Lead Story: FBM KLCI at four-year low, what are the bargains?

TheEdge Mon, Sep 23, 2019 02:00pm - 4 years View Original


THE FBM KLCI, which closed at 1,601 points last Thursday, is currently trading at its lowest level since September 2015. The benchmark index lost its footing shortly after it climbed to a record close of 1,895.18 on April 19, 2018. It has since declined about 15% from its peak.

That would give one an idea of the performance of the 30 component stocks of the FBM KLCI.

Year to date, 15 of the 30 constituent stocks have seen their share prices decline, with 6 out of the 15 seeing more than 10% of their market value wiped out.

These six companies are two Petronas-linked firms (Petronas Chemicals Group Bhd and Petronas Gas Bhd), two banks (Public Bank Bhd and Hong Leong Bank Bhd) and two glove makers (Top Glove Corp Bhd and Hartalega Holdings Bhd).

We take a closer look at the companies to see whether analysts think they still warrant a “buy” call and are worth “bottom fishing” for.

 

Petronas Chemicals Group Bhd

Shares of Petronas Chemicals Group Bhd (Petchem) have declined 19.4% year to date to RM7.23 on Sept 11, wiping out RM13.89 billion in market capitalisation.

For its second financial quarter ended June 30, 2019 (2QFY2019), Petchem reported a 22.3% decline in net profit to RM1.12 billion, on lower revenue and a higher tax expense. Revenue for 2QFY2019 fell 8.4% to RM4.34 billion on lower product prices, in tandem with lower crude oil prices, though they were partially offset by higher sales volume and a weaker ringgit against the US dollar.

In an Aug 14 note, MIDF Research says Petchem’s current share price (which was RM7.24 on Aug 13) presents a strong buying opportunity for investors to accumulate the stock.

The research house says it continues to like Petchem for its robust balance sheet, clear growth strategy, wide range of chemical offerings, favourable feedstock price from its parent company, Petroliam Nasional Bhd (Petronas), and its attractive FY2020 forecast dividend yield of 5.1%.

“Furthermore, Petchem is also currently trading at 13.2 times its FY2020 forecast price-earnings ratio (PER), below its five-year average PER of 16 times, which makes it an attractive stock to accumulate. Historically, it has traded up to 19.3 times PER,” it says.

MIDF Research maintains its “buy” call on Petchem, with a target price of RM8.77, a potential upside of 21.3%.

However, AmInvestment Bank Research, in an Aug 13 note, maintains a “hold” call on Petchem with an unchanged fair value of RM7.80 (upside: 7.9%). The research house says Petchem’s earnings visibility remains clouded given that the group’s product prices have a strong correlation to crude oil prices.

Nevertheless, it says Petchem currently trades at a reasonable FY2020 forecast enterprise value/earnings before interest, taxes, depreciation and amortisation of nine times, which is near its five-year average, while its current dividend yields are fair at 3%.

 

Hong Leong Bank Bhd

Shares of Hong Leong Bank Bhd have declined 19% year to date to RM16.40 on Sept 11, wiping out RM8.3 billion in market capitalisation.

In an Aug 29 note, AmInvestment Bank Research upgrades its call on Hong Leong to a “buy” from a “hold” with a revised fair value of RM18.90.

The research outfit says it sees potential in the stock after the steep decline in its share price, with the stock trading (it was RM16.26 per share at the time of the report) at a low of 1.2 times its FY2020 price-to-book value (P/BV), below its historical mean of 1.5 times.

In an Aug 29 note, RHB Research also upgrades the stock to a “buy” from a “neutral” call, with a target price of RM18.70.

“Although earnings were flattish, asset quality was solid and the capital position robust. With the share price down 20% year to date, Hong Leong Bank now trades at 1.3 times its FY2019 P/BV against ROE (return on equity) of about 11% versus the 1.52 times historical mean.

“We believe Hong Leong Bank’s defensive qualities should come into focus, given growing concerns over slowing global growth,” says RHB Research.

In the recently concluded corporate results season, Hong Leong Bank announced that its net profit for its financial year ended June 30, 2019 (FY2019), came in at RM2.66 billion, compared with RM2.64 billion a year ago, though net income fell to RM4.73 billion from RM4.84 billion.

UOB Kay Hian, in an Aug 29 note, maintains its “hold” call on the stock, with a target price of RM17.30.

“We expect the group to register a mild earnings contraction of 2.5% in FY2020 on the back of modest revenue growth and a sharp upward normalisation in net credit cost from a low two basis points in FY2019 to 15 bps in FY2020,” the firm says.

 

Public Bank Bhd

Public Bank Bhd, the bellwether of banking sector performance, saw its shares decline 16% year to date to RM20.16 on Sept 11, with RM14.9 billion of its market capitalisation evaporating.

Public Bank’s net profit for 2QFY2019 dropped 4.5% to RM1.33 billion due to the negative effect of a 0.25% reduction in overnight policy rate in May, compared with an OPR hike in January last year.

In an Aug 15 note, Kenanga Research maintains its “outperform” call on the stock with a target price of RM25.20.

