ed: JS / sa: WMT, PY
KLCIKLCIKLCIKLCI : : : : 1,648.081,648.081,648.081,648.08
Analyst Bernard CHING +603 2604 3918 [email protected] Malaysian Research Team +603 2604 3333 [email protected]
Market Key Data
(%)(%)(%)(%) EPS GthEPS GthEPS GthEPS Gth Div YieldDiv YieldDiv YieldDiv Yield
2016F (0.3) 3.0
2017F 9.2 3.4
2018F 9.4 3.5
(x)(x)(x)(x) PEPEPEPE PBPBPBPB
2016F 17.0 1.6
2017F 15.6 1.6
2018F 14.3 1.5
Source: AllianceDBS STOCKS
Source: AllianceDBS, Bloomberg Finance L.P.
Closing price as of 3 Nov 2016
Malaysia Market Focus
Malaysia Strategy
Refer to important disclosures at the end of this report DBS Group Research . Equity 7 November 2016
Another unexciting year ahead • Challenging macro conditions dampen outlook
• Themes to look out for: (1) infrastructure spending,
(2) non-commodity exports, (3) demand for yield, and
(4) weaker MYR
• Stay defensive and focus on small- and mid-cap
stocks for alpha; end-2017 FBMKLCI target is 1,720
• Top picks: TNB, PBK, HLBK, GAM, SREIT, INRI, CMMT,
SCGB, VSI and SKP
Macro outlook remains unflattering. We expect another flat performance for the FBMKLCI in 2017 given challenging macro conditions. Weak consumption amid rising unemployment rate, low wage growth and high household debts are some of the overhangs. While earnings is estimated to rebound by 9.2% after three years of weak growth, this is coming from a low base and there is lack of conviction as banks and telcos, which account for 64% of growth in 2017, still face earnings headwinds.
Investment themes to look out for. Domestically, we see four themes. Infrastructure spendingInfrastructure spendingInfrastructure spendingInfrastructure spending will continue to provide a boost to the construction sector. But with peak order books, the next re-rating catalyst for most contractors will be earnings delivery in the year ahead. NonNonNonNon----commodity exportscommodity exportscommodity exportscommodity exports are expected to continue to show encouraging growth underpinned by exports of electronics and electrical goods. Demand for yieldDemand for yieldDemand for yieldDemand for yield will remain strong after witnessing the compression in Malaysian Government Securities (MGS) yield amid strong foreign buying. A widening earnings yield gap favours dividend paying stocks as an alternative to fixed income instruments. Weaker MYRWeaker MYRWeaker MYRWeaker MYR is expected in the run up to the anticipated Fed fund rate hike in Dec. A weaker MYR favours exporters such as those in the glove, technology, oil & gas and plantation sectors.
Strategy: Stay defensive and focus on small/mid cap for alpha generation. Despite all the headwinds and earnings disappointment in 2016, FBMKLCI is still trading at 15.6x CY17PE which is slightly above mean. Our bottom-up valuation pegs end-2017 FBMKLCI target at 1,720 which implies 16.3x PE and offers 4.4% upside. Our top picks for big cap stocks include TenagaTenagaTenagaTenaga (TNB), Public BankPublic BankPublic BankPublic Bank (PBK), Hong Leong BankHong Leong BankHong Leong BankHong Leong Bank (HLBK) and GamudaGamudaGamudaGamuda (GAM). To generate alpha, we prefer small cap stocks with strong re-rating catalysts. Our top picks for small- and mid-cap stocks are SKP ResourcesSKP ResourcesSKP ResourcesSKP Resources (SKP), VS VS VS VS IndustryIndustryIndustryIndustry (VSI), InariInariInariInari AmertronAmertronAmertronAmertron (Inari) and Sunway ConstrSunway ConstrSunway ConstrSunway Constructionuctionuctionuction (SCG). For dividend stocks, we like CapitaMall Malaysia TrustCapitaMall Malaysia TrustCapitaMall Malaysia TrustCapitaMall Malaysia Trust (CMMT) and Sunway REITSunway REITSunway REITSunway REIT (SREIT).
External headwinds are key risks. An unexpected election win by Trump will likely lead to a market selldown due to policy uncertainties. Market under-pricing the pace of US interest rate hikes is another risk to watch out for. A severe slowdown in global trade will impact an export-dependent economy such as Malaysia.
Price Price Price Price Mkt CapMkt CapMkt CapMkt Cap Target PriceTarget PriceTarget PriceTarget Price Performance (%)Performance (%)Performance (%)Performance (%)
RMRMRMRM US$mUS$mUS$mUS$m RMRMRMRM 3 mth3 mth3 mth3 mth 12 mth12 mth12 mth12 mth RatingRatingRatingRating
Tenaga Nasional 14.28 19,203 17.00 (0.8) 12.8 BUY Public Bank 19.84 18,255 22.60 1.2 9.5 BUY Hong Leong Bank 13.08 6,396 15.00 0.2 (3.6) BUY Gamuda 4.84 2,794 5.80 (0.2) 7.8 BUY Sunway REIT 1.77 1,242 1.95 2.9 16.5 BUY Inari Amertron Bhd 3.32 760 4.00 5.4 12.8 BUY CapitaLand Malaysia Mall Trust
1.60 774 1.70 3.2 15.1 BUY Sunway Construction Group
1.70 524 1.92 1.2 32.8 BUY VS Industry 1.38 385 1.70 0.7 (13.2) BUY SKP Resources Bhd 1.32 371 1.88 7.3 (7.0) BUY
Market Focus
2017 Outlook
Page 2
Analysts
Bernard Ching +603 2604 3918
[email protected] Chong Tjen-San + 603 2604 3972
[email protected] Lim Sue Lin +65 6682 3711 [email protected] Ben SANTOSO +65 6682 3707 [email protected] Cheah King Yoong +603 2604 3908 [email protected] Quah He Wei, +603 2604 3966 [email protected] Toh Woo Kim, +603 2604 3917 [email protected] Lynette Cheng +603 2604 3907 [email protected] Marvin KHOR +603 2604 3911 [email protected] Siti Ruzanna Mohd Faruk +603 2604 3965 [email protected] Inani Rozidin +603 2604 3905 [email protected] Malaysian Research Team +603 2604 3333
Table of Contents
Macro outlook remains unflattering 3
Theme #1: Infrastructure upcycle peaking but not over yet 4
Theme #2: Non-commodity exports remain vibrant 4
Theme #3: Yield play still alive amid low interest rate 5
Theme #4: Currency fluctuation 6
Strategy: Cautious and focus on small- and mid-cap 6
Key risks 9 Sector OutlookSector OutlookSector OutlookSector Outlook
Automotive - Underweight 11
Banks - Neutral 13
Building materials - Underweight 15
Construction - Overweight 17
Consumer - Neutral 19
Gaming - Neutral 21
Gloves - Neutral 23
Media - Neutral 25
Oil & gas - Neutral 27
Plantations - Neutral 29
Property - Neutral 31
REIT - Neutral 33
Technology - Overweight 35
Telecommunication - Underweight 37
Transport - Neutral 39
Utilities - Overweight 41 Stock ProfilesStock ProfilesStock ProfilesStock Profiles
Tenaga Nasional 44
Public Bank Bank 51
Hong Leong Bank 59
Gamuda 67
Sunway REIT 73
Inari Amertron 81
CapitaMall Malaysia Trust 87
Sunway Construction 94
VS Industry 100
SKP Resources 107
Market Focus
2017 Outlook
Page 3
Macro outlook remains unflattering
Going into 2017, macro conditions for Malaysia remain
unexciting and pretty much in the same tune as 2016. Weak
domestic consumption amid rising unemployment rate, low
wage growth and high household indebtedness will continue
to be a dampener on the domestic economy.
As such, we are not surprised that corporate earnings growth
will continue to be muted. We recall that besides the
slowdown in the overall domestic economy, 2016 earnings for
FBMKLCI is expected to decline by 0.3%, dragged by margin
compression from telcos as a result of intense competition,
weather-induced production losses from plantation companies
and rising credit cost of banks. Going into 2017, earnings is
expected to grow by 9.2% but this is mainly from a low base.
With banks and telcos accounting for 57% and 7%
respectively of the overall earnings growth, there is still risk of
further earnings downgrades as banks and telcos face earnings
headwinds from rising credit cost and xxx (ARPU) erosion
respectively.
Private consumption growth & consumer sentiments index
Source: MIER, Department of Statistics
Household debt-to-GDP ratio
Source: Bank Negara Malaysia
Unemployment rate
Source: Department of Statistics
EPF contribution growth rate (proxy for wage growth)
Source: Bank Negara, AllianceDBS
FBMKLCI earnings growth trend
Source: Thomson Reuters, Bloomberg Finance L.P, AllianceDBS
50
60
70
80
90
100
110
120
130
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
1Q
11
2Q
11
3Q
11
4Q
11
1Q
12
2Q
12
3Q
12
4Q
12
1Q
13
2Q
13
3Q
13
4Q
13
1Q
14
2Q
14
3Q
14
4Q
14
1Q
15
2Q
15
3Q
15
4Q
15
1Q
16
2Q
16
3Q
16
s.a. % qoq Private consumption growth (lhs)
Consumer sentiments index (rhs)
69.1 68.865.9
60.4
74.5 74.5 76.180.5
86.1 86.8 89.1 89.1
0
10
20
30
40
50
60
70
80
90
100
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Jul-16
% to GDP
3.5
2.0
2.5
3.0
3.5
4.0
4.5
Jan
-09
Jun
-09
No
v-0
9
Ap
r-1
0
Se
p-1
0
Fe
b-1
1
Jul-
11
De
c-1
1
Ma
y-1
2
Oct
-12
Ma
r-1
3
Au
g-1
3
Jan
-14
Jun
-14
No
v-1
4
Ap
r-1
5
Se
p-1
5
Fe
b-1
6
Jul-
16
%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
Jan
-11
Ap
r-1
1
Jul-
11
Oct
-11
Jan
-12
Ap
r-1
2
Jul-
12
Oct
-12
Jan
-13
Ap
r-1
3
Jul-
13
Oct
-13
Jan
-14
Ap
r-1
4
Jul-
14
Oct
-14
Jan
-15
Ap
r-1
5
Jul-
15
Oct
-15
Jan
-16
% y-o-yEPF contribution growth Est. trend growth
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016F2017F2018F
9.4%
(0.3)%
9.2%
Market Focus
2017 Outlook
Page 4
2017 earnings growth contributor by sector
Source: AllianceDBS
Theme #1: Infrastructure upcycle peaking but not over yet
The construction sector has been a multi-year beneficiary of
the roll-out of mega transport-related infrastructure projects in
Malaysia. This was anchored by the implementation of MRT, of
which Line 1 is nearing completion while the award of
contracts for Line 2 is ongoing until mid-2017. Besides the
remaining contracts for MRT Line 2, other key projects to
watch out for in 2017 include LRT 3, Gemas – JV double
tracking and Pan Borneo Sabah. Having said that, the pace of
award of new contracts is expected to slow down in 2017
compared to 2016. This raises the question of whether the
construction sector has peaked in terms of share price
performance. We believe there is still upside in the
construction sector as the forward PE of our construction
universe is undemanding at 13.8x, which is roughly at
historical mean level. The key catalysts for the sector in 2017
would be (1) earnings delivery as many construction stocks are
sitting on peak order books, and (2) timely award of key
projects. Our top picks for the construction theme are Gamuda
and Sunway Construction.
AllianceDBS construction universe PE
Source: Bloomberg Finance L.P, AllianceDBS
Theme #2: Non-commodity exports remain vibrant
Malaysia is an export-oriented nation with gross exports
accounting for around 120.1% of GDP in 2016. The collapse
of commodity prices has severely impacted overall export
performance as fossil fuel and palm oil account for 12.5% and
8.6% of total exports respectively. Year-to-date, export values
of both of these commodities have contracted. On the other
hand, non-commodity exports have fared better especially
exports of electronics and electrical (E&E) goods which
expanded 2.0% for the first nine months of 2016. The outlook
for the smartphone supply chain particularly for Apple is
looking bright again after going through inventory
adjustments in late 2015/early 2016. This benefits downstream
semiconductor players such as Globetronics, Inari, Unisem and
Malaysian Pacific Industries. Beyond semiconductor, the
outlook for electronic manufacturing services (EMS) sector in
Malaysia is also looking bright with improving order volumes
given its cost competitiveness and efficient process
engineering. We continue to see improving volume growth for
Malaysian EMS players such as VS Industry and SKP Resources
as they secure more orders from key customers.
While crude oil and CPO prices have rebounded in 2016, we
remain less sanguine on the prospects for oil & gas services
and plantation stocks in the near term. For oil & gas stocks, we
believe crude oil price rally will be capped at USD60 per barrel
despite OPEC’s decision to curb production at its recent
informal meeting at Algiers. While OPEC remains the largest
producer, the swing producer is currently the US who is not
bound by OPEC’s production curb. Any production cut by
OPEC without the cooperation of non-OPEC major oil
producers will likely be futile. Furthermore, as oil prices edge
higher, more shale oil fields will resume production and that
will cap the oil price in the near term. Under such an
environment, oil majors will likely remain cautious on
exploration and development spending. As such, we do not
expect a turnaround in the earnings prospects of Malaysian oil
& gas services companies in the near term. On the other hand,
those with oil & gas production assets such as SapuraKencana
and Hibiscus (not-rated) will benefit from higher oil prices.
As for plantation companies, our regional plantation analyst is
expecting a recovery in palm oil supply in 2017 after a
contraction this year due to the lagged effect of 2015 El Nino.
While imputing lower crude palm oil (CPO) price for 2017 in
USD terms, earnings of Malaysian planters will be boosted by a
weaker RM as we impute an average CPO price of
RM2,610/MT for 2017, up marginally from an estimated
RM2,600/MT for 2016. While we like TSH to ride on this
56.5%
1.8%
7.4%
1.7%
10.5%
1.3%
8.0%
12.8%
0%
10%
20%
30%
40%
50%
60%
Banking Media Telco Consumer Plantation Oil & Gas Utilities Others
-2SD
-1SD
Mean
+1SD
+2SD
10.0
12.0
14.0
16.0
18.0
20.0
22.0
24.0
2-Jan-09
2-Jun-09
2-Nov-09
2-Apr-10
2-Sep-10
2-Feb-11
2-Jul-11
2-Dec-11
2-M
ay-12
2-Oct-12
2-M
ar-13
2-Aug-13
2-Jan-14
2-Jun-14
2-Nov-14
2-Apr-15
2-Sep-15
2-Feb-16
2-Jul-16
PE (x)
Market Focus
2017 Outlook
Page 5
recovery theme, valuation for the sector as a whole remains
unexciting at +1SD PE of 24x.
Exports growth of major goods
Source: Department of Statistics
Crude oil and CPO prices
Source: Bloomberg Finance L.P
Plantation sector P/
Source: AllianceDBS
Theme #3: Yield plays still alive amid low interest rate
Monetary divergence is expected to remain prevalent going
into 2017 as central bankers grapple with uneven global
economic growth. With the US economy on firmer footings
particularly evidenced by further improvements in employment
and wage growth, expectation is rising that the Feds fund rate
will be raised by 25 bps before end of 2016. At the same time,
growth challenges in rest of the world have led to continued
easy monetary policy stance outside of the US, including
Malaysia. A 25 bps Overnight Policy Rate (OPR) cut by Bank
Negara in July has caught the market by surprise as the central
bank pre-emptively lower its benchmark interest rate to boost
Malaysia’s flagging economic growth amid tame inflationary
pressure. Given fiscal constraint by the federal government,
the range of growth stimulating policy measures at its disposal
will be limited. As such, we do not rule out that interest rate
cuts will be used again to boost the domestic economy.
However, we are anticipating Bank Negara to take a measured
approach in easing the OPR. While interest rate cuts are
negative for banks (conversely positive for borrowers), the
impact is expected to be minimal to lenders.
While there are initial concerns that annuity investments
(including high yielding equities) may succumb to a selldown in
the wake of an US interest rate hike, we expect the pace of
hikes will be gradual from a low base. As such, global investors
will continue to look for higher yielding assets given the large
interest rate differential between advanced and emerging
economies. The continued compression of 10-year MGS yield
to 3.6% as of end-October (vs 4.2% at end-Dec 2015)
supports this thesis. With widening earnings yield gap (inverse
of equity earnings multiple minus 10-year MGS yield), we
believe dividend yielding stocks are increasingly attractive,
particularly those with strong cash generation and resilient
earnings growth. Our top dividend stock picks are
Globetronics, Bermaz Auto, CMMT and Sunway REIT.
10-year MGS yield
Source: Bloomberg Finance L.P
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
Jan
-14
Ma
r-1
4
Ma
y-1
4
Jul-
14
Sep
-14
No
v-1
4
Jan
-15
Ma
r-1
5
Ma
y-1
5
Jul-
15
Sep
-15
No
v-1
5
Jan
-16
Ma
r-1
6
Ma
y-1
6
Jul-
16
Sep
-16
% y-o-y% y-o-y
E&E
Others
Commodities (O&G, CPO, agricultural)
0
20
40
60
80
100
120
140
0
500
1000
1500
2000
2500
3000
3500
4000
4500
De
c-1
0
Ma
r-1
1
Jun
-11
Sep
-11
De
c-1
1
Ma
r-1
2
Jun
-12
Sep
-12
De
c-1
2
Ma
r-1
3
Jun
-13
Sep
-13
De
c-1
3
Ma
r-1
4
Jun
-14
Sep
-14
De
c-1
4
Ma
r-1
5
Jun
-15
Sep
-15
De
c-1
5
Ma
r-1
6
Jun
-16
Sep
-16
USDMYR
CPO(LHS) Brent Crude(RHS)
10
12
14
16
18
20
22
24
26
28
30
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Malaysia 1-year Forward PE
+2sd: 27.3x
+1sd: 23x
Avg: 18.7x
-1sd: 14.4x
-2sd: 10.1x
2.50
2.75
3.00
3.25
3.50
3.75
4.00
4.25
4.50
4.75
5.00
Jan-
07M
ay-0
7Se
p-07
Jan-
08M
ay-0
8Se
p-08
Jan-
09M
ay-0
9Se
p-09
Jan-
10M
ay-1
0Se
p-10
Jan-
11M
ay-1
1Se
p-11
Jan-
12M
ay-1
2Se
p-12
Jan-
13M
ay-1
3Se
p-13
Jan-
14M
ay-1
4Se
p-14
Jan-
15M
ay-1
5Se
p-15
Jan-
16M
ay-1
6Se
p-16
%
Mean
3.9x
- 1 s.d.
3.6x
+ 1 s.d.
4.2x
Market Focus
2017 Outlook
Page 6
Earnings yield gap
Source: AllianceDBS
High yield stocks under coverage
Source: AllianceDBS
Theme #4: Currency fluctuation
Historically, RM has a high correlation with crude oil price.
However, this relationship has seemingly decoupled since
3Q16 when crude oil prices surged past the USD50 per barrel
level. In fact, despite a higher crude oil price now, RM has
weakened against the USD. This is mainly due to the
anticipated Feds fund rate hike in Dec which has led to the
strengthening of the USD. Since July, the implied probability of
a rate hike in Dec has risen from around 40% in mid-July to
78% as of early November. Correspondingly, since July, the
RM has depreciated by around 4.3% against the USD. While
the impact of a weaker RM may be temporary, we highlight
below the sectors which are benefitting from it as well as
those which will be adversely impacted.
USDMYR and crude oil price
Source: Bloomberg Finance L.P
Sector impact from RM depreciation against USD
PositivePositivePositivePositive Glove (revenue in USD) Technology (revenue in USD) Oil & gas (revenue in USD, excluding those with USD borrowings) Plantation (CPO priced in USD, excluding those with USD borrowings) NegativeNegativeNegativeNegative Automotive (input cost in USD) Aviation (fuel cost and borrowings in USD) Oil & gas – OSV players (borrowings in USD) Media (newsprint and TV contents in USD)
Source: AllianceDBS
Strategy: Cautious and focus on small- and mid-cap
After three consecutive years of weak earnings growth, we
expect some form of cyclical earnings recovery with a 9.2%
earnings growth estimate for FBMKLCI in 2017. That said,
there is lack of conviction that we have seen the end of
earnings downgrade cycle, we remain cautious on the market
outlook in 2017. This is particularly so for the big cap stocks as
the FBMKLCI is currently trading at 15.6x CY17 PE which is
slightly above historical mean of 15.4x.
In the absence of earnings growth visibility, market direction is
likely to be choppy and dictated by exogenous factors in 2017.
Our bottom-up valuation pegs the FBMKLCI end-2017 target
at 1,720 implying a 16.3x CY17 PE.
From top-down perspective, we prefer exposure to
construction, technology and utilities sectors. We remain
underweight on automotive, building materials (cement),
chemical and telecommunication sectors.
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
5.00
5.50
6.00
6.50
Jan
-07
Ma
y-0
7Se
p-0
7Ja
n-0
8M
ay
-08
Sep
-08
Jan
-09
Ma
y-0
9Se
p-0
9Ja
n-1
0M
ay
-10
Sep
-10
Jan
-11
Ma
y-1
1Se
p-1
1Ja
n-1
2M
ay
-12
Sep
-12
Jan
-13
Ma
y-1
3Se
p-1
3Ja
n-1
4M
ay
-14
Sep
-14
Jan
-15
Ma
y-1
5Se
p-1
5Ja
n-1
6M
ay
-16
Sep
-16
%
Mean
2.7x
- 1 s.d.
1.8x
+ 1 s.d.
3.6x
Recomm
endationCY2017 CY2018 CY2017 CY2018
Media Prima HOLD 7.8% 8.7% 22% 12%
Globetronics BUY 7.2% 8.9% 30% 23%
Star HOLD 7.2% 7.2% 0% 0%
Berjaya Sports Toto HOLD 6.9% 7.0% 6% 3%
Bermaz Auto BUY 6.8% 7.2% 0% 7%
Magnum HOLD 6.5% 6.6% 20% 2%
MRCB-Quill REIT HOLD 6.3% 6.6% 10% 6%
CapitaMall Malaysia Trust BUY 6.2% 6.4% 3% 4%
Maybank HOLD 6.1% 6.2% 11% 2%
Matrix Concepts BUY 6.1% 6.1% -1% 1%
Sunway REIT BUY 6.0% 6.5% 0% 8%
Media Chinese HOLD 6.0% 6.4% 0% 7%
Pantech Holdings BUY 5.8% 6.3% 14% 8%
IGB REIT HOLD 5.3% 5.5% 11% 3%
BAT HOLD 5.3% 5.3% 9% 1%
Axis REIT HOLD 5.3% 5.5% 12% 4%
YTL Power HOLD 5.2% 5.2% -11% 0%
Pavilion REIT HOLD 5.2% 5.5% -10% 6%
Astro HOLD 5.2% 6.2% 15% 20%
Unisem HOLD 5.0% 5.4% 8% 8%
DPS Growth
(YoY)Dividend Yield
45
55
65
75
85
95
3.00
3.20
3.40
3.60
3.80
4.00
4.20
4.40
4.60
4.80
5.00
30
-Se
p-1
4
21
-Oct
-14
11
-No
v-1
4
2-D
ec-
14
23
-De
c-1
4
13
-Ja
n-1
5
3-F
eb
-15
24
-Fe
b-1
5
17
-Ma
r-…
7-A
pr-
15
28
-Ap
r-1
5
19
-Ma
y-…
9-J
un
-15
30
-Ju
n-1
5
21
-Ju
l-1
5
11
-Au
g-1
5
1-S
ep
-15
22
-Se
p-1
5
USDMYR Curncy(LHS) Brent crude oil(RHS) USD/bbl
Market Focus
2017 Outlook
Page 7
For big cap stock selections, we prefer those with good
earnings visibility. These include Tenaga NasionalTenaga NasionalTenaga NasionalTenaga Nasional, Public BankPublic BankPublic BankPublic Bank,
Hong Leong BankHong Leong BankHong Leong BankHong Leong Bank and GamudaGamudaGamudaGamuda.
To generate alpha, we prefer exposure to selective small- and
mid-cap stocks with strong re-rating catalysts. Our conviction is
further boosted by the federal government’s recent Budget
2017 proposal for government-linked investment companies to
allocate up to RM3bn to external fund managers to invest in
small- and mid-cap companies. We believe this initiative will
provide strong price support to small- and mid-cap stocks with
good fundamentals. Our top picks for small- and mid-cap
stocks are SKP ResourcesSKP ResourcesSKP ResourcesSKP Resources, VS IndustryVS IndustryVS IndustryVS Industry, InariInariInariInari and Sunway Sunway Sunway Sunway
ConstructionConstructionConstructionConstruction.
For dividend stocks, we like CMMTCMMTCMMTCMMT and Sunway REITSunway REITSunway REITSunway REIT.
Sector call OverweightOverweightOverweightOverweight Construction (peak order book and strong earnings visibility) Technology (improving earnings visibility) Utilities (resilient earnings)
UnderweightUnderweightUnderweightUnderweight Automotive (weak demand, adverse FX impact) Building materials – cement (intensifying competition) Chemical (weak demand and depressed petrochemical prices) Telecommunication (intensifying competition)
Source: AllianceDBS
FBMKLCI PE trend
Source: Bloomberg Finance L.P
AllianceDBS’s coverage earnings estimates for CY17 and CY18
Source: AllianceDBS
15.4x
17.0x
13.8x
10
11
12
13
14
15
16
17
18
19
Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16
P/E
ADBS Universe vs KLCI (CY)
Sector Call RM m RM m % % CY2017 CY2018 CY2017 CY2018 CY2017 CY2018 CY2017 CY2018 CY2017 CY2018
Automotive Underweight 7,780.3 7,479.6 (3.9) 0.6 21.5x 17.0x 50% 26% 2.3% 2.9% 0.9x 0.9x 4% 5%
Aviation Neutral 20,353.4 22,085.4 8.5 1.7 29.0x 19.8x 210% 33% 1.6% 2.0% 1.3x 1.2x 10% 10%
Banking Neutral 273,527.6 292,151.4 6.8 22.5 11.6x 10.7x 11% 9% 4.2% 4.4% 1.3x 1.2x 11% 12%
Building Materials Underweight 10,896.7 7,802.5 (28.4) 0.9 30.8x 29.8x 57% 5% 2.2% 2.3% 2.0x 2.0x 7% 8%
Chemicals Underweight 55,520.0 44,000.0 (20.7) 4.6 21.8x 0.0x 4% 0% 2.4% 0.0% 2.0x 0.0x 10% 0%
Conglomerate Neutral 7,338.6 10,657.7 45.2 0.6 14.0x 13.1x 26% 8% 1.9% 1.9% 0.8x 0.7x 5% 6%
Construction Overweight 29,762.9 32,739.0 10.0 2.5 17.4x 9.3x 10% 4% 2.6% 1.9% 1.6x 0.9x 10% 6%
Consumer Neutral 52,140.4 54,553.6 4.6 4.3 21.1x 19.1x 8% 7% 3.6% 3.6% 10.8x 9.8x 54% 56%
Financial non-bank Neutral 13,479.8 14,151.0 5.0 1.1 14.2x 13.0x 6% 9% 3.7% 4.0% 3.0x 2.9x 20% 21%
Gaming Neutral 62,028.0 71,632.5 15.5 5.1 16.3x 14.5x 9% 12% 1.8% 2.0% 1.3x 1.2x 9% 9%
Glove Neutral 19,387.5 18,248.6 (5.9) 1.6 22.1x 17.3x 4% 25% 2.4% 2.9% 3.6x 3.2x 17% 19%
Healthcare Neutral 56,651.1 67,355.8 18.9 4.7 40.8x 30.8x 26% 34% 0.7% 1.0% 2.2x 2.1x 6% 7%
Media Neutral 18,896.6 19,945.2 5.5 1.6 17.2x 15.0x 17% 14% 5.7% 6.6% 18.6x 19.2x 102% 119%
Oil & Gas Neutral 26,998.4 26,555.5 (1.6) 2.2 22.5x 9.0x 34% 23% 1.1% 0.7% 1.4x 0.4x 6% 3%
Plantation Neutral 145,180.5 137,416.2 (5.3) 12.0 24.7x 21.6x 18% 13% 2.3% 2.5% 2.0x 1.9x 8% 9%
Port Neutral 14,867.6 15,174.5 2.1 1.2 9.8x 9.2x 2% 6% 3.6% 3.8% 0.5x 0.5x 6% 6%
Property Neutral 28,372.9 28,952.7 2.0 2.3 16.1x 16.0x 15% (3%) 2.9% 2.5% 0.9x 0.8x 8% 6%
REIT Neutral 36,199.8 38,109.0 5.3 3.0 18.2x 7.4x 6% 1% 5.3% 5.5% 1.3x 1.3x 11% 11%
Shipping Neutral 32,273.2 33,924.8 5.1 2.7 9.5x 8.7x 6% 6% 3.3% 3.3% 0.6x 0.6x 4% 5%
Technology Overweight 7,568.7 8,645.7 14.2 0.6 12.5x 11.0x 35% 13% 4.3% 4.8% 2.6x 2.4x 21% 22%
Telecommunication Underweight 155,349.2 148,837.6 (4.2) 12.8 22.6x 21.0x 7% 8% 3.9% 4.3% 22.4x 22.3x 93% 96%
Utilities Overweight 139,191.8 152,687.4 9.7 11.5 15.3x 14.4x 2% 5% 3.1% 3.3% 2.0x 1.9x 14% 13%
ADBS Universe 1,213,764.8 1,253,105.7 3.2 100.0 19.2x 15.5x 15% 10% 3.2% 3.3% 5.0x 4.8x 24% 25%
FBMKLCI 1,648.08 1,720.00 4.4 15.6x 14.3x 9% 9% 3.4% 3.5% 1.6x 1.5x
Dividend Yield Price/ BVPS ROAEMarket Cap Target Mkt Cap Upside Weightage P/E EPS Growth (YoY)
Market Focus
2017 Outlook
Page 8
Investment thesis of top picks StockStockStockStock TPTPTPTP (RM)(RM)(RM)(RM) % Upside% Upside% Upside% Upside Share price catalystsShare price catalystsShare price catalystsShare price catalysts Tenaga Nasional 17.00 19% Revision of dividend policy; smooth implementation of fuel cost pass-through mechanism in 2017
Public Bank 22.60 14% We expect PBK’s consistent delivery of resilient earnings and above-industry growth while
maintaining steadfast asset quality to re-rate its share price
Hong Leong Bank 15.00 15% We believe share price performance will improve as earnings traction builds. Amid challenging operating environment, we expect the market to attribute a higher premium to HLB’s solid attributes, i.e. robust asset quality indicators and strong liquidity position.
Gamuda 5.80 20% Securing new contracts for LRT 3, Pan Borneo Sabah, and/or Gemas-JB double tracking projects, and resolution for Splash.
Sunway REIT 1.95 10% Acquisition of new assets including injection from major shareholder Sunway Bhd
Inari 4.00 21% Strong earnings growth for its RF division and faster ramp-up of its new testing division
CapitaMall Malaysia 1.70 6% Accretion from asset-enhancement works (Gurney Plaza and Tropicana City Property)
Sunway Construction 1.92 13% Higher margin wins for manufacturing; better earnings delivery
VS Industry 1.70 23% Securing more contracts from client D, including an anticipated additional line of box build assembly of vacuum cleaner by Mar 2017
SKP Resources 1.88 42% Earnings improvement in 3QFY17 (Dec 2016) results due to; 1) contribution from the recent hairdryer contract from its key customer, client D, 2) improved operating margins from the high value contract and 3) resolution of the labour issues in Sept 2016.
Top stock picks
Source: AllianceDBS Price date: 3 Nov 2016
CY2016/2017
Recommen
dation
Target
Price
Current
Price
Market
CapCY2016 CY2017 CY2016 CY2017 CY2016 CY2017 CY2016 CY2017 CY2016 CY2017
Tenaga BUY 17.00 14.28 80,590.8 10.1x 9.9x 2% 2% 3.0% 3.0% 1.3x 1.2x 14% 13%
Public Bank BUY 22.60 19.84 76,612.0 13.8x 12.7x 9% 9% 3.1% 3.3% 2.1x 1.9x 16% 16%
Hong Leong Bank BUY 15.00 13.08 26,842.3 11.9x 10.8x 11% 11% 3.0% 3.1% 1.2x 1.1x 11% 11%
Gamuda BUY 5.80 4.84 11,723.8 19.1x 0.0x 9% 0% 1.8% 0.0% 1.8x 0.0x 10% 0%
Sunway REIT BUY 1.95 1.77 5,212.8 16.0x 0.0x 13% 0% 6.0% 6.5% 1.3x 1.3x 8% 8%
Inari Amertron BUY 4.00 3.32 3,189.2 14.3x 12.6x 26% 14% 3.5% 4.0% 3.8x 3.3x 28% 28%
CapitaMall Malaysia Trust BUY 1.70 1.60 3,250.3 17.2x 0.0x 7% 0% 6.1% 6.3% 1.2x 1.2x 7% 7%
Sunway Construction BUY 1.92 1.70 2,197.9 13.6x 12.0x 14% 13% 3.3% 3.7% 3.6x 3.1x 28% 27%
VS Industries BUY 1.70 1.38 1,615.9 10.0x 8.9x 13% 12% 4.0% 4.5% 1.6x 1.5x 17% 18%
SKP Resources BUY 1.88 1.32 1,556.4 10.1x 8.2x 36% 24% 4.9% 6.1% 3.5x 2.9x 38% 39%
ROAEP/E EPS Growth (YoY) Dividend Yield Price/ BVPS
Malaysia Strategy
2017 Outlook
Page 9
Key risks
US election.US election.US election.US election. An unexpected win by Trump will likely lead to
market selldown given policy uncertainties going forward
which will reverberate beyond US’ shores. While the latest
polls suggest that Clinton is the likely winner of the US
presidential election, memory of Brexit will remind us that
nothing should be taken for granted.
Market underMarket underMarket underMarket under----pricing the pace of US interest rate hike.pricing the pace of US interest rate hike.pricing the pace of US interest rate hike.pricing the pace of US interest rate hike.
Implied fed fund rate has generally been substantially lower
than the median forecast by Fed on expectation of a lower
for longer interest rate environment. However, in the event
the pace of interest rate hike matches or exceed Fed’s
forecast, there will likely be significant market adjustment.
Severe slowdown in global trade.Severe slowdown in global trade.Severe slowdown in global trade.Severe slowdown in global trade. This will adversely affect
Malaysia given that it is an export-dependent economy
which is further exacerbated by the lack of domestic growth
drivers. Furthermore, fiscal constraint faced by the federal
government may also impede its ability to implement
counter-cyclical stimulus to boost the economy in the even
global trade falters.
Malaysia Strategy
2017 Outlook
Page 10
Sector Brief
Malaysia Strategy
2017 Outlook
Page 11
Automotive
Underweight
Analyst Siti Ruzanna MOHD FARUK +603 2604 3965 [email protected]
Price Target
Price PE
2017F
Div Yld
2017201720172017F
EPS CAGR 2015201520152015-2017201720172017
(RM) (RM) Rec (x) (%) (%)
UMW Holdings 5.79 5.75 HOLD 22.9 2.2 41
Bermaz Auto 2.25 2.55 BUY 12.5 6.4 8
MBM Resources 2.60 1.95 FV 12.0 3.2 10
Source: AllianceDBS Historical Total Industry Volume
Source: MAA Statistics, AllianceDBS
Market Share of Car Brands YTD Aug 2016
Source: MAA Statistics, AllianceDBS
Stuck in traffic • Attractive launches may help sustain volume amid
still weak consumer sentiment • Margins erosion from higher cost and promotions • Bermaz Auto our top pick for the sector Outlook • Volume to remain muted.Volume to remain muted.Volume to remain muted.Volume to remain muted. TIV came in at 370,254 units for
YTD Aug 2016 which is 14.8% lower y-o-y. Volume growth will be dampened by the weak consumer sentiment as well as stringent lending policies by the banks. MAA has forecasted a contraction of TIV by 13.8% to 65,000 units for FY16. This is due to the low sales volume in 1H16, as consumers shied away from buying vehicles amid price hikes by auto players. Volume seems to have recovered slightly in 3Q16 from exciting launches and festive promotions. The final boost in numbers should filter through in 4Q16, as the sales figures from the Perodua Sedan Bezza and the all new Proton Saga kick in. Given the tough economic conditions, the lower-end car segment should be able to sustain the volume as consumers opt for cheaper options.
• Not heading for the highway yet.Not heading for the highway yet.Not heading for the highway yet.Not heading for the highway yet. MAA forecasted 8.6% growth for FY17 in anticipation of an economic recovery. We expect minimal growth to remain the norm for auto players in FY17, as there are no major catalysts to help lift numbers. The continued weak consumer sentiment and tighter hire purchase controls will weigh on growth. Upcoming launches by major auto players include the Honda BRV, new Toyota Innova, Toyota Camry face-lift, City face-lift, Jazz and Accord. These launches are targeted at the middle-class consumers who are more cost-cautious during economic slowdowns. Such launches will enable TIV to grow by 8.6% y-o-y.
• Margins pressured by higher cost and promotions.Margins pressured by higher cost and promotions.Margins pressured by higher cost and promotions.Margins pressured by higher cost and promotions. While exciting launches and promotions may be able to support volume, margins will remain pressured by higher cost. Promotions and road shows to spur excitement in the market will incur costs and eat into margins. Margins have been on a downtrend since 2013 for UMW and MBM, and this trend may continue as cost will remain high in light of the unfavourable USD/MYR rate.
Risks • FFFFurther weakness in auto sectorurther weakness in auto sectorurther weakness in auto sectorurther weakness in auto sector. Continued weakness in the
auto sector from unfavourable regulations and tighter consumer spending may cause further earnings downside
• Higher production costs. Higher production costs. Higher production costs. Higher production costs. The auto sector could face margin deterioration as a result of higher production costs – arising from the unfavourable USD/MYR exchange rate as well as higher raw material prices. The intense competition and aggressive promotions will also eat into margins
-40.00%
-30.00%
-20.00%
-10.00%
0.00%
10.00%
20.00%
30.00%
40.00%
0
10000
20000
30000
40000
50000
60000
70000
80000
TIV Growth
Proton, 11.9%
Honda, 15.1%
VW, 1.4%
Toyota/ Lexus,
7.53%
Mitsubishi,
2.20%Perodua,
26.30%
Others, 35.7%
Malaysia Strategy
2017 Outlook
Page 12
Valuation & Stock Picks
• We maintain a BUY call on Bermaz AutoWe maintain a BUY call on Bermaz AutoWe maintain a BUY call on Bermaz AutoWe maintain a BUY call on Bermaz Auto. Our TP of
RM2.50 that is based on 13.0x CY17F EPS. This is
equivalent to +0.5 SD of its historical mean PE. Bermaz
Auto is our top pick as the stock has 1) attractive dividend
yield backed by asset-light business model and net cash
position, 2) increasing capacity from expansion in Inokom
plant and 3) exciting upcoming launches such as Mazda
CX-9 and Mazda CX-5.
• HOLD call for UMWHOLD call for UMWHOLD call for UMWHOLD call for UMW.... We maintain our HOLD rating for
UMW with our SOP-derived TP RM5.75. In our view, a
recovery in O&G earnings and Toyota profits would be re-
rating catalysts.
• FULLY VALUED on MBM ResourcesFULLY VALUED on MBM ResourcesFULLY VALUED on MBM ResourcesFULLY VALUED on MBM Resources. We have a FULLY
VALUED call on MBM with a TP of RM1.95. In view of the
headwinds ahead, our TP is pegged to 9x FY17 EPS which is -
1SD of its 5-year mean PE. We expect the challenging
conditions for the auto segment to weigh on the group’s
share price performance until its auto part manufacturing
contributions become more material.
Peers comparison
Source: AllianceDBS
CallTarget
PriceCurrent Price
Market Cap
(USD)CY2016 CY2017 CY2016 CY2017 CY2016 CY2017 CY2016 CY2017 CY2016 CY2017
UMW Holdings HOLD 5.75 5.56 1,542.9 34.1x 22.0x (67%) 55% 1.5% 2.3% 1.0x 1.0x 3% 4%
Bermaz Auto BUY 2.55 2.25 612.2 12.7x 11.5x (0%) 10% 6.8% 6.9% 4.6x 4.3x 38% 38%
MBM Resources FULLY VALUED 1.95 2.60 241.3 14.1x 12.0x (45%) 17% 3.2% 3.2% 0.6x 0.6x 5% 5%
Average 2,396.4 26.6x 18.3x (48%) 40% 3.0% 3.5% 1.9x 1.8x 12% 13%
Price/ BVPS ROAEP/E (FD)EPS (FD) Growth
(YoY)Dividend Yield
Malaysia Strategy
2017 Outlook
Page 13
Banks
Neutral
Analyst LIM Sue Lin +65 6682 3711 [email protected] Lynette CHENG +60 32604 3907 [email protected]
MALAYSIAN BANKS COVERAGE
Price Target
Price PB
2017F
Div Yld
2017201720172017F
EPS CAGR 2015201520152015-2017201720172017
(RM) (RM) Rec (x) (%) (%)
Affin Holdings 2.18 1.90 FV 0.5 4.3 11.6
Alliance* 3.83 NA NR 1.2 4.0 (0.7)
AMMB 4.12 4.60 HOLD 0.8 4.1 (18.8)
CIMB Group 4.76 4.80 HOLD 0.9 4.2 16.8
Hong Leong Bank
13.08 15.00 BUY 1.2 2.9 (0.4)
Maybank 7.78 7.50 HOLD 1.2 6.1 (2.9)
Public Bank 19.84 22.60 BUY 2.1 3.1 5.1
RHB Bank 4.61 5.50 BUY 0.7 3.6 1.5
BIMB 4.27 NA NR 1.6 2.9 1.5
Hong Leong Financial Group
15.48 18.00 BUY 1.1 3.2 (2.6)
* Based on Bloomberg consensus
Source: DBS Bank, AllianceDBS, Bloomberg Finance L.P. Malaysian banks: Net profit growth
Source: Companies, DBS Bank, AllianceDBS
Malaysian banks: Credit cost
Source: Companies, DBS Bank, AllianceDBS
Testing Murphy’s Law • 2017 earnings set to be tested; NIM and credit costs
are key downside risks • Base-case earnings growth is high, premised on
credit cost declining from a high base in 2016; worst-case scenario could see earnings growth at 4% y-o-y
• Sticking to the defensive; Public Bank (PBK) and Hong Leong Bank (HLB) remain our top picks
Outlook
• Earnings growth driven by lower provisionsEarnings growth driven by lower provisionsEarnings growth driven by lower provisionsEarnings growth driven by lower provisions. Although we have imputed for credit cost to trend lower in CY17, this is largely driven by MAY, RHB and CIMB which have incurred significant provisions in 2016, from its Indonesian operations (CIMB), oil & gas (MAY and RHB), as well as steel (RHB) exposure. Excluding these three banks, our credit cost assumption would be higher y-o-y at 10bps for CY17F (CY16F: 8bps).
• Headwinds to revenue growthHeadwinds to revenue growthHeadwinds to revenue growthHeadwinds to revenue growth. Excluding the effect of credit cost, pre-provision operating profit is expected to grow at the same rate as in CY16 (c. 6%). Revenue growth remains a challenge as loan growth moderates, NIM narrows and non-interest income continue to lack impetus. NIM may at best remain stable unless there are subsequent policy rate cuts ahead. Amid lacklustre loan application and approval trends, we expect 2017 loan growth to hit mid-single digits at best.
• More restructuring to come?More restructuring to come?More restructuring to come?More restructuring to come? We have thus far seen RHB and AFG taking the route of collapsing its financial holding structure and transferring the listing status to its key operating entity (i.e. the bank entity). While the benefits reaped by the remaining financial holding companies may not be as substantial as in RHB’s case (due to its high double leverage ratio), we believe there could be more to come, thanks to the exercise’s appeal in reducing inefficiencies. Apart from RHB and AFG, there are five other financial holding companies in our coverage (AMMB, AFFIN, CIMB, HLFG and BIMB).
Risks • Further cuts in OPR may drag NIMsFurther cuts in OPR may drag NIMsFurther cuts in OPR may drag NIMsFurther cuts in OPR may drag NIMs. Our base-case
assumption is for NIM to drop by 3bps. However, further cuts in Overnight Policy Rate (OPR) may result in more NIM pressures than expected. The full impact of the surprise OPR cut of 25bps in July will surface in the coming quarter’s (3QCY16) results. As variable rate loans are re-priced faster (typically within a week) than fixed deposits (56% of fixed deposits mature within six months; 95% within a year), the impact would be negative initially, before the drop in cost of funds mitigates the impact.
17.0 17.0 17.0 17.0
8.2 8.2 8.2 8.2
(2.4)(2.4)(2.4)(2.4) (3.7)(3.7)(3.7)(3.7)
0.0 0.0 0.0 0.0
14.1 14.1 14.1 14.1
-40
-30
-20
-10
0
10
20
30
40
CY12 CY13 CY14 CY15 CY16F CY17F
%%%%
AMMB AFFIN CIMBHLB MAY PBKRHBBANK AFG Sector
1.16%
1.02%
1.08%
1.12%
0.80%
0.68%
0.71%
0.49%
0.28%
0.16%
0.20%
0.18%
0.33%
0.43%
0.31%
0.00%
0.20%
0.40%
0.60%
0.80%
1.00%
1.20%
1.40%
1.60%
CY03
CY04
CY05
CY06
CY07
CY08
CY09
CY10
CY11
CY12
CY13
CY14
CY15
CY16F
CY17F
Sector credit cost Sector credit cost ex CIMB, MAY, RHB
Malaysia Strategy
2017 Outlook
Page 14
Malaysian banks: NIM trends
Source: Companies, DBS Bank, AllianceDBS
Malaysian banks: Forward-rolling P/BV band
Source: Bloomberg Finance L.P, DBS Bank, AllianceDBS
• Keeping watch on asset qualityKeeping watch on asset qualityKeeping watch on asset qualityKeeping watch on asset quality. Asset quality of Malaysian banks have held up better than expected, except for two banks, positively surprising the market. While banks have indicated that they have prudently impaired loans and provided for them, vulnerable segments (such as oil & gas, commodities, steel and commercial property) may still cause more incidences of restructured and rescheduled (R&R) loans. Meanwhile, on the retail front, asset quality has been largely held up by mortgages. That said, if the operating environment improves, asset quality could also surprise on the upside from a reclassification of R&R loans to non-impaired (allowed upon observance of continuous repayment for at least six months).
• WorstWorstWorstWorst----case scenario. case scenario. case scenario. case scenario. On a worst-case scenario of a 10-bp NIM compression and credit cost of 40bps, our back of the envelope calculation estimates sector earnings to be lower by 9%. If such a scenario were to pan out, sector earnings growth is expected to drop to 4% y-o-y, albeit a recovery from a contraction in CY16.
Valuation & Stock Picks
• Asset quality the critical factor for Asset quality the critical factor for Asset quality the critical factor for Asset quality the critical factor for the sector. the sector. the sector. the sector. Malaysian banks are trading at 10-year trough valuations, pricing in concerns of further ROE de-rating from a significant blow up in asset quality. While this is not our base-case view, we believe this remains the critical factor in determining share price performance in the year to come.
• Stay safe; PBK (RM22.60 TP) and HLB (RM15.00 TPStay safe; PBK (RM22.60 TP) and HLB (RM15.00 TPStay safe; PBK (RM22.60 TP) and HLB (RM15.00 TPStay safe; PBK (RM22.60 TP) and HLB (RM15.00 TP) remain our top picks. . . . In view of the challenging operating environment, we continue to favour banks with defensive attributes, i.e. PBK and HLB. Both banks have strong asset-quality attributes and are expected to see loan growth driven by mortgages from strong pipelines built up in the past few quarters.
