• Mount Ruang, a stratovolcano in North Sulawesi Province, erupted several times in Indonesia's outermost region since Tuesday. The first eruption of the 725-metre-high mountain occurred on Tuesday and 4 times throughout Wednesday.

• Mount Ruang is situated 800km from Malaysia. Following the eruption, volcanic ash clouds have been observed within the Kota Kinabalu Flight Information Region (FIR) and is seen as a significant risk to aircraft safety. At 6.00am, the Malaysian Meteorological Department issued a Significant Meteorological (SIGMET) 1, indicating ash clouds moving westerly at a speed of 30 knots from the surface to 55,000 feet and intensifying.

• Due to the volcanic eruption, Malaysia Airlines and AirAsia announced flight cancellations to East Malaysia due to the Mount Ruang eruption.

• As at 5pm yesterday, 16 stations in Sabah and Sarawak reported healthy Air Pollutant Index readings below 50. Only 5 stations recorded moderate levels below 100. The following hour at 6.30pm, a Malaysia Airlines flight to Kuala Lumpur was believed to be the first to take off from KKIA at around 6.30pm. Additionally, AirAsia has also resumed flights travelling from various locations in the country. It is believed that volcanic ash clouds began to clear from the Sarawak region around 7pm and completely dispersed over the entire island of Borneo by 10pm.

• Volcanic ash can pose various challenges to marine transportation. Volcanic ash can quickly clog air intake filters, severely reducing airflow to essential machinery onboard ships. The abrasive nature of ash particles can cause significant damage to an engine's moving parts if they infiltrate the system. Ships need to be cautious and prepared when navigating areas affected by volcanic eruptions to avoid these potential hazards.

• At this juncture, management guided no disruptions to shipping activities. Sabah port is operating as usual. There were no shipping cancellations nor diversion of shipping arising from the situation. Nevertheless, we will be keeping a close eye on the latest developments at the port.

• We maintain BUY on Suria Capital with an unchanged DCF-derived fair value (FV) of RM2.55/share. A key catalyst for Suria would be the revision of port tariffs, which have been unchanged in the past 35 years.

• Suria currently trades at a bargain FY24F PE of 12x, below Westports’ 16x, and offers a fair dividend yield of 4%.

Source: AmInvest Research - 19 Apr 2024

Investment Highlights

• We maintain HOLD on Axiata Group (Axiata) with an unchanged SOP-based fair value (FV) of RM2.95/share. This implies FY24F EV/EBITDA of 6.3x, which is the 5-year median. We have a neutral 3-star ESG rating for Axiata.

• Axiata’s 82%-owned Dialog has signed a definitive agreement with Bharti Airtel to combine operations in Sri Lanka. Dialog Axiata will acquire 100% of Airtel Lanka's issued shares. In exchange, Bharti Airtel will receive 953bi ordinary voting shares, accounting for 10.4% stake in Dialog Axiata through a share swap. The transaction is pending approval from Dialog's shareholders, clearance from the Colombo Stock Exchange and completion of other legal and regulatory procedures.

• Discussions on the merger between Bharti Airtel and Dialog Axiata have been around since 2016. The rationale for merger during the time was due to the establishment of minimum mobile tariff by Sri Lankan government. The regulation has restricted the ability of smaller mobile players like Airtel Lanka to compete with Dialog, a larger telecom player in pricing and market share.

• Talks on the merger resurfaced in 2018 and 2022. Finally, in 2024, the plan came to fruition as The Telecommunications Regulatory Commission of Sri Lanka (TRCSL) granted approval for the merger, highlighting its commitment to boost telecommunications services throughout Sri Lanka. The target to complete the merger is within 15 months, with expected completion in mid-year 2025. Therefore, there wil be no material impact to Axiata’s FY24 consolidated financial statement.

• Dialog Axiata is Sri Lanka’s largest mobile network operator boasting a 57% market share, with 17mil mobile subscribers (vs. Mobitel 8mil subs and Hutchinson 3.5mil subs). The merger is expected to propel Dialog’s market share to 60%, as mobile subs base widens to 20mil after adding Airtel’s 3mil subs.

• We estimate the combined revenue of Dialog-Airtel will grow by 7% to LKR200bil in FY25F, on the assumption of flat revenue growth for Airtel, achieving similar to LKR13bi revenue in FY23.

• In 2023, Airtel Lanka’s reported losses of INR3.5bi (LKR15.5bil) is already reflected in its parent company, Bharti Airtel's consolidated net income of INR83bil.

• Meanwhile, Dialog’s reported profit after tax (PAT) of LKR20.1bil in FY23, reversed from losses of LKR33.3bil in FY22. Share of Dialog’s profit to Axiata bottom-line is 20%, translating to RM110mil out of RM542mil normalised PAT.

• We think the acquisition of the loss-making Airtel will affect Dialog’s earnings, dragging its bottom line by 70-75% in 2025F before gradually breaking-even via cost savings from lower administrative cost and integrated network cost. Nevertheless, the impact may be partly cushioned by continuous cost rescaling initiative that had pared down Dialog’s operating cost by 2%-pp in FY23.

• We think the impact to Axiata’s net profit is negligible, given the potential profit increase contributed by other emerging frontier market like Indonesia and Philippines. We estimate Axiata’s FY25F consolidated net debt to EBITDA to marginally increase 3.5x to 3.6x. We do not make changes to our forecast pending shareholders approval for the merger exercise.

• We are positive on the Dialog-Airtel merger solidifying Dialog’s leading position in the market. Additionally, Dialog will have wider coverage by integrating Airtel’s 2G & 4G sites in major towns across Sri Lanka. The combined entities of Dialog and Airtel hold a total spectrum ownership of 215 MHz, which will account for 52% of the spectrum allocated in the mobile industry. In contrast, Mobitel owns 105 MHz, representing 26%. The merger will create synergies from spectrum consolidation and overlapping sites elimination. Plus, the dismantled equipment will be redeployed to further improve coverage and enhance consumer experience. As in mergers of telco companies across the region, we expect the merged company to surrender part of the spectrum bands to the government.

• Looking forward, we are cautious on Axiata’s prospects. The group may be affected by digital banking losses and higher interest expense arising from additional debt financing for Link Net’s fibre rollouts.

• We believe that Axiata is fairly valued due to near-term earnings risks, currently trading at 6.1x EV/EBITDA, at parity to its 5-year historical mean.

Source: AmInvest Research - 19 Apr 2024

Investment Highlights

• We maintain HOLD on Infomina with an unchanged fair valu of RM1.60/share after rolling forward our valuation to FY25 We pegged the stock to FY25F PE of 22x, in line with it closest industry peers' average. Our FV also reflects a unchanged neutral ESG rating of 3 stars.

• We lower FY24F earnings by 8% after factoring in a mor conservative sales estimates for the renewal segment as th group’s 9MFY24 results fell short of our expectation an market’s.

• 9MFY24 net profit of RM25mil accounted for only 65% of bot our and consensus FY24F earnings. The negative varianc was due to a slower recognition of orderbook for the renew segment.

• YoY, the group’s 9MFY24 revenue declined by 14% main due to the absence of one-off overage fee charges o overutilisation of the group’s services and lowe contribution from renewal segment (-25% YoY). Additionall gross margin from the renewal segment fell by 0.8%-point YoY. These has resulted in the Infomina’s net profit t decline by 21% YoY to RM25mil.

• QoQ, 3QFY24 revenue slipped by 15% to RM51mil, main due to lower contribution from both renewal (-14%) an turnkey (-17%) segments. We continue to see a slo recognition in the renewal segment as likely due to the ne contracts starting in FY25 and some turnkey projects ha delivered and recognised during 2QFY24.

