KFCH's earnings outlook good despite gloomy economy

Stock Name: KFC
Company Name: KFC HOLDINGS (M) BHD

Research House: RHB

Price Call: BUY

Target Price: 3.50

KFC Holdings (M) Bhd
(Oct 13, RM3.31)
Maintain outperform at 3.23 with fair value of RM3.50: The management estimates that for KFCH's Indian operations to break even, it would need about 30 to 35 outlets, which we believe will be achieved by mid- to end-2013. KFCH has 10 outlets in India, which is expected to grow to 15 to 17 by end-FY11, in line with our estimates. KFCH is targeting to have 25 stores in India by end-2012. Despite the gloomy global economic outlook, we understand that KFCH is not planning to slow down its expansion plans in India.

KFCH's focus for Malaysia is to open more drive-thru outlets. Currently, out of the 528 existing outlets, KFCH has 45 drive-thrus. Year-to-date KFCH has opened 13 outlets, of which six are drive-thrus. For FY11, KFCH aims to open 12 drive-thrus out of its 25 to 28 overall targeted store openings. It plans to open more outlets on the east coast of Peninsular Malaysia and in east Malaysia.

For FY12 onwards, we understand KFCH's plans to open 12 to 15 outlets per year, lower than our current forecast of 25. We have adjusted downwards our new store assumptions to 15 per year for FY12/FY13.

Despite the slowdown in the global economy, we understand that KFCH expects its top line outlook to remain resilient for FY12. Although the management does expect a slowdown in revenues, it has strategies in place to mitigate this through the introduction of value propositions for customers such as its RM4.50 meal.

In the last economic downturn of 2008/09, there was a noticeable slowdown in revenue growth in FY09, which grew by 5.4% year-on-year, a significant slowdown given that FY08 top line grew by 26% y-o-y. The drop in revenue in FY09 was a result of a slowdown in consumer spending growth, which slowed to 0.7% y-o-y (from +8.7% y-o-y in FY08).

Risks include: (i) bird/swine flu escalation; (ii) escalation of corn and soyabean prices, which would eat into margins; and (iii) deteriorating consumer spending power, resulting in lower same-store sales (SSS) growth.

Our FY12/FY13 earnings forecasts have been revised downwards by between 0.8% and 2.2% after imputing a lower number of new outlet openings of 15 per year in Malaysia (from 25 previously).

We expect KFCH's top line and earnings outlook to remain stable despite the cloudy economic outlook, as it is operating in a resilient segment of the food and beverage sector. While there is still downside risk to its revenues if the economy falls to worse than expected levels, the management expects a single-digit revenue decline at most.

Margins are likely to remain stable, or potentially higher, in light of declining raw material prices. As such, we reiterate our 'outperform' call on the stock, with an unchanged fair value of RM3.50 based on 14.5 times FY12 earnings per share. ' RHB Research, Oct 13


This article appeared in The Edge Financial Daily, Ocotber 14, 2011.

Automotive not in the fast lane yet

Automotive sector
Maintain neutral: We expect next year's total industry volume (TIV) to grow by 1.1% on the back of forecast GDP growth of 5.2%. Although the linear correlation between TIV and GDP growth is strong, we think the former's growth upside will be marginal because: (i) the replacement cycle for new vehicles that may give sales a boost has peaked; (ii) the upcoming models may not create enough excitement to sufficiently spur TIV growth; and (iii) consumer sentiment is deteriorating and buyers have become more frugal, which inevitably curtails spending on big ticket items.

We understand the government, together with consultants and industry players, is reviewing key aspects and policies pertaining to the sector in its efforts to drive investment in the manufacture of hybrids and electric vehicles and gradually phase out Approved Permits (AP).

The extension of the deadline for full exemption of excise duties and tax on hybrids and various incentives relating to the replacement of taxis are positive to the sector. However, Budget 2012's proposals could also potentially cap the upside on vehicle sales. The move to raise the price ceiling under the My First Home Scheme may lead to potential vehicle buyers putting a priority on owning a property over replacing their vehicles out of fear of rising property prices .

We still think there is more downside on some counters as their valuations have yet to see any significant price multiple compression. We also highlight the high risk of 2H earnings falling short of consensus expectations given the weakening ringgit, as well as high promotion expenses jacking up costs. The reversal in the ringgit (against the US dollar notably) has taken auto manufacturers by surprise as many had expected the ringgit to sustain its strong momentum.

With TIV remaining lacklustre, we think the sector will lack spark for a while. We are still firmly bearish on the larger caps, on which we have 'sell' calls, although we favour the small-cap autoparts makers in view of their beaten down valuations. Our top pick is EP Manufacturing Bhd (fair value: RM1.38) and Delloyd Ventures Bhd (FV: RM3.88). We maintain our 'neutral' stance on the sector. ' OSK Research, Oct 13


This article appeared in The Edge Financial Daily, Ocotber 14, 2011.

OSK Research has Trading Buy on CSC Steel, FV RM1.78

Stock Name: CSCSTEL
Company Name: CSC STEEL HOLDINGS BERHAD

Research House: OSK

Price Call: TRADING BUY

Target Price: 1.78

KUALA LUMPUR: OSK Research has a trading buy call on CSC Steel with a fair value of RM1.78, which is 43 sen above the last closing price of RM1.35.

It said on Friday, Oct 14 CSC is experiencing a narrowing price spread between hot-rolled coils (HRC) and cold-rolled coils (CRC) which has tapered further to below US$100 a tonne.

Other than that, a prolonged inconsistent supply of HRC by a sole local producer also poses a challenge to its production planning.

The demand for and margin of galvanised iron (GI) and pre-painted GI held up better than CRC and the intensifying competition from new CRC lines entering the local market in past few years has prompt management decided to increase its exports of CRC to 20% recently from 5% in 2010 to optimise plant utilisation although the margin for exports is low.

'We maintain our Trading BUY recommendation with a fair value of RM1.78 on the back of its solid balance sheet, decent dividend yield and the possibility of CSC becoming a privatisation candidate,' it said.

DiGi jumps on positive upside, TP RM33.90

Stock Name: DIGI
Company Name: DIGI.COM BHD

Research House: UOB

Price Call: BUY

Target Price: 33.90

KUALA LUMPUR: Shares of DIGI.COM BHD [] jumped on Friday, Oct 14 on after a research house said it maintained a Buy at RM30.88 and target price of RM33.90.

At 4.12pm, the telco was up RM1.02 to RM31.90. There were 310,600 shares done.

The FBM KLCI fell 3.65 points to 1,441.22. Turnover was 859.19 million shares valued at RM931.89 million. There were 276 gainers, 423 losers and 242 stocks unchanged.

UOB Kay Hian Malaysia research said it expected DiGi to recognise about RM145 million in accelerated depreciation of its network in 3Q11, similar to 2Q11's. The company is upgrading its infrastructure to be LTE-ready.

'Hence, net profit could fall 17% on-year to RM240 million in 3Q11 (+2% on-quarter). Core net profit, however, is expected to improve 2% on-quarter to RM365 million (+26% on-year), driven by the festive Hari Raya season.

'Dividend for 3Q11 could drop 40% yoy to 30 sen/share (1% net yield), premised on a 100% payout vs 134% a year ago. A larger payout is expected in mid-2012 when DiGi completes a proposed capital management exercise.

'DiGi is our sole BUY in the cellular space for its 10% capital upside to our DCF-based target price of RM33.90 with a 7% gross yield,' it said.

YTL Power: Strike while the iron is hot

Stock Name: YTLPOWR
Company Name: YTL POWER INTERNATIONAL BHD

Research House: MAYBANK

Price Call: BUY

Target Price: 2.02

YTL Power International Bhd
(Oct 13, RM1.76)
Upgrade to buy from hold at RM1.69 with target price of RM2.02: YTL Power International's (YTLP) share price has slipped to attractive levels implying net dividend yields of 5.5%, or more than 10% above the historical average and only 1.3 times 1-year forward price-to-book value (P/BV), an 8'' year low below even the global financial crisis (GFC) trough of 1.6 times in October 2008. This devaluation is despite its relatively resilient earnings base. Therefore, we maintain our discounted cash flow-based target price of RM2.02 but upgrade our call from 'hold' to 'buy'.

