August 20, 2010

CARLSBG - Carlsberg more than anticipated

Stock Name: CARLSBG
Research House: RHB

Carlsberg Brewery Malaysia Bhd
(Aug 19, RM5.27)
Maintain buy at RM5.20 with revised target price RM5.80 (from RM5.30)
: Although 1HFY2010 revenue made up 51% of our full-year (FY) forecast (against 1H2009 at 48%), net profit grew even faster than expected in 1H to drown our estimates. It accounted for 59% (against 1H2009 at 45%) of our FY forecast. Year-to-date (YTD) revenue grew 42% while net profit surged by 100%. The higher than expected bottom line growth was mainly due to better operating efficiency, with 1HFY2010 Ebitda margins coming in at 13.74% against our previous conservative estimate of 12.8%.

In view of Calsberg's better than expected efficiency, we now lower our operating cost assumptions to match its YTD performance. Our earnings before interest, tax, depreciation and amortisation (Ebitda) margin is now revised higher to 13.8% from 12.8% (1HFY2010 Ebitda ' 13.7%) previously upon lowering our advertising and promotion expenses. This prompts us to lift our bottom line earnings estimates by 14% to 15% for FY2010. Carlsberg has declared an interim gross dividend of five sen per share for 2QFY2010. However, it also dropped a pleasant surprise by declaring an additional 2.5 sen special dividend.

The higher than expected dividend leads us to revise upwards our FY dividend estimates to 27.5 sen from 25 sen previously. At its current share price, this will translate into a gross yield of 5.3%.

Our higher earnings estimates lead us to revise higher our target price from RM5.30 to RM5.80, and ascribe a lower weighted average cost of capital of 9.8% against 10.7% previously. Backed by a stock upside of 11.5% coupled with a gross dividend yield of 5.3%, we maintain our 'buy' recommendation. ' RHB Research, Aug 19

This article appeared in The Edge Financial Daily, August 20, 2010.

AIRASIA - AirAsia solid 2Q performance

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

AirAsia Bhd
(Aug 19, RM1.73)
Reiterate buy at RM1.68 revised target price RM2.32 (from RM1.67)
: AirAsia's 2Q2010 financial results came in above our expectations due to lower than expected interest expenses. Revenue for the quarter rose 25.8% year-on-year (y-o-y) to RM940.7 million as a result of higher passenger volume as well as higher ancillary income, indicating a recovery in demand for air travel. This led to an increase in adjusted net profit (excluding deferred taxes and MTM derivative gain/loss) by 27% y-o-y to RM164.6 million, bringing year-to-date total to RM271.6 million. This hits 55% of our FY2010 estimates of RM492 million.

Ticket sales were up 20% on a y-o-y basis to RM673 million due to higher traffic and additional capacity from the two new aircraft delivered in 2Q2010. Available seat per kilometre (ASK) improved 9% y-o-y to 5.94 billion while revenue passenger kilometres (RPK) rose 15% y-o-y to 4.32 billion. Seat load factor inched up 2.2 percentage points y-o-y to 76.9% due to enhanced flight frequencies and addition of new routes. Revenue yield crept up 10% y-o-y to 22 sen per RPK.

Cost per ASK (CASK) increased 21% y-o-y to 11.7 sen/ASK as jet fuel prices shot up by almost 60% to US$100 per barrel during the quarter. However, it remained flat quarter-on-quarter. Apart from that, other costs seem to be under control as non-fuel CASK was up by a mere 5% y-o-y to 6.3 sen/ASK.
Looking ahead, we expect demand recovery to accelerate in 2H2010, especially with the Hari Raya Aidilfitri celebration around the corner as well as the year-end festivities. Forward bookings for August have already reached 54%, while September and October have already achieved 37% and 24% respectively.

We revise FY2010/12 earnings estimates by 3.9 to 17.9%, factoring in lower interest expense and lower depreciation from further aircraft delivery deferment in 2012.

We have changed our valuation method to the PER multiple as recovery in demand has increased AirAsia's earnings visibility. Our revised 12-month target price of RM2.32 (previously RM1.67) is pegged to average LCC peers' PER of 11 times on mid CY2011 earnings. Maintain 'buy'. ' ECM Libra Investment Research, Aug 19

This article appeared in The Edge Financial Daily, August 20, 2010.

KLK - KLK turnaround for retail division

Stock Name: KLK
Research House: RHB

Kuala Lumpur Kepong Bhd
(Aug 19, RM16.96)
Maintain outperform at RM16.90 with revised fair value RM20.75 (from RM20.70)
: KLK's 9MFY2009/10 core net profit was within expectations at 69% to 71% of our and consensus FY2010 core net profit forecasts.

KLK recorded approximately RM34.4 million in exceptional item (EI) gains in 9MFY2010 from writeback of provision in diminution in value for Yule Catto (3QFY10: RM1.9 million). We expect stronger numbers in the final quarter, given the higher CPO prices currently and as FFB production gears up towards peak harvest season.

Core net profit rose 36% year-on-year (y-o-y) on the back of a 10% rise in turnover in 9MFY2010. All divisions except the property division saw improvements in revenue, while the relatively larger rise in net profit was due to improved profit margins for the plantations, manufacturing and retail divisions, offset slightly by lower margins for the property division. Average CPO price achieved rose significantly (+2.1% quarter-on-quarter and 10% y-o-y) in 3QFY2010 to RM2,562/tonne, which is slightly higher than the average spot price of RM2,529/tonne for the quarter, while FFB production also improved by 8.7% q-o-q and 6.9% y-o-y. The retailing division recorded a notable turnaround to profitability in 3QFY2010, the first time in many years, as a result of lower expenses after the closure of some of its US stores.

Main risks include: (i) a convincing reversal in crude oil price trend resulting in reversal of CPO and other vegetable oils price trend; (ii) weather abnormalities resulting in an over or under supply of vegetable oils; (iii) revision in global biofuel mandates and trans-fat policies; and (iv) a slower than expected global economic recovery, resulting in lower than expected demand for vegetable oils.

Our forecasts remain unchanged. We highlight that our forecasts have included the potential impact of a further restructuring loss for KLK's retail division of approximately RM16.5 million in FY2010 for C&E US, although this may be unlikely given the operational improvement seen so far.

Despite our unchanged forecasts, we revise our sum-of-parts-based fair value for KLK up slightly to RM20.75 (from RM20.70), after taking into account the latest net debt figure. We continue to like KLK for its inexpensive valuations (as it remains the cheapest amongst the big-cap plantation stocks currently) and for its strong management with a good track record. Further catalysts could come from better than expected FFB production growth as well as sustainable return to profitability of the retail division. We maintain our 'outperform' rating. ' RHB Research Institute, Aug 19

This article appeared in The Edge Financial Daily, August 20, 2010.

APM - APM Automotive ahead of expectation

Stock Name: APM
Research House: INTER PACIFIC

APM Automotive Holdings Bhd
(Aug 19, RM4.85)
Reiterate outperform at RM4.91 with revised target price RM5.70 (from RM5)
: Our FY2010F/11F earnings forecast remains intact. We continue to reiterate our 'outperform' recommendation with our revised target price of RM5.70 (RM5 previously) based on FY2010 forecast EPS of 54.7 sen and PER of 10.4 times.

We remain positive on APM given its solid free cash flow, attractive dividends and strong balance sheet amid a resilient net cash position currently at RM1.47 per share as at end-June. Key risks include: (i) slowdown of the economic recovery; (ii) lower-than-expected industry vehicle sales volumes; and (iii) weakening ringgit.

APM's annualised 1HFY2010 net profit of RM62.5 million is above our expectation and consensus, which accounts for 56.7% and 62.4% of our full-year forecast and market consensus respectively. As expected, APM declared an interim dividend of eight sen per share during the quarter under review.

APM posted a strong performance in 2QFY2010 with pre-tax profit up 114.7% year-on-year (y-o-y) to RM54.1 million which includes a one-time price adjustment amounting to RM7.6 million on the back of higher revenue, up 47.6% y-o-y. By excluding the adjustment, its pre-tax profit would soar by 84.5% y-o-y. The positive growth performance was attributed to: (i) higher production volume and economies of scale; (ii) +141.6% y-o-y surge in its domestic contribution; (iii) better selling prices; and (iv) strengthening of functional currencies against the major trading currencies, which effectively lowered the import materials cost. The earnings before interest, tax, depreciation and amortisation margin rose by 5.4 percentage points to 19.9% in 2QFY2010, despite higher operating cost, up 38.5% y-o-y in 2QFY2010.

