AMMB Holdings – Deep in value (Initiating Coverage)
Price: RM2.43
Target Price: RM2.90
Recommendation: BUY
Attractive valuation proposition, with catalysts – Initiate with Buy
Deep value – AMMB trades at 0.7x 2010E P/BV. We do not believe that the discount to book value is justified. We forecast that AMMB can deliver a sustainable return on equity of 11.5% in the immediate future and potential stronger earnings growth than its Malaysian peers.
Is it already priced in? – With P/B valuations for AMMB trading around 2 standard deviation below its 5-year mean, we use Gordon Growth model valuation approach to estimate the implied ROE which will have an impact on valuation going forward. The bank offers a dividend yield of 9%, which is the highest among others.
Catalysts – We see three positive catalysts: 1) the lucrative dividend payout on excess capital; 2) the achievable ROE targets; and 4) turnaround of the investment banking business.
Top pick in Malaysia – We initiate coverage of AMMB with a Buy recommendation and RM2.90 target price. In addition to 30% discount to book value, we prefer AMMB relative to its peers due to: 1) its strong shareholder, ANZ, to weather the storm and 2) a RM5.1bn excess capital as capacity for capital management initiative.
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Wednesday, 31 December 2008
AirAsia Berhad: Profit renaissance as fuel prices slide - BUY
PO raised 11% to RM1.50 as AirAsia benefits from downturn
We increase our price objective and reiterate our non-consensus Buy rating. After positing two quarters of recurring net losses in 2Q and 3Q08, we expect a record profit in 4Q. AirAsia is benefiting from the current global downturn as fuel costs (its single largest cost) have fallen by 70%, while revenue is relatively resilient as the air travel market becomes more price sensitive and budget oriented.
Fuel falling faster than revenue; EPS forecasts raised 95%
We have raised our recurring EPS estimates for 2009 and 2010 by 95%. The weak macro environment, plus the removal of fuel surcharges mean we assume that AirAsia's unit revenue per seat falls by 13% in 2009. However, with jet fuel assumed at $70/bbl (down from $126 in 2009 and $62 currently), unit costs are expected to decline by 29%. We expect a record recurring EPS of RM0.10.
Budget airlines do much better than majors in a recession
The world's largest budget airline - Southwest Airlines - has consistently outperformed the major US carriers. During a downturn, its outperformance is typically even more pronounced as passengers switch to the lowest cost alternative. We expect AirAsia to benefit from a similar effect in 2009. AirAsia's growth rate in 2009 is expected to be its slowest since IPO (9 net aircraft), which should support margins.
Reiterate Buy rating: stock oversold after privatization halt
The stock has fallen by a quarter since management aborted plans to take the company private. We believe this remains a possibility when credit markets normalize. However, at just 8.6x on recurring PER for 2009E,, it has the lowest multiple among its global peers. Key risks are fuel, currency and management.
We increase our price objective and reiterate our non-consensus Buy rating. After positing two quarters of recurring net losses in 2Q and 3Q08, we expect a record profit in 4Q. AirAsia is benefiting from the current global downturn as fuel costs (its single largest cost) have fallen by 70%, while revenue is relatively resilient as the air travel market becomes more price sensitive and budget oriented.
Fuel falling faster than revenue; EPS forecasts raised 95%
We have raised our recurring EPS estimates for 2009 and 2010 by 95%. The weak macro environment, plus the removal of fuel surcharges mean we assume that AirAsia's unit revenue per seat falls by 13% in 2009. However, with jet fuel assumed at $70/bbl (down from $126 in 2009 and $62 currently), unit costs are expected to decline by 29%. We expect a record recurring EPS of RM0.10.
Budget airlines do much better than majors in a recession
The world's largest budget airline - Southwest Airlines - has consistently outperformed the major US carriers. During a downturn, its outperformance is typically even more pronounced as passengers switch to the lowest cost alternative. We expect AirAsia to benefit from a similar effect in 2009. AirAsia's growth rate in 2009 is expected to be its slowest since IPO (9 net aircraft), which should support margins.
Reiterate Buy rating: stock oversold after privatization halt
The stock has fallen by a quarter since management aborted plans to take the company private. We believe this remains a possibility when credit markets normalize. However, at just 8.6x on recurring PER for 2009E,, it has the lowest multiple among its global peers. Key risks are fuel, currency and management.
Malaysia Construction: Could it be back in favor already?
· Back in favor already? Recent (5-day) out-performance, especially in WCT (16%) and Gamuda (19%) could suggest that the construction sector could very well be back in favor amongst investors. Following our recent sector note, (26th November 2008, Malaysia Construction - 2009 recovery story expected), we reiterate that it remains reasonable to expect the sector to recover in 2009, as a domestic pump-priming looks inevitable for the government to stimulate the economy. Again, we highlight the back-loading of the M$230B budget from the 9MP as an indicator of firepower for spending, since less than 50% has been spent cytd. We continue to bank on PM in-waiting Najib Razak to execute (and ideally, to accelerate) disbursements. If the M$7B stimulus package announced in November 2008 is an indicator of things to come, then it remains fairly reasonable to even expect a raise in the spending budget to boost domestic confidence, with an intention to generate the high multiplier effects.
· Certainly one to keep on the radar: Excessive risk aversion, coupled with thinning liquidity could deprive the contractors from immediate and absolute share price performance. As shown in the past, the share price performance of contractors are highly correlated to domestic spending, granted that the sector in the past has outperformed the benchmark index (38-51%) during "expansionary periods" and underperformed (15-20%) during "contractionary periods". The sector is currently trading at 8x PER, which is a -1 SD event (6-26x range from 2000), and the cheapest that it has been since the Asian Crisis (5x PER).
So the worst could be over: We believe immediate survivorship is now a function of earnings visibility, and the ability for the contractors to service their debt and working capital obligations. Although earnings could continue to deteriorate over the foreseeable quarters, share price recovery is not unreasonable, as we think that the sector could potentially be sprinkled with catalysts for upside surprises. Although the weak macro outlook has led to a sharp pull-back in real estate and infrastructure demand globally, we are hypothesizing that the pipeline of government spending, (e.g. as seen in US and China recently) will take more prominence, and keep the construction orderbooks alive.
· Within our coverage, we remain Overweight on WCT (Dec-09 SOTP PT M$2.90) given their ability to still secure niche projects in Abu Dhabi (not Dubai), coupled with undemanding valuations. The dividend yield angle for Gamuda (Neutral, SOTP PT M$2.20) is also appealing, but IJM (Neutral, SOTP PT M$3.80) is likely to be range-bound in the near-term, as construction earnings could continue to disappoint due to legacy projects, despite trading at c.50% discount to NTA. Project execution is a risk for all 3 companies.
· Source: J.P. Morgan estimates. Prices as of Dec 16.
