2QCY20 Investment Strategy

Market Strategy

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2QCY20 Investment Strategy FBMKLCI 1,328.88

Bottom Fishing Target 1,463.00 ↓ By Koh Huat Soon / [email protected]

Besides having to endure the effects of Covid-19 like everyone else, Malaysian equities also bore the brunt of the collapse in oil price during a brutal 1QCY20 sell-off and uncertainties that come with a changed political landscape. We had previously been expecting corporate earnings to turn around in 2020, leading to a positive re-rating of the stock market valuation. But that is now impossible. Still, the point must be made that this overwhelming pessimism and fear may have been largely priced into the sharp sell-off in just about everywhere. Under these circumstances, we find 1,220 to be a solid fundamental support based on a market price-to-book ratio of 1.2x – a level last seen during the 2008 GFC. When the market recovers, the upside to this battered market on a 6 - 12 months investment time horizon is 1,463, applying a 2 standard deviations below-mean multiple on reduced EPS expectations. While the market risk premium remains elevated, stick with the defensive yielders to anchor portfolios but for alphas, remember to overweight tech as supply chain recovery plays and selected consumer plays for eventual earnings recovery. Our top picks for 2QCY20 are D&O (OP; TP: RM0.90), F&N (OP, TP: RM35.20), HARTA (OP; TP: RM8.00), KESM (OP; TP: RM10.20), MEDIAC (OP, TP: RM0.245), MPI (OP; TP: RM13.30), PADINI (OP, TP: RM2.40), PWROOT (OP; TP: RM2.65), QL (OP; TP: RM8.30) and TM (OP, TP: RM4.30).

FBMKLCI’s 2020 and 2021 EPS lowered: The recent oil price collapse and a relook at the Covid-19 impacted sectors led us to cut EPS for 2020 from 102.4 sen a quarter ago to 87.2 sen. This cuts the FY20 EPS growth estimated previously at +7.5% to -8.4%. Sectors for which EPS were downgraded most were tourism related – GENT, GENM and MAHB were cut 27%, 29% and 28%, respectively. So too were Banks (sector earnings reduced 13% from a quarter ago) and those in the oil & gas sector. The FBMKLCI EPS estimate for FY21 now stands at 98.2 sen - reduced from 107.5 sen a quarter ago - which represents 12.6% recovery over FY20, off a much lower base.

Chart 1

source: Kenanga

For the FBMKLCI in 2020, we see banks, utilities, oil & gas and gaming sectors’ earnings decline. Offsetting these are growth in plantation’s earnings on better CPO price, rubber gloves on near-term Covid-19 led demand upside and telecommunications on defensive organic demand growth. However, building materials component Press Metal’s earnings should likely come in negative-to-flat despite new capacity coming on stream end-3Q20 on weaker ASP. And there are risks to the downside for the automotive sector despite low interest rates given disruptions to employment and wage growth due to economic weakness.

mailto:[email protected]

2Q20 Investment Strategy Market Strategy

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Chart 2

source: Kenanga

Overweight Construction, Media, Property, Rubber Gloves, Telco, Technology/Semicon.

Neutral Automotive, Aviation, Banks, Consumer, Gaming, MREITs, Non-Bank Financials, Oil & Gas, Plantation, Plastic Packaging, Ports & Logistics, Utilities.

Underweight Building Materials, Healthcare

Lowered expectations: In our last quarter’s 1QCY20 Investment Strategy note: “Ratcheting Up Returns in 2020”, we said that Malaysian equities was set for a better year in 2020 with the resumption of earnings growth after a 2-year hiatus. However, events that have taken a negative turn since end January – firstly, Covid-19; secondly, uncertainties due to an abrupt change in government and thirdly, oil price collapse – have forced us to relook at our previous base case with many earlier earnings forecasts and price assumptions revised down sharply. Among the sectors we cover, the sharpest downgrades in FY20 core earnings were in the banks, gaming, oil & gas and transport & logistic sectors. As a result, our year-end target level for the FBMKLCI is reduced from 1,532 points (previously revised on 10

th March)

to 1,463. This is arrived at by applying a PE multiple of 14.9x (two standard deviations below 5-year mean) to FY21E EPS of 98.2 sen. A bottom-up approach (using analysts’ individual target prices for each of the 30 component stocks) places the target at 1,479. How low can the KLCI go? The current downturn has taken the FBMKLCI to a low of 1,219 so far this year, which reflects a Price-to-Book ratio of 1.21x (see Chart 3 below), matching the low reached during the GFC in 2008. An even lower low was charted during the Asian Financial crisis in 1998 when the FBMKLCI fell to the lowest PB ratio of 0.64x (also on Chart 3). This ratio corresponds to 645 points on the FBMKLCI which happens to be the 76.4% Fibonacci retracement (a key-support) level using data ranging from 1995 – 2020. This level will probably be reached in the event this pandemic prolongs, leading to a collapse of the financial system that requires a bail-out. This however, is not our base case. On PB value terms therefore, we believe 1,220 to be a secure fundamentally justifiable level for long-term investors. Technically, worsening sentiment may take the index down to 1,090, being the 76.4% Fibonacci retracement support level (using data since the 2008 GFC lows, see Chart 5). Fundamentally, we now base our market fair value at 2SD below mean PE multiple (versus at mean previously): A review of 2019 reveals that the Malaysian stock market had continued to underperform our Asean peers. For years, it has been an under-owned market by foreign fund managers for a number of reasons - inferior earnings growth, weak commodity prices on which it is dependent, diminishing weight in major international benchmarks and uncertainties around political transitions. The grounds for us applying mean multiple to arrive at market fair value previously was on the notion that a discount will no longer apply when earnings turn around and funds would start increasing positions. As such a scenario is no longer the case and given the increased risk of operating in a recessionary environment, we restore the discount to mean valuations for this market. Instead of the mean valuation of 15.9x (on 12-month forward EPS) applied previously, we are applying two standard deviations below mean multiple of 14.9x to a reduced FY20-21E EPS to arrive at our target KLCI levels.


