Kimlun Corporation - Weaker sequential earnings due to high start-up costs BUY

- Kimlun Corporation (Kimlun) posted weaker earnings QoQ  (-20%) to RM11.7mil in 3QFY12, bringing its cumulative 9-month net profit to RM37.2mil. This can be explained by high start-up costs for its new pre-cast component plant in Negeri Sembilan.

- Nonetheless, this came broadly in-line with our and street’s estimates, covering 78%-79% of FY12F forecast. 

- No dividend was declared for the quarter.

- However, on a YoY basis, earnings grew by 20% despite a solid growth of 44% in revenue. Weaker margins at the construction side (8.8% versus 11.2% last year) contributed to this, where lower margin jobs dominated the works during the period. 

- Going forward, earnings would be supported by strong unbilled sales of RM1.7bil (2.5x FY11 revenue) as at end-September 2012. 

- Kimlun has already bagged new contracts close to RM800mil, which is a record for the company. While this is already above our order book renewal assumption of RM700mil, we are keeping our estimates unchanged.

- The bulk of the contracts would likely be booked in FY13F and this should see strong growth in earnings – at an estimated 20% YoY growth.

- While the newsflow on KV MRT packages have peaked, Kimlun can still look forward to more jobs in Singapore. The group is one of the frontrunners to supply TLSS to Singapore’s underground cable tunnel project, which we gather is worth S$100mil. 

- We gather that the contracts will be awarded by the end of the year, albeit in small packages. Past records indicate Kimlun had won 70% of available tunnel lining packages in Singapore.

- We reaffirm our BUY rating on Kimlun Corporation (Kimlun) with our fair value kept at RM2.20/share.

Source: AmeSecurities

IGB Corporation - Property development and hotel perform strongly BUY

- IGB reported a net profit of RM37.5mil in 3QFY12, bringing its cumulative 9MFY12 earnings to RM151mil. This is broadly in-line with our and consensus expectations, accounting for 73% and 71% of FY12F estimates.

- Earnings jumped by a tad 4% YoY despite recording a healthy revenue growth of 35%. Few factors can explain this:-  (1) one-off accrual expenses amounting to RM28.7mil relating to the listing of IGB REIT and (2) higher-than-expected tax rate 39.6%. On the other hand, earnings fell 33% QoQ on the back of an 8% drop in revenue which was mainly due to the one-off costs relating to IGB REIT.  

- However, the property development division was the star of the show, recording a strong growth in operating profit both YoY and QoQ – albeit coming from a low base and partly because of a write-back amounting to RM10mil relating to its land in Labu . Having said that, the strong progress billings came from its latest project called the G Residence in Pandan. 

- We gather that the take-up rate has reached about 90% from about 70% previously. We expect some decent numbers again for the division in the final quarter as both Garden Manor and Seri Ampang Hilir are at the peak of construction works.

- Similarly, the hotel division’s operating profit jumped 50% YoY mainly due to the full recognition of Renaissance Hotel which was recently fully-owned by the group.  On the flipside, all the office buildings within Mid-Valley are fully occupied at an average rental of RM6.50psf– including Gardens North and South Tower which previously experienced slow occupancy growth. 

- We reaffirm our BUY rating on IGB Corporation with our fair value unchanged at RM3.20/share, a 30% discount to its estimated NAV of RM4.60/share. IGB is currently trading at a steep 45% discount to its estimated NAV. We believe the stock would continue to trade within this range amid the uncertainty over the distribution of special dividends. We continue to like the company due to its solid earnings, upside from the potential ‘REIT-ing’ of its office assets and attractive valuations.

- We believe management ought to engage in a more active capital management exercise. We believe special dividend is now the primary re-rating catalyst for the stock. However, our recent talks with management indicate that special  dividends remain uncertain at this juncture.  

Source: AmeSecurities

DRB-Hicom - Weak auto earnings BUY

- DRB’s 2QFY13 net profit came in at RM81mil, bringing its 1HFY13 earnings to RM113mil which was way short of expectations, covering just 24% and 25% of our and consensus full-year estimates. The underperformance was due to the weak auto numbers and higher- than-expected borrowing costs. 

- Despite revenue growing more than 3 times, auto’s operating profit declined by 17%. Apart from the high borrowing costs incurred for the takeover of Proton, the weak numbers may also be due to more extended losses from Lotus. 

- That aside, the property and construction (PAC) division is now back in the black at RM11mil due to strong progress billings – we believe, mostly due to its Glenmarie developments. Similarly, strong sequential earnings growth was due to strong numbers (+64% QoQ in EBIT) from its services division – aided by decent growth from both concession and insurance businesses.

