A Rebound Is In the Offing

• The FBM KLCI (-0.4%) trended lower for the fourth straight session, weighed down by the sluggish Nikkei Malaysia Manufacturing Purchasing Manager’s Index that fell to 47.6 in February 2019 – the fifth monthly decline on downbeat manufacturing prospects. However, the lower liners – the FBM Small Cap (+0.7%), the FBM Fledgling (+0.5%) and FBM Ace (+0.9%) all rebounded, while the broader market closed mixed.

• Market breadth turned positive as advancers edged decliners on a ratio of 486-to-460 stocks. Traded volumes climbed 12.9% to 2.91 bln shares on signs of bargain hunting activities.

• Notable key-index decliners include Tenaga Nasional (-34.0 sen) after the utility giant announced a 4Q2018 net loss of RM134.3 mln, followed by CIMB (-17.0 sen), Hong Leong Financial Group (-14.0 sen), Genting (-13.0 sen) and Petronas Gas (-8.0 sen). Meanwhile, other laggards include Dutch Lady (-50.0 sen), MNRB (- 20.0 sen), CIMB Bank (-17.0 sen), Mesiniaga (-13.0 sen) and Southern Acids (-12.0 sen).

• On the opposite side, Carlsberg (+98.0 sen), Apex Healthcare (+63.0 sen), Time Dotcom (+45.0 sen), Alliance Bank Malaysia (+24.0 sen) and BAT (+22.0 sen) advanced. Leading the blue-chip gauge, meanwhile were Nestle (+RM1.40), Hartalega (+14.0 sen), PPB (+14.0 sen), Top Glove (+10.0 sen) and IHH Healthcare (+6.0 sen).

• Key regional indices rallied on Friday, as investors look forward to a possible U.S.- Sino trade deal that will end the prolonged tariff war between the two largest economies. The Nikkei and the Hang Seng index added 1.0% and 0.6% respectively, while the Shanghai Composite jumped 1.8% after MSCI announced an increased in the weighting of Chinese A-shares in its indexes, boosting short-term buying-interest. ASEAN stockmarkets, meanwhile, also ended the week mostly positive.

• Major U.S. indices finished on an upbeat note – led by strong gains in technology and healthcare stocks amid easing trade tensions. The Dow closed 0.4% and the S&P 500 snapped three sessions’ of losses to close 0.7% higher, alongside the Nasdaq (+0.8%).

• The FTSE (+0.5%) closed higher on Friday, boosted by a weaker Pound and better-than-expected Chinese manufacturing data. The CAC also gained 0.5%, while the DAX rose 0.8%, as investors digested solid strong jobs data.

The Day Ahead

• Malaysian stocks continue to buck the regional trend to end lower amid the lack of domestic catalysts to lift investor sentiments, resulting in the key index tethering at the 1,700 points level last Friday. However, after four consecutive sessions of weakness, we think the pullback may have been overdone.

• Hence, we think that there could some measure of reprieve even as the technical indicators continue to show weakness. At the same time, global equities are becoming firmer amid the prospects of a trade agreement between the U.S. and China that could provide a shot in the arm to the global economies in due course. The more positive global market undertone should also provide some impetus to Malaysian stocks to post a decent recovery over the near term.

• On the upside, we see the key index headed towards the 1,707 level before making a pass at the 1,710 level. The supports meanwhile, are at 1,697 and 1,692 respectively.

• The FBM Small Cap, Fledgling and ACE Market stocks saw some recovery last Friday that should persist over the near term amid sustained bargain hunting activities by retail players. This should also extend the lower liners and broader market’s overbought streak.

Company Update

• VS Industry Bhd has entered into an agreement with U.S.-based Bissell International Trading Co BV, to manufacture home care products under the Bissell brand name, on a box-build assembly basis.

• The master supply agreement between Bissell and VS Industry is for a three-year period from 27th February 2019 and may be automatically extended in one-year increments thereafter.

• Under the agreement, VS Industry is expected to manufacture, assemble, package, label, test, and sell the products to Bissell.

Comments

• We are positive on the Bissell contract as it could possibly replace the loss of orders from a key customer and increase VSI’s customer diversification. That being said, we keep our forecasts unchanged at the current juncture as we wait for further information (i.e.: expected value of the contract) at the upcoming analysts’ briefing.

• For now, we maintain our BUY call for VSI with a higher target price of RM1.20 (from RM1.00 previously) by ascribing a higher target PER of 16.0x (from 13.0x) to its unchanged FY19 EPS of 7.7 sen, as we remain sanguine on VSI’s long-term growth outlook despite the minor stumble last year due to the unexpected loss of orders from several key assembly customers as some products reached its product cycle maturity.