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Chart 3: At 1,220, the FBMKLCI PB ratio matches the 2008 GFC low

source: Bloomberg

Chart 4: So too has FBMKLCI’s ROE – it has fallen, matching 2008 GFC level

source: Bloomberg

Chart 5: 1,220 is also on a technical support line

source: Bloomberg


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Some glimpses of hope; gradually position for Covid-19 recovery. While the devastation that Covid-19 has inflicted on the stock market had been deep, the recovery could be as swift when the crisis subsides. The South China Morning Post reported on 10

th March that economic activity in China – the source of Covid-19 – is gradually returning

to normal with freight shipping rates for dry bulk and crude oil showing early signs of recovery as factories resume production. Coal consumption by major IPPs have risen and the congestion delay index (CDI) (a measure of road traffic data) has increased sharply for the four major tier-1 cities – Shanghai, Shenzen, Beijing and Guangzhou. However, even as China recovers, it is important to monitor if other countries - especially the key western economies now facing the lagged impact- will follow a similar recovery path. Hopefully they will, and chances are that this will be the case since almost all have adopted some form of lock-down measures albeit at different points of the infection stages. As in the case of SARS, markets should pick up once it can be established that the number of new infections worldwide – now dominated by Europe and the US - have peaked. But in terms of when the new cases will peak, we estimate, from the China and South Korean earlier experiences, that peaking may occur in the West by end-April. And provided there are no incidences of another wave, it is likely that a post-Covid-19 market recovery could take place as early as May. However, doubts about a lasting recovery will likely remain out of fear of a relapse from a second or subsequent wave. For this reason and until it can be established that chances of recurrence have diminished, a sound risk-adjusted return strategy is for one to adopt exposures to both defensives (yielders) and beaten down alpha plays rather than an outright beta-play. Chart 6: China Chart 7: South Korea

Chart 8: Italy Chat 9: Malaysia


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Chart 10: United States Chart 11: World

Source: Worldometer

US appears to be the key to determining when markets can finally recover for good as it is the world’s major economic laggard in the Covid-19 pandemic life-cycle and its development pattern is what is shaping the current build-up of new cases globally. Overweight the non-discretionary consumer names and dividend yielders for defensiveness and technology for alpha and growth. Despite BNM cutting OPR swiftly by 50 bps in one quarter to 2.50%, Malaysia’s 10-year MGS yield has risen 70 bps to 3.58% from its quarter low of 2.84% reflecting flight of foreign money from MGS on badly affected sentiment on Emerging Market sovereigns. The MYR suffered too, weakening 7% YTD against the USD. In a low interest rate environment and heightened earnings risk, we recommend riding out this challenging year by taking a higher-than-usual exposure to non-discretionary consumer names and yielders, Here, high ROE consumer plays whose share prices have recently been hit badly by concerns over the impact of Covid-19 on sales are potential candidates (see Chart 12, many consumer names with above market ROEs). For post-Covid-19 earnings recovery, we recommend exposures to the tech sector as growth resumes when the supply chain disruption ends and demand returns. Being export driven, this sector benefits from the weak MYR and is also free of risks related to domestic politics and policy uncertainties.

Source: Bloomberg; Annual Reports, Kenanga


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1. Shelter in the Defensives

1.1 Consumer/Retail Plays

The economic mess inflicted by Covid-19 has spurred governments all over the world to implement stimulus policies to prevent their respective economies from collapsing. Malaysia is no different as the government implemented two stimulus packages and Bank Negara acted too, with countercyclical measures to reduce risks to the banking system. The stimulus packages amounted to RM250b or 17% of GDP. In a nutshell, the underlying aim of the stimulus is to protect jobs and assist via cash handouts and temporary access to retirement savings so that the daily sustenance of the common people is met. While to some the handouts are additional incomes and to others, merely one-off replacements for incomes lost, in an environment as unsecure as this, receivers may choose to save what is given. But at least, with the cash handouts, the consumption of essential daily needs can continue with minimal disruptions. And with many fundamentally sound consumer names having been indiscriminately sold off so sharply recently, it is now an opportunity to pick up some names, top of our list are: F&N (OP; TP: RM35.20), PADINI (OP; TP:RM2.40), PWROOT (OP; TP:RM2.65), QL (OP; TP:RM8.30). These defensive businesses share a few common positive characteristics. First, they exhibit consistently above-market ROEs; second, they deal in goods which are price inelastic as they are basic necessities; and thirdly, they carry low-to-moderate correlation coefficients (many are less than 0.3) which make them excellent portfolio diversifiers and necessary to have during periods of heightened volatility. (see Chart 13)

1.2 Dividend Plays Between the top consumer picks mentioned, two names also stand out as dividend plays, these being PWROOT and PADINI, both of which offer yields of between 5 – 6%. Here we offer two more names in the media and telco space: MEDIAC (OP; TP: RM0.245) and TM (OP; TP: RM). In the case of MEDIAC, besides dividend yield of 9%, it is recommended as a tactical, situational buy for post-Covid-19 recovery. The past sell-down has largely been over the concern that: (i) its traditional media platform revenue continues to face structural decline – nothing new; (ii) specific to Covid-19, its tourism division will be less profitable in the near term, and (iii) its Hong Kong segment has been hit by street riots of 2019 – but the end of it should see a return to profitability when pandemic fears finally subsides. With the negatives out of the way, what is working well for MEDIAC and not appreciated by investors are (i) timely restructurings involving cost cuts and manpower reorganisation have been implemented; (ii) strategies adopted to grow presence in digital space and offering clients integrated marketing solutions and (iii) the benefit of recent tax incentives would ensure dividend yield of 9%. At the current price of RM0.165, it trades at just 0.4x P/NTA or 1SD below the past 3-year mean, We assign a target price of RM0.245 which is 0.6x FY21 NTA or -0.5SD below mean. Projecting 18% EPS decline in FY21, even with a lower pay-out of 60% versus 70% historically, it can yield 7.3% in FY21 vs. 8.8% in FY20. It must be pointed out that it has RM290m cash on an ungeared balance sheet that translates to 16.0 sen per share versus its current share price of 16.5 sen. In the case of TM, besides offering dividend yield of 3% - 4%, it is a play with it being well positioned to take advantage of the deployment of the 5G network as it owns the widest fibre optic network which other incumbent celcos could feed into but even if it fails on becoming the 5G infrastructure provider, it could continue to focus on its core broadband and fixed line business and reap the fruits of cost-savings effort achieved thus far. Although top-line and net profit are expected to remain flat in the next two years, its operating cashflow is sufficiently robust to cover yearly capex requirements to ensure sustainably strong free cashflows. And, given that it is a GLC and the pressing need by the government to fund a bigger budget post two large stimulus packages, chances are TM’’s dividend payout ratios are expected to maintain at the least if not raised. TM’s free cashflow in FY19 was RM2b, for FY20 we project RM700m and RM1.6b for FY21, averaging RM1.1b annually. Assuming it pays out RM900m after accounting for debt commitments, that would translate into 6% yield on the current price – twice the yield we currently project for FY20.

2. Look for Earnings Growth in Technology

The impact of supply chain disruption due to Covid-19 presents an opportunity to buy this sector on weakness. The recent feed-back from tech companies we follow have been that orders have not been cancelled but back-loaded. The positive long-term outlook for the sector is intact, driven by the development of 5G connectivity, greater electronic content in automotive and the benefits of trade diversion for OSATS and EMS players in the region. And, specific to those in the disk drive industry, the proliferation of cloud computing continues to expand the demand for enterprise memory storage devices. Many of Malaysian listed electronic players are financially secure with solid balance sheets that offer long-term earnings growth. For domestic fund managers, this sector is also a play on a weak MYR.


