Company Notes 2017.12.15

VS Industry Q1 FY2018 Results

The lower-than-proportionate growth in profit before tax was largely owing to shift in product mix towards more box-build assembly. Furthermore, there were additional production lines commissioned during the
quarter under review, which resulted in higher operating costs (e.g. setup cost, operators’ salaries etc.) while production output of the new lines have yet to reach optimal level at the time.

Malaysia segment expects the box-build orders from key customers to sustain for the current financial year. On its operations in China, the Group expects improved performance going foward as it has since commenced mass production of new products for key customers in China and this contributes to higher plant utilisation rate.


Kein Hing International Q2 FY2018 Results

…due to the costs incurred for setting up of new production lines, recruitment and development of skilled and semi-skilled workforce at the new factory located in Hai Phong, Vietnam which is yet to achieve the optimal production and sales, higher depreciation charge resulting from new machines invested and the escalating labour costs as a consequence of constraints in labour supply encountered in Malaysia Operation and the wage inflation experienced in Vietnam Operation respectively.


Berjaya Food Q2 FY2018 Results

The results of the Group in the next quarter is expected to be adversely impacted by the one-off losses arising from the disposal of the KRR operations in Indonesia. Other than this one-off exceptional loss, the Group expects Starbucks to maintain its revenue growth momentum to continue contributing positively to the Group. In addition, the management hopes that the operational and menu rationalisation of KRR, being implemented recently, will yield better results for the brand moving forward.


LKL International Q2 FY2018 Resuults

The Group would continue developing the medical devices segment to grow into a significant contributor of group revenue and profitability. At the same time, the Group will be on the lookout to add more high-value medical products to its range to meet customer demand.


Jaycorp Q1 FY2018 Results

A major plant upgrade is due to take place in Jaycorp Green Energy Sdn Bhd (“JGE”) towards the end of 2017. Whilst this will result in the shut-down of operations for 2-3 months, the upgrade should significantly improve the operational efficiency of JGE in the long-term.


Bison Consolidated Q4 FY2017 Results

Operating expenses were higher in line with the bigger outlets network of 356 compared to last year of 294. Mynews had been more aggressive in driving its marketing campaigns and promotions and coupled with the enlarged staff force to support the Group’s expansion contributed to the increased operating expenses by RM17.67 million or 25.8% from last year of RM68.59 million to current year of RM86.21 million. Mynews had achieved its target of opening 70 outlets in the financial year 2017 and with the closing of 8 outlets, ended the year with 356 outlets. Its jointly controlled entity, WH Smith Malaysia Sdn Bhd had also added 3 new outlets during the year and it now has 12 outlets in the Malaysian airports.

The Board remains positive that Mynews is able to deliver profitable results with its on-going efforts to improve products and services offerings and aggressively expanding its foray into ready-to-eat food. Initiatives put in place such as the joint ventures with the Japanese partners to develop the food processing centre is progressing well. The Johor distribution centre is ready for operation pending the final approval by the relevant authorities.


Hiap Teck Venture Q1 FY2018 Results

The decline in steel demand in ASEAN-6 was mainly attributed by the slowing down in the consumption of two biggest steel consuming countries in the region namely Vietnam and Thailand. The decline in steel demand in Thailand and Vietnam are mainly due to destocking activities, slower economic growth and slow uptake in public investment projects.

The continuing efforts by Chinese Government and its plans to cut production capacity will help stabilise the world steel prices which will definitely benefit the local steel industry players.

OldTown gets takeover bid from global coffee maker

OldTown said its shareholders, holding a total stake of 51.45% in the group, have provided irrevocably undertakings to accept the cash offer. These shareholders are Old Town International Sdn Bhd (42.58%), OldTown’s management director Lee Siew Heng (1.34%) and Mawer Investment Management Ltd (7.52%).

“We are deeply honoured that JDE recognises the powerful brand and platform that we have tirelessly built over the past 18 years. We strongly believe JDE is the ideal partner as we continue to serve best-in-class products to our customers. We look forward to drawing on JDE’s deep global expertise and building a highly successful partnership with them. The OldTown team is focused on delivering premium, high-quality products to consumers and we see huge potential in the business. We are excited to work with the OldTown team to rapidly grow the business as part of the broader JDE platform.”


IRB slaps Aeon Credit with extra RM96.82m in tax bill

Aeon Credit said these taxes and penalties were in relation to the IRB varying the loan transaction collaterised by receivables undertaken by the company with a local financial institution to that of a sale of receivables, which the IRB did not specify which provision of the Income Tax Act 1967 in making this variation.

