May 29, 2010

SIME - Sime Darby downgraded to 'neutral'

Stock Name: SIME
Company Name: SIME DARBY BHD
Research House: JP MORGAN CHASE

Sime Darby Berhad had its stock rating cut to "neutral" from "overweight" by JPMorgan Chase & Co analyst Simone Yeoh. The share-price estimate was cut to 8 ringgit from 10.10 ringgit. -- Bloomberg

May 27, 2010

PROTON - Proton up after OSK Research raises target price

Stock Name: PROTON
Research House: OSK

KUALA LUMPUR: PROTON HOLDINGS BHD [] share price rose in early trade Thursday, May 27 after OSK Research maintained its buy call on the stock at RM4.44 and raised its target price to RM6.94.

At 9.20am, Proton was up 18 sen to RM4.62 with 71,500 shares done.

OSK Research in a note on Thursday said Proton's FY10 core earnings were spot-on with its estimates and consensus, fueled by higher vehicles sales and improved operating efficiency.

It said Proton was likely to see sustainable profitability margins moving forward, backed by the uptrend in sales. In addition, Proton would make massive capex spending of close to RM1 billion in research and development (R&D), it said.

"As such, we have raised our earnings by 7.5% for FY11 on a lower effective tax rate assumption given its favorable investment allowances.

"Due to its capex commitment and the fact that Proton did not announce any dividends this year, we have also excluded the possibility of dividends over the next two years," it said.

Proton, which posted a net profit of RM22.8 million for the fourth quarter ended March 31, 2010 (4QFY10) is expected to make an announcement about a possible collaboration with German carmaker Volkswagen AG (VW) in one to two weeks.

Proton's 4Q net profit of RM22.8 million compares to a net loss of RM322.97 million a year ago. The turnaround was aided by an R&D grant of RM99 million from the government during the quarter under review while the carmaker also wrote off RM118 million for R&D expenditure.

BIPORT - OSK Research maintains buy call on Bintulu Port

Stock Name: BIPORT
Research House: OSK

KUALA LUMPUR: OSK Research has maintained its buy call on BINTULU PORT HOLDINGS BHD [] at RM6.38 with an unchanged target price of RM6.78, and said the company's 1QFY10 revenue and earnings were in line with estimates but slightly below consensus.

It said revenue growth remained flat as the Chinese New Year effect had somewhat contributed to the slowdown.

"Bintulu has announced a dividend of 75 sen, which is slightly above our forecast.

"With our forecasts unchanged at this juncture, premised on a DDM valuation with a required cost of 8.3%, we derive an unchanged target price of RM6.78. Maintain buy," it said.

PELIKAN - ECM Libra: Pelikan stepping into uncertainty

Stock Name: PELIKAN
Research House: ECMLIBRA

Pelikan International Corporation Bhd
(May 26, RM1.06)
Reiterate buy at RM1.02 with a lower target price of RM1.26 (from RM1.94)
: Pelikan's 3MFY10 results were broadly in line with house expectations, despite revenue achieving only 11% of FY10 estimates. The company reported a net profit of RM111.4 million, but after adjusting for RM143.1 million negative goodwill and RM41.9 million merger expense due to the Herlitz acquisition, as well as RM2.7 million forex loss (1QFY09: RM400,000), its 3MFY10 adjusted net profit was RM12.9 million which achieved 15% of our FY10 estimates. Likewise against consensus, Pelikan achieved 12% and 17% in revenue and adjusted net profit of FY10 consensus estimates respectively.

Despite 1QFY10 contributing only 11%-12% of FY10 estimates, the full impact from Herlitz's revenue will be felt from 2QFY10 onwards as Pelikan consolidated Herlitz as a 66% owned subsidiary from March 18. In addition, the RM50 million cost savings imputed into our earnings model from the Herlitz acquisition is expected to materialise only in 2HFY10.

Pelikan's 1QFY10 revenue was negatively affected by the weakening euro, which has dropped about 20% against the ringgit. 1Q adjusted net profit improved due to lower financing costs as total borrowings have decreased 27% year-on-year to RM295 million, while the weaker euro may have resulted in finance costs savings as well.

For 1QFY10, despite revenue growth in Italy and other parts of Europe, Pelikan suffered a contraction in Ebit (earnings before interest and tax) for all major markets except for Latin America. Europe's recovery remains fragile due to the ongoing Greece debt crisis, as well as the risk posed by the highly indebted PIIGS (Portugal, Italy, Ireland, Greece and Spain) economies.

Nonetheless, Pelikan derives almost half of its revenue from Germany, whereby the government in April reiterated its 1.4% 2010 GDP growth forecast, although the IMF in March trimmed its forecast to 1.2% from 1.5%.

We reiterate our buy rating on Pelikan while making no changes to our earnings estimates. However, we are lowering our target price from RM1.94 to RM1.26, as we peg a lower PE (price-to-earnings) multiple of seven times (previously 10 times) to mid-FY11 EPS (earnings per share) of 18.1 sen. We adjust our PE multiple lower by 30% due to the headwinds caused by the European sovereign debt crisis.

Key risk factors to our view are (1) integration risks, (2) failure to reap targeted synergies and (3) a declining euro which results in foreign currency translation loss. ' ECM Libra Investment Research, May 26
This article appeared in The Edge Financial Daily, May 27, 2010.

PENERGY - A surprisingly good quarter for Petra Energy, says OSK

Stock Name: PENERGY
Research House: OSK

Petra Energy Bhd
(May 26, RM1.18)
Upgrade to neutral from sell, with higher target price of RM1.15 (from 85 sen)
: Petra Energy's 1QFY10 results were within consensus but above our expectations, making up 29% and 48% of the FY10 forecasts respectively. Surprisingly, Petra Energy saw more business activities in brownfield maintenance and engineering services when the O&G industry had been generally quiet during the quarter as there were minimal new jobs.

