Mortgage-Related Assets
U.S. banks have sustained $758 billion in credit losses since the crisis began. Many of those losses stemmed from mortgage-related investments that declined with the collapse in the housing market.
Home prices in 20 U.S. cities fell 18.2 percent in November from a year earlier, the fastest drop on record, according to the S&P/Case-Shiller index.
“Unfortunately, the prospect of stable home prices remains many months in the future,” Greenspan said in his speech. “Many forecasters project a decline in home prices of 10 percent or more from current levels.”
Greenspan estimated the collapse in housing, coupled with the steep drop in equity prices worldwide, had wiped out more than $40 trillion of wealth, equivalent to two-thirds of last year’s global gross domestic product. U.S. stocks tumbled to a three-month low yesterday, extending a decline that began overseas.
“Certainly, by any historical measure, world stock prices are cheap,” Greenspan said. “But as history also counsels they could get a lot cheaper before they turn.”
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Saturday, 21 February 2009
US Bank Losses
Bank Losses
U.S. bank stocks have been hammered as their loan losses have mounted. Citigroup Inc., the bank that received $45 billion from the government last year, fell 43 cents to $3.06. JPMorgan Chase & Co., the second-largest U.S. bank by assets, declined $3.04 to $21.65. Bank of America Corp. dropped 67 cents to $4.90.
The Obama administration last week laid out a multipronged plan to aid the banks, drawing on the remaining money in the $700 billion Troubled Asset Relief Program. Greenspan said that wouldn’t be enough.
“To stabilize the banking system and restore normal lending, additional TARP funds will be required,” he said.
He highlighted the importance of building up banks’ capital. “Banks are not going to increase their lending until they feel comfortable with the amount of capital they hold,” he said in the Feb. 16 interview. “That’s not going to happen for a while.”
The 82-year-old economist also stressed the importance of halting the decline in house prices that is battering banks. “Until we can stabilize the asset side of bank balance sheets, this crisis will not come to a close,” he said.
U.S. bank stocks have been hammered as their loan losses have mounted. Citigroup Inc., the bank that received $45 billion from the government last year, fell 43 cents to $3.06. JPMorgan Chase & Co., the second-largest U.S. bank by assets, declined $3.04 to $21.65. Bank of America Corp. dropped 67 cents to $4.90.
The Obama administration last week laid out a multipronged plan to aid the banks, drawing on the remaining money in the $700 billion Troubled Asset Relief Program. Greenspan said that wouldn’t be enough.
“To stabilize the banking system and restore normal lending, additional TARP funds will be required,” he said.
He highlighted the importance of building up banks’ capital. “Banks are not going to increase their lending until they feel comfortable with the amount of capital they hold,” he said in the Feb. 16 interview. “That’s not going to happen for a while.”
The 82-year-old economist also stressed the importance of halting the decline in house prices that is battering banks. “Until we can stabilize the asset side of bank balance sheets, this crisis will not come to a close,” he said.
Greenspan Says U.S. May Not Be Doing Enough to Promote Recovery
Feb. 18 (Bloomberg) -- Former Federal Reserve Chairman Alan Greenspan said the U.S. may be doing too little to repair its financial system and promote an economic recovery.
President Barack Obama yesterday signed into law a $787 billion economic stimulus package of tax cuts and increased spending. He has also pledged to use the bulk of the roughly $315 billion left in the bank bailout fund approved by Congress last October to revive the battered financial industry.
“The amount of money in both these pots may not be enough to solve the problem,” Greenspan said in an interview before a speech yesterday to the Economic Club of New York.
The comments highlight the difficulties Obama faces in fighting the steepest recession in a generation. The economy contracted at an annual pace of 3.8 percent in the fourth quarter of last year, the most since 1982.
In the speech, the former Fed chairman said “what we are currently going through is a once-in-a-century type of event. It will pass.”
Greenspan, who now heads his own Washington-based consulting company, warned in his speech that the positive impact of the stimulus package on the economy will peter out if the U.S. fails to fix its financial system.
“Given the Japanese experience of the 1990s, we need to assure that the repair of the financial system precedes the onset of any major fiscal stimulus,” he said.
President Barack Obama yesterday signed into law a $787 billion economic stimulus package of tax cuts and increased spending. He has also pledged to use the bulk of the roughly $315 billion left in the bank bailout fund approved by Congress last October to revive the battered financial industry.
“The amount of money in both these pots may not be enough to solve the problem,” Greenspan said in an interview before a speech yesterday to the Economic Club of New York.
The comments highlight the difficulties Obama faces in fighting the steepest recession in a generation. The economy contracted at an annual pace of 3.8 percent in the fourth quarter of last year, the most since 1982.
In the speech, the former Fed chairman said “what we are currently going through is a once-in-a-century type of event. It will pass.”
Greenspan, who now heads his own Washington-based consulting company, warned in his speech that the positive impact of the stimulus package on the economy will peter out if the U.S. fails to fix its financial system.
“Given the Japanese experience of the 1990s, we need to assure that the repair of the financial system precedes the onset of any major fiscal stimulus,” he said.
Waiver on CPO Windfall Tax Expected Soon?
Being considered seriously - It was reported in the New Straits Times that the government was likely to waive the windfall tax on crude palm oil (CPO) soon. According to Deputy Finance Minister Datuk Kong Cho Ha, this has been heavily debated in the Finance Ministry and is being considered seriously. Our channel checks reveal that industry players are aggressively lobbying for it.
§ Windfall tax - To recap, the cooking oil stabilization scheme (COSS) palm oil cess was abolished in July 2008 and a windfall profit levy was imposed. For Sabah and Sarawak, it is 7.5% for every tonne of CPO that exceeds RM2,000. While for Peninsular Malaysia, it is 15% for every tonne of CPO that exceeds RM2,000.
