RHB: M'sia a small player in furniture mart

Furniture industry
Maintain neutral: Over the years, exports of furniture products have contributed significantly to Malaysia's total exports. In 2009, exports of Malaysian furniture products were valued at RM7.8 billion or 1.8% of total exports, at the same time achieving a commendable compound annual growth rate (CAGR) of 19.2% (from 1998 till 2009).

According to the Malaysian Industrial Development Authority (Mida), Malaysia exports to more than 160 countries with the main destinations being the US, Japan and Australia. Currently, Malaysia ranks as the 10th largest exporter of furniture in the world and second in Asia after China.

But as a global furniture player, Malaysia's market share is still very small. According to an independent market research report by Frost and Sullivan, the market size for global furniture was approximately US$302 billion (RM970 billion) in 2008. This would mean that Malaysia held approximately 1% of the global furniture industry market share in 2008 (based on the export furniture value for Malaysia worth RM9 billion in 2008).

Jaycorp Bhd is an integrated furniture manufacturer that is involved in: (1) upstream activities, which include sourcing of rubberwood, pressure treatment and kiln drying; (2) downstream activities - furniture manufacturing (mainly dining sets); and (3) packaging of materials. For 1HFY07/10, approximately 88.2% of its sales product mix was from furniture manufacturing. More than 75% of Jaycorp's 1HFY10 revenue is generated from its exports, where the key markets are the US, Europe and Australia.

Latitude Tree Holdings Bhd has carved out a strong niche in the household furniture segment, specifically dining and bedroom sets, and today the group has made great advances to position itself as one of the largest rubberwood furniture manufacturer and exporter in Malaysia and Vietnam.

We value both Jaycorp and Latitude based on seven times FY10 earnings per share (EPS), which is at 40% discount to our manufacturing sector price-earnings ratio (PER) of 12.2 times FY10. This suggests a fair value of RM1.20 for Jaycorp and RM3.85 for Latitude respectively.

Risks to our view include fluctuations in raw material prices; and a weaker US dollar against the ringgit.- RHB Research Institute, April 22


This article appeared in The Edge Financial Daily, April 23, 2010.

Maybulk still in choppy waters, says OSK

Malaysian Bulk Carriers Bhd (Maybulk)
(April 22, RM3.04)
Maintain neutral at RM3.01 with target price of RM3.03: We took a brief look at Maybulk after a series of developments in the iron ore market but again found ourselves looking at a familiar bearish scenario of newbuilding of vessels' capacity capping the upside of the Baltic Dry Index (BDI), a still anaemic tanker market and no major surprises from its associated company PACC Offshore Services Holdings Group (POSH).

With the lack of upside and our already aggressive sum-of-parts (SOP) valuation, our target price of RM3.03 remains unchanged and we reiterate our neutral recommendation.

The world's top miners Vale and BHP Billiton made the first move last month by changing their iron ore benchmark to quarterly contracts. Last week, Rio Tinto jumped onto the bandwagon by confirming the sale of iron ore on a quarterly pricing basis, also putting an end to the decades-old annual benchmark pricing system.

Including Rio Tinto, the trio control approximately two thirds of total seaborne iron ore trade. Although details on the new system are unclear and most steel millers and miners have not reached formal contracts, we think the quarterly pricing approach has obviously brought about more volatility in demand of the commodity, and thus bulkers.

Disagreement over the sharp price increase prompted the China Iron and Steel Association (Cisa) to call for steel mills to boycott purchases from the three giant miners for three months and will likely weaken overall capesize activity. Apart from that, a Chinese trade body has banned its members from importing iron ore with less than 60% iron content, raising concerns about the knock-on effects on bulker demand. China may also investigate suspected monopoly abuse on the part of the world's three mining giants as the timing of Rio Tinto's statement on its iron ore contract appeared to have been coordinated with Vale's and BHP Billiton's at a sensitive time for iron ore talks. The three mining giants' supply, transportation, pricing and timing moves are seen to be highly coordinated, which is clearly an indication of monopoly abuse.

While we are generally doubtful that the restriction on iron ore imports could last more than a month, our main concern is still the heavy delivery of newbuildings in 2H10 as global economies remain fragile and any additional tonnage would severely put the market to the test.

Bulkers aside, the tanker market continues to be weak, with the Baltic Clean Tanker (BCT) Index consolidating at 600 to 800 points. The worldwide mismatch between tanker supply and demand is capping any upside potential. Expectations of a prolonged "L" shaped recovery for tankers also prompt us to hold our bearish view on this division.

In addition, the 21.23% owned POSH is also seeing weaker rates to at least drag down the associate's contribution till June or July 2010 before possibly picking up in 2H. - OSK Research, April 22


This article appeared in The Edge Financial Daily, April 23, 2010.

Nestle hit by cocoa crunch

Nestle (Malaysia) Bhd
(April 22, RM35.36)
Maintain underperform at RM35.18, target price of RM28: On the surface, 1QFY10 was an exceptionally strong quarter as net profit accounted for 37% of our full-year forecast and consensus estimate. But we consider it to be broadly in line with expectations, as earnings in the coming quarters will be weighed down by major marketing campaigns, unlike in 1Q when the focus was on the relocation of the company's HQ from Nestle House to Menara Surian.

The absence of an interim dividend was not a surprise. We maintain our forecasts and target price of RM28 (discounted cash flow at weighted average cost of capital of 9%). While we continue to like Nestle's defensive earnings and reliable dividends, the stock remains an underperform given the potential de-rating catalysts of (1) an upturn in commodity prices; and (2) deceleration of export growth. QSR is our top F&B pick.

1Q revenue rose 4% year-on-year (y-o-y) and crossed the RM1 billion mark, thanks to (1) contributions from new production lines for Nescafe and Coffee-mate; and (2) higher selling prices for Milo products. Exports contributed 23% to revenue as Nestle continued to benefit from the shift of Maggi noodle production from Australia to Malaysia in early FY08.

Particularly outstanding was the improvement in earnings before interest tax, depreciation and amortisation (Ebitda) margin from 16% in 1QFY09 to 20% in 1QFY10 because of less intense marketing. However, marketing expenses will pick up in the coming quarters, potentially reversing the Ebitda margin to around 15%-16%.

Margin pressure could also come from the phenomenal rise of cocoa price. The international price of cocoa now hovers at £2,246/tonne (RM11,065), which is the highest in at least 21 years. The situation has forced Nestle to raise the prices of Milo powder and 3-in-1 mixes by 9% in 1Q. If input prices continue to offset internal initiatives, consumers may have to fork out more for Milo and confectionery this year.

Being Malaysia's biggest F&B producer, Nestle has some pricing power but faces a threat from cheaper alternatives such as hypermarkets' house brands.

In our forecasts, we assume capital expenditure of RM80 million-RM100 million per annum in FY10-FY12. - CIMB Research, April 22


This article appeared in The Edge Financial Daily, April 23, 2010.

MISC - MISC up on AmResearch upgrade

Stock Name: MISC
Company Name: MISC BHD
Research House: AMMB

KUALA LUMPUR: MISC BHD [] advanced in morning trade on Friday, April 23 after AmResearch upgraded the stock to a buy at RM8.80 with a higher fair value of RM11.80 (from RM8.85 previously) and said it had turned bullish on the company's prospects.

The counter was the top gainer in early trade Friday, advancing 28 sen to RM9.08 at 9.20am with 772,300 shares done.

The research house said the market would start to price in a recovery in tanker rates moving into 2HCY10, underpinned by deceleration in global fleet growth and a rebound in demand.

Meanwhile, container losses are expected to narrow, it said.

"MMHE is on the verge of a strong earnings upcycle as margins recover from depressed levels in FY10F. Having raised some RM5.2 billion from a recent rights issue, we sense that MISC is nearing a much-awaited acquisitive expansion.

"We have raised our projections by 1%-6% over FY11F-12F on back of higher tanker rate assumptions, lower losses for the container division and margin recovery at MMHE," it said.

AmResearch said MISC was hugely underowned by the market having underperformed the KLCI by 32% over the past 12 months.

"Convergence of the abovementioned catalysts should trigger a significant re-rating of MISC's share price, which in turn will trigger massive portfolio rebalancing by institutional funds given MISC's position as the 9th largest stock on the index with a significant 3.8% weighting," it said.

BAT - CIMB Research maintains underperform on BAT

Stock Name: BAT
Company Name: BRITISH AMERICAN TOBACCO (M)
Research House: CIMB

KUALA LUMPUR: CIMB Equities Research is maintaining its Underperform recommendation on BRITISH AMERICAN TOBACCO (M) [] Bhd and lowered the target price from RM42.00 to RM40.

It said on Friday, April 23 although BAT's 1Q10 core net profit accounted for 25% of its full-year forecast and 26% of consensus, it regarded the results as being below expectations.

CIMB Research said 1Q has traditionally made up 26%-28% of full-year numbers. In addition, it expects a weaker 2H in view of the ban of the higher-margin small packs in June this year.

As expected, no dividends were declared for 1Q. It is cutting FY10-12 earnings by 2%-5% for lower sales and margin assumptions.

"FY10-12 dividend forecasts are also crimped 3%-5%, which reduces our DDM-based target price from RM42.00 to RM40.00. Given the tough environment, we see little room for share price appreciation.

"We maintain our Underperform recommendation on the potential de-rating catalysts of 1) this poor set of results, 2) more regulatory negatives, 3) continuous market share loss to rival JT International, and 4) investors' appetite for higher-beta stocks," it added.

TOMYPAK - CIMB Research ups Tomypak TP to RM4.96

Stock Name: TOMYPAK
Company Name: TOMYPAK HOLDINGS BHD
Research House: CIMB

KUALA LUMPUR: CIMB Equities Research ups target price for Tomypak to RM4.96 from RM4.66 on expectations of higher margins.

It said on Friday, April 23 during a recent meeting Tomypak voiced its optimism over the prospects for this year, driven by projected orders from its existing major customers and rising demand for its high barrier metallised packaging products.

Shareholders are also likely to be rewarded with much higher dividends this year. Accordingly, CIMB Research raised its FY10-12 net dividend payout ratio from 24% to 27%, which increases our FY10 net DPS from 12 sen to 14 sen.

"We also raise our FY10-12 EBITDA margins by 1.2-2.0% pts for rising sales from its higher margin metallised packaging product. This ups FY10-12 EPS forecasts by 6-11%, leading to a higher target price of RM4.96 (RM4.66)," it said.

CIMB Equities Research said its target basis remains 8.4x CY11 P/E, a 30% discount to Daibochi's 12x target P/E.

