Moderate Gains Ahead

• Tracking the sharp gains on Wall Street overnight, the FBM KLCI (+0.4%) extended its gains after hovering in the positive territory for the entire trading session yesterday. The lower liners – the FBM Small Cap (+0.6%), FBM Fledgling (+0.4%) and FBM ACE (+0.6%) also extended their gains, while the broader market closed mostly higher.

• Market breadth stayed positive as advancers overcame decliners on a ratio of 475-to-357 stocks. Traded volumes, however, fell 1.8% with 2.28 bln shares exchanging hands.

• More than half of the key index constituents advanced, led by Petronas Dagangan (+26.0 sen), followed by Tenaga (+12.0 sen), Maxis (+11.0 sen), Public Bank (+10.0 sen) and MISC (+7.0 sen). Consumer products stocks like BAT (+RM1.58), Ajinomoto (+50.0 sen) andDutch Lady (+44.0 sen) continues to anchor the broader market winners list, while Aeon Credit and MPI added 32.0 sen and 30.0 sen respectively.

• Among the biggest decliners on the broader market were Carlsberg (-30.0 sen), Shangri-La (-20.0 sen), Fraser & Neave (-18.0 sen) and Vitrox (-18.0 sen). I-Bhd slipped 1.5 sen after it reported poor quarterly earnings. Key losers on the local bourse were Nestle (-10.0 sen), Genting Malaysia (-4.0 sen), KLCC (-4.0 sen), Malaysia Airport Holdings (-2.0 sen) and Hartalega (-1.0 sen).

• Asian benchmark indices edged mostly higher, taking cue from the positive developments on Wall Street overnight. The Nikkei jumped 1.8%, while the Hang Seng Index added 0.3% as investors breathed a sigh of relief after the initial uncertainties over the outcome of the U.S. mid-term election. The Shanghai Composite, however, fell 0.2% after erasing all its intraday gains. ASEAN equities, meanwhile, closed mostly higher yesterday.

• U.S. stockmarkets ended mixed overnight as the Dow (+0.04%) extended its gains after the U.S. Federal Reserve kept its benchmark interest rate unchanged and signalled a hawkish tone on the future interest rate direction. On the broader market, the S&P 500 (-0.3%) snapped a three-day winning streak, while the Nasdaq finished 0.5% lower.

• European equities closed on a mixed note as the FTSE added 0.3%, boosted by gains in banking stocks. Both the CAC and DAX fell 0.1% and 0.5% respectively after erasing their intraday gains after the European Commission signalled that the region’s economic growth could stall in coming years.

THE DAY AHEAD

• Although the key index continues to make headway and breaching the 1,720 level yesterday, which reinforces the recovery trend, we continue to think that the near term upsides will be measured amid the continuing lack of market following.

• As it is, there are still few positive catalysts to lure market players to return to the market in a big way, while many market participants are also still reeling from their losses in October’s selloff. Leads will now come from the ongoing results reporting season as there is still no resolve the trade dispute between the U.S. and China that could continue to weigh on sentiments for longer.

• Therefore, we think the key index could persist with its mild rebound over thenear term on the back of the selective institutional support that could lift the FBM KLCI to the 1,727-1,730 levels. The supports, meanwhile, are at 1,720 and 1,710 respectively.

• Among the lower liners and the broader market, the slow recovery trend is still unfolding and looks to continue over the near term. The slow recovery is due in part to the lack of market following as many retail players are still wary of the current market condition.

COMPANY UPDATE

• Hartalega Holdings Bhd reported a 6.1% Y.o.Y growth in 2QFY19 net profit to RM120.2 mln, from RM113.3 mln in the previous corresponding quarter, driven by a stronger topline contribution on higher sales volume (+10.6% Y.o.Y) and ASPs, albeit capped by higher other expense of RM11.1 mln and higher finance costs. Revenue was 22.2% Y.o.Y higher to RM714.2 mln, from RM584.6 mln last year. Following the positive results, the group declared a first interim dividend of 2.2 per share, payable on 28th December, 2018.

• The cumulative 1HFY19 net profit rose 16.9% Y.o.Y to RM245.1 mln, from RM209.7 mln last year, in-tandem with stronger revenue contribution which grew 19.8% Y.o.Y to RM1.42 bln, compared to RM1.19 bln previously. The improvement seen was also due to growing demand for nitrile gloves, rising production capacity and higher ASPs, albeit slightly capped by unfavorable forex position.

