A Dead Cat’s Bounce In The Offing

• Tracking the weakness on Wall Street overnight, coupled with the heightened foreign funds outflow, the FBM KLCI (- 3.2%) suffered its worst daily decline in history yesterday as the key index closed at its lowest level since December 2017. The lower liners – the FBM Small Cap (- 3.4%), FBM Fledgling (-2.3%) and FBM ACE (-3.1%) all plunged, while only the REITS sector (+0.4%) outperformed the negative broader market.

• Market breadth was overwhelmingly negative as decliners hammered advancers on a ratio of 995-to-148 stocks. Traded volumes, however, rose 64.9% to 3.60 bln shares as the selling activities intensified.

• Almost all the key index components were in the red, dragged down by Public Bank (-92.0 sen), followed by Petronas Gas (-68.0 sen), Tenaga (-64.0 sen), MISC (-44.0 sen) and Maybank (-43.0 sen). Amongst the biggest decliners on the broader market were Dutch Lady (- RM1.88), Panasonic (-84.0 sen) and Muda Holdings (-82.0 sen). Construction giants like Gamuda (-95.0 sen) and George Kent (-30.0 sen) sank after the proposed Klang Valley Mass Rapid Transit Line 3 project was scrapped.

• In contrast, notable gainers on the broader market were Far East Holdings (+50.0 sen), Kossan (+49.0 sen), BAT (+22.0 sen), Gas Malaysia (+22.0 sen) and Lingkaran Trans Kota (+18.0 sen). Meanwhile, Petronas Dagangan (+8.0 sen) was the sole winner on the big board.

• Asian benchmark indices extended their losses yesterday amid the political instability in Italy and Spain. The Nikkei (- 1.5%) extended its losses. The Hang Seng Index declined 1.4%, while the Shanghai Composite (-2.5%) recorded its sixth straight session of decline to close at its lowest level since May 2017 after the U.S. plans to impose tariffs on US$50.00 bln worth of Chinese good. ASEAN indices, meanwhile, was splashed mostly in red yesterday.

• U.S. stockmarkets rebounded as the Dow (+1.2%) advanced overnight as concerns over Italy’s political unrest faded, coupled with the recovery in crude oil prices. On the broader market, the S&P 500 rose 1.3% with all 11 major sectors finishing in the positive territory, while the Nasdaq (+0.9%) recovered all its previous session’s losses.

• European benchmark indices mostly higher as the FTSE and DAX chalked in 0.8% and 0.9% gains respectively, rebounding from their previous session’s sharp losses. The CAC, however, fell 0.2% to record its sixth straight session of losses despite recouping most of its intraday losses.

The Day Ahead

• Malaysian stocks continue to reel from the heightened uncertainties over the government’s fiscal outlook and were further compounded by the selldown on construction stocks with further rollback of large rail infrastructure projects that was earlier seen as the big catalyst for the sector.

• Despite the steep falls yesterday that cumulated in the key index falling nearly 7.5% since GE14 and a YTD decline of 4.3%, we think the general market environment is still frail as there remains little certainty in the government’s fiscal condition with the rollback of the GST and the delayed re-instatement of the SST to 4Q2018. The fiscal shortfall could result in a larger budget deficit, despite the potentially higher oil revenues and this could lead to the new government implementing an austerity drive that could also result in further cuts to the future development funds.

• Over the near term, however, we think there could be a slight reprieve after yesterday’s steep fall as mild bargain hunting activities could emerge amid a recovery of many key global indices overnight. Still, we think the reprieve could be measured as there is still substantive selling by foreign funds that could tempter the upsides. We think the recovery could lead the key index to around the 1,730-1,750 levels for now. The main support, meanwhile, is at the 1,700 points level.

• The lower liners and broader market shares have also endured a wretched spell amid the ongoing volatility and uncertainties, which we think will continue due to the lack of buying interest as most retail players will stay defensive and opt to stay on the sidelines until there is further clarity in the market’s direction.

Company Update

• Kimlun Corporation Bhd’s 1Q2018 net profit declined 17.8% Y.o.Y to RM12.6 mln, mainly due to higher depreciation charges, higher finance cost and the inclusion of a RM1.3 mln gain from disposal of property, plant and equipment in the previous corresponding quarter. Revenue for the quarter, however, added 29.8% Y.o.Y to RM220.9 mln.

• The reported earnings came below our expectations, accounting to only 16.5% of our previous full year estimated net profit of RM76.6 mln. Meanwhile, the reported revenue also came below our expectation, accounting to 21.5% of our full year revenue forecast of RM1.03 bln. The variance in the earnings was due to higher depreciation charges coupled with lower margins recorded in the manufacturing segment.

