April 13, 2012

TENAGA - Lock in profits

Stock Name: TENAGA
Research House: HWANGDBSPrice Call: HOLDTarget Price: 7.00

Tenaga Nasional; Hold; RM6.51
Price Target: RM7.00; TNB MK

Strong turnaround in 2QFY12 with increasing gas supply and RM2bn compensation. Negotiating for additional gas supply, but tariff hike unlikely due to upcoming election. Positives largely priced in, downgrade to Hold; TP remains at RM7.00.

Source: HwangDBS Research - 13 April 2012

ZHULIAN - Meeting expectations

Stock Name: ZHULIAN
Research House: HWANGDBSPrice Call: BUYTarget Price: 2.30

Zhulian Corp; Buy; RM1.90
Price Target: RM2.30; ZHCB MK

1Q12 result was within expectation; declared 1st interim single-tier 3 sen DPS. Expect FY12F to post record high earnings despite fragile global economy. Maintain Buy and RM2.30 TP.

Source: HwangDBS Research - 13 April 2012

AMMB - Kurnia deal will give AmG lead in general and motor insurance

Stock Name: AMMB
Research House: HWANGDBSPrice Call: HOLDTarget Price: 5.80

AMMB Holdings; Hold; RM6.35
Price Target: RM5.80; AMM MK

Transaction valued at RM1.6bn (2.0x BV). Will enlarge general and motor insurance market share, customer base, and agency force. Will boost recurring fee income over medium term.

Source: HwangDBS Research - 13 April 2012

AMMB Holdings: Maintain Hold - Kurnia cost lower than expected

Stock Name: AMMB
Research House: MAYBANKPrice Call: HOLDTarget Price: 6.30

Neutral on the deal. The P/BV of 2x for Kurnia Insurans Malaysia (KIMB) is lower than what we had estimated of 2.2-2.4x. Positively, AMMB will emerge as the largest general insurer in the country with an estimated 13% overall market share of gross written premiums (GWP). In the short term, however, we see little impact to AMMB's financials and we are wary at this stage of the large motor exposure. Our Hold call and RM6.30 TP (1.6x CY12 P/BV, ROAE: 13.5%) are maintained.

Click here for full report

Source: Maybank Research - 13 April 2012

Bumi Armada: Maintain Buy - New Caspian Sea job in the pipeline?

Stock Name: ARMADA
Research House: MAYBANKPrice Call: BUYTarget Price: 4.88

Maintain Buy and RM4.88 target price. Bumi Armada is said to have secured an underwater pipelay contract in Russia. While management has yet to confirm this, we anticipate a marginal 1% enhancement to 2014 earnings. Overall, we are marginally positive on this newsflow and it ties in with our expectation of the prospect of what the Caspian region can offer. Our unchanged RM4.88 TP is based on sum-of-parts (SOP) valuations.

Click here for full report

Source: Maybank Research - 13 April 2012

Tenaga Nasional: Maintain Buy - I got my mojo back

Stock Name: TENAGA
Research House: MAYBANKPrice Call: BUYTarget Price: 7.40

A fantastic quarter. RM861m 6MFY12 core net profit (-39.6% YoY) was in-line with ours but well ahead of consensus. 2QFY12 results was buoyed by higher supply of natural gas, lower coal prices and higher output from hydroelectric dams thanks to above normal rainfalls during the period. Tenaga has received its share of RM2.0b from PETRONAS and the government for the cost sharing of using alternative fuel. Maintain Buy, with a revised TP of RM7.40 based on 13x CY13 PER.

Click here for full report

Source: Maybank Research 13 April 2012

Stock Overview - VERSATL - 13 Apr 2012

Stock Name: VERSATL
Research House: JUPITERPrice Call: BUYTarget Price: 0.38

VERSATL ( 4995 : 0.32 ) : Targeting 0.38/stop loss 0.29

Packaging products manufacturer

Resistance : 0.38
Support :

RSI of 41
RSI is starting to recover

It is oversold


With oversold technicals, it is in for a rebound to 0.38. Suggest to buy at current level, and sell at 0.38. A
tight stop loss should be placed at 0.29

Trading Strategy
Buy. Stop loss is at 0.29

Source:Jupiter Securities Research 13 April 2012

Stock Overview - KENCANA - 13 Apr 2012

Stock Name: KENCANA
Research House: JUPITERPrice Call: BUYTarget Price: 3.44

KENCANA ( 5122 : 3.16 ) : Targeting 3.44 /stop loss 3.04


Resistance : 3.44 3.70
Support : 3.06

RSI of 58
RSI is on the rise

It is neutral


The recent uptrend remains intact, with an upside of 3.44, and 3.70

Trading Strategy
Buy. Stop loss is at 3.04

Source:Jupiter Securities Research 13 April 2012

Back in the game

Stock Name: TENAGA
Research House: MIDFPrice Call: BUYTarget Price: 7.50

Deal Sealed for RM1.55bn

Stock Name: KURASIA
Research House: TAPrice Call: SELLTarget Price: 0.66

RHB Cap - OUTPERFORM - A complex merger?

