strategy - malaysia weak september quarter stronger 2015€¦ · 02/12/2014 · see important...

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Market Update, 2 December 2014

Strategy - Malaysia

Weak September Quarter – Stronger 2015

Macro

3

Risks

2

Growth

2

Value

2

Top Picks

TP (MYR/s)

AirAsia 3.11

Berjaya Auto 4.50

Berjaya Food 4.00

Inari Amertron 3.82

Kimlun 1.68

Matrix Concepts 3.93

Naim 4.88

Press Metal 5.75

SKP Resources 0.85

Sunway Group 3.90

Tambun Indah 2.50

Source: RHB

Alexander Chia +603 9207 7621

[email protected]

September quarter earnings failed to spark after only 52.1% of the stocks under our coverage reported earnings that were in line while 37.0% disappointed. We upgraded the tech sector to OVERWEIGHT. We trimmed our 2014 and 2015 earnings forecasts by 4.5% and 2.4% respectively. With earnings growth poised to recover, we are positive on equities and remain buyers of growth stocks on weakness.

Another forgettable quarter. Earnings for corporate Malaysia for the

September quarter were slightly worse than the preceding quarter after

37% of the quarter’s results disappointed while only 52.1% reported

earnings in line with expectations. The ratio of disappointing earnings is

the highest seen in the past 16 quarters. 73 stocks saw earnings

downgrades while only 23 received upgrades and, accordingly, our 2014

and 2015 earnings forecasts are lowered by 4.5% and 2.4%

respectively. Of the 24 FBM KLCI component stocks we have explicit

coverage on, only 45.8% were in line and 37.5% below. Forecasts for

the component stocks were lowered by 4.4% and 1.7% respectively with

the biggest estimate reductions coming from the plantations, oil & gas

(O&G), and banks sector while media, consumer and shipping saw

earnings upgrades Our 2015-2016 earnings growth forecasts for the

RHB universe is 8.4% and 9.5% (7.0% and 7.8% for FBM KLCI

component stocks) respectively. The earnings downgrades and modest

earnings growth means the benchmark index already trades at 16.5x

and 15.3x 2015 and 2016 respectively that will continue to cap the near term upside for the market.

Tech sector upgraded to OVERWEIGHT. 15 out of 22 sectors

contained earnings that were in line while seven (auto, plantations,

banks, timber, construction, gaming and basic materials) disappointed, a

similar ratio to the preceding June quarter. No sectors exceeded

expectations. The tech sector was upgraded to OVERWEIGHT as recent

recommendation revisions means that we have five BUYs and three

NEUTRALS. The sector is generally expected to benefit from the

expected recovery in exports and is a net beneficiary of the stronger

USD. Notably, the aviation sector’s results were in line, breaking a cycle

of three preceding weak consecutive quarters. The auto sector has the longest (seven quarters) streak of earnings below expectations.

Buy on weakness. While developed economies continue to struggle to transition into a self-sustaining growth stage from recovery, we believe the sharply lower crude oil prices will help to increase the disposable incomes of consumers thereby helping to hasten the global economic recovery and boost demand for exports. The risk of significant policy tightening in developed economies that could derail the recovery is also low, in our opinion. Lower oil prices will put pressure on revenues but is unlikely to derail Malaysia’s fiscal deficit target of 3% of GDP in 2015. However, investments into the O&G sector will slow as will earnings growth for O&G companies. With the pickup in corporate earnings heading into 2015 and 2016, we continue to be optimistic on domestic equities, given the lack of appeal of other asset classes. We continue to advocate a buy on weakness strategy, focusing on selective growth stocks that can create shareholder value, over and above defensives and yield stocks. We revise our end-2014 and end-2015 FBM KLCI target to 1,850 pts (from 1,940 pts) and 1,950 pts (from 2,100 pts) based on 16.8x and 16.5x one-year forward respectively.

http://www.efa.biz/

Strategy - Malaysia 2 December 2014

See important disclosures at the end of this report 2

Reference Exhibits

Figure 2: Comparison of Mar 2014 quarter earnings against RHB estimates

Sector Total Above In line Below

Auto 6 0 2 4

REITs 8 1 6 1

Plantations 11 0 5 6

Tech 8 1 5 2

Oil & Gas 17 3 9 5

Banks 7 0 5 2

Timber 3 1 0 2

Non-Bank Financials

5 0 4 1

Media 4 1 2 1

Ports 4 0 4 0

Logistics 4 0 3 1

Aviation 3 1 1 1

Shipping 2 1 0 1

Construction 11 2 5 4

Gaming 4 0 2 2

Healthcare 7 0 4 3

Utilities 5 1 3 1

Rubber products 5 0 3 2

Telecoms 6 0 3 3

Property 17 2 8 7

Basic Materials 11 1 4 6

Consumer 17 3 8 6

Total 165 18 86 61

% of Total 10.9 52.1 37.0

Source: RHB

Figure 1: Net EPS changes QoQ and YoY for FBM KLCI component stocks covered by RHB

(2.9)

(10.4)

5.6 5.6

(5.1)

3.9

3.4

1.8

(3.0)

2.8

-20

-10

0

10

20

30

40

50

60

70

1Q

CY

10

2Q

CY

10

3Q

CY

10

4Q

CY

10

1Q

CY

11

2Q

CY

11

3Q

CY

11

4Q

CY

11

1Q

CY

12

2Q

CY

12

3Q

CY

12

4Q

CY

12

1Q

CY

13

2Q

CY

13

3Q

CY

13

4Q

CY

13

1Q

CY

14

2Q

CY

14

3Q

CY

14

%

qoq yoy

Source: RHB, Company data



Figure 3: Comparison of Mar 2014 quarter earnings against consensus Sector Total Above In line Below

Auto 6 0 2 4

REITs 8 1 6 1


Tech 8 1 5 2

Oil & Gas 17 3 5 9

Banks 7 0 5 2

Timber 3 1 0 2 Non-Bank Financials 5 0 4 1

Media 4 0 3 1

Ports 4 1 2 1

Logistics 4 0 3 1

Aviation 3 0 0 3

Shipping 2 1 0 1


Gaming 4 1 0 3

Healthcare 7 1 3 3

Utilities 5 0 3 2


Telecoms 6 0 3 3

Property 17 3 7 7


Consumer 17 3 7 7

Total 165 19 74 72

Source: RHB

Figure 4: Changes to fair value Sector Total Above In line Below

Auto 6 2 4 0

REITs 8 1 1 6


Tech 8 1 2 5

Oil & Gas 17 1 13 3

Banks 7 2 4 1


Media 4 2 1 1

Ports 4 0 0 4

Logistics 4 0 2 2

Aviation 3 1 2 0

Shipping 2 1 1 0


Gaming 4 0 4 0

Healthcare 7 1 2 4

Utilities 5 2 1 2


Telecoms 6 3 2 1

Property 17 0 9 8


Consumer 17 5 4 8

Total 165 26 78 61

% of Total 15.8 47.3 37.0

Source: RHB



Figure 5: Changes to earnings estimates Sector Total Above In line Below

Auto 6 1 5 0

REITs 8 1 2 5


Tech 8 1 2 5

Oil & Gas 17 2 8 7

Banks 7 0 4 3


Media 4 1 1 2

Ports 4 0 0 4

Logistics 4 0 2 2

Aviation 3 1 2 0

Shipping 2 1 1 0


Gaming 4 0 3 1

Healthcare 7 1 3 3

Utilities 5 2 2 1


Telecoms 6 0 2 4

Property 17 1 7 9


Consumer 17 5 5 7

Total 165 23 73 69

% of Total 13.9 44.2 41.8

Source: RHB

Figure 6: Changes to recommendation

Sector Total Above In line Below

Auto 6 1 1 4

REITs 8 0 0 8


Tech 8 0 0 8

Oil & Gas 17 1 2 14

Banks 7 0 1 6


Media 4 0 1 3

Ports 4 0 0 4

Logistics 4 0 0 4

Aviation 3 0 0 3

Shipping 2 1 1 0


Gaming 4 0 1 3

Healthcare 7 1 1 5

Utilities 5 0 0 5


Telecoms 6 0 0 6

Property 17 0 2 15


Consumer 17 2 1 14

Total 165 11 15 139

% of Total 6.7 9.1 84.2

Source: RHB



Figure 7: Tracker - results vs RHB estimates

0%10%20%30%40%50%60%70%

%

Dec-10

Mar-11

Jun-11

Sep-11

Dec-11

Mar-12

Jun-12

Sep-12

Dec-12

Mar-13

Jun-13

Sep-13

Dec-13

Mar-14

Jun-14

Sep-14

Above 18.1 14.4 13.1 15.3 22.1 15.7 12.3 15.9 17.6 9.8% 18.1 22.6 19.0 8.6% 8.8% 10.9

In Line 52.4 55.9 53.9 55.9 48.7 53.7 58.5 48.6 48.6 60.1 51.0 52.8 51.5 60.5 57.2 52.1

Below 29.5 29.7 33.0 28.8 29.2 30.6 29.2 35.5 33.8 30.1 31.0 24.5 29.4 30.9 34.0 37.0

Source: RHB, Company data

Figure 8: Tracker - results vs consensus

0%

10%

20%

30%

40%

50%

60%%

Dec-10

Mar-11

Jun-11

Sep-11

Dec-11

Mar-12

Jun-12

Sep-12

Dec-12

Mar-13

Jun-13

Sep-13

Dec-13

Mar-14

Jun-14

Sep-14

Above 19.0 10.8 8.7% 9.9% 17.7 14.8 14.1 13.1 17.6 11.1 16.8 21.4 21.5 9.9% 10.1 11.5

In Line 50.5 50.5 51.3 46.9 44.2 50.0 49.1 41.1 35.8 53.6 46.5 45.3 43.6 55.6 50.9 44.8

Below 30.5 38.7 40.0 43.2 38.1 35.2 36.8 45.8 46.6 35.3 36.8 33.3 35.0 34.6 39.0 43.6

Source: Bloomberg, Company data

Figure 9: Sector performance tracker - actual vs RHB

Sector Mar 2012

Jun 2012

Sep 2012

Dec 2012

Mar 2013

Jun 2013

Sep 2013

Dec 2013

Mar 2014

Jun 2014

Sep 2014

Auto Below Below Below In line Below Below Below Below Below Below Below

REITs In Line In Line In Line In Line In Line In Line In Line In Line In Line In Line In Line

Plantations Below Below In Line In Line In Line Below In Line Above In Line In Line Below

Tech In Line Below Below In Line Below In Line In Line Above In Line In Line In Line

Oil & Gas In Line In Line In Line In Line In Line In Line Below Below Below Below In Line

Banks In Line In Line In Line Above In Line In Line In Line In Line In Line In Line Slightly below

Timber Below Below Above Below Below Below In Line Below In line Below Below

Non-Bank Financials In Line Above In Line In Line In Line In Line Above Above Above In Line In Line

Media In Line Below Below In line In Line In Line In Line In Line In Line Below In Line

Logistics In Line In Line In Line In Line In Line In Line In Line In Line In Line In Line In Line

Ports In Line Above In Line In Line In Line Below Above In Line In Line In Line In Line

Aviation Below In Line Below In line Below In Line In Line Below Below Below In Line

Shipping Below In Line Below Inline In Line In Line In Line Inline In Line In Line In Line

Construction In line In Line In Line In line In Line In Line Below Below In Line In Line Below

Gaming Below In Line In Line In line Below In Line In Line In Line In Line In Line Below

Healthcare In Line In Line Below In Line Below Below In Line In Line In Line In Line In Line

Utilities In Line In Line In Line In line In Line Above In Line In Line In Line In Line In Line

Rubber products In Line In Line In Line In line In Line In Line In Line In Line In Line In Line In Line

Telecoms In Line In Line In Line Below In Line In Line Above In Line In Line In Line In Line

Property In Line In Line In Line In Line In Line In Line In Line In Line Below Below In Line

Basic Materials Below Below Below Below Below Below Below Below In Line In Line Below

Consumer In Line In Line In Line In Line In Line In Line In Line In Line In Line In Line In-Line

Source: RHB



Figure 10: Tracker - actual vs RHB

0

2

4

6

8

10

12

14

16

18

Mar2012

Jun2012

Sep2012

Dec2012

Mar2013

Jun2013

Sep2013

Dec2013

Mar2014

Jun2014

Sep2014

Below Above In Line

Source: Bloomberg, Company data

Figure 11: Upgraded recommendation changes

Company New rec. Old rec. New TP

(MYR)

Old TP

(MYR)

Comments

MBM Resources BUY NEUTRAL 3.55 3.05

We expect recurring net profit to rebound 39.2% in 2015 from the alloy wheel business breaking even in 2015, and associates Perodua and Hino enjoying more favourable JPY exchange rates.

