September 10, 2010

MUHIBAH - Muhibbah secures RM56m Penang Port crane job

Stock Name: MUHIBAH
Research House: KENANGA

KUALA LUMPUR: Muhibbah Engineering Bhd has accepted a contract from Penang Port Sdn Bhd for the design, assembly and delivery of eight cranes for about RM56 million.

The company said on Thursday, Sept 9 the rail mounted gantry cranes would be delivered over 26 months.

"The contract is expected to contribute positively to the earnings and net assets of Muhibbah group for the current and future financial years," it said.

In a recent report, Kenanga Investment Bank research said the outlook for Muhibbah "is bright provided Muhibbah can collect its receivables from Asian Petroleum Hub otherwise provisions would have to be made for doubtful debts".

Excluding the Penang Port contract, Muhibbah had RM2.53 billion order book remaining as at June 30, 2010 made up of RM1.6 billion in infrastructure, RM450 million in cranes and RM484 million in ships.

Kenanga Research said Muhibbah continued to be active in bidding for projects and just won a RM124.4m contract to construct an offshore marine centre in Tuas, Singapore.

"We have lowered our FY10 and FY11 net profit by 17% and 11% to RM46m and RM52.1m respectively factoring in slower recognition of profit from the Asia Petroleum Hub project."

"Maintain BUY with a target price of RM1.35 (previously RM1.80) using a sum of parts RNAV. Rerating catalyst for the stock is the payment of its outstanding receivables. The stock is only trading at a low PER of 8x and 7x for FY10 and FY11," it said.

TSH - TSH rises on HwangDBS upgrade

Stock Name: TSH
Research House: HWANGDBS

TSH Resources Bhd, an oil palm planter, rose 1 per cent to RM1.94, its highest close since August 27.

The stock's fair value was raised to RM2.80 from RM2.10 at HwangDBS Vickers Research Sdn Bhd which increased its earnings forecasts in a report today. - Bloomberg

September 9, 2010

WASEONG - RHB Research maintains Underperform on Wah Seong

Stock Name: WASEONG
Research House: RHB

KUALA LUMPUR: RHB Research Institute has reiterated that while it is generally positive on the long-term prospects for Wah Seong Corp Bhd, but FY10 looks to be a significantly weak year and re-rating catalysts are likely to only emerge in FY11.

"Post earnings revision, we revise our fair value down to RM1.79/share (from RM1.89/share) based on an unchanged 13 times PER. We thus maintain our Underperform call on the stock," it said.

RHB Research said on Thursday, Sept 9 it recently met up with management and came away with a bleaker outlook for the rest of FY10.

Current oil and gas contract flows, especially for fabrication jobs, remain slow even though new development projects appear to be on the table.

"We thus suspect 3QFY10 earnings will again be weak and potentially similar to 2Q results," it said.

RHB Research said it trimmed its FY10-12 net profit estimates again, this time by 17.9%, 5.1% and 3.9% respectively.

"Our cuts are extensive on FY10, as we expect it to be a very weak year. Our cuts are mainly to the pipecoating/ pipe-manufacturing and engineering division's revenue. We have also eased the FY11-12 engineering division's PBT margins assumptions to 17% and 19% respectively (from 19% and 21%) as it could take more time for the division to recover.

"However we upgraded the pipe-coating division's FY10-12 PBT earnings to 19%, 20% and 21% respectively, from 18%, 19% and 20% previously as the management has guided for better margins from the Gorgon project," it said.

GAMUDA - OSK Research upgrades Gamuda to Trading Buy, TP RM4

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

KUALA LUMPUR: OSK Research said it recently met up with Gamuda to discuss the proposed mass rapid transit (MRT) for Kuala Lumpur and saw strong incentives for the MRT to be implemented,.

It said on Thursday, Sept 9 that consultants are currently studying its feasibility and the results should be known by month-end.

"We see strong incentives for the MRT to be implemented, driven by the rakyat's needs and political will. Securing the tunneling portion would enhance Gamuda's value by 28 sen a share, which we think is likely. We continue to see the MRT generating more positive news. Upgrade to TRADING BUY," it said.

OSK Research said while it had not factored in any earnings impact from the MRT, it revised upwards its FY11-12 forecasts by 7%-13% by incorporating higher margins for its existing jobs and stronger property sales, which were the main takeaways from our recent meeting.

"Our revised SOP (sum of parts) based TP of RM4 implies a FY11 PER of 20.5 times, still below its historical average of 22x forward PER. Continued positive news on the MRT should serve to further rerate the stock. The year before the Double Track job was awarded, Gamuda was trading at an average forward PER of 27.1 times," it said.

ENG - OSK Research revises downwards Eng Tek earnings forecast

Stock Name: ENG
Research House: OSK

KUALA LUMPUR: OSK Research has revised downwards the earnings forecast for Eng Teknologi (Engtek) after the management guided for a sequential profit before tax drop of 22% to RM10 million for 3QFY10 while 4QFY10 PBT is expected to come in at RM11 million.

"Based on the guidance, we are revising downwards our FY10 and FY11 earnings forecasts by 9%. Our fair value on the stock is accordingly revised lower," it said. Its target price was RM1.73 compared with its previous RM1.90.

OSK Research said in line with the cautious 3Q10 outlook from Western Digital, Engtek's management expects the company's 3QFY10 revenue to contract by 3.5% q-o-q before rebounding by about 8% q-o-q in a seasonally strong 4QFY10.

However, due to the stronger RM against US dollar, 3QFY10 PBT is expected to drop more than revenue, by about 22% q-o-q.

"Management now expects 4QFY10 PBT to come in at RM11m compared with RM10m in 3QFY10. This means that Engtek is on track to record its third consecutive contraction in q-o-q earnings, which are also at risk of shrinking further in 4QFY10," it said.

