Highlights

AmInvest Research Articles

Author: mirama   |   Latest post: Thu, 30 Aug 2018, 4:45 PM

 

FBM KLCI ETF - Dips Into the Red

Author: mirama   |  Publish date: Mon, 3 Sep 2018, 3:23 PM


Investment Highlights

  • We maintain our HOLD call on FTSE Bursa Malaysia KLCI exchange-traded fund (FBM KLCI ETF) but trim our FV by 2% to RM1.97 (from RM2.01) (Exhibit 5). Our FV is based on our fair values (for stocks under our coverage), consensus fair values (for stocks not under our coverage) and last traded price (for Hap Seng Consolidated, which is not under any coverage). It is at a slight premium to its NAV of RM 1.90 (Exhibit 4).
  • For the three months ended 30 June 2018, the ETF reported an investment loss of RM269,811 (comprising gross dividend income of RM26,637 and net investment loss of RM296,448). This represents a significant deterioration in performance both on a YoY and QoQ basis. Having accounted for expenditure, net loss after tax came to RM282,396, vs. net income after tax of RM121,456 three months ago and RM55,606 a year ago (see Exhibit 1).
  • We remain positive on the outlook for the FBM KLCI. We project the FBM KLCI’s earnings to grow by 3.6% and 6.8% in 2018 and 2019 (Exhibit 2), underpinned by a GDP growth of 4.8-5.0% and 4.2-4.5% respectively.
  • We maintain our end-2018 FBM KLCI target of 1,900pts. The implied that P/E for our 1,900pts end-2018 FBM KLCI target based on our projected FBM KLCI earnings in 2019 is at 18.3x, which is consistent with our medium-term target multiple for the FBM KLCI of 18.5x.
  • We believe the FBM KLCI should be fairly traded at a multiple of 18.5x, at a 1.5x multiple premium to the 5-year historical average of about 17x, largely to reflect the introduction of largely high P/E stocks during the recent rounds of changes to the FBM KLCI constituents, i.e. Press Metal, Nestle, Dialog Group, Hartalega Holdings and Malaysia Airports Holdings.
  • We hold the view that investors’ sentiment towards emerging markets, including Malaysia, will improve at some point: (1) when the market feels that the US rate hike cycle and the USD upcycle are about to taper off; (2) when the risk-and-reward profile and valuation-to-growth matrix of emerging markets become attractive again (after the recent selloff); and (3) if commodity prices stay firm, strengthening the finances of commodity-exporting emerging markets.
  • However, we are mindful of various headwinds that could cap the upside of the FBM KLCI including: (1) the US Fed who has remained relatively hawkish; (2) investors’ cautiousness towards emerging markets; (3) the structurally rich valuations of the Malaysian equity market against its regional and global peers; and (4) external risks such as escalating international trade tensions and the potential of a new EU existential crisis.

Source: AmInvest Research - 3 Sept 2018

Labels: FBMKLCI-EA
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Inari Amertron - Strong earnings growth to continue in FY19

