MONEM A. SALAM
President of Saturna Sdn Bhd
Stock pick: Gamuda Bhd
GAMUDA Bhd is a good construction proxy to buy into to ride out the challenging market environment.
The group has strong prospects in the next few years and has an excellent track record in carrying out infrastructure projects.
As a regional fund management company, we do keep a close look at the construction sector throughout Asean.
The most prominent feature we have seen in Malaysia is that the government’s expenditure allocation for major infrastructure projects tend to be executed successfully, unlike some of its regional peers.
These projects are executed well via the project delivery partner structure. Note that Gamuda won two major projects as a PDP in 2015 – the RM27bil Penang Transport Masterplan Project and the RM25bil KVMRT Line II.
As an established construction player, Gamuda is set to make inroads on several fronts.
In 2016, we foresee that the group will be keen on bidding for Sarawak’s Pan Borneo Highway project. It has vast experience in road infrastructure works and stand a good chance of winning substantial contracts from this particular project.
Not many realise that Gamuda’s highway concession business is a vital and stable contributor to its cash flow.
Its water and expressway concessions segment contributed RM98mil in pre-tax profits in Gamuda’s latest quarter, or half of its overall pre-tax profits.
A strong balance sheet allows it to leverage when undertaking new construction projects.
We believe that Gamuda will have no trouble gearing up. It has been in a similar situation previously and successfully executed such ventures.
However, there are some caveats. The Government may yet consider reducing its budget given prevailing low oil prices. Any cuts will likely affect expenditure allocated towards infrastructure investments, which could slow down some projects.
President of Saturna Sdn Bhd
Stock pick: Gamuda Bhd
GAMUDA Bhd is a good construction proxy to buy into to ride out the challenging market environment.
The group has strong prospects in the next few years and has an excellent track record in carrying out infrastructure projects.
As a regional fund management company, we do keep a close look at the construction sector throughout Asean.
The most prominent feature we have seen in Malaysia is that the government’s expenditure allocation for major infrastructure projects tend to be executed successfully, unlike some of its regional peers.
These projects are executed well via the project delivery partner structure. Note that Gamuda won two major projects as a PDP in 2015 – the RM27bil Penang Transport Masterplan Project and the RM25bil KVMRT Line II.
As an established construction player, Gamuda is set to make inroads on several fronts.
In 2016, we foresee that the group will be keen on bidding for Sarawak’s Pan Borneo Highway project. It has vast experience in road infrastructure works and stand a good chance of winning substantial contracts from this particular project.
Not many realise that Gamuda’s highway concession business is a vital and stable contributor to its cash flow.
Its water and expressway concessions segment contributed RM98mil in pre-tax profits in Gamuda’s latest quarter, or half of its overall pre-tax profits.
A strong balance sheet allows it to leverage when undertaking new construction projects.
We believe that Gamuda will have no trouble gearing up. It has been in a similar situation previously and successfully executed such ventures.
However, there are some caveats. The Government may yet consider reducing its budget given prevailing low oil prices. Any cuts will likely affect expenditure allocated towards infrastructure investments, which could slow down some projects.
Director & head of corporate strategy
KSK Group Bhd
Stock pick: Thong Guan Industries
GIVEN the pessimistic outlook for many sectors within the market, investors will have no choice but look for companies that are insulated from slowing domestic demand, tough economic conditions and beneficiary of weak domestic currency.
The export sector is a sweet spot and given the run that we had seen in 2015 among glove, furniture and chips sector and selected others in the packaging sector. Narrowing down the search, Thong Guan Industries is a rare gem, despite rising some 63% in 2015, the stock is still deemed to be undervalued as it is trading at P/B of about 0.85x and annualised forward 2015 basic PER of about 10.5x, which is still a bargain.
Thong Guan is also a net cash company, with cash of about 20 sen per share. Growth for the company will basically come from new capacity installation, which is 33-layer nano-technology stretch film line is expected to be ready soon. Thong Guan also raised its production capacity of PVC food wrap to 720 million tonnes with the installation of 2 additional lines this year.