· Certainly one to keep on the radar: Excessive risk aversion, coupled with thinning liquidity could deprive the contractors from immediate and absolute share price performance. As shown in the past, the share price performance of contractors are highly correlated to domestic spending, granted that the sector in the past has outperformed the benchmark index (38-51%) during "expansionary periods" and underperformed (15-20%) during "contractionary periods". The sector is currently trading at 8x PER, which is a -1 SD event (6-26x range from 2000), and the cheapest that it has been since the Asian Crisis (5x PER).
So the worst could be over: We believe immediate survivorship is now a function of earnings visibility, and the ability for the contractors to service their debt and working capital obligations. Although earnings could continue to deteriorate over the foreseeable quarters, share price recovery is not unreasonable, as we think that the sector could potentially be sprinkled with catalysts for upside surprises. Although the weak macro outlook has led to a sharp pull-back in real estate and infrastructure demand globally, we are hypothesizing that the pipeline of government spending, (e.g. as seen in US and China recently) will take more prominence, and keep the construction orderbooks alive.
· Within our coverage, we remain Overweight on WCT (Dec-09 SOTP PT M$2.90) given their ability to still secure niche projects in Abu Dhabi (not Dubai), coupled with undemanding valuations. The dividend yield angle for Gamuda (Neutral, SOTP PT M$2.20) is also appealing, but IJM (Neutral, SOTP PT M$3.80) is likely to be range-bound in the near-term, as construction earnings could continue to disappoint due to legacy projects, despite trading at c.50% discount to NTA. Project execution is a risk for all 3 companies.
· Source: J.P. Morgan estimates. Prices as of Dec 16.
Gamuda (Outperform)
Stock:GAM MK
Name:Gamuda
Price: RM1.82
Market Cap (m): RM3,651
Market Cap (m): US$1,026
Current valuation (Sum of Parts): RM3.08
12mth price target: RM3.08
Recommendation: Outperform
Event
Gamuda reported 1Q FY09 net profit of RM58m, down 38% YoY and 22% QoQ, comprising just 12% of our full-year estimate.
Impact
Construction margins squeezed: Construction margins for the quarter came in at only 3.2% (vs 5% last quarter) and were attributable to high raw material costs and delays in the Double Tracking project. We understand that despite a significant fall in raw material prices (steel and oil), management has chosen to recognise profits on its projects on a conservative basis, given the volatility in prices and the long duration of its projects. Gamuda accounts for construction margins as a percentage completion of the estimated profit for the entire duration of the contract.
Delays in Double Tracking: Management highlighted that the Double Tracking project is estimated to have been delayed by at least a year due to delays in handing over the land in the state of Penang by the government. The Gamuda-MMC JV has been handed out about 61% of the total land required for the project, and it expects to receive the balance (mainly in Penang) by December 2009. As a result, revenue recognition from the project is likely to be at a slower rate compared to our expectations. On the positive side, however, the contract value has been maintained at RM12.5bn vs earlier indications of a reduction in value to ~RM10bn. As per the terms of the contract, the JV Co. is allowed to make claims for losses suffered as a result of delay in handing over the land, which is the responsibility of the government.
Property sales down significantly QoQ: Property sales were down nearly 40% QoQ as volumes in the domestic market dropped off, while margins were also affected due to higher raw material costs. Gamuda's unbilled property sales stood at RM500m as at end-1Q FY09.
Yen So Park works progressing, but land parcel sales likely to be delayed: The infrastructure works for the Vietnam project continue to progress with the construction of the sewage treatment plant commencing during the quarter. Management also highlighted that while it continues to negotiate with interested parties for land parcel sales, the credit crisis has impacted the borrowing ability of the clients, and consequently, there are likely to be further delays in concluding sales. We had factored in RM122m in EBIT from land parcel sales in Vietnam for FY09E.
Cautious guidance: Management guided for construction margins to remain at 1Q FY09 levels for the next two quarters (vs our full-year expectation of 8.7%) and for property sales to remain muted for the rest of the year. However, management also highlighted that it remained hopeful that the Malaysian government will hand out key infrastructure projects such as LRT lines some time in 2009 in order to pump prime the economy.
Dividend cut, cash conservation is the theme: Management cut its interim dividend to 4sen (vs 12.5sen last year) and guided for an 8sen full-year dividend in an effort to conserve cash. On the positive side, Gamuda's net gearing fell to 22% (from 32% last quarter). We also note that receivables fell QoQ, with management highlighting that Double Tracking payments were being received in a timely manner.
Action and recommendation
We maintain our Outperform recommendation on Gamuda. Although we see downside risk to our near-term earnings estimate, we believe that a large portion of this has already been factored into Gamuda's share price. We value Gamuda's stake in its concessions at RM1.61/sh (including a 25% discount to the fair value of SPLASH). At the current share price, the market is implying just 3x PER for the balance businesses (construction and property) based on the annualised 1Q FY09 numbers, which are likely to be near-trough earnings for the company over the next two years.
Name:Gamuda
Price: RM1.82
Market Cap (m): RM3,651
Market Cap (m): US$1,026
Current valuation (Sum of Parts): RM3.08
12mth price target: RM3.08
Recommendation: Outperform
Event
Gamuda reported 1Q FY09 net profit of RM58m, down 38% YoY and 22% QoQ, comprising just 12% of our full-year estimate.
Impact
Construction margins squeezed: Construction margins for the quarter came in at only 3.2% (vs 5% last quarter) and were attributable to high raw material costs and delays in the Double Tracking project. We understand that despite a significant fall in raw material prices (steel and oil), management has chosen to recognise profits on its projects on a conservative basis, given the volatility in prices and the long duration of its projects. Gamuda accounts for construction margins as a percentage completion of the estimated profit for the entire duration of the contract.
Delays in Double Tracking: Management highlighted that the Double Tracking project is estimated to have been delayed by at least a year due to delays in handing over the land in the state of Penang by the government. The Gamuda-MMC JV has been handed out about 61% of the total land required for the project, and it expects to receive the balance (mainly in Penang) by December 2009. As a result, revenue recognition from the project is likely to be at a slower rate compared to our expectations. On the positive side, however, the contract value has been maintained at RM12.5bn vs earlier indications of a reduction in value to ~RM10bn. As per the terms of the contract, the JV Co. is allowed to make claims for losses suffered as a result of delay in handing over the land, which is the responsibility of the government.
Property sales down significantly QoQ: Property sales were down nearly 40% QoQ as volumes in the domestic market dropped off, while margins were also affected due to higher raw material costs. Gamuda's unbilled property sales stood at RM500m as at end-1Q FY09.
Yen So Park works progressing, but land parcel sales likely to be delayed: The infrastructure works for the Vietnam project continue to progress with the construction of the sewage treatment plant commencing during the quarter. Management also highlighted that while it continues to negotiate with interested parties for land parcel sales, the credit crisis has impacted the borrowing ability of the clients, and consequently, there are likely to be further delays in concluding sales. We had factored in RM122m in EBIT from land parcel sales in Vietnam for FY09E.
