JTINTER - Another cash bonanza for JTI?

Stock Name: JTINTER
Company Name: JT INTERNATIONAL BHD
Research House: OSK

JT International Bhd
(March 10, RM6.60)
Upgrade to buy at RM6.56 with target price raised to RM7.30 (from RM6.32): In FY08, JTI declared a capital repayment of 75 sen per share (2H) and total dividends of 58 sen per share (1H). The repayment was declared when its cash pile was a whopping high at RM265 million. The repayment resulted in its share capital being reduced to RM65.38 million from RM261.5 million.

Paid out in 1QFY09, the capital repayment amounted to some RM196 million, representing 73% of its FY08 cash balance (RM267 million).

Taking into account its recurring 30 sen per share dividend, JTI incurred a cash outlay of RM254.8 million in dividends and capital repayment for 2009. The total amount (in recurring and capital repayment only) represented about 95% of its cash balance as at late FY08/early FY09.

JTI's total cash shrank from RM267 million in 4QFY08 to RM70 million in 1QFY09 following its dividend and capital repayment. Since then, the company's cash position has been increasing at an average RM13.6 million every quarter.

This average increase takes into account the 30 sen tax-exempt dividend it pays out annually. Our average cash increase assumption also strips out JTI's one-off cash received from repayment from a trustee account totalling RM24 million for both years.

Based on the average cash increase of RM13.6 million per quarter, hypothetically JTI's total cash could range from RM240 million to RM260 million in 4QFY11/1QFY12. This is close to the previous high of RM265 million, based on which JTI declared a 75 sen per share capital repayment. The company's net cash per share stood at 72 sen as of its latest reporting quarter. Another plus is that JTI is also debt-free.

With its growing cash pile, JTI is likely to declare special dividends on top of its annual recurring 30 sen per share dividend.

Though our year-end FY11 cash forecast at RM227.1 million is still below the previous capital repayment trigger point of RM265 million, there is still a possibility of a capital repayment.

Based on its previous cash outlay of 95%, this would mean that JTI would fork out cash of around RM215.7 million in FY12 (assuming a special dividend is declared in late FY11 and paid out in 1QFY12). This would translate to a total dividend of about RM1.10 per share (30 sen dividend per share plus a special dividend of 80 sen per share).

Besides a possible dividend payment, JTI may look for an acquisition target domestically to expand its market presence.

However, given increasing illicit trade ' which currently stands at 40% of all cigarettes sold in the street ' we find this option a risky venture for now.

Our expectation of a high dividend payout may also not be met if JTI chooses to retain funds in view of the industry's market pie shrinking over time on high illicit trades stemming from an increase in tobacco excise duties.

We raise our valuations for JTI to a target price of RM7.30 from RM6.32 previously. Our higher target price is arrived at after lowering our weighted average cost of capital assumption to 8.32% from 9.4%, noting the possibility of a bumper special dividend.

Translating to a stock upside of 11.2% coupled with a gross recurring dividend yield at 4.6%, we upgrade the stock to a 'buy' from 'neutral' previously.

Although we have yet to receive any indication of when or how much the possible special dividend might be, we note that its likelihood is high given its growing cash pile. ' OSK Research, March 10


This article appeared in The Edge Financial Daily, March 11, 2011.

TENAGA - TNB's 5pc growth demand achievable: MIDF

Stock Name: TENAGA
Company Name: TENAGA NASIONAL BHD
Research House: MIDF

Tenaga Nasional Bhd's (TNB) projection of five per cent growth in electricity demand in financial year 2011 is achievable based on the growth trend, said MIDF Amanah Investment Bank Bhd.

In a research note, the bank said electricity demand rose by 3.8 per cent year-on-year between September 2010-January 2011 to 37,664 gigawatt hour (GWh).

"We expect demand will continue to emanate from the industrial and commercial segments respectively, accounting for 44.2 per cent and 33.2 per cent of Peninsular Malaysia's electricity demand, while domestic sector will account for 12.6 per cent," it said.

MIDF said every one per cent change in power demand would lift TNB's core net profit by two per cent to three per cent.

It said TNB's unit sales of electricity in Peninsular Malaysia in January 2011 grew by 1.9 per cent year-on-year from 2.2 per cent year-on-year in December 2010 led by healthy consumption from commercial and industrial segments.

The research firm reiterated its 'buy' recommendation and maintained the target price of RM7.98 on TNB amid recovering demand should see TNB reporting better quarters ahead. -- BERNAMA

GAMUDA - Gamuda cut to 'market perform' at RHB

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

Gamuda Bhd was cut to “market perform” from “trading buy” at RHB Research Institute Sdn Bhd to reflect expectations of lower margins from the Malaysian mass rail project in Kuala Lumpur.

The stock’s fair value was reduced to RM4.03 from RM4.51, RHB said in a report today.

The stock fell the most in two weeks in Kuala Lumpur trading, dropping 1.6 per cent to RM3.69 at 9:12 a.m. local time, set for their biggest decline since Feb. 28. -- Bloomberg

ALAM - OSK Research maintains Buy on Alam Maritim, unchanged TP RM1.50

Stock Name: ALAM
Company Name: ALAM MARITIM RESOURCES BHD
Research House: OSK

KUALA LUMPUR: OSK Research is maintaining its Buy call on Alam Maritim with an unchanged target price of RM1.50.

Alam Maritim recently accepted an extension of a spot charter contract to supply of one straight supply vessel worth a contract value of RM11.0m.

OSK Research said the company's announcement of the one-year contract however did not identify the customer, but it believed it is likely be Petronas or its PSC contractors since this is a renewal of contract and the bulk of Alam's existing vessel contracts are from the domestic market

'After the company undertook a kitchen sinking exercise in FY10, we believe the worst is now over. However, as we mentioned earlier, we do not expect Alam's 1H11 results to be very good as it was still affected by the monsoon season in 1Q.

'Also, Petronas' focus is now on the initial stage of marginal oilfield developments and not towards the tail-end of activities, which would more of a 2H11 focus. We maintain a Buy on the company for now, with an unchanged target price of RM1.50 based on the existing PER of 15x FY11 EPS,' it said.

AZRB - OSK Research maintains Buy on AZRB, TP RM1.29

Stock Name: AZRB
Company Name: AHMAD ZAKI RESOURCES BHD
Research House: OSK

KUALA LUMPUR: OSK Research is maintaining a Buy on AHMAD ZAKI RESOURCES BHD [] (AZRB) with a target price of RM1.29 but cautioned that risks remained.

AZRB announced on Thursday, March 10 it had won a RM145.4m contract from the Works Ministry. The job encompasses the remaining works for the East Coast Expressway Phase 2 in Terengganu.

OSK Research said on Friday, March 11 that as YTD job wins are still within its expectations, it left its estimates unchanged.

'Nonetheless we do highlight that a potential provision for Bakun would be the key risk to our estimates. Management continues to guide that no provisions for Bakun will be made.

'Despite this risk, our BUY rating on AZRB is maintained given AZRB's undemanding valuations at 6.6x FY11 earnings and 5.8x FY12. Our RM1.29 TP is based on 10x FY11 earnings which represents the low end of our PER target for small cap contractors within our coverage,' it said.

AFG - Next wave of M&A for Malaysian banks

Stock Name: AFG
Company Name: ALLIANCE FINANCIAL GROUP BHD
Research House: HWANGDBS

Banking sector
We are not just implying temporary value enhancement in banks for the sake of taking advantage of potential general offer valuations. The target banks will benefit from input the potential stakeholders could bring to the table to improve stand-alone value propositions, for example AMMB Holdings Bhd-Australia and New Zealand Banking Group Ltd. We believe nimble banks such as RHB Capital Bhd and Alliance Financial Group Bhd (AFG) are ripe for M&A with new strategic shareholders, given their attractive valuations (1.5 times to 1.6 times CY11 book value) and return on equity (ROE) profiles (14% to 15%).

Prime Minister Datuk Seri Najib Razak said the foreign shareholding cap for local commercial banks will be evaluated on an individual merit basis. There will be no changes to the Banking and Financial Institutions Act for now. If the foreign shareholder limit is raised to 49% from 30% currently, the move would give a positive swing to Malaysian banks, as it could potentially open doors to maintain competitiveness and new strategic partnerships, which could further enhance the value of Malaysian banks. On this note, our bets are on AFG ('buy', target price: RM3.85) and Affin Holdings (not rated).

We believe loan growth will continue to support net interest income growth amid competitive net interest margins, while non-interest income should gear up on capital market activities.

Our pick for regional Malaysian banks is Malayan Banking Bhd (Maybank) ('buy', TP: RM10.80). Maybank still offers an element of positive surprises and carries Indonesia as a multi-year growth story. We also like RHB Capital ('buy', TP: RM10) for its attractive valuation and ROE profile, as well as possible M&A angle. AFG is our new small cap M&A pick ' if Langkah Bahagia exits, it could see a new strategic shareholder. ' HwangDBS Vickers Research, March 10


This article appeared in The Edge Financial Daily, March 11, 2011.

RHBCAP - Next wave of M&A for Malaysian banks

Stock Name: RHBCAP
Company Name: RHB CAPITAL BHD
Research House: HWANGDBS

Banking sector
We are not just implying temporary value enhancement in banks for the sake of taking advantage of potential general offer valuations. The target banks will benefit from input the potential stakeholders could bring to the table to improve stand-alone value propositions, for example AMMB Holdings Bhd-Australia and New Zealand Banking Group Ltd. We believe nimble banks such as RHB Capital Bhd and Alliance Financial Group Bhd (AFG) are ripe for M&A with new strategic shareholders, given their attractive valuations (1.5 times to 1.6 times CY11 book value) and return on equity (ROE) profiles (14% to 15%).