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Increasing RF content in 5G smartphones: The upcoming flagship smartphone in Sept 2020 may bring about more buying interest but even if this does not lead to a huge increase in unit sales, the increase in semiconductor content in smartphones will benefit local OSAT players involved in radio frequency (RF) chips. The absence of Google Mobile Services (GMS) in Huawei devices may move less tech savvy customers towards Apple or Samsung. This is positive for our domestic semiconductor players – MPI, Inari and Unisem - whose businesses are more geared towards the US and Korean smartphone supply chains. Our top pick here is MPI. Recovery seen in European automotive market: We have seen signs of recovery in the automotive markets of Europe and China, albeit temporarily in our view. In Europe, passenger car registrations have seen four consecutive months of YoY gains (to December). With car manufacturers already accustomed to the new test procedure (Worldwide Light Vehicle Test Procedure) that was implemented in Sept 2018, we had expected to see continued recovery from a low base of 1HCY19 until the impact of Covid-19 sets in. On our base case assumption that the worst will be over by 3QCY20, we are seeing a late instead of an early 2020 recovery as previously expected. And because of heightened emission standards in Europe and higher penalties levied on emissions that exceed the targeted 95g/km, there is an urgency there to increase the production of EVs. Meanwhile in China, although car registrations are still declining, the rate has eased recently. And, the fact that China is aiming for electric vehicle (EV) sales to make up one-fifth of the auto market has enormous positive implications for our local players who have supply chains in both geographies namely D&O, KESM and MPI.

Stock Current Price

Target Price

MPI 9.10 13.30 Beneficiary of trade diversion as its expanding plant in Suzhou is benefitting from Huawei aggressively loading local vendors with more orders to mitigate supply chain disruptions. Already running at full capacity prior to the Covid-19 outbreak, it’s just completed “Phase 1” expansion is expected to increase Suzhou’s contribution to group revenue from 30% to 50%. Robust balance sheet with net cash of RM760m, there is no issue in funding Suzhou “Phase 2”.

KESM 5.86 10.20 Specialises in burn-in testing service for automotive semiconductor components where >90% of sales is geared towards auto demand. Prospects are bright as electric vehicles gain market share in Europe and China owing to emission standards requirements and even on traditional autos, there is a structural trend of rising semiconductor content.

D&O 0.50 0.91 Like KESM, its profitability is highly dependent on auto demand. It recorded the highest ever quarterly earnings in 4QFY19 and based on orders (barring temporary supply chain disruptions) this strong demand is expected to spill into 2020 (more likely in the 2H). Being one of the pioneers in smart RGB (which yields higher ASP), this positions it well to capture the increasing use by car makers globally.


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Appendix 2QCY20 Top 10 Stock Picks (Closing as at 20 March 2020)

Stocks

Last Price

(RM)

FY20/21 Core NP Growth

FY21/22 Core NP Growth

FY20/21 Core PER

FY21/22 Core PER

FY20/21 Net Div Yield

FY20/21 ROE

Target (RM)

Upside Rating

D&O 0.500 29.2% 16.6% 12.4 10.6 2.0% 11.5% 0.900 80.0% OP

F&N 30.00 2.5% 6.0% 25.6 24.1 2.2% 16.4% 35.20 31.2% OP

HARTA 6.62 6.5% 11.9% 45.0 40.2 1.1% 20.3% 8.00 22.4% OP

KESM 5.86 236.5% 17.0% 11.9 10.2 1.5% 5.8% 10.20 74.1% OP

MEDIAC 0.165 54.2% -10.4% 6.6 7.3 9.1% 6.0% 0.245 15.2% OP

MPI 9.10 2.0% 29.0% 12.5 9.7 3.0% 10.5% 13.30 33.7% OP

PADINI 2.06 3.2% 5.6% 8.4 7.9 5.6% 20.6% 2.40 16.5% OP

PWROOT 1.77 48.9% 8.8% 14.0 12.9 5.1% 21.8% 2.65 49.7% OP

QL 7.00 13.1% 9.6% 46.4 42.3 0.8% 12.1% 8.30 27.8% OP

TM 3.52 4.1% 1.1% 12.8 12.6 3.1% 15.2% 4.30 35.7% OP

Figure 1: Overweight Sectors

Sector Sector Call Changes

Brief Comments Stock Calls/Ratings

Banks and Non-Bank Financial Institutions

Maintain Despite prevailing uncertainties, we reiterate our OVERWEIGHT stance for the sector given its weightage in

the FBMKLCI. The sharp depreciation of banking stocks in our universe has led to sharp undemanding valuations.

Looking ahead into 2020, as the economy slides on the growing pandemic and global downturn, loans growth will be challenging and at the same time exert downside pressure on asset quality. We believe the recent measures announced by BNM will mitigate pressure on asset quality especially on individual banks’ credit assessment; hence, most likely that credit costs reporting will not be as severe as in previous economic downturn i.e. 2008-09 Financial Crisis. The implementation on Basel III standards beforehand and the high Household debt has prompted the banks to be very selective in their portfolio exposure, mitigating potential uptick in asset quality deterioration. Furthermore, the recent measures (6-month moratorium, Restructure & Rescheduled) will support the mitigation in asset quality deterioration.

Loans growth will be challenging ahead not only attributed to the sliding economy but we believe the banks will also be cautious on lending ahead, mindful of risks emanating from a global recession. The recent liberalisation of lending requirement applies only to the broad property sector (heavily collaterised) and purchase of shares; thus, we believe banks will be still be risk averse in lending especially to those who are still deemed high risk especially during this challenging period

Given the expected downturn, we have slashed our FY20E industry earnings by 11% with industry loans expected to moderate to 3% (from 5% previously). We have also raise our credit charge assumptions by 12bps to 0.43% with industry NIM expected to slide to 2.07% (from 2.15% previously. We applied a lower PBV (-1SD to -2.5SD below mean) to reflect the slide in ROEs due to

OP

AFFIN (TP: RM1.60)

ABMB (TP: RM2.20)

AMBANK (TP: RM3.80)

BIMB (TP: RM4.80)

BURSA (TP: RM6.50)

CIMB (TP: RM4.90)

LPI (TP: RM15.90)

MBSB (TP: RM0.90)

MAYBANK (RM8.50)

PBBANK (TP: RM18.55)

RHBBANK (TP: RM5.20)

TAKAFUL (TP: RM6.05)

UP

AEONCR (TP: RM12.80 –

Under Review)


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our new assumptions.

