RHB Equity 360° - 30 October 2009 Part 2

Corporate Highlights

Sime Darby : FY10 KPIs to surprise on upside? Outperform
Visit Note
- Five key takeaways:
1) Strong recovery from Indonesian plantations’ yield;
2) Downstream expansion still ongoing;
3) Heavy equipment division going strong - one of the core growth drivers;
4) Oil and gas division orderbook rundown – to be replenished soon?: and 5) FY10 KPIs to surprise on the upside?

- Sime intends to only announce its FY10 KPIs and its achieved merger synergies for FY09 upon the release of the 1QFY06/10 results at end-November. However, we believe the KPI target may potentially surprise on the upside, despite the relatively flat CPO price assumptions given by management for FY10 of RM2,100-2,200/tonne (similar to FY09’s RM2,177/tonne average CPO price achieved), on the back of improvements expected from other divisions. As such, we believe Sime would not have any problems achieving our net profit (ex-EI) growth projections of 15.4% for FY06/10.

- We have revised our forecasts slightly upwards by 2.4-3% for FY10-11, after: 1) raising our FFB yield assumptions; 2) adjusting for a delay in the completion of its Port Klang refinery; and 3) slightly tweaking our heavy equipment and oil and gas division projections. As a result of our revised forecasts, we have raised our SOP-based fair value for Sime to RM9.70 (from RM9.50). Maintain Outperform.

Adventa : More expansion in store for surgical gloves Outperform
Company Update
- Given that Adventa is currently operating at full capacity for its surgical gloves, management plans to aggressively expand its surgical glove production capacity to 350m pairs by early-2010 (from 250m pairs currently) and further to 450m pairs by end-2011.

- -Adventa is also currently building a new factory in Kluang, Johor, which will house 7 double-former production lines (+1.5 bn pieces) for the production of dental and examination gloves and plans to add another 5 double-former lines by end-2011.

- -All-in, this will increase Adventa's current annual capacity production of dental and examination gloves of 3bn pieces to 4.5bn pieces by end-2010 and 5.5bn pieces by end-2011.

- Management expects to incur further forex hedging losses until 1QFY10. Given that the US$ is currently weakening against RM, we note that Adventa's forex losses could narrow for these two quarters.

- We have raised our FY10 and FY11 revenue projections by 6.3% and 8.3% respectively to reflect the change in installed capacity assumptions for surgical gloves. As a result, our FY10 and FY11 earnings have been raised by 18.4% and 33.5% respectively.

- Our fair value has been raised to RM2.79 based on target CY10 PER of 8x (from RM2.01 based on target CY10 PER of 7x) and Outperform call on the stock remains unchanged.

AirAsia : Formalises partial deferment of FY12/11 new aircraft delivery Underperform
News Update
- AirAsia has signed an amendment agreement with manufacturer Airbus SAS to reschedule the delivery of eight A320 from Feb-Dec 2011 to Sep 2014 – Oct 2015, reducing new aircraft delivery in FY12/10 to 15 from 25 originally.

- We already in Jul 09 cut FY12/10-11 net profit forecasts by 12-28%, having reduced our capacity growth in terms of available seat km (ASK) to 14% from 20% previously to pre-empt the lower aircraft delivery.

- Indicative fair value is RM1.23. Maintain Underperform.

Kurnia Asia : Better portfolio mix, better results Outperform
Results Note
- Kurnia Asia recorded net profit of RM32.2m (vs. loss RM12m in 1QFY06/09), above ours and consensus annualised full-year forecasts. Main variance was mainly due to MTM gain on its investment amounting RM10.5m, resulting in higher surplus transfer from its general insurance subsidiary.

- Combined ratio improved due to lower management expenses, as the company has been reducing its headcount, to improve underwriting and claims management efficiently. Even though the claims ratio is higher (70.3% vs. 68% in 1QFY106/09), we note that this was due to seasonal factor.

- FY12/09-11 forecasts raised by 12.4-21% following revision in management expense and inclusion of RM10.5m MTM gain in our annualised FY12/09 forecasts.
- Maintain Outperform. Fair value is increased to RM0.98 from RM0.87 previously, (based on unchanged 11x FY12/10 EPS) following the expansion in earnings.

RHB Equity 360° - 30 October 2009 Part 1

Top Story : PLUS – Expecting higher FY12/09 traffic volume growth Outperform

Visit Note
- PLUS hinted that it is likely to raise its core expressways’ traffic volume growth rate guidance from 3-4% to above 5% in the coming quarterly results, due to strong YTD traffic volume growth of 6.4%.

- The migration of accounting standards to IFRIC 12, if this happens, will require concessionaires including PLUS to:
1) Switch amortisation method from revenue-based to either straight-line method or volume-based method; and
2) Exclude concession assets as part of the tangible assets. PLUS felt that the change in accounting treatment is unlikely to come in soon. In any case, this will not affect our DCF-derived NPV for PLUS, given that amortisation expense is a non-cash item.

- PLUS believes that Khazanah, which currently owns 60.6% is unlikely to further pare down its stake.

- We are raising FY12/09 net profit forecast by 1.2% to reflect an 1%-pt rise in our FY12/09 traffic volume growth rate assumption at PLUS’s core expressways that more than offset higher depreciation and amortisation expenses. FY12/10 net profit forecast is lowered by 1.6% to reflect higher depreciation and amortisation expenses.

- We are raising our fair value estimate by 13.5% from RM3.64 to RM4.13, to reflect:
1) Lower weighted average cost of capital of 7.7%; and
2) The upgrade in our FY12/09 traffic volume growth rate assumption.

