Rebound To Sustain In The Near Term

• The FBM KLCI manage to recover all its intraday losses as the key index clawed its way into the positive territory in the second half of the trading session before closing 0.1% higher yesterday. The lower liners also closed mostly higher as the FBM Small Cap and FBM ACE gained 0.3% and 0.7% respectively, while the broader market finished mixed.

• Market breadth stayed negative as losers outnumbered winners on a ratio of 502-to-436 stocks, while 376 stocks traded unchanged. Traded volumes, however, gained 17.3% to 3.13 bln shares on signs of bargain hunting activities.

• Key winners on the local bourse were Malaysia Airport Holdings (+22.0 sen), Hartalega (+19.0 sen), Petronas Chemicals (+14.0 sen), RHB Bank (+7.0 sen) and Top Glove (+7.0 sen). Significant advancers on the broader market were G3 Global (+20.0 sen), Shangri-La (+19.0 sen), Padini (+11.0 sen), Kossan (+10.0 sen) and Pentamaster (+10.0 sen).

• On the flipside, Aeon Credit (-34.0 sen), Hong Leong Industries (-28.0 sen), Carlsberg (-20.0 sen), Panasonic (-14.0 sen) and Innoprise Plantations (-13.0 sen) fell on the broader market. Meanwhile, Hong Leong Bank (-24.0 sen), Petronas Dagangan (-14.0 sen), Axiata (-11.0 sen), Nestle (-10.0 sen) and Petronas Gas (-10.0 sen) declined in the key index.

• Despite recouping most of their intraday losses, Asian benchmark indices remained in the red as the Nikkei slipped 0.7%. The Shanghai Composite (-1.6%) tumbled for the fifth straight session on the lingering uncertainties over the Sino-U.S. trade progress, while the Hang Seng Index ended 0.7% lower. ASEAN stockmarkets, meanwhile, closed mostly lower on Tuesday.

• U.S. stockmarkets rebounded from their recent slump as the Dow gained 1.2% after Chinese government officials announced measures to keep its currency from falling too far. On the broader market, the S&P 500 added 1.3% with only the energy sector (-0.1%) in the red, while the Nasdaq closed1.4% higher.

• Earlier, European benchmark indices – the FTSE (-0.7%), CAC (-0.1%) and DAX (- 0.8%) all extended their losses after falling into the negative territory in the final trading hour. Rising prospects for a Brexit from the European Union without a deal dampened the market sentiment.

THE DAY AHEAD

• The Chinese government’s move to limit the RMB’s weakness helped to shore up sentiments mildly in yesterday’s afternoon session that also allowed stocks on Bursa Malaysia to tip back into the positive territory.

• Although the trade dispute concerns and the prospects of weaker global economic growth are still overwhelming, we think that there could be continuing reprieve for Malaysia stocks over the near term as they continue to recover from oversold. The positive performance on Wall Street overnight, coupled with the slight easing of the trade tensions, will further help to shore up the near term sentiments, albeit the general market outlook is still one of cautiouness.

• The ongoing rebound could lead the FBM KLCI to 1,620 level, followed by the 1,630 level. We have earlier noted in our most recent Quarterly Outlook that we see the 1,600 points level providing firm support and we continue to think that the level will remain a key support level. In the interim, there is support at the the 1,604 level.

• The lower liners and broader market shares are also seeing a recovery that we also see continuing over the near term sentiments improve slightly to prompt bouts of bargain hunting activities.

COMPANY UPDATE

• Hartalega posted a 24.7% Y.o.Y fall in its 1QFY20 net profit to RM94.1 mln, from RM124.9 mln a year earlier, owing to lower sales volume and increased operational costs (i.e.: packaging, electricity, heating and labour). Revenue also fell, but by a smaller degree to RM640.1 mln (-9.4% Y.o.Y), from RM706.4 mln last year.

• The latest earnings were and revenue were below expectations – accounting for only 16.6% and 19.2% of our previous full-year forecast net profit and turnover of RM566.3 mln and RM3.34 bln respectively. The variance is mainly due to lower-than-expected sales volume and higher utility costs, in-tandem with the recent natural gas tariff hike by Gas Malaysia, among others.

Comments

• With the weaker results, we trim our FY20-FY21 net profit estimates by 29.5% and 18.9% respectively, mostly accounting for lower sales volumes, thinner margins and rising costs. Although nitrile and butadiene prices are lower than last year any cost savings will be passed on to the customers eventually, limiting margin gains.

• We downgrade our recommendation on Hartalega to SELL (from Hold) with a lower target price of RM4.40 by ascribing to an unchanged target PER of 34.0x to Hartalega’s FY20 EPS of 12.9 sen as we see limited upside catalysts for the group amid tighter competition which could continue to worsen and rising costs. The group’s forward PER of 39.0x is also above its five-year mean of 34.6x, as such, indicating that valuations are stretched currently.

