Mah Sing Group - 1Q08 within expectations (Results Note)
Price: RM1.50
Target Price: RM2.07
Recommendation: BUY
· 1Q08 net profit of RM22m was within our and market expectations, accounting for 22% and 20% of forecasted RM100m and 109m, respectively, for FY08E. Mah Sing Group Bhd (MSGB) in-line results are attributable to higher billings and take-up rates from Hijaun Residence, Aman Perdana (AP), Kemuning Residence (KR) and The Icon, Jalan Tun Razak (IconJTR).
· YoY, 1Q08 net profit grew 22%, from stronger 1Q08 property operating margins of 30% (1Q07: 23%). 1Q08 saw more billings from higher margin products; like KR with an average 25% operating margin compared to the Perdana (township) series with an average 20% margin. Furthermore, MSGB was able to lock-in lower construction cost for AP and KR as they were being constructed in advance because take-up rates were very promising during launches. Hence, MSGB was able to preserve high margins although raw material cost has escalated by some 10% YoY.
· QoQ, 1Q08 pretax profit increased by 5% to RM31m. Finance cost reduced by 21% QoQ to RM1.2m due to 5% QoQ decrease in borrowings to RM149m. Additionally, MSGB enjoyed an exceptional gain of RM0.5m from sale of scrap metals from demolishing the existing building on Southgate's site, which boosted operating income by 279% to RM1m.
· No revision in our FY08E net profit of RM100m, a 23% YoY growth. Even in these times of political and global economic uncertainties, which typically translate to the "wait-and-see" approach to property purchases, we are confident of our forecasts due to MSGB's locked-in en bloc sales of IconJTR and The Icon, Mont Kiara. Additionally, the scarcity of prime commercial space in the city makes MSGB's high margin commercial project, Southgate, a popular pick as the project is already registering strong sales (80% take-up rate for the Vivo block since launch in 15/3/08 to 31/3/08). Unbilled sales remain strong at RM1.1b, of which 84% is derived from the commercial properties segment.
· Target price of RM2.07 unchanged. FY08E and FY09E PER remains attractive at 9.3x and 6.8x, respectively. Maintain BUY.
KENANGA INVESTMENT BANK BERHAD (15678-H)
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Genting - BUY - 30 May 2008
Genting - 1Q08 in line (Results Note)
Price: RM5.85
Target Price: RM9.90
Recommendation: BUY
· 1QFY08 revenue of RM2.2b was in line while core net profit of RM439.4m was 27.8% of our forecast and 26.6% of street's consensus. All major divisions registered positive growth except leisure which was dragged by slower UK gaming operation.
· QoQ, group revenue and EBITDA slid 3.8% and 1.8% respectively on seasonality as earnings for both Resorts and Asiatic are usually slower in first half before peaking in the second half.
· YoY, 1Q08 revenue increased 6.6% but normalised pretax jumped 31.8%, underpinned by: a) higher plantation contribution (+131.0% yoy) on buoyant CPO price; b) increased power contribution (+6.7% yoy) courtesy to the tariff hike for Meizhou Wan plant; and c) absence of associate losses following Resort's disposal of StarCruises with a mere 19.6% stake. Pretax from leisure however fell 8.8% on the back of a challenging operating environment in UK which were affected by higher gaming duty and lower patronage as a result of the smoking ban.
· No confirmation on the speculated power asset sales but we believe this could be another strategic move for the group to unlock value. We conservatively estimate group's powers plants to be worth at least RM3b based on DCF valuation (WACC=12.0%). Net cash should increase to RM12b or RM3.20/share should the sale crystalised.
· Maintain forecasts and BUY recommendation with an unchanged target price of RM9.90. Genting is currently trading at an undemanding FY08 PER of 13.7x versus regional average of 33x, a huge 42% discount.
KENANGA INVESTMENT BANK BERHAD (15678-H)
Price: RM5.85
Target Price: RM9.90
Recommendation: BUY
· 1QFY08 revenue of RM2.2b was in line while core net profit of RM439.4m was 27.8% of our forecast and 26.6% of street's consensus. All major divisions registered positive growth except leisure which was dragged by slower UK gaming operation.
· QoQ, group revenue and EBITDA slid 3.8% and 1.8% respectively on seasonality as earnings for both Resorts and Asiatic are usually slower in first half before peaking in the second half.
· YoY, 1Q08 revenue increased 6.6% but normalised pretax jumped 31.8%, underpinned by: a) higher plantation contribution (+131.0% yoy) on buoyant CPO price; b) increased power contribution (+6.7% yoy) courtesy to the tariff hike for Meizhou Wan plant; and c) absence of associate losses following Resort's disposal of StarCruises with a mere 19.6% stake. Pretax from leisure however fell 8.8% on the back of a challenging operating environment in UK which were affected by higher gaming duty and lower patronage as a result of the smoking ban.
· No confirmation on the speculated power asset sales but we believe this could be another strategic move for the group to unlock value. We conservatively estimate group's powers plants to be worth at least RM3b based on DCF valuation (WACC=12.0%). Net cash should increase to RM12b or RM3.20/share should the sale crystalised.
· Maintain forecasts and BUY recommendation with an unchanged target price of RM9.90. Genting is currently trading at an undemanding FY08 PER of 13.7x versus regional average of 33x, a huge 42% discount.
KENANGA INVESTMENT BANK BERHAD (15678-H)
HLG: 30 May 2008 Muhibbah Engineering
HLG: 30 May 2008 Muhibbah Engineering - Q108 below forecast on lower billings
Muhibbah Engineering BUY
Price target RM3.35
Share price at 29 May RM2.55
Investment summary
Q108 results were 19% below forecast/consensus, and we cut our FY08E EPS by 9%. However, we expect quarterly earnings to improve, and maintain our BUY rating: share price has fallen 32% YTD, and 8x FY09 PE is 20% discount to big-cap construction stocks and 30% discount to oil & gas peers.
We are positive on the oil & gas sector: (1) crude oil price at USD130/bbl is USD80/bbl above premised capex spending for oil and gas majors (2) high demand for onshore construction expertise will last up to 2010 given the under investment in O&G plants and facilities over the last ten years.
Share price bottomed
Muhibbah is one of the worst performers in the oil&gas sector (-32% YTD share price). We think job-flow prospects are bright, and valuations of 8x FY09E PE is a 20-30% discount to peers.
Muhibbah Engineering BUY
Price target RM3.35
Share price at 29 May RM2.55
Investment summary
Q108 results were 19% below forecast/consensus, and we cut our FY08E EPS by 9%. However, we expect quarterly earnings to improve, and maintain our BUY rating: share price has fallen 32% YTD, and 8x FY09 PE is 20% discount to big-cap construction stocks and 30% discount to oil & gas peers.
We are positive on the oil & gas sector: (1) crude oil price at USD130/bbl is USD80/bbl above premised capex spending for oil and gas majors (2) high demand for onshore construction expertise will last up to 2010 given the under investment in O&G plants and facilities over the last ten years.
Share price bottomed
Muhibbah is one of the worst performers in the oil&gas sector (-32% YTD share price). We think job-flow prospects are bright, and valuations of 8x FY09E PE is a 20-30% discount to peers.
HLG: 30 May 2008 Petra Perdana
HLG: 30 May 2008 Petra Perdana - Quiet Q108; Maintain BUY
Petra Perdana BUY
Price target RM5.50
Share price at 29 May RM4.32
Investment summary
Q108 results were 40% below HLG/consensus, but we maintain our EPS forecast as Q1 is typically a slow business period. We continue to like Petra, given: (1) its fleet of high bhp essels offers greater leverage to deepwater oil & gas production; (2) delivery of 18 new vessels from now till 2010 potentially adds RM40m in incremental earnings.
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.
Watch out for new jobs
Share price of vessel owners/operators have suffered due to absence of news flow in the last six months. We think the roll-out of vessel tender award in H208 for new E&P program will boost interest in Petra.
Petra Perdana BUY
Price target RM5.50
Share price at 29 May RM4.32
Investment summary
Q108 results were 40% below HLG/consensus, but we maintain our EPS forecast as Q1 is typically a slow business period. We continue to like Petra, given: (1) its fleet of high bhp essels offers greater leverage to deepwater oil & gas production; (2) delivery of 18 new vessels from now till 2010 potentially adds RM40m in incremental earnings.
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.
Watch out for new jobs
Share price of vessel owners/operators have suffered due to absence of news flow in the last six months. We think the roll-out of vessel tender award in H208 for new E&P program will boost interest in Petra.
HLG: 30 May 2008 AirAsia Berhad
HLG: 30 May 2008 AirAsia Berhad - Q108 boosted by forex, deferred tax
AirAsia Berhad SELL
Price target RM0.86
Share price at 29 May RM1.01
Investment summary
Excluding one-off gains, normalized Q108 net profit was 75% below forecast. We cut our rating from a HOLD to a SELL: (1) Filling up new capacity at decent yields is the management’s main challenge, given aggressive near-term new aircraft deliveries and the MAS price war. (2) Under passenger-maximizing mode, it will be difficult to fully pass-through higher fuel prices to end-customers, and AirAsia is only hedged until Jun08.
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.
Perfect storm
AirAsia faces major new aircraft deliveries just when fuel prices reach new highs and MAS launches a price war. This could impact cashflow, and AirAsia is already highly-geared. We cut the stock to a SELL, and think the Street is too aggressive with their EPS forecast.
AirAsia Berhad SELL
Price target RM0.86
Share price at 29 May RM1.01
Investment summary
Excluding one-off gains, normalized Q108 net profit was 75% below forecast. We cut our rating from a HOLD to a SELL: (1) Filling up new capacity at decent yields is the management’s main challenge, given aggressive near-term new aircraft deliveries and the MAS price war. (2) Under passenger-maximizing mode, it will be difficult to fully pass-through higher fuel prices to end-customers, and AirAsia is only hedged until Jun08.
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.
Perfect storm
AirAsia faces major new aircraft deliveries just when fuel prices reach new highs and MAS launches a price war. This could impact cashflow, and AirAsia is already highly-geared. We cut the stock to a SELL, and think the Street is too aggressive with their EPS forecast.
HLG: 30 May 2008 Padini Holdings Bhd
HLG: 30 May 2008 Padini Holdings Bhd - Strong domestic sales; Maintain BUY
Padini Holdings Bhd BUY
Price target RM4.40
Share price at 29 May RM3.16
Investment summary
Q308 results were 22% above HLG/consensus, and re-affirms our BUY rating on the stock. We still like Padini given: (1) short-term domestic growth driven by same-store sales growth and store expansion; (2) its retail franchise expansion overseas could provide the next leg of growth; (3) cheap valuations vs. regional peers, at FY08 PE of 9x with 3-year EPS CAGR of 26%.
We are neutral on Malaysia’s consumer sector, given the looming inflationary pressure offsetting GDP growth and public sector pay hikes. For sector exposure, we prefer mass-market retailers, rather than makers of big-ticket items (eg. cars, housing, white goods).
Results beat the Street
Share price has risen +30% since our initiation in Aug07, but we still believe there is sufficient upside to retain a BUY: (1) quarterly EPS continues to beat the mkt; (2) valuations are still just half of its HK peers, despite regional brand scalability.
Padini Holdings Bhd BUY
Price target RM4.40
Share price at 29 May RM3.16
Investment summary
Q308 results were 22% above HLG/consensus, and re-affirms our BUY rating on the stock. We still like Padini given: (1) short-term domestic growth driven by same-store sales growth and store expansion; (2) its retail franchise expansion overseas could provide the next leg of growth; (3) cheap valuations vs. regional peers, at FY08 PE of 9x with 3-year EPS CAGR of 26%.
We are neutral on Malaysia’s consumer sector, given the looming inflationary pressure offsetting GDP growth and public sector pay hikes. For sector exposure, we prefer mass-market retailers, rather than makers of big-ticket items (eg. cars, housing, white goods).
Results beat the Street
Share price has risen +30% since our initiation in Aug07, but we still believe there is sufficient upside to retain a BUY: (1) quarterly EPS continues to beat the mkt; (2) valuations are still just half of its HK peers, despite regional brand scalability.
Parkson - BUY - 29 May 2008
Parkson Holdings - 9MFY08 results within expectations (Results Note)
Price: RM6.40
Target Price: RM8.50
Recommendation: BUY
· Parkson Holdings' (PH) annualised 9MFY08 core net profit of RM220.5m is in line with our forecast of RM223.2m, coming in slightly below by 1%, but is 17.7% lower than consensus estimate of RM268.0m. PH benefited from strong performance in all 3 markets, and , as well as an extraordinary gain of RM231.6m arose from the placement Parkson Retail Group (PRG) shares.
· Exceptional gain from PRG share placement, robust same store sales growth and contribution of new stores caused 9MFY08 pretax profit to double YoY, growing by 104%. PH's placement of 8m PRG shares (at HK$78.66 per share) in January 2008 resulted in a one-off gain of RM231.6m. 9MFY08 core net profit rose by 31% to RM165.4m due to strong same store sales growth (of 17%, 5% and 30% in China, Malaysia and Vietnam) and contribution from 6 new stores (3, 2, and 1 in China, Malaysia and Vietnam respectively).
· QoQ, 3QFY08 pretax profit skyrocketed by 160% fuelled by the Chinese New Year festivities and extraordinary placement gain. The 1.5% dilution of PH's interest in PRG (to 53.5%) caused the exceptional gain. QoQ, recurring net profit in 3QFY08 increased by 5% in line with the 4% growth in revenue, from higher China sales in conjunction with the festival season offsetting lower sales in Malaysia due to apparent slowdown in private consumption from inflationary pressures.
· Maintain FY08 and FY09 earnings estimates. Anticipate net profit growth forecast of 65% to be met given sustained retail spending in PH's key markets and potential one-off gain in 4QFY08 of at least RM4.6m (of RM110m total consideration) from the sale of Jet East Investments Ltd to PRG.
· Re-iterate BUY recommendation with target price of RM8.50, derived from our sum-of-parts valuation (applies 30x, 10x and 20x FY09 PERs to Parkson China, Malaysia and Vietnam). Parkson's access to the rapid growth markets of China and Vietnam is expected to counter sluggish consumer spending in Malaysia. Potential risks are slowdown in private consumption in China due to concerns on inflation and negative sentiment related to the Sichuan earthquake.
KENANGA INVESTMENT BANK BERHAD (15678-H)
Price: RM6.40
Target Price: RM8.50
Recommendation: BUY
· Parkson Holdings' (PH) annualised 9MFY08 core net profit of RM220.5m is in line with our forecast of RM223.2m, coming in slightly below by 1%, but is 17.7% lower than consensus estimate of RM268.0m. PH benefited from strong performance in all 3 markets, and , as well as an extraordinary gain of RM231.6m arose from the placement Parkson Retail Group (PRG) shares.
· Exceptional gain from PRG share placement, robust same store sales growth and contribution of new stores caused 9MFY08 pretax profit to double YoY, growing by 104%. PH's placement of 8m PRG shares (at HK$78.66 per share) in January 2008 resulted in a one-off gain of RM231.6m. 9MFY08 core net profit rose by 31% to RM165.4m due to strong same store sales growth (of 17%, 5% and 30% in China, Malaysia and Vietnam) and contribution from 6 new stores (3, 2, and 1 in China, Malaysia and Vietnam respectively).
· QoQ, 3QFY08 pretax profit skyrocketed by 160% fuelled by the Chinese New Year festivities and extraordinary placement gain. The 1.5% dilution of PH's interest in PRG (to 53.5%) caused the exceptional gain. QoQ, recurring net profit in 3QFY08 increased by 5% in line with the 4% growth in revenue, from higher China sales in conjunction with the festival season offsetting lower sales in Malaysia due to apparent slowdown in private consumption from inflationary pressures.
· Maintain FY08 and FY09 earnings estimates. Anticipate net profit growth forecast of 65% to be met given sustained retail spending in PH's key markets and potential one-off gain in 4QFY08 of at least RM4.6m (of RM110m total consideration) from the sale of Jet East Investments Ltd to PRG.
· Re-iterate BUY recommendation with target price of RM8.50, derived from our sum-of-parts valuation (applies 30x, 10x and 20x FY09 PERs to Parkson China, Malaysia and Vietnam). Parkson's access to the rapid growth markets of China and Vietnam is expected to counter sluggish consumer spending in Malaysia. Potential risks are slowdown in private consumption in China due to concerns on inflation and negative sentiment related to the Sichuan earthquake.
KENANGA INVESTMENT BANK BERHAD (15678-H)
Eastern n Oriental - BUY - 29 May 2008
Eastern & Oriental - FY08 results largely in-line (Results Note)
Price: RM1.58
Target Price: RM3.54
Recommendation: BUY
· FYMarch08 results largely in line with our estimates. Eastern & Oriental (EOB) net profit of RM129m accounted for 97% of our forecast but was 15% below consensus estimates of RM151m. Is 63% owned E&O Property Development (ENOP), recorded higher profit margins of 30% (FY07: 26%) from high margin properties in the Klang Valley (Dua Residency and Idamansara).
· 36% YoY growth in FY08 recurring net profit (RNP*) of RM35m. The Hospitality segment registered a 57% YoY growth in revenue, while its operating margins rose 2% from FY07's 0.3%. The combination of the high margins properties in Klang Valley and Penang products contributed to the higher RNP* despite property development revenue falling by 5% YoY to RM466m. In addition FY08 was also burdened by heavier initial construction works which were not billable to house buyers for new launches at Seri Tanjung Pinang Phase 1 (STP1) in 2H08 resulting in lower progress billing recorded in FY08. (RNP* = RNP less Putrajaya Perdana Bhd (PPB) earnings).
· 4Q08 PBT of RM14m rose 75% QoQ, when stripping-out RM99m gains on disposal of PPB from 3Q08's PBT of RM107m, because of more billings from STP1 and 16.5x QoQ increase in other operating income to RM43m due to higher interest income.
· No forecast revision to our FY09E RNP* of RM38m, which is a 9% YoY growth. Driven by unbilled sales of RM193m as at 30/4/08 and impending new launches in 3Q09.
· 1 month trading suspension for ENOP as of today for the purpose of the election period for ENOP minority shareholders for the merger exercise with EOB which will be listed as new EOB shares in early July 2008.
· Unchanged target price of RM3.54. FY09E and FY10E PER are trading at fair 17.6x and 12.7x, respectively. Reiterate BUY recommendation.
KENANGA INVESTMENT BANK BERHAD (15678-H)
Price: RM1.58
Target Price: RM3.54
Recommendation: BUY
· FYMarch08 results largely in line with our estimates. Eastern & Oriental (EOB) net profit of RM129m accounted for 97% of our forecast but was 15% below consensus estimates of RM151m. Is 63% owned E&O Property Development (ENOP), recorded higher profit margins of 30% (FY07: 26%) from high margin properties in the Klang Valley (Dua Residency and Idamansara).
· 36% YoY growth in FY08 recurring net profit (RNP*) of RM35m. The Hospitality segment registered a 57% YoY growth in revenue, while its operating margins rose 2% from FY07's 0.3%. The combination of the high margins properties in Klang Valley and Penang products contributed to the higher RNP* despite property development revenue falling by 5% YoY to RM466m. In addition FY08 was also burdened by heavier initial construction works which were not billable to house buyers for new launches at Seri Tanjung Pinang Phase 1 (STP1) in 2H08 resulting in lower progress billing recorded in FY08. (RNP* = RNP less Putrajaya Perdana Bhd (PPB) earnings).
· 4Q08 PBT of RM14m rose 75% QoQ, when stripping-out RM99m gains on disposal of PPB from 3Q08's PBT of RM107m, because of more billings from STP1 and 16.5x QoQ increase in other operating income to RM43m due to higher interest income.
· No forecast revision to our FY09E RNP* of RM38m, which is a 9% YoY growth. Driven by unbilled sales of RM193m as at 30/4/08 and impending new launches in 3Q09.
· 1 month trading suspension for ENOP as of today for the purpose of the election period for ENOP minority shareholders for the merger exercise with EOB which will be listed as new EOB shares in early July 2008.
· Unchanged target price of RM3.54. FY09E and FY10E PER are trading at fair 17.6x and 12.7x, respectively. Reiterate BUY recommendation.
KENANGA INVESTMENT BANK BERHAD (15678-H)
Resorts World - BUY - 29 May 2008
Resorts World - 1Q08 within expectations (Results Note)
Price: RM3.20
Target Price: RM4.84
Recommendation: BUY
· 1QFY08 revenue of RM1.1b was in line with our expectations and market's while net profit at RM297.4m was 21.3% of our forecast and 22.3% of street's. Stronger performance was driven mainly by higher visitor arrivals.