Stock Name: RHBCAP
Research House: KENANGAPrice Call: BUYTarget Price: 9.60

We continue to maintain our OUTPERFORM rating on the stockand reiterate our view that value is emerging for RHBCAP at the current level.We recommend investors to bottom-fish the stock into any dips. RHBCAP has beenoutperforming KLFIN by 3.2% since Feb2012, despite its weaker result announcement,and this suggests the stock has limited downside.  We are maintaining our target price of RM9.80for the stock based on a targeted FY12 P/BV multiple of 1.7x, being a 19%discount to big-mid cap banks average of 2.1x. RHBCAP stands out from its peersas it currently trades at just 1.36x to its FY12 BV of RM5.66.  

RHB-OSK merger seesdelay.  Top officials from RHBCAP andOSKIB are reported to share similar views as they spoke at separate pressconferences after the AGMs of their respective companies. According to mediareports, the search for a 'neutral' investment banking head and the need toiron out other 'political and management' issues have been cited by themanagement of both companies as the main reasons for the delay in concludingthe merger between RHBCAP and OSKIB. Other challenges of the merger cited include securing the necessaryapprovals from both the local and overseas regulators. RHBCAP's management is howevereyeing to conclude the merger by the 3Q of 2012, a delay from 1Q2012.

Our views.  We believe that the key challenge of theproposed merger could be the culture shock present in the merged entity, as bothinvestment banks have been operating under different business models for a longtime. RHBCAP operates under a conservative approach  while  OSKIB is  more  of an  entrepreneurdriven  IB that  is  more aggressive  towards  risk-taking. From  what was reported in thenews, we understand that both sides have not agreed on the new management teamstructure of the merged entity as well as the key personnel to head the mergedentity's divisions. As a result, we believe Bank Negara Malaysia will not grantthe green light for the proposed merger yet unless the issues of managementstructure and personnel are ironed out by both parties. We continue to view themerger positively. We believe OSKIB is strategically an ideal fit for RHBCAPand will add a significant diversification of clienteles and scale in thecapital market and also provide an immediate access for RHBCAP into other Aseanmarkets. The proposed merger should be earnings accretive over the medium tolong term.  

However, there are near term concerns i.e. 1) the purchaseprice of 1.2x-1.6x BV is not cheap; 2) RHBCAP could increase its capital ratiovia the issuance of new shares and this could lead to a dilution and 3) therisk of greater-than-expected loss rate in its lending portfolio. While thereis a potential impact on earnings dilution due to the above issues, we believethat the share price correction of approximately 34% since its peak hasadequately priced in these concerns. In summary, we see the potential RHBCAPacquisition of OSKIB as a highly attractive long-term strategic transactionwith the near-term risks fully priced in already.

Source: Kenanga 

Banking - OVERWEIGHT - Bright spots for Responsible Finance them

Stock Name: AFFIN
Research House: KENANGAPrice Call: BUYTarget Price: 4.30

Stock Name: BIMB
Research House: KENANGAPrice Call: BUYTarget Price: 2.90

Stock Name: CIMB
Research House: KENANGAPrice Call: BUYTarget Price: 8.50

Stock Name: HLBANK
Research House: KENANGAPrice Call: HOLDTarget Price: 10.90

Smaller banks are trading at a substantial discount to theirpeers despite their improving balance sheets. Most banks have been rerated over2009-2011 as their share prices have climbed 102% with positive consensus EPSrevisions. Nonetheless, with banks are now trading at 1.8x forward with average16.3% ROE, this makes the bigger banks seem more expensive as compared with the smaller banks, which are only pricedat 0.9x forward P/BV (a 50% discount) despite an estimated 10.3% ROE.  As such, we believe it is time to visit the smallerbanks to find the potential dark horse winners for 2012/13.

Responsible Lendingis a key theme agreed by the consensus in 2012. More responsible policyresponse will reduce systematic risks and thus should benefit banks' asset quality.As such, we reckon that the domestic banking system should continue to see the multi-yearof balance sheet enhancement.  

