AirAsia flies higher, Credit Suisse Research keeps Outperform

Stock Name: AIRASIA
Company Name: AIRASIA BHD

Research House: CREDIT SUISSE

Price Call: BUY

Target Price: 4.80

KUALA LUMPUR: Shares of AIRASIA BHD [] extended its gains in the afternoon session on Friday, June 24, rising to RM3.26 while Credit Suisse Research maintained its RM4.80 target price.

At 2.41pm, it was up 10 sen to RM3.26.

The research house said on Friday, June 24 it remains positive on AirAsia and maintained its Outperform rating on the low-cost carrier.

Credit Suisse Research said it was positive on AirAsia's decision to order 200 Airbus A320-NEOs (with an option to purchase a further 100 aircraft). Delivery of the A320-NEOs, which offers 15% fuel cost savings, is expected to start from 2016.

'We maintain our Outperform. We see this as a positive development, as AirAsia has secured delivery of the next generation of aircraft at a significant 'early bird' discount,' it said.

Credit Suisse Research said the orders are for AirAsia's long-term growth, including the new ventures in the Philippines and Vietnam. It also expected the large scale order at such an early stage of the aircraft development, would enable'' AirAsia to enjoy significant discounts over the list price of the aircraft.

It pointed out the orders were also part of AirAsia's fleet renewal programme. By 2016, AirAsia would have 16 aircraft that are 10 years old and over, with a further 19 aircraft to hit the 10-year mark in 2017.

'We expect AirAsia to maintain a young fleet (lower maintenance cost), thus will dispose of older aircraft to crystalise the gains from the large discounts enjoyed from its A320-200 order,' it said.

The research house said it did not factor the impact of the A320-NEO order, as deliveries are only expected to start in 2016.

'We remain positive on AirAsia and reiterate our OUTPERFORM rating on the stock and RM4.80 target price,' it said.

Expecting a record earnings year

Stock Name: GAMUDA
Company Name: GAMUDA BHD

Research House: MIDF

Price Call: BUY

Target Price: 4.68

Still in the dark

Stock Name: TOPGLOV
Company Name: TOP GLOVE CORPORATION BHD

Research House: MIDF

Price Call: SELL

Target Price: 4.18

BIMB at the forefront

Stock Name: BIMB
Company Name: BIMB HOLDINGS BHD

Research House: HWANGDBS

Price Call: BUY

Target Price: 2.40

BIMB Holdings Berhad
(June 23, RM1.85)
Initiate coverage at RM1.73 with buy call and target price of RM2.40: Bank Islam, which contributes the bulk (circa 88%) of BIMB's income, delivered impressive earnings improvement in FY10 ended December following its turnaround plan. BIMB's annualised pre-provision profit grew 27% led by robust financing and current account/savings account growth, while net financing margin and asset quality had improved significantly. Given robust domestic consumer spending, BIMB's traction is sustainable. We forecast 24% to 30% earnings growth in FY11/12F, driven by 16% financing growth and improving fee-based income.

On its own, Bank Islam can ride on the untapped potential in Islamic finance in the country, in line with the government's vision to develop Malaysia into an international hub for Islamic finance. Bank Islam, with its experience and expertise in Islamic finance could help other banks (domestic and abroad) to build and expand their Islamic banking and capital markets.

This could be done via a merger, acquisition or strategic stake, like its 20% investment in Amana Bank Ltd, Sri Lanka. Mergers and acquisitions could strengthen Bank Islam's size and market share and create scale for future growth.

Our RM2.40 target price (TP) is based on the Gordon Growth Model and assumes 4% long-term growth rate, 10.3% cost of equity, and 13% return on equity. Key catalysts are: (i) earnings turnaround and sustainability; and (ii) untapped potential in Islamic finance in Malaysia and Asean region. BIMB is currently trading at one times FY11 book value and our RM2.40 TP implies 1.4 times. ' HwangDBS Vickers Research, June 23


This article appeared in The Edge Financial Daily, June 24, 2011.

RHB may revisit talk of merger with AMMB

RHB Capital Bhd may revist earlier market speculation of a potential merger with AMMB Holdings Bhd given that this is a
better fit and a marriage of equals.

In a note today, OSK Research Sdn Bhd said the merger would propel AMMB from being the sixth largest bank to the fourth largest in Malaysia.

Earlier, CIMB Group Holdings Bhd and Malayan Banking Bhd said they had decided not to pursue merger opportunities with RHB Capital.

OSK said RHB Cap would benefit from Australia and New Zealand Banking Group's (ANZ) strong credit scoring processes as reflected in AMMB's lower gross impaired loans ratio of 3.4 per cent.

"Also there will be more balanced loan portfolio, with RHB Cap's higher floating rate loans complementing AMMB's higher fixed rate loans," it said.

It said, however, the entry of Aabar Investment had complicated matters in terms of shareholding control.

"Previously, market talk was of Abu Dhabi Commercial Bank (ADCB) selling its 24.9 per cent stake to ANZ.

"This would have enabled ANZ to maintain its shareholding in the merged entity above the 20 per cent level, while the Employees Provident Fund would have gradually pared down its stake and left ANZ as the dominant controlling shareholder," it said.

OSK said ADCB sold its RHB Cap shares to Aabar instead and this meant that any merger between RHB Cap and AMMB would result in ANZ's stake in the merged entity being diluted to below 20 per cent.

"ANZ, being a big controlling shareholder, might not feel comfortable with such a dilution in shareholding post-merger," it said.

It maintained its 'buy' call on RHB Cap with fair value of RM10.16. -- Bernama

RHBCap's valuation intact: HwangDBS

Stock Name: RHBCAP
Company Name: RHB CAPITAL BHD

Research House: HWANGDBS

Price Call: BUY

Target Price: 10.00

RHB Capital Bhd's (RHB Cap) fundamental valuation is intact, with the target price remaining at RM10.00, says HwangDBS Vickers Research Sdn Bhd.

This was based on the assumption of a five per cent long-term growth, 10.5 per cent cost of equity and 16 per cent return on equity, it said in a research note today.

HwangDBS said RHB Cap remains attractive despite Maybank and CIMB have jointly announced that they would not pursue a merger with RHB Cap at this juncture.

This has given RHB Cap good domestic growth prospects and gradual regional expansion, it said.

"We expect net interest margin compression to be less severe in the financial year 2011, while non-interest income is expected to continue to grow strongly with a healthy capital market, coupled with potential benefits from the government's Economic Transformation Programme," it said.

Meanwhile, RHB Cap is further expanding its presence in Singapore via AXS stations for loan repayments or products and services enquiry.

It will also commence money changing services operations at Changi Airport next month.

The Mestika acquisition is still pending approval from Bank Indonesia and Bapepam while the Securities Commission has granted another six months extension for RHB Cap's RM1.3 billion rights issue.

The exercise is expected to be completed by the end of the third quarter this year. -- BERNAMA

Earnings enroute to a record high

Stock Name: GAMUDA
Company Name: GAMUDA BHD

Research House: ECMLIBRA

Price Call: HOLD

Target Price: 3.99

Glomac upgraded to 'strong buy' at ECM

Stock Name: GLOMAC
Company Name: GLOMAC BHD

Research House: ECMLIBRA

Price Call: BUY

Target Price: 2.83

Glomac Bhd, a Malaysian property developer, was upgraded to "strong buy" from "buy" at ECM Libra Capital Sdn Bhd on strong two-year earnings growth.

