Monday, July 4

Gauging the year ahead


Ringing in the New Year

As 2013 draws to a close, companies are gearing up for the New Year ahead, with a fresh start and new motivations to drive them to greater heights.

Overall, despite the 13th general election (GE13) hiccup seen earlier this year, 2013 has generally been a good year for businesses and the market.

With the GE13 overhang dissipated and confidence restored in Malaysia’s market, FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) responded positively reaching multiple highs throughout the year and most recently, surging to an all-time high of 1,843.85.

Nevertheless, based on various factors including the deterioration in public finances and a perceived weakening of prospects for fiscal consolidation and budgetary reform, global ratings agency Fitch Ratings this year, had revised Malaysia’s sovereign credit rating outlook from stable to negative which in turn, affected foreign confidence in Malaysia.

In addition, according to Alliance Research Sdn Bhd (Alliance Research), talks of quantitative easing (QE) tapering by Fed chairman Ben Bernanke from June has led to market gyrations as well as the start of fund withdrawal from emerging markets by foreign investors.

Investors were also increasingly concerned over the potential contagion effect of twin deficits in Indonesia and India to other emerging markets such as Malaysia, given our country’s persistent budget deficit and shrinking current account surplus due to external demand weakness.

All these, said Alliance Research, have led to Malaysia’s foreign net equity outflow from June to November of RM13.7 billion versus net inflow of RM18.3 billion in the first five months of the year.

Accordingly, foreign shareholding in Malaysian equities has declined from a recent high of 25.2 per cent in May to 24.1 per cent in September.

However, to counter this, Prime Minister Datuk Seri Najib Tun Razak had laid out Budget 2014 laced with the intention to lower Malaysia’s budget deficit and boost the nation’s economy.

Alliance Research also projected that domestically, the Malaysian economy is expected to remain resilient in 2014, driven by sustained growth in domestic consumption, albeit at slower annual pace as subsidy rationalisation and fiscal reform by the federal government will result in near term dampening effect on household disposable income.

“Our economist projects a five per cent real gross domestic product (GDP) growth in 2014 versus an estimated 4.6 per cent growth in 2013.

“While investment and consumption growth are expected to ease to 8.2 and 6.2 per cent respectively from 9.7 and 7.7 per cent in 2013, stronger external demand on the back of expected rebound in demand from advanced economies will mitigate the slowdown.

“In this regard, export is expected to grow 3.4 per cent in 2014 from a 0.3 per cent contraction in 2013,” it said.

Additionally, Maybank Investment Bank Bhd’s research division (Maybank IB Research) highlighted that the investment growth momentum will be maintained given the strong pipeline of major infrastructure and investment projects such as yet-to-be-realised committed or planned investments under the Economic Transformation Programme (ETP), regional development corridors and Petroliam Nasional Bhd (Petronas) capital expenditure plan.

Also, with the Budget 2014, a slew of projects and measures have been announced to boost the development of the country particularly in East Malaysia.

With these in mind, BizHive Weekly speaks to a few industry players in Sarawak on their expectations in 2014.

Telco: A promising year with HSBB2

On October 24, Prime Minister Datuk Seri Najib Tun Razak announced during Budget 2014 that the government would implement the second phase of the High-Speed Broadband (HSBB) project in collaboration with the private sector involving RM1.8 billion investments to expand coverage to major towns.

To increase Internet coverage in rural areas, Najib said 1,000 telecommunication transmission towers would be built in the next three years, with an investment of RM1.5 billion and on the local front, he said that new underwater cables would be laid across Sabah and Sarawak within three years at a cost of RM850 million.

For homegrown end-to-end solutions provider to the telecom industry; Instacom Group Bhd (Instacom), this budget announcement is more than good news as the company would be a major beneficiary for tower construction works across the nation.

Furthermore, with telco service providers battling to expand their long-term evolution (LTE) grip on the rapidly-increasing number of smart devices users, Instacom is one of few companies likely to leverage on the spill over of this development.

