Aug 7, 2018

Malaysia - Alpha Picks: Convalescing

Still convalescing from the heavy selldown post GE, our July alpha picks delivered a simple average gain of 11.3%, above FBMKLCI’s +5.5%, as the new government’s decisions on mega projects have been less disruptive than feared, thus allowing construction stocks to partially recover. We add MRCB to August’s picks, along with Bumi Armada, CMS, Gabungan AQRS, Inari and VS Industry.

Review of July’s picks. Recovering from a hefty selldown from GE 14’s aftermath, 5 out of 7 of our alpha picks were above the FBMKLCI’s mom return of 5.5%. The portfolio garnered a simple average of +11.3% for the same period, mainly led by CMS’ stellar performance (+34.0% mom) which we attribute to rising optimism in 25%-owned OM Sarawak’s significant recovery of higher production and improved ASP. This was followed by Gabungan AQRS’ +16.7% returns due to multiple factors (fee warrants, potentially generous dividends from 2019-23, and optimism in securing mega projects).
SPLASH deal to provide ripples in other government deals. Last Friday, the government significantly upped its offer to buy water treatment plant SPLASH to RM2.55b, more than 10x higher than the offer made in 2013. While still at a substantial discount of 20-25% to Splash’s book value, the deal is positive (and expected to be accepted SPLASH’s owners) as it resolves a long-term gridlock for this cash flow- strapped entity. We reckon SPLASH’s resolution will lead to expectations that: a) the long overdue water pipeline replacement projects (benefitting pipe manufacturers like Engtex), and b) resolution to more government dependent deals, such as the sale of MRCB’s EDL highway.

Adding MRCB to August’s portfolio, in anticipation of major monetisation and de- gearing exercises via its stake sale in Bukit Jalil Development (KL Sports City) and a potential sale of EDL. Companies dropped from the list include Serba Dinamik, given its stellar share price run-up (+20.0% mom).
August’s alpha picks are Bumi Armada, Cahya Mata Sarawak, Gabungan AQRS, Inari, MRCB, and VS Industry.

ANALYSTS’ TOP ALPHA* PICKSanalyst top alpha picks

Bumi Armada (Kong Ho Meng)
• 2018 is set to be a turnaround year for the group, with earnings set to ramp up from 2Q18 on Olombendo's final acceptance in May 18. The improved frequency of monthly offloadings of Kraken to three tankers since Jan 18 is positive as it shows Kraken’s production improvement is real and ongoing. This will sustain Kraken's earnings qoq into 2Q18, while Kraken's final acceptance is also on track by mid-18 (which will lift 2H earnings further). We also see the possibility of a TGT1 extension by Aug 18.

Share Price Catalyst
• Conclusion of final acceptance of Kraken and Olombendo by 1H18.
• Recovery of OMS utilisation and rates.

Cahya Mata Sarawak (Abdul Hadi Manaf)
• We expect 2Q18 earnings to be substantially strong, driven by a major turnaround at OMS. Currently, CMS is trading at only 10.9x forward PE. We expect the PE to trend closer to pre-GE level as the recent sell-down was unwarranted. • 2Q18 earnings are expected to neatly beat consensus forecast, led by a significant earnings jump at 25%-owned OM Sarawak.

Share Price Catalyst
• Significant jump in OM Sarawak’s 2Q18 earnings.
• Commencement of another mega project MPA (phosphate manufacturing) in 3Q18, which leverages on cheap electricity from Bakun dam.

Gabungan AQRS (Kader Farhan)
• Provides both earnings growth and generous dividend payments (2019-23), backed by sales momentum of property development division . The company is targeting to secure> RM2b of contract works for ECRL as well as Sabah portion of the Pan Borneo Highway Sabah (PBHS), which would also lift the group’s precast manufacturing division. The government has allowed the ECRL project to proceed, while a final decision on PBHS is still pending (although construction works are already ongoing for some stretches).

Share Price Catalyst
• Clinching contract parcels for ECRL.
• Remaining stretches of PBHS receiving the government’s nod to go ahead.
• Strong take-up for E’Island, a RM491m GDV medium-end priced but high quality condo project in Puchong, Selangor.

Inari Amertron (Yeoh Bit Kun)
• Earnings are expected to improve hoh in 2HFY19 on: a) RF production ramp-up to support its US end-customer’s smartphone launch in September, and b) contribution from data centre chip testing job and fibre-optics chip fabrication and wafer certification jobs.
• Outlook remains positive on: a) new jobs from OSRAM (related to facial recognition and health sensor products for smart devices and mini LED for billboard applications), b) in- house job (foundry bank-end process for fibre optics products) transfer from Broadcom to be completed at end-18, c) consolidation of operations to improve operational efficiency, and d) potential new business for its Batu Kawan plant which is currently under construction.

Share Price Catalyst
• Benefitting from weakening ringgit.
• Confirmation on new contracts.

MRCB (Kader Farhan)
• The development of KL City Project in Bukit Jalil (GDV: RM20.7b) and the potential sales of EDL are expected to strengthen its overall earnings and balance sheet. In addition, its strong orderbook backlog of RM6.2b would potentially provide earnings visibility for its construction arm for the next 3-4 years coupled with its modest reliance on federal government's related project. Also, Putrajaya's nod to proceed with LRT3 project shall be viewed positively as MRCB will continue to become the project delivery partner (PDP), although the proposed "fixed contract" mechanism may potentially contribute lower earnings vs pre-agreed PDP fees.

Share Price Catalyst
• Sales completion of Bukit Jalil and other transport oriented development projects.
• Disposal of EDL.
• Various asset monetisation programmes.

VS Industry (Fong Kah Yan)
• We believe that the worst is over after the weak 3QFY18 results. We expect margins to recover on better operating leverage on commencement of new models for its key customers in 2H18 and 1H19. VSI is currently focusing on filling up capacities at its two new plants which came on-stream in mid-18. Hence, potential large contract wins to fill- up capacities at the plants will lift sentiments further.

Share Price Catalyst
• Large contract wins from key customers or/and new customers.
• Favourable forex movement.

Valuationcompany valuation

source: UOBKayHian – 06/08/2018