§ No impact for now - Given that the CPO spot price is still below RM2,000/t, there is no collection of windfall tax. We are maintaining our CPO price assumption of RM1,930/t for 2009E and 2010E.
§ To lift sentiment - This piece of news is basically government effort to further boost sentiment toward the industry, in our view. If it goes through, it is clearly positive news for the industry, especially as the CPO price edges closer to the RM2,000/t mark. In our previous reports, we have highlighted that there is potential upside to CPO prices if supply of competing oils continues to tighten given unfavourable weather conditions in South America.
§ Windfall tax - To recap, the cooking oil stabilization scheme (COSS) palm oil cess was abolished in July 2008 and a windfall profit levy was imposed. For Sabah and Sarawak, it is 7.5% for every tonne of CPO that exceeds RM2,000. While for Peninsular Malaysia, it is 15% for every tonne of CPO that exceeds RM2,000.
§ No impact for now - Given that the CPO spot price is still below RM2,000/t, there is no collection of windfall tax. We are maintaining our CPO price assumption of RM1,930/t for 2009E and 2010E.
§ To lift sentiment - This piece of news is basically government effort to further boost sentiment toward the industry, in our view. If it goes through, it is clearly positive news for the industry, especially as the CPO price edges closer to the RM2,000/t mark. In our previous reports, we have highlighted that there is potential upside to CPO prices if supply of competing oils continues to tighten given unfavourable weather conditions in South America.
Gamuda: SPLASH stake valued at M$160 mil only - ALERT
Link: https://mm.jpmorgan.com/servlet/UserDocsHelperServlet?action=openpdf&docId=GPS-267939-0
Abstract:
· Gamuda has announced that SPLASH (of which Gamuda owns 40%) has received a formal offer from the Selangor State Government to take over of the water assets and operations, for a price of M$2.0 bil, without taking into consideration the value of the net debt at SPLASH (estimated at c.M$1.6 bil).
· Essentially, this offer values SPLASH at c.M$400 mil, implying that Gamuda's stake is only worth about M$160 mil, significantly lower than our estimate of M$1.2 bil. At M$160 mil, the Selangor State Government essentially values SPLASH at c.1.6x the dividends up-streamed from SLASH to Gamuda annually. A value of M$160 mil also translates only to 8 sen per share.
· While we have yet to further clarify with management on the details of the offer letter, it seems to be low, in our opinion, especially when weighed against our DCF valuation of c.M$1.2bil (roughly on par with consensus). Nevertheless, the option now lies with Gamuda to either accept or reject the offer, deadline of which is set on Feb 20th 2009.
· Pending more clarification from management, we view the offer price as negative to the company.
Abstract:
· Gamuda has announced that SPLASH (of which Gamuda owns 40%) has received a formal offer from the Selangor State Government to take over of the water assets and operations, for a price of M$2.0 bil, without taking into consideration the value of the net debt at SPLASH (estimated at c.M$1.6 bil).
· Essentially, this offer values SPLASH at c.M$400 mil, implying that Gamuda's stake is only worth about M$160 mil, significantly lower than our estimate of M$1.2 bil. At M$160 mil, the Selangor State Government essentially values SPLASH at c.1.6x the dividends up-streamed from SLASH to Gamuda annually. A value of M$160 mil also translates only to 8 sen per share.
· While we have yet to further clarify with management on the details of the offer letter, it seems to be low, in our opinion, especially when weighed against our DCF valuation of c.M$1.2bil (roughly on par with consensus). Nevertheless, the option now lies with Gamuda to either accept or reject the offer, deadline of which is set on Feb 20th 2009.
· Pending more clarification from management, we view the offer price as negative to the company.
Puncak Niaga - BUY - 16 Feb 2009
Puncak Niaga – An offer to refute (Company Update)
Price: RM3.12
Target Price: RM3.86
Recommendation: BUY
l Formal offer for Puncak’s water assets at RM3.1b. The Selangor state government has finally made its offer to buy all water assets in Selangor for RM5.15b. Puncak received an offer from the state government to buy its
water assets for RM3.1b. The offer comprises of RM1.6b and RM1.5b for PNSB and Syabas, respectively. The price is derived from the book value of the assets as at 31st December 2007 excluding the outstanding debt. Puncak will have to revert by 20th February on the offer.
l The offer price is below market expectations. The valua tion base was the book value of the assets, which is unattractive to Puncak given that it is unable to even repay all its debts outstanding comprising bonds and Islamic commercial papers. Pun cak’s net debt reported at RM2.1b and 3.5b in FY07 and 3Q08, respectively. Puncak is valued at RM2.46 using a 1x its BV as at FY07. The state government would have to make an offer of RM5b if the valuation of Puncak post-selling its assets is our target price of RM3.86.
l The crux of the valuation in PNSB and SYABAS is the concession agreements. Given that the sanctity of the concession agreements will be honoured, Puncak has the option to maintain its status quo until the concession period expires in 2034. Existing Islamic bond covenants will also have to be res pected in the process of the sale of assets. Should the government intervene to force the sale of Puncak’s assets, the indirect repercussion on foreign direct investment would be very negative and overall corporate bond ratings especially for other concession companies would be negatively affected.
l The negotiations are stil l on-going. We are neutral on the announced offer price as we expect it would not turn to be much attractive. Puncak will have until 20th February to revert on the offer which we believe the management will reject and counter with a higher price. Nevertheless, in our view, the bargaining power is still with Puncak and they may opt to remain as status quo should the negotiation fail.
l We are maintaining our BUY call with unchanged target price of RM3.86 based on 20% discount to our DCF valuation of RM4.82. Given the low offer price which translates to RM2.46 per share, we expect the share price to react negatively. The main catalyst for the share price will be the outcome from further negotiations on the offer price.
