Kenanga Research & Investment

Author: kiasutrader   |   Latest post: Fri, 16 Mar 2018, 09:26 AM


Telecommunication - Running Transformation

Author: kiasutrader   |  Publish date: Fri, 16 Mar 2018, 09:26 AM

We reiterated our NEUTRAL stand on the telecommunication sector. The industry incumbents have posted solid performances in 2017 and are set to continue to expedite their digital transformation as well as enhancing their operational efficiencies in CY18. Any excitements from the sector are likely to come from potential listing of edotco and U Mobile as well as M&A activities. Besides, our recent study on the global key listed towercos suggested that Asia towercos tend to have a higher financial leverage, PATAMI margin and ROE but lower PER as compared to the listed peers in the CALA and EUROPE region. All in, we made no changes to our Telco earnings forecasts and target prices. We continue to favour fixed-line over the mobile names with Telekom Malaysia (“TM”, OP, TP: RM6.85) remaining as our favourite pick for big cap while OCK (OP, TP: RM0.95) is retained as our preferred choice under the mid-cap telecom space. Meanwhile, while we maintained our MAXIS’ TP at RM6.10, its rating has been raised to OUTPERFORM (vs. MARKET PERFORM previously) in view of the recent share price weakness which could provide more than 10% total return from here. We reiterated our MARKET PERFORM call for AXIATA (TP: RM5.35) and DIGI (TP: RM4.90).

Solid 2017 performance. The sector incumbents reported reasonable 4QCY17 report cards that largely met expectations and continued to show some sequential operational improvements. Maxis reported its highest PATAMI in 4 years but still within expectations. Digi and Axiata’s 4Q17 results, meanwhile, came in without surprises despite the latter’s results partially impacted by widening losses in Idea. TM, on the other hand, performed inline with expectations despite competition and challenges as well as FY17 being a consolidation year for its service. Moving forward, all the industry incumbents are set to continue expediting their digital transformation as well as enhancing their operational efficiencies. While we concur with the industry players’ initiatives, we believe the sector will continue to remain stagnant while waiting for the next growth opportunity to arise. Besides, with increasing operational costs, spectrum scarcity and increased data demand, operators will need to work around the connectivity challenges with industry peers to sustain financial performance. Thus, we do not discount operators finding ways to strive for more efficiency gains via network collaboration/optimisation and/or lower customer acquisition costs.

What to expect in CY18. We expect mobile service revenue to see a mild dip (-0.8% YoY) in CY18 due to the prolonged industry-wide SIM consolidation and new access pricing structure. Besides, the continued competitive pressure in the IDD segment is also likely to weigh on Celcos’ service revenue. EBITDA margin, however, is likely to remain relatively stable, similar to the prior year as a result of the effective cost optimisation efforts. Besides, Capex is set to remain elevated due to spectrumrelated costs for 700MHz (where the result of the tender process is likely to be announced in mid-2018), and continued network expansion. Competition, on the other hand, is expected to remain heightened with key battle likely to focus on the prepaid segment, product upselling, and data monetisation. U Mobile, Unifi mobile and other MVNO players are likely to continue gaining subscriber market share as the big-3 incumbents tend to focus on acquiring revenue-generating subscribers, thus leaving the price-sensitive sub-segments to the smaller operators. Any excitement from the sector is expected to come from: (i) potential listing of edotco and U Mobile, and (ii) M&A activities.

Tower studies. Our finding on the global key listed towercos study suggested that; (i) a pure towerco’s EBITDA margin is likely to be within the range of 50-60%, and (ii) Asia towercos tend to have a higher forward: (a) financial leverage, (b) PATAMI margin (which we believe could be partially due to favourable interest and taxation rate environment), and (c) ROE (as a result of better PATAMI margin) as compared to the peers in the CALA (Centra and Latin America) and EUROPE regions. Nevertheless, Asia towercos’ forward PER ratio tend to be lower given the EBITDA/site is less compelling (which we believe could be due to higher number of roof-top towers vs. monopoles) as compared to other regional peers. In addition, we also downplay the likelihood of edotco and OCK to list their tower assets under the REIT structure in view of the limitation of the financial leverage (where REIT companies typically have a low gearing ratio of <1x, thus constrainting the towercos from expanding their tower portfolio further) and land ownership issue (where towercos tend to lease rather than acquire the land for their towers).

