Wednesday, 31 October 2012
For many traders, AMEDIA was a favourite in the past year. The share rice rallied from a low of 31.5 sen in May to a high of RM1.15 in a short span of 4 months. However, most of the gains were surrendered back this month when the share price "fell off the cliff" and which was further exacerbated by news that the CEO had sold part of his stake in the open market. On Tuesday, AMEDIA’s share price surged 5 sen to 37.5 sen after hovering above the 31.5 sen support where traders and investors alike would likely to look for bargain hunting. As both the Stochastic and RSI indicators are still in deeply oversold levels, we believe that there is a rebound potential from a technical standpoint. Downside is likely to be cushioned at the 31.5 sen support level while the overhead resistance is a fair distance away at 51 sen.
Among the ranks of the top gainers on Tuesday was ALLIANZ, which surged 19 sen to close at RM6.66. ALLIANZ had been on an uptrend in recent months, rising from a low of RM4.49 in May. From a technical
perspective, the share price has exhibited moderate cyclical patterns and yesterday's bullish move potentially signals the start of the next up-swing. Its 20-day SMA has just staged a golden crossover with the 50-day SMA and given that it was accompanied by an increase in traded volumes, it is likely that the share price will continue its move higher going into midweek. The indicators have yet to show any signs of weakness,
although traders should be on their toes as both the Stochastic and RSI indicators have just entered their overbought zones.
- We maintain HOLD on Malaysia Building Society Bhd (MBSB), with an unchanged fully-diluted fair value of RM2.60/share. Our fair value is for ex-warrants. This is based on an estimated adjusted (for rights and warrants) FY12F ROE of 22.5%, leading to a fair P/BV of 2.3x.
- We understand that the gross gain of RM55mil (net of RM41mil, after tax) from sale of freehold commercial land Johor is likely to be booked in FY13F. Thus, we have now changed our forecasts to exclude the net gain from FY12F and to include it in FY13F.
- Our core net earnings for FY13F (without the gain) remain unchanged at RM480mil, but with the gain, our net earnings is now RM520mil FY13F. For FY12F, we expect the company to remain on track to meet our core net earnings forecasts of RM398mil.
- We expect loans growth to slow in 3QFY12, following the robust annualised rate of 77.3% in 2QFY12. We believe the company is already close to achieving its gross new loans target of RM10bil for FY12F. Recall that for FY11, the company had also exceeded its internal targeted gross news loans of RM6.5bil, by achieving RM6.6bil.
- Nevertheless, we expect net earnings to increase on a QoQ basis in 3QFY12, with loan loss provision for the collective assessment portion (similar to general provision applied to new loans) likely to be reduced given a slower new loans. To recap, loan loss provision increased to RM84.5mil in 2QFY12 from RM61.1mil in 1QFY12, mainly due to collective assessment provision related to a higher loan base. Its recent 2Q net earnings rose 17.9% QoQ to RM93.7mil in 2QFY12, from 1QFY12’s RM79.4mil.
- Asset quality is expected to be stable. The overall gross impaired loans for its new business (excluding legacy loans before 2009) are likely to be sustained at 2QFY12’s gross impaired loans ratio of 2.1%, which is much lower than overall gross impaired loans of 13.4%.
- Given the strong loans growth, MBSB disclosed that its Tier 1 ratio is at 6.6% in 2QFY12, compared to the earlier levels of 7% to 8% in 1QFY12. Total CAR is estimated at 10.5% in 2QFY12, which is also lower than 1QFY12’s 12% to 13%. If MBSB is to maintain Tier 1 ratio at 8%, the required capital may be RM267mil. If Tier 1 ratio is maintained at 9%, the required capital is RM458mil.
- We expect share price to hold up well given continuing strong topline growth, improvement in asset quality and affirmation of a minimum dividend payout of 30%.
- TH Plantations Bhd’s (THP) 9MFY12 results fell short of expectations, as the group sold most of its FFB to external parties in 3QFY12 instead of milling the FFB themselves.
- As such, even though FFB production grew 26.1% from 2QFY12 to 3QFY12, THP’s CPO output only inched up by 2.3%. Sale of FFB to external parties climbed 51% QoQ to 30,029 tonnes in 3QFY12.