“This is especially so when at all material times, the company had sought professional advice from an independent and reputable audit and tax firm on its accounting and tax treatment and further, the assessments for the years of assessment of 2010 and 2011 are time barred,” it said.

S P Setia Bhd’s unit was slapped with a back tax bill of RM75.38 million last month, but the company said it has grounds to contest the notice. In October, the IRB slapped Cocoaland Holdings Bhd with RM5.89 million in additional taxes and penalties. In September, EcoFirst Consolidated Bhd said it was sued by the IRB over some RM35.47 million in additional taxes and penalties the latter is claiming for. In May, the IRB sought RM80.77 million in additional taxes and penalties from MK Land Holdings Bhd’s wholly-owned subsidiary Saujana Triangle Sdn Bhd, while Magnum Bhd and its wholly-owned subsidiary Magnum Holdings Sdn Bhd were served with notices of assessment for additional taxes and penalties totalling RM476.5 million.

In that same month, Country Heights Holdings Bhd announced that its executive chairman and major shareholder Tan Sri Lee Kim Yew had his fixed deposits of some RM126 million placed in a foreign-owned bank seized by the IRB in relation to RM22.5 million worth of tax liabilities incurred by Country Height’s wholly-owned unit Country Heights Sdn Bhd. The tax liabilities were accrued from the years of assessment of 1997 and 1998. In April this year, the IRB slapped Tenaga Nasional Bhd with an extra RM2.07 billion tax bill for the 2013-2014 tax years. In October 2016, the IRB also went after a subsidiary of Mega First Corp Bhd for RM22.8 million.


AirAsia worth more than meets the eye, group CEO says

AirAsia Bhd has been undermined by analysts as they have not taken into account the group’s growth potential from overseas joint ventures. Fernandes describes the “zero value” given to AirAsia’s Indonesia, Philippines and India businesses by analysts as “bizarre”.

“Our Indian operation could be a 200-plane operation by itself, because of the tourism potential in India and the middle class travelling out of India is massive. If you look at what we have done in China, where 18% of our revenue is coming from there, it shows you the potential. India is a function of how quick we want it to be profitable. It can be profitable now, but we are in a hurry to get to 20 aircraft which will then allow us to fly international [routes], and that is holding back the profitability.”


Loss of Starbucks Korea business ‘a temporary setback’

The loss of the Korean market in 1QFY18 was due to Starbucks Korea deciding to source its store sets — fixtures for the stores — from local manufacturers in order to stick to its timeline for store openings. Federal Furniture has been working on shortening its lead times and that it remains more cost-effective for Starbucks Korea to purchase store sets from Malaysia. As such, Choy foresees contribution from exports to Korea to bounce back within the next six years.

Starbucks Corp is Federal Furniture’s main customer in its manufacturing division — which makes modular caseworks, shop fixtures, and fitting and furniture for corporate customers — and typically accounts for about 90% of the division’s total sales.

The division currently serves Starbucks’ Asia-Pacific market, which comprises Japan, Korea, the Philippines, Malaysia, Brunei, Thailand, Singapore, Hong Kong, Cambodia, Vietnam, Australia and India, according to the group’s Annual Report 2017. The division is Starbucks’ first approved caseworks vendor outside the US, and has been the only approved caseworks vendor for its Asia-Pacific market for the past 17 years.

Choy shared that the supply of store sets to Starbucks India will be fully produced in that country by April 2018, as the 76% import duty imposed by Indian regulators has become too prohibitive to continue shipping materials from Malaysia. As such, the group is undertaking strategic outsourcing of its fixtures there while it finalises the setting-up of a legal entity in Bangalore to commence operations there. “Four out of 12 stores that have confirmed to be opened in our financial year 2018 (ending June 30, 2018) will use casework that has been manufactured there,” Choy said. The asset-light model Federal Furniture is deploying in India may be used for its planned entry as Starbucks’ fourth vendor in China.


U Mobile turns Ebitda-positive as it plans for IPO after GE14

“We are already Ebitda positive at this stage, and listing will come after election. Because if we go for listing, we got to look at the market, and the market at this stage is very uncertain. With that uncertainty, there is this overhang, so you don’t see a lot of activities in the market. Next year, the market is going to be as tough as this year, generally retail sentiment is still soft, despite what the GDP (gross domestic product) number says, the retail side is still very soft. From our case, hopefully after the election, whatever negative overhang will be lifted, and that should improve people’s sentiment. Hopefully, that will translate into higher spending.”

“Competition has always been intense, but [industry-wide] Ebitda margin is still largely the same. Next year’s capital expenditure (capex) will be at least RM1 billion. This year’s is already RM1 billion.”