Cautious guidance: Management guided for construction margins to remain at 1Q FY09 levels for the next two quarters (vs our full-year expectation of 8.7%) and for property sales to remain muted for the rest of the year. However, management also highlighted that it remained hopeful that the Malaysian government will hand out key infrastructure projects such as LRT lines some time in 2009 in order to pump prime the economy.
Dividend cut, cash conservation is the theme: Management cut its interim dividend to 4sen (vs 12.5sen last year) and guided for an 8sen full-year dividend in an effort to conserve cash. On the positive side, Gamuda's net gearing fell to 22% (from 32% last quarter). We also note that receivables fell QoQ, with management highlighting that Double Tracking payments were being received in a timely manner.
Action and recommendation
We maintain our Outperform recommendation on Gamuda. Although we see downside risk to our near-term earnings estimate, we believe that a large portion of this has already been factored into Gamuda's share price. We value Gamuda's stake in its concessions at RM1.61/sh (including a 25% discount to the fair value of SPLASH). At the current share price, the market is implying just 3x PER for the balance businesses (construction and property) based on the annualised 1Q FY09 numbers, which are likely to be near-trough earnings for the company over the next two years.
Gamuda (GAMU.KL): Transfer of Coverage
Transfer of Coverage: 1Q09 Results - Worse Than Expected
Transfer of coverage - We are transferring primary coverage responsibility of Gamuda to Ng Yong Yin from Choong Wai Kee due to a reallocation of research resources.
1Q09 results below expectations - 1Q09 net profit of RM55m was 22% lower than the preceding quarter and 38% lower than last year's corresponding quarter. On an annualized basis, the results were 42% below our expectations.
Due to project delays and slower property sales - Management attributed the lower-than-expected results to the construction and property divisions. Earnings from construction division declined 52% YoY to RM16m. Construction division is said to be affected by delay in the progress of its Electrified Double Tracking Project (EDTP). While management says it relates to land acquisition in Penang, the State Chief Minister says Gamuda was issued a stop-work order.
The good news - There is no scale-back in EDTP contract value, and Gamuda may be able to claim costs of delay.
Earnings outlook lowered - In light of the lower-than-expected results and negative outlook, we lower FY09E, FY10E and FY11E net profit by 19%, 9% and 14%, respectively. Earnings in the next few quarters may be better than 1Q09, but full-year FY09E net profit is still expected to be lower from FY08.
Target price cut, maintain Sell (3L) - We lower our target price to RM1.45 per share. The revision reflects lower earnings outlook and our more cautious sentiment on the construction, property and trading business segments.
Transfer of coverage - We are transferring primary coverage responsibility of Gamuda to Ng Yong Yin from Choong Wai Kee due to a reallocation of research resources.
1Q09 results below expectations - 1Q09 net profit of RM55m was 22% lower than the preceding quarter and 38% lower than last year's corresponding quarter. On an annualized basis, the results were 42% below our expectations.
Due to project delays and slower property sales - Management attributed the lower-than-expected results to the construction and property divisions. Earnings from construction division declined 52% YoY to RM16m. Construction division is said to be affected by delay in the progress of its Electrified Double Tracking Project (EDTP). While management says it relates to land acquisition in Penang, the State Chief Minister says Gamuda was issued a stop-work order.
The good news - There is no scale-back in EDTP contract value, and Gamuda may be able to claim costs of delay.
Earnings outlook lowered - In light of the lower-than-expected results and negative outlook, we lower FY09E, FY10E and FY11E net profit by 19%, 9% and 14%, respectively. Earnings in the next few quarters may be better than 1Q09, but full-year FY09E net profit is still expected to be lower from FY08.
Target price cut, maintain Sell (3L) - We lower our target price to RM1.45 per share. The revision reflects lower earnings outlook and our more cautious sentiment on the construction, property and trading business segments.
Bumiputra Commerce (BUCM.KL): Buy
Transfers Held-for-Trading Bonds to Held-to-Maturity Book
What's new - BCHB has transferred about RM8bn-worth of corporate bonds from its held-for-trading (HFT) portfolio to its held-to-maturity (HTM) book. This is not new news; the reclassification was mentioned in its 3Q08 earnings briefing. Management is guiding for a "slight loss" on the reclassification, mainly attributed to the US$ bonds portfolio.
BCHB did not suspend mark-to-market accounting on HFT book in 3Q08 - The bank did not take advantage of the new central bank guidelines to effect the transfer on 1 July in its 3Q08 results. Instead, BCHB recorded a net gain of RM36m for the HFT book in 3Q08 alone, mainly due to lower government yields. The mark-to-market rule will apply right up to the date of transfer of the RM8bn book this month.
Reason for the transfer - Management's rationale for the transfer is that the RM8bn long-dated bonds provide a natural hedge for its fixed-rate liabilities (RM1.5bn subordinated debt, RM1bn innovative Tier 1 cap, savings and current deposits).
We are neutral on the reclassification - The bulk of the corporate bonds will be transferred to HTM book leaving mainly government securities in the HFT category. The reclassification in no way changes the underlying quality of the bond assets. That said, there may be a short-term positive earnings impact given the recent government bonds rally due to expectations of a lower interest rate. Accounting deterioration in the HTM book, if any, occurs if there are changes to the financial health or earnings prospects of the issuer.
What's new - BCHB has transferred about RM8bn-worth of corporate bonds from its held-for-trading (HFT) portfolio to its held-to-maturity (HTM) book. This is not new news; the reclassification was mentioned in its 3Q08 earnings briefing. Management is guiding for a "slight loss" on the reclassification, mainly attributed to the US$ bonds portfolio.
BCHB did not suspend mark-to-market accounting on HFT book in 3Q08 - The bank did not take advantage of the new central bank guidelines to effect the transfer on 1 July in its 3Q08 results. Instead, BCHB recorded a net gain of RM36m for the HFT book in 3Q08 alone, mainly due to lower government yields. The mark-to-market rule will apply right up to the date of transfer of the RM8bn book this month.
Reason for the transfer - Management's rationale for the transfer is that the RM8bn long-dated bonds provide a natural hedge for its fixed-rate liabilities (RM1.5bn subordinated debt, RM1bn innovative Tier 1 cap, savings and current deposits).
We are neutral on the reclassification - The bulk of the corporate bonds will be transferred to HTM book leaving mainly government securities in the HFT category. The reclassification in no way changes the underlying quality of the bond assets. That said, there may be a short-term positive earnings impact given the recent government bonds rally due to expectations of a lower interest rate. Accounting deterioration in the HTM book, if any, occurs if there are changes to the financial health or earnings prospects of the issuer.