LIONIND - AmResearch maintains Buy on Lion Industries

Stock Name: LIONIND
Research House: AMMB

KUALA LUMPUR: AmResearch is maintaining a Buy call on Lion Industries Corp Bhd (Lion Ind) - with fair value lowered from RM2.35 a share to RM2.30 a share based on an unchanged 10% discount to its revised sum-of-parts value of RM2.6 a share.

It said on Thursday, Sept 9 that near-term, sequential earnings are likely to weaken as steel demand contracted during the June-July period.

"We expect margins for its Hot Briquetted Iron (HBI) division to be compressed in 1QFY11," it said.

AmResearch said Lion Industries believes its earnings outlook should improve moving into 2HFY11.

On demand side, there have been tentative signs of a rebound in regional steel orders - especially from Vietnam. It also said Lion Industries' HBI operations should get a kick from rising scrap prices by 1H 2011.

"We project Lion Industries' FY12F earnings to turnaround (+33% YoY) at RM388 million against an estimated 3% contraction in FY11F. Valuations remain attractive at FY11F-12F PEs of only 3x-4x against a net gearing position of 17%. There is also potential room for capital management initiatives once the balance RM60 million in LICB bonds are fully paid by year-end," it said.

September 8, 2010

NAIM - AmResearch supports Naim's SOGT project contract

Stock Name: NAIM
Research House: AMMB

Naim Holdings Bhd
(Sept 7, RM3.39)
Maintain buy at RM3.42 with fair value of RM5.09
: The Edge (Issue 822, Sept 6-12) reported details of the Sabah oil and gas terminal (SOGT) project - awarded to a joint-venture (JV) between Samsung Engineering Co Ltd (Samsung) and NCSB Engineering Sdn Bhd (a unit of Naim) last week.

The report said that the bid submitted by a partnership between China's Petroleum & Chemical Corp (Sinopec) and Shapadu Energy & Engineering Sdn Bhd (Shapadu) is believed to have been about US$150 million (RM469 million) lower than the winning bid.

In a written reply to The Edge, Naim's management acknowledged that the Samsung-Naim JV bid was not the lowest. However, it said it believed the JV's superior track record and superior specifications were key to landing this job - a view we share.

Naim's management confirmed the group's 30% share of the JV, whose works would mainly involve the construction of support infrastructure for the SOGT.

However, we do not think the SOGT job will be a precursor to Naim making a big push for more O&G jobs in the near future. Rather, any further expansion into the O&G space would be undertaken via its associate Dayang Enterprise Bhd.

More importantly, we believe the rising proliferation of O&G jobs would be positive for Naim's property developments in Sarawak over the mid to longer term -including in Bintulu. Part of the gas received by the SOGT would be channelled into Petronas' Liquefied Natural Gas (LNG) complex in Bintulu via the 522km Sabah Sarawak Gas Pipeline.

To recap, on Aug 30 the Samsung-Naim JV was awarded the contract by Petronas Carigali Sdn Bhd. It is worth US$766 million and encompasses engineering, procurement, construction and commissioning (EPCC) works for the SOGT. After some delays, fresh tenders for the project were given earlier this year.

In our company update on Naim dated Aug 30, we mentioned that there were up to six firm bidders for this coveted job. We now learn that other contenders were pairings of Dialog Group-Technip SA and Kencana Petroleum Bhd-Mitsubishi Heavy Industries Ltd. - AmResearch, Sept 7

This article appeared in The Edge Financial Daily, September 8 2010.

UMW - Hwang DBS Vickers Research keeps Buy on UMW, TP RM7.40

Stock Name: UMW
Research House: HWANGDBS

KUALA LUMPUR: Hwang DBS Vickers Research is keeping its Buy call on UMW Holdings (RM6.67; Buy; Price Target: RM7.40).

The research house said on Wednesday, Sept 8 that it expected a negligible downward impact on FY10F forecast net profit following the one-month delay in the signing the US$183 million charter for its Naga 2 jack-up rig.

The contract lasting 3.7 years, consists of seven firm wells and 13 option wells. This has a negligible downward impact of less than 0.5% on its FY10F forecast net profit, "because we have factored in only one quarter (4Q10) of contribution in our FY10F projection for UMW".

This delay would not affect FY11F and FY12F projections. While UMW intends to sign the agreement by the end of this month, it would take about one month to prepare the Naga 2 rig, and to mobilise it to the designated location.

"Hence, revenue would likely to start in Nov10, at the earliest; with full-year contribution in FY11F.

Hence, we are keeping our forecasts, BUY call on UMW and sum-of-parts price target of RM7.40. The stock offers potential capital appreciation of 11% plus 3% net dividend yield," it said.

NESTLE - Nestle picking up momentum

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

Nestle (Malaysia) Bhd
(Sept 7, RM41.20)
Maintain buy at RM41 with target price of RM43.86
: While Nestle's lack of trading liquidity is lamentable, investors should also take notice that similar, if not more attractive, growth opportunities elsewhere in the consumer sector will abound if prospects are as rosy for this large-cap consumer sector bellwether.

We reiterate our "buy" call and discounted cash-flow (DCF)-based RM43.86 target price on earnings growth of 10% to 14% per year in 2010 to 2012.

As our market-contrarian pick, Nestle is already 3% higher after just five working days of trading. Allied to its high quality earnings, an upward re-rating on Nestle's earnings growth potential is certain to excite investors who can accept the lack of trading liquidity in the shares.

Both export and local sales returned to positive growth territory in the 12-month period up to 2QFY2010. For export sales especially, it was the first positive growth registered since 2QFY2009, when the impact of the global recession coincided with the unveiling of new export capacity. Since 2002, Nestle's export sales accounted for 14.9% to 22.3% of total sales in the first six months of each year.