"Tomypak remains an OUTPERFORM. Factors that could catalyse the stock include further margin expansion and stronger-than-expected revenue growth over the next few quarters," it said.

JAYCORP - RHB: Malaysia a small player in furniture mart

Stock Name: JAYCORP
Company Name: JAYCORP BHD
Research House: RHB

Furniture industry
Maintain neutral: Over the years, exports of furniture products have contributed significantly to Malaysia's total exports. In 2009, exports of Malaysian furniture products were valued at RM7.8 billion or 1.8% of total exports, at the same time achieving a commendable compound annual growth rate (CAGR) of 19.2% (from 1998 till 2009).

According to the Malaysian Industrial Development Authority (Mida), Malaysia exports to more than 160 countries with the main destinations being the US, Japan and Australia. Currently, Malaysia ranks as the 10th largest exporter of furniture in the world and second in Asia after China.

But as a global furniture player, Malaysia's market share is still very small. According to an independent market research report by Frost and Sullivan, the market size for global furniture was approximately US$302 billion (RM970 billion) in 2008. This would mean that Malaysia held approximately 1% of the global furniture industry market share in 2008 (based on the export furniture value for Malaysia worth RM9 billion in 2008).

Jaycorp Bhd is an integrated furniture manufacturer that is involved in: (1) upstream activities, which include sourcing of rubberwood, pressure treatment and kiln drying; (2) downstream activities - furniture manufacturing (mainly dining sets); and (3) packaging of materials. For 1HFY07/10, approximately 88.2% of its sales product mix was from furniture manufacturing. More than 75% of Jaycorp's 1HFY10 revenue is generated from its exports, where the key markets are the US, Europe and Australia.

Latitude Tree Holdings Bhd has carved out a strong niche in the household furniture segment, specifically dining and bedroom sets, and today the group has made great advances to position itself as one of the largest rubberwood furniture manufacturer and exporter in Malaysia and Vietnam.

We value both Jaycorp and Latitude based on seven times FY10 earnings per share (EPS), which is at 40% discount to our manufacturing sector price-earnings ratio (PER) of 12.2 times FY10. This suggests a fair value of RM1.20 for Jaycorp and RM3.85 for Latitude respectively.

Risks to our view include fluctuations in raw material prices; and a weaker US dollar against the ringgit.- RHB Research Institute, April 22


This article appeared in The Edge Financial Daily, April 23, 2010.

LATITUD - RHB: Malaysia a small player in furniture mart

Stock Name: LATITUD
Company Name: LATITUDE TREE HOLDINGS BHD
Research House: RHB

Furniture industry
Maintain neutral: Over the years, exports of furniture products have contributed significantly to Malaysia's total exports. In 2009, exports of Malaysian furniture products were valued at RM7.8 billion or 1.8% of total exports, at the same time achieving a commendable compound annual growth rate (CAGR) of 19.2% (from 1998 till 2009).

According to the Malaysian Industrial Development Authority (Mida), Malaysia exports to more than 160 countries with the main destinations being the US, Japan and Australia. Currently, Malaysia ranks as the 10th largest exporter of furniture in the world and second in Asia after China.

But as a global furniture player, Malaysia's market share is still very small. According to an independent market research report by Frost and Sullivan, the market size for global furniture was approximately US$302 billion (RM970 billion) in 2008. This would mean that Malaysia held approximately 1% of the global furniture industry market share in 2008 (based on the export furniture value for Malaysia worth RM9 billion in 2008).

Jaycorp Bhd is an integrated furniture manufacturer that is involved in: (1) upstream activities, which include sourcing of rubberwood, pressure treatment and kiln drying; (2) downstream activities - furniture manufacturing (mainly dining sets); and (3) packaging of materials. For 1HFY07/10, approximately 88.2% of its sales product mix was from furniture manufacturing. More than 75% of Jaycorp's 1HFY10 revenue is generated from its exports, where the key markets are the US, Europe and Australia.

Latitude Tree Holdings Bhd has carved out a strong niche in the household furniture segment, specifically dining and bedroom sets, and today the group has made great advances to position itself as one of the largest rubberwood furniture manufacturer and exporter in Malaysia and Vietnam.

We value both Jaycorp and Latitude based on seven times FY10 earnings per share (EPS), which is at 40% discount to our manufacturing sector price-earnings ratio (PER) of 12.2 times FY10. This suggests a fair value of RM1.20 for Jaycorp and RM3.85 for Latitude respectively.

Risks to our view include fluctuations in raw material prices; and a weaker US dollar against the ringgit.- RHB Research Institute, April 22


This article appeared in The Edge Financial Daily, April 23, 2010.

MAYBULK - Maybulk still in choppy waters, says OSK

Stock Name: MAYBULK
Company Name: MALAYSIAN BULK CARRIERS BHD
Research House: OSK

Malaysian Bulk Carriers Bhd (Maybulk)
(April 22, RM3.04)
Maintain neutral at RM3.01 with target price of RM3.03: We took a brief look at Maybulk after a series of developments in the iron ore market but again found ourselves looking at a familiar bearish scenario of newbuilding of vessels' capacity capping the upside of the Baltic Dry Index (BDI), a still anaemic tanker market and no major surprises from its associated company PACC Offshore Services Holdings Group (POSH).

With the lack of upside and our already aggressive sum-of-parts (SOP) valuation, our target price of RM3.03 remains unchanged and we reiterate our neutral recommendation.

The world's top miners Vale and BHP Billiton made the first move last month by changing their iron ore benchmark to quarterly contracts. Last week, Rio Tinto jumped onto the bandwagon by confirming the sale of iron ore on a quarterly pricing basis, also putting an end to the decades-old annual benchmark pricing system.

Including Rio Tinto, the trio control approximately two thirds of total seaborne iron ore trade. Although details on the new system are unclear and most steel millers and miners have not reached formal contracts, we think the quarterly pricing approach has obviously brought about more volatility in demand of the commodity, and thus bulkers.

Disagreement over the sharp price increase prompted the China Iron and Steel Association (Cisa) to call for steel mills to boycott purchases from the three giant miners for three months and will likely weaken overall capesize activity. Apart from that, a Chinese trade body has banned its members from importing iron ore with less than 60% iron content, raising concerns about the knock-on effects on bulker demand. China may also investigate suspected monopoly abuse on the part of the world's three mining giants as the timing of Rio Tinto's statement on its iron ore contract appeared to have been coordinated with Vale's and BHP Billiton's at a sensitive time for iron ore talks. The three mining giants' supply, transportation, pricing and timing moves are seen to be highly coordinated, which is clearly an indication of monopoly abuse.

While we are generally doubtful that the restriction on iron ore imports could last more than a month, our main concern is still the heavy delivery of newbuildings in 2H10 as global economies remain fragile and any additional tonnage would severely put the market to the test.

Bulkers aside, the tanker market continues to be weak, with the Baltic Clean Tanker (BCT) Index consolidating at 600 to 800 points. The worldwide mismatch between tanker supply and demand is capping any upside potential. Expectations of a prolonged "L" shaped recovery for tankers also prompt us to hold our bearish view on this division.

In addition, the 21.23% owned POSH is also seeing weaker rates to at least drag down the associate's contribution till June or July 2010 before possibly picking up in 2H. - OSK Research, April 22


This article appeared in The Edge Financial Daily, April 23, 2010.

NESTLE - Nestle hit by cocoa crunch

Stock Name: NESTLE
Company Name: NESTLE (M) BHD
Research House: CIMB

Nestle (Malaysia) Bhd
(April 22, RM35.36)
Maintain underperform at RM35.18, target price of RM28: On the surface, 1QFY10 was an exceptionally strong quarter as net profit accounted for 37% of our full-year forecast and consensus estimate. But we consider it to be broadly in line with expectations, as earnings in the coming quarters will be weighed down by major marketing campaigns, unlike in 1Q when the focus was on the relocation of the company's HQ from Nestle House to Menara Surian.

The absence of an interim dividend was not a surprise. We maintain our forecasts and target price of RM28 (discounted cash flow at weighted average cost of capital of 9%). While we continue to like Nestle's defensive earnings and reliable dividends, the stock remains an underperform given the potential de-rating catalysts of (1) an upturn in commodity prices; and (2) deceleration of export growth. QSR is our top F&B pick.

1Q revenue rose 4% year-on-year (y-o-y) and crossed the RM1 billion mark, thanks to (1) contributions from new production lines for Nescafe and Coffee-mate; and (2) higher selling prices for Milo products. Exports contributed 23% to revenue as Nestle continued to benefit from the shift of Maggi noodle production from Australia to Malaysia in early FY08.

Particularly outstanding was the improvement in earnings before interest tax, depreciation and amortisation (Ebitda) margin from 16% in 1QFY09 to 20% in 1QFY10 because of less intense marketing. However, marketing expenses will pick up in the coming quarters, potentially reversing the Ebitda margin to around 15%-16%.

Margin pressure could also come from the phenomenal rise of cocoa price. The international price of cocoa now hovers at £2,246/tonne (RM11,065), which is the highest in at least 21 years. The situation has forced Nestle to raise the prices of Milo powder and 3-in-1 mixes by 9% in 1Q. If input prices continue to offset internal initiatives, consumers may have to fork out more for Milo and confectionery this year.

Being Malaysia's biggest F&B producer, Nestle has some pricing power but faces a threat from cheaper alternatives such as hypermarkets' house brands.

In our forecasts, we assume capital expenditure of RM80 million-RM100 million per annum in FY10-FY12. - CIMB Research, April 22


This article appeared in The Edge Financial Daily, April 23, 2010.

KOSSAN - Kossan's bonus issue within expectation

Stock Name: KOSSAN
Company Name: KOSSAN RUBBER INDUSTRIES BHD
Research House: MIDF

Kossan Rubber Industries Bhd
(April 22, RM7.93)
Reiterate trading buy at RM7.90 with unchanged target price of RM9.04: As expected, Kossan finally announced its long-anticipated proposed one-for-one bonus issue on April 21. This bonus issue is the fourth for Kossan since its listing in 1996.

Based on the company's track record, Kossan tends to make a bonus issue every three years. We have also stated in our previous reports that the corporate exercise is viable, after taking into account the fact that Kossan's retained earnings is 3.5 times its share capital.

Upon completion of the bonus issue, Kossan's issued and paid-up share capital shall be enlarged to RM159.9 million comprising 319.7 million shares of 50 sen par each, from 159.9 million shares as at Dec 31, 2009.

This exercise will not change our earnings forecast and the valuation on the stock but will help to improve the liquidity and the marketability of the shares. Besides, it is also a way to reward shareholders.

