December 17, 2010

NOTION - Notion Vtec sued over share sale agreement

Stock Name: NOTION
Research House: OSK

Notion VTec Bhd
(Dec 16, RM1.62)
Maintain sell at RM1.65 with target price RM1.45
: Notion has been served with a writ and statement of claim on behalf of three key personnel of Swiss Impressive Sdn Bhd for the alleged breach by Notion of a share sale agreement dated Dec 10, 2009.

The principal business of Swiss Impressive is in designing, tooling and manufacturing high precision appearance parts for digital cameras and other consumer electronic devices. Notion has 70% equity interest in this subsidiary, while two of the plaintiffs collectively own the remaining 30%. In FY10, Swiss Impressive recorded an unaudited revenue and loss after tax of RM3.5 million and RM300,000 respectively.

In 2009, Notion entered into a share sale agreement with the plaintiffs to dispose of its 70% equity interest in Swiss Impressive to the plaintiffs for RM400,000. Management was of the view the business of Swiss was no longer in line with Notion's present business strategy. The agreement lapsed prior to the completion and finalisation of an audit on Swiss. The suit came about due to the non-completion of the share sale agreement, which the plaintiffs alleged was due to a breach by Notion.

The plaintiffs are claiming RM4.5 million from Notion, but the company has instructed its solicitors to defend the action. This suit is unlikely to have a major impact on Notion. The financial contribution from Swiss to Notion was considered insignificant as Notion recorded RM226.8 million of revenue and RM37.4 million earnings in FY10. On the operations side, Notion had appointed new personnel to manage Swiss. Should Notion lose this case, it would have no problem absorbing the RM4.5 million claim considering that it has a cash hoard of RM36.9 million as at Sept 30.

Due to the poor outlook for the HDD business, possibly until 1Q11, and given the uncertainty over its 2.5' HDD business, we remain cautious and stick to our 'sell' call by pegging its target price at seven times FY11 price-earnings ratio. For FY11, the company will give more priority to the camera business to sustain its uninterrupted earnings growth streak since FY03. It plans to expand its plant in Thailand from 25,000 sq ft to 100,000 sq ft by May 2011, mainly to cater for Nikon and new camera customers. We think it is still too early to factor in any meaningful contribution from the Thai plant expansion. The Thailand plant only contributed revenue of about RM1.4 million for FY10. ' OSK Investment Research, Dec 16

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

MEDIA - Declining viewership not a concern for Media Prima

Stock Name: MEDIA
Research House: RHB

Media Prima Bhd
(Dec 16, RM2.36)
Maintain outperform at RM2.32 with fair value RM2.82
: Concerns have been raised over the declining trend in TV viewership for Media Prima's channels. On the whole, its viewership market share has fallen to 46% this year, compared with 50% in 2009, on the back of lower TV viewership share for TV3, NTV7 and TV9. According to management, the decline in viewership is partly due to fragmentation as Astro continues to increase the number of channels on its platform. In mitigation, while management believes advertisers will continue to pay attention to TV viewership numbers, it also thinks Media Prima's channels offer better value for advertisers, given the concentration of viewership over its four channels as opposed to Astro's over 100 channels. Hence, Media Prima's channels offer better value for money for advertisers to reach out to viewers. Nevertheless, as fragmentation continues Media Prima is actively repositioning itself as a content provider, allowing users to access its content via multiple platforms (for example and Telekom Malaysia Bhd's UniFi).

If the general election is held next year, we think this will boost government ad spending. Recall that in March 2008, gross adex for both TV and print media jumped 24% year-on-year (y-o-y) with TV adex up 37.3% y-o-y while adex for print media recorded y-o-y growth of 17.5%. Within the print media segment, New Straits Times' gross adex for March 2008 rose 41% y-o-y while The Star and Media Chinese International Ltd's (MCIL) adex rose 2.1% y-o-y and 12.2% y-o-y respectively.

Both Media Prima's outdoor and radio segments continue to grow. Typically, adex for the outdoor segment has lagged the economic cycle due to its concession-based nature. Thus, earnings for the outdoor segment could potentially see a pick-up next year. After stripping out the new acquisition of Kurnia Asia Bhd, the outdoor division recorded a 15% y-o-y growth. Its radio segment also recorded a decent 17% y-o-y growth in terms of top line, while the division recorded 14% bottom line growth y-o-y due to higher direct costs during the year.

The risks include: (i) weaker than expected adex growth; (ii) high discounting activities; and (iii) high foreign shareholding level (circa 31.7%).
We maintain our earnings forecasts for now.

Our indicative fair value is maintained at RM2.82, based on CY11 price-earnings ratio of 16 times. We reiterate our 'outperform' call on the stock. ' RHB Research Institute, Dec 16

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

TOPGLOV - Persistent headwinds for Top Glove

Stock Name: TOPGLOV
Research House: HWANGDBS

Top Glove Corporation Bhd
(Dec 16, RM5.12)
Maintain fully valued at RM5.45 with revised target price RM4.60 (from RM4.80)
: Southern Thailand, a major rubber growing area, has been hit by severe flooding since October. This has disrupted transportation, lowered rubber output, and delayed shipments. Unfavourable weather has also affected rubber harvesting in Indonesia, Malaysia and Vietnam. As a result, latex prices hit a record high of RM9.45 per kg, and averaged RM7.35 year-to-date. Top Glove has consistently raised average selling prices (ASPs) in the past three months to keep up with rising latex prices. ASPs (per box of 1,000 pcs) for powdered, powder-free and nitrile gloves now average US$31 (RM97), US$35 and US$33, respectively. But as the ASPs lag latex price hikes, Top Glove is being pressured by rising operating costs, given that 83% of its gloves are made from natural rubber latex.

Demand remains soft as destocking is still ongoing. We understand 1QFY11 sales volume fell 5% quarter-on-quarter and capacity utilisation has fallen to 70% from 75%. Given the excess capacity, Top Glove has again deferred the commissioning of Factory 7 and 21 by three to five months. Latex prices rose 11% in the quarter, and as expected there was a time lag in passing on the higher costs. The greenback has also weakened 2% against the ringgit. Given the persistent headwinds, we cut FY11F earnings per share by 9%.

