MARC has affirmed its AAA(bg) rating on Boustead Holdings Berhad's (Boustead) RM1.0 billion Bank-Guaranteed Medium-Term Notes (BG MTN) programme with a stable outlook. The rating reflects the credit strength of the syndicated bank guarantee fa

MARC has affirmed its AAA(bg) rating on Boustead Holdings Berhad's (Boustead) RM1.0 billion Bank-Guaranteed Medium-Term Notes (BG MTN) programme with a stable outlook. The rating reflects the credit strength of the syndicated bank guarantee facility provided by OCBC Bank (Malaysia) Berhad (OCBC Malaysia), Public Bank Berhad (Public Bank), Malayan Banking Berhad (Maybank) and The Bank of East Asia (BEA) Labuan Branch, all of which carry financial institution ratings of AAA/Stable from MARC. The ratings on OCBC Malaysia and Public Bank are based on publicly available information. As at end-January 2017, the outstanding MTNs under the rated programme stood at RM600.0 million.

Boustead's standalone credit profile has benefitted from a moderate decline in borrowings from part-proceeds of the RM1.05 billion rights issue and a series of asset disposals. Total group borrowings declined to RM7.3 billion at end-September 2016 (9M2016) from RM8.0 billion at end-FY2015, resulting in lower leverage of 0.86 times from 1.09 times at 9M2015. MARC views positively Boustead's ongoing debt reduction efforts amid a tough operating environment for its key subsidiaries which are involved in plantation, property, heavy industries and pharmaceutical.

For unaudited 9M2016, Boustead's financial performance was primarily supported by asset monetisation in the plantation and property divisions, which provided RM316.1 million in disposal gains. On excluding disposal gains, the plantation and property divisions' pre-tax profits were RM77.2 million and RM41.0 million respectively (9M2015: RM88.7 million; RM31.2 million). During the period, fresh fruit bunch production fell by 14% y-o-y to 660,497 MT due to adverse weather conditions. The plantation division's performance was moderated by the improving palm product price environment, with the average selling price of crude palm oil (CPO) increasing by 15% y-o-y to RM2,475 per metric tonne as at end-9M2016. MARC opines that the plantation division's performance going forward would also be supported by the favourable maturity profile of Boustead's 65,366 ha plantation, of which 53% is of prime age.

Boustead's property development division has a limited number of ongoing projects; during 9M2016, it launched 403 units of mid-priced double-storey terrace houses in its Taman Mutiara Rini residential project in Johor. The division's RM3.0 billion mixed development project along Jalan Cochrane, Kuala Lumpur, comprising commercial and residential units and a shopping mall, has reached over 80% completion, and is expected to be completed by mid-2017.  As of end-November 2016, the take-up rate for the project is approximately 80%.

Its property investments comprising two retail malls in Mutiara Damansara, Selangor, four office buildings in the KLCC area, and one office tower in Penang recorded a strong average occupancy rate of 95%. However, a large portion of the rental cash flows from these assets will be channelled to meet financial obligations under the outstanding RM760.0 million asset-backed bonds which will mature in 2019. The group's hotel segment under the ''Royale'' brand has been registering lower average occupancy rates of about 52%.

Boustead's heavy industries division was adversely affected by high working capital requirements and cost overruns in ship construction and restoration projects. This led to a widening of the heavy industries division's pre-tax loss to RM133.9 million as at end-September 2016 (9M2015: negative RM31.6 million). The heavy industries division has sizeable outstanding government contracts of RM6.4 billion; its major contract involves building six combat ships; the first ship is expected to be delivered in 2019 while the physical construction of the second ship commenced in November 2016. The trading and industrial division, which is the major revenue contributor of the group, registered improved profitability; nonetheless, it is characterised by regulated margins under the automatic pricing mechanism for the retail petroleum business.

Boustead's pharmaceutical division, supported by a 10-year concession expiring in 2019, recorded a 25.2% y-o-y decrease in pre-tax profit to RM52.9 million in 9M2016 due largely to higher selling and distribution costs as well as an increase in finance cost. Given the limited potential for expansion domestically, Boustead may continue to seek opportunities to grow in the foreign markets.

MARC notes that Boustead's consolidated CFO as at end-September 2016 stood at a low RM91.9 million; however, its liquidity position remains strong as reflected by cash and cash equivalents of RM982.0 million, which includes the unutilised proceeds of RM400 million from the initial public offering (IPO) listing of its plantation subsidiary, as at end-September 2016. Boustead's outstanding maturing notes of RM600.0 million under the rated programme are due at end-November 2017 when the programme will expire. The maturing debt is likely to be met largely from external borrowings.

At the holding company level, dividends from subsidiaries and associate companies increased by 38.3% y-o-y to RM297.9 million in 2015, mainly as a result of higher contribution from the plantation division. Boustead has continued to adhere to its high dividend payout policy, although dividend payout declined to RM217.1 million in 2015 (2014: RM294.8 million).

Noteholders are insulated from any downside risks in relation to Boustead's credit profile by the irrevocable and unconditional bank guarantees provided by the consortium of banks.