Malaysian banks: Peer comparison
Banking GroupBanking GroupBanking GroupBanking Group Market Market Market Market capcapcapcap
PricePricePricePrice Target Target Target Target PricePricePricePrice
RatingRatingRatingRating PE (x)PE (x)PE (x)PE (x) CAGRCAGRCAGRCAGR P/BV (x)P/BV (x)P/BV (x)P/BV (x) ROROROROE (%)E (%)E (%)E (%) Net div Net div Net div Net div (%)(%)(%)(%)
(US$bn)(US$bn)(US$bn)(US$bn) (RM/s)(RM/s)(RM/s)(RM/s) (RM/s)(RM/s)(RM/s)(RM/s) CY15ACY15ACY15ACY15A CY16FCY16FCY16FCY16F CY17FCY17FCY17FCY17F ^ (%)^ (%)^ (%)^ (%) CY15ACY15ACY15ACY15A CY16FCY16FCY16FCY16F CY17FCY17FCY17FCY17F CY16FCY16FCY16FCY16F CY16FCY16FCY16FCY16F
Affin HoldingsAffin HoldingsAffin HoldingsAffin Holdings 1,009 2.18 1.90 FV 11.5x 9.3x 9.2x 11.6 0.5x 0.5x 0.5x 5.4% 4.3%
Alliance*Alliance*Alliance*Alliance* 1,392 3.83 NA NR 11.4x 11.2x 10.9x 2.2 1.3x 1.2x 1.2x 11.2% 3.7%
AMMBAMMBAMMBAMMB 2,959 4.12 4.60 HOLD 8.4x 9.3x 8.6x -1.2 0.8x 0.8x 0.8x 8.7% 4.4%
CIMB GroupCIMB GroupCIMB GroupCIMB Group 10,059 4.76 4.80 HOLD 14.2x 11.4x 10.4x 16.8 1.0x 0.9x 0.9x 8.4% 3.8%
Hong LeongHong LeongHong LeongHong Leong 6,396 13.08 15.00 BUY 12.2x 12.6x 11.1x 4.9 1.4x 1.3x 1.2x 11.0% 2.6%
MaybankMaybankMaybankMaybank 18,897 7.78 7.50 HOLD 10.9x 13.4x 11.5x -2.9 1.2x 1.2x 1.2x 9.0% 5.5%
Public BankPublic BankPublic BankPublic Bank 18,255 19.84 22.60 BUY 15.2x 15.1x 13.8x 5.1 2.5x 2.3x 2.1x 15.6% 2.8%
RHB BankRHB BankRHB BankRHB Bank 3,377 4.61 5.50 BUY 8.6x 9.3x 8.4x 1.5 0.6x 0.7x 0.7x 8.1% 2.9%
Weighted averageWeighted averageWeighted averageWeighted average 12.6x12.6x12.6x12.6x 13.0x13.0x13.0x13.0x 11.6x11.6x11.6x11.6x 4.14.14.14.1 1.5x1.5x1.5x1.5x 1.4x1.4x1.4x1.4x 1.3x1.3x1.3x1.3x 11.0%11.0%11.0%11.0% 3.9%3.9%3.9%3.9% Weighted average (exWeighted average (exWeighted average (exWeighted average (ex----Public Bank)Public Bank)Public Bank)Public Bank) 11.5x11.5x11.5x11.5x 12.1x12.1x12.1x12.1x 10.7x10.7x10.7x10.7x 3.73.73.73.7 1.1x1.1x1.1x1.1x 1.1x1.1x1.1x1.1x 1.0x1.0x1.0x1.0x 9.0%9.0%9.0%9.0% 4.3%4.3%4.3%4.3% Simple averageSimple averageSimple averageSimple average 11.5x11.5x11.5x11.5x 11.5x11.5x11.5x11.5x 10.5x10.5x10.5x10.5x 4.74.74.74.7 1.2x1.2x1.2x1.2x 1.1x1.1x1.1x1.1x 1.1x1.1x1.1x1.1x 9.9%9.9%9.9%9.9% 3.8%3.8%3.8%3.8% Simple average (exSimple average (exSimple average (exSimple average (ex----Public BankPublic BankPublic BankPublic Bank)))) 11.0x11.0x11.0x11.0x 10.9x10.9x10.9x10.9x 10.0x10.0x10.0x10.0x 4.74.74.74.7 1.0x1.0x1.0x1.0x 1.0x1.0x1.0x1.0x 0.9x0.9x0.9x0.9x 9.3%9.3%9.3%9.3% 3.9%3.9%3.9%3.9%
BIMBBIMBBIMBBIMB 1,616 4.27 NA NR 11.8x 12.0x 11.5x 1.6 1.9x 1.8x 1.6x 17.2% 2.8% Hong Leong Financial Hong Leong Financial Hong Leong Financial Hong Leong Financial GroupGroupGroupGroup
4,224 15.48 18.00 BUY 10.6x 10.3x 9.1x 7.8 1.2x 1.1x 1.1x 11.6% 2.4%
* Based on Bloomberg consensus
^ Refers to a 2-year EPS CAGR for CY15-17F
Source: Companies, Bloomberg Finance L.P., DBS Bank, AllianceDBS
2.46% 2.38%2.25%
2.16% 2.12% 2.09%
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
CY12 CY13 CY14 CY15 CY16F CY17F
AMMB AFFIN CIMB HLB MAY
PBK RHBBANK AFG Sector
Mean, 1.59
+1SD, 1.85
+2SD, 2.12
-1SD, 1.32
-2SD, 1.06
0.5
0.7
0.9
1.1
1.3
1.5
1.7
1.9
2.1
2.3
06 07 08 09 10 11 12 13 14 15 16
PBV (X)PBV (X)PBV (X)PBV (X)
Malaysia Strategy
2017 Outlook
Page 15
Building Materials
Underweight
Analyst Woo Kim TOH +60 32604 3917 [email protected]
Price Target
Price PE
2017F
Div Yld
2017201720172017F
EPS CAGR 2015201520152015-2017201720172017
(RM) (RM) Rec (x) (%) (%)
Cahya Mata Sarawak
3.76 3.90 HOLD 18.9 2.6 42
Lafarge Malaysia 8.07 4.25 FV 37.9 1.9 20
Source: AllianceDBS Newcastle thermal coal prices (USD/tonne)
Source: Bloomberg Finance L.P., AllianceDBS
Facing stumbling blocks • No major improvement in demand-supply
dynamics to drive higher cement ASP in 2017 • Rising coal prices will lead to higher costs and
could exert further pressure on margins • HOLD call on CMS; FULLY VALUED on Lafarge due
to rich valuation Outlook • Oversupply in Peninsular MalaysiaOversupply in Peninsular MalaysiaOversupply in Peninsular MalaysiaOversupply in Peninsular Malaysia. We do not expect any
major improvement in the demand-supply dynamics of the cement industry in Peninsular Malaysia in 2017. Despite uptick in cement demand arising from new large infrastructure projects (such as MRT 2), the cement market in Peninsular Malaysia should still remain in oversupply situation given sizeable capacity expansion activities by cement players over the past few years.
• Sarawak market buoyed by the massive Pan Borneo Highway Sarawak market buoyed by the massive Pan Borneo Highway Sarawak market buoyed by the massive Pan Borneo Highway Sarawak market buoyed by the massive Pan Borneo Highway project.project.project.project. The massive RM36bn Pan Borneo Highway project should lead to higher demand for building materials in Sarawak starting 2017. This will largely benefit CMS which is the sole manufacturer of cement in the state of Sarawak. In addition to that, CMS is also a major supplier of other building materials such as aggregates, premix, wire mesh, etc.
• Higher cost lead by rising coal pricesHigher cost lead by rising coal pricesHigher cost lead by rising coal pricesHigher cost lead by rising coal prices. Thermal coal prices have rebounded significantly in 2H16 to about US$75-80/MT, from its low of US$50-55/MT in early 2016. As coal supply contracts are typically negotiated yearly, this might not affect costs in 2016 but should lead to higher annual contract prices fixed in 2017. Higher coal prices will put pressure on cement manufacturers’ margins because coal accounts for 25-30% of cement production cost.
Risks • Rebates getting more aggressive. Rebates getting more aggressive. Rebates getting more aggressive. Rebates getting more aggressive. Cement players seeking to
gain market share in order to fill their capacity may offer larger rebates. This would generally result in lower cement ASP for the industry.
• Weaker domestic cement demand. Weaker domestic cement demand. Weaker domestic cement demand. Weaker domestic cement demand. Weaker domestic cement demand as a result of slowing construction activities could force cement players to export their cement, but export prices are usually lower than prevailing domestic prices....
40
50
60
70
80
90
100
110
120
130
2012 2013 2014 2015 2016
Malaysia Strategy
2017 Outlook
Page 16
Valuation & Stock Picks • Lafarge Malaysia Lafarge Malaysia Lafarge Malaysia Lafarge Malaysia ---- lofty valuationlofty valuationlofty valuationlofty valuation. We maintain our FULLY
VALUED rating on Lafarge Malaysia with a RM4.25 TP, implying 47% downside. The stock is trading at a lofty valuation, failing to take into account the heightened competition and pricing pressures in the Malaysian cement sector from new capacity coming on stream. The sector’s profitability has been declining since 2013 despite the benefit from lower coal prices.
• CMS CMS CMS CMS –––– waiting for OMwaiting for OMwaiting for OMwaiting for OM----SaraSaraSaraSarawak turnaroundwak turnaroundwak turnaroundwak turnaround. We have a HOLD call on CMS with an SOP-based TP of RM3.90. While the outlook for most of CMS key operating segments looks favourable in 2017 due the rollout of Pan Borneo Highway projects, we expect ongoing weakness at 25%-owned OM Sarawak to be a drag on earnings and sentiment on the stock. As such, we do not foresee a major re-rating of CMS’s share price unless there is a turnaround in OM Sarawak from improving ferrosilicon prices.
Peers comparison
CallTarget
Price (RM)
Current
Price (RM)
Market Cap
(USD)CY2016 CY2017 CY2016 CY2017 CY2016 CY2017 CY2016 CY2017 CY2016 CY2017
LMC FULLY VALUED 4.25 8.07 1,633.9 (50%) 43% 54.2x 37.9x 20.1x 16.3x 1% 2% 4% 6%
CMS HOLD 3.90 3.76 962.6 (52%) 80% 34.0x 18.9x 12.3x 8.9x 1% 3% 6% 10%
Average (51%) 57% 46.7x 30.8x 17.2x 13.5x 1% 2% 5% 7%
ROAE (%)EPS Growth (%) P/E (x) EV/EBITDA (x) Divd yield (%)
Malaysia Strategy
2017 Outlook
Page 17
Construction
Overweight
Analyst Chong Tjen-San,CFA +60 3 26043972 [email protected]
Price Target
Price PE
2017F
Div Yld
2017201720172017F
EPS CAGR 2015201520152015-2017201720172017
(RM) (RM) Rec (x) (%) (%)
Gamuda 4.84 5.80 BUY 17.1 1.8 (15)
IJM Corp 3.28 3.30 HOLD 24.7 3.3 (13)
Kimlun Corp 2.22 2.87 BUY 9.2 1.8 30 Muhibbah Engineering
2.27 3.10 BUY 12.9 1.7 9
WCT Holdings Bhd 1.80 1.55 HOLD 12.5 2.0 (4) Sunway Construction
1.70 1.92 BUY 17.2 2.4 7
Source: AllianceDBS PE Band for AllianceDBS Construction Universe
Source: Bloomberg Finance L.P., AllianceDBS P/BV Band for AllianceDBS Construction Universe
Source: Bloomberg Finance L.P., AllianceDBS
Focus on earnings delivery and execution
• Contracts pipeline remains strong. Contracts pipeline remains strong. Contracts pipeline remains strong. Contracts pipeline remains strong. Near-term contract opportunities include MRT Line 2, LRT 3, Gemas-JB Double tracking and Pan Borneo Sabah.
• Overseas projects will be more crucial. Overseas projects will be more crucial. Overseas projects will be more crucial. Overseas projects will be more crucial. Long-term
pipeline is promising until the end of this decade but overseas projects to feature more prominently.
• Top picks Top picks Top picks Top picks –––– Gamuda and Suncon. Gamuda and Suncon. Gamuda and Suncon. Gamuda and Suncon. Both have peak
orderbooks and experience in large-scale transportation infra projects.
Outlook • Focus on transportationFocus on transportationFocus on transportationFocus on transportation----led projects. led projects. led projects. led projects. The priority for
Malaysian infrastructure projects over the past few years has been more transportation-led, anchored by the MRT project with a total of three lines. MRT Line 1 is nearing completion while for MRT Line 2, 22 work packages worth RM24bn have been awarded. The remaining six out of the 10 large viaduct packages will be awarded by mid-2017. Other transportation projects awarded in 2016 were highways (DASH and SUKE) and Pan Borneo Sarawak. Moving into 2017, we expect the focus to be on LRT 3, Gemas–JB double tracking and Pan Borneo Sabah. It is worthy to note that most of these projects have embraced the Project Delivery Partner (PDP) approach which, in our view, minimises the execution risk.
• Strong pipeline of projects will wane in coming years. Strong pipeline of projects will wane in coming years. Strong pipeline of projects will wane in coming years. Strong pipeline of projects will wane in coming years. On top of the projects above, three large-scale projects which are the High Speed Rail, MRT Line 3 and Penang Transport Master Plan will keep contractors busy until the end of the decade. The timeline for MRT Line 3 appears to have been brought forward with awards slated for end-2018 vs 2020/2021 previously. Malaysia’s MyHSR and Singapore’s Land Transport Authority have called for a joint tender to appoint a Joint Development Partner who will assist in providing project management support, technical and procurement advice.
• HenceHenceHenceHence, overseas projects to feature more. , overseas projects to feature more. , overseas projects to feature more. , overseas projects to feature more. Among the ASEAN countries, Malaysia’s infrastructure is second best behind Singapore. This implies while there is a surge in transport-related infrastructure currently, contractors will eventually need to venture overseas again. Based on the 2015/16 Global Competitiveness Index, Malaysia’s infrastructure ranking stood at 24 vs 25 in the 2014/15 ranking. Within ASEAN, the biggest opportunities lie in Indonesia given the concerted efforts by the Jokowi-led government to address the huge infrastructure gap while Malaysian contractors which have similar languages, cultural and historical precedence may have the upper hand.
-2SD
-1SD
Mean
+1SD
+2SD
10.0
12.0
14.0
16.0
18.0
20.0
22.0
24.0
2-Jan-09
2-Jun-09
2-Nov-09
2-Apr-10
2-Sep-10
2-Feb-11
2-Jul-11
2-Dec-11
2-M
ay-12
2-Oct-12
2-M
ar-13
2-Aug-13
2-Jan-14
2-Jun-14
2-Nov-14
2-Apr-15
2-Sep-15
2-Feb-16
2-Jul-16
PE (x)
-2SD
-1SD
Mean
+1SD
+2SD
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
2-Jan-09
2-Jun-09
2-Nov-09
2-Apr-10
2-Sep-10
2-Feb-11
2-Jul-11
2-Dec-11
2-M
ay-12
2-Oct-12
2-M
ar-13
2-Aug-13
2-Jan-14
2-Jun-14
2-Nov-14
2-Apr-15
2-Sep-15
2-Feb-16
2-Jul-16
PBV (x)
Malaysia Strategy
2017 Outlook
Page 18
• Focus on earnings delivery. Focus on earnings delivery. Focus on earnings delivery. Focus on earnings delivery. With the pace of construction awards expected to slow down moving into 2017 as compared to 2016, we expect a strong emphasis on earnings delivery. Most contractors have peak orderbooks now with strong wins YTD where current revenue visibility is between two and three years. Hence, the execution and timeliness of projects is the next important milestone to monitor. YTD, consensus earnings revision for FY16F and FY17F have been rather flattish at c.1% for both years. The most significant upgrade involves Kimlun, whose FY16F and FY17F earnings were raised 28% p.a. for both years. For 1H16, Kimlun’s positive earnings delivery has been driven by margin expansion for both its construction and manufacturing divisions.
On the flipside, IJM has seen the steepest downgrades with FY17F and FY18F earnings cut by 22% and 17%, respectively, due to poorer property and plantation earnings. For Gamuda, consensus has cut FY17F earnings by 8% since the start of 2016 but this still assumes growth of 14% as MRT Line 2 contribution is expected to kick in and there should be better contribution from property given that the presales for FY16 was RM2bn. Consensus earnings for Suncon for FY16 has been rather flattish but for FY17, earnings have been raised by 13%. This was likely from the ‘S curve’ effect from its peak orderbook of RM5bn.
Risks • Raw material Raw material Raw material Raw material price. price. price. price. Steel prices have been on an uptrend
the start of this year, raising some concerns for contractors. Contractors which have exposure to MRT Line 2 aboveground works are somewhat shielded as fluctuations in prices are borne by the government. We expect contractors to strike a balance when bidding for projects which require higher steel content such as building jobs.
• More competition from foreign contractors. More competition from foreign contractors. More competition from foreign contractors. More competition from foreign contractors. While this is may not be an immediate concern, we think this is something to be cautious about in the future. We have seen the presence of more foreign contractors in Malaysia, articularly from China. A case in point is the Gemas-JB
double tracking which was awarded to a consortium of three Chinese parties.
Valuation & Stock Picks • Valuations at meValuations at meValuations at meValuations at mean. an. an. an. Our construction universe is now trading
at 1-year forward PE of 13.8x and P/BV of 1.7x. This is roughly at mean levels. We think the catalyst for valuation expansion will be a combination of timely awards of key projects such as LRT 3, Pan Borneo Sabah and Gemas-JB double tracking, more positive newsflow on MRT 3 and HSR, and more importantly strong earnings delivery.
• Gamuda Gamuda Gamuda Gamuda –––– best transportation proxy. best transportation proxy. best transportation proxy. best transportation proxy. After bagging the Pan Borneo Highway Sarawak project with partner Naim that brings its outstanding to a peak of RM9bn, it remains confident of another RM3-4bn worth of new orders over the next 12 months. This will come from largely three projects – Gemas-JB double tracking, LRT 3 and Pan Borneo Sabah. A resolution for Splash at a price close to its BV will be a positive catalyst but investors should not expect any special dividends as proceeds will be used for its PTMP project. 4QFY16 marked the bottom of its earnings downcycle and we expect FY17F to see a resumption of its growth trajectory.
• Suncon Suncon Suncon Suncon - MalMalMalMalaysia’s leading pure construction player.aysia’s leading pure construction player.aysia’s leading pure construction player.aysia’s leading pure construction player. Suncon is the largest listed pure play construction player in Malaysia. Given its strong track record with MRT, LRT and BRT jobs previously, we are of the view that SCG is on a strong footing to bag several key infrastructure packages such as LRT3 and BRT as well as other infrastructure-related projects. SCG has also established itself as the only construction specialist to be involved in all three Rapid Line infra projects (MRT, LRT and BRT). Its precast division will also benefit from Singapore’s public housing development. YTD wins of RM2.6bn has exceeded its RM2.5bn forecast, bringing its outstanding orderbook to a high of RM5bn. This ensures strong earnings visibility for two and a half years.
Construction peer
Source: AllianceDBS
Market CapMarket CapMarket CapMarket Cap Rec.Rec.Rec.Rec. T PT PTPTP
(USDm)(USDm)(USDm)(USDm) (Local currency )(Local currency )(Local currency )(Local currency ) CY15CY15CY15CY15 CY16CY16CY16CY16 CY17CY17CY17CY17 CY15CY15CY15CY15 CY16CY16CY16CY16 CY17CY17CY17CY17 CY15CY15CY15CY15 CY16CY16CY16CY16 CY17CY17CY17CY17 CY15CY15CY15CY15 CY16CY16CY16CY16 CY17CY17CY17CY17
Malay siaMalay siaMalay siaMalay sia
Gamuda 2,824.8 BUY 5.80 18.6 20.6 19.0 1.9 1.9 1.8 1.9 1.9 1.9 10.7 9.6 9.7
IJM 3,055.4 HOLD 3.30 15.3 18.3 18.8 1.5 1.4 1.4 3.2 3.2 3.2 9.8 7.9 7.4
WCT 473.8 HOLD 1.55 11.6 16.8 15.5 0.7 0.9 0.9 2.2 2.2 2.2 9.0 5.7 5.9
Muhibbah Eng 255.7 BUY 3.10 12.0 10.6 9.7 1.2 1.1 1.1 1.8 1.9 2.1 11.7 11.2 11.6
Kimlun 133.5 BUY 2.87 10.0 8.3 7.4 1.2 1.0 1.0 2.1 2.3 2.6 14.8 15.6 15.4
SunCon 525.0 BUY 1.92 16.1 14.3 12.6 4.5 3.8 3.8 2.5 2.7 2.9 33.2 28.7 27.4
Simple A v erageSimple A v erageSimple A v erageSimple A v erage 13.913.913.913.9 14.814.814.814.8 13.813.813.813.8 1.81.81.81.8 1.71.71.71.7 1.71.71.71.7 2.32.32.32.3 2.42.42.42.4 2.52.52.52.5 14.914.914.914.9 13.113.113.113.1 12.912.912.912.9
Dilut ed PE (x)Dilut ed PE (x)Dilut ed PE (x)Dilut ed PE (x) P/NTA (x )P/NTA (x )P/NTA (x )P/NTA (x ) Net Div Y ield (%)Net Div Y ield (%)Net Div Y ield (%)Net Div Y ield (%) ROE (%)ROE (%)ROE (%)ROE (%)
Market Focus
2017 Outlook
Page 19
Consumer
Neutral
Analyst King Yoong CHEAH +60 32604 3908 [email protected] Inani ROZIDIN +603 2604 3905 [email protected]
Price Target
Price PE
2017F
Div Yld
2017201720172017F
EPS CAGR 2015201520152015-2017201720172017
(RM) (RM) Rec (x) (%) (%)
British American Tobacco
47.90 50.20 HOLD 17.9 5.3 5 Petronas Dagangan
23.30 23.85 HOLD 26.2 2.9 5 MSM Malaysia Holdings
5.00 4.60 HOLD 16.2 4.0 15
QL Resources 4.42 4.60 HOLD 23.8 1.3 16
Padini Holdings 2.82 2.95 BUY 11.9 3.5 7
OldTown Berhad 1.90 2.15 BUY 14.9 3.2 7
Sasbadi Holdings 1.43 1.58 BUY 17.7 2.8 27
Source: AllianceDBS Private consumption growth and consumer sentiment index- expected to pick up
Source: Bloomberg Finance L.P., AllianceDBS
Malaysia GDP growth
Source: AllianceDBS
Prospects remain cloudy • Despite recovery in consumer spending, cost
pressure and labour issues could drag earnings • Prefer stocks with regional exposure, potential
capital management initiatives and strong brands • Oldtown remains our top pick in the sector Outlook • Indicators point to a gradual recoveryIndicators point to a gradual recoveryIndicators point to a gradual recoveryIndicators point to a gradual recovery. More than six quarters
have passed since GST was implemented in April last year, and we have observed that its impact is fading with a gradual recovery in consumer spending and visits to shopping malls. Our observations are also supported by recent statistics released by the Malaysian Institute of Economic Research (MIER). Since hitting a record low of 64 points in December 2015, the Consumer Sentiment Index (CSI) has gradually recovered and reached 74 points in Sept 2016, although still below the threshold level of optimism of 100. The recovery in CSI was attributed to (1) waning concerns regarding job prospects, (2) stable currency, and (3) stable household incomes.
• Consumer spending recovery Consumer spending recovery Consumer spending recovery Consumer spending recovery ---- slowly but surelyslowly but surelyslowly but surelyslowly but surely. We remain cautiously optimistic that consumer spending is expected to continue to recover gradually in 2017, supported by (1) government stimulus announced this year such as higher BRIM payment, (2) hike in minimum wage in July, and (3) the stable ringgit.
• Still cautious on earnings outlookStill cautious on earnings outlookStill cautious on earnings outlookStill cautious on earnings outlook. The earnings outlook for the sector is expected to remain cloudy as the gradual improvement in consumer spending in the coming quarters could support top-line growth, but cost pressures and potential labour shortage issues may adversely impact earnings prospects
Risks • Unexpected slowdown in consumer spendingUnexpected slowdown in consumer spendingUnexpected slowdown in consumer spendingUnexpected slowdown in consumer spending. Any event that
triggers an unexpected slowdown in consumer spending will derail the consumer recovery story.
• Cost pressure and labour issuesCost pressure and labour issuesCost pressure and labour issuesCost pressure and labour issues. As mentioned above, such issues will pose a downside risk to the sector’s prospects....
60
70
80
90
100
110
120
130
4
5
6
7
8
9
10
1Q
11
2Q
11
3Q
11
4Q
11
1Q
12
2Q
12
3Q
12
4Q
12
1Q
13
2Q
13
3Q
13
4Q
13
1Q
14
2Q
14
3Q
14
4Q
14
1Q
15
2Q
15
3Q
15
4Q
15
1Q
16
2Q
16
% y-o-yPrivate consumption growth (lhs)
Consumer sentiments index (rhs)
Market Focus
2017 Outlook
Page 20
Valuation & Stock Picks • Stock picks. Stock picks. Stock picks. Stock picks. Given the concerns outlined above, we favour
stocks with (1) resilient business models, (2) established brand names in their respective sectors to withstand the continued challenging operating environment, (3) strong balance sheets to undertake earnings-accretive M&A activities to drive growth and/or engage in capital management exercises to reward shareholders, (4) regional exposure to mitigate (potential) domestic earnings risks, and (5) attractive value propositions. OldTown is our preferred pick in the sector.
Peers comparison
Source: AllianceDBS
CallTarget
Price
Current
Price
Market Cap
(USD)CY2016 CY2017 CY2016 CY2017 CY2016 CY2017 CY2016 CY2017 CY2016 CY2017
BAT HOLD 50.20 47.90 3,259.0 19.5x 17.9x (23%) 9% 4.9% 5.3% 25.5x 31.1x 137% 157%
MSM Malaysia HOLD 4.60 5.00 837.5 16.9x 16.2x (26%) 4% 3.9% 4.0% 1.7x 1.6x 10% 10%
Oldtown BUY 2.15 1.90 204.4 15.1x 13.9x 6% 8% 3.5% 3.6% 2.3x 2.1x 15% 16%
Padini BUY 2.95 2.82 442.1 12.6x 11.9x 35% 6% 3.8% 3.5% 3.7x 3.2x 32% 29%
Petronas Dagangan HOLD 23.85 23.30 5,515.6 27.3x 26.2x 7% 4% 2.7% 2.9% 4.5x 4.3x 17% 17%
Sasbadi Holdings BUY 1.58 1.43 95.2 25.2x 16.6x 10% 52% 1.3% 3.0% 2.7x 2.4x 12% 15%
QL Resources HOLD 4.60 4.42 1,314.4 24.8x 21.8x 17% 14% 1.2% 1.4% 3.2x 2.9x 14% 14%
Average 18.2x 16.9x (17%) 8% 5% 5% 18.3x 22.0x 100% 113%
ROAEP/E (FD)EPS (FD) Growth
(YoY)Dividend Yield Price/ BVPS
Market Focus
2017 Outlook
Page 21
Gaming
Neutral
Analyst King Yoong CHEAH +60 32604 3908 [email protected]
Price Target
Price PE
2015F
Div Yld
2015201520152015F
EPS CAGR 2013201320132013-2015201520152015
(RM) (RM) Rec (x) (%) (%)
Genting Berhad 7.57 9.70 BUY 15.8 0.5 (8)
Genting Malaysia 4.66 5.00 BUY 19.5 1.5 6 Berjaya Sports Toto
3.11 3.06 HOLD 12.0 6.6 (8)
Magnum Bhd 2.27 2.15 HOLD 14.3 7.0 (17)
Source: AllianceDBS KLCI vs Gaming YTD Return
Source: Bloomberg Finance L.P., AllianceDBS
Gaming related tax for the sector (excluding GST and corporation tax)
Source: AllianceDBS
Betting on Genting • Prospects look bright for Genting Group but
unexciting for NFOs • Genting Group to benefit from weak RM and GITP
launches • Challenging times for NFOs with illegal activities
picking up Outlook • Betting on the Genting GroupBetting on the Genting GroupBetting on the Genting GroupBetting on the Genting Group. The sector is dominated by
Genting Group and number forecasting operators (NFOs). We are positive on Genting Group’s earnings prospects, supported by upcoming launches of Genting Integrated Tourism Plan (GITP) coupled with weak Ringgit to attract more foreign tourists and encourage more local travelling among Malaysians.
• NFOsNFOsNFOsNFOs---- hold your betshold your betshold your betshold your bets. On the other hand, while we acknowledge that the current easy monetary policy environment favours NFOs, we remain unexcited on Berjaya Sports Toto (BToto) and Magnum given their challenging earnings prospects. Other than the weak consumer sentiment, the intensifying competition from illegal NFO activities continues to drag growth prospects of the sector.
• New game variants may bring some excitement to NFOs, but New game variants may bring some excitement to NFOs, but New game variants may bring some excitement to NFOs, but New game variants may bring some excitement to NFOs, but don’t bet on it.don’t bet on it.don’t bet on it.don’t bet on it. Introduction of new game variants by legalised NFOs could potentially expand their market reach at the expense of illegal NFOs. The authorities have been more receptive towards new game variants between 2012 and 2014, but the momentum has slowed in 2015 and this year.
Risks • Rising competition and weaker consumer sentRising competition and weaker consumer sentRising competition and weaker consumer sentRising competition and weaker consumer sentiment. iment. iment. iment.
Increased industry competition (particularly from the illegal NFOs) and weaker consumer sentiment could significantly impact ticket sales.
• Malaysian gaming tax hike. Malaysian gaming tax hike. Malaysian gaming tax hike. Malaysian gaming tax hike. Gaming was spared in the recent budget, but the sector remains vulnerable to potentially higher taxes going forward.
Valuation & Stock Picks • GENM remains our top pick. GENM remains our top pick. GENM remains our top pick. GENM remains our top pick. Genting Malaysia (GENM)
remains our top pick of the sector as we foresee three catalysts to re-rate the stock: (1) additional gaming capacities arising from Genting Integrated Tourism Plan-related (GITP) launches, (2) the weak RM to attract more foreign tourists and encourage more local travelling among Malaysians, which could benefit GENM, and (3) rising optimism over the group’s earnings outlook as GITP launches could help to re-rate the stock closer to its intrinsic value. Genting Bhd (GENT) remains a BUY from a valuation perspective.
1%
11%
15%
10%
-4%
-20%
-10%
0%
10%
20%
30%
40%
50%
Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16
%
KLCI Genting Genting Malaysia Berjaya Sport Toto Magnum
Tax type Affected player Tax rate
Casino duty Genting Malaysia 25%
Gaming tax NFOs 8%
Pool betting duty NFOs 8%
Malaysia Strategy
2017 Outlook
Page 22
Peers comparison
Source: AllianceDBS
CallTarget
Price
Current
Price
Market Cap
(USD)CY2016 CY2017 CY2016 CY2017 CY2016 CY2017 CY2016 CY2017 CY2016 CY2017
Genting Malaysia BUY 5.00 4.66 6,294.8 18.1x 16.9x 21% 7% 1.6% 1.8% 1.3x 1.2x 8% 7%
Magnum HOLD 2.15 2.45 769.7 18.3x 13.6x (22%) 34% 5.5% 6.6% 1.4x 1.4x 7% 10%
Genting BUY 9.70 7.92 6,716.8 18.3x 16.9x 11% 8% 0.5% 0.5% 0.8x 0.8x 5% 5%
Berjaya Sports Toto HOLD 3.06 3.57 998.9 12.0x 11.2x 8% 7% 6.6% 7.0% 5.2x 4.8x 46% 45%
Average 17.8x 16.3x 13% 9% 1.6% 1.8% 1.4x 1.3x 9% 9%
ROAEP/E (FD)EPS (FD) Growth
(YoY)Dividend Yield Price/ BVPS
Malaysia Strategy
2017 Outlook
Page 23
Gloves
Neutral
Analyst Siti Ruzanna MOHD FARUK +603 2604 3965 [email protected]
Price Target
Price PE
2017F
Div Yld
2017201720172017F
EPS CAGR 2015201520152015-2017201720172017
(RM) (RM) Rec (x) (%) (%)
Hartalega 4.68 4.20 HOLD 31.6 1.5 1
Top Glove 4.85 4.30 HOLD 18.7 2.7 0
Kossan Rubber 6.57 6.50 HOLD 18.1 2.8 16
Supermax 2.13 2.70 HOLD 7.6 3.4 17
Source: AllianceDBS Top four glove makers’ sales volume
Source: Company, AllianceDBS
Top four glove makers’ unit profitability trend
Source: Company, AllianceDBS
In a tight spot • Volume growth from higher demand but fierce
competition could weigh on ASP • Higher operating costs and raw material prices can
erode margins • Neutral on the glove stocks Outlook • Volume growth guaranteed by global demandVolume growth guaranteed by global demandVolume growth guaranteed by global demandVolume growth guaranteed by global demand.... The volume
growth for the glove makers is pegged to global consumption which is expected to grow by 6%-8% annually. This is backed by the better standards encapsulated in healthcare reforms and hygiene practice in emerging markets. The sector has a 5- year volume CAGR of 8.4%. As for the type of gloves, there is a gradual shift from latex to nitrile gloves which provide better comfort and are lightweight. 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 15%/13% for FY16/17F.
• Average selling price (ASP) may normaliseAverage selling price (ASP) may normaliseAverage selling price (ASP) may normaliseAverage selling price (ASP) may normalise.... Given the intense competition among glove players and the time lag in passing on higher costs, ASP has contracted in the recent quarters. The glove makers practise a cost-pass through mechanism whereby additional cost will be passed on to customers by adjusting ASPs accordingly; though this may entail a time lag of 1-2 months as orders are booked three months in advance. This mechanism will be able to mitigate increases in certain costs such as higher raw material prices, wages and natural gas tariffs. The glove players are also pushing back incoming supply to avoid an oversupply and shift the bargaining power back to the suppliers.
• No booNo booNo booNo boost st st st forforforfor margins. margins. margins. margins. Record-high margins are a thing of the past, as glove makers no longer benefited from a rapidly rising USD and cheaper raw material prices. The weaker USD and rising operating costs were a double whammy for the glove players in FY16. A recovery could be underway as glove players enhance their cost efficiency via higher automation.
Risks • Rising competition could erode margins. Rising competition could erode margins. Rising competition could erode margins. Rising competition could erode margins. Competition is
heating up in the glove sector with several players embarking on aggressive expansion plans, which could lead to lower unit profitability (EBIT/k gloves) going forward.
• Rising costRising costRising costRising cost.... Rising cost from higher raw material prices and gas tariffs will cause margins to decline. This presents downside risks to the glove players.
-
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
2009 2010 2011 2012 2013 2014 2015 2016F 2017F
Hartalega Top Glove Kossan Supermax
-
5.00
10.00
15.00
20.00
25.00
30.00
35.00
40.00
2009 2010 2011 2012 2013 2014 2015 2016F 2017F
Hartalega Top Glove Kossan Supermax
Malaysia Strategy
2017 Outlook
Page 24
Valuation & Stock Picks
• RecentlRecentlRecentlRecently downgraded Top Glove from a BUY to a HOLD.y downgraded Top Glove from a BUY to a HOLD.y downgraded Top Glove from a BUY to a HOLD.y downgraded Top Glove from a BUY to a HOLD. We have a HOLD recommendation for Top Glove with TP RM4.30. Top Glove is trading at 18.9x FY17 EPS , which is unjustified as 1) upside from forex gains is diminishing, 2) competition among glove players is intensifying especially in the nitrile segment, and 3) operating costs are rising from natural gas hike and higher raw material prices. Our TP is based on 16x CY17F EPS which is broadly in line with its 5-year mean EPS.
Source: AllianceDBS
Peers Valuation
CallTarget
PriceCurrent Price
Market Cap
(USD)CY2016 CY2017 CY2016 CY2017 CY2016 CY2017 CY2016 CY2017 CY2016 CY2017
Hartalega HOLD 4.20 4.68 1,812.6 32.8x 31.6x 1% 4% 1.5% 1.5% 5.1x 4.7x 16% 15%
Top Glove HOLD 4.30 4.85 1,428.3 17.8x 18.4x 13% (4%) 2.8% 2.7% 3.3x 3.1x 20% 17%
Kossan HOLD 6.50 6.57 1,000.9 20.3x 18.6x 5% 9% 2.5% 2.7% 4.0x 3.6x 21% 21%
Supermax HOLD 2.70 2.13 336.4 8.6x 7.4x 31% 16% 3.1% 3.6% 1.3x 1.2x 16% 17%
Average 3,150.0 23.7x 23.0x 8% 4% 2.2% 2.3% 4.0x 3.7x 18% 17%
Price/ BVPS ROAEP/E (FD)EPS (FD) Growth
(YoY)Dividend Yield
Malaysia Strategy
2017 Outlook
Page 25
Media
Neutral
Analyst Woo Kim TOH +60 32604 3917 [email protected]
Price Target
Price PE
2017F
Div Yld
2017201720172017F
EPS CAGR 2015201520152015-2017201720172017
(RM) (RM) Rec (x) (%) (%)
Astro 2.78 3.00 HOLD 21.6 4.7 13
Media Chinese 0.69 0.71 HOLD 11.9 5.9 (5)
Media Prima 1.28 1.35 HOLD 10.5 7.6 17
Star Media Group 2.48 2.20 HOLD 15.4 7.3 14
Source: AllianceDBS MIER Consumer Index
Source: Malaysian Institute of Economic Research
Cheap for a reason • No catalyst to drive a recovery in consumer
sentiment in 2017 • Traditional media are losing market share • Valuations are cheap but for good reason Outlook • Adex spending remains weak due to poor consumer Adex spending remains weak due to poor consumer Adex spending remains weak due to poor consumer Adex spending remains weak due to poor consumer
sentimentsentimentsentimentsentiment. We believe there is no catalyst to drive a strong recovery in consumer sentiment, and hence adex spending should remain weak in 2017. Furthermore, unlike 2016, there are no major sporting events to help to spur adex. Timing of the 14th general election could also affect adex spending because advertisers generally turn more cautious given the uncertainties leading up to the polling date.
• Traditional media losing market share.Traditional media losing market share.Traditional media losing market share.Traditional media losing market share. Adspend on Media Prima FTA-TV has been quite weak, losing market share to Astro Pay-TV. Although not captured by official statistics, we think online media (such as Youtube) has been gaining market share as well. Similarly, most newspaper publishers are suffering from declining circulation and adex as consumption trends towards online media as well.
• Weak Ringgit still a key issueWeak Ringgit still a key issueWeak Ringgit still a key issueWeak Ringgit still a key issue. Although newspaper publishers benefitted from the low newsprint prices (30-40% of production cost), this had been partly offset by the weaker Ringgit. Other than that, TV operators such as Astro and Media Prima are also affected by the weak Ringgit which results in more costly foreign content.
Risks • Sharp depreciation in Ringgit vs. USD. Sharp depreciation in Ringgit vs. USD. Sharp depreciation in Ringgit vs. USD. Sharp depreciation in Ringgit vs. USD. Revenues of Malaysian
media companies are predominantly denominated in Ringgit, while certain costs such as programme rights and newsprint costs are denominated in USD. A sharp appreciation in USD vs. MYR will be negative for earnings.
Valuation & Stock Picks • HOLD calls for all media companies. HOLD calls for all media companies. HOLD calls for all media companies. HOLD calls for all media companies. Our TP for the media
companies are pegged to 11-12x CY17 EPS, in line with their respective 5-year historical average multiples. The sector lacks re-rating catalysts given persistent weak adex. Nevertheless, net dividend yield for the sector remains decent at 5-7%.
HOLD call on Astroon Astroon Astroon Astro. We have a RM3.00 DCF-based TP for Astro (8.4% WACC, 1.0% TG). The stock trades at about 9.6x EV/EBITDA, similar to other listed pay-TV operators in this region.
Malaysia Strategy
2017 Outlook
Page 26
Peers comparison
Sources: AllianceDBS, Bloomberg Finance L.P
CallTarget
Price (RM)
Current
Price (RM)
Market Cap
(USD)CY2016 CY2017 CY2016 CY2017 CY2016 CY2017 CY2016 CY2017 CY2016 CY2017
Astro HOLD 3.00 2.78 3,450.9 10% 18% 21.7x 18.5x 9.3x 8.9x 5% 5% 111% 130%
Media Prima HOLD 1.35 1.28 338.3 (20%) 22% 12.9x 10.5x 5.2x 4.4x 6% 8% 7% 8%
Star HOLD 2.20 2.48 436.1 (26%) 20% 18.5x 15.4x 8.3x 6.8x 7% 7% 9% 11%
Media Chinese HOLD 0.71 0.69 277.4 (15%) (2%) 11.5x 11.7x 5.4x 5.4x 6% 6% 12% 11%
Average 2% 17% 20.1x 17.2x 8.7x 8.2x 5% 6% 87% 102%
ROAE (%)EPS Growth (%) P/E (x) EV/EBITDA (x) Divd yield (%)
Market Focus
2017 Outlook
Page 27
Oil and Gas
Neutral
Analyst Malaysian Research Team +603 2604 3333 [email protected]
Price Target
Price PE
2017F
Div Yld
2017201720172017F
EPS CAGR 2015201520152015-2017201720172017
(RM) (RM) Rec (x) (%) (%)
Petronas Chemical 6.64 5.50 FV 19.1 2.7 0
Bumi Armada 0.71 0.85 BUY 12.8 2.3 (20)
SapuraKencana 1.63 1.16 FV 8.8 2.7 (22)
Dialog 1.51 1.70 HOLD 33.3 1.4 10
MMHE 1.02 0.98 FV 18.8 0.0 (20)
UMWOG 0.88 0.80 FV nm 0.0 nm
Dayang 1.00 0.88 FV 6.9 3.5 (64)
Coastal Contracts 1.50 1.40 HOLD 4.8 3.3 (24)
Deleum 1.06 1.02 HOLD 9.6 5.2 (33)
Pantech 0.54 0.64 BUY 8.2 7.2 (20)
Source: AllianceDBS Malaysia O&G Contract Flow
Source: Bursa Malaysia, AllianceDBS
Still too early for a relook
• Challenging growth outlook over the next one year. Sector growth for 2017 is guided to be negative 1%
• Continue to be watchful over corporate earnings
disappointment, asset impairments and debt defaults
• Bumi Armada remains our top pick as its long-term
recurring-income business model provides a degree of certainty under current situation
Outlook • Roller coaster ride. Crude oil prices have rebounded from the
2016 low of USD28/bbl. For now, our crude oil price outlook is maintained at USD50-55/bbl for 2017 as we expect supply-demand conditions to balance by next year. This follows the commitment by OPEC to lower output from 33.2m to 32.5m-33.0mmbpd in the Algiers meeting in Sept. However, we need to continue monitoring non-OPEC output decisions.
• Muted earnings growthMuted earnings growthMuted earnings growthMuted earnings growth. Corporate results released thus far have been disappointing. Moreover, sector growth for 2017 is guided to be around -1% despite the low base of this year which recorded 10% decline.
• Slightly positive on domestic contractsSlightly positive on domestic contractsSlightly positive on domestic contractsSlightly positive on domestic contracts. New tenders and contracts have been moving at a sluggish pace over FY16 (9M16 declined 35% y-o-y), but we expect this situation to improve over FY17.
Risks • Persistently low oil prices. Persistently low oil prices. Persistently low oil prices. Persistently low oil prices. Further capex cuts could happen if
oil prices continue to trade below US$50/bbl. This would in turn limit any upside in corporate earnings growth due to slow rollout in contracts.
• Further slowdown in work orders. Further slowdown in work orders. Further slowdown in work orders. Further slowdown in work orders. There is no doubt that oil and gas service providers have been facing a slowdown and margin compression in terms of orderbook execution. There is a risk that the slowdown would persist into next year....
• Asset imAsset imAsset imAsset impairments and default risk. pairments and default risk. pairments and default risk. pairments and default risk. We could potentially see more asset impairments for Malaysian oil and gas players (SapuraKencana, Bumi Armada and UMWOG). Furthermore, some are seeing difficulties in meeting their short-term debt obligations (big cap namely UMWOG) with their operating cash flow and cash in hand.
3,488
255 603
5,759
540
1,020
981
3,539
1,131
4,230
460
7,189
1,601
3,833
1,716 2,239
8,526
14,512
4,484
16,242
11,570
16,082
5,538
2,317
9,743
4,216
2,472
8,005
3,187 1,491
6,047
1Q
09
2Q
09
3Q
09
4Q
09
1Q
10
2Q
10
3Q
10
4Q
10
1Q
11
2Q
11
3Q
11
4Q
11
1Q
12
2Q
12
3Q
12
4Q
12
1Q
13
2Q
13
3Q
13
4Q
13
1Q
14
2Q
14
3Q
14
4Q
14
1Q
15
2Q
15
3Q
15
4Q
15
1Q
16
2Q
16
3Q
16
RMm
Market Focus
2017 Outlook
Page 28
Valuation & Stock Picks • BUY Bumi Armada (TP: RM0.85). BUY Bumi Armada (TP: RM0.85). BUY Bumi Armada (TP: RM0.85). BUY Bumi Armada (TP: RM0.85). We believe that Bumi
Armada could weather the storm quite comfortably compared to its peers, thanks to its decent valuation and long-term FPSO earnings business model which should provide earnings stability under the current market conditions. We believe the potential upside significantly outweighs downside risks. Nonetheless, in the event of potential kitchen sinking exercise we do not rule out the possibility of further downside risk to the stock.
Peers comparison
Sources: AllianceDBS, Bloomberg Finance L.P
CallTarget
Price
Current
Price
Market Cap
(USD)CY2016 CY2017 CY2016 CY2017 CY2016 CY2017 CY2016 CY2017 CY2016 CY2017
Bumi Armada BUY 0.85 0.70 978.5 24.8x 11.3x (49%) 121% 1.0% 2.2% 0.6x 0.5x 2% 5%
Coastal Contracts HOLD 1.40 1.52 192.1 7.7x 7.9x (37%) (3%) 2.1% 2.0% 0.5x 0.4x 6% 6%
Dayang Enterprises FULLY VALUED 0.88 0.86 178.6 32.9x 9.8x (82%) 237% 0.0% 0.0% 0.7x 0.7x 2% 7%
Deleum HOLD 1.02 0.99 94.4 16.3x 10.7x (40%) 53% 3.1% 4.7% 1.4x 1.3x 9% 13%
Dialog Group Bhd HOLD 1.70 1.51 1,909.0 27.9x 24.4x 15% 15% 1.5% 1.6% 3.5x 3.2x 14% 14%
MMHE FULLY VALUED 0.98 0.99 377.4 23.2x 20.7x (20%) 12% 0.0% 0.0% 0.6x 0.6x 3% 3%
Pantech Holdings BUY 0.64 0.55 80.7 8.8x 7.7x 9% 15% 5.1% 5.8% 0.6x 0.6x 8% 9%
SapuraKencana FULLY VALUED 1.16 1.53 2,184.6 50.5x 39.9x (74%) 27% 0.2% 0.3% 0.8x 0.8x 1% 2%
UMW Oil & Gas FULLY VALUED 0.80 0.85 437.9 nm nm 477% (34%) 0.0% 0.0% 0.6x 0.7x (9%) (7%)
Average 32.1x 23.8x (3%) 34% 0.8% 1.1% 1.5x 1.4x 5% 6%
ROAEP/E (FD)EPS (FD) Growth
(YoY)Dividend Yield Price/ BVPS
Market Focus
2017 Outlook
Page 29
Plantations
Neutral
Analyst Ben SANTOSO +65 6682 3707 [email protected] Marvin KHOR +60 32604 3911 [email protected]
Price Target
Price PE
2016F
Div Yld
2016201620162016F
EPS CAGR 2014201420142014-2016201620162016
(RM) (RM) Rec (x) (%) (%)
Felda Global Ventures
1.94 1.55 FV 40.1 2.6 91 Genting Plantations
10.54 11.60 HOLD 24.5 0.9 32
IOI Corporation 4.35 4.30 HOLD 36.6 1.4 17
KL Kepong 24.10 22.40 HOLD 21.8 2.8 10
Sime Darby 8.16 7.40 HOLD 24.0 2.6 1
TSH Resources 1.87 2.20 BUY 20.7 1.2 29
Source: AllianceDBS, DBS Bank CPO, soybean, soybean oil forecast revisions
Source: Bloomberg Finance L.P., DBS Bank, AllianceDBS
CPO prices and USDMYR
Source: AllianceDBS, DBS Bank
The currency play • Global palm oil output set to expand 8% in 2017
after shrinking 5% this year, but biodiesel blending will help support demand
• CY16/17F palm oil price forecasts in Ringgit terms
tweaked -0.7%/+2.0% to RM2,600/RM2,610; pressure from lower soybean prices but lifted by weaker Ringgit
• Upgraded BUY recommendation on TSH Outlook • Palm oil supply to rebound after 2016 contraction.Palm oil supply to rebound after 2016 contraction.Palm oil supply to rebound after 2016 contraction.Palm oil supply to rebound after 2016 contraction. The
lagged impact of 2015 El Nino should cut global palm oil output by 5% this year (steeper than the 3% previously estimated). But we also expect palm oil output to jump 8% next year (low-base effect) to 64.3m MT, as fresh fruit bunch (FFB) yield recovers. Demand from food sector is projected to expand by a smaller 1.4m MT. However, as Indonesia’s export volume rebounds, so too will its collection of export levies – thus allowing Indonesia to fund its biodiesel mandate next year. All things considered, we expect palm oil prices (US$/MT, FOB) to average marginally lower next year.
• Biodiesel mandates to help absorb volume.Biodiesel mandates to help absorb volume.Biodiesel mandates to help absorb volume.Biodiesel mandates to help absorb volume. Indonesia’s biodiesel mandate – including exports and non-subsidised absorption – is assumed to reach 3.7m MT (+46% y-o-y) next year. In Malaysia, total biodiesel output is also expected to expand 15% y-o-y to 0.9m MT (based on USDA projection). Combined with biodiesel output from Indonesia and Malaysia, global palm oil demand is forecast to reach 64.6m MT (+4% y-o-y).
• Currency booster for Malaysian planters.Currency booster for Malaysian planters.Currency booster for Malaysian planters.Currency booster for Malaysian planters. Imputing up to 44% h-o-h recoveries in 2H16 output, we expect plantation firms’ 3QCY16 earnings to sequentially rebound by up to >100%. While better short-term earnings are generally expected, diverging trends in regional currency (i.e. weaker Ringgit and stronger Rupiah) indicate that Malaysian plantation firms will come out better ahead in terms of valuations and reported earnings.
Risks • Where we can go wrong.Where we can go wrong.Where we can go wrong.Where we can go wrong. Palm oil price forecasts are based
on assumed output recovery, crude oil prices/currency exchange rates and no change in policies (i.e. export/import taxes, biodiesel mandates, etc.). Any change in biodiesel price formula/export levies in Indonesia could affect our palm oil supply/demand/price assumptions.
• Global weather phenomena.Global weather phenomena.Global weather phenomena.Global weather phenomena. The US’ National Oceanic and Atmospheric Administration (NOAA) is currently forecasting a 70% chance of La Nina weather formation in fall 2016
3.00
3.40
3.80
4.20
4.60
1,400
1,900
2,400
2,900
3,400
Jan-14
Mar-14
May-14
Jul-14
Sep-14
Nov-14
Jan-15
Mar-15
May-15
Jul-15
Sep-15
Nov-15
Jan-16
Mar-16
May-16
Jul-16
Sep-16
Nov-16
MPOB spot prices (RM/mt) (lhs) USDMYR (rhs)
15151515 16F16F16F16F 17F17F17F17F 18F18F18F18F 19F19F19F19F 20F20F20F20F
CPO price
(RM/MT FOB P.Gudang) 2,168 2,600 2,610 2,720 2,770 2,820
CPO price
(US$/MT FOB P.Gudang) 560 633 618 622 626 637
Prev. CPO price
(RM/MT FOB P.Gudang) 2,168 2,620 2,560 2,530 2,520 2,560
Prev. CPO price
(US$/MT FOB P.Gudang) 560 639 629 630 629 639
Soybean price
(US$/MT FOB Chicago) 346 364 335 335 340 349
Soybean oil price
(US$/MT FOB Chicago) 667 732 711 717 728 747
Previous SB price
(US$/MT FOB Chicago) 346 360 337 338 341 349
Previous SBO price
(US$/MT FOB Chicago) 667 731 723 724 730 748
Market Focus
2017 Outlook
Page 30
(4QCY16) with 55% chance of persisting into winter 2016/17 (1QCY17). This has potential to impact South American soybean crops in 1QCY17 onwards, where supply disruption may mean upside risks to both soybean/palm oil prices.
• USUSUSUSD strength.D strength.D strength.D strength. In our forecasts, we assume a strong USD. A reversal of this trend would have an adverse impact on soybean and crude oil prices in USD terms as well as CPO prices in Ringgit and Rupiah terms. A strong USD would also make planting soybeans in South America more profitable in local currencies.
Valuation & Stock Picks • TSHTSHTSHTSH is our is our is our is our top picks with revised outlooktop picks with revised outlooktop picks with revised outlooktop picks with revised outlook. While our
CY16/17F CPO price forecasts are revised down in US$/MT, FOB terms to 633/618; weaker imputed USD/MYR exchange rates of 4.10/4.22 (from 4.10/4.07) raise the Ringgit forecasts for CY17F onwards. Malaysian plantation firms are net beneficiaries, and we had upgraded most under our coverage. We now rate TSH (TP to RM2.20) a BUY as its production growth should outperforms peers in the coming years thanks to its maturity pipeline.
• Improvements are priced in for most othersImprovements are priced in for most othersImprovements are priced in for most othersImprovements are priced in for most others. We have also upgraded IOI (TP raised to RM4.30), GENP (TP to RM10.70) and SIME (TP to RM7.40) to HOLD on better ASPs. KLK (TP to RM22.40) remains a HOLD. FGV (TP to RM1.55) is kept at FULLY VALUED as its share price rally has run ahead of fundamentals, albeit the improved outlook.
