This article first appeared in Capital, The Edge Malaysia Weekly on July 20, 2020 - July 26, 2020

The decline in the share price of Genting Bhd actually started in January, but became far more pronounced in March, when it fell a total of 36% over seven trading days from March 11 to 19.

Its share price tumbled from RM4.54 to RM2.91. Although it has rebounded slightly, it has yet to breach the RM5 mark.

The diversified group has businesses that range from hospitality, plantations, power and property to oil and gas. It is the holding company of three listed firms — Genting Malaysia Bhd and Genting Plantations Bhd on Bursa Malaysia, and Genting Singapore Ltd on the Singapore Exchange.

With 82% of its revenue derived from hospitality businesses across the world, it is no surprise that the stock has been battered 30.87% year to date amid the prolonged Covid-19 pandemic.

Genting’s Malaysian casino operations were halted during the Movement Control Order (MCO) period and have only reopened in recent weeks. Its hospitality and leisure operations worldwide continue to see a sharp decline in visitors owing to Covid-19 concerns.

For the first quarter ended March 31, Genting reported a net loss of RM132.32 million as revenue slid 26% to RM4.11 billion from a year ago, weighed down by lower contributions from Genting Malaysia and Genting Singapore. Losses are expected to continue in 2Q.

Hong Leong Investment Bank Research, however, believes the share price decline has more than priced in the near-term impact of the pandemic. The research house says Genting is currently trading at only 0.6 times its effective subsidiary ownership value and if the unlisted revenue segments were included, they would further contribute to its fair value.

Kenanga Research says the stock is trading at a 59% discount to its sum-of-parts valuation. “It is still offering deep value at this price,” says the research house.

The regional banking giant’s share price has lost 28.35% year to date. Last Wednesday, it closed at RM3.69, valuing the group at RM36.62 billion.

According to a Maybank Investment Bank Research report, CIMB’s foreign shareholding had fallen to 22.5% as at June 20, from 30.2% as at end-2019. The decline includes a 2.7% transfer from foreign trustee banks to Khazanah Nasional, notes the report.

It has not been smooth sailing for the bank, which was one of a number with significant exposure to troubled oil trader Hin Leong Trading in Singapore. The exposure amounts to about RM500 million on the bank’s loan book.

In the first quarter ended March 31, CIMB saw a spike in total provisioning, which increased more than three times to RM1 billion, owing to a single impairment in Singapore’s oil and gas sector amounting to RM430 million.

The group’s loan loss coverage had fallen to 75.9% from 99.6% in 4QFY2019 while its gross impaired loans stood at 3.4%.

It reported a 57% y-o-y decline in 1QFY2020 net profit to RM507.9 million.

Analysts expect more provisions ahead for the group. Hong Leong Investment Research says CIMB’s asset quality has waned extensively and there will be heavier provisioning in the coming months, which is likely to dent profitability over the next one to two years.

There are others who believe in its longer-term prospects given its diverse geographical reach. However, near-term weakness will be challenging.

CIMB’s impressive dividend yield of 6.57% could very well change should earnings falter further.

Like its holding company, Genting Malaysia has seen its share price fall sharply this year by 21%. It closed at RM2.51 last Wednesday, for a market capitalisation of RM14.19 billion.

Genting Malaysia’s Resorts World Genting (RWG) had halted operations for close to three months and only reopened on June 19 on a staggered basis, and with social distancing measures. Overseas, Genting UK and Resorts World Bahamas resumed operations at the beginning of the month.

“We opine that social distancing measures imposed at RWG are an indication of things to come and they will limit the recovery of gaming revenues going forward,” notes Maybank IB Research in a report.

The research house believes that gaming revenues are unlikely to return to FY2019 levels in the next financial year, FY2021, and projects Genting will record a net loss in FY2020 and a modest net profit in FY2021.

Affin Hwang Research believes that the visitation numbers will continue to remain under pressure going forward — even though more facilities are reopening — because borders are closed to foreign tourists, specifically for its Malaysian operations where it is estimated that 20% of visitors in 2019 were foreign tourists.

The research house adds that given the possibility of a second wave of Covid-19 outbreak, it does not think the Malaysian government will take the reopening of its borders lightly. It expects it will take two to three years before visitation numbers recover to 2019 levels.

Telecommunications company Axiata Group Bhd has lost 18.5% of its value since the start of the year. At RM3.37 last Wednesday, the company was valued at RM30.89 billion.

Maybank IB Research says the group is expected to also feel the impact of the Covid-19 pandemic in that, apart from Celcom, Axiata’s international telcos are primarily prepaid-centric.

And as prepaid subscribers usually prefer physical transactions, these international telcos are more vulnerable in the event of a major lockdown. Among its international markets, Nepal, Bangladesh and Sri Lanka imposed major lockdowns in 2Q2020.

Moreover, the spending power of prepaid subscribers could wane as economic conditions deteriorate, thereby impacting the pace of revenue recovery.

That said, AmInvestment Research believes as a regional telco operator with excellent opportunities to further monetise its assets and engage in merger and acquisition activities, Axiata trades at a bargain FY2020F EV/Ebitda (enterprise value/earnings before interest, taxes, depreciation and amortisation) of 5.1 times compared with Maxis Bhd’s 12 times.

