A4 out of our 5 alpha picks outperformed the stagnant market in Aug 17 (FBMKLCI 0.7%), with three of our BUY picks delivering impressive monthly returns. Our portfolio of picks delivered a respectable and simple average of 3.4%. Our September picks: BUY Ann Joo, Bumi Armada, Gabungan AQRS, Globetronics and VS Industry. SELL RHB Bank. Ann Joo and AQRS are our new BUY additions, while Ekovest has been dropped.
WHAT’S NEW
Review of August picks. Four out of our four BUY alpha picks outperformed the market in August (see RHS), delivering a simple average of 4.5% (FBMKLCI 0.7%). Topping the list was VS Industry (7.7%), followed by Bumi Armada (5.0%), Globetronics (4.2%) and Ekovest (0.9%). However, our SELL-rated RHB Cap gained 1.0%, which reduced our overall average portfolio return to 3.4%.
Mega project plays to gain prominence in 4Q17. Our focus is particularly on: a) beneficiaries of the upcoming East Coast Rail Link (ECRL) and LRT3 contract awards, and b) steel producers that capitalise on twin benefits - sharp spike in steel prices with China’s ongoing Urban Blue Sky initiative and the expected local demand pick-up as mega projects ramp-up.
ACTION
Our Sep 17 picks. BUY Ann Joo, Bumi Armada, Gabungan AQRS, Globetronics, VS Industry, and SELL RHB Bank.
Gabungan AQRS and Ann Joo were added to our conviction BUY list, while Ekovest was dropped . AQRS, a leading contender in clinching contract parcels of the ECRL and LRT3, is also hoping to recover significant variation order claims for its completed subcontract work for MRT1. Ann Joo is a standout in the steel sector, and could deliver impressive earnings in 2H17. Although we continue to like deep-value Ekovest, the stock did not react positively to recent events (separate officiations of KL River City and River of Life) and could lack near-term rerating catalysts.
ANALYSTS’ TOP ALPHA* PICKS
WHAT’S NEW
Review of August picks. Four out of our four BUY alpha picks outperformed the market in August (see RHS), delivering a simple average of 4.5% (FBMKLCI 0.7%). Topping the list was VS Industry (7.7%), followed by Bumi Armada (5.0%), Globetronics (4.2%) and Ekovest (0.9%). However, our SELL-rated RHB Cap gained 1.0%, which reduced our overall average portfolio return to 3.4%.
Mega project plays to gain prominence in 4Q17. Our focus is particularly on: a) beneficiaries of the upcoming East Coast Rail Link (ECRL) and LRT3 contract awards, and b) steel producers that capitalise on twin benefits - sharp spike in steel prices with China’s ongoing Urban Blue Sky initiative and the expected local demand pick-up as mega projects ramp-up.
ACTION
Our Sep 17 picks. BUY Ann Joo, Bumi Armada, Gabungan AQRS, Globetronics, VS Industry, and SELL RHB Bank.
Gabungan AQRS and Ann Joo were added to our conviction BUY list, while Ekovest was dropped . AQRS, a leading contender in clinching contract parcels of the ECRL and LRT3, is also hoping to recover significant variation order claims for its completed subcontract work for MRT1. Ann Joo is a standout in the steel sector, and could deliver impressive earnings in 2H17. Although we continue to like deep-value Ekovest, the stock did not react positively to recent events (separate officiations of KL River City and River of Life) and could lack near-term rerating catalysts.
ANALYSTS’ TOP ALPHA* PICKS
ANN JOO RESOURCES (Abdul Hadi Manaf)
Local steel bar prices have surged to a multi-year high of RM2,488/MT ytd (+14.2% mom). We believe that the local steel bar prices will sustain and potentially go higher when local steel demand picks up from various mega and infrastructure projects. Also note that China billets continue to trade at a premium and the price gap with local steel bars is widening.
Share Price Catalyst
Significant improvement in local steel demand.
Rise of local steel ASP to a multi-year high.
Industry reform in China leading to a tight steel supply and sustained prices.