· QoQ, 1Q08 revenue and EBITDA declined a seasonal 4.3% and 6.8% respectively which is in line with expectations.
· YoY, 1Q08 revenue grew 2.6% while EBITDA rose 6.4% to RM439.0m owning to strong highlands operation. EBITDA margin rose 14 basis points to 40.2% (1Q07: 38.8%) on improved economies of scale. Excluding exceptionals, pre-tax jumped 45.3% due to: a) non-consolidation of StarCruises' losses after becoming a non-associate following its disposal with a mere 19.6% stake from 33.9% in 3Q07, b) higher highland visitorships; and c) rising interest income (+51.3% yoy) on growing cash pile.
· Cash pile rose to c.RM3.7b post sale of Genting International shares. Undemanding capex for 2008 estimated at RM600-700m for upgrading of facilities and renovation could see cash coffer increase further to RM4.0b, or RM0.67/share by year end. Rising cash hoard increases appeal of Resorts World as a possible privatisation target or earmarked as the group's new vehicle to spearhead regional expansion.
· Highlands' operation expected to remain resilient, underpinned by strong visitor arrivals with locals accounting for circa 85% of total visitor arrivals. While there could be some dampener to consumption in the near term on the back of rising costs, impact if any is likely to be temporary. We continue to maintain a +4% growth in total visitor arrivals. Resorts' resilience is a stark contrast to global casino operators, including Sands, MGM Mirage and Wynn which saw 1Q profit dipping due to the prevailing global economic slowdown, heightened competition and rising operating costs in both Vegas and Macau.
· Maintain forecasts and reiterate BUY with an unchanged target price of RM4.84. Trading at FY08 PER of only 13.4x, a huge 60% discount to regional peers' PER of 33x, Resorts is truly one of the most undervalued gaming stocks.
KENANGA INVESTMENT BANK BERHAD (15678-H)
Price: RM3.20
Target Price: RM4.84
Recommendation: BUY
· 1QFY08 revenue of RM1.1b was in line with our expectations and market's while net profit at RM297.4m was 21.3% of our forecast and 22.3% of street's. Stronger performance was driven mainly by higher visitor arrivals.
· QoQ, 1Q08 revenue and EBITDA declined a seasonal 4.3% and 6.8% respectively which is in line with expectations.
· YoY, 1Q08 revenue grew 2.6% while EBITDA rose 6.4% to RM439.0m owning to strong highlands operation. EBITDA margin rose 14 basis points to 40.2% (1Q07: 38.8%) on improved economies of scale. Excluding exceptionals, pre-tax jumped 45.3% due to: a) non-consolidation of StarCruises' losses after becoming a non-associate following its disposal with a mere 19.6% stake from 33.9% in 3Q07, b) higher highland visitorships; and c) rising interest income (+51.3% yoy) on growing cash pile.
· Cash pile rose to c.RM3.7b post sale of Genting International shares. Undemanding capex for 2008 estimated at RM600-700m for upgrading of facilities and renovation could see cash coffer increase further to RM4.0b, or RM0.67/share by year end. Rising cash hoard increases appeal of Resorts World as a possible privatisation target or earmarked as the group's new vehicle to spearhead regional expansion.
· Highlands' operation expected to remain resilient, underpinned by strong visitor arrivals with locals accounting for circa 85% of total visitor arrivals. While there could be some dampener to consumption in the near term on the back of rising costs, impact if any is likely to be temporary. We continue to maintain a +4% growth in total visitor arrivals. Resorts' resilience is a stark contrast to global casino operators, including Sands, MGM Mirage and Wynn which saw 1Q profit dipping due to the prevailing global economic slowdown, heightened competition and rising operating costs in both Vegas and Macau.
· Maintain forecasts and reiterate BUY with an unchanged target price of RM4.84. Trading at FY08 PER of only 13.4x, a huge 60% discount to regional peers' PER of 33x, Resorts is truly one of the most undervalued gaming stocks.
KENANGA INVESTMENT BANK BERHAD (15678-H)
Sime Darby - BUY - 29 May 2008
Sime Darby - 9MFY08 results largely within expectations (Results Note)
Price: RM9.25
Target Price: RM12.90
Recommendation: BUY
· 9MFY08 core net profit of RM2,464.2m was largely within expectations at 70% of our earnings estimate of RM3,501.1m and 69% of consensus estimate of RM3,584.1m. Revenue, EBIT and pretax profit were all largely within expectations at between 75% and 78% of our full year estimates.
· Beneficiary of higher CPO selling prices. 9MFY08 core net profit of RM2,464.2m was 96% higher YoY primarily due to higher average CPO selling price of RM2,744/MT which was 71% higher YoY. Motor vehicle segment turned around with 9MFY08 PBIT of RM182.1m on higher sales in every region and non-recurrence of inventory write downs.
· Not all segments fared well. Property (-22%), industrial (0%) and energy & utilities (-24%) segments recorded negative growth YoY. Property segment experienced slower sales due to higher price revisions and. the industrial segment experienced slower sales in Australia, its primary market, due to severe flooding. Energy & utilities segment was set back by start up costs.
· Commendable QoQ growth nonetheless. Despite the less than sterling performance at the property, industrial and energy & utilities segments, 3QFY08 core net profit of RM1,089.5m was still 49% higher QoQ due to higher average CPO selling price realised of RM3,101/MT in 3QFY08 versus RM2,625/MT in 2QFY08.
· No revision in earnings estimates. We foresee seasonally higher FFB/CPO production in 4QFY08 and sustained high CPO selling prices (currently at circa RM3,600/MT) easily making up, if not exceeding, the remaining 30% of our earnings estimates. We believe our earnings estimates are still achievable.
· Maintain BUY call and RM12.90 target price based on an unchanged 17.5x FY09E PER. We will revise our earnings estimate and target price upwards should CPO selling prices sustain at current levels. Our RM11.90 RNAV/share derived fair value and gross dividend yield of 3% to 4% imply limited downside risk.
KENANGA INVESTMENT BANK BERHAD (15678-H)
Price: RM9.25
Target Price: RM12.90
Recommendation: BUY
· 9MFY08 core net profit of RM2,464.2m was largely within expectations at 70% of our earnings estimate of RM3,501.1m and 69% of consensus estimate of RM3,584.1m. Revenue, EBIT and pretax profit were all largely within expectations at between 75% and 78% of our full year estimates.
· Beneficiary of higher CPO selling prices. 9MFY08 core net profit of RM2,464.2m was 96% higher YoY primarily due to higher average CPO selling price of RM2,744/MT which was 71% higher YoY. Motor vehicle segment turned around with 9MFY08 PBIT of RM182.1m on higher sales in every region and non-recurrence of inventory write downs.
· Not all segments fared well. Property (-22%), industrial (0%) and energy & utilities (-24%) segments recorded negative growth YoY. Property segment experienced slower sales due to higher price revisions and. the industrial segment experienced slower sales in Australia, its primary market, due to severe flooding. Energy & utilities segment was set back by start up costs.
· Commendable QoQ growth nonetheless. Despite the less than sterling performance at the property, industrial and energy & utilities segments, 3QFY08 core net profit of RM1,089.5m was still 49% higher QoQ due to higher average CPO selling price realised of RM3,101/MT in 3QFY08 versus RM2,625/MT in 2QFY08.
· No revision in earnings estimates. We foresee seasonally higher FFB/CPO production in 4QFY08 and sustained high CPO selling prices (currently at circa RM3,600/MT) easily making up, if not exceeding, the remaining 30% of our earnings estimates. We believe our earnings estimates are still achievable.
· Maintain BUY call and RM12.90 target price based on an unchanged 17.5x FY09E PER. We will revise our earnings estimate and target price upwards should CPO selling prices sustain at current levels. Our RM11.90 RNAV/share derived fair value and gross dividend yield of 3% to 4% imply limited downside risk.
KENANGA INVESTMENT BANK BERHAD (15678-H)
Asiatic Development - BUY - 29 May 2008
Asiatic Development - 1QFY08 results seasonally above expectations (Results Note)
Price: RM8.45
Target Price: RM10.10
Recommendation: BUY
· 1QFY08 net profit of RM114.2m was seasonally above expectations at 23% of our earnings estimates of RM497.4m and 25% of consensus estimate of RM464.6m. Revenue, EBIT and pretax profit were all seasonally above expectations comprising between 21% and 22% of our full year estimates.
· 1Q net profit of plantation companies typically comprise between 10% and 20% of full year estimates due to seasonally lower FFB/CPO production. Asiatic Development recorded 1QFY08 average CPO selling price of RM3,403/MT, above our FY08 average CPO selling price assumption of RM3,100/MT.
· Reaped the full benefits of higher CPO selling prices. 1QFY08 net profit of RM114.2m was 146% higher YoY primarily due to higher average CPO selling price of RM3,403/MT compared to RM1,925/MT in 1QFY07.
· QoQ, 1QFY08 net profit of RM114.2m was 6% lower despite higher average CPO selling price as FFB production seasonally declined by 26% QoQ to 259,950MT. We are conservatively maintaining our earnings estimates for Asiatic Development as average CPO selling prices for subsequent quarters are expected to be lower.
· Some 1,800ha from its 70% JV with the Sepanjang Group of Indonesia is expected to mature by FY10 but as young palms typically record low FFB yields, we estimate that these palms will not contribute much more than RM1.0m to net profit. Therefore, we are not imputing earnings contributions from that JV into our earnings estimates.
· Maintain BUY call and RM10.00 target price based on an undemanding 15x FY08E PER. As current CPO selling prices are above RM3,600/MT or 16% above our FY08 average CPO selling price assumption of RM3,100/MT, downside risk to our earnings estimates is very remote.
· We may re-rate target price and earnings higher, should CPO selling prices maintain above our FY08 average CPO selling price assumption of RM3,100/MT. If we rebase our average CPO selling price assumption to the current CPO selling price of RM3,600/MT, the FY08E PER will fall from an already attractive 13x to only 11x.
KENANGA INVESTMENT BANK BERHAD (15678-H)
Price: RM8.45
Target Price: RM10.10
Recommendation: BUY
· 1QFY08 net profit of RM114.2m was seasonally above expectations at 23% of our earnings estimates of RM497.4m and 25% of consensus estimate of RM464.6m. Revenue, EBIT and pretax profit were all seasonally above expectations comprising between 21% and 22% of our full year estimates.
· 1Q net profit of plantation companies typically comprise between 10% and 20% of full year estimates due to seasonally lower FFB/CPO production. Asiatic Development recorded 1QFY08 average CPO selling price of RM3,403/MT, above our FY08 average CPO selling price assumption of RM3,100/MT.
· Reaped the full benefits of higher CPO selling prices. 1QFY08 net profit of RM114.2m was 146% higher YoY primarily due to higher average CPO selling price of RM3,403/MT compared to RM1,925/MT in 1QFY07.
· QoQ, 1QFY08 net profit of RM114.2m was 6% lower despite higher average CPO selling price as FFB production seasonally declined by 26% QoQ to 259,950MT. We are conservatively maintaining our earnings estimates for Asiatic Development as average CPO selling prices for subsequent quarters are expected to be lower.
· Some 1,800ha from its 70% JV with the Sepanjang Group of Indonesia is expected to mature by FY10 but as young palms typically record low FFB yields, we estimate that these palms will not contribute much more than RM1.0m to net profit. Therefore, we are not imputing earnings contributions from that JV into our earnings estimates.
· Maintain BUY call and RM10.00 target price based on an undemanding 15x FY08E PER. As current CPO selling prices are above RM3,600/MT or 16% above our FY08 average CPO selling price assumption of RM3,100/MT, downside risk to our earnings estimates is very remote.
· We may re-rate target price and earnings higher, should CPO selling prices maintain above our FY08 average CPO selling price assumption of RM3,100/MT. If we rebase our average CPO selling price assumption to the current CPO selling price of RM3,600/MT, the FY08E PER will fall from an already attractive 13x to only 11x.
KENANGA INVESTMENT BANK BERHAD (15678-H)
HLG: 29 May 2008 Kinsteel -
HLG: 29 May 2008 Kinsteel - Q108 beat forecast on ASP hikes
Kinsteel Bhd HOLD
Price target RM1.70
Share price at 28 May RM1.62
Investment summary
Q108 net profit of RM62m was 6-12% ahead of forecasts/consensus. We have turned positive on Kinsteel, as we think strong ASP hikes cancel out risk from a near-term gas price hike. However, Kinsteel’s heavy gearing makes EV/EBITDA valuations look rich (8x adjusted for Perwaja minorities, vs. sector cycle peak valuations of 6x). We are positive on Malaysia’s steel sector due to: (1) a rebound in domestic demand from the construction sector; (2) Chinese steel export curbs, which creates a benign pricing environment for Malaysian producers.
Buy on dips
We have turned positive on Kinsteel, and now think the strength of the steel up-cycle outweighs risks from higher coal and iron ore prices. There could be arbitrage opportunities from the Perwaja IPO (1:4 Perwaja offer for Kinsteel minorities).
Kinsteel Bhd HOLD
Price target RM1.70
Share price at 28 May RM1.62
Investment summary
Q108 net profit of RM62m was 6-12% ahead of forecasts/consensus. We have turned positive on Kinsteel, as we think strong ASP hikes cancel out risk from a near-term gas price hike. However, Kinsteel’s heavy gearing makes EV/EBITDA valuations look rich (8x adjusted for Perwaja minorities, vs. sector cycle peak valuations of 6x). We are positive on Malaysia’s steel sector due to: (1) a rebound in domestic demand from the construction sector; (2) Chinese steel export curbs, which creates a benign pricing environment for Malaysian producers.
Buy on dips
We have turned positive on Kinsteel, and now think the strength of the steel up-cycle outweighs risks from higher coal and iron ore prices. There could be arbitrage opportunities from the Perwaja IPO (1:4 Perwaja offer for Kinsteel minorities).
HLG: 29 May 2008 Asiatic
HLG: 29 May 2008 Asiatic - Results in-line, maintain HOLD
Asiatic Development Berhad HOLD
Price target RM9.70
Share price at 28 May RM8.45
Investment summary
Q108 results were within HLG/market expectations. We maintain our HOLD rating: (1) valuation discount to big-caps is fair given lower liquidity/smaller market cap (EV/ha of RM106,000 against RM160,000 of big-cap planters); (2) passive capital management. With RM0.66/share in net cash and RM0.35/share in annual FCF, net DPS of RM0.10/share is too low, in our view. We are neutral on the plantation sector, and advocate switching from IOI/KLK to small/mid-cap planters such as Kulim, which offer better value/yield. Given the tight global supply of edible oil and grain, we expect CPO price to stay firm in the next 6 months.
Quiet stock
Low-beta stock with minimal newsflow. However valuations offer little upside for arbitrage gains, especially without near-term clarity on capital management or M&A.
Asiatic Development Berhad HOLD
Price target RM9.70
Share price at 28 May RM8.45
Investment summary
Q108 results were within HLG/market expectations. We maintain our HOLD rating: (1) valuation discount to big-caps is fair given lower liquidity/smaller market cap (EV/ha of RM106,000 against RM160,000 of big-cap planters); (2) passive capital management. With RM0.66/share in net cash and RM0.35/share in annual FCF, net DPS of RM0.10/share is too low, in our view. We are neutral on the plantation sector, and advocate switching from IOI/KLK to small/mid-cap planters such as Kulim, which offer better value/yield. Given the tight global supply of edible oil and grain, we expect CPO price to stay firm in the next 6 months.
Quiet stock
Low-beta stock with minimal newsflow. However valuations offer little upside for arbitrage gains, especially without near-term clarity on capital management or M&A.
KNM - HOLD - 28 May 2008
KNM Group - 1QFY08 results within expectations (Results Note)
Price: RM6.35
Target Price: RM6.80
Recommendation: HOLD
· 1QFY08 net profit of RM54.1m was within expectations although at only 12% of our earnings estimate of RM454.2m and 13% of consensus estimate of RM427.4m. We expected 1QFY08 net profit to be similar to that of 4QFY07 of RM51.9m as its new acquired companies, Ellimetal, HZM and Borsig will only commence contributions from 3QFY08 onwards.
· Beneficiary of larger fabricating capacity. 1QFY08 net profit of RM54.1m was 41% higher YoY to due to its larger fabricating capacity (115,000MT in FY08 versus 77,500MT in FY07) facilitating the execution of more high margin job orders.
· Flattish QoQ growth expected. 1QFY08 pretax profit of RM61.4m was 6% lower QoQ due to higher interest expense of RM4.6m versus 4QFY07 interest expense of RM0.4m as total borrowings increased from RM265.2m to RM342.5m. 1QFY08 net profit of RM54.1m was 4% higher QoQ due to lower tax expense driven by utilisation of certain tax incentives.
· No revision in earnings estimates. As eluded in the first point, earnings contributions from Ellimetal (¡ÖRM10.0m), HZM (¡ÖRM10.0m) and Borsig (¡ÖRM130.0m) will only commence contributions from 3QFY08 onwards and should make up for the remaining 88% of our earnings estimate.
· Maintain RM6.80 target price based on 15x FY09E PER but revise call from BUY to HOLD as upside potential has been compressed to only 7%. We may review our call after attending its next analyst briefing. Management represents that its current order book remains strong at RM3.9b (Borsig - RM1.5b) and keep them busy for more than a year.
KENANGA INVESTMENT BANK BERHAD (15678-H)
Price: RM6.35
Target Price: RM6.80
Recommendation: HOLD
· 1QFY08 net profit of RM54.1m was within expectations although at only 12% of our earnings estimate of RM454.2m and 13% of consensus estimate of RM427.4m. We expected 1QFY08 net profit to be similar to that of 4QFY07 of RM51.9m as its new acquired companies, Ellimetal, HZM and Borsig will only commence contributions from 3QFY08 onwards.
· Beneficiary of larger fabricating capacity. 1QFY08 net profit of RM54.1m was 41% higher YoY to due to its larger fabricating capacity (115,000MT in FY08 versus 77,500MT in FY07) facilitating the execution of more high margin job orders.
· Flattish QoQ growth expected. 1QFY08 pretax profit of RM61.4m was 6% lower QoQ due to higher interest expense of RM4.6m versus 4QFY07 interest expense of RM0.4m as total borrowings increased from RM265.2m to RM342.5m. 1QFY08 net profit of RM54.1m was 4% higher QoQ due to lower tax expense driven by utilisation of certain tax incentives.
· No revision in earnings estimates. As eluded in the first point, earnings contributions from Ellimetal (¡ÖRM10.0m), HZM (¡ÖRM10.0m) and Borsig (¡ÖRM130.0m) will only commence contributions from 3QFY08 onwards and should make up for the remaining 88% of our earnings estimate.
· Maintain RM6.80 target price based on 15x FY09E PER but revise call from BUY to HOLD as upside potential has been compressed to only 7%. We may review our call after attending its next analyst briefing. Management represents that its current order book remains strong at RM3.9b (Borsig - RM1.5b) and keep them busy for more than a year.
KENANGA INVESTMENT BANK BERHAD (15678-H)
HLG: 28 May 2008 TRC Synergy
HLG: 28 May 2008 TRC Synergy - No surprises 1Q08 results
TRC Synergy Berhad HOLD
Price target RM1.92
Share price at 27 May RM1.80
Investment summary
1Q08 net profit rose 84% YoY, in-line with our forecast but 17% ahead of consensus. We are neutral on TRC because: (1) RM1bn in unbilled orderbook will sustain earnings for the next couple of years. YTD winnings have been RM399m; (2) near term political risk affecting government pump-priming prospects; (3) FY08E FD PE of 8x is a 50% discount to bigger peers. 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.
Buy on dips
Despite strong 1Q08 results and RM399m jobs secured YTD, we are neutral on TRC: (1) TRC trades at a FY08E FD PE of 8x, a 40-50% discount to big-cap construction names; (2) near-term political uncertainty affecting government pump priming; (3) 26% stake in PetroBru enhances LT order book visibility.
TRC Synergy Berhad HOLD
Price target RM1.92
Share price at 27 May RM1.80
Investment summary
1Q08 net profit rose 84% YoY, in-line with our forecast but 17% ahead of consensus. We are neutral on TRC because: (1) RM1bn in unbilled orderbook will sustain earnings for the next couple of years. YTD winnings have been RM399m; (2) near term political risk affecting government pump-priming prospects; (3) FY08E FD PE of 8x is a 50% discount to bigger peers. 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.
