QL Resources – Bonus issue & share buyback (Company Update)
Price: RM4.28 (RM2.85)*
Target Price: RM4.80 (RM3.30)*
Recommendation: BUY
* Ex-Bonus
· QL Resources announced a bonus issue of 110m new shares of RM0.50 each on the basis of 1 new share for every 2 existing shares held, to be completed by 2QCY08. The firm will be capitalising up to RM40m from its share premium account (RM147.5m as at 31 March 2007) and RM15m from retained earnings (RM40.4m) for the bonus issue.
· The bonus issue would eventually raise its market capitalisation and would improve liquidity by raising share capital to 330m from 220m. QL aims to raise the average traded volume of its stock for the past 3 months from 145,430 shares.
· Share buyback for up to 33m shares, pursuant to the bonus issue. The purchase price of up to 10% of the enlarged share capital will not exceed 15% of the 5-day weighted average market price prior to the date of purchase. The firm has not confirmed whether it intends to cancel the shares or hold them as treasury shares. The exercise will be financed by bank borrowings (not exceeding the sum of retained profits and share premium) and internal funds.
· FY08 and FY09 net profit estimates unchanged. The corporate exercises will not have any material effect on earnings. We believe that the firm is on track to achieving our forecast FY08 net profit growth of 20%. FY08 and FY09 EPS adjusted for the bonus issue would be lower at 23.0 sen and 27.2 sen, from 34.5 sen and 40.8 sen respectively.
· Re-iterate BUY recommendation with adjusted target price of RM3.30. Our target price is derived from previous 12x PER applied to FY09 EPS of 27.2 sen adjusted for the bonus issue. QL’s consistent resource-based earnings with double-digit net profit growth for the past 5 years offers some surety given current market conditions. Potential FY08 dividend yield of 2.6% also adds some attraction to the stock.
KENANGA INVESTMENT BANK BERHAD (15678-H)
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Sunday 20 April 2008
AEON Credit - BUY - 16 Apr 2008
AEON Credit Service – Sterling 4QFY08 results (Results Note)
Price: RM3.08
Target Price: RM3.70
Recommendation: BUY
· FY08 net profit was above expectations. RM33.4m net profit was above our estimate and consensus by 12% and 10% respectively, even surpassing the firm’s IPO prospectus forecast of RM30.5m. The solid FY08 result was mainly due to strong performance of the motorcycle easy payment (MEP) segment.
· YoY, 12MFY08 net profit increased by 69% on the back of a 31% increase in revenue. Revenue from the MEP segment rose by 46% aided by 14% increase in the number of MEP merchants. Net profit spiked by a sizeable 69% owing to a 51% increase in EBIT that was boosted by improved cost efficiency as shown by lower operating expenses.
· QoQ, 4QFY08 net profit increased by 20% despite a mere 5% increase in revenue. The higher net profit was due to a 14% improvement in EBIT and stabilising of finance costs aided by the CP/MTN resulting from the issuance of the RM400m CP/MTN in February 2008. NPLs remained low at 2.15% for the quarter.
· Expansion of distribution network and customer base with the addition of new outlets (suburban areas especially), introduction of new products and services (such as prepaid cards, AEON Biz for SMEs, salary deduction scheme) and potential expansion into new markets of India, Singapore and Brunei.
· FY08 final GDPS of 7.44 sen, resulting in total GDPS of 12.8 sen. This translates to a 4% gross dividend yield. Moving forward, management will maintain a dividend payout ratio policy of at least 30% of profit after tax.
· Raising our FY09 and FY10 estimates by 12% and 10% respectively to take into account higher contribution from MEP (increasing FY09 forecast growth to 30% for the division from 25% previously). Management is confident of double-digit growth in FY09 earnings, as underlying demand for consumer financing remains resilient and improved operations.
· Maintain our BUY recommendation with revised target price of RM3.70, based on 11x FY09 PER (at 20% premium to its local and regional industry average). We believe the stock deserves to trade at a premium due to the firm’s strong operational capability and capability and positive growth prospects.
KENANGA INVESTMENT BANK BERHAD (15678-H)
Price: RM3.08
Target Price: RM3.70
Recommendation: BUY
· FY08 net profit was above expectations. RM33.4m net profit was above our estimate and consensus by 12% and 10% respectively, even surpassing the firm’s IPO prospectus forecast of RM30.5m. The solid FY08 result was mainly due to strong performance of the motorcycle easy payment (MEP) segment.
· YoY, 12MFY08 net profit increased by 69% on the back of a 31% increase in revenue. Revenue from the MEP segment rose by 46% aided by 14% increase in the number of MEP merchants. Net profit spiked by a sizeable 69% owing to a 51% increase in EBIT that was boosted by improved cost efficiency as shown by lower operating expenses.
· QoQ, 4QFY08 net profit increased by 20% despite a mere 5% increase in revenue. The higher net profit was due to a 14% improvement in EBIT and stabilising of finance costs aided by the CP/MTN resulting from the issuance of the RM400m CP/MTN in February 2008. NPLs remained low at 2.15% for the quarter.
· Expansion of distribution network and customer base with the addition of new outlets (suburban areas especially), introduction of new products and services (such as prepaid cards, AEON Biz for SMEs, salary deduction scheme) and potential expansion into new markets of India, Singapore and Brunei.
· FY08 final GDPS of 7.44 sen, resulting in total GDPS of 12.8 sen. This translates to a 4% gross dividend yield. Moving forward, management will maintain a dividend payout ratio policy of at least 30% of profit after tax.
· Raising our FY09 and FY10 estimates by 12% and 10% respectively to take into account higher contribution from MEP (increasing FY09 forecast growth to 30% for the division from 25% previously). Management is confident of double-digit growth in FY09 earnings, as underlying demand for consumer financing remains resilient and improved operations.
· Maintain our BUY recommendation with revised target price of RM3.70, based on 11x FY09 PER (at 20% premium to its local and regional industry average). We believe the stock deserves to trade at a premium due to the firm’s strong operational capability and capability and positive growth prospects.
KENANGA INVESTMENT BANK BERHAD (15678-H)
Sino Hua-An - BUY - 16 Apr 2008
Sino Hua-An International – Malaysia’s First Red Chip Resource Company (Initiating Coverage)
Price: RM0.655
Target Price: RM0.96
Recommendation: BUY
· A proxy into China’s coke-steel industry. Sino Hua-An (Huaan) is the largest independent and third largest coke producer in Shandong commanding a market share of 10%. Coke is an energy source as well as a reducing agent for the manufacture of steel.
· High steel prices continue to support high coke prices and margins. Locking in electricity and transport requirements on a long term basis protect margins which at 20%-22% margin is better than its peers.
· Aggressive capacity expansion. We expect continuing growth in China’s steel sector to fuel coke demand. Huaan is constructing 2 more ovens by May 2008 to boost its current capacity to 1.5m MT in 2H 2008 and to 1.8m MT p.a by 2009.
· Future downstream expansion into a 49%-stake Shandong’s largest independent pig iron producer for RM500m provides stable off-take for its coke but current high coke prices and demand makes it more profitable to sell to third parties.
· Rising coke prices. We are assuming coke price of RMB1,760/MT for Huaan vs. the current regional spot price of RMB2,000/MT. Our price assumption is at a conservative level given coke prices at certain regions of China have reached as high as RMB2,350/MT in April 2008.
· Compelling valuation at 3.0x FY09. Fair value at RM0.96 based on 6.5x PER represents 20% discount to the steel industry’s average 2008 PER of 8.0x – discount is warranted to account for the execution risk of its overseas operation. Note however, Huaan is trading at a substantial 83% discount to its Chinese peers. We expect with investors’ increase familiarity and proven execution, the discount factor will be narrowed. BUY with a 60% upside from the current RM0.655 level.
KENANGA INVESTMENT BANK BERHAD (15678-H)
Price: RM0.655
Target Price: RM0.96
Recommendation: BUY
· A proxy into China’s coke-steel industry. Sino Hua-An (Huaan) is the largest independent and third largest coke producer in Shandong commanding a market share of 10%. Coke is an energy source as well as a reducing agent for the manufacture of steel.
· High steel prices continue to support high coke prices and margins. Locking in electricity and transport requirements on a long term basis protect margins which at 20%-22% margin is better than its peers.
· Aggressive capacity expansion. We expect continuing growth in China’s steel sector to fuel coke demand. Huaan is constructing 2 more ovens by May 2008 to boost its current capacity to 1.5m MT in 2H 2008 and to 1.8m MT p.a by 2009.
· Future downstream expansion into a 49%-stake Shandong’s largest independent pig iron producer for RM500m provides stable off-take for its coke but current high coke prices and demand makes it more profitable to sell to third parties.
· Rising coke prices. We are assuming coke price of RMB1,760/MT for Huaan vs. the current regional spot price of RMB2,000/MT. Our price assumption is at a conservative level given coke prices at certain regions of China have reached as high as RMB2,350/MT in April 2008.
· Compelling valuation at 3.0x FY09. Fair value at RM0.96 based on 6.5x PER represents 20% discount to the steel industry’s average 2008 PER of 8.0x – discount is warranted to account for the execution risk of its overseas operation. Note however, Huaan is trading at a substantial 83% discount to its Chinese peers. We expect with investors’ increase familiarity and proven execution, the discount factor will be narrowed. BUY with a 60% upside from the current RM0.655 level.
KENANGA INVESTMENT BANK BERHAD (15678-H)
HLG: 16 April 2008 Tanjong - Upgrade to BUY
Tanjong Plc BUY
Price target RM19.65
Share price at 15 April RM16.00
Investment summary
We raise our rating on Tanjong from a HOLD to a BUY. Following the recent market sell-down, Tanjong’s share price has fallen –14% YTD, despite sound positive fundamentals: (1) 12% EPS CAGR over FY08-10E from the Globeleq IPP acquisition; (2) valuation multiple expansion due to the potential spin-off of Tanjong’s power division and the local investment vacuum created by the Malakoff de-listing. We are negative on the Malaysian power sector, given poor domestic growth opportunities and dividend yield.
Playing the range
Share price has fallen to a 2-yr low, despite power generation capacity doubling in that period. Tanjong is historically a fundamental range-trading opportunity, and downside is limited at current levels.
Price target RM19.65
Share price at 15 April RM16.00
Investment summary
We raise our rating on Tanjong from a HOLD to a BUY. Following the recent market sell-down, Tanjong’s share price has fallen –14% YTD, despite sound positive fundamentals: (1) 12% EPS CAGR over FY08-10E from the Globeleq IPP acquisition; (2) valuation multiple expansion due to the potential spin-off of Tanjong’s power division and the local investment vacuum created by the Malakoff de-listing. We are negative on the Malaysian power sector, given poor domestic growth opportunities and dividend yield.
Playing the range
Share price has fallen to a 2-yr low, despite power generation capacity doubling in that period. Tanjong is historically a fundamental range-trading opportunity, and downside is limited at current levels.
Tuesday 15 April 2008
JPmorgan: 14 apr pbbank (overweight)
• Public reported 1Q08 net profit of M$717MM, which is 29% of
the consensus full-year estimate of M$2,469MM and 28% of
JPMorgan’s forecast of M$2,535MM. The strong 51% Y/Y and
24% Q/Q growth in earnings was partially driven by the
M$200MM goodwill payment received from ING during the
quarter. Stripping out the M$200MM, net profit grew 9% Y/Y but
declined 11% Q/Q. The lower Q/Q figures were mainly a result of
higher specific provisions Q/Q (caused mainly by the 7 year rule
for aged NPLs where loans are completely written off).
• Net interest income continues on the uptrend, increasing 3% Q/Q
and 17% Y/Y driven by continued strong expansion in both the
lending and deposit-taking businesses as well as further
improvement in asset quality. Note that loans grew 6% Q/Q and
21% Y/Y, and deposits grew 4% Q/Q and 24% Y/Y. Non-interest
income, stripping out the M$200MM goodwill payment, came in
8% lower Q/Q but 1% higher Y/Y. Fee income declined 16%
mainly due to poorer unit trust sales. The sales of its unit trust
products at launch in 1Q08 are going at one-third 4Q07 levels. Its
net NPL ratio declined to 1.09% from 1.23% in 4Q07 and 1.52% in
1Q07. With regards to the specific provisioning made for the aged
NPLs mentioned above (estimated at M$20MM+), the prospect of
recovery is high based on our conversation with management.
• No dividends were declared in 1Q08 and none were expected. We
maintain our OW rating on Public Bank with a Dec-08 price target
of M$13.80. Our price target is based on a two-stage DDM. We
believe that key risks are an unexpected weakening of consumer
sentiment, and compressed margins as competition becomes more
intense. Note that the foreign shareholding level is at 33.1% as at
31 March 2008.
the consensus full-year estimate of M$2,469MM and 28% of
JPMorgan’s forecast of M$2,535MM. The strong 51% Y/Y and
24% Q/Q growth in earnings was partially driven by the
M$200MM goodwill payment received from ING during the
quarter. Stripping out the M$200MM, net profit grew 9% Y/Y but
declined 11% Q/Q. The lower Q/Q figures were mainly a result of
higher specific provisions Q/Q (caused mainly by the 7 year rule
for aged NPLs where loans are completely written off).
• Net interest income continues on the uptrend, increasing 3% Q/Q
and 17% Y/Y driven by continued strong expansion in both the
lending and deposit-taking businesses as well as further
improvement in asset quality. Note that loans grew 6% Q/Q and
21% Y/Y, and deposits grew 4% Q/Q and 24% Y/Y. Non-interest
income, stripping out the M$200MM goodwill payment, came in
8% lower Q/Q but 1% higher Y/Y. Fee income declined 16%
mainly due to poorer unit trust sales. The sales of its unit trust
products at launch in 1Q08 are going at one-third 4Q07 levels. Its
net NPL ratio declined to 1.09% from 1.23% in 4Q07 and 1.52% in
1Q07. With regards to the specific provisioning made for the aged
NPLs mentioned above (estimated at M$20MM+), the prospect of
recovery is high based on our conversation with management.
• No dividends were declared in 1Q08 and none were expected. We
maintain our OW rating on Public Bank with a Dec-08 price target
of M$13.80. Our price target is based on a two-stage DDM. We
believe that key risks are an unexpected weakening of consumer
sentiment, and compressed margins as competition becomes more
intense. Note that the foreign shareholding level is at 33.1% as at
31 March 2008.
HDBSVR: Top Glove Corporation, Buy (Initiating Coverage)
Top Glove Corporation: Size matters
-Story: As the largest rubber glove manufacturer in the world, commanding 24% of global market share, Top Glove is set to capitalise on an expected 10% yearly surge in demand for rubber gloves, to be propelled by a growing, ageing world population and consequential increase in healthcare expenditure. Its aggressive expansion plan will culminate by end-FY09 and enable it to capture this rising trend of rubber glove use. We expect a strong CAGR of 21% from FY07-10, due to increased capacity and anticipation of higher economies of scale following expansion of the plants.
-Point: We believe Top Glove has been unfairly treated by the recent equity market rout, as its fundamentals have remained robust, and bolstered by the recent set of satisfactory 2Q08 results. Top Glove managed to register a 16.2% jump y-o-y in net profit despite the triple whammy facing the local rubber glove industry, of rising latex and fuel costs, and a depreciating USD. The strong results indicate Top Glove's ability to pass on the bulk of increase in costs.
-Relevance: We initiate coverage on Top Glove with a BUY call and target price of RM6.00 apiece by pegging a P/E of 11x on CY09 EPS, which is at the lower end of the 1-year historical forward PE band of 8x-16x, or an implied 50% premium to the sector average PE of 7.2x. We believe the premium is justified, given Top Glove's liquidity (its market cap is 20% larger than that of its closest local peers combined). Top Glove is also trading at an attractive PE of 10x against its CY07-10 EPS CAGR of 21%.
-Story: As the largest rubber glove manufacturer in the world, commanding 24% of global market share, Top Glove is set to capitalise on an expected 10% yearly surge in demand for rubber gloves, to be propelled by a growing, ageing world population and consequential increase in healthcare expenditure. Its aggressive expansion plan will culminate by end-FY09 and enable it to capture this rising trend of rubber glove use. We expect a strong CAGR of 21% from FY07-10, due to increased capacity and anticipation of higher economies of scale following expansion of the plants.
-Point: We believe Top Glove has been unfairly treated by the recent equity market rout, as its fundamentals have remained robust, and bolstered by the recent set of satisfactory 2Q08 results. Top Glove managed to register a 16.2% jump y-o-y in net profit despite the triple whammy facing the local rubber glove industry, of rising latex and fuel costs, and a depreciating USD. The strong results indicate Top Glove's ability to pass on the bulk of increase in costs.
-Relevance: We initiate coverage on Top Glove with a BUY call and target price of RM6.00 apiece by pegging a P/E of 11x on CY09 EPS, which is at the lower end of the 1-year historical forward PE band of 8x-16x, or an implied 50% premium to the sector average PE of 7.2x. We believe the premium is justified, given Top Glove's liquidity (its market cap is 20% larger than that of its closest local peers combined). Top Glove is also trading at an attractive PE of 10x against its CY07-10 EPS CAGR of 21%.
KENANGA Tenaga - BUY - 15 Apr 2008
Tenaga Nasional – Earnings erosion apparent (Results Note)
Price: RM7.00
Target Price: RM8.35
Recommendation: BUY
· 1H08 recurring net profit (RNP) of RM1.57b was above our FY08E expectations of RM3.04b but within street forecast of RM3.46b, accounting for 56% and 45%, respectively. Tenaga National Bhd (TNB)’s revenue of RM12.3b for 1H08 came in line with our expectations (49% of our FY08E revenue of RM25.06b). This was due to 1H08 unit electricity demand growth of 6.6% YoY (6.0% for 1H07), which was driven by industrial and commercial sector YoY growth of 7% and 8.9% respectively.
· 1H08 net profit of RM2.58b eroded 8% YoY on the back of higher operating expenses which grew 16% YoY to RM8.20b. Higher coal cost of USD53.9/mT compared to the previous USD49/mT in 1H07 is the main culprit. TNB’s 44% increase in hydroelectricity production compensated the overall increase in fuel cost resulting in a lower 4.3% increase YoY to RM1.64b in 1H08. The increase in hydroelectric generation was necessary as gas supply was curtailed.
· 26% QoQ fall in 2Q08 pretax profit to RM1.22b due to higher IPP capacity payments which increased by 5% to RM2.3b as all 3 Tanjung Bin IPP coal power plants (TJB) were operational. Higher effective tax rates of 12% versus 8% in 1Q08 and softer 2Q08 electricity consumption further compounded the 30% fall in net profit. Typically, the rainy months of December and January coupled with festive seasons dampens electricity demand from residential and industrial customers respectively.
· Interim GDPS of 10sen, which accounts for 58% of our FY08E GDPS of 17.3sen. Management expects to declare lower FY08E dividends, compared to FY07, due to its heavier CAPEX and looming coal prices. To date, 1H08 CAPEX came within expectations, accounting for 52% of our FY08E estimates of RM4b.
· Maintaining FY08E recurring net profit forecast of RM3.04b. We believe our forecast is conservative as it already accounts for higher coal prices, especially when TNB commences bearing TJB’s coal cost differential (market price of USD82.5/mT versus TJB agreed price of USD28/mT) from 2H08 onwards.
· Target price remains at RM8.35, based on our DCF valuations using a 9.2% WACC and a 4.8% long-term growth; a 19% premium to its trading price. FY07E and FY08E PER remains attractive at 9x and 11x, respectively. Maintain BUY.
KENANGA INVESTMENT BANK BERHAD (15678-H)
Price: RM7.00
Target Price: RM8.35
Recommendation: BUY
· 1H08 recurring net profit (RNP) of RM1.57b was above our FY08E expectations of RM3.04b but within street forecast of RM3.46b, accounting for 56% and 45%, respectively. Tenaga National Bhd (TNB)’s revenue of RM12.3b for 1H08 came in line with our expectations (49% of our FY08E revenue of RM25.06b). This was due to 1H08 unit electricity demand growth of 6.6% YoY (6.0% for 1H07), which was driven by industrial and commercial sector YoY growth of 7% and 8.9% respectively.
· 1H08 net profit of RM2.58b eroded 8% YoY on the back of higher operating expenses which grew 16% YoY to RM8.20b. Higher coal cost of USD53.9/mT compared to the previous USD49/mT in 1H07 is the main culprit. TNB’s 44% increase in hydroelectricity production compensated the overall increase in fuel cost resulting in a lower 4.3% increase YoY to RM1.64b in 1H08. The increase in hydroelectric generation was necessary as gas supply was curtailed.
