Monday, 25 March 2013

Insurance - Key Points In BNM, IMF Reports

The insurance and takaful industry saw a boost in profitability in 2012, spurred by improving premiums growth and healthier combined ratios in the general insurance/takaful sectors. Despite notable increases in equity exposure and concerns on interest rate risk, insurers’ risk exposure remains reasonable. BNM intends to tighten scrutiny of the insurance/takaful industry, as recommended by the IMF Country Report. We remain NEUTRAL on the sector.

Better 2012. The life insurance and family takaful sector reported a 38.2% increase in net income or excess income over outgo, backed by premiums/contributions growth of 11.2%. Meanwhile, the general insurance and takaful segment’s operating profits surged by 72.6% to RM2.9bn on the back of premiums/contributions growth of 11.1%. The general insurance and takaful industry also benefited from a low combined ratio of 96.9% (vs 104.7% in 2011).

Regulations tighten their grip. The industry’s capital adequacy ratios (CAR) leveled at 222.3% (vs 222.5% in 2011), well above Bank Negara Malaysia (BNM)'s supervisory target capital level (STCL) requirement of 130%. The IMF Country Report acknowledges the strength and comprehensiveness of the local insurance regulatory measures versus the international framework. Meanwhile, the country’s cross-border operations are still small relative to the industry, which we believe may have prompted BNM to relax cross-border financial activities for resident insurers and takaful operators. The central bank intends to enhance the existing prudential requirements with the Financial Services Act (FSA), as well as other measures which may include containment of systemic risks and cross-border risks. This should boost the sustainability of the industry, which being liberalised.

NEUTRAL. We retain NEUTRAL on the sector, with our Top Picks being Syarikat Takaful for its exposure to the takaful industry, and LPI Capital for its robust business model and solid underwriting strength.

Source: RHB

SapuraKencana Petroleum - Positive Outlook

We reiterate our Buy call on SapuraKencana. Our fair value is upgraded to RM3.96 (from RM3.76 previously) based on 21x FY01/14 EPS. Similar sized peers such as Bumi Armada are currently trading at 19-20x forward earnings. While it currently has the orderbook to sustain revenues for the next 2.5 years, its enlarged asset base and solid balance sheet allow it to bid for larger and more complex projects moving forward.

Seadrill acquisition to be completed by end-April 2013. Based on our discussions with management during the analyst briefing, we understand that the Seadrill acquisition is on track to be completed by end-April 2013. The EGM is slated to be on the 23rd of April, after which the pricing of the market placement would be determined. We thus expect Seadrill’s tender rig business to contribute to the remaining 9M of FY01/14.

Orderbook of RM18.2bn. With an RM18.2bn orderbook, SapuraKencana’s earnings visibility remains clear as the current orders are enough to sustain revenues for the next 2.5 years. Currently, the bulk of SapuraKencana’s orders are from Malaysia which accounts for 36%, followed by Brazil (29%), SEA (15%) and Australia (10%).

Berantai first gas achieved, targeting more RSCs. SapuraKencana’s marginal field RSC, Berantai, has produced first gas and started contribution in 4QFY13. We expect full-year revenue and earnings contributions from the RSC in FY01/14 onwards. When queried, management highlighted that they are interested to bid for more RSCs in the future.

Forecasts. Our FY01/14-15 net profit estimates have been raised by 53-56% as we have imputed the contribution from Seadrill’s tender rig business. Investment case. We maintain our Buy call on the stock with a new fair value of RM3.96 (from RM3.76) based on unchanged 21x FY01/14 EPS.

Source: RHB

Kenanga Research - On our Portfolio - Parliament dissolution around the corner?

The local market traded in a range-bound mode last week while waiting for further developments relating to the upcoming 13th General Election. All of our three model portfolios performed in tandem with the overall broad market last week and recorded a mild change of between -0.6% to +0.8% WoW. On a YTD total return basis, all our three model portfolios have recorded positive returns as compared to the -3.43% return of the FBMKLCI, beating the benchmark index by 474-627 bps. The THEMATIC portfolio continued to remain the top gainer (+2.84%) followed by the GROWTH (+1.74%) and the DIVIDEND (+1.31%) yield portfolio. This week, we expect the market to consolidate but with a downward bias. Based on our technical reading, we believe that the market could otentially slide further towards the 1,600 psychological level should it fail to hold the immediate support level of 1,620. On top of that, there is a strong market rumour that the parliament may likely be dissolved in this week. Should this news materialise, the market could potentially trade lower by 1%-3% during the election campaign period based on our study of the past three general elections.

A range-bound mode. Last week, the local market traded in a range-bound mode at between +0.4% to -0.8% while waiting for further developments relating to the upcoming 13th General Election. For the week under review, the FBMKLCI index was lower by 0.05% or 0.75 pts to settle at 1,626.89. The main index movers were SIME (+RM0.19); MAYBANK (+RM0.14) and CIMB (+RM0.10). Buying interests in SIME re-emerged after the previous week selldown by foreigners, which led the share price to close by 2.1% WoW higher to RM9.19. The banking sector, meanwhile, was cheered by the Bank Negara Malaysia statement that the authority was still comfortable with the current bank lending to households, which suggested that the possibility of the central bank introducing further tightening measures would continue to remains low for now. On the US market, the DOW closed relatively flat at 14,512.03 amid concerns on the Europe debt issue, which overshadowed the better-than-estimated economic data that came out.

THEMATIC Portfolio remains the top gainer. All of our three model portfolios were performed in tandem with the overall broad market and recorded a mildly change in the overall return last week. The THEMATIC Portfolio reported a -0.56% loss WoW but with an unrealised profit of 2,366 or +2.84% on YTD basis. The lower WoW performance was mainly led by PUNCAK (-2.6% to RM1.48) and MPHB (-2.9% to RM3.61). The GROWTH Portfolio, meanwhile, has recorded a positive gain of +0.77% WoW, bringing the YTD total return to RM1,149 or +1.74%. The DIVIDEND Portfolio’s fund value rose by 0.1% or RM66 WoW, aiding the YTD total return advance to 1.31% or RM872. Note that, for a conservative purpose, we have yet to fully investing the allocated amount of RM100k each in our model portfolios at this juncture due to the uncertainly before the general election. Our current invested ratios for the THEMATIC, GROWTH and DIVIDEND portfolios are 83.3%; 66.2%; and 66.4%, respectively.

Parliament likely to be dissolved in this week? We believe the market could become more volatile should the Parliament be dissolved during the week as per market expectations. Based on our study of the past three general elections, the FBMKLCI index tends to fall by as much as an average of -2.3% during the election campaign period. Out of which, the 12th GE experienced the worst performance of the three where the benchmark index fell by as much as -2.9% during the election campaign period. Thus, in view of the high uncertainty in the upcoming GE, we do not discount that history may potentially repeat itself here.

Expecting the market to consolidate but with a downward bias this week. We believe the benchmark index will likely to trade in a consolidation mode but with a downward bias this week judging from the mixed technical indicators. The 1,620 level should present some support for now. Should this level be taken out, the FBMKLCI could potentially slide further towards the 1,600 psychological level. We believe investors will be unwilling to take up major positions in the stock market this week given the slew of speculations surrounding the parliament dissolution date and general elections. Hence, gains could be capped and profit taking could be potentially widespread, especially on the recent gainers such as Johor property related companies like UEMLAND, TEBRAU, EKOVEST, etc.

Source: Kenanga

SapuraKencana Petroleum - 4Q13 Analyst Briefing Key Updates

We were at SapuraKencana’s (“SKPETRO”) well-attended 4QFY13 analyst briefing last week. The key takeaways were: 1) the main reasons for the lower margins in FY13 vs. FY12; 2) details on its Berantai field contribution; 3) an update on the Seadrill tender-rig acquisition; and 4) further details on its upcoming Brazil Pipe-Lay Support Vessel (PLSV) prospect. Overall, management was satisfied by its own progress post the merger between Sapuracrest and Kencana and is looking forward to the potential benefits from the upcoming Seadrill tender rig acquisition. We are maintaining our net profit forecast of RM744.2m for now pending the completion of the acquisition, which will lead to higher earnings, debts and the number of shares. We will also introduce our FY15 net profit after the acquisition. We continue to like SKPETRO for its: 1) extensive service provisions, which span from drilling to the EPCIC value chain; 2) domestic market dominance and 3) increasing exposure to the international markets. We maintain our OUTPERFORM call on the stock and our target price of RM3.82 based on a CY13 PER of 26.5x. Recall, our target price of RM3.82 is based on 20x on implied CY13 of 19sen to accommodate the potential earnings accretion from the new rigs of SKPETRO post its acquisition exercise with Seadrill.

