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Give or take a trillion: Investors still in the dark on Saudi Aramco value

NOVEMBER 4 — Saudi Aramco’s blockbuster listing remained shrouded in mystery today, a day after the company finally announced its plans, with scant details disclosed and expert valuations varying wildly from around US$1.2 to US$2.3 trillion. The…


Analyst research gives wide range for Aramco valuation

DUBAI/ABU DHABI: Analysts provided wide valuation estimates for Saudi Aramco, ranging between US$1.2 trillion (RM4.9 trillion) and US$2.3 trillion, fund managers who have seen research notes said, as the oil giant kick-started its initial public offering (IPO) on the local bourse.

Bank analysts started showing IPO research to fund managers soon after Aramco, the world’s most profitable company, on Sunday announced its intention to float on the domestic bourse in what could be the world’s biggest listing.

The research reports highlight the challenge faced in hitting Saudi Crown Prince Mohammed bin Salman’s initial valuation target of US$2 trillion for the world’s largest oil producer, with some banks having said it could be about US$1.5 trillion.

Bank of America (BOFA) Merrill Lynch estimates Aramco’s valuation could range from a low of US$1.2 trillion to a high of US$2.3 trillion, while EFG Hermes has an equity valuation of US$1.55 trillion to US$2.1 trillion, two fund managers who have seen the research reports told Reuters.

The banks were not immediately available for comment.

BOFA Merrill’s research is based on the discounted-cash-flow model, a valuation methodology that uses future cash flow, according to one fund manager who saw the research.

Credit Suisse’s research also has similar wide ranges, the fund manager said.

“These ranges are always wide as research analysts want to cover both low end and high end so you want to show sensitivity of assumptions,“ one analyst said.

EFG Hermes research implies a 2020 estimated enterprise value to EBITDA ratio of 6.9 times to 9.4 times, a price-to earnings ratio of 14.5 times to 19.5 times, and a dividend yield of 3.9% to 5.3%.

Aramco’s long-awaited announcement on Sunday did not disclose the number of shares to be sold, pricing or the date for a launch.

Sources have told Reuters Aramco could offer 1-2% of its shares on the Riyadh exchange, raising as much as US$20 billion to US$40 billion. A deal over US$25 billion would top the record-breaking one of Chinese e-commerce giant Alibaba in 2014. – Reuters


Aramco meets investors in last-minute bid to hit US$2t IPO target, say sources

DUBAI, Nov 1 — Saudi Aramco officials and advisers are holding last-minute meetings with investors in an attempt to achieve as close to a US$2 trillion (RM8.3 trillion) valuation as possible ahead of an expected listing launch on Sunday, according…


Research houses maintain ‘neutral’, ‘hold’ calls on Digi

KUALA LUMPUR, Oct 21 — Most of the research houses have maintained their “neutral”, or “hold” calls, with unchanged target prices on Digi.com Bhd even after the telecommunications company recorded a lower net profit for the third…


Aramco says IPO timing depends on ‘market conditions’

DUBAI, Oct 20 — Saudi Aramco said today the timing of its long-awaited stock market debut “will depend on market conditions,” after the latest delay in the blockbuster initial public offering. The IPO forms the cornerstone of a reform…


Mixed outlook for banks

PETALING JAYA: There are mixed prospects for the banking industry going forward, but Maybank IB Research said that due to a slowdown in loan application growth, the outlook is subdued at this stage.

“Loan applications contracted across all major consumer segments and even mortgage applications saw growth drop to just 2.7% year-on-year (yoy) in August 2019 after having expanded at a rapid double-digit pace over the past three months,” the research house said in a note today.

Loan growth for August was stable at 3.9% yoy. Household loan growth was 4.6%, while non-household loan growth was 2.9%. Annualised loan growth was 2.9% in August 2019.

Overall deposit growth continued to slow down largely due to a slower pace of deposits from business enterprises. Industry deposit growth slowed down further to 4.6% yoy from 4.9% yoy in the previous month.