Contacts:             Cheah Wan Kin, +603-2082 2232/ wankin@marc.com.my; Taufiq Kamal, +603-2082 2251/ taufiq@marc.com.my

February 24, 2017

Strong bid. Today’s 30y MGS 3/46 auction garnered a sold bid/cover of 2.562x on an expected MYR3b total supply (MYR2b auction + M

Results: MGS 3/46 Reopening

·         Strong bid. Today’s 30y MGS 3/46 auction garnered a sold bid/cover of 2.562x on an expected MYR3b total supply (MYR2b auction + MYR1b private placement). Market is slowly regaining confidence to extend duration as the MGS curve flattened with good bids even in the ultra-long sector. Unlike previous several tenders that cheapened 5-10bps leading to the auction day, the MGS 3/46 was holding up well and strengthened alongside an improved market with real money accounts seen chasing the curve lower.

·         WI was quoted at around 4.69/66 in the morning and was held pretty much in that range to auction close. Successful yields cut off at a reasonably tight 4.686% and averaged 4.676%. To a certain extent, the auction results was partially helped by one third/MYR1b of the total supply being privately placed as this reduced the available size to market.

·         Next auction is the new issue of 5y MGS 3/22. We estimate a size of MYR4b.

Bid to cover:            2.562

Highest yield:           4.686%

Average yield:         4.676%

Lowest yield:           4.660%

Cut off:                   5%

* Consumer prices in Brunei Darussalam fell 0.2% y-o-y in January as prices in the food and non-alcoholic beverages group decreased 0.9% y-o-y and prices in the non-food group were unchanged. In Hong Kong, China, consumer prices rose 1.3% y-o-y in January, up from 1.2% y-o-y in December. Consumer price inflation in Malaysia climbed to

To read the full report, data and graphs go to http://asianbondsonline.adb.org/newsletters/abowdh20170227.pdf?src=newsletter&id=uWidK3KdmgXVUWes9IgIcqKp1miwxx

******************************************************************************

News Highlights - Week of 20 - 24 February 2017

Hong Kong, China’s gross domestic product (GDP) growth accelerated to 3.1% year-on-year (y-o-y) in the fourth quarter (Q4) of 2016 from 2.0% y-o-y in the third quarter (Q3) of 2016. The faster growth rate was largely due to stronger domestic demand and a rebound in exports. For full-year 2016, GDP grew 1.9% annually, up from revised 2.4% growth in 2015. Thailand’s GDP rose 3.0% y-o-y in Q4 2016, slightly down from the 3.2% y-o-y growth posted in Q3 2016. Thailand’s economic expansion was supported by growth in both the agricultural sector, which rose 3.2% y-o-y in Q4 2016 after expanding 0.9% y-o-y in the previous quarter, and the non-agricultural sector, which rose 3.1% y-o-y following an increase of 3.2% y-o-y in Q3 2016. For full-year 2016, Thailand’s GDP expanded 3.2% annually, exceeding the 2.9% growth achieved in 2015.

*     Consumer prices in Brunei Darussalam fell 0.2% y-o-y in January as prices in the food and non-alcoholic beverages group decreased 0.9% y-o-y and prices in the non-food group were unchanged. In Hong Kong, China, consumer prices rose 1.3% y-o-y in January, up from 1.2% y-o-y in December. Consumer price inflation in Malaysia climbed to 3.2% y-o-y in January from 1.8% y-o-y in the preceding month, its highest level since 4.2% y-o-y inflation was recorded in February 2016. Singapore’s consumer prices continued to rise in January after inflation returned in December following 2 years of deflation. Consumer price inflation in January rose to 0.6% y-o-y from 0.2% y-o-y in December. Seven out of the ten major subgroups registered price increases.

*     Last week, the Monetary Policy Board of the Bank of Korea decided to maintain its base rate at 1.25%. The central bank cited improvements in the global economic recovery but also noted risks, including the economic policies of the new United States administration, pace of Federal Reserve rate hikes, spread of trade protectionism, and political climate in the eurozone.

*     Exports from Brunei Darussalam amounted to BND512.9 million in December, which represented decreases of 12.4% month-on-month and 23.7% y-o-y. Imports increased 6.9% month-on-month but decreased 4.5% y-o-y to BND309.6 million. Brunei Darussalam registered a trade surplus of BND203.3 million in December. Japan’s exports inched up 1.3% y-o-y to JPY5.42 trillion in January and imports rose 8.5% y-o-y to JPY6.51 trillion, resulting in a monthly trade deficit of JPY1.09 trillion.

*     Based on the latest report from the Singapore Economic Development Board, Singapore’s manufacturing output grew 2.2% y-o-y in January after steeply rising 22.1% y-o-y in December.

*     Upcoming data releases this week include consumer price inflation data for Indonesia, Japan, the Republic of Korea, and Thailand; and trade data for the Republic of Korea, Malaysia, Thailand, and Viet Nam. In addition, Bank Negara Malaysia will hold a monetary policy meeting on 2 March 2017. 