CBIP NEUTRAL TAKE

PROFIT 2.10 4.10

The relatively smaller downside risk as share price has fallen approximately 10-11% since August.

Petronas

Chemicals NEUTRAL SELL 6.08 6.11

Given the recent selldown, we upgrade our recommendation to NEUTRAL (from Sell).

Ta Ann BUY NEUTRAL 4.40 3.80

Given the continued strength in log dynamics, smaller losses at its plywood division and stabilised CPO prices, we upgrade our recommendation on Ta Ann to BUY

Allianz Msia BUY NEUTRAL 13.50 13.50 Valuations appear attractive again due to the recent retracement.

MISC BUY NEUTRAL 8.15 7.21

Management is upbeat on a sustainable freight rate environment for petroleum tankers, for which we forecast higher profits in FY15. We upgrade MISC to BUY post a 4-5% upward earnings revision.

Esthetics

International BUY NEUTRAL 1.40 1.35

Following the recent share price weakness, we upgrade our call to BUY and nudge up our SOP-based TP to MYR1.40 (from MYR1.35).

Ann Joo TRADING BUY SELL 1.37 1.07

We increase Ann Joo’s FY14/FY15 estimates by 75.7%/37.6% respectively as we revisit our financial model, taking into account of the advantage the blast furnace provides in terms of production costing

Lion Industries NEUTRAL SELL 0.52 0.53

Considering that we value the company only at 0.15x FY15F P/BV, we believe the downside risk from here may be limited. Thus, we upgrade Lion Industries back to NEUTRAL (from Sell).

VS Industry BUY NEUTRAL 2.92 2.00

We are positive that its coffee machine sales will sustain its earnings momentum moving forward

MSM Malaysia BUY NEUTRAL 5.74 5.23

We believe the absence of an LTC come 2015 and the current low raw sugar prices bode well for margins.

Source: RHB



Figure 12: Downgraded recommendation changes

Company New rec. Old rec. New TP (MYR)

Old TP (MYR)

Comments

APM SELL NEUTRAL 4.75 5.80

Earnings were hurt by a combination of weaker sales volumes and price pressure contributing to weaker margins. Medium term growth prospects look unexciting given tepid domestic industry volume growth and slow progress venturing into overseas markets.

Bumi Armada NEUTRAL BUY 1.49 2.24 We cut our FY14/FY15 earnings forecasts by 21%/13% respectively, adjusting for a lower contribution from Bumi Armada’s FPSO and OSV segments. With our new estimates, we arrive at our SOP-based TP of MYR1.49 ie an 8% upside only.

Perisai SELL NEUTRAL 0.88 1.46 We remain wary of its future earnings due to the underutilisation of two marine assets and higher finance cost from borrowings. Hence, we slash our FY14F/FY15F numbers by 95%/38%.

Maybank NEUTRAL BUY 10.20 11.00

We lower our FY14/FY15 net profit projections by 5%/9% respectively. NIM stayed flat QoQ despite the OPR hike, while non-interest income had another soft quarter. In addition, The sector is facing headwinds (eg tightening liquidity, weak capital markets) which may extend into 2015.

AEON Credit NEUTRAL BUY 18.00 18.7 We lower AEON Credit's TP to MYR18.00, based on a new target P/E of 10.5x (from 12x) to reflect asset quality risks.

Media Prima SELL NEUTRAL 1.66 2.10 9M14 earnings came in weaker than expected due to weak consumer sentiment, which was further compounded by plane crash tragedies. Advertisers are withholding their adex budgets.

Maybulk NEUTRAL BUY 1.30 2.00

We downgrade to NEUTRAL with a lower RNAV-based MYR1.30 TP (7.1% downside). Freight rate volatility will continue to persist on fading demand and renewed concerns of an oversupply, as reflected by the drop in asset prices. FY14/FY15/FY16 earnings trimmed by 44%/37%/35% as we cut our freight rate assumptions.

Genting NEUTRAL BUY 9.67 10.96 We downgrade our TP to MYR9.67 (from MYR10.96) (a 2.8% upside) following our valuation revision on its listed subsidiaries in view of potential earnings headwinds ahead.

CARiNG SELL NEUTRAL 1.27 1.70

We downgrade to SELL (from Neutral) and trim TP to MYR1.27 (from MYR1.70), a 17.5% downside, pegged to 16x FY15F P/E as we cut our FY15F/FY16F earnings further by 13.5%/17.4% respectively. This is in view of the increasingly challenging operating environment.

Glomac NEUTRAL BUY 1.28 1.38

While the sector peers have generally seen a sales recovery in 2QCY14, Glomac's sales were weaker than expected. As such, we raise our discount to RNAV to 35% (from 30%). We lower to NEUTRAL (from Buy) with a lower FV of MYR1.28.

Wing Tai SELL NEUTRAL 1.76 2.10 In view of the lower-than-expected results, we reduce our FY15 revenue and net profit forecasts by 12% and 19% respectively. Hence, we are lowering our SOP-based TP on the stock to MYR1.76

Lafarge Malaysia NEUTRAL BUY 10.00 11.27

We cut our ex-gate cement price assumptions by MYR18/MYR9 per tonne for next two years, which lowers our FY14/FY15 earnings estimates by 29.1%/11.1% respectively. That said, we pare our TP to MYR10.00 (from MYR11.27) due to the earnings cut

KKB SELL TRADING

BUY 1.38 2.78

We are cutting our contract win rate for the next two years. We also trim our target P/E to 12x FY15F (from 14x) as we remove the premium we had incorporated earlier due to its exposure to the O&G industry.

Felda Global Ventures

SELL NEUTRAL 2.80 3.68 We believe FGV‟s outlook will remain bleak unless it is able to boost earnings via earnings accretive acquisitions and extract synergy from its previous acquisitions

NTPM SELL NEUTRAL 0.70 0.82 Although we continue to like NTPM for its established Premier brand, we are turning cautious on its business prospects in the coming year as evidenced by its weak 1QFY15 performance.

Source: RHB



Figure 13: Stocks above expectations

Company New rec. Old rec. New TP (MYR)

Old TP (MYR)

Comments

IGB REIT NEUTRAL NEUTRAL 1.35 1.27 Higher-than-expected net profit was mainly attributed to: i) the higher income from The Gardens Mall and ii) writebacks in assessment expenses.

IQ Group BUY BUY 2.51 2.03 The better results were driven by higher export sales and favourable foreign exchange rates.

Petra Energy NEUTRAL NEUTRAL 2.08 3.02 This was boosted by increased work orders from the Pan Malaysia hook up, construction, and commissioning (HuCC) and topside major maintenance (TMM) contract as it picks up pace.

Favelle Favco BUY BUY 4.03 3.62 9M14 core profit rose 51.6% YoY to MYR70m on the back of higher crane sales – smashing our expectations as it makes up 97% of our forecast.

Ta Ann BUY NEUTRAL 4.40 3.80 Ta Ann’s 9MFY14 results were above expectations, due to stronger timber earnings

Astro NEUTRAL NEUTRAL 3.55 3.45

Revenue grew 12.5% YoY on the back of higher TV penetration rate (+13ppts YoY), better ARPU of MYR98 (+3.3% YoY) and higher advertising expenditure (adex) revenue (+7% YoY) – fuelled by the 2014 FIFA World Cup, which drove viewer numbers to a new record high

AirAsia BUY BUY 3.11 2.73 Better-than-expected 3Q14 earnings were largely on lower average jet fuel costs, even after conversion (-10% QoQ, -12.5% YoY).

MISC BUY NEUTRAL 8.15 7.21 MISC’s 9M14 earnings were better than we estimated, made on the back of lower-than-expected losses from its petroleum and chemical units.

Gamuda BUY BUY 5.61 5.61 Gamuda expects Line 2 of the Klang Valley MRT project to start work in mid-2016 (1H16 previously).

SHL Consolidated BUY BUY 5.00 5.00

The better results were mainly due to the encouraging response to its projects in Rawang Corporate Industrial Park and Phase 1 of the Goodview Heights (Cassia East) that have >90% take-up rates, coupled with higher profit contribution from its associate

MRCB BUY BUY 2.05 2.05

The better-than-expected results were mainly attributable to earlier revenue recognition from its PJ Sentral project after the completion of the deal on 25 Sep as well as better contribution from other ongoing projects. One-off revenue of MYR91m for granting the development rights for a parcel of land in PJ Sentral to PKNS was also recognised during the quarter.

Ann Joo Resources TRADING BUY SELL 1.37 1.07 Although local steel mills continue to compete with intensified dumping of steel bars and wire rods from China, the company managed to raise its sales tonnage, which resulted in the 22.0% YoY rise of its YTD revenue.

Puncak Niaga TRADING BUY TRADING

BUY 4.01 4.01

Above our expectations at 73.2% and 79.4% of the respective full-year forecasts due to lower-than-expected effective tax rate of 9.3% in 3Q14

VS Industry BUY NEUTRAL 2.92 2.00 Its exceptional performance was achieved on the back of better earnings from its Malaysian operation and tax incentives for its exported coffee machines.

BAT SELL SELL 57.8 56.00

9M14earnings grew 12.6% YoY due to: i) a 4.9% revenue growth on the back of the cumulative effect of the price hikes in June and September last year, ii) an absence of non-recurring leaf restructuring expenses in 2013, and iii) cost savings from improved productivity.

Carlsberg Brewery NEUTRAL NEUTRAL 12.80 11.55 Although sales were up by a mere 3.8% YoY, earnings rose 24% on the back of: i) strategic cost management, particularly at its Singapore unit, and ii) an improved price and product mix.

Naim Holdings BUY BUY 4.88 5.06 Naim beat our expectations at 93% of our full-year forecast, thanks to better-than-expected property margins

Wah Seong BUY BUY 2.00 2.40 Wah Seong’s 9M14 core profit of MYR96m exceeded expectations again (at 87% of our/consensus estimates), mainly due to contributions from the Polarled pipe coating project.

Source: RHB



Figure 14: Stocks below expectations

Company New rec. Old rec. New TP

(MYR)

Old TP

(MYR) Comments

AirAsia X SELL SELL 0.57 0.68

Earnings continued to come under pressure due to weakening passenger yields and escalation of costs. Airline incidents compounded the already intense operating environment.

Freight Management NEUTRAL NEUTRAL 1.64 1.76

1QFY15 (Jun) earnings came in weaker than expected due to restructuring of its air freight division, cessation of a major 3PL contract as well as subpar performance from the tug & barge wing.