All the stocks’ valuations in our banking universe are undemanding; hence rated at OUTPERFORM. We believe the stocks’ prices have almost bottomed out based on our Fair Valuation at the most extreme scenario. Our Top Pick for the sector is MAYBANK and PBBANK. Both have strong buffers with CET1 ratios likely to remain resilient at 10.9% and 10.5% (well above the other banking stocks in our universe), respectively, in the event of the most extreme loss scenario.

Construction Upgrade We are upgrading our sector call from NEUTRAL to a tactical OVERWEIGHT on valuation grounds.

To be sure, sentiment on construction stocks will remain downcast from the Covid-19 spill-over effects and possible delays in the revival of mega infrastructure projects.

On the other hand, the KLCON Index is currently trading at -2SD below its mean, versus -2SD and -1SD during the 2008/09 global financial crisis. This suggests limited downside risks ahead.

We are changing our valuation methodology from PER to PBV in view of the low earnings visibility and battered market confidence.

After attaching basement PBV multiples at -2.5SD and -1.0SD below their mean levels, our revised target prices indicate positive returns to be made by investors in the medium term as valuations are expected to revert to normalcy post-crisis.

Our top fundamental picks are GAMUDA (TP: RM3.18), SUNCON (TP: RM1.80) and HSL (TP: RM1.37).

OP

GAMUDA (TP: RM3.18)

SUNCON (TP: RM1.80)

HSL (TP: RM1.37)

IJM (TP: RM1.85)

KERJAYA (TP: RM1.10)

KIMLUN (TP: RM1.25)

MUHIBAH (TP: RM1.41)

WCT (TP: RM0.47)

MP

GKENT (TP: RM0.51)

UP

MITRA (TP: RM0.08)

Gaming Upgrade One of the biggest casualties of COVID-19-driven market meltdown. Shares for the sector were thumped

ranging between 17%-41% YTD, to hit 52-week lows, closer to -2SD PBV 5-year mean for NFO players and -3SD PBV 5-year mean for casino operators.

Casino impacted the most. Cut FY20E earnings by 8%

each for BJTOTO and MAGNUM; 13% for GENTING and 39% for GENM on MCO restriction. We see less impact to NFO ticket sales except for the MCO period, as opposed to casino business due to travelling restriction.

Switch to PBV. Earning forecast is dicey but PBV is the

most suitable valuation method over earnings-driven DCF and SoP valuations. We place -1SD PBV mean as target price level for NFO operators while -2SD PBV average for casino as the latter faces higher earnings risk. Ideal buying zone is -2SD for NFO and -3SD for casino players.

Upgrade to OW. Sell-down is too aggressive, overshooting

fundamentals and the view is COVID-19 is not forever. GENTING is the preferred pick for its deep valuation. NFO players offer sustainable yields of >6%.

OP

GENM (TP: RM2.50)

GENTING (TP: RM4.90)

MAGNUM (TP: RM1.95)

MP

BJTOTO (TP: RM2.25)

Media Maintain Maintain our OVERWEIGHT call for the sector.

The sector’s challenging market environment mainly stemmed from higher adoption of digital platforms which is undermining the relevance of traditional media channels (i.e. prints, television).

While the above could have accelerated the already poor market appetite for the sector, we believe stocks sell-down to current levels could be excessive.

OP

ASTRO (TP: RM0.900)

MEDIA (TP: RM0.145)

MEDIAC (TP: RM0.245) – Top Pick

STAR (TP: RM0.310)


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Cost savings efforts and operating efficiency gains could have been underpriced. Additionally, more initiatives are being put in place to enlarge the advertisers’ stake in the digital space.

Our Top Pick is MEDIAC. Though facing headwinds in its

print & publishing as well as tourism segments, the group looks to be able to secure profit growth albeit through tax incentives. High dividend yield prospects at c.9% could also attract yield-hungry investors. The group also possess solid net cash per share of c.16.0 sen, though we believe the reserve is needed to fund the group’s digital thrust.

Property Maintain We are retaining our tactical OVERWEIGHT sector call on valuation grounds.

The property sector is expected to be hit hard by the deteriorating economic conditions and evaporating consumer confidence.

In the midst of this perfect storm, property developers will find it challenging to clear their inventory of completed stocks and achieve forward sales targets.

Nonetheless, after the recent intense sell-off, the KLPRP Index has overshot to trade at the distressed level of -2.5SD below its PBV mean currently, versus the –1.5SD and –1SD below mean levels during the 2008/09 global financial crisis. This suggests a relief rebound is probable.

Applying basement PBV multiples at –2.5SD to –1SD below their mean levels to factor in the challenging outlook, our revised target prices suggest potential upsides while valuations are poised to revert to normalcy post crisis, as was the case in the past.

Our top fundamental picks are SIMEPROP (TP: RM0.88) and IOIPG (TP: RM1.21).

OP

ECOWLD (TP: RM0.41)

IOIPG (TP: RM1.21)

MAHSING (TP: RM0.45)

MRCB (TP: RM0.43)

SIMEPROP (TP: RM0.88)

SPSETIA (TP: RM0.86)

UEMS (TP: RM0.58)

UOAD (TP: RM1.79)

MP

AMVERTON (TP: RM1.20)

LBS (TP: RM0.33)

SUNWAY (TP: RM1.45)

UP

MAGNA (TP: RM0.55)

Rubber Gloves Maintain Maintain OVERWEIGHT. Rubber glove stocks under our

coverage have performed well following our upgrade eight months ago. Despite easing off from recent peaks, they remain strong outperformers YTD, led by TOPGLOV (+31%), HARTA (+26%), KOSSAN (+18%) and SUCB (+14%). The stage is now set for a solid FY20 following three quarters of anaemic quarterly earnings growth.

PER valuation potentially hitting +2.0SD in tandem with peak earnings in coming quarters. Coming off this low base due to the lacklustre demand of the past 12 months, forward earnings growth will be amplified on re-stocking activities ramp-up due to the current outbreak of the Wuhan virus which enforces higher hygiene standards.

Potentially higher ASPs in anticipation of a surge in demand and moderating supply growth in the past 12 months. Signs of demand outstripping supply could potentially lead to higher ASPs. We understand that some players have raised prices in anticipation of higher demand and we also noted the current high >90% utilisation rate for nitrile-centric players which is a stark contrast compared to the lacklustre demand in 2019.