*     Local currency government bond yields fell for all tenors in the PRC; and for most tenors in Malaysia, Singapore, and Viet Nam. Yields rose for all tenors in the Republic of Korea; and for most tenors in Indonesia. Meanwhile, yield movements were mixed in Hong Kong, China; the Philippines; and Thailand. Yield spreads between the 2-year and 10-year tenors widened in all markets except in the PRC, Indonesia, Malaysia, and Singapore.

******************************************************************************

The RM2.0 billion 30-year MGS (MGS Mar’46) reopening auction (alongside RM1.0 billion private placement) saw firm demand with a bid-to-cover ratio of 2.562 times. Meanwhile, average yield was 4.676%, within a narrow spread of 4.660-4.6

30-year MGS auction

• The RM2.0 billion 30-year MGS (MGS Mar’46) reopening auction (alongside RM1.0 billion private placement) saw firm demand with a bid-to-cover ratio of 2.562 times. Meanwhile, average yield was 4.676%, within a narrow spread of 4.660-4.686%, and which was tighter than WI of 4.72/61% quoted late last week.
• The 30-year MGS has substantially tightened from peak of 4.90% earlier this year. However, if positive factors persist (such as doubts on Trump fiscal plans and delay in Fed hikes support further UST rally) technically it may still see upside with a 4.55% support level, in our view. On top of that, 10x30 spread appear to be relatively stable at 67bps, in contrast to median spread of 63bps since Dec 2016.

CPI Review Consumer Price Index (CPI) in January 2017 increased due to the rise in prices of motor vehicle registration fees, electricity tariff, foodstuffs, mobile phone tariff, gasoline, car, gold jewelry, and ho

Monthly Inflation:” Still Benign”

CPI Review

Consumer Price Index (CPI) in January 2017 increased due to the rise in prices of motor vehicle registration fees, electricity tariff, foodstuffs, mobile phone tariff, gasoline, car, gold jewelry, and hospital tariff. Furthermore, monthly inflation reached 0.97% m-o-m, higher from 0.42% m-o-m in the preceding month. Based component, the inflation was posted by the transportation and communication component rose by 2.35% m-o-m, the housing component increased by 1.09% m-o-m, and the foodstuffs component experienced rose by 0.66% compared to preceding month. Moreover, the prepared food component rose by 0.47% m-o-m, the medical care component increased by 0.50% m-o-m and. Furthermore, the education component slightly increased by 0.12% m-o-m and by the clothing component rose by 0.33% m-o-m.

Inflation in the transportation and communication component in January 2017 came primarily from higher prices of motor vehicle registration fees, mobile phone tariff, gasoline, and car prices.

Meanwhile, inflation in the foodstuffs component in January 2017 mainly stemmed from higher prices of chili, fish, chicken meat, rice, salt fish, potato, carrot, grapes, oranges, melon, water melon, and cooking oil. We believe the price increase in these products were mainly due to

a.   Lower domestic supply

b.   Higher domestic demand

Furthermore, inflation in the housing component in January 2017 came primarily from higher prices of electricity tariff, housing rents, housing contracts, labor wages, and servant wages. Inflation in the medical care component in January 2017 came primarily from higher price of hospital tariff.

Moreover, inflation in the prepared foods component in January 2017 mainly stemmed from higher prices of rice with meal, cigarette, white cigarette, and filter cigarette. Inflation in the education, recreation and sports component in January 2017 mainly stemmed from higher prices of courses/training sub-sector.

Meantime, inflation in the clothing component in January 2017 came primarily from higher prices of gold and jewelry.

On a yearly basis, inflation remains in check with the upward trend still intact, as the inflation increased to 3.49% y-o-y in January 2017 compare 3.02% y-o-y in the previous month. Furthermore, year to date inflation in January 2017 reached 0.97% higher than 0.51% for the same time frame in 2016.

CPI Outlook

We expect inflation pressures are still benign in February 2017. Inflationary pressures are still rooted in electricity tariffs, although not as big as the previous month. Meanwhile, foodstuffs prices are still high, but tend to decrease as red chili sauce, chili sauce, chicken, eggs, and sugar. While, prices of beef, rice, cooking oil and instant milk are still experiencing an increase. The price of gold jewelry also showed a slight increase. Based on these factors, we expect the consumer price index in February 2017 may increase 0.28% m-o-m lower than in January 2017 which reached inflation 0.97% m-o-m. However, we expect the yearly inflation rate in February 2017 will increase to 3.88% y-o-y from 3.49% y-o-y in January 2017. Looking ahead, we also expect inflation may reach 4.28% y-o-y by the end of 2017.

Meanwhile, we expect core inflation is still tame in February 2017. Core Inflationary pressure is still caused by rising prices of gold jewelry, car, housing rent, and housing contract. We expect core inflation in February 2017 may reach 0.26% m-o-m lower than 0.56% m-o-m in January 2017. Furthermore, we expect the yearly core inflation in February 2017 will decrease to 3.30% y-o-y from 3.35% y-o-y in the previous month. Forward looking, we also expect core inflation may reach 3.60% by the end of 2017.