This article first appeared in The Edge Financial Daily on July 10, 2017
The Edge Financial Daily compiled a list of 10 stock picks for the year based on some of the investment themes recommended by fund managers and analysts at the beginning of the year. While there were some recommendations that did well, the list overlooked certain sectors, such as the banking sector that has performed very well so far. However, “The Edge Financial Daily’s Top 10 Stock Picks for Year 2017” still managed to record an average total return of 18.6%. It outperformed the benchmark for most of the global markets except Korea’s Kospi Index.
Magni-Tech Industries Bhd
The top performer among the stock picks, Magni-Tech Industries Bhd, saw its share price surge by 82.23% in the first half of 2017 (1H17). Inter-Pacific Research, which gave a “buy” call on the largest original manufacturer for Nike in Malaysia, has since upgraded the target price (TP) from RM5.72 at the beginning of the year to RM7.50 in the latest research report dated June 29. However, the research house has tweaked its view on the company to “neutral”.
Brian Yeoh, the analyst who tracks the company, said in his report that he expects the garment maker to see its earnings in the financial year 2018 (FY18) and FY19 remain flat as its capacity utilisation is almost full.
“We have turned cautious about earnings growth as its top customer, Nike, has been affected by a sluggish retail environment, slow US apparel industry sales and rising competitive pressure from Adidas and Under Armour,” Yeoh said.
The group’s managing director, Tan Poay Seng, however, told The Edge Financial Daily that Magni-Tech still has capacity to grow from its current level with the construction of the first phase of its new factory in Vietnam expected in the first quarter next year.
“We have started construction to build a modern and green flagship factory in Vietnam on a 44.2 sq m strategic land in Tien Giang Province,” Tan said.
According to him, the first phase would see an additional output of 10 million pieces of garments per year. The second phase is targeted to be completed by the first quarter of 2019, which will increase the output of another 10 million pieces per year.
The question on whether Nike could maintain its earnings growth was posed at the beginning of 2017 but the sportswear giant’s latest financial results topped analysts’ expectations, helped by strong sales growth outside the US.
It is also interesting to see how Nike’s latest collaboration with Amazon and Instagram will pan out as Nike will soon start selling sneakers and other sporting goods through these platforms. While the latest tie-up could be a game changer and benefit Magni-Tech in the longer run, there has not been a lot of success by retail, luxury and beauty brands over selling to social media-addicted millennials.
Nonetheless, Nike’s decision to turn to Amazon and Instagram for the next phase of growth bodes well for investors as its share price jumped by 10.96% to US$59 (RM253.70) from US$53.17.
As for Magni-Tech, despite a strong share-price performance, it is trading at a trailing price-earnings ratio (PER) of about 10 times. A long-term investor of the company would have seen an annual return of about 38.34% in the last 10 years.
Another fund manager said that it is a tall order to maintain its earnings growth but the management has a strong track record and should be able to meet the expectations moving forward if Nike could penetrate into the millennials through Amazon and Instagram.
It is also worth noting that the Fifa World Cup 2018, one of the most popular sporting events, could boost earnings growth for Nike, which could be beneficial to Magni-Tech as well. — By Billy Toh
Bumi Armada Bhd
Despite seeing a few contract cancellations, Bumi Armada Bhd recently saw its tides turn by achieving first oil for its Kraken floating production storage and offloading (FPSO) unit.
The offshore oil and gas (O&G) services provider has seen a 15.15% return year to date, in terms of share price. The stock closed at 76 sen on June 30 up from 66 sen at the start of 2017.
Choo Swee Kee of TA Investment Management continues to remain positive about the stock for the next six months in light of the establishment of a new FPSO in Ghana.
“Our hope is that all the bad news is out and moving forward earnings could start to pick up,” he told The Edge Financial Daily.
Net profit for the first financial quarter of FY17 (1QFY17) doubled to RM48.11 million on higher FPSO contribution although revenue slipped 6.17% to RM404.17 million due to lower utilisation of its offshore support vessel (OSV). However, the results marked a turnaround from a poor 4QFY16, with a net loss of RM1.29 billion due to impairment charges.
According to Bloomberg data, 10 analysts have a “buy” recommendation on the stock while eight recommend holding it.
CIMB Research resumed coverage on the company, Asia’s largest FPSO and OSV operator, in early June with an “add” call, saying that with two terrible years now behind it, the group can look forward to improved earnings and cash flow.
However, AmInvest Research, which has a “hold” call on the stock, said that the cessation of FPSO operations in Nigeria warranted a cautious outlook for its near-term earnings trajectory. — By Samantha Ho
Inari Amertron Bhd
One main catalyst for Inari Amertron Bhd being chosen as one of the top picks for the year was the anticipated positive impact from iPhone’s 10th anniversary this year especially with the company having a solid relationship with Broadcom, which has a three-year supply agreement with Apple until 2018.
