Monday, 31 December 2012

Banking Sector - Slow prelude to year-end OVERWEIGHT

- Anaemic indicators in November 2012.  Loans applications fell by 19.0% in November, after turning in a flat performance of -0.4% in October 2012. Loans approved declined 4.1% in November, representing six consecutive months of contraction. 

- Contributed partly by seasonal year-end effect. The November’s slower leading indicators were due mainly to a slower corporate segment. Corporate segment loans applied recorded a decline of 48.9% in November, while loans approved contracted 23.5%. However, this was likely partly due to seasonally slower year-end effect. 

- Auto loan applications surprisingly resilient. One unexpected bright spot was still auto loans applied, which was surprisingly quite resilient with a growth of 13.3% in November (October 2012: 17.8%). We believe this is quite positive given that historical year-end auto purchasing activities tend to be slower, given consumer perception that vehicle value will soon reflect the impact from a new calendar year.  

- Some upticks in gross impaired loans. Gross impaired loans on an absolute basis posted a marginal rise of 0.5% MoM or by RM108mil in November 2012. The segments which experienced some upticks were transport vehicles, personal use, construction, working capital and other purposes segments. 

- But gross impaired loans ratio remained low and unchanged at 2.1%. This was in contrast to October 2012 which showed an improvement in almost all segments except for the other purposes segment. However, gross impaired loans ratio was unchanged and remained low at 2.1%  in November. Loan loss cover remained above 100%, at 101.9% in November (October 2012: 102.4%).  

- Maintain overweight. Our buys are CIMB, PBB and RHB Cap.

Source: AmeSecurities

Kenanga Today - 31 Dec 2012

l SelProp 4QFY2012 net profit falls
l Quality Concrete posts RM1.25m loss for 3Q12
l Kumpulan Europlus incurs higher losses on share of associates, provision, finance cost
l Felda Global may sell Tradewinds stake
l RM1.5b theme park for Morib
l Yinson’s 49%-owned PTSC raises RM918.0m loans to convert FPSO
l OCK eyes transfer to Main Market

l Apple will drop Galaxy S IIIMini from Samsung patent suit
l Toshiba in talks to cut Westinghouse stake

l Japan Economy: Latest Data Underlines Weakness
l South Korea November Industrial Output Up For 3rd Straight Month
l China Central Bank Spells Out Priorities
l Obama Ups Pressure On Republicans Over 'Fiscal Cliff'
l Pending Home Sales Rise 1.7 %, Beating Forecast
l Treasury 10-Year Yields Head For Record Low On Demand For Haven

l IMF And EU Push For Less Drastic Deficit Cuts
l Italy's 10-Year Borrowing Costs Rise Slightly At Auction

Middle East
l Saudi Arabia Boosts Spending Goal By Fifth In Record Budget
l Egypt To Resume IMF Loan Talks As Reserves Dwindle

l Dollar Moves Up As Investors Watch Fiscal Talks

l Oil Slips As USFuel Stocks Rise, Budget Worries Linger
l Gold Down On Day, Week Amid Last-Ditch US Budget Talks

Source: Kenanga

AEON CO. (M) BHD - Acquisition of Land

News    Aeon has entered into a joint development and sale and purchase agreement with Lebar Daun Development S/B and Perbadanan Kemajuan Negeri Selangor (“PKNS”) on a piece of vacant land held in Bandar Shah Alam that measuring approximately 7.602 hectare or 818,273.2 square feet at the purchase price of RM90m. 

 The purpose of the proposed land acquisition is to construct and operate a shopping centre and a departmental store cum supermarket.

 The amount of the acquisition is based on the rate of RM110 per sq ft on an estimated area of 818,273.2 sq ft of the Sale Property after considering the valuation carried out by the company’s valuer, VPC Alliance (KL) Sdn Bhd.

 The acquisition will be fully funded by cash and internal generated funds.

 The company will not be assuming any liabilities including contingent liabilities and guarantees pursuant to the acquisition.  

Comments   We understand the key rationale of the proposed acquisition is to accelerate the expansion of its retail business through opening of new shopping centres and outlets.

 While we believe the upcoming new store on the newly acquired land will enhance its retail business going forward, we have yet to impute the potential earnings' impact into our financial model for conservative purpose.  

 The proposed land acquisition cost of RM90m via internal fund is not a concern to us judging the group has recorded a strong cash position of RM343m as of 9M12. 

Outlook   Outlook remains neutral as the group may potential affected by the global economy weakness despite Aeon continues to expand its outlet network in the next three years.

Forecast   Maintain FY12-13E net profit at RM223.2mRM251.8m.  

