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Author: PublicInvest   |   Latest post: Thu, 12 May 2022, 9:59 AM

 

PublicInvest Research Headlines - 12 May 2022

Author: PublicInvest   |  Publish date: Thu, 12 May 2022, 9:59 AM


Economy

US: Consumer price growth slows less than expected in April. A highly anticipated report released by the Labor Department showed the annual rate of US consumer price growth slowed by less than expected in the month of April. The Labor Department said consumer prices in April were up by 8.3% compared to the same month a year ago. While the annual rate of growth slowed from a 40-year high of 8.5% in March, economists had expected the pace of growth to slow to 8.1%. Energy prices skyrocketed by 30.3% YoY, while food prices spiked by 9.4%, reflecting the largest yearly increase since the period ending April 1981. The annual rate of growth in core consumer prices, which exclude food and energy prices, also slowed to 6.2% in April from 6.5% in March, although the rate was expected to decelerate to 6.0%. (RTT)

US: Treasury reports record budget surplus in April as revenues soar. The US government posted a USD308bn surplus in April - a record for any month - as receipts nearly doubled from a year earlier amid a strong economic recovery from the COVID-19 pandemic, the Treasury Department said. The April surplus compared to a USD226bn deficit for April 2021, when receipts were reduced by a one-month delay in the annual tax filing deadline. The previous record monthly surplus was USD214bn in April 2018. April has traditionally been marked by budget surpluses due to the traditional April 15 tax filing deadline, but deficits for that month were recorded in 2009, 2010 and 2011 after the financial crisis, and in 2020 and 2021 due to the pandemic, a Treasury official told reporters. Receipts last month rose 97% from the year-earlier period to USD864bn, also a record for any month, the Treasury said. (Reuters)

EU: Germany inflation hits record high as estimated. Germany's consumer price inflation hit a record high as estimated in April, final data from Destatis showed. Consumer price inflation rose to 7.4% in April from 7.3% in March. The inflation rate hit an all-time high since German reunification and also came in line with the flash estimate published on April 28. Destatis cited the development in energy prices as the one of the major cause for the record increase in overall prices. The above average increase in food prices also lifted  consumer prices. The impact of the war in Ukraine is becoming more and more visible, the statistical office said. Prices of goods were up 12.2% from the last year. Energy product prices advanced 35.3% and food prices gained 8.6%. At the same time, services cost increased 3.2%. Excluding energy prices, consumer price inflation rate stood at 4.3% in April, data showed. On a monthly basis, consumer price inflation slowed to 0.8%, in line with estimate, from 2.5% in March. (RTT)

China: Inflation rises; PPI inflation slows in April. China's consumer price inflation rose more-than-expected in April on rising food prices, while factory gate inflation slowed moderately. Consumer price inflation rose to 2.1% in April from 1.5% in March, the National Bureau of Statistics said. Economists had forecast inflation to rise to 1.8%. The government targets around 3% inflation for the whole year of 2022. Food prices moved up 1.9%, in contrast to the 1.5% fall in March. The increase partly reflects higher cost of transportation and the rising need for stockpiling of food products. Non-food prices increased 2.2%. Core inflation that excludes energy and food prices eased to 0.9% from 1.1% in March. On a monthly basis, consumer prices climbed 0.4%. Although the increase was slower than the 0.6% rise in March, the rate exceeded the expected 0.2%. (RTT)

China: Vehicle sales plunge 48% but EVs strong as BYD gains. China’s overall vehicle sales for April plunged almost 48% from a year earlier as COVID-19 lockdowns hit factories and showrooms, but sales of electric vehicles surged and Chinese brands took share from global rivals. The monthly sales volume was the lowest for the month in a decade, underscoring the economic toll of the tough restrictions China put in place in April in Shanghai and other cities to control the spread of COVID. The tally released by the China Association of Automobile Manufactuers (CAAM) includes sales to dealers of passenger cars and commercial vehicles. Retail sales of passenger cars alone dropped almost 36% in April, data released by a separate trade group showed. Overall, vehicle sales in the first four months of 2022 were down 12% from the same period a year earlier in the world’s biggest car market, the CAAM said. (Reuters)

Japan: Leading index rises in March. Japan's leading index increased in March after easing in the previous month, preliminary data from the Cabinet Office. The leading index, which measures the future economic activity, rose to 101.0 in March from 100.1 in Feb. The coincident index that measures the current economic situation, increased slightly to 97.0 in March from 96.8 a month ago. This was the highest since Sept 2019. The lagging index rose to 95.7 in March from 95.1 in the previous month. This was the highest since April 2020. (RTT)

South Korea: Jobless rate steady at 2.7%. South Korea's unemployment rate remained stable for a second month in April. The jobless rate was a seasonally adjusted 2.7% in April, same as seen in Feb and March. In April last year, the unemployment rate was 3.7%. On an unadjusted basis, the unemployment rate remained unchanged at 3.0% in April. In the same month last year, unemployment rate was 4.0%. The number of unemployed decreased to 864,000 in April from 873,000 in the preceding month. Compared to a year ago, the figure decreased by 283,000 persons. The number of employed persons increased by 865,000 YoY to 28.078m in April. (RTT)

Markets

Top Glove (Neutral, TP: RM1.48): Accelerates bond buyback, says will continue to do so at right amount, pricing. Top Glove Corp's wholly-owned subsidiary TG Excellence has accelerated the latter’s bond buyback under its RM3bn perpetual sukuk programme as part of the world’s largest rubber glove manufacturer’s continuous capital and balance sheet management to optimise its capital position and reduce funding cost. (The Edge)