· 26% QoQ fall in 2Q08 pretax profit to RM1.22b due to higher IPP capacity payments which increased by 5% to RM2.3b as all 3 Tanjung Bin IPP coal power plants (TJB) were operational. Higher effective tax rates of 12% versus 8% in 1Q08 and softer 2Q08 electricity consumption further compounded the 30% fall in net profit. Typically, the rainy months of December and January coupled with festive seasons dampens electricity demand from residential and industrial customers respectively.
· Interim GDPS of 10sen, which accounts for 58% of our FY08E GDPS of 17.3sen. Management expects to declare lower FY08E dividends, compared to FY07, due to its heavier CAPEX and looming coal prices. To date, 1H08 CAPEX came within expectations, accounting for 52% of our FY08E estimates of RM4b.
· Maintaining FY08E recurring net profit forecast of RM3.04b. We believe our forecast is conservative as it already accounts for higher coal prices, especially when TNB commences bearing TJB’s coal cost differential (market price of USD82.5/mT versus TJB agreed price of USD28/mT) from 2H08 onwards.
· Target price remains at RM8.35, based on our DCF valuations using a 9.2% WACC and a 4.8% long-term growth; a 19% premium to its trading price. FY07E and FY08E PER remains attractive at 9x and 11x, respectively. Maintain BUY.
KENANGA INVESTMENT BANK BERHAD (15678-H)
Sime Darby Berhad : Qatar oil and gas unit hit by cost overrun of M$150MM - ALERT
Sime Darby Berhad : Qatar oil and gas unit hit by cost overrun of M$150MM - ALERT
Over the weekend, The Edge Business Weekly reported that Sime's oil and gas unit in Qatar has run into some cost overruns due to rising material cost (namely steel) to the tune of M$150MM. This relates to the M$2.2B project or contract awarded to Sime for the construction and installation of a process platform, a utility platform, and three bridges in an oil and gas development in Qatar.
The report in the Edge also stated that Sime has earlier this month withdrawn a letter of award for sub-contracting works of the Qatar project to Ramunia. This was on the basis that Ramunia's offer price of US$48.3MM exceeded the proposed subcontracted amount of US$40MM.
The reported M$150MM cost overrun accounts for 4% of our FY08E net profit, and works out to just 2.5sen per share for Sime, which is hence not significant. Nevertheless, there are concerns that there may be more cost overruns of this nature given rising cost overall. We will check with management and feedback later.
Overall, the oil and gas division of Sime however currently makes up just 6sen per share or 0.5% of our Dec-08 price target of M$12.80 based on sum-of-the-parts (SOTP). The plantations division makes up the bulk of the SOTP value at over 70%, followed by the property and heavy equipment divisions. (See Table 4 on page 3 of our separate note on Sime Darby dated 13 April already released). Key risk to our price target is less favorable terms for the multi-billion Bakun hydro-electric project.
Over the weekend, The Edge Business Weekly reported that Sime's oil and gas unit in Qatar has run into some cost overruns due to rising material cost (namely steel) to the tune of M$150MM. This relates to the M$2.2B project or contract awarded to Sime for the construction and installation of a process platform, a utility platform, and three bridges in an oil and gas development in Qatar.
The report in the Edge also stated that Sime has earlier this month withdrawn a letter of award for sub-contracting works of the Qatar project to Ramunia. This was on the basis that Ramunia's offer price of US$48.3MM exceeded the proposed subcontracted amount of US$40MM.
The reported M$150MM cost overrun accounts for 4% of our FY08E net profit, and works out to just 2.5sen per share for Sime, which is hence not significant. Nevertheless, there are concerns that there may be more cost overruns of this nature given rising cost overall. We will check with management and feedback later.
Overall, the oil and gas division of Sime however currently makes up just 6sen per share or 0.5% of our Dec-08 price target of M$12.80 based on sum-of-the-parts (SOTP). The plantations division makes up the bulk of the SOTP value at over 70%, followed by the property and heavy equipment divisions. (See Table 4 on page 3 of our separate note on Sime Darby dated 13 April already released). Key risk to our price target is less favorable terms for the multi-billion Bakun hydro-electric project.
KENANGA : Bursa - BUY - 15 Apr 2008
Bursa Malaysia – Challenging year ahead (Company Update)
Price: RM8.45
Target Price: RM9.70
Recommendation: BUY
· Lethargic trading momentum. Initially affected by global market uncertainties, pressure on trading activities is compounded further by political uncertainties following the recent 12th general election. Consequently, previous anchor themes such as fiscal stimulus, the 9th Malaysian Plan and robust M&A activities have been played down, causing investors’ appetite and sentiment to the market to wane off.
· Daily trading volume and daily trading value remain undoubtedly thin. The daily average trading volume and value in 1Q08 declined by a significant 55.5% and 26.7% YoY to 925.8m shares and RM2.0b, respectively.
· Earnings downgrade. We are lowering our FY08 and FY09 net profit estimates by 16-19% on the back of revised daily average trading value to RM2.1b and RM2.2b from RM2.6b and RM2.8b for FY08 and FY09, respectively.
· We also believe the new clearing fee structure (from 4bps of contract value to 3bps while cap was doubled to RM1,000 effective from 1 Jan, 2008) to depress Bursa’s effective clearing fee by approx. 8% which will drag down its potential revenue.
· Collaboration with Chicago Mercantile Exchange (CME). Management expects to conclude talks with CME, the world’s largest derivative market, by end of the year which will assist the Group to further re-engineer its business. A successful potential collaboration will act as a re-rating catalyst for Bursa, in our view.
· Dividend payout of at least 90% is likely to be maintained. Despite reducing our gross DPS estimates for FY08 and FY09 from 85sen to 60sen and 65sen, respectively, following the earnings revision, Bursa’s gross dividend yield of 7.1% is still appearing more attractive vis-à-vis its peers.
· Cautious against market uncertainties but downside risks appear limited due to its: (1) decent dividend yield and (2) recent sharp share price correction of 49% from RM16.60 high. Upgrade to BUY, Target Price of RM9.70 based on PER of 20x to estimated FY08 EPS of 40.7sen and RM1.60/share of cash at hand value at book.
KENANGA INVESTMENT BANK BERHAD (15678-H)
Price: RM8.45
Target Price: RM9.70
Recommendation: BUY
· Lethargic trading momentum. Initially affected by global market uncertainties, pressure on trading activities is compounded further by political uncertainties following the recent 12th general election. Consequently, previous anchor themes such as fiscal stimulus, the 9th Malaysian Plan and robust M&A activities have been played down, causing investors’ appetite and sentiment to the market to wane off.
· Daily trading volume and daily trading value remain undoubtedly thin. The daily average trading volume and value in 1Q08 declined by a significant 55.5% and 26.7% YoY to 925.8m shares and RM2.0b, respectively.
· Earnings downgrade. We are lowering our FY08 and FY09 net profit estimates by 16-19% on the back of revised daily average trading value to RM2.1b and RM2.2b from RM2.6b and RM2.8b for FY08 and FY09, respectively.
· We also believe the new clearing fee structure (from 4bps of contract value to 3bps while cap was doubled to RM1,000 effective from 1 Jan, 2008) to depress Bursa’s effective clearing fee by approx. 8% which will drag down its potential revenue.
· Collaboration with Chicago Mercantile Exchange (CME). Management expects to conclude talks with CME, the world’s largest derivative market, by end of the year which will assist the Group to further re-engineer its business. A successful potential collaboration will act as a re-rating catalyst for Bursa, in our view.
· Dividend payout of at least 90% is likely to be maintained. Despite reducing our gross DPS estimates for FY08 and FY09 from 85sen to 60sen and 65sen, respectively, following the earnings revision, Bursa’s gross dividend yield of 7.1% is still appearing more attractive vis-à-vis its peers.
· Cautious against market uncertainties but downside risks appear limited due to its: (1) decent dividend yield and (2) recent sharp share price correction of 49% from RM16.60 high. Upgrade to BUY, Target Price of RM9.70 based on PER of 20x to estimated FY08 EPS of 40.7sen and RM1.60/share of cash at hand value at book.
KENANGA INVESTMENT BANK BERHAD (15678-H)
KENANGA : SP Setia - BUY - 14 Apr 2008
SP Setia – Effects of new state governments (Company Update)
Price: RM3.40
Target Price: RM5.62
Recommendation: BUY
We visited SP Setia (SP) yesterday and took home the following interesting points:
· The state government’s involvement in property development approval process. Stage 1 (Fig1) of the property development approval process involves zoning permits, land conversions, followed by the Master Planning approval. These are decided by the state government. Stage 2 (Fig1), which involves planning permissions and building plan, are approved by state-appointed local councils which are subjected to Federal guidelines. The advertising permit (Stage 3) is only issued by the Ministry of Housing and Local Government if the developer has obtained Stage 1 and Stage 2 approvals.
· Pre and post effects of recent general elections. Prior to the recent general election, developers used to apply for project approvals under a single party system (both state and Federal government are from the same party) in states like Selangor and Penang. Now, developers have to accustom themselves to different administrations as these states operate under different parties. Therefore, it could take 3 months or longer for developers to grasp changes.
· Minimal impact on SP. Unlike other developers, SP has already obtained all the zoning permits and land conversion approvals. As such, they have passed the toughest “state administrative approval” hurdles. Thus, the approval process for projects already in the pipeline, like Setia Nexus in Klang and Setia Vista in Penang, should go smoothly within the timeframe under the “one-stop centre” (Fig1).
· Other updates. 1) SP expects to finalize the submission for the plans for Aeropod at Tanjung Aru (TA), Sabah project DO plans by end CY08. The new RM110m JKNS headquarters will be funded on 64%:36% debt-equity basis. 2) Target launch for Eco Lakes at My Phuoc, Vietnam will be in mid CY08, comprising of link houses with an average of USD100,000 per unit. 3) Setia Eco Park, Shah Alam will see commencement of the international school by September 2008. The school is part of SP’s value enhancing strategy for its premium township living experience. 4) Current foreign shareholding is still strong at 40% versus 56% in July 2007.
· Unchanged target price of RM5.62. We are also maintaining our FY08E to FY10E forecast as we have conservatively factored in any potential slow down in earnings due to uncertainties in local political scene and global economic outlooks. FY08E and FY09E PER are fair at 12x and 11x, respectively. BUY.
KENANGA INVESTMENT BANK BERHAD (15678-H)
Price: RM3.40
Target Price: RM5.62
Recommendation: BUY
We visited SP Setia (SP) yesterday and took home the following interesting points:
· The state government’s involvement in property development approval process. Stage 1 (Fig1) of the property development approval process involves zoning permits, land conversions, followed by the Master Planning approval. These are decided by the state government. Stage 2 (Fig1), which involves planning permissions and building plan, are approved by state-appointed local councils which are subjected to Federal guidelines. The advertising permit (Stage 3) is only issued by the Ministry of Housing and Local Government if the developer has obtained Stage 1 and Stage 2 approvals.
· Pre and post effects of recent general elections. Prior to the recent general election, developers used to apply for project approvals under a single party system (both state and Federal government are from the same party) in states like Selangor and Penang. Now, developers have to accustom themselves to different administrations as these states operate under different parties. Therefore, it could take 3 months or longer for developers to grasp changes.
· Minimal impact on SP. Unlike other developers, SP has already obtained all the zoning permits and land conversion approvals. As such, they have passed the toughest “state administrative approval” hurdles. Thus, the approval process for projects already in the pipeline, like Setia Nexus in Klang and Setia Vista in Penang, should go smoothly within the timeframe under the “one-stop centre” (Fig1).
· Other updates. 1) SP expects to finalize the submission for the plans for Aeropod at Tanjung Aru (TA), Sabah project DO plans by end CY08. The new RM110m JKNS headquarters will be funded on 64%:36% debt-equity basis. 2) Target launch for Eco Lakes at My Phuoc, Vietnam will be in mid CY08, comprising of link houses with an average of USD100,000 per unit. 3) Setia Eco Park, Shah Alam will see commencement of the international school by September 2008. The school is part of SP’s value enhancing strategy for its premium township living experience. 4) Current foreign shareholding is still strong at 40% versus 56% in July 2007.
· Unchanged target price of RM5.62. We are also maintaining our FY08E to FY10E forecast as we have conservatively factored in any potential slow down in earnings due to uncertainties in local political scene and global economic outlooks. FY08E and FY09E PER are fair at 12x and 11x, respectively. BUY.
KENANGA INVESTMENT BANK BERHAD (15678-H)
kimeng: 11 apr AMMB (buy)
Opportunity to pile in at below ANZ's entry cost
Medium-term investors wishing to bet on the transformation of AMMB Holdings
(AHB) can now buy the shares at below Australia & New Zealand Banking Group
Ltd's (ANZ) entry cost of around RM3.57, giving no value to ANZ's role as a
strategic partner. ANZ now owns 19.2% of AHB, and will hold 24.6% upon the
conversion of RM575m of exchangeable bonds into 194.9m shares at an
exercise price of RM2.95. Earlier, ANZ bought 300m AHB shares from Amcorp
at RM4.30 in Mar 2007, subscribed to RM58m Rights shares at RM3.40 in Jan
2008 and converted its preference shares (investment cost: RM0.5b) into
163.9m shares on 19 Mar 2008. AHB is important for ANZ as it is ANZ's
single largest investment in Asia (costing RM2.6b). Unlike other foreign
partners in Malaysian banks which are largely confined to board
representation, ANZ has strong influence in AHB, both at the board and
management levels. Besides 3 board members (out of 12 directors), ANZ has 3
senior management positions (Deputy Managing Director, Chief Financial
Officer, Chief Risk Officer), 5 management positions (head of retail
distribution, head of retail strategy, credit risk, senior HR consultant
and project manager). ANZ staff members are also seconded to forex and
treasury on a project basis.
Aiming high: doubling earnings & ROE of 20% by 2011
AHB is targeting a doubling of 2007 underlying profit after tax
(translating to a CAGR of 20%) and a ROE of 20% by 2011, with revenues to
be largely driven by the retail and corporate banking operations. AHB is
completing an internal re-organisation to streamline group operations into
4 major entities, namely banking, asset management, capital market and
insurance in Apr 2008 to facilitate cross-selling. The insurance business
is also expected to increase its contribution to Group profit to 10%,
following the completion of the on-going restructuring to split into
separate life and general insurance entities and the proposed acquisitions
of MAA's general and takaful businesses. Over the same period, it aims to
cut its net NPL ratio to 2%, provision charged to P&L to 1% and cost-income
ratio to 40%. With that, AHB will be in a position to have a more generous
dividend payout of more than 25% of net profits as dividends after FY09.
Medium-term investors wishing to bet on the transformation of AMMB Holdings
(AHB) can now buy the shares at below Australia & New Zealand Banking Group
Ltd's (ANZ) entry cost of around RM3.57, giving no value to ANZ's role as a
strategic partner. ANZ now owns 19.2% of AHB, and will hold 24.6% upon the
conversion of RM575m of exchangeable bonds into 194.9m shares at an
exercise price of RM2.95. Earlier, ANZ bought 300m AHB shares from Amcorp
at RM4.30 in Mar 2007, subscribed to RM58m Rights shares at RM3.40 in Jan
2008 and converted its preference shares (investment cost: RM0.5b) into
163.9m shares on 19 Mar 2008. AHB is important for ANZ as it is ANZ's
single largest investment in Asia (costing RM2.6b). Unlike other foreign
partners in Malaysian banks which are largely confined to board
representation, ANZ has strong influence in AHB, both at the board and
management levels. Besides 3 board members (out of 12 directors), ANZ has 3
senior management positions (Deputy Managing Director, Chief Financial
Officer, Chief Risk Officer), 5 management positions (head of retail
distribution, head of retail strategy, credit risk, senior HR consultant
and project manager). ANZ staff members are also seconded to forex and
treasury on a project basis.
Aiming high: doubling earnings & ROE of 20% by 2011
AHB is targeting a doubling of 2007 underlying profit after tax
(translating to a CAGR of 20%) and a ROE of 20% by 2011, with revenues to
be largely driven by the retail and corporate banking operations. AHB is
completing an internal re-organisation to streamline group operations into
4 major entities, namely banking, asset management, capital market and
insurance in Apr 2008 to facilitate cross-selling. The insurance business
is also expected to increase its contribution to Group profit to 10%,
following the completion of the on-going restructuring to split into
separate life and general insurance entities and the proposed acquisitions
of MAA's general and takaful businesses. Over the same period, it aims to
cut its net NPL ratio to 2%, provision charged to P&L to 1% and cost-income
ratio to 40%. With that, AHB will be in a position to have a more generous
dividend payout of more than 25% of net profits as dividends after FY09.
HLG: 10 April 2008 LPI Capital - Upgrade to BUY
LPI Capital Bhd BUY
Price target RM13.60
Share price at 9 Apr RM11.20
Investment summary
Q108 earnings growth was pedestrian, but in-line with forecast. However, following its share price decline of -9% YTD, we upgrade LPI from a HOLD to a BUY: LPI is a safe (albeit illiquid) bet in a volatile market, given >7% sustainable net DY and 0.8x beta. We are neutral on general insurers given: (1) market maturity and low-growth; (2) increased competition from Takaful and composite insurers; (3) sector consolidation due to competition and introduction of risk-based capital framework, which could raise insurers’ market valuations.
Safe haven
Following recent share price declines, we raise LPI to a BUY. Stock looks attractive on 7% net DY and low beta, for investors who can tolerate its low liquidity.
Price target RM13.60
Share price at 9 Apr RM11.20
Investment summary
Q108 earnings growth was pedestrian, but in-line with forecast. However, following its share price decline of -9% YTD, we upgrade LPI from a HOLD to a BUY: LPI is a safe (albeit illiquid) bet in a volatile market, given >7% sustainable net DY and 0.8x beta. We are neutral on general insurers given: (1) market maturity and low-growth; (2) increased competition from Takaful and composite insurers; (3) sector consolidation due to competition and introduction of risk-based capital framework, which could raise insurers’ market valuations.
Safe haven
Following recent share price declines, we raise LPI to a BUY. Stock looks attractive on 7% net DY and low beta, for investors who can tolerate its low liquidity.
HLG: 9 April 2008 TRC Synergy Berhad - Another major contract win
TRC Synergy Berhad BUY
Price target RM2.50
Share price at 8 Apr RM1.75
Investment summary
Overnight, TRC announced a RM197m construction award from the government. This is within our forecast, and re-affirms our bullish view on TRC: (1) 23% EPS CAGR over FY07-09E, driven by the recent doubling of its win-rate from RM200-300m pa to RM600m; (2) FY08E FD PE of 8x is a 50% discount to bigger peers; (3) high visibility of earnings as current unbilled orderbook of RM924m forms 65% of our FY08-09E revenue forecast.
We are negative on the Malaysian construction sector: (1) recent sharp political changes could lead to a slow-down in government job-flow; (2) construction valuations remain expensive relative to the broader market, despite a peakish macro environment; (3) in most cases, overseas jobs cannot compensate for local govt jobs in terms of profitability.
Taking the long view
Share price has fallen -31% YTD: (1) Mkt sell-down has scared investors away from illiquid small caps. (2) Heightened political risk is affecting sentiment on construction stocks. Neither is likely to change in the next 6 mths. We think TRC is a 2-3 yr punt, given its fundamentals/valuations.
Price target RM2.50
Share price at 8 Apr RM1.75
Investment summary
Overnight, TRC announced a RM197m construction award from the government. This is within our forecast, and re-affirms our bullish view on TRC: (1) 23% EPS CAGR over FY07-09E, driven by the recent doubling of its win-rate from RM200-300m pa to RM600m; (2) FY08E FD PE of 8x is a 50% discount to bigger peers; (3) high visibility of earnings as current unbilled orderbook of RM924m forms 65% of our FY08-09E revenue forecast.
We are negative on the Malaysian construction sector: (1) recent sharp political changes could lead to a slow-down in government job-flow; (2) construction valuations remain expensive relative to the broader market, despite a peakish macro environment; (3) in most cases, overseas jobs cannot compensate for local govt jobs in terms of profitability.
Taking the long view
Share price has fallen -31% YTD: (1) Mkt sell-down has scared investors away from illiquid small caps. (2) Heightened political risk is affecting sentiment on construction stocks. Neither is likely to change in the next 6 mths. We think TRC is a 2-3 yr punt, given its fundamentals/valuations.
