MIDF Sector Research

Author: sectoranalyst   |   Latest post: Tue, 19 Feb 2019, 10:01 AM


Malayan Banking Berhad - Strong Earnings Growth in Indonesia

Author: sectoranalyst   |  Publish date: Tue, 19 Feb 2019, 10:01 AM


  • Strong earnings in FY19 for Maybank Indonesia
  • NII moderated income decline
  • Asset quality stable
  • Loans book expanded but deposits declined
  • No change to our forecast for Maybank Group
  • Maintain BUY with unchanged TP to RM11.40 based on PB multiple of 1.6x

Key takeaway. We participated in a briefing by the management of Maybank Indonesia yesterday. Below are the key takeaway:

  • FY18 saw strong earnings growth and highest PATAMI in its history.
  • Loans growth and asset quality improvement led to the good performance.
  • Sufficient funding and liquidity.

Strong earnings in FY18. Maybank Indonesia posted an earnings growth of +21.6%yoy to IDR2.26t, mainly supported by lower provisions. Provisions fell by -38.6%yoy as asset quality improved with gross NPL ratio declining -0.22ppt(yoy) to 2.59%.

NII moderated income decline. Total income in FY18 came in flattish at -0.7%yoy for Maybank Indonesia. This was due to the - 17.3%yoy decline in NOII. However, NII had moderated this impact as it grew +5.2%yoy despite operating in a policy rate hike environment. Note, in Indonesia, deposit rate are repriced faster than interest rate after a policy rate hike. Interest expense fell -5.8%yoy to IDR6.69t while interest income fell only by -0.1%yoy to IDR14.79t in FY18.

Loans book expanded but deposits declined. As at end 4QFY18, Maybank Indonesia’s loans book expanded +6.3%yoy to IDR133.3t. The growth was driven by non-retail segment where it grew +10.9%yoy to IDR58.3t. Of this, business banking and SME loans grew +9.8%yoy and +12.4%yoy to IDR34.0t and IDR24.3t respectively. Meanwhile, deposits from customers contracted -3.7%yoy to IDR116.8t as CASA fell -8.3%yoy to IDR44.5t. Despite liquidity remained tight, its LCR and NSFR (both bank only) stood at above regulatory requirement of 100% at 116.6% and 107.2% respectively. The management indicated that measures already in place to manage liquidity in addition to selective loans growth.

Source: MIDF Research - 19 Feb 2019

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Kossan Rubber Industries Bhd - Earnings Momentum to Pick Up Pace in FY19

Author: sectoranalyst   |  Publish date: Tue, 19 Feb 2019, 09:58 AM


  • 4QFY18 earnings recovery led to full year FY19 earnings of RM 200.8m, in-line with our and consensus expectations
  • Higher production capacity and lower effective tax rate contributed to the earnings improvement
  • Plant 17 to start contributing meaningfully in 1QFY19, with another two new plants coming on stream in this year
  • Newer plants to command better profit margins
  • Upgrade to BUY with a revised TP of RM4.62

Within expectations. Kossan Rubber Industries Bhd’s (Kossan) 4QFY18 earnings rose by +29.6%yoy to RM59.5m. This brings its FY18 earnings to RM200.8m which is within ours and consensus’ full-year earnings expectation at 97.5% and 97.8% of full year FY18 earnings forecasts respectively. Comparing to FY17, earnings was up by +9.3%yoy thanks to a stronger 2HFY18 performance resulting from the commencement of Plant 16 (August 2018) and Plant 17 (November 2018).

Glove division drives improvement in earnings. The commendable FY18 earnings was mainly attributable to the improved performance of Kossan’s glove division. The division’s FY18 revenue and profit before tax (PBT) increased by +9.3%yoy and +4.8%yoy respectively. This was mainly caused by: (i) higher average selling price (+6.1%yoy); and (ii) higher sales volume (+9.7%yoy) resulting from the new capacity contributed by the commissioning of Plant 16 and Plant 17 (+4.5b pieces); and iii) effective tax rate of 17.7% (vs FY17:19.2%). However, division performance was partially impacted by: (i) higher natural gas price (+22.82%yoy); (ii) higher nitrile price (+9.27%yoy); and (iii) less favourable USD/MYR exchange rate (- 6.2%yoy).