- We do not know the rationale for the increase in the sale of FFB and would have to contact management today to find out. We have revised downwards THP’s FY12F earnings forecast to account for the lower-than-expected CPO production.
- Comparing 9MFY12 against 9MFY11, turnover eased 8.9% YoY to RM276.7mil due to lower CPO prices and production.
- FFB production fell 4.3% from 363,968 tonnes in 9MFY11 to 348,485 tonnes in 9MFY12. This is a production pattern faced by other plantation companies as well.
- The weak FFB output can be attributed to the lag effect of the hot and dry weather, which took place in early-2010.
- Average CPO price realised shrank 5.6% from RM3,203/tonne in 9MFY11 to RM3,025/tonne in 9MFY12.
- THP’s average price realised of RM3,025/tonne is close to MPOB’s (Malaysian Palm Oil Board) average spot price of RM3,083/tonne.
- THP’s gross profit margin slid from 57% in 9MFY11 to 41.2% in 9MFY12. This was due to higher fertiliser costs and wages. In the results announcement, THP said that it had applied a higher dosage of fertiliser in 9MFY12.
- As a result, production costs (excluding depreciation) rose from an estimated RM1,278/tonne in 9MFY11 to RM1,584/tonne in 9MFY12.
- THP benefited from a positive tax expense in 3QFY12, which was attributed to over-provisioning of taxes in previous years. In 2QFY12, THP’s effective tax rate was low at 6.2% compared with the statutory rate of 25%.
- THP’s tax swung from a RM1.5mil expense in 2QFY12 to an income of RM10.1mil in 3QFY12.
- We maintain our HOLD call on Boustead Heavy Industries Corp (BHIC), with a reinstated sum-of-parts-based fair value of RM2.90/share. Our fair value implies a rolledforward FY13F PE of 15x – a 15% discount to Singapore Technologies Engineering Ltd’s (STE) 18x.
- We have cut our FY12F net profit of RM13mil to a loss of RM52mil due to further expected cost overruns and late delivery charges from the group’s commercial projects.
- For the upcoming 3QFY12 results, which will be announced on 14 November, we expect further losses due to the continuing delays for the delivery of the final accommodation crane barge to Swire Pacific Offshore Ltd.
- We understand that 4QFY12 could continue to be weak as the vessel will only be delivered by December this year, which could entail continuing cost overruns and late delivery charges. Recall that the first accommodation crane barge was delivered in September this year, a delay of almost two years.
- Sealink International has also cancelled its RM109mil contract to build two oil tankers, due to the delays and more attractive pricing of China-builds. Given that an initial deposit of 20% has already been paid, we expect minimal provision from this contract.
- But our meeting with management yesterday reaffirms our conviction that 2012 may prove to be a watershed year for the group, which would have cleaned out its loss-making commercial projects and turned to a fresh page for the only military yard in the country. But for any significant rerating on the stock to materialise, the group will need to demonstrate a sustainable earnings turnaround, coupled with a consistent execution record for timely delivery.
- The group’s gross order book of around RM10bil translates into a net order book of RM3bil currently, largely stemming from the RM2bil combat management system contract awarded by the group’s 21%-owned BN Shipyard. But further sub-contracts from the new generation littoral combat ships could expand the net order book to RM6bil – 13x FY13F revenue.
- In the pipeline, there are multiple military and commercial orders which could materialise in 1QFY13. These comprise contracts worth RM1bil for two patrol vessels and RM330mil for 25 additional fast interceptor crafts for the Malaysian Maritime Enforcement Agency.
- The stock currently trades at a fair FY13F PE of 13x – a 28% discount to STE, the leading provider of military PP 12247/06/2013 (032380) equipment, arms and services to Singapore
- Sweden-based Lundin Oil is expected develop the first offshore oil project in Pahang with production scheduled for 4Q2014. Prime Minister Datuk Seri Najib Razak said the state’s 5% oil royalty is expected to amount to RM100mil annually with production expected of between 17,500 and 20,000 barrels per day (bpd).
- The Bertam oil field at Block PM 307, at the shallow water depth of 76 metres and 160km off the shore of Kuantan in Peninsular Malaysia, has reserves of 64mil barrels (See location map in Chart 1). Lundin Oil has a 75% stake in the production-sharing contract, while Petronas holds the balance 25%. This finding is significant as there has never been a discovery of sufficient size for commercial development in the Penyu Basin, at the southern area of the Malay Basin.