Since our last report on Aug 29, 2011, YTLP's share price slipped by 11%. Its share price of RM1.89, then already implied an attractive 5% net dividend yield but its current price of RM1.69, implies an even higher 5.5% net dividend yield (13-year average: 5%). Our FY12 dividend per share estimate of 9.4 sen, assumes 1QFY12 DPS of 3.8 sen and 2QFY12 to 4QFY12 DPS of 1.9 sen per quarter. Even if YTLP continues declaring quarterly DPS of only 1.9 sen, its current price implies a still attractive net dividend yield of 4.4%.

Earnings-wise, we gather that only PowerSeraya (PS ' 58% of FY11 pre-tax profit) is vulnerable to recession. During the FY09 GFC, PS' generation sales contracted by 6% year-on-year (y-o-y). We estimate that should PS' generation sales contract by 6% y-o-y again due to another recession, our earnings estimates will be negatively impacted by only 5%. Therefore, YTLP should be able to sustain a quarterly DPS of 1.9 sen.

YTLP is currently trading at only 1.3 times one-year forward P/BV, the lowest since May 2003 and even below the GFC trough of 1.6 times in Oct 2008. Coupled with our earlier analysis that its current net dividend yields are above their historical average, this suggests that there is very little downside risk to YTLP's share price.

We maintain our earnings estimates and discounted cash flow-based target price of RM2.02 but upgrade our call from 'hold' to 'buy' as deep value is emerging with little downside risk. We would not be surprised if YTLP's shareholders embark on corporate exercises to capitalise on its currently attractive valuations. Also, we understand that it is studying the possibility of acquiring distressed utility assets in Europe, providing another re-rating catalyst. ' Maybank IB Research, Oct 13


This article appeared in The Edge Financial Daily, Ocotber 14, 2011.

Boustead just checking in

Stock Name: BSTEAD
Company Name: BOUSTEAD HOLDINGS BHD

Research House: HWANGDBS

Price Call: BUY

Target Price: 7.00

Boustead Holdings Bhd
(Oct 13, RM5.33)
Recommend buy at RM5.15 with revised target price of RM7 (from RM7.50): Boustead's share price has fallen 20% from its high and it is trading at only eight times FY12 price-earnings ratio and 1.1 times net tangible assets while offering 9% yield (70% payout paid quarterly). At +1 standard deviation (SD), it has dropped from peak of +2SD, it is cheaper than prior to the acquisition of MHS Aviation Sdn Bhd and Pharmaniaga Bhd. We remain confident FY11 will post net profit of RM540 million, anchored by plantations with nine months production locked in at RM3,350 per tonne average (against RM2,796 spot) and nine months consolidation of Pharmaniaga's earnings. Return on equity key performance index for 1HFY11 of 6.9% is also on track to meet our FY11F of 12.6% and 12% internal target. The key risk is timing.

The purchase of 60 acres (24ha) of property in Jalan Cochrane, Kuala Lumpur, is in the final stages of Cabinet approval. The transfer will be directly to Boustead and not Lembaga Tabung Angkatan Tentera (LTAT) to avoid paying stamp duty twice. To ease the burden on its balance sheet, part of the estimated land cost (RM1.3 billion @ RM500 psf) may be financed by rebuilding government quarters on the vacated land and securing anchor tenants for the land. The site is earmarked for more commercial content with Ikea a likely key tenant. We estimate this project could add RM1.03 per share or 12% to our sum-of-parts value. The MRT station and Ikea will improve pricing power ' we assume RM900 psf average selling price, which is similar to less-prime Sunway Velocity.

We understand the letter of award for the next batch of six offshore patrol vessels worth circa RM8 billion (our forecast RM7 billion) will be out end-2011. In our view, this contract is not only important for BN Shipyard Sdn Bhd (60%-owned by Boustead), but also to Lumut's economy with 3,000 workers and 600 local vendors. Given the impending general election, it may be in the government's interest to expedite the rollout. ' HwangDBS Vickers Research, Oct 13


This article appeared in The Edge Financial Daily, Ocotber 14, 2011.

Automotive not in the fast lane yet

Stock Name: DELLOYD
Company Name: DELLOYD VENTURES BHD

Research House: OSK

Price Call: BUY

Target Price: 3.88

Automotive sector
Maintain neutral: We expect next year's total industry volume (TIV) to grow by 1.1% on the back of forecast GDP growth of 5.2%. Although the linear correlation between TIV and GDP growth is strong, we think the former's growth upside will be marginal because: (i) the replacement cycle for new vehicles that may give sales a boost has peaked; (ii) the upcoming models may not create enough excitement to sufficiently spur TIV growth; and (iii) consumer sentiment is deteriorating and buyers have become more frugal, which inevitably curtails spending on big ticket items.

We understand the government, together with consultants and industry players, is reviewing key aspects and policies pertaining to the sector in its efforts to drive investment in the manufacture of hybrids and electric vehicles and gradually phase out Approved Permits (AP).

The extension of the deadline for full exemption of excise duties and tax on hybrids and various incentives relating to the replacement of taxis are positive to the sector. However, Budget 2012's proposals could also potentially cap the upside on vehicle sales. The move to raise the price ceiling under the My First Home Scheme may lead to potential vehicle buyers putting a priority on owning a property over replacing their vehicles out of fear of rising property prices .

We still think there is more downside on some counters as their valuations have yet to see any significant price multiple compression. We also highlight the high risk of 2H earnings falling short of consensus expectations given the weakening ringgit, as well as high promotion expenses jacking up costs. The reversal in the ringgit (against the US dollar notably) has taken auto manufacturers by surprise as many had expected the ringgit to sustain its strong momentum.

With TIV remaining lacklustre, we think the sector will lack spark for a while. We are still firmly bearish on the larger caps, on which we have 'sell' calls, although we favour the small-cap autoparts makers in view of their beaten down valuations. Our top pick is EP Manufacturing Bhd (fair value: RM1.38) and Delloyd Ventures Bhd (FV: RM3.88). We maintain our 'neutral' stance on the sector. ' OSK Research, Oct 13


This article appeared in The Edge Financial Daily, Ocotber 14, 2011.

Automotive not in the fast lane yet

Stock Name: EPMB
Company Name: EP MANUFACTURING BHD

Research House: OSK

Price Call: BUY

Target Price: 1.38

Automotive sector
Maintain neutral: We expect next year's total industry volume (TIV) to grow by 1.1% on the back of forecast GDP growth of 5.2%. Although the linear correlation between TIV and GDP growth is strong, we think the former's growth upside will be marginal because: (i) the replacement cycle for new vehicles that may give sales a boost has peaked; (ii) the upcoming models may not create enough excitement to sufficiently spur TIV growth; and (iii) consumer sentiment is deteriorating and buyers have become more frugal, which inevitably curtails spending on big ticket items.

We understand the government, together with consultants and industry players, is reviewing key aspects and policies pertaining to the sector in its efforts to drive investment in the manufacture of hybrids and electric vehicles and gradually phase out Approved Permits (AP).

The extension of the deadline for full exemption of excise duties and tax on hybrids and various incentives relating to the replacement of taxis are positive to the sector. However, Budget 2012's proposals could also potentially cap the upside on vehicle sales. The move to raise the price ceiling under the My First Home Scheme may lead to potential vehicle buyers putting a priority on owning a property over replacing their vehicles out of fear of rising property prices .

We still think there is more downside on some counters as their valuations have yet to see any significant price multiple compression. We also highlight the high risk of 2H earnings falling short of consensus expectations given the weakening ringgit, as well as high promotion expenses jacking up costs. The reversal in the ringgit (against the US dollar notably) has taken auto manufacturers by surprise as many had expected the ringgit to sustain its strong momentum.

With TIV remaining lacklustre, we think the sector will lack spark for a while. We are still firmly bearish on the larger caps, on which we have 'sell' calls, although we favour the small-cap autoparts makers in view of their beaten down valuations. Our top pick is EP Manufacturing Bhd (fair value: RM1.38) and Delloyd Ventures Bhd (FV: RM3.88). We maintain our 'neutral' stance on the sector. ' OSK Research, Oct 13


This article appeared in The Edge Financial Daily, Ocotber 14, 2011.

