• Following the sharp dive of the FBM KLCI index (-1.26%) last Friday due to heavy selling by foreign investors (-RM657.6 mln), the key index settled lower for the third consecutive week as the key index took a hit from multiple fronts, including a weightage reduction on several blue-chip stocks by MSCI and the weakest GDP growth recorded in three years. This also resulted in the lower liners and the broader market splashed in red, with the exception of Consumer Products (+0.02%).
• Market breadth was negative as decliners outrun gainers on a ratio of 272-to-607 stocks. Traded volumes shed 11.1% to 1.83 bln shares as the investors remain cautious on the sidelines.
• On the big board, significant laggards include companies which saw their weightage reduced in the MSCI Emerging Market Index – Maybank (-33.0 sen), Sime Darby (-31.0 sen), CIMB (-27.0 sen), Petronas Chemical (-25.0 sen) and UMW Holdings (-23.0 sen). Meanwhile, the main losers on broader market include Panasonic Manufacturing and Scientex, which fell 28.0 sen each, followed by Ajinomoto (-24.0 sen), Genting Plantations (-24.0 sen) and Malaysia Airports Holdings Bhd (-18.0 sen).
• Dutch Lady (+RM1.12) managed to break out above the RM54.0 psychological level after it closed flat in the previous two days. Other key gainers included Hong Leong Industries (+19.0 sen), United Plantations (+18.0 sen) and technology counters Excel Force Msc and PMB Technology, which added 14.0 sen each. The five-advancers on the key index were BAT (+86.0 sen), Hong Leong Bank (+14.0 sen), IHH Healthcare (12.0 sen), Astro (+8.0 sen) and Public Bank (+4.0 sen)
• Asian stockmarkets closed mostly lower as the Nikkei lost 1.4% last Friday due to the strengthening of the Yen vs the Greenback, although it was higher by 1.9% for the week. Meanwhile, the Shanghai Composite was flat, closing marginally lower by 0.3%, while the Hang Seng Index fell 1.1%. All ASEAN stockmarkets closed negative for the week.
• U.S. stockmarkets extended their weekly loss as stronger-than-expected retail economic data failed to curtail the negative sentiment on the sector, in addition to weaker crude oil prices. The Dow fell 1.0%, weighed down by energy stocks, while the S&P 500 dipped 0.9%. Both of the key indices fell to their third consecutive week in the red. Meanwhile, the Nasdaq slipped 0.4%, registering a loss for the fourth straight week.
• European benchmark indices, however, finished on a positive note last Friday, backed by the favorable U.S. retail sales data. The FTSE and CAC expanded 0.6% each, while the DAX rose 0.9%.

THE DAY AHEAD

• Market sentiments have taken a severe dent after last week’s insipid performance and we think the mostly negative market environment will continue to affect the Malaysian stockmarket at the start of the week. As it is, the spate of negative market and economic developments, from both domestic and foreign sources, will continue to keep sentiments weak.
• Therefore, we think that the FBM KLCI will continue to dip lower with the 1,600 support level coming into play as investors remain cautious and are likely to stay on the sidelines. Interest on the broader market and lower liner shares are also expected to stay insipid as retail players will also adopt a cautious stance.

MACRO NEWS

• Malaysia’s 1Q2016 GDP grew 4.2% Y.o.Y (4Q2015: +4.5% Y.o.Y) which was slightly ahead of the consensus estimate of 4.1% Y.o.Y. On a Q.o.Q basis, growth was 1.0% higher than 4Q2015. However, the reported growth rate was the country’s fifth consecutive quarter of slower Y.o.Y growth and also the slowest rate since 3Q2009 amid the continuing slowdown in the external sector.
• Bank Negara Malaysia (BNM), meanwhile, attributed the sustained growth to GDP the manufacturing sector (+4.5% Y.o.Y) and services industry (+5.1% Y.o.Y), while the construction industry contributed to 7.9% growth, offsetting the 3.8% Y.o.Y contraction in the agriculture sector and the relatively unchanged mining sector output (+0.3% Y.o.Y).
• The services sector growth was led by domestic demand, while the manufacturing sector’s expansion was mainly due to stronger exports (1Q2015 gross exports: +1.0% Y.o.Y ), albeit it contracted 12.4% Y.o.Y. The agriculture sector, meanwhile, contracted on account of the hot weather that curtailed palm oil production.

