June 18, 2010

KPJ - KPJ Healthcare sees brighter prospects ahead

Stock Name: KPJ
Research House: RHB

KPJ Healthcare Bhd
(June 17, RM3.34)
Maintain outperform at RM3.29 with higher fair value of RM4.25 (from RM3.50)
: For FY09, KPJ recorded a revenue growth of 14.9% year-on-year (y-o-y) largely due to higher contribution from all of its business segments.

Moving forward, we believe KPJ's revenue growth drivers include: the opening of at least two new hospitals per annum; expansion of its existing hospitals; enhancing its presence in medical tourism; and higher utilisation rate per patient.

We understand that KPJ is investing RM200 million to build three new hospitals, purchasing of new medical equipment and expanding its existing hospitals nationwide this year.

The construction works for its three new hospitals which are located in Bandar Baru Klang, Pasir Gudang and Muar have already started and are due for completion by end of 2011.

We believe this is in line with the management's targets to open at least two new hospitals per annum either through greenfield projects or acquisition of established hospitals which would likely be in East Malaysia, the East Coast or Iskandar region.

In FY09, over 15,000 foreigners received treatment at its hospitals and in the 1QFY10, KPJ received more than 5,000 foreigners of which 2,800 were Indonesians.

Although KPJ's focus is on positioning itself as a community healthcare provider, the company realises that there is sizeable growth potential in medical tourism.

However, management mentioned that any significant contribution from medical tourism would only come in three to five years. Currently, medical tourism accounts for less than 10% of total group revenue.

We have revised up our FY10-12 earnings forecasts by 9.7%-14.3% largely to reflect the upward change in our revenue assumptions, and lower effective tax rate and MI (minority interest) assumptions.

The risks to KPJ's earnings include lower-than-expected patient numbers which could be due to slower-than-expected economic recovery and serious disease outbreaks (such as SARS or swine flu) in Malaysia as well as slower-than-expected turnaround in loss-making hospitals.

Besides the earnings revision above, our indicative fair value has been raised to RM4.25 (from RM3.50) based on target FY11 PER of 16 times (10% discount to regional peers' average) as we roll forward our valuation year (from FY10).

We believe the M&A (merger and acquisition) activity in the healthcare sector recently supports our view that there is significant growth potential for the sector in the region.

We continue to like KPJ for its leading position and its expansion plans in Malaysia's growing healthcare market. We reiterate our outperform call on the stock. ' RHB Research, June 17

This article appeared in The Edge Financial Daily, June 18, 2010.

TGOFFS - OSK maintains 'sell' call on Tanjung Offshore

Stock Name: TGOFFS
Research House: OSK

OSK Investment Research has maintained its 'sell' call on oil and gas services provider, Tanjung Offshore Bhd, despite the emergence of Ekuiti Nasional Bhd (Ekuinas) as substantial shareholder.

"We are keeping our call unchanged until we see strong earnings recovery from the company, which we believe would materialise especially after it turns around its CiTECH business," it said in an equity note here today.

Ekuinas, the government-linked private equity fund management company, yesterday agreed to buy 20 per cent stake in the company for RM73.4 million, or RM1.30 per share.

The proceeds from the placement will be used to reduce Tanjung Offshore's debt and pare down its gearing to about 1.5 times from 1.9 times currently, it said.
OSK said Ekuinas was also commercially-driven, with investments focused on strong Malaysian companies with high-growth potential.

"From its recent stake buy, we believe Tanjung Offshore qualifies for this category," it said. - BERNAMA

MAS - MAS going on the offensive

Stock Name: MAS
Research House: AMMB

Malaysian Airline System Bhd
(June 17, RM2.07)
Maintain buy at RM2.04 with fair value of RM3.50
: We retain our buy rating on Malaysia Airlines (MAS) and maintain our fair value of RM3.50 per share, which continues to peg MAS at 1.8 times FY10F book value, in line with historical average.

MAS is expected to introduce a new class of product, namely 'premium economy' seats for its incoming A380 fleet in FY12. MAS' new A380s will entail its first, four-class seating configuration ie first, business, premium economy and economy classes.

