Tag: Bloomberg TV Malaysia

TPPA: Bank Negara Retains Full Autonomy To Regulate Financial System

The independence and autonomy of Bank Negara Malaysia remains intact under the Trans-Pacific Partnership Agreement (TPPA) regime with the central bank being accorded flexibility with regard to the implementation of macro-prudential measures.

According to Maybank IB Research, the TPPA in no way impedes or restricts Bank Negara’s authority and that it continues to retain all rights to regulate the financial system.

“The only major consideration being that the policies do not discriminate between TPPA financial institutions and domestic ones,” analyst Desmond Ch’ng pointed out in a recent banking sector update.

For the record, the TPPA encompasses 12 prospective member countries, namely Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the US and Vietnam.

From a trade perspective, the TPPA effectively opens up four new preferential markets to Malaysia, i.e. the US, Canada, Mexico and Peru with future duty eliminations ranging from 76%-93%. Key domestic sectors that are expected to benefit from this would be the electrical and electronics (E&E), rubber products, palm oil, transport equipment, wood and textiles.

In financial services, Malaysia is offering, among others, (i) new licenses and up to 100% foreign equity subject to the fulfilment of the “best interest of Malaysia” criteria; (ii) additional eight sub-branches over and above the current eight branches that foreign banks are allowed to have, and (iii) no restriction on automated teller machines (ATMs).

“A point to note is that the additional branches and ATM liberties accorded to TPPA member countries are subject to reciprocity, so any increase in competition from foreign players is likely to be a very gradual affair,” asserted Ch’ng.

In any case, as Malaysia is already committed to a gradual liberalization of its financial services sector as outlined in its Financial Sector Blueprint 2011-2020, domestic banks will have to brace for the eventual increase in competition.

Currently, Malaysia has 19 foreign commercial banks and nine foreign Islamic banks which cumulatively account for about 21% of the banking system’s total assets. “The TPPA in itself is relatively neutral on the financial sector, in our view, but the indirect benefits of increased trade flows and investments would eventually be positive for the local banks,” projected Ch’ng.

There is presently a 30% cap on foreign ownership in local financial institutions. Domestic banks with foreign strategic investors include Affin Holdings Bhd (Bank of East Asia has a 23.5% stake), Alliance Financial Group Bhd (Temasek Holdings Pte Ltd has a 14.9% shareholding), and RHB Capital Bhd (Aabar Investments PJS holds a 21.1% stake).

To encourage greater strategic partnership between domestic and foreign banks, particularly with the aim of enhancing the presence of domestic banks abroad, the foreign shareholding limit in domestic banks was lifted in 2009 to 70% for Islamic banks that have a paid-up capital of at least US$1 billion and to 70% for investment banks.

Nomura: Fed Liftoff Augurs Well For ASEAN Equities On The Longer Term

The eventual raising of the US Federal Funds Rate by 25bps (basis points) – the first rate increase by the Federal Open Market Committee (FOMC) since 2006 – would lead to lower Fed-related risk premium in the weeks and months ahead.

Not only are future Fed-hike expectations likely to remain anchored, the uncertainty about how the Fed would begin hiking and what it would mean for market functioning should also fade.

Nomura Global Markets Research observed that this should set ASEAN markets up for decent gains going into 2016 – spurred further by stabilization in China growth metrics and as oil price volatility reduces from extremely high levels.

The research house sees Indonesia as the best market for upside, boosted primarily by (in decreasing order of importance) infrastructure execution, external flow dynamics, growth momentum, reform progress and the domestic political landscape.

“A combination of catalysts may indeed appear at around the same time: reducing Fed risks after the first Fed rate hike; possible passing of the tax amnesty bill (most likely January); financial closing on the Batang power plant project (likely in January/February), and the first Bank Indonesia (central bank) rate cut (in January, albeit with a risk it is delayed),” Nomura pointed out in an ASEAN economic outlook post the US funds rate hike exercise.

In terms of allocation, the research house expects the first beneficiaries to be rate cyclicals (construction, property, banks and cement). But it is NEUTRAL on the telco, consumer (tobacco, pharma, retail) and autos sectors while bearish on energy, plantation and mining.

However, Nomura is UNDERWEIGHT on Malaysia given lower commodity prices, fiscal consolidation and rising costs are weighing on domestic demand even as the export sector continues to perform well and support the overall gross domestic product (GDP).

“The equity market, unfortunately, largely represents this domestically focused set of companies and market earnings growth has thus been understandably lagging a resilient headline GDP number,” opined the research house. “In fact, the slowing property market and high leverage among both corporates and households could prove a further drag on earnings.”