INITIAL PUBLIC OFFERING OF 2,250,000,000 ORDINARY SHARES OF RM0.10 EACH IN MAXIS BERHAD

(I) THE INSTITUTIONAL OFFERING OF 2,037,705,000 OFFER SHARES TO MALAYSIAN AND FOREIGN INSTITUTIONAL AND SELECTED INVESTORS AND BUMIPUTERA INVESTORS APPROVED BY THE MINISTRY OF INTERNATIONAL TRADE AND
INDUSTRY; AND

(II) THE RETAIL OFFERING OF 212,295,000 OFFER SHARES TO THE MALAYSIAN PUBLIC, ELIGIBLE CUSTOMERS, DEALERS AND DISTRIBUTORS AND EMPLOYEES OF MAXIS BERHAD AND ITS SUBSIDIARIES AND THE DIRECTORS OF MAXIS BERHAD AND MAXIS COMMUNICATIONS BERHAD AT THE PRICE OF RM5.20 PER SHARE (“IPO PRICE”), PAYABLE IN FULL UPON APPLICATION AND SUBJECT TO A REFUND OF THE DIFFERENCE IN THE EVENT THAT THE FINAL IPO PRICE IS LESS THAN THE IPO PRICE.

THE FINAL IPO PRICE WILL EQUAL THE LOWER OF (I) THE IPO PRICE OF RM5.20 PER SHARE; AND (II) 95.0% OF THE INSTITUTIONAL PRICE TO BE DETERMINED BY WAY OF BOOKBUILDING (SUBJECT TO ROUNDING TO THE NEAREST SEN).

Market Review 22/10/2009 = Bull to cont to next year

Imagine yourself driving on a highway driving at 110km per hour, which is a safe speed on a highway. If I ask you whether you can go faster, I am sure the answer would be yes but you have to be more careful. Furthermore, if you speed up to say, 150km per hour, other cars are mostly averaging 110km per hour, so there would be times where you have the reduce your speed as the average cars would impede your smooth journey.

I see the same thing here on our stock market. Overall market throughout the world can go higher, but the risk too would be higher by then and it will be often stall by obstacles to pull it down towards average speed. That is all very fine indeed and nothing new to all of us. In fact recently I mentioned that even if KLCI corrects down to 1100 points by end of this year market is still Bullish. Just like when you are speeding at 150km per hour, if you slow down to 110km per hour you are still driving fast.

Just like everyday life, there will be time we would be abruptly stall by events on the road. You could be cruising nicely on the road at 110km per hour and suddenly an accident happen. With the average Malaysian so lacking in quality entertainment (save for the occasional weekly dose of football), we know that traffic would suddenly slow down and we are forced to reduce our comfortable speed to crawling phase. Sometimes we only had to reduce our speed and continue driving at normal phase after we overtake the car in front of us, but not when accident happen. You have to slow down.

In relation to market, slowing down before speeding again is a correction. It happens many times before. However, what would concern us is accident. That is the trend reversal. As mentioned before, market will remain Bullish until trend is reversed. Again, in relation to market, you know there is no problem until you have to slam the brakes. A reversal in trend would usually be accompanied by huge drop in points coupled with bigger than usual volume, i.e. the slamming brake.

Even US markets is still trading within Channel. If you analyze S&P 500, you will notice that it is trading within an Ascending Wedge. With the Wedge getting narrower, you know that “Accident” will eventually happen. It is just a question of when.

For now the road is clear and if you believe my theory on the Average Bull Market, this Bull Market should continue until the 1st quarter to 2nd quarter next year (meaning that the 30 days & 90 Days Moving Averages are below the 200 days Moving Averages). In layman terms I believe that such “accident” will only happen next year.

Upside is not great and there are no low hanging fruits anymore. Honestly, right now is not the best environment to make aggressive investment. Unfortunately in our line of work we all know that we are not allowed to rest on our laurels. The attractive sectors still seems to be Banking stocks, with Plantation stocks might be going higher as well if my view on the upcoming CPO price comes true next month.

e-dividend payment system by Q3 2010

Public-listed companies will be required to provide an e-dividend payment system to shareholders by the third quarter of next year.

"Investors will be given a one-year grace period to provide their bank account number to Bursa Malaysia Depository to enable the dividend payments to be credited directly into their bank account," the Securities Commission (SC) said yesterday.

It plans to undertake a series of investors' awareness programmes to familiarise investors with the benefits of e-dividends.

Stockbroking companies, meanwhile, will by mid-2010 be required to provide e-share payment options for clients to receive and make payments on their share transactions.

This way, payments will be credited into bank accounts more quickly and efficiently compared with cheques.

"The e-dividends and e-share payment initiatives are an integral part of the initiative to move towards a paperless environment and promote the usage of electronic payments in the capital market," the SC said in a statement yester-day. These new measures were recently announced by Prime Minis-ter Datuk Seri Najib Razak in the 2010 Budget.

SP Setia - TRADING BUY - 26 Oct 2009

SP Setia - Prime beneficiary of Budget 2010 (Company Update)



Price: RM3.88

Target Price: RM4.25

Recommendation: TRADING BUY



· Budget 2010 promotes home ownerships. The government will be launching a scheme, enabling EPF contributors to utilize current and future savings in Account 2 to finance one home. It means buyers 1) have more disposal income 2) home affordability increases. Although details have not been revealed, more information should be available closer to targeted commencement in Jan 2010. The scheme will mainly appeal to first-time home buyers (RM150,000-RM500,000 per unit range) and up-graders/those housing more than one generation under one roof (RM500,000-RM1.2m per unit range).

· Townships to benefit from higher EPF withdrawals. By virtue, the mentioned target markets are price sensitive, prefer larger built-ups and more land, as well as, require family orientated amenities. Townships, more specifically, those in its infancy or growing stages fit these criteria and will likely be in locations like Shah Alam, Meru, Puchong, Klang, etc. As a result, we expect SP Setia (SP) Setia Alam, Setia Eco Park, its Johor Bahru and Penang townships/projects to benefit given those products’ demands are mainly from owner-occupancy buyers.