The initial fear of how Trump’s protectionism policy would affect Inari has also subsided, which is positive for the group as well.
Affin Hwang Investment Bank Bhd’s analyst, Kevin Low, said in his report dated June 29, that Inari should see a seasonal pickup in the radio frequency division to facilitate new builds for its US customer in 2H17.
He said that Inari is upgrading tester capacity by 10% to 770 units.
According to Low, production of the Iris chips has gradually ramped up to its installed capacity of five million units per month after being fully qualified in February this year and he expected the capacity to double in July with further plans of capacity expansion by the third quarter of this year, bringing installed capacity closer to the 16 million units per month level. The Iris chips are expected to contribute up to 14% of Inari’s earnings by FY18.
Besides near-term growth being fuelled by rising mobile device complexity, wider global LTE coverage and broader adoption of the Iris biometric scanning function, Inari also has a foot in the data server business and vertical cavity surface emitting laser packaging should also allow Inari to ride on the next wave of laser growth.
In 1H17, the group’s share price gained 29.63%. Affin Hwang maintains its “buy” call for the company with a TP of RM2.60, which indicates an upside of 18.2% as of its closing price of RM2.20 last Friday. — By Billy Toh
Sime Darby Bhd
Sime Darby Bhd’s share price had been expected to climb on proposed corporate restructuring following the appointment of Tan Sri Abdul Wahid Omar as the chairman of Sime Darby’s controlling shareholder, Permodalan Nasional Bhd.
Half a year down the road, the conglomerate has offered more clarity on the restructuring plan, announcing an in specie dividend to existing shareholders for both its property and plantation units sometime in 4Q17. Its share price had gained 16% as at June 30.
According to Bloomberg data, “buy” calls on the stock continue to outweigh “hold” calls by 11 to nine. Out of 23 analysts who cover the stock, the consensus TP of 19 of them is RM9.81 per share in Sime Darby.
However, Moody’s Investors Service has cautioned that it may downgrade the group’s “Baa1” rating on uncertainties from the spin-offs as this would reduce diversification, scale and cash flow, thereby raising the group’s business risks. — By Samantha Ho
Genting Malaysia Bhd
Although Genting Malaysia Bhd ended 1H17 as the second-best performer on the FBM KLCI with a 20.09% increase in share price, the party may not be over for the gaming counter just yet as more gaming and non-gaming revenue is expected to roll in throughout its upcoming quarters on full operations at its Sky Plaza.
Maybank IB Research’s Samuel Yin Shao Yang lifted earnings estimates by 3% to 6% for the next three years on higher priced meals at Sky Avenue, a higher average price per ticket at 20th Century Fox World and a maiden 20th Century Fox World sponsorship income of some RM50 million effective mid-2017.
The research house upgraded its call from “hold” to “buy” and the counter’s TP by 14% to RM6.15 from RM5.40, with earnings expected to grow in 3QFY17 supported by the opening of VIP rooms and 250 suites at the Sky Plaza, Genting Highlands Premium Outlet and the Theme Park Hotel.
“We also understand that most Sky Avenue tenants will begin paying rent in 3QFY17 after their rent-free period expires,” Yin noted.
The 12-month consensus TP from 20 analysts is RM6.15, with seven having a “buy” call and 11 analysts having a “hold” call, while two are telling clients to sell the stock. — By Samantha Ho
Ta Ann Holdings Bhd
Expected to see a turnaround in 2017, Ta Ann Holdings Bhd was the worst performer in 1H17 among the 10 stock picks as its share price fell by 10.4%. Instead of bottom fishing, the experience of holding Ta Ann shares for investors would probably feel more like catching a falling knife instead.
Nonetheless, analysts remain positive about the company, with Bloomberg compilation showing a 12-month TP of RM3.93, indicating an upside of 11.3%. However, of nine analysts, only two of them have a “buy” call with the rest recommending to “hold”.
MIDF Research recommended a “buy” call with a TP of RM4.30, which represents 21.8% upside to Ta Ann’s 1QFY17 core net income of RM42.2 million, which was above expectations. Alan Lim, the analyst from MIDF Research, said that the strong result was caused by stellar performance of the plantation division as 1QFY17 fresh fruit bunch (FFB) production growth came in stronger than expected at 20% year-on-year to 148,715 tonnes.
While the KL Plantation Index gained 3.9%, Ta Ann saw its share price fall by 10.4%. Recall that the group also saw a lacklustre year in 2016 when its share price fell by 5.58%.
