CIMB - OSK Research raises target price for CIMB to RM15.75

Stock Name: CIMB
Company Name: CIMB GROUP HOLDINGS BERHAD
Research House: OSK

KUALA LUMPUR: OSK Investment Research has maintained its buy call on CIMB Group Holdings Bhd at RM14.22 and raised its target price to RM15.75 (from RM14.90) and said the banking group was on track to hit its return on equity (ROE) targets due to a robust capital market and steady net interest margins.

It said CIMB's ROE targets of 18% to 20% versus OSK Research's 15.7% and consensus' 16.4% implied that the market may not have factored in any capital management upside.

"The stock currently trades at an undemanding 12.7 times FY11 PER and 1.9 times FY11 PBV.

"We have raised our fair value from RM14.90 to RM15.75 on rolling forward our Gordon growth derived valuations to FY11 based on 2.20 times FY11 PBV and an estimated ROE of 15.7%," it said.

F&N - MIDF Research raises F&N target price to RM12

Stock Name: F&N
Company Name: FRASER & NEAVE HOLDINGS BHD
Research House: MIDF

KUALA LUMPUR: MIDF Research has upgraded Fraser & Neave Holdings Bhd (F&N) to a buy with a higher target price of RM12 (from RM10.60) and said the company's 1HFY10 net profit grew 56.4% year-on-year to RM162.9 million, accounting for 69% and 60% of MIDF's and consensus full year numbers.

Excluding the RM10 million charges recognised in 2QFY09 due to the closure of glass plant in Petaling Jaya, MIDF estimated that the earnings growth was about +43% y-o-y.

The commendable results were mainly due to the higher soft drinks sales, better-than-expected overall profit margin and lower minority interest, it said.

"We are rolling over our valuation into FY11 numbers but with a lower implied PER of 14.5 times as compared with 16 times previously. As such, we are upgrading our call for F&N to buy with a higher target price of RM12 (previously RM10.60), based on 14.5 times FY11 EPS.

"We believe the downside is fairly limited, cushioned by the 5.1% net dividend yield," it said.

POS - Transmile not included in valuation of Pos Malaysia

Stock Name: POS
Company Name: POS MALAYSIA BHD
Research House: AMMB

Pos Malaysia Bhd
(May 6, RM2.62)
Maintain buy call at RM2.73 with unchanged target price of RM3.80: Transmile Group Bhd (Transmile) said during its annual general meeting briefing that it was in the midst of restructuring its default debts by end-May. This follows a notice of Default Outstanding Amount (DOA) for outstanding debt it owes to parties, which are holding unsecured medium-term notes (MTN) issued by Transmile.

Malaysian Trustees Bhd, representing the Employees Provident Fund, OSK Group, Agrobank, AmBank Group and Meridian Asset Management Sdn Bhd - which are claiming RM106.1 million due (owed as at March 24, 2010) - issued the notice of DOA. It provided a dateline of April 14, 2010 before proceeding to serve a winding-up petition. Todate, Transmile has yet to receive further notice; however it is believed that Malaysian Trustees has already appointed receivers - with strong likelihood of liquidation.

Apart from the DOA, Transmile has another RM450 million in outstanding borrowings involving 20 banks - all borrowings are unsecured and in default for 30 months.

We feel that any progress in debt restructuring hinges on the sale of Transmile's four MD-11 aircraft ­ - with RM386 million valuation at book value. Management provides that a sale in the range of US$40 million (RM130.4 million) to US$50 million for each of four aircraft would be fair. Currently the wide-body planes are parked in a desert area abroad - at an annual cost of US$500,000 per annum each.

Pos Malaysia Bhd (POSM) stands to only receive RM3.3 million if Transmile is liquidated.

Transmile's market value is worth only 2.6 sen per share to POSM currently, and as of a report dated April 4, 2010, we have ceased evaluating Transmile into our fair value for POSM.

We maintain our buy call on POSM with unchanged fair value of RM3.80 per share, based on 20% discount to our discounted-cash-flow estimates (weighted-average-cost-of-capital of 9.5% and terminal price-to-earnings ratio of 14 times). At current level, POSM presents an opportunity to own a 7% yielding stock (conservative 40% payout) - a dividend giant compared to the telecommunications sector, which only yields 5% to 6%. - AmResearch, May 6


This article appeared in The Edge Financial Daily, May 7, 2010.

SIME - Bakun casts shadow again over Sime

Stock Name: SIME
Company Name: SIME DARBY BHD
Research House: CIMB

Sime Darby Bhd
(May 6, RM8.58)
Downgrade to neutral at RM8.63, with target price of RM9.70: We had a trading buy call on Sime Darby because we believe in the group's plan to unlock value by improving fresh-fruit-bunches yields at its oil palm estates and becoming more aggressive in realising the value of its strategic landbank in Malaysia.

We have seen some evidence of improvement in these two areas. But these positives are likely to be overshadowed by the Bakun issues and uninspiring earnings outlook, at least in the short term.

Sime's 1.3% share price loss yesterday wiped RM781 million from its market cap which is more than the likely losses. But more importantly, this issue raises questions about transparency, execution and earnings momentum and leads us to believe there are insufficient catalysts for the stock to outperform in the short term.

To account for the risk of write-downs and our dented confidence in Sime Darby, we are now applying a 10% discount to our sum-of-parts value, which reduces our target price from RM10.82 to RM9.70. Although the stock's P/E valuation may be more attractive than its peers, it is offset by earnings downside risks.

According to the press, Sime Darby has incurred more than RM1 billion in cost overruns from carrying out a civil work contract for the Bakun hydroelectric project. One estimate puts the total cost overruns at RM1.7 billion, which is almost the same size as Sime Darby's actual Bakun contract of RM1.8 billion.

The cost overrun discovery is believed to be among the findings of the special taskforce that the group set up late last year to probe into losses in its energy and utilities division.

Sources said specialists from external accounting, legal and engineering firms were assisting the taskforce. It was reported that the government has agreed to reimburse around RM700 million to Sime Darby, leaving the group with around RM1 billion to deal with.

When contacted by reporters, Sime Darby did not deny or confirm this. To recap, Sime Engineering, a unit of Sime Darby, was awarded the civil works for the Bakun project in September 2002 for a fixed lump sum price of RM1.8 billion. - CIMB Research, May 6


This article appeared in The Edge Financial Daily, May 7, 2010.

AIRASIA - AirAsia well positioned to ride the recovery

Stock Name: AIRASIA
Company Name: AIRASIA BHD
Research House: HWANGDBS

AirAsia Bhd
(May 6, RM1.32)
Upgrade to buy at RM1.32, with raised target price of RM1.95: The International Air Transport Association (IATA) revealed that air travel demand is on the uptrend.