Recall that a key reason for the general lack of enthusiasm over Nestle was its inability to translate over RM500 million in capex spent over 2007 to 2009 into increased export sales in 2009. The quick recovery in export sales in 1HFY2010, however, resulted in its highest ever contribution to Nestle's 1H sales with a contribution of 23.6%, an increase of 1.3% points or RM55.6 million.

A focal point of Nestle's exports continues to be in neighbouring Asean. The favourable general economy in Indonesia, Philippines, Thailand and Singapore (in descending order of population size) point to bright prospects for exports in the forecast period.

Nestle's ready-to-drink (RTD) Milo and Nescafe lines, and its regional soluble coffee plant (upgraded at a cost of RM110 million) have been especially busy. Added capacity at the latter also enabled the entry of a plethora of premixes such as Nescafe Tarik and Nescafe Ipoh White Coffee which have refreshed its line-up in the local sales channel. There is yet more room for growth in beverages.

We notice that non-raw materials expenses ballooned in 2HFY2009 and 1HFY2010, perhaps as Nestle intensified advertising or trade marketing. This affords Nestle nearly RM200 million more in spending efficiency over 2HFY2010 to match 1HFY2010's record net profit of RM239 million.

Further, Nestle's tax rate of 20% in 2009 and 17% in 1HFY2010 is guided to be sustainable, but this is not reflected in our forecasts yet. - Maybank IB Research, Sept 7

This article appeared in The Edge Financial Daily, September 8 2010.

TENAGA - AmResearch maintains Buy on Tenaga, FV RM10

Stock Name: TENAGA
Research House: AMMB

KUALA LUMPUR: AmResearch reiterated its BUY call on TENAGA NASIONAL BHD [] (Tenaga) with an unchanged fair value of RM10 a share, based on a 10% discount to DCF of RM11.10 a share.

On Tuesday, Sept 7 Tenaga announced the signing of three small renewable energy (RE) agreements to purchase electricity for 21 years which will increase the group's RE capacity by 20.5MW or 23% to 109MW.

The annual purchase value of RM38 million translates to a unit rate of 21 sen/KWh, comparable with the RE agreements which Tenaga signed in the past.

"The cost of purchasing RE is higher compared to coal generation, estimated at 18-19sen with coal prices at US$90/tonne. But the impact to Tenaga is insignificant as the group's RE capacity represents only 0.5% of peninsula Malaysia's installed capacity of 21,817MW," it said in its report on Tenaga on Wednesday, Sept 8.

Valuation-wise, Tenaga trades at an attractive CY11F PE of 11x vis-vis a 3-year average of 14x.

AmResearch said it continued to like Tenaga due to the following:

(1) Stronger power consumption growth - a 1-ppts increase could lead to a 3% earnings enhancement;

(2) A strengthening ringgit which enhances earnings by 12% for a 10% ringgit appreciation;

(3) Improving economies of scale with declining power reserve margin - currently at 42%;

(4) Possibility of an electricity and gas tariff adjustment towards the year-end;

(5) Higher dividend payout; and

(6) Return of foreign investors, as their holdings rose from 8.5% in January 2010 to 11.2% in July this year.

EVERGRN - Timber sector shows recovery signs on Japan housing

Stock Name: EVERGRN
Research House: RHB

Timber sector
Upgraded to overweight
: Given the improving outlook for the timber sector where average selling prices have been rising since the start of the year on the back of steady demand from Japan (mainly plywood) and India (mainly logs), we are now upgrading our sector call to overweight from neutral.

We maintain our outperform calls on WTK Holdings Bhd, Jaya Tiasa Holdings Bhd and Evergreen Fibreboard Bhd, and our market perform call for Ta Ann Holdings Bhd. Our top pick for the sector is Evergreen with a fair value of RM2.57.

We like Evergreen as we expect earnings to remain strong due to higher sales volume, higher average selling prices, and cost savings arising from improved efficiency. The commissioning of its Indonesia operations, which we think have started in July 2010, would provide further upside to FY2010 earnings.

Latest July 2010 statistics for Japan housing starts saw a better-than-expected improvement (+4.3% y-o-y and +0.1% m-o-m to 68,785 units), which brings it to two consecutive months of growth (June 10 +0.6% y-o-y) and signifies that Japan's housing recovery may start gaining pace soon.

This is supported by the number of building permits issued, which has been increasing for the eight months up to the latest May 2010 data (+8.7% y-o-y). Going forward, we expect further improvement in Japan housing starts to gain momentum and improve the overall sentiment for the timber sector.

According to the Japan Lumber Report (JLR), tropical log inventories in Japan are dropping due to limited log production in Sabah and Sarawak as a result of poor weather conditions. While overall demand for plywood is slow, the report specifically highlighted that the consumption of tropical plywood has been steady, and thus Japanese plywood mills are "hungry' for tropical logs.

We highlight that log selling prices currently achieved by all timber players (of US$165-US$210/m3 due to different quality and size) under our coverage have generally experienced a rising trend from the start of this year, with exports mainly to India.

The underlying rising trend for logs price bodes well for the timber sector, more so with the recent one-year extension of the 50% export quota by the Sarawak Forestry Department.

Some of the downside risks include lower-than-expected improvement in Japan's housing starts and price discounting from neighbouring countries with lower cost of production, resulting in lower exports from Malaysia to its major export markets. - RHB Research, Sept 7.

This article appeared in The Edge Financial Daily, September 8 2010.

KGB - Kenanga initiates coverage on Kelington with TP of RM1.04

Stock Name: KGB
Research House: KENANGA

Kelington Group Bhd
(Sept 7, 78 sen)
Initiating coverage at 76 sen with a buy call at target price of RM1.04
: At 76 sen, Kelington is currently trading at a price-to-earnings ratio (PER) of 6.7 times for FY2010, which is higher than its initial public offering (IPO) level at 53 sen. We are fair valuing Kelington at RM1.04 based on eight times PER of its FY2011 earnings per share (EPS) of 13 sen.

