Thursday, April 30, 2015

CPO prices to remain soft amid lacklustre demand and weak crude oil prices

Published on 29 April 2015
The price of crude palm oil (CPO) came in at the lower end of RAM’s price forecast of RM2,200/MT-RM2,400/MT for 1Q 2015, averaging RM2,204/MT. Notwithstanding the effects of a weak ringgit, the commodity’s price is expected to remain soft, as concerns over lacklustre demand amid competition from an ample supply of substitute oils and a weak crude oil-price environment weigh on prices. The still-narrow premium of soy oil to CPO (1Q 2015: c.USD90/MT, 2014: c.USD88/MT) could also reduce the appeal of CPO, dampening growth in demand for the commodity as consumers switch to competing oils.
A pick-up in CPO production, as yields recover after disruptions caused by floods and the effects of dry-weather that had depressed CPO production in January and February 2015, may lead to a build-up in Malaysia’s palm oil inventory to over 2 million MT in the near term, further pressuring prices. As at end-March 2015, palm oil stocks in Malaysia stood at 1.87 million MT, a respective 10.5% and 5.2% higher y-o-y and m-o-m.
Nevertheless, we note the potential price catalyst from the successful implementation of Indonesia’s mandate to increase the biofuel content in diesel from 10% to 15%. The B15 mandate is estimated to boost CPO demand by 2 million MT in 2015. Although a higher biodiesel subsidy of Rp4,000/litre and plans to impose levies on the republic’s palm oil exports to fund the B15 programme would be positive to its execution, we remain cautious of the pace of implementation, given that it is still in the preliminary stages and in view of concerns of engine incompatibility with high biodiesel content. Further, the execution of previously initiated mandates had been marred by pricing, infrastructure and logistical challenges.
Please click here to download RAM’s quarterly CPO price outlook.

Media contact
Juliana Koay
(603) 7628 1169

RAM Ratings: Thailand well placed among ASEAN peers; outlook revised to stable from negative

Published on 30 April 2015
RAM Ratings has reaffirmed Thailand’s ASEAN-scale rating of seaAA1(pi) and revised the outlook on the rating to stable from negative in June 2014. “Despite its economic challenges, Thailand still stacks up well against ASEAN peers,” says Esther Lai, RAM’s Head of Sovereign Ratings. Thailand has a healthy external position, a better track record of monetary and financial stability, deeper capital markets and better infrastructure compared to other ASEAN nations. The stable outlook reflects the country’s strong external buffers, balanced by a sluggish economic environment and evolving political landscape. The Kingdom’s reserves-to-import cover has persistently been above 9 months, compared to a peer average of less than 5 months. Moreover, the more diversified nature of the Thai economy cushions it against the current commodity slump, differentiating it in particular from Indonesia’s commodity-centric economy.
“Measured against RAM’s sovereign benchmarks, however, Thailand has underperformed our base expectations. Amid weaknesses of a slower economy, we have downgraded its rating on the global scale to gBBB1(pi) from gA3(pi) previously,” Lai highlights. Thailand’s ratings could be upgraded if we observe a sustained recovery in economic conditions and improvements in growth prospects subsequent to the sovereign addressing structural challenges. Conversely, the ratings could face downward pressure in the event of a significant worsening of government finances, further deterioration of the country’s external position and the erosion of official reserves.
“The Bank of Thailand eased its policy rate yesterday by another 25bps to 1.50%, after the most recent rate cut in March 2015. Subsequent to external and internal headwinds, this move was aimed at shoring up private confidence and providing Thai exporters with some relief against the strong Baht,” notes Lai. Nonetheless, we opine that a reduction in the policy rate is unlikely to provide a meaningful boost to economic recovery at this juncture as households were already highly leveraged at 86.8% of GDP as at end-2014. Notwithstanding increased political stability, Thailand’s economy is still fragile as private confidence and business sentiment have yet to return to levels seen after the massive 2011 flood.
Thailand’s sluggish growth of 0.7% in 2014 was significantly below the 5-year historical trend of 3.0% and the Kingdom’s long-term growth potential of 4.0% to 4.5%. Domestic demand is envisaged to remain weak in 2015 against a backdrop of poor farm income, elevated household debt and slower-than-expected progress on public spending which leads to lethargic private investments. Although the tourism sector is anticipated to contribute positively to growth, the increase in merchandised exports could be limited due to the Kingdom’s inherently weak export competitiveness coupled with uneven global recovery. In line with a contraction in export performance of 4.7% y-o-y in January and February, the government revised its 2015 export growth forecast steeply down to 0.2%, from 1.0% previously.
Figure 1: Thailand’s recovery weaker than past 5-year average of 3.0%
Sources: National Economic and Social Development Board and RAM calculations
For further information, please refer to the full report here.