Also, its net profit improved significantly to RM8.1 million in the current quarter versus a loss in 4QFY09, during which it was hit by: 1) late delivery charges from the boiler business amounting to RM4.9 million; 2) provisions for doubtful debts of RM2.2 million from the design and fabrication sector; 3) mobilisation costs of RM4.8 million for three new vessels (Petra Endeavour, Petra Orbit and Petra Galaxy) to be used for the Shell contract, and 4) dry docking expenses of RM1 million.

Finally, year-on-year, the 1QFY10 net profit was only slightly higher by 9.4% although revenue jumped significantly by 42.9%, mainly due to the difference in product and service mix during the quarters, which gave rise to variations in margin.

We have also upgraded our FY10-FY11 earnings by 36%-58% in line with the better results and expectation of better performance in the coming quarters. Nevertheless, we have lowered our PE (price-to-earnings) valuation for Petra Energy to eight times (previously 10 times) until we see more consistent quarterly results as well as new brownfield services contracts being awarded to the company given the stifr competition.

Our target price on the stock has now been upgraded to RM1.15 as we roll forward to FY11 earnings. Also, note that its competitors like Dayang and Kencana are getting stronger by the day on purchases of new vessels to expand their brownfield services, especially in the hook-up and commissioning area. ' OSK Research, May 26
This article appeared in The Edge Financial Daily, May 27, 2010.

HSL - Inter-Pacific sees good potential in HSL

Stock Name: HSL
Research House: INTER PACIFIC

Hock Seng Lee Bhd (HSL)
(May 26, RM1.40)
Recommend outperform at RM1.32 with target price of RM1.74
: Infrastructure development in Sarawak continues to intensify, driven by the government's stimulus packages and the Sarawak Corridor of Renewable Energy (Score) initiatives. These offer good potential for HSL. With the first quarter financial results outperforming the corresponding quarter of 2009, HSL is positioned for another year of growth.

HSL's revenue increased by 18.7% year-on-year (y-o-y) in 1QFY10 to RM92.4 million. Due to seasonal factors, the first quarter revenue is traditionally slower, hurt by rain and festivities. Thus, 1QFY10 revenue made up only 19.3% of our full-year forecast.

Nonetheless riding on the wave of infrastructure development in Sarawak and drawing on its marine engineering strength, revenue contribution from the construction segment increased by 19.6% y-o-y to RM84.8 million while property development improved by 9.4% y-o-y to RM7.6 millon.

HSL's 1QFY10 net profit margin had climbed by 9.5% y-o-y on the back of a significant step-up in operating income for its construction and property development segment. Operating margin for HSL's construction and property development had jumped by 31.6% and 44.4% respectively.

Following the completion of an educational institution in Bintulu and road works at Panchor, Kuching, HSL's bid of several infrastructure projects for FY10 has been rewarding. It had procured two new road projects, a building work contract in Samarahan and a wharf at Muara Tebas, bringing its order book to RM1.7 billion with RM1.1 billion outstanding.

Following the robust sales of FY09 year-end launching of The Leaf, which achieved more than 90% sales in about four months, HSL had planned to introduce a mixed development worth RM900 million along the Kuching-Samarahan Expressway. Modelled after The Leaf which adopted a high-end gated and guarded concept, the mixed development named La Promenade is expected to be launched in the 2HFY10, providing a growth catalyst to its property development segment.

Other ongoing projects included Vista Aman in Samarahan, Highfields in Batu Kawa, Lavender Hills along Kuching-Serian Road and Vista Parade.

We believe contribution from the property segment would be stepping up from about 15% of HSL revenue or between RM8 million and RM9 million post launching of La Promenade. ' Inter-Pacific Research, May 26
This article appeared in The Edge Financial Daily, May 27, 2010.

KFC - Maybank IB sees KFCH as finger lickin' good

Stock Name: KFC
Company Name: KFC HOLDINGS (M) BHD
Research House: MAYBANK

KFC Holdings (M) Bhd
(May 26, RM8.52)
Maintain buy at RM8.50 with higher target price of RM9.50 (from RM7.90)
: The quietly spectacular performance of KFCH's local outlets led it to a strong start in 1Q10, benefiting also from more benign commodity prices and a favourable currency.

Consumer demand appears strongly resilient. We leave 2010-2011 estimates unchanged and introduce 2012 estimates. Our higher RM9.50 discounted cash flow-based (DCF) target price is based on more positive fundamentals beyond 2011.

KFCH's RM34.2 million 1Q10 net profit (+19.3% year-on-year; -2.3% quarter-on-quarter) was achieved from healthy consumer demand translating into 14.1% y-o-y revenue growth to RM600.7 million. This record-high revenue for its 1Q was matched by manageable raw material prices and unit costs that contributed to an even higher-than-revenue growth of 18.9% y-o-y in operating profit to RM51 million.

It's 1Q10 revenue and pre-tax profit from the ancillary division rose 31.9% and 70.6% y-o-y, to RM28.5 million and RM2.9 million respectively. Whilst impressive, the main growth contributor in absolute terms remained the local KFCH restaurants that posted revenue and pre-tax profit growth of RM53.3 million (+17.5%) and RM7.4 million (+21%) y-o-y to reach RM357.2 million and RM42.6 million, respectively. Although only one store in India was opened in 1Q10, initial signs are positive whilst KFCH's learning curve continues to smoothen over time. KFCH still hopes to open up to 30 stores over a three-year period although local expansion of 30-35 KFCH stores per annum would likely still drive overall earnings growth in 2010-2012.

