Technical | Fundamental Analysis Discussion Stocks Listed In Bursa

Thursday, June 25, 2009

KNM Group
(KNMG MK, Hold, TP: RM0.67) expects its earnings for this year to be comparable to last year, underpinned by the recovery in oil prices and as it moves up the value chain. Group MD Lee Swee Eng said KNM was also pushing ahead with its three pronged business model, which entailed moving up the value chain, seeking new markets and exploring new industries in the O&G sector. He said that the Group planned to move up the value chain via joint ventures, strategic alliances or M&A, depending on the size of the candidates. KNM sees demand picking up in three areas, namely Australia, Brazil and the Middle East, with a higher demand for LNG in Australia, deepwater oil exploration in Brazil and oil and gas in the Middle East. (Financial Daily)
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AirAsia(AIRA MK, Buy, TP: RM1.90) stands to lose up to RM400m a year at the group level with the abolishment of its administration fee from its fare structure but the airline says it will replace lost revenue with income from higher passenger growth and its ancillary business. Group CEO Datuk Seri Tony Fernandez believes that reducing costs of fares is the only way to get people to travel. He hopes that the move woul d increase load factor and increase competitiveness of the airline. There are also other ways of generating income, such as hotel, food operations and priority booking, he added. The administration fees range from RM22.50 to RM43 per route (one way). (Starbiz)
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Firefly, a wholly-owned subsidiary of Malaysia Airlines (MAS MK, Sell, TP: RM2.00), expects it Singapore flights to contribute 10% of revenue this year .Firefly is set to operate six flights daily from various Malaysia ai rports into Singapore by December this year.(BT)
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The government has appointed a consultant to find the middle path in a dispute between AirAsia Bhd(AIRA MK, Buy,TP: RM1.90)and Malaysia Airports Holdings Bhd (MAHB) on total airport taxes of RM65m which is being owed byAirAsia.Prime Minister Datuk Seri Najib Ibrahim said that the Government will remain neutral in a dispute between MAHB andAirAsia on the amount of airport tax owing by AirAsi a. He also said that MAHB had never accorded AirAsia or any other airline the special privilege of owing airport tax.(Financial Daily)
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MK Land Holdings Bhd is venturing into India, partnering India’s property developer Embassy Group for an integrated township development with a gross development value (GDV) of RM3bn on a 120ha parcel of land in northern Bangalore. The joint venture (JV) also sees the participation of MK Land’s sister company, MKN Embassy Development Sdn Bhd, which is under the privately owned Emkay group. The project will be undertaken by a JV company named Mialn Gateway Sdn Bhd. MK Land via Ritma Mantap Sdn Bhd, and Embassy, vi a Star Dreams, each holds a 47.5% stake in the JV company, while MKN Embassy owns the remaining 5%. (Financial Daily)
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Top Glove Corp Bhd said profit growth this fiscal year may be double the company’s earlier estimate after swine flu bolstered demand and the cost of raw materials fell. Net income in the year ending August 30 is on course to climb at least 30%, executive di rector Li m Cheong Guan said in an interview. Thi s would swell earnings to a record RM143m. The group hadearlier forecast growth of 15% to 20%. (Financi al Daily)
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Malaysian Resources Corp Bhd will launch a new brand identity for its property division on Saturday. In a statement yesterday, Group MD Sharil Ridza Ridzuan said the company hoped to achieve robustness in its product offerings and increase the market value with the unveiling of the new brand. MRCB would also launch the second phase of its pioneer project at Bandar Seri Iskandar, in Perak. Over 200 units of residential properties comprising bungalows, semi-detached and terrace houses woul d be showcased this weekend. (Starbiz)
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Rating agencies see more potential downgrades in the second half of this year although the global economy is showing some hints of recovery. According to RAM CEO Liza Mohd Noor, the overall credit quality of its rated portfolio, though resilient in 2008, will trend downwards for the remainder of the year. She believed that GDP trend growth of 5-6% will likely be gradual, possibly taking up to 2 years. She noted that corporate issuers, especially those with significant dependence on export earnings, would be the most vulnerable as the global demand slump had resulted in weaker internal cash flow generation. (Starbiz)
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The Nasdaq trimmed gains Wednesday and the Dow dipped after the Federal Reserve kept a key short-term interest rate near zero, but said nothing about expanding a program meant to keep long-term rates from spiking. The Dow Jones industrial average lost 0.3% (-23.1 pts, close 8,299.9). The Standard & Poor's 500 gained 0.7% (+5.8 pts, close 900.9) and the Nasdaq composite gained 1.6% (+27.4 pts, cl ose 1,792.3). In currency trading, the dollar gained versus the euro and the yen. U.S. light crude oil for August delivery fell 57 cents to $68.67 a barrel on the New York Mercantil e Exchange. (CNNmoney)
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The Federal Reserve refrained from increasing its US$1.75trn bond-purchase program, said the pace of economic contraction is slowing and predicted inflation will remain subdued for some time. “Substantial resource slack i s likely to dampen cost pressures, and the Committee expects that inflation wi ll remain subdued for some time,” the Federal Open Market Committee said in a statement after a two-day meeting in Washington where it also kept the benchmark interest rate between zero and 0.25%. The rate wi ll stay at “exceptionally low levels” for an “extended period. (Bloomberg)
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Orders for U.S. durable goods unexpectedly jumped in May, a sign companies are gaining confidence the recession is easing. The 1.8% rise in bookings for items meant to last several years matched the previous month’s increase, the Commerce Department said today in Washington. The durable-goods figures reinforce a trend of improvement that spurred the Organization for Economic Cooperation and Development to lift its growth forecast for the world’s most developed nations for the first time in two years. The Federal Reserve today signalled the worst of the slump is over. (Bloomberg)
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The U.S. economy and financial system are improving amid declining credit-market risk, according to the head of the Treasury’s office overseeing the US$700bn rescue fund. “There are tentative signs that the financial system is beginning to stabilize, and that our efforts made an important contribution,” Herb Allison, assistant secretary for financial stability, sai d yesterday in testimony before a congressional oversight panel. “Key indicators of credit market risk, while still elevated, have dropped substantially.” (Bl oomberg)
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U.S. may need a second economic stimulus package as unemployment is poised to continue rising, said Warren Buffett. “It looks like we’re going to need more medicine, not less. We’re going to have more unemployment. The recovery really hasn’t got going. Economic rebound will be a slow process,” said Buffett, who predicted the joblessness rate will exceed 10%. “The economy hasn’t turned yet. There’s no telling how long it will take. It will happen.”(Bloomberg)
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The Organization for Economic Cooperation and Development raised its forecast for the economy of its 30 member nations for the first time in two years as the U.S. slump shows signs of easing.
The combi ned economy of the world’s most-industrialized countries will shrink 4.1% this year and grow 0.7% in 2010, OECD said yesterday. The new projections compare with March forecasts for contracti ons of 4.3% and 0.1%. (Bloomberg)
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The European Central Bank said it will lend banks €442bn (US$621bn) for 12 months, the most it has ever allotted in an auction, as it steps up efforts to unblock credit markets in the 16-nation euro region. The Frankfurt-based ECB filled all bids in its first offer of 12-month loans to banks at the current benchmark interest rate of 1%. The 1,121 banks that participated receive the funds tomorrow. The euro interbank offered rate, or Euribor, for 12-month loans fell to 1.57% today, a record low.(Bloomberg)
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Britain’s recovery from the worst recession in a generation will be slow and “uncertain”, according to Bank of England Governor Mervyn King. “There has to be a risk that it will be a long, hard slog” because of the problems in the banking system, King told lawmakers in London yesterday. “I feel more uncertain now than ever. This is not the pattern of a recession coming into recovery that we’ve seen since the 1930s. Having an open mind and not pretending to foresee the future when it’s so uncertai n is important.” The comments suggest the central bank isn’t yet planning to withdraw its stimulus for the economy even though some indicators show the end of the recession is near. (Bloomberg)
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The recession in Germany, will be deeper than previously expected this year as a global slump saps demand for the country’s exports, the Organization for Economic Cooperation and Development said. German gross domestic product will drop 6.1% i nstead of a previ ously projected 5.3%, the Paris-based organization said in its global economic outlook published today. In 2010, the economy will expand 0.2%, it said. Germany’s RWI economic institute said Tuesday i t expects the economy to shrink 6.4% this year with “no initial signs of recovery.” (Bloomberg)
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The International Monetary Fund boosted its 2009 and 2010 forecasts for Australia . In preliminary staff findings released from Washington, the lender said Australia’s economy will shrink 0.5% thi s year, compared with a 1.4% drop predicted in April. The economy will grow about 1.5% next year, the IMF said, after previously predicting a 0.6% gain. This year’s contraction will be driven by lower commodity prices, an increase in the country’s jobless rate and “weak confidence,” the report said, with government spending likely to spur next year’s rebound. (Bloomberg)
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The International Monetary Fund boosted its 2009 and 2010 forecasts for Australia . In preliminary staff findings released from Washington, the lender said Australia’s economy will shrink 0.5% thi s year, compared with a 1.4% drop predicted in April. The economy will grow about 1.5% next year, the IMF said, after previously predicting a 0.6% gain. This year’s contraction will be driven by lower commodity prices, an increase in the country’s jobless rate and “weak confidence,” the report said, with government spending likely to spur next year’s rebound. (Bloomberg)
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Japan’s merchandise exports dropped by 40.9% y-o-y to ¥4trn (US$41.6bn), accelerating from the 39.1% decline of the previous month. This brought a halt to the trend seen in March-April, when the decline in exports had eased, stoking hopes for a recovery. Seasonally adjusted figures also show that exports fell by 0.3% in m-o-m terms in May, after two consecuti ve months of gain. Three out of the four major sectors posted a sharper y-o-y decline in export revenue: the manufacturing, machinery and equipment and electrical machinery and equipment sectors. However, Japan still recorded a merchandise trade surplus of ¥299.8bn, despite being l ower than the ¥341.1bn surplus seen in May 2008.(Bloomberg)
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Monday, June 22, 2009

