Highlights

Kenanga Research & Investment

Author: kiasutrader   |   Latest post: Fri, 11 Jun 2021, 10:45 AM

 

Plantation - The Month of Full Lockdown

Author: kiasutrader   |  Publish date: Fri, 11 Jun 2021, 10:45 AM


Review of May figures:

May inventory of 1.57m MT (+1.5% MoM) came above our, but below consensus’, forecast. Deviation from our estimate was mainly due to lower exports particularly from Islamic countries and slower stockpiling activities from China and India. Production of 1.57m MT is in line with both our and consensus’ estimates.

Our projection for June: 

For June, we forecast: (i) production growth (+1.4% MoM), as growth in East Malaysia is offset by decline in Peninsular, and (ii) exports to rise (+3.1% MoM). Exports should improve for the remaining months as businesses overcome the initial struggles of obtaining approvals from relevant local authorities. Data from cargo surveyors for 1st – 10th June have shown an average 12% MoM decline. All in, we expect total supply to outstrip total demand, leading to higher ending stocks of 1.67m MT (+6.4% MoM).

Our thoughts on the sector:

Moving forward, the prevailing key factors remain: (i) stockpiling activities by India and China, (ii) labour situation, (iii) movement restriction developments, (iv) supply-demand dynamics of soybean market, and (v) biodiesel mandates. Stay NEUTRAL on the plantation sectorwith an unchanged CY21 CPO price forecast of RM3,000/MT.Expectations of rising inventory levels have begun to weigh on CPO price and should continue into June. However, any shock to supply from stricter movement controls will turn the tide. Upstream-centric preferred picks to capitalise on high CPO prices are SIMEPLT (OP; TP: RM5.65) and HSPLANT (OP; TP: RM2.15).Our integrated pick with defensive overall margin against the CPO price variability is KLK (OP; RM25.10).

May 2021 CPO inventory rose (+1.5% MoM) to c.1.57m metric tons (MT). This is above our estimate of 1.46m MT (-5.6% MoM), but below consensus’ estimate of 1.64m (+6.3% MoM). The deviation from our estimate was mainly due to lower exports (-6.0% MoM) attributable to: (i) Iran (-71% MoM), (ii) Turkey (-38% MoM), (iii) Ghana (-97% MoM), and slower stockpiling activities from China and India. Production of 1.57m MT is in line with both our/consensus estimates of 1.59m/1.58m MT, respectively.

Forecasting June 2021 production to rise (+1.4% MoM) to 1.59m MT. We expect continued production growth in Sabah and Sarawak in June, while Peninsular Malaysia continues to take a breather. Premised on these reasons, we forecast 1.4% MoM increase in overall production in June 2021.

Exports to rise (+3.1% MoM) to 1.30m MT in June 2021. Data from cargo surveyors for 1st – 10th June showed an average decline of 12% MoM. We think that this could be a temporary effect from the sudden implementation of Phase 1 MCO 3.0 as businesses struggled to obtain approvals from relevant local authorities. We expect exports to improve gradually for the remaining of the month which should be driven by China and India’s oils and fats inventory replenishment activities. We observed a rising pattern in Malaysia’s palm oil exports to both countries when their oils and fats stock levels plummeted to multi-year lows in Apr-May 2020. Both India and China’s inventories have begun to climb.

June 2021 inventory to increase (+6.4% MoM) to 1.67m MT. All-in, we expect total supply of 1.68m MT to outstrip total demand of 1.58m MT, leading to higher ending stocks of 1.67m MT in June. The key factors to continue focusing on in the coming months are: (i) stockpiling activities by India and China, (ii) labour situation as we approach peak production season, (iii) movement restriction developments, (iv) supply-demand dynamics of soybean market, and (v) biodiesel mandates fulfilment.

Stay NEUTRAL on the plantation sector with an unchanged CY21 CPO price forecast of RM3,000/MT. Expectations of rising inventory levels have begun to weigh on CPO price. This will be more evident should June’s inventory levels rise as anticipated. However, any shock to supply from stricter movement controls will turn the tide. We think valuations of planters under our coverage and the KLPLN index (both at below -1.0SD from mean) seem to have somewhat priced in the negatives. Upstream-centric preferred picks to capitalise on high CPO prices are SIMEPLT (OP; TP: RM5.65) and HSPLANT (OP; TP: RM2.15). Our integrated pick with defensive overall margin against the CPO price variability is KLK (OP; RM25.10).

