1QFY10 results likely to be lower qoq and yoy, due to lower CPO ASP. Sell into strength; expect the share price to retreat due to weakness in CPO prices. Maintain SELL, fair price of RM2.55 based on 15x FY10 PE.
Substantially lower yoy. Yoy, 1QFY09 net profit contraction can be as high as -60% due to : a) lower CPO average selling price (ASP) (estimated: -32% yoy) , b) an estimated 9% yoy fall in production and c) higher operating cost as fertiliser cost has risen by an estimated 11% yoy.
Qoq mitigated by higher production, but still be affected by higher cost. On a qoq basis, 1QFY09’s lower CPO ASP should be partially mitigated by higher production. However, due to slightly higher operating cost (fertiliser application only started in CY2Q), we expect net profit to still be slightly lower compared to RM8.5m in 4QFY09.
Production picking up but still slow. Fresh fruit bunches (FFB) production has started to pick up as shown by the qoq growth, but still slower than expected. Heavy rainfall in 1Q09 had actually affected the formation of FFB and lowered OER. For FY10, we expect a production growth of only 4.9% vs 5.8% for FY09.
Earnings forecasts maintained as we expect higher production to come onstream in late-2QFY10 and 3QFY10. Maintain SELL, fair price of RM2.55 based on 15x FY10 EPS. Sell into strength; expect the share price to retreat due to weakness in CPO prices amid concerns of high inventories (see our sector report dated 23 Jul 09 “Cloudy Outlook On Shockingly High Inventory”). Post-rights issue, IJMP’s target price is RM1.90 based on 15x diluted FY10 EPS of 12.7sen.
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Wednesday, July 29, 2009
Tuesday, July 28, 2009
DiGi.Com - 2Q09: Unsustainable premium
2Q09 net earnings declined significantly (-21.4% yoy; -14.9% qoq) and EBITDA margin fell further to 43.3%. Trading at a high premium given its weak market position. Maintain SELL with fair price at RM20.00/share.
1H09 net earnings 3.8% and 7.7% below our and consensus estimates respectively. DiGi.Com (DiGi) reported a lower 2Q09 net profit of RM234.5m (-21.4% yoy; -14.9% qoq), attributed to 3G spectrum cost amortisation and accelerated depreciation charges (up RM25.8m). EBITDA margin declined further to 43.3% from 44.6% in 1Q09, due to higher leased line costs, A&P expenses and doubtful debts. Revenue fell 1.1% qoq, the second consecutive quarterly contraction, affected by weak macro factors and competitive pressure. On an annualised basis, 1H09 revenue fell short of our forecast by 4.5%
Lower net subscriber adds and ARPU. Net subscriber adds for 2Q09 totalled 75,000, 19.4% below 1Q09’s 93,000. This suggests DiGi’s subscriber’s market share could have shrunk by another 0.5-0.75ppt to 24.25 - 24.50% in 2Q09. The previously strong subscriber growth at the postpaid segment tapered off to 0.9% qoq as DiGi ceded market share in the youth and migrant worker segments to mainly Celcom. Blended ARPU fell by another RM2 qoq to RM54, which management attributed to weak macro factors. We expect DiGi to intensify its A&P activities, suggesting significant risks of further EBITDA margin compression. We have forecast EBITDA margin of 42% for 2009.
Insignificant contribution from 3G broadband wireless. DiGi acknowledged that the 3G broadband wireless subscriber base and revenue (undisclosed) were insignificant. Based on other operators’ past records in this segment, we estimate subscriber numbers at less than 20,000. There is no change in annual 3G capex guidance of RM300m-400m for the next 3-4 years. DiGi is expected to launch 3G services for mobile phones (smallscreen) by end-09, which have higher growth potential as compared with 3G broadband wireless services (big-screen).
Maintain SELL with a fair price of RM20.00 (cost of equity of 8.7% and terminal growth of 1%). We remain concerned about DiGi’s declining trends in net subscriber adds, blended ARPU and EBITDA margin. DiGi is trading at a 17% premium to regional peers even though it has limited domestic growth potential and the weakest market positioning among the three celcos.
DiGi has declared an interim single-tier dividend of 49 sen/share, which translates into 75% of net earnings, in line with its dividend policy (net payout ratio of 75%), and constitutes about 48% of our 2009 dividend forecast. Management has guided that the capital structure optimisation exercise would be completed by 2010, which could point to special dividend payouts in 2009-10. As at 2Q09, DiGi is in net debt position of RM173.6m.
1H09 net earnings 3.8% and 7.7% below our and consensus estimates respectively. DiGi.Com (DiGi) reported a lower 2Q09 net profit of RM234.5m (-21.4% yoy; -14.9% qoq), attributed to 3G spectrum cost amortisation and accelerated depreciation charges (up RM25.8m). EBITDA margin declined further to 43.3% from 44.6% in 1Q09, due to higher leased line costs, A&P expenses and doubtful debts. Revenue fell 1.1% qoq, the second consecutive quarterly contraction, affected by weak macro factors and competitive pressure. On an annualised basis, 1H09 revenue fell short of our forecast by 4.5%
Lower net subscriber adds and ARPU. Net subscriber adds for 2Q09 totalled 75,000, 19.4% below 1Q09’s 93,000. This suggests DiGi’s subscriber’s market share could have shrunk by another 0.5-0.75ppt to 24.25 - 24.50% in 2Q09. The previously strong subscriber growth at the postpaid segment tapered off to 0.9% qoq as DiGi ceded market share in the youth and migrant worker segments to mainly Celcom. Blended ARPU fell by another RM2 qoq to RM54, which management attributed to weak macro factors. We expect DiGi to intensify its A&P activities, suggesting significant risks of further EBITDA margin compression. We have forecast EBITDA margin of 42% for 2009.
Insignificant contribution from 3G broadband wireless. DiGi acknowledged that the 3G broadband wireless subscriber base and revenue (undisclosed) were insignificant. Based on other operators’ past records in this segment, we estimate subscriber numbers at less than 20,000. There is no change in annual 3G capex guidance of RM300m-400m for the next 3-4 years. DiGi is expected to launch 3G services for mobile phones (smallscreen) by end-09, which have higher growth potential as compared with 3G broadband wireless services (big-screen).
Maintain SELL with a fair price of RM20.00 (cost of equity of 8.7% and terminal growth of 1%). We remain concerned about DiGi’s declining trends in net subscriber adds, blended ARPU and EBITDA margin. DiGi is trading at a 17% premium to regional peers even though it has limited domestic growth potential and the weakest market positioning among the three celcos.
DiGi has declared an interim single-tier dividend of 49 sen/share, which translates into 75% of net earnings, in line with its dividend policy (net payout ratio of 75%), and constitutes about 48% of our 2009 dividend forecast. Management has guided that the capital structure optimisation exercise would be completed by 2010, which could point to special dividend payouts in 2009-10. As at 2Q09, DiGi is in net debt position of RM173.6m.
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Digi
Monday, July 27, 2009
Bursa Malaysia - More relevant in the Asian context
Reversing the declining trend in the past five quarters, Bursa Malaysia’s (Bursa) 2Q09 net profit went up 22.3% yoy and 125.9% qoq to RM35m. Revenue from the equity market soared 145.8% qoq while derivatives revenue and stable revenue went up 25.0% and 3.5% qoq respectively. The results were largely in line with expectations.
Going forward, while our assumed turnover velocity remains largely unchanged at 66.5% (47% in Jun 09), total market capitalisation for shares listed on Bursa went up from RM651b at end-Mar 09 to RM806b at end-Jun 09. Hence, the need for us to raise our forecast market turnover. We revised our ADT assumptions higher for 2009 (from RM1.2b to RM1.5b), 2010 (from RM1.9b to RM2.4b) and 2011 (from RM1.9b to RM2.4b). As a result, we raised our 2009, 2010 and 2011 earnings forecasts by 29%, 27% and 26% respectively.
Bursa’s 2009 full-year earnings were dragged down by the weak market turnover in 1Q09 (RM0.7b). We forecast a further pick-up in market turnover in 2H09. In addition, we are rolling into 2010 in less than six months. Hence, our fair price should be based on 2010 PE. In the past, we set our fair PE based on global weighted average of major exchanges. With global liquidity shifting towards Asian markets, we believe the valuation for Bursa is more relevant in the Asian context. Based on the above rationale, we change our fair PE for Bursa from 18.7x 2009 PE (global weighted average of major exchanges) to 25x 2010 PE (weighted average of listed exchanges in Asia). As a result, we raised our fair price for Bursa from RM3.30 to RM8.20. Upgrade to HOLD. Entry price is RM7.00.
On the policy front, the 30% Bumiputra equity requirement is now replaced by a Bumiputra equity condition of 12.5% (ie half of 25% public spread). More importantly, there will not be requirements to maintain Bumiputra equity condition after the IPO. Foreign investors will be allowed to own up to 70% of stock broking companies, compared with the previous 49% limit. Foreign fund managers will be allowed to establish 100% foreign owned fund management companies in Malaysia. We expect the relaxation on the equity market will encourage more new listings and boost market turnover.
Internally, hefty investment in a new trading system has enabled Bursa to handle trades more efficiently, mitigating the likelihood of a major system failure. The potential direct market access capability for the equity market is positive for Bursa and this bodes well for velocity in the long run. Experience from other exchanges indicates that the DMA equity will increase the volume by 20-25%. We expect Bursa’s ongoing business initiatives to improve velocity in the long term.
Going forward, while our assumed turnover velocity remains largely unchanged at 66.5% (47% in Jun 09), total market capitalisation for shares listed on Bursa went up from RM651b at end-Mar 09 to RM806b at end-Jun 09. Hence, the need for us to raise our forecast market turnover. We revised our ADT assumptions higher for 2009 (from RM1.2b to RM1.5b), 2010 (from RM1.9b to RM2.4b) and 2011 (from RM1.9b to RM2.4b). As a result, we raised our 2009, 2010 and 2011 earnings forecasts by 29%, 27% and 26% respectively.
Bursa’s 2009 full-year earnings were dragged down by the weak market turnover in 1Q09 (RM0.7b). We forecast a further pick-up in market turnover in 2H09. In addition, we are rolling into 2010 in less than six months. Hence, our fair price should be based on 2010 PE. In the past, we set our fair PE based on global weighted average of major exchanges. With global liquidity shifting towards Asian markets, we believe the valuation for Bursa is more relevant in the Asian context. Based on the above rationale, we change our fair PE for Bursa from 18.7x 2009 PE (global weighted average of major exchanges) to 25x 2010 PE (weighted average of listed exchanges in Asia). As a result, we raised our fair price for Bursa from RM3.30 to RM8.20. Upgrade to HOLD. Entry price is RM7.00.
On the policy front, the 30% Bumiputra equity requirement is now replaced by a Bumiputra equity condition of 12.5% (ie half of 25% public spread). More importantly, there will not be requirements to maintain Bumiputra equity condition after the IPO. Foreign investors will be allowed to own up to 70% of stock broking companies, compared with the previous 49% limit. Foreign fund managers will be allowed to establish 100% foreign owned fund management companies in Malaysia. We expect the relaxation on the equity market will encourage more new listings and boost market turnover.