SKPETRO's margin was affected by the timing of recognition, one-off merger costs, Seadrill acquisition ongoing costs and higher borrowings. Management guided that the lower YTD PBT margin (12.0% versus 12.4% in FY12), which fell despite the increase in revenue, was mainly due to: (i) timing issues (where SKPETRO could only recognise eight months of Kencana's earnings due to the merger accounting method) and (ii) also due to other higher costs incurred i.e. the one-off Sapuracrest and Kencana merger cost (RM54m recognised in 4QFY13), the Seadrill acquisition cost of RM46m and a higher borrowings cost in the year given its aggressive newbuilding scheme. The merger cost should not recur in FY14. However, there will continue to be some Seadrill acquisition costs given that the exercise is not completed as yet.

Berantai made maiden contribution in 4QFY13. We understand that the Berantai field made its maiden contribution in 4QFY13 after having achieved its first-gas in Oct-12, which also drove the higher EJV division’s revenue/profit in 4QFY13. Management has guided for a full year contribution from FY14 onwards.

Updates on the Seadrill tender-rig acquisition. Management hopes to conclude the acquisition by May-CY13, which would mean a nine-month contribution for FY14. On the overall, management seemed excited about the acquisition as: 1) it foresees that the business will expand SKPETRO’s global footprint (i.e. to countries like Angola, Trinidad and Tobago) and 2) believes that the applications for the tender-rigs could expand (i.e. beyond just the shallow-water application), thus creating more opportunities for the group.

Source: Kenanga

Plantation - Dorab Mistry turned less bearish on CPO Prices

According to Dorab Mistry (director at Godrej International Ltd), CPO prices are expected to rise to RM2,400 to RM2,700 ringgit ($770 to $865) per mt by the end of May due to lower stocks level and output. He believes that Malaysia palm oil inventory will fall below 2.0m mt in Jun-2013. We generally agree with Dorab Mistry’s short term view as we are already bullish on near term CPO prices as we expect exports to improve 14% MoM to 1.59m mt. In 2QCY13, we believe CPO prices could improve up to RM2,800/mt. However, we do not think Malaysia palm oil inventory will reach 2.0m mt as we believe it should reach the lowest level of 2.27m mt by April 2013 before increasing slightly to 2.31m mt by June 2013.

Despite our short term bullishness on CPO prices, we reiterate an UNDERWEIGHT rating on the plantation sector given that the consensus is still estimating an average 2013 CPO price of RM2880/mt (against ours at RM2500/mt). This should lead to another earnings disappointment in the next earnings season in May-2013. Maintain UNDERPERFORM calls on SIME (TP: RM8.82), IOICORP (TP: RM4.34), KLK (TP: RM19.30), FGVH (TP: RM4.00), GENP (TP: RM7.60), IJMP (TP: RM2.75) and TAANN (TP: RM2.84) due to the low CPO price outlook. Maintain MARKET PERFORM calls on TSH (TP: RM2.00) and UMCCA (TP: RM6.70). Our only OUTPERFORM call is on PPB (TP: RM15.00) as we expect it to benefit from Wilmar’s earnings recovery (resulting from better margin in soybean crushing margin).

Dorab Mistry turned less bearish on CPO prices. According to Dorab Mistry (director at Godrej International Ltd), CPO prices are expected to rise to RM2,400 to RM2,700 ringgit ($770 to $865) per mt by the end of May due to lower stocks level and output. He believes that Malaysia palm oil inventory will fall below 2.0m mt in Jun-2013. We gather that his latest CPO prices projection has been less bearish than his previous forecast made during 6-March-2013 in Kuala Lumpur (CPO prices falling below RM2,200 from mid-April onwards). However, he maintained his bearish view in 2H2013 and expects CPO prices to drop below RM2,000 after August-2013 due to high production season, declining energy prices and strong US Dollar.

We are short term bullish on CPO prices too. We generally agree with Dorab Mistry’s short term view as we are already bullish on near term CPO prices in March but do not expect it to increase beyond RM2700/mt. Recall that in our last report on 12-March-2013, we already stated that Malaysia inventory could decline further by 5% MoM to 2.31m mt in Mar-13. We reiterate our view that March exports should increase by 14% MoM to 1.59m mt as palm oil demand should increase after the winter season in the northern hemisphere ended last month in February.

However, we do not think inventory will touch 2.0m mt. We only expect inventory to fall to the lowest level of 2.27m mt by April-2013 before increasing slightly to 2.31m mt by Jun-2013. As inventory stays low in 2QCY13, we expect CPO prices to peak at RM2800/mt. We think our more bullish CPO price outlook (against Dorab Mistry) is due to our better outlook on crude oil prices. Despite our short term bullishness on CPO, 2H13 outlook remains challenging when high production season starts. However, we think that CPO prices should not fall below RM2,000 in 2H13. We believe that CPO prices bottom in 2H13 should be RM2,100/mt as US biodiesel industry demand for palm oil biodiesel will be strong at such prices assuming WTI Crude Oil stays above US$90/mt.

Reiterate UNDERWEIGHT, looking ahead to another earnings disappointment in May-2013. As the consensus is still estimating 2013 average CPO price of RM2880/mt as compared to the average CPO price of RM2310/mt in the first two months of 2013, we believe that 1QCY13 earnings will likely to disappoint again.

Source: AmeSecurities

Plantation Sector - Proposed accounting standard scrapped OVERWEIGHT

- The Edge Financial Daily quoted KPMG as saying that two accounting rules which would have an effect on Malaysian companies have been scrapped.

- One of the accounting standards, which would have forced Malaysian plantation companies to value living things such as oil palm trees, will no longer be implemented. The accounting standard was supposed to be implemented from 2014F onwards.

- This is positive for the plantation companies.

- Implementing the accounting standard would have increased the accounting cost and be a hassle for the plantation companies as they would have to hire independent consultants to value the oil palm estates.

- The accounting standard would have also increased the volatility of earnings in the profit and loss statement as fair value changes in respect of biological assets would fluctuate according to the prices of commodities.

- Plantation companies listed in Singapore follow this accounting standard.

- Every year, the plantation companies would look at the valuation of their oil palm estates and record the fair value changes accordingly.

- The companies use discounted cash flow to value the oil palm estates and some of the main assumptions used in the DCF method are CPO prices, discount rate and FFB yield.

- During periods of high CPO prices, fair value changes in biological assets would increase. When CPO prices are in the doldrums, fair value changes in biological assets would fall.

- The fair value change in biological assets is a non-cash flow item. It does not reflect the core profit of the plantation companies.

- Last year, Muddy Waters LLC said that Olam International was “aggressive” in reporting gains on biological assets. Subsequently, Carson Block of Muddy Waters betted against the stock.

Source: AmeSecurities

Pavilion Reit - Limited upside, earnings upside have been priced in HOLD

- We are downgrading Pavilion REIT (PREIT) to a HOLD, with an unchanged fair value of RM1.65/unit, based on our DCF valuation, given PREIT’s limited upside to its share price.

- Following a company visit, we re-iterate our positive stance on PREIT, underpinned by its asset quality and a growing middleclass. This bodes well for PREIT’s growth.

- Nearly 70% of NLA is due for renewal this year. Given that this represents Pavilion Mall’s second rental cycle (first cycle in 2010) and at early stages, we have factored in a 12% rental reversion.

- However, feedback from some retailers has indicated that mall owners are requesting for sky-high rental reversions that are unjustified. This may in turn suggest a possible softening in rentals in the near term.

- Yet, as KLCC’s average rental is at c.RM25psf, we see room for PREIT (average rental: RM18.80psf) to play catch-up. This is underpinned by Pavilion Mall’s relatively young status and a long waiting-list of interested retailers wanting a presence in the mall.

- Footfall inched up 4% in FY12 contributed by Fashion Avenue and a strong F&B and fashion mix, in our view.