- Lundin’s exploratory drilling started in 2011 which resulted in 3 discoveries and one successful appraisal well in Bertam. This Bertam project is clearly a fast-track development, as production is expected slightly more than a year after the completion of the commercial and technical feasibility studies by 2Q2013.
- Given that this will be the first such project in Pahang and that there is likely to be no direct pipeline network nearby, we expect Lundin to employ a floating production storage offloading vessel to process and help in the transportation of the oil. Local companies which are expected to be bidding to provide these services are MISC, BumiArmada, TH Heavy Engineering and M3Nergy.
- But we also expect fabrication contracts to build wellhead platforms to be awarded by mid-2013. The usual players are SapuraKencana Petroleum and Malaysia Marine and Heavy Engineering Holdings. But other domestic players such as TH Heavy Engineering and Boustead Heavy Industries Corp may also enter the fray.
- These developments are positive for the industry in the longer term. But while the capex upward trend is still intact in the immediate term, fabrication contracts for new offshore platform projects are temporarily slowing down due to project complexities, re-tendering exercises, re-engineering and deferrals. We note that large central processing platform awards for the North Malay Basin Phase 2, as well as the Bokor, Dulang and Semarang fields could slip into early next year from earlier expectations of this year. Hence, the momentum of new contract rollouts has shifted from pure fabrication to offshore installation works in the sector’s value chain over the next six months.
- But the hook-up, commissioning and maintenance works, which include the replacement of expiring long-term contracts, are likely to materialise towards the end of this year. Petronas and its production-sharing contractors are currently holding an open Pan-Malaysian tender for hook-up, construction and commissioning (HUCC) works potentially worth RM8bil-RM10bil, with interested bidders including SapuraKencana Petroleum, Dayang Enterprise, Petra Energy, and possibly, Shapadu.
- We maintain our Neutral stance on the sector with our top BUYs being Dialog Group and Petronas Gas, which are expected to be re-rated from the multiple tank terminal and LNG regassification projects in the pipeline.
Actual vs. Expectations
The group’s 1H13 net profit (NP) of RM9.9m came in largely in line (c.47% of our estimate) although the revenue only made up of 34% of our full-year estimate of RM501.1m.
Dividends Declared a gross first and final dividend of 7.46 sen, with the entitlement date to be announced later.
Key Result Highlights
YoY, SAM’s 1H13 revenue dropped by 33.1% to RM171.0m due to lower demand on its equipment manufacturing segment (-39.3%), which was partially offset by higher growth in its precision engineering segment (+3.2%). The sharp drop in the equipment manufacturing segment was mainly due to lower sales from hard disk drive test equipments in line with the weaker semiconductor industry trend. The EBIT margin, however, improved to 6.9% (1H12: 3.9%) as a result of better cost control. This has led the group to record a higher NP of RM9.9m (+23.4%).
QoQ, SAM’s 2Q13 revenue was lower by 56.1% due mainly to lower sales from the Equipment Manufacturing segment (-66.9%), which was again partially offset by the flat growth in the precision engineering segment (+0.2%). The group’s 2Q13 EBIT margin fell to 3.1% (1Q13: 8.6%) due to a higher operating cost and a lower turnover. Meanwhile, the effective tax rate has risen to 40.9% (1Q13: 9.3%) as a result of lesser tax incentives received, leading the group to report a lower NP of RM0.9m (-90.2%).
Outlook Although the 2H is normally the group’s stronger quarter, the global financial and economic uncertainties may affect the earnings and growth visibility of the semiconductor and HDD industries. This will indirectly and directly affect the growth of the group.
However, the more resilient aerospace industry is expected to provide stability to the group’s earnings.
Change to Forecasts
We have lowered our FY13-FY14 sales forecasts by 23.6%-26.8% to RM383m and RM428m respectively, after reducing our equipment manufacturing segment sales assumption. We have also raised our GP margin to 9.0% from 8.2% previously. On the overall, FY13-FY14 NPs have been revised lower to RM18.1m (-14.2%) and RM21.5m (-19.5%), respectively.
