Waiting For The Next Wave

• The FBM KLCI remained on a downward trajectory on the last trading day of September, weighed down by profittaking in selected heavyweights. Meanwhile, the FBM Small Cap (+0.2%) and the FBM Ace (+2.7%) bucked the general decline in the broader market and closed higher on Friday.

• Market breadth turned positive as winners overtook the losers on a ratio of 434-to-395 stocks. Traded volumes also gained by 5.8% to 2.11 bln shares amid the rotational play in the lower liners.

• Petronas-linked stocks like Petronas Dagangan (-32.0 sen) and Petronas Gas (- 10.0 sen) weighed on the key-index, alongside Hong Leong Financial Group (- 18.0 sen), Axiata (-17.0 sen) and KLCC (- 8.0 sen). Other broader market gainers were BAT (-50.0 sen), United Plantations (-36.0 sen), Hong Leong Industries (-24.0 sen), Malaysian Pacific Industries (-24.0 sen) and Litrak (-19.0 sen).

• Meanwhile, consumer products stocks like Carlsberg (+40.0 sen), Dutch Lady (+38.0 sen), Ajinomoto (+26.0 sen) led the Main Board advancers, together with Scientex (+32.0 sen) and Panasonic Manufacturing (+26.0 sen). Less than half of the blue-chip gauge advanced, including Maybank (+25.0 sen), Hartalega (+13.0 sen), Nestle (+10.0 sen), Hap Seng Consolidated (+5.0 sen) and IHH Healthcare (+3.0 sen).

• Japanese stockmarkets rallied as the Nikkei (+1.4%) hit its highest intraday levels, lifted by stronger-than-expected economic figures. The Shanghai Composite (+1.1%) recovered and closed in the positive region ahead of the weeklong National Day holiday next week, while the Hang Seng Index added 0.3% to 27,700 psychological level. ASEAN stockmarkets also followed suit, ending broadly higher at Friday’s closing bell.

• Wall Street struggled to close higher on Friday, following mixed economic data releases despite notching firm gains on a quarterly basis. The Dow inched higher, lifted by Intel and Boeing, alongside the Nasdaq (0.1%). The S&P 500, however, landed just below the breakeven level at 2,914.0 points.

• European equities retreated after Italy significantly increased its budget deficit target, which could potentially result in a dispute with the European Union. The FTSE and the DAX fell by 0.5% and 1.5% respectively, while the CAC suffered a 0.9% loss.

The Day Ahead

• Malaysian stocks ended 3Q2018 on a limp note as market interest remains insipid in the absence of significant leads – a trend that looks to persist to the start of final quarter of the year. As it is, institutional players are providing the support to the key index constituents and this is also keeping the FBM KLCI’s valuation above its long term average of about 17.0x, thus leaving little room for further near term upsides, in our view.

• With little fresh market impetus and a pricey market, we see the indifferent trend persisting for now and this could see the key index trending between the 1,780 and 1,800 points for longer. We see institutional players providing support to keep the key index afloat as well as to absorb some of the profit taking activities.

• The lower liners and broader market shares, however, is still on a purple patch as they continue to gain traction after their bout of oversold. However, the bargain hunting has been relatively benign as evidenced by the still insipid volumes. Nevertheless, we think that the mild bargain hunting activities will persist for longer and this will provide further lift to stocks listed in the FBM Small Cap, Fledgling and ACE Market.

COMPANY BRIEF

• Comfort Gloves Bhd (CGB) recorded a whopping 54.8% Y.o.Y drop in its 2QFY19 net profit to RM4.1 mln, compared to RM9.1 mln last year, mainly dragged down by a one-off logistics expense of about RM4.4 mln. Revenue also weakened slightly by 4.2% Y.o.Y to RM109.8 mln, from RM114.6 mln in the same quarter last year.

