Poised For A Rebound

• The massive selloff on Wall Street overnight sent the FBM KLCI (-2.2%) sharply lower yesterday as the key index gapped-down at the opening bell and lingered in the negative territory throughout the trading session. The lower liners – the FBM Small Cap (-2.6%), FBM Fledgling (-3.0%) and FBM ACE (-3.3%) all extended their losses, while the broader market was splashed in red.

• Market breadth was decidedly negative as decliners hammered advancers on a ratio of 10-to-1 stock. Traded volumes, however, jumped 95.9% to 5.21 bln shares as selling pressure escalated.

• The majority of the FBM KLCI components were in the red, led by Nestle (-RM2.30), followed by Petronas Dagangan (-RM1.12), Hong Leong Financial Group (-98.0 sen), Petronas Gas (-92.0 sen) and Hong Leong Bank (-66.0 sen). Amongst the biggest declines on the broader market were BAT (-RM1.32), Dutch Lady (-RM1.06), United Plantations (-58.0 sen), Hartalega (-52.0 sen) and KESM Industries (-48.0 sen).

• On the flipside, notable gainers on the broader market include Heineken (+12.0 sen), Globetronics (+11.0 sen), Lingkaran Trans Kota (+11.0 sen) and Pestech (+10.0 sen). Sapura Energy added 1.5 sen after bagging several contracts with a combined value of about RM905.0 mln. Meanwhile, none of the key index constituents advanced yesterday.

• Asia benchmark indices mirrored the meltdown on Wall Street overnight. The Nikkei (-4.7%) tumbled after the Japanese Yen appreciated against the Greenback. The Hang Seng (-5.1%) sank for the fourth straight session, while the Shanghai Composite (-3.4%) erased all its previous two session gains on renewed government crackdown in financial irregularities. ASEAN stockmarkets, meanwhile, ended lower yesterday.

• Despite dropping sharply at the start of the opening bell, U.S. stockmarkets rebounded from its previous two-session selloff as the Dow (+2.3%) recorded its biggest daily gain since 2016 yesterday. On the broader market, the S&P 500 climbed 1.7%, led by gains in the technology (+2.8%) and basic materials (+2.8%) sectors, while the Nasdaq closed 2.1% higher.

• European benchmark indices, however, extended their losses after the Euro Currency appreciated against the U.S. Dollar. The FTSE (-2.6%) suffered its biggest daily decline since Brexit to close at its 10-month low. The CAC sank 2.4%, while the DAX slipped 2.3%, entering into a correction phase.

THE DAY AHEAD

• After the rout over the past two sessions, there could be some reprieve in store after Wall Street rebounded overnight. This could also provide some calm to the market that was significantly affected by the renewed global equity market uncertainties.

• However, we think there will still be some measure of cautiousness as many market players will still be licking their wounds following the steep falls. Therefore, we think the rebound will be selective with index-linked stocks potentially seeing faster and firmer recovery with the rebound potentially bringing the key index back to the 1,820-1,830 levels. Meanwhile, the 1,800 points level serves as the major support level for now.

• While we think the key index stocks could fare better in the impending recovery, the lower liners and broader market’s recovery could be curtailed by quick profit taking and selling into strength activities by retail players amid a still volatile and fragile market environment.

MACRO BRIEF

• The government has announced a slew of liberalisation initiatives to boost the Malaysian equity market’s participation that includes: i) three-year stamp duty waiver on the purchase of mid and small cap stocks, ii) liberalisation of margin financing rules , iii) intraday short-selling allowed, iv) six-month clearing fee waiver for new participants, v) introduction of a new category of traders known as Trading Specialist for traders who trade on their own account, vi) establish a trading link with the Singapore Exchange (SGX), and vii) introduction of volume based incentive programme. The above measures are set to be implemented by March 2018, but the trading link with the SGX will take longer to be implemented, possibly by the end of the year.

Comments

• Although details on the above measures are still sketchy, we are heartened by the new moves as the liberalisation is seen as positive to encourage further trades on Bursa Malaysia and making it cheaper to own shares on companies listed on both Bursa Malaysia and the SGX in due course.

• Whilst stock selection is still driven by company fundamentals, the lower transaction cost will help to draw in more market participants, particularly newcomers. In the meantime, the new category of traders would also help to distinguish a new source of market makers that would also help to add breadth and depth to the Malaysian equity market.

• In particular, the above measures are useful in creating depth, particularly on Mid and Small Cap stocks (MIDS) that are seeing increased coverage with Bursa Malaysia’s MIDS research scheme.
• As we have noted, both market breadth and depth are vital to ensure vibrancy in the market, albeit the availability of intraday short-selling could heighten volatility at the start and the end of the trading day. Nevertheless, we are encouraged by the above measures as they will give the Malaysian equity market a boost over the longer term.

COMPANY NEWS

• Hartalega‘s 3QFY18 net profit jumped 70.7% Y.o.Y to RM113.0 mln, from RM66.2 mln last year, in-tandem with the 32.2% Y.o.Y growth in revenue to RM603.1 mln vs. RM456.3 mln in the 3QFY17.

• Meanwhile, cumulative 9MFY18 net profit soared 66.7% Y.o.Y to RM322.7 mln, from RM193.6 mln a year ago, on the back of stronger revenue (+38.1% Y.o.Y) at RM1.79 bln, from RM1.30 bln last year and a net foreign exchange gain of RM13.8 mln (from a net forex loss of RM10.9 mln previously).

• The stellar performance was also contributed by higher production capacity, improvements in operational efficiencies and a net forex gain. The group has also declared a second interim dividend of 4.0 sen per share, payable on 28th March 2018. Further, its dividend policy has been revised to a 60.0% payout (from 45.0% dividend payout previously), effective in FY18.

