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Revival of Indonesia augurs well for CIMB

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by June 18, 2016 General

Bank’s fortunes depend on economic health of the republic

WITH more than 20% of its business coming from Indonesia, CIMB Group Holdings Bhd’s fortunes depend very much on the economic health of that country.

In this respect, Indonesia, with a population of more than 230 million and a country where everyone wants to be in for exposure to the consumer segment, is poised for a great revival.

Nomura Research has described Indonesia as the greatest recovery this year and the next. The research house has projected Indonesia’s economy to grow at 5.4% this year and 5.8% in 2017.

Indonesia’s public debt, at 26.1% of its gross domestic product, is one of the lowest ratio among Asian countries and emerging markets. Hence it does not carry the “bulging debt” associated with some emerging markets.

A revival of Indonesia should augur well for CIMB. In the past 18 months, CIMB has been providing for exposure to its loans in Indonesia that is carried out by subsidiary PT Bank Niaga.

The fall in the commodity sector coupled with slower economic growth had caused CIMB’s operations there to take a hit last year. An improved economy should allow CIMB’s Indonesian operations to enjoy greater writebacks, says an analyst.

CIMB has also been rationalising its cost and the efforts are beginning to show in its bottom line. In its first quarter results, the banking group attributed its improved results to stronger cost management and improved asset quality.

The improved provisions came largely due the recovery in the banking system in Indonesia and Thailand.

CIMB’s net interest income grew in the first quarter but it was underpinned by the non-interest income due to the soft capital market. The bank has remained cautious for the rest of the year.

Like most other financial institutions, CIMB is trading at less than one time book value. Year-to-date, it is down 7%.

However, on the recovery, the stock has shown to have greater upside due to its liquidity compared with many other financial institutions. – By M. Shanmugam

OLDTOWN BHD

DIVIDEND-YIELDING stocks like cafe chain operator OldTown Bhd is an option for investors in an uncertain and weak market environment such as the current one.

The company recently returned to growth trajectory declaring a special dividend of three sen per share and bringing its FY16 dividend per share to nine sen or more than a 5% yield.

It is sitting on a healthy cash pile with net cash of around 33 sen per share which allows it to increase its payout to shareholders, if it wishes.

For its FY16, the company made a higher net profit of RM52.3mil on revenue of RM393.4mil, compared with a net profit of RM47.5mil on revenue of RM397.7mil in FY15.

In its note on OldTown, Alliance Research says it also expects positive newsflow such as earnings accretive M&A activities to support the company’s share price.

Operations-wise, Alliance estimates that OldTown’s sales to China only represents less than 4% of its sales and as such is positive that there is still plenty of room for the group to boost its export sales with the completion of the restructuring of its China distributorship late last year.

Currently, the group has a total of 237 café outlets, of which 207 are located nationwide while 10 are in Singapore, 16 in Indonesia and four in China.

OldTown, famed for its white coffee products, is currently trading at a trailing price to earnings (PE) ratio of about 15 times and a forward PE of 14 times, a significant discount to its regional peers’ valuation of 21 times.

Main risk to OldTown’s operations would be weaker-than-expected consumer spending which would affect the company’s sales directly.

All seven analysts who cover the stock currently have “buy” calls on the company. – By Yvonne Tan

KESM INDUSTRIES BHD

HAVING flown under the radar until recently, KESM Industries Bhd is regaining investors’ attention after delivering a strong set of earnings in its latest quarterly results.

Despite the perceived weakness in the semiconductor industry at the moment, KESM’s offerings stand a better chance of receiving steady customer demand as it provides testing services, specifically “burn-in” services to major multinational clients.

The company has undertaken intensive productivity programmes and cost management initiatives, and the results are starting to show.

For its third quarter ended April 30, KESM reported a net profit of RM7.57mil, up from RM1.73mil a year ago. Its revenue improved to RM70.77mil compared with RM62.93mil the year before.

Its cumulative earnings over nine months shows a large improvement compared with last year. For the nine months ended April 30 (9MFY16), the company saw its net profit rise to RM22.64mil compared with just RM6.58mil over the same period last year. Its revenue rose to RM211.21mil in 9MFY16 from RM194.18mil a year ago.

As part of its testing mechanism, the company can accurately identify how, where and when devices or equipment may fail during the burn-in process.

A large chunk of its RM82mil in capex this year is dedicated towards the growing automotive market, whereby KESM provides testing services for sensors, power trains and other driver-assisted systems.

Despite the substantial annual capex outlay, its bottom line has improved thanks to greater demand as well as cost rationalisation programmes. With the stock still trading at a discount to its net assets per share of RM6.52, valuations still look undemanding.

Not only is its existing cash pile of RM108mil enough to cover its entire liabilities of RM82mil, at its present share price, KESM carries a historical earnings multiple of just 6.45 times according to Bloomberg data.

As its margins continue to improve, the stock could be poised for further upside.It is worth noting that despite a brief hiccup this year, the stock had more than doubled its value in 2015 when the broader market experienced substantial turmoil. – By Afiq Isa

PALETTE MULTIMEDIA BHD

PALETTE Multimedia Bhd which has convincingly turned around, with two consecutive quarters of profits following three years of losses, might just be a wild card stock to bet on based on its new business pillar of mobile health.

