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Saturday, June 18, 2016

Revival of Indonesia augurs well for CIMB

Saturday, 18 June 2016
Revival of Indonesia augurs well for CIMB

Bank’s fortunes depend on economic health of the republic

WITH more than 20% of its business coming from Indonesia, CIMB Group Holdings Bhd’s fortunes depend very much on the economic health of that country.

In this respect, Indonesia, with a population of more than 230 million and a country where everyone wants to be in for exposure to the consumer segment, is poised for a great revival.

Nomura Research has described Indonesia as the greatest recovery this year and the next. The research house has projected Indonesia’s economy to grow at 5.4% this year and 5.8% in 2017.

Indonesia’s public debt, at 26.1% of its gross domestic product, is one of the lowest ratio among Asian countries and emerging markets. Hence it does not carry the “bulging debt” associated with some emerging markets.

A revival of Indonesia should augur well for CIMB. In the past 18 months, CIMB has been providing for exposure to its loans in Indonesia that is carried out by subsidiary PT Bank Niaga.

The fall in the commodity sector coupled with slower economic growth had caused CIMB’s operations there to take a hit last year. An improved economy should allow CIMB’s Indonesian operations to enjoy greater writebacks, says an analyst.

CIMB has also been rationalising its cost and the efforts are beginning to show in its bottom line. In its first quarter results, the banking group attributed its improved results to stronger cost management and improved asset quality.

The improved provisions came largely due the recovery in the banking system in Indonesia and Thailand.

CIMB’s net interest income grew in the first quarter but it was underpinned by the non-interest income due to the soft capital market. The bank has remained cautious for the rest of the year.

Like most other financial institutions, CIMB is trading at less than one time book value. Year-to-date, it is down 7%.

However, on the recovery, the stock has shown to have greater upside due to its liquidity compared with many other financial institutions. – By M. Shanmugam


DIVIDEND-YIELDING stocks like cafe chain operator OldTown Bhd is an option for investors in an uncertain and weak market environment such as the current one.

The company recently returned to growth trajectory declaring a special dividend of three sen per share and bringing its FY16 dividend per share to nine sen or more than a 5% yield.

It is sitting on a healthy cash pile with net cash of around 33 sen per share which allows it to increase its payout to shareholders, if it wishes.

For its FY16, the company made a higher net profit of RM52.3mil on revenue of RM393.4mil, compared with a net profit of RM47.5mil on revenue of RM397.7mil in FY15.

In its note on OldTown, Alliance Research says it also expects positive newsflow such as earnings accretive M&A activities to support the company’s share price.

Operations-wise, Alliance estimates that OldTown’s sales to China only represents less than 4% of its sales and as such is positive that there is still plenty of room for the group to boost its export sales with the completion of the restructuring of its China distributorship late last year.

Currently, the group has a total of 237 café outlets, of which 207 are located nationwide while 10 are in Singapore, 16 in Indonesia and four in China.

OldTown, famed for its white coffee products, is currently trading at a trailing price to earnings (PE) ratio of about 15 times and a forward PE of 14 times, a significant discount to its regional peers’ valuation of 21 times.

Main risk to OldTown’s operations would be weaker-than-expected consumer spending which would affect the company’s sales directly.

All seven analysts who cover the stock currently have “buy” calls on the company. –By Yvonne Tan


HAVING flown under the radar until recently, KESM Industries Bhd is regaining investors’ attention after delivering a strong set of earnings in its latest quarterly results.

Despite the perceived weakness in the semiconductor industry at the moment, KESM’s offerings stand a better chance of receiving steady customer demand as it provides testing services, specifically “burn-in” services to major multinational clients.

The company has undertaken intensive productivity programmes and cost management initiatives, and the results are starting to show.

For its third quarter ended April 30, KESM reported a net profit of RM7.57mil, up from RM1.73mil a year ago. Its revenue improved to RM70.77mil compared with RM62.93mil the year before.

Its cumulative earnings over nine months shows a large improvement compared with last year. For the nine months ended April 30 (9MFY16), the company saw its net profit rise to RM22.64mil compared with just RM6.58mil over the same period last year. Its revenue rose to RM211.21mil in 9MFY16 from RM194.18mil a year ago.

As part of its testing mechanism, the company can accurately identify how, where and when devices or equipment may fail during the burn-in process.

A large chunk of its RM82mil in capex this year is dedicated towards the growing automotive market, whereby KESM provides testing services for sensors, power trains and other driver-assisted systems.

Despite the substantial annual capex outlay, its bottom line has improved thanks to greater demand as well as cost rationalisation programmes. With the stock still trading at a discount to its net assets per share of RM6.52, valuations still look undemanding.

Not only is its existing cash pile of RM108mil enough to cover its entire liabilities of RM82mil, at its present share price, KESM carries a historical earnings multiple of just 6.45 times according to Bloomberg data.

As its margins continue to improve, the stock could be poised for further upside.It is worth noting that despite a brief hiccup this year, the stock had more than doubled its value in 2015 when the broader market experienced substantial turmoil. – By Afiq Isa

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