- Should Fahrenheit 88 be deemed fit as a yield-accretive acquisition during an evaluation exercise in 4Q13, it will likely be funded via debt and equity. Any injection will only materialise in FY14F. PREIT is not playing any part in the repositioning of Fahrenheit 88’s tenant mix in an upcoming renewal in 3Q.

- Given the rather weak footfall at Fahrenheit 88 due to the tenant mix, we believe in a turnaround under management hands, should the acquisition materialises. This is underpinned by PREIT’s strong management capability and experience in managing Pavilion Mall.

- Based on our channel checks, retail REITs in town, including PREIT, have acknowledged the lack of quality assets that are yield-accretive for acquisitions. This somewhat limits the REITs’ growth, apart from organically.

- As such, management is of the view that the sponsor would eventually have to venture into greenfield shopping malls. PREIT is eyeing day-to-day consumer malls in the Northern and Southern regions of Malaysia but not Iskandar, Johor. This is largely because PREIT is targeting locals and prefers malls located within city centres.

- We continue to like PREIT for its longer term growth potential, underpinned by quality assets and a sizeable pipeline of potential assets for injection. Dividend yields are decent at 4.3% and 4.7% for FY13F and FY14, respectively, based on a 100% payout ratio.

Source: AmeSecurities

Trading Stocks - 25 March 2013 - IJM | Genting | Glomac | Time Engineering | Tebrau Teguh | Sunway REIT | Censof | MK Land |

IJM may rise further after closing at a 6-month high. A position can be  initiated  if  the  stock  closes  above  RM5.25,  with  a  close  below RM5.10  as  stop-loss.  The  price  target  is  RM5.65,  with  selling anticipated at RM5.50.  Failure to get above RM5.250 will likely see the stock trade sideways. Supports lie at RM5.00 and a stronger one at RM4.80.
Genting’s  downside  risk  rose  after  the  stock  closed  below  RM9.50 for  2  consecutive  days.  A  trader  may  liquidate  if  the  stock  stays below RM9.50, with supports seen at RM9.30 and the round figure of RM9.00. However, buying could quickly return if the stock closes above  RM9.63.  the  resistance  levels  are  the  prior  highs  of  RM9.80 and RM10.10.
Source: RHB

Friday, 22 March 2013

Banking Sector - Clearing the air over individual shareholding limit

-  The press recently reported Bank Negara Malaysia (BNM) governor Tan Seri Zeti Akhtar Aziz as confirming that the Financial Services Act (FSA) will not affect the shareholdings of Public Bank (PBB), Hong Leong Bank (HLBB) and AMMB Group Holdings (AMMB).

-  The FSA, which will be enforced from mid-2013, has reiterated that the limit on individual shareholding is 10%, which is the same limit under the Banking and Financial Institutions Act (BAFIA).

-  To recap, Tan Sri Teh Hong Piow’s stake in PBB is 24.1%. Tan Sri Quek Leng Chan’s effective stake in Hong Leong Financial Group (HLFG) is 78.3%. HLFG in turns holds 63.5% in HLBB.

-  The governor said that the FSA will not affect the shareholding in banks like PBB, HLBB and AMMB as the stakes were held even before the BAFIA was implemented in 1989.

-  The governor added that the shareholding limit will affect those who acquired more than 10% after the implementation of BAFIA.

-  The FSA will provide the central bank with more legal and enforcement powers in its actions to enhance governance and regulation.

-  We believe the share prices of both HLBB and PBB are already reflecting expectations on the existing shareholding structure to remain.

-  Thus, the confirmation that the individual shareholders of PBB and HLBB are not required to reduce their shareholding to a maximum of 10% under the FSA is likely in-line with our and market expectations.

-  However, the confirmation is positive as it removes any further speculation over the possibility of the individual shareholders of both banks being required to pare down their stakes, post implementation of the FSA.

-  We remain overweight on the sector.

Source: AmeSecurities

Public Bank - A slow 1Q

-  At our recent company visit, PBB alluded to a slow loans growth in 1QFY12, but this is in-line with the historical trend whereby loan demand tends to be softer due to the Chinese New Year holiday season as well as a shorter working quarter. Nevertheless, PBB remains confident of achieving its overall loans growth target of 11% to 12%. Net interest margin is expected to compress by 10bps YoY in FY13F, in-line with the earlier guidance of around 10bps to 12bps decline YoY for FY13F.

-  For its residential mortgage loans, about 70% of these are still considered to be within the mass market segment, with loan values ranging between RM100k and RM500k. Loans less than RM100k make up about 10% to 15% of its mortgages. Loans exceeding RM1mil remain at a small proportion of its total loans, at less than 5%.

-  Its SME loans had done well in the past one year, with small-and-medium sized enterprises (SMEs) expanding 22.2% YoY in FY12. This was attributed mainly to its strong network within the community, and fast and efficient service, rather than pricing, which is positive for NIM.

-  Fee income ratio is targeted to be slightly higher than the recent range of 20% to 21%. The company is building up its trade finance business, targeted mostly at its SME customers which are traditionally mainly in the shophouse financing segment. The company also reiterated that asset quality remains stable, with a targeted credit cost of 20bps for FY13F.

-  With group common equity ratio at 8.5%, and the bank entity level’s common equity ratio at 7.5% as at end-FY12 (assuming no phase-in arrangements which is allowed under Bank Negara’ final guidelines), the company expects capital to be sufficient in the medium term. The company may consider a rights issue, by 2015 or possibly 2014, if a counter-cyclical buffer is implemented in 2016. However, PBB reiterated that it will not be considering any dividend reinvestment plan. Dividend payout is expected to be slightly lower than the 45.3% in FY12, although the company targets to still increase overall quantum of dividend for FY13F.

-  From the meeting, we now expect the 1QFY13 to be slightly lower than consensus’ net earnings of RM4,189mil on an annualised basis, but this is in-line with a historically slow 1Q. A possible rights issue may materialise earlier, in 2014 rather than 2015. Maintain HOLD.

Source: AmeSecurities

Bursa Malaysia - ASEAN Trading Link yet to see active participation

-  We re-iterate our BUY recommendation on Bursa Malaysia Bhd (Bursa), with an unchanged fair value of RM8.20/share, based on a PE of 26x FY13F earnings.

-  The Wall Street Journal (Asia Edition) yesterday reported that the ASEAN Trading Link, which went live six months ago, has gained little traction among cross-border traders.

-  We gather that Bursa’s foreign retail trading volume has remained at lackadaisical ~400mil shares/month, while average participation in the past 5 months was ~1% of total traded volume. The Singapore Stock Exchange and Stock Exchange of Thailand do not provide monthly figures.

-  The link, which provides a platform for retail investors to ride on the region’s growth opportunities, currently connects the Malaysia, Singapore and Thailand bourses. These three markets alone make up 70% of the ASEAN market capitalisation (USD1.6tril). We understand that the Philippines and both of Vietnam’s bourses could be joining the fray soon. No timeline has been set for the linkage of all 6 bourses in the region.

-  Despite incentives like capital-gains tax exemption for shares bought using the link and lower transaction costs, retail investors are still not keen, citing reasons which include:- (1) unfamiliarity with the foreign capital markets and its companies; (2) additional forex risk; and (3) lack of integration in the rules and regulations front. Interest to diversify is also low on their list as some investors believe the domestic market provides amply investment opportunities.

-  Our previous talks with management revealed that the alliance’s aim of improving the liquidity of the region’s capital markets by positioning ASEAN “as an investable asset class” is a mid- to long-term one. Its immediate goal is educating the investors through roadshows.

-  As stated in our previous reports, we are neutral on this tie-up as:- (1) any positive contribution from it will only be seen at the earliest in FY14/15, and (2) the impact will only be felt by retail investors, which account for a small portion of trading participation on Bursa (FY12: 23% vs. FY11: 26%).

-  Having said that, we are encouraged by Bursa’s bid to elevate its velocity (FY12: 28% vs. FY11: 33%) by increasing retail participation, which has been dwindling YoY since its peak in 2007 of 53%.

Source: AmeSecurities

SapuraKencana Petroleum - Core earnings on track to greater heights

-  We maintain our BUY recommendation on SapuraKencana Petroleum (SapuraKencana), with an unchanged fair value of RM3.70/share, pegged to an FY14F PE of 22x – on par with Kencana Petroleum’s 2007 peak.

