malaysia market focus malaysia strategy - dbs bank malaysia market focus malaysia strategy refer to...
TRANSCRIPT
ed: TH/ sa: YM, CW, CS
Opportunities in oversold stocks
Trade war truce provides hope and potentially alleviates market
overhang
No cheer from 3Q18 results season; earnings cut by 0.8-2.7% for
2018-19
End-2019 KLCI target at 1,800; we see opportunities in sharply
oversold stocks
Bombed out plays: Axiata, Gamuda and CMMT. Other picks:
AMMB, Hong Leong Bank, Matrix, Time dotcom
Much-needed easing of trade tensions. While we remain cautious
on the medium-term outlook, the G20 meeting outcome provides hope
for resolving the trade war and potentially alleviates a major market
overhang in the near term. The KLCI is currently trading at 15.8x 2019
EPS. We look for the KLCI to end 2019 at 1,800, based on 17x EPS. The
recently concluded 3Q18 results season did not provide much cheer.
Although the percentage of disappointments remained in check, we
cut our 2018 and 2019 earnings forecast by 0.8% and 2.7%
respectively. We now expect KLCI earnings to grow 1.8% and 7.3% in
2018 and 2019 respectively.
Oversold plays. The KLCI’s 6.5% retracement YTD belies the degree
of losses felt by the broader market. Share prices of 69% of the top
100 stocks by market capitalisation in Malaysia were lower as at end-
November compared to the start of the year. More than 27 stocks in
this group have seen their share prices drop by more than 30% YTD.
Of these, 14 stocks have lost more than 50% of their value YTD
including Gamuda, Astro, Telekom Malaysia and Lafarge. We believe
the selldown brings out opportunities in bombed out names such as
Axiata, Gamuda, CapitaMall Malaysia Trust (CMMT) and Media
Chinese.
Positive measures for property sector. We see opportunities within
the property sector arising from the introduction of the National Home
Ownership Campaign. This initiative could see clearing of inventory and
ease cashflow pressures on developers. Within this sector, we believe
Matrix Concepts, SP Setia, UEM Sunrise and MKH are oversold. Our
other picks include AMMB and Hong Leong Bank as plays on the
country’s resilient domestic consumption; and Time dotcom – we
believe the stock presents a buying opportunity on the back of its
strong growth profile, supported by its wholesale and retail segments.
KLCI : 1,699.72 Analyst WONG Ming Tek +60 3 26043970 [email protected] Malaysian Research Team +603 2604 3333 [email protected]
Market Key Data
(%) EPS Gth Div Yield
2017A 7.1 3.1
2018F 3.0 3.1
2019F 6.6 3.2
(x) PER PB
2017A 17.3 1.7
2018F 16.8 1.6
2019F 15.8 1.6
DBS Group Research . Equity
4 Dec 2018
Malaysia Market Focus
Malaysia Strategy Refer to important disclosures at the end of this report
Top picks
12-mth
Price Mkt Cap Target Performance (%)
RM US$m RM 3 mth 12 mth Rating
Hong Leong Bank
20.62 10,126 23.15 1.1 36.2 BUY
Axiata Group 3.95 8,602 5.05 (16.1) (25.9) BUY AMMB Holdings
4.24 3,068 4.95 3.4 2.2 BUY Gamuda 2.26 1,339 3.50 (38.9) (53.8) BUY TIME dotCom Bhd
8.17 1,145 9.40 (0.6) (10.7) BUY CapitaLand Malaysia Mall Trust
1.02 501 1.40 (11.3) (30.6) BUY
Matrix Concepts Holdings Bhd
1.93 349 2.50 (7.2) (12.3) BUY
Source: AllianceDBS, Bloomberg Finance L.P.
Closing price as of 3 Dec 2018
Market Focus
Page 2
3Q18 earnings letdown
Corporate earnings disappointed again in 3Q18. Within
AllianceDBS’s coverage, 28% of companies reported negative
surprises, while 9% reported positive surprises. Companies
that met earnings expectations made up the remaining 63%
of our coverage universe vs 60% in 2Q18.
The telco sector (better than expected as broadband ARPU
remains healthy) beat our expectations.
The building materials (intense price competition, subdued
demand), consumer (lower sales), media (decline in adex),
plantation (low average crude palm oil (CPO) prices, property
(lower sales), technology (weak smartphone sales, poor
demand) and utilities (losses from overseas ventures, higher
effective tax rate and lower margins) sectors sprang negative
surprises.
3Q18 summary of financial performance
Performance vs AllianceDBS (%) vs consensus (%)
Above 9% 10%
In-line 63% 61%
Below 28% 29%
Source: AllianceDBS
Following the 3Q18 earnings season, our CY18 and CY19 KLCI
earnings estimates were cut by 0.8% and 2.7% respectively,
largely due to earnings cuts for Tenaga (higher expenses,
losses from overseas ventures) and the Genting group (higher
gaming tax and delay of its outdoor theme park). Post earnings
revision, KLCI earnings growth for CY18 and CY19 have been
revised to 1.8% and 7.3% respectively, from 2.7% and 9.5%
previously.
FBMKLCI free float-weighted earnings change (calendarised)
Nov-18
Oct-18
Change
% Change
CY18 CY19
CY18 CY19
CY18 CY19
CY18 CY19
RM m RM m
RM m RM m
RM m RM m
Axiata Group Bhd 1084.3 1560.8 1,084 1,561 0.3 -0.2 0.0% 0.0% CIMB Group Holdings Bhd 4750.2 5287.0 4,444 5,282 306.2 5.0 6.9% 0.1% DiGi.Com Bhd 1501.2 1511.8 1,501 1,512 0.2 -0.2 0.0% 0.0% Dialog Group 459.3 533.5 459 533 0.3 0.5 0.1% 0.1% Genting Malaysia Bhd 1621.2 998.4 1,741 1,888 -119.8 -889.6 -6.9% -47.1% Genting Bhd 2488.1 2382.4 2,641 2,888 -152.9 -505.6 -5.8% -17.5% Hap Seng Consolidated 719.7 719.7 719.7 719.7 0.0 0.0 0.0% 0.0% Hartalega Holdings 455.8 517.4 456 517 -0.2 0.4 -0.1% 0.1% Hong Leong Bank Bhd 2674.6 2844.7 2,718 2,887 -43.4 -42.3 -1.6% -1.5% Hong Leong Financial Group Bhd 1942.0 2092.9 1,959 2,108 -17.0 -15.1 -0.9% -0.7% IHH Healthcare Bhd 310.5 710.6 311 711 -0.5 -0.4 -0.2% -0.1% IOI Corp Bhd 1025.1 1006.3 1,025 1,006 0.1 0.3 0.0% 0.0% KLCCP Stapled Group 725.4 738.9 725 739 0.4 -0.1 0.1% 0.0% Kuala Lumpur Kepong Bhd 912.3 1144.0 973 1,144 -60.7 0.0 -6.2% 0.0% Malaysia Airports Holdings 407.1 549.2 407 549 0.1 0.2 0.0% 0.0% Maxis Bhd 1989.5 2050.4 1,990 2,050 -0.5 0.4 0.0% 0.0% Malayan Banking Bhd 7819.9 8766.0 7,820 8,766 -0.1 0.0 0.0% 0.0% MISC Bhd 1541.1 1774.0 1,541 1,774 0.1 0.0 0.0% 0.0% Nestle Malaysia Bhd 717.1 766.5 718.5 776.7 -1.4 -10.2 -0.2% -1.3% Public Bank Bhd 5669.5 6194.3 5,669 6,194 0.5 0.3 0.0% 0.0% Petronas Chemicals Group Bhd 4581.7 4634.8 4,342 4,494 239.4 141.2 5.5% 3.1% PPB Group Bhd 1256.0 1331.9 1,256 1,332 0.0 -0.1 0.0% 0.0% Petronas Dagangan BHD 1045.6 1071.8 1,046 1,075 -0.4 -3.2 0.0% -0.3% Press Metal Bhd 703.7 985.7 693 948 10.7 37.7 0.2% 0.8% Petronas Gas Bhd 1929.5 1991.5 1,929 1,992 0.5 -0.5 0.0% 0.0% RHB Bank Bhd 2365.6 2498.6 2,202 2,382 163.6 116.6 7.4% 4.9% Sime Darby Plantation Bhd 1123.0 1142.1 1,123 1,142 0.0 0.1 0.0% 0.0% Sime Darby Bhd 838.0 958.6 836 920 2.0 38.6 0.2% 4.2% Telekom Malaysia Bhd 666.7 568.9 561 555 105.7 13.9 18.8% 2.5% Tenaga Nasional Bhd 5964.9 6287.5 6,885 6,922 -920.1 -634.5 -13.4% -9.2% FBMKLCI (Free-float weighted) 59,288.5 63,620.1 59,775.5 65,367.0 -487.0 -1746.9 -0.8% -2.7% Source: AllianceDBS, Bloomberg Finance L.P
Market Focus
Page 3
Sector performance
Sector 3Q18
(RM m)
3Q17
(RM m)
Y-o-y
change %
vs
expectation
Comments
Automotive 205.28 (9.16) nm Below Sales volume were boosted by the tax holiday period and margins improved from the strengthening of ringgit.