Maintain 'fully valued' with the target price lowered to RM4.60. We have nudged down our TP to RM4.60 (previously RM4.80), pegged to 13 times CY11 EPS. But demand should start to normalise in the next three months when restocking resumes. ' HwangDBS Vickers Research, Dec 16

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

MISC - Tanker shipping's high tide to recede after cold snap

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

Tanker Shipping
Maintain underweight
: We maintain our 'underweight' call on the crude tanker shipping sector as freight rates are set to fall in the next two years as a result of excessive newbuild deliveries. Although the demand for oil has recovered this year, it has not been sufficient to offset the large pool of excess tankers. We view the current rate recovery as purely seasonal in nature, assisted by the delays at Turkey's Bosporus Straits caused by fog, the coming ice restrictions in the Baltic and the expected rise in oil consumption as a cold winter hits the northern hemisphere. We maintain our 'underperform' call for MISC Bhd (target price: RM7). Despite likely weaker chemical shipping rates in 2011, PT Berlian Laju Tanker Tbk (TP: IDR660) remains an 'outperform' on the basis of its attractive 0.4 time price-to-book value valuation.

The Baltic Dirty Tanker index rose 27% to 30% in the month to Dec 10, mainly on the back of a 26% rise in average suezmax earnings and a quadrupling of average aframax earnings since Nov 12. Both the suezmax and aframax sectors benefited from the congestion at Turkey's Bosporus Straits, where seasonal fog is causing transit delays of around 25 days for both north and southbound. However, suezmax and aframax rates in the Mediterranean dropped last week as the backlog of ships in the Bosporus began to clear and charterers reduced cargo bookings to bring rates down. Aframax rates in the Baltic more than doubled last week as the unseasonably cold month led to a rush to book scarce ice-class aframax ships before ice restrictions come into place at the Russian port of Primorsk. It is worth noting that only owners of a very limited pool of ice-class aframaxes benefit from this.

China's oil imports jumped 28% or 4.52 million tonnes month-on-month (m-o-m) in November, which more than offset a 5.4% or two million tonne m-o-m fall in US oil imports. This helped drive up chartering activity, leading to a rise in very large crude carrier (VLCC) rates in mid-November. However, the number of available VLCC units remained higher than demand and VLCC rates fell for the third straight week. Hopes for a winter rally are dissipating. Shipbroker Charles R Weber noted that another 10 to 15 VLCC cargoes can be expected for the rest of December, against an expected availability of 40 units. This suggests that the excess vessels will spill over into January and the VLCC sector could see a depressing start to 2011.

We introduce a set of floating storage lead indicators in this report, where we track the spread between the 12-month forward and spot crude oil prices and calculate whether a buy-spot-and-sell-forward strategy is profitable. We note that the rise in crude oil prices over the past month has actually been sharper at the front end of the curve, leading to a flattening of the contango which reduces the profit available to oil traders. After deducting charterhire costs and financing expenses, floating oil storage will actually yield a loss of US$5.10/bbl over 12 months. Under present circumstances, the employment of VLCC or suezmax ships for oil storage will be minimal and the full brunt of the excess capacity will bear on spot rates after the winter is over. ' CIMB Research, Dec 16

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

December 16, 2010

TA - Exciting prospects for TA Enterprise

Stock Name: TA
Research House: HWANGDBS

TA Enterprise Bhd
(Dec 15, 77 sen)
Maintain buy at 76 sen with revised target price of RM1.25 (from RM1.30)
: The Greater KL Plan under the Economic Transformation Programme (ETP) aspires to transform the city into a vibrant economic hub and place it in the Top 20 most livable cities in the world. And TA Enterprise (TAE), which owns seven acres of prime land in KL, is one of the key beneficiaries given the scarcity and rapid rise in prime land prices. TAE's plan to launch projects with potential RM2.6 billion gross development value (GDV) in the KL prime area is intact.

Average daily trading value and volume soared to RM1.5 billion (+36% quarter-on-quarter) and 1 billion (+40%), respectively, in 3Q10, and almost doubled TAE's broking income in 3QFY11. Income from hotel operations grew 84% driven by strong occupancy rates at Swissotel. However, 9MFY11 net profit of RM49 million fell short of our estimate as we were too bullish on its hotel and property divisions. Hence, we cut FY11/13F earnings per share by 26% to 42%. Our forecast for the broking division is intact, and we believe trading momentum is sustainable given the slew of structural changes taking place at Bursa Malaysia that are aimed at improving trading interest and liquidity. Bursa's year-to-date-November 2010 average daily trading value of RM1.4 billion was ahead of our CY10F assumptions of RM1.2 billion.

We reiterate our 'buy' recommendation with our sum-of-parts-based target price reduced to RM1.25. Our TP is based on a SOP value, that is earnings before interest and tax for broking based on FY12F and overall launch pipeline still intact in spite of some deferment. Consolidation in the broking industry could stir interest in TAE. It has a strong retail franchise with 7% market share of trading volume. Its current valuation is attractive at 0.8 times book value. The market is assigning zero value to its cash-generating broking business, plus a 24% discount for TA Global given its implied market cap of RM1.7 billion against TAE's RM1.3 billion. ' HwangDBS Vickers Research Sdn Bhd

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









KNM - KNM going to Sabah

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

KNM Group Bhd
(Dec 15, RM2.68)
Maintain outperform at RM2.33 with revised fair value of RM3.09 (from RM2.33)
: The company announced on Dec 14 that it is establishing a JV company with Petrosab Logistik (KNM Petrosab Sdn Bhd (KNMP)). Its total initial investment will be RM51,000 for a 51% stake in the company, but we have been guided that the paid-up capital of the company will be increased soon. Petrosab Logistik is a joint venture between Yayasan Sabah and Asian Supply Base Sdn Bhd (a wholly-owned company of Sabah Energy Corporation).

