Poised For A Pullback

• The FBM KLCI (+0.7%) marched higher for the fourth straight session as the key index re-claimed the 1,800 psychological level yesterday, mirroring the mostly positive sentiment across regional peers. The lower liners also ended mostly higher as the FBM Small Cap and FBM Fledgling rose 0.1% and 0.5% respectively, while only the REITs (-0.1%) and construction (- 0.2%) sectors underperformed the positive broader market.

• Market breadth turned positive as advancers edged decliners on a ratio of 485-to-419 stocks. Traded volumes, however, fell 10.9% to 2.25 bln shares as selling pressure amongst the lower liners ebb.

• More than half of key index constituents rose, anchored by Public Bank (+64.0 sen), followed by Nestle (+60.0 sen), Hong Leong Bank (+42.0 sen), Hong Leong Financial Group (+24.0 sen) and Petronas Dagangan (+16.0 sen). Notable winners on the broader market were consumer products stocks like Panasonic (+82.0 sen), BAT (+74.0 sen), Carlsberg (+50.0 sen) and Heineken (+22.0 sen), while Allianz added 40.0 sen.

• In contrast, significant decliners on the broader market include Uchi Technologies (-19.0 sen), Padini (-17.0 sen), United Plantations (-16.0 sen) and Lii Hen (-10.0 sen). Kawan Food slipped 10.0 sen after reporting a weak set of quarterly earnings. Meanwhile, Malaysia Airport Holdings (-20.0 sen), Petronas Gas (-20.0 sen), KLCC (-10.0 sen), Hartalega (-5.0 sen) and Dialog (-3.0 sen) topped the big board decliners list.

• Asia benchmark indices closed mostly higher as the Nikkei (+0.2%) extended its gains after the Japanese Yen depreciated against the Greenback, while the Shanghai Composite added 0.4% after recovering all its intraday losses. The Hang Seng Index (-0.5%), however, halted a four-day winning streak with eight of the ten major sectors in the red. ASEAN stockmarkets, meanwhile, closed mostly higher yesterday.

• U.S. stockmarkets extended their losses overnight as the trade spat between U.S. and China appears to be unresolved in the latest trade talks between the two economic powerhouse. The Dow fell 0.3%, while the S&P 500 closed 0.2% lower with ten of the eleven major sectors in the red.

• Earlier, major European equities – the FTSE (-0.2%), CAC (-0.02%) and DAX (- 0.2%), all edged lower after enduring a choppy trading session. The weakness was attributed by the weak Eurozone’s preliminary Markit Purchasing Managers Index that fell to 21-month at 54.6 in August 2018.

The Day Ahead

• The Malaysian market was making little headway for most of yesterday and it was the end-of-day lift on selective stocks that gave the key index its firmer gains, which we continue to view as superficial.

• Nevertheless, we think the Malaysian market is ripe for a pullback as the lack of a trade deal between the U.S. and China is leaving global markets in a state of flux again. At the same time, the recent gains are leaving the key index tethering on the expensive territory again. Therefore, we expect profit taking activities to escalate as market players lock-in their gains ahead of the weekend. The 1,800 points level is the immediate support, followed by the 1, 790 level. The resistances are at the 1,815 and 1,820 levels

• We also see the lower liners and broader market shares continuing their recent sideway consolidation as the buying interest on the above listed shares remain insipid.

Company Update

• HIL Industries Bhd’s (HIL) 2Q2018 net profit more than doubled to RM3.8 mln, from RM1.6 mln a year ago, due to higher sales orders from a key client and higher progress billings from its property segment. Revenue for the quarter also gained 26.5% Y.o.Y to RM28.5 mln, from RM22.5 mln in the same quarter last year.

• Cumulative 1H2018 net profit also jumped significantly to RM9.2 mln compared to RM3.6 mln earlier, on the one-off acquisition gain in 1Q2018, as well as the stronger manufacturing turnover and progress billings from its recently launched property projects. Revenue, meanwhile, also rose 13.1% Y.o.Y to RM49.1 mln, from RM43.4 mln last year.

Comments

• HIL’s 1H2018 net profit was ahead of expectations, accounting for 67.2% of our previous full-year estimate. Revenue, however, only accounted for 42.3% Y.o.Y of our forecast revenue. The variations were mainly due to better-than-expected performance from the manufacturing division, which benefitted from the strong demand for Perodua’s new MYVI variation.

• Consequently, we increase our estimated FY18-FY19 earnings by 14%-30% to factor in higher manufacturing margins, as well as slight adjustments to our depreciation and tax rate assumptions. However, we trimmed our FY18 and FY19 revenue forecasts by 6.8% and 11.0% respectively after adjusting sales volume conservatively, in-view of the potential slowdown in orders after SST kicks-off in September.

• Following the earnings upgrade, we upgrade our call on HIL to a BUY (from Hold) with a higher target price of RM0.74 (from RM0.68). Our target price is premised on a sum-of-parts (SOP) approach, ascribing to an unchanged target PER of 9.0x to its manufacturing business and a discount of 50% to the revalued net asset value (RNAV) estimate of HIL’s property unit.