Malaysia moving towards cashless society

Governor Tan Sri Muhammad Ibrahim said effective July 1, 2018 the instant transfer fee of 50 sen will be waived for up to RM5,000 per transaction by individuals and small medium enterprises (SMEs). However, the cheque fee would be increased from 50 sen to RM1.00, beginning Jan 2, 2021 to reflect the higher processing cost.

To encourage the use of the QR code payment, Bank Negara has issued an Interoperable Credit Transfer Framework (ICTF). “For the first time in our history, customers of banks and non-banks will soon be able to transfer funds across the network by just referring to the mobile phone number, identification number or QR code,” he said.

Company Notes 2017.06.30

On earnings calls

Magni-Tech Industries in a filing with Bursa Malaysia

The garment segment accounted for about 89.1% and 95.3% of the Group’s revenue and profit from operations respectively.

Garment revenue surged by 38.8% which was mainly due to higher sale orders received and to a moderate extent aided by favourable foreign exchange movements.

Packaging revenue increased by 1.7% mainly despite the cessation of SIPP’s business in Q4-FYR 2017.


LKL International in a filing with Bursa Malaysia

…the lower revenue generated from medical/healthcare beds segment due to economic slowdown generally. Local market continued to contribute a significant portion amounting to 67.03% of the total revenue.

The fully automated Computer Numeric Control (“CNC”) punching machine (TruPunch 2000) which was acquired and completely installed is now fully operational, whereas the CNC laser tube machine (TruLaser Tube 5000 Fiber) is expected to be operational in the Q2 FY2018. These machines will increase the operations efficiency and process accuracy with less wastage, as well as reduce the dependency on manual labour.

The joint venture with T.M.I Solutions (Pvt) Ltd to distribute selected Nihon Kohden products has commenced its business in Q1 FY2018.


Hai-O Enterprise in a filing with Bursa Malaysia

The successful strategy transformation which focused on smaller consumer products and targeted recruitment strategy have continued attract more young entrepreneurs to join in as distributors.

Despite higher sales generated from patented medicine, it was offset by the drop in sales of duty-free goods. The drop in duty-free products’ sales was mainly due to the imposition of more stringent rules by authority on duty-free trade in border town.

The success in re-branding of its key beverage product “Min kaffe” during the year had attracted many consumers and boost up the sales of this product. The intensive member retention program and member recruitment campaign carried out during the year had resulted monthly average new members increased by about 5,000.

The implementation of CRM system which provided E-commerce platform had helped to increase distributors’ productivity and efficiency.


Hiap Tech Venture in a filing with Bursa Malaysia

The outlook of the steel industry in Malaysia in 2017 remain positive if China remains committed and steadfast in cutting its steel output capacity and other proactive actions which will prevent the dumping of cheap steel exports to Malaysia.

The majority of steel products produced locally is destined for infrastructure and construction sector applications. Hence, the outlook for the steel industry in Malaysia very much depends on the growth and performance of this sector. The construction sector is expected to maintain its robust performance with a targeted double-digit growth of 10.3% through new construction works valued at RM138 billion in 2017.


KM Loong Resources in a filing with Bursa Malaysia

We foresee an increase in FFB production from young mature areas and strong FFB yield recovery in Keningau region in where about 50% of the Group’s planted mature area is located. We expect the FFB production to be potentially 20% higher comparing the quantity achieved in the FY2017.


NTPM in a filing with Bursa Malaysia

…we would have felt the full impact on the cost arising from the raise the minimum wage for employees in Peninsular Malaysia by RM100 to RM1,000 per month, and to RM920 from RM800 for employees in East Malaysia starting from 1 July 2016, the recent increased volatility in the foreign currency exchange rate, pose a challenge for the Group to contain and monitor its manufacturing cost.


Subur Tiasa in a filing with Bursa Malaysia

In view of prevailing tight supply of logs in the market as the result of the forest management and timber certification initiated by the authority, timber prices are expected to sustain. The higher tax premium on timber imposed by state authorities will impact the performance of timber division.


Cypark Resources in a filing with Bursa Malaysia

…the implementation of Net Energy Metering Programme by SEDA will provide us with new opportunity to expand our renewable energy project portfolio. Cypark currently has been given first right to undertake the turnkey EPCC, management & operation contract to develop 15MW (dc) solar plants by the winners of the first LSS tender.

Our Biogas to Energy project will start to contribute to our revenue once our Fully Anaerobic Bioreactor System (FABIOS) in Ladang Tanah Merah is commissioned in 2018. We also plan to expand our biogas activities to include Palm Oil Mill Effluent (POME).

…focus our research & development resources in developing business opportunities from energy storage, exportable Biomass Solid Fuels (BSF) and Energy Efficiency (EE) projects.

