Kenanga Research & Investment

Author: kiasutrader   |   Latest post: Tue, 19 Feb 2019, 09:25 AM


Kuala Lumpur Kepong - 1Q19 Broadly Within Expectations

Author: kiasutrader   |  Publish date: Tue, 19 Feb 2019, 09:25 AM

Kuala Lumpur Kepong Berhad (KLK)’s 1Q19 CNP* of RM195m is broadly within our forecast at 17% and consensus estimate at 20%. YoY, 1Q19 CNP plummeted 41% as CPO prices weakened 29% and on poorer Oleochemical performance amid stiffer competition, but cushioned by an 8% FFB growth. QoQ, 4Q18 CNP was up 24% as Oleochemical profit nearly tripled on cheaper feedstock. No dividend, as expected. No changes in FY19-20E CNPs of RM1.15-1.20b. Maintain MARKET PERFORM with an unchanged TP of RM25.70.

Broadly within expectations. KLK’s 1Q19 core net profit* (CNP) of RM195m came in broadly within our forecast at 17% and consensus estimate at 20%. We have stripped out a surplus on government acquisition of land of RM22.5m, a foreign exchange gain of RM33.3m and a surplus on land disposal of RM0.4m in our CNP calculation. While 1Q had normally been a strong season averaging 29% of full- year earnings in the past five years, 1Q19 is likely to be an exception due to unconventionally low CPO prices. Hence, we expect earnings in subsequent quarters to pick up on a sharp CPO price recovery. FFB production of 1.11m MT is within our expectation, accounting for 27% of our 4.11m MT estimate. No dividend was announced, as expected.

Weaker CPO price – the culprit. YoY, 1Q19 CNP plummeted 41% mainly due to lower operating profit in the Plantation segment (-58% to RM127m) amid a 29% drop in average CPO price to RM1,840/MT and a 45% plunge in PK prices. This was partially mitigated by an 8% increase in FFB production. Despite cheaper feedstock, Oleochemical profit also fell, by 31%, as margins waned amid stiff competition from Indonesia and a sharp drop in crude oil prices, which made the group’s Methyl Ester-based products less attractive. QoQ, 1Q19 CNP was up 24% as Oleochemical profit nearly tripled on lower input costs. On the other hand, despite 8% FFB growth, Plantation profit dropped 25% on an 11% decline in CPO prices.

Earnings to improve on higher volumes. Moving forward, we believe earnings would recover on rising CPO prices and higher FFB output (FY19E: +5%). In addition, PK at current price levels is favourable to downstream margins. Over the longer term, KLK’s earnings growth is expected to remain consistent in view of its stable organic and inorganic expansion tracks. The group continues to be on the lookout for acquisitions in the upstream segment, with preference for brownfield oil palm plantations with flat/low-lying land.

No changes in FY19-20E CNPs of RM1.15-1.20b as earnings were in line with expectations.

Maintain MARKET PERFORM with an unchanged TP of RM25.70 pegged to 23.5x CY19E EPS of 109.2 sen. Our Fwd. PER of 23.5x (- 2.0 SD) reflects its CY19E FFB growth prospects of 5% as well as its large-cap and FBMKLCI inclusion statuses. While KLK’s long-term prospects remain positive as management continues its hunt for M&A targets, we do not see any excitement in the near-term given its average production outlook and the competitive environment in the Oleochemical segment.

Risks to our call are sharp falls/rises in CPO prices and a precipitous rise/drop in labour/fertiliser/transportation costs.

Source: Kenanga Research - 19 Feb 2019

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Petronas Gas - 4Q18 Distorted By Associate Losses

Author: kiasutrader   |  Publish date: Tue, 19 Feb 2019, 09:24 AM

4Q18 results were distorted by losses from associate Kimanis IPP on de-recognition of deferred tax assets of RM124.3m but operationally, segment results were on track with the new Pengerang RGT leading earnings growth. However, earnings are set to taper off from 2020 on two step-downs in two regulatory 3-year periods. Nonetheless, all negatives are priced in. Thus, we keep MARKET PERFORM at unchanged target price of RM16.45/SoP share.

