RHB Research Summary - 24 Nov 2014

Genting Malaysia (GENM MK, NEUTRAL, TP: MYR4.21)
Blame It On The Luck Factor
9MFY14 Results Review
Genting Malaysia’s 9M14 core earnings of MYR950.5m fell below expectations due to subpar VIP holds in Malaysia, while its US segment continued to face headwinds from Bimini losses. Maintain NEUTRAL with our SOP-based TP reduced to MYR4.21 (3% upside). We lower our FY14 EPS by 5.6% and reduce our FY15-16 EPS forecasts by 7.1- 9.2% to factor in the impact from the GST implementation come Apr 2015.

IOI Properties Group (IOIPG MK, BUY, TP: MYR3.10)
Earnings On Track
Results Review
IOIPG’s 1QFY15 (Jun) results came in below expectations. Maintain BUY and MYR3.10 TP (26.5% upside). We expect 2H earnings to come in stronger as new projects are progressively rolled out in the coming months. New sales in 1QFY15 reached MYR370m, of which 85% were contributed by projects in Malaysia. Meanwhile, we expect IOI City Mall, which had a soft launch last weekend, to boost FY16 earnings.
Coastal Contracts (COCO MK, BUY, TP: MYR4.80)
Increased Sales of Premium OSVs
Results Review
9M14 MYR153m core profit was in line (met 79% of our/street estimates), buoyed by 14 vessel deliveries (9M13: 13 vessels). We retain our earnings forecast and BUY call, with our new TP at MYR4.80 (implied 13x P/E, 39% upside) after adjusting its shipbuilding valuations. Its MYR2.5bn orderbook is underpinned by vessel deliveries up to 2015 and GCSU long-term contract, while it expects JU rig delivery by 1H15.
Allianz Malaysia (ALLZ MK, BUY, TP: MYR13.50) (Upgraded)
Consistent Track Record
Results Review
Allianz’s 9M14 earnings of MYR225m was in line and met 76% of our FY14F forecasts, buoyed by AGIC’s double digit earned premium growth and underwriting margin of 16% (above industry’s 13%), ALIM’s strong investment performance and higher renewal premium. We upgrade to BUY with an unchanged SOP TP of MYR13.50 (13% upside). Valuations appear attractive again due to the recent retracement.

Genting (GENT MK, NEUTRAL, TP: MYR9.67) (Downgraded)
Lifted By Non-Gaming Divisions
9MFY14 Results Review
Genting’s 9MFY14 core earnings of MYR1.66bn were within our expectations as weakness in its gaming segments was offset by an improved showing from its plantation and O&G divisions. That said, we downgrade our TP to MYR9.67 (from MYR10.96) (a 2.8% upside) following our valuation revision on its listed subsidiaries in view of potential earnings headwinds ahead. Downgrade our call to NEUTRAL.

SKP Resources (SKP MK, BUY, TP: MYR0.85)
A Stronger 2HFY15 Awaits
Results Review
We deem SKP’s 1HFY15 (Mar) earnings of MYR20.2m in line despite reaching only 42.1% of our full-year estimate. Maintain BUY and MYR0.85 TP, a 17.2% upside. We expect 2HFY15 earnings to accelerate on the production of two new Dyson models, which started in early Nov 2014. No dividend was declared for the quarter under review. We make no changes to our earnings forecasts.

Petra Energy (PENB MK, NEUTRAL, TP:MYR2.08)
Results Review
Keeping Up The Pace
Petra Energy’s 9MFY14 core earnings of MYR17.4m came in above our expectations at 85% but missed consensus at only 50%. We maintain our NEUTRAL with a lower SOP-based TP of MYR2.08 (from MYR3.02). We raise our FY14 estimates by 10% on the back of higher work orders from its marine services segment but keep our FY15
numbers unchanged.

7-Eleven Malaysia (SEM MK, BUY, TP: MYR2.00)
Stronger Performance
Results Review
7-Eleven’s 3Q14 results were broadly in line, with net profit improving 109% YoY to MYR17.1m, partly contributed by an increase in ASP and stronger other operating income. We maintain our BUY call and MYR2.00 TP, derived from 28x FY15F P/E, offering a 21.2% upside. Its 9M14 net profit makes up 70% of consensus’ FY14 net profit. We are confident that its business expansion plans are progressing well.

