Highlights

Kenanga Research & Investment

Author: kiasutrader   |   Latest post: Mon, 18 Jun 2018, 09:43 AM

 

Yinson Holdings - A New FPSO With Potentially More

Author: kiasutrader   |  Publish date: Mon, 18 Jun 2018, 09:43 AM


We view the exclusive negotiations between YINSON and First E&P for the supply of a FPSO positively as we believe YINSON is poised to secure the contract which could potentially boost their outstanding order-book by 38% and introduce a new stream of recurring income. Without changes to estimates, we continue to like YINSON for their stable income amidst the better FPSO outlook. Reiterate our OP call with higher SoP-derived TP of RM5.30.

Exclusive negotiations for a new FPSO. Last Thursday, YINSON entered into an exclusive negotiation with First Exploration & Petroleum Development Company Limited (First E&P) to discuss the supply of a FPSO along with O&M works for Anyala & Madu field (under oil mining lease 83 & 85) located 40km offshore from Nigeria. Tentatively, the contract is to have a firm period of 7 years with an option to renew for up to 8 years. The oil field is jointly owned by First E&P (40%) and Nigerian National Petroleum Corporation (60%).

Confident to win. The planned FPSO for Anyala & Madu will be developed based on an existing FPSO to exploit the field containing c.340m barrels of oil equivalent (boe). With an estimated capex of USD400m, the Anyala & Madu FPSO is intended to produce 50k bbls of oil and 120MMscf of gas per day. We are confident that YINSON would be able to seal the deal given their robust track records within the FPSO space. If successful, this would be their second FPSO in Nigeria (after FPSO Adoon secured back in 2006).

Positive impact. Overall, we are positive on the contract as it could potentially boost YINSON’s current outstanding order-book of c.USD3.2b by c.USD1.2b (+38%; USD800m firm, USD400m option) and also inject another stream of recurring net income worth c.RM100m/annum (37% of FY20E earnings) based on EBIT margin of 35%. For now, we make no changes to FY19-20E earnings as contributions from the new FPSO will only kick in from FY21 considering time required for vessel acquisition and modification.

Appetite for more. The demand for FPSOs is picking up as oil majors gradually revive projects shelved during the industry downturn, underpinned by the stronger and more stable oil prices. Given that the capex size of USD400m for the Anyala & Madu FPSO is relatively small compared to YINSON’s earlier indicated capex target of USD1.0b, we believe YINSON is still on the lookout for more projects in Mexico, Ghana, and Brazil in which 3 tenders (of which 2 are worth c.USD1b) will potentially be announced by year end.

Maintain OUTPERFORM with higher SoP-derived TP of RM5.30 (from RM4.50) after imputing in RM0.60/share for the Anyala & Madu FPSO assuming; (i) USD400m capex, (ii) 15% IRR, (iii) 7-year firm, and also accounting for an expected O&M contract win (Layang FPSO worth RM0.20/share). Note that we have an additional expected FPSO contract win in FY20 amounting to RM0.49/share in our SoP as we foresee YINSON securing another FPSO contract given the healthy FPSO market, underpinned by stronger crude prices, and YINSON’s capacity to bid further on the back of a stronger financial footing post disposal of 26% in JAK FPSO, which was completed on 6th June 2018. Our new contract in FY20 assumes; (i) 14% IRR, (ii) 8-year firm period, (iii) 50% equity stake, and (iv) USD1b capex.

Our TP implies FY19-20E PER of 19.5-21.3x which we deem fair given YINSON’s ability to: (i) generate recurring cash flow, and (ii) secure contracts with oil majors amid the competitive global FPSO market. Risks to our call include: (i) project execution risk, and (ii) weaker-than- expected margins.

Source: Kenanga Research - 18 Jun 2018

Labels: YINSON
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US FOMC Meeting (12-13 Jun) - An expected hike, signals four this year. OPR to stay put

Author: kiasutrader   |  Publish date: Thu, 14 Jun 2018, 09:49 AM


OVERVIEW

● As expected, the Federal Reserve has raised its key short-term rate by a modest 25 basis points to a still-low range of 1.75% to 2.00% for the second time this year following the one in March. It was the Fed's seventh rate increase of the current credit tightening cycle since 2015.

● The Fed now foresees four rate hikes this year, up from the three it had previously forecasted. According to the Federal Open Market Committee (FOMC), the move reflects the economy's resilience, the job market's strength and inflation that's finally nearing the Fed's target level. “The Committee expects that further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labour market conditions, and inflation near the Committee’s symmetric 2.0% objective over the medium term,” the Fed said, adding that risks to the outlook were roughly balanced.