BUMI ARMADA (Kong Ho Meng)
2017 is set to be a turnaround year for the group. 1H17 profit 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 a TGT1 extension.
Share Price Catalyst
Full acceptance of FPSOs Olombendo and Kraken by end-17. Recovery of OMS utilisation and rates.
GABUNGAN AQRS (Ridhwan Effendy)
Entry of new CEO, Datuk Azizan Jaafar, has brought in significant changes including: a)
a turnaround in the construction division with commendable margins; b) outstanding orderbook has been lifted to RM1.7b; and c) net gearing on track to hit 0.4x (from a high of 0.86x) by the year-end. The group’s all-time high construction orderbook of RM1.7b is expected to be boosted further in the near-term, driven by rail-related jobs, including LRT3 and ECRL. Also, a potential amicable settlement of the variation orders for MRT1 worth >RM100m could increase the likelihood of a bumper dividend.
Share Price Catalyst
Further contract wins totalling >RM1b in the near term.
Announcement of final settlement amount for MRT Line 1 with a potential of special
dividend.
GLOBETRONICS (Yeoh Bit Kun)
We are upbeat on Globetronics’ prospects, which is ramping up production of new sensor
products and planning for Phase 2 capacity expansion to meet end-clients’ demand. We expect significant improvement in earnings from 3Q17 onwards, given the full contribution from light sensors, which started mass production in June. We estimate strong net profit growth of 93% in 2018, but there could be earnings upside due to: a) commercialisation of developing products (particularly 3D imaging sensors), and b) strong demand for gesture sensors (due to end-client’s bundling strategy).
Share Price Catalyst
Commercialising one or two new sensors in 2018-19, which are currently under co- development with the client, which could significantly lift our earnings forecasts. Appreciation of US dollar against the ringgit.
RHB BANK (Keith Wee)
We maintain SELL and target price of RM4.65 (8.4% ROE, 0.82x 2017F P/B) given weak
growth trends (pre-provision operating profit growth 1.2% for 2Q17 and 1.7% for 1H17) and potential for relatively sharp increase in provisions post implementation of MFRS9 in 2018. The group has the lowest loans-loss coverage ratio inclusive of regulatory reserve in the industry at 81% (industry: 129%). This, coupled with RM1.8b in O&G loans under the watch list category (36% of total O&G loans portfolio and 1.2% of total loans base) does place upside risk to management’s rather benign net credit cost guidance of 25- 30bp for 2017.
Share Price Catalyst
Potentially onerous provisioning requirements post MFRS9 given the group’s low loans
loss coverage ratios.
O&G provisions and impairment may have yet to bottom out.
VS INDUSTRY (Fong Kah Yan)
In addition to the three assembly lines for the vacuum cleaner box-build contract which
are slated to commence in FY17, we expect VS Industry to secure more contracts from
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.
Significant expansion plans by its China subsidiary.
Sharp appreciation of the US dollar against the ringgit.
We maintain SELL and target price of RM4.65 (8.4% ROE, 0.82x 2017F P/B) given weak
growth trends (pre-provision operating profit growth 1.2% for 2Q17 and 1.7% for 1H17) and potential for relatively sharp increase in provisions post implementation of MFRS9 in 2018. The group has the lowest loans-loss coverage ratio inclusive of regulatory reserve in the industry at 81% (industry: 129%). This, coupled with RM1.8b in O&G loans under the watch list category (36% of total O&G loans portfolio and 1.2% of total loans base) does place upside risk to management’s rather benign net credit cost guidance of 25- 30bp for 2017.
Share Price Catalyst
Potentially onerous provisioning requirements post MFRS9 given the group’s low loans
loss coverage ratios.
O&G provisions and impairment may have yet to bottom out.
VS INDUSTRY (Fong Kah Yan)
In addition to the three assembly lines for the vacuum cleaner box-build contract which
are slated to commence in FY17, we expect VS Industry to secure more contracts from
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.
Significant expansion plans by its China subsidiary.
Sharp appreciation of the US dollar against the ringgit.
VALUATION
source: UOB KayHian – 5th Sept 2017