KPower: Wins bid to develop SEDA’s 40.4MW hydro power plants in Kelantan. KPower has been selected as one of the successful bidders under the feed-in tariff (FiT) e-bidding exercise conducted by Sustainable Energy Development Authority (SEDA) for the development of small hydro power plants in Malaysia. KPower was notified that it was a successful bidder under SEDA’s e-bidding mechanism for the development of small hydro power plants with installed capacities of 13.1 megawatt (MW) and 27.3MW. (The Edge)

AME Elite: Gets shareholders’ approval to list AME REIT in the Main market of Bursa Malaysia. AME Elite Consortium has received its shareholders' approval for listing its real estate investment trust (AME REIT), which entails the listing of 520.0m undivided interest on the main market of Bursa Malaysia. At an illustrative offer price of RM1 per unit, AME is estimated to potentially raise RM254.8m in proceeds from the listing of AME REIT. (BTimes)

Nestcon: Secures letter of award for job worth RM85m in Terengganu. Nestcon has received a letter of award (LoA) for a job worth RM85m to design and build an integrated offsite scheduled wastes recovery facility in Kerteh, Terengganu. The company said its unit Nestcon Builders SB has received the LoA from Greenverse SB for the job at Kerteh Biopolymer Park. (The Edge)

Yinson: Fixes two-for-five rights issue at RM1.41. Yinson Holdings has fixed its rights issue price at RM1.41 apiece on an entitlement basis of two rights shares for every five existing shares held, to raise gross proceeds of up to RM1.21bn. The rights issue comes with free detachable warrants, on the basis of three warrants for every seven rights shares subscribed, with an exercise price of RM2.29 apiece. (The Edge)

Straits Energy: Unit completes first STS crude oil transfer operation in Labuan. Straits Energy Resources' unit, Victoria STS (Labuan) SB, has completed a ship-to-ship (STS) crude oil transfer operation for the first time at Victoria Bay, Labuan. (BTimes)

IPO: LGMS Inks underwriting agreement with UOB Kay Hian for listing exercise. LGMS has inked an underwriting agreement with its sole underwriter, UOB Kay Hian Securities (M) SB, for its listing on the ACE Market of Bursa Malaysia. LGMS and its subsidiaries and associate company are primarily involved in cybersecurity assessment and penetration testing, cyber risk management and compliance, and the provision of digital forensics and incident response services. (BTimes)

Market Update

The FBM KLCI might open lower today as US stocks resumed their slide on Wednesday after unexpectedly hot “core” inflation data raised expectations for aggressive policy tightening, pushing the tech-heavy Nasdaq Composite down nearly 30% from its record high. Growth stocks that are seen as particularly sensitive to rising rates led the declines, with the Nasdaq falling 3.2%. The blue-chip S&P 500, which had rallied as much as 1.2% earlier in the trading session, ended the day 1.6% lower. Consumer prices in the world’s largest economy rose at an annual rate of 8.3% in April, down from 8.5% in March but remaining at a historically elevated level. The figure surpassed economists’ expectations for a cool down to 8.1%. The month-on-month change in core inflation — which excludes food and energy prices and is closely watched by economists — also exceeded forecasts at 0.6%. Rising costs of new cars, food, airline fares and housing were the biggest drivers of the increase in consumer prices, the US labour department said. Elsewhere in markets, Europe’s Stoxx 600 share index rose 1.7%. Brent crude, the international oil marker, climbed 4.9% to $107.51 a barrel.

Back home, Bursa Malaysia ended marginally higher on Wednesday with the FTSE Bursa Malaysia KLCI rising by 0.09% as investors continued to bargain-hunt stocks, particularly plantation and banking heavyweights. At 5pm, the barometer index rose 1.35 points to 1,555.93 from Tuesday’s close of 1,554.58. In the region, Hong Kong’s Hang Seng gained 1% and the Shanghai Composite Index added 0.8%.

Source: PublicInvest Research - 12 May 2022

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May 2022 Policy Decision - First Lift Off Post COVID-19

Author: PublicInvest   |  Publish date: Thu, 12 May 2022, 9:56 AM


May Policy Decision

Bank Negara Malaysia (BNM), in a surprise move, decided to increase the Overnight Policy Rate (OPR) by 25 basis points to 2.00%, which also marks the end of twenty-two straight months of policy accommodation by the central bank. The move was driven, among others, by improving growth prospects thanks to sustained recovery in domestic demand and external conditions. The labour market is also recovering well, reflected in a steady drop in unemployment level, an increase in labour force participation and income prospects. The economy is also set to be sustained by massive fiscal spending last year (i.e., RM530bn COVID-19 fiscal stimulus expenditure through PRIHATIN, PRIHATIN+, PENJANA, KITA PRIHATIN, PERMAI, PEMERKASA, PEMERKASA+, PEMULIH), a favourable prospect that has been partly reflected in 4Q GDP momentum (4Q21 GDP: +3.6%; 3Q21: -3.4%). Output will also get a lift from expansionary Fiscal Budgets 2021 and 2022, with double digit YoY increases for the Development Expenditure (DE).

Growth momentum will also be spurred by various pro-consumption measures such as the 2% reduction in Employee Provident Fund (EPF) employee contribution (until June) and various financial assistance for the vulnerable groups (Bantuan Keluarga Malaysia – BKM, My50 unlimited Travel Pass, Early School Assistance, discount for PTPTN repayment). This will also be aided by a vibrant employment market following various initiatives that will underpin massive job creation (1mn, SOCSO’s JaminKerja, GLCs and GLiCs initiatives) which will push unemployment rate lower (2022F unemployment: +4.0%). Output will also be driven by a final and special EPF withdrawal in April where RM40bn have been approved for this purpose.

