Eyeing An Overdue Rebound

• The FBM KLCI (-0.02%) retreated for the fourth straight session after erasing all its intraday gains, dragged down by the eleventh hour selling pressure in selected index heavyweights yesterday. The lower liners, however, closed mostly higher as the FBM Small Cap and FBM ACE rose 0.2% and 0.8% respectively, while the broader market ended mixed.

• Market breadth stayed negative as decliners edged advancers on a ratio of 419-to-365 stocks. Traded volumes fell 22.5% to 1.56 bln shares as investors remain in the sidelines, awaiting for further market stability.

• Tenaga (-16.0 sen) topped the big board decliners list, followed by Malaysia Airport Holdings (-10.0 sen), Digi (-10.0 sen), Public Bank (-10.0 sen) and Axiata (-8.0 sen). Significant decliners on the broader market were Carlsberg (-32.0 sen), Panasonic (-26.0 sen), Lingkaran Trans Kota (-15.0 sen) and Yinson (-15.0 sen). Comfort Gloves slipped 4.0 sen after delivering a weak set of quarterly earnings.

• In contrast, BAT (+84.0 sen), United Plantations (+30.0 sen), Padini (+26.0 sen), Ajinomoto (+20.0 sen) and DKLS (+20.0 sen) rose on the broader market. Meanwhile, Petronas Gas (+22.0 sen), Maybank (+16.0 sen), Petronas Dagangan (+16.0 sen), CIMB (+10.0 sen) and Genting Malaysia (+9.0 sen) were the biggest gainers on the FBM KLCI.

• Asia benchmark indices ended mostly lower on lingering concern over trade spat between U.S. and China. The Nikkei fell 0.01% to close at a one-month low despite trimming most of its intraday losses, while the Shanghai Composite fell 0.9% to close below the 2,800 psychological level amid the sharp depreciation of the Chinese Yuan. The Hang Seng Index (+0.5%), however, rebounded on gains in energy shares. ASEAN stockmarkets, meanwhile, closed mostly lower yesterday.

• Despite the softer 1Q2018 GDP data that just rose 2.0% – the slowest expansion since 1Q2017, U.S stockmarkets rebounded overnight as the Dow rose 0.4% after authorities has taken more conciliatory tone on Chinese investment. Similarly, the S&P 500 rose 0.6% to reclaim the 2,700 psychological level, boosted by gains in technology shares, while the Nasdaq (+0.8%) closed above the 7,500 psychological level.

• European benchmark indices – the FTSE (-0.1%), CAC (-1.0%) and DAX (-1.4%), however, all retreated after the Euro Currency appreciated against the Greenback. The weakness was also impacted by the slowdown in Eurozone’s economic sentiment that stood at 112.3 in June 2018 - lower than 112.5 recorded in May 2018.

The Day Ahead

• Local institutions were again seen providing support yesterday to the key index-linked stocks as the foreign selling remains undiminished. The support was seen as an attempt to break the down cycle, albeit the key index still ended the day with minor losses.

• Nevertheless, we deem yesterday’s move as encouraging as it could be a prelude to a long overdue rebound. As it is, the Malaysian stockmarket is already deeply oversold and recent attempts to shore up the market was met with sustained selling. With foreign funds still on a disposal mode, however, we continue to think that a rebound could be mild for now as the gains could be tempered by the selling that could nullify some of the effects of the bargain hunting activities. Therefore, we see the 1,670 level becoming a main near-term hurdle, followed by the 1,680 level. The supports are at 1,660 and 1,650 respectively.

• The more positive market undertone could also give lower liners and broader market shares a booster over the near term. Investor and retail interest on these shares have dwindled significantly of late due to the cautious market environment and the lack of positive leads. We think the slightly improved market sentiment could help to renew retail participation to the market.

Company Update

• Kim Loong Resources Bhd’s 1QFY19 net profit fell 15.2% Y.o.Y to RM20.1 mln, dragged down by lower fresh fruit bunches (FFB) production from the plantation segment, coupled with lower average selling prices during the quarter which offset the higher crude palm oil (CPO) production. Revenue for the quarter declined 7.5% Y.o.Y to RM236.5 mln, mainly due to lower FFB and CPO average selling prices.

• The results came in below expectations with its net profit amounting to 19.3% of our previous full-year forecast of RM104.3 mln, while its revenue also came below our forecast, amounting to 21.6% of our previous estimate of RM1.09 bln. The variance is due to the lower average selling prices in both FFB and CPO during the quarter.

Comments

• Despite the weaker-than-expected results, we continue to favour KLR as it is among the most efficient local palm oil planter with a superior yield per hectare vs. Malaysia’s average over the past few years.

• However, with the reported results coming below our estimates, we trimmed our earnings forecast by 14.4% and 3.4% to RM89.3 mln and RM100.8 mln in FY19 and FY20 respectively to account for the lower FFB and CPO average selling prices. Consequently, we also downgrade KLR to HOLD with a lower target price of RM1.35 (from RM1.55) as valuation are already fair,

• Our target price is derived by ascribing an unchanged target PER of 14.0x to its revised FY19 EPS of 9.5 sen. The ascribed target PER is in line with the industry average of around 13.5x-15.5x. At the target price of RM1.35, KLR will trade an implied PER of 14.1x in FY19, which is fair, in our view, given the cyclical nature of the crude palm oil industry.

• V.S. Industry Bhd’s (VSI) 3QFY18 net profit more than halved to RM21.1 mln, from RM50.5 mln last year, owing to weaker performance across all of its segments amid high input prices and labor costs. Meanwhile, a significant reduction in earnings from a key customer, in-tandem with the cessation of several models that have reached the end of its product lifecycle, also hit the group’s bottomline during the quarter.