Source: Kenanga Research - 11 Jun 2021

Labels: SIMEPLT, HSPLANT, KLK
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Malaysia Bond Flows - Foreign fund inflow softened in May on the back of MCO 3.0

Author: kiasutrader   |  Publish date: Fri, 11 Jun 2021, 10:44 AM


● Foreign investors remained net buyers of Malaysia’s debt securities for thirteen straight months. However, inflows narrowed to RM1.9b in May (Apr: RM6.4b), a 6-month low

  • Total foreign debt holdings continued to climb in May, reaching its highest level since October 2014 (RM247.9b; Apr: RM246.0b), while its share to total outstanding debt securities remained at 14.8% (Apr: 14.8%), a 3-year high.
  • High yield differentials continued to drive demand for Malaysia’s debt securities. However, investors’ sentiment was tempered by concerns regarding rising local COVID-19 cases, the implementation of Movement Control Order 3.0 (MCO 3.0), and a higher inflation reading in April (4.7%; Mar: 1.7%).

● The narrowedinflowwasmainly due to a smaller net increase in holdings ofMalaysian Government Securities (MGS), as well as net decreases in holdings of Government Investment Issues (GII) and Malaysian Treasury Bills (MTB)

  • MGS (RM2.4b; Apr: RM4.7b): foreign holdings share of total MGS increased marginally (41.1%; Apr: 41.0%).
  • GII (-RM0.6b; Apr: RM0.4b): foreign holdings share decreased to 7.9% (Apr: 8.2%).
  • MTB (-RM0.1b; Apr: RM0.5b): foreign holdings share edged lower (66.4%; Apr: 67.3%), a 4-month low.

● For the equity market, outflows continued for 23 consecutive months

  • Foreign selling in Bursa Malaysia persisted in May (-RM0.2b;Apr: -RM1.1b), albeit at a slower pace, on concerns regarding elevated domestic COVID-19 cases and the impact of MCO 3.0.

● Overall, the capital market registered a smaller net foreign portfolio inflow in May (RM1.7b; Apr: RM5.2b), a 6-month low

● Debt market may continue to experience softer inflow in the near term, on the back of the full-scale MCO

  • The US 10-year Treasury average yield fell by 2 basis points (bps) to 1.61% in May, whilst the 10-year MGS average yield increased by 7 bps to 3.16%, widening the average yield spread to 155 bps in May (Apr: 146 bps).
  • We expect foreign inflows to sustain in the medium-term, supported by Malaysian bonds’ consistently high yield differentials and Moody’s recent affirmation of Malaysia’s credit profile at A3 stable. Nevertheless, the ongoing full-scale lockdown may continue to temper foreign demand in the near-term. Furthermore, inflows will likely be dependent on the outcome of Malaysia’s upcoming sovereign credit review by S&P Global Ratings. Considering this,and the worsening COVID-19 situation throughout Asia, we have revised our end-2021 USDMYR forecast to 4.03 (2020: 4.02) from 3.95 earlier.
  • Despite the full-scale MCO, growth recovery will likely be sustained given the additional fiscal stimulus measures (PEMERKASA+), ongoing vaccinationprogress, andstrong external demand. As such, we expect BNM to keep the policy rate at 1.75% for the remainder of the year.

Source: Kenanga Research - 11 Jun 2021

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Indonesia Retail Sales - Rebounded to a five-year high in April on base effect and seasonal demand

Author: kiasutrader   |  Publish date: Fri, 11 Jun 2021, 10:41 AM


● Retail sales rebounded to a five-year high in April (15.6% YoY; Mar: -14.6%) and the first expansion in 17 months bolstered by low base effect and the fasting month season

  • Growth was attributable to a rebound in sales of apparel (55.2%; Mar: -10.8%), other goods (48.2%; Mar: -17.1%), food, drinks, & tobacco (26.7%; Mar: -9.0%) as well as sharp expansion in fuels (37.3%; Mar: 3.2%).
  • MoM: up sharply (17.3%; Mar: 6.1%), highest since July 2014.

