Weakness To Prevail

• Despite opening in red today, the FBM KLCI (+0.3%) pared earlier losses and closed higher, lifted by bargain-hunting activities in selected large cap stocks. The lower liners, however, continued to spiral downwards as the FBM Small Cap (-0.9%) extended its losses for the third straight day. Meanwhile, the broader market closed mixed on Thursday.

• Market breadth was negative still as losers outrun the winners on a ratio of 648-to-361 stocks. Traded volumes, however, increased by 14.8% to 3.39 bln shares amid selling pressure in the lower liners.

• Top gainers on the blue-chip gauge include Genting (+27.0 sen), Kuala Lumpur Kepong (+26.0 sen), Sime Darby Plantation (+15.0 sen) and IHH Healthcare (+9.0 sen). PPB Group also rose 36.0 sen after posting upbeat quarterly results. Similarly, Panasonic Manufacturing (+RM1.18), Aeon Credit Service (+38.0 sen), Hong Leong Industries (+34.0 sen), Carlsberg (+30.0 sen) and Lotte Chemical Titan (+28.0 sen) outperformed its peers in the broader market.

• On the downside, BAT (-62.0 sen), UMW Holdings (-48.0 sen), Ajinomoto (-36.0 sen), Hengyuan Refining (-36.0 sen) and Globetronics (-30.0 sen) retreated. Meanwhile, Hong Leong-affiliated counters like Hong Leong Bank (-52.0 sen) and Hong Leong Financial Group (- 10.0 sen) weighed on the key-index, followed by other blue chips like Nestle (- RM5.00), Petronas Gas (-18.0 sen) and Telekom Malaysia (-7.0 sen).

• Japanese equities slipped further into the negative territory on Thursday, as the Nikkei closed 1.6% lower to 21,724.5 points. The Shanghai Composite index and the Hang Seng, however, rallied 0.7% and 0.4% respectively, on ebbing fears of aggressive interest rate hikes as investors digested fresh economic data from China. ASEAN stockmarkets were mostly negative at Thursday’s closing bell.
• U.S. stocks finished on a softer footing for the third consecutive session after the White House announced that it would impose import tariffs on steel and aluminium, sparking concerns of potential trade war. The Dow extended its losses for three days in a row, closing lower by 1.7%. Meanwhile, on the broader market the S&P 500 and Nasdaq also lost 1.3% each.
• European benchmark bourses took a beating on escalating fears of rising interest rates, which will potentially hit corporate bottomline. The weakness in ad giant WPP (-8.2%) dragged the FTSE (- 0.8%) lower, after the former guided a weaker outlook for 2018 while the DAX (- 2.0%) and CAC (-1.1%) nosedived amid mixed corporate earnings.

THE DAY AHEAD

• Although the FBM KLCI managed to buck the negative global equity trend yesterday, the underlying market undertone was largely on the weak side, as evidenced by the negative market breadth, despite the onset of the liberalised transaction fees for the purchase of Mid-Small Cap stocks.

• With global equities remaining overwhelmingly negative, we think stocks on Bursa Malaysia will also head lower to end the week. As it is, local institutions have been providing support, but with foreign selling likely to escalate, the downside risk has perked up and will affect the key index stocks, in our view.

• We think the FBM KLCI could head back to the 1,850 support level amid the potentially increased profit taking activities and if it gives way, the next supports are placed at the 1,830-1,840 levels. The 1,870-1,880 levels remain the main resistances.
• Sentiments on the lower liners are broader market shares are likely to stay subdued with the lack of fresh leads amid the generally cautious market undertone that will keep more retail players on the sidelines for now, despite the cheaper transaction cost on many of the second and third liner stocks.

COMPANY UPDATE

• AWC Bhd is planning to diversify its existing engineering services business to include rail-related works via the acquisition of a 60.0% equity stake in Trackwork & Supplies Sdn Bhd for RM43.5 mln. The latter’s principal activities involved supplying track materials and rolling stock, maintenance of railway tracks, supplying and commissioning of track tools, equipment and machineries, as well as supplying of depot equipment, tools and track diagnostics and monitoring systems.

• To this end, the group has inked a conditional share sale agreement with Goh Poey Hong, Chong Kim Loong, Goh Tse Woei, Kong Keat Voon, Chong Chong Hong, Lim Huey Yih and Shaun Chan Thiam Eng for the proposed acquisition. About RM20.0 mln of the total cost will be paid in cash, while the remaining amount will be satisfied via the issuance of new AWC shares in tranches.

• The contract also comes with a net profit guarantee of RM20.0 mln for FY18 and FY19, while a cumulative number of consideration shares worth RM12.0 mln will be withheld initially as a pledge for the aforementioned profit guarantee.

• The proposed diversification could reduce the group’s reliance on its IFM business and AWC is planning to finance the proposed acquisition via internal funds and/or bank borrowings, which is expected to be completed by the second quarter of 2Q2018.

