Alpha Picks: To Also Outperform In A Defensive Market
Four out of our six alpha picks outperformed the market in Apr 17 (FBMKLCI: 1.6%). For our May picks, we replace stellar performer Ann Joo with Globetronics, and retain Ekovest, Kerjaya Prospek, VS Industry and YTL Power, while RHB Bank is our sole SELL call. BUY Ekovest on weakness, given that it is widely expected to fall today in tandem with its sister company IWC’s fall.
WHAT’S NEW
■ Review of April picks. Most of our BUY picks gained in April (see RHS), delivering a simple average return of 11.5% for the month. At the front of the line is Ann Joo, which closed 27% mom higher, followed by VS Industry and Kerjaya Prospek which gained 16.3% and 15.6% respectively. During the month, we raised the target prices for Ekovest, VS and Kerjaya Prospek.
■ We have temporarily turned cautious following TRX City’s shocking announcement that the sale of Bandar Malaysia to the IWH-CREC JV has lapsed on 3 May, the same day that the Prime Minister abruptly pulled out from an official site visit to Bandar Malaysia. Given the hazy circumstances surrounding the announcement, which is being contested by IWC-CREC, plus the uncertainties of events that could unfold, we reckon that the market would continue to temporarily retrace from its earlier upward trend.
■ Nevertheless, the market pullback should be temporary, as upcoming events such as Malaysia’s upcoming participation in China’s ‘One Belt One Road’ summit should partially reignite some of the lost momentum in the China FDI investment theme. Hence, we expect Ekovest, the sister company of IWC, to retrace some of its 16.8% fall following the fateful TRX announcement (which caused Ekovest to open limit down last Thursday, before clawing back some of the losses).
ACTION
■ Our alpha list for May: BUYs are Ekovest, Globetronics, Kerjaya Prospek, VS Industry, YTL Power, while RHB Bank is a SELL. BUY Ekovest on weakness, which is expected to fall in sympathy with IWC’s anticipated fall (post its two-day trading suspension) today.
■ Ann Joo removed due to its stellar performance, but Ann Joo and selected steel companies should still deliver spurts. Although Ann Joo is no longer featured as a top Alpha pick, we acknowledge that the share price could still be positively swayed by strong 1Q17 results. Likewise, we expect many steel manufacturers to post strong 1Q17 results which would lift valuations.
■ Globetronics a new addition. We expect Globetronics to maintain its uptrend through to 3Q17, in anticipation to strong demand response to smart phone launches, which include the expected launch of iPhone8 in Sep 17
ANALYSTS’ TOP ALPHA* PICKS
Ekovest (Ridhwan Effendy)
■ All-time high construction orderbook of RM13b would sustain its earnings delivery for the next 5-6 years. Also, the potential IPO of DUKE 1 & 2 (which could be as soon as 2018) could re-rate the stock, given the significant value (RM1.9b) vs to its market cap of RM2.5b.
Share Price Catalyst
■ Further contract wins.
■ Signing of the concession agreement for DUKE2A, its third highway concession.
Globetronics (Yeoh Bit Kun)
■ We expect meaningful qoq earnings growth in 2Q17 and much stronger hoh performance in 2H17, driven by the maiden contribution from new light sensor (expected in May) and production ramp-up of its gesture sensor. With the contribution of these two sensors, net profit is estimated to grow 142% yoy in 2017 and reach an all-time high in 2018 (+62% yoy). Effective execution in terms of both delivery and product quality of these two sensors could be a near-term catalyst.
Share Price Catalyst
■ Commercialising one or two new sensors in 2018-19, which are currently under co- development with its client.
■ Appreciation of US dollar against the ringgit.
Kerjaya Prospek (Ridhwan Effendy)
■ Kerjaya expects to clinch at least about RM800m worth of new construction jobs in 2017,
which we think is easily achievable given its historical orderbook win track record. Presently, its tenderbook stands at RM2b, which comprise mainly of high-rise residential buildings and commercial property jobs.
Share Price Catalyst
■ New contract wins, expected from end-2Q17 onwards.
■ Valuation laggard to comparable peers like Suncon.
RHB Bank (Keith Wee)
■ The group has the lowest loans-loss coverage ratio inclusive of regulatory reserve in the industry at 75% (industry: 129%), which when coupled with: a) relatively low loans-loss coverage ratio of 30% for its O&G gross impaired loans portfolio, and b) RM2.6b in O&G loans under the watch list category (46% of total O&G loans portfolio) does place a significant upside risk to management’s rather benign net credit cost guidance of 25-30bp for FY17. As such, we see significant downside risk to management’s targeted ROE of 9% to 10% and in turn consensus earnings.
Share Price Catalyst
■ Significant upside risk to management’s guided net credit cost of 25-30bp for FY17. Note
that Maybank and CIMB, with similar O&G exposure and higher provision coverage ratios, are guiding for net credit cost of 50-60bp and 60-70bp respectively.
■ O&G provisions and impairment may have yet to bottom out
■ Asset quality woes will place pressure on overall loans growth.
VS Industry (Fong Kah Yan)
■ In addition to the three assembly lines for the vacuum cleaner box-built contract which are
slated to commence in FY17, we expect VS Industry to secure more contracts from their key customers in FY18 on increasing demand for existing products as well as new product launches notably in the beauty care segment.
Share Price Catalyst
■ Securing new contracts from existing or new customers.
■ Sharp appreciation of US dollar against the ringgit.
YTL Power (Chong Lee Len)
■ YTLP provides a 6.5% sustainable dividend yield anchored by defensive cash flow from Wessex Water. Key re-rating catalysts include new power plant projects between 2020- 21, which are: a) 554MW Jordanian power plant, and b) 80% equity stake in 1,320MW coal-fired Indonesian power plant.
Share Price Catalyst
■ Positive newsflow on the financial close achieved at PT Jati.
source: UOBKayHian Research – 8/5/2017