Leveraging on R&D expertise

Stock Name: FIBON
Company Name: FIBON BERHAD

Research House: TA

Price Call: HOLD

Target Price: 0.61

KFCH edges up in early trade

Stock Name: KFC
Company Name: KFC HOLDINGS (M) BHD

Research House: RHB

Price Call: BUY

Target Price: 3.50

KUALA LUMPUR: Shares of KFC HOLDINGS (M) BHD [] rose in early trade on Thursday, Oct 13 after RHB Research Institute said the company's earnings outlook was not dampened by gloomy economic conditions.

At 9.30am, KFCH was up nine sen to RM3.32 with 254,800 shares traded.

RHB Research in a note Oct 13 said that despite the slowdown in the global economy, KFCH expected its topline growth to remain resilient for FY12.

Although management does expect a slowdown in revenues, it has strategies in place to mitigate the potential slowdown through introduction of value propositions for customers such as its RM4.50 meal, said the research house.

RHB Research said that despite offering various value meals and other promotions, it expects KFCH's EBIT margins to remain stable in FY12-13 at about 8.2-8.5% p.a. (8.5-8.8% p.a. in FY10-11).

'We believe this is achievable given that prices of KFCH's key raw materials, corn and soy, are expected to decline along with other commodities in view of a global economic slowdown.

'We expect KFCH's topline and earnings outlook to remain stable despite the cloudy economic outlook, as it is operating in a resilient segment of the F&B sector. We reiterate our Outperform call on the stock, with an unchanged fair value of RM3.50 based on 14.5x FY12 EPS,' it said.

YTL Power raised to 'buy', stock climbs

Stock Name: YTLPOWR
Company Name: YTL POWER INTERNATIONAL BHD

Research House: MAYBANK

Price Call: BUY

Target Price: 2.02

YTL Power International Bhd rose to a two-week high in Kuala Lumpur trading after the stock was upgraded at Maybank Investment Bank Bhd, which cited its "attractive" valuation.

The stock climbed 1.8 percent to RM1.72 at 10:06 a.m. local time, set for its highest close since Sept. 29.

YTL Power was raised to "buy" from "hold," Maybank Investment said in a report today. -- Bloomberg

MGO not required for Eastern & Oriental

Stock Name: SIME
Company Name: SIME DARBY BHD

Research House: RHB

Price Call: BUY

Target Price: 9.35

Sime Darby Bhd
(Oct 12, RM8.55)
Maintain outperform at RM8.50 with fair value of RM9.35: Sime Darby has announced that pursuant to a letter from the Securities Commission dated Oct 11, the SC has informed it of the following: (i) Further to its review of the above acquisition, it is the SC's finding that Sime Darby and Datuk Terry Tham Ka Hon are not parties acting in concert and as such a mandatory offer obligation would not arise; and (ii) That the SC's finding is without prejudice to a review of the decision should new facts arise in relation to the matter and the SC's right to take appropriate action provided under the securities laws as a consequence of such review.

We view this positively, and believe Sime will now be able to move on from this to focus on extracting synergies from its acquisition of the 30% stake in E&O, especially since Tham has assured shareholders that he will retain his role in E&O for the next few years.

We maintain our view that based on E&O's FY11 net profit of RM30.7 million, earnings accretion from this acquisition to Sime is negligible, after taking out the interest income foregone. Although consensus estimate for FY12 is much higher at RM94.8 million, E&O only achieved net profit ex-EI of approximately RM8.2 million or 8.6% of consensus earnings in 1QFY12. However, it is widely believed that stronger profit will only come in the later part of 2011 and 2012. In the longer term, we believe Sime would like to take part in E&O's Seri Tanjung Pinang 2 (STP 2) project, which has a GDV of RM12 billion, with profit only coming in two to three years.

Risks include: (i) a convincing reversal in crude oil price trends resulting in reversal of crude palm oil and other vegetable oils price trends; (ii) weather abnormalities resulting in an over or under supply of vegetable oils; (iii) increased emphasis on implementing global biofuel mandates and trans-fat policies; and (iv) a slower than expected global economic recovery, resulting in lower than expected demand for vegetable oils.

We make no change to our forecasts. We maintain our sum-of-parts-based fair value of RM9.35 and our 'outperform' recommendation on the stock. ' RHB Research, Oct 12


This article appeared in The Edge Financial Daily, Ocotber 13, 2011.

What would S P Setia's Liew do next?

Stock Name: SPSETIA
Company Name: SP SETIA BHD

Research House: UOB

Price Call: HOLD

Target Price: 3.90

KUALA LUMPUR: Shares of S P Setia Bhd were marginally lower at midday on Thursday, Oct 13, as investors mulled over the next move by S P Setia chief executive officer Tan Sri Liew Kee Sin.

At midday, S P Setia was down one sen to RM3.86 while the warrants were unchanged at 87.5 sen which were lower that Permodalan Nasional Bhd's offer of RM3.90 for the shares and 91 sen offer for the warrants.

The latest development was on Wednesday when S P Setia said there were no competing offers for the stake in the company after the Sept 28 move by Permodalan Nasional Bhd to acquire the property developer.

UOB Kay Hian Malaysia Research said the market was awaiting Liew's decision on PNB's general offer proposal.

'The upcoming two weeks are crucial as the decision could be made anytime from now till Oct 28 when SP Setia's independent adviser (IA) is expected to release its recommendation to shareholders on whether they should accept PNB's GO,' it said.

S P Setia and PNB had recently issued a joint statement that it PNB's desire to retain Liew and S P Setia's management, while PNB's involvement would only be through board representation.

'We explore two outcomes: a) Tan Sri Liew stays on and does not sell any shares, and b) he stays on but sells part/all of his entire 11.3% stake. We reckon the market would be pricing a steeper discount to the share price if the second outcome materialises,' it said.

UOB Kay Hian Research said according to the Malaysian Code of Takeovers and Acquisitions, the offer price of a GO should be at the highest price paid in the six-month period prior to the GO. Bursa filings showed that in Apr 11, a separate fund under PNB's purview, had in fact acquired shares in S P Setia at a higher price which ranged between RM4.10 to RM4.20.

'While PNB's basis for offering the GO of RM3.90 is based on the highest price at which the triggering fund had acquired SP Setia's shares, it could potentially be argued that the highest price at which PNB, as the ultimate beneficial owner of the shares and as the offerer of the GO, acquired its collective stake in S P Setia, is in fact higher than RM3.90.

'After all, it appears that without counting the separate fund's stake in S P Setia, PNB may not have even triggered the GO ownership threshold,' it said.

UOB Kay Hian Research said it was maintaining a HOLD call on S P Setia with an interim target price of RM3.90 (takeover offer price).

'However, we believe the share price would probably retrace to our pre takeover target price of RM3.30 once the verdict is announced,' it said.

HLIB Research 12 October 2011 (Market View; Sunway; Economics; Traders Brief)

Stock Name: SUNWAY
Company Name: SUNWAY BERHAD

Research House: HLG

Price Call: BUY

Target Price: 3.12

Strategy

Positioning For 2012 Post Risk Aversion

'''' Slower growth but no double-dip and Euro debt fallout.

'''' Post earnings revision 2011 and 2012 EPS growth now 6.8% and 10%, 2012 P/E of 12.8x (1.1SD below 5-yr mean), already largely reflecting earnings risk.

'''' However, ST volatility to continue given Euro debt crisis, most indices <200-d SMAs, VIX >30 and looming election.

'''' Cut CI end-11 to 1,440 (13x 2012 P/E ' 1SD <5-yr mean).''

'''' But still LT +ve & intro end-2012 of 1,555 (13x 2013 P/E) given resilient economy, local funds underweighted and ample liquidity will search for returns post risk aversion.

'''' Not expecting 08 type of valuations (9.3x P/E = 2.9SD <5-yr mean and earnings yield of 10.8%).

'''' Persistent volatility implies short-term defensive.

