Weak Sentiments to Prevail

• The FBM KLCI tanked slightly more than 40.0 points, closing in the red on fears of weaker economic growth amid fiscal policy reforms and the revelation of a significantly higher national debt of RM1.0 trillion, or 65% of GDP. Meanwhile, the lower liners showed no signs of recovery, falling further into the negative territory amid a mostly negative broader market, with the exception of the Technology (+0.1%) and Mining (+2.2%) sectors.

• Market breadth was still tepid as decliners more than tripled the advancers on Wednesday. Traded volumes also slumped by 14.2% to 2.69 bln shares on the riskier growth outlook and continued diplomatic uncertainties.

• Telecom giant Axiata (-64.0 sen) took a beating after the group posted a net loss of RM147.4 mln in 1Q2018. Other keyindex underperformers were Petronas Dagangan (-48.0 sen), CIMB (-43.0 sen), Tenaga Nasional (-40.0 sen) and MISC (- 38.0 sen). On the broader market, Dutch Lady (-96.0 sen), Panasonic Manufacturing (-68.0 sen), Ajinomoto (- 64.0 sen), Time Dotcom (-39.0 sen) and Carlsberg (-32.0 sen) retreated.

• On the upside, DRB-Hicom gained 28.0 sen after Prime Minister Tun Dr Mahathir Mohamad dismissed any government plans to re-acquire a stake in Proton from China’s Zhejiang Geely. Hong Leong Industries (+14.0 sen), Integrated Logistics (+14.0 sen), BIMB Holdings (+13.0 sen) and Malaysian Pacific Industries (+12.0 sen), meanwhile, also closed in the green. The only two bluechips which opposed the generally bearish sentiment was KLCC (+14.0 sen) and Hong Leong Bank (+10.0 sen).

• Asian equities were splashed in red on Wednesday as geopolitical uncertainties remained in the spotlight, pressuring sentiments. The Nikkei (-1.2%) was hit by weak economic data and the stronger Yen. Hong Kong’s Hang Seng Index and the Shanghai Composite, meanwhile, declined 1.8% and 1.4% respectively - led by losses in coal miners after Chinese miners were ordered by the government to decrease prices in a bid to control rising prices. Almost all ASEAN stockmarkets closed lower on Wednesday.

• U.S. equities clawed back earlier losses, as investors cheered a more dovish Federal Reserve minutes, calming fears of over-tightening and a sudden spike in borrowing costs. The Dow added 0.2% to 24,886.8 points – led by the strength in tech giant Intel (+1.4%), although financial-related stocks capped gains. On the broader market, the S&P 500 rose 0.3%, supported by gains in Tiffany after it posted better-than-expected earnings. The Nasdaq also added 0.6% to close above the 7,400.0 psychological mark.

• Earlier, European stockmarkets was beaten down by weak manufacturing data, raising concerns of a slowdown in the region’s economy. The FTSE fell 1.1% despite lower-than-expected inflation figures. Meanwhile, the DAX (-1.5%) and the CAC (-1.3%) also retreated amid ongoing political uncertainty in the Italian government.

The Day Ahead

• Malaysian stocks succumbed to further selling pressure as the combination of unsettled global geopolitical and trade issues, coupled with heightened uncertainties over the 1 Malaysia Development Bhd status that may necessitate government assistance to meet its debt obligations. A bailout could further undermine the country’s fiscal position and this is leaving the market in a more precarious mode.

• Even after yesterday’s steep falls, a rebound may not be forthcoming as investor sentiment continues to take a beating. At the same time, foreign selling remains unabated, thus increasing the selling pressure on the index heavyweights and this trend is likely to persist for longer. Hence, we think the 1,800 points level is likely to be re-visited and if it gives way, the FBM KLCI could slip to the 1,780 level. We do not anticipate a meaningful rebound for now and any rebound is likely to be mild, limited to the 1,815-1,820 levels.