“We feel this is justifiable, given Public Bank’s operational efficiency and excellent asset quality, which will support earnings ahead, in spite of the challenging loans and net interest margin.

“Valuations are attractive and undemanding with the recent drop in share price unjustified, given the consistent asset quality and still manageable growth,” Kenanga Research says.

AmInvestment Bank, in an Aug 15 note, maintains its “buy” call on Public Bank, with a fair value of RM23.60.

“Our valuation is based on an FY2020 P/BV of two times supported by an ROE of 13%. Our forward P/BV is lower than the historical mean of 2.3 times. We continue to see value emerging after the recent steep selldown of the stock and believe that concerns about the group’s Hong Kong operations due to the protests as well as about its asset quality are unwarranted,” the firm says.

However, CGS-CIMB Research maintains its “hold” call on Public Bank with a target price of RM22.30 as it anticipates a weaker 2HFY2019 due to margin contraction.

“We are projecting a 1.2% drop in its FY2019F net profit, impacted by margin contraction. However, we think that it is fairly valued at a FY2020F PER of 14 times, below the five-year historical average of 14.3 times,” it says.

 

Top Glove Corp Bhd

Year to date, Top Glove Corp Bhd’s shares have fallen 13.7% to RM4.75 on Sept 11, wiping out RM1.9 billion of its market value.

The lower quarterly net profit seems to have added downward pressure on the stock.

Top Glove’s net profit for its third financial quarter ended May 31, 2019 (3QFY2019), fell 36.5% to RM74.67 million, owing to higher latex prices. Revenue, however, improved 8.1% to RM1.19 billion, backed by growth in sales volume.

Hong Leong Investment Bank maintains its “buy” call on Top Glove, with a target price of RM5.31, based on FY2020 earnings pegged to a PER of 26 times.

“We like Top Glove for its more diverse product mix and its prime position to chip away market share,” the firm says.

MIDF Research maintains its “neutral” call on Top Glove with a revised target price of RM4.70.

“We expect better earnings performance from 4QFY2019 onwards as the upward revisions in average selling prices (ASPs) for natural rubber gloves will take effect. Hence, we reduce FY2020 forecasts marginally by 0.8% as we expect the downward pressure on ASPs for nitrile gloves will be offset by a higher sales volume,” the firm says.

 

Petronas Gas Bhd

Petronas Gas Bhd (PetGas) reported a 1.26% decline in net profit to RM502.9 million in its second quarter ended June 30, 2019 (2QFY2019), as a result of a higher tax expense.

Conversely, quarterly revenue grew 1.6% to RM1.38 billion. However, its share price slid 13.2% year to date to RM16.32 on Sept 11, losing RM4.9 billion of its market capitalisation.

Kenanga Research, in an Aug 28 note, maintains its “market perform” call on the stock with a target price of RM15.75.

“The fear of a tariff cut in the Regulatory Period 1, which takes effect next January, is the main reason for heavy selling pressure of late. However, we believe the near-term negatives should have been priced in,” says Kenanga Research.

In an Aug 27 note, AmInvestment Bank Research says PetGas currently trades at an FY2020 forecast PER of 16 times, 24% below its three-year average of 21 times.

“However, these lower-than-­usual valuations are justifiable, given that PetGas’ recurring income and margins will be declining progressively over a prolonged trajectory due to the new gas transport framework while being supported by attractive dividend yields of 5%,” says AmInvestment Bank.

 

Hartalega Holdings Bhd

Like its peer Top Glove, Hartalega Holdings Bhd’s net profit shrank by a quarter year on year to RM94.06 million for the first financial quarter ended June 30, 2019 (1QFY2020), on lower sales volume and higher costs. Revenue dropped 9% to RM640.1 million. Hartalega shares have declined 12.5% year to date to RM5.33, wiping out RM2.56 billion in market capitalisation.

RHB Research, however, has a “buy” call on Hartalega with a target price of RM6.05.

In our view, Hartalega’s current valuation presents a rare opportunity to accumulate its stock at trough levels. Its share price has weakened 32% to RM4.87 on Aug 2 from its peak of RM7.20 on Aug 28, 2018.

“Its forward PER has declined from the peak of 47 times to 30 times forward PER currently. In the previous earnings downward cycle in 2016, its share price fell about 30% from its peak, suggesting that the current share price downward trend has ended,” RHB Research says.

In its Aug 7 research note, MIDF Research maintains its “neutral” call on Hartalega with a target price of RM4.77.

“We remain concerned about the subdued ASP in view of the industry oversupply situation, which has also affected the group’s profit margin. On a longer-term basis, we opine that efforts to regulate the expansion drive, coupled with the resilient demand for rubber gloves globally, will restore the supply-­demand dynamic.

“In addition, we applaud the group’s effort to continue to be the leader in technology innovation in the glove industry, which gives it the upper hand in managing production cost.

“Valuation-wise, the stock is currently trading close to its three-year historical average PER of 37.4 times. Therefore, we believe that there is limited upside for the stock,” says MIDF Research.

 

 

The content is a snapshot from Publisher. Refer to the original content for accurate info. Contact us for any changes.






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