Thursday, 31 January 2013

IGB Reit - Counting on 54% of Gardens Mall’s NLA expiry HOLD

- We re-affirm our HOLD recommendation on IGB REIT (IGBR), with an unchanged fair value of RM1.38/unit, based on a 10% discount to our DCF value. This follows release of  its 4Q results.

- IGBR posted a 4QFY12 realised net income of RM47mil, bringing pro-rated 3-month and 11-day (covering 21 September 2012 to 31 December 2012) realised net income to RM53mil. On an annualised basis, the FY12 results were within our, and consensus, expectations. Furthermore, the pro-rated FY12 results exceeded management’s expectations by 2.4%.

- IGBR declared a distribution of 1.83 sen/unit. This implies a distribution ratio of 100%, reflecting a 1.4% dividend yield. Looking ahead, we project yields of 4.3% and 4.6% for FY13F and FY14F, respectively. 

- IGBR’s key growth driver this year is the expiry of a voluminous 54% of Garden Mall’s NLA. This would enable the REIT to extract higher rentals for its premium mall, underpinned by a relatively young mall status and only in the second round of rental reversion. 

- More importantly, the Garden Mall’s average rental stands at RM8.74psf, which is at a discount to other premium malls in the city. For instance, Suria KLCC’s average rental is at RM25psf and Pavilion Mall’s at RM18.80psf. Notwithstanding its location, our channel checks suggest that Garden Mall’s Grade A offices are commanding rentals which are comparable to offices located in the Golden Triangle. 

- Nonetheless, we see a potential re-rating catalyst in Mid Valley Megamall if Carrefour decides to exit the mall or reduce its NLA exposure. Carrefour is an anchor tenant, with a 12.3% NLA exposure. We believe the floor space currently occupied by Carrefour can easily boost rentals via converting the space into small speciality stores. This is evident in Pavilion Mall’s recent conversion of an ex-anchor tenant floor space into  smaller speciality stores (Fashion Avenue). 

- Taking all in, we assume a rental growth of 13% for the 54% of NLA expiring in FY13F for Gardens Mall. The mall achieved a rental reversion of 11.8% in the first rental cycle. About 37% NLA of Mid Valley Megamalls expiring in FY14F is estimated to grow at 5%. 

- IGBR’s growth appears to be organic given no visibility of potential asset injection in the short term. Assets under its sponsor, IGB Corporation, are rather far-off at this juncture, in our view. We believe the upcoming Southkey Mall could potentially take a good 8 years incorporating 5 years for construction and another 3 years for stabilisation of rental yields before being injected into the REIT. Thus, our HOLD recommendation is pending constructive asset injections.

Source: AmeSecurities

APM Automotive - JV with global Tier 1 supplier BUY

- We maintain our BUY call on APM, with an unchanged fair value of RM6.50/share. It was announced yesterday that APM has entered into a JV with Tachi-S (Thailand) Co Ltd to develop, manufacture and sell automotive seats for OEMs in Malaysia.

- Tachi-S (Thailand) is a global supplier and manufacturer of automotive seating systems with key customers being Nissan, Toyota, Honda and Mitsubishi. The group is a unit of Tokyo-listed Tachi-S, in charge of overseeing the larger group’s operations in India and ASEAN. 

- A total initial investment of RM3.5mil will be put in, with APM taking a 60% stake in the venture while Tachi-S will control the remaining stake. The JV will likely be focused on marketing, sales and R&D while the manufacturing of products will be via APM’s existing plants. APM’s portion of investment (of RM2.1mil) will be funded by internallygenerated funds.

- While APM already manufactures and supplies seats to OEMs in Malaysia, it is doing so as a Tier 2 supplier. By partnering with Tachi-S (which is a Tier 1 supplier), APM would have access to detailed design drawing and technical blueprints from Japan.  

- The move should pave the way for a deeper localisation for future Nissan models. In fact, the much deeper localisation for the Almera (50% localisation rate vs. typical 30-40% localisation for existing Nissan models) was partly a result of deeper technical partnership with Tachi-S prior to this official JV being set up.

- No changes to our projections at this juncture, as contributions from the JV (in the form of increasing revenue per car set) will only gradually be reflected as and when new CKD Nissan models are rolled out. The higher revenue contribution also comes with higher MI leakage as APM only owns 60% of the JV. 

- Nonetheless, we are overall positive on the move as it structurally lifts APM’s positioning within the OEM parts supply space – having established a strong partnership with a global Tier-1 supplier. The move follows APM’s JV with Tier-1 European supplier, IAC (International Automotive Components) back in 2011. 

- A key near-term catalyst for APM is a step-up in dividends (usually announced in 4Q results). We project FY12F GDPS to rise to 40 sen/share (7% yield) and FY13F to 50 sen/share (9% yield). APM’s huge un-utilised cash pile of RM380mil net cash (or RM1.88/share, accounts for 35% of market cap) and past 5 years’ average annual FCF of RM82mil (RM0.41/share) should easily support the dividend payout.

Source: AmeSecurities

Trading Stocks - Oldtown | Petronas Chemicals | Power Root | Pasukhas | Kim Loong Resources | Sarawak Cable | Rimbunan Sawit | KYM Holdings