Aviation 99.96 510.38 (80.4%) In-line Pax growth moderated amid slower season. Airlines saw margin compression from higher jet fuel costs with minimal pass-on via higher fares.
Banking 6,905.35 6,732.20 2.6% In-line Loan growth during the quarter was mainly driven by the retail segment, while NIMs were mostly lower due to deposit re-pricing following the OPR rate hike in January 2018. A softer capital market environment also resulted in lower non-interest income, particularly fee income and investment income.
Building Materials
(Cement)
(13.49) 20.06 nm Below Mainly dragged by huge losses from Lafarge as the market worsened with higher rebate price
Construction 77.67 346.59 (77.6%) In-line Most contractors met expectations. Muhibbah's earnings remained robust while Kimlun's manufacturing margins have normalised.
Consumer 440.52 501.63 (12.2%) Below Mainly dragged by Padini's disappointing 1QFY19 results due to lower-than-expected sales growth and cost pressure.
Electronics
Manufacturing Services
46.89 84.33 (44.4%) In-line Temporary production hiccups dampened the local EMS's strong growth momentum in the quarter.
Financial non-bank 149.43 127.41 17.3% In-line Led by solid growth in personal financing and auto financing (including moped easy payments) at ACSM.
Gaming 1,174.50 969.27 21.2% In-line The 3QFY18 results largely within expectations. Supported by higher contributions from Genting group's Malaysian and Singapore operations.
Glove 278.58 235.27 18.4% In-line Earnings supported by better sales volume and higher ASPs. Margin was steady as the company passed on higher costs.
Healthcare 55.06 510.12 (89.2%) In-line Both IHH and KPJ have reported decent core earnings for 3QCY18 that are largely within expectations.
Media 117.44 169.08 (30.5%) Below Sharp decline in adex continued to drag on revenue and earnings, despite cost-saving initiatives and restructuring measures taken by the media companies.
Oil & Gas 212.97 338.95 (37.2%) In-line Earnings were supported by strong Brent prices in the quarter and improvements in contract awards.
Plantation 876.64 1,321.39 (33.7%) Below Decline in average CPO prices was exacerbated by weaker production y-o-y by Malaysia-based estates. Certain players were cushioned by stabilised downstream margins or steady Indonesian operations.
Market Focus
Page 4
Sector performance (cont’d)
Sector 3Q18
(RM m)
3Q17
(RM m)
Y-o-y
change
%
vs
expectation
Comments
Port 142.32 142.50 (0.1%) In-line Container handling throughput at Port Klang is stabilising as y-o-y transshipment decline is moderating, while gateway volumes remain strong.
Property 350.15 317.07 10.4% Below Dragged by lower earnings from larger players like SP Setia and Eco World.
REIT 398.33 392.34 1.5% In-line Lower contribution from the office and retail assets.
Shipping 274.30 517.56 (47.0%) In-line Improvement in both petroleum and liquefied natural gas (LNG) charter rates. Demand due to pick up in seasonally high 4Q.
Technology 102.40 139.90 (26.8%) Below Affected by weak smartphone sales and slowdown in the industry due to poor demand outlook. Partly offset by favourable forex.
Telecommunication 1,224.83 1,458.54 (16.0%) Above Fixed-line players showed better-than-expected results as broadband ARPU remains healthy.
Utilities 2,372.27 2,107.79 12.5% Below Weighed down by TNB due to losses from overseas ventures, higher effective tax rate and lower margins.
Total 14,878.10 17,537.80 16.29
Source: AllianceDBS
Market Focus
Page 5
Opportunities from bombed-out stocks
Following the KLCI’s losses of 4.7% and 1.7% in October
and November respectively (6.5% YTD), the benchmark
index could be looking at a stronger performance in
December. While we remain cautious on the medium-term
outlook given the slowdown of regional and domestic
economic growth, continued US$ strengthening and rising
interest rates – the G20 meeting between leaders of US and
China provides hope for resolving the trade war and
potentially alleviates a major market overhang in the near
term.
YTD performance of FBM KLCI, Small Cap and ACE indices:
Large caps performed relatively better
Source: AllianceDBS, Bloomberg Finance L.P
The KLCI is currently trading at 15.8x 2019 earnings. We
look for the KLCI to end 2018 at 1,750 while our end-2019
KLCI target remains at 1,800 based on 17x EPS. In terms of
preferred sectors, we like Banks and Healthcare which will
benefit from resilient domestic consumption. Banks should
continue to see resilient consumer support for loan growth.
We expect bank earnings in 2019 to remain steady on
healthy asset quality and do not foresee spikes in credit
costs. Cement and rubber gloves remain our key
underweight sectors on persistent oversupply and pricey
valuations respectively.
The KLCI’s YTD performance belies the degree of losses felt
by the broader market. Share prices of 69% of the top 100
stocks by market capitalisation in Malaysia were lower as at
end-November compared to the start of the year. The
collective losses have weighed down on the performance of
this pool of stocks. More than 27 stocks among the top 100
have seen their share prices drop by more than 30% YTD.
Fourteen stocks have lost more than 50% of their value YTD
including Gamuda, Astro, Telekom Malaysia, Lafarge and
Bumi Armada.
YTD performance of top 100 stocks by market
capitalisation: Share prices of 69% of stocks lower YTD
Source: Bloomberg Finance L.P
Biggest YTD movers and losers among the top 100 stocks
Source: Bloomberg Finance L.P
We are relatively positive on the measures to be introduced
for the property sector such as the introduction of the
National Home Ownership Campaign. The stamp duty
waivers for first-time homebuyers for properties priced
between RM300,000 and RM1m in 1H19 and a minimum
price discount of 10% to be offered by developers could see
a clearing of inventory and ease cashflow pressures on
developers. While the property sector remains in the
doldrums at this juncture, we believe the worst is over after
experiencing years of downturn. Selected stocks in the
sector are oversold, in our view. They include Matrix
Concepts, SP Setia, UEM Sunrise and MKH. There have been
two recent privatisation proposals in the sector, for Selangor
Properties and Daiman Development, indicating that
business owners are convinced share prices have excessively
discounted the fundamental values of the stocks.
-6.5%
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Market Focus
Page 6
Among our other picks, we continue to like Hong Leong
Bank as a play on the country’s resilient domestic
consumption. The company continues to stand out with low
cost-to-income and NPL ratios. Time dotcom is a recent
addition. We believe the recent share price drop provides a
buying opportunity on the back of its strong growth profile,
supported by its wholesale and retail segments.
FBMKLCI PE trend
Source: Bloomberg Finance L.P, AllianceDBS
KLCI earnings growth breakdown by sectors
Source: AllianceDBS
15.9x
14.7x
16.9x
14.00
14.50
15.00
15.50
16.00
16.50
17.00
17.50
18.00
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-14
Mar
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May
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Jul-
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Sep
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No
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5M
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5M
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Jan
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17
Jan
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Mar
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May
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Jul-
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Sep
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No
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8
P/EKLCI P/E Average +1 SD -1 SD 0.8%
1.6%
2.1%
4.3%
4.6%
5.1%
5.2%
6.1%
6.7%
63.5%
0% 10% 20% 30% 40% 50% 60% 70%
Consumer
Utilities
Shipping
Healthcare
Aviation
Basic Materials
Plantation
Others
Telco
Banking
KLCI CY19 Earnings Growth Contributors
Market Focus
Page 7
Sector Outlook
Sector Outlook Top Stock Picks
Automotive
Neutral
We expect a more modest growth of c.2% in FY19, as there are no major catalysts to help lift
volume as customers bought ahead during the tax holiday period. Auto players have been
launching models in the 4Q18 during the motor show and this could help support volumes in
1H18. We believe the upcoming National Automotive Policy will help support the sector via better
incentives but this could be skewed towards energy-efficient and electric vehicles.
