This article first appeared in The Edge Financial Daily, on December 27, 2018.
On the local front, a stunning defeat of the long-standing Barisan Nasional (BN) coalition in the May 9 general election threw the local market into a frenzy. BN-linked companies as well as construction stocks were especially hit as the government shelved mega infrastructure projects such as the Chinese-funded US$20 billion East Coast Rail Link, and put others including the mass rapid transit Line 3 and the Kuala Lumpur-Singapore high speed rail under review.
The intention of the federal government to cut costs also did not bode well for companies such as Gamuda Bhd, as well as toll concessionaires in light of the Pakatan Harapan coalition’s pledge to abolish tolls. Other companies that were hit are those heavily dependent on government concessions, including MyEG Services Bhd and Prestariang Bhd.
Global factors also affected the local bourse. The FBM KLCI spent most of the second half of 2018 trading in line with regional markets. The manufacturing and technology sectors were particularly affected in line with their international counterparts.
The Edge Financial Daily reviews the stock picks published on Jan 2, 2018, which showed only two out of the 10 stocks recording a gain.
1. Velesto Energy Bhd
Formerly known as UMW Oil & Gas Corp Bhd before its rebranding in May, Velesto Energy Bhd failed to reach an expected turnaround by the end of its financial year ending Dec 31, 2018 (FY18) on lower utilisation of its rigs.
The stock was picked on expectations that its utilisation rate would register at 80% in FY18, but it had fallen to 75% in the third quarter of the year.
The group’s share price, which shot up to a one-year high of 46 sen on Jan 8, declined throughout the year to an all-time low of 17.5 sen per share on Dec 20.
The stock closed down 0.5 sen or 2.78% to 17.5 sen yesterday, leaving the group with a RM1.44 billion market value.
Although the group recorded a net profit of RM5 million in its first quarter of 2018 (1QFY18), it fell back into the red in the following two quarters, resulting in a net loss of RM32.6 million over the nine-month period ended Sept 30, 2018 (9MFY18).
Revenue has also underperformed in 9MFY18, down 2.73% to RM383.9 million versus RM394.7 million a year ago.
In October, Velesto president and executive director Rohaizad Darus told The Edge Malaysia weekly that he believes the worst is over for the company as it had cleaned up its balance sheet and is bidding for some US$500 million worth of jobs.
Analysts seem to agree as the counter is still favoured as a “buy” recommendation by five out of seven analysts with an eye on the stock. According to Bloomberg data, the consensus 12-month target price is 30 sen.
“With an improving outlook over the next 12 months, any short-term weakness in share price is an opportunity to accumulate,” said Maybank Kim Eng in a Nov 2018 report on Velesto.
2. Inari Amertron Bhd
As a semiconductor manufacturer exposed to supply chain changes of US-based Apple Inc, Inari Amerton Bhd has seen a turn in fortunes from a steady increase in its share price in 2017.
In 2018, the stock swung between an all-time high of RM2.53, which it reached on both Jan 8 and Aug 9, and a low of RM1.33 on April 12. This is compared to a doubling of its share price in 2017, when it surged on the back of a strong US dollar to end the year at RM2.19.
Inari shares closed at RM1.43 yesterday, down 35% year to date. The group’s market capitalisation stood at RM4.53 billion.
The group is largely involved in the production of radio frequency (RF) parts it produces for Apple. However, management has expressed its intention to diversify its revenue streams, including into producing light-emitting diodes for digital billboards.
Although the group’s earnings for its financial year ended June 30, 2018 had risen 9.44% to RM249.27 million, quarterly net profit declined from its fourth quarter onwards.
Lower volume loading on a major sensor product and the disposal of assets of a 51%-owned subsidiary also dragged Inari’s earnings down 12.02% to RM60.16 million in 1QFY19 ended Sept 30, 2018. Revenue for 1QFY19 declined 12.7% to RM325.72 million year-on-year.
Twelve of 17 analysts covering the stock have a “buy” call with a consensus 12-month target price of RM2.07, according to Bloomberg data.
“Despite softer loadings at the RF division, we noted of progress with expansion and new projects to diversify its customer and product concentration risk.
