Confidence Dented

• The FBM KLCI gave up its earlier gains and inched lower, weighed down by foreign institutional investors’ portfolio rebalancing activities. All the lower liners retreated, although the majority of the broader market shares finished in the positive territory.

• Market breadth turned negative as decliners tipped the scale on advancers by 62 stocks, while traded volumes corrected 34.5% to 4.31 bln shares, on easing post-election euphoria.

• Amongst the heavyweights decliners were Nestle (-RM1.60) on mild profittaking activities, followed by Public Bank (-80.0 sen), Genting (-20.0 sen), Astro (- 11.0 sen) and Press Metal (-11.0 sen). On the same note, companies with affiliation to the previous government like George Kent (-82.0 sen) and My E.G. (-54.0 sen) also declined, alongside KESM Industries (-64.0 sen), Hengyuan Refining (-42.0 sen) and Petron Malaysia (-31.0 sen).

• On the bright side, O&G services provider Dialog (+25.0 sen) rallied, together with other broader market constituents like Fraser & Neave (+50.0 sen), Amway (+34.0 sen), PMB Technology (+30.0 sen) and Gamuda (+29.0 sen). Leaders of the Main Board winners were banking giants like Hong Leong Bank (+36.0 sen), CIMB (+20.0 sen) and RHB Bank (+18.0 sen). Maxis and KLCC also logged 23.0 sen) and 20.0 sen gains respectively.

• Key regional benchmark indices’ strength waned on Tuesday, closing mostly lower as sentiment turned cautious ahead of the second round of U.S.-China trade negotiations. The Nikkei snapped three consecutive sessions’ of gains to close 0.2% lower, albeit slightly supported by gains in banking shares while the Hang Seng Index also ended its six-day rally, with all of its sectors in the red. The Shanghai Composite (+0.6%), however, bucked the general downtrend as investors digested fresh Chinese economic data, as well as optimisms from the addition of more than 200 China A-shares into MSCI’s indexes from next month. ASEAN stockmarkets also closed mostly on a tepid tone at Tuesday’s close.

• U.S. equities ended its eight-day rally, following weaker-than-expected quarterly results from Home Depot and a continued strength in Treasury yields. The Dow lost 0.8% to 24,706.4 points, weighed down by Intel (-1.8%) and Caterpillar (-1.7%). On the broader market, the S&P 500 and the Nasdaq also fell 0.7% and 0.8% respectively.

• The DAX (-0.1%) extended its losses for the third-straight day despite paring sharp losses in the earlier session after Germany reported slower growth in the first quarter. The FTSE (+0.2%), meanwhile rallied boosted by a stronger Pound amid easing expectations of higher interest rates following mixed jobs data. The CAC also gained 0.2% on Tuesday.

The Day Ahead

• The incessant selling by foreign funds amounting to some RM1.53 bln over the past two sessions is an indication that they remain unconvinced of the new government’s fiscal and monetary plans to be introduced in due course. The main concern could be the fiscal shortfall if the GST is repealed and the fuel subsidies are re-introduced.

• Therefore, we think the selling by foreign funds could continue over the near term as they adjust their portfolios. Still, we think the downside pressure could be partly cushioned by the buying support from local institutions and this could allow the key index to find support around the 1,845 level, while the resistances are at the 1,850 and 1,855 levels.

• After a strong push over the past two sessions, we also see increased profit taking activities among the lower liners and broader market shares and this will increased the volatility of these stocks over the near term.

COMPANY UPDATE

• Hartalega Holdings Bhd’s 4QFY18 net profit (+30.4% Y.o.Y) jumped to RM116.6 mln compared to RM89.4 mln last year, mainly driven by higher sales volume and strong demand for nitrile gloves. Revenue, meanwhile, also gained 17.0% Y.o.Y to RM616.8 mln vs RM527.0 mln in 4QFY17. The group has also declared a second interim dividend of 2.0 sen per share, payable on 27th June 2018.

• Cumulatively, the group’s bottomline improved significantly by 55.3% Y.o.Y to RM439.4 mln, from RM283.0 mln a year ago, in-tandem with higher revenue (+32.0% Y.o.Y) contribution at RM2.41 bln vs RM1.82 bln in FY17, as well as a net forex gain of RM41.4 mln. The reported earnings came in broadly within our forecasts, accounting to 104.2% of our expected full year net profit of RM421.8 mln, although revenue was inline with our FY18 forecasts.

Comments

• Although the latest full year results were largely within our estimates, we tweaked our FY19 forecasts slightly to account for a potential dent in bottomline margins, in-view of rising fuel costs, gas tariffs and costs of levy payments for foreign workers, albeit partially offset by cost pass through mechanisms.

