Weekly Stock Picks Commentary Report (14-18 May 2012)

Malaysia Stock Picks

Week 20 (14-18 May) Stock Picks Commentary

Hi! Welcome to Malaysia Stock Picks site. Here is the stock picks commentary for Week 20 (14-18 May)

This week hasn’t been the most interesting one for many who has existing position in stocks. Companies took turns to unveil their poor quarterly performance, mediocre at best.

With Crude Palm Oil (CPO) futures falling a record 5.5% this week on the Malaysia Derivatives Exchange have prompted investors in Malaysia to pay attention to concerns over global financial uncertainty and slowing economies. Even WTI crude oil has been falling to below US$ 100 a barrel all for the same reasons.

From the feedbacks I received what’s keeping our readers awake at night is the ringing question on whether valuations of the stocks they are holding are still justifiable.

Could the fall in stock prices this week only be a temporary decline while market takes a short breather before continuing its raging bull run? Or is it just the tip of the iceberg to what could be worse in the coming weeks? Either way, understanding the fundamental changes that have affected the stock prices is a good idea.

China Economy Updates

On 16 May China announced that their foreign direct investment (FDI) inflows dropped 2.4% to US$ 37.9 Billion for the first four months of 2012 versus last year.

Even though FDI is an important factor to gauge foreign investor’s confidence toward the Country’s potential growth, but it is only a small contributing factor to overall capital inflow compared to exports which is worth about US$ 1.9 trillion in 2011.

On 14 May, China's Central Bank declares a cut on its bank reserves requirement ratio by 0.5% to 20% to stimulate lending amid heightened risk of economy slowdown.

Bank reserves requirement acts as a buffer to protect the banks from the impact of potential default in loans, so reducing its requirement may mean China banks are now less cushioned against risks of loan defaults.

What could have triggered the regulators to implement such a risky policy change? Could it be a slow down in consumption or rising demand for loans that the banks couldn’t keep up with? Or are the banks not collecting timely enough from its existing borrowers to finance new loans?

Back in Malaysia, I have had a few phone calls from different banks all within this week asking if I could consider a personal loan from them. Could this be a sign that bank’s lending activities slowing down and too much money liquidity is floating idle in the money market?

Or could this be the consequences of Bank Negara’s more stringent lending policy implemented since 1 Jan 2012?

Automotive Sector and the new lending guidelines

On 14 May, an interview by TheStar with Perodua’s Managing Director Datuk Aminar Rashid Salleh revealed that MBM Resources's 20% owned Perodua saw a dip in car loan approval rate since new lending rules.

Datuk Aminar assured investors that the demand for Perodua cars remained robust as indicated by the steady list of bookings of 18,000 to 20,000.

However, the approval rate for people wanting to buy a Perodua car has dropped.because of the more stringent new lending rules that requires loans to be assessed based on disposable income rather than gross income.

Market has reacted negatively because a drop in sales volume may potentially reduce net profits. Furthermore, a majority of sales by Perodua is done through bank loans.

MBM Resources stock price fell 12.2% or 65 sen since 14 May to week low of RM 4.68 which is also the closing price for the week. MBM Resources' rights shares with free detachable warrants has an issue price of RM 1.42 and will begin trading on 24 May.

Similarly, DRB-Hicom, the now owner of Proton suffered the same negative market perception and its stock price gains since since 27 April were erased. To recap, DRB Hicom on 27 April announced that it has received acceptances totaling 98.6% of the total issued and paid up share capital of Proton Holdings Bhd and will proceed to “compulsorily acquire” all outstanding shares. DRB Hicom stock price ended RM 2.36 for the week.

Expansion Plans

For the past few weeks, we hear many companies from all sectors announcing big expansion plans, such as Dijaya Corp’s RM 959 million purchase of properties and IOI Corp’s RM 995.5 million acquisition of 6 acres of land in Singapore to build high end condominiums. But will they still proceed and go ahead to realise them in light of a sluggish commodities market? Or will they re-visit and re-evaluate whether those expansion plans are still viable?