HLG: 9 April 2008 Alam Maritim - RM100m extension for Jaguh, Padu
Alam Maritim Resources BUY
Price target RM2.70
Share price at 08 Apr RM2.02
Investment summary
Yesterday, Alam secured a RM100m contract to extend the charter for Setia Jaguh (8920 bhp) and Setia Padu (5150 bhp). The implied daily charter rate (DCR) at USD2.00/bhp is 50-70% higher than the previous contract, and 10% higher than spot USD1.80/bhp rates 6 months ago. We maintain our BUY call on Alam: (1) 18% share price decline YTD is unwarranted given that charter rates have shown no sign of weakness (2) valuation at 14x FY08 PE is comparable with KLCI, but with 28% earnings growth pa over FY08-10E driven by higher charter rates and new vessel delivery. We remain positive on O&G vessel owner/operators sector: (1) charter rates continue to remain strong with new-builds lagging behind replacement market (2) the number of Malaysian flagged vessel remains below Petronas requirement.
Charter rates inching up
Charter rates have risen 10% in the last 6 mths, while vessel owner/operator share prices fell 20-40% YTD. We think the second round of Petronas charter awards in Q308 could renew investment interest in the sector.
Price target RM2.70
Share price at 08 Apr RM2.02
Investment summary
Yesterday, Alam secured a RM100m contract to extend the charter for Setia Jaguh (8920 bhp) and Setia Padu (5150 bhp). The implied daily charter rate (DCR) at USD2.00/bhp is 50-70% higher than the previous contract, and 10% higher than spot USD1.80/bhp rates 6 months ago. We maintain our BUY call on Alam: (1) 18% share price decline YTD is unwarranted given that charter rates have shown no sign of weakness (2) valuation at 14x FY08 PE is comparable with KLCI, but with 28% earnings growth pa over FY08-10E driven by higher charter rates and new vessel delivery. We remain positive on O&G vessel owner/operators sector: (1) charter rates continue to remain strong with new-builds lagging behind replacement market (2) the number of Malaysian flagged vessel remains below Petronas requirement.
Charter rates inching up
Charter rates have risen 10% in the last 6 mths, while vessel owner/operator share prices fell 20-40% YTD. We think the second round of Petronas charter awards in Q308 could renew investment interest in the sector.
HLG: 8 Apr 2008 AirAsia Berhad - Expensive regional champion
AirAsia Berhad HOLD
Price target RM1.20
Share price at 7 Apr RM1.38
Investment summary
We initiate coverage on AirAsia with a HOLD. While we like the scalability of its business franchise and its long-term secular growth, we think this is priced-in: (1) FY08E normalized PE of 8x and EV/EBITDAR of 8x are a 15%+ premium to MAS’ 7x and 1x respectively. (2) Broker estimates are already aggressive, with +30% yoy growth. (3) AirAsia is still in the early stages of its asset roll-out, and high gearing/capex limit near-term capital management prospects.
We are negative on the airlines sector; (1) negative macro outlook (volatile fuel prices, global economy slowdown) creates a tough operating environment for airlines (2) entry of 400 new aircraft over next two years will increase capacity and potentially cause load factor and yield erosion. For sector exposure, we prefer MAS to AirAsia.
Poor risk-reward
Global airline stocks have fallen –40% YTD on fears of rising crude oil and a slowing global economy. We think AirAsia still offers growth, but at a cost: (1) Valuations are expensive. (2) Balance sheet is leveraged for growth, and any unexpected growth shortfall could be painful.
Price target RM1.20
Share price at 7 Apr RM1.38
Investment summary
We initiate coverage on AirAsia with a HOLD. While we like the scalability of its business franchise and its long-term secular growth, we think this is priced-in: (1) FY08E normalized PE of 8x and EV/EBITDAR of 8x are a 15%+ premium to MAS’ 7x and 1x respectively. (2) Broker estimates are already aggressive, with +30% yoy growth. (3) AirAsia is still in the early stages of its asset roll-out, and high gearing/capex limit near-term capital management prospects.
We are negative on the airlines sector; (1) negative macro outlook (volatile fuel prices, global economy slowdown) creates a tough operating environment for airlines (2) entry of 400 new aircraft over next two years will increase capacity and potentially cause load factor and yield erosion. For sector exposure, we prefer MAS to AirAsia.
Poor risk-reward
Global airline stocks have fallen –40% YTD on fears of rising crude oil and a slowing global economy. We think AirAsia still offers growth, but at a cost: (1) Valuations are expensive. (2) Balance sheet is leveraged for growth, and any unexpected growth shortfall could be painful.
HDBSVR: TSH Resources, Maintain Buy
TSH Resources: Lower CPO price assumptions
-Story: We cut our 2009 and 2010 CPO price forecasts to RM2,610/MT and RM2,525/MT from RM2,800/MT and RM2,650/MT, respectively, after factoring in an anticipated increase in soybean planting intentions this year as highlighted in the US Department of Agriculture (USDA) survey. We are maintaining our 2008 CPO price forecast at RM3,100/MT, as we expect tight soybean supplies to continue this year, while supply from this year's US soybean planting will only be felt in early 2009. We also fine tuned our forecasts to reflect TSH's FY07 results, mainly higher plantation operating costs due to escalating fertilizer prices, although these were more than offset by a cut in SG&A expenses based on last year's performance.
-Point: The above revisions led to 3% cut in our FY08F net profit to RM119.1m (+29% y-o-y) and 8% cut in FY09F to RM124.1m (+4% y-o-y). We expect TSH's FY10 earnings to grow by 3% y-o-y to RM127.3m, on the back of expected higher FFB production.
-Relevance: We are maintaining our BUY call for TSH, with a revised price target of RM4.30 based on 30% discount to its DCF valuation. Our valuation implies 14.3x CY09 EPS. Catalysts for the stock include additional production from recent acquisitions and aggressive planting in Indonesia, contribution from its Sabah refinery, bioenergy power plants, and palm pulp and paper plant.
-Story: We cut our 2009 and 2010 CPO price forecasts to RM2,610/MT and RM2,525/MT from RM2,800/MT and RM2,650/MT, respectively, after factoring in an anticipated increase in soybean planting intentions this year as highlighted in the US Department of Agriculture (USDA) survey. We are maintaining our 2008 CPO price forecast at RM3,100/MT, as we expect tight soybean supplies to continue this year, while supply from this year's US soybean planting will only be felt in early 2009. We also fine tuned our forecasts to reflect TSH's FY07 results, mainly higher plantation operating costs due to escalating fertilizer prices, although these were more than offset by a cut in SG&A expenses based on last year's performance.
-Point: The above revisions led to 3% cut in our FY08F net profit to RM119.1m (+29% y-o-y) and 8% cut in FY09F to RM124.1m (+4% y-o-y). We expect TSH's FY10 earnings to grow by 3% y-o-y to RM127.3m, on the back of expected higher FFB production.
-Relevance: We are maintaining our BUY call for TSH, with a revised price target of RM4.30 based on 30% discount to its DCF valuation. Our valuation implies 14.3x CY09 EPS. Catalysts for the stock include additional production from recent acquisitions and aggressive planting in Indonesia, contribution from its Sabah refinery, bioenergy power plants, and palm pulp and paper plant.
HDBSVR: Plantation, Maintian Overweight
Plantation sector: Cut in CPO price assumptions
-US planting more soybean this year. We lowered our 2009 and 2010 CPO price forecasts to RM2,610/MT and RM2,525/MT from RM2,800/MT and RM2,650/MT, respectively, to take into account this year's planting intentions as indicated in the US Department of Agriculture (USDA) survey released on 31 March. The report indicated an 18% jump (c.4.6m hectares) in soybean planting intentions by US farmers this spring, citing higher soybean prices, lower input costs relative to corn, and crop rotation considerations for corn as their main motivations.
-Near term volatility anticipated. Despite the cuts in our assumptions, CPO prices are still higher than historical levels. And the conditions that have supported prices up to this point will remain in place for some time. However, CPO prices may have some more room for correction (on relative pricing to rapeseed oil), so we expect the commodity to see some price volatility in the near term. Over the next two years, average CPO price should remain sustainable at the RM2,500 to RM2,600 range.
-US planting more soybean this year. We lowered our 2009 and 2010 CPO price forecasts to RM2,610/MT and RM2,525/MT from RM2,800/MT and RM2,650/MT, respectively, to take into account this year's planting intentions as indicated in the US Department of Agriculture (USDA) survey released on 31 March. The report indicated an 18% jump (c.4.6m hectares) in soybean planting intentions by US farmers this spring, citing higher soybean prices, lower input costs relative to corn, and crop rotation considerations for corn as their main motivations.
-Near term volatility anticipated. Despite the cuts in our assumptions, CPO prices are still higher than historical levels. And the conditions that have supported prices up to this point will remain in place for some time. However, CPO prices may have some more room for correction (on relative pricing to rapeseed oil), so we expect the commodity to see some price volatility in the near term. Over the next two years, average CPO price should remain sustainable at the RM2,500 to RM2,600 range.
KENANGA : RCE - BUY - 4 Apr 2008
RCE Capital – Private placement completed (Company Update)
Price: RM0.51
Target Price: RM1.15
Recommendation: BUY
· Private placement of 64.6m new RCE Capital (RCE) shares or 10% of current share capital were placed out at RM0.455 per share (at a 10% discount to 5-day weighted average price prior to 25th March 2008 of RM0.505). The RM29.4m proceeds from the placement have been earmarked for the expansion of the factoring business and the Vietnamese finance company JV. We understand that the placee was already a minority shareholder in RCE.
· RCE Factoring’s complementary business to become significant contributor in near future. The factoring business that caters primarily to SMEs in trading, construction and manufacturing services, currently only accounts for 2% of 9MFY08 revenue. RCE Factoring’s total loan disbursements in FY08 were approximately RM45m and the firm targets RM100m loan book in 3 year’s time.
· 30% stake in Vietnamese finance company still on the cards with definitive JV agreement expected to be signed in 1HFY09. We understand that the firm is in the midst of finalising the details of the agreement with Southern Bank Vietnam.
· No changes to forecast as we have already factored in the enlarged share base into our earnings estimates.
· Earnings Estimates
FYE: 31 Mar (RMm)
2006
2007
2008E
2009E
2010E
Revenue
57.5
98.7
128.4
152.7
170.2
EBIT
25.0
76.7
78.6
93.4
110.4
Pretax profit
23.5
73.8
72.0
87.8
103.7
Net profit
19.8
63.4
51.9
63.1
74.6
Net profit excl. EI
19.8
46.5
51.9
63.1
74.6
Net profit growth
32.9%
134.8%
11.6%
21.8%
18.2%
EPS (sen)
2.8
8.9
7.3
8.9
10.5
EPS excl. EI
2.8
6.5
7.3
8.9
10.5
Growth in EPS excl. EI (%)
32.9%
134.8%
11.6%
21.8%
18.2%
GDPS (sen)
-
1.0
1.0
1.0
1.0
NTA/ share (RM)
0.09
0.19
0.31
0.33
0.43
Net gearing (x)
2.5
2.0
1.3
1.6
1.3
PER (x)
18.3
7.8
7.0
5.7
4.9
Gross Div. Yield (%)
-
2.0%
2.0%
2.0%
2.0%
P/ NTA (x)
5.6
2.7
1.6
1.5
1.2
EV/ EBITDA (x)
23.5
8.8
8.9
8.5
7.2
ROE (%)
26.2%
36.5%
25.1%
24.5%
25.1%
Target price of RM1.15, based on 13x FY09 PER of 8.9 sen. The stock is currently trading at undemanding FY08 and FY09 PERs of 7.0x and 5.7x respectively in comparison to industry average PERs in FY08 and FY09 of 13.7x and 12.2x. We continue to like the firm for its low-risk direct salary deduction model and expect demand for the company’s loan products to remain resilient in line with Malaysia’s domestic consumption. BUY.
KENANGA INVESTMENT BANK BERHAD (15678-H)
Price: RM0.51
Target Price: RM1.15
Recommendation: BUY
· Private placement of 64.6m new RCE Capital (RCE) shares or 10% of current share capital were placed out at RM0.455 per share (at a 10% discount to 5-day weighted average price prior to 25th March 2008 of RM0.505). The RM29.4m proceeds from the placement have been earmarked for the expansion of the factoring business and the Vietnamese finance company JV. We understand that the placee was already a minority shareholder in RCE.
· RCE Factoring’s complementary business to become significant contributor in near future. The factoring business that caters primarily to SMEs in trading, construction and manufacturing services, currently only accounts for 2% of 9MFY08 revenue. RCE Factoring’s total loan disbursements in FY08 were approximately RM45m and the firm targets RM100m loan book in 3 year’s time.
· 30% stake in Vietnamese finance company still on the cards with definitive JV agreement expected to be signed in 1HFY09. We understand that the firm is in the midst of finalising the details of the agreement with Southern Bank Vietnam.
· No changes to forecast as we have already factored in the enlarged share base into our earnings estimates.
· Earnings Estimates
FYE: 31 Mar (RMm)
2006
2007
2008E
2009E
2010E
Revenue
57.5
98.7
128.4
152.7
170.2
EBIT
25.0
76.7
78.6
93.4
110.4
Pretax profit
23.5
73.8
72.0
87.8
103.7
Net profit
19.8
63.4
51.9
63.1
74.6
Net profit excl. EI
19.8
46.5
51.9
63.1
74.6
Net profit growth
32.9%
134.8%
11.6%
21.8%
18.2%
EPS (sen)
2.8
8.9
7.3
8.9
10.5
EPS excl. EI
2.8
6.5
7.3
8.9
10.5
Growth in EPS excl. EI (%)
32.9%
134.8%
11.6%
21.8%
18.2%
GDPS (sen)
-
1.0
1.0
1.0
1.0
NTA/ share (RM)
0.09
0.19
0.31
0.33
0.43
Net gearing (x)
2.5
2.0
1.3
1.6
1.3
PER (x)
18.3
7.8
7.0
5.7
4.9
Gross Div. Yield (%)
-
2.0%
2.0%
2.0%
2.0%
P/ NTA (x)
5.6
2.7
1.6
1.5
1.2
EV/ EBITDA (x)
23.5
8.8
8.9
8.5
7.2
ROE (%)
26.2%
36.5%
25.1%
24.5%
25.1%
Target price of RM1.15, based on 13x FY09 PER of 8.9 sen. The stock is currently trading at undemanding FY08 and FY09 PERs of 7.0x and 5.7x respectively in comparison to industry average PERs in FY08 and FY09 of 13.7x and 12.2x. We continue to like the firm for its low-risk direct salary deduction model and expect demand for the company’s loan products to remain resilient in line with Malaysia’s domestic consumption. BUY.
KENANGA INVESTMENT BANK BERHAD (15678-H)
KENANGA: Tenaga Nasional - BUY - 3 Apr 2008
Tenaga Nasional – Goodbye Lahad Datu (Company Update)
Price: RM7.50
Target Price: RM8.35
Recommendation: BUY
· Lahad Datu coal power plant (LDCP) project is off. Yesterday, the Sabah Government announced that it has cancelled the RM1.3b coal power plant project in Silam, Lahad Datu (see recap below). The Sabah State’s Cabinet stated that its decision was driven by health and environmental reasons. They have also asked Tenaga National (TNB), and its 80% owned Sabah Electricity Board Sdn Bhd (SESB), to look for alternative energy sources.
· The good part… Scrapping this deal will not be detrimental to TNB in the immediate term, especially when reserve margins are around 45% versus worldwide trends of 20% to 25%. FY08E to FY11E CAPEX requirements should be marginally lower as TNB was expected to use 20% equity financing for its RM530m portion of the project or RM35m p.a. over 3 years.
· …and the bad part. Although reserve margins are high, the distribution of power plants is lopped sided towards the Peninsula. In fact, TNB was trying to source cheaper energy for East Malaysia (EM) as the Sabah power plants tend to be small inefficient fuel/diesel power plants; a critical factor when Sabah’s electricity demand is growing from the wealth generated from high CPO prices. As such, it missed out on an opportunity to enhance its profitability where there is a mismatch in supply and demand.
· TNB locked in FY08E average coal cost of USD75.4/mT which is 11.4% higher than our earlier coal price estimates of USD67.7/mT. We are revising downwards FY08E net profit by 6% to RM3.09b. We have maintained our CAPEX estimates of RM4b p.a. given the marginal effect of LDCP to its historical CAPEX of RM3b to RM5b p.a. We are maintaining our FY09E and FY10E coal assumptions at USD90.0/mT and USD94.5/mT, respectively.
· Tweaking fair value lower by 1% to RM8.35, based on our DCF valuations using 9.2% WACC and 4.8% long-term growth rate, to account for FY08E higher coal prices. FY08E and FY09E PER are attractive at of 11x each. BUY.
KENANGA INVESTMENT BANK BERHAD (15678-H)
Price: RM7.50
Target Price: RM8.35
Recommendation: BUY
· Lahad Datu coal power plant (LDCP) project is off. Yesterday, the Sabah Government announced that it has cancelled the RM1.3b coal power plant project in Silam, Lahad Datu (see recap below). The Sabah State’s Cabinet stated that its decision was driven by health and environmental reasons. They have also asked Tenaga National (TNB), and its 80% owned Sabah Electricity Board Sdn Bhd (SESB), to look for alternative energy sources.
· The good part… Scrapping this deal will not be detrimental to TNB in the immediate term, especially when reserve margins are around 45% versus worldwide trends of 20% to 25%. FY08E to FY11E CAPEX requirements should be marginally lower as TNB was expected to use 20% equity financing for its RM530m portion of the project or RM35m p.a. over 3 years.
· …and the bad part. Although reserve margins are high, the distribution of power plants is lopped sided towards the Peninsula. In fact, TNB was trying to source cheaper energy for East Malaysia (EM) as the Sabah power plants tend to be small inefficient fuel/diesel power plants; a critical factor when Sabah’s electricity demand is growing from the wealth generated from high CPO prices. As such, it missed out on an opportunity to enhance its profitability where there is a mismatch in supply and demand.
· TNB locked in FY08E average coal cost of USD75.4/mT which is 11.4% higher than our earlier coal price estimates of USD67.7/mT. We are revising downwards FY08E net profit by 6% to RM3.09b. We have maintained our CAPEX estimates of RM4b p.a. given the marginal effect of LDCP to its historical CAPEX of RM3b to RM5b p.a. We are maintaining our FY09E and FY10E coal assumptions at USD90.0/mT and USD94.5/mT, respectively.
· Tweaking fair value lower by 1% to RM8.35, based on our DCF valuations using 9.2% WACC and 4.8% long-term growth rate, to account for FY08E higher coal prices. FY08E and FY09E PER are attractive at of 11x each. BUY.
KENANGA INVESTMENT BANK BERHAD (15678-H)
HDBSVR: YTL Power, Maintain Buy
YTL Power: Resilient earnings & attractive yield
-Story: We understand that negotiations on the power purchase agreement (PPA) have not resumed after the general election. And if they do, we believe it would be on new tariff rates, and returns on additional capex for upgrading the power plants upon expiry of the existing concession. In any case, impact on local IPPs and resultant impact on YTLP's earnings is expected to be minimal since they account for only 23% and 22% of group FY08F and FY09F EBIT. With full cost pass-through for its Malaysian and Indonesian power plants, the issue of higher fuel costs is virtually non-existent for these operations.
-Point: We believe YTLP will continue to seek new acquisitions given its gross cash of RM7.6b as at 1H08. It recently proposed a RM2.2b convertible bond issue to refinance exiting facilities and to help fund potential new acquisitions. We envisage less competition for regulated assets as the subprime crisis has raised required rates of returns significantly.
-Relevance: We favor YTLP for its defensive utility-type earnings and attractive 8.6% net yield based on sustainable net cash dividend yield of 4.6%, and potential 1-for-25 share distribution that provides 4% net yield. YTLP also enjoys stable earnings and agreed rate of returns for Wessex and Electranet operations in UK and Australia. Maintain Buy with SOP-derived target price of RM3.00.
-Story: We understand that negotiations on the power purchase agreement (PPA) have not resumed after the general election. And if they do, we believe it would be on new tariff rates, and returns on additional capex for upgrading the power plants upon expiry of the existing concession. In any case, impact on local IPPs and resultant impact on YTLP's earnings is expected to be minimal since they account for only 23% and 22% of group FY08F and FY09F EBIT. With full cost pass-through for its Malaysian and Indonesian power plants, the issue of higher fuel costs is virtually non-existent for these operations.
-Point: We believe YTLP will continue to seek new acquisitions given its gross cash of RM7.6b as at 1H08. It recently proposed a RM2.2b convertible bond issue to refinance exiting facilities and to help fund potential new acquisitions. We envisage less competition for regulated assets as the subprime crisis has raised required rates of returns significantly.
