The company's exit from the liner business will lead to lowerlosses going forward. However, we still believe that the company will strugglein the near term as charter rates continue to be volatile and operating conditions remain challenging.Having said that, we foresee minimal downside risks to the stock after thesignificant retracement in share price from its YTD high of RM6.10. Given thecurrent potential total returns of 6.1% upside to the share price, we haveupgraded our call on the stock to
Market Perform with arevised target price of RM5.47. Lowerlosses with exit of Liner business. The decision to exit the liner (container)business will help minimise future losses for the company. To recap, thecontainer division has been making losses since 2008. Given the inability tostomach the high operating costs and also the rapid changes in global tradepatterns, which had caused significant volatility, the company decided to exitthis line of business in Nov-2011. It isnow in the midst of selling off its vessels, exiting trade lines and making thenecessary impairments/provisions, which thus far has come up to around RM1.45b.The company expects to complete the exercise by June-2012, but all efforts areto accelerate the process.
Still tough times in2012. The company is likely to seeimprovement in its LNG, Offshore, Heavy Engineering and tank terminal divisionswith the additional fleet and capacity expected from 2012. However, we stillforesee tough times for the company in the near term on account of the soft operatingconditions of its petroleum and chemical segments. According to management, theoutlook for the two divisions will continue to be challenging due to volatilecharter rates, unyielding bunker costs and demand-supply vessel imbalances.Just for an illustration, while the bunker costs have returned to its highs ofUSD750/mt (seen in mid 2008), the Baltic Dry Index is still at a low of 896(versus the high of 8000-9000 in mid-2008).
Forecasts. We have increased our FY12 EPS by a marginal3.5% as we assume slightly higher charter rates for the petroleum and chemical divisionsbased on the average rate earned for FY11. We also introduce our FY13E andFY14E net profit estimates of RM1.1b and RM1.35b respectively. The improvementsto our bottom line forecasts are based on lower PBT margin loss assumptions forboth the petroleum and chemical divisions as we expect the demand-supplyimbalances to slowly correct, and charter rates to grow 1.5% for all its vesseldivisions. We have also reduced our FY12E DPS assumptions to 15 sen (from 35sen previously) as we believe the company will look to conserve cash untilbetter times. No dividends were paid in the financial year ended Dec-11.
Fair value revisedlower. While we have increased our net profit estimates, we have lowered ourvaluation basis for the company i.e. 1) the LNG division to 13.5x PER valuation(from 17x previously) to be in line with the FY12 PERs of its regional peers;2) Tanker and chemical division's P/BV valuationto 0.9x (from 1.0x P/BV previously) to reflectthe numerous impairments both divisions have already undergone; and 3) Heavy Engineering'sPER valuation to 19.5x (from 25x previously) as we foresee it could undergo ade-rating once the new merged entity, Sapura Kencana Petroleum is listed by mid-2012. Such changes have resulted in our estimated new lower fair value of RM5.47for the stock based on a 10% discount to its SOP.
Upgrade to MarketPerform. Given the now minimaldownside risks to the company's share price since its significant share priceretracement from its YTD high of RM6.10, and the total returns of 6.1% to theshare price (3.3% capital upside and 2.8% dividend yield), we are upgrading ourcall on the stock to a Market Perform.
Source: Kenanga
No comments:
Post a Comment