Malaysia’s growth trajectory is set to recover further, evidenced by the steady turnaround in high frequency indicators (i.e., CPI, IPI, trade), encouraging prospects that are expected to take hold in the near term. This will be further pushed by favourable external conditions thanks to full economic openings around the world especially in major economies (US, Eurozone, ASEAN). This, along with a lag impact of expansionary global fiscal strategy in 2021 and accommodative policy stance (until 1H22) will push demand for our key export especially manufacturing, mining and agriculture goods.

Output will also get a lift from the resolve to allow the rehiring of foreign workers (April onwards) which will address labour shortages issue facing key sectors such as manufacturing and agriculture. This will be further spurred by the strategic decision to open the international borders (from April) - a huge boost for services sector (i.e., tourism, accommodation, leisure, retail). A combination of these factors will push economic activity to rebound sharply in 2022 (+6.1%; 2021: +3.1%).

Risks to growth may however come from COVID-19 outbreak incidences which may lead to pockets of containment measures. Supply chain disruptions given raw material shortages (e.g., chips) could also affect our prospects. The prolonged Russia-Ukraine conflict could also bite given the disruption in global commodity markets and therefore, downside risks to global growth. Strict China COVID-19 lockdown policies is also a worry as it may dampen the full turnaround of manufacturing and trade sectors. All these could weigh on growth potential.

Policy Outlook: Cautious Prospects

Economic momentum is set to gain more traction in 2022 following a lag impact of expansionary fiscal and monetary strategies. This will also be aided by full economic openings given our move into the endemic stage in April. This positive development could underpin a nascent recovery in contact sensitive service-related sectors like airlines, land transport, hotels & restaurants, entertainment & theme parks, medical tourism and travel agents, a much-needed lifeline for these sub-sectors which have been affected by the COVID-19 pandemic. Economic activity will also be pushed by sustained output generation by manufacturing, mining and agriculture thanks to full economic openings in key regions, improvements in global pandemic conditions and rapid structural adjustment in global telecommunication sector. Economic momentum will also be driven by favourable external conditions thanks to vaccine-powered recoveries around the world. Other growth drivers may come from various initiatives including rapid job creation and the reopening of international borders beginning April. All these could be a precursor for further withdrawal of policy accommodation in the 2H. We anticipate another rate hike toward the later part of the year as BNM continues to find the balance between accommodating domestic growth and addressing the potential prospects of imported inflation and capital outflows.

Source: PublicInvest Research - 12 May 2022

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Sentiment Index - Consumer Sentiment Rebounds

Author: PublicInvest   |  Publish date: Thu, 12 May 2022, 9:53 AM


OVERVIEW

The Consumer Sentiment Index (CSI) surged past the 100-neutral level in 1Q22, its best since 3Q18, thanks to sentiment that was lifted by improving income and job prospects. CSI gained by 11.7-points to end the quarter at 108.9 points, a convincing turnaround against 4Q21’s reading of 97.2, and the 98.9 registered a year ago (1Q21). The steady drop in unemployment level (February 2022: 4.1%; 4Q21: 4.2%; May 2020: 5.3%) and bright employment prospects (1mn job creation in 2022; GliCs and GLCs initiative; SOCSO ‘Jamin Kerja’) emerged as one of the driving factors that lifted sentiment. Sentiment was also aided by massive counter-cyclical measures to lift income including specific initiatives (Bantuan Keluarga Malaysia – BKM), special initiatives (Sales and Service Tax exemption for purchase of new vehicles) apart from unprecedented withdrawals from the Employees Provident Fund (EPF). This was further added by fiscal efforts to keep the cost of living manageable particularly a cap in petrol prices (RON95 petrol; Diesel). Sentiment was also soothed by a much-improved COVID-19 conditions, the reopening of international borders in 2Q and the government’s massive Development Expenditure (DE) for 2021 and 2022 respectively.

Sentiment should improve further, consistent with full economic openings beginning May where all businesses are allowed to operate at 100%-capacity. This will be further supported by the government’s commitment to undertake targeted lockdown measures (note: circuit breakers), a precursor for minimal interruption in social and economic activities. Rapid job creation in 2022 following various private-public initiatives will be another factor that could lift sentiment. Overall sentiment will also be pushed by encouraging growth prospects following a sharp economic turnaround in 2022 where output will finally exceed the pre-crisis levels (PIVB: +6.1% YoY).

It was a contrast for the Business Condition Index (BCI) however, reflected by the 21-point drop in 1Q22 to end at 101 points. Sentiment was dented by the still challenging COVID-19 condition following elevated number of daily cases. Other dampeners include persistent labour shortage issues (e.g., restriction in foreign labour in-take) and uncertainty (then) on when the international border will be reopened. Sentiment was also weighed by persistent supply chain disruptions, raw material shortages and an increase in cost input which hampered output to some extent.

This is expected to improve from 2Q onwards consistent with our move into the endemic stage beginning April. This will also be driven by further improvement in external conditions especially in ASEAN and major economies, a precursor for a full turnaround in trade. This may be capped however by headwinds coming from China following growth slowdown in 2022 (4.4%; 2021: 8.1%). China’s strict COVID-19 lockdown policies may also bite, not to mention the prolonged uncertainty arising from Russia-Ukraine conflict.

Outlook. Our nation’s transition into the endemic stage will be the catalyst that will push the composite index higher. The full reopening of the economy as well as our international borders suggest that Malaysia can finally resume growth to pre-pandemic levels. Barring unforeseen circumstances like the sharp rise in COVID-19 infection or emergence of unexpected tailwind risks, we expect to see higher index levels, for both consumer sentiment and business conditions, in the coming quarters.

