Market Outlook & Strategy 2019 - A Tale of Two Halves - JF Apex Research 23 February 2019 - Apex Equity
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Market Outlook & Strategy 2019
A Tale of Two Halves
By
JF Apex Research
23 February 2019 1
Contents
Market Review 2018
Malaysian Economy & Outlook
Equity Outlook 2019
Events to watch out
Implications of yield curve to equity market
Fundamental & Technical Outlooks
Investment Strategy
Sector at a glance
2
Market Review 2018
• A confluence of unfavourable internal and external factors weighed on the local
market – GE14, trade war, rate hike in the US, slowing global growth.
• With the intense foreign selling, the FBM KLCI ended below the 1700-point level with
a negative return of 5.9% for 2018.
3
Market Review 2018
• Net outflow of foreign funds: RM11.5b for 2018 vs net inflow of RM10.3b in 2017.
• The vigorous net selling by foreign investors was evident during the period of May-July
as a result of policy uncertainty with the new ruling govt., unfavourable external factors
and uninspiring corporate earnings.
4
Market Review 2018
• All sub-sector indexes registered negative returns except for Finance & Consumer
sectors which stood out among the crowd.
• Construction sector was the worst performer (-50.3%) as several mega projects were
slashed and/or are currently under reviewed.
• Industrial & Service/Trading Indices were reclassified as Industrial Product &
Services, Telecommunication & Media, Utility, Transport, Energy, Healthcare Indices
effective Sept 18 and hence no compilations and comparisons.
5
Market Review 2018
• The FBM KLCI outperformed most of the regional peers due to relatively less net
inflow of foreign funds into the local bourse for the past few years against these
nations and the local benchmark index was well supported by local funds.
• Most of the emerging and developed markets recorded negative returns.
6
Market Review 2018
PER (X) Dividend yield (%)
2018 2019 2020 2018 2019 2020
FBMKLCI Index 16.6 15.9 15.0 3.3 3.4 3.7
HSI Index 10.7 9.7 8.8 3.9 4.2 4.5
FSSTI Index 12.5 11.7 10.9 4.2 4.4 4.6
JCI Index 16.6 14.6 13.1 2.2 2.4 2.7
SET Index 14.5 13.4 12.3 3.3 3.6 3.9
PCOMP Index 17.6 15.7 13.9 1.7 1.8 2.0
KOSPI Index 8.7 8.6 7.8 2.3 2.4 2.7
TWSE index 12.7 12.5 11.8 4.7 5.0 5.1
Average (ex-KLCI) 13.3 12.3 11.2 3.2 3.4 3.6
KLCI's premium over
region (%) 24.6 29.6 33.7 3.2 1.5 1.8
• Pricey valuation against Asian peers as regional markets tumbled.
• The local bourse now trades at 16.6x/15.9x 2018/2019 PE, the second highest (for
2018) or the highest PER (for 2019) after the Philippines (17.6x 2018 PE and 15.7x
2019 PE).
• The FBM KLCI is trading at 24.6%/29.6% premium to other major Asian indices with
averages of 13.3x 2018 PE and 12.3x 2019 PE.
• Dividend yield wise, the local bourse looks unattractive as it renders 3.3%/3.4% for
2018/2019 vs regional peers (3.2%/3.4%).
7
Malaysian Economic Outlook
Moderate GDP growth in 2018
2018: (+4.7%) vs. 2017: (+5.9%)
Moderate economic activities in GDP’s components
GDP is expected to grow at +4.8% in 2019 – driven by private consumption and investment
Government spending (Public investment): Key projects such as Pan Borneo Highway, MRT2
line and Gemas – Johor Bahru Electrified Double Track
Private consumption: stable labour market amid rising wages and higher disposable income
8
Malaysian Economic Outlook
Soft inflation during 2018
2018:+0.9% vs. 2017: +3.7%
Due to lower cost of transportation, tax holiday during June’18-Aug’18, muted impact of SST
since its implementation in September amid high base effect from a year ago
2019’s CPI to grow at +2.0% y-o-y
Inflationary pressure from floating fuel price and low base effect arising from the tax holiday
period
Overnight policy rate (OPR) maintain at 3.25% in 2019
Amid prevailing robust economic growth and manageable inflation
9
Malaysian Economic Outlook
Languid 2018 exports and imports
Exports: +6.8% vs +18.8% during 2017 – moderate exports of all main components to key trading
partner
Imports: +4.9% vs +19.8% in 2017 – easing imports of intermediate, capital and consumption
goods
External trade remains tepid for 2019
Exports will grow at a modest pace, still underpinned by manufacturing goods, especially E&E
products
Imports will grow moderately, continued to be supported by consumption and capital goods as well
as intermediate goods
10Equity Outlook 2019
• A tale of two halves for the market – 1H19: Volatile and possibly in a
correction mode for most of the time; 2H19: Market recovery with improving
market sentiment.
