Month: October 2015

Moody’s: Asian High-Yield Issuance Falls Sharply in Q3 2015

Asian high-yield bond issuance totaled only US$800 million in 3Q 2015 – down from US $2.7 billion in Q2 2015 – and was also the lowest quarterly issuance level since 2Q 2012 which then totaled just US$250 million, according to Moody’s Investors Service.

Furthermore, total issuance for January-September stood at US$8.0 billion, well below US$13.3 billion a year ago.

“In particular, Chinese property issuance – a major contributor to the high-yield market – has slowed in 2015 due to the relatively small volume of maturing bonds, the opening up of alternative onshore funding channels, and the adverse impact on investor confidence of Kaisa Group Holdings Ltd’s (rating withdrawn) default early in the year,” Moody’s vice president and senior analyst Brian Grieser pointed out.

Grieser further observed that the slowing growth in China’s economy and the potential for an interest-rate increase by the Federal Reserve are also weighing on demand for Asian high yield bonds.

Moody’s conclusions were contained in the latest edition of its quarterly report High Yield Interest which looks at the Asian market. Offshore issuance by Chinese property developers totaled just US$6.0 billion for January-September compared with the US$9.6 billion raised in the same period in 2014.

The report also highlights that the trailing 12-month high-yield default rate for Asian non-financial corporates stood at 3.6% as of end-July 2015 – a slight fall from the 3.9% as of end-2014. In the seven months between January and July 2015, three issuers defaulted: two Chinese firms and one Indonesian company.

Elsewhere, this quarter’s issue of Moody’s newsletter also highlights research focusing on rated issuers exposures to foreign currency debts. On this area, Moody’s opined that most non-property and property rated Chinese companies with debt denominated in foreign currencies have the financial cushion to withstand a hypothetical 10% depreciation of the renminbi against those currencies, all else being equal, in two separate reports.

Additionally, the new Moody’s report also focuses on Indonesian property developers. While the developers’ credit profiles will deteriorate on the rupiah’s sharp fall, the rating agency noted that healthy liquidity levels are expected to offset rupiah’s weakness.

Tenaga’s FY8/2015 Earnings Heavily Impacted By Forex Losses

Tenaga Nasional Bhd’s 4Q FY8/2015 net profit of RM820.9 million (-39.5% y-o-y; +4.0% q-o-q) was adversely affected by forex losses of RM759.4 recorded during the quarter under review against forex gain of RM154.4 million reported in the previous corresponding period.

PublicInvest Research attributed the negative development to the weaker ringgit which has depreciated by an average of 10.2% year-on-year (y-o-y) against the greenback, thus impacting the foreign currency denominated loans of the utility giant.

As of August 31 this year, Tenaga’s debt denominations consist of yen (14.5%), US dollar (7.1%), ringgit (78.3%) and others (0.1%).

“YTD (year-to-date) forex losses of RM932.3 million (RM819.3 million unrealized forex translation loss and RM113 million realized forex transaction loss) dragged FY8/2015 net profit to RM6.1 billion (-5.4% y-o-y),” wrote analyst Syarifah Hidayatul Akmal in a company update. “Stripping out the forex losses, core net profit of RM7.1 billion would have met our estimates at 103% but exceed consensus forecast at 108%.”

Despite recording higher electricity sales of 8.1% y-o-y, Tenaga’s FY8/2015 revenue was flat at RM43.3 billion (+1.2% y-o-y) due to recognition of the imbalance cost pass-through (ICPT) of RM1.9 billion.

A final dividend of 19 sen was declared for the quarter, bringing full year dividend to 29 sen (49% of company’s free cash flow) which is similar to FY8/2014. “We are slightly disappointed with the quantum as it comes short of our expectations of a 33.2 sen payout,” Syarifah Hidayatul pointed out.

Moving forward, the analyst viewed the recognition of ICPT positively as this signifies the full implementation of fuel and generation costs pass-through mechanism under the power sector reform which is beneficial to Tenaga given such framework would shield the power utility from exposure to fluctuations in fuel and generation costs moving forward.

All-in, PublicInvest Research maintained its OUTPRFORM rating on Tenaga with a 12-month target price of RM14.64. “We like Tenaga due to its defensive nature and undemanding valuation which is trading at FY2016F and FY2017F of 10.2x and 9.9x, respectively,” added the research house.