The negative impact of fluctuations in foreign currencies such as the US dollar and Indian rupee is likely to be neutralised by an increasing share of earnings from its Singapore operations. Similarly, the underlying performance of its KFC stores across now four countries of operations (namely Brunei, India, Malaysia and Singapore) continues to be dynamic and resilient.

Our DCF-based target price rises to RM9.50 as we incorporate raised 2012's explicit forecasts from a more conservative semi-explicit base. ' Maybank IB Research, May 26
This article appeared in The Edge Financial Daily, May 27, 2010.

May 26, 2010

COASTAL - OSK Research raises Coastal Contracts' target price to RM3.77

Stock Name: COASTAL
Research House: OSK

KUALA LUMPUR: OSK Research has maintained its buy call on Coastal Contracts at RM2.08 with a higher target price of RM3.77 and said the company's 1QFY10 results were within expectations.

Nevertheless, its 1QFY10 net profit was lower quarter-on-quarter mainly due to the delivery of fewer offshore support vessels (OSV) that fetched higher margins than tug boats and barges, compared with 4QFY09, it said.

"Going forward, we expect new shipbuilding orders in 2H10 to support the growing O&G industry. We continue to like the company's strong orderbook of about RM1 billion.

"Maintain buy with higher target price of RM3.77 (previously RM3.63) as we roll forward to FY11 earnings," it said.

MMCCORP - OSK Research cuts target price for MMC

Stock Name: MMCCORP
Research House: OSK

KUALA LUMPUR: OSK Research has maintained its trading buy call on MMC Corp at RM2.23 but lowered its target price to RM2.54 (from RM2.80 previously) and said the company's results disappointed again, pulled down by continued losses at Zelan and high tax and minority interest (MI) rates.

"While we expect the high tax and MI rates to normalise, the disappointment at Zelan leads us to forecast zero associate earnings for 2010 and strip out Zelan from of our Sum of Parts (SOP) value for MMC.

"Due to the lower net profit forecast (down 5%-6%) and a higher attributed WACC due to market volatility, our SOP fair value is reduced to RM2.54," it said.

Nonetheless, OSK Research said there was still value in the company, and the upcoming 10MP as well as hopes for expansion of the Tanjung Bin power plant prompt it to maintain its trading buy call.

MPI - Malaysian Pacific downgraded at OSK

Stock Name: MPI
Research House: OSK

Malaysian Pacific Industries Bhd (MPI), Malaysia's largest listed chipmaker, had its stock rating cut to "sell" from "neutral" at OSK Research Sdn Bhd, citing "unattractive" valuations.

The share price estimate was reduced to RM4.28 from RM6.36, OSK said in a report today. - Bloomberg

KNM - KNM raised to 'neutral' at JPMorgan

Stock Name: KNM
Company Name: KNM GROUP BHD
Research House: JP MORGAN CHASE

KNM Group Bhd was raised to "neutral" from "underweight" at JPMorgan Chase & Co, which said Malaysian company's share price has fallen close to its book value of 45 sen.

The share price estimate was reduced to 48 sen from 66 sen, JPMorgan said in a report on May 25. -- Bloomberg

MBMR - MBM's roaring start to 2010

Stock Name: MBMR
Research House: OSK

MBM Resources Bhd
(May 25, RM2.71)
Maintain buy at RM2.70 with a higher target price of RM4.06
: MBM reported a 1QFY10 revenue and net profit of RM363.8 million and RM39.9 million respectively. Its annualised revenue and profit before associates were in line within our forecast but on a net basis, the net profit swelled way above our estimate by 68% due to significantly higher contributions from associates Perodua and Hino, thanks to the favourable movements of the ringgit against the Japanese yen, and improved efficiency as overall sales improved.

At the subsidiary level, MBM's 1QFY10 revenue surged 48% year-on-year (y-o-y) and 12% quarter-on-quarter (q-o-q), driven by higher unit sales from its Perodua dealership (unit sales up by 16.4% q-o-q, 44.5% y-o-y), along with higher sales of foreign marques from Federal Auto (unit sales soared 55% q-o-q, 207% y-o-y).

On the manufacturing side, strong vehicle sales also pushed up sales of steel wheels, rims and tyre assembly. This in turn boosted the revenue contribution from its subsidiary; Oriental Metal Industries, by 15.4% q-o-q and 35% y-o-y. Collectively as a manufacturing division however, MBM did not achieve a higher revenue base compared to the preceding quarter due to the recent disposal of one of its key subsidiaries, WSC.

MBM's profit before associate and tax grew by 63% q-o-q and threefold y-o-y as margins normalised, attributed to improving sales productivity from its dealership networks and better operating efficiencies from its manufacturing division.

With the results exceeding our estimates by 68% on an annualised basis on strong associate contributions from Perodua and Hino, we are upgrading our associate earnings by 47% for FY10 and 42% and 26% respectively for FY11 and FY12.

Consequently, this raises our earnings estimates for FY10, FY11 and FY12 by 29%, 27% and 18% respectively. Pegged at a lower PE (price-to-earnings) multiple of eight times (previously nine times) due to its tight liquidity, we derive a new target price of RM4.06 (from RM3.54 previously), with our buy call retained, which gives a potential upside of 50% and a dividend yield of 6.7%. ' OSK Research, May 25

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

QL - QL sees a decade of double-digit growth

Stock Name: QL
Research House: MAYBANK

QL Resources Bhd
(May 25, RM3.65)
Maintain buy at RM3.72 with unchanged target price of RM4.56
: FY10 is QL's ninth straight year of double-digit net profit growth since its listing in FY2000, with more of the same to come in the next five years. Earnings came in very close to our FY10 forecasts. Maintain buy with an unchanged discounted cash flow-based (DCF) target price of RM4.56. QL remains our top consumer stock pick.

