hwang capital

 
 

Kim Hin seen as trade diversion beneficiary, but outlook challenging

PETALING JAYA: While new orders from new clients in the United States are expected to support Kim Hin Industry Bhd’s earnings, weak domestic tile demand will continue to weigh on earnings, according to Affin Hwang Capital.

The research house gathered that the tile manufacturer has secured two new customers from the US following the trade diversion arising from the current US-China trade war. This is expected to support Kim Hin’s earnings in 2020.

“However, we believe earnings prospect remains challenging on the back of the prolonged weak domestic property market and high cost of production,“ it said in a report.

It also gathered from Kim Hin’s management that the new orders account for around 20% of its total domestic production capacity of 14.6 million sq m per year. Orders from the new clients have started on a small scale and should ramp up by early next year.

Currently, it gathered that Kim Hin’s Seremban and Kuching utilisation rates are at 80% and 60%, respectively.

“That said, we remain cautious on the stock as we believe the operating environment remains challenging. This is mainly on the back of weak demand for tiles from the prolonged weak domestic property market. The overhang of unsold properties remains high at 32,810 units (+12% yoy), while housing starts declined by 13% yoy to 47,413 units in the six months of 2019 (1H19).”

Likewise, it said Kim Hin’s overseas operation (Australia, China and Vietnam) reported weak performance in 1H19 with a loss before tax of RM4 million versus pretax profit of RM3 million in 1H18 due to weaker revenue (-14% yoy).

Affin Hwang is maintaining Kim Hin’s 2019-21 earnings as well as its target price of RM1.06. However, the stock has been upgraded to “hold” from “sell” given the limited downside its target price following the 53% fall in the share price from a high of RM2.27 on May 25, 2017.


Lower SRR bodes well for banking sector, say research firms

KUALA LUMPUR, Nov 11 — The recent reduction in the Statutory Reserve Requirement (SRR) ratio will bode well for the banking sector, providing some relief in terms of better liquidity management and being positive for loan growth and…


Loan growth expected to pick up in 4th quarter

PETALING JAYA: Affin Hwang Capital is keeping its 2019’s loan growth target of 3.8% year-on-year (yoy) unchanged, as it expects a pick-up in the fourth quarter of 2019 driven primarily by drawdown of construction-related project loans as well as residential property loans.

This is despite sluggish loan growth of 2.4% year-to-date as at September, with a month-on-month (mom) growth of 0.5% and yoy growth at 3.8%. On an annualised basis, the system loan growth stood at a fairly muted 3.3% growth, as business and consumer sentiment remained cautious.

“We believe that overall downside risks are cushioned by the broad-based economy, resilient domestic consumption spending and a low unemployment rate of 3.3% (in August),” said the research house.

It said the banking system liquidity remains healthy and ample and the commercial banks’ average lending rate edged down further, post-Overnight Policy Rate (OPR) cut.

“We expect banks’ funding costs to ease following the OPR cut, as most banks have an average fixed deposit maturity of between six to nine months. We expect the overall banking system net interest margin (NIM) to edge down by 9bps in 2019 to 2.20%, stemming from weak asset yields and overall higher funding cost.”

It added that the outstanding non-performing loans was up 11.6% on a year-to-date basis (with a mom increase of 0.9%) was driven primarily by the business working capital, residential and commercial property segments. Other economic sectors accounting for the bulk in system impaired loans include agriculture, business services, household, wholesale/retail/restaurant, construction, manufacturing and transportation.

“We note that amidst moderating global growth, oil prices are holding up, which should be positive for Malaysia’s GDP. Affin’s economics team expects the economy to be supported by the private sector from capacity expansion, consumption spending and potentially a gradual recovery in commodity output.”

It maintained a neutral call on the banking sector, with RHB Bank Bhd and Aeon Credit Service (M) Bhd as its top picks.

Key downside risks to its sector call are further cuts in the OPR (further NIM compression), moderation in loan growth, new NPL formation (with respect to commercial property, residential property, agriculture and construction loans) and higher overheads. Upside risks include a recovery in global growth.


