Company Name: BOUSTEAD HOLDINGS BHD
| Research House: HLG | Price Call: BUY | Target Price: 7.71 |
Hostage to DM ' Defensive Candidates
'''' With external uncertainties and long holiday week ahead (end Aug), the local bourse is expected to continue being'' held hostage by financial market's reaction in DM.''
'''' The domestic reporting season is unlikely to excite, similar to the reporting season in the US where investors focus more on economic data and developments from DM.
'''' We had already downgraded our GDP forecast for 2011 to 4.8% (on 16 Jul 2011).'' Recent developments have heightened the risk of global recession but we are not "jumping the gun" and monitoring the PMI indicators from DM, barring further collapse of global markets resulting in a "self fulfilling prophecy".
'''' Investors' preference is expected to be focusing on high yield and defensive stocks in the short-term while any bargain on dips is unlikely to be strong on fear of potential redemption.
'''' Our FBM KLCI year-end target of 1,670 (15x 2012 earnings) is at risk with downside bias in view of risk aversion and potential global recession.''
'''' We have highlighted defensive stocks under HLIB universe as well as high dividend yield stocks and REITs as they may provide more "protection" vis-''-vis high beta stocks.''
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Plantation (Neutral)
Inventory dips to below 2m tonnes
'''' Crude palm oil (CPO) inventory decline by 2.8% in Jul 11 mom (first time since Feb 11) to slightly below 2m tonnes, led by a 0.1% mom decline in production and a 9.1% mom increase in exports.''
'''' Production in Jul 11 declined by 0.1% mom for first time since Feb 11 to 1.75m tonnes mainly on the back of a 1.4% mom decline in East Malaysia production that more than offset a 1.0% mom increase in Peninsular production.
'''' Exports continued to grow for the fifth consecutive month, driven mainly by a sharp increase in demand from China, which surged by 46.1% mom.
'''' While we are keeping our CPO price assumptions of RM3,200/tonne and RM3,000/tonne for 2011 and 2012 for now, we note that the downside risk for CPO price assumptions have now heightened, given the rising fear on global recession.
'''' We are maintaining our earnings forecasts for the five plantation companies under our coverage, and our recommendation on the plantation stocks as well as our sector call (Neutral) are maintained for now, pending further review.
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Boustead Holdings (BUY '')
Consolidation of Pharmaceutical Arm
'''' Pharmaniaga (Pharma) to acquire 51% and 49% of IPMSB from Boustead and IPSB respectively for RM99.73m as well as settle RM68m interco loan due to Boustead.
'''' Pharm will pay IPSB RM51m for terminating supply agreement. IPMSB will obtain IPSB's status of approved Bumiputera supplier of pharmaceutical products and currently manufactures 39 out of the 50 pharmaceutical products that IPSB supply to Pharma..
'''' Based on our back-of-envelope estimates, Pharma is acquiring IPMSB at 3.7x estimated FY11 P/E, lower than Pharma's annualized 1QFY11 P/E of 9.6x.''''
'''' The compensation to IPSB works out to be circa RM19m per annum, implying cost savings in the future.
'''' Positive as Boustead will also enjoy synergistic benefits between Pharma and IPMSB and cost savings from elimination of "middle man".
'''' Maintain Buy and target price of RM7.71 based on 10% holding company discount to estimated SOP of RM8.56.
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Performance of IPI (Jun 2011)
'''' IPI rebounded to +1.0% yoy in June (May: -5.6% yoy), better than the consensus estimate of a -0.8% contraction. The recovery was driven by pick up in manufacturing and electricity production (+4.5% yoy & +3.6% yoy respectively) while mining output declined at more moderate pace'''''' (-8.6% yoy; May: -23.9% yoy).
'''' June's IPI was again affected by the planned maintenance shutdown of Petronas's gas and crude oil production facilities. Impact of Japan supply-chain disruption was still visible with weak performance of transport equipment (-12.9% yoy) and E&E products (-3.5% yoy).
'''' We maintained our estimate that GDP growth will only averaged 3.9% yoy in 2Q. For full year 2011, we had on 17 June lowered our GDP forecast to 4.8% from earlier projection of 5.5%.
'''' We expect heightened external risks to prompt BNM holding rate steady in the September MPC meeting. The recent financial turmoil, if persisted alongside with lower commodity prices, may cause BNM to pause for the remaining of the year.
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