Pintaras Jaya (PINT MK, BUY, TP: MYR4.92)
1QFY15 Net Profit Grows 9% YoY
Results Review
Pintaras Jaya’s 1QFY15 (Jun) results met our forecast. We maintain our BUY call, earnings forecasts and TP of MYR4.92 (implying a 13% upside). Being a dominant player, Pintaras Jaya is well-positioned to capitalise on the strong prospects of the piling segment, backed by the Klang Valley MRT project, a proliferation of high-rise developments and capacity shortage – which should boost piling rates.
Southern Steel (SSB MK, NEUTRAL, TP: MYR1.46)
In Red At The Start Of FY15
Results Review
Southern Steel’s 1QFY15 (Jun) results (MYR21.7m net loss) were below consensus and our estimates due to stiff competition from imported steel, a drop in steel prices and deeper losses from its associates. We maintain our NEUTRAL call, but cut our earnings forecasts for the next two years. Therefore, our book-based TP of 0.7x FY15F P/BV (-1 SD) is trimmed accordingly to MYR1.46 (from MYR1.49) (4.2% upside).

Sarawak Oil Palms (SOP MK, BUY, TP: MYR6.60)
Decent 3Q Earnings
Results Review
We continue to like SOP for its better production growth outlook and as the sole biodiesel supplier in Sarawak. Maintain BUY and MYR6.60 TP (11.9% upside). SOP’s production should benefit from drier conditions in Sarawak compared to its typically excessive rainfall. We trim our FY14 earnings forecast slightly although SOP’s 9M14 core earnings were in line, making up only 72% of our full-year forecast.

Economic Highlights - Inflation Inched Higher In October, BNM Could Revisit Raising Rates In March 2015
(Published 24 Nov 2014)
The headline inflation rate inched higher to 2.8% YoY in October (Sep: +2.6%). The fuel price hike on 2 Oct exerted some pressure on inflation but was mitigated by the higher base effect when the fuel prices were raised in Sep 2013. This was reflected in a faster increase in the core inflation rate, largely due to a sharp pick-up in transportation cost. In contrast, the prices of food & non-alcoholic beverages inched lower in September.

CIMB Research Summary - 24 Nov 2014

Economic Update - Float on RON95 and diesel
Today, the government announced that subsidies for RON95 and diesel will be eliminated and the pricing for these two fuels will transition to a managed float similar to the one currently in place for RON97. This is in line with the government’s subsidy rationalisation agenda and a positive signal indicating that fiscal reforms are progressing in the right direction. The decision to float is timely as the switch should have a benign impact on inflation given that the average market price is close to the current fixed retail price. Moving forward, falling global oil prices put the possibility of lower inflation on the table, given a more direct pass-through of falling global oil prices to domestic pump prices. Furthermore, the government will now have more fiscal space and more control over the fiscal deficit. We understand that the government has earmarked about RM12bn for fuel subsidy spending in 2015, and is likely to channel the savings through BR1M handouts or other means of targeted assistance.

Genting Bhd - No excitement
GENT’s 9M14 core net profit of RM1.4bn was below our expectations, at 62% of our previous full-year and consensus forecasts on poor performance across the board at GENM, GENP and GENS. No interim dividend was declared in 3Q, as expected. Upon transfer of coverage, our FY14-16 EPS forecasts are cut following our earnings cuts for GENP, GENM and GENS. We also introduce a new target price of RM9.90, still based on 20% holding company discount to our RNAV of RM12.40 (lowered from RNAV of RM14.34 after GENS’s target price was lowered from S$1.72 to S$1.22). With total return of only 6.2%, we downgrade our rating from add to Hold as continued operational headwinds faced by GENS and concerns about the competitive landscape at the Las Vegas strip will continue to weigh on investor sentiment. We advise investors to switch from GENT to GENM for exposure to the gaming sector.