 We believe the company will maintain its 3% SSSG (Same Store Sales Growth) rate in FY13, a similar pace that targeted to record in FY12.

Valuation    Maintain TP of RM11.30, based on FY13E PER of 15.8x (+2SD from its historical 5-year mean).  

Risks   Delay in expansion of new outlets.
 Weakness in global economy uncertainties.

Source: Kenanga


A subdued 2012. Although the global environment failed to excite, Malaysia’s economy grew quite robustly, thanks to strong domestic demand underpinned by the Economic Transformation Programme (ETP) and the rise in infrastructure projects. However, the media segment’s growth was tepid as advertisers were cautious with spending during the year. Based on The Nielsen Co figures, 10M12 adex was flat y-o-y (+0.7%) given that the three core segments – i.e. newspaper, free-to-air (FTA) TV and radio – which together account for more than 90% of total adex, registered mediocre y-o-y growth of between -1% and +2%. We were indeed disappointed with this year’s poor adex showing as we had earlier expected adex growth of 2x our house CY12 GDP forecast of 5.2%.
English segment continues to roll downhill. The market share trend in the newspaper space was status quo, as the BM and Chinese publications bit into the adex share of their English counterparts. For the first 10 months of the year, adex in the BM and Chinese segments grew 3% and 2% y-o-y respectively while that in the English segment contracted by 6% y-o-y. This phenomenon is not surprising as English-literate readers are becoming more tech-savvy and are increasingly accessing the web for news. Thus, based on company specifics, Star Publications was no doubt the biggest loser (-2% newspaper adex market share) while Media Prima and Media Chinese were the prime beneficiaries.
Encouraging numbers from cinema segment. To our surprise, FTA TV adex was tepid despite both the Euro 2012 and London Olympics being held this year while radio was also not particularly great as mentioned above. Although we were disappointed with the performance of the heavyweights, the adex growth chalked in by the cinema segment was astonishing, albeit coming from a low base (+63% y-o-y). We think advertisers are being pickier on the target audience to deliver and implant a more significant message across while conserving their coffers – advertising to the masses is pricier and may be ineffective.
Newsprint price stabilizes. Newsprint prices have been going sideways since late-2010. We expect a similar trend moving forward given the lethargic demand from the developed countries of US and Europe. This bodes well for newspaper publishers, for which newsprint comprises the largest cost component, at ~40% of COGS, as it smoothens out the volatility in expenses. We expect newsprint prices to hover at the current USD600-USD650/tonne level. Nevertheless, currency value plays a major role in determining this portion of costs, whereby the appreciation of the RM against the USD will translate into lower overall newsprint price, which is denominated in USD. This had been the case for the past few quarters.
Maintain NEUTRAL. Looking ahead to 2013, the sector is in great need of rerating catalysts. Uncertainties cloud both our domestic political scene as well as the global economy. Furthermore, there will be no major sporting events to spur adex growth next year. Hence, we are NEUTRAL on Media Prima given our caution on its exposure to the volatile TV segment, and Media Chinese, whose bottom-line will shrink after committing to RM500m worth of debts. Meanwhile, Star Publications is a SELL given that its printing business is facing a decline in English readership while its newly acquired businesses are still in their gestation. Similarly, Catcha Media’s businesses are still at their infancy but we are NEUTRAL on the stock. Lastly, the only company in our media universe with a BUY recommendation is Astro, whose business differs from the above-mentioned companies as it adopts the pay-TV model, which could somewhat cushion the impact of adex slowdown.