The stock's share estimate was maintained at RM2.83, analyst Bernard Ching wrote in a report today. -- Bloomberg

OSK Research retains BUY Call on RHB Cap

Stock Name: RHBCAP
Company Name: RHB CAPITAL BHD

Research House: OSK

Price Call: BUY

Target Price: 10.16

Stock Name: MAYBANK
Company Name: MALAYAN BANKING BHD

Research House: OSK

Price Call: BUY

Target Price: 10.07

Stock Name: CIMB
Company Name: CIMB GROUP HOLDINGS BERHAD

Research House: OSK

Price Call: BUY

Target Price: 9.15

KUALA LUMPUR: OSK Research said both CIMB and Maybank have officially announced that they have decided not to pursue the potential merger opportunity with RHB CAPITAL BHD [].

It said on Friday, June 24 this piece of news did not entirely come as a surprise given the fact that the proposed merger with RHB Capital was rumored to have been at the invitation of Bank Negara rather than being initiated by CIMB or Maybank.

'As such pricing and rationale for a synergistic merger were key stumbling blocks from the start.

'We have been highlighting in our previous notes that both banking groups would exercise some form of pricing discipline/caution given the apparent lack of revenue synergies, especially in CIMB's case,' it said.

OSK Research said Abu Dahbi Commercial Bank's relatively expensive sale pricing of its 24.9% stake in RHB Capital to Aabar Investment could have been the deal breaker for Maybank, while in CIMB's case there were no meaningful synergies from the very beginning.

'We are retaining our BUY call for RHB Capital (FV of RM10.16), Maybank: FV:RM10.07 (2.32x FY11 PBV, 15.4% ROE) and CIMB (BUY, FV:RM9.15),' it said.

CIMB Research maintains Outperform on AirAsia, TP RM4.20

Stock Name: AIRASIA
Company Name: AIRASIA BHD

Research House: CIMB

Price Call: BUY

Target Price: 4.20

KUALA LUMPUR: CIMB Equities Research said AirAsia announced a widely-expected order for 200 A320neo aircraft at the Paris Air Show on Thursday, June 23 for delivery starting 2016.

'The orders are a positive development as the aircraft will be 15% more fuel efficient than the existing A320,' it said on Friday.

CIMB Research said AirAsia will not overstretch its balance sheet as its Thai and Indonesian associates should be able to take these planes in their own names post listing and AirAsia has the option to dispose of the older model.

The new planes are also needed to grow its Philippines and future Vietnam operations.

'We maintain our forecasts, RM4.20 target price (9x P/E) and OUTPERFORM rating as AirAsia's low operating costs and strong demand put it in the best position to ride out high oil prices and global overcapacity. A potential catalyst is the listing of its two associates,' it said.

CIMB Research maintains Outperform on Gamuda

Stock Name: GAMUDA
Company Name: GAMUDA BHD

Research House: CIMB

Price Call: BUY

Target Price: 5.63

KUALA LUMPUR: CIMB Equities Research said although Gamuda's annualised 9MFY7/11 core net profit was 1% below its forecast (5% higher than consensus), it was above expectations.

It said on Friday, June 24 CONSTRUCTION [] margins topped expectations and property sales surpassed both its and management's targets for the full year.

'As this will help drive 4Q earnings, we raise our FY11-13 EPS forecasts by 2-4% and DPS forecasts by around 1-2%. Gamuda's earnings momentum is building up and it is heading for a record year in FY11.

'We maintain our OUTPERFORM call and nudge up our RNAV-based target price from RM5.60 to RM5.63. Groundbreaking for the MRT project is slated for 8 July, which could be a share price catalyst, together with the strong 3Q results,' it said.

BIMB up after HwangDBS Vickers initiates coverage

Stock Name: BIMB
Company Name: BIMB HOLDINGS BHD

Research House: HWANGDBS

Price Call: BUY

Target Price: 2.40

BIMB HOLDINGS BHD [] shares advanced on Thursday, June 23 after HwangDBS Vickers Research initiated coverage on the stock with a Buy rating and target price of RM2.40.

At 3.15pm. BIMB was up 11 sen to RM1.84 with 2.07 million shares traded.

HwangDBS Vickers Research in a note June 23 said BIMB's core financing activities would drive its earnings and growth.

The research house also said the largely untapped Islamic finance market could expand its market share in the overall industry.

'Our RM2.40 TP is based on the Gordon Growth Model and assumes 4% long term growth rate, 10.3% cost of equity, and 13% ROE.

'Key catalysts are (i) earnings turnaround and sustainability; and (ii) untapped potential in Islamic finance in Malaysia and ASEAN region. BIMB is currently trading at 1.0 times FY11BV and our RM2.40 TP implies 1.4 times,' it said.

Strong Earnings Ahead

Stock Name: SCIENTX
Company Name: SCIENTEX INCORPORATED BHD

Research House: TA

Price Call: BUY

Target Price: 3.80

Garuda Deal Slightly Sweeter

Stock Name: PERISAI
Company Name: PERISAI PETROLEUM TEKNOLOGI

Research House: TA

Price Call: BUY

Target Price: 1.63

Expanding well

Stock Name: KENCANA
Company Name: KENCANA PETROLEUM BHD

Research House: MIDF

Price Call: BUY

Target Price: 3.16

MAS struggling to cope with challenging market

Stock Name: MAS
Company Name: MALAYSIAN AIRLINE SYSTEM BHD

Research House: MAYBANK

Price Call: HOLD

Target Price: 1.65

Malaysian Airline System Bhd
(June 23, RM1.45)
Maintain hold at RM1.44 with revised target price of RM1.65 (from RM1.80): MAS' reported RM246 million 1Q11 net loss was within our RM263 million loss forecast, but significantly underperformed consensus which was expecting a profit. We have revisited MAS' fundamentals and are lowering our earnings expectations, forecasting a loss this year. MAS is struggling to cope with the challenging aviation market, hit by high fuel prices and a weak yield environment. We shift valuation methodology to price-to-book value (P/BV) from price-earnings ratio. We now value MAS at RM1.65 per share, in line with its long-term average 1.8 times P/BV and maintain 'hold'.

The year 2011 is a write-off, our previous bullish call was one year too early. We revise our jet fuel price assumption up by US$10 per bbl to US$120 per bbl (adds RM480 million to cost) and yield growth is toned down to half at 3% growth (lowers revenue by RM454 million). In its current form, MAS is unable to navigate the turbulent market. Its costs are too high and product quality is below par. This is being rectified with the fleet rejuvenation but it is not moving fast enough to save MAS from making a loss in 2011. We also lower our 2012/13 net profit forecasts by between 20% and 30% for the higher jet fuel price assumption.

Management asserts that MAS is on track to achieve the operating profit target of RM300 million to RM600 million in 2011. We are less optimistic and forecast an operating loss of RM264 million. We think 2Q11 will be just as challenging due to the high fuel price volatility and industry overcapacity that is negatively impacting on yields. Things will look much better and profitable in 2H, which is seasonally stronger, and as MAS extracts the cost benefits of new aircraft inducted into its fleet.

MAS has begun its induction process to the Oneworld alliance, it will take around 12 to 18 months. This is positive as MAS is the sole representative in Southeast Asia and we expect it to enjoy passenger throughput from other members flying into the region.

Since MAS' stock performance has been disappointing, and considering potential headwinds ahead, its parent Khazanah Nasional Bhd may consider privatising MAS as the stock is trading at its lowest historical price and valued at only 1.4 times book. At the current share price, Khazanah needs to pay less than RM1.5 billion for the remaining shares it does not own. If it teams up with the Employees Provident Fund, like their partnership for the privatisation of PLUS Expressways Bhd, it will cost just RM962 million. ' Maybank IB Research, June 23


This article appeared in The Edge Financial Daily, June 24, 2011.

