Nov 8, 2016

Stock Strategy: Malaysia

Alpha Picks: Focusing On Event Catalysts

For October, five (63%) of our analysts’ high conviction picks outperformed the market. Our line-up for November includes BIMB Holdings, Bumi Armada, Ekovest, Genting Malaysia, Inari, Kim Loong, MRCB-Quill REIT, Scientex and Tenaga Nasional. Inari is our new conviction pick. Stocks with near-term catalysts include Ekovest (potential special dividend), Genting Malaysia (first phase opening of GITP), and Bumi Armada (successful sailaways of FPSOs).

Review of October’s picks. Of our eight selected stocks, five outperformed the market, most notably Ekovest, Genting Malaysia and Kim Loong. On the other hand, stocks which underperformed were Bumi Armada, Scientex, and Tenaga (see RHS for stock performances in October).
New conviction pick: Inari Amertron. We recently initiated coverage on outsourced assembly and test (OSAT) company Inari Amertron (Inari), which is a major beneficiary of the global trend towards the adoption of smartphones. We expect Inari to deliver strong earnings CAGR of 20% from FY16 through to FY19, driven by new OSAT contracts and the successful upward integration of its OSAT services.

• Near-term event catalyst beneficiaries to watch out for. The key beneficiaries of event catalysts are Ekovest, Genting Malaysia and Bumi Armada. Trading of Ekovest has been suspended until 8 Nov 16, pending the widely expected definitive agreement to sell a 40% stake in Duke 1 & Duke 2. Ekovest should be in a position to reward shareholders with a special dividend. Meanwhile, Genting Malaysia shares have also been steadily gaining ahead of the inaugural opening phase of Genting International Transformation Plan (GITP) at end-16. While we prefer Genting Malaysia, we note that its parent company Genting Berhad could also play some catch-up, following its subsidiary Genting Singapore’s above-consensus 3Q16 earnings and surprise interim dividends.


Malaysia alpha stock picks

The rest of this report elaborates more on each recommended company.

BIMB Holdings (Keith Wee)
• In the recent 2Q16 earnings reporting season, BIMB reported the strongest set of results among all its peers as reflected by its 10.1% yoy 2Q16 earnings growth vs the sector's 10.0% contraction. BIMB's industry-leading loans-loss coverage ratio of 179% places it in a strong position to weather the current turbulent credit cycle.

Share Price Catalyst
• May fetch a scarcity premium, being the only Syariah-compliant full-fledged bank.
• Takaful subsidiary continues to deliver stronger-than-expected growth which is important given its relatively sizeable 70% composition to the group's non-interest income base.
• Lower collective assessment provisioning arising from the potential downward adjustment
in its overly conservative 1.50% CA closer to industry average of 1.20%.

Bumi Armada (Kong Ho Meng)
• Long-term investors should look beyond the weak 2016 and see that the timely recognition of Armada Claire impairments and delivery of four floating projects by 2H16 will unlock future earnings growth as these projects are of long-term contract tenures (8-18 firm year periods each). The group is trading at 0.7x post-Claire impairment P/B.

Share Price Catalyst
• Smooth delivery in 4Q16 and first oil/ first gas of floating projects.
• Recovery of OSV utilisation and rates.

Ekovest (Ridhwan Effendy)
• We like Ekovest for its: a) unique exposure to the coveted and long-dated Duke 1 & 2 tolled highway concessions, b) deep discount to its SOTP of RM5.00/share, and c) strong 3-year earnings CAGR of 69%.

Share Price Catalyst
• Expected binding agreement for EPF to acquire a 40% stake in Duke 1 & 2 for RM1.13b by November. A special dividend should be announced by year-end. EPF’s entry signals potentially more lucrative property-related JVs.

Inari Amertron (Yeoh Bit Kun)
• Earnings improvement in 1QFY17 due to higher production activity, ahead of its end-client's new smartphone launch.
• Ramping up capacity for new contracts.

Share Price Catalyst
• Upcoming 1QFY17 results to reflect higher sales in Radio Frequency (RF) business, ahead of its end-client’s new phone launching in early-Sep 17.
• Inari is still adding in more capacity for RF (680 unit of testers currently and is targeted to reach 750 by Mar17) and ramping up its new plant’s capacity for switches testing job (data centre application), which started its first production lot in end-June.
• Inari is working on a new project with a capex of RM50m for two lines, and is targeting first shipment in 2HFY17.

Genting Malaysia (Vincent Khoo/Yeoh Bit Kun)
• GENM’s Phase 1 GITP amenities, retail Sky Avenue Mall and new gaming space, are targeted to open progressively in Dec 16. GITP is expected to be a major crowd-puller, particularly among family-oriented visitors. This in turn provides more footfall for the gaming mass market segment, which recorded a mid-single digit yoy GGR drop in 1H16.

Moreover, the earnings contribution from UK would be more stable moving forwards after GENM’s revision in marketing strategies for the international market to focus on high credit quality clients.

Share Price Catalyst
• GENM provides a good trading opportunity, as share price momentum is linked to the phased openings of the GITP, which will start in Dec 16.

Kim Loong (Mong Huey)
• Its earnings growth is supported by: a) positive fresh fruit bunch (FFB) production growth, and b) good milling margins from a high oil extraction rate (OER) and extra income from value-add by-products.
• It offers sustainable dividend yields of 4-5% on the back of a strong balance sheet.

Share Price Catalyst
• Better-than-expected FFB yield and OER.
• Higher-than-expected CPO prices.

MRCB-Quill REIT (Abdul Hadi Manaf)
• Key attraction lies in its ongoing acquisition of Menara Shell which will result in total asset value growing by 40% and market cap surpassing the RM1b mark, and hence improve its trading liquidity.

Share Price Catalyst
• Yield-hungry investors to bid up MRCB-Quill’s valuation, given that its dividend yield is among the highest.
• Healthy acquisition pipeline to boost growth. MQREIT’s next acquisition will be Menara Celcom in PJ Sentral (scheduled for completion in 2017).

Scientex (Fong Kah Yan)
• We remain upbeat on Scientex's ambition to become a regional consumer packaging player, whereby earnings should kick in from 2016 and beyond. Meanwhile, its property segment should stay resilient amid a weak property market due to its focus on affordable housing. It is currently trading at an undemanding 2017F PE of 8.4x.

Share Price Catalyst
• Further expansion in capacity.
• More earnings-accretive M&As.

Tenaga Nasional (Chong Lee Len)
• TNB will benefit from a positive risk reward profile under the IBR framework. The framework, we opine, is still intact and in the longer run, would drive a sustained re-rating of TNB closer to market valuation.

Share Price Catalyst
• Expect positive outcome on a more active capital management by year end.


Malaysia stock valuation

source: UOBKayHian – 07/11/16