- Going forward, we are excited about the tie-up with Honda, of which more details on DRB’s plans would be revealed next week. To recap, the focus of this tie-up would be to develop a 2.0 litre-car via platform sharing, which we believe is for the long-awaited Perdana replacement model and which could also involve engine development. 

- Although Honda has a strong footing in this segment via the Accord model, cannibalisation is not an issue due to distinct pricing. We understand that DRB targets finalisation of this tie-up within six months.

- There is further upside as we believe there will be a similar arrangement with its other partners to produce models in different segments. We are not ruling out a tie-up with VW Group to produce B segment cars. Apart from the technology, DRB would be able to leverage on VW’s strong global distribution network to market Proton cars overseas. Plus, this would address the under-utilisation of its Tanjung Malim plant.

- We reaffirm our BUY rating on DRB Hicom, but place our fair value and estimates under review pending an analyst briefing to be held next Monday.   

Source: AmeSecurities

Media Chinese - Adex to gain momentum next quarter BUY

- We re-affirm our BUY recommendation on Media Chinese International (MCIL), with a lower fair value of RM1.29/share vs. RM1.70/share previously, based on a 10% discount to our DCF value. Our lower fair value is in view of the capital repayment of RM0.41/share which went ex- on 6 November 2012 and was paid on 28 November 2012. 

- MCIL reported a net profit of RM87mil for 1HFY13, after registering RM40mil in 2QFY13. This covers 47% of our estimate. We deem the results to be in-line with expectations and maintain our EPS forecast for now, pending an analyst briefing to be held later. 

- A dividend of 2.05 sen/share was declared, bringing total dividends to 43.05 sen/share, inclusive of the special dividend.

- The weaker 1HFY13 and 2QFY13 were mainly affected by the weakening of ringgit against the US dollar and Canadian dollar. Earnings dipped by 18% QoQ on the back of a 5% decline in revenue. This was primarily attributed to a 63% slip in PBT from the tour segment as travellers prefer to travel in  the early summer to prevent peak season charges. 

- Compared to the preceding quarter, its core business – publishing and printing – was 16% lower in PBT due to:- (1) Negative currency impact; and (2) Rise in staff and operating costs. Meanwhile, Hong Kong operations reported a growth due to active promotions of designer labels and supermarkets, coupled with additional income stemming from the Legislative Council Election. However, we understand that adex in Hong Kong was rather weak in 2Q due to the economic conditions. 

- We expect a better adex momentum in the next quarter backed by the festive period and advertisers’ using up budgets as the year draws to an end. Note that MCIL’s adex grew by a marginal 0.03% in October, suggesting signs of a recovering  adex sentiment.

- At the current level, the stock is trading at a PE of 10x on FY13F earnings, trailing Star’s 15x. This represents a discount of 50% to Star. Our estimates also show that MCIL offers an attractive dividend yield at 5.9% for FY13F after stripping off the special dividend of RM0.41/share, comparable to Star’s 6% and higher than Media Prima’s 4.5% and Astro at 2.4%.

- MCIL is a cheaper proxy in the media sector, anchored by its resilient and dominating position in the Chinese-language newspaper segment with a market share of 89% in the country. This is also supported by a more efficient capital management.

- Key risks to our forecasts are:- (1) Lower-than-expected adex; (2)  Higher-than-expected newsprint cost which rises in tandem with election seasons; and (3) Weakening of the RM against US$.  

Source: AmeSecurities

Axiata Group - Beating industry growth amid stiff competition BUY

- We re-affirm our BUY rating on Axiata with an unchanged fair value of RM6.70/share following its 3Q12 results yesterday. Core earnings were at RM730mil for 3Q12, bringing the 9M12 total to RM2.1bil. This is within our estimates and at the higher end of consensus, accounting for 74% and 79% of FY12F, respectively.

- Normalised EBITDA margin slipped 1.8ppts QoQ to 42.2%, dragged mainly by XL. However, the group looks well on track to exceed its FY12 KPI of 5% revenue growth target for FY12 (9M12 revenue: +9% vs. Maxis: +2% and DiGi: +7%). 

- Celcom: EBITDA margin improved QoQ (+0.4ppt) as sales and marketing expenses fell due to better co-ordination of segmental marketing drives based on identified demarcation. Voice revenue grew 3% QoQ vs. Maxis (+0.6%). Postpaid ARPU declined (-2% QoQ) along with a decline in MoUs (-8% QoQ), but prepaid ARPU improved (+3% QoQ). Blended ARPU remained stable at RM51. 