Price: RM3.12
Target Price: RM3.86
Recommendation: BUY
l Formal offer for Puncak’s water assets at RM3.1b. The Selangor state government has finally made its offer to buy all water assets in Selangor for RM5.15b. Puncak received an offer from the state government to buy its
water assets for RM3.1b. The offer comprises of RM1.6b and RM1.5b for PNSB and Syabas, respectively. The price is derived from the book value of the assets as at 31st December 2007 excluding the outstanding debt. Puncak will have to revert by 20th February on the offer.
l The offer price is below market expectations. The valua tion base was the book value of the assets, which is unattractive to Puncak given that it is unable to even repay all its debts outstanding comprising bonds and Islamic commercial papers. Pun cak’s net debt reported at RM2.1b and 3.5b in FY07 and 3Q08, respectively. Puncak is valued at RM2.46 using a 1x its BV as at FY07. The state government would have to make an offer of RM5b if the valuation of Puncak post-selling its assets is our target price of RM3.86.
l The crux of the valuation in PNSB and SYABAS is the concession agreements. Given that the sanctity of the concession agreements will be honoured, Puncak has the option to maintain its status quo until the concession period expires in 2034. Existing Islamic bond covenants will also have to be res pected in the process of the sale of assets. Should the government intervene to force the sale of Puncak’s assets, the indirect repercussion on foreign direct investment would be very negative and overall corporate bond ratings especially for other concession companies would be negatively affected.
l The negotiations are stil l on-going. We are neutral on the announced offer price as we expect it would not turn to be much attractive. Puncak will have until 20th February to revert on the offer which we believe the management will reject and counter with a higher price. Nevertheless, in our view, the bargaining power is still with Puncak and they may opt to remain as status quo should the negotiation fail.
l We are maintaining our BUY call with unchanged target price of RM3.86 based on 20% discount to our DCF valuation of RM4.82. Given the low offer price which translates to RM2.46 per share, we expect the share price to react negatively. The main catalyst for the share price will be the outcome from further negotiations on the offer price.
An informal tariff mechanism in place - BUY
Tenaga Nasional: An informal tariff mechanism in place - BUY -
Mak Hoy Kit
Tenaga Nasional (TNB MK) - BUY
Price 5.95, TP 8.75, Mkt cap $7,127m, Avg t/o $12.7m
An informal tariff mechanism in place
* Management is upbeat on the recent tariff review, akin to an informal cost-pass-through mechanism.
* Main concern is lower electricity demand growth, but we note historical annual growth rates have never been negative.
* Maintain BUY on this deep-value stock. TP of MYR8.75 (WACC of 9.7%). FY09E P/E of 10.4x below 10-year lows.
2009E: Rec EPS 0.57, P/E 10.4, P/B 0.9, ROE 9.4, Yld 3.0
2010E: Rec EPS 0.63, P/E 9.5, P/B 0.9, ROE 9.6, Yld 3.5
2011E: Rec EPS 0.68, P/E 8.8, P/B 0.8, ROE 9.6, Yld 4.0
Mak Hoy Kit
BNP Paribas Capital (Malaysia) Sdn. Bhd.
Mak Hoy Kit
Tenaga Nasional (TNB MK) - BUY
Price 5.95, TP 8.75, Mkt cap $7,127m, Avg t/o $12.7m
An informal tariff mechanism in place
* Management is upbeat on the recent tariff review, akin to an informal cost-pass-through mechanism.
* Main concern is lower electricity demand growth, but we note historical annual growth rates have never been negative.
* Maintain BUY on this deep-value stock. TP of MYR8.75 (WACC of 9.7%). FY09E P/E of 10.4x below 10-year lows.
2009E: Rec EPS 0.57, P/E 10.4, P/B 0.9, ROE 9.4, Yld 3.0
2010E: Rec EPS 0.63, P/E 9.5, P/B 0.9, ROE 9.6, Yld 3.5
2011E: Rec EPS 0.68, P/E 8.8, P/B 0.8, ROE 9.6, Yld 4.0
Mak Hoy Kit
BNP Paribas Capital (Malaysia) Sdn. Bhd.
Response to Recession
Recent Economic Data Pointing to Deepening Recession
- Industrial production fell sharply in December, reflecting weakness not only from falling external demand but also domestic demand. Monthly indicators of services activity suggest that 4Q08 GDP growth will likely fall below our current forecast of 2%yoy, and -4% QoQ SAAR. While we maintain our 2009 forecast of 0.5% pending 4Q08 GDP, we would not be surprised to see 2009 GDP growth fall by -1 to -2% instead.
§ Pause, But Not End of Monetary Easing - Governor Zeti's comments that "it is not constructive to have too low rates" implies that further OPR cuts are unlikely in Feb. But the worsening outlook could prompt further cuts in 2Q09. A widening fiscal deficit, cuts in EPF contribution rates, are raising supply risk in the bond market, potentially sparking sell off in foreign holdings of Malaysian bills/bonds, further MYR weakness and cause back-end yields to spike. Monetary easing may be needed to anchor back-end yields and accommodate looser fiscal stance.
§ RM10-15bn "Mini-Budget" To Be Announced on March 10th - Possible targeted tax incentives for SMEs, and incentives for the tourism and manufacturing are likely. Possible cuts in EPF contribution rates to boost disposable income and/or lower wage costs, but concerns over sufficient EPF demand to absorb MGS supply could be constraints. Further liberalization in services will have limited immediate effects, but could position Malaysia favourably for the eventual recovery.
