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Bursa Malaysia set to rebound next week

KUALA LUMPUR, June 29 ― Bursa Malaysia is likely to stage a rebound next week on bullish sentiment, Phillip Capital Management said. “Following the bullish recovery of local stocks from the 1,640 baseline, we expect the FTSE Bursa Malaysia KLCI…

Full-blown US-China trade war will slow Malaysia’s export

KUALA LUMPUR, June 25 — A full-blown trade war between the United States and China will impact Malaysia’s economy, slowing down the growth of its export sector by one to two per cent, Affin Hwang Capital chief economist Alan Tan Chew Leong said….

Takeover offer for Yee Lee extended again

PETALING JAYA: Yee Lee Corp Bhd joint offerors have extended again the deadline for acceptance of its takeover offer from 5pm tomorrow, to 5pm on Wednesday, July 3.

In a filing with Bursa Malaysia, the company said that the extension of the closing time and date for the acceptance of the offer is the final extension, with no further extensions beyond the final closing date of July 3.

As at June 18, the joint offerors collectively hold 159.10 million Yee Lee shares, representing 83.04% of the issued shares in Yee Lee.

“The joint offerors have received acceptances (subject to verification) in respect of an additional 374,136 Yee Lee shares (representing 0.2% of the issued shares in Yee Lee),” the company said.

In April, Yee Lee announced an unconditional voluntary takeover offer by its major shareholders to acquire the remaining shares they do not already own in the company for RM2.33 a share.

Yee Lee received the voluntary takeover offer from Yee Lee Organization Bhd, executive chairman Datuk Lim A Heng @ Lim Kok Cheong, Datin Chua Shok Tim @ Chua Siok Hoon, Lee Ee Young and Langit Makmur Sdn Bhd.

Earlier this month, the joint offerors extended the closing date for the takeover offer from June 7 to June 21, giving shareholders an additional two weeks to consider the offer.

In its independent advice circular published in May, independent adviser Affin Hwang Capital had said that the takeover offer is not fair but reasonable, and recommended that holders accept the offer.

The worst is over for Top Glove, say analysts

PETALING JAYA: Top Glove Corp Bhd, whose net profit fell 36.5% in the third quarter ended May 31, 2019 (3Q FY19), is expected to achieve better results moving forward, said analysts.

On Tuesday, the group said its net profit fell to RM74.67 million during the quarter from RM117.57 million a year ago due to a surge in natural rubber latex price and strong competition.

For the nine-months period, net profit was 12.5% lower at RM290.51 million from RM332.03 million a year ago.

CGS-CIMB said the worst is over for Top Glove as quarterly earnings may have bottomed during the quarter and expects the group to post stronger results ahead.

“Our optimism is premised on commissioning of new glove production capacity, tailwinds from weaker ringgit versus US dollar, improved supply-demand dynamics from better absorption of new glove supply and higher selling prices to reflect the recent increase in latex prices,” it said in its report today.

“In addition, we expect Aspion Sdn Bhd to record sequentially stronger results, backed by higher production output and better economies of scale,” it added. Aspion is a surgical glovemaker acquired by Top Glove last year.

CGS-CIMB lowered its FY19-21 EPS estimates by 2-15.6%, to account for higher latex prices, an increase in tax rates and lower average selling prices (ASP) for gloves due to pricing competition.

It maintained its “add” rating on the stock with a higher target price of RM5.20 from RM5.08 previously. Despite the weak 3Q FY19 results, it believes that any sell-down is a buying opportunity as the worst is over for Top Glove.

“We believe Top Glove remains attractive due to the defensive nature of its business, its position as the world’s largest glove maker and it is a beneficiary of potential tailwinds from weak ringgit to US dollar and higher glove demand from spillover effects of the US-China trade war,” said CGS-CIMB.

MIDF Research also expects an improved 4Q FY19 performance for the natural rubber glove segment as the effect of upward revisions in ASP will be reflected then.

The price of natural rubber latex recently subsided by 0.8% to RM4.67 per kg and given the slow demand, MIDF Research does not expect any further significant uptrend in the price. Furthermore, Top Glove will add more than 14.2 billion pieces of nitrile glove production capacity per annum by end-2020.

“At the end of this two-year plan, the group will become the largest manufacturer of nitrile glove with total production capacity of more than 30 billion pieces per annum. While the aggressive expansion in production capacity among glove manufacturers has resulted in pricing pressure, we expect this will be offset by a higher sales volume,” it said.

It revised its FY19 downward by 14.7% year-on-year to take into account the unexpected significant rise in natural rubber latex price in 3Q FY19 while FY20 has been revised marginally lower by 0.8%.