● Positive sales growth expected for the second straight month onthe back of the seasonal demand in conjunction with the Islamic fasting month and Eid-ul-Fitr festive period

  • The Real Sales Index (RSI) is expected to expand at a moderate pace in May (12.9% YoY), with growth to be contributed by higher sales in fuels (59.4%; Apr: 37.3%), car spare parts & accessories (41.1%; Apr: 8.1%) and apparel (37.7%; Apr: 55.2%).
  • On MoM, growth is expected to expand for the third straight month, albeit at a slower pace (1.6%; Apr: 17.3%), in line with the improved consumer confidence index (104.4; Apr: 101.5).

● Higher sales growth expected due to the base effect

  • 3-month Sales Expectation Index (SEI): growth expected to spike in July (23.7%; expected Jun: 14.3), a record high.
  • 6-month SEI: moderate growth expected in Oct (1.1%; expected Sep: 4.1%).

● Inflationary pressure is expected to remain weak for the next three to six months due to adequate supply

  • 3-month Price Expectations Index (PEI): growth expected to fall sharply in July (-12.4% YoY; expected Jun: -12.0%) on base effect. Nonetheless, a slight build-up of inflationary pressure is expected compared to the preceding month (0.8% MoM; Jun: -9.6%).
  • 6-month PEI: weak inflationary pressure expected to persist in October (-8.5% YoY; expected Sep: -11.9%).

● Retail sales to sustain positive growth, but downside risks persist

  • Growth is expected to remain in a positive territory in the near term, underpinned by low base effect and higher spending due to the festive season. Nonetheless, the extended micro-scale restriction until June 14 and fears over the potential COVID- 19 resurgence amid new variants may continue to weigh on the recovery

Source: Kenanga Research - 11 Jun 2021

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Daily technical highlights – (KERJAYA, TECHBND)

Author: kiasutrader   |  Publish date: Fri, 11 Jun 2021, 10:36 AM


Kerjaya Prospek Group Berhad (Trading Buy)

• KERJAYA is principally involved in the construction of high-end commercial and high-rise residential buildings, property development and the manufacturing of
  lighting and kitchen solutions.

• In FY20, the Group’s revenue fell 23% to RM811m and core net profit dropped 40% to RM90m. Its 1QFY21 results – with revenue of RM269m (+8% QoQ; +27%
  YoY) and core net profit of RM26m (-5% QoQ; +1% YoY) – were below expectations, affected by margin squeeze mainly due to elevated steel costs.

• Still, looking ahead, consensus is expecting KERJAYA’s net profit to grow by 39% and 28% to RM125m and RM161m in FY21 and FY22, respectively. This
  translates to forward PERs of 12.2x this year and 9.5x next year respectively, compared to the 5-year historical mean of 12.3x.

• Technically speaking, from a peak of RM1.53 in mid-April, the stock fell (likely due to renewed fears of economic lockdowns) to as low as RM1.08.

• Following which, in mid-May, the stock found support at the 50% Fibonacci retracement level of RM1.19. At the same time, the formation of a large hammer
  candlestick shows the strong rejection of lower prices, which subsequently paved the way for the stock to extend its higher lows trend.

• Since then, the stock has continued to trend higher. With the MACD indicator currently showing strengthening upward momentum, we believe the share price could
  potentially challenge our resistance levels of RM1.38 (R1; 12% upside potential) and RM1.48 (R2; 20% upside potential).

• We have pegged our stop loss price at RM1.10 (11% downside risk).

Techbond Group Berhad (Trading Buy)

• TECHBND is a manufacturer of industrial adhesives with manufacturing facilities in Malaysia and Vietnam, serving customers in Asia, Africa and the Middle East. Its
  industrial adhesives are used in a variety of products, including wood-based products, paper and packaging products, cigarettes and cigarette packs, automotive 
  applications, personal care products, mattresses as well as building and construction applications.

• In FY20, TECHBND’s revenue fell 12% to RM71m attributable to: (i) weaker demand from local manufacturers, particularly from the wood-working industry, and (ii)
  disrupted global supply chain due to the US-China trade war. Despite the decline in revenue, net profit rose by 52% to RM10.7m, as lower material costs and stable
  ASPs led to improved profit margins.