Source: OSK


Demand still growing. We think that the global demand for rubber gloves remains positive, with an expected annual growth rate of 8% p.a., mainly driven by rising global public awareness of hygiene standards. Even without imputing any ‘unpleasant catalysts’ (i.e. pandemic breakouts), we think the resilient demand for gloves is mainly due to the following: i) post-H1N1 breakout, consumers have continued using gloves after having gotten used to them, ii) the stringent hygiene requirements in the developed nations, and iii) escalating hygiene awareness in developing countries.
Operating environment favourable for glove makers. We think that the operating environment is in favour of glove makers and thus, we remain upbeat on the sector. This is mainly due to: i) the demand for rubber has stayed sluggish due to the slow recovery in global vehicle sales, and therefore, the price of latex will remain weak, ii) weakening crude oil prices have led to lower butadiene prices and hence, lower nitrile prices, and iii) the stabilised USD/MYR exchange rate. We still think that the increment in labour costs and gas prices may not significantly impact the earnings of the glove makers.
Total capacity to hit new highs in 2013 and thereafter. The Big Four under our coverage - Top Glove, Supermax, Kossan and Hartalega – have rolled out their expansion plans to increase their production capacities and achieve better product mixes to capture larger shares in both the natural rubber and nitrile gloves markets. By 2013, Top Glove is expected to hit a total capacity of 44.8bn pieces per annum and focus on expanding its nitrile production; Supermax plans to produce 21.5bn pieces p.a. and has indicated plans to achieve a product mix of 52% in nitrile and 48% in natural rubber latex; and Kossan aims to achieve an annual capacity of 14bn pieces (it already has a balanced product mix). Meanwhile, Hartalega is still the largest nitrile glove producer, with an annual capacity of 11.2bn pieces, and is projected to reach total capacity of about 13.5bn pieces a year by 2013 upon the completion of the company’s Plant 6. In short, by 2013, there will additional annual capacity for at least 14bn pieces from the Big Four, and we believe this figure is growing. Besides the capacity increase, Top Glove has ventured upstream into rubber plantations to secure a stable supply of raw materials. Meanwhile, Supermax is focusing on expanding its downstream distribution network, Kossan is putting efforts into niche market products that might fetch better margins, and Hartalega is creating more value through production technology innovation.
Market may continue to consolidate. In 2012, we saw two listed rubber glove companies being taken private. We think that the market will consolidate further as the smaller players are losing out to big companies in terms of capacity and efficiency as well as in terms of technology to produce better quality products.
Maintain OVERWEIGHT. We are maintaining our OVERWEIGHT recommendation on the sector due to the following factors: i) the steady easing of raw material prices, ii) USD/MYR remaining competitive and stable, iii) global demand remaining positive, and iv) escalating costs may not significantly affect glove makers. Top Glove and Hartalega have outperformed their peers while Supermax is still lagging and currently trading at an undemanding PE of 10x. This makes Supermax our Top Pick, with a FV of RM2.70, pegged to a 13x FY13 PE.
Source: OSK

MAYBANK (FV RM10.15 – BUY) Stock Pick: Robust Growth

Maybank has been delivering asset and earnings growth that has beaten its peers for several quarters. Although the recent private placement may give rise to a capital overhang, this would be temporary as the group is effectively channelling the excess in the form of above-industry asset growth while maintaining its relatively high dividend payout. We are maintaining our BUY call and FV of RM10.15 (2.14x FY12 PBV, 14.0% ROE, 9.5% COE and 4% growth rates) given Maybank’s inexpensive 1.8x FY12PBV valuation, the cheapest among the top three banks.
Vital in sustaining sizzling organic growth. Maybank’s recent capital raising exercise places the group ahead of the curve in complying with the stringent capital requirements of Basel 3 while sustaining above-industry growth. This reinforces our positive stance on the exercise since: i) the quantum is relatively manageable and would only marginally impact EPS dilution, ii) it gives the group a headstart in achieving strong capital buffers before Bank Negara’s counter-cyclical buffers come into force from 2014 onwards, and iii) it will allow the group to sustain growth rates above its peers’, which will in turn consistently drive its earnings upside surprises and ROE re-ratings.
Maintaining high dividend payouts. We estimate that the completion of the RM3.6bn share private placement will provide the group with the scope to maintain both its relatively high dividend payout ratio of 60% to 75%, while sustaining its Risk Weighted Asset growth rates at above 12% and Core Tier-1 Equity (CT1E) above the 9% threshold. Given the need to potentially scale up its capital base further, the group intends to maintain its existing dividend reinvestment plan, which will consequently ensure that dividend payouts remain significantly above those of its peers.
Maintain BUY. We are maintaining our BUY recommendation and RM10.15 FV (2.14x FY12 PBV, 14.0% ROE, 9.5% COE and 4% growth rates) on Maybank given the stock’s inexpensive valuation of 1.8x FY12 PBV, which is the cheapest among Malaysia’s top three banks. Its relatively superior capital base places the group in a strong position to consistently deliver earnings growth and generous dividend payouts ahead of its peers in the near- to mid-term.
Source: OSK