We are positive on the JV given that the tie-up with the Sabah government will improve KNM's success rate for potential contracts in the state. Besides this, a presence in East Malaysia is imperative for oil and gas players, given that most of the deeper water developments are located in the region. We believe the company will move some of its fabrication capacity from the peninsula to Sabah to support the venture.

The company has guided that it has its sights on the Kimanis and Sipitang areas for contracts. While we have not heard of potential contracts from Sipitang, we note that confirmed projects in Kimanis include the Sabah Oil and Gas Terminal (SOGT) and the 300MW power plant that is jointly owned by Yayasan Sabah and Petronas Gas. Another proposed Petronas project in Kimanis is the urea and ammonia plant.

We are upgrading our FY11/12 revenue assumptions by 9.6% and 5.8% respectively as we have increased our capacity utilisation forecasts for FY11/12 to 67.3% and 73.6% respectively (from 60.9% and 68.6% previously). This results in our FY11/12 core earnings per share increasing by 15.1% and 12.5% respectively.

Risks include sustained competition for mid-end process equipment; and slower than expected pick-up in E&P activities and contract flows.

Things look increasingly positive for the company going forward, and the pick-up in contract wins suggests that the company is heading for an earnings turnaround in 2011. As such we maintain our 'outperform' call on the stock with an upgraded target price of RM3.09 per share based FY11 target price-earnings ratio of 15 times (from RM2.33 per share and 13 times target PER previously). Our new target PER is line with the company's historical average one-year forward PER. ' RHB Research Institute Sdn Bhd, Dec 15

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

KLK - KLK sets foot in Europe

Stock Name: KLK
Research House: MIDF

Kuala Lumpur Kepong Bhd
(Dec 15, RM21.36)
Maintain buy at RM20.98 with target price of RM24.02
: Yule Catto, in which KLK is a substantial shareholder with 18.82% equity interest, has announced its acquisition of PolymerLatex Group (Europe's third largest latex producer) for about ''376 million (RM1.86 billion). PolymerLatex is owned by TowerBrook, which has built a '60 million plant in Pasir Gudang, Johor, and a new R&D facility near Dusseldorf.

We view the acquisition positively as it will pave way for Yule Catto to further expand into the latex market for the paint, construction, carpeting and adhesive industries. In addition, the acquisition will strengthen its position in Europe and Malaysia in the latex-coated paper market. It will also add value to the nitrile latex market in Malaysia.

The'' acquisition will be financed via a rights issue and bank borrowings. Yule Catto will issue a 4:3 rights issue to raise ''225 million at 116 pence per share, with KLKI to subscribe in full. Upon subscription, KLK will'' acquire an additional 36.55 million new shares that will result in total shares of 63.96 million. It is believed that KLK will use RM209 million of internal funds to purchase the 36.55 million new shares, which we feel will not be a strain given its cash position of RM1.3 billion.

We reiterate our 'buy' recommendation with a target price of RM24.02 based on a price-earnings ratio of 23 times and earnings per share in 2011 of 104.4 sen. ' MIDF Research, Dec 15

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

AXIATA - Secular growth trends at Axiata to continue

Stock Name: AXIATA
Research House: MAYBANK

Axiata Group Bhd
(Dec 15, RM4.68)
Maintain buy at RM4.75 with revised target price of RM5.45 (from RM5.10)
: We revisit our assumptions following Axiata's stellar 3Q10 results and tweak our earnings upwards to reflect the latest operating trends. We still like Axiata for its high growth pan-Asian footprint, and believe it will continue to benefit from a liquidity-induced market rally. We reiterate our 'buy' recommendation with a higher RM5.45 target price.

Robi (Bangladesh) has exhibited strong sequential earnings before interest, taxes, depreciation and amortisation (Ebitda) growth trends in recent quarters, a result of both revenue growth and margin expansion. Direct costs in particular, have been trending down. An Ebitda margin in excess of 35% (3Q10: 35.6%, 9M10: 32.3%) now appears sustainable in our view, from circa 30% previously. We expect Robi's Ebitda contribution to exceed that of Dialog (Sri Lanka) in 2011. Robi contributed 6% to group Ebitda in 3Q10.

Axiata is due to pay its maiden dividend in 2011. We still believe management has been conservative with regards to its 30% net profit payout guidance, and it has concurred that Axiata's balance sheet would still appear 'lazy' with a 30% payout. Our 50% payout assumption remains unchanged, which implies dividend yields in excess of 3.6% net at current share price.

We raise our 2010/12 earnings forecasts marginally by 2% to 4%. We value Axiata based on on sum-of-parts, with the main operating entities valued by discounted cash flow. Celcom and XL account for RM3.26 and RM1.33 per Axiata share respectively. Our target price implies 17 times 2011 price earnings ratio and 7.5 times 2011earned value/Ebitda.

With the market shaping up for a liquidity-driven rally in 2011, we favour Axiata for its high-beta characteristic. Stripping out the value of Axiata's listed subsidiaries and attributing the implied stub entirely to Celcom, the implied forward PER is an undemanding 11.7 times. ' Maybank Investment Bank Bhd Research, Dec 15

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

December 15, 2010

QL - QL making the most of Asean's natural assets

Stock Name: QL
Research House: ECMLIBRA

QL Resources Bhd
(Dec 14, RM5.69)
Initiate coverage with a buy call at RM5.60 and target price of RM7.30
: We initiate our coverage of QL Resources with a 'buy' recommendation and target price of RM7.30 based on 20 times CY11 PER. QL's products will benefit directly from rising global demand and price trends for food commodities. The group is one of Asia's largest surimi manufacturers and a Malaysian market leader in livestock feed trading, fish meal and egg production.

We have forecast a three-year forward forecast EPS CAGR of 17.3% (FY11/13), that will be driven by strong demand for QL's marine, livestock feed, poultry products and palm oil, with rising population and disposable income, as well as the group's steady capacity expansion. Diversification reduces earnings volatility by smoothing out the cyclical nature of its resource-based activities.

QL's expansion plan is both local and regional, with total group capex set to increase by 60% in the next two years to RM200 million annually. The group is replicating its business model in the Asean region with: (i) new poultry farms in Tay Ninh, Vietnam, and Cianjur, Indonesia; (ii) a new marine plant being constructed in Surabaya; and (iii) further planting and palm oil mill slated for its plantation in Tarakan, Kalimantan.

