KLCI erases gains, up 2.3pts at midday

KUALA LUMPUR (April 13): The Malaysian equities barometer erased earlier gains, but still managed to settle in positive territory towards the Friday lunch break.

Gains in the FBM KLCI were in tandem with global markets, which found support from updates that Italian government bonds have seen better than expected demand, although China's first quarter economic growth of 8.1% came in below street estimates.

In technical terms, analysts said dynamics of the FBM KLCI are still weak. In a note on Friday, Kenanga Investment Bank Bhd said that although the index had breached the 1,600-point level, technical dynamics of the index are still deemed weak unless the gauge trades above the all-time high of 1,609.33.

This could result in an uptrend resumption for the FBM KLCI, according to Kenanga.

At 12.30pm, the FBM KLCI added 2.3 points to 1,603.57. Across the exchange, some 653 million shares worth RM612 million were traded, leading to 331 gainers versus 277 decliners.

Top gainer Sam Engineering & Equipment (M) Bhd rose 58 sen to RM2.65, while GUINNESS ANCHOR BHD [] was up 36 sen to RM13.

Decliner Tradewinds PLANTATION [] Bhd fell 21 sen to RM5.69, while KLUANG RUBBER CO (M) BHD [] was down 10 sen to RM2.80.

Most active was INGENUITY SOLUTIONS BHD [], which added one sen to 10 sen with some 100 million shares done.

Among Asian bourses, Japan's Nikkei 225 rose 1.41% to 9,658.66 points, while Australia's S&P/ASX 200 added 0.8% to 4,314.7. The Shanghai Composite was up 0.18% 2,355.14.



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Stocks to watch Subur Tiasa, Amway, Poh Kong, Genetec , Perak Corp, Kein Hing

KUALA LUMPUR (March 24): The FBM KLCI is expected to trend higher in the weekbegining March 26, supported by local market defensiveness election hyped trading sentiment and bullish quartr-end window dressing.

World stocks rebounded on Friday, lifted by shares in energy and basic materials, as concerns about global growth were set aside by investors who saw further gains in this year's rally, according to Reuters.

Meanwhil, US stocks rose in light volume on Friday, boosted by rising energy and basic materials shares, and the S&P 500 continued to show resilience even as it posted its second negative week so far this year, it said.

Affin Investment Bank vice president and head of retail research Dr Nazri Khan said that despite the global weakness on negative manufacturing data from China, French and Germany, he expects the FBMKLCI to trend moderately higher next week, supported by local market defensiveness; election hyped trading sentiment and bullish quarter-end window dressing.

“We note that although most global indices trended lower late last week, the local benchmark closed higher and managed to stay resilient (KLCI up 0.6%, FTSE All World down 0.8% w-o-w) despite negative ideas of China economic contraction and rising recession concerns in the Europe.

“We believe such ideas are not new as market may have factored in eurozone recession and China slow down since late last year,” he said.

Nazri said that the overall feel was that the global market had rallied a long way and was now overbought –he said the FTSE All-World index sits less than 2% below last week’s near eight-month peak, when it had surged almost 13% year to date – hence it needs a breather to neutralize its overboughtness as well as new positive catalysts to propel it higher.

He said cheap liquidity would be the biggest catalyst in the near term, including Ben Bernanke‘s Fed promises to keep interest rates low until 2014 and the ECB decision to lend over $1 trillion (at 1% rates for a three year duration) to under-capitalized European banks will be the primary cushion for the market against unexpected distribution.

“Despite rising inflation risk due to higher oil price, there are rumours that several central banks such as Bank Of England, Swiss National Bank and Bank of Canada and even Bank Of India to play catch up with Fed and ECB (in pumping liquidity) which we think will be supportive for the local market,” he said.

As for the local front, we expect the quarterly portfolio rebalancing as the most important bullish drivers with a combination of premium investors, high end retail and institutional making large bets ahead of the anticipated stronger second half (which include the upcoming mega IPO such as Felda and anticipated election in the second quarter).

The fact that the local benchmark index has already inched up 3% year-to-date and 18% since the September 2011 low is a testimony of the local market defensiveness (in terms of shallower correction, low beta due to slim MSCI weightage, low foreign shareholding and resilient domestic earning driver) especially during global volatility.

“Further, we see most regional bourses have successfully breached the pre-Lehman crisis’ high (Jakarta Composite Index, Philippines Composite Index and Thailand SET Index at three year high) which in turn can be supportive momentum for FBM KLCI.