Kelington is principally engaged in providing engineering services and general trading, specifically in the provision of ultra-high purity gas (UHP) and chemical delivery systems solutions which range from system design, installation, equipment, control, instrumentation, quality assurance, servicing and maintenance of foundries (semiconductor/FPD).

The group recorded a relatively stable revenue and net profit at a four-year compound annual growth rate (CAGR) of 32% and 41%, respectively. Geographically, its single largest revenue contributor is Malaysia (37%), followed by China (34%) and Taiwan (28%) as at FY2008. Its net margins of 11% are due to strong revenue contribution from China and improving project margins.

Due to its unique position as a UHP gas integrator, Kelington is riding on growing demand from China and India. Its earnings will largely depend on capex spending by wafer manufacturers, which is strongly correlated to global consumer demand and economic conditions. Its UHP delivery system works include the design, fabrication and installation as well as service and maintenance.

Since its debut, Kelington has completed Malaysia's largest wafer fabrication plant in Kulim, Kedah, by SilTerra, one of the world's largest wafer fabricators. It has also made its first successful venture abroad in Taiwan for HannStar Display, a thin film transistor liquid crystal display (TFT-LCD) manufacturer, followed by a number of orders from other reputable customers from China and Taiwan.

Its 2QFY2010 net profit of RM2.3 million was 9% higher year-on-year, coming within consensus forecast. We believe due to seasonality in the semiconductor business, Kelington's 2HFY2010 earnings will peak when more capex is spent in the wafer industry, especially in China and Taiwan.

Going forward, we are cautious on the cyclical electrical and electronics (E&E) sector due to economic uncertainties. We believe that the technology sector will take a breather in the short term as uncertainties over the global economic recovery will negatively affect consumer sentiment.

The key risks to our recommendation are potential delays in capex spending in the semiconductor industry, slower recovery in demand for wafers and LCDs and a longer-than-expected economic recovery. - Kenanga IB Research, Sept 7

This article appeared in The Edge Financial Daily, September 8 2010.

TGOFFS - Hwang DBS Vickers Research downgrades Tanjung Offshore to Hold

Stock Name: TGOFFS
Research House: HWANGDBS

KUALA LUMPUR: Hwang DBS Vickers Research said since its last update dated July 6, Tanjung Offshore's share price had jumped 44% buoyed by high expectations of what Ekuiti Nasional Bhd (Ekuinas) could bring to the fold.

It said on Wednesday, Sept 8 that Tanjung Offshore's comparable peers share prices rose an average of only 3% over the same period.

"While Tanjung Offshore is poised for strong earnings turnaround this year, we believe investors may have jumped the gun on its growth prospects. We do not expect significant awards in the near term, only clearer visibility of contracts in the pipeline," it said.

HDBSVR said Tanjung Offshore had indicated there could be several sizable tenders, "but we understand these jobs may not materialise sooner than 2H11".

The research house said it believed FY11 growth would still be largely driven by charter contracts secured by Tanjung Offshore's newbuilds this year, as well as contract wins from its engineering division in 2H10.

"We raised our target price to RM1.60/share after raising target multiple to 12x FY11F earnings, based on Tanjung Offshore's normalised historical valuation. But at current price, valuation seems stretched at 13.5x PE (diluted EPS) against peers' average of 9.1x. Hence, we downgrade Tanjung Offshore to Hold," it said.

PETRA - OSK Research: Petra Perdana stock to watch only in 2011

Stock Name: PETRA
Research House: OSK

KUALA LUMPUR: OSK Research said during a recent meeting with PETRA PERDANA BHD []'s management over the disappointing 2QFY10 results, it gathered that prospects in the upcoming two quarters would remain unexciting.

"We view Petra Perdana as a stock to look at in 2011 rather than now as we expect O&G activities to have cranked up by then," it said on Wednesday, Sept 8.

OSK Research said currently, the company is still inflicted with unfavorable charter rates and low vessel utilisation due to supply overwhelming demand.

The research house said it was downgrading the FY10-11 earnings and likewise its call from Buy to Neutral. Its revised target price was RM1.21.

BIMB - S&P lifts BIMB's call to 'buy'

Stock Name: BIMB
Research House: S&P

Standards and Poor's Equity Research Services (S&P) has raised BIMB Holdings Bhd's call to "buy" from "hold" and the 12-month target price to RM1.50 from RM1.40 on valuation grounds.

In a statement today, S&P said the target price included the group's 68 per cent share of the market value of Syarikat Takaful Malaysia Bhd and a forecast of financial year 2010 dividend.

It said the price-to-book (P/B) multiple remained at 33 per cent discount to the average 2011 P/B valuation for the banking sector.

"This is justified given BIMB's smaller market capitalisation, weaker relative asset quality, less dynamic growth track record, holding company discount and low free float," it said.

S&P said its analysis and forecasts carried a high degree of uncertainty than normal as it had been unable to meet with BIMB's management to obtain additional information since initiating coverage on the stock.

"The risk to our recommendation and target price include higher-than-expected provisioning, resulting from asset quality deterioration due to a weakening of the domestic economy," it said. -- Bernama

September 7, 2010

VITROX - Kenanga remains positive on Vitrox Corp

Stock Name: VITROX
Research House: KENANGA

Vitrox Corp Bhd
(Sept 6, RM1.22)
Maintain buy at RM1.28 with target price of RM1.72
: We attended Vitrox's 1HFY2010 briefing and came away buoyed by the positive guidance and management's conviction of the group's prospects.

While the stock has appreciated some 70% since our upgrade in May 2010, we believe the market could still be underestimating the group's potential, ignoring its high intellectual content as reflected by strong margins and ability to take market share.