Padini NEUTRAL NEUTRAL 1.90 2.03

1QFY15 net profit fell 30.5% YoY as overall margin came in lower at 12.0% (-610bps YoY), mainly due to higher operating expenses and aggressive promotions and discounts.

Media Prima SELL NEUTRAL 1.66 2.10 9M14 earnings came in weaker than expected due to weak consumer sentiment, which was further compounded by plane crash tragedies.

Kossan Rubber

Industries BUY BUY 5.12 5.12

9M14 earnings came in weaker than expected due to lower contributions from all divisions, but we see a bright outlook for FY15 when its new lines commence operations.

Ahmad Zaki Resources BUY BUY 0.92 0.96

9M14 net profit disappointed at only 61% of our full-year forecast. The key variance came from lower than-expected bunkering profits as a result of a temporary slowdown in offshore activities by certain customers

Prestariang NEUTRAL NEUTRAL 1.57 1.60

9M14 net profit of MYR18.5m missed expectations, making up only 64.5%/65.6% of our/consensus full-year estimates due to continued weakness in contract flows

Affin NEUTRAL NEUTRAL 3.30 3.50 Affin’s 3Q14 results were below our and consensus estimates due to higher-than expected overheads and credit cost.

Magnum NEUTRAL NEUTRAL 3.06 3.22

All in, core earnings of MYR196.0m (-24.6% YoY) fell short. We attribute this to the higher-than-expected prize payout ratio booked in during the quarter at an estimated 68.4%, up by some 70bps QoQ and 350bps YoY.

Apex Healthcare NEUTRAL NEUTRAL 3.75 3.75

Apex Healthcare’s (Apex) 9M14 results were slightly below expectations. Its 9M14 core net profit of MYR24m (+14% YoY,) accounted for about 71% of our FY14 full-year target.

Axiata NEUTRAL NEUTRAL 7.20 7.30

Axiata’s 9MFY14 net profit was below expectations following Celcom’s abysmal showing and forex losses. Management appears cautiously optimistic on its outlook (the worst of Celcom’s IT issues are behind it), although we note that competition remains a key risk.

CARiNG SELL NEUTRAL 1.27 1.70 Caring’s 1QFY15 core earnings missed estimates for the second consecutive quarter as margins fell to their lowest level since its listing.

Daibochi NEUTRAL NEUTRAL 4.10 4.10

Despite a 13.2% YoY sales growth, earnings declined 13.1% YoY, largely due to: i) higher raw material prices since 2H13, ii) electricity tariff hike in early 2014, and iii) higher wages.

Malaysian Bulk Carriers NEUTRAL BUY 1.30 2.00

Earnings came in below our estimates on the weak freight rate environment. Freight rate volatility will continue to persist on fading demand and renewed concerns of an oversupply, as reflected by the drop in asset prices. FY14/FY15/FY16 earnings trimmed by 44%/37%/35% as we cut our freight rate assumptions.

Tan Chong SELL SELL 3.55 3.90 Earnings decimated by another inventory provision of USD4.55m at its 74%- owned Nissan Vietnam (NVL).

Thong Guan BUY BUY 2.60 2.60 Earnings slid 0.9% due to: i) a lower earnings contribution from its operations in China, stretch film and compounding divisions, ii) higher impairment losses at its Thailand investment, and iii)higher opex.

Telekom NEUTRAL NEUTRAL 7.00 6.10 EBIT margin narrowed to 11.7% (9MFY13: 12.8%) from higher opex and the accelerated depreciation of its USP assets.

FGV SELL NEUTRAL 2.80 3.68 FGV’s 9M14 core net profit missed expectations due to larger losses at its downstream operations as well as higher depreciation and tax charges.

Notion VTEC NEUTRAL NEUTRAL 0.45 0.49

FY14 revenue of MYR199.4m was 11.1% lower YoY as overall utilisation rate remained subdued on continued weakness in its camera segment (-45.2% YoY).

Genting Msia NEUTRAL NEUTRAL 4.21 4.40

Genting Malaysia’s 9M14 core earnings of MYR950.5m fell below expectations due to subpar VIP holds in Malaysia, while its US segment continued to face headwinds from Bimini losses.

TDM NEUTRAL NEUTRAL 0.85 0.90 Higher-than-expected unit production costs in 3Q14 and higher-than-expected effective tax rate of 49% in 3Q14.

IJM Land BUY BUY 3.97 4.15

IJM Land’s (IJMLD) 2QFY15 results came in below our and market expectations. The weaker earnings were mainly due to slower progress billings during the period.

IOI Properties BUY BUY 3.10 3.10 IOIC’s 1QFY15 (Jun) results disappointed, due to weaker manufacturing contributions and higher tax rates.

Faber NEUTRAL NEUTRAL 2.97 3.20 Its core earnings fell 8.4% YoY on the back of a 5.5% decline in revenue on a fall



in its integrated facilities management (IFM) concession and non-concession revenues.

Axis REIT NEUTRAL NEUTRAL 3.55 3.60 Loss of income from Axis Plaza as well as lower overall occupancy.

Tune Ins BUY BUY 3.00 3.00 Lumpy claim items and lower earned travel policies from slow international travel growth.

Petronas Chemicals NEUTRAL SELL 6.08 6.11 Major maintenance turnarounds carried out in the earlier part of the year dragged down Petronas Chemicals’ 9M14 revenue by 9.8% YoY.

NTPM SELL NEUTRAL 0.70 0.82

Margins continued to shrink, with EBIT and PBT margins slipping 580bps and 590bps respectively due to a surge in overhead costs after higher electricity and natural gas tariffs took effect from Jan and May this year respectively.

Maybank NEUTRAL BUY 10.20 11.00 Maybank’s 9M14 results missed our and consensus estimates as NIM stayed flat QoQ despite the OPR hike, while non-interest income had another soft quarter.

Parkson SELL SELL 2.06 2.30 Operation deleveraging resulted in net profit declining 34.2% YoY to MYR20.2m.

IJM Corp BUY BUY 7.90 7.50

Other than the construction division that benefitted from a lumpy profit recognition on finalisation of certain project accounts, all other divisions reported subdued numbers.

M'sia Steel Works BUY BUY 1.26 1.31 Provision for deferred tax liability caused its effective tax rate to jump to 276% in 3Q14, thus pushing the company into a net loss for the quarter.

Tropicana BUY BUY 1.84 2.15 Revenue came in lower this quarter due to slower progress billings, given that some projects are only at the initial stages of development.

Perisai SELL NEUTRAL 0.88 1.46 Revenue surged 157% but core net margins declined to 7% resulting in bottomline missing its target.

Southern Steel NEUTRAL NEUTRAL 1.46 1.49

Southern Steel’s 1QFY15 (Jun) results (MYR21.7m net loss) were below consensus and our estimates due to stiff competition from imported steel, a drop in steel prices and deeper losses from its associates.

SP Setia BUY BUY 4.08 4.08 SP Setia’s 3QFY14 results came in below expectations, mainly due to the slower progress billings, GST financial impact and LTIP expenses.

Supermax NEUTRAL NEUTRAL 2.16 2.31

Supermax’s 9M14 earnings came in below expectations, which we believe was mainly due to lower production capacity and a challenging operating environment.

M'sia Smelting BUY BUY 3.88 4.20

The decline was attributed to lower tin prices at the average of USD21,913 a tonne in 3Q (-5.3% QoQ). This prompted Rahman Hydraulic Tin SB’s mining operations to record a lower profit whilst the tin smelting division to post a stable core profit.

TAS Offshore BUY BUY 1.42 1.60 The disappointing numbers were due to the underutilisation of two marine assets and higher finance cost from borrowings.

YTL Power NEUTRAL NEUTRAL 1.69 1.54

The key variances against our forecast are weaker contributions from Power Seraya in Singapore (due to increased competition on expanded capacity in the power generation sector in Singapore) and wider losses from its WiMAX division.

Lion Industries NEUTRAL SELL 0.52 0.53

The loss was mainly contributed by its steel division, which we suspect that fast-decreasing steel prices, led by the plunge of iron ore prices (compared with the more gradual adjustment to scrap prices after accounting for the weaker ringgit during the quarter) had caused an operating loss.

DRB Hicom BUY BUY 2.90 3.20

The main reasons for the deviation were an operating loss of MYR8.5m (vs 1QFY15 operating profit of MYR75.9m) at its automotive division and lower services earnings following the sale of the insurance business.

Jaya Tiasa SELL SELL 1.70 1.81

The main variance was weaker contributions from the plywood division caused by lower-than-expected plywood prices and higher-than expected plywood costs, which led to lower-than-expected margins for the plywood division of 2.4% in 1QFY15 (vs our projected 6% for FY15)

TSH Resources NEUTRAL NEUTRAL 2.28 3.70 The weakness was due to continuing losses at its 50%-owned refinery

UEM Sunrise TRADING BUY TRADING

BUY 2.16 2.52

UEM Sunrise’s (UEMS) 3Q14 results missed our and market expectations again. The YoY decline in earnings was mainly attributed to the lack of developed land sales in 9M14.

KKB Engineering SELL TRADING

BUY 1.38 2.78

We are not surprised by its weak results after the absence of significant new contract wins for its fabrication unit for the past one year.

AEON CO NEUTRAL NEUTRAL 3.67 15.60 We attribute missed expectations, at 54.3% of our full-year estimates, to higher utilities and promotional expenses, as well as initial start-up costs for new stores.

Lafarge NEUTRAL BUY 10.00 11.27

We believe its peer, YTL Cement, may have initiated a price cutting exercise in 3Q to expand its market share ahead of its new plant commissioning in 4Q – which induced cement players in Peninsular Malaysia including Lafarge to raise their bulk rebates.

Bumi Armada NEUTRAL BUY 1.49 2.24 We cut our FY14/FY15 earnings forecast by 21%/13% respectively, adjusting for a lower contribution from Bumi Armada’s FPSO and OSV segments.

Dayang BUY BUY 3.73 4.52 We had overestimated the amount of work orders that it would receive this year.



OCK BUY BUY 1.59 1.65

We lower our FY14 core earnings forecast by 28.4% to factor in: i) the delay in the USP project, and ii) the consolidation of PT Mulia Telecommunication’s (PMT) earnings in 4Q14 (from 3Q13 assumed previously)

IOI Corp NEUTRAL NEUTRAL 4.35 4.50 Weaker manufacturing contributions and higher tax rates

APM SELL NEUTRAL 4.75 5.80 Weaker margins on the back of lower revenue.

TH Plantation SELL SELL 1.22 1.40 Weaker-than expected FFB production resulting in lower cost efficiency.

UMW NEUTRAL NEUTRAL 11.00 12.40 While O&G earnings were broadly in line, the other three main divisions all disappointed.

Wing Tai SELL NEUTRAL 1.76 2.10

Wing Tai Malaysia’s (Wing Tai) 1QFY15 (Jun) bottomline missed our target. The lower performance was mainly due to less contribution from both the company’s property development and apparel retailing businesses.

WTK NEUTRAL NEUTRAL 1.25 1.32

WTK Holdings’ (WTK) 9MFY14 core net profit was below expectations, coming in at 62% of our and 55% of consensus’ FY14 forecasts, respectively due to higher than-expected effective tax rate recorded in 3Q14 of 34% (up from 20% in 1HFY14).

E&O BUY BUY 3.13 3.60 E&O’s 2QFY15 results missed our and market’s expectations. Earnings during the quarter were mainly contributed by Andaman and The Mews.

Sime Darby NEUTRAL NEUTRAL 8.75 9.00

The main variance was lower-than-expected earnings at the heavy equipment division on the back of persistent weakness in Australia, as well as losses recorded at its plantation downstream division of MYR18.9m

HSL NEUTRAL NEUTRAL 1.89 2.06 The variance against our forecast came largely from lower than-expected construction billings and property sales.