· Reintroduction of RPGT at 5% will have minimal impact on SP Setia’s townships. Although a negative surprise, but it is aimed at property investors or those owning multiple properties. It singles out popular real-estate investment hot-spots, like KLCC and Mont Kiara, where a slew of luxury condominiums are flooding the market, whilst occupancy rate remains low. It is worthwhile noting that 75% of SP’s Ytd sales are derived from townships while remaining is from high-end residential (Sky Residence) and integrated commercial projects (Setia Walk).

· Stepping-up FY10E-11E net profit by 6%-11% to RM170m (+10% YoY) -RM198m (+16% YoY), based on the above. SP is likely to introduce new promotional schemes for its FY10E sales, if other developers continue with theirs. FY09E net profit of RM155m remains unchanged.

· Fair value of RM4.25 unchanged, based on SOP RNAV or 10% upside to last traded price. Although 23x FY10E PER and 1.9x PBV is expensive vs. 12x and 1.3x peer’s, 11x and 1.2x historical forwards, respectively, as well as, 15x FY10E PER for FBMCI, SP’s last traded price of RM3.88 is 16% lower than Ytd-CY09 peak of RM4.62. Over FY09, SP has also persistently traded at an average 23x forward PER and 1.8x PBV to reflect market’s excess liquidity. Current price weakness provides investors with good accumulation opportunities, especially when we expect share price to re-rate upwards in the near future from more positive news flow (e.g. finalization of the China project, more Vietnam projects and improved sales, commencement of Abdullah Hukum project). Upgrade to Trading BUY.

Citi's Still Got a Long Way to Go

NEW YORK (TheStreet) -- Citigroup(C Quote) posted a small profit for the third quarter, but investors trying to wind their way through the labyrinth of the company's balance sheet will find that the good bank won't be able to significantly grow until the bad bank goes away.

Factor in the company's continued reliance on the government -- its biggest shareholder -- and the message is reinforced that Citi looks to be unable to grow its business until it can stand on more solid ground.
The inability to expand is particularly harrowing considering that other big banks including Goldman Sachs (GS Quote), JPMorgan Chase (JPM Quote) and others are already posting strong profits.

Citi, on the other hand, received $45 billion in government bailout funds since the start of the financial crisis, and completed a $58 billion preferred-to-common stock deal this summer. The transaction makes the U.S. government, which converted some $25 billion of preferred shares, a 34% stakeholder in Citi, and as a result of the government's heavy hand, Citi has been forced to pare down its businesses and assets in response to regulators' expressed concerns on Citi's capital levels.
Citi said Thursday that as a result of its extenuating factors, combined with a continued uncertain economic environment, it is only making "selective investments" in faster growth businesses.

"[O]ur two near-term goals are getting to the point where we have sustained profitability and looking to repay TARP," CFO John Gerspach said on Citi's conference call with analysts earlier today.

"Obviously, by returning to sustained profitability as I said, we are looking to make selective investments," Gerspach continued. "So we have begun to deploy some level of additional capital and expense dollars into our Citicorp businesses. But again, we are doing that in the looking ahead at a rather uncertain economic environment, so we want to be very selective on that, at least in the near term."
Citi posted a third-quarter per share loss of 27 cents, despite making a small profit of $101 million, primarily due to the impact of the stock swap on retained earnings and the payment of government-held dividends.

Citi is having a monster of a time digging through its morass of shoddy mortgages and credit card loans gone bad, particularly as the health of the U.S. economy -- with unemployment hovering around 10% -- remains uncertain. The company has previously said it would cease offering private label retail credit cards as part of its restructuring, and it's also backing away from much of the mortgage business.
On Thursday, Citi disclosed that three quarters of its consumer loan losses were from North America.

During the conference call, CEO Vikram Pandit pointed to regulator discussions concerning elevated levels of capital for financial institutions going forward, something that Citi and other big banks will have to eventually adhere to.
Citi is also further inhibited by the fact that it needs to eventually pay back bailout funds received from the Troubled Asset Relief Program, he said. Questions regarding when Citi will pay back the TARP money have intensified lately. The company did not offer any further information Thursday saying when it would do so.
"We need to get through that, but clearly we are running the company to have more capital than that over time and if that does happen, that can open up a lot of different possibilities for us and it is really too soon to comment on it," Pandit said.

Citi is making progress in its turnaround mission, even if it is likely at the behest of regulators. Citi Holdings, the so-called bad bank, reduced its assets by $32 billion in the quarter to $617 billion. The company reduced its toxic assets by $19 billion in the quarter between asset sales and run off. Still, assets in Citi Holdings are down less than 10% since the first quarter -- the same time the company announced the splitting of the two businesses.

Citi Holdings' assets are expected to decline by at least another $25 billion in the fourth quarter and the company officially completed the sale of Nikko Cordial and Nikko Asset management on Oct. 1.

But as a result of regulators tightening of the belt, the company has also been forced to leave behind some profitable businesses as well.
Citi completed a joint venture with its profitable wealth management arm Smith Barney and Morgan Stanley (MS Quote) in early June. As of the third quarter, Smith Barney no longer contributes revenue to Citi, Gerspach said. The business had contributed $1 billion in revenue in the prior quarter.

Phibro, the company's energy trading unit, which was just sold to Occidental Petroleum Corp. (OXY Quote) had quarterly revenue in the range of $90 million and $100 million, net of pre-tax income, Gerspach also said.

"We do have a business that is going to grow, which is Citicorp, over time and you know it happens to be in those markets and those businesses, which are pretty fast growth and you ought to expect that business to get its share of capital over time," Pandit said.
--Written by Laurie Kulikowski in New York.