'''' Worst case scenario analysis using Fibonacci Retracement, MYR-FBM KLCI regression and foreign shareholding.''''

'''' 1,280-1,293 (11.6-11.7 P/E or 1.7-1.8SD <5-yr mean & 8.6-8.7% earnings yield) good levels to turn more aggressive post risk aversion and focus on bombed out fundamental stocks that have high liquidity and Beta.

'''' Use 6-mth Beta to project potential prices of top 100 stocks if FBM KLCI hit 1,293, high predictability vs. recent lows.''

'''' Chosen 10 based on Beta >1.5, decent fundamentals and high institution following and avg 3-mth vol >5m.

''

Sunway (BUY)

Double bagger

'''' Sunway has been awarded an RM308.9m contract for the construction of Pinewood Iskandar Malaysia Studios and at the same time won a 99-year land lease tender from the Urban Redevelopment Authority of Singapore (URA) for the development of Jalan Loyang Besar/Pasir Ris Rise (known as Parcel 826) for S$140.96m (~RM345m).

'''' The Iskandar Studio award brings the Group's outstanding order book to ~RM2.7bn, translating to 2.5x FY10's revenue. The latest order also implies a stronger presence in the Iskandar region, hence Sunway may potentially benefit from future developments in this corridor.

'''' The latest Singapore land award has a GFA of 17,274.2 sq m, with a maximum GFA of 36,276 sq m (plot ratio of 2.1x). This translates to a land acquisition cost of S$3,886/sq m. The development is for ~355 condominium units and has a minimum potential GDV of S$375m.

'''' We maintain our BUY call on Sunway with a TP of RM3.12 based on SOP valuation.

''

Malaysia: Revisiting Economic Outlook

'''' We are trimming our 2011 GDP growth forecast to 4.6% from 4.8% reflecting supply and implementation timing issue (mining and construction) as well as gloomier global demand for E&E products (manufacturing).''

'''' For 2012, we are still confident that growth will remain stable at 4.5% as the bunching of construction projects and resilient private consumption are expected to cushion softer manufacturing performance.

'''' On trade, there has been structural change that ASEAN, China and India now collectively account for 41.8% of Malaysia's exports. The share of US, Europe and Japan has declined to 29% from a peak of 39% in 2006.

'''' Inflation is expected to ease slowly to 3.2% in 2011 and 3% in 2012, but bi-annual subsidy removals and new salary scheme for civil servants & pensioners will cause it to stay at an elevated level.

'''' We see BNM holding the OPR steady at 3.00% until end-2012 as the policymaker focuses on growth agenda given the recent external developments while inflation is on moderation trend.

'''' We expect short-term volatility in MYR but long-term appreciation is still intact. Our forecasts are RM3.10/US$ by end-2011 and RM3.00/US$ by end-2012.

''

Performance of IPI (Aug 2011)

'''' IPI expanded by 3.0% yoy in Aug (Jul: -0.5% yoy), better than street estimate of +0.4% on the back of stronger manufacturing (+4.8% yoy; Jul: +1.7% yoy) and slower decline in mining output (-1.4% yoy; Jul: -7.5% yoy).''

'''' Subdued E&E output (-5.7% yoy) continued to drag down IPI growth. Motor vehicle output turned positive (+5.1% yoy) as Japan and new HP act disruption eased. Mining output declined at a slower pace as Petronas maintenance shutdown improved further.

'''' Our estimate shows that 3Q GDP had expanded by 4.5% yoy (2Q: +4.0%). For 2H, we still expect higher GDP growth of 4.7% on the back of resilient consumer spending and improvement in mining output.

'''' We see BNM holding the OPR steady at 3.00% until end-2012 as the policymaker focuses on growth agenda given the recent external developments while inflation is on moderation trend.

''

More sideways consolidation ahead

'''' While momentum and trend indicators remain positive, higher trading volume (preferably one billion shares/day) is crucial to sustain further gains within the upward channel. Upside targets are 1420-1434 whilst supports are near 1385-1393.

''

MPHB: Upside target at RM2.66-2.71''

'''' Based on daily chart, the rising RSI and MACD suggest further upside potential in the short term to retest RM2.54 (30-d SMA), RM2.66 (upper Bollinger band) and RM2.71 (76.4% FR) levels.

'''' Supports are RM2.22-2.39.

'''' Buy on weakness but cut loss below RM2.33.

TSH's bonus issue offers a boost to liquidity

Stock Name: TSH
Company Name: TSH RESOURCES BHD

Research House: MAYBANK

Price Call: BUY

Target Price: 3.70

TSH Resources Bhd
(Oct 11, RM3.16)
Maintain buy at RM2.93 with target price of RM3.70: A re-rating opportunity for TSH as the proposed one-for-one bonus issue may help to improve its liquidity and reduce the liquidity discount on the stock over time. In addition, the proposed bonus issue will reflect management's commitment to consistently deliver strong earnings growth beyond the next three years, when its fresh fruit bunch (FFB) production is already poised to deliver a three-year compound annual growth rate (CAGR) of 20%. We reiterate our 'buy' call on TSH with an unchanged target price of RM3.70 based on 15 times FY13 price-earnings ratio (PER).

Management proposes a one-for-one bonus issue of up to 417 million shares of 50 sen each. The RM208 million bonus issue would be distributed from TSH's share premium, asset revaluation reserve and retained earnings. The entitlement date has yet to be determined as the proposal is pending approvals from the authorities and shareholders. The bonus issue is expected to be completed by end-2011. Our earnings per share and price target are unchanged for now.

We think TSH has been under-appreciated in the past due to the liquidity discount on its share price with an average trading volume of 309,000 per day. The bonus issue will raise its share base by 100%, from 208 million to an enlarged share capital of'' 409 milion to 417 million (depending on Treasury shares). The doubled number of shares would in turn attract new investors who were previously discouraged by its relatively low liquidity.

We continue to rate TSH a 'buy' for its robust 20% FFB production CAGR over the next three years. Having the strongest production growth among the Malaysian plantation companies under our coverage would cushion TSH's earnings against an anticipated correction in crude palm oil price. (Note that we recently downgraded our CPO price forecast for 2012 from RM3,000 per tonne to RM2,600 per tonne amid a weak global economic outlook and a strong FFB production outlook.) TSH remains undervalued, trading at 11.8 times 2013 PER and earned value per planted hectare of RM46,693. ' Maybank IB Research, Oct 11


This article appeared in The Edge Financial Daily, Ocotber 12, 2011.

Maxis: Sleepless in India

Stock Name: MAXIS
Company Name: MAXIS BERHAD

Research House: OSK

Price Call: HOLD

Target Price: 5.20

Maxis Bhd
(Oct 11, RM5.25)
Maintain neutral at RM5.10 with fair value of RM5.20: Several media reports yesterday highlighted an alleged telco graft scandal involving the major shareholder of Maxis Communications and few influential parties in India involving the purchase of a 74% stake in Aircel Ltd in 2006. A statement issued by Maxis said the group has been aware of the case for some time and the developments do not have any impact on its operations in Malaysia.

The case involves Maxis Communications Bhd, the previous listed entity (taken private in 2005) that acquired Aircel in 2006. Under an internal restructuring to facilitate the listing of its Malaysian operations in 2009, Maxis Communications became the parent company of currently listed Maxis Bhd. While the issue should not affect the group's domestic mobile operations, it is nonetheless discomforting given that it involves a controlling shareholder of the group. We contrast the latest development with the protracted legal suit affecting Maxis' sister company and pay TV operator, Astro, in 2009 in relation to a failed pay TV venture in Indonesia. Astro was subsequently taken private in June 2010 after stock sentiment was battered.

Maxis remains a 'neutral' based on fair value of RM5.20. Apart from the generous dividend yield of 7%, which provides share price support, Maxis' prospects remain unexciting on the back of falling voice revenue and margin downside arising from the recent launch of its fibre-to-the-home (FTTH) service. For pure mobile exposure in Malaysia, we prefer DiGi.Com Bhd for its execution track record. ' OSK Research, Oct 11


This article appeared in The Edge Financial Daily, Ocotber 12, 2011.

