20160106 2016 Market Outlook & Strategy 201… · 6 January 2016 2016 Market Outlook & Strategy JF APEX SECURITIES Market Outlook & Investment Strategy 2016 Current market valuation

6 January 2016 2016 Market Outlook & Strategy JF APEX SECUJF APEX SECUJF APEX SECUJF APEX SECURITIESRITIESRITIESRITIES

JF Apex Securities Berhad Newsletter 6 January 2016 2016 Market Outlook & Strategy Y.E. 2016 KLCI Target: 1770 Sailing In Rough Water

6 January 2016 2016 Market Outlook & Strategy JF APEX SECURITIESJF APEX SECURITIESJF APEX SECURITIESJF APEX SECURITIES

Market Review 2015

� Volatile year. The FBM KLCI was generally in a sluggish mode for most of the time in 2015, exhibiting sideway trading pattern in a directionless trend. The local benchmark index had a strong start during 1Q15, hitting the year-high of 1862 points before seeing a sharp market correction which dragged down the index to as low as 1532 points in mid-2015. This was trigged by massive foreign selling pursuant to the re-emerged crude oil slump, depreciation of Ringgit, 1MDB fiasco, political instability, as well as worries on Fitch downgrade of sovereign rating and Greek debt default which did not materialise.

Figure 1: The FBM KLCI Performance for 2015

Source: Bloomberg

� Intense foreign exit from local bourse. As of 11 Dec, the net outflow of foreign fund from Malaysian equity market stood at RM19.3b, far exceeding the net outflow of RM4.1b in 2014. The exodus of foreign funds was vigorous in May-Sept, with a consecutive twenty-week selldown on the local bourse, was triggered by renewed concerns on US rate hike and slump in commodity prices. Foreign investors chose to reallocate their funds to developed markets namely EU and Japan which benefited from loosening monetary policies, and US Treasury which was relatively sheltered from market volatility.

Figure 2: Net Inflow/Outflow of Foreign Funds to/from Local Equity Market for 2015

(1,500.0)

(1,000.0)

(500.0)

-

500.0

1,000.0

JAN 2

JAN 1

6

JAN 3

0

FEB 1

3

FEB 2

7

MAR 1

3

MAR 2

7

APR 1

0

APR 2

4

MAY 8

MAY 2

2

JUN 5

JUN 1

9

JULY 3

JULY 1

7

JULY 3

1

AUG 1

4

AUG 2

8

SEP 1

1

SEP 2

5

OCT 9

OCT 2

3

NO

V 6

NOV 2

0

DEC 4

Source: Bursa Malaysia, JF APEX


� Small cap. counters outperformed large and medium cap. stocks. Following the recent market selldown, the FBM Small Cap index still managed to chalk up gains of +4.9% as of 18 Dec as compared to FBM KLCI’s –6.7% and FBM Mid 70’s –1.7%. We believe the large and mid cap. stocks, which are having relatively higher foreign shareholdings, were more prone to the selling pressure by foreign investors coupled with lacklustre corporate earnings.

Figure 3: Returns of FBM KLCI vs FBM Small Cap vs FBM Mid 70 for 2015

Source: Bloomberg, JF APEX

� Most sub-sector indexes registered negative returns except Technology, Consumer and Industrial. As of 18 Dec, the Technology sector (+52.2%) continued its strong performance from last year mainly attributable to continuous strengthening of USD and better semiconductor sales whilst Consumer (+4.4%) and Industrial (+0.5%) sectors performed positively thanks to low commodity prices and surging export values amid softening local demand as affected by GST implementation. Surprisingly, with a slew of infrastructure projects lining up for roll out, the Construction sector chalked up negative return of 2.9% despite outperforming the market. Meanwhile, the Finance (-10.6%) and Property (-8.7%) were the worst performers having underperformed against the FBM KLCI (-6.7%) as investors shunned away those stocks due to challenging economic outlook, rising loan loss provisioning, compression of net interest margin and sluggish residential sales.

Figure 4: FBM KLCI’s Sectoral Performance for 2015

-10.6%-8.7%-6.7%-6.0%-3.5%-2.9%

0.5%4.4%

52.2%

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Consumer

Industrial

Construction

Service/Trading

Plantation

KLCI Index

PropertyFinance


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85

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95

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115

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30-S

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31-O

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KLCI Index FBM Small Cap Index Mid 70


� The FBM KLCI’s performance stayed resilient among regional peers despite achieving negative return. As of 18 Dec, the majority of Asian bourses recorded negative returns, ranging from mid-single digits to mid-teens, due to exodus of foreign funds from emerging markets to capitalise on the US’ interest rate lift-off. Amongst all, HK, Taiwan, India, and other major Asean bourses in the likes of Thailand, Philippines, Indonesia bourses chalked up unimpressive returns with the exception of Japan, China and Korea which registered positive returns. Performance of the local bourse, -6.7%, ranked at the mid tier among the major Asian bourses thanks to local buying support.

Figure 5: Return of FBM KLCI against Regional Bourses and Developed Markets for 2015

-15.2%-14.5%-14.0%-11.3%

-7.8%-7.1%-6.9%-6.7%-5.0%-3.9%-2.6%

3.1%3.6%8.8%10.6%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

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10

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Market Outlook & Investment Strategy 2016

� Current market valuation is fairly priced. The FBM KLCI is currently trading at 15x 2016 consensus PE, which is close to its historical mean PE of 15.2x. At this junction, we deem the current valuation as fully valued in the absence of any positive catalyst whilst immediate market outlook remains bleak, which is mired by prevailing weakness in crude oil prices and Ringgit.

� A trapped market for 1H16. We opine that market would be trading sideways with negative bias for most of 1H16 in the absence of any positive catalyst. Technical indicators are mixed signalling market is still searching for clue of direction. This was reflected by the swift rebound from 1500 level in Aug 15 to 1700 level in Oct 15 but failed to test the 200-day moving average at 1720 points. Hence, we believe the market will remain ‘choppy’ for a while before breaching 200-day moving average to find its firm footing. Thus, the performance of the large cap counters, also the main constituent stocks of the FBM KLCI would remain lacklustre.

� Expecting better 2H16. Our expectation on better 2H16 is premised on stabilisation of oil prices, Ringgit and recovery in corporate earnings towards 2017 as market traditionally moves 3-6 months ahead of the fundamentals. Also, we believe the impacts of GST on domestic consumption, 1MDB woes, foreign selling pressure would subside coupled with crystallisation of TPPA moving into 2H16, which could prompt investors’ interest back into the local bourse.

� Pricey valuation and unattractive dividend yield against regional peers. The local bourse is now trading at 15.0x 2016 PE, the second highest PE after the Philippines Composite Index and on par with Jakarta Composite Index. This indicates that the FBM KLCI is trading at 17% PER premium to other major Asian indices. Furthermore, the yield of the local market looks unappealing for long term investors, rendering a mere 3.5% for 2016, which is lower than Singaporean, Taiwanese, HK and Thai bourses.

Figure 6: Regional P/E & Yield Comparisons

PER (X) Dividend yield (%)

2015 2016 2017 2015 2016 2017

FBMKLCI Index 16.3 15.0 13.9 3.2 3.5 3.7

HSI Index 11.0 10.5 9.5 3.6 3.8 4.1

FSSTI Index 12.5 11.9 11.2 4.1 4.3 4.5

JCI Index 17.3 15.0 13.0 2.3 2.3 2.6

SET Index 14.5 12.5 11.1 3.4 3.7 4.1

PCOMP Index 18.9 16.6 15.1 2.0 2.1 2.2

KOSPI Index 12.5 10.9 9.9 1.5 1.7 1.8

TWSE index 12.7 12.1 11.1 4.1 4.2 4.5

Average (ex-KLCI) 14.2 12.8 11.5 3.0 3.2 3.4

KLCI's premium

over region (%) 14.8 17.0 20.4 6.4 9.7 7.5



• Compelling valuations for small cap. counters….. Meanwhile, for the valuation of small cap. stocks, they are currently trading at 9.8x 2016 consensus PE, which is slightly above its historical mean of 9.5x and still well below its +1 standard deviation of 11.4x.

• ……..but the valuation gap between the small cap. and large cap. counters has narrowed to current 25% PE discount from 35-40% discount since 2H15. Traditionally, the small cap. counters have being trading at 20-50% PE discount to the large cap. stocks for the past 10 years (see figure 7).

Figure 7: Discount of The FBM Small Cap Index ’s P/E Valuation to The FBM KLCI


� Moving forward, we envisage the market will continue to be driven by external factors such as movement of crude oil prices and Ringgit, US monetary policy, and China economic growth. Internally, we expect the 1MDB issues, political stability, and status of fiscal deficit as a result of slide in commodity prices will continue to affect investor sentiment.

� Re-emergence of oil price slump. Whilst it is extremely difficult to predict how low oil price can go with Brent tumbling over 40% YTD, we reckon that crude oil price would continue to find its equilibrium in 2016 amid current massive supply glut in relation to rising American shale oil production and refusal of OPEC to cut production. Hence, volatility in oil price could continue to negatively impact the performance of local bourse. Our in-house forecast for Brent for 2016 is at USD40/barrel against government’s projection of USD48/barrel.

� Ringgit to remain sluggish. Despite RM being perceived to be undervalued based on the country’s underlying economic fundamental - foreign reserves of slightly below USD100b, which is sufficient to finance 8.6 months of retained imports and 1.1 times the short-term external debt - the confidence of investors in the country’s prospects in respect of political stability, sustainability of economic growth and financial health are equally important in determining the nation’s currency strength.

� Yuan to determine emerging-market currencies. To recap, Ringgit has shed more than 20% against USD YTD. Looking forward, we expect RM to continue remain sluggish against USD in 2016, albeit with limited downside risk and possibly hovering in a range of 4.10-4.50 by year-end, amid anticipated further depreciation of RMB to stay competitive in its export as the Chinese central bank has recently set the tone for the Yuan to track a broader basket of currencies in lieu of Yuan-USD peg. Besides, further US rate hike, weakening commodity prices and prolonged politicking with no sight of improvement in the short run could also exert selling pressure to the Ringgit.

