• The FBM KLCI (-0.1%) snapped a two-day rally to close marginally lower due to cautiousness ahead of Janet Yellen’s semi-annual testimony before Congress and a weakening Ringgit. The lower liners declined – led by the FBM Small Cap (- 0.4%), amid a mixed broader market.

• Market breadth turned negative as losers outweighed the winners on a ratio of 470- to-387. Traded volumes also fell by 11.9% to 2.18 bln shares as investors anticipate the Federal Reserve’s stance on the interest rate hike for the year.

• Main Board underperformers were Petronas Dagangan (-24.0 sen), Tenaga (- 14.0 sen), Genting (-10.0 sen), Hap Seng Consolidated (-10.0 sen) and PPB Group (-6.0 sen). Meanwhile, significant broader market decliners include KESM Industries (-41.0 sen), Nestle (-36.0 sen), Bintulu Port Holdings (-32.0 sen), CSC Steel (- 18.0 sen) and Lafarge Malaysia (-17.0 sen).

• Broader market charttoppers, meanwhile, were Country Heights Holdings (+18.0 sen), Petron Malaysia (+14.0 sen), United Plantations (+14.0 sen), Goldis (+13.0) and Malaysia Smelting Corporation (+12.0 sen). Hong Leong-related companies like Hong Leong Bank (+28.0 sen), and Hong Leong Financial Group (+20.0 sen) advanced, alongside other key-index members like BAT (+RM1.52), Sime Darby (+14.0 sen) and KLCC Property & REITs (+3.0 sen).

• Key regional benchmark equities were also mostly lower amid cautiousness ahead of the Federal Reserve Chairperson’s semi-annual testimony on the state of the U.S. economy. The Nikkei declined (-1.1%) – dragged down by defensive counters in the healthcare (- 2.2%) and consumer staples (-1.7%) sectors. The Hang Seng index (-0.03%) and the Shanghai Composite Index (+0.03%) flatlined, the latter on gains in materials and industrials-related shares offsetting the declines in the banking sector. Meanwhile, the majority of ASEAN stockmarkets were painted in red.

• U.S. equities closed favourably overnight after Janet Yellen only signalled a slightly hawkish tone on the Federal Reserve’s interest rate policy. The Dow advanced 0.5%, on the back of gains in financial giants like JPMorgan Chase & Co (+1.6%) and Goldman Sachs (+1.3%), while the S&P 500 and the Nasdaq finished up by 0.4% and 0.3% respectively.

• European stockmarkets eked-out small gains following lower-than-expected economic growth in Germany and Eurozone. The CAC rose 0.2%, while the DAX (-0.02%) finished almost unchanged. The FTSE snapped a six consecutive day winning streak to close 0.1% lower – dragged down by Rolls-Royce (-4.0%) after the luxury carmaker reported a 2016 pretax loss of US$5.05 bln, due to the expenses related to corruption charges and the sharp depreciation of the Sterling Pound.

The Day Ahead

• Despite yesterday’s market weakness, we continue to think that the market undertone is still firm amid the buoyant conditions in most global equity indices and the positive environment will continue to have a positive spillover effect to stocks on Bursa Malaysia over the near term.

• Therefore, we think the uptrend will resume after yesterday’s mild consolidation and this will ensure that the FBM KLCI stays above the psychological 1,700 points level. At the same time, we expect the key index to make a new attempt at clearing the 1,710 level before targeting the 1,720 level in due course. Nevertheless, the way up could become choppier as the market is already overbought and the gains could be milder. The 1,700 points level is the main support for now.

• After their recent gains, the lower liners and broader market shares’ upside may also become choppier as profit taking activities could escalate. Still, market interest is firm and we expect the rotational plays among the lower liners to pick up as retail players switch their interest to laggards instead.

Company Update

• Hartalega’s 3QFY17 net profit saw a 9.0% Y.o.Y drop to RM66.2 mln, from RM72.8 mln in the previous corresponding quarter – as it recognised an unrealised forex loss on the revaluation of a loan denominated in U.S. Dollar, as well as fair value loss on foreign currency forward contracts. Quarterly revenue however, jumped 14.6% Y.o.Y to RM456.3 mln, from RM398.0 mln previously.

• Cumulative 9MFY17 net profit fell slightly by 1.2% Y.o.Y to RM193.6 mln against RM195.9 mln in 9MFY16, dragged down by the aforementioned reasons, albeit slightly offset by the 18.0% Y.o.Y growth in revenue to RM1.3 bln, from RM1.1 bln a year earlier. The reported earnings and revenue were below our expectations - accounting to only 63.6% of our previous FY17 estimated net profit of RM304.2 mln and 70.2% of our previous FY17 revenue of RM1.85 bln.

Comments

• Following Hartalega’s lower-thanexpected earnings, we trimmed our earnings estimates for FY17 and FY18 by 15.2% and 3.0% to RM258.0 mln and RM323.5 mln respectively to reflect the competitive environment of the rubber gloves industry, amid the rising input costs (i.e.: raw materials, utilities, labour).

• Despite the rising cost, higher economies of scale following Hartalega’s production expansion, higher capacity utilisation rate and continuous cost management by the group, we think the group will be able to mitigate most of the challenges ahead and we maintain our HOLD recommendation on Hartalega with lower target price of RM4.90 (from RM5.00).