QL benefits from the government's pro-agriculture stance via tax incentives that translate to a lower tax rate (15% in FY10) and subsidised diesel for its deepsea fishing operations. The group's latest venture into renewable energy is directly in accordance with the government's promotion of green technology as contained in Budget 2011.

Despite what seems like expensive valuations, we are bullish on QL as we firmly believe it deserves premium valuation to peers as well as the market. QL's next two years' earnings CAGR of 16.1% is impressive compared with Malaysian peers of 5.6%. Furthermore, over the last 10 years, QL's average 12-month forward earnings growth is impressive at 23%. At our target price, PEG ratio is undemanding at only 0.9 times based on 10-year average growth rate. ' ECM Libra Investment Research, Dec 14

This article appeared in The Edge Financial Daily, December 15, 2010.

KFC - KFCH fast-tracking growth in India

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

KFC Holdings (M) Bhd
(Dec 14, RM3.81)
Upgrade to market perform at RM3.76 with fair value of RM3.85
: KFCH announced that it is acquiring 100% of Kernel Foods Pte Ltd, via its subsidiary Pune Chicken Restaurants, by way of acquiring the total equity interest of the latter for RM84,000 and subscribing to an additional RM2.4 million worth of shares.

We understand that Kernel Foods has two KFC restaurants in Pune, India, where KFCH is currently running one of its stores in Deccan Mall. After the completion, KFCH will have three stores in Pune in total. Due to the higher number of stores in the city, KFCH will be able to enjoy more competitive rates from suppliers in terms of supply logistics, which would improve the overall profitability of its stores in India. While we consider this to be a positive move, we prefer to keep our profit margin forecasts for India unchanged for now, until we see some positive synergies coming through.

We believe the total purchase price of RM2.5 million is fair. Based on our previous discussions with management, it usually costs approximately RM1 million to RM1.2 million in set-up costs for KFCH to open a store in India. Furthermore, the direct purchase of the stores reduces the execution risk which is usually associated with opening a new 'greenfield' store. Recall that we previously highlighted that KFCH had some hiccups in opening new stores due to various construction and red-tape issues.

With the completion of the acquisition, KFCH will effectively have seven stores in total in the state of Maharashtra (currently five), which is the only state it is allowed to operate in currently. We consider this purchase as a new store opening, thus the total of seven store openings in FY10 is in line with our assumptions.

we make no change to our forecasts. Risks include: (i) bird/swine flu escalation; (ii) escalation of corn and soyabean prices, which would eat into margins; and (iii) deteriorating consumer spending power, resulting in lower same-store sales (SSS) growth.

We are maintaining our fair value for KFCH at RM3.85, based on unchanged 17 times target FY11 PER. We are, however, upgrading our call on the stock to 'market perform' (from 'underperform' previously) as we believe the downside risk from its current share price is minimal. ' RHB Research Institute, Dec 14

This article appeared in The Edge Financial Daily, December 15, 2010.

IJM - IJM Corp morphing into infrastructure powerhouse

Stock Name: IJM
Research House: AMMB

IJM Corporation Bhd
(Dec 14, RM6.20)
Maintain buy at RM6.20 with revised fair value of RM7.52 (from RM6.30)
: We maintain our 'buy' call on IJM Corp Bhd with a higher sum-of-parts (SOP) derived fair value of RM7.52 per share (previously: RM6.30 per share).

IJM Corp is poised to be a key beneficiary of an imminent rollout of the government's Economic Transformation Programme, with an added kicker from the proposed IJM Land-MRCB pact.

IJM Corp's exciting new contract pipeline centres on a few key areas: (i) RM43 billion Klang Valley LRT/MRT; (ii) seven new highways worth RM19 billion (for example, the West Coast Expressway or WCE); (iii) balance of works for the Pahang-Selangor water project (circa RM5 billion); (iv) several mega development proposals within Greater KL (for example PNB's 100-storey tower); and (iv) new infrastructure opportunities in India.

Near-term, an IJM Land-MRCB union provides the impetus for IJM to morph into an integrated infrastructure and property giant ' with the Emplyees Provident Fund as the major shareholder.

First, we expect IJM Corp to play a front-running role in several exciting infrastructure and development projects under the EPF's mandate, including the prized MRB land in Sungai Buloh. This is further solidified by IJM Corp's status as a premium builder of Grade-A buildings that are likely to dominate the Klang Valley skyline.

Second, it could pave the way for IJM Corp to unlock further value via a listing of its infrastructure units (including its Indian highways) and potentially elevate the group to the second largest highway operator in Malaysia after PLUS. Presently, infrastructure assets account for RM1.93 share or 26% of IJM Corp's SOP value.

Just premised on (i) a 20% controlling stake in the IJM Land-MRCB pact and (ii) a 20% stake in WCE Concession/Capex works, IJM Corp's SOP-based value is forecast to rise by 6% to RM7.95 per share along with a near tripling of its order book to RM9.4 billion.

Our FY12F/13F new contract forecasts are raised by 10% to 15% to RM2.2 billion to RM2.5 billion. Construction margins appear to have bottomed ' rising to 5.1% to 8.3% in FY11F/13F (FY10: 2.2%) as legacy jobs are due to be completed by end-FY11.

We recommend a switch away from Gamuda Bhd to IJM Corp for exposure to big-cap construction stocks, given the latter's more exciting news flow and prolific contract pipeline. According to our estimates, every RM500 million of new order book would lift its earnings by 1.4% to 5.6%.

Renewed interest from foreign shareholders, who now control circa 43% of IJM Corp against a peak of more than 60% in 2007, is another re-rating catalyst with a strengthening ringgit. ' AmResearch, Dec 14

This article appeared in The Edge Financial Daily, December 15, 2010.

TA - TA Enterprise a 'buy' at HwangDBS

Stock Name: TA
Research House: HWANGDBS

HwangDBS rates TA Enterprise a "buy" with a lower target price of RM1.25, given that TAE one of the key beneficiaries given the scarcity and rapid rise in prime land prices in Kuala Lumpur.