The Steel/Aluminium Industry 8.0

The Government’s decision to abolish certain import restrictions within the steel industry will allow finished steel product makers to competitively source their raw material needs.

The latest move by the Government, viewed as a step towards full liberalisation of the industry, was designed to “enhance competitiveness” of the local steel players.

Steel manufacturing licences will be granted “without restriction” effective Aug 1 2009 “to meet the demand for domestic and export markets”. By granting “free” steel manufacturing licences, steel millers would be able to produce any type of flat or long steel products that are in short supply at home, or in demand overseas.

Import controls on flat products – hot-rolled coils (HRC), cold-rolled coils (CRC) and electro-galvanised iron (EGI) – that are used for production of finished products for export market would also be lifted from Aug 1 2009.

For downstream players, the latest liberalisation means steel product manufacturers can now buy 100% of their flat steel requirement from overseas. Currently they are allowed to import up to 40% of their steel requirement duty-free while the balance is subject to a 50% tax.

Megasteel Sdn Bhd, a unit of the Lion Group, is the sole producer of HRC in the country. The move will allow HRC users to competitively source their needs for the production requirement.

The CRC producers in the country include Megasteel, Mycron Steel Bhd, CSC Steel Holdings Bhd and Yung Kong Galvanizing Industries Bhd. These semi-finished flat steel products – HRC, CRC and EGI – are then used by manufacturers to make pipes, furniture, cars and consumer durables.

Products meant for the export markets can enjoy free import duty on their flat steel imports. Raw materials imported to make end products for domestic use would be subjected to lower import duty.

Import duty on flat products imported from outside Asean countries would be reduced in stages, with the current duty slashed from 50% to 25% from Aug 1 2009. The rates will be further cut down to zero and 10% from Jan 1, 2018.

Contrasting Comments From Local Steel Manufacturers …

The government’s decision to liberalise further the domestic steel sector has received contrasting comments from local steel manufacturers.

Those making long products, which are used in the construction sector, warn of dire consequences from the liberalisation while the country’s sole producer of flat steel products sees the measures as an opportunity to enlarge market share.

The Case For Against …

Liberalisation of the steel industry is ill-timed and will not contribute positively to the development of the local steel industry.

The current restriction on imports was the only incentive for local steel manufacturers to continue to invest and expand in a capital-intensive industry, especially in the current tough operating environment.

The steel industry should be viewed as a strategic industry that has to be nurtured because domestic steel production has remained stagnant at around nine million tonnes annually for the last 10 years (1998-2008).

If the liberalisation of the industry is not done with care, the country might be beholden to imports to meet local steel demand in the future. With the lack of investment to expand and upgrade production, problems will arise when we have a global shortage like what happened last year (2008).

The Case for …

The move is positive, particularly for Megasteel Sdn Bhd, the sole producer of hot-rolled coils (HRC) in the country.

HRC is better known as flat steel and is used in a variety of industries. HRC is also the feeder material for cold-rolled coils (CRC). The other broad category of steel is long products, which are manufactured by several companies, including Masteel.

The easing of import and export duties and restrictions for both long and flat products will come into effect on Aug 1 2009.

The measures will help boost Megasteel’s HRC plant whose current capacity utilisation of about 45% will increase to 80% and, with increased export orders, to 100% within a short period.
The measures were a positive development for the local steel industry and, in particular, the flat steel sector, namely HRC and CRC.

The import duty review for all flat products will enable the industry to be streamlined and become more competitive. Notably, this will increase the consumption of locally produced CRC and thus benefit the cold-rolled mills whose total capacity now (Till June 2009) far exceeds local consumption.

Demand Of The Steel Product Makers …

Industry players see hot rolled coil price is likely to rise from August 2009 due to anticipated higher demand for flat steel products in the second half of this year (2009).

The speedier implementation of the government stimulus package was among the reasons for a boost in demand for steel products.

Hot rolled coil price is expected to hover between RM2,100 and RM2,200 per tonne between June and July. It price jumped to as high as RM3,800 per tonne in October 2008 before correcting sharply by 10% in November 2008, and subsequently fell to as low as RM1,600 per tonne in March 2009.

The surge in price is beneficial to secondary steel product makers as customers will place their orders in anticipation of the hike.

The local flat steel product makers, in particular electrical resistance welded steel pipe producers, include Hiap Teck Venture Bhd, Melewar Industrial Group Bhd, Choo Bee Metal Industries Bhd and Amalgamated Industrial Steel Bhd (AISB). Megasteel Sdn Bhd, a sister company of Lion Industries Corporation Bhd, is the sole supplier of hot rolled coils in the country.

This scenario will allow producers to adjust the market prices upwards quite immediately to help generate some positive margins they have not seen for more than six months.