Oldtown’s  rally  may  resume  after  staying  above  the  RM2.10 support  level.  A  purchase  can  be  made  if  it  stays  above  RM2.20, with  a  close  below  RM2.10  as  a  stop-loss.  The  price  target  is  at RM2.50,  if  the  recent  high  of  RM2.35  is  violated.  Failure  to  stay above  RM2.20  could  see  the  stock  trade  sideways,  with  strong support anticipated at RM2.10.
Petronas  Chemicals  may  rebound  after  staying  above  the  RM6.00 support level. A purchase can be made on close above RM6.06, with a close below RM5.90 as a stop-loss. The price target is at RM6.60, if the recent high of RM6.40 is broken. Failure to stay above RM6.00 could  see  the  stock  lower,  with  strong  support  anticipated  at RM5.65.
Power  Root  may  rebound  after  staying  above  the  RM1.16  support level. A purchase can be made if it stays above RM1.22, with a close below the RM1.16 as a stop-loss. The price target is at RM1.45, with resistance  also  expected  at  RM1.30.  Failure  to  stay  above  RM1.22 could see the stock trade sideways, with strong support anticipated at RM1.10.
Pasukhas  may  decline  after  the  relatively  high-volume  trade  failed to see the stock higher yesterday. Liquidation can be undertaken if it closes below RM0.24 and support levels are expected at RM0.20 and  RM0.15.  Buying  support  could  take  over  if  the  stock  fails  to break below RM0.24 but expect strong resistance at RM0.30
Kim  Loong  may  fall  further  after  closing  the  lowest  in  more  than  a year.  Liquidation  can  be  undertaken  as  long  as  it  stays  below RM2.25,  and  supports  are  expected  at  RM2.15  and  RM2.00. However, the stock could make a rebound if it closes above RM2.32 and resistance are expected at RM2.40 and RM2.45.
Sarawak  Cable  may  decline  after  printing  a  new  52-week  low.  A trader  can  liquidate  if  the  stock  closes  below  RM1.50,  while supports  are  anticipated  at  RM1.30  and  RM1.20.  Buying  could return  quickly  if  the  stock  closes  back  above  RM1.55,  but  expect strong resistance at RM1.67 and RM1.80.
Rimbunan  Sawit’s  downtrend  should  continue  after  breaking  below the  RM0.80  support  level.  A  position  can  be  exited  as  long  as  the stock  stays  below  RM0.80  and  supports  are  anticipated  at  RM0.70 and  RM0.65.  Buying  could  make  a  quick  return  if  it  closes  back above RM0.80.  Resistance should come at RM0.85 and RM0.90.
KYM may decline after it failed the test of the psychological RM1.00 yesterday. Liquidation can be made below RM1.00 and supports are anticipated  at  RM0.80  and  RM0.73.  However,  the  stock  may  rebound if it closes above RM1.00 and resistance levels are located at RM1.10 and RM1.20.
Source: OSK

CI Holdings - Still Waiting On New Business

We  are  ceasing  coverage  on  CI  Holdings  (CIH),  for  which  our  last  call  was  SELL, with RM0.60 FV. The group is still searching for a new core business after disposing off its subsidiary, Permanis, in November 2011. Note that CI Holdings does not have to follow a timeline to acquire a new business as it is not a PN17 or PN16 company. 

Flat  results.  CIH’s 1HFY13  earnings  were  much  lower  y-o-y  given  the  high  base  for comparison in 1HFY12, largely driven by a RM688.4m accounting gain from the sale of its bottling  arm,  Permanis  SB.  Vis-à-vis  1QFY13,  revenue  and  profit  improved  marginally, mainly  due  to  a  cut  in  one-off  professional  fees  incurred  in relation to the company’s search for new investment opportunities. 

Cease coverage. We are ceasing coverage due to resource reallocation and uncertainties relating to the company’s potential new core business.
Source: OSK

Tong Herr - Awaiting Better Days

We  are  ceasing  coverage  on  Tong  Herr  Resources  (THR)  due  to  internal  resourcereallocation.  We  think  the  company  may  still  be  facing  challenging  operating conditions due to sluggish demand, no thanks to the weak recovery in the European and  US  economies.  That  the  European  Commission  has  terminated  its  probe  into possible  circumvention  of  its  anti-dumping  measures  may  be  positive  for  THR  but demand is still the key factor. Our last call for THR was SELL with FV of RM1.56. 
Demand  remains  sluggish.  Against  the  backdrop  of  slow  recovery  and  uncertainties  in both  the  Eurozone  and  the  US  economy,  demand for THR’s product  has  remained sluggish as these markets are its largest revenue contributors. Apart from that, the global economy has been fragile while the prevailing uncertainties have further sapped demand.  
Termination  of  investigation  looks  positive  but  demand  is  still  key.  The  European Commission  had  on  15  Jan  2013  proposed  to  terminate  investigations  into  possible circumvention of anti-dumping measures in accordance with Regulation No. 2/2012 for the imports of certain stainless steel fasteners and parts thereof consigned from Malaysia and Thailand. We believe this latest development will have a positive effect on THR’s sales to Europe  and  boost  the  contribution  from  that  region.  However,  we  think  that  a  pick-up  in demand is still the key for the company to turn around. 
Outlook still gloomy. We continue to believe that the company has a solid foundation and strong  balance  sheet  but  macro  factors  are  affecting  its  earnings  power.  As  we  have highlighted earlier, we think that THR’s profit visibility  remains  murky  and  its  outlook continues  to  be  fraught  with  challenges.  We  had  earlier  revised  downwards  THR’s earnings forecasts significantly and downgraded the counter to SELL.   
Ceasing  coverage  on  THR.  We  are  ceasing  coverage  on  Tong  Herr  Resources  due  to internal  resource  reallocation,  with  our  last  call  for  the  company  being  a  SELL,  with  FV standing at RM1.56.

Source: OSK

Puncak Niaga - Selangor Govt Courting Syabas Again?

Selangor’s  Menteri  Besar  has  written  to  the  Energy,  Green  Technology  and  WaterMinister  to  proposing  to  take  over  the  state  water  service  concessionaire,  Syabas SB. We are unmoved by this move as we do not see a takeover as possible without prior  consent  from  Puncak  Niaga,  its  shareholders  and  creditors,  plus  the  Federal Government,  which  holds  a  golden  share  in  the  company.  We  also  rule  out  the possibility of any offer from the state government being acceptable to Puncak since the  polls  are  just  around  the  corner.   Hence,  we  keep  our  Trading  BUY  call  on  the stock  given  its  undemanding  valuation  and  rising  contribution  from  its  O&G division. Our FV stands at RM2.08.

