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Glove sector downgraded as challenges grow

PETALING JAYA: PublicInvest Research has downgraded the glove sector to “underweight” on the back of a more challenging operating landscape for the glove makers in near term.

This is due to additional capacity coming on stream and average selling pressure (ASP) pressure on latex gloves due to growing competition from Thailand.

Share prices of the glove makers under its coverage have seen price-to-earnings (PE) contraction with Top Glove Corp Bhd, Hartalega Holdings Bhd and Kossan Rubber Industries Bhd retracing by more than 18% year-to-date.

Despite the recent selloff, the research house said the sector is still trading at unattractive PE valuations and could potentially contract closer to historical average of 21-26 times.

It has also cut the sector’s FY19-20F earnings forecasts by 3-14% and downgraded its rating on Hartalega and Top Glove to “underperform” while Kossan is maintained at “neutral”.

PublicInvest Research said the global consumption of rubber gloves has always been growing at a steady rate of 8-10% annually.

“The previous vinyl gloves disruption in 2016/17 has led to glove makers expanding their capacity more aggressively in order to satisfy the sudden surge in demand for latex and nitrile gloves due to the impact of substitution effect.”

It noted that the capacity expansion planned during the vinyl disruption is expected to come in the market in the second half of 2019. This includes Thailand’s largest glove maker Sri Trang, which expects their production to increase to 23 billion pieces at the end of the year from the current capacity of 21.1 billion.

Overall, global supply for 2019 is expected to grow by 15% based on planned capacity, outpacing the demand growth of 8-10%.

Due to Thailand’s Sri Trang’s aggressive expansion plan and its product mix of 69% latex gloves and 31% nitrile gloves, PublicInvest Research expects it to have a stronger impact on Top Glove as latex gloves make up 49% of its product mix compared with the more nitrile-heavy glove players like Hartalega (95% nitrile, 5% latex) and Kossan (76% nitrile, 24% latex).

“We understand that Sri Trang has been cutting ASP in order to gain market share,” said the report.

In addition, Hartalega could be facing stronger ASP pressure due to its premium pricing and in the times of excess capacity, greater bargaining power is in the hands of buyers.

Hence, Hartalega may see margin compression in the coming quarters.


Seacera flags potential default on debts

PETALING JAYA: Tile manufacturer Seacera Group Bhd has warned that it is potentially headed towards a default on its payment obligations in the highly likely event that it will not be able to proceed with its settlement proposals in time.

In a filing with Bursa Malaysia, the company said if it is unable to complete the proposals in a timely manner, it will be headed towards default, and possibly cross default on all its outstanding banking facilities and corporate guarantees of the banking facilities, on the payment obligations amounting to up to RM81 million.

In addition, the company will not be able to declare that it is solvent as the board will not be able to form an opinion that the company will be able to pay all its debts as and when they fall due.

In the event of a default in payment and inability to provide the solvency declaration, the company will trigger Practice Note 17 criteria and will face possible suspension and de-listing as an affected listed issuer.

Earlier on Jan 16, the group announced the proposed settlement of RM31.31 million owed by Seacera and two of its subsidiaries namely Seacera Ceramics Sdn Bhd and Seacera Properties Sdn Bhd to certain creditors. The amount was to be settled via the issuance of 149.09 million new shares at 21 sen per share.

The group had also proposed a private placement of up to 126.34 million new shares representing 30% of the existing issued share capital, to be subscribed by potential investors. The proposed exercise was expected to raise gross proceeds of about RM24.64 million, of which RM20 million was to be used to repay bank borrowings.

The settlement agreements were subject to the approval of Seacera shareholders to be obtained on or before April 15 (cut-off date), which was subsequently extended by 20 days to May 6.

The company was to convene an EGM on April 16. However, its largest shareholder Datuk Tan Wei Lian initiated legal action to stop the company from proceeding with the proposed resolutions. A writ and an application for injunction was served on the company and the EGM was adjourned to a later date.

Tan, who holds a 16% stake, withdrew a notice to convene an EGM to remove two directors last week due to a “technical” issue. However, he is planning for an EGM again on May 15 to remove eight directors and appoint six new directors.

Following the injunction, the company will be blocked from proceeding with the proposals, which are imminent for it to immediately address its current cash flow position. Without the proposals, settlement creditors, financial institutions and other creditors may initiate legal proceedings which may include winding up petitions against the group to recover their ascertained/agreed debts.

The group will also be unable to finance its working capital requirements for its tiles plant operations and/or other overhead expenses, and has decided to permanently shut down its only tiles plant operations in Selayang.

Seacera said the permanent shut down may result in the group not having adequate level of operations to warrant continued listing on the bourse as well as financial impairment of up to RM24 million, which may affect its financial results for the financial year ending Dec 31.

In view of the developments above, Seacera expects its share price to be negatively impacted.