Prime Minister Datuk Seri Najib Razak said the foreign shareholding cap for local commercial banks will be evaluated on an individual merit basis. There will be no changes to the Banking and Financial Institutions Act for now. If the foreign shareholder limit is raised to 49% from 30% currently, the move would give a positive swing to Malaysian banks, as it could potentially open doors to maintain competitiveness and new strategic partnerships, which could further enhance the value of Malaysian banks. On this note, our bets are on AFG ('buy', target price: RM3.85) and Affin Holdings (not rated).

We believe loan growth will continue to support net interest income growth amid competitive net interest margins, while non-interest income should gear up on capital market activities.

Our pick for regional Malaysian banks is Malayan Banking Bhd (Maybank) ('buy', TP: RM10.80). Maybank still offers an element of positive surprises and carries Indonesia as a multi-year growth story. We also like RHB Capital ('buy', TP: RM10) for its attractive valuation and ROE profile, as well as possible M&A angle. AFG is our new small cap M&A pick ' if Langkah Bahagia exits, it could see a new strategic shareholder. ' HwangDBS Vickers Research, March 10


This article appeared in The Edge Financial Daily, March 11, 2011.

RHBCAP - Price Target News

Stock Name: RHBCAP
Company Name: RHB CAPITAL BHD
Research House: HWANGDBS

Banking sector
We are not just implying temporary value enhancement in banks for the sake of taking advantage of potential general offer valuations. The target banks will benefit from input the potential stakeholders could bring to the table to improve stand-alone value propositions, for example AMMB Holdings Bhd-Australia and New Zealand Banking Group Ltd. We believe nimble banks such as RHB Capital Bhd and Alliance Financial Group Bhd (AFG) are ripe for M&A with new strategic shareholders, given their attractive valuations (1.5 times to 1.6 times CY11 book value) and return on equity (ROE) profiles (14% to 15%).

Prime Minister Datuk Seri Najib Razak said the foreign shareholding cap for local commercial banks will be evaluated on an individual merit basis. There will be no changes to the Banking and Financial Institutions Act for now. If the foreign shareholder limit is raised to 49% from 30% currently, the move would give a positive swing to Malaysian banks, as it could potentially open doors to maintain competitiveness and new strategic partnerships, which could further enhance the value of Malaysian banks. On this note, our bets are on AFG ('buy', target price: RM3.85) and Affin Holdings (not rated).

We believe loan growth will continue to support net interest income growth amid competitive net interest margins, while non-interest income should gear up on capital market activities.

Our pick for regional Malaysian banks is Malayan Banking Bhd (Maybank) ('buy', TP: RM10.80). Maybank still offers an element of positive surprises and carries Indonesia as a multi-year growth story. We also like RHB Capital ('buy', TP: RM10) for its attractive valuation and ROE profile, as well as possible M&A angle. AFG is our new small cap M&A pick ' if Langkah Bahagia exits, it could see a new strategic shareholder. ' HwangDBS Vickers Research, March 10


This article appeared in The Edge Financial Daily, March 11, 2011.

GAMUDA - Gamuda trains full focus on MRT project

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

Gamuda Bhd
(March 10, RM3.75)
Maintain buy at RM3.76 with target price RM4.45: Results for 2QFY11 should at least meet our forecast of 26% growth in FY11 net profit. The quarter may however feature a US$30 million (RM91 million) impairment for Yen So Park due to the devalued Vietnamese dong, but this will likely be a balance sheet item. The construction business remains unperturbed by the turmoil in the Middle East and North Africa, with full focus this year on the Kuala Lumpur/Klang Valley Mass Rapid Transit (MRT) project. Gamuda remains a 'buy' as a beneficiary/enabler of the Economic Transformation Programme, with an 18% upside potential to our realisable net asset value-based target price.

Results for 2QFY11, to be released on March 24, should at least meet our RM355 million net profit forecast for FY11. Gamuda delivered RM88.5 million in net profit in 1QFY11 (+11% year-on-year, +16% quarter-on-quarter), which made up 25% of our full-year forecast. The sequential quarterly earnings uptrend, which started in 4QFY09, may continue into 2QFY11 as major construction projects, like the double-tracking rail project, have entered matured phases. Margins should at least sustain. We maintain our earnings forecasts.

Route alignment for the first track, Sungai Buloh-Kajang, has been opened for public comment until mid-May. While the prime minister retains the July deadline for construction to start, we think the work progress will not be meaningful this year due to land acquisition and alignment issues. The construction value should have risen by approximately 30% based on higher material prices. The underground works portion, where MMC Gamuda Joint Venture Sdn Bhd could feature as a contractor, could be worth about RM6 billion. The works have not been reflected in our earnings forecasts for Gamuda.

Gamuda has completed the Sitra Bridge (Bahrain), and its only work exposure in the Middle East now is the New Doha International Airport contract (Qatar) with circa RM200 million worth of works outstanding. Collections for the Sitra Bridge job have been progressively forthcoming. On the other hand, the dong, which has devalued by 25.7% since 2008 (9.3% on Feb 11) will impact its financials with a likely US$30 million impairment in the retained earnings (4.5 sen book value of equity per share), to be reflected in the upcoming 2QFY11 results. ' Maybank IB Research, March 10


This article appeared in The Edge Financial Daily, March 11, 2011.

CARLSBG - Malt liquor sector back on upward trend

Stock Name: CARLSBG
Company Name: CARLSBERG BREWERY MALAYSIA BHD
Research House: AMMB

Malt liquor sector
Maintain neutral: We believe the malt liquor market (MLM) in Malaysia is back on a cyclical upward trend, with the industry forecast to grow at a decent 4% to 5% in 2011 and 2012. In contrast, average MLM growth was flattish at 0.5% to 1.5% per year over the last three years, with the exception of the estimated 4% to 5% FIFA World Cup-led growth in 2010.

The latest industry data reveals that consumption as measured in hectolitres (1HL = 100 litres) has surpassed its previous peak of 1.3HL in 2004/05 ' marking a significant industry turnaround. As we have seen, consumption has been stagnant over the years, ever since alcohol excise duty was raised from RM6 per litre to RM7.40 back in 2004.

Notwithstanding a slight moderation in consumption this year due to the absence of special world events, demand momentum should remain relatively steady moving forward, buoyed by the status quo of excise duties, more brewer-organised events and festivities, and the UEFA European Cup further out in 2012. We forecast higher advertising and promotion spending of RM160 million for Guinness Anchor Bhd (GAB) and RM245 million for Carlsberg Brewery Bhd (CAB) in 2011 (year-on-year: +2% to 3%).

Despite the upward pressure on soft commodity costs, brewers have successfully averted any significant margin erosion via forward purchases of raw ingredients of up to 10 to 12 months. Prices of malting barley, hops and wheat have surged 13% to 18% (last four months) on concerns of tight weather-related crop outputs, potentially translating into higher cost structures for brewers from 2012 onwards. Additional costs are mostly passed on to consumers through higher average selling prices (ASPs) as in the past, while annual price adjustments averaged 3% to 5%. Nevertheless, the stronger ringgit against the US dollar would bode well in providing some cushion against volatile imports. Raw ingredients and packaging materials constitute approximately 13% to 14% of revenue.

At the forefront of CAB's growth is rising earnings contribution from increased brewing capacity of Carlsberg Singapore. Carlsberg Singapore makes up 30% of group revenue at present. Industry prospects in Singapore are comparatively brighter, as it registered a faster growth rate of 8% to 9% in 2010 (twice that of Malaysia), while consumption per capita at approximately 25 litres is 19% higher than that in Malaysia.

On the other hand, GAB is expected to at least retain its 60% MLM market leadership in Malaysia. While lacking a strong premium beer to compete against CAB, the group has nevertheless grabbed overall MLM market share off CAB though its iconic Tiger beer. We expect the group to leverage on its stronghold of better margins on trade sales channels to boost consumption. Our earnings forecast model indicates a three-year compound annual growth rate of 4%.

For exposure to the MLM sector, we prefer CAB as valuations are more attractive. Unlike GAB, CAB is currently trading below the mean of its 10-year historical price-earnings ratio band. CAB's undemanding current price-to-book value of three times is near its mean, at a deep discount to GAB's seven times (equivalent to 2.5 standard deviation). For a stock offering comparable earnings per share growth and implied dividend yields, CAB's valuations are unjustifiably cheap. ' AmResearch, March 10


This article appeared in The Edge Financial Daily, March 11, 2011.

KIMLUN - Kitchen-sinking in construction

Stock Name: KIMLUN
Company Name: KIMLUN CORPORATION BERHAD
Research House: OSK

Construction sector
Maintain overweight: During the 4Q10 reporting season last month, we noted that some contractors had embarked on kitchen-sinking exercises.
WCT Bhd and MTD Bhd (not rated) each made RM36 million in provisions for Bakun Dam. The provisions comprise: (i) RM26 million for additional costs required to complete the job; and (ii) RM10 million for contributions on the part of two other consortium members that are unlikely to be able to meet the cash calls of the MCH JV, which is undertaking the Bakun Dam job.

Ahmad Zaki Resources Bhd (AZRB) reversed out RM99 million in revenue for its Alfaisal University job in Saudi Arabia. The job has incurred delays and the reversed sum represents the associated prolongation costs.

Sunway's associates were in the red mainly due to RM18 million in profit reversal on its Al Reem project. Job delays led to an upward revision in costs and Sunway chose the most conservative approach by reversing out all its past profits.

Although AZRB has a 7.7% stake in the MCH JV (similar to WCT and MTD), it did not make the RM36 million provision. We understand that the individual members of the JV were given the discretion on how much to provide, subject to their auditors' approval. Unlike WCT and MTD, AZRB was never awarded any of Bakun's construction packages by the MCH JV. While AZRB was in the running for one package worth RM240 million, the job was subsequently awarded to Sinohydro Corp as its price was slightly lower. We gather that due to cost overruns, the final cost of that package had ballooned to over RM400 million.