The banks' improvingasset quality remains as our central case. The increased trust in banks'asset quality and their continuous improvement in the same are likely to support banks' earnings growth inthe near  future  with lower  credit  cost. We  reckon  that BIMB  and AFFIN will be the keybeneficiaries for this theme. In a nutshell, we see small banks being reratedin 2012/13 as their valuation could rise closer to their bigger peers' currentvaluations and their improving asset qualities could provide the trigger forthis.  We will initiate coverage on AFFINand BIMB, driven by the following catalysts:  
-         Responsible Finance.    Bank Negara  Malaysia  (BNM) has issued a new set of guidelines toensure household debts do not pose a threat to the stability of the financialsystem.  More policy responses willreduce systematic risk and benefit bank valuation multiples. The progress ofcontinuous improving asset quality is now in motion and will be long lasting inour view, with positive consequences for banks' earnings.  

-         The two banks above should benefit from thesustainable downtrend of non-performing loans that we have witnessed thus far.Furthermore, due to the perception of weaker asset quality, the tighterregulations that BNM imposed of late i.e. 70% LTV cap for 3rd  mortgages should in a way improve their assetquality going forward. 

-         Hence, for 2012, we are likely to see the twobanks achieving a conservative earnings growth rate of 5%-6% on the back of9%-10%  growth  in loans.  We  reckon that  our current estimates areconservative judging  from their businessvolumes, fees growth and credit qualities. As such, we believe that they arepoised for upward revisions over the next 12-24 months. We believe the twobanks would be able to achieve healthy profit growth, with provisioningcharges  continuing to drop towards andpossibly below their normalised levels.

-         Pursuant to improving asset qualities and aresultant lower credit costs, their FY12/13 Return on Equity (ROE) of 10.3%would be lower than the bigger banks' ROE rate of 13%-25% while also trading atundemanding valuations (of 0.9x P/BV) (see Figure 1).
We believe the two dark horses above share a commoncharacteristic i.e. they have decent and liquid balance sheets  (reasonable RWCR and low L/D ratio) but generallysub-par in ROAs and ROEs (in part due to their low leverage levels).  Thus far, investors have yet to be convincedby their recent management changes or new strategies, perhaps due in part totheir previously less impressive historic track records in showing improvinggrowth and profitability. In addition, they also need some critical executionrelating to regional growth and M&As may be needed and central to themrealising their full potentials. Still, our valuation model suggests that smaller banks are currently tradingwell below the overall banking stocks' price multiple ranges.  These valuations are likely to  play catch-up due to reasons mentioned above.Hence, we strongly believe that AFFIN and BIMB could be the dark horses amongthe banking stocks.

AFFIN: At just 0.7xBV, it deserves more. 
We believe AFFIN's potentially higher credit risks aresomewhat priced in by the discount in its valuation, which is already based onmore conservative earnings and credit cost assumptions. With a reasonable 9%ROE and its undemanding  valuations (FY13E:10.2x PER, 0.7x P/BV), there is room for its earnings to improve. We  are initiating  coverage  of AFFIN  with  an OUTPERFORM rating and a target price ofRM4.30.

A tough operating environment had led to previous consensusearnings and price target cuts. However, we believe its current valuation atFY13 P/BV multiple of 0.7x with an estimated ROE of 9.1% is overlypessimistic.  

BIMB: Uniquelypositioned for more growth. 
We believe BIMB's unique footprint translates into acompetitive edge  in funding as well as positioningfor growth as BIMB appears ideally positioned to capture the fastest growth in Malaysia's Islamic financingarea.  (Islamic financing has grown at aCAGR of 20% since 2005.)  It  has a  very  liquid balance  sheet  (50% L/F  ratio,  liquid assets  at  40.5% of  assets)  and the highest proportion of CASA deposits (43%) should drive faster NIMexpansion vs. other larger banks as balance sheet gearing and financings growfaster.

We are initiating coverage with an OUTPERFORM rating and aTP of RM2.90. Its unique footprint translates into a competitive edge. Itscheap funding and long term positioning for growth in Islamic areas also makeit an interesting financial stock to invest in with its current undemanding valuations.

OVERWEIGHT.    As a  result  of our  initiation  on AFFIN  and  BIMB with  an  OUTPERFORM rating for each and coupled with our recent upgrade in  CIMB rating  to  OUTPERRFORM (TP:  RM8.50), we are now raisingour sector rating to OVERWEIGHT from NEUTRAL. Following our upgrade of HLBANK(TP: RM10.90) from UNDERPERFORNM to MARKET PERFORM, we have none outstandingUNDERPERFORM call in our banking stock coverage.  