Chief executive officer Anne Kung told BizHive Weekly, “Some of the major contracts secured in 2013 will be rolled out in earnest in 2014. Plus, the recent announcement by the Prime Minister in his budget speech provides Instacom with potential new major tower construction works with the announcement of 1,000 towers.”

When asked what are Instacom’s plans for the year ahead, she replied, “We are participating in major fibre rollouts for our clients and hope that our plans on building our own portfolio of tower assets will be realised.”

Overall, 2013 has been a sterling year for Instacom. After a year of its successful Reverse Takeover (RTO) on the Bursa Malaysia Ace Market, Kung enthused, “Instacom has made a remarkable impact on the investing public, raising our profile, bringning to the attention of investors the success story of this Sarawakian company.”

To usher in the new year, Kung said, “As a Sarawakian based company, we hope that Sarawak will benefit the most from the 1,000 towers planned to be built under the Universal service Provision Funds as Sarawak is still the most underserved state in terms of telecommunication coverage.

“Also the planned Phase 2 of the HSBB will also be deployed to Sarawak to provide us with this much needed service.”

Meanwhile, analysts have pegged mixed views on the outlook of the telecommunication sector in 2014. Maybank Investment Bank Bhd’s research division (Maybank Research) highlighted, “Data usage growth is both explosive and secular, driven by increased users, faster internet access and improved content.

“For fixed-line players, we continue to expect growth in data revenue to more than offset falling voice revenue.”

It further projected, “We expect competition among the cellular majors to remain rational, allowing the cellular majors to continue focusing on further monetising data.

“We see pockets of trading opportunity for selected telco stocks given the potential crystallisation of stock-specific catalysts in 2014.”

Seaport and logistics: Sailing with SCORE

Being on the forefront of Sarawak Corridor of Renewable Energy (SCORE) and a critical component to the energy-intensive Samalaju Industrial Park, port operator Bintulu Port Holdings Bhd (Bintulu Port) envisaged 2014 to be a promising year with an overall modest growth in cargo fuelled by the growing industrial development within SCORE.

Bintulu Port’s chief executive officer Dato Mior Ahmad Baiti Mior Lub Ahmad said, “For 2014, our expectation and outlook for cargo growth outlook seem to be promising with overall modest growth in cargo throughput with certain cargo sector showing strong growth potential and demand.

“It is our hope that in 2014, the industrial development in Sarawak will contribute and fuel the cargo growth for Bintulu Port. In 2014, new cargo composition such as aluminium products, manganese products, silicon products, pulp and paper products, bio-diesel, downstream timber products and agri produces shall make its way through Bintulu Port.”

He also hoped that in 2014, Bintulu Port would be able to see all its project development implemented and carried out as per its planning and target.

On the group’s plans for the year ahead, Mior explained, “We are optimistic that our Phase 4 development for additional bulking tanks of 25 units will be fully completed in August 2014. This will give Biport Bulkers Sdn Bhd additional storage capacity of 53,000 metric tonne with a total storage capacity of 154,600 metric tonne of palm oil products by third quarter of 2014 (3Q14).

“We plan to carry out the development project of barge berth at Edible Oil Terminal by 2014. The barge berth is targeted to be completed within the next two years.

“We also plan to implement some of the project task for the construction of supply base terminal dedicated for the oil and gas industries. This task includes detail costing, detail design, provision of operating procedure and other project management related matters.”

Next year will also be another active year for the development of Samalaju Industrial Port Sdn Bhd, as Mior revealed to BizHive Weekly that its interim operations should start by the 1Q14, with the completion of two barge berth and one Ro-Ro Ramp by January 2014.

“The interim phase will allow the plant operators at Samalaju Industrial Park to import their raw material or project cargo using barge or smaller size vessels.  Cargo can also be export using barge to Bintulu Port for transshipment through this interim facilities.

“While the interim phase is in operation, construction is underway and proceeding as planned for the whole Phase 1 Development of Samalaju Port. The Phase 1 development which caters for handymax and handysize berths is slated for completion by 1Q16.”