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-40

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Sep

-06

Mar

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-11

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-14

Sep

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-15

Sep

-15

PE

Dis

coun

t (%

)


� Worries on further US rate hike will continue to haunt the market. With the normalisation of interest rate underway in the US as evidenced by recent lift of 25bps to the current 0.25-0.50% of federal funds rate, the market is expecting further rate hike happening in 2016 which brings the Fed’s target rate to around 1.25-1.50% by end 2016. Although the recent US rate hike, the first in 9 years, did not pose any knee-jerk reaction to the emerging markets, we opine that subsequent four quarter-point increase or more could spring a negative surprise to the market in view of compression of yields between US and emerging market.

� Local market shall withstand foreign selling. We believe the foreign selling momentum could taper off moving into 2016 as compared to last year, as current foreign shareholdings in local equity market stands at c.22% nearing 20-21% low during Lehman Crisis in 2009 and trending downwards from the peak of c.25% in mid 2013. Furthermore, we believe domestic liquidity is able to absorb selling pressure with c.RM300b deposits in the banking system provided there is no massive capital flight in bond markets, which we think is unlikely (with c.47% foreign shareholding in MGS worth c.RM160b). In fact, foreign shareholding in MGS has increased from 44% in end-2014 to current 47%. Furthermore, the RM20b injection by ValueCap into local equity market would well support the local stock market or at least act as a buffer to the downside.

� Concern on China slowdown. With China being a major trading partner to Malaysia, any sharp slowdown in China’s economic growth in 2016 would pose a serious threat to our nation’s GDP growth. Chinese economy is in the midst of structural reform or transition from export-oriented dependent to consumption-led growth as GDP is expected to grow slightly below 7% in 2015 and continue to weaken in 2016. President Xi Jinping has mentioned that China must keep annual growth rate of no less than 6.5% over the next five years to achieve its target of doubling the GDP and per capita income by 2020 from 2010.

� Ongoing political noises. Base on political commentaries in town, PM Datuk Seri Najib Razak seems to have an upper hand over the issues of 1MDB and political challenge following the recently concluded UMNO AGM, cabinet reshuffle and re-appointment of key administrative officers. Thus, we reckon that market’s concern on political stability is waning with the outcome of investigation over 1MDB being highly watched. However, we do not write off the re-emerge of political risk as ‘anything is possible in politics’.

� Pressure on fiscal deficit. With the current oil price hovering around USD30-40/barrel which is below the government’s forecast of USD48/barrel for next year, the government is under pressure to revise Budget 2016 and hence missing its initial budget deficit target of 3.1% of GDP in view of dwindling oil revenue. Should the widening budget deficit jeopardises the nation’s balance of payment status, this may lead to risk of downgrade of sovereign rating by international credit agencies and trigger more outflow of funds.

� Policies dilemma on domestic front. Should there be any economic slowdown encountered locally, we envisage that the government and BNM would have limited policy options in cushioning any negative impacts by adjusting the country’s fiscal and monetary policies in a larger manner to stimulate economic growth. This could derail the government’s effort to achieve targeted fiscal deficit amid prevailing weakness in oil prices coupled with its respective high public debt and contingent liabilities of 54% and c.70% to GDP. Elsewhere, BNM is running out of options for monetary expansion given relatively high household debt (i.e. household debt to GDP of 87% and household debt to income of 146%), one of the highest household debt across Asia which could eventually lead to a credit bubble.


� We are cautiously optimistic on 2016 market outlook and introduce our year-end 2016 FBM KLCI target of 1770 points - with market EPS growth forecast for 2016: +5%; 2017: +8% and target PER at 16.5x 2016 PE (+0.75 standard deviation above mean) and 15.3x 2017 PE (mean). We foresee a rising equity risk premium in tandem with higher risk free rate as a result of increasing bond yield which would eventually lead to lower asset value.

� Profits awaken in 2016. Corporate earnings-wise, we envisage 2016F market EPS to grow at 5.0% (vs consensus of 9.0%) on the back of low-base earnings in 2015. We believe 2016 market earnings growth will end the period of 3-year earnings downcycle or disappointments, i.e. 2013: -5.1%; 2014: 1.9%; 2015F market estimate: -6.8%.

� Another ‘stock-picking’ year. We opine that selective stock selection is crucial for 2016 in order to have stock return that outperforms the market since our target index offers limited upside and broader market sentiment still remains cautious due to heightened volatility.

� Investors shall adopt combination of defensive and active investment strategy by investing in: a) Value stocks which are trading at lower price relative to their BV, earnings; b) Growth stocks which yield brighter earnings prospects; c) High-yielding stocks with resilient business models, i,e, stable earnings coupled with positive operating cash flow which are unfazed by the slowdown in economic growth; and d) Thematic plays which are expected to benefit from the upcoming positive newsflow.

� Our picks on value stocks are: Maybank, CIMB, Tenaga, Astro, WCT; growth stocks are: Pestech, MyEG; high-yielding stocks such as: Sunreit, Carlsberg.

� Investment themes in the likes of:

� 1) Sarawak election, anticipated in 1H16, which could see more construction projects being rolled out. Beneficiaries are: CMS, HSL, KKB, Naim, SCB for the state’s road projects, water & sewerage projects, housing developments and improved amenities;

� 2) Wave of Chinese investment in Malaysia as evidenced by participations/acquisitions in Iskandar Malaysia, Gemas-JB double tracking railway, Edra Global Energy, Kuantan Industrial Park, Penang undersea tunnel, strong interests in KL-Singapore HSR, commitment of Chinese government to buy MGS and recent Chinese party buying into Bandar Malaysia. Companies having business relationship with Chinese parties are: LBS, Ewein, Instacom, GDEX, PUC Founder, IWH, Ekovest;

� 3) Trans-Pacific Partnership Agreement (TPPA) which is expected to be tabled to Parliament in Mid-Jan 16. However, this free-trade agreement unlikely to be enforced before 2018. Beneficiaries are palm oil (downstream), rubber glove, chip and plastic/timber/furniture exporters;

� 4) El-Nino likely to happen in 1H16 which could benefit upstream planters - KLK, Sime, IOI, FGV, GENP, IJMP, TSH;

� 5) Construction boom with a slew of infrastructure and building projects, Transit-Oriented Development (TOD), PRIMA to be undertaken, potential winners are IJM, WCT, Sunway, Gamuda, Gadang, Mitrajaya, Ikhmas Jaya, Econpile; and Building Material/M&E or fit-out suppliers such as SCH, OKA, Signature International;

� 6) Indochina’s thematic plays as economic activities and property markets in Vietnam, Cambodia and Myanmar are picking up which see stocks such as Gamuda, SP Setia, Ireka, Tan Chong, OCK, RGB to attract investors’ interests;

� Export-oriented industries which will continue to benefit from the strengthening of USD against RM - Technology (Globetronics, MPI, Inari, Vitrox, V.S Industry), Furniture (Latitude Tree, Poh Huat, Lii Hen), rubber/plastic related and wooden based manufacturers (Kossan, Wellcall, Scientex, SCGM, SLP, Heveaboard).


� For sectors under coverage, we have Overweight call on Construction. We envisage various initiatives undertaken by the government to drive economic growth, namely 11th MP, ETP, TOD and The Corridors and Cities Transformation Programme. Newsflow of the tender-call and major civil work award for the KV MRT2 as well as other mega projects awards could excite investors to look at the construction companies.

� Neutral to positive bias on O&G, Plantation……... For oil and gas players, we opine that they may face a tough time to grab a slice of the shrinking pie with companies resort to cost cutting to cushion squeezed margins. In view of the challenging outlook, we favour large cap. stocks with huge orderbooks that will help them sail through the current rough seas. Furthermore, Petronas will continue to invest for the future, albeit in a more conservative way. Sentiment wise, we reckon that share prices of the O&G counters would react to a lesser extent for any further decline of crude oil prices at this junction. Meanwhile, we foresee limited downside for the CPO prices as advent of an El Nino might render ‘wild card’ to the Plantation sector amid record high stockpiles of 2.9m tonnes (as of November 2015) and subdued crude oil, soybean prices.

� ……….Property and Rubber Glove. For Property sector, outlook remains challenging with loan tightening being the main hindrance for sales growth. However, we advise investors to adopt long-term investment strategy and start to accumulate property counters in 2H16 in view of current depressed valuations, i.e. large cap stocks and mid to small cap. stocks are now trading at respective 11-12x forward PE and 6-7x forward PE, whilst at a deep discounts to their RNAVs of 40-70%. Rubber glove wise, we downgrade our Overweight call to Marketweight as we believe the positives in low raw material prices and strengthening of USD have been largely priced in following recent sharp prices run-up and hence renders unfavourable risk-reward. Having said that, immediate catalyst to the sector would be the further depreciating RM against USD.

� Underweight on Consumer, Auto and Telco. We foresee another tepid consumer sentiment in 2016 as consumers become more prudent in their spending under prevailing rising cost of living and job retrenchment. We expect the consumer discretionary segment to feel the pinch more than the consumer staple players as demand on F&B products is more resilient than discretionary items during the hard times. Also, the automotive players will continue to face subdued sales as consumers may feel reluctant to commit in big-ticket items coupled with headwinds such as margin erosion in relation to higher import cost as a result of strengthening USD and Yen against RM, and higher marketing expenses amid fierce competition. Meanwhile, for Telecommunication sector, the local mobile network operators will continue to face a tough operating atmosphere this year after last year’s price war resulted in lower average revenue per user (ARPU) and hence the overall revenue growth is expected to remain at low single digits. Furthermore, the Telco counters currently offer unattractive dividend yields of 3-4%.

� Our top picks under coverage are: Ikhmas Jaya (Target Price: RM0.90), Gadang (Target Price: RM2.86), LBS (Target Price: RM1.70), and Bumi Armada (Target Price: RM1.14).