• The target PER is similar to other smallto-mid cap peers and is at a slight discount to its closest competitor, APM Automotive Holdings due to the latter’s larger market capitalisation.

• Downside risks to our recommendation include unexpected volatility in raw material prices, labour shortages, weak consumer sentiment which could deter big-ticket spending and tighter financing regulations that could affect both automobile and property sales.

COMPANY BRIEF

• Sime Darby Plantation Bhd has acquired coconut oil exporter, Markham Farming Co Ltd (MFCL) for US$52.6 mln (approximately RM215.6 mln) in cash, in order to expand its operations in Papua New Guinea. MFCL is the largest coconut oil exporter in Papua New Guinea and the acquisition will allow Sime Darby Plantations to expand its lauric oils business into coconut oil production. (The Edge Daily)

• Axiata Group Bhd has appointed Tan Sri Ghazzali Sheikh Abdul Khalid as the interim Chairman, effective immediately, following the resignation of Tan Sri Azman Hj Mokhtar.

• Tan Sri Ghazzali has been on Axiata’s board for over 10 years as an Independent Non-Executive Director, and is also the Chairman of the group’s two South Asian subsidiaries, Robi Axiata Ltd in Bangladesh and Ncell Private Ltd in Nepal. (The Star Online)

• Malakoff Corp Bhd is planning to dispose its entire stake of about 13.6 mln shares (or 20.0% shareholding) in Lekir Bulk Terminal Sdn Bhd (LBTSB) for RM90.0 mln to Tenaga Nasional Bhd's whollyowned unit Integrax Bhd.

• Presently, Pelabuhan Lumut Sdn Bhd, a wholly-owned unit of Integrax, holds 54.4 mln shares (or 80.0% shareholding) in LBTSB. There will be a gain on disposal of RM55.3 mln which will be used to fund future investments, as well as working capital requirements. (The Edge Daily)

• Pestech International Bhd was awarded a RM58.0 mln contract from Sarawak Energy Bhd for the Sibiyu 132/33kV substation project. The 28-month project, will commence from 3th September 2018, is about 35 minutes from Bintulu Airport in the Kemena Land District in Sarawak. (The Edge Daily)

• Censof Holdings Bhd has secured a RM3.9 mln contract from Kuala Lumpur City Hall (DBKL) to undertake a comprehensive maintenance and support services of ePBT financial management system for 12 months. (The Edge Daily)

• An independent evaluation of Hibiscus Petroleum Bhd’s 50.0%-owned Anasuria Cluster off the North Sea in UK has revealed an estimated 24.4 mln barrels of oil reserves and 17.5 bln standard cubic feet of gas reserves. (The Edge Daily)  S P Setia Bhd's 2Q2018 net profit spiked 77.0% Y.o.Y to RM442.7 mln on increased revenue due to sale of completed properties and a one-off provisional fair value gain of RM343.8 mln. The latter arose due to the remeasurement of S P Setia's existing equity stake in Setia Federal Hill Sdn Bhd, which has now become a wholly-owned unit of S P Setia.

• Setia Federal Hill was previously a jointventure (JV) entity of the group. Quarterly revenue, meanwhile gained 6.9% Y.o.Y to RM926.0 mln, from RM866.4 mln a year ago.

• Cumulative 1H2018 net profit climbed to RM504.2 mln (+39.0% Y.o.Y), from RM362.7 mln a year earlier, although revenue fell to RM1.58 bln (-16.4% Y.o.Y) from RM1.89 bln in the previous year. (The Edge Daily)

• Malaysian Bulk Carriers Bhd (Maybulk) 2Q2018 net loss widened about 14x to RM151.3 mln, from RM10.8 mln in the previous corresponding period, due to an impairment loss from the disposal of its former associate, Singapore-listed PACC Offshore Services Holdings Ltd (POSH). Revenue also fell 19.0% Y.o.Y to RM57.5 mln, from RM70.7 mln last year.

• Consequently, the group recorded a 1H2018 net loss of RM165.6 mln vs. a net loss of RM44.0 mln in 1H2017, while revenue was down 18.0% Y.o.Y to RM111.8 mln, from RM135.7 mln. (The Edge Daily)

• Malaysian Pacific Industries Bhd (MPI) posted a marginal decline of 2.4% Y.o.Y in its 4QFY18 net profit to RM39.0 mln, from RM40.0 mln a year ago, although revenue inched higher by 1.0% Y.o.Y to RM393.1 mln, from RM389.1 mln.

• Full-year net profit also fell 19.9% Y.o.Y to RM142.5 mln, from RM177.9 mln in FY17, while revenue flatlined at RM1.54 bln. (The Edge Daily)  Lower sales weighed on Tropicana Corp Bhd’s performance, resulting in an 18.2% Y.o.Y drop in 2Q2018 net profit to RM38.0 mln from RM46.5 mln a year ago, which contributed to the lower earnings, on top of additional staff costs in 2Q2018 in preparation for the commencement of operations at the W Hotel in Kuala Lumpur City Centre. Quarterly revenue also weakened by 35.9% Y.o.Y to RM281.4 mln, from RM439.1 mln a year ago. (The Edge Daily)  

Source: Mplus Research - 24 Aug 2018