Monday, 25 March 2013

Insurance - Key Points In BNM, IMF Reports

The insurance and takaful industry saw a boost in profitability in 2012, spurred by improving premiums growth and healthier combined ratios in the general insurance/takaful sectors. Despite notable increases in equity exposure and concerns on interest rate risk, insurers’ risk exposure remains reasonable. BNM intends to tighten scrutiny of the insurance/takaful industry, as recommended by the IMF Country Report. We remain NEUTRAL on the sector.

Better 2012. The life insurance and family takaful sector reported a 38.2% increase in net income or excess income over outgo, backed by premiums/contributions growth of 11.2%. Meanwhile, the general insurance and takaful segment’s operating profits surged by 72.6% to RM2.9bn on the back of premiums/contributions growth of 11.1%. The general insurance and takaful industry also benefited from a low combined ratio of 96.9% (vs 104.7% in 2011).

Regulations tighten their grip. The industry’s capital adequacy ratios (CAR) leveled at 222.3% (vs 222.5% in 2011), well above Bank Negara Malaysia (BNM)'s supervisory target capital level (STCL) requirement of 130%. The IMF Country Report acknowledges the strength and comprehensiveness of the local insurance regulatory measures versus the international framework. Meanwhile, the country’s cross-border operations are still small relative to the industry, which we believe may have prompted BNM to relax cross-border financial activities for resident insurers and takaful operators. The central bank intends to enhance the existing prudential requirements with the Financial Services Act (FSA), as well as other measures which may include containment of systemic risks and cross-border risks. This should boost the sustainability of the industry, which being liberalised.

NEUTRAL. We retain NEUTRAL on the sector, with our Top Picks being Syarikat Takaful for its exposure to the takaful industry, and LPI Capital for its robust business model and solid underwriting strength.

Source: RHB

SapuraKencana Petroleum - Positive Outlook

We reiterate our Buy call on SapuraKencana. Our fair value is upgraded to RM3.96 (from RM3.76 previously) based on 21x FY01/14 EPS. Similar sized peers such as Bumi Armada are currently trading at 19-20x forward earnings. While it currently has the orderbook to sustain revenues for the next 2.5 years, its enlarged asset base and solid balance sheet allow it to bid for larger and more complex projects moving forward.

Seadrill acquisition to be completed by end-April 2013. Based on our discussions with management during the analyst briefing, we understand that the Seadrill acquisition is on track to be completed by end-April 2013. The EGM is slated to be on the 23rd of April, after which the pricing of the market placement would be determined. We thus expect Seadrill’s tender rig business to contribute to the remaining 9M of FY01/14.

Orderbook of RM18.2bn. With an RM18.2bn orderbook, SapuraKencana’s earnings visibility remains clear as the current orders are enough to sustain revenues for the next 2.5 years. Currently, the bulk of SapuraKencana’s orders are from Malaysia which accounts for 36%, followed by Brazil (29%), SEA (15%) and Australia (10%).

Berantai first gas achieved, targeting more RSCs. SapuraKencana’s marginal field RSC, Berantai, has produced first gas and started contribution in 4QFY13. We expect full-year revenue and earnings contributions from the RSC in FY01/14 onwards. When queried, management highlighted that they are interested to bid for more RSCs in the future.

Forecasts. Our FY01/14-15 net profit estimates have been raised by 53-56% as we have imputed the contribution from Seadrill’s tender rig business. Investment case. We maintain our Buy call on the stock with a new fair value of RM3.96 (from RM3.76) based on unchanged 21x FY01/14 EPS.

Source: RHB

Kenanga Research - On our Portfolio - Parliament dissolution around the corner?

The local market traded in a range-bound mode last week while waiting for further developments relating to the upcoming 13th General Election. All of our three model portfolios performed in tandem with the overall broad market last week and recorded a mild change of between -0.6% to +0.8% WoW. On a YTD total return basis, all our three model portfolios have recorded positive returns as compared to the -3.43% return of the FBMKLCI, beating the benchmark index by 474-627 bps. The THEMATIC portfolio continued to remain the top gainer (+2.84%) followed by the GROWTH (+1.74%) and the DIVIDEND (+1.31%) yield portfolio. This week, we expect the market to consolidate but with a downward bias. Based on our technical reading, we believe that the market could otentially slide further towards the 1,600 psychological level should it fail to hold the immediate support level of 1,620. On top of that, there is a strong market rumour that the parliament may likely be dissolved in this week. Should this news materialise, the market could potentially trade lower by 1%-3% during the election campaign period based on our study of the past three general elections.

