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Analysts turn cautious on banking

PETALING JAYA: In line with the central bank’s view of heightened downside risks in 2019 emanating from external uncertainties, analysts have turned cautious on the banking sector’s core net earnings growth in 2019.

Affin Hwang Capital currently pencils in a growth rate of 2.5% year-on-year against a stronger growth rate of 6.9% year-on-year as seen in 2018.

“We continue to see higher earnings downside risks arising from deposit competition within the sector itself, of which will drive up funding costs and erode bank’s net interest margin,“ the research house said in a report today.

It said market participants are currently worried about a potential cut in the overnight policy rate (OPR), of which will be negative for the banking sector earnings in the near term before the downward repricing effects of deposit start to kick-in in the next six to 12 months.

Despite that, Affin Hwang believes that the banking sector is underpinned by sound asset quality (as implied by a gross impaired loan ratio of 1.45% as at January), of which is also underscored by the high debt-servicing capacity of the business sector.

On the asset quality of household debts, it said the decline in aggregate impairment ratio to 1.2% (2018) from 1.4% (2017) implies that banks continue to be watchful of unproductive growth of household credits (especially for unsecured lending) and exercise stringent approvals only for borrowers with sound debt-servicing capacity.

It maintained its neutral stance on the sector, noting that business and consumer outlook in 2019 will be dampened by external uncertainties and a lack of domestic catalysts.

“For 2019, we have a loan growth target of 5%, against a higher target of 7-8% set by some key banking players in the industry. On a more positive note, our strong economic fundamentals – resilient consumer spending, business growth and low unemployment rate, are holding up. We expect consumer sentiment and business activities to gradually improve in 2H19 as trade tension may dissipate.”

Kenanga Research said loans growth will remain to be moderate, but valuations seem more attractive with most of the banking stocks under its coverage being rated as outperform except for CIMB, Hong Leong Bank Bhd, Public Bank and RHB Bank Bhd which are at market perform.

It warned that further external risks might put a dampener on business sentiments with softer demand and applications with higher risk perceived lowering approval rates. The dampening credit demand might be exacerbated by an increase in corporate bonds as upside pressure on interest rates lessens.

Meanwhile, AmInvestment Bank maintained its “overweight” call on the sector due to the anticipation of global liquidity into emerging markets from a slowdown in normalisation of the US monetary policy that is widely expected.

“The fund inflows are expected to benefit share prices of banking stocks which are liquid, offering decent dividend yields with banks still expected to deliver positive growth in earnings despite challenging conditions,“ it said.


E&O has deep value, says Affin Hwang Capital

PETALING JAYA: Affin Hwang Capital reiterated its long-term “buy” call on Eastern & Oriental Bhd (E&O) with a reduced target price of RM1.44, after a visit to the property developer’s Seri Tanjung Pinang Phase 2A (STP2A) project.

“We reduce our RNAV (revalued net asset value)/share to RM2.88 from RM3.12 previously to reflect the dilutive impact of the private placement. Based on the same 50% discount to RNAV, our target price is cut to RM1.44 from RM1.56. We see deep value in the stock as it is currently trading at price/RNAV of 0.3 times,” it said in its report.

According to Affin Hwang Capital, overall reclamation work is 73% complete at STP2A and the group is on track for full completion by end of 2019.

The reclamation work was initially slated for completion in June 2018, but was delayed to December 2019 due to complications encountered in undertaking large scale reclamation projects namely a 253-acre island and 131-acre Gurney Wharf.

The 131-acre Gurney Wharf will be handed over to the government upon completion.

“We saw a substantial portion of development land on the island has surfaced during our visit. We gather that non-financial foreign parties, including several from Singapore, are exploring joint venture opportunities with E&O to develop part of STP2A,” said Affin Hwang Capital.

Meanwhile, the entry of Tan Sri Wan Azmi Wan Hamzah as a strategic partner is expected to support E&O’s fund raising efforts to accelerate the development of STP2A.


Malaysia’s ¥200 billion bond priced at 0.63% coupon rate per annum

PETALING JAYA: The Malaysian government has priced its ¥200 billion (RM7.3 billion) 10-year Samurai bond at a coupon rate of 0.63% per annum.

This will be the largest Japan Bank for International Cooperation (JBIC)-guaranteed sovereign bond issuance in the market.