In domestic operations, total vehicle production swelled 30% y-o-y to 150,636 units in 2QFY2010. APM benefitted from a higher revenue contribution from the domestic interiors and plastics segment, up 67.6% y-o-y, that reflects the supply of interior parts (especially high-value items like car seats) to Perodua's Alza. Perodua will increase the production of Alza by 50% to 6,000 units per month in 2HCY2010. As for its overseas operations, although pre-tax profit fell by 12% y-o-y, revenue swelled by 60.3% y-o-y due to higher demand for new vehicles from Indonesia, up 78% y-o-y to 196,132 units in 2QFY2010.

Nissan Motors' (NM) plans a US$20 million expansion of its existing plant in Indonesia. Capacity is expected to double to 100,000 units per year while market share is set to expand from 4.4% to 10% by end-2012. We believe that APM would be the key beneficiary of NM Indonesia's aggressive expansion plans given its status as a Tier-1 supplier to NM Indonesia via its 50% stake in the JCI-Armada-APM consortium. It plans to commence production of the high volume with highly localised Nissan model by November 2010. Adding on, APM has committed about RM68 million to expand production facilities in Vietnam to support Tan Chong's expansion plan in Vietnam, which APM will eventually turn into its Nissan assembler and distributor for the Vietnamese market. ' Inter-Pacific Research, Aug 19

This article appeared in The Edge Financial Daily, August 20, 2010.

HLBANK - RHB upgrades Hong Leong Bank

Stock Name: HLBANK
Research House: RHB

Hong Leong Bank Bhd, a Malaysian lender, had its stock rating upgraded to "outperform" from "market perform" at RHB Research Institute Sdn Bhd after raising its financial year 2011-2012 profit forecasts by 11 per cent to 14.8 per cent.

The stock's fair value was increased to RM10.70 from RM9.20, RHB said in a report today. -- Bloomberg

PLUS - Kenanga Research ups PLUS target price to RM5.08

Stock Name: PLUS
Research House: KENANGA

KUALA LUMPUR: Kenanga Investment Research is maintaining its Buy on PLUS EXPRESSWAYS BHD [] with a higher target price at RM5.08 from RM4.63, previously.

'No change to our forecast and 4% traffic growth assumptions for FY10. We upgraded our target price as we roll over our valuation to FY11. Our TP is based on 20% discount to our DCF valuation with WACC at 7.8%,' it said.

Kenanga Research said on Friday, Aug 20 that PLUS's 1H10 core net profit of RM623 million came in within its expectations and consensus.

The toll collection increased by 12% which in line with the traffic growth by 10%.Its newly acquired TERAS and PLUS Helicopter''contributing RM2 million while the overseas projects in India at about RM8 million to the topline.

'The core net profit grew by 11% despite of increase in interest expenses due to issuance of its Islamic securities last year. Interim dividend of 7.5 sen per share declared which is 1 sen higher than the previous year. Overall performance is well within expectation,' it said.

HLBANK - OSK, MIDF lift Hong Leong target price

Stock Name: HLBANK
Research House: OSK

OSK Research and MIDF Research have raised their target price on Hong Leong Bank after raising their financial year 2011-2012 earnings forecasts by 14.1 per cent and 8.5 per cent respectively.

Both research houses today revised upwards their target price to RM9.20 for the Hong Leong Bank stock from RM8.80 previously.

"Although the share price upside from current levels is rather limited, we are maintaining our trading ''buy'' recommendation as a successful merger with EONCap could see a re-rating in our fair value for Hong Leong Bank to RM9.80 on the back of higher book value accretion and return on equities of 16 per cent," OSK Research said in a statement.

MIDF Research said that it has raised earnings per share forecast for Hong Leong Bank for financial year 2011 to 72.3 sen from 63 sen previously.

"Our earnings per share forecast for financial year 2011 and 2012 implies a net profit growth of 6.0 per cent and 8.5 per cent respectively," it said in a research note today.

It, however, maintained neutral call on the Hong Leong Bank stock. -- Bernama

YTLPOWR - Kenanga raises YTL Power target price

Stock Name: YTLPOWR
Research House: KENANGA

Kenanga Research has raised its target price for YTL Power International Bhd stocks to RM2.48 from RM2.45 after updating Wessex regulatory capital value figures and earnings adjustments.

YTL Power is a "must have" defensive stock given current market condition with financial year 2011 expectation gross yield of 7.6 per cent, it said in a research note today.

"We continue to like the group for its steady cash-flow utilities business and strong cash pile of RM7.4 billion," Kenanga Research said.

"YTL Power's key catalyst lies with the appreciation in the British pound and Singapore dollar as well as new acquisitions," it said.

The research house expects the Singapore dollar rate to appreciate by one per cent year-on-year to S$1.00=RM2.35.

"The resulting rate will more than compensate impact of lower Wessex revenue from further depreciation in the British pound, which is expected to slide one per cent year-on-year to one pound=RM4.80," it said.

"Note that we are not expecting any significant rate hikes for Wessex," it added.

Kenanga Research also said that positive news flow from YTL Power's WiMAX venture could provide further excitement.

"Market talk indicates the group is working on a number of WiMAX devices, which will be used on Android (mobile phones); if so, this potentially means WiMAX-enabled handsets will be easily accessible," it said. -- Bernama

HLBANK - OSK, MIDF lift Hong Leong target price

Stock Name: HLBANK
Research House: MIDF

OSK Research and MIDF Research have raised their target price on Hong Leong Bank after raising their financial year 2011-2012 earnings forecasts by 14.1 per cent and 8.5 per cent respectively.

Both research houses today revised upwards their target price to RM9.20 for the Hong Leong Bank stock from RM8.80 previously.

"Although the share price upside from current levels is rather limited, we are maintaining our trading ''buy'' recommendation as a successful merger with EONCap could see a re-rating in our fair value for Hong Leong Bank to RM9.80 on the back of higher book value accretion and return on equities of 16 per cent," OSK Research said in a statement.

MIDF Research said that it has raised earnings per share forecast for Hong Leong Bank for financial year 2011 to 72.3 sen from 63 sen previously.

"Our earnings per share forecast for financial year 2011 and 2012 implies a net profit growth of 6.0 per cent and 8.5 per cent respectively," it said in a research note today.

It, however, maintained neutral call on the Hong Leong Bank stock. -- Bernama

TENAGA - OSK maintains 'buy' call on Tenaga

Stock Name: TENAGA
Research House: OSK

The Department of Environment's rejection of the Lahad Datu coal plant detailed environmental impact assessment is likely to mean that Tenaga Nasional Bhd needs to find alternative power plant solutions for the east coast of Sabah.

In stating this, OSK Research said the main reason cited for the rejection was that the environmental impact assessment report did not address numerous important environmental parameters in respect of the proposed project

"Given that the Department of Environment has exercised independent judgment on the matter, we believe Tenaga Nasional, which has a 40.8 per cent stake in the Lahad Datu plant, would be forced to consider other alternatives such as biomass given the abundance of oil palm plantations in Sabah or the long discussed Liwagu dam in central Sabah," it said in a research note today.

"For now, given the uncertainty over possible alternatives, we leave our assumptions on the Lahad Datu plant unchanged as an investment in associates in Tenaga Nasional's balance sheet forecast," it added.

OSK Research said while this could mean costlier biogas plants given the ample oil palm plantations in Sabah, it was leaving "assumptions intact for now".

"Thus, we are maintaining a ''buy'' call on Tenaga Nasional, given the growing foreign interest in the counter recently as well as weaker coal prices," it said.

"Fair value is unchanged at RM9.90, while we await further developments with regard to the 2,000-megawatt new plant," it added. -- Bernama

TM - OSK Research maintains Neutral on Telekom

Stock Name: TM
Research House: OSK

KUALA LUMPUR:'' OSK Research maintains its NEUTRAL recommendation on Telekom Malaysia on lingering concerns over the erosion of its traditional voice business (45% of revenue) and its premium valuations against the KLCI/local peers.

The research house said on Friday, Aug 20 that TM will announce its 2QFY10 results on Monday, to be followed by a conference call.

'We expect EBITDA margin to come under pressure from (i) higher HSBB related opex; and (ii) increased marketing spending. TM slugged it out to defend its ADSL broadband business, drive take-up of its bundled voice packages and introduced the new HSBB (Unifi) service in 2Q10,' it said.

