Monday, September 25th, 2017
PETALING JAYA: MIDF Research has maintained its “positive” stance on construction sector despite blips in its expectations, with financial year 2018 (FY18) potentially bearing better results due to higher revenue recognition, coupled with catalysts of subcontracting packages from China’s state-owned enterprises (SOEs).
In a note today, its analyst Fadhli Dzulkifly said the government’s policy of furtherance for the One Belt One Road Policy enables China SOEs to participate freely in construction projects, to improve its risk-reward profile.
Fadhli noted that large China’s construction SOE such as China Railways Engineering Corp and China Railways Construction Corp have made strong developments in local construction sector – shrinking the impact to local companies further.
“The ‘Buffett Indicator’ or total market cap to GNI (gross national income) of China is 92.5% and its three-year forward earnings are -0.86%. With an anaemic earnings climate in China, it is only natural for its SOEs to look for better opportunities.
“We believe the push factor for China’s SOE to Malaysia is the insipid three-year operating margin of CSI300 (Mean:+12.1%) compared to rest of FBMKLCI and Asean.”
Generally, Fadhli said Malaysia’s stable operating margin proxied by FBMKLCI’s average of 19.12% is a boon for China’s SOE.
Moreover, he said valuation of KL Construction Index is set to climb higher as the price-to-earnings (PER) and price-to-book (PBR) starts to converge again, to reflect the intensifying news flow on the sector.
He said the sectoral PER climbed to 22.9 times which is closer to its 11-year average of 24.2 times. From PBR standpoint, the sector fetches only 1.26 times PBR below its mean of 1.36 times.
Despite that, ‘writings on the wall’ such as drop in infrastructure projects and uneven earnings for big caps and small-mid caps construction companies are ominous for the sector, he added.
Meanwhile, Fadhli said the compression and uneven earnings in big-caps is seen through the accretion of infrastructure projects to the construction company’s bottom line.
For example, Pan Borneo Highway (Sarawak) was awarded to several companies such as WCT Holdings Bhd and Cahya Mata Sarawak in July 2016.
Despite that, he said the progress is still at an early stage, hence meaningful impact to WCT and Cahya Mata 1HFY17 earnings is still undemonstrative.
Fadhli said the research house believes the trend will persist due to the joint-venture (JV) and project delivery partner (PDP) structure of the mega-projects is regressive to earnings upside.
For instance, he said the revenue per share (RPS) of big caps construction companies (BC) has lagged the RPS of small-mid caps construction companies (SMC).
“However, revenue growth does not always translate into healthy earnings. Earnings per share (EPS) for BC and SMC under our observation have decreased due to higher expenses, longer project period and gaps in billings recognition.
“We opine that longer termed contracts yield lower margins, compared with packages with shorter duration, hence the dovish EPS growth for SMC.”
PETALING JAYA: Foundpac Group Bhd is acquiring a 75% stake in Dynamic Stencil Sdn Bhd (DSSB) for RM16.5 million.
The group said in a filing with Bursa Malaysia that it had entered into a share sale agreement with the vendors Lim Seng Chiew and Lim Seng Choon for the acquisition.
DSSB is principally engaged in the manufacture and sale of laser stencils. It registered a net profit of RM1.9 million for the financial year ended May 31, 2017. The purchase consideration is to be funded from internally-generated funds.
Foundpac is principally involved in the design, development, manufacture, marketing and sale of precision engineering parts, namely, stiffeners, test sockets, hand lids and related accessories.
It said the proposed acquisition is an opportune venture for the group to market laser stencils, which serves as a complementary component, to its customers.
Concurrently, Foundpac said it may also cross-sell its products to DSSB's customers.
With that, both parties may leverage on each other's customer base to increase their revenues.
“On these bases, the board believes that the proposed acquisition would contribute positively to the group's future earnings and financial position of the group.”
Foundpac shares rose 2.5 sen to close at 91.5 sen, on some 15.17 million shares traded. It has a market capitalisation of RM338.6 million.