- Management re-iterated that it does not intend to participate in the price war initiated by Maxis. Celcom’s micro granular approach in strategising the types of bundling and marketing approach for different market segments have enabled it to maintain a strong revenue growth and maintain subs growth and usage despite stiff price competition in the industry.

- XL: Margins were negatively affected by strong growth in data revenue (+60% YoY). There has been aggressive pricing in the market and XL lagged behind, leading to a net 8% churn in subs in 3Q12. Margins were also negatively affected by SMS interconnect (XL has a net-out position currently) which started in June 2012.

- IDR9-10tril capex for FY12F has been accelerated from 2013 allocations. While there is room to lower capex for FY13, this depends largely on data demand. Increasing adoption of smartphones, supported by gradual reduction in device pricing, is key to underpinning this trend.

- On a group-wide basis, management conservatively expects capex to remain at circa RM5bil next year but does not rule out a reduction (much of this hinges on XL’s requirements). The RM5bil capex includes expected capex for LTE (Celcom), for which the rollout is expected to be gradual.

- Axiata remains the cheapest local telco trading at 7x FY13F EV/EBITDA vs. Maxis and DiGi’s 11x-12x. Above-industry revenue growth, resilient margins and the abundance of room for an increase in dividend payout are strong share price catalysts. Potential M&A in the near term (utilising ready credit line of US$1.5bil) is another strong catalysts further out.  

Source: AmeSecurities

Kulim (Malaysia) - QoQ jump in plantation earnings in 3QFY12 BUY

- Maintain BUY on Kulim for its special dividend of 82 sen to 93 sen/share. We believe that there is one more leg up to Kulim’s share price. 

- We reckon that Kulim’s special dividend would be paid by end-January 2013 or early-February 2013 assuming that the High Court takes two months to approve QSR’s and KFC’s capital repayment exercises. 

- Kulim’s 9MFY12 results were below consensus estimates and our expectations. While the group’s operations  in Malaysia improved on a quarterly basis in 3QFY12, Kulim’s 49%-owned associate, New Britain Palm Oil Ltd (NBPOL) chalked up lower profits as FFB output tapered off.

- Kulim’s average CPO price realised of RM3,093/tonne for 9MFY12 was close to our assumption. Nevertheless, we have revised our CPO price assumption downwards to RM2,900/tonne to account for the fall in prices in 4QFY12.

- Kulim’s plantation EBIT almost tripled from RM25.7mil in 2QFY12 to RM66.4mil in 3QFY12. EBIT margin expanded from 12.1% in 2QFY12 to 36.1% in 3QFY12. 

- We believe that the enhancement in margins was driven by a 60% QoQ jump in FFB production in 3QFY12. This helped compensate for a 4% QoQ decline in average CPO price in 3QFY12.

- NBPOL’s FFB processed amounted to roughly 522,493 tonnes in 3QFY12, 16% lower than 625,594 tonnes in 2QFY12. NBPOL’s FFB output fell 9% in 9MFY12 versus 9MFY11 as heavy rains affected harvesting of fruits at the start of the year. 

- NBPOL also faced higher operating costs from the appreciation of the Papua New Guinea Kina against the US$.   

- As at mid-November 2012, NBPOL had sold forward 95,000 tonnes of CPO for an average price of US$962/tonne or RM2,934/tonne. 

- NBPOL had also sold forward 40,000 tonnes of CPO into FY13F for an average price of US$913/tonne or RM2,785/tonne. 

- Kulim’s shipping division recorded an improved EBIT of RM22.7mil in 3QFY12 versus RM10mil in 2QFY12. As for fast food, the division’s earnings climbed 15.1% QoQ to RM67.9mil in 3QFY12. However on a YoY basis, EBIT of the fast food division inched down 3.6% due to higher operating expenses.   

Source: AmeSecurities

Naim Holdings - Dayang factor still strong despite better overall 9MFY12 BUY

- Maintain BUY on Naim Holdings with a lower fair value of RM2.32/share (previously: RM2.88/share) – pegged to a higher discount (from 20% to 40%) to its revised sum-of-parts (SOP) value, despite our earnings upgrade. This reflects a more muted take-off for some of its higher-value property projects that are being lined up. 

- Naim delivered a 9MFY12 net profit of RM76mil, coming ahead of both consensus and our full-year estimates (89%-93%) even though we expect a sequentially softer 4Q due to seasonal factors.

- The positive variance against our forecast mainly came from:- (i) higher-than-expected contributions from oil & gas associate Dayang Holdings (9MFY12; at RM29mil, was already 92% of our previous FY12F forecast); (ii) marked improvement in the SOGT job progress (77% done); and (iii) sharply lower tax rates of 2% in 3QFY12 (9MFY12: 12%).