It was another record-breaking year for QL as it chalked up 4QFY10 net profit of RM26 million (+40.3% year-on-year; -15.8% quarter-on-quarter). Although 4Q earnings from the marine division was seasonally low, QL's continuous investment in cold rooms has helped ease scarcity of raw materials and helped raise marine's pre-tax profit margin by 5.6 percentage points y-o-y to 14%, leading to a 4Q pre-tax profit of RM13 million (+102.6% y-o-y; -19.1% q-o-q).

QL's FY10 net profit was better than the market's but within our expectations. Its RM106.4 million FY10 net profit (+19.2% y-o-y) was slightly higher than market consensus. Key contributors to earnings remain the farming and marine divisions contributing 53.3% and 40.8% respectively to QL's FY10 total pre-tax profit, by growing 34.5% and 23.4% y-o-y.

A final gross dividend of 7.5 sen per share or RM29.6 million was proposed, which is 28.6% more than the seven sen per share paid in FY09 as a 1-for-5 bonus issue was completed in FY10. Unlike stocks that trumpet paper profits but deliver little tangible returns, QL's net dividends paid out to shareholders have grown by nearly 10 times since its maiden net dividends of RM3.5 million in FY01.

Our RM4.56 target price assumes discounted free cash flows stagnating around FY11's levels although Ebitda (earnings before interest, tax, depreciation and amortisation) and net profit growth over the last decade have averaged at least 10% annually.

As is usual, we are highly encouraged that QL's earnings visibility over the five years will remain high as various domestic and overseas expansion plans progress. ' Maybank IB Research, May 25

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

KENCANA - Kenanga expects improvements in Success Transformer

Stock Name: KENCANA
Research House: KENANGA

Success Transformer Group Bhd
(May 25, RM1.01)
Maintain buy at RM1.08 with lower target price of RM1.55
: Success Transformer has a slow start to the year with 1Q10 revenue and net profit coming in at 19% of our forecast. While transformer and lighting were in line with our expectation, contributing RM33 million or 24% to our full-year estimates, process equipment had a poor start, contributing a mere RM6.4 million or 9%.

Quarter-on-quarter (q-o-q), revenue dipped 26% with all divisions registering lower sales. Process equipment took a hard knock, down 63% sequentially while transformer and lighting combined was down 8%. As a result, net profit dipped 20% to RM5.2 million (4Q09: RM6.5 million) mainly due to a marginal operating loss of RM263,000 registered by its process equipment division.

However, strong operational margins at its transformer and lighting division which jumped to 23% (4Q09: 14%) had mitigated substantially the poorer showing from process equipment. Better product mixes were the main earnings drivers.

Year-on-year (y-o-y), revenue fell 13% while net was 15% lower due to losses from its process equipment division. Transformer and lighting division combined had in fact enjoyed a 20% uptick in sales while operating profit was 48% higher, helped by higher operating margins at 23% (1Q09: 19%).

The management is cautious of future prospects in view of the current market uncertainties although process equipment is expected to see substantial improvement in the subsequent quarters on improved order flows.

As at May, process equipment under 65%-owned Seremban Engineering stands at RM27 million with the management confident of doubling the figure towards the latter part of the year. Expansion into new markets including Oceania and Africa will provide growth impetus. Based on guidance, the management sees huge latent potential from Africa in terms of sales and profitability.

We are tweaking our forecast and factoring higher minority to reflect the listing of its process equipment subsidiary. Diluting its interest to 65% from 100% previously, net is only lowered by less than 1%.

With improved transparency post-listing, we were able to fine-tune our forecast for process equipment. We maintain a buy with RM1.55 target price (RM1.58 previously) based on an unchanged seven times FY10F. ' Kenanga Research, May 25

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

HLBANK - HLB's loan growth remains tepid, says ECM Libra

Stock Name: HLBANK
Research House: ECMLIBRA

Hong Leong Bank Bhd (HLB)
(May 25, RM8.55)
Maintain hold at RM8.55 with target price raised to RM9.12
: HLB's 9MFY10 results came in below house but within market expectations as net profit for the period achieved 70% and 75% of house and consensus full-year estimates respectively.

The bank's 9MFY10 net profit declined by 2.7% to RM686.9 million due to (1) lower net interest, (2) higher loan-loss provision, (3) lower non-interest income and (4) higher operating expenses. This was partly mitigated by (1) higher contribution from associate Bank of Chengdu, (2) higher Islamic banking income and (3) lower effective tax rate.

In terms of segmental results, pre-tax profit contribution from the corporate and commercial banking division continued to trend downwards with a 46.9% fall year-on-year (y-o-y).

While HLB's loan growth has been tepid, 3QFY10 has seen an uptick, particularly lending for purchase of residential property which grew 5.2% quarter-on-quarter (q-o-q). Year to date (YTD), gross loans expanded by 5% or 6.7% on-year.

The loan-to-deposit ratio continues to remain the lowest amongst its peers at 54.2%, although it has increased from preceding quarter's 53.5%.

After falling for three consecutive quarters, gross non-performing loans (NPL) have edged up q-o-q by 6.4% in 3QFY10 to RM775.3 million. Nevertheless, they remained below 3QFY09's RM865 million level. Net NPL ratio also edged up to 1.2% from 1% in 2QFY10. Nevertheless, it remained at a benign level as compared to industry average of 1.8%.

We lower our FY10-FY12 earnings estimates by between 3% and 6.1%. We maintain our hold call but raise our target price to RM9.12 as we roll over our valuation to FY11 based on 1.92 times book value (one standard deviation higher than long-term average of 1.67 times). ' ECM Libra Investment Research, May 25

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

May 25, 2010

HLBANK - OSK Research mulls RM9.55 target price for Hong Leong Bank

Stock Name: HLBANK
Research House: OSK

KUALA LUMPUR: OSK Research maintained its trading buy call on HONG LEONG BANK BHD [] at RM8.55 with target price RM8.80 as it expects the share price to continue to re-rate ahead of the completion of the groups value accretive acquisition of EON Capital.