TA Enterprise owns 7 acres of prime land bank in KL.

The Greater KL plan under the Economic Transformation Programme aspires to transform the city into a vibrant economic hub and the top-20 most livable cities globally.

TAE's plan to launch projects with potential RM2.6 billion Gross Development Value in the KL prime area is intact, says HwangDBS.

Average daily trading value and volume soared to RM1.5 billion (+36 per cent quarter-on-quarter) and RM1.0 billion (+40 per cent), respectively, in the third quarter of 2010, and almost doubled TAE's broking income in 3QFY11.

Income from hotel operations grew 84 per cent driven by strong occupancy rates at Swisshotel. However, 9MFY11 net profit of RM49 million fell short of "our estimate as we were too bullish on its hotel and property divisions," says the research firm.

" Hence, we cut FY11-13F EPS by 26 per cent-42 per cent.

"Our forecast for the broking division is intact, and we believe trading momentum is sustainable given the slew of structural changes taking place in Bursa that are aimed at improving trading interests and liquidity," says HwangDBS.

KNM - KNM jumps to highest since April on target price upgrades

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

KUALA LUMPUR: KNM GROUP BHD []' shares and warrants advanced in active trade on Wednesday, Dec 15 after Maybank Investment Bank Bhd Research and OSK Investment Research upgraded their respective target prices for the stock.

At 11.01am, KNM was up 18 sen to RM2.51, the highest since April 20 this year, with 22.5 million shares done.

Its warrants added 1.5 sen to 16 sen with 28.15 million units done.

Maybank IB maintained its buy call on KNM and raised its target price to RM3.10 from RM2.20, while OSK Research said it was raising its target price to RM2.96 from RM2.22.

Maybank IB said it was positive over KNM's JV with Petrosab as East Malaysia fabrication opportunities are huge, riding on PETRONAS' rising domestic capex spend.

The Sabah Oil and Gas Terminal'' and Sipitang CTF projects are some of the JV's targeted projects, it said.

'KNM remains a Buy with a raised 12-month target price of RM3.10 (+41%) as we foresee a sustained recovery outlook, locally and globally.

'Our new target PER is 10 times (previously 9 times) and we roll-over valuations to 2012 earnings,' it said.

KENCANA - OSK Research: Maintain Buy on Kencana, TP RM2.93

Stock Name: KENCANA
Research House: OSK

KUALA LUMPUR: OSK Research said KENCANA PETROLEUM BHD []'s good 1QFY11 results were within estimates, boosted by a two-month contribution from MKR-1.

It said on Wednesday, Dec 15 the results were also boosted by the recognition of a portion of the fabrication works secured since April 2010, better yard utilization and improved cost management and production efficiency.

'We believe the robust quarter is just the beginning with more catalysts coming its way. Maintain Buy on Kencana with a target price of RM2.93. This stock remains our only pick in the O&G sector for now,' it said.

KLK - OSK Research maintains Neutral call on KLK, unch TP RM20.50

Stock Name: KLK
Research House: OSK

KUALA LUMPUR: OSK Research is maintaining its Neutral call for Kuala Lumpur Kepong with its target price unchanged at RM20.50.

It said on Wednesday, Dec 15 that Yule Catto contributes very minimally to KLK's net profit i.e. with less than 1%. As such, its doubts the acquisition of PolymerLatex would make any material difference to KLK's bottom line.

To recap, KL Kepong will spend RM209.8 million to subscribe for Yule Catto & Co's rights issue. Yule Catto, which is listed on London Stock Exchange, has proposed to acquire PolymerLatex Group for 443 million euros via the rights issue and bank borrowings.

PolymerLatex Group is an emulsion polymer products manufacturer with assets in Europe and Asia, which among others, supplies raw material for the manufacture of synthetic rubber gloves.

OSK Research said'' KLK has a 18.8% stake in Yule Catto. As Yule Catto is trading at an undemanding 10.7 times'' CY11 earnings and 7.0x EV/EBITDA, it makes sense for KLK to subscribe for the rights to prevent its stake from being diluted.

'Moreover, the rights shares are priced at a steep discount of 34.7% to their theoretical ex-rights price. The subscription will do little to stretch KLK's balance sheet. Its gearing is very low at 7.2% and cash flow generation is very strong given the currently high CPO price. KLK generated an operating cash flow of RM783.9m in its FY2010,' it said.

GPACKET - OSK Research cautious on potential competition in Malaysia's broadband universe

Stock Name: GPACKET
Research House: OSK

KUALA LUMPUR: OSK Research said it was turning increasingly cautious on potential competition in Malaysia's broadband universe and it believes Green Packet could lose out owing to Packet One's limited coverage.

The research house said on Wednesday, Dec 15 following its earnings revision, it cut its target price from 92 sen previously to 78 sen, based on an unchanged 8x FY11 EV/EBITDA.

'The stock price has retreated by more than 25% since mid-2010 and hence we maintain our NEUTRAL recommendation,' it said.

The key re-rating catalysts are: (i) potential earnings surprises in the near term on solid broadband net adds, (ii) a quicker-than-expected earnings turnaround on cost moderation, (iii) solution sales to surge on more WiMAX deployment, and (iv) expedited coverage expansion to take advantage of fledging broadband take-ups.

WCT - CIMB Research maintains Outperform on WCT, TP RM4.21

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

KUALA LUMPUR: CIMB Equities Research said WCT's deal to develop a RM688 million commercial project in Medini was a positive surprise.

It said on Wednesday, Dec 15 this marks another milestone for WCT as it is its third venture in Medini and raises its profile as one of the leading developers and contractors in Iskandar.

'This project raises WCT's outstanding GDV to RM4.6bn, which will last 7-8 years. Though the project will only start filtering through to earnings from FY12, it reinforces our positive stance on the group's outlook.

'We make no changes to our EPS forecasts, OUTPERFORM call or RM4.21 target price, which is pegged to an unchanged 10% discount to RNAV. Potential re-rating catalysts include (i) this announcement, and (ii) other contract wins. WCT remains one of our top picks for the CONSTRUCTION [] sector,' CIMB Research said.