Introduction of premium economy emulates moves by FSC (full service carrier) peers like Qantas, British Airways and Air France. Premium economy seats are typically 35%-85% more expensive than economy but 65% cheaper than business class'' and with several extra offerings versus typical economy seats.

MAS aims to capture market share from Middle Eastern carriers for long-haul routes between Asia and Europe. Notably, business class seating of Middle Eastern carriers entail relatively smaller seat pitch compared to MAS' and other carriers' business class configuration.

Additionally, MAS is one of the first Asian carriers to introduce premium economy class in its fleet.

The significance of this move is that MAS seems to be switching to an offensive strategy which has not been the case over the past half decade, given MAS' constraint in its financial restructuring and setbacks of an old operating fleet.

Separately, MAS is planning to order either the A350 or B787, on top of existing firm orders for B737-800s, A330s and A380s. The new aircraft type is positioned in between the A380 and A330 fleet which entail a large gap in terms of seating capacity (525 seats for A380s versus 295 seats for A330s).

Our projections are maintained at this juncture as MAS' A380 fleet is only expected to arrive in FY12F while the number of additional fleet to be ordered is still uncertain at this juncture.

Nonetheless, over the longer term, we would expect structural yield enhancement from market share wins and potential uptrading from existing economy seats.

Valuation-wise, MAS has been a laggard in the sector's cyclical recovery where it is still trading at a deep 50% discount to historical average PBV of 1.8 times. Regional peers on the other hand have, since late 2009, converged to historical average valuations. ' AmResearch, June 17

This article appeared in The Edge Financial Daily, June 18, 2010.

GAB - World Cup kick for GAB

Stock Name: GAB
Research House: INTER PACIFIC

Guinness Anchor Bhd
(June 17, RM7.61)
Maintain neutral at RM7.63 with higher target price of RM7.90 (from RM7.20)
: Guinness Anchor Bhd (GAB) recorded higher net profit in the past two World Cup seasons. Being supported by its strong portfolio brands like Tiger, Guinness, Heineken, Anchor and super-premium Kilkenny coupled with its strong advertising and promotional activities via the RM10 million nationwide promotional programme that was carried out, we believe GAB is well-positioned to sustain their market position. Room to further alleviate their market share remains high as they continue to invest in brand building. Accordingly, our earnings forecast for FY10-FY11 has been revised upwards by 5%-8% and our target price raised to RM7.90 (previously RM7.20) based on our discount dividend model with weighted average cost of capital at 9.1%. We reiterate neutral.

GAB expects sales to increase between 10% and 15% during the ongoing FIFA World Cup 2010 season. This was based on the RM10 million nationwide promotional programme carried out by GAB. Positive contribution from 2010 World Cup is viewed as the 'icing on the cake' from its already good financial year ending June 30, 2010. GAB's optimism was reflected by its bottling line which has been operating at full capacity to cater for the increase demand, with production volume up 15% to ensure no shortages during the 2010 World Cup. GAB reported that sales have been overwhelming since the kick-off of 2010 World Cup, especially during the opening match in Penang and Klang Valley. ' Inter-Pacific Research, June 17

This article appeared in The Edge Financial Daily, June 18, 2010.

TOPGLOV - top Glove's topline growth offsets lower margin

Stock Name: TOPGLOV
Research House: MIDF

Top Glove Corporation Bhd
(June 17, RM12.84)
Maintain trading buy at RM12.86 with lower target price of RM14.20 (from RM14.68)
: Strong glove sales momentum sustained with volumes increasing 25% year-on-year (y-o-y) or 1% quarter-on-quarter (q-o-q) in 3QFY10, supported especially by the emerging markets.

In tandem with latex price trends, average glove selling price was 30% y-o-y or 11% q-o-q higher to US$26 (RM84.76) per thousand pieces. Due to both factors and adverse impact on US currency depreciation, Top Glove's revenue grew 49.4% y-o-y or 9% q-o-q to RM555.9 million. ''

Top Glove's earnings before interest and tax (Ebit) margin declined to 15% in 3QFY10 from average of 18.6% in the past three quarters.