Nevertheless, Nomura noted that capital outflows are stabilizing as the current political risks are already priced into the Malaysian market with no change in leadership or policy direction.

“But while this may on the margin entice foreign investors to take a look at the market, they are unlikely to find valuations that aptly reflect the scale of fund outflows we have seen from the equity market this year,” cautioned the research house.

For example, the perceived lack of clarity and “due-process” in addressing the financial accounts of 1Malaysia Development Bhd (1MDB) has left foreign investor sentiment very weak and the status quo does nothing to repair this.

However, Nomura expects Malaysian equities to see near-term upside in line with the rest of the region. In addition, ValueCap is now set to begin investing soon.

“Stocks to focus on will likely be ones that are cheap, large-cap, higher yielding and ones more recently under pressure,” suggested the research house. “But it is still unlikely that Malaysia will outperform given the weaker earnings outlook.”

In this regard, Nomura prefers earnings visibility and ringgit depreciation beneficiaries. It suggests banks which offer earnings visibility at cheap valuations as well as healthcare stocks and other exporters which benefit from ringgit depreciation.

“We recommend NEUTRAL positioning in chemicals, consumer discretionary and utilities sectors while being UNDERWEIGHT on energy, staples, industrials and telcos,” added the research house.

Getting Federal Government’s Approval A Challenge Poser In Penang’s Colossal Transportation Project

Obtaining the Federal government’s approval for land reclamation and for the light rail transit (LRT) portion of the Penang Transport Master Plan (PTMP) remain the two key hurdles that may potentially delay the kickstarting of the mammoth project.

AllianceDBS Research observed that both key challenges could mar Gamuda Bhd’s earnings outlook although the infrastructure group has received a Letter of Award (LOA) – via the SRS Consortium – from the Penang State Government to be the project delivery partner (PDP) under the Penang Transport Master Plan Strategy (2013-2030).

The shareholding structure of the SRS Consortium is as follows: Gamuda (60%), Ideal Property Development (20%), and Loh Poh Yen Holdings (20%).

“Gamuda is hoping to have two bites of the cherry – being the PDP and also turnkey contractor for some key components – but that is still uncertain at this stage,” analyst Tjen San Chong pointed out in a results review of Gamuda. “The two main components of the project are LRT from George Town to Bayan Lepas and the Pan Island Link highway.”

According to Tjen, on-going discussions with the relevant parties have been encouraging thus far. The environmental and social impact assessment studies have also commenced together with alignment optional studies.

For its first quarter ended October 31, 2016, Gamuda saw its net profit dwindled 13.2% year-on-year (y-o-y) to RM161.23 million (1Q FY7/2016: RM185.85 million; 4Q FY7/2015: RM153.68 million) on the back of a 10% y-o-y decline in revenue to RM512.8 million (1Q FY7/2016: RM569.64 million; 4Q FY7/2015: RM623.27 million).

Aside from the PTMP, Gamuda is also eyeing a piece of action from the Mass Rapid Transit Line 2 (MRT2) project of which major awards will be announced in April/May 2016 onwards, including the tunneling portion.

“The award of the tunneling portion will be via a Swiss Challenge similar to Line 1 and the MMC-Gamuda JV (Joint Venture) will continue to have the similar pricing preference advantage for local contractors,” rationalized Tjen. “(The) PDP fee remains at 6% similar to MRT Line 1.”

The only difference is that the Mass Rapid Transit Corporation Sdn Bhd has introduced three additional key performance indicators (KPIs) – safety, quality and public response – which will constitute half a percentage point out of the 6% fee.

“The total project value estimated by MRT Corp is now at RM28 billion – RM12 billion for the underground portion and above-ground at RM16 billion,” noted the analyst.

All-in, AllianceDBS Research maintained its BUY rating on Gamuda with an unchanged sum-of-parts (SOP)-derived target price of RM5.60. “We have not factored in projects outside of MRT Line 2,” added the research house.

Other views

TA Securities Research: The MRT Line 1 has achieved 76% completion (80% and 70% financial completion for the underground works and PDP scope, respectively) as of 1Q FY7/2016. It is on track to achieve overall completion by July 2017 within the budgeted cost. Gamuda’s outstanding order book has depleted further to RM800 million.

Several civil tenders for MRT Line 2 (MRT2), including underground works package are being called. Major awards are likely to take place in April/May 2016. There are 10 viaduct packages and one underground works package up for grab with an estimated total project cost of RM28 billion. MRT2 has a total length of 52km (13.5km underground) with 37 stations (11 underground).