Buy on dips
Despite strong 1Q08 results and RM399m jobs secured YTD, we are neutral on TRC: (1) TRC trades at a FY08E FD PE of 8x, a 40-50% discount to big-cap construction names; (2) near-term political uncertainty affecting government pump priming; (3) 26% stake in PetroBru enhances LT order book visibility.
HLG: 28 May 2008 SunCity
HLG: 28 May 2008 SunCity - 9months results in-line, re-iterate BUY
Sunway City Berhad BUY
Price target RM4.80
Share price at 27 May RM3.10
Investment summary
Annualized 9M results were in-line with consensus and HLG full-year estimates, supporting our BUY call on the stock. SunCity’s share price had been depressed due to slow down in property launches, despite positive earnings and newsflow. We think the recent -40% share price correction offers an attractive entry point: (1) 3-year 24% EPS CAGR from a shift into high-end property development; (2) SunCity is the cheapest big-cap developer, at 9x CY08 PE and 1x P/NTA; (3) the upcoming SunCity REIT spin-off could raise RM900m cash (RM1.90/ share), and provide an avenue for unlocking future asset value. We are neutral on Malaysia property sector, with preference on companies with prime land bank/high end property developers. We believe the foreign money/petrodollar will continue to fuel demand, as KL property prices are still at a substantial valuation discount to HK/Singapore.
Laggard large cap play
9M results were largely in-line. SunCity’s share price has fallen 40% YTD, and we think is an ideal laggard play given positive near-term newsflow regarding the listing of its REITs. At 7x FY6/09 PE SunCity is the cheapest big cap property developer.
Sunway City Berhad BUY
Price target RM4.80
Share price at 27 May RM3.10
Investment summary
Annualized 9M results were in-line with consensus and HLG full-year estimates, supporting our BUY call on the stock. SunCity’s share price had been depressed due to slow down in property launches, despite positive earnings and newsflow. We think the recent -40% share price correction offers an attractive entry point: (1) 3-year 24% EPS CAGR from a shift into high-end property development; (2) SunCity is the cheapest big-cap developer, at 9x CY08 PE and 1x P/NTA; (3) the upcoming SunCity REIT spin-off could raise RM900m cash (RM1.90/ share), and provide an avenue for unlocking future asset value. We are neutral on Malaysia property sector, with preference on companies with prime land bank/high end property developers. We believe the foreign money/petrodollar will continue to fuel demand, as KL property prices are still at a substantial valuation discount to HK/Singapore.
Laggard large cap play
9M results were largely in-line. SunCity’s share price has fallen 40% YTD, and we think is an ideal laggard play given positive near-term newsflow regarding the listing of its REITs. At 7x FY6/09 PE SunCity is the cheapest big cap property developer.
HLG: 28 May 2008 KNM Group
HLG: 28 May 2008 KNM Group - Expect Borsig, Ellimetal boost in H208
KNM Group BUY
Price target RM7.30
Share price at 27 May RM6.35
Investment summary
Q108 net profit of RM54m was 53% below our forecast and 49% below consensus. The earnings are way below as we have imputed earnings accretion from Borsig deal as well as timing differences surrounding the fabrication yard expansion. We are keeping our BUY rating on KNM: (1) earnings accretion from Borsig and Ellimetal deals will provide the next leg-up in earnings in H208 (2) share price is attractively priced on a 12-month look ahead at 12x FY09E EPS (3) potential cross-selling synergies from Borsig, Ellimetal has not been factored-in. We think KNM stands to benefit from the record crude oil price above USD130/bbl as oil majors increase their capex spending.
Better H208 from M&A
Q108 net profit was below our full-year estimate as we have imputed the earnings accretion from M&A deals. Share price has declined 10% YTD but has outperformed the KLCI by 18% over the last 3 months. KNM looks attractively prices at 12x FY09E PE, assuming 96% earning growth pa.
KNM Group BUY
Price target RM7.30
Share price at 27 May RM6.35
Investment summary
Q108 net profit of RM54m was 53% below our forecast and 49% below consensus. The earnings are way below as we have imputed earnings accretion from Borsig deal as well as timing differences surrounding the fabrication yard expansion. We are keeping our BUY rating on KNM: (1) earnings accretion from Borsig and Ellimetal deals will provide the next leg-up in earnings in H208 (2) share price is attractively priced on a 12-month look ahead at 12x FY09E EPS (3) potential cross-selling synergies from Borsig, Ellimetal has not been factored-in. We think KNM stands to benefit from the record crude oil price above USD130/bbl as oil majors increase their capex spending.
Better H208 from M&A
Q108 net profit was below our full-year estimate as we have imputed the earnings accretion from M&A deals. Share price has declined 10% YTD but has outperformed the KLCI by 18% over the last 3 months. KNM looks attractively prices at 12x FY09E PE, assuming 96% earning growth pa.
Proton - TRADING BUY - 27 May 2008
Proton - FY08 earnings back to the black (Results Note)
Price: RM3.74
Target Price: RM5.40
Recommendation: TRADING BUY
· FY08 net profit above expectations on recognition of RM194m R&D grant. FY08 net profit of RM202.9m beats our forecast and consensus' net loss of RM28.7m and RM43.5m respectively. This is largely due to receipt of the RM194m R&D grant from the government. Stripping out the grant, net recurring profit of only RM8.9m augmented by RM40.6m of write back of tax overprovision was still above expectations.
· YoY, FY08 net profit returned to black from a net loss of RM589.5m in FY07. The huge improvement was driven mainly by: (1) stronger sales volume with better profit margins; (2) new income of RM32.0m from sale of rights for use of Intellectual Property Rights (IPR) in China market and (3) recognition of tax-exempt R&D grant of RM194.0m offered under the National Automotive Policy (NAP).
· Saddled with increase amortisation of not so successful models. The lower profit was impacted mainly on the back of additional depreciation of the new Saga, accelerated amortisation of the Savvy and increase in operating costs due to some write-offs and higher manufacturing overhead.
· 4Q08 net recurring profit of RM42.4m was significantly higher than in 4Q07 and 3Q08 of RM0.9m and RM10.3m respectively, mainly on the back of RM42.9m reversal over provision of income tax.
· FY09 and FY10 net earnings upgraded to RM236.2m and RM238.6m from previous estimates of RM25.9m and RM43.7m, respectively. Our new forecasts were adjusted significantly to account for the encouraging strong sales of Proton new models to-date, and operational improvements from cost reduction initiatives which are beginning to show positive results.
· Maintain Trading BUY with unchanged Target Price of RM5.40 based on P/NTA of 0.6x. Long term strategy remains uncertain for Proton.
KENANGA INVESTMENT BANK BERHAD (15678-H)
Price: RM3.74
Target Price: RM5.40
Recommendation: TRADING BUY
· FY08 net profit above expectations on recognition of RM194m R&D grant. FY08 net profit of RM202.9m beats our forecast and consensus' net loss of RM28.7m and RM43.5m respectively. This is largely due to receipt of the RM194m R&D grant from the government. Stripping out the grant, net recurring profit of only RM8.9m augmented by RM40.6m of write back of tax overprovision was still above expectations.
· YoY, FY08 net profit returned to black from a net loss of RM589.5m in FY07. The huge improvement was driven mainly by: (1) stronger sales volume with better profit margins; (2) new income of RM32.0m from sale of rights for use of Intellectual Property Rights (IPR) in China market and (3) recognition of tax-exempt R&D grant of RM194.0m offered under the National Automotive Policy (NAP).
· Saddled with increase amortisation of not so successful models. The lower profit was impacted mainly on the back of additional depreciation of the new Saga, accelerated amortisation of the Savvy and increase in operating costs due to some write-offs and higher manufacturing overhead.
· 4Q08 net recurring profit of RM42.4m was significantly higher than in 4Q07 and 3Q08 of RM0.9m and RM10.3m respectively, mainly on the back of RM42.9m reversal over provision of income tax.
· FY09 and FY10 net earnings upgraded to RM236.2m and RM238.6m from previous estimates of RM25.9m and RM43.7m, respectively. Our new forecasts were adjusted significantly to account for the encouraging strong sales of Proton new models to-date, and operational improvements from cost reduction initiatives which are beginning to show positive results.
· Maintain Trading BUY with unchanged Target Price of RM5.40 based on P/NTA of 0.6x. Long term strategy remains uncertain for Proton.
KENANGA INVESTMENT BANK BERHAD (15678-H)
RCE Capital - BUY - 27 May 2008
RCE Capital - FY08 results right on the money (Results Note)
Price: RM0.62
Target Price: RM1.20
Recommendation: BUY
· RCE Capital's (RCE) FY08 core net profit of RM54.0m was in line with our forecast of RM51.9m and consensus estimate of RM53.6m. The slight 4% discrepancy between actual FY08 net profit excl. EI and our estimate was due to an impairment loss of RM3.4m from RCE's participation in a Collaterised Loan Obligation (CLO) programme.
· The loan financing business was the main driver of the 16% YoY increase in FY08 core net profit, with net loan receivables growth of 34% spurred by civil servants' salary hike in July 2007. Revenue from the factoring division also increased by more than 3x, which offset the decline in investment holding income (due to the disposal of 23.2m units of AmFIRST REIT in FY07).
· FY08 EBIT margin declined due to higher marketing expenses incurred on incentive programmes for the co-operative agents that distribute RCE's products. RCE rewarded agents with incentive trips for example, to motivate performance and counter stiff competition from Bank Rakyat and other commercial banks that have entered the civil servants' consumer financing market.
· 4QFY08 net profit excluding EI of RM16.1m grew by 1% YoY and 7% QoQ due to higher net loan disbursements by the loan financing and factoring segments.
· Final gross dividend per share of 1.0 sen announced translates into a FY08 dividend yield of 1.6%, on par with that of FY07.
· Tweaking FY09 and FY10 net profit estimates upwards to take into account lower corporate tax rate of 26% and 25%, resulting in FY09 and FY10 EPS increasing by 3% for both years. Anticipate FY09 net profit growth of 20% with sustained demand for loans boosted by the extension of government employees' retirement age to 58 years.
· Maintain BUY recommendation with revised target price of RM1.20 derived from previous 13x PER (regional industry average) applied to FY09 EPS of 9.1 sen. Continue to favour RCE for its niche civil servant customer base, low default risk with direct salary deduction and potential growth from factoring.
KENANGA INVESTMENT BANK BERHAD (15678-H)
Price: RM0.62
Target Price: RM1.20
Recommendation: BUY
· RCE Capital's (RCE) FY08 core net profit of RM54.0m was in line with our forecast of RM51.9m and consensus estimate of RM53.6m. The slight 4% discrepancy between actual FY08 net profit excl. EI and our estimate was due to an impairment loss of RM3.4m from RCE's participation in a Collaterised Loan Obligation (CLO) programme.
· The loan financing business was the main driver of the 16% YoY increase in FY08 core net profit, with net loan receivables growth of 34% spurred by civil servants' salary hike in July 2007. Revenue from the factoring division also increased by more than 3x, which offset the decline in investment holding income (due to the disposal of 23.2m units of AmFIRST REIT in FY07).
· FY08 EBIT margin declined due to higher marketing expenses incurred on incentive programmes for the co-operative agents that distribute RCE's products. RCE rewarded agents with incentive trips for example, to motivate performance and counter stiff competition from Bank Rakyat and other commercial banks that have entered the civil servants' consumer financing market.
· 4QFY08 net profit excluding EI of RM16.1m grew by 1% YoY and 7% QoQ due to higher net loan disbursements by the loan financing and factoring segments.
· Final gross dividend per share of 1.0 sen announced translates into a FY08 dividend yield of 1.6%, on par with that of FY07.
· Tweaking FY09 and FY10 net profit estimates upwards to take into account lower corporate tax rate of 26% and 25%, resulting in FY09 and FY10 EPS increasing by 3% for both years. Anticipate FY09 net profit growth of 20% with sustained demand for loans boosted by the extension of government employees' retirement age to 58 years.
· Maintain BUY recommendation with revised target price of RM1.20 derived from previous 13x PER (regional industry average) applied to FY09 EPS of 9.1 sen. Continue to favour RCE for its niche civil servant customer base, low default risk with direct salary deduction and potential growth from factoring.
KENANGA INVESTMENT BANK BERHAD (15678-H)
Hunza Properties - BUY - 27 May 2008
Hunza Properties - 9M08 results in line (Results Note)
Price: RM1.84
Target Price: RM3.59
Recommendation: BUY
· 9M08 net profit of RM38m was within our and street estimates, accounting for 79% and 76% of respective FY08E forecasts of RM48m and RM50m. Hunza Properties (Hunza)'s in-line results can be attributed to its iconic Penang projects, Gurney Paragon (GP) and Infiniti, which commenced earnings contribution and recorded high take-up rates of 48% and 52% (at 31/3/08), respectively.
· Sharp 64% YoY rise in 9M08 net profit, on the back of higher billings from Alila Horizon, Alila townhouses and Mutiara Seputeh semi-detached as they have high-take up rates (99%, 78% and 86%, respectively, at 31/3/08) and are near or fully completed. However, EBITDA margins fell 27 bps to 29.4% due to last year's strong sales and billings from Bandar Putra Bertam's higher margin shop offices.
· 40% QoQ drop in 3Q08 pretax profit to RM13m, largely due slow down in GP sales due to negative sentiments and sharp increases in finance cost from RM4,000 to RM0.9m. Interest expense relating to the Sungai Petani township must be expensed, and not capitalized, as the project is temporarily on hold. In the immediate term, Hunza will be focusing its attention on higher growth projects in Penang as demand is much softer in Sungai Petani.
· Gurney Paragon project will NOT be reviewed. The Penang state government stated the project will continue as GP does create a traffic dispersal problem. Sales are expected to recover while Hunza puts more efforts in advertising.
· 3.7sen GDPS declared, which accounts for 35% of our 10.6sen FY08 GDPS or a yield of 5.7%. Our estimates are a 31.0% net profit payout versus FY07's 31.5% or a GDPS of 9.1sen. We expect a flat growth in dividend payout due to heavy capital requirements arising from GP, Infiniti and the pipeline projects, Alila II (estimated RM250m GDV) and the Segambut project.
· Fine-tuning FY08E and FY09E net profit forecast by 2.0% and 0.8% to RM47m and RM62m, respectively, to account for the higher interest expense from Sungai Petani. Unbilled sales remain strong at RM276m as at 31/3/08.
· No change in target price of RM3.59. FY08E and FY09E PER is very attractive at 5.3x and 4.1x, respectively. Maintain BUY.
KENANGA INVESTMENT BANK BERHAD (15678-H)
Price: RM1.84
Target Price: RM3.59
Recommendation: BUY
· 9M08 net profit of RM38m was within our and street estimates, accounting for 79% and 76% of respective FY08E forecasts of RM48m and RM50m. Hunza Properties (Hunza)'s in-line results can be attributed to its iconic Penang projects, Gurney Paragon (GP) and Infiniti, which commenced earnings contribution and recorded high take-up rates of 48% and 52% (at 31/3/08), respectively.
· Sharp 64% YoY rise in 9M08 net profit, on the back of higher billings from Alila Horizon, Alila townhouses and Mutiara Seputeh semi-detached as they have high-take up rates (99%, 78% and 86%, respectively, at 31/3/08) and are near or fully completed. However, EBITDA margins fell 27 bps to 29.4% due to last year's strong sales and billings from Bandar Putra Bertam's higher margin shop offices.
· 40% QoQ drop in 3Q08 pretax profit to RM13m, largely due slow down in GP sales due to negative sentiments and sharp increases in finance cost from RM4,000 to RM0.9m. Interest expense relating to the Sungai Petani township must be expensed, and not capitalized, as the project is temporarily on hold. In the immediate term, Hunza will be focusing its attention on higher growth projects in Penang as demand is much softer in Sungai Petani.
· Gurney Paragon project will NOT be reviewed. The Penang state government stated the project will continue as GP does create a traffic dispersal problem. Sales are expected to recover while Hunza puts more efforts in advertising.
· 3.7sen GDPS declared, which accounts for 35% of our 10.6sen FY08 GDPS or a yield of 5.7%. Our estimates are a 31.0% net profit payout versus FY07's 31.5% or a GDPS of 9.1sen. We expect a flat growth in dividend payout due to heavy capital requirements arising from GP, Infiniti and the pipeline projects, Alila II (estimated RM250m GDV) and the Segambut project.
· Fine-tuning FY08E and FY09E net profit forecast by 2.0% and 0.8% to RM47m and RM62m, respectively, to account for the higher interest expense from Sungai Petani. Unbilled sales remain strong at RM276m as at 31/3/08.
· No change in target price of RM3.59. FY08E and FY09E PER is very attractive at 5.3x and 4.1x, respectively. Maintain BUY.
KENANGA INVESTMENT BANK BERHAD (15678-H)
PIE - BUY - 26 May 2008
P.I.E. Industrial - 1Q08 net profit above expectations (Results Note)
Price: RM5.80
Target Price: RM7.15
Recommendation: BUY
· 1Q08 net profit of RM7.63m was above expectations at 17% of our FY08 net profit of RM41.6m. Typically 1Q net profit is 15% of full year's profit being the slowest quarter. The better than expected results is largely due to sharply improved gross margin of 21% as contract manufacturing services (CMS) division contribution to turnover is 98% as trading activities winds down as PIE concentrates on CMS.
· YOY, 1Q08 net profit was 60% higher. Contribution from low margin trading division was lower at 2% compared to 5% in 1Q07. In addition, stronger revenue of 33.7% arose from higher orders from its key clients and also from its expanded wire and cable harness division. Gross margin was significantly higher at 21% compared to 16% in 1Q07.
· QoQ, 1Q08 net profit fell 46.2% as income tax rate was higher at 25.6% while higher administration and distribution expenses arose from the new plant including depreciation.
· YOY, 4Q07 net profit was 34% higher on the back of higher operating margins with lower trading revenue. Expense were lower as PIE made extra provision for bonus in 4Q06 where, in 4Q07 they have already reversed the extra the made earlier in 1H07. operating income was also lower by 34.9%. Typically, the realisation of investment income arose in 4Q.
· Maintaining FY08E and FY09E net profit of RM41.6m and RM47.3m respectively. We believe our forecast is reflective of the current conditions of rising cost especially with commodities.
· Maintain BUY with target price of RM7.15 based on regional CMS players' average FY08E PER of 11x on EPS of 65 sen. We remains very positive on PIE's future prospects under the current rising cost environment as customers will turn to more efficient CMS companies as they can provide the lowest cost alternative without compromise on quality and timing. As demonstrated by PIE, they continue to secure more contracts while being able to maintain their profit margins. Their track record has also enabled them to pass on the cost of rising raw materials to their clients.
KENANGA INVESTMENT BANK BERHAD (15678-H)
Price: RM5.80
Target Price: RM7.15
Recommendation: BUY
· 1Q08 net profit of RM7.63m was above expectations at 17% of our FY08 net profit of RM41.6m. Typically 1Q net profit is 15% of full year's profit being the slowest quarter. The better than expected results is largely due to sharply improved gross margin of 21% as contract manufacturing services (CMS) division contribution to turnover is 98% as trading activities winds down as PIE concentrates on CMS.
· YOY, 1Q08 net profit was 60% higher. Contribution from low margin trading division was lower at 2% compared to 5% in 1Q07. In addition, stronger revenue of 33.7% arose from higher orders from its key clients and also from its expanded wire and cable harness division. Gross margin was significantly higher at 21% compared to 16% in 1Q07.
· QoQ, 1Q08 net profit fell 46.2% as income tax rate was higher at 25.6% while higher administration and distribution expenses arose from the new plant including depreciation.
· YOY, 4Q07 net profit was 34% higher on the back of higher operating margins with lower trading revenue. Expense were lower as PIE made extra provision for bonus in 4Q06 where, in 4Q07 they have already reversed the extra the made earlier in 1H07. operating income was also lower by 34.9%. Typically, the realisation of investment income arose in 4Q.
· Maintaining FY08E and FY09E net profit of RM41.6m and RM47.3m respectively. We believe our forecast is reflective of the current conditions of rising cost especially with commodities.
· Maintain BUY with target price of RM7.15 based on regional CMS players' average FY08E PER of 11x on EPS of 65 sen. We remains very positive on PIE's future prospects under the current rising cost environment as customers will turn to more efficient CMS companies as they can provide the lowest cost alternative without compromise on quality and timing. As demonstrated by PIE, they continue to secure more contracts while being able to maintain their profit margins. Their track record has also enabled them to pass on the cost of rising raw materials to their clients.
