Friday, July 29, 2016

Tenaga Nasional : Strong 3Q on peak demand BUY

Tenaga Nasional : Strong 3Q on peak demand    BUY

We maintain BUY on Tenaga Nasional Bhd (TNB) with a higher DCF-based fair value of RM17.30/share (vs. RM16.60/share earlier) as we roll forward our base year to FY17F.
TNB’s reported net earnings for the 9M period grew 6% to RM5.6bil. Excluding forex translation, TNB reported earnings of RM5.9bil – up 9% YoY. Reported topline rose 5.6% for the 9M period – in tandem with a 5.3% electricity sales growth. As anticipated, 9M electricity sales in terms of unit in Peninsular saw a strong growth of 4.5% (vs. 2.5% a year earlier). This was mainly due to stronger demand from the commercial and domestic sectors, which grew 6% and 12% respectively during the 9M period (vs. 3% a year earlier). For the 3Q, earnings grew impressively to RM2.3bil (vs. RM790mil a year earlier). While the 3Q demand was strong, management is expecting demand to normalised in 4Q. We have increased our FY16F growth assumption to 4% (vs. 3.4% earlier; FY15F: 2.2%).

Looking ahead, we expect electricity demand to be sustained on steady demand. We maintain our FY17F growth assumption of 3.3% for now. While coal prices are on the rise, we expect TNB to continue to report cost over-recovery. Recall that the tariff rebate was maintained for the July-Dec 2016 period while the price of piped gas was adjusted upwards. Reserve margin is currently at 27.9% (vs. 22.5% in end-CY15). During the briefing, management reassured that its Turkey operations remain “business as usual” while the High Court had granted TNB leave to commence judicial proceedings for IRB’s additional assessments. It is also still seeking judicial review in relation to the PPA extension for YLTP’s Paka plant. Maintain BUY; TNB is our top pick for the utilities sector given the steady demand on stable fuel prices, while the ICPT mechanism ensures earnings stability. Potential upside includes a more attractive dividend policy moving forward (current policy: 40%-60% of annual FCF) as it reassesses its capital structure; it is expected to be announced at year-end. TNB is currently trading at 10x (vs. our implied FY17F target PE of 12x).

Others :
Malaysia Airports : 2Q16: Turkey remains a drag on group             HOLD
Wesports Holdings : Strong transhipment growth from ad-hocs in 1HFY16             HOLD
SapuraKencana Petroleum : New EPCI job in Turkey        HOLD

DRB-Hicom: Shareholders’ approval for KLAS deal with POS Malaysia      BUY
Construction Sector : Another two Pan Borneo awards  OVERWEIGHT

US : 2Q2016 GDP figure expected to shed light

Malayan Banking : Indonesia’s 1HFY16 earnings more than double on better income
Public Bank : 2Q net profit gains 5%
Malaysia Airports Holdings : Posts Q2 earnings of RM9mil on higher revenue
Astro Malaysia Holdings : Ends ties with Bloomberg Malaysia

US Treasury yields hovered near prior levels, as investors awaited BoJ meeting outcome on Friday.

Market Roundup
  • US Treasury yields hovered near prior levels, as investors awaited BoJ meeting outcome on Friday. Elsewhere, US macro data were weak ahead of Friday’s release of 1Q2016 GDP, including initial jobless claims which rose to 266k as at 23 Jul, from 252k recorded a week ago, whilst US goods trade balance narrowed to a deficit of $63.3 billion in Jun from -$61.1 billion in May.
  • Following poor auction results from 2T and 5T conducted earlier this week, the $28 billion 7T auction was well received with a bid-cover of 2.51 times, similar to the past twelve months’ average. High yield stopped at 1.34%, whilst indirect bidders took 65.5% of the sales.
  • USD continued to show weakness against major rivals. EUR/USD peaked at 1.1119, but was eventually pared lower and closed at 1.1077. Still see upward bias, with immediate resistance at 1.1150. On the flipside, USD/JPY remained range trading, amid speculation of further easing measure to be conducted by BoJ.
  • USD/MYR dipped and tested the support of 4.0500 on Thursday. Topside remains at 4.1500 at this juncture, given the broadly weaker USD post FOMC. However, downside may be limited in the short term amid declining crude oil prices.
  • Ringgit denominated sovereign bonds posted mild gains on the back of improved sentiment in conjunction with firmer Ringgit post FOMC. Expect market to further strengthen if Ringgit and crude oil prices are able to stabilize.
  • Thai govvies stood on stronger footing, tracking gains in overnight UST following the FOMC decision. Flows were relatively thin at Bt17.3 billion, led by LB21DA and LB206A, whilst lower than Bt30.1 billion garnered a day prior. We reckon that Thai govvies will see better support in the medium term period, as the Fed is expected to tighten at a gradual pace.
  • Indonesian government bond market was relatively quiet ahead of BoJ meeting. Indo govvies were dealt on biddish tone with local players seemed to be on the paying side, and some buying action occurred on the shorter dated bonds with maturities of 2-3 years. Market volume fell to IDR11 trillion and was dominated by bonds maturing in over 10 years (69%).

