20150713 2H15 Market Outlook & Strategy - Apex Equity · PCOMP Index 19.7 17.4 15.6 1.9 2.0 2.2...

13 July 2015 2H15 Market Outlook & Strategy JF APEX SECURITIESJF APEX SECURITIESJF APEX SECURITIESJF APEX SECURITIES

JF Apex Securities Berhad Newsletter 13 July 2015 2H15 Market Outlook & Strategy Y.E. 2015 KLCI Target: 1720 A Trapped Market


Market Review 1H15

� Strong start, poor finish. The FBM KLCI was generally in an uptrend during 1Q15 thanks to the recovery of crude oil price with the index hitting year-high of 1862 points but still failed to break the all-time high of 1892 points achieved in mid-2014. Moving into 2Q15, the market correction started to kick in with foreign selling re-emerged as concerns on 1MDB, political instability, depreciation of RM against USD, possible Fitch downgrade and Greek debt default weighed on investor sentiment.

Figure 1: The FBM KLCI Performance for 1H15

Source: Bloomberg

� Intense foreign exit on local bourse. As of 1H15, the net outflow of foreign fund from Malaysian equity market stood at RM8.8b, in strong contrast with net inflow of RM1.1b in 1H14 and far exceeded the net outflow of RM4.1b for the whole year 2014. The exodus of foreign funds was evidenced in May-June, with a consecutive nine-week selldown on the local bourse, as triggered by renewed concerns on US rate hike, potential Fitch downgrade of the country’s sovereign rating, 1MDB woes, political instability coupled with uninspiring 11MP announcement and 1Q corporate results. Foreign investors chose to reallocate their funds to other Asian peers especially North Asian markets.

Figure 2: Net Inflow/Outflow of Foreign Funds to/from Local Equity Market for 1H15

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Source: Bursa Malaysia, JF APEX


� Small cap. counters outperformed large and medium cap. stocks. Following the recent market selldown, the FBM Small Cap index still managed to chalk up gains of +4.8% in 1H15 as compared to FBM KLCI’s –3.1% and FBM Mid 70’s –2.6%. We believe the large and mid cap. Stocks, which are having relatively higher foreign shareholdings, were more prone to the recent selling pressure by foreign investors.

Figure 3: Returns of FBM KLCI vs FBM Small Cap vs FBM Mid 70 for 1H15

Source: Bloomberg, JF APEX

� Most sub-sector indexes registered negative returns except Technology and Consumer. In 1H15, the Technology sector (+30.7%) continued its strong performance from last year mainly attributable to continuous strengthening of USD and better semiconductor sales whilst Consumer sector (+4.1%) surprisingly performed well amid GST implementation. Meanwhile, Plantation (-7.8%) and Property (-5.7%) were the worst performers having underperformed against the FBM KLCI (-3.1%) as investors shunned away those stocks due to weakening CPO prices and softening residential sales.

Figure 4: FBM KLCI’s Sectoral Performance for 1H15

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KLCI Index FBM Small Cap Index Mid 70


� The FBM KLCI’s 1H15 return was one of the worst among regional peers. China, Japan, HK, Europe, Korean bourses chalked up impressive returns due to monetary stimulus and loosening monetary policies in place. Performance of the local bourse ranked at the bottom against the major Asian indices and even lagged behind developed markets no thanks to outflow of foreign funds.

Figure 5: Return of FBM KLCI against Regional Bourses for 1H15

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Market Outlook & Investment Strategy 2H15

� Review of our 1H15 market outlook & strategy. The FBM KLCI ended at 1706 points as of 30 June 15 which is close to our target KLCI of 1720 points with a –0.8% deviation. Our investment advice of bottom-up approach in small cap. stock selection, preferring active investment strategy to passive investment strategy also yields encouraging results as small cap. counters outperformed large and medium cap. stocks (return of FBM Small Cap index: +4.8% vs FBM KLCI: –3.1% and FBM Mid 70: –2.6%).

� Current market valuation is fairly priced. Following the recent market correction to the 1710~1730-point level, the local benchmark is now trading at 16.1-16.4x 2015 PE, implying a +0.5 standard deviation above mean (see figure 6). We deem the current valuation as fully valued and uncompelling especially for the index-linked or large cap. counters.

� A trapped market, struggling for break out. We opine that the FBM KLCI would be trading sideways with a negative bias for most of 2H15, particularly in 3Q15 in the absence of positive catalyst with trading range from 1650 to 1830 points, i.e. ranging from mean to +1 standard deviation before seeing a better 4Q15. Hence, we advocate investors to adopt trading strategy of ‘buy low’ when the index below 1700 level, and ‘sell high’ when the index above 1750 level in this ‘choppy’ market.

Figure 6: The FBM KLCI’s P/E Valuation


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• Compelling valuations for mid and small cap. counters. Meanwhile, for the valuation of mid cap. stocks, they are currently trading at 14.6x 2015 PE, in the range of mean to +0.5 standard deviation; whilst the FBM Small Cap Index is now trading at 9.7x 2015 PE, which is close to its mean (see figure 7 & 8) .

Figure 7: The FBM Mid 70 Index’s P/E Valuation


Figure 8: The FBM Small Cap Index ’s P/E Valuation


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• We foresee the valuation gap between the small cap. and large cap. counters to narrow from current 40% PE discount to mid range of 30-35% discount in view of lack of earnings growth in blue-chips. Traditionally, the small cap. counters have being trading at 20-50% PE discount to the large cap. stocks for the past 10 years (see figure 9). To recap, the PE ratio of small cap. counters have been trending higher after GE 13 to as high as 20-30% discount during 3Q13-4Q14 and only started to correct itself to wider discount of 35-40% since late 4Q14.

Figure 9: Discount of The FBM Small Cap Index ’s P/E Valuation to The FBM KLCI


� Pricey valuation against regional peers and moderate dividend yield. The local bourse is now trading at 16.4x 2015 PE and 15.0x 2016 PE, the second highest PE after the Philippines Composite Index. The FBM KLCI is trading at 12.4% and 15.6% premium to other major Asian indices. Furthermore, the yield of the local market looks unappealing for long term investors, rendering a mere 3.2% and 3.4% for 2015 and 2016 respectively. This is lower than Taiwan and Singapore bourses and on par with other Asian markets such as HK and Thailand. Hence, we opine that foreign investors have better alternative for equity exposures in Asian markets.

Figure 10: Regional P/E & Yield Comparison

PER (X) Dividend yield (%)

2015 2016 2017 2015 2016 2017

FBMKLCI Index 16.4 15.0 13.9 3.2 3.4 3.7

HSI Index 12.6 11.5 10.5 3.2 3.4 3.7

FSSTI Index 13.8 12.7 11.8 3.4 3.6 3.9

JCI Index 15.5 13.1 11.5 2.0 2.3 2.7

SET Index 15.3 13.3 12.0 3.2 3.5 3.8

PCOMP Index 19.7 17.4 15.6 1.9 2.0 2.2

KOSPI Index 11.8 10.6 9.7 1.4 1.5 1.6

TWSE index 13.2 12.3 11.5 3.6 3.9 4.1

Average (ex-KLCI) 14.6 13.0 11.8 2.7 2.9 3.1

KLCI's premium

over region (%) 12.4 15.6 18.1 20.3 19.2 18.0


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� Receding concerns on slide of crude oil prices…..? We opine that it is still premature to assume that crude oil prices has stabilised although we have witnessed the Brent hovering at a range of USD55-65/barrel for the last six months. The rebound of oil prices since early this year from as low as USD50 in Jan 15 (after slumping from USD105 in mid 2014) has prompted the resumption of shale oil production in US amid stubbornly high OPEC production. Study showed that the number of US actively drilling oil rigs jumped by 12% in the first week of July which indicates the streak of rigs being taken offline was nearing its end. The amount of US rigs drilling for oil increased for the first time this year after 29 consecutive weeks of declines. Besides, the lifting or easing of Iran sanction would exacerbate the supply glut.