OSK Research said TM will recognise the full quarter opex relating to its high speed broadband service (launched late March) in 2Q10. As a result, we expect its core EBITDA to slide q-o-q/y-o-y in 2Q10.

The group posted flat EBITDA of RM731m in 1Q10 due to start-up costs for Unifi while revenue fell 7% q-o-q (+1% y-o-y) following the lumpy project sales recognition in 4Q09.

'We expect 2Q10 revenue to show a slight recovery as the strong ADSL net-add momentum extended into 2Q10, albeit partially offset by the dilution in overall voice revenue as TM offered free local calls on its new bundled voice packages,' it said.

August 19, 2010

WASEONG - Wah Seong Corp could face challenging times

Stock Name: WASEONG
Research House: OSK

Wah Seong Corporation Bhd
(Aug 18, 2.36)
Maintain buy at RM2.37 with lower target price of RM2.71 (from RM2.85)
: The oil and gas (O&G) business contributes 60% to 70% to Wah Seong's total revenue while the balance is from industrial services. Out of its entire O&G business, the engineering division contributes 30% to 40% of total revenue, with the balance mainly from the pipe coating business. We gather that the engineering jobs which were supposed to come in by 1H2010 are still delayed given the protracted slowdown in global O&G activities. Hence, we are not expecting any performance boost from this division to Wah Seong's 2QFY2010 and 3QFY2010 performance for the time being.

Fortunately, Wah Seong has secured the pipe coating job for the entire Gorgon project valued at about US$162.9 million (RM514.76 million), which should keep its Kuantan plant busy until early 2012. We understand that the bulk of the revenue and profit will be recognised in 2011 and that the job involves conventional and concrete coating. Although margins are not as attractive as those for the Gemusut deepwater pipe coating job executed last year, we believe the gross margin is still good at 20% to 30%.

Given that Wah Seong's volume and business outlook remained unchanged as at 1QFY2010, we expect to see flat quarterly results quarter-on-quarter. Hence, we are downgrading our FY2010/11 earnings by 5% to 28%.

Failure to clinch Socotherm deal a blessing in disguise? In our view, it now appears to be a blessing for the company in the short term since new drilling activities in the US and Europe have slowed down following the BP oil spill. However, on the negative side, this would make it difficult for Wah Seong to penetrate the US and Europe markets in the future, and Bredero Shaw would be a tough rival to compete with, given its combined size with Socotherm.

We maintain our 'buy' call with a lowered target price of RM2.71 (previously RM2.85) based on the existing PER of 14 times following our FY2011 earnings downgrade. Wah Seong is still the market leader in the provision of pipe coating and corrosion protection in Asia. ' OSK Investment Research, Aug 18

This article appeared in The Edge Financial Daily, August 19, 2010.

MAYBANK - Maybank expect positive surprises

Stock Name: MAYBANK
Research House: HWANGDBS

Malayan Banking Bhd
(Aug 18, RM7.97)
Maintain buy at RM7.97 with target price raised to RM9.90 (from RM9.10)
: Even after stripping out one-off items, we expect Maybank to post strong non-interest income for 4Q2010, which could be the key earnings driver for FYJune10. Non-interest income is likely to come from fee and commission income and insurance. Every 4Q, Maybank transfers about RM150 million to RM200 million life insurance surplus funds to shareholders' funds. The volatile items remain forex and MTM gain/loss for trading securities and derivatives.

We raise FY2010/12F earnings by 5% to 10% following the stronger non-interest income. Maybank is due to release its results Friday with a net profit of RM1 billion to RM1.1 billion, and we expect final dividends. We assume 40% payout ratio (low end of 40% to 60% guidance), leading to 19 sen final dividend per share (declared 11 sen interim DPS in 2Q2010).

BII's earnings disappoint, but still small relative to Maybank group. BII's 2Q2010 results released on July 30 reported 43% quarter-on-quarter (q-o-q) drop in earnings mainly due to higher provisions. But loans surged 17% q-o-q (higher than most Indonesian peers), led by the SME and consumer segments. Meanwhile, its NPL ratio has inched up, so we will keep an eye on BII's asset quality.

We reiterate 'buy' and raise our target price (TP) to RM9.90 after rolling forward our valuation base to CY2011. Our TP is equivalent to 2.3 times CY2011 BV, and based on the following Gordon Growth Model assumptions: 16% sustainable return on equity, 7% long-term growth and 10.8% cost of equity. Key catalysts include: (i) NIM improvement following OPR hikes, (ii) better performance at BII, and (iii) build-up of Malaysian capital markets and treasury capabilities. ' HwangDBS Vickers Research, Aug 18

This article appeared in The Edge Financial Daily, August 19, 2010.

AMMB - AMMB profit momentum on track to achieve targets

Stock Name: AMMB
Research House: MIDF

AMMB Holdings Bhd
(Aug 18, RM5.51)
Reaffirm buy at RM5.43 with revised target price of RM6.20 (from RM5.60)
: AMMB's 1Q2011 net profit of RM368.3 million rose 52.4% quarter-on-quarter (q-o-q) due to higher net interest'' income, fee income, investment and'' trading'' income, and income from the insurance business.

Its 1Q2011 net'' profit is within expectations at 30.5% of our forecast and 30.4% of consensus estimates for FY2011.

Annualised return on equity of 15.3% was higher than that in 4Q2010 of 10.2%.'' ''

A higher net'' interest margin'' for 1Q2011 of'' 3.08% (against 1Q2010 of 2.75%) was due to an increase in OPR due to the repricing of floating rate loans as well as'' lagged effects of deposit repricing. ''

Non-interest income growth was stronger than 4Q2010 with fee income growing 17.8% q-o-q in 1QFY2011, while investment and trading income edged up 69.9% q-o-q in 1QFY2011.

Gross loans grew at a faster rate of 1.68% q-o-q and 12.7% year-on-year (y-o-y). Growth was driven by higher loans to SMEs, government and statutory bodies and to the retail'' segment. The total loan book comprised 65.2% retail loans and the remaining'' portion in business and corporate loans (unchanged'' from'' 4Q2010). Loan growth is'' higher than the banking system's growth rate of 12.5% y-o-y as at June.

Gross impaired loan/NPL rose 32.3% q-o-q to'' RM2.5 billion. The group'' restated'' its gross NPL as at April 1 with an increase in impaired loan/NPL by RM673 million due'' to adoption of FRS139. Higher impaired loan was contributed by recognition of (i)'' impairment for restructured loans which were not expected to be fully repaid (RM300 million), (ii) add back of interest in suspense (RM129 million)'' and'' (iii) additional impairment recognised for corporate loans (RM244 million).

This resulted in the gross impaired loan ratio rising to 3.6% in 1Q2011 against NPL ratio of 2.8% in 4Q2010 under Bank Negara Malaysia GP3. LLC declined to 93.7% (against) 99.5% in 4Q2010.'' ''

Current account savings account (CASA) grew 13.3% y-o-y to RM7.43 million in 1Q2011.

Proportion of CASA to total deposits stood at 12.4% (against 12.2% in'' 4Q2010). We'' believe the group will continue to drive for growth of low-cost deposits to support its loan expansion and to stabilise margins from expected competition pressure moving forward.

We revise our target price (TP) to RM6.20 (from RM5.60). The stock's TP is pegged to 14.8 times FY2011 EPS, implying an ROE of 14.5% and P/BV of 1.8 times for FY2011.

Our forecast implies a 20.5% growth in net profit for FY2011. Our dividend forecast of 14.6 sen implies a payout of 35% of FY2011 net profit. 'Buy'. ' MIDF Research, Aug 18

This article appeared in The Edge Financial Daily, August 19, 2010.

TMCLIFE - OSK Research maintains Sell on TMC Life Sciences

Stock Name: TMCLIFE
Research House: OSK

KUALA LUMPUR: OSK Research is maintaining its Sell call on TMC Life Sciences and earnings forecast but revise higher its fair value (FV) to 30 sen based on about 2.0 times FY10 P/NTA.

It said on Thursday, Aug 19 that it was revising higher its FV because it did not dismiss the possibility of the currently buoyant stock market sentiment.

Underpinning its higher FV and expectations of future corporate actions from the new shareholder Peter Lim Eng Hock, OSK Research said these factors would help to sustain TMC's share price at around the 52 sen transacted price.

Therefore TMC is unlikely to retrace much lower towards its previous 21 sen price target, it said.