Margins are directly impacted by the USD/MYR rate. Current rates may compress margins in the
medium term. Additional promotional activities may also erode margins. Improvement in the
exchange rate could lift up margins significantly.
Bermaz Auto
Aviation
Neutral
Malaysian air passenger traffic is expected to continue its normalised growth in 2019, carrying over
from 2H18. 2018 will likely turn out to be a strong rebound year, with 9M18 pax growth of 2%
compared to -2% contraction in 2016. Our current assumptions are for Malaysia Airports (MAHB)
to chart 2.9% pax growth in 2018, following a projected 4.5% growth for 2017.
Jet fuel prices picked up over 2H18 alongside rising oil prices, ultimately averaging USD84/bbl in
2018 or 31% higher y-o-y. We expect an average of USD80/bbl in 2019, which present further
cost pressures for airlines – however this may be partially mitigated by a stronger ringgit.
Yield (fares/RPK) management will be crucial as carriers are targeting up to double-digit growth in
capacity. We think airlines will have to strike a balance between pushing higher fares (to pass on
higher costs) and maintaining load factors. All in, margin pressures will likely impact 2019 earnings.
Our top pick is MAHB as it will enjoy steady traffic though re-rating still hinges on its Turkish
operations. AIRA as its dominant market share will ensure more yield defensibility; while further
catalysts may come from value-accretive divestments. AAX is more exposed to fuel price factors
and faces the risk of losses in the event of severe yield deterioration.
MAHB
Banks
Overweight
Like 2018, we expect 2019 loans growth to be underpinned by the retail sector. Specifically,
mortgages have been propping the industry by contributing to more than 40% of system loan
growth y-o-y. Various budgetary measures to boost home ownership would also serve to expand
mortgage growth going forward. Business loans, which have seen comparatively slower traction in
9MCY18, may pick up in 2019 due to pent-up demand (after adopting a wait-and-see approach
through most of 2018) and better clarity on the new administration’s policies. However, this may
be dampened by moderating economic growth. We believe asset quality will stay mostly healthy,
given the banks’ relatively tight underwriting practices. We do not envisage significant spikes in
credit costs for the industry over the next year.
Net interest margins (NIMs) of the banks will remain pressured in 2019, fuelled primarily by
funding costs ahead of deposit competition. The 1-year extension of Bank Negara Malaysia’s
observation period for net stable funding ratio requirements should provide some short-term
respite from further aggression in deposit rates, but on the whole, we expect rates to remain high
as banks take defensive positions. Any kind of NIM expansion would originate from a changing
asset portfolio mix.
Most banks are expected to close 2018 with muted growth in non-interest income, particularly in
market-related fee income and trading & investment income. Non-interest income only expanded
by an uninspiring 1% y-o-y in 1HCY18 due to a soft capital market environment in 2QCY18. While
3QCY18 saw improved activity, we do not expect the second half to be able to offset the prior
weakness earlier in the year. Avenues for growth in this aspect may be more limited if the current
sentiment spills over into 2019.
AMMB Holdings is our top pick for the sector, premised on its turnaround strategy after a host of
M&A-related distractions over the past few years. Its ‘Top 4’ aspiration has resulted in moves that
have paid off – the group has recorded better-than-industry growth, driven by its targeted
segments. Despite the challenging market environment and normalising credit costs (lower
recoveries from legacy corporate NPLs), AMMB’s robust loans growth and BET300 initiative to save
RM300m in costs in FY19-20 would help it weather potential headwinds over the next year. A 9%
ROE is within reach in FY20 if the group is able to execute on its deliverables. We believe the
market has yet to price AMMB’s turnaround in – the stock is trading at an affordable 0.7x P/BV.
AMMB
Market Focus
Page 8
Sector Outlook (cont’d)
Sector Outlook Top Stock Picks
Building materials
Underweight
While oversupply remains the biggest hurdle among cement players in Peninsular,
demand remains sluggish – largely affected by the slowdown in the construction
sector. Pricing pressure intensifies as cement players have been offering more
rebates this year compared to last year.
Not helping either is the rising thermal coal prices (~30% of costs) which are around
USD107/tonne this year, 22% higher than the average of USD88/tonne in 2017. On
top of that, electricity cost expected to increase following tariff hike by Tenaga
Nasional Bhd (TNB).
As such, we think the challenging operating environment for the cement industry is
likely to continue going to 2019 as earnings are expected to remain depressed.
Having said that, cement price increase could be a strong re-rating catalyst for the
sector.
Cahya Mata Sarawak is on a better footing as the Sarawak-based company will not
be impacted by price competition, unlike its Peninsular peers. The company is also
expected to benefit from 1) increased infrastructure spending such as the Pan
Borneo Highway, and 2) higher contribution from its associate – OM Sarawak.
Cahya Mata Sarawak
Construction
Neutral
2018 was an extremely volatile year for the sector which saw projects being deferred
and existing projects subjected to cost cuts. We think 2019 will be a less volatile and
also quiet year for the sector where the focus will be on executing and extracting
cost savings from current orderbook. Two larger projects will be in focus, namely the
Penang Transport Master Plan and Pan Borneo Sabah.
Contractors have to adjust to a new normal of lower margins and more competition
given the new landscape. On a more positive note, greater transparency and less
bureaucracy will be more apparent going forward.
While we are less excited on near-term prospects, valuations of -2SD of 5-year mean
would suggest the majority of bad news is already priced in and incremental positive
newsflow would act as a re-rating catalyst. Our large-cap BUY is Gamuda for its
exposure to the PTMP and other large-scale government projects when they are
eventually revived. Our small-cap pick is Kimlun for its exposure to the affordable
housing segment and also the expected surge in manufacturing contracts in
Singapore.
Gamuda, Muhibbah and
Kimlun
Market Focus
Page 9
Sector Outlook (cont’d)
Sector Outlook Top Stock Picks
Consumer
Neutral
After surging to 132.9 points, the highest reading in 20 years in 2Q19, the recent
MIER consumer sentiment index (CSI) for 3Q19 contracted by 25.4 points q-o-q to
107.5points. The sharp decline was largely expected as we have forewarned that the
CSI would moderate from its 20-year high once the post-GE14 euphoria dissipates,
given that the survey was done right after GE14 with hopes riding high on the new
administration. Despite the sharp contraction, the index is still above 100 points
threshold of optimism, indicating still positive but more selective consumption pattern
going forward,
The improved consumer sentiments are reflected on the recent 3Q GDP announced by
the authorities where private consumption growth accelerated to 9.0% y-o-y in 3Q18
(2Q18: +8.0%). Furthermore, private consumption grew steadily at 2.5% on a
seasonally adjusted (SA) q-o-q basis (2Q18: +3.0%), above the 2015-2017 average SA
q-o-q growth of 1.5%.
In line with the CSI, we expect the consumption growth to be strong in 2H18 before
moderating in 2019. This is because we observe that many consumers have taken
advantage of the tax holiday (Jun-Aug 2018) to engage in big-ticket purchases such as
motor vehicles and household appliances prior to the implementation of the sales and
service tax (SST). We believe the bulk of these big ticket purchases are likely to involve
personal financing such as hire purchase and/or instalment loans, which could limit
their propensity to consume going forward, in view of the more leveraged household
balance sheet. Furthermore, the implementation of SST in September would also
weigh on consumption growth going forward.
In Budget 2017, The government has resorted to improve the livelihood of Malaysians,
particularly among the B40, by proposing measures such as (1) raising the minimum
wage to RM1,100 from RM1,050 initially – starting January, and (2) targeted petrol
and electricity subsidies. Overall, we believe that this Budget will be mildly positive for
the consumer sector as the initiatives outlined will help to offset the impact of rising
cost of living, but do not serve as a significant catalyst for the sector.
Among the consumer stocks under our coverage universe, British American Tobacco
(HOLD, TP: RM35.60) could be the beneficiary of Budget 2019 as the government has
reiterated its commitment to clamp down on smuggling activities. The government is
aiming to regain at least RM1bn in lost revenue due to illicit trade.
At present, the Bursa Malaysian Consumer Product Index (BMCPI) is trading at a
forward PE of 22x, which is at +2SD of its historical mean. Although we believe that
the sector could be subjected to potential earnings upgrades, given the improved
consumer sentiments, we believe that this has largely been priced in by the market in
view the relative outperformance of the index and its rich valuation.