� …….. and Ringgit? Despite RM staging a mild relief rebound straight after the news of Fitch not downgrading the country’s sovereign rating, it failed to hold on to its gains and continued to trend downwards against USD and even broke the RM3.80 level at one time. The RM tumbled to the weakest level since the USD peg was scrapped in 2005 due to ‘Grexit’ and political debate surrounding 1MDB and its corruption allegations. Whilst we agree with BNM’s view that RM is currently undervalued based on the country’s underlying economic fundamental (foreign reserves of c.USD100b, which is sufficient to finance 8 months of retained imports and 1.1 times the short-term debt), the confidence of investors in the country’s prospects in respect of political stability, sustainability of economic growth and financial health are equally important under the current globalised market. Moving forward, we expect RM to continue weakening against USD in 2H15, albeit with limited downside risk and possibly recovering mildly to RM3.65-3.75 by year end, amid anticipated US rate hike, weakening exports pursuant to prevailing sluggish commodity prices and prolonged politicking with no sight of improvement in the short run.

� Would the local market climb back into foreigners’ investment radar? Whilst we reckon that the foreign selling momentum on local bourse could have tapered off moving into 2H15 as compared to 1H15, we opine that the local market is still short of convincing stories to lure back foreign investors in an immediate term. Political stability and hence policy continuation is being viewed as a ‘long-time selling point’ to foreigners as such the current politicking is doing ‘no good’ to the local bourse, we believe. To recap, even with the uncertain outcome clouded in last General Election (GE13), foreigners were still net buyers prior to the GE13 as contrast to local buyers (who were the net sellers) as they were convinced that ruling government could extend its wining streak and economically beneficial policies.

� Local stock market ‘unappealing’. We see that institutional investors, especially foreign funds, who have greater appetite in large cap/blue chip stocks (with high liquidity) may have limited stock selections at this moment due to unfavourable risk-reward tradeoffs. Fundamental-wise, the local market renders neither growth nor value investing proposition in view of lacklustre earnings growth coupled with high shareholdings of government-linked investment funds, which resulted in relatively higher PE than regional peers. For yield-seeking investors, investments are made preferably in the fixed income market as evidenced by the stubbornly high foreign shareholdings of 47% in MGS, which surprisingly increased from 44% in end 2014 despite the weakening RM in 1H15. Liquidity-wise, we reckon that BNM might not have much leeway to revise downwards our OPR in a large extent, at most a 25bp, in view of seriousness of ‘financial imbalances’ attributable to high household debts.

� Policies dilemma on domestic front. Should there be any economic slowdown encountered locally, we envisage that the government and BNM would have limited policy tools in cushioning any negative impacts by adjusting the country’s fiscal and monetary policies in a larger manner to stimulate economic growth. This could derail the government’s effort to achieve targeted fiscal budget deficit of 3.2% for 2015 and balanced budget by 2020 amid prevailing weakness in oil prices coupled with its high public debt and contingent


liabilities of c.54% and c.70% to GDP respectively. Elsewhere, BNM is running out of options for monetary expansion given relatively high household debt (i.e. household debt to GDP of 87% and household debt to income of 146%), one of the highest household debt across Asia which could lead to a credit bubble.

� Abundance of uncertainties on external front. Global economic outlook will continue its mixed fortunes in 2H15………

� ……US continues to register strong economic footing judging by its latest positive job data, consumer confidence index, retail sales, PMI, home sales & starts.

� ……EU’s economy emerged strongly in 1H15 but worsening Greek debt crisis may weigh on 2H15 growth. EU registered 0.8% yoy GDP growth underpinned by strong private consumption and investment thanks to ECB’s loosening monetary policy, cheap oil price and weak Euro.

� ……Japan’s economy still not out of the woods yet. Japan’s economy strengthened in 1Q15 with 2.4% yoy GDP growth mainly due to favourable labour market and solid corporate profits, attributable to loosening monetary policy and weakening Yen. However, the recent dip in PMI suggests that the nation still struggling with its sluggish economic growth and deflationary pressures.

� ……..Meanwhile, Chinese economy is in consolidation mode with GDP expected to grow between 6.5-7% for 2015 despite facing some structural economic issues with remote possibility of economic hard landing especially after the recent rate cut.

� Divergent monetary policies dictate fund flow. With the normalisation of monetary policy underway in US as rate hike could happen as early as Sept this year and the rest of the world is still maintaining loosening monetary policies to accommodate economic growth, further strengthening of USD is expected as continuous foreign funds flow back to US to capitalise on the higher yields. Having said that, ‘cheap money’ will continue to flow into countries with monetary stimulus as stock markets will be continued to be driven by liquidity such as EU, Japan, China, and lesser extent to other emerging markets.

� Global economy still flush with liquidity but at a lesser extent than QE era. We deem that major central banks in the world will have more leeway for monetary easing with the current lower oil price. The global economy especially Japan and EU will continue or even intensify their loosening monetary policies following weakening oil price which put more deflationary pressure on their economies.

� How well the local market can withstand foreign selling? We reckon that foreign selling momentum could taper off moving into 2H15 as compared to 1H15, as current foreign shareholdings in local equity market stands at c.23% nearing c.20-21% low during Lehman Crisis in 2009 and trending downwards from the peak of c.25% in mid 2013. Furthermore, we believe the domestic liquidity is able to absorb the selling pressure with c.RM300b deposits in banking system provided there is no massive capital flight in bond markets, which we think is unlikely (currently with c.48% foreign shareholding in MGS worth c.RM170b). In fact, the foreign shareholding in MGS has increased from 44% in end-2014 to 48% currently despite the weakening RM in 1H15.

� Back to fundamentals after years of liquidity-driven market rally. We believe the valuation of local market could de-rate to the mean after years of liquidity-driven market rally since the Lehman crisis. Investors are now accepting the fact that the market will ultimately be propelled by fundamentals premised on state of the economy and corporate earnings.


� We maintain our year-end 2015 FBM KLCI target of 1720 points (with unchanged EPS growth - 2015: +5.3%, 2016: +9.0%) and target PER (at 15.5x 2015 PE, which implies +0.25 standard deviation above mean; and 14.2x 2016 PE, implying -0.5 standard deviation below mean). We foresee a rising equity risk premium in tandem with higher risk free rate as a result of increasing bond yield which would eventually lead to lower asset value.

� Our year-end KLCI target renders minimal upside since current downside risks are more than upside risks. Our top-down valuation is close to historical average PE of 15.2x as we expect equity valuation will gradually de-rate to be close to mean pursuant to: a) diminishing market liquidity with the end of US’ QE and higher possibility of Federal Reserve increasing interest rate in 2H15; b) challenging domestic economic outlook in respect of weakening local consumption with the implementation of GST, declining exports and hence current account surplus as a result of dismal commodity prices, coupled with depreciation of RM and current political uncertainty; c) slowdown in China’s real economy pursuant to share slump due to wealth plunge as high participation of retailers in stock market; d) contagious effects of ‘Grexit’ to other troubled EU nations such as Spain, Italy, Portugal should Greek debt talks fail.