• Continuing the rising earnings momentum, in the quarter ended 31 March 2021, TECHBND achieved revenue of RM21.6m (- 8.9% QoQ; +26.3% YoY) and net
  profit of RM3.8m (+50% QoQ; + 51.5% YoY).

• Moving forward, TECHBND will continue to focus on its expansion plans to cater for the robust overseas and domestic demand across its business segments.

• Technically speaking, from a peak of RM0.87 in early-February this year, the stock has subsequently fallen by 49% before bottoming at RM0.44 early this month when it bounced off the 61.8% Fibonacci retracement level.

• The emergence of the rounding bottom pattern, coupled with yesterday’s formation of a large green candlestick, indicate the resurgence of positive momentum.

• With the MACD indicator also showing strengthening upward momentum, an anticipated rise in the share price could challenge our resistance levels of RM0.56 (R1;
  12% upside potential) and RM0.61 (R2; 22% upside potential).

• We have pegged our stop loss price at RM0.45 (10% downside risk).

Source: Kenanga Research - 11 Jun 2021

Labels: KERJAYA, TECHBND
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Top Glove Corporation - 9MFY21 Below Expectations, But ASP Weakness Reflected in Current Share Price

Author: kiasutrader   |  Publish date: Thu, 10 Jun 2021, 11:46 AM


9MFY21 PATAMI of RM7262m (+13-fold YoY) came in below expectations at 66%/69% of our/consensus full-year forecasts. The negative variance from our forecast is due to lower-than- expected volume sales and ASP. Hence, we lower our FY21E/FY22E net profit by 15% each to account for lower ASP and volume growth. ASP trend is expected to soften albeit at a slower pace going forward as nitrile lead times have been reduced to between 90 to 120 days from 150 days previously. In our view, subsequent quarters of ASP weakness have already been reflected in the current share price. Reiterate OUTPERFORM with lower TP from RM6.49 to RM5.60 based on 12x CY22 EPS.

QoQ, 3QFY21 revenue fell 22% due to lower ASP (-16%) and volume sales (-4%). Lower QoQ sales volume was due to reduction in sales to the U.S., following a temporary halt in shipments to the U.S. from Malaysia, in compliance with requirements of the U.S. Customs and Border Protection. This brings 3QFY21 PATAMI to RM2,036m (-29%). A 3rd interim and special dividend totalling 18.0 sen was declared, bringing 9MFY21 DPS to 59.7 sen, below our estimate due to the poorer-than-expected results.

YoY, 9MFY21 revenue rose 246% due to higher volume sales (+12%) and ASP (+200%). The improved profit came on the back of higher sales output, coupled with higher average selling prices (ASPs) which peaked in February 2021. This propelled 9MFY21 PATAMI higher by 13-fold.

Outlook. ASP trend is expected to soften albeit at a slower pace going forward as lead times have been reduced to between 90 to 120 days from 150 days previously. Specifically, nitrile ASP is expected to decline 3-5% m-o-m or be adjusted down. In our view, the share price weakness is reflecting subsequent quarters of ASP weakness ahead. Looking ahead into 4QFY21, the group expect volume sales to improve QoQ by 10-20%. Post COVID-19, inventory restocking cycle is expected to spur demand coupled with increased usage arising from new users and increased hygiene awareness. Although sentiment on the sector is diminishing, lead times suggest that CY22 demand will remain strong, from increased demand brought by heightened hygiene awareness extending beyond the healthcare community. According to Malaysian Rubber Glove Manufacturers Association, the demand for rubber gloves will last beyond 1Q 2022 with growth rate averaging between 15% and 20% going forward. Plan for the listing in The Stock Exchange of Hong Kong Limited (HKEX) is expected to be delayed from end-2QFY21, while waiting for the US Customs Border to uplift the Withhold Release Order (WRO).

Our FY21E and FY22E net profits are downgraded by 15% each. FY21E net profit lowered due to cutting our volume growth from 18% to 10% and our ASP from USD76 to USD70/1,000 pieces. FY22E net profit lowered by 15% due to lower ASP from USD40 to USD37/1,000 pieces.

