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Kenanga Research & Investment

Author: kiasutrader   |   Latest post: Mon, 14 Jun 2021, 10:44 AM

 

Bond Market Weekly Outlook - MGS/GII yields to trend rangebound, on extended FMCO

Author: kiasutrader   |  Publish date: Mon, 14 Jun 2021, 10:44 AM


Government Debt Trend and Flows

▪ MGS and GII yields were mixed last week, moving between -10.0bps to 2.3bps overall. The 10Y MGS soared 7.4bps to 3.323%on8 June, an 11-week high, before
  closing the week lower at 3.23%.

▪ The 10Y MGS yield initially surged amid its reopening auction last Tuesday but saw strong risk-off demand by the end of the week. The market still remained
  cautious due to the persistently high level of local COVID-19 cases and the ongoing Full Movement Control Order (FMCO). As expected, foreign inflows into the
  bond market softened in May, but charted 13-months of consecutive inflows.

▪ We expect domestic yields to continue trending rangebound this week, with a slight downside bias, on the back of pressured UST yields and the extension of the
  FMCO until 28 June. In the medium to long-term, when lockdown restrictions ease, we project yields to return to an uptrend amid a solid domestic economic
  recovery.

▪ We expect the ongoing FMCO to temper foreign demand for local bonds this month. Nevertheless, foreign flows will likely remain positive due to high yield
  differentials and Moody’s recent affirmation of Malaysia’s credit profile. However, the outlook for inflows will be contingent on the outcome of Malaysia’s sovereign
  credit review by S&P Global Ratings. The 10Y MGS-UST yield spread remains attractive, rising to 178bps (previous week: 169bps).

Auction Results (08-June)

▪ The 10Y MGS 04/31 reopened at RM5.0b, of which RM0.5b was privately placed, and was awarded at an average yield of 3.313%.

▪ Demand was decent, with a bid-to-cover (BTC) ratio of 1.966x, although lower than the YTD BTC average of 2.157x.

▪ The next auction is a reopening of the 3Y GII 10/24. We estimate an issuance of RM4.0b without private placement.

Source: Kenanga Research - 14 Jun 2021

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Malaysia Distributive Trade - Leaped to a record high in April, largely due to the low base of last year

Author: kiasutrader   |  Publish date: Mon, 14 Jun 2021, 10:43 AM


● Distributive trade sales jumped 66.2% (Mar: 9.3%), the biggest YoY increase since records began, largely attributable to the low base effect, as last
   year’s Movement Control Order (MCO) weighed heavily on business operations and consumer activities

  • Sales value (RM111.1b; Mar: RM112.8b): remained above the pre-pandemic level (Feb-20: RM109.0b) but fell 1.5% MoM (Mar: 4.4%) on renewed concerns over rising domestic COVID-19 cases and a decrease in spending in non-food sector during the month of Ramadhan.

● Broad-based sales improvement, driven mainly by a quadruple-digit YoY growth in motor vehicle sales

  • Motor vehicles (1,551.3%; Mar: 40.7%): recorded a parabolic growth due to an extremely low base effect as April 2020’s car sales were almost non-existent. However, MoM sales growth fell (-7.9%: Mar: 34.6%) on global chip shortage.
  • Retail trade (56.4%; Mar: 10.5%): expanded significantly due to higher sales of others in specialised stores.
  • Wholesale trade (40.5%; Mar: 1.8%): climbed to a record high, largely due to increased sales of other specialised items (69.1%; Mar: -2.5%) and household goods (35.8%; Mar: 4.5%).

● Mixed retail trade performance across advanced and developing economies

  • US: soared to a new record high of 40.6% (Mar: 20.1%) on improved demand as more people have been vaccinated in the US.
  • UK: accelerated to a record high of 42.4% (Mar: 7.1%) as non-essential shops were allowed to reopen in April.
  • CN: slowed to 17.7% from a 314-month high of 34.2% in March, indicating that China's economic recovery momentum is tapering as domestic consumption remained weak.