Comments

• With the reported earnings coming below our estimates, we trimmed our earnings forecast by 15.3% and 15.4% to RM64.9 mln and RM64.8 mln for 2018 and 2019 respectivel, to account for the lower orderbook replenishment coupled with the decline in manufacturing orders. Consequently, we downgrade our recommendation on Kimlun to HOLD (from BUY) with a lower target price of RM1.85 (from RM2.10).

• Our target price is derived from ascribing an lower target PER of 8.0x (from 11.0x) to its 2018 fully diluted construction earnings to reflect the slowdown in the general construction sector and PER of 6.0x (unchanged) to its fully diluted manufacturing earnings, while its property development segment’s valuation remains unchanged at 0.6x its BV due to its relatively small development projects.

• Mitrajaya Holdings Bhd’s 1Q2018 net profit slipped 33.2% Y.o.Y to RM19.2 mln, dragged down lower contribution from the construction segment arising from a provision for cost overrun for the RAPID project and lower property sales in both the local market and in South Africa. Revenue for the quarter declined 9.0% Y.o.Y to RM265.1 mln.

• The reported earnings came slightly below our expectations, amounting to 23.5% of our 2018 net profit forecast of RM81.7 mln, while revenue for the quarter also came slightly below our expectations, accounting to 23.2% of our RM1.14 bln forecast. The difference in its reported earnings is mainly due to lower contribution from the construction segment.

Comments

• We trimmed our earnings forecast for 2018 and 2019 by 3.4% and 2.3% to RM78.9 mln and RM79.9 mln respectively to account for the lower construction orderbook replenishment prospects amid the new government’s impending austerity drive. Consequently, we downgrade Mitrajaya to a HOLD (from BUY) recommendation with a lower target price of RM0.54 (from RM0.75).

• Our target price was derived from sumof-parts valuation as we ascribed a lower target PER of 8.0x (from 11.0x) to its fully diluted 2018 fully diluted construction earnings, while its local and overseas property development units are valued at an unchanged 0.8x their respective book values.

• OCK’s 1Q2018 net profit climbed 8.6% Y.o.Y to RM5.1 mln, helped by a lower effective tax rate of 20.4% vs. 26.3% recorded in previous corresponding quarter. Revenue for the quarter, however, fell 8.5% Y.o.Y to RM97.5 mln on lower contribution from the telecommunication network services segment.

• Although the reported earnings and revenue only amounted to 18.7% and 17.9% or our full year forecast at RM27.5 mln and RM545.3 mln respectively, we deem the aforementioned results to be in line as the first quarter results traditionally make up about 15.0%-20.0% of its full year earnings.

Comments

• With the 1Q2018’s results coming within our expectations, we leave our earnings forecast unchanged and we maintain our BUY recommendation on OCK with an unchanged target price of RM0.95.

• We adopt a sum-of-parts (SOP) approach as we valued its telecommunication network services and green energy & power solutions business segments on a discounted cash flow approach (key assumptions include a WACC of 9.0%, terminal growth rate of 1.5%) to reflect its ability to generate recurring revenues and steady earnings growth over the longer term. Meanwhile, we ascribe a 15.0x target PER to both its fully-diluted trading and mechanical & electrical engineering services businesses, based on their potential earnings contribution in 2018.

• Protasco Bhd’s 1Q2018 net loss stood at RM2.1 mln vs. a net profit of RM3.3 mln in the previous corresponding quarter, dragged down by losses in the construction, property development and education segments, coupled with higher finance cost. Revenue for the quarter, however, added 19.1% Y.o.Y to RM157.5 mln.

• The reported earnings fell short of our previous 2018 earnings forecast of RM37.4 mln, whilst the reported revenue also came below our expectations, amounting to 15.6% of our full year estimate of RM1.01 bln.

Comments

• With the reported earnings coming below our estimates, we slashed our earnings forecast by 22.5% and 13.4% to RM29.0 mln and RM32.4 mln for 2018 and 2019 respectively to reflect the lower construction orderbook replenishment and slower execution of its projects in the construction segment. However, we maintain our HOLD recommendation on Protasco but with a lower target price at RM0.62 (from RM1.10).

• We arrive our target price on a sum-ofparts basis by ascribing a lower target PER of 8.0x (from 11.0x) to its 2018 fully diluted construction earnings due to the uncertainties surrounding the general construction sector as well as a target PER of 8.0x (unchanged) to its fully diluted 2018 concession and engineering services’ earnings. Its education and trading units’ valuations remain pegged at target PERs of 6.0x respectively due to their smaller scale businesses, while its property development division’s valuation is derived from ascribing an unchanged 0.6x to its BV.

