Big challenges for top decliners to reverse fortune on KLCI

TM, Axiata, Genting, Astro and MISC as a group had lost some RM60b in market cap


The global equity markets were shaken recently after the Dow Jones Industrial Average fell more than 800 points, its worst drop in eight months.

Markets across Asia and Europe were a sea of red as investors fretted over further market earthquakes. Malaysia’s equity market had witnessed its own roller-coaster ride. The main index reached the 1,896-point level in April, but that optimism had been battered due to local developments and deteriorating global growth.

The FTSE Bursa Malaysia KLCI (FBM KLCI), which tracks selected blue chips, ended yesterday’s trading at 1,736, after dropping below 1,700 following the recent US record drop.

While the FBM KLCI may have reached new highs this year, many companies’ profits are depressed.

The successful ones were helped by extraordinary gains, but share prices of some of these stocks continue to head south, erasing billions in market capitalisation and reaching new record lows.

Five index-linked counters — Telekom Malaysia Bhd (TM), Axiata Group Bhd, Genting Bhd, Astro Malaysia Holdings Bhd and MISC Bhd — as a group had lost some RM60 billion in market capitalisation compared to a year ago.

These five companies had also been among the biggest decliners percentage-wise since the start of the year.

1. TM
TM saw its share prices plunging about 58% this year alone and more than RM14.8 billion in market cap evaporated from its 52-week high of RM6.50 on Dec 22, 2017. The stock closed yesterday’s trading at RM2.58.

Profit at the government-linked company (GLC) is set to be squeezed further as the government pushes to lower broadband prices by 25% by year-end.

TM seems to be taking the lion’s share of the impact as the new government calls for telcos to double the speed of fixed broadband services, while cutting the price by half.

But investors are dumping TM as worries that the largest broadband operator will continue to see earnings squeezed.

AllianceDBS Research Sdn Bhd Toh Woo Kim said in a report that TM’s UniFi average revenue per user is expected to fall by 10% in financial year 2019 (FY19) and 6% in FY20 as some of the low-tier subscribers take up the cheaper UniFi Basic plan.

TM’s net profit fell 51.6% to RM101.93 million in the second quarter ended June 30, 2018 (2Q18), from the RM210.48 million recorded a year ago despite revenue only dropping 1.3% to RM2.94 billion. TM attributed the poor performance to lower revenue and foreign-exchange losses.

TM expects regulatory and sector challenges to persist in the near to mid term, while the company continues to strengthen its core business and operations.

2. Astro
Disruptive technology, challenging market conditions and rising cost for content had also pulled Astro to new uncharted waters.

The pay-TV company’s share price dropped about 45.6% this year to close at RM1.36 yesterday.

Astro’s market cap shrank as much as RM8.24 billion after its share price tumbled from a 52-week high of RM2.94.

For 2Q18, the company’s earnings dropped 93% yearon- year (YoY) to RM16.6 million compared to RM246 million a year ago. Astro’s revenue for the quarter was steady at RM1.41 billion.

The company is also facing competition from over-the-top (OTT) platforms including Netflix and iflix. The reduction in prices for broadband services is expected to drive the OTTs which, in turn, would create greater competition for Astro.

The government is also looking to liberalise the pay- TV market and allow greater competition and improved services. The move would add pressure to the company largely owned by tycoon Tan Sri T Ananda Krishnan.

Rumours have also been circulating that the billionaire may take the company private.

AmInvestment Bank Bhd said an Astro-Maxis merger is a rational option in the face of intense market competition faced by both companies on multiple fronts.

3. Axiata
Axiata, which has businesses across the region, had seen its share price plummeting almost 29% this year, erasing billions from what was once a jewel among the GLCs.

Its earnings for the first half ended June 30, 2018 (1H18), was a real disappointment. The regional telco reported a 1H18 net loss of RM3.5 billion compared to a net profit of RM646 million a year ago. The loss was mainly due to a one-off provision related to its investment in India amounting to RM3.4 billion.

In the last 12 months, Axiata’s market cap had dropped by RM17.4 billion after its share price reached a 52-week high of RM5.82. Its share prices closed at RM3.90 yesterday, valuing it at RM35.5 billion.