Maintain NEUTRAL sector weighting due to stiffer competition and data monetisation challenges. The sector is currently trading at 10.3x EV/EBITDA in FY18, at a 19.8% premium as compared to the regional average of 8.6x. We expect modest performance for all the telecom stocks in 2018, supported by the decent dividend yield of 3.4%. We continued to favour fixed-line exposure over the mobile names under the current challenging times given the latter’s earnings are set to be affected by heightened competition. TM (OP, TP: RM6.85) remains as our favourite pick for the big cap due to (i) its long-term growth opportunities arising from its increasingly widening broadband and network coverage, (ii) lesser competition in its fixed-line broadband business, and (iii) its laggard performance YTD, which could provide room for the stock to play catch-up when trading sentiment improves. Besides, we continue to favour OCK (OP, TP: RM0.95) under the mid-cap telecom in view of its (i) healthy cash flow on the back of escalating recurring income trend, (ii) ability to ride with the passive infrastructure sharing trend, and (iii) expanding EBITDA margin trend. Meanwhile, we also raised our MAXIS call to OUTPERFORM (from MARKET PERFORM previously) with unchanged TP of RM6.10 as the recent share price weakness could provide bargain hunting opportunity given a potential total return of c.12%. We maintain our MARKET PERFORM calls on AXIATA (TP: RM5.35) and DIGI (TP: RM4.90).

Source: Kenanga Research - 16 Mar 2018

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Top Glove Corporation - Decent 1H18, Stretched Valuations

Author: kiasutrader   |  Publish date: Fri, 16 Mar 2018, 09:25 AM

1H18 PATAMI of RM214.5m (+37% YoY) came in within expectations at 48%/50% of our/consensus full-year forecasts. We expect earnings in subsequent quarters to gain momentum, underpinned by new capacity expansion and contribution from Aspion. TP is unchanged at RM9.40 based on 24.5x FY19E EPS (+1.5 SD above 5-year forward historical mean). Reiterate MARKET PERFORM.

1H18 results came in within expectations. 1H18 PATAMI of RM214.5m (+37% YoY) came in within expectations at 48%/50% of our/consensus full-year forecasts. We expect subsequent quarter’s earnings to gain momentum underpinned by new capacity expansion and contribution from Aspion. No dividend was proposed for the current quarter as expected.

Key Result Highlights. QoQ, 2Q18 revenue rose 2.2% due to higher sales volume (+3%) and higher ASPs (+4%). Correspondingly, PBT rose 2.1% to RM124.5m as PBT margin came in flat at 13% compared to 13% in 1Q18 due to improvement in production efficiency and with new capacity coming on-stream which more than offset higher nitrile latex price (+5%) and natural gas price (average +20%). However, 2Q18 PATAMI rose 3.4% to RM109m boosted by a lower effective tax rate of 11.7% compared to 13.2% in 1Q18.

YoY, 1H18 revenue rose 15.8% to register a record-high RM1,896.6m due to higher sales volume (+19%) and ASPs (+3%). The improved results followed strong demand growth stemming from developed and emerging markets. 1H18 PBT margin expanded by 1.2pp to 13.0% compared to 11.8% in 1H17 due to better economies of scale, improved productivity and higher ASPs offset by a marked increase in natural gas price. As a result, 1H18 PATAMI was higher by 37% to RM214.5m boosted by a lower effective tax rate of 12% compared to 19% in 1H17.