� Expect better 2H15 corporate earnings following disappointing 1Q15. Corporate earnings-wise, we envisage 2015F market earnings to grow at 5.3% against 2014F’s –2.0% on the back of low-base earnings achieved in 2014. Sectors that would spur the KLCI’s yoy earnings growth are Utility (Tenaga, Westport and Petronas Gas), media (Astro) and Finance (Public Bank, Maybank). Elsewhere, the non-index linked counters such as Property (higher unbilled sales), Technology, Rubber glove, Furniture, Plastic and Wooden-based manufacturers could spring better yoy results, benefiting from strengthening USD. Sectors that may post lacklustre or flat/moderate earnings growth are Plantation, Gaming, Auto, Telco, Consumer, Construction, Finance. We opine that the stronger economic growth is not translated into strong set of corporate results. This was judging from the weaker 2013-2014 results albeit stronger GDP growth for the past two years.

� Seeking alpha play with bottom-up approach for stock selection. We opine that stock pick is crucial for 2H15 in order to have stock return that outperforms the market since our target index offers limited upside and broader market sentiment still remains cautious due to heightened volatility.

� Investors shall adopt combination of defensive and active investment strategy by investing in undervalued stocks, either small cap or mid and large cap stocks, with positive newsflow and brighter earnings prospects in addition to the high yield stocks with resilient business models which are unfazed by the slowdown in economic growth.

� Overweight on Construction. We continue to see flux of contract awards in relation to projects highlighted under Budget 2015 and 11th Malaysia Plan to excite the Construction sector.

� Upgrade Rubber Glove to Overweight from Marketweight. Despite we are mindful of the pricing competition in the industry, particularly in nitrile gloves segment, as glove makers are aggressively tapping into and expanding in the nitrile gloves segment, we turned more optimistic on the sector following the tailwinds of favourable forex and subdued raw material costs. We reckon that further weakness in Ringgit would serve as a short-term catalyst to the sector.

� Neutral with positive bias on Plantation. We expect CPO prices to stay supported at

above RM2100/mt level in 2H2015, as we envisage crude oil to stabilize at around US$60-70/barrel level hence posing limited downside risk to CPO prices. On the flip side, we reckon that the seasonal high production in 2H would keep upside of CPO prices limited. However, we view the advent of an El Niño would serve as a catalyst to CPO prices. We estimate CPO


prices to hit RM2400-RM2500/mt should the El Niño risks strengthening, as the dry weather would hurt crop production.

� Neutral with negative bias on Automotive, Consumer, Property, O&G and Telco sectors. We foresee the rising cost of living would dampen buyers’ purchasing power especially on discretionary spending and hence affect automakers/distributors and certain consumer stocks. Meanwhile, we expect physical property market will continue to consolidate, with lower new sales achieved for this year, caused by stringent mortgage approval, buyers’ wait-and-see attitude in relation to implementation of GST. We envisage limited O&G contract awards in near term with Petronas cutting its capex whilst Telco operators continue to face margin compression as a result of stiff competition.

� Our top picks under coverage are IJM Corp. (TP: RM7.74), Gadang (TP: RM1.98), Top Glove (TP: RM7.75), Genting Plantation (TP: RM11.21), LBS (TP: RM2.05) and SCH (TP: RM0.34).

� External-driven beneficiaries. Beyond our coverage, we also advocate investors to invest in export-oriented industries such as Technology (Globetronics, MPI, Inari, Vitrox, KESM, V.S Industry), Furniture (Latitude Tree, Poh Huat), rubber/plastic related and wooden based manufacturers (Kossan, Wellcall, Scientex, SCGM, SLP, Heveaboard, Classic Scenic) which could benefit from strengthening USD against RM with cheaper local cost content and stronger US economic growth.

� For local catalyst-driven sectors, investors could look at: a) E-service providers which could benefit from the implementation of cashless payment and other E-commerce transactions - MyEG, GHL, Scicom; b) Sarawak election thematic plays - CMSB, Naim, HSL, Dayang, KKB, Press Metal, Sarawak Cable; c) Penang transport hub – MRCB, EcoWorld, IJM, Gamuda; d) Education – Sasbadi; d) Material Suppliers benefited from property boom for the past few years – LB Aluminium, Signature Kitchen; e) Building material counters riding on the construction boom – SCH, OKA.

� For long-term investors who aim for defensive sectors and/or decent dividend yield to shelter the short-term volatility, they are advised to fish for retail and industrial REIT (SunReit, PavReit, Axis Reit, KLCCP); Consumer staples – F&B, Tobacco (F&N, Nestle, Dutch Lady, BAT); NFO (BJ Toto, Magnum); Healthcare (KPJ, IHH); Concessionaires – highway, port (LITRAK, Westport); Utilities (Tenaga, YTL, YTL Power, Gas Malaysia, Malakoff).

Lee Chung Cheng [email protected] 603 8736 1118 (ext: 758)


Technical Outlook

� The FBM KLCI started the year brightly rallying from 1670 points in December 2014 to 1860 points in April 2015.

� The benchmark index then tumbled more than 8.5% from 1860 points in April to below 1700 points recently, surrendering all its gains for the year.

� Downtrend was confirmed in May when the index crossed below the 200-day moving average (orange line)

� Last week’s rebound failed to break the downtrend channel. Immediate outlook remains bearish until a clear reversal is seen.

� Support and resistance levels are seen at 1670 and 1765 points respectively.

Lee Cherng Wee [email protected]

603 8736 1118 (ext: 759)


Economic Review & Outlook

• Strong GDP growth in 1Q15 but momentum might be tapered off in 2Q15 - Malaysia posted higher-than-expected Gross Domestic Product (GDP) growth of +5.6% in 1Q15, aided by impressive growth of all sectors from the production side, driven by services, construction manufacturing, and mining & quarrying sectors coupled with strong domestic demand. Services sector acted as a star performer in 1Q15 after contributed 53.6% on the production side and managed to sustain its uptrend by recording a positive growth of 6.4%. However, for 2Q15, we envisage the GDP growth to taper off to +4.3% as we expect consumers will cut their spending and adopt wait-and-see approach due to one-time adjustment of goods price hike following the 6% implementation of Good and Service Tax (GST) in April.

• Moderate GDP growth of 4.8% for 2015 – Looking forward, for 3Q15 and 4Q15, we

expect GDP continues to record a slower growth of +4.5% and +4.6% respectively based on continuous subdued exports and hence lower trade surplus which will result in full-year forecasting GDP growth of +4.8% for 2015. We also expect a slower growth in domestic demand starting from 2Q15 due to lower private consumption as consumers become more cautious in spending following the implementation of GST. Furthermore, slowdown in private and public investments in the oil and gas industry attributable to the decline in oil prices will also dent our 2015’s GDP growth.

• Nonetheless, our GDP growth will continue to be supported by manufacturing sector. This sector will sustain its expansion driven by E&E products due to higher external demand of semiconductors, electronics component, communications and computer component.

Figure 11: Yearly GDP Growth

Source: Department of Statistics, JF Apex


• Slower inflation growth for 5M15…..Inflation increased by 1.2% in May 2015, translating into 5M2015 headline inflation of +1.2% as compared to +3.4% in 5M2014. The weaker inflation growth recorded in 5M15 mainly caused by sluggish performance for its main component which is Transport that posted a negative growth since Jan’15, dragged down by the downward adjustments in petrol and diesel prices via “managed float” retail fuel price mechanism since Dec 2014. Furthermore, CPI expansion also dented by flat growth of other main components including Housing, Water, Electricity, Gas & Other Fuels, Education, Communication, Health, and Recreation services & cultures.

• …….and predicted to be in softer growth of 2.5-3.0% for full year 2015 – We

revised our 2015 inflation forecast from +3.8% to +3.0% after achieving lower-than-expected 5M15 CPI of +1.2%. We revise downward our forecast in view of continued lower retail fuel prices which is now subject to `managed float system' coupled with postponement of the electricity tariff hike. There will be no hike in the electricity tariff in Peninsular Malaysia, Sabah and Labuan until the end of this year, according to the Ministry of Energy, Green Technology and Water Ministry. To recap, the electricity tariff was last revised in March 2015 with the average electricity tariff in Peninsular Malaysia was lowered by 5.8% to 36.28 sen/kWh. Before that, government had raised the electricity tariff in January 2014 to an average of 38.53 sen/kWh (or +15% from 33.54 sen/kWh).