The loan-to-deposit ratio for the sector was 87.9%. Industry current account, savings account (CASA) expanded by 5.2% yoy, marginally lower than the 5.3% yoy registered in the previous month. CASA ratio remained stable at 25.7%.

The industry’s gross impaired loans (GIL) ratio was slightly higher at 1.61% in August versus 1.6% in July. On an absolute basis, GILs rose RM337 million month-on-month, mainly due to an increase in manufacturing GILs.

Maybank is retaining a neutral outlook on the sector, with a buy call on the smaller to mid-cap banks such as RHB Bank Bhd, AMMB Holdings Bhd, Hong Leong Financial Group Bhd, Alliance Bank Malaysia Bhd and BIMB Holdings Bhd.

CIMB Research is keeping its neutral call on the sector on concerns over margin contraction, due to the cut in the OPR, and an expected uptick in credit cost in 2019.

“On the flip side, banks’ dividend yields are attractive at 4.3% for CY19F. RHB Bank remains our top pick for the sector.”

Meanwhile, AmBank Research said it is maintaining its loan growth assumption for the sector at 4-5%, as well as its expectation of another Overnight Policy Rate (OPR) cut of 25 basis points in the second half of the year, which will be supportive of economic growth.

“Meanwhile, should Budget 2020 turn out to be mildly expansionary in line with market expectations, this will be positive on loan growth as well as mitigating the downside risk on the sector’s asset quality.”

AmBank is maintaining its overweight call on the sector as valuation and dividend yields of banks remain compelling. Its top picks remain as Malayan Banking Bhd (Maybank) and RHB Bank Bhd.

MIDF Research is also keeping a positive outlook on the sector as it thinks banking stocks are currently undervalued.

“The impact of the OPR cut will normalise and there are still positives for banks such as the low credit cost which should be able to alleviate any weakness in income.

“However, we also remain cautious due to prevalent uncertainties coming from external events such as the ongoing trade tension between the US and China,” it said.

MIDF’s picks for the sector are Maybank, CIMB Group Holdings Bhd and Public Bank Bhd.


Wall Street week ahead: Fund managers gird for long trade war after FedEx slide

NEW YORK, Sept 20 — A profit warning and muted outlook from package delivery company FedEx Corp is prompting some high-profile fund managers to prepare for the trade war between the United States and China to last longer than many had originally…


Potential positives for BAT from US vaping ban

PETALING JAYA: The imminent ban on vape products in the US over mounting health concerns could arrest the surge in local usage of vape products that may translate into a potential positive for British American Tobacco (BAT), according to Affin Hwang Capital.

The research house said the US authorities are planning a ban on the back of multiple vaping-related deaths and illnesses alongside an epidemic of youth usage in the country.

“Given the mounting health concerns, we believe this could arrest the surging local usage of vape products in the near-term. In tandem, this may benefit cigarette volumes and position heated tobacco products such as iQos and BAT’s upcoming Glo as safer smoking alternatives,” it said in a report.

Affin Hwang said the domestic situation is resembling the US as the public and local health authorities’ concerns over vaping’s health risks and teen usage are likely to escalate.

In Malaysia, unregulated new-generation vape products, most of which are nicotine-filled, have proliferated and it is estimated to account for an equivalent of 8-10% of Malaysia’s tobacco consumption, said the research house.

It said that this magnifies the issue of illegal smoking consumption (combined vaping and illicit cigarettes market share of 70%), while also nullifying a recent decline in smuggled cigarette volumes due to stricter enforcement activities by local authorities.

“Rising local awareness on the dangers of illicit nicotine products and looming oversight on vape and shisha products could disrupt the burgeoning vape market, and in turn potentially benefit the legal tobacco players’ cigarette volumes and reception of heat-not-burn products such as iQos and BAT’s Glo (launching in 4Q19).

“However, the former would be dependent on positive outcomes arising from the enforcement of illicit cigarettes and fake tax stamps, while the latter could be offset by stricter compliance requirements, amid the e-cigarette health crisis,” said Affin Hwang.

The US Food and Drug Administration (FDA)’s latest survey data saw a prominent rise of underage vaping – over a quarter of American high school students being active vape users, up from 20.8% in 2018.