The research house said it might raise its target price for the stock to RM9.55, depending on the level of subscription for its proposed rights issue, which will have an impact on its return on equity (ROE) projection.

"Although maximum subscription of the rights would slightly dilute the group's pro-foma ROE from 15.5% to 14.8%, the book value accretion would more than offset this dilutive impact.

"As such, there is high probability that we will upgrade our recommendation on the stock to buy post completion of its proposed acquisition of EONCap's asset and liabilities," it said.

QL - OSK Research upgrades QL Resources target price to RM4.65

Stock Name: QL
Research House: OSK

KUALA LUMPUR: OSK Research has maintained its buy recommendation on QL Resources at RM3.72 and upgraded its target price for the stock to RM4.65 (from RM4.30 previously).

The research house said while the 4Q monsoon season typically affects the performance of QL's marine processing manufacturing (MPM) segment and palm oil milling, its FY10 net profit still beat its own and consensus estimates.

"It was 17.9% above our full-year forecast. Net earnings for 4Q were 40.3% better against that in the previous corresponding quarter, primarily attributed to strong contribution from its marine product manufacturing (MPM) segment as the company benefited from higher pricing and sales from Japanese surimi stockists.

"Given its segment-wide expansion, we are prompted to revise higher QL's earnings by 8% for FY11 and upgrade our target price from RM4.30 to RM4.65 on FY11 numbers," it said.

EONCAP - A good quarter for EONCap

Stock Name: EONCAP
Research House: MAYBANK

EON Capital Bhd (EONCap)
(May 24, RM6.90)
Maintain hold at RM6.92 with higher target price of RM7.80
: EONCap's RM98 million 1Q10 net profit (+23% year-on-year, +59% quarter-on-quarter) was 30% of our full-year forecast, and 26% of consensus'.

The provision for loan impairment loss was lower than expected after the switch to FRS 139. Also, operational expenditure (opex) growth moderated. We raise our 2010 forecast by 20%, 2011-2012 forecast by 15%-19% per annum, and the discounted dividend model-based (DDM) target price to RM7.80. Hold, with just a 5% upside to Hong Leong Bank's implied RM7.30 offer price for its assets, which we think is low, without a takeover premium.

EONCap's operating income rose 13% y-o-y and 3% q-o-q on continued loans growth, and higher fee and investment income. Net interest margin was stable q-o-q at 2.7% but rose six basis points (bps) y-o-y, we estimate. The growth in opex moderated, and is expected to taper off further after 2009's infrastructure upgrading exercise.

The FRS 139 implementation resulted in a lower provision for loan impairment loss of RM42 million versus RM54 million under GP3. 1Q10 net profit growth of 23% y-o-y is commendable as 'business continued as usual' despite 'disruptions' at the shareholding level.

Gross loans grew 9.5% (annualised) mainly in the SME and residential property segments. Customer deposits rose an annualised 13.2% with the current account savings account (CASA) ratio remaining stable at 22.6%. FRS 139 resulted in a one-off RM35 million charge to the retained profits lowering book value (BV) per share by five sen, and a RM177 million addition to the gross impaired loans account. The gross impaired loans ratio was 4.23% (Dec 09: 3.79% under GP3) while loan loss coverage was 82.6% (Dec 2009: 84.9%). Capital ratios stayed well at 10.8% (Tier 1) and 14.9% (RWCR).

EONCap's loan pipeline stayed strong and we raise our 2010 loan growth forecast to 12% from 8%, expecting the year-to-date growth to be sustainable. Also, we lower our opex growth for 2010 to 8% from 12%. The provision for loan impairment loss is lowered based on a 50bps charge versus 60bps previously. As a result, our net profit forecast is upgraded by 20% for 2010, and 15%-19% for 2011-2012. We now project EONCap to deliver a 14% net profit growth in 2010 and an ROE (return on equity) of 10.4%. This is still behind the internal target of above 11% for the year.

Despite the opinion from independent financial adviser Credit Suisse Securities (Malaysia) Sdn Bhd that the RM5.06 billion offer price by Hong Leong Bank for EONCap's assets and liabilities is not fair, EONCap's board of directors has decided to put the offer to a shareholders' vote as it wants to resolve the matter the soonest so as not to erode EONCap's franchise value.

EONCap will also table a proposal for the RM5.06 billion cash proceeds to be distributed back to EONCap's shareholders via a special dividend and capital repayment. The date of the shareholders' EGM has not been announced. ' Maybank IB Research, May 24

This article appeared in The Edge Financial Daily, May 25, 2010.

JCY - JCY International's healthy balance sheet

Stock Name: JCY
Research House: INTER PACIFIC

JCY International Bhd
(May 24, RM1.53)
Reiterate outperform at RM1.55 with a target price of RM2.30
: We reiterate our outperform recommendation with our fair value at RM2.30 based on FY11 EPS (earnings per share) of 17.7 sen and a PER (price-earnings ratio) of 13 times.

Both JCY's annualised top and bottom line are in line with our expectations accounting for 50.9% and 50% of our FY10 revenue and net profit respectively. Annualised net profit margin of 13.3% is in line with our expectation of 13.5%. JCY also declared a dividend of 3.91 sen per share, which is slightly above our expectation of seven sen in FY10.

Despite a commendable revenue growth of 4.1% quarter-on-quarter (q-o-q) on a usual weak quarter, JCY's 2QFY10 operating profit fell by 13.1% to RM76.1 million. The lower operating profit was due to the strengthening ringgit against the US dollar, which resulted in a foreign exchange loss of RM2.4 million in comparison to RM1.3 million in 1QFY10.