QL (FV RM4.05 – BUY) Stock Pick: A Good Catch

QL, alrea dy a leading marine products and poultry player, is forging ahead with its expansion into highly populated ASEAN countries like Vietnam and Indonesia. We expect earnings from the group’s marine, integrated poultry and palm oil operations in Indonesia to kick in strongly by FY14, taking QL’s numbers to new heights. We like its resilient business and solid management. Maintain BUY, with FV unchanged at RM4.05.
25 years of uninterrupted growth. QL Resources has evolved from a livestock feed trading company with a small fishery into a successful marine and poultry egg producer with a fast-growing palm oil business. Backed by a solid business model, QL’s exposure to three sustainable basic food industries has enabled it to deliver remarkable results in the last 25 years.
Marine business leads the way. As the leading surimi producer in Malaysia with 25k tonnes of capacity, QL has four marine manufacturing plants in Malaysia and one in Brondong, Surabaya. It is No.1 in chilled fabricated fish-based products in Malaysia, manufacturing 30k tonnes of surimi-based products a year, as well as the country’s largest fishmeal producer, making 25k tonnes of fishmeal annually. In view of the bountiful supply of fish in Indonesia and the promising outlook for the global surimi industry, the group ventured into Surabaya, Indonesia with a 10k-tonne capacity surimi plant, up from 5k tonnes previously, after it beefed up capacity in August 2012. The group is also building a new frozen surimi factory with annual capacity of 15k tonnes in Hutan Melintang, as well as a new cold room for surimi-based products in Johor Bahru (5k tonnes.), and a frozen fish cold room in Endau (2k tonnes).
The next catalyst - Indonesia. QL is targeting to ramp up egg production at its integrated livestock farm in Indonesia to 900k eggs per day (epd) by March 2013 from 450k epd currently. It also plans to increase the number of day old chicks (doc) from 1.3m to 2.5m docs per month by March 2013. We believe that the group’s Indonesian operation will fuel its future earnings given the aggressive expansion in marine production, integrated poultry and palm oil divisions.
Top consumer sector pick. Our Top Buy in the consumer sector, QL is a relatively safe bet amid economic uncertainties due to its earnings track record and defensiveness. Maintain BUY, with RM4.05 FV, based on 19x CY13 EPS.
Source: OSK

Friday, 28 December 2012

Kenanga Today - 28 Dec 2012

l Berjaya Corp revenue climbs to RM1.8b in Q2
l Adventa returns to profitability in 4Q
l Poh Huat recorded RM7.9m net profit on Vietnam's operation
l VSI 1Q profit down, reduces Indonesia operation
l Analab earnings down 52% in Q2
l HeiTech Padu accepts RM34m deal
l Protasco clinches Perak 7-yr road concession
l Eversendai increases stake in Singapore's Technics
l QSR trading suspension on January 7

l Berkshire to buy Lightower, Sidera for USD2.0b
l Blackstone's SeaWorld files for USD100.0m IPO

l Thai Factory Output In November Up Sharply
l South Korea Lowers Its Growth Forecast
l Profits At China's Factories Jump As Economy Recovers
l US Senate Leader Harry Reid Voices Fiscal Cliff Fear
l Labor Market, Housing In U.S. Strengthen Into 2013
l Consumer Sentiment Weakens As Fiscal Crisis Looms
l Italy Hits Target Amount At First Debt Auction Of 2013
l Dollar Edges Down On Fiscal-Cliff Flip-Flop
l Oil Eases As U.S.Budget Uncertainty Drags On
l Gold Up Again But Gains Small As Fiscal Crisis Hedge

Source: Kenanga

Highlights / Stock Picks of the Day - GSB Group Bhd ("GSB")

On Thursday, GSB rose 12% or 1 sen to 9.5 sen on fresh bargain hunting activities. What caught our interest was that the share price broke above the downward sloping resistance level with a surge  in volume. From a technical standpoint, GSB also depicted the classic "Bollinger Squeeze" in the previous weeks before staging an explosive breakout. The MACD, Stochastics and RSI are all supportive of a move higher, and we reckon
that the 12 sen  and 14 sen levels should make decent targets. Traders who are keen to buy into the stock may do so between 9 sen - 9.5 sen, while a tight stop loss of 8 sen should also be placed just below the trend line resistance-turned-support.

Source: Kenanga

Highlights / Stock Picks of the Day - Zhulian Corporation Berhad ("ZHULIAN")

Recall that on the 7 December 2012, we called a technical buy on ZHULIAN at RM2.73. Since then, the share price had  been rising fairly slow. Recall that the stock rose to a high of just  RM2.80, the stock
retreating to the trend line support of RM2.70 of late. However, we continue to like the stock for its obvious cyclical patterns over the past year, and we believe that the next up-leg is already in the making. The stock has staged a strong upswing to RM2.81 yesterday. We noticed that each upward cycle spans roughly two months, and share price rise 43 sen after each resistance breakout. Using history as a guide, we have set our
sights on RM2.98, or 5 sen below the price projection following the earlier buy signal. We reckon that traders should look to buy into the stock with a stop-loss below the trend line at RM2.65.