-  The group’s FY13 core net profit of RM558mil (excluding 9MFY13 exceptional items of RM34mil) came in within our earlier FY13 forecast of RM565mil and consensus estimate of RM568mil.

-  We understand that there was some one-off cost in 4QFY13 arising from the acquisition of Seadrill’s tender rigs, but the quantum is uncertain at this juncture pending an analyst briefing later today.

-  Hence, we have fine-tuned FY14F-FY15F net profits and introduce FY16F earnings with a growth of 18% driven by fullyear contributions of 5 additional tender rigs currently under construction.

-  Excluding the RM42mil reversal of minority charge from the acquisition of the remaining 74% stake in construction vessel QP2000 in 3QFY13, we estimate that the group’s core 4QFY13 net profit fell 12% QoQ to RM124mil as the seasonal decline in progress work from the offshore construction & installation activities was partly offset by contributions from the group’s 50%-owned Berantai marginal field project and fabrication activities.

-  Offshore construction and subsea services accounted for half of the group’s FY13 pre-tax profit, and fabrication, hookup & commission/offshore support vessels and energy/joint ventures at 27% and 23%, respectively.

-  We estimate that SapuraKencana’s order book slid 15% QoQ to RM11bil currently from the quarterly depletion, but this will surge to RM16bil (see Chart 3-4 for breakdowns) with the inclusion of the RM4.8bil built-in charter contracts for the 16 new tender rigs which will be acquired from Seadrill. The group still expects to secure RM5bil-RM6bil annually, with potential tenders of over RM30bil.

-  Over the next few months, we still expect a higher magnitude of newsflow for hook-up, construction and commissioning (HUCC) works vs. pure fabrication jobs. The tenders which the group is bidding for include the RM8bil-RM10bil PanMalaysian umbrella HUCC contract and 6 new flexible pipelay construction vessel charters from Petrobras.

-  SapuraKencana’s valuations are currently attractive at an FY14F PE of 18x, which is at an 18% discount to Kencana PP 12247/06/2013 (032380) Petroleum’s peak in 2007.

Source: AmeSecurities

Trading Stocks - 22 March 2013 - Sunway | Poh Huat Resources | Ahmad Zaki | Favelle Favco | KUB Malaysia | Ekovest | FACB Industries | Lein Hoe Corp

Sunway should continue scaling higher after holding on to the gains of  Wednesday.  A  purchase  can  be  made  if  the  stock  stays  above RM2.80, with a close below RM2.72 as a stop-loss. The price target is  RM3.30,  if  the  psychological  RM3.00  is  broken.  Failure  to  stay above  RM2.80  should  see  the  stock  move  sideways,  with  support seen at RM2.60 and RM2.50. 
Poh  Huat  may  rise  further  after  closing  the  highest  in  more  than  a year.  A  position  can  be  initiated  if  the  stock  stays  above  RM0.47, with  a  close  below  RM0.46  as  a  stop-loss.  The  price  target  is  at  RM0.585, with resistance also expected at RM0.525. A close  below RM0.46 will likely see the stock trade sideways, with strong support at RM0.40.
Source: ;RHB

SapuraKencana Petroleum - No Surprises

We maintain our Buy call on SapuraKencana with an unchanged fair value of RM3.76. We remain positive on SapuraKencana’s earnings outlook, underpinned by its extensive oilfield service capabilities, which allows it to undertake major oilfield services contract, overseas and locally. Completion of its tender rig business would provide further earnings upside of approximately 18-20% in FY01/14. The deal is expected to be completed by 2Q CY2013. SapuraKencana is our top pick for big cap O&G service providers.

Within expectations. SapuraKencana’s 4QFY01/13 core net profit of RM123.9m brought full-year FY01/13 core profit to RM482.7m. This is in line with our and consensus estimates, accounting for 97% and 98% of our and consensus estimates respectively. Revenue grew by 44.1%, driven mainly by its offshore construction and subsea division (OCSS).

Margins were weaker. PBT margins contracted by 7.4%-pts yoy, although this is was mainly due to: 1) one-off merger costs of approximately RM130-140m; and 2) higher interest expense due to the debt undertaken to finance the merger. We expect margins to recover in FY01/14, as the synergies of the merger are realised as SapuraKencana continues to execute more contracts.

Expect more Malaysian contracts in FY01/14. We believe SapuraKencana is one of the main beneficiaries of Petronas’ 5-year RM300bn capex commitment due to its scale and capabilities. Furthermore, given that it has achieved first gas for Berantai, we expect it to bid for more marginal field RSC’s. Petronas is expected to award more RSC’s this year as it only awarded one (KBM cluster) in 2012.

Forecasts. No change to our earnings forecasts pending its analyst briefing later today.

Investment case. Our fair value is unchanged at RM3.76, based on 21x pro-forma FY01/14.

Source: RHB

Muhibbah Engineering - Three awards alone in March

News  Muhibbah announced yesterday that it had received a ship building contract award worth RM216m from Jasa Merin (Malaysia) Sdn Bhd, a 70%-owned subsidiary of Silk Holdings Berhad. At the same time, its 62%-owned subsidiary Favelle Favco also announced four crane orders totalling up to RM78.8m.

Comments  The contract awards and caught us by surprised on their timings as the contract awards all came within a month.

 We are pleased with the contract flows from Muhibbah as the above will be Muhibbah’s second and third contract awards for the month of March itself, bringing its total wins alone for the month to RM496.8m, which made up 25% of our RM2.0b total order book replenishment assumption for FY13. To recap, MRT Co. had announced earlier in the month that it had also secured a contract worth RM202m for the design, supply, installation, testing and commissioning of noise barriers and enclosures (Package V1-V8) to Muhibbah-SV-Samjung Joint Venture (JV).

 Based on its historical track record, we expect the operating margin for its ship building award to hover at about 18%-20% with an estimated order book burn rate of 24-30 months. To recap, Muhibbah was awarded a similar contract sum of works by Jasa Merin back in Dec-08 and the delivery of the vessels took place in 2012.

 Favelle’s cranes’ order of RM78.8m is likely to have a shorter burn rate of 12 months with an operating margin of 10%-12%. We expect 75% of the purchase orders to contribute positively to its FY13 earnings with the balance in FY14.

 On the other hand, there will not be any earnings contribution from on the RM202m MRT Co contract award in the near term as we understand that works on noise barriers and enclosures on package V1-V8 can only be executed once the elevated portion from V1-V8 is completed. However, we are waiting for more details from Muhibbah as there has been no formal announcement by the company on the project award yet.

Outlook  We believe that given that it had already made full provision for its potential liabilities in Asian Petroleum Hub (“APH”) in FY12, Muhibbah is now set to put the dampening issue behind and ride on new positive contract flows after GE13.

Forecast  There are no changes in our earnings estimates as the abovementioned contract awards fall within our order book replenishment assumption of RM2.0b.

Rating   Upgrade to OUTPERFORM

 We are upgrading our recommendation on Muhibbah from a MARKET PERFORM to an OUTPERFORM given the positive sentiment likely for the stock as it moves forward from the APH issue.

Valuation  We have increased our Target Price on Muhibbah to RM1.46 from RM0.86 as we removed the APH provision discount, which was amounted to RM0.60/share, from our SOP valuation given that Muhibbah books are now clean after APH was fully provided for.

Risks  Delays in project execution and a spike in building material prices.

Source: Kenanga

Highlights / Stock Picks of the Day - Plenitude Berhad ("PLENITU") – Not Rated

Earlier this month (2nd March), wire news reported that PLENITU had entered into a sale and purchase agreement with Arabayu Sepakat Sdn Bhd in a proposal to dispose of 15 parcels of freehold land for RM49.2m cash. The news was well received by the market, and the share price had over the past three weeks gained 22 sen or 13% to yesterday's closing price of RM1.95. Chart-wise, PLENITU formed a "Bullish Marubozu" candlestick yesterday, following a week-long pause in the recent rally. In fact, the channel resistance has also been breached, and we believe that the bullish move effectively signals a continuation of the uptrend. Should the follow-through buying contunue, we reckon that the share price could
potentially rally towards the RM2.10 projected target. Meanwhile, the RM1.90 resistance has now turned support.

