Monday 8 October 2012

About DIGI,UOA Dev,MISC,P​harmania,A​nn Joo/Lion Grp/Hiap Teck/Maste​el ....


DIGI
What’s NEXT! … dated Oct 2012
It will be moving more aggressively to capture the large screen date segment of the telcos market, which is about providing broadband connectivity to laptops and PCs.

It is almost ready to provide long-term evolution (LTE) speeds on its network and has already upgraded 80% of its sites across Malaysia to cope with the increased bandwidth speeds. Part of its network modernisation was to put in place a network that is actually capable to cope with LTE type of services.
LTE, also known as 4G, which is the next generation after 3G technology, offered higher speeds and would be the next growth driver for DiGi.com, given its appeal to the younger generation. LTE could also boost the customers' adoption of smartphones and tablets as the newer devices would usually require the use of modernised networks to cope with today's technological advances.

The expected high take-up rates would compensate for the anticipated decrease in voice revenues moving forward. Moving forward, especially with LTE, data will be the main growth driver. LTE gives a better opportunity for us to serve larger screens in a more cost-effective way at price points that the customer is willing to pay.

A case in point was the launch of Apple's iPhone 5, which is equipped with the LTE type of technology and will require an upgraded LTE network to make full use of its potential. DiGi was hoping to launch the LTE-ready iPhone 5 by the fourth quarter of 2012. The launch will happen the way it used to happen with the past iPhone launches, with a very coordinated fashion across the Malaysian market with all the main three telcos.
In the past, the telco had prioritized the small to mid screen market, staying away from the large screen segment because it consumed more network resources. However, its three year nationwide network transformation is halfway to completion. The new modernized network, which is LTE equipped, will give the company leverage to seriously pursue the large screen market.

LTE technology, or more widely known as 4G technology, rides on the 2600 MHz spectrum that provides higher speed and capacity compared with 3G.

The MCMC had named nine companies as recipients of the 2.6GHz spectrum band, which the telcos will utilise to provide LTE services. These companies are DiGi, Celcom Axiata Bhd, Maxis Bhdand U Mobile; and four WiMAX players: Asiaspace Sdn Bhd, Packet One Networks Sdn Bhd, REDTone International Bhd and YTL Communications Bhd. In June 2011, the regulator called for a re-submission from the players. A final decision on the award and allocation was supposed to have been announced in August 2011.
The MCMC is due to finalize the allocation of the 2600 MHz spectrum by end of 2012 and DIGI is waiting for the spectrum allocation as it is ready to launch LTE services.

DIGI – a 49% associate of the Norway based Telenor Group –will have the advantage of riding its parent’s LTE experience.

The company had allocated capex of rm700 million to rm750 million for 2012 and estimates capex to hover a similar guidance for 2013.

Meanwhile over the near-term, it is not going into fixed-lined broadband business. It will focus on growing its mobile business and has no immediate plans to go into the fixed-line broadband services.
Currently, there are only a few players offering high-speed fixed-line broadband services in the country and they include Telekom Malaysia Bhd, Maxis Bhd and Packet One Networks Sdn Bhd. Celcom Axiata Bhd, the country's second largest mobile operator, has voiced its interests to offer such services in the near-term.
It is understandable why mobile operators are interested in offering fixed-line broadband services - it can help to boost the operators' revenue stream and retain the customers through the offering of more services in bundled packages.

About half of DiGi's customer base are active data users. (What this means is that the customers use data services at least once a month). On top of that, about 24 per cent of its customers are using a smartphone.
The growth in the smartphone user base, driven mainly by the increasing number of available models as well as lower prices, is critical to DiGi's future revenue growth - as in most cases, smartphone users spend more each month.


UOA Development
Its Prospects … dated Oct 2012
Its total GDV has increased to RM15bil from its IPO guidance of RM13bil due to its
new projects at Jalan Ipoh and Kepong, which exclude the potential 15% to 20% upside to Bangsar South's remaining GDV of RM5bil due to the area's run-up in capital values.

The group is targeting RM3.1bil to RM3.2bil of new launches (mainly affordable segments) over the next 12 to 18 months from Oct 2912 in highly sought-after locations.

Cash proceeds from sale of its en bloc offices of RM298mil means UOA can comfortably undertake Bangsar South's next growth phase.

To recap, UOA in the first half of 2012 registered RM900mil sales.