RHB Capital update – Indonesia here I come

RHB Capital is buying 80% of Indonesian bank, Bank Mestika for RM1.16bn, with an option to acquire another 9%. The deal is broadly in line with our expectations, notwithstanding the bank’s decision to finance the purchase through a RM1.3bn rights issue which could dilute EPS by 8-9%. Overall, we take a positive view of the deal as it will enable the group to tap into the underpenetrated market in Indonesia where loan growth is expected to be 15-25% and net interest margin is above 6%. As the terms of the rights issue are not finalised, we retain our earnings numbers, target price of RM7.00 (10% premium over DDM value) and OUTPERFORM call. Potential re-rating catalysts are (1) regional expansion, including this deal, (2) benefits from the ongoing transformation programme, (3) improvement in investment banking income, and (4) value-add from its strategic partner, Abu Dhabi Commercial Bank.

Sarawak Energy update – Taking the private road
Sarawak Energy’s parent, the Sarawak State Financial Secretary, is making a voluntary offer for all the 534.6m SEB shares that it does not already own, after which it will delist SEB. This development is a positive surprise. As the RM2.65/share cash offer is attractive, we advise minority shareholders to accept it. We retain our FY09-11 earnings forecasts but up our target price from RM2.06 to the VGO price of RM2.65. We think that investors have only a very small window of opportunity to buy the stock when trading resumes today given the likely share price bounce to close to the offer price. As a result, we upgrade the stock from sell to a HOLD instead of a buy. For exposure to the power sector, we advise investors to switch to Tenaga. For a play on Score, our preferred pick is now CMS.

Tenaga Nasional update – The dark hours before the dawn

Quick takes – Eastern & Oriental update – EX-uberance

VIEWS & NEWS, Maybank IB (19 Oct)

Results Review

Bursa Malaysia RM8.49: Sell
– Sequentially weaker
Maintain Sell. RM81m 9M09 net profit (-11% YoY) was above our expectations, at 79% of our 2009 forecast. This was due to higher-than-expected trading activities and a one-off RM5m CDS fee recognition relating to prior periods, both in 3Q09. The results were however below market expectations, at 64% of consensus full-year forecasts. We raise our net profit forecasts by 6% for 2009, 11% p.a over 2010-11. Current valuations nonetheless remain high, at a huge premium to peers.

Company Update

Media Prima RM1.77: Buy (Under review)
– A marginal deal for NSTP shareholders
Media Prima looks to swallow NSTP, creating a media behemoth. Media Prima’s offer to privatise 43%-associate New Straits Times Press (NSTP) is unattractive when compared to the latest share price. However, it allows NSTP holders to participate in a media conglomerate covering five media platforms with greater growth prospects. Media Prima may be happy with control of NSTP despite it not being wholly owned.

Comment on News

Water: Neutral
– Selangor water: Issue moves up to Federal level?
A step towards conclusion? We think that the final offer to take over water infrastructure in Selangor, after a due diligence by PAAB, will not be lower than the offer made by the Selangor Government in July 2009. We see the due diligence as a positive indication of a conclusion to the whole take-over exercise. We retain our Buy call on Gamuda (GAM MK); Not Rated on Puncak Niaga Holdings (PNH MK) and Kumpulan Perangsang Selangor (KUPS MK).
Technicals

The FBM KLCI should remain firm today. The strong support areas for the FBM KLCI are located in the 1,233 to 1,256-zone. The key resistance areas of 1,260 and 1,288 may cap any selling activities. Market may remain buoyant despite the DJIA’s 67.03-points decline last Friday. Our chart buy calls today are 3A and NOTION.

Other Local News
Construction: Another theme park for Nusajaya
ETI Tech: To expand Kulim factory
Mulpha: Plans Klang Valley projects
RHB Bank: Said to buy Medan bank for RM1b
Technology: PMC-Sierra to set up HQ in Penang

Outside Malaysia

U.S: 2009 budget deficit widens to record USD 1.42tr on crisis spending
U.S: Industrial production increased 0.7% MoM in September
U.S: Consumer confidence falls in October
E.U: Exports decline 5.8% MoM in August
Japan: Government keeps its economic assessment for third month
Japan: To freeze JPY 2.9tr (USD 32b) of extra budget
Singapore: September exports decline matches smallest drop in 11 months

Market Review 19/10/2009 - Bull to continue

Technical Review 13th October 2009

FBMEMAS Daily


Source: Nextview

Many markets including ours tested their respective support in the last 2 weeks but as it turns out, buying support managed to hold on. KLCI saw selling pressure or profit taking testing its psychological support at 1200 points. However without strong selling volume it was rather easy to spot that support would hold. The technical outlook on US markets was more dramatic since first support was broken but at the end of the day S&P 500 rallied strongly right after testing its critical support.

That was what happened to market. As always we are more interested to know what would or could be happening in the future. First, let us revisit how long a Malaysian Bull Market last. In my calculation, we had 10 Bulls market since 1977. On average, a Bull Market would last around 17.8 months.

However, there is an extreme in the 10 Bull Markets. The first Bull Market lasted 44 months, and that was between December 1977 to July 1981. If we take out this Bull Market, then the average Bull Market length would drop drastically to 14.9 months. By my own personal definition, our market entered Bull Market in April this year. Thus, if we add the AVERAGE Bull Market length, the current Bull Market should last until July 2010. Plus minus 2 months, it may end around May 2010 or September 2010.
Obviously, things would not be as simple as that, but it is good to know that when we have a Bull Market, it usually last slightly more than 1 year or 5 quarters to be exact. Be warned however, that you have to understand my definition of a Bull & Bear Market. As mentioned before this, our market entered Bull Market phase in April this year, but that was 6 months after it hit rock bottom at 800 points. Similarly, the previous Bear Market started in March 2008 but it hit peak in January 2008.

What I am trying to say here is that do not confuse the highest/lowest point for a Bull/Bear Market with the end of the respective Bull/Bear Market. For example, the current Bull Market might hit peak in February or March next year but will only enter Bear Market 4-5 months after that. Interestingly if our market remains flat between 1200-1250 points in the next 6 months (highly unlikely though) and reversed after that, it would still be considered as a full cycle of a Bull Market.