SMRT Holdings Bhd - MEGB’s white knight

7-Eleven Malaysia Holdings Berhad - Growing but below expectations

Genting Malaysia - More bad luck in Genting

Lafarge Malaysia Bhd - Preventing cracks from volatility

Pharmaniaga Bhd - Dividend surprise in 3Q

SBC Corp - Jesselton Quay is the key…

Star Publications - Still cloudy skies

Thong Guan Industries - Feeling Japan’s blues

Economic Update - Oct inflation rises slightly

MIB Research Summary - 24 Nov 2014

Genting Malaysia: Maintain Buy Banishing the ghost of 2Q14

3Q14 core net profit was in-line and rebounded 28% QoQ; VIP and mass market volumes up YoY. Trim earnings estimates by 3-4%, imputing higher marketing and payroll costs. Maintain BUY on marginally lower TP of MYR5.05 (-2%). Genting Bhd: Maintain Hold Fair valuations 3Q14 results within expectations but wary of GENS’ outlook. Trim earnings estimates by 3-7%. Maintain HOLD with a trimmed TP of MYR10.00 (-19sen). Sarawak Oil Palms: Maintain Buy Long term prospects intact  Shariah-compliant 3Q14 core net profit was within expectation. We lower 2014 earnings by 7% to realign with our adjusted industry-wide CPO ASP forecast of MYR2,430/t (-3%). BUY with unchanged TP of MYR6.90 on 15x 2015 PER. Next catalyst is unlocking of estates for property development. 7-Eleven Malaysia Holdings: Maintain Hold Expect a decent finish 9M14 core net profit of MYR45m within expectations. Expect on-going margin improvement from better product mix and higher contribution from new/existing stores. Maintain HOLD with an unchanged TP of MYR1.78. Malaysia CPI, October 2014 Picks up but remains sub-3.0% Inflation rate quickened in Oct 2014 to +2.8% YoY on RON95 and diesel retail price hikes during the month. Tweaked our full-year 2014 inflation rate estimate to +3.2% (earlier +3.3%; YTD 2014: +3.2% YoY). Widen our inflation rate forecast range for 2015 to 4.0%-5.0% from 4.5%-5.0% as fuel prices will be "volatile" under "managed float" pricing mechanism effective 1 Dec 2014, besides GST introduction on 1 Apr 2015 Fuel Subsidy: Fuel Subsidy No More... Government announced RON 95 and diesel prices will be "managed floated" on 1 Dec 2014 Falling crude oil price has result in convergence between subsidised prices and market prices of fuels The move should allay concerns on 2015 budget deficit target of -3% of GDP as the Government will not be spending the MYR11b allocation. Lafarge Malaysia: Maintain Hold Seeking ASP stability  Shariah-compliant Expect earnings rebound in 4Q on seasonally strong volume. Future ASP volatility to be cushioned by savings in fuel cost. Cut FY14-16 EPS by 8%/18%/20%; TP lowered to MYR9.35 (22x 2016 PER). Maintain HOLD on decent DY of 3.2-3.8%. Kuala Lumpur Kepong: Maintain Hold Mulling Kalimantan downstream JV  Shariah-compliant KLK (63%), IJM Plant (32%) and an Indonesian partner (5%) plan a downstream JV to operate in East Kalimantan. Mutually beneficial to all parties, for the downstream facility will be assured of steady supply of CPO for the long term. Maintain HOLD with unchanged TP of MYR23.20 on 23x FY15E PER target. TECHNICAL: Dow rises, but FBMKLCI falls further The FBM KLCI fell 4.66 points WoW to close at 1,809.13, as persistent foreign activities caused the small decline. We advise clients to sell at the resistance areas of 1,809 to 1,896. The support levels of 1,766 and 1,805 will witness very weak nibbling activities. Trading idea is a Take Profit call on AAX with dwonside target areas at MYR0.61 & MYR0.56.   NEWS Barakah Offshore Petroleum: Felda group a substantial Barakah shareholder. Felda Investment Corp Sdn Bhd (FIC) is believed to have bought a substantial equity stake of more than 10% in Barakah Offshore Petroleum last Friday, according to sources familiar with the matter. FIC was the buyer of some 85.5m shares, or an 11.4% equity stake through offshore transactions to pave the way for the Felda group to invest in the oil and gas sector. (Source: The Edge Financial Daily) IOI Properties Group: Plans to expand IOI City Mall in Putrajaya. IOI Properties Group said plans are already in the pipeline to add a further 1 million sq ft retail space at IOI City Mall in Putrajaya as occupancy rate at the newly-opened complex reached 85%. To boost customer traffic, the mall operator is lobbying for a mass rapid transit station to be open within its vicinity. (Source: The Star) External reserves as of 14 November 2014 amounted to MYR414.5b or USD126.6b - equivalent to 8.7 months of retained imports and 1.1 times of the country's short-term external debt. The reserve was down compared with MYR419.7b or USD128.1b at 30 October 2014. Latest trade and portfolio investment data showed narrowing surplus in external balance and capital outflows. The recent 3Q 2014 balance of payment data which showed smaller current account surplus and net outflow of portfolio investment. Foreigners were net sellers of Malaysian debt securities. Total domestic debt securities held by foreigners declined to MYR249.3b in September 2014 from MYR256.9b in August 2014. The MYR7.6b net selling of Malaysian debt securities in September 2014 was the largest since QE Taper began. Consequently, MYR depreciated significantly against the US Dollar i.e. - 4.2% between end-August 2014 and end-October 2014. The Ringgit eased further so far this month by -2%. (Source: BNM, MKE) E.U: Said to plan EUR 21b risk-sharing fund for investment. The new entity is designed to have an impact of about 15 times its size, making it the anchor of the EU’s EUR 300b investment program, said the officials, who asked not to be named because the plans aren't final. European Commission President Jean-Claude Juncker is due to announce the three-year initiative this week. (Source: Bloomberg) China: PBOC seen fueling old China as banks hold key to policy success. China's central bank said its surprise move to cut interest rates for the first time since 2012 is designed to help small firms and protect depositors instead of all-out monetary easing. The one-year lending rate was reduced by 0.4 ppts to 5.6%, while the one-year deposit rate was lowered by 0.25ppts to 2.75%. The bulk of bank debt in China is still concentrated on big borrowers, with outstanding credit to small firms less than a third of total loans. The People's Bank of China's rate cuts came after months of targeted measures failed to lower financing costs for smaller companies. (Source: Bloomberg) OPEC: Iran may seek OPEC cut of 1mbpd in Saudi talks. Iran may propose that OPEC cut its output target by as much as 1 million barrels a day to halt the slide in crude prices when the country's oil minister consults with his Saudi counterpart before the group gathers this week. Bijan Namdar Zanganeh and Saudi Arabia's Oil Minister Ali Al-Naimi will talk on the sidelines of the meeting in Vienna of the Organization of Petroleum Exporting Countries, seeking to define a common view among its 12 members for supporting prices, Iran's state-run Mehr News agency reported, without saying where it got the information. (Source: Bloomberg)