Eversendai NEUTRAL NEUTRAL 0.73 1.06

It was still unable to substantially recover its outstanding variation order (VO) claims during 3Q14. Not helping either was the recognition of “costs incurred on the development of new businesses” during 9M14.

Source: RHB



Sector Review Basic Materials – More Missed Than Within Expectations OVERWEIGHT

The recently-concluded reporting season saw most basic materials companies recording a disappointing set of results. Amongst others, most of the steel companies still reported disappointing numbers. The fast-decreasing steel prices, led by the plunge in iron ore prices vis-à-vis the more gradual adjustment in scrap prices after accounting for the weaker MYR during the quarter, had caused steel millers’ margins to slide. Furthermore, the intense competition from steel imports forced local producers to lower prices, which further dampened earnings. The exception to this was Ann Joo Resources (AJR MK, TRADING BUY, TP: MYR1.37), thanks to cheaper hot metal production costs via its blast furnace route following declining iron ore and coke prices in 3Q. Separately, the results of pure cement players like Lafarge Malayan Cement (Lafarge) (LMC MK, NEUTRAL, TP: MYR10.00) also disappointed. We attributed this to higher electricity and logistics costs coupled with further pressure brought about by intense price competition amongst the local cement boys ahead of additional capacity from YTL Cement. That said, niche players continue to deliver decent results and we were most impressed with Press Metal’s (PRESS MK, BUY, TP: MYR5.75) results that are set for a record earnings year whilst its newly proposed Phase 3 smelter expansion also provides sustainable volume growth for next few years. Apart from that, Cahya Mata Sarawak (CMS MK, BUY, TP: MYR5.00) looks also well set to post record earnings this year after posting improvements in almost all of its business units. Separately, we also have Hiap Teck Venture’s (HTVB MK, BUY, TP: MYR1.00) and Pantech’s (PGHB MK, BUY, TP: MYR1.25) results, which came in within our expectations. With that, we recommend that investors focus on interesting names involved in Sarawak and niche sub-industries, as their respective financial performances continue to improve, which could lead to robust alpha returns. Based on these factors, we keep our OVERWEIGHT rating on the basic materials sector.

Ng Sem Guan, CFA +603 9207 7678

[email protected]

Construction – Non-Construction Profits Disappoint OVERWEIGHT

While most construction companies booked earnings from construction profits during the quarter, some players reported weaknesses in their respective non-construction divisions. Of the nine construction companies in our coverage universe which reported results, four (44.5%) came in within our projections, four (44.5%) missed our expectations and only one (11%) beat our forecast. IJM Corp (IJM MK, BUY, TP: MYR7.50) fell short on property, infrastructure and building materials profits, which led to us cutting our FY15/FY16 earnings forecasts by 20%/19% respectively, and our TP by 5%. Hock Seng Lee (HSL MK, NEUTRAL, TP: MYR1.89) was hurt by lower construction billings and property sales, and we pared our FY14/FY15 earnings forecasts by 16%/8% respectively, and TP by 8%. Meanwhile, Eversendai (EVSD MK, NEUTRAL, TP: MYR0.73) was still unable to substantially recover outstanding variation order claims. As a result, we slashed our FY14/FY15 earnings forecasts by 31% each, and TP by 31% as well. As Ahmad Zaki’s (AZR MK, BUY, TP: MYR0.92) performance was dragged down by weaker bunkering profits, we cut our FY14/FY15 earnings forecasts by 31%/10% respectively, and TP by 4%. On the other hand, Naim (NHB MK, BUY, TP: MYR4.88) surprised on the upside –thanks to higher property margins achieved. We raised our FY14 earnings forecast for Naim by 14%, but trimmed our FY15 earnings forecast by 4% to reflect the reduced share of profits from Dayang Enterprise (DEHB MK, BUY, TP: MYR3.73) following a recent private placement of new shares that diluted the former’s stake in this hook-up and commissioning specialist to 29% from 30.9%. We also reduced our TP for Naim by 4%. We maintain our calls on all stocks and OVERWEIGHT recommendation for the construction sector, given their strong prospects, underpinned by the MYR73bn Klang Valley MRT project that will keep industry players busy until 2021.

Joshua Ng +603 9207 7606

[email protected]



Logistics – Growing In Tandem With The Recovery In The Economy

OVERWEIGHT

Earnings for import-export trade-related logistics counters like TASCO (TASCO MK, BUY, TP: MYR3.00) and Freight Management (FMH MK, NEUTRAL, TP: MYR1.64) reported a mixed set of results for the quarter under review. TASCO’s earnings were within expectations but have normalised down from its 1Q numbers. This was partly due to a one-off jump in air freight volumes due to an urgent shipment from a customer. Nonetheless, TASCO’s contract logistics division has been holding up the growth story strongly. Freight Management’s numbers were affected by the restructuring process in its air freight and tug & barge divisions due to an oversupply issue. As for Pos Malaysia (POSM MK, BUY, TP: MYR5.70), whose business model is more correlated to domestic mail volume and e-commerce trades, it reported weaker quarterly earnings on a YoY basis. This was mainly due to absence of a one-off general election catalyst when compared to 1QFY14 and higher cost base as Pos Malaysia has increased its headcount since 3QFY14. On a full-year basis, we concur with management’s view that the company is still able to report growth on a YoY basis, banking on increased volume in 4Q. On the other hand, GD Express (GDEX MK, BUY, TP: MYR2.42), whose business is mainly derived from domestic demand, has grown strongly on a YoY basis due to increased demand from e-commerce and prudent cost management. All in all, with expected improved trade activities and greater e-commerce transactions, logistics counters are set to report more solid numbers in the near future.

Jerry Lee 603 9207 7622

[email protected]

NBFI – Generally Resilient Despite Falling Bond Yields OVERWEIGHT The 9M14 results for the non-bank and financial institution (NBFI) companies were deemed in line. The only exception being Tune Ins (TIH MK, BUY, TP: MYR3.00), which reported lacklustre results due to lumpy claims in the medical and fire classes from its local insurance unit. We expect the general insurers to maintain strong bottomline performances as the industry’s underwriting margins remained healthy at 12%, though premium growth has lagged behind GDP growth due to weakened consumer spending. For the life insurers under our coverage, Allianz Life Insurance Malaysia was not majorly impacted from a net increase in contract liabilities across the life insurance industry, which was caused by falling bond yield movements since late 2013. This was because it had lengthened its asset duration to about eight years. We upgrade parent Allianz Malaysia (ALLZ MK, TP: MYR13.50) to BUY, given that current levels offer bargaining opportunity for its long-term value.

Kong Ho Meng +603 9207 7620

[email protected]

Property – Earnings Generally Improved From 2Q OVERWEIGHT The latest quarterly results for the property sector were more within expectations. Earnings were still largely underpinned by the healthy unbilled sales that the developers have secured over the last 1-2 years. Of the 11 companies under our coverage that have reported results, four missed our expectations, six came in line and one beat our forecasts. This was Malaysian Resources Corp (MRC MK, BUY, TP: MYR2.05), given the revenue recognition from PJ Sentral after the completion of the deal and higher progress billings from other projects. Earnings were generally better than 2Q. This was in line with our expectations, as 2H is typically stronger for developers based on the past trends. The pick-up in new property sales, however, has tapered off from 2Q. This was partly due to the timing of launches as developers turn more positive but are still cautious with the overall market sentiment. 4Q sales should be slightly better than 3Q, and most developers will likely hit their sales target for the year. Maintain OVERWEIGHT, with Sunway (SWB MK, BUY, TP: MYR3.90), Tambun Indah Land (TILB MK, BUY, TP: MYR2.50) and Matrix Concepts (MCH MK, BUY, TP: MYR3.93) remaining as our Top Picks.

Loong Kok Wen, CFA +603 9207 7614

[email protected]



Rubber Products – A Mixed Set Of Results OVERWEIGHT

Rubber product manufacturers (rubber gloves and condoms) reported mixed results for the quarter under review. Glove makers’ earnings generally came in slightly below expectations. The average selling prices of glove manufacturers declined on the back of lower raw material prices and intensifying pricing competition. The prophylactic manufacturer in our coverage, however, did not face such problems as the demand for its products remained resilient. Moving forward, we expect the demand for gloves to remain resilient at 8-10% per annum – although pricing may remain under pressure due to oversupply on the back of the capacity expansion. High efficiency in production lines could be the key for glove makers to yield stronger results moving forward. The ongoing Ebola outbreak situation appears to be contained. Among the glove makers, our Top Pick is Kossan (KRI, BUY, TP: MYR5.12) as we expect it to report strong earnings for coming quarters on the back of new capacity coming on-stream and improved technology that could expand its margin. We also like Hartalega (HART MK, BUY, TP: MYR7.70) as its new capacity coming on-stream may propel earnings to a new level. Top Glove (TOPG, BUY, TP: MYR5.06) is currently under review as its share price is close to our TP. Meanwhile, Supermax’s (SUCB MK, NEUTRAL, TP: MYR2.16) earnings missed market estimates as its production capacity was badly affected in 1H14. The demand for condoms, in the meantime, remained healthy, as Karex (KAREX MK, BUY, TP: MYR3.43) booked slightly stronger-than-expected earnings. We continue to expect the growth momentum to pick up for Karex following the recent completion of its acquisition of Global Protection. In addition, the company is currently looking to manufacturer polyisoprene products and eyeing the European market for its next growth phase.

Jerry Lee +603 9207 7622

[email protected]

Utilities – A Mixed Bag OVERWEIGHT

Of the four utilities companies under our coverage universe which reported results, two (50%) came in within our projections, one (25%) missed our expectations and one (25%) beat our forecast. Tenaga Nasional (TNB MK, BUY, TP: MYR15.50) met our numbers as we had not assumed in our forecasts an adjustment in electricity tariff on 1 Jul 2014 in accordance with the fuel cost pass-through (FCPT) mechanism, as stipulated in the new energy policy that took effect on 1 Jan 2014. We took the opportunity to raise our FY15 net profit forecast by 13% to factor in a lower coal cost assumption. Correspondingly, we raised our TP for the stock by 13%. Petronas Gas (PTG MK, NEUTRAL, TP: MYR21.98) was able to deliver numbers as reduced gas processing profits (due to lower plant liquid performance) were more than offset by maiden contributions from the new 300MW Kimanis power plant in Sabah and a first full-year contribution from the liquefied natural gas (LNG) regasification terminal in Sungai Udang, Melaka. In the meantime, Puncak Niaga (PNH MK, TRADING BUY, TP: MYR4.01) beat our numbers, thanks to a lower-than-expected tax, while YTL Power (YTLP MK, NEUTRAL, TP: MYR1.69) was hurt by weaker contributions from PowerSeraya in Singapore (due to increased competition on expanded capacity in the power generation sector in Singapore) and widened losses from its WiMAX division. These eclipsed the slight improvement in performance from its power generation businesses in Malaysia and Wessex Water in the UK. We cut our FY15 earnings forecast by 27% but raised our TP by 10% after updating our WACC assumptions.