On the other hand, we wish to highlight that increased cost pressures driven by (1)
labour shortage issues and rising labour costs due to a higher minimum wage
threshold, (2) weakening ringgit vs USD leading to more costly imported products, and
(3) higher cost of production with the authorities expected to float the RON95 price in
2Q19, and the implementation of digital tax. These could exert downward pressures
on companies’ profit margins, particularly in an increasingly competitive operating
environment, coupled with expectations of moderating consumption in 2019 that may
restrict companies’ ability to pass on any cost increase.
As a whole, we are maintaining our Neutral stance on the sector prospects, given that
(1) we expect consumption growth to moderate moving into 2019, (2) we believe that
the BMCPI has largely priced in the vastly improved consumer sentiments in view of its
rich valuation, and (3) rising cost pressures.
Market Focus
Page 10
Sector Outlook (cont’d)
Sector Outlook Top Stock Picks
Gaming
Neutral
The sector is dominated by Genting Group and number forecasting operators (NFOs).
In Budget 2019, the bulk of the sin tax increase was primarily targeted at the Genting
group where the government proposed: (1) casino licence fees to be increased from
RM120m to RM150m per annum, and (2) casino duty to be raised from 25% to 35%
on gross gaming income.
The punitively high casino tax and increased license fees will adversely impact the
group’s earnings prospects. We estimate the Genting Malaysia’s (HOLD, TP: RM4.65)
earnings to drop by 26% y-o-y in FY19 even with the progressive launch of the
Genting Integrated Tourism Plan (GITP).
For the number forecast operators (NFOs), they are spared from increases in both
gaming tax and betting duty, although the special draws will be reduced by half. This
will have <5% earnings impact to the NFOs.
For NFO players, other than an attractive dividend yield of >6%, other positive
catalysts such as (1) sustainably high consumer sentiments, (2) ability to introduce
successful new game variants, and (3) intensified efforts by the regulators to curb
illegal number forecast operators’ (NFOs) activities could also boost their ticket sales.
Regulatory direction remains the major downside risk for the sector. The punitively
high casino tax and curbing of special draws announced in Budget 2019 have
illustrated the authorities’ commitment to (1) raise its fiscal revenue without causing
any social outcry, and (2) reduce gambling activities in Malaysia. We wish to highlight
that Act 65 of the Gaming Tax Act 1972 allows the government to adjust gaming tax
rate beyond the Budget period.
Genting Bhd (GENT) remains our top pick of the sector from a valuation perspective.
We maintain our BUY recommendation on GENT with RM9.45 TP. As the parent
company of GENS and GENM, we believe that GENT offers cheaper exposure to both
these subsidiaries.
Genting
Gloves
Neutral
We expect volume growth to be supported by higher demand and capacity expansion.
The sector has a 5-year volume CAGR of 12.0% from CY12-CY17. As for the type of
gloves, there is a gradual shift from latex to nitrile gloves that provide protection
against protein allergy and better comfort. Glove players are catching up to this trend
as they focus more on nitrile gloves for their upcoming expansion plans. We deem this
a positive development as nitrile gloves have higher margins vs. latex gloves. We
forecast volume growth for Malaysian glove players at 19%/11% for FY18/19F.
Glove players will see some margin expansion in the coming quarters as they benefit
from the more favourable exchange USD/MYR exchange rate as there is a timelag in
adjusting ASPs of 1-2 months. Margins will also improve as glove players enhance their
cost efficiency via higher automation.
We believe positives are priced in, given the elevated valuations of the sector. We have
FULLY VALUED calls on both Hartalega and Top Glove where as we have a HOLD call
for Kossan Rubber Industries.
None
Market Focus
Page 11
Sector Outlook (cont’d)
Sector Outlook Top Stock Picks
Healthcare
Overweight
We maintain our positive stance on sector moving into 2019. The sustained strength
of domestic economic activities should improve healthcare affordability and help price-
sensitive patient switch back from public to private healthcare.
With the abolishment of GST, we expect the profit margin for private healthcare
services providers to be enhanced going forward given that they have been absorbing
the 6% GST input tax on drugs and medicine under the exempt supply.
In Budget 2019, the government has made the following proposals: (1) allocating
RM50m for the specific purpose of treating rare diseases; (2) widening the Public-
Private Partnership programme where the government will invest in the healthcare
facilities while the private sector will invest to deliver the best quality of service to the
people; and (3) allocating RM20m for the Malaysia Healthcare Tourism Council
(MHTC) to generate 25% growth in a year, and allocating RM10m per annum to make
available healthcare services for the parents of the contract service officers working
with the government.
Besides that, the government will pilot a national B40 Health Protection Fund to
provide free protection against the top 4 critical illnesses for up to RM8,000 and up to
14 days of hospitalisation with an income cover of RM50 per day starting 1 January
2019. In other words, a hospitalisation income of RM700 per annum is available.
We believe that the proposals outlined above, particularly the ones that focus on
growing the healthcare tourism industry and the national B40 Healthcare Protection
Fund, will strengthen the private healthcare sector and benefit the key players.
We maintain that the long-term structural dynamics, such as (1) an ageing population,
(2) growing affluence, and (3) broader insurance coverage, will remain supportive of
the private healthcare sector.
Nonetheless, the sustained weakening of MYR vs USD could increase the cost of
imported drugs, which will drag the profit margins of hospital operators. Other risks
include longer-than-expected gestation period for their new hospitals and increased
competition from other private healthcare providers.
We continue to like IHH Healthcare (BUY, TP: RM6.35), and KPJ Healthcare (BUY, TP:
RM1.30).
IHH Healthcare, KPJ
Media
Neutral
Despite the uptick in consumer sentiment post-GE14, industry adex spending still
remains on a downtrend, implying this is more of a structural issue rather than cyclical.
The liberalisation of media sector in Malaysia could introduce new players in the
market that would affect the dominant position of the existing players. The
government is also mulling new policies regarding the ownership of media companies
by political parties – Star and Media Prima will be the most affected.
Weakening ringgit vs. USD is also negative for the sector due to higher foreign content
fees and newsprint costs.
The saving grace is valuation is at depressed level, while balance sheets of media
companies are still very healthy (net cash position or low gearing, except for Astro).
None
Market Focus
Page 12
Sector Outlook (cont’d)
Sector Outlook Top Stock Picks
Oil & Gas
Neutral
Oil prices have lost almost a third of their value since early Oct 2018, weighed down by an
emerging supply overhang and widespread financial market weakness. Saudi Arabia raised oil
production to an all-time high in Nov 2018, pumping 11.1 to 11.3 million barrels per day
(mmbpd).
Earlier expectations were that Saudi will lead talks to re-impose production quotas and cut
production by 1.0-1.4 mmbpd to tackle the supply glut. However, following the Jamal Khashoggi
incident, speculation is rife that the US may have more bargaining power with the Saudis to keep
oil prices low. OPEC will meet in Vienna on 6 December to discuss output policy together with
some non-OPEC producers, including Russia.
If there is indeed an agreement to reduce production, which is our base-case scenario, we expect
Brent crude oil prices to recover to around US$70/bbl and average in the range of US$70-75/bbl in
2019. On the other hand, if OPEC fails to come to a solution given the complex politics involved,
Brent could stay depressed and average in the US$60/bbl region in 2019. We do not expect a deep
rout to US$50/bbl or below for Brent, as any further oil price declines will lead to lower-than-
expected US shale production in 2019, thus supporting the case for a reversal of prices.
Serba Dinamik is our top pick for the O&G sector as demand for the maintenance and operation
(M&O) segment has proven to be reliable and less susceptible to volatile movements of oil prices.
Serba Dinamik,
Hibiscus Petroleum
Plantations
Neutral
We foresee higher CPO prices in 2019, on the back of: 1) stronger demand from CPO restocking
by major importing countries amid current low price levels – countries such as India need imported
CPO to meet their domestic edible oil demand; 2) the brief dip in global supply from declining
Indonesian output after a bumper 2018 crop; and 3) better biodiesel economics due to CPO’s price
differential with crude oil price. We expect CPO price to recover to US$610 per MT in 2019 before
reaching US$611 per MT in 2020.
We favour planters with younger tree age profiles for their higher volume growth. Volume and
yield expansion can benefit margins as long as costs are well-managed, we thus believe that
efficient planters can enjoy another leg of earnings expansion beyond a CPO price recovery. We
also like planters with a strong balance sheet, which would allow them to take advantage of any
opportunistic brownfield acquisitions, expand value chains downstream, and/or to diversify their
businesses to other crops.