Rating Maintained MARKET PERFORM
Valuation We have lowered our TP to RM2.68 (from RM2.80 previously), based on a SOP valuation methodology. We expect the group’s FY14 net profit to achieve RM21.5m, of which RM6.7m will come from its equipment manufacturing business segment and RM14.8m from the full-year earnings impact of the aerospace engine casing business.
We value its equipment manufacturing business segment at the industry’s average PER of 7.0x and is pegging a market PER of 15.0x for its aerospace engine casing business division.
Risks Fluctuation in foreign currencies and the cyclical nature of part of its businesses.
We believe that LPI’s outlook continues to look attractive vs. its Malaysian financial peers. The evidence of its strong prospect is illustrated by its potential earnings growth of a 21% CAGR for FY10-14. Its strong cash flow also supports attractive dividend payouts. We are maintaining our dividend estimates and believe that LPI is on track to pay a 5.1%-6.7% dividend yield over the next two years while retaining its strong group capital surplus. The stock is a huge laggard within the financial sector and thus is likely to play a catch-up to its sister company, Public Bank Berhad (“PBBANK”) in our view. We are maintaining our OUTPERFORM call with an unchanged TP of RM16.10 based on 15x PER, 2.26x BV and 6.7% net yield. The current share price implies a 24% total upside to our target price.
A huge laggard despite its strong fundamentals. LPI’s share price has risen only 1.1% YTD compared to its sister company, PBBANK (+17.3% YTD), which has performed much better. We attribute LPI’s share price under-performance to the uncertainty over its dividends and fears of disappointing profits following its weak 1QFY12. However, we understand that its earnings have rebounded thereafter. Not only has LPI’s share price performance lagged that of PBBANK substantially, the stock is also currently trading at the lowest point of its historical PER band as well as its P/BV band. Its 12.9x FY13 PER is also at a 20% discount to its 16.1x historical average and at a -1SD to its historical average P/BV band of 2.3x.
Fundamentals intact. We believe that its weak share price performance will reverse soon over the next 6-12 months. LPI has clearly demonstrated a track record of delivering quality growth consistently above market expectations year after year since its listing. This impressive track record has given us a strong confidence belief in the existing management team led by Mr Tee Choon Yeow, Group CEO. In our view, LPI has the ability to generate new business growth over and above its premium sales level of RM1.0b in 2012. We like the company’s high-quality growth drivers of margin expansion, productivity gain and strong cash generation. These were proven once again in its recent strong turnaround in the 2Q and its recent 3Q12 result.
A compelling dividend play story. Apart from the strong rise in its cash pile with its earnings, the positive news is that PBBANK also does not need to raise new capital anymore under the new Basel III capital requirement. This could make LPI a good dividend paymaster going forward, especially since it has no acquisition plan in place in the short term. We estimate that this will free up a total of RM80-90m in surplus capital over the next few years.
Paying for protection. The valuation on defensive stocks is on the rise again over the last couple of weeks and some of them have been hitting historical highs. We think that recent macro data have turned weaker globally, putting at risk earnings estimates. The resulting market volatility has been favouring defensive stocks. Our analysis shows that stocks with a high dividend yield, earnings certainty and positive earnings revisions have outperformed the rest. Relative to other defensive stocks, LPI is still trading at a substantial discount. As such, rising demand for defensive stocks should see a catch-up play soon for LPI especially given its rising dividends, better free cash flow generation, consistent ROE and high earnings certainty. This is likely to make LPI a favourite among investors in the period ahead, in our view.
A huge laggard among Malaysian financial institutions. It is not often that we can refer to LPI as a “cheap” financial institution in Malaysia. LPI’s share price performance has substantially lagged that of PBBANK for the first time in the last 3 years with the stock now trading at just 12.9x PER, its lowest valuation point since 2009. LPI’s share price has risen only by 1.1% YTD while PBBANK (+17.7% YTD) and Maybank (+5.7%) have performed much better. As such, LPI’s PER (FY13 PER of 12.9x) is now at a 20% discount to its historical average PER of 16.1x and at a -1SD its historical average P/BV band of 2.3x. Historically, ever since the group embarked on its capital management programme and started offering generous dividend yields in 2005, LPI has been outperforming PBBANK every year. However, since its weak 1Q12 result, growing concerns over LPI’s ability to sustain a high leverage and dividend payout as well as worries over its profits have weighed down share price performance. Consequently, the group’s price outperformance has reversed to being a laggard for this year.