Source: Kenanga

Plantation - OVERWEIGHT - Tree stress effect may have just starte

Stock Name: SIME
Company Name: SIME DARBY BHD
Research House: KENANGAPrice Call: BUYTarget Price: 11.60

Stock Name: IJMPLNT
Research House: KENANGAPrice Call: BUYTarget Price: 4.25

Stock Name: TAANN
Research House: KENANGAPrice Call: BUYTarget Price: 7.75

Stock Name: UMCCA
Research House: KENANGAPrice Call: BUYTarget Price: 8.00

Stock Name: KLK
Research House: KENANGAPrice Call: HOLDTarget Price: 23.60

Stock Name: IOICORP
Research House: KENANGAPrice Call: HOLDTarget Price: 5.60

Stock Name: GENP
Research House: KENANGAPrice Call: HOLDTarget Price: 9.90

Malaysia's CPO inventory level for Mar-12 was reported at1.96m mt or 2% lower than the consensus estimate of 2.00m mt. It was also 6%below our estimate of 2.08m mt. The key surprise was the better-than-expectedexports growth of 11% MoM to 1.34m mt (5% above the consensus and ourexpectation of 1.28m mt). Judging from the CPO production severe YoY decline of14% to 1.21m mt in Mar-12, we believe that oil palm trees may have just enteredtheir tree stress period. Typically, CPO production will be flat or declineduring its tree stress period. Among the key CPO consumers, the highest exportgrowth was noticed in Pakistan (+125% MoM to 78k mt), Europe (+63% MoM to 174kmt) and India (+11% MoM to 120k mt). The latest USDA WASDE report was bullishto CPO prices as it reaffirmed the global soybean oil shortage for the 2011/12season. The global soybean oil inventory was cut by 0.17m mt or 6.2% from itsprevious forecast to only 2.56m mt. All the bullish fundamental  factors mentioned continue to support ourOVERWEIGHT call on the plantation sector. We maintain our CY12 average CPO priceof RM3,200 per mt but may increase it further if soybean oil production continuesto deteriorate in South America.  We  have OUTPERFORM  calls  on SIME (TP: RM11.60) and IJM Plantation (TP: RM4.25) on valuation grounds.To leverage on  their  double digit  FFB  growth, we  also  have OUTPERFORM  calls  on Ta  Ann (RM7.75) and UnitedMalacca (TP: RM8.00). Meanwhile, we maintain MARKET PERFORM calls on KLK (TP:RM23.60), IOI (TP: RM5.60) and GENP (TP: RM9.90).

Mar-12 stocks levelbelow expectation.  The  CPO inventory level of 1.96m mt was 2% lowerthan the consensus estimate of 2.00m mt. It is also 6% below our estimate of 2.08m mt. The key surprise was thebetter-than-expected exports growth of 11% MoM to 1.34m mt (5% above theconsensus and our expectation of 1.28m mt). As the exports growth of 11% MoMsurpassed the production increase of 2% MoM, the stocks-to-usage ratio declined to 11.3% in Mar-12 (from 13.5%in Feb-12). On the overall, the meaningful drop in the stocks level to below2.00 mt is positive for CPO prices.

Tree stress effecthas just started. CPO production slumped 14% YoY to 1.21m mt in Mar-12.  The decline  was  more severe  than  market expectations  of  a 7%  to  9% drop  and  our expectation of a 2% drop. As highlightedearlier  in our sector update report on27 Mar, we believe that the tree stress effect on oil palm trees has started.Hence, the CPO production upcycle, which has lasted for 12 months (from Mar-11to Feb-12) should have ended. In Apr-12, CPO production is likely to register aYoY production decline of about 4% to about 1.47m mt. However, our estimate mayappear too optimistic at the current juncture as the severity of tree stresseffect is still unclear. CPO prices are nonetheless likely to appreciatefurther as CPO production will be limited as tree stress effects usually lastfor 2 years.

Strong CPO exports inMar-12 likely to continue. Exports surged by 11% MoM or 132k mt in Mar-12to 1.34m mt. Among the key CPO consumers, the highest growth was seen in Pakistan(+125% MoM to 78k mt), Europe (+63% MoM to 174k mt) and India (+11% MoM to 120kmt). The strengthening CPO exports to Pakistan were probably caused by a normalisationprocess as the Feb-12 number was extremely low (due to transporters' strike in thecountry causing closure of the factories). The strong CPO export trend islikely to continue in  April,  judging from  the  cargo surveyor's  estimate  of an  8%  CPO export  growth  to 479k  mt in the first 10 days ofApril. The resilient CPO demand should support CPO prices in 2Q12.