The Ministry of Finance (MoF) said in a statement that this also marks the government’s return to the Japanese yen bond market after a 30-year absence.

MoF noted that the issuance has been received extremely well across the investor spectrum and picked up by quality Japanese investors. These investors are specialised banks (37.9%), city banks (35%), life insurance companies (13.9%), regional banks (6.5%), shinkin banks (3.8%) and others (2.9%).

As part of a government-to-government arrangement, the issuance is guaranteed by JBIC under its “Guarantee and Acquisition toward Tokyo market Enhancement” programme, the first JBIC guarantee undertaken by Malaysia.

Proceeds from the offering will be used by the government for its general purposes, financing development expenditures that among others include building schools, hospitals, public roads and utilities.

MoF said the issuance process commenced with a two-day investor road show in Tokyo on February 7 and 8, which was led by the Finance Minister Lim Guan Eng. This was followed by an official marketing exercise from March 4 to March 7.

MoF noted that during the engagement period, investors expressed strong interest towards the issuance and this reflected their confidence towards Malaysia’s stable macroeconomic fundamentals, governance and structural reforms.

Mizuho Bank, HSBC Malaysia and Daiwa Securities in collaboration with Affin Hwang Investment Bank acted as joint lead arrangers and bookrunners for this issuance.


Fourth-quarter 2018 corporate earnings among worst in recent years

PETALING JAYA: Corporate earnings of Malaysian stocks in the fourth quarter of 2018 (4Q18) were among the worst seen in recent years with large-cap companies turning into a drag.

“On the surface, the 4Q18 reporting season looked better; 26% of companies in our universe (121 companies under coverage) reported earnings that were ahead of our expectations, a marked increase of 16% in 3Q18,” said Affin Hwang Capital in a report today.

It noted that companies whose earnings that disappointed shrank to 31% from 48% in 3Q18, implying that a higher number of companies delivered a better set of earnings after the successive disappointments in the previous quarters.

However, a review of the larger-cap companies (27 of 30 under its coverage) showed a higher number of companies reporting poorer performances with 33% of the companies registering earnings below expectations while a smaller proportion registered earnings above expectations.

“Being heavyweights, the impact of this disappointment was significant. Cumulative 4Q18 core earnings fell a sharp 23% year on year (yoy) or 14% quarter on quarter (qoq), one of the largest ever quarterly earnings contractions in recent years,” said Affin Hwang Capital.

In 4Q18, only 40% of the 20 sectors under coverage managed to deliver yoy earnings growth with telcos, transport and utilities being the key heavyweight sectors that were a drag, contributing a combined RM3.1 billion qoq decline in 4Q18 earnings.

Post 4Q18 results season, the earnings per share (EPS) growth rate for stocks under Affin Hwang Capital’s coverage has shrunk to -4.5% and for the FBM KLCI companies -0.6%. This makes 2018 the fourth year of frail corporate earnings over a five-year period from 2014 till 2018.

Its current market earnings growth forecast is 6.7% and 4.2% for 2019 and 2020. For the FBM KLCI companies, this growth is at a lower 3.8% and 2.9% for 2019 and 2020, implying weaker earnings growth for the larger-cap companies.

“Nevertheless, we are of the view that the larger-cap company earnings will better hold up in 2019 considering that their 2018 earnings were distorted by a lot of bulky items that may not recur,” it added.

Due to the lack of major catalysts, it expects the FBM KLCI to continue to trend sideways over the near term, maintaining its neutral rating on the FBM KLCI and year-end 2019 target of 1,810 points.

“We would, however, recommend investors position themselves in the large-cap stocks and favour sectors that are still delivering growth on a yoy basis,” it added.

Meanwhile, CGS-CIMB has lowered its FBM KLCI earnings growth forecast to 5% for 2019 from 6%, but maintained its growth projection of 6% for 2020. Its 2019 FBM KLCI earnings growth projection of 5% is below Bloomberg consensus, which forecasts a 6% growth.

“This is lower than the 6% core net profit growth rate we estimated before the 4Q18 results season, as we adjust for the downgrades in earnings forecasts for several big-cap names like Axiata, Tenaga, Petronas Gas and Maxis,” it said in its report.

In 4Q18, only 18% of the 127 companies actively covered by CGS-CIMB reported results that were above expectations while the percentage of companies with results below expectations rose to 39% from 38% in 3Q18.