- Naim recently won two MRT station works worth a combined RM408mil, taking new job wins to-date to ~RM691mil – close to our FY12F forecast of RM700mil.

- The group’s current tender book consists of over RM2bil worth of jobs against an outstanding order flow of ~RM2.3bil (ex-Kuching flood mitigation project: RM1.2bil). 

- Naim is on track to meet our FY12F pre-sales target of RM305mil, with new sales to-date reaching RM286mil (Bandar Baru Permyjaya: RM250 mil, Riveria & Desa Ilmu RM27 mil; others RM9 mil).

- On a slightly negative note, the local press revealed over the weekend that Naim is seeking to appeal a potential downgrade by RAM on its debt – which we believe relates to its RM500mil Islamic MTN programme. This comes at a time when Naim is set to embark on some larger-scale property projects in Sarawak. We are keeping our earnings for now pending more concrete updates from management. 

- That said, Naim remains a strategic mid-to-long term play on growing housing/property demand within Sarawak’s SCORE. The group is the largest landbank holder in Sarawak (~2,620 acres) with an estimated GDV of RM9bil of projects in Kuching, Bintulu and Miri.

- The litmus test is on how it executes the roll-out  of key catalyctic projects (e.g. Bintulu Airport redevelopment, Batu Lintang integrated development), for which launches have been re-scheduled a couple of times. 

- Naim’s aggressive stance to reinvent itself is a significant shift away from its mostly low/medium-cost residential products on offer now. This is vital to help narrow the steep 50% discount the stock is trading at vs. its NAV.   

Source: AmeSecurities

Sarawak Cable - 3Q below; pick-up expected with Trenergy in the ring BUY

- Maintain BUY on Sarawak Cable (S Cable) with a lower sum-ofparts- (SOP) derived fair value of RM2.02/share (previously: RM2.22/share) on lowered earnings, as 3QFY12 net profit of RM2mil fell short of our expectations. 

- While we expect a stronger 4Q on a full-quarter contribution from recently-acquired Trenergy Infrastructure – the earnings slippage mainly came from:- (i) a one-month less contribution from Trenergy effective 5 August (vs. our previous six-month estimate); and (ii) margin compression for its cable/fabrication divisions. 

- That said, we expect the injection of Trenergy – at an implied PE of only 4x – to start contributing immediately to group’s earnings expansion. It has raked in RM2mil in pre-tax profit alone from its date of acquisition or roughly 37% of the enlarged S Cable group’s 9MFY12 pre-tax profit of RM8mil.

- Most importantly, the injection of Trenergy would complete S Cable’s transformation into an integrated transmission line specialist. With Trenergy on board, S Cable is strongly positioned to bid for Sarawak’s 500kV backbone line, for which the transmission package is reportedly to be worth ~ RM1bil.

- While there have admittedly been delays in the roll-out, we expect a firm decision from the project to materialise over the next one to two quarters – as the 500kv line is expected to be completed by end-2014.

- Likewise, the same can be said for a resumption of spending on rural electrification projects in 2013, where S Cable is the dominant supplier of fabricated products and cables – the latter under Sarwaja.  

- This is due to the urgent need to boost Sarawak’s power infrastructure to support the committed heavy industry investments in SCORE – notably within the Samalaju Industrial Park. 

- To be sure, the future power available from both the Bakun and Murum dams has already been pre-committed – the bulk of which would be used by investors operating within Samalaju.

- Beyond the near-term earnings weakness, we expect the groups’ revised net profit to expand three-fold to RM31mil in FY13F (FY12F: RM10mil). This is backed by a 4x increase in new contract assumptions at RM600mil against an estimated RM150mil new jobs that have been procured year-to-date (mainly of Trenergy).

- An added comfort is the fact that its key management – i.e. chairman Datuk Seri Mahmud and MD Toh Chee Ching – took up half of the placement. This fortifies our conviction of more robust prospects for the group going forward.    

Source: AmeSecurities

Genting Malaysia - UK division hit by bad luck BUY

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

- GenM’s 3QFY12 earnings were hit by impairment charges of RM178.9mil and a RM13.8mil loss in the UK casino division resulting from a low win percentage. 

- Excluding the impairment charges, GenM’s annualised earnings would have been within our expectations and consensus estimates. Although GenM’s UK division recorded a loss in 3QFY12, this was compensated by improved profits from “Resorts World New York” (RWNY).

- The impairment charges were in respect of properties in Miami, provincial casinos in the UK and a casino concession agreement in Egypt. 