After achieving RM14.3 million in 1HFY2010, the better market response to its products and higher margins from a combination of scale and improved efficiencies prompted management to raise its FY2010 guidance by 74% from its original forecast. The revised FY2010 projection is 16% higher than our forecast while unchanged FY2011 guidance of RM38.1 million is also 16% higher than our RM32.9 million projected.

Despite the positive outlook, we maintain our 'buy' call pending more evidence of execution and prefer to remain conservative amidst the growing economic uncertainties in the medium term. High intellectual content, proven technologies coupled with newfound sales channels should work positively for the group in the medium to longer term.

New products and sales channels as a result of Agilent Technologies' withdrawal from the Automated Optical Inspection (AOI) market have created opportunities for the group. The combination of an economic recovery, launch of well-received new products, AOI and Advance XRay Inspection (AXI), and a successful beachhead into new markets via channel partners enabled Vitrox to improve sales five-fold for the first six months of 2010.

Diversification from sales from the Automated Board Inspection (ABI) division, consisting of AOI and AXI machines, now accounts for 41% of sales in 1HFY2010 from 18% previously, helping reduce a reliance on the Machine Vision System (MVS).

However, the outlook for MVS remains robust with order visibility up to October. As at August, some 1,271 units have been delivered year-to-date, averaging 159 units per month which is in line with our forecast of 2,000 units for FY2010.

Vitrox has also allocated capex of RM20 million for its new innovation centre. The centre, spanning 120,000 sq ft had its ground breaking ceremony in August and is slated for completion in 2HFY2011. It has also budgeted RM25 million for research and development in 2010-2011, aided by a RM7.1 million grant from the Multimedia Development Corp (MDeC). ' Kenanga IB Research, Sept 6

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

HIRO - OSK positive on Hirotako following new contract with Perodua

Stock Name: HIRO
Research House: OSK

Hirotako Holdings Bhd
(Sept 6, RM1.23)
Trading idea at RM1.18 with target price of RM1.63
: Hirotako has positioned itself as Malaysia's only safety equipment manufacturer. Compared with its peers, Hirotako is trading at a relatively cheap FY2011 price-to-earnings ratio (PER) of only 5.1 times against the sector average of 5.8 times, and our overall autoparts sector valuation of seven times (at mid-cycle PER).

Our recent discussions with management revealed that its prospects continue to be exciting going forward as it will see more revenue contribution from Perusahaan Otomobil Kedua Sdn Bhd (Perodua), having secured a new contract to supply Myvi airbags in FY2011.

We see this contract, together with other contracts spurred by new model launches, giving Hirotako's earnings a fillip and buoying its compound annual growth rate (CAGR) to 42.3% from FY2010-FY2011. Although the stock price has been running up since last year, we see still more upside for Hirotako given its attractive valuation, from which we derive a target price of RM1.63 based on seven times PER.

Over the past five years, it has been trading at a forward PER ranging from 2.2 times to 9.3 times and averaged at 4.7 times. It expects higher revenue contribution going forward from the Myvi airbag contract and the positive outlook for the overall industry, on top of its monopolistic hold on the safety equipment space.

We also like the stock's superior margins (relative to other autoparts makers) and its net cash position in the absence of any borrowings. Its balance sheet has been healthy, holding net cash for the last five years, which as at 1HFY2010 stood at RM89 million, representing 46% of its current market cap.

Its future capex needs will be minimal as we expect Hirotako to spend an average RM12 million over the next three years given the slew of vehicle launches going forward. Its return on equity (ROE) since 2008 has grown by double digits, and we envisage it to be consistent going forward. The stock also provides an attractive net dividend yield of 5.1%.

Given the low base effect in 1HFY2009, with vehicle sales expected to reach a record high in FY2010, Hirotako was able to register revenue of RM153 million for 1HFY2010, representing a revenue growth of 83.1% year-to-date and accounting for 48% of our full-year forecast. While we expect a slower half this year for overall total industry volume, Hirotako will benefit from additional contribution from the upcoming Proton Waja and the Nissan CKD Teana. ' OSK Research, Sept 6

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

HARTA - Hartalega looking for land for expansion

Stock Name: HARTA
Research House: RHB

Hartalega Holdings Bhd
(Sept 6, RM5.03)
Maintain outperform at RM5.02 with fair value of RM6.19
: We met with Hartalega's management recently and continue to like the company for its niche position as the largest nitrile glove producer in Malaysia as well as its technological capabilities that are well ahead of its competitors.

The company is actively looking for new land for expansion beyond FY2013. Currently, it is in negotiations to purchase a plot of land adjacent to its existing location as it wants to streamline operations in one location to minimise cost, which would also help boost margins.

Currently, the expansion of Plant 5 is ongoing. To recap, four lines in Plant 5 were commissioned in 1HCY2010, while the remaining six lines (+0.9 billion pieces) are expected to be commissioned and installed by end-CY2010.

Hartalega also plans to decommission all 10 of its lines in Plant 1 in October, replacing them with six new high-capacity lines. These new high-capacity lines are expected to be progressively installed and commissioned from July 2011 to February 2012.

Hartalega is currently operating at an average utilisation rate of approximately 80%, and while this appears low management explained that it is due to the product mix. With nitrile gloves accounting for 85% of sales, average utilisation rates tend to be lower compared with a manufacturer that predominantly manufactures natural rubber gloves.

However, this has been to Hartalega's advantage as it was not really affected by the surge in latex prices. As such, prices for nitrile gloves are currently lower than latex gloves and the company is experiencing a switch in customer ordering patterns.

Moving forward, Hartalega's growth strategy would include growing organically by building new production capacity, leveraging on its technical know-how, expanding its nitrile glove exports to more developed nations and developing human capital as well as improving its processes to enhance its competitiveness against its peers.