Reiterate OP. Correspondingly, we downgrade our TP from RM6.49 to RM5.60 based on 12x CY22E EPS of 46.4 sen (at close to -1.0SD below 5- year forward historical mean). Our target PER is at a 33% discount to normalised 5-year pre-COVID-19 historical forward mean averaging 18x. We believe the share price weakness is reflecting subsequent quarters of ASP weakness ahead and also reflecting ASP moving towards USD35/1,000 pieces. Still, in our view, from the perspective of a long-term investor, we see significant value in Malaysian glove players which command 65-68% of global market share which are consistently evolving and innovating in terms of products and plant modernization via automation.

A key downside risk to our call is lower-than-expected ASP in 2022.

Source: Kenanga Research - 10 Jun 2021

Labels: TOPGLOV
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RainT READ
12/06/2021 6:43 PM

IJM Corporation - A Good Deal

Author: kiasutrader   |  Publish date: Thu, 10 Jun 2021, 11:46 AM


We are positive on the RM1.58b cash offer KLK has made to acquire IJM’s stake in IJMPLNT as it is 39% higher than our ascribed value for IJMPLNT. Also, with such sizeable cash proceeds, we believe IJM would be well positioned to take on incoming PFI related projects and also dish out a special dividend post deal. Nonetheless, FY23E earnings would reduce by 14% after stripping off IJMPLNT’s contributions. All in, maintain OP with higher TP of RM2.35 (from RM2.20) after factoring for the higher-than-expected value derived from IJMPLNT.

An unexpected offer. KLK has made a cash offer to purchase IJM’s 56.2% stake in IJMPLNT for RM3.20*/IJMPLNT’s share (or RM1.58b). The offer price values IJMPLNT’s 61k hectares of lands (spread across Sabah, Sumatra and East Kalimantan) at RM54k/ha – a fair price in our opinion.

*RM3.10 offer + RM0.10 dividend declared by IJMPLNT to be paid on 30 July 2021

This cash deal effectively translates to RM0.44 per IJM share. Based on announcements made, while the deal is still not casted in stone, IJM has agreed in principle.

A good deal with potential gains of RM727m. We are positive on the RM3.20 cash offer made as it is 39% higher than our RM2.30 ascribed value for IJMPLNT. Against IJMPLNT’s RM1.63 BV/share, IJM would recognise a potential gain of c.RM727m (or RM0.20/IJM share).

Beefed up war chest for PFI projects. We believe these fresh proceeds could be channelled to spearhead PFI (private finance initiative) related projects and shore up IJM’s current outstanding orderbook of RM4b given the government’s weaker fiscal position post Covid-19 pandemic. Note that current orderbook has shrunk from its peak orderbook of RM8.8b registered in FY19.

Net gearing to decline to 0.23x post deal. Prior to this deal, IJM’s net gearing was already comfortable at 0.45x against its past 5 years’ net gearing of 0.36x – 0.54x. Post deal, IJM’s net gearing would come off further to 0.23x. While some proceeds could be earmarked for PFI, we still believe there is room for special dividends to be made. Historically, IJM has paid out special dividends after recording gains from their asset disposals*. Assuming a 20 sen special dividend being paid, IJM’s net gearing would still remain comfortable at 0.31x.

*IJM had paid out special dividends in FY14 and FY16 from gains in disposal of assets at Kemaman Port, Trichy Highway, Kuantan Port (40%), Swarna toll (70%) and Jaipur Manua Toll.

FY23E earnings adjusted lower by 14% after excluding IJMPLNT’s contribution. We assume the deal would only materialise late FY22 – hence we only strip off IJMPLNT’s earnings contribution starting FY23E. In our assumption, we have allocated RM0.20/share (RM727m) for special dividends and the rest (RM856m) to pare down borrowings – effectively saving on c.RM34m worth of financing costs.

Keep Outperform with higher SoP-TP of RM2.35 (from RM2.20) after factoring for the higher-than-expected value derived from IJMPLNT.

Key downside risks for our call are: (i) lower-than-expected margins, and (ii) slower-than-expected progress in construction works and clearing of property inventories.

Source: Kenanga Research - 10 Jun 2021

Labels: IJM
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