A range-bound mode. Last week, the local market traded in a range-bound mode at between +0.4% to -0.8% while waiting for further developments relating to the upcoming 13th General Election. For the week under review, the FBMKLCI index was lower by 0.05% or 0.75 pts to settle at 1,626.89. The main index movers were SIME (+RM0.19); MAYBANK (+RM0.14) and CIMB (+RM0.10). Buying interests in SIME re-emerged after the previous week selldown by foreigners, which led the share price to close by 2.1% WoW higher to RM9.19. The banking sector, meanwhile, was cheered by the Bank Negara Malaysia statement that the authority was still comfortable with the current bank lending to households, which suggested that the possibility of the central bank introducing further tightening measures would continue to remains low for now. On the US market, the DOW closed relatively flat at 14,512.03 amid concerns on the Europe debt issue, which overshadowed the better-than-estimated economic data that came out.

THEMATIC Portfolio remains the top gainer. All of our three model portfolios were performed in tandem with the overall broad market and recorded a mildly change in the overall return last week. The THEMATIC Portfolio reported a -0.56% loss WoW but with an unrealised profit of 2,366 or +2.84% on YTD basis. The lower WoW performance was mainly led by PUNCAK (-2.6% to RM1.48) and MPHB (-2.9% to RM3.61). The GROWTH Portfolio, meanwhile, has recorded a positive gain of +0.77% WoW, bringing the YTD total return to RM1,149 or +1.74%. The DIVIDEND Portfolio’s fund value rose by 0.1% or RM66 WoW, aiding the YTD total return advance to 1.31% or RM872. Note that, for a conservative purpose, we have yet to fully investing the allocated amount of RM100k each in our model portfolios at this juncture due to the uncertainly before the general election. Our current invested ratios for the THEMATIC, GROWTH and DIVIDEND portfolios are 83.3%; 66.2%; and 66.4%, respectively.

Parliament likely to be dissolved in this week? We believe the market could become more volatile should the Parliament be dissolved during the week as per market expectations. Based on our study of the past three general elections, the FBMKLCI index tends to fall by as much as an average of -2.3% during the election campaign period. Out of which, the 12th GE experienced the worst performance of the three where the benchmark index fell by as much as -2.9% during the election campaign period. Thus, in view of the high uncertainty in the upcoming GE, we do not discount that history may potentially repeat itself here.

Expecting the market to consolidate but with a downward bias this week. We believe the benchmark index will likely to trade in a consolidation mode but with a downward bias this week judging from the mixed technical indicators. The 1,620 level should present some support for now. Should this level be taken out, the FBMKLCI could potentially slide further towards the 1,600 psychological level. We believe investors will be unwilling to take up major positions in the stock market this week given the slew of speculations surrounding the parliament dissolution date and general elections. Hence, gains could be capped and profit taking could be potentially widespread, especially on the recent gainers such as Johor property related companies like UEMLAND, TEBRAU, EKOVEST, etc.

Source: Kenanga

SapuraKencana Petroleum - 4Q13 Analyst Briefing Key Updates

We were at SapuraKencana’s (“SKPETRO”) well-attended 4QFY13 analyst briefing last week. The key takeaways were: 1) the main reasons for the lower margins in FY13 vs. FY12; 2) details on its Berantai field contribution; 3) an update on the Seadrill tender-rig acquisition; and 4) further details on its upcoming Brazil Pipe-Lay Support Vessel (PLSV) prospect. Overall, management was satisfied by its own progress post the merger between Sapuracrest and Kencana and is looking forward to the potential benefits from the upcoming Seadrill tender rig acquisition. We are maintaining our net profit forecast of RM744.2m for now pending the completion of the acquisition, which will lead to higher earnings, debts and the number of shares. We will also introduce our FY15 net profit after the acquisition. We continue to like SKPETRO for its: 1) extensive service provisions, which span from drilling to the EPCIC value chain; 2) domestic market dominance and 3) increasing exposure to the international markets. We maintain our OUTPERFORM call on the stock and our target price of RM3.82 based on a CY13 PER of 26.5x. Recall, our target price of RM3.82 is based on 20x on implied CY13 of 19sen to accommodate the potential earnings accretion from the new rigs of SKPETRO post its acquisition exercise with Seadrill.