• There is also little reprieve for the broader market shares as the weak sentiments, coupled with the generally weaker corporate results released thus far is likely to leave more retail players on the sidelines. With the fading interest, the downside pressure on the lower liners will continue to dampen their share price performance over the near term.

MACRO BRIEF

• Malaysia's inflation, as measured by the consumer price index (CPI), increased 1.4% Y.o.Y in April 2018 on costlier food and non-alcoholic beverages, besides higher expenses at restaurants and hotels.

• Among the major groups that recorded increases were food & non-alcoholic beverages (+2.6% Y.o.Y), restaurants and hotels (+2.2% Y.o.Y), health (+2.1% Y.o.Y), housing, water, electricity, gas & other fuels (+2.0% Y.o.Y), furnishings, household equipment & routine household maintenance (+1.8% Y.o.Y) and education (+1.1% Y.o.Y). Meanwhile, the CPI for the period January-April 2018 increased 1.7% Y.o.Y. (The Edge Daily)

COMPANY UPDATE

• Econpile Holdings Bhd’s 3QFY18 net profit added 7.3% Y.o.Y to RM23.7 mln on the back of higher recognition from its increased orderbook, coupled with lower effective tax rate of 15.8% vs. 30.9% recorded in the previous corresponding quarter. Revenue for the quarter gained 26.4% Y.o.Y to RM205.0 mln.

• For 9MFY18, cumulative net profit improved 12.9% Y.o.Y to RM67.6 mln. Revenue for the period rose 26.4% Y.o.Y to RM536.1 mln. The reported earnings fell short of our expectations, amounting to only 70.1% of our FY18 estimate of RM96.5 mln. The reported revenue, however, came within our expectations, amounting to 74.5% of our full-year forecast of RM719.6 mln. The variance in its bottom was mainly due increase in the recognition of infrastructure projects that yields lower margins.

Comments

• As the reported earnings came below our expectations, we trimmed our earnings forecast by 5.5% and 9.6% to RM91.2 mln and RM92.1 mln in FY18 and FY19 respectively to reflect the lower margins from higher contribution of piling and foundation works for infrastructure projects, coupled with slower orderbook replenishment for FY19 to RM400.0 mln (from RM600.0 mln).

• However, given that its share price has fallen 45.0% YTD, we think that its valuation are attractive at the current level as the group is trading at prospective PERs of 9.7x and 9.6x for 2018 and 2019 respectively.

• Consequently, we upgrade our recommendation on Econpile to a BUY (from HOLD), but with a lower target price at RM0.90 (from RM1.15) by ascribing a lower target PER of 13.0x (from 15.0x) to its revised FY19 EPS of 6.8 sen. The lower target PER is to reflect the general weakness in the construction industry, which is also in line with its peers with similar market capitalisation.

COMPANY BRIEF

• DBE Gurney Resources Bhd is expanding its Harumi brand of restaurants to Thailand via collaboration with a local partner. DBE is collaborating with Farmmesh Foods Co Ltd to run the chain of quick service restaurants in Thailand operating under the Harumi banner. DBE will hold a 30.0% stake in the new joint venture with the remainder held by Farmmesh. The proposed initial paid-up capital of the joint venture is about RM124,000. (The Star Online)

• MSM Malaysia Bhd’s 1Q2018 net profit stood at RM15.8 mln vs. a net loss of RM34.6 mln in the previous corresponding quarter, due to lower raw material costs and favourable foreign exchange rate. Revenue for the quarter, however, fell 14.2% Y.o.Y to RM549.1 mln. (The Star Online)

• Boustead Plantations Bhd’s 1Q2018 net profit sank 82.2% Y.o.Y to RM5.3 mln as crude palm oil prices were significantly lower from a year earlier. Revenue for the quarter fell 18.2% Y.o.Y to RM154.6 mln. A first interim dividend of 2.5 sen per share, payable on 27th June 2018 was declared. (The Star Online)