Cost of sales also increased 6.8% q-o-q as the stronger ringgit resulted in higher raw material prices while the increase in cost is due to labour shortage. As a result, operating margin fell from 15% in 1QFY10 to 12.5% in 2QFY10.

2QFY10 revenue grew by 58.7% y-o-y to RM549.7 million on the back of stronger volume, up 63.3% y-o-y. Actuator pivot flex assembly (APFA) grew by 42.6% y-o-y to RM269.1 million contributing about 38.7% of its 2QFY10 total revenue.

Capital expenditure for 2QFY10 is accelerated to RM80 million from RM36.9 million in 1QFY10. The increase in capex in 2QFY10 was mainly due to the expansion of capacity in Malaysian factories and the completion of a second factory in Suzhou, China. The expansion to China is also to ease the labour shortage problem as JCY's China's production facilities are expected to focus on products that require high labour ' the APFA. The increase in production also is due to the increase in global HDD shipments and the better outlook for the industry.

JCY's 2QFY10 net tangible asset (NTA) per share of 45.8 sen is slightly higher than the 42.9 sen recorded in 1QFY10 and 39.2 sen in FY09. Due to the higher capex in 2QFY10, its cash level dipped to RM255.2 million from RM374.6 million in 1QFY10. Nevertheless, the management indicates that it will maintain a cash balance of not lower than RM200 million.

Net gearing ratio remains at a comfortable level of 11.5%. The strong balance sheet maintained by the management is to give confidence to customers on the company stability and to provide a strong balance sheet should opportunity for M&A arises. ' Inter-Pacific Research, May 24

This article appeared in The Edge Financial Daily, May 25, 2010.

WCT - More jobs in store for WCT

Stock Name: WCT
Company Name: WCT BHD
Research House: MIDF

(May 24, RM2.56)
Maintain buy at RM2.57 with unchanged target price of RM3.30
: WCT recorded a net profit of RM35 million for 1Q10, down 11% year-on-year (y-o-y) and'' +7.4% quarter-on-quarter (q-o-q).

Although the E&C (engineering and construction) division registered lower earnings before interest and tax (Ebit), other divisions especially property development and property and investment holding recorded higher Ebit in 1Q10 as property sales showed an improvement as compared to 1Q09. WCT's turnover in 1Q10 dropped 60% y-o-y due to lower recognition from its construction division. ''

The group continues to aggressively bid for new jobs, both overseas and domestic in order to replenish its existing order book of RM3.2 billion. Year to date (YTD), WCT secured the RM221 million Bahrain City Centre Hotels fit-out works in February via its 50%-owned company, Cebarco-WCT. Besides that, WCT is also bidding for other jobs in Iskandar Malaysia, Johor and a major water infrastructure work in Sabah.

We believe that WCT would retain its 50:50 split between local jobs and the Middle East contracts.

On the home front, WCT was recently identified as one of the prequalified main contractors for the LRT extension project, together with 16 other prequalified applicants. WCT was also prequalified for the subcontractors.

Although we are expecting intense competition among the prequalified bidders, we do not discount the possibility of WCT clinching a portion of the LRT extension job as the company would likely be a strong runner in terms of competitive pricing. ''

We are maintaining our target price of RM3.30, implying a potential upside of 32% (including dividend yield of 3.5%) from its current share price of RM2.57, backed by positive outlook in the construction sector and WCT's proven track records in securing jobs, both domestic and in the Middle East.

The current share price weakness resulting from the global selldown provides an opportunity for investors to accumulate WCT shares. ' MIDF Research, May 24 ''

This article appeared in The Edge Financial Daily, May 25, 2010.

PLUS - OSK sees decent yields in PLUS

Stock Name: PLUS
Research House: OSK

PLUS Expressways Bhd
(May 24, RM3.34)
Maintain buy at RM3.34 with lower target price of RM4.25
: PLUS' 1QFY10 revenue rose to RM813.2 million (+10.2% year-on-year, -4.8% quarter-on-quarter) and earnings to RM299.1 million (+7.4% y-o-y, -5% q-o-q). Earnings before interest and tax (Ebit) margins increased y-o-y at 74.4% versus 70% last year, mainly due to better cost management. Net margins were, however, lower y-o-y at 36.8% versus 37.8% mainly due to a higher effective tax rate as certain interest expenses were not tax deductible. To sum up, the 1Q results were in line at 23.7% of our full-year estimates and 24.4% of consensus.

Traffic volume on the NSE (North-South Expressway) grew by 9.1% y-o-y in 1Q. Growth was the strongest along the northern region (+18%) due to toll relocations, followed by the central region (+7.7%) and southern (+5.2%). The strong growth in traffic volume was mainly due to the low base effect witnessed in 1Q last year. The management expects growth rates to taper down in 2H as last year's low base effect would have diminished by then. It is guiding for an annual traffic growth of 3%-4%.

A 10% toll hike along the NSE was due in 2008 but was delayed to 2009 and later to an indefinite date. The management indicates that it has not heard from the government if the increase would take place this year. We are of the opinion that a toll hike will not materialise this year. Allowing a toll hike would imply two back-to-back increases as another scheduled hike (+10%) is due in 2011. The government may wish to tackle other subsidies such as gas and electricity first before toll rates.

The main impact from FRS139 is on PLUS' non-cash toll compensation recoverable from the government, which will be offset against future taxation. The present value (PV) of the offset against future taxation is computed and subtracted off the initial book value. The difference between the two is charged to retained earnings, thus reducing earnings. It is important to note that these changes are non-cash items.