Last December, AZRB instituted a RM58 million counter-claim against three members of the JV (Sime Engineering Sdn BHd, WCT and Sinohydro) on the grounds of breach of their fiduciary duties. Management maintains its view that no provisions for Bakun will be made. Should AZRB be required to make a provision for the RM36 million, this would wipe out our FY11 earnings forecast of RM35.8 million.

The 1.33 billion dirhams (RM1.32 billion) Al Reem job in Abu Dhabi comprising five towers was awarded to a consortium comprising IJM Corp Bhd, LFE Corp Bhd, Sunway and Zelan Bhd (each with a 25% stake) in 2006. The job is now 95% complete and Sunway will not be recognising any profits on the remaining portion of works. There was no profit reversal on the part of IJM as it had not recognised any to begin with. Based on the notes accompanying the recent results, there was no indication of either Zelan (NR) or LFE (NR) recording any profit reversals on the said job.

We highlight two risks that may lead to more kitchen-sinking:
(i)'' ''drastic increases in material prices, and
(ii)'' ''the further spread of the Middle East unrest. An unexpected rise in material prices cannot be discounted given that oil prices are now above US$100 per barrel. This would lead to failure to achieve the targeted margins on existing jobs, which may in turn result in profit reversals and provisions. In the Middle East, Malaysian contractors have minimal exposure to the countries experiencing protests but if these spread, ongoing jobs could be adversely impacted (WCT is the most exposed at 52% of its order book, mainly in Qatar). This may give rise to project delays and in the worst-case scenario, cancellations.

While we regard the recent kitchen-sinking exercises as one-off events that are unlikely to recur, spiralling material prices and escalation of the Middle East crisis remain the key risks. For now, we maintain our 'overweight' rating on the sector, driven primarily by:
(i)'' ''implementation of the various projects under the Economic Transformation Programme; and
(ii)'' ''the potential of more contract awards as the government attempts to generate a feel-good factor given the potential of an early general election. Our top picks are Gamuda Bhd ('buy', target price: RM4.78) and Mudajaya Group Bhd ('buy', TP: RM7.44). For small cap plays, we like KimLun Sdn Bhd ('buy', TP: RM2.32). ' OSK Research, March 10


This article appeared in The Edge Financial Daily, March 11, 2011.

GAMUDA - Kitchen-sinking in construction

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

Construction sector
Maintain overweight: During the 4Q10 reporting season last month, we noted that some contractors had embarked on kitchen-sinking exercises.
WCT Bhd and MTD Bhd (not rated) each made RM36 million in provisions for Bakun Dam. The provisions comprise: (i) RM26 million for additional costs required to complete the job; and (ii) RM10 million for contributions on the part of two other consortium members that are unlikely to be able to meet the cash calls of the MCH JV, which is undertaking the Bakun Dam job.

Ahmad Zaki Resources Bhd (AZRB) reversed out RM99 million in revenue for its Alfaisal University job in Saudi Arabia. The job has incurred delays and the reversed sum represents the associated prolongation costs.

Sunway's associates were in the red mainly due to RM18 million in profit reversal on its Al Reem project. Job delays led to an upward revision in costs and Sunway chose the most conservative approach by reversing out all its past profits.

Although AZRB has a 7.7% stake in the MCH JV (similar to WCT and MTD), it did not make the RM36 million provision. We understand that the individual members of the JV were given the discretion on how much to provide, subject to their auditors' approval. Unlike WCT and MTD, AZRB was never awarded any of Bakun's construction packages by the MCH JV. While AZRB was in the running for one package worth RM240 million, the job was subsequently awarded to Sinohydro Corp as its price was slightly lower. We gather that due to cost overruns, the final cost of that package had ballooned to over RM400 million.

Last December, AZRB instituted a RM58 million counter-claim against three members of the JV (Sime Engineering Sdn BHd, WCT and Sinohydro) on the grounds of breach of their fiduciary duties. Management maintains its view that no provisions for Bakun will be made. Should AZRB be required to make a provision for the RM36 million, this would wipe out our FY11 earnings forecast of RM35.8 million.

The 1.33 billion dirhams (RM1.32 billion) Al Reem job in Abu Dhabi comprising five towers was awarded to a consortium comprising IJM Corp Bhd, LFE Corp Bhd, Sunway and Zelan Bhd (each with a 25% stake) in 2006. The job is now 95% complete and Sunway will not be recognising any profits on the remaining portion of works. There was no profit reversal on the part of IJM as it had not recognised any to begin with. Based on the notes accompanying the recent results, there was no indication of either Zelan (NR) or LFE (NR) recording any profit reversals on the said job.

We highlight two risks that may lead to more kitchen-sinking:
(i)'' ''drastic increases in material prices, and
(ii)'' ''the further spread of the Middle East unrest. An unexpected rise in material prices cannot be discounted given that oil prices are now above US$100 per barrel. This would lead to failure to achieve the targeted margins on existing jobs, which may in turn result in profit reversals and provisions. In the Middle East, Malaysian contractors have minimal exposure to the countries experiencing protests but if these spread, ongoing jobs could be adversely impacted (WCT is the most exposed at 52% of its order book, mainly in Qatar). This may give rise to project delays and in the worst-case scenario, cancellations.

While we regard the recent kitchen-sinking exercises as one-off events that are unlikely to recur, spiralling material prices and escalation of the Middle East crisis remain the key risks. For now, we maintain our 'overweight' rating on the sector, driven primarily by:
(i)'' ''implementation of the various projects under the Economic Transformation Programme; and
(ii)'' ''the potential of more contract awards as the government attempts to generate a feel-good factor given the potential of an early general election. Our top picks are Gamuda Bhd ('buy', target price: RM4.78) and Mudajaya Group Bhd ('buy', TP: RM7.44). For small cap plays, we like KimLun Sdn Bhd ('buy', TP: RM2.32). ' OSK Research, March 10


This article appeared in The Edge Financial Daily, March 11, 2011.

LMCEMNT - 'Reduce' call on LaFarge Cement

Stock Name: LMCEMNT
Company Name: LAFARGE MALAYAN CEMENT BHD
Research House: AFFIN

Given the rising coal prices, KL Affin thinks there could likely be another round of price hike over the next three to six months.

Given historical trend, KL Affin expects it would likely be another 10 per cent hike in gross selling price. The most recent hike was in May 2010, where Ordinary Portland Cement average gross selling price (ASP) was raised by 10 per cent to RM305 per tonne.

Based on our simulation, all things being equal, for every RM5 per tonne hike in cement price, it will raise our earnings by 8 per cent.

Going forward, as we expect demand to at least remain stable, if not improve, rebates would also likely to be lower. recommendation.

We believe at current price level, we believe the market has already imputed the positive construction newsflow, while any potential hike in selling prices will likely be offset by the rising coal prices.

La Farge Cement continues to offer a decent yield of around 4-5 per cent , based on 80-90 per cent payout ratio. However, this is insufficient to offset the expensive valuation.

Currently, at 16.5 times current year 2011 price earnings ration, it is trading at a premium to its high of 14 times forward P/E during the last peak of construction sector growth in Q3 2007.

Hence, we maintain our 'Reduce' recommendation with a slightly lower target price of RM6.60, based on an unchanged target PER of 14.5 time. - Reuters

MAYBANK - Malaysia banking profits set to grow 15pc

Stock Name: MAYBANK
Company Name: MALAYAN BANKING BHD
Research House: HWANGDBS

Banking sector earnings is expected to grow at 15 per cent while return on equity (ROE) is anticpated at 16 per cent this year, says HwangDBS Vickers Research.

"We believe loans growth will continue to support net interest income growth amid competitive net interest margin while non-interest income should gear up on capital market activities," it said in a note today.

The research firm said banks were increasingly relying on non-interest income to enhance capital costs and improve ROE while expenses were expected to remain stable and provisions low.

It said projects under the Economic Transformation Programme would drive more fund raising activities this year while mergers and acquisitions transactions could surface with further divesment of government link companies.

Taking cue from the positive momentum last year, HwangDBS expects capital market activities to spur higher non-interest income for banks this year.

"We forecast industry ROE to reach a new high of 16.3 per cent by 2012, driven by overall revenue drivers, in particular non-interest income," it added.

HwangDBS's pick for "Regional Malaysian Banks" is Malayan Banking Bhd, which has been accorded a "buy" call and a target price of RM10.80.

"But, Malayan Banking would still offer an element of positive surprises and carries Indonesia as a multi-year growth story," it said, adding that CIMB was also considered as having done well and a proxy for Asean banks.

The research house also prefered RHB Capital, recommending a buy call and target price of RM10 for its attractive valuation, ROE profile as well as possible merger and acquisition angle.
-- Bernama

TAANN - CIMB Research has Sell on Ta Ann, near term gains capped

Stock Name: TAANN
Company Name: TA ANN HOLDINGS BHD
Research House: CIMB

KUALA LUMPUR: CIMB Equities Research has a Sell on timber stock Ta Ann Holding Bhd at RM4.80.

It said on Thursday, March 10 the recent breakout looks more like a fake-out. After hitting a new 52-week high of RM5.39, prices have been on a descending trend, suggesting that the bears are gaining pace fast.

'If the 200-day SMA support (now at RM4.65) is breached, we expect renewed selling pressure to set in, pushing prices lower towards RM4.35 and RM4 next.

'Near term gains are likely capped at RM4.84-RM5.02. Hence, our strategy here is to unload on strength. But a buy stop at RM5.15, just in case,' it said.

JTINTER - OSK Research upgrades JTI to Buy from Neutral, sees special dividend payment

Stock Name: JTINTER
Company Name: JT INTERNATIONAL BHD
Research House: OSK

KUALA LUMPUR: OSK Research said Japan Tobacco International's (JTI) cash pile has been growing since its last capital repayment in 1Q2009.

It said on Thursday, March 10 that JTI, with a cash hoard of RM189m and still growing, it believed the company was likely to pay a special dividend in due course.