In order to facilitate the issuance of new shares resulting from the proposed bonus issue, as well as to cater for any future increases in the share capital of the company, Kossan has also proposed to increase its authorised share capital.

The proposed corporate exercises are subject to the approval from Bursa Malaysia and shareholders at the forthcoming EGM. The management expects the proposals to be completed by 3QCY10.

We are maintaining our earnings forecast for FY10 pending the completion of the exercise. We are also maintaining our trading buy recommendation on Kossan with an unchanged target price of RM9.04 (before adjusting for bonus issue), derived from 14 times earnings per share (EPS) FY10.

Kossan is our top pick for the glove sector, taking into account its discounted valuation as compared to its peers. Furthermore, we also expect a potential re-rating of the counter when investors regain confidence on Kossan after the fire incidents and forex losses last year. - MIDF Research, April 22


This article appeared in The Edge Financial Daily, April 23, 2010.

MAHSING - MIDF bullish on Mah Sing's Jln Ampang plan

Stock Name: MAHSING
Company Name: MAH SING GROUP BHD
Research House: MIDF

Mah Sing Group Bhd
(April 23, RM1.68)
Maintain buy at RM1.65 with target price of RM1.94: Launches from the M Suites@Jalan Ampang's development will be catered to local professionals and foreign buyers looking for affordable high-rise serviced apartments in the heart of KLCC. The residence will house units with built-ups between 430sf and1,150sf. In addition, the serviced residence will also house retail outlets on the ground floor of the development as well as recreational facilities such as a swimming pool and a podium roof garden. We believe the property will be able to garner strong interest given its strategic location coupled with convenient amenities with direct access to key access roads MRR2 highway, Smart highway and Maju Expressway. The estimated gross development value (GDV) is approximately RM257 million. The development named M Suites@Jalan Ampang will be housed under Mah Sing's new brand "M Suites" which offers mid to high end high-rise residences. Construction works is expected to commence by 2H10 and to be developed over three years.

Note that this is not Mah Sing's first venture into high-rise residence. We believe demand was supported by the successful response for its Icon Residence@Mont'Kiara and Icon Residence@Penang. Other high-rise condominium developments are located at Garden Plaza (Cyberjaya) and high-rise residence on the land parcel along Pykett Road (Penang). More so, the introduction of high-rise residence development will complete the group's product offerings and launch its brand name to compete with the likes of Ireka Corp Bhd and Sunrise Bhd.

The present ample supply of high-rise residential units in Kuala Lumpur City Centre (KLCC) presents further pressure on prices. Present yields have declined from 7% to 4%. Data collected by Henry Butcher indicate up to 19,455 new units (+40.5%) will be introduced through 2012. Nevertheless, we believe prices of residential properties will recover with the return of foreign interest and domestic investors favouring inflation-hedging asset class. We gather from key developers that present local investors are still keen on properties within KLCC, but are either looking for own-occupancy or smaller sized units, which are easier to disposed off in the market. We believe reception for M Suites@Jalan Ampang will be encouraging due to Mah Sing's brand name and on the back of the company's successful launch of the Icon Residence@Mont'Kiara and Icon Residence@Penang which have been receptive.

Inclusion of the M-Suites development could potentially raise EPS for FY11/12 by +5.4% and +15.0%, respectively. We have introduced our FY11 numbers, which also reflects contributions from the Pykett development (Penang) and M-Residences.

Our preliminary estimates suggest that the balance purchase sum of RM48.42 million will be financed via Debt/Equity of 70:30. Assuming an average financing cost of 4.5%, Mah Sing's gearing levels and interest coverage ratio remains fair at 0.31 times (versus peers of 0.55 times) and 30.6 times (versus peers of 22.8 times) which are in-line with its peers.

Maintain buy with an adjusted target price of RM1.94 (ex-bonus issue). Our target price is derived from the group's revised net asset value (RNAV) parity. Mah Sing remains our sector's top pick given its (i) proven ""quick turnaround model'' (ii) commendable GDV balance that provides strong earnings visibility, (iii) healthy balance sheet, (iv) steady historical dividend yield (4%-6%) and consistent mid-teens return on equity (ROE) (five-year average 15.7%). The group's year-to-date sales remain impressive at RM516 million, accounting for almost 50% of its FY10 target of RM1 billion. We remain confident the group is on track to meet its FY10's sales target with future launches. - MIDF Research, April 23


This article appeared in The Edge Financial Daily, April 26, 2010.

Media Prima best proxy to sector, says OSK

Media Prima Bhd
(April 21, RM2.21)
Initiating coverage with a buy at RM2.25: target price of RM2.60: Over the years, Media Prima has transformed from a single media entity into an integrated media group with presence across all platforms.

We see MPB as the best proxy to the entire media sector, which is expected to grow in line with the country's growing economic prosperity.

Following a series of acquisitions, Media Prima has become the only integrated media player in Malaysia with exposure to all the media platforms, which we believe works to the group's advantage.

As an integrated media group, it benefits from synergies across areas such as back-office consolidation, cross marketing and expanded reach across media platforms, as well as focused segmentation, which facilitate its marketing efforts and revenue strategies.

Supported by its exposure in all platforms, we believe the group will also be the key beneficiary from advertising expenditure (adex) growth.

With the Malaysian economy projected to grow at more than 5% in 2010 and over the next few years, Media Prima - which has the biggest exposure in the media sector - may gain the most from the favourable sector outlook. This would also see the group posting better financial performance going forward.

Given the fast-growing adex, particularly in the TV, radio and Malay market segments, Media Prima is in the right position to capture their growth potential.

As the TV and radio segments continue to snare adex share from the newspapers, Media Prima is set to gain the lion's share of total adex given its strong hold in the TV and radio segments.

Although the newspaper segment has been losing adex share over the last few years, the Malay newspaper sub-segment has been doing otherwise. As such, Media Prima, through its subsidiary The New Straits Times Press (Malaysia) Bhd, is expected to reap the benefits driven particularly by Harian Metro, which currently has the highest daily circulation and a growing adex share.

We initiate coverage on Media Prima with a buy recommendation at a target price of RM2.60 based on the regional sector price-earnings ratio (PER) of 18 times on FY10 earnings per share (EPS).

The 18 times PER implies a premium of 25% over its historical PER (since its listing in Oct 2003) of 14.4 times, which we deem reasonable given that the group has over the years emerged stronger and more robust, and can now lay claim to being the country's only integrated media company.

With some of its regional peers trading at more than 20 times PERs, we do not discount the possibility of an upward PER re-rating as Media Prima is the only proxy to the country's fast-growing broadcasting industry, especially after the upcoming privatisation of Astro. - OSK Research, April 21


This article appeared in The Edge Financial Daily, April 16, 2010.

Inter-Pac sees room for re-rating Axis REIT

Axis Real Estate Investment Trust
(April 21, RM2)
Outperform at RM2, target price RM2.30: We recommend Axis REIT as an outperform with our target price at RM2.30 based on a 5% discount using discounted cash flow (DCF) valuation.

We believe there is room for potential re-rating to our fair value given that Axis REIT has four properties in the pipeline namely Axis Technology Centre and Axis Techpoint 1 in PJ, Axis SADC 2&3 in Shah Alam and Axis PDI Centre in Klang which has not been imputed into our valuation.

Axis REIT is also looking at acquiring office buildings in Cyberjaya, factory/warehouse in Puchong and a logistic warehouse in Johor. We believe Axis REIT will embark on its expansion plan with acquisition of the said properties through bank borrowings and share placement sometime this year.

Annualising 1QFY10 gross rental income of RM19.79 million comes to RM79.16 million, accounting for 94% of our FY10 forecast. Nonetheless, our forecast had factored in future revenue from Quattro West (former Nestle House), Shah Alam DC1 (SADC1) and rental reversion of existing properties. Quattro West had successfully leased out 84% of the space commencing 2H10 following the refurbishment in 2009.

SADC 1 had secured new tenancies for a period of 11 years commencing end-March 2010 at 8% rental reversion. Axis REIT management had also renegotiated 451,868 sq ft of space, which represents approximately 54% of their total lettable space due for renewals.

The increase in gross rental income was due to additional rental contribution from newly acquired properties - two Seberang Perai logistic warehouses, which were completed in March, and a Bukit Raja distribution centre that was completed in mid-December 2009.

Axis-REIT has made a provision of RM11.36 million for income distribution for the first quarter ended March 31, 2010, which is approximately 95.5% of its realised income before tax in respect of the period from Jan 1, 2010 to March 31, 2010 and the brought forward undistributed retained earnings as at Jan 1, 2010. This leaves its undistributed realised income before taxation at RM530,000.

Axis expects to complete the acquisition of PTP D, Johor that comprises a warehouse and two-storey office buildings in October 2010. The purchase consideration of RM30 million is at a 3.23% discount to the market value providing unitholders with a net capital gain of approximately RM500,000.

The acquisition will be funded via bank borrowings, which will raise Axis REIT's gearing level to 37.49% from the current 35.43%. - Inter-Pacific Research, April 21


This article appeared in The Edge Financial Daily, April 16, 2010.

Maybank IB: Bursa still trading at premium to peers

Bursa Malaysia Bhd
(April 21, RM7.67)
Maintain sell at RM7.60 with an unchanged target price of RM6.50: Bursa's RM28 million 1Q10 net profit was within our expectations, at 23% of our full-year forecast, but below consensus, at 20%.

The results showed a marked improvement due to higher market activities. There is no change to our earnings forecasts and target price, pegged to 20 times 2011 earnings plus available cash. Bursa is still trading at a premium to its peers, sell.

1Q10 core net profit rose 81% year-on-year (y-o-y) and 38% quarter-on-quarter (q-o-q). Operating revenue jumped 41% y-o-y and 9% q-o-q driven by improved trading revenue from equity (+103% y-o-y, +18% q-o-q), which made up 49% of the total.

Equity average daily trading value (ADV) was stronger at RM1.53 billion in 1Q10 (+122% y-o-y, +26% q-o-q), on a higher trading velocity of 35% (+12 percentage points y-o-y, +7ppt q-o-q). The earnings before interest and tax (Ebit) margin rose to 45% (+10.8ppt y-o-y, +9ppt q-o-q) partly due to lower staff costs after year-end bonus. We retain our ADV forecasts at RM1.34 billion for 2010 (+10% y-o-y) based on a weaker market outlook in 2H. We project a stronger RM1.56 billion ADV (+16% y-o-y) for 2011.