It is learnt that there was a surge in steel pipe orders in April 2009, mainly due to the restocking by customers as inventories dropped. A near-term rebound in local steel consumption is primarily due to restocking activities amid a tight supply.

Most producers and customers have been aggressively destocking their inventory since late 2008, and bought much less materials or products to replace as market demands were seriously squeezed.

If the international steel commodity continues to move up gradually during the second half of 2009, we would expect that the demand for products to surge and margins to rise. The sector might see its bottom in the second quarter of 2009. Once the second half 2009 improves, it should provide the momentum to push 2010 into better times for business activities.

Industry players confirmed that there had been an improvement in local demand for its flat steel products over the 1A2009, mostly from stockists who were restocking and expecting prices to move up. A return of enquiries from certain export markets has also been seen.

Most steel pipe makers are currently (June 2009) still operating in the red. Gross margins remain negative as market prices and demand have not picked up fast enough.


Local iron makers will likely enjoy cost savings when the proposed iron ore centre in Manjung, Perak, comes on stream, possibly by 2013.

This is certainly good news for local iron makers as freight charges constitute a major production cost.

Vale International SA, the world’s second largest diversified metals and mining company, had agreed to buy 165.5ha in Manjung from property developer KYM Holdings Bhd in a deal believed to be related to recent statements by the Perak government of a RM9bil South American investment in an iron ore centre in the state.

Mentri Besar Datuk Seri Dr Zambry Abdul Kadir had said that a South American company planned to make Manjung the production and distribution centre for its iron ore in the Asian region.

The company has a paid-up capital exceeding US$100bil and is among the largest in the world in iron ore mining and will provide at least 1,800 job opportunities for the people in the state.

Currently (June 2009), local companies such as Perwaja Holdings Bhd, Lion Industries Corp and Ann Joo Resources Bhd import iron ore pellets from Brazil to make their products of direct reduced iron (DRI) and hot briquetted iron (HBI).

The sudden surge in the Baltic Dry Index, the benchmark for commodity shipping rates, to above 4,000 points and its present level of about 3,500 points was pushing shipment costs to an average US$35 per tonne.

This means upon commissioning of the plant, local iron makers will potentially be able to enjoy savings of at least US$50 per tonne of finished DRI/HBI based on the estimation that for every tonne of DRI and HBI, about 1.5 tonnes of iron ore pellets are consumed.

However, estimated that the first phase of the iron ore mining and pelletising plant would take more than three years to be commissioned. Earnings enhancement will not be immediate for the local boys.

Zambry had admitted that the Vale iron ore plant investment was not yet a done deal.

It was still subject to “certain matters”.


State Of The Domestic Steel Players …

The 1Q2009 was definitely a bad one for local steel players. Their bottom line tumbled into the red while their cash flow statement showed operating losses before working capital changes. A glance at their balance sheet also reveals a tight working capital situation, with capital tied up in stocks.

It would appear that steel players sacrificed their bottom line for cash flow in 1Q2009. In the steel industry, players employ most of their working capital (cash and short term trade financing) to stock up their raw materials such as scrap metal and iron ore. Hence, it is crucial for them to be able to convert these raw materials to semi finished or finished products and sell these for cash to sustain operations and pay back short term trade financing.

A steel market with lukewarm demand and immobile prices could tie up the companies’ working capital and hence their ability to sustain their operations, unless they bring in fresh working capital or further delay paying the suppliers and bankers.

But in general, the 1Q2009 results spelt out the dire straits the steel players were in. While some say the situation has improved in the current quarter (2Q2009), a meaningful recovery may come only in 4Q2009.

The share price of steel companies have rebounded in the recent market (April – May 2009) rally, but have these run far ahead of the fundamentals of the companies considering their tight capital situation.

Steel players hope both prices and demand will pick up sooner rather than later. Otherwise, they will be forced to pour in more cash to pay bills and sustain their operations rather than generating cash flow to sustain operating needs.

Of course, further improvement in steel prices in the coming months (June 2009 & Beyond) will inflate the value of inventories, enabling steel players to realise stocks at a higher value to cover their payables and short term obligations. But if steel prices and demand remain stagnant throughout 2009, perhaps it would be better to shift to players with a better balance sheet.

Going Forward …

The outlook for the domestic steel sector should be brighter going forward as the slump in the industry has bottomed out following losses of about RM485.9mil in the first quarter 2009 and even more in the fourth quarter of last year (2008).

The worst is clearly over for the steel industry and earnings are expected to stage a strong turnaround in the third quarter of this year (2009).

Most steel mills continued to be in the red in the quarter ended March 31, 2009. However, the quantum of losses for players such as Ann Joo Resources Bhd, Perwaja Holdings Bhd and Southern Steel Bhd had been reduced substantially in the absence of further write-downs in the value of their inventories.

Pump-priming efforts by both the (Malaysian) Government as well as (governments) overseas would boost demand for local steel going forward. Domestic demand would drive growth instead of export sales as the roll-out of select cornerstone projects under the Ninth Malaysia Plan gathered momentum.

Steel prices, which had bottomed out in the fourth quarter of 2009 and were on the uptrend, would be boosted by international prices due to the rising demand for infrastructure projects in China.

Prices of long steel products (used for construction works) rebounded by 25% to RM2,000 per tonne currently from a low of RM1,600 per tonne in April 2009. It peaked at RM4,000 per tonne in mid-2008.

Credit Suisse said in a note that steel prices would be on the uptrend as a result of the Government’s pump-priming initiatives.

It is also believed that the inventory cycle in key Asian markets is bottoming out, further boosting demand. The production of local steel products shrank from August 2008 and declined 48% year-on-year in the first quarter of 2009, the sharpest drop since the Asian financial crisis.

The price of steel bars could climb higher in the coming months (June 2009 & Beyond) in line with improved prices in the international market as well as increased cost of raw materials compared to the previous quarter (1Q2009). Earnings for the second half 2009 would improve on increased demand from the domestic market.

Meanwhile, recovery in the demand for steel in China has also raised plant utilisation at Sino Hua-An International Bhd, which produces metallurgical coke, a raw material used in the smelting of iron ore for the manufacture of steel. Sino Hua-An is a China-based company listed on Bursa Malaysia. Decisive efforts by the Chinese government to stimulate the economy had pushed up demand for its product. Due to the direct exposure to China’s steel industry, its orders had started to pick up since December last year, while our total production output capacity is up at 90% from 58% December 2008.

Masteel is known for being prudent its stocking and inventory strategy. While the others were stocking up on raw materials towards 3Q2008, the company actually trimmed its stocks.

Hence, when prices crashed late 2008 following global financial crisis, the other steel players were forced to write down the value of their overpriced inventories in 4Q2008 by the hundreds of millions of ringgit. Masteel was the exception.

Armed with a working capital surplus, Masteel is now (June 2009) in a comfortable position to gradually build up its inventory position, in anticipation of further improvement in prices and demand. The company may become more aggressive because inventory accounted for only 44% or RM134 million (trade receivables another 44%) of its total current assets as at March 31, 2009.

Ann Joo, which is sitting on a huge inventory of RM875 million marked at lower cost prices, may offer investors strong growth momentum to take advantage of an upswing in recovery.