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KUALA LUMPUR: The government of the United Kingdom(UK) has injected an additional £2.75 billion(RM15.59 billion) into its export credit agency the UK Export Finance (UKEF), bringing the total financial support available for UK-Malaysia trade to £5 billion (RM28.35billion).
The UK's trade envoy to Malaysia Richard Graham, MP said the additional financing available through the credit agency will provide Malaysian buyers access to attractive long-term financing to source high-quality goods and services from the UK.
“I am delighted to announce that the UK Government, through UK Export Finance, is increasing financial support available for trade with Malaysia to £5 billion, meaning billions of pounds of additional financial support to support UK exporters and their Malaysian buyers,” Graham said.
The UKEF which now provides Ringgit as a currency means, will enable buyers in Malaysia an access to financing in their own currency when sourcing from the UK.
KUALA LUMPUR: Bursa Malaysia closed lower on Monday following a long weekend on lack of buying momentum amid mixed performance on regional bourses, dealers said.
At the close, the key FTSE Bursa Malaysia KLCI (FBM KLCI) fell 1.90 points to end at 1,769.14 against last Thursday's close of 1,771.04.
Earlier, the benchmark index opened 0.35 of-a-point better at 1,771.39.
Market breadth was negative as losers overwhelmed gainers 626 to 259 with 349 counters unchanged, 611 untraded and 23 others suspended.
Volume fell to 2.46 billion units worth RM2.36 from 3.25 billion units worth RM2.41 billion last Thursday.
The market was closed on Friday for Awal Muharram holiday.
A dealer said market sentiment was quiet earlier as market participants digested the outcome of the national elections in Germany and New Zealand over the weekend.
“Later in the day we saw selling activities in the market but overall the losses in the exchange were capped by higher oil prices, with Petronas-linked companies seen supporting the index,” the dealer said.
Regionally, Japan's Nikkei 225 rose 0.50% to 20,397.58 boosted by gains in most automakers and finance counters, while the South Korea's Kospi reversed earlier gains to end 0.35% lower at 2,380.40.
On the home front, Petronas Gas soared 42 sen to RM18.44, Petronas Chemicals added five sen to RM7.35, while Petronas Dagangan was four sen better at RM24.26.
On the scoreboard, the FBM Emas Index was 23.20 points lower at 12,602.52, the FBMT 100 Index went down 18.927.74 points to 12,276.94, the FBM Emas Syariah Index retreated 10.18 points to 12,821.64, the FBM 70 fell 44.88 points to 15,046.87 and the FBM Ace decreased 71.00 points to 6,581.34.
Sector-wise, the Plantation Index declined 30.90 points to 7,886.37, the Finance Index lost 117.64 points to 16,641.10 but the Industrial Index went up 6.94 points to 3,227.49.
For other heavyweights, Maybank fell seven sen to RM9.78, Tenaga slipped four sen to RM14.40, Public Bank added two sen to RM20.60 and IHH was two sen better at RM5.82.
Among active counters, Hibiscus gained 1.5 sen to 63 sen, Trive Property improved half-a-sen to 16.5 sen, CIMB eased four sen to RM6.31 and Netx was flat at 5.5 sen.
The Main Market volume decreased to 1.78 billion shares worth RM2.25 billion from last Thursday's 2.44 billion shares worth RM2.27 billion.
Volume on the ACE Market narrowed to 525.63 million units valued at RM95.42 million versus 599.62 million units valued at RM122.37 million.
Warrants declined to 156.62 million units worth RM17.28 million from 207.07 million units worth RM19.04 million.
Consumer products accounted for 69.20 million shares traded on the Main Market, industrial products (533.95 million), construction (64.00 million), trade and services (704.55 million), technology (148.52 million), infrastructure (8.84 million), SPAC (13.18), finance (100.31 million), hotels (3.3 million), properties (107.88 million), plantations (14.51 million), mining (51,000), REITs (7.5 million), and closed/fund (8,300).
The physical price of gold as at 5pm stood at RM168.87 per gramme, down 46 sen from RM169.33 at 5pm last Thursday. — Bernama
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