Source: OSK

Yinson Holdings - Above Expectations Again

Period    3Q13/9M13

Actual vs. Expectations     Yinson’s 3Q13 net profit of RM8.5m brought its 9M13 net profit to RM29.1m. This was above both our (RM31.0m) and consensus (RM31.5m) full year estimates, accounting for 95% and 92% respectively.

 The variance to our estimate was again due to the better-than-expected performance from its transport and trading divisions.

Dividends   No dividend was declared in the quarter.

Key Results Highlights    QoQ, 3Q13 net profit dropped by 12.7% (from RM9.7m in 2Q13) mainly due to 1) lower trading division revenue (-18.6%) as the business slowed down (as expected) and 2) lower marine division margins as most of the work majority of the incremental revenue (+RM28.8m from 2Q13) was third-party charters and thus fetched very low margins.  

 YoY, the 3Q13 net profit was up 5.9% (from RM8.0m in 3Q12) mainly on the back of: 1) higher marine division as revenue as there were more third-party charters, and 2) margin expansion in the trading division (+1.2ppts).

Outlook   In the long run, we are positive on the company as its growth trajectory is accelerating. The company is looking to kick-start its FSO operations in FY14 and FPSO operations in FY15.

 Strong links to PTSC are a precursor to more Vietnamese opportunities and it is expected to posta 3-year net profit CAGR of 38.8%.

Change to Forecasts    Due to the strong performance in 9MFY13, we are lifting our full year numbers to RM34.0m (from RM31.0m previously) on the back of higher margins assumption for its trading division. 

 Note that our forecasts imply a weaker 4Q13 as we assume the trading division to be weaker as business typically slows down towards the end of the year, and potentially weaker marine earnings as such third-party charters continue. 

 We are also adjusting our FY14-15E net earnings higher to RM48.5m-RM73.2m (from RM47.6mRM72.3m) after imputing higher earnings contribution from trading division (+~6%) 


Valuation    Our target price is upgraded to RM2.71 from previous RM2.68, based on FY14 Sum-of-Parts (SOP) valuation. 

Risks   1) Significant reliance on Petrovietnam poses an earnings risk to Yinson; 2) high capex requirements and 3) contractual and project execution risks of new projects due to its inexperience. 

Source: Kenanga 

Cuscapi Berhad - Fairly valued

News    The company has announced the proposed transfer of the listing of and quotation for the entire stock from the ACE market to the MAIN market of Bursa Malaysia.

It also proposed a 1-for-2 rights issue, a 1-for-2 bonus issue for every two rights shares subscribed and one free warrant for every one rights share subscribed by the entitled shareholders. 

Based on the current outstanding shares, the bonus and rights issues entail up to 184.0m additional new shares and another 122.7m warrants.  

The entitlement date will be determined later pending approvals from Bursa Malaysia Securities, Securities Commission, shareholders and others. The exercise is expected to be completed in 2Q2013.
Comments      We are positive on the proposal as we expect the exercise to enhance Cuscapi’s liquidity and reward shareholders, which may potentially re-rate the stock. They are not entirely surprising given its sizeable retained earnings reserve to the share capital at the ratio of 1.5:1.

Assuming full conversion of the warrants and the new issuance, the company’s share base will increase 125% to 552.0m. The total proceeds that would be raised from the rights and full warrants conversion is RM62.6m (RM29.3m from the rights and RM33.1m from the warrants based on the indicative issue price of RM0.24 per rights and the indicative warrants’ exercise price of RM0.27 per piece).

Based on the latest closing price of RM0.325, the theoretical exall price is estimated at RM0.255. As such, the warrants are slightly out-the-money. 

In our earnings model, we assume gradual conversion of 20% each year for the next five years. As a result, the share base will increase by 5.7% and 5.4% for FY13E and FY14E.
Outlook     We believe the company will continue to strengthen the contributions from its overseas units. In fact, its South East Asia and China regional operations have registered 2-year revenue CAGR(s) of 42.8% and 121.3%, respectively.

We are still looking forward to see the company concluding a project with one of the biggest fast-food restaurant chains in Philippines in the near future, which has been delayed since late last year. 

