JULY’S EXTERNAL RESERVES
By CIMB Investment Bank
MALAYSIA’s foreign reserves rose US$1.7bil month-on-month (m-o-m) to US$137.8bil at end-July (versus -US$5.3bil to US$136.1bil in June) as capital outflows subsided.
Foreign investors in emerging markets appear to be sensing that the Fed’s tapering is unlikely to be immediate, and that a disorderly unwinding can be avoided.
However, the untimely revised negative outlook for Malaysia’s sovereign credit in late-July and warnings about potential downgrades by Fitch reinforced selling pressure in equity and bond markets.
On a cumulative basis, foreign reserves are still down US$1.9bil in the seventh month of 2013 versus +US$0.9bil in the same period last year. The outstanding July foreign reserves is sufficient to finance 9.7 months of retained imports and is 4.3 times the short-term external debt.
In July, foreigners were net sellers of Malaysian equities for the second month by RM0.3bil (-RM3.5bil in June).
Fitch’s negative outlook for Malaysia annouced on July 30 reinforced the selling in equity and bond markets, triggering a 0.6% intra-day depreciation in the ringgit to RM3.24 against US$1 on July 31.
Government bond yields also spiked 10 basis point (bp) to 3.49% for 3-year papers and 7 bp to 4.13% for 10-year papers in a single day.
Foreign holdings of Malaysian debt securities shrank 4.6% m-o-m to RM228.9bil at end-June (+1.4% to RM240bil at end-May).
At end-June, foreign ownership of total Malaysian Government Securities reduced to 46.8% from 49.5% in May.
We cut our end-2013 foreign reserves target to US$136.5bil from US$144.6bil previously given the volatile capital flows, weighed down by investor concerns about the potential downgrades by rating agencies due to fiscal weakness as well as the emergence of “twin deficits” for the first time since 1992.
LONDON PROPERTY
By HwangDBS Vickers Research
OUR recent site visit to London and meeting with property consultant CBRE UK reveals there is still upside to Central London property market, especially residential because of the following: housing supply is one-third below government target; strong rental market (4% to 5% yield; 5% to 7% growth per annum); weak forex rate (£/US$ down 28% from peak) and euro woes likely a long-drawn affair with London regarded as safe haven and government incentives to stimulate mass housing demand.
The return of local buying (banks are starting to ease lending slightly) will be a strong growth driver (currently just 20% of buyers).
Transaction prices are hitting £1,000 to £2,000 per sq ft (psf) with high-end enclaves (Mayfair, Knightsbridge) crossing £4,000 psf. Asean buyers make up 38% of buyers, Middle-East 15%, and Russians 13%.
We were impressed by Battersea’s showroom and strong sales. Phase 1 was fully sold in record time. Its competitive advantages are the strategic location near West End, integrated development with iconic power station and river frontage, improving infrastructure with Northern line extension (£1bil government funding; targeted completion end-2019), relocation of US and Dutch embassies to create 10,000 jobs, and deep value of £1,000 psf versus £3,000 psf in neighbouring Chelsea.
Phase 2 is slated for launch in the first half of 2014 at £2,000 psf (prime units above power station), while Phase 3 may see conversion of office space to residential.
SP Setia offers the largest exposure to Central London’s burgeoning property market.
We also visited Eastern & Oriental’s Prince House near London School of Economics and IJM Land’s mixed development near the Tower of London.
Interest in the former is reportedly overwhelming at £1,500 psf, while the latter will be launched in October (Phase 1) at £1,000-1,200 psf.
Contribution to earnings and revalued net asset value are small, but these could be stepping stones to more London ventures.
There may be upside to IJM Land’s RM1.5bil gross development value (GDV) if its hotel is converted to another residential tower.
WILMAR INTERNATIONAL
Maybank Kim Eng
Buy (unchanged)
Target price: S$4.60
SECOND quarter 2013 results were within expectations, with recurring net profit up 43% year-on-year (yoy) against a weak corresponding period last year.
First half of 2013 now makes up 42% of full-year consensus, and with seasonal sugar earnings kicking in for the second half 2013; we believe consensus earnings are too low.
We see evidence that earnings are rebounding off a cyclical low and the current stock price level represents an opportunity for accumulation.
The second quarter’s recurring net profit came in at US$45mil, up 42% yoy, despite a 5% decline in revenue due to lower commodity prices.
Overall, all business segments showed yoy profit before taxes (PBT) growth, with the exception of plantations & palm oil mills, which continues to be dragged by low crude plam oil prices.
This is in line with our investment thesis that Wilmar will benefit overall from the lower commodity price environment, since upstream CPO only accounts for around 16% of group’s PBT.
For soybean crushing, which managed to turn in another quarter of profit, management expects to remain in the black for the rest of the year as good volume was expected.
For consumer segment (mostly pack oil), volume and profit jumped 22% and 20% respectively yoy, even as Wilmar cut prices to reflect lower cost inputs.
Management expects volume to benefit from the ongoing austerity drive as more meals are consumed at home.
In our view, Wilmar is building up leadership positions in products outside its traditional portfolio where it is already a dominant player.
These will provide the next leg of growth. For example, rice and flour volume grew 60% and 29% respectively, while scale in sugar is also building up quickly.
We keep our estimates mostly unchanged, with our target price of S$4.60 remaining pegged to 16x FY13F, its five-year historical mean.
As a signal that management is also more upbeat, Wilmar announced an interim dividend of S$0.25, up from S$0.20 last year. We maintain “buy”.