Traffic growth in the Asia-Pacific had recovered from its deepest decline of 15% year-on-year (y-o-y) in March 2009 to rise 13% in March 2010 following economic recovery.

We expect 8% GDP growth for Malaysia in 2010. Hence, AirAsia's fleet expansion programme is now timely to capture the recovery in demand. We expect AirAsia to record revenue-per-kilometre (RPK) growth of 12% to 15% each year in financial years ending Dec 31, 2010 (FY2010) to FY2011, assuming load factor of 72% to 74% (from 70% in FY2009). Note that despite weak market conditions in FY2009, AirAsia was able to book 14% y-o-y growth in RPK.

Ability to fund new aircraft purchases and repay loans is no longer a major concern. We expect operating cash flow or sales to improve from 26 sen in FY09 to 35 sen to 39 sen in FY2010 to FY2012 while cash ratio to rise from 0.5 times in FY2009 to 0.7 time in FY2012.

Meanwhile, net gearing should remain stable at 2.5 times to 2.7 times in FY2010 to FY2012 as AirAsia continues to raise debt to expand its fleet but this will be cushioned by stronger earnings. Our FY2010 to FY2011 core earnings are raised by 30% to 37% mainly on higher yield and load factor assumptions. Apart from ticket sales, ancillary business also offers huge potential while helping AirAsia to keep its fares low.

We project the total ancillary income to grow by 12% to 14% y-o-y each year over FY2010 to FY2012. The group will be able to capitalise on its growing passenger volume, as well as its large web visitor base while riding on its strong branding and existing infrastructure where costs are minimal.

Share valuations are bombed-out. The stock is trading at 6.1 times calendar year 2011 earnings per share and 1.1 times calendar year 2011 book value, 27% to 33% discount to its peers' and also hovering near its historical low valuations.

We believe this is unwarranted considering that earnings downside for AirAsia is limited as sector gradually recovers. Upgrade to buy with RM1.95 target price based on nine times calendar year 2011 earnings per share, consistent with the average small and mid-cap peers' valuation.

Catalysts for the stock include higher load factor, yield, and ancillary income. - HwangDBS Vickers Research, May 6


This article appeared in The Edge Financial Daily, May 7, 2010.

PLUS - Strong traffic rebound for PLUS

Stock Name: PLUS
Company Name: PLUS EXPRESSWAYS BHD
Research House: MAYBANK

Plus Expressways Bhd
(May 6, RM3.38)
Maintain buy at RM3.33 with unchanged target price of RM4.20: First quarter of financial year ending Dec 31, 2010 (1QFY2010) traffic at PLUS' major expressways has shot past our expectations.

We raise traffic forecasts, impute Financial Reporting Standard 139 (FRS 139) charges, and update our earnings model after the 2009 annual report release - all in, a small 5% downgrade in our FY2010 net profit forecast. Our discounted-cash-flow derived target price is however, unchanged. We continue to like PLUS for its dividend yield and long-term regional expansion offerings.

Traffic growth at North-South Expressway (NSE), North Klang Valley Expressway, Federal Highway Route 2 and Seremban-Port Dickson Highway stayed strong at a combined 9.1% year-on-year (y-o-y) in the first quarter (1QFY2010) above our 2% growth forecast for FY2010. Quarter-on-quarter (q-o-q), traffic contracted 3.9% but this is seasonal as 4Q traffic has always been the strongest due to the long school holidays and year-end festive travelling.

We expect 1QFY2010 traffic to sustain and peak in 4QFY2010. We raise our traffic growth forecast for 2010 to 5% from 2%. This assumes a modest 1% q-o-q growth in 2Q to 3Q FY2010, and 3% in 4QFY2010.

FRS 139, effective this year, requires PLUS to fair value the amount of toll compensation due from the government (RM2.49 billion at end-2009) through a cash flow valuation. This will result in a one-off adjustment to the retained earnings this year.

We understand that the negative income statement impact is minimal for FY2010; we have imputed RM30 million in our revised earnings. FRS 139 should not impair PLUS' ability to pay dividends.

PLUS has yet to hear from the government on the latter's plan for a country-wide restructuring of tolled roads. A study on the domestic toll rate structure was commissioned last year which should include toll revisions due this year, affecting PLUS' NSE. The NSE was due for a 10% toll hike in early-2008 but this has been deferred by two years. It is also due for a 10% toll hike in early-2011.

Meanwhile, cash compensation from the government remains forthcoming. We continue to expect no major impact on valuations under any new toll structure. - Maybank IB Research, May 6


This article appeared in The Edge Financial Daily, May 7, 2010.

PLUS - Maybank Research maintains Buy on PLUS at RM3.33

Stock Name: PLUS
Company Name: PLUS EXPRESSWAYS BHD
Research House: MAYBANK

KUALA LUMPUR: Maybank Investment Bank Research is maintaining a Buy on PLUS EXPRESSWAYS BHD [] at RM3.33 with an unchanged target price of RM4.20 after the 1Q10 traffic at PLUS' major expressways has shot past its expectations. It said on Thursday, May 6 that it had raised traffic forecasts, impute FRS 139 charges, and update its earnings model after the 2009 annual report release – all in, a small 5% downgrade in its 2010 net profit forecast. "Our DCF derived TP is however, unchanged. We continue to like PLUS for its dividend yield and long-term regional expansion offerings," it said. Maybank Research expects 1Q10 traffic to sustain and peak in 4Q10. We raise our traffic growth forecast for 2010 to 5% from 2%. This assumes a modest 1% QoQ growth in 2Q-3Q10, and 3% in 4Q10.

SIME - CIMB Research downgrades Sime to Neutral

Stock Name: SIME
Company Name: SIME DARBY BHD
Research House: CIMB

KUALA LUMPUR: CIMB Equities Research has downgraded Sime Darby from Trading Buy to NEUTRAL on news that more than RM1 billion in cost overruns for Bakun has come as a negative surprise. The research house said on Thursday, May 6 the cost overruns could lop 8% off its FY6/10 earnings and dent investors' confidence and sentiment towards Sime. "Management has not denied the news of a potential cost overrun at Bakun. Sime's 1.3% share price loss yesterday (Wednesday) wiped RM781 million from its market cap which is more than the likely losses," it said. CIMB Research said more importantly, this issue raises questions about transparency, execution and earnings momentum and leads it to believe there are insufficient catalysts for the stock to outperform in the short term. "To account for the risk of write-downs and dented confidence in Sime Darby, we now apply a 10% discount to our SOP value, which reduces our target price from RM10.82 to RM9.70. Although the stock's P/E valuation may be more attractive than its peers, it is offset by earnings downside risks from potential losses from Bakun project. "We recommend investors to switch to Wilmar in Singapore or Genting PLANTATION [] in Malaysia for exposure to the plantation sector," it said.

