Alpha Picks: Slimmer Pickings
While only four of our alpha
picks outperformed the market in Mar 17, the picks collectively still
delivered a respectable simple average return of 4.6% for the month
(FBMKLCI: 2.7%). We shorten the line-up for Apr 17 as many of the picks
have outperformed. We retain Ann Joo, Ekovest, VS Industry and YTL
Power, while we add Kerjaya Prospek and RHB Bank (SELL).
WHAT’S NEW
Review of March picks. Our alpha picks delivered a respectable 4.6% simple average return in March, although only four stocks outperformed the FBMKLCI’s 2.7% mom return (see RHS table). The outperformers continue to come from mainly our promoted infra-related and E&E investment themes, with the exception of Axiata.
China FDI, infrastructure and E&E investment themes will continue to deliver positive momentum. In particular, we look forward to Chinese President Xi Jinping’s planned visit to Malaysia in 2Q17, which could raise interest in the China FDI theme. Implicit in our stock-picking strategy is our expectations for market returns to moderate, having risen 6.0% ytd, driven initially both domestic flows, and recently amplified by foreign investment inflows.
ACTION
Our alpha list for April. BUYs are Ann Joo, Ekovest, Kerjaya Prospek, VS Industry, YTL Power, while RHB Bank is a SELL.
New conviction picks. We add Kerjaya Prospek into our list. Kerjaya should clinch at least RM800m worth of new construction jobs in 2017, allowing valuations to catch up with its comparable peers. We also included RHB Bank as a conviction SELL, as NPL provisions have yet to peak. Meanwhile, we retain Ekovest in the alpha list, and its present deep 29% discount to our RNAV of RM2.02/share should allow valuation to stretch as the China FDI theme fully unfolds.
Out of the list are outperformers Axiata (14.2%) and Inari (7.8%). Also off the list are stocks which have less compelling near-term investment theses – BIMB (no near-term catalyst anticipated post the 4Q16 results season), Top Glove (earnings momentum priced in), and Yinson (some contract termination risks counter-balance potential of securing a new sizeable FPSO contract).
Ann Joo Resources (Abdul Hadi)
Following its return to profitability in 2016, Ann Joo is set to see another year of earnings recovery in 2017 with steel prices on a rising trend, coupled with favourable raw material prices. We reckon Ann Joo's share price will continue to trend up ahead of its 1Q17 results as steel prices and sales volume rise qoq, and raw material costs peak.
Share Price Catalyst
Improved steel ASP on the back of rising local demand from infra projects.
Industry consolidation in China will curtail cheap steel imports.
Prudent capital management with dividend policy of 60%; subject to capital requirement.
Ekovest (Ridhwan Effendy)
All-time high construction orderbook of RM13b would sustain its earnings delivery for the
next 5-6 years. Also, the potential IPO of DUKE 1 & 2 (which could be as soon as 2018) could re-rate the stock, given the significant value (RM1.9b) vs to its market cap of RM3.1b.
Share Price Catalyst
Planned visit by China President Xi Jinping should elevate interest in China FDI beneficiaries.
Signing of the concession agreement for DUKE2A, its third highway concession.
Further contract wins.
Following its return to profitability in 2016, Ann Joo is set to see another year of earnings recovery in 2017 with steel prices on a rising trend, coupled with favourable raw material prices. We reckon Ann Joo's share price will continue to trend up ahead of its 1Q17 results as steel prices and sales volume rise qoq, and raw material costs peak.
Share Price Catalyst
Improved steel ASP on the back of rising local demand from infra projects.
Industry consolidation in China will curtail cheap steel imports.
Prudent capital management with dividend policy of 60%; subject to capital requirement.
Ekovest (Ridhwan Effendy)
All-time high construction orderbook of RM13b would sustain its earnings delivery for the
next 5-6 years. Also, the potential IPO of DUKE 1 & 2 (which could be as soon as 2018) could re-rate the stock, given the significant value (RM1.9b) vs to its market cap of RM3.1b.
Share Price Catalyst
Planned visit by China President Xi Jinping should elevate interest in China FDI beneficiaries.
Signing of the concession agreement for DUKE2A, its third highway concession.
Further contract wins.
Kerjaya Prospek (Ridhwan Effendy)
Kerjaya expects to clinch at least about RM800m worth of new construction jobs in 2017, which we think is easily achievable given its historical orderbook win track record. Presently, its tenderbook stands at RM1.4b, which comprise of mainly high-rise residential buildings and commercial property jobs.
Share Price Catalyst New contract wins, expected from end-2Q17 onwards.
Valuation laggard to comparable peers like Suncon.
Kerjaya expects to clinch at least about RM800m worth of new construction jobs in 2017, which we think is easily achievable given its historical orderbook win track record. Presently, its tenderbook stands at RM1.4b, which comprise of mainly high-rise residential buildings and commercial property jobs.
Share Price Catalyst New contract wins, expected from end-2Q17 onwards.
Valuation laggard to comparable peers like Suncon.
RHB Bank (Keith Wee)
The group has the lowest loans-loss coverage ratio inclusive of regulatory reserve in the industry at 75% (industry: 129%). This coupled with: a) relatively low loans-loss coverage ratio of 30% for its O&G gross impaired loans portfolio, and b) RM2.6b in O&G loans under the watch list category (46% of total O&G loans portfolio) does place a significant upside risk to management’s rather benign net credit cost guidance of 25-30bp for FY17.
As such, we see significant downside risk to management’s targeted ROE of 9% to 10% and in turn consensus earnings.
Share Price Catalyst
Significant upside risk to management’s guided net credit cost of 25-30bp for FY17. Note
that Maybank and CIMB, with similar O&G exposure and higher provision coverage ratios, are guiding for net credit cost of 50-60bp and 60-70bp respectively.
O&G provisions and impairment may have yet to bottom out
Asset quality woes will place pressure on overall loans growth.
The group has the lowest loans-loss coverage ratio inclusive of regulatory reserve in the industry at 75% (industry: 129%). This coupled with: a) relatively low loans-loss coverage ratio of 30% for its O&G gross impaired loans portfolio, and b) RM2.6b in O&G loans under the watch list category (46% of total O&G loans portfolio) does place a significant upside risk to management’s rather benign net credit cost guidance of 25-30bp for FY17.
As such, we see significant downside risk to management’s targeted ROE of 9% to 10% and in turn consensus earnings.
Share Price Catalyst
Significant upside risk to management’s guided net credit cost of 25-30bp for FY17. Note
that Maybank and CIMB, with similar O&G exposure and higher provision coverage ratios, are guiding for net credit cost of 50-60bp and 60-70bp respectively.
O&G provisions and impairment may have yet to bottom out
Asset quality woes will place pressure on overall loans growth.
VS Industry (Fong Kah Yan)
In addition to the three assembly lines for the vacuum cleaner box-built contract which are slated to commence in FY17, we expect VS Industry to secure more contracts from their key customers in FY18 on increasing demand for existing products as well as new product launches notably in the beauty care segment.
Share Price Catalyst
Securing new contracts from existing or new customers.
Sharp appreciation of US dollar against the ringgit.
YTL Power (Chong Lee Len)
YTLP provides a 6.5% sustainable dividend yield anchored by defensive cash flow from Wessex Water. Key re-rating catalysts include new power plant projects between 2020-2021, which are: a) 554MW Jordanian power plant, and b) 80% equity stake in 1,320MW coal-fired Indonesian power plant.
Share Price Catalyst
Positive newsflow on: a) Jordanian power plant construction, and b) financial close achieved at PT Jati.
source: UOBKayHian – 03/04/2017
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