Weakening of Ringgit (RM) vs. US dollar (USD) is positive to rubber glove players since sales are USD-denominated. YTD, the USD had risen by 8% against the MYR (USD1 = RM4.42). Ceteris paribus, a 1% weakening of RM against USD will lead to an average 1-2% increase in the net profit of rubber glove players

Our Top pick is HARTA

OP

HARTA (TP: RM8.00) –

Top Pick

KOSSAN (TP: RM5.90)

SUPERMX (TP: RM2.00)

MP

TOPGLOV (TP: RM6.50)


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Technology Maintain Pockets of opportunities have emerged after stocks took a beating in the wake of the novel coronavirus outbreak. While there is valid concern for disruption in both chip production and demand in China and neighbouring countries, we believe the general trend for the technology sector is still pointing towards positive growth, albeit temporarily disrupted.

From recent analysts’ briefings with tech companies, we are getting a general sense that orders are not being cancelled but back-loaded. This could translate in to a late recovery in 2020, as seen in 2019. Hence, we believe that 1QCY20 earnings performance which is likely to be soft could provide the opportunity to re-position for a recovery in 2HCY20.

We like automotive-centric players as they offer more room for growth compared to smartphones. Our top picks are MPI, KESM and D&O.

OP

D&O (TP: RM0.900) – Top

Pick

KESM (TP: RM10.20) –

Top Pick

MPI (TP: RM13.30) – Top

Pick

SKPRES (TP: RM1.56)

MP

PIE (TP: RM1.40)

UP

UNISEM (TP: RM2.00)

Telecommuni-cations

Upgrade We upgrade our sector to OVERWEIGHT.

With the on-going slump in the stock market, investors are seeking resilient names and potential value buys to ride through the uncertainty. We stand by the notion that telcos are favoured picks during an economic downturns as:

(i) the nature of services that are fundamental societal needs (be it fixed line or mobile) and deemed to be immune to economic slowdown, and

(ii) being in a matured industry, disruption in capex plans would not be detrimental to overall performance.

Furthermore, we do not anticipate significant swings to our estimated corporate earnings during the year, regardless of it meeting the earlier intended 3QFY20 5G commercialisation timeline.

During the MCO period, all telcos offering complimentary 1GB to all existing subscribers, but is expected to have little impact to earnings due to the length and scale of the exercise.

Our Top Pick for the sector is TM. Strategically, we

believe TM is in a favourable position centred around the deployment of 5G. TM will likely see a spike in investor sentiment if: (i) it successfully participate in the deployment

of 5G network infrastructure, having the widest fibre network which it would administer with the incumbent celcos and in turn to boost its own mobile initiatives but (ii)

should TM fail with its bid and focuses on its core broadband and fixed line business, it could continue to reap its cost savings efforts and pushing its endeavour to fulfil NFCP agendas.

OP

AXIATA (TP : RM4.70)

DIGI (TP: RM4.65)

OCK (TP: RM0.630)

TM (TP: RM4.30) – Top

Pick

MP

MAXIS (TP: RM5.10)

Source: Kenanga Research


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Figure 2: Underweight Sectors



Building Materials

Maintain Reiterate UW on the sector in view of: (i) weaker ASP, (ii)

softer demand, (iii) depressed margin as competition intensified, and (iv) COVID-19-led slowdown of economic growth, sluggish business confidence and the collapse of oil prices. This is especially so for ANNJOO, ULICORP and WTHORSE.

PMETAL still has value, after a 30% decline YTD in share

price. The sell-down which pushed the stock to -2SD PBV mean, is excessive and has overshot fundamentals against 12% decline in aluminium prices. Also, business operations are not restricted by MCO due to its “essential services” status.

Upgrade ANNJOO to OP after intense sell-off to oversold

position, suggesting a relief rebound is probable. PMETAL keeps as OP with a lower TP of RM3.75, based on -1SD PBV 3-year mean, for its attractive valuation. Maintain UP on ULICORP on challenging prospects while WTHORSE is cut to UP as it is unlikely to turn around in the near term given the lacklustre construction and property outlook.

OP

ANNJOO (TP: RM0.580

PMETAL (TP: RM3.75)

UP

WTHORSE (TP: RM0.750)

ULICORP (TP: RM0.250)

Healthcare Maintain We maintain our UNDERWEIGHT rating on the sector

which is expected to be dull in terms of earnings growth and further capped by expensive valuations. However, we believe the healthcare industry will continue to enjoy stable growth, supported by the growing healthcare expenditure, rising medical insurance and an ageing population demographic. The latest 4QCY19 results season saw a mixed bag of results. IHH and Pharmaniaga’s earnings came in line with expectations. KPJ stole the show with the help of investment tax allowance. However, IHH’s FY19 earnings were impacted by lacklustre performance from Acibadem and wider losses in its India operation. Despite in-line results, Pharmaniaga reported earnings were hit by amortisation of the PHIS system under the concession agreement. On picks, we like KPJ as (i) start-up costs from its new openings will be absorbed by incremental ramp-ups from earlier openings and steady contributions from matured hospitals and (ii) the stock is currently trading at 20% and 40% discounts compared to historical average of 25.5x and regional peers of 35x, respectively.

OP:

KPJ (TP: RM1.20)

UP:

IHH (TP: RM4.70)

PHARMA (TP: RM0.90)



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Figure 3: Neutral Sectors



Automotive Maintain We maintain NEUTRAL on the sector but we cut our 2020 sales target to 560,000 units (-6.7%) from 612,000 units on cautious consumer spending in 1HCY20 on high-

value discretionary spending such as vehicles, imported goods and overseas travels.

We believe that the quantum of TIV decline will not be as severe as the 1997-98 Asian financial crisis (-60%), but below the 2007-08 sub-prime crisis (+13%) based on the current state of the Malaysian economy.

As all the companies under our coverage are already experiencing sharp fall in their share prices, we believe the downside is limited; thus, we maintain our calls for most of the stocks but revising TPs to reflect the lowest valuation possible, and expect a better 2HCY20 on recovering consumer sentiment and stream of all-new models launches.

OP

BAUTO (TP: RM1.40)

DRBHCOM (TP: RM1.90)

UMW (TP: RM2.70)

MP

MBMR (TP: RM2.90)

SIME (TP: RM1.75)

UP

TCHONG (TP: RM0.750)

Aviation Maintain Maintain NEUTRAL

We are expecting airlines carrier including AirAsia to face tougher operating conditions following the COVID-19 pandemic due to the restrictions and collapse in air travel. We are expecting more losses ahead following the pandemic which is taking a toll on airlines operators including AirAsia from these restrictions and collapse in air travel. AirAsia Malaysia will temporarily suspend all international and domestic flights from Mar 29 to April 25 while AirAsia Philippines will be suspended from Mar 20 to April 14. Additionally, AirAsia Indonesia will see a sharp reduction in frequency in its international flights. Similarly, AirAsia Thailand will halt its international flights from March 22 to April 25. However, we prefer Malaysia Airport Holdings Berhad (MAHB) being the monopolistic airport operator in the country. While a prolonged coronavirus pandemic could impact MAHB’s earnings, the experience from SARS indicates that the impact to passenger volume saw a recovery soon after. TP for MAHB is RM5.70 based on 19x FY21E EPS (-1.0SD below historical forward mean). Reiterate Outperform on Malaysia Airport. However, AirAsia, a high beta stock could also bounce up strongly when Covid-19 is finally overcome. For now, it is maintained at UNDERPERFORM

OP

AIRPORT (TP: RM5.70)

UP

AIRASIA (TP: RM0.600)

Consumer Maintain While market sentiment has been hugely dented by the current Covid-19 outbreak with FBMKLCI plunging 18% YTD (as of our cut-off date at 20 March), we believe our F&B counters’ “safe haven status” shines even brighter now amidst these uncertain times, premised on their resiliency and relatively protected earnings in comparison to other sectors.