UNISEM - OSK Research downgrades Unisem to Neutral

Stock Name: UNISEM
Company Name: UNISEM (M) BHD
Research House: OSK

KUALA LUMPUR: OSK Research said UNISEM (M) BHD []'s annualised 1QFY10 net profit was 26% above market consensus and 30% above its estimates. The research house said on Thursday, May 6 the variance in our forecast arose mainly because the 1QFY10 net profit margin was higher at 13.9% compared to the estimated 10.2%. "As for recommendation, given the limited upside to our fair value and factoring in the dilution effect from the rights issue, we downgrade the stock to Neutral," it said. Its new target price was reduced to RM3.05 from the earlier RM3.53. Unisem posted net profit of RM41.63 million versus a net loss of RM23.1 million a year ago, as it rode on the recovery of the semiconductor sector and expected a further improvement in the current quarter. It also proposed a three-for-10 bonus issue, one-for-four rights issue of 5-year maturity warrants and ESOS which shall not exceed 10% of its issued and paid-up share capital. OSK Research said Unisem's sequential revenue growth of 3.9% is closer to the higher end of the 3%-5% guidance provided by management. The company performed commendably in what is traditionally a weak quarter. "We believe the strong 1Q revenue was mainly due to the demand for consumer electronics being not entirely satisfied in the 4Q09 period. Due to greater economies of scale, earnings jumped 18.6% q-o-q," it said. The research house said that riding on improving sales, Unisem's high operating leverage has enhanced its net profit margin over the last few quarters. Net profit margin has been improving since 4QFY08, with the 1QFY10 net profit margin of 13.9% surpassing that in the pre crisis level.

AIRASIA - HDBSVR ups AirAsia to Buy, TP RM1.95

Stock Name: AIRASIA
Company Name: AIRASIA BHD
Research House: HWANGDBS

KUALA LUMPUR: Hwang DBS Vickers Research (HDBSVR) has upgraded AirAsia to a Buy with a target price of RM1.95 based on 9x CY11F EPS. It said on Thursday, May 6 the low-cost carrier is well-positioned to capitalise on demand recovery with its fleet expansion programme. "Ability to fund new aircraft purchases and repay loans no longer a major concern as operating cash flows strengthen," it said. HDBSVR said AirAsia is trading at 6.1x CY11F EPS and 1.1x CY11F BV, 27-33% discount to its peers' and also hovering near its historical low valuations. "We believe this is unwarranted considering that earnings downside for AirAsia is limited as sector gradually recovers," it said. "Upgrade to Buy with RM1.95 TP based on 9x CY11F EPS, consistent with the average small and mid-cap peers' valuation. Catalysts for the stock include higher load factor, yield, and ancillary income," it said.

DIGI - DiGi prepaid revenue gains traction

Stock Name: DIGI
Company Name: DIGI.COM BHD
Research House: OSK

DiGi.Com Bhd
(May 5, RM22.66)
Maintain neutral call at RM23.10 with target price of RM22.68: There were no surprises in DiGi's 1QFY10 results. Among the notable plus points were the improved prepaid revenue momentum and further opex (operation expenditure) savings contributing to the two percentage points sequential accretion in Ebitda (earnings before interest, tax, depreciation and amortisation) margin.

On the flip side, the management is now guiding for stronger pressure on Ebitda from increased handset subsidies and rising competition. Our forecast is intact. DiGi remains a neutral based on a target price of RM23.10 pegged to an average 5.5 times FY11 enterprise value/Ebitda and 10.5% weighted average cost of capital.

DiGi's 1QFY10 results were in line with core earnings, making up 25%- 26% of ours and consensus full-year estimates. The key operational highlights were: (i) the commendable 6% year-on-year rise in revenue (+3% quarter-on-quarter) versus +1.3% in 4Q09 and +4.4% in 1Q09, alluding to improved mobile revenue traction on the back of the recovery in economic activities and the greater propensity for mobile spending among the foreign workers segment (note that y-o-y revenue growth was the strongest since 3Q08, with prepaid revenue climbing for three consecutive quarters); (ii) opex efficiency; and (iii) the slightly moderated base-case FY10 Ebitda guidance of a "stable" as opposed to "stable to slight increase" as DiGi now expects to incur higher subsidies on the iPhone and/or other smartphones to spur data adoption and growth.

The management has declared a first interim net dividend of 35 sen per share (payable June 18), which translates to a 98% payout.

With the RM250 million MTN raised in 1Q10, DiGi's borrowings increased to RM1.12 billion as at 1QFY10. However, net debt also improved to RM440 million on the back of seasonally low capex or stable net debt/equity of 0.32 time. DiGi has issued fresh net debt/equity guidance of 0.3-0.45 time for the longer-term to be on par with its regional peers. Extrapolating the guidance on forecast Ebitda would translate into an estimated net debt/Ebitda of 0.3 times, which we still consider as conservative. By our estimate, a more aggressive net debt/equity target of 0.6-0.8 times would free up 52 sen-89 sen per share.

DiGi disclosed that the response to its iPhone packages (launched commercially on April 3) has been "phenomenal" but stopped short of revealing the actual metrics (contribution reflected from 2QFY10). As DiGi expenses the cost of the iPhone upfront, the impact on margins will be front-loaded versus its rivals' practice of amortising the cost over the contractual period.

On access pricing, the management's internal assumption is for a downward adjustment in mobile termination rates when the new framework is tabled by end-June although it is inclined to believe that the current access rates would be maintained. - OSK Research, May 5


This article appeared in The Edge Financial Daily, May 6, 2010.

YNHPROP - ECM: YNH's earnings visibility still in doubt

Stock Name: YNHPROP
Company Name: YNH PROPERTY BHD
Research House: ECMLIBRA

YNH Property Bhd
(May 5, RM1.76)
Reiterate sell at RM1.77, target price reduced to RM1.40: Following a post-1QFY10 results briefing last week, we gathered further information from the management. Although earnings visibility for FY10 exceeds our earlier expectation as a result of better-than-expected sales of completed inventories, we are still concerned about earnings visibility from FY11 onwards.

Unbilled sales as at 1QFY10 were RM825 million. However, stripping away unbilled sales of Kiara 163 (RM300 million) and the retail portion of Menara YNH (RM300 million), which are still subject to uncertainty, adjusted unbilled sales amount to only RM225 million which is less than one year's revenue.

Contributions from Ceriaan Kiara is expected to cease in 1HFY10 following its completion. Although Fraser Residence will pick up some of the slack when it is launched in June, we are not bullish on Kiara 163 and Menara YNH which may be delayed due to a building plan revision and negotiation with potential new partners respectively.

We have revised our earnings estimate for FY10 (+47.7%) and FY11 (-28.0%) as well as introduce FY12 numbers. Our revision has taken into account (1)
higher-than-expected sale of inventory in FY10; and (2) the launching of Fraser Residence in June.