TSH is a BUY as it remains well-positioned for any upturn and sustained recovery in CPO prices
given its pure upstream exposure and rising CPO yield.
TSH Resources
Property
Neutral
While the property market will remain challenging in the near term, we expect the unveiling of the
new National Housing Policy by Dec 2018 to help address the issues of affordability and supply
glut. A comprehensive review to the existing housing development policy is required to rectify the
structural problems.
We believe the introduction of the National Home Ownership Campaign in 1H2019 with stamp
duty waivers will be a major catalyst for developers to clear their unsold inventory. Nevertheless, it
could still take some time for the property overhang to be absorbed by the market to achieve a
balanced supply-demand dynamics.
As more developers venture into the affordable housing segment amid the challenging
environment, stiff competition in an increasingly crowded space is expected to result in weaker
profitability. Sustaining their sales momentum will be a key task for developers in 2019 given the
lack of earnings growth
Our top sector pick is Matrix Concepts which has consistently outperformed its larger peers with
record high property sales due to its impeccable track record in township developments. Low land
cost remains its inherent competitive advantage which will continue to underpin its strong
profitability. Its valuation remains undemanding at 6x FY19 PE despite its sustainable earnings
visibility and high dividend yield of ~6.5%.
Matrix Concepts
Market Focus
Page 13
Sector Outlook (cont’d)
Sector Outlook Top Stock Picks
REIT
Neutral
Rental reversion growth is expected to be moderate-to-low for all subsectors. Retail rents
and occupancy should remain resilient at prime locations, but weak consumer sentiment
and spending will cap rental reversion. Office assets will focus on maintaining occupancy
as oversupply conditions persist, while softer business conditions (weaker general
economy, a depreciated ringgit, minimum wage hikes) will pressure rents for both office
and industrial spaces.
Inorganic growth via acquisitions will be a running theme in the face of weak organic
growth. However, the key point remains whether the REITs can inject assets at a price that
will be DPU-accretive to unitholders.
CMMT is our top pick as we think its current valuations are attractive. Despite having
negative rental reversion for its Klang Valley malls, overall portfolio saw positive rental
reversions supported by the Gurney Plaza and East Coast Mall. We think that its asset-
enhancement projects will bear fruit in the coming quarters. We have BUY rating with a TP
of RM1.40 that is based on DDM with 7.7% cost of equity and 1.2% terminal growth. We
also like Sunway REIT, in view of its strong DPU growth as income contributions resume,
following the completion of Sunway Putra refurbishments, plus its visible pipeline of
potential asset injections from sponsor Sunway Bhd.
CMMT, Sunway REIT
Shipping
Neutral
LNG spot rates are expected to improve moderately in 2019 as newbuild deliveries are
toned down at an estimated 36 (51 in 2018, 26 in 2017), thus allowing demand to catch
up to the currently oversupplied market.
Crude tanker rates were generally tepid in 2018 on the back of vessel oversupply issues
with the Baltic Dirty Tanker Index (BDTI) averaging 9% lower for the year. With no major
vessel supply control measures in view, the current rates may persist with muted growth –
barring an uptick in petroleum shipping demand.
We have a HOLD call on MISC, as its organic earnings outlook remains mild from softer
charter rates which offset the positive impact of its fleet and asset expansion. The group is
still seeking inorganic growth, especially within the offshore space, which may have the
potential to transform its outlook.
None
Technology
Neutral
After two years of exceptionally strong growth (partly due to the memory segment), we
expect the semiconductor industry to register weak growth in 2019 amid slowing demand
and risks of escalation foe the ongoing US-China trade war. We expect the sector to
undergo a cyclical downturn in 1H19, before starting to recover in 2H19 after the
inventory adjustment period is over.
We think smartphone unit sales is a headwind going into 2019 as the replacement cycle
becomes longer, amid the lack of new innovative features. Similar to past few years, the
investment theme will still be on content winners that can sustain earnings growth (5G,
sensors, automotive, etc.), but investors might need to be mindful of their entry and exit
strategies as this is likely to be a “crowded” trade again.
For the near term, we advise investors to stay on the sidelines given the disappointing
smartphone sales and risks of potential escalation of the US-China trade war. While stocks
under our coverage have corrected substantially since then, we believe it is still early for
investors to bottom-fish. We recommend a re-visit in early 2019 when there is more
visibility on fresh catalysts – particularly on new business expansion (Inari, Unisem, MPI) or
new content wins (GTB).
None
Market Focus
Page 14
Sector Outlook (cont’d)
Sector Outlook Top Stock Picks
Telecommunication
Neutral
Amid already high penetration rates in Malaysia, we expect competition and data
pricing to remain stable in the mobile segment. Data now contribute approximately
55-60% of mobile operators’ revenue, which means diminishing impact from declining
legacy voice and SMS revenue over the next few years. It is possible for the mobile
industry to return to a low-growth period, as long as data pricing stays rational.
Spectrum could be a potential regulatory issue for mobile players as the 700MHz
spectrum auction has been delayed, while the 2600MHz spectrum extension period
will expire in 2019.
For the fixed-line segment, the implementation of MSAP (Mandatory Standard on
Access Pricing) had been a major regulatory change that has a huge impact on
lowering broadband pricing in Malaysia. We expect continued regulatory pressures to
weigh on TM’s share price.
We have a BUY call on Axiata given its undemanding valuation, and expect the
improvement in Celcom and XL’s results to be the key re-rating catalysts. Asset-
monetisation initiatives for its stake in edotco and associates (M1 and Idea-Vodafone)
will be a bonus, if they materialise.
Axiata
Utilities
Neutral
Energy demand is expected to grow in tandem with the relatively healthy economic
outlook in Malaysia, which will continue to underpin the growing recurring income for
utility players.
The government remains committed to the power sector reform with the
implementation of the incentive-based regulation (IBR) framework that will provide
strong earnings clarity for utility players as well.
Our top pick is Tenaga Nasional (TNB) for its more attractive valuation and improving
earnings visibility from the implementation of the IBR framework.
Tenaga Nasional
Market Focus
Page 15
Top stock picks
Source: AllianceDBS Price date: 3 Dec 2018
Top Stock Picks
Stocks Key Investment Merits
Hong Leong Bank Conservative yet solid. Even with the implementation of MFRS 9 in the most recent quarter, Hong Leong Bank (HLBK)
recorded lower annualised net credit costs y-o-y at 6bps (1QFY18: 8bps). On a q-o-q basis, this was only slightly higher
by 3bps. The group's asset quality continued to improve both q-o-q and y-o-y, while capital ratios remained solid. The
group has shown resilient performance despite challenging market conditions. HLBK is targeting to lower its cost-to-
income (CTI) ratio to <40% over the medium term, and is progressively making inroads – CTI ratio in 1QFY19 fell 1ppt
to 42% y-o-y.
BOCD to be a mainstay in HLBK’s earnings. Bank of Chengdu (BOCD), HLBK’s associate, has finally listed its shares on
the Shanghai Stock Exchange. As HLBK did not participate in the initial public offering (IPO), its stake in BOCD has been
slightly diluted as the issue size was relatively small. From its previous stake of 19.99%, its stake is now diluted to 18%.
As such, there was minimal impact on HLBK’s earnings. HLBK continues to equity account for this investment. BOCD’s
contribution to HLB’s pre-tax profit remains at 15-17%, which will provide robust support amidst a more challenging
domestic operating environment. BOCD has recorded strong performance during the quarter, with solid 16% ROE,
good loan growth of 19% and improving asset quality.
Potential catalyst: Loosening its grip on liquidity. What remains a resistance is the group’s conservative stance on tight
liquidity by keeping loan-to-deposit ratio one of the lowest in the industry at 82%. Should the bank decide to loosen
this metric, we believe there will be a lot more upside it can achieve in terms of NIM, earnings and ROE. HLBK’s digital
agenda could also add a twist to valuations.
BUY with RM23.15 TP. Our TP is based on the Gordon Growth Model (assuming 12% ROE, 4% growth and 8% cost of
equity), equivalent to 1.8x CY19F BV.
Axiata Gradual improvement to drive recovery. Axiata's share price is down by 34% YTD, and we believe this has largely priced
in the near-term weak performance by its OpCos. Gradual improvement in Celcom and XL results will be the key
catalyst to drive recovery in share price. Asset monetisation of its stake in edotco, M1 and Idea-Vodafone will be a
bonus, if they materialise.