• 1H19 – Clouded by a slew of uncertainties with majority risks being
concentrated in the first half of the year. Higher risk premium weighs on
global equity markets with rising risk-off appetite.
• 2H19 – Policies coming to rescue, i.e. possibility of loosening monetary policy
& fiscal stimulus by the US and China so as to prevent any global economic
downturn coupled with uncertainties and risks start to dissipate.
11Equity Outlook 2019 Our house view: • NEUTRAL on outlook – Our year-end 2019 FBM KLCI target of 1700 points. • Our KLCI target is based on market EPS growth forecasts of -3.1% for 2018 and +4.4% for 2019 with target PER of 16.1x 2019 PE (+0.5 SD above mean). • At a worst case scenario, we could see local bourse trending as low as 1525- point level (14.4x 2019 PE or -0.5 SD below mean) in 1H19, indicating 19% decline from the record closing of 1895 points in April 18. • Déjà vu of 2014/2015? To recap, the FBM KLCI registered all time high of 1896 points in July 2014 before seeing oil price collapsed and dragged the index to 1532 points in Aug 15 (19% drop). • Crude oil (Brent): US$60/barrel (average) • USD/MYR: 4.07 (average) • CPO: RM2232/MT (average) 12
Events to watch out
Major events which could derail stock market in 1H19 are: -
• Uncertainty returns upon end of 90-day trade truce.
• Potential slowdown of China economy.
• Brexit bombshell.
• Escalating geopolitical risk in the region.
• US Fed rate hike still on track, albeit at a slower pace.
• Policy uncertainty, dismal corporate earnings and dip in crude oil prices hold
back foreign interests in local bourse.
13Events to watch out
Uncertainty re-emerges upon end of 90-day tariff ceasefire
• End in early March 19.
• Temporary relief to global financial markets.
• We are cautious on the outcome and foresee trade dispute to remain unresolved.
• Arrest of Huawei CFO complicated the talks between the US and China.
• The US is, in fact, escalating a ‘technological cold war’ with China and the on-going tussle is
not centred on tariff and trade per se.
14Events to watch out
Potential slowdown of China economy
• Nov 18’s industrial output and retail sales growth were significantly below expectations.
• Caixin/Markit Manufacturing Purchasing Managers’ Index (PMI) for Dec 18 fell to 49.7
from 50.2 in Nov 18 – the first contraction since May 17.
• China’s economic slowdown set to deepen in 1H19 before seeing the Chinese govt. to
embark on another fresh round of fiscal stimulus and loosening monetary policy to spur
credit growth.
• China expected to grow at 6-6.5% for 2019 vs estimate of 6.6% in 2018 and 6.9% in
2017.
15
• High corporate debt (c.160% of GDP) could mean slower economic growth.Events to watch out
Source: Capital Economics, CEIC
16Events to watch out
17Events to watch out
Brexit bombshell
• Brexit will formally take effect in end Mar 19.
• Possibly a ‘no deal’ Brexit!
• If so, there would be no 21-month transition period and consumers, businesses and public
bodies would have to respond immediately with no clarity about what would happen.
18Events to watch out
Political risk in the region
• Few general elections in ASEAN.
• Thailand – Feb 19, Indonesia – April 19, The Philippines – May 19.
• Expecting exodus of foreign funds from these nations pre and post elections.
• Political stabilities and executions are highly watched.
• Malaysia might benefit, to a certain extent, as some foreign funds could opt to park their
monies in local bourse while deciding their next moves.
19Events to watch out
US Fed rate hike still on track, albeit at a slower pace
• Dec 18’s rate hike brought the Fed funds rate to 2.25%-2.50%.