Affin Hwang Capital’s Maimoonah to retire

PETALING JAYA: Affin Hwang Capital’s group managing director Datuk Maimoonah Hussain (pix) will be retiring with effect from Nov 3, the bank announced in a statement today.

Maimoonah has served the bank for 12 years – seven years as Affin Investment Bank Bhd managing director and five years with Affin Hwang Capital as group MD, since the merger between Affin Investment Bank and HwangDBS Investment Bank Bhd in November 2014.

Affin Hwang Investment Bank Bhd chairman Abdul Malik Rahman said that under Maimoonah’s leadership and guidance, Affin Hwang Capital had built a strong foundation for growth.

“Today, the bank is well positioned as one of the leading investment banks in the country, with the right strategy and people culture to drive innovation, accelerate sales growth and enhance profitability.

“Her dedication, commitment and relentless pursuit of excellence have made an indelible impact to everyone who has worked with her. I thank her for being an inspirational leader in the development and progress of the Bank and wish her all the best in her future endeavours,” he said in the statement.


Affin Hwang Capital’s group MD to retire after more than 10 years

PETALING JAYA: Affin Hwang Capital’s group managing director Datuk Maimoonah Hussain will be retiring with effect from Nov 3, the bank announced in a statement today.

Maimoonah has served the bank for 12 years -7 years as Affin Investment Bank Bhd managing director and 5 years with Affin Hwang Capital as group MD, since the merger between Affin Investment Bank and HwangDBS Investment Bank Bhd in November 2014.

Affin Hwang Investment Bank Bhd chairman Abdul Malik Rahman said Affin Hwang Capital had built a strong foundation for growth.

“Today, the bank is well positioned as one of the leading investment banks in the country, with the right strategy and people culture to drive innovation, accelerate sales growth and enhance profitability.

“”Her dedication, commitment and relentless pursuit of excellence have made an indelible impact to everyone who has worked with her. I thank her for being an inspirational leader in the development and progress of the Bank and wish her all the best in her future endeavours,” he said in the statement.


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…


AME posts 19.2% premium, optimistic on FY20 earnings

PETALING JAYA: AME Elite Consortium Bhd shares made a strong debut on the Main Market of Bursa Malaysia with a premium of 25 sen or 19.2% over its offer price of RM1.30.

Despite falling to a low of RM1.27 in the early trade, the counter was quick to rebound as much as 29 sen or 22.3% to a high of RM1.59 before ending the day at RM1.55 on 49.75 million shares changing hands, giving it a market capitalisation of RM662.03 million.

Managing director Kelvin Lee is upbeat on the Johor-based integrated industrial property solutions provider’s future prospects, targeting double-digit growth in profit for 2020.

Executive director Simon Lee elaborated that the optimistic view is based on the government’s announcement that approved foreign direct investments (FDIs) saw a 97% jump to RM49.5 billion in the first half of the year.

“As we are a proxy to FDIs and rolling investments in manufacturing, we hope to enjoy the benefits from this.”

This view is also supported by Affin Hwang Capital, which has initiated coverage on the counter with a “buy” rating and a target price of RM1.83.

The research house said in a report that the group is a beneficiary of the general rise in demand for industrial properties in Malaysia due to trade diversion amidst the ongoing US-China trade war.

Kelvin also noted that the “special channel” to attract investments from China established under InvestKL announced last week is expected to further boost the group’s future prospects.

“We have received a lot of enquiries as a result of the trade war and the government had announced in the Budget with a special channel to welcome trade war customers. We foresee we can benefit from all the good news.”

AME’s net profit jumped 96% to RM13.1 million for the first quarter ended June 30, 2019 against RM6.7 million a year ago.

With regards to the group’s planned expansion into Selangor and Penang, Kelvin said that it is still mulling the options.

“We are still looking for an ideal location with good connectivity and good price, hopefully we’ll have something by the end of the year.”