'Apart from its recurring annual dividend payout of 30 sen per share, we roughly estimate a possible special dividend amounting to 80 sen per share.

'We are raising our target price for the stock to RM7.30 from RM6.20 previously upon lowering our WACC assumption to 8.32% from 9.4% previously. The stock is upgraded to a BUY from NEUTRAL,' it said.

CYPARK - OSK Research ups Cypark Resources target price to RM2.98

Stock Name: CYPARK
Company Name: CYPARK RESOURCES BERHAD
Research House: OSK

KUALA LUMPUR: OSK Research said Cypark Resources, the premier landfill rehabilitator in Malaysia, has announced its foray into the Renewable Energy (RE) space by setting up a 10MW RE Park on a previous landfill site in Pajam, Negeri Sembilan.

The research house said on Thursday, March 10 that it finds Cypark's current business of landfill management already fairly valued at a generous PER of 15x after the 77% share price rally since it picked Cypark as a 'Hidden Jewel' in its January outlook report.

'Nonetheless, the RE business provides great opportunity IF and WHEN the Renewable Energy Act is passed to allow for higher RE electricity tariffs.

'The RE Act could mean that the Pajam RE Park alone will contribute some 22% in additional value for Cypark and lift its indicative target price to RM2.98. With the potential for more RE parks, Cypark makes for an interesting Trading Idea pending the passing of the RE Act,' it said.

JTINTER - JT Intl remains a 'buy' at OSK

Stock Name: JTINTER
Company Name: JT INTERNATIONAL BHD
Research House: OSK

JT International Bhd, a Malaysian cigarette maker, had its share price estimate increased to RM7.30 from RM6.32 at OSK Research Sdn Bhd, which expects the company to distribute a special dividend.

“With its growing cash pile the company is likely to declare special dividends on top of its annual recurring 30 sen per share dividends,” OSK said in a report today. It kept a “buy” rating on the stock. -- Bloomberg

AEONCR - Growth slowing down at Aeon Credit Service

Stock Name: AEONCR
Company Name: AEON CREDIT SERVICE (M) BHD
Research House: HWANGDBS

Aeon Credit Service (M) Bhd
(March 9, RM3.97)
Downgrade to hold at RM3.92 with target price reduced to RM4.20 (from RM4.60): We expect financing volumes for ACSM's two key business segments ' motorcycle easy payment (MEP) and general easy payment (GEP) ' to show healthy single-digit improvement quarter-on-quarter (q-o-q), while personal financing and credit card operations could have exceeded internal targets in 4QFY11. All in, ACSM should meet our loan growth projection and hit RM1 billion in FY11F with unearned interest income underpinning earnings visibility in FY12F/13F.

Rising interest rates normally mean higher interest cost for lenders like ACSM. But the net impact on net interest margin (NIM) may be lessened by its funding mix (64% fixed and 36% floating rate) and ability to adjust lending rates. Our sensitivity analysis shows that every 1% increase in average funding cost would reduce ACSM's FY12F/13F net profit by 1.5% to 1.7%.

Taking into account FY11 growth expectations, we trim our loan growth assumption for GEP and MEP to an average of 11% for FY12F/13F. In addition, we raise interest cost for floating loans by 50 basis points to reflect DBS Bank's expectation of overnight policy rate hikes in 2011. As a result, FY12F/13F earnings are cut by 6% to 7%.

Since its listing in December 2007, group net profit has been expanding at 41% compound annual growth rate (CAGR). But growth will start to slow because of a larger earnings base (FY10/FY13F CAGR of 14%). This has prompted us to change our valuation metric from a price-earning to growth ratio to price-earnings (PER). Applying a three-year historical average PER of seven times on FY12F earnings per share, we derive a lower target price of RM4.20 (from RM4.60). Downside risk is limited by its undemanding PER valuation and decent FY12F net dividend yield of 5.4%. Downgrade to 'hold' as the stock ' which has risen 5.1% year-to-date ' offers only 13% total potential return (including dividends). ' HwangDBS Vickers Research, March 9


This article appeared in The Edge Financial Daily, March 10, 2011.

WCT - OSK maintains 'buy' call on WCT

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

OSK Research has maintained a "buy" call on WCT Bhd and increased the target price to RM3.75 from RM3.66 previously, on the prospect of the company winning RM2 billion new jobs, and RM400 million property launches this year.

OSK in a research statement today said the RM2 billion jobs target in Malaysia and the Middle East, is in line with its assumption.

Among the projects being tendered are the RM1.5 billion light rail transit Package B in Malaysia, two road jobs in the Middle East and a building in Qatar worth RM500 million each, and some projects in Putrajaya and Iskandar Malaysia, it said.

For the property launches, it said the company is expected to achieve a 80 per cent take-up rate from it.

OSK has also raised WCT's Financial Year 2011 and 2012 forecast earnings by 3.2 per cent and 5.5 per cent respectively, as it predicts higher property sales. -- Bernama

PCHEM - Petronas Chemical climbs , boost from upgrades

Stock Name: PCHEM
Company Name: PETRONAS CHEMICALS GROUP BHD
Research House: JP MORGAN CHASE

KUALA LUMPUR: Shares of Petronas Chemicals rose in active trade on Wednesday, March 9 in line with the positive market sentiment and upgrades by foreign and local research houses.

At 3.28pm, Petronas Chemicals was up 35 sen to RM6.80 with 41 million shares done while its call warrants, PChem-WA added 3.5 sen to 35.5 sen.

The FBM KLCI rose 7.23 points to 1,524.89. Turnover was 1.09 billion shares valued at RM1.50 billion. There were 495 gainers, 242 losers and 253 stocks unchanged.

JP Morgan Research set a new December 2012 target price of RM7.80 based on 2.5 times FY12 estimated book value.

'Petronas Chemicals remains one of our top picks in the region due to its competitive feedstock structure, product slate and volume growth in 2011. Key downside risk to our forecasts is rapidly falling crude oil prices and capacity utilisation lower than our expectations,' it said.

Meanwhile, Credit Suisse Research said during its marketing trip in Europe and the US over the past two weeks,'' it said Petronas Chemicals attracted attention.

'Petronas Chemicals was of particular interest because it is: (1) most leveraged to rising oil prices among the petrochemical companies; (2) a beneficiary of the upturn in the petrochemical cycle; (3) cheap versus its peers and among the Malaysian big-cap stocks,' it said.

Credit Suisse has an Outperform at RM6.45 and a target price of RM7.50.

PCHEM - Petronas Chemical climbs , boost from upgrades

Stock Name: PCHEM
Company Name: PETRONAS CHEMICALS GROUP BHD
Research House: CREDIT SUISSE

KUALA LUMPUR: Shares of Petronas Chemicals rose in active trade on Wednesday, March 9 in line with the positive market sentiment and upgrades by foreign and local research houses.

At 3.28pm, Petronas Chemicals was up 35 sen to RM6.80 with 41 million shares done while its call warrants, PChem-WA added 3.5 sen to 35.5 sen.

The FBM KLCI rose 7.23 points to 1,524.89. Turnover was 1.09 billion shares valued at RM1.50 billion. There were 495 gainers, 242 losers and 253 stocks unchanged.

JP Morgan Research set a new December 2012 target price of RM7.80 based on 2.5 times FY12 estimated book value.

'Petronas Chemicals remains one of our top picks in the region due to its competitive feedstock structure, product slate and volume growth in 2011. Key downside risk to our forecasts is rapidly falling crude oil prices and capacity utilisation lower than our expectations,' it said.

Meanwhile, Credit Suisse Research said during its marketing trip in Europe and the US over the past two weeks,'' it said Petronas Chemicals attracted attention.

'Petronas Chemicals was of particular interest because it is: (1) most leveraged to rising oil prices among the petrochemical companies; (2) a beneficiary of the upturn in the petrochemical cycle; (3) cheap versus its peers and among the Malaysian big-cap stocks,' it said.

Credit Suisse has an Outperform at RM6.45 and a target price of RM7.50.

FABER - OSK Research maintains Trading Buy on Faber, unchanged TP RM3.02

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

KUALA LUMPUR: OSK Research is maintaining its Trading Buy on FABER GROUP BHD [] with an unchanged target price of RM3.02 after tyhe company announced it would spearhead the proposed Energy Performance Management System (EPMS) project.

OSK Research said on Wednesday, March 9 that as the project is still at an early stage, it had not factored in any revenue contribution in its forecast. Nevertheless, it believes the project will enhance Faber's future earnings.

'We maintain our TRADING BUY recommendation at an unchanged TP of RM3.02 based on SOP valuation. We still think that Faber should get its existing concession renewed in view of its track record and excellent execution of the existing concession, which should provide the upward catalyst for its share price,' it said.

ILB - Integrated Logistics remains an 'outperform'

Stock Name: ILB
Company Name: INTEGRATED LOGISTICS BHD
Research House: RHB

Integrated Logistics Bhd
(March 9, RM1.01)
Maintain outperform at RM1 with fair value RM1.40: The construction of the 67 million yuan (RM34 million) Phase 2 of ILB's warehouse complex in Wujiang, with a total area of 390,000 sq ft, is scheduled to start during the month with completion expected by August. We understand that ILB has already identified potential tenants, including a world-renowned France-based cosmetics and beauty company and a prominent US-based global online retailer.

The full completion of the greenfield 170 million yuan warehouse complex for Frestech/Xinfei is expected by June. At present, three of the five warehouses within the 810,000 sq ft complex have been completed.

We understand from independent sources that ILB may also embark on a fairly sizeable greenfield warehouse project within the auto industry belt in northeastern China, to be leased to a Sino-American auto company for the storage of auto parts on a 15-year lease.

Currently 75% completed, ILB's 50%-owned new RM260 million warehouse in Dubai is scheduled to open for business by early-2012. Substantially equipped with cold room facilities, the warehouse will tap into Dubai's fast-growing regional fast moving consumer goods (FMGC) distribution business, covering the Middle East and North Africa. While the unrest in the region may put a dent in the growth in its FMGC sector, we are more inclined to believe that this is temporary.