KENANGA INVESTMENT BANK BERHAD (15678-H)
UMW Holdings - BUY - 26 May 2008
UMW Holdings - 1Q08 earnings within expectations (Results Note)
Price: RM6.65
Target Price: RM8.00
Recommendation: BUY
· Results in line. 1Q08 net profit of RM141.8m represents 26.5% and 27.6% of our forecast and consensus' respectively mainly on the back of strong Toyota and Perodua vehicle sales.
· Substantial 76.5% YoY growth in 1Q08 net profit driven by improved margins, favourable currencies movement (hinged upon Ringgit strengthening against USD and Yen) and higher contributions from associated companies, namely Perodua. Total Toyota and Perodua vehicle sales of 68,654 units represented 52.5% of the Total Industry Volume.
· Marginal 3.3% QoQ net profit growth as a result of lower operating margins recorded especially by its O&G segment due mainly to the refurbishment of Naga-1 for duration of almost half of 1Q08. Automotive segment's contribution was also narrower QoQ, due to comparative strong vehicle sales QoQ.
· No interim dividend was announced, however, we believe the Group is on track to achieve its 2008 KPIs of minimum ROE of 14% and minimum dividend payout ratio of at least 50%. We expect UMW to table out gross DPS of 35 sen for FY08.
· Earnings estimates unchanged. Despite demand remain strong to-date, we are maintaining our Toyota and Perodua estimated sales of 86,000 and 158,900 units, respectively, for 2008 on expectation of private consumption spending is slow down to around 7-8% from 11.5% a year ago. We expect continued growth for its O&G segment driven mainly by: (1) strong order book from Wuxi and (2) robust O&G exploration and production activities on the back of rising crude oil prices.
· Maintain BUY with Target Price of RM8.00 based on PER of 16x to its FY08 EPS of 49.7sen. We believe current share price offers investors good opportunity to buy into UMW's early cycle of its O&G overseas ventures.
KENANGA INVESTMENT BANK BERHAD (15678-H)
Price: RM6.65
Target Price: RM8.00
Recommendation: BUY
· Results in line. 1Q08 net profit of RM141.8m represents 26.5% and 27.6% of our forecast and consensus' respectively mainly on the back of strong Toyota and Perodua vehicle sales.
· Substantial 76.5% YoY growth in 1Q08 net profit driven by improved margins, favourable currencies movement (hinged upon Ringgit strengthening against USD and Yen) and higher contributions from associated companies, namely Perodua. Total Toyota and Perodua vehicle sales of 68,654 units represented 52.5% of the Total Industry Volume.
· Marginal 3.3% QoQ net profit growth as a result of lower operating margins recorded especially by its O&G segment due mainly to the refurbishment of Naga-1 for duration of almost half of 1Q08. Automotive segment's contribution was also narrower QoQ, due to comparative strong vehicle sales QoQ.
· No interim dividend was announced, however, we believe the Group is on track to achieve its 2008 KPIs of minimum ROE of 14% and minimum dividend payout ratio of at least 50%. We expect UMW to table out gross DPS of 35 sen for FY08.
· Earnings estimates unchanged. Despite demand remain strong to-date, we are maintaining our Toyota and Perodua estimated sales of 86,000 and 158,900 units, respectively, for 2008 on expectation of private consumption spending is slow down to around 7-8% from 11.5% a year ago. We expect continued growth for its O&G segment driven mainly by: (1) strong order book from Wuxi and (2) robust O&G exploration and production activities on the back of rising crude oil prices.
· Maintain BUY with Target Price of RM8.00 based on PER of 16x to its FY08 EPS of 49.7sen. We believe current share price offers investors good opportunity to buy into UMW's early cycle of its O&G overseas ventures.
KENANGA INVESTMENT BANK BERHAD (15678-H)
Sino Huaan - BUY - 26 May 2008
Sino Hua-An International - 1Q08 within expectations (Results Note)
Price: RM0.73
Target Price: RM0.96
Recommendation: BUY
· Results in line. 1Q08 net profit of RM35.6m represents 21.1% and 24% of our full year forecast and consensus. 1Q results are typically lower on the
· Excluding the one-off restructuring cost incurred in 1Q07, 1Q08 net profit increased by 33.9% YoY driven mainly by: (1) stronger contribution from additional by-products, namely middling and coal slime following the commissioning of the coal washing facility in May 2007 and (2) rising prices of metallurgical coke (65% YoY) and by-products except coal gas.
· QoQ, 1Q08 net profit however, decreased by 5.0%. Although coke and coal prices were rising in tandem, the more substantial spike in coal price as compared to coke price has eroded its profit margin. As a result...
· ...EBIT margins were lower YoY and QoQ as coal price (key raw material) which was rising at a faster pace than coke price (63% YoY and approx. 39.0% QoQ) has offset the favourable pricing trend of coke. Higher transportation cost has also lowered EBIT margin.
· Maintain earnings estimates. Substantial spike in coal price remains as the key risk to our earnings forecast. Hua-An has the ability to pass on the additional cost immediately to its customers as long the spike in coal price (weekly basis) is within 3-5%. Moreover, Hua-An is expected to commence production of its 600,000 MT new oven by mid-June 2008 to 1.8m MT p.a. due to high demand for coke from the robust steel industry.
· Maintain BUY, Target Price of RM0.96 based on 6.5x PER, which is of about 20% discount to the Malaysian listed steel companies' average 2008 PER of 9.0x.
KENANGA INVESTMENT BANK BERHAD (15678-H)
Price: RM0.73
Target Price: RM0.96
Recommendation: BUY
· Results in line. 1Q08 net profit of RM35.6m represents 21.1% and 24% of our full year forecast and consensus. 1Q results are typically lower on the
· Excluding the one-off restructuring cost incurred in 1Q07, 1Q08 net profit increased by 33.9% YoY driven mainly by: (1) stronger contribution from additional by-products, namely middling and coal slime following the commissioning of the coal washing facility in May 2007 and (2) rising prices of metallurgical coke (65% YoY) and by-products except coal gas.
· QoQ, 1Q08 net profit however, decreased by 5.0%. Although coke and coal prices were rising in tandem, the more substantial spike in coal price as compared to coke price has eroded its profit margin. As a result...
· ...EBIT margins were lower YoY and QoQ as coal price (key raw material) which was rising at a faster pace than coke price (63% YoY and approx. 39.0% QoQ) has offset the favourable pricing trend of coke. Higher transportation cost has also lowered EBIT margin.
· Maintain earnings estimates. Substantial spike in coal price remains as the key risk to our earnings forecast. Hua-An has the ability to pass on the additional cost immediately to its customers as long the spike in coal price (weekly basis) is within 3-5%. Moreover, Hua-An is expected to commence production of its 600,000 MT new oven by mid-June 2008 to 1.8m MT p.a. due to high demand for coke from the robust steel industry.
· Maintain BUY, Target Price of RM0.96 based on 6.5x PER, which is of about 20% discount to the Malaysian listed steel companies' average 2008 PER of 9.0x.
KENANGA INVESTMENT BANK BERHAD (15678-H)
HLG: 26 May 2008 Sino Hua An International
HLG: 26 May 2008 Sino Hua An International - Q108 core net profit up +34%
Sino Hua An International BUY
Price target RM1.00
Share price at 23 May RM0.73
Investment summary
Reported Q108 core net profit of RM36m (+34%) was 22% of our full year forecast, despite new capacity coming in only after Jun08. We think our previous price assumptions are too conservative and raise our coke and coal price assumption by 23% and 22% respectively. We raise our FY08-10E EPS by 8-9% following the revision. The strong results re-affirm our BUY rating on the stock. We are bullish on Sino Hua An (SHA): (1) 5x FY08PE is a >70% discount to Chinese peers’ 14x-32x, and more than compensates for any perceived corporate governance risks, in our view. (2) 50% coking capacity expansion by H208 will boost recurring earnings by 50% pa (3) Strongly positive macro fundamentals for steel and coke manufacturing in China, given >10% pa demand growth and sector consolidation/ supply constraints.
Core profits +34% yoy
Share price has appreciated +21% since our initiation on 06Mar08. We think the key catalyst for re-rating is intact: (1) coke prices in China is up +50-60% YTD (2) commissioning of 50% new capacity by H208 will boost recurring income by 50% (3) >20% FCF yield in FY09E
Sino Hua An International BUY
Price target RM1.00
Share price at 23 May RM0.73
Investment summary
Reported Q108 core net profit of RM36m (+34%) was 22% of our full year forecast, despite new capacity coming in only after Jun08. We think our previous price assumptions are too conservative and raise our coke and coal price assumption by 23% and 22% respectively. We raise our FY08-10E EPS by 8-9% following the revision. The strong results re-affirm our BUY rating on the stock. We are bullish on Sino Hua An (SHA): (1) 5x FY08PE is a >70% discount to Chinese peers’ 14x-32x, and more than compensates for any perceived corporate governance risks, in our view. (2) 50% coking capacity expansion by H208 will boost recurring earnings by 50% pa (3) Strongly positive macro fundamentals for steel and coke manufacturing in China, given >10% pa demand growth and sector consolidation/ supply constraints.
Core profits +34% yoy
Share price has appreciated +21% since our initiation on 06Mar08. We think the key catalyst for re-rating is intact: (1) coke prices in China is up +50-60% YTD (2) commissioning of 50% new capacity by H208 will boost recurring income by 50% (3) >20% FCF yield in FY09E
HLG: 26 May 2008 Tanjung Offshore
HLG: 26 May 2008 Tanjung Offshore - Poor Q108, expect better H208
Tanjung Offshore BUY
Price target RM3.45
Share price at 23 May RM2.37
Investment summary
Annualized Q108 net profit was 35% below HLG forecast and 45% below market estimate due to timing differences surrounding the delivery of engineering equipments and new vessel deliveries. We are maintaining our EPS forecast for FY08-09E and believe net profit in subsequent quarters will be stronger due to: (1) delivery of 3 vessels in FY08E and 2 in FY09E (2) booking of engineering equipment sales in H208. We remain positive on the O&G vessel chartering segment: (1) increase exploration and production (E&P) activities will support strong demand for offshore support vessels. Petronas H108 capex for E&P activities is up +68% to USD2.5bn (2) lagging vessel new-builds vs. replacement market will hold daily charter rates at current level till 2010.
Watch for strong H208
Despite falling below market expectation, Q108 EPS grew an impressive +36% yoy. EPS should pick-up in subsequent quarters once: (1) engineering equipments are delivered to end clients (2) new vessels are commissioned. Valuation at 9x FY09E EPS is 15% discount to domestic peers.
Tanjung Offshore BUY
Price target RM3.45
Share price at 23 May RM2.37
Investment summary
Annualized Q108 net profit was 35% below HLG forecast and 45% below market estimate due to timing differences surrounding the delivery of engineering equipments and new vessel deliveries. We are maintaining our EPS forecast for FY08-09E and believe net profit in subsequent quarters will be stronger due to: (1) delivery of 3 vessels in FY08E and 2 in FY09E (2) booking of engineering equipment sales in H208. We remain positive on the O&G vessel chartering segment: (1) increase exploration and production (E&P) activities will support strong demand for offshore support vessels. Petronas H108 capex for E&P activities is up +68% to USD2.5bn (2) lagging vessel new-builds vs. replacement market will hold daily charter rates at current level till 2010.
Watch for strong H208
Despite falling below market expectation, Q108 EPS grew an impressive +36% yoy. EPS should pick-up in subsequent quarters once: (1) engineering equipments are delivered to end clients (2) new vessels are commissioned. Valuation at 9x FY09E EPS is 15% discount to domestic peers.
Parkson Holdings - BUY - 23 May 2008
Parkson Holdings - Injection of managed stores to Parkson Retail (Company Update)
Price: RM6.60
Target Price: RM8.50
Recommendation: BUY
· Parkson Holdings (PH) is transferring 2 of its managed stores to Parkson Retail Group (PRG), its 53.5% subsidiary. Jet East Investments Ltd (a wholly-owned subsidiary of East Crest International that is in turn owned by PH) that owns 70% of Parkson Nanning and 100% of Parkson Tianjin, is being acquired by Grand Parkson Retail Group (a wholly-owned subsidiary of PRG).
· Disposal consideration of RMB240.0m (RM110.0m) to be satisfied by a combination of cash and new PRG shares. RMB120m (RM55.2m), half the consideration will be in cash while the remaining RMB120m (RM55.2m) will take the form of 1.99m new PRG shares. The new shares will be issued at HK$67.45 (at 6.1% discount to the average closing price of HK$71.86 over the last 5 days) and expected to be allotted to PH by September 2008.
· Acquisition PER of 11.3x and P/book of 17.7x for Parkson Nanning and Parkson Tianjin is slightly lower than the 16.8x PER PRG paid for a 49% share of the Xi'an Parkson store in March 2008. Proceeds from the disposal will be used by PH for working capital and investment.
· PH's stake in PRG to increase by a marginal 0.2% to 53.7% of enlarged share capital. The divestment will cause a slight dip in earnings by 0.2% from the loss of rental income from the 2 stores, and a one-off gain on disposal of approximately RM46.0m. FY09 FD EPS is expected to increase by 3.7 sen to 28.9 sen as a result.
· FY08 net profit forecast maintained as the disposal is only expected to be completed in September 2008. Revise FY09 net profit estimate upwards by 15% to RM223.2m to take into account the gain on disposal and marginal decline in MI.
· Re-iterate BUY recommendation with revised target price of RM8.50, based on our sum-of-parts valuation comprising PER valuations for China, Malaysia and Vietnam. Potential earnings upside to come from the firm's aggressive expansion into China and Vietnam.
KENANGA INVESTMENT BANK BERHAD (15678-H)
Price: RM6.60
Target Price: RM8.50
Recommendation: BUY
· Parkson Holdings (PH) is transferring 2 of its managed stores to Parkson Retail Group (PRG), its 53.5% subsidiary. Jet East Investments Ltd (a wholly-owned subsidiary of East Crest International that is in turn owned by PH) that owns 70% of Parkson Nanning and 100% of Parkson Tianjin, is being acquired by Grand Parkson Retail Group (a wholly-owned subsidiary of PRG).
· Disposal consideration of RMB240.0m (RM110.0m) to be satisfied by a combination of cash and new PRG shares. RMB120m (RM55.2m), half the consideration will be in cash while the remaining RMB120m (RM55.2m) will take the form of 1.99m new PRG shares. The new shares will be issued at HK$67.45 (at 6.1% discount to the average closing price of HK$71.86 over the last 5 days) and expected to be allotted to PH by September 2008.
· Acquisition PER of 11.3x and P/book of 17.7x for Parkson Nanning and Parkson Tianjin is slightly lower than the 16.8x PER PRG paid for a 49% share of the Xi'an Parkson store in March 2008. Proceeds from the disposal will be used by PH for working capital and investment.
· PH's stake in PRG to increase by a marginal 0.2% to 53.7% of enlarged share capital. The divestment will cause a slight dip in earnings by 0.2% from the loss of rental income from the 2 stores, and a one-off gain on disposal of approximately RM46.0m. FY09 FD EPS is expected to increase by 3.7 sen to 28.9 sen as a result.
· FY08 net profit forecast maintained as the disposal is only expected to be completed in September 2008. Revise FY09 net profit estimate upwards by 15% to RM223.2m to take into account the gain on disposal and marginal decline in MI.
· Re-iterate BUY recommendation with revised target price of RM8.50, based on our sum-of-parts valuation comprising PER valuations for China, Malaysia and Vietnam. Potential earnings upside to come from the firm's aggressive expansion into China and Vietnam.
KENANGA INVESTMENT BANK BERHAD (15678-H)
Coastal Contracts - BUY - 23 May 2008
Coastal Contracts - A new quarter, a new record (Results Note)
Price: RM2.38
Target Price: RM3.48
Recommendation: BUY
· Record quarterly revenue and net profit which is in line with expectations. Reported revenue of RM90.9m is 24.7% of our full year's forecast while net profit of RM21.0m is 25%. Continuing strong demand for offshore vessel and on time delivery backed by a strong execution track record had underpinned the current strong set of interim.
· QoQ, revenue was up by 11.2% to RM90.9m despite the record number achieved in 4Q07. Net profit meanwhile was up a stronger 23.4% due to a combination of higher specifications delivery and an overall bullish environment for offshore vessels. For the quarter, we believe that the company had delivered 15 tugs/barges and 1 offshore support vessel versus 10 tugs/barges and 1 offshore support. A special point to note is that pricing for offshore vessels that are being delivered within the next few quarters are very likely to have been signed in late 2006 or early 2007 which therefore might not be reflective of the higher prices that we are experiencing at the moment. Going forward, there is potential for the company to be reporting vessels sales of higher values due to the buoyant environment.
· YoY, revenue was up 32.8% while net was higher at 38.5%, boosted by lower effective taxes. The better performance is underpinned by a more aggressive delivery in 1Q08 of 16 vessels (15 tugs/barges and 1 offshore support) versus 10 in 1Q07 (9 tugs/barges and 1 offshore support).
· Margins have continued to stay strong despite an overall higher cost environment. Concerns of a potential margin squeeze are unfounded as evidenced by the current strong set of interims. Management have always guided that due to the current strong demand for vessels, higher costs including steel plates etc are passed on with minimal resistance. With record high prices and E&P activity, margins are very likely to remain intact for the near to medium term. A point to note is that specifications for all its vessels even the normal tugs/barges are moving up which could translate into higher sales value and hence earnings in the near to medium term.
· Forecast and recommendation is maintained. As the results are within expectations, we are therefore maintaining our forecast for the time being. Currently trading at a lowly 10.3x current year's earnings which is a discount to the peer average of 16x is we believe unjustified. Strong earnings visibility of up to 2010 with order book of RM1.2billion back by a strong management team with hands-on experience are key drivers behind our BUY recommendation. Further rerating catalysts should include higher order book and possibly partnership with large operators to be part of the latter's fleet renewal program. BUY with target price of RM3.48 maintained.
KENANGA INVESTMENT BANK BERHAD (15678-H)
Price: RM2.38
Target Price: RM3.48
Recommendation: BUY
· Record quarterly revenue and net profit which is in line with expectations. Reported revenue of RM90.9m is 24.7% of our full year's forecast while net profit of RM21.0m is 25%. Continuing strong demand for offshore vessel and on time delivery backed by a strong execution track record had underpinned the current strong set of interim.
· QoQ, revenue was up by 11.2% to RM90.9m despite the record number achieved in 4Q07. Net profit meanwhile was up a stronger 23.4% due to a combination of higher specifications delivery and an overall bullish environment for offshore vessels. For the quarter, we believe that the company had delivered 15 tugs/barges and 1 offshore support vessel versus 10 tugs/barges and 1 offshore support. A special point to note is that pricing for offshore vessels that are being delivered within the next few quarters are very likely to have been signed in late 2006 or early 2007 which therefore might not be reflective of the higher prices that we are experiencing at the moment. Going forward, there is potential for the company to be reporting vessels sales of higher values due to the buoyant environment.
· YoY, revenue was up 32.8% while net was higher at 38.5%, boosted by lower effective taxes. The better performance is underpinned by a more aggressive delivery in 1Q08 of 16 vessels (15 tugs/barges and 1 offshore support) versus 10 in 1Q07 (9 tugs/barges and 1 offshore support).
· Margins have continued to stay strong despite an overall higher cost environment. Concerns of a potential margin squeeze are unfounded as evidenced by the current strong set of interims. Management have always guided that due to the current strong demand for vessels, higher costs including steel plates etc are passed on with minimal resistance. With record high prices and E&P activity, margins are very likely to remain intact for the near to medium term. A point to note is that specifications for all its vessels even the normal tugs/barges are moving up which could translate into higher sales value and hence earnings in the near to medium term.
· Forecast and recommendation is maintained. As the results are within expectations, we are therefore maintaining our forecast for the time being. Currently trading at a lowly 10.3x current year's earnings which is a discount to the peer average of 16x is we believe unjustified. Strong earnings visibility of up to 2010 with order book of RM1.2billion back by a strong management team with hands-on experience are key drivers behind our BUY recommendation. Further rerating catalysts should include higher order book and possibly partnership with large operators to be part of the latter's fleet renewal program. BUY with target price of RM3.48 maintained.