Kenanga - 24 Nov 2014

IDEAS OF THE DAY

l  Results Note: COASTAL, GENM, GENTING, IOIPG, PHARMA

l  Company Update: STAR

l  On Our Portfolio: Higher Downside Risk 

l  Economic Viewpoint: Malaysia Consumer Price Index, Fuel Subsidy To be Removed

NEWS HIGHLIGHTS

l  End of RON95, diesel subsidies

l  Willowglen bags RM14.2m contract

l  Gunaria, KL Kepong unit in share deal

l  Bina Darulaman to acquire land worth RM202.0m

l  Protasco sues PT Goldchild

FOREIGN NEWS HIGHLIGHTS

l  Tesla says in talks with BMW over car batteries, parts

l  BHP targets further spending cuts as iron prices tumble

l  Visa sees Visa Europe option now costing more than USD10.0b

l  Australia's Medibank IPO prices at AUD2.15 a share, raising AUD5.7b

 

ECONOMIC NEWS HIGHLIGHTS (MACRO BITS) 

Malaysia

l  Malaysia Scraps Fuel Subsidies As Najib Ends Decades-Old Policy

l  Inflation Rate In October Rose To 2.8%

l  Malaysia Jumps To No. 5 In The Latest World Talent Ranking

Asia

l  Central Bank Seen Fueling Old China As Banks Hold Key To Policy Success

l  Chinese Premier Urges 'New Growth Engines' Amid Slowing Economy: Xinhua

l  Thailand Stepping Up Infrastructure Spending

Americas

l  Brazil Government Slashes 2014 Budget Surplus Goal

l  Mexico Cuts 2014 Growth Forecast After Surprisingly Weak Third-Quarter

Europe

l  Draghi Throws ECB Door Open To Money Printing As Global Prospects Dim

Currencies

l  Dollar Index Ends Week At Four-Year High

Commodities

l  Oil Up First Time In 8 Weeks On China Rate Cut, OPEC Expectations

l  Gold Rallies To 3-Week High After Surprise China Rate Cut

HLIB Research Summary - 24 Nov 2014

Lafarge (BUY é)