Figure 8: State of Global Economy & Economic Indicators at A Glance (Source: Trading Economics)

GDP YoY

GDP QoQ

Interest rate

Inflation rate

Jobless rate

Gov. Budget

Debt/GDP Current Account

United States 2.10% 2.00% 0.50% 0.50% 5.00% -2.50% 102.98% -2.40

China 6.90% 1.80% 4.35% 1.50% 4.05% -2.10% 41.06% 2.10

Japan 1.60% 0.30% 0.00% 0.30% 3.10% -7.70% 230.00% 0.50

Euro Area

Germany 1.80% 0.30% 0.05% 0.40% 4.50% 0.70% 74.70% 7.60

France 1.10% 0.30% 0.05% 0.00% 10.60% -4.00% 95.00% -1.00

United Kingdom 2.30% 0.50% 0.50% 0.10% 5.20% -5.70% 89.40% -5.50

Italy 0.80% 0.20% 0.05% 0.10% 11.50% -3.00% 132.30% 1.90

Spain 3.40% 0.80% 0.05% -0.30% 21.18% -5.80% 97.70% 0.80

Greece -0.90% -0.90% 0.05% -0.70% 24.62% -3.50% 177.10% 0.90

Asia

South Korea 2.70% 1.30% 1.50% 1.00% 3.40% -1.80% 35.98% 6.30

Hong Kong 2.30% 0.90% 0.75% 2.40% 3.30% 2.80% 32.00% 1.90

Taiwan -0.63% -0.30% 1.63% 0.53% 3.84% -2.10% 36.50% 12.30

Singapore 1.90% 1.90% 0.64% -0.80% 2.00% -0.13% 99.30% 19.00

India 7.40% 1.90% 6.75% 5.41% 4.90% -4.50% 66.10% -1.40

Asean

Thailand 2.90% 1.00% 1.50% -0.97% 0.90% -2.50% 45.70% 3.50

Malaysia 4.70% 0.70% 3.25% 2.60% 3.10% -3.50% 52.80% 7.10

Philippines 6.00% 1.10% 4.00% 1.10% 5.70% -0.60% 45.40% 4.40

Indonesia 4.73% 3.21% 7.50% 4.89% 6.18% -2.25% 25.02% -2.95


Figure 9: Indicators to Gauge Global Economic & Financial Markets Outlook PMI – US and EU are in expansion mode (>50) while China is in contraction (<50)

Declining US unemployment (back to pre-Lehman crisis) while inflation looks disappointing (far from 2008 level)

Improving US housing starts & home sales since 2008/09

China export growth has been trending downwards since 2010 indicating risk of economic slowdown

China’s M2 growth has stabilised since 2009/10 stimulus, signaling government still supportive of credit expansion

Sliding China’s FAI suggesting risks of softening property & manufacturing sectors



Figure 9: Indicators to Gauge Global Economic & Financial Markets Outlook (Con’t) Decreasing China retail sales reflecting consumption-led economic growth has yet to yield desirable results to underpin the country’s economic growth

Tumbling Iron ore price signaling subdued demand for steel as a result of weakening China’s construction activities

Lackluster BDI, which is significantly below pre-Lehman crisis level in 2008/09, indicating slow recovery of international trade

Copper price is trending downwards, suggesting worldwide manufacturing activities, especially in China, are still lack of momentum

Book-to-bill ratio for North America Semiconductor industry is hovering at 1, signaling the semiconductor sales are still not robust

Slumping Brent Oil price due to supply glut coupled with sluggish demand



Figure 9: Indicators to Gauge Global Economic & Financial Markets Outlook (Con’t) Volatility Index – hovering at low range indicating relatively stable US market and fund flow

Spike in 10-year MGS yield during 2015 suggesting outflow of foreign funds from Malaysia, whilst continuous low US 10-year Treasury yield indicating that fund flow back to US with anticipated US rate hike

Strong surge in Dollar Index implying USD is strengthening against other major currencies in the world

Ringgit is the worst performing currency against USD in Asia


Lee Chung Cheng

[email protected] 603 8736 1118 (ext: 758)


Technical Outlook

• The FBM KLCI started year 2015 around 1750 points and climbed towards a high of 1867.53 points in April before tumbling 19% to a low of 1503.68 points in August. The index then rebounded to 1700 points and hovered within the range of 100 points.

• Last Week (as of 31 Dec 2015), the FBM KLCI rallied to 1700 points to test the 200-day

moving average (orange line) but fell short of a breakthrough. The MACD crossed its signal line to indicate a positive sign in the short-term.

• In the long-term, the index needs to breach the critical 200-day moving average to

reverse last year’s downtrend. Until that happens we remain cautious with immediate support at 1670 points marked by the 100-day moving average (blue line).

Lee Cherng Wee [email protected]

603 8736 1118 (ext: 759)


Economic Review & Outlook

• Discouraging GDP growth in 9M15 - Malaysian Gross Domestic Product (GDP) posted moderate growth of +5.1% in 9M15 as compared to +6.1% in 9M14. The softer growth was dampened by weaker expansion in consumer spending as private consumption remained a major driver for Malaysia’s GDP growth. The private consumption expenditure (PCE), recorded the slowest growth since 1Q10 by +4.1% y-o-y in 3Q15 as consumer spending was dragged lower by the implementation of GST coupled with rising in cost of living amid weaker MIER’s consumer sentiment index in 3Q15 that sank further to a new low of 70.2 which recorded a fifth consecutive quarter of decline. We foresee that consumer sentiment will continue to be weak in 4Q15 as consumers remain cautious in their spending in order to cope with the escalating standard of living. Hence, we expect economic growth to be slower again in 4Q15, grow 4.5% y-o-y which will result in full-year forecasting GDP growth of 4.8% for 2015 (vs 2014:+6.0%).

• GDP is expected to grow moderately in 2016 – The impact from weakening ringgit, domestic

political uncertainties as well as lower oil prices will dent the oil & gas investment and government spending, and hence likely to constrain the growth of domestic demand going forward. Thus, we forecast that our GDP will grow by +4.9% in full year 2016. We foresee the slower momentum for domestic demand will continue for the next few quarters as we expect the private consumption expenditure (PCE) to grow by +4.2% y-o-y in 2016 as consumers and businesses will gradually adjust to a weaker ringgit. Nevertheless, we envisage that government’s action to increase amount of BR1M for the low-income group of population and additional tax relief for individuals that announced in Budget 2016 in order to help the consumer to reduce the cost of living will mitigate the impact of slowdown in consumer spending as well.

• Besides, the persistent growth in Gross Fixed Capital Formation (GFCF) and recovery in

external trade managed to partly salvage or cushion the slowdown in PCE. We envisage the uptrend in public investment by 2016 in view of the continued increase in Government’s gross development expenditure as well as the on-going and roll-out of major infrastructure and investment projects will continue to support our GDP growth. These include the completions of KVMRT1 and LRT extensions; the commencements of KVMRT2 and LRT3; RAPID Complex in Pengerang; and Pan -Borneo Highway. Despite the headwinds, our manufacturing sector will sustain its expansion driven by E&E products due to higher external demand of semiconductors, electronics component, communications and computer component coupled with bright outlook of semiconductor industry.

Figure 10: Yearly GDP Growth

Source: Department of Statistics, JF Apex


0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

107.0

108.0

109.0

110.0

111.0

112.0

113.0

114.0

115.0

116.0

CPI Y-O-Y

• YTD Inflation rate remained low against corresponding period last year - Inflation increased by +2.6% in Nov’15, translating into 11M2015 headline inflation of +2.0% as compared to +3.2% in 11M2014. The sluggish performance of inflation owing to negative expansion by its main component which is transport index, attributable to lower transportation costs as a result of the managed float pricing mechanism starting Dec’14 since retail price for RON95 petrol was based on the monthly average of global crude oil prices. Besides, CPI expansion also dented by flat growth by other main components including Housing, Water, Electricity, Gas & Other Fuels, Education, Communication, Health, and Recreation services & cultures. Hence, we maintain our moderate growth rate for full year 2015 forecast of +2.1% y-o-y (v.s 2014: +3.1%).

• Likely to increase further in 2016 – Despite lower contribution from transport index due to managed float mechanism, we envisage the negative effect will diminish by 2016 with the base effect factor as we opine that oil price will begin to stabilize. We foresee CPI will continue to grow in 2016 supported by its main components include food & non-alcoholic beverages, alcoholic and tobacco indexes and Housing, Water, Electricity, Gas & Other Fuels.

• Alcoholic and tobacco indexes will maintain their expansion backed by moves of cigarette companies which raised their cigarette prices effective Nov’15 after having taken into consideration the impact on GST and inflationary cost pressures. The transport index will also continue to grow following the toll rates hike in several major highways in Klang Valley in Oct’15. This is further elevated by the 5% increase in toll rate for every three years starting from year 2016 until the end of the concession agreement in 2038 for North-South Highway by Plus Expressway Berhad (PLUS). Besides, Keretapi Tanah Melayu Berhad (KTMB) has increased the KTM commuter fares in Klang Valley by 36% from Dec’15 onwards to cover its operating and maintenance costs. In addition, starting this year, consumers in Peninsular Malaysia need to pay 0.73 sen per kilowatt hour (kWh) more for electricity for the next six months, as the government plans to reduce the rebate on power tariff, and also revised upwards the natural gas tariff for the non-power sector in peninsular Malaysia. Therefore, we expect that our inflation will expand by +2.9% for full year 2016 amid increases in public transportation charges, toll rates and the abolishment of electricity rebates for certain segments of the population.

• Keeping OPR forecast unchanged at 3.25% for 2016 – To recap, in July’14, BNM increased Overnight Policy Rate (OPR) by 25 bp to 3.25%, which was the first hike since May 2011. On last meeting for year 2015 in Nov'15, Bank Negara Malaysia's Monetary Policy Committee decided to keep the OPR unchanged at 3.25%. BNM stated that the global economy continues to grow at a moderate pace while the economic recoveries in the major advanced economies remain modest. At the current level of the OPR, the stance of monetary policy remains accommodative and supportive of economic activity. Hence, we maintain our view that BNM will keep the OPR at 3.25 per cent in 2016 which we believe that inflation is still manageable.