'We had earlier speculated that the new shareholder could be a reputable industry player which could turn around the medical centre faster. However, we are uncertain of the expertise of Lim in the medical industry,' it said.

AXIATA - CIMB Research cautious on Axiata's potential tie-up with Samart

Stock Name: AXIATA
Research House: CIMB

KUALA LUMPUR: CIMB Equities Research is cautious about Axiata Group Bhd's potential tie-up with its Thai associate Samart to bid for Thailand's 3G spectrum given the regulatory uncertainties and questions over Samart's balance sheet strength.

The research house said on Thursday, Aug 19 that alternatively, Axiata could acquire a minority stake in True.

'While this is a lower-risk alternative, we think it may not be palatable to Axiata which appears to prefer controlling its operating units,' it said.

CIMB Research said lastly, should Axiata decide to bid for the spectrum, we believe this would dash any hope of an earlier-than-expected dividend payout.

'Separately, we expect Axiata's 2Q10 core net profit to come in at RM640 million to RM660 million, up 6% to 9% QoQ and 131-138% YoY, driven mainly by Celcom, Dialog and Idea,' it said.

CIMB Research said Axiata remains its top Malaysian telco pick and an OUTPERFORM with an unchanged SOP-based target price of RM5.25.

'Likely re-rating catalysts are positive earnings surprises and an earlier-than-expected dividend payout. Our forecasts are 19-22% above consensus,' it said.

SALCON - OSK Research maintains Buy on Salcon, TP 77 sen

Stock Name: SALCON
Company Name: SALCON BHD
Research House: OSK

KUALA LUMPUR: OSK Research said on an annualised basis, Salcon's bottom line earnings were below its and consensus estimates. However, it expects Salcon will see higher 2H earnings contribution from its CONSTRUCTION [] division, and hence meet its estimates.

The research house said it was also revising its net profit upwards by about 20% after factoring in the exceptional gain from disposal of a property.

'However, we are maintaining our target price as we are not imputing these gains into our valuation. Salcon's BUY is maintained, as well as its TP of 77 sen.

OSK Research said its target price was derived by valuing its water concession operations at 41 sen and ascribing a PE of 9x to its FY10 construction EPS of 4.45 sen.

August 18, 2010

MAS - MAS 2Q10 still in red

Stock Name: MAS
Research House: HWANGDBS

Malaysian Airline System Bhd
(Aug 17, RM2.20)
Maintain hold at RM2.28 with target price RM1.90
: MAS' 2Q2010 core net loss ballooned to RM425.6 million, 72% higher than the RM248 million loss recorded in 1Q2010. Although passenger RPK and yield (passenger revenue per available seat kilometre) rose 4% and 2% respectively in 2Q2010, these could not offset the 8% increase in cost/ASK. While fuel cost/ASK was relatively flat quarter-on-quarter (at 10.3 sen), non-fuel cost/ASK (circa 65% of total cost) jumped 14% to 19.5 sen. This was due to higher maintenance costs and sales incentives. MAS also reported RM158 million combined net cash settlement on derivatives and premium paid on derivatives.

Going forward, we expect higher yields with recovering air travel demand. Yields continued to improve with 16% year-on-year growth in 2Q2010 against 22% y-o-y decline in 2Q2009. Although costs/ASK may improve with higher efficiencies as new aircraft are delivered from 4Q2010 onwards, earnings may still be hit by fuel hedging losses. As at end-2Q2010, MAS has hedged 60% of its fuel requirement at US$100/ bbl West Texas Intermediate for the rest of FY2010, and 40% at US$100/bbl for FY2011.

We look to cut FY2010F earnings by 44% given that 1H2010 core net loss of RM673.6 million already accounted for 88% of our full-year forecast. We maintain our RM1.90 target price based on 15 times CY2011F EPS. We also maintain our 'hold' call considering the expected longer term earnings turnaround in FY2011. We believe FY2010 remains challenging for MAS due to increasing pressures on yield. ' HwangDBS Vickers Research, Aug 17

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

PUNCAK - Puncak Niaga vying for pipeline project in India

Stock Name: PUNCAK
Research House: ECMLIBRA

Puncak Niaga Holdings Bhd
(Aug 17, RM2.87)
Maintain hold at RM2.88 with target price RM2.61
: Puncak Niaga yesterday entered into an agreement with India-based P&C Constructions (P) Ltd (P&C) to form an unincorporated joint venture in the name of PNHB-P&C Joint Venture (PPJV) to jointly participate in an international competitive tender for a pipeline conveyance system project in Mangalore, India.

The promoter of the project is Mangalore Special Economic Zone Ltd, set up in 2006 for the development of the Mangalore Special Economic Zone to boost economic growth in the area. Spanning a proposed 3,985 acres of land in the southwestern state of Karnataka, the MSEZ is a specifically delineated duty free enclave.

For the purposes of the tender, Puncak Niaga will be the lead partner with a 70% stake in PPJV, with the remaining 30% held by P&C. Preliminary talks are ongoing with P&C regarding the details of the tender, which opened yesterday. The project is given 13 months for completion, and we understand the project value is to be in the region of RM200 million to RM300 million. As the water infrastructure in the MSEZ is slated for completion by December 2011, we expect results of the tender to be made known by November 2010.

The project is in line with Puncak Niaga's efforts to expand its presence in India. The company made its first foray into India in 2002, with Lanco Infratech Ltd and Kris Heavy Engineering & Construction Sdn Bhd for the Chennai Water Supply Project, which involved the supply and laying of 114km of steel pipes for RM234 million and a five-year operations and maintenance contract.

As the project is still in the preliminary stages, we make no changes to our estimates pending the outcome of the tender. We maintain our 'hold' call and target price of RM2.61 based on one time NTA. ' ECM Libra Investment Research, Aug 17

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

EVERGRN - Evergreen Fibreboard's stellar results due to higher ASP, improved efficiency

Stock Name: EVERGRN
Research House: RHB

Evergreen Fibreboard Bhd
(Aug 17, RM1.59)
Maintain outperform at RM1.55 with higher fair value of RM2.67 (from RM2.30)
: Evergreen's 1HFY12/10 net profit of RM69.6 million came in above our and consensus expectations, accounting for 64% of our and 63% of consensus expectations respectively. Key variances to our earnings were higher average selling price and a better earnings before interest and tax (EBIT) margin (17.3% in 1HFY12/10 against our full-year forecast of 14.1%) arising from improved efficiency. As expected, two sen interim tax-exempt dividend was declared during the quarter, bringing total dividend declared year-to-date to four sen.

Year-on-year (y-o-y), net profit increased by more than 100%, mainly driven by: (i) 43.1% increase in revenue due to higher average selling prices and sales volume as demand recovered strongly in 1H2010 after the global economic downturn last year; and (ii) expanding profit margins due to the higher capacity utilisation rate together with synergistic savings derived from its power plants in Thailand and its glue plant in Batu Pahat.

Quarter-on-quarter (q-o-q), average selling price has improved by approximately 4% in US dollar terms (from US$249/m3 in 1Q2010 to US$259/m3 in 2Q2010).

However, this was largely offset by a stronger ringgit. Nevertheless, net profit was still higher by 10.3% q-o-q as a result of improved operational efficiency and cost savings.

The risks include: (i) sharp drop in MDF price; (ii) sharp increase in log costs; (iii) further escalation of crude oil related glue and logistics costs; and (iv) strengthening of the ringgit which could reduce the company's export competitiveness.

We have revised upwards our earnings forecasts for FY12/10-12 by 7.6%-21.6% after: (i) raising our average selling price assumptions by 3.9%-6% for FY2010-12; (ii) lowering our operating and administration and finance cost assumptions slightly to be in line with 1H results; and (iii) raising our effective tax rates to 13% for FY2010-12 (from 7.8%-9.4%) to be in line with 1H results.

Post-earnings revision, we raise our fair value for Evergreen to RM2.67 (from RM2.30), based on unchanged target PER of 10 times FY12/11 earnings (which is at a two times PER discount to the timber sector).

We maintain our 'outperform' recommendation on the stock. ' RHB Research Institute, Aug 17

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

JCY - JCY Intl near-term glitch, long-term intact

Stock Name: JCY
Research House: CIMB

JCY International Bhd
(Aug 17, RM1.18)
Maintain outperform at RM1.20 with target price RM2.28
: We estimate that sales remained flat quarter-on-quarter (q-o-q) at RM552 million in 3QFY2010 though there is downside risk to our estimate given the q-o-q decline in volumes earlier reported by its two major HDD customers, Western Digital (-3%) and Seagate (-7%).

