Going Nowhere

• The FBM KLCI extended its losses to close lower on Thursday, weighed down by profit-taking activities in selected heavyweights. On a weekly basis, however, the key-index gained 0.6% W.o.W as the earnings season remained in full swing. All the lower liners were also splashed in red, with the FBM Small Cap (-1.7%) being the worst hit. The majority of the broader market stocks finished on a downbeat note, with the exception of the Finance and the Plantations subsectors.

• Market breadth was negative as losers outpaced winners on a ratio of 685-to- 299 stocks. Traded volumes also narrowed slightly by 2.0% to 2.63 bln stocks due to holiday-thinned trading.

• Heavyweights laggards include Telekom Malaysia (-26.0 sen), MISC (-16.0 sen), Kuala Lumpur Kepong (-14.0 sen), Petronas Chemicals (-11.0 sen) and Petronas Gas (-10.0 sen). Meanwhile, Supermax (-56.0 sen) led the broader market lower, followed by Heineken Malaysia (-28.0 sen), Allianz (-20.0 sen), APM Automotive (20.0 sen) and Prestariang (-19.0 sen).

• On the bright side, broader market gainers were BAT (+66.0 sen), Petron Malaysia (+48.0 sen), Chin Teck Plantations (+28.0 sen), Fraser & Neave (+24.0 sen) and Carlsberg (+18.0 sen). Chart-toppers on the blue-chip gauge, meanwhile, were Hong Leong Financial Group (+42.0 sen), Nestle (+40.0 sen), Hong Leong Bank (+28.0 sen), Press Metal (+13.0 sen) and Hartalega (+10.0 sen).

• Key regional benchmark indices ended in the negative territory on Friday, weighed down by renewed worries over the escalation of trade war after President Donald Trump signaled his support for another round of trade tariffs on China goods. Consequently, the Shanghai Composite (-0.5%) fell for the fourthstraight session, while the Hang Seng Index (-1.0%) weakened, dragged down by losses in tech-giant Tencent. The Nikkei pared sharp losses in the early session, despite closing a hairline below the breakeven point. Most ASEAN stockmarkets retreated on Friday.

• Major U.S. bourses closed mixed after U.S. and Canada failed to reach a consensus for a new trade deal on Friday. The Dow closed slightly in the red despite rebounding from earlier losses, boosted by gains in Apple. On the broader market, however, the Nasdaq (-0.3%) and S&P 500 (+0.01%) eked -out gains amid light trading ahead of the Labor Day holiday.

• European stockmarkets took a beating on Friday as investors continued to digest developments from the trade front. The DAX fell 1.0%, dragged down by losses in automakers, alongside the CAC (-1.3%). Meanwhile, the FTSE (-1.1%) extended its losing streak after posting its weakest month in three years, mainly contributed by ongoing geopolitical uncertainties and a strengthening Pound.

The Day Ahead

• The key index continues its mild retracement amid the directionless trading pattern that saw the key index finding support around the 1,820 level. It appears that the indifferent market trend is likely to persist as there remain few leads as the results season ends with yet another mixed performance.

• At the same time, the recent gains have left the FBM KLCI tethering on the overbought zone, whilst valuations have also tipped into the expensive zone with the key index’s PERs above the 14x-17x historical average. With valuations already expensive, we think further upsides could be more difficult to come by on valuation grounds and we see the 1,826 level serving as the major hurdle for now, followed by 1,830 level. The supports, meanwhile, are at 1,815 and 1,800 respectively.

• The FBM Small Cap index, however, is already oversold and a rebound is already due after its incessant fall over the past two weeks. While a rebound is already due, we think the recovery is likely to be mild amid the weak buying interest. Leads are also far and in-between to draw fresh buying and as a consequence, we think the downside bias could continue for longer.

Company Update

• Engtex Group Bhd’s 2Q2018 net profit sank 53.8% Y.o.Y to RM6.3 mln, dragged down by: (i) volatility in international domestic metal prices that resulted in margins erosion in the wholesale and distribution segment, (ii) higher operating cost from the completed property development projects in Kepong and Selayang, and (iii) the hospitality segment has yet to breakeven. Revenue for the quarter, however, rose marginally by 0.5% Y.o.Y to RM286.1 mln.

• For 1H2018, cumulative net profit slipped 48.7% Y.o.Y to RM16.2 mln. Revenue for the period, however, grew 8.5% Y.o.Y to RM584.3 mln. The reported earnings fell short of our expectations, amounting to only 33.6% of our previous estimated net profit of RM48.1 mln. The reported revenue, however, came within our expectations, accounting to 50.1% our full year estimated revenue of RM1.17 bln. The lower-than-expected net profit was due to lower margins recorded in the wholesale and distribution segment, coupled with the escalation of construction cost in its property development projects.

Comments

• With the reported earnings coming below our forecast, we cut earnings estimates by 16.6% and 16.9% to RM40.1 mln and RM45.4 mln for 2018 and 2019 respectively to account for the lower margins from the manufacturing segment that is likely to endure stiffer price competition and higher raw material cost, coupled with the higher cost incurred in both its property and hospitality segments. Nevertheless, we maintain our HOLD recommendation on Engtex, but with a lower target price of RM1.05 (from RM1.15).

• Our target price was derived from ascribing a unchanged target PER of 8.0x to our 2019 earnings forecast of its manufacturing and wholesale and distribution businesses, in line with its historical PER. Its property development segment’s valuation remains unchanged at 0.6x its BV due to its relatively smallscale property development projects, while its hospitality segment earnings is pegged to an unchanged PER of 6.0x to its 2019 earnings due to its small contribution to the group.