Consequently, we forecast a 22% growth in net profit in 2010 and 18% in 2011. Bursa's collaboration with the Chicago Mercantile Exchange (CME) for derivative products should see the full impact from 2011 onwards.

Bursa's focus in 2010 would be to strengthen liquidity and efficiencies in equities, develop the derivatives market further and internationalise Islamic market products.

At current levels, it continues to trade above its peers - seven to 10 times 2010 price-earnings ratio (PER) multiples above the Hong Kong and Singapore exchanges. Foreign shareholding however has come off to 15.6% as at March 2010, from 17.6% as at Dec 2009. - Maybank IB, April 21


This article appeared in The Edge Financial Daily, April 16, 2010.

CIMB remains neutral on Tenaga

Tenaga Nasional Bhd
(April 21, RM8.39)
Maintain neutral at RM8.50 with higher target price of RM9.45: As previewed, Tenaga's 1HFY8/10 core net profit beat expectations - annualised core net profit came in 22% ahead of our forecast due to stronger-than-expected demand.

The six sen gross interim dividend per share (DPS) was below our 8-9 sen expectations but higher than last year's 4.7 sen. We continue to expect a margin squeeze in 2H from higher coal costs.

However, we raise our power demand growth forecast for FY10 from 4.8% to 8% and lift FY11's growth from 3% to 4.5%, closer to our CY11 GDP forecast of 5.5%. This increases our FY10-FY12 core earnings per share (EPS) by 7%-11%.

Despite the disappointing interim DPS, we are retaining our FY10-FY12 DPS projections as we expect a stronger final payout. Tenaga remains committed to its 40%-60% free cash flow policy. Its RM5.4 billion cash balance should also help.

Post earnings upgrade, our end-CY10 target price rises from RM9.15 to RM9.45, based on an unchanged price-book value (P/BV) of 1.4 times. Tenaga remains a neutral as fuel-related risks could surface in FY11 in the absence of a transparent pass-through formula.

We also see uncertainty over the next tariff review and Tenaga's plans to source hydropower from Sarawak.

Its topline rose 3% year-on-year (y-o-y), lifted by the 8% y-o-y uptick in Peninsular Malaysia's electricity sales. This more than offset March 2009's 3.7% tariff cut and weaker earnings from EGAT and Liberty Power.

Tenaga revealed an 11.7% y-o-y rise in March 2010's sales, which helped push overall power demand in the first seven months 8.5% higher y-o-y, well ahead of our 4.8% projection for the full year.

Tenaga's earnings before interest and tax (Ebit) uptick was more pronounced (+29% y-o-y), thanks to coal-related savings, which more than offset the 10% increase in non-fuel costs. Its average coal costs settled at US$81/tonne (RM258) at the mid-year mark, 20% below 1HFY09's US$101.

But margin squeeze lies ahead. We expect a heavier cost structure in the coming two quarters, particularly from coal. - CIMB Research, April 21


This article appeared in The Edge Financial Daily, April 16, 2010.

TENAGA - CIMB remains neutral on Tenaga

Stock Name: TENAGA
Company Name: TENAGA NASIONAL BHD
Research House: CIMB

Tenaga Nasional Bhd
(April 21, RM8.39)
Maintain neutral at RM8.50 with higher target price of RM9.45: As previewed, Tenaga's 1HFY8/10 core net profit beat expectations - annualised core net profit came in 22% ahead of our forecast due to stronger-than-expected demand.

The six sen gross interim dividend per share (DPS) was below our 8-9 sen expectations but higher than last year's 4.7 sen. We continue to expect a margin squeeze in 2H from higher coal costs.

However, we raise our power demand growth forecast for FY10 from 4.8% to 8% and lift FY11's growth from 3% to 4.5%, closer to our CY11 GDP forecast of 5.5%. This increases our FY10-FY12 core earnings per share (EPS) by 7%-11%.

Despite the disappointing interim DPS, we are retaining our FY10-FY12 DPS projections as we expect a stronger final payout. Tenaga remains committed to its 40%-60% free cash flow policy. Its RM5.4 billion cash balance should also help.

Post earnings upgrade, our end-CY10 target price rises from RM9.15 to RM9.45, based on an unchanged price-book value (P/BV) of 1.4 times. Tenaga remains a neutral as fuel-related risks could surface in FY11 in the absence of a transparent pass-through formula.

We also see uncertainty over the next tariff review and Tenaga's plans to source hydropower from Sarawak.

Its topline rose 3% year-on-year (y-o-y), lifted by the 8% y-o-y uptick in Peninsular Malaysia's electricity sales. This more than offset March 2009's 3.7% tariff cut and weaker earnings from EGAT and Liberty Power.

Tenaga revealed an 11.7% y-o-y rise in March 2010's sales, which helped push overall power demand in the first seven months 8.5% higher y-o-y, well ahead of our 4.8% projection for the full year.

Tenaga's earnings before interest and tax (Ebit) uptick was more pronounced (+29% y-o-y), thanks to coal-related savings, which more than offset the 10% increase in non-fuel costs. Its average coal costs settled at US$81/tonne (RM258) at the mid-year mark, 20% below 1HFY09's US$101.

But margin squeeze lies ahead. We expect a heavier cost structure in the coming two quarters, particularly from coal. - CIMB Research, April 21


This article appeared in The Edge Financial Daily, April 16, 2010.

AXREIT - Inter-Pac sees room for re-rating Axis REIT

Stock Name: AXREIT
Company Name: AXIS REITS
Research House: INTER PACIFIC

Axis Real Estate Investment Trust
(April 21, RM2)
Outperform at RM2, target price RM2.30: We recommend Axis REIT as an outperform with our target price at RM2.30 based on a 5% discount using discounted cash flow (DCF) valuation.

We believe there is room for potential re-rating to our fair value given that Axis REIT has four properties in the pipeline namely Axis Technology Centre and Axis Techpoint 1 in PJ, Axis SADC 2&3 in Shah Alam and Axis PDI Centre in Klang which has not been imputed into our valuation.

Axis REIT is also looking at acquiring office buildings in Cyberjaya, factory/warehouse in Puchong and a logistic warehouse in Johor. We believe Axis REIT will embark on its expansion plan with acquisition of the said properties through bank borrowings and share placement sometime this year.

Annualising 1QFY10 gross rental income of RM19.79 million comes to RM79.16 million, accounting for 94% of our FY10 forecast. Nonetheless, our forecast had factored in future revenue from Quattro West (former Nestle House), Shah Alam DC1 (SADC1) and rental reversion of existing properties. Quattro West had successfully leased out 84% of the space commencing 2H10 following the refurbishment in 2009.

SADC 1 had secured new tenancies for a period of 11 years commencing end-March 2010 at 8% rental reversion. Axis REIT management had also renegotiated 451,868 sq ft of space, which represents approximately 54% of their total lettable space due for renewals.

The increase in gross rental income was due to additional rental contribution from newly acquired properties - two Seberang Perai logistic warehouses, which were completed in March, and a Bukit Raja distribution centre that was completed in mid-December 2009.

Axis-REIT has made a provision of RM11.36 million for income distribution for the first quarter ended March 31, 2010, which is approximately 95.5% of its realised income before tax in respect of the period from Jan 1, 2010 to March 31, 2010 and the brought forward undistributed retained earnings as at Jan 1, 2010. This leaves its undistributed realised income before taxation at RM530,000.

Axis expects to complete the acquisition of PTP D, Johor that comprises a warehouse and two-storey office buildings in October 2010. The purchase consideration of RM30 million is at a 3.23% discount to the market value providing unitholders with a net capital gain of approximately RM500,000.

The acquisition will be funded via bank borrowings, which will raise Axis REIT's gearing level to 37.49% from the current 35.43%. - Inter-Pacific Research, April 21


This article appeared in The Edge Financial Daily, April 16, 2010.

BURSA - Maybank IB: Bursa still trading at premium to peers

Stock Name: BURSA
Company Name: BURSA MALAYSIA BHD
Research House: MAYBANK

Bursa Malaysia Bhd
(April 21, RM7.67)
Maintain sell at RM7.60 with an unchanged target price of RM6.50: Bursa's RM28 million 1Q10 net profit was within our expectations, at 23% of our full-year forecast, but below consensus, at 20%.

The results showed a marked improvement due to higher market activities. There is no change to our earnings forecasts and target price, pegged to 20 times 2011 earnings plus available cash. Bursa is still trading at a premium to its peers, sell.

1Q10 core net profit rose 81% year-on-year (y-o-y) and 38% quarter-on-quarter (q-o-q). Operating revenue jumped 41% y-o-y and 9% q-o-q driven by improved trading revenue from equity (+103% y-o-y, +18% q-o-q), which made up 49% of the total.

Equity average daily trading value (ADV) was stronger at RM1.53 billion in 1Q10 (+122% y-o-y, +26% q-o-q), on a higher trading velocity of 35% (+12 percentage points y-o-y, +7ppt q-o-q). The earnings before interest and tax (Ebit) margin rose to 45% (+10.8ppt y-o-y, +9ppt q-o-q) partly due to lower staff costs after year-end bonus. We retain our ADV forecasts at RM1.34 billion for 2010 (+10% y-o-y) based on a weaker market outlook in 2H. We project a stronger RM1.56 billion ADV (+16% y-o-y) for 2011.

Consequently, we forecast a 22% growth in net profit in 2010 and 18% in 2011. Bursa's collaboration with the Chicago Mercantile Exchange (CME) for derivative products should see the full impact from 2011 onwards.

Bursa's focus in 2010 would be to strengthen liquidity and efficiencies in equities, develop the derivatives market further and internationalise Islamic market products.

At current levels, it continues to trade above its peers - seven to 10 times 2010 price-earnings ratio (PER) multiples above the Hong Kong and Singapore exchanges. Foreign shareholding however has come off to 15.6% as at March 2010, from 17.6% as at Dec 2009. - Maybank IB, April 21


This article appeared in The Edge Financial Daily, April 16, 2010.

Construction sector building up nicely

Construction sector
Remain overweight: Construction stocks under our coverage have gained 9%-35% year to date (YTD) led by Hock Seng Lee (HSL; +35%) and Sunway (+21%), outperforming the FBM KLCI's +4%.

News flow should pick up in the coming months, driving share prices further. Our top pick is WCT, which should benefit from its multi-presence in the Middle East, East and Peninsular Malaysia. We recently upgraded IJM to a buy, and remain buyers of Gamuda, Sunway, HSL and Loh & Loh.

