The company’s exit from the liner business will lead to lower
losses going forward. However, we still believe that the company will struggle
in the near term as charter rates continue to be volatile and operating conditions remain challenging.
Having said that, we foresee minimal downside risks to the stock after the
significant retracement in share price from its YTD high of RM6.10. Given the
current potential total returns of 6.1% upside to the share price, we have
upgraded our call on the stock to
Market Perform with a
revised target price of RM5.47. Lower
losses with exit of Liner business. The decision to exit the liner (container)
business will help minimise future losses for the company. To recap, the
container division has been making losses since 2008. Given the inability to
stomach the high operating costs and also the rapid changes in global trade
patterns, which had caused significant volatility, the company decided to exit
this line of business in Nov-2011. It is
now in the midst of selling off its vessels, exiting trade lines and making the
necessary impairments/provisions, which thus far has come up to around RM1.45b.
The company expects to complete the exercise by June-2012, but all efforts are
to accelerate the process.
Still tough times in
2012. The company is likely to see
improvement in its LNG, Offshore, Heavy Engineering and tank terminal divisions
with the additional fleet and capacity expected from 2012. However, we still
foresee tough times for the company in the near term on account of the soft operating
conditions of its petroleum and chemical segments. According to management, the
outlook for the two divisions will continue to be challenging due to volatile
charter rates, unyielding bunker costs and demand-supply vessel imbalances.
Just for an illustration, while the bunker costs have returned to its highs of
USD750/mt (seen in mid 2008), the Baltic Dry Index is still at a low of 896
(versus the high of 8000-9000 in mid-2008).
Forecasts. We have increased our FY12 EPS by a marginal
3.5% as we assume slightly higher charter rates for the petroleum and chemical divisions
based on the average rate earned for FY11. We also introduce our FY13E and
FY14E net profit estimates of RM1.1b and RM1.35b respectively. The improvements
to our bottom line forecasts are based on lower PBT margin loss assumptions for
both the petroleum and chemical divisions as we expect the demand-supply
imbalances to slowly correct, and charter rates to grow 1.5% for all its vessel
divisions. We have also reduced our FY12E DPS assumptions to 15 sen (from 35
sen previously) as we believe the company will look to conserve cash until
better times. No dividends were paid in the financial year ended Dec-11.
Fair value revised
lower. While we have increased our net profit estimates, we have lowered our
valuation basis for the company i.e. 1) the LNG division to 13.5x PER valuation
(from 17x previously) to be in line with the FY12 PERs of its regional peers;
2) Tanker and chemical division’s P/BV valuation
to 0.9x (from 1.0x P/BV previously) to reflect
the numerous impairments both divisions have already undergone; and 3) Heavy Engineering’s
PER valuation to 19.5x (from 25x previously) as we foresee it could undergo a
de-rating once the new merged entity, Sapura Kencana Petroleum is
listed by mid-2012.
Such changes have
resulted in our estimated new lower fair value of RM5.47
for the stock based on a 10% discount to its SOP.
Upgrade to Market
Perform. Given the now minimal
downside risks to the company’s share price since its significant share price
retracement from its YTD high of RM6.10, and the total returns of 6.1% to the
share price (3.3% capital upside and 2.8% dividend yield), we are upgrading our
call on the stock to a Market Perform.
Source: Kenanga
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