Our F&B preferred picks are PWROOT (OP; RM2.75) as we favour the name for its decent dividend yield of c.6% coupled with anticipation of a meaningfully stronger year driven by favourable sales and cost environment.

We also like QL (OP; RM8.30) for its resilience and diversified earnings base which offers a growth trajectory of c.13-10%, as well as F&N (OP; RM35.20) for its booming Thai operations and below mean valuations of 24x PER which serves as an attractive entry point.

Retailers, on the other hand, are poised for a recovery when the MCO is lifted from pent-up demand. Our sector top pick is PADINI (OP: RM2.40) for: (i) steady dividend

yield of c.6% with net cash position, (ii) its resilient

OP

BAT (TP: RM15.50)

CARLSBG (TP: RM25.65)

F&N (TP: RM35.20) – Top

Pick

HEIM (TP: RM26.05)

PADINI (TP: RM2.40) –

Top Pick

PWROOT (TP: RM2.65) –

Top Pick

QL (TP: RM8.30) – Top

Pick

SPRITZER (TP: RM2.30)

MP

AEON (TP: RM1.05)

AMWAY (TP: RM4.40)

DLADY (TP: RM40.50)


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business model with growing e-commerce presence, and (iii) expectation of a recovery starting 2QCY20 on post MCO pent-up demand and from the seasonal Hari Raya Aidilfitri sales.

SEM (TP: RM1.25)

UP

HAIO (TP: RM0.850)

MYNEWS (TP: RM0.550)

NESTLE (TP: RM124.50)

MREITs Maintain YTD, MREITs were not spared the pandemic-induced market sell-down, down between 3% and 44% save for AXREIT (+1%), with those with weaker asset profile taking a heavier beating.

Retail and hospitality MREITs’ tenants would be the hardest hit by the MCO while office and industrial tenants would likely feel the pinch from the MCO and Covid-19 if it prolongs. Earnings concern is a growing reality, lowering MREITS’ earnings by 9-24% in FY20 and 2-7% in FY21E.

Increase 10-year MGS to 3.7% (from 3.4%). Valuations

are also under threat with a rising 10-year MGS (to 3.58% currently) on concerns of rising Covid-19 cases as well as the health of the Malaysian economy given the sharp dip in oil prices, while MREITs’ valuations are further impacted by heavy selling as investors prefer to retain cash under current circumstances.

We have also widened MREITs’ spreads to the MGS to +2.0SD (vs. average to +0.5SD previously). CY20 will

undoubtedly be one of the most challenging years for MREITs in recent history given the threat of Covid-19 pandemic on all facets of the economy. We believe the situation in CY20 will continue to remain fluid and challenging, but we are of the view that it would stabilise by FY21. All in, we lower our TPs by 10-33% on lower earnings and valuations.

Maintain NEUTRAL. We prioritise MREITs with strong

value and capital preservation over high yields at this juncture, and MREITs that have the ability to be the first movers once the Covid-19 is resolved. Post rolling forward our valuations to FY21, our preferred picks are KLCC (MP; TP: RM7.45) and IGBREIT (MP; TP: RM1.50) for their balance sheet strength.

OP

MQREIT (TP: RM0.500)

MP

CMMT (TP: RM0.700)

IGBREIT (TP: RM1.50)

KLCC (TP: RM7.45)

PAVREIT (TP: RM1.50)

SUNREIT (TP: RM1.55)

UP

AXREIT (TP: RM1.55)

Oil and Gas Maintain Our in-house 2020 average Brent crude price assumption is USD40/barrel, anticipating oil market oversupply to remain throughout the year, with rebalancing only to occur in 2021.

At current oil prices, there would not be enough new oil at below USD40/barrel breakeven level to support global demand by 2023. Hence, one of two things has to happen: (i) oil prices eventually rebalance back to around the USD60/barrel mark, or (ii) cost structures within the oil and gas industry undergo a massive reform to hugely increase efficiency and bring down lifting costs per barrel.

Ultimately, while we acknowledge that oil prices could be oversold on a longer-term basis, we believe a market upwards reversion may take longer than expected (i.e. more than just a few months). The slew of oil producers having announced reduction in capex (e.g. Petrobras, Shell, Chevron, OMV) suggest that oil producers are also preparing for a similar stance. Hence, we will not be surprised if Petronas follows suit.

Entire value-chain is facing disruptions. Players traditionally benefiting from green field investments (e.g. SAPNRG, PANTECH, MHB, WASEONG) may see slower contracts flow, while services contractors (e.g. DAYANG, UZMA)

OP

DIALOG (TP: RM4.15)

MISC (TP: RM8.70)

SERBADK (TP: RM3.05)

YINSON (TP: RM8.80)

MP

PCHEM (TP: RM4.50)

PETDAG (TP: RM21.35)

UZMA (TP: RM0.510)

UP

ARMADA (TP: RM0.130)

DAYANG (TP: RM1.30)

MHB (TP: RM0.600)

PANTECH (TP: RM0.360)

SAPNRG (TP: RM0.080)

VELESTO (TP: RM0.110)

WASEONG (TP: RM0.650)


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could face further margins pressure amidst low oil prices.

Maintain NEUTRAL. We would still advocate investors to remain cautious with this sector. Should one require exposure, we prefer names that have proven to be resilient and are able to continue delivering earnings growth with little balance sheet risk despite the challenging environment such as DIALONG, YINSON, SERBADK and MISC.

Meanwhile, bargain hunters may look at ARMADA, DAYANG and UZMA given that they are now trading below 5x forward PER. SAPNRG is also currently trading near liquidation valuations of merely 0.1x PBV, although one should be aware of its inability to deliver earnings.

Plantation Maintain Stay NEUTRAL on the plantation sector as CPO supply-demand tightness remains relatively intact. Our CY2020 CPO price target of RM2,550/MT remains.

Chinese palm oil demand could wane due to its U.S. soybean purchase pledge and high oil and fats inventory (Feb: +17.4% MoM), while lower crude oil prices cast uncertainty for biodiesel mandates especially B30.

