Our June alpha picks delivered a simple average of 12.8%, well above market returns, primarily supported by Gabungan AQRS’ sharp bounce (+87.5% mom) as the government signalled to proceed with mega project ECRL. For July, we reduce our exposure to construction stocks, and add Inari and VS Industry. We reckon that most of our picks have reached their inflection points, trading close to their trough valuations, while their respective event catalysts are drawing close.

WHAT’S NEW

Review of June’s picks. Chalking a respectable +12.8% mom simple average return, most of our alpha picks recovered from May’s bloodbath while the FBMKLCI still recorded a 2.8% loss. Supporting this was Gabungan AQRS’ (GAQRS) stellar performance (+87.5% mom) following the new government’s announcement to proceed with mega project East Coast Rail Link (ECRL) while the company remained positive on the Pan Borneo Highway Sabah (PBHS). A secondary driver for GAQRS was the announced free warrants on a 1-for-4 basis. Our alpha picks still managed to outperform the market at +0.3% excluding AQRS’ significant return, led by IJM Corp (+6.4%) and Yong Tai (+4.3%).

ACTION

Inari and VS Industry added to July’s picks, as we position for the commencements of newly-won assembly and test contracts, possible new contract wins, and a softer ringgit. However, we have dropped Gamuda and IJM as the newsflow on the government’s confirmation to proceed with some mega projects (ECRL, TRX) has played out.

July’s alpha picks are Bumi Armada, Cahya Mata Sarawak, Gabungan AQRS, Inari, Serba Dinamik, VS Industry and Yong Tai. We foresee near-term event catalysts for all our picks except Serba Dinamik.

Bumi Armada (Kong Ho Meng)

2018 is set to be a turnaround year for the group, with earnings set to ramp up from 2Q18 on Olombendo's final acceptance in May 18. The improved frequency of monthly offloadings of Kraken to three tankers since Jan 18 is positive as it shows Kraken’s production improvement is real and ongoing. This will sustain Kraken's earnings qoq into 2Q18, while Kraken's final acceptance is also on track by mid-18 (which will lift 2H earnings further). We also see the possibility of a TGT1 extension by Aug 18.

Share Price Catalyst

• Conclusion of final acceptance of Kraken and Olombendo by 1H18.
• Recovery of OMS utilisation and rates.

Cahya Mata Sarawak (Abdul Hadi Manaf)

Following a 42% drop in share price, CMS trades at only 8x 2018F PE. Share price has been unduly swayed by calls by a non-government organisation to investigate on past graft allegations on Sarawak’s ex Chief Minister Taib Mahmud, the controlling shareholder of CMS. However, Taib Mahmud’s family has not been involved in the management of CMS for over a decade, and CMS has not been heavily reliant on government related projects/contracts.

2Q18 earnings are expected to neatly beat consensus forecast, led by a significant earnings jump at 25%-owned OM Sarawak.

Share Price Catalyst

• Significant jump in OM Sarawak’s 2Q18 earnings.
• Commencement of another mega project MPA (phosphate manufacturing) in 3Q18, which leverages on cheap electricity from Bakun dam.

Gabungan AQRS (Vincent Khoo)

Trades at a mere 6.4x 2019 earnings before factoring in mega project subcontracting works, driven by construction contracts at hand and a launch of a property development. Targets to secure >RM2b of contract works for ECRL as well as Sabah portion of the Pan Borneo Highway Sabah (PBHS), which would also lift the group’s precast manufacturing division. The government has allowed the ECRL project to proceed, while a final decision on PBHS is still pending (although construction works are already ongoing for some stretches).

Share Price Catalyst

• Clinching contract parcels for ECRL.
• Remaining stretches of PBHS receiving the government’s nod to go ahead.
• Strong take up for E’Island, a RM491m GDV medium-end priced but high quality condo project in Puchong, Selangor.

Inari Amertron (Yeoh Bit Kun)

Earnings are expected to improve hoh in 2HFY19 on: a) RF production ramp-up to support its US end-customer’s smartphone launch in September, and b) contribution from data centre chip testing job and fibre-optics chip fabrication and wafer certification jobs.

Outlook remains positive on: a) new jobs from OSRAM (related to facial recognition and health sensor products for smart devices and mini LED for billboard applications), b) Inhouse job (foundry bank-end process for fibre optics products) transfer from Broadcom to complete in end-18, c) Consolidation of operations to improve operational efficiency, and d) Potential new business for its Batu Kawan plant which is currently under construction.

Share Price Catalyst

• Benefitting from weakening ringgit.
• Confirmation on new contracts.

Serba Dinamik (Kong Ho Meng)

Earnings growth to trump expectations on the back of yearly new contract wins (RM2.8b target to bring total 2018 orderbook to RM7.2b - close to management's guidance of RM7.5b) and high renewal rate (>80%) of its existing orderbook. We expect Serba to announce more contracts as it embarks on its asset ownership strategies. Our earnings forecasts are above consensus’.

Share Price Catalyst

• Higher-than-expected new orderbook wins and renewals.
• Lower-than-expected costs and quicker profit breakeven achievement from JV income (Muaro Jambi)

VS Industry (Fong Kah Yan)

Following a 13.9% drop in share price in the past one month which may be attributed to the weak 3QFY18 results, we believe that the worst is over. We expect margins to recover on better operating leverage on commencement of new models for its key customers in 2H18 and 1H19. VSI is currently focusing on filling up capacities at its two new plants which came on-stream in mid-18. Hence, potential large contract wins to fill-up capacities at the plants will lift sentiments further.

Share Price Catalyst

• Large contract wins from key customers or/and new customers.
• Favourable forex movement.

Source: UOB Kay Hian Research - 2 Jul 2018