HLIB Research Summary - 20 Oct 2014

Automotive (NEUTRAL  çè)

Weak September; Expect Strong 4Q14

• As expected, MAA reported weak September TIV at 47.8k units (-13.1% yoy; -6.6% mom), mainly dragged down by national OEMs. However, we expect strong TIV in 4Q14 driven by newly launched Perodua Axia and Proton Iriz.
• Perodua (UMW and MBM) sales dropped to 12.1k units (-30.8% yoy; -16.9% mom) and Proton (DRB) reported 8.1k sales (-45.7% yoy; -6.5% mom).
• We expect foreign OEMs to maintain their sales campaigns into 4Q14, in order to achieve their respective sales target for 2014 and defend their market share ahead of GST implementations.
• Market Down-Trading remained intact, as higher cost of living take effects. OEMs focusing on A-B segment cars will be the major beneficiary.
• Top Picks: MBM (TP: RM4.00) and DRB (TP: RM3.00).

oil and gas (OVERWEIGHT  çè)

Music Stop?”Encore?Encore??”

• Red October to O&G sector… On average, O&G companies fell by 17-18% (despite last Friday’s rebound). Some small to mid-cap were hit harder by falling 20-25%.
• How low could oil price go? In our view, Brent crude could settled around US$80-90 level in the midterm instead of >US$100 previously given rising supply from US. we believe near term oil price is close to the floor as any extended price below US$80 level (Brent) will slow down the production growth from US shale.
• Premium valuation for O&G no longer…We reduced target P/E for big cap from 20x to 16x with small and mid-cap reduced from 14-16x to 12-14x.
• Despite P/E De-Rating, valuation still compelling with average potential upside of ~27%. Most companies trading close to 1SD below average or near trough of P/E and P/B bands.
• Alpha can be discovered in selective areas like RAPID and brownfield development.

Top picks: Big Cap: Dayang Mid to Small cap: KNM and Scomi Energy.

KNM (BUY çè)

Too cheap to Ignore!

• To proposed a renounceable rights issue of up to 430.5m shares on the basis of 1 right shares for every 5 existing shares together with up to 215m free warrants on 1 free warrant  for every 2 rights subscribed.
• We are positive but not surprise about this exercise as it strengthens the balance sheet in order to finance potential more contract wins from RAPID and well prepare for Peterborough project.
• To note, the proposed right will be fully underwritten by its major shareholders and investment banks.
• Its owner Ir Lee Swee Eng also shows his confident on the company by progressively increased its share stake in open market with price ranging from RM0.69 - RM0.815.
• We maintained our BUY call with unchanged target price of RM1.35 based on 16x FY15 P/E. Our TP have not factored in value from EnergyPark Peterborough yet.

Economics

September Inflation Report

• Headline inflation declined to 12-month low of 2.6% yoy in September (Aug: +3.3% yoy), in line with our (+2.5%) and market expectations (+2.6%).
• Demand-driven price pressures are largely contained with core inflation slowing to 2.0% yoy in September (Aug: +2.6% yoy) and mom growth CPI ≤ 0.2%.
• We maintain our 2014 full-year inflation estimate at 3.2% as we had earlier on factored in impact of fuel price hike either in the form of direct subsidy cut or via a multi-tiered fuel subsidy mechanism in 4Q14.
• Inflation is expected to trend higher to ~4% in 2015, driven by cost factors i.e. (i) GST implementation in April; (ii) potential new fuel subsidy scheme in early 2015; and (iii) school bus fares hike in Jan-15.
• We expect BNM to pause at 3.25% on 6 Nov, as growth concerns outweigh inflation risks. BNM Governor Zeti also recently highlighted the need to maintain policy accommodation given recent weakness in the global economy.

Traders Brief

Short term relief rally target at 1820-1830 levels     

• Technically, after tumbling 6.9% from all time high of 1896 to a low of 1766 on 17 Oct, an “Exhaustion gap” emerged (FIG2) following “Breakaway & Runaway gap”, suggesting end of the retracement. Moreover, “Bullish Engulfing” pattern in oversold zone indicated impending technical rebound. Coupled with the “Bottom-out” oscillators, especially when RSI reached near 16%, KLIC is expected to trigger technical rebound to close Runaway gap of 1825 and Breakaway gap of 1834 and eventually resume its long term uptrend line if the long term 200-d SMA resistance at 1850 is taken out decisively. Immediate support are 1766-1778 levels
• Today’s recommendation: Trading BUY on UNISEM.

Trading idea - UNISEM

UNISEM: Anticipate a strong 3Q results

• Likely to rerate higher. Despite a 10% rebound last Friday, we remain optimistic of further share price recovery in the short term in anticipation of  stronger 2H14 results, driven by its strong turnaround story after a successful restructuring and its relentless focus towards high-margin-packages for smartphone/tablets and automotive segments; a resilient semiconductor industry coupled with cheap valuation.
• Bottoming up from grossly oversold levels. Further decisive breakout above RM1.37 (50% FR) will push prices higher towards RM1.42 (10-d SMA) and RM1.49 (38.2% FR), respectively. Our long term target price is RM1.58 (200-h SMA and 30-d SMA). Immediate supports are RM1.27 (10-h SMA) and RM1.20 levels. Cut loss at RM1.19.