On a year-on-year basis, however, both drive makers still registered healthy double-digit growth of 24% and 15%, respectively. Other mitigating factors include maiden contributions from Seagate's top cover project and possible higher allocations from major customers.

We estimate that 3QFY2010 earnings before interest, tax, depreciation and amortisation (Ebitda) margin widened 20 basis points q-o-q to 17.4% on the back of better cost control. It had been hit by higher labour costs due to an increase in the number of contract workers in 2QFY2010.

However, the management has addressed this issue in May and this should have resulted in some improvement. But again, we see downside risk to our forecast due to slower sales and the negative impact of the weaker US dollar.

We expect JCY's guidance to be more muted this time in view of the uninspiring guidance from both WD and Seagate.

Its two HDD customers are projecting single-digit q-o-q volume growth in the coming quarter due to weakness in the European markets as well as higher inventory in the channel, which ended the June quarter at around five weeks against less than four weeks as at end-March. On a slightly positive note, JCY has started mass production of base plates for Hitachi and Samsung.

However, volume is unlikely to be significant this year. Also, we understand JCY is in active discussions with major customers for higher allocations to mitigate the current slower growth.

We leave our FY2010-12 profit forecasts unchanged ahead of the 3QFY2010 results and also retain our 'outperform' rating and target price of RM2.28. Our current target price of RM2.28 is based on 12 times CY2011 PER.

We believe the share price has already factored in the weak near-term outlook. JCY remains an 'outperform' as we believe it has the financial ability to weather the short-term weakness. We like its scale, which helps keep its returns consistently above industry and its good cash flows which allow for decent dividend yields.

Potential catalysts for the stock include (i) a turnaround of the HDD sector, and (ii) more meaningful contributions from Hitachi and Samsung. ' CIMB Research, Aug 17

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

AMMB - OSK Research maintains Neutral on AMMB

Stock Name: AMMB
Research House: OSK

KUALA LUMPUR: OSK Research said AMMB's annualised 1QFY11 net profit was 21.5% and 20.2% above consensus and its full-year forecast.

It said on Wednesday, Aug 18 the stronger than expected results were largely driven by: i) lower-than-expected loan loss provision (-33% y-o-y and -38.3% q-o-q), ii) a RM10.2m write-back in financial investments, and iii) further improvement in cost containment measures, which resulted in a 7.2% q-o-q decline in operating expenses and a cost to income ratio of 38.5% versus its full-year implied 41.5% targeted run rate.

The research house said although a longer term expansion in less volatile transaction fee income and a solidifying forex and derivative platform could be the group's key catalysts for its medium to longer term ROE targets of 15%-18%, the group's immediate term margins are likely to be pressured by rising interest rates given its high fixed rate loan portfolio and relatively low CASA deposit base.

'Post earnings revision, we have tweaked upwards our TP from RM5.60 to RM5.78 (1.65x FY11 PBV, 12.8% ROE). Despite this upward revision, we are maintaining our NEUTRAL recommendation given the limited upside after the recent share price rally,' it said.

TGOFFS - AmResearch reaffirms Buy on Tanjung Offshore

Stock Name: TGOFFS
Research House: AMMB

KUALA LUMPUR: AmResearch reaffirmed its BUY rating on Tanjung Offshore (Tanjung) and raised its fair value (FV) from RM1.67/share to RM2.60/share.

It said on Wednesday, Aug 18 the higher FV was based on higher forward fully diluted FY11F PE of 16x to reflect its greater conviction on the company after its visit.

'Our investment thesis centres around three themes: (1) Transformational growth from the entry of a 'well-connected' strategic investor - Ekuinas; (2) Restructuring of a loss making operation; and (3) Strong earnings upgrades from re-acceleration of domestic contracts,' it said.

AmResearch said backed by Ekuinas, Tanjung is set to further capitalise on Petronas' spending shift towards domestic capex and greater equipment localisation.

Thus far this year, Tanjung was awarded the largest offshore support vessel contracts vis-''-vis its peers.

'We are raising our estimates for FY10F-FY12F by 22% to 50% to RM44mil- RM74mil. This is to account for: (a) Expected extension to MOPU contract; (b) Order book replenishment of RM200mil-RM250mill a year for engineering equipment; and (c) Full year contributions from five new vessels delivered this year, bringing total vessels deployed to 16 in FY11F,' it said.

UNISEM - Tech stocks up after AmResearch reaffirms overweight on semicon sector

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

KUALA LUMPUR: TECHNOLOGY []-related stocks advanced in early trade on Wednesday, Aug 18 after AmResearch reaffirmed its overweight call on the semiconductor sector.

The research house said the recent sentiment selling was due to downgrade reports on US industry leaders which were namely AMD and Intel.

"Nevertheless, we hold firm to our conviction and believe that this sentiment is temporary, especially in light of recent announcements from SIA (Semiconductor Industry Association) and SEMI (Semiconductor Equipment Manufacturers Industry) ' the two most authoritative trackers on the sector," it said.

At 9.30am, MPI was up nine sen to RM5.99, Unisem rose one sen to RM2.15, Eng Teknologi added three sen to RM1.96 while JCY was up two sen to RM1.20.

According to SIA, the semiconductor industry increased sales by 7.1% in 2Q10 year-on-year, more than doubling the pace recorded at 2.8% in 1Q10. Meanwhile, SIA maintains a positive outlook for the rest of the year.

SIA data showed booking growth for June is up 10.4% month-on-month (m-o-m), a double up from May's number of 5.7% m-o-m.

Book-to-bill ratio stood at 1.19 times gaining pace from 1.13 times in April and May. More importantly, the ratio increase came in from an increase in booking as well as delivery, which signals that demand appetite has not slowed down SEMI also reported wafer shipments in 2Q10 increased by 7% against 1Q10, a sign for higher output along the supply chain in 3Q10.

AmResearch said the sector continues to enjoy a sweet spot from combination demand growth maintained strength, which is set to continue well in 4Q10 though constraints along the supply chain will hamper speed of order delivery, which may well gain manufacturers some relative pricing power.

"We reaffirm BUY on MPI (FV=RM8.90, 1.7 times price-to-book) and Unisem (FV=RM3.25, 1.9 times price-to-book). Our valuation is still below peak boom time 2.3 times price-to-book (observed in 2004-2005). Unisem stands to gain more from such constraints as its operation in China comes on stream as early as end of 3Q10," it said.

August 17, 2010

BSTEAD - Boustead submarine contract comes through

Stock Name: BSTEAD
Research House: ECMLIBRA

Boustead Holdings Bhd
(Aug 16, RM4.30)
Maintain buy at RM4.36 with target price of RM4.48
: Last Friday, Boustead Holdings subsidiary Boustead Heavy Industries Corp (BHIC) announced the receipt of the letter of award from the government for the contract to undertake In Service Support (ISS) for the two Royal Malaysian Navy's Prime Minister Class Scorpene Submarines. The contract is worth a total of '193 million (RM772 million) and RM532 million and is effective till Nov 30, 2015. The job will be carried out by Boustead DCNS Naval Corp, a JV between DCNS (40%) and BHIC (60%). Note that the contract sum differs slightly from the RM600 million that was originally announced in June 2009, as it includes other service components.

This is welcome news for the group considering that it has been more than a year since the letter of intent was received. In terms of earnings contribution, we have been guided that the first few years' contribution will be lower given that the submarines are still relatively new and will not require much service. As such, we expect this contract to contribute more significantly from 2012 or 2013 onwards.

We make no changes to our estimates with the inclusion of this job as we view that we have captured it in our forward earnings for BHIC. To note, margin expectation from the jobs is in the 5% to 10% range at earnings before interest and tax level.

Boustead is carrying out the job on a JV basis in order to get technology transfer from DCNS SA, the supplier of the twoScorpene submarines to the Royal Malaysian Navy. Judging from recent share price movement, there could be more in store for Boustead in the coming months. To recap, this is the second job that has been firmed up with the government so far this year. The first was the RM130 million order of fast interceptor craft in June. Therefore, we believe that the group could be closer to being awarded another six vessels to build for the navy soon, given that the sixth and final patrol vessel from the previous contract is to be delivered this month. The contract is expected to be sizeable, with each vessel costing up to RM1 billion, and will likely lead us to adjust our estimates upwards.