“On the technical front, momentum studies continue to trend higher despite entering overbought levels, suggesting more positive bias. Uptrend so far remains intact with FBMKLCI still holding above the 20, 50 and 200 moving average near 1,580-1,565 support level. The next area of resistance are pegged at 1,590 and 1,600 while support should come at 1,580 and 1,565 levels,” he said.

Among the stocks that could be in focus are SUBUR TIASA HOLDINGS BHD [], AMWAY (M) HOLDINGS BHD [], POH KONG HOLDINGS BHD [], Genetec TECHNOLOGY [] Bhd, Perak Corp Bhd, KEIN HING INTERNATIONAL BHD [].

Subur Tiasa’s earnings rose 10.5% to RM6 million in the second quarter ended Jan 31, 2012 from RM5.43 million a year ago, boosted by the stronger manufacturing sector.

Kenanga Investment Bank Bhd has initiated coverage on Amway with an “outperform” call and target price of RM10.94.

Poh Kong said the jeweler has fully settled its outstanding debt under a RM200 million Islamic bond scheme. The stock was down 0.5 sen to 56 sen.

Genetec, a contract manufacturer of industrial equipment, has secured RM27.9 million worth of jobs, of which, orders from the hard disk drive sector account for 90% or RM25 million of the total amount.

Meanwhile, Perak Corp is collaborating with Sanderson Project Development (M) Sdn Bhd to develop and operate an animation theme park in Ipoh. The project includes hotel and high-rise residential portions. Shares of Perak Corp fell one sen to RM1.39 on Friday.

Finally, industrial component assembler Kein Hing reported a net loss of RM292,000 in the third quarter ended Jan 31, 2012 from a net profit of RM1.55 million a year earlier as revenue was down 8% to RM37.99 million. Kein Hing closed unchanged at 51 sen last Friday.



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Top Glove climbs on higher Q2 profit

At 9.59am trading Top Glove Corp, the world’s biggest rubber-glove maker, climbed 2.9 per cent to RM5.06, poised for the steepest advance since Jan 11. The company was upgraded to market perform, the equivalent of hold, from underperform, at Kenanga Investment Bank Bhd. Top Glove said yesterday its second-quarter profit more than doubled from a year earlier. -- Bloomberg



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Bursa shares rise on bullish ratings

Bursa Malaysia Bhd, the nation’s stock and derivatives exchange operator, rose to a six-month high after brokerages including Credit Suisse Group AG raised their share-price estimates to reflect better growth prospects.

The stock gained as much as 2.7 per cent to RM7.72 in Kuala Lumpur trading, the highest intraday level since July 29.

It traded at RM7.60 at 11.51 am local time. Fourth- quarter net income rose 5.2 per cent to RM31.3 million (US$10.3 million), bolstered by higher trading revenue on the derivatives market, it said in a statement yesterday.

“Bursa’s earnings are highly leveraged to improving market activity, with January 2012 volumes boding well,” Arjan van Veen, an analyst at Credit Suisse, wrote in a report today.

“Bursa has capacity to lift pricing as well as utilize the current excess capital on its balance sheet.”

He raised his price estimate to RM7.50 from RM6.94 and kept his “neutral” rating.

The average daily trading volume on the Southeast Asian nation’s stock exchange jumped 20 per cent to 1.8 billion shares in the past three months compared with the same period a year earlier, according to data compiled by Bloomberg.

Trading volume surged to 4.4 billion shares at the close on Feb 8, the highest since February 2007. Derivatives trading also surged, led by palm oil futures.

CIMB Group Holdings Bhd increased its price estimate for Bursa to RM7.65 from RM7.18, while Kenanga Investment Bank Bhd raised its target price to RM8 from RM7.40, they said in separate reports today.

Chan Ken Yew, an analyst at Kenanga, increased his 2012 earnings estimates by 5.3 per cent and 13 per cent for 2013.

The stock exchange operator’s 2012 profit may be similar to last year’s “if not better,” Bursa Chief Executive Officer Tajuddin Atan told reporters in Kuala Lumpur yesterday.

The bourse is open to strategic alliances to boost market access and improve efficiency, he said, without giving details.

Shares of Bursa have gained 13 per cent this year, outpacing a 2.1 per cent increase in the benchmark FTSE Bursa Malaysia KLCI Index. - Bloomberg



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Higher dividends for Kian Joo shareholders?

KUALA LUMPUR: Kian Joo Can Factory Bhd (KJCF), which has paid out half its earnings in dividends, could be even more generous considering its new controlling shareholder Can-One Bhd needs cash to pare down its high borrowings.

Can-One has raised borrowings to finance the acquisition of a 32.9% equity stake in KJCF costing RM241 million in cash.