We estimate 24% implementation of B30 (upon full exhaustion of its biodiesel fund and export levies) based on our in-house CY20 crude oil and palm oil assumption of USD40/barrel and RM2,550/MT. Nevertheless, national savings from lower crude oil import and prices could be channelled to the successful implementation of its B30 programme.

Despite uncertain Chinese demand and biodiesel, we believe CPO supply-demand tightness remains relatively intact as the expected decline in demand is cushioned by an expected dip in production.

We see a window of opportunity for investors to bottom fish given that some planters are currently traded (report cut-off date: 20 Mar 2020) at -2.0SD valuation level, which is even lower than the -1.0SD to -1.5SD levels recorded during the period (2018-2019) when CPO prices were at RM1,800-2,000/MT. Expected improvement in planters’ 1QCY20 earnings and ROEs also reinforces our case.

For investors seeking exposure to the plantation sector, we recommend taking positions in bashed down names like HSPLANT (OP; TP: RM1.65) and KLK (OP; TP: RM21.30), both being traded at near -2.0SD valuation

level.

OP

FGV (TP: RM0.950)

HSPLANT (TP: RM1.65)

IJMPLNT (TP: RM1.55)

IOICORP (TP: RM4.10)

KLK (TP: RM21.30)

SAB (TP: RM3.55)

TAANN (TP: RM2.65)

TSH (TP: RM0.800)

UMCCA (TP: RM4.95)

MP

GENP (TP: 8.90)

PPB (TP: RM17.00)

SIMEPLT (TP: RM4.80)

UP

CBIP (TP: RM0.730)

Plastic Packagers

Maintain 4QCY19 results were a mixed bag with three coming in within, one below (SLP) and one above (TOMYPAK with its results not as bad as expected despite being loss making).

YTD, plastic packagers recorded a steep decline (-28 to -45% YTD, in tandem with the FBMSC of -37%).

Possibly lower top-line but expect margins to hold. We

are of the view that lower oil prices and low resin prices may not be all that great for the sector as it may put downward pressure on average selling prices given the Covid-19 climate. All in, we expect margin to hold but we are concerned about top-line erosion from both selling prices as well as sales volume due to the MCO.

All in, we lower earnings by 20-31% (save for TOMYPAK by 89% on widening losses and low base effect (assuming MCO prolongs for 3 months in 2020).

All in, our TPs are lowered by 9-48% as we downgrade valuations to -1.5SD to -2.0SD to the 5-year PER or PBV

averages for now (from average SD to -1.0SD, save for

MP

SCGM (TP: RM1.40)

SCIENTX (TP: RM6.50)

TGUAN (TP: RM2.20)

UP

SLP (TP: RM0.625)

TOMYPAK (TP: RM2.45)


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TOMYPAK at -2.0SD).

Maintain NEUTRAL as we believe we have priced in most

foreseeable downsides to earnings and valuations, which have also been largely priced in by the market for now. We continue to monitor the situation closely and do not discount the option of further downsides in the near term if the MCO prolongs more than 3 months. On the bright side, we believe this sector will be quick to bounce back to previous valuations as soon as the Covid-19 kerfuffle is over.

Ports & Logistics

Maintain We keep our NEUTRAL call on the sector, premised on

expected muted earnings from ports players of which we believe their growth could be at risk due to the Covid-19 pandemic. Since a majority of the ships that call at Westports plies the Intra-Asia routes, the impact from the shutdowns and quarantines will likely hit throughput, though the duration is uncertain depending on when the pandemic can be beaten. Separately, for POSM, the postal tariff hike on postage rates for registered and commercial mails could see potential average RM12m incremental revenue per month which is expected to flow straight to bottom-line. We expect a turnaround to profitability for POSM in subsequent quarters. Overall, we are downgrading our TP for the stocks under our coverage to reflect the de-rating of the market on the back of a much bleaker economic outlook, both globally and locally. Following our downgrade, these are our new TPs; WPRTS (MP; TP: RM3.65), MMCORP (MP; TP: RM0.62) and POSM (OP; TP: RM1.07)

OP

POS (TP : RM1.07)

MP

MMCCORP (TP: RM0.620)

WPRTS (RM3.65)

Utilities Maintain A mix performance amidst market meltdown. Mild stock

declines of 5%-9% YTD for TENAGA and gas-based utilities PETGAS and GASMSIA while IPPs YTLPOWR and MALAKOF, and PESTECH were bombed out by 22%-38%.

Stocks traded mostly at -1SD to -1.5SD, as the sell-down

was not as severe to hit critical level of -2SD. YTLPOWR is the only stock to surpass -2SD, likely due to earnings risk from PowerSeraya and YES.

Earnings to remain resilient. MCO is likely to have mild

impact on the sector given it is not restricted under the order for its “essential services” status. Risk for TENAGA is covered under the ICPT framework while a slowdown in demand growth may affect PETGAS and GASMSIA as well as the IPPs. PESTECH’s projects are still on-going during MCO.

Still in the price; keep Neutral. We switch to PBV

valuation with targeted fair value of -1SD PBV mean under such depressed market condition, except for YTLPOWR which is placed at -2SD PBV mean for earnings risks in PowerSeraya and YES.

OP

PESTECH (TP: RM1.15)

TENAGA (TP: RM13.00)

MP

GASMSIA (TP: RM2.50)

MALAKOF (TP: RM0.78)

PETGAS (TP: RM16.25)

YTLPOWR (TP: RM0.57)



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Figure 4: 2Q20 Top Picks List

Top Picks Comments

D&O

(OP; TP: RM0.91)

One important aspect when designing an EV is driving range, and car manufacturers are always in the race to extend the mileage per charge cycle. With battery as the main power source for EV, even marginal power saving from LED makes a difference in terms of driving range. Such savings become even more pronounced with the increase of LEDs per vehicle, in tandem with market trend to improve both safety and aesthetics. As one of the pioneers of smart RGB, D&O is well positioned to reap the benefits as car makers are moving towards such technology. Smart RGB yield higher ASP and allows for local dimming which results in better contrast and lower power consumption.

F&N

(OP; TP: RM35.20)

F&N is one of our preferred large-cap F&B pick. We like the name for: (i) its robust Thailand operations (takes up c. 70% of operating profit) premised on the group’s strong brand presence as the market leader in its Dairy segment, as well as its (ii) longer-term positive venture into the upstream fresh milk business, which would allow the group to expedite its growth within the fresh milk segment (which currently takes up low single-digit percentage of total revenue), on the back of more competitive cost advantages. With majority of the dairy consumed in Malaysia made up almost entirely from imported milk powder, we believe the group’s ambition in the fresh liquid milk sector also jives with the shift in consumer trend towards a healthier and sustainable food future. Furthermore, value has emerged from the irrational sell-down as F&N is now trading at a below mean valuation of 24x PER (closely in-line with -1SD over its 3-year mean), which serves as an attractive entry point.