We maintain our buy call on Boustead Holdings for now with a RM4.48 target price (eight times historical PER pegging FY2011 EPS) in the interim despite'' Boustead trading close to our target price. We will be reviewing this when 2QFY2010 results are announced at the end of the month. ' ECM Libra Investment Research, Aug 16

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

TCHONG - OSK Research maintains overweight call on auto sector

Stock Name: TCHONG
Research House: OSK

Automotive sector
Maintain overweight
: Last Friday, DRB-Hicom (Not rated) announced a MoU with Volkswagen AG to jointly assemble Volkswagen cars at its plant in Pekan, Pahang. This comes two months after the car maker's talks on potential collaboration with Proton (buy; TP: RM5.67) were aborted. It is expected that three new models will be rolled out, with the first completely knocked down (CKD) to start production by the end of 1Q2011.

Just two months after talks on a potential collaboration with Proton were aborted, DRB Hicom last Friday announced the MoU with Volkswagen.

We are not surprised by the move as both DRB-Hicom and Volkswagen have been in discussion over the past two years. But priority was given to Proton on whether the national car maker would be interested in collaborating with the German automaker because its plant is underutilised.

In Proton's announcement in early June of the termination of the talks with Volkswagen, the company said it feared localising the Volkswagen (or rebadging it) may cannibalise its own vehicle sales.

As the deal now has been secured by DRB, we opine that Volkswagen's intention to make Malaysia its sedan exporting hub has been firmed up, especially with the inking of the deal with DRB as a last resort.

We understand that the Pekan plant has an estimated production capacity of up to 60,000 units per annum, and that it currently assembles the Suzuki and Mercedes marques.

Volkswagen is targeting to roll out three CKD models, with the first production to be rolled out by the end of 1Q2011.

It is uncertain which models are likely to be rolled out but, but we believe it could be the Golf, Beetle and Passat, as these are Volkswagen's top three selling models in Malaysia currently. As at June 2010, Volkswagen had sold 273 Gold GTIs, 96 Beetles and 90 Passat, with all three models combined representing as much as 68% of the total volume sold (total 668 units).

In terms of volume sales, within the passenger segment, Volkswagen ranks 16th among automakers. It is also worth mentioning that going forward, DRB-Hicom will also likely start the CKD assembly of the Audi (also part of the Volkswagen Group) by 2012, for which it intends to increase yearly sales from 700 to 1,000 units.

Will Volkswagen be cheaper then? Unfortunately for consumers, we think it will be quite a while before the Volkswagen becomes more affordable, as initial production rollout will have minimal localisation of content.

As an indication, when BMW Group announced that it would start local assembly of the BMW 523i, the entry-level F10 5-Series was priced at RM398,800 (completely built-up) when launched in May. The locally assembled model is only RM15,000 lower in price at RM383,800 (OTR, without insurance, with BMW service inclusive + repair), although it is in the higher excise duty tax bracket. This essentially means that one who is more mindful of quality would still potentially buy a CBU model, even if it costs RM15,000 more.

We see autopart players as the winners from the localisation of the Volkswagen production line in Pekan, especially those that have established strategic tie-ups or JVs with foreign players such as Bosch (EPMB, buy; TP RM0.75) and Autoliv (Hirotako, Not rated). Autoliv is a worldwide leading airbag supplier and Volkswagen is its third biggest customer, accounting for up to 12% of its total revenue.

Bosch, another global autoparts supplier through EPMB, will likely be making brake modules and components for Volkswagen.

While the deal secured by DRB is an opportunity missed for Proton in mitigating underutilisation of its plant, we see no impact on Proton as Volkswagen serves a niche in the mid-high end market. MBM Resources (buy; TP: RM4.57), which also owns a Volkswagen distributorship through Federal Auto, also stands to benefit from the higher sales contribution of the CKD Volkswagen over the longer term, although in the near term sales could slow down as some potential buyers may defer their purchases until a cheaper CKD model is rolled out.

Meanwhile, news reports have quoted Proton managing director Datuk Syed Zainal Abidin as saying that the government may decide on the possibility of merging the two national automakers (Proton and Perodua) by year-end.

Note that neither of the companies have an inkling what kind of consolidation the government may be proposing. We continue to believe that a consolidation would potentially be met with resistance from Perodua, which is currently in a more favourable position in terms of market share and its lucrative business model, on which the car maker would be unwilling to compromise.

Likewise, Daihatsu Motor Co Ltd, which is essentially Perodua's key technology partner (whose models Perodua re-badges) and a shareholder with significant management influence (with a 20% stake) in Perodua's decision making, is also heavily reliant on sales contribution from its Asian subsidiaries.

Perodua Manufacturing (Malaysia) and PT Astra Daihatsu (Indonesia), which together contribute some 20% of Daihatsu's revenue, are the second largest geographical contributors after Japan. We understand that Daihatsu's re-badging concept in Asia fetches higher operating margins relative to the domestic division in Japan.

Furthermore, issues such as integrating the two automakers' technologies and production lines will prove daunting and difficult in the near term. Total industry volume (TIV) for the month of July continued to be strong, with a year-on-year (y-o-y) growth of 13% and month-on-month of 8.3%.

Year-to-date July growth stood at 18.6%, and indications are that August numbers will be higher than July's due to the rush for delivery before the Hari Raya Aidilfitri exodus begins.

However, from September onwards, sales are likely to deteriorate due to the seasonally slower period given the number of festive seasons ahead, coupled by the year-end holiday period. We continue to maintain our TIV projection of 585,719 units, representing a y-o-y growth of 9% for 2010.

We continue to maintain our overweight call on the auto sector. Auto-parts makers EPMB (buy; TP: 75 sen) and Delloyd (buy; TP: RM3.90) also stand to benefit from higher output from both Perodua and Proton, with the former also possibly benefiting from the upcoming localisation of Volkswagen's models.

Our sector top pick is Tan Chong (buy; TP: RM5.73) given the stock's sound fundamentals and earnings trajectory, for which we expect revenue and earnings to grow at a CAGR of 27% to 35% over the next three years as it transforms into Malaysia's major non-national auto exporter to the region come FY2013-14. We also like Proton and MBM Resources (buy; TP: RM4.57) for national marque exposure, noting that both will experience vehicle sales growth on the back of a better operating landscape.

We are, however, still neutral on UMW (TP: RM6.62) in view of its ailing oil and gas division owing to the unfortunate delay in deploying the Naga 2 and Naga 3 jack-up drilling rigs. ' OSK Investment Research, Aug 16

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

WELLCAL - Wellcall eroding margins

Stock Name: WELLCAL
Research House: INTER PACIFIC

Wellcall Holdings Bhd
(Aug 16, RM1.28)
Maintain neutral at RM1.30 with target price of RM1.30
: We maintain our neutral recommendation with our target price at RM1.30 based on PER of 11 times and EPS of 12 sen. We believe the uncertain global economic prospects will put pressure on the company as 91% of its revenue is derived from the foreign market.

In addition, we reckon there could be negative impact margins due to the strengthening of the ringgit and escalating prices of certain locally sourced raw materials, particularly if these costs cannot be fully passed on to the customers if there is a two-to-three-month time lag.

3QFY2010 revenue rose by 10.8% quarter-on-quarter (q-o-q) to RM25.27 million. The recovery in demand for industrial rubber hose was sustainable, mainly supported by strong growth in revenue contributions from Europe and South America which grew by 49.4% and 45.7% respectively. Middle East and Australia/New Zealand are the overseas markets which registered negative growth at 7.9% and 7.7% respectively.

3QFY2010 profit before tax (PBT) increased by RM570,000 or 6.8% q-o-q to RM4.02 million. The increase in PBT was due to the one-off bonus payout to employees and foreign worker levy expenses amounting to approximately RM500,000 and RM234,000 respectively, incurred in the 2QFY2009.

The net profit margin dropped by 0.2% q-o-q to RM13.8 million despite revenue growth by 10.7%. We believe the drop was due to: (i) Gross margin was hurt by the strengthening ringgit against the US dollar as 91% of revenue contribution comes from exports; and (ii) Higher raw material costs compared with the preceding quarter. ' Inter-Pacific Research, Aug 16

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

MAS - MAS upgraded to 'neutral' by OSK

Stock Name: MAS
Research House: OSK

OSK says that Malaysia Airlines (MAS) second quarter (Q2) core earnings were below its and consensus estimates, attributed to higher fuel expenses and additional provisions in its books.