3Q14 Analyst Briefing

• Disappointing 3QFY14 performance. To recap, Lafarge’s 3QFY14 net profit declined due to higher input cost and pricing pressure from the market arising from Lafarge’s stance to regain and reposition itself as the market leader.
• Mitigating higher electricity and fuel costs via efficiency. Energy and fuel costs now consist of 50% of total cost and the only strategy to mitigate the rising price of electricity and fuel is by being more efficient.
• Coal prices for FY15. The company recently finalised the terms for the supply of coal for next year and has hinted that the prices for next year is marginally lower compared to FY14.
• Outlook for 2015. Price volatility is expected to continue and industry cement demand will continue to sustain into next year, with a projected mid-single digit demand growth of 3-5% in 2015, similar pace for 2014.
• We slashed FY14 by 6.1% to impute the weak 9MFY14 results. However, we have revised upwards our FY15-FY16 earnings by 7.4% and 11.6% due to (1) lower coal price; and (2) higher domestic net selling prices.
• Despite the disappointing 3QFY14, our TP is raised to RM10.72 based on 22.5x 2016 EPS of 47.7 sen. We have raised our P/E on the stock to 22.5x, one standard deviation above its 1-year forward average P/E of the last 3 years.  We upgrade our rating from Hold to BUY.

Star Publications (BUY é)

A sweet dividend for the ride

• We attended Star’s 9MFY14 briefing, chaired by its Managing Director/CEO, Datuk Seri Wong Chun Wai and the management team.
• A pretty good cost management… Star will continue to keep its costs well controlled. Will also benefit from low newsprint prices which have been on a downtrend (see Figure #1).
• Appealing dividends… It is likely to retain the dividend payment of 15 – 18 sen/share, translating to a dividend yield of 6.6% - 7.9%.
• FY14, FY15 and FY16 earnings trimmed by 1%-3%, as we assume weaker macro environment which contributes to a poorer consumer and business sentiment.
• Despite the soft adex environment, we see better prospect for Star based on their prudent cost management, strong balance sheet with net cash position and attractive dividend yield. Also, its share price has, since the beginning of November, declined by 12%. Thus, we upgrade Star to a BUY call, TP revised upwards by 7% to RM2.73 based on an unchanged dividend yield of 5.5% as we increase our dividend forecasts from 14.0 to 15.0 sen/share. 

ViTrox (BUY çè)

Deliver as Promised

• Again, achieved new highs in revenue and profit merely with 9 months results. FY14 top line is forecasted grow 55.7% yoy reaching ~RM165m.
• MVS-S: resilient 3Q14 order despite seasonality weakness. 4Q14 revenue is forecasted to be ranging RM9-10m. Demand is expected to pick up from 2Q15 onwards.
• MVS-T: YTD 9M14 sales more than doubled (+173.7%) yoy and 4Q14 sales expected to be between RM6-8m.
• ABI: 3Q14 fell dragged by disappointment in PCB. 4Q14 revenue forecast is estimated to be RM20m while carry forward backlog into 1Q15 will be higher than in 2H14.
• By summing the mid-points of those guidance, 4Q14 sales could potentially grow 30.4% yoy to RM36.5m.
• Confident to extend its pioneer status / tax exemptions which will end in 1Q15.
• Reiterate BUY with unchanged TP of RM3.17, pegged to 1SD above 5-year historical average P/E multiple of 16.2x.

Genting Bhd (BUY çè)

9MFY14: Below Expectations

• Reported 9MFY14 core PATAMI of RM1.3bn came in below expectations due to weaker-than-expected performance from Genting Singapore .
• We imputed the latest earnings revision from GenS and GenM and as such, FY14-16 EPS are cut by 12.7%, 2.6% and 4.9% respectively.
• Post-earnings revisions, TP is cut slightly to RM10.64 (from RM10.81) based on SOP valuations. Maintain BUY.

Genting Malaysia (HOLD çè)

9MFY14 Slightly Below Expectations

• GenM reported 9MFY14 core PATAMI of RM949.8m came in below expectations from higher-than-expected tax rate.
• Following the higher-than-expected effective tax rate in 3Q, we increase FY14’s tax rate assumptions. As such, FY14-16 earnings are reduced marginally by 0.4-3.9%.
• Given that the downgrade in forecasts is for FY14, our TP of RM4.16 is unchanged based on FY15’s SOP valuations. Maintain HOLD.