Its 2012 target of RM1.2bil is achievable with its en bloc sales to Lembaga Tabung Haji (LTH) of RM204mil and ongoing project sales, including the recently previewed Desa Green with GDV of RM600mil.
The group has three more Horizon office blocks, of which two will be kept for rental while the remaining is earmarked for sale.

Assuming similar sale price as LTH's, or RM102mil per block, with transaction by year-end (2012), it will increase its estimated financial year 2012 core earnings by 13% to RM305.0mil in addition to higher sales.
Upon completing of the three en bloc sales (one to DKLS Industries Bhd and two to LTH), the group will have amassed an additional RM298mil cash, in addition to its second quarter ended June 30 cash pile of RM137mil and ongoing billings.

UOA is now (Oct 2012) in a net cash position while its two latest (Jalan Ipoh and Kepong) pieces of land have already been paid for.

Based on the abovementioned GDV on Bangsar South, estimate UOA's capital commitments will be around RM100mil-RM150mil per annum for the next three to four years, which can be easily funded by borrowings.
In terms of landbanking, the group did express interest in doing niche developments in Iskandar Malaysia although no timeline or specific plan was offered.

In addition to the capital commitments and assuming minimum RM1bil per annum sales and conservative 30% net margin, it will not affect dividend payouts that average around RM150mil per annum for the next two to three years.


MISC
What’s Up? … dated Oct 2012
MISC Bhd is selling a 50% stake of Gumusut-Kakap Semi-Floating Production System (L) Ltd (GKL) to Petronas Carigali Sdn Bhd for US$305.7mil (RM934.4mil).

The disposal of GKL - which owns a semi-submersible floating production system Gumusut-Kakap Semi-Floating Production System (Gumusut-Kakap Semi-FPS)-- would be used to pare down its debts.
GKL completed the purchase of the Gumusut-Kakap Semi-FPS from MISC for US$2.038bil. The US$2.038bil purchase consideration was satisfied via the issuance of 611.40 million new US$1 shares in GKL amounting to US$611.4mil, and an amount owing to MISC of US$1.426bil.

GKL will repay the amount owing to MISC via a short term loan obtained from Petronas. At this time, it is the intention of GKL to refinance the short term loan with a longer term external financing on expiry of the short term loan.
This initiative will enable MISC to monetise an asset currently held under construction whilst having joint control and interest in GKL to benefit from future cash flows once the Gumusut-Kakap Semi-FPS is operationalised.

Total proceeds from the exercise would total US$1.732bil of which a large part will be used to pare down our debts. Besides savings on interest, it will also create the debt headroom for MISC to gear up for future growth.

On the semi-FPS, the 37,500 tonnes production system could produce 150,000 barrels of crude oil per day from subsea wells and was capable of 300 million cubic feet per day gas injection and 225,000 barrels of water per day water injection.

The semi-FPS has a power generating capacity of 69MW and is designed to function as a deepwater facility in the South China Seaand is the first deepwater Semi-FPS in the Asia Pacific region. It will be installed in about 1,200 meters water depth offshore Sabah, Malaysiaand is expected to be delivered to the client by mid 2013.

Meanwhile Moody said that MISC Bhd's (Baa2 negative) decision to sell a 50% stake in its semi-floating production sytem (FPS) for US$1.7bil is credit positive.

It was selling 50% of Gumust Kakap to E&P Venture Solutions (EPV), a unit of parent Petroliam Nasional Bhd (A1 stable).

The transaction, which is subject to shareholders' approval, will result in an improvement in the company's credit metrics and liquidity, once completed.

The company will use the proceeds to prepay US$1.25bil of its loans and fund capital expenditure in its offshore business.

The FPS being sold has been under construction since 2006 and has been one of the major drivers for the increase in MISC's borrowings. The FPS is targeted to be delivered in the middle of 2013, and thus does not contribute to the company's existing revenue base and EBITDA.

With the completion of the transaction, expected by the end of 2012.

MISC adjusted debt to EBITDA was at 7.8 times as of December 2011. Since then, the company has completed its exit from its loss-making liner segment, which should help improve EBITDA. With this transaction, MISC will also reduce its reported debt of USD4.7 billion as of June 2012 by around 25%.

The transaction also reinforces the strategic importance of MISC to Petronas and reinforces the assumptions of the extraordinary support incorporated in the ratings of MISC.

Moody's rates MISC at Baa2 with a negative outlook. The rating incorporates a three-notch uplift, from the company's baseline credit assessment of ba2, for the expected extraordinary support from its parent Petronas.