FY18 missed forecast. At 94%/95% of house/street’s FY18 estimates, FY18 core profit of RM1.83b came in slightly below expectations, which was largely due to losses from associate Kimanis IPP on de-recognition of deferred tax assets amounting to RM124.3m in 4Q18, being PETGAS’ 60%, in relation to certain tax benefits, which now have a 7- year utilisation limit under the new Finance Act 2018. Should we adjust for this, FY18 earnings would be RM1.95b which is on the dot with our forecast and 1% above consensus. It declared 4th interim NDPS of 22.0 sen (ex-date: 01 Mar; payment date: 15 Mar) in 4Q18, which is higher than 18.0 sen and 19.0 sen paid in 3Q18 and 4Q17, respectively. This totalled FY18 NDPS to 72.0 sen which is higher than our forecast of 68.8 sen and the 66.0 sen paid in FY17.

Operationally on track. 4Q18 core profit contracted 35% sequentially to RM328.3m from RM504.5m in 3Q18 while revenue dipped slightly by 1%. This was largely due to the abovementioned share of loss for Kimanis IPP. Operationally, segmental results were fairly in-line with FY18 operating profit of RM2.57b making up 99% of our FY18 forecast. Segment earnings for Gas Processing (GP) grew 5% in 4Q18, which offset a 4% decline in RGT. Meanwhile, Gas Transportation (GT) and Utilities units reported operating profits falling 10% and 47%, respectively, owing to higher maintenance costs and depreciation expenses. The 1% drop in 4Q18 top-line was owing to lower segment revenue from GT and Utilities.

New RGT led earnings growth. On YoY comparison, 4Q18 core profit plunged 32% from RM483.7m, due primarily to de-recognition of deferred tax assets for Kimanis IPP as mentioned above. Overall, segment results posted reasonably growth, especially RGT, as the new Pengerang RGT was started in November last year. On the contrary, Utilities segment posted 10% decline in EBIT owing to higher cost of sales on upward revision of fuel gas price coupled with higher depreciation on statutory turnaround and capital projects. YTD, FY18 core profit rose only 3% to RM1.83b although revenue jumped by a higher proportion of 14%, affected by the Kimanis IPP’s losses. At operating profit level, earnings jumped 13% as RGT registered an 85% surge in profit as the new Pengerang RGT came online last November.

TPA remains the only issue going forward. Although the Pilot Period of 2019 will see less severe impact to PETGAS, its earnings will be impacted by two step-downs, in Regulatory Period 1 (RP1) in 2020- 2022 and Regulatory Period 2 (RP2) in 2023-2025, before stabilising from 2026 onwards. We take the view that its ROA will eventually taper to 8% by 2026. Hence, we expect base-tariff for PGU to reduce sharply by 60% to RM0.502/GJ in 2026 from RM1.248/GJ in 2018. As such, this will continue to dent sentiment on PETGAS. Meanwhile, we keep FY19 estimates unchanged while introduce FY20 forecast in which we expect earnings to decline by 14.7% on the back of base-tariff cut mentioned above.

Keep MARKET PERFORM. Although expecting lower earnings post- 2020, all negatives have priced in as share price have been supressed in the past two years over the concern of tariff cut. Thus, we keep our MARKET PERFORM rating at unchanged target price of RM16.45/SoP share. Our call is supported by c.4% yield. Upside risk to our call is higher-than-expected return of regulated asset base.

Source: Kenanga Research - 19 Feb 2019

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Daily Technical Highlights – (JTIASA, TONGHER)

Author: kiasutrader   |  Publish date: Tue, 19 Feb 2019, 08:58 AM

JTIASA (Not Rated)

  • JTIASA gained 3.0 sen (+4.88%) to close at RM0.645.
  • Overall technical outlook is positive as the share appears to have broken out from the downtrend that lasted for close to two years.
  • Notably, it is now trading above all key SMAs while the MACD line had also just cross over the Signal line.
  • Expect the share to test its next resistance at RM0.700 (R1) and possibly RM0.770 (R2).
  • Conversely, downside supports can be found at RM0.600 (S1) and RM0.430 (S2).

TONGHER (Not Rated)

  • Yesterday, TONGHER gained 12.0 sen (+2.93%) to close at RM4.22 on the back of stronger-than-average trading volume.
  • The share has rallied over the past few days, closing above all key SMAs currently in “Golden Crossover” state.
  • Technical outlook appears leaning on the upside at this juncture underpinned by encouraging momentum indicators as evidenced by the bullish MACD crossover and upwards trending seen in RSI and Stochastic.
  • From here, a decisive takedown of RM4.30 (R1) will see next advancement towards RM4.65 (R2).
  • Conversely, downside supports can be found at RM4.00 psychological support level (S1) and RM3.90 (S2) further down.