• Malakoff Corporation Bhd’s 1Q2018 net profit fell 46.4% Y.o.Y to RM52.9 mln, primarily attributed to lower contribution from Segari Energy Ventures (SEV) following the reduction in tariff under the extended power purchase agreement (PPA) effective from 1st July 2017 as well as lower fuel margin recorded at Tanjung Bin Power Sdn Bhd and Tanjung Bin Energy Sdn Bhd coal plants. Revenue for the quarter contracted 10.1% Y.o.Y to RM1.60 bln. (The Star Online)

• Axiata Group Bhd's subsidiary, edotco Group Sdn Bhd, is eyeing two substantial acquisitions to achieve its target of becoming the world's fifth largest independent tower company by 2021. Edotco is set to become the world's eighth largest independent tower company in the next one or two months, following the completion of an acquisition in Pakistan. Edotco currently operates a portfolio of 40,000 towers across Malaysia, Sri Lanka, Bangladesh, Cambodia, Pakistan and Myanmar. (Bernama)

• Sunway Construction Group Bhd (SunCon) has bagged two construction jobs worth a total of RM69.5 mln. SunCon’s was awarded a RM23.2 mln piling works contract by Tenaga Nasional Bhd (TNB). The second contract worth RM46.3 mln was awarded to SCSB’s subsidiary, Sunway Geotechnics (M) Sdn Bhd by Cergas Murni Sdn Bhd, involving piling works for the Bukit Bintang City Centre (BBCC) mixed development project. (The Edge Daily)

• TSH Resources Bhd's 1Q2018 net profit fell 39.1% Y.o.Y to RM17.8 mln, owing to lower CPO and PK prices. Revenue for the quarter decreased 17.5% Y.o.Y to RM904.4 mln.(The Edge Daily)

• MBM Resources Bhd's (MBMR) 1Q2018 net profit jumped 68.9% Y.o.Y to RM32.8 mln due to improved sales from both motor trading and automotive parts manufacturing divisions, as well as higher profits from the associates and joint venture entities. Revenue for the quarter grew 10.9% Y.o.Y to RM463.5 mln. (The Edge Daily)

• The Securities Commission Malaysia (SC) has reprimanded Khee San Bhd and its Directors for failing to comply with approved accounting standards within the financial years ended 30th June 2015 and 30th June 2016. Khee San said given the seriousness of the breach, the SC has imposed a total fine of RM1.9 mln on the Directors.

• Two existing Directors of Khee San, who are also audit committee members, Leslie Looi Meng and Huang Yan Teo, as well as ex-Director Datuk Seri Liew Kuek Hin, who at the material time was a member of the audit committee, were fined RM392,000 each. Two other existing Directors, Datuk Seri Liew Yew Chung and Liew Yet Mei were fined RM343,000 each. (The Edge Daily)

• Jaya Tiasa Holdings Bhd’s 3QFY18 net loss stood at RM38.4 mln vs. a net profit of RM28.0 mln in the previous corresponding quarter due to lower output at both its oil palm and timber divisions. Revenue for the quarter fell 40.3% Y.o.Y to RM160.2 mln.

• For 9MFY18, cumulative net profit tumbled 90.9% Y.o.Y to RM5.9 mln. Revenue for the period fell 11.0% Y.o.Y to RM660.0 mln. (The Edge Daily)

• Perak Corporation Bhd’s external auditors have issued a statement of material uncertainty over the company's ability to function as a going concern. The group incurred a net loss of RM340.6 mln, whilst the group's current liabilities exceeded its current assets by RM158.5 mln in 2017.
• The auditors had also highlighted an impairment test which resulted in a loss of RM167.2 mln as an area of audit focus due to the significance of the amount and subjectivity involved. This is related to property, plant and equipment of a subsidiary operating a theme park, where commencement of full operation had been delayed numerous times. (The Edge Daily)  

Source: Mplus Research - 24 May 2018