Interesting to know that on 17 May, World’s largest miner BHP Billiton announced that they had scrapped their US$ 80 Billion 5-year expansion plans as they expect a further cool down in commodity prices.

From the poll survey that you have participated for the week showed readers have mostly been interested in Plantation sectors, which could have been because of the upcoming IPO on Felda Global Ventures which would be the second largest planter in the World.

Palm Oil Sector and the falling Crude Palm Oil Prices

Bloomberg reported that Crude Palm oil futures fell 5.5% this week with August delivery contract closed at RM 3,096 a tonne for the week on the Malaysia Derivatives Exchange due to concerns that investors will hold back purchases in view of the uncertainty and slowing economies.

Throughout the week, major palm oil companies stock prices suffered the most losses stemmed from poor quarterly earnings results. On 25 April, TH Plantations reported decline of 40% in net profit to RM 13 million affected by higher production costs.

THPLANT stock price dropped 21% since 25 April to week low of RM 2.22 on 10 May and closed at RM 2.34 for the week.

On 15 May, United Plantations announced its Q1 2012 net profit fell 15.6% on higher wages and lower selling prices of CPO. In its quarterly announcement, it also stated that it anticipates CPO prices to weaken in second half of 2012 due to recovery in the biological yield cycle coupled with more favourable weather conditions

UTDPLT stock price dropped 5.2% since 15 May to week low of RM 23.70 on 18 May and closed at RM 24.20 for the week

On 16 May, Tradewinds Plantations announced quarterly earnings fell 91% to RM 4.34 million due to lower sales at unfavourable palm products prices, revenue rose 164% to RM 608.45 million due to contribution from Mardec Bhd

TWSPLNT stock price dropped 16.8% since 16 May to week low of RM 4.74 on 18 May and closed at RM 5.01 for the week.

Even for Kuala Lumpur-Kepong (KLK), which has not announced their quarterly results yet, suffered stock price decline of 9% to week low of RM 21.50 and closed at RM 22.10 for the week. Market anticipated KLK to suffer the same fate as its peers. KLK is scheduled to announce their results next week on 24 May.

Can we actually tell when CPO prices are heading downwards before they actually do?

Following frequently asked in our discussion section on whether the analysts or we retail investors could have predicted the falling CPO prices, I have written an article on how to tell when crude palm oil (CPO) prices are going to drop.

The current scenario has made it pretty clear that all factors should have triggered an alarm back in February this year, some time ahead before the start of a sliding trend which begins late March.

Food Sector

Three-A resources had on 23 April announced hydrolyzed vegetable protein plant in China will commence operations this month and is expected to account for 5% earnings in 2012 and 23% in 2013.

To recap, in late 2009, Wilmar International Ltd took up a 15.65% stake in Three-A. The plant is located near Wilmar's existing plant including Qinhuangdao Goldensea Foodstuff Industries Co Ltd, China’s largest soya protein producer.

3A stock price rose 14% (12 sen) on week 17 to its high of RM 1.35 on 25 April where market took this news positively as the additional capacity and opportunity to leverage on Wilmar's established sales and distribution network in China are both beneficial to Three-A's financial performance from 2012 onwards.

Subsequently, on 10 May, Wilmar International posted 34% drop in quarter earnings due to losses at its China-based oilseeds and grains business.

Market took this news as negative for 3A because profitability of its new hydrolyzed vegetable protein plant in China is dubious following the losses suffered by Wilmar. As a result, 3A stock price cancelled all gains from its stock price surge since 23 April to close at RM 1.12 for the week

On another note, PPB Group stock price continued to decline to a total drop of 8% to a two-week low of RM 15.20 since 10 May when its 18.3% owned Wilmar International posted 34% drop in quarter earnings due to losses at its China-based oilseeds and grains business.

Although PPB Group hasn’t announce their quarter results yet, market is still negative in anticipation of a lower share of profits from Wilmar in PPB’s next quarter’s results as well as questioning chances that PPB will suffer the same fate as other plantation stocks in light of the falling crude palm oil prices.