Source: Kenanga Research - 19 Feb 2019

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Kossan Rubber Industries - Solid 4Q18, Growth Powering Ahead

Author: kiasutrader   |  Publish date: Tue, 19 Feb 2019, 08:56 AM

FY18 PATAMI of RM200.8m (+10% YoY) came in within expectations at 97%/98% of our/consensus full-year forecasts. We are positive of its earnings growth ahead since Plant 16, 17, 18 and 19 are expected to be fully taken up. Volume sales from new capacity coupled with better efficiency from new plants are expected to offset any ASPs pressure. TP is RM4.95 based on 25.5x FY19E EPS. Reiterate OP.

FY18 PATAMI of RM200.8m (+10% YoY) came in within expectations at 97%/98% of our/consensus full-year forecasts. No dividend was declared as expected. However, we expect Kossan to declare a final DPS of 3 sen somewhere in 2Q 2019 bringing our FY18 DPS to 6.0 sen which is inline with our expectation.

Key result highlights. QoQ, 4Q18 revenue rose 2.7% due to higher contribution from rubber gloves (+2.7%) underpinned by higher volume sales (+2.5%) that more than offset lower ASPs (-1.9%) and further supported by new capacity from Plant 16 (full quarter contribution) which commenced operations in Aug 2018, albeit on a higher base, which accounted for 88% of total revenue. Overall, PBT margin reduced by 0.2ppt to 12.1% in 4Q18 compared to 12.3% in 3Q18 due to higher energy cost. This brings 4Q18 net profit to RM59.5m (+10% QoQ) due to a lower effective tax rate of 14.5% compared to 22.2% in 3Q18.

YoY, FY18 revenue rose 10% due to higher contribution from the Gloves division (+5%) underpinned by higher volume sales (+9.7%) and ASP (+6.1%) which was boosted by the improved performance in the TRP division compared to FY17. The TRP division’s revenue rose 14% in FY18, while PBT soared 76% attributable to increased sales deliveries and sales of higher margin products. This brings FY18 PATAMI to RM200.8m (+10% YoY) boosted by a lower effective tax rate of 17.7% compared to 19.3% in FY17.

Outlook. We are positive of earnings growth ahead since Plant 16,17,18 and 19 are expected to be fully taken up. We expect volume sales from new capacity coupled with better efficiency from new plants to offset any ASPs pressure. Looking ahead, Plant 16 is expected to anchor subsequent quarters’ earnings, which was fully commissioned in Aug 2018. It has an installed capacity of 3b pieces per annum and will focus on the Group’s patented Low Derma Technology gloves. The group has started commercial production of Plant 17 (1.5b pieces) in Nov 2018. Construction works for Plant 18 (2.5bn pieces) and Plant 19 (3.0bn pieces) are currently on-track, with expected full commissioning by 2Q 2019 and 4Q 2019, respectively. Upon completion, these three new plants will add additional 7b pieces of gloves per annum, bringing the group’s total installed capacity to 35bn (+25%) pieces of gloves per year by end FY2019. The next phase of expansion programme will be focused on Bidor, Perak, which is intended to accommodate the group’s expansion in a centralised location (i.e. an integrated glove manufacturing facility) over the medium and longer term. The Group expects the expansion, which is currently in the planning stage, to commence in 2020 and take eight years to complete.

Maintain Outperform. TP is RM4.95 based on 25.5x FY19E EPS (+1.0SD above 5-year historical forward mean). We like Kossan for its stronger YoY earnings growth in subsequent quarters ahead compared to peers.

Key risk to our call is slower-than-expected commissioning of the new plants.

Source: Kenanga Research - 19 Feb 2019

Labels: KOSSAN
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Axiata Group - Exiting Singapore

Author: kiasutrader   |  Publish date: Mon, 18 Feb 2019, 09:55 AM

Axiata has accepted M1’s offer to exit the Singapore market. On the other hand, XL has reported a disappointing FY18 due to the higher D&A charges and finance costs. All in, we have trimmed our FY18/19E numbers by 2%/6% post imputing XL’s numbers as well as to remove M1 contribution. Maintain OUTPERFORM rating but with a lower TP of RM4.35 after removing M1 from our SoP valuation.