Currently, the group has over 130 acres of land bank with 108 acres in [email protected] Airport City and over 30 acres at its industrial park in [email protected]


‘Limited impact from US seizure of gloves’

PETALING JAYA: The detention of disposable rubber gloves by the US Customs and Border Protection (CBP) because of the use of forced labour is not expected to have an adverse impact on the entire sector, as the CPB’s “withhold release” order is for a specific company, WRP Asia Pacific Sdn Bhd, only.

Affin Hwang Capital said weak sector sentiment may, however, offer an opportunity to accumulate its top “buy” picks for the sector – Kossan Rubber Industries Bhd and Super-max Corp Bhd.

It believes the direct impact from the seizure of WRP’s gloves would be relatively limited, as the producers would still be able to sell their products in other countries.

According to Affin Hwang’s checks, WRP has an estimated production capacity of 11 billion pieces a year (around 5% of Malaysia’s overall capacity), with focus on the nitrile and surgical gloves segment.

“As the overall impact to the sector is relatively limited, we are maintaining our neutral call on the sector. Kossan and Supermax are our top buys for the sector, due to their undemanding valuations and higher-than industry growth rates. We have ‘sell’ calls on Top Glove Corp Bhd, Hartalega Holdings Bhd and Karex Bhd due to their rich valuations.”

The research house said the allegation of forced labour in the Malaysian rubber products sector is not new, as it was first reported by the UK press in end-2018 and early-2019, whereby they had identified three companies which had engaged in such. WRP was one of the three companies that was identified by the press.

“Although Top Glove and Karex were also mentioned back then, we believe that the recent changes implemented by the latter two have managed to address most, if not all, of the concerns. The resulting higher labour costs arising from the changes were already reflected in their P&Ls (profit & loss statements) since 1Q19.”

Affin Hwang said the biggest challenge for Malaysian companies to avert these allegations results from the continuously changing standards, as the definition of forced labour varies across countries.

“Our recent checks with the companies under our coverage indicated that they are in compliance with Malaysian regulations, and are subjected to social-compliance audits by their customers from time to time.”

It added that most of them have engaged social activists to conduct independent audits in order to be in compliance with international stan-dards. Ultimately, the companies have limited the maximum allowable overtime to 104 hours a month (average four hours a day) for all their workers.

“We believe the increased scrutiny on the sector’s labour practices is likely to speed up the whole automation process. Although the government does provide grants to help with the changes, it is relatively insignificant to the overall investment that the manufacturers need.

“We believe that the larger manufacturers might be able to increase their market share at the expense of the smaller manufacturers as some of them are unable to invest in automation,” Affin Hwang said.


Downside risks to banking sector’s earnings forecasts

PETALING JAYA: Despite being backed by resilient and strong fundamentals, the Malaysian banking sector is expected to see downside risks from the impact of higher external risks (moderating economic growth) and a more cautious business/consumer sentiment.

Affin Hwang Capital said these two key factors may pose downside risks to its 2019-2020 earnings forecasts.

The research house highlighted some downside risks factors to its earnings forecasts, including the risk of another 25bps interest rate cut – resulting in an aggregate 1.7% reduction in sector earnings; a 1% decline in loan growth – resulting in a 1.1% decline in sector net profit; as well as a 10bps increase in net credit cost could result in a 6.3-6.4% decrease in net profit.

The research house said potentially, the commercial/residential property sector could pose some risks to the system, though impaired loans remain minimal to total loans.

However, it noted the resilient and strong fundamentals of the banking sector, such as adequate capital ratios, ample liquidity, a relatively low gross impaired loan ratio and healthy loan loss cover.

“We maintain our sector neutral call, noting that business and consumer outlook in 2H19-1H20 will likely stay cautious due to external uncertainties and a lack of domestic catalysts,“ it said.

For 2019, after some earlier revisions to its universe’s loan growth forecasts, Affin Hwang now set a 3.8% target for 2019’s system loan growth.