Author: mirama   |  Publish date: Thu, 30 Aug 2018, 4:45 PM


Investment Highlights

  • We maintain our BUY call on Inari Amertron (Inari) with an unchanged forecasts and fair value of RM2.61/share. Our FV is based on CY19F PE of 20x.
  • During Inari's analyst briefing yesterday, the company guided that the mini-LED (<2mm pixel pitch) has been qualified by its German customer and has commenced production in its P21 plant, albeit in a small volume.
  • In regards to its Inari Optical Technology (IOT) division, the facial recognition sensor for an upcoming Chinese flagship smartphone has been qualified by its customer while the health sensor is still in the qualifying stage. Both of these will be relying on the vertical-cavity surface-emitting laser (VCSEL) technology. We expect meaningful earnings contribution to kick in after 6 to 9 months.
  • Inari’s bread-and-butter radio frequency (RF) business has continued to grow steadily. As of May 2018, it has 970 testers (+24% YoY) in its P13 plant in Penang, which is occupying almost 90% of the floor space. Furthermore, the company expects gradual increase in RF testers underpinned by rising content per device. Higher content amplifies the average selling price of RF chips, thereby increasing Inari’s RF revenue despite modest growth in smartphone volume. Going forward, RF content growth is expected to be fuelled by the transition from 4G LTE to 5G.
  • The relocation of its Philippine operations in Paranaque (PQ) to existing plants in Clark Field (CK) has been completed. The move will allow for some cost savings as CK plants are situated in Clark Freeport Zone, which entitles investors to certain tax incentives. In addition, the group also intends to relocate operations in its P8 plant to P13 by the end of September 2018 as both are producing RF components. Collectively, we believe the group will be able to save labour cost and rental expenses of >RM500K/month (c:2% of FY19F earnings) from the exercise.
  • For the upcoming 640K sq ft factory in Batu Kawan, the group targets to have the first phase of 240K sq ft completed by Sept-Oct 2018, followed by the remaining second and third phases by May 2019. The new facility is to cater for additional jobs from its German optoelectronics customer, as well as potential new jobs from prospective customers. We have not factored in any earnings contribution from its Batu Kawan facility into our profit forecasts.
  • All-in, we expect Inari’s earnings to register a robust CAGR of 31% from FY17 to FY20F, riding on 3 core pillars: 1) RF, which benefits from the transition to 5G and rising content per device; 2) laser devices, which are boosted by increasing biometric and augmented reality (AR) applications in smartphones; and 3) LED, which rides on rising demand for high-resolution billboards in shopping malls.

Source: AmInvest Research - 30 Aug 2018

Labels: INARI
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CIMB Group - Softer non-interest income; NIM under pressure in Indonesia

Author: mirama   |  Publish date: Thu, 30 Aug 2018, 4:43 PM


Investment Highlights

  • We downgrade our call on CIMB Group Holdings (CIMB) from BUY to HOLD with a lower fair value of RM6.30/share (previously: RM6.80/share). Our projected FY19 ROE has been reduced to 10.1% from 10.8%, leading to a drop in P/BV multiple to 1.1x. We trim our FY18/19/20 net profit by 6.3%/6.7%/9.3% after reducing our NOII estimates further and lowering our loan growth assumptions.
  • The group reported a core net profit of RM1.04bil (- 9.6%QoQ) after excluding a one-off gain of RM928mil from the partial disposal of CIMB-Principal Asset Management (CPAM) and CIMB-Principal Islamic Asset Management (CPIAM) and an additional gain of RM11mil from the sale of a 50.0% stake in CIMB Securities International (CSI). 1HFY18 core earnings of RM2.19bil, excluding one-off gains totalling RM1.09bil from partial disposals of CSI, CPAM, CPIAM, were below expectations, making up 43.7% of our and 44.6% of consensus estimates. ROE for 1HFY18 based on core earnings was 9.1% vs. our projection of 10.2%.
  • The group's gross loans accelerated to a growth of 3.3%YoY from 0.5%YoY in the preceding quarter. Excluding FX impact, the group’s loan growth was 7.0%YoY.
  • Group NIM declined by 9bps QoQ to 2.48% in 2QFY18 largely due to the lower margins in Indonesia.
  • NOII was weaker in 2QFY18 due to slower capital market activities in Malaysia. Treasury and markets business has picked up pace in July and Aug 2018. However, it remains challenging to play catch-up in 2HFY18 for the weaker NOII in 1HFY18 as the market remains volatile.
  • The group's impaired loans in 2QFY18 remained stable with a marginal increase of 0.5%QoQ to RM10.6bil. Overall GIL ratio declined to 3.17% in 2QFY18 from 3.22% in 1QFY18. 1HFY18 credit cost of 0.45% improved from 1HFY17’s 0.66%, and remained lower than our estimate of 0.60% for FY18.
  • A first interim dividend of 13 sen/share has been proposed, resulting in a payout of 51.6%.
  • As at the end of 2QFY18, the group’s CET1 ratio remained healthy at 11.9%, and is on track to meet its T18 target of 12.0%. The partial disposals of the group’s stakes in CSI as well as CPAM and CPIAM have provided a lift of 14bps and 15bps to the group’s CET1 ratio respectively.