• However, its net profit only declined slightly by 2% Qo thanks to better GPM by 22%-point to 38.7% for the turnke segment in Malaysia.

• Moving forward, Infomina continue to focus on Thailand an 2.6 3.2 Philippines to provide value-added application programmin interface (API) software to existing customers in the renew segment.

• Management is also targeting the Japanese market wit potential customers to switch to Infomina once the previou 500 renewal contract with another vendor ends. While th 450 company anticipates the Japan market to contribute to it 400 revenue towards end of FY24F, no guidance has been give so far.

• The stock currently trades at a fair FY25F P/E of 20x, clos 250 to industry peers' average of 22x.

Source: AmInvest Research - 19 Apr 2024

• Maintain BUY on Kimlun Corp (Kimlun) with an unchanged fair value (FV) of RM1.20/share, pegged to FY24F PE of 9x. This is in line with our benchmark for small-cap construction stocks. There is no FV adjustment for ESG based on our neutral 3-star ESG rating.

• Kimlun announced that it has been awarded with a contract to develop a service residence development in Johor Bahru. Details of the contract is as follows:
  
  ➢ Contract value RM150mil.
  ➢ A service residence apartment called Aliva Mount Austin.
  ➢ Awarded by Astaka Development Sdn. Bhd.
  ➢ Construction will start soon, target completion date 4Q 2026.

• We keep our earnings forecasts and target price unchanged as this job win was part of our orderbook replenishment targets.

• This supplements the company’s orderbook to RM2.4bil. Kimlun has secured RM2.4mil of job wins thus far this year (RM134mil Sunway Parkview and RM150mil Aliva Mount Austin). This is well underway to meet with management’s FY24F replenishment target of RM700mil, with more jobs waiting for approvals such as the Phase 2 of Sabah-Sarawak Link Road (SSLR), Pan-Borneo Highway, Johor-Singapore Rapid Transit System, road upgrading works in Johor and affordable housing projects.

• This is Kimlun’s second service apartment project in Johor with the first project currently under construction and is targeted to be ready in 2H2025. Kimlun has proven to be the best Johor Bahru-themed investment with its consistent job wins around the Johor development area.

• Risks are (i) weaker-than-expected recovery of job flows; (ii) eroding profit margins from rising energy and material costs; and (iii) shelving of mega projects.

• We believe Kimlun is undervalued, currently trading at a FY24F PE of 7.7x, a 15% discount to the average PE of 9x for small-cap construction stocks in Malaysia.

Source: AmInvest Research - 19 Apr 2024

Mega First Corporation may trend higher after hitting its new multi-year high with a long white candle yesterday. Given that the stock has broken out from a 1-month bullish rectangle pattern, the resumption of its previous uptrend may be taking place now. A bullish bias may emerge above the RM4.50 level with stop-loss set at RM4.10, below the 50-day EMA. Towards the upside, near-term resistance level is seen at RM5.00, followed by RM5.50.

Entry : RM4.50–4.68

Target : RM5.00, RM5.50

Exit : RM4.10

Source: AmInvest Research - 19 Apr 2024

Snapshot Summary…

Global FX: The dollar rose overnight to follow the uptick in UST yields

Global Rates: UST saw more net selling following the weekly jobless claims report, which showed no change from the prior week's level

MYR Bonds: The MGS market strengthened yesterday on the back of the prior day's UST rally

USD/MYR: The pair firmed, but cautious sentiment may ensue today after the dollar strengthened overnight

Macro News

Australia: Australia reported that employment fell by 6.6K in March (consensus +7.2K), whilst full-time employment increased by 27.9K (February: 79.4K). Also, in March, Australia's unemployment rate rose to 3.9% from 3.7% in February (consensus 3.9%), and the March participation rate fell to 66.6% from 66.7%.

United States: The US reported a negative number for housing, where existing home sales fell 4.3% m/m in March to a seasonally adjusted annual rate of 4.19 million (consensus 4.20 million) compared with 4.38 million recorded in February. Sales fell at the start of the spring selling season amid high prices, mortgage rates, and low inventory.

Malaysia: Malaysia’s Economy Minister said that Malaysia will go ahead and reduce petrol subsidies later this year to reduce its fiscal deficit to reach the target of 4.3% by phasing out blanket subsidies for RON95 fuel, which holds the lion's share of the MYR81 billion overall subsidies spent in 2023. At the same time, he said that the current model has allowed the T20 households to become 53% of the recipients.

Fixed Income

Global bonds: UST saw more net selling following the weekly jobless claims report, which showed no change from the prior week's level, as well as a better-than-expected Philadelphia Fed index for April (actual 15.5; consensus 0.0). More losses followed, with hawkish Fedspeak from New York Fed President (FOMC voter) Williams, who said there is no urgency to cut rates at this time and that a rate hike would be considered if data warrant it. Atlanta Fed President (FOMC voter) Bostic said the path to 2.0% inflation will be slower than expected.

MYR Government Bonds: The MGS market strengthened yesterday after the prior UST rally. However, overnight, the UST market recorded more losses, especially following some hawkish comments from a couple of FOMC voters; thereby, we think there is a risk of losses in the MGS market today.

MYR Corporate Bonds: Following the overnight UST rally, more net buying activity was seen on the ringgit corporate bond market. Various AAA and AA names saw firmer levels. The more heavily traded papers include 12/28 PONSB (AA2), which fell 4 bps to 4.10%, and 09/33 Danga at 4.10% (-3 bps).

Forex

United States: The dollar rebounded stronger overnight, and the DXY index rose above 106. Hawkish comments from some FOMC voters added to dollar strength and firm economic data, including no increase in weekly unemployment claims.

Europe: The EUR fell against the firm USD overnight. However, we think movement today for the EUR should be on the downside, seeing the strong USD again moving to above the 106 level, especially because of hawkish comments from FOMC officials while recent comments from ECB officials were mixed to dovish on rates.

Asia-Pacific: Generally, steady movements were seen in Asian currencies yesterday. However, like DM currencies, we think the downside risk to EM Asia is possible today after the overnight USD rally. Yesterday, we saw CNY was stable amid reports of yuan buying by state-owned banks. There is also pressure on the AUD, especially after this week's data showed employment fell by 6.6K in March, whereas expectations were for a rise of about 7.7 K.

Malaysia: Yesterday, the ringgit appreciated despite the strength of the US dollar possibly due to its cheap valuation. The 10-day Relative Strength Index (RSI) showed that the USD/MYR pair had crossed the overbought threshold after recently touching the 4.80 level. However, upside risks are on for today after the overnight USD rally.

Other Markets

Gold: Gold prices rose 0.8% to USD2,379/oz as traders looked past the hawkish Fedspeak and stronger US labour market data. The precious metal remains attractive as a safe-haven asset amidst geopolitical risks and demand from central banks.

Crude oil: Oil prices closed mixed as Brent shed 0.2% while WTI was stable at USD82 per barrel as players weighed stronger dollar vs. escalating geopolitical tensions in the Middle East.