Other views

Affin Hwang Capital Research: We understand from management that electricity demand growth for FY2016 may be similar to 2.2% in FY2015 (vs the research house’s 2.7% assumption) as the government expects gross domestic product (GDP) growth to moderate slightly from 4.5%-5.5% in 2015 to 4%-5% in 2016.

“We see little upside to electricity demand growth as consumption may be capped by potentially higher electricity prices,” Affin Hwang Capital Research pointed out. The 2.25 sen/kWh tariff rebate currently enjoyed by consumers may not be sustainable as Tenaga’s over-recovery may remain low due to (1) higher gas price; (ii) stronger US dollar, and (iii) LNG (liquefied natural gas) prices potentially bottoming out (LNG prices trended lower to RM31/mmbtu in 4Q FY2015 (3Q FY2015: RM36/mmbtu).

As a whole, the research house maintained its HOLD rating on Tenaga with an unchanged 12-month target price of RM12.00 based on a 20% discount to its discounted cash flow (DCF)-based valuation of RM15.00.

“We make no changes to our earnings forecasts,” rationalized the research house. “The discount is to account for the uncertainty on pricing surrounding Tenaga’s ongoing bid for Edra Global Energy’s power assets.” (Note: Edra Global is the power generation arm of 1Malaysia Development Bhd [1MDB])

AllianceDBS Research: Tenaga announced that the government will maintain the ICPT rebate of 2.25sen/ kWh for July-December 2015. Also, the price of piped gas for the power sector has been raised by RM1.50 to RM16.70/mmbtu effective July 1 this year. Therefore, the average tariff remains at 36.28sen/kWh while the ICPT implementation will have a neutral impact on Tenaga.

This supports the research house’s view that the government is committed to the energy reform that started on January 1, 2014. More importantly, the increase in piped gas price has quashed concerns over the government’s commitment to address the gas subsidy rationalization issue given the staggering discount for local gas prices against international prices.

Tenaga has spent RM10.8 billion capex in FY8/2015 (vs RM10 billion in FY8/2014), of which 44% was utilized for generation capacity. Nevertheless, its balance sheet remains healthy at 33% net gearing.

All-in, AllianceDBS Research maintained its BUY rating on Tenaga with a target price of RM14.50 (from RM13.40 previously), premised on promising power demand and improving earnings visibility arising from the incentive-based regulation framework.

At 12.01pm, Tenaga was down 4 sen to RM12.62 with 2,222,8500 shares traded.

Moody’s Assigns (P)Baa2 Rating To Axiata’s Proposed Sukuk Notes

Moody’s Investors Service has assigned a provisional (P)Baa2 rating to the proposed sukuk (Islamic bond) notes to be issued under the US$1.5 billion multi-currency sukuk issuance program established by Axiata SPV2 Bhd (ASB), a wholly owned subsidiary of Axiata Group Bhd (Axiata; Baa2 stable).

The outlook on all ratings is stable. The proposed notes will represent the second drawdown under the program which is rated (P)Baa2 and is in line with Axiata’s long-term issuer rating.

“The provisional rating on the proposed sukuk notes will be removed upon completion of the issuance, satisfactory review of the final terms and conditions, and legal opinions,” the international rating agency pointed out in a media release.

Commenting on its rating rationale, Moody’s considers the sukuk to be a senior unsecured obligation of Axiata.

As such, its rating reflects (i) the ultimate obligation of Axiata to ensure that the periodic distribution amount is always maintained, and (ii) the existence of a purchase undertaking which implies that the sukuk holders ultimately rely on the creditworthiness of Axiata for repayment when the trust is dissolved.

“Moody’s rating of the proposed sukuk notes is equivalent to Axiata’s senior unsecured issuer rating as the notes are viewed as being commensurate with a senior unsecured payment obligation with sukuk holders ultimately relying on Axiata for return and principal repayment,” noted Moody’s vice president and senior analyst Gloria Tsuen.

Certificate holders have no security, lien or pledge over any of the leased assets. Under the structure, Axiata acts as servicing agent and lessee. “The linkage to Axiata is further established through existence of cross default provisions between the sukuk and other debt at Axiata and its principal subsidiaries,” added Tsuen.