Source: AmInvest Research - 30 Aug 2018

Labels: CIMB
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Oil & Gas Sector - Petronas’ commitment to E&P despite lower 2Q capex

Author: mirama   |  Publish date: Thu, 30 Aug 2018, 4:42 PM


Investment Highlights

  • Petronas’ 2Q2018 core net profit rose 10% QoQ. Petroliam Nasional’s (Petronas) 2Q2018 core net profit (excluding one-off impairments) rose 10% QoQ to RM11bil from higher crude oil prices as Brent climbed 11% to US$74/barrel while the ringgit depreciated by 1%; partly offset by a lower production of crude oil and gas.
  • Production down 6% QoQ. Petronas’ upstream revenue fell 10% QoQ to RM25bil, causing EBIT to drop by 14% as production output slid by 6%, with gas production contracting by 10% to 1.3mil barrels/day while crude oil decreased by 1% to 982K barrels/day due to statutory plant turnaround activities.
  • Total capex spending decreased 34% QoQ. Petronas’ 2Q2018 capital expenditure shrank 34% QoQ to RM7.9bil, as spending halved to RM2bil for the US$27bil Pengerang Integrated Complex (PIC) in Pengerang Johor, which has reached a progress stage of 92% with completion still targeted in stages from mid-2019. This is not a surprise as the proportion of capex spent on PIC has declined from 59% in 1H2017 to 26% in 2Q2018. The overall spending contraction was also contributed by capex for other operations, which dropped 41% QoQ to RM3.4bil as progress on the Pengerang FLNG (PFLNG) 2 has reached a completion stage of 88%. Domestic projects, which accounted for 66% of 1H2018 capex, is likely to remain Petronas’ priority despite its recent acquisition of a 25% equity stake in the C$40bil LNG Canada project in Kitimat, British Columbia.
  • Overall capex spending may miss target this year, but E&P reaffirmed. While Petronas’ president/CEO Tan Sri Wan Zulkiflee Wan Ariffin had earlier indicated that its capex could increase by 24% YoY to RM55bil for 2018 amid higher crude oil prices and cost reduction initiatives, there is a possibility that the group could miss its target given that spending has only reached 36% in 1H2018 notwithstanding a ramp-up in construction progress towards the end of the year. Despite the lower spending on PIC and other projects, the group’s commitment to exploration and production (E&P) is reaffirmed by its 2Q2018 capex increase of 28% QoQ and 9% YoY to RM2.4bil.
  • Likely E&P refocus for Petronas under Pakatan government. Given the nation’s huge debt of RM1tril, we maintain our view that one of the Pakatan government’s options to raise revenue will be to ramp up Petronas’ production against the backdrop of improving crude prices. This will mean a substantive refocus in spending for E&P activities despite Wan Zulkiflee earlier saying that the group will invest in downstream operations such as speciality chemicals and renewable energy solutions, including solar. Hence, we expect the asset utilisation rates for local service companies to improve in the medium to longer term, even though charter rates could remain unexciting in the light of excess capacity globally.
  • 2Q2018 contract awards declined but uptrend remains intact. Malaysia’s 2Q2018 contract awards slumped 33% QoQ to RM2.5bil as 1QFY18 benefited from Sapura Energy’s huge but lumpy EPCIC work for the Pegaga central processing platform. Nevertheless, the rollout of projects still appears to be ongoing as 1H2018 awards rose 33% YoY to RM6.2bil and the pipeline of overseas jobs was still slow last year. Going forward, we expect the rising momentum of fresh awards to gain traction, partly driven by Petronas’ downstream focus on PIC Johor, together with the resumption of massive offshore developments in Brazil and West Africa.
  • Maintain 2018-2019 price forecast at US$70-75/barrel. We maintain our 2018-2019 Brent crude oil projection at US$70- 75/barrel vs. the EIA’s Brent crude oil prices at US$72/barrel and Petronas’ unchanged US$52/barrel for 2018. For 2019, the EIA is forecasting Brent at US$71/barrel against a projected 11% YoY increase in US daily production to 11.9mil barrels. The OPEC production quotas that were initiated in the beginning of last year have suppressed US oil inventories, which have fallen to 408mil barrels, down 5% since the beginning of the year and 23% from the 534mil peak in March 2017. Although US daily crude production has expanded by 12.5% since the beginning of the year to 11mil barrels, this has been mitigated by declining Venezuelan output and potential resumption of US sanctions on Iran.
  • Maintain OVERWEIGHT view on the sector given the stabilising crude oil prices above US$75/barrel notwithstanding Petronas’ cautious capex strategy. As asset utilisation rates have begun to improve, we expect charter rates to have bottomed out even in the absence of any upward trajectory at this juncture. Our top picks are still companies with stable and recurring earnings such as Dialog Group and Yinson. Dialog’s earnings visibility is secured largely by the Pengerang Deepwater Terminal project with its enlarged buffer zone while Yinson’s FPSO charters are secured by strong client/operators together with a proven track record of savvy management/execution capabilities. We are UNDERWEIGHT on Petronas Gas due to the Energy Commission’s upcoming announcement of the transportation tariff setting mechanism, which we expect to be valueeroding due to an expected lower targeted rate of return on asset values.