KNM - KNM up, OSK keeps Trading Buy, TP RM2.96

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

KUALA LUMPUR: Shares of KNM GROUP BHD [] rose in early trade on Wednesday, Dec 15 with OSK Research maintaining its trading buy on the stock with a higher target price of RM2.96 from RM2.22.

At 9.45am, KNM was up 14 sen to RM2.47 while its call warrants, KNM-CE rose 1.5 sen to 16 sen with 20.12 million units done.

The FBM KLCI rose 0.31 of a point to 1,510.89. Turnover was 213.36 million shares valued at RM233.46 million. Gainers led losers 201 to 142 while 217 stocks were unchanged.

OSK Research said sentiment in the O&G industry has improved tremendously over the last few weeks with the announcement of collaborations between Malaysia and its neighbouring countries on new oilfields, as well as the dishing out of new O&G contracts and a spate of positive news.

'We are maintaining our Trading Buy call on KNM with a higher target price of RM2.96 (previously RM2.22), based on a higher PER valuation of 12x (previously 9x) FY11 EPS,' it said.

OSK Research said KNM is one of the front-runners should there be a re-rating on the share prices of O&G stocks.

'Hence our target price higher as we believe there is still upside for investors to trade on the stock. In addition, KNM recently addressed concerns over its over-liquidity by implementing a 4-into-1 share consolidation. However, note that we are keeping our Trading Buy call until we see improved earnings potential for the company going forward,' it said.

YTLPOWR - Credit Suisse maintains Underperform on YTL Power

Stock Name: YTLPOWR
Research House: CREDIT SUISSE

KUALA LUMPUR: Credit Suisse Securities Research is maintaining its Underperform on YTL Power International on concerns about its investments in projects which are not widely adopted.

It said on Wednesday, Dec 15, YTL Power is fairly valued, as it is trading at a FY11E price-to-earnings (PE) of 15 times, which is in line with the Malaysian market P/E.'' It maintained its Underperform rating.

On Tuesday,'' YTL Power said it was investing in oil shale in Jordan with the acquisition of a 30% stake in Enefit's Jordanian oil shale projects, marking its foray into the upstream oil business.

The consortium plans to develop an oil plant with output of approximately 38,000 barrels per day and a 900 megawatt oil shale-fired power plant. As oil shale extraction is not widely adopted yet, the output figure may be contentious.

'Main concerns with oil shale: (1) cost has been significantly higher than conventional pumped oil (2) environmental concerns.

'As oil shale is still largely 'conceptual', we would not incorporate any profit contribution from this project yet. The risk profile of YTL Power continues to increase as it is investing in projects that are not widely adopted, that is Wimax and oil shale,' it said.

It rose one sen to RM2.42 at midday on Wednesday.

December 14, 2010

BJTOTO - BToto out of luck in 2Q

Stock Name: BJTOTO
Research House: CIMB

Berjaya Sports Toto Bhd
(Dec 13, RM4.23)
Maintain neutral at RM4.13 with target price of RM4.67
: A higher-than-expected prize payout led to a subpar interim showing by BToto, with 1HFY4/11 core earnings coming in at only 39% of our projection and 34% of consensus.

The second interim tax-exempt dividend per share (DPS) of four sen was marginally below forecast and took year-to-date (YTD) DPS to 12 sen or 42% of our full-year estimate. Factoring in the higher payout for 2Q, we cut our FY11 EPS forecast by 11% and trim FY11 DPS by one sen. Our FY12-13 numbers are unchanged. Our discount dividend model-based end-CY11 target price also stays at RM4.67 due to the minimal reduction in dividends assumed.

We remain neutral on BToto given the competitive threat from Magnum's 4D Jackpot game and concerns over softer sales following the recent cut in prize payout for the Big 4D game. We prefer Genting for exposure to the sector.

2QFY11 topline fell 1.3% year-on-year (y-o-y) due to a lower number of draw days compared to the previous year. On a quarter-on-quarter (q-o-q) basis, 2Q sales advanced 1.3%, lifted mainly by stronger lotto sales despite the lower number of draw days. Like the previous quarter, Supreme Toto 6/58 was the main growth driver, propelling 2Q11 lotto revenue higher by a staggering 55% y-o-y and 26% up q-o-q, thanks to its attractive jackpot which snowballed to RM47.8 million during the quarter. On a year-to-date basis, revenue dipped 0.1% y-o-y as the gaming business was affected by the lower number of draw days and rising competition.

2Q11 earnings before interest and tax (Ebit) fell 33% y-o-y due to the two percentage points (ppts) hike in pool betting duty on June 1 and the less favourable prize payout ratio of 70% versus 2Q10's 63%. Ebit margin continued to narrow q-o-q due to the higher payout ratio. We expect BToto's gaming margin to improve in 4Q as the government recently approved a reduction in the special prize payout, which we estimate will lower the payout ratio for the Big 4D game by two ppts effective Dec 15.

Although we expect BToto to retain its market leadership in CY11 due to decent punting interest in its flagship 4D game and the boost from its three lotto variants, we expect its lead to be crimped by strong interest in Magnum's 4D Jackpot game. Because of this and the maturity of the NFO market in general, we see some downside risk to our flat to +3% annual topline growth projections for BToto for FY11-13. ' CIMB Research, Dec 13

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

TENAGA - Tenaga's tariff hike deferred again

Stock Name: TENAGA
Research House: MIDF

Tenaga Nasional Bhd
(Dec 13, RM8.66)
Maintain buy at RM8.60 with target price of RM9.98
: The latest deferment in tariff hike is the third over the past year. Also, it fails to comply with the earlier government's commitment for a biannual review. Despite the inconclusiveness as to when the adjustment will take place now, we believe the recent announcement on potential possible adjustment as positive. The last tariff adjustment was in March 2009 when the electricity tariff structure in Peninsular Malaysia was reduced by 3.7% to 31.3 sen/kWh following a 25% cut in gas prices to RM10.70 respectively.