As traffic growth rates are expected to normalise in 2H, we cut our traffic volume forecast on the NSE from 5% to 4%. We trim our FY10-FY12 earnings by an average of 2.2%. This reduces our free cash flow to the equity owners-based (FCFE) (9.2% equity cost) valuation to RM4.25. Nonetheless, we retain our buy rating. Yields at the current share price are decent at 5%- 6.6%. ' OSK Research, May 24

This article appeared in The Edge Financial Daily, May 25, 2010.

May 24, 2010

LEADER - OSK Research maintains buy call on Leader Universal, lowers target price

Stock Name: LEADER
Research House: OSK

KUALA LUMPUR: OSK Research has maintained its buy call on LEADER UNIVERSAL HOLDINGS BHD [] at 86 sen and said on an annualised basis, Leader's results came in 42% below its expectations and 36.3% below consensus.

Its weaker year-on-year results were largely caused by a sharp increase in other operating expenses, which curtailed much of its growth, it said.

"On conservative grounds, we are now lowering our earnings estimates by 12.6% for FY10.

"We also lower our target price to RM1.05 from RM1.11 previously. Our valuations parameter however factors in a higher PE assumption for its cables and wires division at 9 times against 8 times previously as we see the company benefiting from the development of the SCORE region, which will open opportunities for Leader. Buy recommendation maintained," it said.

WCT - MIDF Research maintains buy call on WCT

Stock Name: WCT
Company Name: WCT BHD
Research House: MIDF

KUALA LUMPUR: MIDF Research has maintained its buy call on WCT BHD [] at RM2.57 and said the company's 1Q10 net profit of RM35 million was within its own and consensus estimates.

The company's pretax margin improved to 13% in 1Q10 as compared to 7.1% in 1Q09, thanks to its E and C and property and investment holdings while property development remained stable, it said.

"Maintain buy recommendation with a target price of RM3.30, pegged at 14.5 times PER on FY10 EPS.

"At RM2.57, the stock represents a 12-month potential returns of 32%, inclusive of 3.5% dividend yield," it said.

PROTON - Proton boosts position with model updates

Stock Name: PROTON
Research House: MIDF

Proton Holdings Bhd
(May 21, RM4.54)
Maintain buy at RM4.74 with target price of RM5.80
: The Proton Gen2 gets an update that includes cosmetic tweaks with additional equipment. The enhanced model will continue to be available in high-line and medium-line versions. The new Gen2 high-line's enhancements include new finishing for the front grille, alloy rims and outer door handles as well as black painted roof. On the inside, leather upholstery is standard with audio control on the steering wheel and a new door trim finishing.

Despite the enhancements, the high-line price remains unchanged at RM57,488 for the manual variant and RM60,488 for the auto. The best bit is for the mid-line version which is RM1,500 cheaper (retail price RM54,988) where it will get similar enhancements as the high-line except the leather seats, multi-function steering wheel and the bodykit. In addition, the Gen2 mid-line will now also be fitted with the Proton Campro PS engine in place of the Campro IAFM unit.

Proton expects to sell 300 units of the enhanced Gen2 per month, which is more than the average of 99 units per month sold from January to April this year, and 75% more than the monthly average in 2009. Overall, Proton is aiming to sell 165,157 vehicles in 2010, which is in line with our estimate that would be 12% higher year-on-year (y-o-y) with market share to improve to 30% from its current 28%.

The improving sales in 1QCY10 would be a great booster to its earnings and may offer a surprise on the upside come the result announcement anytime soon. Until then, we are maintaining our forecast and valuation.

The decision on its foreign partnership is still the main catalyst. We have heard various news flows and we expect this to continue, keeping interest on the stock strong for a foreseeable future. The most recent is the news of a contract manufacturing deal with VW, which was not a surprise at all. The Tanjung Malim plant has a designed capacity for one million cars per annum and currently it is churning out only 150,000 units of Proton cars a year.

The Waja replacement model could be due later this year alongside the facelifted Persona. The development of a turbo-charged engine for the Exora is completed and would be in service in late 2010/early 2011. The recent launch of Satria Neo R3 Lotus Racing Edition is a good marketing exercise to take advantage of its F1 lineage.

According to Proton, it may decide by the end of this year or early 2011 whether to sell or lease its main car manufacturing plant in Shah Alam once the assessment to relocate to Tanjung Malim is finalised. Proton expects to move its staff and some of its equipment to the new site within the next two to three years.

Ramping up sales for the export markets has become a major target for Proton in an attempt to achieve the economies of scale with Thailand and Indonesia providing the platform. The China venture is still at the infancy stage while its other established market, while showing signs of progress, have yet to impress.

We maintain buy with target price maintained at RM5.80 pegged at 10 times FY11 earnings or 0.5 times its estimated'' PBV (price-to-book value) for FY11. ' MIDF Research, May 21

This article appeared in The Edge Financial Daily, May 24, 2010.

EONCAP - EONCap still a hold, says Maybank IB

Stock Name: EONCAP
Research House: MAYBANK

EON Capital Bhd (EONCap)
(May 21, RM6.92)
Maintain hold at RM6.92 with target price of RM7.20
: EONCap's board of directors will put Hong Leong Bank's (HLB) RM5.06 billion offer to a shareholders' vote despite the opinion from independent financial adviser Credit Suisse Securities (Malaysia) Sdn Bhd that the offer price is not fair. EONCap will also table a proposal for the RM5.06 billion cash proceeds to be distributed back to EONCap's shareholders via a special dividend and capital repayment.

Credit Suisse's opinion letter will be included in a circular to shareholders. The board's main arguments favouring HLB's proposal are: (i) the domestic banking sector's evolving landscape, including sector liberalisation and a potential new capital requirement framework which will further drive consolidation in the sector, (ii) rising competition from new foreign players, which will further compress banks' margins, and (iii) the absence of an alternative bidder.