A compelling dividend play story. That said, its business cash generation remains the strongest in the sector with an expected RM170m in FY12. Apart from the strong rise in its cash pile, the positive news is that PBBANK does not need to raise new capital anymore under the new Basel III capital requirement. This could make LPI a good dividend paymaster going forward, especially since it has no acquisition growth plan in place in the short term. We estimate that this will free up a total of RM80-90m in surplus capital over the next few years. We reckon that LPI could return this excess cash to shareholders. Nonetheless, we have only factored in a conservative payout ratio of 90% for FY12-FY14 in our model. We reckon that our prudent dividend payout ratio assumption is achievable as the payout ratio in FY11 already surpassed 100%. Based on our estimates, LPI could potentially pay out RM0.69-RM0.94 in dividends per share for FY12-FY14, translating into net dividend yields of 5.1%-7.0%. In addition, the deployment of surplus cash will also provide a lever to improve its ROE.
Fundamentals intact. Judging from our recent conversation with management, we believe that the group’s fundamentals remain intact. The key highlights of the discussion are highlighted below. LPI’s higher-than-industry organic growth is seen as sustainable. Its gross premium portfolio is likely to reach beyond RM1.0b and together with the lag between its higher premium growth and profit, its earnings are likely to grow in 2013 despite the challenging environment. In 3Q12, on a YTD basis, the key positive was its solid gross premium growth. LPI registered a 17.1% YoY growth rate in its gross written premium to RM715.5m, driven by the fire and marine divisions. This was above the 7% industry growth rate and should rise to 18% YoY by year-end.
The total portfolio claims ratio was stable at 45.9% as compared to 2Q12’s 45% and was substantially lower than 1Q12’s 60%.
The ratio was within our full-year forecast of 48%. Meanwhile, the fire division’s loss ratio improved to 14.9% (vs. 2Q12: 14.6%), the motor division to 75.1% (vs. 2Q12: 75.3%), the miscellaneous division to 45.0% (vs. 2Q12: 43.1%) and the marine, aviation and transit division to 19.4% (vs. 2Q12: 13.1%). The relatively low expense ratio seen in 3Q12 was encouraging, which was also within management’s guidance and our forecast of 12%. This impressive track record has given us a strong confidence belief in the existing management team led by Mr. Tee Choon Yeow, Group CEO, that it will continue to grow the company successfully. We continue to like the company’s high-quality growth drivers of margin expansion, productivity gain and strong cash generation.
Guinness Anchor Bhd (“GAB”) is the market leader in the domestic Malt Liquor market with a market share of 60% as at June-12. Moving forward, we would see GAB’s market share to stabilise at 58.5% given the competition in the mainstream and super premium segment from Carlsberg Brewery Malaysia (“CARLSBG”). We like GAB for its defensive and decent dividend yield of 3.9% (based on a dividend payout ratio of 90%). GAB’s share price has gained traction post the Budget 2013 announcement, which we believe is largely due to the absence of “sin taxes” and its potential to benefit from the consumers’ higher disposal income. This is further supported by its wider range of product offering and reach due to its commonly-known brand. We are initiating coverage on GAB with a MARKET PERFORM recommendation and a Target Price of RM17.10, which is based on DCF valuation with a WACC of 7.5% and a long-term growth rate of 1.5%. Our MARKET PERFORM rating is premised on its decent dividend yield of 3.9% and defensive earnings during the global economic uncertainties.
Strong brand and wide range of product offerings. Over the years, GAB has nurtured its branding in the market through its three strongest and most successful products i.e. Tiger, Guinness and Heineken. Its most notable flagship brand, Tiger, makes up 51.0% of the mainstream segment, while Guinness and Heineken cater for the premium market which they dominate at 95.0% compared to its peer, Carlsberg Brewery Malaysia (“CARLSBG”), which controls the remaining 5% share only. Apart from that, GAB also has eight other brands in its stable that cater for the value for money (“VFM”) and super premium segment. However, its total market share in these two segments (in terms of price position) is relatively small at just about 7%. Due to its wider range of product offerings and it having the commonly-known products, Guinness is well positioned to benefit from the likely higher demand growth ahead as a result of the consumers’ higher disposable income.