Accepts M1 offer. Last Friday, Axiata announced that it had accepted the voluntary conditional general offer by Konnectivity Pte.Ltd, Singapore, to dispose the entire 28.67% stake in M1 for a total cash consideration of c.RM1.65b at the offer price of SGD2.06 (or c.26% premium over the last traded price of SGD1.63 on 21st September 2018, being the last trading date prior to the announcement of the Offer). The divestment of nonstrategic investment is expected to record an estimated gain of RM126.5m and bring home RM1.65b cash. The proceeds are expected to be utilised for general corporate purposes and/or repayment of existing debts. The proposed disposal is expected to be completed by February 2019.

Divest without petition. Axiata’s investment in M1 commenced in 2005 and the latter had steadily contributed to the Group’s growth over the years with dividends amounting to RM1.1b or c.7% yield in the last 10 years. As of 9M18, M1 has contributed a profit of RM90m (or c.11%) to Axiata’s normalized PATAMI. Despite the short-term challenges with new entrant into Singapore's market, Axiata had remained hopeful on M1’s long-term prospect. However, given Axiata’s inability to extend control either via management representatives or ownership structure, over M1, the group had decided to divest the investment and reallocate the capital to support its vision of becoming the next-generation digital champion by year 2022.

XL - Expediting 2G Assets Reduction. In a separate announcement, XL (a 66.4%-owned subsidiary of Axiata)’s FY18 normalised NL of Rp9b (vs. FY17:Rp741b) came in below expectations, where the street as well as we were targeting net profit of Rp139b and Rp209b for the full-year, respectively. The key negative variance from our end was mainly due to higher-than-expected finance costs. On a sequential performance basis, XL has reported a net loss of Rp3.1T due mainly to the higher D&A charges (Rp4.1T one-off accelerated deprecation cost that associated with the lower 2G traffic). Stripping off the one-off charges, the group reported a core PATAMI of Rp81b in 4Q18 with EBITDA margin improving to 38.8% vs. 37.1% in 3Q18. All in, despite the challenges faced in 4Q18, XL’s ability to perform sequentially coupled with some margins enhancement, suggested that the group is heading in the right direction. (Please refer to overleaf page for more XL’s FY18 result review).

Maintain OUTPERFORM. We have trimmed our Axiata’s FY18-FY19 core PATAMI by 1.5% and 5.7%, respectively, post imputing XL’s numbers as well as to remove M1 contribution. Similarly, we also removed M1’s valuation from our SoP valuation post the divestment. All in, we are keeping our OUTPERFORM call (in view of its relatively decent valuation with Fwd. EV/EBITDA of 7.0x vs. peers of 12-13x) but with lower SOPdriven TP of RM4.35 (vs. RM4.50 previously), implied -0.5x EV/fwd. EBITDA below its 5-year mean.

Key downside risks include: (i) keener competition, (ii) tax and regulatory challenges, and (iii) currency volatility; Upside risks are: (i) stronger-thanexpected recovery at Celcom and XL, and (ii) edotco’s organic and inorganic growth.YoY, XL’s FY18 revenue was flat at Rp23.0T as the higher data revenue (+13% to Rp15.8T, thanks to successful upselling coupled with increased monetization of data) was offset by the softer non-data segment (-34% to Rp4.1T as a result of declines in legacy service revenue). XL’s total customer base improved by 1.4m to 54.9m in FY18 but with lower blended ARPU of Rp30k (FY17: Rp34k) as a result of competitive behaviour in 1H18. Its smartphone users grew to 43.9m with 80% penetration rate as opposed to 72% a year ago. EBITDA, meanwhile, improved by 2% with margin inching higher by 70bps to 37% due to a prudent cost structure. The group, however, recognised higher D&A expenses (due mainly to the Rp4.1T one-off accelerated depreciation associated to the 2G network) in FY18, leading its bottom-line to turn to the red at Rp3.3T.

QoQ, its service revenue improved by 6% (to Rp5.3T) in 4Q18 with EBITDA strengthened by 8% to Rp2.35T driven mainly by the higher data revenue. The group’s normalised PAT returned to a black at Rp81b (vs. –Rp27b in the preceding quarter) in 4Q18 despite accelerated depreciation on 2G assets. To date, XL’s 4G network covers 400 cities and areas across Indonesia with more than 29k 4G BTS on top of its >51k 3G BTS.