The second important factor that we have to consider is that although market has tested support on many occasions, it is imperative that we understand that market will only go lower IF it breaks the critical support. The most recent example was in Shanghai after it close below 3100 and crash lower by 500 points to touch 2600 points. Shanghai is still consolidating right now so there is no danger just as yet. For Malaysia & regional markets, I will continue to warn if there is any danger that any of these markets is in danger of cracking major support. It is not Bearish until critical support are clearly broken.

So what would be the correlation between these 2 points? Historically we know that market has on average, would remain Bullish for slightly more than 1 year (14-15 months). Our market is currently in the 6 months of Bull Market, believe it or not. Therefore, if there is any technical breakdown, it should be viewed as an opportunity to buy rather than get out of market. The only problem is to measure the degree of correction. Again on Shanghai market as an example, I suspect that the current chart formation suggest that it might be ready for the next up cycle but before that happened it had to face correction from 3500 down to 2600 points. Now the foundation for the next up cycle seems set for Shanghai but I might need to see few more weeks to be certain on that.

In short, on historical basis market is only halfway from its Bull Market journey. It takes a lot to pull market into Bear territory from current level and so far market has not shown any significant signs that it is going lower. If there is good time for market to go down, it should be around the First Quarter 2010 after the Bull Market has matured. At the very least we would know that world market might be flat in June & July 2010 due to World Cup.

Since market might have more than 6 months of Bull Market to go (if the theory is right that is), then we should be looking on what sector that would be good to buy. 1 sector that typically typifies the end of a Bull Market would be Property Stock. This does not mean that they did not go up at all previously. It just means that this class of stock would be going much stronger compared to other class of stocks. Stocks like SPSetia, UEMLand, and IGB seems set to go higher. If these stocks do go higher, expect other smaller Property stocks to go higher as well. So far these stocks had performed well but it did not go crazy.

Another sector that might interest you would be Plantation. Early this year I was Bullish on CPO, thinking that it would be going up to RM2800, and it went as high as RM2775. Right after that I felt it would be going or consolidation, and it has consolidated for 5 months. Now, the chart looks ripe that it might be going up yet again in the near future.

Kenanga Today 15 Oct 2009

NEWS HIGHLIGHTS

· Penang submits Budget 2010 wish-list

· Norwegian fund buys into Kulim

· Top Glove may build more factories overseas

· Ho Wah plans capital reduction

· TRC (BUY; TP: RM2.90) unit secures RM13m project in Australia

· Litrak open to Asas Serba takeover proposal

· TM plans service to enable Internet access on TV set



ECONOMIC NEWS HIGHLIGHTS

· Mier revises upward 2009 GDP forecast

· Japan to promote Iskandar Malaysia



FOREIGN NEWS HIGHLIGHTS

· Dow passes 10,000 mark on earnings optimism

· JPMorgan 3Q profit soars; shares jump

· Lazard CEO Bruce Wasserstein dies

· Top 10 sovereign wealth funds have US$1t in stocks

· Dollar trades near 14-month low on earnings, equity rally

Top Glove Corp (BUY, Unchanged)- Topping FY09 with special dividend

Top Glove Corp (BUY, Unchanged)- Topping FY09 with special dividend
Fair value: RM8.45 (Under Review)
Share price: RM8.15

* Top Glove Corp (Top Glove) reported a net profit of RM169mil for its 12-months ended August FY09, exceeding street estimates of RM155mil by 9%. This is however, within our recently revised estimate of RM163mil.

* Top Glove recorded a robust 15% QoQ increase in turnover to RM427mil, buoyed mainly by strong sales growth of basic powdered latex examination gloves. Compared to its preceding quarter, net profit surged 35% to RM57mil. This was largely attributed to higher EBITDA margin which had expanded to 22%, or +2.8ppts from the previous quarter.

* Compared to last year, Top Glove's full year net profit of RM169mil was up 54% on the back of stronger demand from A(H1N1) buying, overall lower cost structures from price of latex, a stronger US dollar to Ringgit exchange rate as well as better margins. This was despite a higher effective tax rate of 24% versus 19.7% in FY08.

* Its management has proposed total dividends of 15sen/share, single tier tax-exempt, bringing total dividends to 22 sen/share for Top Glove's financial year. The group declared and paid an interim dividend of 7 sen/share in Q3FY09. Besides a final dividend of 9sen/share, investors can look forward to a special dividend of 6 sen/share.

* Going forward, Top Glove's earnings growth would be underpinned by additional production capacity from its new production lines - from Factory 19, 20 and 21. While Factory 19 has been fully operational since June 2009, Factory 20 and 21 are scheduled to start operations in February and July 2010, respectively.

* Given its bright prospects ahead and net cash of RM177mil, there is a possibility of the group increasing its dividend payout for the coming years as well. As it is, Top Glove's total dividend payout of 40% for FY09 is currently higher than its historical 30%.

* The group's share price had appreciated circa 15% in the past two weeks, prior to release of the group's last quarter performance. This could thus see some retracement in the coming weeks. But Top Glove's valuation is still undemanding as it is trading way below its historical mean of 15x.

* We maintain our BUY recommendation on Top Glove. Our fair value of RM8.45/share - based on 14x CY10F earnings - is Under Review with an upward bias, pending Top Glove's briefing for analysts on 14 October 2009.

Auto Sector- NAP review delayed by a month

Recommendation: OVERWEIGHT (unchanged)
- NAP review delayed by a month
* Review of the National Automotive Policy (NAP) is understood to have been delayed - according to a business weekly, citing unidentified sources. The NAP review, which was earlier scheduled to be releaseed end of this month has been postponed to November.

* Complications are understood to have stemmed from issues related to approved permits (AP). While there were calls in the past for the AP system to be reformed - due to its inconsistency with World Trade Organisation rules and other open trade policies due to restrictions brought about to international trade - abolishing the system may not be as straight forward a task.