“The high ratio of earnings disappointment suggests that Malaysian corporates are facing a challenging operating environment due to local and external (US-China trade war, rising rates) factors,” it said.

Although its revision ratio improved to 0.46 times during the quarter versus 0.29 times in the previous quarter, the 4Q18 revision rate stood out for being among the lowest historical revision ratios for 4Q, matching 4Q12’s revision ratio.

Market earnings for stocks under its coverage fell in 4Q18 at a higher rate of 7.5% yoy due to lower earnings from the agribusiness, aviation, construction, oil and gas and telco sectors. Corporate earnings under its coverage fell 2.1% in FY18 due to lower sales, provisions for receivables and weaker profit margins.

CGS-CIMB maintained its end-2019 FBM KLCI target of 1,638 points with no change to its top three picks namelym Dialog, Astro and MPI.


Mixed sentiments on AAX’s prospects

KUCHING: AirAsia X Bhd (AAX) garnered mixed sentiments from analysts as they expect the airline could see recovery in its core routes while others believe oil prices and subdued passenger growth could continue to weigh down its prospects. In a filing on Bursa Malaysia, AAX reported a net loss of RM312.7 million for 2018, compared […]


Malaysia’s auto industry off on a positive start

KUCHING: Malaysia’s automotive industry is off on a positive start this year, led by strong numbers recorded by national carmakers. Analysts expect the industry to continue this strong momentum, underpinned by healthy demand and favourable foreign exchange (forex). According to the research arm of Affin Hwang Investment Bank Bhd (AffinHwang Capital), the automotive industry’s January […]


Affin Hwang AM appoints new chairman

PETALING JAYA: Affin Hwang Asset Management Bhd (Affin Hwang AM) today announced the appointment of Raja Tan Sri Datuk Seri Aman Raja Haji Ahmad (pix) as its new chairman, effective Feb 19, 2019.

In a statement today, Affin Hwang AM said that Aman had held various positions in the Maybank Group from 1974 to 1985 prior to joining Affin Bank Bhd as an executive director.

In 1992, he joined Perbadanan Usahawan Nasional Bhd as its CEO before he was re-appointed as the CEO of Affin Bank in 1995.

He had served as a member of the National Pension Fund’s (KWAP) Investment Panel and is currently the chairman of Lembaga Tabung Angkatan Tentera’s (LTAT) Investment Committee.

He had also served as a member of the Malaysian Government’s Working Group Policy of the Special Task Force to Facilitate Business (Pemudah) for a period of ten years from 2007 to 2017.

Aman is also the chairman of Ahmad Zaki Resources Bhd, and sits on the Board of Affin Hwang Investment Bank Bhd as well as Tomei Consolidated Bhd.

A graduate from Universiti Malaya, Aman is a Fellow of the Institute of Chartered Accountants in England and Wales, member of the Malaysian Institute of Certified Public Accountants and the Malaysian Institute of Accountants as well as a Fellow of the Institute of Bankers Malaysia.


Corporate earnings unlikely to excite stock market: Affin Hwang AM

KUALA LUMPUR: Corporate earnings delivery will not significantly influence the Malaysian capital market this year as catalysts are expected to come from the external front, according to Affin Hwang Asset Management Bhd (Affin Hwang AM).

Its managing director, Teng Chee Wai, said for 2019, the company expects a single-digit upside in the FBM KLCI at around 8% to 10%, partly buoyed by recovery in global growth as the economic cycle matures.

“2019 is a year that the markets are going to respond more towards macro policies rather than earnings. And I do not see price-earnings expansion to be one big factor this year for the market because there is a very little growth,” he told a press conference after presenting Affin Hwang AM market outlook and company briefing here today.

“With 5% in (consensus) earnings (estimates) growth, I don’t expect this year to be a double-digit year (for the FBM KLCI),” he said, noting downward revisions in earnings are likely if there is slowdown in global economic activities.

Asked whether 2019 is a good year to invest in stocks, Teng warned of risks and uncertainties in the market such as the ongoing trade dispute between the United States and China.

“There is no such thing as the best time to invest … you must be mindful of the risks, and asset allocation is the way forward,” he added.

Nevertheless, Teng said given the positive development in the US-China trade talks, coupled with changes in policy by the Federal Reserve, he is fairly confident that the market will improve at some point in the second half of the year.