Source: PublicInvest Research - 12 May 2022

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Banking - Rate Normalization Begins

Author: PublicInvest   |  Publish date: Thu, 12 May 2022, 9:51 AM


Bank Negara Malaysia (BNM) made a 25bps upward adjustment to its Overnight Policy Rate (OPR), citing improvements in labour market conditions and reopening of the global economy as major factors in supporting recovery of economic activity. While the military conflict in Ukraine, China’s strict containment measures and resultant supply chain disruptions, and elevation in global inflationary pressures are clouding the outlook somewhat, BNM opines that the Malaysian economy is on firmer footing and is therefore now timely to reduce the degree of monetary accommodation. With the overnight move, OPR is now at 2.00% (1.75% previously), with the ceiling and floor rates of the corridor correspondingly raised to 1.75% and 2.25% respectively.

Margin expansions are expected, though history (as per Table 3 and Table 4) suggests uneven impacts. In any case, banks have already anticipated this rate hike by BNM, though this move may have possibly come earlier-than-expected. We make no adjustment to our earnings assumptions, having already assumed eventual rate normalizations in our forecasts. An immediate overhang on the sector is still asset quality, given the potentially challenging economic conditions over the horizon due to the above-mentioned disruptions.

Short-term volatilities notwithstanding, the start of the rate normalization cycle and gradual economic recovery will bring about asset quality improvements, loans growth and margin expansions, all of these medium-term boons to the sector. While we maintain our NEUTRAL view on the sector, it continues to be with a positive bias given its lagging valuations relative to the broader market. For sector exposure, we like Maybank and CIMB Group.

  • Positive impacts, on face value, will be more notable on banks with higher levels of variable-based loans (ie. RHB Bank @ 87.6%, Alliance Bank @ 83.1%, Hong Leong Bank @ 82.5%) as loan rates are re-priced more immediately thereby lifting income faster. While CIMB Group also has a high proportion of variable rate loans (82.1%) in its portfolio, 37.0% of its total loans are overseas exposures not affected by this hike. It should however be noted that Indonesia, its 2nd largest interest income contributor, is also on track for upward adjustments in rates. 
    RHB Bank, AmBank and Affin Bank’s relatively higher levels of fixed-rate deposits should help sustain margin expansions over the near-term seeing that as these are presumably locked-in at lower rates. Local-sourced deposits are also a plus point, giving it fuller impact. Maybank and CIMB Group, while exhibiting similar portfolio make-ups, have higher levels of overseas exposures that may see effects muted. 
    On the balance, RHB Bank appears poised to benefit the most (on face value) from BNM’s rising OPR trend given its higher levels of variable-rate loans and fixed-rate deposits. While Affin Bank and Alliance Bank may also appear to benefit more, this rising tide will lift all boats and benefit all banking stocks through imminent margin expansions, though to varying degrees.
  • Loans growth momentum appears to be stabilizing at the +4.0% YoY level, still underpinned by household related loans. Any significant strengthening will have to come from business-related loans however given the elevated level of household indebtedness, though question marks remain over the strength of the economic recovery.
    Downward trend in applications shows no signs of flattening out, though it still remains very early days in sounding alarm bells to call out a possible disintermediation to capital markets for fund-raising. Applications (by quantum) has averaged an encouraging ~RM78bn since the March 2021-high of RM94.2bn nevertheless. Loan approval rates have seen slight improvements, though also not yet on a consistent basis. We reckon financial institutions are still continuing to balance between the need to protect asset quality, maintain sufficient liquidity while also driving growth in current times 
    The previous all-time OPR low of 2% during the 2009/2010 period did see demand for credit pick up about 9 months after the final OPR cut, which even accelerated despite rates being hiked gradually, though this was very much the result of improved economic conditions. 
    Whether history repeats itself is dependent on global conditions taking a decided turn for the better. At this point, we are cautiously optimistic and maintain our industry loans growth assumption of 4.5%.
    Any upturn in sentiment and/or activity may likely see banks with respective focuses on non-household loans (ie. Maybank, CIMB Group and Affin Bank) see greater penetration given already-elevated levels of household indebtedness.
  • Benefits to net margins (on a business as usual basis) vary amongst banks. Rate hikes are largely positive to most banks, in theory, as can be seen in the following tables (Table 3 and Table 4) that show net interest income (minor periods of adjustments notwithstanding) generally on an upward trajectory. The periods under observation are from March 2010 (2Q CY10) to March 2012 (2QCY12) during which the OPR was hiked by 1% from 2.0% to 3.0% (March 2010: +25bps to 2.25%, May 2010: +25bps to 2.50%, July 2010: +25bps to 2.75%, May 2011: +25bps to 3.00%).
    In the said observation period (2QCY10 to 2QCY12), loan-deposit ratios (LDR) of Maybank, CIMB Group and AmBank were relatively stable whilst that of Public Bank and Hong Leong Bank rose, providing an added lift. Conversely, the LDRs of RHB Bank, Affin Bank and Alliance Bank fell.
  • Asset quality concerns are likely to be adequately mitigated despite recent uptick in levels of impairment. Banks’ cumulative pre-emptive provisions in 2020 and 2021 should provide buffers to profitability against further economic deterioration, a global meltdown notwithstanding. (Note: 2020 impairment +RM1.8bn, provisions +RM7.2bn, 2021 impairment -RM979.5m, provisions + RM4.4bn)
  • Selective exposure. Share prices had improved recently, though easing off again amid the prolonging Russia-Ukraine conflict and global bond yield spike. All said, policy rate normalization (margin expansion), sustained economic recovery (improved loans growth and asset quality) are mixtures for a stronger 2022/23. For sector exposure, we like Maybank and CIMB Group.