§ Political uncertainties rear their ugly head again - Political noise could divert the government's energy away from addressing the impending economic woes, and deter foreign investors further. Coming soon after DPM Najib's inauguration as PM in March, the two by elections in Kedah and Perak in April are widely viewed as referendum on his premiership.
§ Markets
§ Fixed Income Markets - It was a cautious start to the week for the local bond market ahead of the 10-year GII Tender on Thursday. A steeper yield curve was the play of the week, as yields rose across the curve, on supply concerns ahead of the 2nd economic stimulus package, which is to be announced in parliament on March 10th.
§ Interest Rate and Related Derivatives - Global positive sentiment towards risky assets (emerging markets) were short-lived as the release of the US bank rescue plan was deemed to lack detail. MYR closed the week at 3.6010/30. $MYR forwards move right as BNM Governor Zeti seemed to rule out a rate cut in Feb, 6s 60/80 (previous week's close -30/par).
To view this full article click on the link below:
https://www.citigroupgeo.com/pdf/SAP24612.pdf
- Industrial production fell sharply in December, reflecting weakness not only from falling external demand but also domestic demand. Monthly indicators of services activity suggest that 4Q08 GDP growth will likely fall below our current forecast of 2%yoy, and -4% QoQ SAAR. While we maintain our 2009 forecast of 0.5% pending 4Q08 GDP, we would not be surprised to see 2009 GDP growth fall by -1 to -2% instead.
§ Pause, But Not End of Monetary Easing - Governor Zeti's comments that "it is not constructive to have too low rates" implies that further OPR cuts are unlikely in Feb. But the worsening outlook could prompt further cuts in 2Q09. A widening fiscal deficit, cuts in EPF contribution rates, are raising supply risk in the bond market, potentially sparking sell off in foreign holdings of Malaysian bills/bonds, further MYR weakness and cause back-end yields to spike. Monetary easing may be needed to anchor back-end yields and accommodate looser fiscal stance.
§ RM10-15bn "Mini-Budget" To Be Announced on March 10th - Possible targeted tax incentives for SMEs, and incentives for the tourism and manufacturing are likely. Possible cuts in EPF contribution rates to boost disposable income and/or lower wage costs, but concerns over sufficient EPF demand to absorb MGS supply could be constraints. Further liberalization in services will have limited immediate effects, but could position Malaysia favourably for the eventual recovery.
§ Political uncertainties rear their ugly head again - Political noise could divert the government's energy away from addressing the impending economic woes, and deter foreign investors further. Coming soon after DPM Najib's inauguration as PM in March, the two by elections in Kedah and Perak in April are widely viewed as referendum on his premiership.
§ Markets
§ Fixed Income Markets - It was a cautious start to the week for the local bond market ahead of the 10-year GII Tender on Thursday. A steeper yield curve was the play of the week, as yields rose across the curve, on supply concerns ahead of the 2nd economic stimulus package, which is to be announced in parliament on March 10th.
§ Interest Rate and Related Derivatives - Global positive sentiment towards risky assets (emerging markets) were short-lived as the release of the US bank rescue plan was deemed to lack detail. MYR closed the week at 3.6010/30. $MYR forwards move right as BNM Governor Zeti seemed to rule out a rate cut in Feb, 6s 60/80 (previous week's close -30/par).
To view this full article click on the link below:
https://www.citigroupgeo.com/pdf/SAP24612.pdf
KNM Group: Oil sands contracts cancelled - BUY
KNM Group: Oil sands contracts cancelled - BUY - Foong Choong
Chen
KNM Group (KNMG MK) - BUY
Price 0.42, TP 1.18, Mkt cap $456m, Avg t/o $8.3m
Oil sands contracts cancelled
* MYR80m oil sands contracts cancelled. Balance MYR140m under review. No
cancellations on non-oil sands jobs.
* Sentiment likely to be negative. Company may also reduce earnings
guidance at analyst briefing later this month.
* Maintain BUY. Longer term positive, as risk of slowdown
appears priced-in.
2008E: Rec EPS 0.11, P/E 3.8, P/B 0.8, ROE 32.7, Yld 4.8
2009E: Rec EPS 0.15, P/E 2.8, P/B 0.7, ROE 26.5, Yld 6.0
2010E: Rec EPS 0.18, P/E 2.4, P/B 0.6, ROE 25.5, Yld 8.3
Foong Choong Chen
BNP Paribas Capital (Malaysia) Sdn. Bhd.
(60 3) 2050 9938
Chen
KNM Group (KNMG MK) - BUY
Price 0.42, TP 1.18, Mkt cap $456m, Avg t/o $8.3m
Oil sands contracts cancelled
* MYR80m oil sands contracts cancelled. Balance MYR140m under review. No
cancellations on non-oil sands jobs.
* Sentiment likely to be negative. Company may also reduce earnings
guidance at analyst briefing later this month.
* Maintain BUY. Longer term positive, as risk of slowdown
appears priced-in.
2008E: Rec EPS 0.11, P/E 3.8, P/B 0.8, ROE 32.7, Yld 4.8
2009E: Rec EPS 0.15, P/E 2.8, P/B 0.7, ROE 26.5, Yld 6.0
2010E: Rec EPS 0.18, P/E 2.4, P/B 0.6, ROE 25.5, Yld 8.3
Foong Choong Chen
BNP Paribas Capital (Malaysia) Sdn. Bhd.
(60 3) 2050 9938
Forward CPO sales 35% above spot - HOLD
KL Kepong: Forward CPO sales 35% above spot - HOLD - Michael
Greenall
KL Kepong (KLK MK) - HOLD
Price 9.95, TP 10.30, Mkt cap $3,048m, Avg t/o $7.4m
Forward CPO sales 35% above spot
* We rate KLK a HOLD: KLK has managed to sell forward 58% of 2009 CPO production at 35% above current spot price.