We reiterate our sell call as we continued to be concerned of YNH earnings visibility as planned projects face risks of further delay.

Although the stock is trading at steep discount to its revised net asset value (RNAV) of RM2.96 (previously RM3.14), the valuation gap is unlikely to narrow anytime soon, given risk of further project delay. Furthermore, with the new accounting standard IFRIC 15 being implemented from FY11, YNH may even record an accounting loss until Fraser Residence is completed in FY13 or FY14. This will further dampen investors' confidence in the stock.

Our target price, pegged to 10 times of average FY10 and FY11 earnings per share (EPS), has been revised from RM1.43 to RM1.40. We believe our target price is fair as it would trade closer to average price-to-earnings (P/E) of 9.1 times compared to the current P/E of 12.1 times which is higher than the one time standard deviation above the average P/E in the past.

At the current valuation, YNH is more expensive than Sunrise Bhd, one of our top picks for the property sector. - ECM Libra Investment Research, May 5


This article appeared in The Edge Financial Daily, May 6, 2010.

SIME - Affin maintains add call on Sime Darby

Stock Name: SIME
Company Name: SIME DARBY BHD
Research House: AFFIN

Sime Darby Bhd
(May 5, RM8.63)
Maintain add at RM8.76 with target price of RM8.70: A local daily reported that Sime Darby has incurred total cost overrun amounting to RM1.7 billion for the Bakun project, of which the government has agreed to reimburse around only RM700 million. That would leave Sime with an estimated loss of RM1 billion for the RM1.8 billion contract secured in 2002.

The report added that the massive cost overrun was discovered by a special taskforce set up late last year to investigate losses at its energy and utilities division.

In 2HFY09, Sime's energy and utilities division reported an operating loss of RM110 million due to a loss of RM201 million recorded by its oil and gas unit following cost overruns from the RM2.1 billion Maersk Oil Qatar (MOQ) project.

Civil works for the Bakun project amounting to RM1.8 billion were awarded to the Malaysia-China Hydro JV consortium in 2002. The consortium was led by Sime Engineering and Sino-Hydro Corporation of China. Other members of the consortium were WCT, MTD Cap, Ahmad Zaki Resources, Syarikat Ismail, and Edward & Sons.

According to the report, Sime said that a total of RM130 million has been provided for its share of the cost overrun in the project. If the reported total cost overrun is true, additional provisions of around RM870 million would have to be made in FY10 or later. This amount is a 20.5% of our FY10 pretax profit forecast.

Even though one-off, the amount is massive and coming straight after the MOQ losses, would not reflect well on the company's project execution capability as well as transparency.

Pending the management's response on the report, the target price of RM8.70 (based on CY10 price earnings of 18 times) and add rating (in anticipation of valuation on CY11 earnings per share) are maintained. - Affin Research, May 5


This article appeared in The Edge Financial Daily, May 6, 2010.

PROTON - Tug of war at Proton?

Stock Name: PROTON
Company Name: PROTON HOLDINGS BHD
Research House: AMMB

Proton Holdings Bhd
(May 5, RM4.80)
Maintain buy at RM4.99 with fair value RM6.30: Euromobil Sdn Bhd, a subsidiary of DRB-Hicom which recently secured an exclusive distributorship for Audi models in Malaysia, has expressed interest to assemble Audi vehicles locally, if it could reach minimum sales volume of 1,000 units per annum - according to press reports. This year, Audi sales averaged 53 units per month, up 36% from 39 units per month in 2009.

In a related development, press reports indicated that Proton is considering consolidating its manufacturing operations and highlighted possibilities of divesting its Shah Alam plant.

Our channel checks suggest that if Proton succeeds in securing a strategic partner to take up its spare capacity, there is less need to consolidate its manufacturing operations, but if a strategic partnership is sealed solely based on a technical collaboration, asset sales could come into play. Gains from sale of Proton's Shah Alam plant are estimated at RM442 million (based on RM60psf market value). Proton's Shah Alam assets, which have not been revalued since 1983, are currently valued at RM147 million in its books.

To put things in perspective, should DRB-Hicom succeed in securing rights to contract assemble VW models, it may opt to acquire Proton's Shah Alam plant to complement existing operations. DRB's Pekan plant only entails a capacity of 60,000 vehicles per annum (on two shifts) versus Proton's Shah Alam plant's 220,000 vehicles per annum. Talks between Proton and VW are ongoing, and notably, Audi is part of the larger VW group. Collectively, VW and Audi generate sales of 1,100 units per annum in Malaysia. The assembly of Audi vehicles by DRB-Hicom provides a strong basis for it to assemble VW marques as well, considering similar platforms and part commonisation questioning Proton's position in VW's whole scheme of plans for local assembly of VW models.

Political pressure imposed on Proton could likely expedite decision making on Proton's strategic partner, in our view.

We do not rule out possibilities of equity participation/exchange in DRB-Hicom should DRB-Hicom acquire the right to assemble VW models, which could eventually lead to VW using Malaysia as an export hub for the Asean region.

DRB Hicom has a market capitalisation of RM2 billion, but notably, a net cash of some RM3.3 billion.

We maintain our buy rating on Proton at a fair value of RM6.30 per share, pegged to 0.7 time FY11 adjusted net tangible asset (NTA) of RM7.70 per share. When talks were initiated with VW in 2006, Proton's valuation rerated up to over one times adjusted NTA and 0.7 time price-to-book value (PBV). Current valuations are at deep 40% and 43% discount respectively. - AmResearch, May 4


This article appeared in The Edge Financial Daily, May 6, 2010.

DIGI - ECM Libra Research reiterates hold call on DiGi

Stock Name: DIGI
Company Name: DIGI.COM BHD
Research House: ECMLIBRA

KUALA LUMPUR: ECM Libra Investment Research reiterated its hold recommendation on DIGI.COM BHD [] at RM22.68 with target price RM23.20 and said the company's 3MFY10 results were within expectations, as revenue and net profit both achieved 25% of its FY10 estimates.

Compared to consensus estimates, DiGi also met expectations as revenue and net profit were at 25% and 26% of FY10 estimates respectively, said the research house.

It said DiGi's 3MFY10 revenue rose as its subscriber base expanded, but net profit growth was marginal due to amortisation for 3G licence (RM19 million), which was non-existent in 1QFY09.

"EBITDA (earnings before interest, tax, depreciation and amortisation) margins rose two percentage points quarter-on-quarter (q-o-q) to 44.6% mainly due to higher revenue and cost control, it said.

The research house said subscriber (subs) growth weakened in 1QFY10 as DiGi added 227, 000 new subs (4QFY09: +327,000) q-o-q to 7.95 million.

DiGi added 192,000 prepaid subs to 6.68 million while postpaid subs increased 35,000 to 1.27 million.