Capacity expansion on track. Kossan’s Plant 17 has been fullycommissioned since November 2018. Meanwhile, the two other plants (Plant 18 and 19) are now currently under construction and expected to be fully commissioned by 2QFY19 and 4QFY19 respectively. These two new plants will add additional 5.5b pieces of new production capacity in 2019. This will increase Kossan’s existing glove production capacity from 26.5b pieces to 32.0b pieces (+20.8%). Hence, we believe that these plants will contribute strongly to Kossan’s earnings going forward driven by the robust demand for glove product.

Source: MIDF Research - 19 Feb 2019

Labels: KOSSAN
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Kuala Lumpur Kepong Berhad - Tough Operating Environment

Author: sectoranalyst   |  Publish date: Tue, 19 Feb 2019, 09:56 AM


  • KLK’s 1QFY19 normalised earnings failed to keep pace with our and consensus expectations
  • Both the plantations and manufacturing segments underperformed
  • Improvement in FFB production insufficient to make up for the fall in CPO and PK price
  • Financial performance of the downstream segment impacted by the group’s oversea operation in China and Europe
  • Maintain NEUTRAL with a revised TP of RM22.39

1QFY19 earnings lower than expected. Kuala Lumpur Kepong Bhd (KLK) 1QFY19 normalised earnings amounted to RM190.4m, a decline of -37.2%yoy. Lower earning was seen from the plantation and manufacturing segments. This, however, was partially buffered by higher contribution from the property development and farming segments. All in, the group’s 1QFY19 financial performance came in below ours and consensus’ expectations, accounting for 17.5% and 19.5% of full year FY19 earnings estimates respectively.

Plantations. The plantations segments registered profit of RM127.5m. This represents a drop of -58.0%yoy as compared to 1QFY18 profit of RM303.6m. This was mainly impacted by lower CPO and PK prices of RM1,840/mt (-28.7%yoy) and RM1,375/mt (-44.7%yoy) respectively. Fortunately, FFB production improved by +7.9%yoy to 1.1mmt.

Manufacturing. The segment profit dropped by -28.8%yoy to RM98.0m as a result of decrease in selling prices. Decline in profits from China and Europe operations had more than offset the improvement in profit from Malaysia operations.

Property Development. The property segment registered a +542.6%yoy improvement in profit to RM11.1m. This was mainly supported by higher revenue of RM39.8m (+122.3%yoy).

Impact on earnings. Premised on weaker-than-expected performance from the plantations and manufacturing segments, we are revising our FY19 and FY20 earnings downwards to RM912.2m and RM1,060.3m respectively.

Target Price. We are rolling forward our valuation base year to FY20 and derive a new target price of RM22.39. This is achieved by pegging revised FY20 EPS of 93.3 to target PER of 24.0x based on +0.5 standard deviation valuation.

Maintain NEUTRAL. The weak CPO and PK prices environment has negatively impacted the revenue generating capability of the group. Fortunately, KLK registered an improvement in FFB production though it is insufficient to offset the fall in the commodity prices. Moving forward, as we do not expect much improvement in both CPO and PK price, we expect the future performance of the plantation division to remain under pressure. There is also profit pressure from the group’s oversea downstream segment, i.e. China and Europe. On another note, there is an uptick in the profit of the property development. However, the segment’s contribution to the group is minute. Given the lack of rerating catalyst, we are maintaining our NEUTRAL recommendation at this juncture.