● 2021 distributive trade sales forecast revised down to between 6.0% to 8.0% from 8.0% to 10.0% (YTD: 12.7%; 2020: -5.9%) due to the implementation of a nationwide full-scale MCO

  • The tightening of government measures starting from the implementation of MCO 3.0 on 6th May until the imposition of a full-scale MCO on 1st June is expected to drag retail sales down in the May-July period. However, starting from August onwards, retail sales are expected to pick up pace due to higher expected vaccination rollout, loosening of COVID-19 restrictions and further extension of the new vehicle sales tax.
  • Thus, we have revised our 2Q21 private consumption growth to 13.3% (1Q21: -1.5%) from 16.1%. Consequently, 2021 GDP growth forecast has been revised down to 5.0-6.0% (2020: -5.6%) from 6.0-6.5% previously.

Source: Kenanga Research - 14 Jun 2021

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Malaysia Industrial Production - Soared to a record high in April, due to low base effects from MCO 1.0

Author: kiasutrader   |  Publish date: Mon, 14 Jun 2021, 10:43 AM


● Industrial Production Index (IPI) growthsurgedinApril (50.1%; Mar: 9.3%), its highest level on record; beating market expectations but below house
   forecast (KIBB: 55.4%; consensus: 47.9%)

  • Primarily reflecting the lower base of last year, amid the onset of the COVID-19 pandemic and nationwide Movement Control Order (MCO).
  • MoM (-4.5%; Mar: 7.4%): returned to a contraction after last month’s positive turnaround, as all three segments declined on a MoM basis.

● Manufacturing index expansion accelerated to a record high (68.0%; Mar: 12.7%), in line with a surge in exports (63.0%; Mar: 31.0%) and manufacturing
   sales growth (72.5%; Mar: 15.3%), but largely due to a low base effect

  • Broad-based expansion among all subsectors, led by a surge in the production of electrical & electronics products (70.1%; Mar: 13.8%), non-metallic mineral, basic metal & fabricated metal products (141.0%; Mar: 8.0%), transportation equipment & other manufactures (275.2%; Mar: 20.9%), and petroleum, chemical, rubber & plastic products (37.5%; Mar: 14.1%).
  • MoM (-4.3%; Mar: 6.8%): declined substantially, after rebounding last month.

● Mining index expanded for the first time in 14 months (14.3%; Mar: -1.9%), reaching its highest level since July 2013, but also due to a lower base

  • Expansion was led by a rebound in the extraction of crude oil & natural gas (14.3%; Mar: -1.9%), followed by a surge in natural gas production (23.9%; Mar: 4.3%) and improving crude petroleum output (2.7%; Mar: -9.4%); even as global oil prices fell slightly (USD64.8/barrel; Mar: USD65.4).
  • MoM (-5.7%; Mar: 7.0%): returned to contraction after recovering last month.

● Electricity index recorded its largest expansion since March 2010 (22.9%; Mar: 10.3%), primarily due to a low base effect

  • MoM (-3.4%; Mar: 16.2%): fell back into contraction after last month’s rebound.

● 2021 manufacturing production forecast revised down to 9.2% from 11.2% (2020: -2.7%) amid the full-scale MCO

  • Manufacturing output is expected to be mildly impacted by the tightening of MCO 3.0 and the extension of the full-scale lockdown until 28 June. Nevertheless, its impact will likely be softer than that of MCO 1.0 last year, as several key manufacturing sectors are still allowed to operate, albeit at a reduced capacity of 60.0% workforce. After MCO 3.0 is eased, we can expect manufacturing production to be supported by a potential rebound in domestic demand, the continuing recovery of major trading partners as COVID-19 vaccinations progress, and the ongoing technology upcycle.
  • As a result of the tightening of MCO 3.0, we have revised down our 2Q21 GDP growth forecast to 11.7% from 14.3% (1Q21: -0.5%). We have also revised our 2021 GDP growth forecast range to 5.0% – 6.0% from 6.5% previously (2020: -5.6%).