Proceeds from the proposed notes will be used for Axiata’s merger and acquisition (M&A) activities, refinancing, and general working capital purposes.

Axiata will issue the proposed notes through ASB. However, payment obligations under the various documents will be direct, unconditional, unsecured and general obligations of Axiata and rank at least pari passu with all other unsecured, unsubordinated and general obligations of the company, including the US$300 million 2020 notes currently outstanding.

At maturity or upon a dissolution event, Axiata is required by means of the purchase undertaking to fully repay – including any unpaid and accrued periodic distribution amount – the aggregate face value of the sukuk.

Moody’s does not opine on the transaction’s compliance with Sharia law and has thus taken the statement from CIMB Islamic Bank Bhd and the Sharia advisor of Detusche Bank AG (Singapore Branch) as confirmation that the structure and mechanism of the transaction are acceptable within the principles of Sharia.

Axiata is one of Asia’s largest regional cellular telecommunications providers with over 260 million subscribers of end-June 2015. Its key investments include Celcom in Malaysia (wholly owned); XL in Indonesia (66.43% stake); Dialog in Sri Lanka (83.32%); Smart in Cambodia (84.99%); Robi in Bangladesh (91.59%); M1 Limited in Singapore (28.33%), and Idea Cellular Ltd in India (19.78%).

Axiata demerged from Telekom Malaysia Bhd (A3 positive) in April 2008. The regional telco is 60.0% directly owned by related entities of the Government of Malaysia, including a 38.61% stake held by Khazanah Nasional Bhd (A3 positive).

Maxis: Riding High On Solid Prepaid Growth And Stable Core Postpaid In 3Q FY2015

Maxis Bhd, Malaysia’s largest cellular operator by subscriber base, saw its after-tax profit for the third quarter ended September 30 this year rose 1.8% year-on-year (y-o-y) to RM509 million (3Q FY2014: RM500 million; 2Q FY2015: RM492 million).

This is after adjusting for accelerated depreciation due to network modernization as well as unrealized foreign exchange losses, according to a media release by the telco.

Prior to adjustments (as per filing to Bursa Malaysia), the telco’s net profit dwindled 6.5% y-o-y to RM420 million (3Q FY2014: RM449 million; 2Q FY2015: RM441 million) but its revenue saw a marginal 4.8% y-o-y increase to RM2.17 billion (3Q FY2014: RM2.07 billion; 2Q FY2015: RM2.11 billion).

For the nine-month period (as per filing to Bursa Malaysia), Maxis’ net profit was lower by 8% y-o-y to RM1.27 billion (9M FY2014: RM1.38 billion) while its revenue rose 2.6% y-o-y to RM6.43 billion (9M FY2014: RM6.27 billion).

More broadly, Maxis noted that its performance in 3Q FY2015 was buoyed by a solid prepaid growth and stable core postpaid. “The growth was driven by higher data usage, supported by attractive customer propositions and superior Internet experience,” the telco pointed out in its media release.

Service revenue for 3Q FY2015 grew 3.1% q-o-q to RM2.16 billion, led by 6% growth in prepaid and 0.7% in postpaid. Compared to 3Q FY2014, the telco’s service revenue grew 5.3%. “The growth in prepaid revenue was fueled by higher data usage while for postpaid, growth came from high value customers subscribing to MaxisONE plan,” explained Maxis.

During 3Q FY2015, Maxis spent RM359 million to further improve its high performing network. The telco’s 4G LTE (long-term evolution) coverage now extends to 55% of the population, making Maxis the market leader with the fastest and widest 4G LTE coverage in the country.

“It means Maxis has 95% coverage in key market centers and 60% in all state capitals,” noted the telco. “On a further positive note, Maxis has 9 million mobile Internet users, with more and more of these customers adopting 4G LTE.”

Maxis added 1.5 million 4G LTE users in the last 12 months and they consume an average of 2.3GB of data a month. To cater for high data traffic growth, Maxis expects its 2015 capex expenditure to be in the range of RM1.2 billion to RM1.3 billion.

Comments

BIMB Securities Research: Maxis’ total data volume has reached 45,000TB (terabyte) as compared to q-o-q’s 42,000TB. (27,000TB y-o-y). Presently, Maxis’ postpaid data consumption averaged at 1.76GB/month while prepaid at 1.29GB/month per month where 15% is handled by the telco’s 4G LTE network.