Sime Darby likely to take part in E&O's RM12b project

Stock Name: SIME
Company Name: SIME DARBY BHD

Research House: RHB

Price Call: BUY

Target Price: 9.35

KUALA LUMPUR: RHB Research Institute said SIME DARBY BHD [] was likely, in the longer term,'' participate in Eastern and Oriental Bhd's (E&O) Seri Tanjung Pinang 2 (STP 2) project in Penang, which has a gross development value (GDV) of RM12 billion.

In its report issued on Wednesday, Oct 12, it expected profit to only come in two to three years' time.

The research house had also viewed the Securities Commission's decision that Sime Darby did not have to extend a mandatory general offer for E&O as positive.

RHB Research believed Sime would now be able to move on from this to focus on extracting synergies from its acquisition of the 30% stake in E&O. This was especially since E&O managing director Datuk Terry Tham had assured shareholders that he would retain his role in E&O for the next few years, it said.

The research house said it was maintaining its sum-of-parts based fair value of RM9.35 and its outperform recommendation on Sime Darby.

'We maintain our view that based on E&O's FY03/11 net profit of RM30.7 million, earnings accretion from this acquisition to Sime is negligible, after taking out the interest income foregone," it said.

The research house said although consensus estimate for FY03/12 is much higher at RM94.8m, E&O only achieved net profit ex-exceptional items of approximately RM8.2 million or 8.6% of consensus earnings in 1QFY03/12. However, it is widely believed that stronger profits would only come in the later part of 2011 and 2012, said RHB Research.

Buy Time dotCom shares: OSK

Stock Name: TIMECOM
Company Name: TIME DOTCOM BHD

Research House: OSK

Price Call: BUY

Target Price: 0.67

Time dotCom Bhd's wholesale segment would be the beneficiary of an increasing demand for internet bandwidth and the rising trend of mobile operators fiberising their 3G networks with an estimated RM3.75 billion market potential.

OSK Research in a research note today said there is a strong upside potential as Time dotCom's share of the wholesale market is a paltry nine per cent of an indicative addressable market of RM1.83 billion.

"We believe Time dotCom's current management team has the credentials to move the company to the next level, after having successfully engineered its turnaround in 2009," it said in a research note today.

It also said the soon-to-be concluded acquisition of three companies with business synergies, should drive the group's next leg of growth, and enable it to ride on the robust regional prospects.

"The purchase would allow Time dotCom to capitalise on soaring demand for international and intra-regional bandwidth, which is projected to hit 4 Tbps by 2020 from 0.2 Tbps currently," it added.

The research house has commenced coverage on the telecommunications company, initiating a "buy" call and a fair value of 67 sen. -- Bernama

OSK keeps 'buy' call on Sunway

Stock Name: SUNWAY
Company Name: SUNWAY BERHAD

Research House: OSK

Price Call: BUY

Target Price: 3.31

Sunway Bhd's construction orderbook is expected to pass the RM3 billion mark, due to the latest RM308.9 million contract won from Iskandar Malaysia Studios SB.

The development, namely Pinewood Iskandar Malaysia Studios, is targeted to be completed on or by May 10, 2013, over a construction period of 19 months, OSK Research Sdn Bhd said in a statement today.

"We view this latest development positively as it demonstrates Sunway's immaculate track record in being able to secure consecutive jobs from existing and repeat clients," it said.

OSK Research has maintained its forecast and "buy" recommendation on Sunway at an unchanged fair value of RM3.31, based on a 20 per cent dis count on it realisable net asset value. -- Bernama

Top Glove likely to face a tough time

Stock Name: TOPGLOV
Company Name: TOP GLOVE CORPORATION BHD

Research House: OSK

Price Call: SELL

Target Price: 4.00

Rubber glove manufacturer, Top Glove Corp Bhd, may have to brace for more difficult times if the latex price continues to climb, says OSK Research Sdn Bhd.

In a research note today, OSK said Top Glove would likely face a tough time as the group would encounter a higher cost base and limited ability to pass on the cost increase to its customers, due to glove oversupply.

Top Glove's pre-tax profit for the financial year ended Aug 31, 2011 slipped to RM145.39 million from RM304.96 million last year, while revenue fell to RM2.05 billion.

Going into the remainder of this year and first half of 2012, OSK said it expected latex price to inch up again due to the severe floods in Thailand and the expected wintering season in first half of 2012.

"The concerns for Top Glove are the factors beyond its control, namely latex price and that the price movement influenced by speculation and not purely driven by demand and supply factors," it said.

HwangDBS Vickers Research said the adverse weather in Thailand would affect tapping as about 70 per cent of Top Glove's latex supply came from southern Thailand (although southern province was spared by floods so far).

"We retain our 'hold' rating because volatile latex prices will continue to be a dampener on an efficient cost pass-through mechanism," it said in a research note.

Meanwhile, ECMLibra Investment Research said it would maintain its 'hold' call for the group despite further weakness in share price, as there were no re-rating catalysts in the near term.

"Margin recovery is expected to be further delayed by continued oversupply in the industry and renewed concern of high latex price due to flood in Thailand," it said in a research note.

OSK said it expected financial year 2012 to continue to be challenging for Top Glove. -- Bernama

OSK Research maintains Neutral on auto sector

Stock Name: UMW
Company Name: UMW HOLDINGS BHD

Research House: OSK

Price Call: SELL

Target Price: 6.29

Stock Name: PROTON
Company Name: PROTON HOLDINGS BHD

Research House: OSK

Price Call: SELL

Target Price: 2.00

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

Research House: OSK

Price Call: SELL

Target Price: 4.27

Stock Name: EPMB
Company Name: EP MANUFACTURING BHD

Research House: OSK

Price Call: BUY

Target Price: 1.38

Stock Name: DELLOYD
Company Name: DELLOYD VENTURES BHD

Research House: OSK

Price Call: BUY

Target Price: 3.88

KUALA LUMPUR: OSK Research is maintaining its Neutral stance on the auto sector as sentiment on big ticket purchases in the upcoming months will remain weak.

It said on Wednesday, Oct 12 that adding to the current woes is the strengthening US dollar vs the ringgit, which will put a dent on earnings.

'UMW, Proton and Tan Chong remain Sells, with FVs of RM6.29, RM2.00 and RM4.27 respectively, with our Buys confined to auto parts makers such as EPMB and Delloyd Ventures, whose FVs are RM1.38 and RM3.88 respectively,' it said.

OSK Research said Thailand's auto exporters are being hit by supply chain disruptions following the worst floods in the country in nearly half a century.

Quoting a news report, it said Thailand is a major production and export hub for global auto makers like Toyota Motor Co, Ford Motor Co and Honda Motor Co. All three have shut their Thai plants after severe floods swept a cluster of component plants in Ayutthaya, 67 km north of Bangkok. On Tuesday, Isuzu Motors Ltd also halted production at its two Thai plants due to supply disruption.

As for Malaysia, OSK Research said it expects automakers in Malaysia - which rely heavily on completely-knocked-down (CKD) imports from Thailand (notably for UMW and DRB-Hicom) - to be impacted by the supply chain disruptions although we see the impact largely as being mild.

'Our channel checks indicate that the inventory of local auto players is at comfortable levels of at least a month. Assuming a one-month backlog, in a worst-case scenario, this would only affect total TIV volume of the Japanese marques for a month, at an estimated total of 15,000 vehicles. This will subsequently be made up for in the subsequent months, provided that the rainy season does not prolong,' it said.

Top Glove gives a dividend sweetener

Stock Name: TOPGLOV
Company Name: TOP GLOVE CORPORATION BHD

Research House: HWANGDBS

Price Call: HOLD

Target Price: 4.05

Top Glove Corp Bhd
(Oct 12, RM4.20)
Maintain hold at RM4.07 with target price of RM4.05: As expected, revenue and net profit were flat in the quarter, and operating profit margin remained weak at 6.5% (same as 3QFY11). Operating margin for FY11 was 7%, a record low since 2002, mainly due to volatile latex prices, weaker US dollar against the ringgit and lower cost pass through to customers. Nitrile gloves now contribute 14% of total sales (against 13% in 3QFY11). Capacity utilisation averaged 70%. The balance sheet remained strong with RM146 million net cash or 23.7 sen per share. Top Glove declared a single-tier final dividend per share of six sen in the quarter, taking FY11 total DPS to 11 sen or 60% payout, higher than our 50% assumption.