Defensive earnings & decent dividend yields. Despite the constant rise in the raw material prices (12% on average per annum), GAB’s bottom line still recorded an impressive growth of a 5-year CAGR of 10.5%. This was mainly due to its procurement strategy of locking in raw material prices 12-18 months ahead through its parent company, GAPL Pte Ltd (co-owned by Diageo Plc and Asia Pacific Breweries Ltd’s) coupled with its ability to pass on the bulk of the cost increase to its customers (e.g. GAB adjusted its selling price higher by 3-4% last year). Apart from that, based on GAB’s historical dividend payout rate of 90% to 95%, GAB will offer decent yields of 3.9%-4.2% on the back of our earnings growth assumption of 4.9-7.3% for FY13-14E.
Excise duties hike expectations. It was a relief to the sector that there was no excise duty hike in previous Budget 2013 announcement. However, the risk of substantial increase in excise tax is still intact. In our scenario analysis, assuming that there is a 15% increase in the excise duty, we believe that GAB will still be able to record a positive earnings growth of 0.5%. This is assuming the tax hike pass- through to the consumer and annual hike in ASP (“Average Selling Price”) of 3% to 4%. GAB’s earnings will be negatively affected by 6.4% should the excise duty increase substantially to 25%.
Risks. (1) Regulatory risk i.e. Higher than expected increase in excise duties (2) global economic downturn/recession and (3) higher than expected input cost.
Fairly valued at RM17.10. We initiate coverage on the stock with a MARKET PERFORM recommendation with a target price of RM17.10 based on our DCF valuation with a WACC of 7.5% and a long-term growth rate of 1.5%. We recommend investors to hold the stock given its defensive earnings and its decent net dividend yields of 3.9%-4.2% for FY13-14E.
Tuesday, 30 October 2012
- CIMB Group Holdings Bhd’s (CIMB) 97.9%-owned Indonesian subsidiary PT Bank CIMB Niaga Tbk (CIMB Niaga) recorded a healthy earnings growth of 6.8% QoQ, bringing annualised earnings to 10% above our forecasts. We estimate CIMB Niaga’s net earnings contribution at 37% in 3QFY12, vs. 31% in 2QFY12, based on our prorated group forecast for FY12F.
- Loans growth had slowed to 1% QoQ in 3QFY12 from 6% QoQ in 2QFY12, due mainly to lumpy corporate repayments, as well as continuing effects from CIMB Niaga’s withdrawal from the mortgage loans segment (14% of total loans) which expanded only 1% QoQ in 3QFY12 vs. 4% in 2QFY12. Looking ahead, the company alluded to likely adopting a more active stance in selected mortgage segments (with focus on properties out of Jakarta as well as selected customers for cross-selling purposes). Loans growth guidance is now lowered to 15% to 16% FY12F from 18% previously.
- Despite the slower loans growth, the company had managed to maintain NIM at 5.90% in 3QFY12, vs. 5.93% in 2QFY12. This was likely due to a higher contribution from its commercial loans segment (contributed 38.1% to total loans in 3QFY12 from 36.9% in 2QFY12), which includes higher-yielding loans from the micro segment.
- Non-interest income continued to benefit from some gains in treasury bonds (3Q: Rp155bil, 2Q: Rp191bil; 1Q: Rp462bn), with the company hinting of healthy marked-tomarket gains for its existing bonds portfolio. The other portion which had seen healthy growth year-to-date is fees from its third-party forex flow business, which is about Rp300bil YTD. The company expects growth to be boosted from further corporate customer flows, as well as the consumer segment with better live-feed services arising from IT upgrading.
- Gross NPL ratio was lowered to 2.41% in 3QFY12 from 2.52% in 2QFY12 while gross impaired loans ratio also improved, to 2.84% in 3QFY12m from 3.29% in 2QFY12, attributed to good recoveries. Absolute levels of gross NPL and impaired loans declined by 3.4% QoQ and 12.8% QoQ, respectively, which is positive. CIMB Niaga’s 3Q is decent despite a slower loans growth, with non-interest income growing steadily and asset quality improved. Maintain BUY on CIMB with a fair value of RM9.70/share.
- We maintain our BUY call on Petronas Chemicals Group (PChem), with an unchanged fair value of RM8.20/share, pegged to a FY13F EV/EBITDA of 8x – at a 20% premium to Thailand’s PTT Global Chemicals’ 6.7x.