It is currently projecting a core net earnings per share growth rate of -0.9% for 2019 and a 1.2% and 1.6% expansion for 2020 and 2021, respectively.

“Our slightly negative growth rate in 2019 is underpinned by the negative impact of the OPR cut, which moderated banks’ fund-based income; a 2.2% increase in operating expenses; and a 15% increase in impairment allowances.”

On stock picks, Affin Hwang remains selective and prefers RHB Bank Bhd for banking exposure.

“For non-banking stocks, we like Aeon Credit Service (M) Bhd and ELK-Desa Resources Bhd due to their higher receivables growth and attractive return on equities.”

Meanwhile, Kenanga Research said while it sees moderate loans growth ahead, the resilient asset quality translates into stable credit cost, sustaining profitability.

“Valuations are attractive and undemanding with most of the banking stocks under our coverage rated as ‘outperform’ with top picks being CIMB Group Holdings Bhd and Alliance Bank Malaysia Bhd.”


Deal for Prince Court seen as ‘tonic’ for IHH Healthcare

PETALING JAYA: IHH Healthcare Bhd’s RM1.02 billion acquisition of Prince Court Medical Centre Sdn Bhd (PCMC) is seen as a positive move by analysts, citing possible synergies between the group’s existing network of hospitals.

Affin Hwang Capital pointed out that PCMC’s earnings before interest, taxes, depreciation and amortisation (ebitda) margin of 17% is significantly lower than IHH Malaysian operations’ 29% as it is reaching structural limitation as a standalone single hospital, unlike the economies of scale IHH is able to derive having own a wide network of hospitals.

“Hence, by integrating PCMC’s existing business functions, systems and personnel with IHH’s established shared services and business functions structure that services its existing hospital network in Malaysia, there is plenty of potential headroom to grow via medical supply procurement and cost synergies,” said the research house in a note yesterday.

Affin Hwang is keeping a “buy” call on IHH with a target price of RM6.40.

It highlighted that PCMC has a similar revenue intensity, occupancy and payer mix to IHH’s flagship hospitals in Klang Valley, but the contribution from the acquisition is expected to be minimal in the near-term after taking into account the financing cost for the acquisition.

At the moment, IHH is working on the scenario of funding 64% of the purchase consideration via bank borrowings.

The research house estimated that based on an indicative interest rate of 4.13% on the borrowing of RM650 million, the interest expense for the acquisition is estimated to be RM26.8 million, which is slightly above PCMC’s FY18 core net profit of RM26 million.

Post-acquisition, IHH’s gearing is expected to increase from 0.48 times to 0.51 times. Note that a one-off estimated expense of RM11 million relating to the proposed acquisition will be incurred upon completion of the transaction.

PCMC is a debt-free profitable operating hospital, with a reported RM260 million revenue, RM44 million ebitda and RM51 million net profit in FY18. Stripping off the writeback of deferred tax of RM25 million, FY18 core net profit came in at RM26 million.

Its FY18 revenue and ebitda represent 13% and 8% of IHH’s FY18 Malaysian operations’ revenue and ebitda respectively. However, in term of the entire IHH group, PCMC’s revenue, ebitda and core net profit contribution to the group are only around 2%.

With regard to the valuation, Affin Hwang sees the RM1.02 billion purchase price as fair as it represents the midpoint of the fair value of between RM960 million and RM1.08 billion.

In addition, it was also lower than the seller’s original cost of investment of RM1.09 billion in August 2018.

Public Bank Investment Research echoed such views, but noted that the earnings uplift is not material as it only makes up of about 6% of IHH’s bottom line.

“Judging on IHH’s capability to turn Fortis around ahead of its targeted 100 days, we believe IHH can also bring PCMC to greater heights going forward.”

It is maintaining an “outperform” call on IHH with an unchanged target price of RM7.

On Bursa’s close today, the stock gained 6 sen or 1.05% to RM5.75 on 1.88 million shares done.