IOIPG (HOLD ê)

Disappointing 1QFY15

• Reported 1QFY15 PATAMI of RM101.0m came in below expectations, mainly due to higher-than-expected expenses and effective tax rate.
• YTD unbilled sales stood at RM1.43bn, representing 0.95x of IOIPG’s FY14 revenue.
• We trimmed our FY15-17 EPS by approximately 22-25% as we turn more conservative on the group’s prospects.
• TP is lowered to RM2.65 (from RM3.94) after taking into account earnings revision and higher discount to RNAV of 30% (vs. 20% previously). Our TP of RM2.65 valued IOIPG at 18.5x FY15 P/E, vs. 18.7x FY15 P/E which UEM Sunrise is currently trading at.
• We also downgraded our recommendation to HOLD in view of persistent earnings disappointment.

Scomi Energy (BUY çè)

2Q Analyst Briefing…

• Despite declining oil price, drilling campaign from Petronas has picked up with rig count increased from 4 rigs in Jun 14 to 6 rigs in Sep 14 and further increase to 12 rigs in Nov 14.
• Given this, it expects gross margin for oilfield services to gradually improve from 24% in 2QFY15 to 26% in subsequent quarters.
• Marine business swung from profit to losses mainly due to lower coal tonnage carried arising from new tax rules imposed by Indonesian government which resulted in production halt of a customer. After the election, it expects the operation to improve.
• We also understand that national oil companies (NOCs) comprise around 65% of SES’ revenue. NOCs have traditionally been able to better withstand the impact of declining oil price with long term capex plan.
• We maintained our BUY call with TP reduced from RM1.07 to RM0.93.

Pharmaniaga (BUY çè)

9M14 Results – In Line

• 9M14 core net profit of RM71.9m, came in within our expectations but slightly ahead of consensus’ estimates, accounting for 77% and 83% of HLIB and consensus full year estimates, respectively.
• Declared 3^rd single tier dividend of 8.0 sen per share (3Q13: 3.0 sen) with ex-date on 5^th Dec.
• 3Q14 revenue gained 13.9% yoy to RM502.1m contributed by the entire core business operations. However, qoq sales contracted 4.4% due to seasonally lower demand.
• Logistics and Distribution Division posted more than three-fold increase in PBT qoq, boosted by higher ASP coupled with higher sales volume. Manufacturing Division’s PBT slipped due to lower off-take for in-house products from government hospitals as well as higher R&D expenses.
• Moving forward, Pharmaniaga remains positive as the pharmaceutical sector in Malaysia is showing improved prospects.
• Reiterate BUY with unchanged fair value of RM5.30 based on FY15 P/E multiple of 14.5x, 10% discount to US peers.

CSC (HOLD çè)

3Q Losses Again

• Another disappointing quarter. 9MFY14 performance came in weaker than our expectation, with a reported net loss of RM12.3m vs. our full-year net profit forecast of RM5.1m. 
• YoY. 3QFY14 revenue decreased by 1.2% to RM254.4m and turned into a net loss of RM3.1m from a net profit of RM2.9m, a staggering declining of 206.4%. This is due to lower selling prices.
• QoQ. 3QFY14 net loss narrowed to RM3.1m (from RM8.8m in the previous quarter) mainly on the back of lower raw material costs.
• We belief that 4QFY14 looks bleak, thus, we have cut our FY14 forecast to a net loss of RM15.2m. For FY15, we have slashed our earnings by 2.2% and for FY16, we cut by 17.5%.
• SOP-derived TP lowered by 5.1% to RM1.06 to reflect the roll forward of our base year from FY14 to FY15 (for valuation purpose) and lower earnings forecasts. Maintain HOLD recommendation.

Economics

Managed Float for RON95 & Diesel Report

• Retail price of RON95 and diesel will be fixed according to a managed float system starting 1 Dec.
• We are positively surprised as the floating of fuel price will entirely eliminate the government ' s fuel subsidy bill in 2015. Fuel subsidies rose to as high as RM28.9bn in 2013 (13.7% of operating expenditure).
• The move is favourable to help the government achieving its target fiscal deficit of 3.0% GDP. We see slim chance of the proposed multi-tiered fuel subsidy scheme being implemented. We believe that the government may instead give special BR1M payouts should global crude oil price spikes up sharply in an unexpected manner.
• We estimate that RON95 and diesel would be retailed at RM2.30/litre and RM2.20/litre respectively in Dec 2014. We maintain our 2014 full-year inflation forecast at 3.2%.
• Based on our crude oil forecast of US$90/bbl for 2015, we expect RON95 retail price to average RM2.50/litre in 2015. Consequently, our CPI growth forecast for 2015 is raised to 4.3% (previously: 4.0% with multi-tiered fuel subsidy).
• The managed float fuel scheme is expected to bring greater uncertainty to consumer spending in 2015, which we had already factored in in our projection. We reiterate our projection that GDP growth will moderate to 5.0% in 2015 (2014f: +6.0%).
• We do not expect the switch to a managed float system for fuel price will alter the thinking of BNM. We maintain our view that BNM will leave its OPR unchanged at 3.25% throughout 2015.