- We have cut FY12F net profit by 10% due to the estimated RM560mil one-off provision to discontinue the group’s vinyl business, in largely decommissioning, site remediation, contract termination and impairment charges. But core net profit is largely unchanged. Similarly, we maintain our fair value, which is pegged to PChem’s earnings next year.
- PChem’s board has approved a plan to discontinue its vinyl business, which comprises 3 plants manufacturing vinyl chloride monomer (VCM) and polyvinyl chloride (PVC) in Kertih Integrated Petrochemical Complex in Malaysia and Vung Tau in Vietnam.
- The Malaysian operations have an annual production capacity of 400,000 tonnes of VCM and 180,000 tonnes of PVC while the Vietnam factory has 100,000 tonne of PVC. We understand that the Malaysian operations suffered a loss of RM133mil from 1 April 2011-31 December 2011, and generated a small net profit of RM30mil in 1HFY12.
- We are positive on this development as the group’s ethylene feedstock and resources can be reallocated to higher margin products, such as more complex polymer chains and performance chemicals, which could provide a stronger earnings outlook next year.
- PChem’s vinyl operations have not been able to optimise on the margins along the group’s integrated value chain because annually, most of the 320,000 tonnes of ethylene di-chloride feedstock is sourced externally while only 90,000 tonne of ethylene is supplied by PChem’s ethylene cracker. Hence, the vinyl division’s earnings were vulnerable to market cycles.
- Ethylene prices have fallen by 5% MoM and 18% HoH, polyethylene has contracted by 3% MoM and 7% HoH, while methanol fell 14% MoM and 13% HoH. But since the beginning of the year, polyethylene prices are still up 6%, and methanol up 3%.
- Hence, we maintain product price increases of 3%-5% in FY12F-FY14F assumptions, on expectations of a stronger global economy next year, driven by QE3 and furtherpump priming measures to stabilise and underpin a turnaround in petrochemical prices.
- The stock currently trades at an attractive FY13F EV/EBITDA of 6x, which is 61% below Taiwan’s Formosa Petrochemicals’ 16x.
- We reaffirm our BUY rating on DRB Hicom, with our fair value unchanged at RM3.80/share – a 10% discount to its SOP value of RM4.20/share.
- It was announced to Bursa Malaysia yesterday that DRB’s Proton has signed a collaboration agreement with Honda Motor Co. Ltd Japan (Honda). This agreement is inked with a view for both parties to explore collaboration opportunities in the areas of technology enhancement, new product line up, platform and facilities’ sharing.
- Although it has been well-communicated by DRB that it will be leveraging on its existing partners to revive Proton, we are surprised that Honda came into the picture as it was heavily speculated that a VW tie-up was imminent. Recall that currently, DRB has an arrangement with Honda for the contract assembly of Honda CKD units via its effective 34%-stake.
- Nonetheless, details are sketchy at this juncture. The following are key take-aways from our discussion with the management:
- (1) There will not be any equity participation by Honda; thus, we believe there should be some royalty compensation for Honda and the existing business arrangement with Honda will continue as usual.
- (2) The focus of this tie-up would be to develop a 2.0 litre-car via platform sharing, which we believe is for the long-awaited Perdana replacement model and which could also involve engine development. Although Honda has a strong footing in this segment via the Accord model, cannibalisation is not an issue due to distinct pricing. We understand that DRB targets finalisation of this tie-up within six months.
- (3) There is further upside as we believe there will be a similar arrangement with its other partners to produce models in different segments. We are not ruling out a tie-up with VW Group to produce B segment cars. Apart from the technology, DRB would be able to leverage on VW’s strong global distribution network to market Proton’s cars overseas. Plus, this would address the under-utilised plant issue in Tanjung Malim.
- On the flipside, while gearing is currently is on the higher side (net gearing as at end of June: 0.7x%) DRB intends to trim down its debt to RM1bil-RM1.5bil by next year. This is already under way with the proposed divestment of Hicom Power. Further divestments of non-core businesses – Bank Muamalat and UniAsia Capital – would further ease its balance sheet.
- From a valuation standpoint, DRB is currently trading at an attractive CY13 PE of 8x versus its conglomerate peers’ 17x. It is also trading at a steep discount of 41% to its SOP value.