We believed that higher volatility in latex price and forex market signified the lag effect in passing on the costs. Noted also, production utilisation rate was lower to 75% from 2QFY10's 80%.

We reckon the additional production capacity growth might be faster than the glove sales order. Nonetheless, y-o-y, EBIT margin was still at par with that in 3QFY09 despite average latex price surged 71.7% y-o-y while US currency depreciated by 9.5% y-o-y, reflecting company's cost passing power remained intact.'' ''

A total of five new factories are targeted to be completed by FY11. All in, Top Glove's total glove production capacity will increase by 8.25 billion pieces or about 25% to 33 billion.

To be on the conservative side, we are keeping our earnings forecast unchanged, reflecting the risk of lower margin due to potential excess production capacity, and higher energy and labour costs going forward.

After all, the government has planned to scrap subsidies on energy products gradually. Beyond 2015, we expect glove makers to face a more volatile cost environment as natural gas will be priced at market rate. ''

In addition, a higher levy may also be charged on foreign workers. On the mitigating side, glove demand could be stronger particularly from the developing countries. In addition, glove makers' business model of passing on costs to the consumers is expected to be intact, and this will also cushion the downside. ''

First interim single-tier dividend of 14 sen per share was declared with ex-date and payable date on July 2 and July 23, 2010 respectively.

We continue to like Top Glove for its market leadership which commands about 22% of the global glove market share and its net cash position with good earnings quality.

Currently, Top Glove's net cash is about 90 sen per share, the highest in the industry. Furthermore, there is no significant sign indicating glove demand slowing down.

We are rolling over our valuation into FY11 earnings, based on lower PER of 16 times (17 times previously) in order to factor in potential risks mentioned above. Consequently, we are revising marginally our target price downwards to RM14.20 (from RM14.68). ' MIDF Research, June 17

This article appeared in The Edge Financial Daily, June 18, 2010.

SPSETIA - OSK Research maintains take profit call on SP Setia

Stock Name: SPSETIA
Company Name: SP SETIA BHD
Research House: OSK

KUALA LUMPUR: OSK Investment Research has maintained its take profit recommendation call on SP SETIA BHD [] at RM4.03 with a CY10 target price of RM3.59 and said the company's 1HFY10 annualised results came in 17% below expectation and 11% below consensus.

Although the pace of progress billings on its high unbilled sales continues to pick up, the research house on Friday, June 18 said it preferred to leave its earnings forecasts unchanged for now.

"1HFY10 year-on-year turnover and net profit improved significantly by 19% and 25% respectively on the back of much improved new property sales and higher progress billings.

"An interim dividend of six sen (an improvement from five sen in 2QFY09) has been declared for 2QFY10. Maintain take profit with a CY10 target price of RM3.59 based on 1.69 times CY10 P/NTA," it said.

IJM - RHB Research ups IJM Corp fair value

Stock Name: IJM
Research House: RHB

IJM Corporation Bhd
(June 16, RM4.84)
Maintain market perform at RM4.82 with fair value raised to RM5.01 (from RM4.88)
: IJM has been awarded by Jabatan Kedua Sdn Bhd the Package 3B of The Second Penang Bridge, namely the 5.7km dual-lane Batu Kawan Expressway for RM350 million. Assuming an earnings before interest and tax (Ebit) margin of 8%, the latest contract will fetch a total Ebit of RM28 million over the construction period of 31 months from June 2010. This is the second key job IJM has secured in FY03/11, on the heels of the two work packages of the Murum access road worth a total of RM247 million secured back in April 2010.

The latest contract has boosted its year-to-date new contracts secured to RM597 million and its outstanding construction order book by about 10% to RM4 billion. We are positive on the latest development.

No change in our earnings forecasts that already assume IJM to secure RM2 billion worth of new jobs in FY03/11.

The risks include: (1) new contracts secured coming in below our target of RM2 billion per annum; and (2) steep increases in input costs.