• The increased target PER, meanwhile, in is-line with the recent rebound in regional EMS players and remains at a premium to its closest competitor, SKP Resources Bhd mainly due to the group’s leading position in Malaysia’s EMS industry attributed to its wide array of supply chain services and solid earnings trackrecord.

• Downside risks to our call include low contracts replenishment, production delays, rising competition and sudden spike in raw material prices.

• Protasco Bhd is undertaking a joint mixed residential development project in Tampin, Negeri Sembilan, which has an estimated gross development value of RM371.6 mln, with Penmaland Sdn Bhd. The collaboration is considered a related party transaction as Penmaland’s major shareholder is Datuk Seri Chong Ket Pen, the Executive Vice Chairman-cumManaging Director and the single largest shareholder in Protasco, with a 29.5% stake.

• The land is approved to be developed as a mixed residential development known as Denai Hills, comprising 703 units of terraced houses, 32 units of semidetached houses, 71 units of bungalows, three homestay units and a commercial lot. Subject to property market conditions, the development period is expected to be approximately seven years. The development has yet to commence and the construction works for the development is expected to commence in the third quarter of 2019, provided that the agreement has become unconditional.

• Pursuant to the agreement, Penmaland will grant De Centrum (the group’s mixed development) full and unfettered rights to carry out the development on the land, in exchange for a cash consideration of RM48.6 mln. The group intends to fund the development through a combination of internal funds (including cash flows generated from the project) and bank borrowings, the quantum of which cannot be determined at this juncture. Under the agreement, De Centrum is entitled to receive approximately 87.0% of the estimated aggregate GDV of the project, or some RM323.3 mln based on its current estimation.

Comments

• We raised our earnings forecast for 2019 and 2020 by 12.5% and 16.9% to RM22.9 mln and RM23.2 mln respectively account for the potential contribution from the Denai Hills project. Still, we maintain our HOLD recommendation on Protasco but with a higher target price at RM0.28 (from RM0.25).

• We arrive our target price on a sum-ofparts basis by ascribing an unchanged target PER of 8.0x to its 2019 fully diluted construction earnings as well as a target PER of 8.0x (unchanged) to its fully diluted 2019 concession and engineering services’ earnings. Its education and trading units’ valuation remain pegged at target PERs of 6.0x respectively due to its smaller scale businesses, while its property development division’s valuation is derived from ascribing an unchanged 0.6x its BV.

COMPANY BRIEF

• Dolphin International Bhd is planning to seek its shareholders’ approval to expand into construction and property development. The board anticipates that the proposed diversification may contribute 25.0% or more of the net profits of the group in the future. The proposed diversification of its business is subject to the approval obtained from its shareholders at the forthcoming EGM. (The Star Online)

• Yinson Holdings Bhd has inked a letter of agreement (LOA) with Sumitomo Corporation to participate in a potential joint venture for the provision of a floating, production, storage and offloading unit (FPSO) for the Marlim field in Brazil. The LOA confirmed Sumitomo Corporation’s intention to participate in the project with an effective interest of at least 20.0% in the event of a successful bid by Yinson. Under this collaboration, Yinson commits to overseeing and conducting the overall project implementation, while Sumitomo commits to seeking competitive logistics and financing on top of enhancing the project execution. (Bernama)

• OCR Group Bhd has reported that the RM324.0 mln contract to undertake a 1Malaysia Civil Servants Housing (PPA1M) project in Precinct 5, Putrajaya has been cancelled. The letter of award (LoA) it received from Damansara Realty Bhd (DBhd), for the appointment of OCR as the turnkey contractor for the PPA1M project has been terminated. The cancellation was due to the Government’s move to unify the development of affordable homes under the Ministry of Housing and Local Government. (The Edge Daily)

• KNM Group Bhd has secured an engineering, procurement and construction contract worth US$24.9 mln (approximately RM101.4 mln) for a liquefied petroleum gas (LPG) facility in Myanmar. The turnkey contract was awarded by CECA Gold Company Ltd. (The Edge Daily)

• Salween Azila Ahmad Tauffik, the group Chief Executive Officer (GCEO) of Majuperak Holdings Bhd has resigned just after five months on the job to pursue other interests. Salween, took over the post which was left vacant after Rustam Apandi Jamaludin resigned on 9th July 2018. (The Edge Daily)

• TMC Life Sciences Bhd has secured an RM300.0 mln loan from Malayan Banking Bhd to part finance the construction of hospital-related expansions undertaken by its whollyowned subsidiary, Thomson Hospitals Sdn Bhd at Thomson Hospital, Kota Damansara, Petaling Jaya. Based on the audited consolidated financial statements of the group for the financial year ended 31st August 2018, the facility, when fully drawn, is expected to increase the group's gearing to 0.4x, from 0.002x. (The Edge Daily)  

Source: Mplus Research - 4 Mar 2019