Perisai active, up in early trade

Stock Name: PERISAI
Company Name: PERISAI PETROLEUM TEKNOLOGI

Research House: CIMB

Price Call: BUY

Target Price: 1.60

KUALA LUMPUR: PERISAI PETROLEUM TEKNOLOGI [] Bhd shares were actively traded on Thursday, June 23 after CIMB Research maintained its Outperform call on the stock and raised its target price to RM1.60 from RM1.40 previously.

At 9.30am, Perisai gained 3.5 sen to 78.5 sen with 2.89 million shares done.

Garuda Energy Ltd's vendor -- Nagendran Nadarajah -- has guaranteed Perisai an attractive RM50 million annual net profit for the duration of a 2+1+1 contract for the charter of a mobile offshore production unit (MOPU).

'The profit guarantee, which is a positive surprise as it is 25% higher than our RM40 million annual profit forecast for Garuda, provides a safeguard to Perisai,' CIMB Research said on Thursday, June 23.

The research house said that when factoring in the higher profit for Garuda from 4Q11 onwards, it raised the EPS forecasts for Perisai by 6.1% for FY11, 9.7% for FY12 and 10.3% for FY13.

'This increases our target price from RM1.40 to RM1.60, which we continue to peg to our target market P/E of 14.5 times. This profit guarantee could spark a re-rating of Perisai, which we continue to rate an Outperform,' it said.

RHB Research ups Lion Industries to trading buy, FV RM2.54

Stock Name: LIONIND
Company Name: LION INDUSTRIES CORPORATION

Research House: RHB

Price Call: BUY

Target Price: 2.54

KUALA LUMPUR: RHB Research Institute has upgraded Lion Industries' indicative fair value to RM2.54 and upgraded it to a Trading Buy.

Bloomberg reported that Baosteel Group Corp, China's second largest steelmaker, is in talks with Lion Group to buy a stake in Amsteel Mills Bhd.

'We suspect that the offer will not be just for a stake in Amsteel Mills, but may include stakes in other steelmaking units within the Lion Group as well. It is also quite likely that Baosteel could be roped in as a strategic investor for the RM3.2 billion blast furnace project, given its expertise in the flat steel product segment,' RHB Research said.

RHB Research said it lowered its holding company discount to 20% to reflect improved trading sentiment on the back of the potential entrance of Baosteel and the likelihood that Lion Industries may not be roped in to invest in Lion Diversified's high-risk RM3.2 billion blast furnace project.

MIDF keeps 'neutral' call on auto sector

Stock Name: PROTON
Company Name: PROTON HOLDINGS BHD

Research House: MIDF

Price Call: BUY

Target Price: 4.00

Stock Name: TCHONG
Company Name: TAN CHONG MOTOR HOLDINGS BHD

Research House: MIDF

Price Call: HOLD

Target Price: 4.94

Stock Name: MBMR
Company Name: MBM RESOURCES BHD

Research House: MIDF

Price Call: HOLD

Target Price: 3.20

Stock Name: UMW
Company Name: UMW HOLDINGS BHD

Research House: MIDF

Price Call: HOLD

Target Price: 7.00

MIDF Research has maintained its 'neutral' call on the automotive sector.

In a note today, MIDF said although the supply situation post-Japan calamities was under control and the recovery appeared to be earlier than expected, there was still some uncertainty at this juncture.

"We believe the full impact of the post-Japan calamities on local carmakers will only be felt over the next few months," it said.

MIDF said the lower vehicle sales in May 2011 were expected as the spillover effect on car supply shortages from post-Japan calamities has finally kicked in.

It said while demand was still strong, vehicle sales would continue to be weighed down further for another two to three months by supply constraints.

It said Perusahaan Otomobil Kedua Sdn Bhd was expected to gain its momentum in the market share in the months ahead as it ramped up production of the new Myvi.

The Korean marques would continue to benefit due to the shortage of Japanese marques to post positive growth on a month on-month basis, it said.

MIDF has recommended a 'buy' call on Proton with a target price (TP) of RM4 and 'neutral' call on Tan Chong Motors (TP:RM4.94), MBM Resources (TP:RM3.20) and UMW Holdings (TP:RM7). -- Bernama

Lion Ind upgraded to 'trading buy'

Stock Name: LIONIND
Company Name: LION INDUSTRIES CORPORATION

Research House: OSK

Price Call: TRADING BUY

Target Price: 2.73

Lion Industries Corp was upgraded to "trading buy" from "neutral" at OSK Research Sdn Bhd as a potential sale of a stake in Amsteel Mills Sdn. will allow it to ‘unlock'' the value of its steel business.

Lion Industries rose to a four-month high, climbing 4.8 per cent to RM1.96 at 9:03 a.m. local time, set for its highest close since Feb. 23.

Bloomberg reported yesterday that China's Baosteel Group Corp is in talks to buy a stake in Amsteel Mills for about US$1 billion, according to two people with knowledge of the matter. -- Bloomberg

3QFY11 Results Within Expectations

Stock Name: SCIENTX
Company Name: SCIENTEX INCORPORATED BHD

Research House: TA

Price Call: BUY

Target Price: 3.80

Insurance: More M&A likely

Stock Name: ALLIANZ
Company Name: ALLIANZ MALAYSIA BHD

Research House: OSK

Price Call: BUY

Target Price: 6.60

Insurance
Maintain neutral: On June 20, MAA Holdings Bhd (MAAH) announced that MAAH and its subsidiary MAA Corp Sdn Bhd have entered into a conditional sale and purchase agreement with Zurich Insurance for the disposal of 100% equity interest in Malaysian Assurance Alliance Bhd (MAAB), Multioto Services Sdn Bhd, Malaysian Alliance Property Services Sdn Bhd (MAPS) and Maagnet Systems Sdn Bhd, for a total cash consideration of RM344 million.

Previously, Business Times had reported that Zurich Insurance was willing to pay RM1.2 billion for 70% of MAAB, which translates into an extremely high price-to-book value (P/BV) of 6.78 times.

Given the lower than expected selling price for MAAB, MAAH's share price dipped by 29.6% yesterday, from RM1.03 to 72.5 sen, the lowest level in three months.

Taking into account the unaudited net assets of the group's subsidiaries as at Sept 30, 2010, the sales consideration of RM344 million was arrived at on a 'willing buyer willing seller' basis. The insurance business that resides in MAAB is therefore valued at 1.36 times P/BV, which is relatively lower than that transacted in recent mergers and acquisitions (M&A) in the Malaysian insurance industry.

Jerneh Asia Bhd and PacificMas Bhd disposed of their insurance arms, Jerneh Insurance and Pacific Insurance, at 2.25 times and 1.71 times P/BV. In another instance, Berjaya Corp sold off its 40% stake in Berjaya Sompo Insurance (B-Sompo) at 3.35 times, which set a new benchmark pricing in the general insurance space.

Compared with these recently completed M&A, MAAB is being sold at a significantly lower price.

MAAB's valuation is lower for a reason. There have been concerns over its asset quality, which as at December 2010 had non-performing loans (NPL) amounting to RM305 million, accounting for 3.5% of the company's total assets.

In addition, MAAB has yet to meet the minimum supervisory capital adequacy ratio (CAR) of 130% required under the risk-based capital framework (RBC). Based on MAAB's audited financial statements as at Dec 31, 2010, MAAH needs to pump roughly RM436 million into MAAB to satisfy this requirement.

To fulfil a generally accepted CAR of 180%, MAAH would need to inject some RM667 million into MAAB. We believe that MAAB's lower than peer valuation is the exception rather than the rule and should not be a point of reference for future M&A in the insurance industry.

Moreover, if we take the injection of RM436 million, which will fulfil the minimum RBC framework requirement, into account, MAAB is actually valued at 3.1 times P/BV instead of 1.36 times.

We believe there will be more moves for consolidation in the insurance sector, which may lead to a re-rating of the whole industry.