We are neutral on the construction sector. On one hand, we foresee improved investors' risk appetite for construction stocks following: (1) the massive underperformance of the sector vis-a-vis the market in 4Q2009 and 1H2010; and (2) A better sector news flow and new expectations on the heels of the recent announcement of the 10th Malaysia Plan (10MP). On the other hand, certain negative elements remain such as: (1) the still slow pace of the roll-out of public projects, a highly competitive market and declining dominance of established players in large-scale projects locally; and (2) the not-so-rosy outlook and increased operating risks in key overseas markets.

Indicative fair value is raised by 3% from RM4.88 to RM5.01 as we roll forward the base year for valuation purpose from FY03/11 to FY03/12.

Our indicative fair value for IJM is based on 16 times fully diluted FY03/12 EPS of 31.3 sen, at two times multiple premium above our one-year forward target PER for the construction sector of 10-14 times to reflect: (1) IJM's group earnings that are resilient as reduced construction profits in the event of sharp increases in construction input costs will be cushioned by higher plantation profits during a commodity price upcycle; and (2) IJM's largely trouble-free position as it is not involved in any major arbitration cases in the overseas market. ' RHB Research Institute, June 16

This article appeared in The Edge Financial Daily, June 17, 2010.

PLUS - Small investment to complete PLUS' value chain

Stock Name: PLUS
Research House: MAYBANK

PLUS Expressways Bhd
(June 16, RM3.33)
Maintain buy at RM3.33 with target price of RM4.20
: PLUS' acquisition of Teras Teknologi will enable it to derive some future cost savings from the procurement of toll systems and equipment, and raise its value chain in providing total toll-related solutions. The pricing seems fair for a related party transaction. No change to our forecasts as the earnings increment is marginal. PLUS remains a buy for its rising dividend yield potential with a discounted cash flow-based target price of RM4.20.

PLUS has proposed to acquire a full stake in Teras Teknologi Sdn Bhd from its parent, UEM Group, for RM44 million cash. Established in 1994 as an information and communications technology (ICT) provider, Teras also offers facilities management, outsourcing, e-commerce services and Internet services. It supplies, install and maintain toll systems and equipment for highways. Teras introduced the Toll Revenues and Collection System, Touch 'n Go and non-stop vehicle on-board unit known as SmartTAG to Malaysia.

Teras' businesses are divided into three market segments: (i) transportation which deals with the payment systems, (ii) property which provides safety and security solutions, and (iii) e-Business which provides and manages enterprise-wide solutions. Nonetheless, we suspect that its revenue driver is in the transportation segment. Its clients for toll systems and equipment are not confined within the PLUS group, but includes other toll operators in Malaysia.

PLUS will be paying 10 times historical earnings, and one time P/B for Teras which reported a net profit of RM4.4 million in 2009, and net assets of RM50.1 million as at Dec 31, 2009. As Teras has since paid a dividend of RM6 million in March 2010, PLUS will be buying Teras' adjusted net assets of RM44.1 million. We understand that a major portion of the net assets comprise receivables, and a financial due diligence has been conducted on Teras by PLUS. This gives us some comfort against the likelihood of potential investment write-downs by PLUS later.

Teras fits into PLUS' requirements for diversification into related businesses. We believe that PLUS can derive some cost savings from the future procurement and maintenance of toll equipment under Teras. Teras will also complement PLUS in the bidding for overseas tolled road concessions as PLUS will be able to offer itself as a 'total solutions' provider. ' Maybank IB Research, June 16

This article appeared in The Edge Financial Daily, June 17, 2010.

AEONCR - OSK maintains buy call on AEON Credit

Stock Name: AEONCR
Research House: OSK

AEON Credit Service (M) Bhd
(June 16, RM3.94)
Maintain buy at RM3.83 with target price of RM4.95
: Revenue for 1QFY11 rose 2.9% year-on-year (y-o-y) but dipped -0.2% from the previous quarter.

Revenue growth was largely contributed by the easy payment business for financing consumer durables and motorcycles. This was in line with its growing trade receivables which were higher by 7.8% y-o-y. Revenue from its credit card and personal financing operation was flattish.