Besides MRT2, Gamuda is also exploring opportunities in main package of the Light Rail Transit Line 3 (LRT3), Pan Borneo Highway and Southern Double Track as well as the Kuala Lumpur-Singapore High Speed Rail.

While the margins for these projects are expected to be lower due to competitive biddings, these projects would enable Gamuda to mitigate the risk of overly relying on MRT2 post completion of MRT1 as it has yet to obtain the green light to proceed with the PTMP.

As a whole, TA Securities Research maintained its HOLD rating on Gamuda but trimmed the company’s target price to RM4.74 (from RM4.91 previously) based on unchanged 20x CY2016 construction earnings, 14x CY2016 property earnings and 16x CY2016 earnings from toll road and water concessions.

At today’s mid-day trading break, Gamuda was down 1 sen to RM4.39 with 2,862,700 shares traded.

Reaction To The US Fed Fund Rate’s Liftoff

The Federal Open Market Committee (FOMC) has unanimously voted to raise its target fed fund rate by 25bps (basis points) from 0-0.25% to 0.25-0.5%. The FOMC also raised the discount rate by 25bps to 1%.

The long-term neutral rate target remained unchanged at 3.5% in 2018. The FOMC members also maintained their forecast of fed fund rate at 1.375% by end-2016. However, they lowered the end-2017 forecast slightly to 2.375% (from 2.625% previously).

Below are comments compiled from global and local research houses:

BofA Merrill Lynch Global Research: The Fed’s decision offered few surprises. They finally stopped vacillating and hiked rates by 25bps. It was a “dovish hike” – the statement, the forecasts and the press conference underscored a gradual pace of hikes ahead.

However, it wasn’t dovish enough to “dovetail” with market expectations of only two hikes next year. The dot plot continued to show that the Fed expects to hike by 100bp next year which is much slower than history but still well above market expectations. At the same time, the statement’s more optimistic tone was welcomed by the equity market.

It is hard to hike and “hug” the bond market at the same time. The FOMC statement is directed not only to financial markets but to the American public. The Fed needed to be clear why – after so many years – it is finally hiking.

“Moreover, we think the Fed would not be hiking unless it expects more to come,” projected the research house. “If the Fed’s message is too dovish, it could raise doubts about why they are hiking in the first place.”

HSBC Global Research: The bond market’s reaction supports the view that this was a relatively dovish hike. The research house maintained its near-term trading views for a 2.1%-2.4% range for the 10-year Treasury and an 85-105bps range for the two-year. Its end-2016 1.5% 10-year US Treasury yield forecast is unchanged.

With regard to forex strategy, HSBC Global Research opined that the dovish overtone to this first hike lends further credence to potential US dollar weakness. Gradual tightening accompanied by low core bond volatility is an important factor that supports its base case that the pace of emerging market (EM) currency weakness should be slower in 2016.

The research house also expects equities to wobble as investors digest the news that the long period of near-zero interest rates has come to an end. “Historically, however, prices are often higher within a year of a hike,” noted HSBC Global Research.

Elsewhere, the research house expects EM assets to recover some of the lost ground given attractive valuations following the Fed’s fairly smooth liftoff, though differentiation still remains paramount.

“Looking forward, the FOMC action leaves gold positioned to build on gains, but probably only modestly,” added HSBC Global Research.

Hong Leong Investment Bank (HLIB Research): The research house expects the US$ strength to struggle in the near term as global capital flows may have already worked to the extreme (flocking into US$ assets before the liftoff).

“Empirical evidence does not suggest that Fed liftoff (i.e. rate hike cycle in June 2004) would result in stronger US$,” noted HLIB Research.

Closer to home, the ringgit has enjoyed a period of stability since end-September despite being recently pressured again by lower oil prices. With the Fed liftoff done, the research house opined that the ringgit will now be more influenced by oil price movement and domestic factors, i.e. 1Malaysia Development Bhd (1MDB) and the successor of Bank Negara Malaysia’s Governor Tan Sri Zeti Akhtar Aziz.

For 2016, HLIB Research expects the ringgit to remain range-bound in most of 1H 2016 while a more noticeable appreciation towards 3.80/US$-4.00/US$ will only materialize in 2H 2016 after the confirmation of Zeti’s successor and bottoming of crude oil prices.