Internally, hefty investment in a new trading system has enabled Bursa to handle trades more efficiently, mitigating the likelihood of a major system failure. The potential direct market access capability for the equity market is positive for Bursa and this bodes well for velocity in the long run. Experience from other exchanges indicates that the DMA equity will increase the volume by 20-25%. We expect Bursa’s ongoing business initiatives to improve velocity in the long term.
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Bursa Malaysia
Thursday, July 23, 2009
Public Bank - Momentum picking up
Public Bank (PBK) reported a net profit of RM611m, up 2.9% yoy and 3.6% qoq. The better-than-expected results were mainly driven by non-interest income and stronger loans growth of 7.2% ytd. Non-interest income was mainly lifted by an increase in unit trust management fees and stockbroking income. PBK declared a gross dividend of 30.0 sen/share, or a net dividend of 22.5 sen/share or a net yield of 2.2%.
Loan approval picked up in 2Q09. Loans grew RM8.7b, or 7.2%, in 1H09, on track to meet our expectation of 15.0% for 2009. There was a strong pickup in loan approval during 2Q09, mainly driven by SME and corporate loans, a third of which came from SME refinancing. Strong loan approval will sustain loans growth in 2H09 and may even spill over to 1Q10.
Margin to remain under pressure. Though rate cuts may come to an end, the pressure on net interest margin (NIM) will continue amid PBK’s aggressive involvement in price wars to gain market share. Currently the mortgage lending rate is at a historical low of BLR-2.4%, vs BLR-2.2% in early-09. But the recent upward adjustment of the hire purchase rate by 80-100bp will mitigate pressure from mortgages.
Overseas operations unlikely to turn around in 2009. For 1H09, pre-tax profit (PBT) from overseas operations fell 24% yoy due to a 53% drop in Public Bank Hong Kong’s net profit to HK$118m from 1H09. The decline was affected by higher impairment allowance and a decline in non-interest income. Management does not foresee a turnaround in the Hong Kong operations in 2H09 due to a high level of personal bankruptcy.
Asset quality best in class. Surprisingly, absolute non-performing loans (NPL) came off in 2Q09, falling RM24m qoq and bringing net NPL to 0.8%. Although management does not rule out potential weakness in asset quality, it seemed less pessimistic compared to a quarter ago. On restructured loans, management commented that since early-08, only RM1.8b in loans were restructured, with only 7-8% of restructured loans relapsing or turning into NPLs at a rate of 30-40bp.
Potentially more special dividends. Two potential sources of special dividends: a) Potential write-back of general provisions with the implementation of FRS 139 on 1 Jan 10. The write-back will go into shareholders’ funds and this will strengthen the bank’s overall capital and core capital base. b) Another potential share dividend from the remaining 80.4m units of treasury shares. Assuming one dividend share for every 43 shares held, this will imply a net yield of 2.3%.
As at Jun 09, PBK’s risk-weighted capital ratio and core capital ratio remained healthy at 13.9% and 8.7% respectively after the proposed dividend. We maintain HOLD on PBK for its high dividend yield of 5-6% and potential special dividend for another 2% yield. Our fair price of RM9.00 implies a target P/B ratio of 3.13x, and is derived from the Gordon Growth Model (ROE: 18%, payout ratio: 65%, required return: 10%). Entry price is RM8.10.
Loan approval picked up in 2Q09. Loans grew RM8.7b, or 7.2%, in 1H09, on track to meet our expectation of 15.0% for 2009. There was a strong pickup in loan approval during 2Q09, mainly driven by SME and corporate loans, a third of which came from SME refinancing. Strong loan approval will sustain loans growth in 2H09 and may even spill over to 1Q10.
Margin to remain under pressure. Though rate cuts may come to an end, the pressure on net interest margin (NIM) will continue amid PBK’s aggressive involvement in price wars to gain market share. Currently the mortgage lending rate is at a historical low of BLR-2.4%, vs BLR-2.2% in early-09. But the recent upward adjustment of the hire purchase rate by 80-100bp will mitigate pressure from mortgages.
Overseas operations unlikely to turn around in 2009. For 1H09, pre-tax profit (PBT) from overseas operations fell 24% yoy due to a 53% drop in Public Bank Hong Kong’s net profit to HK$118m from 1H09. The decline was affected by higher impairment allowance and a decline in non-interest income. Management does not foresee a turnaround in the Hong Kong operations in 2H09 due to a high level of personal bankruptcy.
Asset quality best in class. Surprisingly, absolute non-performing loans (NPL) came off in 2Q09, falling RM24m qoq and bringing net NPL to 0.8%. Although management does not rule out potential weakness in asset quality, it seemed less pessimistic compared to a quarter ago. On restructured loans, management commented that since early-08, only RM1.8b in loans were restructured, with only 7-8% of restructured loans relapsing or turning into NPLs at a rate of 30-40bp.
Potentially more special dividends. Two potential sources of special dividends: a) Potential write-back of general provisions with the implementation of FRS 139 on 1 Jan 10. The write-back will go into shareholders’ funds and this will strengthen the bank’s overall capital and core capital base. b) Another potential share dividend from the remaining 80.4m units of treasury shares. Assuming one dividend share for every 43 shares held, this will imply a net yield of 2.3%.
As at Jun 09, PBK’s risk-weighted capital ratio and core capital ratio remained healthy at 13.9% and 8.7% respectively after the proposed dividend. We maintain HOLD on PBK for its high dividend yield of 5-6% and potential special dividend for another 2% yield. Our fair price of RM9.00 implies a target P/B ratio of 3.13x, and is derived from the Gordon Growth Model (ROE: 18%, payout ratio: 65%, required return: 10%). Entry price is RM8.10.
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Public Bank
Wednesday, July 22, 2009
WCT - Clinches RM766m jobs in Iskandar Malaysia
WCT has secured four contracts worth RM766.5m, awarded by Iskandar Investment Berhad (subsidiary of Khazanah), to undertake infrastructure works in Medini, Iskandar Malaysia. The works comprise earthwork, drainage, roads, infrastructure works, sewerage pumping station, electricity sub-stations and 33KV main distribution sub-stations. The project is expected to start in 2009 and be completed by 2011.
We estimate the job will add RM61.3m to WCT’s pre-tax profit (PBT) - RM24.5m (+12.2%) in 2009, and RM18.4m each (+9.7% and +9.1%) in 2010 and 2011, assuming 8% PBT margin.
RM1b job win target for 2009 now an easy target, now that WCT has clinched the RM766m job. In addition, we understand that WCT is waiting for two Letter of Intent (LOI) jobs in Sabah totalling RM500m to be converted into Letter of Award (LOA) by end-09. Should this materialise, WCT’s orderbook will increase to RM3.5b from RM3b currently.
Orderbook replenishment looks promising in 2010. The third LOI (estimated at RM2b) for an infrastructure job in Sabah could also boost earnings growth in 2010-11. Furthermore, the Group is also scouring for other mega projects such as an extension of two LRT lines worth RM8b-10b.
We maintain our net profit forecasts as we have already factored in RM1b of new orders for 2009, above WCT’s ytd contract wins of RM766m. However, we acknowledge the rising probability of earnings upgrades for 2010-11, as the government appears to be expediting the tender and award process for key mega projects like the LCCT and LRT extension.
Upgrade to HOLD. We raise our fair price to RM2.30 (from RM1.46) to reflect WCT’s potential to clinch more mega projects. Our fair price is based on 14x 2010 PE target, which is +1 standard deviation above the long-term mean PE, taking into account higher PEs during construction upcycle. The target is also in line with the construction sector’s average PE of 14-15x.
We raise our fair price to RM2.30 as 2009’s RM1b orderbook target replenishment looks “surpass-able” after the new contract win. Expect more mega contract wins (eg Sabah infrastructure works).
We estimate the job will add RM61.3m to WCT’s pre-tax profit (PBT) - RM24.5m (+12.2%) in 2009, and RM18.4m each (+9.7% and +9.1%) in 2010 and 2011, assuming 8% PBT margin.
RM1b job win target for 2009 now an easy target, now that WCT has clinched the RM766m job. In addition, we understand that WCT is waiting for two Letter of Intent (LOI) jobs in Sabah totalling RM500m to be converted into Letter of Award (LOA) by end-09. Should this materialise, WCT’s orderbook will increase to RM3.5b from RM3b currently.
Orderbook replenishment looks promising in 2010. The third LOI (estimated at RM2b) for an infrastructure job in Sabah could also boost earnings growth in 2010-11. Furthermore, the Group is also scouring for other mega projects such as an extension of two LRT lines worth RM8b-10b.
We maintain our net profit forecasts as we have already factored in RM1b of new orders for 2009, above WCT’s ytd contract wins of RM766m. However, we acknowledge the rising probability of earnings upgrades for 2010-11, as the government appears to be expediting the tender and award process for key mega projects like the LCCT and LRT extension.
Upgrade to HOLD. We raise our fair price to RM2.30 (from RM1.46) to reflect WCT’s potential to clinch more mega projects. Our fair price is based on 14x 2010 PE target, which is +1 standard deviation above the long-term mean PE, taking into account higher PEs during construction upcycle. The target is also in line with the construction sector’s average PE of 14-15x.
We raise our fair price to RM2.30 as 2009’s RM1b orderbook target replenishment looks “surpass-able” after the new contract win. Expect more mega contract wins (eg Sabah infrastructure works).
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WCT
Tuesday, July 21, 2009
DiGi.Com 2Q09 results preview: In a declining mode
DiGi will announce 2Q09 results on 22 July. We expect its revenue to be in a declining trend, contracting 1.0-1.5% qoq, due to shrinking market share and lower ARPU. EBITDA margin is expected at 43-44% with net profit pressured by amortisation of 3G licence cost and 3G broadband rollout services in Penang and Kota Kinabalu.
Shrinking market share and lower ARPU. We foresee its subscriber’s market share to be shaved by another 0.3-0.5ppt to 25-25.2% in 2Q09, mainly losing to Celcom in the youth and migrant worker segments. Celcom has very aggressively promoted an XPAX plan which targets the youth segment, whereas its MVNO partner Merchantrade focuses on the migrant worker segment. Digi’s blended ARPU is expected to decline by RM1 to RM55 in 2Q09, attributed to weaker consumption, and 5% lower than our ARPU forecast of RM57.90 for 2009. These two factors suggest that 2Q09 revenue would contract 1.0-1.5% qoq.
1H09 net profit to come in below consensus, margins still under pressure. 1H09 net profit is expected to be within our expectation but below consensus estimate by 4.1%. We expect EBITDA margin of 43-44% in 2Q09 (1Q09: 44.6%), partly due to price pressure and associated expenses on expanding 3G broadband services in Penang and Kota Kinabalu. Net profit could be further impacted by amortisation of 3G licence cost.
New strategy to stem declining market share. DiGi has just launched two new plans, DG Family plan and Hit1 plan, to strengthen its hold on the family and youth segment respectively. This marks a shift in its marketing strategy from a product-oriented to a segment-oriented approach. DG Family plan allows a primary post-paid subscriber to transfer talktime credit to up to three prepaid supplementary lines and enjoy unlimited free calls, and nationwide SMS and MMS services. Under Hit1 plan, once the user spends a minimum RM1 a day on domestic SMS, he is entitled to flat rates on calls (12sen/min from original 36sen/min), SMS (1sen/SMS from original 10sen/SMS) and a maximum daily charge of RM5 for unlimited mobile Internet use.