Source: AmInvest Research - 30 Aug 2018

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Fixed Income – Should we worry about UST yield inversion?

Author: mirama   |  Publish date: Thu, 30 Aug 2018, 4:41 PM


While the growing concern of a yield curve inversion remains high, it is equally important to ascertain if we are missing some other key points. Currently, the rate hike by the US Fed has led to high yields, while during the 2012 quantitative easing, the focus was on seeking high-risk debt instruments. Also in today’s setting, the Fed’s rate hike policy and trade war uncertainties have sparked volatility on the global capital market, and even raising the alarm on the possible risk of an emerging market crisis.

In the meantime, we expect the Fed to maintain its current hawkish forward guidance on the direction of the monetary policy on the condition that the economy continues to grow. If the economic growth scales above 3% over the next couple of years, we foresee both rates and the USD strengthening.

What happens if the Fed embarks on a more dovish forward guidance? Under such circumstances, the yield curve will steepen as shorter term yields fall. It will cast doubts on the Fed’s independence, especially after coming under criticism from US President Donald Trump on the aggressiveness in hiking rates. The dovishness can also be due to the economy losing steam.

Volatility in fixed income thus far in 2018 was driven by storylines of trade war, emerging market crisis and the US economy potentially overheating. These noises still remain. Hence, we suggest a more cautious approach to investing in global fixed income.

In Malaysia, with supply constraints from PDS estimated at RM20bil to RM70bil, govvies bond issuance projected at around RM103bil, plus factoring in the US Fed’s another two rate hikes in 2018 and BNM maintaining the OPR at 3.25% coupled with a low inflation to average at 1.5%, these provide an edge for slightly lower yields from the current level. Besides, MGS yields should continue to be well supported by onshore real money demand. Therefore, we are looking at 10-year MGS yields of around 3.95-4.00.