Source: Kenanga Research - 14 Jun 2021

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Ringgit Weekly Outlook - Volatility expected to rise ahead of FOMC meeting

Author: kiasutrader   |  Publish date: Mon, 14 Jun 2021, 10:42 AM


Fundamental Overview

▪ MYR further strengthened its position to below the 4.11 level against the USD as the 10-year US Treasury (UST) yield fell to below 1.5% despite a higher-than-expected increase in US CPI. The local note was also supported by record high Malaysia's IPI and retail sales readings, increased pace of vaccinations and higher Brent crude oil price.

▪ The local note could advance further against the greenback this week as the Fed's policy is expected to remain easy as we think that it is a little bit too soon for the Fed to be hawkish. However, stronger-than-expected readings in the US industrial production and retail sales data could potentially push the UST yields higher, prompting the MYR to trade lower against the USD.

Technical Analysis

▪ If the USDMYR pair can break above the 5-day EMA of 4.118, it is possible that we will see a short-term USD bullish reversal above the 4.120 level.

▪ Based on our technical analysis, the USD may test the pair’s upside at (R1) 4.122 and potentially hit the (R2) 4.135 level if there is a surprise hawkish shift in the Fed’s tone during the FOMC meeting. Conversely, a potential downside could tilt the pair towards the (S1) 4.102 and (S2) 4.096 support level.

Source: Kenanga Research - 14 Jun 2021

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IJM Plantations - Proposed MGO Likely to Happen

Author: kiasutrader   |  Publish date: Mon, 14 Jun 2021, 10:41 AM


Pending shareholders’ approval at an EGM, we think the votes are likely to be in favour of the disposal. This will then trigger an MGO and KLK will extend the same offer (RM3.10/share + RM0.10 DPS) to the remaining shareholders. We recommend ACCEPT OFFER given the premium valuations against closest peer – PER (41%), PBV (101%), and EV/planted Ha (39%).

Conditional SPA. IJM Corp (IJM) has agreed and entered into a conditional SPA with Kuala Lumpur Kepong’s (KLK) for the disposal of the entire 56.2% stake in IJM Plantations (IJMP) for an offer price of RM3.10/share + RM0.10 DPS payable to IJM on 30 July 2021. The acquisition is still subject to shareholders’ approvals at EGM which will be convened at a later date.

Fair price, attractive for shareholders. The offer price of RM3.10/share + RM0.10 DPS translates into an EV/planted Ha of c.RM54k (in line with market price). IJMP’s estates are located in Sabah (41%) and Indonesia (59%) with an average EV/planted Ha of c.RM80k and c.RM40k, respectively – giving the aggregated estate an average market price of c.RM56k. Meanwhile, the implied FY22E PER/PBV is 23.6x/1.9x (41%/101% premium to closest upstream peer HSPLANT) which is highly attractive. EV/planted Ha for HSPLANT is c.RM39k. Operationally, we believe IJMP will benefit from the synergy of its operations in Sabah, East Kalimantan, and Sumatra as well as KLK’s more efficient production cost structure.

No changes to earnings estimate.

ACCEPT OFFER of RM3.10. We think shareholders are likely to vote in favour of the acquisition. Upon the SPA turning unconditional, this will trigger a MGO and KLK will extend the same offer to the remaining shareholders. KLK does not intend to maintain IJMP’s listing status should they achieve 90% acceptance. We recommend IJMP shareholders to accept the offer given the attractive valuations against closest peer – PER (41% premium), PBV (101% premium), EV/planted Ha (39% premium).

Source: Kenanga Research - 14 Jun 2021

Labels: IJMPLNT
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Plantation - The Month of Full Lockdown

Author: kiasutrader   |  Publish date: Fri, 11 Jun 2021, 10:45 AM


Review of May figures:

May inventory of 1.57m MT (+1.5% MoM) came above our, but below consensus’, forecast. Deviation from our estimate was mainly due to lower exports particularly from Islamic countries and slower stockpiling activities from China and India. Production of 1.57m MT is in line with both our and consensus’ estimates.