- In Malaysia, revenue of the leisure and hospitality division inched up 1% YoY in 9MFY12 underpinned by a higher volume of business. This was partly offset by a low win percentage in 1QFY12. 

- If the win percentage were to normalise, then revenue and EBITDA of the division would have increased 5% YoY each in 9MFY12. High-rollers accounted for 37% of gaming revenue in 9MFY12 versus 36% in 9MFY11.

- In the UK, attendances at the London casinos rose 6% YoY in 9MFY12. Casino attendances at the provinces climbed 3% YoY. 

- We understand that the losses of RM13.8mil at the casinos in the UK were entirely due to a low win percentage at the casinos in London in 3QFY12. Bad debts or provisions were minimal.  

- In New York, the racino’s EBITDA margin remained high at 36% in 3QFY12. EBITDA margin was 34% in 9MFY12. RWNY recorded a daily win of US$387/machine in 3QFY12 and US$374/machine in 9MFY12. 

- We understand that there have not been any updates on the casino legislative process in New York and Miami. Lawmakers in New York are currently busy with rebuilding efforts after Superstorm Sandy. 

- In spite of the current lack of progress, legislative sittings in Miami and New York are still scheduled to take place in early-2013. Hence, the casino bills would be up for debate and discussion again in early-2013.   

Source: AmeSecurities

Genting Bhd - Hurt by GenS BUY

- Reiterate BUY on Genting Bhd with a lower RNAV-based fair value of RM10.10/share. The downward revision in the fair value accounts for revised fair values for Genting Singapore PLC (GenS) and Genting Plantations (GenP). 

- We believe that the fall in Genting Bhd’s share price has reflected GenS’ uncertain outlook. Our fair value includes a 15% discount to Genting Bhd’s RNAV.  

- Genting Bhd’s 9MFY12 core earnings were below our expectations and consensus estimates due to GenS’ poor results. Recall that GenS’ 3QFY12 results were affected by a fall in the volume of VIP business.   

- Included in Genting Bhd’s earnings were impairment charges recognised by Genting Malaysia (GenM) and GenS. 

- Apart from these, Genting Bhd also recognised an impairment charge pertaining to an investment in associate. 

- We believe this to be Landmarks Bhd. We estimate Genting Bhd’s acquisition cost of Landmarks at RM2.05/share versus the current share price of RM0.985/share. 

- Although GenS is flushed with cash, Genting Bhd does not interfere with its subsidiary’s capex or dividend plans.

- Genting Bhd’s policy is to let its subsidiaries make its own dividend and expansion decisions. As at end-September 2012, GenS had gross cash of S$4.2bil.  

- Genting Group has capex commitments of RM5.7bil as at end-September 2012. Most of these capex would be incurred over a two- to five-year period. 

- The bulk of the capex is in respect of Genting Bhd’s plan to build a coal-fired power plant in West Java, Indonesia. This would cost about RM3.2bil. The power plant would command a capacity of 660MW upon completion. 

- The capex also includes GenM’s extension of First World Hotel, which would cost roughly RM300mil. This would increase the number of rooms at the hotel by 700 to 6,818.

Source: AmeSecurities

Genting Malaysia - Strong on The Home Front

The group’s annualised 9MFY12 results were in line with both consensus and our expectations. Its core gaming operations in Malaysia reported double-digit growth for VIP gaming and mid single-digit growth for mass market gaming but a partial drag  in  win  rates.  The  current  share  price  offers  an  excellent  opportunity  to accumulate, as its valuation is undemanding at 12.3x PE. Its stable domestic mass market gaming revenue, amidst such global macroeconomic uncertainty, is a key attraction. Maintain BUY, with the FV unchanged at RM4.21.

In line. The group’s headline earnings were impacted by RM183.9m in impairments and RM48.2m  in  construction  cost  overruns  for  its  casino  in  the  US.  Adjusting  for  the abovementioned exceptional items, Genting Malaysia’s annualised 9MFY12  core  net profit  met  expectations,  representing  74.8%  and  74.7%  of  consensus  and  our  full  year forecast respectively. The impairments were related to a write-down of goodwill from the acquisition of the Omni Centre in Miami, Florida, certain casinos and provincial casinos’ assets in its UK operations and the carrying value of its casino concession agreement in Egypt.

Sequential  results  impacted  by  UK  casinos.  Given  Genting  Malaysia’s high base of its preceding earnings  in  2Q12,  earnings  in  3Q12  declined by  25.4%  q-o-q  thanks  to  a drop  in  business  volume,  lower  luck  factor  and  some  bad  debt  write-offs  from  its  UK operations. This was largely expected as its UK casino operations  have benefitted from exceptionally strong win rates in 2Q12 which resulted in it registering EBITDA growth of 278% q-o-q and 141% y-o-y.