Peers comparison
CallTarget
Price
Current
price
Market Cap
(USD m)CY2016 CY2017 CY2016 CY2017 CY2016 CY2017 CY2016 CY2017 CY2016 CY2017
Felda Global Ventures FULLY VALUED 1.55 1.94 1,691.5 93.8x 40.1x n.m. 134% 1.1x 1.1x 1% 3% 2.6% 2.6%
Genting Plantations HOLD 11.60 10.54 1,998.3 34.2x 24.5x 27% 40% 1.9x 1.8x 6% 7% 0.7% 0.9%
IOI Corporation HOLD 4.30 4.35 6,537.4 39.7x 33.8x 101% 17% 3.8x 3.6x 10% 11% 1.6% 1.5%
KL Kepong HOLD 22.40 24.10 6,133.9 23.7x 21.3x 18% 11% 2.4x 2.3x 14% 11% 3.4% 2.8%
Sime Darby HOLD 7.40 8.16 12,956.0 22.8x 22.5x (7%) 1% 1.6x 1.5x 7% 7% 3.0% 2.8%
TSH Resources BUY 2.20 1.87 605.9 26.4x 20.7x 8% 27% 1.8x 1.7x 7% 8% 0.9% 1.2%
Sector weighted average 31.5x 25.8x 17% 17% 2.2x 2.1x 9% 8% 2.5% 2.3%
P/E EPS Growth (YoY) P/BV ROAE Dividend Yield %
Market Focus
Plantations
Page 31
Property
Neutral
Analyst QUAH He Wei, CFA +603 2604 3966 [email protected]
Price Target
Price PE
2016F
Div Yld
2016201620162016F
EPS CAGR 2014201420142014-2016201620162016
(RM) (RM) Rec (x) (%) (%)
SP Setia 3.37 3.40 HOLD 14.1 4.3 (12)
Sunway Bhd 3.06 2.90 HOLD 11.0 2.7 (9)
UEM Sunrise Bhd 1.10 1.00 HOLD 29.7 0.9 0
Eco World 1.33 1.80 BUY 24.4 0.0 89 Eastern & Oriental Bhd
1.53 1.20 FV 127.0 1.3 4 Matrix Concepts Holdings Bhd
2.54 3.20 BUY 5.5 7.3 9
MKH Berhad 2.72 3.20 BUY 7.5 2.9 19
Source: AllianceDBS Weak consumer sentiment
Source: Bloomberg Finance L.P., AllianceDBS
Breakdown of residential property transactions by price
Source: AllianceDBS
Challenging outlook • Slow sales is the new norm due to weak
affordability and low supply of affordably-priced properties
• Increasing supply from public housing may
intensify competition in affordable segment • Top pick: Matrix Concepts – affordable township
developer with sustainable earnings and yield Outlook • No signs of recoveryNo signs of recoveryNo signs of recoveryNo signs of recovery. After the sluggish property sales in
2016, we expect the property market to remain lacklustre in 2017, driven by prolonged weak sentiment, low affordability and accelerating incoming supply. Property buyers are likely to adopt a wait-and-see attitude in anticipation of lower selling prices in the near to medium term.
• Demand for valueDemand for valueDemand for valueDemand for value----adding products remaiadding products remaiadding products remaiadding products remains resilientns resilientns resilientns resilient. We are still seeing strong demand for selective new projects which offer value proposition to buyers despite the relatively weaker market. Differentiating features and value-driven pricing have increasingly dominated buyers’ priority list given the weak sentiment.
• Intensifying competition for private developers. Intensifying competition for private developers. Intensifying competition for private developers. Intensifying competition for private developers. Private developers face the challenge of supplying affordably-priced properties at the expense of lower profitability due to the rising cost environment (land, compliance, construction). Developers will have to revise their product offerings to incorporate more ‘value-buy’ properties with differentiating lifestyle amenities that will distinguish themselves from lower-priced public housing.
Risks • Potential earnings downside risk. Potential earnings downside risk. Potential earnings downside risk. Potential earnings downside risk. While unbilled sales remain
healthy for near-term earnings visibility, weaker-than-expected sales replenishment over the next 12 months could pose further earnings risk come 2H17-2018. With most developers vying for the affordable housing space now, this could come at the expense of margins as well. . . .
• Deteriorating economic outlook. Deteriorating economic outlook. Deteriorating economic outlook. Deteriorating economic outlook. This could lead to more stringent bank assessment of property buyers in obtaining bank financing. High loan rejection rates have resulted in slow take-up rates for new property projects.
Valuation & Stock Picks • Prefer pure township developerPrefer pure township developerPrefer pure township developerPrefer pure township developer. Matrix is the best proxy to
affordable housing as it mainly focuses on landed properties priced below RM600k. Its property sales remain robust
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
70%
60
70
80
90
100
110
120
130
1Q10
3Q10
1Q11
3Q11
1Q12
3Q12
1Q13
3Q13
1Q14
3Q14
1Q15
3Q15
1Q16
MIER consumer sentiment (LHS)
Total approved property loan growth (RHS)
87% 85% 83% 83% 81% 78% 75%72%
60%53%
61% 58%
9% 11% 12% 12% 14% 15% 16% 18%
27%31%
25% 27%
2% 3% 3% 4% 4% 5% 6% 7% 9% 11% 11% 11%
0%
20%
40%
60%
80%
100%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 1H16
<250k 250-500k 500k-1m
Market Focus
2017 Outlook
Page 32
despite the tough operating environment, and it is on track to achieve its record-high property sales of RM1bn in FY17.
Number of property transactions
Source: AllianceDBS, Bloomberg Finance L.P.
Peer comparison
Market Market Market Market capcapcapcap
(USDm)(USDm)(USDm)(USDm) RNAV RNAV RNAV RNAV discountdiscountdiscountdiscount
PEPEPEPE PBPBPBPB ROEROEROEROE
CompanyCompanyCompanyCompany FYEFYEFYEFYE RatingRatingRatingRating PricePricePricePrice TPTPTPTP CY16CY16CY16CY16 CY17CY17CY17CY17 CY16CY16CY16CY16 CY17CY17CY17CY17 CY16CY16CY16CY16 CY17CY17CY17CY17
SP Setia Dec Hold 3.37 3.40 2,264 40% 14.1 12.1 1.2 1.1 8% 9%
Sunway Dec Hold 3.06 2.90 1,483 27% 11.0 11.1 0.8 0.8 7% 7%
UEM Sunrise Dec Hold 1.10 1.00 1,189 68% 29.7 22.9 0.8 0.8 2% 3%
Eco World Oct Buy 1.33 1.80 871 38% 23.5 18.6 1.0 0.9 4% 5%
E&O Mar FV 1.53 1.20 458 61% 55.8 43.6 1.1 1.1 2% 3%
Matrix Concepts Dec Buy 2.54 3.20 346 44% 6.2 6.1 1.4 1.2 23% 20%
MKH Sep Buy 2.72 3.20 272 46% 7.4 7.1 0.9 0.8 12% 12%
AverageAverageAverageAverage
46%46%46%46% 21.1 21.1 21.1 21.1 17.4 17.4 17.4 17.4 1111.0 .0 .0 .0 1.0 1.0 1.0 1.0 8%8%8%8% 8%8%8%8%
Source: AllianceDBS, Bloomberg Finance L.P.
-
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
450,000
500,000
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
UnitUnitUnitUnit
Residential Commercial Industrial Agricultural Development land others
Market Focus
2017 Outlook
Page 33
REIT
Neutral
Analyst Inani ROZIDIN +603 2604 3905 [email protected]
Price Target
Price PE
2017F
Div Yld
2017201720172017F
EPS CAGR 2015201520152015-2017201720172017
(RM) (RM) Rec (x) (%) (%)
Sunway REIT 1.77 1.95 BUY 16.8 5.7 13
CMMT 1.60 1.70 BUY 17.2 6.2 6 KLCCP Stapled Group
7.80 8.05 HOLD 18.6 4.8 2
IGB REIT 1.62 1.70 HOLD 20.8 5.3 4
Pavilion REIT 1.74 1.85 HOLD 18.8 5.2 5
Axis REIT 1.71 1.80 HOLD 16.0 5.2 1
MRCB-Quill REIT 1.28 1.30 HOLD 14.5 6.2 4
Source: AllianceDBS M-REIT yield chart
Source: Bloomberg Finance L.P., AllianceDBS
Consumer Sentiment
Source: MIER, Department of Statistics
Holding up well • Limited organic growth; weak consumer sentiment
is the prevailing impediment • Acquisition play to boost earnings in CY17 • Selective BUY of M-REITs with robust asset
portfolio: SunREIT, CMMT Outlook • The MIER Consumer Sentiment Index has shown some signs The MIER Consumer Sentiment Index has shown some signs The MIER Consumer Sentiment Index has shown some signs The MIER Consumer Sentiment Index has shown some signs
of recovery in 2QCY16 at 78.5 pts (+6.8 pts yof recovery in 2QCY16 at 78.5 pts (+6.8 pts yof recovery in 2QCY16 at 78.5 pts (+6.8 pts yof recovery in 2QCY16 at 78.5 pts (+6.8 pts y----oooo----y)y)y)y). Although still below the 100-pt threshold level of confidence, we believe this is an indication that the prolonged weak domestic consumption may have bottomed out since the implementation of GST last year and we expect the consumer sentiment to gradually improve moving forward. In addition, the improvement in consumer spending was also supported by fiscal measures to raise household disposable income such as the EPF contribution rate cut (March), tax relief (March), salary increment for civil servants (July) and minimum wage hike (July). We expect the implementation of further fiscal measures to raise household disposable income in CY17.
• We expect to see the following prevailing challenges in CY17We expect to see the following prevailing challenges in CY17We expect to see the following prevailing challenges in CY17We expect to see the following prevailing challenges in CY17: 1) weak consumer spending to affect retail segment, 2) oversupply of office space, and 3) weaker hotel segment due to softer demand. That being said, we have incorporated the weak/negative reversions and poor occupancies of underperforming assets in our portfolio. As such, we believe the fundamentals are intact given that major earnings risks have been accounted for, and our estimates are conservative compared to consensus.
• In the near term, organic rental income is expected to remain In the near term, organic rental income is expected to remain In the near term, organic rental income is expected to remain In the near term, organic rental income is expected to remain steady with flattish growthsteady with flattish growthsteady with flattish growthsteady with flattish growth due to moderate reversions and the current weak consumer sentiment. Any substantial improvement in NPI growth will be driven by acquisitions and portfolio expansions. While rental reversions from retail assets have moderated, it has remained in positive territory. However, the hospitality and office segments continue to struggle in filling up vacancies. In order to grow further, the majority of the REITs are looking at potential acquisitions with immediate earnings accretions to boost NPI and DPU.
• Retail segmentRetail segmentRetail segmentRetail segment. The tepid consumer sentiment may have a negative effect on the retail sector, in the form of lower retail spending, rental reversions and visitor traffic. In light of the prolonged weak sentiment and sluggish same store sales growth, REIT managers have begun to negotiate tenancy renewals in advance. Across the board, occupancy levels remained resilient for all the retail REITs under our coverage as REIT managers focused on retaining tenants rather than securing high reversions. Aside from prime shopping hotspots
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
4.50%
5.00%
5.50%
6.00%
Oct
-13
De
c-1
3
Feb
-14
Ap
r-1
4
Jun
-14
Au
g-1
4
Oct
-14
De
c-1
4
Feb
-15
Ap
r-1
5
Jun
-15
Au
g-1
5
Oct
-15
De
c-1
5
Feb
-16
Ap
r-1
6
Jun
-16
Au
g-1
6
Oct
-16
%%
Weighted Portfolio Yield (lhs) 10YR MGS Yield (lhs)Portfolio vs MGS Spread (rhs)
60
70
80
90
100
110
120
130
4
5
6
7
8
9
10
1Q
11
2Q
11
3Q
11
4Q
11
1Q
12
2Q
12
3Q
12
4Q
12
1Q
13
2Q
13
3Q
13
4Q
13
1Q
14
2Q
14
3Q
14
4Q
14
1Q
15
2Q
15
3Q
15
4Q
15
1Q
16
2Q
16
% y-o-y
Private consumption growth (lhs)
Consumer sentiments (rhs)
Market Focus
2017 Outlook
Page 34
such as Suria KLCC, Sunway Pyramid, Mid Valley Megamall and The Gardens mall, REITs are adopting a different strategy for other malls in their portfolio. For small- to mid-sized urban malls, management is adjusting the tenants mix and re-positioning the malls’ target market to cater to the needs of the neighbourhood. One of the focuses is to improve the F&B tenant mix at the expense of other segments, as F&B is less vulnerable to fluctuations in discretionary spending.
• Office segmentOffice segmentOffice segmentOffice segment. The National Property Info Centre’s most recent data release is for 4Q15, which showed that the composite Kuala Lumpur office rental index rose 3.2%. However, the average availability rate (or vacancy rate) had increased in 2H15 to 21.5% from 19.7% (2H14). Although occupancy levels have been struggling to trend up, the average rental rates have been increasing due to the presence of more investment-grade properties and newer buildings with better facilities. The increase was also influenced by upgraded services and facilities provided in existing buildings. Nonetheless, vacancy rate is still a worrying issue faced by the office REITs in our coverage. Out of all the REITs in our coverage, Axis REIT and MQ-REIT are office and industrial-based REITs, while KLCCSS has high exposure to the office segment at 82% of its total NLA. On the other hand, CMMT, PavREIT and IGB REIT are retail-focused REITs.
• Acquisition playAcquisition playAcquisition playAcquisition play. There have been few acquisitions in CY16. Year-to-date, Axis REIT has agreed to acquire four logistics assets worth RM177m and Sunway REIT has announced its planned acquisition of a vacant land next to
Sunway Carnival Mall for RM17m that is intended to facilitate future expansion of the mall. Furthermore, the most sizeable announcement is MRCB-Quill REIT’s proposed acquisition of Menara Shell for RM640m. Nonetheless, we expect the conditions to improve in CY17, with more proposed acquisitions in the pipeline – involving PavREIT (Pavilion Extension and Fahrenheit88 Mall) and Axis REIT (six assets with an indicative value of RM242m). Moreover, in the mid to long term, we foresee injection opportunities for SunREIT and IGB REIT, as their sponsors are developing new retail malls.
Risks • Pace of acquisitionsPace of acquisitionsPace of acquisitionsPace of acquisitions. A REIT’s draw is its potential to secure a
steady stream of DPU-accretive acquisitions. On this note, any significant delay in acquisitions could cap a REIT’s share price appreciation, especially as its peers could also be looking at asset growth.
• Weak general sentimentWeak general sentimentWeak general sentimentWeak general sentiment. The tepid consumer sentiment may have a negative effect on the retail and hospitality sectors, in the form of lower retail spending, rental reversions and local tourist visits.
• Office space oveOffice space oveOffice space oveOffice space oversupplyrsupplyrsupplyrsupply. If the supply overhang of office space persists, it could be challenging to refill vacancies and rental rates may see negative growth.
Valuation & Stock Picks • Selective picks. We continue to like Sunway REIT for its
diversified segmental asset portfolio and acquisition pipeline, and CMMT for its diversified retail presence in the Klang Valley, Penang and Kuantan.
Peer comparison
Sources: AllianceDBS, Bloomberg Finance L.P
Call TP PriceMkt Cap
(USD m)CY2016 CY2017 CY2016 CY2017 CY2016 CY2017 CY2016 CY2017 CY2016 CY2017
AllianceDBS forecasts
Sunway REIT BUY 1.95 1.77 1,241.3 8% 10% 9.7 10.7 1.29x 1.30x 5.5% 6.0% 9.8 11.1
CapitaMalls Malaysia Trust BUY 1.70 1.60 764.3 1% 12% 8.7 9.8 1.21x 1.21x 5.4% 6.1% 8.7 9.3
KLCC Stapled Securities HOLD 8.05 7.80 3,374.7 4% 3% 35.9 37.2 1.12x 1.12x 4.6% 4.8% 40.8 42.0
IGB REIT HOLD 1.70 1.62 1,347.7 0% 5% 8.2 8.6 1.52x 1.51x 5.0% 5.3% 7.5 7.8
Pavilion REIT HOLD 1.85 1.74 1,266.8 (1%) 11% 8.2 9.1 1.37x 1.36x 4.7% 5.2% 8.5 9.3
Axis REIT HOLD 1.80 1.71 450.0 0% 8% 8.4 9.1 1.39x 1.39x 4.9% 5.3% 9.8 10.7
MRCB-Quill REIT HOLD 1.30 1.28 203.2 5% (10%) 8.9 8.0 0.94x 1.02x 6.9% 6.2% 8.6 8.8
ADBS total / weighted avg 8,648.0 3% 6% 19.3 20.2 1.26x 1.26x 5.0% 5.3% 21.2 22.1
less KLCCSS 5,273.3 2% 8% 8.7 9.4 1.35x 1.35x 5.2% 5.6% 8.7 9.4
EPS (sen)DPU Growth
(YoY)DPU (sen) Price/NAV Dividend Yield
Malaysia Strategy
2017 Outlook
Page 35
Technology
Overweight
Analyst Woo Kim TOH +60 32604 3917 [email protected]
Price Target
Price PE
2017F
Div Yld
2017201720172017F
EPS CAGR 2015201520152015-2017201720172017
(RM) (RM) Rec (x) (%) (%)
Globetronics 3.57 4.00 BUY 12.6 7.3 85
Inari Amertron 3.32 4.00 BUY 15.5 3.2 27
MPI 7.92 8.15 HOLD 10.4 2.9 7
Unisem 2.45 2.80 HOLD 11.2 5.3 6
Source: AllianceDBS Smartphone shipments (in million units)
Source: IDC
Indexed performance of Malaysian semi vs. regional index (Jan 2015 = 100)
Source: Bloomberg Finance L.P., AllianceDBS
Slow growth, the new normal • A phase of slow growth for the industry as the
current growth driver, smartphone is peaking out • Prefer companies with identifiable growth drivers
such as new content wins that will help to offset slowing unit growth
• Top pick is Inari Outlook • Slow growth is the new normalSlow growth is the new normalSlow growth is the new normalSlow growth is the new normal. We expect the
semiconductor industry to undergo a phase of slow growth as smartphone sales reach its peak. While semiconductor content in automotive is rising with the move towards advanced driver assistance systems (ADAS) and driverless cars, we think this is more of a longer-term trend as the qualification process and widespread adoption will need more time (due to safety issues, legislations, etc.).
• Favourable outlook for Apple supply chainFavourable outlook for Apple supply chainFavourable outlook for Apple supply chainFavourable outlook for Apple supply chain. The iPhone 7 is generally well received, and this is sufficient to serve as a re-rating catalyst for the supply chain because prior expectations were very low. With a decent iPhone 7 cycle till 2Q17, followed by a 2H17 iPhone 8 supercycle where a major design overhaul and new features are expected, we believe the outlook for the Apple supply chain looks favourable over the next 12 months.
• New content wins will be key.New content wins will be key.New content wins will be key.New content wins will be key. New content wins will be the key driver for earnings growth and performance by Malaysian semiconductor companies. In this context, we still like companies involved in radio frequency (RF) such as Inari and Unisem which have better earnings visibility due to growing RF content in smartphones. We also like Globetronics due to the introduction of new sensor products that will underpin its earnings recovery in 2017.
Risks • Major slowdown in smartphone salesMajor slowdown in smartphone salesMajor slowdown in smartphone salesMajor slowdown in smartphone sales. Global semiconductor
sales in recent years have been mainly driven by the explosive growth in demand for smartphones. Thus, a major slowdown in smartphone sales will be negative for the industry.
• Forex riskForex riskForex riskForex risk. Earnings and margins of Malaysian semiconductor companies could also be affected if there is a strong reversal in the RM vs. USD trend.
0%
10%
20%
30%
40%
50%
60%
70%
80%
-
200
400
600
800
1,000
1,200
1,400
1,600
2010 2011 2012 2013 2014 2015 2016F
Smartphone shipments YoY growth
80
100
120
140
160
180
200
Jan 2015 Apr 2015 Jul 2015 Oct 2015 Jan 2016 Apr 2016 Jul 2016
SOX TWSESCI Equal-Weighted (INRI, GTB, MPI, UNI)
Malaysia Strategy
2017 Outlook
Page 36
Valuation & Stock Picks • Top pick is Inari (BUY; TP: RM4.00). Top pick is Inari (BUY; TP: RM4.00). Top pick is Inari (BUY; TP: RM4.00). Top pick is Inari (BUY; TP: RM4.00). Significant content
gains in latest smartphone models should comfortably help to drive our 30% growth forecast for Inari's RF segment in FY17. The medium-term outlook appears to be relatively secure as well because of Broadcom’s 3-year supply agreement with Apple (till 2018). As such, with strong visibility for the RF segment and contribution from new testing division driving robust 3-year earnings CAGR of 22%, we believe Inari's valuation could trade up to 18x PE, +1SD of its 3-year average forward PE.
• Globetronics is also a BUY (TP: RM4.00) Globetronics is also a BUY (TP: RM4.00) Globetronics is also a BUY (TP: RM4.00) Globetronics is also a BUY (TP: RM4.00) as we believe its risk-reward is compelling, with clearer signs emerging to underpin growth recovery in FY17 from new sensor products (i.e. new proximity sensors, gesture sensors, and 3D imaging sensors).
• HOLD on Unisem (TP: RM2.85) and MPI (TP: RM8.15). HOLD on Unisem (TP: RM2.85) and MPI (TP: RM8.15). HOLD on Unisem (TP: RM2.85) and MPI (TP: RM8.15). HOLD on Unisem (TP: RM2.85) and MPI (TP: RM8.15). We expect earnings growth for Unisem and MPI to moderate given the lack of strong growth drivers for the semiconductor sector in general. Valuations for both companies are also fair with decent dividend yields, in line with Taiwanese peers....
Peers comparison
Sources: AllianceDBS, Bloomberg Finance L.P
CallTarget
Price
Current
Price
Market Cap
(USD)CY2016 CY2017 CY2016 CY2017 CY2016 CY2017 CY2016 CY2017 CY2016 CY2017
Inari Amertron BUY 4.00 3.32 759.9 18.9x 15.0x 16% 25% 2.9% 3.5% 4.3x 3.8x 26% 28%
Unisem HOLD 2.80 2.45 428.4 11.7x 11.2x (2%) 4% 4.9% 5.3% 1.3x 1.2x 11% 11%
Malaysian Pacific Industries HOLD 8.15 7.92 375.4 10.2x 10.1x 16% 1% 2.9% 2.9% 1.5x 1.4x 16% 14%
JCY International NR NR 0.53 264.8 8.9x 11.6x (39%) (24%) 9.4% 9.4% 0.8x 0.7x 3% 4%
Globetronics Technology BUY 4.00 3.57 239.8 33.0x 12.6x (58%) 162% 5.6% 7.3% 3.6x 3.6x 11% 28%
Vitrox Corporation NR NR 3.81 216.5 15.6x 11.6x 29% (24%) 1.7% 9.4% 3.5x 0.7x 22% 4%
Uchi Technologies NR NR 1.65 174.7 15.6x 12.7x 29% 0% 1.7% 7.0% 3.5x 2.7x 22% 24%
Average 16.1x 12.6x 2% 20% 4.0% 5.5% 2.8x 2.3x 17% 18%
ROAEP/E (FD)EPS (FD) Growth
(YoY)Dividend Yield Price/ BVPS
Malaysia Strategy
2017 Outlook
Page 37
Telecommunication
Underweight
Analyst Woo Kim TOH +60 32604 3917 [email protected]
Price Target
Price PE
2017F
Div Yld
2017201720172017F
EPS CAGR 2015201520152015-2017201720172017
(RM) (RM) Rec (x) (%) (%)
Large Caps
Axiata Group 4.83 4.95 HOLD 20.5 4.1 9
Digi.Com 5.01 4.35 HOLD 24.6 4.1 0
Maxis Bhd 5.89 5.10 FV 22.5 3.7 4
Telekom Malaysia 6.50 7.50 BUY 23.7 3.8 21
TIME dotCom Bhd 7.99 7.50 HOLD 21.1 1.2 21
Source: AllianceDBS Estimate of subscriber market share in 1Q16 (%)
Source: MCMC, Companies, AllianceDBS
Spectrum distribution after re-allocation exercise
MHzMHzMHzMHz
Spectrum BandSpectrum BandSpectrum BandSpectrum Band 900900900900 1800180018001800 2100210021002100 2300230023002300 2600260026002600 Maxis 20 40 30 - 20 Celcom Axiata 20 40 30 - 20 DiGi 10 40 30 - 20 UMobile 10 30 30 - 20 P1/TM - - - 30 20 YTL e-Solutions - - - 30 20 RedTone - - - 25 20 Puncak Semangat - - - - 40
Source: MCMC, AllianceDBS
Spectrum of competition • 2017 could be another shake-up year for
competition in the mobile sector as new spectrum is allocated to U Mobile
• Potential spectrum re-allocation for other bands
(700MHz, 2600MHz, etc.) is also a key thing to watch out for
• Prefer fixed-line operators. Top pick is TM Outlook • A stronger 4th playerA stronger 4th playerA stronger 4th playerA stronger 4th player. 2017 will be the start of the year
where the fourth player, U Mobile will have an almost equal amount of spectrum relative to the incumbents. As such, we believe it is reasonable to expect U Mobile to turn more aggressive in order to gain market share, which currently stands at about 11% vs. 28-29% each for DiGi, Maxis, and Celcom. If history is any indication, market share should eventually converge between the four mobile players in the long run, similar to what happened after DiGi acquired its 3G spectrum in 2008.
• Another specAnother specAnother specAnother spectrum retrum retrum retrum re----allocation in 2017?allocation in 2017?allocation in 2017?allocation in 2017? With existing licences of 2100MHz and 2600MHz bands expiring in April 2018 and December 2017 respectively, we believe MCMC could likely call for another spectrum allocation exercise in 2017. This could be followed by the 700MHz band which is targeted to be freed up by 2018 at the earliest after complete migration of analogue TV to digital TV broadcasting in Malaysia. Based on Singapore spectrum reserve pricing, we estimate this round of spectrum re-allocation exercise to cost as much as RM9.0bn for the mobile industry.
• Prefer fixedPrefer fixedPrefer fixedPrefer fixed----line operatorsline operatorsline operatorsline operators. With the move towards a new regime for spectrum allocation as well as a stronger fourth player, we believe questions will eventually be raised on competition risk and margin sustainability, as well as premium valuation vs. regional peers for the Malaysian mobile operators. As such, we prefer the fixed-line operators, with TM being our top pick.
Risks • Intensified competitionIntensified competitionIntensified competitionIntensified competition. Further increase in competitive
pressure will drag down ARPU, leading to lower margins. In addition, the incumbents could also potentially concede some market share to the smaller players.
• High spectrum feeHigh spectrum feeHigh spectrum feeHigh spectrum fee. There could be another spectrum allocation exercise in 2017. A high spectrum fee will put pressure on free cashflow generation and dividend payout. Earnings could also be impacted by increased amortisation charges for the spectrum.
U Mobile, 11%
MVNOs / discrepancy,
4%
DiGi, 28%
Celcom, 28%
Maxis, 29%
Malaysia Strategy
2017 Outlook
Page 38
Valuation & Stock Picks • Top pick is TM (BUY, TP: RM7.50). Top pick is TM (BUY, TP: RM7.50). Top pick is TM (BUY, TP: RM7.50). Top pick is TM (BUY, TP: RM7.50). We are optimistic that
the rollout of the High-Speed Broadband Phase 2 (HSBB2) project, Sub Urban Broadband (SUBB) project, and Webe mobile services would drive the long-term growth for TM, as the company expands the coverage of its high-speed broadband network to more areas. Our TP implies 7.8x FY17 EV/EBITDA and 26x FY17 PE.
• PrPrPrPremium valuation unsustainable. emium valuation unsustainable. emium valuation unsustainable. emium valuation unsustainable. Domestic-focused operators such as DiGi and Maxis are trading at around 12.6-12.8x CY16 EV/EBITDA, a premium relative to regional average of 8.6x. With potential earnings risks and falling free cashflow translating into lower dividend going forward, we do not think the current premium valuation is justified.
Regional peers comparison
Sources: DBS Bank, AllianceDBS, Bloomberg Finance L.P
LC USD CY16 CY17 CY16 CY17 CY16 CY17 CY16 CY17 CY16 CY17
Axiata HOLD MYR 4.95 4.83 10,273 22.1x 20.5x 3.8% 4.1% 1.8x 1.8x 8.1x 7.6x 2.4x 2.3x
Maxis FULLY VALUED MYR 5.10 5.89 10,541 23.7x 22.5x 3.4% 3.7% 9.7x 9.1x 12.5x 12.6x 2.1x 2.1x
DiGi.Com HOLD MYR 4.35 5.01 9,282 24.1x 24.6x 4.2% 4.1% 75.0x 75.0x 14.1x 13.9x 0.7x 0.7x
Telekom BUY MYR 7.50 6.50 5,820 28.4x 23.7x 3.2% 3.8% 3.1x 3.1x 7.4x 7.2x 1.2x 1.2x
TIME dotCom HOLD MYR 7.50 7.99 1,101 26.9x 21.1x 7.6% 1.2% 2.2x 2.1x 15.0x 12.2x nm nm
Starhub FULLY VALUED SGD 2.80 3.27 4,088 15.1x 16.3x 6.1% 6.1% 26.1x 25.6x 8.7x 8.9x 0.8x 0.9x
M1 FULLY VALUED SGD 1.97 2.06 1,385 12.5x 13.1x 6.4% 6.1% 4.6x 4.3x 6.8x 6.9x 0.8x 0.9x
PT Telekom HOLD IDR 3800 4150 31,977 23.4x 21.6x 3.4% 3.7% 5.4x 5.3x 8.3x 8.0x 0.0x nm
XL Axiata BUY IDR 3300 2270 1,855 61.2x 38.4x 1.0% 1.6% 1.1x 1.1x 5.5x 5.4x 2.6x 2.5x
Indosat HOLD IDR 5900 6500 2,700 37.8x 30.2x 0.0% 0.0% 2.6x 2.4x 4.3x 3.8x 1.4x 1.0x
Advance Info Service HOLD THB 160.00 153.50 13,051 13.7x 15.1x 7.3% 5.3% 10.0x 9.7x 8.7x 8.4x 1.3x 1.6x
Intouch Holdings BUY THB 90.00 53.25 4,883 9.4x 0.0x 10.5% 0.0% 12.0x 0.0x 9.3x 0.0x nm #DIV/0!
Total Access Comm FULLY VALUED THB 33.00 31.00 2,099 28.9x 24.3x 2.6% 3.0% 2.7x 2.6x 3.8x 3.6x 1.2x 1.1x
Average 22.3x 20.2x 4.4% 3.7% 13.3x 12.6x 9.1x 8.4x 0.9x 0.9x
Call LC
Target
PriceNet Debt/EBITDADivd yield
Current
Price
Market
CapP/E Price/ BVPS EV/EBITDA
Malaysia Strategy
2017 Outlook
Page 39
Transport
Neutral
Analyst Marvin KHOR +60 32604 3911 [email protected]
Price Target
Price PE
2017F
Div Yld
2017201720172017F
EPS CAGR 2015201520152015-2017201720172017
(RM) (RM) Rec (x) (%) (%)
Aviation
AirAsia 2.86 3.20 HOLD 9.2 2.4 (1)
AirAsia X 0.39 0.46 HOLD 6.6 0.0 15
Malaysia Airports 6.68 6.20 HOLD 74.8 0.9 89
Shipping/Ports
MISC 7.56 7.60 HOLD 12.9 4.6 6 Westports Holdings
4.40 4.45 HOLD 24.2 3.1 3
Source: AllianceDBS Spot Jet Fuel
Source: Bloomberg Finance L.P., AllianceDBS
Baltic Dirty Tanker Index
Source: Bloomberg Finance L.P., AllianceDBS
A need to keep pace • Key subsectors to see normalisation, after enjoying
respective periods of upcycle within 2015-16 timeframe
• Air fares, shipping rates seeing pressure from
competition/supply growth, macro factors • Control over volume, productivity will separate
winners from losers Outlook Aviation • Airlines coming out of sweet spotAirlines coming out of sweet spotAirlines coming out of sweet spotAirlines coming out of sweet spot. Moving into 2017, the
key theme for the airlines sub-sector will shift from cheaper fuel (key earnings booster in 2016) towards the management of supply. The recovering growth ambitions of Malaysia Airlines’ (MAB) will be key – namely if it will result in earnings-destructive competition akin to the 2014 period; or if the players can settle into respective profitable niches. Yield management is also crucial, as domestic demand may be affected by weaker macroeconomics.
• PSC PSC PSC PSC revision a needed boost forrevision a needed boost forrevision a needed boost forrevision a needed boost for airportsairportsairportsairports. Passenger service charges (PSCs) are now confirmed to be revised in 2017, generally being higher and with rates at klia2 being gradually equalised with those of KLIA. We do not expect material adverse impact on passenger traffic given that the PSCs are still among the lowest in the region, plus the introduction of cheaper ASEAN tier provides travellers with more options. We expect Malaysian passenger traffic growth to be nominal, yet still recovering (FY17F: +5%, FY16F: +3.5%). On the other hand, instances of instability in Turkey are expected to have slower passenger traffic at the Istanbul Sabiha Gokcen from its previous trajectory of double-digit growth. (FY17F: +7%, FY16F: +5%).
Shipping/Ports • Headwinds for LNG, petroleum shipping. Headwinds for LNG, petroleum shipping. Headwinds for LNG, petroleum shipping. Headwinds for LNG, petroleum shipping. The pipeline of
newbuild vessel supply for LNG and petroleum shipping look to be higher in 2017, which will be suppressive to rates. Contrasted to tepid shipping demand, LNG rates are unlikely to recover to 2014 levels. Petroleum shipping demand is variable to seasonality, but large volume surges will be less likely given tepid crude oil prices.
• Global container shipping facing challenges. Global container shipping facing challenges. Global container shipping facing challenges. Global container shipping facing challenges. Global container shipping economics continue be challenging, resulting in consolidation of industry players and more recently, the insolvency of Hanjin Shipping. While global container throughput is not expected to expand, there may be pockets of growth, especially within the intra-Asia region. The shuffling of alliances may also shift volume around transhipment ports.
0
20
40
60
80
100
120
140Spot jet fuel (US$/bbl) Calendar quarter average
0
200
400
600
800
1000
1200
1400Baltic Dirty Tanker Index
Malaysia Strategy
2017 Outlook
Page 40
Risks • Competitive forces. Competitive forces. Competitive forces. Competitive forces. We think overbearing supply is the key
dampening force on rates for transportation in 2017, as demand is unlikely to be substantially spurred. Excessive acceleration in supply growth is a threat to profitability. Conversely, supply disruption (player exits, deferred deployments etc) will ease the market condition for existing players.
• Oil price spikes. Oil price spikes. Oil price spikes. Oil price spikes. A surge in crude oil prices will have impact on sub-sectors, which may have begun to treat the lower prices as a new normal. Airlines would be negatively hit by higher jet fuel expenses, though hedges will delay full impact for up to a year. On the other hand, rebalancing of petroleum stockpiles may result in higher demand for movement, helping shipping rates.
Valuation & Stock Picks • WPRTS may yet come out ahead. WPRTS may yet come out ahead. WPRTS may yet come out ahead. WPRTS may yet come out ahead. WPRTS is at a turning
point with regard to the growth direction of its container volume traffic, as M&A in the container shipping scene plays out. While full clarity will only come late-2016 to 2017, we are reassured by its cost advantage of cheaper box handling rate than geographic peers. Beating our conservative 7.5%/5% container throughput volume
growth assumptions for FY16/17F will provide upside. Our current TP is RM4.45 with a HOLD recommendation.
• Neutral on airlines. Neutral on airlines. Neutral on airlines. Neutral on airlines. We think that valuations have run up for AIRA and AAX, particular in 1H16 in response to the surging earnings recovery. While 2H16 will maintain the same strength, growth momentum into 2017 will be more challenging. There is downside risk to our FY17F yield growth assumption of 5% for AIRA and AAX. We have HOLD recommendations for both, with RM3.20 TP on AIRA and RM0.46 TP on AAX.
• MAHB MAHB MAHB MAHB faces external headwindsfaces external headwindsfaces external headwindsfaces external headwinds. . . . While MAHB benefits from favourable PSC revisions, the impacted passenger growth at its Istanbul Sabiha Gokcen airport will impede re-rating as those operations continue to be loss-making. Our current SOP-based TP is RM6.80, with a HOLD recommendation.
• Noticeable challenges for shipping. Noticeable challenges for shipping. Noticeable challenges for shipping. Noticeable challenges for shipping. Given the weak rates outlook for MISC we think that organic earnings growth will be muted. A saving grace is that its functional currency is the USD, which will give it appeal in a weaker-Ringgit scenario. Our TP is RM7.60 with a HOLD recommendation.
Peers comparison
Source: AllianceDBS
CallTarget
Price
Current
price
Market Cap
(USD m)CY2016 CY2017 CY2016 CY2017 CY2016 CY2017 CY2016 CY2017 CY2016 CY2017
Aviation
AirAsia HOLD 3.20 2.79 1,855.6 8.3x 8.9x 292% (7%) 1.3x 1.2x 28% 15% 2.6% 2.5%
AirAsia X HOLD 0.46 0.435 431.3 8.8x 7.4x n.m. 19% 2.2x 1.7x 28% 26% 0.0% 0.0%
Malaysia Airports HOLD 6.80 6.50 2,577.5 234.6x 47.1x n.m. 398% 1.4x 1.4x 1% 3% 1.4% 1.3%
Sector weighted average 128.3x 29.0x n.m. 210% 1.4x 1.3x 13% 10% 1.7% 1.6%
Shipping / Ports
MISC HOLD 7.60 7.23 7,713.1 15.0x 13.9x (19%) 8% 0.9x 0.9x 8% 6% 4.8% 4.8%
Westports Holdings HOLD 4.45 4.36 3,553.3 24.7x 23.9x 19% 3% 7.0x 6.6x 31% 28% 3.1% 3.1%
Sector weighted average 18.1x 17.1x (7%) 7% 2.8x 2.7x 15% 13% 4.3% 4.3%
EPS Growth (YoY) P/BV ROAE Dividend Yield %P/E
Market Focus
2017 Outlook
Page 41
Utilities
Overweight
Analyst QUAH He Wei, CFA +603 2604 3966 [email protected]
Price Target
Price PE
2016F
Div Yld
2016201620162016F
EPS CAGR 2014201420142014-2016201620162016
(RM) (RM) Rec (x) (%) (%)
Tenaga Nasional 14.28 17.00 BUY 10.4 2.2 12
Petronas Gas Bhd 22.04 21.50 HOLD 25.2 2.7 0
YTL Power 1.51 1.45 HOLD 13.0 6.6 (9)
Gas Malaysia 2.55 2.30 HOLD 23.1 4.1 18
Source: AllianceDBS Electricity demand highly correlated with GDP growth
Source: Bloomberg Finance L.P., AllianceDBS
Increasing electricity demand in Peninsular Malaysia
Source: AllianceDBS
Smooth sailing • Improved earnings clarity with cost pass-through in
full force • Resilient energy demand to underpin strong
recurring earnings base • Top pick: Tenaga Nasional Outlook • Strong earnings clarity. Strong earnings clarity. Strong earnings clarity. Strong earnings clarity. The smooth implementation of the
Imbalance Cost Pass-Through (ICPT) mechanism has effectively insulated utilities players from fuel-cost volatility. Therefore, this gives rise to strong earnings visibility for utilities players going forward as earnings growth will be mainly driven by sales volume and operational efficiency. We also take comfort that the gradual increase in piped gas price has quashed concerns about the government’s commitment to address the gas subsidy rationalisation issue given the large discount for local piped gas prices against international prices.
• Steady energy demand. Steady energy demand. Steady energy demand. Steady energy demand. A relatively healthy economic outlook in Malaysia will help underpin steady demand growth for electricity which will in turn sustain the strong recurring earnings base of utilities players in Malaysia.
Risks • Regulatory risk. Regulatory risk. Regulatory risk. Regulatory risk. Government’s approval is required for tariff
adjustments. Therefore, there is no guarantee that a large tariff hike will be approved in the event of a sharp increase in fuel cost the though ICPT mechanism has already been running smoothly with timely tariff revisions since 2015.
• EcoEcoEcoEconomic recession. nomic recession. nomic recession. nomic recession. This could lead to lower electricity consumption, as evidenced during the global financial crisis in 2008-2009.
Valuation & Stock Picks • Buy Tenaga Nasional. Buy Tenaga Nasional. Buy Tenaga Nasional. Buy Tenaga Nasional. Tenaga continues to trade at an
undemanding valuation of 10x FY16 compared to Gas Malaysia’s 23x. Also, Tenaga is set to benefit from its aggressive capacity expansion plan which has also resulted in the utility giant gaining more generation market share against the independent power producers. Since 2015, 3,092MW of new capacity have been planted up by Tenaga, and this will be followed by 3,080MW assets over the next three years, thus leading to a higher market share for TNB
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
GDP growth Electricity sales growth
60,000
65,000
70,000
75,000
80,000
85,000
90,000
95,000
100,000
105,000
110,000
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
GWhGWhGWhGWh
Market Focus
2017 Outlook
Page 42
Historical revisions of electricity tariff and gas tariff
Effective dateEffective dateEffective dateEffective date Jun06Jun06Jun06Jun06 Junl08Junl08Junl08Junl08 Mar09Mar09Mar09Mar09 Jul09Jul09Jul09Jul09 Jun11Jun11Jun11Jun11 Jan14Jan14Jan14Jan14 Mar15Mar15Mar15Mar15 Jun15Jun15Jun15Jun15 Jan16Jan16Jan16Jan16 Jul16Jul16Jul16Jul16
Tariff (sen/kWh) 26.2 32.5 31.3 31.3 33.5 38.5
36.3
36.3
37.0
37.0
changes 12% 24% -4% 0% 7% 15% -6% 0% 2% 0% Gas price (RM/mmbtu) 6.4 14.3 10.7 10.7 13.7 15.2 15.2 16.7 18.2 19.7
changes 0% 124% -25% 0% 28% 11% 0% 10% 9% 8%
Source: AllianceDBS, Bloomberg Finance L.P.
Peer comparison
Market Market Market Market capcapcapcap
(USDm)(USDm)(USDm)(USDm)
PEPEPEPE PBPBPBPB ROEROEROEROE YieldYieldYieldYield
CompanyCompanyCompanyCompany FYEFYEFYEFYE RatingRatingRatingRating PricePricePricePrice TPTPTPTP FY16FY16FY16FY16 FY17FY17FY17FY17 FY16FY16FY16FY16 FY17FY17FY17FY17 FY16FY16FY16FY16 FY17FY17FY17FY17 FY16FY16FY16FY16 FY17FY17FY17FY17
Tenaga Nasional Aug Buy 14.28 17.00 19,822 10.4 10.3 1.5 1.4 15% 14% 2.2% 2.9%
Petronas Gas Dec Hold 22.04 21.50 10,297 25.2 24.4 3.6 3.5 14% 14% 2.7% 2.7%
YTL Power Jun Hold 1.51 1.45 2,593 11.7 15.0 1.0 1.0 8% 6% 6.6% 5.3%
Gas Malaysia Dec Hold 2.55 2.30 728 23.1 22.1 3.3 3.3 14% 15% 4.1% 4.3%
AverageAverageAverageAverage
17.6 17.6 17.6 17.6
18.0 18.0 18.0 18.0 2.4 2.4 2.4 2.4 2.3 2.3 2.3 2.3 13%13%13%13% 12%12%12%12% 3.9%3.9%3.9%3.9% 3.8%3.8%3.8%3.8%
Source: AllianceDBS, Bloomberg Finance L.P.
Market Focus
2017 Outlook
Page 43
Stock Profile
ASIAN INSIGHTS VICKERS SECURITIES ed: JS / sa:WMT, PY
BUYBUYBUYBUY Last Traded PriceLast Traded PriceLast Traded PriceLast Traded Price (((( 3 Nov 20163 Nov 20163 Nov 20163 Nov 2016)))): : : : RM14.28 (KLCIKLCIKLCIKLCI : : : : 1,648.08) Price Target Price Target Price Target Price Target 12121212----mthmthmthmth:::: RM17.00 (19% upside) (Prev RM17.00)
Potential Catalyst: Potential Catalyst: Potential Catalyst: Potential Catalyst: Stronger electricity consumption
Where we differWhere we differWhere we differWhere we differ:::: Higher earnings possibly due to higher electricity sales
growth Analyst QUAH He Wei, CFA +603 2604 3966 [email protected]
What’s New • FY16 results met expectations; 22sen final DPS
proposed
• Raised FY17-18F earnings by 5% p.a. on lower
effective tax rate and operating expenses
• Maintain BUY, TP raised to RM17.00
Price Relative
Forecasts and Valuation FY FY FY FY AugAugAugAug ((((RMRMRMRM m) m) m) m) 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF
Revenue 44,532 46,839 47,878 48,935 EBITDA 14,919 15,444 16,215 16,715 Pre-tax Profit 8,067 8,531 8,931 9,121 Net Profit 7,368 7,849 8,128 8,119 Net Pft (Pre Ex.) 7,758 7,849 8,128 8,119 Net Pft Gth (Pre-ex) (%) 24.8 1.2 3.6 (0.1) EPS (sen) 131 139 144 144 EPS Pre Ex. (sen) 137 139 144 144 EPS Gth Pre Ex (%) 25 1 4 0 Diluted EPS (sen) 131 139 144 144 Net DPS (sen) 32.0 41.7 43.2 43.2 BV Per Share (sen) 928 1,026 1,127 1,227 PE (X) 10.9 10.3 9.9 9.9 PE Pre Ex. (X) 10.4 10.3 9.9 9.9 P/Cash Flow (X) 6.1 5.9 5.8 5.6 EV/EBITDA (X) 6.6 6.3 5.9 5.6 Net Div Yield (%) 2.2 2.9 3.0 3.0 P/Book Value (X) 1.5 1.4 1.3 1.2 Net Debt/Equity (X) 0.3 0.3 0.2 0.2 ROAE (%) 14.8 14.2 13.4 12.2 Earnings Rev (%):Earnings Rev (%):Earnings Rev (%):Earnings Rev (%): 0 0 0 Consensus EPS Consensus EPS Consensus EPS Consensus EPS (sensensensen):::: 131 133 74.0 Other Broker Recs:Other Broker Recs:Other Broker Recs:Other Broker Recs: B: 22 S: 3 H: 0
Source of all data on this page: Company, AllianceDBS, Bloomberg Finance L.P
Smooth sailing Steady eSteady eSteady eSteady electricity lectricity lectricity lectricity demanddemanddemanddemand. . . . After experiencing stronger electricity demand growth of 4% in Peninsular Malaysia in FY16 due to the El-Niño phenomenon, consumption is set to normalise in FY17, growing in tandem with the relatively healthy economic outlook in Malaysia which is projected to grow between 4%-5% in 2017. We believe electricity consumption will continue to grow steadily, driven by the domestic and commercial segments. Energy reform remains on track. Energy reform remains on track. Energy reform remains on track. Energy reform remains on track. The government is fully committed to the implementation of the Imbalance Cost Pass-Through which has removed the burden of fuel cost volatility and ensures strong earnings clarity for Tenaga Nasional (TNB). More importantly, the gradual increase in piped gas price has quashed concerns over the government’s commitment to address the gas subsidy rationalisation issue given the huge discount for local gas prices against international prices. Management is also likely to review its dividend policy given the improved earnings visibility. New stateNew stateNew stateNew state----ofofofof----thethethethe----art power plants to drive expansion.art power plants to drive expansion.art power plants to drive expansion.art power plants to drive expansion. Since 2015, 3,092MW of new capacity has been planted up by TNB, and this will be followed by 3,000MW assets over the next three years, leading to a higher market share for TNB. Also, the adoption of the latest power generation technologies such as ultra-supercritical technology and efficient combined cycle gas turbines will result in better operational efficiency.
Valuation:
We revised up our DCF-derived TP to RM17.00 (WACC 7.2%,
1.5% terminal growth) after increasing our FY17-18F earnings
by 5% p.a. Our BUY rating is premised on healthy power
demand growth and improving earnings visibility arising from
the incentive-based regulation framework.
Key Risks to Our View:
Operational breakdownOperational breakdownOperational breakdownOperational breakdown. Unplanned outages may result in the
shortage of electricity which may necessitate expensive
overseas procurement.
At A Glance Issued Capital (m shrs) 5,644
Mkt. Cap (RMm/US$m) 80,591 / 19,203
Major Shareholders (%)
Khazanah Nasional 28.3
EPF 15.7
Skim ASB 6.8
Free Float (%) 49.2
3m Avg. Daily Val (US$m) 35.7
ICB IndustryICB IndustryICB IndustryICB Industry : Utilities / Electricity
DBS Group Research . Equity
4 Nov 2016
Malaysia Company Guide
Tenaga Nasional Version 5 | Bloomberg: TNB MK | Reuters: TENA.KL Refer to important disclosures at the end of this report
ASIAN INSIGHTS VICKERS SECURITIES
Page 45
Company Guide
Tenaga Nasional
WHAT’S NEW
Strong FY16
Within expectationsWithin expectationsWithin expectationsWithin expectations. Excluding RM115m translation loss,
TNB’s 4QFY16 earnings came in at RM1.88bn, taking FY16
core earnings to RM7.76bn - 104% of our FY16 forecast.
FY16 results have largely benefitted from the strong electricity
sales (inclusive of non-Peninsular Malaysia) which grew 4.2%
- Peninsular Malaysia 4.0%, Sabah 3.1%, Pakistan 25.9% -
largely driven by warm weather conditions in Malaysia which
occurred during 3QFY16. Meanwhile, TNB’s 4QFY16
electricity demand grew by 2.7% y-o-y, compared to 6.2% in
3QFY16 as weather patterns normalised.
Higher coalHigher coalHigher coalHigher coal----fired power generation.fired power generation.fired power generation.fired power generation. Coal-fired generation mix
improved to 57% in 4QFY16 (vs 44% in 4QFY15) – highest in
recent years – due to the contribution of Tanjung Bin 4 which
was commissioned in Mar 16. Meanwhile, lower gas-fired
generation mix of 38.9% (vs 51% in 4QFY15) has resulted in
lower consumption of LNG.
Healthy financials.Healthy financials.Healthy financials.Healthy financials. TNB incurred RM11.4bn capex in FY16, of
which 45% was utilised for new generation capacity. This is
also the highest capex amount spent over the past five years.
Nevertheless, balance sheet remains very healthy with 33%
net gearing levels despite its aggressive expansion plans.
Management has also proposed a final DPS of 22 sen, taking
FY16 DPS to 32 sen. This translates into 23% of FY16 core
net profit.
Potentially higher dividend in FY17Potentially higher dividend in FY17Potentially higher dividend in FY17Potentially higher dividend in FY17. Management is currently
embarking on a capital structure review which seeks to
optimise its debt-equity ratio. This is in view of the strong
earnings clarity after the smooth implementation of
Imbalance Cost Pass-Through mechanism since 2014 which
has effectively removed the burden of fuel cost volatility.
Management has shared that the result will be known by
end-CY16, which may result in a change in dividend policy
which is currently based on 40-60% payout of free cash flow.