Source: Kenanga

SapuraKencana Petroleum - 4Q13 within expectations

Period  4Q13/12M13

Actual vs. Expectations  The 4Q13 core net profit of RM123.9m brought the core FY13 net profit to RM482.9m. This was within our expectations at 97.3% of our full year net profit estimate of RM496.3m. However, it was below (at 85%) the consensus expectation of RM568.2m.

 The core net profit excludes the RM42m one-off gain adjustment (recognised in 3Q13) arising from the additional investment in Quippo-Prakash.

 Note that we have included Kencana Petroleum’s estimated 12MFY12 earnings to arrive at our SKPETRO’s 4QFY12 and 12MFY12 figures for a more meaningful YoY comparison and analysis.

Dividends  No dividend was declared as expected.

Key Results Highlights  QoQ, the revenue fell (-11.6%) mainly due to lower offshore construction and subsea services (OCSS) works in the quarter. The net profit was also down (-12.1%) mainly due to weaker margins from all its divisions, mainly from OCSS. The sluggish showing within the quarter is expected as the company’s offshore operations are seasonally weaker during the monsoon season.

 YoY, while the revenue was up (77%), net profit was down (7.8%) mainly due to: 1) a higher interest cost and 2) lower margins at the Energy and Joint Ventures (EJV) division due to more manpower hiring.

Outlook  SKPETRO’s strong presence and scale in the domestic EPCIC market both domestically and globally makes it a prime candidate for securing further contract wins.

 The impending Seadrill asset injection is expected to increase the group’s net profits further.

Change to Forecasts  We are maintaining our earnings estimates for now pending the company’s analyst briefing tomorrow.


Valuation  Maintaining our fair value of RM3.82 based on an implied targeted CY13 PER of 26.5x.

 Recall that we had tactically raised our target price earlier to accommodate the potential earnings accretion from the new rigs of SKPETRO post its acquisition exercise with Seadrill. The premium valuation accorded to the stock (versus 15.0x for the sector average and 18.0x for MMHE) is due to its significant domestic market dominance and service scale range.

Risks  1) High capex plans for the company could strain its growth prospect and 2) delay in contract executions could result in lower than expected earnings.

Source: Kenanga

UMW Holdings - Secures contract from PetroVietnam

News  UMW Standard Drilling Sdn Bhd (UMWSD), a wholly owned unit of UMW Holdings has secured a contract from PetroVietnam Drilling & Well Services Corporation (PV Drilling).

 UMW would provide the Naga 2 rig and related drilling services to PetroVietnam Drilling to drill wells for the end client, Hoang Long Joint Operating Company. The UMWSD-PV Drilling contract is for a duration of six months with an option for another six months.

 NAGA 2 is a premium independent-leg cantilever jack-up rig that has a drilling depth capability of 30,000 feet and has a rated operating water depth of 350 feet.

Comments  At the moment, NAGA 2 is operating in Indonesia, serving its contract with HESS (Indonesia-Pangkah) Limited, which is expected to end in April 2013.

 Based on UMW's press release, NAGA 2 will be moved to the Vietnam waters in May 2013 after completing its contract in Indonesia.

Outlook  We expect UMW Toyota and Perodua to retain their leadership in the non-national and national passenger car segments respectively.

 Re-rating catalysts would include: (i) stronger-than expected vehicle sales and (ii) the listing of its Oil & Gas unit.

Forecast  There were no financial details revealed in the press release. As such, we are leaving our FY13-14 forecasts unchanged for now pending further guidance from management. However, based on NAGA 3’s charter rate of USD145k/day (which was obtained in 2012) and the short duration of 6 months, we expect the profit contribution to be small.

Rating    Maintain MARKET PERFORM
 We are maintaining our MARKET PERFORM rating on the stock at this juncture even though the share price has already rallied above our target price. However, our target price is currently under review for a possible upgrade on valuation grounds.

Valuation  Our target price of RM12.37 which is based on 14.0x FY13 EPS is currently under review. At the moment, the PE multiple of 14.0x applied on UMW is lower than the auto sector’s peers’ average range of 15.5x-16.0x.

Risks  Uncertainty from the upcoming General Election may weaken consumer sentiments.

Source: Kenanga

Thursday, 21 March 2013

Banking - 2012 Financial Stability And Payment Systems Report Highlights

We are keeping our Overweight stance on the sector. Despite the further rise in household indebtedness, BNM appears comfortable with bank lending to households and is unlikely to introduce further tightening measures for now, in our view. The new Financial Services Act will further expand BNM’s reach to entities that it does not currently regulate and is potentially a game changer ahead, we believe.

Household indebtedness rose further to 80.5% of GDP in 2012, as compared to 75.8% in 2011. Nevertheless, BNM appeared comfortable with bank lending to households, as the bulk of the loans were for the purchase of assets. However, the non-bank financial institutions (NBFI) continued to enjoy rapid credit expansion, driven by the growth in personal loans. We believe the Financial Services Act could be a game changer ahead for the NBFIs that are currently outside the purview of BNM. The new legislation will come into effect mid-2013 and empowers BNM to impose regulations on entities that it currently does not regulate.

Residential property prices continue to rise but further measures unlikely for now. BNM believes the upward trend in residential property prices is mainly a reflection of supply-demand dynamics, rather than financial factors. Other contributing factors include demographic changes and rate of urbanisation. Measures to address the rising house prices include the Government’s efforts to increase the supply of affordable houses while pre-emptive measures introduced in 2010 appear to have helped moderate investment activities. For now, we do not expect BNM to introduce further measures on this front.

Maintain Overweight stance on sector. Our Overweight stance is unchanged. Our top picks for the sector are Maybank and Public Bank, while we advocate a “buy on weakness” strategy for CIMB, pending the general election.

Source: RHB

Kuala Lumpur Kepong - Expanding Downstream Aggressively

KLK remains a solid, well-focused plantation company that we like, but valuations are too rich, in our opinion. Although it would suffer as a result of lower CPO prices, we believe this would be somewhat offset by improved margins at its downstream operations due to its integrated business model. KLK’s new and expanded downstream facilities coming on stream sometime in CY13 would also help mitigate the effect of lower CPO prices on its upstream business.

Key visit highlights from our recent meeting with Roy Lim, KLK’s group plantations director: (1) Impressive FFB production growth so far, but expected to moderate; (2) Some forward sales done for 1QFY09/13, but not much left to be unwound; (3) Bearish view on prices proven right so far; (4) Leveraging on price gap between spot and futures prices on MDEX; (5) Production costs expected to fall slightly yoy; (6) New planting on track in Indonesia, no detailed plans for PNG land yet; (7) CPO feedstock supply important factor for KLK’s new Indonesian refineries; and (8) Oleochemical expansions in Indonesia. Germany, Malaysia and China.

Expanding downstream capacities aggressively. With CPO prices on a downtrend, KLK is seemingly focusing more on its downstream operations at this juncture. It is on track to complete its three refineries and one oleochemical plant in Indonesia by end-CY13, while it would also complete expansions at its existing oleochemical facilities in Malaysia, Germany and China within this CY13.

Forecasts and Investment case. We have revised our forecasts up by 1-6% for FY09/13-15. Post-earnings revision, we have raised our SOP-based fair value for KLK to RM22.00 (from RM21.80). No change to our Neutral rating. Although KLK would suffer as a result of lower CPO prices, we believe this would be somewhat offset by improved margins at its downstream operations due to its integrated business model. KLK’s new and expanded downstream facilities coming on stream sometime in CY13 would also help mitigate the effect of lower CPO prices on its upstream business.

Source: RHB

Glomac - Earnings Growth Sustaining Dividend

We maintain our Neutral rating with a fair value of RM0.93. 3QFY13 results came in within expectations. Glomac secured RM136m sales in 3QFY13, mainly contributed by the township projects. This has boosted unbilled sales to RM827m and YTD property sales to RM519m, well within our expectation. A 3 sen dividend was declared, and we expect a 3.5 sen final dividend. Our forecast DPS of 6.5 sen translates into a gross yield of 6.6%.

Within expectations. Glomac’s 3QFY13’s results came in within expectations. Earnings were mainly from the progress billings of Glomac Damansara, Reflection Residences, Bandar Saujana Utama and Saujana Rawang. Compared to 10% sequential growth, 9MFY13 PBT contracted 5%, as FY12 earnings were lifted by the one-off RM9m gain from the disposal of a warehouse in Thailand, as well as the cost savings arising from the completion of Glomac Tower last year.