• Revenue, however, grew marginally by 3.0% Y.o.Y to RM879.8 mln, from RM854.1 mln in the previous corresponding period.

• Cumulative 9MFY18 net profit, meanwhile, narrowed 6.0% Y.o.Y to RM112.3 mln, from RM119.5 mln previously, dragged down by weaker margins attributed to the aforementioned reasons, although revenue jumped 34.0% Y.o.Y to RM3.08 bln, from RM2.30 bln in 9MFY17. The group has declared a third interim dividend of 0.5 sen per share, payable on 31st July 2018. Cumulative dividend per share to-date is 3.5 sen, compared to 3.9 sen in the same period a year ago.

Comments

• VSI's 9MFY18 results were below our estimates, accounting to only 65.2% of our previous full-year net profit of RM175.5 mln, although revenue was broadly in-line, making up about 71.5% of our sales target of RM4.30 bln. The variance was mainly attributed to weaker-than-expected EBITDA margins and unexpected loss reported by the Indonesian segment following lower sales orders.

• As the reported earnings were below our estimates, we reduce our FY18 net profit and revenue to RM152.2 mln (- 13.3%) and RM4.09 bln (-5.0%) respectively as we adjust our sales target across all segments. We also tweaked our FY19 forecast revenue marginally lower to RM4.84 bln (-1.4%), while net profit was adjusted to RM239.3 mln (-8.8%).

• Even so, we maintain our BUY recommendation on VSI, but with a lower target price of RM1.90 (from RM2.60 previously) despite the softer earnings growth expectations and a larger share base following the completion of the bonus issue, as we believe that the company’s shares has been oversold and now offers a good opportunity for investors to accumulate. The target price is arrived by ascribing a lower target PER of 15.0x (from 18.0x) to its revised FY19 diluted EPS of 12.7 sen. We trimmed our target PER in-view of the recent weakness in share price of industry peers.  However, the ascribed target PER is at a small premium to its closest competitor, SKP Resources which we believe is justified in view of the group’s leading position in Malaysia’s EMS industry. The premium is also accorded for its wide array of supply chain services and solid earnings trackrecord.

COMPANY BRIEF

• Eco World Development Group Bhd's (EcoWorld) 2QFY18 net profit inched 2.3% Y.o.Y higher to RM34.5 mln on the back of contribution from its projects in the Klang Valley, Iskandar Malaysia in Johor, and Penang, despite a 2.6% Y.o.Y decline revenue to RM498.7 mln. (The Edge Daily)

• KUB Malaysia Bhd expects to commence development of its flagship commercial building – KUB Tower – in Petaling Jaya next year on a plot of land where the landmark A&W Restaurant was sited, after receiving a development order for the project.

• KUB will be partnering with a property developer to jointly-develop the project and construction is scheduled to start in 2019. Meanwhile, the proposed sale of Restoran Kualiti Sdn Bhd, the owner of A&W Malaysia Sdn Bhd — the sole franchisor of A&W restaurants in Peninsular Malaysia is expected to be completed within the year. (The Star Online)

• Aeon Credit Service (M) Bhd's 1QFY19 net profit jumped 30.9% Y.o.Y to RM99.2 mln mainly due to higher financing receivables, while revenue gained 7.8% Y.o.Y to RM325.7 mln. Financing receivables was RM6.92 bln (+ 3.8% Y.o.Y), from RM6.67 bln in the same period last year. (The Edge Daily)

• Felda Global Ventures Holdings Bhd (FGV), indicated that at least two more months are needed to conduct its forensic investigation into several investments undertaken by the group previously, including its investment in Asian Plantations Ltd. FGV has also initiated legal actions against a subsidiary's client, Dubai-based Safitex Trading LLC, to claim back some US$11.0 mln owed.

• Meanwhile, a representative from Federal Land Development Authority (FELDA) has failed to be re-elected as a director at FGV's annual general meeting (AGM) yesterday. The director involved was a Non Independent NonExecutive Director, Datuk Sri Abu Bakar Harun who is also chairman of Pahang State FELDA Affairs Committee. (The Edge Daily)

• Icon Offshore Bhd has secured contracts valued at RM275.0 mln from oil and gas (O&G) companies to provide offshore support vessels (OSVs) for their production operations in Malaysian waters. The three-year contracts also come with an extension option of up to two years of one year each.

• Separately, the group has also received a conditional RM106.0 mln award to provide two platform supply vessels to ExxonMobil Exploration and Production Malaysia Inc for its production operations. (The Edge Daily)

• Turkish conglomerate, Gama Holding are reportedly in talks with Tenaga Nasional Bhd (TNB) and other potential buyers about a sale of its 50.5% shareholding in Gama Enerji energy unit as part of a US$1.0 bln debt restructuring. TNB, which bought 30.0% stake in Gama Enerji in 2015 for US$243.0 mln, had shown interest in the sale. (The Star Online)

• Mah Sing Group Bhd has planned to defer most of its project launches, which have a combined gross development value (GDV) of RM2.2 bln until later in the year. Comparatively, the group has launched projects with a total GDV of RM1.86 bln last year. Mah Sing is also maintaining its sales target of RM1.8 bln for 2018, matching last year's sales level. (The Star Online)

• Berjaya Corp Bhd (BCorp) sunk into the red with a 4QFY18 net loss of RM95.2 mln compared to a net profit of RM3.2 mln a year ago, dragged down by a significant drop in profit from operations. Provision was also made for the impairment of various assets and unfavourable foreign exchange difference of about RM101.0 mln — without which it would have recorded a pretax profit of about RM58.0 mln vs. a pretax loss of RM43.1 mln. Revenue for the quarter also saw a 6.0% Y.o.Y drop to RM2.11 bln, from RM2.23 bln in 4QFY17. (The Star Online)  

Source: Mplus Research - 29 Jun 2018