SKPETRO's margin was affected by the timing of recognition, one-off merger costs, Seadrill acquisition ongoing costs and higher borrowings. Management guided that the lower YTD PBT margin (12.0% versus 12.4% in FY12), which fell despite the increase in revenue, was mainly due to: (i) timing issues (where SKPETRO could only recognise eight months of Kencana's earnings due to the merger accounting method) and (ii) also due to other higher costs incurred i.e. the one-off Sapuracrest and Kencana merger cost (RM54m recognised in 4QFY13), the Seadrill acquisition cost of RM46m and a higher borrowings cost in the year given its aggressive newbuilding scheme. The merger cost should not recur in FY14. However, there will continue to be some Seadrill acquisition costs given that the exercise is not completed as yet.

Berantai made maiden contribution in 4QFY13. We understand that the Berantai field made its maiden contribution in 4QFY13 after having achieved its first-gas in Oct-12, which also drove the higher EJV division’s revenue/profit in 4QFY13. Management has guided for a full year contribution from FY14 onwards.

Updates on the Seadrill tender-rig acquisition. Management hopes to conclude the acquisition by May-CY13, which would mean a nine-month contribution for FY14. On the overall, management seemed excited about the acquisition as: 1) it foresees that the business will expand SKPETRO’s global footprint (i.e. to countries like Angola, Trinidad and Tobago) and 2) believes that the applications for the tender-rigs could expand (i.e. beyond just the shallow-water application), thus creating more opportunities for the group.

Source: Kenanga

Plantation - Dorab Mistry turned less bearish on CPO Prices

According to Dorab Mistry (director at Godrej International Ltd), CPO prices are expected to rise to RM2,400 to RM2,700 ringgit ($770 to $865) per mt by the end of May due to lower stocks level and output. He believes that Malaysia palm oil inventory will fall below 2.0m mt in Jun-2013. We generally agree with Dorab Mistry’s short term view as we are already bullish on near term CPO prices as we expect exports to improve 14% MoM to 1.59m mt. In 2QCY13, we believe CPO prices could improve up to RM2,800/mt. However, we do not think Malaysia palm oil inventory will reach 2.0m mt as we believe it should reach the lowest level of 2.27m mt by April 2013 before increasing slightly to 2.31m mt by June 2013.

Despite our short term bullishness on CPO prices, we reiterate an UNDERWEIGHT rating on the plantation sector given that the consensus is still estimating an average 2013 CPO price of RM2880/mt (against ours at RM2500/mt). This should lead to another earnings disappointment in the next earnings season in May-2013. Maintain UNDERPERFORM calls on SIME (TP: RM8.82), IOICORP (TP: RM4.34), KLK (TP: RM19.30), FGVH (TP: RM4.00), GENP (TP: RM7.60), IJMP (TP: RM2.75) and TAANN (TP: RM2.84) due to the low CPO price outlook. Maintain MARKET PERFORM calls on TSH (TP: RM2.00) and UMCCA (TP: RM6.70). Our only OUTPERFORM call is on PPB (TP: RM15.00) as we expect it to benefit from Wilmar’s earnings recovery (resulting from better margin in soybean crushing margin).

Dorab Mistry turned less bearish on CPO prices. According to Dorab Mistry (director at Godrej International Ltd), CPO prices are expected to rise to RM2,400 to RM2,700 ringgit ($770 to $865) per mt by the end of May due to lower stocks level and output. He believes that Malaysia palm oil inventory will fall below 2.0m mt in Jun-2013. We gather that his latest CPO prices projection has been less bearish than his previous forecast made during 6-March-2013 in Kuala Lumpur (CPO prices falling below RM2,200 from mid-April onwards). However, he maintained his bearish view in 2H2013 and expects CPO prices to drop below RM2,000 after August-2013 due to high production season, declining energy prices and strong US Dollar.

We are short term bullish on CPO prices too. We generally agree with Dorab Mistry’s short term view as we are already bullish on near term CPO prices in March but do not expect it to increase beyond RM2700/mt. Recall that in our last report on 12-March-2013, we already stated that Malaysia inventory could decline further by 5% MoM to 2.31m mt in Mar-13. We reiterate our view that March exports should increase by 14% MoM to 1.59m mt as palm oil demand should increase after the winter season in the northern hemisphere ended last month in February.

However, we do not think inventory will touch 2.0m mt. We only expect inventory to fall to the lowest level of 2.27m mt by April-2013 before increasing slightly to 2.31m mt by Jun-2013. As inventory stays low in 2QCY13, we expect CPO prices to peak at RM2800/mt. We think our more bullish CPO price outlook (against Dorab Mistry) is due to our better outlook on crude oil prices. Despite our short term bullishness on CPO, 2H13 outlook remains challenging when high production season starts. However, we think that CPO prices should not fall below RM2,000 in 2H13. We believe that CPO prices bottom in 2H13 should be RM2,100/mt as US biodiesel industry demand for palm oil biodiesel will be strong at such prices assuming WTI Crude Oil stays above US$90/mt.