Our top pick, Allianz Malaysia Bhd ('buy', fair value: RM6.60), is appealing as the stock is trading at only 1.3 times P/BV, which is still lower than the unfavourable valuation for MAAB's disposal at 1.36 times P/BV, not to mention the actual 3.1 times P/BV required for MAAB to meet minimum requirements. The company is also poised to benefit from the high-growth takaful industry should the deal with Takaful Ikhlas Sdn Bhd go through.

We maintain 'neutral' on Kurnia Asia Bhd (FV: 42 sen) due to its patchy financial performance and 'take profit' on LPI Capital Bhd (FV: RM12.30) for the stock's lofty valuation. ' OSK Research, June 22


This article appeared in The Edge Financial Daily, June 23, 2011.

Retracement at Petronas Chemicals, but largely expected

Stock Name: PCHEM
Company Name: PETRONAS CHEMICALS GROUP BHD

Research House: MAYBANK

Price Call: BUY

Target Price: 8.15

Petronas Chemicals Group Bhd
(June 22, RM7.07)
Maintain buy at RM7.08 with target price of RM8.15: Petronas Chemicals (PetChem) product margin in May 2011 was US$1,222 (RM3,690) per tonne (+42.1% year-on-year, -1.7% month-on-month), we estimate. The year-to-date product margin of US$1,157 per tonne is 25.8% higher y-o-y. Product prices are retracing from a super run over the past three months.

This is largely expected and we are unperturbed as our 2011 earnings forecast is based on a realistic US$1,027 per tonne. We maintain 'buy' with an unchanged target price of RM8.15.

Product prices are retracing in line with our prediction back in May (refer to our report dated May 4: April high to take a breather). We attribute this largely to a curb in demand brought on by the combination of chemical prices achieving a multi-year high and some, actual plus announced, increasing Middle Eastern supplies.

The April/June quarter could be PetChem's strongest yet, but there is a speed bump in the form of a scheduled maintenance shutdown and a major nationwide gas pipeline overhaul. Gas supply volume will inevitably reduce, which will impact PetChem's utilisation rates and product volumes. We will gather inputs from management and ascertain the impact.

Naphtha prices have come off their highs in line with the retracement of crude oil prices. The price of natural gas has largely remained at low levels and there is little cost pressure. Overall, May has remained good for PetChem as it enjoyed good product prices and still manageable feedstock costs. ' Maybank IB Research, June 22


This article appeared in The Edge Financial Daily, June 23, 2011.

SEG International spreading its wings with new campus

Stock Name: SEG
Company Name: SEG INTERNATIONAL BHD

Research House: RHB

Price Call: BUY

Target Price: 4.60

SEG International Bhd
(June 22, RM3.84)
Maintain outperform at RM3.83 with revised fair value of RM4.60 (from RM5.05): The media recently reported that SEGi is constructing a RM300 million to RM500 million campus in Perak. Management clarified that although there is a campus being built in Perak, SEGi is not directly involved in its construction.

SEGi has entered into an agreement with a private developer, Oakfine Development Sdn Bhd, to build the campus with SEGi leasing it from the developer upon completion. As SEGi will not be bearing any of the construction costs, there is no direct impact on SEGi's financials in the immediate term. The campus is expected to be completed in late 2013 or early 2014, which is beyond our current investment horizon.

Earlier this month, the government announced that a consortium of nine early childhood care and education (ECCE) providers had been formed under the Economic Transformation Programme (ETP). SEGi will lead the way in providing ECCE programmes and setting up the ECCE education hub.

Under this programme, SEGi will look at providing courses to kindergarten teachers and childcare providers. The courses are expected to start at end-2011 or early-2012, subject to'' government approval of the syllabus.

Management has guided that the introduction of new high margin programmes is on track. The optometry programme is already underway at its Kota Damansara campus, while the dentistry programme is currently awaiting approval.

Risks include: (i) change in requirements set by governing bodies; and (ii) a change in government policy might impact the eligibility criteria for students to obtain loans/scholarships.

We make no change to our FY11 to FY13 net profit forecasts for now. We reiterate our 'outperform' call on the stock, with a revised fair value of RM 4.60 (from RM5.05), which is based on target 18 times FY12 price earnings ratio and fully-diluted earnings per share.

In our opinion, SEGi deserves to trade at a premium to its peers with its superior three-year compound annual growth rate of 24.4% (against HELP International Corp Bhd's 17.1% and Masterskill Education Group Bhd at 11.3%) and an attractive dividend yield of 4.4% (against HELP and Masterskill of 1.7% and 7.4%). ' RHB Research, June 22


This article appeared in The Edge Financial Daily, June 23, 2011.

Media: Adex growth momentum slows in May

Stock Name: MEDIA
Company Name: MEDIA PRIMA BHD

Research House: MAYBANK

Price Call: BUY

Target Price: 3.25

Media
Downgrade to neutral from overweight: While May 2011 total gross advertising expenditure was up 10% year-on-year (y-o-y), it was below expectations as it was only up 4% month-on-month when we expected it to be 10% to 15% higher m-o-m. This was likely due to weakening consumer sentiment due to inflation which will only be aggravated by the recent 7% electricity tariff hike. Furthermore, total gross adex growth y-o-y will decelerate in 2H11 due to the high base effect of 2H10. Only Media Prima remains a 'buy'.

May 2011 total gross adex was up 10% y-o-y due to the relatively stronger economy and advertisers, especially government institutions, fast food chains and hypermarkets, ramping up ad spend ahead of Hari Raya Aidilfitri in August. TV, newspapers and radio all grew 10% y-o-y. Outdoor continued its losing streak for the fourth month in a row sliding 7% y-o-y.

Of the four major mediums, TV led growth expanding 9% m-o-m. Total gross adex for 5M11 grew 13% y-o-y, led by newspapers (+14% y-o-y) followed by TV (+13% y-o-y).

Total gross adex for June 2011 will be flattish m-o-m. Historically, June total gross adex is 0% to 6% higher m-o-m as advertisers pause before adex-friendly festivities in 3Q. That said, we gather that the 7% electricity tariff hike effective June 1 will have a negative impact on adex sentiment despite early indications to the contrary.

The second half of 2011 is looking precarious. We maintain our 8.3% total gross adex growth forecast for 2011 based on 1.5 times real GDP growth expectation of 5.5% (1998 to 2010: 2.3 times). In our view, y-o-y total gross adex growth will decelerate in 2H11 due to the high base effect of 2H10 and weakening consumer sentiment due to the recent subsidy cuts.

With the three media companies under our coverage trading close to their long-term averages, we are now 'neutral' on the media sector. We have only one 'buy' call and that is on Media Prima. We roll forward valuations pegging the stock at 15 times 2012 price-earnings ratio (PER) which derives a RM3.25 target price (previously RM3.06). Only Media Prima has the chance to outperform should a general election be called, as elections have historically favoured TV and Malay newspaper adex.

We retain our 'hold' calls on Star Publications (M) Bhd and Media Chinese International Ltd (MCIL). Our target prices imply 12.6 times 2012 PER for Star and 13.2 times for MCIL. We think these are fair valuations considering slower adex growth momentum for single digit earnings growth over the near term. ' Maybank IB Research, June 22


This article appeared in The Edge Financial Daily, June 23, 2011.

WTK edges higher in early trade

Stock Name: WTK
Company Name: WTK HOLDINGS BHD

Research House: HWANGDBS

Price Call: BUY

Target Price: 2.90

KUALA LUMPUR: Shares of WTK Holdings Bhd [] edged higher in early trade on Wednesday, June 22 after HwangDBS Vickers Research initiated coverage on the stock with a Buy call and target price of RM2.90.

At 9.10am, WTK added two sen to RM1.84 with 45,000 shares traded.

