Thursday, January 25th, 2018


Dollar hits three-year euro low as ECB warns of forex volatility

LONDON, Jan 25 — The dollar sank to a three-year euro low today after a top member of Donald Trump’s cabinet talked down the currency, while European Central Bank chief Mario Draghi warned that exchange rate volatility was as “source of…

OPR hike may weigh on corporate, consumer spending

PETALING JAYA: Bank Negara Malaysia's (BNM) decision to raise the Overnight Policy Rate (OPR) by 25 basis points (bps) to 3.25% could further curb corporate and consumer spending amid rising cost of living, resulting in slower economic growth, according to analysts.

The ringgit shot up to a high of 3.8853 today after the rate hike announcement. As at 8pm, it traded at 3.8855 against the greenback.

Head of research at Inter-Pacific Research Sdn Bhd Pong Teng Siew told SunBiz that companies and consumers will have to spend more on loan repayments and have less to spend on investments, discretionary spending as well as consumption items, which will see a moderation in gross domestic product (GDP) growth to some extent. The property sector could also be one of the hardest hit sectors.

He believes larger banks will take the lead by adjusting their base lending rates (BLRs) upwards within a week from BNM's announcement.

“Some banks will react very quickly, perhaps within a day or two,” he said.

Pong said theoretically, the OPR needs to be at around 3.7% in order to return to a positive real interest rate environment given that headline inflation grew 3.7% in 2017. Real interest rates have been in the negative territory for 12 consecutive months.

The central bank increased the OPR for the first time since July 10, 2014 at its Monetary Policy Committee (MPC) meeting yesterday. The last action was to cut it from 3.25% to 3% on July 13, 2016.

With the OPR hike, the floor and ceiling rates of the corridor for the OPR are correspondingly raised to 3% and 3.50% respectively.

Explaining the rationale for the rate hike, BNM said there is a need to pre-emptively ensure that the stance of monetary policy is appropriate to prevent the build-up of risks that could arise from interest rates being too low for a prolonged period of time.

The central bank also pointed to a strong growth momentum in 2018, supported by stronger global growth and positive spillovers from the external sector to the domestic economy.

Pong said it is possible for the central bank to raise the OPR by another 25 bps this year, depending on the future levels of inflation and global oil prices.

He highlighted that BNM had repeatedly postponed the interest rate hike, as it viewed the higher level of inflation as transitory and would eventually ease off.

“But this time it was not to be, because the oil price is climbing and the level of inflation is not going to come back down again. I think it (inflation rate) is probably going to be maintained at a very high level for some time to come. And that makes future rate hikes more likely,” he said.

Pong acknowledged that the strengthening of ringgit would likely bring down the inflation rate gradually, but the sustainability of the ringgit rally is uncertain.

Meanwhile, MIDF Research expects no more hikes, as it forecasts GDP growth to remain strong this year, supported by gradual rise in global commodity prices, further market integration, stable labour market and contained inflationary pressure.

It foresees Malaysia’s economy to grow 5.5% in 2018, slower than previous year’s forecasted growth of 5.9%, with inflation falling to 2.6% amid unfavourable base effects.

Separately, CIMB Group CEO Tengku Zafrul Aziz in a statement said the market will be able to absorb the modest 25 bps hike particularly with the stronger Ringgit and the government having a firm grip on inflation.

“We do not expect any further interest rate hikes in the near term, but whatever the macro situation, CIMB is ever ready and well-equipped to help our customers navigate interest rate hikes and other business challenges, whether in Malaysia or in Asean.”

Consumer sentiment-economic growth disconnect may be due to income distribution disparity

KUALA LUMPUR: The disconnect between consumer sentiments on the ground, which is lacking the “feel good sentiments”, and the stellar growth in terms of gross domestic product (GDP) could be due to disparity in income distribution.

“Looking at the average growth numbers some parts of the economy are growing more strongly than the others (and) some Malaysians are making more in that growth than the others”, said World Bank Group lead economist, macroeconomics & fiscal management global practice, Richard Record today.

He also said that the inflationary pressure on food and housing, which is continuously on the rise, has resulted in the poorest 10% spending 75% of their income on the two necessities.

“In the middle of last year we saw strong inflationary pressure around food and housing products. If you breakdown Malaysians from poorest 10% to the richest 10% what you will find is that those in the bottom end of Malaysia’s income distribution spends a very high proportion of their income on food and housing,” he explained, adding that rising transportation and fuel prices have also increased spending pressure.

Record was speaking at a panel session entitled “Malaysia’s Economic Prospects and Challenges-Is the Worst Over? Is the Recovery Sustainable?” during the 20th Asian Strategy & Leadership Institute’s (ASLI) Malaysia Strategic Outlook Conference.

Socio-economic Research Centre (SERC) Executive Director Lee Heng Guie said at the session that based on household income expenditure between 2014 and 2016, it was noted that the Bottom 40 (B40) group could only afford a monthly net saving of RM54, while the Middle 40 manages to save some RM365 and Top 20 could afford RM820.

Thus, he said, any shocks to income will hit the B40 and M40 brackets the most, as their consumption account for 50% of total private consumption.