• OPR remained at 3.25% for 2015 – In July’14, BNM increased OPR by 25 bp to 3.25%,

which was the first hike since May 2011. The moderate rate hike was to contain inflationary pressure and rising financial imbalances whilst at the same time accommodate positive GDP growth. Moving forward, we believe that the inflation rate is manageable and hence we expect Bank Negara Malaysia (BNM) to keep the Overnight Policy Rate (OPR) at 3.25% in 2015.

Figure 12: CPI & OPR Movements



• Cautious outlook for exports. Malaysia’s exports contracted by 4.7% for 5M15 compared to +13.5% growth in last year. Export growth has started its weaker performance since July’14 as the trading partners from advanced economies recorded an unimpressive recovery. The continued slowdown in our main trading partners’ economy including China that posted a weaker PMI data will lead to a softer export of our products. Furthermore, the export performance also weighed down by lower sales of commodity-based products due to lower prices of crude oil, palm oil and natural rubber.

• Elsewhere, overall imports for 5M15 contracted at a slower pace as compared to exports.

For the first 5 months (Jan’15- May’15), import declined by 2.64% (vs 5M14: +6.8%). The weaker import growth was due to lower intermediate and capital goods purchases coupled with decrease in import from main trading partners. Import recorded a bigger decline of 7.2% in May’15 followed by -7.0% in April’15 due to post GST implementation as most imported goods are subject to GST.

• Trade surplus is projected to be lower in 2015. We estimate that trade surplus will

decline by 6.0% in 2015 to RM78.13bill (vs 2014: RM83.04bill) mainly caused by sluggish performance of exports in 5M15 and anticipated lower growth forecast for exports and imports for 2015 by +0.1% and +0.9% respectively. This was on the back of lower exports and imports from main products amid slower growth in global economy. However, trade will likely to improve marginally in 2H15 backed by the positive outlook in E&E products underpinned by economic recovery of developed nations mainly US and EU, which will lead to an increase in overall exports.

Figure 13: Trade surplus & Y-o-Y and M-o-M of Exports and Imports Growth


Research Team [email protected] 603 8736 1118 (ext. 755)

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Sector Outlook

Automotive Marketweight

• Lower vehicle sales growth – As of 5M2015, the industry recorded a Total Industry Volume (TIV) of 264,747 units, which was 3.6% lower than 5M2014 of 274,583 units. The lower growth attributed by unfavourable exchange rates, cautious economic outlook.

• The notable decrease was recorded in April’15 after total vehicle sales only reached

45,187 units, declined by 33% m-o-m and 23% y-o-y caused by adjustment to post GST environment and high base achieved in Mar’15. The abnormal high base in Mar’15 was due to forward buying by consumers prior to the implementation of the GST.

• However, the latest data showed that sales volume in May 2015 rebounded

strongly by 13.4% m-o-m after falling 33% in April’15 reflecting the maiden impact of the GST implementation and a vacuum created by pre-GST purchases which brought sales forward. However, on a yearly basis, May’15 TIV continued to decline by 8.4% y-o-y as customers cut their spending on big ticket items for this year. We foresee, sales volume for June’15 is expected to be higher than the previous month aided by pre-Raya buying and festive sales campaign by automakers. Currently, customers are still adjusting their spending pattern under this so-called ’new’ tax environment, i,e, GST. Customers become more cautious in their spending especially on big ticket items in view of rising in cost of living.

Figure 14: Total Industry Volume (Jan’15 – May’15)

Source: Malaysian Automotive Association, JF Apex


• 2015 car sales on track to achieve our slightly higher TIV forecast. The TIV for 5M15 has reached 264,747 units, which accounts for 39% of our 2015 forecast of c.679k units. The introduction of new model - New Perodua Axia (achieved 119,000 orders with 75,000 units delivered by end-May’15) with an affordable pricing range is a key driver for the industry growth. Elsewhere, several carmakers including Proton, Honda and Toyota are reducing their vehicle prices, between 2% and 3.25%, depending on the models and variants after the implementation of GST on April 1.

• Anticipate slower growth of 2% for TIV in 2015 – We envisaged that TIV for this year will increase slightly to 679,794 units which will result in full-year forecasting TIV growth of +2.0% for 2015. We expect consumer spending will remain weak for this year amid the GST implementation. We maintained our marketweight rating on the automotive sector in view of the "challenging" environment ahead.

Figure 15: TIV – MAA & Our Forecasts (2008 – 2016F)

Source: Malaysian Automotive Association, JF Apex

• We maintain HOLD call on UMW with a lower target price of RM9.64 (previous TP: RM11.47) after lowering our earnings estimates by cutting the car sales assumption and O&G revenue. We expect the Group’s automotive division will record a slower growth for this year due to lower car sales, heightening competition in the industry, no new model launching for this year coupled with gloomy outlook for O&G.

• We maintain HOLD call on Tan Chong with a lower target price of RM2.99 (previous TP: RM3.27) after lowering our earnings estimates. We slashed our car sales forecast from 51,132 units to 47,206 units for 2015F as we foresee consumer sentiment to remain weak in 2H15 mainly affected by rising in cost of living. Furthermore, in the absence of new launching of segment A model for this year, the Group might be losing market share to others especially national car markers. In addition, the stringent hire purchase rules and softer economic outlook for this year also dampened the consumer sentiment.

Research Team [email protected] 603 8736 1118 (ext: 755)

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2008 2009 2010 2011 2012 2013 2014 2015F 2016F

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Consumer Marketweight

• Consumer Index outperformed KLCI in 1H2015. The KL Consumer Index (KLCSU) outperformed KLCI in 1H2015, recoded gains of 4.1% as compared to 3.1% loss in KLCI. The outperformance of KLCSU was mainly due to gains in heavyweights particularly the foods & beverage (F&B) counters. Investors sought shield in defensive F&B counters during the volatile market while expecting staple F&B counters to be less affected by the implementation of Goods & Services Tax (GST).

Figure 16: KL Consumer Index (KLCSU) outperformed KLCI in 1H2015

Source: Bloomberg, JF Apex Figure 17: Top 20 heavyweights of KL Consumer Index (KLCSU) and total returns in 1H2015

Weightage

(%) Return (%)

Weightage

(%) Return (%)

British American Tobacco 14.47 0.66 Dutch Lady Milk 2.30 9.81

PPB Group Bhd 14.09 7.68 Karex Bhd 1.65 39.35

Nestle Malaysia Bhd 13.25 7.66 Tan Chong Motor 1.64 -7.58

UMW Holdings Bhd 9.46 -3.33

Hong Leong Industries

Bhd 1.16 5.39

Fraser & Neave Holdings Bhd 5.20 6.70 Panasonic Manufacturing 1.09 24.32

QL Resources Bhd 3.96 23.33 Goldis Bhd 1.06 -5.93

Oriental Holdings BHD 3.56 4.57 Hup Seng Industries Bhd 0.76 51.24

Guinness Anchor Bhd 3.39 18.39 Zhulian Corp Bhd 0.74 -6.08

Carlsberg Brewery Malaysia 3.00 11.90 Padini Holdings Bhd 0.70 -3.55

MSM Malaysia Holdings Bhd 2.90 9.10 Bonia Corp Bhd 0.61 1.05

Source: Bloomberg, JF Apex


• Tepid outlook for retail sector in 2H2015. According to Malaysia Retailers Association (MRA), retail sales grew 4.6% in the 1Q2015 however subsequently dipped 3% in 2Q2015 as consumers held back spending after GST came into effect on April 1, 2015. Meanwhile, consumer sentiment dipped to 6-year low as at March 2015 due to inflationary worries, according to Malaysian Institute of Economic Research (MIER). We reckon that consumer spending would remain cautious in 3Q2015 amid transition period of adapting rising cost of livings post implementation of GST. We estimate that consumer spending would normalize and consumer sentiment to pick up by year-end as Malaysian consumers ‘get used’ to GST.