Note that Ann Joo’s aggressive inventory strategy in 2008 resulted in it pilling up a massive holding of overpriced stocks. This forced the company to write down Rm335 million in inventory value in 4Q2008. As a result, its inventory value of RM875 million as at March 2009 had fully factored in current low market prices

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Wednesday, June 17, 2009

Telekom Malaysia Bhd
(T MK, Buy, TP: RM4.90)
is looking at setting up new nodes in the Middle East to expand its global coverage. “We plan to put up new nodes in the Middle East, the key new growth in the telecom market. We are looking
at Oman and Saudi Arabia currently,” said Rozaimy Rahman, executive vice-president of TM Global, the global sales arm of TM. TM currently has two nodes in the Middle East, located i n Bahrain and Egypt. TM and Telstra signed an agreement yesterday to interconnect the companies’ Internet Protocol Virtual Private Networks.(Starbiz)
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Telekom Malaysia Bhd’s
(T MK, Buy, TP: RM4.90)partnership with global communications, IT and security solutions company Verizon in producing a new IP node will provide an impetus for he country to become a regional internet hub. TM Group chief said the IP node would be able to provide high-end network and IP-based services at competitive prices to local servi ce provi ders. The IP node would also support delivery of advanced data services to Malaysian-headquartered companies throughout the region.(Financial Daily)
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Australia based and ASX-listed Mission NewEnergy Ltd, which inked a RM114.54m turnkey contract with KNM Group Bhd (KNMG MK, Hold, TP: RM0.67) to build a second biodiesel refinery in Pahang, has commenced the commissioning phase of the mechanically completed plant. Concurrently, KNM founding member and group managing director Lee Swee Eng is investing about RM43.54m in the Australian firm via the subscription of 85m ordinary shares and warrants under the same financial terms as Mission’s April 2009 announced private placement. Lee’s proposed investment is to help secure funds needed for the second biodiesel plant in Pahang. (Malaysian Reserve)
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Resorts World (RNB MK, Buy, TP: RM3.00), told shareholders yesterday that the gaming firm does not see any obstacles in investing in the Chinese gambling enclave of Macau, but has made no decision on the move. The comments came in after intense speculation that Genting Group may be a potential buyer of MGM Mirage’s stake in a JV in Macau. (Financi al Daily)
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Time dotcom Bhd (TdC) will not be disposing anymore of its shares in DiGi.Com Bhd (DIGI MK, Hold, TP: RM22.60) in the near term as it is comfortable with the current level of borrowings. Its CEO Afzal Abdul Rahim said that though the company would continue to evaluate market conditions, it wi ll keep DIGI shares for now for dividends. In January, TdC sold 2.9% of its stake in DIGI for RM461m for debt repayment, which effectively brought its holding in the company to 7.1%. (Malaysian Reserve)
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Petroliam Nasional Bhd (Petronas) production sharing contract (PSC) operator Murphy Oil Corp has made to 2 additional discoveries on its acreages offshore Sabah and Sarawak, on top of its existing development in the offshore Kikeh field, the country’s deepwater discovery. The US based oil and gas exploration firm said the discovery wasmade at its Siakap North prospect located in Block K, offshore Sabah, Malaysia, located 6 miles from its Kikeh field development in about 4,300 ft of water.(Malaysian Reserve)
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AirAsia X, has inked a contract to buy 10 Airbus A350s worth more than US$2.2bn (RM7.8bn), with option to purchase another five. Deliveries are scheduled between 2016 and 2018. The A350s will complement its current fleet of A330s. The airline has ordered 25 A330s, due to be delivered through 2015, of which two have been delivered since October last year. The A350-900 vari ant will be configured to seat 425 passengers in a two-class layout. (BT)
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Mudajaya Group Bhd, which has an order book of RM5.6bn, is bidding for new projects worth a combined RM1.8bn. "We expect further improvement (in our revenue) from 2008 as we received progress payments from our jobs," managing director Ng Ying Loong told reporters after the group's annual general meeting in Kuala Lumpur yesterday. "Our orderbook is at a healthy level, which will keep us busy for another three years. But we continue to participate in bids. Locally, we have bidded for some RM800m jobs," he added.
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Despite the current economic slowdown, Aeon Credit Services (M) Bhd continues to be upbeat that it will continue to register a double digit growth in revenue this year, backed by strong demand in consumer finance and its easy payment scheme. MD Naruhito Kuroda said that while the effect of the slowdown might be reflected in results in the coming quarters, they were still seeing growth in all business divisions. (Financial Daily)
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Perwaja Holdings Bhd has filed its defense and counterclaim for up to RM105.26m from Petronas as excess payment for gas supply by Petronas. Perwaja on May 12 received a writ of summons and a statement if claim from Petronas for RM85.79m together with a claim for interest. (BT)
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The government will look at cutting its operating costs next year to keep the national budget deficit low, but will maintai n its development expenditure. Government revenue is widely expected to fall next year, given the weak economic environment. The budget deficit is projected to rise to as high as 7.6% of the country's gross domestic product (GDP) i n 2010. "We are looking at our operating costs and what expendi tures we must reduce. But in terms of development expenditure, we will maintain that," Second Finance Minister Datuk Seri Ahmad Husni Mohamad Hanadzlah said. On the local economy, Ahmad Husni said second quarter growth is expected to be at the same level as in the first quarter, whi ch was a contraction of 6.2%. (BT)
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Southeast Asia's bourses are working to develop electronic trading links but are unlikely to merge, as suggested by a top Malaysian banker, Bursa Malaysia said yesterday. "It's a good idea but, personally, I think it is going to be a challenge to become reali ty," Bursa Malaysia chief executi ve Datuk Yusli Mohamad Yusoff said at a media briefing here. "There are no plans at the moment." (BT)
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Stocks tumbled Tuesday, falli ng for a second session in a row on continued worries that the pace of the recession is not waning as much as has been hoped. Better-than-expected reports on housing and wholesale inflation gave stocks a boost early in the session. But the advance was tepid and soon lost momentum as concerns about the economy reared up again. The Dow Jones industrial average lost 1.3% (-107.5 pts, close 8,504.7). The Standard & Poor's 500 dropped 1.3% (-11.8 pts,close 911.9) and the Nasdaq composite dropped 1.1% (-20.2 pts, close 1,796.2). In currency trading, the dol lar tumbled versus the euro and yen. U.S. light crude oil for July delivery fell 15 cents to settle at US$70.47 a barrel on the New York Mercantil Exchange.(CNNmoney)
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President Barack Obama said the U.S. unemployment rate will reach 10% this year, even as the economy begins to emerge from the recession. Obama acknowledged that unemployment lines may keep growing despite government efforts to boost economic growth, saying he’s confident an expansion will begin “shortly.” His outlook mirrors the forecasts of pri vate economists who predict a jobless rate of 10% - a level unseen since 1983 – by 4Q09. “What you’ve seen is that the pace of job loss has slowed,” the president said. “The economy is going to turn around, but as you know, jobs are a lagging indicator and we’ve got to produce 150,000 jobs every month just to keep pace, just to flatten this out.” (Bloomberg)
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Housing starts jumped more than forecast in May while industrial production tumbled, offering a picture of an American economy stil l struggling to emerge from the deepest recession in half a century. Builders broke ground on 532,000 dwellings at an annual rate, with single-family starts posting a thi rd straight gain, Commerce Department figures showed yesterday i n Washington. Housing starts were projected to rise to a 485,000 annual pace, according to the median forecast of 71 economists surveyed by Bl oomberg News. Output at factories, mines and utilities dropped 1.1%, and the share of industrial capacity in use slid to a record l ow, the Federal Reserve said. Excluding automobil es, factory output dropped 0.6% for a second month. In addition to cars, other consumer goods retreating last month included home electronics, clothing and furniture and appliances.(Bloomberg)
* * * * *
European Central Bank Governing Council member Yves Mersch said the bank has done everything it can to fight the financial crisis, suggesting he sees no scope to expand emergency poli cy measures. The ECB on June 4 kept its benchmark interest rate at a record low of 1%. It has announced pl ans to lend banks as much money as they need for up to 12 months and said it wil l buy 60bn euros (US$83bn) of covered bonds to counter the worst recession since World War II. The Federal Reserve and Bank of England have gone further, cutting their key rates close to zero and buying government and corporate bonds to stimulate growth. Mersch indicated the ECB would only consider further action if the economy takes an unexpected turn for the worse. (Bloomberg)
* * * * *
German investor confidence rose more than economists forecast to a three-year high in June
after evidence emerged that the recession in Europe’s largest economy i s bottoming out. The ZEW Center for European Economi c Research i n Mannheim said its index of investor and analyst expectations, which aims to predict economic developments six months ahead, increased to 44.8 from 31.1 in May. That’s the highest reading since May 2006. Economists expected a gain to 35, according to the median of 35 forecasts in a Bloomberg News survey. A gauge measuring investors’ assessment of the current economic situation rose to minus 89.7 from minus 92.8 i n May, ZEW said. (Bloomberg)
* * * * *
U.K. inflation slowed less than economists forecast in May after higher taxes and the weakness of the pound sustained price pressures in the economy. Consumer prices rose 2.2% y-o-y, compared with 2.3% in April, the Offi ce for National Statistics said yesterday in London. The median forecast in a Bloomberg News survey of 30 economists was 2%. Prices increased 0.6% m-o-m. Inflation has been “sticky” because of the U.K. currency’s drop in the past year, Bank of England markets director Paul Fisher said last week. Policy makers still predict it will slow further and are spending 125bn pounds (US$204bn) of newly printed money in U.K. debt markets to prevent deflation from taking hold. Inflation has now stayed above the central bank’s 2% target for 20 months. The monthly increase in prices was twice as much as the 0.3% median prediction of 25 economists. (Bloomberg)
* * * * *