HwangDBS Vickers said Japan's post-quake reCONSTRUCTION [] should result in increased demand for plywood.

'WTK stands out as a pure timber play with biggest exposure to Japan. Set to record fastest CY10-12F earnings CAGR of 70%,' the research house said on June 22.

MRCB: From conceptualism to realism

Stock Name: MRCB
Company Name: MALAYSIAN RESOURCES CORP

Research House: UOB

Price Call: BUY

Target Price: 3.02

Malaysian Resources Corp Bhd
(June 21, RM2.20)
Maintain buy at RM2.16 with target price of RM3.02: Our roadshow with Malaysian Resources Corp Bhd (MRCB) reinforced our positive conviction of its imminent growth, largely emanating from the strong performance of KL Sentral, potential development in Sungai Buloh, LRT extension Package 2, 'River of Life' project and more prime land acquisitions in the pipeline.

Its recurring revenue model is unfolding nicely, with potential rental/revenue upside from the upcoming Nu Sentral mall and toll road concession in Johor. We still expect recurring revenue to account for 78% to 80% of its 2013 pre-tax profit.

It was recently reported that MRCB could win the RM800 million contract for civil works for Phase 2 of the Ampang light rail transit (LRT) extension line linking Putra Heights to Shah Alam, Selangor. We understand it was the lowest bidder for Package 2, worth RM1.7 billion, and management is positive on the awarding of the contract.

Nu Sentral Retail Mall is 60% rented (including anchor tenants) at RM8 to RM10psf. Management is confident of renting out the remaining 40% of the retail outlets (smaller units) at around or above RM15psf. This is achievable given that Nu Sentral has three ground floors (better pricing mechanism), and a monorail extending to the mall.

Other reputable shopping malls in Kuala Lumpur like The Gardens in Mid Valley City and Suria KLCC are enjoying such rates as well. Furthermore, these malls chalk up strong human traffic volume (over RM30 million a year), benefiting strongly from LRT stations located in or near the malls.

To enhance its property value, MRCB is planning to construct a bridge connecting Sentral Residence and St Regis Hotel & Residences to the National Museum and Perdana Lake Gardens. Currently, the office tower in Q Sentral is 50% taken up at about RM1,200psf and management is targeting to sell the remaining units at RM1,500psf. It is likely to have a MRT cut through the office tower for better accessibility.

We have learned that St Regis Residence received positive response at the pre-launch two weeks ago, with an average selling price (ASP) of RM1,600 to RM2,000psf, comparable with other reputable high-end condominiums like Binjai on the Park (KLCC), Troika and St Mary Residences which are selling at RM1,300 to RM2,600psf.

Our ground checks hinted that MRCB is one of the lowest bidders for the entire LRT extension Package 2 worth RM1.7 billion, which is expected to be announced in late June. Assuming a 5% net margin, we expect net profit contribution of about RM30 million per year from 2012 until 2014, if it clinches the entire package.

Once the contract award is confirmed, we expect this piece of news to stir up more interest in MRCB and provide clearer visibility on the group's prospects in its construction and property division. MRCB's ability to top up its order book of RM1 billion worth of new contracts remains intact, and potentially better.

We understand Kwasa Land Sdn Bhd is in the process of transferring land from the Selangor to the federal government and we expect the transfer to be completed by the end of this year or early 2012.

We foresee no reason for delays as the state government gets land premiums straight into its coffers. We still expect MRCB to clinch at least one or the two of nine available land parcels at the 1,214ha Sungai Buloh land.

We believe MRCB has the potential to do sizeable land deals in Selangor, which would allow it develop the biggest township in a mature area with an estimated gross development value (GDV) of RM4 billion to RM5 billion. If successful, this acquisition could potentially lift its GDV to RM12 billion.

We foresee plenty of long-term opportunities to develop more landbank along its highway concessions (Duke and EDL) in Selangor and in partnership on Pos Malaysia's land in KL Sentral.

We gather the first package of the River of Life project worth RM3 billion will be awarded in mid-July. This signifies a RM1.2 billion order book with its 40% stake in the JV company with Ekovest Bhd.

We raise our FY11/13 net profit forecasts by 10%, 3% and 0% after factoring in the latest project status at the construction and property development divisions. Our forecasts are 18%, 25% and 60% above consensus.

The key risk to our forecasts is the timing of clinching construction projects or federal land.

We maintain our 'buy' call and realisable net asset value-based target price of RM3.02.

There is also potential to co-develop a 9.7ha site in Penang Sentral, finalising approval in 2H11, and future property development projects and land acquisitions in the Klang Valley, Johor Bahru and Penang. ' UOBKayHian, June 21


This article appeared in The Edge Financial Daily, June 22, 2011.

Auto production may have bottomed out, sector still weak

Stock Name: APM
Company Name: APM AUTOMOTIVE HOLDINGS BHD

Research House: AMMB

Price Call: BUY

Target Price: 6.60

Automotive sector
Maintain neutral: We maintain our 'neutral' rating on the auto sector on the back of: (i) earnings uncertainties stemming from the sector's supply chain crisis; (ii) sales contraction, reversing last year's record total industry volume (TIV); and (iii) potential price discounting towards 3Q11 and 4Q11 as players rush out sales to meet yearly commitments to principals once parts supply recovers.

As forewarned, TIV slipped by a further 10% in May to 46,045 units. This follows April's collapse ' which saw TIV drop 20% month-on-month (m-o-m) to 50,936 units. For the first five months of the year, TIV still showed a 3% year-to-date growth, but we believe this should taper off towards 4Q11 against a stronger base in 4Q10 (which was driven by heavy price discounting) and post impact of inventory replenishment in 3Q11.

May TIV also marked the first year-on-year contraction seen this year (-10% y-o-y), following seven straight months of y-o-y growth (excluding minor contractions of less than 1% in February 2011 and November 2010).

Proton took pole position from Perodua in May. The latter lost significant market share in May which could have been driven by an inventory shortage, but we think underlying demand for Perodua was weak in anticipation of the new Myvi launch. Perodua's May TIV fell 19% m-o-m driven by a 42% contraction in Myvi sales. Of the non-nationals, Honda took the worst hit with sales shrinking 41% m-o-m driven by a 63% drop in sales of the City. Toyota was the second worst performer (-23% m-o-m) as sales of its Vios model shrank by 35% m-o-m.

Production saw a slight recovery, but producton-to-sales ratio is still weak. We expect production contraction to have bottomed out in April (-20% m-o-m). May production saw a slight rebound (+4% m-o-m) to 38,909 units from 37,419 units in April, and we believe this will improve further in June.

However, May production levels are still low relative to the pre-earthquake production of an average 45,000 units per month. Production-to-sales ratio has dropped to 70% to 85% since March from 100% to 110% prior to the earthquake.

Numbers for the new Myvi could be delayed. We had highlighted in our previous report that we only expect meaningful numbers from the new MyVi to flow in from August onwards, given the shortage of parts sourced from Japan relating to engine management electronics and transmission systems.

We do not rule out the possibility of Perodua under-meeting orders which were given to parts suppliers in April to June. We understand parts orders from Perodua (for the new Myvi) trended upwards from 5,000 car sets in May to 6,000 in June and this is expected to rise to 8,000 by August.

Inventory replenishment should kick in from 3Q11, which should see sales re-accelerate. However, we are sceptical about TIV catching up to meet the Malaysian Automotive Association's estimate of 610,000 units.

We conservatively maintain our projection of a 2.5% TIV drop to 590,027 units this year ' which reflects our 6% cut in April this year in anticipation of a slowdown stemming from the supply chain crisis. Of the stocks under our coverage, we see UMW Holdings Bhd ('hold', fair value: RM6.50 per share) most at risk of earnings downgrade by the market. UMW's 1Q11 earnings were weakest against expectations, accounting for only 21% of consensus estimates versus 24% to 26% for APM Automotive Holdings Bhd and Tan Chong Motor Holdings Bhd (TCM).