Maxis declared its third interim dividend (single tier) of 5 sen per share which is lower compared to the previous year’s 8 sen. The research house maintained its dividend forecast at 25 sen/share for FY2015 which translates into yield of 3.8%.

BIMB Securities Research also reduced its FY2015 and FY2016 net earnings forecast to RM1.86 billion (-4.7%) and RM1.96 billion (-4.5%), respectively by factoring higher expenses and finance costs. “We remain cautious on the higher net gearing of 2.1x,” the research house pointed out.

All-in, BIMB Securities Research maintained its HOLD rating on Maxis with a lower discounted cash flow (DCF)-based target price of RM6.60 (from RM6.70 previously. “At current price, the stock offers limited upside potential upside,” added the research house.

At 3pm, Maxis was down 4 sen to RM6.66 with 359,700 shares traded.

Maybank Indonesia’s 9M FY2015 Net Profit Soared 70.7%

PT Bank Maybank Indonesia Tbk in which  Malayan Banking Bhd (Maybank) has a 98.31% effective interest, posted a 70.7% year-on-year (y-o-y) jump in its net profit for the nine-month period ended September 30 this year to 592 billion rupiah (circa RM186.8 million) (9M FY2014: 347 billion rupiah/circa RM109.5 million).

Formerly known as PT Bank Internasional Indonesia Tbk, Maybank Indonesia attributed its strong performance to improved net interest income; better net interest margin; higher fee based income; solid growth on liquidity especially in current accounts, and outstanding achievement in sharia banking.

Maybank Indonesia’s net interest income (NII) increased 10.5% y-o-y to 4.8 trillion rupiah in September 2015 (September 2014: 4.3 trillion rupiah) as its net interest margin improved to 4.82% from 4.63%. “Increase in NII was achieved through the Bank’s discipline in loan pricing and active funding management,” Maybank Indonesia pointed out in a media release.

Elsewhere, the Bank noted that it has continued to manage down exposures from certain corporate accounts that had led to increase in non‐performing loan (NPL) level. Towards this end, it has actively carried out restructuring of those accounts and expects to see improvements in the coming months. The Bank’s NPL level was at 4.34% (gross) and 2.79% (net).

“The Bank remains cautious over loan quality as businesses are still impacted by the current economic slow‐down, and weakening of the rupiah,” explained Maybank Indonesia. “The Bank has strengthened its focus on re‐profiling its corporate portfolio and on realigning business with redefined risk appetite toward higher credit quality corporate to improve asset quality.”

In view of the anticipated challenging market condition for remainder of the year, Maybank Indonesia president director Taswin Zakaria noted that the Bank will remain selective in growing its portfolio while exercising pricing discipline for both loan and liquidity to support its business growth responsibly.

“While our business banking continues to be the backbone of the Bank in generating revenues, I am heartened that our efforts in re‐profiling our corporate portfolio and realigning business have started to show positive results as our corporate portfolio showed an increase of 8.4% in the third quarter 2015,” Taswin pointed out. “We are poised to see further growth in global banking going forward.”

Moreover, the Bank’s sharia banking segment has continued to show outstanding performance following the implementation of a Sharia First strategy across the Bank’s line of business and branches since 2014. “Sharia banking’s net profit of 239 billion rupiah has contributed approximately 40% of the Bank’s net profit in September 2015,” added Taswin.

Meanwhile, Maybank Indonesia’s president commissioner and chairman of Maybank Group Tan Sri Megat Zaharuddin Megat Mohd Nor said by virtue of being part of the Maybank Group, Maybank Indonesia has the advantage of harnessing group synergies across the region and tap on the potentials arising from economic activities across the region, notably China and ASEAN which are expected to remain robust in comparison to elsewhere in the world.

“Our recent brand realignment with Maybank Group will enable the Bank to further leverage the Group’s differentiated strengths which we hope will lead to commendable results and deliver better values to all our stakeholders,” rationalized Megat Zaharuddin.

One of Indonesia’s largest banks with 460 branches, Maybank Indonesia boasts total customer deposit of 110.6 trillion rupiah and 153.9 trillion rupiah in assets as of September 30 this year.