Source: AmInvest Research - 19 Apr 2024

Snapshot Summary…

Global FX: The dollar fell to follow the drop in UST yields

Global Rates: Global bonds mostly rallied on Wednesday as Treasury yields fell from their highest levels of the year

MYR Bonds: The Ringgit PDS market was pressured, in tandem with the weakness in the sovereign space

USD/MYR: The pair fell for the first time in four straight sessions

Macro News

United Kingdom: The annual inflation rate for March decreased to 3.2% y/y, a more modest reduction than anticipated and above the market forecasts of 3.1%. This decline, from February's 3.4%, marks the lowest rate since September 2021, primarily driven by a slowdown in food price increases. Despite this easing, inflation remains above the central bank's target of 2%, influenced by higher fuel costs and persistent service sector inflation. The rate decrease has prompted the financial markets to adjust expectations, pushing the anticipated timing of the first interest rate cut from June to September and November.Japan: The Japanese Reuters Tankan index showed that business confidence among major Japanese manufacturers and service sector firms declined during April 2024. This dip was influenced by heightened cost-of-living concerns and uncertain economic conditions in China, a key market for firms. The survey, which reflects the sentiment from April 3 - 12, reported a decrease in the manufacturers' sentiment index to +9 from +10 and a drop in the services sector index to +25 from +32, despite some gains in retail.

Malaysia: The International Monetary Fund (IMF) revised the outlook for Malaysia’s GDP growth upward to 4.4% in 2024, from 4.3% prior projections, to follow the upward revision on global growth at 3.2%, compared to a previous forecast of 3.1%. However, the agency said that global growth is low by historical standards, owing to both near- term and longer-term factors.

Fixed Income

Global bonds: Bonds rallied on Wednesday, and Treasury yields fell from their highest levels of the year. Overnight saw support from the UK and the Eurozone deceleration in their inflation y/y growth rates. Meanwhile, there was modest support for bonds as the Federal Reserve released its April Beige Book, showing that the US economy grew slightly since February and moderating wage pressure.

MYR Government Bonds: The Ringgit government market continues to be pressured as the prior day saw US bond yields sustaining their YTD highs. Sentiment was also pressured by signals from Fed Chairman Powell that restrictive monetary policy is needed as inflationary pressures remain.

MYR Corporate Bonds: Weak sentiment in the global bond space, including in the Malaysian government bond market, meant the ringgit corporate bond market remained pressured. Various names were dealt lower, including higher grade AAA bonds and infra-related names. Notable trades include 06/30 Gamuda (AA3), which rose 7 bps to 4.01% and 04/29 IJM (AA3), which rose 1 bps to 4.04%.

Forex

United States: As US bond yields fell, especially after the release of weak UK and Eurozone inflation, the dollar also fell as the Dixie slipped to below the 106 level, the first decline in six days. However, the weakness in the dollar was contained in federal funds futures trading, and the probability of a Fed rate cut at the June FOMC meeting dropped to 19% from 66% at the start of the month.

Europe: EUR and GBP took advantage of the lower dollar. Comments from ECB officials were mixed; ECB President Lagarde said output in the Eurozone is "recovering, and we are seeing signs of recovery”, while ECB Governing Council member Holzmann said he's "not fully" convinced of a June cut as rising risks from the Middle East could drive inflation further upwards. However, ECB member Centeno said it may be time for a change to monetary policy due to weak economic growth and progress on inflation. In the UK, BoE Governor Andrew Bailey said the UK faces less inflation threat than the US, opening up the possibility for a rate cut before the Fed moves.

Asia-Pacific: Asian FX were mixed while the dollar was weaker yesterday. The CNY was dealt above 7.230. There was continued support from PBoC as the midpoint rate was 7.1025 versus the dollar, firmer than the previous fix of 7.1028. According to Bloomberg, state-owned banks ramped up dollar selling after the CNY was traded above 7.24 during the Asia session.

Malaysia: The USD/MYR pair fell for the first time in four straight sessions and partly erased some of the recent gains, but it is still near February’s more than two-decades high amidst lesser expectations for rate cuts by the US Fed.

Other Markets

Gold: Gold prices fell 0.9% to USD2,361/oz as traders price in “higher-for-longer” rates play.

Crude oil: Brent surged from 3.0% to USD 87 per barrel after data showed that US crude inventories rose from 2.7 million to 460 million per barrel, above market expectations of a 1.4 million barrel build-up.

Source: AmInvest Research - 18 Apr 2024

Investment Highlights

• We maintain BUY on IGB REIT with a higher fair value (FV) of RM1.98/unit (from RM1.95/unit previously) based on our revised dividend discount model (DDM) and a neutral 3-star ESG rating .

• The FV implies a FY24F distribution yield of 5.7%, at parity to its 5-year median.

• IGB REIT’s 1QFY24 distributable income of RM109mil was within expectations, accounting for 28% of our earlier forecast and 29% of street’s.

• On 26 March 2024, one of Mid Valley Megamall’s (MVM) anchor tenant, Metrojaya surrendered 200,403 sqft of its previously leased space for reconfiguration works.

• Hence, we lower our FY24F distributable income by 8% to incorporate the reconfiguration cost, which are estimated to range between RM25mil-RM35mil. We also take into account the estimated temporary rental loss of RM9mil, partially offset by a potential post-configuration rental increment of RM4mil.

• Meanwhile, we raise our FY25F/FY26F distributable income modestly by 1% to reflect the improvement in rental rate for the spaces previously leased by Metrojaya following the reconfiguration.

• In 1QFY24, IGB REIT’s gross revenue improved 5% YoY while net property income (NPI) climbed 6% YoY. The improvement was driven by stronger rental income from favourable FY23 rental reversions in MVM and The Gardens Mall (TGM) . Additionally, higher tenant sales in 1QFY24 increased the variable portion of rents tied to the level of retail store business transactions.

• On QoQ comparison, IGB REIT’s 1QFY24 gross revenue expanded 3% while NPI grew 8%. These were driven by higher gross monthly rental income in both MVM and TGM.

• To date, IGBREIT has completed the renewal of a majority of leases expiring in FY24 at a rate of 4%-6% (close to pre- pandemic levels), supported by an improvement in retail sales.

• Despite concerns regarding potential dilution of footfalls following the opening of Pavilion Damansara Heights and The Exchange TRX, we understand that footfall traffic in both MVM and TGM remained resilient in 1QFY24 at 3mil visitors per month, which is comparable to their foot traffic in 1QFY23.

• In 1QFY24, occupancy rate for TGM was nearly full at close to 100%. However, the occupancy in MVM fell to 88.6% in 1QFY24 from 99.9% in 4QFY23 . This decline was attributed to the surrender of 200,403 sq ft of space tenanted by one of its anchor tenants, Metrojaya on 26 March 2024. The surrendered space is currently undergoing reconfiguration works. IGB REIT plans to convert a portion of the previous Metrojaya-leased space into specialty stores which carry higher rental rates.

• As anchor tenants typically pay lower rental rates, we assume Metrojaya’s monthly rental rate to be high-single digit at RM9 psf. The reconfiguration is expected to complete by 3QFY24. The short-term impact of the 4-6 months rental loss to IGB REIT’s FY24F earnings is immaterial as it only accounts for 1.1%-1.7% of IGB REIT’s FY24 total revenue.

• Moreover, the higher rental rate for Metrojaya and specialty store post-configuration could partially mitigate the temporary rental loss caused by the 4-6 months of vacancy. Given MVM’s strategic location and relatively lower rental rate, we are confident that MVM’s occupancy rate will return to 100% after the reconfiguration.

• IGB REIT declared its gross distribution per unit (DPU) of 2.96 sen in 1QFY24. The 12-month trailing DPU of 10.6 sen represents a distribution yield of 6%.

• We like IGB REIT due to its resilient long-term outlook underpinned by the group’s strategically located assets in the heart of Klang Valley.

• IGB REIT offers a compelling FY25F distribution yield of 6.5% vs. 10-year MGS yield of 3.98%. IGB REIT’s distribution yield spread against 10-year MGS of 2.5% vs. a pre-pandemic (2017-2019) median of 1% is appealing to yield-seeking investors with its higher distribution spread against 10-year MGS .