For now, we expect APM and TCM to perform in line with expectations in 2Q11, as the expected weakness has been factored into projections.

APM ('buy', FV: RM6.60 per share) is our top sector pick. Despite our expectation of a soft patch in global economic recovery in the near-term, we like APM for the structural elevation in its earnings prospects stemming from: (i) regional expansion into Thailand ' whose vehicle production is three times that of Malaysia ' and Ford as a potential major customer.

Ford owns the second largest plant in Thailand with a capacity of 450,000 units per year by 2012, three-quarters the size of Malaysia's TIV; (ii) deepening localisation which means a step-up in revenue per car set from new model launches, for example, the new Myvi has resulted in 20% to 100% increases in revenue per car set for parts suppliers; and (ii) an influx of local assembly by foreign marques, like Peugeot and VW for example, which means customer base expansion for parts players. ' AmResearch, June 21


This article appeared in The Edge Financial Daily, June 22, 2011.

Top Glove Corp Bhd - Higher latex prices hit 3Q results

Stock Name: TOPGLOV
Company Name: TOP GLOVE CORPORATION BHD

Research House: MIDF

Price Call: SELL

Target Price: 4.18

Top Glove Corp Bhd
(June 20, RM5.19)
Downgrade to sell at RM5.26 with reduced target price RM4.18 (from RM5.14):Top Glove's cumulative 9MFY11 net profit of RM88.3 million fell below our and consensus expectations, accounting for 52.9% and 61.2% of full-year forecasts. Net profit shrank 56.5% year-on-year (y-o-y) owing to unfavourable latex prices and weakening US dollar against the ringgit.

As anticipated, sales volume declined 15% y-o-y in 3QFY11. Revenue eroded 3.7% y-o-y despite the 23% y-o-y higher average selling price (ASP) of US$32 (RM97.60) per thousand pieces. The demand shrinkage was primarily due to: (i) lower average utilisation rate of 63% (due to the commissioning of a new plant, F21 in Klang, in May); and (ii) customers holding minimum inventory in anticipation of a retreat in latex prices. The prevailing inventory holding period of one to two months is lower than the normal levels of circa three to four months. During the Influenza A (H1N1) outbreak, the holding period was even higher at four to six months.

Quarter-on-quarter sales volume, meanwhile, was up 10.3%, charting revenue of RM535.4 million. For 9MFY11, Top Glove's revenue declined 1.7% to RM1,512.1 million compared with the corresponding period last year.

Top Glove's net income tumbled 56.5% y-o-y to RM87.1 million for 9MFY11, dampened by higher input costs of RM1,412.7 million (10.3% y-o-y). Earnings before interest and tax (Ebit) margin was therefore squeezed by 10 percentage points to 7.3%. We believe the culprits were: (i) the elevated average latex price by 47.4% y-o-y (from RM6.26 per kg in 9MFY10 to RM9.24 per kg in 9MFY11); (ii) declining US dollar against ringgit by 8.8% (from RM3.36 in 9MFY10 to RM3.07 in 9MFY11); and (iii) lag effect in passing on the costs to customers.

Top Glove factory F21 in Klang, which has 16 additional lines, was commissioned in May. In addition, three other factories are slated to be completed by end-FY11 and FY12. We are revising upwards our glove capacity from six billion to 6.3 billion pieces to better reflect the guidance given by management. Top Glove's total capacity of 35.25 billion gloves per year will be increased to 41.6 billion pieces.

The first single-tier interim dividend of five sen (net) per share was declared for the quarter, payable on July 21.

We trim our earnings forecast by 20.6% (from RM166.9 million to RM132.5 million) for FY11 and 16.9% (from RM222.2 million to RM184.6 million) for FY12. The cuts are basically to reflect the rise in latex prices as well as the depreciation in US dollar. Any further adjustments on the numbers are pending our meeting with management during the analysts briefing this Thursday.

We expect sales volumes in 4QFY11 to grow but remain cautious due to the high volatility of latex prices coupled with risks of further deterioration in rubber glove demand. Therefore, we downgrade our recommendation to 'sell' with a lower target price of RM4.18 per share. We ascribe a full-year price-earnings ratio of 14 times, Top Glove's average three-year forward PER band. ' MIDF Research, June 20


This article appeared in The Edge Financial Daily, June 21, 2011.

Kapar Power Station (KPS)

Stock Name: TENAGA
Company Name: TENAGA NASIONAL BHD

Research House: MIDF

Price Call: BUY

Target Price: 7.98

Credit Suisse maintains Underweight on plantations

Stock Name: SIME
Company Name: SIME DARBY BHD

Research House: CREDIT SUISSE

Price Call: SELL

Target Price: 8.00

Stock Name: IOICORP
Company Name: IOI CORPORATION BHD

Research House: CREDIT SUISSE

Price Call: SELL

Target Price: 5.00

KUALA LUMPUR: Credit Suisse Research maintains its Underweight stance on PLANTATION []s due to the rich valuations and also its bearish outlook for palm oil prices in the short term.

At 3.51pm on Tuesday, June 21, Kuala Lumpur Kepong share price was down 18 sen to RM21.92, Sime Darby was unchanged at RM9.19 and IOI Corp inched up two sen to RM5.30.

'Our key Underperform calls are on IOI Corp (target price RM5) and Sime Darby (TP RM8),' it said on Monday, June 20. As for KLK, it was Neutral on the stock and had a TP of RM21.70.

The research house said corn prices have fallen 10% over the past week and it believed this had dragged palm oil prices. The palm oil futures are now closer to RM3,200/tonne (19% below the peak of RM3,930 in mid-February 2011).

'Historical trends suggest that corn, soyabean and palm oil prices are highly correlated. Corn and palm oil prices have a correlation factor of 79%, 77% and 78% over a one-, three- and five-year period, respectively. If corn prices continue to fall, palm oil prices would also weaken,' it said.

Recently, the US Senate's vote ended three decades of ethanol subsidies.

Effective from July 1, ethanol tax credits of 45 cents per gallon have been removed.

Credit Suisse Research said the mandated level of ethanol is 12.6 bn gallons in 2011. However, given the current incentive for refiners to blend ethanol, current ethanol demand and production is expected to be 13.8 billion gallons, or 1.2 billion above the mandatory blend.

If the tax credit is scrapped, this would reduce margins for refiners and reduce, although not remove, the incentive for blending more ethanol. Weak crude oil price has also not helped, it said.

Not a time to celebrate... yet

Stock Name: BJTOTO
Company Name: BERJAYA SPORTS TOTO BHD

Research House: ECMLIBRA

Price Call: BUY

Target Price: 4.56

Petronas Gas rises at mid-morning

Stock Name: PETGAS
Company Name: PETRONAS GAS BHD

Research House: OSK

Price Call: BUY

Target Price: 14.00

KUALA LUMPUR: Shares of PETRONAS GAS BHD [] advanced on Tuesday, June 21 in early trade as investors picked up the stocks in line with a positive outlook by analysts.

It rose eight sen to RM12.98 with 83,100 shares done.

OSK Research raised its target price to RM14, adding the share price had rallied by some 11.4% since it highlighted in its last report the vast growth potential for the company.

The research house was upbeat on the outlook for the upcoming second and third liquified natural gas (LNG) regasification terminals in Pengerang and Sabah, just as it is working on its first plant in Melaka.