Comments

• Although the GDP was slightly ahead of expectations, the Malaysian economy is still displaying weakness amid the challenging external environment that will continue to dampen the country’s economic prospects, going forward. As it is, the global economic recovery is still stuttering and this could further undermine the country’s export performance, which is already seeing a significant moderation. China’s slowing economy is also expected to continue affecting Malaysia’s export performance, albeit BNM is maintaining its stance that global economy will continue to post modest recoveries.
• Meanwhile, the government is banking on domestic consumption to weather the difficult external sector with the reduction in EPF contribution until end-2017, but the higher cost will continue to dampen spending and slow the recovery prospects. Still, the government’s emphasis on infrastructure projects will help to mitigate some of the effects of slower consumer spending. Consequently, BNM is maintaining the 2016 growth rate of 4.0%-4.5% for now.

COMPANY UPDATE

• Engtex Group Bhd has acquired 40.0% equity interest in Englen Manufacturing Sdn Bhd (EMfg) and Englen Metals Sdn Bhd (EMSB) respectively, from vendor Lee Wee Kok for RM2.7 mln. The purchase consideration was funded by internally generated funds and subsequently the companies would become wholly-owned subsidiaries of Engtex.

Comments

• We are mildly positive on the above acquisition as the acquisition will allow Engtex to take full control of the affairs and business direction of both EMfg and EMSB, which we deem as earnings accretive over the long run. We expect Engtex’s net gearing to increase to 1.5x (from 1.49x as of 31st December 2015) following the completion of the acquisition.
• There are no changes to our earnings forecast given that the savings from non-controlling interest will be offset by the reduction of interest income from cash and bank balances. We also maintain our HOLD recommendation with an unchanged target price at RM1.25 as we ascribe an unchanged target PER of 6.5x to our 2016 forecast earnings of its manufacturing and wholesale & distribution businesses. Its property development segment’s valuation, meanwhile, remain unchanged at 0.6x its BV, based on its relatively small-scale property development projects.

COMPANY BRIEFS

• Handal Resources Bhd’s 1Q2016 net profit plunged 60.1% Y.o.Y to RM0.2 mln, due to lower contributions from its crane fabrication and workover divisions. Revenue for the quarter, however, rose 10.4% Y.o.Y to RM22.4 mln. (The Star Online)
• Pharmaniaga Bhd’s 1Q2016 net profit fell 42.2% Y.o.Y to RM18.4 mln due to increased selling and distribution costs, amortisation of its Pharmacy Information System and higher finance costs. Revenue for the quarter, however, added 18.5% Y.o.Y to RM559.2 mln. An interim dividend of 4.0 sen per share was declared, payable on 28th June 2016. (The Star Online)
• Kumpulan Perangsang Selangor Bhd (KPS) is venturing into the mattress business by buying a 60.0% stake in the King Koil mattress brand licensing business.
• KPS would acquire the stake in the licensing business in Kaiserkorp Corp Sdn Bhd for US$28.8 mln or RM115.9 mln cash. King Koil Licensing Company Inc (KKLC) in Delaware, U.S. owns the King Koil and other related trademarks. (The Star Online)
• Boustead Heavy Industries Corp Bhd’s (BHIC) 1Q2016 net loss stood at RM19.0 mln vs. a net profit of RM8.4 mln in the previous corresponding quarter due to shipbuilding project provisions and mutual separation scheme (MSS) payment. Revenue for the quarter, however, increased 3.0% Y.o.Y to RM62.9 mln. (The Star Online)
• KNM Group Bhd's unit, KNM Process Systems Sdn Bhd has clinched US$23.2 mln (RM93.3 mln) worth of orders for the fabrication of vessels for Tecnicas Reunidas SA. The contracts involve the fabrication of high-thickness vessels and high-thickness columns. The orders are expected to be completed between 16 and 18 months, starting from the respective purchase order dates. (The Edge Daily)
• Dagang Nexchange Bhd’s (DNeX) 1Q2016 net profit surged 11.5x to RM5.4 mln, due to growth in its trade facilitation business and better operational efficiency. Revenue for the quarter increased 22.3% Y.o.Y to RM26.9 mln. A single-tier interim dividend of one sen a share, payable on 15th June 2016, was declared. (The Edge Daily)
• Konsortium Transnasional Bhd has decided not to go ahead with its three-for-two rights issue that was first announced in September 2014, citing unfavourable market conditions which are not conducive for the implementation of the rights issue. The public bus operator said that it will continue to explore other proposals to address its capital requirements. (The Edge Daily)

Source: M+ Online Research - 16 May 2016