Malaysian  casino  ops  resilient.  The group’s domestic gaming profit declined by a marginal  2%  as  a  result  of  higher  marketing  costs.  Revenue  was  up  2%  despite  lower win  rates  as  relatively  healthy  domestic  gaming  volume  growth  was  sufficient  to  offset the poorer win rates. The group’s Malaysian  casino  operation,  comprising  the  bulk  of group  earnings  at  83%,  reported  double-digit  volume  growth  in  VIP  gaming  and  mid single-digit growth in mass market gaming. Meanwhile, overall visitor numbers rose 2% y-o-y as domestic day trippers continued to contribute the bulk of the total arrivals at a steady 74%. 

Source: OSK

Media Chinese International - Bleak Outlook Awaits

Media Chinese (MCIL)’s 1HFY13 earnings fell short of expectations, representing only  45%/46%  of  our/consensus  full-year  estimates.  Despite  a  promising  start  in 1Q, the group’s top- and bottom-line in 1H were flat y-o-y. Hence, we are trimming our  FY13/FY14  earnings  forecasts  by  13%/25%  in  response  to  the  lackluster  1H financial  performance.  Our  new  FV  of  RM1.17  is  based  on  unchanged  13x  CY13 PE. With little upside potential to the current share price, we are downgrading thestock to NEUTRAL.  

Missing expectations. MCIL’s 1HFY13 earnings fell short of expectations, representing only 45%/46% of our/consensus full-year estimates. Despite a promising start in 1Q, the group’s top-  and  bottom-line  in  1H  were  flat  y-o-y.  During the quarter, MCIL’s revenue contracted by 5% q-o-q, pushing earnings down sharply (-18% q-o-q) after the company recognised  a  one-time  gain  of  RM5.4m  (sale  of  convertible  notes)  in  1Q.  Other takeaways were:

• Advertising revenue slid 6% q-o-q (-4% y-o-y) amid a lethargic adex environment in Malaysia and Hong Kong. Meanwhile, its Chinese newspaper segment posted only a tepid 1% q-o-q revenue growth (+0.3% y-o-y), based on the recent 3QCY12 adex numbers from Nielsen Co.

• The seasonally strong travel division also saw a revenue decline in 2Q (-6% q-o-q,-21% y-o-y). Management claimed that there was a shift in customers’ preference to travel in early summer to avoid the typically peak season in 2Q.

• After  forking  out  a  huge  bumper  dividend  of  41  sen/share  on  28  Nov,  MCILdeclared its first interim dividend of 2 sen/share during the quarter,  payable on 15 Jan 2013.

Downgrade  to  NEUTRAL,  FV  revised  to  RM1.17.  We  are  trimming  our  FY13/FY14 earnings forecasts by 13%/25% respectively in response to the company’s lacklustre 1H financial performance. Going forward, we expect MCIL to book in higher interest charges after  committing  to  RM500m  worth  of  debts  to  partly  fund  its  bumper  dividend  on  28 Nov.  Hence,  we  arrive  at  our  new  FV  of  RM1.17  based  on  unchanged  13x  CY13  PE. With  little  upside  potential  to  the  current  share  price,  we  are  downgrading  the  stock  to NEUTRAL.  Nevertheless,  the  company  still  offers  a  commendable  dividend  yield  of 5.4%.

 Source: OSK

JT International - The Eagle Struggles to Take Off

JTI shed more light on its performance during its analysts’ briefing yesterday. The absence  of  trade  speculation  before  the  Budget  softened  3Q  volume  and consequently, volume should rebound swiftly in 4Q. The company’s performance trailed its peers’ this year due to poor VFM sales as price-sensitive smokers opted for  illicit whites.  Higher marketing  expenses  expected  next  year arising  from  therebranding  of  Mild  Seven  to  Mevius  may  lead  to  some  margin  compression. Maintain  NEUTRAL,  with  an  unchanged  RM7.02  FV,  given  the  rising  regulatory 
risks in the tobacco industry. 

Tepid trade speculation softens sales. JTI sold 713m sticks of cigarettes in 3QFY12 (-8.1% y-o-y, +0.1% q-o-q), as the near absence of trade speculation prior to the Budget announcement  on  28  Sept  kept  volume  muted.  While  the  absence  of  tobacco  excise hike last year caught many off guard, this year’s no-hike was mostly anticipated in view of the looming general election, hence resulting in less trade speculation.