Celcom. Celcom lost significant market share in 2015 and 2016, which heavily impacted its margins. Its EBITDA margins
had been relatively weak at 35-37% and below peers. We believe Celcom's margins should start to improve from FY19
onwards, underpinned by cost optimisation efforts, while network investment should also taper off as Celcom already
caught up to its peers in terms of 4G coverage.
XL. Early signs are pointing towards a recovery for the Indonesian mobile sector in 2H18 as incumbents start to raise
data pricing. With high service revenue exposure to data (60-70%), XL is well positioned to capitalise on improving data
yields in Indonesia. Rising contributions from regions outside Java, where XL has been aggressively expanding in over
the past two years, should also further buttress the carrier's revenue growth.
BUY, TP of RM5.05 based on SOP valuation.
Recommend
ationTarget Price Current Price
Market Cap
(RM)CY2018 CY2019 CY2018 CY2019 CY2018 CY2019 CY2018 CY2019 CY2018 CY2019
Hong Leong Bank BUY 23.15 20.62 42,180.3 15.6x 14.6x 13% 6% 2.6% 2.9% 1.7x 1.6x 11% 11%
Axiata BUY 5.05 3.95 35,830.4 32.7x 22.7x 19% 44% 2.6% 3.7% 1.4x 1.4x 4% 6%
AMMB BUY 4.95 4.24 12,780.1 10.0x 9.0x 9% 11% 4.0% 4.5% 0.7x 0.7x 8% 8%
Gamuda BUY 3.50 2.26 5,577.8 10.0x 8.7x (3%) 14% 3.9% 3.9% 0.7x 0.7x 7% 8%
TIME dotCom BUY 9.40 8.17 4,768.1 17.2x 16.3x 56% 6% 1.5% 1.5% 1.9x 1.7x 12% 11%
CapitaMall Malaysia Trust BUY 1.40 1.02 2,085.1 13.3x 13.2x (4%) 1% 8.0% 8.1% 0.8x 0.8x 6% 6%
Matrix Concepts BUY 2.50 1.93 1,452.9 6.4x 5.8x 8% 10% 6.5% 6.9% 1.1x 1.0x 18% 18%
Media Chinese BUY 0.29 0.21 345.9 15.3x 8.0x 233% 91% 7.8% 7.5% 0.4x 0.4x 3% 5%
Price/ BVPS ROAEP/E EPS Growth (YoY) Dividend Yield
Market Focus
Page 16
Top Stock Picks (cont’d)
Stocks Key Investment Merits
AMMB Holdings Results from business strategy ramping up. With most of the noise from merger talks out of the way, AMMB has been
looking to turn around its operations, which had previously been boosted by recoveries instead of organic growth. After
unveiling its Top 4 aspirations, we think the group is just beginning to reap the benefits from its new business strategy.
Over the past six quarters, AMMB’s SME loan growth has beaten the industry average (double digits against 2-8%),
gradually increasing its market share by c.1ppt over the same period. Its focus on the affluent and mass affluent
segments has also resulted in robust results for its credit card and mortgage businesses, both also showing strong
double-digit growth. Asset quality has been relatively stable, with blips coming more from its corporate loan portfolio.
We note that the group has been conservative in making impairments, with recovery surprises observed in previous
quarters.
Controlling its overheads. AMMB’s cost-to-income ratio for 1HFY19 was at the low end of its guidance of less than 55%.
Looking ahead, the group is committed to reining in its overheads through its BET300 initiative as well as stretching out
investments in view of the more challenging operating environment, i.e. soft capital markets impacting non-interest
income and keen deposit competition hurting NIMs. The group’s BET300 initiative is expected to save RM300m over
three years. With the conclusion of its MSS programme in 4QFY18, the group will save around RM80m in personnel
costs beginning FY19. It targets to realise around RM100m in costs this fiscal year, with the remainder to be recognised
in FY20. Our forecast assumes normalising credit costs and does not reflect the potential cost savings in FY20. If the
group is able to successfully deliver on its initiatives, we think reaching a 9.0% ROE in FY20F is not impossible.
Potential catalyst. The stock would likely re-rate as performance improvements continue to roll in to offset normalising
recoveries. Renewed interest in major shareholders potentially divesting their stakes could also spark a re-rating.
BUY with RM4.95 TP. AMMB’s valuations have remained depressed thus far, trading at levels below 1SD of its 6-year
mean. The stock is currently trading at 0.7x CY19F BV, and we think the market has yet to price in the group’s positive
results from its business strategy going forward.
Gamuda Valuations at trough levels and discount to sector average. Valuations appear to be a steal, trading at CY19F PE of 9x,
which is more than -2SD below mean and a discount to the sector average of 10x. With the changing construction
landscape now and loss of recurring earnings for Splash, it is unlikely that valuations will revert to even -1SD below mean
or 16x PE any time soon. At our new SOP-derived TP of RM3.50, the stock will trade at 13x FY20F EPS which is about -
2SD below mean.
PTMP approvals gaining traction. We understand there has been more progress over the last few months in terms of
securing the required approvals for the Penang Transport Master Plan (PTMP). The last few months have seen the public
display and concerns on the project being ironed out. As it stands, the Federal Government has approved the LRT project
in principle. We expect the consortium partners within SRS Consortium (Gamuda has a 60% stake) to sign and finalise
the PDP agreement in December 2018 which will likely coincide with the relevant federal government agencies' approval
of the railway scheme for the LRT and Environmental Impact Studies for Pan Island Link 1 and reclamation works.
Property sales to help fill earnings void from Splash. Gamuda's FY19F presales target stands at RM4bn, of which
RM2.3bn will come from local projects and the balance of RM1.7bn from overseas. Almost half or RM1.05bn of local
property sales is expected to be anchored by three newer townships which are Gamuda Cove, Gamuda Gardens and
Twentyfive7. Its recently announced new project Anchorvale Crescent in Sengkang Singapore (GDV of S$650m;
S$1,100-1,200 psf) is expected to do as well as Gem Residences, as it is designated as an Executive Condominium and is
not likely to be impacted by the cooling measures. The company is expecting to rake in RM550m in property sales from
this project in FY20F.
Market Focus
Page 17
Top Stock Picks (cont’d)
Stocks Key Investment Merits
TIME dotCom A data-centric player. We like TIME for its strong growth profile, contributed by both its wholesale (domestic and
international) and retail segments. While the reduction in fixed broadband prices might have short-term impact on
margins, we believe this is beneficial for TIME in the medium-to-long term as it gains meaningful market share.
Cutting retail broadband prices. TIME has responded to competition by lowering its entry-level fibre broadband prices as
well as significantly boosting its speed offerings. TIME broadband packages now start from RM99-199 for 100Mbps-
1Gbps, compared to its entry-level package of RM149 for 100Mbps previously.
Strong balance sheet to support capex. As at 30 September, TIME had a net cash position of about RM197m.
Management has indicated before that they are comfortable to gear up to 0.3x net-debt/equity, implying about RM1bn
of debt headroom. Coupled with its strong cashflow, we believe this is sufficient to fund any potential major capex in the
future, if needed (especially on the domestic network).
BUY, TP of RM9.40. Our TP is based on DCF-valuation assuming 7.6% WACC and 2.5% terminal growth.
CMMT Take opportunity. We believe CMMT’s current valuations represent an attractive opportunity. The stock offers a yield of
c.8%, the highest in our Malaysian REIT universe. At 0.8x NAV, the stock is trading at -2SD of its mean since 2014. We
believe the stock’s retracement (-20% YTD) in response to the general weakness of its Klang Valley malls has been
excessive. The attractive yields would appeal to dividend-seeking investors.
Portfolio steady with geographically diversified strategy. While CMMT’s Klang Valley malls saw negative rental reversions
in 1H18, the group’s overall portfolio rental reversions are positive – lifted by Gurney Plaza in Penang and the East Coast
Mall in Kuantan. Asset enhancements and reconfiguration of assets will benefit CMMT as it keeps up with the trends in
attracting shoppers. The improving consumer consumption would be supportive for the group’s business.
Jumpa to revive Sungei Wang. To improve Sungei Wang’s performance and to ensure the mall complements the Bukit
Bintang-KLCC shopping belt, CMMT has embarked on a major asset- enhancement initiative with an estimated cost of
RM55m. This is expected to complete in 1Q19.