Bank of Japan Governor Masaaki Shirakawa said there’s no guarantee the economy’s revival will be sustained, signalling it’s too early for the central bank to end its unprecedented steps to channel cash to companies. “The Bank of Japan remains cautious about the strength of final demand once companies at home and overseas complete their inventory adjustments,” Shirakawa said in Tokyo yesterday after his board left the overnight lending rate at 0.1%. While the Bank of Japan said earlier that the nation’s worst postwar recession is easing, Shirakawa told reporters policy makers have yet to decide when to stop buying corporate debt and providing lenders with unlimited credit. Shirakawa said the economy is improving because of three temporary factors: replacement of stockpiles at home and abroad, global fiscal stimulus measures, and improving confidence. It’s unclear whether a recovery in demand wi ll take hold, he said. (Bloomberg)
* * * * *

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Saturday, June 13, 2009

Plantation Overweight

Here comes the El Niño?
Feeling a little hot of late?

El Niño and La Niña are officially defined as sustained sea surface temperature anomalies of magnitude greater than 0.5°C across thecentral tropical Pacific Ocean. The severity of this temperature change is classified by the NOAA in three categories; MILD, MODERATE and STRONG. Direct effects of the El Niño result in drier conditions occurring in parts of Southeast Asia and Northern Australia, increasing bush fires and worsening haze and decreasing air quality dramatically. In the NOAA’s latest report released 8th June, they noted that “conditions were currently favourable for a transition from ENSO neutral conditions to ElNino conditions during June-August 2009”.

Years 1997-8, 2002-3, 2004-5, 2006-7

    The years above represent the previous 4 dry spells we have experienced. 1997-1998 and 2002-3 categorised as STRONG, 2006-7 as MODERATE and 2004-5 as MILD.

Only when Moderate to Strong do CPO prices react

    Based on our observations of data on Malaysia’s stock, production (stock to production ratio) as well as the corresponding CPO price average of the month, we note that the STRONG and MODERATE El Niño events tend to affect prices rather significantly. This was seen in 1998, 2003 and 2007.

    This could possibly bring CPO prices to the next level Hence, should this weather phenomenon occur in a severe manner, we believe it would create more legroom for CPO prices to run. We note that for now, it is only the very early stages of this weather development hence the outcome is highly uncertain. But if the current weather is any indication and that a couple of planters we have spoken to have also noted dryness in estates, this may be a sign of things to come. Needless to say, we will be monitoring weekly reports from the NOAA on further developments.

Maintain Overweight.

    Your browser may not support display of this image.We maintain overweight on the sector for now in view that this development as well as soybean shortages and rising oil prices which will keep CPO prices buoyant for the time being. We are also acutely aware that production trends are beginning to turn up into the high season and if exports turn out flattish, stocks could be on the rise again and put downward pressure on CPO prices. If these positive factors really come into play and if valuations reverted to the upper range of these companies PE Bands, it would appear that there is much room to go for the sector.

Figure 1 : Financial summary of stocks under coverage


(RM) @ Company 10 June

Asiatic 5.75

IOI Corp 4.70

Kim Loong 2.20

TSH 1.92

Sime Darby 7.05

KL Kepong 12.00

Boustead 4.22

EPS (sen)

2008 2009F 2010F

52.2 37.1 43.5

35.7 27.3 30.3

21.5 30.9 24.3

27.0 18.4 19.6

58.4 31.1 49.7

97.5 66.5 74.4

88.9 60.5 73.8

EPS Growth (%)

2009F 2010F

-28.9 17.3

-23.5 11.0

43.7 -21.4

-31.9 6.5

-46.8 59.8

-31.8 11.9

-31.9 22.0

P/E (x)

2008 2009F 2010F

11.0 15.5 13.2

13.2 17.2 15.5

10.2 7.1 9.1

7.1 10.4 9.8

12.1 22.7 14.2

12.3 18.0 16.1

4.7 7.0 5.7

    ROE (%)

2009F 2010F

    11.3 12.1

    17.0 16.0

    21.0 12.1

    14.3 12.1

    12.0 14.0

    12.0 12.8

    11.0 13.0


Yield (%)

2009F 2010F

1.7 1.7

2.1 2.1

4.5 4.5

3.4 3.9

2.1 3.5

2.9 4.2

2.4 2.4

The El Niño Explained

Feeling a little hot of late?

El Niño and La Niña are officially defined as sustained sea surface temperature anomalies of magnitude greater than 0.5°C across the central tropical Pacific Ocean. When the condition is met for a period of less than five months, it is classified as El Niño or La Niña conditions; if the anomaly persists for five months or longer, it is classified as an El Niño or La Niña episode. Historically, it has occurred at irregular intervals of 2-7 years and has usually lasted one or two years.