We are raising FY12/13 net profit forecasts by 1% to 3%, having changed our assumptions on the commencement and area of Phase 2 of the warehouse project in Wujiang to FY12 and 390,000 sq ft, from FY13 and 240,000 sq ft as guided previously.

Risks include: (i) A major slowdown in the global economy, hence China's export sector; (ii) Prolonged downturn in Dubai; and (iii) Rising costs in China, particularly, labour.

With the disposal of its business in Malaysia, ILB has become very much a high-growth China-based company listed in Malaysia. Indicative fair value is RM1.40 based on 13 times FY11 earnings per share, at a 30% premium to our benchmark one-year forward target price-earnings ratio for the transport and logistics sector of 10 times to reflect ILB's superior earnings growth visibility with the good execution of its second wave of investment/expansion in China. ' RHB Research, March 9


This article appeared in The Edge Financial Daily, March 10, 2011.

STAR - A strong finish and an encouraging start for media sector

Stock Name: STAR
Company Name: STAR PUBLICATIONS (M) BHD
Research House: MAYBANK

Media sector
Maintain overweight: Media earnings surprised on the upside during the 4Q10 results season on strong advertising expenditure growth. January industry gross adex growth remained encouraging at 14% year-on-year (y-o-y), led by TV, as consumer sentiment remained robust at a 3'' year high. We expect seasonal weakness in February but still a likely high single to low double-digit growth in percentage terms y-o-y. Media Prima's recent share price weakness is an opportunity to accumulate and MCIL is a value proposition at single-digit valuations.

Media and gaming were the only sectors that surprised on the upside in the recent 4Q10 results season. Combined recurring net profit in 4Q10 was RM169.7 million (+19% y-o-y, +23% quarter-on-quarter). Media Prima results were in line, but we had imputed very conservative adex growth assumptions for the print media: Star and MCIL. In the end, both recorded strong mid-double-digit percentage rises in adex growth.

Y-o-y growth was led by TV (18%), while newspapers did not fare too poorly (12%). As a result, TV gained one percentage point of gross adex share y-o-y at the expense of newspapers. Most of the top 10 advertisers spent more y-o-y on advertisements. Month-on-month (m-o-m), January's total gross adex was 22% lower, but within the historical range of 20% to 22% contraction. This is because advertisers exhausted their A&P budgets in December, took a breather in January, negotiated rates in February and gradually increased ad spend from March onwards as adex-friendly events and festivals come to pass.

We understand that February's total gross adex will be lower m-o-m but higher y-o-y by high single to low double digits in percentage terms. Advertisers seek to capitalise on still strong consumer sentiment. According to the MIER, consumer sentiment is at a 3'' year high. We maintain our 5% total gross adex growth forecast for 2011, conservatively premised on one times real GDP growth (12-year average: 2.3 times). That said, we see some publications (The Star and New Straits Times) recording lower adex growth on waning daily circulation.

Media Prima is trading at a significant four times price-earnings ratio (PER) discount to its historical mean of 17 times despite TV adex still growing strongly. MCIL is attractive for its single-digit valuations and high dividend yields. MCIL is a 'value buy' at 9.2 times 2011 PER, 31% discount to its peers (average: 13 times) and with an earnings base that is closing in on The Star (just 7% behind). The Star ('hold') offers high net dividend yields, but in light of declining daily circulation, valuations do not yield a compelling 'buy' call. ' Maybank IB Research, March 9


This article appeared in The Edge Financial Daily, March 10, 2011.

AEONCR - HDBSVR lowers AEON Credit Service to Hold, cuts TP to RM4.20

Stock Name: AEONCR
Company Name: AEON CREDIT SERVICE (M) BHD
Research House: HWANGDBS

KUALA LUMPUR: Hwang DBS Vickers Research has downgraded'' AEON Credit Service to Hold as growth slows with larger profit base.

It said on Wednesday, March 9 it had cut the target price to to RM4.20, pegged to 7x FY12F EPS.

'FY12F-13F trimmed by 6-7% on slower loan growth.'' Share price supported by cheap 6.5x FY12F PE and projected 5.4% dividend yield,' it said.

HDBSVR said since its listing in December 2007, Aeon Credit's group net profit had been expanding at 41% CAGR. But growth will start to slow because of a larger earnings base (FY10-FY13F CAGR of 14%).

'This has prompted us to change our valuation metric from PEG to PE. Applying a 3-year historical average PE of 7x on FY12F EPS, we derive a lower target price of RM4.20 (from RM4.60),' it said.

HDBSVR said downside risk is limited by its undemanding PE valuation and decent FY12F net dividend yield of 5.4%. Downgrade to Hold as the stock ' which has risen 5.1% YTD ' offers only 13% total potential return (including dividends).

''

MUDAJYA - OSK Research maintains Buy on Mudajaya, TP RM7.44

Stock Name: MUDAJYA
Company Name: MUDAJAYA GROUP BHD
Research House: OSK

KUALA LUMPUR: OSK Research is maintaining its BUY rating on Mudajaya and target price of RM7.44 based on a 20% discount to its Sum of Parts (SOP) valuation.

It said on Wednesday, March 9 the immediate term catalyst would be the award of the RM5bn Janamanjung EPCC, in which it expected the company to participate in the civil portion potentially worth RM800 million to RM1 billion.

'Mudajaya remains as one of our top sector picks,' it said.

Mudajaya has proposed a corporate exercise involving a bonus issue of up to 137.08 million new shares and the setting up of an employees' share option scheme (ESOS).

The bonus issue would on the basis of one bonus share for every three shares held.

AEONCR - Aeon Credit Service downgraded to 'hold'

Stock Name: AEONCR
Company Name: AEON CREDIT SERVICE (M) BHD
Research House: HWANGDBS

AEON Credit Service (M) Bhd, a Malaysian consumer financing provider, was cut to “hold” from “buy” at HwangDBS Vickers Research Sdn Bhd to reflect slower loan growth.

The share estimate was reduced to RM4.20 from RM4.60, analyst Kok Chiew Sia wrote in a report today. - Bloomberg

POS - Transformation on track for Pos Malaysia

Stock Name: POS
Company Name: POS MALAYSIA BHD
Research House: OSK

Pos Malaysia Bhd
(March 7, RM3.05)
Maintain buy at RM3.08 with revised target price of RM4.12 (from RM4.45): Pos Malaysia's analyst briefing was centred on the latest 4Q results and progress made on its transformation master plan, which highlighted the impact to volume following the postal tariff hike, measures to mitigate the impact of declining mail volume as well as its efforts to reduce operating costs through effective delivery beat management. All in, we gather that Pos' transformation plan remains on track given that all its 2010 key performance indicators had been achieved.

While we expect mailing volume to continue to decline, the retail contribution from its tie-ups with banks will offset the overall impact. Revenue growth is projected to be on an uptrend as the company would see the full effects of the tariff hike in FY11.

Furthermore, we expect overall margins to continue to expand as the impact of the postage will offset the full year effect of the 2010 salary hike.

However, owing to spiralling costs on assumption of higher jet fuel and staff costs, we are trimming our earnings forecasts by 17.1% for FY11 and 13.3% for FY12.

The unveiling of its strategic partner is expected to be announced in the next one to two months as the deadline of March 15 for bidding draws near.

Potential relaxation of the use of its lands bank under the purview of the Postal Bill appears to be progressing well as the draft Bill will be tabled in Parliament this month. We expect the proposed amendments related to relaxation will go through as it would make more economic sense for the government to optimise the potential value of the landbank.

We maintain our 'buy' recommendation on Pos, but have downgraded our target price to RM4.12 following the downward revision in earnings (from RM4.45).

We continue to value Pos on a sum-of-parts basis to capture the near-term earnings impact, where we apply a 14-time PER (from 13 times historical forward PE with inclusion of the strategic partnership catalyst premium), and the value of its five pieces of land not under the purview of the Postal Bill and its net cash. Maintain buy. ' OSK Research, March 7


This article appeared in The Edge Financial Daily, March 8, 2011.

PBBANK - Banking sector: Valuations are undemanding

Stock Name: PBBANK
Company Name: PUBLIC BANK BHD
Research House: MAYBANK

Banking sector
Maintain overweight:
The sector's value proposition lies in (i) stable economic growth which lends support to our aggregate net profit growth forecast of 11.6% for 2011 and 11.8% for 2012; (ii) benign inflation and bottoming margins; (iii) steady loan growth momentum; (iv) potential Economic Transformation Programme upside surprises; (v) cross-synergies and burgeoning contribution from regional operations to group earnings; (vi) healthy capital ratios; and (vii) decent valuations and dividend yields. RHB Capital and CIMB continue to be our top picks.

Results were broadly within expectations, with recurring net profit up 24% year-on-year (y-o-y). While cumulative loan growth was a commendable 12.9% y-o-y, net interest margin (NIM) compression during the period contributed to a more moderate 10.3% y-o-y expansion in net interest income, while fee income and other non-interest income growth rates were a modest 6.8% y-o-y respectively. Operating expenses, meanwhile, rose 10.1% y-o-y. Consequently, operating profit rose by a slower 11% y-o-y, while the jump in net profit was driven primarily by lower loan loss provisions, which fell a sizeable 34.5% y-o-y in 2010.

Our industry loan growth estimate is raised to 11.5% for 2011 from 10%-11% previously and we forecast 2012 loan growth at 10.5%. We expect household loan demand to moderate from 13.2% for 2010 to about 10.5% for 2011 and 8% for 2012, but expect non-household (business/government) lending to pick up the slack with growth rates of 12.7% and 13.5% for 2011 and 2012 respectively, from 12.3% for 2010.