PMI  on  fire.  JTI’s sales  decline  was  steeper  than  its  peers’. BAT’s shipping volume during the quarter was 2.2bn sticks (-4.9% y-o-y, +1.8% q-o-q), implying a strong 522m sticks  for  the  non-listed  PMI  (+8.7%  y-o-y,  +2.8%  q-o-q).  For  the  9-month  period,  JTI and BAT’s sales volumes edged  down  1.3%  and  0.7%  y-o-y  respectively,  while  PMI’s sales  surged  18.1%  following  the  highly  successful  introduction  of  the  Marlboro  Ice Blast.  JTI  subsequently  shed  0.6ppt  market  share  to  21.0%.  PMI,  in  contrast,  gained 2.1ppt to chalk up 15.2% of the legal market (excluding sub-VFM).

VFM  underperforms;  Premium  shines.  Winston  was  again  the  company’s major disappointment, with its Value-for-Money (VFM) segment continued to suffer from down-trading to illicit cigarettes. A key task management has on its hands is figuring out a way to  “premium-ize”  the  brand  by  building  enough  brand  equity  to  stem  the  switch. Winston’s  sales  volume  declined  to  1.1bn  so  far  this  year  (-6.0%  y-o-y), while JTI’s flagship  Premium  brand  Mild  Seven  continued  to  be  the  sole  bright  spot  for  the Japanese company (9MFY12 volume: 563m, +15.0% y-o-y).

Government  gets  greater  leeway.  Following the Government’s mandatory ex-factory price  increase  in  late-October,  JTI  on  25  Oct  raised  its  selling  prices  by  RM0.20  per pack  to  cover  the  higher  ad-valorem  taxes.  We  understand  that  the  Government  now uses  an  “open  market  value”  to  determine  the  transfer  pricing  between  the manufacturing  and  trading  arms, thus  leaving  it much discretion  in  adjusting  taxes  and pricing.  Nonetheless,  JTI’s  RM0.20/pack  price  hike,  which  more  than  covers  the additional taxes, should help shore up margins for the company, all else being equal.

Higher marketing costs. In tandem with Japan Tobacco’s initiative to rebrand Mild Seven to Mevius starting February  2013,  FY13  marketing  expenses  are  expected  to  increase  by  ~10%.  Margins  next  year  are  thus likely  to  be  squeezed  if  the  name  change  does  not  immediately  translate  into  higher  sales  volumes.  Pack designs for Mevius will continue to utilize Mild Seven’s recently-revamped packaging. FY13 and FY14 capital expenditures  should also be higher than FY12’s on the back of  several  anticipated  new  launches  and  new machinery purchases.

Maintain  NEUTRAL.  We  are  keeping  our  earnings  forecasts  unchanged  following  our  downward  revision yesterday. We see intensifying regulatory risks and an excise hike for the tobacco industry after the general election as the Government looks to promote a healthier population  while increasing tax revenues. Maintain NEUTRAL with FV of RM7.02, based on our FCFF model (WACC: 7.5%, terminal growth: 1.0%).

 Source: OSK

Carlsberg Brewery (M): Solid Performance on Premium

Carlsberg’s 9MFY12 earnings of RM151.2m (+17.4% y-o-y) beat estimates on the back of an improved product mix, better cost efficiencies and a lower effective tax rate. Its Malaysian operations (73.7% of total EBIT) expanded 16.0% y-o-y. The firm’s strong push of Asahi and Kronenbourg brands in the local market boosted its ASPs, while giving it greater ability to secure more retail outlets through diversified product offerings. We are adjusting our FV higher to RM14.12, following an upward revision in our earnings forecasts. Maintain BUY.

Topping expectations. Carlsberg recorded 3QFY12 revenue of RM410.8m (+2.3% y-o-y, +7.2% q-o-q) and earnings of RM61.1m (+25.0% y-o-y, +61.8% q-o-q). Strong performance from its premium brands (Asahi and Kronenbourg) led to an improved product mix, while cost efficiencies and a lower effective tax rate further boosted its profitability. Operating expenses dipped 1.0% y-o-y despite a 2.3% revenue increase, while taxes dropped 11.4% whereas PBT climbed 15.3%. The group’s 9MFY12 revenue of RM1,248.3m (+8.1% y-o-y) and RM151.2m profit (+17.4% y-o-y) topped forecasts given: i) wider margins arising from a better product mix, and ii) lower taxes. The 9M earnings represented 84.8% and 82.8% of our and consensus estimates.