• Fed may soothe volatile financial markets and counter any slowing economy by softening
its hawkish tone.
• Federal Reserve is expected to have 2 more rate hikes this year against earlier
expectations of 3 times.
• Probably happen during 1H19 (Mar and June 19).
• Strong dollar would persist in 1Q/2Q19 before weakening in 2Q/3Q19 onwards.
20Events to watch out Unfavourable domestic factors hold back foreign interests • Foreign investors rather adopt ‘wait-and-see’ attitude and would continue to trade cautiously in the local bourse, at least for 1H19. • Policy consistency and execution in doubt? Reviewing certain mega projects, undertaking some reform agendas, diplomatic relations with Singapore & China, highly disputed third national car project & Johor-Singapore third bridge. • Uninspiring corporate earnings after dismal 9MFY18 results. Our market EPS growth for 2018 and 2019 are -3.1% and +4.4% respectively. Banking, Utilities, Healthcare sectors and Petronas related counters shall underpin market earnings moving forward. • Oil price remains sluggish does not bode well for the country as Malaysia is a net oil exporter (2014 market downtrend in line with collapse of oil price) • All eyes on fiscal deficit and sovereign rating with current depressed oil price – Govt. targets fiscal deficit of 3.7% in 2018 and 3.4% for 2019 based on oil price assumption of US$70/barrel (vs current level of ~US$60). • Resilient domestic economic growth – GDP: 4.7% (2018) and 4.8% (2019) mainly driven by private consumption and private investment amid softening public consumption and investment. 21
Events to watch out
Era of shrinking liquidity
• Liquidity has driven the market run for the past 9-10 years since the 2008/09 Lehman
Crisis.
• To recap, the US ended its QE in end 2014 and preluded its normalization of interest rate
in a gradual manner since end-15 with its first rate hike.
• ECB officially ended its QE in Dec 18 but would keep reinvesting cash from maturing
bonds for a period of time. It would maintain its primary rates unchanged till Aug/Sept 19.
• Positive surprise to the markets if Fed reduces rate and ECB restarts its QE in 2019?
22Events to watch out
Repeat of 10-year cycle?
• 1987 - Black Monday in the US; 1997/98 – Asian Financial Crisis; 2008/09 –
Global/Lehman Financial Crisis.
• Investors would trade cautiously with reluctance of taking ‘long-term
investment horizon’.
• However, market usually exhibits a strong rally ahead of any perceived
market crash that could happen.
23Implications of yield curve Flattening of yield curve signaling recession ahead? • Recessions in the US have always preceded by an inversion in the yield curve but not every inversion has been followed by a recession, though it does generally signal economic risk. • The shallow slope of the yield curve, i.e. the yield spread between 2-yr and 10-yr Treasury Notes is currently at 18 bps (as of end Dec 18), the flattest in a decade and since 2007 (pre Lehman crisis). • Investors now believe the Fed’s actions will cause the economy to slow and yields to fall, and hence buying more longer-dated paper to lock in current yields, rather than taking the risk of continually rolling over shorter-dated debt where the yields they earn are declining. • A flattening yield curve can have a negative impact to the US banking stocks as they are typically 24 borrow short and lend long.
Source: Capital Economics
25Implications of yield curve
Narrowing Yield Spread between 10-yr MGS & US Treasury Note
• As a result of US Fed’s normalization policy in the form of rate hikes (now at 2.25-2.50% vs Malaysian
OPR of 3.25%).
• 220-240bps in mid-2016 to about 150bps as of end-2017, and thereafter to about 130bps currently (as
of Dec 18).
• Trend is expected to persist in the near future with few more rate hikes in the US while Malaysia has
limited leeway for monetary tightening in view of austerity measures undertaken by the govt. to reduce
debt.
26
• Continuous exit of foreign funds from our capital markets?Implications of yield curve
Implications of rising bond Yield to equity markets
• Asset de-rating is underway for the local bourse.
• Premium between the market earnings yield (market E/P) and 10-yr MGS is narrowing, i.e. stock
getting less attractive to fixed income.
• FBM KLCI’s earnings yield: 5.3% (current P/E of 19x) vs 10-yr MGS: 4.0%.
• Rising yields could alter the value proposition for equities vs fixed income for years to come.