Kenanga Research: The end of zero interest-rate policy (ZIRP) is the beginning of a new chapter of monetary policy. This chapter will tell the story of the Fed’s efforts to normalize policy, and that particular tale has yet to be written. But one thing for sure is that more uncertainties now loom among emerging economies.

In the case of Malaysia, the research house expects Bank Negara to face a tough choice between supporting the economy or defending the ringgit.

“For now, we believe that Bank Negara would err on supporting growth,” reckoned Kenanga Research. “Our study based on the Taylor Rule model suggests that there is some degree of justification for the central bank to lean towards a rate cut but not after exhausting other policy options.”

However, the research house opined that the probability for Bank Negara to make any rate adjustment in the near term is relatively low barring an unforeseen and disruptive financial or geopolitical event. Hence, it expects the central bank to keep the overnight policy rate (OPR) at 3.25% in 2016.

Affin Hwang Capital Research: The research house expects the Fed to be diligent in managing market expectation on the pace of subsequent rate hikes going into 2016. After this 25bps rate hike, it further expects three 25bps hike – possibly one each in April, September and December 2016.

As the subsequent federal funds rate (FFR) hikes will likely be gradual next year, Affin Hwang Capital Research expects Bank Negara to likely leave the OPR unchanged at 3.25% throughout 2016.

Even if the US Fed were to raise its policy rate by 75-100bps in 2016 from the current level, the research house opined that the interest rate differential between US fed funds rate and Malaysia’s OPR remain wide and positive, but also premised somewhat on the development of global economy.

“Bank Negara will likely maintain its current accommodative policy stance to support country’s domestic demand, especially private consumption spending,” added Affin Hwang Capital Research.

TA Securities Research: The eventual start of US monetary policy normalization may also heighten the volatility in the Malaysian financial markets including our stock markets and currency.

Since mid-August 2014, the FBMKLCI index has declined by 14% while the ringgit has depreciated by almost 19% so far in 2015 against the greenback. The research house expects the ringgit to remain on a depreciating mode going forward and to trade within 4.00/US$-4.50/US$ in 2016 in view of prevailing global uncertainties.

Nevertheless, TA Securities Research opined that Bank Negara will maintain the OPR at 3.25% throughout 2016. The next Bank Negara’s Monetary Policy Committee (MPC) meeting is on January 21 next year which is few days before the next FOMC meeting (January 26-27).

S&P Affirms A- Rating On Sarawak And Its Guaranteed Notes

Sarawak has scored a remarkable double sovereign rating with Standard & Poor’s Ratings Services (S&P) affirming its ‘A-‘ long-term issuer credit rating and the ‘axAA’ long-term ASEAN regional scale rating on the state’s performance and robust liquidity.

The international agency also affirmed the ‘A-‘ issue ratings on the state-owned Equisar International Inc’s (EII) US$800 million guaranteed notes (due June 2026) and SSG Resources Ltd’s (SSG) US$800 million guaranteed notes (due October 2022).

The affirmed ratings on Sarawak reflect the state’s very strong budgetary performance and exceptional liquidity.

“This is against the backdrop of an evolving but balanced institutional framework,” S&P pointed out in its rating assessment. “The state’s very high debt burden, high contingent liabilities, and low-income economy relative to international benchmarks for gross domestic product (GDP) per capita temper these strengths.”

The rating agency described Sarawak’s budgetary performance as “very good”. The state’s operating surpluses are forecast at an average of around 62% of its annual operating revenue and 21% after capital account of total revenues between from 2013-2017.

Surpluses for 2015-2017 are expected to decline but remain positively healthy. This is due to an increase in capital expenditure (accounting for 58% of total expenditure) for social and commodity development as well as for commerce and industry.

Nevertheless, S&P gauged that Sarawak’s very high debt burden had constrained its rating. About 67% of Sarawak’s debt is denominated in the US dollars while the rest are domestic borrowings.

“The state’s tax-supported debt is projected to rise to 196% of operating revenues in 2017 compared with 145% in 2014,” noted the rating agency. “This is a result of the 33% projected depreciation in the ringgit from 2014 to 2017 and lower operating revenues.”

S&P expects Sarawak to continue remaining in a strong net creditor position. Its cash reserve is expected to reach RM29 billion at the end of this year, more than double the tax-supported debt of RM11.4 billion. Additionally, around 35% of Sarawak’s US dollar-denominated bonds have already been prefunded with cash set aside in a US dollar sinking fund account.

“Such funding mitigates some of the foreign exchange risks and demonstrates the state government’s capacity to manage debt,” explained the rating agency.