These plans are clearly part of DiGi’s defensive strategy to stem its declining share in the prepaid market segment and to capture the growing family and youth segments. However, the impact will only be felt from 3Q09 onwards. Going forward, we foresee the telco sector becoming even more competitive as other competitors launch aggressive call plans. This reinforces our view that DiGi’s EBITDA margin is likely to decline further from 45.1% in 2008 to 42% in 2009.
We expect revenue to contract in 2Q09, its second consecutive quarterly contraction.. EBITDA margin is expected to remain below 45%. Maintain SELL with fair price at RM20.00/share.
Shrinking market share and lower ARPU. We foresee its subscriber’s market share to be shaved by another 0.3-0.5ppt to 25-25.2% in 2Q09, mainly losing to Celcom in the youth and migrant worker segments. Celcom has very aggressively promoted an XPAX plan which targets the youth segment, whereas its MVNO partner Merchantrade focuses on the migrant worker segment. Digi’s blended ARPU is expected to decline by RM1 to RM55 in 2Q09, attributed to weaker consumption, and 5% lower than our ARPU forecast of RM57.90 for 2009. These two factors suggest that 2Q09 revenue would contract 1.0-1.5% qoq.
1H09 net profit to come in below consensus, margins still under pressure. 1H09 net profit is expected to be within our expectation but below consensus estimate by 4.1%. We expect EBITDA margin of 43-44% in 2Q09 (1Q09: 44.6%), partly due to price pressure and associated expenses on expanding 3G broadband services in Penang and Kota Kinabalu. Net profit could be further impacted by amortisation of 3G licence cost.
New strategy to stem declining market share. DiGi has just launched two new plans, DG Family plan and Hit1 plan, to strengthen its hold on the family and youth segment respectively. This marks a shift in its marketing strategy from a product-oriented to a segment-oriented approach. DG Family plan allows a primary post-paid subscriber to transfer talktime credit to up to three prepaid supplementary lines and enjoy unlimited free calls, and nationwide SMS and MMS services. Under Hit1 plan, once the user spends a minimum RM1 a day on domestic SMS, he is entitled to flat rates on calls (12sen/min from original 36sen/min), SMS (1sen/SMS from original 10sen/SMS) and a maximum daily charge of RM5 for unlimited mobile Internet use.
These plans are clearly part of DiGi’s defensive strategy to stem its declining share in the prepaid market segment and to capture the growing family and youth segments. However, the impact will only be felt from 3Q09 onwards. Going forward, we foresee the telco sector becoming even more competitive as other competitors launch aggressive call plans. This reinforces our view that DiGi’s EBITDA margin is likely to decline further from 45.1% in 2008 to 42% in 2009.
We expect revenue to contract in 2Q09, its second consecutive quarterly contraction.. EBITDA margin is expected to remain below 45%. Maintain SELL with fair price at RM20.00/share.
Labels:
Digi
Monday, July 20, 2009
Malaysian Resources Corp - Construction to drive growth
Potential catalyst from clinching RM2b works for Bakun Energy Transmission Grid. Malaysian Resources Corp (MRCB) has decent chances of clinching the RM2b Bakun hydroelectric dam’s power transmission line contract (to be awarded in 2010), as it has expertise in power transmission jobs. The project entails laying inland transmission lines from Bakun to Tanjung Leman in Johor, and to a power off-taker in Bentong, Peninsular Malaysia (excluding undersea cable from Sarawak to Peninsular Malaysia). Clinching the job will be a big boost to MRCB’s current orderbook of RM1.8b (excluding Penang Sentral Station), mainly contributed by construction works of Permai Hospital and Eastern Dispersal Link in Johor.
Bidding for other mega projects. We understand that MRCB is also looking to bid for jobs like extension of 2 LRT lines worth RM7b-10b and Langat 2 water treatment plant worth RM5b. Such large-scale projects would probably be shared by consortiums made up of a few established contractors. However, we understand that it is not keen on bidding for the new low-cost carrier terminal (LCCT) in Sepang.
Engineering & Construction division to drive 2009 earnings. The Group is targeting a RM400m-800m orderbook replenishment for this year. We foresee margin recovery to 3-5% from last year’s operating losses for ongoing projects this year, following the tailing off of construction jobs that have locked in higher raw material costs, and given the overall downtrend in key material costs. Management is still hoping for a potential provision write-back (about RM30m) via variation orders claims against the government for earlier engineering and construction jobs.
New property development’s earnings to be recognised in 2010. Most of MRCB’s projects in KL Sentral were delayed since last year due to the economic downturn and spike in construction cost. The Group has recently resumed new launches such as: a) Lot 348 (40:60 JV with Gapurna) of office towers and serviced apartments with GDV of RM914m, b) Lot A (CIMB Tower) with GDV of RM404m and c) Lot G parcel C and D (60:40 JV with Aseana) of office towers and hotel with GDV of RM860m. However, earnings contributions would not be significant in 2009 as construction progress is still at initial stages.
Office segment still resilient. We understand that a Korean investor is interested to buy an office tower in Lot G (Parcel C & D which consists of two office towers with GFA of 846,000sf) in KL Sentral to lease out to existing Korean companies operating in Malaysia wanting to relocate to Central Business District. We understand also that a MNC is interested to occupy 60% of Lot 348 KL Sentral with an indicative rental rate of RM7-8psf.
Still delay in proposed Penang transport hub and mixed development. MRC’s turnkey contract for the RM200m Penang Sentral Station in Butterworth has yet to start, pending issues on the land usage. The project entails MRCB venturing with Permodalan Hartanah to undertake an estimated RM2b mixed property development with a targeted completion year of 2021.
Upgrade to HOLD. We raise our fair price to RM1.28 (from RM0.97) to reflect the potentially positive newsflow of clinching mega projects, and in recognition that in the past construction cycles, MRCB’s valuation would significantly perk up ahead of ascending development expenditures (see chart on RHS). We note that MRCB features the highest beta (of 2.0) among the liquid construction companies. Our fair price is based on a 35% discount (from previous 50% discount) to RNAV of RM1.97/share, which implies a target 1.5x 2010F P/B, which is in line with its historical average P/B.
Bidding for other mega projects. We understand that MRCB is also looking to bid for jobs like extension of 2 LRT lines worth RM7b-10b and Langat 2 water treatment plant worth RM5b. Such large-scale projects would probably be shared by consortiums made up of a few established contractors. However, we understand that it is not keen on bidding for the new low-cost carrier terminal (LCCT) in Sepang.
Engineering & Construction division to drive 2009 earnings. The Group is targeting a RM400m-800m orderbook replenishment for this year. We foresee margin recovery to 3-5% from last year’s operating losses for ongoing projects this year, following the tailing off of construction jobs that have locked in higher raw material costs, and given the overall downtrend in key material costs. Management is still hoping for a potential provision write-back (about RM30m) via variation orders claims against the government for earlier engineering and construction jobs.
New property development’s earnings to be recognised in 2010. Most of MRCB’s projects in KL Sentral were delayed since last year due to the economic downturn and spike in construction cost. The Group has recently resumed new launches such as: a) Lot 348 (40:60 JV with Gapurna) of office towers and serviced apartments with GDV of RM914m, b) Lot A (CIMB Tower) with GDV of RM404m and c) Lot G parcel C and D (60:40 JV with Aseana) of office towers and hotel with GDV of RM860m. However, earnings contributions would not be significant in 2009 as construction progress is still at initial stages.
Office segment still resilient. We understand that a Korean investor is interested to buy an office tower in Lot G (Parcel C & D which consists of two office towers with GFA of 846,000sf) in KL Sentral to lease out to existing Korean companies operating in Malaysia wanting to relocate to Central Business District. We understand also that a MNC is interested to occupy 60% of Lot 348 KL Sentral with an indicative rental rate of RM7-8psf.
Still delay in proposed Penang transport hub and mixed development. MRC’s turnkey contract for the RM200m Penang Sentral Station in Butterworth has yet to start, pending issues on the land usage. The project entails MRCB venturing with Permodalan Hartanah to undertake an estimated RM2b mixed property development with a targeted completion year of 2021.
Upgrade to HOLD. We raise our fair price to RM1.28 (from RM0.97) to reflect the potentially positive newsflow of clinching mega projects, and in recognition that in the past construction cycles, MRCB’s valuation would significantly perk up ahead of ascending development expenditures (see chart on RHS). We note that MRCB features the highest beta (of 2.0) among the liquid construction companies. Our fair price is based on a 35% discount (from previous 50% discount) to RNAV of RM1.97/share, which implies a target 1.5x 2010F P/B, which is in line with its historical average P/B.
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MRC
Friday, July 17, 2009
KL Kepong - Landbank Acquisition in Indonesia
KLK, via its subsidiary PT. Steelindo Wahana Perkasa (SWP), has entered into agreements to acquire 95% of the issued and paid-up share capital of PT. Bumi Makmur Sejahtera Jaya (PT BMS) for a total cash consideration of Rp6.7b (or RM2.3m). Through 2 conditional agreements (the S&Ps), SWP will acquire a 94% equity stake in PT BMS from Tjong Hasan Agus Salim and another 1% from Tjhang Ardy Fadrinata respectively. The Proposed Acquisition will result in PT BMS becoming a subsidiary of KLK.
Buying a small adjacent landbank in Indonesia. The proposed acquisition will add 2,336.62 hectares to its current landbank of 245,905 hectares (54% in Indonesia). The acquisition is strategic because it is adjacent to KLK's plantation in Belitung Island.
Valued at US$274/hectare. Based on the total consideration of RM2.3m, the proposed land with izin lokasi (location permit) is valued at US$274/hectare, which is a fair value for the current market value range of US$250-US$300/hectare.
The purchase consideration will be financed by internally-generated funds. As at end-Mar 09, KLK had total cash of RM1.3b, which can be utilised to finance this transaction.
The proposed acquisition is expected to be completed in the 1Q10. The landbank can potentially bring in additional operating profit of RM2.1m to KLK, assuming CPO price of RM2,000/tonne and cost of production of RM1,1,00. The acquisition will not have an impact on earnings in the immediate term, but will add to KLK's unplanted reserve of 38,502 hectares (@ end-Sep 08).
Buying a small adjacent landbank in Indonesia. The proposed acquisition will add 2,336.62 hectares to its current landbank of 245,905 hectares (54% in Indonesia). The acquisition is strategic because it is adjacent to KLK's plantation in Belitung Island.
Valued at US$274/hectare. Based on the total consideration of RM2.3m, the proposed land with izin lokasi (location permit) is valued at US$274/hectare, which is a fair value for the current market value range of US$250-US$300/hectare.
The purchase consideration will be financed by internally-generated funds. As at end-Mar 09, KLK had total cash of RM1.3b, which can be utilised to finance this transaction.
The proposed acquisition is expected to be completed in the 1Q10. The landbank can potentially bring in additional operating profit of RM2.1m to KLK, assuming CPO price of RM2,000/tonne and cost of production of RM1,1,00. The acquisition will not have an impact on earnings in the immediate term, but will add to KLK's unplanted reserve of 38,502 hectares (@ end-Sep 08).