9M RM519m sales. Glomac achieved RM136m sales in 3QFY13, compared to RM171m sales in 2QFY13. The township projects such as Saujana Utama and Saujana Rawang are the key contributors, making up more than half of the total. We expect Glomac to end the year with RM750-800m sales. The recent booking for the launch of Lakeside Residences will be converted into sales in 4QFY13. Response for this new township project in Puchong has been encouraging. The first two phases were fully sold within a day through balloting process. The next phase comprising 75 units terraces will be launched in the next weekend. Selling prices have seen a gradual step-up of about 5-10% by phases. The terraces in the coming launch will be priced at about RM800k. Meanwhile, sales at Glomac Centro, comprising 54 units shop offices and 344 units serviced apartments, were improving gradually with the latest take-up rate at 51%, after the connectivity is enhanced.

Forecasts. Unchanged.

Investment case. As the general election is getting nearer, we maintain our Neutral rating on the stock and fair value of RM0.93 unchanged, based on 35% discount to RNAV.

Source: RHB

E&O Berhad - Mitsui Entering The Mews

E&O and Mitsui, Japan’s largest property company, are entering into a 51:49 JV to develop The Mews in the KL city centre. The equity contribution of RM41.3m from Mitsui valued the 5,221 sqm land at RM1,500 psf, which is deemed reasonable. We are positive on the JV, as the closer collaboration with Mitsui will make the marketing of the project easy. E&O will be able to tap on Mitsui’s strong high net worth clientele.

The JV. Both E&O and Mitsui will now jointly develop The Mews, which is a RM400m GDV project located at Jalan Yap Kwan Seng. The equity contribution of RM41.3m from Mitsui valued the land at RM1,500 psf, which is reasonable and not far from valuer’s valuation of RM1,513 psf. The Mews comprises 256 units of serviced apartments with unit size ranging 922 sqf to 2,623 sqf, and it is expected to be launched in 2Q. Indicative pricing is about RM1,500 psf, which is comparable to some of the ongoing projects within the KLCC enclave.

Mitsui to make marketing easy. We are positive on the JV, as Mitsui will make marketing easier and help accelerate the take-up of The Mews. The JV signifies the potential long-term partnership that E&O could establish with Mitsui as this marks a step forward from the earlier marketing collaboration that was signed in 2011. Since the first collaboration, Japanese buyers have now become the second largest segment in E&O’s foreign buyers’ profile. E&O has been conducting marketing roadshow together with Mitsui in overseas. Tapping on Mitsui’s current clientele of 170k, E&O at the same time is able to cross sell its other projects such as Quayside Andaman as well as the upcoming Integrated Wellness Capital.

Forecasts. No change in our FY13 core net profit forecast. E&O is expected to realise a one-off gain of RM3.45m arising from the JV.

Maintain Trading Buy. Valuations are largely unchanged after we adjust our RNAV estimate to reflect the JV and the disposal gain. The key catalyst for the stock is still the crystalisation of STP 2, which is expected to happen after the general election. We keep our fair value at RM2.08, based on 40% discount to RNAV.

Source: RHB

Multi-Purpose Holdings - Most of previous conditions are the same HOLD

- Multi-Purpose Holdings Bhd (MPHB) announced that Bank Negara has approved its demerger exercise with revised conditions. For example, prior approval from Bank Negara is required before MPHB Capital provides any form of assistance to the non-financial services units in the group.

- Other conditions stipulated in Bank Negara’s approval letter dated 21 December 2012 remain unchanged.

- We are neutral on this development as Bank Negara’s previous conditions are still the same.

- The previous conditions include requiring MPHB Capital to rationalise its non-financial services businesses within three years from the date of the completion of the demerger exercise and requiring MPHB Capital to obtain approval of Bank Negara before paying dividends.

- Also, MPHB Capital has to comply with the individual shareholding limit of not more than 10% within five years from the date of the completion of the demerger exercise or by the effective date of the Financial Services Act 2012, whichever is earlier.

- This means that there is a possibility that MPHB Capital would have to carry out a restructuring exercise in respect of its property assets.

- We reckon that the new entity might have to divest or spin-off its property assets to rationalise the division within three years as per Bank Negara’s conditions.

- In addition, Tan Sri Dato’ Surin would have to reduce his stake in MPHB Capital to below 10% within five years from the date of the completion of the demerger exercise. We believe that this is because Tan Sri Dato’ Surin’s stake in MPHB was acquired after the implementation of the Banking and Financial Institution Act in 1989.

- According to MPHB’s circular dated 9 November 2012, Tan Sri Dato’ Surin would have an estimated indirect stake of 32.94% or 235.5mil shares in MPHB Capital after the demerger exercise.

- We maintain a HOLD on MPHB. Due to Bank Negara’s conditions and the Securities Commission’s requirement that the group updates the valuation of its properties, there are uncertainties in respect of MPHB’s demerger exercise.

Source: AmeSecurities

Malayan Banking - Clear market leadership in Islamic finance HOLD

- We are maintaining our HOLD rating on Malayan Banking Bhd (Maybank), with an unchanged fair value of RM10.20/share. This is based on an ROE of 14.0% FY13F, which translates into a fair P/BV of 1.9x.

- Maybank recently hosted an Investor Luncheon Talk on Maybank Islamic Bhd (Maybank Islamic).

- Islamic finance is one of Maybank’s key strategic pillars. Its vision is to be a regional financial services leader by 2015.

- Maybank Islamic has maintained its leadership position in both financing and deposit. It has the highest market share in financing at 26.2%, while market share of deposit is at 23.2% as at end-FY12 for the domesticmarket. Its market share of assets is at 22% overall, while it estimates that the next largest competitor is at 16%.

- Maybank Islamic now contributes about 30.6% of the total overall domestic financing for the group. Thus, Maybank Islamic is on track to achieve its target of onethird contribution to the group’s domestic loans by FY15F.

- At the pre-tax level, Maybank Islamic’s profit had risen to RM1.19bil in FY12, from RM953mil in FY11.

- Domestic penetration for Islamic products is high. Maybank Islamic estimates that about 40% to 45% of its domestic Islamic loan customers and about 50% of its domestic deposit customers are non-Muslims.

- In terms of industry penetration, it estimates Islamic financing contributed 29% of total financing in FY10. Maybank Islamic said Islamic financing is estimated to account for 40% of total financing by 2020, according to Bank Negara Malaysia.

- There is strong growth potential in Indonesia. The total Islamic loans now contribute about 5% to 6% of total industry loans in Indonesia. Maybank’s Indonesian subsidiary Bank Internasional Indonesia (BII)’s Islamic loans now comprise about 4% of total loans.

- We reckon that Maybank Islamic has done well given its dominant leadership position. This is due to Maybank Islamic leveraging on its overall domestic branch network, besides providing end-to-end solutions in its recent global wholesale banking deals.

Source: AmeSecurities

Parkson Holdings - China a dampener in the near term HOLD

- We are re-initiating coverage on Parkson Holdings Bhd (PHB), with a HOLD at our fair value of RM4.43/share, based on a sum-of-parts valuation for FY14F.

- Over the past year, PHB has rapidly expanded into China and Southeast Asia via its respective 52%-owned and 68%-owned listed-subsidiaries, Parkson Retail Group (PRG) and Parkson Retail Asia (PRA). PRA has further expanded into Southeast Asia’s least developed markets – Vietnam, Sri Lanka, Myanmar and Cambodia – following its foray into Indonesia in 2011.

- On the revenue front, PHB is driven by China (66%), followed by Malaysia (26%) and Indonesia (4%). China and Vietnam have been adversely impacted by slower economic growth, resulting in weak consumer spend.

- China’s SSSG has hit historical lows, with contractions of 1% and 2% in 1QFY13 and 1HFY13, respectively. There, we believe, were largely attributed to intensification of competition among China-based retailers (including Golden Eagle and Intime). There appears to be a footfall shift towards more appealing malls amid their proliferation in numbers.

- Despite efforts to improve merchandising mix and establishment of an ecommerce portal to circumvent the slowdown in SSSG, the impact of these efforts is too early to gauge. Parkson undergoes facelifts once every 4-5 years in order to maintain footfall momentum.