Joshua Ng +603 9207 7606

[email protected]



Auto – A Sluggish Quarter NEUTRAL

Auto sector earnings disappointed for the seventh consecutive quarter. Only Berjaya Auto (BAUTO MK, BUY, TP: MYR4.50) and MBM Resources (MBM MK, BUY, TP: MYR3.55) reported earnings that were in line with expectations. Berjaya Auto is our Top Pick for the sector and we expect Mazda cars to continue gaining market share on the back of a strong product suite helped by sturdy principal support. It is also a beneficiary of the weaker JPY, which will lower cost of sales. 2015 is looking more positive for MBM Resources, with its alloy wheel business targeting to break even from higher plant utilisation rates. Perusahaan Otomobil Kedua SB (Perodua) should also have a stronger year given the strong market reception to the new Axia model and the lower JPY. APM Automotive Holdings (APM) (APM MK, TP: MYR4.75) suffered from sharply lower total industry production volumes during the quarter in addition to pricing pressure from original equipment manufacturer (OEM) customers that compressed margins. The stock was downgraded to SELL. Tan Chong Motor Holdings’ (Tan Chong) (TCMH MK, SELL, TP: MYR3.55) domestic business suffered from a lack of compelling products, intense competition and the need to discount to reduce inventory, thereby sacrificing margins in the process. Its Indochina venture has been a minefield given the dispute with customs earlier during the year and compounded by a MYR15m Nissan Vietnam Ltd-related inventory provision during the quarter. UMW Holdings (UWMH MK, NEUTRAL, TP: MYR11.00) suffered from weaker automotive and equipment margins during the quarter while its non-core oil & gas (O&G) businesses remained loss making. DRB-Hicom’s (DRB) (DRB MK, BUY, TP: MYR2.90) core earnings were weak, reflecting dismal Proton’s sales volumes. The initial market response to the Proton Iriz has been tepid, having been overshadowed by Perodua’s Axia. DRB’s huge interest costs – running at MYR95m a quarter – remain a drag on earnings. Resilient consumption spending, a competitive market place and a strong product pipeline should support auto sales in 2015. Key risks for the sector heading into the new year will be the availability of financing and how consumers react in the run-up to the introduction of the goods and services tax (GST) in Apr 2015, considering the higher cost of living and elevated inflation rates. Maintain NEUTRAL.

Alexander Chia +603 9207 7621

[email protected]

Aviation – A Mixed Bag NEUTRAL

3Q14 earnings were a mixed bag for the stocks under our aviation coverage. Of the three counters, only AirAsia (AIRA MK, BUY, TP: MYR3.11) reported better-than-expected earnings while Malaysia Airports (MAHB MK, BUY; TP: MYR8.04) came in line. AirAsia X’s (AAX, SELL, TP: MYR0.57) core losses were much deeper than we had anticipated, owing to weaker load factor amidst a depressed yield environment. Generally, 3Q14 was seasonally weaker QoQ, with overall passenger numbers dropping by 4% QoQ. The twin flight incidents of MH370 and MH17 had negatively impacted overall numbers on a YoY basis, which were down by 2% YoY in 3Q14. The drop in passenger numbers, which came largely from the sharp decline in Chinese tourist arrivals, had a negative impact on AirAsia X, Malaysian Airline System (MAS) (MAS MK, NR) and Malaysia Airports. Malaysia Airports saw passenger spending at its airports taking a hit, which was due to the absence of the high-spending Chinese tourists. On the positive note, yield momentum on a QoQ basis has shown an uptick despite 3Q14 being seasonally weaker. However, this was more evident on domestic flights where MAS is trimming down its capacity. Moving forward, in view of the weakness in oil prices, coupled with the improved yields, we expect the aviation sector’s outlook to see an improvement. FY15 is expected to be a turning point for the sector on the back of more capacity reduction by MAS, which has been the culprit for the depressed sector yields given its irrational pricing strategy. The weakness in jet fuel price, which could be persistent in the year ahead, ought to further give a lift to earnings.

Ahmad Maghfur Usman 603 9207 7654

[email protected]



Banking – OPR Hike Helps Lift NIM NEUTRAL

Four out of the six banking stocks that we cover reported results that were in line with our estimates. Affin Holdings’ (Affin) (AHB MK, NEUTRAL, TP: MYR3.30) results came in below expectations due to higher-than-expected overheads and credit cost while Malayan Banking’s (Maybank) (MAY MK, NEUTRAL, TP: MYR10.20) earnings missed estimates due to weaker-than-expected non-interest income. Relative to consensus expectations, Affin, Maybank and CIMB (CIMB MK, NR) reported numbers that were below estimates. Sector earnings momentum improved this quarter (underlying QoQ net profit growth of +6% vs 2Q14’s -3%). This was on the back of: i) stronger net interest income – corporate lending picked up pace while sector net interest margin (NIM) enjoyed a mild uptick of 2bps QoQ due to July’s 25bps overnight policy rate (OPR) hike, ii) better non-interest income contribution led by fee and forex income, iii) overheads generally were under control, and iv) relatively low and stable credit cost of 18bps (2QCY14: 17bps). Asset quality, however, deteriorated, with absolute gross impaired loans rising 5% QoQ (flat YoY) due to the domestic corporate segment as well as Indonesia. Overall, despite the stronger earnings momentum, the improvement was still short of expectations. In terms of dividends, Affin surprised with a higher-than-expected interim DPS of 15 sen, which translates to a net payout ratio of about 50% vs our 36% assumption. Dividends from Alliance Financial Group (AFG MK, NEUTRAL, TP: MYR4.90) and AMMB Holdings (AMMB MK, BUY, TP: MYR7.45) were broadly as expected.

David Chong, CFA +603 9207 7618

[email protected]

Gaming – Subpar Luck Factor The Main Culprit NEUTRAL

The 3Q14 earnings of three out of the four gaming companies under our coverage fell below expectations, primarily due to the below-average luck factor during the quarter. Of note, Genting Malaysia’s (GENM MK, NEUTRAL, TP: MYR4.21) 9M14 EBITDA margin at its Malaysian operation would have stood at 37.0% (vis-à-vis 34.6% currently) had its VIP luck factor held up in 3Q14. 3Q14 visitor arrivals continued the downtrend, dropping 3% YoY, as visits from foreign tourists declined by 14% YoY. Its proposed MYR5bn Genting Integrated Tourism Plan remains largely on track. Of note, 500 new rooms will be available by end-2014, with another 800 to come online by mid-2015. Genting Singapore’s (GENS SP, NEUTRAL, TP: SGD1.14) 3Q14 earnings disappointed, too, as its VIP luck factor closed below 2.0% (vs theoretical hold of 2.85%), while volume shed 5.0% YoY on tighter credit control. Genting’s (GENT MK, NEUTRAL, TP: MYR9.67) net profit, however, came within our expectations as weakness in its gaming segments were mitigated by an improved showing from its plantation business (+17.6% YoY) and maiden O&G contribution via its 57% interest in the Chengdaoxi oil block in Bohai Bay, China. On the other hand, Magnum (MAG MK, NEUTRAL, TP: MYR3.06) reported subpar numbers – having experienced a higher-than-expected prize payout ratio during the quarter. All in, we maintain our NEUTRAL stance on the sector, as the potential earnings erosion upon implementation of the goods and services tax (GST) come Apr 2015 warrants our cautious stance as we step into 2015.

Kong Heng Siong +603 9207 7666

[email protected]

mailto:[email protected]



Healthcare – A Smooth Sailing Quarter NEUTRAL

Both major healthcare players, ie IHH Healthcare (IHH) (IHH MK, NEUTRAL, TP: MYR4.63) and KPJ Healthcare (KPJ) (KPJ MK, NEUTRAL, TP: MYR3.67), recorded a relatively robust set of numbers in 3Q14, despite the quarter being a seasonally slower period due to the festive seasons in Malaysia and Singapore as well as the summer season in Turkey. Both IHH and KPJ registered an annual increase in revenue of 6.7% and 16.3% respectively while core profit jumped 20.7% and 50.0% on a YoY basis. These were mainly attributed to: i) growing inpatient admissions, as well as ii) an increase in revenue intensity per patient for both healthcare service operators. KPJ also declared a 2 sen dividend for the quarter. Faber Group’s (FAB MK, NEUTRAL, TP: MYR2.97) earnings came in below our and consensus expectations from the underperformance of its integrated facilities management concession and non-concession divisions. However, we expect the completion of the Projek Penyelenggaraan Lebuhraya (PROPEL) and Opus acquisitions in Oct 2014 to boost its earnings from FY15 onwards. As for pharmaceutical players, we noted that earnings improved for Hovid (HOV MK, NEUTRAL, TP: MYR0.39) as it booked a MYR5.7m profit in 1QFY15 (Jun), which made up 26.4% of our full-year earnings forecast. This was attributed mainly to the appreciation of the USD against MYR and an increase in sales volume. Meanwhile, we downgraded Caring Pharmacy (CARING MK, SELL, TP: MYR1.27) to a SELL as it registered two consecutive quarters of disappointing earnings as a result of the poor performance of new outlets and higher operating costs. Although we maintain NEUTRAL as valuations remain rich, we feel that the sector is still attractive given its defensive nature and long-term growth prospects post the expansion of major healthcare players. This is also supported by increasing healthcare expenditure, an affluent population and an awareness towards health issues. However, re-rating catalysts for the shorter term remain muted, for now.

Malaysia Research +603 9207 7688

[email protected]

Media – Impacted By Airline Tragedies NEUTRAL Due to the weak consumer sentiment that has arisen from the rationalisation of government subsidies as well as the impending goods and services tax (GST) which will be implemented in Apr 2015, advertisers are withholding their advertisement expenditure (adex) budgets. The situation was further compounded by the MH370 and MH17 tragedies, during which corporations and advertisers withdrew their entertainment and promotions-related advertisements as a sign of respect to the victims. Media companies also had to cancel all their outdoor and promotional activities, which are usually able to attract more adex revenue. With that, Media Prima’s (MPR MK, SELL, TP: MYR1.66) earnings came in below expectations. On the other hand, Media Chinese’s (MCIL MK, NEUTRAL, TP: MYR0.90) earnings were within estimates, but still lack strong growth catalysts as the company is currently embarking onto digital media – although that would take a while before it can book a meaningful earnings contribution from the medium. Rev Asia (REV MK, BUY, TP: MYR1.68) was still reporting losses for the quarter under review, which is within expectations, but we note that its social media division has become its main growth driver. Astro (ASTRO MK, NEUTRAL, TP: MYR3.55) will announce its results in December and we are of the view that the company will sustain its growth as guided by its management. Jerry Lee 603 9207 7622

[email protected]



Oil& Gas – Nothing To Shout About NEUTRAL

Oil & gas earnings were in line with our expectations after four disappointing quarters. Of the 16 counters under our coverage, only Wah Seong (WSC MK, BUY, TP: MYR2.00) and Favelle Favco (FFB MK, BUY, TP: MYR4.03) reported numbers that were above our expectations. Wah Seong beat our expectations for a second straight quarter due to contributions from the Polarled project for Statoil in Norway, which is almost 70-72% completed. Wah Seong’s total outstanding orderbook as of Sep 2014 was worth MYR1.4bn, with 66% coming from oil & gas, while its tenderbook stood at MYR5.5bn. As for Favelle Favco, earnings were helped along by an increase in orders for cranes. Its current orderbook is at an all-time high of MYR1.1bn, which will keep the company busy until 2016. Orders mainly came in from the oil & gas, shipyard, construction and the wind turbine industries. Four players recorded numbers that were below our expectations, ie Bumi Armada (BAB MK, NEUTRAL, TP: MYR1.44), Dayang Enterprise (DEHB MK, BUY, TP: MYR3.73), Perisai Petroleum Teknologi (PPT MK, SELL, TP: MYR0.88) and Petronas Chemicals (PCHEM MK, NEUTRAL, TP: MYR6.08). Bumi Armada was negatively affected by higher depreciation on new vessels as well as higher tax rates levied on its transportation and installation (T&I) activities. Although its orderbook is impressive, at MYR21.8bn, meaningful earnings for the company could only start to trickle in FY16. Thus, we downgraded the stock to NEUTRAL. We also downgraded Perisai Petroleum Teknologi to a SELL as idle assets continue to eat into earnings. Meanwhile, Petronas Chemicals’ results were below expectations as its major turnaround activities hurt its utilisation rate – which resulted in lower production. Dayang Enterprise results were marginally lower than expected as we had overestimated the amount of work orders coming in from its umbrella pan-Malaysia contract. We foresee tough times for the sector ahead, as we believe concerns over weakening oil prices due to oversupply coupled with Petronas’ capex cut will force players with operational inefficiencies to continue being sidelined. Although we expect contracts to still trickle in, we believe margins will be squeezed as competition between local and foreign players heats up. Maintain NEUTRAL.