In tandem with a moderate economic outlook in CY11, with real GDP to expand by 5.3% from 7.2% in CY10, Tenaga expects electricity demand will grow by 5% in FY11 which is slightly higher than our forecast of 4.5%. Upside potential for electricity demand to grow remains. Much will depend on projects rolling out under Budget 2011 and the Economic Transformation Programme (ETP). We found for every 1% change in power demand growth, it affects Tenaga's core net profit by 2%-3%.

Tenaga's average coal cost in FY10 was US$88.20 (RM276.07) per metric ton (MT), slightly lower than FY09 by 2.2% to US$90.20/MT. For FY11, we expect coal cost to average at US$100/MT, which is in line with Tenaga's projection of US$100 to US$102 per MT. Room for average coal prices to be above the current level is brewing as the average coal price of Newcastle is at US$97.20/MT for the first eleven months of CY10. Should average coal cost be above both our and Tenaga's estimation, we found Tenaga's core net profit will drop by 15% for every US$10/MT increase in coal cost, assuming no changes to other factors (ceteris paribus).

We have maintained our forecasts for FY11 and FY12 on the assumption that: (1) there is no tariff hike; (2) average coal cost is at US$100/MT; and (3) gas price stays at RM10.70/mmBTU which translates into an average electricity tariff of 31.3 sen/kWh. On that premise, our fair value is at RM9.98. But should we assume Tenaga were to adjust its tariff upwards by 4% and holding all other factors constant, it will raise its core net profit by 35.2% to RM3.4 billion. This would translate to a fair value of RM11.50 which is a 15% premium to our current fair value of RM9.98 based on discounted cash flow with WACC of 10.9% and Terminal Growth of 3%. Our sensitivity analysis showed for every 1% change in tariff, it will affect Tenaga's core net profit by 7.8%. ' MIDF Research, Dec 13

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

SAPCRES - SapuraCrest eyes strategic assets, target price lifted

Stock Name: SAPCRES
Research House: MAYBANK

SapuraCrest Petroleum Bhd (SapCrest)
(Dec 13, RM2.89)
Maintain buy at RM2.85 with revised target price of RM3.30 (from RM3.05)
: 3Q results yielded no surprises but we are turning even more positive on SapCrest. It has a strengthened balance sheet to expand its core businesses (ie IPF, marine services, drilling operations) through M&As. Maintain buy with a higher RM3.30 target price (+8%) as we lift target PER multiple from 16 times to 17 times FY13 on new asset injection prospects.

3QFY net profit of RM55 million (+3% quarter-on-quarter, +3% year-on-year) took 9M earnings to RM159 million (+21% y-o-y), on track to meet our and consensus full-year forecasts of RM216 million to RM218 million. No dividend was declared in the quarter. SapCrest remained cash rich for the fourth consecutive quarter with net cash level of RM76 million as at October.

The IPF division was the key performer in 3Q. Pretax profit jumped 123% quarter-on-quarter (q-o-q) to RM83 million, driven primarily by higher contribution from transportation and installation (T&I) projects. Other divisions disappointed. Drilling division's pretax profit fell 21% q-o-q to RM79 million on higher dry-dock costs and lower utilisation. Marine services pretax losses swelled nine times q-o-q; 2 times y-o-y to RM39 million whilst operations and maintenance (O&M) turned into a pretax loss of RM1 million (2Q: +RM1 million).

No change to our forecasts. Its balance sheet allows SapCrest the opportunity to gear up and build its asset base. Marine services division is an area which SapCrest can strengthen ' through M&A or newbuild (or secondary) routes. We also do not rule out SapCrest growing its rigs and pipe-lay vessels through JV with its existing partners (ie Seadrill, Acergy).

Petra Perdana and Alam Maritim are touted as potential acquiree targets. Hypothetically, taking over 100% of any of these companies would cost SapCrest between RM389 million and RM687 million (based on Friday's closing price) and could add RM53 million to RM61 million (+22-25%) to its FY13 net profit (full-year impact); after netting off 7% interest cost.

Pricing will be a key issue for the existing owners to exit. Acquiring Petra could be a less expensive option at Petra's current market value of RM389 million. An asset-liability option may be easier as major owners/shareholders hold just a collective 14%. ' Maybank IB Research, Dec 13

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

MAS - MAS' turnaround risky due to expansion plans

Stock Name: MAS
Research House: HWANGDBS

Malaysian Airline System Bhd (MAS)
(Dec 13, RM2.02)
Maintain hold at RM2.01 with revised target price of RM1.85 (from RM1.90)
: We cut FY11-12F earnings by 3%-6% after imputing lower passenger yields and higher interest expense, which more than offset the impact of the weaker US dollar and lower level of fuel requirement hedged. We expect MAS to turn around next year driven by year-on-year (y-o-y) yield improvement as market conditions improve, while the US dollar is expected to continue to weaken against the ringgit. But MAS' expansion in the low-cost segment could start a price war between low-cost carriers and pressure yields.

We understand MAS is looking to own the first five B738-800s and all six A380-800s that it had ordered. These are scheduled to be delivered between 4QFY10F and FY12F, and likely to be funded by borrowings. Hence, we project net gearing to rise to 1.5 times in FY11F and peak in FY12F at 2.3 times. We understand that it has secured funding for all aircraft to be delivered in FY11.

Maintain hold with a revised target price of RM1.85 pegged to 15 times CY11F EPS. Though we expect MAS to turn around next year, we note that its expansion into the domestic and regional low-cost segment might create downside risk to yields. Furthermore, MAS' net gearing level is expected to rise over the next two years as some of the new aircraft would be owned by the group. This makes it crucial for MAS to deliver consistent earnings to meet its future capital and debt commitments. ' HwangDBS Vickers Research, Dec 13

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

BJTOTO - BSports Toto cut to 'neutral' at Credit Suisse

Stock Name: BJTOTO
Research House: CREDIT SUISSE

Berjaya Sports Toto Bhd, a Malaysian lottery-operator, was cut to "neutral" from "outperform" at Credit Suisse Group AG after reporting weaker fiscal-first half earnings.