-Relevance: We favor YTLP for its defensive utility-type earnings and attractive 8.6% net yield based on sustainable net cash dividend yield of 4.6%, and potential 1-for-25 share distribution that provides 4% net yield. YTLP also enjoys stable earnings and agreed rate of returns for Wessex and Electranet operations in UK and Australia. Maintain Buy with SOP-derived target price of RM3.00.
jpmorgan: WTK Holdings Berhad
WTK Holdings Berhad : Trend in plywood / log prices reported by Japan Lumber Report is in line with expectations - ALERT
Japan Lumber Report reported 1Q08 plywood / log prices. Average 1Q08 plywood prices came in 2-6% higher Q/Q but still 24-27% lower Y/Y against a 2% Q/Q decline and 8% Y/Y decline in log prices. 1Q08 plywood prices were mainly driven up by higher prices in March 2008. The 8-13% M/M increase in March prices was largely expected – that plywood prices have bottomed, as highlighted in our note 'Bottomed but no sign of immediate rebound in sight' dated 20th March 2008. Our checks with timber companies have revealed that despite weak Jan/Feb prices, prices showed recovery in March with Japan trading houses entering into contracts at higher volumes.
However, we see no near-term catalyst for now and hence, expect the stock to remain range-bound. The line of sight is unclear for investors over the next few months: 1) Japan's GDP growth could be dampened by a US recession. Note that JPMorgan recently lowered the 2008 GDP forecast for Japan to 1.3% from 1.7%. 2) Housing starts may not stage a strong rebound in 2008 given weak condominium sales in Japan at the moment.
Maintain OW on WTK as we believe that the downside for the stock is limited as the company is able to absorb any short term negative cash flows given its strong balance sheet position. Moreover, the stock is currently trading at a 0.8x FY08E P/B. Our Dec-08 PT of M$2.60 is based on a 1.1x FY08E P/B, which is the mid range of its historical trading range since 1998 (trading range 0.6x-2.4x). Key risk to our PT is a prolonged and deeper slowdown in the US affecting the Japanese economy.
Japan Lumber Report reported 1Q08 plywood / log prices. Average 1Q08 plywood prices came in 2-6% higher Q/Q but still 24-27% lower Y/Y against a 2% Q/Q decline and 8% Y/Y decline in log prices. 1Q08 plywood prices were mainly driven up by higher prices in March 2008. The 8-13% M/M increase in March prices was largely expected – that plywood prices have bottomed, as highlighted in our note 'Bottomed but no sign of immediate rebound in sight' dated 20th March 2008. Our checks with timber companies have revealed that despite weak Jan/Feb prices, prices showed recovery in March with Japan trading houses entering into contracts at higher volumes.
However, we see no near-term catalyst for now and hence, expect the stock to remain range-bound. The line of sight is unclear for investors over the next few months: 1) Japan's GDP growth could be dampened by a US recession. Note that JPMorgan recently lowered the 2008 GDP forecast for Japan to 1.3% from 1.7%. 2) Housing starts may not stage a strong rebound in 2008 given weak condominium sales in Japan at the moment.
Maintain OW on WTK as we believe that the downside for the stock is limited as the company is able to absorb any short term negative cash flows given its strong balance sheet position. Moreover, the stock is currently trading at a 0.8x FY08E P/B. Our Dec-08 PT of M$2.60 is based on a 1.1x FY08E P/B, which is the mid range of its historical trading range since 1998 (trading range 0.6x-2.4x). Key risk to our PT is a prolonged and deeper slowdown in the US affecting the Japanese economy.
Tuesday 1 April 2008
kimeng: 1 apr Litrak (buy)
Gamuda's urban toll road concessionaire
Lingkaran Trans Kota Holdings Bhd (Litrak) is an associate company ofGamuda Bhd, with the latter owning a 44.8% stake. Litrak's major assets are 100% interest in Lingkaran Trans Kota Sdn Bhd (LTK), which owns theLebuh Raya Damansara-Puchong (LDP) and 50% interest in Sistem Penyuraian Trafik KL Barat Sdn Bhd (Sprint), owner of the privatized road called Western KL Traffic Dispersal Scheme (WTDS). Both are BOT urban tol roads of 40 and 26km in lengths with outstanding concession lives of 22
and 23 years respectively.
BUY ? steep 24% discount to DCF per share plus low PERs
Litrak is trading on a steep 24% discount to DCF valuation of RM4.68 per share, in addition to decent prospective PE valuations of 14-16x. Whilst we do not expect Litrak to trade at full DCF valuation due to perceptions of risks associated with the concession toll rates, we anticipate the discount to narrow as Litrak puts its excess cash to good use ? rewarding its shareholders. Our 12-month target price is RM4.20,
ascribing an arbitrary 10% discount to our DCF value.
Lingkaran Trans Kota Holdings Bhd (Litrak) is an associate company ofGamuda Bhd, with the latter owning a 44.8% stake. Litrak's major assets are 100% interest in Lingkaran Trans Kota Sdn Bhd (LTK), which owns theLebuh Raya Damansara-Puchong (LDP) and 50% interest in Sistem Penyuraian Trafik KL Barat Sdn Bhd (Sprint), owner of the privatized road called Western KL Traffic Dispersal Scheme (WTDS). Both are BOT urban tol roads of 40 and 26km in lengths with outstanding concession lives of 22
and 23 years respectively.
BUY ? steep 24% discount to DCF per share plus low PERs
Litrak is trading on a steep 24% discount to DCF valuation of RM4.68 per share, in addition to decent prospective PE valuations of 14-16x. Whilst we do not expect Litrak to trade at full DCF valuation due to perceptions of risks associated with the concession toll rates, we anticipate the discount to narrow as Litrak puts its excess cash to good use ? rewarding its shareholders. Our 12-month target price is RM4.20,
ascribing an arbitrary 10% discount to our DCF value.
KENANGA: Reliance Pacific - HOLD - 1 Apr 2008
Reliance Pacific – Acquisitions of Regional Travel Companies (Company Update)
Price: RM0.52
Target Price: RM0.48
Recommendation: HOLD
· Proposed acquisitions. We have noted in our previous report that Reliance Pacific Berhad (RPB) had proposed to acquire nine regional travel companies – 2 each in Australia, Hong Kong, Thailand and 3 in Malaysia with completion expected by 1H 2008. We believe the plans to grow via acquisitions and tap into new markets are necessary for RPB to stay competitive in the long run in a highly fragmented industry.
· Total purchase consideration of RM49m at 9x PER is fair. Gearing of the Group should increase from 0.3x to 0.5x post acquisition assuming 50% bank funding.
· Acquisition is strategic as it allows instant penetration into key markets including China and South East Asia. Besides the opening of new markets and enhancing its revenue stream, the acquisition also allows the Group to be more integrated in terms of product offerings. Increasing its brand awareness and synergies from economies of scale are additional drivers behind the strategic move.
· New source of income. Management expects the acquisitions to enhance the Group’s FY09 bottom line earnings by about RM5.0m. The acquirees’ aggregated FY08 net profit is expected to reach RM3.8m on an annualised basis, from RM3.0m in FY07.
· FY08 and FY09 earnings adjusted. After updates from the recent analysts’ briefing, we are lowering our FY08 net profit by 10.7% to RM22.1m premised mainly on tighter profit margins and delay in profit recognisation of the MICE-related activities. This has also prompted us to adjust lower our FY09 net profit by 5.6% to RM31.9m, after factoring in about RM3.0m and RM2.0m contribution from the acquisition and MICE-related activities, respectively.
· Maintain HOLD on RPB with a Target Price of RM0.48 based on PER of 13x, which is at 32% discount of the hotel industry sector but in line with the current market’s 2008 PER.
· Risks to our recommendation include: (1) Unexpected slowdown in the Malaysia and global economy which will affect the overall consumer spending on travel and (2) Breakout of diseases such as bird flu which could affect the travel industry.
KENANGA INVESTMENT BANK BERHAD (15678-H)
Research Department
Price: RM0.52
Target Price: RM0.48
Recommendation: HOLD
· Proposed acquisitions. We have noted in our previous report that Reliance Pacific Berhad (RPB) had proposed to acquire nine regional travel companies – 2 each in Australia, Hong Kong, Thailand and 3 in Malaysia with completion expected by 1H 2008. We believe the plans to grow via acquisitions and tap into new markets are necessary for RPB to stay competitive in the long run in a highly fragmented industry.
· Total purchase consideration of RM49m at 9x PER is fair. Gearing of the Group should increase from 0.3x to 0.5x post acquisition assuming 50% bank funding.
· Acquisition is strategic as it allows instant penetration into key markets including China and South East Asia. Besides the opening of new markets and enhancing its revenue stream, the acquisition also allows the Group to be more integrated in terms of product offerings. Increasing its brand awareness and synergies from economies of scale are additional drivers behind the strategic move.
· New source of income. Management expects the acquisitions to enhance the Group’s FY09 bottom line earnings by about RM5.0m. The acquirees’ aggregated FY08 net profit is expected to reach RM3.8m on an annualised basis, from RM3.0m in FY07.
· FY08 and FY09 earnings adjusted. After updates from the recent analysts’ briefing, we are lowering our FY08 net profit by 10.7% to RM22.1m premised mainly on tighter profit margins and delay in profit recognisation of the MICE-related activities. This has also prompted us to adjust lower our FY09 net profit by 5.6% to RM31.9m, after factoring in about RM3.0m and RM2.0m contribution from the acquisition and MICE-related activities, respectively.
· Maintain HOLD on RPB with a Target Price of RM0.48 based on PER of 13x, which is at 32% discount of the hotel industry sector but in line with the current market’s 2008 PER.
· Risks to our recommendation include: (1) Unexpected slowdown in the Malaysia and global economy which will affect the overall consumer spending on travel and (2) Breakout of diseases such as bird flu which could affect the travel industry.
KENANGA INVESTMENT BANK BERHAD (15678-H)
Research Department
HLG: 1 Apr 2008 Malaysian Airlines - Buying up to 55 B737-800 aircraft
Malaysian Airlines BUY
Price target RM7.00
Share price at 31 Mar RM3.54
Investment summary
MAS announced the purchase of up to 55 Boeing narrow-body planes valued at USD4.2bn at list price and agreed with Airbus on compensation and new delivery timetable for the 6 A380. We believe yesterday’s order for narrow-body aircraft and impending decision on wide-body aircraft will enable management to finalize its capital management policy. MAS is accumulating cash at an aggressive rate, and we expect FY10 net cash to easily reach RM8bn (RM4.80/share), before aircraft purchases. We have a BUY on MAS: (1) normalised pre-tax margins of 4% is low by regional standards (SIA 15-20%) and increase in yield creates a disproportionately strong EPS growth (2) revenue has been growing at a faster rate than cost, thanks to fare hikes and flat non-fuel cost (3) -27% share price YTD has fully discounted the growing competition from low cost carriers and global macro threats (jet fuel prices, economic slowdown).
Fleet renewal leads to capital management
We think MAS is a prime candidate for capital management (net cash of RM2.60/ share, 20% FCF yield), which could happen after management finalizes its fleet renewal program within the next few months.
Price target RM7.00
Share price at 31 Mar RM3.54
Investment summary
MAS announced the purchase of up to 55 Boeing narrow-body planes valued at USD4.2bn at list price and agreed with Airbus on compensation and new delivery timetable for the 6 A380. We believe yesterday’s order for narrow-body aircraft and impending decision on wide-body aircraft will enable management to finalize its capital management policy. MAS is accumulating cash at an aggressive rate, and we expect FY10 net cash to easily reach RM8bn (RM4.80/share), before aircraft purchases. We have a BUY on MAS: (1) normalised pre-tax margins of 4% is low by regional standards (SIA 15-20%) and increase in yield creates a disproportionately strong EPS growth (2) revenue has been growing at a faster rate than cost, thanks to fare hikes and flat non-fuel cost (3) -27% share price YTD has fully discounted the growing competition from low cost carriers and global macro threats (jet fuel prices, economic slowdown).
Fleet renewal leads to capital management
We think MAS is a prime candidate for capital management (net cash of RM2.60/ share, 20% FCF yield), which could happen after management finalizes its fleet renewal program within the next few months.
HDBSVR: British American Tobacco, Buy (Initiating Coverage)
British American Tobacco: A defensive play
-Story: BAT, the manufacturer of Dunhill and Pall Mall cigarettes in Malaysia, has been able to retain its leadership despite competition from the influx of exceptionally low priced cigarettes (ELPC) and contraband cigarettes. As at 31 Dec 2007, BAT commanded a retail market share of 60.3%, followed by its rivals: JT International (JTI) 18%, Philip Morris (PMI) 13.5% and ELPC 8.2%.
-Point: BAT has historically distributed up to 100% of its earnings as cash dividend to shareholders. For FY07, BAT has declared a total of 256.5 sen net DPS, translating into 6.0% dividend yield. Going forward, we expect BAT to pay out at least 90% of earnings in FY08F (240 sen) and FY09F (249 sen), with implied yield of 5.6% and 5.9%, respectively, to shareholders. This is premised on our forecast EPS of 266 sen and 277 sen, respectively.
-Relevance: We re-initiate coverage on BAT with a BUY call and a DDM-derived target price of RM47.00. BAT is currently trading at 1-year forward PE of 16.0x against its 5-year historical range of 13x-23x. YTD, the share price has gained 3.0%, outperforming KLCI's 12.9% drop. The stock offers investors a defensive equity exposure amidst the prevailing uncertainties in the Malaysian bourse. Based on the last closing price, BAT offers 10.6% potential upside from our target price, and 5.9% net dividend yield. These add up to a probable total return of 16.5%.
-Story: BAT, the manufacturer of Dunhill and Pall Mall cigarettes in Malaysia, has been able to retain its leadership despite competition from the influx of exceptionally low priced cigarettes (ELPC) and contraband cigarettes. As at 31 Dec 2007, BAT commanded a retail market share of 60.3%, followed by its rivals: JT International (JTI) 18%, Philip Morris (PMI) 13.5% and ELPC 8.2%.
-Point: BAT has historically distributed up to 100% of its earnings as cash dividend to shareholders. For FY07, BAT has declared a total of 256.5 sen net DPS, translating into 6.0% dividend yield. Going forward, we expect BAT to pay out at least 90% of earnings in FY08F (240 sen) and FY09F (249 sen), with implied yield of 5.6% and 5.9%, respectively, to shareholders. This is premised on our forecast EPS of 266 sen and 277 sen, respectively.
-Relevance: We re-initiate coverage on BAT with a BUY call and a DDM-derived target price of RM47.00. BAT is currently trading at 1-year forward PE of 16.0x against its 5-year historical range of 13x-23x. YTD, the share price has gained 3.0%, outperforming KLCI's 12.9% drop. The stock offers investors a defensive equity exposure amidst the prevailing uncertainties in the Malaysian bourse. Based on the last closing price, BAT offers 10.6% potential upside from our target price, and 5.9% net dividend yield. These add up to a probable total return of 16.5%.
KENANGA: Bintulu Port - BUY - 31 Mar 2008
Bintulu Port – Stable earnings and attractive dividend (Initiating Coverage)
Price: RM6.10
Target Price: RM6.75
Recommendation: BUY
· Bintulu Port is Malaysia’s sole LNG export gateway and the largest LNG export terminal in the world. LNG export is the single largest revenue generator, contributing some 60% to the group’s revenue. Meanwhile, Bintulu Port also houses the largest container terminal in East Malaysia, a multipurpose terminal and acts as a major palm oil export outlet in Sarawak.
· Earnings anchored by LNG with growth from container and palm oil. Company enjoys stable earnings from LNG division given long term contracts of between 15 years – 20 years for Petronas’ LNG exports while growth should be driven by increasing container handling, palm oil storage and exports. Bintulu International Container Terminal is the leading container hub in East Malaysia and has registered an impressive CAGR 27% growth since 2000. Meanwhile, the new vegetable oil division, Biport Bulkers is the only Sarawak port-run firm specialising in edible oil storage and bulking facilities. Though loss making still, Biport Bulkers is however expected to turnaround from 2008 onwards on the back of rising economies of scale and aggressive expansion to double its capacity by 2009.
· Positive outlook for key divisions with LNG output rising by 5% following the de-bottlenecking exercise at MLNG 2 expected by end 2008. Rising hinterland developments driven by Sarawak Corridor should translate into higher container volumes for Bintulu Port while buoyant CPO price is also expected to spur palm oil activities with export on a rising trend.
· Defensive earnings and attractive dividend yield at 8.2% should be enough lure in light of the current volatile market conditions. Strong balance sheet also provides room for capital management with potential capital repayment of up to RM1/share boosting yield up to 24.5%. Initiate coverage with a BUY fair valuing it using a DCF derived target price of RM6.75 based on WACC of 9%.
KENANGA INVESTMENT BANK BERHAD (15678-H)
Research Department
Price: RM6.10
Target Price: RM6.75
Recommendation: BUY
· Bintulu Port is Malaysia’s sole LNG export gateway and the largest LNG export terminal in the world. LNG export is the single largest revenue generator, contributing some 60% to the group’s revenue. Meanwhile, Bintulu Port also houses the largest container terminal in East Malaysia, a multipurpose terminal and acts as a major palm oil export outlet in Sarawak.
· Earnings anchored by LNG with growth from container and palm oil. Company enjoys stable earnings from LNG division given long term contracts of between 15 years – 20 years for Petronas’ LNG exports while growth should be driven by increasing container handling, palm oil storage and exports. Bintulu International Container Terminal is the leading container hub in East Malaysia and has registered an impressive CAGR 27% growth since 2000. Meanwhile, the new vegetable oil division, Biport Bulkers is the only Sarawak port-run firm specialising in edible oil storage and bulking facilities. Though loss making still, Biport Bulkers is however expected to turnaround from 2008 onwards on the back of rising economies of scale and aggressive expansion to double its capacity by 2009.
· Positive outlook for key divisions with LNG output rising by 5% following the de-bottlenecking exercise at MLNG 2 expected by end 2008. Rising hinterland developments driven by Sarawak Corridor should translate into higher container volumes for Bintulu Port while buoyant CPO price is also expected to spur palm oil activities with export on a rising trend.
· Defensive earnings and attractive dividend yield at 8.2% should be enough lure in light of the current volatile market conditions. Strong balance sheet also provides room for capital management with potential capital repayment of up to RM1/share boosting yield up to 24.5%. Initiate coverage with a BUY fair valuing it using a DCF derived target price of RM6.75 based on WACC of 9%.
KENANGA INVESTMENT BANK BERHAD (15678-H)
Research Department
KENANGA: Adventa - BUY - 31 Mar 2008
Adventa – Dividends surprise (Results Note)
Price: RM1.19
Target Price: RM1.90
Recommendation: BUY
· Commendable finals with revenue and bottomline growing by 29.6% and 24.9% respectively on the back of improved production and rising demand for surgical and dental especially. For the full year, we estimate that sales of surgical and examination gloves would have grown by 10% while dental up by at least 50%.
· Final results though commendable but is still short of our expectations. Topline of RM224.9m was at 91.5% of our full year’s forecast while bottomline of RM20.1m at 90.5%. Our more aggressive assumption on both production and the exchange rate were mainly to blame for the short-fall while some further gestation on the Uruguay operation had contributed to the slight underperformance.
· QoQ, topline was lower at 4.8% while net profit was higher by 16.2%. The lower topline for the 4Q08 was mainly attributable to a combination of less favourable product mix and the strengthening of the local unit – RM. Lower effective taxes as a result of investment allowances had helped to shore up bottomline performance for the period.
· Dividend surprise. Company has declared a final tax-exempt dividend of 4.4sen or a payout of 30% which is much higher than our forecast of a 20% payout. Balance sheet remains most healthy still after placing out 9m shares at RM1.56 recently, raising some RM14m to fund its capital expansion. Post dividend payment, net gearing remains a comfortable 36%.
· Forecast is revised lower on account of a stronger RM, higher production costs on the back of rising latex prices as well as a slightly more conservative assumption overall on our part. Our topline forecasts for FY09 and FY10 are lowered by 11.6% and 10.9% respectively while net profit for the two years have been lowered accordingly by 15.3% and 19%. As a result, our target price is also lowered to RM1.90 from RM2.48 previously, applying the same 9.5x multiple.
· Despite the lowering of our forecast and targets, we continue to rate the company a BUY given the encouraging prospects in the medical glove segment especially surgical. Strong R&D capability, product niche especially in the high-end surgical couple with a growing suite of products and solutions should set a strong platform for the company in becoming a supply chain leader in the healthcare institutions in the Asean region.
KENANGA INVESTMENT BANK BERHAD (15678-H)
Research Department
Price: RM1.19
Target Price: RM1.90
Recommendation: BUY
· Commendable finals with revenue and bottomline growing by 29.6% and 24.9% respectively on the back of improved production and rising demand for surgical and dental especially. For the full year, we estimate that sales of surgical and examination gloves would have grown by 10% while dental up by at least 50%.