On Affin Hwang AM’s outlook, Teng said the fund manager is confident that it will surpass the RM50 billion mark in assets under administration (AUA) this year and reach the RM52 billion level.

He said the firm’s AUA grew 0.84% or RM400 million to RM47.8 billion as at end of 2018 from RM47.4 billion in late 2017.

Earlier at the press conference, Affin Hwang AM’s Islamic entity, Aiiman Asset Management Sdn Bhd, launched its maiden fund called Aiiman Asia Pacific (ex-Japan) Dividend Fund, which marks its foray into the retail market.

Aiiman managing director Akmal Hassan said the fund is suitable for retail investors who want regular income distribution and capital gains, and have a medium- to long-term investment horizon and moderate risk tolerance.

The fund will invest a minimum of 70% of the fund’s net asset value (NAV) in syariah-compliant equities and a maximum of 30% of its NAV in sukuk, syariah-compliant money market instruments and/or deposits.

The base currency of the fund is in ringgit with a minimum investment amount of RM1,000.


All-over optimism for Serba Dinamik’s maiden 2019 contracts

KUCHING: Analysts across the board gave two thumbs up for Serba Dinamik Holdings Bhd (Serba Dinamik) catching its first batch of contract wins in 2019 totalling US$110 million (RM448 million). The announced values consist only of the international contracts – United Arab Emiraes, Uzbekistan and Qatar – as the Malaysian contracts are all call-out in […]


E&O loses RM318m in market cap on cash call news

PETALING JAYA: Investors reacted negatively towards Eastern & Oriental Bhd’s (E&O) proposed fund raising exercise of up to RM550.3 million with its share price tumbling 24 sen or 22.02% to a multi-year low of 85 sen today.

The heavy selling pressure led to RM318 million of its market capitalisation being wiped off.

It was the top fourth loser on Bursa Malaysia today on 36.7 million shares done.

On Monday, E&O announced a proposed fund raising exercise which would raise proceeds of RM250 million to RM550.3 million, to fund its Seri Tanjung Pinang (STP) Phase 2 project in Penang and repay bank borrowings.

“Although the company seems to have identified a taker for the placement shares, we think investor sentiment on E&O may turn cautious given the magnitude of the equity call,” RHB Research said in its report today.

The research house, however, noted that the need for financing is understandable, based on the funding requirement for the reclamation and infrastructure capital expenditure on STP 2A, 2B and 2C, as well as working capital to kick-start new high-rise projects such as The Conlay (GDV: RM900 million), which is slated for launch at the end of 2019, and The Peak (GDV: RM280 million) in 1H 2020.

“We believe that as a result of tight cash flow, slow high-end property sales and weak market sentiment, the maiden launch of STP 2A’s Plot 14 has been delayed until 1H 2020,” it added.

The total proceeds of around RM350 million to RM400 million from the fund raising exercise would be about 24-28% of the stock’s current market cap. After factoring in the impact from the placement and rights issue, RHB Research reduced its target price to RM1 from RM1.24 previously.

It maintained E&O’s net profit estimates but reduced its earnings per share (EPS) forecasts due to the expected dilution from the placement and rights issue.

PublicInvest Research maintained its “neutral” call on E&O but reduced its target price to RM1 from RM1.30 previously.

“This comes as a negative surprise as we had believed earlier that the group would raise funds by disposing non-strategic assets and/or get more strategic partners for its STP Phase 2 development. Based on illustrative issue price of RM1.12, our RNAV (revalued net asset value) could be diluted from RM4 per share to RM2.80 to RM3.30,” it said.

Meanwhile, Affin Hwang Capital, which maintained its “buy” call on E&O with RM1.55 target price, believes the long-term prospects for the group remain good, despite the short to medium term impact of the fund raising exercise on investor sentiment.

“We believe the overhang from the equity issuance will dampen sentiment on the stock in the short to medium term, but the long-term prospects for E&O remains good with the scheduled completion of 253-acre STP 2A by September 2019,” it said.

“We gather that the entrepreneurs and substantial shareholders Datuk Seri Tham Ka Hon (owns 20.6% stake) and Datuk Tee Eng Ho/Tee Eng Seng (owns 15.2%) will likely undertake to subscribe for their rights issue entitlement. This will show the entrepreneurs’ commitment and shore up support for the proposed equity issuances,” it added.