"The LNG plants will not only lead to more gas transportation, processing and fixed reservation revenue, but the capex incurred should also drive down Petronas Gas' tax rate to below 20%." "Factoring in the lower tax rate, our forecasts are raised by 3% to 7%, while our discounted cashflow-derived fair value rises to RM14.00. We noted during our recent European marketing trip that interest in the counter was quite strong," it said.

CIMB Research maintains Neutral on BToto, RM4.75 target price

Stock Name: BJTOTO
Company Name: BERJAYA SPORTS TOTO BHD

Research House: CIMB

Price Call: HOLD

Target Price: 4.75

KUALA LUMPUR: CIMB Equities Research said BERJAYA SPORTS TOTO BHD []'s results for the financial year ended April 30, 2011 were broadly in line.

It said on Tuesday, June 21 that core net profit was 3% above its forecast and 4% above consensus because of better-than-expected margins arising partly from a lower prize payout. The final single-tier dividend per share of three sen took full-year tax-exempt DPS to 21.0 sen, which was marginally above its 20.5 sen estimate but below FY10?s 57.5 sen.

"We are tweaking our FY13 earnings upwards by 1% for house-keeping purposes while maintaining our forecasts for other years and our DDM-based target price of RM4.75."

"BToto remains a NEUTRAL as it lacks near-term earnings catalysts beyond the introduction of its 4D+Jackpot variant. We prefer higher-beta plays such as GENTING BHD []," it said.

RHB Research downgrades Star to market perform, FV RM3.71

Stock Name: STAR
Company Name: STAR PUBLICATIONS (M) BHD

Research House: RHB

Price Call: HOLD

Target Price: 3.71

KUALA LUMPUR: RHB Research Institute has downgraded Star Publications to Market Perform from Outperform as the stock's potential return is roughly in line with its expected return from the market.

In its research note on Tuesday, June 21 it lowered its indicative fair value to RM3.71 (from RM4.23 previously), which takes into account the earning revisions above and after rolling-forward its valuation base year to FY12 from FY11 previously.

“Our fair value is based on a revised target FY12 PER of 15 times from 16 times previously to take into account the slower earnings growth that we now project and which is also in line with its five-year average PER.

"As the stock's potential return is roughly in line with our expected return from the market, we downgrade the stock to Market Perform from Outperform previously," it said. RHB Research also lowered its FY11-13 earnings forecasts by 7.7% to 12.8% following the changes in: 1) higher depreciation; 2) interest expense for FY11-13; and 3) higher newsprint prices for FY12-13.

CI Holdings: New product launching soon, margins to remain stable

Stock Name: CIHLDG
Company Name: C.I. HOLDINGS BHD

Research House: RHB

Price Call: HOLD

Target Price: 3.30

CI Holdings Bhd
(June 20, RM3.08)
Maintain market perform at RM3.05 with revised fair value of RM3.30 (from RM3): We recently visited CI Holdings' (CIH) factory in Bangi where we viewed its production lines for both its carbonated and non-carbonated products. One of the key interests of the tour was the new non-carbonated line which was installed in September 2010.

The new line, which cost approximately RM45 million, increased CIH's non-carbonated capacity by 70% to 80% as it operates at a much faster speed than the previous two lines. CIH's maximum annual non-carbonated capacity in terms of revenue was thus increased to about RM560 million per year (from about RM300 million), although it is currently only utilising about 40% to 45%.

We understand that CIH is planning to launch a new non-carbonated product within these two weeks. It has already launched Revive Lime Burst (carbonated) in 1QFY11, followed by the launch of Tropicana Twister Blackcurrant (non-carbonated) in 2QFY11. In 3QFY11, CIH launched a new logo and packaging for its Revive products.

Although the management would not reveal any details about the new product, we believe it could be another variant of Tropicana Twister, as we expect CIH to continue to leverage on its strong brand equity and market leadership position.

We understand that CIH has locked in its sugar requirements until the end of 2012 at somewhere between RM2.60 to RM2.70 per kg, as it was locked in sometime in 3QFY11.

This is in line with our estimate of about RM2.63 per kg for 2HFY11 and 1HFY12. From 2HFY12 onwards, CIH's sugar costs would depend on the new long-term contract (LTC) negotiated by the government for raw sugar.

We are keeping our sugar cost assumptions for FY11/12, although for FY13, we are reducing our assumptions slightly as we expect sugar prices to remain fairly stable from 2012 to 2015 due to the government LTC. We have previously assumed a sugar cost rise of about 8% for FY13, which we have now changed to a flat price assumption from FY12.

The risks include: (i) a significant drop in demand; (ii) significant increase in raw material prices such as crude oil and sugar; and (iii) foreign exchange risk as CIH buys concentrate from PepsiCo in US dollars.

Our FY13 ending June earnings forecast is increased by 15.2% after imputing our new flat sugar cost assumptions for the year, while our FY11/12 forecasts are unchanged.

Our fair value is increased to RM3.30 (from RM3.00 previously) after rolling forward our valuations to 11 times CY12 (from CY11 previously). We maintain our 'market perform' call on the stock. A near-term re-rating catalyst could be its venture into the snack manufacturing business, depending on the valuations and synergistic benefits. ' RHB Research, June 20


This article appeared in The Edge Financial Daily, June 21, 2011.

Evergreen Fibreboard raising ASP to mitigate cost pressures

Stock Name: EVERGRN
Company Name: EVERGREEN FIBREBOARD BHD

Research House: RHB

Price Call: SELL

Target Price: 1.16

Evergreen Fibreboard Bhd
(June 20, RM1.15)
Maintain underperform at RM1.14 with revised fair value of RM1.16 (from 92 sen): Evergreen's average rubberwood log costs escalated by 21% year-on-year in 2010 as a result of a reduction in supply, largely thanks to rising latex prices as well as the bad weather conditions in 2HCY10.

The high rubberwood log costs have persisted so far into 2011 with the current average cost (up to April) actually 24% higher than FY10's average. The management believes that current rubberwood log costs have more or less reached their peak, and feels they are more likely to trend down due to an expected increase in rubberwood log supply as a result of improving weather conditions.

Glue cost was quite stable throughout 2010, and only started to escalate towards the end of the year. In line with the higher crude oil prices in early 2011, average glue cost (up to April) has increased by 15% compared with 2010's average.

The average increase in glue cost for FY11 ending December will likely be lower, as crude oil prices have since April started to ease off from their highs to the current level of US$116 (RM353.80) per barrel.

To mitigate the cost pressure on margins, Evergreen has been raising the average selling price (ASP) of its medium density fibreboard'' (MDF) products by US$5 per cu m consecutively each month since January. The management said the planned hike in ASP is only halfway through and it will need to hike prices by another US$15 to US$20 per cu m to fully mitigate the increase in raw material costs. This is not expected to be an issue, as the management said its customers have been more receptive to the higher ASP because the increases have been gradual.

The management has assured that it will maintain its 30% dividend payout ratio, which translates to a net dividend payout of about four sen per share based on our FY11 earnings per share forecast of 13.5 sen and a net yield of 3.5%.

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

We raise our FY11 to FY13 earnings forecasts by between 3% and 7% after raising our ASP and rubberwood log cost assumptions.

We believe further headwinds ahead for the MDF industry, such as high raw material costs and the strengthening of the ringgit against the greenback will continue to weigh on Evergreen's share price performance.

Post earnings revision, and after rolling forward our valuation base year, we now value Evergreen at RM1.16 (from 92 sen previously) based on an unchanged target price-earnings ratio of seven times FY12 earnings, in line with its five-year average historical PER. We maintain 'underperform'. ' RHB Research, June 20


This article appeared in The Edge Financial Daily, June 21, 2011.