• Separately, Hartalega has proposed a bonus issue of up to 1.71 bln new shares on the basis of one bonus sharefor-every existing Hartalega share. The proposed bonus issue is expected to be completed in the 1Q2018, while the entitlement date will be announced later.

• Assuming a full exercise of all of its outstanding ESOS options, Hartalega’s share base will hike up by 100.0% to 3,428.6 mln shares (from 1,714.3 mln). Based on yesterday’s closing share price, the ex-bonus issue share price is expected to be adjusted by 50.0% to RM5.42. We view the proposed bonus issue favorably as a means to reward its shareholders. Comments

• The reported earnings and revenue were well within our expectations - accounting to 77.1% of our FY18 estimated net profit of RM418.1 mln and 75.0% of our FY18 revenue of RM2.39 bln. Although Hartalega’s recent results were in-line with our estimates, we raised our FY18 revenue and earnings forecast slightly to RM2.42 bln and RM423.9 mln respectively after imputing higher sales volume forecasts.

• We also adjusted our FY19 revenue and net profit estimates upwards, on the back of adjustments made on the forex exchange assumptions (to reflect the weaker US Dollar), better production volume growth and higher ASPs as glovemakers pass through the rising costs to customers.

• We maintain our positive view on Hartalega’s growth trajectory moving forward, underpinned by increasing sales volume, high operational efficiency and higher ASPs amid the prevailing supply shortages of rubber gloves, due to stringent environmental laws in China.

• Consequently, we upgrade our recommendation on Hartalega to a  HOLD call (from Sell) with a higher exbonus target price of RM5.50 (previously RM10.40), based on an unchanged target PER of 31.0x on Hartalega’s adjusted FY19 EPS of 17.7 sen, following the sharp correction in Hartalega’s share prices recently and continuous expansion activities by the group.
• Hartalega’s target PER remains at a premium to its competitors, which we think is justified in-view of its concrete position as a market leader in the nitrile glove segment, superior operational efficiency and lucrative margins.

COMPANY BRIEFS

• Canadian institutional investor,British Columbia Investment Management Corp has emerged as a substantial shareholder of Red Sena Bhd, a special purpose acquisition company (SPAC) looking to buy assets in the processed food and beverage industry. The former currently holds about 6.9% (or 68.9 mln shares) of the group’s stake after acquiring a total of 19.0 mln shares from the open market in-between 22th January 2018 to 25th January 2018. (The Edge Daily)

• Fraser and Neave Holdings Bhd’s (F&N) 1QFY18 net profit declined 16.0% Y.o.Y to RM106.8 mln, from RM127.3 mln, mainly due to higher input costs in both its Malaysian and Thai operations. Meanwhile, revenue for the quarter also declined marginally by about 2.0% Y.o.Y to RM1.07 bln, from RM1.09 bln.

• The group’s Malaysian F&B segment's operating profit slipped 40.0% ( excluding a one-off item) due to higher input costs which it is expected to ease from 2Q onwards, and lower volume. The decline was, however, partly offset by operational cost savings and lower overheads. (The Star Online)
• Talam Transform Bhd has aborted its plan to sell its 85.0% shareholding in its Chinese unit that is involved in hotel operations and management in Jilin Province, China following the failure of the purchaser to obtain approval from Jilin's Trade and Industry Bureau on the proposed deal.
• Under the plan, Talam was to sell its stake in Jilin Province Maxcourt Hotel Ltd (JPMH), which is principally involved in the operation and management of the now defunct Maxcourt Hotel, for RMB84.7 mln. (The Edge Daily)
• Gadang Holdings Bhd is buying two parcels of freehold land totalling 78.0 ac. in Pontian, Johor from GP Views Development Sdn Bhd — a private company owned by Tropicana Corp Bhd founder Tan Sri Danny Tan Chee Sing and his family — for RM149.0 mln cash. The group will fund the acquisition via a combination of internal funds and/or bank borrowings. (The Edge Daily)
• Sunway Real Estate Investment Trust’s (Sunway REIT) 2QFY18 net property income (NPI) grew 10.0% Y.o.Y to RM103.4 mln, mainly boosted by higher revenue from its hotel segment, while revenue added 11.5% Y.o.Y to RM141.5 mln, from RM126.9 mln. The group has proposed an income distribution per unit (DPU) of 2.4 sen, payable on 8th March this year.

• Meanwhile, 1HFY18 NPI grew 12.7% Y.o.Y to RM214.4 mln (from RM190.1 mln), in-tandem with a 10.5% Y.o.Y growth in revenue to RM282.6 mln. (The Star Online)

• The Inland Revenue Board (IRB) has served a winding-up petition on PJBumi Bhd's wholly-owned subsidiary, PJBumi Composites Sdn Bhd (PJBC), over unpaid income tax. The aforementioned claim was for the outstanding income tax from 1998 to 2004, with the IRB claiming RM2.1 mln in accrued balance as at 21st August, 2017.
• PJBumi had negotiated with IRB on a monthly instalment basis since 2014 and continued with the instalment payment until early 2017 due to weak cashflow. (The Edge Daily)
• Ni Hsin Resources Bhd has terminated its plans to fabricate and supply scaffolding, materials and accessories to Protection Rigging Access Services Sdn Bhd (PRA) after the Memorandum of Understanding (MoU), signed on 2nd ZNovember 2017, has lapsed and ceased to have force and effect. (The Edge Daily)
• Elevator and busduct systems maker, Eita Resources Bhd was awarded six contracts for the replacement of primary and ancillary equipment across the country worth an accumulated RM24.8 mln from Tenaga Nasional Bhd (TNB). The contracts were awarded to its 60.0%-owned unit Transsystem Continental Sdn Bhd. (The Edge Daily)

Source: Mplus Research - 7 Feb 2018