OSK noted that despite the earnings cut, it is upgrading MAS to "neutral" as it sees the company as being in a better position come financial year 2011.

It added tha pegging the counter at 18 times price earnings (PE) on financial year 2011 earnings, OSK derived a new target price of RM2.10 from RM1.50. - Reuters

MAS - MAS remains Outperform by CIMB Research

Stock Name: MAS
Research House: CIMB

KUALA LUMPUR: CIMB Research is maintaining its Outperform recommendation on MALAYSIAN AIRLINE SYSTEM BHD [] (MAS) with a RM3 target price despite the disappointing 2Q ended June 30, 2010

It said on Tuesday, Aug 17 that in 2Q, MAS suffered a core net loss of RM465 million, which took cumulative losses to 67% of its full-year forecast of RM1 billion loss.

'Although the 2Q loss was 42% lower year-on-year, it was more than double 1Q's loss which surprised us as we had anticipated a sequential reduction in losses. The culprits were catch-up maintenance and other lumpy provisions which more than offset higher cargo profits and the recovering passenger topline,' it said.

CIMB Research said as a result of these provisions, it cut its FY10-11 EPS by 10%-14% but retain its FY12 estimate.

'We also maintain our target price of RM3, pegged to an unchanged 6x CY12 core EPS. The stock remains an OUTPERFORM given the potential catalysts of a global yield recovery and a structural cost reduction from FY11 onwards. Investors should accumulate on any price weakness,' it said.

CIMB Research said MAS reported a net loss of RM535 million in 2Q mainly due to the RM217 million marked-to-market (MTM) losses as spot/forward oil prices dropped between March 31 and June 30, 2010, in contrast to the RM1.3 billion MTM gains posted last year when oil prices rose in 2Q09.

'What's behind the higher costs in 2Q? We were taken by surprise by the quarter-on-quarter cost increase of almost RM500 million, ahead of the RM250 million on-quarter revenue rise. The main component was the catch-up provision for maintenance of 18 leased aircraft which MAS intends to return to the lessor.

'MAS had underprovided for costs as spare parts and labour charges have since increased. Given that a further 13 leased aircraft may be similarly returned, another catch-up provision is likely in 2011. We have imputed this into our revised forecasts,' it said.

CIMB Research said MAS did very well in cargo, with 2Q revenue rising 73% on-year on the back of a 44% increase in demand and 21% rise in cargo yield. Cargo profits almost doubled on-quarter to RM49 million and turned around from the RM48 million loss last year.

It added that passenger yield anaemic so far. 2Q pax revenue only rose 15% on-year, with revenue per km demand up 18% on-year but pax yield still 2.2% lower on-yea. Over the past three quarters, MAS's pax yield has barely budged from its lows whereas SIA's yield has recovered a cumulative 19% due to its higher business mix.

'MAS will make yield recovery a more urgent task for 2H. It underperformance vis-''-vis SIA is not unexpected and does not dampen our enthusiasm for the fleet renewal story,' it said.

August 16, 2010

JTINTER - Winston's continued growth fires up JT International

Stock Name: JTINTER
Research House: INTER PACIFIC

JT International Bhd
(Aug 13, RM5.65)
Maintain outperform at RM5.60 with target price RM6.20
: We reiterate 'outperform' with our target price at RM6.20 based on our discounted cash flow valuation with weighted average cost of capital of 8%. We continue to like JTI given its (i) growing market share; (ii) resilient quality, cash nature of its business; (iii) zero gearing; and (iv) high dividend yield of 5.4%. However, our key concerns are: (i) expectation of higher excise duty in the upcoming Budget 2011; and (ii) enforcement will remain a challenge with higher illicit trade and contraband.

JTI's annualised 1HFY10 net profit of RM71.3 million surpassed both our estimates and consensus, which accounted by 57.4% and 60% respectively. As expected, JTI declared a first interim dividend of 15 sen per share during the quarter under review. This is on track to meet our full year gross dividend per share estimate of 30 sen per share which translates to a yield of 5.4%.

In 2QFY2010, net profit swelled by 12% year-on-year on the back of a 3.3% y-o-y increase in revenue to RM298.5 million, mainly attributed to improved sales volume driven by its value-for-money (VFM) Winston label, which expanded its market share by 1.2 percentage points to 10.7%, and higher excise-led price increase led by JTI's lower marketing and operating expenditure. Adding on, the earnings before interest, tax, depreciation and amortisation (Ebitda) margin was up 0.5 percentage points 16.2% y-o-y from 15.7% in 2QFY2009. However on a q-o-q basis, both net profit and revenue slipped by 11.1% and 4.7% respectively, mainly due to lower sales volume and higher marketing expenditure.

JTI reported that overall tobacco industry volume contracted by 1.1% y-o-y in 1HFY2010. Decline in total industry volume was due to the continued moderate growth of illicit trade from 38.7% in August 2009 to 37.1% by end-2009. However, JTI's market share was elevated to 19.6% in 1HFY2010 from 18.4% in 1HFY2009. We note that Winston's continued growth further strengthened JTI's position in the VFM segment, previously dominated by rival British American Tobacco's Pall Mall. Also, given the recent post-excise hike, it saw consumers' downgrading from the premium segment to the VFM segment. ' Inter-Pacific Research, Aug 13

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

CENTURY - Century Logistics a record first half

Stock Name: CENTURY
Research House: OSK

Century Logistics Holdings Bhd
(Aug 13, RM1.72)
Maintain buy at RM1.62 with higher target price of RM2.24 (from RM2)
: Century recorded its highest semi-annual revenue and earnings (in 1HFY2010) of RM75 million and RM7.6 million respectively, which were higher year-on-year (due to the low base in 1HFY09) as well as year-to-date and quarter-on-quarter (revenue q-o-q: 26%; earnings q-o-q: 14%). With 1HFY10 top and bottom line numbers already representing 51% to 53% of our and consensus' full-year forecast, we deem the numbers in line. On a q-o-q basis, margins contracted slightly owing to higher costs of goods from the assembly segment.

For 2Q, revenue from all three segments (OEM, third party logistics and oil & gas) was predominantly driven by higher sales from the OEM assembly division (which manufactures TV sets) ahead of the FIFA World Cup in South Africa (q-o-q: 152%, y-o-y: 132%, YTD: 78%).

On the logistics side, demand for trade activities continued to be driven by the larger number of shipments handled for its new and current customer base, while O&G logistics continued to see healthy turnover for ship-to-ship transfer, thanks to spillover demand from Singapore, Asia's largest bunker market.

For 2H, management is taking a prudent stance to its upcoming expansion plans in anticipation of slowing growth, notably at its logistics and assembly division. Management's immediate focus is centred on cost cutting, optimisation of its own warehouses and setting up a new production line (from which capacity will increase to 50% by end-2010).

With the results in line with our numbers, we continue to maintain our earnings estimates. We have rolled over our valuation base to reflect FY2011 earnings, as we continue to peg the counter at six times PER, which is a slight discount on the sector PER of seven times, after taking into consideration the dilution effect from the exercise of its warrants. This gives a fair value of RM2.24 (from RM2), which provides an attractive net dividend yield of 5% (FY2010F) and 6.2% (FY2011F). Maintain 'buy'. ' OSK Research, Aug 13

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

UMW - UMW oil & gas division's woes

Stock Name: UMW
Research House: KENANGA

UMW Holdings Bhd
(Aug 13, RM6.33)
Maintain hold at RM6.30 with reduced target price of RM6.10 (from RM6.60)
: NAGA 2 and NAGA 3 are expected to negatively affect UMW's earnings performance as they remain warm-stacked. If not deployed, the two rigs will incur substantial operating costs. UMW has been unable to secure a contract at a reasonable rate since the rig market is currently facing an oversupply, pushing utilisation down in the offshore market rig segment, leading to downward pressure on day rates. However, NAGA 1's contract (which is due to expire soon ) is likely to be extended at possibly higher day rates.