Focus on expanding product portfolio. Moving forward, XL is set to continue with its growth strategy focusing on growing its product portfolio through both brands, supported by network expansion ex-Java and technology upgrades. Growth is likely to be derived from a combination of increased usage and monetization of data. With that, XL expects its FY19 revenue growth to perform in line or better than market (at mid-single-digit growth). Its EBITDA margin is expected to stay at the high thirties in view of the ongoing cost initiatives. The group is targeting to spend c.Rp.7.5T capex in FY19, focused on widening its 4G technology development as well as network improvement, especially in the ex-Java areas.

Source: Kenanga Research - 18 Feb 2019

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Maxis - Ready, Aim, Converge

Author: kiasutrader   |  Publish date: Mon, 18 Feb 2019, 09:54 AM

A higher-than-expected OPEX has dragged Maxis’ full-year performance in 4Q18. Maxis is aiming to transform itself from a consumer & mobile-centric telco into a converged player by the year 2023. Post the poorer result, anticipated higher transformation OPEX and latest management’s guidance, we lowered our FY19E PATAMI by 16% and downgraded the stock to UNDERPERFORM with a lower DCF-driven TP at RM4.90 (implied -1.0x EV/fwd. EBITDA below its 5-year mean).

Hit by higher OPEX. FY18 core PATAMI of RM1.77b (-15% YoY) came in below expectations at 92%/91% of our/street’s full-year estimates, no thanks to the higher-than-expected OPEX in 4Q18 that was led by one-off cost of RM250m (associated with the launch of a new strategy and to enhance operational efficiency). As expected, it declared a single-tier tax exempt dividend of 5.0 sen, bringing the full-year DPS to 20.0 sen.

YoY, FM18 service revenue dipped to RM8.1b (-2.5%) as a result of lower Prepaid segment’s performance (-11%, due to SIM consolidation and migration to Postpaid) but partially offset by higher growth in Postpaid (+5%, driven by innovative device offerings and stable ARPU) and Home Fibre business (+17%, thanks to affordable subscription plans). Normalised EBITDA declined by 8.4% with margin (as a percentage of its service revenue) softening to 47.1% (vs. 52.1%) due mainly to the one-off cost in 4Q18. QoQ, Prepaid revenue was lower by 0.7% to RM845m in 4Q18 as a result of lower subscribers’ base (-29k to 6.6m) albeit ARPU maintaining at RM42. Postpaid revenue, meanwhile, climbed 3% with higher subscriber base of 3.1m (+80k) and better ARPU of RM94 (+RM1). The growth was mainly fueled by premium experience and higher 4G data usage.

New strategy for future growth. Maxis has made a significant change to its strategy with an aim to become the leading converged communications and digital service player by 2023. The group has commenced scaling its business to address opportunities in Enterprise solutions and converged services across all segments. Maxis is targeting to spend an incremental capex of RM1b over the next 3 years to support this new strategy and its 5- year internal service revenue target of more than RM10b by 2023. While we believe the group’s strategy is heading towards the right direction, we view the internal service revenue target as a tall order for now given the heightened competition in the fixed broadband space coupled with an increasing competition in the Enterprise solutions and ICT segments. All these suggested that the group’s ICT initiatives could potentially face a longer gestation period.

Introduce FY19 guidance. Maxis is aiming to maintain its strong leadership position by leveraging on its extensive 4G network and expanding its presence in the fixed broadband market in both the Consumer and Enterprise segments. Having said that, the termination of RAN sharing arrangement with U Mobile, dilution impact in Fibre ARPU coupled with increasing customer acquisition costs as well as new regulatory policies are set to impact the group’s performance in FY19. All in, Maxis is expecting its service revenue and EBITDA to decline by low single-digit and mid-single digit, respectively. Core network capex is set to be c.RM1b with operating FCF (at c.RM1.36b) at a similar level to FY18.

Downgrade to UNDERPERFORM rating. Post results review, we have lowered our FY19E PATAMI by 16% (after raising our OPEX assumptions and taking management’s latest guidance into consideration) and introduce our FY20 numbers. With lower DCF-derived target price of RM4.90 (vs. RM5.55 previously; WACC: 6.7%; TG: 1.5%) we have downgraded our Maxis’ rating to UP (vs. MP previously). Risks to our call include: (i) higher- than-expected service revenue growth, (ii) lower-than-expected OPEX, and (iii) less aggressive competition.

Source: Kenanga Research - 18 Feb 2019

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