Alliance Research bullish on construction, O&G, glove sectors

Posted on 8 August 2013 - 05:36am

sunbiz@thesundaily.com 

Alliance Research Sdn Bhd head Bernard Ching

PETALING JAYA (Aug 8, 2013): The confluence of a depreciating ringgit, fiscal discipline, monetary tightening and normalisation of government bond yields will have significant impact on Malaysian equities going forward, said Alliance Research Sdn Bhd head Bernard Ching (pix), who sees limited upside potential for the FBM KLCI.

"Our year-end 2013 FBM KLCI target of 1,850 points implies only a 3.7% upside. Going into the second quarter results season in August, we see limited catalyst," he said in a strategy report yesterday.

Given the limited upside potential, Ching sees investors taking a defensive stance, but warned of the downside risk for exposure to the typical dividend plays in the real estate investment trust (REIT) and telecommunication sectors due to impending normalisation of risk-free rate.

"We continue to like the construction, oil and gas (O&G) and glove sectors which we believe are the most resilient in terms of topline growth given continued government and quasi-government capital expenditure commitment in the construction and O&G space," he said.

"As for the glove sector, we like the resilient export demand and an improving economic environment in the advanced economies with further underpin our bullish view.

"We also selectively like stocks such as Tenaga Nasional Bhd (TNB) which will benefit from the government's measures to address fiscal imbalances via subsidy rationalisation," he added.

Alliance Research's top picks are SapuraKencana Petroleum Bhd, Perisai Petroleum Teknologi Bhd, Gamuda Bhd, Ahmad Zaki Resources Bhd, Kossan Rubber Industries Bhd and TNB.

Ching noted that following the US Federal Reserve chairman Ben Bernanke's testimony before the US Congress on May 22 of the impending tapering of its US$85 billion bond buying programme in the coming months, investors' sentiment was further dampened when Fitch Ratings recently revised its outlook for Malaysia to "negative" from "stable" due to weakening public finances.

To recap, Malaysia has run a budget deficit for the last 15 years while federal government debt-to-GDP ratio has rose from 51.5% in 2011 to 53.3% in 2012, which is just shy of the 55% threshold.

As such, the federal government would need to address such fiscal imbalances to avoid any rating downgrade. For 2013, the federal government plans to reduce the budget deficit from 4.5% in 2012 to 4%.

"On the flip side, we believe the federal government may now be more committed towards fiscal discipline going forward in order to avoid a potential rating downgrade.

"We believe the federal government will rein in operating expenditure and raise revenue while keeping its capital expenditure intact. Besides fiscal measures, we also expect monetary tightening to take hold to address rising household debts," he said.

Ching reckons that these fiscal and monetary tightening measures may be introduced in the fourth quarter of this year or early 2014 post Umno Supreme Council election on Oct 5 and Umno general assembly on Dec 2.

"Fiscal discipline will likely provide a boost to the utilities sector as it is the main beneficiary of impending electricity tariff hike but negative to other sectors due to higher cost of doing business (higher fuel cost, GST, sin tax hike), while discretionary consumer spending will also take a hit as households tighten their belts.

"Monetary tightening will largely be negative on the banking sector as well as other sectors whose revenue growth is dependent on consumer credit expansion such as automotive, consumer and property," he said.

Meanwhile, Ching said the depreciation of ringgit will generally be positive to exporters in the chemicals, glove, plantation and technology sectors, but negative to importers in the automotive, aviation and media sectors.

"Since May 22, 2013, the ringgit has depreciated by 7.3% to RM3.25 per US dollar as of Aug 2. While we expect the ringgit to be volatile in the near term due to the hot money flow, we expect the ringgit to regain some strength in the fourth quarter of 2013 and to close the year-end at around 3.13 per US dollar," he added.