Lift Lift Lift Lift FYFYFYFY17171717----18F 18F 18F 18F earnings by earnings by earnings by earnings by 5555%%%% largely due to a lower effective
tax rate and lower operational cost. Overall, we are projecting
3% electricity sales growth (inclusive of non-Peninsular
Malaysia sales) in FY17, before tapering off to 2.2% in FY18.
Quarterly / Interim Income Statement (RMm)
FY FY FY FY AugAugAugAug 4Q4Q4Q4Q2015201520152015 3Q3Q3Q3Q2016201620162016 4Q4Q4Q4Q2016201620162016 % chg yoy % chg yoy % chg yoy % chg yoy % chg qoq% chg qoq% chg qoq% chg qoq
Revenue 11,744 12,129 11,237 (4.3) (7.4)
Cost of Goods Sold (9,756) (9,570) (9,355) (4.1) (2.2)
Gross ProfitGross ProfitGross ProfitGross Profit 1,9881,9881,9881,988 2,5592,5592,5592,559 1,8821,8821,8821,882 (5.3)(5.3)(5.3)(5.3) (26.4)(26.4)(26.4)(26.4)
Other Oper. (Exp)/Inc 231 188 203 (12.1) 8.0
Operating ProfitOperating ProfitOperating ProfitOperating Profit 2,2192,2192,2192,219 2,7472,7472,7472,747 2,0852,0852,0852,085 (6.0)(6.0)(6.0)(6.0) (24.1)(24.1)(24.1)(24.1)
Other Non Opg (Exp)/Inc (25.9) 30.1 7.20 nm (76.1)
Associates & JV Inc 44.5 25.4 24.6 (44.7) (3.1)
Net Interest (Exp)/Inc (91.5) (231) (130) (42.2) 43.7
Exceptional Gain/(Loss) (734) (39.8) (115) 84.3 (188.4)
PrePrePrePre----tax Profittax Profittax Profittax Profit 1,4131,4131,4131,413 2,5322,5322,5322,532 1,8721,8721,8721,872 32.632.632.632.6 (26.0)(26.0)(26.0)(26.0)
Tax (603) (225) (136) (77.5) (39.5)
Minority Interest 11.3 1.50 25.8 128.3 1,620.0
Net ProfitNet ProfitNet ProfitNet Profit 821821821821 2,3092,3092,3092,309 1,7621,7621,7621,762 114.7114.7114.7114.7 (23.7)(23.7)(23.7)(23.7)
Net profit bef Except. 1,554 2,349 1,877 20.8 (20.1)
EBITDA 3,751 4,271 3,634 (3.1) (14.9)
Margins (%)
Gross Margins 16.9 21.1 16.7
Opg Profit Margins 18.9 22.6 18.6
Net Profit Margins 7.0 19.0 15.7
Source of all data: Company, AllianceDBS
ASIAN INSIGHTS VICKERS SECURITIES
Page 46
Company Guide
Tenaga Nasional
CRITICAL DATA POINTS TO WATCH
Earnings Drivers:
Electricity demand. Electricity demand. Electricity demand. Electricity demand. This is the key earnings driver for TNB.
Historically, the growth in electricity sales has been highly
correlated with the country’s GDP growth. Industrial and
commercial users typically account for ~75% of TNB’s electricity
usage, and therefore a healthy economy is of utmost
importance to TNB.
Transparent tariffTransparent tariffTransparent tariffTransparent tariff----setting mechanism. setting mechanism. setting mechanism. setting mechanism. The implementation of
the Incentive Based Regulation (IBR) framework will have a base
tariff that reflects: 1) capex and opex of transmission and
distribution business, 2) return on regulated assets, and 3)
power purchase cost charged by generators. The
implementation of the imbalance cost pass-through (ICPT)
mechanism which is part of IBR will offer strong earnings clarity
going forward with a tariff revision every six months. We believe
the government is committed to the energy reform that was
started on 1 Jan 2014.
New power plants coming onNew power plants coming onNew power plants coming onNew power plants coming on----streamstreamstreamstream. TNB is set to benefit from
the new generation capacity that is under construction which
will progressively increase its capacity by ~30% by 2019. The
new power plants will be completed progressively to boost its
generation capacity. Ultimately, the new power plants will help
reduce generation cost due to the more efficient technology.
The new additions will also help replace expiring power
purchase agreements/service level agreements which tend to be
more costly.
Favourable generation costFavourable generation costFavourable generation costFavourable generation cost. TNB’s coal-based generation mix
has improved to 57% in 4QFY16, compared to 44% a year ago,
likely due to the contribution of Tanjung Bin 4 which was
commissioned in Mar 16. This enables TNB to consume less LNG
for power generation which is more expensive. Also, weak coal
prices are in its favour, and will translate into lower fuel cost
and energy payments. While these savings will eventually be
transferred to consumers, there will be a lagged impact on
quarterly results, as tariff revision is only carried out every six
months.
Overseas expansionOverseas expansionOverseas expansionOverseas expansion. TNB’s overseas footprint is still minimal at
this juncture, though it intends to expand into energy-related
businesses overseas such as project management, operation and
maintenance, as well as power generation. Its 100%-owned
Liberty Power Ltd, which operates a 235-MW combined-cycle
natural gas power plant, currently contributes ~1% of TNB’s
revenue. We understand the group will focus on the Middle
East and ASEAN regions as its target markets.
Electricity sales growth (%)
Coal price (US$/MT)
Gas price (RM/mmbtu)
Gas-based generation (%)
Coal-based generation (%)
Source: Company, AllianceDBS
ASIAN INSIGHTS VICKERS SECURITIES
Page 47
Company Guide
Tenaga Nasional
Balance Sheet:
More debt headroom to gear up. More debt headroom to gear up. More debt headroom to gear up. More debt headroom to gear up. TNB’s net gearing stood at
33% as at end-Aug 16. This is after taking into consideration its
total capex spending of RM11.4bn in FY16. The recent award of
Project 3B will not strain its balance sheet, as we understand the
group is still able to stomach more than RM20bn of borrowings.
Share Price Drivers:
Strong power consumptionStrong power consumptionStrong power consumptionStrong power consumption. Higher-than-expected electricity
consumption will be TNB’s key earnings driver given the
implementation of ICPT mechanism which insulates the
company from fuel cost volatility.
Government’s commitment on ICPTGovernment’s commitment on ICPTGovernment’s commitment on ICPTGovernment’s commitment on ICPT. There have always been
doubts on TNB's ability to implement ICPT fully, due to the
government’s intervention. We believe the government is
committed to energy reform, as evidenced by the latest piped
gas price hike. A smooth implementation of ICPT will be a
strong re-rating catalyst for TNB as ICPT will remove the burden
of volatility in its energy procurement.
Key Risks:
Increase in fuel costs. Increase in fuel costs. Increase in fuel costs. Increase in fuel costs. Gas and coal account for more than
90% of TNB's fuel mix and a hike in the costs of these inputs
would reduce TNB's profitability. The timing of tariff
adjustments is uncertain in Malaysia, but TNB has historically
been fully compensated by a tariff hike for each gas cost
increase, with a small net enhancement.
Demand weakness. Demand weakness. Demand weakness. Demand weakness. TNB's earnings are sensitive to power
demand growth, which is affected by the overall economic
condition.
Company Background
Tenaga Nasional Berhad (TNB) is the largest electricity provider
in Malaysia. Its core business comprises the generation,
transmission & distribution of electricity. It has 11,000MW total
installed generation capacity.
Leverage & Asset Turnover (x)
Capital Expenditure
ROE (%)
Forward PE Band (x)
PB Band (x)
Source: Company, AllianceDBS
ASIAN INSIGHTS VICKERS SECURITIES
Page 48
Company Guide
Tenaga Nasional
Key Assumptions
FY FY FY FY AugAugAugAug 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF
Electricity sales growth (%)
2.22 4.21 2.99 2.25 2.24
Coal price (US$/MT) 57.7 55.7 68.0 68.0 68.0
Gas price (RM/mmbtu) 21.6 20.9 20.9 20.9 20.9
Gas-based generation (%) 49.4 42.7 43.4 41.9 40.8 Coal-based generation (%)
45.6 53.1 52.6 54.2 55.2 Income Statement (RMm)
FY FY FY FY AugAugAugAug 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF Revenue 43,287 44,532 46,839 47,878 48,935
Cost of Goods Sold (35,483) (36,171) (38,146) (38,660) (39,452)
Gross ProfitGross ProfitGross ProfitGross Profit 7,8037,8037,8037,803 8,3618,3618,3618,361 8,6938,6938,6938,693 9,2189,2189,2189,218 9,4839,4839,4839,483 Other Opng (Exp)/Inc 824 712 849 866 883
Operating ProfitOperating ProfitOperating ProfitOperating Profit 8,6288,6288,6288,628 9,0729,0729,0729,072 9,5429,5429,5429,542 10,08410,08410,08410,084 10,36610,36610,36610,366 Other Non Opg (Exp)/Inc (833) 31.8 0.0 0.0 0.0
Associates & JV Inc 101 93.3 96.1 99.0 102
Net Interest (Exp)/Inc (663) (740) (1,107) (1,252) (1,347)
Exceptional Gain/(Loss) (99.3) (390) 0.0 0.0 0.0
PrePrePrePre----tax Profittax Profittax Profittax Profit 7,1347,1347,1347,134 8,0678,0678,0678,067 8,5318,5318,5318,531 8,9318,9318,9318,931 9,1219,1219,1219,121 Tax (1,073) (746) (759) (883) (1,082)
Minority Interest 57.5 46.8 77.7 80.5 80.4
Preference Dividend 0.0 0.0 0.0 0.0 0.0
Net ProfitNet ProfitNet ProfitNet Profit 6,1186,1186,1186,118 7,3687,3687,3687,368 7,8497,8497,8497,849 8,1288,1288,1288,128 8,1198,1198,1198,119 Net Profit before Except. 6,218 7,758 7,849 8,128 8,119
EBITDA 13,190 14,919 15,444 16,215 16,715
Growth
Revenue Gth (%) 1.2 2.9 5.2 2.2 2.2
EBITDA Gth (%) 14.0 13.1 3.5 5.0 3.1
Opg Profit Gth (%) 30.9 5.2 5.2 5.7 2.8
Net Profit Gth (Pre-ex) (%) 14.5 24.8 1.2 3.6 (0.1)
Margins & Ratio
Gross Margins (%) 18.0 18.8 18.6 19.3 19.4
Opg Profit Margin (%) 19.9 20.4 20.4 21.1 21.2
Net Profit Margin (%) 14.1 16.5 16.8 17.0 16.6
ROAE (%) 13.5 14.8 14.2 13.4 12.2
ROA (%) 5.4 5.9 5.7 5.6 5.3
ROCE (%) 7.2 7.4 7.1 7.0 6.7
Div Payout Ratio (%) 26.7 24.5 30.0 30.0 30.0
Net Interest Cover (x) 13.0 12.3 8.6 8.1 7.7
Source: Company, AllianceDBS
Lifted by heat wave
Steady growth
ASIAN INSIGHTS VICKERS SECURITIES
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Company Guide
Tenaga Nasional
Quarterly / Interim Income Statement (RMm)
FY FY FY FY AugAugAugAug 4Q4Q4Q4Q2015201520152015 1Q1Q1Q1Q2016201620162016 2Q2Q2Q2Q2016201620162016 3Q3Q3Q3Q2016201620162016 4Q4Q4Q4Q2016201620162016 Revenue 11,744 10,677 10,489 12,129 11,237
Cost of Goods Sold (9,756) (8,418) (8,828) (9,570) (9,355)
Gross ProfitGross ProfitGross ProfitGross Profit 1,9881,9881,9881,988 2,2582,2582,2582,258 1,6611,6611,6611,661 2,5592,5592,5592,559 1,8821,8821,8821,882 Other Oper. (Exp)/Inc 231 139 181 188 203
Operating ProfitOperating ProfitOperating ProfitOperating Profit 2,2192,2192,2192,219 2,3982,3982,3982,398 1,8421,8421,8421,842 2,7472,7472,7472,747 2,0852,0852,0852,085 Other Non Opg (Exp)/Inc (25.9) 6.10 (11.6) 30.1 7.20
Associates & JV Inc 44.5 16.9 26.4 25.4 24.6
Net Interest (Exp)/Inc (91.5) (199) (180) (231) (130)
Exceptional Gain/(Loss) (734) (58.5) (177) (39.8) (115)
PrePrePrePre----tax Profittax Profittax Profittax Profit 1,4131,4131,4131,413 2,1632,1632,1632,163 1,4991,4991,4991,499 2,5322,5322,5322,532 1,8721,8721,8721,872 Tax (603) (201) (184) (225) (136)
Minority Interest 11.3 13.8 5.70 1.50 25.8
Net ProfitNet ProfitNet ProfitNet Profit 821821821821 1,9761,9761,9761,976 1,3211,3211,3211,321 2,3092,3092,3092,309 1,7621,7621,7621,762 Net profit bef Except. 1,554 2,035 1,498 2,349 1,877
EBITDA 3,751 3,761 3,254 4,271 3,634
Growth
Revenue Gth (%) 18.6 (9.1) (1.8) 15.6 (7.4)
EBITDA Gth (%) 19.1 0.3 (13.5) 31.2 (14.9)
Opg Profit Gth (%) 13.9 8.1 (23.2) 49.2 (24.1)
Net Profit Gth (Pre-ex) (%) (7.4) 30.9 (26.4) 56.8 (20.1)
Margins
Gross Margins (%) 16.9 21.2 15.8 21.1 16.7
Opg Profit Margins (%) 18.9 22.5 17.6 22.6 18.6
Net Profit Margins (%) 7.0 18.5 12.6 19.0 15.7 Balance Sheet (RMm)
FY FY FY FY AugAugAugAug 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF Net Fixed Assets 90,300 96,513 101,707 105,675 109,428
Invts in Associates & JVs 758 1,838 1,934 2,033 2,135
Other LT Assets 7,282 7,796 7,796 7,796 7,796
Cash & ST Invts 8,910 17,154 19,627 22,547 25,840
Inventory 844 792 869 877 892
Debtors 8,639 8,277 8,896 9,094 9,294
Other Current Assets 402 533 533 533 533
Total AssetsTotal AssetsTotal AssetsTotal Assets 117,135117,135117,135117,135 132,902132,902132,902132,902 141,362141,362141,362141,362 148,554148,554148,554148,554 155,919155,919155,919155,919
ST Debt
1,986 1,489 1,582 1,641 1,700
Creditor 10,412 11,409 11,588 11,691 11,898
Other Current Liab 3,195 3,186 3,895 4,019 4,218
LT Debt 22,713 32,818 34,880 36,177 37,473
Other LT Liabilities 31,363 31,401 31,401 31,401 31,401
Shareholder’s Equity 47,208 52,389 57,883 63,573 69,256
Minority Interests 259 211 133 52.9 (27.5)
Total Cap. & Liab.Total Cap. & Liab.Total Cap. & Liab.Total Cap. & Liab. 117,135117,135117,135117,135 132,902132,902132,902132,902 141,362141,362141,362141,362 148,554148,554148,554148,554 155,919155,919155,919155,919
Non-Cash Wkg. Capital (3,721) (4,994) (5,185) (5,207) (5,397)
Net Cash/(Debt) (15,789) (17,153) (16,835) (15,271) (13,334)
Debtors Turn (avg days) 66.5 69.3 66.9 68.6 68.6
Creditors Turn (avg days) 111.1 130.8 129.8 130.2 129.6
Inventory Turn (avg days) 10.5 9.8 9.4 9.8 9.7
Asset Turnover (x) 0.4 0.4 0.3 0.3 0.3
Current Ratio (x) 1.2 1.7 1.8 1.9 2.1
Quick Ratio (x) 1.1 1.6 1.7 1.8 2.0
Net Debt/Equity (X) 0.3 0.3 0.3 0.2 0.2
Net Debt/Equity ex MI (X) 0.3 0.3 0.3 0.2 0.2
Capex to Debt (%) 43.6 32.5 30.2 26.4 25.5
Z-Score (X) 1.8 1.8 1.8 1.8 1.8
Source: Company, AllianceDBS
Induced by El-Nino phenomenon
Healthy balance sheet
ASIAN INSIGHTS VICKERS SECURITIES
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Company Guide
Tenaga Nasional
Cash Flow Statement (RMm)
FY FY FY FY AugAugAugAug 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF Pre-Tax Profit 7,134 8,067 8,531 8,931 9,121
Dep. & Amort. 5,294 5,722 5,806 6,032 6,246
Tax Paid (811) (721) (50.6) (759) (883)
Assoc. & JV Inc/(loss) 0.0 0.0 (96.1) (99.0) (102)
Chg in Wkg.Cap. 974 1,412 (517) (102) (9.3)
Other Operating CF (1,152) (1,188) 0.0 0.0 0.0
Net Operating CFNet Operating CFNet Operating CFNet Operating CF 11,43911,43911,43911,439 13,29313,29313,29313,293 13,67213,67213,67213,672 14,00314,00314,00314,003 14,37314,37314,37314,373 Capital Exp.(net) (10,774) (11,143) (11,000) (10,000) (10,000)
Other Invts.(net) 0.0 0.0 0.0 0.0 0.0
Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0
Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0
Other Investing CF (2,052) (7,253) 0.0 0.0 0.0
Net Investing CFNet Investing CFNet Investing CFNet Investing CF (12,826)(12,826)(12,826)(12,826) (18,396)(18,396)(18,396)(18,396) (11,000)(11,000)(11,000)(11,000) (10,000)(10,000)(10,000)(10,000) (10,000)(10,000)(10,000)(10,000) Div Paid (1,637) (1,806) (2,355) (2,438) (2,436)
Chg in Gross Debt (1,775) 9,063 2,156 1,356 1,356
Capital Issues 0.0 0.0 0.0 0.0 0.0
Other Financing CF (840) (664) 0.0 0.0 0.0
Net Financing CFNet Financing CFNet Financing CFNet Financing CF (4,252)(4,252)(4,252)(4,252) 6,5936,5936,5936,593 (199)(199)(199)(199) (1,083)(1,083)(1,083)(1,083) (1,080)(1,080)(1,080)(1,080)
Currency Adjustments (2.6) 9.90 0.0 0.0 0.0
Chg in Cash (5,641) 1,500 2,473 2,920 3,293
Opg CFPS (sen) 185 211 251 250 255
Free CFPS (sen) 11.8 38.1 47.4 70.9 77.5
Source: Company, AllianceDBS
Target Price & Ratings History
Source: AllianceDBS
Analyst: QUAH He Wei, CFA
Capex for new power plants and maintenance capex
ASIAN INSIGHTS VICKERS SECURITIES ed: CK / sa: BC, PY
BUYBUYBUYBUY Last Traded PriceLast Traded PriceLast Traded PriceLast Traded Price (((( 3 Nov 20163 Nov 20163 Nov 20163 Nov 2016)))): : : : RM19.84 (KLCIKLCIKLCIKLCI : : : : 1,648.08) Price Price Price Price Target 12Target 12Target 12Target 12----mthmthmthmth :::: RM22.60 (14% upside) (Prev RM22.60) Potential Catalyst: Potential Catalyst: Potential Catalyst: Potential Catalyst: Sustainable and robust earnings deliveries
Where we differ:Where we differ:Where we differ:Where we differ: Our TP is higher than consensus as we believe its
consistent earnings delivery could help re-rate its share price
Analyst Sue Lin LIM +65 8332 6843 [email protected] Lynette CHENG +60 32604 3907 [email protected]
What’s New • 3Q/9M16 earnings within expectations; revenue
growth supported by robust loan growth and stable NIM
• NIM pressure alleviated by lower wholesale funding costs; loan growth still outpacing the industry’s
• Challenges aplenty for the Malaysian banking sector; but expect PBK to defy headwinds and continue to deliver better-than-industry metrics
• Maintain BUY, TP of RM22.60; remains our top pick among Malaysian banks
Price Relative
Forecasts and Valuation FY FY FY FY DecDecDecDec ((((RMRMRMRMmmmm) ) ) ) 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF
Pre-prov. Profit 6,631 6,791 7,413 8,073 Net Profit 5,062 5,106 5,588 6,080 Net Pft (Pre Ex.) 5,062 5,106 5,588 6,080 Net Pft Gth (Pre-ex) (%) 12.0 0.9 9.4 8.8 EPS (sen) 130 132 144 157 EPS Pre Ex. (sen) 130 132 144 157 EPS Gth Pre Ex (%) 12 1 9 9 Diluted EPS (sen) 130 132 144 157 PE Pre Ex. (X) 15.2 15.1 13.8 12.7 Net DPS (sen) 56.0 58.0 62.0 66.0 Div Yield (%) 2.8 2.9 3.1 3.3 ROAE Pre Ex. (%) 17.1 15.6 15.7 15.6 ROAE (%) 17.1 15.6 15.7 15.6 ROA (%) 1.4 1.4 1.4 1.4 BV Per Share (sen) 804 878 960 1,051 P/Book Value (x) 2.5 2.3 2.1 1.9 Earnings Rev (%):Earnings Rev (%):Earnings Rev (%):Earnings Rev (%): 0 0 0 Consensus EPS Consensus EPS Consensus EPS Consensus EPS (sensensensen):::: 151 N/A N/A
Other Broker Recs:Other Broker Recs:Other Broker Recs:Other Broker Recs: B: 12 S: 3 H: 9
Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P.
The exception to the rule
Still making headway amid challenging times, BUY.Still making headway amid challenging times, BUY.Still making headway amid challenging times, BUY.Still making headway amid challenging times, BUY. Public Bank (PBK) is our top pick among Malaysian banks. Our BUY rating is premised on its sustainable earnings and robust asset quality. Despite macro headwinds, we expect PBK to continue to deliver above-industry growth and dominant market share in mortgages, auto and SME segments. Contribution from the unit trust business will continue to differentiate it from peers. PBK’s ability to safeguard its asset quality despite years of outperforming industry growth attests to the success of its prudent practices.
3Q16/9M3Q16/9M3Q16/9M3Q16/9M16 net profit largely within our and consensus 16 net profit largely within our and consensus 16 net profit largely within our and consensus 16 net profit largely within our and consensus expectations.expectations.expectations.expectations. Revenue growth remained strong, underpinned by strong loan/deposit growth (7.2%/7.4% y-o-y respectively), outpacing industry metrics, and surprisingly stable NIM despite the OPR cut in July. We understand that the stable NIM was held up by lower wholesale funding costs which offset most of the re-pricing effect from retail loans. Non-interest income was lower largely due to forex, prompting us to trim our non-interest income forecasts by 4% across FY16-18F. Provisions increased but were still within expectations. Absolute NPLs increased 5% y-o-y, but NPL ratio stayed low at 0.5%. The increase came mainly from its Laos operations; domestic NPLs were largely stable. Residential mortgage NPLs arose from pockets of its mass-market customers but recovery efforts are underway. Positively, impaired loans from the hire-purchase stayed healthy despite earlier caution on the vulnerability of this segment.
Sector will be challenging in Sector will be challenging in Sector will be challenging in Sector will be challenging in 2017201720172017; PBK will still defy headwinds. ; PBK will still defy headwinds. ; PBK will still defy headwinds. ; PBK will still defy headwinds. Further cuts in OPR may pose sector-wide downside risk to NIM. Although growth expectations have moderated slightly and the industry appears to be seeing more challenges to come, PBK remains the silver lining in the banking sector as its financial metrics (such as loan growth, deposit growth, asset quality and cost efficiency) remain superior to its peers.
Valuation: Our target price of RM22.60, which implies 2.3x FY17F BV, is derived using the Gordon Growth Model and assumes 9% cost of equity, 4% long-term growth and 16% ROE. PBK’s premium valuation vs. peers is justified, as it continues to deliver solid growth and quality trends, contrary to peers.
Key Risks to Our View: Failure tFailure tFailure tFailure to sustain aboveo sustain aboveo sustain aboveo sustain above----industry growth and asset qualityindustry growth and asset qualityindustry growth and asset qualityindustry growth and asset quality. A key de-rating factor for PBK would be the failure to sustain its excellent growth and asset quality track record, as well as faltering market share in segments which it excels in.
At A Glance Issued Capital (m shrs) 3,861
Mkt. Cap (RMm/US$m) 76,612 / 18,255
Major Shareholders (%)
Tan Sri Dato' Dr Teh Hong Piow (%) 21.8%
Employees Provident Fund (%) 15.4%
Free Float (%) 62.4
3m Avg. Daily Val (US$m) 24.9
ICB IndustryICB IndustryICB IndustryICB Industry : Financials / Banks
DBS Group Research . Equity
4 Nov 2016
Malaysia Company Guide
Public Bank Version 5 | Bloomberg: PBK MK | Reuters: PUBM.KL Refer to important disclosures at the end of this report
88
108
128
148
168
188
208
13.4
14.4
15.4
16.4
17.4
18.4
19.4
20.4
21.4
22.4
Nov-12 Nov-13 Nov-14 Nov-15 Nov-16
Relative IndexRM
Public Bank (LHS) Relative KLCI (RHS)
ASIAN INSIGHTS VICKERS SECURITIES
Page 52
Company Guide
Public Bank
WHAT’S NEW
Still making headway amid challenging times
HighlightsHighlightsHighlightsHighlights
Strong revenues led by robust loan growthStrong revenues led by robust loan growthStrong revenues led by robust loan growthStrong revenues led by robust loan growth and stable NIMand stable NIMand stable NIMand stable NIM....
PBK’s net profit came in largely within our and consensus
expectations. Net interest income growth remained strong,
underpinned by stable NIM and strong loan growth of 7.5% y-
o-y. NIM held up, despite the lowering of its Base Rate (BR)
and Base Lending Rate (BLR) by 23bps (effective 27 July)
following a cut in the Overnight Policy Rate (OPR) by 25bps, as
wholesale deposit costs eased, offsetting the effect of the
lower lending yields. Non-interest income fell due to lower
gains on financial instruments and forex transactions. There
were some structural non-operational forex gains recorded last
year which were not recurring. PBK’s cost efficiency remains
best in class, with cost-to-income ratio of 33% (unchanged q-
o-q).
Superior loan and deposit growthSuperior loan and deposit growthSuperior loan and deposit growthSuperior loan and deposit growth. The segments contributing
to its healthy loan growth include residential and construction
loans. Deposit growth stood at 7.3% y-o-y, led by growth in
fixed deposits (+10% y-o-y). Given the similar growth pace of
its loans and deposits, its loan to deposit ratio was relatively
unchanged at 90%. Annualised domestic loan/deposit growth
stood at 7.2%/7.4% which outpaced industry metrics of
2.8%/-1.4%.
Asset quality in check.Asset quality in check.Asset quality in check.Asset quality in check. Absolute NPLs increased by 5% y-o-y,
attributable to an increase in residential and working capital
impaired loans. Nonetheless, gross NPL ratio remained low at
0.5% (vs the industry’s 1.7%). Provisions increased but were
within expectations, keeping its loan loss coverage ratio high
at 110% (247% including regulatory reserve). No dividends
were declared, as expected. PBK is sufficiently capitalised with
Total/Tier 1/CET1 ratio of 15.2/11.9/11.0%.
OutlookOutlookOutlookOutlook
Further cut in OPR pose downside risk to NIMsFurther cut in OPR pose downside risk to NIMsFurther cut in OPR pose downside risk to NIMsFurther cut in OPR pose downside risk to NIMs.... Despite
challenging times ahead, we believe PBK will continue to
deliver sustainable earnings growth. This should be supported
by resilient loan growth, best-in-class cost-to-income ratio, and
unrivalled asset quality. Contribution from its asset
management business will continue to set the bank apart from
peers. Our base-case assumption is for PBK to experience a
slight decline in NIM of 4bps from FY16 to FY17. Deposit
competition which could be seasonal during the yearend
period could etch that trend in 4Q. In the event of further cuts
in OPR, NIM pressure may be more pronounced than expected.
PBK has seen it NIM hold up well despite the OPR cut in July.
The slower forex income trends prompted us to reduce our
FY16-18F earnings forecasts by 4% per annum. As the revision
to our risk-free rate assumption has offset the changes to our
Gordon Growth assumptions, our TP is unchanged.
Valuation and recommendationValuation and recommendationValuation and recommendationValuation and recommendation
Maintain BUY,Maintain BUY,Maintain BUY,Maintain BUY, RM22.60 TP. RM22.60 TP. RM22.60 TP. RM22.60 TP. PBK remains the top pick in our
Malaysian bank universe. Our TP, which implies 2.3x FY17F BV,
is derived using the Gordon Growth Model and assumes 9%
cost of equity, 4% long-term growth and 16% ROE. In our
view, PBK’s premium valuation vs. its Malaysian and ASEAN
peers is justified for a quality defensive bank.
ASIAN INSIGHTS VICKERS SECURITIES
Page 53
Company Guide
Public Bank
Quarterly / Interim Income Statement (RMm)
FY FY FY FY DecDecDecDec 3Q3Q3Q3Q2015201520152015 2Q2Q2Q2Q2016201620162016 3Q3Q3Q3Q2016201620162016 % chg yoy % chg yoy % chg yoy % chg yoy % chg qoq% chg qoq% chg qoq% chg qoq
Net Interest Income 1,629 1,700 1,736 6.6 2.2
Islamic Income 211 233 249 18.0 18.0
Non-Interest Income 631 492 482 (23.7) (2.1)
Operating IncomeOperating IncomeOperating IncomeOperating Income 2,4712,4712,4712,471 2,4252,4252,4252,425 2,4672,4672,4672,467 (0.2)(0.2)(0.2)(0.2) 1.81.81.81.8
Operating Expenses (741) (803) (815) 9.9 1.5
PrePrePrePre----Provision ProfitProvision ProfitProvision ProfitProvision Profit 1,7301,7301,7301,730 1,6221,6221,6221,622 1,6521,6521,6521,652 (4.5)(4.5)(4.5)(4.5) 1.91.91.91.9
Provisions (117) (68.9) (93.7) (19.7) 35.9
Associates 0.76 (1.2) (0.4) nm 66.8
Exceptionals 0.0 0.0 0.0 nm nm
Pretax ProfitPretax ProfitPretax ProfitPretax Profit 1,6141,6141,6141,614 1,5521,5521,5521,552 1,5581,5581,5581,558 (3.4)(3.4)(3.4)(3.4) 0.40.40.40.4
Taxation (397) (281) (306) (23.0) 8.8
Minority Interests (15.6) (14.4) (14.4) 7.7 (0.5)
Net ProfitNet ProfitNet ProfitNet Profit 1,2011,2011,2011,201 1,2561,2561,2561,256 1,2381,2381,2381,238 3.13.13.13.1 (1.4)(1.4)(1.4)(1.4)
Growth (%)
Net Interest Income Gth 4.4 0.9 2.2
Net Profit Gth 0.4 2.1 (1.4)
Key ratio (%)
NIM 2.1 2.1 2.2
NPL ratio 0.5 0.5 0.5
Loan-to deposit 89.8 90.5 90.2
Cost-to-income 30.0 33.1 33.0
Total CAR 14.8 15.4 15.2
Source of all data: Company, DBS Bank
ASIAN INSIGHTS VICKERS SECURITIES
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Company Guide
Public Bank
CRITICAL DATA POINTS TO WATCH
Earnings Drivers:
NIM compression largely from funding cost pressures.NIM compression largely from funding cost pressures.NIM compression largely from funding cost pressures.NIM compression largely from funding cost pressures. Like its
peers, PBK expects continued pressure on NIM arising from
higher cost of funds and is guiding for NIM to decline by 8-
10bps in FY16F. PBK will be focusing on garnering core deposits
(CASA and FD) while managing expensive wholesale deposits.
Loan yields are expected to stay stable.
Strong consumer franchise to defy headwindsStrong consumer franchise to defy headwindsStrong consumer franchise to defy headwindsStrong consumer franchise to defy headwinds. PBK has
consistently beat industry loan growth and for 2016, it targets
around 8% growth. The bank expects growth in deposit to be a
tad bit lower at 7%. Despite the weaker consumer sentiment,
we expect loan growth to remain resilient as its key portfolio lies
in the mass market. The bank is expected to maintain its market
share positions, particularly in the mortgages, auto and SME
segments. Consumer loans make up close to 60% of PBK’s loan
book.
Asset management contribution drives nonAsset management contribution drives nonAsset management contribution drives nonAsset management contribution drives non----intereintereintereinterest income.st income.st income.st income.
Sustainable and growing contribution from its asset
management arm, Public Mutual, continues to differentiate PBK
from its peers. Despite the volatile market, Public Mutual
continued to deliver profits and grow its assets under
management (FY15: RM65bn). This business unit is a key driver
of recurring income. PBK’s recurring income to non-interest
income ratio is among the highest in the industry at c.75%. On
top of that, PBK also has a strategic bancassurance partnership
with AIA Group that enables the group to offer life, health and
investment-linked products to its customers. Although
bancassurance’s contribution is still small as a percentage of
non-interest income, its growth has been strong.
PBK has the lowest costPBK has the lowest costPBK has the lowest costPBK has the lowest cost----totototo----income ratioincome ratioincome ratioincome ratio in the industry at
c.30%. The bank intends to keep that under 33% in 2016. We
forecast its cost-to-income ratio to remain flat. The cost
containment measures, coupled with its targeted income
growth, should keep ROE above 16% (taking into account the
full dilution impact of the rights issue completed in July 2014).
Small regional franchise.Small regional franchise.Small regional franchise.Small regional franchise. Apart from domestic operations, PBK
also has a regional presence, in Hong Kong, Sri Lanka, Laos,
Cambodia, and Vietnam. That said, overseas operations remain
a small contributor to PBK, at about 9% of PBT. Since April
2016, PBK has full control of its Vietnam operations. At this
juncture, operations remain small. PBK intends to build its
franchise in Vietnam in the retail segment. While it is still keen
on expanding regionally, PBK’s mode of expansion will remain
organic.
Margin Trends
Gross Loan & Growth
Customer Deposit & Growth
Loan-to-Deposit Ratio Trend
Cost & Income Structure
Source: Company, DBS Bank
1.9%
2.0%
2.0%
2.1%
2.1%
2.2%
2.2%
2.3%
2.3%
2.4%
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
2014A 2015A 2016F 2017F 2018F
RM m
Net Interest Income Net Interest Income Margin
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
0
50,000
100,000
150,000
200,000
250,000
300,000
2014A 2015A 2016F 2017F 2018F
RM m
Gross Loan (LHS) Gross Loan Growth (%) (YoY) (RHS)
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
2014A 2015A 2016F 2017F 2018F
RM m
Customer Deposits (LHS)
Customer Deposits Growth (%) (YoY) (RHS)
79%
84%
89%
94%
99%
218,900
268,900
318,900
368,900
418,900
2014A 2015A 2016F 2017F 2018F
RM bn
Loans Deposit Loan-to-Deposit Ratio (RHS)
29.4%
29.6%
29.8%
30.0%
30.2%
30.4%
30.6%
30.8%
31.0%
31.2%
0
2,000
4,000
6,000
8,000
10,000
12,000
2014A 2015A 2016F 2017F 2018F
Net Interest Income Non-interest Income
Islamic Banking Income Cost-to-income Ratio
ASIAN INSIGHTS VICKERS SECURITIES
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Company Guide
Public Bank
Balance Sheet:
Unrivalled asset quality.Unrivalled asset quality.Unrivalled asset quality.Unrivalled asset quality. PBK leads the industry in terms of asset
quality with an enviable NPL ratio of 0.5%. The bank’s ability to
safeguard its asset quality despite years of outperforming
industry growth attests to the success of its prudent practices.
Given its strong credit culture, we expect its NPL ratio to remain
low and stable.
PBK is wellPBK is wellPBK is wellPBK is well----capitalised,capitalised,capitalised,capitalised, boosted by the RM5bn rights issue
completed in 2014. PBK aims to keep total capital ratio at not
less than 13%. It does not have a dividend reinvestment plan
but its dividend payout ratio has been stable at slightly more
than 40%.
Share Price Drivers:
PBK is trading at premium valuation vs. peersPBK is trading at premium valuation vs. peersPBK is trading at premium valuation vs. peersPBK is trading at premium valuation vs. peers. This is justified
for a quality defensive bank. PBK is currently trading close to -
2SD of its 10-year P/BV mean. This represents a good
opportunity to accumulate the stock to gain exposure to long-
term sustainable earnings.
Consistent earnings delivery.Consistent earnings delivery.Consistent earnings delivery.Consistent earnings delivery. PBK’s consistent earnings delivery
and robust underlying trends amid a challenging operating
environment could act as the key catalysts for the stock.
Key Risks:
Sharp deterioration in retail growth prospects.Sharp deterioration in retail growth prospects.Sharp deterioration in retail growth prospects.Sharp deterioration in retail growth prospects. PBK’s consumer
loan growth did not weaken following Bank Negara’s
tightening measures over the last three years, although we
expect pockets of speculative and high-end properties to
soften. As PBK’s key portfolio focus is the mass market, we
expect its loan growth to remain resilient.
Company Background
Public Bank Berhad provides a range of commercial banking
and financial services which include unit trust management,
financing for the purchase of licensed public vehicles, and
other financial services. The group's overseas operations
include branches in Hong Kong, Sri Lanka, Laos, Cambodia,
and Vietnam.
Asset Quality
Capitalisation (%)
ROE (%)
Forward PE Band (x)
PB Band (x)
Source: Company, DBS Bank
0.0%
0.1%
0.2%
0.3%
0.4%
0.5%
0.6%
0.7%
0.8%
0.9%
1.0%
2014A 2015A 2016F 2017F 2018F
NPL Ratio Provision Charge-Off Rate
12.0%
12.5%
13.0%
13.5%
14.0%
14.5%
15.0%
15.5%
16.0%
2014A 2015A 2016F 2017F 2018F
Tier-1 CAR Total CAR
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
2014A 2015A 2016F 2017F 2018F
Avg: 14.4x
+1sd: 15.3x
+2sd: 16.1x
-1sd: 13.6x
-2sd: 12.8x
11.4
12.4
13.4
14.4
15.4
16.4
17.4
18.4
Nov-12 Nov-13 Nov-14 Nov-15
(x)
Avg: 2.76x
+1sd: 3.16x
+2sd: 3.56x
-1sd: 2.35x
-2sd: 1.95x
1.7
2.2
2.7
3.2
3.7
Nov-12 Nov-13 Nov-14 Nov-15
(x)
ASIAN INSIGHTS VICKERS SECURITIES
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Company Guide
Public Bank
Key Assumptions
FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF
Gross Loans Growth 10.8 11.6 8.0 8.0 8.0
Customer Deposits Growth 10.2 8.9 8.0 8.0 8.0
Yld. On Earnings Assets 4.1 4.2 4.2 4.2 4.1
Avg Cost Of Funds 2.4 2.6 2.6 2.6 2.6
Income Statement (RMm)
FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF
Net Interest Income 5,930 6,377 6,613 6,994 7,422
Islamic Income 831 829 903 985 1,073
Non-Interest Income 1,912 2,340 2,316 2,676 3,035
Operating IncomeOperating IncomeOperating IncomeOperating Income 8,6738,6738,6738,673 9,5469,5469,5469,546 9,8329,8329,8329,832 10,65510,65510,65510,655 11,53011,53011,53011,530
Operating Expenses (2,606) (2,915) (3,041) (3,241) (3,456)
PrePrePrePre----provision Profitprovision Profitprovision Profitprovision Profit 6,0676,0676,0676,067 6,6316,6316,6316,631 6,7916,7916,7916,791 7,4137,4137,4137,413 8,0738,0738,0738,073
Provisions (258) (147) (268) (274) (305)
Associates 4.98 7.56 7.56 7.56 7.56
Exceptionals 0.0 0.0 0.0 0.0 0.0
PrePrePrePre----tax Profittax Profittax Profittax Profit 5,8145,8145,8145,814 6,4916,4916,4916,491 6,5306,5306,5306,530 7,1477,1477,1477,147 7,7767,7767,7767,776
Taxation (1,251) (1,370) (1,378) (1,508) (1,641)
Minority Interests (44.5) (59.1) (45.7) (50.0) (54.4)
Preference Dividend 0.0 0.0 0.0 0.0 0.0
Net ProfitNet ProfitNet ProfitNet Profit 4,5194,5194,5194,519 5,0625,0625,0625,062 5,1065,1065,1065,106 5,5885,5885,5885,588 6,0806,0806,0806,080
Net Profit bef Except 4,519 5,062 5,106 5,588 6,080
Growth (%)
Net Interest Income Gth 6.5 7.5 3.7 5.8 6.1
Net Profit Gth 11.2 12.0 0.9 9.4 8.8
Margins, Costs & Efficiency (%)
Spread 1.7 1.6 1.6 1.6 1.5
Net Interest Margin 2.2 2.1 2.1 2.1 2.0
Cost-to-Income Ratio 30.0 30.5 30.9 30.4 30.0
Business Mix (%)
Net Int. Inc / Opg Inc. 68.4 66.8 67.3 65.6 64.4
Non-Int. Inc / Opg inc. 22.0 24.5 23.6 25.1 26.3
Fee Inc / Opg Income 15.9 16.3 16.4 17.4 18.5
Oth Non-Int Inc/Opg Inc 6.1 8.2 7.1 7.7 7.8
Profitability (%)
ROAE Pre Ex. 18.7 17.1 15.6 15.7 15.6
ROAE 18.7 17.1 15.6 15.7 15.6
ROA Pre Ex. 1.4 1.4 1.4 1.4 1.4
ROA 1.4 1.4 1.4 1.4 1.4
Source: Company, DBS Bank
Expect loan growth to outpace the industry’s
ASIAN INSIGHTS VICKERS SECURITIES
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Company Guide
Public Bank
Quarterly / Interim Income Statement (RMm)
FY FY FY FY DecDecDecDec 3Q3Q3Q3Q2015201520152015 4Q4Q4Q4Q2015201520152015 1Q1Q1Q1Q2016201620162016 2Q2Q2Q2Q2016201620162016 3Q3Q3Q3Q2016201620162016
Net Interest Income 1,629 1,654 1,685 1,700 1,736
Islamic Income 211 204 227 233 249
Non-Interest Income 631 638 592 492 482
Operating IncomeOperating IncomeOperating IncomeOperating Income 2,4712,4712,4712,471 2,4972,4972,4972,497 2,5042,5042,5042,504 2,4252,4252,4252,425 2,4672,4672,4672,467
Operating Expenses (741) (749) (788) (803) (815)
PrePrePrePre----Provision ProfitProvision ProfitProvision ProfitProvision Profit 1,7301,7301,7301,730 1,7481,7481,7481,748 1,7161,7161,7161,716 1,6221,6221,6221,622 1,6521,6521,6521,652
Provisions (117) 106 (67.0) (68.9) (93.7)
Associates 0.76 4.41 2.88 (1.2) (0.4)
Exceptionals 0.0 0.0 0.0 0.0 0.0
Pretax ProfitPretax ProfitPretax ProfitPretax Profit 1,6141,6141,6141,614 1,8581,8581,8581,858 1,6521,6521,6521,652 1,5521,5521,5521,552 1,5581,5581,5581,558
Taxation (397) (351) (407) (281) (306)
Minority Interests (15.6) (14.7) (15.3) (14.4) (14.4)
Net ProfitNet ProfitNet ProfitNet Profit 1,2011,2011,2011,201 1,4921,4921,4921,492 1,2301,2301,2301,230 1,2561,2561,2561,256 1,2381,2381,2381,238
Growth (%)
Net Interest Income Gth 4.4 1.6 1.8 0.9 2.2
Net Profit Gth 0.4 24.2 (17.6) 2.1 (1.4)
Balance Sheet (RMm)
FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF
Cash/Bank Balance 16,817 14,831 17,178 19,898 23,052
Government Securities 6,314 4,379 4,817 5,299 5,829
Inter Bank Assets 0.0 0.0 0.0 0.0 0.0
Total Net Loans & Advs. 243,222 271,814 293,529 317,017 342,384
Investment 64,237 54,955 58,361 61,990 65,857
Associates 157 191 191 191 191
Fixed Assets 1,476 1,423 1,494 1,569 1,647
Goodwill 2,083 2,376 2,376 2,376 2,376
Other Assets 11,415 13,789 14,746 15,774 16,879
Total AssetsTotal AssetsTotal AssetsTotal Assets 345,722345,722345,722345,722 363,758363,758363,758363,758 392,691392,691392,691392,691 424,113424,113424,113424,113 458,215458,215458,215458,215
Customer Deposits 276,540 301,157 325,250 351,270 379,371
Inter Bank Deposits 20,670 9,970 10,966 12,063 13,269
Debts/Borrowings 11,428 11,667 11,667 11,667 11,667
Others 8,209 8,657 9,600 10,674 11,896
Minorities 850 1,077 1,122 1,172 1,227
Shareholders' Funds 28,025 31,231 34,085 37,267 40,784
Total Liab& S/H’s FundsTotal Liab& S/H’s FundsTotal Liab& S/H’s FundsTotal Liab& S/H’s Funds 345,722345,722345,722345,722 363,758363,758363,758363,758 392,691392,691392,691392,691 424,113424,113424,113424,113 458,215458,215458,215458,215
Source: Company, DBS Bank
Consistent earnings delivery
ASIAN INSIGHTS VICKERS SECURITIES
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Company Guide
Public Bank
Financial Stability Measures (%)
FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF
Balance Sheet Structure
Loan-to-Deposit Ratio 88.0 90.3 90.2 90.2 90.3
Net Loans / Total Assets 70.4 74.7 74.7 74.7 74.7
Investment / Total Assets 18.6 15.1 14.9 14.6 14.4
Cust . Dep./Int. Bear. Liab. 89.6 93.3 93.5 93.7 93.8
Interbank Dep / Int. Bear. 6.7 3.1 3.2 3.2 3.3
Asset Quality
NPL / Total Gross Loans 0.6 0.5 0.5 0.4 0.4
NPL / Total Assets 0.4 0.4 0.4 0.3 0.3
Loan Loss Reserve Coverage 122.4 120.8 129.4 135.8 142.5
Provision Charge-Off Rate 0.1 0.1 0.1 0.1 0.1
Capital Strength
Total CAR 15.8 15.5 15.3 15.3 15.4
Tier-1 CAR 12.2 12.0 12.5 12.7 13.0
Source: Company, DBS Bank
Target Price & Ratings History
Source: DBS Bank
Analyst: Sue Lin LIM
Lynette CHENG
S.No.S.No.S.No.S.No.Date of Date of Date of Date of
ReportReportReportReport
Closing Closing Closing Closing
PricePricePricePrice
12-mth 12-mth 12-mth 12-mth
Target Target Target Target
PricePricePricePrice
Rat ing Rat ing Rat ing Rat ing
1: 10 Dec 15 18.24 21.95 BUY
2: 22 Jan 16 18.20 21.95 BUY
3: 02 Feb 16 18.34 21.95 BUY
4: 04 Feb 16 18.48 21.95 BUY
5: 25 Feb 16 18.38 21.95 BUY
6: 01 Mar 16 18.52 21.95 BUY
7: 02 Mar 16 18.64 21.95 BUY
8: 24 Mar 16 18.78 21.95 BUY
9: 04 Apr 16 18.84 21.95 BUY
10: 20 Apr 16 19.02 21.95 BUY
11: 03 May 16 18.56 21.95 BUY
12: 04 May 16 18.92 21.95 BUY
13: 02 Jun 16 19.04 21.95 BUY
14: 03 Jun 16 19.12 21.95 BUY
Note Note Note Note : Share price and Target price are adjusted for corporate actions. 15: 04 Jul 16 19.38 21.95 BUY
16: 12 Jul 16 19.36 21.95 BUY
17: 14 Jul 16 19.44 21.95 BUY
18: 29 Jul 16 19.50 21.80 BUY
19: 01 Aug 16 19.68 21.80 BUY
20: 05 Aug 16 19.60 21.80 BUY
21: 02 Sep 16 19.90 21.80 BUY
22: 05 Sep 16 19.84 22.60 BUY
23: 06 Oct 16 19.96 22.60 BUY
24: 21 Oct 16 19.80 22.60 BUY
25: 24 Oct 16 19.82 22.60 BUY
26: 31 Oct 16 19.86 22.60 BUY
1
2
3
4
5
67
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
16.92
17.42
17.92
18.42
18.92
19.42
19.92
20.42
20.92
Nov-15 Mar-16 Jul-16 Nov-16
RMRMRMRM
Lowest NPL ratio among peers
ASIAN INSIGHTS VICKERS SECURITIES ed: JS / sa: BC, PY
BUYBUYBUYBUY Last Traded Price: Last Traded Price: Last Traded Price: Last Traded Price: RM13.08 (KLCIKLCIKLCIKLCI : : : : 1,648.08) Price Target Price Target Price Target Price Target 12121212----mthmthmthmth :::: RM15.00 (15% upside) (Prev RM15.00) Potential Catalyst: Potential Catalyst: Potential Catalyst: Potential Catalyst: Improved earnings traction
Where we differ:Where we differ:Where we differ:Where we differ: We are more bullish on non-interest income growth as
we expect HLB’s wealth management contribution to gain traction
Analyst Sue Lin LIM +65 8332 6843 [email protected] Lynette CHENG +60 32604 3907 [email protected]
What’s New • 4QFY16 earnings surged on stronger non-interest
income and write-backs; ex-MSS, FY16 net profit was largely in line
• Ensuring asset quality and liquidity preservation; loan growth expected to be in line with industry
• Strategic initiatives focused on digital capabilities
• Maintain BUY, TP raised to RM15.00 as we shift our valuation base to CY17
Price Relative
Forecasts and Valuation FY FY FY FY JunJunJunJun ((((RMRMRMRMmmmm) ) ) ) 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF
Pre-prov. Profit 2,263 2,511 2,807 3,149 Net Profit 1,903 2,257 2,494 2,769 Net Pft (Pre Ex.) 2,034 2,257 2,494 2,769 Net Pft Gth (Pre-ex) (%) (6.7) 10.6 10.5 11.1 EPS (sen) 87.8 104 115 128 EPS Pre Ex. (sen) 94.1 104 115 128 EPS Gth Pre Ex (%) (10) 11 11 11 Diluted EPS (sen) 87.8 104 115 128 PE Pre Ex. (X) 13.9 12.6 11.4 10.2 Net DPS (sen) 41.0 38.4 39.8 42.2 Div Yield (%) 3.1 2.9 3.0 3.2 ROAE Pre Ex. (%) 10.0 10.3 10.7 11.0 ROAE (%) 10.0 10.3 10.7 11.0 ROA (%) 1.0 1.2 1.2 1.3 BV Per Share (sen) 974 1,040 1,115 1,201 P/Book Value (x) 1.3 1.3 1.2 1.1 Earnings Rev (%):Earnings Rev (%):Earnings Rev (%):Earnings Rev (%): 0 0 NA Consensus EPS Consensus EPS Consensus EPS Consensus EPS (sensensensen):::: 103 110 116
Other Broker Recs:Other Broker Recs:Other Broker Recs:Other Broker Recs: B: 2 S: 10 H: 9
Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P.