Economics

October Inflation Report

• Malaysia ' s CPI growth climbed up to 2.8% yoy in October after recording a 12-month low of 2.6% in September, lower than our and market expectations (+3.0%).
• 20 sen fuel price hike was the sole reason behind the spike in October CPI growth. Price inflation of other components broadly held stable. Food & alcoholic beverages and tobacco witnessed slower price increases.
• Headline inflation is projected to creep up further in Nov-Dec 14 and 2015, driven by domestic cost factors. We maintain our full-year inflation estimate of 3.2% for 2014 but raise our 2015 forecast to 4.3% (previously: +4.0%) given the commencement of managed float system for fuel prices.
• We expect BNM to keep the OPR steady at 3.25% throughout 2015, backed by moderate domestic demand, softer global outlook, contained inflation risks and slower property speculative activities.

Traders Brief

Likely to consolidate sideway

• Last Friday’s black candlestick removed the reversal signal of “Bullish Engulfing” pattern on daily chart, turning KLCI into consolidation mode.
• The psychological level of 1800 would be a critical support zone after 50% Fibonacci level was penetrated last Friday. Next supports are at 1778 and 1760 if 1800 is broken.
• However, KLCI could stage a technical rebound during this week, which might be shortlived. Resistances are 1823 (38.2% FR), 1836 (23.6% FR) and 1850 (downtrend line and 200-d SMA).
• Took profit on ESCERAM last Friday as it hit beyond R1.

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.

MIB Research Summary - 20 Oct 2014

Hong Leong Bank: Maintain Buy The cheaper proxy to retail banking

A worthy and cheaper alternative to Public Bank with prudent management and a strong deposit base. Trimming our FY15-FY17 earnings by 2% p.a. on lower contributions from Bank of Chengdu. BUY – MYR16.20 TP maintained on unchanged CY14 P/BV target of 1.9x, supported by ROEs of ~14.6%. KNM Group: Maintain Buy Proposes rights issue  Shariah-compliant Plans a 1-for-5 rights issue plus 1 warrant for every 2 rights. We advocate shareholders to subscribe to the rights issue. Reiterate BUY. Recent share price weakness is an opportunity to accumulate. Our MYR1.50 TP is on 0.7x EV/backlog. MY Automotive: OVERWEIGHT Sep TIV: A minor speed bump  Shariah-compliant Sep TIV fell to 47.8k units (-7% MoM), a temporary weakness as buyers held back in anticipation of new model launches. There is upside to our 2014 TIV forecast (+3% YoY). Stay OVERWEIGHT. Expect small car sales to outperform as buyers trade down amid rising costs/GST. MBM our Top Pick. Malaysia CPI, Sep 2014 Slower on "base-effect" Inflation rate slowed in Sep 2014 to +2.6% YoY from +3.3% YoY in Aug 2014 on "base-effect" from the fuel price hikes in Sep 2013. The "base effect" should be temporary as we see inflation rate picking up and averaging +3.2% YoY in 4Q 2014 from the latest round of fuel price hike earlier this month. Our full-year 2014 inflation rate estimate is +3.3% (YTD 2014: +3.3% YoY), and we see inflation rate accelerating to 4.5%-5.0% in 2015 on the impact of fuel subsidy reform and GST introduction on 1 Apr 2015. But OPR to stay at 3.25% for most of 2015 as BNM refrains from reacting to policy-driven spike in inflation amid growth concern, and any review is likely only in late-next year. Technicals: Selling on rebounds would be wise The FBM KLCI plunged 20.57 points WoW to close at 1,788.31, as persistent forced selling activities led the index down below the 1,800-mark. We advise clients to sell at the resistance areas of 1,795 to 1,879. The support levels of 1,732 and 1,788 will see some meagre buying activities. Trading idea is a Take Profit call on BAT with downside target areas at MYR63.76 & MYR62.80.