Media contact
Lynette Lee
(603) 7628 1182

RAM Ratings reaffirms ratings of Quill Retail Malls’ financial/bank-guaranteed debt issue

Published on 30 April 2015
RAM Ratings has reaffirmed the ratings of Quill Retail Malls Sdn Bhd’s (QRMSB or the Company) RM850 million CP/MTN Programme (2013/2020) as follows:
Issue Size (RM million)
Up to 260
Danajamin Nasional Berhad
Up to 260
DBS Bank Ltd
Up to 180
United Overseas Bank (Malaysia) Berhad
Up to 150
The enhanced ratings reflect the irrevocable and unconditional financial or bank guarantees extended by the respective Guarantors. The guarantees enhance the credit profile of Tranches A, B and C of the CP/MTN Programme beyond QRMSB’s stand-alone credit strength.
Excluding the guarantees, QRMSB’s ability to repay the lumpy RM650 million under the CP/MTN Programme will be heavily reliant on the completion of disposal of Quill City Mall (the Mall) to the Employees Provident Fund (EPF). We are cognisant of the sustainability of the Mall’s income generation as it goes through a gestation period. With the selling price of Quill City Mall and payments from the EPF subject to the operating performance of the Mall, any potential underperformance in its net operating income may translate into a lower selling price that gives rise to a shortfall in its 2017 debt repayment.
Meanwhile, QRMSB is highly leveraged, with an adjusted gearing ratio of 3.5 times as at end-December 2014 (end-December 2013: 3.2 times). In addition, its operating cashflow debt cover is expected to remain thin in the near term on the back of hefty debt load.  
On a positive note, Quill City Mall’s strategic location fronting Jalan Sultan Ismail provides it with much visibility. Accessibility to the Mall is enhanced by direct connectivity to a monorail line and adjacent office building through a covered elevated walkway, as its close proximity to hotels and other office towers around the area enhance the Mall’s footfall potential. Elsewhere, a fairly good and diverse tenant mix at the Mall offers a holistic shopping and entertainment experience for the mass market. As at end-December 2014, about 77% of the Mall’s total net leasable area had been leased out.
QRMSB is a project company undertaking the development of some 7 acres of freehold land (with partially built buildings) located along Jalan Sultan Ismail, Kuala Lumpur, into an integrated mixed-development known as Vision City. Proceeds of the debt issue are primarily utilised for the redevelopment of Quill City Mall, which commenced operations in 4Q 2014.

Media contact
Juliana Koay
(603) 7628 1169

RHB FIC Rates & FX Market Update - 30/4/15

30 April 2015

Rates & FX Market Update

FOMC Highlights 1Q Economic Weakness to be Transitory; EGBs Fell; Short Dated ThaiGBs Rallied as BoT Cut Rates