Outlook. Demand growth for natural rubber gloves stems from emerging markets, where healthcare awareness and hygiene standards are rising steadily, particularly Asia (ex-Japan) and Eastern Europe, which respectively saw 60% and 40% boost in sales volume for 1H18 compared with 1H17. Looking ahead, Top Glove is in the process of constructing 2 new manufacturing facilities namely, Factory 31 (operational by June 2018) and Factory 32 (operational by early 2019), which upon completion will boost the Group’s total number of production lines by an additional 78 lines and production capacity by 7.8b gloves per annum to 59.7b (+15%). Meanwhile, preparations for Top Glove's condom manufacturing facility have also commenced and expected to be operational by June 2018. Separately, the group has obtained approval from its shareholders to proceed with the proposed acquisition of Aspion, which is targeted to be completed by early April. Following the acquisition, Top Glove is projected to control 40 factories consisting of 34 glove factories and 6 other supporting factories, 693 glove production lines and a glove production capacity of 64.3b gloves per annum.

Maintain MARKET PERFORM. TP is unchanged at RM9.40 based on 24.5x FY19E EPS (+1.5 SD above 5-year forward historical mean). Reiterate MARKET PERFORM.

A key upside risk to our call is higher-than-expected sales volume.

Source: Kenanga Research - 16 Mar 2018

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“On Our Radar” Tracker Review - Right Here Waiting

Author: kiasutrader   |  Publish date: Fri, 16 Mar 2018, 09:25 AM

The local market finally pulled back last month after a strong run which started last December. This was not unexpected given the toppish technical readings. The persistent geopolitical tension between US and North Korea coupled with the anxiety over upcoming GE14 did not help sentiment much either. In addition, crude oil price was also off its recent high of USD70/bbl to current level of USD65/bbl. As such, we advocate a “Sell on Strength” strategy in the range of 1,855-1,925 which is deemed as a low-risk Selling/Profit- Taking zone while level of <1,800 should act as low risk buying levels. As sentiment is not in favour to the mid-to-small-cap stocks, we believe it is time to switch focus to the big caps especially those with resilient earnings play. Meanwhile, our OR tracker portfolio underperformed the benchmark index with average monthly return of -2.07% in February against FBMKLCI’s - 0.54%. On the other hand, average total return between realised OR portfolio and unrealised OR tracker since inception of 27.73% is trailing behind the index for the 3rd consecutive month with barometer index registering total returns of 34.20% for the same period.

A volatile month. We did not issue any On Our Radar (OR) reports in the shortened working month of February given the busy earnings reporting season, CNY festive holidays and the market volatility going against the small caps which saw FBMSC falling to its 52-week low. In the recent results roundup strategy piece “Feeling Down? Not Really?”, we highlighted that based on our Market Sentiment Study, mid-and-smallcap stocks have shown signs of cooling off as per our Valuation Gaps Study with FBMKLCI vs. FBM70 and FBMSC, which could be an early sign of market topping. In addition, the Accumulated Volume-Price Indicators for all the three indices have crossed below their respective 30-day SMAs. These technical pictures are signalling reversal in Buying Momentum. Most importantly, the FBMKLCI was traded at a discount of 3.8%, as of end-Feb, against the consensus index target of 1,930 which surpassed its 3-year mean level of 4.4% discount. As such, we reckon that risk-reward consideration does not favour buyers at this juncture. Hence, we advocate a “Sell on Strength” strategy in the range of 1,855-1,925 which is deemed as a low-risk Selling/Profit-Taking zone. On the flipside, level of <1,800 should act as low risk buying levels.

Market closed lower especially for small caps. After a good year-end rally which extended to January, mood of the local market swung negatively in February over geopolitical issue, i.e. US and North Korea tension while crude oil price also retraced from a recent high of USD70/bbl level. In addition, anxiety over upcoming GE14 led investors to profit take which also dragged the market lower. In fact, foreign investors also turned net sellers last month for the first time after two months of net buying with total net outflow of RM1.12b from RM3.41b net inflow in January. However, YTD flow is still positive at RM2.29b. At the end of February, the FBMKLCI settled 12.38pts or 0.66% lower to 1,856.20, which was largely led by GENTING (-8.10%), AXIATA (- 5.10%) and AMBANK (-14.11%). However, investors turned to bigger banking stocks such as PBBANK (+4.64%), MAYBANK (+3.56%) and HLBANK (+7.63%) while NESTLE (+13.06%) continued to see strong buying interest as investors looked for resilient earnings stocks. On the other hand, our OR Tracker Portfolio posted an average monthly decline of 2.07% which underperformed the benchmark index’s total returns of -0.55% but similar to the FBMSC’s -2.03%. The overall tracker portfolio performance was negatively impacted by the decline in SALUTE (-22.63%), AZRB (-19.07%) and SASBADI (-17.80%) while the gainers were GKENT (+13.35%). SCICOM (+8.79%) and MYEG (+7.60%).