Besides that, he enthused that 2014 would also mark Bintulu Port’s continuous efforts as a port operator striving to provide quality and efficient services to the customers as part of the on-going effort to retain and attract existing and new customers.

“We want to deliver sufficient infrastructure and capacity to serve the customers.

“We will improve our service delivery to give the customers the shortest turnaround time and high productivity to shipping lines when they call at Bintulu Port especially for the container, breakbulk and dry bulk sector,” he said and added that the provision of new efficient operating procedure, new facilities and equipment is reviewed from time to time.

As 2013 comes to a close, Bintulu Port is expected to register about four to six per cent from growth from year 2012’s cargo throughput of 41.157 million tonnes.

Furthermore, for 2013, Bintulu Port is expected to record encouraging growth of eight per cent in container (TEUs) throughput as compared to 2012.

The growth is attributed to strong demand in containerisation shipment especially for timber products, rice and fertilizer shipment, increased export and import from SCORE generated cargo and expected increased in Sarawak transshipment container and this trend is expected to continue in 2014.

Other sectors to keep an eye out for in 2014

Oil and gas: An exciting year for industry players

The discovery of new oil reserves throughout 2013 and Petroliam Nasional Bhd’s (Petronas) RM300 billion five-year capital expenditure, with more than RM150 billion to be spent over the next eight quarters, are set to push the oil and gas (O&G) industry to greater heights in 2014.

Analyst Aaron Tan from the research arm of MIDF Amanah Investment Bank Bhd (MIDF Research) highlighted that so far, 2013 has been a year packed with awards of contracts, new oil and gas discoveries, and possibly more mergers and acquisitions to expand and strengthen income streams.

He expects this active momentum in the O&G industry seen in 2013, to extend into 2014.

“We can expect a good mix of local, regional and international jobs to be awarded to Malaysian O&G players and we can expect Petronas to keep the momentum going as it pushes for more deepwater, high pressure, high temperature, and high carbon dioxide oil fields,” he said in a note.

Maybank IB Research viewed the secular growth thematic plays – RSC, drilling, OSVs, fabrication, RAPID – are set to drive prospects for the respective service providers along the various value chains in 2014.

Property: Challenging year ahead with new measures

For property developers, 2014 poises as a challenging year ahead due to measures announced during Budget 2014 and various other initiatives undertaken by the government to control the turbulence in property market prices.

“We expect property demand to be hit hard by the new property cooling measures of Budget 2014 and by some state governments.

“Stricter mortgage lending by the banks will also slow new transactions.

“Developers have already expressed caution on the property market outlook over the next six months and are switching their product focus to affordable housing, which still has resilient demand, supported by a young demographic,” Maybank Research said in a note.

On a local front, Sarawak Housing and Real Estate Developers’ Association (Sheda) foresees that the state’s property market could see a mixed outlook next year due to several ongoing initiatives which include the 30 per cent of Real Property Gains Tax (RPGT) for properties disposed within three years, 20 per cent for properties disposed within four years, 15 per cent for properties disposed within five years; as well as the removal of the Developers Interest Bearing Scheme (DIBS) on property sales by property developers.

Sheda secretary general Sim Khiang Chiok believed these measures being implemented would reduce the supply of properties for the secondary market, thus causing prices in the secondary market to go up.

“There could be a shortage of supply for properties in the secondary market (due to the measures that is going to be implemented by the government).

“As a result, prices for properties in the secondary market could potentially go up while demand for properties remains consistent,” he was quoted as saying.

However, he cautioned that developers could potentially be affected by the initiatives as there would be less speculators in the market and hence, less sales due to increasingly cautious property buyers.

Automotive: Mixed outlook for 2014

Despite several challenges faced in the auto industry in 2013 which include the introduction of responsible lending guidelines, inventory backlog clearance and also some ‘wait-and-see’ attitude with regards to new purchases prior to the GE13, vehicle sales have turned out relatively stronger year-on-year by an increase of 5.7 per cent as at end October.