• An uptick of US 10-year Treasury yield – now at 2.7% (vs average of 2.66% for the past 10 years).
• Risky assets in emerging markets look unappealing.
• US Treasury yield is expected to inch up in the near term (bond price trending down whilst yield
picking up) pursuant to Fed tightening, i.e. unwinding its balance sheet and issuance more Treasury
notes and govt. bonds to fund Trump’s tax cut, infrastructure spending.
27Fundamental Outlook
• Market valuation is fairly priced.
• Currently trading at 15.9~16.0x 2019 PE, which is at the range of
+0.5~+1.0 SD above its historical mean PE of 15~16x.
• 1H19: Absence of any positive catalyst whilst immediate outlook
remains uncertain and challenging.
• 2H19: Anticipating foreign funds to return to the emerging markets
which would benefit the local equity market banking on policy
reversal, i.e. stimulus fiscal policy & loosening monetary policy.Technical Outlook
FBM KLCI Technical Chart
29Technical Outlook
• Last year, the FBM KLCI declined from an all-time high near 1900
points in April. Hit a low of 1626 points in December before
rebounding to above1700 points recently.
• Technical indicators are mixed with the RSI being flat below the
overbought zone while the MACD is climbing above the signal line.
• Immediate term: Positive view as the index has just crossed above
the 100-day moving average (blue line). Above the support of 1700
points, further downside if this level fails to hold.
• Longer term: Negative view as the index remains in the downtrend
channel since April 2018. A reversal can be seen if the resistance of
1740 points is broken.Investment Strategy
P/E valuation discount of the FBM Small Cap Index to the FBM KLCI
• Are small caps ripe for picking? Valuation looks appealing now.
• The Small Cap Index is currently trading at 8.0x forward PE, which is below its historical mean of
10.4x.
• Valuation gap between the small-cap and large-cap counters has widened to the current 52% PE
discount, which is at its high side (traditionally trading at an average of 34% PE discount)
• Upcycle: 5~25% PE discount; Downcycle: 35~55% PE discount.
31
• We advise investors to bottom fish in 2H19 due to low liquidity & high beta in nature.Investment Strategy
• Equities de-rating well underway pursuant to shrinking liquidity and risk-off sentiment.
• Bottom-up approach in stock selection under current heightened volatility.
• Investors shall stay defensive, favouring Healthcare (IHH, KPJ, Apex Healthcare, YSP,
Top Glove, Hartalega, Kossan, Supermax), Consumer (Brewery – Carlsberg, Heineken,
Non-discretionary – F&N, Nestle, Dutch Lady, Ajinomoto, QL, CCK, Apollo, Cocoland,
Spritzer, Caring, Aeon), and REIT (retail & industrial – IGB, Sunway, Pavilion, Axis).
• Sectors ‘in the theme’ or relatively shelter from prevailing business downcycle – Banking
& Finance (Consumer and SME financing – Aeon Credit, Public Bank, HL Bank, Maybank,
Alliance Bank, ELK-Desa, Takaful), Renewable energy/Utilities (Cypark, Pestech,
Tenaga, Gas Malaysia), O&G (Downstream – Yinson, Dialog, Serba Dinamik), Aviaiton
(AirAsia), Automobile (UMW, Bermaz), Concessionaire (Perak Transit, UEM Edgenta,
PBA), Industrial (SAM, Scientex, Chin Well, Wellcall, VS), Car vendors (Proton - D&O, 32
Pecca), Water proxy (Engtex).Investment Strategy
• Positive: Automobile, Consumer, Glove sectors
• Neutral: Construction, Plantation, Property, Telco, O&G sectors
• Negative: Industrials/Manufacturing sector
• Our top picks under coverage are: UMW(TP: RM6.88), Top Glove (TP:
RM6.37), Padini (TP: RM5.00), LBS (TP: RM1.06), Tasco (TP: RM1.35) and
Pantech (TP: RM0.63).