Figure 18: Retails sales growth rate by Malaysia Retailers Association (MRA)

Source: MRA, Media, JF Apex Figure 19: Malaysian Institute of Economic Research (MIER) Consumer Sentiment Index

Source: MIER, JF Apex


• Maintain Marketweight rating on consumer sector. We maintain our neutral stance on the sector as we expect retail sales to be subdued in the coming months as consumer spending remains cautious. For retail counters, we rate HOLD for Padini (target price: RM1.57) as we expects its short-term earnings to be dragged down by the lower consumer spending. Yet, we advocate investors to go for bottom fishing in 4Q2015 as we expect consumer sector to stage a recovery by year-end.

• We rate HOLD for QL Resources (target price: RM4.08). We like QL Resources for its

decent earnings track record and defensive business nature, however we think that its earnings prospect has been largely priced in at the moment. Meanwhile, we are rating HOLD for OldTown (target price: RM1.79) and SELL for Hai-O (target price: RM1.90). We expect challenging time ahead for Hai-O as its shift in strategy to promoting “small ticket” items in MLM division is only expected to yield results in longer term while the Group’s earnings in the coming quarters would normalize from pre-GST stock up activities.

• For exposure in consumer sector, we prefer resilient F&B players such as

Carlsberg Brewery (non-rated) and Guinness Anchor (non-rated). Meanwhile, small-to-mid cap F&B players under our radar include Hup Seng Industries (non-rated) and Power Root (non-rated) as the Groups delivered solid earnings growth while their products are non-discretionary nature.

Jessica Low Jze Tieng [email protected]

603 8736 1118 (ext: 756)


Construction Overweight

• Construction sector index outperformed FBM KLCI index in 1H2015. In the first half of 2015, the Construction Index outperformed KLCI by recording a mild fall of 0.26% as compared to KLCI’s loss of 3.10%. The outperformance of Construction sector was due to anticipated roll-out of Infrastructure and mega projects under 11th Malaysian Plan (11MP) and Economic Transformation Programme (ETP).

Figure 20: Construction Index outperformed KLCI

Source: JF Apex, Bloomberg

• Higher development expenditure. Allocation under 11th MP is RM260bil, an increase of 13% as compared to allocation under 10th MP of RM230bil. This is translating into a CAGR of 10.3% between 2016 and 2020. The total value of construction works done in 1Q2015 recorded a growth of 15.1% Y-o-Y and 6.1% Q-o-Q to RM28.7bil. Looking forward, we expect construction sector to continue grow as the multiplier effect of the sector towards the economy is vital to boost the future growth momentum to achieve the status of developed nation by 2020.

• Imminent project roll-out to replenish order book of construction players.

According to the authority’s schedule, KV MRT2 (RM28bil) tender-calling is expected to carry out by 4Q2015 and contract awards of major civil works starting from mid-2016. There is a fast track option for pre-qualification process to tender jobs especially for those contractors who have experienced in KV MRT1. Other projects which are expected to roll-out in 2016 are: a) Pan-Borneo Highway (RM27bil); b) LRT Line 3, linking Bandar Utama to Shah Alam and Klang (RM9bil); c) Southern Double-tracking, Gemas-Johor Bahru (RM8bil). We expect the roll-out of projects mentioned above to sustain order book of players in the construction sector.


• More jobs ahead with the soon-to-be-announced confirmation of PDP role for Penang Transportation Master Plan (PTMP). As of todate, only two firms left in bidding for the RM27bil PTMP jobs - Gamuda and Chinese entity linked to The Export-Import Bank of China (China Exim Bank), which is a wholly-owned subsidiary of the Chinese government. The outcome is expected to be announced by 2H2015. Payment method for PTMP is expected in land swap instead of cash term which is in line with Penang tunnel job (which was awarded earlier). As details are yet to be known, mechanism of the payment is still vague at this stage. However, it is foreseeable that the project will render a long gestation period for successful bidder for the PDP role and its related works as it takes time to unlock the value of land development right that earned as an exchange of the consulting fees and construction costs.

• Major risks remain in the execution of mega infrastructure projects. Any delay or

postpone of government projects under 11MP or ETP will have a direct impact toward players in the construction sector. While we expect costs of building materials remain low despite implementation of GST, we opine that construction companies could face the risk of margin squeeze as the competitive bid for the abovementioned mega projects would hamper the contractors’ operating margins moving forward. Besides, continuous headwinds in property sector may negatively affect some construction players’ group earnings that have property development exposures and reduces job awards for building works.

• Maintain Overweight on the sector. We are maintaining our positive stance on the

sector on the back of slew of project awards pursuant to government initiated infrastructure projects namely railway and highway jobs.

• For stocks under our coverage, we are maintaining BUY on IJM Corp with target Price of

RM7.74 based on SOP valuation, and implied FY2016F PER of c.15x. We continue to favour the group for its well-diversified business model especially strong growths in its construction and industry segments. Meanwhile, we believe current headwinds in property segment could be mitigated by products launching that suit current market conditions with its strong property brand name.

• Maintain BUY on Gadang Berhad with target price of RM1.98 based on SOP (Sum-of-

parts) valuation, implying 10x FY2016F PE. We continue to favour the Group for its well-diversified business model as well as its potential and ability to achieve growth across all divisions.

• Meanwhile, we maintain HOLD with target price of RM4.98 for Gamuda Berhad, based

on SOP valuation, which implies 16.4x FY2015F PER. Our current target price is yet to taking into account of the PMTP’s PDP role. We maintai neutral stance as our current target price offers limited upside from the last closing price. We see that the group might face earnings blip in the near term as there is a lag period where KVMRT1’s works taper off before KVMRT2’s tunneling works started to flow in addition to weak performance in its property division.

• We also favour SCH (BUY with target price of RM0.34) as we reckon that the Group is a

well established quarry equipment & machinery and spare parts supplier which would benefit from the booming domestic construction sector.

Research Team [email protected]

603 8736 1118 (ext: 754)


Oil & Gas Marketweight Petronas slowing down

• Petronas’s 1Q15 net profit declined 39% YoY on the back of a 21% drop in quarterly revenue. The national oil company spent capex totaling RM12.1bn in 1Q15, down 30% YoY from RM17.3bn in 1Q14. The latest casualty of Petronas’ spending cut is RAPID in Pengerang as the project’s start-up has been postponed to mid-2019 from early 2019 for re-bidding and re-negotiating of contracts. Petronas’ decision to delay the project has caught us off guard.

• Lower capex going forward translates into less jobs that are up for grab. Contracts from

Petronas have been the main driver that spurred growth in the local O&G industry in the past few years. O&G companies are now relying more on their orderbook and contracts that were secured earlier to go through current tough times.

Steady oil price but oversupply to continue

• Crude oil price is expected to stabilise around US$60-70/barrel. Crude oil price plunged about 50% from near US$100/barrel to a low of US$48/barrel in January before consolidating between US$50/barrel and US$60/barrel. We maintain our expectation of oil price stabilizing around US$60/barrel to US$70/barrel. Any geopolitical tension could cause a temporary spike but would not return to its golden days of US$100/barrel in the near term.

