We are now at the mid-way juncture of 2014, and already, the year of the horse comes galloping at full force, bringing with it a multitude of events that have in more ways than one, stirred the global and local markets.
From unfortunate events which impacted Malaysia’s overall aviation sector to the on-going geo-political tensions in the Middle East and Eastern Europe, Malaysia’s economic performance was not spared.
More recently, for the tail-end of the first half of the year (1H), Malaysia’s bourse index took a slight dip which alerted local and regional investors, making them more wary of the country’s outlook for the remainder of the year.
Market strategist Benny Lee in his June column for BizHive Weekly observed that on the back of the Ukraine and Iraq crisis, the FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) remained unchanged for the end of June.
Subsequently, in July, the market rebounded thanks to the growth expansion in US and Bank Negara Malaysia’s announcement of the overnight policy rate (OPR) hike.
But this was short lived as mid-way through July, local markets were shaken by the MH17 incident as US and European market reacted to the incident. It was further affected by heightened tensions in the Middle East.
“Geopolitical problems such as Ukraine-Russia and Israel-Palestine crises caused markets to be cautious and took profits in an all-time high market in the US. Furthermore, the Argentinians’ second default in 12 years provided negative vibes to the financial markets,” Lee noted.
Despite these circumstances, Malaysia’s overall economy stayed firm in its forward growth rate while the world’s economic activity continued to grow albeit at a moderate pace.
According to BNM, “The recovery in the US resumed after an unusual weather-related weakness in the first quarter. Growth in Japan was, however, affected by the implementation of the increase in the consumption tax in April.
“In Asia, economic activity continued to expand, albeit at a more moderate pace in most economies,” it explained.
Malaysia’s economy registered strong growth with its gross domestic product (GDP) accelerating faster than expected at 6.4 per cent in the second quarter of 2014 (2Q14).
Meanwhile, Malaysia’s Department of Statistics said for the first half, Malaysia’s GDP strengthened to 6.3 per cent compared to last year’s 1H at 4.4 per cent.
GDP in current prices amounted to RM262.8 billion in this quarter, an increase of RM25.3 billion as against the second quarter of 2013. In constant 2005 prices, GDP registered a value of RM205.6 billion.
Bank Negara Malaysia in a report, said Malaysia’s strong growth was underpinned by higher exports and continued strength in private domestic demand.
“On the supply side, growth in the major economic sectors remained firm, supported by trade and domestic activity.
“On a quarter-on-quarter (q-o-q) seasonally adjusted basis, the economy grew by 1.8 per cent (1Q14 at 0.8 per cent),” it said.
Exports, private sector still key components
The bank further highlighted that exports and private sector activity were key drivers of growth during 2Q.
“Private investment continued to register double-digit growth, expanding by 12.1 per cent (1Q14 at 14.1 per cent), reflecting investments in the services and manufacturing sectors.
“Private consumption increased by 6.5 per cent (1Q14 at 7.1 per cent), supported by stable employment conditions and continued wage growth.
“In contrast, public sector expenditure declined by 2.1 per cent (1Q14 at 2.7 per cent).
“Public consumption declined marginally by 1.3 per cent (1Q14 at 11.2 per cent), reflecting lower Government spending on emoluments, and supplies and services.
“Public investment declined by of 3.3 per cent (1Q14 at 6.4 per cent), due to lower spending on fixed assets by both the Federal Government and public enterprises,” it reported.
Chief economist Manokaran Mottain of AllianceDBS Research Sdn Bhd (AllianceDBS) in a recent report said, Malaysia’s the 2Q growth rate came above Bloomberg’s median forecast of 5.8 per cent while its 1H outpaced the 4.1 per cent in 1H13 and five per cent in 2H13.
He explained, activities in the private sector was driving the growth in this quarter (12.1 per cent), mainly in the services and manufacturing sectors.
While the public investment fell 3.3 per cent due to lower spending on fixed assets by both the federal government and public enterprises.
“Meanwhile, private consumption rose at a moderate pace of 6.5 per cent, supported by higher consumption on food & beverages, communication and housing & utilities – backed by stable employment conditions and continued wage growth.
“Public consumption declined marginally by 1.3 per cent on lower government spending on emoluments, supplies and services.
“On the supply side, 2Q growth was supported by the manufacturing (7.3 per cent) and services sectors (six per cent).