The state’s average GDP per capita between 2012 and 2014 was US$13,444 which is higher than Malaysia’s average of about US$10,578. Its economic growth prospects remain healthy with real GDP expected to grow 3.5%-4% over the next two years.

On Sarawak’s exceptional and strong liquidity, S&P opined that the state’s free cash and liquid reserves are sufficient to cover about 40x of its debt service over the next 12 months. The state is only expected to face large principal payments in 2022 and 2026.

“Sarawak’s internal cash flow generation is very robust, with operating surplus that is projected at more than RM3 billion between 2015 and 2017, more than sufficient to cover 200% of expected debt services,” suggested the rating agency.

Elsewhere, the state’s short-term liquidity risk is minimal as most of its debt obligations are long term. Its conservative reserves management policy has most of liquidity holdings held in money-market funds and fixed deposits.

S&P reiterated that its STABLE outlook reflected Sarawak continued strong budgetary performance and maintaining its exceptional liquidity over the next two years.

The upside to the rating is limited as the issuer credit rating is capped by the foreign currency rating on Malaysia (foreign currency: A-/STABLE/A-2; local currency: A/STABLE/A-1; ASEAN scale: axAAA/axA-1+).

Downward ratings pressure would arise if the financial performance of Sarawak’s state-owned enterprises (SOEs) sector deteriorates materially, thus resulting in higher contingent liabilities. It could also be affected if Sarawak’s compensation in lieu of oil and gas (O&G) rights is significantly lower than S&P’s expectation or its capital expenditure increases significantly, resulting in structural deficits after capital accounts.

All-in, S&P maintained its rating on Sarawak mainly due to its highly strong budgetary performance and exceptional liquidity.

The rating agency also highlighted that Sarawak maintained satisfactory financial management as well as being supported by the state government’s political and managerial strengths. The recent transition in Sarawak’s top leadership was smooth, thus maintaining political stability.

“At the same time, the state government’s policy direction and implementation capability have contributed to its largely stable status,” added the rating agency.

Foreign Holdings Of Malaysian Debt Securities Hit 7-Month High In November

Foreign holdings of Malaysian debt securities continued to stabilize in November with an overall net inflow of RM3.9 billion (+1.9% m-o-m). The total value of foreign-held investments stood at RM213.6 billion as of end-November (end-October: RM209.7 billion), raising it to a seven-month high, according to RAM Ratings.

Overall, foreign holdings made up 19.4% of the Malaysian bond market as at end-November (October: 19.2%).

Both the government and public debt securities (PDS) markets charted m-o-m increases, i.e. 4.0% and 2.6%, respectively. Malaysian Government Securities (MGS) and Government Investment Issues (GII) attracted a total of RM6.5 billion of foreign interest.

“MGS remained the largest type of security held by foreign investors at 74.4%,” RAM Ratings pointed out in its December 2015 issue of Bond Market Monthly.

However, the value of foreign-held Bank Negara Malaysia (BNM) securities declined 11.7% to RM24.2 billion in November (October: RM27.4 billion) as RM3.7 billion of BNM papers had matured during the month without being replenished by any new issuance.

With the US Federal Reserve’s normalization cycle having become less uncertain at present RAM Ratings expects some pressure from possible capital outflows in the near term. However, this will be somewhat cushioned by foreign investors’ under-exposure to Malaysian securities.

“Given historical trends, the rationalization of foreign investors’ portfolios in the Malaysian bond market has largely caused a decline in the holdings of BNM securities rather than longer-tenured government securities, the holdings of which have stayed relatively stable,” asserted rating agency. “As such, we expect most of the portfolio rebalancing to primarily involve these types of securities in the near term.”

As of end-November, foreign holdings of BNM securities (valued at RM24.2 billion) accounted for 11.3% of total foreign-held assets holdings.

“Notably, the most accentuated foreign investor outflows this year have been based on expectations on oil and global growth prospects as well as the financial volatility stemming from the Chinese markets,” rationalized the rating agency. “We therefore do not expect any prolonged or disorderly volatility if the Fed Funds Rate is finally raised this year.”

More broadly, RAM Ratings noted that the year-to-date (YTD) gross issuance of government securities stood at RM99.5 billion as of end-November 2015, slightly lower year-on-year (y-o-y) but in line with its forecast of RM100 billion-RM105 billion of overall gross issuance in 2015.

Similarly, YTD issuance of quasi-government securities declined 24.2% to RM18.8 billion for the same period. Meanwhile, issuance of Bank Negara Malaysia securities remained firm at RM18.7 billion with no new issuance in November.