Source: AmInvest Research - 18 Apr 2024

We expect further upside for Unitrade Industries after it posted a white candle and closed above the RM0.31 resistance yesterday. With the stock pushing near its 52-week high and with rising EMAs, upward momentum may be present now. A bullish bias may emerge above the RM0.31 level with stop-loss set at RM0.29, below the 50-day EMA. Towards the upside, near-term resistance level is seen at RM0.35, followed by RM0.37.

Entry : RM0.31–0.32

Target : RM0.35, RM0.37

Exit : RM0.29

Source: AmInvest Research - 18 Apr 2024

Press Metal Aluminium’s buying momentum is back after it broke out of the 1-week bullish flag pattern with a long white candle yesterday. As the 20-day and 50-day EMAs have confirmed their bullish crossover a few sessions ago, the stock looks positive in the near term. A bullish bias may emerge above the RM5.13 level with stop-loss set at RM4.78, below the 50-day EMA. Towards the upside, near-term resistance level is seen at RM5.70, followed by RM6.00.

Entry : RM5.13–5.32

Target : RM5.70, RM6.00

Exit : RM4.78

Source: AmInvest Research - 17 Apr 2024

Investment Highlights

• Increased possibility of escalation in the Middle East as Iran finally retaliates to bombing of Damascus consulate. On 14 April, Iran commenced a retaliatory attack against Israel over its alleged role in masterminding the airstrike on the country’s consulate in Damascus, which resulted in the deaths of 12 Iranians including 2 senior military officials. The incident involves the use of 170 drones and over 120 ballistic missiles supposedly targeting the Nevatim airbase located within the Negev desert. Subsequently, Iran states that it does not intend to continue with further attacks as the government deems the incident concluded based on Article 51 of the United Nations (UN) charter, which stipulates the rights of member countries to self-defense pursuant to an attack.

• Israel promises to “exact a price”, but with lack of backing as allies urges restraint. In response, the Israeli government has devised a military plan via its war cabinet, but timing and scale remains uncertain for now as its biggest ally, the United States of America (US), urges restraint and are currently attempting to coordinate a diplomatic response to prevent further escalation. President Joe Biden has communicated to Prime Minister Benjamin Netanyahu that the superpower will not participate in offensive moves against Iran. Recall, numerous reports suggest 99% of the attacks by Iran were intercepted only through the combined efforts of the Israel and its allies, the US, United Kingdom (UK) and Jordan. Note that Israel has not waged a multifrontal war since 1973.

• Muted reaction within oil markets as participants view risks of sanctions on Iran as largely ineffective, in our view. Nevertheless, oil markets remained dull as Brent crude oil prices remains largely unchanged at US$90.40/barrel at opening trade on Monday (15 April), or +0.3% vs. prior day close . We believe this is due to 2 factors:
  
  a. Run-up in Brent crude oil prices which has risen by 17.3% YTD following concerns over lower primary oil refining capacity levels in Russia and the rollover of production cuts by Organisation of the Petroleum Exporting Countries Plus (OPEC+) to 2Q2024 amounting to an estimated 1.7mil barrel (mbbl) per day; and
  
  b. Impact of sanctions on Iran-produced Brent crude oil by the US which appears to be largely ineffective thus far. According to the latest data by the Energy Information Administration (EIA), Iran accounts for 3% of total world liquid production. Despite the various primary and secondary sanctions on Iranian produced oil, the country’s crude exports remained strong with March averaging 1.61mil bpd, the highest since May 2023 when they were 1.68mil bpd, according to industry analysts Kpler. Much of it is said to be imported by China; made possible through the use of alternative oil trade routes, ‘dark fleet’ tankers and the recently minted status of Petro-Yuan.

• Despite slight easing, shipping index remain at 10-year highs from expectations of elevated risks and higher sea freight costs. More relevant to companies under our coverage, the Shanghai Containerised Freight Index (SCFI), representing spot rates for containers loading in Shanghai, has eased by 22% to 1,0757.04 pts from its peak 2,240 pts in mid-January . However, it has shown a slight uptick of 11.6 pts in the week ending 12 April 2024 from the previous week ending 3 April 2024. This shows that freight shipping costs will remain elevated in near term due to geopolitical tensions despite slowly tapering off as many carriers are struggling to meet regular load and planned timelines due to longer transit time.

• We expect fewer vessels and longer sailing time in 1H2024. According to Mint, insurance paid for Supramax vessels used to be US$10,000 (RM47,705) in October 2023, and had shot up to US$35,000 (RM165,375) in March. The increased war-risk premium in the area is compelling more shippers to circumnavigate through Cape of Good Hope in Africa. The route is estimated to add 4,000 miles to the total voyage length and extra 2 weeks of transit time. The extended sailing times will impact the return of empty containers to Asia; causing temporary shortages of containers and further reduce available capacity for ships departing from Europe and thereby decrease cargo throughput for ports. However, we think the shortages will not last long as the supply of ships has increased since the pandemic catered to high demand of goods of during the quarantine period worldwide. In addition, Maersk has adopted a cost-effective approach to remain resilient via sea-air transportation, enabling customers to transport goods from Asia Pacific via Tanjung Pelepas and air transfer to major airports globally.

• Our scenario analysis presents a conservative upside to Brent crude oil prices and a later-than-expected recovery in cargo throughput from further escalation. To ascertain the impact to companies under our coverage, we present 2 scenarios, as follows:
  
  a. Base-Case Scenario: Maintain 2024F Brent crude oil price of US$85/barrel and recovery of cargo throughput by 3Q2024F based on assumption of minor or nil escalation of conflicts with the geopolitical environment remaining status quo. As it stands, global supply and demand levels have remained broadly within our expectations. For reference, this is slightly lower than EIA’s 2024 forecast which was recently raised to US$88/bbl (from US$83/bbl in its January STEO) on the back of OPEC+ production cuts albeit in line with leading consultant Rystad Energy’s forecast of US$85/bbl; and
  
  b. Worst-Case Scenario: Higher 2024F Brent crude oil price of US$95/barrel and delayed recovery of cargo throughput by 1Q2025F based on assumption of significant decline in Iranian oil production, which will force China to return to formal oil markets to meet current refinery demands and rerouting of remaining ships via the Cape of Good Hope. Though we do not discount the possibility of Brent crude oil prices trading within the US$95-US$100/barrel range, we believe this will be largely based on news and sentiments. However, this is not supported by fundamentals as OPEC+ may increase production given significant amount of spare capacity to maintain its market share . For reference, Moody’s Analytics recently priced in a higher US$10/bbl risk premium in response to the incident.

• Maintain OVERWEIGHT on Oil & Gas and Ports. Applying our worst-case scenario to impacted companies sees potential for earnings upside for oil & gas players whilst port operators remain largely resilient with minor earnings impact. We highlight 3 companies which we expect will be directly affected given their exposure to the upstream sub-segment and the global shipping industry:
  
  a. Hibiscus Petroleum (BUY, FV: RM3.44) which is fully exposed to the sub-segment through its direct interest in 4 production assets in both Malaysia and the North Sea, UK. The group expects total sales volume to be in line with its prior guidance at 7.7MMboe in FY24. Our earnings forecast for FY25F is currently based on a conservative full year Brent crude oil price assumption of US$85/bbl. Raising this to account for a US$95/bbl environment sees an earnings upside of 6% as selling prices will continue to remain strong up to at least 2QFY25F, particularly for the Anasuria cluster, which registered a relatively lower average selling price of US$81.96/bbl compared to other production assets. Note that the group reported a combined average realised price of US$90.21/bbl for 2QFY24.
  
  b. Dialog (BUY, FV: RM2.91) has a partial exposure via assets L53/48 field in Thailand and the D35, D21 and J4 production sharing contract (PSC) in Malaysia. Our current forecasts estimate the assets to contribute ~5% to FY25F revenue based on a full year Brent crude oil price assumption of US$70/bbl. Raising this to account for a US$95/bbl environment sees a minor earnings upside of 1.2%.
  
  c. Westports (BUY, FV: RM3.83). Our current earnings forecast is premised on recovery in throughput growth by 2HFY24F due to the ongoing Red Sea crisis, which implied a full year growth of 2%. Based on a delayed recovery assumption, we expect to see muted throughput growth, which translates to a slight earnings decline of 3%.