While cash handouts such as BR1M, according to Lee, do to an extent “help” these groups, a longer term solution. such as employment and higher income, is crucial to help them sustain their consumption.

He noted that Malaysia’s household debt still remains high, although there wa a marginal drop.

As at September 2017, Malaysia’s household debt was at 84.6% to the GDP.

Meanwhile, moderator of the session and ASLI Chairman Tan Sri Ramon Navaratnam noted that consumption is rising due to borrowings, which in turn has led to personal debt issues.

“This consumption generated growth cannot be sustainable. Consumption is rising because people without higher wages or income or disposable income are borrowing and that causes problem of personal debt which can be a source of instability,” said Ramon.

Brahim’s bags KTMB deal

PETALING JAYA: Brahim’s Holdings Bhd’s subsidiary Brahim’s SATS Food Services Sdn Bhd has entered into a catering services agreement with Keretapi Tanah Melayu Bhd (KTMB) for the supply of food & beverages on all Electric Train Services (ETS) operated by KTMB.

Brahim’s told Bursa Malaysia that the deal also includes operating identified rail café at stations/terminals, developing IT software to integrate with KTMB software to capture the sales of pre-booked meals, renovating and making good the new catering kitchen hubs at Butterworth and Kuala Lumpur stations.

The agreement became effective from May 1, 2017 and will continue for a fixed initial term of five years until April 30, 2022. It is expected to contribute positively to the company’s future earnings.

Brahim’s shares were up 1.1% to close at 44.5 sen on some 105,100 shares done.

Malaysia joins OECD-led multilateral tax framework

KUALA LUMPUR, Jan 25 — Malaysia is committed to meet the internationally-agreed tax standards by signing the Organisation for Economic and Cooperation Development (OECD)-led initiative, the Multilateral Convention to Implement Tax Treaty Related…

Comintel falls into PN 17

PETALING JAYA: Comintel Corp Bhd slipped into the Practice Note 17 (PN 17) status after it underwent a major disposal exercise which left it without a business.

The company said in a filing with the stock exchange that Bursa Securities does not consider it a cash company and instead is an affected issuer with a PN17 status.

Comintel completed the disposal of its 100% stake in BCM Electronics Corporation Sdn Bhd to Aurelius Holdings Sdn Bhd for RM123.8 million, which triggered Paragraph 8.03A(2) of the Main Market Listing Requirements of Bursa Malaysia Securities Bhd.

BCM Electronics provides printed circuit board assembly, sub-system assembly and box build manufacturing services to original equipment manufacturers (OEM) of telecommunication equipment, network equipment, tracking and monitoring devices, power solutions and telemetric products.

Comintel is required to submit a regularisation plan to the regulator within 12 month, failing which will face suspension and delisting.

The company noted that it is taking the necessary actions to develop and expand the waste-to-energy and green waste management business in order to regularise its condition.

Comintel had expected that its maiden waste-to-energy 2MW plant in Kuang to be fully commissioned and revenue generating in the fourth quarter of the financial year ending Jan 31, 2018.

Despite that, its shareholders and potential investors are reminded that there is no assurance that the company will be successful in developing and growing these segments and/or venture into other viable businesses.

Its share price gained 0.6% to close at 81 sen, with some 989,300 shares changing hands.

R&A Telecommunication to be delisted from Jan 30

PETALING JAYA: Guidance Note 3 (GN 3) company R&A Telecommunication Group Bhd will be delisted from Bursa Malaysia next Tuesday, after the regulator rejected its appeal for an extension of time to submit a new regularisation plan.

Despite the delisting, the company’s securities may remain deposited with Bursa Malaysia Depository Sdn Bhd and it is not mandatory to be withdraw from Bursa Depository.

Upon the delisting, R&A will continue to exist but as an unlisted entity. It is still able to continue its operations and business and proceed with its corporate restructuring and its shareholders can still be rewarded by the company’s performance.

“However, the shareholders will be holding shares which are no longer quoted and traded on Bursa Securities,” it said.

Trading in R&A shares have been suspended since September 14, 2016.

Yinson a buy, with target price of RM5.50 a share

PETALING JAYA: AmInvestment Bank maintained its buy call on Yinson Holdings Bhd and raised its target price for the group to RM5.05 a share on its novation agreement with TH Heavy Engineering Bhd for the Layang Development floating, storage production and offloading (FPSO) job.

The stock closed unchanged at RM4.20, with some 161,500 shares changing hands.

It has not changed its forecasts for the group and has a sum-of-parts (SOP) fair value of RM5.05/share (from an earlier RM4.50/share), which implies an FY19F price to earnings (PE) of 17x.

It also expects further re-rating possibilities with the extension of the group's 49%-owned Lam Son FPSO charter.

The Lam Son FPSO vessel is still being deployed in the field after the charter termination in June last year.

In its note today AmInvestment said Yinson is expected to deploy its currently idle Four Rainbow FPSO, acquired at a cost of US$44mil, which has better specifications to the field requirements.