After a relatively laggard performance in the first 10 months of 2015, YTD issuance of PDS turned around to RM81.5 billion as of end-November, slightly surpassing the previous corresponding period’s RM80.6 billion. Outstanding PDS came up to RM352.9 billion as of the same date (end-October: RM351.3 billion).

Moody’s Affirms A1 Ratings On PETRONAS

Moody’s Investors Service has affirmed the A1 issuer rating and senior unsecured rating of national oil corporation Petroliam Nasional Bhd (PETRONAS).

At the same time, the international rating agency has also affirmed (i) the A1 rating on senior unsecured notes issued by PETRONAS Capital Ltd and guaranteed by PETRONAS; (ii) the (P)A1 rating on the US$15 billion medium-term note (MTN) program set up by PETRONAS Capital Ltd and guaranteed by PETRONAS, and (iii) A1 rating on sukuk (Islamic bond) issued through PETRONAS Global Sukuk Ltd.

The outlook on the ratings is STABLE.

“The rating actions follows sharp reduction in Moody’s oil price assumptions in light of continuing oversupply in the global oil markets,” the rating agency pointed out in a media release.

Moody’s now assumes the Brent crude – the international benchmark – to average US$43/barrel and US$48/barrel in 2016 and 2017, respectively. This marks a US$10/barrel and US$12/barrel reduction from its previous assumptions for 2016 and 2017, respectively.

“The affirmation of ratings on PETRONAS reflects our expectation that the company’s credit metrics – although will weaken – will stay well within our downgrade thresholds despite the lower oil price assumptions,” rationalized Moody’s vice president and senior credit officer Vikas Halan.

The rating agency expects PETRONAS’ EBITDA (earnings before interest, taxes, depreciation and amortization) to decline by about 38%-40% in 2015 and fall further by 4%-6% in 2016 under its price assumptions.

“We also expect the company to continue to make investments of RM50 billion of capital expenditure in each of the next three years,” projected Halan who is also Moody’s lead analyst for PETRONAS. “Despite these assumptions, we expect the company to remain in a net cash position until end-2016 at least.”

PETRONAS has reduced its dividends to the Government of Malaysia (A3 POSITIVE) to RM16 billion for 2015 against RM26 billion for 2014. The impact of low oil prices on PETRONAS has also been partly mitigated by depreciation of the ringgit by over 20% in 2015.

Moving forward, Moody’s expects PETRONAS’ debt to capitalization to stay 18%-22% over the next two years as against the downgrade threshold of 35%- 40%.

According to the rating agency, PETRONAS’ STABLE outlook reflects its expectation that the national oil corporation will maintain its strong credit metrics over the next 12-24 months by optimizing its shareholder payments and investment activities.

“The possibility of a rating upgrade is limited given the high inter-dependence between the government and the firm, as well as the implementation risks related to the company’s overseas acquisitions,” noted Moody’s. “In addition, an upgrade to Malaysia’s sovereign rating will not necessarily lead to an upgrade of PETRONAS’ rating.”

Nevertheless, downward rating pressure could arise if PETRONAS faces significant setbacks in developing its new investments.

“Moreover, a weakening of its financial and liquidity profiles as a result of substantial debt funding for its existing investments, or material acquisitions leading to a gross adjusted debt-to-total capitalization ratio above 35%-40% or RCF (retained cash flow)/Net debt falling below 60% could also pressure the rating,” cautioned the rating agency.

PETRONAS is a 100% Malaysian government-owned oil and gas (O&G) company with operations spanning upstream oil and gas exploration and production, downstream oil refining, marketing and distribution of petroleum products, as well as trading in oil, petroleum and petrochemicals products.

Malakoff Receives Official Extension To Its Port Dickson Power PPA

Independent power producer (IPP) Malakoff Corporation Bhd has finally received the long-awaited official extension to its Port Dickson Power Bhd’s power plant operations from the Energy Commission.

In a filing to Bursa Malaysia yesterday, Malakoff notified that the official award is for a duration of three years from March 1, 2016 to 28 February 2019.

The announcement follows the statement made by the Minister of Energy, Green Technology and Water, Datuk Seri Dr Maximus Ongkili, in October that the government had approved the extension of three first generation power purchase agreements (PPAs), i.e. Paka (YTL Power International Bhd), Powertek (Edra Global Energy Bhd) and Port Dickson Power as stop-gap measures to ensure supply stability given the delay in the completion of two new power plants (Track 3B and 4A).