· Final results though commendable but is still short of our expectations. Topline of RM224.9m was at 91.5% of our full year’s forecast while bottomline of RM20.1m at 90.5%. Our more aggressive assumption on both production and the exchange rate were mainly to blame for the short-fall while some further gestation on the Uruguay operation had contributed to the slight underperformance.
· QoQ, topline was lower at 4.8% while net profit was higher by 16.2%. The lower topline for the 4Q08 was mainly attributable to a combination of less favourable product mix and the strengthening of the local unit – RM. Lower effective taxes as a result of investment allowances had helped to shore up bottomline performance for the period.
· Dividend surprise. Company has declared a final tax-exempt dividend of 4.4sen or a payout of 30% which is much higher than our forecast of a 20% payout. Balance sheet remains most healthy still after placing out 9m shares at RM1.56 recently, raising some RM14m to fund its capital expansion. Post dividend payment, net gearing remains a comfortable 36%.
· Forecast is revised lower on account of a stronger RM, higher production costs on the back of rising latex prices as well as a slightly more conservative assumption overall on our part. Our topline forecasts for FY09 and FY10 are lowered by 11.6% and 10.9% respectively while net profit for the two years have been lowered accordingly by 15.3% and 19%. As a result, our target price is also lowered to RM1.90 from RM2.48 previously, applying the same 9.5x multiple.
· Despite the lowering of our forecast and targets, we continue to rate the company a BUY given the encouraging prospects in the medical glove segment especially surgical. Strong R&D capability, product niche especially in the high-end surgical couple with a growing suite of products and solutions should set a strong platform for the company in becoming a supply chain leader in the healthcare institutions in the Asean region.
KENANGA INVESTMENT BANK BERHAD (15678-H)
Research Department
DBS Vickers (M'sia): Maybank, Downgrade to Fully Valued
Maybank: Wins bid for BII
-Story: Maybank has won the bid for a controlling stake in Bank Internasional Indonesia ("BII") and would have to make a tender offer for the remaining stake it does not own. Maybank will pay RM3.6bn for Fullerton's 75% stake in Sorak, RM1.2bn for Kookmin Bank's 25% stake in Sorak and RM3.8bn for the remaining 44.3% stake in BII not owned by Sorak. Maybank may have to fork out up to RM8.6bn for the entire deal. But it will fund the transaction internally as it has ample room to raise Tier-1 and Tier-2 capital of up to RM14bn.
-Point: We think Maybank is paying a premium for the stake in BII for its late entry into the Indonesian banking scene. It had been Maybank's ambition to expand regionally, especially into Indonesia. The transaction price, estimated at Rp510 per share, implies that Maybank is effectively paying 4.1x FY08 BV and 35x FY08 PE for BII, which is the highest recorded M&A transaction for Indonesian banks. BII is estimated to add 8% to Maybank's FY6/09F net profit. After imputing interest and merger costs, the acquisition could potentially lower our FY09 earnings by 11%.
Preliminarily, we think BII will contribute meaningfully from FY6/11 onwards.
-Relevance: Downgrade to Fully Valued with TP lowered to RM8.10 from RM9.00.
We reduced our dividend payout assumption to 60-65%, implying 62.5sen DPS for FY08F (32.5 sen paid out) and 60sen each for FY09F and FY10F. Our sustainable ROE assumption in the Gordon Growth Model is lowered to 15.5% from 17%. Switch to Public Bank and BCHB for earnings growth. Public Bank also offers higher dividend yield of 7-10%.
-Story: Maybank has won the bid for a controlling stake in Bank Internasional Indonesia ("BII") and would have to make a tender offer for the remaining stake it does not own. Maybank will pay RM3.6bn for Fullerton's 75% stake in Sorak, RM1.2bn for Kookmin Bank's 25% stake in Sorak and RM3.8bn for the remaining 44.3% stake in BII not owned by Sorak. Maybank may have to fork out up to RM8.6bn for the entire deal. But it will fund the transaction internally as it has ample room to raise Tier-1 and Tier-2 capital of up to RM14bn.
-Point: We think Maybank is paying a premium for the stake in BII for its late entry into the Indonesian banking scene. It had been Maybank's ambition to expand regionally, especially into Indonesia. The transaction price, estimated at Rp510 per share, implies that Maybank is effectively paying 4.1x FY08 BV and 35x FY08 PE for BII, which is the highest recorded M&A transaction for Indonesian banks. BII is estimated to add 8% to Maybank's FY6/09F net profit. After imputing interest and merger costs, the acquisition could potentially lower our FY09 earnings by 11%.
Preliminarily, we think BII will contribute meaningfully from FY6/11 onwards.
-Relevance: Downgrade to Fully Valued with TP lowered to RM8.10 from RM9.00.
We reduced our dividend payout assumption to 60-65%, implying 62.5sen DPS for FY08F (32.5 sen paid out) and 60sen each for FY09F and FY10F. Our sustainable ROE assumption in the Gordon Growth Model is lowered to 15.5% from 17%. Switch to Public Bank and BCHB for earnings growth. Public Bank also offers higher dividend yield of 7-10%.
kimeng: 27 mar Maybank (buy)
Proposing full acquisition of Bank Internasional for RM8.6b
Malayan Banking Berhad (MBB) proposed to buy 75% and 25% of Sorak Financial Holdings Pte Ltd for Rp10.4 trillion (or RM3.6b) and Rp 3.5 trillion (RM1.2b) from Temasek Holdings and Kookmin Bank respectively. Sorak's principal investment is a 55.7% stake in listed PT Bank Internasional Tbk (BII). The purchase is conditional upon MBB passing the fit and proper test as stipulated by Bank Indonesia, and approvals from Bank Negara Malaysia (received 25 Mar 2008) and shareholders of MBB (via a simple majority in an EGM). The acquisition should be completed within 6 months. Upon completion, MBB is obliged to make a tender offer
for the remaining 44.3% of BII. The total amount for the tender offer is Rp 11.0 trillion (or RM3.8b). All in, the purchase of a 100% stake in BII will cost MBB RM8.6b cash.
Good yields, sound fundamentals and high ROEs
Following the recent decline of the share price, we are upgrading MBB to BUY.
Malayan Banking Berhad (MBB) proposed to buy 75% and 25% of Sorak Financial Holdings Pte Ltd for Rp10.4 trillion (or RM3.6b) and Rp 3.5 trillion (RM1.2b) from Temasek Holdings and Kookmin Bank respectively. Sorak's principal investment is a 55.7% stake in listed PT Bank Internasional Tbk (BII). The purchase is conditional upon MBB passing the fit and proper test as stipulated by Bank Indonesia, and approvals from Bank Negara Malaysia (received 25 Mar 2008) and shareholders of MBB (via a simple majority in an EGM). The acquisition should be completed within 6 months. Upon completion, MBB is obliged to make a tender offer
for the remaining 44.3% of BII. The total amount for the tender offer is Rp 11.0 trillion (or RM3.8b). All in, the purchase of a 100% stake in BII will cost MBB RM8.6b cash.
Good yields, sound fundamentals and high ROEs
Following the recent decline of the share price, we are upgrading MBB to BUY.
kimeng: 27 mar IOICorp (buy)
CPO prices to be sustained at current high levels
IOI expects CPO prices to sustain at current high levels for the next 2-3 years, projecting CPO prices of RM2900-3000 for FY08, RM3300-3600 for FY09 and RM3000-3300 for FY10. We have accordingly increased our CPO price assumptions to RM3000/mt in FY08 and RM3200/mt in FY09, from RM2800 and RM3000 previously. Every RM100/mt rise in CPO price translates to ~RM70m increase in plantation EBIT. Meanwhile, FFB production is projected to grow by 5% in FY08 and 6% in FY09 with another 7,000 ha coming into maturity in the next 2 years. This will
help to offset the estimated cess payment of RM135m in FY08 (RM150/mt based on average CPO prices of RM3000/mt) for the cooking oil stabilisation scheme which was implemented effective 1 July 2007.
Raising EPS forecasts by 4% in FY08 and 7% in FY09
IOI's management is guiding for a significantly better FY08, projecting EBIT (including associates before revaluation reserves) of ~RM3.02bn, some 65% higher than FY07's RM1.83bn. Plantations will be the major contributor to group EBIT (65%), followed by resource-based manufacturing (20%) and property (15%). Consequently, we have raised our EPS forecast by 4% to RM0.357 for FY08 and 7% to RM0.397 for FY09. We are maintaining our Trading BUY recommendation with a revised price target of RM8.30 based on 22x CY2008 EPS forecast of RM0.377.
IOI expects CPO prices to sustain at current high levels for the next 2-3 years, projecting CPO prices of RM2900-3000 for FY08, RM3300-3600 for FY09 and RM3000-3300 for FY10. We have accordingly increased our CPO price assumptions to RM3000/mt in FY08 and RM3200/mt in FY09, from RM2800 and RM3000 previously. Every RM100/mt rise in CPO price translates to ~RM70m increase in plantation EBIT. Meanwhile, FFB production is projected to grow by 5% in FY08 and 6% in FY09 with another 7,000 ha coming into maturity in the next 2 years. This will
help to offset the estimated cess payment of RM135m in FY08 (RM150/mt based on average CPO prices of RM3000/mt) for the cooking oil stabilisation scheme which was implemented effective 1 July 2007.
Raising EPS forecasts by 4% in FY08 and 7% in FY09
IOI's management is guiding for a significantly better FY08, projecting EBIT (including associates before revaluation reserves) of ~RM3.02bn, some 65% higher than FY07's RM1.83bn. Plantations will be the major contributor to group EBIT (65%), followed by resource-based manufacturing (20%) and property (15%). Consequently, we have raised our EPS forecast by 4% to RM0.357 for FY08 and 7% to RM0.397 for FY09. We are maintaining our Trading BUY recommendation with a revised price target of RM8.30 based on 22x CY2008 EPS forecast of RM0.377.
kimeng: 27 mar Asiatic (buy)
Expects CPO prices to hover between RM2800-3200/mt in 2008 Asiatic expects CPO prices to hover between RM2800-3200/mt in 2008, in line with our projections of RM3000/mt for FY08 and RM2900/mt for FY09. It has largely continued with last year's policy of selling on the spot market where the average selling price for the first 3 months of 2008 was above RM3200/mt, having missed out on aggressive forward sales during the two-week window when prices spiked above RM3600/mt. Meanwhile, FFB and CPO production is expected to grow by ~5% in FY08 to about 1.27m tonnes and 265,000 tonnes respectively.
Keeping EPS forecasts unchanged; BUY maintained
We are maintaining our EPS forecasts for FY08 and FY09 although there is potential upside risk to our forecasts if CPO prices stay above RM3500/mt. According to management, every RM100/mt increase in CPO prices will raise plantation EBIT by ~RM25m or EPS by 2.5 sen. Plantations will contribute about 93% to group operating profit in FY08, followed by property development with 5%. We are keeping our BUY recommendation with a price target of RM9.90 based on 18x FY08 EPS of RM0.549.
Keeping EPS forecasts unchanged; BUY maintained
We are maintaining our EPS forecasts for FY08 and FY09 although there is potential upside risk to our forecasts if CPO prices stay above RM3500/mt. According to management, every RM100/mt increase in CPO prices will raise plantation EBIT by ~RM25m or EPS by 2.5 sen. Plantations will contribute about 93% to group operating profit in FY08, followed by property development with 5%. We are keeping our BUY recommendation with a price target of RM9.90 based on 18x FY08 EPS of RM0.549.
HLG: 28 March 2008 SP Setia - Seasonally weak Q108 results
SP Setia Bhd Group HOLD
Price target RM3.54
Share price at 27 Mar RM3.68
Investment summary
Annualized Q108 results were 20-30% below HLG/market full-year estimates due to seasonality. We maintain our HOLD rating: (1) 14x FY08E PE is 30% premium to peers, fully reflecting its property market leadership. (2) High foreign shareholding of 40% remains a major market risk. (3) We think there are better growth prospects elsewhere in our property universe. Over the last 4 years, sales has maxed-out at RM1bn pa, translating into 6-7% yoy EPS growth. Management aims to reverse this by launching RM1.8bn in new township projects in non-traditional areas (eg. Penang, Vietnam), but we are cautious: we maintain our view that the current inflationary environment could crimp demand for mass-market housing.
Prefer SunCity/Mah Sing
Despite its share price falling –26% YTD, SP Setia is still more expensive and has lower growth than our property picks Sun City/MahSing. We think SP Setia has reached a size which makes growth difficult in Malaysia’s small and increasingly competitive property market: EPS has grown by just 6-7% yoy in the last 4 yrs.
Price target RM3.54
Share price at 27 Mar RM3.68
Investment summary
Annualized Q108 results were 20-30% below HLG/market full-year estimates due to seasonality. We maintain our HOLD rating: (1) 14x FY08E PE is 30% premium to peers, fully reflecting its property market leadership. (2) High foreign shareholding of 40% remains a major market risk. (3) We think there are better growth prospects elsewhere in our property universe. Over the last 4 years, sales has maxed-out at RM1bn pa, translating into 6-7% yoy EPS growth. Management aims to reverse this by launching RM1.8bn in new township projects in non-traditional areas (eg. Penang, Vietnam), but we are cautious: we maintain our view that the current inflationary environment could crimp demand for mass-market housing.
Prefer SunCity/Mah Sing
Despite its share price falling –26% YTD, SP Setia is still more expensive and has lower growth than our property picks Sun City/MahSing. We think SP Setia has reached a size which makes growth difficult in Malaysia’s small and increasingly competitive property market: EPS has grown by just 6-7% yoy in the last 4 yrs.
HLG: 28 March 2008 SP Setia - Seasonally weak Q108 results
SP Setia Bhd Group HOLD
Price target RM3.54
Share price at 27 Mar RM3.68
Investment summary
Annualized Q108 results were 20-30% below HLG/market full-year estimates due to seasonality. We maintain our HOLD rating: (1) 14x FY08E PE is 30% premium to peers, fully reflecting its property market leadership. (2) High foreign shareholding of 40% remains a major market risk. (3) We think there are better growth prospects elsewhere in our property universe. Over the last 4 years, sales has maxed-out at RM1bn pa, translating into 6-7% yoy EPS growth. Management aims to reverse this by launching RM1.8bn in new township projects in non-traditional areas (eg. Penang, Vietnam), but we are cautious: we maintain our view that the current inflationary environment could crimp demand for mass-market housing.
Prefer SunCity/Mah Sing
Despite its share price falling –26% YTD, SP Setia is still more expensive and has lower growth than our property picks Sun City/MahSing. We think SP Setia has reached a size which makes growth difficult in Malaysia’s small and increasingly competitive property market: EPS has grown by just 6-7% yoy in the last 4 yrs.
Price target RM3.54
Share price at 27 Mar RM3.68
Investment summary
Annualized Q108 results were 20-30% below HLG/market full-year estimates due to seasonality. We maintain our HOLD rating: (1) 14x FY08E PE is 30% premium to peers, fully reflecting its property market leadership. (2) High foreign shareholding of 40% remains a major market risk. (3) We think there are better growth prospects elsewhere in our property universe. Over the last 4 years, sales has maxed-out at RM1bn pa, translating into 6-7% yoy EPS growth. Management aims to reverse this by launching RM1.8bn in new township projects in non-traditional areas (eg. Penang, Vietnam), but we are cautious: we maintain our view that the current inflationary environment could crimp demand for mass-market housing.
Prefer SunCity/Mah Sing
Despite its share price falling –26% YTD, SP Setia is still more expensive and has lower growth than our property picks Sun City/MahSing. We think SP Setia has reached a size which makes growth difficult in Malaysia’s small and increasingly competitive property market: EPS has grown by just 6-7% yoy in the last 4 yrs.
kimeng: 27 mar Gamuda (buy)
Earnings and dividends no surprise
EPS for H108 was 8.9sen (+48% Y/Y), meeting our forecast of 18sen for FY08. There was broad-based improvement in performances of construction, property and toll/water concessions. Construction rebounded with a vengeance, with 59% higher turnover and more than 200% higher profits, due to sharp margin recovery to 10% in H108 from 4.4% in H107, in the absence of provisions for the Dukhan Highway in Qatar. The property division saw 3% lower sales but profits improved 83%, thanks to claw-back of cost provision and positive sentiment for the sector that helped Gamuda to rake in new sales of RM350m. The concessions grew profits by 25%, thanks to effect of toll hike for and higher stake at Lebuh Raya Damansara-Puchong and growing profits from water concessions. No dividend was declared for the quarter.
BUY maintained; target price of RM3.70
BUY retained, with a reduced target price of RM3.70, valuing the stock on FY09 PER of 12x, consistent with market average. Gamuda offers a very decent dividend of 8%, based on guided normal dividend of 25sen. Share price however could stay range-bound for awhile as investors keenly await delivery of promises, since confidence on the stock was spooked by recent share sale by the Managing Director.
EPS for H108 was 8.9sen (+48% Y/Y), meeting our forecast of 18sen for FY08. There was broad-based improvement in performances of construction, property and toll/water concessions. Construction rebounded with a vengeance, with 59% higher turnover and more than 200% higher profits, due to sharp margin recovery to 10% in H108 from 4.4% in H107, in the absence of provisions for the Dukhan Highway in Qatar. The property division saw 3% lower sales but profits improved 83%, thanks to claw-back of cost provision and positive sentiment for the sector that helped Gamuda to rake in new sales of RM350m. The concessions grew profits by 25%, thanks to effect of toll hike for and higher stake at Lebuh Raya Damansara-Puchong and growing profits from water concessions. No dividend was declared for the quarter.
BUY maintained; target price of RM3.70
BUY retained, with a reduced target price of RM3.70, valuing the stock on FY09 PER of 12x, consistent with market average. Gamuda offers a very decent dividend of 8%, based on guided normal dividend of 25sen. Share price however could stay range-bound for awhile as investors keenly await delivery of promises, since confidence on the stock was spooked by recent share sale by the Managing Director.
VS Industry - BUY - 28 Mar 2008
VS Industry – 2Q08 results in line with expectations (Results Note)
Price: RM2.84
Target Price: RM5.88
Recommendation: BUY
· 2Q08 topline of RM332.7m is a record for the company. Continuing strong loadings from key customers especially Dyson remain to be the driver behind the strong set of revenue for the quarter. Growing familiarity with the company’s execution capability and rising acceptance of the company’s suite of services from supply chain management to design and fabrication is helping to lift the company’s topline performance. At half time, topline of RM622.7m is already 48.5% of our full year’s estimates while net profit of RM42.3m is 47.4%. Higher effective taxes at 23.5% versus our assumed 20% is the main reason for the slight under achievement versus our forecast. In summary, forecast is considered in line with our expectations.
· QoQ, topline grew a sequential 14.7% on the back of higher loadings from key customers all round. Margins however was at 1.3% point lower at 15.2% mainly as a result of less favourable product mix and new client loadings with relatively lower volume runs and thus lower economies of scale.
· For the 6M08, revenue was up 22.5% while net profit grew by 29.3%. With the rising volume comes the economies of scale, helping the company to register improved profitability all round. GP% was an improvement to 15.8% from 14.7% previously while net profit margin improved 4 basis points to 6.8% despite higher overall effective taxes at 23.5% versus 21.5% previously.
· 3-sen tax-exempt dividend is declared (1H07: 5.5sen TE). We are estimating DPS of 25sen or a 40% payout for the year. Net gearing of 44% as at half time remain manageable.
· We remain positive on the company and given that the numbers are very much in line with our expectations, we are therefore maintaining our forecast for the time being. The counter had lost some 33% from its October 2007 peak of RM4.24 to the current RM2.84 and is currently trading at a lowly 4.6x FY08F with an estimated yield of 8.8% based on a DPS of 25sen. Our BUY is maintained with a target price of RM5.88 based on 8.8x CY08 earnings.
Price: RM2.84
Target Price: RM5.88
Recommendation: BUY
· 2Q08 topline of RM332.7m is a record for the company. Continuing strong loadings from key customers especially Dyson remain to be the driver behind the strong set of revenue for the quarter. Growing familiarity with the company’s execution capability and rising acceptance of the company’s suite of services from supply chain management to design and fabrication is helping to lift the company’s topline performance. At half time, topline of RM622.7m is already 48.5% of our full year’s estimates while net profit of RM42.3m is 47.4%. Higher effective taxes at 23.5% versus our assumed 20% is the main reason for the slight under achievement versus our forecast. In summary, forecast is considered in line with our expectations.
· QoQ, topline grew a sequential 14.7% on the back of higher loadings from key customers all round. Margins however was at 1.3% point lower at 15.2% mainly as a result of less favourable product mix and new client loadings with relatively lower volume runs and thus lower economies of scale.