The stock fell 1.47% to 33.5 sen with 28.6 million shares done, making it one of the most actively traded stocks prior to the suspension in the trading of its shares at 3.30pm today. Trading in its shares resume tomorrow.


GDB shares rise on acquisition of stake in geotechnical specialist

PETALING JAYA: GDB Holdings Bhd saw its share price rise as much as 1.67% this morning after announcing its proposed acquisition of 70% stake in construction contractor Eco Geotechnics Sdn Bhd.

At midday, the stock was 1.67% or half sen higher at 30.5 sen, from its 30 sen closing price yesterday. A total of 496,100 shares were traded.

In a filing with Bursa Malaysia yesterday, GDB said it, and its wholly owned subsidiary Grand Dynamics Builders Sdn Bhd have entered into a binding term sheet with Goh Eng Ngai, Wong Choo Keong and Tan Loo Loo in relation to the proposed acquisition.

“The proposed acquisition will enable GDB to venture into the piling business, to expand its customer base and to create opportunities with an added scope of jobs the group can tender for,” it said.

“The proposed acquisition will also enhance the group’s prospects when tendering for jobs which involve sub-structure works as well as to create opportunities in securing superstructure works where contract owners call for separate sub-structure and superstructure tenders for a project,” it added.

Eco Geotechnics is principally involved in providing services as a construction contractor specialising in geotechnical and foundation engineering works.


Axiata shares fall 5 sen in early trade

PETALING JAYA: Axiata Group Bhd’s share price fell as much as 5 sen this morning after its subsidiary Ncell Private Ltd was ordered to pay capital gains tax of NPR39.06 billion (RM1.44 billion) by Monday.

The stock traded at a low of RM4.03 during early trade, 1.23% or 5 sen lower than its RM4.08 closing price yesterday. At midday, the stock was 0.49% or 2 sen lower at RM4.06 with 778,200 shares traded.

Yesterday, Axiata told Bursa Malaysia that Ncell received a letter from the Large Taxpayers Office in relation to the capital gains tax.

The capital gains tax is in relation to the indirect transfer to Axiata Investments UK of an 80% stake in Ncell through the sale of Reynolds Holdings Ltd by the previous foreign investor, TeliaSonera Norway Nepal Holdings AS.

“The letter stated that the assessment order issued against the seller (TeliaSonera) in relation to the transaction, has been transferred to Ncell and further states that the balance amount of the capital gains tax arising from the transaction due is NPR39.06 billion. Ncell has been ordered to deposit the said amount within seven days, or by April 22.”

Axiata and Ncell are currently reviewing the letter and are considering appropriate course in relation to the letter.


Bursa Malaysia opens lower in early session

KUALA LUMPUR, April 18 ― Share prices continued their downward momentum on Bursa Malaysia this morning with trading remaining lacklustre.  At 9.15am, the benchmark FTSE Bursa Malaysia KLCI (FBM KLCI) was 5.48 points easier at 1,615.42, after…


Ann Joo unlikely to benefit from improved construction sentiment

PETALING JAYA: Despite a gradual pick-up in construction activity, it is unlikely to translate into better operating margins for Ann Joo Resources Bhd, according to Hong Leong Investment Bank (HLIB) Research.

This is due to the marginal rise in steel bar and billet being insufficient to mitigate higher prices for raw materials such as iron ore and scrap metal.

Prices of iron ore and scrap metal have risen 28.4% and 6% year-to-date (YTD) to US$92.9/metric ton (mt) and US$333/mt, respectively, triggered by the Vale Dam incident.

The research house has lowered its forecasts for Ann Joo by 7.9% and 2.1% in FY19 and FY20 to account for higher raw material prices.

HLIB Research has also downgraded Ann Joo to “sell” from “hold” with a lower target price of RM1.41 from RM1.53 previously.

“While there has been an improvement in construction sector sentiment, we are of the view that Ann Joo’s outlook will be clouded by higher raw materials price and thus, earnings delivery is poised to be on a weaker trend. With share price up 41% YTD, we reckon this presents an opportune time for investors to take money off the table, especially given the headwinds from rising raw material price.”

HLIB Research believes it could take a while for world supply of iron ore supply to be restored as Vale, the world’s largest iron ore producer, has recently cut its iron ore supply estimate by up to 75 million tonnes in 2019, accounting for 12% of the global iron ore production.

“This would in turn, result in mismatch between prices of steel and iron ore, hence dragging earnings of steel producers in the near term.”

In order to cushion the manufacturing division’s weak near-term demand outlook, Ann Joo’s management is looking to ramp up exports of its manufactured products, in particular rebars to Southeast Asia and the Middle East, where demand for construction steel products remains stable.

“On a more positive note, we note that Ann Joo will be able to cushion the weaker earnings prospects in FY19 by utilising its RM500 million tax allowance arising from the investment in its blast furnace.”

The tax allowance will be used to offset the normalised taxation for five years, which started since the fourth quarter of 2018.