Source: MIDF Research - 19 Feb 2019

Labels: KLK
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Petronas Gas - Sustained 98% Asset Reliability

Author: sectoranalyst   |  Publish date: Tue, 19 Feb 2019, 09:54 AM


  • Petronas Gas Bhd (PetGas) 4QFY18 reported earnings contracted by -32.9%yoy to RM342.4m
  • Earnings supported by revenue growth of +4.9%yoy
  • All business segments recorded sales growth
  • Regasification revenue and earnings boost from Pengerang Regasification
  • Fourth interim dividend of 22sen declared
  • Maintain NEUTRAL with an unchanged TP of RM19.75 per share

Earnings met expectations. PetGas’ 4QFY18 reported earnings contracted by -32.9%yoy to RM342.4m despite a revenue growth of +4.9%yoy. This is due to share of losses from its joint-venture company Kimanis Power Sdn Bhd (KPSB) which was a result of derecognition of deferred tax assets (DTA) amounting to RM124.3m. Excluding the impact of the DTA, PetGas’s earnings would be lower by -8.6%yoy at RM466.7m attributable to a one-off impairment loss on assets and higher finance costs. FY18 earnings met expectations as it accounted for 97% of both our and consensus full year FY18 earnings estimates.

98% overall asset reliability. The sustained sales growth is largely attributable to: (i) excellent plant and operational performance and 98% overall asset reliability (100% uptime for Gas Processing segment, 100% uptime for Gas Transportation segment and 100% uptime for Regasification segment); (ii) contribution of Performance Based Scheme from Gas Processing segment and; (iii) favourable selling prices for Gas Utility segment.

Gas processing. Segment revenue contracted marginally to RM390.2m (-1.4%yoy), whilst profit declined by -4.3%yoy attributable to higher depreciation expense following the completion of statutory plant turnarounds despite lower OPEX. That said, the company’s gas processing plants’ asset reliability remains at 100% during the quarter.

Gas transportation. Both segment revenue and profit decreased by -2.0%yoy and -20.0%yoy respectively in relation to operations and maintenance revenue from Sabah Sarawak Gas Pipeline. This resulted in segment profit margin to drop slightly to 69%. However, gas transmission reliability remains at near 100%.

Utilities. Segment revenue staged an increase of +11.6%yoy to RM340.6m due to favourable sales volumes on higher customer demand for electricity and industrial gasses, coupled with higher product prices in line with upward revision in fuel gas price. However, segment profit declined by -11%yoy due to higher cost of sales and higher depreciation due to completion of statutory turnarounds and capital projects.

Regasification. Both segment revenue and profit were boosted by the completion of second tank in its Pengerang Regasification facility terminal on 9 April 2018. Revenue and profit were higher by +15.2%yoy and +11.0%yoy respectively. Plant reliability in Sungai Udang and Pengerang was at 100% during the quarter.

Impact on earnings. No changes to earnings forecasts pending analyst briefing to be held today.

Maintain NEUTRAL. We are maintaining our NEUTRAL recommendation on PetGas with an unchanged TP of RM19.75 pending the analyst briefing scheduled to be held today. Our neutral recommendation is due to the recently implemented Incentive Based Regulation (IBR) on setting the base tariff that was announced last December. That said, going forward we are of the opinion that the company will continue to perform premised on: (i) strong and diversified income stream; (ii) expected strong national GDP 4.9% for FY19 and; (iii) strong potential capital upside, despite the recent revision implementation of the IBR pricing mechanism. Our valuation is premised on forward PER19 of 21.2x pegged to EPS19 of 96.4sen. The target PER is based on PetGas’ rolling four-quarter average PER over six years.