33Automotive Overweight
• Tax holiday to boost 2018’s TIV – Auto’s TIV grew 3.8% yoy in 2018 to 598.7k units (vs 2017: 576.6k
units)
• MAA’s TIV forecast of 585k in 2018 vs our forecast of 588.1k units
• Encouraging car sales underpinned by ‘zero-rated’ GST during June’18-Aug’18
• Among top market players in 2018: Perodua (38%), Honda (18%), Proton (13%), and Toyota (11%)
Total Industry Volume 2018
80,000
70,000
60,000
50,000
Commercial Vehicles
40,000
Passenger Vehicles
30,000
20,000
10,000
-
34• Steady outlook for automotive sector in 2019 – Forecast another stable growth of 2.1% for 2019 TIV to
611.3k units (vs 2019 MAA’s forecast of RM600k units)
• Underpinned by new launches, better consumer sentiment towards big ticket items, higher approval
loan rate as well as improvement in profit margin following the strengthening in Ringgit
• NAP to unveil in 2019
• BUY on UMW (TP: RM6.88) – Group to re-focus on its three core businesses which will resume
growth momentum over the medium to longer term
• BUY on Tan Chong (TP: RM1.68) – Group is able to sustain its growth momentum and earnings
recovery is well underway
Total Industry Volume for 2012-2019F
800000
700000
600000
500000
400000
300000
200000
100000
0
2012 2013 2014 2015 2016 2017 2018 2019F
TIV MAA Forecast TIV JF Apex Forecast
35Property Marketweight
• Outlook remains subdued - Slower GDP growth, low affordability pursuant to rising cost of living,
stringent mortgage approval, and oversupply of residential and commercial properties will continue to
weigh on the property market. Hence, we do not foresee the fundamentals of the sector to improve in
2019.
• Tepid transaction activity - Property transaction volume and value remained sluggish in 1H2018.
Total volume 1H2018: -2.4% yoy; Total value 1H2018: -0.1% yoy; House Price Index (HPI) 2017:
+6.5% yoy; Existing stock of residential property in 2QCY18: +3% yoy; Unsold residential property in
2QCY18: +40% yoy.
• Dismal corporate earnings - Most of the property counters delivered lacklustre yoy earnings growth
for its 9MFY18 results due to lower progress billings, higher costs coupled with tumbling new sales. FY19
financial results of the developers are expected to be uninspiring with lower topline as well as shrinking
margins.
• Declining margins - We expect developers to fork out more rebates or incur higher marketing costs
to brush up their promotional activities to market their offerings and inventory. Moreover, with the
concentration of selling affordable housings, it would also affect developers’ product margins.
36• Distressed valuation but no immediate re-rating catalyst.
• The majority of property counters are trading at rock-bottom valuations, 40-60% discount to their
RNAVs with some even trading below their BVs.
• PE multiples wise, large cap stocks and mid-to-small cap stocks are now trading at 10-15x forward PE
and 5-9x forward PE respectively.
• We do not foresee the sector to have a meaningful recovery in the short term due to
prevailing poor market sentiment towards property counters.
• Maintain NEUTRAL on the sector – Long-term investment wise, we have BUYs on LBS
(Target Price: RM1.06), Titijaya (Target Price: RM0.38) and Tambun Indah (Target Price:
RM0.96); SELL on HCK Capital (Target Price: RM1.06).
• Other non-rated property counters under our investment radar are – Mah Sing, Matrix Concept and
UOA Development.
37Plantation Market weight
• Plantation Index underperformed FBM KLCI in 2018 – Soft CPO price
– Soft CPO Price – Higher supply growth outweighed demand growth (record
high inventory of over 3m mt)
– Supply growth - Lifted by high inventory carried forward from 2017 to 2018,
coupled with a decent production in 2018.
– Demand growth – Buoyed by higher domestic intake amid flat export growth
in 2018.