* First, AP holders generally comprise of well connected individuals within the country - whereby APs are understood to have turned into a means to reward those who had assisted poiticians in garnering support. Second, there is the issue of compensating existing AP holders - who have invested a considerable amount into existing auto businesses.

* Back in July, Tan Sri Muhyiddin Yassin stated that the system of AP imports would be done away with and urged existing players to "buck up". However, this was the complete opposite of what was indicated in the year before - that the AP system will likely be around for the next decade.

* While it is difficult to conclude - at this point in time - whether an outright abolishment of the AP system will materialise, we think progressive measures to liberalise the local auto sector would be considered, nonetheless.

* This would lead us to conclude that measures to strengthen Proton's foothold in the auto industry are also in the works . This would include potential strategic partnerships with foreign carmakers to address issues in areas of technology, new model development, quality control, economies of scale and market outreach.

* Adding to newsflows of an imminent restructuring at Proton, it was reported in a local daily over the weekend that DRB-Hicom had submitted a bid for a 32% stake in Proton - with hopes that a more private sector driven approach will help improve the entire industry.

* While we do not rule out potential local partners taking up strategic stakes in Proton - we do not expect this to materialise any time soon in view of huge investment write-offs faced by Khazanah should it relinquish its stake at current price levels. We would rather think that any shareholding changes at the holding company level should happen post a strategic partnership - which we expect would enhance Proton's prospects - leading to improved valuation.

* We maintain our OVERWEIGHT call on the auto sector on an expected recovery in sector earnings following a projected 50% contraction in 2009. Our top picks are Proton (BUY, FV: RM4.80) - mainly on expectations of stuctural changes coming off a depressed valuation base and Tan Chong (BUY, FV: RM2.70) on expectations of a strategic expansion in model mix within the next three years starting from 2010.

Construction : OVERWEIGHT

- Additional claims for Bakun?

* A consortium of contractors awarded the contract to supply four turbines to the Bakun Hydroelectric dam (Bakun) project are making additional claims of RM353mil, said TheEdge Weekly in a report. The claim was submitted early last month.

* The consortium - collectively known as the Bakun EM1 Contract Consortium (BEM1-C) - comprises Impsa Asia Ltd, Impsa (M) Sdn Bhd and Muhibbah Engineering (M) Bhd. It is one of only two parties which won the contract to supply turbines to the Bakun project.

* The 2,400-megawatt Bakun project is currently spearheaded by Federal-backed Sarawak Hidro, and will be installed with up to eight hydro power turbines upon its completion. The Impsa-led consortium is one of two parties being awarded the contract to supply four turbines each.

* Latest claim is in addition to early ones submitted by the consortium since 2005. Last year, the Federal-backed Sarawak Hidro is believed to have paid the consortium about RM139mil on an initial claim of RM349mil the latter had filed.

* If the fresh claim were to be approved, the consortium stands to receive total claims of up to RM492mil compared to the original contract value of RM460mil. In total, Sarawak Hidro has had to deal with more than RM1.2bil in additional claims due to work delays at the Bakun project site.

* We do not think the additional claims for the turbine contract will have a significant impact on the funding status of the Bakun project. The Bakun dam - currently being constructed by a joint venture between a Sime Darby-led consortium of local contractors and China Hydro - is on track for completion early next year.

* Furthermore, a consortium comprising Tenaga Nasional Bhd, Sarawak Energy Bhd and the Ministry of Finance - is planning to raise up to RM10bil in bonds over an eight-year period to fund the RM10bil transmission cable portion of the Bakun project.

* We understand that the cable transmission portion is to be funded on an 80:20 debt/equity ratio, with a maturity period of between 20 to 25 years. First tranche of the bonds could be issued early next year. CIMB has been appointed lead arranger for the bond issues.

* More importantly, tenders for cable works - 1,000km high voltage direct transmission line and 680km undersea cable - will likely be dished out by 1Q10. The undersea transmission package will likely go to foreign contractors - given the lack of local expertise. However, we gather that Malaysian Resources Corp Bhd (MRCB) are among the potential candidates interested in the land transmission package of the massive cable project.

* We believe the Bakun project is one of the few cornerstone projects worth a combined RM62bil that the Federal Government could roll-out over next six to twelve months as part of its pump-priming initiatives. This should significantly improve the order book visibility of contractors moving into 2010. In addition, there is also greater margin certainly for contractors as prices of building materials have stabilised against volatile prices in 1H 2008.

AirAsia Berhad

AirAsia Berhad
Recommendation: BUY (unchanged)
Fair value: RM1.96
Share price: RM1.39

Secures landing rights in Paris
AirAsia was reported to have been granted landing rights to Paris, France - according to a newswire report yesterday. The news came following Prime Minister, Datuk Seri Najib Razak's four-day visit to France this week.

Actual details of the landing rights have yet to be worked out with no further details forthcoming at this juncture. So far, indications are for AirAsia to be given rights to land at Paris Orly Airport, located south of Paris (See map).

This will be AirAsia's second port of call in France following an earlier grant of rights for it to land in Nice, announced a few months ago. Based on routes operated by airlines to Nice and Orly, we reckon bulk of feeder traffic at these airports would originate from within Europe and certain Middle eastern countries.

Prior to Charles de Gaulle Airport being operational, Paris Orly was the main airport for France. Even with a shift of most international traffic to Charles de Gaulle, Orly remains the busiest French airport for domestic traffic and second busiest French airport overall in terms of passenger boardings. Other airlines that operate via Paris Orly include Air France, Alitalia and EasyJet. Nice meanwhile, is the third most important airport in France.

No firm timeline has been given by AirAsia X on the launch of its routes to France. AirAsia X is currently operating three A330s - these do not attain the flight range to reach Europe. While ultralong haul routes such as United States, New Zealand and Europe are in the plans, these are expected to be served by longer range A350s, scheduled for delivery only in 2016. We understand however, that AirAsia currently has leased two A340s (almost similar range to the A350).