Besides, we are also looking forward to a new product of the company, which is currently in the trial run stage and could be one of the growth drivers from 2013 onwards.    
Forecast      Due to the higher cost spent for its regional expansion and not factored in by us earlier, coupled with the back-loaded earnings contribution from regional and product expansions, we are thus cutting Cuscapi’s FY12E-13E earnings by 27.0%-36.9% to RM6.5m-RM7.2m (from RM8.9m-RM11.4m), implying diluted FY12E-13E PERs of 16.9x-16.1x (vs. current FY12E-13E PERs of 12.4x-11.1x).
Rating     Maintain MARKET PERFORM.
Valuation  We  have  downgraded  our  TP  on  Cuscapi  to  RM0.36  (ex-all: RM0.27), from RM0.41 previously, implying diluted FY12E-13E PERs of 17.0x-16.1x (vs. FY12E-13E PERs of 12.4x-11.1x).
Risks      Delay in its projects implementation

Source: Kenanga

Trading Stocks - YTL Power | Scomi Group | Cuscapi | Hup Seng Industries | Zhulian | OCK | SEG International | Inch Kenneth Kajang Rubber

YTL  Power  may  climb  after  a  firm  close  yesterday.  A  purchase  can be  made  if  the  stock  stays  above  RM1.55,  with  a  close  below RM1.50  as  a  stop-loss.  The  price  targets  are  RM1.63  and  RM1.75. The  stock  may  decline  if  it  is  unable  to  stay  above  RM1.55,  with supports seen at RM1.40 and RM1.30.
Scomi  may  rebound  if  it  can  close  above  the  two-day  high  of RM0.36.  A  purchase  can  be  made  if  this  happens,  with  a  close below  RM0.345  as  a  stop-loss.  The  price  target  is  RM0.45,  should the  recent  high  of  RM0.40  be  broken.  Failure  to  surpass  RM0.36 could  see  the  stock  trend  lower,  with  supports  expected  at RM0.325 and RM0.30.
Cuscapi may rebound after holding above the RM0.30 support level.A purchase can be made if it stays above RM0.32, with a close belowRM0.30 as a stop-loss. The price target is the recent high of RM0.42,with selling anticipated at RM0.38. Failure to stay above RM0.32 willlikely see the stock lower, with strong support seen at RM0.25.
Hup Seng may accelerate after closing higher yesterday. A purchase can  be  made  if  the  stock  stays  above  RM2.85,  with  a  close  below RM2.76  as  a  stop-loss.  The  price  target  is  RM3.20,  should  the psychological  RM3.00  be  broken.  Failure  to  stay  above  RM2.85 could see the stock sideways, while support is expected at RM2.55. 
Zhulian  should  trade  higher  after  posting  a  new  52-week  high.  A position can be initiated if it stays above RM2.80, with a close below RM2.70  as  a  stop-loss.  The  price  target  is  RM3.20,  with  selling anticipated  at  RM2.95.  Failure  to  hold  above  RM2.80  will  likely  see the stock sideways while further support lies at RM2.50.
OCK  may  scale  higher  after  closing  the  highest  in  more  than  a month.  A  purchase  can  be  made  if  it  stays  above  RM0.475,  or otherwise above RM0.50, with a close below RM0.45 as a stop-loss. The  price  targets  are  RM0.55  and  RM0.60.  Failure  to  get  above RM0.50  should  see  the  stock  sideways,  with  selling  likely  to intensify on a close below RM0.40.  
SEG  will  likely  fall  after  closing  at  its  lowest  in  almost  six  months.  A trader  can  liquidate  below  RM1.90,  with  supports  anticipated  at RM1.70  and  RM1.60.  A  close  above  RM1.90  could  see  a  return  of buying support but expect strong resistance at RM2.00.
IncKen should climb higher if it closes above the RM0.83 resistance level.  A  purchase  can  be  made  if  this  happens,  with  a  close  below last week’s low of RM0.79 as a  stop-loss.  The  price  target  is  the psychological RM1.00, with selling anticipated at RM0.90. Failure to break above RM0.83 should see the stock sideways, and selling will intensify should the RM0.75 support level be violated.
Source: OSK

Sarawak Oil Palms - Poised For a Vibrant Year

Industry-wide earnings plummeted in 2012, weighed down by a 11.8% drop in CPO prices, weaker-than-expected production and increased fertilizer costs. We believe that  earnings  will  spring  back  in  2013,  driven  by:  i)  lower  fertilizer  costs,  ii)  a recovery in production from 2012’s depressed levels, and iii) firmer CPO prices on the  back  of  lower  stockpiles.  We  see  SOP  outperforming  its  peers  due  to  itsfavourable  tree  age  profile  and  strong  near-  and  medium-term  production  growth, as well as a management that knows how to get the most out of its trees. Maintain BUY, with FV of RM6.77.