KENANGA INVESTMENT BANK BERHAD (15678-H)
HLG: 23 May 2008 Parkson Holdings
HLG: 23 May 2008 Parkson Holdings - Selling two China stores to PRG
Parkson Holdings Bhd HOLD
Price target RM7.10
Share price at 22 May RM6.60
Investment summary
Parkson Holdings (PHB) yesterday proposed to sell 2 of its 7 directly-owned China stores to HK-listed subsidiary PRG for RM110m. We think the deal is neutral to PHB, reaffirming our HOLD rating on the stock. We continue to think PHB is an imperfect proxy to PRG’s share price, with few arbitrage opportunities for alpha investors at current levels. Though we expect a modest slowdown in H208 on spillover from a US recession, we remain positive on China’s longer-term macro-economic prospects. China retail sales have been growing at a 15-20% clip for the last 2 years, and a moderation to 5-10% would still be a comfortable growth level for the retail sector.
Index + China = interesting
Share price implies a 10% discount to PRG, which we think is fair. For index investors, we would be buyers at current levels, ahead of a potential recovery in Greater China equity markets. PHB is the only index stock with China growth levels
Parkson Holdings Bhd HOLD
Price target RM7.10
Share price at 22 May RM6.60
Investment summary
Parkson Holdings (PHB) yesterday proposed to sell 2 of its 7 directly-owned China stores to HK-listed subsidiary PRG for RM110m. We think the deal is neutral to PHB, reaffirming our HOLD rating on the stock. We continue to think PHB is an imperfect proxy to PRG’s share price, with few arbitrage opportunities for alpha investors at current levels. Though we expect a modest slowdown in H208 on spillover from a US recession, we remain positive on China’s longer-term macro-economic prospects. China retail sales have been growing at a 15-20% clip for the last 2 years, and a moderation to 5-10% would still be a comfortable growth level for the retail sector.
Index + China = interesting
Share price implies a 10% discount to PRG, which we think is fair. For index investors, we would be buyers at current levels, ahead of a potential recovery in Greater China equity markets. PHB is the only index stock with China growth levels
HDBSVR: TSH Resources, Maintain Buy
TSH Resources: 1Q08 results better than forecast
-Story: TSH Resources 1QFY08 results were slightly better than expected on an annualised basis. The company booked revenues of RM284.1m (+68.3% y-o-y) and net profit of RM34.3m (+73.9% y-o-y) – respectively representing 26.3% and 28.7% of our full year forecast. The jump was attributable to higher palm oil prices (+63.1% y-o-y to RM3,100/MT), yield recovery which increased own FFB production by +10.0% y-o-y, and a doubling in share of profit from palm oil refinery JV with Wilmar. The Group's wood product manufacturing revenues however declined by 2.0% y-o-y, dragging this segment's EBIT down by 6.4% y-o-y to RM4.9m. Meanwhile, cocoa-manufacturing revenues rose by 24.2% y-o-y to RM39.2m, contributing RM5.8m EBIT (+83.1% y-o-y).
-Point: We have made adjustments to take into account restatements made in the Group's annual report. Amongst others, new planting expenditure incurred on land clearing and upkeep until maturity are now capitalised under biological assets and are not amortised beginning 2007. TSH also adopted FRS 112 (investment tax allowance) and 117 (leasehold land held for own use). These and other changes resulted in fine-tuning of FY08F to FY10F earnings forecasts upwards by up to 1.7%. We have also cut the company's new planting to 2,000 hectares in FY08F as TSH made no significant new planting in 1Q08 given the small claims in one of its Kalimantan estates. The cut in new planting does not affect earnings until FY11F but our DCF valuation will be slightly lowered to RM4.10 from RM4.30 as a result.
-Relevance: With the prospect of continued y-o-y own FFB production growth over the next 3 quarters, we expect TSH to expand its share of CPO from own FFB, hence improving margins. At the current price, TSH is trading at 11.1x FY08F PE and offers 28% upside potential to our target price (implying 14.2x FY08F PE). TSH is one of the cheapest plantation stocks under our coverage. Maintain Buy.
-Story: TSH Resources 1QFY08 results were slightly better than expected on an annualised basis. The company booked revenues of RM284.1m (+68.3% y-o-y) and net profit of RM34.3m (+73.9% y-o-y) – respectively representing 26.3% and 28.7% of our full year forecast. The jump was attributable to higher palm oil prices (+63.1% y-o-y to RM3,100/MT), yield recovery which increased own FFB production by +10.0% y-o-y, and a doubling in share of profit from palm oil refinery JV with Wilmar. The Group's wood product manufacturing revenues however declined by 2.0% y-o-y, dragging this segment's EBIT down by 6.4% y-o-y to RM4.9m. Meanwhile, cocoa-manufacturing revenues rose by 24.2% y-o-y to RM39.2m, contributing RM5.8m EBIT (+83.1% y-o-y).
-Point: We have made adjustments to take into account restatements made in the Group's annual report. Amongst others, new planting expenditure incurred on land clearing and upkeep until maturity are now capitalised under biological assets and are not amortised beginning 2007. TSH also adopted FRS 112 (investment tax allowance) and 117 (leasehold land held for own use). These and other changes resulted in fine-tuning of FY08F to FY10F earnings forecasts upwards by up to 1.7%. We have also cut the company's new planting to 2,000 hectares in FY08F as TSH made no significant new planting in 1Q08 given the small claims in one of its Kalimantan estates. The cut in new planting does not affect earnings until FY11F but our DCF valuation will be slightly lowered to RM4.10 from RM4.30 as a result.
-Relevance: With the prospect of continued y-o-y own FFB production growth over the next 3 quarters, we expect TSH to expand its share of CPO from own FFB, hence improving margins. At the current price, TSH is trading at 11.1x FY08F PE and offers 28% upside potential to our target price (implying 14.2x FY08F PE). TSH is one of the cheapest plantation stocks under our coverage. Maintain Buy.
MMC Corporation - BUY - 23 May 2008
MMC Corporation - 1Q08 net profit below expectations (Results Note)
Price: RM3.62
Target Price: RM4.70
Recommendation: BUY
· 1Q08 net profit of RM157.1m was below expectations being 21% and 22% of our FY08 forecast and consensus of RM753.1m and RM717.5m respectively. This was largely due to lower contribution from engineering and construction which turned in operating loss of RM4.0m. We gather this is largely due to start up cost incurred ahead of commencing work on double tracking rail project.
· YOY, 1Q08 net profit was higher by 70.9% largely on the completion of 100% acquisition of Malakoff which was completed in May 2007. At pretax profit level 1Q08 was 146% higher. The wide divergence in the difference in increase was largely due to significantly lower income tax expense in 1Q07 where income tax rate was only 2.5% as a result of deferred tax adjustments.
· QoQ, 1Q08 net profit was 16.1% lower as administrative expense rose sharply by 232% while higher income tax expense and minority interest resulted in the weaker performance which disappointed as market expected higher construction earnings.
· We are maintaining FY08E and FY09E forecast as earnings could be lumpy QoQ despite the bulk of the profits coming from Transport and Energy divisions. Construction earnings are volatile QoQ.
· Maintain BUY and target price of RM4.70. MMC has significant upside as our target price based on sum of parts RNAV does not include any forecast of the USD30b Jazan City in Saudi Arabia (including the MOU to take a 20% stake in the aluminium smelter in Jazan City. Execution risk remains the greatest downside to earnings disappointment given the enormous task ahead. In addition, several more projects are in the pipeline like the Aeropolis near Senai airport that is expected to be spearhead by a company linked to Tan Sri Syed Mokthar.
KENANGA INVESTMENT BANK BERHAD (15678-H)
Price: RM3.62
Target Price: RM4.70
Recommendation: BUY
· 1Q08 net profit of RM157.1m was below expectations being 21% and 22% of our FY08 forecast and consensus of RM753.1m and RM717.5m respectively. This was largely due to lower contribution from engineering and construction which turned in operating loss of RM4.0m. We gather this is largely due to start up cost incurred ahead of commencing work on double tracking rail project.
· YOY, 1Q08 net profit was higher by 70.9% largely on the completion of 100% acquisition of Malakoff which was completed in May 2007. At pretax profit level 1Q08 was 146% higher. The wide divergence in the difference in increase was largely due to significantly lower income tax expense in 1Q07 where income tax rate was only 2.5% as a result of deferred tax adjustments.
· QoQ, 1Q08 net profit was 16.1% lower as administrative expense rose sharply by 232% while higher income tax expense and minority interest resulted in the weaker performance which disappointed as market expected higher construction earnings.
· We are maintaining FY08E and FY09E forecast as earnings could be lumpy QoQ despite the bulk of the profits coming from Transport and Energy divisions. Construction earnings are volatile QoQ.
· Maintain BUY and target price of RM4.70. MMC has significant upside as our target price based on sum of parts RNAV does not include any forecast of the USD30b Jazan City in Saudi Arabia (including the MOU to take a 20% stake in the aluminium smelter in Jazan City. Execution risk remains the greatest downside to earnings disappointment given the enormous task ahead. In addition, several more projects are in the pipeline like the Aeropolis near Senai airport that is expected to be spearhead by a company linked to Tan Sri Syed Mokthar.
KENANGA INVESTMENT BANK BERHAD (15678-H)
HLG: 23 May 2008 Coastal Contracts
HLG: 23 May 2008 Coastal Contracts - Q108 earnings within expectation
Coastal Contracts BUY
Price target RM3.80
Share price at 22 May RM2.38
Investment summary
Reported Q108 net profit of RM21m was in-line with HLG forecast and market estimate. The strong results re-affirm our BUY rating on Coastal. The company has transformed into a serious offshore support vessel (OSV) builder in the region; outstanding order book has more than doubled to RM1.1bn in the last 12 months. We remain bullish on the stock and thinks share price is grossly undervalued at 7x FY09E EPS. We are positive on the offshore support vessel industry because: (1) tight demand-supply for offshore support vessels (OSV) has created superior pricing power for shipbuilders (2) lagging vessel new-builds vs. replacement market offers opportunity for Coastal to replenish order book.
Cheap at 7x FY09 PE
Q108 net profit (+38% yoy) was in-line with our estimate, mainly due to higher shipbuilding revenue. We think share price is attractive at 7x FY09E PE. RM1.1bn outstanding order book provides strong earnings visibility over the next two years.
Coastal Contracts BUY
Price target RM3.80
Share price at 22 May RM2.38
Investment summary
Reported Q108 net profit of RM21m was in-line with HLG forecast and market estimate. The strong results re-affirm our BUY rating on Coastal. The company has transformed into a serious offshore support vessel (OSV) builder in the region; outstanding order book has more than doubled to RM1.1bn in the last 12 months. We remain bullish on the stock and thinks share price is grossly undervalued at 7x FY09E EPS. We are positive on the offshore support vessel industry because: (1) tight demand-supply for offshore support vessels (OSV) has created superior pricing power for shipbuilders (2) lagging vessel new-builds vs. replacement market offers opportunity for Coastal to replenish order book.
Cheap at 7x FY09 PE
Q108 net profit (+38% yoy) was in-line with our estimate, mainly due to higher shipbuilding revenue. We think share price is attractive at 7x FY09E PE. RM1.1bn outstanding order book provides strong earnings visibility over the next two years.
QL Resources - BUY - 22 May 2008 (Errata)
QL Resources - FY08 results just above estimates (Results Note)
Price: RM4.30
Target Price: RM5.35
Recommendation: BUY
· FY08 net profit of RM80.8m came in slightly above our forecast of RM75.8m by 7%, and above consensus estimate of RM73.5m by 10%. The higher FY08 net profit came mainly from larger earnings contribution from the integrated livestock farming (ILF) division. All business segments recorded stronger earnings though.
· Elevated price of feed commodities and poultry products largely responsible for the YoY, FY08 net profit increase of 28%. ILF's FY08 pretax profit rose by 37% driven by higher selling price of animal feed raw materials traded, as well as the higher price of poultry products (eggs in particular). The pretax profit of the marine products manufacturing (MPM) and CPO milling (CPOM) divisions increased by 16% and 7% due to higher price of surimi and CPO.
· Greater contribution from Sabah plantation and high CPO price, as well as higher price of marine products resulted in YoY, 4QFY08 net profit rising by 22%, on the back of a 23% increase in revenue. Pretax profit from the CPOM division was 119% higher YoY due to larger yield from QL's maturing 3,000 acre plantation and high price of CPO.
· QoQ, the 11% decline in 4QFY08 net profit is in line with traditional seasonality. The monsoon weather reduced fish catch and lowered FFB harvest, resulting in a 21% and 13% QoQ decline in MPM and CPOM pretax profit. The ILF segment's pretax profit also decreased by 8% due to the lower volume of feed commodities traded.
· Final dividend of 13% proposed under the single-tier tax system. With additional 110m new bonus issue shares, this translates into an FY08 DPS of 6.5 sen. At the current share capital of 220m, the FY08 DPS would be 9.75 sen, 34% higher than FY07 net DPS of 7.3 sen. FY08 dividend yield of 2.3%.
· Revising FY09 and FY10 net profit estimates upwards by 7% for both years to take into account higher contribution of the ILF division. We are raising our FY09 and FY10 estimates for the price of poultry products by an average of 5%, and increasing the FY09 and FY10 FFB yield for QL's Sabah plantation to 15mt/acre from 10/mt acre.
· Re-iterate our BUY recommendation with revised target price of RM5.35 utilising our previous 12x PER applied to raised FY09 EPs of 44.7 sen. Earnings have the potential to surprise on the upside as QL's aggressive expansion plan bears fruit.
KENANGA INVESTMENT BANK BERHAD (15678-H)
Price: RM4.30
Target Price: RM5.35
Recommendation: BUY
· FY08 net profit of RM80.8m came in slightly above our forecast of RM75.8m by 7%, and above consensus estimate of RM73.5m by 10%. The higher FY08 net profit came mainly from larger earnings contribution from the integrated livestock farming (ILF) division. All business segments recorded stronger earnings though.
· Elevated price of feed commodities and poultry products largely responsible for the YoY, FY08 net profit increase of 28%. ILF's FY08 pretax profit rose by 37% driven by higher selling price of animal feed raw materials traded, as well as the higher price of poultry products (eggs in particular). The pretax profit of the marine products manufacturing (MPM) and CPO milling (CPOM) divisions increased by 16% and 7% due to higher price of surimi and CPO.
· Greater contribution from Sabah plantation and high CPO price, as well as higher price of marine products resulted in YoY, 4QFY08 net profit rising by 22%, on the back of a 23% increase in revenue. Pretax profit from the CPOM division was 119% higher YoY due to larger yield from QL's maturing 3,000 acre plantation and high price of CPO.
· QoQ, the 11% decline in 4QFY08 net profit is in line with traditional seasonality. The monsoon weather reduced fish catch and lowered FFB harvest, resulting in a 21% and 13% QoQ decline in MPM and CPOM pretax profit. The ILF segment's pretax profit also decreased by 8% due to the lower volume of feed commodities traded.
· Final dividend of 13% proposed under the single-tier tax system. With additional 110m new bonus issue shares, this translates into an FY08 DPS of 6.5 sen. At the current share capital of 220m, the FY08 DPS would be 9.75 sen, 34% higher than FY07 net DPS of 7.3 sen. FY08 dividend yield of 2.3%.
· Revising FY09 and FY10 net profit estimates upwards by 7% for both years to take into account higher contribution of the ILF division. We are raising our FY09 and FY10 estimates for the price of poultry products by an average of 5%, and increasing the FY09 and FY10 FFB yield for QL's Sabah plantation to 15mt/acre from 10/mt acre.
· Re-iterate our BUY recommendation with revised target price of RM5.35 utilising our previous 12x PER applied to raised FY09 EPs of 44.7 sen. Earnings have the potential to surprise on the upside as QL's aggressive expansion plan bears fruit.
KENANGA INVESTMENT BANK BERHAD (15678-H)
Suria Capital - BUY - 22 May 2008
Suria Capital - Lower 1Q but growth intact (Results Note)
Price: RM2.50
Target Price: RM4.00
Recommendation: BUY
· Lower 1Q. 1QFY08 revenue at RM68.7m and net profit of RM10.1m comprised of only 20.6% and 12.0% of our forecasts respectively. Lower than expected performance was due to higher depreciation, administrative and finance costs incurred mainly for the new Sepangar Bay Container Port.
· QoQ, 1Q08 revenue and EBIT was down by 21.3% and 18.4% respectively on lower business volume as seasonally 4Q is characterised by stronger sales.
· YoY, 1Q08 grew 4.6% on higher contribution from the ports & bunkering division, which more than offset lower revenue from the contract & engineering division as its key project, the rehabilitation of Tanjung Aru - Tenom railway project is close to completion. Operating profit however slid 23.6% on the back of higher depreciation, administrative and finance costs incurred for the construction and operation of Sepangar Bay Container Port.
· We continue to like Suria for its monopoly of ports operations in Sabah and well designed growth plan. Group's growth strategies include expansion of ports operations, ventures into lucrative bunkering business, property development and possibly the O&G industry. Fine-tuning our model to reflect the higher depreciation and interest costs and potential delay in bidding of new construction projects, we tweak our FY08 and FY09 net profit forecasts downwards by 11.1% to 8.4% respectively to RM75.4m and RM91.1m respectively. Reiterate BUY on Suria Capital but lower our target price to RM4.00 accordingly based on DCF valuation with a WACC of 12.5%.
KENANGA INVESTMENT BANK BERHAD (15678-H)
Price: RM2.50
Target Price: RM4.00
Recommendation: BUY
· Lower 1Q. 1QFY08 revenue at RM68.7m and net profit of RM10.1m comprised of only 20.6% and 12.0% of our forecasts respectively. Lower than expected performance was due to higher depreciation, administrative and finance costs incurred mainly for the new Sepangar Bay Container Port.
· QoQ, 1Q08 revenue and EBIT was down by 21.3% and 18.4% respectively on lower business volume as seasonally 4Q is characterised by stronger sales.
· YoY, 1Q08 grew 4.6% on higher contribution from the ports & bunkering division, which more than offset lower revenue from the contract & engineering division as its key project, the rehabilitation of Tanjung Aru - Tenom railway project is close to completion. Operating profit however slid 23.6% on the back of higher depreciation, administrative and finance costs incurred for the construction and operation of Sepangar Bay Container Port.
· We continue to like Suria for its monopoly of ports operations in Sabah and well designed growth plan. Group's growth strategies include expansion of ports operations, ventures into lucrative bunkering business, property development and possibly the O&G industry. Fine-tuning our model to reflect the higher depreciation and interest costs and potential delay in bidding of new construction projects, we tweak our FY08 and FY09 net profit forecasts downwards by 11.1% to 8.4% respectively to RM75.4m and RM91.1m respectively. Reiterate BUY on Suria Capital but lower our target price to RM4.00 accordingly based on DCF valuation with a WACC of 12.5%.
KENANGA INVESTMENT BANK BERHAD (15678-H)
Hap Seng Plantations - BUY - 22 May 2008
Hap Seng Plantations - Slow start to the year but remain steadfast (Results Note)
Price: RM3.04
Target Price: RM4.38
Recommendation: BUY
· Financial year end change. Hap Seng Plantations Holdings ("HSPH") recently changed its financial year end from 31 January to 31 December and the results released yesterday were for the 2 month period ended 31 March 2008.
· Proforma 1QFY08 FYE 31 Dec was probably below expectations. We gather that the proforma 1QFY08 FYE 31 Dec net profit would have been in the region of RM20.0m or 9% our earnings estimate of RM233.5m and consensus estimate of RM221.1m.
· 1Q net profit of pure plantation companies such as HSPH typically comprises between 10% and 20% of full year net profit estimates due to seasonally lower CPO/FFB production. Management explained that adversely wet weather conditions caused delays in CPO sales.
· This was evidenced in the increase in inventories from RM21.3m as at 31-Jan-08 to RM27.1m as at 31-Mar-08 or approximately 8,000MT which is equivalent to approximately 5% of annual CPO production. Recall that 1QCY08 witnessed heavy rainfall across Malaysia due to La Nina and HSPH primarily operates on a contiguous block of 36,354ha in Sabah.
· No revision in earnings estimates. We opine that our full year FY08E net profit estimate of RM233.5m is achievable if not exceeded once CPO sales resume. On another front, HSPH realised average CPO selling price of RM2,431/MT which is in-line with our average CPO selling price forecast of RM2,500/MT for HSPH.
· Maintain BUY and RM4.38 target price on 15x CY08E PER. For its top notch yields (3rd highest CPO yield among its listed peers at 5.5MT/ha), it is grossly undervalued at single digit forward PERs. Its valuations are the most attractive in our universe of plantation companies under coverage. Investors should anticipate attractive gross dividend yields of between 5% and 7% with its 60% DPR dividend policy.