Affin Hwang gathered that all flavoured vape products, aside from tobacco-flavoured ones, would soon be removed from US retail channels, until and if they receive subsequent authorisation from the FDA.

Following the recent collapse in BAT’s share price, as the tobacco manufacturer delivered a disappointing 2Q19 results hamstrung by the rise in fake tax stamps and vape products, – to a 20-year low, the risk-reward has once again turned favourable, viewed Affin Hwang.

“Even after trimming our 2020-21 forecast earnings by 5-6% to reflect our expectations of higher advertising & promotion and compliance costs due to Glo’s introduction to the market, price-to-earnings ratio valuations are at multi-year lows.”

With that, Affin Hwang upgraded its call on the stock to buy, albeit with a lower dividend discount model-derived target price of RM27.80 from RM30, previously. It noted that attractive dividend yields of 6.2%-7.1% are also on the cards at current levels.

Meanwhile, downside risks to BAT are weaker-than-expected enforcement outcomes, heightened competition from alternative products and a resumption of excise duty hikes.


Another recent inversion could provide support for stocks

NEW YORK, Sept 7 — A decline in interest rates on long-term US government bonds below the average stock dividend yield has received less attention than an inverted Treasury yield curve, but it could be a reason stocks find support after a bruising…


Banking sector inexpensive, go for selective stock picking

PETALING JAYA: Despite negative developments in the banking sector and a modest growth outlook for banks, investors can draw comfort from the sector’s inexpensive valuations.

HLIB Research said the sector is trading at -1.5 standard deviation (SD) to its five-year mean price-to-book (P/B), retaining its neutral call and advocating selective stock picking rather than blanket exposure to the sector.

“Those that favour exposure to this sector have to be selective. We like banks that give above average dividend yields, still eking out healthy growth, and valuations got bashed down to -2SD and trough P/B valuations.”

Its preferred pick is Malayan Banking Bhd (Maybank). Other buys are RHB Bank Bhd, Alliance Bank Malaysia Bhd and BIMB Holdings Bhd.

MIDF Research opined that banking stocks in general are currently undervalued given its fundamentals remains intact. Hence, it is maintaining the positive stance on the banking sector at this junction.

The banking system saw a lower loan growth of 3.9% year-on-year (yoy) in July 2019 compared with the 4.2% in June.

Despite the weak business sentiment, Affin Hwang Capital noted that the loan disbursement of RM102.4 billion in July 2019 remained higher than the average monthly disbursement from 2014-18 of RM93 billion.

Business loans grew at a more subdued pace of 2.5% yoy in July (from 3.4% in June 2019), partially affected by loan repayment activity in the finance/insurance sector, wholesale/retail trade and manufacturing sectors.

Household loan growth was up 4.7% yoy in June (June: 4.9% yoy) driven by residential mortgages and personal financing.

“We are currently reviewing our 2019 loan growth target of 5%, amidst cautious business and consumer outlook in 2019. On the other hand, downside risks are largely cushioned by the broad-based economy while over the longer term, we expect consumer sentiment to gradually improve and drive consumption spending,“ said Affin Hwang.

It said the banking system liquidity remains healthy and ample, and expects banks’ funding costs to ease over the next six months following the Overnight Policy Rate cut, as most banks have an average fixed deposits’ maturity of between six to nine months.

“We expect the overall banking system NIM to edge down by 6bps in 2019 to 2.22%, stemming from weak asset yields and overall higher funding cost.”

Affin Hwang Capital maintained its neutral sector stance, with RHB and Aeon Credit Service (M) Bhd as its top picks.

“We maintain our neutral sector view as we foresee a sector core earnings growth of 1.0% yoy in 2019, followed by 4.3% yoy in 2020.”

HLIB said with limited positive catalysts to spur stronger borrowing demand, it has toned down 2019 loans growth estimate to 4-4.5% from 4.5-5%.

The research house believes sustaining net interest margins (NIM) would remain as an uphill challenge, given that the slower loans growth environment should encourage banks to engage in price-based competition to chip share away from one another.