On 17 May, Malayan Flour mills reported its first quarterly loss of RM 598,000 as compared to a net profit of RM 29.8 million a year ago due to lower selling prices and lower sales volume due to stiff competition in its flour and grains segment.

Market reacted negatively as they became cautious on whether Malayan Flour is able to turnaround and improve its profitability in light of stiff competition in the flour and grains segments.

Malayan Flour’s bonus issue and warrants from a rights issue were listed on the stock exchange on 14 May, when it closed at RM 1.70.

MFLOUR stock price plunged 16.5% since 14 May to week low of RM 1.42 on 18 May and closed at RM 1.43 for the week.

Semiconductor Sector

HDD component manufacturers continue to report phenomenal growth in their quarterly net profit banking on severe shortage in global supply due to the Thailand flood which happened late last year.

On 18 May, Notion Vtec announced that its quarterly earnings rose 43.5% to RM 15.53 million compared to a year ago on strong orders for HDD and camera segments from affected clients due to the severe flooding in Thailand last year.

Notion Vtec’s turnover increased 56.7% to RM84.51mil from RM53.93mil

On 17 May, JCY International quarterly earnings surged 1,209% to RM 163 million on better HDD component selling prices and higher sales volume due to shortages in supply from Thailand floods

Take note that even though JCY net profit recovered strongly compared to previous year, current quarter’s net profit (RM 163 million) is rather flattish if compared with its preceding Q4 2011’s net profit (RM 162 million).

Surge in net profit from Thailand floods had started since Q4 of 2011. Market talk has it that the benefit from this event could have peaked and whether or not such robust results can be sustained and replicated for the next quarters ahead is questionable.

JCY stock price dropped 2.6% since 17 May to a week low of RM 1.47 on 18 May. Nonetheless, JCY stock price had surged by 268% since Oct 2011 when Thailand’s flood took effect from around 40 sen in Oct 2011 to RM 1.47 closing on 18 May.

Oil and Gas Sector

The SapuraKecana is a merged entity between SapuraCrest and Kencana. SapuraKencana has been a local hype since the company has a market capitalisation of RM 11.2 billion and a free float of 44%. Analysts and research houses favoured the enlarged entity as they have capabilities across the oil and gas value chain.

Even though SapuraKencana has been recently awarded a RM 460 million contract from Murphy Oil Sarawak and getting positive views from analysts such as Kenanga Research, SKPETRO stock price plunged a total of 13.8% to week low of RM 1.91 on its second day of listing on 18 May due to weak sentiment in the oil and gas sector. However, Affin IB Research believes Malaysia's Oil and Gas industry is still in a capex upcycle and SapuraKencana is the best proxy to ride the capex upcycle.

Market talk has it that SEPETRO stock price is due for a technical rebound after suffering two days of heavy losses. The global crude oil prices have yet to recover and when it does, then chances of SEPETRO getting an upward rebound is better.

Gas Malaysia IPO

On 14 May, MMC Corp obtained approval from Securities Commission to register Gas Malaysia’s IPO prospectus paving the way for a listing on 11 June.

A total of 333.84 million shares offered for sale will be from existing shareholders and the price is fixed at RM 2.20.

During an interview with Gas Malaysia’s Managing Director Datuk Muhamad Noor Hamid by TheStar, it was highlighted that revenue and sale volume this year will be robust as Gas Malaysia had on Feb 2012 signed a 10-year gas supply agreement with Petronas for a 29% increase in supply at 492 million standard cubic per day (mmscfd), from its previous supply of 382 mmscfd per day.

Do take note that Gas Malaysia's 2011 yearly net profit dropped 23% to RM229mil from RM298mil recorded in the previous year due to the new gas tariff implemented since 1 June 2011. Consistently, net margins fell from 26.3% to 12.5%.

The new gas tariff has only taken effect since June 2011, so the question really is whether the impact could be more severe this year with a whole-year effect? Or could the 29% increase in sales volume make up the lost in margins in absolute terms?

Click here for all latest updates on Gas Malaysia IPO