KENANGA INVESTMENT BANK BERHAD (15678-H)
Price: RM3.04
Target Price: RM4.38
Recommendation: BUY
· Financial year end change. Hap Seng Plantations Holdings ("HSPH") recently changed its financial year end from 31 January to 31 December and the results released yesterday were for the 2 month period ended 31 March 2008.
· Proforma 1QFY08 FYE 31 Dec was probably below expectations. We gather that the proforma 1QFY08 FYE 31 Dec net profit would have been in the region of RM20.0m or 9% our earnings estimate of RM233.5m and consensus estimate of RM221.1m.
· 1Q net profit of pure plantation companies such as HSPH typically comprises between 10% and 20% of full year net profit estimates due to seasonally lower CPO/FFB production. Management explained that adversely wet weather conditions caused delays in CPO sales.
· This was evidenced in the increase in inventories from RM21.3m as at 31-Jan-08 to RM27.1m as at 31-Mar-08 or approximately 8,000MT which is equivalent to approximately 5% of annual CPO production. Recall that 1QCY08 witnessed heavy rainfall across Malaysia due to La Nina and HSPH primarily operates on a contiguous block of 36,354ha in Sabah.
· No revision in earnings estimates. We opine that our full year FY08E net profit estimate of RM233.5m is achievable if not exceeded once CPO sales resume. On another front, HSPH realised average CPO selling price of RM2,431/MT which is in-line with our average CPO selling price forecast of RM2,500/MT for HSPH.
· Maintain BUY and RM4.38 target price on 15x CY08E PER. For its top notch yields (3rd highest CPO yield among its listed peers at 5.5MT/ha), it is grossly undervalued at single digit forward PERs. Its valuations are the most attractive in our universe of plantation companies under coverage. Investors should anticipate attractive gross dividend yields of between 5% and 7% with its 60% DPR dividend policy.
KENANGA INVESTMENT BANK BERHAD (15678-H)
QL Resources - BUY - 22 May 2008
QL Resources - FY08 results just above estimates (Results Note)
Price: RM4.30
Target Price: RM5.35
Recommendation: BUY
· FY08 net profit of RM80.8m came in slightly above our forecast of RM75.8m by 7%, and above consensus estimate of RM73.5m by 10%. The higher FY08 net profit came mainly from larger earnings contribution from the integrated livestock farming (ILF) division. All business segments recorded stronger earnings though.
· Elevated price of feed commodities and poultry products largely responsible for the YoY, FY08 net profit increase of 28%. ILF's FY08 pretax profit rose by 37% driven by higher selling price of animal feed raw materials traded, as well as the higher price of poultry products (eggs in particular). The pretax profit of the marine products manufacturing (MPM) and CPO milling (CPOM) divisions increased by 16% and 7% due to higher price of surimi and CPO.
· Greater contribution from Sabah plantation and high CPO price, as well as higher price of marine products resulted in YoY, 4QFY08 net profit rising by 22%, on the back of a 23% increase in revenue. Pretax profit from the CPOM division was 119% higher YoY due to larger yield from QL's maturing 3,000 acre plantation and high price of CPO.
· QoQ, the 11% decline in 4QFY08 net profit is in line with traditional seasonality. The monsoon weather reduced fish catch and lowered FFB harvest, resulting in a 21% and 13% QoQ decline in MPM and CPOM pretax profit. The ILF segment's pretax profit also decreased by 8% due to the lower volume of feed commodities traded.
· Final dividend of 13% proposed under the single-tier tax system. The 6.5 sen FY08 DPS is slightly lower YoY (by 9%) than FY07 net DPS of 7.3 sen as the firm conserves cash for its aggressive expansion plans that include a Vietnamese layer farm, Indonesian plantation, and prospective marine plants in Sarawak and Indonesia.
· Revising FY09 and FY10 net profit estimates upwards by 7% for both years to take into account higher contribution of the ILF division. We are raising our FY09 and FY10 estimates for the price of poultry products by an average of 5%, and increasing the FY09 and FY10 FFB yield for QL's Sabah plantation to 15mt/acre from 10/mt acre.
· Re-iterate our BUY recommendation with revised target price of RM5.35 utilising our previous 12x PER applied to raised FY09 EPs of 44.7 sen. Any FY09 earnings surprise is likely to be on the upside as QL's acquisitions begin to bear fruit.
KENANGA INVESTMENT BANK BERHAD (15678-H)
Price: RM4.30
Target Price: RM5.35
Recommendation: BUY
· FY08 net profit of RM80.8m came in slightly above our forecast of RM75.8m by 7%, and above consensus estimate of RM73.5m by 10%. The higher FY08 net profit came mainly from larger earnings contribution from the integrated livestock farming (ILF) division. All business segments recorded stronger earnings though.
· Elevated price of feed commodities and poultry products largely responsible for the YoY, FY08 net profit increase of 28%. ILF's FY08 pretax profit rose by 37% driven by higher selling price of animal feed raw materials traded, as well as the higher price of poultry products (eggs in particular). The pretax profit of the marine products manufacturing (MPM) and CPO milling (CPOM) divisions increased by 16% and 7% due to higher price of surimi and CPO.
· Greater contribution from Sabah plantation and high CPO price, as well as higher price of marine products resulted in YoY, 4QFY08 net profit rising by 22%, on the back of a 23% increase in revenue. Pretax profit from the CPOM division was 119% higher YoY due to larger yield from QL's maturing 3,000 acre plantation and high price of CPO.
· QoQ, the 11% decline in 4QFY08 net profit is in line with traditional seasonality. The monsoon weather reduced fish catch and lowered FFB harvest, resulting in a 21% and 13% QoQ decline in MPM and CPOM pretax profit. The ILF segment's pretax profit also decreased by 8% due to the lower volume of feed commodities traded.
· Final dividend of 13% proposed under the single-tier tax system. The 6.5 sen FY08 DPS is slightly lower YoY (by 9%) than FY07 net DPS of 7.3 sen as the firm conserves cash for its aggressive expansion plans that include a Vietnamese layer farm, Indonesian plantation, and prospective marine plants in Sarawak and Indonesia.
· Revising FY09 and FY10 net profit estimates upwards by 7% for both years to take into account higher contribution of the ILF division. We are raising our FY09 and FY10 estimates for the price of poultry products by an average of 5%, and increasing the FY09 and FY10 FFB yield for QL's Sabah plantation to 15mt/acre from 10/mt acre.
· Re-iterate our BUY recommendation with revised target price of RM5.35 utilising our previous 12x PER applied to raised FY09 EPs of 44.7 sen. Any FY09 earnings surprise is likely to be on the upside as QL's acquisitions begin to bear fruit.
KENANGA INVESTMENT BANK BERHAD (15678-H)
Vitrox - BUY - 22 May 2008
Vitrox Corporation - Soft patch (Results Note)
Price: RM0.77
Target Price: RM0.98
Recommendation: BUY
· 1Q08 results are below expectations. Slower market dynamics as a result of the uncertain global economic outlook that had prevailed during the initial part of the year had impacted results negatively. Reported revenue of RM6.9m is a mere 13.4% of our forecast while net profit of RM2.4m is 12.3%.
· QoQ, 1Q08 revenue dipped 36.8% to RM6.9m while net profit was lower by 44.9% to RM2.4m. Slower demand for its vision systems and solutions as testing houses cut down on capital expenditure in view of the uncertain economic outlook during the first few months of the year had impacted the company negatively. Margin meanwhile was also lowered to 35.4% at the net versus 40.6% in 4Q07. Reduced economy of scale couple with higher expenses associated with the expansion drive were the main attributing factors.
· YoY, revenue of RM6.9m was flat versus 1Q07's RM6.7m while net profit of RM2.4m was also similarly flat. With no pick up in demand for its systems and solutions couple with an adverse currency effect had capped performance in the near term.
· Forecast is trimmed. In view of the uncertain economic outlook and the soft semiconductor environment, we would therefore prefer to be conservative and lower our revenue forecast for FY08 and FY09 by 22.2% and 10.7% respectively to RM39.9m and RM51.3m respectively. As a corollary, net profit for the relevant years are also lowered by the same quantum. Our revised net profit forecast is now RM15.1m and RM19.5m for FY08 and FY09 respectively.
· Buy recommendation is maintained but with a lower target price of RM0.98 versus RM1.26 previously applying the same 10x multiple. Despite the trying market conditions, the company continues to hold much latent potential with top-of-class offerings in terms of solutions and intellectual property. Net margins of 35% is still stellar and we share management optimism that company's fortunes will be lifted once the current soft patch is over.
KENANGA INVESTMENT BANK BERHAD (15678-H)
Price: RM0.77
Target Price: RM0.98
Recommendation: BUY
· 1Q08 results are below expectations. Slower market dynamics as a result of the uncertain global economic outlook that had prevailed during the initial part of the year had impacted results negatively. Reported revenue of RM6.9m is a mere 13.4% of our forecast while net profit of RM2.4m is 12.3%.
· QoQ, 1Q08 revenue dipped 36.8% to RM6.9m while net profit was lower by 44.9% to RM2.4m. Slower demand for its vision systems and solutions as testing houses cut down on capital expenditure in view of the uncertain economic outlook during the first few months of the year had impacted the company negatively. Margin meanwhile was also lowered to 35.4% at the net versus 40.6% in 4Q07. Reduced economy of scale couple with higher expenses associated with the expansion drive were the main attributing factors.
· YoY, revenue of RM6.9m was flat versus 1Q07's RM6.7m while net profit of RM2.4m was also similarly flat. With no pick up in demand for its systems and solutions couple with an adverse currency effect had capped performance in the near term.
· Forecast is trimmed. In view of the uncertain economic outlook and the soft semiconductor environment, we would therefore prefer to be conservative and lower our revenue forecast for FY08 and FY09 by 22.2% and 10.7% respectively to RM39.9m and RM51.3m respectively. As a corollary, net profit for the relevant years are also lowered by the same quantum. Our revised net profit forecast is now RM15.1m and RM19.5m for FY08 and FY09 respectively.
· Buy recommendation is maintained but with a lower target price of RM0.98 versus RM1.26 previously applying the same 10x multiple. Despite the trying market conditions, the company continues to hold much latent potential with top-of-class offerings in terms of solutions and intellectual property. Net margins of 35% is still stellar and we share management optimism that company's fortunes will be lifted once the current soft patch is over.
KENANGA INVESTMENT BANK BERHAD (15678-H)
Kuala Lumpur Kepong - 1HFY08 net profit well in-line (Results Note)
Success Transformer Group - In line with expectations (Results Note)
Price: RM1.03
Target Price: RM1.43
Recommendation: BUY
· 1Q08 results continue to trend in line with expectations underpinned by commendable showings across all divisions. Reported revenue of RM42.6m is some 24.3% of our full year's forecast while net profit of RM5.1m is higher at 25.5%.
· QoQ, revenue was 3.5% lower seasonally given the lesser number of workdays during the quarter. On a divisional basis, the transformer and lighting division saw revenue dipping 4.7% while process equipment was lower by 1.5%. At the net, profit was lower by 5.6%.
· YoY, 1Q08 revenue surged 65.5% underpinned by strong growth from all the key divisions. While the transformer and lighting division grew 30.9%, the process equipment division under Seremban Engineering registered growth of 179.5% underpinned by continuous strong demand and a mere single month contribution in 1Q07.
· Margins continue to trend above our forecast. Despite a challenging environment of higher input costs and adverse currency effect, group continues to show stable margins without the need for any price revision during the quarter. A well hedged inventory of raw materials and a never ending efficiency drive had helped to cushion profitability. Going forward, some price adjustment will be inevitable with management confident that historical margins can be sustained.
· Forecast and Buy recommendation is maintained. We continue to like the company for its low valuation and strong growth prospects for all its divisions. Trading at a mere 6.2x current year, we rate it a BUY at RM1.43 based on 8.5x FY08. A 3 sen tax-exempt interim payable in July or a yield of 2.9% should be an added incentive.
KENANGA INVESTMENT BANK BERHAD (15678-H)
Price: RM1.03
Target Price: RM1.43
Recommendation: BUY
· 1Q08 results continue to trend in line with expectations underpinned by commendable showings across all divisions. Reported revenue of RM42.6m is some 24.3% of our full year's forecast while net profit of RM5.1m is higher at 25.5%.
· QoQ, revenue was 3.5% lower seasonally given the lesser number of workdays during the quarter. On a divisional basis, the transformer and lighting division saw revenue dipping 4.7% while process equipment was lower by 1.5%. At the net, profit was lower by 5.6%.
· YoY, 1Q08 revenue surged 65.5% underpinned by strong growth from all the key divisions. While the transformer and lighting division grew 30.9%, the process equipment division under Seremban Engineering registered growth of 179.5% underpinned by continuous strong demand and a mere single month contribution in 1Q07.
· Margins continue to trend above our forecast. Despite a challenging environment of higher input costs and adverse currency effect, group continues to show stable margins without the need for any price revision during the quarter. A well hedged inventory of raw materials and a never ending efficiency drive had helped to cushion profitability. Going forward, some price adjustment will be inevitable with management confident that historical margins can be sustained.
· Forecast and Buy recommendation is maintained. We continue to like the company for its low valuation and strong growth prospects for all its divisions. Trading at a mere 6.2x current year, we rate it a BUY at RM1.43 based on 8.5x FY08. A 3 sen tax-exempt interim payable in July or a yield of 2.9% should be an added incentive.
KENANGA INVESTMENT BANK BERHAD (15678-H)
KLK - BUY - 22 May 2008
Kuala Lumpur Kepong - 1HFY08 net profit well in-line (Results Note)
Price: RM17.90
Target Price: RM22.00
Recommendation: BUY
· Results in-line. 1HFY08 net profit of RM527.8m was within expectations at 45% of our earnings estimates of RM1,165.0m and 47% of consensus estimate of RM1,112.0m respectively. Revenue, EBIT and pre-tax profit were all in-line with expectations at 46% to 49% of our estimates.
· Huge turnaround in manufacturing segment fortunes. Manufacturing EBIT improved by nearly four times over YoY as Taiko Palm-Oleo (Zhangjiagang) no longer incurred start up expenses and Dr.W.Kolb Holdings, KL Kepong Oleomas and Uniqema all commenced contributions.
· Benefited from higher CPO selling prices. 2QFY08 net profit of RM236.7m was 87% higher YoY primarily due to higher CPO selling prices which according to MPOB, averaged at RM3,466/MT in 2QFY08 or 80% higher YoY.
· 2QFY08 net profit of RM236.7m was 19% lower QoQ due to seasonal post-Christmas retailing losses at Crabtree & Evelyn and allowance for diminution in value of an overseas quoted investment despite increased contribution from the plantation segment which was 38% higher QoQ.
· No revision in earnings estimates. 1HFY08 manufacturing EBIT of RM87.4m pleasantly surprised at 94% of our RM93.0m estimate. We believe strong CPO selling prices and seasonally higher CPO production in 2HFY08 will compensate for the remaining 55% of our earnings estimates of RM1,165.0m.
· Maintain BUY call and RM22.00 target price based on 17x FY09E PER. Dividend yields remain attractive at between 4% and 5%. Current CPO selling prices are circa RM3,500/MT, above our CY08 average CPO selling price forecast of RM3,100/MT. There is additional upside to earnings estimates and target price should CPO selling prices remain high.
· Ladang Perbadanan Fima yet to be imputed into our estimates. As eluded in our company update report dated 5 March 2008, assuming average CPO selling price forecast of RM3,100/MT, Ladang Perbadanan Fima which is currently the subject of an MGO by Kuala Lumpur Kepong will add between RM40.0m and RM50.0m to net profit.
KENANGA INVESTMENT BANK BERHAD (15678-H)
Price: RM17.90
Target Price: RM22.00
Recommendation: BUY
· Results in-line. 1HFY08 net profit of RM527.8m was within expectations at 45% of our earnings estimates of RM1,165.0m and 47% of consensus estimate of RM1,112.0m respectively. Revenue, EBIT and pre-tax profit were all in-line with expectations at 46% to 49% of our estimates.
· Huge turnaround in manufacturing segment fortunes. Manufacturing EBIT improved by nearly four times over YoY as Taiko Palm-Oleo (Zhangjiagang) no longer incurred start up expenses and Dr.W.Kolb Holdings, KL Kepong Oleomas and Uniqema all commenced contributions.
· Benefited from higher CPO selling prices. 2QFY08 net profit of RM236.7m was 87% higher YoY primarily due to higher CPO selling prices which according to MPOB, averaged at RM3,466/MT in 2QFY08 or 80% higher YoY.
· 2QFY08 net profit of RM236.7m was 19% lower QoQ due to seasonal post-Christmas retailing losses at Crabtree & Evelyn and allowance for diminution in value of an overseas quoted investment despite increased contribution from the plantation segment which was 38% higher QoQ.
· No revision in earnings estimates. 1HFY08 manufacturing EBIT of RM87.4m pleasantly surprised at 94% of our RM93.0m estimate. We believe strong CPO selling prices and seasonally higher CPO production in 2HFY08 will compensate for the remaining 55% of our earnings estimates of RM1,165.0m.
· Maintain BUY call and RM22.00 target price based on 17x FY09E PER. Dividend yields remain attractive at between 4% and 5%. Current CPO selling prices are circa RM3,500/MT, above our CY08 average CPO selling price forecast of RM3,100/MT. There is additional upside to earnings estimates and target price should CPO selling prices remain high.
· Ladang Perbadanan Fima yet to be imputed into our estimates. As eluded in our company update report dated 5 March 2008, assuming average CPO selling price forecast of RM3,100/MT, Ladang Perbadanan Fima which is currently the subject of an MGO by Kuala Lumpur Kepong will add between RM40.0m and RM50.0m to net profit.
KENANGA INVESTMENT BANK BERHAD (15678-H)
Petronas Gas - SELL - 22 May 2008
Petronas Gas - FY08 results very much expected (Results Note)
Price: RM10.00
Target Price: RM9.70
Recommendation: SELL
· 12MFY08 net profit of RM1,092.9m was in line with expectations at 104% of our earnings estimate of RM1,054.5m and 100% of consensus estimate of RM1,094.3m. Revenue and pretax profit were in-line with expectations but the effective tax rate of 22% was below our 24% forecast due to a one off reversal of RM78.2m in deferred tax liabilities as the corporate tax rate will be reduced by 1% to 25% for YA2009.
· High tax rate adversely impacted earnings. 12MFY08 pre-tax profit grew by 9% YoY due to 115 mmscfd gas delivery to Keppel Energy that commenced in 3QFY08 and the 12% electricity tariff increase but net profit fell by 12% due to sharply higher effective tax rate of 22% (12MFY07: 3%) as almost all its tax allowances were utilised in FY07.
· Margins under pressure too. Despite 4QFY08 revenue of RM799.9m being a record high, 4QFY08 pretax profit of RM335.3m was 3.0% lower QoQ and 8% lower YoY due to higher operating expenses at both the throughput and utilities segment. 4QFY08 net profit of RM300.6m was 19% higher QoQ only due to 10% effective tax rate driven by a one off RM58.2m reversal in deferred tax liabilities in that quarter.
· 50 sen GDPS expected but could have done better. Final GDPS of 20 sen tax exempt and 15 sen less 25% tax plus the interim GDPS of 15 sen less 27% tax total 50 sen GDPS. Having said that, Petronas Gas could have declared higher dividends as its net cash position strengthened to a new high of RM1,253.7m or 63 sen per share.
· No revision in earnings estimates. Maintain RM9.70 target price (utilising 3% terminal growth rate and 10.0% WACC assumptions) and SELL call. At 18x FY09 PER, valuations appear fair for Petronas Gas as a utilities company but its hesitance to pay higher dividends with its huge net cash position gives us pause as to its earnings outlook.
KENANGA INVESTMENT BANK BERHAD (15678-H)
Price: RM10.00
Target Price: RM9.70
Recommendation: SELL
· 12MFY08 net profit of RM1,092.9m was in line with expectations at 104% of our earnings estimate of RM1,054.5m and 100% of consensus estimate of RM1,094.3m. Revenue and pretax profit were in-line with expectations but the effective tax rate of 22% was below our 24% forecast due to a one off reversal of RM78.2m in deferred tax liabilities as the corporate tax rate will be reduced by 1% to 25% for YA2009.