Kong Ho Meng +603 9207 7620

[email protected]

Plantations – Dragged Down By Downstream Operations NEUTRAL

The recently-concluded reporting season saw six of the eleven plantation companies in our coverage record a disappointing set of results, while five booked numbers which were within expectations. The companies which recorded weaker-than-expected earnings were mostly players that were involved in downstream operations, and were affected by the negative refining margins that are impacting the industry. These include companies like IOI Corp (IOIC MK, NEUTRAL, TP: MYR4.35), Sime Darby (SIME MK, NEUTRAL, TP: MYR8.75), Felda Global (FGV MK, SELL, TP: MYR2.80) and TSH Resources (TSH MK, NEUTRAL, TP: MYR2.28). The other two companies that reported lower-than-expected earnings are TH Plantations (THP MK, SELL, TP: MYR1.22) and TDM (TDM MK, NEUTRAL, TP: MYR0.90), which were affected by dry weather in Sarawak and higher-than-expected effective tax rates respectively. Five plantation players recorded earnings that were in line with our expectations, and these are mostly the pure planters – with the exception of KL Kepong (KLK MK, NEUTRAL, TP: MYR20.70) – including Genting Plantations (GENP MK, BUY, TP: MYR11.60), IJM Plantations (IJMP MK, NEUTRAL, TP: MYR2.22), Sarawak Oil Palms (SOP MK, BUY, TP: MYR6.60) and CB Industrial Product (CBP MK, NEUTRAL, TP: MYR2.10). We maintain our NEUTRAL stance on the Malaysian plantation companies, with selective stock picks (ie Genting Plantations and Sarawak Oil Palms), as we continue to like their growth trajectories with regards to FFB growth as well as strong management and efficient cost structure.

Hoe Lee Leng +603 9207 7605

[email protected]



Ports – Topline Grew But Hit By Higher Costs NEUTRAL

The ports sector earnings were generally within estimates as all the stocks under our coverage reported in line sets of results. Although topline improved YoY on the back of higher volume for all the ports counter we cover, three of the four posted a drop in profits. In the case of Bintulu Port (BPH MK, NEUTRAL, TP: MYR7.21), this was due to either higher costs. For Integrax (INTEG MK, NEUTRAL, TP: MYR2.28), this was attributed to depreciation, while for Suria Capital (SURIA MK, BUY, TP: MYR3.50), land lease charges were to blame. Westports (WPRTS MK, BUY, TP: MYR3.44) was the only counter in our coverage that recorded earnings growth, thanks to its improved efficiencies on the back of enhanced economies of scale. Moving into 4Q14, we expect container throughput numbers to be relatively unchanged QoQ but weaker YoY owing to the high base effect in 4Q13. Integrax has seen a sequential pick-up in throughputs and we expect this momentum to increase into 2015. For the coming quarters, although volume is expected to see improvements ahead, costs control would be of paramount focus.


[email protected]

REITs – Slight Snag In Acquisition Prospects This Quarter NEUTRAL

The REITs’ 3Q14 results were broadly in line, although Axis REIT’s (AXRB MK, NEUTRAL, TP: MYR3.55) results were slightly below expectations, dragged down by lower occupancy rates in some of its assets. Its management has indicated that all of its new acquisitions will only be completed towards end-December (instead of its previous guidance of Oct 2014). Thus, we expect earnings from the new assets to only contribute significantly from FY15 onwards. Quill Capita Trust (QUIL MK, NEUTRAL, TP: MYR1.25) also hit a snag in its proposed acquisition of Platinum Sentral from MRCB (MRC MK, BUY, TP: MYR2.05), and this is now only likely to be completed in 1Q15. As expected, the earnings for Kuala Lumpur-based REITs such as Pavilion REIT (PREIT MK, NEUTRAL, TP: MYR1.48) and IGB REIT (IGBREIT MK, NEUTRAL, TP: MYR1.27) showed some improvement after the Kuala Lumpur City Hall (DBKL) decided to revise its assessment rate hike to only 25% from 100% in July. This led to an expected overall savings of about 5-8% for the REITs’ total property expenses. CapitaMalls Malaysia Trust (CMMT MK, NEUTRAL, TP: MYR1.41) announced a change of guard from 1 Nov, although we expect earnings to remain largely intact going forward. We expect no significant surprises for the sector going into 4Q. Maintain NEUTRAL.

Alia Arwina +603 9207 7608

[email protected]

Shipping – A Divided Performance NEUTRAL

The earnings performance between MISC (MISC MK, BUY, TP: MYR8.15) and Malaysian Bulk Carriers (Maybulk) (MBC MK, NEUTRAL, TP: MYR1.30) saw a huge divergence. The former’s 9M14 earnings were better than we estimated, made on the back of lower-than-expected losses from its petroleum and chemical tanker units. On the hand, Maybulk’s earnings came in below our expectations on the weak dry bulk freight rate environment. Thankfully, contributions from its PACC Offshore (POSH SP, NR) associate were able to cushion the magnitude of losses as the offshore services providers are still able to report earnings, albeit lower. The tone from MISC’s management has since shown optimism. MISC expects a better performance from its petroleum tanker unit in the quarters ahead on improved rates amidst higher tonnage mile demand coupled with the tighter supply of Aframaxes and very large crude carriers (VLCCs). Meanwhile, the outlook in the dry bulk segment remains shaky, as we expect the shipping division to remain in losses next year. We caution that the volatility in dry freight rates will continue to persist and could likely repeat another set of underperformance as it did in 1H14. Dry bulk vessel asset prices are starting to come off from their peak this year (seen in mid-2014) on concerns of oversupply building up again as demolition activities dissipate. This may be on the market being over-optimistic on the dry bulk outlook earlier.


[email protected]



Tech – A Decent Quarter OVERWEIGHT Five out of the eight tech stocks under our coverage reported 3Q14 earnings that were within expectations. Notion VTEC (NVB MK, SELL, TP: MYR0.45) and Prestariang (PRES MK, NEUTRAL, TP: MYR1.57) disappointed. The former witnessed further earnings disappointment due to a subpar overall utilisation rate dragged by its camera segment while the latter’s numbers disappointed on continued weakness in contract flows. IQ Group (IQGH MK, BUY, TP: MYR2.51) beat expectations from stronger overseas sales and favourable FX rates. Malaysian Pacific Industries’ (MPI MK, BUY, TP: MYR6.34) and Unisem (M)’s (UNI MK, BUY, TP: MYR2.16) decent set of numbers were again underpinned by improved utilisation rate of approximately 75-80%. Inari Amertron, (Inari) (INRI MK, BUY, TP: MYR3.82) meanwhile, kick-started its FY15 with 1Q core earnings of MYR30.8m, up over 61.9% YoY as demand for its radio frequency-related integrated packaging and testing services remained sturdy on a higher take-up of smartphones and mobile devices. On the other hand, Datasonic’s (DSON MK, BUY, TP: MYR2.10) quarterly earnings were largely in line with our previous guidance driven by an estimated 1m copies of MyKad delivered during the quarter under review. We estimate that Datasonic is currently sitting on an outstanding orderbook of 9m MyKad copies plus 6m national passports’ photo-pages. This will continue to drive its earnings momentum for the remainder of FY15. Following our recent recommendation revisions, we now have five Buys and three Neutrals within our coverage. As such, we are upgrading our sector call to OVERWEIGHT.

Kong Heng Siong +603 9207 7666

[email protected]

Telco – Mobile revenue growth remains sluggish NEUTRAL

The 3Q14 results of the Malaysian telcos were generally in line, although Axiata (AXIATA MK, NEUTRAL, TP: MYR7.20) posted weaker earnings following a poor showing from Celcom on top of forex losses. Although the 9M14 earnings for OCK Group (OCK MK, BUY, TP: MYR1.06) and Telekom Malaysia (T MK, NEUTRAL, TP: MYR7.00) only accounted for 61% and 68% of our full-year estimates, we expect the shortfall to be made up in 4Q14. Overall, industry voice revenue continued to slide, declining 6.1% YoY in 3Q14 (-4% YoY in 9M14) vs -4.0% in 2Q14. Nonetheless, data revenue (including SMS and mobile internet) has been growing steadily in the range of 2-3% YoY, partially mitigating the loss in voice revenue. Timedotcom ’s (TDC MK, NEUTRAL, TP: MYR5.20) results saw the lack of the typically lumpy global bandwidth sales contributing to the 3.3% QoQ decline in revenue for 3Q14 although its YTD revenue is still up 9.8% YoY. Following the results, we have tweaked our DCF-derived TPs for Maxis (MAXIS MK, NEUTRAL, TP: MYR6.35) and TM, in line with the revision in RHB’s key valuation parameters. We also cut Axiata’s FY14/FY15 earnings by 12%/6% respectively after revising some of our key assumptions (ARPU and subscriber numbers) for Celcom. Going forward, we believe Axiata and Maxis could start to see some earnings recovery after resolving their internal issues, although headwinds will likely remain due to an increasingly responsive U-Mobile (Not Listed) and the generally sluggish industry mobile revenue.

Alia Arwina +603 9207 7608 Jeffrey Tan +603 9207 7633

[email protected] [email protected]



Timber – Stronger Log Outlook Offset By Weaker Plywood Prospects NEUTRAL

In the recent 3Q14 results season, two out of the three timber companies under our coverage came in below expectations, while one beat estimates. The two companies that disappointed were Jaya Tiasa (JT MK, SELL, TP: MYR1.70) and WTK Holdings (WTK) (WTKH MK, NEUTRAL, TP: MYR1.25) For the former, this was due to weaker-than-expected contributions from its plywood division that experienced lower EBIT margins, while the latter posted higher-than-expected effective tax rates. The only company that beat expectations was Ta Ann Holdings (Ta Ann) (TAH MK, TP: MYR4.40), which we upgraded to BUY (from Neutral) on the back of its strong results caused by rising log production volumes and lower-than-expected losses at its plywood division. In addition, Ta Ann declared a surprisingly larger-than-expected second interim net DPS of 10 sen (3Q13: 5 sen), bringing YTD net DPS to 20 sen (9M13: 5 sen). This translates into a net payout of 73% based on 9M14 EPS of 27.5 sen vs a normal payout of 20-40% and a commendable net yield of 5-5.5%. We believe this is to return to shareholders some of the MYR79m received from the Australian Government as compensation over the last two FYs. We continue to have a NEUTRAL call on the sector, as we believe that, while log prices are likely to continue on their steady upward trend on strong India demand, plywood prices will remain relatively stagnant on a weakening Japanese economy.