Together with conversion costs likely below US$200mil, its assumption of a capex of US$350mil for the Layang FPSO is
achievable. Hence, it maintained the Layang FPSO’s net present value (NPV) of RM395mil in Yinson’s unchanged sums-of-part valuation.

“There is a possibility that Yinson may revise some of the charter terms in Yinson’s favour, including a potential award of the operation and maintenance contract, which could support our assumed project IRR of 12%,” AmInvestment said.

The firm added that the excess cash of US$35mil post-full settlement of the Lam Son FPSO debt which was paid off with the termination fee, coupled with US$117mil proceeds from selling a 26% stake in the JAK FPSO to a formidable Japanese consortium, the group has a massive cash pile of RM1.3bil (30% of market cap) to secure new FPSO projects.

If Yinson secures the charter for the US$1bil FPSO for Hess’ Tano-Cape Three Points project off Ghana by the end of the
year, Yinson’s SOP can be raised further by 35% or RM1.79/share.

Underpinned with locked-in earnings visibility from an order book of US$4.2bil (25x FY18F revenue), the stock currently trades at a bargain current year 2018 forecast PE of 14x vs. over 20x for Dialog Group and Sapura Energy.

Inflation to ease in 2018 on strong ringgit

PETALING JAYA: The strength of the ringgit is expected to moderate the inflation in 2018, according to economists.

PublicInvest Research expects the inflation to slow down in 2018 to an average 3% against 3.9% in 2017 due to several factors, including the expected rise in the ringgit, which will be a dampener on imported inflation.

“We expect the ringgit to average at RM4.00-4.10 per US dollar in 2018 vs RM4.30 per dollar average in 2017, marking an almost 6% appreciation.”

The ringgit broke the 3.90 level in early trade yesterday to a high of 3.8890 against the greenback. As at 5pm, it was at 3.8965 to the dollar.

The research house also foresees an orderly rise in crude oil prices driven by the gradual adjustment in the US policy rates, which is one of the catalysts to support the ringgit’s stability.

As core inflation is expected to be lower at 2.3% in 2018 from 2.5% in 2017, PublicInvest Research said it signals muted demand-driven inflation, supporting the view of a less-than-aggressive policy intervention by the central bank.

The Consumer Price Index (CPI) rose slightly in December to 3.5% year-on-year versus 3.4% in November, pushing the full-year CPI to 3.7%.

Meanwhile, Kenanga Research estimates inflation to average at 2.8% this year given the expected ease of imported inflationary pressure in Q1, particularly on food prices.

The research house said while the ringgit is expected to take a breather moving into 2018 on the back of the impact of US tax reforms as well as an expected three US Fed rate hikes, there is room for it to sustain a gradual appreciation at least in Q1 on healthy macro conditions, continued US dollar weakness and stronger crude oil prices.

Corporate bond issuance hit record high of RM124.9b in 2017

KUALA LUMPUR: The latest edition of RAM Ratings’ Bond Market Monthly highlights that gross issuance of corporate bonds hit a record high of RM124.9 billion in 2017, surpassing its expectation of RM105 billion-RM115 billion.

The last time gross issuance reached such a lofty level was in 2012, clocking in at RM121.1 billion. The robust issuance in 2017 was supported by both sub-segments of the corporate bond market: quasi-government and private, which posted double-digit year-on-year growth rates of 46.1% and 45.6% respectively.

RAM’s head of research Kristina Fong said the bond market will remain robust this year, with RM90 billion-RM100 billion of gross corporate bond issuance expected.

“This will again likely be driven by a healthy pipeline of issuances from the financial institutions and infrastructure & utilities sectors, which have traditionally issued the lion’s share of the market’s corporate bonds.

“Last year, total issuance of MGS and GII (Malaysian government securities/government investment issues) came in at RM113.9 billion – surpassing our projection of RM100 billion-RM110 billion. Taking into account the government’s deficit financing needs and the RM62.8 billion of MGS and GII set to mature this year, we expect gross issuance of long-term government debt securities to sum up to RM100 billion-RM110 billion in 2018,” said Fong.

Overall, foreign holdings of Malaysian bonds posted a net outflow of RM8.0 billion in 2017, as opposed to a net inflow of RM825 million in 2016. The bulk of the outflow occurred in the first quarter, following Bank Negara Malaysia’s (BNM) curb of offshore ringgit trading in November 2016; foreign investors had subsequently wound down their positions in the Malaysian bond market by RM37.4 billion.

Although the trend reversed in the second quarter of 2017, after the announcement of BNM’s liberalisation initiatives on currency and interest-rate hedging mechanisms onshore, the cumulative inflow of RM29.4 billion in the last three quarters could not compensate the excessive knee-jerk reaction at the start of the year.

Moving forward, the Malaysian bond market is anticipated to experience pressure from the outflow of foreign investors this year, stemming from external global developments such as the relative pace and timing of future monetary policy tightening by the US Federal Reserve.

That said, the brighter outlook for the ringgit – which has so far maintained its uptrend against the greenback in January, having appreciated more than 3% since end-December 2017 – may offer some support to foreign investments. Moreover, the market remains vulnerable to geopolitical risk – a major driver of market uncertainties in 2018.