…confident to secure more government contracts for landfill closures and new sanitary landfill projects. We believe that we have strong competitive advantage based on our solid track records of successful completion of 18 landfill closure projects covering total area of about 600 acres nationwide and our success in constructing and operating 1000 tpd sanitary landfill in Negeri Sembilan which is one of the country’s largest and most modern facilities.

…our current successes have made Cypark as the preferred partner for many world renowned green technology providers such as Hitachi (Japan), TESCO (Japan) and Ciel Terre (France).

On logistic services

Tasco shareholders approve venture into cold chain business

“The expected RM110mil revenue contribution represents about 15%-20% of our overall top line based on our revenue last year. We consider this to be a conservative projection, as we did not include the value that could be generated via the synergy created between the new cold chain segment and our other existing business segments. We believe that the acquisitions that have been approved by our shareholders would position us as one of the best end-to-end logistics solutions providers.”


Tasco develops global distribution hub in DFTZ for Renesas

“Whatever [Renesas] produces is sent to our KLIA warehouse to be integrated. We have something like a factory where we do ‘pick and pack’, and from there we distribute [the products] globally.

“The warehouse is actually temperature-controlled. It is how we will expand our dry service menu into the cold service menu — not just for food and beverages or pharmaceuticals, but also for semiconductors.

“Malaysia still carries very good conditions to be a regional hub. [However,] we see operations getting more sophisticated and need many things to cope [with that].”

“Our focus for the Westport land is making it a regional hub. We would like to promote it to existing customers.”


On banking

Non-performing loans to rise — S&P

The household debt-to-GDP ratio was 88.4%, while corporate debt was about 110% of GDP in Malaysia.

“The rate hikes are expected to lead to a higher NPL ratio among local banks to between 1.8% and 2%, up from a near-historical low of 1.6%.”

“Malaysian banks in general [have focused on] protecting their bottom line, but we do have our doubts about how sustainable this approach can be in the future. The banks need to grow, and they have constant requirements to invest in compliance and technology.


Banking sector consolidation faces many stumbling blocks — S&P

“We have a saturated banking sector. There are a lot of cannibalisation and duplication in the sector as a whole. So, there is a clear need for consolidation, which has taken place at a very slow pace.”

The sector’s net interest margins have been trending downwards consistently for the last five or six years, adding that profitability has been declining.


On corporate development

U Mobile ends network sharing deal with Maxis

Maxis said the termination is a convenience option available to U Mobile under the NSA. The termination will take place in stages over a period of 18 months with completion on Dec 27, 2018. U Mobile is not obliged to compensate for terminating the NSA as the company has an option to review the NSA after five years from the agreement’s commencement date.

“For FY17, the impact is going to be minimal, but it can be material moving forward. Assuming the fee to be stagnant at FY16’s level, that would be almost RM1 billion from FY19 through FY21.”

U Mobile was seen as a winner in the Malaysian Communications and Multimedia Commission’s spectrum reallocation exercise last year, where it was allocated 2x5MHz of the 900MHz frequency and 2x15MHz of the 1,800MHz frequency for 15 years effective July 1 this year. The spectrum used to belong to Maxis and Celcom.


Bumi Armada climbs on Armada Kraken first oil

“Achieving first oil on the Armada Kraken FPSO is an important milestone, as we work to deliver oil to our clients, EnQuest plc and Cairn Energy plc, and work towards receiving the charter income for Bumi Armada.”

The Armada Kraken is the third of four FPO projects Bumi Armada is starting up this year. “She is our first ever heavy oil production facility and has the largest liquid handling capacity in our fleet (460,000 barrels of liquid per day) and she marks Bumi Armada’s entry into the North Sea as a production facilities owner, operator and duty holder.”


Gamuda stands to gain from booming construction sector

…to benefit from the booming construction sector in Malaysia, given its dominant roles in the MRT and other rail-based projects.

…to ride on the next infrastructure/property boom in Penang via its project delivery partner role in the Penang Transport Master Plan.

“…there would likely be a lag effect before more meaningful earnings contribution, as land acquisition and actual mobilisation of machinery could be slower than expected for a project like the ECRL.”

Gamuda’s order book is still 50% lower than management’s target of RM10bil per annum.


Alibaba ups its stake in Southeast Asia’s Lazada with $1 billion investment

“That [valuation] is quite a significant uptick and overall that reflects the great performance and traction that Lazada has seen. It also reflects that Alibaba continues to be extremely positive about this region, doubling down on Southeast Asia and seeing the potential.”

“The e-commerce markets in the region are still relatively untapped, and we see a very positive upward trajectory ahead of us. We will continue to put our resources to work in Southeast Asia through Lazada to capture these growth opportunities.”