Hoe Lee Leng +603 9207 7605

[email protected]

Consumer – No Quick Turnaround UNDERWEIGHT

For the quarter under review, food and beverage (F&B) players booked results that were within expectations due to inelastic and stable demand. However, retailers like Padini (PAD MK, NEUTRAL, TP: MYR1.90), Parkson Holdings (PKS MK, SELL, TP: MYR2.06) and AEON (AEON MK, NEUTRAL, TP: MYR3.67) recorded results below our and street estimates as they continued to be dragged down by the challenging operating environment amid the slowdown in consumer discretionary spending. Meanwhile, among the sin stocks, Guinness Anchor (GUIN MK, NEUTRAL, TP: MYR13.10) reported results that came within expectations while that of British American Tobacco (ROTH MK, SELL, TP: MYR59.60) and Carlsberg (CAB MK, NEUTRAL, TP: MYR12.80) were slightly ahead of expectations, largely due to strategic cost management. While we remain UNDERWEIGHT on the Malaysian consumer sector and maintain our view that the high cost of living, rationalisation of subsidies as well as the planned implementation of the goods and services (GST) tax in April 2015 could take its toll on consumers’ disposable incomes and skew spending patterns, we expect that over the course of the year, spending trends will gradually normalise. RHB economists project consumption spending to grow at a slower pace (+5.2% YoY) in 2015. Our Top Pick for the sector is Berjaya Food (BFD MK, BUY, TP: MYR4.00). We like its strong earnings growth momentum from its aggressive expansion of Starbucks Coffee outlets. We also continue to like consumer packaging companies, such as SKP Resources (SKP MK, BUY, TP: MYR0.85), Thong Guan Industries (TGI MK, BUY, MYR2.60) and Scientex (SCI MK, BUY, TP: MYR8.64) due to their earnings visibility, on the back of their expanding production capacity and strong orders from the exports market

James Koh +65 6232 3839

[email protected]

Fong Kah Yan +603 9207 7668

[email protected]

mailto:[email protected]



Market Strategy

Figure 15: Earnings outlook and valuations

FBM KLCI RHB BASKET RHB BASKET (EX-FBM KLCI)

COMPOSITE INDEX @ 1,778.27 2013A 2014F 2015F 2016F 2013A 2014F 2015F 2016F 2013A 2014F 2015F 2016F

1 Dec 2014

EBITDA Growth (%) 1.4 4.5 8.9 (2.2) 2.1 5.3 9.1 0.2 2.7 7.9 9.3 5.1

Pre-Tax Earnings Growth (%) (1.1) 5.8 4.3 (0.3) 1.5 2.7 7.4 2.1 5.8 (2.8) 15.0 6.6

Normalised Earnings Growth (%) 2.9 1.3 7.7 8.1 3.4 1.7 10.2 8.3 3.9 3.1 15.9 8.0

Normalised EPS (sen) 43.1 43.2 46.2 49.8 28.9 28.5 30.9 33.9 16.2 15.9 18.0 20.1

Normalised EPS Growth (%) 0.9 0.3 7.0 7.8 (0.6) (1.7) 8.6 9.7 (1.7) (2.3) 13.3 11.9

Normalised EPS Growth ex-TNB (%) 1.3 (1.4) 5.0 8.1 (0.8) (2.9) 7.3 10.3 (3.1) (2.5) 13.3 12.6

Prospective PER (x) 17.5 17.3 16.1 14.9 17.4 17.1 15.6 14.4 17.2 16.7 14.4 13.3

Price/EBITDA (x) 10.0 9.5 8.8 9.0 10.0 9.5 8.7 8.7 9.8 9.1 8.3 7.9

Price/Bk (x) 2.0 1.9 1.8 2.0 2.0 1.8 1.7 1.8 1.8 1.6 1.5 1.5

Price/NTA (x) 3.0 2.8 2.5 2.6 2.7 2.4 2.2 0.0 2.0 1.8 1.6 0.0

Net Interest Cover (x) 9.8 10.4 11.1 12.7 8.7 8.3 8.6 9.6 7.0 6.1 6.3 7.0

Net Gearing (%) 26.3 26.1 25.0 27.6 32.7 31.1 30.3 30.6 48.3 45.4 41.3 38.2

EV/EBITDA (x) 7.6 7.3 6.7 6.8 8.7 8.4 7.7 7.5 10.5 10.0 9.3 8.4

Div Yld (%) 3.3 3.3 3.4 3.4 3.1 3.2 3.3 3.3 2.8 3.0 3.1 3.2

ROE (%) 11.6 10.9 10.9 13.7 11.2 10.5 10.9 12.9 10.5 9.7 10.6 11.4

FBM KLCI stocks not under our coverage: CIMB, HLFG, PPB, Pet Dagangan, RHB Cap and YTL.

Source: Bloomberg, RHB

Slower exports crimp 3Q14 GDP growth

Real GDP growth moderated to 5.6% YoY in 3Q14, after rising to a six-quarter high of +6.4% in 2Q14. The reading was higher than our expectation of 5.2% due to stronger-than-expected growth in consumption demand but was slower sequentially because of weaker export growth, while domestic demand slowed to its weakest pace since 4Q09. Overall, domestic demand is envisaged to grow at a more moderate pace in 2014, dampened by rising inflationary pressure, measures to control rising household debt and the ongoing Government’s fiscal consolidation drive. As a whole, we expect real GDP to grow at a faster pace of 5.8% in 2014, compared with +4.7% recorded in 2013. Growth, however, will likely moderate to 5.3% in 2015.

Lack of strong growth drivers in 2014 2014 has been a washout year for corporate earnings that have lacked strong revenue growth drivers while operating costs have escalated. We attribute this to new investments in capacity that have incurred front loaded costs, crimping margins, in addition to more challenging external and domestic economic conditions.

Global economic recovery on track While developed economies continue to struggle to transition into a self-sustaining growth stage from recovery, we believe the sharply lower crude oil prices will help to increase the disposable incomes of consumers, thereby helping to hasten the global economic recovery and boost demand for exports.

Lower oil prices unlikely to derail 3% fiscal deficit target We expect that lower oil prices will put pressure on revenues but are unlikely to derail Malaysia’s fiscal deficit target of 3% of GDP in 2015. We estimate that the O&G sector contributed MYR64.6bn to government revenues in 2013 in the form of dividend from Petronas (MYR27bn), petroleum income tax (MYR29.8bn), royalty (MYR6.2bn and export duty (MYR1.6bn). Lower oil prices will pressure this source of revenue but will be offset by reduced fuel subsidies (2013: MYR23.5bn). Domestic fuel prices have transitioned to a managed float system from 1 Dec that will also offer savings from reduced smuggling activities. RHB Economics also believes that the government will be able to adjust its expenditure to make up for a shortfall in oil revenue by cutting gross development expenditure.



As a result, we believe the Government’s fiscal deficit target of 3.0% of GDP in 2015 will unlikely be derailed. However, investments into the O&G sector will slow, as will earnings growth for O&G companies.

Buy on weakness The risk of significant policy tightening in developed economies that could derail the recovery is also low, in our opinion. With the pickup in corporate earnings heading into 2015 and 2016, we are optimistic on domestic equities, given the lack of appeal of other asset classes. We continue to advocate a buy on weakness strategy, focusing on selective growth stocks that can create shareholder value, over and above defensives and yield stocks. We revise our end-2014 and end-2015 FBM KLCI target to 1,850 pts (from 1,940 pts) and 1,950 pts (from 2,100 pts) based on 16.8x and 16.5x 1-year forward respectively.

Figure 16: FBM KLCI’s performance relative to regional markets

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

30.0

FBM

KLC

I

Thail

and

Philip

pine

s

Indo

nesia ST

I

Hang

Seng

Nikk

ei

Dow

Jone

s

YTD 3 quarter Source: Bloomberg

Figure 17: Foreign participation tracker

-600

-400

-200

0

200

400

600

Foreign Source: Bursa Malaysia

Figure 18: Sector weighting and valuations

Before After Before After



Covered Stocks MKT CAP

Weight EPS GWTH(%)

PER(x) Recommendation

MYRbn % FY14 FY14 FY15 FY15 FY16 FY14 FY15 FY16

Utilities 133.6 10.8 14.7 15.2 4.6 10.6 0.8 17.1 15.5 15.3 Overweight

Property 51.6 4.2 (6.1) (8.8) 13.0 10.2 9.3 13.5 11.9 11.0 Overweight

Rubber Products 43.8 3.5 4.9 (5.7) 9.1 20.3 11.7 18.8 15.4 13.8 Overweight

Construction 27.3 2.2 15.7 4.9 17.6 15.9 6.9 14.7 12.2 11.1 Overweight

Basic Materials 18.8 1.5 24.9 18.0 27.3 29.0 39.8 18.3 13.5 12.4 Overweight

Non-Bank Financials 17.5 1.4 1.1 14.6 7.5 12.4 (4.4) 15.3 13.6 15.2 Overweight

Technology 6.8 0.5 74.2 22.7 15.4 32.3 15.2 18.7 12.4 10.8 Overweight

Logistics 5.1 0.4 7.0 1.3 5.2 2.1 1.4 3.9 3.8 3.8 Overweight

Banking 214.6 17.3 0.3 (3.5) 7.2 5.7 8.6 12.7 11.7 10.6 Neutral

Telecommunications 186.7 15.0 (0.4) (5.8) 6.7 10.5 4.3 24.9 22.6 21.7 Neutral

Plantation 142.5 11.5 (7.1) (9.6) (2.6) (9.0) 16.4 20.1 21.9 18.8 Neutral

Oil & Gas 83.1 6.7 17.3 3.1 12.6 10.1 5.0 12.5 11.3 10.8 Neutral

Gaming 67.3 5.4 (3.3) (6.2) 11.7 8.4 5.9 16.6 15.3 14.4 Neutral

Shipping 33.6 2.7 8.5 14.8 28.9 12.8 11.3 16.7 14.8 13.3 Neutral

Property-MREITs 30.2 2.4 1.7 0.9 5.8 6.5 3.5 18.6 17.1 16.3 Neutral

Auto 23.5 1.9 13.9 (2.8) 18.3 28.1 7.1 14.7 11.5 10.7 Neutral

Aviation 23.1 1.9 (90.8) (82.0) +>100 269.5 180.6 130.0 35.2 19.7 Neutral

Media 20.8 1.7 5.5 0.4 14.2 14.6 5.6 25.7 22.4 21.3 Neutral

Ports 13.7 1.1 11.2 11.2 4.9 4.8 10.7 20.3 19.4 17.5 Neutral

Healthcare 13.4 1.1 21.3 17.9 44.6 39.0 19.3 42.2 29.7 24.9 Neutral

Timber 3.7 0.3 56.4 59.9 26.0 24.0 11.3 16.5 13.3 11.9 Neutral

Consumer 81.7 6.6 2.0 3.3 7.2 5.2 11.0 25.4 23.7 21.3 Underweight

RHB BASKET 1242.3 100.0 (1.7) 8.6 9.7 17.1 15.6 14.4

Source: RHB



Figure 20: High dividend yield stocks

Price NDY

(%) EPS GWTH

(%) P/E

(x) P/BV

(x)

ROE

(x)

(MYR/s) FY15 FY16 FY15 FY16 FY15 FY16 FY16 FY16

1 Dec 2014

MCIL^ 0.83 7.5 7.8 4.1 4.1 9.4 9.0 1.9 21.3

Quill Capita 1.17 7.3 7.5 22.9 (19.3) 10.3 12.8 1.0 7.8

Hektar REIT 1.52 7.1 7.1 5.5 0.5 12.6 12.5 1.0 7.8

CapitaMalls 1.37 7.0 7.3 5.6 5.4 15.0 14.2 1.1 7.7

UOA Dev 2.10 6.7 6.7 4.0 (3.6) 8.5 8.8 1.0 11.5

Hua Yang 2.10 6.5 6.9 11.6 5.1 5.4 5.1 0.9 19.8

Magnum 2.88 6.5 6.7 10.9 3.0 13.9 13.5 1.6 12.2

SHL Consolidated 3.44 6.4 6.4 7.7 7.3 12.6 11.7 1.3 11.2

Dayang 2.39 6.4 6.4 26.6 35.6 7.8 5.8 1.6 28.9

Paramount 1.44 6.3 6.3 (2.2) (0.5) 8.7 8.7 0.7 8.3

B-Toto 3.43 6.2 6.4 2.1 3.1 13.7 13.3 6.0 46.9

Protasco 1.62 6.2 6.2 33.3 9.5 7.1 6.5 1.2 19.2

MMHE 1.68 6.0 6.5 30.6 n.a. 13.0 n.m. n.m (1.7)