ENSO (El Niño Southern Oscillation) is associated with floods, droughts, and other disturbances in a range of locations around the world. These effects, and the irregularity of the ENSO phenomenon, make predicting it of high interest. Direct effects of El Niño resulting in drier conditions occur in parts of Southeast Asia and Northern Australia, increasing bush fires and worsening haze and decreasing air quality dramatically. Drier than normal conditions are also generally observed in Queensland, inland Victoria, inland New South Wales and eastern Tasmania from June to August. (Sources from Wikipedia)

The first signs of an El Niño are:-

    Rise in surface pressure over the Indian Ocean, Indonesia, and Australia

    Fall in air pressure over Tahiti and the rest of the central and eastern Pacific Ocean

    Trade winds in the south Pacific weaken or head east

    Warm air rises near Peru, causing rain in the northern Peruvian deserts

Your browser may not support display of this image.Warm water spreads from the west Pacific and the Indian Ocean to the east Pacific. It takes the rain with it, causing extensive drought in the western Pacific and rainfall in the normally dry eastern Pacific.

El Niño in recent times

1997-8, 2002-3, and 2006-7

As the chart above and table below indicates, there have been some 3 very significant El Niño events since 1950 (highlighted in grey in figure 3). According to the NOAA (National Oceanic and Atmospheric Administration), the 2002-2003 El Niño barely ranks 10th place over the past half century. The 2006-2007 occurrences reached a similar peak as the 2002-2003 event but lacked staying power and collapsed in 2007 leading into a LaNina event Your browser may not support display of this image.which we recall as heavy flooding seen early 2008 in Malaysia. 1997-1998 was one of the strongest El Niño events of the century.

Your browser may not support display of this image.Figure 2 : ENSO occurrence since 1950 in table format

El Niño ONI Value La Niña ONI Value
JAS 1951 -NDJ 1951/52
ASO 1949 –FMA 1951
MAM 1957 –MJJ 1958
MAM 1954 –DJF 1956/57
JJA 1963 –DJF 1963/64
ASO 1962 −DJF 1962/63
MJJ 1965 –MAM 1966
MAM 1964 –DJF 1964/65
OND 1968 –MJJ 1969
NDJ 1967/68 –MAM 1968
ASO 1969 –DJF 1969/70
JJA 1970 –DJF 1971/72
AMJ 1972 –FMA 1973
AMJ 1973 –MAM 1976
ASO 1976 –JFM 1977
SON 1984 –ASO 1985
ASO 1977 -DJF 1977/78
AMJ 1988 –AMJ 1989
AMJ 1982 –MJJ 1983
ASO 1995 –FMA 1996
JAS 1986 –JFM 1988
JJA 1998 –MJJ 2000
AMJ 1991 –JJA 1992
SON 2000 –JFM 2001
AMJ 1994 –FMA 1995
ASO 2007 –AMJ 2008
AMJ 1997 –AMJ 1998

AMJ 2002 –FMA 2003

MJJ 2004 –JFM 2005

JAS 2006 -DJF 2006/07

Source: NOAA,

Oceanic Niño Index (ONI) – the defacto standard that the NOAA uses to identify El Niño (warm) and La Niña (cool) events in the tropical pacific. Events are defined as 5 consecutive months at or above the +0.5o anomaly for warm (El Niño) events and at or below the -0.5

anomaly for cold (La Nina) events. These are further broken down into Weak (with a 0.5 to

0.9 SST anomaly), Moderate (1.0 to 1.4) and Strong ( 1.5) events. (

And the next one could possibly be soon…

The latest report on the El Niño development was released on 8th June by the NOAA (

In the summary of the report, it was noted that conditions were currently favourable for a transition from ENSO neutral conditions to El Niño conditions during June- August 2009.

However it is pertinent to note that the length and severity of a potential El Niño cannot be measured in these early stages.

El Niño and Palm Oil

Lower stock/production ratio – supply concerns – Higher CPO Prices

We had Asiatic over for a luncheon yesterday during which we received some clarity on the impact of dry weather on plantations. From their observations, should severe dry weather prolong for periods of >6 months, then they will, after a few months into the dry season, start to see dropping yields. However, if the dry period is short and severe, then it could have adverse impact on yields in the coming 12 months. Below we have a chart on Malaysia’s stock to production ratio dating back to 1999 against average CPO prices for the respective months. Ideally we would want to have pre 1998 data to asses the last major drought, but it is unfortunately unavailable from MPOB.

Your browser may not support display of this image.Your browser may not support display of this image.Figure 4 : Stock to production ratio vs. average CPO prices since 1999 .Our observations from the chart above are as follows:-

The last 2 major dips in stock to production ratio were in 2003 and 2007 coinciding with the 2 El Niño events which had an ONI value of >1, indicating a MODERATE drought. We can see that the 2003 stock/production ratio was lower than the low in

2007 corresponding with the higher ONI value of 1.5. The El Niño event in 2004-5 did not have major impact as the ONI value was <1,>

Next we look at how prices reacted during the time. In 2003 there was a definite reaction as prices hit a RM2000 high (this was also seen in 1998 when prices went past RM2400, ONI reading was 2.5, in the STRONG category). Then the 2007-

2008 period of low stock/production caused by the drought also brought prices upwards.

    Simple correlation tests on this data from Jan-99 to May-09 reveal an irrelevant -

0.06 correlation result. However if we tested data from Jan-08 to May-09, correlation improves to a stronger 0.26. Correlation was also stronger if data included the 2003 period. We further deduce from here that when there are El Niño (drought) effects and stock/production ratio is behaving out of the norm, there will be some impact to CPO prices. We also don’t doubt that data from 1997-1998 will yield similar results.

Your browser may not support display of this image.Figure 5 : Correlation results of stock/production ratio vs. CPO average monthly price

      Time Period Correlation

      Jan-99 to May-09 -0.06

      Jan-00 to May-09 -0.06

      Jan-01 to May-09 0.02

      Your browser may not support display of this image.Jan-02 to May-09 0.13

      Jan-03 to May-09 0.18

      Jan-04 to May-09 0.11

      Jan-05 to May-09 0.03

      Jan-06 to May-09 -0.02

      Your browser may not support display of this image.Jan-07 to May-09 0.08

      Jan-08 to May-09 0.26

Source: Bloomberg,

Our better question is if this will happen again? From the appearance of the chart, we would need a MODERATE to STRONG El Niño to take CPO prices to the next level. Needless to say, stock prices will follow. But as said, for now, it waits to be seen.

Your browser may not support display of this image.

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Friday, June 12, 2009

IJM Corp Bhd's (IJM MK, Hold, TP: RM5.10) chief executive officer and managing director Datuk Krishnan Tan plans to make way for his deputy, Teh Kean Ming, in December 2010. "It's part of my own philosophy that there comes a time when you need to hand over the baton for the next guy to run. I definitely feel I've been with this company a very long time and I have also put a very long shadow on it. It's time that the new people take over and run," Tan told reporters after participating in a forum on corporate governance in Kuala Lumpur yesterday. Tan has been with the company for 27 years, 12 of which was as its chief. He said he has made it a point to inform his institutional shareholders of his exit strategy and that it by no means meant that he would be totally out of the scene. (BT)

* * * * *

SapuraCrest Petroleum Bhd (SCRES MK, Sell, TP: RM0.67), is bidding for some RM5bn worth of contracts, of which more than half comes from within the region, group president and chief executive officer Datuk Shahril Shamsuddin said. "We are continuously bidding, but we believe that we can secure a certain portion of these bids this year," he said yesterday on the sidelines of the Oil and Gas Asia 2009 exhibition in Kuala Lumpur. Shahril was speaking to reporters after the launch of SapuraCrest's Typhoon remote-operated vehicle (ROV) by former Prime Minister Tun Dr Mahathir Mohamad. The company has about RM7bn worth of contracts in hand, which will keep it busy for the next two to three years. (BT)