• The ongoing war between OPEC and shale producers will keep oil prices capped.

The current excess supply situation is unlikely to improve as OPEC decides to maintain production of 30 million barrels a day. On the demand side, the world’s largest net oil importer China bought 25% less oil in May as compared to April.

Figure 21: Crude oil price on NYMEX (US$ per barrel)

Source: Bloomberg


SapuraKencana

• 4QFY14 bottomline declined 63% QoQ following exceptional items and one-off impairments of RM190m. Meanwhile, topline was flat QoQ following a 34.8% decline in revenue from Offshore Construction and Subsea Services. The group’s decision to diversify its business and acquire Seadrill and Newfield assets has paid off with the Drilling and Energy Services segment now sustaining its revenue. However, we expect margin contraction in new jobs going forward and renegotiation of existing contracts.

• We revise downwards our FY16 revenue and EPS by 13% and 23% respectively.

Maintain BUY with a lower target price of RM2.95 (from RM3.21 previously). The company maintains a huge orderbook of RM26bn after securing close to RM1bn worth of jobs globally last month.

Bumi Armada

• 1Q15 results came below expectation with Floating Production Storage and Offloading (FPSO) cushioning QoQ revenue declines in Offshore Support Vessel (OSV) and Transport & Installation (T&I) at -10% and -50% respectively.

• We lowered our FY15 revenue and EPS forecast by 7.3% and 26.3% respectively.

Downgrade to HOLD with a lower target price of RM1.30 (from RM1.50 previously). Margin contraction is contained by internal restructuring which saw the group incurred retrenchment cost of RM20.6m and expects to save RM65m a year following its cost reduction and capital budgeting measures.

• Order book remains strong at RM25.6bn with RM13.3bn worth of extension options that

could sustain the company for a long period as FPSO contracts range from 4 to 12 years. Pantech

• Pantech will be impacted by the delay of RAPID in Pengerang. Orders worth US$150m from RAPID were initially expected to materialise in late-2015.

• We reduced our FY16 revenue and EPS forecast by 18.8% and 21% respectively to

reflect the delay in RAPID’s start-up, potential lower contract value in rebidding and also lower orders from other customers globally. Maintain BUY with a lower target price of 80 sen (from RM1.04 previously). The stock still pays an attractive dividend yield of 5.5%.


603 8736 1118 (ext: 759)


Plantation Marketweight • Plantation Index underperformed KLCI in 1H2015. In the first half of 2015, the

Plantation Index underperformed KLCI by recording a steeper loss (-7.8% vs -3.1%). The key culprit in the underperformance of Plantation Index was the lackluster CPO prices which were hovering at RM2200/mt level during the period.

Figure 22: Plantation Index underperformed KLCI

Source: JF Apex, Bloomberg

• CPO production gears up. CPO production in Malaysia has been rising since March as CPO production entered into high production season. We expect CPO production to continue gear up and peak in October/November on seasonal factor. Meanwhile, CPO production in the first five months of 2015 eased 3% from the previous year, as lagged impact of drought in early of 2014 hit crop production. Nevertheless, we estimate full year CPO production to grow marginally at below 5% in 2015, as we reckon that CPO production would recover in 2H2015 from the lagged impact of drought barring unforeseen impact from El Niño.

• Biodiesel programme to lift up CPO consumption. Malaysia is set to roll out B10

biodiesel programme by October to boost the domestic usage of CPO. The Plantation Industries and Commodities Minister, Datuk Amar Douglas, expects the B10 programme which involves a blending rate of 10% palm methyl ester and 90% diesel to consume about 1million tonnes of CPO a year, from 700,000 tonnes under the current B7 programme. However, we are mindful of the potential technical challenges for B10 biodiesel programme as car producer BMW Group Malaysia had raised its concern that not all diesel-powered vehicles are compatible with B10 biodiesel fuel. While we are slight positive on the rollout of B10 biodiesel programme to lift domestic CPO consumption, we opine that its impact on CPO prices would be minimal, as the increased consumption of 25,000 tonnes CPO per month is a small proportion to monthly CPO production of around 1.7mil tonnes.


• Neutral outlook with positive bias for CPO prices in 2H2015. CPO prices achieved an average of RM2230/mt in 1H2015, decreasing 14% y-o-y from RM2622/mt achieved in the same period last year. The drop in CPO prices was mainly attributable to growing competition from competing soy oil and the falling crude oil prices. Looking ahead, we expect CPO prices to stay supported at above RM2100/mt level in 2H2015, as we expect crude oil to stabilize at around US$60-70/barrel level hence posing limited downside risk to CPO prices. Meanwhile, we reckon that the seasonal high production in 2H would keep upside of CPO prices limited. However, we view the advent of an El Niño would serve as a catalyst to CPO prices. We estimate CPO prices to hit RM2400-RM2500/mt should the El Niño risks strengthening, as the dry weather would hurt crop production. Overall, we are maintaining our average CPO prices assumption for 2015 at RM2200/mt.

Figure 23: CPO prices

Source: JF Apex, MPOB

• Maintain Marketweight on the sector. We are maintaining our neutral stance on the

sector, as we see the seasonally higher crop production in 2H and subdued crude oil prices would keep CPO prices upside limited. However, we see the advent of an El Niño as the potential strong catalyst to the sector should severe El Niño phenomenon happens. For stocks under our coverage, we are maintaining BUY call on Genting Plantations with a target price of RM11.21. We remain favour its young tree age profile which would translate into exciting crop production going forward and hence provide earnings catalyst to the Group. Meanwhile, we are having HOLD calls for Kuala Lumpur Kepong (target price: RM22), IOI Corporations (target price: RM4.10), and IJM Plantations (target price: RM3.42).


603 8736 1118 (ext: 756)


Property Marketweight � Lack of re-rating catalyst. The Property index has underperformed the FBM KLCI index in

1H15 (-5.7% vs –3.1%) weighed down by poor investor sentiment on the sector as a result of anticipated slower property sales for this year. Corporate earnings-wise, most of the property counters posted higher yoy 1Q15 net profits thanks to healthy unbilled sales achieved for the past 2-3 years. Overall results were in line with our and market estimates.

� 2014 property transaction volume inched up marginally with value continue to

grow. JPPH’s (Valuation and Property Services Department) figures indicated that volume and value transacted in 2014 rose by 1.0% and 7.0% respectively as compared to 2013 amid stringent loan approval. For the residential sub-segment, volume was flattish, +0.4% yoy whilst transacted residential value picked up strongly, +13.9% yoy. We believe the strong surge of residential value was attributable to continuous house price increase whereby the HPI (House Price Index) for 2014 rose 8.5% yoy with Johor and Penang property prices increased significantly, up 11.7% each.

� Outlook remains challenging for 2H15. We anticipate physical property transaction to

dip in 2015 whilst property prices continue to rise with slower pace. Property transaction is expected to decline about 10%, whilst house price to be flattish or slightly trend higher by <5% judging from continued increase of HPI by 4.1% yoy in 1Q15. The residential property market is entering consolidation mode for this year following rallies in the past few years due to: a) challenging economic outlook in relation to tumbling commodity prices; b) stringent mortgage approval; c) property cooling measures announced earlier (removal of DIBS, RPGT hike and LTV ratio of 70% for third housing onwards); and d) buyers adopting ‘wait-and-see’ approach for 3-6 months after implementation of GST.

� Significant drop in May 15’s mortgage approval and application. BNM’s data showed

that the mortgage approval and application for the month of May tumbled 21.3% and 15.9% yoy respectively. On monthly basis, the figures also exhibited drops of 13.0% and 7.3% respectively with loan approval rate of 50% (see figure 24 & 25).