We project recurring net profit growth of 11.6% and 11.8% for 2011 and 2012 respectively for the top 5 banks, on operating profit growth of 8.6% for 2011 and 12.4% for 2012. We expect cumulative loans (domestic and regional) for the top 5 banks to expand by 12% for 2011, 10.9% for 2012. While we have imputed a 6-11 basis points NIM contraction this year, we expect NIMs to bottom out and recover in 2012, aided in part by likely rate hikes in 2H10. Amid volatility in the external environment, we are factoring in moderately higher non-performing loans.

Valuations are undemanding, in our opinion, with the large banks trading at a prospective 2011 calendarised PER of 13.1 times, 11.7 times for 2012. Separately, the sector trades at a prospective 2012 P/BV of 1.9 times supported by an average ROE of 16.9%. Dividend yields, meanwhile, average a decent 4.2% and 4.7% for 2011 and 2012 respectively. ' Maybank IB Research, March 7


This article appeared in The Edge Financial Daily, March 8, 2011.

CIMB - Banking sector: Valuations are undemanding

Stock Name: CIMB
Company Name: CIMB GROUP HOLDINGS BERHAD
Research House: MAYBANK

Banking sector
Maintain overweight:
The sector's value proposition lies in (i) stable economic growth which lends support to our aggregate net profit growth forecast of 11.6% for 2011 and 11.8% for 2012; (ii) benign inflation and bottoming margins; (iii) steady loan growth momentum; (iv) potential Economic Transformation Programme upside surprises; (v) cross-synergies and burgeoning contribution from regional operations to group earnings; (vi) healthy capital ratios; and (vii) decent valuations and dividend yields. RHB Capital and CIMB continue to be our top picks.

Results were broadly within expectations, with recurring net profit up 24% year-on-year (y-o-y). While cumulative loan growth was a commendable 12.9% y-o-y, net interest margin (NIM) compression during the period contributed to a more moderate 10.3% y-o-y expansion in net interest income, while fee income and other non-interest income growth rates were a modest 6.8% y-o-y respectively. Operating expenses, meanwhile, rose 10.1% y-o-y. Consequently, operating profit rose by a slower 11% y-o-y, while the jump in net profit was driven primarily by lower loan loss provisions, which fell a sizeable 34.5% y-o-y in 2010.

Our industry loan growth estimate is raised to 11.5% for 2011 from 10%-11% previously and we forecast 2012 loan growth at 10.5%. We expect household loan demand to moderate from 13.2% for 2010 to about 10.5% for 2011 and 8% for 2012, but expect non-household (business/government) lending to pick up the slack with growth rates of 12.7% and 13.5% for 2011 and 2012 respectively, from 12.3% for 2010.

We project recurring net profit growth of 11.6% and 11.8% for 2011 and 2012 respectively for the top 5 banks, on operating profit growth of 8.6% for 2011 and 12.4% for 2012. We expect cumulative loans (domestic and regional) for the top 5 banks to expand by 12% for 2011, 10.9% for 2012. While we have imputed a 6-11 basis points NIM contraction this year, we expect NIMs to bottom out and recover in 2012, aided in part by likely rate hikes in 2H10. Amid volatility in the external environment, we are factoring in moderately higher non-performing loans.

Valuations are undemanding, in our opinion, with the large banks trading at a prospective 2011 calendarised PER of 13.1 times, 11.7 times for 2012. Separately, the sector trades at a prospective 2012 P/BV of 1.9 times supported by an average ROE of 16.9%. Dividend yields, meanwhile, average a decent 4.2% and 4.7% for 2011 and 2012 respectively. ' Maybank IB Research, March 7


This article appeared in The Edge Financial Daily, March 8, 2011.

KNM - Kenanga maintains 'buy' call on KNM

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

OSK Research Sdn Bhd and HwangDBS Vickers Research maintained their 'buy' call on KNM Group Bhd with a higher target price
of RM3.34 to RM3.50 from the previous RM3.02 price.

OSK said the company had overcome the financial downtrend and expected to see a recovery this year. "It expects to see margins improve, contributed by its process equipment business segment," OSK Research said in a research note here today.

KNM, a diversified group with its core business in the provision of process plants, modules and O&M equipment and systems provider to various industries including oil and gas, has secured RM693 million worth of contracts year-to-date taking its order backlog to a record high of RM5.4 billion.

Of this, 41 per cent was for process equipment, while renewable and green energy constituted 40 per cent.

"We expect more new contracts going forward and higher margins from the newer jobs with the recovery more pronounced from second half of 2011 onwards," said another research company, HwangDBS.

KNM is poised to ride on the growing domestic and global opportunities as high oil prices will continue to spur new capital expenditure, said HwangDBS.

KNM is expecting strong overseas contribution from its energy unit following the GBP450m Energy Park Peterborough contract. There are abundant opportunities given to the rise in the global push for green and clean energy, and KNM has the expertise to provide total solutions by leveraging on Borsig’s strong track record, HwangDBS said.

Meanwhile, Kenanga Research house which also maintained its 'buy' call on KNM, has put a lower target price of RM3.06 saying it would remain cautious of the group's earnings forecast until the company consistently met the expectations. -- Bernama

KNM - OSK, HwangDBS maintain 'buy' call on KNM

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

OSK Research Sdn Bhd and HwangDBS Vickers Research maintained their 'buy' call on KNM Group Bhd with a higher target price
of RM3.34 to RM3.50 from the previous RM3.02 price.

OSK said the company had overcome the financial downtrend and expected to see a recovery this year. "It expects to see margins improve, contributed by its process equipment business segment," OSK Research said in a research note here today.

KNM, a diversified group with its core business in the provision of process plants, modules and O&M equipment and systems provider to various industries including oil and gas, has secured RM693 million worth of contracts year-to-date taking its order backlog to a record high of RM5.4 billion.

Of this, 41 per cent was for process equipment, while renewable and green energy constituted 40 per cent.

"We expect more new contracts going forward and higher margins from the newer jobs with the recovery more pronounced from second half of 2011 onwards," said another research company, HwangDBS.

KNM is poised to ride on the growing domestic and global opportunities as high oil prices will continue to spur new capital expenditure, said HwangDBS.

KNM is expecting strong overseas contribution from its energy unit following the GBP450m Energy Park Peterborough contract. There are abundant opportunities given to the rise in the global push for green and clean energy, and KNM has the expertise to provide total solutions by leveraging on Borsig’s strong track record, HwangDBS said.

Meanwhile, Kenanga Research house which also maintained its 'buy' call on KNM, has put a lower target price of RM3.06 saying it would remain cautious of the group's earnings forecast until the company consistently met the expectations. -- Bernama

PERISAI - CIMB Research initiates coverage on Perisai with BUY, TP 80c

Stock Name: PERISAI
Company Name: PERISAI PETROLEUM TEKNOLOGI
Research House: CIMB

KUALA LUMPUR: CIMB Equities Research has initiated coverage of Perisai Petroleum Bhd with a BUY call and a target price of 80 sen, which implies 38% potential upside.

It said on Tuesday, March 8 its target price is pegged to its target market P/E of 14.5 times. The potential re-rating catalysts are a growing fleet of strategic assets, and success in new markets.

'We like Perisai for several reasons. This under-researched stock is underappreciated; the company is set to benefit from opportunities in the deepwater transport & installation segment while a skilled new management is firmly in place and is backed by Ezra's operational strength,' it said.

CIMB Research said gone are the days of corrosion control and earnings volatility as the company is now streamlined with a focus on vessel chartering.

'Our initiation is timely given Perisai's recent clinching of a Petronas licence and ongoing acquisition of a vessel operator,' it said.

PERISAI - CIMB Research initiates coverage on Perisai with BUY, TP 80c

Stock Name: PERISAI
Company Name: PERISAI PETROLEUM TEKNOLOGI
Research House: CIMB

KUALA LUMPUR: CIMB Equities Research has initiated coverage of Perisai Petroleum Bhd with a BUY call and a target price of 80 sen, which implies 38% potential upside.

It said on Tuesday, March 8 its target price is pegged to its target market P/E of 14.5 times. The potential re-rating catalysts are a growing fleet of strategic assets, and success in new markets.

'We like Perisai for several reasons. This under-researched stock is underappreciated; the company is set to benefit from opportunities in the deepwater transport & installation segment while a skilled new management is firmly in place and is backed by Ezra's operational strength,' it said.

CIMB Research said gone are the days of corrosion control and earnings volatility as the company is now streamlined with a focus on vessel chartering.

'Our initiation is timely given Perisai's recent clinching of a Petronas licence and ongoing acquisition of a vessel operator,' it said.

TOPGLOV - Top Glove: Tide is turning

Stock Name: TOPGLOV
Company Name: TOP GLOVE CORPORATION BHD
Research House: MAYBANK

Top Glove Corporation Bhd
(March 8, RM4.82)
Upgrade to hold from sell at RM4.75 with revised target price RM4.55 (from RM4.70): We see limited downside to the current price level because: (i) the share price has fallen 22% since our downgrade in September 2010 and is close to our old target price (TP) of RM4.70; (ii) earnings may bottom out in 2QFY11 (expected to be flat quarter-on-quarter) and sequentially, driven by new capacities in 2HFY11; and (iii) the latex cost has stabilised and is set to fall by May after the 'wintering season'. Our discounted cash flow (DCF)-derived TP is lowered to RM4.55 (from RM4.70) after tweaking our FY11/12 forecasts (-5% to 11%). But, downside to our TP from the current level is only 4%, hence we raise Top Glove to a 'hold'.

Top Glove is scheduled to release its 2QFY11 results on March 16. We expect flattish q-o-q earnings (1QFY11: RM36 million net profit) on flattish orders as distributors withheld purchases given high latex cost and stable margins on a cost pass-on rate of 70% (similar to 1QFY11). In view of the incoming capacity in 2HFY11 (+11% or +4.5 billion pieces from the current 41.3 billion pieces), we see stronger earnings in 2HFY11.