Tracker behind the index for the 3rd consecutive months. With no changes to our OR tracker list, the Trading Buy list remained unchanged at 31 stocks. Together with 104 stocks in the realised portfolio, the average total return for the tracker stocks (+27.44%) and realised portfolio (+27.84%) since inception in August 2012 is 27.73%, which underperformed the FBMKLCI’s 34.20% for the same period. VITROX (+301.67%) remains as the top performer under our OR unrealised tracker list followed by GKENT (+257.46%) and ELSOFT (+114.74%) while REACH (-49.30%), SALUTE (-35.71%) and SASBADI (- 32.11%) are the top three losers. On the other hand, VS (306.02%), PESTECH (+225.92%) and CAB (+166.74%) remain as the top three realised gainers. On the flip side, EATECH (-68.29%) and K1 (-60.39%) and KNM (-45.45%) remain as the top three losers under the realised portfolio.

Source: Kenanga Research - 16 Mar 2018

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Daily Technical Highlights – (TRC, GTRONIC)

Author: kiasutrader   |  Publish date: Fri, 16 Mar 2018, 09:24 AM

TRC (Close Position @ RM0.655)

  • TRC slipped 0.5sen (-0.76%) to finish at RM0.655.
  • Since our ‘Trading Buy’ call-back in January, the bullish momentum did not sustain and the share experienced a downtrend thereafter.
  • Momentum indicators are now in bearish mode with the 20-day SMA line trending below both 50-day and 100-day SMA.
  • Trading volume has not been exceptionally high, probably indicating a lack of interest in the share.
  • Thus, we decide to close position for now. Traders could consider selling on strength towards RM0.740 (R1). Conversely, should the share fall further to RM0.620 (S1) and RM0.545 (S2) support levels, we may re-look into this share.

GTRONIC (Close Position @ RM5.31)

  • GTRONIC has now closed below the key 61.8% Fibonacci level of RM5.37 post recent selling pressure, reflecting a weak sentiment.
  • Overall technical picture is bearish with SMAs in “Death Crossover” state whilst MACD hitting a lower trough in the negative territory with Signal-line above MACD.
  • Believe the technical outlook could remain negative amid weak market breadth in recent days thus opt to close our position. Moving forward, the stock’s support levels can be identified at RM4.87 (S1); and RM4.37 (S2) further down which we may consider positioning for a re-entry.
  • However, traders could consider selling on strength towards RM6.00 (R1).

Source: Kenanga Research - 16 Mar 2018

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Daily Technical Highlights – (DIALOG, SUPERMX)

Author: kiasutrader   |  Publish date: Thu, 15 Mar 2018, 08:45 AM

DIALOG (Not Rated)

  • DIALOG gained 11.0 sen (4.13%) to close at RM2.77 on high trading volume.
  • The share seems to be in the midst of testing the RM2.80 (R1) resistance level, which it had failed to break above over the past three months.
  • The MACD line had just crossed over the Signal line, which may indicate the beginning of a bullish run.
  • Given that the technical indicators are improving, we believe there is a higher chance of the share breaking above R1 compared to prior retests.
  • A break above R1 will be deemed as highly positive with the next resistance level identified at RM3.10 (R2). Conversely, downside support levels are identified at RM2.51 (S1) and RM2.33 (S2) if the bullish momentum is short-lived.