From its total subs base, 1.5 million are mobile Internet users of which 77,000 are mobile broadband (dongle) users.

Overall ARPU and usage was stable q-o-q, as higher prepaid minutes of usage (MOU) offset lower postpaid MOU. Blended ARPU decreased to RM53 (4QFY09: RM54) while blended AMPU eased to 227 mins (4QFY09: 228 mins).

DiGi declared a first interim net dividend of 35 sen a share, which implies almost full payout from 1QFY10 earnings.

"Given DiGi's improving strong cash flow, we continue to assume DiGi will payout 130% of its earnings as dividends for FY10-12, implying FY10 dividend per share of RM1.84 or 8.1% yield," it said.

DAIBOCI - Stronger 2H expected for Daibochi

Stock Name: DAIBOCI
Company Name: DAIBOCHI PLASTIC & PACKAGING
Research House: CIMB

Daibochi Plastic & Packaging Industry Bhd
(May 4, RM3.20)
Maintain outperform at RM3.21 with target price of RM4.60: Despite coming in at only 76% of our forecast when annualised, Daibochi's 1QFY10 results met our and market expectations as earnings in the remaining quarters should be stronger. The company declared an interim tax-exempt dividend per share (DPS) of 3.5 sen, which was within market and our expectations.

We maintain our outperform call, earnings forecasts and RM4.60 target price, which remains based on a 20% discount to our 15 times target price-to-earnings (P/E) for the market.

Factors that could catalyse the stock include: (i) further margin expansion over the next few quarters, (ii) contracts from major non-food and beverage companies and, (iii) investors' increasing awareness of its generous dividend yields of 7%.

1QFY10 revenue climbed 7% year-on-year (y-o-y) while Ebitda (earnings before interest, tax, depreciation and amortisation) surged 26.5%. Ebitda margin was 14.4%, higher than 1QFY09's 12.2% but lower than 4QFY09's 15.9%. The quarter-on-quarter (q-o-q) margin erosion largely resulted from higher raw material costs and a 150% jump in foreign exchange (forex) loss to RM500,000 due to a stronger ringgit.

During Feb-March 2010, the ringgit firmed almost 6% to RM3.25 against the US dollar. This led to the forex loss as there is around a 60-day gap between placing of orders and payment for its goods. Furthermore, Daibochi booked RM200,000 additional expense on research and development for new products related to the electrical and electronic product testing. If not for these expenses and the forex loss, 1QFY10 Ebitda margin would have been above 15%.

As the prices Daibochi charges its MNC clients are reviewed quarterly for changes in raw material costs and forex fluctuations, Daibochi's 2QFY10 Ebitda margin is expected to be much better than 1QFY10's as the selling prices will reflect higher raw material costs and currency rates.

Daibochi should see a much stronger 2H as the company started delivering to a major pet food brand in Australia in 2Q10. It should also see higher contributions from Fonterra which began sourcing flexible packaging products from Daibochi in 1QFY10. Fonterra is the world's leading exporter of dairy products and is responsible for more than a third of the international dairy trade. - CIMB Research, May 4


This article appeared in The Edge Financial Daily, May 5, 2010.

KENCANA - More jobs in the pipeline for Kencana

Stock Name: KENCANA
Company Name: KENCANA PETROLEUM BHD
Research House: RHB

Kencana Petroleum Bhd
(May 4, RM1.58)
Reiterate outperform at RM1.58 with target price of RM1.88: Kencana announced on May 3 that it had received a letter of award from Saipem S A (an oil and gas service provider) for the fabrication of LNG jetty and marine structures for the Gorgon LNG project. The contract is worth RM166 million and is expected to be delivered in stages between 2Q11 and 3Q12.

Recall in our note dated April 15, we highlighted that the company is in the final stage of negotiations for three sizeable contracts (two from Malaysia and one from overseas), which are collectively worth RM400 million. Hence, we expect Kencana to announce two more sizeable contracts worth around RM240 million in the near term. In addition, Kencana expects to secure around RM600 million-RM800 million contracts under the PSCs' direct assignment by 4Q2010.

Kencana is currently tendering another RM4 billion worth of orders, which include fabrication contracts in Malaysia, Myanmar, Vietnam and India as well as for the long-awaited Sabah Oil & Gas Terminal.

With the upgrade in the Lumut yard (tonnage handling capability increased to 30,000 tonnes from 20,000 tonnes previously) nearing completion, we believe Kencana stands a good chance of securing higher-margin deepwater jobs. In tandem with the growing order book, we highlight that FY11-FY12 utilisation rate is expected to increase to 85% and 92% respectively from the estimated 45%-55% in FY10.

The risks to our view are: (1) contracts in overseas markets that may have higher execution risk; (2) rising steel cost and other cost overruns; (3) the strengthening of ringgit against the US dollar; and 4) contracts' cancellation/deferment if crude oil price pulls back.

No change to our forecasts as we have already assumed RM1 billion-RM1.3 billion new orders per annum flowing in over the next 24 months to replenish existing ones.

We continue to like Kencana given its: (1) proven earnings track record; (2) strong management; and (3) plans to diversify into more recurrent earnings. We believe the company's earnings visibility will continue to improve on the back of a revival in exploration and production (E&P) spending after recent delays, and driven by the continued long-term shortage of E&P assets.

We therefore reiterate our outperform recommendation on Kencana with an unchanged fair value of RM1.88 per share (based on 16 times FY11 price-earnings ratio). - RHB Research Institute, May 4


This article appeared in The Edge Financial Daily, May 5, 2010.

MAMEE - Mamee an outperform, says Inter-Pacific

Stock Name: MAMEE
Company Name: MAMEE-DOUBLE DECKER (M) BHD
Research House: INTER PACIFIC

Mamee-Double Decker Bhd
(May 4, RM3.14)
Outperform at RM3.12 with target price of RM3.63: We like Mamee due to: (1) its good track record and competence to develop food products as well as branding the products; (2) net cash position of RM84 million (56 sen per share); (3) high dividend payout policy; (4) strong presence in Australia and with Coles, Australia's second-largest retailer is knocking on their doors; and (5) a beverage segment - comprising yogurt drink, Nutrigen, and soft drinks - is making its present felt.

Our fair value of RM3.63 was derived based on 34.9 sen FY11 earnings per share (EPS) and a price-earnings ratio (PER) of 10.4 times which is 23.8% premium.

Mamee, which was established in 1971, has successfully developed a brand name in the area of instant noodles, snacks and confectionery. Seventy per cent of their products are sold locally with 30% exported to more than 80 countries.

Australia is their main export market, contributing 18% of its total export revenue. Replacing "Pringles" with "Mr Potato" chip snacks in the shelves of Woolsworth chain of supermarkets, which is Australia's biggest food retailer, gave Mamee a big boost. Competitive pricing and strong quality were the main drivers.