European shares ease from eight-month high as miners weigh

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Hibiscus Petroleum unfazed by production halt at Anasuria FPSO

PETALING JAYA: Hibiscus Petroleum Bhd assured that the temporary production halt at Anasuria floating production storage and offloading (FPSO) is not expected to impact its crude oil offtake schedule or have any material effect on the group for the financial year ending June 30, 2019.

Hibiscus Petroleum was responding to a recent online article published by Upstream Online titled “Petrofac launches appeal against UK prohibition notice” that states a prohibition notice was served against Petrofac Facilities Management, which has been running the FPSO on behalf of Anasuria Operating Company (AOC), a joint venture between Hibiscus Petroleum and Ping Petroleum since 2016.

Hibiscus Petroleum told Bursa Malaysia that its indirect wholly-owned subsidiary Anasuria Hibiscus UK Ltd (AHUK) jointly operates the Anasuria Cluster via AOC with Ping Petroleum UK Ltd.

“In the subsequent to a routine visit by the health and safety executive (HSE) in late February 2019 to FSPO, Petrofac as the duty holder was instructed through the prohibition notice to temporarily halt production pending the mitigation of the risk identified by the inspectors in relation to the asset’s flare tip.”

As a result, it said production was temporarily halted at the facility for six days to mitigate any potential risk.

“Other previously planned maintenance work was also simultaneously undertaken during this period. There were no injuries or loss of containment as a result of this matter.”

Hibiscus Petroleum understands that Petrofac is appealing the issuance of the prohibition notice by the HSE.

“We wish to emphasise that Hibiscus Petroleum, AHUK and Petrofac’s priority is always the safety and welfare of all employees and contractors,” it added.

At the midday break, Hibiscus Petroleum’s share price was down 2 sen or 1.8% to RM1.11 on 23.2 million shares done.


Pharmaniaga a ‘buy ’ despite Cabinet scrutiny

PETALING JAYA: MIDF Research has upgraded Pharmaniaga Bhd to a “buy” call from “neutral” previously, with a revised target price of RM2.45 from RM2.63 pre-viously, despite concerns over the government not renewing its concession agreement with the company.

Pharmaniaga has a 10-year concession agreement with the government which is slated to end in November 2019. The group, along with My EG Services Bhd, Padiberas Nasional Bhd and Puspakom Sdn Bhd are currently under scrutiny by the cabinet com-mittee on market monopolies.

MIDF Research said there is a fair chance that the concession business still be awarded to Pharmaniaga given its years of experience and expertise in the logistics and distribution business; the huge amount of investment to ensure efficient deliveries; and the massive savings enjoyed by the Health Ministry from Pharmaniaga’s handling capability.

“We estimate that it will take up at least four years for other competitors to reach the same capability. In addition, the group has renewed its focus on its non-concession business by streng-thening business synergies between its Indonesian sub-sidiaries to expand its presence in the Indonesian market,” it said in its report today.

MIDF Research said these factors will help support the group’s earnings going forward while the recent decline in the share price presents an oppor-tunity to accumulate the stock.

“In addition, the stock commands an attractive dividend of more than 7% in comparison with its peers. All things considered, we upgrade our call on the stock to ‘buy’,” it added.

Based on a meeting with Pharmaniaga, MIDF Research concluded that the company’s logistics and distribution of medical supplies is vital to all 148 government hospitals and 1,700 clinics nationwide.

Pharmaniaga’s concession business involves the logistics and distribution of 750 items listed under the Health Ministry’s approved product purchase list. The company is required to organise tender exercises that involve all prospective vendors but the selection of vendors is managed by the ministry.

“The company is allowed to submit its own bid to supply the products but their tender documents need to be sub-mitted two weeks in advance before the public call for tender. This ensures a level playing field to all other potential vendors. In fact, Pharmaniaga’s in-house products only accounted for about 27% of the concession business,” MIDF Research noted.

Pharmaniaga has incurred huge investments on system and process improvements over the 10-year tenure of the concession agreement, including RM300 million for the development of the Pharmacy Information System (PhIS) across the ministry’s 1,118 facilities.

In FY19, the company plans to invest some RM122 million to increase its warehouse capacity, particularly in Terengganu and Sarawak to further reduce delivery time. Its current ware-house capacity is about 430,000 sq ft nationwide.

Meanwhile, the group is also working on reducing its depend-ency on the concession business, with a mid-term target revenue contribution of 40% from the concession business and 60% from the non-con-cession business.

“Going forward, we expect the growth momentum to continue given the company’s focus on manufacturing seg-ment which commands a better margin. In fact, Pharmaniaga has allocated about RM52 million to build up its manufacturing capabilities,” said MIDF Research.

The research house, however, revised Pharmaniaga’s earnings forecasts downwards for FY19F and FY20F by RM5.9 million and RM5.8 million respectively, based on higher finance costs to fund the planned capital expenditure and higher effective tax rate of 30%.