However, Alliance Research noted, “We expect that auto sales could be somewhat dampened in 2014 with the on-going subsidy rationalisation programme.

“Besides the already-announced removal of sugar subsidies and electricity tariff hikes, further petrol price increases are also to be expected. This could see consumers holding back purchases as they adjust to the new prices.”

For auto players, the research firm reckoned that 2014 would be an increasingly competitive year and it is cautious on margin compression as a result of the heightened competition between marquees.

Maybank IB Research, on the other hand, projected that positives in the auto sector could come from the National Automotive Policy revision in January 2014 and the Goods and Services Tax (GST) impact on car prices, which is still unclear.

Aviation: Prime beneficiary of VMY 2014 as great Malaysian fare war concludes

After a turbulent year in 2013 spurred by price war and overcapacity that decimated yields and profitability, analysts are of opinion that the Malaysian aviation sector is finally poised to see bluer skies in 2014.

“The industry is gradually improving and we are more optimistic on the balanced capacity planning and deployment in 2014,” Maybank IB Research said in a note.

The research firm forecast that traffic growth would be at nine to 10 per cent in 2014, which the market should absorb comfortably because it is close to Malaysia’s long-term growth rate of sight per cent. The yield outlook should gradually improve as the supply-demand is in balance and airlines no longer need to engage in an all-out fare war.

Concurring this, Alliance Research highlighted, “Going forward, we believe further downside risk to yields will not be significant. With yields at historical low, Malaysia Airlines System (MAS) cannot afford to cut fares further as marginal revenue generated will be outweighed by the marginal cost.

“Indeed, management has mentioned that it plans to undertake a network review with the aim of redeploying aircrafts to more profitable routes such as desinations outside Southeast Asia.”

Furthermore, the surge in tourist arrivals in conjunction with Visit Malaysia Year 2014 (VMY 2014) is expected to help to ease further pressure on yields.

Plantations: Blooming back into profitability

For the plantations sector, analysts of RHB Research Institute Sdn Bhd (RHB Research) are of opinion that the industry will see a rosier 2014 as compared with its performance in 2013.

“We believe stronger palm oil prices will be seen as a result of stronger demand for both food and fuel, and poor production growth from Indonesia as a result of rainfall deficit.

“These will lead to Indonesia’s stock/usage ratio falling to eight per cent in 2014 (2013: 13 per cent), its lowest levels since 2009, and weakening further in 2015,” the analysts viewed.

Furthermore, the significantly cheaper fertilisers following the potash cartel breakup will help ease the cost pressures that plantation companies have been facing since 2006.

“The stronger output prices and cheaper input prices mean sector profitability will improve next year,” they said.

‘Blips’ to watch out for in 2014

For the past three to four years, the global economy have had a penchant for displaying promising signs of rebounds as one year closes and another year opens, only for the momentum to fizzle out later as it fell victim to negative shocks and surprises.

Maybank IB Research identifies a few blips to watch out for in 2014. Domestically, it said the key thing to watch for Malaysia in 2014 is consumer spending which now accounts for 53 per cent of GDP.

“This is in view of slump in consumer confidence (which leads consumer spending growth) in reaction to the above-mentioned resumption of subsidy rationalisation that resulted in the acceleration in monthly consumer price index since September 2013, which in turn fuels inflation expectations on the expected knock on effects on other prices of goods and services (that is talks of reviews in public transport fares), hence cost of living in general.

“Rising inflationary pressures adds to the persistent issue of high and rising household indebtedness. While we are pricing in slower consumer spending growth in 2014, the moderation also factored in mitigating factors such as the continuation of the conditional cash transfers to the lower income group (that is increase in the financial assistance amount and expansion in the criteria for eligibility) and the special personal income tax rebate for the middle income group that was announced in Budget 2014, as well as the expected increase in tourist spending during VMY 2014,” the research firm commented in a note.