BUY, TP of RM1.40. Our DDM-derived TP (7.7% cost of equity, 1.2% terminal growth) is at RM1.40. The share price is
supported by an attractive FY18 DPU yield of 8.0%.
Matrix Concepts Record-breaking property sales. Matrix raked in property sales of RM517m in 2QFY19 (+35% q-o-q, +48% y-o-y), which
is an all-time high. Accordingly, the company's unbilled sales stood at a record high of RM1.4bn. Matrix has continued to
chalk up strong sales despite the challenging environment which has affected most of its peers.
More launches in the pipeline. The company has a launch pipeline of RM1.7bn in FY19 (vs RM1.2bn in FY18), of which
RM807m has been rolled out in 1HFY19. We expect its maiden project in KL, Chambers KL serviced residences (with a
GDV of RM310.6m) to contribute strongly to its 2HFY19 property sales.
Low land cost is unrivalled competitive advantage. Bandar Sri Sendayan remains the jewel in its crown given the low
average land cost of RM7psf (with infrastructure in place) when its affordably-priced properties are already selling at
~RM200psf, leading to significantly higher-than-average profit margins.
BUY, TP of RM2.50. We continue to like Matrix for its impeccable track record in township developments. Its valuation
remains undemanding at 6x FY19 EPS despite having sustainable earnings visibility and a high dividend yield of ~6.5%.
We maintain our BUY recommendation and TP of RM2.50.
MCIL Unjustified valuation. At 14% FCF yield with net cash making up 78% of market capitalisation, MCIL is trading way
below its potential break-up value, which we believe is unjustified even though the industry outlook might not be
favourable. In our view, the controlling shareholder already holds a 50% stake in MCIL and it will not take much capital
to privatise the company. With the last tranche of its medium-term notes being redeemed by February 2019, any
potential corporate manoeuvre would be easier to execute by then.
Strong balance sheet and healthy cashflow. MCIL took up RM450m debt financing in FY13 to partly fund its 41
sen/share capital repayment exercise. With a slightly lower dividend payout of 50% (vs. 60% previously), the company
has built back its cash pile and is presently in a net cash position of RM270m after 4-5 years.
BUY, TP of RM0.29. We value MCIL conservatively at 0.6x BV (about -1.5SD) and derive a RM0.29 TP.
Market Focus
Page 18
Appendix: 3Q18 earnings summary
Financial EPS vs ADBS vs consensus
Company Sector quarters Change estimates estimates UMW Holdings Automotive 3QFY18 ▲ Below Above
Bermaz Auto Automotive 1QFY19 ◄► Inline Inline
AirAsia Aviation 3QFY18 ▼ Below Below
AirAsia X Aviation 3QFY18 ▼ Below Below
MAHB Aviation 3QFY18 ◄► Inline Inline
Affin Holdings Banking 3QFY18 ◄► Above Above
AMMB Banking 2QFY19 ▲ Above Above
BIMB Holdings Banking 3QFY18 ◄► Above Above
CIMB Group Banking 2QFY18 ▲ Above Above
Hong Leong Bank Banking 1QFY19 ▲ Inline Inline
Hong Leong Financial Group Banking 1QFY19 ▲ Inline Inline
Maybank Banking 3QFY18 ◄► Inline Inline
Public Bank Banking 3QFY18 ◄► Inline Inline
RHB Bank Bhd Banking 3QFY18 ▲ Above Above
Cahya Mata Sarawak Building Materials 2QFY18 ◄► Inline Inline
Lafarge Building Materials 2QFY18 ▼ Below Below
MMC Conglomerate 3QFY18 ▼ Below Below
Gamuda Construction 3QFY18 ▲ Above Above
IJM Corp Construction 2QFY19 ▼ Inline Inline
Muhibbah Engineering Construction 2QFY18 ◄► Inline Inline
Kimlun Corporation Construction 3QFY18 ▼ Inline Inline
Sunway Construction Construction 3QFY18 ▼ Inline Inline
WCT Holdings Construction 3QFY18 ▼ Inline Inline
BAT Consumer 3QFY18 ▲ Inline Inline
Padini Consumer 1QFY19 ◄► Inline Inline
Petronas Dagangan Consumer 3QFY18 ◄► Inline Inline
Sasbadi Holdings Consumer 4QFY18 ◄► Below Below
SKP Resources EMS 2QFY19 ▼ Inline Inline
VS Indsutry EMS 4QFY18 ▼ Below Below
QL Resources Consumer 2QFY19 ◄► Inline Inline
AEON Credit Finance non-bank 2QFY19 ◄► Inline Inline
Bursa Malaysia Finance non-bank 3QFY18 ◄► Inline Inline
Berjaya Sports Toto Gaming 1QFY19 ▼ Inline Inline
Genting Gaming 3QFY18 ◄► Inline Inline
Genting Malaysia Gaming 3QFY18 ◄► Inline Inline
Magnum Gaming 3QFY18 ◄► Inline Inline
Hartalega Glove 2QFY19 ◄► Inline Inline
Kossan Glove 3QFY18 ◄► Inline Inline
Top Glove Glove 4QFY18 ▲ Inline Inline
IHH Healthcare Healthcare 3QFY18 ◄► Inline Below
KPJ Healthcare Healthcare 3QFY18 ◄► Inline Inline
Astro Media 2QFY19 ▼ Below Below
Media Chinese Media 2QFY19 ◄► Inline Inline
Media Prima Media 3QFY18 ▼ Below Below
Star Media 3QFY18 ▼ Below Below
Market Focus
Page 19
Financial EPS vs ADBS vs consensus
Company Sector quarters Change estimates estimates Bumi Armada Oil & Gas 2QFY18 ▼ Below Below
Hibiscus Oil & Gas 4QFY18 ▲ Inline Inline
Dialog Group Bhd Oil & Gas 4QFY18 ◄► Inline Inline
Pantech Group Oil & Gas 1QFY19 ▼ Inline Inline
Sapura Energy Oil & Gas 1QFY19 ▼ Below Below
Serba Dinamik Oil & Gas 2QFY18 ◄► Inline Inline
Wah Seong Oil & Gas 2QFY18 ▼ Inline Inline
CB Industrial Product Plantation 3QFY18 ◄► Inline Inline
Genting Plantation Plantation 3QFY18 ▼ Below Below
IOI Corporation Plantation 1QFY19 ◄► Inline Inline
KL Kepong Plantation 4QFY18 ◄► Below Below
Sime Darby Plantation Plantation 1QFY19 ▼ Below Below
Felda Global Ventures Plantation 3QFY18 ▼ Below Below
PPB Group Plantation 3QFY18 ◄► Inline Inline
TSH Resources Plantation 3QFY18 ◄► Inline Inline
Westports Holdings Port 3QFY18 ◄► Inline Inline
Eastern & Oriental Property 2QFY19 ◄► Inline Below
MKH Property 4QFY18 ◄► Inline Inline
SP Setia Property 3QFY18 ▼ Below Below
UEM Sunrise Property 3QFY18 ◄► Inline Below
Eco World Development Property 3QFY18 ▼ Below Below
Matrix Concepts Property 2QFY19 ◄► Inline Inline
Yong Tai Property 1QFY19 ▼ Below Below
Sunway Property 3QFY18 ◄► Inline Inline
Axis REIT REIT 3QFY18 ◄► Inline Inline
CapitaMall Malaysia Trust REIT 3QFY18 ◄► Inline Inline
KLCC Stapled REIT 3QFY18 ◄► Inline Inline
Pavilion REIT REIT 3QFY18 ◄► Inline Inline
MRCB-Quill REIT REIT 3QFY18 ◄► Inline Inline
Sunway REIT REIT 1QFY19 ◄► Inline Inline
MISC Shipping 3QFY18 ◄► Inline Inline
Malaysian Pacific Industries Technology 1QFY19 ◄► Inline Inline
Globetronics Technology 3QFY18 ◄► Below Inline
Inari Amertron Technology 1QFY19 ▼ Below Below
Unisem Technology 3QFY18 ◄► Inline Inline
Axiata Telecommunication 3QFY18 ◄► Inline Inline
Digi Telecommunication 3QFY18 ◄► Inline Inline
Maxis Telecommunication 3QFY18 ◄► Inline Inline
TIME dotCom Telecommunication 3QFY18 ▲ Above Above
TM Telecommunication 3QFY18 ▲ Above Above
Gas Malaysia Utilities 3QFY18 ▼ Below Below
Petronas Gas Utilities 3QFY18 ◄► Inline Inline
Tenaga Utilities 3QFY18 ▼ Below Below
YTL Power Utilities 3QFY18 ▼ Below Below
Market Focus
Page 20
Macro Data
Key Data Period m-o-m / y-o-y
chg
Prev. / Consensus
(y-o-y)
GDP 3Q18 0.3% / 4.4% +4.5% / +4.6% In 3Q18, growth was driven mainly by improvement in Manufacturing
(+5.0%), Services (+7.2%) and Construction (+4.6%). On the other
hand, the demand side was supported by private consumption (+9.0%),
private investment (+6.9%) and public consumption (+5.2%). Private
consumption remains the main driver of growth (57.5% of total GDP);
expanding faster at 9.0% y-o-y, benefitting from the remaining two
months of tax-free period. Additionally, net exports of goods and
services contracted by 7.5% in 3Q18, from a 1.7% growth y-o-y in
2Q18. Nonetheless, we are still confident that current fiscal reforms by
the new government such as standardisation of minimum wage across
the country and targeted fuel subsidy will likely provide favourable
domestic demand conditions that will drive Malaysia’s private
consumption growth towards the end of the year, contributing positively
towards 4Q18 GDP growth.