ASTRO : Buy
Strong Subscriber Growth at the Expense of ARPU
9M09 Revs RM2.2b - Revs +16% yoy despite a decline in ARPU thanks to continued strong subscriber growth. 9M EBITDA expanded at a slower pace (+11%) due to high content and operating costs on new channel additions. However, a RM264m provision in 3Q took the group to a 9M net loss of RM500.3m. A 2.5sen dividend was declared for the quarter.
Strong domestic operations - YTD net additions increased to 293k, driven by the rural/Malay segment. However, the strong growth from this lower-ARPU segment has translated into a dip in overall ARPU to RM81 (2Q: RM83). Churn remains manageable at 9.8%. Radio revenues grew 9.5% yoy.
Re-evaluating its Indo content business - Given ongoing litigation and economic concerns in Indonesia, Astro has made a full provision of RM264m on its content providing business. Pending evaluation, it may have to account for further restructuring charges estimated at RM75m.
Lowering earnings, target price - We lower our ARPU assumptions to RM82 in FY09 and RM81 in FY10. We also incorporate the additional provision charges into our estimates. This lowers our FY10-11E earnings by 11-19% and brings our target price down by 11% to RM3.05/share.
Maintain Buy (1L) - We prefer Astro to adex-reliant Star (STAR.KL; RM3.08; 3L) and Mprima (MPRM.KL; RM1.01; 3M) given its healthy subscriber growth and relatively more resilient earnings model. Exit from cash-draining Indonesia will allow it to re-focus its resources on the robust Malaysian operations
9M09 Revs RM2.2b - Revs +16% yoy despite a decline in ARPU thanks to continued strong subscriber growth. 9M EBITDA expanded at a slower pace (+11%) due to high content and operating costs on new channel additions. However, a RM264m provision in 3Q took the group to a 9M net loss of RM500.3m. A 2.5sen dividend was declared for the quarter.
Strong domestic operations - YTD net additions increased to 293k, driven by the rural/Malay segment. However, the strong growth from this lower-ARPU segment has translated into a dip in overall ARPU to RM81 (2Q: RM83). Churn remains manageable at 9.8%. Radio revenues grew 9.5% yoy.
Re-evaluating its Indo content business - Given ongoing litigation and economic concerns in Indonesia, Astro has made a full provision of RM264m on its content providing business. Pending evaluation, it may have to account for further restructuring charges estimated at RM75m.
Lowering earnings, target price - We lower our ARPU assumptions to RM82 in FY09 and RM81 in FY10. We also incorporate the additional provision charges into our estimates. This lowers our FY10-11E earnings by 11-19% and brings our target price down by 11% to RM3.05/share.
Maintain Buy (1L) - We prefer Astro to adex-reliant Star (STAR.KL; RM3.08; 3L) and Mprima (MPRM.KL; RM1.01; 3M) given its healthy subscriber growth and relatively more resilient earnings model. Exit from cash-draining Indonesia will allow it to re-focus its resources on the robust Malaysian operations
SapuraCrest - BUY
CBRS: SapuraCrest – Net profit almost doubled (Results Note)
Price: RM0.765
Target Price: RM1.15
Recommendation: BUY
Within expectations. 9M09 net profit of RM89.4m accounted 67.2% and 72.4% of our full year estimate and consensus, respectively. We expect 4Q09 earnings to sustain by the seasonally stronger 2H and continuing operations from the contracts secured.
YoY, 9M09 net profit almost doubled to RM89.4m driven mainly by increased activities in the IPF (103.4%); Drilling (25.8%) and Marine Services (21.8%) division whilst PBT margin rose to 7.9% from 6.4% YoY underpinned by improved operations on better day rates and contract terms.
3Q09 net profit increased by 15% QoQ and 58.3% YoY to RM36.9m. This is largely attributable to higher revenue contribution from IPF (33.2% QoQ and 112.5% YoY) and Drilling (3.2% QoQ and 19.8% YoY) divisions. Profit margin registered by Drilling division improved (34.6% from 29.6% QoQ and 21.7% YoY) due mainly to more favourable contract terms.
IPF and Drilling divisions to continue to drive earnings. The loss from JV of Sapura 3000 which was deployed for the RM3.0b IPF works awarded by Petronas narrowed to RM6m from RM26.1m in 1H09. These two divisions collectively contributed about 81.2% of revenue to-date while account more than 95% of total order book of around RM5.5b currently.
Maintain FY09 net profit of RM130.8m, however lower FY10 net profit to RM186.1 (-9%). SapCrest’s unbilled order book will underpin earnings for the next 2 years. Nevertheless, we are lowering our FY10 PBT margin to 11.5% from 12.9% mainly on expectation of tougher operating outlook on the back of uncertainties in the global economy; therefore easing the power of pricing.
Maintain BUY, Target Price lowered to RM1.15 (from RM1.54) based on PER of 8x which is in line with the O&G industry. Strong order book and ownership of capable vessels are expected to support earnings. SapCrest is forecasted to trade at undemanding 5.3% PER in FY10. However, continue decline in world oil price which could lower capex spending of oil majors and delays in contracts affect market sentiment of the O&G industry and may pose risks to our recommendation.
Price: RM0.765
Target Price: RM1.15
Recommendation: BUY
Within expectations. 9M09 net profit of RM89.4m accounted 67.2% and 72.4% of our full year estimate and consensus, respectively. We expect 4Q09 earnings to sustain by the seasonally stronger 2H and continuing operations from the contracts secured.
YoY, 9M09 net profit almost doubled to RM89.4m driven mainly by increased activities in the IPF (103.4%); Drilling (25.8%) and Marine Services (21.8%) division whilst PBT margin rose to 7.9% from 6.4% YoY underpinned by improved operations on better day rates and contract terms.
3Q09 net profit increased by 15% QoQ and 58.3% YoY to RM36.9m. This is largely attributable to higher revenue contribution from IPF (33.2% QoQ and 112.5% YoY) and Drilling (3.2% QoQ and 19.8% YoY) divisions. Profit margin registered by Drilling division improved (34.6% from 29.6% QoQ and 21.7% YoY) due mainly to more favourable contract terms.
IPF and Drilling divisions to continue to drive earnings. The loss from JV of Sapura 3000 which was deployed for the RM3.0b IPF works awarded by Petronas narrowed to RM6m from RM26.1m in 1H09. These two divisions collectively contributed about 81.2% of revenue to-date while account more than 95% of total order book of around RM5.5b currently.
Maintain FY09 net profit of RM130.8m, however lower FY10 net profit to RM186.1 (-9%). SapCrest’s unbilled order book will underpin earnings for the next 2 years. Nevertheless, we are lowering our FY10 PBT margin to 11.5% from 12.9% mainly on expectation of tougher operating outlook on the back of uncertainties in the global economy; therefore easing the power of pricing.