The financial services company is worth about 17.28% less than at the beginning of 2020, and closed at RM13.98 last Wednesday.

For the third quarter ended March 31, it saw net profit decline 26.8% to RM339.2 million while revenue fell to RM1.14 billion. Analysts say the earnings were weighed down by subsidiary HL Bank Bhd and its insurance division.

HL Bank was the main contributor in 2019, accounting for about 90% of group profit.

Maybank IB Research highlights any slowdown in the domestic economy would negatively impact HL Bank’s earnings, as would a pick-up in deposit competition. It also says  a deterioration in China’s economic outlook, particularly for the Sichuan province where the group’s 18%-owned Bank of Chengdu is located, would also impact associate contributions.

Petronas Chemicals Group’s share price has lost considerable ground given the crash in global crude oil prices in April. Year to date, the chemical company’s share price has declined 16% to close at RM6.24 last Wednesday.

According to AmInvestment Research, the group’s product prices have a high three-year coefficient correlation of 81% to crude oil prices.

As Brent crude has mostly recovered from the April crash and is currently hovering above the US$40 per barrel threshold, the research house believes that Petronas Chemicals’ earnings visibility has been restored.

In a May report, AffinHwang Investment Research said management highlighted that there have been no signs of volume being affected nor have they seen contract cancellations, despite the weak global outlook. May and June volumes are 97% booked.

AmInvestment Research further notes that while 2QFY2020 earnings are likely to decline quarter-on-quarter, due to the lag effect on chemical prices versus crude oil, it believes that investors are now looking ahead to FY2021F earnings outlook with a moderated impact of Covid-19 demand destruction.

Another banking group, RHB has fallen out of favour with investors as evident from its 13% year-to-date erosion in share price. It ended at RM5.01 last Wednesday.

However, CGS-CIMB Research notes that RHB’s net interest margin (NIM) only fell by three basis points q-o-q for 1QFY2020, which is one of the lowest among its peers. The bank managed to limit the NIM compression by actively managing its asset-liability mix and successfully increasing its low-cost deposit by 16.4% y-o-y at the end of March.

“It was also among the few banks that managed to increase net interest income by 1.6% y-o-y in 1Q2020,” it adds.

Meanwhile, Hong Leong IB Research adds that the bank is well collateralised given that its mortgage book has a loan-to-value of 64%, while about half of its personal financing portfolio consists of salary deduction packages and 80% of its small and medium-size loans are secured.

Even so, like its peers, gross impaired loans are expected to rise. For RHB Bank, it is expected to increase to 2.10% to 2.2%, from 2% in 1Q2020.

Hong Leong Bank’s share price has declined 12.95% year to date. Last Wednesday, it closed at RM15.06, valuing the company at RM20.09 billion.

Net profit for the third quarter ended March 31, 2020 declined 15.6% to RM534.79 million on the back of revenue of RM1.13 billion.

While domestic loan growth slowed to 5.9% y-o-y for 3QFY2020, it continued to outpace the industry’s growth of 4% y-o-y.

The bank also saw its gross impaired loan (GIL) ratio increasing to 0.98% from 0.84% in 2QFY2020. However, AmInvestment Research says the GIL ratio is expected to normalise to 0.84% in 4QFY2020 as the banking group is encouraging borrowers to settle arrears for loans approved under the moratorium.

“The group continues to have superior asset quality and lower provisions relative to most banks. With a shorter tenure of deposits, the group is expected to recover faster from NIM compressions due to OPR (overnight policy rate) cuts,” says AmInvestment Research.

MAHB was dropped as a KLCI constituent after the semi-annual review by FTSE Russell in June. If it had remained as a KLCI constituent, it would have been the biggest underperformer.

Year to date, MAHB has shed 33.68%. It closed at RM5.04 last Wednesday. Like others in the related industries of travel and hospitality, its share price has suffered from the Covid-19 outbreak.

But domestic flights have resumed since June and MAHB says demand for air travel is expected to pick up in stages with the domestic sector leading the recovery. International traffic is also expected to rise gradually, adds MAHB, but it largely depends on travel bubble arrangements and easing of border restrictions as countries remain cautious.

However, MIDF Research says consumer confidence remains key and could take a while to be restored, even after the government begins opening borders and relaxing travel restrictions.

AMMB is the other constituent member that was dropped from the KLCI on June 22. Like its banking peers, its share price has taken a hit in the last seven months. As at July 15, it had shed about 19.7% and closed at RM3.14 last Wednesday.

For the fourth quarter ended March 31, net profit was 46% lower at RM247.54 million while revenue declined 5.1% to RM2.21 billion.

The banking group’s net interest income growth of 16.5% y-o-y for 4QFY2020 was significantly above the sector’s growth rate of 0.5% y-o-y. CGS-CIMB Research says it was contributed by loan growth of 5.3% y-o-y and a 17-basis-point expansion in its 4QFY2020 NIM to 1.95%.

Its GIL was slightly higher at 1.73% as at end-March 2020 compared with 1.71% as at end-December 2019.

While asset quality is expected to be weaker in FY2021 due to the Covid-19 impact, MIDF Research says the robustness of its income may moderate the increase in provisions.

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