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Disappointments Of The Year: A year full of disappointments on Bursa

IT, January 8 (The Edge Markets) —

This article first appeared in Capital, The Edge Malaysia Weekly, on December 31, 2018 – January 06, 2019.

IT has been a disappointing year for stocks on Bursa Malaysia, with more decliners than gainers. Here are the laggard sectors, with construction being the worst hit

Construction hit by cancellations, deferments

The construction sector was one of the worst-performing sectors on Bursa Malaysia, with most of the decline coming post-GE14 as the cancellation and deferment of contracts by the new administration affected approved and awarded rail jobs.

Year to date (Dec 21), the Bursa Malaysia Construction Index has fallen more than 50%.

Among the projects affected are the Singapore-Kuala Lumpur high-speed rail project, which will be deferred for two years, and the East Coast Rail Link, which was still under review at the time of writing.

CIMB Equity Research analyst Sharizan Rosely says in a recent strategy report that the construction sector is likely to enter a downward cycle, given the subdued outlook for contract awards. He foresees a downside to the order books of the bigger contractors arising from the impact of the cost rationalisation of the light rail transit Line 3 (LRT3) and mass rapid transit Line 2 (MRT2), lower construction profit per annum arising from project delays and extensions of time and the risk of margin markdowns or provisions due to the substantial scaling down of the scope of some projects.

“Our top big-cap ‘sell’ is Gamuda Bhd and top small- or mid-cap ‘sell’ calls are on Protasco Bhd and Salcon Bhd. Our top ‘buy’ is Muhibbah Engineering (M) Bhd for its overseas exposure, undemanding valuations and high return on equity,” Sharizan says.

Affin Hwang Investment Bank Sdn Bhd is also cautious on the construction sector due to potential earnings risks from profit margin squeeze and reduction in contract values.

Nonetheless, Affin Hwang analyst Loong Chee Wei says in his strategy report that most construction companies are now trading at sharp discounts to their revised net asset value.

“The current weighted-average, sector-expected 2019 core price-earnings ratio of 11 times is reasonable, considering core 2019 expected earnings per share growth of 12% year on year,” he says, reiterating the investment bank’s “neutral” weighting on the sector.

On the other hand, MIDF Equity Research has maintained a positive view on the sector despite the near-term swing in direction.

“This was mainly a recognition of the stable development expenditure allocation in Budget 2019, continuation of mega projects — LRT3, MRT2 and Pan Borneo Highway, to name a few — and pending implementation of infrastructure projects, [including] the Coastal Road, Second Link Road and state water grid projects,” it says in its Dec 17 strategy report.

It adds that some stocks are trading at attractive levels following the heavy selldown this year. They include Gabungan AQRS Bhd and Muhibbah Engineering. MIDF also has “buy” calls on Cahya Mata Sarawak Bhd and KKB Engineering Bhd, which could benefit from the pending rollout of Sarawak infrastructure developments.

Genting’s luck runs out

THE PH administration’s first budget delivered a major blow to Genting Malaysia Bhd with the first increase in gaming tax in 20 years. Genting Malaysia lost more than RM1.24 billion in market capitalisation in just a few minutes, shortly before Bursa’s closing bell, while its parent company, Genting Bhd, saw RM2.23 billion wiped off of its market cap. The selldown occurred after Finance Minister Lim Guan Eng announced that casino duties will be raised to 35% from 25% on gross gaming income and gaming machine duties to 30% from 20% on gross collection, as well as the increase of annual casino licence fees by RM30 million to RM150 million and machine dealer’s licence to RM50,000 from RM10,000 a year.

Then, in November, Genting Malaysia announced that it was suing Fox Entertainment Group LLC and The Walt Disney Co for US$1 billion for terminating an agreement to develop a 20th Century Fox World theme park in Genting Highlands. This has led to uncertainty over the development of Genting Malaysia’s new outdoor theme park.

And, if things were not bad enough, Genting Bhd’s indirect wholly-owned subsidiary, which is developing the Resorts World Las Vegas property, has found itself entangled in a lawsuit with US-based casino operator Wynn Resorts Holdings LLC.

Wynn Resorts is suing Resorts World Las Vegas LLC, a unit of Genting, on claims that the architectural design embodied in the Resorts World Las Vegas hotel and casino is substantially similar to Wynn Las Vegas, Encore and Wynn Macau.

It is also worth noting that Genting Malaysia suffered its largest quarterly loss of RM1.49 billion for the third quarter ended Sept 30 (3QFY2018) due to an impairment on its investment in promissory notes issued by the Mashpee Wampanoag tribe for the development of an integrated gaming resort in Massachusetts, US.