Axiata continues to face regulatory and execution risks, as well as higher competition across its Asian markets.

MIDF Research, in a report dated Aug 27, 2018, stated that the primary concern with Axiata is the performance of Celcom Axiata Bhd and PT XL Axiata Tbk in Indonesia, which contributed slightly over half of the group’s earnings before interest, taxes, depreciation and amortisation.

At present, Axiata has built a presence in Malaysia via Celcom and edotco Group Sdn Bhd; Indonesia with XL; Sri Lanka with Dialog Axiata plc; Bangladesh with Robi Axiata Ltd; Cambodia with Smart Axiata Co Ltd; and Nepal with Ncell Pte Ltd — boasting some 350 million customers.

The company has plans to venture into the fixed broadband space in Malaysia over the next three years with significant investment expected to take place next year.

Recently, Axiata said it will review all available options for its 28.7% shareholding in Singaporean mobile operator M1 Ltd following a S$2.06 (RM6.24) per share bid tabled by M1’s other substantial stakeholders — Keppel Corp Ltd and Singapore Press Holdings Ltd.

MISC was affected by the weak performance of its petroleum and heavy engineering divisions in 1H18. Its financial performance for 2Q18 also saw a decline due to the heavy plunge in its liquefied natural gas (LNG) division.

MISC’s net profit for the quarter dropped 42.28% to RM321.2 million from RM556.5 million, while its revenue fell 6.98% to RM2.14 billion from RM2.3 billion a year ago.

The share price of the national oil company’s logistics arm had lost 24.9% of its value this year to RM5.68 yesterday, valuing it at RM24.9 billion.

MISC has lost about RM10.5 billion of its market value compared to its 52-week share price high of RM7.90.

Analysts anticipate cloudy days ahead for MISC in FY18 due to the volatile petroleum shipping market.

Hong Long Investment Bank Research has reduced its FY18, FY19 and FY20 earnings forecasts by 15%, 10% and 3% respectively, after lowering petroleum tanker rates and factoring in higher operating cost for the heavy engineering segment.

The research firm said most of MISC’s LNG carriers are on secured long-term charters and shielded from the volatile spot market.

AllianceDBS in a report noted that the US exchange rate against the ringgit is one of the critical factors to take into account as MISC’s businesses are generally transacted in US dollar while financials are reported in ringgit. As such, AllianceDBS said a stronger US dollar would lift reported earnings and vice versa.

5. Genting
Genting’s share price had lost 21.3% of its value this year alone despite its 1H18 earnings largely meeting market expectations.

Core earnings surged to RM1.33 billion for the first six months, supported by a higher contribution from both gaming and non-gaming operations in the country.

However, its plantation business, via Genting Plantations Bhd, was dragged by weaker crude palm oil (CPO) prices and production levels.

AllianceDBS noted that Genting Plantations’ 1H18 core earnings declined 19% YoY to RM124 million as CPO average selling price declined 15% YoY to RM2,291 per metric tonnes (MT). Analysts have projected CPO price to range between RM2,100 and RM2,500 per MT this year compared to RM2,783 per MT last year.

Management has toned down full-year production growth expectations to 15% after factoring in a 2% to 4% decline in Malaysian output.

Genting’s stock price is down 21.3% year-to-date, erasing RM9.93 billion in value since its 52-week high of RM9.74 registered on Jan 23 this year. The counter closed at RM7.16 yesterday.

TA Securities Holdings Bhd analyst Tan Kam Meng has a ‘Buy’ call on the stock driven by the bright prospects of its proposed integrated resort casino development in Japan that would create greater interest in gaming stocks. For its Las Vegas project, Tan said the construction progress is on track to meet the opening deadline in 2020.

AllianceDBS sensitivity analysis showed a 1% increase in casino duty would lower Genting and Genting Malaysia Bhd’s forward earnings by about 1% and 3% respectively, should Putrajaya decide to hike gaming-related tax in the upcoming Budget 2019 and under the assumption gaming groups opt to absorb the tax hike.