Source: AmInvest Research - 17 Apr 2024

Investment Highlights

• We maintain BUY on Bintulu Port (BiPort) with an unchanged DCF-derived fair value (FV) of RM6.50/share (WACC: 9%, TG; 3.5%). Our FV implies a FY24F PE of 23x, a 1.5 standard deviation above its 5-year average PE of 15x. There is no FV adjustment for ESG based on our 3- star rating.

• We believe Bintulu Port will benefit from the prolific projects in Sarawak, which is expected to achieve economic growth between 5% and 6% in 2024F, bolstered by increased development expenditure from state and federal governments.

• This year, Sarawak Petrochem’s methanol project is expected to commence its first shipment in July 2024. The methanol project is estimated to contribute an additional monthly average of 100,000 tonnes of cargo.

• In the same month, BiPort will facilitate the first shipment of Biomass Raw Energy Hot Tropical Grass, adding 10,000 tonnes of liquid bulk volume monthly. The combined total addition to liquid bulk throughput for FY24F is estimated to be 660,000 tonnes, which is our assumption.

• In 2023, liquid bulk accounted for 70% of BiPort's total cargo throughput. Of this, LNG made up 73% of the liquid bulk cargo while the remaining 27% consisted of other liquids like methanol. This indicates that non-LNG liquid cargo throughput is relatively small compared to LNG.

• Bintulu International Container Terminal (BICT) is expected to benefit from additional medical glove shipments from Sarawak Medical Innovation Technology Hub (SMITH) in FY25F. Phase 1A of SMITH is expected to be operational at the end of FY24F.

• BiPort will benefit from Sarawak’s vision for a green hydrogen economy, in line with the National Energy Transition (NETR). SEDC Energy is managing 2 mega hydrogen-focused projects at the Sarawak Hydrogen Hub in Bintulu and Rembus Depot.

• The first project named H2ornbill, is in collaboration with Eneos and Sumitomo Corp. The joint venture is for the development of 2 clean hydrogen-producing plants.

• The second project, H2biscus, involves partnerships with 3 South Korean firms: Samsung Engineering, Posco and Lotte Chemical. The project aims to develop hydrogen derivative facilities.

• H2ornbill and H2biscus projects are expected to produce a combined 240,000 tonnes per annum of green hydrogen, making the Sarawak Hydrogen Hub, one of the largest producers of clean energy globally. The 2 projects are envisaged to be operational in Bintulu Petchem Industrial Park in 2027. They will use BiPort’s shipping equipment and port facilities for export to Japan and South Korea.

• In March 2024, Ministry of Transport (MOT) and Sarawak Ministry of Infrastructure and Port Development (MIPD) signed a memorandum of understanding (MOU) to formalise the takeover of BiPort by the state from federal government. The transition process is expected to be finalised by the end of 2024.

• Recall that Bintulu Port’s concession expired on 31 December 2022 with the option to extend for another 30 years until 2052. The extension has been approved in principle. Ahead of finalising the new concession agreement between BiPort and Bintulu Port Authority, the first interim agreement was signed on 24 Nov 2022 to continue operating Bintulu Port for 6 months from 1 Jan 2023 to 30 June 2023. The second interim period has since been extended by 12 months from 1 July 2023, with a further extension option of 6 months until 31 December 2024.

• In a separate development, the Trans Borneo Railway project linking Sabah, Sarawak, Brunei and Kalimantan, Indonesia is expected to be an economic catalyst for the Borneo region. The Federal government has approved a financial allocation specifically to carry out a feasibility ground study on the routes within Sabah and Sarawak. A tender for a feasibility study on the railway project in Borneo will start in May 2024. However, beyond the feasibility study, there has been no agreement or expressed interest among the governments of Malaysia, Indonesia and Brunei to collaboratively build the Kalimantan-Borneo railway.

• Meanwhile, BiPort is planning to upgrade its port facilities, expected to be implemented in phases over the next 2 years. The tender for the project has been called and the contract is expected to be awarded in 3QFY24. However, the detailed plans of the upgrade and estimated contract value have yet to be revealed.

• Looking ahead, we believe that LNG demand from Japan, South Korea and China would remain positive. In addition, BiPort’s LNG shipments are expected to grow steadily as it exports to new markets such as the Philippines and Kuwait.

• We continue to like BiPort for:
  
  i) potential tariff revisions, which will be implemented in stages from FY25F onwards,
  
  ii) multiple economic development projects in Sabah and Sarawak, which will benefit the group, and
  
  iii) its position as the sole licensed holder to operate a full-fledged oil and gas supply base in Sarawak.

• Key risks are:
  
  (i) delays in the new privatisation agreement,
  
  (ii) macroeconomic and geopolitical uncertainties affecting LNG demand, and
  
  (iii) port congestions which may depress throughput volume.

• The stock currently trades at a decent FY24F PE of 20x, below its 5-year peak of 23x.

Source: AmInvest Research - 17 Apr 2024

Snapshot Summary…

Global FX: Euro and dollar were little changed but the GBP fell as traders looked at the latest UK jobs numbers

Global Rates: Treasuries fell after Fed chair Powell said restrictive monetary policy still needs to be in place

MYR Bonds: We noted auction of 15Y MGS was well-received as we think players were taking the opportunity to load up on longer tenor bonds

USD/MYR: The ringgit continued to weaken versus the dollar post-release of firm US retail sales data and concerns over the Middle East tensions

Macro News

China: China reported faster-than-expected economic growth in 1Q2024. Gross domestic product rose 5.3% in the period, slightly faster from the previous quarter of 5.2% and beating estimates of 4.8%. The target for full-year GDP growth is 5% which means we think the 1Q number is on track. However, we also see risks as the upbeat 1Q data was mainly aided by public investment levels.

China: Despite the print of upbeat GDP for 1Q, we noted also that industrial production in China was lower than expectations; the March 2024 industrial production growth was 4.5% against the 6.0% Bloomberg consensus expectation. Meanwhile, retail sales for March showed a 3.1% growth while Bloomberg consensus expectation was higher at 4.8%.UK: Britain’s unemployment rate unexpectedly rose to the highest in six months. According to the Office for National Statistics, the jobless rate rose to 4.2% in the three months through February from 4% in the period through January. The rate is the highest since the summer of 2023. Average weekly earnings for the period reviewed was 5.6% y/y versus a similar 5.6% in the prior three-month period.

Fixed Income

Global bonds: Treasuries fell further yesterday. The day started with weak sentiment after the print of upbeat China GDP numbers and later sustained weakness despite below-consensus US Housing Starts data and in-line Industrial Production numbers. Treasuries also weakened after Fed chair Powell commented that restrictive monetary policy needs to still be in place as inflation has not shown adequate progress downward.

MYR Government Bonds: MGS weakened yesterday, pressured by overnight UST losses due to stronger US retail sales data. Aside, in the primary space, the auction of 15Y MGS was well-received with the final BTC standing at 2.159x while we think some players were taking the opportunity to load up on longer tenor bonds.