* CPO prices have stabilised but retail and manufacturing are vulnerable to a slowdown, particularly in the EU and US.
* Strongest balance sheet and capital management capability. TP of MYR10.30 based on 14x FY09E earnings.
2009E: Rec EPS 0.71, P/E 14.1, P/B 1.6, ROE 12.5, Yld 4.1
2010E: Rec EPS 0.90, P/E 11.1, P/B 1.4, ROE 13.8, Yld 4.1
2011E: Rec EPS 0.92, P/E 10.8, P/B 1.3, ROE 12.7, Yld 4.1
Greenall
KL Kepong (KLK MK) - HOLD
Price 9.95, TP 10.30, Mkt cap $3,048m, Avg t/o $7.4m
Forward CPO sales 35% above spot
* We rate KLK a HOLD: KLK has managed to sell forward 58% of 2009 CPO production at 35% above current spot price.
* CPO prices have stabilised but retail and manufacturing are vulnerable to a slowdown, particularly in the EU and US.
* Strongest balance sheet and capital management capability. TP of MYR10.30 based on 14x FY09E earnings.
2009E: Rec EPS 0.71, P/E 14.1, P/B 1.6, ROE 12.5, Yld 4.1
2010E: Rec EPS 0.90, P/E 11.1, P/B 1.4, ROE 13.8, Yld 4.1
2011E: Rec EPS 0.92, P/E 10.8, P/B 1.3, ROE 12.7, Yld 4.1
ROEs Fall as Margins Squeezed
Malaysia Banks: Consumer Business: ROEs Fall as Margins Squeezed
§ Aggressive Central Bank rate cuts present NIM challenge - Our recent channel checks show, post OPR cuts, the declines in lending rates for mortgages and auto loans have outpaced deposit rates. This will shrink the ROEs on mortgage and auto loans, even before accounting for the likelihood of higher credit losses as unemployment rates mount, in our view.
§ Mortgage ROEs to fall to 9% from 13% - NIMs have shrunk c20bps as the effective cost of funds decline of 60bps lagged the BLR cut of 80bps, on our estimates. If credit costs were to double, say from 20bps to 40bps, the effective ROE would collapse to just 4%. In spite of this, domestic banks continue to pursue this segment of the market and are willing to take on new loans at BLR minus 2.0-2.2%, near the historical low.
§ (Unadjusted) Auto ROEs fall to 14% from 24% - Our channel checks with car dealers and banks reveal that non-national car lending yields have fallen more than 150bps from the peak of 6.5% in August 08. By comparison, national car rates have fallen about 50bps over the same period. However, adjusting for 4-year cost of funds (using Government securities' yield as proxy) to match duration, auto ROE would be just 3%.
§ We have imputed an average NIM decline of 5bps this year - Banks with high exposure to housing loans (Public) and a high CASA base (Maybank, Alliance, RHBC) would see narrower margins, in our view. At the other end, AMMB should benefit from falling rates as >50% of its loans are on a fixed-rate basis. Even though auto ROEs will decline, we view positively AMMB's cautious stance and price discipline to minimize the squeeze in margins.
§ Maintain Underweight on MY banks - Despite the marked deterioration in global economic conditions, credit spreads in the mortgage and auto loan markets have not widened, which is surprising to us. We view that sector credit costs will rise this year to 137bps from 81bps in 2008, which will add pressure to bottom lines. AMMB remains our top pick in the sector as it benefits from interest rate cuts.
§ Aggressive Central Bank rate cuts present NIM challenge - Our recent channel checks show, post OPR cuts, the declines in lending rates for mortgages and auto loans have outpaced deposit rates. This will shrink the ROEs on mortgage and auto loans, even before accounting for the likelihood of higher credit losses as unemployment rates mount, in our view.
§ Mortgage ROEs to fall to 9% from 13% - NIMs have shrunk c20bps as the effective cost of funds decline of 60bps lagged the BLR cut of 80bps, on our estimates. If credit costs were to double, say from 20bps to 40bps, the effective ROE would collapse to just 4%. In spite of this, domestic banks continue to pursue this segment of the market and are willing to take on new loans at BLR minus 2.0-2.2%, near the historical low.
§ (Unadjusted) Auto ROEs fall to 14% from 24% - Our channel checks with car dealers and banks reveal that non-national car lending yields have fallen more than 150bps from the peak of 6.5% in August 08. By comparison, national car rates have fallen about 50bps over the same period. However, adjusting for 4-year cost of funds (using Government securities' yield as proxy) to match duration, auto ROE would be just 3%.
§ We have imputed an average NIM decline of 5bps this year - Banks with high exposure to housing loans (Public) and a high CASA base (Maybank, Alliance, RHBC) would see narrower margins, in our view. At the other end, AMMB should benefit from falling rates as >50% of its loans are on a fixed-rate basis. Even though auto ROEs will decline, we view positively AMMB's cautious stance and price discipline to minimize the squeeze in margins.
§ Maintain Underweight on MY banks - Despite the marked deterioration in global economic conditions, credit spreads in the mortgage and auto loan markets have not widened, which is surprising to us. We view that sector credit costs will rise this year to 137bps from 81bps in 2008, which will add pressure to bottom lines. AMMB remains our top pick in the sector as it benefits from interest rate cuts.
How are our stocks doing?
Reviewing our recent stock calls
Nothing has changed much in markets yesterday. The KLCI only corrected 2.6 points while the overnight US markets were closed. We still maintain our positive view on the KLCI. Meanwhile, let us review the progress of our recent batch of stock picks.