Port Dickson Power commenced operations in January 1995 and its current power purchase agreement (PPA) shall expire in January 2016. Port Dickson Power is an open cycle gas turbine (OCGGT) power plant with a capacity of 436.4MW.

“We understand the plant is still in a good condition as it is a peaking plant,” commented PublicInvest Research analyst Syarifah Hidayatul Akmal in a company update on Malakoff. “As such, we do not expect major capex required for refurbishment and upgrading of equipment.”

According to the analyst, Malakoff has yet to disclose tariff for the extended Port Dickson Power’s PPA. Typically, the extended tariff is usually much lower as the power plant has been fully depreciated with no more financing costs. With its current PPA, Port Dickson Power contributes about 6% to Malakoff’s total revenue.

“Assuming the new tariff is 20% of the existing rate, we estimate the group’s earnings will increase by an average of 5% for FY2016 to FY2019,” projected the analyst. “However, the short-term extension does not contribute significant impact to our DCF (discounted cash flow) valuation.”

All-in, PublicInvest Research maintained its OUTPERFORM rating on Malakoff with a target price of RM2.18. “We continue to like Malakoff based on its IPP business model which provides the group with consistent and sustainable revenue streams of income throughout the PPA concession period with fuel cost-pass through features,” added the research house.

 

Other views

TA Securities Research: Earnings-wise, the research house expects the extension to lift Malakoff’s FY2016/FY2017/FY2018 earnings forecasts by 3.2%/3.4%/2.9%. To arrive at this estimates, the research house has assumed the Capacity Rate Financials in the existing PPA will be reduced by 50% in the new PPA.

Also, since Port Dickson Power is a peaking plant, TA Securities Research has assumed there will not be any substantial capex incurred to extension the life span of the power plant.

As a whole, the research house maintained its BUY rating on Malakoff with a higher target price of RM2.07 (from RM2.03 previously) based on EV/EBITDA (enterprise value/earnings before interest, taxes, depreciation and amortization) target multiple of 8.5x upgraded by 2% after updating the IPP’s earnings forecasts to reflect its PPA extension.

“We continue to like the stock as an ideal defensive play which fits well into our 2016 equity strategy of going on defensive mode amidst broader market volatility,” rationalized TA Securities Research. “A strong re-rating catalyst will be the group delivering on value accretive M&As (merger and acquisitions).”

At 3.33pm, Malakoff was unchanged atRM1.60 with 3,769,800 shares traded.

Top Glove In Pole Position To Reap Forex Gains Advantage

Top Glove Corporation Bhd is best positioned among its peers to retain the currency gains emanating from the stronger greenback against the ringgit given its prominent exposure to the natural rubber glove segment where competition is less intense (due to modest incoming supply), according to AllianceDBS Research.

The research house further observed that currency gains by nitrile glove makers will likely be less prominent given the need to deploy new capacities under an increasingly competitive environment.

Top Glove is the world’s largest rubber glove manufacturer with an annual production capacity of 44.6 billion gloves.

“Competition is heating up in the glove sector with several glove makers undertaking aggressive expansion plans which could see unit profitability suffer going forward,” analyst Siti Ruzanna Mohd Faruk pointed out in a results review of Top Glove. “However, Top Glove’s core natural rubber glove products will see relatively less competition than nitrile gloves because of better supply-demand dynamics.”

For its first quarter ended August 31, 2016, Top Glove posted a 163.7% year-on-year (y-o-y) surge in net profit to RM128.35 million (1Q FY8/2016: RM48.68 million; 4Q FY8/2015: RM103.12 million) on the back of 41% y-o-y climb in revenue to RM800.28 million (1Q FY8/2016: RM567.63 million; 4Q FY8/2015: RM709.45 million).

At a glance Top Glove’s 1Q FY8/2016 revenue which grew 41% y-o-y outpaced the 15% sales volume growth during the quarter. Its average selling price (ASP) rose by 23% y-o-y in ringgit terms but this was mainly driven by a stronger US dollar (+31% y-o-y) and cheaper latex (currently at RM3.96/kg; 10% lower vs 4Q FY8/15). ASP in US dollar terms fell by 6% y-o-y.

Moving forward, AllianceDBS Research raised Top Glove’s FY8/2016F and FY8/2017F earnings by 21% and 20%, respectively after imputing higher EBIT/’000 gloves of RM15.67/15.54 for the two years (previous: RM12.58/12.71) (EBIT = earnings before interest and taxes).

All-in, the research house maintained its BUY rating on Top Glove but raised its target price to RM14.20 (from RM11.75 previously) based on 20x CY2016F price-to-earnings ratio (PE) following the earnings upgrade.