Our projection for June: 

For June, we forecast: (i) production growth (+1.4% MoM), as growth in East Malaysia is offset by decline in Peninsular, and (ii) exports to rise (+3.1% MoM). Exports should improve for the remaining months as businesses overcome the initial struggles of obtaining approvals from relevant local authorities. Data from cargo surveyors for 1st – 10th June have shown an average 12% MoM decline. All in, we expect total supply to outstrip total demand, leading to higher ending stocks of 1.67m MT (+6.4% MoM).

Our thoughts on the sector:

Moving forward, the prevailing key factors remain: (i) stockpiling activities by India and China, (ii) labour situation, (iii) movement restriction developments, (iv) supply-demand dynamics of soybean market, and (v) biodiesel mandates. Stay NEUTRAL on the plantation sectorwith an unchanged CY21 CPO price forecast of RM3,000/MT.Expectations of rising inventory levels have begun to weigh on CPO price and should continue into June. However, any shock to supply from stricter movement controls will turn the tide. Upstream-centric preferred picks to capitalise on high CPO prices are SIMEPLT (OP; TP: RM5.65) and HSPLANT (OP; TP: RM2.15).Our integrated pick with defensive overall margin against the CPO price variability is KLK (OP; RM25.10).

May 2021 CPO inventory rose (+1.5% MoM) to c.1.57m metric tons (MT). This is above our estimate of 1.46m MT (-5.6% MoM), but below consensus’ estimate of 1.64m (+6.3% MoM). The deviation from our estimate was mainly due to lower exports (-6.0% MoM) attributable to: (i) Iran (-71% MoM), (ii) Turkey (-38% MoM), (iii) Ghana (-97% MoM), and slower stockpiling activities from China and India. Production of 1.57m MT is in line with both our/consensus estimates of 1.59m/1.58m MT, respectively.

Forecasting June 2021 production to rise (+1.4% MoM) to 1.59m MT. We expect continued production growth in Sabah and Sarawak in June, while Peninsular Malaysia continues to take a breather. Premised on these reasons, we forecast 1.4% MoM increase in overall production in June 2021.

Exports to rise (+3.1% MoM) to 1.30m MT in June 2021. Data from cargo surveyors for 1st – 10th June showed an average decline of 12% MoM. We think that this could be a temporary effect from the sudden implementation of Phase 1 MCO 3.0 as businesses struggled to obtain approvals from relevant local authorities. We expect exports to improve gradually for the remaining of the month which should be driven by China and India’s oils and fats inventory replenishment activities. We observed a rising pattern in Malaysia’s palm oil exports to both countries when their oils and fats stock levels plummeted to multi-year lows in Apr-May 2020. Both India and China’s inventories have begun to climb.

June 2021 inventory to increase (+6.4% MoM) to 1.67m MT. All-in, we expect total supply of 1.68m MT to outstrip total demand of 1.58m MT, leading to higher ending stocks of 1.67m MT in June. The key factors to continue focusing on in the coming months are: (i) stockpiling activities by India and China, (ii) labour situation as we approach peak production season, (iii) movement restriction developments, (iv) supply-demand dynamics of soybean market, and (v) biodiesel mandates fulfilment.

Stay NEUTRAL on the plantation sector with an unchanged CY21 CPO price forecast of RM3,000/MT. Expectations of rising inventory levels have begun to weigh on CPO price. This will be more evident should June’s inventory levels rise as anticipated. However, any shock to supply from stricter movement controls will turn the tide. We think valuations of planters under our coverage and the KLPLN index (both at below -1.0SD from mean) seem to have somewhat priced in the negatives. Upstream-centric preferred picks to capitalise on high CPO prices are SIMEPLT (OP; TP: RM5.65) and HSPLANT (OP; TP: RM2.15). Our integrated pick with defensive overall margin against the CPO price variability is KLK (OP; RM25.10).

Source: Kenanga Research - 11 Jun 2021

Labels: SIMEPLT, HSPLANT, KLK
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