• Our target PER of 25.0x (unchanged) is at a premium to its peer’s average of 20.0x on its revised FY18 EPS of 19.7 sen due to: (i) Hartalega’s position as the global market leader in the growing nitrile glove industry, (ii) superior operational efficiency in terms of production speed and the lower number of workers per glove output, as well as (iii) solid fundamentals where it commands the highest net profit margin vs. its peers.

Company Briefs

• Digi.Com Bhd's has received the Securities Commission's approval for its proposed Sukuk programmes which would be used for capital expenditure and working capital. The programmes comprise of an Islamic Medium Term Notes (IMTN) programme of up to RM5.00 bln in nominal value (IMTN programme) and an Islamic Commercial Papers (ICP) programme of up to RM1.00 bln in nominal value (ICP Programme).

• The proceeds would be used to finance the capital expenditure, working capital requirements, other general funding requirements and/or general corporate purposes. The tenure of the IMTN programme is 15 years from the date of the first issuance of the IMTN under the IMTN Programme, while for the ICP programme is seven years from the date of the first issuance of ICP. (The Star Online)

• Kuala Lumpur Kepong Bhd’s 1QFY17 net profit slipped 54.6% Y.o.Y to RM360.7 mln, mainly due to a one-time sale of plantation land to an associate which offset the surge in plantations profit as crude palm oil (CPO) rebounded. Revenue for the quarter, however, rose 26.7% Y.o.Y to RM5.50 bln. (The Star Online)

• Sunway Real Estate Investment Trust’s 2QFY17 net property income fell 3.1% Y.o.Y to RM94.1 mln, primarily due to cessation of manager's fee payable in units, effective financial year 2017. Revenue for the quarter declined 3.8% Y.o.Y to RM126.9 mln.

• For 1HFY17, cumulative net realised income decreased marginally by 0.2% Y.o.Y to RM133.9 mln. Revenue for the period, however, added 1.1% Y.o.Y to RM255.8 mln. A lower distribution of 2.3 sen per unit for 2QFY17 was announced, down from 2.6 sen per unit it distributed in 2QFY16. (The Edge Daily)

• Goodway Integrated Industries Bhd has withdrawn several corporate proposals announced in July 2016 as it requires additional time to enhance disclosure and information requirement. The proposals include a significant diversification of its business through the acquisition of holistic security solutions provider, S5 Systems Sdn Bhd for RM900.0 mln via a share issuance. (The Edge Daily)

• Hektar Real Estate Investment Trust’s 4Q2016 net property income slipped 4.1% Y.o.Y to RM18.7 mln, due to higher service and maintenance charges. Revenue fell 2.4% Y.o.Y to RM31.2 mln. ? For cumulative net 2016 property income decreased 2.8% Y.o.Y to RM74.3 mln. Revenue for the year was down marginally by 0.7% Y.o.Y to RM124.6 mln. A distribution per unit of 2.7 sen for the quarter, payable on 16th March 2017, was announced. (The Edge Daily)

• Dialog Group Bhd’s 2QFY17 net profit rose 17.1% Y.o.Y to RM91.4 mln, owing to higher contributions from the group’s joint ventures in the Pengerang Independent Terminals, which has fully leased out its storage capacity and secured better storage rates. Revenue for the quarter climbed 33.9% Y.o.Y to RM856.8 mln.

• For 1HFY17, cumulative net profit added 25.1% Y.o.Y to RM172.7 mln. Revenue for the period gained 28.4% Y.o.Y to RM1.51 bln. (The Edge Daily)

• Tadmax Resources Bhd is revising the terms for its proposed rights issue with free warrants exercise in conjunction with the implementation of the amended Companies Act 2016 which imposes a no-par value regime. Previously, companies that intended to raise capital were required to issue shares that were priced above their par value. By imposing a no-par value regime under the amended Companies Act 2016, companies now have the flexibility to fix their new share issue price that reflects the market value.

• Consequently, Tadmax is revising the indicative issue price for its rights share to 40 sen, which represents a discount of about 1.5% to the five days-volume weighted average price of its shares. Based on such an indicative price, Tadmax is expected to raise up to RM87.7 mln, compared with proceeds of up to RM109.7 mln based on the previous requirement. The group also revised its plan to utilise the proceeds, which involves halving the funds allocated for future investments to RM20.0 mln and reducing allocations for working capital to RM14.6 mln. (The Edge Daily)

• MISC Bhd's wholly-owned unit, GumusutKakap Semi-Floating Production System (L) Ltd (GKL) has been awarded US$254.5 mln (RM1.13 bln) after it obtained an adjudication decision against Sabah Shell Petroleum Co Ltd. GKL took the legal action in September 2016 in its dispute with Sabah Shell over outstanding additional lease rates, payment for completed variation works and other associated costs for the construction of the Gumusut-Kakap Semi-Floating Production System (Semi-FPS), which is for crude oil production. (The Edge Daily)

• AirAsia X Bhd will suspend its flights from Malaysia to Mauritius from April 2017 as part of the budget airline's network restructuring to improve aircraftutilisation efficiency. The suspension is also to accelerate capacity growth in AirAsia X's key markets of Australia, China, Taiwan, Japan and Korea. AirAsia X currently operates thrice weekly Kuala Lumpur-Mauritius flights. (The Edge Daily)  

Source: Mplus Research - 15 Feb 2017