Following the one-for-two bonus issue, Hartalega's share base will increase to 363.5 million from 242.2 million shares. Management intends to maintain a 20 sen net dividend per share (DPS) despite the larger share base given its strong cash balance.

Risks include a surge in raw material prices which may result in margin squeeze, an appreciating ringgit against the US dollar and execution risk from capacity expansion. ' RHB Research, Sept 6

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

MAYBANK - Stellar performance for banks in 2Q

Stock Name: MAYBANK
Research House: CIMB

Banking sector
Maintain overweight
: The continuation of sterling results for Malaysian banks reflects the favourable operating environment, enabling them to achieve our projected core net profit growth of 26.2% for 2010, driven by healthy top line growth and a drop in credit costs.

Earnings in 2QFY2010 were buoyed by a 13.5% year-on-year (y-o-y) rise in net interest income and 52.3% y-o-y plunge in loan loss provisioning. These more than offset a 1.6% y-o-y dip in non-interest income and a 9.6% y-o-y increase in overheads.

The combined net profit for Malaysian banks in the quarter was ahead of our forecast by just 1.3% but trumped consensus by 5.7%. All the banks met our and market expectations, and AMMB Holdings Bhd did better than expected. We have upgraded our earnings numbers for AMMB and Malayan Banking Bhd (Maybank), leading to FY2011-12 net earnings upgrades of 3% to 5% for the sector.

The swift core net earnings growth of 33% to 51% in the past four quarters reflects the improving operating environment of accelerating loan growth, increased activity in the capital markets and stable asset quality. All this substantiates our positive take on bank earnings for 2010 and 2011.

Thanks to robust loan approvals in the past five to six months on the back of strong economic recovery in 1HFY2010, the industry's loan growth strengthened further from 9.8% y-o-y in March 2010 to 12.5% y-o-y in June 2010. This was driven by the acceleration of both key loan segments from 4.3% y-o-y to 7.2% y-o-y for business loans, and from 11.7% y-o-y to 12.9% y-o-y for consumer loans.

We are projecting brisk core net earnings growth of 26.2% for 2010, riding on strong economic recovery given the projected GDP growth of 7%. Given the improved economic climate, we expect stronger loan growth of 11% to 12% (against 7.8% in 2009) and a stable gross NPL ratio of 3.7%to 3.8% (against 3.7% in December 2009) for 2010.

AMMB remains our top pick as we believe that its transformation programme should help it raise its return on equity (ROE) from 11.6% in FY2010 to 16% in FY2012. For the longer term, management is gunning for an even higher target of 18%, which will be one of the best among local banks. ''

Our other picks for the sector are Maybank on the bullish outlook for its overseas operations, Public Bank Bhd for the best fundamentals among the Malaysian banks and Affin Holdings Bhd's expected robust loan growth and the decline in credit costs. ' CIMB Research, Sept 6

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

KGB - Kenanga rates Kelington a 'buy'

Stock Name: KGB
Research House: KENANGA

Kenanga has initiated coverage on Kelington Group with a "buy" recommendation.

"KGB is currently RM0.76 trading at 6.7x FY10 PE higher than its IPO level atRM0.53.

"We fair valuing KGB at RM1.04 sen based on 8x PER of its FY11EPS of 13 sen. with a target price of RM0.76," noted Kenanga.

Kelington Group Bhd is principally engaged in system design, installation, equipment, control, instrumentation, quality assurance, servicing and maintenance of Ultra High Purity gas delivery system.

The group was formed in 1999 and has a strong presence in both local and abroad which saw their flagship project with SilTerra, one of the largest wafer fabricator in Malaysia in Kulim, Kedah.

TM - RHB Research: Telekom Malaysia has capacity to return cash over minimum dividend policy

Stock Name: TM
Research House: RHB

KUALA LUMPUR: RHB Research said Telekom Malaysia has the capacity to return cash above its minimum dividend policy of RM700 million per annum.

It said on Tuesday, Sept 7 that it maintained its market perform and fair value of RM3.55 following the latest corporate development by TM over its stake sale in MEASAT GLOBAL BHD [].

On Monday, TM said it had decided to dispose of its 15.39% stake in Measat Global Bhd for RM252 million or RM4.20 per share. It is the second largest shareholder in Measat.

The stake, comprising of 60.02 million shares, would be disposed at RM4.20, a premium of 40 sen or 10.53% to the last traded market price on July 27, 2010.

RHB Research said while no firm commitment has been made, 'we continue to hold the view that TM has the capacity to return cash above its minimum dividend policy of RM700 million per annum'.

It said this was based on TM's healthy cash pile of RM3.6 billion (at end-June 2010); 2) comfortable gross debt/EBITDA of 2.3x; 3) its 200 million Axiata shares, which would raise another RM900 million; and 4) proceeds from Measat's privatisation.

CIMB - OSK Research maintains Overweight on banking sector

Stock Name: CIMB
Research House: OSK

KUALA LUMPUR: OSK Research is maintaining its Overweight recommendation on the sector.

'The current industry average valuation of 2.1 times CY10 price-to-book value is at a 16% premium to its historical average of 1.8 times, but we think that this is justifiable given our domestic banks' promising progress in their regional forays, which will enhance future growth prospects,' it said on Tuesday, Sept 7.

OSK Research said the industry's strong capitalization provides future capital management upside surprises, which have yet to be fully reflected in banks' valuations.

The research house's top large cap banking top picks are CIMB (Buy, TP: RM8.70), Maybank (Buy, TP: RM9.25) and mid-cap stock RHB Cap (Buy, TP: RM7.85).