Maintain BUY, Target Price lowered to RM1.15 (from RM1.54) based on PER of 8x which is in line with the O&G industry. Strong order book and ownership of capable vessels are expected to support earnings. SapCrest is forecasted to trade at undemanding 5.3% PER in FY10. However, continue decline in world oil price which could lower capex spending of oil majors and delays in contracts affect market sentiment of the O&G industry and may pose risks to our recommendation.
Malaysian Plantations - Record inventory levels yet again
Event
Malaysian palm oil inventories rose to a record 2.27m tonnes as at end November 2008 (up 25% YoY and 9% MoM) as per data reported by the Malaysian Palm Oil Board today.
Impact
We believe that this is likely to put further pressure on CPO price in the near term. The market is clearly unable to absorb the increase in supply from strong production this year and, with global economic growth expected to slow down further in coming months, we believe that inventories are likely to remain high.
We also note that record CPO production was achieved in the month (slightly up MoM and YoY), despite market expectations of a slowdown due to potential biological stress to estates in Malaysia. We had highlighted earlier that production in November was likely to remain strong as our checks had indicated that fruits in East Malaysia attained late maturity this year (in October and November) compared to Peninsular Malaysia (September).
Although recent data for Indonesian inventory is not available, we note that the Executive Director of Indonesian Confederation of Vegetable Industries was quoted earlier this week saying that palm oil export volumes out of Indonesia are expected to drop by 31% YoY in 4Q08. Given that Indonesian palm oil inventories were reported to be about 2m tonnes at the end of September, a slowdown in exports in 4Q08 could mean that inventories there could also rise substantially.
Going forward, we do expect Malaysian palm oil inventories to come down over the next three months, as we enter a seasonally low production period (Nov-Feb). However, we believe that inventories would still remain elevated relative to historical levels.
Action and recommendation
We maintain our Underweight view on the Malaysian plantations sector. The valuations of the Malaysian plantation companies still remain rich at 15-20x 2009E earnings vs historical average of 10-14x.
Malaysian palm oil inventories rose to a record 2.27m tonnes as at end November 2008 (up 25% YoY and 9% MoM) as per data reported by the Malaysian Palm Oil Board today.
Impact
We believe that this is likely to put further pressure on CPO price in the near term. The market is clearly unable to absorb the increase in supply from strong production this year and, with global economic growth expected to slow down further in coming months, we believe that inventories are likely to remain high.
We also note that record CPO production was achieved in the month (slightly up MoM and YoY), despite market expectations of a slowdown due to potential biological stress to estates in Malaysia. We had highlighted earlier that production in November was likely to remain strong as our checks had indicated that fruits in East Malaysia attained late maturity this year (in October and November) compared to Peninsular Malaysia (September).
Although recent data for Indonesian inventory is not available, we note that the Executive Director of Indonesian Confederation of Vegetable Industries was quoted earlier this week saying that palm oil export volumes out of Indonesia are expected to drop by 31% YoY in 4Q08. Given that Indonesian palm oil inventories were reported to be about 2m tonnes at the end of September, a slowdown in exports in 4Q08 could mean that inventories there could also rise substantially.
Going forward, we do expect Malaysian palm oil inventories to come down over the next three months, as we enter a seasonally low production period (Nov-Feb). However, we believe that inventories would still remain elevated relative to historical levels.
Action and recommendation
We maintain our Underweight view on the Malaysian plantations sector. The valuations of the Malaysian plantation companies still remain rich at 15-20x 2009E earnings vs historical average of 10-14x.
JPM: Berjaya Sports Toto
1H FY09 net profit 47% of our FY09 estimate: BToto reported 2Q FY09 net profit of M$114MM, up 23% Q/Q and 27% Y/Y. 1H FY09 net profit came in at M$206MM, representing 47% of our full-year estimate of M$438MM and 49% of consensus estimates.
· Higher sales and lower prize payout in 2Q FY09: Revenue from the NFO segment recorded a significant increase in 2Q FY09 (up 14% Q/Q and 19% Y/Y). Even on a per draw basis, revenue increased by approximately 22% Y/Y and 8% Q/Q mainly attributable to strong sales of the Mega 6/52 game which recorded its highest-ever jackpot prize of M$20MM in October 2008 as well as improved sales contribution from the 4 Digit game. Pre-tax profit also increased 44% Y/Y and 24% Q/Q due to a lower prize payout. Thus, NFO operating margin improved to 18.2% in 2Q FY09 from 16.7% in 1Q FY09 and 11% in 4Q FY08. The results demonstrate that demand remains resilient and relatively inelastic.
Dividend below expectations: The company declared a 2Q FY09 net dividend of 5.25 sen (gross of 7 sen), which represents a payout ratio of approximately 58%. On a cumulative basis, the 1H FY09 net dividend amounted to 9.75 sen, bringing the payout ratio for 1H FY09 to 59%. However, we believe that dividends will likely increase in 2H FY09 as management reiterated its dividend policy of a 75% payout ratio for the year.
· We assume coverage and maintain OW: We are maintaining our earnings estimates for now until we meet with management following the recent transfer in coverage. Our Apr-09 PT of M$5.70 is based on DCF. The stock is currently trading at a FY09E P/E of 13.1x, a slight premium to the market P/E of 11x but we believe this is justifiable given its defensive nature and high dividend yield of 5.7% (assuming a 75% payout ratio). A key risk is unexpected regulatory changes.
· Higher sales and lower prize payout in 2Q FY09: Revenue from the NFO segment recorded a significant increase in 2Q FY09 (up 14% Q/Q and 19% Y/Y). Even on a per draw basis, revenue increased by approximately 22% Y/Y and 8% Q/Q mainly attributable to strong sales of the Mega 6/52 game which recorded its highest-ever jackpot prize of M$20MM in October 2008 as well as improved sales contribution from the 4 Digit game. Pre-tax profit also increased 44% Y/Y and 24% Q/Q due to a lower prize payout. Thus, NFO operating margin improved to 18.2% in 2Q FY09 from 16.7% in 1Q FY09 and 11% in 4Q FY08. The results demonstrate that demand remains resilient and relatively inelastic.
Dividend below expectations: The company declared a 2Q FY09 net dividend of 5.25 sen (gross of 7 sen), which represents a payout ratio of approximately 58%. On a cumulative basis, the 1H FY09 net dividend amounted to 9.75 sen, bringing the payout ratio for 1H FY09 to 59%. However, we believe that dividends will likely increase in 2H FY09 as management reiterated its dividend policy of a 75% payout ratio for the year.
· We assume coverage and maintain OW: We are maintaining our earnings estimates for now until we meet with management following the recent transfer in coverage. Our Apr-09 PT of M$5.70 is based on DCF. The stock is currently trading at a FY09E P/E of 13.1x, a slight premium to the market P/E of 11x but we believe this is justifiable given its defensive nature and high dividend yield of 5.7% (assuming a 75% payout ratio). A key risk is unexpected regulatory changes.