· High tax rate adversely impacted earnings. 12MFY08 pre-tax profit grew by 9% YoY due to 115 mmscfd gas delivery to Keppel Energy that commenced in 3QFY08 and the 12% electricity tariff increase but net profit fell by 12% due to sharply higher effective tax rate of 22% (12MFY07: 3%) as almost all its tax allowances were utilised in FY07.
· Margins under pressure too. Despite 4QFY08 revenue of RM799.9m being a record high, 4QFY08 pretax profit of RM335.3m was 3.0% lower QoQ and 8% lower YoY due to higher operating expenses at both the throughput and utilities segment. 4QFY08 net profit of RM300.6m was 19% higher QoQ only due to 10% effective tax rate driven by a one off RM58.2m reversal in deferred tax liabilities in that quarter.
· 50 sen GDPS expected but could have done better. Final GDPS of 20 sen tax exempt and 15 sen less 25% tax plus the interim GDPS of 15 sen less 27% tax total 50 sen GDPS. Having said that, Petronas Gas could have declared higher dividends as its net cash position strengthened to a new high of RM1,253.7m or 63 sen per share.
· No revision in earnings estimates. Maintain RM9.70 target price (utilising 3% terminal growth rate and 10.0% WACC assumptions) and SELL call. At 18x FY09 PER, valuations appear fair for Petronas Gas as a utilities company but its hesitance to pay higher dividends with its huge net cash position gives us pause as to its earnings outlook.
KENANGA INVESTMENT BANK BERHAD (15678-H)
HLG: MRCB - 1Q08 results way below expectations (Results Note)
Kuala Lumpur Kepong Bhd HOLD
Price target RM19.80
Share price at 21 May RM17.90
Investment summary
H108 EPS doubled, but was broadly in-line with HLG/market expectations. We maintain our HOLD rating on KLK due to valuations: EV/ha of RM160,000 and implied terminal CPO price of RM2,600 is a 117% premium to mid-cap names such as Kulim.
We think the appeal of big-cap planters will fall in an environment where CPO prices move sideways and cease to reach new highs: (1) big-cap stocks have been treated as liquid, leveraged CPO proxies; (2) this has created a large 40%+ valuation premium to small/ mid-cap planters. From a macro view, given the tight global supply of edible oil and grain, we expect CPO prices to stay firm over the next 6 months.
Expensive
H108 results were in-line with Street expectations, but are probably priced-in. We still prefer mid-cap plantation names with cheaper valuations. For big cap exposure, we prefer Sime, again on valuations.
Price target RM19.80
Share price at 21 May RM17.90
Investment summary
H108 EPS doubled, but was broadly in-line with HLG/market expectations. We maintain our HOLD rating on KLK due to valuations: EV/ha of RM160,000 and implied terminal CPO price of RM2,600 is a 117% premium to mid-cap names such as Kulim.
We think the appeal of big-cap planters will fall in an environment where CPO prices move sideways and cease to reach new highs: (1) big-cap stocks have been treated as liquid, leveraged CPO proxies; (2) this has created a large 40%+ valuation premium to small/ mid-cap planters. From a macro view, given the tight global supply of edible oil and grain, we expect CPO prices to stay firm over the next 6 months.
Expensive
H108 results were in-line with Street expectations, but are probably priced-in. We still prefer mid-cap plantation names with cheaper valuations. For big cap exposure, we prefer Sime, again on valuations.
MRCB - BUY - 21 May 2008
MRCB - 1Q08 results way below expectations (Results Note)
Price: RM1.52
Target Price: RM2.26
Recommendation: BUY
· 1Q08 net profit of RM13.9m was below expectations at 12.2% and 15.1% of our full year forecast and consensus of RM113.6m and RM91.8 respectively. The weak 1Q08 results is not representative of full year's results given lumpy profit recognition on land sale and typically weaker 1Q results for construction given the shorter operating months.
· YOY 1Q08 net profit was 14% higher, largely on investment income. Other operating income of RM27.3m was 3.5x higher YOY which included redemption of non cumulative redeemable preference shares (NCRPS) of associate and subsidiary.
· QoQ, 1Q08 net profit was a sharp turn around from 4Q07 net loss of RM5.5m. 4Q08 net loss was largely a result of recognition of significant deferred tax expense of RM18.1m in finalising its accounts giving an effective tax rate of 147%.
· Lowering forecast for FY08E and FY09E by 16% and 14% to RM95.3m and RM147.5m respectively. Despite the lock in construction contracts and property development sales, we have lowered our forecast anticipating raw material cost increases and delays in execution of the projects. Nevertheless, we are still positive on MRCB given its focus on developing the highly sought after KL Sentral In addition, East Malaysia electrification is expected to be fast track given the focus on SCORE.
· Is Penang Monorail off? MRCB has just added the RM1.1b Penang Monorail project to its list of projects prior to the general elections in March 2008. While there are many rumours and statements made on the project being delayed and reviewed, the project remains a Federal project and is sorely needed to alleviate the traffic congestion in Penang. We believe the project will be carried out and a review of costing is necessary given the rising cost of building materials. MRCB's order book with the Penang Monorail project is about RM3.4b and should last them the next 2 ½ years.
· Maintain BUY with target price of RM2.26 The stock is trading at 12x and 8x FY08E and FY09E PER respectively. Rerating catalysts would arise from securing large infrastructure projects and more immediately confirmation of Penang Monorail project commencement.
KENANGA INVESTMENT BANK BERHAD (15678-H)
Price: RM1.52
Target Price: RM2.26
Recommendation: BUY
· 1Q08 net profit of RM13.9m was below expectations at 12.2% and 15.1% of our full year forecast and consensus of RM113.6m and RM91.8 respectively. The weak 1Q08 results is not representative of full year's results given lumpy profit recognition on land sale and typically weaker 1Q results for construction given the shorter operating months.
· YOY 1Q08 net profit was 14% higher, largely on investment income. Other operating income of RM27.3m was 3.5x higher YOY which included redemption of non cumulative redeemable preference shares (NCRPS) of associate and subsidiary.
· QoQ, 1Q08 net profit was a sharp turn around from 4Q07 net loss of RM5.5m. 4Q08 net loss was largely a result of recognition of significant deferred tax expense of RM18.1m in finalising its accounts giving an effective tax rate of 147%.
· Lowering forecast for FY08E and FY09E by 16% and 14% to RM95.3m and RM147.5m respectively. Despite the lock in construction contracts and property development sales, we have lowered our forecast anticipating raw material cost increases and delays in execution of the projects. Nevertheless, we are still positive on MRCB given its focus on developing the highly sought after KL Sentral In addition, East Malaysia electrification is expected to be fast track given the focus on SCORE.
· Is Penang Monorail off? MRCB has just added the RM1.1b Penang Monorail project to its list of projects prior to the general elections in March 2008. While there are many rumours and statements made on the project being delayed and reviewed, the project remains a Federal project and is sorely needed to alleviate the traffic congestion in Penang. We believe the project will be carried out and a review of costing is necessary given the rising cost of building materials. MRCB's order book with the Penang Monorail project is about RM3.4b and should last them the next 2 ½ years.
· Maintain BUY with target price of RM2.26 The stock is trading at 12x and 8x FY08E and FY09E PER respectively. Rerating catalysts would arise from securing large infrastructure projects and more immediately confirmation of Penang Monorail project commencement.
KENANGA INVESTMENT BANK BERHAD (15678-H)
Alam Maritim - BUY - 21 May 2008
Alam Maritim Resources - Slow start to the year but still bullish (Results Note)
Price: RM2.10
Target Price: RM3.32
Recommendation: BUY
· 1QFY08 net profit of RM11.2m was below expectations and consensus at 16% of our earnings estimate of RM71.3m and consensus estimate of RM70.7m. Alam Maritim Resources ("AMRB") recognised only RM7.6m in revenue and RM1.6m in gross profit from charter of 3rd party vessels and RM1.0m in ESOS share based payment.
· Management represented that contributions from charter of 3rd party vessels was below its historical range of RM20.0m to RM30.0m in revenue and RM4.0m to RM6.0m in gross profit due to abnormally strong monsoon rainfall in 1QFY08 leading to decreased short term charter of 3rd party vessels.
· AMRB still recorded YoY growth. 1QFY08 net profit of RM11.2m was 33% lower QoQ due to the aforementioned factors but still 10% higher YoY higher due to contributions from charter of own vessels which command more than 50% gross margins compared to charter of 3rd party vessels which command approximately 20% gross margins.
· No downgrade in earnings estimates. The strong monsoon rainfall in 1QFY08 has subsided and contributions from charter of 3rd party vessels should resume to historical levels from hereon onwards. In addition, AMRB will take delivery of eight vessels this year. We are confident that our full year FY08E net profit of RM71.3m will be realised if not exceeded.
· Due to >US$100/bbl crude oil, we understand from other offshore support vessel operators that the long term average daily charter rate for Malaysian flagged AHTS has increased from US$2.00/bhp to US$2.60/bhp. In addition, AMRB will take delivery of four vessels by FY10. Growth will be driven by fleet count growth AND higher charter rate reversions.
· Reiterate BUY call and RM3.32 target price based on DCF valuation method utilising 5% terminal growth rate and 12% WACC. RM3.32 implies an undemanding 16x FY09E PER and 15x FY11E PER (when all thirty four vessels operate on full year bases).
· We continue to like AMRB for its robust earnings growth potential, high earnings visibility and 'easy to understand' business model. It is also a good hedge against high crude oil prices as higher crude oil prices translate into larger budgets for oil majors to pay higher charter rates.
KENANGA INVESTMENT BANK BERHAD (15678-H)
Price: RM2.10
Target Price: RM3.32
Recommendation: BUY
· 1QFY08 net profit of RM11.2m was below expectations and consensus at 16% of our earnings estimate of RM71.3m and consensus estimate of RM70.7m. Alam Maritim Resources ("AMRB") recognised only RM7.6m in revenue and RM1.6m in gross profit from charter of 3rd party vessels and RM1.0m in ESOS share based payment.
· Management represented that contributions from charter of 3rd party vessels was below its historical range of RM20.0m to RM30.0m in revenue and RM4.0m to RM6.0m in gross profit due to abnormally strong monsoon rainfall in 1QFY08 leading to decreased short term charter of 3rd party vessels.
· AMRB still recorded YoY growth. 1QFY08 net profit of RM11.2m was 33% lower QoQ due to the aforementioned factors but still 10% higher YoY higher due to contributions from charter of own vessels which command more than 50% gross margins compared to charter of 3rd party vessels which command approximately 20% gross margins.
· No downgrade in earnings estimates. The strong monsoon rainfall in 1QFY08 has subsided and contributions from charter of 3rd party vessels should resume to historical levels from hereon onwards. In addition, AMRB will take delivery of eight vessels this year. We are confident that our full year FY08E net profit of RM71.3m will be realised if not exceeded.
· Due to >US$100/bbl crude oil, we understand from other offshore support vessel operators that the long term average daily charter rate for Malaysian flagged AHTS has increased from US$2.00/bhp to US$2.60/bhp. In addition, AMRB will take delivery of four vessels by FY10. Growth will be driven by fleet count growth AND higher charter rate reversions.
· Reiterate BUY call and RM3.32 target price based on DCF valuation method utilising 5% terminal growth rate and 12% WACC. RM3.32 implies an undemanding 16x FY09E PER and 15x FY11E PER (when all thirty four vessels operate on full year bases).
· We continue to like AMRB for its robust earnings growth potential, high earnings visibility and 'easy to understand' business model. It is also a good hedge against high crude oil prices as higher crude oil prices translate into larger budgets for oil majors to pay higher charter rates.
KENANGA INVESTMENT BANK BERHAD (15678-H)
HLG: 21 May 2008 Malaysian Airlines System
HLG: 21 May 2008 Malaysian Airlines System - Q108 results hit by high oil prices
Malaysian Airlines System BUY
Price target RM5.50
Share price at 20 May RM3.70
Investment summary
Annualized, Q108 net profit of RM120m was 35-40% below HLG/consensus estimates, partly due to seasonality but mostly due to an unanticipated recent surge in fuel prices. We cut our FY08-10E EPS forecast by 30% and DCF-derived price target by 21%, but remain bullish on MAS. (1) attractive FCF yield of 10% and cash backing of RM2.41/share (2) normalised pre-tax margins of 4% is low by regional standards (SIA 13-14%) and increase in yield creates a disproportionately strong EPS growth (3) -24% share price YTD has fully discounted the growing competition from low cost carriers and global macro threats (jet fuel prices, economic slowdown).
Fuel risk priced-in
Q108 earnings were a big disappointment due to fuel prices, but we think MAS’ bargain valuations (4x FY08 ex-cash PE) already prices this in.
Malaysian Airlines System BUY
Price target RM5.50
Share price at 20 May RM3.70
Investment summary
Annualized, Q108 net profit of RM120m was 35-40% below HLG/consensus estimates, partly due to seasonality but mostly due to an unanticipated recent surge in fuel prices. We cut our FY08-10E EPS forecast by 30% and DCF-derived price target by 21%, but remain bullish on MAS. (1) attractive FCF yield of 10% and cash backing of RM2.41/share (2) normalised pre-tax margins of 4% is low by regional standards (SIA 13-14%) and increase in yield creates a disproportionately strong EPS growth (3) -24% share price YTD has fully discounted the growing competition from low cost carriers and global macro threats (jet fuel prices, economic slowdown).
Fuel risk priced-in
Q108 earnings were a big disappointment due to fuel prices, but we think MAS’ bargain valuations (4x FY08 ex-cash PE) already prices this in.
Saturday, 7 June 2008
HLG: 20 May 2008 Boustead Heavy Industries - RM205m barge jobs from Swiber
Boustead Heavy Industries BUY
Price target RM9.00
Share price at 16 May RM4.94
Investment summary
Last Friday, BHIC announced a new contract to fabricate two barges valued at RM205m for Swire Offshore, raising YTD secured order book to RM400m. The company is on track to meet HLG expectation of RM1bn new orders for FY08. We are maintaining our EPS forecast for FY08-10E and target price of RM9.00/share based on 16x FY09E. The new orders re-affirm our BUY rating on the stock. We remain bullish on BHIC because: (1) BHIC is negotiating for the next batch of Offshore Patrol Vessels (OPV) valued at RM5-7bn (2) vessel charter rates at record-high levels are fuelling demand for offshore support vessels (3) Petronas plans to award >RM8bn O&G fabrication contracts in the next five years.
Still cheap
New order was within our expectation of RM1bn new contract for FY08 and raises its earning visibility for FY08-09. Share price has declined 36% from its high of RM7.75/share in end CY07. We think share price will re-rate: (1) confirmation of orders for remaining 21 OPV jobs for BNS (2) steady commercial order-flow for BPS.
Price target RM9.00
Share price at 16 May RM4.94
Investment summary
Last Friday, BHIC announced a new contract to fabricate two barges valued at RM205m for Swire Offshore, raising YTD secured order book to RM400m. The company is on track to meet HLG expectation of RM1bn new orders for FY08. We are maintaining our EPS forecast for FY08-10E and target price of RM9.00/share based on 16x FY09E. The new orders re-affirm our BUY rating on the stock. We remain bullish on BHIC because: (1) BHIC is negotiating for the next batch of Offshore Patrol Vessels (OPV) valued at RM5-7bn (2) vessel charter rates at record-high levels are fuelling demand for offshore support vessels (3) Petronas plans to award >RM8bn O&G fabrication contracts in the next five years.
Still cheap
New order was within our expectation of RM1bn new contract for FY08 and raises its earning visibility for FY08-09. Share price has declined 36% from its high of RM7.75/share in end CY07. We think share price will re-rate: (1) confirmation of orders for remaining 21 OPV jobs for BNS (2) steady commercial order-flow for BPS.
HLG: 20 May 2008 Kulim - Expanding landbank via acquisition
Kulim (Malaysia) Berhad BUY
Price target RM13.00
Share price at 16 May RM8.30
Investment summary
Kulim announced that its 51%-subsidiary NBPOL has offered to privatize Ramu Agri-Industries for USD44m. We think the deal is cheap (normalized 9x PE, vacant land value of USD1,800/ha) and transformative. Kulim remains our top pick in the plantation sector: 1) the stock trades at a FY08 PE of 8x vs. 14x for mid-cap peers; (2) Room for corporate action gains, given lumpy low-performing assets (eg. QSR, Johor development land). We are neutral on the plantation sector, and advocate switching from IOI/KLK to small/mid-cap planters such as Kulim, which offer better value/yield. Given the tight global supply of edible oil and grain, we expect CPO price to stay firm in the next 6 months.
PNG acquisition
NBPOL’s acquisition of RAI sets the stage for its emergence as a serious mid-cap planter. We expect further upside to NBPOL’s London-listed share price, and consequently to Kulim’s SOTP value.
Price target RM13.00
Share price at 16 May RM8.30
Investment summary
Kulim announced that its 51%-subsidiary NBPOL has offered to privatize Ramu Agri-Industries for USD44m. We think the deal is cheap (normalized 9x PE, vacant land value of USD1,800/ha) and transformative. Kulim remains our top pick in the plantation sector: 1) the stock trades at a FY08 PE of 8x vs. 14x for mid-cap peers; (2) Room for corporate action gains, given lumpy low-performing assets (eg. QSR, Johor development land). We are neutral on the plantation sector, and advocate switching from IOI/KLK to small/mid-cap planters such as Kulim, which offer better value/yield. Given the tight global supply of edible oil and grain, we expect CPO price to stay firm in the next 6 months.
PNG acquisition
NBPOL’s acquisition of RAI sets the stage for its emergence as a serious mid-cap planter. We expect further upside to NBPOL’s London-listed share price, and consequently to Kulim’s SOTP value.
IOIC - BUY - 16 May 2008
IOI Corp - 9MFY08 results largely in-line (Results Note)
Price: RM7.50
Target Price: RM8.45
Recommendation: BUY
· Largely expected. 9MFY08 core net profit of RM1,407.6m (ex-RM226.8m translation gain on US$ denominated borrowings) was largely in-line with expectations, comprising 68% of our earnings estimate of RM2,080.3m. We expect higher CPO prices and seasonally higher FFB production in 4QFY08 to easily makeup for the remainder.
· 9MFY08 net profit of RM1,634.3m was 59% higher YoY due to higher average CPO price realised of RM2,705/MT for 9MFY08 or 64% higher YoY compared to RM1,649/MT for 9MFY07. While 9MFY08 plantation segment operating profit almost doubled YoY to RM1,302.4m, all other segments recorded YoY improvement in earnings contribution.
· Although 3QFY08 FFB production of 848,455MT was 23% lower QoQ, 3QFY08 net profit of RM601.6m was 4% higher QoQ as average CPO price realised of RM2,971/MT was 11% higher QoQ and the resource based manufacturing segment continued to do well due to raw material feedstock costs locked in at lower prices, yielding higher margins.
· Resource-based manufacturing continues to shine. At this segment, 9MFY08 earnings contribution of RM457.4m was 47% higher YoY due to full year contributions from the Pan Century Group that was acquired in 3QFY07 and higher refining and oleo-chemical margins due to raw material feedstock costs locked in at lower prices and increased volumes.
· No revision in earnings estimates. CPO prices are currently above RM3,500/MT, above our FY08 average CPO price assumption of RM2,700/MT. We continue to employ that assumption as circa 50% of FY08 CPO production was sold forward at RM2,500/MT, diluting the positive impact further appreciation in CPO prices would have on net profit. After hitting the seasonal trough in 3QFY08, FFB production should recover in 4QFY08. We believe our FY08 estimates will be met.
· Maintain RM8.45 target price based on an unchanged 20x FY09E PER and BUY call. We believe that downside risk is limited and there are re-rating catalysts in higher CPO prices (current CPO price of RM3,500/MT already higher than FY09 average CPO price assumption of RM3,100/MT) and M&As (US$600m in exchangeable bonds raised on 9 January 2008).
Price: RM7.50
Target Price: RM8.45
Recommendation: BUY
· Largely expected. 9MFY08 core net profit of RM1,407.6m (ex-RM226.8m translation gain on US$ denominated borrowings) was largely in-line with expectations, comprising 68% of our earnings estimate of RM2,080.3m. We expect higher CPO prices and seasonally higher FFB production in 4QFY08 to easily makeup for the remainder.
· 9MFY08 net profit of RM1,634.3m was 59% higher YoY due to higher average CPO price realised of RM2,705/MT for 9MFY08 or 64% higher YoY compared to RM1,649/MT for 9MFY07. While 9MFY08 plantation segment operating profit almost doubled YoY to RM1,302.4m, all other segments recorded YoY improvement in earnings contribution.