Going premium. Although the Carlsberg Green Label still accounts for more than 80% of the company’s sales, the company has, in our opinion, successfully transitioned itself from being viewed as a one-brand company to a corporation with diversified product offerings. Its subsidiary Luen Heng has brought in a slew of imported beers to expand the firm’s brand portfolio. Sales of most of these imported brands are still low while costs are high as a result of the RM5/litre import duty. Nevertheless, Carlsberg has built a commendable range of locally-brewed beers with the likes of Carlsberg Green Label, Asahi and Kronenbourg.

Malaysia-driven growth. The group’s 9MFY12 operating profit from its Malaysian operations surged 16.0% y-o-y on a 10.7% revenue increase. Its Singapore operations, meanwhile, saw an EBIT and revenue rise of 7.3% and 3.9% respectively. The 61.8% q-o-q jump in the company’s 3Q earnings reflected a marketing-heavy 2Q, mainly attributed to advertising and promotional expenses in the Euro 2012 campaign.

Maintain BUY. We are raising our FY12 and FY13 forecasts by 7.7% and 4.1% respectively on expectations of: i) better ASPs arising from a better product mix, and ii) lower operating expenses. Hence, we are lifting our FV to RM14.12, based on our FCFF model (WACC: 7.6%, terminal growth: 2.2%).

FYE Dec (RMm)	FY09	FY10	FY11	FY12f	FY13f
Revenue	1,045.5	1,368.2	1,489.4	1,662.9	1,768.3
Net Profit	76.1	133.2	166.2	192.0	206.3
% chg y-o-y	0.0	75.0	24.7	15.5	7.5
Consensus				182.7	202.2
EPS	24.9	43.6	54.3	62.8	67.5
DPS	17.3	58.5	72.5	59.7	64.1
Dividend yield (%)	1.3	4.5	5.5	4.6	4.9
ROE (%)	15.4	24.3	27.4	30.4	32.5
ROA (%)	9.7	14.2	17.6	19.9	21.1
PER (x)	52.6	30.1	24.1	20.9	19.4
BV/share	1.69	1.90	2.06	2.06	2.10
P/BV (x)	7.3	6.5	6.0	6.0	5.9
EV/EBITDA (x)	31.9	19.4	15.9	14.1	13.2

Results Table (RMm)

FYE Dec	3Q12	2Q12	Q-o-Q chg	YTD FY12	YTD FY11	Y-o-Y chg	Comments
Revenue	410.8	383.4	7.2%	1,248.3	1,154.4	8.1%
EBIT	79.7	48.1	65.7%	193.9	170.5	13.7%
Net interest expense	(2.0)	(0.4)	358.5%	(3.2)	(2.3)	41.0%
Associates	1.8	1.6	11.7%	5.8	6.0	-2.7%
PBT	79.5	49.3	61.3%	196.5	174.2	12.8%
Tax	(17.7)	(11.1)	58.8%	(43.5)	(44.5)	-2.4%
MI	(0.7)	(0.4)	87.8%	(1.8)	(0.8)	129.1%
Net profit	61.1	37.7	61.8%	151.2	128.8	17.4%
EPS	20.0	12.3		49.4	42.1
DPS	-	5.0		5.0	5.0
EBIT margin	19.4%	12.6%		15.5%	14.8%
NTA/Share	0.87	0.67		0.87	0.64

EARNINGS FORECAST

FYE Dec (RMm)	FY09	FY10	FY11	FY12f	FY13f
Turnover	1,045.5	1,368.2	1,489.4	1,662.9	1,768.3
EBITDA	117.6	193.4	236.1	267.0	284.9
PBT	102.6	176.5	220.4	255.0	273.9
Net Profit	76.1	133.2	166.2	192.0	206.3
EPS	24.9	43.6	54.3	62.8	67.5
DPS	17.3	58.5	72.5	59.7	64.1
Margin
EBITDA (%)	11.3	14.1	15.9	16.1	16.1
PBT (%)	9.8	12.9	14.8	15.3	15.5
Net Profit (%)	7.3	9.7	11.2	11.5	11.7
ROE (%)	15.4	24.3	27.4	30.4	32.5
ROA (%)	9.7	14.2	17.6	19.9	21.1
Balance Sheet
Fixed Assets	545.9	569.0	591.4	592.2	592.5
Current Assets	399.2	362.0	369.5	375.1	392.1
Total Assets	945.1	931.0	960.9	967.2	984.6
Current Liabilities	356.2	276.1	253.8	263.5	270.5
Net Current Assets	43.1	85.9	115.7	111.6	121.6
LT Liabilities	72.3	72.8	76.0	73.2	73.2
Shareholders Funds	516.6	582.1	631.0	630.6	640.9
Net Gearing (%)	Net cash	Net cash	Net cash	Net cash	Net cash

Source: OSK