· For the 6M08, revenue was up 22.5% while net profit grew by 29.3%. With the rising volume comes the economies of scale, helping the company to register improved profitability all round. GP% was an improvement to 15.8% from 14.7% previously while net profit margin improved 4 basis points to 6.8% despite higher overall effective taxes at 23.5% versus 21.5% previously.
· 3-sen tax-exempt dividend is declared (1H07: 5.5sen TE). We are estimating DPS of 25sen or a 40% payout for the year. Net gearing of 44% as at half time remain manageable.
· We remain positive on the company and given that the numbers are very much in line with our expectations, we are therefore maintaining our forecast for the time being. The counter had lost some 33% from its October 2007 peak of RM4.24 to the current RM2.84 and is currently trading at a lowly 4.6x FY08F with an estimated yield of 8.8% based on a DPS of 25sen. Our BUY is maintained with a target price of RM5.88 based on 8.8x CY08 earnings.
HLG: 27 March 2008 Gamuda - Political shifts cause uncertainty
Gamuda Berhad HOLD
Price target RM3.50
Share price at 26 Mar RM3.14
Investment summary
H108 results were in-line with consensus and forecast. Still, we remain lukewarm on Gamuda: (1) though the share price fell -45% in Mar08, multiples remain comparable to construction peers; (2) domestic job-flow (especially for big-ticket construction projects) could slow on on-going political uncertainty/changeovers; (3) FY09E net DY of 6% provides a fundamental floor to the share price, though this is still at risk from high foreign shareholding of 51%. We are negative on the Malaysian construction sector: (1) recent sharp political changes could lead to a slow-down in government job-flow; (2) construction valuations remain expensive relative to the broader market, despite a peakish macro environment; (3) in most cases, overseas jobs cannot compensate for local govt jobs in terms of profitability.
Do not chase the stock
Though the share price has halved, we remain bearish: (1) Gamuda has out-grown Malaysia’s govt-driven construction mkt in terms of scale/margins, and the success of overseas diversification is unclear; (2) domestic construction job-flow could slow due to political uncertainty.
Price target RM3.50
Share price at 26 Mar RM3.14
Investment summary
H108 results were in-line with consensus and forecast. Still, we remain lukewarm on Gamuda: (1) though the share price fell -45% in Mar08, multiples remain comparable to construction peers; (2) domestic job-flow (especially for big-ticket construction projects) could slow on on-going political uncertainty/changeovers; (3) FY09E net DY of 6% provides a fundamental floor to the share price, though this is still at risk from high foreign shareholding of 51%. We are negative on the Malaysian construction sector: (1) recent sharp political changes could lead to a slow-down in government job-flow; (2) construction valuations remain expensive relative to the broader market, despite a peakish macro environment; (3) in most cases, overseas jobs cannot compensate for local govt jobs in terms of profitability.
Do not chase the stock
Though the share price has halved, we remain bearish: (1) Gamuda has out-grown Malaysia’s govt-driven construction mkt in terms of scale/margins, and the success of overseas diversification is unclear; (2) domestic construction job-flow could slow due to political uncertainty.
HLG: 27 March 2008 SapuraCrest Petroleum - Full-year FY08 results beat the Street
SapuraCrest Petroleum BUY.
Price target RM1.90
Share price at 26 Mar RM1.12
Investment summary
SapCrest reported full year FY08 net profit of RM78m was 8-12% above HLG/consensus estimate due to an unexpectedly low tax rate. Strong results re-affirm our BUY rating on SapCrest. We remain positive on the company: (1) recent sharp –29% share price declines in oil&gas services provides an attractive entry level into a sector which is still seeing strong job-flow/ASP growth; (2) 11x FY08E PE and 3x P/BV is a 30% and 70% discount to global peers Seadrill/Acergy. We remain positive on O&G asset owners: (1) purpose built heavy lift vessel are enjoying strong charter rates due to the scarce availability of such assets globally (2) record oil prices continue to support demand for drilling rigs as global fleet utilization remains close to 100 percent.
Bargain basement prices
Following the recent sell-down, sector multiples are comparable to the KLCI, but with 2-3x the level of EPS growth. For SapCrest, FY09E EPS could double on its current RM4bn order book, and continued share accumulation by Seadrill provides us a comfort zone.
Price target RM1.90
Share price at 26 Mar RM1.12
Investment summary
SapCrest reported full year FY08 net profit of RM78m was 8-12% above HLG/consensus estimate due to an unexpectedly low tax rate. Strong results re-affirm our BUY rating on SapCrest. We remain positive on the company: (1) recent sharp –29% share price declines in oil&gas services provides an attractive entry level into a sector which is still seeing strong job-flow/ASP growth; (2) 11x FY08E PE and 3x P/BV is a 30% and 70% discount to global peers Seadrill/Acergy. We remain positive on O&G asset owners: (1) purpose built heavy lift vessel are enjoying strong charter rates due to the scarce availability of such assets globally (2) record oil prices continue to support demand for drilling rigs as global fleet utilization remains close to 100 percent.
Bargain basement prices
Following the recent sell-down, sector multiples are comparable to the KLCI, but with 2-3x the level of EPS growth. For SapCrest, FY09E EPS could double on its current RM4bn order book, and continued share accumulation by Seadrill provides us a comfort zone.
KENANGA: Tenaga - BUY - 26 Mar 2008
Tenaga Nasional – One less uncertainty (Company Update)
Price: RM7.35
Target Price: RM8.46
Recommendation: BUY
· Gas prices to remain unchanged for the moment, according to the Prime Minister and the Second Finance Minister at yesterday’s “Invest Malaysia 2008” conference. The government has reassuringly stated that if gas subsidies are reduced/removed, they will not “squeeze” Tenaga National (TNB).
· Good news… We believe this is positive because TNB will be momentarily sparred as any gas subsidy revisions. As reduction/removal in gas subsidies, without a concurrent tariff revision, will be extremely detrimental to its bottomline. Recall that 1) gas constitutes 68% of fuel required for TNB’s industry generation 2) every RM1 increase in TNB’s gas subsidized price of RM6.40/mmBtu implies that EPS falls by 6% to 8%.
· “Fuel-pass-through-mechanism” (FPTM) not likely to see light this year. TNB’s CFO also stated today that TNB hopes to implement the FPTM within 12 months. However, as gas subsidies remain unchanged while uncertainty looms in the political arena, we believe that the government may not be in a hurry to resolve the FPTM. Nevertheless, we expect the government to deliver meet its commitment to TNB to revise its base tariff in mid 2009. Base tariff revisions are needed to address general inflationary effects on their overheads.
· …but not the best news. However, the absence of the FPTM means that TNB will still face the issue of rising coal prices. Coal makes up 26% of fuel requirements for TNB’s industry generation, which is equivalent to some 13 mTonnes of coal. Although coal is less than half of gas requirements, one must remember that TNB has to bear the difference of coal prices between market (USD78/mT at 25/03/08) and PPA agreed prices (USD29/mT). Our analysis reveals that every USD1/mT increase in coal prices for TNB implies a 3.2% decline in EPS.
· The FPTM is needed in a long run, but for the meantime, the next best government move for TNB is reviewing the PPA terms, which are extremely favourable to the IPPs and not to TNB or the people. However, any PPA renegotiation will be much later on as we wait for the political “dust” to settle.
· No revision in FY08E forecast of RM3.3b pending further information about FY08E average coal prices. It was reported that TNB managed to secure 111% of its FY08 coal requirements or c.150 mT coal. However, they have not secured coal procurement contracts for FY09 and FY10, which is normal as most contracts have a 6 month horizon. We have assumed USD67.7/mT average coal prices for FY08E.
· Maintain target price of RM8.46. FY08E and FY09E PER are attractive at of 10x and 11x, respectively. BUY
KENANGA INVESTMENT BANK BERHAD (15678-H)
Research Department
Price: RM7.35
Target Price: RM8.46
Recommendation: BUY
· Gas prices to remain unchanged for the moment, according to the Prime Minister and the Second Finance Minister at yesterday’s “Invest Malaysia 2008” conference. The government has reassuringly stated that if gas subsidies are reduced/removed, they will not “squeeze” Tenaga National (TNB).
· Good news… We believe this is positive because TNB will be momentarily sparred as any gas subsidy revisions. As reduction/removal in gas subsidies, without a concurrent tariff revision, will be extremely detrimental to its bottomline. Recall that 1) gas constitutes 68% of fuel required for TNB’s industry generation 2) every RM1 increase in TNB’s gas subsidized price of RM6.40/mmBtu implies that EPS falls by 6% to 8%.
· “Fuel-pass-through-mechanism” (FPTM) not likely to see light this year. TNB’s CFO also stated today that TNB hopes to implement the FPTM within 12 months. However, as gas subsidies remain unchanged while uncertainty looms in the political arena, we believe that the government may not be in a hurry to resolve the FPTM. Nevertheless, we expect the government to deliver meet its commitment to TNB to revise its base tariff in mid 2009. Base tariff revisions are needed to address general inflationary effects on their overheads.
· …but not the best news. However, the absence of the FPTM means that TNB will still face the issue of rising coal prices. Coal makes up 26% of fuel requirements for TNB’s industry generation, which is equivalent to some 13 mTonnes of coal. Although coal is less than half of gas requirements, one must remember that TNB has to bear the difference of coal prices between market (USD78/mT at 25/03/08) and PPA agreed prices (USD29/mT). Our analysis reveals that every USD1/mT increase in coal prices for TNB implies a 3.2% decline in EPS.
· The FPTM is needed in a long run, but for the meantime, the next best government move for TNB is reviewing the PPA terms, which are extremely favourable to the IPPs and not to TNB or the people. However, any PPA renegotiation will be much later on as we wait for the political “dust” to settle.
· No revision in FY08E forecast of RM3.3b pending further information about FY08E average coal prices. It was reported that TNB managed to secure 111% of its FY08 coal requirements or c.150 mT coal. However, they have not secured coal procurement contracts for FY09 and FY10, which is normal as most contracts have a 6 month horizon. We have assumed USD67.7/mT average coal prices for FY08E.
· Maintain target price of RM8.46. FY08E and FY09E PER are attractive at of 10x and 11x, respectively. BUY
KENANGA INVESTMENT BANK BERHAD (15678-H)
Research Department
HLG: 26 March 2008 SP Setia - Still expensive, despite sell-down
SP Setia Bhd Group HOLD
Price target RM3.54
Share price at 25 Mar RM3.62
Investment summary
We initiate coverage on SP Setia with a HOLD: (1) 14x FY08E PE is 30% premium to peers, fully reflecting its property market leadership. (2) High foreign shareholding of 40% remains a major market risk. (3) We think there are better growth prospects elsewhere in our property universe. Over the last 4 years, sales has maxed-out at RM1bn pa, translating into poor 6-7% yoy EPS growth. Management aims to reverse this by launching RM1.8bn in new township projects in non-traditional areas (eg. Penang, Vietnam), but we are cautious: we maintain our view that the current inflationary environment could crimp demand for mass-market housing. We are positive on Malaysia’s property sector, as share prices have corrected to historical troughs, despite earnings growth visibility. We like high-end developers, as we anticipate continued robust demand from foreign buyers.
Prefer SunCity/Mah Sing
Despite its share price falling –30% YTD, SP Setia is still more expensive and has lower growth than our property picks Sun City/MahSing. We think SP Setia has reached a size which makes growth difficult in Malaysia’s small and increasingly competitive property market: EPS has grown by just 6-7% yoy in the last 4 yrs.
Price target RM3.54
Share price at 25 Mar RM3.62
Investment summary
We initiate coverage on SP Setia with a HOLD: (1) 14x FY08E PE is 30% premium to peers, fully reflecting its property market leadership. (2) High foreign shareholding of 40% remains a major market risk. (3) We think there are better growth prospects elsewhere in our property universe. Over the last 4 years, sales has maxed-out at RM1bn pa, translating into poor 6-7% yoy EPS growth. Management aims to reverse this by launching RM1.8bn in new township projects in non-traditional areas (eg. Penang, Vietnam), but we are cautious: we maintain our view that the current inflationary environment could crimp demand for mass-market housing. We are positive on Malaysia’s property sector, as share prices have corrected to historical troughs, despite earnings growth visibility. We like high-end developers, as we anticipate continued robust demand from foreign buyers.
Prefer SunCity/Mah Sing
Despite its share price falling –30% YTD, SP Setia is still more expensive and has lower growth than our property picks Sun City/MahSing. We think SP Setia has reached a size which makes growth difficult in Malaysia’s small and increasingly competitive property market: EPS has grown by just 6-7% yoy in the last 4 yrs.
HLG: 25 March 2008 MAS - Buy for the cashflow
Malaysian Airlines BUY
Price target RM7.00
Share price at 24 Mar RM3.48
Investment summary
We initiate coverage on MAS with a BUY: share price has fallen –29% YTD, implying an ex-cash FY07 PE of 3x, vs. 8-9x for regional peers SIA/Cathay. Despite cheap valuations, we think MAS’ near-term earnings are biased upwards: (1) normalized pretax margin of 4% is low by regional standards (SIA is 15-20%), and modest increases in passenger yield create disproportionately strong EPS growth; (2) revenue has been growing at a faster rate than cost, thanks to fare hikes and flat non-fuel cost; (3) MAS benefits from USD depreciation, at a rate of +RM60m (8% of consensus FY08 forecast) for every 1% decline in the USD exchange rate. We think the current share price fully discounts longer-term challenges (competition from Air Asia X, difficult second-round reform gains) and global macro threats (fuel prices, economic slowdown, one-off event risks).
Double-bagger
Share price has collapsed to a level which ignores MAS’ current cash hoard (RM2.63/ share) and annual FCF (RM0.60/Sshare). While longer-term challenges remain, we think MAS is an easy gainer over a 1-yr holding period.
Price target RM7.00
Share price at 24 Mar RM3.48
Investment summary
We initiate coverage on MAS with a BUY: share price has fallen –29% YTD, implying an ex-cash FY07 PE of 3x, vs. 8-9x for regional peers SIA/Cathay. Despite cheap valuations, we think MAS’ near-term earnings are biased upwards: (1) normalized pretax margin of 4% is low by regional standards (SIA is 15-20%), and modest increases in passenger yield create disproportionately strong EPS growth; (2) revenue has been growing at a faster rate than cost, thanks to fare hikes and flat non-fuel cost; (3) MAS benefits from USD depreciation, at a rate of +RM60m (8% of consensus FY08 forecast) for every 1% decline in the USD exchange rate. We think the current share price fully discounts longer-term challenges (competition from Air Asia X, difficult second-round reform gains) and global macro threats (fuel prices, economic slowdown, one-off event risks).
Double-bagger
Share price has collapsed to a level which ignores MAS’ current cash hoard (RM2.63/ share) and annual FCF (RM0.60/Sshare). While longer-term challenges remain, we think MAS is an easy gainer over a 1-yr holding period.
jpmorgan: 24 mar Ynhprop ( overweight)
• YNH has announced a proposed increase in its stake in the D'Kiara mixed development project (next to Plaza Mont Kiara) from 70% to 100%.
• The purchase price for the additional 30%-stake is M$33MM, translating to a pricing of M$421psf. Pricing looks to be at a premium to recent transactions in the area at no more than M$300psf. But, management indicated there is already sunken cost with the purchase as land conversion premium, basic infrastructure and sewerage cost for the land has already been incurred.
• The original 70%-stake in the project/land was acquired last year for M$68MM or pricing of M$371psf. On a blended basis hence, the overall acquisition works out to a pricing of M$386psf for the land acquired or 15% of total estimated GDV for the project of about M$700MM.
• Based on the overall land cost for the project, and assuming a plot ratio of 6x and construction cost at close to M$200psf, the estimated EBIT margin of 30-35% from the overall project factored into our earnings projections we estimate looks achievable (management however is guiding for operating margin of at least 40%).
• Management indicated that there are foreign parties who have expressed interest in this project (sits on very prime land in Mont Kiara), and hence it may look to sell down if there is an attractive offer.
• This transaction increases our RNAV for the stock marginally from M$4.06/share to M$4.08/share. The stock is currently trading at 45% discount to RNAV.
• Key risk for the stock is failure to come to finalization for the ongoing negotiations to sell 50% of its iconic office tower project for M$920MM to Kuwait Finance House. The office project accounts for 30% of our RNAV and 35-40% of group EBIT over FY09-10E
• The purchase price for the additional 30%-stake is M$33MM, translating to a pricing of M$421psf. Pricing looks to be at a premium to recent transactions in the area at no more than M$300psf. But, management indicated there is already sunken cost with the purchase as land conversion premium, basic infrastructure and sewerage cost for the land has already been incurred.
• The original 70%-stake in the project/land was acquired last year for M$68MM or pricing of M$371psf. On a blended basis hence, the overall acquisition works out to a pricing of M$386psf for the land acquired or 15% of total estimated GDV for the project of about M$700MM.
• Based on the overall land cost for the project, and assuming a plot ratio of 6x and construction cost at close to M$200psf, the estimated EBIT margin of 30-35% from the overall project factored into our earnings projections we estimate looks achievable (management however is guiding for operating margin of at least 40%).
• Management indicated that there are foreign parties who have expressed interest in this project (sits on very prime land in Mont Kiara), and hence it may look to sell down if there is an attractive offer.
• This transaction increases our RNAV for the stock marginally from M$4.06/share to M$4.08/share. The stock is currently trading at 45% discount to RNAV.
• Key risk for the stock is failure to come to finalization for the ongoing negotiations to sell 50% of its iconic office tower project for M$920MM to Kuwait Finance House. The office project accounts for 30% of our RNAV and 35-40% of group EBIT over FY09-10E
KENANGA: Parkson - BUY - 25 Mar 2008
Parkson Holdings – Further growth from new stores & Setapak mall (Company Update)
Price: RM5.40
Target Price: RM7.00
Recommendation: BUY
· Development of new mall in Setapak. Spring Active Sdn Bhd, a wholly-owned subsidiary of Parkson Holdings (PH), has entered into an agreement with Premier Equity Holdings Ltd, a wholly-owned subsidiary of Fitters Diversified Bhd, to develop a 3-storey shopping centre in Setapak. The total cost of the project is RM214m and is due for completion in 2HCY09.
· Same store sales growth to remain robust in China and Vietnam but restrained in Malaysia. Management anticipates same store sales growth of 15-18% in China, 4-6% in Malaysia and 25-30% in Vietnam for FY08-09. This corresponds to the expected economic growth of the respective countries.
· 10-14 new stores planned for FY08. We understand that the firm intends to open 5-7 new stores in China, 2-3 in Malaysia and 3-4 in Vietnam in FY08. Potential acquisition of managed stores or third party stores in China to boost earnings.
· Revising FY08 net profit forecast upwards by 7%. We are raising the total number of new stores planned to 11 from 10 previously to account for an additional store in China. We are also increasing our estimated capital expenditure by RM113.5m, RM67m and RM34m in FY08, FY09 and FY10 respectively to account for the cost of the Setapak mall.
· Our sum-of-parts valuation utilising PERs of 30x, 10x and 20x applied to FY09 EPS of China, Malaysia and Vietnam gives us a new target price of RM7.00. The lower target price reflects the decrease in the industry’s average FY09 PER in China. We continue to like the stock for its unique access to the rapidly growing retail markets of China and Vietnam.
Price: RM5.40
Target Price: RM7.00
Recommendation: BUY
· Development of new mall in Setapak. Spring Active Sdn Bhd, a wholly-owned subsidiary of Parkson Holdings (PH), has entered into an agreement with Premier Equity Holdings Ltd, a wholly-owned subsidiary of Fitters Diversified Bhd, to develop a 3-storey shopping centre in Setapak. The total cost of the project is RM214m and is due for completion in 2HCY09.
· Same store sales growth to remain robust in China and Vietnam but restrained in Malaysia. Management anticipates same store sales growth of 15-18% in China, 4-6% in Malaysia and 25-30% in Vietnam for FY08-09. This corresponds to the expected economic growth of the respective countries.
· 10-14 new stores planned for FY08. We understand that the firm intends to open 5-7 new stores in China, 2-3 in Malaysia and 3-4 in Vietnam in FY08. Potential acquisition of managed stores or third party stores in China to boost earnings.
· Revising FY08 net profit forecast upwards by 7%. We are raising the total number of new stores planned to 11 from 10 previously to account for an additional store in China. We are also increasing our estimated capital expenditure by RM113.5m, RM67m and RM34m in FY08, FY09 and FY10 respectively to account for the cost of the Setapak mall.
· Our sum-of-parts valuation utilising PERs of 30x, 10x and 20x applied to FY09 EPS of China, Malaysia and Vietnam gives us a new target price of RM7.00. The lower target price reflects the decrease in the industry’s average FY09 PER in China. We continue to like the stock for its unique access to the rapidly growing retail markets of China and Vietnam.