AMMB RM 2.52(Up 10.6% since 10th Feb)
Support : 2.30 | Resistance : 2.73
Since our buy call on this stock on the 10th of February, AMMB Holdings has risen 10.6% and seems poised to go up higher. We see it going higher and touching 2.73 soon which is its January high. If it can break 2.73, it will most likely be heading towards the 3.00 level. Volume remains healthy and increasing for this high beta stock while it is now trading above its short term and mid term lines.
ANNJOO RM1.28 (Up 12.2% since 10th Feb)
Support : 1.20 | Resistance : 1.32
On the 6th of February, we made a long term buy-call on this stock as it has dropped 72% from its peak. Since then, Ann Joo has rallied 12.2% in just one week.
Ann Joo remains a long term buy call and not a trading call as it is still a very thinly trade volume which indicates that this stock is still at a pre-interest and long term accumulation stage. We maintain our positive view on the stock and advise long term investors to accumulate this stock at these low levels as Ann Joo may have
already seen its ultimate bottom on the 28th of October (RM1.08).
TMI RM3.34 (Unchanged)
Support : 3.00 | Resistance : 3.45
Cut Loss Level : <3.00
TMI remains our worse performing stock and remains unchanged since our call on
the 10th of February. We are concerned over the fact that it is drifting below its short term 30-day MAV line but we still maintain our confidence in this stock pick. However, we would advise caution if TMI decides to drift lower and revisit its 3.00 critical support. Traders should cut loss if TMI breaks this critical 3.00 support as it will invite huge selling volume immediately.
Nothing has changed much in markets yesterday. The KLCI only corrected 2.6 points while the overnight US markets were closed. We still maintain our positive view on the KLCI. Meanwhile, let us review the progress of our recent batch of stock picks.
AMMB RM 2.52(Up 10.6% since 10th Feb)
Support : 2.30 | Resistance : 2.73
Since our buy call on this stock on the 10th of February, AMMB Holdings has risen 10.6% and seems poised to go up higher. We see it going higher and touching 2.73 soon which is its January high. If it can break 2.73, it will most likely be heading towards the 3.00 level. Volume remains healthy and increasing for this high beta stock while it is now trading above its short term and mid term lines.
ANNJOO RM1.28 (Up 12.2% since 10th Feb)
Support : 1.20 | Resistance : 1.32
On the 6th of February, we made a long term buy-call on this stock as it has dropped 72% from its peak. Since then, Ann Joo has rallied 12.2% in just one week.
Ann Joo remains a long term buy call and not a trading call as it is still a very thinly trade volume which indicates that this stock is still at a pre-interest and long term accumulation stage. We maintain our positive view on the stock and advise long term investors to accumulate this stock at these low levels as Ann Joo may have
already seen its ultimate bottom on the 28th of October (RM1.08).
TMI RM3.34 (Unchanged)
Support : 3.00 | Resistance : 3.45
Cut Loss Level : <3.00
TMI remains our worse performing stock and remains unchanged since our call on
the 10th of February. We are concerned over the fact that it is drifting below its short term 30-day MAV line but we still maintain our confidence in this stock pick. However, we would advise caution if TMI decides to drift lower and revisit its 3.00 critical support. Traders should cut loss if TMI breaks this critical 3.00 support as it will invite huge selling volume immediately.
Paul Schulte [Nomura] - Under the Hood
Multi-Strategy | ASIA
We offer our pair trade of Asian banks against Western banks. One has US$89bn to give and the other needs US$522bn, according to our calculations.
Under the Hood
We offer the ten banks most in need of capital and the ten most able to give it. Voila. Our pair trade for 2009.
The top ten banks globally with the most leverage (42.2x) need to raise US$522bn in capital (or shed US$10.5tn in assets) to arrive at a lower leverage of 20x. Seven out of these ten are in Europe.
The top ten banks globally with the least leverage (13.5x), have US$88bn of capital to offer. ALL OF THESE ARE IN ASIA. This has important implications for currencies, credit markets and assets values and explains the Great Shift we believe we will see over the coming years.
Imagine a world of barter! One year ago, one share of Citi bought 183 pounds of sugar. Now, it buys a mere 29 pounds. What if we only have a barter system? Citi shares, oil, HK property and palm oil are cheap. Gold, wheat and sugar are now expensive.
Deflation watch. Deflation/disinflation is on the march globally. US deflation expectations have lessened but remain at -2%.
Paul Schulte +852 2252 1409 paul.schulte@nomura.com
Mixo Das +852 2252 1424 mixo.das@nomura.com
Please go to http://www.nomura.com/research/GetPub.aspx?pid=309782 to view the full report
We offer our pair trade of Asian banks against Western banks. One has US$89bn to give and the other needs US$522bn, according to our calculations.
Under the Hood
We offer the ten banks most in need of capital and the ten most able to give it. Voila. Our pair trade for 2009.
The top ten banks globally with the most leverage (42.2x) need to raise US$522bn in capital (or shed US$10.5tn in assets) to arrive at a lower leverage of 20x. Seven out of these ten are in Europe.
The top ten banks globally with the least leverage (13.5x), have US$88bn of capital to offer. ALL OF THESE ARE IN ASIA. This has important implications for currencies, credit markets and assets values and explains the Great Shift we believe we will see over the coming years.
Imagine a world of barter! One year ago, one share of Citi bought 183 pounds of sugar. Now, it buys a mere 29 pounds. What if we only have a barter system? Citi shares, oil, HK property and palm oil are cheap. Gold, wheat and sugar are now expensive.
Deflation watch. Deflation/disinflation is on the march globally. US deflation expectations have lessened but remain at -2%.