While there is no direct impact on AirAsia as a result of this development (long-haul routes are operated by AirAsia X, 10% owned by AirAsia), feeder traffic brought by AirAsia X into Malaysia or any other part of ASEAN will increase potential traffic for AirAsia, which already has a comprehensive regional route network. About 80% of AirAsia X's traffic use AirAsia's flights for connecting flights and vice versa for regional traffic bound for Europe.

We reiterate our BUY rating on AirAsia and maintain our fair value of RM1.96/share - based on 9x FY10F earnings. AirAsia is one of the least expensive budget airline stocks globally, trading at just 6.5x FY10F earnings - a deep 53% discount to historical average of 14x and 47% discount to peers' average of 13x. This is despite Air Asia generating premium ROE of 19% versus industry's 11%.

Plantation Sector (Overweight) - Palm oil inventory up 11% MoM in September

* MPOB (Malaysian Palm Oil Board) released the country's plantation statistics for September yesterday. In summary, palm oil inventory rose 11% MoM to 1.6 million tonne in September underpinned mainly by a 4.1% expansion in production.

* Average price of crude palm oil (CPO) declined 8% MoM to RM2,227/tonne in September. Year-do-date, average CPO price was RM2,231/tonne. Price discount between CPO and soybean oil inched up from 18.4% in August to 20.3% in September. This was marginally higher than the five-year average of 19.9% and 10-year average of 18.3%.

* After a lacklustre production period in August, CPO production expanded 4.1% MoM to 1.6 tonne in September. In the first 10 months of the year, production of palm oil amounted to 12.5 million tonne - 3.7% lower than the same period last year. September's palm oil output has been the highest for this year so far.

* Industry players have indicated that they expect CPO production to peak in September or October. For the full year, MPOB is forecasting palm oil production at 17.6 million tonne, 4% lower than their previous estimate of 18.4 million tonne and flat compared to last year.

* Palm oil inventory rose from 1.4 million tonne in August to 1.6 million tonne in September. This is similar to the average inventory level for the past five years. Stock usage (stocks as % of exports) rose from 1.1x in August to 1.2x in September, which is below the five-year average stock usage ratio of 1.3x.

* After a 9.4% MoM decline in palm oil exports in August, palm oil exports were flat at 1.3 million tonne in September. YoY, palm oil exports inched up 1.2% in September. Year-to-date, palm oil exports totalled 11.7 million tonne, which is 5% higher than the same period last year.

* Palm oil exports were stagnant in September compared to August though a fall in exports to the United States and India was compensated by increased demand from China and the European Union (EU). Exports to the US declined 52% MoM to 48,796 tonne, lowest for the year while India imported 27% less palm oil in September versus August.

* Palm oil exports to China climbed 7% MoM to 423,736 tonne in September underpinned by the festive season while EU imported 48.3% more palm oil in September. From January-September 2009, palm oil exports to China inched up 2.4% YoY on the back of its cheaper price relative to soybean oil. Average price discount between the two commodities was 19.4% this year.

* China remained as the largest importer of palm oil from Malaysia, accounting for 25.3% of the country's exports for the first 10 months of the year. This was followed by Pakistan (accounting for 11.7% of Malaysia's palm oil exports), EU (10.9%), India (8.3%) and US (5.8%).

* We remain positive on the plantation sector as we believe that palm oil production should start to soften towards year-end while demand could be stabilising. This is reflected in the 3.9% increase in exports for the first 10 days of this month compared to the same period in September as reported by SGS. We have BUYS on IOI Corp, Kuala Lumpur Kepong, Kulim and Singapore-listed companies like Wilmar International and Indofood Agri-Resources.

Steel: OVERWEIGHT

- Mandatory standards takes effect today

* Malaysia will implement the mandatory standards on iron and steel products from today onwards, The Star reported today. This forms part of the Malaysian Government's further liberalisation measures announced in June.

* Mandatory screening will be implemented on imported iron and steel items. It was earlier reported that Sirim Bhd would charge RM2,000 per 100 tonne of products screened although we understand that the testing fees have been reduced by 39%.

* We gather that enforcement will be based on the revised list of 187 tariff lines instead of 627 tariff lines. Under this new ruling, all importers of iron ore and steel products need a certificate of approval (COA) or a letter of exemption from Sirim for non-construction sectors. COAs for the construction sector are from the Construction Industry Development Board.

* The COA ruling was supposed to take effect on August 13. However, the Malaysian Government subsequently announced a temporary exemption for importers of non-critical iron ore and steel products (e.g. nuts, bolts and screws) until October 12. This followed some objections by construction players concerned with potential delays in the delivery of iron and steel products due to the mandatory screening process.

* Based on our channel checks, the 187 tariff lines mainly involves structural items for the construction sector. More importantly, we believe the introduction of the COA would have a mild positive impact on local long steel players as: (1) Such a move would help weed out sub-standard imported steel products; (2) Local steel products will have the upperhand over imported products in terms of logistics and time factor.

* We maintain our OVERWEIGHT call on the steel sector. Regional steel prices have held firm, as positive impact from pump-priming initiatives around the world are beginning to filter through. On the local front, cumulative quarterly losses of steel millers have narrowed substantially to RM99mil in 2Q09 against RM429mil in 1Q09 and RM682mil in 4Q08.

* We believe that recovery in domestic steel demand should gather momentum by end-2H 2009 ahead of pump-priming activities by the Malaysian Government. We expect up to RM62bil worth of big ticket projects likely to be rolled out over the next six to 12 months.

* Our discussions with various local steel millers reveal that domestic steel prices may reach RM3,000/tonne by 2010 due to a resurgence in local steel demand amid potential supply squeeze. Within the sector, Ann Joo Resources Bhd remains our top pick with an unchanged fair value of RM3.20/share.