KENANGA : ASTRO - HOLD - 21 Mar 2008
ASTRO – FY08 earnings dragged down by Indonesia (Results Note)
Price: RM3.40
Target Price: RM4.55
Recommendation: HOLD
· FY08 net loss of RM6.2m was below our expectation and market consensus’ of RM80.6m and RM43.8m respectively. FY08 EBITDA of RM556m was within expectations as the Malaysian operations improved with higher net adds of 281,000 and 5% higher ARPU of RM82 per month. However, this was offset by the high “burn-rate” in Indonesia of RM135m and write down in investment in PDTV resulting in a 52.4% YoY decline in FY08 EBIT.
· FY08 net loss was incurred as Astro recognised RM95.7m loss from associate PDTV. Since 2Q08, Astro has discontinued recognising PDTV share of associate’s contribution due to the changes in the law on foreign shareholding limit.
· 4Q08 EBITDA fell 30.9% QoQ primarily due to the cost of introducing 8 new channels in Oct 2007 and higher CAC, which have more than offset the increase in revenue of 4.5% QoQ.
· FY08 EBITDA increased by 5.5% YoY due to 17.0% YoY surge in revenue underlined by higher customer net adds and improved ARPU on the back of the May’s re-pricing exercises, partially offset by higher content costs and CAC per box sold.
· Gross DPS of 5.0sen was announced in 4Q08 amounted to total gross DPS of 10.0sen for FY08. Project gross DPS of 12sen for FY09 and FY10.
· Malaysian operations solidified with capacity available to expand channel offering and at such, ARPU is expected to rise in tandem. Astro TV expects to launch 21 new channels in 2008 and targets penetration rate of 50% over the next 3 years from 40% currently.
· Indonesia challenge remains protracted and complex. Astro will continue to identify a suitable partner and provide basic services to support the Indonesia operations at the rate of RM20m/month as long as Management still believes favourable outcome can be achieved.
· Maintain HOLD on the stock’s overall risk profile with India’s expecting to incur losses and the unresolved problems in Indonesia. Target price lowered to RM4.55 (based on sum of parts valuation, with RM4.21 for the Malaysian operation which is based on a DCF valuation with 13% WACC, plus 22 sen per share for its Indonesia and India investments and 12 sen FY09 dividend).
KENANGA INVESTMENT BANK BERHAD (15678-H)
Research Department
Price: RM3.40
Target Price: RM4.55
Recommendation: HOLD
· FY08 net loss of RM6.2m was below our expectation and market consensus’ of RM80.6m and RM43.8m respectively. FY08 EBITDA of RM556m was within expectations as the Malaysian operations improved with higher net adds of 281,000 and 5% higher ARPU of RM82 per month. However, this was offset by the high “burn-rate” in Indonesia of RM135m and write down in investment in PDTV resulting in a 52.4% YoY decline in FY08 EBIT.
· FY08 net loss was incurred as Astro recognised RM95.7m loss from associate PDTV. Since 2Q08, Astro has discontinued recognising PDTV share of associate’s contribution due to the changes in the law on foreign shareholding limit.
· 4Q08 EBITDA fell 30.9% QoQ primarily due to the cost of introducing 8 new channels in Oct 2007 and higher CAC, which have more than offset the increase in revenue of 4.5% QoQ.
· FY08 EBITDA increased by 5.5% YoY due to 17.0% YoY surge in revenue underlined by higher customer net adds and improved ARPU on the back of the May’s re-pricing exercises, partially offset by higher content costs and CAC per box sold.
· Gross DPS of 5.0sen was announced in 4Q08 amounted to total gross DPS of 10.0sen for FY08. Project gross DPS of 12sen for FY09 and FY10.
· Malaysian operations solidified with capacity available to expand channel offering and at such, ARPU is expected to rise in tandem. Astro TV expects to launch 21 new channels in 2008 and targets penetration rate of 50% over the next 3 years from 40% currently.
· Indonesia challenge remains protracted and complex. Astro will continue to identify a suitable partner and provide basic services to support the Indonesia operations at the rate of RM20m/month as long as Management still believes favourable outcome can be achieved.
· Maintain HOLD on the stock’s overall risk profile with India’s expecting to incur losses and the unresolved problems in Indonesia. Target price lowered to RM4.55 (based on sum of parts valuation, with RM4.21 for the Malaysian operation which is based on a DCF valuation with 13% WACC, plus 22 sen per share for its Indonesia and India investments and 12 sen FY09 dividend).
KENANGA INVESTMENT BANK BERHAD (15678-H)
Research Department
KENANGA : IOI Corp - BUY - 21 Mar 2008
IOI Corporation – Expanding closer to home (Company Update)
Price: RM6.75
Target Price: RM8.45
Recommendation: BUY
· Entirely cash financed. On 18 March 2008, IOI Corporation announced that it entered into conditional share sale agreements with Double Dynasty Sdn Bhd and Nirwana Muhibbah Sdn Bhd to acquire an effective 65% shareholding in 7 Sarawak plantation companies for RM439.9m in cash. The list of companies is detailed overleaf.
· Plantation land bank largely unplanted/ immature. The purchase consideration encompasses 30,850ha unplanted area, 13,500ha planted area, of which 4,500ha mature, and a 60MT/hour palm oil mill. This exercise will increase IOI Corporation’s overall plantation land bank (incl. Indonesia) to 365,800ha.
· Value deal nonetheless. We calculate that the purchase consideration of RM439.9m is at 10% discount to its RNAV (assume market value of RM50,000/ha for planted area, RM1,500/ha for unplanted area and RM30.0m for the 60MT/hour palm oil mill. Calculations detailed overleaf.
· 10% of the purchase consideration or RM44.0m will be paid on completion of S&P and the balance 90% or RM395.9m will be settled on completion date which is expected to be in 2QCY08. In addition, IOI Corporation will pay Double Dynasty and Nirwana Muhibbah, the net debt owing to them by the 7 Sarawak plantation companies of RM33.7m.
· The 9,000ha immature planted area will mature progressively. We assume mature area growth of 3,000ha p.a., average FFB yields of 18MT/ha as the newly matured oil palms will dilute average FFB yields and average direct CPO cost of RM800/MT. Like the rest of IOI Corporation, we assume average CPO selling price of RM3,100/MT for FY09 and FY10.
· Immediate impact to earnings estimates immaterial. As the plantation land bank of the 7 Sarawak plantation companies is largely unplanted/ immature, we are upgrading our earnings estimate by only RM17.5m for FY09 and RM32.6m for FY10 or approximately 1% p.a.
· Acquisition spree unlikely to have ended though. After raising US$600m (RM2.0b) in exchangeable bonds on 10 January 2008, we estimate that IOI Corporation’s cash and bank balance has exceeded the RM4.0b level. This exercise will utilise slightly more than 10% of its cash and bank balance.
· Maintain RM8.45 target price based on an unchanged 20x FY09E PER but upgrade call from HOLD to BUY for 25% upside potential. Not only do we like IOI Corporation for its top notch operational efficiency but also for re-rating catalysts in potential mergers and acquisitions.
KENANGA INVESTMENT BANK BERHAD (15678-H)
Research Department
Price: RM6.75
Target Price: RM8.45
Recommendation: BUY
· Entirely cash financed. On 18 March 2008, IOI Corporation announced that it entered into conditional share sale agreements with Double Dynasty Sdn Bhd and Nirwana Muhibbah Sdn Bhd to acquire an effective 65% shareholding in 7 Sarawak plantation companies for RM439.9m in cash. The list of companies is detailed overleaf.
· Plantation land bank largely unplanted/ immature. The purchase consideration encompasses 30,850ha unplanted area, 13,500ha planted area, of which 4,500ha mature, and a 60MT/hour palm oil mill. This exercise will increase IOI Corporation’s overall plantation land bank (incl. Indonesia) to 365,800ha.
· Value deal nonetheless. We calculate that the purchase consideration of RM439.9m is at 10% discount to its RNAV (assume market value of RM50,000/ha for planted area, RM1,500/ha for unplanted area and RM30.0m for the 60MT/hour palm oil mill. Calculations detailed overleaf.
· 10% of the purchase consideration or RM44.0m will be paid on completion of S&P and the balance 90% or RM395.9m will be settled on completion date which is expected to be in 2QCY08. In addition, IOI Corporation will pay Double Dynasty and Nirwana Muhibbah, the net debt owing to them by the 7 Sarawak plantation companies of RM33.7m.
· The 9,000ha immature planted area will mature progressively. We assume mature area growth of 3,000ha p.a., average FFB yields of 18MT/ha as the newly matured oil palms will dilute average FFB yields and average direct CPO cost of RM800/MT. Like the rest of IOI Corporation, we assume average CPO selling price of RM3,100/MT for FY09 and FY10.
· Immediate impact to earnings estimates immaterial. As the plantation land bank of the 7 Sarawak plantation companies is largely unplanted/ immature, we are upgrading our earnings estimate by only RM17.5m for FY09 and RM32.6m for FY10 or approximately 1% p.a.
· Acquisition spree unlikely to have ended though. After raising US$600m (RM2.0b) in exchangeable bonds on 10 January 2008, we estimate that IOI Corporation’s cash and bank balance has exceeded the RM4.0b level. This exercise will utilise slightly more than 10% of its cash and bank balance.
· Maintain RM8.45 target price based on an unchanged 20x FY09E PER but upgrade call from HOLD to BUY for 25% upside potential. Not only do we like IOI Corporation for its top notch operational efficiency but also for re-rating catalysts in potential mergers and acquisitions.
KENANGA INVESTMENT BANK BERHAD (15678-H)
Research Department
Merrill Lynch - Bursa; target now 5 !!
More downside from fee cuts and reduced trading velocity
Multiple challenges ahead; maintain Sell We see three key challenges for Bursa Malaysia in 2008: (1) falling trading velocity on the Malaysian stock market, (2) introduction of a new clearing fee structure that we expect to be revenue-negative, and (3) potential P/E multiple compression as growth expectations get ratcheted down. M&A is a wild card for any exchange, but we do not think it is worth paying for. Merrill Lynch’s fair value for Bursa is RM5/share, translating to 13x FY08E P/E.
Trading velocity has slowed by 30% since early 2007 Equity trading activity peaked at an average RM2.8bn per day in 1Q07, but has slowed steadily since then. It currently averages just RM2.0bn per day. The increased political uncertainty in Malaysia following the general elections on 8 March could further depress market sentiment and stock-market turnover.
New clearing fees likely to be revenue-negative
We remain surprised by the analyst community’s lack of attention to the impact from cuts to regulated stock-market clearing fees that took effect 1 January 2008. The changes were announced in Malaysia’s Budget late last year. We believe that the net impact from the change in clearing fees will be revenue-negative. ML’s profit estimates 17%/18% below consensus in 08/09 We have lowered our average daily equity trading assumptions to RM2.0bn (from RM2.4bn) in FY08 and RM2.2bn (from RM2.7bn) in FY09 to reflect a much more subdued outlook for market turnover. This leaves our profit
estimates for Bursa at 17%/18% below consensus in FY08/09.
Multiple challenges ahead; maintain Sell We see three key challenges for Bursa Malaysia in 2008: (1) falling trading velocity on the Malaysian stock market, (2) introduction of a new clearing fee structure that we expect to be revenue-negative, and (3) potential P/E multiple compression as growth expectations get ratcheted down. M&A is a wild card for any exchange, but we do not think it is worth paying for. Merrill Lynch’s fair value for Bursa is RM5/share, translating to 13x FY08E P/E.
Trading velocity has slowed by 30% since early 2007 Equity trading activity peaked at an average RM2.8bn per day in 1Q07, but has slowed steadily since then. It currently averages just RM2.0bn per day. The increased political uncertainty in Malaysia following the general elections on 8 March could further depress market sentiment and stock-market turnover.
New clearing fees likely to be revenue-negative
We remain surprised by the analyst community’s lack of attention to the impact from cuts to regulated stock-market clearing fees that took effect 1 January 2008. The changes were announced in Malaysia’s Budget late last year. We believe that the net impact from the change in clearing fees will be revenue-negative. ML’s profit estimates 17%/18% below consensus in 08/09 We have lowered our average daily equity trading assumptions to RM2.0bn (from RM2.4bn) in FY08 and RM2.2bn (from RM2.7bn) in FY09 to reflect a much more subdued outlook for market turnover. This leaves our profit
estimates for Bursa at 17%/18% below consensus in FY08/09.
CLSA: 17 mar IJM (underperform)
Uncertainties abound
We downgrade our call on IJM to U-PF from O-PF and cut our target price to RM5.00 from RM8.60. Implementation of construction and property projects could be delayed due to the changes in state governments where these projects are located. IJM also faces profit margin risk due to rise in material prices as most of its projects have no cost pass through clauses. We cut our core EPS forecasts by 2-11% for FY08-09CL to reflect the lower profit margin and slower implementation of the West Coast Expressway (WCE) project.
Risk of project delays
The launch of IJM’s WCE project could be delayed due to the change in state governments of Perak and Selangor, where the projects are located. The opposition parties have taken over the administration of the Selangor and Perak state governments, which each own a 20% stake in the WCE project. The opposition leaders have said they will review the projects within the state, which could cause delays, but gave the assurance that they will be probusiness and investments.
Cost pressures intensifying
We cut our construction average profit margin assumption to 7-8% from 9% for its existing construction projects to reflect rising material costs. Coupled with the delay in recognition of earnings for its WCE project to FY10CL, we cut our core EPS forecasts by 10-11% for FY08-09CL and 2% for FY10CL. The impact is partly offset by the new highway project in India and building project in Pakistan that replenishes its orderbook by RM0.9bn to RM6bn.
Slower property launches
Most of IJM’s domestic projects are located in opposition-led states such as
the Canal City and Jelutong projects. Building plans for the Jelutong project has been approved and is expected to be launched in June/July. But sales may be affected by the easing demand for residential properties.
Downgrade to U-PF
We downgrade IJM to U-PF from O-PF due to project implementation and profit margin risks. We cut our RNAV to RM7.10 from RM8.60 to reflect the increase in net debt for its overseas expansion and lower valuation for its construction and property divisions (cut by 1x PE multiple to 12x and 10x respectively). Applying a 30% discount to RNAV for heightened risks, we cut our target price to RM5.00.
We downgrade our call on IJM to U-PF from O-PF and cut our target price to RM5.00 from RM8.60. Implementation of construction and property projects could be delayed due to the changes in state governments where these projects are located. IJM also faces profit margin risk due to rise in material prices as most of its projects have no cost pass through clauses. We cut our core EPS forecasts by 2-11% for FY08-09CL to reflect the lower profit margin and slower implementation of the West Coast Expressway (WCE) project.
Risk of project delays
The launch of IJM’s WCE project could be delayed due to the change in state governments of Perak and Selangor, where the projects are located. The opposition parties have taken over the administration of the Selangor and Perak state governments, which each own a 20% stake in the WCE project. The opposition leaders have said they will review the projects within the state, which could cause delays, but gave the assurance that they will be probusiness and investments.
Cost pressures intensifying
We cut our construction average profit margin assumption to 7-8% from 9% for its existing construction projects to reflect rising material costs. Coupled with the delay in recognition of earnings for its WCE project to FY10CL, we cut our core EPS forecasts by 10-11% for FY08-09CL and 2% for FY10CL. The impact is partly offset by the new highway project in India and building project in Pakistan that replenishes its orderbook by RM0.9bn to RM6bn.
Slower property launches
Most of IJM’s domestic projects are located in opposition-led states such as
the Canal City and Jelutong projects. Building plans for the Jelutong project has been approved and is expected to be launched in June/July. But sales may be affected by the easing demand for residential properties.
Downgrade to U-PF
We downgrade IJM to U-PF from O-PF due to project implementation and profit margin risks. We cut our RNAV to RM7.10 from RM8.60 to reflect the increase in net debt for its overseas expansion and lower valuation for its construction and property divisions (cut by 1x PE multiple to 12x and 10x respectively). Applying a 30% discount to RNAV for heightened risks, we cut our target price to RM5.00.
KENANGA : Techfast - SELL - 18 Mar 2008
Techfast Holdings - FY07 results disappointing... again (Ceasing Coverage)
Price: RM0.29
Target Price: RM0.26
Recommendation: SELL
· 12MFY07 net profit of RM5.1m came in below our forecast of RM7.0m by 27%. This was primarily due to lower demand for SCFs in line with the overall slowdown in the electronics industry as well as losses sustained by its foreign subsidiaries. Techfast China's production was disrupted due to the forced relocation of its factory while Techfast Thailand only began operations in 2QFY07.
· Higher operating expenses and finance costs offset higher foreign sales revenue in FY07. FY07 earnings declined by 15% YoY in spite of a 9% increase in revenue primarily due to a 224% increase in finance costs due to greater loans drawdown for the acquisition of factories in Thailand and Malaysia. The increase in revenue came from a larger contribution from Techfast's foreign subsidiaries. Effective tax rate improved by 4% due to tax incentives given to subsidiaries with pioneer status- Techfast Precision and Techfast Plating.
· Uncharacteristically low demand for SCFs in 4QFY07 caused 18% decline in 4QFY07 sales revenue. QoQ, 4QFY07 net profit fell by 98% corresponding to the decline in pretax profit. The lower pretax profit was mainly caused by the 85% decrease in 4QFY07 EBIT resulting from flat-screen TV manufacturers passing on pricing pressures.
· Revising FY08 and FY09 net profit estimates downwards by 24% and 26% respectively to take into account slowing SCF demand as well slower-than-expected earnings contribution from foreign subsidiaries.
· Downgrade to SELL with target price of RM0.26 based on 7x PER applied to FY09 FD EPS of 3.8 sen. Our previous target price of RM0.38 was based on 8x PER applied to FY08 FD EPS of 4.7 sen. We are ceasing coverage on the stock due to its lacklustre results, and uninspiring prospects in the near-term.
KENANGA INVESTMENT BANK BERHAD (15678-H)
Research Department
Price: RM0.29
Target Price: RM0.26
Recommendation: SELL
· 12MFY07 net profit of RM5.1m came in below our forecast of RM7.0m by 27%. This was primarily due to lower demand for SCFs in line with the overall slowdown in the electronics industry as well as losses sustained by its foreign subsidiaries. Techfast China's production was disrupted due to the forced relocation of its factory while Techfast Thailand only began operations in 2QFY07.
· Higher operating expenses and finance costs offset higher foreign sales revenue in FY07. FY07 earnings declined by 15% YoY in spite of a 9% increase in revenue primarily due to a 224% increase in finance costs due to greater loans drawdown for the acquisition of factories in Thailand and Malaysia. The increase in revenue came from a larger contribution from Techfast's foreign subsidiaries. Effective tax rate improved by 4% due to tax incentives given to subsidiaries with pioneer status- Techfast Precision and Techfast Plating.
· Uncharacteristically low demand for SCFs in 4QFY07 caused 18% decline in 4QFY07 sales revenue. QoQ, 4QFY07 net profit fell by 98% corresponding to the decline in pretax profit. The lower pretax profit was mainly caused by the 85% decrease in 4QFY07 EBIT resulting from flat-screen TV manufacturers passing on pricing pressures.
· Revising FY08 and FY09 net profit estimates downwards by 24% and 26% respectively to take into account slowing SCF demand as well slower-than-expected earnings contribution from foreign subsidiaries.
· Downgrade to SELL with target price of RM0.26 based on 7x PER applied to FY09 FD EPS of 3.8 sen. Our previous target price of RM0.38 was based on 8x PER applied to FY08 FD EPS of 4.7 sen. We are ceasing coverage on the stock due to its lacklustre results, and uninspiring prospects in the near-term.
KENANGA INVESTMENT BANK BERHAD (15678-H)
Research Department
HLG: 19 March 2008 Petra Perdana - Fleet expansion
Petra Perdana BUY
Price target RM5.50
Share price at 19 Mar RM3.34
Investment summary
Acquisition of two new work barges brings total work barges in the pipeline to eight units to be delivered over 2008-09. We estimate the new vessels to boost FY08-09 EPS by 2-8%. Share price trades at attractive valuation of 9x FY08PE and 40% discount to our sum-of-the-parts target price. High charter vessel charter rates environment is expected to prolong over the next two years, thus re-affirming our BUY call on Petra Perdana. We remain positive on O&G vessel owner/operators sector: (1) we believe charter rates are unlikely to see near term reversal and will continue to remain strong with new-builds lagging behind replacement market (2) the number of Malaysian flagged vessels is way below Petronas domestic demand.