New tussle. The Malaysian Insider quoted a statement from Selangor Menteri Besar (MB) Tan Sri Abdul Khalid Ibrahim saying that the Selangor government  wants to take over the state water service provider Syabas SB in two weeks. He also claimed that he has received the  green  light  from  Deputy  Prime  Minister  Tan  Sri  Muhyiddin  Yassin,  who  is  also  the chairman  of  the  Cabinet  Committee  on  Water.  The  MB  said  the  state  government  has written  to  the  Energy,  Green  Technology  and  Water  Ministry  to  notify  the  latter  of  its proposal to take over the concessionaire within 14 days. 

Not  the  first  time.  This  is  not  the  Selangor  government’s  first  attempt  to  take  over  the concessionaire,  having  made  its  first  offer  back  in  2009.  We  suspect  the  state government’s  latest  move  may  have  been  sparked  by  the  recent  spate  of  water  supply disruption due to faulty pumps at the Wangsa Maju pump house. As the details are sketchy at this juncture, we are unsure if the takeover referred to in the statement represents a new offer to take over Syabas SB, or if it is merely action taken by the state government against Syabas for having failed to fulfill certain terms and conditions stipulated in  its Concession Agreement.   

No  immediate  solution  in  sight.  We  suspect  that  the  verbal  tussle  between  the  state government  and  Syabas  SB may  continue  at  least until  the  conclusion  of  the  ever  closer upcoming General Election. Although the state government owns a 30% stake in the water supply  company  via  Kumpulan  Darul  Ehsan  and  Kumpulan  Perangsang  Selangor,  it remains a minority shareholder with a limited two seats on the company board. Therefore, any  takeover  would  need  the  consent  from  its  major  shareholder,  Puncak  Niaga  (70%), which  in  turn  will  require  the  blessings  of  its  shareholders  and  creditors.  As  the  Federal Government, through the Minister of Finance Inc., also holds one golden share in Syabas SB,  its  written  consent  needs  to  be  obtained  prior  to  any  asset  disposal  or  merger. Meanwhile,  we  also  rule  out  possibility  of  the  state  government  making  any  acceptable offer  for  the  remaining  stake  in  Syabas  SB  considering  that  the  election  polls  could  be called  anytime  in  the  next  few  months.  Besides  these,  the  state  government  would  also need to go through the normal legal process before it can revoke any concession.  
Reiterate  Trading  BUY.  As we think the tussle with the state government to prolong, we instead focus on the company undemanding valuation. We reckon the major improvements to the company’s bottomline the late were mainly attributed to compensation for the non-implementation of higher water tariffs and did not involve any physical cash inflow until the court delivers its judgement. Nonetheless, the improvement in P&L is indeed a sentiment booster. In addition, the group’s successful move into the lucrative O&G field on top of its rural water supply projects are also sufficient reasons for investors to cheer. Therefore, we are maintaining our Trading BUY recommendation, with the stock’s fair value kept at RM2.08. This implies a mere 3x forward FY12 EPS.
Source: OSK

Malaysian Pacific Industries - Cautiously Optimistic

Following MPI’s analyst  briefing,  we  maintain  our  NEUTRAL  call  on  the  company, with an unchanged FV of MYR2.70. Although we  like what it is doing internally, the external  environment  has  not  been  as  supportive.  We  are  cautiously  optimistic  on the  semiconductor  sector  because  despite  the  positive  indicators  shown  recently, its outlook visibility remains low.  
3QFY13 revenue to be flat q-o-q. During its analyst briefing yesterday, MPI attributed the q-o-q  decline  in  its  2QFY13  revenue  to  the  persistently  soft  demand  from  its  leadframe business.  However,  management  shared  that  its  high  yielding  offerings  like  the  micro leadframe  packaging  (MLP)  and  its  turn-key  test  service  business  continued  to  grow robustly.  Management  guided  that  3QFY13  revenue  will  be  broadly  similar  to  that  of 2QFY13 and cited strong growth potential in 4QFY13 and beyond.

High-margin  business  paying  off.  Compared  to  a  year  ago,  we  think  MPI  has  indeed positioned itself very well by successfully transitioning  into the high-margin businesses of: i)  high density packaging,  ii) MLP,  and iii) test. The company’s 1HFY13 EBITDA grew by 41%  y-o-y,  while  its  EBITDA  margin  expanded  by  4.4%  y-o-y.  In  the  MLP  space, management highlighted that the company had shipped more than 200m units of products related to its radio frequency (RF) and multi-die businesses in 1HFY13.

Maintain NEUTRAL, FV unchanged at MYR2.70. Although we are positive with what MPI is  doing  internally  to  turn  around  and  flourish  its  business,  the  external  environment  may be  an  obstacle,  suppressing  its  prospects.  Visibility  of  the  semiconductor  sector  remains short  but  with  the  recent  positive  indicators,  we  are  cautiously  optimistic.  Hence,  we maintain our NEUTRAL recommendation on the stock, with an unchanged FV of RM2.70, based  on  0.8x  CY14  P/NTA  (40%  discount  to  the  historical  five-year  sector  average  of 1.4x).
The company’s 1HFY13 EBITDA grew by 41% y-o-y, while its EBITDA margin expanded by 4.4% y-o-y.  This  indicates  the successful  transitioning over to the high margin businesses.
We  are  not  concern  with  the  low  capex  spending in  2QFY13  given  that  MPI  had  aggressively  done so in the two previous quarters.

S&T-related products still growing robustly. The smartphone and tablet (S&T) segment continues  to  weigh  in  heavily  on  MPI’s sales,  representing  approximately  33%  of  its  top-line.  Regionally,  its  US  business  was  the  prime  beneficiary  of  the booming  S&T  segment whereby  its  revenue  grew  by  22.5%  y-o-y  in  1HFY13.  We  understand  that  RF,  Bluetooth modules,  microelectromechanical  systems  (MEMS)  and  gyroscopes  were  the  main contributor of growth in the S&T segment.
Automotive  segment  still  relevant.  Management  also  shared  that  its  legacy  leaded packages is still an important business as MPI intends to support the mature industries of: i) automotive, ii) industrial and iii) consumer electronic appliances. It was highlighted that the automotive  industry  is  relatively  stable and  secure,  providing  MPI  sound  basis  for  organic growth  moving forward.  Note,  currently  half  of the leaded  packages  business  comes  from this segment.