NESTLE - Maybank IB Research maintains Buy on Nestle, TP RM43.86

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

KUALA LUMPUR: Maybank Investment Bank Research said reiterated its Buy call on NESTLE (M) BHD [] and a discounted cashflow-based target price of RM43.86 on earnings growth of 10-14% per annum in the 2010-12 period.

'Our market-contrarian pick is already 3% higher after just five working days of trading.'' Allied to its high quality earnings, an upward re-rating on Nestle's earnings growth potential is certain to excite investors who can accept the lack of trading liquidity in the shares,' it said.

Maybank IB Research said both export and local sales returned to positive growth territory in the 12-month period up to 2Q10.

For export sales especially, it was the first positive growth registered since 2Q09, when the impact of the global recession coincided with the unveiling of new export capacity.

'The generally upbeat domestic consumption indicators locally and in neighbouring countries will bode well for Nestle's sales trends in the rest of 2010-12,' it said.

September 6, 2010

SUNCITY - Inter-Pacific Research maintains outperform call on SunCity

Stock Name: SUNCITY
Research House: INTER PACIFIC

Sunway City Bhd
(Sept 3, RM3.99)
Maintain outperform at RM3.94 with target price of RM4.70
: Our fair value is pegged at RM4.70 based on PER of 12 times and EPS of 39 sen, a 28% discount on the estimated RNAV per share of RM6.51. We maintain 'outperform'. We are positive on the acquisition considering; (i) a consistent income stream from Sunway Lagoon theme park. Sunway Lagoon Sdn Bhd (SLSB) anticipates at least a 20% increase in the visitorship for Sunway Lagoon; (ii) the development potential of Sunway South Quay and Australia Wonderland Industrial Land; (iii) improvement to earnings considering its 51% stake in SLSB Group contributed to 12% of SunCity Group's profit after tax (excluding revaluation gain) for the 18-month FY2009 ending December 31. SLSB registered PAT of RM53.3 million in FY2009.

Acquiring 45% of Sunway Lagoon Sdn Bhd minority interest via internal funds: Suncity presently owns 51% of Sunway lagoon group which effectively holds 30.6% equity interest each in Sunway South Quay and Eastern Glory. Upon acquisition, SunCity's effective stake in Sunway Lagoon Bhd would be elevated to 96%, raising its effective shares in Sunway South Quay and Eastern Glory to 60% each.

Potential of Sunway South Quay and Eastern Glory: Sunway South Quay, located in the integrated township of Bandar Sunway, is a massive development with a land area of 123 acres and gross development value (GDV) of RM5.2 billion. To date RM1 billion worth of properties have been launched, with RM836 million in the pipeline. Those recently launched include: (i) A'Marine condominium achieved an impressive take-up of 70%; and (ii) Bayrocks, a high-end bungalow development with GDV of RM350 million, achieved take-up of 40% mainly due to its steeper pricing. Eastern Glory is the holding company of one of its operations in Australia. Eastern Glory, a wholly own subsidiary of Sunway Australia Unit Trust, entered into a 50:50 JV with Australand to develop Australia Wonderland Industrial Land, a 46ha tract with GDV of RM800 million. In the current year, 20% of the development has been sold. ' Inter-Pacific Research, Sept 3

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

PPB - Still early days for PPB Group

Stock Name: PPB
Company Name: PPB GROUP BHD
Research House: HWANGDBS

PPB Group Bhd
(Sept 3, RM17.38)
Maintain hold at RM17.40 with target price RM16.80
: The analyst briefing focused on PPB's flour business. PPB expects the current higher wheat prices to have some impact on 2H2010 earnings (1H2010 flour margin: 8.7%; FY2010F assumption: 8%). But this will be mitigated by a stronger ringgit against the US dollar that will result in cheaper raw material costs, plus, only 35% of its domestic flour business is generated from general purpose flour, a controlled item. The association has agreed to raise selling prices in 2010 for the other types of flour. We understand part of the spike in wheat prices to US$7.60/bushel from a low of US$4.40 is due to the drought in Russia that resulted in a ban on wheat exports.

PPB is still committed to expanding its flour business regionally, especially to Indonesia and Vietnam (capex estimate US$50 million), but the timing remains unclear. Postpayment of special 65 sen dividend per share, we expect PPB to have RM677 million net cash remaining. It already has a 1,000 MT/day plant in Indonesia, that started operations in September 2009, that contributed to 1H2010 flour earnings. We understand production has been strong in the last two months, and all its flour had been sold. While PPB is a relatively new player in Indonesia (Indofood has more than 70% market share), we are positive on longer-term prospects since the flour price is not controlled there and its large population would translate into positive consumption trends. Indonesia imports'' three to four million tonnes of wheat per year against one million for Malaysia.

We maintain our 'hold' recommendation with a target price of RM16.80. Our preferred pick is Wilmar as a stronger, more liquid proxy to the growing opportunities in the China market. On a relative basis, PPB's share price also continues to outpace Wilmar's, with a premium over the latter. ' HwangDBS Vickers Research, Sept 3

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

MUHIBAH - Muhibbah Engineering's 1H2010 below expectations

Stock Name: MUHIBAH
Research House: KENANGA

Muhibbah Engineering Bhd
(Sept 3, 90 sen)
Maintain buy at 88.5 sen with lower target price of RM1.35 (from RM1.80)
: Muhibbah's 1H2010 net profit of RM16.1 million was below expectations at 29% and 28% of our forecast of RM55.6 million and RM56.5 million respectively. This is largely due to the construction division's pre-tax loss of RM11.6 million in 1Q2010. However, a strong recovery in 2Q2010 to RM19.8 million was heartening, as the losses from the Yemen oil and gas jetty were fully accounted for in 1Q2010. Asia Petroleum Hub remains a concern given that more than RM200 million of Muhibbah's receivables are from that project.

However, its shipyard and concessions divisions contributed strongly with year-on-year (y-o-y) increases of 142% and 50% respectively.