40% discount to SOTP
Weak market sentiment continues to push the stock price down, declining by -40% YTD. The two new accommodation/work barges will boost EPS by 2-8%. Share price trades at 9x FY08PE and 35% discount to our SOTP.
Price target RM5.50
Share price at 19 Mar RM3.34
Investment summary
Acquisition of two new work barges brings total work barges in the pipeline to eight units to be delivered over 2008-09. We estimate the new vessels to boost FY08-09 EPS by 2-8%. Share price trades at attractive valuation of 9x FY08PE and 40% discount to our sum-of-the-parts target price. High charter vessel charter rates environment is expected to prolong over the next two years, thus re-affirming our BUY call on Petra Perdana. We remain positive on O&G vessel owner/operators sector: (1) we believe charter rates are unlikely to see near term reversal and will continue to remain strong with new-builds lagging behind replacement market (2) the number of Malaysian flagged vessels is way below Petronas domestic demand.
40% discount to SOTP
Weak market sentiment continues to push the stock price down, declining by -40% YTD. The two new accommodation/work barges will boost EPS by 2-8%. Share price trades at 9x FY08PE and 35% discount to our SOTP.
HDBSVR: KNM Group, Maintain Buy
KNM Group
Time to bottom-fish
-Story: KNM held an analyst briefing yesterday to provide more details on its recent acquisition of Borsig, HZM and Ellimetal. These acquisitions should be completed by mid-2008, and raises KNM's orderbook to RM3.9b. Borsig and Ellimetal offer significant synergies given their established brand names and strong foothold in Europe – they can offer a new customer base to KNM. Upon completion of the acquisitions, KNM will have 22 plants in 13 countries. Its organic growth coupled with new acquisitions will enhance FY08-09F capacity by 51% and 10%, respectively. Growing contribution from Europe will also enhance orderbook breakdown in Euro and US$ to 50:50, and help to cushion against forex risk arising from a weakening US$.
-Point: KNM is on track to move up the value chain by increasing sales of higher end products from Borsig and Ellimetal. It has targeted sales of higher end products to make up 45% of FY08F (FY07-30%) revenue. We raised our FY08-09F net profit forecast by 29% and 62%, respectively, after factoring in the increased capacity and higher average selling price of RM19,00/tonne after the completion of the acquisitions in 2Q08. There is potential upside to our forecasts as KNM plans to cross-sell mid and high end products, and shift part of Borsig and Ellemetal's production to its lower cost plants.
-Relevance: KNM's share price has fallen 19% since 4 Mar 2008 due to a weak equity market. We believe this is excessive as KNM's prospects remain promising with improving margins and strong FY08-10 EPS CAGR of 51%. Its fundamentals are intact, but we lowered our target price to RM7.60 per share based on 15x FY09 EPS (25x previously), to reflect average peers' PE and KNM's historical low PE valuation.
Time to bottom-fish
-Story: KNM held an analyst briefing yesterday to provide more details on its recent acquisition of Borsig, HZM and Ellimetal. These acquisitions should be completed by mid-2008, and raises KNM's orderbook to RM3.9b. Borsig and Ellimetal offer significant synergies given their established brand names and strong foothold in Europe – they can offer a new customer base to KNM. Upon completion of the acquisitions, KNM will have 22 plants in 13 countries. Its organic growth coupled with new acquisitions will enhance FY08-09F capacity by 51% and 10%, respectively. Growing contribution from Europe will also enhance orderbook breakdown in Euro and US$ to 50:50, and help to cushion against forex risk arising from a weakening US$.
-Point: KNM is on track to move up the value chain by increasing sales of higher end products from Borsig and Ellimetal. It has targeted sales of higher end products to make up 45% of FY08F (FY07-30%) revenue. We raised our FY08-09F net profit forecast by 29% and 62%, respectively, after factoring in the increased capacity and higher average selling price of RM19,00/tonne after the completion of the acquisitions in 2Q08. There is potential upside to our forecasts as KNM plans to cross-sell mid and high end products, and shift part of Borsig and Ellemetal's production to its lower cost plants.
-Relevance: KNM's share price has fallen 19% since 4 Mar 2008 due to a weak equity market. We believe this is excessive as KNM's prospects remain promising with improving margins and strong FY08-10 EPS CAGR of 51%. Its fundamentals are intact, but we lowered our target price to RM7.60 per share based on 15x FY09 EPS (25x previously), to reflect average peers' PE and KNM's historical low PE valuation.
FW: DBS Vickers (M'sia): Bumiputra-Commerce, Maintain Buy
Bumiputra-Commerce
Moving into China with Yingkou
-Story: BCHB bought a 19.99% stake in Yingkou Bank, China for a total consideration of US$49m (RM156m), making it the single largest shareholder.
This is equivalent to 1.6x adjusted book value. We think the price is fair compared to Hong Leong Bank's Chengdu Bank that was acquired at 2.5x enlarged NTA.
-Point: This is in line with BCHB's regional expansion plans. We see the Yingkou Bank acquisition as neutral to BCHB in the immediate term. But as business opportunities grow, this acquisition should be gradually earnings accretive.
-Relevance: Buy call maintained with a target price of RM12.90 (from RM13.00), derived from the Gordon Growth Model. We rolled over our valuation to CY09 book value, and lowered our long term growth rate assumption to 5% from 6% previously. Other parameters i.e. sustainable ROE of 18% and cost of equity of 11% are unchanged. We also lowered our FY09F estimates by 4% afterimputing lower non-interest income growth.
Moving into China with Yingkou
-Story: BCHB bought a 19.99% stake in Yingkou Bank, China for a total consideration of US$49m (RM156m), making it the single largest shareholder.
This is equivalent to 1.6x adjusted book value. We think the price is fair compared to Hong Leong Bank's Chengdu Bank that was acquired at 2.5x enlarged NTA.
-Point: This is in line with BCHB's regional expansion plans. We see the Yingkou Bank acquisition as neutral to BCHB in the immediate term. But as business opportunities grow, this acquisition should be gradually earnings accretive.
-Relevance: Buy call maintained with a target price of RM12.90 (from RM13.00), derived from the Gordon Growth Model. We rolled over our valuation to CY09 book value, and lowered our long term growth rate assumption to 5% from 6% previously. Other parameters i.e. sustainable ROE of 18% and cost of equity of 11% are unchanged. We also lowered our FY09F estimates by 4% afterimputing lower non-interest income growth.
SP Setia - Aborts Cyberjaya land deal
S P Setia (SPSB MK, Hold, TP: Under review for downgrade)
SP Setia announced that it is terminating the purchase of approximately 156 acres of freehold land in Cyberjaya from Cyberview Sdn Bhd and Setia Haruman worth RM190.6m that was announced in July 2007 due to non-fulfillment of certain conditions by the vendors. (Source: Bursa Malaysia Announcement)
Comments:
Slightly negative on SP Setia. The Cyberjaya project, termed Setia Eco Villa, with an estimated GDV of RM1.2b, comprising mid-to-high end gated and guarded semi-D, bungalow and commercial units, was originally targeted for launch in FY08 to be developed over a period of 7 years. As the deal has been aborted, it remains to be seen if SP Setia could quickly identify another piece of land in the Klang Valley with good development potential.
The bigger picture gets cloudy. However, in the present uncertain political / legislative climate, we believe SP Setia is likely to take a prudent, wait-and-see approach before going all out to secure more development land. In fact, we understand that management is guiding for a slowdown in near-term launches and sales in view of uncertainties in the market.
Vietnam also not so rosy. The less promising outlook is apparently not only affecting the Malaysian market. We understand that operating conditions in Vietnam are increasingly challenging, having to deal with high inflation which runs close to 15.6% YoY in Feb 2008. An unconfirmed source in Vietnam also indicated that house prices have fallen by as much as about 10-15% recently.
Target price and earnings forecasts under review. Our target price of RM4.80 based on 16x FY09 EPS and our earnings forecasts are presently under review for potential downgrades pending management's guidance in light of a likely slowdown in upcoming launches by SP Setia.
SP Setia announced that it is terminating the purchase of approximately 156 acres of freehold land in Cyberjaya from Cyberview Sdn Bhd and Setia Haruman worth RM190.6m that was announced in July 2007 due to non-fulfillment of certain conditions by the vendors. (Source: Bursa Malaysia Announcement)
Comments:
Slightly negative on SP Setia. The Cyberjaya project, termed Setia Eco Villa, with an estimated GDV of RM1.2b, comprising mid-to-high end gated and guarded semi-D, bungalow and commercial units, was originally targeted for launch in FY08 to be developed over a period of 7 years. As the deal has been aborted, it remains to be seen if SP Setia could quickly identify another piece of land in the Klang Valley with good development potential.
The bigger picture gets cloudy. However, in the present uncertain political / legislative climate, we believe SP Setia is likely to take a prudent, wait-and-see approach before going all out to secure more development land. In fact, we understand that management is guiding for a slowdown in near-term launches and sales in view of uncertainties in the market.
Vietnam also not so rosy. The less promising outlook is apparently not only affecting the Malaysian market. We understand that operating conditions in Vietnam are increasingly challenging, having to deal with high inflation which runs close to 15.6% YoY in Feb 2008. An unconfirmed source in Vietnam also indicated that house prices have fallen by as much as about 10-15% recently.
Target price and earnings forecasts under review. Our target price of RM4.80 based on 16x FY09 EPS and our earnings forecasts are presently under review for potential downgrades pending management's guidance in light of a likely slowdown in upcoming launches by SP Setia.
KENANGA: KLCC Property Holdings - Gearing up to lower interest cost
KLCC Property Holdings - Gearing up to lower interest cost (Company Update)
Price: RM2.86
Target Price: RM4.37
Recommendation: BUY
· RM420m new credit facilities... KLCC Property Holdings (KLCCP), via its 75% owned subsidiary Asas Klasik Sdn Bhd (AKSB) or the owner of Mandarin Oriental (MO), entered into an agreement to get up to RM420m credit facilities from Public Bank. This is in line with management's earlier guidance to refinance up to RM1b of existing loans in the next 3 years.
· ...to facilitate on-going KLCC developments. The additional gearing will be used to facilitate the working capital requirements of Lot C and the underground tunnel linking Lot C to Lot D1 in the KLCC Development area. Typically, KLCCP's projects are financed on a 3:2 debt-equity ratio.
· Increased gearing but lower future interest expense! FY08E and FY09E gearing of 32.5% respectively, has increased to 34.9% and 35.6%, respectively. However, via re-financing management expects up to 47% savings in future finance cost due to lower interest rates, which is not surprising given the strong credit rating and fundamentals of KLCCP. Recall that KLCCP re-financed some RM400m loans relating to Suria KLCC at lower interest rates.
· Maintaining FY08E net profit of RM660m and tweaking FY09E net profit lower by 2% to RM242m, respectively, to account for higher gearing and lowered effective interest rates.
· Unchanged target price of RM4.37. Fantastic buying opportunity given the recent sell-down in KLCCP, 53% premium to its last trading price while FY08E and FY09E PER are undemanding at 4x and 10x, respectively. Maintain BUY.
KENANGA INVESTMENT BANK BERHAD (15678-H)
Research Department
Price: RM2.86
Target Price: RM4.37
Recommendation: BUY
· RM420m new credit facilities... KLCC Property Holdings (KLCCP), via its 75% owned subsidiary Asas Klasik Sdn Bhd (AKSB) or the owner of Mandarin Oriental (MO), entered into an agreement to get up to RM420m credit facilities from Public Bank. This is in line with management's earlier guidance to refinance up to RM1b of existing loans in the next 3 years.
· ...to facilitate on-going KLCC developments. The additional gearing will be used to facilitate the working capital requirements of Lot C and the underground tunnel linking Lot C to Lot D1 in the KLCC Development area. Typically, KLCCP's projects are financed on a 3:2 debt-equity ratio.
· Increased gearing but lower future interest expense! FY08E and FY09E gearing of 32.5% respectively, has increased to 34.9% and 35.6%, respectively. However, via re-financing management expects up to 47% savings in future finance cost due to lower interest rates, which is not surprising given the strong credit rating and fundamentals of KLCCP. Recall that KLCCP re-financed some RM400m loans relating to Suria KLCC at lower interest rates.
· Maintaining FY08E net profit of RM660m and tweaking FY09E net profit lower by 2% to RM242m, respectively, to account for higher gearing and lowered effective interest rates.
· Unchanged target price of RM4.37. Fantastic buying opportunity given the recent sell-down in KLCCP, 53% premium to its last trading price while FY08E and FY09E PER are undemanding at 4x and 10x, respectively. Maintain BUY.
KENANGA INVESTMENT BANK BERHAD (15678-H)
Research Department
KENANGA: SP Setia - BUY - 18 Mar 2008
SP Setia - No longer going to Cyberjaya (Company Update)
Price: RM3.44
Target Price: RM5.62
Recommendation: BUY
· Ceased Cyberjaya project. Yesterday, SP Setia (SP) announced that it has terminated its land acquisition agreement to purchase 156.4ac land in Cyberjaya, worth RM190.6m (RM27.98 psf), from Setia Haruman Sdn Bhd and Cyberview Sdn Bhd. The site was earmarked for the RM1.2b GDV mid to high end mixed development named Setia Eco Villa (SEV).
· Terminated agreement due to the selling parties' inability to fulfil the SPA conditions, whereby SP will purchase the land for a discounted RM24.85psf if and only if main access roads are provided. The access roads could not be built as it would cut through a government protocol road, while neither party could agree on a suitable alternative.
· We are relieved with the termination, as it results in a 1% and 3% dampener in our FY08E and FY09E EPS to 29.56sen and 36.97sen, respectively. We were cautious about the project because the Cyberjaya-Putrajaya area could face great difficulty in attracting a sizeable population to support a township like SEV. Now, SP can devote more energy and resources towards their high margin and commercial projects, like Setia Sky Residences and Setia Nexus.
· Downward revision in FY08E and FY09E net profit by 3% and 15% to RM266.9m and RM298.1m, respectively, to account for slower sales from township products. Apart from absence of SEV, management feels that earnings may soften as a result of brewing uncertainties from this year's surprising general election results. SP feels that home buyer's sentiment will be cautious as many will wait to observe the governments' reaction.
· Lowering fair value to RM5.62 from RM5.78 as we remove the SEV land from our fully diluted sum of parts RNAV. This is a fantastic opportunity to accumulate SP given its recent sell down. FY08E and FY09E PER are fair at 12x and 11x, respectively. Maintain BUY.
KENANGA INVESTMENT BANK BERHAD (15678-H)
Price: RM3.44
Target Price: RM5.62
Recommendation: BUY
· Ceased Cyberjaya project. Yesterday, SP Setia (SP) announced that it has terminated its land acquisition agreement to purchase 156.4ac land in Cyberjaya, worth RM190.6m (RM27.98 psf), from Setia Haruman Sdn Bhd and Cyberview Sdn Bhd. The site was earmarked for the RM1.2b GDV mid to high end mixed development named Setia Eco Villa (SEV).
· Terminated agreement due to the selling parties' inability to fulfil the SPA conditions, whereby SP will purchase the land for a discounted RM24.85psf if and only if main access roads are provided. The access roads could not be built as it would cut through a government protocol road, while neither party could agree on a suitable alternative.
· We are relieved with the termination, as it results in a 1% and 3% dampener in our FY08E and FY09E EPS to 29.56sen and 36.97sen, respectively. We were cautious about the project because the Cyberjaya-Putrajaya area could face great difficulty in attracting a sizeable population to support a township like SEV. Now, SP can devote more energy and resources towards their high margin and commercial projects, like Setia Sky Residences and Setia Nexus.
· Downward revision in FY08E and FY09E net profit by 3% and 15% to RM266.9m and RM298.1m, respectively, to account for slower sales from township products. Apart from absence of SEV, management feels that earnings may soften as a result of brewing uncertainties from this year's surprising general election results. SP feels that home buyer's sentiment will be cautious as many will wait to observe the governments' reaction.
· Lowering fair value to RM5.62 from RM5.78 as we remove the SEV land from our fully diluted sum of parts RNAV. This is a fantastic opportunity to accumulate SP given its recent sell down. FY08E and FY09E PER are fair at 12x and 11x, respectively. Maintain BUY.
KENANGA INVESTMENT BANK BERHAD (15678-H)
Sime Darby - Plans expansion into Liberia and East
Sime Darby is looking to develop plantations in Africa and plans to build new palm oil processing plants in eastern Europe to exploit booming edible oil demand.
In Liberia (Africa), the concession that was offered to Sime was about 200,000 acres for rubber but Sime is looking at potential for rubber plus palm oil.
For the new processing plants in eastern Europe, Sime has short-listed three countries in eastern Europe to site its downstream palm oil units which could include refineries and margarine plants. Palm oil is used in the production of cooking oil and in products ranging from cosmetics to cookies and biofuels. (Source: Business Times)
Comments:
Neutral in the short term. While Sime's plan to expand its plantation size is a good strategic move, we are unable to comment as to whether venturing into Liberia is a good move for now, given our limited knowledge of the country including weather and soil conditions, and work ethics of local plantation workers. In addition, there are country and currency risks to contend with.
As for its processing plants in eastern Europe, it remains to be seen if setting up downstream units there is a good strategic move given the high transportation costs (to transport refined palm oil to Eastern Europe from Asia), high start up costs and the business itself, which has low margins.
Maintain target price and earnings forecasts for Sime. We are maintaining our Hold call and target price of RM10.80 based on CY09 EPS pending clarification from management.
In Liberia (Africa), the concession that was offered to Sime was about 200,000 acres for rubber but Sime is looking at potential for rubber plus palm oil.
For the new processing plants in eastern Europe, Sime has short-listed three countries in eastern Europe to site its downstream palm oil units which could include refineries and margarine plants. Palm oil is used in the production of cooking oil and in products ranging from cosmetics to cookies and biofuels. (Source: Business Times)
Comments:
Neutral in the short term. While Sime's plan to expand its plantation size is a good strategic move, we are unable to comment as to whether venturing into Liberia is a good move for now, given our limited knowledge of the country including weather and soil conditions, and work ethics of local plantation workers. In addition, there are country and currency risks to contend with.
As for its processing plants in eastern Europe, it remains to be seen if setting up downstream units there is a good strategic move given the high transportation costs (to transport refined palm oil to Eastern Europe from Asia), high start up costs and the business itself, which has low margins.
Maintain target price and earnings forecasts for Sime. We are maintaining our Hold call and target price of RM10.80 based on CY09 EPS pending clarification from management.
Sime Darby - Plans expansion into Liberia and East
Sime Darby is looking to develop plantations in Africa and plans to build new palm oil processing plants in eastern Europe to exploit booming edible oil demand.
In Liberia (Africa), the concession that was offered to Sime was about 200,000 acres for rubber but Sime is looking at potential for rubber plus palm oil.
For the new processing plants in eastern Europe, Sime has short-listed three countries in eastern Europe to site its downstream palm oil units which could include refineries and margarine plants. Palm oil is used in the production of cooking oil and in products ranging from cosmetics to cookies and biofuels. (Source: Business Times)
Comments:
Neutral in the short term. While Sime's plan to expand its plantation size is a good strategic move, we are unable to comment as to whether venturing into Liberia is a good move for now, given our limited knowledge of the country including weather and soil conditions, and work ethics of local plantation workers. In addition, there are country and currency risks to contend with.
As for its processing plants in eastern Europe, it remains to be seen if setting up downstream units there is a good strategic move given the high transportation costs (to transport refined palm oil to Eastern Europe from Asia), high start up costs and the business itself, which has low margins.
Maintain target price and earnings forecasts for Sime. We are maintaining our Hold call and target price of RM10.80 based on CY09 EPS pending clarification from management.
In Liberia (Africa), the concession that was offered to Sime was about 200,000 acres for rubber but Sime is looking at potential for rubber plus palm oil.
For the new processing plants in eastern Europe, Sime has short-listed three countries in eastern Europe to site its downstream palm oil units which could include refineries and margarine plants. Palm oil is used in the production of cooking oil and in products ranging from cosmetics to cookies and biofuels. (Source: Business Times)
Comments:
Neutral in the short term. While Sime's plan to expand its plantation size is a good strategic move, we are unable to comment as to whether venturing into Liberia is a good move for now, given our limited knowledge of the country including weather and soil conditions, and work ethics of local plantation workers. In addition, there are country and currency risks to contend with.
As for its processing plants in eastern Europe, it remains to be seen if setting up downstream units there is a good strategic move given the high transportation costs (to transport refined palm oil to Eastern Europe from Asia), high start up costs and the business itself, which has low margins.
Maintain target price and earnings forecasts for Sime. We are maintaining our Hold call and target price of RM10.80 based on CY09 EPS pending clarification from management.
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