Figure 11: Consumer Price Index (CPI) Movement & Outlook & OPR



• Trade performance recovered in 3Q15 in Ringgit term. Malaysia’s exports faced a challenging time during 1H15 after declining by 3.1% as compared to growth of +12.6% last year. The subdued performance owing to unimpressive growth by our main trading partners from advanced economies including China that posted downtrend in its PMI data during 1H15. Besides, the negative export growth of main products also caused by lower sales of commodity-based products due to lower prices of crude oil, palm oil and natural rubber. Nonetheless, from 3Q15 onwards, our exports performance started to trend upwards after increasing by +5.4% against +1.5% growths in 3Q14. The weakening of the currency on a yearly basis continued to translate into higher export values in ringgit terms, also aided by a low base effect where exports suffered a contraction in 3Q14 last year. Exports surged by the fastest pace in 19 months to +16.5% y-o-y in Oct’15, from +8.7% in September as compared to +4.1% in August’15, marking the fifth consecutive month of expansion.

• In the same vein, 1H15, import declined by 2.5% as compared to growth in 1H14 of +7.2%. The weaker import growth as a result of lower intermediate and capital goods purchases coupled with decrease in import from main trading partners. Import recorded a bigger decline of 7.0% in Apr’15 followed by -7.2% in May’15 due to post GST implementation from April 1 as most imported goods are subject to GST. However, imports growth started to pick up in 3Q15 by 3.1% (vs 3Q14: +2.6%) mainly supported by recovery in its main components following higher imports from main destinations.

• Weakening ringgit could help to boost export growth in 2016. Due to the rebound of trade figures in 3Q15, we are expecting that our trade performance will slightly improve in 2016. Furthermore, the weaker ringgit is expected to boost Malaysia's export sector through translation gains from export earnings as well as sustain our trade surplus. In addition, the continuous higher demand for our E&E products will support our exports growth in 2016. Besides, imports performance will continue to be aided by increase in its main components include capital goods, in relation to the growth in transport equipment, industrial and capital goods. In addition, we envisage positive contribution from import of intermediate goods which will sustain our imports growth going forward.

• However, we admit that downside risks remain. The possibility of lower prices of commodities will continue to dent the export of major commodity products including refined petroleum, natural rubber, palm oil and palm-based and crude petroleum products.

Figure 12: Trade surplus & Y-o-Y and M-o-M of Exports and Imports Growth


Research Team

[email protected] 603 8736 1118 (ext. 752)


Sector Outlook

Automotive Marketweight

• Unimpressive sales growth – As of 11M2015, total industry volume (TIV) recorded total vehicle sales of 597,273 units, which is 0.8% lower than 11M2014 (601,827 units) sales in previous year. The subdued performance owing to weaker consumer sentiment towards big-ticket items mainly due to rising in cost of living especially after the implementation of GST in Apr’15.

• Knee-jerk reaction on GST implementation in April’15 with total vehicle sales declined by 33%

m-o-m and 23% y-o-y caused by adjustment to post GST environment. Prior to this, we witnessed the marvelous jump in TIV sales in Mar’15 that due to attractive offers and incentives given by car companies to clear stocks before the implementation of GST also attributed to the sluggish performance for TIV in April’15. Elsewhere, the latest data showed that sales volume in Nov’15 was higher by 0.5% m-o-m and 1.4% y-o-y mainly backed by aggressive year-end promotional campaigns by car players and announcement of price increases in 2016 by several automotive companies.

• Subdued growth expected for 2015 car sales. The TIV for 11M15 has reached 91% of our 2015 revised forecast of c.660k units after Malaysian Automotive Association (MAA) lowered their forecast to 670k units in July’15 in view of the challenging economic landscape in year 2015. The introduction of new model - New Perodua Axia with lower prices coupled with car prices reduction by automakers after the implementation of GST on April 1 were the key drivers to mitigate weaker consumer sentiment towards auto sector in year 2015. We foresee sales volume for Dec’15 is expected to be slightly higher aided by continuation of aggressive year-end promotional campaigns and consumers’ ‘last-minute’ buying to beat the car price increases in 2016.

Figure 13: Total Industry Volume (Jan’15 – Nov’15)

Figure xx: Total Industry Volume for 2008 – 2016F

Source: Malaysian Automotive Association, JF Apex


• Cautious outlook for automotive sector in 2016 – We envisage another challenging year for the sector in 2016 attributable to softer consumer spending particularly in big-ticket items in view of higher cost of living. Besides, the carmaker will feel the pinch from the stronger greenback on its bottom line. The weakening ringgit will remain the key pressure to the automakers with huge cost exposure to the USD since the carmakers need to bear the higher costs for their foreign components which are mostly denominated in the USD and Japanese Yen. Furthermore, we foresee there will be margin erosion for carmakers in relation to higher marketing costs due to the higher advertising and promotion spending in order to tackle the intense competition among them.

• Falling Ringgit to affect car prices in 2016 – The drastic depreciation of the ringgit has caused a significant increase to the cost of imported parts and components for our carmaker in Malaysia. In order to bear higher cost of production, some of automakers including Toyota, Honda, Nissan and Proton will pass on some cost to the consumers to offset rising input costs due to the strengthening of the US dollar against the Malaysian Ringgit. We foresee that the price increase is mainly to compensate the effect of the lower ringgit.

• UMW Toyota Motor announced that the prices of Toyota and Lexus vehicles will go up from 4% to 16% starting January 2016 and also mentioned that the increase is inevitable as there is no clear indication on when the Ringgit will rebound. In addition, according to Honda, the price increase effective Jan’16, will likely be in the range of 2% to 3%, depending on the model of the vehicle. Same with others, Nissan models may also see price increase in 2016 despite implementing numerous cost rationalisation and efficiency optimisation exercises to mitigate the ringgit impact on its business. Our National carmakers include Proton might also increase the prices of its cars since major raw materials are purchased in foreign currency. In Dec'15, Perodua announced that it will increase the prices for its Axia G model to factor in the cost of installing the anti-lock braking system (ABS) in the vehicles with effect from January 2016. Hence, we opine that the car prices hike will continue to dent consumer sentiment in 2016.

• Flattish growth of TIV for 2016 – We envisage that TIV for this year (2016) will slightly increase to 670k units which will result in full-year forecasting TIV growth of +1.5% for 2016 while MAA indicated a TIV forecast of c.683k units for 2016. We opine that consumers will continue to tighten their belt in 1H16 this year amid car price hike before seeing slight rebound in 2H16 after adapting the new car prices in a longer run.

• We expect Perodua’s models will continue to be the favourite of the consumers due to its affordable pricing. Meanwhile, Proton shall benefit from its three new models include new Saga, Persona and Perdana in 2016 which equipped with the latest safety features and designs. In addition to the new three mentioned models, Proton will also build its first car developed in collaboration with Suzuki which is widely tipped to be rivalled against Perodua’s Axia, A-segment car that could go on sale as early as August 2016. For non-national car makers, we opine that Mazda will continue its strong growth in 2016 amid introduction of new models plus its decision to maintain the current selling price in 2016 by reducing other expenses. Nevertheless, we have maintained our `marketweight’ rating on the automotive sector for this year due to the challenges mentioned above.

• We maintain HOLD call on UMW with target price of RM7.68 following our earnings cut for Automotive, M&E and O&G segments. We expect the intense competition among car makers and higher campaign and promotion spending further impacted the Group’s automotive division coupled with gloomy outlook for O&G due to unfavourable impact of low oil prices.

• We maintain HOLD on TCM with target price of RM3.04 as we lifted our 2015F earnings estimates by 3.6% by lifting our car sales forecast. While we reckon that the Group’s strategy to strengthen its position across Malaysia, Vietnam, and the Indochina markets will continue to support its long-term earnings. However, we are still skeptical on its sustainability of immediate earnings rebound amidst tepid consumer sentiment and unfavourable forex which affects its import cost. Research Team



Consumer Marketweight • Consumer Index outperformed KLCI in 2H2015. The KL Consumer Index (KLCSU) has

outperformed the FBMKLCI since 2H2015. The commendable performance aided by gains in heavyweights particularly the foods & beverage (F&B) counters. Investors tend to choose defensive stocks during uncertain times as they believe the F&B counters will remain resilient as demand for basic items is generally stable and inelastic despite the implementation of Goods & Services Tax (GST).

Figure 14: KL Consumer Index (KLCSU) Outperformed KLCI in 2H2015

Source: Bloomberg • Unimpressive growth by retail sector in 2015. The Malaysian Employers’ Federation (MEF)

highlighted that retailers have experienced a major drop in sales with some registering a more than 40% decline over festive periods in the 2H15. The combined impact from the implementation of GST in April'15 and the ringgit’s depreciation against the US dollar attributed to the bigger decline for retail sales in 2015. According to Malaysia Retailers Association (MRA), retail sales grew 4.6% in 1Q15 and further plunged by 11.9% in 2Q15, the worst quarterly retail growth rate since the 1997/98 Asian financial crisis. The negative impact from GST implementation on the country’s retail industry was worse than expected in 2Q15 as consumers held back on their spending and adopted wait-and-see stance while waiting for more promotions by the retailers.

• Businesses of many retailers dropped from 20% to 50% as the introduction GST from April 2015 affected all retail sub-sectors (from retailers selling grocery, fashion and fashion accessories, toys, gifts, handphones, furniture as well as electrical & electronics). Retailers came out with promotions by offering heavy price discounts and continued to sacrifice their bottom lines in order to get more shoppers. Meanwhile, the data showed Malaysia’s retail sales growth remained slow during 3Q15, +1.6% y-o-y as compared to +2% y-o-y of the same period in 2014.

Figure 15: Retail Sales Growth Rate by Malaysia Retailers Association (MRA)

Source: MRA, Media, JF Apex

8.10%

5.50%4.50%

3.40%4.60%

-11.90%

1.60%

-12.00%

-7.00%

-2.00%

3.00%

8.00%

2011 2012 2013 2014 1Q15 2Q15 3Q15


• Consumer confidence sank to all-time low in 3Q15. According to Malaysian Institute of Economic Research (MIER), the consumer sentiment index (CSI) fell to a new low of 70.2 in 3Q15 from 71.7 points recorded in 2Q15 as income. The bigger contraction in 3Q15 was due to the uncertainties over the inflationary pressure in regards to GST implementation, weakening of the MYR plus falling crude oil prices. Malaysian consumers are tightening their belts, anticipating higher cost of living. We believe consumer sentiment will remain weak in 4Q15 since the spending activities will grow at slower pace post-GST after advanced spending in 1Q15.