These are key drivers for both topline and bottomline growth. With the new capacity, Thong Guan is rightly placed to benefit to rising demand for plastic films and this could drive earnings by 10%-15% in 2016.
Some 90% of Thong Guan’s revenue comes from plastic films and the current low oil price basically translates to lower selling prices for plastic and hence increase in demand. With a favourable exchange rate, Thong Guan is a winner due to lower input cost as close to 80% of its revenue are derived from exports.
Head of research, TA Securities
Stock pick: SKP Resources Bhd
EXCITEMENT in a company’s shares always hinges on its track record, ability to deliver strong earnings growth and generate cash flows to reward shareholders with dividends.
SKP Resources Bhd fits this bill. Despite reporting a profit growth of 43% in the last financial year, the company is expected to record a 3-year earnings CAGR of 68.2% until 2018 based on our projections.
This growth will be underpinned by the RM1bil annual orders from its main customer, Dyson, to produce cordless vacuum cleaners. Considering this new source of demand is only taking up about 25% of its newly enlarged 20-assembly line facility that came on board last September, growth potential is enormous. Dyson plans to launch 100 new products by 2018 to satisfy increasing demand for its products and services.
SKP has also mitigated operational risks by having specific agreements with clients to pass through nearly 100% of costs related to changes in raw material prices and currency fluctuations. This not only provided business stability but also some predictability.
SKP has a high ROE of 40% and a strong balance sheet. With current net gearing of only 4.5%, it is expected to turn net cash soon on the back of strong profit growth and cash flows. Thus, our expectations for future dividend yield to remain attractive around 4.6% to 6% are not far-fetched.
While having Dyson as a single largest customer can be considered as a major risk, the management is aware of that and has taken a proactive step by acquiring the subsidiaries of Technic to diversify the product range and customer base. It has also succeeded in growing the business through a win-win strategy that has strengthened the relationship, for the partnership to continue into distant future.
The fair value ascribed to SKP Resources shares is RM2 based on a calendar year (CY) 2016 price earnings (PE) multiple of 18 times, which will dwindle to 16 times and 10 times in CY17 and CY18 respectively on the back of robust earnings growth.
AZLAN HUSSIN
CEO of MIDF Amanah Asset Management Bhd
Stock pick: Brahim’s Holdings Bhd
BRAHIM’S Holdings Bhd is involved in the food and beverage (F&B) business with its main contribution coming from the airline in-flight catering business.
The airline catering industry is a highly regulated industry due to the health and safety requirements and the Malaysian market is practically dominated by Brahim’s.
Due to the restructuring exercise taking place at Malaysia Airlines, Brahim’s earnings were affected as new contracts entered into were less favourable than before. This resulted in a selldown of Brahim’s shares.
Still, Brahim’s unique niche position in this industry allows them to focus on the provision and supply of halal meals. A key “game changer” for the group is the emergence of Singapore-listed SATS Ltd as a new strategic shareholder. Brahim’s should be able to leverage and benefit from the “halal-hub” position Malaysia is pushing for and from other government initiatives, especially in the tourism segment. We expect the potential for cost-benefit efficiencies of Brahim’s to improve further moving forward with their new business model.
Brahim’s is currently trading at a price-to-book ratio of 1.1 times which is reasonable given that its regional and global peers trade in the 2-3 times range albeit with a much larger footprint in the in-flight catering business.
Earnings are expected to recover from losses this year and should help support a re-rating of Brahim’s as it heads towards a recovery in 2016. We believe it offers an excellent opportunity to enter the market at a very attractive level.
CEO of MIDF Amanah Asset Management Bhd
Stock pick: Brahim’s Holdings Bhd
BRAHIM’S Holdings Bhd is involved in the food and beverage (F&B) business with its main contribution coming from the airline in-flight catering business.
The airline catering industry is a highly regulated industry due to the health and safety requirements and the Malaysian market is practically dominated by Brahim’s.