“In particular, manufacturing sector growth was driven by electrical & electronic products, which picked up 11.4 per cent on higher demand for semiconductor and communication equipment products,” Manokaran said.
BizHive Weekly observes Malaysia’s major economic sectors and several major Sarawakian stocks’ performance for 1H.
Sectors performance in first half
Services sector leads the way
SOURCE: Department of statistics, Malaysia
According to the department of statistics, services sector grew six per cent propelled by the brisk pace in wholesale & retail trade and steadfast momentum in communication. It reported that, wholesale & retail trade advanced further to 9.1 per cent supported by solid performance in retail (9.9 per cent), wholesale (8.4 per cent) and motor vehicle (8.9 per cent).
Communication remained strong by registering 9.8 per cent while business services increased eight per cent backed by the engineering services.
All these despite a turbulent aviation sector and a massive merger in the financial services sector which is bound to change the landscape of Malaysia’s financial industry.
According to Bank Negara Malaysia (BNM), trade-related sub-sectors had helped in the growth of the services sector.
The department of statistics reported, the growth of manufacturing sector escalated to 7.3 per cent, while electrical & electronic products picked-up to 11.4 per cent following the higher demand for semiconductor and communication equipment products.
The expansion of manufacturing sector was also reinforced by transport equipment & other manufactures (18.1 per cent) and food, beverages & tobacco (10.8 per cent).
Ratings agency RAM Ratings said the construction sector remained extremely robust in 1H14, underscored by ongoing residential construction activities and infrastructure developments.
Meanwhile, it noted manufacturing activities will remain supported by improving external demand, amid the particular resilience of component-part exports.
“Domestic industrial activities are also expected to be sustained in the 2H; in part, this is a spill-over from greater export resilience and forward momentum.
“Furthermore, the manufacturing sub-sectors benefiting from the growth of the construction sector will also provide some upside to domestic-oriented manufacturing activities,” it added.
As for non-metallic mineral products, basic metal & fabricated metal products expanded further to 3.9 per cent. BNM noted, the mining sector turned around to record positive growth, due mainly to higher production of both natural gas and crude oil.
Agriculture sector grows
For the agriculture sector, despite the unfavourable weather conditions seen throughout 1H, the department of statistics reported that the sector had surged to 7.1 per cent spearheaded by the escalation of oil palm (14.9 per cent).
For other agriculture sectors, it stated growth of 6.8 per cent supported by vegetables, fruits and paddy while livestock remained vital at 6.1 per cent following a higher demand for domestic consumption of poultry.
Meanwhile, after eight consecutive quarters of negative growth, forestry & logging rebounded substantially to 5.9 per cent in this quarter, Malaysia’s department of statistics reported.
Sarawak’s stocks performance for first half
CMS
Cahya Mata Sarawak Bhd (CMS) recently reported that its pre-tax profit (PBT) increased 33 per cent to RM164.84 million for 1H14, compared to the corresponding period of last year’s (1H13) PBT at RM123.63 million.
It said, the main contributors towards the solid PBT earnings for 1H14 were the cement, construction & road maintenance and property development divisions.
CMS’ construction materials & trading and construction & road maintenance divisions also reported higher revenues and PBT compared to the corresponding six-month period of last year.
According to analyst Ng Sem Guan of RHB Research Sdn Bhd (RHB Research), CMS’ 2Q14 net profit surged 70 per cent quarter-on-quarter to RM66.1 million.
He highlighted that all eyes are now on the commissioning of the OM Materials (Sarawak) Sdn Bhd (OMS) smelter and its huge cash pile also opens doors for many business opportunities in Sarawak.
Malaysian Phosphate Additives Sdn Bhd (MPA) project is also progressing well, while its 51 per cent-owned Samalaju Property Development Sdn Bhd business may offer some upside, he said.
Dayang
For the 1H14, Dayang Enterprise Holdings Bhd (Dayang) recorded earnings of earnings of RM89.4 million while its 2Q14 earnings rose 55 per cent year-on-year (y-o-y) to RM54.6 million, which analysts have deemed the best performance in seven consecutive quarters.
The company noted that its robust results were mainly attributable to higher value of work orders received and performed in 2Q14 and strong earnings contribution from its associate companies such as Perdana Petroleum Bhd which recorded RM5.9 million earnings for 2Q.