ADCB sells RHBCap stake to related company

Stock Name: RHBCAP
Company Name: RHB CAPITAL BHD

Research House: AMMB

Price Call: BUY

Target Price: 9.70

RHB Capital Bhd
(June 20, RM9.56)
Maintain buy at RM9.75 with fair value of RM9.70: The press reported that RHB Capital Bhd's (RHBCap) strategic investor, Abu Dhabi Commercial Bank (ADCB), has signed an agreement with its sister company Aabar Investments PJS to sell its 24.9% stake in RHBCap to the latter for RM10.80 per share. The transaction was widely expected.

ADCB CEO Ala'a Eraiqat said in a press statement that the sale is expected to enhance ADCB's capital ratios. Upon completion of the transaction, ADCB's tier-1 ratio would increase to 14.43% from 12.39%, while the capital-adequacy ratio would rise to 21.11% from 17.03%.

Ala'a said while ADCB had benefited tremendously from its ownership in RHBCap, the management and board are now'' focused on executing its strategy of being an UAE-centric bank.

Aabar CEO Mohamed Badawy Al Husseiny said the purchase would add a core asset to the company's portfolio of financial services investments.

Based on RHBCap's latest book value of RM4.79 per share, the RM10.80 per share price tag would work out to a price-to-book value (P/BV) of 2.25 times. The press reported the price of RM10.80 per share would value the deal at RM5.9 billion, a gain of 51% for ADCB after acquiring the stake for RM3.9 billion.

In terms of the impact on RHBCap, in our view this merely represents a change in strategic shareholder.

While ADCB has been a major shareholder in RHBCap for the past three years, we believe it was largely a passive investor. We believe Aabar is likely to adopt the same stance.

We maintain our fair value for RHBCap at RM9.70, based on a net earnings forecast of RM1.7 billion and a return on equity of 15.4% FY11F leading to a fair P/BV of 1.9 times FY11F. ' AmResearch, June 20


This article appeared in The Edge Financial Daily, June 21, 2011.

Top Glove Corp Bhd - Operating environment stabilising

Stock Name: TOPGLOV
Company Name: TOP GLOVE CORPORATION BHD

Research House: CITI GROUP

Price Call: BUY

Target Price: 5.95

Top Glove Corp Bhd
(June 20, RM5.19)
Maintain buy at RM5.25 with target price RM5.95: Net profit was stable at RM25.6 million for 3QFY11 against 2QFY11. Earnings of RM87.1 million for 9MFY11 were 62% of our FY11E forecast of RM141 million and 60% of street's RM144 million. An interim dividend of 5 sen per share (single-tier) was declared.

For 3QFY11, revenue rose 10% quarter-on-quarter (q-o-q) mainly on a 10% rise in average selling price (ASP). Volume sales rose 1% q-o-q (improved from -5% to -6% q-o-q in 2QFY11) as buyers continued to adopt a wait-and-see attitude. Earnings before interest, tax depreciation and amortisation (Ebitda) grew a smaller 6% q-o-q as latex prices rose 6.8% q-o-q to an average of RM9.85 per kg (2QFY11: +28% q-o-q to RM9.22 per kg) and the ringgit +2% q-o-q against the US dollar (3.02 against 3.08 in 2QFY11).

Latex prices have eased 14% to RM9.35 per kg from an all-time high of RM10.84 per kg (Feb 22, 2011). Industry players see room for a further decline in rubber prices as supplies are improving post-winter season and on reduced rainfall. As ASP is gradually lowered, customer orders should pick up.

A gradual easing of, or even stable, rubber prices would allow for catch-up in cost pass-through (against 70% to 80% in 9MFY11) and aid margin recovery in FY12E. A strategy to rebalance the production mix towards higher-margin nitrile gloves (from 7% of production in 1QFY11 to 13% in 3QFY11 and a target of 16% by December 2011) would also have a positive impact on margins. A recent 7% hike in gas price will have a negligible impact, with Top Glove being able to fully pass on the higher cost with a small price increase of 0.6% or US$0.20 per 1,000 pieces.

We trim our net profit forecast by 13% to RM123 million for FY11E and 11% to RM217 million for FY12E after tweaking margin assumptions to reflect the slower-than-expected recovery. We are keeping our 'buy' rating as we believe earnings have bottomed out and the market has priced in poor results for FY11E. Rolling forward our base year to CY12E and applying a price-earnings ratio of 15.5 times (+0.5 standard deviation historical mean of 13.6 times), we maintain our target price of RM5.95. ' Citi Investment Research, June 17


This article appeared in The Edge Financial Daily, June 21, 2011.

Gamuda 3Q results to meet expectations

Stock Name: GAMUDA
Company Name: GAMUDA BHD

Research House: UOB

Price Call: BUY

Target Price: 4.40

Gamuda Bhd
(June 20, RM3.74)
Maintain buy at RM3.72 with target price RM4.40: We expect Gamuda's 3QFY11 ended April 31 net profit to remain flat at RM90 million to RM95 million against 2QFY11's RM94 million. We expect construction earnings before interest and tax (Ebit) margin to stay at 8.7%, the same as in 2QFY11, and continue to improve from 1QFY11's 6.6%.

If 3QFY11 net profit meets our expectation, this would bring 9MFY11 net profit to RM270 million, which would be 73% of our full-year forecast and 70% of consensus. Looking ahead, we expect contribution from the construction division to improve in 4QFY11, aided by an acceleration of construction activities and margin improvement.

Gamuda and MMC Corp recently agreed to form MMC Gamuda KVMRT (T) Joint Venture a 50:50 JV for the purpose of pre-qualifying and tendering for the tunnelling, and other underground works packages for the mas rapid transit project.

We understand the management may increase its FY11 domestic pre-sales target by 30% to RM1.3 billion. Year-to-date, Gamuda has unbilled sales of about RM950 million (1.8 times FY10's property revenue).

We gather that the management may hold back two property launches in Vietnam ' Celadon City (Ho Chi Minh City) and Gamuda City (Hanoi) ' due to uncertainties surrounding the Vietnamese dong.

We maintain our earnings forecasts for FY11/12, but note the potential upside from the bagging of the RM13 billion to RM14 billion MRT tunnelling works and sales from Vietnam projects.

We maintain 'buy' with a target price of RM4.40. Our target price factors in contributions from the following: (i) RM13 billion MRT project (36 sen per share increment to our realisable net asset value) given the project's increased visibility; (ii) RM10 billion Yenso Park (27 sen per share increment to our RNAV); and (iii) rollover of our valuation for the construction and property segments to FY12. Our sum-of-parts target price implies FY12F fully-diluted price earnings ratio of 21 times (below its +1 standard deviation PER of 23 times).

The share price could rise with upcoming news flow on the MRT groundbreaking which is expected to take place on July 8. We anticipate another momentum play approaching 4Q11 before the award announcement of the MRT tunnelling works. ' UOB KayHian, June 20


This article appeared in The Edge Financial Daily, June 21, 2011.

TOPGLOV - Top Glove downgraded, stock slips

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

Top Glove Corp, the world’s biggest rubber-glove maker, fell in Kuala Lumpur trading after OSK Research Sdn Bhd downgraded the stock as the company reported quarterly earnings that were below expectations.

The stock slid 1 per cent to RM5.21 at 9:46 a.m. local time, set for its lowest close since June 14.

Top Glove’s rating was cut to “neutral” from “buy,” Jason Yap, an analst at OSK, wrote in a report today. -- Bloomberg

Disappointing 3Q results due to higher latex prices and weaker USD

Stock Name: TOPGLOV
Company Name: TOP GLOVE CORPORATION BHD

Research House: MIDF

Price Call: SELL

Target Price: 4.18

Up the ante in land acquisition

Stock Name: SWKPLNT
Company Name: SARAWAK PLANTATION BHD

Research House: MIDF

Price Call: BUY

Target Price: 2.83