Profit before tax was higher by 8.6% y-o-y and lower by -5.4% quarter-on-quarter (q-o-q). It was marginally lower compared to the previous quarter, mainly attributed to higher operating expenses, which spiked up by 5.1% q-o-q and 21.4% y-o-y.

Net profit jumped 8.2% y-o-y but fell -7.7% q-o-q compared to that in the preceding quarter due to a higher effective tax rate of 25.4% versus 23.5% in the last quarter. The rate was higher than the statutory tax rate as certain expenses were not deductible for tax purposes.

As Malaysia recorded a strong 10.1% growth in 1Q GDP, AEON Credit is confident that the continued expansion in domestic and external demand will benefit the company. As it expects to sustain its growth momentum, we are maintaining our buy call on AEON Credit with a target price of RM4.95 (based on a historical two-year PE band of 8.5 times over FY11 EPS). ' OSK Investment Research, June 16

This article appeared in The Edge Financial Daily, June 17, 2010.

ADVENTA - Adventa's earnings not so elastic

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

Adventa Bhd
(June 16, RM3.15)
Maintain outperform at RM3.17 with target price of RM4.45
: Adventa's 2QFY10/10 results missed expectations as annualised 1H net profit made up only 75% of our estimate and consensus. The absence of dividends was no surprise.

Although 2H earnings should be stronger, we think the company will find it a stretch achieving our forecast given the time lag in price adjustments and delay in the delivery of equipment for its new plants.

Factoring in lower sales volumes, higher latex prices and a weaker US dollar, we cut our FY10-12 earnings by 9%-17%. This takes our target price from RM5.44 to RM4.45, still pegged to a 20% discount to Top Glove's target P/E of 16.5x. Despite the earnings hiccups, we are still positive on this rubber glove manufacturer and continue to rate it an outperform. Potential rerating catalysts for the stock include earnings improvement supported by the recovery in demand after the rubber wintering season as well as further capacity expansion.

As we noted in our 1QFY10/10 results note, Adventa anticipated margin compression in 2QFY10 due to the time lag in adjusting average selling prices (ASPs) for higher latex prices. Recall that latex prices went as high as RM7.72/kg in April compared to an average of RM5.91/kg in 1QFY10. On top of that, the US dollar eased 2% against the ringgit to RM3.31. The sharp movement in latex prices and depreciating US dollar led to an Ebit margin contraction from 14% in 1Q to 11% in 2Q. This pushed Adventa's 2Q net profit down by 31% quarter-on-quarter.

Despite the earnings hiccups, we remain positive on Adventa's long-term prospects for capacity expansion and development of its other business segments which will turn it into a significant healthcare products supplier in the region. Our outperform call remains intact. However, the stock is no longer one of our top picks in view of the disappointing results and lower upside than Latexx Partners (outperform), whose premium products are driving earnings and Supermax (outperform) which is seeing strong earnings contributions from its own brand and distribution centres. ' CIMB Research, June 16

This article appeared in The Edge Financial Daily, June 17, 2010.

GAMUDA - Gamuda results to meet expectations

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

Gamuda Bhd
(June 15, RM2.96)
Maintain underperform at RM2.95 with fair value of RM2.74
: Taking the cue from the improved construction margins recorded by peers IJM and WCT in their just-released January-March 2010 results, we expect Gamuda's 3QFY10 results, due out by the end of the month, to come in roughly within expectations.

We expect Gamuda's 3QFY10 core net profit to come in at RM80 million-RM85 million, vis-a-vis RM68 million recorded in 2QFY10. Cumulatively, 9M net profit of RM211 million-RM216 million is equivalent to 76%-78% of our full-year forecast and 70%-72% of the full-year market consensus.

At RM211 million-RM216 million, net profit in 9MFY10 will have grown 40%-44% year-on-year (y-o-y), in line with our full-year projection of 43%, premised upon a strong recovery in construction margins that appears to have begun to show in the sector.