HARTA

(OP; TP: RM8.00)

We are positive on HARTA’s growth prospect going forward, underpinned by demand uptick. The lacklustre demand in the past 12 months coupled with the importance of higher standards of hygiene reinforced by the outbreak of Covid-19 is expected to ramp up re-stocking activities. The recent land acquisition provides earnings visibility beyond Plant 7 in NGC. We like HARTA for: (i) its “highly automated production processes” model, which is moving from ‘good’ to ‘great’ as they are head and shoulders above peers in terms of better margins and cost reduction management, (ii) constantly evolving via innovative products development, and (iii) its booming nitrile gloves segment. TP is RM8.00 based on 48x FY21E EPS (at +2.0SD above 5-year historical forward mean).

KESM

(OP; TP: RM10.20)

KESM derived 97% of its revenue from automotive semiconductor jobs. KESM will benefit from more burn-in testing jobs, thanks to strong demand for EVs as seen in the first two months of positive growth in Europe. The new European car tax regulation that will take effect in April 2020 is expected to further the cause as tax on zero-emission vehicles will be reduced from 16% to 0% while tax on internal combustion engine (ICE) vehicles will increase due to the newly adopted WLTP standard. The push for more EV production will in turn benefit KESM as EVs require more semiconductor content compared to ICE vehicles.

MEDIAC

(OP; TP: RM0.245)

We like MEDIAC for its earnings recovery prospects, which we believe in underpriced at this moment, mainly coming from tax incentives previously not available, bringing the group’s estimated average corporate tax rate to c.20% from c.40%. Dividend payments are also handsome with yields at 9%. It also possesses solid net cash per share of c.16.0 sen, though we believe the reserve is needed to fund the group’s digital thrust. Our valuation for the stock is based on a 0.6x FY21E NTA (0.5SD below its 3-year mean).

MPI

(OP; TP: RM13.30)

MPI offers a good exposure balance between smartphone and automotive segments, with the latter its focus. It’s foray into silicon carbide (SiC) power module that will likely be used in Tesla cars provide a great exposure into EVs. With the US customer aiming to increase its SiC production capacity by 30x, we expect more packaging jobs to trickle down to MPI’s Ipoh plant. Barring any further hiccups, the expansion of the Suzhou plant is estimated to be completed by 3QCY20. This is to cater for more jobs from Huawei which is heavily loading up on local suppliers in order to reduce its reliance on US vendors.

PADINI

(OP; TP: RM2.40)

We like the stock for: (i) steady dividend yield of c.6% with net cash position, (ii) its resilient business model, focusing on the value-for-money segment through its Brands Outlet stores, with growing e-commerce presence, and (iii) expectation of a recovery starting 2QCY20 (if no extension of MCO) on MCO pent-up demand and from the seasonal Hari Raya Aidilfitri sales. For FY20, the group will not be opening more than 10 outlets in the local market to streamline cost allocation. We understand that the new, slower expansion plan is to streamline the operational cost towards strategic locations, while expanding regionally through own-managed stores to strategically control stores’ value which include Cambodia (1 BO & 2 PADINI stores), and Thailand (7 Vincci stores).

PWROOT

(OP; TP: RM2.65)

PWROOT could be attractive to yield-seekers, offering a solid dividend yield of c. 5-6%. On top of that, the group is well-poised to benefit from various tailwinds, mainly driven by: (i) higher sales growth potential following the rationalisation of its distributor network locally and for exports, (ii) more favourably locked-in commodity prices, as well as (iii) improving operational efficiency. The group’s high export mix (i.e. c.50% of total sales) also enhance the defensiveness of the stock against any weakness in the local market while also benefits the group from the weakening of Ringgit.

QL

(OP; TP: RM8.30)

We favour the name for its diversified and resilient earnings base, as well as rosy earnings growth expectations of c.13-10%, in comparison to other large cap F&Bs with earnings growth of c.8% on average. Even during uncertain times like this, the group’s core Marine Product Manufacturing segment (takes. up c.53% of group’s PBT) is expected to remain robust, supported by the irrational panic buying on essential food products and the weaker Ringgit which yields better returns from its exports. Expected to be segmented out in 4QFY20, the group’s Family Mart business also offers the group another exciting avenue of growth, on the back of: (i) better-than-peers ticket sales as the group greatly emphasize on high margin fresh food content which takes up c.80% of sales, coupled with (ii) widening geographical coverage, with c.175 stores to date and on track to meeting the FY22 target of 300 locations.

TM

(OP; TP: RM4.30)

Strategically, we believe TM is in a favourable position, centred around the deployment of 5G. TM will likely see a spike in sentiment if: (i) it successfully participate in the deployment of 5G network

infrastructure, having the widest fibre network which it would administer with the incumbent celcos and in turn to boost its own mobile initiatives but (ii) should TM fail with its bid and focuses on its core

broadband and fixed line business, it could continue to reap its cost savings efforts and pushing its endeavour to fulfil NFCP agendas.



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Stock Ratings are defined as follows: Stock Recommendations

OUTPERFORM : A particular stock’s Expected Total Return is MORE than 10% MARKET PERFORM : A particular stock’s Expected Total Return is WITHIN the range of -5% to 10% UNDERPERFORM : A particular stock’s Expected Total Return is LESS than -5% Sector Recommendations***

OVERWEIGHT : A particular sector’s Expected Total Return is MORE than 10% NEUTRAL : A particular sector’s Expected Total Return is WITHIN the range of -5% to 10% UNDERWEIGHT : A particular sector’s Expected Total Return is LESS than -5% ***Sector recommendations are defined based on market capitalisation weighted average expected total return for stocks under our coverage.

This document has been prepared for general circulation based on information obtained from sources believed to be reliable but we do not make any representations as to its accuracy or completeness. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may read this document. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees. Kenanga Investment Bank Berhad accepts no liability whatsoever for any direct or consequential loss arising from any use of this document or any solicitations of an offer to buy or sell any securities. Kenanga Investment Bank Berhad and its associates, their directors, and/or employees may have positions in, and may effect transactions in securities mentioned herein from time to time in the open market or otherwise, and may receive brokerage fees or act as principal or agent in dealings with respect to these companies.

Published and printed by: KENANGA INVESTMENT BANK BERHAD (15678-H) Level 17, Kenanga Tower, 237, Jalan Tun Razak, 50400 Kuala Lumpur, Malaysia Telephone: (603) 2172 0880 Website: www.kenanga.com.my E-mail: [email protected]

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2QCY20 Investment Strategy

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