• CPO production forecast for 2019 is 20.1m mt
• CPO average selling price for 2019 is RM2232/mt500,000
0
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
3,500,000
Jan2017
Feb2017
Mar2017
Apr2017
May2017
Jun2017
Plantation
Jul2017
Aug2017
Source: JF Apex, MPOB
Sep2017
Oct2017
Nov2017
Dec2017
Jan2018
Feb2018
Mar2018
Apr2018
May2018
Jun2018
Jul2018
Aug2018
Sep2018
Oct2018
Nov2018
Dec2018
Jan2019
Feb2019
Mar2019
Apr2019
May2019
Jun2019
Jul2019
Aug2019
Sep2019
Oct2019
Nov2019
Dec2019
Historical and forecast Palm Oil's inventory (Jan2017-Dec2019)
Export
Production
Closing Stock
Opening Stock
Market weightPlantation Market weight
• Maintain neutral view on plantation sector
- expect CPO ASP will remain soft
- Higher operating costs (minimum wage hike)
- long-standing challenge of shortage of labour
– Stock under our coverage:
• HOLD calls for:
- Kuala Lumpur Kepong (target price: RM22.91)
- IOI Corporations (target price: RM4.37)
- Genting plantations (target price: RM10.37)
due to soft CPO price outlook
- Kim Loong Resources (target price: RM1.25)
and their rich valuation
- C.I. Holdings (target Price RM1.70).
• Upgrade from SELL to HOLD for IJM Plantation (target Price RM1.50) in view
its recent retreat in share price.
• HOLD on Boilermech (target price: RM0.68) due to weak outlook of planters.Rubber Glove Overweight (upgraded) • Strong USD benefiting glove makers o US interest rate hike spillover to 2019 o Revenue mostly denominated in USD o Positive topline growths (ie. Higher average selling price) • Demand remain robust o Rising global demand for gloves o Average 10% growth rate per year • Minimal impact from vinyl gloves segment o Intense competition - supply disruption for China normalized o Lower impact - contribute around 10% to the topline • Stable cost of material o Latex price remain stable/increase steadily - supply outweighs demand. o Nitrile Butadiene remain stable - low crude oil price o If any spike in costs, glove makers are able to pass on costs customers
• Minimal impact from rising operating cost o Natural gas tariff – less than 10% of overall operating costs o Minimum wages – offset by strengthening of USD against MYR • Key risk o Oversupply of gloves or Overcapacity o Rapid rise in minimum wages • Favourable outlook o Continue to deliver growth o Demand for nitrile disposable glove remains intact • BUY on Top Glove (TP: RM6.37) due to strong growth prospects • HOLD on Hartalega ( TP: RM6.05) as share price fully valued • Non-rated stocks such as Supermax, Kossan are worth a look.
Consumer Overweight
• Strong surge in (Consumer Sentiment Index) CSI
• Surpassed threshold of 100-point level
• Foresee CSI to maintain at the healthy level for 1H2019
• Better spending for lower and middle income group
• Budget 2019 announcement.
• Lower fuel price, increase in minimum wages, cash grants for B40
household, 30-day rapid travel passes• Positive outlook for the sector
• Better consumption - staple goods, small ticket and fast moving
consumer goods
• Eg, Nestle, QL, Sprtizer, Aeon
• Less positive – big ticket items as 3 month tax holiday in 2018 ended
• Key risk
• Weakening of MYR
• Threat of competition from online retailers
• BUY call on Padini (TP: RM 5.00) as value re-emerges from recent sell
down
• BUY on Oriental Food (TP: RM0.66) as elevated operating costs weigh on
earnings
• HOLD call on Hai-O (TP: RM3.00) due to slowing MLM division
• HOLD on Ajinomoto (TP: RM21.60) due to higher marketing expenses,
raw material cost coupled with fluctuations in forex.Construction Market weight
• Worst performer in 2018 following cut and revision in mega infrastructure
projects.
– Under review (total value worth RM150b) :
- East Coast Rail Line (c.RM55b) – regained traction with recent news flow
- KL-Singapore High Speed Rail (c.RM60b) – without timeline
- MRT 3 (c.RM40b) - without timeline
– Cost cutting (total amount reduction of RM23.84b):
- MRT2 (RM39.35b -> RM30.53b, -22.4%)
- LRT3 (RM31.65b -> RM16.63b, -47%)Construction Market weight
• Focus shifting from mega projects to smaller scale jobs (building
works) - especially those related to benefits of “rakyat” or public amenities, i.e.
schools, hospitals and affordable housings.
• Construction players to face margin contractions - intense competition
among contractors to secure smaller pool of jobs.