Continued strengthening of the economy prompted the Fed to signal an additional rate increase for 2018. Quarterly economic projections released at the meeting showed Fed officials’ expectations for the economy to grow at a 2.8% rate this year, up from a 2.7% forecast in March. It also predicts the unemployment rate to dip to 3.6% by year’s end, down from a forecast of 3.8% in March. Unemployment rate reached 3.8% in May, its lowest since 1969.

● Dot-plot-wise, the FOMC members’ projections for the midpoint of Fed Fund rate, the expectation of an additional rate hike is the result of a single vote shifting toward more hikes among the officials to 7-Versus-6 from 6-Vs-6 in March.

● Slippery slope. While many economists think the current growth expansion will exceed the 1990's streak, some worry about what might occur once the impact of the tax cuts begin to fade and the Fed's gradual rate hikes begin to curb growth. The Fed's pace of rate hikes for the rest of the year could end up reflecting a tug of war between a sturdy economy and the risks to growth, including from a potential trade war that could break out between the US and key trading partners namely China, the EU, Canada and Mexico. A global trade war would risk cutting into US economic growth by depressing American export sales and raising inflation.

● On the home front, the biggest risk to the monetary policy outlook is that a post-election sharp decline in investment would augment an economic slowdown. In fact, Malaysia’s capital market has been experiencing large outflows of funds since the surprise outcome of the General Election in early May as well as the current policy changes and measures brought by the new administration led by Pakatan Harapan government; mainly the removal of Goods and Services Tax rate and scrutinising key infrastructure projects. To ensure capital market stability and ample liquidity as well as to support growth, we expect BNM to adopt an accommodative stance and hold the overnight policy rate at 3.25% for the year and perhaps the next as well.

Meanwhile, we expect the ringgit to remain weak against major currencies. Against the USD we expect the ringgit to test the 4.05-4.10 level in the near term. We are revising our year-end USDMYR target to 4.05 from 3.90.

Source: Kenanga Research - 14 Jun 2018

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Rubber Gloves - Insignificant Gas Tariff Hike, Overstretched Valuations

Author: kiasutrader   |  Publish date: Thu, 14 Jun 2018, 09:15 AM


Gas Malaysia in an announcement to Bursa Malaysia informed that the Government has approved a natural gas tariff revision for non-power sectors in Peninsular Malaysia with effect from 1 July 2018 to 31 December 2018 by an average of 0.5%. However, the quantum increase appears insignificantly small this time around compared to 1H2018’s hike (+22%). Ceteris paribus, assuming “no-cost pass through”, an average 0.5% increase in natural gas tariff is expected to only marginally impact rubber gloves players’ earnings by 0.2-0.5%. Anecdotal evidence suggests that rubber gloves stocks’ share price rally was led largely by massive PER expansion compared to pedestrian earnings growth over the past eight quarters and 12-month period. On the flipside, key upside risk is stronger-thanexpected demand. We have UNDERPERFORM calls on HARTA (UP; TP: RM5.00); TOPGLV (UP; TP: RM9.40), SUPERMX (UP; TP: RM2.20); and KOSSAN (UP; TP: RM6.85).

Average 0.5% tariff hike for natural gas for non-power sectors. Gas Malaysia in an announcement to Bursa Malaysia informed that the Government has approved a natural gas tariff revision for non-power sectors in Peninsular Malaysia with effect from 1 July 2018 to 31 December 2018 by an average of 0.5%. However, the quantum appears smaller this time around compared to 1H2018’s hike (+22%). Ceteris paribus, assuming “no-cost pass through”, an average 0.5% increase in natural gas tariff is expected to only marginally impact rubber gloves players’ earnings by 0.2-0.5%. Fuel accounts for an average of 10% of production cost, of which natural gas accounts for an average of 7% of the production cost. Based on our back-of-envelope calculations, players need to raise their average selling prices by 0.5%. Generally, its takes approximately between one to three months to pass through the cost increase.

Massive PER expansion but pedestrian earnings growth over the past eight quarters and 12-month period. Anecdotal evidence suggests that rubber gloves stocks’ share price rally was led largely by massive PER expansion compared to pedestrian earnings growth over the past eight quarters and 12-month period. For example, Hartalega’s PER expanded from 18x to 44x but EPS only rose an average 10% over the past eight sequential quarters. Similarly, Top Glove’s PER expanded from 17x to 32x but EPS only averaged 9% growth over the past eight sequential quarters. Following a period of capacity consolidation starting back in mid-year 2016 which led to falling ASPs, nascent signs of glove-makers ramping up capacities are building up again. The robust demand is attracting players to ramp up production. In anticipation of higher demand and switching from vinyl gloves, players are raising capacities again.