• Our target PER remains at a premium to Hartalega’s competitors premised on: (i) Hartalega’s solid position as the global market leader in the nitrile glove segment, (ii) superior operational efficiency in terms of production speed and the lower number of workers per glove output, (iii) consistent and high quality control standards, and (iv) solid fundamentals where it commands the highest net profit margin vs. its peers.

COMPANY BRIEF

• Mah Sing Group Bhd is planning to buy approximately 1.8 ha. (4.5-ac.) land along Jalan Wangsa Melawati 1, Kuala Lumpur for RM62.0 mln, for the development of two blocks of condominiums with an estimated gross development value of RM378.0 mln. The tract is a leasehold land expiring on 21st January 2117. (The Edge Daily)

• Independent advisor Mercury Securities advises loss-making Tasek Corp Bhd’s minority shareholders to accept the revised takeover offer of RM5.80 per share by Singapore-listed Hong Leong Asia Ltd, as the revised offer for its ordinary shares is seen as is “fair and reasonable”. However, the offer of RM5.80 for preference shares is “not fair but reasonable”.

• Mercury Securities is of the view that the RM5.80 offer, which has been raised from RM5.50 previously, is 47.0 sen-to-69.0 sen higher than the range of estimated value of Tasek’s ordinary shares, representing a premium of between 8.8% and 13.5%. (The Edge Daily)

• Barakah Offshore Petroleum Bhd is asking for RM1.02 bln as compensation from Petroliam Nasional Bhd (Petronas) and the latter's exploration arm Petronas Carigali Sdn Bhd (PCSB), over what it claims to be an unwarranted suspension notice.

• The compensation amount is based on the loss of future profits, reputation and market share prices, as a result of the three-year suspension notice issued by Petronas on 8th July 2019 on the licence of Barakah's wholly-owned, PBJV Group Sdn Bhd.

• Barakah said the notice was issued after the completion of a contract to provide underwater services for PCSB, and was issued — according to Petronas — based on grounds of adverse reports of PBJV's performance. (The Star Online)

• Fraser and Neave Holdings Bhd's (F&N) 3QFY19 net profit gained 10.0% Y.o.Y to RM114.9 mln, compared to RM104.5 mln a year earlier, on the back of better performance from its Thai operations and marginally better results from its Malaysian operations. Quarterly revenue was also higher by 10.9% Y.o.Y to RM1.07 bln, from RM961.9 mln in the same period last year.

• Cumulative 9MFY19 net profit increased by 12.6% Y.o.Y to RM342.2 mln, from RM303.9 mln in the previous corresponding period, with revenue up 6.1% Y.o.Y at RM3.1 bln, from RM2.92 bln previously. (The Edge Daily)

• Unisem (M) Bhd’s 2QFY19 net profit more than halved to RM14.5 mln vs RM31.1 mln a year ago, on lower sales volume, while revenue also narrowed by 9.1% Y.o.Y to RM311.9 mln, from RM343.2 mln a year ago. Nevertheless, the group declared an interim dividend of two sen per share, payable on 6th September 2019.

• The weak quarterly performance weighed on its cumulative 1H2019 to RM20.5 mln (-44.9% Y.o.Y), from RM37.2 mln a year ago, while revenue fell 7.5% Y.o.Y to RM615.1 mln, from RM664.8 mln in 1H2018. Moving forward, Unisem expects uncertainties stemming from the global trade war to continue into 2H2019. (The Edge Daily)

• PRG Holdings Bhd's 54.2%-owned subsidiary, Furniweb Holdings Ltd has issued a profit warning as it expects to record a net loss of RM4.2 mln for its 1H2019 results, compared with a net profit of RM600,000 during the same period a year earlier. (The Star Online)

• Malaysia Steel Works (KL) Bhd's (Masteel) standalone credit profile remains vulnerable to fluctuations in steel price, fluctuating cost of raw materials and increased competitive pressures in the Malaysian market, according to Malaysian Rating Corp Bhd (MARC). MARC also concurred that given Masteel's relatively modest market position in the production of steel billets and steel bars, which are mainly for local consumption, these factors have weighed on its profitability margins.

• Nonetheless, the rating agency has affirmed its AAA IS(fg) rating on Masteel's RM130.0 mln Sukuk Ijarah programme, with a stable outlook. The affirmed rating and outlook are based on the unconditional and irrevocable financial guarantee insurance provided by Danajamin Nasional Bhd. (The Edge Daily)

• Practice Note 17 (PN17) company Malaysia Pacific Corp Bhd (MPCorp) will resume trading of its shares starting today, after the stock was suspended for a year. This follows the termination of the winding-up order, that was filed by RHB Bank Bhd over unpaid debts back in June last year. The company has filed an application for the termination of the winding-up order on 19th July 2019. (The Edge Daily)

Source: Mplus Research - 7 Aug 2019