� Declining new sales in 1Q15. We witnessed the slowdown of new sales for most of the

developers in town in their 1Q15 corporate results which lead to downward revision of full year sales target. We expect the new sales figures might deteriorate further 2Q15 onwards affected by implementation of GST in April. Moving forward, the new launches from developers will be higher in 2H against 1H amid weak consumer sentiment and more product offerings in the market will be focusing on medium cost housing, with smaller built-up sizes yet stubbornly high ASP psf.

� Developers with low net gearing, medium cost product offerings and minimal

exposures in Iskandar Malaysia shall withstand any sudden turn of market cycle. We believe the demand for mass market residential segment which is priced between RM300k-700k will be more sustainable as this segment is well affordable underpinned by genuine buyers who look for owner occupation. In respect of locality, we envisage Klang Valley, Seremban (benefiting from scarcity of land and steep pricing of landed property in Klang Valley) and Penang (especially Seberang Perai due to scarcity of land in Penang island and its pricey property) will continue to be the house buyers or investors’ interests whereas Iskandar Malaysia will face challenging outlook no thanks to existing property glut there.

� We reckon that earnings of developers are still resilient, backed by sizeable unbilled

sales secured during the past few years. Having said that, we may see the prelude of declining unbilled sales which is in tandem with new sales in 2015. Furthermore, developers’


operating margins may be eroded in consideration of some provision of GST incurred for their construction works/marketing expenses/building materials and selling of commercial properties which are subject to GST coupled with launches of more medium cost housing projects which command lower margins.

� Maintain Marketweight - BUY on LBS (TP: RM2.05) whilst HOLD on Tambun (TP: RM1.82) and A&M (TP: RM0.92). Other non-rated property counters which are under our buy recommendations are: MRCB, Matrix Concepts, Eco World and Paramount.

Figure 24: Mortgage Approval Growth (%) – Sluggish y-o-y and m-o-m since early 14

(40.0)

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2

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13

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3

Sep-1

3

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14

Mar

-14

May

-14

Jul-1

4

Sep-1

4

Nov

-14

Jan-

15

Mar

-15

May

-15

YoY MoM

Source: BNM, JF Apex

Lee Chung Cheng [email protected] 603 8736 1118 (ext: 758)


Rubber Glove Overweight � Stronger greenback benefits glove makers. Malaysian Ringgit (Ringgit) has been

depreciating against US Dollar over the past one year, triggered by capital outflow. Recently, the Ringgit further depreciated to 10-year low of RM3.78/USD amid anticipation of interest rate hike by Federal Reserve and uncertainty in Greece. The persistent weakness in Ringgit is positive to rubber gloves makers as sales of gloves are denominated in USD. The continuous depreciation in Ringgit will further boost the revenue of the glove makers upon sales are being converted to Ringgit. We reckon that the depreciating Ringgit would support topline growth of glove makers in 2H2015.

Figure 26: US Dollar to Malaysian Ringgit Exchange Rate

Source: Bloomberg

� Costs of raw materials to stay flat in 2H2015. Prices of natural rubber latex have gone up in 2Q2015 to above RM5/kg in May due to wintering season and concern over dry weather may hurt production. Nevertheless, prices of natural rubber latex retreated recently and we see limited catalyst to shore up natural rubber latex prices in 2H2015. We expect natural rubber latex prices to stay below RM5/kg throughout 2H2015. Meanwhile, nitrile latex prices are expected to stay flat in 2H2015 as we see crude oil prices to stabilize at around US$60-70/barrel. Overall, we think that costs of raw materials would stay stable in 2H2015 with limited cost hike risks.

Figure 27: Natural Latex Prices

Source: Bloomberg


Figure 28: Nitrile Latex Prices

Source: Top Glove Corp

� Improving efficiency to mitigate pricing pressure and increased energy cost. While glove makers are expanding production capacity, pricing competition is expected to stay stiff in 2H2015 as new production capacity of glove manufacturers comes on stream progressively. We estimate additional gloves production capacity of more than 10billion pieces annual capacity for 2016. Nevertheless, glove makers have been emphasizing on improving operating efficiency amid rising labour costs and competitive environment by having more automation in its factory. Meanwhile, the impact of the natural gas tariff hike effective 1 July 2015 is expected to be mitigated by cost pass through mechanism and the improving operating efficiency of the glove makers.

� Upgrade to Overweight on the rubber glove sector. Despite we are mindful of the

pricing competition in the industry, particularly in nitrile gloves segment, as glove makers are aggressively tapping into and expanding in the nitrile gloves segment, we turned more optimistic on the sector following the tailwinds of favourable forex and subdued raw material costs. We reckon that further weakness in Ringgit would serve as a short-term catalyst to the sector.

� For stocks under our coverage, we rate BUY for Top Glove Corp with a higher target

price of RM7.75 (previous target price: RM6.90), pegging 17x FY16F EPS. We revise upwards the earnings forecast for the Group for FY16 by 8.9% in view of the recent sharp depreciation of Ringgit would boost the Group’s earnings. Top Glove delivered strong set of results recently and we remain sanguine on its outlook, premises mainly on the depreciating ringgit and improved efficiency of the Group.

� Maintain HOLD call for Hartalega with a higher target price of RM8.88 (previous

target price: RM8.23), pegging at 24.8x FY16F EPS, which is close to its +1SD mean of 3 year PER. We have revised upwards the earnings forecast for the Group for FY16-17F by 2% after inputting the weaker Ringgit. We are also positive on the recently announced bonus issue and think it would provide short term catalyst to the Group.

� Maintain HOLD on Supermax with a higher target price of RM2.13 (previous

target price: RM2.00), pegging at 10.5x CY2016F EPS which is close to its mean PER. We have also revised upwards its earnings for FY16-17F by 1-2%.


Figure 29: Top Glove’s Financial Highlights

Year Ending 31 August 2012 2013 2014 2015F 2016F

Revenue 2314.5 2313.2 2276.5 2339.5 2677.2

PBT 240.7 242.2 214.7 312.7 367.8

Net profit 202.7 196.5 180.1 250.2 283.2

EPS (RM) 0.33 0.32 0.30 0.40 0.5

P/E (x) 21.4 22.1 23.1 17.4 15.3

DPS (RM) 0.16 0.16 0.16 0.19 0.22

Dividend yield (%) 2.3% 2.3% 2.3% 2.3% 3.1%

PBT margin 10.4% 10.5% 9.4% 13.4% 13.7%

Net margin 8.8% 8.5% 7.9% 10.7% 10.6% Source: JF Apex

Figure 30: Hartalega’s Financial Highlights

Year Ending 31 Mac FY2013 FY2014 FY2015F FY2016F FY2017F

Revenue (RM'm) 1032.0 1107.2 1168.2 1400.4 1710.6

Operating profit (RM'm) 304.0 309.5 286.3 388.9 469.1

PBT (RM'm) 258.4 309.2 276.3 370.9 449.1

Net profit (RM'm) 233.6 233.2 215.5 289.3 350.3

EPS 0.29 0.31 0.27 0.36 0.43

P/E (x) 31.1 29.0 33.7 25.1 20.8

Dividend yield 1.6% 1.6% 1.6% 1.8% 2.2%

Operating margin 29.5% 28.0% 24.5% 27.8% 27.4%

PBT margin 29.5% 27.9% 23.7% 26.5% 26.3%

Net profit margin 22.6% 21.1% 18.5% 20.7% 20.5%

BV/share 0.95 1.27 1.32 1.45 1.51

ROE 30.6% 24.5% 20.2% 24.7% 28.7% Source: JF Apex

Figure 31: Supermax Corp’s Financial Highlights

FYE 30 June (RM'm)

2012 2013 2014 2016F (18-month)

2017F

Revenue 997.4 1048.2 1007.5 1667.5 1446.3

PBT 137.3 148.2 129.3 215.1 195.5

Net profit 121.7 119.7 100.8 169.7 149.5

EPS(RM) 0.18 0.18 0.15 0.25 0.22

P/E (x) 11.2 11.4 13.6 8.1 9.1

PBT margin 13.8% 14.1% 12.8% 12.9% 13.5%

Net margin 12.2% 11.4% 10.0% 10.2% 10.3%

Source: JF Apex


603 8736 1118 (ext: 756)


Telecommunications Marketweight

� We remain Neutral on the sector despite the challenging outlook as the sector’s

defensive nature could protect investors from the market volatility. Telcos’ strong cashflow provides consistent dividend payouts, making telco stocks resilient during uncertain times.