“We like the group for its double-digit earnings growth prospects on the back of expansion plans, strong margins and robust balance sheet,” TA Securities said in a Nov 28 note.
3. Berjaya Food Bhd
Supported by the expansion of international coffee chain Starbucks across Malaysia, Berjaya Food Bhd (BFood) recorded a 19% growth in net profit for its first half ended Oct 31, 2018 (1HFY19) to RM13.27 million. Revenue for the period was up 4% at RM327.96 million from RM315.17 million previously.
The group’s share price, however, did not follow suit. The counter has declined 46 sen or 25.2% year to date, closing at RM1.35 yesterday with a market capitalisation of RM489.92 million.
This was despite RM20 million worth of share buy-backs in October, and subsequent acquisitions of shares by major shareholders Berjaya Corp Bhd and tycoon Tan Sri Vincent Tan Chee Yioun.
BFood returned to the black as scheduled in the fourth quarter ended April 30, 2018 on a shot in the arm from Starbucks, and subsequently recorded higher year-on-year profits in 1HFY19, partly due to its disposal of loss-making Indonesian Kenny Rogers Roasters (KRR) unit PT Boga Lestari Sentosa Indonesia in November last year.
However, its Malaysian KRR operations continue to disappoint, as did its Jollibean brand of restaurants.
Looking forward, observers of the stock are still positive on its prospects.
“BFood has started to offer its Jollibean brand for franchising. Although minimal, we believe the contribution from franchising will further elevate the group’s earnings growth potential,” AmInvestment Bank said in a Dec 6 report.
Cheaper coffee prices are also expected to favour the group, although this is partially offset by a 10% import tax and higher costs from substituting plastic straws, the report noted
4. Straits Inter Logistics Bhd
As Malaysia’s only public listed company providing bunkering services, Straits Inter Logistics Bhd was picked on the basis of strong earnings performance in its 2017 financial year after being rebranded from Raya International Bhd in August that year.
With its new direction set, the group’s earnings grew 29.28% to RM2.33 million in 9MFY18 ended Sept 30, 2018, following an 81.06% surge in revenue to RM150.03 million year-on-year. This was the result of growth in the group’s oil bunkering services and trading in oil products.
Unfortunately, this has not translated into stronger investor interest in the counter, which has lost 4 sen or 15.4% to 22 sen year to date. Straits Inter Logistics last closed at 22 sen at a market capitalisation of RM122.99 million.
On Dec 5, the group proposed to diversify into land transportation and logistics to meet rising demand from its existing customers for such services.
The inland transportation business segment could contribute more than a fourth of total net profit in the future, the group said of the plan, which is still subject to shareholders’ approval.
It is unclear what the remaining shareholders think as yet, but Straits Inter Logistics managing director and substantial shareholder Datuk Seri Ho Kam Choy has been seen to be mopping up the group’s shares, giving him a total stake of 11.94% as at Dec 12.
Ho was appointed to lead the company in August 2017 after the exit of former shareholders and had spent 18 months restructuring the company.
5. Serba Dinamik Holdings Bhd
Shares in Serba Dinamik Holdings Bhd have gained 50 sen or 15.6% year-to-date, closing at RM3.67 yesterday.
The company has benefited from strong growth in its operation and maintenance (O&M) activities, posting a 21.4% increase in net profit to RM278.61 million for 9MFY18 ended Sept 30, 2018. Revenue was up 20% year-on-year over the cumulative period to RM2.31 billion.
Its growth is driven largely by its overseas investments in the Middle East, where it is involved in O&M and engineering, procurement, construction and commissioning (EPPC) and Tanzania, where it is building a chlor-alkali plant via a joint venture.
Despite the group’s strong performance, volatility in oil prices has been seen to affect investor sentiment. This brought Serba Dinamik’s share price off its record high of RM4.26 on Oct 18 since a Feb 2017 listing.
The price of Brent crude oil declined from a three-year high of US$86.29 on Oct 3, 2018 to a one-year low of US$58.71 on Nov 30, 2018.
That being said, analysts are still wildly positive on the stock. All 10 analysts followed by Bloomberg recommend a “buy” on the stock, with a consensus 12-month target price of RM4.91.
