Prescriptions For A Lull Period
Only three out of our five BUY alpha picks outperformed the market in May 17 (FBMKLCI: -0.12%), delivering a simple average of -0.98%, while our sole alpha SELL call softened in line with the market. Despite expectations for a lull market in the near term, we expect outperformance from our June line-up of BUY picks which include Bumi Armada (new addition), Ekovest, Globetronics, Kerjaya Prospek, VS Industry and YTL Power. RHB Bank remains a conviction SELL.
WHAT’S NEW
● Review of May picks. Only three of our BUY picks outperformed the market in May (see RHS), delivering a simple average of -0.98% (FBMKLCI -0.12%). Topping the list is Kerjaya Prospek (6.9%), followed by Globetronics (3.5%) and YTL Power (1.3%). Meanwhile, as expected, Ekovest retreated (-14.1%) from its previous month’s stellar performance, following the government’s shocking annulment of Ekovest’s sister company IWC’s (in JV with China’s CREC) stake acquisition of Bandar Malaysia. Market outperformer VS Industry also chalked a disappointing -2.5%.
● Quarterly portfolio performance. We introduce three methodologies of measuring our alpha picks portfolio returns on a quarterly basis (see RHS), namely price-weighted, market cap-weighted and equal-weighted.
ACTION
● Our alpha list for June. BUYs are Bumi Armada, Ekovest, Globetronics, Kerjaya Prospek, VS Industry, YTL Power, while RHB Bank is a SELL.
● Bumi Armada a new addition. We add Bumi Armada based on its reassuring 1Q17 results justified by new contributions from FPSO Olombendo (first oil since Feb 17) and Armada LNG Mediterrana (FSU Malta).
Only three out of our five BUY alpha picks outperformed the market in May 17 (FBMKLCI: -0.12%), delivering a simple average of -0.98%, while our sole alpha SELL call softened in line with the market. Despite expectations for a lull market in the near term, we expect outperformance from our June line-up of BUY picks which include Bumi Armada (new addition), Ekovest, Globetronics, Kerjaya Prospek, VS Industry and YTL Power. RHB Bank remains a conviction SELL.
WHAT’S NEW
● Review of May picks. Only three of our BUY picks outperformed the market in May (see RHS), delivering a simple average of -0.98% (FBMKLCI -0.12%). Topping the list is Kerjaya Prospek (6.9%), followed by Globetronics (3.5%) and YTL Power (1.3%). Meanwhile, as expected, Ekovest retreated (-14.1%) from its previous month’s stellar performance, following the government’s shocking annulment of Ekovest’s sister company IWC’s (in JV with China’s CREC) stake acquisition of Bandar Malaysia. Market outperformer VS Industry also chalked a disappointing -2.5%.
● Quarterly portfolio performance. We introduce three methodologies of measuring our alpha picks portfolio returns on a quarterly basis (see RHS), namely price-weighted, market cap-weighted and equal-weighted.
ACTION
● Our alpha list for June. BUYs are Bumi Armada, Ekovest, Globetronics, Kerjaya Prospek, VS Industry, YTL Power, while RHB Bank is a SELL.
● Bumi Armada a new addition. We add Bumi Armada based on its reassuring 1Q17 results justified by new contributions from FPSO Olombendo (first oil since Feb 17) and Armada LNG Mediterrana (FSU Malta).
ANALYSTS’ TOP ALPHA* PICKS
Bumi Armada (Kong Ho Meng)
● 2017 is set to be a turnaround year for the group. 1Q17 profits showed growth due to
maiden earnings from Olombendo and Malta. New earnings from the remaining two floating projects (Kraken and Madura) will support a stronger 2H17 performance. We also see the possibility of TGT1 extension.
Share Price Catalyst
● First oil announcement on FPSO Kraken by end-June 17
● Conclusion of final acceptance test of JV FPSO Karapan Armada Sterling III (Madura) by
2H17.
● Recovery of OMS utilisation and rates.
● 2017 is set to be a turnaround year for the group. 1Q17 profits showed growth due to
maiden earnings from Olombendo and Malta. New earnings from the remaining two floating projects (Kraken and Madura) will support a stronger 2H17 performance. We also see the possibility of TGT1 extension.
Share Price Catalyst
● First oil announcement on FPSO Kraken by end-June 17
● Conclusion of final acceptance test of JV FPSO Karapan Armada Sterling III (Madura) by
2H17.
● Recovery of OMS utilisation and rates.
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.
● 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 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.
● We expect meaningful qoq earnings growth in 2Q17 and much stronger hoh 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 RM1.6b, which comprise mainly 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.
● 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 RM1.6b, which comprise mainly 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)
● RHB Bank's proposed merger with AMMB is expected to have an immediate term earnings dilution due to potential revenue duplication and gestation period required for the various cost rationalisation initiatives to come through. Post merger, RHB Bank’s cost-to-income ratio, CASA ratio and loans-to-deposit ratio will deteriorate given AMMB’spoorer financial metrics in these areas. On a BAU basis, the group has the lowest loans-loss coverage ratio inclusive of regulatory reserve in the industry at 75% (industry: 129%). This 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.
Share Price Catalyst
● 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.
● Potential merger with AMMB is expected to have an immediate dilution to earnings while cost synergies would require a gestation period of at least 2 years.
● RHB Bank's proposed merger with AMMB is expected to have an immediate term earnings dilution due to potential revenue duplication and gestation period required for the various cost rationalisation initiatives to come through. Post merger, RHB Bank’s cost-to-income ratio, CASA ratio and loans-to-deposit ratio will deteriorate given AMMB’spoorer financial metrics in these areas. On a BAU basis, the group has the lowest loans-loss coverage ratio inclusive of regulatory reserve in the industry at 75% (industry: 129%). This 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.
Share Price Catalyst
● 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.
● Potential merger with AMMB is expected to have an immediate dilution to earnings while cost synergies would require a gestation period of at least 2 years.
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.
● 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- 2021, 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.
Share Price Catalyst
● Positive newsflow on the financial close achieved at PT Jati.
source: UOBKayHian – 5/6/2917