As expected, 1Q10 was quiet in terms of project awards as pre-qualifications, tenders and evaluations were ongoing. Except for IJM which firmed up the supplementary Besraya concession leading to RM600 million worth of works, and the Sinohydro-Loh & Loh joint venture (JV) which won the RM828 million Hulu Terengganu hydroelectric project civil works, there were no significant construction wins (less than RM500 million).

Our records show RM3.1 billion of domestic job wins in 2010-YTD versus RM9.7 billion in 2009.

Last week's award of works on two roads leading to the Murum Dam in Sarawak worth RM247 million lifts hopes that the remaining two to three Murum road packages would be awarded soon.

Likely beneficiaries are HSL and Loh & Loh. The Edge weekly this week reports that Syarikat Prasarana Negara would announce the main contractors pre-qualified (pre-Q) for the first package of the Klang Valley LRT extension (Kelana Jaya line) soon. An award is expected in two months. Six players including UEM, IJM and Putrajaya Perdana are in the running. We understand that WCT, Gamuda and Sunway have also participated in the pre-Q.

The groundbreaking ceremony for the Pahang-Selangor water transfer project was held on April 6, 11 months after the letter of acceptance was given for the RM1.3 billion tunnel works package (in May 2009) to the Shimizu-Nishimatsu-UEM-IJM JV.

The pumping station package worth RM300 million is close to being awarded to a Japanese-led consortium. At the Sepang LCCT project, the award for the main terminal and satellite building works worth RM1 billion is pending - the press reported in February that five contractors had been shortlisted.

As we have explored in our sector update early this year, 2010 would be a year of events; themes are the unveiling of the 10th Malaysia Plan (10MP) and the run-up to the Sarawak state election. The 10MP would be unveiled in June, which would see a larger private sector role in the form of private finance initiative (PFI) projects.

We expect higher development spend for East Malaysia under the 10MP supported by the New Economic Model's high-income society target. The Sarawak state election (due by May 2011) and the Sarawak Corridor of Renewable Energy (Score) should continue to drive interest in Sarawak stocks. - Maybank IB, April 20
This article appeared in The Edge Financial Daily, April 21, 2010.

Inter-Pac: Notion Vtec forging ahead

Notion Vtec Bhd
(April 20, RM3.34)
Maintain outperform at RM3.34 with target price of RM3.78: Notion Vtec, an integrated precision engineering specialist, supplies high precision components mainly to hard disk drive (HDD) and single-lens reflex (SLR) camera manufacturers.

Its main customers for HDD business are Western Digital and Nikon for the SLR camera business segment, each contributing about 30%-35% to its top line. It expects to register double-digit growth in 2010 and 2011 on the back of stronger demand for both their products.

The HDD outlook is expected to grow positively driven by: (1) increasing digital information flow which raises the need for digital storage; (2) rising consumer spending in electronic products and personal computers; and (3) a recovery in corporate IT spending.

According to Trendfocus, the estimated compound annual growth rate (CAGR) for global HDD is 8.5% between CY09 and CY12, and 17.9% for the 2.5" HDD for the same period.

Although the SLR camera business over the last two years outshined HDD business to become the major revenue contributor, Notion expects the HDD business to become its top revenue contributor for FY10 onwards mainly coming from the 2.5" base plate with stator and spindle motor production for Samsung.

The base plate with spindle motor hub production volume for Samsung is expected to increase from 250,000 pieces per month currently to two million pieces by 4QFY10 and subsequently to four million a month by FY12.

To meet the steep demand, Notion has rented a third factory in Klang and is expected to be commissioned by August. When fully operational, the factory will have the capacity of up to seven million pieces a month.

Besides Samsung, Notion is also in talks with Alphana. We expect HDD revenue to grow by 35% in FY10 and 57% in FY11 when the contribution from the base plate and spindle motor hub contribution kicks in.

According to Camera & Imaging Products Association (CIPA), CY10 shipments of digital SLR cameras with interchangeable lens should reach 11 million units or up 11.1% year-on-year (y-o-y). At the same time, the total shipment of interchangeable lens for SLR cameras will grow by 11.2% y-o-y or 17.9 million units in CY10.

Nikon, Notion's largest camera customer, acquired a 8.98% stake in Notion via private placement. The private placement raised about RM33.8 million and will be used to set up its Thailand plant in Ayuthaya and also for working capital.

Notion is unable to pass down any increase in raw material cost to its customer. Hence, for better cost control, it does most of the tooling in-house. To further increase cost efficiency, it plans to purchase the balance 60% of the nickel plating company, which they currently own 40%.

Underpinned by its aggressive expansion, we project Notion capex will be RM100 million in FY10 and RM75 million in FY11. Capex in FY10 will include (1) RM35 million Thailand factory; (2) RM10 million expansion in China; and (3) RM20 million for its third factory expansion.

We remain positive on Notion on the back of strong growth coming from both the HDD and SLR camera segments. Nevertheless, Notion is exposed to currency fluctuation as most of their HDD sales are carried out in the US dollar. The strengthening of the ringgit versus the US dollar will bite its bottom line slightly.

Our fair value of RM3.78 is based on FY11 earnings per share (EPS) of 36 sen and PER of 10.5 times. - Inter-Pacific Research, April 20
This article appeared in The Edge Financial Daily, April 21, 2010.

AEONCR - AEON Credit to sustain growth momentum

Stock Name: AEONCR
Company Name: AEON CREDIT SERVICE (M) BHD
Research House: OSK

AEON Credit Service (M) Bhd
(April 20, RM4.04)
Maintain buy at RM4.08, target price of RM4.95: AEON Credit's revenue and net profit for 4QFY10 grew 4.4% and 5.2% respectively year-on-year (y-o-y) on the back of a growing customer base due to successful promotions and the expansion of its market reach.

This is in line with its growing trade receivables, which were higher by 8.4% y-o-y. However, net profit rose by a marginal 0.2% quarter-on-quarter due to flattish trade receivables, as there were fewer working days in the month of February.

Although a service tax on credit cards was imposed effective Jan 1, 2010, credit card retail transactions surged 16% against that in the preceding quarter as the company allowed its credit cardholders to redeem a RM50 department store voucher for a total of 12,500 points collected.

As part of its efforts to reward its shareholders, a final dividend of 12 sen per share was proposed for the quarter, which translates into a total dividend payout of 37.3% for FY10.

Due to a prudent lending policy and effective credit management, AEON Credit non-performing loans (NPL) declined marginally from 1.87% to 1.80% y-o-y.

In growing its customer base, AEON Credit is looking to convert the face of all its cards to a standard one bearing the "AEON" design, expand its used car easy payment financing in the east coast, Sabah and Sarawak, and launch a new loyalty programme and a new AEON web portal.

As the company expects to sustain its growth momentum, we are maintaining our buy call on AEON Credit with a target price of RM4.95 (based on a historical two-year price earnings band of 8.5 times over FY11 earnings per share). - OSK Research, April 20
This article appeared in The Edge Financial Daily, April 21, 2010.

More upside in store for Dayang

Dayang Enterprise Holdings Bhd
(April 20, RM1.96)
Maintain buy at RM1.93 with target price of RM2.60: We understand that Petronas Carigali is expected to call a tender for its offshore topside maintenance services in the next few months. Early estimates put the contract values for both Peninsular Malaysia (PMO) and Sarawak and Sabah (SKO & SBO) operations at around RM1.2 billion.

Dayang is currently the incumbent for the SKO & SBO while Vastalux holds the PMO operations.

We believe Dayang is well poised to secure the contracts (especially the SKO & SBO) given its long-standing track record as well as ownership of a fleet of workboats which are assets required for the job. Success here would lead to an earnings upgrade in our forecast.

Typically, a maintenance contract value tends to be higher than the original award as additional works apart from those stipulated may need to be carried out.

Similarly, the eventual value of the Sarawak Shell Bhd/Sabah Shell Petroleum Co Ltd (SSB/SSPC) contract could be higher than the RM400 million secured, or 1.25 times of the original value as a rule of thumb, translating into about RM500 million (FY10F contract wins assumption).

Meanwhile, we understand that Borcos may make a provision for previous years' taxation owing from vessels' charter income. However, this is pending discussion with the auditors. We estimate potential downside of 6% in earnings could be made up by stronger contribution from Dayang's oil and gas operations.

Dayang's valuation remains undemanding at FY11F price-to-earnings (PE) and price-to-book-value (PBV) of 8.3 times and 1.6 times, respectively. We view the recent market correction as a good opportunity to accumulate the shares.

Dayang offers strong growth (FY09-FY11F net profit compound annual growth rate of 31.3%) and is a good proxy to oil and gas contract newsflow.

We maintain buy call and RM2.60 per share target price, pegged to 11 times FY11F earnings per share (EPS). - HwangDBS Vickers Research, April 20
This article appeared in The Edge Financial Daily, April 21, 2010.

PUNCAK - CIMB Research maintains Trading Buy on water sector

Stock Name: PUNCAK
Company Name: PUNCAK NIAGA HOLDINGS BHD
Research House: CIMB

KUALA LUMPUR: CIMB Equities Research is maintaining is Trading Buy on the water sector after GAMUDA BHD []'s 40% associate Syarikat Pengeluar Air Sungai Selangor Sdn Bhd (SPLASH) made a revised takeover offer for all the water concessionaires in Selangor. Under the revised offer, Splash will not own, but lease water assets from Pengurusan Aset Air Bhd. Its earlier offer of RM10.75 billion remains unchanged. "The move was to align with the WSIA legislation. The acquisition price of RM10.8 billion is unchanged but now comprises PAAB's RM8.1bn offer topped up by Splash's offer of RM2.6 billion," it said in a research note issued on Wednesday, April 21. CIMB Research said while this development is a surprise, PAAB's involvement at this juncture is understandable as SPLASH's operating structure post consolidation should comply with the asset-light model under WSIA. It added this is a positive turn of events as the new proposal has the backing of the federal government and an even better chance of going through. "We maintain our TRADING BUY on the water sector. Puncak Niaga remains our top pick with an unchanged target price of RM4.50 (10% discount to DCF), backed by its effective takeover price of RM4.54/share. "Gamuda remains an Outperform as it will still control 40% of the enlarged Splash. The deal will enhance our RNAV by 8.5% and push up our target price from RM4.30 to RM4.65, based on an unchanged 10% discount to RNAV," it said.