Update on the Carsem/Amkor dispute. As for the ongoing Carsem/Amkor dispute, on 15 Sept 2012, MPI’s 70%-subsidiary  Carsem  had  filed  a  request  to  the  US  Patent  and Trademark  Office  (PTO)  to  re-examine Amkor’s 277 patents. On  10  Jan  2013,  the  PTO issued  an  Office  Action  rejecting  all  25  claims  on   the  patents,  including  11  claims  of  the International  Trade  Commission  (ITC)  proceedings.  Amkor  is  now  required  to  respond within two months.
Source: OSK

Highlights / Stock Picks of the Day Industronics ("ITRONIC") – Not Rated

It wasn't all doom and gloom for the local bourse, and among the bright spots was ITRONIC which has been bucking the overall market selldown in the past month. For the January month, ITRONIC almost doubled from its lows of 28.5 sen. In fact, the share price ended 5.5 sen higher at 59.5 sen yesterday. This comes after a brief single-day  pause in the month long rally. With yesterday's strong move, ITRONIC is now within a whisker of the long term resistance line.  Buying momentum in the share remains strong, although the 14-day Stochastic and RSI indicators have both entered into overbought regions. We reckon that some near term consolidation is due. Nevertheless, traders should  watch for a decisive breakout above the 60 sen resistance level which would potentially herald the start of the next up-leg towards 65 sen and 75.5 sen.

Source: Kenanga

Kenanga Today - 31 Jan 2013

l Foreign workers to pay levy instead of employers with immediate effect (Comment included in Kenanga Today)
l IGB REIT posts RM146.9m profit
l Al-Hadharah Boustead REIT’s earnings fall
l Southern Steel’s 2Q loss wider than a year ago
l Favelle Favco gets RM76.0m orders
l Salcon bags contracts worth RM15.3m
l APM inks JV with Thailand's Tachi
l China Private Equity buys 5.0% in Patimas
l Zenotec to invest RM3.1m in R&D

l Boeing sees no big impact from 787 woes, profit beats
l Fiat profit beats estimates on narrower European losses

l S. Korean Output Unexpectedly Climbs On Domestic Demand
l US Growth Hit By Surprise Setback
l Fed Keeps USInterest Rates On Hold
l Private Sector Adds More Jobs; Services Lead Way
l Spain's Recession Worsens In The Fourth Quarter
l Euro-Area Economic Confidence Rises More Than Forecast
l Dollar Falls As Fed Stays Aggressive; Euro Climbs
l Oil Rises As Economic Optimism Overshadows Weak USData
l Gold Rises On Surprise Drop In US Growth, Fed

Source: Kenanga

MRCB - Termination of LRT extension sub-contract

News   In an announcement made by Fajarbaru Builder Group Bhd  (FGB, UP, TP: RM 0.51), MRCB’s wholly-owned subsidiary, MESB had terminated the sub-contract works of the Ampang Line Extension Work to FGB. At the same time, Prasarana had taken over the liability and cost of the project and awarded the project to FGB. The contract value is worth RM289m. It was mutually agreed between Prasarana and MESB that the project value would be omitted from the earlier main contract award to MRCB of RM1.3b.  
Comments   This news is a negative development for MRCB. This will shrink its existing order book by RM289m. Its current order book stands at c.RM1.4b. To recap, MRCB had secured the contract from Prasarana for the extension of the Ampang Line LRT project (Package B) worth RM1.3b. MRCB subsequently subcontracted the construction of the depot (under the same package) to FGB worth RM289m. 

 We understand that the margin for the project is minimal at c.3% to 4%. The site progress is behind schedule due to delays in site possession. Based on management guidance, thus far, the contribution from the project in FY12 was negligible. This is in line with our assumption as we had already rolled over the recognition to FY2013.

 We think that there could be more unfavourable news that could come out in the near term for MRCB. It is likely that MRCB will have to make a c.RM44m provision in its upcoming 4Q12 results due to the damages claim by Juranas Sdn Bhd in December 2012. 
Outlook  In the near term, there will be less excitement or even possibly more negative surprises to the construction sector due to the election risk.

 However, on a longer term outlook, the upside for MRCB’s earnings should emerge post the elections, possibly from the development of the RRI land and land banks injection from its potential new shareholders. 
Forecast  We have reduced our FY13E by 11% as we stripped out the RM289m contract value from its existing order book.
Rating    Maintain OUTPERFORM
 We are maintaining our  OUTPERFORM recommendation as we expect MRCB to be the likely beneficiary of post-election events.
Valuation   We have reduced our Target Price from RM2.22 to RM2.16 based on a SOP valuation.
Risks  Delays in securing more land banks and cost overruns at its ongoing projects due to construction delays.

Source: Kenanga

Fajarbaru Builder - Re-award of LRT extension project

News    Fajarbaru announced that it had been notified by MESB, which is a wholly-owned subsidiary of MRCB, that the latter had cancelled the previous sub-contract award for the Ampang LRT extension project worth RM289m to the company. 

 This came about as the contract had been taken over by Prasarana from MESB, where the former had also assumed the liability and cost for the package (project). Prasarana has now reawarded the contract back to Fajarbaru. 

 The contract scope is mainly for the construction and commission of depot works in Kuala Sungai Baru.

Comments   To recap, the contract was initially awarded to Fajarbaru by MRCB Engineering Sdn Bhd (MESB) back in May-12. However, MESB has now terminated the contract with Fajarbaru as highlighted above. 

 We are neutral on this news as we have already imputed in the project in our earnings forecasts. However, this news could be a slight positive to Fajarbaru as we expect the contract to now carry a better margin for the company due to it being on the main contractor status now. On top of that, based on its track record, one of the key advantages for Fajarbaru is that is has ability to help Prasarana directly in realising cost and time benefits for the project via proposed alternative designs, which should enhance the project’s margin.  