COMPANY BRIEF

• AirAsia Group Bhd’s 2Q2018 net profit soared 146.9% Y.o.Y to RM361.8 mln, due to the reversal of deferred tax on the sale of aircraft. Revenue for the quarter increased 10.1% Y.o.Y to RM2.62 bln.

• For 1H2018, cumulative net profit jumped 96.7% Y.oY to RM1.50 bln. Revenue for the period improved 12.6% Y.o.Y to RM5.18 bln. (The Star Online)

• AirAsia X Bhd’s 2Q2018 net loss stood at RM57.5 mln vs. a net profit of RM47.4 mln recorded in the previous corresponding quarter, mainly due to an increase in the average fuel price from US$65 (RM267) per barrel in the second quarter of 2017 to US$89 (RM366) per barrel during the quarter. Revenue in the quarter added 0.9% Y.o.Y to RM1.05 bln.

• For 1H2018, cumulative net loss stood at RM16.0 mln vs. a net profit of RM57.8 mln recorded in the previous corresponding period. Revenue for the period grew 4.5% Y.o.Y to RM2.32 bln. (The Star Online)

• Digi.Com Bhd has announced the appointment of Haakon Bruaset Kjoel as Chairman of the board, effective 1st September 2018. Kjoel was the Acting Executive Vice-President and Chief Corporate Affairs Officer for the Telenor Group. (The Star Online)

• Malaysian Resources Corp Bhd’s (MRCB) 2Q2018 net profit rose 39.1% Y.o.Y to RM33.5 mln, boosted by improved contributions from its engineering, construction and environment division. Revenue for the quarter, however, dropped 44.1% Y.o.Y to RM405.3 mln.

• For 1H2018, cumulative net profit expanded 68.2% Y.o.Y to RM55.0 mln. Revenue for the period, however, fell 33.1% Y.o.Y to RM832.8 mln. (The Star Online)

• Malayan Banking Bhd’s (Maybank) 2Q2018 net profit rose 18.1% Y.o.Y to RM1.96 bln, driven by higher insurance and Islamic banking income, besides lower allowances for loan impairment losses. Revenue for the quarter grew 5.4% Y.o.Y to RM11.51 bln.

• For 1H2018, cumulative net profit rose 13.9% Y.o.Y to RM3.83 bln. Revenue for the period grew 3.7% Y.o.Y to RM23.02 bln. (The Sun Daily)

• RHB Bank Bhd’s 2Q2018 net profit increased 13.8% Y.o.Y to RM570.3 mln, mainly on higher net fund-based and nonfund based income and lower allowances for credit losses on other assets. Revenue for the quarter rose 1.1% Y.o.Y to RM2.66 bln.

• For 1H2018, cumulative net profit added 16.0% Y.o.Y to RM1.16 bln. Revenue for the period rose 3.6% Y.o.Y to RM5.44 bln. An interim dividend of 7.5 sen per share was declared. (The Edge Daily)

• Alliance Bank Malaysia Bhd’s 1QFY19 net profit rose 1.2% Y.o.Y to RM136.4 mln, driven by higher net interest margin. Revenue for the quarter grew 3.7% Y.o.Y to RM401.1 mln. (The Edge Daily)

• Media Prima Bhd will sell a piece of land and three properties in Bangsar and Shah Alam, to PNB Development Sdn Bhd for RM280.0 mln, resulting in a one-off net gain of about RM127.7 mln. The group’s 98.2%-owned subsidiary, New Straits Times Press (M) Bhd (NSTP) has entered into three separate conditional sales and purchase agreements with PNB Development for the proposed sale of the properties. (The Edge Daily)

• Utusan Melayu (Malaysia) Bhd will have the Corporate Debt Restructuring Committee (CDRC), under the purview of Bank Negara Malaysia, mediate between the group and its financiers. Utusan was classified as a PN17 company on 21st August 2018 after it failed to provide a solvency declaration to Bursa Malaysia after defaulting on its principal and profit payment to Maybank Islamic Bhd and Bank Muamalat Malaysia Bhd.(The Edge Daily)

• IGB Bhd is undertaking an internal group reorganisation which will see its 49.1% indirect stake in IGB Real Estate Investment Trust (REIT) come directly under the group. Currently, the stake is held via wholly-owned IGB Corp Bhd. The transfer will be undertaken by way of a dividend-in-specie to be declared by IGB Corp out of its available profits to IGB.

• The exercise is part of its continuing strategic review of its group of companies following the privatisation of IGB Corp in March 2018. The exercise will result in IGB REIT becoming a direct subsidiary of IGB, facilitating the regular distributions of income from the yield-play IGB REIT without having to go through IGB Corp as intermediary. (The Edge Daily)

• The Finance Ministry has clarified that Petron Malaysia Refining & Marketing Bhd’s sister company, Petron Fuel International Sdn Bhd, is not the sole fuel provider for government vehicles, but an addition to existing providers Petroliam Nasional Bhd (Petronas) and Shell Malaysia, for healthier competition. The Ministry also stressed that it was an administrative decision. (The Edge Daily)

• Sime Darby Bhd is not opting for a fire sale of its non-core assets, including its 30.0% stake in Tesco Stores (M) Sdn Bhd, despite the group's long-term strategy to focus on its three core businesses, namely industries, motor, and healthcare. The management, however, is still waiting for the right time to divest its shareholding in the hypermarket chain. (The Edge Daily)

Source: Mplus Research - 3 Sept 2018