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KL Kepong
Thursday, July 16, 2009
Tanjong - 1Q FY10 core net profit up 38% YoY; inexpensive valuations
Excluding the disposal gain of RM62 mn in 1Q FY09, Tanjong’s 1Q FY10 core net profit rose by 38% YoY. EBIT growth of 25% was mainly driven by a 33% increase from the ‘power’ division.
It maintained a first quarter net dividend of 17.5 sen. We estimate that its full-year net dividend yield will amount to 5.5%.
Tanjong is seen as a defensive company, and therefore, has a beta of 0.8x. We estimate that 78% of Tanjong’s EBIT is derived from the regulated power division.
However, there is another attempt to renegotiate power purchase agreements (PPAs) in Malaysia. Any attempt to renegotiate the PPAs will create ‘noise’ in the industry, but we believe that the sanctity of the PPAs will be preserved.
Maintain OUTPERFORM with a target price of RM15.20. Valuations are attractive – Tanjong is trading at FY10E P/E of 8.6x and FY11E P/E of 7.7x, which are at some a 45% discount to the Malaysian market valuations. It is trading close to the bottom of its historical P/E trading range.
It maintained a first quarter net dividend of 17.5 sen. We estimate that its full-year net dividend yield will amount to 5.5%.
Tanjong is seen as a defensive company, and therefore, has a beta of 0.8x. We estimate that 78% of Tanjong’s EBIT is derived from the regulated power division.
However, there is another attempt to renegotiate power purchase agreements (PPAs) in Malaysia. Any attempt to renegotiate the PPAs will create ‘noise’ in the industry, but we believe that the sanctity of the PPAs will be preserved.
Maintain OUTPERFORM with a target price of RM15.20. Valuations are attractive – Tanjong is trading at FY10E P/E of 8.6x and FY11E P/E of 7.7x, which are at some a 45% discount to the Malaysian market valuations. It is trading close to the bottom of its historical P/E trading range.
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Tanjong
Wednesday, July 15, 2009
Berjaya Sports Toto - New trajectory of growth with new Power Toto 6/55 game
Berjaya Sports Toto (BToto) will go ex-dividend and treasury share distribution (1:14) on 13 Jul 09. Dividend payment and share transfer will be made on 27 Jul 09. In addition, the new Power Toto 6/55 game, which replaces the existing Toto 6/42 Jackpot game, will be launched in Nov 09. All the necessary approvals have been obtained from the Ministry of Finance (MOF).
Power Toto 6/55 lotto game to power tickets sales. The new lotto game will have a much larger matrix (three additional numbers), it guarantees a larger upfront jackpot of RM3m and has no limit on jackpots vs RM2m upfront and a maximum jackpot of RM30m for Mega Toto 6/52. Drawing on the experience with the Mega Toto 6/52 game which raised revenue by about 5%, the new lotto game is expected to raise gross turnover per draw by 1-3% and earnings by 2-4% for FY10-12, after factoring in some cannibalisation on existing games.
Utilisation of 12 special draws by Dec 09. Management plans to utilise all 12 special draws by Dec 09, leaving 4QFY10 without any special draws pending new approval by MOF. There will be three, five and four special draws in 1QFY10, 2QFY10 and 3QFY10 respectively, giving 9MFY10 five additional draws over 9MFY09. 2HFY10 will benefit from the new Power Toto 6/55 game.
Parent well equipped for potential RM900m bond redemption by bondholders. By 16 Jul 09, exchangeable bondholders of Berjaya Land (BLand) would have decided on whether they would exercise their put option. Recall that we have estimated that less than 50% of the bondholders would exercise the put option given the bond’s attractive 8% yield. Backed by cash in hand (RM558m), upcoming BToto dividends and recent placement of 40m BToto shares at RM4.75/share (raising RM369m), BLand will have sufficient funds to redeem the bonds. The 40m BToto share placement is slightly below BToto’s entitled shares (42.6m shares) under the treasury share distribution (1:14).
Bumper dividend payout is unlikely in near term. BToto has front-loaded 72% (adjusted to enlarged share base) of FY10’s prospective gross dividend (33 sen), leaving only an outstanding 9 sen/share to be paid in the next 12 months. This prospective dividend payout meets the minimal dividend policy of a 75% net payout ratio. Assuming 100% payout, there is an increment of 10.5 sen. We believe a bumper dividend payout in the near term is very unlikely. Nevertheless, beyond FY10, effective dividend yield would be sustained at an attractive 7-8% gross, post ex-dividend and treasury share distribution.
Raising FY10-12 earnings forecasts by 2-4%. We expect the new lotto game to attract more punters and generate higher tickets sales given its attractive prize payouts and unlimited jackpots, although there is potential of cannibalisation of its existing game especially the Mega Toto 6/52. Thus, we conservatively revise upward our forecasts for gross turnover per draw marginally by 1-3% and subsequently raise our earnings forecast by 2-4% for FY10-12. The upside potential of 12 special draws has been imputed in a previous earnings revision. Given these two positive drivers (new Power Toto game and 12 special draws), net earnings growth of 7.4% yoy for FY10 is within reach.
Maintain BUY. Based on DCF (cost of equity of 8.9% and terminal growth of 1%), we value BToto at RM4.90/share post-dividend and treasury share distribution (total entitlements worth 60 sen/share). Btoto’s share price still has 11% upside potential and its future earnings growth will be underpinned by the new Power Toto 6/55 game which is expected to attract more punters.
Power Toto 6/55 lotto game to power tickets sales. The new lotto game will have a much larger matrix (three additional numbers), it guarantees a larger upfront jackpot of RM3m and has no limit on jackpots vs RM2m upfront and a maximum jackpot of RM30m for Mega Toto 6/52. Drawing on the experience with the Mega Toto 6/52 game which raised revenue by about 5%, the new lotto game is expected to raise gross turnover per draw by 1-3% and earnings by 2-4% for FY10-12, after factoring in some cannibalisation on existing games.
Utilisation of 12 special draws by Dec 09. Management plans to utilise all 12 special draws by Dec 09, leaving 4QFY10 without any special draws pending new approval by MOF. There will be three, five and four special draws in 1QFY10, 2QFY10 and 3QFY10 respectively, giving 9MFY10 five additional draws over 9MFY09. 2HFY10 will benefit from the new Power Toto 6/55 game.
Parent well equipped for potential RM900m bond redemption by bondholders. By 16 Jul 09, exchangeable bondholders of Berjaya Land (BLand) would have decided on whether they would exercise their put option. Recall that we have estimated that less than 50% of the bondholders would exercise the put option given the bond’s attractive 8% yield. Backed by cash in hand (RM558m), upcoming BToto dividends and recent placement of 40m BToto shares at RM4.75/share (raising RM369m), BLand will have sufficient funds to redeem the bonds. The 40m BToto share placement is slightly below BToto’s entitled shares (42.6m shares) under the treasury share distribution (1:14).
Bumper dividend payout is unlikely in near term. BToto has front-loaded 72% (adjusted to enlarged share base) of FY10’s prospective gross dividend (33 sen), leaving only an outstanding 9 sen/share to be paid in the next 12 months. This prospective dividend payout meets the minimal dividend policy of a 75% net payout ratio. Assuming 100% payout, there is an increment of 10.5 sen. We believe a bumper dividend payout in the near term is very unlikely. Nevertheless, beyond FY10, effective dividend yield would be sustained at an attractive 7-8% gross, post ex-dividend and treasury share distribution.
Raising FY10-12 earnings forecasts by 2-4%. We expect the new lotto game to attract more punters and generate higher tickets sales given its attractive prize payouts and unlimited jackpots, although there is potential of cannibalisation of its existing game especially the Mega Toto 6/52. Thus, we conservatively revise upward our forecasts for gross turnover per draw marginally by 1-3% and subsequently raise our earnings forecast by 2-4% for FY10-12. The upside potential of 12 special draws has been imputed in a previous earnings revision. Given these two positive drivers (new Power Toto game and 12 special draws), net earnings growth of 7.4% yoy for FY10 is within reach.
Maintain BUY. Based on DCF (cost of equity of 8.9% and terminal growth of 1%), we value BToto at RM4.90/share post-dividend and treasury share distribution (total entitlements worth 60 sen/share). Btoto’s share price still has 11% upside potential and its future earnings growth will be underpinned by the new Power Toto 6/55 game which is expected to attract more punters.
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Berjaya
Tuesday, July 14, 2009
Malaysia Public Bank - Solid as a rock
Public is targeting mid-teens loan growth over FY09, aiming to outpace the broader sector for the eighth year in a row and build on its current loan market share of 15% (FY01: 6.4%). The focus is on mortgages, hire-purchase and SME lending, collectively making up more than 80% of its loanbook. Management has conservatively moderated the pace of expansion in Hong Kong and Cambodia, but with the core Malaysian market making up more than 90% of total assets, the resultant drag on earnings growth is marginal. Fee income growth is expected to be relatively flat over FY09F, as strong non-trade areas like remittances and insurance are overcome by weakness in trade-related revenues and in the unit trust division, where YTD gross sales are RM2.2bn, against RM7.6bn in 2008.
With the loan-deposits ratio just under 75% and interest rates trending lower, the group’s aggressive growth strategy is supportive of margins as excess liquidity is deployed out of the interbank market into loans. Coupled with positive re-pricing trends in the corporate and hire-purchase segments as well as a favourable funding structure (15.5% deposits market share), aggressive price competition in the mortgage and SME spaces are being substantially mitigated, hence cushioning the margin decline.
Public’s gross NPL ratio as at 1Q09 remained at a remarkable 1%, compared to 4% for the broader sector, with loan loss cover above 100%. Credit costs are largely unchanged from the previous year with 90-95% of customers being middle income with relatively higher credit risk ratings, while the SME portfolio is 80% comprised of non-export related businesses and has been helped by government credit support initiatives. Loan-to-value (LTV) ratios are conservative, at 50% for SMEs and 60% for mortgages, boosting recovery prospects in the event of delinquency.
While Public’s group end-1Q09 Tier 1 ratio appears low at 7.6% (sector: 12-13%), management is comfortable in maintaining a balance sheet leverage ratio in excess of 20x given the high quality of the assets being accumulated as well as the stability of the group’s retail funding base. Further, capital ratios are seen to benefit from the introduction of FRS 139 in 2010 (to add 1pp to the Tier 1 capital ratio), which will reduce general provisioning requirements as well as further Basel II-related capital improvements in 2011 (to add another 1.2ppts to the Tier 1 capital ratio) when the group makes the transition from the current standardised approach to the more rigorous internal ratings based (IRB) approach in 2010. Public raised RM1.2bn in noninnovative capital in June 2009, boosting the Tier 1 ratio to over 11% at the bank level, and more non-core equity capital is to be tapped, including innovative and noninnovative hybrid Tier-1 capital as well as subordinated debt, with the aim of optimising the group’s capital composition and hence ROE generation ahead of potentially restrictive new regulatory requirements on capital backing. Aiding the capital optimisation process will be a sustained high dividend payout policy of around 75% of earnings (the previous three year average is just over 5%), comfortably maintaining the dividend yield above 5%. Hence, medium-term group Tier 1 and CAR ratios are targeted at 8-9% and 13-14%, respectively.