Outlook   Fajarbaru’s outstanding order book currently stands at c.RM800m, which will provide it earnings visibility for the next three years. Moving into FY14, we believe that Fajarbaru will be able to go on full swing in executing its outstanding order book of c.RM800m.

Forecast   There are no changes in our earnings estimates. 

Rating     Maintain UNDERPERFORM
 We are maintaining our UNDERPERFORM recommendation on Fajarbaru as we believe that the recovery for Fajarbaru will remain slow in FY13 due to its site possession issues.

Valuation    No changes to our TP of RM0.51, based on 5.0x
PER on its FY14E EPS.  

Risks   Delay in LRT works by the main contractors.
 Escalating building material prices.

Source: Kenanga

M’sian Pacific Industries - Cautious outlook still for 1H2013

We came away from the group’s 2QFY13 post-result briefing with our cautious view unchanged. The weak market sentiment and pallid PC sales amid the prolonged global economic uncertainties remained a drag on the industry. Management itself is of the view that any lights at the end of the tunnel could only be seen earliest only in 2H2013, a view that we share as well. It however clarified that the recent minimum wage policy would not have a material impact on the earnings as the company’s labour cost had only increased by c.RM160k as of end-Jan 2013. We have meanwhile lowered our FY13 earnings estimate by 47.6% to RM7.7m after imputing in the assumption of higher commodity prices ahead for the year. However, our FY14 and FY15 earnings estimates are unchanged. To align with our conservative stance, we have also ascribed a lower targeted FYE14 PBV of 0.78 (-1.0 SD below its historical 3-year mean) from 0.85x previously on our MPI’s valuation. This has led to our new lower MPI’s target price of RM2.59 (from RM2.78 previously). Maintain MARKET PERFORM.

Snapshot of 2QFY13 results. MPI recorded losses of RM1.8m in 2QFY13, dragging its 1HFY13 earnings back into the red with a net loss of RM1.6m. The main culprits were the prolonged soft demand in its leadframe business coupled with a tax adjustment of –RM1.6m in 2Q13. In terms of its revenue breakdown, the smartphones and tablets segment continued to be the largest contributor, accounting for c.33% of the group’s total revenue as of 1HFY13. 

Expecting a strong growth potential in 4QFY13 and beyond. While management expects another subdued 3QFY13, which could come in broadly similar to the 2QFY13 performance in light of the prolonged weak market sentiment, it however sees a strong recovery from 4QFY13 onwards due to its increasingly strong position in new products such as micro leadframe package (MLP) and its turnkey test business.  

The impact of minimum wage policy is minimal.  On the labour cost issue, management has downplayed the impact of the minimum wage policy on its earnings as most of its workers’ salaries are higher than the indicative minimum wage of RM900. The group also indicated that its labour cost, which accounted for about 23% of its total operating cost, has only increased by c.RM160k as of end-Jan 2013.

Capex guidance lowered to c.RM170m from c.RM200m previously. The group’s capex has been pulled back significantly to only c.RM19.3m in 2QFY13 as compared to c.RM63.3m in 1QFY13. We understand that this was in line with management’s long term view to keep its capex lower than its EBITDA level. On a full year basis, management has now guided for a lower capex of RM170m-180m for FY13. We have thus lowered our FY13 capex assumption to RM180m from RM212m previously.

Our take post the results briefing.  While we are sanguine on the increasingly strong position of the group’s new products, any lights at the end of the tunnel could only be seen earliest in 2HCY13 as we believe the prolonged weak market sentiment and order visibility could continue to weigh on the industry’s prospect at this juncture. To reflect our conservative stance, we have slashed our FY13 earnings estimate by 47.6% to RM7.7m after imputing in the assumption of higher commodity prices ahead for the year. However, our FY14 and FY15 earnings estimates are unchanged. We have also slashed our FY13 DPS assumption to 10 sen (from 20 sen previously) after our earnings revision above.

Source: Kenanga

Texcycle Technology - Steady business but rich valuation

- A wide clientele network nationwide.  TEXCYCL is primarily involved in the environmentally friendly waste management business, which collect recycle materials such as rags, wipes, gloves and container, from over 2000 clienteles nationwide. The key sectors focused by the company are mostly in electronics, engineering, automotive, printing and the oil & gas industries. We believe the wide clientele ensures a stable collection of wastes to the group as it would not be dependent too much on a particular industry/market to secure its scheduled wastes. 

- Current plant is running at full capacity. The group’s existing one acre plant located in Taman Perindustrian Kinrara (Puchong) is currently running at full capacity according to management. We understand that the plant has been awarded 11 types of scheduled wastes code by the Department of Environment (“DOE”). 

- Aiming to construct a new plant in 1H13. In view of the capacity constraint in its current plant, the group has acquired an 8-acre land in Teluk Gong, Klang in May 2012 for RM6.7m. Management is aiming to construct a new plant in 1H13, subject to receiving all the necessary approvals from the relevant authorities, on the first 3 acres of the land with the balance retained for future plant expansion. We understand that management is targeting to apply more scheduled waste codes under the renewable-energy category and manufacturing sectors for its recycling business. The new waste codes are expected to further improve the group’s revenue from the recycling business. 

- There is no special dividend in the pipeline despite the group recording a total net gain of RM4.4m in 1H12 from the disposal of two pieces of industrial lands as management intends to utilise the disposal gains for future capex and working capital purposes. 

- Consistent dividend policy.  The group have consistently rewarded its shareholders since its debut on Bursa Malaysia in July 2005, having declared a yearly 5% dividend per share (or 0.5 sen per share) since then, which translates into a 1.6% dividend yield. Going forward, we understand management intends to maintain this current dividend policy. 