 

Other views

PublicInvest Research: Top Glove will continue to expand its operations with the installation of faster, more efficient and technologically advanced production lines. A total of 28 new lines are expected to commence by end-FY8/2016 with an additional 28 lines by 2Q FY8/2017. This will increase the group’s total capacity to 52.4 billion pieces per annum by February 2017. The new contributions are expected in stages from FY8/2016F onwards.

In line with growing demand of gloves and ongoing capacity expansion, the research house has increased Top Glove’s utilization rate to 76% from 68% for FY8/2016F while lowering its cost estimates by 11%-15% for FY8/2016F onwards to account for the group’s efficiency efforts.

As a result, its earnings estimates are lifted by 35%-42% on the back of average US dollar/ringgit forecasted rates of 3.70/US$ to 3.95/US$ for FY8/2016 to FY8/2018.

As a whole, PublicInvest Research maintained its NEUTRAL rating on Top Glove with a NEUTRAL call but with a higher target price of RM10.52 (from RM8.29 previously) on the assumption of higher dividend payout and lower costs.

“We believe future growth has been priced in at this juncture as (Top Glove’s) share price has rallied circa 157.8% YTD (year-to-date),” added the research house.

Maybank IB Research: The strong 1Q FY8/2016 performance was largely driven by external factors (especially strong US dollar/ringgit). Hence, the strength of currency exchange rate is crucial to determine the sustainability of Top Glove’s strong 1Q FY8/2016 earnings.

The research house maintained its earnings forecasts for now, expecting weaker earnings on potential US dollar/ringgit volatility ahead. It has assumed an average exchange rate of 4.10/US$ in FY8/2016-FY8/2018 (vs spot rate of 4.30/US$ presently).

Trading at 2016 PER of 18x, Top Glove’s valuation is undemanding considering that it is now the sector’s new bellwether (highest profitability) yet still cheaper than its big-cap peers (Hartalega Holdings Bhd: 30x; Kossan Rubber Industries Bhd: 25x).

“Its 1-for-1 bonus issue (target completion in mid-January 2016) could provide additional impetus to share price,” suggested Maybank IB research.

All-in, the research house reiterated its BUY rating on Top Glove with a target price of RM16.60 based on 25x FY8/2017 PER.

At today’s mid-day trading break, Top glove was up 30 sen to RM12.16 with 3,734,600 shares traded.

S&P: Global Banking Faces Numerous Challenges Into 2016

Risks to global banking sector credit quality leading remain numerous in 2016, according to a recent report published by Standard & Poor’s Ratings Services (S&P).

The report entitled The 2016 Global Credit Outlook For Banks: Challenges Still Numerous Leading Into The Chinese Year Of The Monkey identified four key risks and two emerging risks that could be most likely influence bank ratings in 2016.

The key risk factors identified by the international rating agency are (i) China; (ii) higher US interest rates and potentially volatile currencies and other market prices including oil, other commodities and property; (iii) regulatory developments, and (iv) geopolitical risks.

“Meanwhile, emerging risks that could influence bank credit quality are (i) lower market liquidity, and (ii) cyber­security,” S&P pointed out in its report. “The relative importance of these key and emerging risks tends to vary by region.”

There is more certainty looking toward 2016 compared with this time last year. “This is mainly due to rating adjustments flagged leading into 2015 for banks in jurisdictions where government support was expected to diminish – principally in Western Europe and the US – has now largely occurred,” noted the report.

S&P cited that across six major regions globally, issuers on NEGATIVE outlook or CreditWatch with negative implications still outnumbered POSITIVE ones. This resulted in a net negative bias of about 30% of banking group issuers (as of December 4).

“While there are variations between regions, our outlook overall is that ratings momentum in 2016 is more likely to be negative,” projected S&P.

The international rating agency further identified that nine of 20 of the world’s largest economies and banking sectors as showing a negative trend for economic risk. They include China and Japan which are the world’s second and third largest economies, respectively; each of the four BRIC countries (Brazil, Russia, India and China); Germany, Canada, Sweden and Hong Kong.

“Meanwhile, the United Kingdom, Italy, Spain, and Singapore showed positive trends for economic risk, while the economic risk trend in the United States is stable,” noted S&P.

All-­in, the rating agency maintained that while the recovery of the global banking sector from the aftermath of the global financial crisis beginning in 2007 has been a long and slow grind, the sector is now in a much better shape to contend with the numerous challenges ahead.