The share price estimate was reduced to RM4.30 from RM4.60, Loke Foong Wai, an analyst at Credit Suisse, said in a report today. -- Bloomberg

MAS - HwangDBS rates MAS a 'hold'

Stock Name: MAS
Research House: HWANGDBS

HwangDBS rates Malaysian Airlines Bhd a "hold" with a price target of RM2.01.

"We cut FY11-12F earnings by 3-6 per cent after imputing lower passenger yields and higher interest expense, which more than offset impact of weaker USD and lower level of fuel requirement hedged.

"We expect MAS to turnaround next year driven by y-o-y yield improvement as market conditions improve, while the USD is expected to continue to weaken against the MYR," says Hwang DBS.

"But MAS' expansion in the low-cost segment could start a price war between low-cost carriers and pressure yields. Though we expect MAS to turnaround next year, we note that its expansion into the domestic and regional low-cost segment might create downside risk to yields.

"Furthermore, MAS' net gearing level is expected to rise over the next two years as some of the new aircraft would be owned by the Group," says the research outfit.

"This makes it crucial for MAS to deliver consistent earnings to meet its future capital and debt commitments."

NOTION - Notion Vtec a 'buy' at HwangDBS

Stock Name: NOTION
Research House: HWANGDBS

HwangDBS has rated Notion Vtec a "buy" with a lower target price of RM1.64.

The SLR camera division is expected to grow strongly on expectations of orders for new models of cam barrels and lens rings from major customer, Nikon, and other camera makers, noted HwangDBS.

"YTD-Oct 10 industry shipment volume was strong, growing 17 per cent year-on-year to 100.2 million units and likely to beat CIPA's full year projection of 109.9 million units (+3.8 per cent).

"We expect FY11F SLR camera division revenue to grow 35 per cent year-on-year to RM132 million, and account for 53 per cent of group revenue (vs 44 per cent in FY10)," said the research firm.

Notion has also started to buy back shares (3.7 million shares or 2.4 per cent of paid-up capital YTD-2010).

Near term share price catalysts are more orders for SLR camera components, recovering demand for mainstream PCs, and successful new business ventures.

SAPCRES - AmResearch maintains SapuraCrest FV at RM3.12

Stock Name: SAPCRES
Research House: AMMB

KUJALA LUMPUR: AmResearch is maintaining its Buy call on SAPURACREST PETROLEUM BHD [] with an unchanged fair value of RM3.12 a share based on a CY11F PE of 16.0 times.

The research house said on Monday, Dec 13 SapuraCrest's 9MFY11 net profit of RM159 million was within expectation, accounting for 76% of its FY11F earnings of RM210 million and 74% street estimate of RM216 million.

'But pending our upcoming meeting with management, we are likely to upgrade SapCrest's fair value given its improved earnings record, massive gross order book of RM10 billion and strong new order development against the backdrop of Petronas' prolific capital expenditure programme in enhance oil recovery, deep water and marginal field clusters,' it said.

CENTURY - OSK Research maintains Buy on Century Logistics, unch TP RM2.24

Stock Name: CENTURY
Research House: OSK

KUALA LUMPUR: OSK Research is maintaining its earnings estimates and BUY call on Century Logistics, with an unchanged target price of RM2.24 based on a price-to-earnings (PE) multiple of 6.0 times.

It said The Edge weekly had reported that Century Logistics secured a contract with F&N Dairies Sdn Bhd to provide all transport logistics for the latter's inbound movement of finished dairy products. The three-year contract will kick start sometime in June-July next year.

OSK Research said this marks Century Logistics' second largest MNC client after Nestle, from which it secured a contract three-to-four years ago.

'With this big client coming on board, we are hopeful of Century Logistics'securing more sizeable long term contracts. This contract's contribution to revenue is estimated at RM20m-RM30m a year, especially for Century Logistics' warehousing and land transportation segment, and fetch a net margin of 5%,' it added.

OSK Research said being a regional based customer, management does not rule out the possibility of this contract becoming a regional one since Century Logistics also has a warehouse in Ayutthaya, Thailand.

'Management is targeting for the group's revenue to grow by more than 20% on-year, which is slightly above our forecast of 15%. However, as we prefer to be conservative, we maintain our earnings estimates and BUY call, with an unchanged TP of RM2.24 based on a PE multiple of 6.0 times. Maintain BUY,' it said.

BJTOTO - OSK Research reduces BToto TP to RM4.65, keeps Buy call

Stock Name: BJTOTO
Research House: OSK

KUALA LUMPUR: OSK Research said BERJAYA SPORTS TOTO BHD [] 1HFY11 numbers fell below expectations, largely due to higher prize payouts, pool betting duties and corporate taxes.

In a research note issued on Monday, Dec 13, it said BToto remains committed to maintaining its high payout policy, as evident from 1HFY11's 124% net dividend payout ratio.

'Nonetheless, we are tweaking downwards our dividend payout assumption in tandem with the reduction in our earnings estimates for FY11, for which we are projecting a payout ratio of 95%.

'Consequently, we are reducing our DDM derived target price from RM4.86 to RM4.65 but maintain our BUY recommendation as the stock's current net dividend yield of 5.8% is still one of the highest among the stocks under our coverage,' it said.

GAMUDA - OSK Research: Trading Buy on Gamuda, TP RM4.64

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

KUALA LUMPUR: OSK Research has a Trading Buy call on Gamuda'' Bhd with a Target Price of RM4.64, up from its previous RM4.31.

It said on Tuesday, Dec 14, it said the adjustments increased its sum-of-parts based TP from RM4.31 to RM4.64, which implied CY11 PER of 24 times. This is still close to its historical long term 1-year forward PER of 22 times.

'We maintain our TRADING BUY rating on Gamuda as we expect more positive news flow on the MRT to spur the share price higher. The Cabinet approval of the RM36bn KL MRT and appointment of Gamuda-MMC as the Project Delivery Partner should be the key news to watch,' it said.

Gamuda is set to report its 1QFY11 results this Friday, Nov 17 and OSK Research expects earnings to make up 20%-23% of its full year estimates.