruption are increasing internet and smartphone penetration, a growing middle class population, demographic tailwinds and income growth. With the advent of new technologies, the development and innovation cycles of companies are becoming shorter, requiring businesses to continually adapt to stay relevant. The omnipresent threat of disruption to traditional business models underlines the risk of overpaying. The challenge for fund managers is to discover promising companies that are poised to benefit from structural tailwinds early enough to provide that margin of safety.

Positive takeaways from corporates
We are more upbeat on Muhibbah after the large track session, as the group indicated that it has fully received the RM600-700m variation orders claims in relation to its contract with New Doha International Airport. We are also more positive on Hartalega’s earnings prospects as the group is confident of retaining its strong profit margin and expects sales volumes for its gloves to remain robust.

Maintain KLCI target of 1,790 points
We are positive on the government's push to improve corporate governance via the establishing of integrity and governance unit at GLCs and state-owned enterprises. We maintain our end-2017 KLCI target of 1,790, which is still based on its 3-year average P/E of 16x. Our key sector picks for 2H17 are utilities, construction and small caps. Our three
big cap picks are Sime Darby, Gamuda and Tenaga.

source: CIMB Research – 27/07/2017.