Y-o-y, 1H2010 net profit was 45% lower due to 9% lower turnover and 130% higher interest expenses. The write-down in losses from the Yemen oil and gas jetty was accounted for only from 3Q2009 to 1Q2010. One-off interest expense was recognised in 2Q2010.

Quarter-on-quarter, 2Q2010 net profit doubled to RM10.8 million given the absence of write-downs in losses from the Yemen oil and gas jetty project. Besides construction, shipyard and crane turned in strong performances in 2Q2010 with 27% and 90% increases.

The outlook is bright, provided Muhibbah can collect its receivables from Asian Petroleum Hub, otherwise provisions will have to be made for doubtful debts. Muhibbah has RM2.53 billion order book remaining as at June 30, made up of RM1.6 billion in infrastructure, RM450 million in cranes and RM484 million in ships. It continues to be active in bidding for projects and just won a RM124.4 million contract to construct an offshore marine centre in Tuas, Singapore.

We have lowered our FY2010 and FY2011 net profit by 17% and 11% to RM46 million and RM52.1 million respectively, factoring in slower recognition of profit from the Asia Petroleum Hub project.

Maintain 'buy' with a target price of RM1.35 (previously RM1.80) using a sum-of-parts RNAV. Re-rating catalyst for the stock is the payment of its outstanding receivables. The stock is trading at a low PER of eight times and seven times for FY2010 and FY2011. ' Kenanga IB Research, Sept 3

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

MUDAJYA - Mudajaya up on positive outlook from CIMB Research

Stock Name: MUDAJYA
Research House: CIMB

KUALA LUMPUR: Shares of Mudajaya rose in early trade on Monday, Sept 6 after CIMB Research maintained its BUY call and RNAV-based target price of RM7.94, which is pegged to an unchanged 20% discount to RNAV.

At 10.29am, Mudajaya rose two sen to RM4.50 while Mudajaya-CB added 0.5 sen to 7.5 sen.

The FBM KLCI was up 0.52 of a point to 1,436.19. Turnover was 238.47 million shares valued at RM244.12 million. There were 235 gainers, 193 losers and 214 stocks unchanged.

CIMB Research viewed positively the indications from management on the status of the Securities Commission query on its Indian independent power producer IPP, which appears to be coming to a close.

It said investors are likely to be encouraged by this as well as a local news report's clarification on a previous article stating that there could be more queries.

The appointment of a new chairman should add credibility to Mudajaya's corporate governance and Indian IPP venture.

A closure statement by the SC would be a bonus. We maintain our BUY call and RNAV-based target price of RM7.94, which is pegged to an unchanged 20% discount to RNAV.

'Potential share price triggers include (i) the above positive developments (ii) likely closure by the SC, (iii) contract awards, and (iv) positive earnings surprises. This should extend the rebound of the stock which jumped 53 sen last Friday,' it said.

TASCO - HLG Research: TASCO good defensive stock

Stock Name: TASCO
Company Name: TASCO BERHAD
Research House: HLG

KUALA LUMPUR: HLG Research said Trans-Asia Shipping Corporation Bhd (TASCO), with its robust earnings during good and bad times, is a good defensive stock.

It said on Monday, Sept 6 that Tasco has an attractive dividend yield, supported by its solid track record and savvy management in delivering performance over the years in a competitive environment.

'TASCO's mid-term uptrend remains firmly intact following the strong breakout above the overhead resistance at RM1.03. However, after surging 23% from RM1.00 to a 52-week high of RM1.23 on Aug 27, TASCO's share price is likely to take a breather and consolidate around the RM1.10 zone before marching to our 6-month technical target of RM1.40,' it said.

HLG Research said TASCO ''is likely to find strong support at the RM1.09 (38.2% FR from high RM1.23 and low of RM1) and RM1.05 (23.6% FR) levels. Cut-loss below RM1.00 as failure to hold at this level will trigger more selling pressure to RM0.90.

'At RM1.14, TASCO is trading at 5.2x annualised FY10 P/E and 0.56x P/B, supported by attractive yield of 6.1%. Our six-month technical target is RM1.40, implying a 6.4x annualised FY10 P/E,' it said.

HARTA - RHB Research maintains Outperform on Hartalega

Stock Name: HARTA
Research House: RHB

KUALA LUMPUR: RHB Research maintains its Outperform call on Hartalega after its recent meeting with the management on the latest corporate developments.

'Our ex-bonus fair value will be revised downwards to RM6.19 (cum= basis RM9.29) while the theoratical share price ex-bonus price based on Friday's closing price of RM5.02, still provides an upside of some 23.3%. No change to our Outperform call on the stock,' it said on Monday, Sept 6.

RHB Research said Hartalega's growth strategy would include growing organically by building new production capacity; leveraging on its technical know-how; expanding its nitrile glove exports to more developed nations; and ''developing human capital as well as improving its processes to enhance its competitiveness against its peers.

HIRO - OSK Research: More upside for Hirotako

Stock Name: HIRO
Research House: OSK

KUALA LUMPUR: OSK Research sees more upside for HIROTAKO HOLDINGS BHD [] which positions itself as the only safety equipment manufacturer in Malaysia.

'Our recent discussions with management reveals that prospects for the company will continue to be exciting going forward of which the group will see more revenue contributions from Perodua after securing a new contract for the supply of the Myvi replacement come FY11,' it said ina research note issued on Monday, Sept 6.

OSK Research foresees that this contract coupled by the slew of other contracts given the slew of model launchings ahead; Hirotako's earnings growth is expected to stage a buoyant CAGR of 42.3% over FY10-FY11.

'Despite the stock running-up since last year, we still see more upside for Hirotako given its attractive valuations in which we derive a TP of RM1.63 based on 7x PE,' it said.