Reiterate UNDERWEIGHT, looking ahead to another earnings disappointment in May-2013. As the consensus is still estimating 2013 average CPO price of RM2880/mt as compared to the average CPO price of RM2310/mt in the first two months of 2013, we believe that 1QCY13 earnings will likely to disappoint again.

Source: AmeSecurities

Plantation Sector - Proposed accounting standard scrapped OVERWEIGHT

- The Edge Financial Daily quoted KPMG as saying that two accounting rules which would have an effect on Malaysian companies have been scrapped.

- One of the accounting standards, which would have forced Malaysian plantation companies to value living things such as oil palm trees, will no longer be implemented. The accounting standard was supposed to be implemented from 2014F onwards.

- This is positive for the plantation companies.

- Implementing the accounting standard would have increased the accounting cost and be a hassle for the plantation companies as they would have to hire independent consultants to value the oil palm estates.

- The accounting standard would have also increased the volatility of earnings in the profit and loss statement as fair value changes in respect of biological assets would fluctuate according to the prices of commodities.

- Plantation companies listed in Singapore follow this accounting standard.

- Every year, the plantation companies would look at the valuation of their oil palm estates and record the fair value changes accordingly.

- The companies use discounted cash flow to value the oil palm estates and some of the main assumptions used in the DCF method are CPO prices, discount rate and FFB yield.

- During periods of high CPO prices, fair value changes in biological assets would increase. When CPO prices are in the doldrums, fair value changes in biological assets would fall.

- The fair value change in biological assets is a non-cash flow item. It does not reflect the core profit of the plantation companies.

- Last year, Muddy Waters LLC said that Olam International was “aggressive” in reporting gains on biological assets. Subsequently, Carson Block of Muddy Waters betted against the stock.

Source: AmeSecurities

Pavilion Reit - Limited upside, earnings upside have been priced in HOLD

- We are downgrading Pavilion REIT (PREIT) to a HOLD, with an unchanged fair value of RM1.65/unit, based on our DCF valuation, given PREIT’s limited upside to its share price.

- Following a company visit, we re-iterate our positive stance on PREIT, underpinned by its asset quality and a growing middleclass. This bodes well for PREIT’s growth.

- Nearly 70% of NLA is due for renewal this year. Given that this represents Pavilion Mall’s second rental cycle (first cycle in 2010) and at early stages, we have factored in a 12% rental reversion.

- However, feedback from some retailers has indicated that mall owners are requesting for sky-high rental reversions that are unjustified. This may in turn suggest a possible softening in rentals in the near term.

- Yet, as KLCC’s average rental is at c.RM25psf, we see room for PREIT (average rental: RM18.80psf) to play catch-up. This is underpinned by Pavilion Mall’s relatively young status and a long waiting-list of interested retailers wanting a presence in the mall.

- Footfall inched up 4% in FY12 contributed by Fashion Avenue and a strong F&B and fashion mix, in our view.

- Should Fahrenheit 88 be deemed fit as a yield-accretive acquisition during an evaluation exercise in 4Q13, it will likely be funded via debt and equity. Any injection will only materialise in FY14F. PREIT is not playing any part in the repositioning of Fahrenheit 88’s tenant mix in an upcoming renewal in 3Q.

- Given the rather weak footfall at Fahrenheit 88 due to the tenant mix, we believe in a turnaround under management hands, should the acquisition materialises. This is underpinned by PREIT’s strong management capability and experience in managing Pavilion Mall.

- Based on our channel checks, retail REITs in town, including PREIT, have acknowledged the lack of quality assets that are yield-accretive for acquisitions. This somewhat limits the REITs’ growth, apart from organically.

- As such, management is of the view that the sponsor would eventually have to venture into greenfield shopping malls. PREIT is eyeing day-to-day consumer malls in the Northern and Southern regions of Malaysia but not Iskandar, Johor. This is largely because PREIT is targeting locals and prefers malls located within city centres.

- We continue to like PREIT for its longer term growth potential, underpinned by quality assets and a sizeable pipeline of potential assets for injection. Dividend yields are decent at 4.3% and 4.7% for FY13F and FY14, respectively, based on a 100% payout ratio.

Source: AmeSecurities