Over the last three months, IJM's construction profit before tax (PBT) margin recovered from 2.2% to 3.1% while WCT's construction Ebit margin (adjusted for inter-company elimination) jumped from 0.8% to 12% as cost pressure eased.

Forecasts maintained. Risks to our view include: (1) new construction contracts secured coming in above our target of RM1 billion per annum in FY10-11; and (2) a stronger-than-expected recovery in construction margins.

We are neutral on the construction sector. On one hand, we foresee improved investors' risk appetite for construction stocks following: (1) the massive underperformance of the sector vis-a-vis the market in 4Q2009 and 1H2010; and (2) a better sector news flow and new expectations on the heels of the announcement of the 10th Malaysia Plan (10MP).

On the other hand, certain negative elements remain such as: (1) the still slow pace of the roll-out of public projects, a highly competitive market and declining dominance of established players in large-scale projects locally; and (2) the not-so-rosy outlook and increased operating risks in key overseas markets.

Maintain underperform as upside exhausted. Indicative fair value is RM2.74, valuing its operations ex-Vietnam at 14 times fully diluted CY11 EPS of 15.7 sen, in line with our benchmark one-year forward target PER of 10-14 times for the construction sector, and its two property projects in Vietnam based on a 30% discount to their NPV, translating to 54 sen per Gamuda share on a fully-diluted basis. ' RHB Research Institute, June 15

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

LITRAK - Litrak accounting adjustments to kick in

Stock Name: LITRAK
Research House: MAYBANK

Lingkaran Trans Kota Holdings Bhd (Litrak)
(June 15, RM3.05)
Maintain buy at RM3.05 with target price of RM3.65
: FY11 will see the implementation of FRS139 which may be positive to reserves but mildly negative to the P&L while FY12 will see IFRIC 12 (service concessions agreement) (IC12) coming into play, but a decision on the accounting treatment has yet to be made.

Cash flow projections nonetheless are unaffected. We continue to rate Litrak a buy for its rising dividend yield potential. No change to our discounted cash flow-derived target price of RM3.65 (9.2% cost of equity).

Litrak will implement FRS139 this year. At the group level, this new rule affects two financial instruments: (i) a RM98 million government loan, and (ii) a RM1.445 billion Sukuk IMTN.

For (i), we estimate a positive RM20 million (four sen per share) impact to FY11's opening reserves which will be gradually reversed out into the P&L until the loan is repaid by FY15.

For (ii), amortisation of the Sukuk's nominal and fair value differences will be based on the effective interest method, resulting in a gradual rise in the charge to the P&L versus a constant charge now. This may have an estimated positive RM1 million per annum P&L impact initially.

IC12 will be effective July 2010, affecting Litrak from FY12. Litrak will be affected at two fronts: (i) heavy repairs will be directly charged out and recognised as a long-term liability although not incurred (versus capitalisation and yearly amortisation now), and (ii) amortisation of highway development expenditure (HDE), now under the revenue method, may shift to straight line or traffic volume-based.

The transitional treatment for heavy repairs will be a one-off negative to the reserves for the balance in the books (RM45 million or nine sen per share at end-FY10). As for HDE amortisation, the policy has yet to be finalised.

We lower our FY11-12 net profit forecasts by 6%-11% for FRS139 impact, and after adjusting for a five-year amortisation of RM150 million government compensation for the LDP highway which will complete in end-CY10 (FY11) versus our previous forecast of early-FY12.

Our FY12 forecast has yet to incorporate IC12 which is likely to be negative o earnings considering the charge out in heavy repairs and potentially higher HDE amortisation. These are mainly P&L adjustments with projected cash flows remaining very much unchanged. ' Maybank IB Research, June 15

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

BHIC - AmResearch maintains hold call on BHIC

Stock Name: BHIC
Research House: AMMB

Boustead Heavy Industries Corp Bhd (BHIC)
(June 15, RM3.76)
Maintain hold at RM3.76 with fair value of RM4.40
: We maintain our hold rating on Boustead Heavy Industries Corp Bhd (BHIC) with an unchanged fair value of RM4.40 per share ' based on a FY10F PE premium of 10% to the stock's three-year average of 11 times.