Young  and  vibrant.  Despite  industry-wide  weak  production  in  2012,  SOP’s fresh  fruit bunches (FFB) production growth  was one of the highest within our Malaysian coverage due to its young trees and good estate management practices. 11M2012 production grew 6.5%  y-o-y,  improving  from  10M2012’s 4.6%  y-o-y  growth.  Monthly  production  y-o-y accelerated  by  24.9%  in  November  2012,  a  stark  contrast  from  the  contraction  seen  in 1H2012. We believe  SOP’s production  will  revert  to  a  normal  growth  trend  in  2013,  with output increasing by a decent 11.9% in 2013. Some 68.2% of the company’s trees are still at or below 10 years old, which provides ample room for organic production expansion in the medium term.

More  benign  downstream  environment.  Being  new  to  the  refining  business,  SOP  has been  particularly  conservative  in  its  business  dealings.  To  avoid  initial  glitches  that  may could force it to default on its refined palm oil sale agreements, the company chose to be conservative  by  lengthening  the  gap  between  production  and  sale  (e.g.  scheduling  to produce refined oil in July but selling the product in August). However, as palm oil prices have  plunged  sharply  since  July,  this  move  led  to  losses,  forcing  SOP  to  sell  its  refined products below cost. Since then, refining margins have widened  and downstream profits are likely to improve further next year following the Government’s long-delayed initiative to abolish tax-free CPO exports beginning January 2013.

A  more  bountiful  2013.  In  view  of  weaker-than-expected  production  and  prices,  SOP’s FY12 earnings will likely come in 32.4% weaker than that in FY11. Nonetheless, we see a meaningful recovery in 2013. Our estimate is for FY13 earnings to surge 38.2% as CPO price averages RM2,750 per tonne and FFB production rises to 1.05m tonnes.

Maintain  BUY.  We  value  SOP  at  a  FV  of  RM6.77,  based  on  a  13.0x  FY13  PE.  The company  continues  to  be  a  BUY  as  well  as  our  top  Malaysian  sector  pick  for  its  strong growth  prospects  and  solid  management.  Despite  the  industry-wide  weak  earnings  in FY12,  SOP  represents  particularly  good  value  within  the  Malaysian  plantation  space.  It possesses one of the best tree age profiles in terms of near- and medium-term production growth and is trading at valuations below the industry benchmark.
Source: OSK


Growth drivers. The insurance industry is expected to see a high single-digit growth in premium income,  supported  by:  i)  growing  affluence  among  the  middle-income  population  and  healthy consumer  spending  power,  ii)  an  underpenetrated  market,  compared  to  that  of  developed nations (the penetration rate is 4.5% to GDP, according to the 2011 ETP Annual Report), and iii) innovative  products  through  channels  like  bancassurance  and  agencies  have  enhanced  the profits from life insurance. We believe the industry’s growth will continue to outpace GDP growth as  the  Government  has  pledged  to  increase  insurance  protection  of  the  low-income  household segments, which bodes well as the Asian region as countries are facing pressure to elevate their respective minimum wage. Should Malaysia follow on this this trend, it should be able to channel more  disposable  income  to  purchases  of  insurance  policies.  The  Government  also  recognizes the need to safeguard savings, retirement funds and provide health protection for the people. As such, it aims to increase life insurance penetration from 2.8% currently to at least 4% of GDP, or 75% in terms of number of policies over population, by 2020.

Unimpeded growth. The takaful segment is expected to continue registering a high double-digit growth  of  around  20%  through  2014.  Insurers  increasingly  identified  takaful  as  a  high-growth, profitable segment. The penetration rate of ~13% for family takaful (measured by number of life policies over population) is an indication of the latent potential for takaful versus conventional life insurance’s 55%.  That  said,  the  takaful  industry  is  still  at  an  early  stage  of  development,  with growth expected to outpace the growth of conventional insurance, supported by the following: i) increasing  awareness  to  diversify  takaful  from  being  a  niche  segment  catering  to  Muslim communities,  ii)  enhanced  regulatory  reforms  to  support  takaful  infrastructure,  iii)  identifying common  grounds  or  workable  solutions  for  issues  faced  by  Shariah  committees  and  industry leaders,  iii)  stronger  participation  and  liquidity  in  sukuks  and  Shariah-compliant  instruments  to support investment income, and iv) strengthening takaful and retakaful capacity. The risk-based capital  (RBC)  framework  for  Islamic  banking  and  takaful,  expected  to  be  finalized  soon,  is  not expected  to  significantly  differ  from  the  framework  applied  to  conventional  insurers,  but  will nonetheless enhance valuations in the takaful sector.