USDA WASDE reportbullish for CPO prices.  In thelatest World Agriculture Supply and Demand Estimates report released on 10 Apr,USDA has reduced its 2011/12 season global soybean oil inventory by 0.17m mt or6.2% from its previous forecast to only 2.56m mt. As a result, the 2011/12season global soybean oil stock-to-usage ratio declined by 41pp to 6.08% fromlast month's estimate of 6.49%. Soybean oil production from South America has meanwhilebeen severely affected by bad weathers. Argentina soybean oil productionforecast has been reduced by 0.13m mt or 1.7% to 7.30m mt while Brazil soybeanoil production has been  cut  by 0.11m  mt  or 1.6%  to  6.81m mt.  CPO  prices will  benefit  from this  as  it is  usually used as a substitutefor soybean oil.  

Source: Kenanga

KFC Holdings (M) - Privatisation to be completed by year-end? BUY

Stock Name: KFC
Company Name: KFC HOLDINGS (M) BHD
Research House: AMMBPrice Call: BUYTarget Price: 4.15

- Johor Corp's (JCorp) president and chief executiveKamaruzzaman Abu Kassim said the proposed privatisation of KFC Holdings (KFC)and QSR Brands Bhd (QSR) is on track and that there are no objections from Yum!Brands, according to local dailies.  

- It is understood JCorp has been actively briefing theowner of the KFC franchise, Yum! Brands, in arriving at the current terms ofunderstanding, but has yet to make a formal application.  

- Nevertheless, we see this development as a positive sign.As it is, JCorp's president is confident of concluding the privatisationexercise by the year-end after a longer-than- expected delay.

- On a separate matter, JCorp is looking at raising RM3bilthrough the issuance of 'sukuk wakalah' Islamic bonds with a guarantee from thefederal government. 

- The proceeds will be used to settle JCorp's debtrepayments due in July 2012. 

- KFC recently launched a new marketing campaign based on athematic extension of its 'So Good' tagline at a RM4mil investment cost. Thegroup expects the A&P drive to boost sales by 10%-15% in 2QFY12.

- KFC has allocated a RM63mil capex for KFC restaurantoutlet expansion this year. The group will be adding 15 new outlets in Malaysiaand 9 in India, for which we have taken into account into our earnings forecastmodel.    

- Maintain BUY with an unchanged fair value of RM4.15/share,based on a fair PE of 18x FY13F earnings. We like the group's high cashgenerative food business model on the back of an established global brandequity, with stable restaurant sales in Malaysia and exciting growth prospectsin India.   

Tenaga Nasional - 2QFY12 rebound from fuel relief and more gas supply BUY

Stock Name: TENAGA
Research House: AMMBPrice Call: BUYTarget Price: 7.35

- We reiterate our BUY call on Tenaga Nasional (Tenaga),with an unchanged DCF-derived fair value of RM7.35/share, which implies a CY12FPE of 13x and a P/BV of 1.3x. 

- Excluding forex gains and the RM2bil fuel reliefcompensation arising from the use of additional distillates and oil, Tenaga's 1HFY11core net profit of RM864mil came in above expectations. On an annualised basis,this was 18% above our FY12F core net profit of RM1,466mil (excluding fuelrelief). We are unable to provide a meaningful comparison with  street estimate of RM2,242mil (high ofRM3.8bil and low of RM2.2bil), which is skewed by different assumptions, withsome likely not including the fuel relief. 

- But given gas supply variations until August this year, wemaintain Tenaga's FY12F-FY14F net profits which incorporate natural gas supplyassumption of 1,150mmscfd in FY12F and 1,350mmscfd for FY13F-FY14F. We alsomaintain our coal cost assumption of US$110/tonne (vs US$100/tonne currently)and electricity demand growth of 4% for FY12F-FY14F as guided by management.

- Tenaga's 2QFY12 core net profit surged by 2x to RM670mil largelyfrom a 67% QoQ contraction in the consumption of high cost distillates andmedium fuel oil. This came from:- (1) a 2% QoQ seasonal decline in Peninsularelectricity demand which reduced distillate and oil consumption, (2) a 6% QoQ increasein natural gas supply to 1,100mmscfd, and (3) a 24% QoQ increase in hydro-powergeneration due to good seasonal rainfall. 

- As we had earlier highlighted, provided in our forecast assumptionsand now confirmed by management, Tenaga has received a letter from thegovernment that stipulates that the additional fuel cost borne by the nationalutility will continue to be equally shared between Tenaga, Petronas and the governmentfrom 1 November 2011 until 1 September 2012 ' by then the supply of 200mmscfdof gas will commence from the Melacca regassification facility to the powersector.