About 70% of Top Glove's latex supply comes from southern Thailand. Adverse weather in Thailand will affect tapping, but we understand the southern provinces have been spared by floods so far. Latex prices have fallen approximately 5% to RM8.20 per kg (from RM8.60 in September), but we think prices will be supported by adjustments to output. Based on our sensitivity analysis, each 1% change in latex price would change net profit by about 4%. We maintain our assumptions for natural rubber latex prices of RM8.10 to RM8.80 per kg.

Our target price is pegged to 13 times CY12 earnings per share, similar to its 10-year historical mean. We retain our 'hold' rating because volatile latex prices will continue to be a dampener on an efficient cost pass through mechanism. The 60% dividend payout in FY11 may not be recurring. Top Glove is maintaining its dividend payout policy at a minimum of 40%. ' HwangDBS Vickers Research, Oct 12


This article appeared in The Edge Financial Daily, Ocotber 13, 2011.

KNM to build RM628m waste to energy plant

Stock Name: KNM
Company Name: KNM GROUP BHD

Research House: MIDF

Price Call: HOLD

Target Price: 1.22

KNM Group Bhd
(Oct 12, RM1.30)
Maintain neutral at RM1.22 with target price of RM1.22: KNM announced yesterday that it has secured a conditional turnkey engineering, procurement, construction and commissioning (EPCC) contract for a waste to energy (WTE) plant worth US$200 million (approximately RM628 million) from Orizon Renewable Energy (Pte) Ltd (ORE), an indirect 51%-owned subsidiary of Octagon Consolidated Bhd. To note, earlier last week KNM was also awarded a RM70 million contract by Octagon to manufacture an advanced thermal gasification reactor.

The WTE plant is a public private partnership project between ORE and the Waste Management Authority of Western Province, an agency under the government of Sri Lanka. The plant, which will be located in Karadiyana, Thumbowila, Kesbewa, Colombo, Sri Lanka, has the capacity to process up to 1,000 tonnes per day of municipal solid waste and generate a minimum of 40MW of electricity.

Should the EPCC contract be finalised, KNM's order backlog is expected to increase to between RM3.5 billion and RM3.8 billion (excluding the RM2.2 billion Peterborough project). We understand that the construction of the WTE plant is expected to start in 2Q12 and be completed in 2Q14.

We understand that ORE has received the government's approval to build-own-operate the WTE plant. The ground-breaking ceremony was held last week. The electricity will be sold to Ceylon Electricity Board, the Sri Lanka state-owned electricity company. Hence, we reckon the government is committed to this project.

However, we are concerned about the accessibility of financing given the fact that Octagon is a highly leveraged company with net debt of RM177 million, equivalent to 2.3 times net gearing. Assuming a funding structure of 60% equity and 40% debt for this project, Octagon is expected to fork out additional RM195 million cash, putting further pressure on its balance sheet. Credit risk for the project owner is also high, in our opinion.

The contract between ORE and KNM is subject to the signing of a definitive agreement, pending the financial close (needs to be secured by December 2011). KNM also revealed in the announcement that one of the risks is that the project may not achieve its financial close. Hence, we are making no change to our forecasts.

We maintain 'neutral' with unchanged target price of RM1.22. Our target price is derived from eight times 2012 price-earnings ratio, which is slightly higher than one standard deviation below its five-year historical multiple of 5.7 times.

Recall that we reduced our earnings forecast by 20% recently, after factoring in the fact that we have now excluded the Peterborough project in our forecasts. Securing the financing for WTE and Peterborough projects are strong re-rating catalysts for KNM. A knee-jerk reaction as a result of this sizeable EPCC contract announcement, which we are generally neutral on, is possible. ' MIDF Research, Oct 12


This article appeared in The Edge Financial Daily, Ocotber 13, 2011.

Marginal impact on F&N from Thai floods

Stock Name: F&N
Company Name: FRASER & NEAVE HOLDINGS BHD

Research House: AMMB

Price Call: BUY

Target Price: 20.40

Fraser & Neave Holdings Bhd
(Oct 12, RM16.22)
Recommend buy at RM16.30 with fair value of RM20.40: Fraser & Neave Holdings (F&N) has ceased the production of dairy products at its Thai plant in Ayutthaya due to severe flooding, according to the latest announcement on Bursa Malaysia.

The group halted operations at the Thai plant yesterday morning and is currently still in the process of assessing the extent of the damage.

Ayutthaya is one of the areas affected by the floods in Thailand due to its location in the vicinity of three rivers ' Lop Buri, Pasak and Chao Phraya. The ongoing floods in Thailand are the worst in more than 50 years as flood waters have hit 60 of the country's 77 provinces in the past two months.

Dairy operations make up 51% of group revenue but only 26% of group operating profit. Its better margin Thai arm contributes 14% to group revenue and 16% to group operating profit (1HFY11).

We understand the group has property all-risk and business interruption insurance cover for its Thai operations.

Based on our channel checks, we understand other factories in the vicinity are looking at a potential downtime of one to two months for repairs and obtaining replacement parts and components.

Our back-of-envelope calculation indicates a potential earnings revision of 5% to 5.5% to our FY12F forecast, assuming a two-month downtime. This would trim our fair value by 94 sen per share.

We make no change to our earnings estimate and fair value of RM20.40 per share at this juncture, pending a meeting with management. Our fair value is based on a price-earnings ratio of 18 times CY12F earnings ' at the top end of the stock's PER trading band and backed by our discounted cash flow value of RM20.88 per share (weighted average cost of capital: 9.6%, long-term gain: 2%). ' AmResearch, Oct 12


This article appeared in The Edge Financial Daily, Ocotber 13, 2011.

ECM Libra Research maintains Trading Buy on KNM

Stock Name: KNM
Company Name: KNM GROUP BHD

Research House: ECMLIBRA

Price Call: TRADING BUY

Target Price: 1.72

KUALA LUMPUR: ECM Libra Equities Research is maintaining its trading buy call on KNM GROUP BHD [] with a target price of RM1.72 based on a 1.0 times price-to-book value is unchanged.

It said on Wednesday, Pct 12 that KNM Group secured another contract from Octagon Consolidated, this time worth some RM638 million to build a renewable energy plant in Sri Lanka.

'While the project still awaits its financial close, with the backing of the Sri Lankan Government we believe achieving financial close could be less of a concern as compared to the UK biomass project,' it said.

ECM Libra Research said it is maintaining a Trading Buy call as KNM is already trading at trough valuation despite concerns about its margin and potential further delay in the UK biomass project.

TSH's bonus issue offers a boost to liquidity

TSH Resources Bhd
(Oct 11, RM3.16)
Maintain buy at RM2.93 with target price of RM3.70: A re-rating opportunity for TSH as the proposed one-for-one bonus issue may help to improve its liquidity and reduce the liquidity discount on the stock over time. In addition, the proposed bonus issue will reflect management's commitment to consistently deliver strong earnings growth beyond the next three years, when its fresh fruit bunch (FFB) production is already poised to deliver a three-year compound annual growth rate (CAGR) of 20%. We reiterate our 'buy' call on TSH with an unchanged target price of RM3.70 based on 15 times FY13 price-earnings ratio (PER).

Management proposes a one-for-one bonus issue of up to 417 million shares of 50 sen each. The RM208 million bonus issue would be distributed from TSH's share premium, asset revaluation reserve and retained earnings. The entitlement date has yet to be determined as the proposal is pending approvals from the authorities and shareholders. The bonus issue is expected to be completed by end-2011. Our earnings per share and price target are unchanged for now.

We think TSH has been under-appreciated in the past due to the liquidity discount on its share price with an average trading volume of 309,000 per day. The bonus issue will raise its share base by 100%, from 208 million to an enlarged share capital of'' 409 milion to 417 million (depending on Treasury shares). The doubled number of shares would in turn attract new investors who were previously discouraged by its relatively low liquidity.