In early-March 2011, the latex price (60% of production cost) eased somewhat (-2% from its peak in February 2011) as heavy rainfall has subsided.

Currently, rubber trees are going through the regular 'wintering season' (February-May) and production is better than during rainfall. Hence, we would deduce that latex cost has peaked and will remain stable at the current level until it falls again in May. As a result, distributors will resume buying and a rebound in sales orders will be seen for Top Glove.

We have lowered our market share assumptions for Top Glove to -2 percentage points (ppts) in FY11 and +0.4 ppts in FY12 (previously was 0 ppts in FY11 and +0.6 ppts in FY12) as we think nitrile players will take away some market share from Top Glove. Subsequently, our FY11 earnings per share is cut by 11% and another 5% for FY12.

At our new DCF-derived TP of RM4.55, Top Glove will trade at 13 times CY12 price-earnings ratio, similar to its five-year historical average of 13.5 times. ' Maybank IB Research, March 8


This article appeared in The Edge Financial Daily, March 9, 2011.

SIME - Sime Darby building vegetable oil plant in France

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

Sime Darby Bhd
(March 8, RM9.10)
Maintain buy at RM9.13 with target price RM11.86: Sime Darby announced that Sime Darby Plantation Sdn Bhd is planning to build a vegetable oil plant in Europe. The proposed location is in Languedoc-Roussillon, France.

Languedoc-Roussillon is in the central region of the south of France with a total population of about 2.4 million.'' Historically, agriculture was the main economic activity. The establishment of the processing plant will benefit the local'' growers of crops such as sunflowers. The palm-based feedstock for the plant will also be sourced from Sime's operations in Liberia.

We believe Languedoc-Roussillon is a 'safe' choice for Sime Darby Plantation as the town has a business park which the French authority is promoting for new businesses. Currently, there are five regional business parks available for traditional industrial, traditional heritage professions, high-tech and life science, logistics and agribusiness and artisanal and industrial. ''

The total capex required has yet to be quantified. However, with the current cash position at RM4.3 billion (as at December'' 2010), internal financing should not be a problem for Sime Darby.'' ''

At this current juncture, we maintain our FY11 and FY12 earnings forecast as the proposed'' plant will only be in operation by end-2013 subject to the results of the feasibility study and the final approval from Sime's board of directors

We are positive on Sime Darby's French move as it reflects the company's commitment to its overseas expansion plan. Late last year the company obtained a 63-year land concession in Liberia, and will be pumping RM70 million to develop a potentially sizeable area of 220,000ha. We reiterate our 'buy' recommendation for Sime Darby Plantation at an unchanged target price of RM11.86, derived from sum-of-parts valuation. ' MIDF Research, March 8


This article appeared in The Edge Financial Daily, March 9, 2011.

UEMLAND - UEM Land too big to be ignored

Stock Name: UEMLAND
Company Name: UEM LAND HOLDINGS BHD
Research House: RHB

UEM Land Holdings Bhd
(March 8, RM2.82)
Initiate coverage at RM2.71 with market perform rating and fair value RM2.80: The growth and prospects of UEM Land (ULHB) become particularly more promising after the bilateral agreement between Malaysia and Singapore governments in May last year. The synergistic acquisition of Sunrise in November 2010 is an additional boost in confidence to the investment community on management's execution ability with the entrance of Datuk Tong Kooi Ong into the development committee. Apart from the expected improvement in earnings visibility contributed from Sunrise, more news flow is expected with the strong government's support for promoting the Iskandar Development Region, which is the key economic corridor that the government has put serious emphasis on. Given that ULHB is the largest landowner in Nusajaya, and considering the stock's market cap, liquidity, the recent value-added corporate exercise as well as the government's 'rejuvenation' effort, more eyes are already on the stock, considering the over 60% of subscription of ULHB RCPS as an exit option of Sunrise.

Investment case: (i) The largest property stock by market cap and landbank, and will be the only pure property stock if included into the FBM KLCI 30 Index; (ii) The inclusion of Sunrise will reduce execution risk with RCPS to ensure alignment of interest of Tong with downside being capped; (iii) The entrance of Temasek via the iconic wellness township projects a strong repricing catalyst for land and property values in Nusajaya; (iv) Continued diversification of landbank either via outright acquisition of land parcels or property companies to minimise concentration risk; and (v) Quality of earnings to improve.

Risks and concerns included: (i) external risk that will deter foreign investment interest; (ii) high beta; (iii) regulatory risk; and (iv) country risk.

While Sunrise will contribute 10 months of earnings in FY11, ULHB's earnings in FY12 will reach a tipping point as it will be a crucial year to assess the 'effectiveness' of'' Tong and all projects will be in full swing. Land sales will become more vigorous with more infrastructure and amenities getting ready.

ULHB's share price is highly driven by news flow and correlates with the level of foreign shareholding. We initiate coverage on ULHB with a 'market perform' rating, and fair value of RM2.80, at its revised net asset value(RNAV). News flow on the development of Singapore land parcels will be the key re-rating catalyst, which will potentially raise RNAV per share to RM3.19. ' RHB Research, March 8


This article appeared in The Edge Financial Daily, March 9, 2011.

SIME - OSK keeps 'sell' call on Sime Darby

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

OSK says Sime Darby is currently exploring and evaluating a potential investment in a refinery complex in France to serve the Southern European and potentially the North African market.

Despite the proposal, OSK is maintaining our 'sell' call on Sime Darby on valuation grounds.

"While appearing to be on the right track now, Sime Darby has a lot of catching up to do in the downstream area compared to its peers such as Wilmar International (Buy, TP or Target Price at S$6.15), IOI Corp (Sell, TP at RM4.41), KL Kepong (Neutral, TP at RM20.55 ) and Golden Agri (Trading Buy, TP at S$0.83), all of which are smaller than Sime Darby in terms of hectarage but are substantially stronger in downstream operations. - Reuters

SUNWAY - Buy Sunway Holdings shares: OSK

Stock Name: SUNWAY
Company Name: SUNWAY HOLDINGS BHD
Research House: OSK

Sunway Holdings Bhd announced it was awarded a RM74.1 million contract from Malaysian Bio-XCell SB. The EPCC contract is to construct the central utilities facility at Biotechnological Park BioXCell, Nusajaya in Iskandar Malaysia.

It is scheduled for completion by 25 May 2012. Given that the company’s year to date job wins are still within OSK's replenishment target, OSK left its estimates unchanged.

OSK target price continues to be based on the implied Sunway-SunCity merger price of RM2.60, which translates into an FY2011-2012 price earnings ratio of 9.3 times and 8.2 times. Based on the last close, there is an 18.2 per cent share price upside to OSK's target price. - Reuters

TOPGLOV - Top Glove raised to 'hold' at Maybank

Stock Name: TOPGLOV
Company Name: TOP GLOVE CORPORATION BHD
Research House: MAYBANK

Top Glove Corp was raised to “hold” from “sell” at Maybank Investment Bank Bhd, which said earnings will “bottom” out in the second quarter of its financial year 2011.

“The tide is turning,” Lee Yen Ling, an analyst at Maybank, wrote in a report today. The share price estimate was cut to RM4.55 from RM4.70. -- Bloomberg

KNM - Buy KNM shares: HwangDBS

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

HwangDBS says that KNM has secured RM693 million wins year to date, taking its order backlog to a record high of RM5.4 billion.

It noted that of this, 41 per cent is for process equipment, while renewable & green energy constitute 40 per cent.

The new orders are equal to 23 per cent of its RM3 bilion new order win assumption for financial year 2011 forecast.

"Its current RM17 billion tender book will continue to replenish its order book, and we expect more new contracts going forward. We expect higher margins from the newer jobs with the recovery more pronounced from H2 FY2011 onwards."

KNM is poised to ride on the growing domestic and global opportunities as high oil prices will continue to spur new capital expenditure.

Valuation is undemanding at 11.2 times FY2011 earnings against peers’ 16.7 times. HwangDBS is making a 'buy' call in KNM at RM3.50. - Reuters

DRBHCOM - HDBSVR sets new target price of RM3.80 for DRB-Hicom

Stock Name: DRBHCOM
Company Name: DRB-HICOM BHD
Research House: HWANGDBS

KUALA LUMPUR:'' DRB-HICOM BHD []'s unit DRB-Hicom Defence Technologies Sdn Bhd securing of the government contract to'' supply 257 units of armoured wheeled vehicles (AWV) worth RM7.55 billion has prompted Hang DBS Vickers Research to set a new target price of RM3.80.

On Monday, March 7, DefTech accepted the letter of award from the federal government for the contract to supply armoured wheeled vehicles (AWV). The contract is to design and supply 257 units of the 8x8 AWV, which will be in eight variants. The contract valued at RM7.55 billion is for a period of seven years commencing from 2011.

HDBSVR said it expects a substantial rerating with this newsflow and as the market tags a higher premium to its services business.

'Our new TP of RM3.80 factors in some contribution from the Deftech contract - PE of 15x of CY12 earnings, tagged to our target market PE given it has virtually monopoly in this business,' it said.

It raised its FY12-FY13F EPS by 3%-10% by assuming contract tenure of seven years, 12% pretax margins, maintenance is back ended and there is three and 12-months recognition in FY12-13F respectively.

LIONIND - OSK Research maintains Neutral on Lion Industries, FV RM1.57

Stock Name: LIONIND
Company Name: LION INDUSTRIES CORPORATION
Research House: OSK

KUALA LUMPUR: OSK Research is maintaining its Neutral recommendation on Lion Industires and believes the revocation of Lion Group's investment licence in Vietnam last month as the group did not fulfill its commitments has a positive bias for the group.

It said on Tuesday, March 8 that it remain cautious on the investment risks associated with Lion Industries and its subsidiary, Lion Forest (LFIB)'s involvement in the just proposed JV in a Blast Furnace (BF) project.

OSK Research said it was not surprised with the news of Lion Group's investment licence being revoked as rumors have surfaced a few times before this official revocation. Also, the group has not made much progress since it first announced the proposal in September 2008.