MYR Corporate Bonds: The ringgit corporate bonds segment maintained downbeat trading activity as well though flows were more active as traders started to return fromtheir Eid break. Losses included 01/30 Guan Chong IMTN (AA-) at 4.48% and 12/24 MACB (AAA) at 3.70%.

Forex

United States: The dollar sustained strength though little changed still hovering above the 106 level on the DXY. Bearish signals from the equities markets after their recent rally meant some lack of dollar demand, but there remains apprehension on the Middle East geopolitical risks while the latest comments from Fed chief Powell on slow development on the inflation front kept up dollar strength.

Europe: The Euro was little changed at the close alongside the dollar being in range. On the other hand, the GBP fell and was seen hitting a five-month low as traders looked at the latest UK jobs numbers. There was an unexpected rise in UK unemployment to 4.2% versus the expectation of 4.0%.

Asia-Pacific: The yuan lost some ground against the strong dollar. The release of strong 1Q2024 China GDP did not aid sentiment for the yuan. As it were, though the GDP growth was firm, China also reported industrial production and retail sales growing less than anticipated. Meanwhile, the yen also continued to weaken vis-a-vis the dollar. Comments from Japanese Finance Minister Shunichi Suzuki that he was watching currency moves and would take a "thorough response as needed" did not appear to support the yen.

Malaysia: The ringgit continued to weaken versus the dollar post-release of firm US retail sales data and amid concerns over the Middle East tensions.

Other Markets

Gold: Gold maintained strength, seen above USD2,380 overnight. Gold was held back as Powell warned that restrictive policy needs more time to take hold though safe haven demand was intact amid geopolitical risks.

Crude oil: Oil fell with Brent down 0.1% on some ease in geopolitical risks compared with a couple of days ago. Print of firm China GDP was mainly shrugged aside especially as Brent was already above the USD90 per barrel level, in our opinion.

Source: AmInvest Research - 17 Apr 2024

Investment Highlights

• We maintain BUY on Alliance Bank Malaysia (ABMB) with an unchanged fair value (FV) of RM4.10/share, pegging the stock to a P/BV of 0.9x supported by FY25F ROE of 10.5%.

• Our FY24F earnings have been raised by 4.3% to reflect a higher NOII estimate and lower credit cost. For FY25F, net profit has been tweaked lower by 1.7% to account for slightly higher CI ratio expectation. No change to our neutral 3-star ESG rating.

• The group’s NIM in 4QFY24 is expected to be stable QoQ with cost of funds (COF) and asset yield holding up. Funding cost remains elevated while housing loan rates continued to be competitive, particularly financing of properties in the primary market.

• NIM for the full FY24F is likely to come in within the guided range of 2.45-2.50%.

• Recall in 3QFY24, ABMB’s loans grew strongly by 12.9% YoY, supported by growth in all segments (SME, Commercial, Consumer and Corporate Banking). The strong loan momentum is expected to continue in 4QFY24 as we have seen the banking system’s stronger loan growth of 5.8% YoY in Feb 2024 and 5.7% YoY in Jan 2024 vs. 5.3% YoY in Dec 2023. Credit growth will be supported by expansion of loans in Penang (technology sector) and Sarawak (infrastructure sector and RE projects).

• On deposits, the availability of SavePlus as a digital savings account to depositors with interest rate of up to 3% p.a is seen as competitive to defend challenges on CASA, especially with the aggressive deposit rates offered by digital banks such as GX Bank. SavePlus has features of flexible and unlimited ATM withdrawals at no charge.

• OPEX in 4QFY24 is expected to be flattish QoQ. Moving forward, accruals for potential increase in wages for unionised workers will be done gradually, and this will not see lumpy adjustments in wages for employees under collective agreements as in 1QFY24. Meanwhile, IT spend is likely to taper going forward due to earlier front loading of expenses related to the group’s ACCELER8 2027 strategy.

• On NOII, 4QFY24 client-based fee income, which includes wealth management, fx, trade and banking services, is anticipated to be stable QoQ between RM80-90mil. However, investment and trading income is likely to be softer amidst an increase in the 10-year MGS yield QoQ.

• Improved asset quality trend as evidenced by the gradual decline in GIL ratio from the peak of 2.63% in 1QFY24 to 2.33% in 3QFY24. Stepped up collection efforts and incentives for impaired loans led to improved asset quality trend of consumer loans.

• Management overlays stood at RM157mil as of end-3QFY24. With an improving asset quality trend for consumer loans and benign asset quality for SME loans, we have factored in a credit cost projection of 25bps for the full FY24F. This is lower than the 30-35bps guided by management. We remain comforted that 70% of the group’s impaired loans are secured by collaterals with the balance covered by adequate provisions. Loan loss coverage ratio including regulatory reserves of 117% as of end-3QFY24 is close to the industry’s 119.2%.

• ABMB is in the process of carrying out stress test of climate risk with the impact assessment from floods similar to other institutions in the financial sector.

• We do not expect any significant negative impact on capital position from the potential implementation of new Basel III standards.

• 4QFY24 results are scheduled to be announced on 30 May 2024. We expect 4QFY24 net profit to be higher at RM179mil (+37.3% YoY, +1.1% QoQ), bringing the full FY24F earnings to RM691mil (+2% YoY). A 2nd dividend of 11.5 sen/share is expected to be declared, resulting in total dividends of 22.3 sen/share (payout: 50%) in FY24F.

• We are positive on ABMB premised on: i) its NIM, which is well above 2% and CASA ratio of 45.1%, one of the highest in the industry, ii) the group’s loans growing at a faster pace exceeding the industry growth rate, and iii) ROE at 10% comparable to the larger cap banking stocks with a compelling valuation at 0.8x P/BV for FY25F. Dividend yield is decent at 6.4% for FY25F.

Source: AmInvest Research - 16 Apr 2024

• The Malaysian Palm Oil Board (MPOB) has released the country’s palm statistics for March 2024. Malaysia’s palm inventory declined for the 5th month in a row. Palm inventory slid by 10.7% to 1.7mil tonnes in March from 1.9mil tonnes in February as the 28.6% surge in exports compensated for a 10.6% expansion in production.

• We believe that CPO output would continue to be low in April as workers returned home for the Hari Raya festivities. We reckon that palm production and inventory would start rising from May onwards. Malaysia’s palm inventory of 1.7mil tonnes in March was marginally below Bloomberg consensus estimates of 1.8mil tonnes.

• Domestic consumption of palm products rose by 7.8% YoY to 1.1mil tonnes in 1Q2024, underpinned by higher transportation and HORECA activities. On a monthly basis, however, domestic consumption retreated by 15.4% to 313,563 tonnes in March as economic activities took a breather during the fasting month. Palm imports continued to ease. Palm imports plummeted by 59.4% to 116,181 tonnes in 1Q2024 from 286,099 tonnes in 1Q2023. We attribute this to weak global demand for oleochemical and refined products and the small price differential between CPO in Malaysia and Indonesia. Indonesia’s CPO export tax and levy was unchanged at US$118/tonne (RM555/tonne) in March.

• CPO production grew by 3.4% YoY to 4.1mil tonnes in 1Q2024. MPOB forecasts the country’s CPO output to inch up to 18.8mil tonnes in 2024F from 18.6mil tonnes in 2023. Comparing March against February, CPO production rose by 10.6% to 1.4mil tonnes on the back of a higher number of working days. CPO output in Peninsular Malaysia increased by 15% MoM to 797,280 tonnes in March while in Sabah, CPO production rose by 10.5%. On the other hand, in Sarawak, CPO output edged down by 0.4% to 274,477 tonnes in March.