- We remain positive on Tenaga due to:-
(1) Falling global coal and US-based natural gas prices,which will positively transform the company's cost structure. A US$10/tonnedecrease in coal costs will raise FY13F net profit by 14%.

(2) Likelihood that Petronas and the government willcontinue to bear the higher liquefied natural gas costs from the Melaccaregassification plant in the near term (due to political factors), which couldmitigate further fuel cost pressures. 

(3) New plant-ups to replace the first generationindependent power producers, with expiring power purchase agreements likely toreduce capacity payments. In an open tender environment with Tenaga as thebidder and sole offtaker, fixed power purchase costs are likely to decline.

- The stock currently trades at a P/BV of 1.2x, at the lowerrange of 1x-2.6x over the past 5 years. Earnings-wise, Tenaga offers anattractive CY12F PE of 11x, compared with the stock's three-year average bandof 10x-16x.  

AMMB Holdings - Better cover through M&A

Stock Name: AMMB
Research House: CIMBPrice Call: HOLDTarget Price: 6.22

Target RM6.22

AMMB's AmG Insurance will emerge as the largest general insurer in Malaysia following its acquisition of Kurnia Insurans, which was sealed by the execution of S&P agreement yesterday. The deal will provide cost synergies and cross-selling opportunities in longer term. But the earnings accretion for AMMB will initially be minimal at only about 1% for FY3/14. We retain our valuation basis of 10% discount to DDM value and Neutral rating given the below-industry loan growth.

Tenaga Nasional - Safety net is in place

Stock Name: TENAGA
Research House: CIMBPrice Call: BUYTarget Price: 7.98

Target RM7.98

As Tenaga's 2H earnings will get a boost from a 20% rise in gas supply and higher demand, we consider its interims to be in line at 47% of our full-year estimate and 43% of consensus numbers. In 2Q, the company booked an RM1.5bn gain from the clawback of oil and distillate costs. This raises CY13 book value and our target price by 4.4%, still based on 1.3x P/BV or a 35% discount to the historical average. Retain Trading Buy as Tenaga's turnaround and sector reforms should accelerate. Election uncertainty is the reason why it is not an outright outperform.

Tenaga Nasional (TNB MK, BUY, FV: RM7.68, Last Close: RM6.51)

Stock Name: TENAGA
Research House: OSKPrice Call: BUYTarget Price: 7.68

TNB's 1HFY12 profits were inflated by the RM2bn compensationfor additional fuel costs arising from the gas supply shortage. Stripping outthis amount and forex gains, its core operating profit still came in within ourestimates. As gas supply has normalized, we expect TNB's profits to bounce backto levels last seen in early 2010. For FY13, a combination of contained coalcosts, potentially lower capacity payments and strong demand growth could seeTNB post its 2nd highest core net profit ever. Despite successionconcerns, we believe the new CEO has breathing room to familiarize himself withTNB given that it is a GLC.

Within forecasts.TNB's 2QFY12 results are a little harder to analyze as they included RM1,517min net compensation from the Government and Petronas (RM2.023bn less RM506m intax) as part of the fuel cost sharing compensation up to  Oct 2011. We choose to not recognize theRM1,517m as a core profit item, although we acknowledge that this discriminatesagainst TNB. The resultant core net profit of RM867.4m is deemed within ourforecasts and consensus. Do note that our forecasts  for RM2.5bn implies a net profit of RM816m per quarter for the remaining 2quarters  of  FY12 vs a core net profit of RM672m in 2Q. We deem this as a slightly stretched but achievable forecast. Havingreceived the compensation amount, TNB's book value per share  has risen back to a comfortable RM6.41.

Looking ahead.TNB's management touched upon the following concerns:
  • Succession  ' The  names of the candidates for CEO  have beensubmitted to the Government while an executive search firm has been appointedto look for a new CFO
  • Gas supply ' Since Jan 2012, gas from Petronas has hoveredat around 1100 mmscfd, which meant that TNB required minimal oil &distillates
  • 25% Coal export tax  'Management feels that the tax could be delayed or cancelled given  the strong lobbying from Indonesian coal miners and excess coal from SouthAfrica
  • PPA renegotiations ' Tenders have been called but managementfeels that it is unlikely to lead to a significant reduction in capacitypayments
  • Demand growth  'Surprisingly strong at 4.9% y-o-y from Sept 2011 to March 2012. Management hasguided for 4%, which may potentially be exceeded

Maintain  forecasts and fair value. We are revising upwards our demand growth forecasts butalso tweaking down our tariff assumptions, which were previously on the bullishside. The net effect is our FY12 forecasts remain  largely unchanged but  the FY13 and FY14 net profit forecasts arerevised up by 3.2%. Our RM7.68 DCF based fair value implies a PER of 14x onFY13 numbers, a slight stretch over TNB's historical 13.5x PER, but isjustified given a potential rerating post general election. 