The loan, which finances the share purchase, will effectively double Can-One’s existing borrowings to RM467 million, and raise net gearing to about 2.2 times, according to estimates by The Edge Financial Daily.

As at Sept 30, 2011, before the KJCF acquisition, Can-One had RM226.04 million in borrowings and RM11.84 million cash. With a shareholders’ equity of RM205.44 million, it then had a net gearing of 1.04 times.

“We believe Can-One would need additional cash inflow to pay off the loan interest. At this juncture, we reckon that Can-One will probably opt to receive dividends from KJCF to pay off its borrowings plus interest.

“As such, there is a possibility that with Can-One controlling KJCF now, the company may see a higher dividend payout in the future, benefiting minority shareholders of KJCF as well,” said Kenanga Research.

Kenanga estimates Can-One to incur interest expense of an additional RM28 million per annum on the borrowings to finance the acquisition of the KJCF stake.

The research house reckons that Can-One could increase KJCF’s payout ratio from the current 50% to 80%, which translates into 20.3 sen dividend per share (DPS) based on net profit forecast of RM112.8 million or 25.3 sen per share for FY11 ended Dec 31.

KJCF recorded a net profit of RM89.75 million or 20.21 sen per share for the nine months ended Sept 30.

With 146.1 million shares in KJCF, Can-One would receive about RM30 million in extra cash.

For FY10, KJCF declared a 55% dividend payout, amounting to 13.75 sen per share. KJCF posted a net profit of RM101.97 million or 22.96 sen per share for FY10.

Kenanga forecasts KJCF’s net profit to grow to RM132 million or 29.8 sen per share for FY12. Meanwhile, TA Research expects a net profit of RM143 million or 32.2 sen per share for FY12.

Assuming a payout ratio of 80%, KJCF could probably declare DPS of 23.8 sen to 25.7 sen. This will make KJCF an attractive dividend stock with a 10% yield based on its share price which closed at RM2.20 last Friday.

To recap, Can-One won the bid for a controlling 32.9% stake in its largest competitor KJCF in February 2009 at RM1.65 per share. But the See family, who founded KJCF, waged a legal battle to reject the share disposal.

After three years of courtroom tussles, the Federal Court ruled in favour of Can-One’s bid to purchase the stake on Jan 5.

The acquisition is considered a good bargain for Can-One as the price it paid was at more than 20% discount over the market value, and nearly 25% over its net asset per share of RM2.02.

With the large block of shares crossed via off-market last week, Can-One is now the single largest shareholder of KJCF. Can-One is expected to seek board representation at KJCF.

More generous dividend payments would probably be good news for other shareholders as well. Other substantial shareholders of KJCF are Kumpulan Wang Persaraan with 8.96%, and the Employees Provident Fund 7.94%.

Kian Joo Holdings Sdn Bhd, the investment vehicle of the See family, is left with 1.74%. The See brothers collectively own a 6.6% stake.

Apart from the steady cash flow generated from its can manufacturing business, KJCF has the option to divest its shareholding in Box-Pak (M) Bhd, a corrugate carton box manufacturer.

“If KJCF disposes of its 54.8% stake in Box-Pak at the previously rumoured price of RM3.20, Can-One could be getting about RM34.6 million as capital repayment at the level,” added Kenanga.

However, an analyst noted that at Kenanga’s rumoured price, Box-Pak would look very pricey, at 1.82 times book and a price-to-earnings ratio of 13.9 times, based on annualised earnings per share of 23 sen for FY11 ended Dec 31.

Box-Pak’s shares surged 28 sen or 11.9% to RM2.64 on a heavy volume of 1.91 million shares last Friday.

The stock is trading near its 12-month high, whose share price doubled over the past two months.

The possible dividends would come in handy for Can-One to at least cover its interest expenses.

However, Kenanga conceded that the move to raise dividends would only lift Can-One’s debt burden temporarily, and it is still uncertain how Can-One plans to pay off its huge borrowings in the long run.


This article appeared in The Edge Financial Daily, January 30, 2012.



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Kian Joo stake sale completed

KUALA LUMPUR: Can-One Bhd finally got hold of 32.9% equity interest, or 146.1 million shares, in Kian Joo Can Factory Bhd (KJCF) from the See family via an off-market trade yesterday.

The news should lay to rest any remaining uncertainty over Can-One’s acquisition of the stake in KJCF at RM1.65 per share, which is at a 25.6% discount to yesterday’s closing price of RM2.22.

In fact, Can-One’s share price climbed further yesterday, setting a record high of RM2.17. Some 6.9 million shares changed hands on the open market.

It has been two weeks since the Federal Court ruled in favour of Can-One’s takeover of the See family’s 32.9% stake in KJCF.