GAMUDA - CIMB Research maintains Trading Buy on water sector

Stock Name: GAMUDA
Company Name: GAMUDA BHD
Research House: CIMB

KUALA LUMPUR: CIMB Equities Research is maintaining is Trading Buy on the water sector after GAMUDA BHD []'s 40% associate Syarikat Pengeluar Air Sungai Selangor Sdn Bhd (SPLASH) made a revised takeover offer for all the water concessionaires in Selangor. Under the revised offer, Splash will not own, but lease water assets from Pengurusan Aset Air Bhd. Its earlier offer of RM10.75 billion remains unchanged. "The move was to align with the WSIA legislation. The acquisition price of RM10.8 billion is unchanged but now comprises PAAB's RM8.1bn offer topped up by Splash's offer of RM2.6 billion," it said in a research note issued on Wednesday, April 21. CIMB Research said while this development is a surprise, PAAB's involvement at this juncture is understandable as SPLASH's operating structure post consolidation should comply with the asset-light model under WSIA. It added this is a positive turn of events as the new proposal has the backing of the federal government and an even better chance of going through. "We maintain our TRADING BUY on the water sector. Puncak Niaga remains our top pick with an unchanged target price of RM4.50 (10% discount to DCF), backed by its effective takeover price of RM4.54/share. "Gamuda remains an Outperform as it will still control 40% of the enlarged Splash. The deal will enhance our RNAV by 8.5% and push up our target price from RM4.30 to RM4.65, based on an unchanged 10% discount to RNAV," it said.

BURSA - MIDF Research maintains trading buy call on Bursa Malaysia

Stock Name: BURSA
Company Name: BURSA MALAYSIA BHD
Research House: MIDF

KUALA LUMPUR: MIDF Research has reaffirmed its trading buy recommendation on BURSA MALAYSIA BHD [] at RM7.60 with an unchanged target price of RM8.70, and said Bursa's 1Q10 net profit of RM28.05 million accounted for 18.6% of its net profit forecast for FY10 and 19.6% of consensus full FY10 estimates. The reported net profit for 1Q10 was lower by 70.9% quarter-on-quarter (q-o-q) but higher by 81% year-on-year (y-o-y), it said. Excluding the one-off capital gain of RM76 million in 4Q09 from the disposal of 25% stake in Bursa Malaysia Derivatives (subsidiary) to CME Group, Bursa's 1Q10 net profit grew 38.1% q-o-q and 81% y-o-y, it said. Operating revenue was higher due to higher equity trades as a result of buoyant equity market and higher derivatives trading volume, it said. "We maintain our expectation that the derivative trading revenue will account for 14.2% of total operating revenue in FY10, an increase of 1.2 percentage points from FY09. "Additionally, we expect an increase in usage for Bursa Suq al Sila' (BSAS), the Islamic commodity trading platform as Bursa continues its effort to internationalise the Islamic markets and products as well as attract international investors," it said. The research house maintained its trading buy call on the stock with an unchanged target price of RM8.70, pegged at 30 times PER (average of four years historical PE) on FY10 earnings per share. The stock is now trading at 28.25 times PER to consensus forecast for FY10 earnings, it said.

TENAGA - ECM Libra Investment Research maintains buy call on Tenaga

Stock Name: TENAGA
Company Name: TENAGA NASIONAL BHD
Research House: ECMLIBRA

KUALA LUMPUR: ECM Libra Investment Research has maintained its buy recommendation on TENAGA NASIONAL BHD [] (TNB) at RM8.50 with an unchanged target price of RM9.90, and said the company's 6MFY10 core net profit of RM1.6 billion (+24% y-o-y) was within expectations at 57% of its full-year earnings estimate and 54% of consensus estimates. "We consider this within expectations as historically, TNB incurs more expenses towards year end. 6MFY10 revenue of RM14.7 billion (+3% y-o-y) was also within expectations at 49% of our full-year estimate. "The interim dividend per share of six sen less 25% tax (6MFY09: two sen less 25% tax and two sen tax exempt) was within expectations too," it said. The research house said that for 6MFY10, although unit demand grew 7% y-o-y on the back of the recovering economy, the average tariff was reduced by 4% on March 1, 2009. "Therefore, revenue grew by only 3% y-o-y. That said, fuel costs dived by a disproportionate 25% y-o-y driven by lower coal (6MFY10: US$80.7/MT, 6MFY09: US$100.9/MT) and gas prices (6MFY10: US$10.70/mmBTU, 6MFY09: US$14.31/mmBTU). "Consequently, 6MFY10 core net profit of RM1.6 billion was 24% higher y-o-y," it said. ECM Libra said it was trimming its FY10-FY12 earnings estimates by 3%-5% for higher average coal price assumption of US$90/MT (US$85/MT previously) as spot coal prices are currently hovering at the US$100/MT level tempered by higher unit demand growth assumption of 7.5% (6.5% previously) as per revised management guidance of 7%-8%. "Although management is not confident of obtaining a base tariff review we believe it will obtain a fuel cost tariff adjustment come mid-2010 as the average coal price of US$90/MT is higher than the US$85/MT level current tariffs are designed to cover," it said. The research house said although fuel cost adjustments are meant to be earnings neutral, it believes TNB's valuations will revert to long-term averages as it proves that the government is committed to preserving TNB's profitability. "Our unchanged RM9.90 target price implies 15 times one-year forward PE, which is the mean since June 2006 when tariffs were increased for the first time in a decade. Tenaga is currently trading at only 13 times one-year forward PE or two times above the recent trough. "Foreign shareholding is still low at 9% suggesting limited downside risk. Tenaga remains our top pick in the power sector," it said.

BURSA - CIMB Research lowers Bursa TP to RM10.20

Stock Name: BURSA
Company Name: BURSA MALAYSIA BHD
Research House: CIMB

KUALA LUMPUR: CIMB Equities Research lowered its target price for stock exchange operator Bursa Malaysia to RM10.20 from RM10.70 as it reduces its earnings per share (EPS) forecast. It said on Wednesday, April 21 that even with an 81.3% on-year rise, Bursa's 1Q10 net profit came in at only 18% of its full-year forecast and 20% of consensus. The variance came from a lower-than-expected velocity of 35% against its projection of 40%. As expected, no dividend was announced for the quarter. "We pare down our FY10-12 EPS forecasts by about 4% for a slower velocity of 38%. This leads to a reduction in target price from RM10.70 to RM10.20, still pegged to an FY11 P/E of 33x. The strong recovery in 1Q affirms our view of favourable prospects for Bursa, backed by our end-2010 KLCI target of 1,450," it said. CIMB Research maintained its trading buy call, based on the potential re-rating catalysts of (1) an expected rise in trading value, (2) sustained market sentiment, (3) a rebound in the effective clearing fee rate, and (4) stronger growth in the derivatives business.

DAYANG - More upside in store for Dayang

Stock Name: DAYANG
Company Name: DAYANG ENTERPRISE HOLDINGS BHD
Research House: HWANGDBS

Dayang Enterprise Holdings Bhd
(April 20, RM1.96)
Maintain buy at RM1.93 with target price of RM2.60: We understand that Petronas Carigali is expected to call a tender for its offshore topside maintenance services in the next few months. Early estimates put the contract values for both Peninsular Malaysia (PMO) and Sarawak and Sabah (SKO & SBO) operations at around RM1.2 billion.

Dayang is currently the incumbent for the SKO & SBO while Vastalux holds the PMO operations.

We believe Dayang is well poised to secure the contracts (especially the SKO & SBO) given its long-standing track record as well as ownership of a fleet of workboats which are assets required for the job. Success here would lead to an earnings upgrade in our forecast.

Typically, a maintenance contract value tends to be higher than the original award as additional works apart from those stipulated may need to be carried out.

Similarly, the eventual value of the Sarawak Shell Bhd/Sabah Shell Petroleum Co Ltd (SSB/SSPC) contract could be higher than the RM400 million secured, or 1.25 times of the original value as a rule of thumb, translating into about RM500 million (FY10F contract wins assumption).

Meanwhile, we understand that Borcos may make a provision for previous years' taxation owing from vessels' charter income. However, this is pending discussion with the auditors. We estimate potential downside of 6% in earnings could be made up by stronger contribution from Dayang's oil and gas operations.

Dayang's valuation remains undemanding at FY11F price-to-earnings (PE) and price-to-book-value (PBV) of 8.3 times and 1.6 times, respectively. We view the recent market correction as a good opportunity to accumulate the shares.

Dayang offers strong growth (FY09-FY11F net profit compound annual growth rate of 31.3%) and is a good proxy to oil and gas contract newsflow.

We maintain buy call and RM2.60 per share target price, pegged to 11 times FY11F earnings per share (EPS). - HwangDBS Vickers Research, April 20
This article appeared in The Edge Financial Daily, April 21, 2010.

AEONCR - AEON Credit to sustain growth momentum

Stock Name: AEONCR
Company Name: AEON CREDIT SERVICE (M) BHD
Research House: OSK

AEON Credit Service (M) Bhd
(April 20, RM4.04)
Maintain buy at RM4.08, target price of RM4.95: AEON Credit's revenue and net profit for 4QFY10 grew 4.4% and 5.2% respectively year-on-year (y-o-y) on the back of a growing customer base due to successful promotions and the expansion of its market reach.

This is in line with its growing trade receivables, which were higher by 8.4% y-o-y. However, net profit rose by a marginal 0.2% quarter-on-quarter due to flattish trade receivables, as there were fewer working days in the month of February.

Although a service tax on credit cards was imposed effective Jan 1, 2010, credit card retail transactions surged 16% against that in the preceding quarter as the company allowed its credit cardholders to redeem a RM50 department store voucher for a total of 12,500 points collected.

As part of its efforts to reward its shareholders, a final dividend of 12 sen per share was proposed for the quarter, which translates into a total dividend payout of 37.3% for FY10.

Due to a prudent lending policy and effective credit management, AEON Credit non-performing loans (NPL) declined marginally from 1.87% to 1.80% y-o-y.

In growing its customer base, AEON Credit is looking to convert the face of all its cards to a standard one bearing the "AEON" design, expand its used car easy payment financing in the east coast, Sabah and Sarawak, and launch a new loyalty programme and a new AEON web portal.

As the company expects to sustain its growth momentum, we are maintaining our buy call on AEON Credit with a target price of RM4.95 (based on a historical two-year price earnings band of 8.5 times over FY11 earnings per share). - OSK Research, April 20
This article appeared in The Edge Financial Daily, April 21, 2010.

NOTION - Inter-Pac: Notion Vtec forging ahead

Stock Name: NOTION
Company Name: NOTION VTEC BHD
Research House: INTER PACIFIC

Notion Vtec Bhd
(April 20, RM3.34)
Maintain outperform at RM3.34 with target price of RM3.78: Notion Vtec, an integrated precision engineering specialist, supplies high precision components mainly to hard disk drive (HDD) and single-lens reflex (SLR) camera manufacturers.