Figure 16: Malaysian Institute of Economic Research (MIER) Consumer Sentiment Index

Source: Bloomberg • Slowdown is expected to continue in 2016. Going forward, we opine that Malaysia’s retail

industry would not recover meaningfully from the negative impact of the goods and services tax (GST) on consumer spending in 2016 while the unexpected drop in Ringgit value could worsen the prevailing tepid sentiment. Moreover, the political developments in Malaysia also affect the retail sales indirectly as consumers are reluctant to spend with concerns on the spill over effect to economic front. We opine that the recovery of consumer discretionary spending could take a little longer due to more cautious spending by consumers. Rising costs of living amid higher transportation costs arising from recent and upcoming hikes in Klang Valley’s highway toll rates and railway fares, as well as concerns over the job market conditions amid news regarding workers’ retrenchments in sectors like oil & gas, manufacturing, aviation, banking, and media also exacerbate the domestic consumption. In order to mitigate the impact, we foresee retailers to continue incurring more promotional expenses to stimulate demand, hence impacting their margin.

• Maintain Marketweight rating on consumer sector. We maintain our neutral stance on the

sector as we foresee another slower consumer sentiment in 2016 as consumers became more prudent in their spending. We expect the consumer discretionary segment to feel the negative impact more than the consumer staple players as demand on F&B products is more resilient than discretionary items during the hard times. For retail counters, we rate BUY for Padini with target

price of RM1.78. We continue to favour the Group’s strategy of taping into value-for-money product market via Brands Outlet. This strategy will maintain its position in retail market and continue to shield the Group from the headwind of weaker consumer sentiment due to rising in cost of living. Besides, the Group has no intention of raising prices in the short term in light of the poor consumer sentiment in order to remain competitive in the market.

• We rate HOLD for QL Resources (target price: RM4.50). We continue to favour the Group for its defensive and solid consumer play amid the current weak consumer sentiment, as the impact of softer consumer spending will be minimal on the Group where QL’s products are largely staple food-based products. Meanwhile, we are rating HOLD for OldTown (target price: RM1.41) and Hai-O

(target price: RM2.50). We are positive on Hai-O’s recent profit rebound with positive results of concentrating on ‘small-ticket’ items and initiatives to re-look into product sourcing and product pricing strategy in order to curb the higher import cost problems in view of the slowdown in economy and weakening of RM against major currencies.

Research Team [email protected] 603 8736 1118 (ext. 752)


Construction Overweight • The performance of Construction Index outperformed the FBM KLCI during 2015 despite

the Construction Index inched down 0.8% as compared to FBKLCI that slid 2.5%. The performance of Construction Index is expected to remain favourable given government’s effort and initiatives to roll-out several infrastructure and mega projects under 11th Malaysia Plan, Economic Transformation Programme (ETP) and Transit-Oriented Developments (TOD).

Figure 17: The Construction Index Outperformed the FBM KLCI

Source: JF Apex, Bloomberg • Construction sector is expected to grow at a CAGR of 10.3%. Allocation under 11th MP is

RM260bil, an increase of 13% as compared to allocation under 10th MP of RM230bil, this translates into a forecasting CAGR of 10.3% between 2016 and 2020. Under 2016 budget, government will

spend RM50b on development expenditure in 2016, up from an estimated RM47.4 billion in 2015. Looking forward, we expect construction sector continues to grow as the multiplier effect of construction sector towards the economy is vital to sustain the overall economic growth momentum in achieving vision 2020.

• 2016, a year for contractors to replenish their order books from rail-related mega

projects.

1.) MMC-Gamuda JV consortium was appointed as the PDP for KVMRT2 project (RM28b) and several civil works tenders for KVMRT2 are now open and expect major civil awards to dish out in April or May 2016 onwards. As of to date, there are 10 (Viaduct) packages and 1 underground package up for grabs where we believe Gamuda is able to clinch the underground package that worth around RM16b given their expertise and core strength in underground works. Meanwhile, companies with experience in the construction of KV MRT1 will be more favourable to clinch the 10 Viaduct packages with potential winners are Gadang, IJM Corp, SunCon Ahmad Zaki, Muhibah Engineering, Mudajaya and UEM (unlisted).

2.) Malaysia Resources Corporation (MRCB) - George Kent (Malaysia) JV consortium was

appointed as the PDP for LRT3 project (RM9b). We learnt that the consortium will have open tender for this project as early as 1Q2016. We expect the award of the projects to give out in 6-month times.

• Highway related projects remain the key focus in 2016 especially Pan Borneo Highway

(RM28.9b). We believe the upcoming Sarawak state election to act as the catalyst in the progress of this project with the potential beneficiaries would be Naim Holdings, Gamuda, IJM Corp, SunCon, Hock Seng Lee, Ahmad Zaki and Cahya Mata Sarawak. On top of that, the roll out of Sungei Besi-

Ulu Kelang Expressway (SUKE) (RM5.3b) and Damansara- Shah Alam Highway (DASH)

(RM4.2b) also benefit IJM Corp, SunCon, WCT Holdings and Ahmad Zaki.


• Major risk lies in the execution of mega infrastructure project. Any delay or postpone of government projects under 11MP or ETP will have a direct impact toward players in the construction sector. We expect risk in construction material remains low as building materials cost continue to stay sluggish despite implementation of GST. Meanwhile, we opine that construction companies could face the risk of margin squeeze as the competitive bid for the abovementioned mega projects would hamper the contractors’ operating margins moving forward. Besides, headwinds in property sector may indirectly dampen the demand for construction activities or directly impact the earnings of some construction players that have property development exposures.

• Maintain Overweight on the sector. We feel excited on the sector, as we foresee various

initiatives undertaken by the government to drive economic growth, namely 11th MP, ETP, TOD, GTP and The Corridors and Cities Transformation Programme. The potential catalyst will be the newsflow of the tender-call and major civil work award for the KV MRT2 as well as other mega projects awards.

• For stocks under our coverage, we maintain BUY on IJM with Target Price of RM3.83. Our fair

value for IJM is based on SOP valuation which implies 17.2x FY2016F PER. We continue to favour the group for its well-diversified business model especially strong growth in infrastructure division coupled with encouraging performance posted by industry division as benefiting from the domestic construction activity. Meanwhile, we believe the construction division’s performance is expected to be underpinned by an all-time high order book of RM7b whilst property division is supported by its unbilled sales of c.RM1.7b and its focus on launching more affordable housing products moving forward.

• Maintain BUY with target price of RM0.90 for Ikhmas Jaya, based on 13x FY2016F PE. The

target PE assigned is at the range of upcycle PE for small-and-mid cap contractors amid current booming infrastructure works. We believe the Group’s growth trajectory is sustainable in mid-term backed by a slew of construction works especially piling works.

• Meanwhile, we maintain HOLD on Gamuda with target price of RM4.88, based on SOP

valuation. Our target price implies 18.0x FY2016F PER. Our current target price is yet to take into account of the PMTP’s PDP role. We maintain our neutral stance as we foresee the group may face ‘earnings blip’ in the near term as there is a lag period where KVMRT1’s works taper off while KVMRT2’s work has yet to flow in. This is also aggravated by the weak performance in property division. We believe that FY16 is a transition year before seeing a stronger growth in FY17 onwards. We also expect long gestation period for PTMP’s as it takes time to unlock the value of land development right that earned as an exchange of the construction costs. The whole master plan can stretch as long as 15 to 20 years and hence, it may go through up to two property cycles to realize the development value.

• Maintain BUY on Gadang with a higher target price of RM2.86 (previously was RM1.98).

We pegged our fair value at 8.4x PER with FY16 EPS of RM0.34 (based on +0.5 standard deviation above 5-year mean PE of 7.1x) as the group’s earnings is sustainable in view of the current order book secured. We continue to favour the Group for its well-diversified business model as well as its ability to achieve growth across all divisions. Looking forward, we are positive in Gadang’s earnings given the recent order book replenishment of RM560m from RAPID projects and continuous sales activities generated by the flagship projects in property segment.

• For indirect proxy to construction boom, we are currently having HOLD call on SCH (target price of

RM0.23) as near-term outlook remains challenging in respect of sales of its quarry equipment & machinery and spare parts amid prevailing weakness in RM where import of capital goods are now costlier to its clients, i.e. the mining operators. However, we reckon that the group would ultimately benefit from the booming domestic construction sector over a longer run as mining activity picks up in a strong manner along with awards and execution of mega projects.

Research Team [email protected]

603 8736 1118 (ext: 754)


Oil & Gas Marketweight Oil price continues to slump amid oversupply

• The oil crisis started when crude price plunged over 50% from US$100/barrel in mid-2014 to a low of US$48/barrel in January 2015 before consolidating between US$50/barrel and US$60/barrel in 1H15. In 2H15, oil price resumed its decline to a low of US$34/barrel recently.

• Unlike the post-Lehman crisis V-shape recovery in 2009, a slow recovery is predicted this time as the

ongoing price war between OPEC and US shale producers will keep oil prices pressured.

• The current oversupply situation is unlikely to improve as OPEC decides to maintain production level at 30 million barrels a month. On the demand side, global economic growth is needed to consume the excess supply. The world’s largest net oil importer China could face potential economic slowdown and subsequently purchase less oil in 2016.

• Any geopolitical tension could cause a temporary spike but would not return to its golden days of

US$100/barrel in the near term. • Meanwhile, oil and gas players will be facing a tough time to grab a slice of the shrinking pie.

Companies resort to cost cutting to cushion squeezed margins. In view of the challenging outlook, we favour companies with huge orderbooks that will help them sail through the current rough seas.

Petronas still investing

• Despite the current crisis, Petronas continues to invest for the future, albeit in a more conservative way. The national oil company spent capex totaling RM49.7bn in 9M15, up 5.5% YoY from RM47.1bn in 9M14 mainly on the acquisition of Statoil's Shah Deniz assets, domestic upstream capex and RAPID. Going forward, Petronas has allocated RM350bn of capex for the next 5 years.

• Contracts from Petronas have been the main driver that spurred growth in the local O&G industry in

the past few years. Given the cautious mood, local O&G players will be facing tight competition for jobs from Petronas.