Backed by solid fundamentals
NNNNormaliseormaliseormaliseormalisedddd FY17FY17FY17FY17 backed by solid fundamentalsbacked by solid fundamentalsbacked by solid fundamentalsbacked by solid fundamentals; BUY.; BUY.; BUY.; BUY. Hong Leong Bank’s (HLB) banking franchise remains undervalued in our view. We believe the market is not attributing sufficient premium to its key attributes of solid asset quality indicators and strong liquidity position. In this current uncertain environment, balancing liquidity versus profitability will be crucial. We expect HLB to grow cautiously in the current operating environment, ensuring asset quality and liquidity preservation while delivering decent earnings growth and ROEs. Bank of Chengdu (BOCD), its 20% associate remains a wildcard. 4Q16 earnings surged on 4Q16 earnings surged on 4Q16 earnings surged on 4Q16 earnings surged on stronger revenues and writestronger revenues and writestronger revenues and writestronger revenues and write----backsbacksbacksbacks;;;; FY16 earnings saw several distortionsFY16 earnings saw several distortionsFY16 earnings saw several distortionsFY16 earnings saw several distortions. . . . As expected, 4QFY16 (FYE June) earnings improved sequentially led by non-interest income with write-backs as a bonus. Expenses were well contained. Topline growth benefited from improved net interest margin (NIM) as asset yields were lifted despite funding cost pressures. Contribution from BOCD was a tad lower q-o-q. On a full year basis, HLB’s FY16 numbers were distorted by (1) Mutual Separation Scheme (MSS) costs booked in 2Q16, (2) larger equity base from its rights issue (completed in Dec 2015), and (3) lower contribution from BOCD. Cautious outlookCautious outlookCautious outlookCautious outlook for FY17Ffor FY17Ffor FY17Ffor FY17F. . . . FY17F targets appear to skew towards a cautious mode with loan growth at 5-6%. Deposits would likely grow at the same pace. HLB aims to keep NIM stable by managing its liability mix. Non-interest income to total income ratio is targeted at above 25%, driven by transactions and customer flows. Cost savings from the MSS will be reinvested to enhance digital capabilities. Digital banking initiatives are expected to drive transaction banking volumes higher over time. Cost-to-income ratio is targeted to be below 46%. Guidance is for credit costs excluding recoveries to normalise at 25-35bps; there are still some recoveries that could be expected but chunky ones are largely done. BOCD is expected stabilise. Post rights and with slower growth expected, ROE is targeted at 10-11%. Valuation: HLB is a BUY, with a target HLB is a BUY, with a target HLB is a BUY, with a target HLB is a BUY, with a target price of RMprice of RMprice of RMprice of RM15.0015.0015.0015.00. . . . The higher TP is a result of the shift in our valuation base to CY17 despite some minor tweaks to our forecast to reflect a cautious outlook. Our TP is derived using the Gordon Growth Model and assumes 11% ROE, 9% cost of equity and 4% long- term growth rate; it implies 1.4x CY17 BV. Key Risks to Our View: SlowerSlowerSlowerSlower----thanthanthanthan----expected materialisation of growth plans.expected materialisation of growth plans.expected materialisation of growth plans.expected materialisation of growth plans. Inability to deliver growth plans for wealth management and excessive NIM compression could limit earnings growth. At A Glance Issued Capital (m shrs) 2,052
Mkt. Cap (RMm/US$m) 26,842 / 6,396
Major Shareholders (%)
Hong Leong Financial Group (%) 64.4 EPF (%) 14.0 Free Float (%) 21.6
3m Avg. Daily Val (US$m) 2.0
ICB IndustryICB IndustryICB IndustryICB Industry : Financials / Banks
DBS Group Research . Equity
4 Nov 2016
Malaysia Company Guide
Hong Leong Bank Version | Bloomberg: HLBK MK | Reuters: HLBB.KL Refer to important disclosures at the end of this report
74
94
114
134
154
174
194
214
11.0
11.5
12.0
12.5
13.0
13.5
14.0
14.5
15.0
15.5
16.0
Nov-12 Nov-13 Nov-14 Nov-15 Nov-16
Relative IndexRM
Hong Leong Bank (LHS) Relative KLCI (RHS)
ASIAN INSIGHTS VICKERS SECURITIES
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Company Guide
Hong Leong Bank
WHAT’S NEW
Core earnings within expectations
HighightsHighightsHighightsHighights: : : :
4Q16 earnings surged.4Q16 earnings surged.4Q16 earnings surged.4Q16 earnings surged. As expected, 4Q16 net profit improved
sequentially. NIM improved as loans were re-priced after a
10bps hike in Base Rate (BR) and Base Lending Rate (BLR) in
April 2016. Funding costs however negated some of the
increase. Deposit growth of 6% y-o-y was driven by fixed
deposits. Retail deposits comprise 55% of total deposits, the
highest mix vs peers. Loans grew 2% q-o-q and 6% y-o-y
driven by mortgages and SMEs. Hire-purchase loans grew
marginally while unsecured loans (credit cards and personal
loans) were flattish. Non-interest income rose on higher forex
gains; these were largely from customer flows for hedging
activities. Cost-to-income for the quarter dipped a little thanks
to stronger revenues. The strong pre-provision profits were
further exacerbated by writebacks for the quarter but net
profit was partially negated by a slightly lower contribution
from BOCD.
FY16 distorted by several oneFY16 distorted by several oneFY16 distorted by several oneFY16 distorted by several one----offs.offs.offs.offs. FY16 net profit was 6%
lower y-o-y, excluding the RM172m one-off MSS costs, was in
line. Topline growth was softer due to NIM pressure y-o-y as
funding costs mounted. Non-interest income saw broad base
improvements with a surge in fee income from wealth
management (bancassurance driven) and credit card fees as
well as forex and higher investment income. Excluding the
MSS, cost-to-income ratio was 46%. Provisions normalised as
recoveries tapered off. Credit cost excluding recoveries was at
22bps. Its associate, BOCD, contributed 14% to pre-tax profit,
lower than previous years, as it was dampened mainly by
higher provisions and NIM pressure following rate cuts in
China. Its NPL ratio hit a high of 2.5% for FY16 while its loan
loss coverage ratio was still elevated at 159%.
Asset quality remains sound.Asset quality remains sound.Asset quality remains sound.Asset quality remains sound. Positively, NPL ratios were lower
at 0.8% with absolute NPLs only rising by 1% y-o-y. NPL ratios
in its core segments were stable: NPL ratios for mortgages
were at 0.45%, hire-purchase at 0.79% and SME at 1.42%
respectively. Loan loss coverage ratio stood at 120%, albeit
lower than a year ago, remains among the highest vs peers.
Concerns on commodities and oil & gas sectors should be
minimal with only 4% exposure to commodities and less than
1% to the oil & gas sector. HLB’s asset quality appears well
under control and is unlikely to experience blips.
Capital ratios reCapital ratios reCapital ratios reCapital ratios remained robust.mained robust.mained robust.mained robust. HLB’s capital ratios remained
robust with CET1 (fully loaded), Tier-1 and Total CAR at
11.7%, 13.1% and 14.7% respectively. Note that the rights
issue was completed in Dec 2015. HLB declared a final DPS of
26sen, bringing full year DPS to 41sen, equivalent to a 47%
payout ratio.
OutlookOutlookOutlookOutlook: : : :
CCCCautious mood for FY17F.autious mood for FY17F.autious mood for FY17F.autious mood for FY17F. FY17F targets appear to skew
towards a cautious mode with loan growth targeted at 5-6%.
Deposits would likely grow at the same pace. HLB aims to keep
NIM stable by managing its liability mix. Non-interest income
to total income ratio is targeted at above 25% driven by
transactions and customer flows. Cost savings from the MSS
will be reinvested to enhance digital capabilities. Digital
banking initiatives are expected to drive transaction banking
volumes higher over time. Cost-to-income ratio is targeted to
be below 46%. Credit costs excluding recoveries are guided to
normalise at 25-35bps; there are still some recoveries that
could be expected but chunky ones are largely done. Post
rights and with slower growth expected, ROE is targeted at 10-
11%.
Trim earTrim earTrim earTrim earnings by 3nings by 3nings by 3nings by 3----4% across FY174% across FY174% across FY174% across FY17----18F18F18F18F.... With more clarity on
HLB’s targets for FY17, we have adjusted our assumptions
accordingly. Both loan and deposit growth assumption now
stands at 6% for FY17-18F and 8% for FY19F. This should
keep loan-to-deposit ratio at c.80%. Our credit cost
assumption for FY17-19F is 9/12/14bps.
BOCD should stabilize but remains a wildcard. BOCD should stabilize but remains a wildcard. BOCD should stabilize but remains a wildcard. BOCD should stabilize but remains a wildcard. After a weak
showing in FY16, BOCD is expected to see a peak of its NPL
issues by 1QFY17 with NPLs stabilising in the recent quarters.
BOCD’s earnings have improved compared to trends booked
six months ago. With such stable trends in the past two
quarters, BOCD should continue to contribute at least 15% of
pre-tax profit in FY17F. This, however, remains a wildcard.
Digital banking, a strategic direction Digital banking, a strategic direction Digital banking, a strategic direction Digital banking, a strategic direction forward.forward.forward.forward. HLB’s new CEO,
Mr Domenic Fuda, identified digital banking as its key strategic
initiative to drive the bank forward. It is not a matter of how
much digital banking will be able to contribute to the bank’s
earnings but more of the stance where if nothing is done, the
bank will stand to lose traction amid the fintech boom. Over
time, digital banking transaction volumes are expected to rise
and potential cross selling opportunities would further
enhance its capabilities to deliver growth.
ValuationValuationValuationValuation::::
Maintain BUY, TP raised to Maintain BUY, TP raised to Maintain BUY, TP raised to Maintain BUY, TP raised to RM15.00RM15.00RM15.00RM15.00.... HLB’s banking franchise
remains undervalued in our view. We believe market is not
attributing sufficient premium to its key attributes of solid asset
quality indicators and strong liquidity position. We have shifted
our valuation base to CY17. Our TP of RM15.00 is based on
the Gordon Growth Model and implies 1.4x CY17 BV. Our TP
assumes 11% ROE, 9% cost of equity and 4% long- term
growth rate.
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Company Guide
Hong Leong Bank
Quarterly / Interim Income Statement (RMm)
FY FY FY FY JunJunJunJun 4Q4Q4Q4Q2015201520152015 3Q3Q3Q3Q2016201620162016 4Q4Q4Q4Q2016201620162016 % chg yoy % chg yoy % chg yoy % chg yoy % chg qoq% chg qoq% chg qoq% chg qoq FY15FY15FY15FY15 FY16FY16FY16FY16 % chg yoy % chg yoy % chg yoy % chg yoy
Net Interest Income 657 654 663 0.9 1.3 2,741 2,655 (3.1)
Islamic Income 105 114 121 15.6 15.6 420 468 11.4
Non-Interest Income 279 234 295 5.7 26.1 906 1,055 16.5
Operating IncomeOperating IncomeOperating IncomeOperating Income 1,0411,0411,0411,041 1,0021,0021,0021,002 1,0791,0791,0791,079 3.73.73.73.7 7.67.67.67.6 4,064,064,064,067777 4,174,174,174,178888 2.72.72.72.7
Operating Expenses (471) (472) (494) 4.9 4.6 (1,769) (1,914.8) 8.3
PrePrePrePre----Provision ProfitProvision ProfitProvision ProfitProvision Profit 570570570570 530530530530 585585585585 2.72.72.72.7 10.310.310.310.3 2,2982,2982,2982,298 2,2632,2632,2632,263 (1.5)(1.5)(1.5)(1.5)
Provisions (13.7) (17.7) 54.1 nm nm 75 (43) nm
Associates 116 94.2 85.3 (26.6) (9.4) 418 333 (20.2)
Exceptionals 0.0 0.0 0.0 nm nm (45) (172) 282.2
Pretax ProfitPretax ProfitPretax ProfitPretax Profit 673673673673 607607607607 724724724724 7.77.77.77.7 19.419.419.419.4 2,746.2,746.2,746.2,746. 2,382,382,382,382222 (13.3)(13.3)(13.3)(13.3)
Taxation (57.7) (109) (166) 187.7 52.4 (513) (478) (6.8)
Minority Interests 0.0 0.0 0.0 nm nm - - nm
Net Net Net Net ProfitProfitProfitProfit 615615615615 498498498498 559559559559 (9.2)(9.2)(9.2)(9.2) 12.212.212.212.2 2,2332,2332,2332,233 1,9031,9031,9031,903 (14.8)(14.8)(14.8)(14.8)
Net Profit (exNet Profit (exNet Profit (exNet Profit (ex----oneoneoneone----offs)offs)offs)offs) 579579579579 498498498498 559559559559 (3.5)(3.5)(3.5)(3.5) 12.212.212.212.2 2,1562,1562,1562,156 2,0342,0342,0342,034 (5.6)(5.6)(5.6)(5.6)
Growth (%)
Net Interest Income Gth 0.0 (3.5) 1.3 3.0 (3.1)
Net Profit Gth 18.4 44.7 12.2 6.2 (14.8)
Key ratio (%)
NIM 1.94 1.91 1.95 1.94 1.86
NPL ratio 0.8 0.8 0.8 0.8 0.8
Loan-to deposit 79.9 80.5 80.4 79.9 80.4
Cost-to-income 45.3 47.1 45.8 44.6 49.9
Total CAR 14.3 15.7 14.7 14.3 14.7
Source of all data: Company, DBS Bank
ASIAN INSIGHTS VICKERS SECURITIES
Page 62
Company Guide
Hong Leong Bank
CRITICAL DATA POINTS TO WATCH
Earnings Drivers:
NIM compression largely unavoidable.NIM compression largely unavoidable.NIM compression largely unavoidable.NIM compression largely unavoidable. Although we expect
funding cost pressures, we believe HLB’s active treasury
functions would strive to keep NIM as stable as possible. CASA,
as a low-cost funding source, should help to alleviate NIM
compression as well. HLB’s CASA-to-total deposits ratio
currently stands at 26% of total deposits and it intends to build
up this portfolio to 28-30% over the next 3-5 years.
Room to scale up loan growth; loanRoom to scale up loan growth; loanRoom to scale up loan growth; loanRoom to scale up loan growth; loan----totototo----deposit ratio is still deposit ratio is still deposit ratio is still deposit ratio is still
among the lowestamong the lowestamong the lowestamong the lowest. HLB’s loan growth is driven by mortgage
and SME loans. We are assuming 6% loan growth in our
forecasts, while deposit should track loan growth. With a loan-
to-deposit ratio still among the lowest in the industry, HLB
would have room to further leverage its asset-liability mix to
accelerate loan growth and optimise NIM. We expect its loan-
to-deposit ratio to hover around 80%.
Wealth management a crucial new driver.Wealth management a crucial new driver.Wealth management a crucial new driver.Wealth management a crucial new driver. Recurring fee income
(loan-related and credit card fees) remains HLB’s key non-
interest income driver. However, it is also building up income
from wealth management. HLB has established a regional
wealth management and private banking platform in Singapore.
Wealth management is expected to be HLB’s new growth driver
as it gradually gains prominence.
Addressing efficiency issues.Addressing efficiency issues.Addressing efficiency issues.Addressing efficiency issues. From a business-as-usual (BAU)
perspective, costs should remain nimble, and cost-to-income
ratio should hover below 45%. HLB announced a Mutual
Separation Scheme (MSS) on 20 Oct which resulted in an
acceptance rate of 12.5%. The MSS cost incurred was RM172m
while savings are expected to be RM109m per annum from as
early as Jan 16. Cost savings are likely to be used for
investments in the bank’s digitisation agenda
Bank of Chengdu contribution should stabilize, but remains a Bank of Chengdu contribution should stabilize, but remains a Bank of Chengdu contribution should stabilize, but remains a Bank of Chengdu contribution should stabilize, but remains a
wildcardwildcardwildcardwildcard.... After a weak showing in FY16, BOCD is expected to
see a peak of its NPL issues by 1QFY17 with NPLs stabilising in
the recent quarters. Our forecast assumes contribution from
BOCD to drop to hover around 15% of pre-tax profit in FY17-
19F. This, however, remains a wildcard.
Margin Trends
Gross Loan& Growth
Customer Deposit & Growth
Loan-to-Deposit Ratio Trend
Cost & Income Structure
Source: Company, DBS Bank
1.8%
1.8%
1.9%
1.9%
2.0%
2.0%
2.1%
2.1%
0
500
1,000
1,500
2,000
2,500
3,000
2015A 2016A 2017F 2018F 2019F
RM m
Net Interest Income Net Interest Income Margin
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
2015A 2016A 2017F 2018F 2019F
RM m
Gross Loan (LHS) Gross Loan Growth (%) (YoY) (RHS)
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
2015A 2016A 2017F 2018F 2019F
RM m
Customer Deposits (LHS)
Customer Deposits Growth (%) (YoY) (RHS)
71%
73%
75%
77%
79%
81%
83%
85%
87%
89%
100,912
120,912
140,912
160,912
180,912
200,912
2015A 2016A 2017F 2018F 2019F
RM bn
Loans Deposit Loan-to-Deposit Ratio (RHS)
36.0%
37.0%
38.0%
39.0%
40.0%
41.0%
42.0%
43.0%
44.0%
45.0%
46.0%
47.0%
0
1,000
2,000
3,000
4,000
5,000
6,000
2015A 2016A 2017F 2018F 2019F
Net Interest Income Non-interest Income
Islamic Banking Income Cost-to-income Ratio
ASIAN INSIGHTS VICKERS SECURITIES
Page 63
Company Guide
Hong Leong Bank
Balance Sheet:
Superior asset quality.Superior asset quality.Superior asset quality.Superior asset quality. At <1%, HLB’s NPL ratio is second only to
Public Bank (PBK). Similar to PBK, HLB also boasts a prudent
credit culture. We expect HLB to continue recording resilient
asset quality indicators. Normalised credit cost is expected to
hover around 25bps, excluding recoveries.
Stronger capital ratios post rights.Stronger capital ratios post rights.Stronger capital ratios post rights.Stronger capital ratios post rights. Post-rights, capital ratios are
now stronger, comfortably above the minimum required CET1
of 9.5% (inclusive of conservation and countercyclical buffers)
by 2019 as per Basel III requirements. Any capital overhang
should be removed with this rights issue. HLB does not have a
dividend reinvestment plan in place, but we expect at least 35%
payout for FY17F.
Share Price Drivers:
Charting the next course.Charting the next course.Charting the next course.Charting the next course. HLB is currently trading just below -
1SD of its 10-year P/BV mean. We believe that the current
valuation has unfairly priced this strong banking franchise with
solid asset quality and liquidity indicators. In addition, the stock
provides a decent dividend yield of 3-4%.
Book value growth has been underappreciated.Book value growth has been underappreciated.Book value growth has been underappreciated.Book value growth has been underappreciated. HLB has been
consistently seeing its book value and earnings grow at c.10%
p.a., save for the year when it raised capital to acquire EON
Capital and the recent rights issue. This however, has not been
reflected in its share price performance. Furthermore, we
believe HLB's resilient earnings, with wealth management and
SME business as key drivers, coupled with strong liquidity
indicators and asset quality parameters, should act as a catalyst
for the stock.
Key Risks:
SlowerSlowerSlowerSlower----thanthanthanthan----expected materialisation of plans.expected materialisation of plans.expected materialisation of plans.expected materialisation of plans. Inability to
deliver growth plans for wealth management and slowdown in
regional operations. While loan-to-deposit ratio is at 80%,
which is the lowest among peers, slower-than-expected loan
growth and excessive NIM compression could limit earnings
growth.
Company Background
Hong Leong Bank Berhad provides commercial banking and
related financial services. The company's services include
leasing and hire purchase, nominee, Islamic banking, and unit
trust management.
Asset Quality
Capitalisation (%)
ROE (%)
Forward PE Band (x)
PB Band (x)
Source: Company, DBS Bank
-1.0%
-0.8%
-0.6%
-0.4%
-0.2%
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
2015A 2016A 2017F 2018F 2019F
NPL Ratio Provision Charge-Off Rate
12.0%
13.0%
14.0%
15.0%
16.0%
17.0%
2015A 2016A 2017F 2018F 2019F
Tier-1 CAR Total CAR
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
2015A 2016A 2017F 2018F 2019F
Avg: 13.5x
+1sd: 14.1x
+2sd: 14.8x
-1sd: 12.8x
-2sd: 12.2x
10.7
11.7
12.7
13.7
14.7
15.7
16.7
Nov-12 Nov-13 Nov-14 Nov-15
(x)
Avg: 1.84x
+1sd: 2.18x
+2sd: 2.52x
-1sd: 1.51x
-2sd: 1.17x
1.0
1.2
1.4
1.6
1.8
2.0
2.2
2.4
2.6
2.8
Nov-12 Nov-13 Nov-14 Nov-15
(x)
ASIAN INSIGHTS VICKERS SECURITIES
Page 64
Company Guide
Hong Leong Bank
Key Assumptions
FY FY FY FY JunJunJunJun 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF
Gross Loans Growth 8.9 6.3 6.0 6.0 8.0
Customer Deposits Growth 7.7 5.9 6.0 6.0 8.0
Yld. On Earnings Assets 3.7 3.8 3.6 3.6 3.6
Avg Cost Of Funds 2.2 2.2 2.2 2.2 2.2
Income Statement (RMm)
FY FY FY FY JunJunJunJun 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF
Net Interest Income 2,741 2,655 2,756 2,924 3,119
Islamic Income 420 467 514 555 600
Non-Interest Income 906 1,055 1,214 1,359 1,522
Operating IncomeOperating IncomeOperating IncomeOperating Income 4,0674,0674,0674,067 4,1784,1784,1784,178 4,4844,4844,4844,484 4,8394,8394,8394,839 5,2425,2425,2425,242
Operating Expenses (1,859) (1,915) (1,972) (2,031) (2,092)
PrePrePrePre----provision Profitprovision Profitprovision Profitprovision Profit 2,2082,2082,2082,208 2,2632,2632,2632,263 2,5112,5112,5112,511 2,8072,8072,8072,807 3,1493,1493,1493,149
Provisions 75.4 (42.8) (114) (158) (207)
Associates 418 333 423 468 519
Exceptionals 45.0 (172) 0.0 0.0 0.0
PrePrePrePre----tax Profittax Profittax Profittax Profit 2,7462,7462,7462,746 2,3822,3822,3822,382 2,8212,8212,8212,821 3,1173,1173,1173,117 3,4623,4623,4623,462
Taxation (513) (478) (564) (623) (692)
Minority Interests 0.0 0.0 0.0 0.0 0.0
Preference Dividend 0.0 0.0 0.0 0.0 0.0
Net ProfitNet ProfitNet ProfitNet Profit 2,2332,2332,2332,233 1,9031,9031,9031,903 2,2572,2572,2572,257 2,4942,4942,4942,494 2,7692,7692,7692,769
Net Profit bef Except 2,156 2,034 2,257 2,494 2,769
Growth (%)
Net Interest Income Gth 3.0 (3.1) 3.8 6.1 6.7
Net Profit Gth 6.2 (14.8) 18.6 10.5 11.1
Margins, Costs & Efficiency (%)
Spread 1.6 1.5 1.5 1.5 1.5
Net Interest Margin 1.9 1.9 1.9 1.9 1.9
Cost-to-Income Ratio 45.7 45.8 44.0 42.0 39.9
Business Mix (%)
Net Int. Inc / Opg Inc. 67.4 63.6 61.5 60.4 59.5
Non-Int. Inc / Opg inc. 22.3 25.3 27.1 28.1 29.0
Fee Inc / Opg Income 14.8 14.8 15.8 16.4 17.0
Oth Non-Int Inc/Opg Inc 7.5 10.5 11.2 11.7 12.1
Profitability (%)
ROAE Pre Ex. 14.3 10.0 10.3 10.7 11.0
ROAE 14.3 10.0 10.3 10.7 11.0
ROA Pre Ex. 1.2 1.1 1.2 1.2 1.3
ROA 1.3 1.0 1.2 1.2 1.3
Source: Company, DBS Bank
FY16 earnings dragged by one-off MSS cost
ASIAN INSIGHTS VICKERS SECURITIES
Page 65
Company Guide
Hong Leong Bank
Quarterly / Interim Income Statement (RMm)
FY FY FY FY JunJunJunJun 4Q4Q4Q4Q2015201520152015 1Q1Q1Q1Q2016201620162016 2Q2Q2Q2Q2016201620162016 3Q3Q3Q3Q2016201620162016 4Q4Q4Q4Q2016201620162016
Net Interest Income 657 660 678 654 663
Islamic Income 105 115 118 114 121
Non-Interest Income 279 249 278 234 295
Operating IncomeOperating IncomeOperating IncomeOperating Income 1,0411,0411,0411,041 1,0231,0231,0231,023 1,0741,0741,0741,074 1,0021,0021,0021,002 1,0791,0791,0791,079
Operating Expenses (471) (463) (486) (472) (494)
PrePrePrePre----Provision ProfitProvision ProfitProvision ProfitProvision Profit 570570570570 561561561561 587587587587 530530530530 585585585585
Provisions (13.7) (21.1) (58.0) (17.7) 54.1
Associates 116 85.5 68.5 94.2 85.3
Exceptionals 0.0 0.0 (172) 0.0 0.0
Pretax ProfitPretax ProfitPretax ProfitPretax Profit 673673673673 625625625625 426426426426 607607607607 724724724724
Taxation (57.7) (122) (81.7) (109) (166)
Minority Interests 0.0 0.0 0.0 0.0 0.0
Net ProfitNet ProfitNet ProfitNet Profit 615615615615 503503503503 344344344344 498498498498 559559559559
Growth (%)
Net Interest Income Gth 0.0 0.4 2.7 (3.5) 1.3
Net Profit Gth 18.4 (18.2) (31.6) 44.7 12.2
Balance Sheet (RMm)
FY FY FY FY JunJunJunJun 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF
Cash/Bank Balance 6,230 7,474 8,857 9,732 11,299
Government Securities 3,476 4,296 3,853 4,079 4,396
Inter Bank Assets 3,982 2,057 2,160 2,268 2,382
Total Net Loans & Advs. 112,125 119,457 126,451 133,885 144,513
Investment 42,421 41,712 43,797 45,987 48,287
Associates 3,107 3,323 3,746 4,213 4,733
Fixed Assets 679 1,382 1,410 1,438 1,467
Goodwill 2,149 2,096 2,096 2,096 2,096
Other Assets 9,852 8,030 8,190 8,354 8,521
Total AssetsTotal AssetsTotal AssetsTotal Assets 184,020184,020184,020184,020 189,827189,827189,827189,827 200,561200,561200,561200,561 212,053212,053212,053212,053 227,693227,693227,693227,693
Customer Deposits 140,276 148,524 157,435 166,881 180,232
Inter Bank Deposits 7,096 6,201 6,511 6,837 7,179
Debts/Borrowings 8,847 4,523 4,523 4,523 4,523
Others 11,010 9,463 9,550 9,640 9,732
Minorities 0.0 0.0 0.0 0.0 0.0
Shareholders' Funds 16,790 21,117 22,541 24,172 26,027
Total Liab& S/H’s FundsTotal Liab& S/H’s FundsTotal Liab& S/H’s FundsTotal Liab& S/H’s Funds 184,020184,020184,020184,020 189,828189,828189,828189,828 200,561200,561200,561200,561 212,053212,053212,053212,053 227,693227,693227,693227,693
Source: Company, DBS Bank
Earnings led by strong non-interest income and higher writebacks
ASIAN INSIGHTS VICKERS SECURITIES
Page 66
Company Guide
Hong Leong Bank
Financial Stability Measures (%)
FY FY FY FY JunJunJunJun 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF
Balance Sheet Structure
Loan-to-Deposit Ratio 79.9 80.4 80.3 80.2 80.2
Net Loans / Total Assets 60.9 62.9 63.0 63.1 63.5
Investment / Total Assets 23.1 22.0 21.8 21.7 21.2
Cust . Dep./Int. Bear. Liab. 89.8 93.3 93.5 93.6 93.9
Interbank Dep / Int. Bear. 4.5 3.9 3.9 3.8 3.7
Asset Quality
NPL / Total Gross Loans 0.8 0.8 0.8 0.8 0.7
NPL / Total Assets 0.5 0.5 0.5 0.5 0.4
Loan Loss Reserve Coverage 136.3 119.8 135.8 150.0 179.5
Provision Charge-Off Rate (0.1) 0.0 0.1 0.1 0.1
Capital Strength
Total CAR 14.7 15.1 15.3 16.1 16.6
Tier-1 CAR 12.3 13.6 13.8 14.7 15.4
Source: Company, DBS Bank
Target Price & Ratings History
Source: DBS Bank
Analyst: Sue Lin LIM
Lynette CHENG
S.No.S.No.S.No.S.No.Date of Date of Date of Date of
ReportReportReportReport
Closing Closing Closing Closing
PricePricePricePrice
12-mth 12-mth 12-mth 12-mth
Target Target Target Target
PricePricePricePrice
Rat ing Rat ing Rat ing Rat ing
1: 18 Nov 15 13.14 15.66 BUY
2: 10 Dec 15 13.20 14.80 BUY
3: 15 Dec 15 13.40 14.80 BUY
4: 14 Jan 16 13.04 14.80 BUY
5: 22 Jan 16 12.90 14.80 BUY
6: 02 Feb 16 13.36 14.80 BUY
7: 24 Feb 16 13.12 14.70 BUY
8: 01 Mar 16 13.10 14.70 BUY
9: 02 Mar 16 13.16 14.70 BUY
10: 24 Mar 16 13.32 14.70 BUY
11: 04 Apr 16 13.62 14.70 BUY
12: 03 May 16 13.20 14.70 BUY
13: 04 May 16 13.40 14.70 BUY
14: 25 May 16 13.40 14.70 BUY
Note Note Note Note : Share price and Target price are adjusted for corporate actions. 15: 02 Jun 16 13.16 14.70 BUY
16: 03 Jun 16 13.16 14.70 BUY
17: 12 Jul 16 13.24 14.70 BUY
18: 14 Jul 16 13.26 14.70 BUY
19: 01 Aug 16 13.22 14.70 BUY
20: 05 Aug 16 13.06 14.70 BUY
21: 30 Aug 16 13.08 15.00 BUY
22: 02 Sep 16 13.10 15.00 BUY
23: 05 Sep 16 13.10 15.00 BUY
24: 06 Oct 16 13.10 15.00 BUY
25: 10 Oct 16 13.16 15.00 BUY
26: 21 Oct 16 13.28 15.00 BUY
27: 24 Oct 16 13.30 15.00 BUY
28: 31 Oct 16 13.32 15.00 BUY
1
23 4
5
6
7
89
10111213
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
12.06
12.56
13.06
13.56
14.06
Nov-15 Mar-16 Jul-16 Nov-16
RMRMRMRM
Low loan-to-deposit ratio
ASIAN INSIGHTS VICKERS SECURITIES ed: CK / sa: BC, PY
BUYBUYBUYBUY Last Traded PriceLast Traded PriceLast Traded PriceLast Traded Price (((( 3 Nov 20163 Nov 20163 Nov 20163 Nov 2016)))): : : : RM4.84 (KLCIKLCIKLCIKLCI : : : : 1,648.08) Price Target Price Target Price Target Price Target 12121212----mthmthmthmth:::: RM5.80 (20% upside) (Prev RM5.80)
Potential Catalyst: Potential Catalyst: Potential Catalyst: Potential Catalyst: Sale of Splash, higher margin wins
Where we differ:Where we differ:Where we differ:Where we differ: We are below consenus likely due to timing of
earnings recognition for MRT Line 2 Analyst Chong Tjen-San,CFA +60 3 26043972 [email protected]
Price Relative
Forecasts and Valuation FY FY FY FY JulJulJulJul ((((RMRMRMRMmmmm) ) ) ) 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF
Revenue 2,400 2,122 4,498 5,784 EBITDA 590 470 641 702 Pre-tax Profit 858 781 917 977 Net Profit 682 626 691 739 Net Pft (Pre Ex.) 682 626 691 739 Net Pft Gth (Pre-ex) (%) (5.2) (8.2) 10.3 6.9 EPS (sen) 28.4 22.3 24.6 26.3 EPS Pre Ex. (sen) 28.4 22.3 24.6 26.3 EPS Gth Pre Ex (%) (8) (21) 10 7 Diluted EPS (sen) 28.4 22.3 24.6 26.3 Net DPS (sen) 8.88 8.88 8.88 8.88 BV Per Share (sen) 263 245 262 281 PE (X) 17.1 21.7 19.7 18.4 PE Pre Ex. (X) 17.1 21.7 19.7 18.4 P/Cash Flow (X) 19.3 129.2 62.6 56.1 EV/EBITDA (X) 24.9 36.8 27.0 24.8 Net Div Yield (%) 1.8 1.8 1.8 1.8 P/Book Value (X) 1.8 2.0 1.8 1.7 Net Debt/Equity (X) 0.4 0.5 0.4 0.4 ROAE (%) 11.6 9.5 9.7 9.7 Earnings Rev (%):Earnings Rev (%):Earnings Rev (%):Earnings Rev (%): 0 0 0 Consensus EPS Consensus EPS Consensus EPS Consensus EPS (sen):::: N/A 28.6 31.9
Other Broker Other Broker Other Broker Other Broker Recs:Recs:Recs:Recs: B: 18 S: 2 H: 4
Source of all data on this page: Company, AllianceDBS, Bloomberg Finance L.P....
Best transportation proxy
Best proxy to transportation infrastructureBest proxy to transportation infrastructureBest proxy to transportation infrastructureBest proxy to transportation infrastructure Gamuda is our top large cap pick in the sector, as it is the best proxy to a slew of upcoming transportation-related projects. Its strong reputation for MRT Line 1 and PDP appointment for Penang Transport Master Plan (PTMP) provide it with leverage for other large-multiplier projects such as LRT 3, Gemas-JB double tracking, Pan Borneo Highway and High Speed Rail. Large multiLarge multiLarge multiLarge multi----year projects ensure strong earnings visibilityyear projects ensure strong earnings visibilityyear projects ensure strong earnings visibilityyear projects ensure strong earnings visibility Gamuda’s outstanding orderbook now stands at RM9bn which does not include the PDP fees for MRT Line 2 aboveground works. The final contract value for the whole project will only be known once all the packages are awarded which will likely be about RM30bn. Gamuda is also vying for other large-scale projects such as Pan Borneo Highway Sabah, LRT 3 and Gemas-JB double tracking, and is confident of adding another RM3-4bn of new orders in the next 12 months. This will bring its orderbook to a new high and ensure strong earnings visibility from FY17F onwards. Swapping oneSwapping oneSwapping oneSwapping one----off dividend for longoff dividend for longoff dividend for longoff dividend for long----term growthterm growthterm growthterm growth There are expectations for the Splash deal to be concluded in 2016 at close to the book value of RM2.8bn. We do not expect special dividends as the proceeds will likely be used for the Penang Transport Master Plan project; this will be positive as Gamuda could secure long-term construction earnings and a firm footing in Penang’s property market. Valuation:
We maintain our BUY rating and SOP-derived TP of RM5.80.
We have accounted for the dilution of warrants and a
corresponding increase in cash raised from the full conversion
of warrants while also assuming some marginal wins outside
of MRT 2.
Key Risks to Our View:
High raw material price. The tunnelling portion of MRT Line 2
is its largest project and is susceptible to fluctuations of raw
material prices, particularly for steel. Nonetheless, we think this
is partly mitigated by the higher contract value on a per km
basis. At A Glance Issued Capital (m shrs) 2,422
Mkt. Cap (RMm/US$m) 11,724 / 2,794
Major Shareholders (%)
EPF 9.8
KWAP 6.8
Free Float (%) 78.8
3m Avg. Daily Val (US$m) 3.9
ICB ICB ICB ICB IndustryIndustryIndustryIndustry : Industrials / Construction & Materials
DBS Group Research . Equity
4 Nov 2016
Malaysia Company Guide
Gamuda Version | Bloomberg: GAM MK | Reuters: GAMU.KL Refer to important disclosures at the end of this report
89
109
129
149
169
189
209
3.2
3.7
4.2
4.7
5.2
5.7
Nov-12 Nov-13 Nov-14 Nov-15 Nov-16
Relative IndexRM
Gamuda (LHS) Relative KLCI (RHS)
ASIAN INSIGHTS VICKERS SECURITIES
Page 68
Company Guide
Gamuda
CRITICAL DATA POINTS TO WATCH
Earnings Drivers:
On track for next earnings upcycleOn track for next earnings upcycleOn track for next earnings upcycleOn track for next earnings upcycle. After the 8% decline in
FY16 earnings, we think Gamuda is on track for the next
earnings upcycle with its strong high-margin orderbook of
RM9bn. We think this is a key price catalyst. Drawing parallels
to FY13 where it delivered 19% growth in net profit driven by
maiden contributions from MRT Line 1, we think MRT Line 2
earnings contribution from FY17F onwards will be a key share
price driver. It is also confident of clinching another RM3-4bn
worth of new orders in the next 12 months.
MRT Line 2 to contribute in FY17.MRT Line 2 to contribute in FY17.MRT Line 2 to contribute in FY17.MRT Line 2 to contribute in FY17. There is low risk of the
project being delayed or shelved because it is deemed a high-
multiplier and top priority ETP project. The PDP fee remains at
6%, similar to MRT Line 1. The only difference is MRT Co. has
introduced three additional KPIs (safety, quality and public
response) which will constitute half a percentage point out of
the 6%. The MMC-Gamuda JV has returned as the tunnelling
contractor with a total contract value of RM15.47bn or
RM7.7bn per contractor. A few viaduct packages for the
aboveground works have been awarded and all should be
awarded by mid-2017. Sale of Splash.Sale of Splash.Sale of Splash.Sale of Splash. The sale of Splash remains the biggest overhang
for Gamuda. It remains optimistic about concluding the deal by
end-2016 with pricing likely at a book value of about RM2.8bn.
Given that it is actively pursuing the Penang Integrated
Transport System project which requires higher upfront capex,
there may not be special dividends from the sale. Awaiting approvals for Penang Transport Master Plan (PTMP).Awaiting approvals for Penang Transport Master Plan (PTMP).Awaiting approvals for Penang Transport Master Plan (PTMP).Awaiting approvals for Penang Transport Master Plan (PTMP).
Gamuda has received a Letter of Award (LOA) – via SRS
Consortium – from the Penang State Government to be the PDP
for the Roads and Public Transport Projects in Penang (Penang
Transport Master Plan Strategy 2013-2030). The key hurdle for
this project is obtaining the federal government’s approval for
land reclamation and for the LRT. Gamuda is hoping to have
two bites of the cherry – PDP, and also as turnkey contractor for
some key components – but these are uncertain at this stage.
The two main components of the project are LRT from George
Town to Bayan Lepas and the Pan Island Link highway. The
railway scheme has been submitted to SPAD while the
environmental and social impact assessment studies are
ongoing. In our view, this project will only take off post the next
general elections. Property sales driven by overseas projects.Property sales driven by overseas projects.Property sales driven by overseas projects.Property sales driven by overseas projects. Gamuda ended FY16
with strong presales of RM2.05bn (+69% y-o-y). FY17F presales
target has been set at RM2.1bn (RM0.79bn local and
RMRM1.33bn overseas) with two key launches planned –
Gamuda Gardens (March 2017) and Kundang Estates
(December 2016), both in Rawang and will have good MRT
accessibility.
Construction margins
Property launches Malaysia
Construction profit contribution
Property profit contribution
New order wins
Source: Company, AllianceDBS
8.7
7.6 7.4
9.5
11.8
0.0
1.7
3.4
5.1
6.8
8.5
10.2
11.9
2014A 2015A 2016A 2017F 2018F
1,700.0
950.0 900.0 850.0
1,330.0
0
347
694
1,040
1,387
1,734
2014A 2015A 2016A 2017F 2018F
32.0
24.723.4
26.9
29.5
0.0
6.5
13.0
19.6
26.1
32.6
2014A 2015A 2016A 2017F 2018F
26
29
24
27 26
0.0
6.0
11.9
17.9
23.8
29.8
2014A 2015A 2016A 2017F 2018F
7,735
1,5002,000
0
1,562
3,125
4,687
6,250
7,812
2016A 2017F 2018F
ASIAN INSIGHTS VICKERS SECURITIES
Page 69
Company Guide
Gamuda
Balance Sheet:
Manageable net gearing. Net gearing remained manageable at
0.46x as at 31 July 2016, but has inched up from 0.4x as at 31
July 2015 largely due to land banking over the past two years.
More recent land bank purchases include its maiden project in
Toa Payoh, Singapore for S$345.9m (Gamuda has a 50%
share), a small parcel of freehold land in Melbourne for
AUD40m, an 18-acre land in Kota Kinabalu for RM100m, and a
257-acre parcel located just 2km from Kota Kemuning for
RM392m.
Further land banking could raise gearing.Further land banking could raise gearing.Further land banking could raise gearing.Further land banking could raise gearing. Gamuda is still
seeking to land bank further in choice locations despite the
softening property market. But it will be more selective now
given its aggressive land banking over the past year or so.
Share Price Drivers:
Proxy to transportationProxy to transportationProxy to transportationProxy to transportation----related projects.related projects.related projects.related projects. Besides having a strong
reputation, it also has ample capacity and the technical know-
how to bid for large upcoming transport-related projects such
as LRT 3, PTMP, Pan Borneo Sabah, Gemas-JB double tracking
and High Speed Rail. Thus far, execution for MRT Line 1 has
been smooth. It is confident of replenishing its RM9bn
ordebook by another RM3-4bn in the next one year. We have
assumed a total of RM3.5bn worth of new orders over FY17-
187F.
Resolution for SplashResolution for SplashResolution for SplashResolution for Splash. A successful resolution for Splash would
remove the overhang on the stock. Investors could welcome
potential earnings prospects from the Penang Integrated
Transport project at the expense of a one-off special dividend. We understand Splash’s book value now is close to RM3bn
which would imply Gamuda’s 40% stake is worth c.RM1.2bn. A
key event to watch out for which will facilitate the completion
of this exercise is a potential water tariff increase, making it a
stronger case to pay a higher price for Splash. Recall the last
offer was just RM250m or 10% of its BV then of RM2.5bn.
Key Risks:
Macroeconomic factors.Macroeconomic factors.Macroeconomic factors.Macroeconomic factors. Generally, an economic slowdown
could adversely affect the group because this could defer or
halt some projects, especially infrastructure projects. This could
result in slower order book replenishment.
Slowdown in property marketSlowdown in property marketSlowdown in property marketSlowdown in property market. The various tightening policies
for the Malaysian property sector could reduce the demand for
properties (i.e. residential and commercial) in the near future.
Company Background
Gamuda's core businesses focus on three segments which are
engineering & construction, infrastructure concessions, and
property development.
Leverage & Asset Turnover (x)
Capital Expenditure
ROE (%)
Forward PE Band (x)
PB Band (x)
Source: Company, AllianceDBS
0.1
0.2
0.2
0.3
0.3
0.4
0.4
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
2014A 2015A 2016A 2017F 2018F
Gross Debt to Equity (LHS) Asset Turnover (RHS)
0.0
20.0
40.0
60.0
80.0
100.0
120.0
2014A 2015A 2016A 2017F 2018F
Capital Expenditure (-)
RMm
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
2014A 2015A 2016A 2017F 2018F
Avg: 17.8x
+1sd: 20.3x
+2sd: 22.9x
-1sd: 15.2x
-2sd: 12.7x
11.4
13.4
15.4
17.4
19.4
21.4
23.4
Nov-12 Nov-13 Nov-14 Nov-15
(x)
Avg: 1.97x
+1sd: 2.12x
+2sd: 2.26x
-1sd: 1.82x
-2sd: 1.67x
1.3
1.5
1.7
1.9
2.1
2.3
2.5
Nov-12 Nov-13 Nov-14 Nov-15
(x)
ASIAN INSIGHTS VICKERS SECURITIES
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Company Guide
Gamuda
Key Assumptions
FY FY FY FY JulJulJulJul 2014201420142014AAAA 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF
Construction margins 8.70 7.60 7.41 9.54 11.8 Property launches Malaysia
1,700 950 900 850 1,330 Construction profit contribution
32.0 24.7 23.4 26.9 29.5 Property profit contribution
26.1 29.5 23.6 26.6 26.4
New order wins #,##0;(#,##0)
#,##0;(#,##0)
7,735 1,500 2,000 Segmental Breakdown
FY FY FY FY JulJulJulJul 2014201420142014AAAA 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF Revenues (RMm)
Construction 1,180 1,158 905 2,765 3,741
Property development 895 842 758 660 790
Infrastructure 154 401 459 468 477
TotalTotalTotalTotal 2,2302,2302,2302,230 2,4002,4002,4002,400 2,1222,1222,1222,122 4,4984,4984,4984,498 5,7845,7845,7845,784
Pretax profit (RMm) Construction 294 242 212 291 341
Property development 239 289 214 198 204
Infrastructure 385 450 481 503 508
Overseas property 0.0 0.0 0.0 89.6 101
Others (66.4) (124) (126) (164) (177)
TotalTotalTotalTotal 852852852852 858858858858 781781781781 917917917917 977977977977
Pretax Margins (%) Construction 24.9 20.9 23.4 10.5 9.1
Property development 26.7 34.4 28.2 30.0 25.8
Infrastructure N/A N/A N/A N/A N/A
Others N/A N/A N/A (27.1) (22.8)
TotalTotalTotalTotal 38.238.238.238.2 35.735.735.735.7 36.836.836.836.8 20.420.420.420.4 16.916.916.916.9
Income Statement (RMm)
FY FY FY FY JulJulJulJul 2014201420142014AAAA 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF Revenue 2,230 2,400 2,122 4,498 5,784
Cost of Goods Sold (1,741) (1,820) (1,685) (3,788) (4,961)
Gross ProfitGross ProfitGross ProfitGross Profit 488488488488 580580580580 437437437437 710710710710 823823823823
Other Opng (Exp)/Inc (28.2) (10.4) 10.9 (95.7) (152)
Operating ProfitOperating ProfitOperating ProfitOperating Profit 460460460460 570570570570 448448448448 614614614614 671671671671 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0
Associates & JV Inc 430 375 413 417 421
Net Interest (Exp)/Inc (38.0) (86.6) (79.7) (114) (115)
Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0
PrePrePrePre----tax Profittax Profittax Profittax Profit 852852852852 858858858858 781781781781 917917917917 977977977977 Tax (117) (133) (112) (183) (195)
Minority Interest (15.7) (43.3) (42.6) (42.6) (42.6)
Preference Dividend 0.0 0.0 0.0 0.0 0.0
Net ProfitNet ProfitNet ProfitNet Profit 719719719719 682682682682 626626626626 691691691691 739739739739 Net Profit before Except. 719 682 626 691 739
EBITDA 481 590 470 641 702
Growth
Revenue Gth (%) (42.6) 7.6 (11.6) 112.0 28.6
EBITDA Gth (%) 42.7 22.7 (20.4) 36.6 9.5
Opg Profit Gth (%) 47.4 23.9 (21.4) 37.1 9.3
Net Profit Gth (Pre-ex) (%) 33.0 (5.2) (8.2) 10.3 6.9
Margins & Ratio
Gross Margins (%) 21.9 24.2 20.6 15.8 14.2
Opg Profit Margin (%) 20.6 23.7 21.1 13.7 11.6
Net Profit Margin (%) 32.3 28.4 29.5 15.4 12.8
ROAE (%) 13.9 11.6 9.5 9.7 9.7
ROA (%) 7.7 5.8 4.6 4.7 4.7
ROCE (%) 4.8 4.6 3.2 3.7 3.8
Div Payout Ratio (%) 28.7 31.3 39.8 36.1 33.7
Net Interest Cover (x) 12.1 6.6 5.6 5.4 5.8
Source: Company, AllianceDBS
ASIAN INSIGHTS VICKERS SECURITIES
Page 71
Company Guide
Gamuda
Quarterly / Interim Income Statement (RMm)
FY FY FY FY JulJulJulJul 4Q4Q4Q4Q2015201520152015 1Q1Q1Q1Q2016201620162016 2Q2Q2Q2Q2016201620162016 3Q3Q3Q3Q2016201620162016 4Q4Q4Q4Q2016201620162016 Revenue 623 513 527 467 614
Cost of Goods Sold (531) (428) (454) (377) (478)
Gross ProfitGross ProfitGross ProfitGross Profit 91.891.891.891.8 84.984.984.984.9 73.973.973.973.9 89.989.989.989.9 136136136136 Other Oper. (Exp)/Inc 43.0 24.2 35.6 16.8 32.4
Operating ProfitOperating ProfitOperating ProfitOperating Profit 135135135135 109109109109 110110110110 107107107107 169169169169 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0
Associates & JV Inc 99.3 114 112 109 78.3
Net Interest (Exp)/Inc (43.6) (30.2) (29.2) (29.7) (37.0)
Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0
PrePrePrePre----tax Profittax Profittax Profittax Profit 191191191191 193193193193 192192192192 186186186186 210210210210 Tax (35.5) (19.7) (22.2) (20.7) (49.4)
Minority Interest (1.3) (11.6) (9.9) (12.5) (8.6)
Net ProfitNet ProfitNet ProfitNet Profit 154154154154 161161161161 160160160160 153153153153 152152152152 Net profit bef Except. 154 161 160 153 152
EBITDA 234 223 221 215 247
Growth
Revenue Gth (%) 12.5 (17.7) 2.9 (11.4) 31.5
EBITDA Gth (%) 0.3 (4.9) (0.6) (2.7) 14.7
Opg Profit Gth (%) (8.5) (19.0) 0.4 (2.6) 58.1
Net Profit Gth (Pre-ex) (%) (4.2) 4.9 (0.7) (4.6) (0.4)
Margins
Gross Margins (%) 14.7 16.6 14.0 19.2 22.2
Opg Profit Margins (%) 21.6 21.3 20.8 22.8 27.5
Net Profit Margins (%) 24.7 31.4 30.4 32.7 24.8 Balance Sheet (RMm)
FY FY FY FY JulJulJulJul 2014201420142014AAAA 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF Net Fixed Assets 285 312 420 492 561
Invts in Associates & JVs 1,234 2,621 2,881 3,298 3,719
Other LT Assets 3,125 5,163 5,529 5,529 5,529
Cash & ST Invts 920 1,438 1,473 1,831 2,226
Inventory 295 186 117 135 155
Debtors 1,716 1,377 1,441 1,657 1,905
Other Current Assets 2,778 2,230 2,297 2,297 2,297
Total AssetsTotal AssetsTotal AssetsTotal Assets 10,35310,35310,35310,353 13,32613,32613,32613,326 14,15814,15814,15814,158 15,23915,23915,23915,239 16,39216,39216,39216,392
ST Debt
792 777 640 1,040 1,440
Creditor 881 1,355 1,046 1,203 1,383
Other Current Liab 126 327 413 413 413
LT Debt 1,739 3,358 4,169 4,169 4,169
Other LT Liabilities 653 815 676 676 676
Shareholder’s Equity 5,474 6,337 6,878 7,360 7,890
Minority Interests 687 356 336 379 421
Total Cap. & Liab.Total Cap. & Liab.Total Cap. & Liab.Total Cap. & Liab. 10,35310,35310,35310,353 13,32613,32613,32613,326 14,15814,15814,15814,158 15,23915,23915,23915,239 16,39216,39216,39216,392
Non-Cash Wkg. Capital 3,783 2,110 2,395 2,472 2,560
Net Cash/(Debt) (1,611) (2,698) (3,335) (3,377) (3,383)
Debtors Turn (avg days) 212.6 235.2 242.3 125.7 112.4
Creditors Turn (avg days) 195.5 226.8 263.5 109.1 95.7
Inventory Turn (avg days) 41.4 48.7 33.2 12.2 10.7
Asset Turnover (x) 0.2 0.2 0.2 0.3 0.4
Current Ratio (x) 3.2 2.1 2.5 2.2 2.0
Quick Ratio (x) 1.5 1.1 1.4 1.3 1.3
Net Debt/Equity (X) 0.3 0.4 0.5 0.4 0.4
Net Debt/Equity ex MI (X) 0.3 0.4 0.5 0.5 0.4
Capex to Debt (%) 0.7 0.6 2.1 1.9 1.8
Z-Score (X) 2.8 1.9 2.0 2.1 2.1
Source: Company, AllianceDBS
ASIAN INSIGHTS VICKERS SECURITIES
Page 72
Company Guide
Gamuda
Cash Flow Statement (RMm)
FY FY FY FY JulJulJulJul 2014201420142014AAAA 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF Pre-Tax Profit 852 858 781 917 977
Dep. & Amort. 20.9 20.2 21.6 27.2 31.0
Tax Paid (72.9) (882) (124) (183) (195)
Assoc. & JV Inc/(loss) (430) (375) (413) (417) (421)
Chg in Wkg.Cap. (712) 164 (228) (76.7) (88.2)
Other Operating CF (83.7) 818 67.3 (50.4) (61.2)
Net Operating CFNet Operating CFNet Operating CFNet Operating CF (426)(426)(426)(426) 604604604604 105105105105 217217217217 242242242242 Capital Exp.(net) (16.6) (24.3) (102) (100.0) (100.0)
Other Invts.(net) 0.0 0.0 0.0 0.0 0.0
Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0
Div from Assoc & JV 123 83.5 189 0.0 0.0
Other Investing CF 88.1 (1,473) (743) 50.4 61.2
Net Investing CFNet Investing CFNet Investing CFNet Investing CF 195195195195 (1,413)(1,413)(1,413)(1,413) (656)(656)(656)(656) (49.6)(49.6)(49.6)(49.6) (38.8)(38.8)(38.8)(38.8) Div Paid (277) (285) (289) (209) (209)
Chg in Gross Debt 354 1,561 650 400 400
Capital Issues 142 219 27.3 0.0 0.0
Other Financing CF (374) (167) 198 0.0 0.0
Net Financing CFNet Financing CFNet Financing CFNet Financing CF (155)(155)(155)(155) 1,3281,3281,3281,328 586586586586 191191191191 191191191191
Currency Adjustments 0.0 0.0 0.0 0.0 0.0
Chg in Cash (386) 518 35.2 358 394
Opg CFPS (sen) 12.3 18.3 11.9 10.5 11.8
Free CFPS (sen) (19.0) 24.1 0.10 4.17 5.06
Source: Company, AllianceDBS
Target Price & Ratings History
Source: AllianceDBS
Analyst: Chong Tjen-San
S.No.S.No.S.No.S.No.Date of Date of Date of Date of
ReportReportReportReport
Closing Closing Closing Closing
PricePricePricePrice
12-mth 12-mth 12-mth 12-mth
T arget T arget T arget T arget
PricePricePricePrice
Rat ing Rat ing Rat ing Rat ing
1: 15 Dec 15 4.38 5.60 BUY
2: 17 Dec 15 4.40 5.60 BUY
3: 02 Mar 16 4.66 5.60 BUY
4: 25 Mar 16 4.93 5.80 BUY
5: 01 Apr 16 4.85 5.80 BUY
6: 04 Apr 16 4.88 5.80 BUY
7: 04 May 16 4.75 5.80 BUY
8: 17 May 16 4.72 5.80 BUY
9: 03 Jun 16 4.86 5.80 BUY
10: 24 Jun 16 4.82 5.80 BUY
11: 30 Jun 16 4.86 5.80 BUY
12: 11 Jul 16 4.91 5.80 BUY
13: 05 Aug 16 4.85 5.80 BUY
14: 02 Sep 16 4.85 5.80 BUY
Note Note Note Note : Share price and Target price are adjusted for corporate actions. 15: 29 Sep 16 4.90 5.80 BUY
16: 06 Oct 16 4.85 5.80 BUY
17: 21 Oct 16 4.93 5.80 BUY
18: 24 Oct 16 4.95 5.80 BUY
1
2
3
4
5
6
7
8 9
10
11
12
13
14
15
16
17
18
4.15
4.35
4.55
4.75
4.95
5.15
Nov-15 Mar-16 Jul-16 Nov-16
RMRMRMRM
ASIAN INSIGHTS VICKERS SECURITIES ed: CK / sa: WMT, PY
BUYBUYBUYBUY Last Traded PriceLast Traded PriceLast Traded PriceLast Traded Price (((( 3 Nov 20163 Nov 20163 Nov 20163 Nov 2016)))): : : : RM1.77 (KLCIKLCIKLCIKLCI : : : : 1,648.08) Price Target Price Target Price Target Price Target 12121212----mthmthmthmth:::: RM1.95 (10% upside) (Prev RM1.95)
Potential Catalyst: Potential Catalyst: Potential Catalyst: Potential Catalyst: Yield-accretive acquisitions, higher reversions
Where weWhere weWhere weWhere we differ:differ:differ:differ: Higher DPU accretion forecast compared to consensus Analyst Inani ROZIDIN +603 2604 3905 [email protected]
What’s New • In-line 1Q17 earnings
• Earnings boosted by improvements in the retail
segment
• Retaining our positive outlook on rising Sunway
Putra contributions, asset-enhancement work and
asset-injection opportunities
• DPU of 2.27 sen declared with ex-date of 10 Nov
Price Relative
Forecasts and Valuation FY FY FY FY JunJunJunJun ((((RMRMRMRMmmmm) ) ) ) 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF
Gross Revenue 507 562 600 626 Net Property Inc 374 428 462 484 Total Return 271 306 338 354 Distribution Inc 271 306 338 354 EPU (sen) 8.92 10.2 11.2 11.8 EPU Gth (%) (52) 14 10 5 DPU (sen) 9.19 10.2 11.2 11.8 DPU Gth (%) 5 11 10 5 NAV per shr (sen) 136 136 136 136 PE (X) 19.9 17.4 15.8 15.0 Distribution Yield (%) 5.2 5.7 6.3 6.7 P/NAV (x) 1.3 1.3 1.3 1.3 Aggregate Leverage (%) 35.5 35.7 35.9 36.2 ROAE (%) 6.5 7.5 8.2 8.6 Distn. Inc Chng (%):Distn. Inc Chng (%):Distn. Inc Chng (%):Distn. Inc Chng (%): 0 0 0 Consensus DPU Consensus DPU Consensus DPU Consensus DPU (sensensensen):::: 9.20 10.0 10.1 Other Broker Recs:Other Broker Recs:Other Broker Recs:Other Broker Recs: B: 6 S: 1 H: 6
Source of all data on this page: Company, AllianceDBS, Bloomberg Finance L.P.