• CPO exports inched down by 1.6% YoY to 3.7mil tonnes in 1Q2024 compared to the 3.4% rise in production. On a monthly basis, CPO exports jumped by 28.6% to 1.3mil tonnes in March. According to Intertek, Malaysia’s palm shipments to India climbed by 42.6% in March while exports to China were flat. On a negative note, palm shipments to EU fell by 14.5%.

• We are NEUTRAL on the plantation sector. We believe that CPO prices would start softening from May onwards as the industry enters the peak production period in 2H2024. Also, soybean prices may remain low due to the higher production in US. According to the Prospective Plantings Report, US farmers would be planting 86.5mil acres of soybean in 2024F (2023: 83.6mil acres) compared to 90mil acres for corn (2023: 94.5mil acres).

Source: AmInvest Research - 16 Apr 2024

Snapshot Summary…

Global FX: The dollar kept up its appreciation amid strong US retail sale data release and liquidity demand on the back of lower stock markets (S&P500 index down 1.2%)

Global Rates: The driver for UST losses was the better-than-expected US retail sales, while there is a lack of serious escalation in the Middle East conflict to drive UST safe haven demand

MYR Bonds: The MGS market was steady and moved within a narrow range

USD/MYR: Like other regional currencies, the ringgit remained weak amid the current dollar rally

Macro News

US: The US reported advance retail sales rose by 0.7% m/m in March, higher than the consensus expectation of 0.4%. Meanwhile, the February number was revised higher to +0.9% m/m from the prior estimate of +0.6% m/m. Retail sales ex-autos rose a firm 1.1% m/m versus +0.5% m/m consensus, while the February pace was revised higher to +0.6% m/m from +0.3% m/m prior estimate. On the other hand, the Empire State manufacturing index was worse-than-expected at the reading of -14.3 for April versus the -5.2 consensus expectation, though higher than the prior month’s -20.9.

Europe: The Eurozone's industrial production for February rose 0.8% m/m, which is in line with expectations, but it was up from the prior month’s -3.0%. However, on a worrying note, industrial production still fell by -6.4% y/y, which was weaker than estimates of -5.5%. The prior month’s y/y pace was -6.6%.

Fixed Income

Global bonds: Treasuries closed weaker, with the 10Y UST yield climbing 8 bps to close at 4.60%, whilst the 2Y was testing the 5% level but closed 2 bps higher at 4.92%. Driver for the UST losses was the release of better-than-expected retail sales, which rose 0.7% in March versus +0.4% consensus and the prior month’s upward revised +0.9%. There was less safe-haven demand from the Middle East conflict, which has not escalated as widely feared so far, where we also noted crude oil prices closed lower on the day.

MYR Government Bonds: The MGS market was steady and moved within a narrow range from their previous closing despite a cautious sentiment alongside the emerging geopolitical risks. However, there was some support from UST, which strengthened last Friday.

MYR Corporate Bonds: Despite some support in the MGS space yesterday, risk appetite was largely absent, and sending ringgit corporate bonds mostly weaker. We noted profit-taking activity on various names, including higher-grade AAA papers. These include AAA-rated PLUS 01/36 and 01/37, higher by 2-3 bps. Also, 12/31 MAHB (AAA) rose 1 bp to 4.02%.

Forex

United States: The dollar kept up its appreciation, seeing up 0.2% on the DXY, which closed at 106.21. There was added demand for dollar liquidity amid the lower stock markets (S&P500 index down 1.2%), whereas the release of better-than-expected retail sales data also aided the dollar. This was despite hopes for diplomatic efforts to contain the Middle East conflict and a more dovish comment from NY Fed’s Williams, who said there’s a ‘need’ to start the process to cut rates ‘likely this year’.

Europe: The EUR remained pressured by the strong dollar, as well as after some ECB policymakers signalled their support for a rate cut by June. Although ECB Governing Council member Kazimir said Europe’s economic recovery is taking hold, he also said inflationary pressures are retreating and may open the door for the June cut. Meanwhile, according to data released, the number of Eurozone industrial production rose by 0.8% m/m in February, as expected.

Asia-Pacific: The yuan remained pressured by the strong dollar but found support and rebounded slightly from three-week lows as the PBoC kept its one-year medium-term lending facility rate at 2.5%, as widely expected. The currency also continued to be supported by purchases by state-owned banks, as per reporting by Reuters. Meanwhile, the yen weakened further and found itself above the 154 level. There was pressure on the yen amid news reports suggesting that the BoJ is wary of raising rates too soon and may avoid rate hikes even if inflationary pressure increases.

Malaysia: The ringgit remained weak, like other regional currencies, amid the current dollar rally. The closing for USD/MYR yesterday was 4.780.

Other Markets

Gold: Gold prices rose again after the drop in profit-taking pressure the day before. Prices are suspected to remain buoyed by demand from major fund managers and central banks. Suspected demand for gold from central banks includes those at the PBoC, which is reportedly heard trying to defend the yuan.

Crude oil: Prices fell on Monday as markets await Israel’s response to the attacks. The lack of immediate reaction justified an oil price decline, though Brent remained hovering just above the USD90 per barrel level.

Source: AmInvest Research - 16 Apr 2024

Snapshot Summary…

Global Rates: Treasuries fell after the strong US inflation data release, though safe-haven bids boosted bonds at the end of last week

MYR Bonds: Malaysian govvies fell to follow the weak global sentiment

Global FX: Dollar swung higher on the back of rates outlook and geopolitical risks

USD/MYR: With the strength in USD, the ringgit remained pressured

Fixed Income

Global Bonds: Treasuries rallied last Friday but still ended lower for the week, with yields coming down from their highest levels YTD. To end the week, a move into Treasuries was driven by safe-haven demand due to geopolitical concerns between Iran and Israel. At the same time, data showing China saw a drop in its foreign trade in March also aided bond demand. On the other hand, there was a surge in yields earlier in the week due mainly to the release of strong US inflation numbers. US CPI rose 0.4% m/m in March (consensus 0.3%), while core CPI, which excludes food and energy, also rose 0.4% m/m (consensus 0.3%). On a year-on-year basis, the CPI increased by 3.5%, y/y or higher, versus 3.2% in February, while core CPI was up 3.8% for the second month. In addition, the US headline PPI for March had a cooler-than-expected rate of 0.2% (consensus 0.3%) and a core PPI of 0.2% (consensus 0.3%). However, the year-on-year headline PPI quickened to 2.1% from 1.6% in February, while core PPI rose to 2.4% from 2.1%.

Malaysian Government Bonds: Modest weakening in the MGS/GII market was seen last week, while MYR IRS levels rose in tandem with bond yields. Anticipation for delayed Fed rate cuts arose post-release of firm US CPI numbers and steady NFP data the week before, affecting pricing in the onshore bond and swap markets. However, we do not anticipate a shift in BNM’s interest rate policy this year. This is despite bond yields, specifically the 3Y MGS hovering near 3.55%, at a relatively large spread of 55 bps over the OPR.

Malaysian Government Bonds View: Given the weakness in UST, while USD is a safe haven and is likely to persist this week, focus on the MGS market would be on the primary segment, namely the sale of MGS 04/39. At MYR3.0 billion public tender and MYR2.0 billion PP, BTC should be decent for the new 15Y benchmark to take over from MGS 06/38.

Malaysian Corporate Bonds: Overall, trading flows in the corporate bond space were low last week due to the midweek Eid holiday. PDS yields rose along with the rise in MGS yields, though spreads tightened due to the slightly larger MGS/GII yield climb.

Malaysian Corporate Bonds View: Some, though limited, opportunities in the GG space remain, namely on selected Prasarana tranches (Exhibit 2).