Paul Schulte +852 2252 1409 paul.schulte@nomura.com
Mixo Das +852 2252 1424 mixo.das@nomura.com
Please go to http://www.nomura.com/research/GetPub.aspx?pid=309782 to view the full report
QL Resources Bhd BUY
Price target RM3.00
Share price at 16 Feb RM2.45
Investment summary
We initiate coverage on QL Resources (QL) with a BUY rating and PT of RM3.00/share based on 9x FY10E PE: (1) We like QL for its proven management, strong profit track record (32% CAGR in FY04-08) and consistently high ROE (20-22% FY04-08). Successful implementation of its expansion plans in Indonesia and Vietnam provides impetus for next growth phase in FY11E. (2) In a recessionary economy, QL stands out for its defensive earnings qualities due to the inelasticity of consumer demand for staple food items. (3) The economic slowdown provides an opportunity for QL to gain market share by acquiring competitors at discounted valuations.
ST defensive; LT growth
Share price is trading at 8x FY10E PE, re-testing its 5-year historical trough PE band. QL is a LT growth play with defensive earnings. Share price could re-rate on successful expansion to regional markets.
Share price at 16 Feb RM2.45
Investment summary
We initiate coverage on QL Resources (QL) with a BUY rating and PT of RM3.00/share based on 9x FY10E PE: (1) We like QL for its proven management, strong profit track record (32% CAGR in FY04-08) and consistently high ROE (20-22% FY04-08). Successful implementation of its expansion plans in Indonesia and Vietnam provides impetus for next growth phase in FY11E. (2) In a recessionary economy, QL stands out for its defensive earnings qualities due to the inelasticity of consumer demand for staple food items. (3) The economic slowdown provides an opportunity for QL to gain market share by acquiring competitors at discounted valuations.
ST defensive; LT growth
Share price is trading at 8x FY10E PE, re-testing its 5-year historical trough PE band. QL is a LT growth play with defensive earnings. Share price could re-rate on successful expansion to regional markets.
Alam Maritim - BUY - 19 Feb 2009
Alam Maritim Resources – 4QFY08 results spot on (Results Note)
Price: RM0.685
Target Price: RM1.11
Recommendation: BUY
· Alam’s 4QFY08 results slightly surpassed both our and consensus’ expectations. Net profit of RM76.4mil was 1% above our RM75.9m and 8% above the consensus of RM 71m.
· QoQ, revenue grew 2.2% to RM110.1mil, while net profit dipped 2.0%, to RM22.7mil. While top line remained strong given locked in charters, net margins were however lower due to hike in operating expenses with recognition of forex losses given Group’s foreign denominated term loan and provision for doubtful debts (+ 161.8% QOQ).
· YoY, revenue increased by a significant 43%, reflected correspondingly with net profit increase of 35.5%, product of the year’s higher daily charter rates, expanded fleet of vessels (FY07 22; FY08 28) and its upcoming underwater services division, of which its net profit increased YOY YTD by a whopping 171.0%.
· We maintain our earnings estimates FY09 and FY10 going forth. As at December 08, order book of RM550mil should sustain earnings throughout FY09.
Maintain BUY but lower target price to RM 1.11 (Previous RM1.27) as we ascribe a lower PER of 7.0x (vs 8.0x previously) as multiple compressed for the sector. We continue to like Alam for its young and extensive fleet, its proven execution capabilities and its’ undemanding valuation at 4.4x PE valuation.
Price: RM0.685
Target Price: RM1.11
Recommendation: BUY
· Alam’s 4QFY08 results slightly surpassed both our and consensus’ expectations. Net profit of RM76.4mil was 1% above our RM75.9m and 8% above the consensus of RM 71m.
· QoQ, revenue grew 2.2% to RM110.1mil, while net profit dipped 2.0%, to RM22.7mil. While top line remained strong given locked in charters, net margins were however lower due to hike in operating expenses with recognition of forex losses given Group’s foreign denominated term loan and provision for doubtful debts (+ 161.8% QOQ).
· YoY, revenue increased by a significant 43%, reflected correspondingly with net profit increase of 35.5%, product of the year’s higher daily charter rates, expanded fleet of vessels (FY07 22; FY08 28) and its upcoming underwater services division, of which its net profit increased YOY YTD by a whopping 171.0%.
· We maintain our earnings estimates FY09 and FY10 going forth. As at December 08, order book of RM550mil should sustain earnings throughout FY09.
Maintain BUY but lower target price to RM 1.11 (Previous RM1.27) as we ascribe a lower PER of 7.0x (vs 8.0x previously) as multiple compressed for the sector. We continue to like Alam for its young and extensive fleet, its proven execution capabilities and its’ undemanding valuation at 4.4x PE valuation.
New Bear Frontiers
Traders’ Brief
New Bear Frontiers
New Low will drag KLCI down today
Last night, the KLCI charted a new low at 7,447.55, exceeding the November low by a mere 1.45 points. As a marginal 1.45 points cannot be considered a true break, we instead now have a new support band at the 7,447-7,449 level.
Dow may go places not gone before in 11 years
In yesterday’s report, we wrote about how the strength of the Dow bears are capped for now. However, hypothetically speaking, if the bears reign supreme, what are the next strong support levels after this 7,447-,449 support band? It appears the bears may bring the Dow to places where it has not gone before in 11 years.
Next Strong Support :
If the bears can break the 7,447-7,449 support band convincingly, the Dow may venture
towards the next strong support at 7,161.15 which was last reached 11 years ago in the month of October 1997.
If the 7,161.15 level can be breached by the bears, then the Dow’s next strong support level would be 769 points lower at the April 1997 low of 6,391.69.
Strategy : Dow’s new lows will be drag-down on KLCI
While we opine that the strength of the Dow is capped for now, we will be watching the Dow like a hawk tonight to validate the strength of the bears. If the Dow breaks the 7,447-7,449 support band convincingly, it will be revisiting the 7,161 level soon.