* * * * *

Wah Seong Corp Bhd (WSC MK, Hold, TP: RM1.62), is on track to making up to two overseas acquisitions in the second half of the year and will not turn to shareholders for funding. The company plans to expand geographically to achieve its targeted 25% annual revenue growth and sees vast potential for deepwater pipe-coating jobs in Brazil, West Africa and the Gulf of Mexico. (BT)

* * * * *

Property developer Magna Prima Bhd will launch three projects worth over RM700m in the second half of 2009 to boost its income. Its new chief executive officer Loo Kent Choong said it will launch One Jalil, a gated development in Bukit Jalil featuring 109 units of superlink homes worth RM85m, in the third quarter. By December, it will launch Magna Prima City, a RM600m gated residential project along Jalan Kuching in Kuala Lumpur. Its on-going projects are Magna Ville in Selayang, U1 Shah Alam and Dataran Otomobil. (BT)

* * * * *

UMW Oil and Gas Bhd, which is en route to a listing on Bursa Malaysia, expects to rake in some RM1bn revenue this year from its new pipe-manufacturing plant in China. President Zulkifly Zakaria said the plant in Qinhuangdao, Hebei province, officially launched by Prime Minister Datuk Seri Najib Razak last Friday, began production in January. It is meeting demand not only in China but also the region. "The new plant has secured a contract to supply transmission pipes for part of the East-West Gas Pipeline project. This is our sixth plant in China," Zulkifly said. The plant is a joint venture between UMW Holdings Bhd (49% stake) and Baoji Petroleum Steel Pipe Co Ltd (51%), a subsidiary of China National Petroleum Corp. It is one of three major overseas projects that UMW Oil and Gas is focusing on this year. (BT)

* * * * *

Satellite operator Measat Global Bhd’s shares uptrend continued, climbing 3 sen, or 1.49%, to RM2.05 yesterday, despite Bursa Malaysia’s caution to investors. The caution came after an unusual market activity query on June 4, when Measat shares hit double limit-up ending 52.89%, or 19 sen to RM1.66 for that day. (StarBiz)

* * * * *

Vale International SA, the world’s 2nd largest diversified metals and mining company, has agreed to buy 165.5ha in Manjung, Perak, from property developer KYM Holdings Bhd. The deal is believed to be related to recent statements by the Perak government of a RM9bn South American investment in an iron ore centre in the state. KYM in a filing with Bursa Malaysia yesterday said Brazil’s Vale had an option to buy another 305.95ha, putting the total amount of land available to Vale at 471.46ha in Manjung. (StarBiz)

* * *

UEM Group Bhd has been under some scrutiny in relation to a lawsuit to the tune of RM840m by the government of Qatar over a dispute regarding a highway project in Qatar. It was reported that UEM Group received a set of legal documents from the state of Qatar on April 27. Qatar claimed that the defendants, Parsons International Ltd., UEM Group and Qatar Insurance Co, failed to fulfil contractual obligations in relation to the construction of the Salwa Road in Doha. (StarBiz)

* * * * *

The Employees Provident Fund’s (EPF) total investment income dropped 10.47% to RM3.26bn in 1Q09 form RM3.64bn in 4Q08. The decline was attributed to the lower returns from investments in fixed income instruments and equities, EPF said in a press release yesterday. The highest income contributor in 1Q09 was loans and bonds, which added RM1.78bn to EPF’s income. However, this was a drop of 2.15% compared to RM1.83bn in 4Q08. (The Malaysian Reserve)

* * * * *

The budget for 2010 will emphasise on ways to spur the country’s economy by making it “high income” based with the services sector playing a pivotal role in the new economic model that is currently being finalised, Prime Minister Datuk Seri Mohd Najib Razak said. He promised that all government policies would be consistent, with no “U-turns or flip- flops”. He said policies would be designed to spur growth and instill greater confidence among investors for an improved inflow of Foreign Direct Investments (FDIs), taking into account the stiff competition as a result of the global economic meltdown. (The Malaysian Reserve)

* * * * *

The Sarawak Regional Economic Development Authority (Recoda) has approved 24 investments worth over RM80bn for implementation in the state's new economic growth area, the Sarawak Corridor of Renewable Energy (Score) over the next five years. The projects are estimated to generate over 20,000 jobs, excluding preparation of the basic infrastructure and plant site and construction of the factories. Sarawak Chief Minister Tan Sri Abdul Taib Mahmud said the two biggest projects approved are an aluminium smelter in Mukah and a polysilicon plant in Bintulu. Press Metal Bhd's aluminium smelter has a capacity of 100,000 tonnes per year and is expected to start production in August, with an initial production of 50,000 tonnes per year. (BT)

* * * * *

The local market’s new benchmark, FTSE Bursa Malaysia KLCI, will be adopted on July 6th with the 30 constituents being the same as the current FTSE Bursa Malaysia Large 30 Index. Bursa Malaysia said the semiannual review of the FTSE Bursa Malaysia Index Series concluded yesterday with no constituent changes. (Financial Daily)

* * * * *

Prime Minister Datuk Seri Najib Razak will make a major announcement relating to greater liberalisation at the 2009 Invest Malaysia, which will be held at the end of this month. "I will make another significant announcement in line with our move for greater liberalisation to make Malaysia much more competitive," Najib said in his opening speech at the 2010 Budget Consultation meeting held in Putrajaya yesterday. Najib, who is also Finance Minister, made two liberalisation announcements in April. They were the relaxation of foreign ownership in 27 services sub-sectors and in the financial sector. (BT)

* * * * *

The government’s recent move to liberalise 27 services sub-sectors has given the franchise industry a shot in the arm, says Deputy International Trade and Industry Minister Datuk Mukhriz Mahathir. “It has enabled foreign franchisors and new brands to enter the market and support the franchise spectrum like franchisees (to foreign franchisors),” he said when

opening the Malaysian Franchise Association’s 14th annual general meeting in Kuala Lumpur yesterday. He said the leeway in equity control, for instance, will enable them to have 100% ownership of businesses set up here. (BT)

* * * * *

Works Minister Datuk Shaziman Mansor said the government needs to relook the stamp duty of 0.5% on service contracts, as it is having a negative impact on the construction sector. The new stamp duty rate, proposed under Budget

2009, makes a RM10m construction contract attract an ad valorem duty of RM50k. The combined effect of stamping all agreements including sub-contracting and outsourcing at 0.5% of the contract value is exponential and will be passed on to consumers, regardless of whether they are government or private contracts. (BT)

* * * * *
Stocks ended modestly higher Thursday, with all three major gauges closing at multi-month highs after the day's economic reports fed hopes that a recovery is brewing. Stocks have seesawed this week after rising Treasury yields and higher commodity prices sparked worries about inflation hampering a burgeoning recovery. Thursday restarted the advance, as a rise in retail sales and a bigger-than-expected dip in jobless claims raised hopes that the pace of the recession is slowing. But the early advance lost momentum; the S&P 500 failed to hold on after briefly hitting a key level that traders and other market pros watch. The Dow Jones industrial average gained 0.4% (+31.9 pts, close 8,770.9). The Standard & Poor's 500 gained 0.6% (+5.7 pts, close 944.9) and the Nasdaq composite gained 0.5% (+9.3 pts, close 1,853.4). In currency trading, the dollar fell versus the euro and the yen. U.S. light crude oil for July delivery rose US$1.35 to settle at US$72.68 a barrel on the New York Mercantile Exchange. (CNNmoney)