CPI Oct 18 +0.2% / +0.6% +0.3% / +0.6% During the month, price pressures were driven by key items in the basket
of goods, namely Food and Non-alcoholic Beverages (+1.2%), Housing
and Utilities (+2.1%) and Transport (+0.8%) sectors. On a seasonally
adjusted m-o-m basis, the consumer price index (CPI) expanded 0.2%
(September: +0.4%), mainly attributed to a normalising trend in prices
after the transition period from zero-rated Goods and Services Tax (GST)
to Sales and Services Tax (SST). Overall, we expect a slower-than-
expected increase in prices of goods after the re-implementation of SST,
coupled with a higher-base effect.
OPR Nov 18 3.25%^ 3.25% / 3.25% Bank Negara Malaysia (BNM) kept rates unchanged in its November
meeting. BNM expects inflation to average lower than earlier projections
in 2018. Overall, we believe that BNM will keep OPR steady at 3.25% at
least until mid-2019. However, there may be a possible review for a rate
cut of 25bps to spur economic activity if GDP growth falls below 4% in
the coming quarters.
Exports Sep 18 1.1% / +6.7% -0.3% / +6.7% During the month, export growth was led by expansion in major
segments: E&E (+6.5%), refined petroleum products (+20.5%), crude
petroleum (+54.4%) and LNG (+1.8%), while exports of palm oil and
palm oil-based products (-11.5%) declined. The reduction on a m-o-m
basis was partly due to lower public consumption of goods and
investments in infrastructure as the tax holiday period ended and SST
was implemented on 1 September. We revised our export growth
projection to 5.5 - 6.0% y-o-y in 2018.
PMI Nov 18 48.2^ 49.2/ - Nikkei reported that Malaysia’s manufacturing conditions continued to
contract to a six-month low at 48.2 during November, in line with the
trend of global PMI and other major countries such as US, Japan and
Singapore. This was mainly due to a reduction in total sales as demand
eased domestically impacted by the implementation of Sales and Services
Tax (SST) as well as depicting downside risks as overall demand fell
sharply.
IPI Sep 18 -0.4% / +2.3% +2.2% / +2.3% Industrial production index (IPI) growth was supported by expansion in
the Manufacturing (+4.8%) and Electricity (+4.2%) sectors, while the
Mining sector contracted 6.2%. However, the 3-month moving average
growth of 4.8% (August: +4.7%) suggests that the underlying growth
momentum continues to moderate particularly for the mining sector.
Source: AllianceDBS, Bloomberg Finance L.P * q-o-q ^ latest reading
Market Focus
Page 21
Macro Graphs
Malaysia GDP and Consumer Price Index growth Malaysia exports growth
Source: Department of Statistics Source: Department of Statistics
Malaysia industrial production and PMI index MGS 10-year and US Treasury 10-year yield spread
Source: Department of Statistics, Markit Source: Bloomberg Finance L.P
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
Jan
-16
Mar
-16
May
-16
Jul-
16
Sep
-16
No
v-1
6
Jan
-17
Mar
-17
May
-17
Jul-
17
Sep
-17
No
v-1
7
Jan
-18
Mar
-18
May
-18
Jul-
18
Sep
-18
No
v-1
8
%y-o-y%y-o-yGDP growth CPI
-40
-30
-20
-10
0
10
20
30
40
50
60
70
-30
-20
-10
0
10
20
30
40
Jan
-16
Mar
-16
May
-16
Jul-
16
Sep
-16
No
v-1
6
Jan
-17
Mar
-17
May
-17
Jul-
17
Sep
-17
No
v-1
7
Jan
-18
Mar
-18
May
-18
Jul-
18
Sep
-18
% y-o-y% y-o-y
Others
E&E
O&G
40.0
45.0
50.0
55.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
Jan
-15
Ap
r-1
5
Jul-
15
Oct
-15
Jan
-16
Ap
r-1
6
Jul-
16
Oct
-16
Jan
-17
Ap
r-1
7
Jul-
17
Oct
-17
Jan
-18
Ap
r-1
8
Jul-
18
Oct
-18
% y-o-yIPI growth (lhs)Mfg IPI growth (lhs)Mfg PMI (rhs)
0.80
1.00
1.20
1.40
1.60
1.80
2.00
2.20
2.40Ja
n-1
6
Mar
-16
May
-16
Jul-
16
Sep
-16
No
v-1
6
Jan
-17
Mar
-17
May
-17
Jul-
17
Sep
-17
No
v-1
7
Jan
-18
Mar
-18
May
-18
Jul-
18
Sep
-18
No
v-1
8
%
Brexit
Trump election Ringgit
strengthening
Market Focus
Page 22
AllianceDBS recommendations are based an Absolute Total Return* Rating system, defined as follows:
STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)
BUY (>15% total return over the next 12 months for small caps, >10% for large caps)
HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)
FULLY VALUED (negative total return i.e. > -10% over the next 12 months)
SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)
Share price appreciation + dividends
Completed Date: 4 Dec 2018 09:40:34 (MYT) Dissemination Date: 4 Dec 2018 11:48:33 (MYT)
Sources for all charts and tables are AllianceDBS unless otherwise specified.
GENERAL DISCLOSURE/DISCLAIMER
This report is prepared by AllianceDBS Research Sdn Bhd (''AllianceDBS''). This report is solely intended for the clients of DBS Bank Ltd, its
respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in
any form or by any means or (ii) redistributed without the prior written consent of AllianceDBS Research Sdn Bhd (''AllianceDBS'').
The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS
Bank Ltd, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively,
the “DBS Group”) have not conducted due diligence on any of the companies, verified any information or sources or taken into account any other
factors which we may consider to be relevant or appropriate in preparing the research. Accordingly, we do not make any representation or
warranty as to the accuracy, completeness or correctness of the research set out in this report. Opinions expressed are subject to change without
notice. This research is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific
investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees
only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial
advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit)
arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not
to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons
associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group, may have
positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and
other banking services for these companies.
Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can
be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments.
The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed, it may
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This publication has not been reviewed or authorized by any regulatory authority in Singapore, Hong Kong or elsewhere. There is no planned
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The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and
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which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual
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(a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and
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assessments stated therein.
Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets.
Market Focus
Page 23
Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies)
mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the
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DBSVUSA, a US-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public
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Compensation for investment banking services:
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other investment recommendations in respect of the same securities / instruments recommended in this research report during the
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1 An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of which the analyst, his spouse, minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (iii) another person accustomed or obliged to act in accordance with the directions or instructions of the analyst.
2 Financial interest is defined as interests that are commonly known financial interest, such as investment in the securities in respect of an issuer or a new listing applicant, or financial accommodation arrangement between the issuer or the new listing applicant and the firm or analysis. This term does not include commercial lending conducted at arm's length, or investments in any collective investment scheme other than an issuer or new listing applicant notwithstanding the fact that the scheme has investments in securities in respect of an issuer or a new listing applicant.
Market Focus
Page 24
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Market Focus
Page 25
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This report is provided by DBS Bank Ltd (Company Regn. No. 196800306E) which is an Exempt Financial Adviser as
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Market Focus
Page 26
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