Tanjong Plc - Defensive EPS
Tanjong Plc BUY
Price target RM16.70
Share price at 12 Dec RM13.50
Investment summary
Last week, Tanjong reported a poor set of Q309 results, which were ~5% lower than expectations due to one-off kitchen-sinking expenses. However, we remain bullish on Tanjong: (1) +6% EPS CAGR over FY08-10E from the Globeleq IPP acquisition, which is superior to growth rates at other Bursa-listed power/ infrastructure stocks. (2) Tanjong’s earnings are highly defensive to the current global recession (50-60% is derived from Malaysian IPP/gaming), and could potentially benefit from USD appreciation and falling interest rates. (3) Valuation multiple expansion due to the potential long-term spin-off of Tanjong’s power division and the local investment vacuum created by the Malakoff de-listing.
Fundamental trade
In a sideways market, along with Resorts, we think Tanjong is a fundamental trading opportunity: (1) liquid/ wide 2-mth trading band of RM10-14/share; (2) defensive earnings profile, and USD beneficiary.
Price target RM16.70
Share price at 12 Dec RM13.50
Investment summary
Last week, Tanjong reported a poor set of Q309 results, which were ~5% lower than expectations due to one-off kitchen-sinking expenses. However, we remain bullish on Tanjong: (1) +6% EPS CAGR over FY08-10E from the Globeleq IPP acquisition, which is superior to growth rates at other Bursa-listed power/ infrastructure stocks. (2) Tanjong’s earnings are highly defensive to the current global recession (50-60% is derived from Malaysian IPP/gaming), and could potentially benefit from USD appreciation and falling interest rates. (3) Valuation multiple expansion due to the potential long-term spin-off of Tanjong’s power division and the local investment vacuum created by the Malakoff de-listing.
Fundamental trade
In a sideways market, along with Resorts, we think Tanjong is a fundamental trading opportunity: (1) liquid/ wide 2-mth trading band of RM10-14/share; (2) defensive earnings profile, and USD beneficiary.
Tanjong (TJPL.KL): Buy
Tanjong (TJPL.KL): Buy: Results In-Line, Expect Better 4Q09
9-month net profit up 7% YoY - Tanjong reported 9-month net profits of RM435m, up 7% YoY following 22% top-line growth, following the Globeleq acquisition in December 2007. Third quarter net profit fell 29% QoQ to RM97m after 1) an additional RM55m (for full RM62m levy) provision for windfall levy; 2) reversal of translation gain of RM29m (estimate); and 3) additional RM10m (estimate) in business & corporate charges. Please refer to Figure 1 for details.
Lower Leisure losses - Though not a major division, it is comforting to see lower losses at the Leisure division on improved contribution from Tropical Island.
Expect higher 4Q09 - The circa RM84m levy and reversal in translation gain are not expected to recur. We expect a stronger 4Q in the absence of these and higher gaming earnings in 4Q09 (i.e., bonus draws and festive sales).
Third interim 17.5 sen dividend - Management has declared a third interim gross dividend of 17.5 sen less 25% tax. The ex-date has been fixed on 31 December 2008 and will be paid on 16 January 2009.
Earnings trimmed slightly and dividend lowered - We have trimmed FY09E-FY10E net profit by 0%-1% to take into account higher business & corporate expenses. We have also lowered FY09E dividend to 90 sen from 100 sen. We expect management to be more prudent in capital management following the windfall levy payment and further deterioration in the economic outlook.
Maintain Buy (1L) - We are maintaining our Buy/Low Risk rating on Tanjong.
9-month net profit up 7% YoY - Tanjong reported 9-month net profits of RM435m, up 7% YoY following 22% top-line growth, following the Globeleq acquisition in December 2007. Third quarter net profit fell 29% QoQ to RM97m after 1) an additional RM55m (for full RM62m levy) provision for windfall levy; 2) reversal of translation gain of RM29m (estimate); and 3) additional RM10m (estimate) in business & corporate charges. Please refer to Figure 1 for details.
Lower Leisure losses - Though not a major division, it is comforting to see lower losses at the Leisure division on improved contribution from Tropical Island.
Expect higher 4Q09 - The circa RM84m levy and reversal in translation gain are not expected to recur. We expect a stronger 4Q in the absence of these and higher gaming earnings in 4Q09 (i.e., bonus draws and festive sales).
Third interim 17.5 sen dividend - Management has declared a third interim gross dividend of 17.5 sen less 25% tax. The ex-date has been fixed on 31 December 2008 and will be paid on 16 January 2009.
Earnings trimmed slightly and dividend lowered - We have trimmed FY09E-FY10E net profit by 0%-1% to take into account higher business & corporate expenses. We have also lowered FY09E dividend to 90 sen from 100 sen. We expect management to be more prudent in capital management following the windfall levy payment and further deterioration in the economic outlook.
Maintain Buy (1L) - We are maintaining our Buy/Low Risk rating on Tanjong.
JPM: Tanjong Plc: 3Q FY09 profits hit....
Tanjong Plc: 3Q FY09 profits hit by windfall tax levy and rise in NFO prize payouts; Tropical Island turns EBIT positive
9M FY09 net profit rose 7% Y/Y, or at 72% of our full-year forecast (73% of consensus). 9M FY09 operating profit also rose by 7% Y/Y driven largely by additional income from the Globeleq power plants acquired in Nov-07 despite the M$62MM windfall levy on the Malaysian power plants. Below the operating level or at the bottom line, profits were partly boosted by gains from disposal of the group's broadcasting assets in UK, which raised net investment income by 2x to M$48MM for 9M FY09. Tanjong declared a third interim GDPS of 17.5sen, translating to a total of 52.5sen for 9M FY09, up 25% Y/Y.
· 3Q FY09 profits were down 29% Q/Q and 45% Y/Y due largely to one-off items. These included: 1) the balance of the windfall levy of M$55MM for the full year totally provided for in 3Q (M$7MM in 2Q) with no further charge expected; and 2) business and corporate development costs of M$10MM – i.e., bidding and listing expenses for the overseas power division.
· 3Q FY09 divisional breakdown; Tropical Island turns EBIT positive: Stripping out the windfall levy, power division profits rose 11% Y/Y in 3Q FY09 although headline profits were down 15% Y/Y. 3Q FY09 gaming profits fell 39% Y/Y due to fewer draws and an increase in the NFO prize payout from 62% to 66%. This dragged down 9M FY09 gaming profits, which fell 2% Y/Y. Due to improved attendees overall, Tropical Island turned EBIT positive in 3Q FY09, with operating losses for the nine-month period, as a result, down 66% to M$13MM (see Table 2 for divisional breakdown details).