Wuxi Seamless Oil Pipe Company (WSP) has been affected by duties in the US, the moratorium on exploration in the Gulf of Mexico and unfavourable market conditions. The countervailing and anti-dumping policies imposed on WSP's seamless pipes, coupled with the decline in oil prices are likely to continue to negatively affect its overall profitability. The US accounted for 34.3% of WSP's net revenue in FY2008; it now accounts for only 9% of its net revenue. Moreover, its domestic sales have declined as well due to oversupply and a decrease in average selling prices. Profit turnout in WSP in FY2010 is highly unlikely, and we expect it to register a loss of US$40 million and a profit of US$5.8 million in FY2011.With weaker offshore rig fleet utilisation in the market, we have lowered our'' FY2010 net forecast by 6.23% to RM452.5 million as day rates are under tremendous downward pressure. We believe the demand for jack-up rigs will be relatively flat for FY2010. We do not expect a profit turnout by UMW's O&G division for FY2010 as outlook remains bleak for WSP, and NAGA 2 and NAGA 3 jack-up rigs are not expected to be in operation until at least 1Q2011.

We expect the automotive and M&E division to buoy earnings despite the negative outlook for UMW's O&G division. The expected losses in the O&G division should be mitigated by the company's'' solid and sustained performance in the automotive division, supported by favourable currency movements, higher economies of scale on increased sales volume, improving macroeconomic factors and robust demand on new facelift and variant models from Perodua and Toyota. We are revising upwards our FY2010 sales forecast to 91,000 units (Toyota) from 85,915 units and 185,000 (Perodua) from 165,942 units originally, attributable to strong sales performance in 1H2010.

Maintain 'hold' with a revised target price of RM6.10 (previously RM6.60) based on 10 times PER for the automotive division and 10 times for the O&G division. ' Kenanga Investment Research, Aug 13

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

PETRA - Petra Perdana prudent move to cancel vessel

Stock Name: PETRA
Research House: ECMLIBRA

Petra Perdana Bhd
(Aug 13, RM1.38)
Maintain hold at RM1.35 with revised target price of RM1.26 (from RM1.20)
: Petra Perdana announced last Thursday it is cancelling the order of one AHTS (anchor handling tug and supply, 12,240bhp vessel) from Nam Cheong Dockyard (the group's new major shareholder). The US$8.85 million (RM28.3 million) deposit it paid will therefore be refunded to Petra. The group says the cancellation is in the best interests of the company in view of low fleet utilisation and the possibility of prolonged low drilling activities. Following this, a change was announced in the group's utilisation of proceeds for the private placement. Part of the private placement was meant to fund the delivery of this vessel. With the cancellation, RM19.78 million of the proceeds will now be earmarked for working capital purposes.

Given the group's tight cash flows this year, we see the move as a prudent one. Taking on more vessels would only stress the group financially no matter how it is financed. Recall that Petra is suffering this year as they try their best to meet operating lease payments, while AHTS fleet utilisation at some 65% is not conducive to profitability. A new vessel sitting idle would only eat into earnings.

Given our assumption that vessel was to be funded off balance sheet and achieve only 65% capacity utilisation at a low charter of US$1.70 per bhp per day, we were forecasting that Petra was going to make a loss on this vessel in FY2011. Removing the vessel from our model actually turns out to be earnings enhancing for the group in FY2011 (+5%) and very slightly negative for FY2012 (-0.3%).

For now, the group's rights issue is still pending so more earnings dilution is to come. We continue to see a difficult operating scenario for Petra and still forecast only a breakeven situation for FY2010. While FY2011 is looking much better for the group, we choose to stay cautious at this time as there could be a downside to our estimates should charter jobs not be awarded in time. We maintain our 'hold' call on the group with a revised target price of RM1.26, is based on an 11 times historical average PER pegged to FY2011 EPS (previously RM1.20). ' ECM Libra Investment Research, Aug 13

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

BHIC - AmResearch: Maintain Hold on BHIC, unchanged FV of RM4.40

Stock Name: BHIC
Research House: AMMB

KUALA LUMPUR: AmResearch is maintaining its Hold rating on BOUSTEAD HEAVY INDUSTRIES CORP [] Bhh (BHIC) with an with an unchanged fair value of RM4.40/share, based on a FY10F PE of 12x at a 10% premium to the stock's three-year average of 11x.

In a research note issued on Monday, Aug 16, the research house said this implied a 20% discount to its unchanged Sum-of-Parts valuation of RM5.50/share.

BHIC announced last Friday its 60%-owned Boustead DCNS Naval Corp Sdn Bhd was awarded a contract from the government to provide in-service support maintenance services for two Scorpene submarines.

'Contract value is worth RM1.3bil comprising of 193 million euros (RM791mil) for procurement of material and equipment and RM532mil for local content. This is higher than the earlier indicative 'ceiling price' of RM600mil mentioned in the Government's letter of intent back in June last year,' it said.

AmResearch said this was in line with its forecast assumption of RM265mil annually as highlighted in its earlier reports.

'As the six-year contract is expected to expire in Nov 30, 2015, we expect the recognition of 10-months of progress work starting on Dec 1, 2009 to materialise in 3QFY10,' it said.

CBIP - AmResearch maintains Buy on CBIP at RM3.31

Stock Name: CBIP
Research House: AMMB

KUALA LUMPUR: AmResearch is maintaining its Buy call on CB INDUSTRIAL PRODUCT HOLDING [] Bhd (CBIP) at RM3.31 with a fair value of RM3.85.

'We maintain a Buy on CBIP for its undemanding valuations and proven track record in the mill CONSTRUCTION [] business,' it said in a research note issued on Monday, Aug 16.

AmResearch said The Edge Weekly reported that CB Industrial Product Holding Bhd (CBIP) may be selling its PLANTATION [] assets.

Currently, CBIP's plantation assets are held by associates, a joint venture and a subsidiary. CBIP's plantation landbank amount to about 9,656 ha (joint venture's and subsidiary's stake).

'We view the proposed disposal of plantation assets positively. Although CBIP would lose earnings contribution from the plantation division, which is a source of recurring income, we believe that it would allow the group to be more focused on its mill construction business,' it said.

AmResearch said CBIP would also be selling its plantation assets at a period when CPO prices are high ' currently hovering between RM2,600/tonne to RM2,700/tonne.

The research house said with the proceeds from the disposal of the plantation assets, CBIP would be able to expand the production capacity of its mill construction business. This would help compensate for the loss in earnings of the plantation division.

Currently, CBIP builds between 12-15 mills a year. The plantation division is expected to account for 30%-40% of FY11F EBITDA.

AmResearch estimates the value of the plantation division at RM235mil based on FY11F PE of 8x on the subsidiary's earnings. From a replacement cost perspective, the plantation division (only subsidiary's and joint venture's stake) could fetch a value of RM245 million based on landbank value of RM35,000/ha. CBIP's investment cost in the associates was RM49 million.

The price of greenfield plantation landbank in Sarawak is about RM5,000/ha to RM7,000/ha. The price of prime landbank in Sabah is more than RM60,000/ha presently.

'We believe that the buyers may be plantation companies in Sarawak such as SARAWAK OIL PALMS BHD [], TRADEWINDS PLANTATION BHD [] or even timber companies with plantation operations like JAYA TIASA HOLDINGS BHD [],' it said.

PENERGY - OSK Research maintains Neutral on Petra Energy

Stock Name: PENERGY
Research House: OSK

KUALA LUMPUR: OSK Research maintains Neutral on Petra Energy and upgraded its target price for Petra Energy to RM1.44 (previously RM1.15) based on a higher PER valuation of 10x (previously 8x). However, it is not changing its earnings forecast.

The research house said the upgrading of the target price was based on the improved outlook for brownfield services providers.

'This is on the basis that: 1) greater emphasis is being placed on environment concerns, especially after the BP oil spill; 2) modern TECHNOLOGY [] has to date made further drilling possible below the rock level in the sea to extract O&G, and 3) we gather from our sources that Petronas and its PSC contractors will continue spending a portion of their capex on rejuvenating existing and old platforms,' it said in a research note issued on Monday, Aug 16.

OSK Research said its valuation for Petra Energy based on 10x PE is also higher than that of Petra Perdana at 9x as it is more positive on the group's provision of brownfield services rather than vessel chartering based on the present O&G operating environment.

'In fact, this is also reflected in its current share price, whereby Petra Energy is trading at FY11 PE of 10x compared to Petra Perdana at FY11 PE of 7x,' it added.

Last Friday, Petra Energy announced that it had received three letters of awards from Petronas Carigali to provide hook-up and commissioning services to 3 oilfield projects, which include the PL-353, PL-357 and PL-70 SKO pipeline rejuvenation project, ERB West Development project (Phase I) and Phase II for the Betty Revisit 4 project.

OSK Research said works on all these three jobs began between April and July 2010 and are expected to last until end-2010. Cumulatively, all these three jobs are worth about RM26.4 million.