Company Brief

• Guan Chong Bhd‘s 1Q2018 net profit surge seven-fold to RM39.3 mln, from RM5.8 mln a year earlier on improved margins, despite revenue declining 17.7% Y.o.Y to RM519.7 mln, from RM631.3 mln in the previous corresponding period.

• The group expects 2018 to be less volatile following strong demand growth for chocolates. Guan Chong will also continue to focus on efforts to explore new markets for its wide range of cocoa ingredients, optimise production according to market conditions and expand overall grinding capacity. (The Edge Daily)

• BIMB Holdings Bhd’s (BHB) posted a 13.9% Y.o.Y growth in 1Q2018 net profit to RM172.1 mln, in-tandem with the increase in the base rate and base financing rate by 25 basis points in February this year. Consequently, revenue grew 8.7% Y.o.Y to RM999.4 mln, from RM919.6 mln previously. The positive bottomline was also attributed to higher net financing assets.

• The bank’s capital position continued to be healthy as reflected by its total capital ratio of 16.9%, compared with 14.9% a year ago. (The Star Online)

• Hong Leong Capital Bhd‘s 1Q2018 net profit narrowed by 17.0% Y.o.Y to RM21.4 mln, mainly due to lower noninterest, albeit partially offset by lower overhead expenses. Revenue also fell by about 10.0% Y.o.Y to RM72.7 mln, from RM81.6 mln in 1Q2017. (The Edge Daily)

• LBS Bina Group Bhd and timber products manufacturer NWP Holdings Bhd have agreed to mutually terminate a joint-development agreement to transform the Zhuhai International Circuit in China, in which LBS has a 60.0% stake. (The Edge Daily)

• Former Lembaga Tabung Haji Chairman, Datuk Seri Abdul Azeez Abdul Rahim has tendered his resignation as the Non-Independent and Non-Executive Director of airline food caterer, Brahim's Holdings Bhd. (The Edge Daily)

• CIMB Group Holdings Bhd's 1Q2018 net profit rose 10.6% Y.o.Y to RM1.31 bln, in comparison to RM1.18 bln a year ago, due to ongoing cost management, lower provisions and a gain from the disposal of its 50.0% equity stake in CIMB Securities International Pte Ltd to China Galaxy International Financial Holdings Ltd. Revenue, however, slipped marginally by 1.3% Y.o.Y to RM4.30 bln, from RM4.36 bln previously. (The Star Online)

• Hong Leong Bank Bhd (HLB) posted a 21.2% Y.o.Y jump in 3QFY18 net profit to RM690.0 mln, from RM569.5 mln a year ago, boosted by higher net income, lower allowance for impairment losses on loans, advances and financing, and higher share of profit from associates, despite higher operating expenses. Revenue, meanwhile, also rose by 7.8% Y.o.Y to RM3.66 bln vs RM3.40 bln last year. (The Star Online)

• Malaysian Resources Corp Bhd's (MRCB) 1Q2018 net profit more than doubled to RM21.5 mln, from RM8.6 mln in the previous year, on the back of a stronger performance from the engineering, construction and environment division, although revenue dropped 18.0% Y.o.Y to RM427.6 mln, from RM519.84 mln a year ago. (The Star Online)

• Lingkaran Trans Kota Holdings Bhd’s (Litrak) 4QFY18 net profit added 6.3% Y.o.Y to RM52.8 mln, from RM49.7 mln a year earlier, driven by lower maintenance costs and reduced losses in its associate company, Sistem Penyuraian Trafik KL Barat Holdings Sdn Bhd. Quarterly revenue, however, inched lower by 2.5% Y.o.Y to RM127.9 mln, from RM131.2 mln a year ago. (The Edge Daily)

• My E.G. Services Bhd‘s 3QFY18 net profit gained 8.6% Y.o.Y to RM58.6 mln, compared to RM53.9 mln in the same quarter last year, thanks to higher transaction volumes for its foreign worker services from online renewal of foreign workers’ permits (FWP), foreign workers rehiring programme services (FWR services) and foreign workers’ insurance from both FWP and FWR services. Revenue for 3QFY18 also grew by 12.4% Y.o.Y to RM111.5 mln vs. RM99.2 mln in 3QFY17. (The Star Online)

• Malayan Flour Mills Bhd (MFM) saw its 1Q2018 net profit plunged 93.6% Y.o.Y to RM1.6 mln, from RM24.9 mln last year, dragged down by higher wheat costs in its flour and grains trading segment, coupled with lower sales volume and price of live birds for its poultry integration segment. Revenue, however, only decreased by 6.7% Y.o.Y to RM563.8 mln, from RM604.2 mln in the same period in 2017. (The Edge Daily)  

Source: Mplus Research - 31 May 2018