The licence was initially issued to the JV company to be formed by Lion Group and Vietnam's Vinashin to undertake the proposed steel mill project. Management also has not decided which company under the Lion Group will undertake the project since obtaining the licence.

OSK Research said considering that the group has not started CONSTRUCTION [] on the project, the only cost involved is on the preliminary research on the investment and other administrative expenses, which in its opinion is marginal.

'We also have not incorporated any earnings contribution from this project and have had very low expectations even at the initial stages. Looking deeper into this development, we think revoking of the licence may even help to ease concerns over the high borrowings of certain companies under the group.

'Therefore, we are keeping our NEUTRAL recommendation on Lion Industries, with our fair value maintained at RM1.57 pending approval of this project by minority shareholders at an upcoming EGM. The fair value is derived from a 5x PER multiple and P/NTA to 0.43x, which is the mean of its historical trading band on CY11 numbers,' it said.

MSPORTS - OSK Research positive on Multi Sports' Taiwan depository receipt programme

Stock Name: MSPORTS
Company Name: MULTI SPORTS HOLDINGS LTD
Research House: OSK

KUALA LUMPUR: OSK Research is positive on Multi Sports Holdings Ltd's plans to sponsor a Taiwan depository receipt programme (TDR) that would represent up to 67.50 million new shares of 5 US cents each or 15% of the current paid-up share capital.

Under the plan, Multi Sports It would issue up to 67.50 million new shares at an issue price to be determined later, which would be the underlying shares for the programme.'' The TDR will be offered to investors in Taiwan, it said. The ratio would be two TDR for every one underlying share.

The issue size is up to 135 million units of TDRs represented by up to 67.5 million underlying shares.

OSK Research said based on the illustrative issue price of 50 sen, the exercise will raise total proceeds of up to RM33.75m, of which RM2.3m will be used for the proposed exercise's expenses while the remaining portion will be used for on-going working capital purposes.

'Apart from creating a new listing platform for the group in Taiwan that could provide an alternative valuation for its shares, the proposed exercise will enhance Multi sports' profile in Taiwan where investors are perceived to be more familiar with Chinese companies.

'In addition, while Multi sports has sufficient internal funds to fund the expansion of its plant, which was completed in Dec 2010 as well as working capital requirements, the proposed exercise will also provide Multi sports with easier future access to the Taiwanese capital market,' it said.

OSK Research said the listing of the TDRs on the TWSE will also give Taiwanese investors an opportunity to acquire a shareholding in the company and hence diversifies the group's shareholder base.

'Upon completion of the exercise and assuming the issuance of the 67.50 million underlying shares, our ex-target price is reduced to 76 sen versus the cum target price of 87 sen, which still represents a 54% share price upside.

'While there will be EPS dilution, we think that the benefits of a potential rerating of the shares' valuation driven by the potentially higher valuation that may command in Taiwan, would outweigh the negative effects on an EPS dilution in a longer term. The exercise is targeted for completion in 2H2011,' it said.

PERISAI - Perisai jumps on CIMB 'outperform' call

Stock Name: PERISAI
Company Name: PERISAI PETROLEUM TEKNOLOGI
Research House: CIMB

Perisai Petroleum Teknologi Bhd, a Malaysian oil and gas services provider, rose to a two-week high after CIMB Investment Bank Bhd rated the stock new “outperform,” reflecting its earnings prospects.

The stock climbed 5.2 per cent to 61 sen at 9:18 a.m. in Kuala Lumpur trading, set for its highest close since Feb. 21.

CIMB’s share estimate for the stock is 80 sen, according to a report today. -- Bloomberg

POS - OSK maintains 'buy' call on Pos Malaysia

Stock Name: POS
Company Name: POS MALAYSIA BHD
Research House: OSK

OSK Research is maintaining a "buy" call on Pos Malaysia Bhd but has lowered the target price to RM4.12, from RM4.45 previously, following spiraling costs of incorporating higher jet fuel assumption and its overall staff cost.

It toned down earnings expectation for financial year 2011 and 2012 by 17 per cent and 13.3 per cent, respectively.

OSK said the unveiling of Pos Malaysia's strategic partnership, expected to be announced within the next one to two months as the deadline of March 15 for bidding draws near, remained a key catalyst as it may be timed to coincide with measures to unlock the value of its landbank.

It said the potential relaxation of the use of its landbank under the purview of the Postal Bill appeared to be progressing well as the draft Bill would be tabled in Parliament sometime this month.

"We expect the proposed amendments related to relaxation to go through as it would make more economic sense for the government to optimise the potential value of the landbank," it added. -- Bernama

PBBANK - Banking sector: Valuations are undemanding

Stock Name: PBBANK
Company Name: PUBLIC BANK BHD
Research House: MAYBANK

Banking sector
Maintain overweight:
The sector's value proposition lies in (i) stable economic growth which lends support to our aggregate net profit growth forecast of 11.6% for 2011 and 11.8% for 2012; (ii) benign inflation and bottoming margins; (iii) steady loan growth momentum; (iv) potential Economic Transformation Programme upside surprises; (v) cross-synergies and burgeoning contribution from regional operations to group earnings; (vi) healthy capital ratios; and (vii) decent valuations and dividend yields. RHB Capital and CIMB continue to be our top picks.

Results were broadly within expectations, with recurring net profit up 24% year-on-year (y-o-y). While cumulative loan growth was a commendable 12.9% y-o-y, net interest margin (NIM) compression during the period contributed to a more moderate 10.3% y-o-y expansion in net interest income, while fee income and other non-interest income growth rates were a modest 6.8% y-o-y respectively. Operating expenses, meanwhile, rose 10.1% y-o-y. Consequently, operating profit rose by a slower 11% y-o-y, while the jump in net profit was driven primarily by lower loan loss provisions, which fell a sizeable 34.5% y-o-y in 2010.

Our industry loan growth estimate is raised to 11.5% for 2011 from 10%-11% previously and we forecast 2012 loan growth at 10.5%. We expect household loan demand to moderate from 13.2% for 2010 to about 10.5% for 2011 and 8% for 2012, but expect non-household (business/government) lending to pick up the slack with growth rates of 12.7% and 13.5% for 2011 and 2012 respectively, from 12.3% for 2010.

We project recurring net profit growth of 11.6% and 11.8% for 2011 and 2012 respectively for the top 5 banks, on operating profit growth of 8.6% for 2011 and 12.4% for 2012. We expect cumulative loans (domestic and regional) for the top 5 banks to expand by 12% for 2011, 10.9% for 2012. While we have imputed a 6-11 basis points NIM contraction this year, we expect NIMs to bottom out and recover in 2012, aided in part by likely rate hikes in 2H10. Amid volatility in the external environment, we are factoring in moderately higher non-performing loans.

Valuations are undemanding, in our opinion, with the large banks trading at a prospective 2011 calendarised PER of 13.1 times, 11.7 times for 2012. Separately, the sector trades at a prospective 2012 P/BV of 1.9 times supported by an average ROE of 16.9%. Dividend yields, meanwhile, average a decent 4.2% and 4.7% for 2011 and 2012 respectively. ' Maybank IB Research, March 7


This article appeared in The Edge Financial Daily, March 8, 2011.

CIMB - Banking sector: Valuations are undemanding

Stock Name: CIMB
Company Name: CIMB GROUP HOLDINGS BERHAD
Research House: MAYBANK

Banking sector
Maintain overweight:
The sector's value proposition lies in (i) stable economic growth which lends support to our aggregate net profit growth forecast of 11.6% for 2011 and 11.8% for 2012; (ii) benign inflation and bottoming margins; (iii) steady loan growth momentum; (iv) potential Economic Transformation Programme upside surprises; (v) cross-synergies and burgeoning contribution from regional operations to group earnings; (vi) healthy capital ratios; and (vii) decent valuations and dividend yields. RHB Capital and CIMB continue to be our top picks.

Results were broadly within expectations, with recurring net profit up 24% year-on-year (y-o-y). While cumulative loan growth was a commendable 12.9% y-o-y, net interest margin (NIM) compression during the period contributed to a more moderate 10.3% y-o-y expansion in net interest income, while fee income and other non-interest income growth rates were a modest 6.8% y-o-y respectively. Operating expenses, meanwhile, rose 10.1% y-o-y. Consequently, operating profit rose by a slower 11% y-o-y, while the jump in net profit was driven primarily by lower loan loss provisions, which fell a sizeable 34.5% y-o-y in 2010.

Our industry loan growth estimate is raised to 11.5% for 2011 from 10%-11% previously and we forecast 2012 loan growth at 10.5%. We expect household loan demand to moderate from 13.2% for 2010 to about 10.5% for 2011 and 8% for 2012, but expect non-household (business/government) lending to pick up the slack with growth rates of 12.7% and 13.5% for 2011 and 2012 respectively, from 12.3% for 2010.

We project recurring net profit growth of 11.6% and 11.8% for 2011 and 2012 respectively for the top 5 banks, on operating profit growth of 8.6% for 2011 and 12.4% for 2012. We expect cumulative loans (domestic and regional) for the top 5 banks to expand by 12% for 2011, 10.9% for 2012. While we have imputed a 6-11 basis points NIM contraction this year, we expect NIMs to bottom out and recover in 2012, aided in part by likely rate hikes in 2H10. Amid volatility in the external environment, we are factoring in moderately higher non-performing loans.

Valuations are undemanding, in our opinion, with the large banks trading at a prospective 2011 calendarised PER of 13.1 times, 11.7 times for 2012. Separately, the sector trades at a prospective 2012 P/BV of 1.9 times supported by an average ROE of 16.9%. Dividend yields, meanwhile, average a decent 4.2% and 4.7% for 2011 and 2012 respectively. ' Maybank IB Research, March 7


This article appeared in The Edge Financial Daily, March 8, 2011.