Lim said the recommendation being upgraded to “buy” was due to an expectation of plantation division’s earnings growth to remain strong on high FFB volume seen at 10%, the timber division to remain profitable due to support from high export log prices and it is a key laggard among plantation stocks. — By Billy Toh
Protasco Bhd
Picked as one of the construction players that were expected to benefit from the government’s spending on infrastructure building, Protasco Bhd had not been up to the expectations, at least in terms of share price. The stock dropped nearly 8% in 1H17.
Nonetheless, the company saw its joint venture with Kumpulan Perangsang Selangor Bhd awarded a RM174.4 million contract for the proposed infrastructure works at Pulau Indah Industrial Park, which are for 18 months and scheduled for completion in January 2019.
Jeremy Goh, an analyst with Hong Leong Investment Bank (IB), shared that Protasco has a letter of intent for phase three of the 1Malaysia Housing Project for Civil Servants in Putrajaya.
Other than a potential election play, Protasco also has a strong defensive nature for a construction player with its dividend yield of about 5.7%.
Hong Leong IB has a TP of RM1.20 for Protasco, indicating an upside of 14.3% based on its close last Thursday. — By Billy Toh
Sapura Energy Bhd
O&G services provider Sapura Energy Bhd, previously SapuraKencana Petroleum Bhd, saw its share price take a beating after reporting a 75% slump in its net profit for 1QFY18.
A low oil price environment and worsening rig utilisation also did not help. Its share price had seen a drop in profitability amid higher taxation. Its revenue took a hit in 1QFY18, falling 9% on lower contributions from the drilling and exploration segment and the production segment.
The results sent its share price down to RM1.57 — the lowest level since early December last year. It closed at RM1.65 last Friday, trading at a forward PER of slightly more than 40%, according to Bloomberg.
Bloomberg data indicates that a higher number of analysts — now seven — has a “buy” call on the stock compared with the five that recommended adding it at the beginning of the year.
However, six analysts downgraded the stock within the past two months, lowering the consensus TP to RM3.19. — By Samantha Ho
Classic Scenic Bhd
While Classic Scenic Bhd underperformed against the FBM KLCI, the company has proven to be a resilient counter that is suitable for a defensive strategy with a high dividend yield of about 6.04%.
The wooden picture frame maker’s share price increased by 1.68% in 1H17.
Its latest quarterly financial results showed a 12.2% decline in net profit to RM3.7 million for 1QFY17 from RM4.2 million in the corresponding quarter a year ago, mainly attributed to a varying product mix and higher cost of labour and operating expenses as a result of lower fair value gain from foreign currency forward contracts.
The company is primarily involved in the manufacturing and export of high-end wooden picture framework mouldings and about 90% of its sales come from the export market, mainly to the US and are denominated in US dollars.
Classic Scenic continues to remain one of the best defensive counters given the strong balance sheet, with its net cash standing at RM26.4 million or 21.9 sen per share at end-March, an increase from RM23.9 million in 2016.
The group also has a good track record of generous dividend payout. In 2016, Classic Scenic paid a total of 11 sen per share for dividends, up from 10 sen per share a year ago.
InsiderAsia, which remains positive about the company, estimated a total dividend of 13 sen to 14 sen per share for 2017, giving an above-market average yield of above 7%. — By Billy Toh
Gamuda Bhd
Gamuda Bhd, whose shares soared 14.29% year-to-date to close at an eight-year high of RM5.50 per share, still appears to be riding on a wave of optimism towards the construction sector ahead of the upcoming elections.
Widely held as a proxy for the sector and beneficiary of expected infrastructure jobs to be awarded, the counter still commands a “buy” call by 18 out of 23 analysts covered by Bloomberg data. The consensus TP is RM5.93 per share by 20 out of 23 analysts.
CIMB Research kept the counter as its top pick as a beneficiary of the rail theme, with Hong Leong Investment Bank agreeing that Gamuda would ride on upcoming mega rail projects such as the Kuala Lumpur-Singapore High-Speed Rail, light rail transit Line 3 and East Coast Rail Link.
Meanwhile, AffinHwang Capital Research had cut its earnings forecast by 5% to 6% to reflect lower property earnings and higher tax rates. However, it raised its TP for the stock to RM5.94 per share and highlighted that the group targeted a higher new contract target of RM10 billion from RM3 billion to RM4 billion this year.
Property sales recovered for Gamuda in 3QFY17 at RM620 million compared with RM575 million in the year before. Net profit had been on a climb over the past three quarters to RM170.93 million in 3QFY17. The group also announced that it would be paying a second interim dividend of six sen per share on July 28. — By Samantha Ho