Mamee's invasion into Australia did not stop at "Mr Potato". Its flagship product "Monster Noodle" snacks is now sold in Australia's schools, clearly endorsing the quality of its products.

Its noodles segment Mamee Instant Noodle (MIN) account for between 22% and 25% of its total revenue, capturing a large market share from its main competitor Maggi Mee.

MIN currently enjoys 14% market share in the noodle segment market, which is valued around RM800 million to RM900 million according to World Instant Noodles Association (WINA).

With 10 new snacks and noodles expected to roll out in 2010, Mamee plans to spend a total of RM35 million or 8.5% of FY09 revenue on advertising and promotion. This should boost their top line to about 10% FY11.

Mamee's continuous success could be attributed to: (1) its ability to introduce new products continuously in niche areas where the company has a distinct brand recognition; (2) expand export sales with selected niche products and assist distributors to achieve higher sales targets; (3) good cost management via hedging of raw material prices, bulk buying, cash payment discount and better production scheduling; and (4) expanding their business through acquisition of food-related companies with existing brands and leverage on its manufacturing expertise and distribution channels to grow total revenue.

Mamee is still locally dependent as 70% of their sales are domestic driven with the strategy to increase overseas contribution to about 50%. Currently, it has a production plant in Myanmar to produce products for the Myanmar market. It sees vast potential in Thailand, Indonesia and Cambodia especially with their Monster Snack products. - Inter-Pacific Research, May 4


This article appeared in The Edge Financial Daily, May 5, 2010.

QL - Maybank IB: QL still a great catch

Stock Name: QL
Company Name: QL RESOURCES BHD
Research House: MAYBANK

QL Resources Bhd
(May 4, RM3.76)
Maintain buy at RM3.77 with higher target price of RM4.56: We think that QL's share price has recently been playing catch-up to its stellar earnings growth profile. We expect QL's upcoming FY10 results to exceed market expectations, but we have still not factored in potential big wins from its palm division pending clarity on FY13 earnings forecasts. Maintain buy with a raised discounted cash flow-based (DCF) target price of RM4.56 (from RM3.68) in line with raised FY10-FY12 forecasts.

We are raising FY10-FY12 net profit forecasts by 7%-15% on the back of better selling prices and better-than-expected sales volumes. Fishmeal prices, for instance, were at a record-high US$1,794/tonne (RM5,759) in March 2010, or a whopping 70.2% higher year-on-year due to both lower global supplies and higher global demand. We also expect better margins as QL's divisions gain scale economies.

Whilst scale economies contribute to better margins, we also note QL's continuous efficiency drives in FY10 that have resulted in the continual installation of biomass boilers to replace diesel boilers at its marine plants. We expect a continuous improvement in marine's pre-tax profit margin by at least 50-100 basis points annually to 16% in FY12 from 14% in FY09 as a result.

Earnings visibility from its marine and farming divisions remain solid in FY10-FY12, as carefully planned capacity growth is expected to tie in with raised demand. If overseas expansion into Indonesia and Vietnam remains on track, there are upside risks to our FY11-FY12 forecasts.

QL's share price has risen 16.9% year-to-date, and 78.8% over the last year. Nevertheless, we remain steadfast buyers of QL given its sterling track record and strong earnings visibility. Earnings per share (EPS) growth in FY11 appears negative only to the extent that QL completed a 1-for-5 bonus issue in January 2010 that enlarged its share base. Investors will still share in its 20.5% and 13.3% net profit growth in FY10 and FY11 without dilution. Our RM4.56 DCF-based target price assumes a conservative 2% terminal growth rate and 6.6% weighted average cost of capital. - Maybank IB, May 4


This article appeared in The Edge Financial Daily, May 5, 2010.

SSTEEL - Southern Steel an outperform, says Inter-Pacific Research

Stock Name: SSTEEL
Company Name: SOUTHERN STEEL BHD
Research House: INTER PACIFIC

KUALA LUMPUR: Inter-Pacific Research Sdn Bhd has recommended SOUTHERN STEEL BHD [] (SSB) an outperform at RM2.35 with target price RM2.80 on the back of a more optimistic outlook which translates into firmer demand and steel price.

The target price of RM2.80 was derived based on a PER of 8.15 times on FY10 EPS of 34.4sen and P/BV of 1.35 times, it said.

The research house said that underpinned by better economy and firmer steel prices, SSB's top and bottom line which turned to black in 4QFY09 continued to remain in black in 1QFY10.

Topline in 1QFY10 surged by 59.7% year-on-year and 6.8% quarter-on-quarter to RM628.7 million, translating into earnings of RM34.5 million which accounts for 23.9% of FY10's forecast, it said.

"Although SSB's earnings improved, margins for both pre-tax and net profit eroded in 1QFY10 to 5.9% and 34.5% respectively from 10.8% and 59.7% in 4QFY09 respectively.

"Erosion was due to higher raw material cost which has been on the rise since early 2010. Pressure on margins could remain as the economic recovery at this stage remains nascent, thus affecting demand," it said.

Inter-Pacific Research said steel prices are expected to stay firm going forward primarily supported by both private and public CONSTRUCTION [] activities which are expected to roll out more significantly after the 10MP is unveiled in June 2010, plus possible stocking up by traders in anticipation of further price increases.

HUNZPTY - OSK raises target price on Hunza Prop

Stock Name: HUNZPTY
Company Name: HUNZA PROPERTIES BHD
Research House: OSK

OSK Research has upgraded Hunza Properties Bhd's calender year 2010 target price to RM1.54 from RM1.27 previously.

In a research note today, OSK said value could now only be found in the smaller-capitalised property stocks such as Hunza as they were trading at a significant discount even to the mid-cap ones.

It said this was because most mid- to big-cap stocks had somewhat been fully priced in the anticipated rebound.

It said the broad sector would rebound starting from late 2010/early 2011 and spur investment interest in fundamentally-sound and still-undervalued property stocks.
"Therefore, we have been contemplating an upgrade on Hunza's fair value for some time," it said.

OSK said when the 2011 rebound materialised, the risk premium on smaller-cap stocks was likely to fall and the valuation gap narrow.

It said Hunza was involved in property development with main exposure on Penang Island and the Klang valley.

Given the improving property sales and encouraging pick-up in construction works at Gurney Paragon project, Hunza reported significantly better numbers for nine-month financial year 2010 (9MFY10) on a year-on-year basis, slightly surpassing its and street estimates, it said.

"As construction works on Gurney Paragon gain pace, it is likely that Hunza will continue to report rather good results for the coming quarters," it said.

The Infinity and Gurney Paragon projects recorded substantially stronger sales in 9MFY10 compared with that in the previous financial year, it said.

OSK said after three quarters of encouraging new property sales on Penang Island, it appeared that the island's property market was on a much firmer footing.