• Low orderbook replenishment but earnings are supported by sizeable
outstanding orderbook - outstanding orderbook for construction companies are
close to RM81.8b, with an average earnings visibility of around 2 years.Estimated Outstanding Orderbook for Listed Construction Companies
Name RM>3B Name > RM 5b
VIZIONE HOLDINGS BHD 3,910 GAMUDA BHD 11,100
AHMAD ZAKI RESOURCES BERHAD 3,200 IJM CORP BHD 8,800
EKOVEST BHD 3,000 WCT HOLDINGS BHD 6,000
HOCK SENG LEE BERHAD 3,000 GEORGE KENT (MALAYSIA) BHD 5,500
SUNWAY CONSTRUCTION GROUP BH 5,205
Name RM>1B Name > RM 2b
JAKS RESOURCES BHD 1,880 KERJAYA PROSPEK GROUP BHD 2,670
MGB BHD 1,830 EVERSENDAI CORP BHD 2,400
MUHIBBAH ENGINEERING (M) BHD 1,800 GABUNGAN AQRS BHD 2,400
KIMLUN CORP BHD 1,800 PESONA METRO HOLDINGS 2,000
MUDAJAYA GROUP BHD 1,800
TRC SYNERGY BHD 1,636
GADANG HOLDINGS BHD 1,510
CREST BUILDER HOLDINGS BHD 1,300
MITRAJAYA HOLDINGS BHD 1,200
ECONPILE HOLDINGS BHD 1,100
Name RM 500m
PUNCAK NIAGA HOLDINGS BHD 489 BINA PURI HOLDINGS BHD 900
HO HUP CONSTRUCTION CO BHD 375 ADVANCECON HOLDINGS BHD 876
IREKA CORP BHD 323 IKHMAS JAYA GROUP BHD 820
FAJARBARU BUILDER GROUP BHD 318 OCR GROUP BERHAD 791
BENALEC HOLDINGS BHD 239 INTA BINA GROUP BHD 748
PINTARAS JAYA BHD 200 GDB HOLDINGS BHD 614
WIDAD GROUP BHD 93
MERCURY INDUSTRIES BHD 25
Source: Companies’ annual report, quarterly reports and media as at December 2018Construction Market weight
• Maintain market weight for construction sector - lacking infrastructure projects and
positive news flow to spur the sector for 2019
• Valuation looks cheap - construction sector is now trading at 10.6x trailing PE, which is
below its historical average of 15.6x.
• BUY calls:
– IJM Corporation (target price: RM2.05) Orderbook: RM8b/ Property unbilled sales:
RM2b
– Gadang (target price: RM0.68) Orderbook: RM1.43b/ Property unbilled sales:
RM100.9m
– HOLD call :
– Gamuda (target price: RM2.70) Orderbook: RM11.1b/ Property unbilled sales: RM2.3b
– Ikhmas Jaya (target price: RM0.11) mainly due to its sizeable trade receivable despite
an orderbook of RM820m.Telecommunications (Marketweight)
• Downgrade to Neutral due to lack of catalyst, flat earnings growth
and unattractive dividend yield.
• Challenges: price competition, pressured ARPU and regulatory
risks. Earnings growth expected to be flat due to difficulties in lifting
ARPU amid intense competition. Telcos are maintaining their profit
margins with ongoing cost cutting initiatives and attracting more
postpaid subscribers.
• With the mobile market being matured, opportunities are seen in
fixed broadband and digital services. Our top pick is Axiata with due
to its earnings growth potential and exposure to regional markets.