Meanwhile, the Dow’s charting of new lows will be a huge drag-down on the KLCI these few days. While we are bearish on the Dow, we however, still maintain our positive bias view of the KLCI in the short term as well as in the mid term as we are of the view that the correlation between the KLCI and the Dow is decreasing in the short term.
New Bear Frontiers
New Low will drag KLCI down today
Last night, the KLCI charted a new low at 7,447.55, exceeding the November low by a mere 1.45 points. As a marginal 1.45 points cannot be considered a true break, we instead now have a new support band at the 7,447-7,449 level.
Dow may go places not gone before in 11 years
In yesterday’s report, we wrote about how the strength of the Dow bears are capped for now. However, hypothetically speaking, if the bears reign supreme, what are the next strong support levels after this 7,447-,449 support band? It appears the bears may bring the Dow to places where it has not gone before in 11 years.
Next Strong Support :
If the bears can break the 7,447-7,449 support band convincingly, the Dow may venture
towards the next strong support at 7,161.15 which was last reached 11 years ago in the month of October 1997.
If the 7,161.15 level can be breached by the bears, then the Dow’s next strong support level would be 769 points lower at the April 1997 low of 6,391.69.
Strategy : Dow’s new lows will be drag-down on KLCI
While we opine that the strength of the Dow is capped for now, we will be watching the Dow like a hawk tonight to validate the strength of the bears. If the Dow breaks the 7,447-7,449 support band convincingly, it will be revisiting the 7,161 level soon.
Meanwhile, the Dow’s charting of new lows will be a huge drag-down on the KLCI these few days. While we are bearish on the Dow, we however, still maintain our positive bias view of the KLCI in the short term as well as in the mid term as we are of the view that the correlation between the KLCI and the Dow is decreasing in the short term.
YTL Power: 1H FY09 results: Sterling weakness largely priced in; yield support remains
· 1H FY09 profit below expectations, down 18% Y/Y to M$395MM, represents 41% of our full year forecast (42% of consensus). This is below expectations even after adjusting for the one-off windfall tax of M$90MM for the power division in 1Q FY09. In 2Q FY09, profits dropped 12% Y/Y but rose 19% Q/Q due to absence of the windfall tax.
· Segmental performance: Profits from power generation were in line, or up 6% Y/Y in 2Q FY09. The shortfall in profit, however, was registered mainly by Wessex Water, where 2Q FY09 profit fell by 19% Y/Y due to lower translated earnings with the 24% depreciation in the Pound Sterling versus the Malaysian dollar. In Sterling terms, 2Q FY09 profit from Wessex Water was flat Y/Y. Associate profits (i.e. PT Jawa and Electra Net) also fell short of our expectations, falling by 25% Y/Y.
· We cut our earnings estimates sharply from Wessex, factoring in J.P. Morgan's exchange rate forecast of M$5.40:£1 for 2009-2010. We also incorporate the impact of the M$8.6B acquisition of Powerseraya to be completed by 3Q FY09. The net impact is still a cut in group profit by 10% for FY09E and 19% for FY10E. Full year income from Powerseraya is expected by FY10, where we forecast net income at 8% of group profit, rising to 14% by FY11E. With the revisions, our forecast for the group is now 8% below consensus for FY09-10.
· Maintain OW: Our new Dec-09 PT is M$2.00 (down from M$2.25) based on SOTP valuing the power business on DCF and Wessex on its regulatory capital value of 1x. Hence, the stock still offers decent returns if we include a net dividend yield of 5% for FY09E, rising to 6% for FY10-11E (excluding scrip dividends) as Powerseraya's contributions rise. The group has declared total net DPS of 6 sen for 1H FY09, or 60% of FY09E DPS. The ability to extract value, reduce costs, or improve efficiency for Powerseraya in the long term is a key re-rating catalyst, and the group is also backed by a proven M&A execution track record. A key risk is regulatory changes in the Malaysian power sector, but this segment will account for no more than 20% of profits going forward.
· Segmental performance: Profits from power generation were in line, or up 6% Y/Y in 2Q FY09. The shortfall in profit, however, was registered mainly by Wessex Water, where 2Q FY09 profit fell by 19% Y/Y due to lower translated earnings with the 24% depreciation in the Pound Sterling versus the Malaysian dollar. In Sterling terms, 2Q FY09 profit from Wessex Water was flat Y/Y. Associate profits (i.e. PT Jawa and Electra Net) also fell short of our expectations, falling by 25% Y/Y.
· We cut our earnings estimates sharply from Wessex, factoring in J.P. Morgan's exchange rate forecast of M$5.40:£1 for 2009-2010. We also incorporate the impact of the M$8.6B acquisition of Powerseraya to be completed by 3Q FY09. The net impact is still a cut in group profit by 10% for FY09E and 19% for FY10E. Full year income from Powerseraya is expected by FY10, where we forecast net income at 8% of group profit, rising to 14% by FY11E. With the revisions, our forecast for the group is now 8% below consensus for FY09-10.
· Maintain OW: Our new Dec-09 PT is M$2.00 (down from M$2.25) based on SOTP valuing the power business on DCF and Wessex on its regulatory capital value of 1x. Hence, the stock still offers decent returns if we include a net dividend yield of 5% for FY09E, rising to 6% for FY10-11E (excluding scrip dividends) as Powerseraya's contributions rise. The group has declared total net DPS of 6 sen for 1H FY09, or 60% of FY09E DPS. The ability to extract value, reduce costs, or improve efficiency for Powerseraya in the long term is a key re-rating catalyst, and the group is also backed by a proven M&A execution track record. A key risk is regulatory changes in the Malaysian power sector, but this segment will account for no more than 20% of profits going forward.
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