SUPERMX (Not Rated)

  • SUPERMX slipped 5.0 sen (-1.8%) to finish at RM2.80.
  • Despite yesterday’s loss, the longer-term uptrend is still firmly intact with key SMAs remains in “Golden Crossover” state whilst momentum indicators continue to display bullishness.
  • From here, expect an eventual retest of RM2.92 (R1). Bullish outlook would be solidified should R1 be taken out decisively, leading to possible advancement towards next resistance at RM3.21 (R2).
  • Any downside towards 20-day SMA RM2.60 (S1) may be viewed as a buying opportunity, though a break below RM2.45 (R2) would then be highly negative.

Source: Kenanga Research - 15 Mar 2018

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SCGM Berhad - Margin Compression in the Near Term

Author: kiasutrader   |  Publish date: Thu, 15 Mar 2018, 08:40 AM

We came away from SCGM’s 3Q18 results’ briefing feeling concerned of near-term margin compression from higher cost, while resin cost is increasing in 4Q18. However, cost pass-through should help cushion FY19E margins, while longer term plans are intact with completion of the new factory by 2H19, increasing capacity (+65%) to 67.6k MT/year. All in, we lower FY18-19E by 13-9%. Maintain MARKET PERFORM but lower TP to RM1.75 (from RM2.00).

Margin compression on higher raw materials and expansion cost. To recap, recent 9M18 results disappointed for the fourth quarter in a row, primarily on margin compression from higher resin cost, as well as increased overhead from ongoing expansions, and higher financing cost from additional borrowings to fund the expansion. We have trimmed our earnings post results (refer to report dated 14th March 2018, ‘9M18 Below Expectations’) to account for weaker margins, but we caution that there may be more downside risk to 4Q18 margins.

Cost pass-through may not benefit 4Q18, but should cushion FY19E margin compression. Management guided that resin cost for polypropylene (PP) has increased in March 18 (c.5% YoY), while they may look to pass on the higher cost on certain products gradually in coming quarters in light of the higher cost environment in FY18. As such, we believe the benefits of the cost pass-through will mostly accrete from FY19 onwards.

Expansion well on track. We expect improved contributions in coming quarters from SCGM’s rented Klang Valley factory. As at Jan 2018, the factory has four thermoform and two extrusion machines, adding 5k MT of capacity per year. The construction of the second factory in Kulai, Johor is completed (as at 3Q18), pending the issue of the CCC and expected to come online in Dec 2018 (2H19), as scheduled. Post completion, the new factory will bring the group’s total capacity to 67.6k MT/year (+65% from current level).

Outlook. We are expecting FY18-19E capex of RM60-54m, with FY18E capex to be utilised for; (i) the 2nd factory construction in Kulai, and (ii) the new Klang Valley rented factory, while FY19 capex of RM54m will be utilised for constructing its Kulai factory. We expect low effective tax rates of 13-18% for FY18-19E as SCGM will benefit from reinvestment allowance.

We lower FY18-19E CNP by 13-9% to RM19.3-21.1m (from RM22.0- 23.3m) upon lowering our FY18-19E EBIT margins to 10.4-10.9% (from 11.8-12.0%), accounting for; (i) higher resin cost in 4Q18 onwards, and (ii) gradual increase in average selling prices (+1% to FY19 revenue) from FY19 onwards. We are assuming conservative margin assumptions going forward in light of constant margins compressions in FY18, but we may look to upgrade our earnings should we see margin improvements.

Maintain MARKET PERFORM but lower our FD ex-all TP to RM1.75 (from RM2.00). Our FD ex-all TP is based on a lower FD CY18E EPS of 9.6 sen (from 10.8 sen after accounting for the bonus issue and full conversion of warrants), and a lower Fwd. PER of 18.0x (from 18.5x) post trimming our margins and earnings. Our applied PER is lower than SLP’s Fwd. PER of 18.7x due to SCGM’s weaker margins and earnings growth, but above TOMYPAK’s PER of 17.5x. We are comfortable with our MARKET PERFORM call in light of recent share price weakness (- 30% YTD), in tandem with the FBMSC (-7% YTD), and we believe that we have accounted for most foreseeable earnings risk going forward.

Source: Kenanga Research - 15 Mar 2018

Labels: SCGM
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