Analysts are generally positive on the group’s performance for the remaining half of the year. MIDF Amanah Investment Bhd’s research arm; MIDF Research, said studying Dayang’s historical earnings pattern, it is evident that earnings in the 1st and 4th quarters of the calendar year are usually the lowest.
As such, it envisaged the group to sustain its strong growth throughout 2H.
Analysts are also generally positive on long term Dayang’s prospects as its large orderbook is bound to keep Dayang busy until
Dayang said the group has call out contracts estimated at about RM4.5 billion to last at least until 2018. It is also optimistic on the prospects for oil and gas in the domestic market going forward as the group currently has an outstanding tender book of approximately RM400.0 million. It also noted improving marine charter which could benefit its associate company; Perdana Petroleum Bhd.
Naim
Also performing commendably for 1H14, Naim Holdings Bhd (Naim) reported a 60 per cent jump y-o-y and its 2Q14 soared 217 per cent y-o-y to RM28.76 million compared with RM9.08 million in 2Q13.
According to MIDF Research, in 1HFY14, the group’s construction segment’s revenue and pre-tax profit (PBT) recorded stronger numbers of RM164.3 million (+14.8 per cent y-o-y) and RM13.5 million (less than 100 per cent y-o-y) respectively.
It attributed the stronger performance to improvement in the progress of its ongoing projects especially, the construction of elevated stations for MRT Package S2 and S4 as well as other projects in Sarawak State which helped it to return to black in 1HFY14.
However, RHB Research cautioned that its property segment is not spared from the slowdown following various cooling measures introduced by the Government.
Despite that, analysts are generally positive on the group’s outlook given that its construction segment places it as a good proxy to robust SCORE projects and potential hydroelectric dams to be built in Sarawak
HSL
Hock Seng Lee Bhd (HSL) reported that its pre-tax profit stood at RM47.4 million on the back of revenue at RM256.2 million.
Some 70 per cent of HSL’s new contracts for 2014 are derived from the SCORE heavy industry town of Samalaju.
“We are still actively bidding for a range of contracts including several in the SCORE growth node towns of Samalaju, Mukah and Tanjung Manis,” said HSL’s managing director Dato Paul Yu.
“Overall, we see turnover in the second half of this year continuing to pick-up pace with momentum gaining on several large projects. We also anticipate further procurement successes based on our competitive edge in marine engineering,” said Yu.
Analyst Mohd Iqbal Zainal of Kenanga Investment Bank Bhd’s research arm (Kenanga Research) said, given its status as the market leader in Sarawak coupled with the vibrant state growth story, the research arm reaffirmed its view that HSL is one of the major beneficiaries of the sustained development of infrastructure projects in Sarawak, driven by SCORE and the state’s urbanisation.
This is evidenced from HSL consistently securing more than RM500 million worth of contracts per annum since 2012.
“As for this year and the next, we expect HSL to secure RM600 million worth of new jobs (so far RM181 million year to date), driven by SCORE-related projects and Phase 2 of Kuching Centralised Wastewater System,” he added.
Press Metal
Performing outstandingly after a rocky 2013, Press Metal Bhd (Press Metal) recorded a robust RM60 million core net profit for 2QFY14, which is double q-o-q and triple y-o-y.
RHB Research in a recent note said, the successful re-commissioning of its Mukah smelter and the full operation of its Samalaju smelter from April 2014 were timely to ride on higher all-in aluminium prices, which rose 10.3 per cent q-o-q and 4.2 per cent y-o-y to an average US$2,168 per tonne in 2QFY14.
Although Press Metal’s 1HFY14 numbers came below expectations on simple annualisation, RHB Research expects a much stronger 2H driven by higher aluminium prices and smelting volume.
Besides improved profitability, the research team noted that Press Metal’s loan repayment using proceeds from the disposal of a 20 per cent stake in Samalaju smelter had cut its net gearing to 1.08-folds from 1.83-folds in 1QFY14.
Bintulu Port
Bintulu Port Holdings Bhd’s (Bintulu Port) 2Q14 results came in as no surprise at RM30.4 million, bringing its 1H14 cumulative earnings to RM71.5 million.
Kenanga Research noted that Bintulu Port’s net profit in 2Q14 declined 25.8 per cent q-o-q mainly due to higher effective tax rate and higher staff and maintenance costs. On a y-o-y basis, it nnoted a positive 26.4 per cent y-o-y change is seen in 2Q14 core earnings underpinned by higher LNG vessel calls and higher bulking division.