Source: MIDF Research - 19 Feb 2019

Labels: PETGAS
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Tiong Nam Logistics Holdings Berhad - Lack of Earnings Visibility in Property Segment

Author: sectoranalyst   |  Publish date: Tue, 19 Feb 2019, 09:01 AM


  • 9MFY19 normalised PAT fell short of estimates in view of lower capitalisation of property development projects
  • Nonetheless, the logistics and warehousing segment remained profitable due to new clients and expansion of current ones
  • E-commerce delivery segment and cross border trucking yet to deliver meaningful contributions amid tight competition
  • Lack of new property developments in the pipeline, with the exception of Kota Masai township, to inhibit earnings growth
  • Downgrade to SELL with a reduced TP of RM0.58 per share

9MFY19 earnings fell short of estimates. Tiong Nam Logistics Holdings Bhd (Tiong Nam) reported 3QFY19 normalised PAT of RM3.3m (-74.4%yoy), which contributed to a 9MFY19 normalised PAT of RM11.8m (-67.0%yoy). This was below ours and consensus’ FY19 earnings estimates by a variance of more than 10%. The deviation was mainly due to lower capitalisation of property development projects despite the incurrence of higher finance costs.

Logistics and warehousing profitable for third straight quarter. Tiong Nam’s logistics and warehousing segment recorded a PBT of RM18.1m in 9MFY19 compared to the -RM2.5m loss before tax in 9MFY18. Moreover, EBITDA margins were +6ppts higher at 14% compared to the same period last year. The improvement came from the addition of new MNC customers and expansion of existing ones which could sustain the occupancy rate at its warehouses at approximately 80% for FY19 and subsequently 90% in FY20.

Longer gestation period for the oversea distribution centres. Meanwhile, Tiong Nam’s overseas distribution centres have yet to deliver meaningful earnings contribution as the company is focusing on gaining reputation with certain customers before expanding service offerings to others. Likewise, its e-commerce delivery segment, ‘Instant’ will still be loss-making in FY19 amidst competition from new entries in the industry. Tiong Nam cited that it will maintain ‘Instant’ while waiting for the market to consolidate before making any huge expansions. As such finance costs will continue to remain elevated before breaking even as indicated by the net gearing levels which have increased to 1.24x as of 31 December 2018 from 1.09x during the same period last year.

Source: MIDF Research - 19 Feb 2019

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Axiata Group Berhad - Building Up Its War Chest

Author: sectoranalyst   |  Publish date: Mon, 18 Feb 2019, 10:01 AM


  • Axiata is disposing its 28.7% stake in M1 for RM1.7b with an estimated gain of RM126.5m
  • M1’s operation resides in challenging Singapore telecommunication landscape
  • The divestment allow Axiata to focus on its main opcos and build sizeable war chest to fulfil edotco’s acquisition goal
  • Maintain NEUTRAL with a revised target price of RM3.69

Exiting the Singapore market. Axiata Group Bhd’s (Axiata) has accepted the voluntary conditional general offer by Konnectivity Pte. Ltd for the Group’s entire stake in M1 Limited for a total cash consideration of approximately RM1.7b at the offer premium price of SGD2.06 per share. The Group will effectively divest its 28.7% stake in M1 and exit its investment in Singapore with an estimated gain of RM126.5mn from this deal.

Rationale. Axiata has made the decision to accept the offer due to the need for capital reallocation and new priorities in line with its vision to be the Next Generation Digital Champion by 2022 and the investments required to achieve that. The Group also prefers not to be a minority investor in a potentially privatised company, making the investment illiquid.

Usage of the additional fund. The proceeds from the disposal of M1 will be channelled to support the transformation of all of Axiata’s mobile-centric OpCos into digital converged companies over the next few years, while at the same time, continuing to provide moderate dividends to its shareholders. These investments include the modernisation of the Group’s IT and network infrastructure, digitisation of its operations across all functions and investments into new growth areas especially in Home and Enterprise segments, and to a smaller extent, its digital businesses. Axiata also expects to participate in industry consolidation if opportunities arise, and possible acquisitions in new growth areas over the mid-and long-term in some of its footprint countries.

View. We view that there are earnings pressure from M1 due to the increasingly challenging and competitive market conditions in the Singapore telecommunications sector. Note that more mobile service providers are set to enter in Singapore this year. Thus, the disposal of M1 will enable Axiata to focus on its main opcos.

Source: MIDF Research - 18 Feb 2019

Labels: AXIATA
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