Its main customers for HDD business are Western Digital and Nikon for the SLR camera business segment, each contributing about 30%-35% to its top line. It expects to register double-digit growth in 2010 and 2011 on the back of stronger demand for both their products.

The HDD outlook is expected to grow positively driven by: (1) increasing digital information flow which raises the need for digital storage; (2) rising consumer spending in electronic products and personal computers; and (3) a recovery in corporate IT spending.

According to Trendfocus, the estimated compound annual growth rate (CAGR) for global HDD is 8.5% between CY09 and CY12, and 17.9% for the 2.5" HDD for the same period.

Although the SLR camera business over the last two years outshined HDD business to become the major revenue contributor, Notion expects the HDD business to become its top revenue contributor for FY10 onwards mainly coming from the 2.5" base plate with stator and spindle motor production for Samsung.

The base plate with spindle motor hub production volume for Samsung is expected to increase from 250,000 pieces per month currently to two million pieces by 4QFY10 and subsequently to four million a month by FY12.

To meet the steep demand, Notion has rented a third factory in Klang and is expected to be commissioned by August. When fully operational, the factory will have the capacity of up to seven million pieces a month.

Besides Samsung, Notion is also in talks with Alphana. We expect HDD revenue to grow by 35% in FY10 and 57% in FY11 when the contribution from the base plate and spindle motor hub contribution kicks in.

According to Camera & Imaging Products Association (CIPA), CY10 shipments of digital SLR cameras with interchangeable lens should reach 11 million units or up 11.1% year-on-year (y-o-y). At the same time, the total shipment of interchangeable lens for SLR cameras will grow by 11.2% y-o-y or 17.9 million units in CY10.

Nikon, Notion's largest camera customer, acquired a 8.98% stake in Notion via private placement. The private placement raised about RM33.8 million and will be used to set up its Thailand plant in Ayuthaya and also for working capital.

Notion is unable to pass down any increase in raw material cost to its customer. Hence, for better cost control, it does most of the tooling in-house. To further increase cost efficiency, it plans to purchase the balance 60% of the nickel plating company, which they currently own 40%.

Underpinned by its aggressive expansion, we project Notion capex will be RM100 million in FY10 and RM75 million in FY11. Capex in FY10 will include (1) RM35 million Thailand factory; (2) RM10 million expansion in China; and (3) RM20 million for its third factory expansion.

We remain positive on Notion on the back of strong growth coming from both the HDD and SLR camera segments. Nevertheless, Notion is exposed to currency fluctuation as most of their HDD sales are carried out in the US dollar. The strengthening of the ringgit versus the US dollar will bite its bottom line slightly.

Our fair value of RM3.78 is based on FY11 earnings per share (EPS) of 36 sen and PER of 10.5 times. - Inter-Pacific Research, April 20
This article appeared in The Edge Financial Daily, April 21, 2010.

MEDIA - Media Prima best proxy to sector, says OSK

Stock Name: MEDIA
Company Name: MEDIA PRIMA BHD
Research House: OSK

Media Prima Bhd
(April 21, RM2.21)
Initiating coverage with a buy at RM2.25: target price of RM2.60: Over the years, Media Prima has transformed from a single media entity into an integrated media group with presence across all platforms.

We see MPB as the best proxy to the entire media sector, which is expected to grow in line with the country's growing economic prosperity.

Following a series of acquisitions, Media Prima has become the only integrated media player in Malaysia with exposure to all the media platforms, which we believe works to the group's advantage.

As an integrated media group, it benefits from synergies across areas such as back-office consolidation, cross marketing and expanded reach across media platforms, as well as focused segmentation, which facilitate its marketing efforts and revenue strategies.

Supported by its exposure in all platforms, we believe the group will also be the key beneficiary from advertising expenditure (adex) growth.

With the Malaysian economy projected to grow at more than 5% in 2010 and over the next few years, Media Prima - which has the biggest exposure in the media sector - may gain the most from the favourable sector outlook. This would also see the group posting better financial performance going forward.

Given the fast-growing adex, particularly in the TV, radio and Malay market segments, Media Prima is in the right position to capture their growth potential.

As the TV and radio segments continue to snare adex share from the newspapers, Media Prima is set to gain the lion's share of total adex given its strong hold in the TV and radio segments.

Although the newspaper segment has been losing adex share over the last few years, the Malay newspaper sub-segment has been doing otherwise. As such, Media Prima, through its subsidiary The New Straits Times Press (Malaysia) Bhd, is expected to reap the benefits driven particularly by Harian Metro, which currently has the highest daily circulation and a growing adex share.

We initiate coverage on Media Prima with a buy recommendation at a target price of RM2.60 based on the regional sector price-earnings ratio (PER) of 18 times on FY10 earnings per share (EPS).

The 18 times PER implies a premium of 25% over its historical PER (since its listing in Oct 2003) of 14.4 times, which we deem reasonable given that the group has over the years emerged stronger and more robust, and can now lay claim to being the country's only integrated media company.

With some of its regional peers trading at more than 20 times PERs, we do not discount the possibility of an upward PER re-rating as Media Prima is the only proxy to the country's fast-growing broadcasting industry, especially after the upcoming privatisation of Astro. - OSK Research, April 21


This article appeared in The Edge Financial Daily, April 16, 2010.

Asian airlines less affected by eruption

Malaysian Airline System Bhd
(MAS) (April 19, RM2.22)
Maintain outperform at RM2.15 with target price of RM3: Since last Thursday, many flights to and from European airports have been cancelled as a result of a second volcanic eruption in Iceland. MAS flights to London, Amsterdam, Paris and Frankfurt have been cancelled, disrupted or re-routed although flights to Rome still continue.

It is difficult to estimate the negative impact of this natural disaster on MAS as it depends on how long the ash cloud lingers in the environment, if a third eruption happens, if passengers rebook and reschedule or if they permanently cancel their flights.

We believe that the impact on airlines like MAS will not be as significant as the European carriers or other Asian hub carriers that carry a lot of traffic from Europe. We, therefore, maintain our earnings forecasts, target price of RM3 (six times CY12 core earnings per share) and outperform recommendation. We advise investors to focus on potential re-rating catalysts such as improved results in FY10 from the global yield recovery and the structural fleet renewal.

The volcanic eruption in Iceland on April 15 has blanketed much of European airspace with ash, threatening the safety of flights. The IATA estimated that airlines could turn in US$200 million (RM644 million) losses for each day of disruption. The cost of grounding British Airways' entire long-haul fleet for a day is about US$20 million while Finnair said it was losing €2 million (RM8.65 million) revenue per day.

Airlines worst affected are those headquartered in Europe as they have to ground the majority of their planes and stop both long-haul and short-haul flights. However, airlines based in Asia are affected only to the extent of their flights to Europe and some connecting traffic to Australia.

For MAS, flights to its five destinations in Europe have been affected but its primary focus is on regional Asian flights, which remain unscathed. According to the 2008 annual report, flights to Europe and Middle East combined have a 30% revenue market share. Assuming 15% of passenger and freight revenue is affected for one week, MAS could see RM33 million in lost revenue, which would reduce our FY10 net profit forecast by 10%. However, the true impact may be harder to estimate given that some connecting traffic may also be disrupted.

Qantas has said that it expected flights to Europe to be cancelled for the whole of this week. Some meteorologists say that if the ice on the crater melts, another crater could open, leading to another ash plume. Others pointed out that in 1821, the same volcano erupted and it lasted for a year.

Although it is impossible to predict the eventual outcome of this disaster, we are confident that MAS will not be as badly affected as the European carriers or other Asian hub carriers that carry a lot of kangaroo traffic between Europe and Australia. SIA depends on European flights for about 25% of its revenue and almost 20% on Australia/New Zealand.

We recently turned bullish on MAS because (1) the rights issue is finally over, (2) the stock has lagged behind regional peers like AirAsia and SIA, (3) analysts are almost universally bearish on the stock, (4) the macroeconomic environment is improving, and (5) the major fleet renewal programme should contribute to significant unit cost reduction by FY12.

The outcome of the European flight disruptions is impossible to predict but MAS's focus on the Asian market should reduce the impact on the airline. The stock remains an outperform and our preferred aviation pick in the region.

We retain our earnings forecasts and our end-CY10 target price of RM3, which is based on six times CY12 core EPS. However, we think MAS can eventually reach RM4 (price/earnings of eight times) over a two-year period. We have used CY12 earnings as it better reflects MAS' true potential due to continuing core net losses in 2010 and shallow profits in 2011. - CIMB Research, April 19


This article appeared in The Edge Financial Daily, April 16, 2010.

Sime Darby's possible listing in Jakarta, HK

Sime Darby Bhd
(April 19, RM8.73)
Maintain outperform at RM8.69, fair value of RM9.85: According to a report in The Edge weekly, Sime Darby is planning to list its Indonesian plantations on the Jakarta Stock Exchange in 2011, and its China and Hong Kong motor operations on the Hong Kong Stock Exchange in 2012.

Sime is reportedly in the process of identifying strategic partners to expand further into Indonesia, which could also see an injection of the local partner's plantation assets into the listed vehicle.

We believe the listing of the Indonesian plantation assets would be positive for the group, as it could help unlock some value, given that the medium-term growth of Sime's plantation division earnings are expected to come mainly from the Indonesian estates due to its younger age profile.

At end-FY06/09, Sime's planted Indonesian estates comprise about 37% of its total planted landbank, contributing about 30% to total group fresh fruit bunches (FFB) production, due to the younger age profile of the trees, which led to lower FFB yields of 16.6 tonnes per hectare (t/ha) versus the 22.9t/ha achieved in the Malaysian estates.

We note that FFB yields in Indonesia have improved significantly in 1HFY10, having risen by 27% to 10.5t/ha (from 8.3t/ha in 1HFY09), as the age profile of the trees improved and as production recovered after the impact of the bad weather in the previous year.

Assuming about 30% of Sime's plantations profit we projected for FY10 comes from Indonesia, and applying a price-to-earnings (PE) of 14.5 times to it (being 20% discount to our sector target PE of large Malaysian plantations companies and in line with the average PE for Indonesian listed companies), we estimate Sime's Indonesian listed plantations could be worth RM6.5 billion-RM7 billion, at least.

Nevertheless, while listing would help bring in some extra funds to the group, we do not expect it to add any significant value to the Malaysian-listed entity, unless the funds are put to use elsewhere with higher returns.

On the listing of the motor division in Hong Kong, we believe this may not necessarily be a good idea, given that the operating environment in China is intensely competitive and that sustainability of earnings and therefore, added value from listing it, may not be meaningful.