¨    Core and peripheral EGBs sold off yesterday as investors were sidelined ahead of the FOMC meeting (10y EGB yields +12-15bps). In addition, the 5y Bund auction failed to hit the EUR4bn issuance sales target for the third time this year, with lower German CPI print likely dimming the lustre of the negative yielding Bunds, spreading underperformance to the rest of the EU govies. Investors are likely to remain cautious ahead of the shortened week, with EU CPI prints partly to dictate the appetite for EGBs, which we expect to stay subdued. Separately, the decline in the DXY persisted (-0.92%) following the underwhelming release of 1Q US GDP data at +0.2% q-o-q. The bearish USD momentum was however interrupted by the release of FOMC statement, as it emphasized that the weaker 1Q growth was transitory, with the recovery likely to resume at a moderate pace while providing no new insights to the timing of the rate hike. Nonetheless, despite the overall dovish tone from FOMC statement, yields on the mid-to-long end USTs rose by 2-5bps.
¨    Meanwhile, BoT voted 5-2 to cut interest rates by 25bps to 1.50% on the slowing exports and private consumption, supporting a rally in the short to mid tenor ThaiGBs (-1 to -7bps) while sending the USDTHB higher by 0.71% to 32.85; the level nears Thai Finance Ministry’s YE15 target of 33.10. We opine the underperforming export data may keep yields on ThaiGBs subdued. Separately, BI governor has committed to maintain Indonesia’s current account deficit in its 2.5-3.0% to GDP target, as it imposes anti dumping import duties amounting to 15% on steel products amid the supply glut; IDR appreciated by 0.45% overnight, as the USDIDR pair continues to hover below the 13,000 resistance level.
¨    EURUSD climbed towards its 2- month intraday high of 1.1188, spurred by a combination of short squeeze and softer appetite for USD following the release of US 1Q GDP. Subdued CPI and potentially softer jobs data from EU due to be released today may see the EUR pullback as it approaches its strong resistance level at 1.12/USD.

RHB FIC Credit Market Update - 30/4/15

30 April 2015

Credit Market Update

Bharat Petroleum Priced USD500m at 5Y+208bps; Weaker 1Q15 GDP to Keep APAC Credits Flowing
¨      Weaker 1Q GDP in US to keep APAC credits flowing; Bharat Petroleum raises USD500m at 5Y+208. Credit protection costs inched up 0.26bps, with the iTraxx AxJ closing at 106bps. Credit markets again opened to steeper USTs as the 2y and 10y rates rose up 4.5bps and 8.3bps respectively. Overnight, the US GDP Annualized QoQ print registered below expectations at 0.2% (consensus: 1.0%) and weaker than 2.2% in 4Q14; core PCE QoQ lowered to 0.9% (consensus: 1.0%; prior: 1.1%) while pending home sales MoM weakened but met expectations at 1.1% (consensus: 1.0%; prior: 3.1%). Additionally, the Fed kept benchmark rates status quo at 0.25%, acknowledging slowdown in 1Q15 but expecting pickup in the subsequent quarter. Secondary trading remained quiet as the market was still preoccupied with new supply, led by Bharat Petroleum Corp (BPCL, Baa3/NR/BBB-) launching USD500m 10y notes priced at T+208bps (IPT: T+225bps) and oversubscribed 4.2x, marking India’s third dollar bond sale this week after Reliance Communications and Bank of India. Nonetheless, we noted secondary yields widening in the bank space, in particular CCB 17-24s (+2-6bps), ICBC complex (+1-7bps) and AXSBIN 15-20s (+1-4bps). Elsewhere, BHARTI 23-24s softened as yields rose 9-10bps following its 4QFY15 results announcement. In the pipeline, China Construction Bank (A1/A/A) will meet investors from 1-May onwards for its upcoming USD T2 deal. Upcoming data for the remainder of the week includes US initial jobless claims and China PMI prints.
¨      O&G interest as oil prices hit YTD high. We continued to see widening in the short-to-mid SOR curve, with the 3y and 5y widening by around 2.3-2.75bps to close at 1.53% and 1.89% respectively. We saw interest tilted towards the O&G space (NCLSP, EZISP) as Brent oil prices hit a YTD high of USD65/bbl. There was also demand in recently-printed papers such as UENVSP and in existing RLSSP ahead of the retap. In the primary market, Raffles Education (NR) successfully retap the market with RLSSP 5.9% 5/18 at final price of 100 and SoilBuild Business Space REIT (BBB-/-/-) are meeting investors for a SGD issuance.
¨      MARC rates NNKSB at AA-; RAM expects CPO prices to be under pressured. Investors stayed active in the credit market with MYR764m transacted yesterday. Yields continued to move lower, notably in the banking bonds. HSBC Amanah 3/20 has narrowed by 9bps since issuance in 27-Mar to close at 4.146%. Also note tightening by couple of bps in some highly traded GG bonds - PTPTN 8/26, DanaInfra 4/40 and Prasarana 8/26. Govvies benchmarks moved sideways on relatively quiet activity of MYR1.5bn. Meanwhile, MARC assigned AA- rating to Grand Sepadu’s proposed MYR210m Sukuk, the concession owner of New North Klang Straits Bypass Expressway (NNKSB) which links from North Port to NKVE. RAM expects CPO prices to stay at the lower end of its forecast of MYR2,200-2,400/MT in 2Q15 (1Q15 averaged at MYR2,204/MT) and anticipate lower CPO prices in 2H15.