Source: PublicInvest Research - 12 May 2022

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Real Estate Investment Trust (REIT) - Surprise Rate Hike

Author: PublicInvest   |  Publish date: Thu, 12 May 2022, 9:45 AM


Bank Negara Malaysia (BNM), contrary to consensus expectations, raised its overnight policy rate (OPR) by 25 basis points (bps) to 2.00% from the record low of 1.75%. This comes hot on the steps of the US Federal Reserve which raised its benchmark interest rate by 0.5% to a target rate range of between 0.75% and 1.00% recently. The move, we understand, is to rein in inflationary pressure due to a rise in commodity prices, strained supply chains and strong demand conditions, particularly in the US. That said, BNM is cognizant that risks to growth remain, which include a weaker-than-expected global growth, further escalation of geopolitical conflicts, worsening supply chain disruptions, and adverse developments surrounding COVID-19. It is projecting headline inflation between 2.2% - 3.2% in 2022. Although the rate adjustment would increase the funding costs of some REITs (those with floating rates), the impact is minimal at ~2%, by our estimates. All told, we keep our earnings estimates unchanged for now. With narrowing spreads (10-year MGS at 4.4%, from c.3.2% a year ago), we believe the sector is fairly valued for now. We maintain our Neutral stance.

  • Surprise 25bps hike. While risks to growth remain, stemming from weaker-than-expected global growth, further escalation of geopolitical conflicts and worsening supply chain disruptions, BNM still believes that the economy is on a firmer footing domestically, supported by easing of restrictions and better investment prospects. Therefore, the central bank feels it is opportune to start normalizing interest rates by announcing the first OPR hike since the onset of the COVID-19 pandemic. Recall that BNM had slashed the OPR by a cumulative 125bp to a historic low of 1.75% during the course of the COVID-19 pandemic period.
  • Minimal impact to the REITs under coverage. Among the REITs under our coverage, Sunway REIT’s floating rate loans are at c.62%, with Axis REIT at c.32%. IGB REIT’s debt is all at fixed rates. Interest costs are estimated to be higher by between 1% and 2% with this increase in OPR, by our estimates.

Source: PublicInvest Research - 12 May 2022

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Technical Buy - OPCOM (0035)

Author: PublicInvest   |  Publish date: Thu, 12 May 2022, 9:43 AM


  • Target Price: RM1.04, RM1.14
  • Last closing price: RM0.965
  • Potential return: 7.7%, 18.1%
  • Support: RM0.925
  • Stop Loss: RM0.870

Possible for sideways breakout. OPCOM is potentially staging a breakout from its sideways channel, with anticipation of continuous improvement in both momentum and trend in the near term. Should immediate resistance level of RM1.04 be broken with renewed buying interest, it may continue to lift price higher to subsequent resistance level of RM1.14.

However, failure to hold on to support level of RM0.925 may indicate weakness in the share price and hence, a cut-loss signal.

Source: PublicInvest Research - 12 May 2022

Labels: OPCOM
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PublicInvest Research Headlines - 11 May 2022

Author: PublicInvest   |  Publish date: Wed, 11 May 2022, 10:22 AM


Economy

US: Small business confidence steady in April -NFIB. US small business confidence held steady in April after three straight monthly declines, but owners remained worried about high inflation and worker shortages, a survey showed. The National Federation of Independent Business (NFIB) said its Small Business Optimism Index was unchanged at a reading of 93.2 last month. The index had declined since Jan. Thirty-two percent of owners reported that inflation was their single most important problem in operating their business. That was the largest share since the fourth quarter of 1980 and was up a point from March. The economy is experiencing high inflation caused by shortages, massive fiscal stimulus and low interest rates. Annual inflation is rising at the fastest pace in 40 years. The Federal Reserve last week raised its policy interest rate by half a percentage point, the biggest hike in 22 years, and said it would begin trimming its bond holdings next month. The US central bank started raising rates in March. According to the NFIB survey, more owners expected business conditions to worsen over the next six months. But there are signs inflation has likely peaked. (Reuters)

EU: German ZEW economic confidence improves in May. Germany's economic confidence improved in May but remained at a very low level as the economy is expected to continue to deteriorate in the near-term in the face of the war in Ukraine and the coronavirus restrictions in China, survey results from the ZEW - Leibniz Centre for European Economic Research. The ZEW Indicator of Economic Sentiment unexpectedly rose to -34.3 in May from -41.0 in April. The reading was forecast to fall to -42.0. Meanwhile, the current situation indicator fell by 5.7 points -36.5 in May. This was the third consecutive decline since the beginning of the war in Ukraine. The expected reading was -35.0. The survey suggested that the economy will contract in the 2Q, Jack Allen Reynolds, an economist at Capital Economics, said. The ZEW economic expectations as well as the assessment of the situation continued to point to deterioration in the German economy over the next six months. The financial market experts assessed that the situation will continue to deteriorate, but with less intensity. (RTT)

EU: Italy industrial production remains flat in March. Italy's industrial production remained unchanged in March, in contrast to the expected decline, data from the statistical office Istat. On a monthly basis, industrial production remained flat in March, following Feb's 4.0% increase. Output was forecast to decline 1.9%. Industrial production grew by calendar-adjusted 3% annually in March, but slower than the 3.4% rise in Feb. The annual growth was underpinned by an 8.1% rise in consumer goods output, followed by a 5.2% increase in energy production. Capital goods output gained 3.0%, while the production of intermediate goods fell 0.4%. The unadjusted industrial output growth improved to 3.8% annually from 3.4% in Feb. In the 1Q, industrial production decreased 0.9% from the previous three months. (RTT)