The delay to the block of shares changing hands had raised uncertainty about whether Can-One was facing hurdles on the share purchase after a three-year tussle in the courtroom.

To recap, Can-One won the bid for its largest competitor, KJCF, three years ago at RM1.65 per share but the See family waged a legal battle to reject the share disposal.

Today, KJCF has net assets per share of RM1.96 and it is valued at 1.13 times book value based on yesterday’s closing of RM2.22.

As such, Can-One is buying KJCF at a discount of 0.84 times book value. Can-One only has to pay RM241 million for the KJCF block that is worth RM324.3 million based on yesterday’s closing price. This gives Can-One a paper gain of about RM83.3 million.

KJCF has a string of real estate assets in Malaysia and Vietnam with a total net book value of RM340.98 million, according to the company’s latest annual report.

With KJCF shares in hand, Can-One will no longer have to contemplate the See family’s potential “poison pill” of a rights issue.

The rights issue was announced in February 2011 and would have diluted the block of shares substantially if the See family decides not to subscribe to the cash call before selling to Can-One.


An analyst noted that Can-One’s acquisition will translate into better margins. Combined, both players will be able to command better prices as well as leverage their combined size for better prices from suppliers.

Analysts also said Can-One is getting a bargain as KJCF has a stable earnings track record, having expanded its production capacity in Malaysia and Vietnam. It also has improved future earnings prospects as it ventures into Indonesia.

As things stand, KJCF looks poised for a record year of profits.

TA Research forecasts KJCF’s FY11 net profit to rise to RM116.8 million, up 14.5% from RM101.98 million for FY10. Net profit for FY12 is expected to be RM143 million.

In line with that expectation, Kenanga Research forecasts KJCF’s net profit for FY11 to grow 10.6% year-on-year to RM112.8 million and hit RM132 million for FY12. Kenanga maintained its target price of RM2.38 with a “market perform” call on the counter.

Funding to acquire KJCF would not have been difficult to secure, as Can-One has bought an income-generating asset at a discount.

On the other hand, Can-One’s relatively weak cash position of RM11.85 million compared with its debt obligation of RM226.04 million may be a problem moving forward. Concern has been raised that the high gearing might prove challenging, particularly if Can-One should require additional funding at a later date.






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Challenges remain at MISC’s tanker business

KUALA LUMPUR: Analysts are positive on MISC Bhd’s move to exit its liner business, but they remain cautious on the group’s tanker operations which have been bleeding losses as well.

Analysts said MISC’s tanker business was the next largest drag to earnings after the liner division, and the situation is expected to persist until next year. The tanker division incurred about RM270 million in pre-tax losses for the six-month period ended Sept 30.

“The tanker division would likely remain challenging given that global tanker fleet growth will peak in 2012,” AmResearch said in a note last Friday.

OSK Research also noted the unbalanced demand and supply situation could persist for another one or two years, which would depress freight rates for MISC’s tanker business.

MISC says the cessation of the liner business would cost the group a US$400 million one-time loss and would throw MISC into the red for FY11 ending Dec 31.

“Meanwhile, the expected peak in winter rates may not even materialise as it is unlikely that rates will hit a seasonal high if the market is experiencing an imbalance,” it said.

For the cumulative six-month period, MISC’s net profit fell 67.1% to RM262 million while revenue declined 11.5% to RM5.63 billion.

MISC said the cessation of the liner business would cost the group a US$400 million (RM1.28 billion) one-time loss and would throw MISC into the red for FY11 ending Dec 31. The shipping company would incur US$30 million in costs, due to penalty charges for cessation of services and payment for retrenchment.

MISC is expected to exit the liner business by June 30, 2012 and will also dispose of all its liner-related assets.

Despite that, analysts welcomed the move as MISC had been dragged down by its liner business for the past three financial years despite a turnaround plan last year. MISC said the liner business had incurred US$789 million in losses for the past three financial years.

“We are positive on MISC exiting the liner business, which has dragged the group down with losses totalling US$120 million this year. With the losses to be fully provided for this year, we estimate that this could potentially stop the bleeding in the division from 2HFY12 onwards,” said OSK Research.

OSK Research added that MISC could raise at least US$315 million from the vessel disposals.

Nevertheless, it downgraded its FY11 revenue forecast by 13%, and core earnings by 26% to RM451.5 million given the depressed rates.

“We expect MISC to book in losses of RM804 million after factoring in the exceptional provisions of US$400 million arising from the cessation of its liner business,” it said.

Similarly, Kenanga Research downgraded its FY11 earnings forecast by 26% to RM401.8 million, excluding the US$400 million one-off cost.