Moody’s Places Chinese Financial Leasing Companies Under Review for Upgrade; Lippo Karawaci Slashed to B+

29 July 2016

Credit Markets Update

Moody’s Places Chinese Financial Leasing Companies Under Review for Upgrade; Lippo Karawaci Slashed to B+
¨      APAC USD Credit Market: Asian credit markets unchanged post-FOMC. IG spreads rose 1.6bps to 199.4bps while non-IG bond yields narrowed -2bps to 6.27% while Asian CDS was a tad lower at 119.3bps. Benchmark USTs’ settled broadly flat with the exception of the 2y which tighten 1bps to 0.70%, whereas the 30y added 2bps to 2.23%, ahead of the BOJ meeting, plunging oil prices (Brent: -1.9% to USD42.6/bbl) and better initial jobless claims at 266k (consensus: 262k). Turning to ratings, PT Lippo Karawaci was slashed to B+/Sta from BB-/Neg by S&P driven by elevated leverage and poor debt servicing ability amid slower property sales and delays in asset disposals. Moody’s placed Chinese financial leasing companies’ (China Development Bank Financial Leasing, ICBC Financial Leasing, CCB Financial Leasing and CMB Financial Leasing) ratings on review for upgrade to reflect their importance to the parent banks. In the primaries, Adani Transmission (Baa3/BBB-/BBB-) received a whopping 10.2x BTC for its USD500m 4.0% 10y bonds at T+260bps; IPT at 290bps, while India EXIM (Baa3/BBB-/NR) sold USD1.0bn 10y 3.375% bonds at T+187.5bps against IPT +210bps area (BTC: 2.5x).
¨      SGD Credit Market: Sell-off in the O&G space; Sembcorp Marine’s 2Q16 results disappoint. There was a bull flattening in the short-to-mid benchmark swap curve, with the 5y falling by 4.5bps to 1.73% while the 2y dipped 2.3bps to 1.49%. The Swiber winding-up application announcement yesterday has unsurprisingly seen a sell-off in the O&G space on papers such as VALZSP and NCLSP. DBS Group announced that it has exposures of SGD700m to Swiber via loans and off-balance sheet exposures. Meanwhile, Sembcorp Marine (NR) announced that its 2Q16 revenue dipped by 24.8% YoY to SGD908.5m while its net profit was 91% lower at SGD10.7m, partially dragged down by tightening gross profit margins and foreign exchange loss on its British GBP assets.
¨      MYR Credit Market: More contract awards for Pan Borneo Highway Project. A total of MYR2.89bn of contracts awarded to Naim-Gamuda (MYR1.57bn) and Musyati-Mudajaya (MYR1.33bn) for the construction of Pan Borneo Highway Project. Corporate activities increased by 70% to MYR726m. Most active was Cagamas with tranche ’18-’20 on combined MYR110m closing mixed in between 3.528-3.782% (-6 to +10bps). In the primary market, BGSM Broadband (NR) issued MYR840m 9y IMTN at 5.40% amid the internal reorganization of BGSM Group. Govvies market ended mixed with MGS10y settling 1bp lower at 3.60%, while 5y rose 2bps to 3.23%. Nevertheless, MYR strengthened 0.8% to 4.0493/USD after the FOMC meeting.

It was a sea of red for the European session ahead of ECB stress test results due today.

FX Research
by Saktiandi Supaat

BoJ Jitters, ECB Stress Test

It was a sea of red for the European session ahead of ECB stress test results due today. US stocks also started in red before regaining their foothold and ended the session mixed. US weekly jobless claims rose to 266K and its Jun trade deficit was also wider than expected. We are in for a jittery session this morning ahead of BOJ policy announcement at mid-day. Nikkei was last seen flat as investors steered to the side-lines ahead of the policy announcement.

Brexit Uncertainty Weighed on Consumer Sentiment, Fuelling BoE Rate Cut Views in the Week Ahead

29 July 2016

Rates & FX Market Update

Brexit Uncertainty Weighed on Consumer Sentiment, Fuelling BoE Rate Cut Views in the Week Ahead


¨   Global Markets: Modestly higher jobless claims did little to sway sentiment on USTs, with movements on the curve remaining relatively subdued post FOMC statement. Decent demand was seen for the 7y UST issuance which garnered a BTC of 2.51x despite a lower cutoff yield and coupon of 1.340% and 1.250% respectively (June: 2.56x; 1.497%; 1.375%) as FOMC appeared to provide little signals towards an imminent rate hike over the coming quarter, underscoring our mild overweight stance on USTs. Meanwhile, GBP underperformed despite the softer USD overnight, with the sharpest drop of GfK Consumer Confidence in more than 26 years reigniting Brexit concerns, fueling speculations towards a 25bps a BoE rate cut in the week ahead; remain positioned to sell GBP on strength.
¨   AxJ Markets: Singapore’s unemployment rate climbed to 2.1% in 2Q (1Q: 1.9%), with the services sector accounting for the bulk of the layoffs (62%). Expectations for a sluggish economic outlook alongside increasing global risks could continue to exert pressure on the economy, fueling speculations for MAS to re-centre the SGD NEER in October; maintain mildly bearish SGD. Turning to South Korea, IP posted a soft growth of 0.8% y-o-y in June (May: 4.7%), compounding on the optimism within the market following the release of stronger than expected 2Q GDP growth. However, KTBs continued to post strong gains, with 10y UST-KTB spread sustaining its 6-month high of 13bps on further easing expectations; maintain neutral stance on KTBs. Elsewhere, Thailand’s manufacturing output climbed for the fourth consecutive month but remained constrained by the tepid external demand; maintain neutral view on THB with expectations for political uncertainty to remain contained amid the Constitution Referendum.
¨   Strong appetite for risk assets following the release of FOMC statement spurred sharp appreciation on KRW to its 9-month high of 1125/USD. With CNY, the currency of its largest trade partner, testing new lows and expected to continue depreciating over the medium term, the strong performance on KRW is likely to erode the attractive of South Korean exports, further exerting pressure on the sluggish economic recovery.

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