Bank of India (BOIIN) BOIIN 3.125% 5/20 Senior (Baa3/NR/BBB-) (price: 99.46 yield: 3.24%; T+185bps) (O/S amount: USD750m)
BOIIN 6.25% 2/21 Senior (Baa3/NR/BBB-) (price: 114.72; yield: 3.42%; Z+178bps) (O/S amount: USD500m )
ICICI Bank Ltd, ICICI 5.75% 11/20 Senior (Baa3/BBB-/BBB-) price: 113.71; yield: 3.04%; Z+144bps) (O/S amount: USD1.0bn)
Syndicated Bank of India, SNDBIN 3.875% 12/19 Senior (Baa3/BBB-/NR) (price: 102.43; yield: 3.30%; Z+184bps) (O/S amount: USD400m)
IDBI Bank Ltd, IDBI 4.125% 4/20 Senior (Baa3/BB+/BBB-) (price: 101.82; yield: 3.72%; Z+220bps) (O/S amount: USD350m)
Relative Value
We think the new BOIIN 3.125% 5/20 Senior is fairly valued against Indian bank peers. While offering 25bps pickup in yield (after tenor adjustment) against recently downgraded ICICI 11/20, we view the differential as justifiable as ICICI’s superior credit metrics, scale and reach and diversified loan base compensate for BOIIN’s very high likelihood of government support. We also note SNDBIN 12/19 offering 10bps more over BOIIN 5/20 considering SNDBIN’s better credit metrics. Finally, while IDBI 4/20 trades much wider than BOIIN 5/20 after adjustments by 48bps, we note that the former is on review for downgrade by Moody’s on deteriorating credit fundamentals and has a high exposure to corporate borrowers. For investors wishing to gain exposure to BOIIN, we prefer BOIIN 5/20 over BOIIN 6.25% 2/21 as the former trades 10bps wider in adjusted yield while being larger in size.
We view BOIIN’s credit profile to be sound based on the following:
1)     Very high likelihood of systemic support, as BOIIN is 64.4%-owned by the Government of India, which has demonstrated support in the form of capital injections;
2)     Strong domestic franchise, being India’s third-largest public-sector bank in terms of assets and deposits and having a well-established nationwide presence; and
3)     Stable liquidity and funding, with a loan/deposit ratio of 80.35% and deposits making up over 90% of funding.

Notwithstanding, BOIIN’s credit profile remains challenged by declining profitability (NIM: 2.29%), pressured asset quality (NPL ratio: 3.48%) and weak capitalization metrics (T1 ratio: 7.42%).

All financial data as 31-Mar 14

RHB | Economic Research | Tracking Global News

Economic Research
30 April 2015
Global News

Economic Highlights

US Federal Reserve Kept Its Key Policy Rate Unchanged But The First Rate Increase Still In Play

US Economy Near Stalled in 1Q, As Business Spending And Exports Slump

Eurozone’s Economic Confidence Weakened Slightly In April, But Bank Lending Picked Up In March

Thailand Surprised With Another Rate Cut To 1.50%

Economist:  Peck Boon Soon  | +603 9280 2163
Economist:  Vincent Loo Yeong Hong  | +603 9280 2172

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