Figure 18: Crude oil price on NYMEX

Source: Bloomberg


Figure 19: OPEC monthly crude oil production

Source: EIA

Recommendation

SapuraKencana

• 9MFY16 net profit declined 62% YoY following non-cash impairments on oil and gas assets totalling RM857m. Further impairment is possible as oil price dropped below USD40/barrel. Despite the impairment, core earnings were within expectation.

• The Engineering & Construction and Drilling divisions are sustaining revenue while but contribution from Energy division decreased following lower oil price and less barrels lifted.

• Orderbook was reduced to RM23bn in 3QFY15 from RM21bn in the previous quarter due to challenges in securing new jobs. Despite the decline, its orderbook is big enough to keep the company busy for the next 2-3 years.

• Given its strength and depth we expect the company to secure more jobs albeit at lower margins. We opine that SapuraKencana is in a good position to benefit from any recovery in oil price in the long term. A reversal of impairment could take place should oil price rebound significantly, though unlikely in the near future.

• Share price is more resilient now after recovering from a low of RM1.50 in August when oil price was US$45/barrel compared to RM2.00 recently when oil price was lower at US$34/barrel. Maintain BUY

with a target price of RM2.75.


Bumi Armada

• Similarly, Bumi Armada also suffered from impairment totalling RM490m in 9M15. Floating Production Storage and Offloading remains its main earnings driver as revenue from FPSO is cushioning declines in Offshore Support Vessel (OSV) and Transport & Installation (T&I) due to lower vessel utilisation.

• Order book remains strong at RM29bn (FPSO: RM25.6bn, OSV: RM2.2bn & T&I: RM1.2bn) vs RM25.8bn in 2Q15 with another RM15.6bn worth of potential extension. This will sustain the group’s earnings for the next few years with FPSO contracts ranging from 4 to 12 years.

• Going forward, we expect the FPSO business continue leading growth as earnings from long term contracts, such as Kraken (North Sea, UK), Olombendo (Angola), Madura (Indonesia) and Malta, gradually pour in.

• We like the stock for its huge orderbook and long term prospects in FPSO. FY17 revenue and net profit are expected to increase 40% and 55% respectively on higher conversion activity by Kraken and Angola FPSOs. Buy with a target price of RM1.14

Pantech

• Pantech will benefit from the development of RAPID in Pengerang. Orders for pipes, valves and fittings (PFV) worth US$150m from RAPID are expected to materialise in late-2015.

• In October, Pantech formed a 51:49 joint venture company to venture into the hot-dip galvanising business. The JV company will invest RM30m to build a new factory by end of FY17 with revenue to start pouring in FY18. The JV will benefit Pantech as it can stop outsourcing the galvanising of its PVF products.

• We expect earnings to pick up towards end-FY16 on contribution from RAPID and also the company’s internal cost cutting measures. The company pays an attractive dividend yield of 5%-6%. Maintain BUY with a target price of 80 sen.

Lee Cherng Wee [email protected]

603 8736 1118 (ext: 759)


Plantation Marketweight

• Plantation Index outperformed the FBM KLCI in 2015. In 2015, the Plantation Index outperformed the KLCI by recording a slid of 1.7% against KLCI’s losses of 2.5%. The main culprit of the lackluster performance of the Plantation Index was the unfavourable CPO prices during 2015. For the first eleven-month period of 2015, CPO price achieved an average of RM2169/mt, representing a plunge of 10.8% from the CPO price achieved in the corresponding period last year.

Figure 20: The Plantation Index Outperformed the FBM KLCI

Source: JF Apex, Bloomberg

• Lagged impact of EL Nino starts to hit CPO production. CPO production in Malaysia for the first eleven-month grew by 1.4% y-o-y, as affected by the prolonged haze issue. However, demand for palm oil was inched up by 1% in 11M2015 from a year ago. Looking ahead, we are expecting CPO production to come under pressure in 1Q2016, as the lagged impact of El Nino kicks in would hit production. For 2016, we are projecting CPO production to slide with a negative growth of 0.5% to 20.1mil tonnes.

Figure 21: CPO Production and Palm Oil exports

11M2015 11M2014 Changes (%)

CPO Production (tonnes) 18,561,320 18,302,196 1.41%

Palm oil export (tonnes) 15,946,232 15,786,625 1.01%

Source: JF Apex, MPOB

• Indonesian biodiesel mandate to boost palm oil demand for 2016. Indonesia has been pushing greater local use of edible oil-based biodiesel to cut its import of crude oil and create more demand for palm oil. According to chairman of the Indonesian Biofuel Producers Association, the implementation of the biodiesel program that requires minimum bio content in diesel from 15% to 20% in 2016 will see current capacity of 6.8m kilolitres of biofuel increase to 8m kilolitres. Should the execution go on smoothly; we expect the increase in biodiesel output shall boost or cushion the downside for CPO prices.

• Moderate hike for CPO prices in 2016. CPO prices achieved an average of RM2167/mt in 2015, decreasing 10% y-o-y from RM2408/mt achieved in the same period last year. The drop in CPO prices was mainly attributed to growing competition from competing soy oil and the continued slide in crude oil prices. Looking ahead, we expect CPO prices to stay supported at above RM2250/mt level in 2016, given the current crude oil price hovering at


around US$40/barrel level but CPO prices still stay resilient. Meanwhile, we reckon that the seasonal low production in 1H would limit the downside of CPO prices. Besides that, we view the advent of an El Nino would serve as a catalyst to CPO prices. We estimate CPO prices to hit RM2450-RM2550/mt should the El Nino risks strengthening, as the dry weather would hurt crop production. Overall, we are maintaining our average CPO prices assumption for 2016 at RM2400/mt.

Figure 22: CPO prices from 2014 to 2015

Source: JF Apex, MPOB

• Maintain Marketweight on the sector. We are maintaining our neutral stance on the sector, given the record high stockpiles of 2.9m tonnes as at November 2015 may serve a buffer for the expecting lower supply in 2016, and subdued crude oil prices would limit upside of the CPO prices. Meanwhile, the implementation of higher minimum wages and higher fertilizer costs in view of weak ringgit would mitigate the positive impact of higher CPO prices. However, we see the advent of an El Nino as the potential strong catalyst to the sector should severe El Nino phenomenon happens.

• We maintain our HOLD call on Genting Plantations with a target price of RM9.67,

given current elevated share price and hence renders limited upside in a short run. Also, we have HOLD calls for Kuala Lumpur Kepong (target price: RM21.60) and IOI Corporation (target price: RM4.10) as we do not foresee immediate catalyst to plantation players with downstream operations as they are currently suffering from refining margins compression. Meanwhile, we maintain our HOLD call for IJM Plantations (target price: RM3.22) due to current rich valuation.


603 8736 1118 (ext: 754)


Property Marketweight � Property sector in the midst of consolidation. The Property index underperformed the

FBM KLCI index in 2015 (-8.7% vs –6.7% as of Dec 18) weighed down by poor investor sentiment on the sector due to slower property sales as a result of stringent mortgage approvals and rising cost of living pursuant to GST implementation and depreciation of Ringgit coupled with cautious economic outlook. Corporate earnings-wise, most of the property counters posted weaker yoy 9M15 net profits no thanks to dwindling new sales achieved for 2015 against last year. However, developers are generally having healthy unbilled sales which could underpin their bottom line for another 1-2 years till 2016-2017. Overall results were in line or below our and market expectations.

� Declining 1H2015 property transaction volume and value. JPPH’s (Valuation and

Property Services Department) figures indicated that volume and value transacted in 1H2015 decreased by 3.5% and 6.6% respectively as compared to 1H2014. For the residential sub-segment, transacted volume was down by 2.6% yoy whilst transacted residential value was slumped by 9.7% yoy (see Figure 23-26). Nevertheless, the House Price Index (HPI) showed that property prices continued to rise, +5.4% during 9M15 (vs 9.4% in 2014), albeit at a slower pace. Klang Valley’s house prices continued to stay resilient, growing by respective 6.1% and 6.6% for KL and Selangor. Elsewhere, Johor and Penang recorded +4.4% and 5.2% price growth, which were significantly down from +11.5% and +11.9% respectively in 2014 (see Figure 27).

� Moderate housing supply. On the supply side, we noticed that positive momentum of

future supply growth for residential units has been tapered off to +5% as of 1H2015 (vs +7% in 2014 and +8% in 2013) due to lower new launches in 2015 (see Figure 28). Meanwhile, ratio of future supply to existing stocks has been increased to current 30% from 28% in 2013, which is slightly above its 10-year average ratio of 29% (see Figure 29).

� Tumbling mortgage approval and application. On the demand side, BNM’s data

showed that the mortgage approval and application for the month of Oct 15 tumbled 20.4% and 9.5% yoy respectively. On monthly basis, the figures exhibited slight recovery of +2.7% and +0.2% respectively after consecutive three-month negative growth with current lacklustre loan approval rate of 49% (see Figure 30-32).

� Take-up rate remain resilient amid slowdown in new launches. As expected, the

new launches sank during 1H2015, down 12.8% yoy against 1H2014, with substantial cutbacks in Klang Valley and Johor on the back of weak market sentiment pre and post GST implementation. However, sales performance was recorded at 31% with no major slump happening as we believe the developers re-strategised their projects and marketing activities to offer suitable products that catered for current market needs (see Figure 33).

� Overhang concern in Johor with build up of unsold units. The residential unsold

units slid 8.9% yoy during 1H2015 as compared to 1H2014. However, the unsold under construction surged 32.7% yoy. Notably, Johor made up more than one third of the national total in the unsold category with oversupply concerns on serviced apartments and terraced houses (see Figure 34-35).

� Outlook remains challenging for 2016. Empirical evidence suggests that developers

have experienced slowdown in their new sales since 2H14. Some smaller players with limited variety of product offerings and localities had difficulties to achieve their targeted new sales. We anticipate physical property transaction to dip in 2016 whilst property prices to be flattish or continue to rise with slower pace. Property transaction volume and value are


expected to decline about 5-10%, whilst house price to be flattish or slightly trend higher by <5% judging from continued increase of HPI by 5.4% yoy in 9M15. The residential market continues to soften in 2016 as affected by: a) challenging economic outlook in relation to prevailing weakness in commodity prices; b) stringent mortgage approval; c) property cooling measures which is still in place (removal of DIBS, RPGT hike and LTV ratio of 70% for third housing onwards); and d) diminishing purchasing power due to rising cost of living.