Alliance not ruling out hike in tax on gaming sector

Posted on 7 August 2013 - 05:36am

sunbiz@thesundaily.com 

PETALING JAYA (Aug 7, 2013): The increasing pressure for the federal government to address a high budget deficit and high government debt levels may lead to potential increase in tax on gaming revenue as the government strives to widen its tax revenue base, said Alliance Research Sdn Bhd analyst Cheah King Yoong.

"Recalled the last time the government standardised the 25% casino duty for domestic casino operator, Genting Group, was back in 1998; while gaming tax and pool betting duty for number forecasting operators (NFOs) were raised to 8% in 1998 and 2010, respectively.

"As such, we do not discount the likelihood that the government could relook at raising these taxes for the domestic gaming players," he said in a report yesterday.

Cheah also raised concern that should the government introduces the goods and services tax (GST) at the upcoming Budget 2014 on Oct 25, 2013, it would either mean imposing a new layer of tax on the operations of domestic gaming players or serve as a partial replacement for the current tax charge that they are paying.

"Although we as well as investors are uncertain of the likelihood whether these measures will be implemented by the government, we believe that share price performances of domestic gaming players could be dragged by the rising market concern in the coming months, prior to budget announcement," he added.

Cheah also expects the potential gaming liberalisation in New York and Miami that would see new casino operations being set up, to be deferred to 2014 instead of this year.

"With the deferment in New York and Miami gaming liberalisation, Genting Malaysia Bhd (GENM) would lack re-rating catalyst in the near term, which has thus far placed heavy bets in these two states, with the gaming giant proposing an integrated resort business model in Miami.

"(And) although Genting Singapore PLC is optimistic that the gaming liberalisation in Japan could happen over the next 12 months period, it remains to be seen whether the authority will push through the long dragged gaming liberalisation proposal by this year as the liberalisation plan was proposed since 2010," said Cheah.

Upon considering the factors, he has downgraded the gaming sector to "neutral" from "overweight". He has also cut his recommendation for GENM to "neutral" from "buy" at RM4.40 with a RM4.53 target price, on limited upside potential for the stock following strong share price performance post the 13th general election.

Relook implementation of NEM, says ex-AmCham chief

Posted on 5 August 2013 - 08:59pm

Last updated on 5 August 2013 - 09:32pm

KUALA LUMPUR (Aug 5, 2013): Malaysia needs to relook the implementation of its New Economic Model (NEM) to succeed in the long term, said Datuk Nicholas S. Zeffreys, past president and board member of the American Malaysian Chamber of Commerce (AmCham).

He said to succeed, Malaysia also needed to do many things now, the first being the implementation of the goods and services tax (GST), which has been delayed, and hopefully would be included in the next budget.

"Malaysia is not earning much revenue but spending more. The country depends a lot on Petroliam Nasional Bhd to fund 44% of its budget.

"This is unhealthy to run the country based on the funding of a company. As such, the GST is expected to transform change in that regard," Zeffreys said.

He said this on the sidelines of the ceremony to present Amcham-Malaysian-American Commission on Educational Exchange Scholarship Award 2013 here today.

Zeffreys was a member of the team involved in the formulation of the NEM.

He said a country cannot be healthy without competition.

"The country needs to address the issue of liberalisation of services sector, which is expected to be the next big growth area. This is going on at a very slow rate because of protectionism in certain areas," he said.

Zeffreys said another issue was that investments from private sector were less than half of what they used to be 10-15 years ago and ever since the economic crisis.

He said to address the various issues, the NEM team should be reconvened and a post-mortem be undertaken on the various models and their implementation.

Meanwhile, he said, the Malaysia media were also playing on issues which could scare off investors from Malaysia. – Bernama

Censof in good position for growth

Published: Saturday August 3, 2013 MYT 12:00:00 AM 

Updated: Saturday August 3, 2013 MYT 9:15:27 AM

BY YVONNE TAN

SINCE listing more than two years ago, it’s safe to say that Censof Holdings Bhd has hardly had any major announcement that has taken the market by storm.

It however has had a steady flow of contracts.