MIDF Research maintained its “neutral” recommendation with a lower target price of RM4.70 from RM4.75 previously.

Meanwhile, Affin Hwang Capital expects margins to recover in the subsequent quarters as Top Glove has raised prices by 17% to pass on the higher cost.

It downgraded Top Glove to “hold” from “buy” previously, with a lower price target of RM4.70 from RM4.90 previously. It also cut its EPS for FY19-21 by 2.8-12.8% to factor in the weaker 3Q FY19.

Analysts divided on outlook for local stocks after muted Q1 corporate earnings

PETALING JAYA: Analysts are divided on the market outlook for the year, following a muted quarter of corporate earnings.

Despite a downward revision to its end-2019 FBM KLCI target, PublicInvest Research remains positive over the near to medium-term market outlook and expects the earnings cycle to improve.

“Our optimism is premised on, among others, the government’s focus on growth, an undervalued ringgit which should encourage capital inflows, and an expected resolution to the US-China trade spat, albeit piecemeal, but sufficient to make both parties coming out looking like ‘winners’,” it said in its report on Tuesday.

In terms of stocks, it favours EA Technique, Sapura Energy, D&O Green Technologies, Mega First, Ta Ann and Alliance Bank while Uzma and Perak Transit were dropped in favour of CIMB Group and Serba Dinamik.

“The current result reporting cycle saw some cuts to significant market moving sectors in the benchmark index, most noticeably in plantations. Banking saw some minor tweaks lower owing to the recent Overnight Policy Rate (OPR) cut while telecommunications were adjusted for accounting standard changes.

“Reaction has again been relatively muted thus far, with the benchmark FBM KLCI actually inching 4.55 points higher on Monday (June 3) to show some resilience, despite weaker global markets on account of President Donald Trump now ‘picking a fight’ with Mexico and India,” said PublicInvest Research.

Its earnings growth assumption for 2019 and 2020 are 2.5% and 6.2% respectively due to prevailing weak conditions. The adjustments to earnings resulted in a reduction of its end-2019 FBM KLCI target to 1,690 points.

MIDF Research has also cut its 2019 baseline target for the local benchmark from 1,800 points to 1,720 points, following the reduction in its aggregate forward earnings estimates for 2019 and 2020.

“Having reasoned the above, however, we take cognisance that equity price is a function of both underlying value and valuation. Granted, the performance of corporate earnings (which is a key measure of underlying value) may have been less than buoyant lately hence the decision to cut our FBM KLCI 2019 baseline target. Nevertheless, valuation expansion is a bona fide risk to our baseline outlook on the local benchmark,” it said.

Meanwhile, Affin Hwang Capital said there is no significant catalyst for the market, especially given the poor corporate earnings delivery while PE valuations for the KLCI remain at a premium over its peers.

“We maintain our ‘neutral’ rating on the KLCI although our 2019 year-end estimate for the KLCI is reduced to 1,679 (based on an unchanged 18 times 2019 KLCI EPS), from 1,810 previously.

“We make no change to our sector positioning for now, and remain overweight on the autos, gaming, healthcare, insurance, oil and gas, and rubber gloves sectors, where we believe the risk-reward is still favourable and earnings growth is still a key consideration,” it said.

However, it believes that equity outflows may recede over the near term as foreign shareholdings appear to have plateaued at 23%.

“Note that the KLCI was one of the only markets within the Asia-6 that saw significant equity outflows. Year-to-date, RM4.8 billion has been withdrawn and contributing to the 2.5% drop of the KLCI.”

Offer for Yee Lee shares ‘not fair but reasonable’

PETALING JAYA: The unconditional voluntary takeover offer by Yee Lee Corp Bhd’s major shareholders to acquire the remaining shares they do not already own in the company for RM2.33 a share is deemed not fair but reasonable, said independent adviser Affin Hwang Capital.

Affin Hwang Capital said the offer is not fair as the offer price represents a discount of 31.87% to 40.71% to the estimated fair value of Yee Lee shares of between RM3.42 and RM3.93, although the offer price represents a premium to the historical market prices of Yee Lee shares over the past 12 months up to and including the last trading day (LTD).

However, it opined that the offer is reasonable as Yee Lee shares have been thinly traded over the past 12 months up to March 2019, with an average monthly trading volume (as a percentage of free float) of 0.89%.

“The trading liquidity of Yee Lee shares is comparatively lower than KLCPI’s average monthly trading volume (as a percentage of free float) for the past 12 months up to March 2019 of 4.21%,“ it said in its independent advice circular. Accordingly, it recommend that the holders accept the offer.