To keep for FY17 Still positive about its prospects.Still positive about its prospects.Still positive about its prospects.Still positive about its prospects. We remain positive on Sunway REIT (SunREIT). Its DPU remains attractive in the near to medium term, following the completion of refurbishment works for Sunway Putra assets (mall, office and hotel) and full-year income contribution from Sunway Hotel Georgetown. Furthermore, we expect further earnings accretion from the asset-enhancement work done on Sunway Pyramid Hotel, slated to be completed by 2QFY17. Furthermore, SunREIT could benefit further from the continued expectations of further monetary policy easing. Asset enhancement underwayAsset enhancement underwayAsset enhancement underwayAsset enhancement underway. Management plans to embark on a refurbishment project for Sunway Pyramid Hotel which saw its occupancy rate dropping to 55% in 3QFY16 (3QFY15: 74%). The drop is mainly due to lower demand from corporates. The decline is mainly due to lower demand from corporates and the progressive closure of the hotel pre-prior to the commencement of its refurbishment plan. The project (with a budgeted capex of c.RM120m) is expected to commence progressively in April 2016 with full closure of the hotel by 4QFY16 for approximately 12 months with a budgeted capex of c.RM120m. The NPI foregone (FY15: RM18m) will be offset by the recent inclusion of assets. Visible sponsor asset pipeline.Visible sponsor asset pipeline.Visible sponsor asset pipeline.Visible sponsor asset pipeline. Sunway REIT’s sponsor and shareholder (37% stake) Sunway Bhd has a large pipeline of potential assets for injection under its “build-own-operate” model. Future injections could include Sunway University and Monash University campuses, The Pinnacle office tower, Sunway Giza mall, Sunway VeloCity mall and Sunway Pyramid Phase 3. These underpin an attractive growth pipeline for the REIT. We are optimistic about potential injections from sponsor Sunway Bhd to meet the REIT’s RM7bn asset target.
Valuation: Our DDM-derived TP rises to RM1.95, with 7% cost of equity and 1% TG, as we adjust our risk-free rate assumption from 4.0% to 3.9% to reflect the compression in MGS yield. Key Risks to Our View: Pace of acquisitions.Pace of acquisitions.Pace of acquisitions.Pace of acquisitions. Sunway REIT’s yields are on par with its larger M-REIT peers. The draw is the potential to secure steady acquisitions. On this note, any significant delay in acquisitions could hamper its share price appreciation, especially as its peers are also looking at asset growth.
At A Glance Issued Capital (m shrs) 2,945
Mkt. Cap (RMm/US$m) 5,213 / 1,242
Major Shareholders (%)
Sunway Berhad 37.3
Employees Provident Fund 12.04
Skim Amanah Saham 9.88
Free Float (%) 39.7
3m Avg. Daily Val (US$m) 1.3
ICB IndustryICB IndustryICB IndustryICB Industry : Real Estate / Real Estate Investment Trusts
DBS Group Research . Equity
4 Nov 2016
Company Guide
Sunway REIT Version 5 | Bloomberg: SREIT MK | Reuters: SUNW.KL Refer to important disclosures at the end of this report
ASIAN INSIGHTS VICKERS SECURITIES
Page 74
Company Guide
Sunway REIT
WHAT’S NEW
Resilient earnings
• 1QFY17 net distributable income of RM72m (15% y-o-y)
was largely in line with our expectations and consensus
forecasts, taking into account contribution from Sunway
Putra Mall (SPM) and improvement in NPI for the retail
segment. NPI margins remained stable at 74.5%.
• A DPU of 2.27 sen was declared, implying a full payout.
• Management has received RM3.2m court award that is
related to Sunway Putra which will be recognised in
2QFY17 following confirmation of the legal case closure.
Resilient performance from retail segmentResilient performance from retail segmentResilient performance from retail segmentResilient performance from retail segment
• The highest contributing retail segment recorded a
1QFY17 NPI of RM71.5m (+17% y-o-y), as Sunway
Pyramid’s occupancy was steady at c.97.9% in 1QFY17
(1QFY16: 98.3%). The shift in occupancy level is due to
the introduction of two anchor tenants and reshuffling of
the mall’s existing tenant mix. We understand that retail
sales in Jan-Aug 2016 grew by 10% y-o-y. The
percentage of lease expiring in Sunway Pyramid for FY17
is 19% of total portfolio NLA. Out of which, 59.6% of the
leases expiring for the mall in FY17 were renewed in
1QFY17 at a single-digit rental reversion rate over the
three-year tenancy term.
• The percentage of lease expiring in Sunway Carnival for
FY17 is 28% of total portfolio NLA. Out of which, 60% of
the leases expiring for the mall in FY17 were renewed in
1QFY17 at a single-digit rental reversion rate over the
three-year tenancy term. The renewal has included the
anchor tenant in the mall.
• It was disclosed that SPM’s occupancy reached 85.2%
(from 83.9%), and tenants such as TGV Cinema, Padini
and Uniqlo have opened to help draw footfall. We look
forward to higher contributions as we expect occupancy
to reach c.90% by end-FY17.
• We expect SunREIT’s retail assets to maintain its
performance throughout FY17.
Hotel segment improvingHotel segment improvingHotel segment improvingHotel segment improving withwithwithwith plans for asset enhaplans for asset enhaplans for asset enhaplans for asset enhancement.ncement.ncement.ncement.
• The hospitality segment continues to progress with
1QFY17 NPI of RM15.4m registering a y-o-y decline of
22%, due to the closure of Sunway Pyramid Hotel
(formerly known as Pyramid Tower East). Sunway Pyramid
Hotel is undergoing refurbishment during the quarter,
which is expected to complete by 2QFY17. Excluding the
NPI contribution from Sunway Pyramid Hotel in 1QFY16,
overall hotel portfolio’s NPI grew by 13% y-o-y.
• Sunway Resort Hotel & Spa’s average occupancy rate rose
to 94.3% in 1QFY17 (1QFY16: 87.4%). The encouraging
occupancy was attributable to strong Middle-Eastern
tourists during the summer holiday season.
• The average occupancy rate for Sunway Putra Hotel has
also improved to 69.0% in 1QFY17 (1QFY16: 36.5%) as
the hotel was still undergoing refurbishment during the
same period last year. Post completion of refurbishment in
2QFY16, the hotel has embarked on active marketing
activities and promotional rates to regain market shares
across all segments.
Office segment strugglOffice segment strugglOffice segment strugglOffice segment struggleseseses
• The office segment remained a drag due to significant
vacancies at Sunway Tower and Sunway Putra Tower,
leading to 1QFY17 NPI of RM3.7m (- 9% y-o-y).
• We foresee the office segment facing challenges in filling
up occupancies in the current oversupplied and weak
market environment. Additionally, little headway was
made in replenishing occupancies at Sunway Tower and
Sunway Putra Tower after the departure of anchor
tenants.
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Company Guide
Sunway REIT
Quarterly / Interim Income Statement (RMm)
FY FY FY FY JunJunJunJun 1Q1Q1Q1Q2016201620162016 4Q4Q4Q4Q2016201620162016 1Q1Q1Q1Q2017201720172017 % chg yoy % chg yoy % chg yoy % chg yoy % chg qoq% chg qoq% chg qoq% chg qoq
Gross revenue 121 124 129 6.3 4.3
Property expenses (31.3) (33.4) (32.8) 4.9 (1.8)
Net Property Income 89.9 90.2 96.1 6.8 6.5
Other Operating expenses (3.9) (9.2) (10.2) 157.7 10.4
Other Non Opg (Exp)/Inc 0.0 0.0 0.0 N/A N/A
Net Interest (Exp)/Inc (21.5) (21.5) (21.8) (1.3) (1.0)
Exceptional Gain/(Loss) (4.0) 1.20 2.59 N/A N/A
Net IncomeNet IncomeNet IncomeNet Income 60.660.660.660.6 60.660.660.660.6 66.766.766.766.7 10.210.210.210.2 10.110.110.110.1
Tax 0.0 0.0 0.0 N/A N/A
Minority Interest 0.0 0.0 0.0 N/A N/A
Net Income after Tax Net Income after Tax Net Income after Tax Net Income after Tax 60.660.660.660.6 60.660.660.660.6 66.766.766.766.7 10.210.210.210.2 10.110.110.110.1
Total Return 60.6 60.6 66.7 10.2 10.1
Non-tax deductible Items 0.0 7.82 4.50 nm (42.5)
Net Inc available for Dist. 62.3 70.7 71.7 15.1 1.4
Ratio (%)
Net Prop Inc Margin 74.2 73.0 74.5
Dist. Payout Ratio 99.1 112.4 106.7
Source of all data: Company, AllianceDBS
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Company Guide
Sunway REIT
CRITICAL DATA POINTS TO WATCH
Earnings Drivers:
Performance at Sunway Pyramid a key earnings driver.Performance at Sunway Pyramid a key earnings driver.Performance at Sunway Pyramid a key earnings driver.Performance at Sunway Pyramid a key earnings driver. Despite
its diversified portfolio of 14 assets, SunREIT derives the bulk of
its income (c.60% NPI) from its crown jewel, the 1.6m sq ft NLA
Sunway Pyramid retail asset. Located in the Sunway Resort City
township, the Egyptian-themed mall is one of the better
performing properties in its portfolio. The property enjoys
strong visitation from locals and tourists, and has sustained high
occupancy rates of 98-99%. Rental reversions have averaged in
the high single digits per annum. As a result of the strong
recurring footfall and connectivity, we expect such trends to
continue against a modest retail market outlook.
Sunway Resort City’s performance will accelerate going Sunway Resort City’s performance will accelerate going Sunway Resort City’s performance will accelerate going Sunway Resort City’s performance will accelerate going
forward.forward.forward.forward. We remain positive on the outlook for Sunway Resort
City township. It is already registering strong visitations of 40m
per annum. And, visitations should leap with the completion of
the BRT-Sunway Line – a 6-km elevated bus rapid transit path
that will connect seven key public transport stations. In addition,
ongoing developments at Sunway Pyramid Phase 3 – an
integrated retail and hotel project by the Sunway Group – will
improve the township’s appeal to locals and tourists. SunREIT is
expected to benefit from the ongoing rejuvenation of the
township. And apart from Sunway Pyramid, the REIT has four
other assets – Sunway Resort, Hotel & Spa, Pyramid Tower
hotel, Menara Sunway office tower, and Sunway Medical
Centre. All these properties are expected to perform strongly on
the back of a growing population and higher visitations.
AssetAssetAssetAsset----enhancement plans.enhancement plans.enhancement plans.enhancement plans. Management plans to embark on a
refurbishment project for Pyramid Tower East, which saw its
occupancy rate dropping to 55% in 3QFY16 (3QFY15: 74%).
The drop is mainly due to lower demand from corporates and
the progressive closure of the hotel prior to the commencement
of its refurbishment plan. The project (with a budgeted capex of
c.RM120m) is expected to commence progressively in April
2016 with full closure of the hotel by 4QFY16 for approximately
12 months. The NPI foregone (FY15: RM18m) will be offset by
the recent inclusion of assets.
Weakness in office segment will moderate growth potential.Weakness in office segment will moderate growth potential.Weakness in office segment will moderate growth potential.Weakness in office segment will moderate growth potential.
We foresee the office segment to face challenges in filling up
occupancies in the current oversupplied and weak market
environment. Additionally, little headway has been made in
replenishing occupancies at Sunway Tower and Sunway Putra
Tower after the departure of their anchor tenants.
Net Property Income and Margins (%)
Net Property Income and Margins (%)
Distribution Paid / Net Operating CF
Interest Cover (x)
Source: Company, AllianceDBS
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Company Guide
Sunway REIT
Balance Sheet:
Sensible gearing levels.Sensible gearing levels.Sensible gearing levels.Sensible gearing levels. SunREIT has historically kept total
debt/total assets ratio at 33-35%, which is a comfortable level.
This leaves room to gear up for acquisition opportunities, but
we believe any deals are likely to be funded by a mixture of
debt and equity, given the manager’s track record of
conservative gearing levels. At present, of its RM2.1bn
borrowings, RM1.4bn is from a commercial paper facility that
will expire in four tranches between Oct 2017 and Apr 2018.
The rest are on a monthly rollover basis. We also note that
about half of SunREIT’s manager fees are paid in units.
Share Price Drivers:
Acquisition newsflow.Acquisition newsflow.Acquisition newsflow.Acquisition newsflow. One of SunREIT’s appeal is the availability
of asset acquisition pipeline of completed investment properties
from sponsor Sunway Bhd. Confirmation of injections at
accretive yields will be key re-rating signals for the stock.
Yield spread.Yield spread.Yield spread.Yield spread. A REIT’s attractiveness depends on its distribution
yield relative to other fixed-income assets. A common
benchmark is the REIT’s yield spread over the indicative 10-year
Malaysian Government Securities yield, which is currently
stabilising near the 3.8% level.
Key Risks:
Pace of acquisitiPace of acquisitiPace of acquisitiPace of acquisitions.ons.ons.ons. SunREIT’s yields are on par with its larger
M-REIT peers, so the draw is the potential to secure a steady
stream of acquisitions. On this note, any significant delay in
acquisitions could cap its share price appreciation, especially as
its peers are also looking at asset growth.
Weak general sentiment.Weak general sentiment.Weak general sentiment.Weak general sentiment. A dampened consumer sentiment
may have a negative effect on the retail and hospitality sectors,
in the form of lower retail spending, rental reversions and local
tourist visits.
Office space oversupply.Office space oversupply.Office space oversupply.Office space oversupply. As the supply overhang of office
space persists, it could be challenging to refill vacancies and
rental rates may see negative growth
Company Background
Sunway REIT is a real estate investment trust with key assets in
Bandar Sunway, Selangor, primarily the Sunway Pyramid mall.
It also has hospitality and office assets, and is geographically
diversified to the Penang and Perak states.
Aggregate Leverage (%)
ROE (%)
Distribution Yield (%)
PB Band (x)
Source: Company, AllianceDBS
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Company Guide
Sunway REIT
Key Assumptions
FY FY FY FY JunJunJunJun 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF
Lease Expiry Profile (%) of NLA
26.2 6.91 38.3 22.0 17.3
SP Rental Gth (%) 11.0 8.00 10.0 12.0 12.0 SP Annual Step Up Gth (%)
3.00 3.00 3.00 3.00 3.00 Segmental Breakdown
FY FY FY FY JunJunJunJun 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF Revenues (RMm)
Retail 333 383 398 421 443
Hotel 61.3 72.8 66.4 79.2 81.4
Office 39.1 30.3 49.4 50.5 51.6
Others 20.4 21.1 47.5 49.1 50.7
TotalTotalTotalTotal 453453453453 507507507507 562562562562 600600600600 626626626626
(RMm) Retail 237 269 291 310 328
Hotel 58.7 68.8 61.7 74.1 76.1
Office 24.8 14.5 30.7 31.3 32.0
Others 20.4 21.1 45.0 46.5 48.0
TotalTotalTotalTotal 341341341341 374374374374 428428428428 462462462462 484484484484
Margins (%) Retail 71.2 70.4 73.1 73.6 74.0
Hotel 95.8 94.5 92.9 93.6 93.5
Office 63.5 47.9 62.2 61.9 62.0
Others 100.0 100.0 94.7 94.7 94.7
TotalTotalTotalTotal 75.275.275.275.2 73.773.773.773.7 76.376.376.376.3 77.077.077.077.0 77.277.277.277.2
Income Statement (RMm)
FY FY FY FY JunJunJunJun 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF Gross revenue 453 507 562 600 626
Property expenses (113) (133) (133) (138) (143)
Net Property IncomeNet Property IncomeNet Property IncomeNet Property Income 341341341341 374374374374 428428428428 462462462462 484484484484 Other Operating expenses 0.0 (27.4) 0.0 0.0 0.0
Other Non Opg (Exp)/Inc (32.9) 0.0 (36.0) (37.1) (38.0)
Net Interest (Exp)/Inc (67.3) (86.2) (86.4) (86.6) (91.5)
Exceptional Gain/(Loss) 307 2.26 0.0 0.0 0.0
Net IncomeNet IncomeNet IncomeNet Income 547547547547 262262262262 306306306306 338338338338 354354354354
Tax (5.9) 0.0 0.0 0.0 0.0
Minority Interest 0.0 0.0 0.0 0.0 0.0
Preference Dividend 0.0 0.0 0.0 0.0 0.0
Net Income After Tax Net Income After Tax Net Income After Tax Net Income After Tax 541541541541 262262262262 306306306306 338338338338 354354354354 Total Return 541 271 306 338 354
Non-tax deductible Items 14.1 8.51 0.0 0.0 0.0
Net Inc available for Dist. 256 271 306 338 354
Growth & Ratio
Revenue Gth (%) 6.0 11.8 10.8 6.8 4.5
N Property Inc Gth (%) 6.2 9.7 14.6 7.8 4.8
Net Inc Gth (%) 31.7 (51.5) 16.6 10.4 4.9
Dist. Payout Ratio (%) 100.0 100.0 100.0 100.0 100.0
Net Prop Inc Margins (%) 75.2 73.7 76.3 77.0 77.2
Net Income Margins (%) 119.4 51.8 54.5 56.4 56.6
Dist to revenue (%) 56.5 53.4 54.5 56.4 56.6
Managers & Trustee’s fees to sales %)
0.0 5.4 0.0 0.0 0.0
ROAE (%) 14.1 6.5 7.5 8.2 8.6
ROA (%) 9.0 4.0 4.5 4.9 5.1
ROCE (%) 5.8 5.4 6.5 6.9 7.2
Int. Cover (x) 5.1 4.0 5.0 5.3 5.3 Source: Company, AllianceDBS
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Company Guide
Sunway REIT
Quarterly / Interim Income Statement (RMm)
FY FY FY FY JunJunJunJun 1Q1Q1Q1Q2016201620162016 2Q2Q2Q2Q2016201620162016 3Q3Q3Q3Q2016201620162016 4Q4Q4Q4Q2016201620162016 1Q1Q1Q1Q2017201720172017 Gross revenue 121 132 130 124 129
Property expenses (31.3) (34.8) (33.7) (33.4) (32.8)
Net Property Income 89.9 97.1 96.7 90.2 96.1 Other Operating expenses (3.9) (3.9) (10.3) (9.2) (10.2)
Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc (21.5) (21.6) (21.6) (21.5) (21.8)
Exceptional Gain/(Loss) (4.0) 2.06 2.95 1.20 2.59
Net IncomeNet IncomeNet IncomeNet Income 60.660.660.660.6 73.673.673.673.6 67.767.767.767.7 60.660.660.660.6 66.766.766.766.7
Tax 0.0 0.0 0.0 0.0 0.0
Minority Interest 0.0 0.0 0.0 0.0 0.0 Net Income after Tax Net Income after Tax Net Income after Tax Net Income after Tax 60.660.660.660.6 73.673.673.673.6 67.767.767.767.7 60.660.660.660.6 66.766.766.766.7
Total Return 60.6 73.6 67.7 60.6 66.7
Non-tax deductible Items 0.0 0.0 0.0 7.82 4.50 Net Inc available for Dist. 62.3 75.6 69.7 70.7 71.7
Growth & Ratio
Revenue Gth (%) 5 9 (1) (5) 4
N Property Inc Gth (%) 7 8 0 (7) 7
Net Inc Gth (%) 6 21 (8) (10) 10
Net Prop Inc Margin (%) 74.2 73.6 74.2 73.0 74.5
Dist. Payout Ratio (%) 99.1 99.3 99.4 112.4 106.7 Balance Sheet (RMm)
FY FY FY FY JunJunJunJun 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF Investment Properties 6,324 6,697 6,726 6,754 6,783
Other LT Assets 5.27 7.60 9.92 12.3 14.6
Cash & ST Invts 80.6 88.9 92.3 97.9 100
Inventory 0.0 0.0 0.0 0.0 0.0
Debtors 20.2 22.7 25.0 26.7 27.9
Other Current Assets 0.0 0.0 0.0 0.0 0.0
Total AssetsTotal AssetsTotal AssetsTotal Assets 6,4306,4306,4306,430 6,8166,8166,8166,816 6,8536,8536,8536,853 6,8916,8916,8916,891 6,9266,9266,9266,926
ST Debt
763 793 823 853 853
Creditor 0.0 3.53 3.81 3.95 4.08
Other Current Liab 223 223 223 223 223
LT Debt 1,379 1,624 1,624 1,624 1,654
Other LT Liabilities 83.0 83.0 83.0 83.0 83.0
Unit holders’ funds 3,982 4,090 4,097 4,105 4,109
Minority Interests 0.0 0.0 0.0 0.0 0.0
Total Funds & LiabilitiesTotal Funds & LiabilitiesTotal Funds & LiabilitiesTotal Funds & Liabilities 6,4306,4306,4306,430 6,8166,8166,8166,816 6,8536,8536,8536,853 6,8916,8916,8916,891 6,9266,9266,9266,926
Non-Cash Wkg. Capital (203) (204) (202) (200) (199)
Net Cash/(Debt) (2,061) (2,328) (2,355) (2,379) (2,407)
Ratio
Current Ratio (x) 0.1 0.1 0.1 0.1 0.1
Quick Ratio (x) 0.1 0.1 0.1 0.1 0.1
Aggregate Leverage (%) 33.3 35.5 35.7 35.9 36.2
Z-Score (X) 1.6 1.5 1.5 1.5 1.5
Source: Company, AllianceDBS
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Company Guide
Sunway REIT
Cash Flow Statement (RMm)
FY FY FY FY JunJunJunJun 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF Pre-Tax Income 547 271 306 338 354
Dep. & Amort. 0.36 0.91 1.19 1.47 1.75
Tax Paid (5.9) 0.0 0.0 0.0 0.0
Associates &JV Inc/(Loss) 0.0 0.0 0.0 0.0 0.0
Chg in Wkg.Cap. 101 0.97 (2.0) (1.6) (1.1)
Other Operating CF (295) 89.8 86.4 86.6 91.5
Net Operating CFNet Operating CFNet Operating CFNet Operating CF 348348348348 363363363363 392392392392 424424424424 447447447447 Net Invt in Properties (404) (376) (32.3) (32.3) (32.3)
Other Invts (net) 0.0 0.0 0.0 0.0 0.0
Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0
Div from Assoc. & JVs 0.0 0.0 0.0 0.0 0.0
Other Investing CF 3.34 2.48 2.80 2.92 3.34
Net Investing CFNet Investing CFNet Investing CFNet Investing CF (401)(401)(401)(401) (374)(374)(374)(374) (29.5)(29.5)(29.5)(29.5) (29.4)(29.4)(29.4)(29.4) (29.0)(29.0)(29.0)(29.0) Distribution Paid (255) (274) (299) (330) (350)
Chg in Gross Debt 393 275 30.0 30.0 30.0
New units issued 0.0 102 0.0 0.0 0.0
Other Financing CF (72.0) (83.8) (89.2) (89.5) (94.9)
Net Financing CFNet Financing CFNet Financing CFNet Financing CF 65.165.165.165.1 19.219.219.219.2 (359)(359)(359)(359) (389)(389)(389)(389) (415)(415)(415)(415)
Currency Adjustments 0.0 0.0 0.0 0.0 0.0
Chg in Cash 11.6 8.32 3.43 5.57 2.49
Operating CFPS (sen) 8.40 12.3 13.1 14.1 14.9
Free CFPS (sen) (1.9) (0.5) 11.9 13.0 13.8 Source: Company, AllianceDBS
Target Price & Ratings History
Source: AllianceDBS
Analyst: Inani ROZIDIN
ASIAN INSIGHTS VICKERS SECURITIES ed: TH / sa: BC, PY
BUYBUYBUYBUY Last Traded PriceLast Traded PriceLast Traded PriceLast Traded Price (((( 3 Nov 20163 Nov 20163 Nov 20163 Nov 2016)))): : : : RM3.32 (KLCIKLCIKLCIKLCI : : : : 1,648.08) Price TaPrice TaPrice TaPrice Target rget rget rget 12121212----mthmthmthmth:::: RM4.00 (20% upside) (Prev RM4.00)
Potential Catalyst: Potential Catalyst: Potential Catalyst: Potential Catalyst: Faster ramp-up at IIS; stronger smartphone sales
Where we differWhere we differWhere we differWhere we differ:::: FY17-18F EPS slightly above consensus Analyst Woo Kim TOH +60 32604 3917 [email protected]
Price Relative
Forecasts and Valuation FY FY FY FY JunJunJunJun ((((RMRMRMRMmmmm) ) ) ) 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF
Revenue 1,041 1,315 1,453 1,576 EBITDA 207 286 333 364 Pre-tax Profit 153 217 256 282 Net Profit 148 204 240 265 Net Pft (Pre Ex.) 148 204 240 265 Net Pft Gth (Pre-ex) (%) (2.8) 37.9 17.6 10.2 EPS (sen) 15.5 21.4 25.1 27.7 EPS Pre Ex. (sen) 15.5 21.4 25.1 27.7 EPS Gth Pre Ex (%) (8) 38 18 10 Diluted EPS (sen) 14.8 20.3 23.8 26.2 Net DPS (sen) 8.40 10.7 12.6 13.8 BV Per Share (sen) 71.2 81.9 94.4 108 PE (X) 21.4 15.5 13.2 12.0 PE Pre Ex. (X) 21.4 15.5 13.2 12.0 P/Cash Flow (X) 19.2 11.2 10.8 9.7 EV/EBITDA (X) 14.5 10.3 8.6 7.6 Net Div Yield (%) 2.5 3.2 3.8 4.2 P/Book Value (X) 4.7 4.1 3.5 3.1 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 24.4 27.9 28.5 27.3 Earnings Rev (%):Earnings Rev (%):Earnings Rev (%):Earnings Rev (%): 0 0 0 Consensus EPS Consensus EPS Consensus EPS Consensus EPS (sen):::: N/A N/A N/A
Other Broker Recs:Other Broker Recs:Other Broker Recs:Other Broker Recs: B: 7 S: 0 H: 5
Source of all data on this page: Company, AllianceDBS, Bloomberg Finance L.P....
Strong earnings visibility
Maintain BUY; RM4.00 TPMaintain BUY; RM4.00 TPMaintain BUY; RM4.00 TPMaintain BUY; RM4.00 TP. We like Inari for its strong earnings
visibility, mainly underpin by its RF division where growth is
relatively secured due to significant content gains in
smartphone. Beyond that, there are also other growth avenues
for Inari arising from: 1) Its new testing division, Inari
Integrated System (IIS); 2) The tie-up with PCL Technologies;
and 3) New business opportunities from Osram. With strong
visibility for the RF segment and new contribution from IIS
driving robust 3-year earnings CAGR of 22%, we believe Inari
valuation could trade up to 18x PE, +1 SD of its 3-year average
forward PE. Maintain BUY and RM4.00 TP.
RF segment RF segment RF segment RF segment –––– still strong growth. still strong growth. still strong growth. still strong growth. Significant content gains in
latest smartphone models (especially Apple iPhone) would
comfortably help to drive our 30% growth forecast for Inari RF
segment in FY17F, despite concerns over slowing smartphone
sales. The medium-term outlook appears to be relatively secure
as well because of Broadcom’s 3-year supply agreement with
Apple (till 2018). Broadcom is in the midst of increasing its RF
filters capacity (by converting 6-inch wafer to 8-inch wafer
fabs), which should ease supply constraints and possibly allow
the company to supply to other smartphone manufacturers in
the future besides Apple and Samsung.
Valuation:
Our RM4.00 TP for Inari is based on 18x CY17 fully-diluted
EPS, which is +1 SD of its 3-year average forward PE. Maintain
BUY recommendation.
Key Risks to Our View:
Significant slowdown in demand for smartphonesSignificant slowdown in demand for smartphonesSignificant slowdown in demand for smartphonesSignificant slowdown in demand for smartphones. This could
affect sales for the RF segment. However, the impact may not
be as severe because of the rising RF content in smartphones. At A Glance Issued Capital (m shrs) 961
Mkt. Cap (RMm/US$m) 3,189 / 760
Major Shareholders (%)
Insas Berhad 27.8
KWAP 6.9
Employee Provident Fund 6.4
Free Float (%) 72.2
3m Avg. Daily Val (US$m) 2.1
ICB IndustryICB IndustryICB IndustryICB Industry : Technology / Technology Hardware & Equipment
DBS Group Research . Equity
4 Nov 2016
Malaysia Company Guide
Inari Amertron Bhd Version 8 | Bloomberg: INRI MK | Reuters: INAR.KL Refer to important disclosures at the end of this report
ASIAN INSIGHTS VICKERS SECURITIES
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Company Guide
Inari Amertron Bhd
CRITICAL DATA POINTS TO WATCH
Earnings Drivers:
Riding on Broadcom’s strong lead in RF.Riding on Broadcom’s strong lead in RF.Riding on Broadcom’s strong lead in RF.Riding on Broadcom’s strong lead in RF. The key customer for
Inari’s RF division is US-listed Broadcom (formerly Avago), one of
the top RF chipmakers in the world. Inari’s RF segment has
grown at a 4-year CAGR of 39% since listing in 2011,
underpinned by strong orders from Broadcom. We expect
demand for Broadcom’s RF content in smartphones to continue
to grow rapidly in the medium term, driven by three key factors:
1) rising adoption of 4G LTE; 2) smartphone variant
consolidation; and 3) further integration of RF modules.
Significant capacity eSignificant capacity eSignificant capacity eSignificant capacity expansion.xpansion.xpansion.xpansion. To prepare for the increase in RF
sales volumes in the coming years, Inari had doubled floor space
at its Penang facility with the new P13 plant in 2015. It has also
expanded capacity of its RF segment by 30%, and there are
plans to increase by another 30% during 2HCY16. It may also
need to build or lease another plant within the next 12 months.
However, the significant capacity expansion will nudge down
overall utilisation rate at the RF segment to 70-80% in FY16-
17F (from 85-90% in previous years), as the incremental wafer
volume from Avago will be staggered. Given its improving
economies of scale, ASP cost-down should be higher in FY16-
18F as Inari passes on some of the cost-savings to Broadcom.
Stable growth at Amertron. Stable growth at Amertron. Stable growth at Amertron. Stable growth at Amertron. Amertron’s growth was relatively
stable at 5-6% in FY16, but we expect growth to pick up to
10+% from FY17F onwards, when the 90k-sqft expansion at
the Clark Field factory is completed.
Margins should improve further. Margins should improve further. Margins should improve further. Margins should improve further. After consolidating Amertron
in FY14, Inari’s net margins fell to 12.5% because of lower
profitability at Amertron, before recovering in FY15. After the
dip in FY16, we expect margins to recover to around 16% in
FY17-18F given: 1) better economies of scale from higher
volumes; 2) cost-saving initiatives at Amertron; and 3) larger
contribution from the RF segment.
Benefitting from stronger USD.Benefitting from stronger USD.Benefitting from stronger USD.Benefitting from stronger USD. While most of Inari’s sales are
denominated in USD, only 50% of its costs (mainly raw material
costs) are priced in the greenback. As such, the company will be
a net beneficiary of a stronger USD, all things being equal.
Revenue breakdown, by segment (in RM m)
Inari RF division revenue (in RM m)
No. of testers (RF division)
Inari net margins (%)
Source: Company, AllianceDBS
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2014 2015 2016 2017F 2018F 2019F
RF Amertron IIS Others
120
181233
309
448 454
592
652696
0
200
400
600
800
2011 2012 2013 2014 2015 2016 2017F 2018F 2019F
180
270 326
422
522
640
760 810
860
-
200
400
600
800
1,000
2011 2012 2013 2014 2015 2016 2017F 2018F 2019F
15.7%
11.0%
17.4%
12.5%
16.3%
14.2%
15.5%
16.5%16.8%
8%
9%
10%
11%
12%
13%
14%
15%
16%
17%
18%
2011 2012 2013 2014 2015 2016 2017F 2018F 2019F
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Balance Sheet:
Net cash position. Net cash position. Net cash position. Net cash position. Despite rapid expansion over the years, Inari
has been able to maintain a net cash position because of cash
proceeds from warrant conversion and two rights issues. As at
30 June 2016, the company had RM210m net cash.
Higher capex in FY17F. Higher capex in FY17F. Higher capex in FY17F. Higher capex in FY17F. There is no cutback on capex spending
and expansion of manufacturing facilities will take place in FY17
to cater to higher orders from Broadcom and new business
initiatives. Inari had spent RM129m capex in FY16 (FY15:
RM62m) for the purchase/construction of a new plant,
additional equipment, and automation processes.
Share Price Drivers:
Rising LTE adoption Rising LTE adoption Rising LTE adoption Rising LTE adoption will drive Broadcom's growth, and in turn,
Inari's, as Broadcom is the dominant supplier of high-band
frequency (>2.0 GHz) RF products, thanks to its superior film
bulk acoustic resonator (FBAR) filters.
Broadcom’s guidance and capex plan. Broadcom’s guidance and capex plan. Broadcom’s guidance and capex plan. Broadcom’s guidance and capex plan. As demand continues to
outstrip supply, we understand Broadcom’s current FBAR
production is on an allocation basis only to its main customers.
To resolve this, Broadcom is currently doubling its FBAR filter
capacity, likely to be completed by 3Q16. In turn, Inari also
needs to expand its manufacturing capacity to prepare for the
increase in RF sales volumes from Broadcom.
Key Risks:
Slower demand for smartphonesSlower demand for smartphonesSlower demand for smartphonesSlower demand for smartphones. A significant slowdown in
demand for smartphones could affect sales at the RF segment.
However, the impact may not be as severe because of rising RF
content in smartphones.
Single customer riskSingle customer riskSingle customer riskSingle customer risk. Risk factors that could affect Broadcom’s
RF sales (such as introduction of better technology by peers)
are also risks for Inari. Nevertheless, this risk is mitigated by
continuous high-level R&D spending by Broadcom to improve
and maintain the competitive edge of its FBAR filters.
Company Background
Inari is principally involved in back-end semiconductor
packaging services, which comprise mainly back-end wafer
processing, package assembly and RF final testing.
Leverage & Asset Turnover (x)
Capital Expenditure
ROE (%)
Forward PE Band (x)
PB Band (x)
Source: Company, AllianceDBS
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Key Assumptions
FY FY FY FY JunJunJunJun 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF
No. of testers (RF division) 522 640 760 810 860
Utilisation rate (%) 90.0 70.0 85.0 90.0 93.0
Amertron (y-o-y growth) (6.5) 3.00 3.00 3.00 3.00
RM vs. USD 3.45 4.10 4.00 4.00 4.00 Segmental Breakdown
FY FY FY FY JunJunJunJun 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF Revenues (RMm)
Inari RF 448 454 592 652 696
Inari Integrated System 0.0 0.0 65.0 109 169
Amertron & Others 485 587 658 692 711
TotalTotalTotalTotal 933933933933 1,0411,0411,0411,041 1,3151,3151,3151,315 1,4531,4531,4531,453 1,5761,5761,5761,576
Income Statement (RMm)
FY FY FY FY JunJunJunJun 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF Revenue 933 1,041 1,315 1,453 1,576
Cost of Goods Sold (736) (827) (1,010) (1,101) (1,190)
Gross ProfitGross ProfitGross ProfitGross Profit 197197197197 214214214214 305305305305 352352352352 386386386386 Other Opng (Exp)/Inc (39.7) (56.0) (85.5) (94.5) (102)
Operating ProfitOperating ProfitOperating ProfitOperating Profit 157157157157 158158158158 219219219219 257257257257 284284284284 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0
Associates & JV Inc 0.0 0.0 0.0 0.0 0.0
Net Interest (Exp)/Inc (5.7) (5.3) (1.7) (1.7) (1.7)
Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0
PrePrePrePre----tax Profittax Profittax Profittax Profit 152152152152 153153153153 217217217217 256256256256 282282282282 Tax (1.4) (6.0) (13.0) (15.3) (16.9)
Minority Interest 2.29 1.16 0.0 0.0 0.0
Preference Dividend 0.0 0.0 0.0 0.0 0.0
Net ProfitNet ProfitNet ProfitNet Profit 153153153153 148148148148 204204204204 240240240240 265265265265 Net Profit before Except. 153 148 204 240 265
EBITDA 191 207 286 333 364
Growth
Revenue Gth (%) 17.6 11.6 26.3 10.5 8.4
EBITDA Gth (%) 41.0 8.4 38.2 16.4 9.3
Opg Profit Gth (%) 40.0 0.6 38.3 17.5 10.2
Net Profit Gth (Pre-ex) (%) 53.7 (2.8) 37.9 17.6 10.2
Margins & Ratio
Gross Margins (%) 21.1 20.6 23.2 24.2 24.5
Opg Profit Margin (%) 16.9 15.2 16.7 17.7 18.0
Net Profit Margin (%) 16.3 14.2 15.5 16.5 16.8
ROAE (%) 38.4 24.4 27.9 28.5 27.3
ROA (%) 22.9 17.4 21.2 21.3 20.8
ROCE (%) 30.8 22.1 26.5 27.2 26.3
Div Payout Ratio (%) 53.1 54.2 50.0 50.0 50.0
Net Interest Cover (x) 27.6 30.2 129.7 152.3 167.8
Source: Company, AllianceDBS
Driven by significant content gains in new smartphone model
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Inari Amertron Bhd
Quarterly / Interim Income Statement (RMm)
FY FY FY FY JunJunJunJun 4Q4Q4Q4Q2015201520152015 1Q1Q1Q1Q2016201620162016 2Q2Q2Q2Q2016201620162016 3Q3Q3Q3Q2016201620162016 4Q4Q4Q4Q2016201620162016 Revenue 255 275 294 217 255
Cost of Goods Sold (198) (217) (230) (176) (203)
Gross ProfitGross ProfitGross ProfitGross Profit 56.656.656.656.6 57.757.757.757.7 63.363.363.363.3 41.441.441.441.4 52.052.052.052.0 Other Oper. (Exp)/Inc (15.3) (12.4) (17.0) (16.6) (10.0)
Operating ProfitOperating ProfitOperating ProfitOperating Profit 41.341.341.341.3 45.345.345.345.3 46.346.346.346.3 24.824.824.824.8 42.042.042.042.0 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0
Associates & JV Inc 0.0 0.0 0.0 0.0 0.0
Net Interest (Exp)/Inc (1.5) (1.3) (1.5) (1.8) (0.7)
Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0
PrePrePrePre----tax Profittax Profittax Profittax Profit 39.839.839.839.8 43.943.943.943.9 44.844.844.844.8 23.023.023.023.0 41.341.341.341.3 Tax 0.34 (1.5) (2.0) (0.3) (2.3)
Minority Interest 0.25 3.02 (1.4) (1.3) 0.90
Net ProfitNet ProfitNet ProfitNet Profit 40.440.440.440.4 45.545.545.545.5 41.441.441.441.4 21.421.421.421.4 39.939.939.939.9 Net profit bef Except. 40.4 45.5 41.4 21.4 39.9
EBITDA 51.5 57.1 58.2 35.9 56.6
Growth
Revenue Gth (%) 11.7 7.8 6.8 (26.0) 17.3
EBITDA Gth (%) 7.8 10.8 1.9 (38.4) 57.8
Opg Profit Gth (%) 4.7 9.7 2.3 (46.4) 69.1
Net Profit Gth (Pre-ex) (%) 6.0 12.7 (9.0) (48.3) 86.5
Margins
Gross Margins (%) 22.2 21.0 21.6 19.0 20.4
Opg Profit Margins (%) 16.2 16.5 15.8 11.4 16.5
Net Profit Margins (%) 15.8 16.6 14.1 9.8 15.7 Balance Sheet (RMm)
FY FY FY FY JunJunJunJun 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF Net Fixed Assets 190 274 327 352 371
Invts in Associates & JVs 0.0 0.0 0.0 0.0 0.0
Other LT Assets 14.3 50.7 50.7 50.7 50.7
Cash & ST Invts 298 210 272 345 439
Inventory 145 165 188 208 225
Debtors 187 172 219 242 263
Other Current Assets 0.05 1.18 1.18 1.18 1.18
Total AssetsTotal AssetsTotal AssetsTotal Assets 835835835835 873873873873 1,0581,0581,0581,058 1,1981,1981,1981,198 1,3501,3501,3501,350
ST Debt
45.3 16.0 16.0 16.0 16.0
Creditor 171 136 219 239 258
Other Current Liab 15.6 11.1 11.1 11.1 11.1
LT Debt 22.0 17.8 17.8 17.8 17.8
Other LT Liabilities 45.8 10.9 10.9 10.9 10.9
Shareholder’s Equity 535 681 783 903 1,036
Minority Interests 0.0 0.0 0.0 0.0 0.0
Total Cap. & Liab.Total Cap. & Liab.Total Cap. & Liab.Total Cap. & Liab. 835835835835 873873873873 1,0581,0581,0581,058 1,1981,1981,1981,198 1,3501,3501,3501,350
Non-Cash Wkg. Capital 146 191 178 201 219
Net Cash/(Debt) 231 176 238 311 405
Debtors Turn (avg days) 60.7 63.0 54.3 57.9 58.5
Creditors Turn (avg days) 60.1 72.0 68.6 81.5 81.9
Inventory Turn (avg days) 73.5 72.7 68.2 70.3 71.2
Asset Turnover (x) 1.4 1.2 1.4 1.3 1.2
Current Ratio (x) 2.7 3.4 2.8 3.0 3.2
Quick Ratio (x) 2.1 2.3 2.0 2.2 2.5
Net Debt/Equity (X) CASH CASH CASH CASH CASH
Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH
Capex to Debt (%) 94.3 380.5 355.1 295.9 295.9
Z-Score (X) 8.7 12.7 9.8 9.5 9.1
Source: Company, AllianceDBS
Initial ramp-up ahead of new smartphone launches
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Inari Amertron Bhd
Cash Flow Statement (RMm)
FY FY FY FY JunJunJunJun 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF Pre-Tax Profit 152 153 217 256 282
Dep. & Amort. 33.3 48.5 66.8 75.4 80.3
Tax Paid (1.1) (6.4) (13.0) (15.3) (16.9)
Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0
Chg in Wkg.Cap. (1.9) (41.8) 13.0 (22.8) (18.7)
Other Operating CF (5.8) 11.6 0.0 0.0 0.0
Net Operating CFNet Operating CFNet Operating CFNet Operating CF 176176176176 165165165165 284284284284 293293293293 327327327327 Capital Exp.(net) (63.4) (129) (120) (100.0) (100.0)
Other Invts.(net) 0.0 0.0 0.0 0.0 0.0
Invts in Assoc. & JV (25.6) 0.0 0.0 0.0 0.0
Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0
Other Investing CF 0.0 (44.9) 0.0 0.0 0.0
Net Investing CFNet Investing CFNet Investing CFNet Investing CF (89.0)(89.0)(89.0)(89.0) (173)(173)(173)(173) (120)(120)(120)(120) (100.0)(100.0)(100.0)(100.0) (100.0)(100.0)(100.0)(100.0) Div Paid (49.3) (75.8) (102) (120) (132)
Chg in Gross Debt 12.3 (33.5) 0.0 0.0 0.0
Capital Issues 174 68.5 0.0 0.0 0.0
Other Financing CF (6.2) (41.3) 0.0 0.0 0.0
Net Financing CFNet Financing CFNet Financing CFNet Financing CF 131131131131 (82.1)(82.1)(82.1)(82.1) (102)(102)(102)(102) (120)(120)(120)(120) (132)(132)(132)(132)
Currency Adjustments 3.62 2.10 0.0 0.0 0.0
Chg in Cash 222 (88.4) 62.0 72.8 94.1
Opg CFPS (sen) 19.6 21.6 28.3 33.0 36.1
Free CFPS (sen) 12.4 3.82 17.2 20.2 23.7
Source: Company, AllianceDBS
Target Price & Ratings History
Source: AllianceDBS
Analyst: Woo Kim TOH
Includes capex for new testing equipment
ASIAN INSIGHTS VICKERS SECURITIES ed: CK / sa: BC, PY
BUYBUYBUYBUY Last Traded PriceLast Traded PriceLast Traded PriceLast Traded Price (((( 3 Nov 20163 Nov 20163 Nov 20163 Nov 2016)))): : : : RM1.60 (KLCIKLCIKLCIKLCI : : : : 1,648.08) Price Target Price Target Price Target Price Target 12121212----mthmthmthmth:::: RM1.70 (6% upside) (Prev RM1.70)
Potential Catalyst: Potential Catalyst: Potential Catalyst: Potential Catalyst: Higher rental reversion and occupancy
Where we differ:Where we differ:Where we differ:Where we differ: Higher operating expenses assumptions Analyst Inani ROZIDIN +603 2604 3905 [email protected]
What’s New • 3QFY16 earnings below expectations on weaker
than expected rental reversion
• Near term challenges priced in; earnings inflection
in FY17 still intact, supported by improvement in
overall portfolio’s visitor traffic
• We cut FY16F/FY17F/FY18F earnings by
9%/6%/6%
• Maintain BUY, TP of RM1.70
Price Relative
Forecasts and Valuation FY FY FY FY DecDecDecDec ((((RMRMRMRMmmmm) ) ) ) 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF
Gross Revenue 345 384 408 422 Net Property Inc 226 254 273 283 Total Return 155 166 188 196 Distribution Inc 163 177 199 208 EPU (sen) 11.9 8.15 9.21 9.57 EPU Gth (%) (10) (32) 13 4 DPU (sen) 8.59 8.69 9.78 10.1 DPU Gth (%) (4) 1 12 4 NAV per shr (sen) 132 132 132 132 PE (X) 13.4 19.6 17.4 16.7 Distribution Yield (%) 5.4 5.4 6.1 6.3 P/NAV (x) 1.2 1.2 1.2 1.2 Aggregate Leverage (%) 31.7 34.8 34.8 34.9 ROAE (%) 9.1 6.2 7.0 7.3 Distn. Inc Chng (%):Distn. Inc Chng (%):Distn. Inc Chng (%):Distn. Inc Chng (%): 0 0 0 Consensus DPU Consensus DPU Consensus DPU Consensus DPU (sensensensen):::: 8.8 10.0 10.2 Other Broker Recs:Other Broker Recs:Other Broker Recs:Other Broker Recs: B: 4 S: 1 H: 6
Source of all data on this page: Company, AllianceDBS, Bloomberg Finance L.P.