� Tight competition will continue to put downward pressure on monthly average revenue

per user (ARPU) as price war intensified and has now spread to the postpaid segment with U Mobile joining the Big 3 in slashing prices.

� Overall industry revenue expected to increase by single low digit with rising

subscribers compensating sliding ARPUs. Revenue growth will come from internet and data usage replacing declines in SMS and voice revenue.

� Telcos will continue to expand 4G LTE coverage, which would require continuous

investments in infrastructure. The capex requirement would lower cash reserves but we expect dividend payouts to be stable except for Maxis which lowered its dividend payout due to higher gearing.

� We opine that telcos are fairly valued now as share prices came off their peaks

following the recent market selldown. Telekom Malaysia (TM)

� TM is the broadband leader with earnings growth driven by rollout of High Speed

Broadband (HSBB). � Growth would come from 2 fronts: a) new UniFi subscribers; b) continuous migration of

broadband users from Streamyx to Unifi, lifting ARPU from RM81 to RM180. UniFi subscribers stands at 757,000 in 1Q15 and ARPU is holding up without much competition.

� HSBB2 and SUBB, pending final approval and details from the government, would

act as catalysts for re-rating that could increase earnings significantly. Apart from more subscribers, TM might possibly benefit from tax break as experienced in HSBB1 for capex invested.

� Losses in 55.3%-owned P1 could continue for another 1-2 years as it continues to

invest in capex but we are not too concerned. � We prefer TM ahead of other telcos given its dominant position with little competition.

We have yet to include potential earnings contribution from HSBB2 and SUBB in our forecast. Both projects will warrant an upward re-rating once they kick off. HOLD (TP: RM6.40)


Maxis

� Maxis’ transformation program has started to bear fruit as subscriber numbers

recovered and revenue improved. Maxis’ gained 1.1 million prepaid subscribers in the past 12 months to reverse its decline in 2013.

� Meanwhile, impact of cost cutting measures and restructuring also kicked in to

arrest the decline in revenue and EBITDA. Maxis‘ 1Q15 EBITDA margin of 48.7% is superior than Digi and Celcom.

� Dividend payment is expected to decline to 30 sen/share for FY15 (from 40

sen/share paid annually) as its net debt/EBITDA increased to 1.78x and is approaching the threshold of 2.0x. This translates into a yield of 4.6%. HOLD (RM6.70)

Axiata

� Axiata was affected by lower revenue from its biggest subsidiaries Celcom and

XL, but the decline was cushioned by growth in smaller operating companies. � Moving forward, Celcom has rectified its IT glitches that affected operations and

is trying to regain lost market share by launching new packages. It started a price war in the postpaid segment after launching its new plan.

� Meanwhile, XL will undergo a transformation plan after integrating Axis to

improve profitability and optimise its business model. Outlook remains challenging as Celcom and XL attempts to turn around. HOLD (TP: RM6.60)

DiGi

� DiGi has been gaining market share as subscribers hit a record high of 11.7 million. The

telco emerged as the leader in the prepaid segment with 9.9m subs as it took advantage of Maxis’s restructuring and Celcom’s technical issues.

� Potential catalyst is its business trust that has been under planning for a few

years. The progress of the plan has been slow due to regulatory issues and we do not expect it to take off anytime soon. However, it would surprise the market when it happens. HOLD (TP: RM5.61)


Figure 32: Financial summary for 1Q15

RM million DIGI MAXIS CELCOM

Revenue 1791 2149 1923

Revenue share 31% 37% 33%

Net Profit 479 455 452

Net margin 26.7% 21.2% 23.5%

EBITDA 775 1047 772

EBITDA margin 43.3% 48.7% 40.1%

Subscriber Prepaid 9.9 9.0 9.5

(million) % share 35% 32% 34%

Postpaid 1.8 2.8 2.7

% share 24% 39% 37%

Total 11.7 11.8 12.3

% share 33% 33% 34%

ARPU (RM) Prepaid 39 38 33

Postpaid 81 96 90

Blended 46 53 46

Source: JF Apex


603 8736 1118 (ext: 759)

DIGI MAXIS AXIATA TM

Share Price (RM) 5.53 6.44 6.31 6.75

Market Cap (RM billion) 43.00 48.36 54.91 25.37

PER 21.2 29.4 24.0 32.9

Dividend yield 4.7% 4.7% 3.5% 3.6%

Target price (RM) 5.61 6.70 6.60 6.40

Recommendation Hold Hold Hold Hold


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Mervyn Wong (ext 363) Azfar Bin Abdul Aziz (Ext 822) Tan Heng Cheong (Ext 111)

RESEARCH TEAM

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JF APEX SECURITIESJF APEX SECURITIESJF APEX SECURITIESJF APEX SECURITIES - RESEARCH RECOMMENDATION FRAMEWORK

STOCK RECOMMENDATIONS

BUY : The stock’s total returns* are expected to exceed 10% within the next 12 months.

HOLD : The stock’s total returns* are expected to be within +10% to – 10% within the next 12 months.

SELL : The stock’s total returns* are expected to be below -10% within the next 12 months.

TRADING BUY : The stock’s total returns* are expected to exceed 10% within the next 3 months.

TRADING SELL : The stock’s total returns* are expected to be below -10% within the next 3 months.

SECTOR RECOMMENDATIONS

OVERWEIGHT : The industry as defined by the analyst is expected to exceed 10% within the next 12 months.

MARKETWEIGHT : The industry as defined by the analyst is expected to be within +10% to – 10% within the next 12 months.

UNDERWEIGHT : The industry as defined by the analyst, is expected to be below -10% within the next 12 months.

*capital gain + dividend yield

JF APEX SECURITIES BERHADJF APEX SECURITIES BERHADJF APEX SECURITIES BERHADJF APEX SECURITIES BERHAD – DISCLAIMER

Disclaimer: The report is for internal and private circulation only and shall not be reproduced either in part or otherwise without the prior written consent of JF Apex Securities Berhad. The opinions and information contained herein are based on available data believed to be reliable. It is not to be construed as an offer, invitation or solicitation to buy or sell the securities covered by this report. Opinions, estimates and projections in this report constitute the current judgment of the author. They do not necessarily reflect the opinion of JF Apex Securities Berhad and are subject to change without notice. JF Apex Securities Berhad has no obligation to update, modify or amend this report or to otherwise notify a reader thereof in the event that any matter stated herein, or any opinion, projection, forecast or estimate set forth herein, changes or subsequently becomes inaccurate. JF Apex Securities Berhad does not warrant the accuracy of anything stated herein in any manner whatsoever and no reliance upon such statement by anyone shall give rise to any claim whatsoever against JF Apex Securities Berhad. JF Apex Securities Berhad may from time to time have an interest in the company mentioned by this report. This report may not be reproduced, copied or circulated without the prior written approval of JF Apex Securities Berhad.

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20150713 2H15 Market Outlook & Strategy - Apex Equity · PCOMP Index 19.7 17.4 15.6 1.9 2.0 2.2...

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