"Recent buying activities, particularly on the island's high-end condominium segment is said to be sustained by domestic real demand, although we see some signs that speculative activities are fast emerging," it said.

Meanwhile, the shares of Hunza rose the most in seven weeks in Kuala Lumpur after announcing plans for a special dividend as its third-quarter net income almost doubled to RM11.3 million.

The stock climbed 3.3 per cent to close at RM1.26, its steepest advance since March 23. -- Bernama, Bloomberg

TM - TM downgraded to 'sell' at UBS

Stock Name: TM
Company Name: TELEKOM MALAYSIA BHD
Research House: OTHER

Telekom Malaysia Bhd was downgraded at UBS AG because the company's fundamentals remain "unexciting" and valuations are "stretched."

The stock was cut to "sell" from "neutral," UBS said in a report today.

The share price estimate was increased to RM3.10 from RM2.90, it said. -- Bloomberg

GENM - Maybank IB sees weaker 2H for GenM

Stock Name: GENM
Company Name: GENTING MALAYSIA BERHAD
Research House: MAYBANK

Genting Malaysia Bhd
(May 3, RM2.87)
Maintain sell at RM2.90 with unchanged target price of RM2.40: Genting Malaysia (GenM) will report its first-quarter (1Q) results by month-end. It seems the Malaysian resort continued to perform strongly in the quarter, notwithstanding the hype from newly opened Resorts World Singapore (RWS). We expect deterioration in ensuing quarters as the two Singaporean integrated resorts (IRs) ramp up to full operations.

About two-thirds of RWS' casino tables are currently operating, the hotels are fully occupied and visitor numbers at Universal Studios are up despite the flagship Battlestar Galactica ride being closed. The drop is in line with expectations. Elsewhere, the second IR, Marina Bay Sands, had its soft opening on April 27.

We believe GenM has a viable long-term niche among Malaysian and lower-budget punters. However, we expect curiosity to drive at least some of its core punters to Singapore over the next 12 months as both IRs become fully operational. Day-trippers accounted for 71% of GenM's 19.5 million visitors last year. The bulk of the hotel guests are Malaysian (56%). The balance includes mainly Singaporean (22%) and China/HK nationals (7%).

GenM had RM5.3 billion (93 sen per share) cash as at Dec 31, 2009 and generated RM2 billion earnings before interest, tax, depreciation and amortisation (Ebitda) last year. However, it paid out just 7.3 sen dividend per share (DPS), equivalent to a 24% payout ratio. GenM has been investing in MGM Mirage US dollar bonds, most recently US$48 million (RM154.08 million) at 4.25% last week. GenM now has a total US$116 million in MGM bonds, at coupons up to 11.125%.

Our earnings forecasts incorporate 10% revenue contraction in 2010, which might still be too optimistic. Our target price is discounted cash flow-based (11.7% equity discount rate: 4% risk-free, 6.5% market risk premium, 1.1 beta). We exclude balance sheet cash from our valuation, as this is unlikely to be returned to minorities in the near future. - Maybank IB, May 3


This article appeared in The Edge Financial Daily, May 4, 2010.

SUNCITY - SunCity a proxy for China property play

Stock Name: SUNCITY
Company Name: SUNWAY CITY BHD
Research House: ECMLIBRA

Sunway City Bhd (SunCity)
(May 3, RM3.84)
Reiterate buy at RM3.90 with target price of RM4.33: SunCity moved a step closer to securing its second project in China following a collaboration agreement with Sino-Singapore Tianjin Eco-City Investment and Development Co, Ltd (SSTEC) for the joint development of 102.3 acres (41.4ha) land in Tianjin, China, which forms part of the 7,500 acres Sino-Singapore Tianjin Eco-City project. The company has previously entered into a memorandum of understanding with SSTEC in October 2009.

The project is strategically located in the fast-growing Tianjin Binhai New Area and is well-positioned to be the focal point for the acceleration of growth in the Bohai Rim region. Over the next two decades, this project will be transformed into an urban city with 110,000 homes for about 350,000 people.

The mixed residential and commercial project will have an estimated gross development value (GDV) of 10 billion yuan or RM4.7 billion, double that of earlier estimate of five billion yuan. The project, which comprises more than 5,000 units, will be developed over five years and is expected to commence in March 2011 at the earliest.

This project is even bigger than Sunway South Quay project and is poised to be SunCity's largest project. It will boost its remaining GDV from approximately RM15 billion to RM20 billion. The project will also position SunCity to be the Malaysian developer with the largest exposure to the China property market.

We are not making any revision to earnings at this juncture as the joint venture is still subject to the approval of the Tianjin local government. Upon procurement of the authority's approval, SSTEC and SunCity will enter into joint-venture agreement. While no details have been revealed on the equity investment and profit sharing at this juncture, we understand that SunCity will have a majority stake in the JV.

We maintain our buy call as we like SunCity for its undemanding 10.4 times price/earnings (P/E) and 32% discount to revised net asset value (RNAV) of RM5.77. Our unchanged target price of RM4.33 is based on 12 times P/E on FY10 earnings per share (EPS).

With increasing sales momentum and landbank acquisitions, SunCity's valuation is compelling as our target price implies price-to-earnings growth (PEG) multiple of 0.7 time only. Furthermore, its impending REIT listing later this year will unlock the value of its investment properties, which will be a catalyst to narrow its valuation gap to its RNAV. - ECM Libra Investment Research, May 3


This article appeared in The Edge Financial Daily, May 4, 2010.

LPI - Kenanga Research initiates coverage on LPI Capital with buy call

Stock Name: LPI
Company Name: LPI CAPITAL BHD
Research House: KENANGA

KUALA LUMPUR: Kenanga Research has initiated coverage on LPI CAPITAL BHD [] with a buy recommendation at RM15.04 and target price RM16.80, and said it favours LPI the most among general insurers in Malaysia due to its well-diversified business portfolio enabling the company to minimise its operating risks and generates the highest return on equity (RoE) to reward shareholders.

The research house said the auto insurance segment is expected to turn around in 2010-11 with the proposed increase in premium rates and the change of motor tariff structure, which is a re-rating catalyst.

"We have not factored in the potential tariff hike in this report, however, we estimate every 5% increase in net premium, could increase LPI's earning by 9%," it said.

The research house said LPI has multiple distribution channels including its own agency network and tapping into Public Bank's 250 branch networks.

"We believe its faster-than industry's organic gross premium growth rate of 15%-16% is achievable," it said.

Kenanga Research said historically, LPI's premium has grown at a CAGR of 15% for the last 10 years.

"We estimate LPI now trades at 12.7 times FY11 PER, offers 6.2% net dividend yield and we forecast RoE of 17.2%; which is better than most of the banking stocks.

"We believe its business model of growing revenues at the calculated risk should sustain its earning growth of 12%-14% over next two years and efficient capital structure do offer a solid dividend yield story to investors," it said.