Continuing to gain market share and with balance sheet ratios and ROE the bestgrounded in the industry, we believe low-beta earnings, a generous provisioning buffer and solid dividend yield conviction will continue to underpin premium valuations. The Gordon-growth derived target price (methodology unchanged; cost of equity at 11.5%, sustainable ROE of 24%, long-term growth of 5%) is RM9.00, or 2.6x FY10F book value and 11x FY10F earnings. In terms of risks to our view, as a consumer bank, Public Bank faces the possibility of higher-than-expected unemployment affecting customers’ ability to repay loans, and thus higher NPLs. This is true for both its Malaysian operations, and even more so in Hong Kong, where it runs a high-risk, highreturn consumer finance operation.
With the loan-deposits ratio just under 75% and interest rates trending lower, the group’s aggressive growth strategy is supportive of margins as excess liquidity is deployed out of the interbank market into loans. Coupled with positive re-pricing trends in the corporate and hire-purchase segments as well as a favourable funding structure (15.5% deposits market share), aggressive price competition in the mortgage and SME spaces are being substantially mitigated, hence cushioning the margin decline.
Public’s gross NPL ratio as at 1Q09 remained at a remarkable 1%, compared to 4% for the broader sector, with loan loss cover above 100%. Credit costs are largely unchanged from the previous year with 90-95% of customers being middle income with relatively higher credit risk ratings, while the SME portfolio is 80% comprised of non-export related businesses and has been helped by government credit support initiatives. Loan-to-value (LTV) ratios are conservative, at 50% for SMEs and 60% for mortgages, boosting recovery prospects in the event of delinquency.
While Public’s group end-1Q09 Tier 1 ratio appears low at 7.6% (sector: 12-13%), management is comfortable in maintaining a balance sheet leverage ratio in excess of 20x given the high quality of the assets being accumulated as well as the stability of the group’s retail funding base. Further, capital ratios are seen to benefit from the introduction of FRS 139 in 2010 (to add 1pp to the Tier 1 capital ratio), which will reduce general provisioning requirements as well as further Basel II-related capital improvements in 2011 (to add another 1.2ppts to the Tier 1 capital ratio) when the group makes the transition from the current standardised approach to the more rigorous internal ratings based (IRB) approach in 2010. Public raised RM1.2bn in noninnovative capital in June 2009, boosting the Tier 1 ratio to over 11% at the bank level, and more non-core equity capital is to be tapped, including innovative and noninnovative hybrid Tier-1 capital as well as subordinated debt, with the aim of optimising the group’s capital composition and hence ROE generation ahead of potentially restrictive new regulatory requirements on capital backing. Aiding the capital optimisation process will be a sustained high dividend payout policy of around 75% of earnings (the previous three year average is just over 5%), comfortably maintaining the dividend yield above 5%. Hence, medium-term group Tier 1 and CAR ratios are targeted at 8-9% and 13-14%, respectively.
Continuing to gain market share and with balance sheet ratios and ROE the bestgrounded in the industry, we believe low-beta earnings, a generous provisioning buffer and solid dividend yield conviction will continue to underpin premium valuations. The Gordon-growth derived target price (methodology unchanged; cost of equity at 11.5%, sustainable ROE of 24%, long-term growth of 5%) is RM9.00, or 2.6x FY10F book value and 11x FY10F earnings. In terms of risks to our view, as a consumer bank, Public Bank faces the possibility of higher-than-expected unemployment affecting customers’ ability to repay loans, and thus higher NPLs. This is true for both its Malaysian operations, and even more so in Hong Kong, where it runs a high-risk, highreturn consumer finance operation.
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Public Bank
Monday, July 13, 2009
Lafarge Malayan Cement - A bigger and better 2010
2Q09 results: Nothing spectacular. 2Q09 results should improve yoy as weaker demand in 1H09 (vs 1H08) is more than offset by better domestic average selling prices (ASPs). However, the results could ease qoq as export income may have weakened (as noted in the 1Q09 results disclosure) and 1Q09’s demand contraction of 8% should spill over into 2Q09.
Resurgence in demand for 2010. The recent pick-up in new property launches and project implementation in the construction sector, aided by the new administration’s drive to expedite mega projects, are expected to boost domestic cement demand from as early as 4Q09. Although we still expect 2009 demand to contract 6% due to 1H09’s drastic 8% contraction, we are increasingly optimistic on 2010 prospects. We understand that a tender has been called for cement supply to the 2nd Penang Bridge which is expected to consume about 200,000 tonnes of cement. We expect more of such tenders in 2010 as the government has to spend the remaining RM80b out of the RM230b allocation under the 9MP by next year. In addition, there is still RM23.8b of additional development expenditure from the two stimulus packages announced in Nov 08 and Mar 09 respectively. As such, we are raising our domestic demand growth assumption to 5% (previously 1%).
EBITDA margin sustainable at 20%. Lafarge was unable to fully benefit from the reversal of coal prices from US$195/tonne to US$ 64/tonne in 1H09, as it had locked in US$8m worth of coal supplies (as disclosed in 1Q09 results). However, going into 3Q09, the higher-cost raw material inventories would have been depleted, which should translate into cost savings and better margins in 2H09. Coal prices are currently about US$73/tonne, up 21% from 1Q09’s low.
We raise our 2010 and 2011 EPS forecasts by 7% to 44.9sen and 47.6sen respectively after raising our domestic assumption growth from 1% to 5%.
Our fair price assumes a target 8.5x EV/EBITDA (historical average) vs Lafarge’s historical low of 6x, in line with valuations during the construction upcycle (refer to chart overleaf). Potentially, the upside could temporarily surpass valuations based on historical trends. We see trading opportunities for the stock, should its share price decline to RM5.80 based on target 7.8x EV/EBITDA using the 5-year historical average.
Resurgence in demand for 2010. The recent pick-up in new property launches and project implementation in the construction sector, aided by the new administration’s drive to expedite mega projects, are expected to boost domestic cement demand from as early as 4Q09. Although we still expect 2009 demand to contract 6% due to 1H09’s drastic 8% contraction, we are increasingly optimistic on 2010 prospects. We understand that a tender has been called for cement supply to the 2nd Penang Bridge which is expected to consume about 200,000 tonnes of cement. We expect more of such tenders in 2010 as the government has to spend the remaining RM80b out of the RM230b allocation under the 9MP by next year. In addition, there is still RM23.8b of additional development expenditure from the two stimulus packages announced in Nov 08 and Mar 09 respectively. As such, we are raising our domestic demand growth assumption to 5% (previously 1%).
EBITDA margin sustainable at 20%. Lafarge was unable to fully benefit from the reversal of coal prices from US$195/tonne to US$ 64/tonne in 1H09, as it had locked in US$8m worth of coal supplies (as disclosed in 1Q09 results). However, going into 3Q09, the higher-cost raw material inventories would have been depleted, which should translate into cost savings and better margins in 2H09. Coal prices are currently about US$73/tonne, up 21% from 1Q09’s low.
We raise our 2010 and 2011 EPS forecasts by 7% to 44.9sen and 47.6sen respectively after raising our domestic assumption growth from 1% to 5%.
Our fair price assumes a target 8.5x EV/EBITDA (historical average) vs Lafarge’s historical low of 6x, in line with valuations during the construction upcycle (refer to chart overleaf). Potentially, the upside could temporarily surpass valuations based on historical trends. We see trading opportunities for the stock, should its share price decline to RM5.80 based on target 7.8x EV/EBITDA using the 5-year historical average.
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LMC
Thursday, July 9, 2009
Vale International pouring RM9b into an iron ore centre in Perak?
Brazil's Vale lands Manjung deal. Vale International SA, the world's second largest diversified metals and mining company, has agreed to buy 409 acres in Lumut (Manjung), Perak from KYM Holding Berhad for RM101.9m. In its filing to Bursa, KYM has also granted Vale the right to purchase 756 acres of adjacent land for RM93.7m cash. According to StarBiz, the deal is believed to be related to recent statements by the Perak government of a RM9b South American investment in an iron ore centre in the state. He said that a 526ha site in Manjung had been earmarked for the project, with the built-up area occupying a third of the site, and the remainder landbank serving as buffer zone.
As the land size appears enormously large just to serve as a distribution center, it could spark speculation that perhaps, Vale could also be keen to prospect for minerals.
Micro cap KYM emerges as a major winner in this transaction. The purchase and option price work out to be RM5.70 psf and RM2.80 psf respectively (KYM will have negligible landbank left in Manjung). The value of land sale of RM101.9m (excluding the option) is already significantly well above its market cap of RM55m. Below is some information gleaned from Bloomberg on KYM, which has been nondescript for many, many years.
As the land size appears enormously large just to serve as a distribution center, it could spark speculation that perhaps, Vale could also be keen to prospect for minerals.
Micro cap KYM emerges as a major winner in this transaction. The purchase and option price work out to be RM5.70 psf and RM2.80 psf respectively (KYM will have negligible landbank left in Manjung). The value of land sale of RM101.9m (excluding the option) is already significantly well above its market cap of RM55m. Below is some information gleaned from Bloomberg on KYM, which has been nondescript for many, many years.
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KYM
Wednesday, July 8, 2009
KL Kepong - Stronger growth ahead
Strong earnings momentum in 2HFY09 coming from plantation business. Contribution from plantation (85-90% of pre-tax profit) will pick up substantially in 2HFY09, supported by:
a) Higher production from Indonesia estates. Production is likely to be supported by stronger production in 2HFY09. Despite the 4% FFB production drop in 1HFY09, we expect production to grow 7-8% yoy for FY09, i.e., expecting mid-teens growth for 2HFY09. It is an industry norm to have a production ratio of 45:55 for the both halves of the year.
b) Stronger ASP. KLK has been selling mainly on the spot market now. Thus, it will benefit from current high CPO prices of RM2,400-2,600/tonne. In 1HFY09, ASP was RM2,200/tonne vs industry of about RM1,700.
c) Positive contribution from manufacturing. We project a small profit of RM90m (-23% yoy) in FY09, a turnaround from a RM4m loss in FY08. Downstream business was hit by inventory write-offs and defaults in China, but the worst is over with stock level dropping from the peak of 45,000 tonnes to 30,000 tonnes. Malaysia’s operation is still making money with a margin of 3-4%.
d) Retail will be in the red with losses in the US and Europe markets, as they are hit hardest by the financial crisis and recession. We are even more bullish on KLK’s FY10 performance, backed by the strong performance from the plantation division. It will a bonus to come if the new management team is able to turn Crabtree & Evelyn around.
Strong production growth coming from high young and immature areas. From FY10, KLK is likely to report a 10% fresh fruits bunch (FFB) production growth for at least three consecutive years, with the strong newly mature acreage coming onstream and young areas making up a total of 48.2% of planted areas.
Management change for Crabtree & Evelyn. There is a change in management recently to make it more Asia-centric. As Asia has been the profit centre for Crabtree & Evelyn, it makes sense to let an Asian team to drive the business growth strategy. Management expects breakeven by end- 09 (1HFY09: a loss of RM8.9m) and should be able to report a small profit for FY10. This business will be kept for the next 2-3 years and it fails to turn around, it could be disposed.
No change to our earnings forecasts. Potential earnings upgrade for FY10 onwards from strong FFB production. Earnings risk increases if CPO price falls.