• Consequently, our revised FY19 net profit will stand at RM421.8 mln (- 1.3%), although revenue is envisaged to be marginally higher amid ongoing capacity expansion plans. Further, we introduce our FY20 net profit and revenue forecast of RM690.5 mln and RM3.74 bln respectively. Potential rerating could be in the horizon for Hartalega if US Dollars continue to growth in strength, amid rising U.S. interest rates.

• We maintain our HOLD recommendation on Hartalega with an unchanged target price of RM6.10 based on a higher target PER of 35.0x (from 34.5x) on the group’s FY19 EPS of 17.4 sen. The increase in target PER were in-line with the recent rally in the share prices of industry peers.

• Our target PER remains at a premium to its competitors premised on: (i) Hartalega’s solid position as the global market leader in the nitrile glove segment, (ii) superior operational efficiency in terms of production speed and the lower number of workers per glove output, (iii) consistent and high quality control standards, and (iv) solid fundamentals where it commands the highest net profit margin vs. its peers.

COMPANY BRIEF

• KKB Engineering Bhd has accepted a contract from Sapura Fabrications Sdn Bhd to construct the wellhead deck, piles and conductors. The letter of award was part of the Sapura Fabrications' engineering, procurement, construction, installation and commissioning (EPCIC) for the Pegaga development project (Mubadala Petroleum) in Block SK320, offshore waters of Sarawak.
• The undisclosed value of the subcontract has commenced work in April 2018. (The Star Online)
• Tenaga Nasional Bhd (TNB) will invest RM2.70 bln into the “Grid of the Future” technologies that help improve the grid’s reliability and efficiency. The RM2.70 bln is inclusive of the RM18.8 bln capital investment in transmission and distribution grid secured under the second Regulatory Period (2018-2020). (The Star Online) 
• Cahya Mata Sarawak Bhd’s (CMSB) 1Q2018 net profit surge 50.7% Y.o.Y to RM39.0 mln, largely due to turnaround in its 25.0% associate OM Materials (Sarawak) Sdn Bhd, which operates a ferrosilicon and manganese alloy smelting plant in the Samalaju Industrial Park in Sarawak. Revenue for the quarter increased 15.4% Y.o.Y to RM355.0 mln. (The Edge Daily) 
• Four Independent and Non-Executive directors of Utusan Melayu (Malaysia) Bhd have resigned as part of an overall restructuring  plan. The Umnocontrolled media group reported that the four directors who voluntarily resigned were the Group’s Chairman, Tan Sri Mohamad Fatmi Che Salleh, Datuk Seri Tengku Sariffuddin Tengku Ahmad (Press Secretary to former Prime Minister Datuk Seri Najib Razak), Jamalul Kiram Mohd Zakaria and Mohd Yusof Abu Othman. (The Edge Daily) 
• Media Prima Bhd’s Group Managing Editor for news and current affairs for its Media Prima Television Networks (MPTN), Datuk Seri Ashraf Abdullah, will step down effective 20th May 2018. Ashraf’s deputy, Datuk Manja Ismail will assume the duties left vacant by him. (The Edge Daily)

• Matrix Concepts Holdings Bhd is teaming up with an Indonesian consortium to jointly develop an Islamic financial district in Pantai Indah Kapuk 2, Jakarta, which will mark its first step in establishing a presence in Indonesia. It has entered into a Memorandum of Understanding with PT Bangun Kosambi Sukses and PT Nikko Sekuritas Indonesia for the joint development dubbed PIK 2 Sedayu Indo City. PIK 2 Sedayu Indo City will encompass 1,000 ha. site complete with residential houses, apartments, shopping centres, a light rail transit system and a stadium. (The Edge Daily)

• Enra Group Bhd has disposed of its 70.0% stake in property development firm, Landmark Zone Sdn Bhd (LZSB) for RM5.6 mln. The divestment plan will enable Enra to monetise its investment in LZSB and provide the company with funds to reinvest in other more earnings accretive opportunities and to meet working capital requirements. (The Edge Daily)

• Star Media Group Bhd will only look into a voluntary separation scheme (VSS) as a last option to its cost-cutting measures as the MCA-controlled media group intends to continue its cost reduction efforts started last year. There is a series of cost cutting measures being implemented. Some of the measures involve changes in management of printing plant operation. Star will focus on the digital space, which is Star Online, and the group will revamp its content and improve it and grow the revenue of its digital assets. (The Edge Daily)

• Southern Steel Bhd’s 3QFY18 net profit grew 64.0% Y.o.Y to RM52.3 mln due to higher sales volume. Revenue for the quarter added 43.2% Y.o.Y to RM953.4 mln. ? For 9MFY18, cumulative net profit jumped 100.2% Y.o.Y to RM175.6 mln. Revenue for the period rose 41.7% Y.o.Y to RM2.81 bln. An interim singletier dividend of 3.5 sen per share, payable on 13th June 2018, was declared. (The Edge Daily)  

Source: Mplus Research - 16 May 2018