- Fully Valued.  TEXCYCL is currently trading at 10.2x FY13 PER, which is much higher as compared to an average FTSE Bursa Malaysia Small Capital Index (“FBMSC”) forward PER of 7.5x. FULLY VALUED.

- Strength: Wide clientele network nationwide, awarded ISO 14001 by SIRIM Malaysia
- Weaknesses: Small market capitalisation 
- Opportunities: Tapping into other type scheduled waste recycling business e.g. base oil, engine oil, etc.
- Threats: Regulatory risks, political risks

- Resistance: RM0.375 (R1), RM0.425 (R2)
- Support: RM0.275 (S1), RM0.225 (S2)
- Comments: Though illiquid, TEXC's share price has been on a mild uptrend over the past two years. We reckon that a strategy may be developed whereby traders look to buy at 27.5 sen and targeting the 35 sen resistance.

Tex Cycle Technology (M) Bhd (“TEXCYCL” Bursa Code: 0089) was founded in 1984 and listed on the ACE Market of Bursa Malaysia on 27 July 2005. TEXCYCL is primarily engaged in an environmentally  friendly Waste Management Business which provides professional services preferred by companies from the various industries, mainly of the Electronics, Engineering, Automobile, Oil & Gas and Printing industries in accordance with the Environmental Quality Act. In 2003, the group was awarded the ISO 14001 certificate by SIRIM Malaysia. Currently, TEXCYCL has over 2000 clienteles network nationwide, with some of its big clients being Gardenia, Proton, Perodua, Western Digital, Motorola and etc. 

Its principal activities are mainly categorised into three major divisions, namely
 - Recovery and recycling scheduled wastes e.g. rags, wipes and gloves
 - Manufacturing and marketing of chemical products
 - Trading of chemical products, e.g. agro-cultural chemical products

Source: Kenanga

Wednesday, 30 January 2013

Genting Malaysia - What is GenM’s return on its investments? BUY

- Maintain BUY on Genting Malaysia Bhd (GenM) with an unchanged RNAV-based fair value of RM4.30/share.

- Risk to share price is the outcome of general elections. There is risk that if the opposition were to win the elections, then they might increase the gaming tax rate from 25%.    

- In this report, we take a look at the return of GenM’s major investments in the past five years. 

- In spite of the group’s mixed record in investing, we are keeping our positive stance on GenM for the resilience of its profits from  “Resorts World Genting” and growing earnings contribution from UK and New York. 

- We find that most of the return on GenM’s investments is below the IRR (internal rate of return) of 15%. Although the group has never revealed its internal IRR, we have assumed it at 15%. 

- According to  Bursa Announcements, GenM made six major acquisitions in the past five years. We have counted the subscription of debt papers in Wynn Resorts and MGM Mirage as one investment. Out of the six investments, about half were related party transactions. The return on these investments ranged from negligible to 11.1%.  

- One of GenM’s safest and highest yielding investments is the debt papers of MGM Mirage. MGM Mirage’s senior secured notes due November 2017 yield a return of 11.125% annually. 

- In total, GenM subscribed US$131mil (RM441mil) worth of notes in MGM Mirage and Wynn Resorts from FY09 to FY10. These give coupon payments of 4.25% to 11.125% annually. 

- GenM’s worst investment is its RM250mil subscription of a 10% equity interest in Walker Digital Gaming LLC in FY08. We believe that so far, GenM has not received any dividend payment from Walker Digital for its 10% stake in the company.

- Instead, we estimate that GenM recorded impairments of up to RM156.6mil in respect of its investment in Walker Digital Gaming. Silver lining is that a few of Walker Digital’s gaming patents such as Elite Baccarat have been used at “Resorts World Genting”. 

- We estimate the return on GenM’s investments in New York and UK at 8.0% to 9.6% each based on the EBITDA of the respective division. If interest expense and depreciation were taken into account, then the return on investments in the assets would be lower than that. 

Malaysia Airports Holdings - Toning Down

While  the  macro  outlook  continues  to  be  promising  for  Malaysia  Airports  (MAHB), driven by the resilient low cost travel segment, we highlight that the higher User Fee payable to the Government coupled, with the steeper costs to operate KLIA2, could put a dent in its earnings. As such, we trim our FY13 and FY14 numbers by 35% and 32% respectively. Nonetheless, prospects for FY14 onwards will be promising as its free  cash  flow  turns  positive,  the  first  since  FY07.  We  maintain  our  BUY  call  at  a lower FV of RM7.23 premised at a lower WACC of 7.6%.  

Passenger  numbers  in  line.  MAHB  recorded  a  total  of  60.6m  passengers  in  11MFY12, representing a growth of 4.7% YTD. With December being a peak period for air travel, we expect  MAHB  to  end  the  year  with  a  5%  passenger  growth,  which  is  in  line  our  and consensus’ expectations. We have  a  11%  passenger  growth  forecast  for  FY13,  far  ahead of MAHB’s KPI target of 7.1%, which we deem too conservative.

4Q  likely  within  expectations.  4QFY12  earnings  is  expected  to  come  in  at  RM132m, representing a 40% y-o-y and a 22% q-o-q increase respectively. We foresee that earnings will  be  driven  by  strong  passenger  numbers  (+8.4%  y-o-y,  +8.7%  q-o-q),  which  in  turn translates  to  higher  non-aeronautical  revenue.  Unfortunately,  the  airport  operator  would likely  see  its  earnings  hit  by  provisions  following  the  termination  of  the  Male  Airport concessionaire, although this will not hit our core earnings estimate.  

Higher  User  Fee  to  be  incurred.  Management  guided  that  FY13  earnings  will  be  lower due to the higher User Fee it will have to pay to the Government. Upon the full settlement of the Balance Residual Payment in 1Q13 under its new operating agreement signed back in 2009, the User Fee will thereafter be fully recognized in the income statement. The higher User Fee is estimated to be in the tune of RM220m-RM240m in FY13, which is double the amount MAHB is expected to incur in FY12. Due to the higher User Fee, we are trimming our  FY13  and  FY14  earnings  by  35%  and  32%  respectively.  We  have  also  factored  in  a higher cost assumption to operate the upcoming KLIA2.