· We assume coverage and maintain OW: Overall, the results did not present significant surprises. Hence, we maintain our earnings estimates and also our full-year GDPS forecast of 96sen, or 72sen on a net basis for FY09E (FY08: GDPS of 90sen, or 67sen on a net basis). We will be meeting with management next week for more details or an update following the recent transfer in coverage of the stock. Our Jun-09 PT is M$24 based on sum-of-the-parts. A key risk to our PT is regulatory changes to the power sector in Malaysia.
9M FY09 net profit rose 7% Y/Y, or at 72% of our full-year forecast (73% of consensus). 9M FY09 operating profit also rose by 7% Y/Y driven largely by additional income from the Globeleq power plants acquired in Nov-07 despite the M$62MM windfall levy on the Malaysian power plants. Below the operating level or at the bottom line, profits were partly boosted by gains from disposal of the group's broadcasting assets in UK, which raised net investment income by 2x to M$48MM for 9M FY09. Tanjong declared a third interim GDPS of 17.5sen, translating to a total of 52.5sen for 9M FY09, up 25% Y/Y.
· 3Q FY09 profits were down 29% Q/Q and 45% Y/Y due largely to one-off items. These included: 1) the balance of the windfall levy of M$55MM for the full year totally provided for in 3Q (M$7MM in 2Q) with no further charge expected; and 2) business and corporate development costs of M$10MM – i.e., bidding and listing expenses for the overseas power division.
· 3Q FY09 divisional breakdown; Tropical Island turns EBIT positive: Stripping out the windfall levy, power division profits rose 11% Y/Y in 3Q FY09 although headline profits were down 15% Y/Y. 3Q FY09 gaming profits fell 39% Y/Y due to fewer draws and an increase in the NFO prize payout from 62% to 66%. This dragged down 9M FY09 gaming profits, which fell 2% Y/Y. Due to improved attendees overall, Tropical Island turned EBIT positive in 3Q FY09, with operating losses for the nine-month period, as a result, down 66% to M$13MM (see Table 2 for divisional breakdown details).
· We assume coverage and maintain OW: Overall, the results did not present significant surprises. Hence, we maintain our earnings estimates and also our full-year GDPS forecast of 96sen, or 72sen on a net basis for FY09E (FY08: GDPS of 90sen, or 67sen on a net basis). We will be meeting with management next week for more details or an update following the recent transfer in coverage of the stock. Our Jun-09 PT is M$24 based on sum-of-the-parts. A key risk to our PT is regulatory changes to the power sector in Malaysia.
Malaysia Equity Strategy
High Valuations Vulnerable to Negative Macro Surprises
Best performing Asian market YTD; valuations still holding up - Malaysia has been the best performing Asian market YTD, with P/B holding up at 1.45x. Its high valuation, however, is defying trends in other markets and is prompting investors to look elsewhere. Malaysia has fared well as a defensive.
New index target is 691 (1.2x 09E P/B) - With the macro risk rising, the market could fall below the 1.4x P/B it last hit during the 2000-01 recession. EPS growth expectations continue to fall in an uncertain market, and hence our previous bottom-up approach was losing relevance. Taking a more cautious approach, we are now using as our benchmark the average Asia P/B of 1.2x - implying a further 17% decline in the KLCI, to 691 points.
Bear market to bottom earliest in 1Q09E - In three of the last four recessions, the bear market ended in or immediately after the worst quarter of GDP growth. Our economist forecasts GDP to bottom at around 2.0% in 1Q09, down from 2.6% in 4Q08. If history repeats itself, 1Q09 is the earliest the market could bottom.
Macro risks - Relatively resilient private consumption, which accounts for half of Malaysia's GDP, has so far saved the economy. At risk is 1Q09 GDP, which could fall sharply before staging a mild rebound in 2H09. The market has yet to fully discount a potential disappointment in GDP numbers.
Further downward EPS revisions for 09 - We have cut our 09E EPS growth further post the 3Q results. We are now forecasting -11.1% growth, down from -3.9%. Utilities are forecast to record -23.7% EPS growth, banks -8.3%, telecoms -14.4%, plantation -20.6% and tobacco -10.5%.
Go for stocks with low P/B or high earnings visibility - Be they cyclical or defensive, stocks trading at trough P/Bs or have strong earnings visibility are on our top buys list - AMMB, BCHB, IGB Corp, KLCC Property, Tanjong plc and IOI Corp. Our top Sell ideas are Public and Maybank.
Best performing Asian market YTD; valuations still holding up - Malaysia has been the best performing Asian market YTD, with P/B holding up at 1.45x. Its high valuation, however, is defying trends in other markets and is prompting investors to look elsewhere. Malaysia has fared well as a defensive.
New index target is 691 (1.2x 09E P/B) - With the macro risk rising, the market could fall below the 1.4x P/B it last hit during the 2000-01 recession. EPS growth expectations continue to fall in an uncertain market, and hence our previous bottom-up approach was losing relevance. Taking a more cautious approach, we are now using as our benchmark the average Asia P/B of 1.2x - implying a further 17% decline in the KLCI, to 691 points.
Bear market to bottom earliest in 1Q09E - In three of the last four recessions, the bear market ended in or immediately after the worst quarter of GDP growth. Our economist forecasts GDP to bottom at around 2.0% in 1Q09, down from 2.6% in 4Q08. If history repeats itself, 1Q09 is the earliest the market could bottom.
Macro risks - Relatively resilient private consumption, which accounts for half of Malaysia's GDP, has so far saved the economy. At risk is 1Q09 GDP, which could fall sharply before staging a mild rebound in 2H09. The market has yet to fully discount a potential disappointment in GDP numbers.
Further downward EPS revisions for 09 - We have cut our 09E EPS growth further post the 3Q results. We are now forecasting -11.1% growth, down from -3.9%. Utilities are forecast to record -23.7% EPS growth, banks -8.3%, telecoms -14.4%, plantation -20.6% and tobacco -10.5%.
Go for stocks with low P/B or high earnings visibility - Be they cyclical or defensive, stocks trading at trough P/Bs or have strong earnings visibility are on our top buys list - AMMB, BCHB, IGB Corp, KLCC Property, Tanjong plc and IOI Corp. Our top Sell ideas are Public and Maybank.
Tanjong Plc (Outperform)
One-off is past us, is TI turning?
Event
Tanjong reported its 3Q FY1/09 results. Excluding an estimated RM54m provision for the IPP windfall tax, the results were within expectations.
Tropical Island (TI) reported RM2.6m in pretax profit for the quarter, only the second time ever since it started in 2005.
Impact
Excluding one-offs at the power division, 9M09 was within expectation. At the 9-month mark, net profit rose 7% to RM435m, which represents 71% of our full-year forecast and 72% of consensus. Excluding the IPP windfall tax provision, net profit would have represented 78% of our forecast, or 79% of consensus.