Due to the restructuring exercise taking place at Malaysia Airlines, Brahim’s earnings were affected as new contracts entered into were less favourable than before. This resulted in a selldown of Brahim’s shares.
Still, Brahim’s unique niche position in this industry allows them to focus on the provision and supply of halal meals. A key “game changer” for the group is the emergence of Singapore-listed SATS Ltd as a new strategic shareholder. Brahim’s should be able to leverage and benefit from the “halal-hub” position Malaysia is pushing for and from other government initiatives, especially in the tourism segment. We expect the potential for cost-benefit efficiencies of Brahim’s to improve further moving forward with their new business model.
Brahim’s is currently trading at a price-to-book ratio of 1.1 times which is reasonable given that its regional and global peers trade in the 2-3 times range albeit with a much larger footprint in the in-flight catering business.
Earnings are expected to recover from losses this year and should help support a re-rating of Brahim’s as it heads towards a recovery in 2016. We believe it offers an excellent opportunity to enter the market at a very attractive level.
MICHAEL KURTZ
Global head of equity strategy & chief strategist,
Asia ex-Japan Nomura Securities
Stock pick: Malayan Banking Bhd
MAYBANK is one of Nomura’s Asia-Pacific ex-Japan’s top picks for 2016.
The bank is well positioned to ride out the competition for deposits among the local banks, in our view. With the largest network of 400 branches nationwide, it has the strongest current and savings account (Casa) and consumer deposit franchises. In spite of the tough competition for low-cost Casa deposits, Maybank has consistently been growing ahead of the industry growth rate over the last 10 years. Even so, given the higher term deposit cost, we expect net interest margins to fall by 8 basis points to 2.24% by FY17F, from 2.32% in FY14.
Compliance with Basel III requirements will lead to greater competition for retail deposits. We do not believe the bank is vulnerable to any particular systemic risk as it has a diversified portfolio and relatively strong risk management.
Maybank reported its 3Q results recently and there were no negative surprises. The underlying operating ratios were relatively stable and we believe the bank is in a strong position to withstand the current challenges.
Our price target of RM9.70 is based on an return on equity of 12%.
Global head of equity strategy & chief strategist,
Asia ex-Japan Nomura Securities
Stock pick: Malayan Banking Bhd
MAYBANK is one of Nomura’s Asia-Pacific ex-Japan’s top picks for 2016.
The bank is well positioned to ride out the competition for deposits among the local banks, in our view. With the largest network of 400 branches nationwide, it has the strongest current and savings account (Casa) and consumer deposit franchises. In spite of the tough competition for low-cost Casa deposits, Maybank has consistently been growing ahead of the industry growth rate over the last 10 years. Even so, given the higher term deposit cost, we expect net interest margins to fall by 8 basis points to 2.24% by FY17F, from 2.32% in FY14.
Compliance with Basel III requirements will lead to greater competition for retail deposits. We do not believe the bank is vulnerable to any particular systemic risk as it has a diversified portfolio and relatively strong risk management.
Maybank reported its 3Q results recently and there were no negative surprises. The underlying operating ratios were relatively stable and we believe the bank is in a strong position to withstand the current challenges.
Our price target of RM9.70 is based on an return on equity of 12%.
CEO of Fortress Capital Asset Management (M) Sdn Bhd
Stock pick: RHB Capital Bhd
Since the termination of its proposed merger with CIMB Bank Bhd, RHB Cap has embarked on an internal re-organisation programme.
In 2015, RHB Cap has completed its implementation of an employee mutual separation scheme that will generate cost savings of RM190mil per annum.
It has also completed a rights issue in December 2015 that raised RM2.3bil. This capital raising exercise effectively strengthens its core equity Tier-1 capital ratio to about 11%, meeting the BASEL III requirement.
RHB Cap will proceed with an internal restructuring to establish RHB Bank Bhd as the group’s listed holding company, assuming RHB Cap’s listing status. This will improve tax efficiencies and eliminate holding company inefficiencies.