Revamping the malls Maintain BUY.Maintain BUY.Maintain BUY.Maintain BUY. We cut our FY16/FY17/FY18 earnings by 9%/6%/6% as NPI margins grew at a slower pace than anticipated, with 3Q16 NPI standing at 65.7% vs. our forecast of 70%. This is due to the negative reversions from Tropicana City Mall at 6.7% y-o-y. The negative reversions were due to management’s efforts to realign the mall and include mini anchor tenants in the mix. Occupancy improved to 92.5% in 3Q16 (2Q16: 91.9%). Tropicana City Mall presents CMMT with a good growth avenue. The property’s occupancy has room to rise, while rental rates of c.RM6/psf/mth has upside potential in view of the impending asset-enhancement initiatives. Increase in shopper traffic a positive indicator.Increase in shopper traffic a positive indicator.Increase in shopper traffic a positive indicator.Increase in shopper traffic a positive indicator. Excluding the newly acquired Tropicana City Property, CMMT’s portfolio shopper traffic improved by c.9.4% y-o-y in 3Q16, marking a turnaround in the visitor footfall downtrend in the previous year. This was attributable to the enhancement initiatives carried out and tenant-mix improvements for GP, ECM and the Mines. We note that SWP also experienced a rise in shopper traffic by c.3% y-o-y in 3Q16, attributed to the introduction of new tenants and enhancement initiatives carried out, including the extension of its unique F&B cluster and introduction of the toys and hobbies cluster. We are positive on this development as it signals an improvement in CMMT’s malls popularity, specifically SWP. Assets enhancement work in plan.Assets enhancement work in plan.Assets enhancement work in plan.Assets enhancement work in plan. Management plans to carry out asset-enhancement works for GP and Tropicana City Property with an estimated budget of RM30m. The enhancement work will be carried out in stages in FY16, with targeted full completion by 4Q16. We believe this will contribute positively to overall rental reversion in FY16/FY17. In particular, GP has expiring leases for c.14% of its total NLA.
Valuation: Our DDM-derived TP remains at RM1.70, with 7.5% cost of equity and 1.5% TG, as we trimmed our earnings forecasts but was mitigated by a cut in risk-free rate assumptions from 4.0% to 3.9% to reflect compression in MGS yield. We maintain our BUY call in anticipation of DPU growth from potential upside from further enhancement initiatives. The stock provides an FY17 yield of c.6.3%. Key Risks to Our View: Weak consumer sentiment.Weak consumer sentiment.Weak consumer sentiment.Weak consumer sentiment. The soft retail spending outlook may impact CMMT, as it is largely retail-focused. Tenants’ capacity to absorb rental increases may be affected by their lower sales, and this would negatively impact CMMT as it also derives 3-4% of its top-line from turnover rent.
At A Glance Issued Capital (m shrs) 2,031 Mkt. Cap (RMm/US$m) 3,250 / 774 Major Shareholders (%) CapitaMalls Asia Ltd (%) 35.4 Employee Provident Fund (%) 9.7 Skim Amanah Saham Bumiputera 6.6 Free Float (%) 42.7 3m Avg. Daily Val (US$m) 0.92 ICB IndustryICB IndustryICB IndustryICB Industry : Real Estate / Real Estate Investment Trusts
DBS Group Research . Equity
4 Nov 2016
Malaysia Company Guide
CapitaLand Malaysia Mall Trust Version 5 | Bloomberg: CMMT MK | Reuters: CAMA.KL Refer to important disclosures at the end of this report
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Company Guide
CapitaLand Malaysia Mall Trust
WHAT’S NEW
Asset enhancements underway
Steady growthSteady growthSteady growthSteady growth
• 3Q16 NPI came in at RM61.4m (+3% y-o-y), which is below our and consensus expectations. The growth was mainly driven by contribution from Tropicana City Property upon its acquisition in 3Q15 and improved performance from Gurney Plaza (GP) and East Coast Mall (ECM) on the back of higher rental rates achieved from new and renewed leases.
• However, the NPI margins grew at a slower pace than anticipated, with 3Q16 NPI standing at 65.7% vs. our forecast of 70%. This was due to the negative reversions from Tropicana City Mall at 6.7% y-o-y. The negative reversions were due to management’s efforts to realign the mall and include mini anchor tenants in the mix. Occupancy improved to 92.5% in 3Q16 from 2Q’s 91.9%. We expect reversions to steadily improve in FY17, supported by the asset-enhancement works and marketing initiatives carried out.
Steady performance due to Gurney Plaza and East Coast MallSteady performance due to Gurney Plaza and East Coast MallSteady performance due to Gurney Plaza and East Coast MallSteady performance due to Gurney Plaza and East Coast Mall
• Organic growth came mainly from GP, which registered 11% growth in NPI, supported by the increase in gross rental revenue of RM35m (+9% y-o-y). NPI margins in 3Q16 for GP also improved to c.71% (3Q15: c.70%) amid
a stable occupancy level of c.98.8%. Positive reversions were supported by the completion of major enhancement works in 2015 as well as reversions of expiring leases. ECM NPI grew by 1.3% y-o-y in this quarter due to the lower number of reversions.
• Sungei Wang Plaza (SWP) continued to struggle, with NPI dropping 26.5% y-o-y as a result of the adjacent MRT station construction. However, occupancy remained stable at 90.2% and management has revised rentals down by c.37% to keep tenants. As the construction works will only be completed in 2HFY17, we expect no recovery until then. That being said, we have incorporated the weak/negative reversions and poor occupancies of SWP in our forecasts. As such, we believe CMMT’s fundamentals are intact given that major earnings risks have been accounted for.
• Excluding SWP, rental reversions for the portfolio rose a decent 5.3%. There are remaining 11% of overall leases by NLA expiring in FY16. However, lease expiries from SWP are minimal at 1.3% of overall leases by NLA.
• We are positive about the upcoming reversions as a sizeable portion of the remaining expiries comes from GP/ECM, with 1.4%/4.8% of overall leases by NLA. We understand that GP and ECM registered positive reversions of 6% and 12%, respectively, in this quarter.
Quarterly / Interim Income Statement (RMm)
FY FY FY FY DecDecDecDec 3Q3Q3Q3Q2015201520152015 2Q2Q2Q2Q2016201620162016 3Q3Q3Q3Q2016201620162016 % chg yoy % chg yoy % chg yoy % chg yoy % chg qoq% chg qoq% chg qoq% chg qoq
Gross revenue 90.9 92.0 93.5 2.8 1.6
Property expenses (31.2) (32.0) (32.1) 2.9 0.4
Net Property Income 59.8 60.0 61.4 2.8 2.3
Other Operating expenses (6.5) (6.5) (6.4) (1.4) (1.3)
Other Non Opg (Exp)/Inc 0.0 0.0 0.0 N/A N/A
Net Interest (Exp)/Inc (13.5) (13.4) (13.5) 0.0 (0.9)
Exceptional Gain/(Loss) 12.7 2.57 0.0 N/A N/A
Net IncomeNet IncomeNet IncomeNet Income 52.552.552.552.5 42.842.842.842.8 41.541.541.541.5 (20.8)(20.8)(20.8)(20.8) (2.9)(2.9)(2.9)(2.9)
Tax 0.0 0.0 0.0 N/A N/A
Minority Interest 0.0 0.0 0.0 N/A N/A
Net Income after Tax Net Income after Tax Net Income after Tax Net Income after Tax 52.552.552.552.5 42.842.842.842.8 41.541.541.541.5 (20.8)(20.8)(20.8)(20.8) (2.9)(2.9)(2.9)(2.9)
Total Return 52.5 42.8 41.5 (20.8) (2.9)
Non-tax deductible Items 0.0 0.0 0.0 nm nm
Net Inc available for Dist. 41.6 42.3 43.2 3.8 2.3
Ratio (%)
Net Prop Inc Margin 65.7 65.3 65.7
Dist. Payout Ratio 0.0 99.9 0.0
Source of all data: Company, AllianceDBS
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Company Guide
CapitaLand Malaysia Mall Trust
CRITICAL DATA POINTS TO WATCH
Earnings Drivers:
Positive rental reversion.Positive rental reversion.Positive rental reversion.Positive rental reversion. In FY15, CMMT managed to secure
positive rental reversion for four of its five malls, with reversions
of c.7.9% (excluding SWP). SWP was the only drag with a
negative reversion of 31.5%. But this is a strategic decision by
management to retain key tenants, as the ongoing MRT
construction works nearby have reduced shopper footfall.
Looking at FY16F/FY17F, we expect reversion rates to average
8-10% (except for SWP) which is supported by asset-
enhancement works.
Maintaining occupancy levels.Maintaining occupancy levels.Maintaining occupancy levels.Maintaining occupancy levels. Occupancy rates directly affect
the income received by mall owners. It is also an indicator of the
quality of the mall, which is determined by shopper footfall,
pace of vacancy-replenishment, and general attractiveness of
the asset as a retail hub. CMMT has a decent track record of
securing c.96% to full occupancy of net lettable area (NLA).
Occupancy at SWP has fallen over the last few quarters to
c.90% because of the ongoing MRT construction works.
AssetAssetAssetAsset----enhancement initiatives.enhancement initiatives.enhancement initiatives.enhancement initiatives. Besides regular rent increases,
the REIT’s earnings would also be boosted by enhancement
works for its assets. This encompasses a wide range of actions,
including increasing NLA, improving facilities and amenities,
refreshing external appearances, and restructuring rentable
space and tenant mix. CMMT has a good track record in this
space, with successful enhancement works done on The Mines
and East Coast Mall, leading to NPI growth of 24% and 15%,
respectively, over two years.
Sensible financing rates, the bulk of whiSensible financing rates, the bulk of whiSensible financing rates, the bulk of whiSensible financing rates, the bulk of which are already locked in.ch are already locked in.ch are already locked in.ch are already locked in.
About 74% of CMMT’s debts have fixed interest rates ranging
from 4.1% to 4.6%, and the rest are at floating rates. Its
average financing cost was c.4.4% in FY15, and we expect this
to increase to 4.6% over the next few years due to rate
fluctuations from floating-rate debts.
Net Property Income and Margins (%)
Net Property Income and Margins (%)
Distribution Paid / Net Operating CF
Interest Cover (x)
Source: Company, AllianceDBS
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CapitaLand Malaysia Mall Trust
Balance Sheet:
Staying conservative.Staying conservative.Staying conservative.Staying conservative. CMMT has kept gearing at about 31% in
recent years, and financed the purchase of the Tropicana assets
with a 30:70 debt-equity mix to keep gearing within that limit.
We expect its balance sheet to remain strong going forward.
Decent maturity profile.Decent maturity profile.Decent maturity profile.Decent maturity profile. Interest rates are fixed for 74% of its
debt, with the remaining debts on floating rate. More than
70% of borrowings mature in 2022 and beyond.
Share Price Drivers:
DPU growth.DPU growth.DPU growth.DPU growth. The steady occupancy levels and positive rental
reversions will help lift DPU, which would in turn translate into a
higher unit price.
Key Risks:
Weak consumer sentiment.Weak consumer sentiment.Weak consumer sentiment.Weak consumer sentiment. The soft retail spending outlook
may impact CMMT, as it is largely retail-focused. Tenants’
capacity to absorb rental increases may be affected by their
lower sales, and this would negatively impact CMMT as it also
derives 3-4% of its top-line from turnover rent.
PostPostPostPost----acquisition sentiment.acquisition sentiment.acquisition sentiment.acquisition sentiment. The RM540m acquisition price for
the Tropicana assets involves a substantial placement of new
units at an indicative RM1.32/unit (c.13% increase in unit
base), plus some debt financing. As such, we feel that the
market has reacted to the implied dilution (which is now
largely priced in) with the selldown of CMMT shares since
April. Nonetheless, the sentiment towards the stock might
recover more gradually than expected.
Deteriorating performance at SWP.Deteriorating performance at SWP.Deteriorating performance at SWP.Deteriorating performance at SWP. SWP is currently affected
by construction works for a new MRT station nearby. Footfall
at SWP will be weak until 2HFY17, when the MRT works will
be completed.
Company Background
CMMT is a retail-focused real estate investment trust with
malls in Kuala Lumpur, Selangor, Penang, and Pahang. Its malls
employ a mass-market profile, but it is moving up to the
middle- to upper-income segments.
Aggregate Leverage (%)
ROE (%)
Distribution Yield (%)
PB Band (x)
Source: Company, AllianceDBS
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CapitaLand Malaysia Mall Trust
Key Assumptions
FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF
Lease expiry (% NLA) 53.2 20.5 33.7 42.5 20.7
Avg rental growth (%) 1.23 1.96 2.15 6.41 2.50 Segmental Breakdown
FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF Revenues (RMm)
Gurney Plaza 123 128 137 146 150
Mines 79.7 81.6 87.8 92.2 98.9
Sungai Wang Plaza 67.2 55.0 50.3 53.8 50.4
East Coast Mall 45.9 55.1 62.0 66.4 70.1
Others #,##0;(#,##0)
25.1 46.9 50.1 51.7
TotalTotalTotalTotal 315315315315 345345345345 384384384384 408408408408 422422422422
NPI (RMm) Gurney Plaza 83.3 83.3 99.1 104 108
Mines 48.6 51.6 59.4 60.9 67.0
Sungai Wang Plaza 49.2 37.2 30.7 30.3 26.5
East Coast Mall 27.9 35.0 41.9 43.3 46.5
Others #,##0;(#,##0)
19.3 32.2 34.1 35.2
TotalTotalTotalTotal 209209209209 226226226226 263263263263 273273273273 283283283283
NPI Margins (%) Gurney Plaza 67.9 65.0 72.2 71.3 71.6
Mines 60.9 63.3 67.6 66.1 67.7
Sungai Wang Plaza 73.1 67.6 61.0 56.3 52.5
East Coast Mall 60.8 63.5 67.6 65.2 66.4
Others N/A 76.9 68.6 68.1 68.0
TotalTotalTotalTotal 66.266.266.266.2 65.765.765.765.7 68.568.568.568.5 66.766.766.766.7 67.167.167.167.1
Income Statement (RMm)
FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF Gross revenue 315 345 384 408 422
Property expenses (106) (118) (130) (136) (139)
Net Property IncomeNet Property IncomeNet Property IncomeNet Property Income 209209209209 226226226226 254254254254 273273273273 283283283283 Other Operating expenses (22.5) (24.4) (27.0) (28.1) (28.8)
Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0
Net Interest (Exp)/Inc (36.7) (46.8) (61.5) (56.7) (58.4)
Exceptional Gain/(Loss) 86.6 70.9 0.0 0.0 0.0
Net IncomeNet IncomeNet IncomeNet Income 236236236236 227227227227 166166166166 188188188188 196196196196 Tax 0.0 0.0 0.0 0.0 0.0
Minority Interest 0.0 0.0 0.0 0.0 0.0
Preference Dividend 0.0 0.0 0.0 0.0 0.0
Net Income After Tax Net Income After Tax Net Income After Tax Net Income After Tax 236236236236 226226226226 166166166166 188188188188 196196196196
Total Return 150 155 166 188 196
Non-tax deductible Items 0.0 0.0 0.0 0.0 0.0
Net Inc available for Dist. 158 163 177 199 208
Growth & Ratio
Revenue Gth (%) 3.4 9.3 11.4 6.3 3.2
N Property Inc Gth (%) 0.1 8.4 12.2 7.3 3.8
Net Inc Gth (%) 2.9 (4.4) (26.8) 13.5 4.2
Dist. Payout Ratio (%) 99.9 99.9 99.9 99.9 99.9
Net Prop Inc Margins (%) 66.2 65.7 66.1 66.7 67.1
Net Income Margins (%) 74.9 65.5 43.1 46.0 46.4
Dist to revenue (%) 50.2 47.3 46.0 48.9 49.3
Managers & Trustee’s fees to sales %)
7.1 7.1 7.0 6.9 6.8
ROAE (%) 10.5 9.1 6.2 7.0 7.3
ROA (%) 7.1 6.0 3.9 4.3 4.5
ROCE (%) 5.8 5.5 5.5 5.8 6.0
Int. Cover (x) 5.1 4.3 3.7 4.3 4.4 Source: Company, AllianceDBS
Lease expiries skewed towards 2017
NPI margins to be relatively stable
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CapitaLand Malaysia Mall Trust
Quarterly / Interim Income Statement (RMm)
FY FY FY FY DecDecDecDec 3Q3Q3Q3Q2015201520152015 4Q4Q4Q4Q2015201520152015 1Q1Q1Q1Q2016201620162016 2Q2Q2Q2Q2016201620162016 3Q3Q3Q3Q2016201620162016 Gross revenue 90.9 93.3 93.6 92.0 93.5
Property expenses (31.2) (32.7) (33.1) (32.0) (32.1)
Net Property Income 59.8 60.6 60.6 60.0 61.4 Other Operating expenses (6.5) (6.6) (6.3) (6.5) (6.4)
Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc (13.5) (13.4) (13.3) (13.4) (13.5)
Exceptional Gain/(Loss) 12.7 6.11 0.0 2.57 0.0
Net IncomeNet IncomeNet IncomeNet Income 52.552.552.552.5 46.746.746.746.7 41.141.141.141.1 42.842.842.842.8 41.541.541.541.5
Tax 0.0 0.0 0.0 0.0 0.0
Minority Interest 0.0 0.0 0.0 0.0 0.0 Net Income after Tax Net Income after Tax Net Income after Tax Net Income after Tax 52.552.552.552.5 46.746.746.746.7 41.141.141.141.1 42.842.842.842.8 41.541.541.541.5
Total Return 52.5 46.7 41.1 42.8 41.5
Non-tax deductible Items 0.0 0.0 0.0 0.0 0.0 Net Inc available for Dist. 41.6 42.4 43.0 42.3 43.2
Growth & Ratio
Revenue Gth (%) 14 3 0 (2) 2
N Property Inc Gth (%) 14 1 0 (1) 2
Net Inc Gth (%) (41) (11) (12) 4 (3)
Net Prop Inc Margin (%) 65.7 65.0 64.7 65.3 65.7
Dist. Payout Ratio (%) 0.0 98.1 0.0 99.9 0.0 Balance Sheet (RMm)
FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF Investment Properties 3,233 3,886 3,940 3,994 4,048
Other LT Assets 1.86 2.47 3.09 3.70 4.31
Cash & ST Invts 157 187 348 310 271
Inventory 0.0 0.0 0.0 0.0 0.0
Debtors 13.3 16.4 18.2 19.4 20.0
Other Current Assets 0.0 0.0 0.0 0.0 0.0
Total AssetsTotal AssetsTotal AssetsTotal Assets 3,4053,4053,4053,405 4,0924,0924,0924,092 4,3094,3094,3094,309 4,3274,3274,3274,327 4,3444,3444,3444,344
ST Debt
145 307 307 307 317
Creditor 70.0 61.7 68.8 73.1 75.5
Other Current Liab 33.2 38.9 43.3 46.1 47.6
LT Debt 817 951 1,151 1,151 1,151
Other LT Liabilities 51.3 58.0 58.0 58.0 58.0
Unit holders’ funds 2,287 2,675 2,681 2,691 2,694
Minority Interests 0.0 0.0 0.0 0.0 0.0
Total Funds & LiabilitiesTotal Funds & LiabilitiesTotal Funds & LiabilitiesTotal Funds & Liabilities 3,4053,4053,4053,405 4,0924,0924,0924,092 4,3094,3094,3094,309 4,3274,3274,3274,327 4,3444,3444,3444,344
Non-Cash Wkg. Capital (89.9) (84.3) (93.9) (99.8) (103)
Net Cash/(Debt) (806) (1,071) (1,110) (1,149) (1,197)
Ratio
Current Ratio (x) 0.7 0.5 0.9 0.8 0.7
Quick Ratio (x) 0.7 0.5 0.9 0.8 0.7
Aggregate Leverage (%) 29.3 31.7 34.8 34.8 34.9
Z-Score (X) 1.9 1.6 1.6 1.6 1.6
Source: Company, AllianceDBS
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CapitaLand Malaysia Mall Trust
Cash Flow Statement (RMm)
FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF Pre-Tax Income 236 226 166 188 196
Dep. & Amort. 1.16 1.11 1.11 1.11 1.11
Tax Paid 0.0 0.0 0.0 0.0 0.0
Associates &JV Inc/(Loss) 0.0 0.0 0.0 0.0 0.0
Chg in Wkg.Cap. 3.91 19.0 9.60 5.92 3.24
Other Operating CF (41.3) (15.0) 71.6 67.2 69.2
Net Operating CFNet Operating CFNet Operating CFNet Operating CF 200200200200 231231231231 248248248248 262262262262 269269269269 Net Invt in Properties (52.2) (603) (55.8) (55.8) (55.8)
Other Invts (net) 0.0 0.0 0.0 0.0 0.0
Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0
Div from Assoc. & JVs 0.0 0.0 0.0 0.0 0.0
Other Investing CF 4.62 4.73 5.80 11.0 9.75
Net Investing CFNet Investing CFNet Investing CFNet Investing CF (47.5)(47.5)(47.5)(47.5) (598)(598)(598)(598) (50.0)(50.0)(50.0)(50.0) (44.8)(44.8)(44.8)(44.8) (46.0)(46.0)(46.0)(46.0) Distribution Paid (160) (160) (170) (188) (203)
Chg in Gross Debt 13.8 245 133 (67.6) (58.1)
New units issued 0.0 313 0.0 0.0 0.0
Other Financing CF 0.0 0.0 0.0 0.0 0.0
Net Financing CFNet Financing CFNet Financing CFNet Financing CF (146)(146)(146)(146) 398398398398 (37.0)(37.0)(37.0)(37.0) (256)(256)(256)(256) (261)(261)(261)(261)
Currency Adjustments 0.0 0.0 0.0 0.0 0.0
Chg in Cash 6.08 30.5 161 (38.3) (38.3)
Operating CFPS (sen) 11.0 11.2 11.7 12.6 13.0
Free CFPS (sen) 8.33 (19.6) 9.45 10.1 10.4 Source: Company, AllianceDBS
Target Price & Ratings History
Source: AllianceDBS
Analyst: Inani ROZIDIN
ASIAN INSIGHTS VICKERS SECURITIES ed: CK / sa: BC, PY
BUYBUYBUYBUY Last Traded PriceLast Traded PriceLast Traded PriceLast Traded Price (((( 3 Nov 20163 Nov 20163 Nov 20163 Nov 2016)))): : : : RM1.70 (KLCIKLCIKLCIKLCI : : : : 1,648.08) Price TaPrice TaPrice TaPrice Target rget rget rget 12121212----mthmthmthmth:::: RM1.92 (13% upside) (Prev RM1.92) Shariah Compliant: Shariah Compliant: Shariah Compliant: Shariah Compliant: No Potential Catalyst: Potential Catalyst: Potential Catalyst: Potential Catalyst: Higher-than-expected construction and manufacturing wins Where we differ: Where we differ: Where we differ: Where we differ: Broadly in line with consensus Analyst Chong Tjen-San +60 3 26043972 [email protected]
Price Relative
Forecasts and Valuation FY FY FY FY DecDecDecDec ((((RMRMRMRMmmmm) ) ) ) 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF
Revenue 1,917 1,989 2,361 2,769 EBITDA 178 221 244 269 Pre-tax Profit 141 178 202 229 Net Profit 127 143 162 183 Net Pft (Pre Ex.) 127 143 162 183 Net Pft Gth (Pre-ex) (%) 1.9 12.1 13.5 13.1 EPS (sen) 9.84 11.0 12.5 14.2 EPS Pre Ex. (sen) 9.84 11.0 12.5 14.2 EPS Gth Pre Ex (%) 2 12 14 13 Diluted EPS (sen) 9.84 11.0 12.5 14.2 Net DPS (sen) 4.00 4.96 5.63 6.37 BV Per Share (sen) 34.9 41.0 47.8 55.6 PE (X) 17.3 15.4 13.6 12.0 PE Pre Ex. (X) 17.3 15.4 13.6 12.0 P/Cash Flow (X) 9.3 12.7 10.2 9.3 EV/EBITDA (X) 10.5 8.1 6.9 5.8 Net Div Yield (%) 2.4 2.9 3.3 3.7 P/Book Value (X) 4.9 4.2 3.6 3.1 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 33.2 29.1 28.2 27.4 Earnings Rev (%):Earnings Rev (%):Earnings Rev (%):Earnings Rev (%): 0 0 0 Consensus EPS Consensus EPS Consensus EPS Consensus EPS (sen):::: 10.6 12.5 13.1
Other Broker Other Broker Other Broker Other Broker Recs:Recs:Recs:Recs: B: 10 S: 0 H: 3
Source of all data on this page: Company, AllianceDBS, Bloomberg Finance L.P....
Strong and dependable Malaysia’s leading pure construction player.Malaysia’s leading pure construction player.Malaysia’s leading pure construction player.Malaysia’s leading pure construction player. Sunway Construction Group (SCG) is the largest listed pure play construction company in Malaysia. Given its strong track record with MRT, LRT and BRT jobs previously, we are of the view that SCG is on a strong footing to bag several key infrastructure packages such as LRT3 and BRT as well as other infrastructure-related and building projects. SCG has also established itself as the only construction specialist to be involved in all three Rapid Line infra projects (MRT, LRT and BRT). This makes the group one of the strongest contenders to win the pipeline of 11MP projects. Riding on Singapore’s public housing development. Riding on Singapore’s public housing development. Riding on Singapore’s public housing development. Riding on Singapore’s public housing development. Its precast division is a strong proxy to the growing demand for HDB residences in Singapore, where the government is targeting to build an additional 88,000 units of public housing in FY16-FY19. With premium EBIT margins recorded over the past few years, the business is ROE-enhancing and also synergistic to its construction business. The completion of its 3rd precast plant in Iskandar should give it ample capacity to cater for more orders while also compensating for the eventual return of the Tampines plant. Still bidding for more jobs and ahead of RM2.5bn forecast. Still bidding for more jobs and ahead of RM2.5bn forecast. Still bidding for more jobs and ahead of RM2.5bn forecast. Still bidding for more jobs and ahead of RM2.5bn forecast. Not one to rest on its laurels, SCG will be bidding for LRT 3 (already prequalified), private and public sector building jobs and the internal projects from the property arm of its holding company. With YTD wins reaching RM2.6bn (including precast), it has exceeded its RM2.5bn forecast this year where the more recent wins have been for internal jobs and MRT 2 advanced works.
Valuation:
BUY, TP set at RM 1.92. BUY, TP set at RM 1.92. BUY, TP set at RM 1.92. BUY, TP set at RM 1.92. Our TP is based on sum-of-parts (SOP)
valuation to reflect the growing contribution from its high-
margin precast business. While our SOP value is RM2.77bn or
RM2.14/share, we have ascribed a 10% discount to arrive at
our target price of RM1.92.
Key Risks to Our View:
The timely execution of its peak orderbook of RM5bn is crucial
to minimise any earnings cuts. With its strong execution track
record and experience, we believe the group is able to execute
the projects in a timely manner. At A Glance Issued Capital (m shrs) 1,293
Mkt. Cap (RMm/US$m) 2,198 / 524
Major Shareholders (%)
Sunway Berhad 55.6
Tan Sri Jeffrey Cheah & Family 7.6
Free Float (%) 37.9
3m Avg. Daily Val (US$m) 0.91
ICB IndustryICB IndustryICB IndustryICB Industry : Industrials / Construction & Materials
DBS Group Research . Equity
4 Nov 2016
Malaysia Company Guide
Sunway Construction Group Version 5 | Bloomberg: SCGB MK | Reuters: SCOG.KL Refer to important disclosures at the end of this report
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Company Guide
Sunway Construction Group
CRITICAL DATA POINTS TO WATCH
Earnings Drivers:
Sweet spot ahead. Sweet spot ahead. Sweet spot ahead. Sweet spot ahead. We think SCG’s construction segment is
entering a ‘sweet spot’ on the back of the expected upturn in
Malaysia’s construction industry. Given its notable brand name
and strong execution track record, we believe the group is one
of the strongest contenders to bag several key projects under
the Eleventh Malaysia Plan (11MP). We are of the view that SCG
is on a strong footing to bag several key infrastructure packages
such as LRT3, BRT and other private sector building jobs.
Stronger infrastructure orderbStronger infrastructure orderbStronger infrastructure orderbStronger infrastructure orderbook.ook.ook.ook. With MRT2 viaduct package
(V201) being the major infra win in 2016 so far, its construction
orderbook now stands at RM5.0bn. We think SCG has gotten
off to a strong start with construction YTD wins of RM2.6bn
(excluding precast). We have assumed no more new wins for
this division for FY16F and any incremental wins from here
onwards will only be accretive to FY17F earnings and beyond.
Additionally, we think margins should also be relatively intact as
c.50% of its outstanding orderbook comes from two key
projects – MRT Line 2 V201 and Putrajaya Parcel F where the
raw material requirements for MRT aboveground works are
borne by the government while it has also locked in half of the
steel requirements for the Putrajaya job at lower prices.
Highly proHighly proHighly proHighly profitable precast segment. fitable precast segment. fitable precast segment. fitable precast segment. SCG’s precast segment
should be sturdy in contributing a larger share of earnings to
the group. SCG’s precast division made up 13-16% of revenue
in FY12-FY15. It was the largest earnings contributor in FY15,
accounting for 57% of the group’s overall EBIT. The group
believes the normalised margin lies in the 20-25% range. This is
supported by sustainable orders from the Singapore market.
Assuming that it will retain the 3rd precast plant this year, its
total annual production capacity in 2016 is estimated to rise to
251,000 m³. The continuous expansion of its plants enables the
group to have ample capacity to cater for more orders from the
Singapore market, as the group plans to return the Tampines
plant by 2017.
Potential Potential Potential Potential writebacks. writebacks. writebacks. writebacks. We understand SCG may recognise
potential writebacks from its KLCC project, Indian tollroads and
MRT V4 package. It was initially quite positive on recognising
RM40m worth of writebacks for its Indian tollroads this year but
this has been delayed – due to the ongoing arbitration process
for legacy highway-related projects in India.
New order wins
Construction revenue
Precast revenue
Construction EBIT margins
Precast EBIT margins
Source: Company, AllianceDBS
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Sunway Construction Group
Balance Sheet:
Strong balance sheet and cash generation ability.Strong balance sheet and cash generation ability.Strong balance sheet and cash generation ability.Strong balance sheet and cash generation ability. As at 30 June
2016, the company has a net cash position of RM315m, with
no long-term borrowings and minimal working capital
requirements going forward. We estimate the group will retain
its strong balance sheet with a net cash position of RM417m in
for FY16F and RM527m in FY17F. Meanwhile, its ROAE is
expected to hover around the 27-29% level.
Share Price Drivers:
Executing on peak orderbook.Executing on peak orderbook.Executing on peak orderbook.Executing on peak orderbook. Suncon's orderbook now stands
at RM5bn which is at its peak. This will give it two and a half
years’ visibility. The largest projects are Putrajaya Parcel F and
MRT Line 2, V201 package which form 53% of the orderbook.
More importantly, we think pretax margins for these two key
projects will also be at least 7-8%. Recall that 2015 pretax
margin was low at 3.6% due to MRT Line 1 and KLCC project
(NEC and Package 2 and 2A) where certain losses and
provisions were fully provided for.
Dividend payout policy of at least 35%Dividend payout policy of at least 35%Dividend payout policy of at least 35%Dividend payout policy of at least 35%. . . . SCG is committed to
distribute a minimum 35% of its core profit to shareholders,
which is rare among construction players. This could be
attributable to its sizeable operations with a large asset base
that requires little capex spending going forward. We have
imputed a 45% dividend payout ratio, based on our strong net
cash forecasts. This translates into decent yields of c.3-3.9%.
Key Risks:
Delays in construction. Delays in construction. Delays in construction. Delays in construction. There may be project cost overruns due
to several factors such as design and engineering issues and
soil conditions.
Fluctuating prices of raw materials. Fluctuating prices of raw materials. Fluctuating prices of raw materials. Fluctuating prices of raw materials. The construction business
typically requires a wide range of raw materials including steel
bars, ready-mixed concrete, diesel, electrical cables and fittings,
which are all subject to price fluctuations.
Company Background
An established player with >30 years of heritage, Sunway
Construction Group (SCG) is one of Malaysia’s largest
construction companies. It adopts an integrated business
model that covers various phases of construction activities,
from project design to completion.
Leverage & Asset Turnover (x)
Capital Expenditure
ROE (%)
Forward PE Band (x)
PB Band (x)
Source: Company, AllianceDBS
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Sunway Construction Group
Key Assumptions
FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF
New order wins 800 2,600 2,600 2,100 2,100
Construction revenue 2,032 1,664 1,690 2,012 2,469
Precast revenue 301 253 300 350 300
Construction EBIT margins 3.56 6.90 6.48 6.77
Precast EBIT margins 30.5 21.0 21.0 21.0 Segmental Breakdown
FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF Revenues (RMm)
Construction 2,032 1,664 1,690 2,012 2,469
Precast Concrete 301 253 300 350 300
Consolidated Adjustments (452) 0.0 0.0 0.0 0.0
Segment 4 0.0 0.0 0.0 0.0 0.0
Others 0.0 0.0 0.0 0.0 0.0
TotalTotalTotalTotal 1,8811,8811,8811,881 1,9171,9171,9171,917 1,9891,9891,9891,989 2,3612,3612,3612,361 2,7692,7692,7692,769
EBIT (RMm) Construction 59.2 117 130 167
Precast Concrete 77.1 62.9 73.5 63.0
TotalTotalTotalTotal 120120120120 136136136136 180180180180 204204204204 230230230230
EBIT Margins (%) Construction 3.6 6.9 6.5 6.8
Precast Concrete 30.5 21.0 21.0 21.0
TotalTotalTotalTotal 6.46.46.46.4 7.17.17.17.1 9.09.09.09.0 8.68.68.68.6 8.38.38.38.3
Income Statement (RMm)
FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF Revenue 1,881 1,917 1,989 2,361 2,769
Cost of Goods Sold (1,485) (1,514) (1,530) (1,876) (2,256)
Gross ProfitGross ProfitGross ProfitGross Profit 395395395395 403403403403 460460460460 485485485485 513513513513
Other Opng (Exp)/Inc (275) (267) (280) (281) (283)
Operating ProfitOperating ProfitOperating ProfitOperating Profit 120120120120 136136136136 180180180180 204204204204 230230230230 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0
Associates & JV Inc 30.4 (0.1) 0.0 0.0 0.0
Net Interest (Exp)/Inc 0.72 4.54 (1.4) (1.4) (1.5)
Exceptional Gain/(Loss) (10.6) 0.0 0.0 0.0 0.0
PrePrePrePre----tax Profittax Profittax Profittax Profit 141141141141 141141141141 178178178178 202202202202 229229229229 Tax (26.5) (13.0) (35.6) (40.5) (45.7)
Minority Interest 0.05 (0.6) 0.0 0.0 0.0
Preference Dividend 0.0 0.0 0.0 0.0 0.0
Net ProfitNet ProfitNet ProfitNet Profit 114114114114 127127127127 143143143143 162162162162 183183183183 Net Profit before Except. 125 127 143 162 183
EBITDA 162 178 221 244 269
Growth
Revenue Gth (%) 2.2 1.9 3.8 18.7 17.3
EBITDA Gth (%) 90.0 10.1 24.0 10.3 10.4
Opg Profit Gth (%) 183.7 13.4 31.7 13.5 13.0
Net Profit Gth (Pre-ex) (%) 86.5 1.9 12.1 13.5 13.1
Margins & Ratio
Gross Margins (%) 21.0 21.0 23.1 20.5 18.5
Opg Profit Margin (%) 6.4 7.1 9.0 8.6 8.3
Net Profit Margin (%) 6.1 6.6 7.2 6.9 6.6
ROAE (%) 24.6 33.2 29.1 28.2 27.4
ROA (%) 8.5 9.2 9.1 9.2 8.9
ROCE (%) 21.8 25.3 22.3 22.4 22.3
Div Payout Ratio (%) 0.0 40.7 45.0 45.0 45.0
Net Interest Cover (x) NM NM 130.7 144.1 158.3
Source: Company, AllianceDBS
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Sunway Construction Group
Quarterly / Interim Income Statement (RMm)
FY FY FY FY DecDecDecDec 2Q2Q2Q2Q2015201520152015 3Q3Q3Q3Q2015201520152015 4Q4Q4Q4Q2015201520152015 1Q1Q1Q1Q2016201620162016 2Q2Q2Q2Q2016201620162016 Revenue 500 450 470 424 430
Cost of Goods Sold 0.0 0.0 0.0 0.0 0.0
Gross ProfitGross ProfitGross ProfitGross Profit 500500500500 450450450450 470470470470 424424424424 430430430430 Other Oper. (Exp)/Inc (459) (422) (443) (389) (393)
Operating ProfitOperating ProfitOperating ProfitOperating Profit 41.341.341.341.3 28.228.228.228.2 27.627.627.627.6 35.435.435.435.4 37.637.637.637.6 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0
Associates & JV Inc 0.0 0.0 0.0 0.0 0.0
Net Interest (Exp)/Inc 0.37 1.90 1.84 2.14 0.51
Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0
PrePrePrePre----tax Profittax Profittax Profittax Profit 41.741.741.741.7 30.130.130.130.1 29.429.429.429.4 37.537.537.537.5 38.138.138.138.1 Tax (3.8) (5.0) 0.97 (8.5) (6.8)
Minority Interest 0.0 0.46 (1.0) 0.0 0.0
Net ProfitNet ProfitNet ProfitNet Profit 37.837.837.837.8 25.725.725.725.7 29.429.429.429.4 29.129.129.129.1 31.331.331.331.3 Net profit bef Except. 37.8 25.7 29.4 29.1 31.3
EBITDA 41.3 28.2 27.6 35.4 37.6
Growth
Revenue Gth (%) 0.8 (10.0) 4.4 (9.8) 1.4
EBITDA Gth (%) 5.4 (31.6) (2.4) 28.4 6.3
Opg Profit Gth (%) 5.4 (31.6) (2.4) 28.4 6.3
Net Profit Gth (Pre-ex) (%) 10.0 (32.1) 14.4 (1.0) 7.8
Margins
Gross Margins (%) 100.0 100.0 100.0 100.0 100.0
Opg Profit Margins (%) 8.3 6.3 5.9 8.3 8.7
Net Profit Margins (%) 7.6 5.7 6.2 6.8 7.3 Balance Sheet (RMm)
FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF Net Fixed Assets 179 163 156 151 147
Invts in Associates & JVs 24.2 0.0 0.0 0.0 0.0
Other LT Assets 10.8 17.4 17.4 17.4 17.4
Cash & ST Invts 222 468 543 653 774
Inventory 20.2 17.3 19.8 23.7 27.8
Debtors 790 835 872 1,035 1,214
Other Current Assets 8.52 14.4 14.4 14.4 14.4
Total AssetsTotal AssetsTotal AssetsTotal Assets 1,2541,2541,2541,254 1,5151,5151,5151,515 1,6231,6231,6231,623 1,8941,8941,8941,894 2,1952,1952,1952,195
ST Debt
135 137 138 139 140
Creditor 791 913 942 1,123 1,322
Other Current Liab 13.2 9.26 9.26 9.26 9.26
LT Debt 0.07 0.0 0.0 0.0 0.0
Other LT Liabilities 4.29 4.10 4.10 4.10 4.10
Shareholder’s Equity 315 451 529 618 719
Minority Interests (5.2) 0.63 0.63 0.63 0.63
Total Cap. & Liab.Total Cap. & Liab.Total Cap. & Liab.Total Cap. & Liab. 1,2541,2541,2541,254 1,5151,5151,5151,515 1,6231,6231,6231,623 1,8941,8941,8941,894 2,1952,1952,1952,195
Non-Cash Wkg. Capital 14.1 (56.1) (45.1) (59.3) (74.9)
Net Cash/(Debt) 86.4 332 406 514 634
Debtors Turn (avg days) 175.7 154.7 156.6 147.4 148.2
Creditors Turn (avg days) 192.4 211.3 227.5 205.3 201.2
Inventory Turn (avg days) 5.8 4.6 4.6 4.3 4.2
Asset Turnover (x) 1.4 1.4 1.3 1.3 1.4
Current Ratio (x) 1.1 1.3 1.3 1.4 1.4
Quick Ratio (x) 1.1 1.2 1.3 1.3 1.4
Net Debt/Equity (X) CASH CASH CASH CASH CASH
Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH
Capex to Debt (%) 33.8 18.8 25.4 25.2 25.0
Z-Score (X) 3.4 3.1 3.3 3.2 3.0
Source: Company, AllianceDBS
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Sunway Construction Group
Cash Flow Statement (RMm)
FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF Pre-Tax Profit 151 141 178 202 229
Dep. & Amort. 41.6 41.9 41.5 40.1 39.0
Tax Paid (26.5) (13.0) (35.6) (40.5) (45.7)
Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0
Chg in Wkg.Cap. 297 79.9 (11.0) 14.2 15.6
Other Operating CF (279) (13.6) 0.0 0.0 0.0
Net Operating CFNet Operating CFNet Operating CFNet Operating CF 184184184184 236236236236 173173173173 216216216216 238238238238 Capital Exp.(net) (45.7) (25.7) (35.0) (35.0) (35.0)
Other Invts.(net) 0.0 0.0 0.0 0.0 0.0
Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0
Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0
Other Investing CF 395 (38.8) 0.0 0.0 0.0
Net Investing CFNet Investing CFNet Investing CFNet Investing CF 349349349349 (64.5)(64.5)(64.5)(64.5) (35.0)(35.0)(35.0)(35.0) (35.0)(35.0)(35.0)(35.0) (35.0)(35.0)(35.0)(35.0) Div Paid (429) (70.0) (64.1) (72.8) (82.3)
Chg in Gross Debt 46.5 1.64 1.00 1.00 1.00
Capital Issues 0.0 0.0 0.0 0.0 0.0
Other Financing CF (85.5) 65.7 0.0 0.0 0.0
Net Financing CFNet Financing CFNet Financing CFNet Financing CF (468)(468)(468)(468) (2.6)(2.6)(2.6)(2.6) (63.1)(63.1)(63.1)(63.1) (71.8)(71.8)(71.8)(71.8) (81.3)(81.3)(81.3)(81.3)
Currency Adjustments 0.0 0.0 0.0 0.0 0.0
Chg in Cash 65.5 169 74.9 109 121
Opg CFPS (sen) (8.7) 12.1 14.2 15.6 17.2
Free CFPS (sen) 10.7 16.3 10.7 14.0 15.7
Source: Company, AllianceDBS
Target Price & Ratings History
Source: AllianceDBS
Analyst: Chong Tjen-San
ASIAN INSIGHTS VICKERS SECURITIES ed: CK / sa:BC, PY
BUYBUYBUYBUY Last Traded PriceLast Traded PriceLast Traded PriceLast Traded Price ((((3333 Nov 2016Nov 2016Nov 2016Nov 2016)))): : : : RM1.38 (KLCIKLCIKLCIKLCI : : : : 1,648.24) Price Target Price Target Price Target Price Target 12121212----mthmthmthmth:::: RM1.70 (23% upside) (Prev RM1.70) Potential Catalyst: Potential Catalyst: Potential Catalyst: Potential Catalyst: New contracts; better-than-expected margins Where we differ:Where we differ:Where we differ:Where we differ: Lower margins assumptions compared to consensus Analyst Inani ROZIDIN +603 2604 3905 [email protected]
What’s New • Growth will be driven by new contracts from its
largest customer, client D
• Specialised portfolio catering to clients with large-
scale expansion plans
• Improving overseas prospects
• Maintain BUY with TP of RM1.70
Price Relative
Forecasts and Valuation FY FY FY FY JulJulJulJul ((((RMRMRMRM m) m) m) m) 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF
Revenue 2,176 2,703 3,390 3,676 EBITDA 247 278 317 337 Pre-tax Profit 142 190 224 239 Net Profit 118 158 184 195 Net Pft (Pre Ex.) 137 158 184 195 Net Pft Gth (Pre-ex) (%) 39.5 15.2 16.7 5.9 EPS (sen) 10.2 12.9 15.1 16.0 EPS Pre Ex. (sen) 11.8 12.9 15.1 16.0 EPS Gth Pre Ex (%) 24 10 17 6 Diluted EPS (sen) 11.2 12.4 14.4 15.3 Net DPS (sen) 4.74 5.17 6.04 6.40 BV Per Share (sen) 75.8 79.9 89.0 98.6 PE (X) 13.6 10.7 9.1 8.6 PE Pre Ex. (X) 11.7 10.7 9.1 8.6 P/Cash Flow (X) 12.1 11.2 14.9 8.3 EV/EBITDA (X) 8.0 7.3 6.5 6.0 Net Div Yield (%) 3.4 3.7 4.4 4.6 P/Book Value (X) 1.8 1.7 1.6 1.4 Net Debt/Equity (X) 0.2 0.2 0.2 0.1 ROAE (%) 14.2 17.0 17.9 17.1 Earnings Rev (%):Earnings Rev (%):Earnings Rev (%):Earnings Rev (%): 0 0 0 Consensus EPS Consensus EPS Consensus EPS Consensus EPS (sensensensen):::: 14.0 16.0 18.0 Other Broker Recs:Other Broker Recs:Other Broker Recs:Other Broker Recs: B: 3 S: 0 H: 0
Source of all data on this page: Company, AllianceDBS, Bloomberg Finance L.P
Passion to grow We recommend BUY on VSI as we believe it is a high growth We recommend BUY on VSI as we believe it is a high growth We recommend BUY on VSI as we believe it is a high growth We recommend BUY on VSI as we believe it is a high growth company with potential for significant contract wins. company with potential for significant contract wins. company with potential for significant contract wins. company with potential for significant contract wins. We expect VSI’s growth to be driven by its largest client (with 30% of total revenue in FY16) – client D. We forecast strong growth from client D due to contributions from a sizeable box-build assembly contract for vacuum cleaners worth RM400m p.a. which started operations in Oct 2016. While this has been priced in, we believe the imminent signing of another contract for an additional line of box-build assembly of vacuum cleaners by Mar 2017 has not been factored in yet. Taking these two contracts into account, we forecast client D’s revenue contribution to grow at a CAGR of 42% in FY16-FY19F. Beyond these two contracts, we believe there is high potential for further contract wins from client D as it launches more products.
Specialised portfolio catering to clients with largeSpecialised portfolio catering to clients with largeSpecialised portfolio catering to clients with largeSpecialised portfolio catering to clients with large----scalescalescalescale expansion plans.expansion plans.expansion plans.expansion plans. VSI’s top 3 customers (client D, Keurig and Zodiac) account for 58% of its total revenue in FY16. All three of VSI’s main clients are expanding and we expect each to contribute to VSI’s overall growth in FY17-FY19. VSI has both the capacity and capability to cater to its main clients’ growing needs. We believe VSI is protected against termination risk from its key clients in the mid-term due to: 1) the long-standing working relationships, 2) VSI’s participation in the product development for Keurig and Zodiac, and 3) client D’s need for additional contract manufacturers to cater to its expansion plan. Valuation: More conservative view than consensus.More conservative view than consensus.More conservative view than consensus.More conservative view than consensus. Our fair value of RM1.70 is based on 12x fully-diluted CY17F EPS, which is the industry’s average. In the mid-term, we conservatively forecast VSI’s revenue/core EPS to grow at a 3-year CAGR of 19%/11% over FY16-FY19F. We are factoring a decline in margins due to large increase in sales from client D which carries a lower margin in comparison to VSI’s other key customers due to its large order size. Consensus is more bullish on topline growth and margin assumptions. A +/- 0.1% shift in net margin will affect earnings by +/-2%, causing our fair value to increase/decrease by 3%. Key Risks to Our View: LowerLowerLowerLower----thanthanthanthan----expected margins.expected margins.expected margins.expected margins. Lower-than-expected margins due to raw material costs escalation and/or sub-optimal operational efficiency could dampen VSI’s earnings growth momentum, in comparison to its top-line growth. At A Glance Issued Capital (m shrs) 1,171 Mkt. Cap (RMm/US$m) 1,616 / 384 Major Shareholders (%) Datuk Beh Kim Ling 20.6 BNP Paribas Wealth Management 8.8 Datuk Gan Sem Yam 7.0 Free Float (%) 51.0 3m Avg. Daily Val (US$m) 1.7 ICB IndustryICB IndustryICB IndustryICB Industry : Industrials / Electronic & Electrical Equipment
DBS Group Research . Equity
4 Nov 2016
Malaysia Company Guide
VS Industry Version 1 | Bloomberg: VSI MK | Reuters: VSID.KL Refer to important disclosures at the end of this report
70
170
270
370
470
570
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
Nov-12 Nov-13 Nov-14 Nov-15 Nov-16
Relative IndexRM
VS Industry (LHS) Relative KLCI (RHS)
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WHAT’S NEW
Things to look out for in FY17
Growth driven by client D.Growth driven by client D.Growth driven by client D.Growth driven by client D. Client D’s contribution to VSI’s total
revenue grew at a 2-year CAGR of 24%, from RM420m in
FY14 to RM644m in FY16, thus making it VSI’s largest client at
30% of total revenue. Currently, the bulk of revenue from
client D is from printed circuit boards (PCB) and battery pack
assembly. In fact, VSI supplies approximately 80% of client D’s
PCB and battery pack requirements. We expect strong double-
digit growth from client D from FY17 onwards due to
contributions from a sizeable box-build assembly contract for
vacuum cleaners worth RM400m p.a. which has started
production in Oct 2016. We also anticipate another contract
for an additional line of box build assembly of vacuum cleaner
by Mar 2017. There is also high potential for future contract
wins. We have incorporated these developments in our model.