* * * * *

Fewer Americans filed claims for unemployment benefits last week, indicating the deepest job cuts may be subsiding even as companies hold off on hiring. Initial jobless claims fell by 24,000 to 601,000 in the week ended June 6, fewer than forecast and the lowest level since January, from a revised 625,000 the prior week, Labour Department figures showed yesterday in Washington. The number of people collecting benefits rose for a 19th straight time to a record 6.82m in the prior week. Businesses are slowing staff reductions as signs emerge that the worst recession in at least five decades may end in 2H09. Still, economists in a Bloomberg News survey predicted the unemployment rate will climb to 10% by year-end and restrain consumer spending, muting any recovery. (Bloomberg)

* * * * *

Retail sales rose in May for the first time in three months, an increase driven almost solely by U.S. shoppers returning to automobile showrooms seeking bargains and the rising cost of gasoline. The pending demise of thousands of Chrysler LLC and General Motors Corp. dealers attracted customers constrained by rising unemployment and falling home values. Retail sales rose 0.5%, as forecast, after a 0.2% drop in April, the Commerce Department said in Washington. Car dealers were among the retailers that performed the best last month. Auto sales increased 0.5% after falling 0.4% in April. (Bloomberg)

* * * * *

Inventories at U.S. businesses fell in April for an eighth straight month, the longest stretch since 2002, as companies cut back in the face of slowing sales. The 1.1% decline in stockpiles followed a revised 1.3% drop in March that was larger than previously estimated, the Commerce Department said yesterday in Washington. Sales decreased 0.3%. Companies are limiting production and spending to draw down stockpiles that piled up last year when demand plunged. A record inventory reduction in 1Q09 was among the largest drags on the economy and may set the stage for stabilization and a return to growth later this year. It would take 1.43 months to deplete stockpiles at the current sales pace, the lowest reading since November. Stockpiles at retailers, the only part of yesterday's release not previously reported, decreased 1% after a 0.9% decrease the prior month. Retail sales fell 0.3%. (Bloomberg)

* * * * *

U.S. household wealth fell in 1Q09 by US$1.3trn, extending the biggest slump on record, as home and stock prices dropped. Net worth for households and non-profit groups decreased to US$50.4trn, the lowest level since 2004, from US$51.7trn in 4Q08, according to the Federal Reserve’s Flow of Funds report yesterday. The drop in net worth is one reason Americans are boosting savings, blunting the effect of the tax breaks and income supplements from the Obama administration’s stimulus plan. One positive aspect of yesterday’s Fed report is that the decreases in net worth are starting to ease. Wealth dropped by a record US$4.9trn in 4Q08. Americans have taken on less debt as the economic recession unfolds. While the jump in savings rate to 5.7% in April was helped by an increase in incomes linked to the fiscal stimulus plan, some economists are forecasting savings will continue to rise as consumers hold back on spending. Consumer debt fell at a 1.1% annual pace following a 2% decrease in 4Q08 that was the first drop on record. (Bloomberg)

* * * * *

The World Bank cut its global economic outlook for this year, citing rising unemployment and weak production. The Washington-based lender projects the world economy will shrink “close to 3%,” compared with a 1.7% contraction forecast in March, the bank said yesterday in a statement. Developing countries may need US$350bn to US$635bn this year, less than previously forecast, to counter the effects of the global economic crisis. While developed economies “seem to be contracting at a slower pace,” he said, prospects for a recovery depend on fixing credit markets and recapitalizing banks. Zoellick said requests for loans from the bank’s two main lending facilities reached records this fiscal year, which ends June 30. The World Bank’s projection in March said the world economy would expand 2.3% next year. Yesterday’s report did not include a 2010 forecast or revised 2009 projections for individual countries. (Bloomberg)

* * * * *
Bank of England policy maker Andrew Sentance said the U.K. recession may be “bottoming out,” setting the scene for a recovery as soon as this year. “The very big policy stimulus that has been provided by fiscal and monetary authorities around the world should now be beginning to be felt,” he said in a speech in Aberdeen, Scotland yesterday. “We should be able to look forward to a recovery beginning either later this year or early 2010.” Data on Wednesday showed manufacturing rose for a second month in April, prompting the National Institute of Economic and Social Research to estimate the recession reached a trough in March with economic output growing in the following two months. (Bloomberg)

* * * * *

Japan’s economy shrank less than the government initially estimated as business investment and inventories fell at a slower pace. Gross domestic product shrank at a record 14.2% annual pace in 1Q09, less than the 15.2% reported last month, the Cabinet Office said yesterday in Tokyo. The median forecast of 23 economists surveyed by Bloomberg News was for a

15% contraction. The decline may represent the low point for an economy forecast to expand this quarter as demand from China helps stabilize exports and leaner inventories allow manufacturers to increase output. Still, with factories sitting idle and profits falling, companies are slashing investment and jobs, casting doubt on whether the revival will last. 4Q08 GDP was revised to a 13.5% decline from 14.4%, yesterday’s report showed. That’s still the worst contraction since the government began keeping records in 1955. (Bloomberg)

* * * * *

China’s spending on factories, property and roads surged by the most in five years as the government’s 4trn yuan (US$585bn) stimulus package countered a record slump in exports. Urban fixed-asset investment climbed 32.9% y-o-y in the five months to the end of May, the statistics bureau said yesterday in Beijing. Overseas shipments declined 26.4% y-o-y last month, the customs bureau said. Climbing property and auto sales, record new lending and growth in manufacturing are also signs that the stimulus spending announced in November is driving a recovery in the world’s third-biggest economy. Falling exports because of the global recession are the nation’s biggest challenge, the State Council said last month. Urban fixed- asset investment in the first five months was 5.35trn yuan. (Bloomberg)

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Russia’s economy contracted the most in 15 years in 1Q09 after industrial production plunged and the government’s 3trn rubles (US$97bn) in stimulus spending failed to boost companies and banks. Gross domestic product tumbled an annual 9.8%, compared with growth of 1.2% in the previous quarter, the Moscow-based Federal Statistics Service said in a statement yesterday. The preliminary estimate on May 15 was a 9.5% contraction. The world’s biggest energy supplier is falling into its first recession in a decade after the global slowdown sapped demand for its commodities and companies struggled to find funds. The government’s stimulus package has failed to spur bank lending, even as the central bank cut its main interest rates three times since April. GDP may slump as much as 8% in 2009, Economy Minister Elvira Nabiullina said last month, after growth of 5.6% in 2008 and 8.1% the year before. (Bloomberg)

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Swine flu, causing mostly mild disease outbreaks on four continents, prompted the World Health Organization to declare the first influenza pandemic since 1968. Margaret Chan, the WHO’s director-general, moved the alert to the top of the agency’s six-stage pandemic scale yesterday on evidence the virus is spreading in communities outside the Americas. The new H1N1 flu strain has taken root in Australia, Chile, the U.K. and Spain since its discovery in Mexico and the U.S. in April. It’s the third time since April 27 that Geneva-based WHO has raised the alert level over swine flu, which has turned up in more than 70 nations as far removed as Iceland, New Zealand and the Bahamas. The move doesn’t mean there will be more deaths or severe cases, Chan said. Drugmakers will be finishing their production of seasonal influenza vaccine for the Northern Hemisphere winter in coming weeks, Chan said. (Bloomberg)

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