· Although 3QFY08 FFB production of 848,455MT was 23% lower QoQ, 3QFY08 net profit of RM601.6m was 4% higher QoQ as average CPO price realised of RM2,971/MT was 11% higher QoQ and the resource based manufacturing segment continued to do well due to raw material feedstock costs locked in at lower prices, yielding higher margins.
· Resource-based manufacturing continues to shine. At this segment, 9MFY08 earnings contribution of RM457.4m was 47% higher YoY due to full year contributions from the Pan Century Group that was acquired in 3QFY07 and higher refining and oleo-chemical margins due to raw material feedstock costs locked in at lower prices and increased volumes.
· No revision in earnings estimates. CPO prices are currently above RM3,500/MT, above our FY08 average CPO price assumption of RM2,700/MT. We continue to employ that assumption as circa 50% of FY08 CPO production was sold forward at RM2,500/MT, diluting the positive impact further appreciation in CPO prices would have on net profit. After hitting the seasonal trough in 3QFY08, FFB production should recover in 4QFY08. We believe our FY08 estimates will be met.
· Maintain RM8.45 target price based on an unchanged 20x FY09E PER and BUY call. We believe that downside risk is limited and there are re-rating catalysts in higher CPO prices (current CPO price of RM3,500/MT already higher than FY09 average CPO price assumption of RM3,100/MT) and M&As (US$600m in exchangeable bonds raised on 9 January 2008).
Success Transformer Corp - BUY - 16 May 2008
Success Transformer Corp - Moving upstream with China JV (Company Update)
Price: RM1.10
Target Price: RM1.43
Recommendation: BUY
· Success announced that it is setting up a joint venture with Ninghai Zhenye Luminaries Manufacturing Co. Ltd (Zhenye) of China to jointly design and manufacture industrial lighting fixtures in China under a new company - Ningbo Success Zhenye Luminaries Limited Liabilities Company (JV Co) with Success taking a 60% stake with the remainder by Zhenye. The JV company will be incorporated in Zhejiang Province with an initial capital of RMB10m or RM4.7m.
· Zhenye has its core competencies in design, manufacturing and customization of aluminium die cast lighting fixtures and fittings. With a solid 15 years track record, the company has also an established network of customers including multi-nationals.
· Fast track. To reduce gestation, the JV will be assuming the existing production facility of Zhenye with all the established infrastructures while the vendor - Mr. Gu Zhenwu which holds the remaining 40% of the JV will assume the post of Chief Executive Officer.
· Moving up the value chain. By doing so, Success is not only able to control the costing but also leverage upon the network of customers many of which are MNCs via the new JV. In fact, Success has been a customer of Zhenye for their industrial lighting component requirements for the past 7 - 8 years and had become both comfortable and confident with its quality and execution capabilities.
· Success is guaranteed. Profit guarantee of RMB3b for the first 12 months upon incorporation with RMB4m for the subsequent 12 month period will be provided by the vendor.
· Investment is undemanding. With a mere RMB10m (RM4.7m) investment, profit guarantee of RM7m profit guarantee for the two years will reduce risk, if any, substantially.
· Growing confidence after fruitful venture into process equipment. The company is shedding its conservative image and moving aggressively to grow its business via the M&A route. The successful acquisition of Seremban Engineering had paved the way for more of such deals to augment its growth prospect. Amazing still is the ability of top management to seek out such M&A prospects which the market has yet to price in.
· Forecast and recommendation is maintained. Before we are able to fully assess the prospects of the above deal, we are therefore maintaining our forecast and recommendation with a positive bias. A long ignored gem of a company which is trading at a lowly 6.6x current year's earnings despite the bright outlook for all its key businesses. A capable management team that is turning increasingly aggressive in the M&A space should we believe not be taken lightly by investors. Our target price of RM1.43 based on 8.3x 2008F is conservative we believe.
KENANGA INVESTMENT BANK BERHAD (15678-H)
Price: RM1.10
Target Price: RM1.43
Recommendation: BUY
· Success announced that it is setting up a joint venture with Ninghai Zhenye Luminaries Manufacturing Co. Ltd (Zhenye) of China to jointly design and manufacture industrial lighting fixtures in China under a new company - Ningbo Success Zhenye Luminaries Limited Liabilities Company (JV Co) with Success taking a 60% stake with the remainder by Zhenye. The JV company will be incorporated in Zhejiang Province with an initial capital of RMB10m or RM4.7m.
· Zhenye has its core competencies in design, manufacturing and customization of aluminium die cast lighting fixtures and fittings. With a solid 15 years track record, the company has also an established network of customers including multi-nationals.
· Fast track. To reduce gestation, the JV will be assuming the existing production facility of Zhenye with all the established infrastructures while the vendor - Mr. Gu Zhenwu which holds the remaining 40% of the JV will assume the post of Chief Executive Officer.
· Moving up the value chain. By doing so, Success is not only able to control the costing but also leverage upon the network of customers many of which are MNCs via the new JV. In fact, Success has been a customer of Zhenye for their industrial lighting component requirements for the past 7 - 8 years and had become both comfortable and confident with its quality and execution capabilities.
· Success is guaranteed. Profit guarantee of RMB3b for the first 12 months upon incorporation with RMB4m for the subsequent 12 month period will be provided by the vendor.
· Investment is undemanding. With a mere RMB10m (RM4.7m) investment, profit guarantee of RM7m profit guarantee for the two years will reduce risk, if any, substantially.
· Growing confidence after fruitful venture into process equipment. The company is shedding its conservative image and moving aggressively to grow its business via the M&A route. The successful acquisition of Seremban Engineering had paved the way for more of such deals to augment its growth prospect. Amazing still is the ability of top management to seek out such M&A prospects which the market has yet to price in.
· Forecast and recommendation is maintained. Before we are able to fully assess the prospects of the above deal, we are therefore maintaining our forecast and recommendation with a positive bias. A long ignored gem of a company which is trading at a lowly 6.6x current year's earnings despite the bright outlook for all its key businesses. A capable management team that is turning increasingly aggressive in the M&A space should we believe not be taken lightly by investors. Our target price of RM1.43 based on 8.3x 2008F is conservative we believe.
KENANGA INVESTMENT BANK BERHAD (15678-H)
KLCC Property - BUY - 16 May 2008
KLCC Property Holdings - Dampened by tax treatments (Results Note)
Price: RM3.10
Target Price: RM4.37
Recommendation: BUY
· FY08 net profit of RM442m came below expectations and is 33% and 31% less than ours and street forecast, respectively. However, FY08 PBT of RM904m was within both estimates. Net profit significantly varied because KLCC Property Holdings' (KLCCP) has just started conservatively incurring significant deferred tax provision for its annual fair value adjustments (FRS 112).
· YoY, FY08 recurring net profit grew over 100% to RM173m against FY07 recurring net loss of RM13m due to a reduction in deferred tax provisions by 76% to RM82m which stems from the 75% drop in revaluation gains to RM427m. Our YoY comparison uses re-stated FY07 figures as deferred tax provisions were not included previously. The original FY07 tax charge and net profit were 32x and 20% higher, respectively, compared to the re-stated figures.
· QoQ, 4Q08 pretax profit grew 369% to RM551m. Besides revaluation gains, KLCCP managed to achieve a stronger 4Q08 EBITDA margin of 80% compared to 4Q07's 77% (FY07: 75%; FY08: 78%). This is due to increased rental and room rates for Suria KLCC and Mandarin Oriental, as well as, Petronas Twin Towers who has its triple-net rental revision by 27% this financial year.
· 12.43sen for FY08E GDPS or a 4.0% dividend yield (FY07: 3.9%). KLCCP proposed a final gross dividend of 1.72sen subject to a taxation of 25% tax and a tax exempt 4.71sen in 4Q08 which brings total FY08 GDPS to 12.43sen. We believe that the flat dividends payout is in line with cash conservation for funding the on-going construction of Lot C.
· Maintaining FY09E net profit of RM233m. We are confident that KLCCP will meet our forecast because of strong occupancy rates, increasing rates on Suria KLCC and Mandarin Oriental. We will adjust our forecast for higher deferred tax provisions when management informs us of FY09's revaluation gains/loss in 3Q09.
· Unchanged target price of RM4.37, based on our conservative sum of parts RNAV (assuming 50% dilution of RCULS), which is a 41% upside to its trading price. FY09E and FY10E PER is fair at 12x and 11x, respectively. Maintain BUY recommendation.
KENANGA INVESTMENT BANK BERHAD (15678-H)
Price: RM3.10
Target Price: RM4.37
Recommendation: BUY
· FY08 net profit of RM442m came below expectations and is 33% and 31% less than ours and street forecast, respectively. However, FY08 PBT of RM904m was within both estimates. Net profit significantly varied because KLCC Property Holdings' (KLCCP) has just started conservatively incurring significant deferred tax provision for its annual fair value adjustments (FRS 112).
· YoY, FY08 recurring net profit grew over 100% to RM173m against FY07 recurring net loss of RM13m due to a reduction in deferred tax provisions by 76% to RM82m which stems from the 75% drop in revaluation gains to RM427m. Our YoY comparison uses re-stated FY07 figures as deferred tax provisions were not included previously. The original FY07 tax charge and net profit were 32x and 20% higher, respectively, compared to the re-stated figures.
· QoQ, 4Q08 pretax profit grew 369% to RM551m. Besides revaluation gains, KLCCP managed to achieve a stronger 4Q08 EBITDA margin of 80% compared to 4Q07's 77% (FY07: 75%; FY08: 78%). This is due to increased rental and room rates for Suria KLCC and Mandarin Oriental, as well as, Petronas Twin Towers who has its triple-net rental revision by 27% this financial year.
· 12.43sen for FY08E GDPS or a 4.0% dividend yield (FY07: 3.9%). KLCCP proposed a final gross dividend of 1.72sen subject to a taxation of 25% tax and a tax exempt 4.71sen in 4Q08 which brings total FY08 GDPS to 12.43sen. We believe that the flat dividends payout is in line with cash conservation for funding the on-going construction of Lot C.
· Maintaining FY09E net profit of RM233m. We are confident that KLCCP will meet our forecast because of strong occupancy rates, increasing rates on Suria KLCC and Mandarin Oriental. We will adjust our forecast for higher deferred tax provisions when management informs us of FY09's revaluation gains/loss in 3Q09.
· Unchanged target price of RM4.37, based on our conservative sum of parts RNAV (assuming 50% dilution of RCULS), which is a 41% upside to its trading price. FY09E and FY10E PER is fair at 12x and 11x, respectively. Maintain BUY recommendation.
KENANGA INVESTMENT BANK BERHAD (15678-H)
Coastal - BUY - 16 May 2008
Coastal Contracts - Order book surpasses RM1 billion mark (Company Update)
Price: RM2.37
Target Price: RM3.48
Recommendation: BUY
· Company announced that it has secured the sale of 2 offshore support vessel via its subsidiary - Thaumas Marine Ltd for USD62 million (RM201.5m) or RM100.8m each which according to our records should be the most valuable contract per vessel for the company. With this sale, the company's order book is now at RM1.2 billion with delivery stretching up to 2010.
· Record selling price per vessel. While details of the two vessels are not revealed including its buyer, but given the high selling price of at least RM100m each lead us to believe that it could be at least 70m in length with engine capacity of 10,000 bhp. Delivery is slated for 2010.
· Recall that in October last year when the record RM365m deal was announced for the delivery of 4 vessels including two 70m x 10,880 bhp AHTS, those two vessels based on our estimates have a price tag of RM97m each. Should these two to be of similar specifications, prices of the vessels would have improved by an additional 3.9%.
· Order book now at RM1.2billion after having secured RM518m during the first 5 months of the year. With such a high order book stretching up to 2010, earnings visibility likewise will be high. Based on our cumulative sales forecast of RM1.26billion between 2008-2010, company has already achieved some 95% of our forecast for the coming three years!
· We are very positive with the deal. Besides the headline numbers, what really impressed us was the fact that company's reputation as a world-class offshore support vessel builder is firmly entrenched especially in the bigger type vessels including the 10,000 bhp category. Previous skepticism of the company being restricted to building the smaller vessel type namely the 5,000 bhp and below should be clearly expounded now with this current deal. We believe that company's growing reputation especially in the higher class vessels where demand is expected to increase further on the back of a shift of exploratory work towards the deeper waters globally should be a boon for the company.
· Not resting on laurels. Even with the record orders, management we gathered is working extremely hard to continue to add to their order book. As guided much earlier, time and resources are now trained on growing their order book even beyond 2010!
· Yesterday's announcement on the yard acquisition is timely, as its original yard of 17 acres is already filled to the brim with work orders. Meanwhile, our sources have indicated that talks with a major offshore support vessel owner remain on track which if successful can potentially open up new market for the company's vessels.
· Forecast and recommendation unchanged. BUY is maintained. With delivery slated for 2010, impact therefore will be in FY10. Based on a conservative net margin of 20%, the RM201m deal is expected to generate some RM40m in net profit or 11sen EPS. High order visibility, strong management and an undemanding valuation of 10x for current year's earnings are key drivers for our BUY recommendation. Our target price of RM3.48 is maintained.
KENANGA INVESTMENT BANK BERHAD (15678-H)
Price: RM2.37
Target Price: RM3.48
Recommendation: BUY
· Company announced that it has secured the sale of 2 offshore support vessel via its subsidiary - Thaumas Marine Ltd for USD62 million (RM201.5m) or RM100.8m each which according to our records should be the most valuable contract per vessel for the company. With this sale, the company's order book is now at RM1.2 billion with delivery stretching up to 2010.
· Record selling price per vessel. While details of the two vessels are not revealed including its buyer, but given the high selling price of at least RM100m each lead us to believe that it could be at least 70m in length with engine capacity of 10,000 bhp. Delivery is slated for 2010.
· Recall that in October last year when the record RM365m deal was announced for the delivery of 4 vessels including two 70m x 10,880 bhp AHTS, those two vessels based on our estimates have a price tag of RM97m each. Should these two to be of similar specifications, prices of the vessels would have improved by an additional 3.9%.
· Order book now at RM1.2billion after having secured RM518m during the first 5 months of the year. With such a high order book stretching up to 2010, earnings visibility likewise will be high. Based on our cumulative sales forecast of RM1.26billion between 2008-2010, company has already achieved some 95% of our forecast for the coming three years!
· We are very positive with the deal. Besides the headline numbers, what really impressed us was the fact that company's reputation as a world-class offshore support vessel builder is firmly entrenched especially in the bigger type vessels including the 10,000 bhp category. Previous skepticism of the company being restricted to building the smaller vessel type namely the 5,000 bhp and below should be clearly expounded now with this current deal. We believe that company's growing reputation especially in the higher class vessels where demand is expected to increase further on the back of a shift of exploratory work towards the deeper waters globally should be a boon for the company.
· Not resting on laurels. Even with the record orders, management we gathered is working extremely hard to continue to add to their order book. As guided much earlier, time and resources are now trained on growing their order book even beyond 2010!
· Yesterday's announcement on the yard acquisition is timely, as its original yard of 17 acres is already filled to the brim with work orders. Meanwhile, our sources have indicated that talks with a major offshore support vessel owner remain on track which if successful can potentially open up new market for the company's vessels.
· Forecast and recommendation unchanged. BUY is maintained. With delivery slated for 2010, impact therefore will be in FY10. Based on a conservative net margin of 20%, the RM201m deal is expected to generate some RM40m in net profit or 11sen EPS. High order visibility, strong management and an undemanding valuation of 10x for current year's earnings are key drivers for our BUY recommendation. Our target price of RM3.48 is maintained.
KENANGA INVESTMENT BANK BERHAD (15678-H)
E&O Berhad - BUY - 15 May 2008
CBRS: Eastern & Oriental Bhd - Fueling Brand Power (Initiating Coverage)
Price: RM1.65
Target Price: RM3.54
Recommendation: BUY
· Making a name in real-estate. Eastern & Oriental Bhd (EOB) core business is in property development (via its 63%-owned E&O Property Development Bhd (ENOP)), hospitality and property investment. EOB made its name by successfully restoring Penang's heritage E&O Hotel. Subsequently, they ventured into property development by acquiring ENOP (previously Kamunting Corp Bhd) in 2003. Since then, they have successfully completed and sold high-end projects in prime areas of KL (Dua Residency, Idamansara and Seventy Damansara).
· Brand power is what drives EOB's corporate goals to create strong sustainable income in the long term. Fuelling this strategy are aggressive overseas marketing, c.1,600ac of prime development land in KL and Penang, and ability to meet discerning taste of high-end property buyers.
· Consolidation removes conflict of interest of the MI of two listed companies. EOB can then fully consolidate ENOP's earnings and will have more flexibility in realising the value of its assets and greater financial muscles to seize opportunities. Upon completion of the merger process (by mid July 08), we are expecting at least 65% of ENOP MI shares to be converted to EOB shares on a 1:1.1 basis, which will result in a 11% upside in FY09E EPS to 10.2sen.
· Capitalizing on prime land and high-end property expertise. ENOP plans to launch its first phase of 7 high-end condominium blocks of GDV RM1.5b, in Seri Tanjung Pinang Phase 1 (STP1) and the RM1b St Mary service apartments JV project by end 2008. Earnings contribution will be in FYMar10 onwards. We expect the projects to do well, given the strategic location and ENOP track record.
· Targeting RM1b investment property (IP) portfolio within 5 years, for strong recurring income in the long-term. EOB intends to buy properties developed by ENOP (STP1 Marina Retail, Dua Residency Annexe, etc) to preserve asset values and increase brand visibility. Significant income flow should be visible in the next 2 to 3 years.
· Target price of RM3.54, based on our fully diluted sum of parts RNAV. Our valuations are conservative as we have yet to factor in yield effect from its IP portfolio. We are also estimating 116% YoY growth for FY08E net profit of RM132m, on the back of RM99m gains from sale of Putrajaya Perdana Bhd, more progress billings and take-up rates from Dua Residency, Idamansara and STP1 with RM200m unbilled sales. Initiating with a BUY recommendation.
KENANGA INVESTMENT BANK BERHAD (15678-H)
Price: RM1.65
Target Price: RM3.54
Recommendation: BUY
· Making a name in real-estate. Eastern & Oriental Bhd (EOB) core business is in property development (via its 63%-owned E&O Property Development Bhd (ENOP)), hospitality and property investment. EOB made its name by successfully restoring Penang's heritage E&O Hotel. Subsequently, they ventured into property development by acquiring ENOP (previously Kamunting Corp Bhd) in 2003. Since then, they have successfully completed and sold high-end projects in prime areas of KL (Dua Residency, Idamansara and Seventy Damansara).
· Brand power is what drives EOB's corporate goals to create strong sustainable income in the long term. Fuelling this strategy are aggressive overseas marketing, c.1,600ac of prime development land in KL and Penang, and ability to meet discerning taste of high-end property buyers.
· Consolidation removes conflict of interest of the MI of two listed companies. EOB can then fully consolidate ENOP's earnings and will have more flexibility in realising the value of its assets and greater financial muscles to seize opportunities. Upon completion of the merger process (by mid July 08), we are expecting at least 65% of ENOP MI shares to be converted to EOB shares on a 1:1.1 basis, which will result in a 11% upside in FY09E EPS to 10.2sen.
· Capitalizing on prime land and high-end property expertise. ENOP plans to launch its first phase of 7 high-end condominium blocks of GDV RM1.5b, in Seri Tanjung Pinang Phase 1 (STP1) and the RM1b St Mary service apartments JV project by end 2008. Earnings contribution will be in FYMar10 onwards. We expect the projects to do well, given the strategic location and ENOP track record.
· Targeting RM1b investment property (IP) portfolio within 5 years, for strong recurring income in the long-term. EOB intends to buy properties developed by ENOP (STP1 Marina Retail, Dua Residency Annexe, etc) to preserve asset values and increase brand visibility. Significant income flow should be visible in the next 2 to 3 years.
· Target price of RM3.54, based on our fully diluted sum of parts RNAV. Our valuations are conservative as we have yet to factor in yield effect from its IP portfolio. We are also estimating 116% YoY growth for FY08E net profit of RM132m, on the back of RM99m gains from sale of Putrajaya Perdana Bhd, more progress billings and take-up rates from Dua Residency, Idamansara and STP1 with RM200m unbilled sales. Initiating with a BUY recommendation.
KENANGA INVESTMENT BANK BERHAD (15678-H)
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