The research house said LPI deserved a valuation premium given stronger growth, higher margin, low investment risk, better market position; whilst the downside is well cushioned by its 6.2% net dividend yield.

NOTION - Inter-Pacific Research reiterates outperform call on Notion Vtec

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

KUALA LUMPUR: Inter-Pacific Research Sdn Bhd has reiterated its outperform recommendation on NOTION VTEC BHD [] at RM3.17 and revised its fair value upwards to RM3.83 from RM3.78 based on diluted EPS of 35 sen and PER of 11 times.

It said Notion's management expects the company's revenue to grow by 6% quarter-on-quarter (q-o-q) and 18% q-o-q in the remaining quarters of FY10 emanating from camera and HDD.

The stronger growth in latter quarter could be attributed to seasonality, it said.

"Nevertheless, the management expects its EBTIDA margin would fall from 38.7% in 2QFY10 to 37% in 4QFY10 in view of higher contribution from the lower end margin HDD and also partly due to the start up and development cost of its Thailand factory.

"But their continuous effort to reduce cost 1) the purchase of Autic Mekki for RM3.4 million which translates to a 100% ownership (previously 40%); 2) recycling of aluminum scrap; 3) commissioning of new adonising plant in Klang will provide comfort to its margin," it said.

The research house said Notion would spend about RM120 million in FY10 for capital expenditure, of which, RM80 million will be used for its 2.5" base plate production with the objective to hit two million pieces by end FY10.

It said Notion was expected to raise the needed fund through private placement of RM40 million and the balance through borrowings, adding that borrowings is expected to increase from RM57 million in FY09 to RM110 million - RM 125 million in FY10 thus bringing their FY10 net gearing ratio to 0.54 times from 0.43 times in FY09.

AXIATA - Target price on Axiata raised to RM4.90

Stock Name: AXIATA
Company Name: AXIATA GROUP BERHAD
Research House: TA

TA says it is revising its estimates on Axiata higher by 8-16 per cent for financial years 2010-2012 for after imputing XL's adjustments.

"In our new estimates, XL's higher earnings contribution would likely come from EBITDA margin adjustments," TA says.

The research firm is maintaining its "buy" recommendation on Axiata with a revised target price of RM4.90.

"We believe our earnings projections are too conservative and therefore have tweaked our FY10-11 estimates to reflect i) data growth driven by affordable smartphones, ii) tower leasing rising and iii) stable RPM," TA says.

MAS - TA Keeps 'hold' on MAS over A380 delay

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

TA has maintained its "hold" rating on MAS with a target price of RM2.50, citing delayed delivery of A380s to MAS.

"We are dismayed by this news as this is the third time Airbus had announced delays in delivering the A380s to MAS," says the research outfit.

MAS' parent company Penerbangan Malaysia Bhd (PMB) had initially ordered the six A380s in 2003 for delivery from January 2007 to December 2008.

Nonetheless, the delivery of the aircraft was deferred to January 2011 and then to August 2011 due to production rampup issues.
To recap, in December 2009, MAS has proposed to acquire the six undelivered A380sand a bundle of 4 Boeing aircraft (2 B777 and 2B747) from PMB, for about RM3.2 billion.

PMB has agreed to pay the liquidated and ascertained damages - post-acquisition that potentially compensated by Airbus to MAS. The total compensation receivable from PMB/Airbus in connection with the delay is estimated to be in excess of RM330 million.

NOTION - Rapid expansion ahead for Notion VTEC

Stock Name: NOTION
Company Name: NOTION VTEC BHD
Research House: RHB

Notion VTEC Bhd
(May 3, RM3.03)
Maintain outperform at RM3.17 with fair value of RM4.64: The management expects revenue and profit to grow over the next two years on the back of: (1) stronger-than-expected demand for mobile computing and consumer electronics; and (2) higher utilisation rate for the camera segment as demand for SLR cameras picks up.

We note that the 2QFY10 utilisation rates for hard disk drive (HDD) and the camera segments were 90% and 50% respectively.

Given the rapid growth in demand for data storage, Samsung is planning to ramp up its capacity for 2.5'' HDD. Notion thus plans to raise its own monthly unit production targets to one million by September 2010, five million in FY11 and seven million in FY12 versus previous targets of three million in FY11 and five million in FY12.

Assuming Notion hits these targets, our FY11-FY12 revenue estimates could be raised by 35% and 25% per annum, respectively.

While we are positive on Notion's long-term earnings outlook, we are maintaining our forecasts for now. The management warned that there is some risk that capacity ramp-up and product testing costs for its 2.5" base plate and spindle motor lines could dampen earnings in the next two quarters.

Nevertheless, longer term, we believe there is potential upside to our FY11-FY12 forecasts arising from: (1) stronger-than-expected sales of spindle motor hubs and 2.5'' base plates; (2) stronger contribution from its Thailand and Klang operations, capitalising on the rapid expansion of key customers, Alphana Tech and Samsung; and (3) higher contribution from the auto segment.

We maintain our indicative fair value of RM4.64 based on a target FY09/11 price-earnings ratio (PER) for now although we note that after adjusting for the potential dilution arising from the proposed 10% private placement and 1-for-5 rights issue of free warrants, our fair value would fall to RM3.87.

Nevertheless this would still imply 22.1% upside. Maintain outperform. - RHB Research Institute, May 3


This article appeared in The Edge Financial Daily, May 4, 2010.

KNM - Tax break boosts KNM FY09 net profit

Stock Name: KNM
Company Name: KNM GROUP BHD
Research House: OSK

KNM Group Bhd
(May 3, 53 sen)
Upgrade to neutral at 53.5 sen, target price maintained at 59 sen: Last Friday, KNM announced that there was a positive deviation between its unaudited financial statements for FY09 announced in February 2010 and the audited financial statements released last Friday.

The FY09 net profit of RM260.6 million (previously RM170.8 million) is now higher by RM89.8 million, or 52.6%, after taking into account recognition of the tax incentives granted for Borsig's acquisition.

The company announced in early April that it had received a tax incentive of RM1.4 billion from the finance ministry in respect of acquisition cost and other approved incidental costs incurred by KNM Process Systems Sdn Bhd (KNMPS) for the Borsig acquisition. This incentive will be applied over four years with effect from year of assessment 2009 onwards. Hence, the auditors have started to recognise this incentive beginning from its FY09 accounts.

Earlier, we had downgraded KNM to a sell after BlueFire Capital Group Ltd decided to allow its offer price of 90 sen per share to lapse. The share price has come down to a low of about 50.5 sen recently. Hence, we are now upgrading our call to neutral but advise investors to avoid this stock until further positive developments are seen. - OSK Research, May 3


This article appeared in The Edge Financial Daily, May 4, 2010.