Media Prima 1.89 5.9 6.6 15.1 10.0 11.7 10.6 1.1 10.9

Pavilion REIT 1.44 5.8 0.0 4.7 4.6 18.1 17.3 1.2 7.1

Padini 1.66 5.7 6.3 1.1 9.4 12.2 11.2 2.5 23.3

Carlsberg 11.44 5.7 6.0 6.3 5.5 17.5 16.6 12.9 77.9

MISC 7.25 5.7 6.3 11.8 10.8 14.7 13.3 0.3 8.4

Favelle Favco 2.88 5.7 5.8 2.6 2.7 7.1 6.9 1.1 16.8

Axis REIT 3.50 5.7 5.7 9.0 (4.6) 16.7 17.5 1.5 8.4

Matrix 2.83 5.7 6.1 10.7 10.9 7.1 6.4 1.5 24.8

Sunway REIT 1.49 5.6 6.3 10.2 14.3 17.8 15.5 1.2 7.6

Maybank 9.14 5.6 5.8 3.7 5.0 12.3 11.7 1.4 12.5

Syarikat Takaful 10.72 5.5 6.2 12.3 12.4 9.9 8.8 2.2 27.2

IGB REIT 1.30 5.4 5.7 4.7 3.4 20.4 19.7 1.2 6.3

VS Industry 2.44 5.4 4.8 12.0 (11.3) 7.6 8.5 0.8 9.3

UMW 11.10 5.4 5.4 13.9 6.6 13.0 12.2 2.3 18.3

Thong Guan 2.01 5.4 6.3 35.0 17.4 5.2 4.5 2.0 13.3

KLCCSS 6.65 5.1 5.2 5.7 2.9 17.7 17.2 1.0 5.9

Wing Tai Malaysia 1.97 5.1 5.1 (15.5) 9.1 10.4 9.5 0.5 5.9

Oka Corp Bhd 0.79 5.1 5.1 1.5 4.8 7.0 6.7 0.8 12.7

LPI Capital 17.76 5.0 5.5 11.2 9.2 15.9 14.6 1.8 13.2

Globetronics 4.42 5.0 5.0 20.6 12.9 15.8 14.0 3.8 28.1

SKP Resources^ 0.74 5.0 5.5 66.1 10.5 10.1 9.1 2.6 30.5

AFG 4.79 4.9 5.0 6.2 10.4 11.9 10.8 1.5 14.6

Source: RHB ^ FY15-16 valuations refer to those of FY16-17.

Figure 19: Top Picks

FYE Price Fair Value

Mkt

Cap Shariah

EPS

(sen)

EPS

GWTH

(%)

P/E

(x)

P/BV

(x)

P/CF

(x)

NDY

(%)

(MYR/s) (MYR/s) (MYRm) Compliant FY15 FY16 FY15 FY16 FY15 FY16 FY16 FY16 FY16

1 Dec 2014

Air Asia Dec 2.79 3.11 7,758 N 22.2 29.2 +>100 31.5 12.6 9.6 1.2 3.4 2.0

Sunway Bhd Dec 3.25 3.90 5,601 Y 33.1 33.7 9.4 1.6 9.8 9.7 3.3 16.3 3.7

Berjaya Auto^ April 3.30 4.50 2,665 Y 35.2 41.7 26.9 18.5 9.4 7.9 3.0 9.2 4.2

Press Metal Dec 3.18 5.75 2,558 N 37.9 50.5 16.3 33.0 8.4 6.3 1.4 3.8 4.8

Inari Amertron Jun 2.75 3.82 1,419 Y 20.0 23.5 2.6 17.4 13.7 11.7 3.7 11.4 3.4

Matrix Dec 2.83 3.93 1,293 Y 40.1 44.5 10.7 10.9 7.1 6.4 1.5 6.1 6.1

Berjaya Food^ Apr 3.17 4.00 1,208 N 15.7 19.2 77.8 22.5 20.2 16.5 2.8 3.3 3.0

Tambun Indah Land Dec 2.14 2.50 872 Y 28.0 31.3 16.1 12.0 7.6 6.8 1.6 8.8 5.3

SKP Resources^ Mar 0.74 0.85 799 Y 7.4 8.1 66.1 10.5 10.1 9.1 2.6 1.1 5.5

Naim Dec 3.15 4.88 788 Y 48.8 60.2 (3.2) 23.4 6.5 5.2 0.5 10.8 2.5

Kim Lun Dec 1.33 1.68

360 Y 18.9 19.4 37.0 2.7 7.0 6.8 0.8 4.6 2.3

^ FY15-16 valuations refer to those of FY16-16

Source: RHB

26

RHB Guide to Investment Ratings Buy: Share price may exceed 10% over the next 12 months

Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain Neutral: Share price may fall within the range of +/- 10% over the next 12 months Take Profit: Target price has been attained. Look to accumulate at lower levels

Sell: Share price may fall by more than 10% over the next 12 months Not Rated: Stock is not within regular research coverage

Disclosure & Disclaimer

All research is based on material compiled from data considered to be reliable at the time of writing, but RHB does not make any representation or warranty, express or implied, as to its accuracy, completeness or correctness. No part of this report is to be construed as an offer or solicitation of an offer to transact any securities or financial instruments whether referred to herein or otherwise. This report is general in nature and has been prepared for

information purposes only. It is intended for circulation to the clients of RHB and its related companies. Any recommendation contained in this report does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This report is for the information of addressees only and is not to be taken in substitution for the exercise of judgment by addressees, who should obtain separate legal or

financial advice to independently evaluate the particular investments and strategies. This report may further consist of, whether in whole or in part, summaries, research, compilations, extracts or analysis that has been prepared by RHB’s

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Singapore This report is published and distributed in Singapore by DMG & Partners Research Pte Ltd (Reg. No. 200808705N), a wholly-owned subsidiary of DMG &

Partners Securities Pte Ltd, a joint venture between Deutsche Asia Pacific Holdings Pte Ltd (a subsidiary of Deutsche Bank Group) and OSK Investment Bank Berhad, Malaysia which have since merged into RHB Investment Bank Berhad (the merged entity is referred to as “RHBIB”, which in turn is a wholly-owned subsidiary of RHB Capital Berhad). DMG & Partners Securities Pte Ltd is a Member of the Singapore Exchange Securities Trading Limited. DMG &

Partners Securities Pte Ltd may have received compensation from the company covered in this report for its corporate f inance or its dealing activities; this report is therefore classified as a non-independent report.

As of 10 November 2014, DMG & Partners Securities Pte Ltd and its subsidiaries, including DMG & Partners Research Pte Ltd do not have proprietary positions in the securities covered in this report, except for: a) -

As of 10 November 2014, none of the analysts who covered the securities in this report has an interest in such securities, except f or: a) -

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report in its entirety. In respect of any matters arising from, or in connection with this research report, you are to contact our Singapore Office, DMG & Partners Securities Pte Ltd

Hong Kong

This report is published and distributed in Hong Kong by RHB OSK Securities Hong Kong Limited (“RHBSHK”) (formerly known as OSK Securities Hong Kong Limited), a subsidiary of OSK Investment Bank Berhad, Malaysia which have since merged into RHB Investment Bank Berhad ( the merged entity is referred to as “RHBIB”), which in turn is a wholly-owned subsidiary of RHB Capital Berhad.

27

RHBSHK, RHBIB and/or other affiliates may beneficially own a total of 1% or more of any class of common equity securities of the subject company. RHBSHK, RHBIB and/or other affiliates may, within the past 12 months, have received compensation and/or within the next 3 months seek to obtain compensation for investment banking services from the subject company.

Risk Disclosure Statements

The prices of securities fluctuate, sometimes dramatically. The price of a security may move up or down, and may become valueless. It is as likely that losses will be incurred rather than profit made as a result of buying and selling securities. Past performance is not a guide to future performance. RHBSHK does not maintain a predetermined schedule for publication of research and will not necessarily update this report

Indonesia

This report is published and distributed in Indonesia by PT RHB OSK Securities Indonesia (formerly known as PT OSK Nusadana S ecurities Indonesia), a subsidiary of OSK Investment Bank Berhad, Malaysia, which have since merged into RHB Investment Bank Berhad, which in turn is a wholly-owned

subsidiary of RHB Capital Berhad. Thailand

This report is published and distributed in Thailand by RHB OSK Securities (Thailand) PCL (formerly known as OSK Securities (Thailand) PCL), a subsidiary of OSK Investment Bank Berhad, Malaysia, which have since merged into RHB Investment Bank Berhad, which in turn is a wholly-owned

subsidiary of RHB Capital Berhad. Other Jurisdictions

In any other jurisdictions, this report is intended to be distributed to qualified, accredited and professional investors, in compliance with the law and regulations of the jurisdictions.

DMG & Partners Research Guide to Investment Ratings

Buy: Share price may exceed 10% over the next 12 months Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain

Neutral: Share price may fall within the range of +/- 10% over the next 12 months Take Profit: Target price has been attained. Look to accumulate at lower levels Sell: Share price may fall by more than 10% over the next 12 months

Not Rated: Stock is not within regular research coverage DISCLAIMERS

This research is issued by DMG & Partners Research Pte Ltd and it is for general distribution only. It does not have any regard to the specific investment objectives, financial situation and particular needs of any specific recipient of this research report. You should independently evaluate particular

investments and consult an independent financial adviser before making any investments or entering into any transaction in relation to any securities or investment instruments mentioned in this report.

The information contained herein has been obtained from sources we believed to be reliable but we do not make any representation or warranty nor accept any responsibility or liability as to its accuracy, completeness or correctness. Opinions and views expressed in this report are subject to change without notice.

This report does not constitute or form part of any offer or solicitation of any offer to buy or sell any securities.

DMG & Partners Research Pte Ltd is a wholly-owned subsidiary of DMG & Partners Securities Pte Ltd, a joint venture between OSK Investment Bank Berhad, Malaysia which have since merged into RHB Investment Bank Berhad (the merged entity is referred to as “RHBIB” which in turn is a wholly-owned subsidiary of RHB Capital Berhad) and Deutsche Asia Pacific Holdings Pte Ltd (a subsidiary of Deutsche Bank Group). DMG & Partners Securities

Pte Ltd is a Member of the Singapore Exchange Securities Trading Limited. DMG & Partners Securities Pte Ltd and their associates, directors, and/or employees may have positions in, and may effect transactions in the securities

covered in the report, and may also perform or seek to perform broking and other corporate finance related services for the corporations whose securities are covered in the report. This report is therefore classified as a non-independent report.

As of 10 November 2014, DMG & Partners Securities Pte Ltd and its subsidiaries, including DMG & Partners Research Pte Ltd, do not have proprietary positions in the subject companies, except for: a) -

As of 10 November 2014, none of the analysts who covered the stock in this report has an interest in the subject companies covered in this report, except for:

a) - DMG & Partners Research Pte. Ltd. (Reg. No. 200808705N)

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