People talk about the Internet of things. Well healthcare is also moving into that segment.

For Palette, it is via its iMedic system used for mobile digital medicine which enables patients to take measurements of their vital signs (for example, blood pressure, oxygen saturation in the blood and electrical activity of the heart) with home wireless medical devices.

Data from these devices is transmitted to a Cloud (which is an Internet-based database) where doctors have access and can analyse such data at any time and any place using WiFi.

The most important aspect about iMedic is that it manages complete patient information because it includes radiology and ultra-sound images.

The iMedic pillar has started generating revenue for Palette.

The stock is also cheap at seven sen and market capitalisation of only RM22.37mil.

For the three months to March 31, 2016, the stock recorded net profit of RM472,000 on the back of RM1.3mil in revenue.

For the fourth quarter to end-December 2015, Palette recorded a net profit of RM304,000 from loss of RM5.32mil. For the full year, it swung back to the black with a net profit of RM2.18mil from net loss of RM7.3mil.

More importantly, the i-Medic system has its maiden contract valued at US$500,000 (RM2mil) from Griffin International Pte Ltd.

The exciting thing for Palette is whether it is able to sign up more hospitals and replicate the business on a much larger scale, Once it gets a contract, revenue is recurring in nature. It will be interesting to see whether Palette signs up more contracts over the next few quarters. – By Tee Lin Say

CENTURY LOGISTICS HOLDINGS BHD

IN the bearish market, companies like Century Logistics Holdings Bhd offer two notable attractions – a decent dividend yield and a merger and acquisition (M&A) play.

Although Century does not have a dividend policy, but for the past five years it has been dishing out healthy dividends. Last year it paid out a total of RM20mil in dividends, which worked out to 63.7% of its profits. According to Bloomberg data, the stock currently offers dividend yield of about 5%.

According to its 2015 annual report, Century is aiming to pay more than 50% of profit as dividend.

Century has a cash position of about RM80mil, which is equivalent to about 22 sen a share but it has total debts of around the same amount. It also churned earnings before interest, tax, depreciation and amortisation (Ebitda) of some RM45mil last year.

But it is possibly its M&A play which is holding up interest in the stock, which has increased 4% year to-date, compared with the KLCI’s 4.2% drop.

In August last year, media reports indicated that parties from South Korea and Japan were looking to buy a substantial stake in Century. A source said that the negotiation is still ongoing. Prior to that even Felda Global Ventures Holdings Bhd (FGV) was looking to buy Century, but that deal did not materialise.

It learnt that Century’s major shareholders are looking to sell a significant block to a third party.

The company owns a 8.2 acres in the Eastern Gateway Industrial Hub in Klang, of which it is planning to build a multi-storey warehouse that will add about 500,000 sq ft to its current two million sq ft storage facility

At its current price of 83 sen per share, Century is trading at an undemanding forward price earnings ratio of seven times. – By Intan Farhana Zainul

DESTINI BHD

ENGINEERING specialist Destini Bhd, which caters to the aviation, marine, and oil and gas sectors is a stock to watch for the large number of projects it could be securing soon, to add to its already large order book. It is poised to win new jobs in rail-related maintenance, repair and operations (MRO), among others.

Its current order book stands at RM650mil. It is tendering for over RM1bil in contracts, out of which jobs worth RM250mil are for the rail sector including those of Keretapi Tanah Melayu Bhd.

The company seems to have strategically positioned itself in rail, a sector that has become a key focus of the Government’s transportation policy.

Sources say the company is close to clinching its maiden contract in the rail sector.

The company, which counts the Ministry of Finance Inc as its the second largest shareholder with 20,5%, has transformed itself from a pure aviation MRO service provider that was traditionally reliant on contracts in relation to the defence industry.

In the last few years, the company has ventured into a new businesses, namely oil and gas (O&G) services, marine MRO services and lifeboat manufacturing, through a series of acquisitions.

Last July, Destini inked a collaborative agreement to handle the MRO of AirAsia Bhd’s aircraft under a strategic outsourcing exercise.

The deal marks the company’s first venture into the commercial aviation MRO segment that has the capacity to see 60,000 turnarounds by 2018 from 5,000 per year it does now. According to an analyst it is expected to contribute revenue of about RM100mil per year based on an the average US$400 charge per turnaround.

Destini’s share price has moved up 13% over a one-year period to 58 sen. The stock has caught the eye of institutional interest such as Norway’s Norges Bank Investment Management. The world’s biggest wealth fund has invested in it, albeit a small stake at 1.58%. Its market cap stood at RM570.8mil based on its last traded price of 58 sen.

Its earnings has grown at a compounded annual growth rate of 17% in the last three years.

Its regional presence in the United Arab Emirates through a tie-up with AMMROC (Advanced Military MRO Centre) LLC, which is in the final stages of discussion to confirm the terms of a definitive agreement, will give it a geographical advantage to target the aviation players in the South Asia, Middle East and North Africa. – By Gurmeet Kaur

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