In addition, one of the joint offerors Langit Makmur Sdn Bhd has been actively acquiring Yee Lee shares from the open market during the period between the LTD and the latest practicable date (LPD), whereby its shareholding in Yee Lee has increased from nil as at the LTD to 2.56% as at the LPD.

As a result, the joint offerors’ shareholding in Yee Lee has correspondingly increased from 58.41% as at the LTD to 60.96% as at the LPD.

“Hence, in any case, whether the joint offerors receive valid acceptances upon the completion of the offer or Langit Makmur continues to acquire Yee Lee shares, the liquidity of Yee Lee shares is expected to tighten further (due to lower public shareholding spread) and consequentially, holders may find it difficult to dispose of the offer shares in the open market.”

In this regard, the offer presents an opportunity for holders to realise their investment in the Yee Lee shares on a wholesale basis in cash and at premium to its historical market prices.

“Save for the offer, the board has not received any competing offer for the offer shares or any other offer to acquire the assets and liabilities of Yee Lee,“ said Affin Hwang Capital.

It noted that the offer is the only available offer for the holders’ consideration and the joint offerors do not intend to maintain the listing status of Yee Lee on the Main Market of Bursa Securities.

To recap, Yee Lee received the voluntary takeover offer from Yee Lee Organization Bhd, executive chairman Datuk Lim A Heng @ Lim Kok Cheong, Datin Chua Shok Tim @ Chua Siok Hoon, Lee Ee Young and Langit Makmur Sdn Bhd last month.

Lim is also chairman of Spritzer Bhd. As at the LPD, the joint offerors hold a 60.96% stake in Yee Lee Corp.

“The non-interested directors concur with our opinion that the offer is not fair but reasonable. Accordingly, the non-interested directors recommend that the holders accept the offer,“ it added.

Malaysia’s current account surplus to remain strong: RHB Research

PETALING JAYA: RHB Research has maintained its 2019 current account surplus forecast at RM38.8 billion, or 2.5% of GDP for 2019, from 2.3% of GDP in 2018, as the slowdown in trade may continue to cap import growth more than exports, as seen in Q1’19.

Malaysia’s Q1’19 current account surplus rose to the highest level in five years, as goods surplus rose amidst a fall in imports while the services and income deficits narrowed.

Affin Hwang Capital maintained its forecast for 2019 current account surplus at RM30 billion.

“Even with the trade tension between the US and China, we expect export growth to be supported by Malaysia’s diversified export structure, steady commodity prices and healthy demand for manufactured goods. This, in turn, will likely support the current account surplus. Besides that, we expect the current account surplus to also be supported by higher tourist receipts,“ it said.

For 2019, it said Tourism Malaysia projected tourist receipts to grow by 9.6% year-on-year to RM92.2 billion from RM84.1 billion in 2018. Tourist arrivals are also forecasted to increase to 28.1 million persons from 25.8 million persons in 2018.

“Therefore, we expect the trade surplus to remain healthy at around RM100 billion (RM120.3 billion in 2018) and the current account surplus to also remain healthy at around RM30 billion in 2019 (RM33.5 billion or 2.4% of GNI in 2018).”

The research house has revised its real GDP growth forecast to 4.5% from 4.7% previously for 2019 following slower-than-expected GDP growth thus far in 1H19.

“However, we believe growth in total investment, which has been dragged down by the continued cautious business sentiment as well as lower capital expenditures in 1Q19, will likely recover in the quarters ahead, supported by implementation of infrastructure development projects and capital spending in the manufacturing and services sectors.

“More importantly, we expect the possibility of an acceleration in the federal government’s development expenditure as well as improvement in public corporations’ capital spending to support domestic demand and provide some cushion to slowing exports due to the escalation in US-China trade tensions. Nevertheless, external risks remain elevated,“ said Affin Hwang.

Going forward, with the trade tensions escalating between the US and China, and Malaysia being an open economy that is highly dependent on exports and the manufacturing sector, it believes that Malaysian external demand could be dampened on possible global supply chain disruptions.

“We believe that growth in net real exports will contract by 0.5% for 2019, as gross exports are expected to register a slower growth of 1% (2.2% in 2018), but gross imports may increase by 1.2% in 2019 (1.3% in 2018).

Meanwhile, Fitch Solutions Macro Research said with the re-escalation in May of US-China trade tensions, which saw another round of tit-for-tat tariffs, as well as the possibility of additional US tariffs on another US$300 billion (RM1.3 trillion) worth of Chinese goods, the external environment has once again taken a negative turn.

“Malaysia’s export growth will likely see spill-over effects from slowing regional growth as a result and we expect export growth to remain subdued over the coming months.”

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.

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.