Currently China contributes 41% to Sime's motor division earnings and is the fastest-growing market for Sime, but we note that margins are diminishing, at just 3.3% in 1HFY10 (versus 5.9% in 1HFY09).

Our forecasts are unchanged. We maintain our sum-of-parts-based (SOP) fair value of RM9.85 and outperform recommendation on the back of further upside via stronger operational efficiencies, future positive merger and acquisition activities and better merger synergies. - RHB Research Institute, April 19


This article appeared in The Edge Financial Daily, April 16, 2010.

AmResearch maintains buy call on Pos

Pos Malaysia Bhd
(April 19, RM2.95)
Maintain buy at RM3.05 with fair value at RM3.80: We are maintaining our buy call on Pos Malaysia with an unchanged fair value of RM3.80 per share, based on 20% discount to our discounted cash flow (DCF) estimates (weighted average cost of capital of 9.5% and terminal price-to-earnings of 14 times).

However, we have lowered our FY10F earnings per share (EPS) estimates by 20%. With the salary review from a tariff hike being a one-off, our FY11F-FY12F has increased 2%-10%. On net basis, our valuation remains intact.

As for Pos' expected salary adjustment, we had projected a +10% yearly increment for the next three years; while Pos has officially declared an immediate 11%-20% increase once new tariff rates come into effect from July 2010. The review will not be pro-rated.

The two-prong first-stage strategy of Khazanah's divestment plan includes: (i) the stamp tariff review; and (ii) the usage of government-owned land currently allocated only for postal infrastructure.

After detailed analysis of Pos' properties, we found that it holds three under-utilised pieces of land, worth an estimated RM250 million (46 sen per share). The land with the most significant development potential is a tract next to KL Sentral which currently is a PosLaju centre and warehouse for vehicles. We value this 2.7-acre (1.09ha) land at RM1,800/sq ft, which is 39 sen per share or 13% of its current price.

A more concrete sale in the immediate term would be Pos' current 2.2-acre mail processing centre (MPC) in Bukit Raja. The property is expected to be vacant once the national MPC in Shah Alam opens in 4Q10.

The stock represents an opportunity for a 6% yield (a conservative 40% payout) and an implied 25% return, on top of a special dividend potential arising from its land sale, with re-rating catalysts from the government's deregulation. - AmResearch, April 19


This article appeared in The Edge Financial Daily, April 16, 2010.

Ann Joo raised to buy with higher target price

Ann Joo Resources Bhd
(April 19, RM2.78)
Upgrade to buy at RM2.84 with higher target price of RM3.45: Ann Joo's share price rose 1% year to date (YTD) and underperformed its peers by 26% on a six-month basis.

We believe its share price performance going forward will be boosted by domestic demand rebound and positive steel price momentum. We upgrade Ann Joo to buy (from hold) with a higher target price of RM3.45 (11 times 2011 price-earnings ratio).

The steelmaker's 1Q10 results are set to be released on April 28. We expect better sequential earnings (4Q09 net profit: RM23 million) on higher sales volume, with 50% to export markets and domestic demand uptick.

1Q10 earnings before interest and tax (Ebit) margin may be comparable to 4Q09's 11% as steel average selling price (ASP) hikes lagged behind scrap cost. However, we expect quarterly earnings momentum to pick up significantly as billet-scrap spread has begun to rise (US$150/tonne now versus US$130/tonne in 1Q10).

Recent steel ASP hikes (+32% YTD) merely reflect higher input costs, but we see sharp above cost ASP hikes going forward on strongly positive steel fundamentals: (i) Demand from traditional Vietnam export market continues to be strong as indicated by March 2010 long steel sales volume which rose to 569,000 tonnes (+60% year-on-year, +88% month-on-month); (ii) The Middle East (ex-Dubai) has resumed its construction activities on economic recovery; (iii) the 15-month high global steel capacity utilisation of 80% in Feb 2010; and (iv) limited capacity addition in 2010-2011 as key global steelmakers are inclined towards expanding flat steel production capacity, rather than long.

Note that China's (47% of 2009 global production) focus is on mergers and acquisitions with the aim of creating three to five globally competitive steelmakers to be in a better position in negotiating iron ore supplies. Additionally, greenfield projects in India face delays due to multiple issues. We raise our target price to RM3.45 (from RM2.60) by raising our target fully diluted 2011 PER to 11 times (from eight times), in line with Ann Joo's historical mean.

We believe investors will re-rate long steel sector on strong demand-price dynamics. Also, it is practically the only sector with cheaply-priced (less than seven times PER) positive news flow in the broader market) - Maybank IB, April 19


This article appeared in The Edge Financial Daily, April 16, 2010.

GPACKET - OSK Research re-initiates coverage on Green Packet with buy call

Stock Name: GPACKET
Company Name: GREEN PACKET BHD
Research House: OSK

KUALA LUMPUR: OSK Investment Research has re-initiated coverage on GREEN PACKET BHD [] with a buy call at RM1.08 and target price RM1.30 and said it liked the company's turnaround story and its exposure to the thriving wireless broadband market via the fledgling WiMAX service.

It said the target price was based on eight times FY11 EV/EBITDA to mark the company's return to the black at EBITDA level, the first since FY07.

This is premised on superior revenue growth of >100% y-o-y for FY10 and 59.6% y-o-y for FY11 from (i) robust demand for its WiMAX services arising from the aggressive coverage expansion; (ii) strong customer premise equipment sales; and (iii) the rapid fall in subscriber acquisition cost, it said.

OSK Research said despite the aggressive go-to-market strategy heavily weighing down its earnings since commercial rollout in August 2008, Green Packet's longer-term prospects appear attractive with losses set to bottom out by year-end upon achieving a critical mass of subscribers.

"The key share price re-rating catalysts are (i) a quicker than expected earnings turnaround; (ii) strong subscriber additions; and (iii) positive industry outlook and global developments on the WiMAX front," it said.

SCOMI - Scomi advances on AmResearch upgrade

Stock Name: SCOMI
Company Name: SCOMI GROUP BHD
Research House: AMMB

KUALA LUMPUR: SCOMI GROUP BHD [] shares advanced in active trade on Tuesday, April 20 after AmResearch Sdn Bhd upgraded it and accorded fair value of 76 sen while it expects the company to secure more monorail projects. At 3.27pm, Scomi is up 3.5 sen to 49.5 sen with 24.9 million shares done while the warrants, Scomi-WA rose 2.5 sen to 24 sen. AmResearch upgraded Scomi to buy, from hold previously, at 46 sen with a higher fair value of 76 sen, previously 48 sen, based on a price-to-earnings (PE) multiple of 12 times, which is in-line with peer average. It added that Scomi was trading towards the lower end of its PE band at a multiple eight times. However, the research house believed Scomi's revenue from drilling fluids and drilling waste management should pick up. "Another re-rating catalyst would be forthcoming for Scomi, if it were successful in securing new monorail jobs. First phase awards for monorail work in Brazil (24km) - valued at US$2 billion (RM6.41 billion) - should be announced within the next few weeks," it said.

MAS - Asian airlines less affected by eruption

Stock Name: MAS
Company Name: MALAYSIAN AIRLINE SYSTEM BHD
Research House: CIMB

Malaysian Airline System Bhd
(MAS) (April 19, RM2.22)
Maintain outperform at RM2.15 with target price of RM3: Since last Thursday, many flights to and from European airports have been cancelled as a result of a second volcanic eruption in Iceland. MAS flights to London, Amsterdam, Paris and Frankfurt have been cancelled, disrupted or re-routed although flights to Rome still continue.

It is difficult to estimate the negative impact of this natural disaster on MAS as it depends on how long the ash cloud lingers in the environment, if a third eruption happens, if passengers rebook and reschedule or if they permanently cancel their flights.

We believe that the impact on airlines like MAS will not be as significant as the European carriers or other Asian hub carriers that carry a lot of traffic from Europe. We, therefore, maintain our earnings forecasts, target price of RM3 (six times CY12 core earnings per share) and outperform recommendation. We advise investors to focus on potential re-rating catalysts such as improved results in FY10 from the global yield recovery and the structural fleet renewal.

The volcanic eruption in Iceland on April 15 has blanketed much of European airspace with ash, threatening the safety of flights. The IATA estimated that airlines could turn in US$200 million (RM644 million) losses for each day of disruption. The cost of grounding British Airways' entire long-haul fleet for a day is about US$20 million while Finnair said it was losing €2 million (RM8.65 million) revenue per day.

Airlines worst affected are those headquartered in Europe as they have to ground the majority of their planes and stop both long-haul and short-haul flights. However, airlines based in Asia are affected only to the extent of their flights to Europe and some connecting traffic to Australia.

For MAS, flights to its five destinations in Europe have been affected but its primary focus is on regional Asian flights, which remain unscathed. According to the 2008 annual report, flights to Europe and Middle East combined have a 30% revenue market share. Assuming 15% of passenger and freight revenue is affected for one week, MAS could see RM33 million in lost revenue, which would reduce our FY10 net profit forecast by 10%. However, the true impact may be harder to estimate given that some connecting traffic may also be disrupted.

Qantas has said that it expected flights to Europe to be cancelled for the whole of this week. Some meteorologists say that if the ice on the crater melts, another crater could open, leading to another ash plume. Others pointed out that in 1821, the same volcano erupted and it lasted for a year.

Although it is impossible to predict the eventual outcome of this disaster, we are confident that MAS will not be as badly affected as the European carriers or other Asian hub carriers that carry a lot of kangaroo traffic between Europe and Australia. SIA depends on European flights for about 25% of its revenue and almost 20% on Australia/New Zealand.

We recently turned bullish on MAS because (1) the rights issue is finally over, (2) the stock has lagged behind regional peers like AirAsia and SIA, (3) analysts are almost universally bearish on the stock, (4) the macroeconomic environment is improving, and (5) the major fleet renewal programme should contribute to significant unit cost reduction by FY12.

The outcome of the European flight disruptions is impossible to predict but MAS's focus on the Asian market should reduce the impact on the airline. The stock remains an outperform and our preferred aviation pick in the region.

We retain our earnings forecasts and our end-CY10 target price of RM3, which is based on six times CY12 core EPS. However, we think MAS can eventually reach RM4 (price/earnings of eight times) over a two-year period. We have used CY12 earnings as it better reflects MAS' true potential due to continuing core net losses in 2010 and shallow profits in 2011. - CIMB Research, April 19


This article appeared in The Edge Financial Daily, April 16, 2010.