  • The US Treasury 2-year yield rose to 2.67% while the 10-year yield currently stood at 2.88%. This squeezed the spread between them to just 21 basis points, the lowest since August 2007. It is a step closer to falling into the flattening yield curve and soon into a yield curve inversion, unless the 10-year yield jumps due to the aggressive rate hike scenario.
  • In the past, an inversion of the yield curve tends to be accompanied by recession. Our question is whether we need to be worried about a downturn? While concern on a yield curve inversion remains high, it is equally important to ascertain if we are missing some other key points.
  • With global monetary policy gradually moving towards a tightening stance, it will raise the competition for global capital flows. Under such circumstances, we felt it is important to examine our strategies with regards to positioning ourselves rather than to merely focus on the noises of a US economic slowdown and its potential implications, though it is important to have these on the back of our mind.
  • Currently, the rate hike by the US Fed has led to high yields while during the 2012 quantitative easing, the focus was on seeking high-risk debt instruments. Besides, in today’s setting, underpinned by the Fed’s rate hike policy, it led to uncertainties and volatility on the global capital market, and even raising the alarm on the possible risk of an emerging market crisis.
  • In the meantime, we expect the Fed to maintain its current hawkish forward guidance on the direction of the monetary policy. We have factored in two more rate hikes in 2018, each by 25 basis points to settle at 1.75%–2.00%. Looking ahead, should Trump’s ambition to lift the economic growth above 3% over the next couple of years is achieved, we foresee both rates and the USD on a strengthening mode. This may pose a risk to the economic growth.
  • Thus, we foresee the Fed will mostly likely embark on a gradual rate hike going forward without jeopardizing the medium-term growth trajectory and causing a huge market disruption. US treasuries remain one of the safest place to park your money. And with the government debt still attractive, it will continue to contribute to the explosion of global capital market volatility, fuelling competition for capital. We are looking at another two rate hikes in 2019 to 2.75%– 3.00% and likely to stabilise at 3.25%–3.50% by 2020 should the GDP growth continues to remain strong.
  • What happens if the Fed embarks on a more dovish forward guidance? Under such circumstances, the yield curve will steepen as shorter term yields fall. It will cast doubts on the Fed’s independence, especially after coming under criticism from Trump on the aggressiveness in hiking rates.
  • Besides, the Fed may turn dovish if the economy starts to lose steam much earlier than anticipated. Under such circumstances, the Fed may loosen its monetary policy with rates being reduced by 50–100 basis points in 2019–2020. Under a reverse policy scenario, it will ease pressure on global rates to move up. Portfolio rebalancing can become trickier. Hence, we believe the need to embark on a more cautious approach.
  • Volatility in fixed income thus far in 2018 was driven by storylines of trade war, emerging market crisis and US economy potentially overheating. These noises still remain. Hence, we suggest a more cautious approach to investing in global fixed income.
  • In Malaysia, supply constraints with the estimated supply of PDS to drop by about RM20bil to RM70bil, govvies bond issuance projected at around RM103bil, pricing in an additional two rate hikes by the US Fed in 2018 and our OPR staying unchanged at 3.25% in 2018 given the low inflation to average at 1.5%, these provide an edge for slightly lower yields from the current level. Besides, MGS yields should continue to be well supported by onshore real money demand. Therefore, we are looking at 3-year; 5-year; and 10-year MGS yields at around 3.45-3.50; 3.65-70 and 3.95-4.00 respectively.

Source: AmInvest Research - 30 Aug 2018

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Econpile Holdings - FY18 net profit grows 8% YoY

Author: mirama   |  Publish date: Thu, 30 Aug 2018, 4:39 PM


Investment Highlights

  • We trim our FY19-20F net profit forecasts by 2% each, after updating Econpile’s cash balance. Similarly, we lower our FV to RM0.53 (from RM0.54) based on 9x revised FD CY19F EPS of 5.9 sen, in line with our benchmark forward P/E of 7-10x for small-cap construction stocks. We downgrade our call to UNDERWEIGHT from HOLD as valuations are unattractive at 14-15x forward earnings on muted earnings growth prospects.
  • Econpile’s FY18 results came in within our forecast and consensus estimates. FY18 topline expanded 25% YoY but EBIT only grew 3% as EBIT margin eased by 3.4ppts. The lower margins were due to: (1) higher steel cost; and (2) increased infrastructure piling jobs, i.e. 25% of turnover vs. only 9% a year ago (while high-rise property piling jobs made up 75% of turnover, vs. 91% a year ago).
  • Typically, infrastructure piling jobs (for instance, LRT or MRT lines) command lower margins due to the high idle times for machines as they have to be mobilised to a new spot along the line every few days or weeks, while highrise property piling jobs stay on the same site throughout the project period.
  • So far in FY19, Econpile has secured new jobs worth a total of RM186.2mil, boosting its outstanding construction order book to RM1.1bil (Exhibit 2). Our forecasts assume job wins of RM500mil annually in FY19-21F. Econpile secured RM488.3mil new contracts in FY18.
  • We remain cautious on the outlook for the local construction sector. As the government scales back on public projects, local contractors will be competing for a shrinking pool of new jobs in the market. Severe undercutting among the players will result in razor-thin margins for the successful bidders. On the other hand, the introduction of a more transparent public procurement system under the new administration should weed out rent-seekers, paving the way toward healthier competition within the local construction sector.
  • We believe Econpile is mitigated by its substantial order backlog that should keep it busy over the next 1-2 years, coupled with its proven ability to compete under an open bidding system.

Source: AmInvest Research - 30 Aug 2018

Labels: ECONBHD
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