In a Nov 28 report, PublicInvest Research highlighted that earnings visibility for Serba Dimaik is backed by a strong outstanding order book of RM7.5 billion over the next three years.
6. CIMB Group Holdings Bhd
Shares in CIMB Group Holdings Bhd, which are 27% owned by sovereign wealth fund Khazanah Nasional Bhd, hit a record high of RM7.16 on April 19.
However, post-14th general election, which saw a historical change in government, CIMB shares have declined by 17% from their record high to RM5.92 on May 24.
The country’s second-largest banking group also announced a significant change in leadership in 2018, with the departure of its chairman Datuk Seri Nazir Razak.
Nazir, the younger brother of former prime minister Datuk Seri Najib Razak, stepped down as CIMB chairman on Oct 20, after an illustrious 29-year career with the bank.
Datuk Mohd Nasir Ahmad, the former chief executive officer of Perbadanan Usahawan Nasional Bhd, was then appointed as the new chairman of CIMB.
Earnings-wise, CIMB saw a vast improvement in 2018. For the nine months ended Sept 30, 2018 (9MFY18), the group’s net profit rose 31.1% to RM4.47 billion from RM3.41 billion a year ago, while revenue was marginally higher at RM13.31 billion compared with RM13.11 billion.
This was underpinned by lower provisions and costs, continued improvement from consumer and commercial banking, as well as a recovery in wholesale banking revenue in 3QFY18.
Maybank IB Research said in a Dec 11 note that CIMB’s valuations were undemanding, in light of its year-to-date share price decline.
Moreover, the research firm was projecting faster earnings growth of 11% into FY19 for CIMB, on the back of more stable net interest margins and credit costs, leading to a recovery in return on average equity to 10% from 9.4% (excluding one-offs) in FY18.
Maybank IB had a “buy” call on CIMB, with a target price of RM6.70.
At their closing price of RM5.72 yesterday, CIMB shares are trading at a trailing price-earnings ratio of 9.6 times with an indicated dividend yield of 4.4%.
7. Muhibbah Engineering (M) Bhd
Muhibbah Engineering (M) Bhd shares hit a 10-year high on Jan 8 at RM3.22. This was shortly after the group announced that it had bagged a RM70 million construction contract from Tenaga Nasional Bhd, for the construction of a reinforced concrete jetty and platform in Johor Baru.
Job wins, coupled with higher recurring income courtesy of its concession division namely its stake in all three of Cambodia’s International Airports — Phnom Penh, Siem Reap and Sihanoukville — made Muhibbah a top pick by analysts last year.
The group reported a 12.4% increase in net profit to RM106.92 million for the cumulative nine months ended Sept 30, 2018 (9MFY18) while revenue grew 3.4% to RM1.12 billion.
In a Nov 29 note on Muhibbah, RHB Research remarked that there were concerns from the investment committee on Muhibbah’s prospects in Cambodia, due to the memorandum of understanding signing between Cambodia and China to develop a new airport in Phnom Penh.
However, RHB Research opined that this new airport would not be completed anytime before 2019 and by the time that it is completed, which would be in 2020 or thereafter, Muhibbah’s airports there should reach 90% capacity or more.
Muhibbah also has a construction and cranes division, which recently bagged two engineering, procurement, construction, installation and commissioning contracts from two subsidiaries of Petroliam Nasional Bhd.
MIDF Research said following the addition of these contracts Muhibbah’s current outstanding order book now stands at RM2.1 billion. The firm also noted that Muhibbah’s tender book currently stands at RM4.1 billion, of which 76% are related to infra jobs, the firm noted.
MIDF is maintaining its “buy” call on Muhibbah, with a target price of RM3.15.
At its closing price of RM2.81 yesterday, Muhibbah is trading at a trailing price-earnings ratio of 9.42 times with an indicated dividend yield of 2.5%.
8. Tenaga Nasional Bhd
Tenaga Nasional Bhd (TNB) was among the casualties of the post-14th general election outcome selling. Its shares, which hit a record high of RM15.80 on May 4 just five days before the election, have since declined by 14% to RM13.54 yesterday.
Year to date, TNB shares have declined by 8%, with RM7 billion in market capitalisation wiped out.