As such, we forecast client D’s revenue contribution to grow at
a CAGR of 42% in FY16-FY19F. Client D will remain VSI’s
main client in FY17-19 due to its aggressive growth.
Turnaround in overseas plants.Turnaround in overseas plants.Turnaround in overseas plants.Turnaround in overseas plants. VSI has a presence in China
through 43.9%-owned VS International Group Ltd (VSIG), and
in Indonesia through wholly-owned VS Technology Indonesia.
As at end-FY16, China/Indonesia accounted for 26%/5% of
total revenue. However, we note its China earnings are
currently in the red while its Indonesia unit, previously in the
red, registered positive PBT of RM7.1m in FY16. The main issue
with its overseas operations is underutilisation. In addition,
earnings from operations in China were affected by the one-off
provision for impairment of RM21.8m in FY16. We understand
that operations in China would have broken even in FY16,
excluding the provisions made. However, we expect operations
to improve in China and Indonesia from the increase in
production volume and capacity utilisation. Operations in China
are expected to be profitable in FY17 due to the increase in
production from customers such as Perfect China, NEP,
Georgia-Pacific and Amway. We expect operations in Indonesia
to remain profitable from FY17, boosted by orders from Fluidic
Energy, LG Innotek, Epson and Sanken.
Synergistic partnership with NEP.Synergistic partnership with NEP.Synergistic partnership with NEP.Synergistic partnership with NEP. In Jul 2016, VSI announced its
proposed acquisition of a 20% stake in NEP Holdings (Malaysia)
Sdn Bhd (NEP) for RM60m in cash. NEP is one of the largest
water filtration system companies in Asia with operations in
Malaysia (c.30% market share), Singapore (c.20% market
share), Hong Kong (c.30% market share), plus new markets
such as Taiwan and China. Upon completion of the transaction
by March 2017, NEP will become an associate of VSI. NEP will
benefit from leveraging on VSI’s design and R&D expertise and
manufacturing capacity; and VSI will benefit from having NEP as
a new and secure long-term high volume ODM customer. With
the new orders from NEP as well as increase in orders from the
existing clients in China, we expect operations in China to be
profitable from FY17 onwards. NEP has committed to RM100m
in sales order p.a. starting from FY17. In addition, the
acquisition of NEP comes with a profit guarantee of RM40m for
NEP’s FY17 (ending June 2017) results, which will benefit VSI in
the form of share of profit from associate. NEP registered a net
profit of RM29m in FY16 (June-2016). We have incorporated
the RM100m sales order p.a. into our model but conservatively
assume flat earnings growth for NEP, i.e. RM29m p.a.
Acquired 12% stake in Seeing Machines Ltd. Acquired 12% stake in Seeing Machines Ltd. Acquired 12% stake in Seeing Machines Ltd. Acquired 12% stake in Seeing Machines Ltd. Seeing Machines
Ltd (SML), a vehicle operator monitoring technology company,
is listed on the AIM market of London Stock Exchange. Its
products have been successfully commercialised, as evidenced
by its licensing arrangement with Caterpillar, as well as its
success in securing a major follow-on order from one of the
world’s largest car manufacturers in March 2016. We are
positive on VSI's latest acquisition of a 12% stake in SML, as it
has the potential to generate lucrative prospects. Although VSI
is well known as a consumer OEM, it also manufactures
automotive component parts for leading multinational (MNC)
automotive suppliers. VSI is well positioned for potential
collaborative opportunities with SML.
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CRITICAL DATA POINTS TO WATCH
Earnings Drivers: Expanding earnings base.Expanding earnings base.Expanding earnings base.Expanding earnings base. We expect growth to come from new and existing customers securing more manufacturing orders, thus boosting its earnings growth to double digits in FY17F. In addition, VSI has the technology and space capacity at its existing Johor plants to support an increase in production volume. We conservatively forecast VSI’s revenue/earnings to grow at a 3-year CAGR of 19%/18% over FY16-FY19F. Growth driven by client D.Growth driven by client D.Growth driven by client D.Growth driven by client D. Client D’s contribution to VSI’s total revenue grew at a 2-year CAGR of 24%, from RM420m in FY14 to RM644m in FY16, thus making it VSI’s largest client at 30% of total revenue. Currently, the bulk of revenue from client D is from printed circuit boards (PCB) and battery pack assembly. In fact, VSI supplies approximately 80% of client D’s PCB and battery pack requirements. We expect strong double-digit growth from client D from FY17 onwards due to contributions from a sizeable box-build assembly contract for vacuum cleaners worth RM400m p.a. which has started production in Oct 2016. We also anticipate another contract for an additional line of box-build assembly of vacuum cleaner by Mar 2017. As such, we forecast client D’s revenue contribution to grow at a CAGR of 42% in FY16-FY19F. There is also high potential for future contract wins from client D as it rolls out more products. Client D will remain VSI’s main client in FY17-19. Enduring relationship with Keurig.Enduring relationship with Keurig.Enduring relationship with Keurig.Enduring relationship with Keurig. Keurig’s contribution to VSI’s total revenue grew at a 4-year CAGR of 147%, from RM14m in FY12 to RM528m in FY16. The high growth rate of VSI’s revenue from Keurig signifies the growing confidence in VSI’s quality and delivery. VSI’s partnership with Keurig began in 2011 and the group has progressively grown to be one of Keurig’s main manufacturers. Furthermore, VSI is Keurig’s only manufacturer outside of China. We believe there are ample growth opportunities given: a) VSI’s share of Keurig’s production sales volume stands at only 25-30% currently, and b) the group recently clinched a full-assembly contract for Keurig’s upcoming new coffee machine model, in which the new model is fully designed by VSI. Correspondingly, VSI has been given 18 months’ manufacturing exclusivity for this model. Keurig has awarded to VSI a minimum order of USD82m for this model over the next three years. We forecast Keurig’s revenue contribution to grow at 9% CAGR in FY16-FY19F. Sole OEM for Zodiac robotic pool cleaners.Sole OEM for Zodiac robotic pool cleaners.Sole OEM for Zodiac robotic pool cleaners.Sole OEM for Zodiac robotic pool cleaners. VSI has been appointed the sole original equipment manufacturer (OEM) for Zodiac robotic pool cleaners. Zodiac streamlined its production in France and Australia in 2H14 and 2H15, respectively, due to high production costs and consequently, VSI was appointed the sole OEM for its Zodiac pool cleaners. As a result, Zodiac’s contribution to VSI’s total revenue increased from RM26m in FY14 to RM79m/RM94m in FY15/FY16. Although Zodiac’s contribution to VSI's total revenue was only at 4% in FY15/FY16, its contribution to group PBT was higher at an estimated 7%/9%. Management has guided that the turnover from Zodiac is expected to grow steadily at 8-10% per annum in FY17 and FY18. We forecast Zodiac’s revenue contribution to grow at a CAGR of 8% in FY16-FY19F.
Keurig growth (%)
Client D growth (%)
Zodiac growth (%)
Others growth (%)
Margin trends
Source: Company, AllianceDBS
53.7
-6.4
28.8
0 0
-7.0
1.7
10.5
19.2
28.0
36.7
45.5
54.2
2015A 2016A 2017F 2018F 2019F
1.0
51.6
63.2
54.0
14.4
0.0
12.9
25.8
38.7
51.5
64.4
2015A 2016A 2017F 2018F 2019F
206.6
19.28.0 8.0 8.0
0
42
84
126
169
211
2015A 2016A 2017F 2018F 2019F
-4
5
-4
13
4
-4.6
-1.1
2.4
5.9
9.5
13.0
2015A 2016A 2017F 2018F 2019F
14.8%15.5%
13.8%12.9% 12.7%
7.3%8.0%
7.2% 6.8% 6.7%
6.9%
5.4% 5.8% 5.4% 5.3%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
FY15A FY16A FY17F FY18F FY19F
Gross Margin (%) EBIT Margin (%) Net Margin (%)
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Balance Sheet: Strong balance sheet with low gearing.Strong balance sheet with low gearing.Strong balance sheet with low gearing.Strong balance sheet with low gearing. Despite rapid expansion in the past few years, VSI has been able to maintain net gearing at c.0.2x due to its strong earnings growth and healthy cash-flow generation. Moving forward, we expect net gearing to be sustained at the current level amid minimal maintenance capex. With its strong cash position of RM218m as of end-FY16, we believe this cash pile allows the group to seize any good business opportunities as and when they arise.
Share Price Drivers: New contract awards.New contract awards.New contract awards.New contract awards. VSI’s price movement is highly sensitive to new contract announcements, as seen in the past when the share price rose by c.30% from the date of the announcement of the first contract from client D in July 2016. Margin expansion.Margin expansion.Margin expansion.Margin expansion. Expect margins to fall in FY17-FY19, mainly due to the shift in customer mix, as VSI undertook more of client D’s projects which incurred high costs for purchasing specific components to support orders. Nevertheless, the shortfall in margins has been compensated by the increase in contract values. We note that any slight improvement in margins will considerably improve VSI’s earnings as the contract values are significant.
Key Risks: LowerLowerLowerLower----thanthanthanthan----expected margins.expected margins.expected margins.expected margins. VSI’s FY16 net margin stood at 5.4% (-1.4bps y-o-y). The reduction in margins was due to a large increase in sales from client D, which shifted the margin dynamics of VSI. This is because client D‘s volume is higher but entails a lower margin in comparison to VSI’s other key customers. Margins were also affected by the one-off impairment made in FY16. Adjusted for the impairment, net margin would have been in the region of 5.8%. Going forward, a lower-than-expected margin due to raw material costs escalation and/or sub-optimal operational efficiency could dampen VSI’s earnings growth momentum, in comparison to its top-line growth Foreign currency fluctuation risk.Foreign currency fluctuation risk.Foreign currency fluctuation risk.Foreign currency fluctuation risk. Approximately 90% of its Malaysia sales are denominated in USD while c.65% of its cost of sales is also denominated in USD. Nevertheless, there is still a net exposure of c.25% per dollar of sales. In times of the USD strengthening against the RM, VSI will profit from the currency gain as a large portion of its coffee machines, battery packs and PCB sales are denominated in USD. Conversely, VSI will be negatively affected when the USD weakens. Downturn of the consumer electronics industry.Downturn of the consumer electronics industry.Downturn of the consumer electronics industry.Downturn of the consumer electronics industry. VSI, as an EMS provider, is primarily dependent on the global demand for consumer electronics products. In FY16, almost 100% of its revenue was generated from the consumer electronics industry. Hence, any unfavourable macro factors such as a global economic slowdown or another global financial crisis will negatively impact the demand for VSI’s products.
Company Background
VSI offers integrated services from product mould design to
tool fabrication; injection moulding; finishing process; PCB
assembly, sub-assembly and full assembly.
Leverage & Asset Turnover (x)
Capital Expenditure
ROE (%)
Forward PE Band (x)
PB Band (x)
Source: Company, AllianceDBS
1.1
1.2
1.2
1.3
1.3
1.4
1.4
1.5
1.5
0.00
0.10
0.20
0.30
0.40
0.50
2015A 2016A 2017F 2018F 2019F
Gross Debt to Equity (LHS) Asset Turnover (RHS)
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
90.0
100.0
2015A 2016A 2017F 2018F 2019F
Capital Expenditure (-)
RMm
0.0%
5.0%
10.0%
15.0%
20.0%
2015A 2016A 2017F 2018F 2019F
Avg: 6.8x
+1sd: 9.8x
+2sd: 12.8x
-1sd: 3.8x
-2sd: 0.9x0.7
2.7
4.7
6.7
8.7
10.7
12.7
14.7
Nov-12 Nov-13 Nov-14 Nov-15
(x)
Avg: 1.04x
+1sd: 1.6x
+2sd: 2.15x
-1sd: 0.49x
0.0
0.5
1.0
1.5
2.0
2.5
Nov-12 Nov-13 Nov-14 Nov-15
(x)
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Key Assumptions
FY FY FY FY JulJulJulJul 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF
Keurig growth (%) 53.7 (6.4) 28.8 0.0 0.0
Client D growth (%) 1.00 51.6 63.2 54.0 14.4
Zodiac growth (%) 207 19.2 8.00 8.00 8.00
Others growth (%) (3.6) 4.64 (4.2) 12.9 4.44
Segmental Breakdown
FY FY FY FY JulJulJulJul 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF Revenues (RMm)
Malaysia 1,328 1,489 1,981 2,555 2,797
China 526 565 603 716 759
Indonesia 80.8 119 119 119 119
Others 2.02 1.99 0.0 0.0 0.0
TotalTotalTotalTotal 1,9371,9371,9371,937 2,1762,1762,1762,176 2,7032,7032,7032,703 3,3903,3903,3903,390 3,6763,6763,6763,676
Segmental profit (RMm) Malaysia 170 163 160 189 202
China (7.6) (18.9) 18.1 21.5 22.8
Indonesia (3.6) 7.10 8.33 8.33 8.33
Others 0.0 (9.2) 3.60 5.42 5.55
TotalTotalTotalTotal 159159159159 142142142142 190190190190 224224224224 239239239239
Segmental profit Margins (%)
Malaysia 12.8 10.9 8.1 7.4 7.2
China (1.5) (3.3) 3.0 3.0 3.0
Indonesia (4.5) 6.0 7.0 7.0 7.0
TotalTotalTotalTotal 8.28.28.28.2 6.56.56.56.5 7.07.07.07.0 6.66.66.66.6 6.56.56.56.5
Income Statement (RMm)
FY FY FY FY JulJulJulJul 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF Revenue 1,937 2,176 2,703 3,390 3,676
Cost of Goods Sold (1,650) (1,839) (2,331) (2,952) (3,209)
Gross ProfitGross ProfitGross ProfitGross Profit 287287287287 337337337337 372372372372 438438438438 466466466466 Other Opng (Exp)/Inc (146) (163) (176) (207) (220)
Operating ProfitOperating ProfitOperating ProfitOperating Profit 142142142142 173173173173 196196196196 231231231231 246246246246 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0
Associates & JV Inc (1.6) 1.62 8.00 8.00 8.00
Net Interest (Exp)/Inc (14.9) (14.1) (13.9) (14.6) (15.4)
Exceptional Gain/(Loss) 34.6 (19.0) 0.0 0.0 0.0
PrePrePrePre----tax Profittax Profittax Profittax Profit 160160160160 142142142142 190190190190 224224224224 239239239239 Tax (34.2) (37.6) (45.5) (53.8) (57.3)
Minority Interest 7.27 13.7 13.7 13.7 13.7
Preference Dividend 0.0 0.0 0.0 0.0 0.0
Net ProfitNet ProfitNet ProfitNet Profit 133133133133 118118118118 158158158158 184184184184 195195195195
Net Profit before Except. 98.2 137 158 184 195
EBITDA 203 247 278 317 337
Growth
Revenue Gth (%) 12.9 12.3 24.2 25.4 8.4
EBITDA Gth (%) 70.9 21.6 12.7 13.9 6.2
Opg Profit Gth (%) 144.2 22.4 12.8 18.1 6.6
Net Profit Gth (Pre-ex) (%) 83.0 39.5 15.2 16.7 5.9
Margins & Ratio
Gross Margins (%) 14.8 15.5 13.8 12.9 12.7
Opg Profit Margin (%) 7.3 8.0 7.2 6.8 6.7
Net Profit Margin (%) 6.9 5.4 5.8 5.4 5.3
ROAE (%) 20.4 14.2 17.0 17.9 17.1
ROA (%) 7.8 6.1 7.7 8.1 7.8
ROCE (%) 6.5 8.2 9.2 10.1 10.0
Div Payout Ratio (%) 40.6 46.6 40.0 40.0 40.0
Net Interest Cover (x) 9.5 12.3 14.0 15.9 15.9
Source: Company, AllianceDBS
Growth will be driven by client D
To be profitable in China from FY17 onwards
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VS Industry
Quarterly / Interim Income Statement (RMm)
FY FY FY FY JulJulJulJul 4Q4Q4Q4Q2015201520152015 1Q1Q1Q1Q2016201620162016 2Q2Q2Q2Q2016201620162016 3Q3Q3Q3Q2016201620162016 4Q4Q4Q4Q2016201620162016 Revenue 507 612 501 508 554
Cost of Goods Sold (435) (506) (415) (437) (481)
Gross ProfitGross ProfitGross ProfitGross Profit 72.372.372.372.3 107107107107 85.985.985.985.9 70.770.770.770.7 73.373.373.373.3 Other Oper. (Exp)/Inc (11.8) (27.5) (46.2) (44.1) (64.4)
Operating ProfitOperating ProfitOperating ProfitOperating Profit 60.560.560.560.5 79.179.179.179.1 39.739.739.739.7 26.626.626.626.6 8.918.918.918.91 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0
Associates & JV Inc (1.0) (0.1) (0.3) (1.0) 2.99
Net Interest (Exp)/Inc (2.4) (4.1) (3.6) (3.3) (3.1)
Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0
PrePrePrePre----tax Profittax Profittax Profittax Profit 57.157.157.157.1 74.974.974.974.9 35.835.835.835.8 22.322.322.322.3 8.868.868.868.86 Tax (6.9) (16.2) (7.7) (4.6) (9.2)
Minority Interest 2.51 1.50 (0.6) 1.55 11.3
Net ProfitNet ProfitNet ProfitNet Profit 52.752.752.752.7 60.260.260.260.2 27.527.527.527.5 19.319.319.319.3 10.910.910.910.9 Net profit bef Except. 52.7 60.2 27.5 19.3 10.9
EBITDA 76.0 97.2 58.4 43.6 28.9
Growth
Revenue Gth (%) 20.6 20.8 (18.2) 1.3 9.1
EBITDA Gth (%) 41.2 27.9 (39.9) (25.4) (33.6)
Opg Profit Gth (%) 57.8 30.9 (49.8) (33.1) (66.5)
Net Profit Gth (Pre-ex) (%) 98.8 14.2 (54.3) (29.8) (43.3)
Margins
Gross Margins (%) 14.3 17.4 17.1 13.9 13.2
Opg Profit Margins (%) 11.9 12.9 7.9 5.2 1.6
Net Profit Margins (%) 10.4 9.8 5.5 3.8 2.0 Balance Sheet (RMm)
FY FY FY FY JulJulJulJul 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF Net Fixed Assets 664 681 634 636 641
Invts in Associates & JVs 8.10 9.63 17.6 25.6 33.6
Other LT Assets 164 184 219 219 219
Cash & ST Invts 244 218 226 235 273
Inventory 273 307 367 465 506
Debtors 501 583 673 845 916
Other Current Assets 2.17 2.04 2.04 2.04 2.04
Total AssetsTotal AssetsTotal AssetsTotal Assets 1,8561,8561,8561,856 1,9841,9841,9841,984 2,1402,1402,1402,140 2,4282,4282,4282,428 2,5902,5902,5902,590
ST Debt
289 323 300 350 350
Creditor 396 441 530 672 730
Other Current Liab 12.6 11.1 11.1 11.1 11.1
LT Debt 123 92.5 100 100 100
Other LT Liabilities 55.1 51.8 51.8 51.8 51.8
Shareholder’s Equity 777 880 975 1,085 1,202
Minority Interests 203 186 172 159 145
Total Cap. & Liab.Total Cap. & Liab.Total Cap. & Liab.Total Cap. & Liab. 1,8561,8561,8561,856 1,9841,9841,9841,984 2,1402,1402,1402,140 2,4282,4282,4282,428 2,5902,5902,5902,590
Non-Cash Wkg. Capital 367 440 501 629 682
Net Cash/(Debt) (168) (197) (174) (215) (177)
Debtors Turn (avg days) 89.3 90.9 84.9 81.7 87.4
Creditors Turn (avg days) 95.8 86.4 78.5 76.3 81.8
Inventory Turn (avg days) 62.4 59.8 54.5 52.8 56.6
Asset Turnover (x) 1.1 1.1 1.3 1.5 1.5
Current Ratio (x) 1.5 1.4 1.5 1.5 1.6
Quick Ratio (x) 1.1 1.0 1.1 1.0 1.1
Net Debt/Equity (X) 0.2 0.2 0.2 0.2 0.1
Net Debt/Equity ex MI (X) 0.2 0.2 0.2 0.2 0.1
Capex to Debt (%) 15.6 12.4 16.0 17.9 19.4
Z-Score (X) NA NA NA NA NA
Source: Company, AllianceDBS
Impairment loss of RM21.8m from China subsidiary
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VS Industry
Cash Flow Statement (RMm)
FY FY FY FY JulJulJulJul 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF Pre-Tax Profit 160 142 190 224 239
Dep. & Amort. 63.1 72.1 74.8 78.2 82.5
Tax Paid (34.2) (37.6) (45.5) (53.8) (57.3)
Assoc. & JV Inc/(loss) 1.57 (1.6) (8.0) (8.0) (8.0)
Chg in Wkg.Cap. (159) (96.3) (60.9) (128) (53.2)
Other Operating CF 25.0 54.4 0.0 0.0 0.0
Net Operating CFNet Operating CFNet Operating CFNet Operating CF 56.556.556.556.5 133133133133 150150150150 113113113113 203203203203 Capital Exp.(net) (64.3) (51.6) (64.1) (80.4) (87.2)
Other Invts.(net) 0.0 0.0 0.0 0.0 0.0
Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0
Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0
Other Investing CF (44.7) (60.0) 0.0 0.0 0.0
Net Investing CFNet Investing CFNet Investing CFNet Investing CF (109)(109)(109)(109) (112)(112)(112)(112) (64.1)(64.1)(64.1)(64.1) (80.4)(80.4)(80.4)(80.4) (87.2)(87.2)(87.2)(87.2) Div Paid (53.9) (55.0) (63.1) (73.7) (78.1)
Chg in Gross Debt (6.3) (24.2) (15.0) 50.0 0.0
Capital Issues 118 15.7 0.0 0.0 0.0
Other Financing CF 70.4 (6.8) 0.0 0.0 0.0
Net Financing CFNet Financing CFNet Financing CFNet Financing CF 128128128128 (70.3)(70.3)(70.3)(70.3) (78.2)(78.2)(78.2)(78.2) (23.7)(23.7)(23.7)(23.7) (78.1)(78.1)(78.1)(78.1)
Currency Adjustments 40.6 24.3 0.0 0.0 0.0
Chg in Cash 117 (24.9) 7.77 8.98 37.5
Opg CFPS (sen) 20.9 19.7 17.3 19.7 21.0
Free CFPS (sen) (0.8) 6.98 7.04 2.68 9.48
Source: Company, AllianceDBS
Target Price & Ratings History
Source: AllianceDBS
Analyst: Inani ROZIDIN
S.No.S.No.S.No.S.No.Date of Date of Date of Date of
ReportReportReportReport
Closing Closing Closing Closing
PricePricePricePrice
12-mth 12-mth 12-mth 12-mth
Target Target Target Target
PricePricePricePrice
Rat ing Rat ing Rat ing Rat ing
1: 18 Apr 16 1.22 1.60 NOT RATED
2: 04 Nov 16 1.38 1.70 BUY
Note Note Note Note : Share price and Target price are adjusted for corporate actions.
1
2
1.10
1.20
1.30
1.40
1.50
1.60
1.70
Nov-15 Mar-16 Jul-16
RMRMRMRM
ASIAN INSIGHTS VICKERS SECURITIES ed: CK / sa:BC, PY
BUYBUYBUYBUY Last Traded PriceLast Traded PriceLast Traded PriceLast Traded Price (((( 3 Nov 20163 Nov 20163 Nov 20163 Nov 2016)))): : : : RM1.32 (KLCIKLCIKLCIKLCI : : : : 1,648.08) Price Target Price Target Price Target Price Target 12121212----mthmthmthmth:::: RM1.88 (42% upside) (Prev RM1.88)
Potential Catalyst: Potential Catalyst: Potential Catalyst: Potential Catalyst: New contracts; higher utilisation at Senai, Johor plant
Where we differ:Where we differ:Where we differ:Where we differ: Largely in-line with consensus Analyst Inani ROZIDIN +603 2604 3905 [email protected]
What’s New • 2QFY17 earnings to be resilient; rise in costs being
mitigated by inclusion of high value contract
• Single customer risk not an alarming; secured
contracts will run for another 4-5 years
• High-growth prospects on ample spare capacity
and potential further high value contract wins
• Reiterate BUY with higher TP of RM1.88
Price Relative
Forecasts and Valuation FY FY FY FY MarMarMarMar ((((RMRMRMRM m) m) m) m) 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF
Revenue 1,051 1,783 2,354 2,781 EBITDA 125 201 270 328 Pre-tax Profit 105 167 226 279 Net Profit 82.1 129 174 211 Net Pft (Pre Ex.) 82.1 129 174 211 Net Pft Gth (Pre-ex) (%) 94.0 57.5 34.6 21.3 EPS (sen) 7.12 10.3 13.9 16.9 EPS Pre Ex. (sen) 7.12 10.3 13.9 16.9 EPS Gth Pre Ex (%) 51 45 35 21 Diluted EPS (sen) 6.55 10.3 13.9 16.9 Net DPS (sen) 3.56 5.16 6.95 8.43 BV Per Share (sen) 29.4 32.2 39.2 47.6 PE (X) 18.5 12.8 9.5 7.8 PE Pre Ex. (X) 18.5 12.8 9.5 7.8 P/Cash Flow (X) nm 12.9 7.6 7.2 EV/EBITDA (X) 12.0 7.9 5.5 4.2 Net Div Yield (%) 2.7 3.9 5.3 6.4 P/Book Value (X) 4.5 4.1 3.4 2.8 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 33.4 34.8 38.9 38.9 Earnings Rev (%):Earnings Rev (%):Earnings Rev (%):Earnings Rev (%): 0 0 0 Consensus EPS Consensus EPS Consensus EPS Consensus EPS (sensensensen):::: 10.3 13.4 15.8 Other Broker Recs:Other Broker Recs:Other Broker Recs:Other Broker Recs: B: 5 S: 0 H: 1
Source of all data on this page: Company, AllianceDBS, Bloomberg Finance L.P
FY17 earnings still intact Expect 2Q17 results to still be affected by cost issues.Expect 2Q17 results to still be affected by cost issues.Expect 2Q17 results to still be affected by cost issues.Expect 2Q17 results to still be affected by cost issues. We expect earnings for 2QFY17 to be similar to 1QFY17 due to the labour issues that prevailed during the quarter and provisions for additional costs from production shift of the new hairdryer product. However, we understand that in the past any provisions made for unexpected product start-up costs are claimable from the client in due course. Taking these into account, we see improved visibility for the group’s earnings from 3QFY17 onwards, arising from; 1) the accretion of the recent hairdryer contract from its key customer, client D, 2) supported by improved operating margins from the high value contract and 3) resolution of the labour issues in Sept 2016. In our view, we believe there is further upside to its share price given the high-growth momentum from its sizeable contract wins and prospective expansion in margins.
SingleSingleSingleSingle----customer concentration riskcustomer concentration riskcustomer concentration riskcustomer concentration risk not a pressing issuenot a pressing issuenot a pressing issuenot a pressing issue. In FY16, c.55% of revenue is derived from client D. Looking forward, we forecast this key customer to contribute an even higher portion, c.72% in FY17F. In the event that its key customer reduces or terminates contracts with SKPRES, the latter’s earnings could be materially and adversely affected. However, we are not overtly alarmed by this risk, as the contract wins are on a mid-term basis. SKPRES currently has two significant contracts from client D worth c.RM1.1bn p.a. which will run for another 4-5 years; contracts to manufacture cordless vacuum cleaners and hairdryers. Given its longstanding relationship with client D, we are positive about SKPRES’ long-term prospects as it has been able to continuously secure manufacturing contracts for client D’s latest flagship products.
New celebrated product. New celebrated product. New celebrated product. New celebrated product. The recent product launch of the group’s key customer has the potential to be the next best-selling product, following glowing reviews from the Japan and UK launches. The recent US launch of the product (which is carried by large retailers) in Sept 2016 has been met with positive reviews. We are positive on the developments as SKPRES is currently the sole manufacturer for this product.
Valuation: We maintain our BUY call on SKPRES with a higher TP of RM1.88. Our revised TP is pegged to FY18 PE of 13.5x, which is +1SD of its 5-year average forward PE. We previously peg it to the industry average PE of 12x but believes it deserves a premium valuation given much stronger earnings growth than peers especially post-resolution of its recent labour issue. Key Risks to Our View: Slower Slower Slower Slower than expected than expected than expected than expected margins margins margins margins recoveryrecoveryrecoveryrecovery. . . . SKPRES’s net margin dropped to 5.7% in 1QFY17 (7.8% in FY16) due to operation shifts and labour issues. While resolved, it will take time for SKPRES to gradually achieve optimal efficiency levels. Thus, we conservatively forecasts FY17-19 net margin at 7.3%-7.6%. At A Glance Issued Capital (m shrs) 1,179 Mkt. Cap (RMm/US$m) 1,556 / 371 Major Shareholders (%) Dato’ Gan Kim Huat 51.7 EPF 6.0 Free Float (%) 42.4 3m Avg. Daily Val (US$m) 0.77 ICB IndustryICB IndustryICB IndustryICB Industry : Industrials / Electronic & Electrical Equipment
DBS Group Research . Equity
4 Nov 2016
Malaysia Company Guide
SKP Resources Bhd Version 4 | Bloomberg: SKP MK | Reuters: SKPR.KL Refer to important disclosures at the end of this report
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Company Guide
SKP Resources Bhd
WHAT’S NEW
FY17 earnings intact
• We expect earnings for 2QFY17 to be similar to 1QFY17
due to the labour issues that prevailed during the quarter
and provisions for additional costs from production shift
of the new hairdryer product.
• However, we understand that in the past any provisions
made for unexpected product start-up costs are
claimable from the client in due course.
• Taking these into account, we see improved visibility for
the group’s earnings from 3QFY17 onwards, arising
from; 1) the accretion of the recent hairdryer contract
from its key customer, client D, 2) supported by
improved operating margins from the high value
contract and 3) resolution of the labour issues in Sept
2016.
• To recap, SKPRES has clinched a four-year contract worth
RM2bn (RM500m p.a.) for manufacturing a newly
launched product from its key customer. However,
SKPRES would be foregoing the previous RM400m p.a.
contract, for the manufacturing of a specific model of
cordless vacuum cleaner. The move is to optimise and
shift the existing limited labour resources to work on the
higher valued product, following the government’s
decision to freeze the hiring of foreign labour in Feb
2016. To ensure continued production, the group has
resorted to hiring significantly higher-cost contract
workers in the quarter.
• The contract awarded in Sep 2015 (contract value of
RM600m/p.a. over five years) for the manufacturing of
another model of cordless vacuum cleaner remains in
production.
• The labour issue has been resolved with 1,000 new
workers coming in batches from Sept 2016. Currently,
almost 400 new foreign workers have arrived, with an
agency providing the hostel management services. These
new foreign workers will be given on-the-job training.
Once the new foreign workers are familiarised with their
workspace, the higher-cost contract workers will be
discontinued. To-date, half of the 600 higher-cost
contract workers have been discontinued, with the
remaining half to be let go by end of Oct 2016.
• With the labour issues being resolved recently, we see
more certainty for the group’s mid-term prospects arising
from the accretion of sizeable contracts.
OUTLOOK
New celebrated product. New celebrated product. New celebrated product. New celebrated product. The recent product launch of the
group’s key customer has the potential to be the next best-
selling product, following glowing reviews from the Japan and
UK launches. The recent US launch of the product (which is
carried by large retailers) in Sept 2016 has been met with
positive reviews. We are positive on the developments as
SKPRES is currently the sole manufacturer for this product.
Vertical integrated manufacturer.Vertical integrated manufacturer.Vertical integrated manufacturer.Vertical integrated manufacturer. SKPRES intends to go into the
production of PCBA in the mid-term. This will complement its
present tooling, plastic moulding and full-assembly operations.
There will be a cost-saving opportunity as SKPRES will no longer
need to purchase PCBA for the assembly of vacuum cleaners.
Expanding clientele base.Expanding clientele base.Expanding clientele base.Expanding clientele base. Growth is also supported by SKPRES’
initiative to expand its clientele base and management has
targeted 8% annual growth for non-key customer contracts.
Among the areas management is looking into is the plastic
moulding and F&B packaging segment, with plans to increase
supply to existing customers such as Sony, Panasonic, Unilever,
Nestle, Suntory and Shell.
Well positioned for further contract awards.Well positioned for further contract awards.Well positioned for further contract awards.Well positioned for further contract awards. Only c.25% of the
capacity at SKPRES’ new plant in Senai, Johor has been utilised.
With ample spare capacity, we believe the group is well
prepared to take on more contracts. We forecast the utilisation
rate to increase steadily with the addition of two assembly lines
p.a. to cater for the expected increase in order volume.
Exhibit 1: Revenue and net profit trends
Source: Company, AllianceDBS
413 619
1,051
1,783
29
42
82
129
-
20
40
60
80
100
120
140
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
FY14 FY15 FY16 FY17F
RM'mRM'm
Revenue (LHS) Net Profit (RHS)
Rising trend
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Company Guide
SKP Resources Bhd
CRITICAL DATA POINTS TO WATCH
Earnings Drivers:
Longstanding relationship with key customer.Longstanding relationship with key customer.Longstanding relationship with key customer.Longstanding relationship with key customer. SKPRES has
proven to be a capable and reliable world-class manufacturer
for its key customer. SKPRES is one of its key customer’s four
main contract manufacturers. The other three contract
manufacturers are Flextronics (US), Meiban Group (Singapore)
and ATA Industrial (Singapore). Its key customer is also the
group’s main client. The bulk of SKPRES’ business (c.55% in
FY16) comes from key customer-related contracts.
Benefiting from key customer’s expansion plans.Benefiting from key customer’s expansion plans.Benefiting from key customer’s expansion plans.Benefiting from key customer’s expansion plans. Given the
group’s enduring partnership with its key customer, we are
positive of SKPRES’ long-term prospects as we expect it to gain
further contracts from its key customer’s aggressive expansion
plan. SKPRES has secured substantial contracts from its key
customer for the manufacturing of cordless vacuum cleaners
and hairdryers totalling RM1.1bn p.a. for the next four years.
After imputing the new contract wins into our model, revenue
contribution of its key customer-related contracts is forecasted
at c.72% in FY17F. We foresee more contract flows for SKPRES
in the future as this key customer progresses along its expansion
plan.
Expanding clientele base.Expanding clientele base.Expanding clientele base.Expanding clientele base. Growth is also supported by SKPRES’
initiative to expand its clientele base and management has
targeted 8% annual growth for non-key customer contracts.
Among the areas management is looking into is the F&B
packaging segment, with plans to supply more plastic
packaging to existing customers such as Unilever, Nestle,
Suntory and Shell. The recent acquisition of Tecnic has not only
increased SKPRES’ production capacity but also enabled the
group to leverage on Tecnic’s existing clientele to grow its
customer base.
Well positioned for more contract awards.Well positioned for more contract awards.Well positioned for more contract awards.Well positioned for more contract awards. Taking into account
the projects at hand, only c.25% of the floor capacity in
SKPRES’ new plant in Senai, Johor has been utilised.
Furthermore, the new plant has a potential capacity for 20
assembly lines. The remaining c.75% of floor capacity is
currently unutilised. With ample spare capacity, we believe the
group can take on further contracts, both from key customer-
and non-key customer-related parties. We forecast the
utilisation rate to increase steadily with the addition of two
assembly lines p.a. to cater for the expected increase in order
volume.
Key customer-related weightage (%)
Key customer-related growth (%)
Other customer related weightage (%)
Other customer-related growth (%)
New plant utilisation (%)
Source: Company, AllianceDBS
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Company Guide
SKP Resources Bhd
Balance Sheet:
Strong balance sheet in net cash position.Strong balance sheet in net cash position.Strong balance sheet in net cash position.Strong balance sheet in net cash position. Despite its rapid
expansion in the past few years, SKPRES has been able to
maintain a net cash position due to its strong earnings and
healthy cashflows. In addition, SKPRES has minimal debt and
prior to FY15, the group had no debt. The group took up a
long-term debt of c.RM24m to partly finance the construction
of a new plant in Senai, Johor with an estimated capex of
RM40m and additional short-term debt of c.RM25m to finance
the capex of RM20m for equipment and machineries for the
new plant and other working capital purposes. However, we
expect total capex to normalise to RM25m p.a. from FY17F
onwards mainly for maintenance works. We estimate SKPRES to
be in net cash position in FY17F-FY19F.
Share Price Drivers:
New contract awards.New contract awards.New contract awards.New contract awards. SKPRES’s price movement is highly
sensitive to new contract announcements, as seen in the past
when the share price rose by c.40% from the date of the
announcement of the first contract from its key customer in
May 2015.
Margin expansion.Margin expansion.Margin expansion.Margin expansion. Margins fell in FY14-FY15 mainly due to the
shift in customer mix, as SKPRES undertook more of its key
customer-related projects which incurred high costs for
purchasing specific components to support its key customer’s
orders. Nevertheless, the shortfall in margins has been
compensated by the increase in contract values. We note that
any slight improvement in margins will considerably improve
SKPRES’s earnings as the contract values are significant.
Key Risks:
Slower Slower Slower Slower than expected than expected than expected than expected margins margins margins margins recoveryrecoveryrecoveryrecovery.... SKPRES’s FY16 net
margin stood at 7.8% (+1bps y-o-y). The improvements in
margins are due to higher value contracts and increased
production efficiency. However, its net margin dropped to
5.7% in 1Q17 due to operation shifts and labour issues. It will
take time for SKPRES to gradually achieve optimal efficiency
levels. Thus, we conservatively forecasts net margin to be at
7.3%/7.4%/7.6% for FY17/FY18/FY19.
Relatively high customer concentration risk.Relatively high customer concentration risk.Relatively high customer concentration risk.Relatively high customer concentration risk. In FY16, c.55% of
revenue is derived from its key customer. Looking forward, we
forecast its key customer to contribute an even higher portion,
c.72% in FY17F. In the event that its key customer reduces or
terminates contracts with SKPRES, the latter’s earnings could
be materially and adversely affected. However, we are not
overtly alarmed by this risk, as the contract wins are on a mid-
term basis.
Company Background
SKPRES is principally involved in manufacturing plastic
components, precision mould-making, advance secondary
processes, sub-assembly of electronics equipment and full turn-
key contract manufacturing.
Leverage & Asset Turnover (x)
Capital Expenditure
ROE (%)
Forward PE Band (x)
PB Band (x)
Source: Company, AllianceDBS
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Company Guide
SKP Resources Bhd
Key Assumptions
FY FY FY FY MarMarMarMar 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF
Key customer-related weightage (%) 55.0 55.2 71.5 76.7 78.7
Key customer-related growth (%) 50.0 70.5 120 41.6 21.2
Other customer related weightage (%) 45.0 44.8 28.5 23.3 21.3
Other customer-related growth (%) 50.0 68.8 8.00 8.00 8.00
New plant utilisation (%) 0.0 25.0 30.0 40.0 50.0 Income Statement (RMm)
FY FY FY FY MarMarMarMar 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF Revenue 619 1,051 1,783 2,354 2,781
Cost of Goods Sold (532) (902) (1,533) (2,025) (2,392)
Gross ProfitGross ProfitGross ProfitGross Profit 87.187.187.187.1 149149149149 250250250250 330330330330 389389389389 Other Opng (Exp)/Inc (32.1) (42.6) (80.9) (102) (113)
Operating ProfitOperating ProfitOperating ProfitOperating Profit 55.055.055.055.0 106106106106 169169169169 227227227227 277277277277 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0
Associates & JV Inc 0.0 0.0 0.0 0.0 0.0
Net Interest (Exp)/Inc 0.83 (1.6) (1.9) (1.1) 1.07
Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0
PrePrePrePre----tax Profittax Profittax Profittax Profit 55.855.855.855.8 105105105105 167167167167 226226226226 279279279279 Tax (13.5) (22.6) (37.6) (52.0) (66.7)
Minority Interest 0.0 0.0 0.0 0.0 0.0
Preference Dividend 0.0 0.0 0.0 0.0 0.0
Net ProfitNet ProfitNet ProfitNet Profit 42.342.342.342.3 82.182.182.182.1 129129129129 174174174174 211211211211 Net Profit before Except. 42.3 82.1 129 174 211
EBITDA 64.6 125 201 270 328
Growth
Revenue Gth (%) 50.0 69.7 69.6 32.0 18.1
EBITDA Gth (%) 37.8 94.1 60.5 34.2 21.6
Opg Profit Gth (%) 42.9 93.2 58.9 34.6 21.8
Net Profit Gth (Pre-ex) (%) 44.3 94.0 57.5 34.6 21.3
Margins & Ratio
Gross Margins (%) 14.1 14.2 14.0 14.0 14.0
Opg Profit Margin (%) 8.9 10.1 9.5 9.6 9.9
Net Profit Margin (%) 6.8 7.8 7.3 7.4 7.6
ROAE (%) 22.7 33.4 34.8 38.9 38.9
ROA (%) 9.8 14.3 18.6 18.6 18.2
ROCE (%) 21.9 28.0 28.9 33.4 34.7
Div Payout Ratio (%) 50.2 50.0 50.0 50.0 50.0
Net Interest Cover (x) NM 68.0 89.8 208.3 NM
Source: Company, AllianceDBS
ASIAN INSIGHTS VICKERS SECURITIES
Page 112
Company Guide
SKP Resources Bhd
Quarterly / Interim Income Statement (RMm)
FY FY FY FY MarMarMarMar 1Q1Q1Q1Q2016201620162016 2Q2Q2Q2Q2016201620162016 3Q3Q3Q3Q2016201620162016 4Q4Q4Q4Q2016201620162016 1Q1Q1Q1Q2017201720172017 Revenue 243 261 315 232 321
Cost of Goods Sold (209) (225) (271) (197) (279)
Gross ProfitGross ProfitGross ProfitGross Profit 33.933.933.933.9 36.336.336.336.3 43.843.843.843.8 34.834.834.834.8 41.141.141.141.1 Other Oper. (Exp)/Inc (9.9) (11.7) (11.5) (9.5) (16.8)
Operating ProfitOperating ProfitOperating ProfitOperating Profit 24.124.124.124.1 24.624.624.624.6 32.332.332.332.3 25.325.325.325.3 24.324.324.324.3 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0
Associates & JV Inc 0.0 0.0 0.0 0.0 0.0
Net Interest (Exp)/Inc (0.5) (0.4) (0.5) (0.2) (0.3)
Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0
PrePrePrePre----tax Profittax Profittax Profittax Profit 23.523.523.523.5 24.224.224.224.2 31.831.831.831.8 25.125.125.125.1 24.024.024.024.0 Tax (5.6) (5.8) (7.6) (3.5) (5.8)
Minority Interest 0.0 0.0 0.0 0.0 0.0
Net ProfitNet ProfitNet ProfitNet Profit 17.917.917.917.9 18.418.418.418.4 24.224.224.224.2 21.621.621.621.6 18.318.318.318.3 Net profit bef Except. 17.9 18.4 24.2 21.6 18.3
EBITDA 28.7 29.3 37.1 30.3 29.4
Growth
Revenue Gth (%) 25.0 7.5 20.5 (26.3) 38.2
EBITDA Gth (%) 56.6 2.0 26.6 (18.2) (3.1)
Opg Profit Gth (%) 52.2 2.3 31.1 (21.5) (4.1)
Net Profit Gth (Pre-ex) (%) 58.3 3.0 31.0 (10.5) (15.5)
Margins
Gross Margins (%) 14.0 13.9 13.9 15.0 12.8
Opg Profit Margins (%) 9.9 9.4 10.2 10.9 7.6
Net Profit Margins (%) 7.4 7.1 7.7 9.3 5.7 Balance Sheet (RMm)
FY FY FY FY MarMarMarMar 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF Net Fixed Assets 179 193 186 168 143
Invts in Associates & JVs 0.0 0.0 0.0 0.0 0.0
Other LT Assets 3.23 1.82 1.57 1.33 1.08
Cash & ST Invts 83.4 73.1 112 218 318
Inventory 74.9 89.8 140 185 218
Debtors 219 220 366 484 572
Other Current Assets 6.00 4.37 4.37 4.37 4.37
Total AssetsTotal AssetsTotal AssetsTotal Assets 565565565565 582582582582 810810810810 1,0601,0601,0601,060 1,2561,2561,2561,256
ST Debt
0.0 38.2 38.2 38.2 38.2
Creditor 398 173 336 499 590
Other Current Liab 0.45 0.0 0.0 0.0 0.0
LT Debt 0.0 15.3 15.3 15.3 15.3
Other LT Liabilities 14.6 16.7 16.7 16.7 16.7
Shareholder’s Equity 152 339 404 491 596
Minority Interests 0.0 0.0 0.0 0.0 0.0
Total Cap. & Liab.Total Cap. & Liab.Total Cap. & Liab.Total Cap. & Liab. 565565565565 582582582582 810810810810 1,0601,0601,0601,060 1,2561,2561,2561,256
Non-Cash Wkg. Capital (98.6) 141 175 174 204
Net Cash/(Debt) 83.4 19.6 58.3 164 265
Debtors Turn (avg days) 92.9 76.2 60.0 65.9 69.2
Creditors Turn (avg days) 165.0 117.9 61.9 76.9 84.9
Inventory Turn (avg days) 35.1 34.0 27.9 29.9 31.4
Asset Turnover (x) 1.4 1.8 2.6 2.5 2.4
Current Ratio (x) 1.0 1.8 1.7 1.7 1.8
Quick Ratio (x) 0.8 1.4 1.3 1.3 1.4
Net Debt/Equity (X) CASH CASH CASH CASH CASH
Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH
Capex to Debt (%) N/A 62.9 46.7 46.7 46.7
Z-Score (X) 3.6 7.1 6.2 5.6 5.4
Source: Company, AllianceDBS
ASIAN INSIGHTS VICKERS SECURITIES
Page 113
Company Guide
SKP Resources Bhd
Cash Flow Statement (RMm)
FY FY FY FY MarMarMarMar 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF Pre-Tax Profit 55.8 105 167 226 278
Dep. & Amort. 9.61 19.1 32.5 42.9 50.6
Tax Paid (13.5) (22.6) (37.6) (52.0) (66.7)
Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0
Chg in Wkg.Cap. (29.2) (138) (33.4) 0.93 (30.7)
Other Operating CF 0.15 (0.2) 0.0 0.0 0.0
Net Operating CFNet Operating CFNet Operating CFNet Operating CF 22.822.822.822.8 (37.4)(37.4)(37.4)(37.4) 128128128128 218218218218 231231231231 Capital Exp.(net) (40.7) (33.6) (25.0) (25.0) (25.0)
Other Invts.(net) 71.4 (19.4) 0.0 0.0 0.0
Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0
Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0
Other Investing CF 16.2 1.25 0.0 0.0 0.0
Net Investing CFNet Investing CFNet Investing CFNet Investing CF 47.047.047.047.0 (51.7)(51.7)(51.7)(51.7) (25.0)(25.0)(25.0)(25.0) (25.0)(25.0)(25.0)(25.0) (25.0)(25.0)(25.0)(25.0) Div Paid (21.2) (41.0) (64.7) (87.0) (106)
Chg in Gross Debt 0.0 53.5 0.0 0.0 0.0
Capital Issues 0.0 18.3 0.0 0.0 0.0
Other Financing CF 5.93 27.4 0.0 0.0 0.0
Net Financing CFNet Financing CFNet Financing CFNet Financing CF (15.3)(15.3)(15.3)(15.3) 58.258.258.258.2 (64.7)(64.7)(64.7)(64.7) (87.0)(87.0)(87.0)(87.0) (106)(106)(106)(106)
Currency Adjustments 0.26 (0.1) 0.0 0.0 0.0
Chg in Cash 54.8 (31.1) 38.7 106 100
Opg CFPS (sen) 5.79 8.76 12.9 17.3 20.9
Free CFPS (sen) (2.0) (6.2) 8.25 15.4 16.4
Source: Company, AllianceDBS
Target Price & Ratings History
Source: AllianceDBS
Analyst: Inani ROZIDIN
Market Focus
2017 Outlook
Page 114
AllianceDBS recommendations are based an Absolute Total Return* Rating system, defined as follows:
STRONG BUYSTRONG BUYSTRONG BUYSTRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)
BUY BUY BUY BUY (>15% total return over the next 12 months for small caps, >10% for large caps)
HOLDHOLDHOLDHOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)
FULLY VALUEDFULLY VALUEDFULLY VALUEDFULLY VALUED (negative total return i.e. > -10% over the next 12 months)
SELL SELL SELL SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)
Share price appreciation + dividends
Completed Date: 14 Oct 2016 10:17:46 Dissemination Date: 7 Nov 2016 15:43:25
GENERAL DISGENERAL DISGENERAL DISGENERAL DISCLOSURE/DISCLAIMER CLOSURE/DISCLAIMER CLOSURE/DISCLAIMER CLOSURE/DISCLAIMER
This report is prepared by This report is prepared by This report is prepared by This report is prepared by AllianceDBS Research Sdn BhdAllianceDBS Research Sdn BhdAllianceDBS Research Sdn BhdAllianceDBS Research Sdn Bhd. . . . This report is solely intended for the clients of DBS Bank Ltd, DBS Vickers Securities
(Singapore) Pte 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.
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”)) do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to
change without notice. This document is prepared for general circulation. Any recommendation contained in this document does not have regard
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The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed and it
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Market Focus
2017 Outlook
Page 115
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The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the
companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her
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COMPANYCOMPANYCOMPANYCOMPANY----SPECIFIC / REGULATORY DISCLOSURES SPECIFIC / REGULATORY DISCLOSURES SPECIFIC / REGULATORY DISCLOSURES SPECIFIC / REGULATORY DISCLOSURES
1. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates have a proprietary position in
StarHub, M1 recommended in this report as of 30 Sep 2016.
2. DBS Bank Ltd does not market make in equity securities of the issuer(s) or company(ies) mentioned in this Research Report.
Compensation for investment banking services: Compensation for investment banking services: Compensation for investment banking services: Compensation for investment banking services:
3. DBS Bank Ltd, DBSVS, their subsidiaries and/or other affiliates of DBSVUSA have received compensation, within the past 12 months for
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Directorship/trustee interests:Directorship/trustee interests:Directorship/trustee interests:Directorship/trustee interests:
6. Peter Seah Lim Huat, Chairman of DBS Group Holdings, is a Director of Starhub as of 3 Aug 2016. Nihal Vijaya Devadas Kaviratne CBE, a
member of DBS Group Holdings Board of Directors, is a Director of Starhub as of 3 Aug 2016.
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Market Focus
2017 Outlook
Page 116
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