- All in, we opine management’s guidance of a mid-single digit SSSG in FY13 may not be achievable. We are mainly uncertain about China’s turnaround in SSSG, given that the key issue stems from a more competitive landscape. We believe China’s 3Q SSSG growth would remain flat at best, and any recovery will be gradual. Expansion will be at a slow pace, at 5 new stores per annum.

- PRA will continue to expand its network in Indonesia based on a dualbranding strategy (Parkson and Centro). The recent acquisition of Ordel is deemed as a strategic platform for PRA to further expand into the larger Indian sub-continent. Underpinned by stable recurring income, PHB aims at a higher ratio of self-owned properties, moving forward.

- For FY13F, we project a healthy SSSG at 5% for Malaysia and Indonesia, riding on stable consumer spending. This should cushion a muted outlook in China and Vietnam given the near-term cyclical SSSG that is in negative territory.

- FY13F-FY15F growth will be driven by an enlarged network of outlets – China (FY13F: +8 and FY14F: +5) and Southeast Asia (FY13F: +7 and FY14F: +8), coupled with the foray into Myanmar and Cambodia. Our annual new store assumption is at two for each market.

- On a more positive note, the stock is a great play in the Asian consumer sector. Balance sheet is healthy, with a strong cash pile of RM1.5bil as at end-1HFY13.

- It is trading at 15x FY14F PE, on par with its 5-year historical mean and at a 33% discount to local peer AEON Co (M) Bhd’s (AEON Mk Equity, Nonrated) 20x.

Source: AmeSecurities

Guan Chong Bhd - Capacity expansion-led growth

- Broadly in line. Guan Chong’s full-year FY12 net profit (NP) of RM118.8m (-5.6% YoY) came in broadly in line with ours but was below market expectations, making up 94% and 89% of both numbers respectively. The main culprits were mainly: 1) the lower average selling price (ASP) of cocoa achieved, 2) a higher finance cost and 3) higher operating expenses. The group’s FY12 revenue was up by 4.3% YoY to RM1441.5m, thanks to higher sales volume (+23% YoY) but partially offset by a lower ASP (-12.7% YoY to RM1329.0/MT). The full-year net margin was lower at 8.2% from 9.1% a year ago, largely due to the higher finance cost and tax expenses.

- Capacity expansion to drive industrial chocolate business. Guan Chong is in the midst of raising its industrial chocolate capacity to 10.4k MT (from the current 2.4k MT) to capitalise on the rising demand in emerging markets. The new plant, which is located in Tanjung Pelapas, Johor, is expected to be completed in April 2013 and will become one of the largest industrial chocolate plants in Malaysia upon completion. We believe that the additional capacity raised could potentially lure some global F&B players to set up their regional hubs in Iskandar Malaysia. Note that a capex of RM45.0m has already been incurred in FY12 for the new plant.

- New order from a global F&B market leader. Despite volatile cocoa prices, the demand for cocoa products remains robust. This can be seen from Guan Chong’s ability to secure its first order from one of the leading global F&B manufacturers, at 800 MT of cocoa products. The order is expected to kick start at the end of 1Q13. Moving forward, we expect Guan Chong to secure more businesses from the global F&B manufacturer, underpinned by its enlarged capacity as well as the strong industrial chocolate demand.

- Lowering TP to RM1.85. Post-FY12 results, we have trimmed our FY13 NP by 6.5% to RM134.9m from RM144.3m after imputing in a lower ASP and higher operating expenses. Correspondingly, our target price has been cut to RM1.85 (from RM2.00) based on a 2-year average forward FY13 PER of 6.6x (6.9x previously). Dividend-wise, we have trimmed our FY13 NDPS to 7.5 sen (from 8.0 sen previously) based on an unchanged targeted dividend payout ratio of 26.5%, which translates to a net dividend yield of 4.2%. In view of the unattractive capital upside, we are closing our trading position and will visit the stock again should the value re-emerge. Trading Sell.

- Strength: The 5th largest cocoa processor in the world with an extensive distribution network
- Weaknesses: Longer cash conversion cycle
- Opportunities: Market expansion in US, Brazil, and Russia, M&A opportunities in US.
- Threats: Higher price of cocoa bean, a slower export market.

- Resistance: RM1.92 (R1), RM2.05 (R2)
- Support: RM1.65 (S1), RM1.57 (S2)
- Comments: Over the past month, Guan Chong's share price has broken above the 20-, 50-, and 100-day SMA. There has been some improvement in the overall technical picture since our last write-up on the stock, although the overall technical picture lacks luster at this point in time.

Guan Chong Berhad (GCB) embarked into the cocoa processing business in Pasir Gudang, Johor in 1990. GCB is also the top five largest cocoa processors in the world with a total capacity of 200k MT/yr (80k in M’sia & 120k in Indonesia) with presence in Johor (Pasir Gudang), Indonesia (Batam), and USA (Delaware). GCB exports its “Favorich” brand of cocoa products to >60 countries; its clientele include world-famous cholocate makers and leading cocoa ingredient traders e.g. Mars, Lotte, Arcor, Apollo, and Tate & Lyle.

GCB sources its cocoa beans mainly from Indonesia and Africa and processes it into cocoa liquor, cocoa butter, cocoa cake and cocoa powder. Its FY12 revenue breakdown by product range were:
- Cocoa butter (32%)
- Cocoa cake (34%)
- Cocoa powder (24%)
- Cocoa Preparations (5%)
- Cocoa liquor (3%)
- Covertures & Confectioneries (2%)

Source: Kenanga

Telecommunication - Bottom Searching

We are maintaining our OVERWEIGHT view on the Telecommunication sector. Despite a lacklustre price performance for the YTD, the sector’s defensive nature and reasonable dividend yield will still be able to provide investors with the much-needed shelter during the current period of uncertainties. The sector’s outlook remains intact, in our view, judging from the incumbents’ FY13 KPIs and their earnings guidance. Based on our actual price/consensus target price study, we believe that there could be some nearterm trading opportunities in Telekom Malaysia (‘TM”) and Digi. Even if the trend of “flight to quality” is downplayed, we believe the sector could find its near-term floor level when the incumbents’ EV/forward EBITDA valuations fall to their respective mean levels. Valuation-wise, we have trimmed all our big capitalisation telco companies’ targeted standard deviation (“SD”) level by 0.5x each after taking the following factors into the consideration: 1) potentially higher than expected margin pressure; 2) lack of dividend upsides in the 1H and 3) the fact that LTE earnings opportunities may kick in only later rather than sooner due to the absence of an LTE eco-system. Our big capitalisation telco companies’ target prices fell by 2%-6% after the above-mentioned SD adjustments, which also implies a lower EV/forward EBITDA multiplier. TM (OP, TP: RM6.25 (from RM6.68 previously)) remains our top pick in the telco sector due to its solid presence in the FTTH market and the lesser competition seen in its wholesale and fixed-line segment. We also reiterate our OUTPERFORM ratings on both Maxis and Digi although their target prices are now lower at RM6.75 (from RM6.92 previously) and RM5.30 (from RM5.60) respectively. Meanwhile, our Axiata (MP) TP has been lowered to RM6.60 from RM6.86 previously. There is, however, no change in our OUTPERFORM call and target price on Redtone (TP: RM0.56).

4QFY12 results snapshot. Local telco players posted mixed 4QCY12 results. TM is the only incumbent that recorded better than expected results due to a higher turnover that was led by lumpy other telco related services segment income. Maxis and Axiata’s results were within the street and our expectations while Digi was hit by higher operating costs due to a higher handset subsidy and competitive IDD pricings. On the dividend front, all the incumbents’ full-year dividends came in within expectations except for TM, which failed to meet the market expectations of tabling a special dividend/capital management plan.

FY13 KPIs. All the incumbents are still expecting mid to single digit revenue growth in CY13 despite the intense competitions. Margin-wise, all the industry players are expecting some margin constrains as a result of the higher contribution from their data segment. Nevertheless, in absolute terms, players are still targeting to achieve a mild annual EBITDA growth, if not flat, suggesting the earnings outlook for telco operators are still intact in the current financial year.

Intensifying competition in the IPTV segment. Both Astro and Maxis have targeted to unveil their joint IPTV packages by end-April. We believe that it will provide a head-to-head competition to TM’s Unifi should the latter fail to implement its customer retention plans as well as enrich its current bundled IPTV plans.