• Meanwhile, cumulative 1HFY19 net profit also thinned by 40.4% Y.o.Y to RM11.4 mln, from RM19.2 mln previously – due to weaker EBITDA margins on the aforementioned logistics costs, higher raw materials prices, utility costs and weaker Greenback. Revenue, however, was marginally stronger at RM216.4 mln (+3.9% Y.o.Y), from RM208.3 mln in 1HFY18.

• The group’s adjusted net profit was within our expectations, making up 52.3% of our previous full year estimated net profit of RM30.3 mln. Revenue was also in-line and accounted for 51.6% of our forecast of RM419.1 mln. The adjusted net profit included the one-off logistics expense mentioned above, which could have been incidental costs due to restrictions slapped by the U.S. FDA.

• We trim our FY19 net profit by 15.2% to RM25.7 mln after taking into consideration thinner margins, but increase our revenue slightly to RM435.9 mln (+4.0%) on the strengthening US Dollar. Meanwhile, FY20’s net profit and turnover was also adjusted higher by 11.5% and 4.0% to RM34.3 mln and RM475.8 mln respectively.

• Separately, the group has proposed to acquire the entire stake in Pacewell Asia Sdn Bhd for RM150,000 in cash, in a bid to acquire an additional FDA license which will allow it to immediately export medium-risk medical device (i.e.: rubber gloves) to the U.S. The acquisition is expected is expected to be completed before 31st October 2018.

Comments

• We maintain our HOLD recommendation on CGB with a higher target price of RM1.05 (from RM0.92) after rolling over our valuations to FY20. Although we are positive on the proposed acquisition of Pacewell, it remains uncertain at this point if the proposed acquisition will significantly impact CGB’s performance in the near-term, thus we opted to keep our existing call on CGB.

• Our target price is arrived by ascribing a higher target PER of 18.0x to its FY20 EPS of 6.1 sen following the appreciation in the share price of its peers. The ascribed target PER remains at a discount to the PER of industry bellwethers like Hartalega Holdings Bhd and Top Glove Corporation Bhd, due to its smaller market capitalisation and capacity.

• AWC Bhd is planning to issue up to 61.6 mln free warrants on the basis of one warrant-for-every five existing shares owned. The proposal takes into consideration the new AWC shares to be issued in tranches as part settlement for its acquisition of the 60.0% stake in Trackwork. The entitlement date for the warrants will be determined by the board later.  Based on an illustrative exercise price of 77.0 sen per warrant, AWC could potentially raise up to RM47.5 mln, which will be used to fund future working capital requirements. The corporate exercise is expected to be completed by 4Q2018.

• Subsequently, the gross proceeds may also be utilised to part finance the option price in the event the proposed call or put options (for AWC to acquire the remaining 40.0% stake in Trackwork) are exercised.

• To recap, Trakniaga has a call option to dispose of its 40.0% shareholding in Trackwork within five years of the completion of the acquisition, while AWC has a put option to acquire Trakniaga's stake.

• The warrants have a five-year tenure and can only be exercised at any time after the third year onwards from the date of issuance of the warrants until its expiry date.

Comments

• Assuming a full exercise of the warrants, all outstanding ESOS options and new shares issued as payment for the acquisition of Trakwork, AWC’s share base will increase by 36.7% to 373.0 mln shares (from 272.9 mln, excluding treasury shares).

• We have excluded the additional shares which could be issued should the call/put option rights under the Trackwork acquisition agreement be exercised due to the underlying uncertainties involved. As the exercise period for the proposed free warrants is beyond our forecast timeline, we concur that there will be no significant impact to our estimates for the time being.

• We maintain our BUY recommendation on AWC at an unchanged target price of RM1.20 by ascribing a target PER of 12.0x to its FY19 EPS of RM9.9 sen. Our target PER is at a discount to UEM Edgenta Bhd, due to the AWC’s smaller market capitalisation.