UK: BRC retail sales fall in April. UK retail sales declined in April as consumers reduced their spending amid rising cost of living, data compiled by the British Retail Consortium and the advisory services firm KPMG. Total sales were down 0.3% in April from the last year, the first fall since Jan 2021. At the same time, like-for-like sales decreased 1.7% annually. The rising cost of living has crushed consumer confidence and put the brakes on consumer spending, Helen Dickinson, chief executive at BRC, said. Sales growth has been slowing since January, though the real extent of this decline has been masked by rising inflation. Paul Martin, UK Head of Retail, KPMG, said with interest rates and inflation rising and the BOE warning of a possible recession, the squeeze on disposable household income is starting to have an impact on the high street. Against a backdrop of falling consumer confidence, the retail sector has a bumpy time ahead as they face spiraling cost pressures from all directions, Martin noted. (RTT)

Japan: Household spending jumps 4.1% in March. The average of household spending in Japan was up a seasonally adjusted 4.1% on month in March, the Ministry of Internal Affairs and Communications said - coming in at JPY307,261. That beat expectations for an increase of 2.6% following the 2.8% decline in Feb. On a yearly basis, household spending fell 2.3% - again topping forecasts for a decline of 2.8% following the 1.1% increase in the previous month. The average of monthly income per household stood at JPY503,128, up 2.3% on year. (RTT)

South Korea: USD6.73bn current account surplus. South Korea had a current account surplus of USD6.73bn in March, the BOK said - up from USD6.42bn in Feb. The goods account surplus decreased to USD5.31bn, compared to the USD7.85bn figure in March 2021. The services account recorded a USD0.36bn surplus, up from the USD1.10bon deficit seen one year earlier, owing to a large surplus in the transport account. The primary income account surplus decreased from USD1.29bn the year previously to USD1.15bn in March. The secondary income account saw a USD0.09bn deficit. Looking at the financial account, net assets increased by USD5.37bn during March. For the 1Q of 2022, the current account surplus was USD15.06bn. (RTT)

Australia: Retail sales climb 1.6% in March. The total value of retail sales in Australia was up a seasonally adjusted 1.6% on month in March, the Australian Bureau of Statistics said - coming in at AUD33.626bn. Individually, sales were up for food, household goods, clothing, department stores, other retailing and cafes and restaurants. Retail sales were up 9.4% on year. For the 1Q of 2022, retail sales rose 1.2% on quarter to AUD93.186bn after jumping 7.9% in the three months prior. (RTT)

Markets

Mesiniaga: Inks RM59.6m deal with Telekom Malaysia. Mesiniaga has bagged a contract worth RM59.63m from Telekom Malaysia to provide maintenance and support services for telecommunication cloud core data centre. T he contract period is from April 1 this year to Nov 16, 2024 and there is no automatic renewal clause in the contract. The contract is expected to contribute positively to the group's earnings from the financial year ending Dec 31, 2022 until the expiry of the contract. (The Edge)

EA Technique: Sells tanker to Korean company for RM21.39m. EA Technique (M) said it has sold off its vessel Nautica Renggam (NRG) to a Korean company for a cash consideration of USD5.05m, equivalent to RM21.39m. EA Technique had executed an agreement for the sale of NRG to Korea-based C&M Co Ltd on May 10 after obtaining the best offer through the former’s independent broker Braemar ACM (Singapore) on April 15. (The Edge)

Xin Hwa: To diversify into precision machining business by acquiring 79% stake in Micron. Xin Hwa Holdings plans to diversify into the precision machining business after acquiring a 79% stake in Micron Metal Engineering SB (Micron) for RM19.75m in a cash plus shares deal. The SSA also entails a put option which enables the vendors to sell the remaining 94,500 shares or 21% equity interest in Micron for RM5.25m in cash. (The Edge)

Willowglen MSC: Bags RM23.97m telecom tower infrastructure contract in Sabah. Willowglen MSC has been awarded a RM23.97m contract by Majubina Resources SB. The contract is for the design, build and transfer of infrastructures capable of supporting 20 telecommunication towers at various sites in Sabah. The contract, which commenced on May 9, 2022, will be completed by Feb 8, 2023. (The Edge)

Scomi: Inks MOU for RE generation programme in Johor. Scomi Group Bhd 51%-owned joint venture company Scomi SGSB SB had executed a memorandum of understanding (MOU) with Skill Johor SB (SJSB) to develop a Renewable Energy (RE) generation programme in the latter's TVET Campus in Johor. (The Edge)

CSH: EV unit buys land for EV business expansion plan. CSH Alliance (CSH), through its wholly owned subsidiary and electric vehicle (EV) business arm Alliance EV SB (AEV), is acquiring three pieces of adjacent land measuring 55 acres in Tanjung Malim, Perak for RM12m, which is intended for a local complete knocked down (CKD) assembly plant for its EV business. (SunBiz)

Serba Dinamik: To seek leave from High Court for resolution of payment obligation. Serba Dinamik Holdings is taking steps to seek leave from the High Court to allow the company to convene one or more court-convened creditors meeting to present one or more scheme(s) of arrangement to seek a constructive resolution to the company and its subsidiaries’ payment obligation. The company is responding to the queries from the creditors and its trading partners regarding the winding-up petitions on SDHB and its group of companies. (The Edge)

Market Update

The FBM KLCI might open flat today after US stocks eked out a marginal advance after a volatile trading day on Tuesday, as investors attempted to navigate an increasingly complex outlook for monetary policy and the global economy. The broad S&P 500 gauge, which closed 3.2% lower on Monday, swung between gains and losses but was 0.2% higher by late afternoon. The technology focused Nasdaq Composite, which fell more than 4% the previous session, gained 1%. Europe’s regional Stoxx 600 added 0.7% — tracing back some of the previous day’s 2.9% decline. Global equities had on Monday posted their worst day since June 2020. Tuesday’s swings reflected the tension between investors keen to buy the market dip and rising caution over the outlook. The Federal Reserve last week raised its interest rate by half a percentage point for the first time since 2000, while the UK, Australia and India also lifted borrowing costs.