Amid the negative news and developments, Genting Malaysia and Genting have seen YTD declines of 44% and 30.1% respectively, based on their closing on Dec 21.

E-government players hurt by change in government

MY EG Services Bhd (MyEG) saw 29.8%, or RM2.78 billion, of its market capitalisation wiped out on May 14, the first trading day post-GE14, as companies seen as linked to the previous administration saw heavy selling pressure.

It was the company’s largest decline in a single day since 2008. Adding to the pressure is the concern over the loss of income from its Goods and Services Tax (GST) monitoring project with the scrapping of the GST and the reintroduction of the Sales and Services Tax.

While there was a recovery following the heavy selldown, MyEG’s share price came under selling pressure again this month following the decision to scrap the RM3.5 billion national immigration control system (SKIN) project. Prestariang Bhd was affected by the termination of the project, in which it holds a 70% stake. Its share price plunged more than 40% during the week the termination was announced, while the share prices of MyEG and Scicom (MSC) Bhd were also affected.

Other e-government services providers include Dagang NeXchange Bhd (DNeX), Datasonic Group Bhd and Iris Corporation Bhd, which fell 5.2%, 8.4% and 6.5% respectively, on May 14.

The average YTD decline of e-government services providers is 50.8%.

Analysts have mixed views on the various e-government services providers. Most analysts covering MyEG continue to be positive on its prospects for 2019, despite seeing its share price fall by more than 50% YTD. In fact, six out of seven analysts covering it have a “buy” call on MyEG with only one calling a “sell”. Its average 12-month target price is RM1.82, indicating a potential upside of more than 100%.

On the other hand, three of the analysts covering Prestaring have downgraded the company to “sell” with an average target price of 24 sen, indicating further downside to its current price of 35 sen per share.

Analysts were more neutral on Datasonic with one “buy” and one “hold” recommendation with a 12-month average target price of 45 sen apiece, which is close to its closing price of 43 sen on Dec 21.

DNeX was also favoured by analysts, with all three having a “buy” call with an average target price of 41 sen, indicating a potential upside of 86.4%.

Regulatory pressure and competitive market hurt telcos

THE telecommunications (telco) sector came under pressure from both the regulators and a competitive market. In fact, it was so bad that Telekom Malaysia Bhd (TM) was removed from the FBM KLCI constituents in the year-end review after the sharp decline of its share price.

YTD, the telco giant has dropped 56.5%, and has seen RM13.6 billion wiped off its market value — the biggest loss in market cap over one year since the 2008 global financial crisis, when more than RM27.5 billion was erased.

The selldown was mainly due to the May 22 announcement by Minister of Communications and Multimedia Gobind Singh Deo that he would work towards improving broadband connections at lower prices. This led to an agreement by the country’s four key telcos TM, Maxis Bhd, TIME dotCom Bhd and Celcom Axiata Bhd, on the mandatory standard on access pricing, which will result in lower fixed broadband prices.

Being the largest fixed broadband market player, investors see TM as the company that will be impacted the most. There is also concern that the reform could put TM’s monopoly in the fixed broadband space at risk. This year, Tenaga Nasional Bhd (TNB) announced that it will be running a pilot project in Melaka to test the viability of providing broadband services through its fibre-optic network.

Apart from that, changes in TM’s management team added to investor concerns. At the end of November, Imri Mokhtar was appointed acting group CEO, the third person to take the helm at TM this year, after Datuk Seri Mohammed Shazali Ramly resigned in June, followed by his successor Datuk Bazlan Osman’s resignation a few months later.

Other telco players also found themselves under pressure in a competitive market. Axiata’s share price has fallen 28.2% YTD, while Digi.Com Bhd fell 11%. TIME dotCom was also down 9.8% while the best performer in the sector, Maxis, also saw a decline of 6.8%.

Despite the sharp selldown, most analysts remain cautious on the sector’s earnings outlook for 2019.

“We expect Maxis to report lower 2019 earnings after the termination of the U-Mobile RAN sharing agreement in late 2018. TM should see a steep earnings decline due to intensifying competition and lower broadband prices. Axiata should deliver the highest earnings growth due to a low base effect and operational improvement at its overseas entities, [though]macro headwinds may weigh on its overseas profitability,” Isaac Chow, an analyst at Affin Hwang says.

Nonetheless, he maintains a “neutral” call on the sector, as the lacklustre earnings outlook is somewhat compensated for by the 4% yield.

Oil and gas sector falls short of expectations as oil prices collapse

EXPECTATIONS for the oil and gas industry, which had been tipped as a dark horse for 2018, were high for some fund managers at the start of the year, but optimism turned into volatility, and then panic going into the final quarter.