Is Tropical Island (TI) turning around? TI reported RM2.6m in pretax profit in 3Q. Average visitors per day rose sharply to 2,796, while ARPU held at €31.4. This could be because Germans are finding TI to be a value alternative to flying to tropical beaches in Asia. Visitor days have been holding up during November to December. At this point, we maintain our forecast of a RM30–40m loss pa in FY09–11. The recent JV to build 375 vacation homes by April 2010 could boost visitor days further by opening up the market to overnight guests.
Gaming divisions within expectations. Lottery pretax in 9M09 rose 4.4% as revenue per draw edged up by 2%.
Interim dividend is on track to meet our forecast. A third interim dividend of 17.5 sen less 25% tax was declared. This brings the total interim dividend to 52.5 sen (39.4 sen net) and assuming a fourth interim of 17.5 sen and a final dividend similar to the 34 sen in FY08, total dividend would hit 104 sen (78 sen net).
Earnings revision
Incorporating windfall tax and other one-offs raises our FY09 earnings forecast by 3%. No change otherwise.
Price catalyst
12-month price target: RM17.00 based on a Sum of Parts methodology.
Catalyst: Potential power acquisitions, potential listing of power or gaming division, potential turnaround of TI by April 2010.
Action and recommendation
We maintain our Outperform rating on Tanjung. Our DCF valuation of RM17 assumes a cost of equity of 11.5%. The implied target PER is 10x calendarised for 2009.
We believe Tanjong is attractive to investors seeking value and yield, providing solid and stable cashflows with the potential for upside from overseas power acquisitions, the potential listing of the gaming or power division and the turnaround of TI.
Event
Tanjong reported its 3Q FY1/09 results. Excluding an estimated RM54m provision for the IPP windfall tax, the results were within expectations.
Tropical Island (TI) reported RM2.6m in pretax profit for the quarter, only the second time ever since it started in 2005.
Impact
Excluding one-offs at the power division, 9M09 was within expectation. At the 9-month mark, net profit rose 7% to RM435m, which represents 71% of our full-year forecast and 72% of consensus. Excluding the IPP windfall tax provision, net profit would have represented 78% of our forecast, or 79% of consensus.
Is Tropical Island (TI) turning around? TI reported RM2.6m in pretax profit in 3Q. Average visitors per day rose sharply to 2,796, while ARPU held at €31.4. This could be because Germans are finding TI to be a value alternative to flying to tropical beaches in Asia. Visitor days have been holding up during November to December. At this point, we maintain our forecast of a RM30–40m loss pa in FY09–11. The recent JV to build 375 vacation homes by April 2010 could boost visitor days further by opening up the market to overnight guests.
Gaming divisions within expectations. Lottery pretax in 9M09 rose 4.4% as revenue per draw edged up by 2%.
Interim dividend is on track to meet our forecast. A third interim dividend of 17.5 sen less 25% tax was declared. This brings the total interim dividend to 52.5 sen (39.4 sen net) and assuming a fourth interim of 17.5 sen and a final dividend similar to the 34 sen in FY08, total dividend would hit 104 sen (78 sen net).
Earnings revision
Incorporating windfall tax and other one-offs raises our FY09 earnings forecast by 3%. No change otherwise.
Price catalyst
12-month price target: RM17.00 based on a Sum of Parts methodology.
Catalyst: Potential power acquisitions, potential listing of power or gaming division, potential turnaround of TI by April 2010.
Action and recommendation
We maintain our Outperform rating on Tanjung. Our DCF valuation of RM17 assumes a cost of equity of 11.5%. The implied target PER is 10x calendarised for 2009.
We believe Tanjong is attractive to investors seeking value and yield, providing solid and stable cashflows with the potential for upside from overseas power acquisitions, the potential listing of the gaming or power division and the turnaround of TI.
Berjaya Sports Toto Bhd
Everything in place but the dividends
Sports Toto's 2Q earnings were line with our estimates, with revenues 54% of our full year estimate, but net profits 48% of our full year estimate. Dividend per share rose 17% (or 1 sen) but its div payout still fell short of the promised 75% for the year. Mgmt reiterates its div payout target will still be achieved, and given last year's div behaviour, we believe the divs will be delivered. Buy maintained.
Strong revenues, low prize payout, both due to Jackpot
2Q net profit grew 27% YoY, 23% QoQ, as revenue growth was boosted by punters chasing the RM20mn prize offered by Toto's 6/52 jackpot game. We estimate the prize payout was ~2 ppts below prize payout in the comparative quarter, which is partly a function of a higher proportion of jackpot game sales, since such games have a lower theoretical prize payout (55% compared to the 65% for 4 digit games). Rev/draw grew 9% QoQ and 21% YoY, superior to Tanjong's 2.6% YoY growth and flat QoQ for the same 3 mth period, attesting to the importance of the Jackpot games to growth. We expect a similar strong 3Q as the Jackpot prize is still at RM20mn.
Dividends - still the dark cloud on the horizon
2Q div payout fell from 61% in the immediately preceding quarter to 58% this quarter or 59.4% for the 6 mths. Toto stated it remains committed to a 75% div payout policy, suggesting its div payout will catch up in the final quarter, as it did last year, when 4Q div payout exceeded 100% to close the year's div payout at 93%. This allows the co to pay rising dividends in the yr without being caught out by unusually high prize payouts in the later quarters.
Sports Toto's 2Q earnings were line with our estimates, with revenues 54% of our full year estimate, but net profits 48% of our full year estimate. Dividend per share rose 17% (or 1 sen) but its div payout still fell short of the promised 75% for the year. Mgmt reiterates its div payout target will still be achieved, and given last year's div behaviour, we believe the divs will be delivered. Buy maintained.
Strong revenues, low prize payout, both due to Jackpot
2Q net profit grew 27% YoY, 23% QoQ, as revenue growth was boosted by punters chasing the RM20mn prize offered by Toto's 6/52 jackpot game. We estimate the prize payout was ~2 ppts below prize payout in the comparative quarter, which is partly a function of a higher proportion of jackpot game sales, since such games have a lower theoretical prize payout (55% compared to the 65% for 4 digit games). Rev/draw grew 9% QoQ and 21% YoY, superior to Tanjong's 2.6% YoY growth and flat QoQ for the same 3 mth period, attesting to the importance of the Jackpot games to growth. We expect a similar strong 3Q as the Jackpot prize is still at RM20mn.
Dividends - still the dark cloud on the horizon
2Q div payout fell from 61% in the immediately preceding quarter to 58% this quarter or 59.4% for the 6 mths. Toto stated it remains committed to a 75% div payout policy, suggesting its div payout will catch up in the final quarter, as it did last year, when 4Q div payout exceeded 100% to close the year's div payout at 93%. This allows the co to pay rising dividends in the yr without being caught out by unusually high prize payouts in the later quarters.
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