Maintain BUY. We forecast core net profit of RM867.1m (EPS: 81.2 sen) and RM1,007.2m (EPS: 94.3sen) for FY09 and FY10 respectively. KLK is our top pick for Malaysia-listed companies. It is the best big-cap pure play on rising CPO prices and for the strong production growth coming onstream. We raise our target price to RM14.00 based on 15x FY10F PE, in line with the rising PE multiples for big-cap peers.
a) Higher production from Indonesia estates. Production is likely to be supported by stronger production in 2HFY09. Despite the 4% FFB production drop in 1HFY09, we expect production to grow 7-8% yoy for FY09, i.e., expecting mid-teens growth for 2HFY09. It is an industry norm to have a production ratio of 45:55 for the both halves of the year.
b) Stronger ASP. KLK has been selling mainly on the spot market now. Thus, it will benefit from current high CPO prices of RM2,400-2,600/tonne. In 1HFY09, ASP was RM2,200/tonne vs industry of about RM1,700.
c) Positive contribution from manufacturing. We project a small profit of RM90m (-23% yoy) in FY09, a turnaround from a RM4m loss in FY08. Downstream business was hit by inventory write-offs and defaults in China, but the worst is over with stock level dropping from the peak of 45,000 tonnes to 30,000 tonnes. Malaysia’s operation is still making money with a margin of 3-4%.
d) Retail will be in the red with losses in the US and Europe markets, as they are hit hardest by the financial crisis and recession. We are even more bullish on KLK’s FY10 performance, backed by the strong performance from the plantation division. It will a bonus to come if the new management team is able to turn Crabtree & Evelyn around.
Strong production growth coming from high young and immature areas. From FY10, KLK is likely to report a 10% fresh fruits bunch (FFB) production growth for at least three consecutive years, with the strong newly mature acreage coming onstream and young areas making up a total of 48.2% of planted areas.
Management change for Crabtree & Evelyn. There is a change in management recently to make it more Asia-centric. As Asia has been the profit centre for Crabtree & Evelyn, it makes sense to let an Asian team to drive the business growth strategy. Management expects breakeven by end- 09 (1HFY09: a loss of RM8.9m) and should be able to report a small profit for FY10. This business will be kept for the next 2-3 years and it fails to turn around, it could be disposed.
No change to our earnings forecasts. Potential earnings upgrade for FY10 onwards from strong FFB production. Earnings risk increases if CPO price falls.
Maintain BUY. We forecast core net profit of RM867.1m (EPS: 81.2 sen) and RM1,007.2m (EPS: 94.3sen) for FY09 and FY10 respectively. KLK is our top pick for Malaysia-listed companies. It is the best big-cap pure play on rising CPO prices and for the strong production growth coming onstream. We raise our target price to RM14.00 based on 15x FY10F PE, in line with the rising PE multiples for big-cap peers.
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KL Kepong
Tuesday, July 7, 2009
Sime Darby - All engines off
Performance likely to stay subdued on weak plantation production and, more critically, lower margins from other divisions. Potential write-offs for its variation of order (VO) for Qatar project, which should be the VO not approved by client.
Plantation unlikely to turn around soon. Higher production in 4QFY09 is unlikely to compensate for 3QFY09’s shortfall. Thus, for the full year, the plantation division would likely be hit by lower production and lower average selling prices. It is the largest division, contributing about 60% of pre-tax profit.
Uncertainty over Qatar projects. Sime may recognise potential provisionings/losses at its two Qatar projects in 4QFY09. No details have been given. We understand the “variation of order” claims for its Qatar Petroleum project have not been approved, but management expects them to be finalised by Jun 09. Also, there is still risk of potential write-offs for unclaimable amounts, as well as potential cost overruns at its oil & gas fabrication project in Qatar, the Maersk Oil Qatar project.
Momentum slows at heavy equipment division. This division has been growing rapidly and accounted for 30% of 9MFY09 group EBIT. It would likely experience decelerating growth or even earnings contraction, as a wave of cancellations has reduced its order visibility beyond Sep-Oct 09.
We now expect a net profit of RM1,642.3m (EPS: 27.3 sen) for FY09, lower than Sime’s KPI target of RM1.9b. The key adjustment to this was the revision of fresh fruit bunch production in FY09 from a growth of 7.6% to a contraction of 7.9%.
For FY10, net profit is expected to increase 38.4% to RM2,272.8m (EPS: 37.8 sen) on the back of higher crude palm oil price (RM2,200/tonne vs FY09: RM1,900/tonne) and stronger production growth of 7.0% (vs FY09: -7.9%), while growth in other sectors remains subdued.
Maintain SELL. We have switched our valuation method from P/B for the downcycle back to PE for an uptrend. Our fair price has been lowered from RM6.60 to RM5.70 based on 15x FY10F PE, in line with the PE multiple for big-cap peers on an uptrend and in line with Sime’s historical PE multiple.
Plantation unlikely to turn around soon. Higher production in 4QFY09 is unlikely to compensate for 3QFY09’s shortfall. Thus, for the full year, the plantation division would likely be hit by lower production and lower average selling prices. It is the largest division, contributing about 60% of pre-tax profit.
Uncertainty over Qatar projects. Sime may recognise potential provisionings/losses at its two Qatar projects in 4QFY09. No details have been given. We understand the “variation of order” claims for its Qatar Petroleum project have not been approved, but management expects them to be finalised by Jun 09. Also, there is still risk of potential write-offs for unclaimable amounts, as well as potential cost overruns at its oil & gas fabrication project in Qatar, the Maersk Oil Qatar project.
Momentum slows at heavy equipment division. This division has been growing rapidly and accounted for 30% of 9MFY09 group EBIT. It would likely experience decelerating growth or even earnings contraction, as a wave of cancellations has reduced its order visibility beyond Sep-Oct 09.
We now expect a net profit of RM1,642.3m (EPS: 27.3 sen) for FY09, lower than Sime’s KPI target of RM1.9b. The key adjustment to this was the revision of fresh fruit bunch production in FY09 from a growth of 7.6% to a contraction of 7.9%.
For FY10, net profit is expected to increase 38.4% to RM2,272.8m (EPS: 37.8 sen) on the back of higher crude palm oil price (RM2,200/tonne vs FY09: RM1,900/tonne) and stronger production growth of 7.0% (vs FY09: -7.9%), while growth in other sectors remains subdued.
Maintain SELL. We have switched our valuation method from P/B for the downcycle back to PE for an uptrend. Our fair price has been lowered from RM6.60 to RM5.70 based on 15x FY10F PE, in line with the PE multiple for big-cap peers on an uptrend and in line with Sime’s historical PE multiple.
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Sime Darby
Monday, July 6, 2009
Rubber Gloves Manufacturing - G-love is in the air
2009 is a year of strong recovery for Malaysian glove makers, which dominate approximately 65% of the global natural rubber glove supply and about 50% of global nitrile glove supply, led by easing raw material costs and extra demand following the outbreak of the H1N1 virus. However, the sector could be heading into a slower growth phase beyond 2009, hampered by measured capacity expansion and slight margin cost pressure – weaker export receipts and higher commodity price when the US dollar weakens. Nevertheless, there are still good trading opportunities and valuations of some undervalued producers like Kossan Rubber are bound to stretch considerably.
Slower growth era after 2009. Glove manufacturers are expected to record impressive 17-24% earnings growth in 2009 on favourable exchange rates, as well as respite from 2008’s steep rise in raw material prices. However, revenue growth from 2010 onwards would trend towards the global demand growth of 8-10% as other macro trends (outsourcing and industry consolidation) have moderated. Industry earnings growth should ease from high teens previously to low to mid-teens post-2009.
More stable margins as industry capacity growth slows. Margins are expected to remain relatively stable as most manufacturers are strategising on measured capacity growth through 2010-11. We expect industry utilisation rates to rise marginally, providing sufficient pricing power for producers to pass on higher costs. We also expect raw material prices to rise in 2010 by 40% from their current levels, reflecting price levels similar to 2007-08, where crude oil prices were sustained at US$80/bbl.
Industry trends and beneficiaries. We expect the following segments to feature above-trend growth – synthetic gloves such as nitrile gloves, medical gloves, emerging markets (expected to grow at 15% annually). Users for natural latex gloves will shift to nitrile gloves eventually when prices of the latter become more affordable (currently, the price difference is about 30%). Among the producers which we monitor - Top Glove, Kossan and Hartalega - we expect Kossan to register better incremental margins from the shift to nitrile gloves. Kossan and Hartalega are the larger beneficiaries should the H1N1 pandemic continue to gain traction, given their larger exposure to the medical segment (see overleaf).
Companies which we cover in the sector are Top Glove Corporation (TOPG MK/HOLD/Fair: RM6.70, based on mid-2011 12x PE) and Kossan Rubber Industries (KRI MK/BUY/Target: RM4.24, based on mid-2011 8x PE). Top Glove is fairly priced given its current valuation premium (4.69x PE), which factors in better trading liquidity and market leadership, has already surpassed its average historical PE premium to peers of 4.60x. We like Kossan, which is a sector laggard and provides the cheapest exposure (mid-2011 PE of 6.8x) of a considerable size to the glove manufacturing sector.
Slower growth era after 2009. Glove manufacturers are expected to record impressive 17-24% earnings growth in 2009 on favourable exchange rates, as well as respite from 2008’s steep rise in raw material prices. However, revenue growth from 2010 onwards would trend towards the global demand growth of 8-10% as other macro trends (outsourcing and industry consolidation) have moderated. Industry earnings growth should ease from high teens previously to low to mid-teens post-2009.
More stable margins as industry capacity growth slows. Margins are expected to remain relatively stable as most manufacturers are strategising on measured capacity growth through 2010-11. We expect industry utilisation rates to rise marginally, providing sufficient pricing power for producers to pass on higher costs. We also expect raw material prices to rise in 2010 by 40% from their current levels, reflecting price levels similar to 2007-08, where crude oil prices were sustained at US$80/bbl.
Industry trends and beneficiaries. We expect the following segments to feature above-trend growth – synthetic gloves such as nitrile gloves, medical gloves, emerging markets (expected to grow at 15% annually). Users for natural latex gloves will shift to nitrile gloves eventually when prices of the latter become more affordable (currently, the price difference is about 30%). Among the producers which we monitor - Top Glove, Kossan and Hartalega - we expect Kossan to register better incremental margins from the shift to nitrile gloves. Kossan and Hartalega are the larger beneficiaries should the H1N1 pandemic continue to gain traction, given their larger exposure to the medical segment (see overleaf).
Companies which we cover in the sector are Top Glove Corporation (TOPG MK/HOLD/Fair: RM6.70, based on mid-2011 12x PE) and Kossan Rubber Industries (KRI MK/BUY/Target: RM4.24, based on mid-2011 8x PE). Top Glove is fairly priced given its current valuation premium (4.69x PE), which factors in better trading liquidity and market leadership, has already surpassed its average historical PE premium to peers of 4.60x. We like Kossan, which is a sector laggard and provides the cheapest exposure (mid-2011 PE of 6.8x) of a considerable size to the glove manufacturing sector.