Potential headwinds from minimum wage. We expect headwinds, including potential higher minimum wage, which could derail earnings of glove players. Any hike in minimum wage could derail glove players’ earnings since labour accounts for 9% of production cost. For illustrative purposes, if the present minimum wage is hiked by 50% to RM1,500/month, ceteris paribus, assuming ‘a no cost pass-through’ scenario, the minimum wage policy is expected to hit glove players’ bottom-line by 3-12% on a full-year basis based on our back-of-the-envelope calculations. However, in the past, glove makers had managed to gradually pass cost through via higher ASPs.

Downgrade Top Glove from Market Perform to Underperform. All-in, we believe positives have been priced in. Based on an unchanged TP of RM9.40 based on 24.5x FY19E EPS (+1.5SD above 5-year forward historical mean), we downgrade Top Glove from Market Perform to Underperform. The stock is trading at 32.1x and 29.6x on FY18E and FY19E EPS, respectively, which is +2.0SD above 5-year historical mean.

Downgrade Kossan from Market Perform to Underperform. Based on an unchanged TP of RM6.85 based on 20x FY19E EPS, we downgrade Kossan from Market Perform to Underperform. The stock is trading at 24.8x and 23.8x on FY18E and FY19E EPS, respectively, which is +1.5SD above 5-year historical mean.

Reiterate UNDERWEIGHT. Near-term headwinds include potential higher minimum wage and rising new capacities are seen to undercut ASPs and hence derail earnings. On the flipside, a key upside risk is the stronger-than-expected demand. We have UNDERPERFORM calls on HARTA (UP; TP: RM5.00); TOPGLV (UP; TP: RM9.40), SUPERMX (UP; TP: RM2.20); and KOSSAN (UP; TP: RM6.85).

Source: Kenanga Research - 14 Jun 2018

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Gas Malaysia Berhad - Slightly Higher Tariff Rate in 2H18

Author: kiasutrader   |  Publish date: Thu, 14 Jun 2018, 09:07 AM


The higher effective tariff rate of RM32.69/mmbtu in 2H18 will have neutral impact to GASMSIA’s bottom-line as it is a cost pass-through from higher gas costs. Nonetheless, we still continue to like the IBR framework as it offers better earnings visibility. We also believe that this framework will stay beyond 2019 as it is a fair and transparent mechanism. With share price rising 7% in the past two weeks and positives priced-in, we cut the stock to MP at RM3.05/DCF.

Flattish effective gas tariff rate in 2H18. Yesterday, Gas Malaysia Bhd (GASMSIA) announced that the Government has approved the half-yearly natural gas base-tariff rate revision for non-power sectors in Peninsular Malaysia to RM31.92/mmbtu on average for Jul-Dec 2018 from RM30.90/mmbtu in Jan-Jun 2018 which is in line with the national rationalisation plan and Gas Cost Pass-through (GCPT) announced in Dec 2016. In addition, under the GCPT framework, a surcharge of RM0.77/mmbtu will apply to all tariff categories due to higher actual gas costs against the reference gas costs, translating to an average effective tariff of RM32.69/mmbtu which is slightly higher than RM32.52/mmbtu for 1H18.

Earnings neutral to GASMSIA. This is not a surprise to us as it is a scheduled half-yearly revision while the tariff revision has neutral impact to GASMSIA on a 6-month lagged basis as it is a cost pass- through under the GCPT mechanism. Meanwhile, with the implementation of GCPT in Jan 2016, which is similar to the Imbalance Cost Past-through (ICPT) for the power sector in Peninsular Malaysia, upward revisions in natural gas tariff are expected in the upcoming reviews until gas price reaches market price. Having said that, GASMSIA’s profitability would not be affected as its profit margin spread is determined under the Incentive Base Regulation (IBR) framework based on asset return of 7.5%, which is estimated between RM1.80/mmbtu and RM2.00/mmbtu currently. As such, any price hikes will have neutral impact to GASMSIA via GCPT adjustment.

We expect GCPT to stay beyond 2019. Like the other two regulated utilities companies, TENAGA (OP; TP: RM17.90) and PETGAS (OP; TP: RM22.80), GASMSIA also faces the concern of any changes in GCPT mechanism that may negatively affect it under the PH government’s populist policy. In our opinion, it is unlikely that the authority will review the base-tariff under the current GCPT’s regulatory period of 2017-2019 as it does not impact the public directly given that it deals only with businesses. And, we also believe that even beyond 2019, the base-tariff is likely to adjust according to market price as to lessen government’s burden since it is not involved with the general public directly.

Cut to MARKET PERFORM. We downgrade the stock to MARKET PERFORM from OUTPERFORM as we believe all positives have already been priced-in following a 7% run in the past two weeks. Nonetheless, we remain positive on GASMSIA’s outlook for its steady volume growth coupled with the margin spread certainty. Therefore, any price weakness would offer buying opportunity. We maintain DCF- driven target price of RM3.05. The MARKET PERFORM call is also supported by its decent yield of 3%-4%. Risks to our downgraded call include stronger-than-expected sales volume and higher margin spread.