49Telecommunications (Neutral)
Telecommunications (Neutral)
Telecommunications Axiata (BUY, TP: RM4.95) • We see value emerging after the recent sell down in share price. Catalyst would be earnings recovery in its two biggest subsidiaries Celcom (Malaysia) and XL (Indonesia). Growth will also be driven by earnings momentum as its regional subsidiaries continue to outperform in the respective countries. • Its ongoing cost cutting program aims to reduce costs by RM5b by 2022, translating into 300 basis points of EBITDA margin improvement. Axiata has managed to achieve RM1b of cost savings so far this year. Telekom Malaysia (HOLD, TP: RM2.50) • Share price tumbled over 50% last year on concerns of reduced earnings and dividend after the new government lowered broadband internet prices. • Earnings are expected to drop 20% after the price reduction of broadband packages. Currently, revenue from Internet accounts for over one-third of total revenue. Challenges include price competition, more entrants into the fixed broadband market and regulatory risks. • Slashed dividend payout - TM reduced its dividend policy of RM700m or 90% of normalized PATAMI, whichever higher, to 40%-60% of PATAMI 52
Telecommunications Maxis (HOLD, target price: RM5.51) • Continues maintain a steady growth in its postpaid segment thanks to growth in shared lines propositions, while seeing decline in its prepaid segment impacted by SIM consolidation and migration to postpaid from prepaid. • We do not foresee any significant positive catalyst to drive the share price in the near term. Meantime, lower EBITDA margin is expected from the termination of its network sharing and alliance agreement with U Mobile. The stock’s dividend yield stands at unattractive level of 3.72%. Digi (HOLD, target price: RM4.71) • Digi continues to attract more postpaid subscribers but lower prepaid subscribers. Postpaid revenue fueled by strong take-up and plan upgrades to value postpaid plan with device bundles. • We do not foresee any potential catalyst in near term which will drive the Group’s future earnings. However, better earnings are expected due to its optimized cost agenda. • Digi has an unattractive dividend yield of 3.36%. Healthy cash flow, attractive dividend payout ratio of 100% along with its higher EV/EBITDA as53 compared to its peers.
Oil and Gas (Marketweight)
• Remain Neutral on the sector due to weak oil prices, oversupply
concerns and scarce jobs. Valuations are depressed but recovery is
expected to be slow as award of contracts and capital investments
have not picked up significantly.
• Oil price plunged 40% from US$80/barrel to US$50/barrel in 4Q18.
We expect oil prices to stabilize as OPEC and several producing
countries agreed to cut production by 1.2m barrels a day for 6
months starting January 2019.
• Offshore capital expenditure is expected to pick up later this year
with international oil companies (IOCs) and national oil companies
(NOCs) starting to pour in investments. Petronas’ upstream capex
for 2019 is expected to increase to RM14-15b from RM12b in 2018.
Award of contracts is expected to accelerate slowly from 1H19.
• We prefer companies with large orderbook to sustain earnings in the
immediate term while riding the recovery.
54Bursa Malaysia Energy Index (red) vs Brent Crude
price (yellow)Oil and Gas Sapura Energy (BUY, TP: RM0.50) • Share price hit record low after being dragged by lacklustre earnings, high gearing and impairments. However, we have seen signs of improvement after its recent corporate exercises and kitchen sinking. • To reduce gearing level to 0.7x from 1.7x currently using cash from two recent corporate exercises, namely rights issue to raise RM4b and selling a 50% stake sale in the Exploration & Production (E&P) arm to OMV for RM3.7b. • Huge orderbook OF RM19.4b, its highest in 24 months, after new contract wins of RM9.3b year-to-date. Bid funnel improved significantly as Sapura bids for US$8.8b worth of jobs this year compared to US$2.5b in 2017. • Earnings from Engineering & Construction (E&C) division to improve given the gradual pickup in global capex spending coupled with maiden contribution from the SK408 gas fields coming on stream in end-2019. However, the Drilling division is still loss making with an 56 utilisation rate of 44%.
Bumi Armada (HOLD, TP: RM0.66) • FPSO (floating production storage and offloading) contracts remain as main earnings driver to cushion the low utilisation rate in its offshore support vessels. FPSO earnings are driven by FPSO Kraken (North Sea) and Olombendo (Angola). • Orderbook remains steady at RM21bn with another RM10.3bn worth of potential extension that could sustain Bumi Armada’s earnings for the next few years. • Share price was battered following concerns of high gearing level at 1.8x and impairments. As such, we are lowering our recommendation to Hold until it resolves its debt through refinancing.
Pantech (BUY, TP: RM0.63) • Earnings were significantly impacted after Pantech suspended the export of carbon steel butt welded fittings to the US following a 183% anti-dumping tax imposed on Pantech amid the US-China trade war. • Going forward, earnings will be sustained by ongoing orders from the Refinery and Petrochemical Integrated Development (RAPID) in Pengerang, Johor and its new galvanising plant in Pasir Gudang. • Potential upside could come if the US Department of Commerce’s decision is reversed as the management is using legal means to contest the anti- dumping tax. Should the US upholds its decision, Pantech as a major player in supplying pipes, valves and fittings (PFV), is able to sell its products to other countries albeit at lower margins. • The company pays an attractive dividend yield of 5%.
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