TNB announced on Dec 14 that the government had approved the continuation of the imbalance cost pass-through mechanism for the period from Jan 1 until June 30, 2019.
Due to higher fuel and generation cost for the period of July 1 until Dec 31, 2018, the additional generation cost or imbalance cost is RM1.82 billion. This is mainly due to the increase in average coal price to US$97.835 per tonne, as compared to the forecast coal price set in the Base Tariff for Regulatory Period 2 (RP2) from 2018 to 2020, which is at US$75 per tonne.
Alliance DBS Research said in a Dec 17 note that as per the IBR (incentive-based regulation) framework, excess revenue generated will have to be passed through to customers due to the revenue cap and price cap models implemented for TNB’s entities. Higher revenue arising from higher-than-projected electricity volume sales or average selling prices will be returned to customers by offsetting higher generation cost.
Following this, AllianceDBS Research revised down its earnings projection for TNB by 1% to 3% to account for lower effective electricity sales as the utility will have to return excess revenue.
The firm cut its target price for TNB to RM14.20 following the earnings revision, and reiterated its “hold” rating on the stock.
At their close of RM13.54 yesterday, TNB shares are trading at a trailing price-earnings ratio of 13.75 times with an indicated dividend yield of 3.8%.
9. Tasco Bhd
Logistics provider Tasco Bhd was among our top picks in 2018 due to prospects of future growth following its venture into the cold chain market after its takeover of Gold Cold Transport Sdn Bhd, one of the largest cold chain logistics players in Malaysia, and MILS Cold Chain Sdn Bhd last year.
However, the stock has turned out as to be worst performer among our picks for the year as its earnings were hampered by finance costs, which more than doubled as a result of loans taken to finance its cold chain business — in spite of the group recording a growth in revenue.
For the first half ended Sept 30, 2018 (1HFY19) Tasco reported a 52% decline in net profit to RM7.78 million on increased finance costs for its cold chain business as well as its recent acquisition of land and warehouse on Pulau Indah in Selangor.
This was on the back of a 7% increase in 1HFY19 revenue to RM372.7 million.
Following this, its share price hit a four-year low of RM1.02 on Nov 27.
In a Nov 16 note to investors, MIDF Research downgraded its call on Tasco to “neutral” from “buy”, with a target price of RM1.28 per share.
The firm said that its revised valuation target represents its further conservatism in valuation of Tasco amid increasing competition and uncertainty of global trade.
“While Tasco’s retail logistics business focuses mostly on petrol kiosks and convenience stores, which we reckon its demand to be resilient, contribution to the bottom line is expected to be minimal. “Nevertheless, we note that Tasco has a manageable net debt to equity ratio below 1 time despite increased financing costs,” the firm said.
At its closing price of RM1 yesterday, Tasco is trading at a trailing price-earnings ratio of 9.51 times with an indicated dividend yield of 5%.
10. MKH Bhd
MKH Bhd, which is primarily involved in property development, construction, and plantation, was one of our top picks last year premised on the expectation of a stable crude palm oil (CPO) price, at above RM2,300 per tonne, which could help boost its plantation earnings.
However, CPO prices started to decline below the perceived stable level of RM2,300 per tonne in the second half of the year, falling to as low as RM1,775 per tonne on Nov 16.
For its full financial year ended Sept 30, 2018 (FY18), MKH reported a 46% drop in net profit to RM69.03 million, while revenue increased marginally to RM1.08 billion, from RM1.06 billion in FY17.
Its plantation operations located in East Kalimantan, Indonesia saw lower earnings due to the weakening of the rupiah against the US dollar and the ringgit.
MKH’s property division saw a lower gross profit margin as a result of competitive sales rebates offered to purchasers for certain development projects.
AllianceDBS Research in a Oct 17 note on MKH acknowledged that the group’s share price had dropped significantly over the past one year on weak earnings delivery concerns.
The firm noted that a potential earnings catalyst for MKH was its 500 acres (202ha) of land bank in Kajang which are carried at low cost, that could underpin its launch pipeline of affordably priced properties going forward.
Year to date, MKH’s share price has declined by 29% to close at RM1.12 yesterday, with a market capitalisation of RM648.59 million.