“According to the management, the throughput contribution from Samalaju port will be insignificant in the near-term and it expects the throughput contribution to amount to 4.9 million MT/year possibly in 2016.
“For the time being, Bintulu port remains as the major revenue contributor for the group with the completed interim phase of Samalaju port supporting the operations with the bulk division expected to contribute positively to the group.
“Phase 1 of Samalaju is expected to be only completed in 2Q16 and we believe that the earnings could be marginally hit when it commences operations with breakeven period of circa two years at least.
“Overall, we are still positive on the long-term prospects of the project as economic activity in Sarawak is expected to pick up due to the SCORE Initiative,” it said.
KKB
Performing at a mediocre rate, KKB Engineering Bhd’s (KKB) 2Q14 revenue came in at RM48.5 million while its 1H profit after tax and minority interest (PATAMI) was at RM11.4 million which was below analysts’ expectations. However, its 2Q PATAMI almost doubled at RM7.6 million compared with that in 1QFY14
MIDF Research said sluggish earnings were due to lack of big jobs and slower billings while the uninspiring 1HFY14 earnings was attributable to absence of sizeable projects undertaken during the quarter, lower progress billings from on-going projects and completion of projects, and higher operating costs particularly distribution costs.
The loss at associate Oceanmight also dragged current earnings the company has yet to undertake any fabrication job while it incurs administrative expenses, it added.
Although the results were weaker-than-expected, analysts at MIDF Research are still confident that KKB can recover to register stronger earnings in FY15 in view that it is a strong proxy to secure infrastructure and steel related works in Sarawak, and poised to be awarded sub-contract oil and gas fabrication jobs from its associate, Oceanmight.
SOP
Sarawak Oil Palms Bhd (SOP), like all plantations company, is susceptible to weather conditions.
Nevertheless, SOP’s 2Q14 core net profit of RM33 million came within expectations as the stronger y-o-y results were boosted by higher CPO average selling price (ASP) achieved at RM2,614 per tonne, higher FFB production, and lower all-in cost of production estimated at RM1,635 per tonne.
Maybank IB Research said, SOP’s 1H14 FFB output met with its forecast and it is in line with historical trends of 42:58 (1H:2H).
“Elsewhere, its refining business barely broke even in 1H14. But we do expect stronger 2H refining margins during peak crop months.
“The commissioning of its 300 metric tonne per day capacity biodiesel plant at its Bintulu complex has been delayed by one quarter to Oct 1, 2014.
“This coincided with the delay in the national biodiesel mandate programme for East Malaysia,” it said.
Maybank IB Research’s analysts remain optimistic on SOP’s prospects over the medium term, premised on a projected 12 per cent three-year 2013-16 FFB output CAGR, and the unlocking of its oil palm estates value near Miri via property development over the next three to five years.
Cover StoryAnalysts expectations for 2H
While Malaysia recorded better than expected growth for the 1H, analysts are generally still cautious about the country’s growth rate with most projecting slower to moderate growth for 2H.
Economist Manokaran Mottain of AllianceDBS Research Sdn Bhd (AllianceDBS Research) said: “Moving forward, we hold our view that the strength of exports would likely soften in 2H14, on account of uncertainties in the advanced economies due to heightened geopolitical concerns; and also base effect from the corresponding period in 2013.
“Domestically, we expect dampening consumer demand to continue, given the inflationary effect from the government’s fiscal consolidation measures, which aim to lower fiscal deficit to 3.5 per cent by 2015.”
With that, AllianceDBS Research projected a slower 2H growth of five to 5.5 per cent, and for the full-year forecast at 5.5 per cent.
Similarly, analysts from the research arm of Maybank Investment Bank Bhd (Maybank IB Research) viewed or the remaining half of the year, Malaysia’s growth would be tapered primarily due to impact of “tighter” macroeconomic policies on domestic spending.
“While real GDP growth was an impresive 6.3 per cent in 1H14, we see the pace of economic expansion to “taper” in 2H 2014 and 2015.
“Besides the high-base effect, we see final consumption expenditures in the economy – namely consumer spending (which have slowed for three quarters in a row already, coinciding with the subsidy rationalisation and its inflationary consequences) and Govenrment’s consumption and investment expenditures to be affected by what we see as “tighter” macroeconomic policies which is further fiscal consolidation and resumption in monetary policy normalisation,” it explained.