Regional expansion is progressing healthily and we expect to see further growth from regional businesses compared to the current 14% contribution to top line.
Our primary premise for picking RHB Cap is its attractive valuation. Its current share price trades at a price-to-earnings ratio of 8.8 times and a price-to-book ratio of 0.72 times, which is lower than the level seen during the global credit crisis in 2008.
This valuation level should allow the stock to withstand any near term market challenges and offers investors an opportunistic base for price revaluation going forward.
NIGEL FOO
Senior analyst of CIMB Research
Stock pick: MyEG Services Bhd
OVER the next one to two years, foreign workers working permit renewal services are expected to be the MyEG Services Bhd’s main earnings contributor.
Currently, there are some 2.5 million legal foreign workers in the country, whereby MyEG makes about RM100 in revenue per foreign worker – RM35 for processing fees paid by the government and RM65 from commission selling compulsory foreign workers insurance.
MyEG is expected to register 1 million illegals in the financial year 2016 (FY16), which is a conservative figure given that there are an estimated 5 million illegal foreign workers in the country.
If the company could register 2 million illegal foreign workers, FY16 and FY17 earnings per share could be boosted by 18%-22%.
For the financial year ended June 30, 2015, MyEG posted revenue of RM141.52mil compared to the RM109.87mil the year before.
The improved revenue translated into a 35.8% increase in profit after tax to RM68.05mil from last year’s RM50.11mil.
Overall, potential catalysts for the stock include stronger than expected revenue from the foreign worker permit renewal services and undemanding stock valuations.
Senior analyst of CIMB Research
Stock pick: MyEG Services Bhd
OVER the next one to two years, foreign workers working permit renewal services are expected to be the MyEG Services Bhd’s main earnings contributor.
Currently, there are some 2.5 million legal foreign workers in the country, whereby MyEG makes about RM100 in revenue per foreign worker – RM35 for processing fees paid by the government and RM65 from commission selling compulsory foreign workers insurance.
MyEG is expected to register 1 million illegals in the financial year 2016 (FY16), which is a conservative figure given that there are an estimated 5 million illegal foreign workers in the country.
If the company could register 2 million illegal foreign workers, FY16 and FY17 earnings per share could be boosted by 18%-22%.
For the financial year ended June 30, 2015, MyEG posted revenue of RM141.52mil compared to the RM109.87mil the year before.
The improved revenue translated into a 35.8% increase in profit after tax to RM68.05mil from last year’s RM50.11mil.
Overall, potential catalysts for the stock include stronger than expected revenue from the foreign worker permit renewal services and undemanding stock valuations.
UOB KayHian Research
Stock pick: WCT Holdings Bhd
WITH RM2.8bil worth of jobs secured last year, WCT Holdings Bhd’s order book makes up 4.1 times of its 2014 construction income.
Besides the decade-high order book of RM5bil, margins for the outstanding jobs are also higher due to the slew of infrastructure contracts that could bring its pre-tax margins to between 5% and 8%.
The upcycle seen in the construction industry is among the few main reasons that WCT is one of UOB KayHian Research’s top picks. UOB KayHian sees earnings contribution from its bread and butter construction arm, which should come in as early as the first quarter.
There could be upside surprises if the company clinches more contracts going forward. It is tendering for construction jobs worth RM4.9bil.
Following the paring down of its stake in the 608 acres in Serendah to UEM Sunrise Bhd in December, there is the possibility of more asset monetisation in future.
WCT is in active discussions to unlock the value of its investment properties through a real estate investment trust structure, which could start with the Bukit Tinggi Shopping Centre and the Paradigm Mall in Kelana Jaya.
Both have a combined value of RM853mil and earnings before interest, taxes, depreciation and amortisation of RM70mil.
Another catalyst is the RM1bil cash settlement that it could recover from the arbitration case in Dubai for the next two to three years.
The Star - Fund manager's stock pick 2016
http://www.thestar.com.my/business/business-news/2016/01/02/fund-managers-stock-pick/?style=biz