Plantation- Better production recovery

· As Sept production staged a stronger recovery (+4.1% mom), inventory rose 11.5% to 1.58m MT on the back of flat exports (-0.4% mom).

· Sabah’s Sept output increased with a lower mom contraction of 4.8% (Aug: -13.2% mom) as it recovers from the aftermath of unfavourable weather since early 2009. YTD Sabah production declined 10.7% yoy to 3.73m MT. Malaysia’s total YTD output is 12.5m MT (-3.7% yoy) with the largest supply shortfall from Sabah.

· Sept exports relatively flat at 1.31m MT (-0.4% mom). Slower India and US palm oil intake was offset by increased imports from China, Pakistan and EU. Indonesia’s August palm oil export jumped 48.9% mom to 1.62m MT as the country removed palm oil export duty since August. This could be the reason why Malaysia’s exports were slower for both August and September. Malaysia’s October exports however should improve as palm oil operation in West Sumatra was temporarily disrupted by an earthquake in end Sept.

· CPO price: near term bearish, but medium term positive. CPO price drifted to a low of RM2103/MT in September on better production outlook. The key factors including weather and demand should dictate future price direction. While CPO output should improve over the next 2 months, we continue to believe that 2010 supply will remain sluggish with the impact of lower fertilizer usage and El-Nino weighing in. (Please refer to our previous sector report dated 17 Sept 2009) Demand meanwhile is expected to remain robust with India importing more palm oil to meet its oilseeds supply shortfall as a result of the recent drought. Already the Soybean Processors Association of India is forecasting a 10.1% decline for India’s soybean 2009 production. Global consumption for vegetable oil will also improve as the world economy gains strength. Near term CPO to range trade between RM2100-2300/MT before rising further in 2010 as supply concerns set in.

· Maintain our Neutral view for the sector with unchanged 2009 and 2010 CPO price assumption of RM2200/MT and RM2400/MT respectively. Our favourite pick remains KLK (BUY; TP:RM15.00) while Sime (HOLD; TP:RM7.90) and IOI (Trading Sell; TP:RM4.98) are expensive at current valuation. Other BUYs include Sarawak Plantation (BUY; RM2.60) and NPC Resources (BUY; RM2.96).

Kenanga Today

COMPANY UPDATE

· Genting (BUY; RM7.20; TP:RM8.48)- Raising debt for rights subscription



ECONOMICS

· Malaysia External Trade- August exports takes a breather, fell larger-than-expected (Report to follow)



NEWS HIGHLIGHTS

· TM wins RM170m contract

· Top Glove to beef up capacity

· Media Prima renews Disney-ABC deal

· Naza Auto to roll out entry-level Peugeot car

· AirAsia, named Best Asian Low-Cost Carrier

· B. Braun to invest RM500mil to expand Penang plant

· MRCB to recoup IT spending on Sentral Park in 3 years

· China firm awaits Govt nod for RM28bil rail project



FOREIGN NEWS

· Gold rises to record above $1,060 on weak dollar

· Oil rises above $71 on recovery hope, weak dollar

· Fed boss sees no rush to boost rates

· New jobless claims fall to 521K, lowest since Jan.

· GM nearing completion of Hummer sale

Kenanga Today - NEWS HIGHLIGHTS

NEWS HIGHLIGHTS

· TNB-Pesaka Tech deal

· Astro pays US$250m for EPL rights (HOLD; RM3.37; TP: RM3.65)

· PAAB plans to raise RM20b from Islamic bond sale

· Mah Sing to buy land

· Bursa a quality market

· Dialog Group Proposes Special Share Dividend At 10 Sen

· Petronas, Gazprom in gas talks

· Bank Negara's International Reserves Up At RM334.3 Billion

· CIMB launches call warrants

· New Istanbul Airport Terminal Built With MAHB's Expertise

FOREIGN NEWS

· Oil price dips below $70 on strong dollar, fuel stocks

· Gold touches fresh high even as dollar rises

· FCC chairman warns of 'looming spectrum crisis'

· GM's US sales chief leaves after decline in sales

· Alcoa returns to profit as cost cuts, sales help

· Mortgage rates below 5 percent fuel re-fi boom





KENANGA INVESTMENT BANK BERHAD (15678-H)

Genting Malaysia : Listing of Wynn Macau to support valuations BUY

STOCK FOCUS OF THE DAY
Genting Malaysia : Listing of Wynn Macau to support valuations BUY

Maintain BUY with unchanged fair value of RM3.40/share. Valuation-wise, GenM is more attractive. Due to GenM's domestic-centric operations, its casino earnings are less volatile than Wynn Macau's during economic downturns. Volatility in earnings of casinos in Macau is partly reflected in Wynn Macau's 16% YoY fall in revenue and 35% YoY decline in net profit in 1HFY09. In comparison, GenM's leisure and hospitality turnover did not slide in 1HFY09, instead it sustained at RM2.3bil YoY.

GenM's balance sheet is clean as reflected in its net cash of RM5.1bil (US$1.5bil) as at end-June 2009. Capex requirements are minimal - about RM200mil to RM300mil annually. In contrast, Wynn Macau's net borrowings amounted to HK$5.4bil (US$698mil) as at end-June 2009. GenM's earnings are visible and its balance sheet - solid. We believe that the listing of casinos in Macau such as Wynn and Las Vegas Sands may help to narrow GenM's discounted valuations against its peers. As such, we remain positive on the group.

QUICK TAKES
AirAsia : Defers delivery of another eight A320 BUY
SapuraCrest Petroleum : Higher contract value from Apache Energy BUY
Plantation Sector : Minimal impact from earthquake in Padang OVERWEIGHT

NEWS HIGHLIGHTS
MAS : Plans further cost cuts
Proton Holdings : In talks for contract assembly
Axiata Group : Excelcomindo gets 500 billion Rupiah loan from Mitsubishi UFJ
DiGi.Com : Aims to bounce back from lacklustre first half