MISC's BCA reflects (1) the company's ability to secure vessel contracts by aligning its business development with its parent Petronas; (2) the diversified nature of its fleet and its leading market position in LNG transportation, which provides stable income; and (3) the term contracts that provide nearly half of its revenues from shipping segments and offer some protection against the cyclicality in freight rates.
However, these strengths are counter-balanced by (1) excess global capacity in the petroleum and chemical transportation sectors, which could pressure the company's freight rates and profit margins; and (2) substantial capital expenditures which will result in negative cash flow in the short to medium term.


Pharmaniaga
Its Prospects … dated Oct 2012
The government concession it has to distribute drugs and medical supplies to over 148
hospitals and 1200 government clinics which lasts through Nov 2019, secures and provides visibility of its business outlook.

Its logistics capability and distribution network spans Malaysian and Indonesiaputs it in a unique competitive advantage over rivals in both non concession and private sectors.

Although there is no dividend policy, Pharmaniaga will practice quarterly dividend distribution similar to its parent, Boustead Holdings which controls 54.7% stake of Pharmaniaga.

It is worth noting that Pharmaniaga also has a 55% owned public unit in Indonesia – PT Millennium Pharmacon Intl Tbk (MPI) which distributes and trades pharmaceutical, food supplements and diagnostic products and is the top largest distributors in Indonesia with 29 branches.

In 2011, this unit saw 12% growth in sales to rm336 million and it contributed 21% of the group turnover in the 1QFY2012.

Among the futures plans, Pharmaniaga foresees the potential of recapturing sales worth between rm20 million and rm30 million a year from the Ministry of Defence.

LTAT is Pharmaniaga’s ultimate parent. LTAT owns 10.7% stake in Pharmaniaga but also controls more than 50% of BStead, which controls Pharmaniaga.


Ann Joo/Lion Group/Hiap Teck/Masteel
Its Prospects … dated Oct 2012
The slump in the global steel sector is weighing down local steelmaker that have geared up their balance sheets on capacity expansion projects.

Weak global demand has resulted in prices of steel billets plummeting over 50% from close to US$700 per tone in Sept 2011 to about US$330 per tone in 05 Oct 2012.

The steed decline in prices has impacted steelmakers in China, where slowing growth is a big contributing factor to the drag on the overall market.

Ann Joo Res had commissioned its 500000 tone capacity blast furnace in Oct 2011. The furnace costing rm650 million was funded with rm487 million in borrowings that are now (Oct 2012) sitting in the company’s balance sheet.

The cost of shutting down the furnaces and re starting it later when demand picks up would be costly affair for Ann Joo. Even at current (Oct 2012) levels of demand, Ann Joo’s furnace is forced to run at overcapacity, making it not highly efficient. It will take a while to achieve the initial cost benefit intended for the blast furnace.

Lion Group and Hiap Teck is have new blast furnaces in the pipeline.

A unit of Lion group, Lion Diversified Holdings is stuck with a blast furnace project in Banting tha has been stalled due to funding problem and is only 18% completed.

In March 2011, the company roped in Lion Industries and Lion Forest Industries and together injected rm584 million in financing the project. However progress remains at a standstill with the group continuing talks with foreign steelmakers to help fund the project. Among them is China Steel Corp and Baosteel.
But roping in such partners may prove difficult in the current (Oct 2012) steel climate and with Baosteel having just reduce its capacity. It would not think anything would come about within the next six months to a year from Oct 2012. Doubt foreign steelmakers are aggressively expanding and do not see why they would want to buy a local plant at this point in time.

Eastern Steel Sdn, a 55% unit of Hiap Teck, is in the process of constructing a huge blast furnace in Terengganu, in partnering with China Shougang. Phase one is targeted for completion in mid 2013 at a cost of rm754 million while Phase two is estimated to cost rm1 billion.

Given the current (Oct 2012) market conditions, Eastern Steel may chose to push back the completion deadline.
Masteel Bhd will have a rm100 million rolling mill in Klang operational by end 2013 or early 2014.
Masteel has a largely domestic target market comprising local ETP projects and stands to gain from the construction and property markets making it fairly insulated.

But the wildcard is Masteel’s proposed venture outside its core segment as it is bidding for the concession to develop and operate a rm1 billion commuter rail transit project in Iskandar Malaysia.

The project is not expected to have earnings contribution in the next two to three years from Oct 2012.
Such diversification presents risks as Masteel has no experience building railways. The size of the projects is huge.

In general, steel sector is not expected to do well in terms of profitability in 2013.

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