Back home, Bursa Malaysia ended mixed on Tuesday with the FBM KLCI snapping three consecutive days of losses to rise by 0.35%, as bargain hunting emerged in telecommunications and banking heavyweights. In the region, Japan’s Nikkei 225 closed 0.6% lower, the Shanghai Composite rose 1.1% and Hong Kong’s Hang Seng Index dropped 1.8%.

Source: PublicInvest Research - 11 May 2022

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Cnergenz Bhd - A Growing Smart Factory Solution Provider

Author: PublicInvest   |  Publish date: Wed, 11 May 2022, 10:18 AM


Cnergenz Bhd (CNERGEN) is an electronics manufacturing solutions provider, specialising in surface mount technology (SMT) manufacturing solutions for the electronics and semiconductor (E&S) industries. The group primarily provides its solutions and services to E&S companies, who are looking to: i) commission new integrated production lines for their production facilities, and ii) automate their production facilities. In addition to the abovementioned integrated solutions, CNERGEN is involved in the: i) sales of individual machinery, equipment and tools to E&S companies who are looking to upgrade and/ or modify their existing production line systems, and ii) provision of after-sales technical support and training services for its integrated solutions.

Moving forward, CNERGEN intends to scale up its operations by relocating its premises to a new and expanded facility, design and develop its proprietary range of smart factory solutions, apart from growing and developing its SMT production line solutions. We derive a fair value of RM0.71 based on a c. 17x PE multiple to its FY23F EPS of 4.2sen. The IPO is expected to raise approximately RM58.0m from the issuance of 100.0m new shares. Besides utilising 65.2% of the proceeds for expansion of the group’s facility, 10.3% and 17.2% of the proceeds are allocated for research and development (R&D) as well as working capital, respectively.

  • Growth drivers. CNERGEN’s growth will be dependent on: i) scale-up of operations with relocation to a new and expanded facility, ii) development of its proprietary range of smart factory solutions, and iii) enhancement of its SMT production line solutions.
  • Competitive strengths. CNERGEN’s competitive strengths include: i) technical ability that adapts to rapid technological advancements, ii) proven track record in complying with its customers' stringent selection and quality requirements, iii) established network of reputable suppliers, iv) ability to tap into the opportunities arising from the growing E&S industries in Malaysia, Thailand and Vietnam, as well as v) having an experienced and technically strong management team, together with a sizable engineering division.
  • Catalysts. Key drivers may include: i) rapid technological advancements in E&S industries, ii) shift towards smart factories, iii) relocation of electronics manufacturing activities to Southeast Asia (SEA) following the US-China trade war, and iv) government initiatives to grow the E&S industries in SEA.
  • Key risks. Key downside risks, among others, include: i) dependency on the performance of E&S industries ii) competition from various industry players, iii) foreign exchange fluctuations, iv) potential termination, non-renewal and exclusivity of its distributorships, together with v) relationship with its affiliates which may be subject to adverse changes.

Source: PublicInvest Research - 11 May 2022

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Industrial Production Index (IPI) - Another Solid Month

Author: PublicInvest   |  Publish date: Wed, 11 May 2022, 10:17 AM


OVERVIEW

The Industrial Production Index (IPI) delivered its seventh straight month of expansion in March, powered by broad-based increases across all components especially mining and manufacturing. This is significant given mining’s lackluster form over the last 2 years since the COVID-19 pandemic started. March’s achievement could have been much higher however if not for base disadvantage following the turnaround in IPI last year (IPI March 2021: +9.4%). Favourable operating conditions underpinned a 5.1% jump in IPI in March particularly in the manufacturing (+6.9%) and mining (+0.3%) components, two of the IPI’s significant contributors (combined: 90% share). The jump in IPI was further aided by commendable recovery in the electricity component (March 2022: +0.8%) which benefitted from further relaxation in COVID-19 Standard Operating Procedures (SOPs). On a MoM and seasonally-adjusted basis, IPI ticked 0.7% lower, a slowdown against February (+5.2%) however.

ANALYSIS BY SECTOR

Manufacturing. Manufacturing component produced another respectable achievement in March (+6.9%) on account of improving operating conditions following further relaxation in COVID-19 SOPs. Demand for manufacturing goods was also boosted by full economic openings around the world thanks to much-improved COVID-19 conditions. This is consistent with favourable manufacturing exports (March: +19.1% YoY) especially electrical and electronics – E&E (February: +32.8%), a condition that signals further improvement in supply and demand dynamics. The upbeat manufacturing performance is also consistent with the rebound in Manufacturing PMI (March: 51.6), the index’s best since December 2021.

On specifics, manufacturing IP that jumped by +6.9% YoY in March (February: +5.2%) was driven by industrial products (for export) especially non-metallic mineral products, basic metal and fabricated metal products (March: +5.6%) thanks to an improvement in economic activity post COVID-19 (i.e., North America, Europe, ASEAN). The sector’s performance was further driven by a solid E&E performance (March: +18.6%), the sub-index’s continued expansion since August last year. Consumer-related products produced an expected recovery thanks to full economic openings - a favourable condition for sub-sectors especially food, beverages and tobacco (March: +4.1%) and textiles, wearing apparel, leather products and footwear (March: +5.4%). On a MoM and seasonally-adjusted (SA) adjusted basis, manufacturing output increased by +0.1%, a deceleration against +4.0% in February.