EONCap's board has proposed a special dividend of RM3.3 billion and capital repayment of RM1.76 billion to shareholders, after the proposed sale of EONCap's assets and liabilities to HLB. This proposal puts to rest concerns on EONCap's intention for the cash proceeds. EONCap's paid-up capital will consequently be reduced to two shares, from 693.2 million now. The proposed special dividend is expected to be completed within one month from the completion of the proposed disposal, while the capital repayment will be completed by end-2010.

As we had highlighted earlier, the sale of EONCap's assets and liabilities requires only a simple majority vote at a shareholders' EGM. EPF and Khazanah's votes (holding a combined 22%) are therefore critical in light of Credit Suisse's opinion on the pricing. We think that Rin Kei Mei and Tiong Hiew King who hold 15.5% and 17.1% respectively will still vote in favour of the sale to HLB.

Our view remains, that HLB's offer is low at 1.42 times book (2009), without incorporating a sufficient take-over premium for the takeover of a business in its entirety. With only a 5% upside to the implied takeover price of RM7.30 per share by HLB, we also retain our hold call on the stock. ' Maybank IB Research, May 21

This article appeared in The Edge Financial Daily, May 24, 2010.

UMW - UMW: Auto rebound leads earnings growth

Stock Name: UMW
Research House: ECMLIBRA

UMW Holdings Bhd
(May 21, RM6.25)
Upgrade to buy at RM6.19 with higher target price of RM6.95
: UMW's 1QFY10 revenue was within house and consensus expectations. However, net profit surprised, coming in at 59% and 45% of FY10 estimates, respectively. The higher revenue was mainly due to stronger vehicle sales of 71,000 units (1QFY09: 56,000 units). Net profit was sharply higher led by margin expansion in the auto division.

UMW recorded strong vehicle sales compared to a very weak 1QFY09 when pessimism on the global economic outlook was at its peak. Economic recovery and improved consumer confidence saw Toyota vehicle sales increasing 4,000 units year-on-year (y-o-y) to 21,000 in 1QFY10, while associate Perodua saw sales gaining 9,000 units y-o-y to 48,000. Overall 1QFY10 combined market share of Toyota and Perodua rose to 47.9% (1QFY09: 47.1%). Meanwhile, revenue and profit after tax and minority interest for equipment and M&E divisions posted higher y-o-y performance as demand recovered and margins improved.

With only semi-submersible rig NAGA 1 making major contributions since 1QFY09, revenue and net profit growth is lacking in the O&G segment. The management attributed the loss mainly due to pre-operating expenses incurred on greenfield investments which will mostly commence production in 2H10. At the associate level, Wuxi's profitability is still adversely affected by anti-dumping duties, but the management expects a turnaround in 2H10.

UMW is targeting the O&G segment to be profitable by year-end, underpinned by jack-up rig NAGA 2 scheduled to be operational in 3QFY10. Jack-up rig NAGA 3 is slated to be delivered by end 2QFY10. Negotiations with potential clients are said to be in final stages for both jack-up rigs.

As results were above expectation, we have revised our earnings forecasts higher by 58%-68% in FY10-FY12 mainly on the back of higher vehicle sales and better auto margins, while scaling back on profit contributions from the O&G segment. Hence, we upgrade UMW from sell to buy as our target price is raised from RM5.59 to RM6.95.

Barring a double-dip recession, the auto industry is expected to enjoy bumper profits this year as industry vehicle sales look to exceed its previous peak of 548,000 units achieved in 2008. ' ECM Libra Investment Research, May 21

This article appeared in The Edge Financial Daily, May 24, 2010.

KOSSAN - Kossan's clean start in FY10

Stock Name: KOSSAN
Research House: OSK

Kossan Rubber Industries Bhd
(May 21, RM7.41)
Maintain buy at RM7.52, target price of RM11.30
: Kossan's 1QFY10 results made up 26% and 25% of consensus and our FY10 forecasts respectively. Overall, the company maintained the absolute quarterly net profit amount as it was able to pass on higher costs to consumers and kept sales consistent.

The 1QFY10 revenue of RM262.8 million was 15.4% higher quarter-on-quarter (q-o-q) after Kossan raised selling prices by about US$1-US$3 (RM3.32-RM9.96) per one thousand pieces to pass on rising latex cost to its customers during the quarter. However, due to the minimal change in its production volume since it was already operating at above 90% utilisation, the 1QFY10 core net profit was quite consistent at about RM30 million q-o-q.

On the other hand, the 1QFY10 Ebit (earnings before interest and tax) margin of 15.6% was 6.7 percentage points lower q-o-q given the higher revenue base in the current quarter. We understand that Kossan is no different from the other rubber glove manufacturers whereby it would only pass on the incremental cost to customers to maintain its absolute bottom line rather than the cost plus additional profit, as this would not be acceptable to its customers.

Finally, there were no more foreign exchange (forex) losses as Kossan had recognised the last of its forex loss in 4QFY09, amounting to RM17 million (total of up to RM53 million, which wiped out some 38% of its FY09 net profit.) This will enable Kossan to start its FY10 with a clean quarter. Moreover, based on our recent plant visit, we gather that all its new nitrile lines, which had progressively begun operation early last year, are now running at full steam and hence, we believe it should see growing contribution from nitrile gloves going forward.

Our target price for Kossan remains unchanged at RM11.30 based on the existing PER (price-earnings ratio) of 14 times FY11 EPS (earnings per share). We continue to like the company for being a balanced player, with a product mix comprising 60% natural rubber gloves and 40% nitrile gloves, which allows it to target all markets. ' OSK Research, May 21

This article appeared in The Edge Financial Daily, May 24, 2010.