Despite that, Maybank IB Research outlined, that Malaysia’s Government is still on track in cutting its full-year deficit.
It said, “Underscoring the commitment and progress in fiscal consolidation and the impact of specific measures like subsidy rationalisation and Government spending optimisation, budget deficit in 1H14 narrowed to RM19.1 billion or minus 3.7 per cent of GDP compared with RM19.7 billion or minus 4.1 per cent of GDP in 1H13.
“This implies the Government is on track to meet the target of cutting its full-year deficit spending to minus 3.5 per cent of GDP (2013 at minus 3.9 per cent of GDP).”
It added, Malaysia’s growth ETP-related investments are expected to accelerate this year onwards as the implementation of “big ticket” infrastructure and investment projects such as the Klang Valley Mass Rapid Transit to gather momentum or kick off.
There is also the ramping up of oil & gas investment by Petronas.
Other key drivers of investment growth include Government land development and heavy manufacturing industries (especially in the Sarawak Corridor of Renewable Energy or SCORE), Maybank IB Research added.
“We also foresee investment growth to be driven by “energy efficiency” and “productivity” to deal with and adjust to the new reality of operating and doing business in Malaysia such as declining and eventual removal of fuel and energy subsidies; minimum wage; higher financing cost.”
Meanwhile, the research arm of Affin Investment Bank Bhd (Affin Research) opined, the more moderate growth envisaged for 2H14 (estimated at 5.2 per cent) is mainly on account of the higher base effect in the corresponding period of last year, where growth of exports will likely moderate.
As for Malaysia’s inflation outlook, Maybank IB Research said it expected another overnight policy rate (OPR) hike by end 2014 due to the continuous “financial imbalances” in the country.
On the flip side, Manokaran opined, “Despite a stronger growth of 6.3 per cent in 1H14 and an inflation outlook of 3.5 per cent, we expect the OPR to remain unchanged for the rest of the year following a 25bps hike in July.
“Nevertheless, the central bank may not hesitate to introduce more macro-prudential measures to rein in financial imbalances.”
On a regional view, Haren Shah, chief Investment strategist for Wealth Management, Citi Asia Pacific said, “The 2H14 could be a little more challenging as valuations are not as cheap as they used to be. The US equity markets are close to all-time highs and many others are at multi-year highs.”
He added, “Now we have many starting to discuss when the Fed will raise rates rather than when the tapering will end. If these current economic trends continue to improve, then the rate hike noise will get louder as we head into the summer months.”
“Therefore, we are expecting a modest reacceleration in global real GDP growth from 2.5 per cent in 2013 to three per cent in 2014. Improving macro environment and upward revisions to global GDP growth are likely to support equity markets move higher.”
Haren further remarked, “Whilst it has been an unpredictable year thus far, the outlook for the rest of the year is looking brighter.
“Keeping focus on fundamentals and remaining overweight on equity over bonds will be key for this second half of the year. Headwinds should likely subside and economic fundamentals may assert themselves.”
On a more positive note, ratings agency RAM Ratings is positive about the growth in Malaysia following the announcement of better-than-expected 2Q GDP. It further envisaged robust growth for the year for Malaysia.
“The surge in investment approvals towards the end of last year is anticipated to be manifested in 2H14, thereby providing further momentum to the already-very-strong 13 per cent growth in private investment in the 1H.
“Going forward, favourable demographics and employment conditions are supportive of private consumption, despite the significantly greater inflationary pressure on households this year.
“Moreover, the trend of ”front-loaded” consumption is set to escalate well into 2015, ahead of the implementation of the GST.”
It however noted that there is a probability that negative real interest rates will persist through the 2H and there is a need to anchor further inflationary expectations ahead of GST implementation in 2015.
Aside from that, it said exchange rate is expected to strengthen and trade activities are expected to maintain a positive momentum given the ongoing improvement in external conditions, thus lending further support to the nation’s robust export performance.
All of RAM’s broad sector projections have been revised upwards, apart from mining activities, which remains at 2.2 per cent.
“Construction, manufacturing and services are expected to perform better than initially expected, underscored by the continued strengthening of domestic and external demand drivers. In particular, construction activities are expected to lead this growth, which is projected to come in at 11.6 per cent this year. The manufacturing and services sectors are expected to expand a respective 5.4 and 6.2 per cent.”