Positive Development on US Import Tax – Jay Corp Berhad (Q3 FY17)

Last Traded Price RM 1.43
Target Price RM 1.65 (from RM 1.43)
Est. Return 15.55%
Rating BUY (From Neutral)
Price to Earnings 8.6x
Price to Book 1.3x

 1) Though economic data is optimistic, it is primarily driven by the weak MYR.

Malaysia External Trade Development Corporation’s data showed that the total export was RM451bil between Jan-Jun 2017, up c. 21% YoY. It is due in large part to the weak performance against major currencies. We believe the actual organic growth for export is around mid-single digit. Management also explained that the robust performance is due to stronger overseas demand and favourable FX environment. Many JayCorp’s segments have improved significantly with a couple segments started to generate profit from loss.

Political tension results in favourable FX movements.

In line with the textbook world, current situation between the US and N Korea is expected to see money flowing back to US which will see a stronger USD in the near future. We do not foresee any material adverse change in US’s economic activities. However, it will affect market’s sentiment, and we have seen money flowing into bond funds (source: wealthmanagement.com). It may results in lower trading multiples.

3) The most welcoming news is the US ditching the import tax.

Initially, we were concerned about the negative impact of import tax, but the Republican sees ‘many unknowns’ associated with it thus decided to abandon the plan. The decision that could potential raised over a trillion of tax revenue over a 10-year horizon. Very positive to many export-oriented counters. The attention is now on the friendly domestic tax rate to allow US companies to compete with foreign companies.

Revisit our relative valuation, upgrade to BUY rating.

We re-assessed our relative valuation and added Lii Hen to our sample. We believe that JayCorp is fairly valued at RM 1.65 which offers an upside potential of 15.55%. We are upgrading the rating from Neutral to BUY on the following considerations:

  • Reasonable trading multiples which reflect sizable discount to the industry peers
  • Stronger USD to support its export-related revenue (North America contributes almost 30% of income).
  • Healthy domestic demand as reflected by an increase in residential loan growth.

Though we believe there is a reasonable discount to the fair value, we do not exclude the possibility that the share performance may outweigh by temporary negative market sentiment and fund outflow from foreign institutions.


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Disclaimer: The views above are opinions based on facts and subjective judgements. Yield Mountain (including the contributors) does not take any responsibility (be in monetary or non-monetary) for any actions rely on the information discussed.

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