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Rubber Gloves
Saturday, July 4, 2009
UEM Land - Damac scraps land deal
Middle Eastern investor Damac has notified UEM Land (UEML) it would not fulfil its Sales & Purchase Agreement (signed in Jun 08) to acquire about 44 acres of land in Puteri Harbour, Nusajaya for RM396m cash (equivalent to RM207psf).
This is not a surprise as much earlier on, the media had speculated over Damac’s cancellation in view of its financial difficulties since Dubai’s property bubble burst. In the past six months, Damac, one of Dubai’s largest private developers, had to pare its stakes in international operations, notably in Egypt. And according to a Dubai newspaper, it had to lay off about 200 workers. The land deal cancellation has put in limbo Damac’s development portion of Puteri Harbour, namely an integrated waterfront and marina project (GDV: RM3.8b).
We understand the other Middle Eastern investor in Puteri Harbour, Limitless, is still committed to its investment in Puteri Harbour. A JV company has been set up and layout plans for the canal housing precinct have been submitted for authority approval. Physical work (over 111 acres) is expected to start in end-09.
Although Damac’s cancellation is a setback, UEML will still realise its land values with all the ongoing Khazanah-led developments (eg Legoland) in Nusajaya (which also houses the Johor government’s new state administrative centre). In particular, the recent warming of Malaysia-Singapore ties (following PM Najib’s visit to Singapore) should lead to bilateral efforts in developing iconic developments in the Nusajaya area, eg the proposed wellness centre and mixed development project. As recently highlighted, the scheduled completion of major infrastructure works (highways in the Iskandar area) by 2011 is a major catalyst for future developments, which would thereby lift UEML’s land values (which are presently at a fraction of Singapore’s land values).
We cut our net profit forecasts for 2009, 2010 and 2011 by 23%, 21% and 24% to RM73.0m, RM83.5m and RM68.2m respectively as our earlier forecasts had factored in the land sale to Damac which was scheduled for equal-installment payments over four years.
This is not a surprise as much earlier on, the media had speculated over Damac’s cancellation in view of its financial difficulties since Dubai’s property bubble burst. In the past six months, Damac, one of Dubai’s largest private developers, had to pare its stakes in international operations, notably in Egypt. And according to a Dubai newspaper, it had to lay off about 200 workers. The land deal cancellation has put in limbo Damac’s development portion of Puteri Harbour, namely an integrated waterfront and marina project (GDV: RM3.8b).
We understand the other Middle Eastern investor in Puteri Harbour, Limitless, is still committed to its investment in Puteri Harbour. A JV company has been set up and layout plans for the canal housing precinct have been submitted for authority approval. Physical work (over 111 acres) is expected to start in end-09.
Although Damac’s cancellation is a setback, UEML will still realise its land values with all the ongoing Khazanah-led developments (eg Legoland) in Nusajaya (which also houses the Johor government’s new state administrative centre). In particular, the recent warming of Malaysia-Singapore ties (following PM Najib’s visit to Singapore) should lead to bilateral efforts in developing iconic developments in the Nusajaya area, eg the proposed wellness centre and mixed development project. As recently highlighted, the scheduled completion of major infrastructure works (highways in the Iskandar area) by 2011 is a major catalyst for future developments, which would thereby lift UEML’s land values (which are presently at a fraction of Singapore’s land values).
We cut our net profit forecasts for 2009, 2010 and 2011 by 23%, 21% and 24% to RM73.0m, RM83.5m and RM68.2m respectively as our earlier forecasts had factored in the land sale to Damac which was scheduled for equal-installment payments over four years.
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UEM Land
Friday, July 3, 2009
IOI Corporation - Worst is over but see better entry in 3Q09
4QFY09 would be its best quarter. IOI Corporation (IOI) likely to deliver a better 4QFY09 net profit compared with 3QFY09 of just RM37.4m. We expect 4QFY09 to be the strongest quarter for IOI due to the absence of derivatives losses and provision for default contracts and it could benefit from the writeback of some forex gains with the Ringgit's appreciation. For FY09, we project a net profit of RM1,038m (ytd: RM496.4m). For 4QFY09, performance will be boosted by seasonally stronger production in 2Q09 and higher contributions from the recently privatised property arm, IOI Properties.
Production started to recover but still below expectation. Recovery in production started in Mar 09 after a sharp drop in February (see bar chart) as it entered the higher production cycle and tree stress has eased. However, management highlighted the recovery is still below expectation. If El Nino is to come in end-3Q or 4Q09, production in 2H10 would be hit again.
Management viewed current price too low given that palm oil supply in 2H09 is likely to be lower than expected. In addition, tight soyoil supply is also an advantage for CPO price. Thus, prices are expected to trade higher by 4Q09 from current level of RM2,400-RM2,500/tonne. This is more bullish than our expectation of an average CPO price of RM2,200/tonne for 2009. The difference is due to the demand outlook which we are expecting a slowdown vs management’s optimism.
Growth in FY10 will be driven by higher CPO prices. CPO prices hold the key to IOI’s FY10 performance. Production growth is expected at 3-5% due to its mature acreage. Is manufacturing divisions (especially oleochemical) will remain weak due to softening demand for personal care products in developed countries. Manufacturing used to contribute about 20% to the Group’s operating profits.
We trim our net profit forecasts for FY09 by 6.7% on a higher effective tax rate of 28% (previously 22%) as some of the losses are not tax-deductable. We now project a net profit of RM1,038m (EPS: 16.2sen) for FY09 and a growth of 63.5% to RM1,697m (EPS: 26.5sen) for FY10. Excluding one-off losses in FY09 (net profit would be RM1,543m), FY10 net profit growth would just be 10% yoy.
Production started to recover but still below expectation. Recovery in production started in Mar 09 after a sharp drop in February (see bar chart) as it entered the higher production cycle and tree stress has eased. However, management highlighted the recovery is still below expectation. If El Nino is to come in end-3Q or 4Q09, production in 2H10 would be hit again.
Management viewed current price too low given that palm oil supply in 2H09 is likely to be lower than expected. In addition, tight soyoil supply is also an advantage for CPO price. Thus, prices are expected to trade higher by 4Q09 from current level of RM2,400-RM2,500/tonne. This is more bullish than our expectation of an average CPO price of RM2,200/tonne for 2009. The difference is due to the demand outlook which we are expecting a slowdown vs management’s optimism.
Growth in FY10 will be driven by higher CPO prices. CPO prices hold the key to IOI’s FY10 performance. Production growth is expected at 3-5% due to its mature acreage. Is manufacturing divisions (especially oleochemical) will remain weak due to softening demand for personal care products in developed countries. Manufacturing used to contribute about 20% to the Group’s operating profits.
We trim our net profit forecasts for FY09 by 6.7% on a higher effective tax rate of 28% (previously 22%) as some of the losses are not tax-deductable. We now project a net profit of RM1,038m (EPS: 16.2sen) for FY09 and a growth of 63.5% to RM1,697m (EPS: 26.5sen) for FY10. Excluding one-off losses in FY09 (net profit would be RM1,543m), FY10 net profit growth would just be 10% yoy.
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IOI
Thursday, July 2, 2009
Bumiputra-Commerce Holdings - Upside surprise
Strong 2Q performance, well supported by:
a) Resilient net-interest income, backed by a larger loans base. Based on the mortgage applications and approvals in the pipeline, management is comfortable of achieving its mortgage growth target of 12%. But we think there is a upside bias with the improved property sales momentum.
b) Higher non-interest income with more vibrant capital markets and fees from treasury products. More treasury fees to expect from its enlarged presence in Indonesia and also from Bank Thai. This is proven by its recent breakthrough in Thailand in co-managing the placement of Toyota Leasing’s bonds. Although the financial impact is marginal, it is definitely a good start for its regional presence.
c) Lower operating cost with the bank’s ongoing branch rationalisation exercise. Potential upside could come from better property sales and continued robust activities in the capital and debt markets.
Strong 1H09 performance could lead to upward revision of profit target. The strong 1Q09 net profit (+14.8% yoy, +92.5% qoq) and expected strong 2Q performance would likely lead to an upward revision of its profit target for 2009. After raising our earnings forecasts, we now expect ROE of 13.3% for 2009, higher than the 12.5% guided by management in early-09.
Management may raise its ROE target in the upcoming 2Q results announcement in Aug 09.
We raise our EPS forecasts by 7% to 64.5sen for 2009, by 11% to 76.6sen for 2010 and by 7% to 88.5sen for 2011, to reflect the upward revisions to non-interest income and lower operating costs.
Maintain HOLD with higher fair price of RM8.35. Our revised fair price of RM8.35 (from RM8.00), which implies a target P/B of 1.61x, is derived from the Gordon Growth Model (ROE: 15%, required return: 10% and sustainable growth rate: 6%). Besides the strong earnings performance, BCHB will also benefit from FBM30, which make it the largest market cap index stocks. Its latest foreign shareholding was 32.4% as at end-May 09 (end-Apr 09: 31.6%).
a) Resilient net-interest income, backed by a larger loans base. Based on the mortgage applications and approvals in the pipeline, management is comfortable of achieving its mortgage growth target of 12%. But we think there is a upside bias with the improved property sales momentum.
b) Higher non-interest income with more vibrant capital markets and fees from treasury products. More treasury fees to expect from its enlarged presence in Indonesia and also from Bank Thai. This is proven by its recent breakthrough in Thailand in co-managing the placement of Toyota Leasing’s bonds. Although the financial impact is marginal, it is definitely a good start for its regional presence.
c) Lower operating cost with the bank’s ongoing branch rationalisation exercise. Potential upside could come from better property sales and continued robust activities in the capital and debt markets.
Strong 1H09 performance could lead to upward revision of profit target. The strong 1Q09 net profit (+14.8% yoy, +92.5% qoq) and expected strong 2Q performance would likely lead to an upward revision of its profit target for 2009. After raising our earnings forecasts, we now expect ROE of 13.3% for 2009, higher than the 12.5% guided by management in early-09.
Management may raise its ROE target in the upcoming 2Q results announcement in Aug 09.
We raise our EPS forecasts by 7% to 64.5sen for 2009, by 11% to 76.6sen for 2010 and by 7% to 88.5sen for 2011, to reflect the upward revisions to non-interest income and lower operating costs.
Maintain HOLD with higher fair price of RM8.35. Our revised fair price of RM8.35 (from RM8.00), which implies a target P/B of 1.61x, is derived from the Gordon Growth Model (ROE: 15%, required return: 10% and sustainable growth rate: 6%). Besides the strong earnings performance, BCHB will also benefit from FBM30, which make it the largest market cap index stocks. Its latest foreign shareholding was 32.4% as at end-May 09 (end-Apr 09: 31.6%).
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Bumiputra-Commerce
Wednesday, July 1, 2009
Digi.com - Upside potential from 3G broadband wireless remains remote
Optimistic on broadband wireless potential but... Management is upbeat on broadband wireless on a longer-term horizon, although the segment is crowded with players like Celcom, Maxis, P1, Redtone and TM (fixed broadband). New players such as YTL e-Solution, U Mobile and Wi-Net Technology are expected to enter this market in the near to medium term. Management thinks wireless broadband revenues have the potential to reach RM3b -4b in 4-5 years, but Digi’s 3G broadband revenue is only expected to be significant from 2011. Going forward, however, we think margins and tariffs of 3G broadband will come off substantially as more players can enter the market by riding on the HSBB infrastructure being built by TM.