Comments

• We view the proposed acquisition as positive as it will strengthened AWC’s earnings visibility in the long run, although we do not foresee a significant bump to bottomline in the near term due to dilution of a larger share base, following the issuance of new AWC shares to the sellers of Trackwork.

• For now, we keep our earnings forecast unchangedas our analysis is pending and we maintain our BUY recommendation on AWC with a target price of RM0.95. We continue to arrive at our target price by ascribing a target PER of 13.0x on FY19's EPS of 7.3 sen (all unchanged). Our target PER is discounted to AWC’s nearest competitor, UEM Edgenta Bhd due to the former’s smaller market capitalisation.

COMPANY BRIEF

• Shares of Daya Materials Bhd (DMB) has been classified as a Practice Note 17 (PN17) issuer after its shareholders’ equity fell to RM19.1 mln on a consolidated basis, which was less than RM40.0 mln minimum and represents less than 25.0% of its issued capital.

• Under the PN17 status, the company has 12 months to submit a regularisation plan to the Securities Commission (SC) if the plan will result in a significant change in the business direction or policy of DMB. If Daya Materials fails to regularise its condition, it will be delisted from Bursa Malaysia. (The Star Online)

• Vsolar Group Bhd and Universiti Teknologi Malaysia (UTM) mutually terminated their joint venture to develop solar energy facilities due to the poor rates of returns. Back on 11th April 2017, the company announced that the JV – in which it would hold 80.0% and UTM 20.0%, would develop the facilities with a capacity of up to 30 MW. The JV was also to undertake research and development on solar energy generation technology and solar plant installation and construction design. The project was to have been built on a site of about 20 ac. for every 10 MW to be identified and provided by UTM. (The Star Online)

• Handal Resources Bhd, has received a letter of award from Petronas Carigali Sdn Bhd for an umbrella contract for the provision of hydraulic workover units. The contract commences from February 2018 for a period of three years, with a one-year extension option. (Bernama)

• AirAsia Bhd is divesting its aircraft leasing business to BBAM Ltd Partnership for US$1.19 bln (RM4.62 bln), at an enterprise value of US$2.85 bln (RM11.1 bln). AirAsia is expected to recognise a gain on sale of approximately RM967.1 mln, with part of the proceeds to be distributed as special dividends. (The Edge Daily)

• SMRT Holdings Bhd and Creador II LLC have mutually terminated their collaboration agreement in relation to the proposed conditional takeover of Asiamet Education Group Bhd, whose holding company is Minda Global Bhd, without giving any reason.

• Recall that in January 2015, SMRT and Creador proposed to acquire a 30.8% stake in Asiamet (then known as Masterskill Education Group Bhd) and subsequently launched a takeover for the remaining shares in Asiamet, with the intention of turning it around in one year. Asiamet has been loss-making in the past two years. (The Edge Daily)

• Tenaga Nasional Bhd (TNB) has acquired an 80.0% stake in two United Kingdom-based renewable energy (RE) companies, GVO Wind Ltd and Bluemerang Capital Ltd, for £77.4 mln (RM418.1 mln), in line with its RE expansion strategy to be among the top global utility players by 2025.

• The acquired companies have a combined 53 operational onshore medium wind turbines with a total combined capacity of 26.1 MW and the acquisition will increase TNB's total RE portfolio capacity to about 280.0 MW. (The Edge Daily)

• GD Express Carrier Bhd (GDex) has proposed to acquire two companies that make up MBE Malaysia, the master franchise holder of MBE Worldwide SPA in the country, for RM5.5 mln cash. GDex will use internally-generated funds to acquire the retail delivery firm, which has 92 operating outlets in the country, of which 91 are franchisees. (The Edge Daily)

• Uzma Bhd has received an umbrella contract for a period of 3 years and an option for a further one year from Petronas Carigali for the provision of 150K, 225K and 460K drilling of hydraulic workover unit. The contract is conditional upon its wholly-owned unit Uzma Engineering Sdn Bhd (UESB) obtaining and maintaining a valid licence with Petronas and depending on work orders to be issued to UESB from time to time at the discretion of Petronas Carigali. (The Edge Daily)
• Green Ocean Corp Bhd has entered into a RM70.0 mln deal to supply crude palm kernel oil-mass balance to Palm Oleo (Klang) Sdn Bhd. The agreement, inked by Green Ocean's wholly-owned unit Ace Edible Oil Industries Sdn Bhd, is valid till 31st Dec 2018. (The Edge Daily)
• Pasukhas Group Bhd is buying a 60.0% stake in an Indonesian coal trading company, PT Berkah Bumi Leluhur for 3.30 bln rupiah (RM1.0 mln). The acquisition of PT Berkah will create opportunities for it to expand its coal trading business, which is synergistic with its concessionaire business. (The Edge Daily)

Source: Mplus Research - 2 Mar 2018