COMPANY BRIEF

• Sapura Energy Bhd’s 2QFY19 net loss stood at RM126.1 mln, from net profit of RM28.9 mln recorded in the previous corresponding quarter on lower contribution from both its drilling and engineering & construction business. Revenue dropped 23.9% Y.o.Y to RM1.25 bln.

• For 1HFY19, cumulative net loss stood at RM261.8 mln vs. a net profit of RM56.5 mln recorded in the previous corresponding period. Revenue for the period slipped 32.7% Y.o.Y RM2.31 bln. (The Star Online)

• Notion VTec Bhd has accepted a full and final claim settlement of RM159.4 mln from its insurer for material fire losses in the incident that occurred at its main manufacturing plant in Klang, Selangor. It received RM80.0 mln from AXA Affin General Insurance Bhd as partial settlement for the material fire loss. The balance net settlement of RM79.4 mln will be paid at a subsequent date. (The Star Online)

• Gamuda Bhd’s 4QFY18 net loss stood at RM101.1 mln vs. a net profit of RM102.8 mln recorded in the previous corresponding quarter due to the disposal of 40.0%-owned associate Syarikat Pengeluar Air Sungai Selangor Sdn Bhd (Splash) amounting to RM300.0 mln and an impairment on investment in Gamuda Water of RM4.0 mln. Revenue for the quarter gained 20.0% Y.o.Y to RM1.21 bln  For FY18, cumulative net profit dipped 14.6% Y.o.Y to RM513.9 mln. Revenue for the year, however, climbed 31.6% Y.o.Y to RM4.23 bln. (The Star Online)

• Pos Malaysia Bhd has appointed Syed Md Najib Syed Md Noor as its group CEO effective 1st October 2018, replacing Al-Ishsal Ishak who is leaving the group to become chairman of the Malaysian Communications and Multimedia Commission on the same date. Syed Najib is currently the chairman of Altel Communications Sdn Bhd and MYTV Broadcasting Sdn Bhd. (The Edge Daily)

• Reach Energy Bhd's oil producing asset in Kazakhstan, Emir-Oil LLP, has obtained authority approval to commence the trial production period of the North Kariman field in Kazakhstan for 15 months, which will commence on 1st October 2018 until 31st December 2019. The approval granted for the trial production period allows Emir-Oil to put the North Kariman wells on production and this is expected to increase the current oil production levels substantially. (The Edge Daily)

• Cypark Resources Bhd’s 3QFY18 net profit rose 16.4% Y.o.Y to RM19.2 mln, mainly due to improved margin contribution from the environmental engineering as well as the green technology and renewable energy divisions. Revenue for the quarter, however, was flat at RM75.1 mln.

• For 9MFY18, cumulative net profit increased 27.3% Y.o.Y to RM50.2 mln. Revenue for the period grew 8.7% Y.o.Y to RM258.2 mln. (The Edge Daily)

• Berjaya Corp Bhd’s 1QFY19 net profit stood at RM35.1 mln, against a net loss of RM43.4 mln recorded in the corresponding quarter a year ago, helped by a disposal gain. Revenue for the quarter, however, fell 2.3% Y.o.Y to RM2.14 bln. (The Edge Daily)

• My EG Services Bhd is acquiring a commercial space within the podium level below the MyEG Tower at Empire City for RM35.4 mln cash from Cosmopolitan Avenue Sdn Bhd. MyEG has also entered into a put option agreement with Cosmopolitan to obtain an option at MyEG's sole discretion to sell the property back to Cosmopolitan at a sum equal to 66.7% of the purchase consideration within six months from the date of delivery of vacant possession of the property to MyEG. (The Edge Daily)

• Ikhmas Jaya Group Bhd has once again postponed the construction of its new prefabricated building system manufacturing facility in Teluk Panglima Garang, Selangor. This is the second postponement this year after the earlier deferment on 30th March 2018. (The Edge Daily)  

Source: Mplus Research - 1 Oct 2018