BUY. We lower our FV to RM7.23 following the earnings downgrade, premised on a WACC assumption  of  7.6%  after  revising  our  CAPM  variables.  We  continue  to  like  MAHB's prospects  for  its  non-aeronautical  revenue  from  the  upcoming  opening  of  the  KLIA2 sustained by the growing demand in the low cost travel segment.   

2013  to  be  a  better  year  for  passenger  growth.  MAHB  recorded  a  total  of  60.6m passengers in 11MFY12, representing a growth of 4.7% YTD. With December being a peak period for air travel, we expect MAHB to end the year with a 5% passenger growth, which is in line with our and consensus’ expectations. We understand that both MAS and AirAsia had in December took in delivery of nine and five aircraft respectively, which could result a surge  in  passenger  traffic.  For  2013,  we  forecast  a  11%  passenger  growth,  far  ahead  of MAHB’s KPI of 7.1%,  which  we  think  is  too  conservative  considering  that  AirAsia  and AirAsia  X  are  expected  to  see  10  and  seven  aircraft  delivered  in  2013  respectively.  The setting up of a new airline, Malindo, will also boost MAHB’s passenger numbers while MAS will also be increasing the frequency of its short- to mid-haul segment after scaling back its long haul operations last  year  due  to  route  rationalization. The  capacity  expansion  by  low cost carriers in Thailand should also bode well for the airport operator.
FY12  and  4QFY12  to  be  within  expectations.  After  revising  our  estimates  down  to remove  any  contribution  from  associate  Male  Airport  for  4Q  following  the  concession termination  by  the  Male  government,  we  anticipate  that  MAHB  will  see  a  full-year  core earnings  contribution  of  RM458m  (previously  RM463m)  on  the  back  of  RM2.15bn  in revenue.  For  9MFY12,  MAHB  recorded  a  core  net  profit  of  RM326m,  which  accounts  for 71%  of  our  new  FY12  forecast.  4Q  earnings  is  expected  to  come  in  at  RM132m, representing a 40% y-o-y and a 22% q-o-q increase respectively, of which earnings will be driven  by  stronger  passenger  numbers  (+8.4%  y-o-y,  +8.7%  q-o-q),  hence  translating  to higher  non  aeronautical  revenues.  MAHB  is  scheduled  to  release  its  earnings  on  the  18 Feb.
Compensation  for  Male  Airport.  MAHB  would  likely  see  its  earnings  hit  by  provisions following  the  termination  of  the  Male  Airport  concessionaire  although  this  will  not  hit  our core  earnings  estimate.  Compensation  for  the  termination  is  likely  and  Management  is seeking  higher  compensation  due  to  the  loss  of  future  potential  revenue.  As  of  to  date, MAHB has invested a total equity of USD6.9m (equivalent to RM21.5m) and has accounted for  an  accumulated  share  of  associate  profits  of  approximately  USD13.2m  (equivalent  to RM41.2  million).  In  any  case,  any  compensation  will  not  impact  on  our  FV  due  to  the exceptional nature of the item.

2013  and  beyond  to  take  a  hit  on  higher  user  fee.  Many  question  why MAHB’s KPI forecasted  2013  EBITDA  of  RM751m,  which  is  lower  than  our  FY12  forecast  of  RM840m and the RM737m it achieved back in 2011. Management guided that FY13 earnings will be hit by the higher User Fee to be paid to the Government. Currently, only half of the actual User Fee paid by MAHB to the Government is reflected in the income statement whilst the other  half  is  deducted  from  the  amount  due  (parked  in  non-current  payables)  for  the Balance Residual Payment arising from MAHB’s restructuring exercise completed back in February  2009.  Originally  when  the  restructuring  exercise  was  done,  the  amount  of  the Balance  Residual  Payment  was  RM419m  and  by  1QFY13,  MAHB  is  expected  to  have  a balance of only RM25m-RM30m. Upon the full settlement of the Balance Residual Payment in  1Q13,  the  User  Fee  incurred  will  be  fully  recognised  in  the  income  statement  and  as such, 100% of the User Fee to be paid to the government will be reflected in the net income moving  forward.  The  User  Fee  is  expected  to  be the  tune of  RM220m-RM240m,  which  is more than double the RM103m MAHB is expected to incur in FY12 and the RM84.2m it had incurred in FY11. 
Trimming  earnings.  Due  to  the  higher  User  Fee  expected  to  be  forked  out,  earnings  for FY13 will take a hit. Consequently, we trim our FY13 and FY14 earnings by 35% and 32% respectively. We have also factored in a higher cost assumption for operating the upcoming KLIA2 as we anticipate that direct overheads, utilities and maintenance costs will increase by  30%  and  15%  y-o-y  in  FY13  and  FY14  respectively,  premised  on  the  assumption  that the KLIA2 will commence operation by 28 June.

Delay  in  the  opening  of  KLIA2?  MAHB  is  committed  to  see  KLIA2  commencing operations by 28 June 2013 as announced by the Prime Minister. Any delay in the airport’s commencement will likely be attributed to completion of a new runaway and its apron. Even if this is likely the case, we foresee that the upcoming KLIA2 will still be able to operate with its existing two runaways although this would not bode well for airline operators due to the long  taxi  for  take-off  and  traffic  congestion.  However,  we  understood  from  AirAsia  that based  on  the  current  rate  of  aircraft  delivery,  the  existing  runaways  in  KLIA  will  still  be enough to accommodate the low cost carrier’s expansion until next year. Furthermore, we understand that of the 10 aircraft to be delivered this year, not all will be placed at its hub in Kuala Lumpur as some will be dedicated to serve in its hubs in Kota Kinabalu and Johor.