Comments

• The reported net profit and revenue was below our expectations, accounting to 42.1% of our previous full-year forecast net profit of RM582.7 mln, while revenueaccounted for 45.6% of our estimated RM3.11 bln. The difference was largely due to lower-than-expected production capacity and sales volume, albeit slightly offset by stronger ASPs.

• Consequently, we trim our FY19-FY20 net profit by 10.8%-8.7% to RM520.0 mln and RM644.9 mln, after lowering sales volume on slower expansion pace and thinner margins, in-view of rising raw materials and fuel prices. Revenue was also adjusted to RM2.93 bln (-5.8%) and RM3.51 bln (-8.6%) for FY19 and FY20 respectively.

• We raise our recommendation on Hartalega to HOLD (from Sell) with a higher target price of RM6.55 (from RM6.25), after rolling forward our valuations to FY20 to better reflect the long-term growth prospects of Hartalega, which will be underpinned by consistently high levels of utilisation, ongoing capacity expansion and product differentiation (i.e: the AMG gloves), which could potentially help Hartalega achieve even more lucrative margins. We arrive at our target price by ascribing to a lower target PER of 34.0x to Hartalega’s FY20 EPS of 19.9 sen.

• Our target PER remains at a 45% premium to Hartalega’s peers average due to Hartalega’s superior operational efficiency and margins.

COMPANY BRIEF

• Fraser & Neave Holdings Bhd’s 4QFY18 net profit soared more than four times to RM81.2 mln, from RM19.7 mln in the previous year, on the back of improvements in its Malaysian and Thailand operations and the absence of restructuring costs and other one-off items incurred last year. Revenue also gained, albeit marginally by 2.0% Y.o.Y toRM996.6 mln, from RM976.3 mln a year ago. The group has also proposed an interim single dividend of 30.5 sen per share.

• For the full year, the group's net profit expanded 19.0% Y.o.Y to RM385.1 mln, from RM323.4 mln in FY17, while revenue improved slightly to RM4.11 bln, from RM4.10 bln a year ago. (The Star Online)

• Malayan Flour Mills Bhd (MFM) posted its first quarterly loss since the end of 2015 with a 3Q2018 net loss of RM5.2 mln, from a net profit of RM23.5 mln previously, hit by lower poultry sales.

• For the cumulative 9M2018, net profit plunged 98.2% Y.o.Y to RM1.2 mln, from RM64.6 last year due to the aforementioned reasons, despite only a 3.1% Y.o.Y drop in revenue to RM1.75 bln, from RM1.81 bln in 9M2017. (The Edge Daily)

• Rhone Ma Holdings Bhd (RMH) is planning a bonus issue on the basis of one bonus share-for-every 10 existing shares on a date to be fixed later. The proposed exercise will entail the issuance of up to 16.6 mln bonus shares. (The Edge Daily)

• Malaysian Pacific Industries Bhd‘s (MPI) 1QFY19 net profit surged 20.3% Y.o.Y to RM63.3 mln, from RM52.6 mln last year, largely driven by stronger revenue contribution of RM413.8 mln, from RM387.6 mln in 1QFY20. The group has declared a first interim single tier dividend of 10.0 sen per share, payable on 12th December 2018. (The Edge Daily)

• ECS ICT Bhd posted a 56.9% Y.o.Y spike in net profit to RM7.7 mln, from RM4.9 mln last year, thanks to higher gross profit margin in both its ICT Distribution and Enterprise Systems segments. Revenue, however, weakened by 1.0% Y.o.Y to RM436.2 mln, from RM440.8 mlnin the previous corresponding period. ECS has proposed a single interim dividend of 2.5 sen per share, payable on 19th December 2018.

• For the cumulative 9MFY18, its net profit expanded 11.0% Y.o.Y to RM16.3 mln, from RM14.7 mln last year, despite a 11.6% Y.o.Y fall in revenue to RM1.19 bln, from RM1.34 bln last year. (The Edge Daily)

• Malaysia Steel Works (KL) Bhd (Masteel) is planning to raise up to RM130.0 mln via the issuance of sukuk for refinancing, capital expenditure and working capital requirements. The tenure of the sukuk is up to seven years from the date of first issuance. The first issuance of the sukuk is expected to be for a period of up to five years. (The Edge Daily)

Source: Mplus Research - 9 Nov 2018