Source: OSK188

TSH Resources (TSH MK, BUY, FV RM2.65, Last Close: RM2.53)

Stock Name: TSH
Research House: OSKPrice Call: BUYTarget Price: 2.65

TSH Resources (TSH) joined us in hitting the road inSingapore recently to meet 9 institutional funds. FFB production growth wasspectacular last year, surging by more than 40% y-o-y, with its youngIndonesian estates being the key growth  driver.Management is looking to quicken the pace of new planting over the next fewyears and also  shed light on  why the company  is further expanding in Kalimantan.TSH continues to have one of the best tree age profiles, with 75.0% of itstrees below peak. Maintain BUY, with FV of RM2.65.

Planted area reaches30,521 ha. TSH planted on 2,584 ha in 2011, which was slower than  the aggressive 3.1k to 5.2k ha  it covered annually  between 2006  and 2009. Planting has been slow over the past two years as the company  endeavoured to keep its net gearing(calculated  based on total equityinstead of shareholders' equity) below the 0.8x needed to maintain its AA- credit rating  from MARC. A drop to an A rating would see the company's borrowing cost riseby as much as 1 ppt from the current 4+%. With this ratio now having trendedlower to 0.71x, the company is looking to plant 4k ha of palms and 1k ha ofrubber annually,  which  translate into a 10%-13%  growth  in  oilpalm planted areas over the next 3 years. The company will continue to enlargeits 94,003 ha landbank in Indonesia, of which only  27.8% is planted, beforegood Kalimantan land becomes scarce and expensive.

Age profile primedfor growth spurt. With over 21.8k ha planted since 2006, 75.0% of TSH'strees are below peak production age, making it the 5th mostfavourable tree age profile within  our18-stock plantation universe. Of the  total area planted,47.5%  has immature  trees - the highest within our Malaysian plantation coverage. Indonesia representedonly 42.2% of the company's planted area at the turn of the millennium but this  has risen to 85.5%. The archipelago  nation was the driver last year, with FFB production surging 59.4% compared toan overall FFB production growth of 43.2%.

Becoming less  Malaysian. Indonesia will continue to beTSH's key growth  engine given its youngtree profile (87.7%  of  trees below peak) while Sabah should see decliningproduction (0.5% of trees below peak). Management forecasts the firm's FFB productionwill grow by 21.4% in 2012 while we expect a weaker but still commendable growthof 18.2%. We gather from management that as the heavy rainfall during the firsttwo months of the year had affected harvesting, 1Q production should thus berelatively weak, although it may bounce back in 2Q.

Source: OSK188

AMMB (FV RM6.20- NEUTRAL) Corporate News Flash: Kurnia Joins The Stable

Stock Name: AMMB
Research House: OSKPrice Call: HOLDTarget Price: 6.20

AMMB announced that it has entered into a conditional saleand  purchase agreement with Kurnia AsiaBhd for the proposed acquisition by AmG Insurance Bhd for a total cashconsideration of RM1.55bn, or 2.05x Kurnia's book value as at 30 June 2011.

Ties in with plans to boost motor, general insurance marketshare. The acquisition will raise AmG's general insurance market share inMalaysia from 5% to 13%, making it the largest general insurer in Malaysia withclear dominance in the motor insurance business and a market share of 22%. This ties in  with  its strategy to build scale and leverage onthe expertise of its partner, Insurance Australia Group, to deliver cost and revenuesynergies on a broader platform and enhance the standalone profitability of itsinsurance unit. Post acquisition, the group will have the largest insuranceagency force in Malaysia, with which it can maximize any cross-sellingopportunities.

Marginal earningsimpact.  Based on AMMB's 51%effective stake in AmG Insurance Bhd, and assuming: i) zero revenue and costsynergies in the first year of acquisition, ii) acquisition to be 100% fundedby borrowings at 5% interest, and iii)  an  estimated average FY12/13 net profit  from Kurnia  of  RM72.2m p.a, the  impact on AMMB's bottomline  in the  first year of acquisition isestimated at  'RM2.7m, implying a very marginal've 0.16% impact on group earnings. Assuming that the deal is funded equally byinternal funds and borrowings, the impact on the group's earnings is estimatedat +ve 0.57%. As such, the deal should be earnings neutral at best while thecosts at the initial stages of integration may in fact be a slight drag onearnings before the group starts to reap the target revenue and cost synergies.