The price of Brent crude had been on a steady upward trend until early October, when it reached its recent high of US$86.29 per barrel. However, it did not take long for the price to collapse and drop below the US$60 per barrel level to US$53.82 on Dec 21, on concerns over a weakening global economy and surging US crude output and falling stock prices.

The decline continued despite the Organisation of the Petroleum Exporting Countries (Opec) and Russia-led allies agreeing to slash production.

It is worth noting that most O&G counters on Bursa Malaysia were in the red, including Sapura Energy Bhd, Bumi Armada Bhd, Velesto Energy Bhd and Barakah Offshore Petroleum Bhd. Dialog Group Bhd and Serba Dinamik Holdings Bhd were among the few O&G players that managed to chalk up gains.

YTD (Dec 21) Sapura Energy has fallen 57.8%, Bumi Armada, 79.1%, Velesto Energy, 42.6%, and Barakah Offshore by 84.5%. Dialog and Serba Dinamik recorded total returns of 20.7% and 15.6% respectively.

Maybank Investment Bank Research analyst Liaw Thong Jung writes in a recent strategy report that the Opec+’s (comprising Opec and 14 non-Opec countries) latest pact to cut production by 1.2 million barrels per day from Jan 1 will be closely monitored.

“A strong compliance will shape 2019 positively. A break-up, or poor execution, will reverse all that and a volatile market will ensue. We estimate the oil price to average US$65 per barrel, a level that would instil confidence,” Liaw says, adding that Dialog and Yinson Holdings Bhd are his top “buy” calls in the sector. He is also calling a “buy” on Malaysia Marine and Heavy Engineering Holdings Bhd (MHB), Sapura Energy and Velesto Energy.

Affin Hwang’s Tan Jianyuan agrees with Liaw that share prices in this space have mostly bottomed out, with a select few staging a recovery.

“Based on consensus estimates, aggregate sector earnings will see a stronger 13% year-on-year growth in 2019 against our coverage universe of 14%, driven by a turnaround or recovery of a few … companies like Sapura Energy, MISC Bhd, MHB and Velesto Energy. Risks to earnings lie in movement of the ringgit, oil prices and capital expenditure spending,” Tan says, adding that he has a “buy” call on Petronas Chemicals Group Bhd and Serba Dinamik.

Plantations continue to underperform

CRUDE palm oil (CPO) prices struggled near a three-year low of RM1,965 per metric ton (MT) in November, as the benchmark palm oil contract for January delivery hovered at RM1,972 per MT with rising inventories weighing on market and physical demand. On Dec 21, CPO futures were trading at RM2,157 per MT.

This has weighed on the share prices of many plantation counters. FGV Holdings Bhd was one of the worst performers as it fell 55.9% YTD (Dec 21). IJM Plantations Bhd was down 47.7%, IOI Corp Bhd, 1%, and Kuala Lumpur Kepong Bhd fell 1.3% during the same period.

The Bursa Malaysia Plantation Index declined 13.8% YTD.

Affin Hwang analyst Nadia Aquidah says the current low CPO price is unlikely to sustain in the first quarter of 2019 as world palm oil consumption is expected to exceed production as seasonal declines in production take hold, thus reducing stocks.

“As we expect inventory levels to slowly decline with higher consumption and the export of palm oil products, we think CPO prices could improve in 2019 onwards to RM2,400 to RM2,500 per MT (from an estimated average of RM2,200 to RM2,250 for this year). Sector-wise, we maintain our “neutral” rating for the plantation sector,” Nadia says.

Maybak Investment Bank analyst Ong Chee Ting agrees, saying in a report that the new threshold for Indonesia’s export tax is a possible game changer for the industry, which provides a more level playing field for Malaysian exporters.

Ong adds that the El Niño climate cycle might make a comeback early next year, and could disrupt the soybean supply during South America’s ongoing planting season.

“Our sector valuation remains fair, hence, our “neutral” weight. For a trade, investors can position themselves after an expected weak 4Q2018 results season in February 2019, ahead of a potential CPO price recovery in 2Q2019. However, longer-term investors should consider bottom fishing for bombed-out small- to mid-cap stocks as stock prices tend to mean-revert over the long run,” Ong says.

Ivy Ng, at CIMB Equity, agrees with both, saying that CPO prices are expected to average RM2,400 per MT in 2019, higher than the first 11 months’ average price of RM2,267 in Malaysia.

“We expect oil palm players to report a mixed earnings performance in 2019. We believe upstream planters with strong fresh fruit bunch output growth should report better earnings, driven by higher output and CPO prices. However, this will be partially offset by higher labour and fertiliser costs as well as depreciation charges,” Ng says in a report.