We continue to rate TSH a 'buy' for its robust 20% FFB production CAGR over the next three years. Having the strongest production growth among the Malaysian plantation companies under our coverage would cushion TSH's earnings against an anticipated correction in crude palm oil price. (Note that we recently downgraded our CPO price forecast for 2012 from RM3,000 per tonne to RM2,600 per tonne amid a weak global economic outlook and a strong FFB production outlook.) TSH remains undervalued, trading at 11.8 times 2013 PER and earned value per planted hectare of RM46,693. ' Maybank IB Research, Oct 11


This article appeared in The Edge Financial Daily, Ocotber 12, 2011.

Impact of India's new telecom policy on Axiata Group seen minimal

Stock Name: AXIATA
Company Name: AXIATA GROUP BERHAD

Research House: MIDF

Price Call: BUY

Target Price: 5.85

Axiata Group
(Oct 11, RM4.80)
Maintain buy with unchanged target price of RM5.85: India's minister of telecommunications Kapil Sibal unveiled a new draft telecom policy yesterday that includes proposals to make roaming free, introduce a pan-India permit that will enable telcos to offer all communication services, allow operators to share and trade spectrum and facilitate consolidation in the sector. The draft policy also allows the government to audit the use of spectrum periodically for efficient use. We understand Indian telcos currently hold 22 separate mobile permits as the country is split into this many zones.

The details of the proposals were not disclosed but the new rules will be finalised by Dec 2011. The last comprehensive telecom policy was announced in 1999 and since then the sector has witnessed explosive growth. More importantly, it was marred by one of the country's biggest corruption scandals.

While details of the new draft policy are still sketchy, we understand that Indian telcos such as Axiata Bhd associate Idea Cellular (Idea), Barti Airtel and Reliance Communication will be negatively impacted by the removal of the inter-India roaming fees. It is estimated that roaming charges contribute to 10% of the operators' total revenue. However, we take a positive view on the consolidation in the sector the policy will facilitate as currently there are approximately 15 telco players in India. The consolidation could lead to stabilisation of rates affected by fierce competition.

We feel there will be no direct impact on Axiata's operations and earnings before interest, tax, depreciation and amortisation (Ebitda) but the policy will have an impact on its earnings due to Idea's position as an associate of Axiata.

Consensus expects the removal of roaming charges may have a 5% to 6% impact on the margins of leading telecom operators. However, all associates (not just Idea but M1 and Hello as well) contributed about 6% to Axiata's 1H11 earnings. Hence, we believe the impact on earnings will be minimal.

We believe a possible positive impact will be on Axiata's year-end impairment test. To recap, in FY10, Axiata recorded an impairment of RM1.08 billion for its investment in Idea due to the intense competition in India, causing it to register a lower-than-expected net profit of RM2.1 billion. Discounting the impairment, FY10 net profit was estimated to be RM2.9 billion. The stabilisation of rates stemming from consolidation might lessen any future impairment or even provide a possible writeback.

While we believe consolidation in India's telecom industry will be positive for Axiata, the impact will not be in the near term given that the policy is only at the draft stage. We maintain our FY11 and FY12 forecasts therefore. We retain our expectations that Axiata's dual growth source will be data (for Celcom and XL) and the continuing growth in Bangladesh and Sri Lanka. We maintain our 'buy' recommendation for Axiata with a target price of RM5.85. Our valuation is based on 6.5 times earned value/Ebitda, which is the average of its regional peers. ' MIDF Research, Oct 11


This article appeared in The Edge Financial Daily, Ocotber 12, 2011.

Proton edges up at mid-morning

Stock Name: PROTON
Company Name: PROTON HOLDINGS BHD

Research House: RHB

Price Call: HOLD

Target Price: 2.90

KUALA LUMPUR: PROTON HOLDINGS BHD [] shares edged up at mid-morning on Tuesday, Oct 11 after RHB Research upgraded the stock to Market Perform and raised its fair value to RM2.90.

At 10.30am, Proton added three sen to RM2.69 with 124,900 shares traded.

RHB Research in a note Oct 11 said that according to Autosport UK, speculation was circulating during last weekend's Japanese Grand Prix, that Genii Capital could be buying a stake in Group Lotus.

It said the report cited 'high level sources' that Genii Capital has held advanced talks with Group Lotus' owners about taking a management and financial interest in the company that could even go as far as a majority shareholding.

'We see the odds of an outright sale of a majority stake in Lotus by Proton as low at this juncture, given the time and money already invested as well as political implications for the company and the Government.

'However, the sale of a minority stake in Group Lotus could have long-term strategic benefits in addition to helping Proton mitigate financial risks from Lotus' ongoing financial and operational turnaround,' it said.

The research house raised its fair value to RM2.90 (from RM2.50) based on a reduced 25% discount to its five-year average P/B of 0.39x (from 35% discount), applied to CY12 BVPS.

''

OSK Research maintains Buy on TSH Resources

Stock Name: TSH
Company Name: TSH RESOURCES BHD

Research House: OSK

Price Call: BUY

Target Price: 3.81

KUALA LUMPUR: OSK Research is maintaining its Buy rating on TSH RESOURCES BHD [] with a fair value of RM3.81, based on 13.5 times mid-CY12 EPS.

The research house said the upbeat outlook was also based on the estimated market value of its rubber areas of 32 sen per share.

'The company possesses one of the youngest tree age profiles and strongest production growth among Malaysian companies within our PLANTATION [] universe,' it said.

On Monday, TSH proposed a bonus issue of up to 416.7 million new shares on the basis of one bonus share for every one existing share.

Following the one-for-one bonus issue, OSK Research's present fair value on TSH of RM3.81 would be adjusted to RM1.91.

Assuming full exercise of TSH's 1.14 million outstanding ESOS options, representing just 0.3% of the shares outstanding, its FV will be adjusted downwards to RM1.90.

A boost to liquidity

Stock Name: TSH
Company Name: TSH RESOURCES BHD

Research House: MAYBANK

Price Call: BUY

Target Price: 3.70

A cleaner platform

Stock Name: AFG
Company Name: ALLIANCE FINANCIAL GROUP BHD

Research House: AMMB

Price Call: BUY

Target Price: 3.80

Possible rights issue unlikely to be finalised soon

Stock Name: PBBANK
Company Name: PUBLIC BANK BHD

Research House: AMMB

Price Call: HOLD

Target Price: 13.40

Sleepless in India

Stock Name: MAXIS
Company Name: MAXIS BERHAD

Research House: OSK

Price Call: HOLD

Target Price: 5.20

On middle ground

Stock Name: RHBCAP
Company Name: RHB CAPITAL BHD

Research House: AMMB

Price Call: HOLD

Target Price: 6.90

Back to pre-merger levels

Stock Name: HLBANK
Company Name: HONG LEONG BANK BHD

Research House: AMMB

Price Call: BUY

Target Price: 13.00

KNM Group: Peterborough project delayed

Stock Name: KNM
Company Name: KNM GROUP BHD

Research House: RHB

Price Call: SELL

Target Price: 0.70

KNM Group Bhd
(Oct 10, RM1.20)
Maintain underperform with fair value of 70 sen: Last week, KNM announced that it had been prompted by its client that the financial close of its UK Peterborough contract (worth RM2.2 billion) has been delayed to December.

As such, the company believes it will be unable to meet its guided FY11 revenue of RM2.2 billion and earnings before interest, taxes, depreciation, and amortisation (Ebitda) earnings of RM270 million.

The project involves the development of a biomass and waste recycling centre in the UK using high-end technology. KNM was awarded the engineering, procurement and construction (EPC) contract on Dec 21, 2010.

We are not surprised by the announcement as we have noted that the project had yet to achieve financial close by August. The management had previously guided that it would likely be achieved in early 2HFY11.

As such, we had postponed the project's earnings contribution to FY12 in our previous note (dated Aug 23, 2011).

We reiterate our view that the stock will likely continue to report disappointing earnings. Moreover, it has significant exposure to Europe and the UK, which are at high risk of economic slowdown.