This implies a 20% discount to its unchanged sum-of-parts valuation (SOP) of RM5.50 per share.

We have marginally adjusted FY11F-FY12F earnings as contribution ' from a RM131 million contract by the government of Malaysia to design, construct and commission 10 units of Fast Interceptor Craft for Malaysian Maritime Enforcement Agency (MMEA) ' has been mostly offset by our reduction in revenue estimates for the next patrol vessel package.

We have deferred recognition of a next batch of naval patrol vessels, estimated at RM7 billion, from 3QFY11F to 4QFY12F ' given delays in the announcement of a letter of award from the government.

Even if BHIC were to be awarded the next major naval contract in 4QFY10F, it may need a year to mobilise before recognition of revenues.

The MMEA contract, likely to be the first package, is for a period of 20 months from the effective date of the acceptance letter by BHIC, which means that the 10 vessels are scheduled for delivery by 1QFY12F.

While the management has indicated that contributions from the MMEA contract could begin in 4QFY10F, we have adopted a more conservative assumption with revenue commencement in FY11F given past execution delays.

We have not revised BHIC's SOP valuation of RM5.50 per share as valuation for the group's construction business is pegged at 10x FY10F earnings, which has not been changed.

While the group's long-term prospects remain bright given a potentially huge pipeline of new military contracts, we believe that a re-rating for the stock will only come from a significant recovery in earnings deliverance, which has been poor over the past three quarters.

The stock currently trades at a fair FY10F's PE of 10 times, at parity to the oil and gas industry's average valuations and just below BHIC's three-year PE of 11 times. ' AmResearch, June 15

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

SIME - OSK Research maintains sell on Sime Darby

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

Sime Darby Bhd
(June 15, RM7.81)
Maintain sell at RM7.81 with target price of RM6.74
: Datuk Mohd Bakke Salleh has been designated as the new president and group chief executive of Sime Darby, effective as soon as practicable.

Mohd Bakke, 56, was chosen in view of his expertise, experience and his proven track record in managing large corporations. Mohd Bakke, who is the CEO of Felda Global Ventures Holdings, has the necessary experience in corporate restructuring exercises as well as management expertise in the plantation and property industries.

Mohd Bakke is highly regarded in the corporate sector. Prior to his appointment at Felda Global, he served in various capacities within government-linked companies.

He was Group MD of Felda Holdings, Group MD and chief executive of Lembaga Tabung Haji, and has served as the director of the property division of Pengurusan Danaharta Bhd. He has also served in several companies within the Permodalan Nasional Bhd group.

We view the appointment as positive as one of the many elements of uncertainty is removed. However, after much disappointment, the market is likely to wait and see if Mohd Bakke is able to straighten out Sime and turn it into a respectable company.

It is also yet to be seen if the new CEO is given a free hand to shake up the company in whatever way necessary like what Datuk Seri Idris Jala did in Malaysia Airlines.
We find it highly unusual that Sime's board of directors has yet to meet Mohd Bakke as one would think that the appointment of a CEO is the board's prerogative and whoever is appointed should have gone through a series of meetings with the board to ensure that he is the right person for the job.

According to Sime's CFO Tong Poh Keow, PWC is still carrying on forensic investigation on the loss-making subsidiaries, the result of which will be known in August.

We are maintaining our sell call with a target price of RM6.74 as we view Sime as substantially overvalued and lacking in focus.

For large cap plantation exposure, we prefer Wilmar International (buy, target price S$7.35) and Golden Agri (buy, TP S$0.68), both of which are highly focused and well-managed and are trading at PE multiples of under 15 times compared to Sime's 18 times. ' OSK Investment Research, June 15

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

June 15, 2010

BSTEAD - ECM Libra Research: Latest BHIC deal prelude to bigger jobs for Boustead

Stock Name: BSTEAD
Research House: ECMLIBRA

KUALA LUMPUR: ECM Libra Investment Research has maintained its buy call on BOUSTEAD HOLDINGS BHD [] at RM3.68 with target price RM4.48 and said the RM130.7 million government contract awarded to its heavy industries segment could be a prelude to a bigger job.