Management has reiterated that it has no intention to increase capex for 3G (RM300m-400m) in 2009. No number has been disclosed on 3G broadband wireless subscribers acquired since the service was launched in Mar 09. … expect weak 2Q09 results. Indications are that 2Q09 revenue trend would be similar to 1Q09’s qoq pace of contraction, as a weak economy has lessened mobile phone usage by the lower income group. Thus, 2Q09 earnings could be lower than our and consensus estimates. Margins and tariffs are also under downward pressure, stemming from aggressive promotional programmes from Celcom.
Meanwhile, Digi’s corporate market share dipped to 25.5% in 4Q08 from the peak of 28.4% in 2Q07, based on revised figures published by the Malaysian Communications and Multimedia Commission (SKMM). It was only able to capture 16.7% of new mobile subscribers in 4Q08. We expect its market share to continue shrinking by another 0.5ppt in 1Q09. We believe the company would eventually need to accelerate its 3G roll-out and A&P programmes in order to stem its shrinking market share trend. Intensity of competition has also increased significantly as Malaysia’s mobile penetration rate has crossed the 100% mark (100.1% in 1Q09), coupled with implementation of the Mobile Number Portability (MNP) framework.
In an MVNO JV to target niche market. DiGi has entered into an MVNO JV agreement with Baraka Telecom (JV has an authorised paid-up capital of RM10m) to target Middle Eastern travellers in Malaysia. The MVNO agreement is conditional upon Baraka Telecom obtaining all relevant licences and approval from SKMM. We note, however, that only 173,000 Middle Eastern tourists visited Malaysia in 2008, which is not significant enough to have any meaningful impact on Digi’s subscriber base growth and earnings. Nevertheless, we think this is part of DiGi’s measures to mitigate its falling corporate market share.
Management has reiterated that it has no intention to increase capex for 3G (RM300m-400m) in 2009. No number has been disclosed on 3G broadband wireless subscribers acquired since the service was launched in Mar 09. … expect weak 2Q09 results. Indications are that 2Q09 revenue trend would be similar to 1Q09’s qoq pace of contraction, as a weak economy has lessened mobile phone usage by the lower income group. Thus, 2Q09 earnings could be lower than our and consensus estimates. Margins and tariffs are also under downward pressure, stemming from aggressive promotional programmes from Celcom.
Meanwhile, Digi’s corporate market share dipped to 25.5% in 4Q08 from the peak of 28.4% in 2Q07, based on revised figures published by the Malaysian Communications and Multimedia Commission (SKMM). It was only able to capture 16.7% of new mobile subscribers in 4Q08. We expect its market share to continue shrinking by another 0.5ppt in 1Q09. We believe the company would eventually need to accelerate its 3G roll-out and A&P programmes in order to stem its shrinking market share trend. Intensity of competition has also increased significantly as Malaysia’s mobile penetration rate has crossed the 100% mark (100.1% in 1Q09), coupled with implementation of the Mobile Number Portability (MNP) framework.
In an MVNO JV to target niche market. DiGi has entered into an MVNO JV agreement with Baraka Telecom (JV has an authorised paid-up capital of RM10m) to target Middle Eastern travellers in Malaysia. The MVNO agreement is conditional upon Baraka Telecom obtaining all relevant licences and approval from SKMM. We note, however, that only 173,000 Middle Eastern tourists visited Malaysia in 2008, which is not significant enough to have any meaningful impact on Digi’s subscriber base growth and earnings. Nevertheless, we think this is part of DiGi’s measures to mitigate its falling corporate market share.
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Digi
Berjaya Sports Toto - 4QFY09: Hefty shareholder payouts but …
As expected, BToto declared a hefty net interim DPS of 30 sen (for FY09 and FY10) plus distribution of treasury share for every 14 shares held. Future payouts may be less spectacular. FY09 results beat our expectation by 2.4%.
BToto reported a net profit of RM107.2m in 4QFY09, +10.4% qoq, despite having six draws less than the preceding quarter. This was attributed to a lower estimated prize payout ratio of 60.9% vs 65% in 3QFY09. Revenue grew 12.7% yoy in FY09, driven by strong ticket sales and additional draws. Correspondingly, net profit rose 17.7% yoy as the result of higher revenue and lower prize payout ratio.
Net DPS of 30 sen and distribution of treasury shares provide an effective 13% net yield. Management has recommended a fourth interim tax exempt DPS of 11 sen for FY09 and brought forward its first interim DPS for FY10, comprising a 9 sen tax exempt and a 10 sen single-tier. In addition, it is distributing treasury shares on a 1-for-14 basis. This brings the total effective net DPS to 65 sen (entitlement date on 15 Jul 09), which translates to a net yield of 13% in one month.
Generous payouts unlikely in the near future. The payouts are close to our base case assumption of a net DPS of 36 sen and a 1-for-13 treasury share distribution, which would provide just sufficient funds for parent Berjaya Land (BLand) to meet its financial obligations if half of its exchangeable bondholders (outstanding value of RM882m) choose to exercise their put options by 16 Jul 09.
BLand may need to raise more cash should over half of the bondholders exercise their put options but we understand such a scenario may not materialise. More importantly, BToto’s future shareholder payouts may be limited by a few issues, including limited distributable reserves, even though theoretically it has the funding capacity to do so.
BToto reported a net profit of RM107.2m in 4QFY09, +10.4% qoq, despite having six draws less than the preceding quarter. This was attributed to a lower estimated prize payout ratio of 60.9% vs 65% in 3QFY09. Revenue grew 12.7% yoy in FY09, driven by strong ticket sales and additional draws. Correspondingly, net profit rose 17.7% yoy as the result of higher revenue and lower prize payout ratio.
Net DPS of 30 sen and distribution of treasury shares provide an effective 13% net yield. Management has recommended a fourth interim tax exempt DPS of 11 sen for FY09 and brought forward its first interim DPS for FY10, comprising a 9 sen tax exempt and a 10 sen single-tier. In addition, it is distributing treasury shares on a 1-for-14 basis. This brings the total effective net DPS to 65 sen (entitlement date on 15 Jul 09), which translates to a net yield of 13% in one month.
Generous payouts unlikely in the near future. The payouts are close to our base case assumption of a net DPS of 36 sen and a 1-for-13 treasury share distribution, which would provide just sufficient funds for parent Berjaya Land (BLand) to meet its financial obligations if half of its exchangeable bondholders (outstanding value of RM882m) choose to exercise their put options by 16 Jul 09.
BLand may need to raise more cash should over half of the bondholders exercise their put options but we understand such a scenario may not materialise. More importantly, BToto’s future shareholder payouts may be limited by a few issues, including limited distributable reserves, even though theoretically it has the funding capacity to do so.
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Berjaya
Public Bank - Growth driven by domestic operations
Slight improvement in 2Q. 2Q09 results likely to grow marginally qoq, vs 1Q09 net profit of RM589.3m. 2Q09 results will be supported by better-thanexpected performance from Public Mutual (6%-7% of group PBT) on higher fee income generated from new unit trust sales and also higher management fees from record net asset value of RM29b in Jun 09. Meanwhile, net interest income would be flat due to margin squeeze as deposit rates are yet to be fully repriced and as competition drives mortgage rates lower.
Loan growth better than expected. 2009 loan growth would be domestically driven as the Hong Kong operations continue to be dragged down by weak economic activities. 2Q09 loan growth is expected to reach 4% qoq, bringing 1H09 loan growth to approximately 7%. Based on loan approvals growth of 10-12% ytd, Public Bank is likely to achieve a loan growth of 14-15% in 2009, much higher than our expectation of 6%. The variance comes from stronger-than-expected mortgages and auto loans for national car financing.
Core capital ratio strengthens. Public Bank successfully raised RM1.2b non-innovative Tier 1 capital in early Jun 09, boosting its core capital ratio from 7.6% to 8.7%. The bank has set a plan to issue up to RM5.0b (issued: RM1.4b) of sub-debt and RM5.0b (issued: RM1.2b) of non-innovative Tier 1 capital. The balance will be issued to support loan growth.
High dividend yield still a main focus. The bank will at least maintain 2008 cash dividend to ensure reasonably high dividends. In 2008, Public Bank paid a total 55sen/share gross cash dividend (41sen/share net). This translates into an attractive 6.2% gross dividend yield based on the current share price of RM8.85, compared to Malaysia’s FD rates: 2.0% for 1 to 11-month FDs or 2.5% for 12-month FDs. We are expecting an interim gross dividend of at least 20sen to be announced during its 1H09 results in mid-Jul 09.
We have revised up our 2009 earnings forecast by 5.1% to RM2.11b (EPS: 59.9sen) from RM2.01b (EPS: 57.0sen), to reflect: a) higher loan growth of 15% (previous: 6%), b) higher non-interest income of RM1.3b (previous: RM1.2b) and c) higher operating costs as commissions to pay for better unit trust sales.
Maintain HOLD. Our revised fair price of RM9.00 (based on revised BV/share: RM2.86) from RM8.60 (previous BV/share: RM2.75) implies a target P/B ratio of 3.13x, derived from the Gordon Growth Model (ROE: 18%, payout ratio: 65%, required return: 10%).
Loan growth better than expected. 2009 loan growth would be domestically driven as the Hong Kong operations continue to be dragged down by weak economic activities. 2Q09 loan growth is expected to reach 4% qoq, bringing 1H09 loan growth to approximately 7%. Based on loan approvals growth of 10-12% ytd, Public Bank is likely to achieve a loan growth of 14-15% in 2009, much higher than our expectation of 6%. The variance comes from stronger-than-expected mortgages and auto loans for national car financing.
Core capital ratio strengthens. Public Bank successfully raised RM1.2b non-innovative Tier 1 capital in early Jun 09, boosting its core capital ratio from 7.6% to 8.7%. The bank has set a plan to issue up to RM5.0b (issued: RM1.4b) of sub-debt and RM5.0b (issued: RM1.2b) of non-innovative Tier 1 capital. The balance will be issued to support loan growth.
High dividend yield still a main focus. The bank will at least maintain 2008 cash dividend to ensure reasonably high dividends. In 2008, Public Bank paid a total 55sen/share gross cash dividend (41sen/share net). This translates into an attractive 6.2% gross dividend yield based on the current share price of RM8.85, compared to Malaysia’s FD rates: 2.0% for 1 to 11-month FDs or 2.5% for 12-month FDs. We are expecting an interim gross dividend of at least 20sen to be announced during its 1H09 results in mid-Jul 09.
We have revised up our 2009 earnings forecast by 5.1% to RM2.11b (EPS: 59.9sen) from RM2.01b (EPS: 57.0sen), to reflect: a) higher loan growth of 15% (previous: 6%), b) higher non-interest income of RM1.3b (previous: RM1.2b) and c) higher operating costs as commissions to pay for better unit trust sales.
Maintain HOLD. Our revised fair price of RM9.00 (based on revised BV/share: RM2.86) from RM8.60 (previous BV/share: RM2.75) implies a target P/B ratio of 3.13x, derived from the Gordon Growth Model (ROE: 18%, payout ratio: 65%, required return: 10%).
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Public Bank
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