Investors who appreciate the low-profile nature of this information technology (IT) solutions provider are probably a happy lot as the stock is up more than 50% from the beginning of the year, outperforming by leaps and bounds, the benchmark index, the FBM KLCI which is only up 6.45%.

Profit-wise, Censof has shown some improvements.

For the fiscal year ended Dec 31, 2012 Censof made a net profit of RM9.3mil on revenue of RM44.5mil compared to a net profit of RM8.8mil on revenue of RM43.4mil a year earlier.

A glance at its most recent balance sheet shows low borrowings, positive cash flow
and about RM6mil in cash and cash equivalents.

Industry observers point out that Censof is a beneficiary of Government jobs, going by the string of Government-related projects that it has obtained such as those from the Social Security Organisation (Socso), the Inland Revenue Board (IRB) and the Finance Ministry.

Group managing director Datuk Samsul Husin was once quoted as saying that Censof was not a politically-connected company.

Still, almost all of its jobs currently come from the Government.

Censof’s involvement as a financial management solutions provider to the Government and its agencies goes as far back as the mid-1990s coinciding with the Government’s plan to standardise the accounting software used across its agencies then.

Today, about 80 government agencies and 27 ministries
reportedly use Censof’s software.

Apart from new contracts, Censof also focuses on further upgrading and enhancing projects involving its current clients as an income generator.

Notably, Censof owns some of its intellectual property in the systems it deploys. This has helped it achieve decent net profit margins of around 30% in some of the projects that it embarks on.

Bidding for GST project

Now, its Government-related job segment could grow even further. Sources say the company is likely a front-runner for a sizeable contract in relation to the provision of Goods and Services Tax or GST software services nationwide.

There were reportedly four competitors in the bidding process for the mega project. The project, of course, depends on if and when the Government goes ahead to implement GST.

Censof’s focus on Government-related projects may not necessarily be a good thing if the projects stop being dished out to the company for some reason or other.

For this reason, Censof has also been reported to be on the lookout for jobs from the corporate side, both local and international.

Overseas profit contribution are relatively minute at the moment although the company has said recently that it managed to secure clients from countries like Australia and the United States.

Recently, it also said it was looking to tap into markets such as the Middle East and Africa, where there is demand for quality financial management solutions which is growing in tandem with global accounting standards.

Censof is 57.27% controlled by Censof Sdn Bhd, which is majority controlled by Samsul followed by chairman Tan Sri Mohd Ibrahim Mohd Zain who holds a 3.01% stake, according to Bloomberg.

At last look, Censof’s stock was at 53.5 sen, off its recent high of 64.5 sen.

Censof’s business is not only confined to its financial management solutions division. According to its 2012 annual report, its payment aggregate solutions division has rationalised its efforts to reposition its marketing activities toward the establishment of a one-stop payment and collection portal for statutory payments, to implement mobile payments and e-EA forms submission for income tax.

It has also gained “good market traction” in its wealth management solutions division and was awarded its maiden project locally in January 2012.

Under this division, it also managed to secure a project with the Federal Bank of Indonesia.

As for its training solutions division, boosted by newly acquired Knowledgecom Corp Sdn Bhd, Censof will focus on enhancing and growing talent using its e-learning platform.

KnowledgeCom specialises in solutions and training, IT business solutions, corporate IT training and management courses. It has developed various types of software and has trained over 800 companies in specialised information communication technology skills across Malaysia.

Censof recently proposed to issue redeemable convertible notes with an aggregate principal amount of up to RM100mil, which will be utilised by the company and its subsidiaries for future strategic acquisitions and/or repay any borrowings undertaken to fund the acquisitions.

Notably, Censof’s recurring income business model is somewhat like e-solutions provider MyEG Services Bhd whose stock has performed spectacularly thus far.

MyEG’s stock has risen to RM1.91 from 79 sen at the beginning year, up more than 140%.

The company does about 2.6 million road tax renewals and 50,000 motor insurance renewals per year via their IT platform.