On Monday, June 14, BOUSTEAD HEAVY INDUSTRIES CORP []'s wholly owned sub-subsidiary BYO Marine Sdn Bhd received a government contract worth RM130.7 million.

BHIC on Monday said the company, which it holds through its unit Boustead Penang Shipyard Sdn Bhd, had received the letter of award for the contract to design and build 10 units of Fast Interceptor Craft for Malaysian Maritime Enforcement Agency.

ECM Libra Research said it was not making any changes to its assumptions with this job as it falls within the research house's replenishment assumptions for FY11.

"We assume that there would be at least RM700 million in new jobs awarded to the segment in 2011 for commercial as well as some government jobs.

"As for margin expectations, we believe it to be up to 20% at EBIT level as per their other jobs. More details will be required from management for a firmer estimate. This RM130 million job will bump up the group's current orderbook for the heavy industries segment to RM2.13 billion," it said in a note Tuesday.

ECM Libra Research said there appeared to be a slew of good news on Boustead at the moment, especially with their recent proposal to purchase Pharmaniaga and it opined that there was more good news to come over the rest of 2010 into 2011.

"Some of the goodies we are awaiting include (1) sale of their Sumatran palm oil estates that would significantly bump up group yields, (2) securing the job for the vessels for the Royal Malaysian Navy that could be worth in excess of RM6 billion and provide earnings visibility for up to 10 years, and (3) potential land bank expansion in KL through the government land privatisation programme.

"As such, we view now to be a good time for entry into the stock. We maintain our buy call on Boustead with a target price of RM4.48. This is based on FY11 EPS pegging a historical average P/E of eight times," it said.

GENM - OSK maintains buy call on GenM

Stock Name: GENM
Research House: OSK

Genting Malaysia Bhd
(June 11, RM2.75)
Maintain buy at RM2.64 with target price RM3.15
: Genting Malaysia has confirmed that its indirect wholly owned subsidiary, Genting New York LLC, is bidding for the rights to develop and operate video lottery terminal (VLT) facilities at Aqueduct Racetrack in the city of New York.

Genting New York LLC has submitted a US$1 million (RM3.29 million) entry fee to the New York lottery on June 1. Genting New York is currently evaluating the project and has until June 29, 2010 to decide if it wishes to formally submit a bid.

The details on the development and upfront licensing cost remain sketchy. We note that bids of up to US$2 billion were proposed in 2007 for the 'racino' project in Aqueduct, while the latest round of bidding in 2009 involved an upfront licensing fee of US$300 million.

We estimate that net profit margins could be as low as 5% and ebitda (earnings before interest, tax, depreciation and amortisation) margins potentially ranging from 9% to 14% versus Genting Malaysia's core domestic casino margins of 40% to 45%.

Assuming a net win per VLT/day of US$290, which is what the closest racino (Empire City casino at Yonkers Raceway) in proximity to Aqueduct earned in 2009, we estimate that the Aqueduct racetrack casino could generate average revenue of US$473.3 million.

However, due to the various legislative deductions, bottom-line contribution from the project could equate to less than 5% of Genting Malaysia's PBT. Note that our US$290 net win per VLT/day also assumes the upper end of net wins for racinos around New York city.

Valuations are undemanding at 5.7 times EV/Ebitda versus regional large scale peers' eight times to 14 times. Although we are slightly negative on Genting Malaysia's potential bid for the racino project in New York City with only marginal potential incremental returns, we await greater clarity on the details of the development expenditure and the actual legislative deductions that it may have to comply with.

What is a racino? A combination of racetrack and casino. In New York, racinos have only video gaming machines. The closest racino to Aqueduct is Empire City at Yonkers raceway which has 5,300 VLTs and live harness racing. These VLT games cost from a penny to US$100 to play. ' OSK Investment Research, June 11

This article appeared in The Edge Financial Daily, June 14, 2010.