It said MISC would likely post lower earnings due to higher bunker costs and lower charter rates for the petroleum and chemical tanker divisions.

Kenanga has an “underperform” call on MISC with a fair value of RM6.05.

OSK Research and AmResearch are more optimistic and upgraded their calls to “buy” with target prices of RM7.23 and RM7.40 respectively.

“We are positive on this development given the elimination of losses from the liner division, which we had earlier estimated at between RM300 million and RM600 million for FY12-FY13. As a result, we have raised FY12-FY13 core earnings by 3% and 5%,” said AmResearch.

OSK Research noted that MISC would start replenishing cash in FY12 after disposing of its container segment, which would bolster profit margins and lower its depreciation expenses.

“Axeing the liner business will help enhance FY12-FY13 profit by RM172 million (24%) and RM226 million (21%),” it said.

MISC was among the top losers last Friday, shedding 33 sen to close at RM5.80.


This article appeared in The Edge Financial Daily, November 29, 2011.



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MPOB data shows better-than-expected demand

KUALA LUMPUR: Unexpectedly strong demand for palm oil has helped prices stay afloat amid increasing supply. The Malaysian Palm Oil Board (MPOB) which released the October data showed a 2.1% increase in crude palm oil (CPO) production.

Inventory levels fell 1.55% to 2.1 million tonnes from September but remained significantly higher than the five-year average of 1.7 million tonnes.

Kenanga Investment Bank Bhd research analyst Alan Lim told The Edge Financial Daily that inventory levels were still very close to the all-time high of 2.27 million tonnes in November 2008. “The stock to usage ratio decrease to 8.8% from 10.5% in September this year has supported CPO prices recently,” he noted.

Demand has been mostly external with exports increasing by 19.04% month-on-month (m-o-m).

Lim said this was largely driven by exports to Pakistan (+80% m-o-m) and Europe (+23% m-o-m).

“However, I do not think this number is sustainable. As winter comes, demand for palm oil traditionally falls in countries in the northern hemisphere as consumers switch to soyabean oil which does not solidify in colder temperatures. In fact, cargo surveyor Intertek Testing Services has reported a 5.9% drop in Malaysian palm oil exports for the first ten days of November,” said Lim.

“Furthermore, the economic outlook in Europe is uncertain. CPO prices have a strong 80% correlation with European GDP growth,” he added.

With European exports expected to fall, Lim said there is China which is still the biggest export market. “Year to date (YTD), Malaysia has exported over 3.34 million tonnes of palm oil to China, which represents 23% of total exports against last year’s 22% with 2.95 million tonnes,” said Lim.

He noted that the supply side would depend largely on the weather which can be difficult to predict. “There are two kinds of La Nina, mild and severe. A mild La Nina may not affect production very much as the fresh fruit bunch (FFB) harvesting process can still continue. However, a severe La Nina may disrupt FFB harvesting, especially if it rains during the day for several consecutive days,” he said.

“Excessive rain can also reduce yields affecting the pollination of (oil palm) flowers which results in fewers fruits,” Lim said, adding that the US climate prediction centre forecast that the La Nina weather would gradually strengthen and continue through the winter in the northern hemisphere.

However, he reckons the current La Nina will not be as bad as the one that ended in April. Lim expects CPO prices to stay between RM2,950 and RM3,050 per tonne until the end of the year.

CPO prices have slipped after reaching a seven-week high on Wednesday when January palm oil futures hit RM3,068 per tonne on the Bursa Malaysia Derivatives Exchange.

The average spot settlement price of CPO futures for October was RM2,839.70 per tonne, down from RM3,130 in September.

Lim has a negative price outlook and forecasts CPO prices to average RM3,000 per tonne in 2012 with a downward bias on expectations of weakening demand.

Planters and producers in the oil palm industry will continue to be profitable, said Lim, as costs are still below CPO prices. As CPO prices fall, he expects most plantation companies to underperform.

“One exception will be Ta Ann which has relatively young trees of about 4½ years old. We expect double-digit growth in earnings for the company as FFB yields will continue to increase until the trees peak at nine to 10 years old,” said Lim.

Lim gave an “outperform” call for Ta Ann Holdings Bhd, which has turned to plantation from timber. For FY11, Lim expects 80% of Ta Ann’s earnings to be derived from the oil palm segment.

Kenanga has an “underperform” call for Kuala Lumpur Kepong Bhd, IOI Corp Bhd and Genting Plantations Bhd and “market perform” for Sime Darby Bhd.


This article appeared in The Edge Financial Daily, November 11, 2011.