� Affordable housing – a way forward. Moving forward, the new launches from

developers will be fewer amid of weak consumer sentiment. More product offerings in the market will be focusing on medium cost housing with pricing less than RM500-600k, but smaller built-up sizes with stubbornly high ASP psf, aiming for genuine demand.

� Favourable supply and demand factors. Over a longer run, we believe the residential market is still supported by the moderate supply, i.e. the growth in future supply (i.e. under construction and planned supply) of residential property has only clinched positive growth, mid single digit, four years ago after recording negative growth since 2006, and the percentage of future supply to existing stocks only inched up marginally to current 30%, slightly above its 10-year average of 29%. Meanwhile, demand is well underpinned by young demographics in the country (c. 47% of the population is aged between 20-49 years old), resilient domestic economic growth of over 4%, healthy unemployment level and relatively low Average Lending Rate (ALR) of 4.54% as compared to ALR of 6.36% pre Lehman crisis (see Figure 36).

� Improving infrastructure to further boost property sales over a longer run.

Government is about to undertake a few projects such as LRT 3, MRT 2 (MRT 1 will be completed by 2016-17), few highways surrounding Klang Valley in likes of SUKE, DASH, EKVE, DUKE extension, West Coast Highway linking Banting to Taiping, High Speed Rail linking Singapore to KL, Bus Rapid Transit (BRT) and Transit-Oriented Development (TOD) which will spur housing demand with the improved accessibility and amenities.

� Maintain Marketweight on the sector as lack of near-term re-rating catalyst. Our top pick under coverage is LBS (BUY, TP: RM1.70). We favour LBS for its: a) strong sales momentum and high earnings visibility; b) diversified product offerings and geographical exposures (mid to high-end property across Klang Valley, Pahang, Johor, Sabah); c) attractive dividend yield of over 6%; d) sturdy balance sheet with current low net gearing of 0.2x; and e) unlocking the potential landbank values in Zhuhai International Circuit (ZIC) following the recent signing of MOU between LBS and JiuZhou group Holdings Limited on the upgrading of ZIC. We are having HOLD call on Tambun (TP: RM1.51) and A&M (TP: RM0.86). Other non-rated property counters which are under our buy recommendations are: UOA Development, Matrix Concepts, Eco World, SP Setia and Mah Sing.

� Bottom fishing in 2H16. We advise investors to adopt long-term investment strategy and

start to accumulate property counters in 2H16 in view of current depressed valuations, i.e. large cap stocks and mid to small cap. stocks are now trading at respective 11-12x forward PE and 6-7x forward PE, whilst at a deep discounts to their RNAVs of 40-70%

Lee Chung Cheng



Figure 23: Declining Property Transaction Volume

Source: NAPIC

Figure 24: Declining Property Transaction Value

Source: NAPIC

Figure 25: Declining Residential Volume

Source: NAPIC

Figure 26: Declining Residential Value

Source: NAPIC

Figure 27: % Increase in House Price (by State)

% Increase in House Price (by State)

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

2001 2003 2005 2007 2009 2011 2013 9M2015

Msia KL Sgor Johor Penang

Source: NAPIC, JF Apex


Figure 28: Positive Future Supply Growth for Residential Since 2012

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

1H20

15

y-o-y (%)

Source: NAPIC, JF Apex Figure 29: Rising % of Future Supply to Existing Stock Since 2012

22%

24%

26%

28%

30%

32%

34%

36%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 1H2015

10-year average

Source: NAPIC, JF Apex Figure 30: Sluggish Y-o-Y & M-o-M Growth for Mortgage Approval Since 2H14

(40.0)

(30.0)

(20.0)

(10.0)

-

10.0

20.0

30.0

40.0

50.0

60.0

Jan-

13

Mar

-13

May

-13

Jul-1

3

Sep-1

3

Nov

-13

Jan-

14

Mar

-14

May

-14

Jul-1

4

Sep-1

4

Nov

-14

Jan-

15

Mar

-15

May

-15

Jul-1

5

Sep-1

5

YoY MoM

Source: BNM, JF Apex


Figure 31: Sluggish Y-o-Y & M-o-M Growth for Mortgage Application Since 2H14

(40.0)

(30.0)

(20.0)

(10.0)

-

10.0

20.0

30.0

40.0

50.0

60.0

70.0

Jan-

13

Mar

-13

May

-13

Jul-1

3

Sep-1

3

Nov

-13

Jan-

14

Mar

-14

May

-14

Jul-1

4

Sep-1

4

Nov

-14

Jan-

15

Mar

-15

May

-15

Jul-1

5

Sep-1

5

YoY MoM

Source: BNM, JF Apex Figure 32: Dropping Loan Approval Rate Since Early 2015

Loan Approval Rate (%)

40%42%44%46%48%50%52%54%56%58%60%

Jan-

13

Mar

-13

May

-13

Jul-1

3

Sep-1

3

Nov

-13

Jan-

14

Mar

-14

May

-14

Jul-1

4

Sep-1

4

Nov

-14

Jan-

15

Mar

-15

May

-15

Jul-1

5

Sep-1

5

Source: BNM, JF Apex Figure 33: Reducing New Launches Since Early 2015 After 2011-14’s Peak

Source: NAPIC


Figure 34: Residential Unsold Units – Strong Surge for the ‘Under Construction’ During 1H15

Source: NAPIC Figure 35: Overhang Units by State – Supply Glut in Johor

Source: NAPIC Figure 36: Historically Low ALR

4.0

5.0

6.0

7.0

8.0

9.0

10.0

11.0

12.0

13.0

14.0

Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15

(%)

Average Lending Rate

Base Lending Rate

Source: BNM, JF Apex


Rubber Glove Downgraded to Marketweight • USD continues its appreciation against MYR, no signs of retreating. Malaysian

Ringgit (ringgit) has been depreciating against US Dollar in the past one year, triggered by capital outflow. With the Ringgit stays above RM4/USD amid decision made by Federal Reserve on interest rate hike, we expect ringgit would not retreat in a strong manner in the near term. This gives gloves makers the advantage to further boost their revenue as most of the sales of gloves are denominated in USD.

Figure 37: US Dollar to Malaysian Ringgit Exchange Rate

Source: Bloomberg

• Costs of raw materials to stay sluggish in 2016. Prices of natural rubber latex dipped lower as of December 2015. Despite with all the talks that prices of natural rubber latex will refine in 2016, we expect it will have minimal upside from current price as the global economy especially China, which is the major consumer of rubber, is slowing down. Thus, it will suppress the demand whilst supply remains consistent, which will keep the latex prices subdued for quite sometimes. We expect natural rubber latex prices to stay below RM5/kg throughout 2016. Meanwhile, nitrile latex prices are expected to stay soft during 2016 as we see crude oil prices remain weak, lingering below US$40/barrel. Overall, we think that costs of raw materials would stay moderately low in 2016 and hence benefiting the glove makers.

Figure 38: Natural Latex Prices

Source: Bloomberg


• Rubber gloves industry will maintain its growth momentum with cautious. The demand of rubber gloves mostly due to rising hygiene awareness together with the demand from food industry and other sectors. Going forward, it is expected that the global demand growth on rubber gloves to be 5-6% p.a which will encounter by expansion of gloves production especially in the nitrile segments. We believe that migration trends towards nitrile gloves will boost Malaysia’s export as most of glove makers have skewed to fill up new nitrile capacity to cater global demand. We estimate additional gloves production capacity of more than 10billion pieces annual capacity for 2016. Nevertheless, glove makers have been emphasizing on improving cost efficiencies via automation, computerisation and technology transformation initiatives which render the margins upward momentum to the industry. Meanwhile, the impact of electricity hike as a result of rebates cut is expected to be mitigated by cost pass through mechanism resulting in minor implication on rubber gloves sector, we believe.

• We downgrade our OVERWEIGHT call to MARKETWEIGHT on the sector but with

positive bias as we believe the positive in low raw material prices has been largely priced in following recent sharp prices run-up. Meanwhile, we do not expect the cost spikes arising from electricity tariff revision to significantly dent rubber glove manufacturers’ earnings by which they can pass the extra costs to their customers. The only immediate catalyst to the sector we can foresee would be the further depreciating RM against USD. However, with the slowdown of the global economy somehow will affect the export in rubber gloves industry amid current intense competition following their earlier capacity expansions. Thus, we keep neutral with positive bias on the sector.

• For stocks under our coverage, we rate HOLD on Top Glove Corp with target price of

RM10.84 following our earlier earnings upgrade. Our valuation for Top Glove is pegged at 21x FY16F EPS, which is +2 SD above its 5-year mean PE. Given the recent sharp rally of share price, we reckon that the market has factored in the positives and hence we foresee limited upside to the share price with unfavourable risk-reward.

• Maintain HOLD for Hartalega with target price of RM5.34 after adjusting for

recent bonus issue. Our target price is pegged at 25x FY17F EPS, which is at its historical 3-year mean PE.

• Maintain HOLD on Supermax with target price of RM2.37 following our earlier

earnings upgrade with higher EPS. Our valuation is pegged at 10.5x annualized FY16F EPS. We expect the group will continue to deliver encouraging earnings in the coming quarters judging from the expansion plan of the Group, lower raw material prices, appreciation of US Dollar and improved operational efficiency.


603 8736 1118 (ext: 755)


Telecommunications Marketweight

• We remain Neutral on the Telecommunications sector with the mobile segment facing a

challenging outlook after last year’s price war resulted in lower average revenue per user (ARPU).

• Overall revenue growth is expected to remain at low single digits. Although tight competition

will continue to put downward pressure on ARPU, this will be compensated by rising subscribership on the back of population growth. Revenue growth will also come from increasing internet and data usage replacing declines in SMS and voice revenue.

• The implementation of GST has impacted consumer wallet and changed the business

landscape following softer consumer sentiment. The depreciation of Ringgit has also affected migrant worker subscribers apart from higher IDD interconnect fees.