Trading opportunities in TM and Digi? TM’s share price has corrected 13.1% for the YTD and is now at a 8.5% discount to its consensus target price (“TP”) of RM5.74. The discount is about 780 bps below TM’s 5-year actual price/consensus TP discount rate of -0.7%. Should TM’s consensus TP remain unchanged, this suggests some near-term trading opportunities may arise if the discount rate narrows to its mean level. Similarly, Digi’s share price is currently trading at a 8.9% discount to its consensus TP of RM4.85. The discount is about 700bps below Digi’s 5-year average actual price/consensus TP discount rate of -1.9%. In contrast, however, to the above two companies, Axiata’s actual price /consensus TP discount rate is now above its average level. This suggests a potential downside risk for the stock should the discount widen to its mean level. Maxis’ share price level, meanwhile, is fair in our view given that its discount rate is close to its mean level.

Near-term floor valuations. In view of the 13th GE concern / uncertainties, market could remain volatile. Apart from the ability to pay decent dividends, we believe that the sector could see excellent buying opportunity or could reach its near-term floor level when the incumbents’ EV/forward EBITDA valuations fall to their respective mean levels. Based on our estimate, Axiata’s share price could see its worst performance at its floor level to RM5.47 (-13.6%) followed by Digi (-9.5% to RM4.00), Maxis (-7.1% to RM6.05) and TM (-6.3% to RM4.92). Should the incumbents’ share prices fall to these floor levels, the sector’s dividend yield will be more reasonable at 4.9% as compared to the current 4.3%.

4QFY12 results snapshot. Local telco players posted a set of mixed 4QCY12’s results. TM is the only incumbent that recorded better than expected result due to higher turnover of its lumpy other telco related services segment income. Maxis and Axiata’s results were within the street and our expectations while Digi was hit by higher operating costs due to a higher handset subsidy and competitive IDD pricings. On the dividend front, all the incumbents’ full-year dividends came in within expectations with the exception of TM, which failed to meet the market expectations to table a special dividend/capital management plan. Moving forward, celcos are likely to unveil their respective LTE service detail road maps in the coming months, where we believe online video service could be a key focus even though the local 4G eco-system is not well prepared yet. Data traffic is expected to rise tremendously when the 4G eco-system is in place and this will ultimately benefit the network backhaul providers (i.e. TM and TDC) in the long run due to the higher data offloading demand.

FY13 KPIs and earnings guidance. While competition continues to intensify in the local telco sector, all the incumbents are still expecting a mid-single digit revenue growth in CY13 based on their latest KPIs as well as earnings guidance. Margin-wise, all the industry players are expecting some margin constrains in the current year, although this is not a major concern to us given that their revenue growth will be mainly driven by higher data contributions, which typically contribute lower margins as compare to the traditional voice business. In absolute terms, all the players are still targeting to achieve a mild EBITDA growth, if not flat, suggesting thus that the earnings outlook for telco operators are still intact in the current financial year.

Current dividend yields for both Maxis and Digi are still sound. Maxis has reiterated its intention to maintain another RM0.40/share dividend in FY13, which translated to a dividend yield of 6.2% based on its 15 March 2013 closing price of RM6.50. Based on our observation, Maxis’s current dividend of 6.2% still lies within the range of its historical 3-year average and its highest dividend yield of 5.21%-7.51%, suggesting thus that the stock still has some rooms for yield compression going forward.

Digi, on the other hand, in continuously finding ways to improve its shareholders value, the group intends to maintain its present dividend policy, which is currently set at a minimum 80% payout ratio and to be paid on a quarterly basis. In fact, the group has continued to reward its shareholders generously by declaring more than 100% dividend payouts in the past few years. Nevertheless, we saw some softening signs in its 4QFY12 results, where the group had merely declared a 2.5 sen or 80% payout ratio as compared to its 100% payouts in the past as highlighted above. We have thus lowered our FY13 DPS forecast to 18.4 sen after taking a more conservative view by reducing the targeted dividend payout ratio to 85% (from 100% previously) post its results above.

Based on our Digi’s FY13 DPS forecast of 18.4 sen, the group’s current dividend yield of 3.9% seems fair given that the yield is already close to its 4-year historical dividend yield range, albeit at the lowest end. Our FY13 DPS is about 35% lower as compared with the consensus DPS estimate of 24.8 sen, which we believe the latter to be likely premised on a 100% dividend payout ratio. Adopting the consensus FY13 DPS forecast of 24.8 sen to the group’s 4-year average and lowest dividend yields of 4.74% and 4.04% respectively, Digi could be valued at RM5.23-RM6.14 per share. Meanwhile, should we adopt a 100% dividend payout ratio into our financial model, its FY13 DPS forecast could rise to 21.6 sen, which suggests that the group could be valued at RM4.56-RM5.34/share based on its historical average and lowest dividend yield.

Scope for special dividends. Axiata has recommended a special dividend of 12 sen (FY11: nil) in conjunction with its 4QFY12 results release. The group has progressively increased its DPR (dividend payout ratio) from 30% in FY10 to 60% in FY11 and 70% thereafter. Going forward, we see a potential dividend upside on our current FY13 DPS forecast of 23.6 sen (3.8% dividend yield), which is based on a 70% payout ratio judging from the fact that the group has shown an intention to increase its DRP progressively. We estimate that the group still has ample cash of about RM5.7b (from RM7.9b as of end-FY12) after distributing a final dividend of RM1.3b (or 15 sen/share) and a special dividend of RM1.1b (or 12 sen/share). The group recorded a gross debt/EBITDA ratio of 1.7x as of end-FY12. The ratio is still below its optimal capital structure of 2.0-2.2x gross debt/EBITDA level, suggesting that Axiata still has rooms to leverage up its balance sheet if needed.

TM, on the other hand, has disappointed the market with the absence of a special dividend/capital management plan in FY12. Despite the disappointment, we still believe that there could be still scope for the group to declare special dividends in FY13 albeit the quantum may not be the same as what shareholders have enjoyed in the past (RM1.07b or RM0.30/share each for both FY10 and FY11). Management has argued that the absent of the special dividend in FY12 was mainly due to the lack of further co-HSBB investment by the government as well as the company preserving its cash for competition ahead. Nonetheless, in view of its declining capex trend coupled with its strong retained earnings (RM4.2b as of end-FY12) as well as its underleveraged balance sheet (2.1x gross debt/EBITDA ratio as of end-FY12 as compared to its maximum optimal capital structure ratio of 2.5x), we hence do not discount that there could be some dividend surprises by end-FY13. All in all, we reckon that the possibility of a special dividend For TM in FY13 will likely only be apparent in the late 2H. As such, we are maintaining our TM’s FY13 DPS forecast of 19.9 sen for now, which is based on a targeted 90% dividend payout ratio.

Intensifying competition in the IPTV segment. Both Astro and Maxis are targeted to unveil their joint IPTV packages by end-April. Based on our earlier understanding, the upcoming Astro-Maxis IPTV packages will be likely be priced at a similar level to the current Astro-Time IPTV packages. As such, we believe that the former’s packages will be priced at between RM248 and RM378 per month, depending on the broadband speed powered by Maxis.

Under the current Astro-Time IPTV packages, Astro is packaging its TV contents via four super pack products ranging between RM100-RM130/month. We understand that the Astro super packs are its four new Astro packages that are tailored made to suit each customer needs. They comprise the best of Astro’s channels and packages, including Astro Family, Sports, Movies, a choice of three Minis and at least two vernacular packages. On top of that, the packages also include premium Astro services such as High Definition and Personal Video Recording. Note that some Media Prima’s channels (i.e. NTV7 and 8TV), channel Al Hijarah (114) and TV1 (180) are not available on Astro B.yond IPTV at this juncture.

TV content-wise, we understand that the upcoming Astro-Maxis IPTV packages will be similar to the current Astro-Time IPTV, where Astro may bundle all its channels under the same superpack packages. On the subscriber front, we understand that Astro-Maxis IPTV subscribers will be classified as Astro’s users and Astro will receive all the TV content APRU as well as certain percentages from the broadband ARPU. Astro-Maxis IPTV subscribers will receive a single itemized bill from Astro. Meanwhile, we also understand that Astro is eyeing to record a number of 500k IPTV subscribers within the next 3-5 year period.

Source: Kenanga