Further consolidation. The surge in M&A activities as a result of the industry’s liberalisation has re-rated  industry  valuations.  The  weighted  average  PBVs  arising  from  the  transaction  values were recorded at above 2.2x, with the latest deals being the acquisition of ING's business by AIA, CIMB  Aviva's  stake  sale,  P&O's  divestment  to  Sanlam  and  UMW's  divestment  of  its  insurance unit. This is due to: i) the ceiling for foreign ownership being raised from 49% to 70% since 2009, ii)  increased  participation  of  foreign  insurers  with  greater  regional  scale  and  access  to  capital, and iii) attaining strategic fits to fulfill capital adequacy requirements of the RBC framework and changing regulatory requirements. We believe the industry consolidation will progress as players are  still  aligning  their  operational  efficiency  to  adapt  to  an  increasingly  competitive  and  free market. Any changes in the rules of the game, like BNM's decision to take the cap off acquisition costs  and  commission  rates,  may  further  spur  the  industry’s  consolidation  as  the  smaller insurance players may lack the capital and size to compete in a free market. Therefore, we view the  RBC  framework  for  takaful  and  the  Competition  Act  as key  determinants  of  the  direction  of M&As  in  the  insurance  industry.  The  industry  capital  adequacy  ratio  (CAR)  of  222.5%  in  2011 was  above  the  comfortable  internal  target  capital  level  (ITCL)  and  supervisory  CAR  of  130% each insurer is required to comply with.

Maintain  NEUTRAL.  We maintain our NEUTRAL call on the insurance sector  given that it has been substantially re-rated due to M&A activities. We like Syarikat Takaful Malaysia (BUY, FV: RM8.02), for its long operating history and leading position in the takaful segment and attractive dividend  yields.  We  maintain  our  NEUTRAL  call  on  LPI  Capital  (FV:  RM14.82)  and  Allianz Malaysia (FV: RM8.02) for their resilient underwriting strengths and solid financial performance.
Source: OSK

SapuraKencana Petroleum - More is to Come

A  global  champion  in  the  making,  SapuraKencana  Petroleum  (SKPETRO)  remains one of our top picks in the oil & gas (O&G) sector. The stock’s key rerating catalyst lies in its acquisition of Seadrill’s tender rig business for USD2.9bn. In view of the impending acquisition and potential rerating if the group bags more jobs next year, we maintain our BUY call and RM3.00 FV. If our assumptions hold, our forecast for FY14 will be bumped up by some 22.6%, thereby boosting our FV to RM3.70.

Enlarged  entity  to  command  59%  share  of  global  rig  business.  SKPETRO announced  in  November  that  it  had  entered  into  a  non-binding  memorandum  of understanding with Seadrill for the proposed combination and integration of the tender rig businesses  of  both  companies.  The  tie-up  will  see  SKPETRO  taking  control  of  an enlarged rig business comprising 16 tender rigs in operation and five more units currently under construction (the group will own 21 rigs in total upon completion of the transaction). SKPETRO will also be given the right to manage three tender rigs that are not part of the proposed  transaction. We  are  positive  on  the  deal  as  SKPETRO  will  in  the  long  run  not only inherit an existing orderbook of USD1.6bn, but also be able to capitalize on Seadrill’s expertise as well as expand its deepwater customer base in East Asia.

Orderbook  rock  solid.  SKPETRO’s  strong  orderbook  of  RM13.5bn  as  at  end-October 2012,  beefed  up  by  with  steady  replenishment  in  all  its  business  segments,  will  provide the group with a healthy revenue stream. Most of the jobs secured at in Malaysia (49%), followed  by  Brazil  and  the  Gulf  of  Mexico  (34%),  Australia  (15%)  and  South-East  Asia (2%).  We  believe  that  the  group  would  be  able  to  further  expand  its  presence  in  the lucrative Brazil market by virtue of its upcoming partnership with Seadrill.

Maintain FV for now but more is to come. As the MOU with Seadrill is still non-binding at  this  juncture,  we  are  leaving  our  FY14  earnings  forecast  unchanged,  although  we expect the transaction to be completed by end-January 2013. If our assumptions hold, our earnings  forecast  for  FY14  will  be  enhanced  by  some  22.6%,  which  would  accordingly boost  our  FV  to  RM3.70.  The stock’s rerating catalysts are:  i)  securing  new  contracts  in Brazil  and  domestically,  ii)  the  potential  earnings  accretion  from  the  acquisition  of Seadrill’s rig business, and iii) new hook-up and commissioning (HUC) contracts secured from the Pan Malaysian cluster.
Source: OSK