• Despite the challenges, telcos’ strong cashflow provides consistent dividend payouts, making

telco stocks resilient during uncertain times albeit at lower yields. • Our top pick in the sector is Telekom Malaysia (TM) due to its position as the leader in

the broadband segment. • For the mobile segment, we like Axiata due to its regional presence where earnings growth

from other countries have cushioned declines in its two major operating companies XL (Indonesia) and Celcom (Malaysia).

Telekom Malaysia

• We prefer TM ahead of other telcos given its dominant position in the broadband segment

with little competition. •

Earnings growth is driven by rollout of High Speed Broadband (HSBB) and take-up of UniFi fibre internet package. UniFi subscribers stand at 793,000 in 3Q15 and ARPU is holding up at RM190 without serious competition. Earnings are also lifted by continuous migration of broadband users from Streamyx to UniFi, lifting ARPU from RM87 to RM192.

• HSBB2 and SUBB agreement finally inked – Last month, TM has finally signed the

official agreement with the government to roll out HSBB phase 2 and Sub-Urban Broadband (SUBB) projects. To recap, HSBB2, was first announced in Budget 2014 but was delayed and restructured to include SUBB in Budget 2015.

• This is a huge catalyst for TM to gain new markets and subscribers. Apart from more subscribers, TM might possibly benefit from tax break as experienced in HSBB1 for capex invested.

• HSBB2 will require investments of RM1.8bn (RM1.3bn from TM and RM500m from the

government) to connect 390k premises in urban areas and SUBB will require RM1.6bn (RM1bn from TM and RM600m from the government) to connect 420k premises suburban areas. We think capex for HSBB2 and SUBB will not affect its dividend policy of at least RM700m or up to 90% of normalized PATAMI.

• Moving into mobile segment – PacketOne (P1)’s LTE/4G network roll-out is progressing

well into testing stages. Through P1, TM is mulling the launch of mobile services this year and could bring competition to the mobile players.


• In 3Q15, TM’s 55.3%-owned P1 contributed RM54.3m revenue but posted RM53.6m operating loss. For the nine months, P1’s revenue totaled RM176.7m while operating loss is at RM185.5m. Losses in P1 could continue for another 1-2 years as it continues to invest in capex but we are not too concerned as P1 would benefit from HSBB2’s wider fibre network to support the quality of its 4G services.

• We think its valuation of over 30 times PER is warranted and fairly valued as share price

have accounted for HSBB2. HOLD (TP: RM6.85)

Axiata

• Axiata’s FY15 performance was affected by lower earnings from its two biggest subsidiaries

Celcom (Malaysia) and XL (Indonesia), but the decline was cushioned by growth in smaller operating companies namely Dialog (Sri Lanka), Robi (Bangladesh) and Smart (Cambodia).

• Moving forward, Celcom has rectified its IT glitches that affected operations and is trying to

regain lost market share by launching new packages. Meanwhile, XL is undergoing transformation after integrating Axis to improve profitability and optimise its business model by targeting profitable subscribers.

• Entering Nepalese market – Recently, Axiata announced the acquisition of Ncell in Nepal. Ncell is the market leader with 13m mobile subscribers, translating into 48.8% of the subscriber market and 57.5% share of the market revenue. Its three-year revenue CAGR stands at 20% with an impressive FY15 EBITDA margin of 62%.

• We are positive on the acquisition as it would boost Axiata's earnings. Based on FY14's financials, the acquisition would increase Axiata's revenue, EBITDA and PATAMI by 9%, 13% and 19% respectively.

• By penetrating the Nepalese market, this would strengthen Axiata's position in South Asia after having presence in India, Bangladesh, Pakistan and Sri Lanka through either subsidiary or associate companies.

• Axiata has assured investors that the acquisition would not affect its dividend policy as Ncell

has strong cashflow generation with operating cashflow of US$217m a year. • We prefer Axiata to Maxis and Digi due to its overseas exposure following the challenges

faced by Malaysian telcos. HOLD (TP: RM6.60)

DiGi

• In 3Q15, DiGi saw its stronghold in prepaid segment being affected by competition. It lost

145k prepaid subscribers to 9.9m from 10.0m in 2Q15. Facing the current challenges, Digi is counting on cost efficiency measures to protect its margin. Despite the setback, Digi has the highest expected dividend yield of 4% due to strong cashflow and low gearing with net debt/EBITDA at 0.14x.

• Going forward, Digi plans to transform from a telco into an Internet service provider

following growing mobile Internet demand and increasing smartphone penetration. Riding the evolution of digital services, Digi is looking to provide digital services related to social media, entertainment, storage and payment.


• Potential catalyst is its business trust that has been under planning for a few years. The progress of the plan has been slow due to regulatory issues and we do not expect it to take off anytime soon. However, it would surprise the market when it happens. HOLD (TP: RM5.18)

Maxis

• Maxis is seeing the impact of its restructuring as the company slowly regain market share.

Its transformation program has started to bear fruit as subscribership and revenue recovered. Maxis has gained over 1m prepaid subscribers to over 9m from a low of 7.8m in 2013.

• Meanwhile, impact of cost cutting measures and restructuring also kicked in to arrest the

decline in revenue and EBITDA. Maxis‘ 3Q15 EBITDA margin of 47% is superior than Digi and Celcom.

• We expect earnings momentum to continue into 2016. However, its valuation stands at over

30 times PER making the stock expensive. Furthermore, full year dividend payment is expected to decline to 25 sen/share (from 40 sen/share paid annually) due to higher gearing as net debt/EBITDA increased to 1.85x and is approaching the threshold of 2.0x. HOLD (RM6.28)

Figure 39: Financial Summary for 3Q15

RM million DIGI MAXIS CELCOM

Mobile Revenue 1584 2050 1801

Revenue share 29% 38% 33%

Net Profit 397 422 408

Net margin 23.7% 19.5% 22.6%

EBITDA 719 1021 737

EBITDA margin 42.9% 47.1% 40.9%

Subscriber Prepaid 9.900 8.850 9.707

(million) % share 35% 31% 34%

Postpaid 1.78 2.784 2.802

% share 24% 38% 38%

Total 11.68 11.634 12.509

% share 33% 32% 35%

ARPU (RM) Prepaid 38 39 32

Postpaid 81 98 91

Blended 45 53 45

DIGI MAXIS AXIATA TELEKOM

Share Price (RM) 5.40 6.80 6.41 6.78

Market Cap (RM billion) 42.0 51.1 56.5 25.5

PER 22.1 31.6 20.6 34.8

Dividend yield 4.4% 3.7% 3.4% 3.0%

Target price (RM) 5.18 6.28 6.60 6.85

Recommendation Hold Hold Hold Hold Lee Cherng Wee [email protected]

603 8736 1118 (ext: 759)


JF APEX SECURITIES BERHAD – CONTACT LIST

JF APEX SECURITIES BHD

Head Office: 6th Floor, Menara Apex Off Jalan Semenyih Bukit Mewah 43000 Kajang Selangor Darul Ehsan Malaysia General Line: (603) 8736 1118 Facsimile: (603) 8737 4532

PJ Office: 15th Floor, Menara Choy Fook On No. 1B, Jalan Yong Shook Lin 46050 Petaling Jaya Selangor Darul Ehsan Malaysia General Line: (603) 7620 1118 Facsimile: (603) 7620 6388

DEALING TEAM

Head Office: Kong Ming Ming (ext 3237) Shirley Chang (ext 3211) Norisam Bojo (ext 3233) Institutional Dealing Team:

Lim Teck Seng Sanusi Bin Mansor (ext 740) Fathul Rahman Buyong (ext 741) Muhammad Syukri (ext 744) Ahmad Mansor (ext 744) Zairul Azman (ext 746) Nur Nadia (ext 741) PJ Office: Mervyn Wong (ext 363) Azfar Bin Abdul Aziz (Ext 822) Tan Heng Cheong (Ext 111)

RESEARCH TEAM

Head Office: Lee Chung Cheng (ext 758) Lee Cherng Wee (ext 759) Norsyafina binti Mohamad Zubir (ext 753) Low Zy Jing (ext 754) Nazhatul Shaza Binti Shukor (ext755)

JF APEX SECURITIESJF APEX SECURITIESJF APEX SECURITIESJF APEX SECURITIES - RESEARCH RECOMMENDATION FRAMEWORK

STOCK RECOMMENDATIONS

BUY : The stock’s total returns* are expected to exceed 10% within the next 12 months.

HOLD : The stock’s total returns* are expected to be within +10% to – 10% within the next 12 months.

SELL : The stock’s total returns* are expected to be below -10% within the next 12 months.

TRADING BUY : The stock’s total returns* are expected to exceed 10% within the next 3 months.

TRADING SELL : The stock’s total returns* are expected to be below -10% within the next 3 months.

SECTOR RECOMMENDATIONS

OVERWEIGHT : The industry as defined by the analyst is expected to exceed 10% within the next 12 months.

MARKETWEIGHT : The industry as defined by the analyst is expected to be within +10% to – 10% within the next 12 months.

UNDERWEIGHT : The industry as defined by the analyst, is expected to be below -10% within the next 12 months.

*capital gain + dividend yield

JF APEX SECURITIES BERHADJF APEX SECURITIES BERHADJF APEX SECURITIES BERHADJF APEX SECURITIES BERHAD – DISCLAIMER

Disclaimer: The report is for internal and private circulation only and shall not be reproduced either in part or otherwise without the prior written consent of JF Apex Securities Berhad. The opinions and information contained herein are based on available data believed to be reliable. It is not to be construed as an offer, invitation or solicitation to buy or sell the securities covered by this report. Opinions, estimates and projections in this report constitute the current judgment of the author. They do not necessarily reflect the opinion of JF Apex Securities Berhad and are subject to change without notice. JF Apex Securities Berhad has no obligation to update, modify or amend this report or to otherwise notify a reader thereof in the event that any matter stated herein, or any opinion, projection, forecast or estimate set forth herein, changes or subsequently becomes inaccurate. JF Apex Securities Berhad does not warrant the accuracy of anything stated herein in any manner whatsoever and no reliance upon such statement by anyone shall give rise to any claim whatsoever against JF Apex Securities Berhad. JF Apex Securities Berhad may from time to time have an interest in the company mentioned by this report. This report may not be reproduced, copied or circulated without the prior written approval of JF Apex Securities Berhad.

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