Thursday 28 Mar 2024
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KUALA LUMPUR: Sentiment on aviation, leisure and plantation may be impacted by news of the flu outbreak, with more than 100 dead in Mexico, while markets correct from recent overbought levels, according to OSK Investment Research.

The research house said on April 28 while it did not wish to downplay the severity of the epidemic, it felt concerns were overblown given the quick containment measures taken by governments worldwide.

“Instead, investors had been looking for an excuse to take profit and this outbreak provided the right cue,” it said.

It added that reports on the swine flu might dominate in the short term, aviation and plantation stocks would be the key losers in the event of a prolonged outbreak.

“On the other hand, rubber glove companies may benefit from higher medical equipment demand,” it said.

On April 27, CPO prices were dragged down on fears of lower demand for livestock feed. CPO third-month futures fell RM104 to RM2,481.

OSK Research said while it certainly did not want to downplay the seriousness of a fatal disease nor the outbreak in Mexico, it did note some similarities between the panic generated by the current outbreak and that sparked by a resurgence of bird flu cases in East Asia in 2003.

While the WHO has repeatedly highlighted the possibility of a pandemic arising from bird flu, we note that there have been only 421 confirmed cases of bird flu mortality since 2003.

The research house said after the experience dealing with SARS, Asian countries seem to have done a good job of containing the bird flu.

“As such, with the quick reaction from governments worldwide, we feel that swine flu could also be contained before it reaches pandemic levels. We note, however, that the key risk here is human-to-human transmission, which was an unconfirmed factor for bird flu,” it added.

OSK Research said investors’ immediate concern was the potential negative impact from the spread of the virus, especially to humans, thus adversely impacting tourism and business activities, and possibly traveling and thus the aviation business.

Taking the cue from SARS in 2003, there was a sharp contraction in passenger numbers, which led to many airlines suffering huge losses. With the current incident still very much confined within Mexico, the US and nearby countries, as well as the measures being taken to prevent the virus from spreading, “we think the outbreak could be resolved soon”.

It said although local airline companies had limited exposure to these locations, it was  more cautions on Singapore Airlines (SIA), which had generally greater coverage.

Such a development always hurts market sentiment towards aviation stocks. It said based on the latest development and airlines’ passenger numbers and yield were already under tremendous pressure, its maintained its Sell recommendation on SIA (TP: S$9) as well as its Take Profit call for MAS (TP: RM2.50) and AirAsia (TP: 93 sen).

With the Asian region still free from any swine flu cases and hence no significant impact to air passenger arrivals in Malaysia, it maintained its Trading Buy recommendation on MAHB (TP: RM3.60).

As for leisure, it said depending on the severity of the outbreak, it believed that the negative impact on Genting Highlands visitors’ arrivals was unlikely to be significant.

Resorts’ earnings were more heavily dependent on casino patronage, which we believe would reflect greater resilience as 85% comprised of the captive domestic day trippers market.

“We believe that any further selldown on the stock presents an opportunity to accumulate on weakness, noting that even during the SARS period, Resorts traded at a low of 12.4 times price-to-earnings ratio (PER).

“Assuming that news flow deteriorates and we were to assign a more conservative 10 times FY09 PER (lower end of 9 times to 22 times historical PER band), Resorts would be priced at RM2.28/share (35% discount to RNAV),” it said.

OSK Research said any further selldown in its share price to below the RM2.20 level as an opportunity to accumulate. Nonetheless, given the recent strength in its share price performance and the limited upside to its RM2.50 fair value, it was putting its call on Resorts under review.

As for plantations, it said the swine flu would have a mixed and indirect impact on the oil palm industry.

Presumably, the pandemic will cause a slowdown in demand for pork, which will reduce the demand for soybean meal, the main produce of soybean. Soybean and soybean meal price have already fallen by some 4% in reaction to the flu.

OSK Research said the price of soybean oil is relatively resilient as the drop in soybean meal demand will result in lower crushing, hence reducing the supply of soybean oil.

“Having said this, soybean oil’s price resilience may not translate into the same for palm oil as the spread between the two edible oils is much narrower than the  usual range of US$100 to US$200 per tonne. The flu could well be a trigger for the spread to normalise, that is, palm oil price will need to correct to a lower level.

Meanwhile, rubber glove manufacturers’ share prices had on April 27 risen by between 5% and 22% on April 27, on expectation that the deadly swine flu outbreak would spur demand for rubber gloves in the medical segment.

“We believe that if the outbreak continues to spread, the rubber glove companies may experience a one-off jump in sales orders since there will be a strong chance of stock replenishment,” it said.

OSK Research said most of their glove makers’ customers had been holding minimal stock level in view of the slower demand following the global economy crisis.

Some of the customers might also replenish their stocks in anticipation of some discounts given that latex price has fallen close to 10% from RM4.60/kg in February to RM4.17/kg now.

“All the five rubber glove manufacturers under our coverage produce gloves for the medical segment but among them, we believe Hartalega and Kossan would be the main beneficiaries because more than 90% of their gloves are dedicated to the medical segment, with US and Europe as their largest target markets. We continue to maintain Overweight on the sector,” it said.

 

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