Source: Kenanga Research - 14 Jun 2018

Labels: GASMSIA
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Daily Technical Highlights – (DESTINI, MAGNI)

Author: kiasutrader   |  Publish date: Thu, 14 Jun 2018, 09:05 AM


DESTINI (Not Rated)

  • DESTINI gained 1.0 sen (+3.85%) to end at RM0.270.
  • After gapping down post-GE14, the share had traded below the 20-day SMA with other key indicators showing bearishness.
  • However, there appears to be a change in trend after it started trading above the 20-day SMA last week. Moreover, yesterday’s move was backed by high trading volume, possibly signalling more upside.
  • The share may continue to rally towards the RM0.300 (R1) resistance level and possibly RM0.390 (R2).
  • Conversely, downside support can be identified at RM0.250 (S1) and RM0.200 (S2).

MAGNI (Not Rated)

  • MAGNI gained 29.0 sen (+5.6%) to end at RM5.50, with above-average trading volume.
  • MAGNI started its trending lower since Sep-2017, with its price hitting a low of RM4.10 in Feb-2018. However, recent series of white candlesticks may signal that the stock has bottomed out and poised for a recovery.
  • Technical outlook is positively biased with recent key SMAs’ formation of “Golden Crossover” and up trending momentum indicators.
  • Expect follow-through buying towards RM5.90 (R1) and RM6.33 (R2) further up.
  • Conversely, downside supports are identified at RM4.96 (S1) and RM4.10 (S2).

Source: Kenanga Research - 14 Jun 2018

Labels: DESTINI, MAGNI
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George Kent (M) Bhd - Broadly Within

Author: kiasutrader   |  Publish date: Wed, 13 Jun 2018, 09:34 AM


1Q19 CNP of RM18.9m came in broadly within expectations at 13% each of our/consensus estimates. No dividends declared, as expected. No changes to FY19-20E earnings. Upgrade to OUTPERFORM from UNDERPERFORM with a lower SoP driven Target Price of RM2.20 (previously, RM3.65).

Results broadly within. 1Q19 CNP of RM18.9m (excluding forex gains of c.RM2.7m) came in at 13% of our and consensus estimates. However, we deem the results to be inline as first-half performances are generally weaker and we expect a strong performance in 2H19. No dividends declared, as expected.

Results highlight. 1Q19 CNP only dipped 4% YoY despite a steep drop in revenue (-23%) as the impact was well cushioned by higher contribution from associates/joint-ventures level, which increased substantially by 479% thanks to the contribution from LRT3. The drop in revenue was driven by both its construction and metering divisions which we believe could be due to the timing of the billings for its on-going projects and meter orders. QoQ, 1Q19 CNP fell 69% underpinned by lower revenue (- 42%) mainly dragged down by its construction division, which saw 48% decrease in revenue, as they booked in several project completions in 4Q18.

Outlook. To-date, the total construction cost for LRT3 has yet to be finalized by Prasarana. Based on available data and news flow which we compiled, the construction cost for LRT3 has well exceeded RM9.0b. We are expecting the total cost for LRT3 to hover closer to RM14.0-15.0b, and we believe that the government will continue with the construction works of LRT3, as most of the contracts have already been awarded to various contractors and construction works are already in progress. While we think that LRT3 is likely to proceed, we highlight that there would be significant risk to earnings and valuations on the contrary. (Refer overleaf for more details).

Earnings estimates unchanged. Post results, we made no changes to our FY19-20E earnings.

Upgrade to OUTPERFORM. We are upgrading GKENT from UNDERPERFORM to OUTPERFORM but with a lower SoP-driven Target Price of RM2.20 (previously, RM3.65). To recap, we had previously called an UNDERPERFORM on GKENT due to its rich valuation as it traded up to FY19E PER of 17.3x. However, we see value emerging in the stock arising from the recent sell-down due to the negative news flow in the construction as several mega infrastructure projects have been scraped since the change in government. Our current TP of RM2.20 is based on; (i) 10x FY19E PER for metering, (ii) 9x FY19 PER for construction (lowered from 17x PER, previously in anticipation of low contract flows going forward), (iii) NPV of 6% PDP fees based on RM9b cost, and (iv) 30% discount to 1Q19 net cash, implying FY19E PER of 8.8x.

Key downside risks to our call are: (i) lower-than-expected margins, (ii) delay in construction works, and (iii) scrapping of LRT3 project by the government.

Source: Kenanga Research - 13 Jun 2018

Labels: GKENT
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