As such, we foresee continual volatility in its forward earnings despite its order backlog of RM5.3 billion (of which half is made up of the Peterborough project).

We estimate that the Peterborough contract accounts for around 80% of our core FY12 earnings per share (EPS).

However, this is based on conservative assumptions that the company secures minimal new wins beyond the project within FY12 and Ebitda margins grow by one percentage point to 9.5% (from our 8.5% assumption for FY11).

We maintain our FY11 to FY13 earnings estimates as we had already assumed: (i) the project would kick start in FY12; and (ii) lower than guided revenue and Ebitda earnings of RM1.98 billion and RM168.5 million respectively for FY11.

However, we are removing our FY11 dividend per share assumption of two sen, as we believe the company is unlikely to pay a dividend under such difficult conditions.

Upside risks to our view include: (i) better than expected margins for contracts executed in the latter part of FY11; and (ii) higher than expected contract wins moving ahead which will significantly increase revenue earnings.

The stock has continued to negatively surprise the market, reinforcing our view that the stock deserves to trade at a discount to sector peers. We maintain our fair value of 70 sen per share based on nine times FY12 price earnings ratio. ' RHB Research, Oct 10


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

Good IPO price for Parkson Holdings' stakeholders?

Stock Name: PARKSON
Company Name: PARKSON HOLDINGS BHD

Research House: OSK

Price Call: BUY

Target Price: 6.68

Parkson Holdings Bhd
(Oct 10, RM5.45)
Maintain buy with reduced fair value of RM6.68 from RM7.58: The Edge weekly reported that Parkson Asia's (PA) shares may be offered to Parkson Holdings (PHB) shareholders at about a 30% discount to the proposed IPO price.

A PHB circular to shareholders said PA may be priced at a minimum 17.4 times price-earnings ratio (PER) against FY11 net profit of S$35 million (RM85.2 million) with the new share issue making up 18.9% of its enlarged share capital and generating proceeds of no less than S$115 million. PHB will sell up to 13.1% of PA's enlarged share capital and raise no less than S$56 million.

As we highlighted in our previous report, we think the listing of PA would be positive for PHB given that it could increase PA's valuation as the company grows bigger. Based on the latest market cap of Parkson Retail Group (PRG) and PHB, the market is currently valuing PA at only a 6.7 times forward PER (based on our FY12 forecast for its net profit).

Assuming that PRG's current market cap does not reflect a 20% holding discount and incorporating a 20% discount to PRG's market cap, PA has an implied PER of 17.5 times, which is more or less in line with its potential minimum listing trailing valuation of 17.4 times PER.

There is no direct listed peer comparison for PA in Singapore. While the consumer companies listed on SGX are trading at a relatively low PER of 5.3 to 13.4 times, we think that PA ' which could be the largest consumer retail company listed in SGX and it has a solid track record ' would allow the group to list at a stronger valuation.

Furthermore, PA provides investors with regional retail exposure in Vietnam, Indonesia, Malaysia and soon, Cambodia.

Note that the potential 17.4 times listing trailing PER only incorporates one month's earnings from its Indonesia operation, and the minimum target listing PER would have been lower at 15.1 times had the full-year earnings of its Indonesia business been included.

Assuming PA is listing at a 17.4 times minimum trailing PER, shareholders would be able to subscribe for PA at 12.1 times PER, which we think is attractive considering its growth potential and given that the discounted offer is lower than PA's current implied PER of 17.5 times.

While PHB's fundamentals remain unchanged, we reduce our fair value (FV) from RM7.58 to RM6.68 as we have updated our net cash balance and reduced our target PER for its China operation from 24 times to 22 times PER given the weakening share market.

Factoring in a 20% holding discount and a 62.7% diluted stake (90.1% stake currently) in PA (assuming 18.9% new shares to be issued and 13.1% of offer for sale), our post PA listing FV for PHB will be reduced to RM6.14, which still offers approximately 13% upside against its last closing price.

The potential upside risk to our post listing FV is if PA manages to list at more than a 10% higher PER. Hence, we maintain our 'buy' recommendation on PHB. ' OSK Research, Oct 10


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

Telekom Malaysia and P1 to seal HSBB pact?

Stock Name: TM
Company Name: TELEKOM MALAYSIA BHD

Research House: OSK

Price Call: BUY

Target Price: 4.80

Telekom Malaysia Bhd
(Oct 10, RM4.19)
Maintain buy with fair value RM4.80: Packet One Networks (M) Sdn Bhd, a subsidiary of Green Packet, is expected to sign an agreement with Telekom Malaysia Bhd for the reselling of TM's high-speed broadband (HSBB) network on Thursday.

The wholesale agreement reaffirms our positive view on TM, which continues to successfully monetise its HSBB network.

The contract follows the 10-year agreements inked with Maxis Bhd late last year and Celcom Axiata Bhd in early 2011.

While contribution from TM's wholesale business remains small (at 9%), we expect this to pick up from 4QFY11 on the back of the recent launch of Maxis' fibre-to-the-home (FTTH) service and similar launches by P1 and Celcom Axiata in the near future.

We believe the agreement with TM will complement P1's current nomadic wireless broadband service by targeting high-end users with heavy downloads who use the service at home.

In selected surveys, P1 discovered that the majority of its wireless broadband subscribers access the Internet at home through their wireless devices, which is not ideal considering coverage limitations (line of sight and signal degradation issues) and this ultimately affects user experience.

The HSBB network would provide an avenue for P1 to migrate its bandwidth-hungry users or risk losing them to competitors in view of the stiff competition for wireless broadband services.

While TM will benefit from additional wholesale revenues, the launch of new services by its wholesale customers on its HSBB network ultimately competes with its own FTTH product, UniFi, which has captured over 160,000 users, as it was the first service of its kind to be launched in 2010.

TM remains one of our top picks for the domestic telecoms sector owing to its defensive attributes, with further share price re-rating catalysts coming from: (i) the stronger than expected UniFi subscriber additions; (ii) the likelihood of a special dividend payout; and (iii) positive earnings surprises. ' OSK Research, Oct 10


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

WCT optimistic despite no MRT jobs

Stock Name: WCT
Company Name: WCT BHD

Research House: RHB

Price Call: HOLD

Target Price: 2.08

WCT Bhd
(Oct 10, RM2.10)
Maintain market perform with fair value RM2.08: WCT reiterated its guidance of RM2 billion worth of new contracts in FY11 ending December, despite having only secured RM187 million year-to-date. Specifically, WCT spoke about 'a large shopping mall near the Abu Dhabi F1 Circuit', 'highways in Oman', 'government offices in Qatar' and a new building for the Ministry of International Trade and Industry reportedly worth about RM300 million.

WCT is caught in an odd situation. It is the third largest construction company listed on Bursa Malaysia by market capitalisation, yet it is staring at the prospect of not being involved at all in the RM20 billion Sungai Buloh-Kajang (SBK) Line of the Klang Valley MRT project.

However, we draw comfort from: (i) WCT is seeking a dialogue with MRT Co on it being left out of the list of contractors pre-qualified to bid for the 'open' elevated civil work packages; (ii) The market may have substantially priced in this 'odd situation'; and (iii) With substantial industry capacity being locked up in the MRT project, there will be less competition in the sector, so WCT stands a better chance of winning other public jobs as well as private-sector jobs.

We maintain our forecasts but risks to our view include: (i) new contracts secured in FY11 to FY13 coming in below our target of RM1.5 billion per year; and (ii) escalation of input costs.

We have turned positive on the construction sector as there is now even more urgency for the government to expedite the rollout of various public projects to pump- prime the local economy to shield it against the increased risk of the global economy slipping into a double-dip recession. Indicative fair value for WCT is RM2.08 based on 12 times fully-diluted FY12 earnings per share of 17.3 sen, in line with our benchmark 1-year forward target price earnings ratio of 10 to 14 times for the construction sector. ' RHB Research, Oct 10


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

Acquisition of Landbank in City Centre

Stock Name: DIJACOR
Company Name: DIJAYA CORPORATION BHD

Research House: OSK

Price Call: HOLD

Target Price: 1.33