It’s the cash flow…  Whilst  earnings  are  expected to drop, we highlight that MAHB’s operating cash flow is expected to improve from FY13 onwards. FY13 operating cashflow is expected to be bumped up to RM689m from RM573m in FY12f. Due to the fact that MAHB will  still  incur  substantial  capex  for  the  remaining  construction  of  the  KLIA2,  the  capex  for this  year  is  still  expected  to  be  significant  –  to  the  tune  of  RM1bn-RM1.1bn.  Most  of  the capex  allocation  in  the  immediate  term  will  be  funded  by  the  remaining  drawdown  of  its sukuk facility and through its recently announced dividend reinvestment plan. MAHB’s Free cash  flow  to  firm  is  only  expected  to  turn  positive  by  2014  –  we  estimate  the  figure  to  be RM597m.  This  amount  is  a  reversal  from  the  negative  free  cash  flow  of  RM828.5m  and RM411m MAHB incurred in FY12 and FY13.

Higher  dividends  seen? We are nudging up our dividends from a 50% payout to a 60% payout  as  we  estimate  that  MAHB  would  not  take  into  account  the  higher  depreciation charges  starting  this  year  in  determining  its  overall  dividend  payout  considering  the likelihood  of  its  Malaysian  concessions  being  extended.  For  simplicity,  due  to  the  lack  of clarity  on  the  take  up  rate  of  its  dividend  reinvestment  plan  (DRP),  we  have  not incorporated any DRP take up rate in our assumption. At 60% payout, this would translate to  a  yield  of  2.4%  and  3.5%  in  FY13  and  FY14  respectively.  Our  assumptions  are considered conservative as we expect its Free cash flow to equity (FCFE)  – after changes in borrowing repayments etc –  to bump up to RM438m in FY14 from a negative FCFE of RM242.7m in FY13.

Maintain  BUY.  We  maintain  our  BUY  call  but  we  lower  our  FV  to  RM7.23  following  the earnings  downgrade  of  35%  and  32%  in  FY13  and  FY14  respectively.  Despite  the  lower earnings, a further drop in our FV is cushioned by a lower WACC assumption of 7.6% from 9.1%  earlier  after  revising  our  CAPM  variables,  notably  on  the  lower  expected  market return  given  the  risk  of  the  impending  General  Election.  Although  on  a  FY12  and  FY13 EV/EBITDA  perspective,  MAHB  is  15%  pricier  than  Airports  of  Thailand  (BUY,  FV: THB120)  currently,  we  think  the  slight  premium  is  warranted  in  view  of  the former’s operational free cash flow turnaround. A comparison on a PE multiple basis would prove to be  meaningless  given  the  high  depreciation  expense  pending  the  concession  extensions expected to be granted by the Government after the General Election. We continue to like MAHB’s outlook and its KLIA2 story which would boost its cash flow from FY14 onwards, its first positive free cash flow since 2007.
Source: OSK

Education - A Positive Move


The Oriental Daily reported that the Ministry of Higher Education (MOHE) will impose a  two-year moratorium  on  the  setting  up  of  new  private  learning institutions  from  1 Feb 2013 onwards.


Sufficient  supply.  According to the report quoting the Minister of Higher Education Datuk Seri Mohamed Khaled Nordin, the number of private institutions in the country is sufficient to  meet  current  demand.  The  Government  will  focus  on  enhancing  the  quality  of  tertiary education in line with global standards, to increase the competitiveness of local graduates. He  also  highlighted that  the  exceptions  would  include  world-renowned  universities  as  well as institutions that are currently in the process of a status upgrade or pending an upgrade. 
A  positive  move.  We  are  not  entirely  surprised  with  the  move  as  there  are  too  many tertiary  varsities  in  Malaysia,  considering  the  size  of  our  student  population.  Official statistics  from  MOHE  indicated  that  there  are  currently  498  private  tertiary  varsities  in  the country, comprising five foreign universities, 50 universities, 25 university colleges and 418 colleges,  which  altogether  have  an  estimated  total  of  some  500k students.  At  first  glance, this  works  out  to  be  a  reasonable  average  of  over  1k  students  per  establishment. Unfortunately, channel checks indicated that many of these - especially the private colleges -  are  either  dormant  or  are  operating  on  a  too-small  scale,  with  less  than  50  students registered. Hence, we laud the Ministry’s moratorium, which we deem timely, as this would help to address the issues of oversupply as the Government tackles the quality of our local education system amid its move to transform the nation into a regional education hub.

Potentially  triggering  M&As?  Over  the  medium  term,  this  would  likely  spark  more  M&A activities  within  the  sector  given  that  new  players  in  the  industry  may  have  to  buy  out existing  institutions  to  secure  operating  licenses.  This  could  likely  lead  to  a  sector-wide consolidation, especially among the smaller players, which in our view is positive to phase out less competitive education providers. 

Prestariang:  one  of  the  last  beneficiaries.  The  impact  of  the  moratorium  on  existing education  providers  remains  unknown  for  now,  as  there  is  a  lack  of  more  affirmative indications  from  the  Ministry.  In  a  worst-case  scenario,  this  could  potentially  curb  future capacity expansion. From our quick checks with HELP (NEUTRAL; FV RM1.93) and SEGi (NEUTRAL;  FV RM1.75),  both  the  management  teams  believe  this  implementation  would likely have a minimal impact on their respective operations at this juncture. They have yet to receive any notifications from the Ministry itself. Meanwhile, we deem Prestariang (BUY; FV RM2.15) as one of the last pre-moratorium beneficiaries as it is possibly one of the last education  players  in  the  country  to  have  secured  a  full-fledged  university  license  from MOHE.
NEUTRAL. All in, we are positive on the ministry’s decision, as this would help to alleviate the issues of a capacity oversupply in tertiary education for the immediate term. That said, we  are  maintaining  our  NEUTRAL  call  on  the  sector  pending  more  concrete  signals  from MOHE  on  whether  such  an  implementation  would  be  enforced,  should  existing  players embark  on  any  future  expansion  of  capacity.  Prestariang  remains  as  our  top  BUY  for  the sector, as it is set to launch its university in Cyberjaya tomorrow. 

Source: OSK