Full economic openings around the world and favourable operating conditions will push manufacturing firms to continue raising output. This will also be driven by the global semiconductor upcycle, backlogs, and re-stocking activities – combination of drivers that will lift the sector’s performance in 2022. Our transition into the COVID-19 endemic stage will give the sector the additional push especially from April onwards. This will be further lifted by the reopening of international borders which will address the sector’s labour shortage issue. The sector’s performance may be dampened however by pockets of outbreaks and supply chain disruptions, the latter possibly taking some time to improve. This is in addition to supply disruptions from China due to strict COVID-19 lockdown policies and the Russia-Ukraine conflict. The rise in input costs is another concern as that could eat into firms’ margins, precipitating a possible slowdown in activity.

Mining: Mining output improved further in March (+0.3%; February: -0.4%) driven especially by natural gas (March: +5.7%). This could have been much higher however if not for the larger decline in petroleum oils and condensates production (March: -6.8%). Recall that production of petroleum oils and condensates was affected by facilities closure for maintenance purposes (e.g., Gumusut-Kakap field) since last year and this has been a bane for the mining sector. That said, OPEC+ higher supply direction (April: 400k barrel per day; May onwards: 432k barrel per day), is expected to drive the sector’s performance in the near-term. This is also set to be lifted by an expected turnaround in petroleum oils and condensates output soon in addition to the new commissioning of oil field facilities (Pegaga gas project; East Malaysia; March 2022). There could also be a fair chance for OPEC+ to boost output given the disruption in global oil market following the Russia-Ukraine conflict. On a MoM and SA basis, mining output pulled back after output slipped to +0.1% (February: +4.0%).

Electricity: Electricity component delivered another commendable performance (March: +0.8%) pushed by full economic openings since early January. Output dropped on a MoM and SA-adjusted basis however, reflected by a decline of 0.3% (February: +2.5%). Output is expected to remain on the rise in the near term nonetheless thanks to full economic openings. This will be further aided by an expansionary Fiscal Budget 2022 and our transition into the COVID-19 endemic stage beginning April.

OUTLOOK

IPI is expected to remain favourable in the near term thanks to full economic openings domestically, and around the world - a boon for the manufacturing component. IPI will also be driven by a lag impact of expansionary global fiscal strategies in 2021 and accommodative interest rate environment (until 1H22) - a boost for all the three components. OPEC+ higher supply direction will also bode well for the mining component in addition to a fair prospect for the pact to ramp-up output due to Russia-Ukraine conflict. This will also be topped by the commissioning of new oil field facilities in March. Electricity output is also set to rebound thanks to full economic openings postimplementation of the National Recovery Plan (NRP) and our transition into the COVID-19 endemic stage beginning April. The steady turnaround in the headline index forms the basis of our sanguine IPI outlook though we remain cautious given the risks of COVID-19 outbreak in workplaces. Other headwinds may come from prolonged supply chain disruption and shortages in raw materials and containers. This may also be dampened by China strict COVID-19 lockdown policies and Russia-Ukraine conflict.

Source: PublicInvest Research - 11 May 2022

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Plantations - Highest Inventory Level in 5 Months

Author: PublicInvest   |  Publish date: Wed, 11 May 2022, 10:15 AM


Malaysia’s palm oil inventory registered its first gain in 6 months, up 11.5% to 1.64m mt, as high CPO prices deterred buying interests. CPO futures slipped to the current level of RM6,377/mt after hitting record level of RM7,104/mt a week ago. Meanwhile, we maintain our Overweight call on the plantation sector with a full-year CPO price forecast of RM4,300/mt. Our top picks are Sarawak Plantation and Ta Ann.

  • Palm oil inventory registered first gain in 6 months. Palm oil stockpiles jumped to a 5-month high at 1.64m mt in April as production rose while exports fell to the lowest level in 14 months. Stock-to-usage ratio rose from 8% to 10%.
  • Exports slipped to 14-month low. Palm oil exports contracted 17.7% to 1.0m mt, the lowest level in 14 months as all major consuming countries except US (+25.8%) showed weaker demand. Pakistan registered the steepest drop, down 90% followed by China, 51% and EU, 23%.
  • Output grew for second straight month. After seeing a sharp palm oil production growth in the previous month, palm oil extended its gain by another 3.6% MoM to 1.46m mt, the highest level in 5 months. The higher production was contributed by Peninsular Malaysia (+2.7%) and East Malaysia (+4.9%).
  • Earnings surprise for the first quarter? In view of the stronger-than expected CPO price performance for 1Q 2022, we do not rule out the possibility of earnings surprises especially Sarawak Plantation and Ta Ann as both are not exposed to the hefty duties in Indonesia and almost all of their CPO sales are in spot prices. During the first quarter, KLK registered the steepest FFB production growth, up 23.4%, followed by FGV, 11.8% and IOI Corp, 8.9%. (refer to Figure 5)
  • Foreign workers returning soon. The Malaysia’s Plantation and Industries and Commodities Ministry is eyeing 30% growth for production and exports amid increased demand after Indonesia banned exports and following the re-entry of plantation workers. In Sept, authorities approved the recruitment of 32,000 foreign workers for palm oil plantations and some are expected to arrive this month and in June under a special government quota. The ministry has proposed cutting the export tax on CPO from the current 8% to 4%-6% next month as it aims to boost its global market share.

Source: PublicInvest Research - 11 May 2022

Labels: SWKPLNT, TAANN
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