Forex

DXY Index: The dollar index surged last week, rising from the prior week’s level of around 104 to close just above the 106 handle. The first upswing of the index (from 104 to 105) midweek occurred post-release of the strong US inflation numbers. The second upswing (from 105 to 106) occurred due to USD safe-haven demand from the Iran-Israel conflict. At the same time, Fed-speak remained more on the hawkish side. Atlanta Fed President (FOMC voter) Bostic said he is not hurrying to cut rates. Another FOMC voter, New York Fed President Williams, said that despite "tremendous progress" toward lowering inflation vis-a-vis employment, there is little need to cut interest rates in the "very near term."

Europe: EUR fell versus the surging USD. Also depressing the EUR was last week’s ECB's latest stance. Last week, the ECB held its interest rate for the fifth consecutive time but signalled confidence that inflation would return to target and that it could soon ease its stance. “In June, we know that we will get a lot more data,” ECB president Christine Lagarde said at a news conference. The ECB's primary refinancing rate remained unchanged at 4.50%.

Asia: Asian currencies were pressured by the strong dollar mid-week after the strong US inflation numbers were released. The JPY rose above the 153.0 level post-release of the US data, but the currency further weakened to above 153.5 as the dollar continued its rise due to safe-haven demand from geopolitical concerns. The absence of hints of immediate BoJ intervention to allay JPY's weakness meant little support for the currency. The CNY continued its month-long depreciation, with the USD/CY pair hovering near 7.238 from around the 7.190 level mid-last month. There was some consolidation near the 7.240 level for the CNY as the PBoC continued to set stronger-than-expected midpoint rates. In the middle of last week, we saw a PBoC fixing of 7.0968, or >1,650 pips, stronger than the spot rate. Yet, we think CNY will remain pressured ahead of more domestic data this week, comprising home prices, industrial production, retail sales, and the 1Q2024 GDP. However, today saw the PBoC maintaining the 1Y medium- term lending rate steady at 2.50%. Last week’s data was worrisome: March exports sank 7.5% y/y, and imports fell 1.9%, versus consensus of -1.9% and +1%, respectively.

Malaysia: With the strength in USD, the ringgit remained pressured and posted a weekly loss of 0.5% w/w. The USD/MYR closed at 4.771 on Friday, up from 4.748 the prior week.

Source: AmInvest Research - 16 Apr 2024

Company Background. Southern Cable Group (Southern Cable) is primarily a manufacturer of cables & wires used for power distribution & transmission, telecommunications, building & construction, infrastructure and control/instrumentation applications. Currently, the group boasts a total annual production capacity of 36,000 tonnes of aluminum & copper rods, 40,780 km of cables & wires and 7,800 tonnes of polyvinyl chloride (PVC) compounds. Southern Cable is the registered supplier of cables & wires to Tenaga Nasional (TNB), Telekom Malaysia (TM), Sabah Electricity, Petroliam Nasional and Sarawak Energy.

Prospects. (i) As at 31 Dec 2023, orders on hand amounted to RM829mil (0.8x FY23 revenue) and are expected to be fulfilled by FY26. These orders include the supply of underground cables & conductors, rectifier & battery systems as well as purchase orders from engineering, procurement, construction and commissioning (EPCC) contractors/resellers/others, (ii) In FY23, the group invested in new machinery which boosted its cable & wire production capacity by 21%. Moving forward, it intends to further expand its capacity by investing in additional machinery and production facilities to meet growing demand, and (iii) Seeking to leverage the increasing demand for power cables & wires driven by Malaysia's National Energy Transition Roadmap (NETR) objectives.

Financial Performance. In FY23, Southern Cable reported higher revenue of RM1.05bil (+20% YoY) with a PAT of RM29.4mil (+2x YoY). This was mainly attributed to improved sales volume of power cables & wires, higher sales of control/instrumentation cables & wires to oil & gas projects and supply of rectifier & battery systems to the telecommunications sector.

Valuation. Based on Southern Cable’s FY23 net profit, the stock is trading at an attractive P/E of 14.5x, which is lower than Bursa Industrial Production Index’s 18x currently. As a comparison, Supercomnet Technologies, involved in manufacturing cables & wires, trades at a much higher FY24F P/E of 28x.

Technical Analysis. Southern Cable may rise higher after it surged to a new multi-year high with a long white candle a few sessions ago. The stock’s move above the RM0.52 resistance coupled with rising EMAs indicate that the near term upward momentum may persist. A bullish bias may emerge above the RM0.52 level with stop-loss set at RM0.48, below the 50-day EMA. Towards the upside, near-term resistance level is seen at RM0.60, followed by RM0.65.

Source: AmInvest Research - 16 Apr 2024

We expect further upside for Dufu Technology after it posted a long white candle and pushed above the RM2.10 mark 2 sessions ago. As the 20-day and 50-day EMAs have established their bullish crossover a few candles back, the current upward momentum may continue in the near term. A bullish bias may emerge above the RM2.10 level with stop-loss set at RM1.96, below the 12 Apr low. Towards the upside, near-term resistance level is seen at RM2.40, followed by RM2.60.

Entry : RM2.10–2.19

Target : RM2.40, RM2.60

Exit : RM1.96

Source: AmInvest Research - 16 Apr 2024

Investment Highlights

• We maintain HOLD on Chin Teck Plantations (CTP) with an unchanged fair value of RM8.36/share, based on a FY25F PE of 10x - the simple average of small cap plantation companies over the past 5 years. We ascribe a neutral 3- star ESG rating to CTP.

• In this report, we compare the valuations, operational metrics and dividends of CTP with its sister company, Negri Sembilan Oil Palms (NSOP).

• We find CTP to be a more interesting investment proposition compared with NSOP. In spite of this, we are not upgrading CTP to a BUY as its liquidity is low and the size of its planted areas is small.

• CTP is currently trading at a FYE8/25F PE of 8.9x. In comparison, NSOP trades at a higher FYE12/25F PE of 11.5x assuming a 20% net profit growth. CTP’s P/BV is 0.8x vs. NSOP’s 0.5x. CTP’s return on equity was 6.4% in FYE8/23 against NSOP’s 3% in FYE12/23.

• CTP is larger than NSOP. CTP has 12,021ha of planted areas vs. NSOP’s 7,174ha. We estimate CTP’s gross profit per mature ha at RM8,624 in FYE8/23 compared with NSOP’s RM5,940 in FYE12/23. Based on the gross profit, CTP’s cost is estimated to be RM2,502/tonne in FYE8/23 vs. NSOP’s cost of more than RM3,000/tonne.

• CTP has a bigger proportion of young oil palm trees compared to NSOP. 26% of CTP’s planted areas are in the prime age of 11-15 years vs. NSOP’s 14%. Another 22% of CTP’s are 6-10 years old compared to 23% for NSOP. 22% of CTP’s oil palm trees are more than 20 years old vs. 12% for NSOP.

• Supported by young trees, CTP’s FFB yields and OERs are higher than NSOP. In FYE8/23, CTP’s FFB yield was 19.1 tonnes/ha while its OER was 19.1%. In contrast, NSOP’s FFB yield was 16.9 tonnes/ha while its OER was 18% in FYE12/22.

• CTP’s dividend yield was 2.7% (gross DPS: 20 sen) with a payout ratio of 34% in FYE8/23. In comparison, NSOP’s dividend yield (gross DPS: 12 sen) was 3% and its payout ratio 47% in FYE12/23.

• CTP is currently trading at a fair FY25F PE of 9x, which is marginally below its 2-year average of 10x.

Source: AmInvest Research - 15 Apr 2024