2.02x PBV valuationfair.  From recent M&As in theinsurance industry, we noted the following: i) MAA Holdings sold its insurancebusiness for 1.36x PBV, ii) PacificMas Bhd sold its insurance business for1.71x PBV, iii) Jerneh Asia sold its insurance business for 2.25x PBV, whileiv) Berjaya Corp hived off its 40% stake in Berjaya Sompo Insurance at 3.35xPBV. Benchmarking the deal to our findings, we deem the 2.05x PBV fair.

Revenue cross-sellingsynergy may take time. Management  highlighted  the cross selling synergies including thepotential of marketing a full suite of banking products within the AMMB groupto urnia's 4m customer base, particularly the smaller ticket loan products like personal loans. GivenKurnia's relatively higher risk customer profile  - as reflected in the group's relatively poorclaims ratio  versus  AMMB's more stringent risk culture - we thinkthat the upside benefits from such cross selling opportunities may take time asthe group may have to restructure and transform Kurnia's portfolio and customerbase. That said, Kurnia has to a certain extent successfully restructured itsportfolio over the past few years, with the benefits beginning to flow throughin the form of an improvement in its claims ratio from 76% to 71%.

More optimistic onimmediate cost synergies. AmG's general insurance portfolio is similar toKurnia's but its claims ratio  -currently at 64.9%  - is significantlybetter than Kurnia's 71%. As such, there may be great scope for improvement inthe areas of risk management and cost enhancement.

Funding in place.The acquisition is expected to be fully funded by AmG, with fresh capitalraised from a combination of borrowings and internal funds injectedproportionately by AMMB Group (51%) and Insurance Australia General GroupLimited (49%). The group has said that the there is no need for  any equity fund raising to pay for theacquisition since its core capital ratios will remain intact post acquisition. MaintainNEUTRAL. We are maintaining our NEUTRAL recommendation and fair value ofRM6.20  (13.2% ROE, FY12 PBV of 1.61x).Despite  there being  scope for revenue and cost synergy upsidefrom the acquisition over the longer term, it is not expected to be materiallyaccretive to the group's bottomline in the immediate to medium term as theearnings contribution is expected to be NEUTRAL for the group at best for thenext two years.

Source: OSK188

CIMB: Signs cooperation agreement with RBS

Stock Name: CIMB
Research House: ECMLIBRAPrice Call: HOLDTarget Price: 7.00

CIMB Group Holdings Bhd (CIMB MK, Hold, TP: RM7.00) and Royal Bank of Scotland (RBS) have entered into a cooperation agreement which covers potential collaboration in capital market activities, mergers and acquisitions, equities, derivatives, loan markets, trade advisory and trade financing solutions, cash management services and agent or custodian bank arrangements. "We're extremely pleased to be able to do this so quickly after announcing our acquisition of RBS' investment banking and cash equities business in Asia Pacific last week. This will provide a framework for our ex-RBS team to continue to work together with their ex-colleagues in areas of mutual interest between RBS and CIMB," said CIMB Group CEO Datuk Seri Nazir Razak. (StarBiz)

AMMB Holdings (Company Update): No impact from acquisition of Kurnia Insurans

Stock Name: AMMB
Research House: ECMLIBRAPrice Call: HOLDTarget Price: 5.70

Maintain HOLD, TP: RM5.70

AMMB is acquiring Kurnia Insurans to have the largest general insurance and motor insurance company in Malaysia. Estimating the borrowing cost to be incurred to fund the acquisition, and AMMB's share of net profit from Kurnia Insurans, we find that the net impact on AMMB's earnings is immaterial. Hence, we are not revising our earnings forecasts, valuation nor HOLD recommendation for AMMB. (refer to report for details)

April 12, 2012

TNB gains, rating raised to 'outperform'

Stock Name: TENAGA
Research House: RHBPrice Call: BUYTarget Price: 7.60

As of 9.31 am. in Kuala Lumpur, Tenaga Nasional Bhd, the country's biggest power producer, added 0.9 per cent to RM6.43, bound for its steepest increase since April 2.

The utility's earnings visibility has improved because of a recovery in gas supply, Lim Tee Yang, an analyst at RHB Capital Bhd, wrote in a report today. He rated Tenaga outperform with a so-called fair value of RM7.60.

An outperform means the stock's return is expected to exceed the benchmark index by more than 5 percentage points over the next six to 12 months, according to RHB. Tenaga will release its second-quarter earnings result today. -- Bloomberg

Maybank (Buy) - Interest in Philippines & Saudi Banks?

Stock Name: MAYBANK
Research House: HLGPrice Call: BUYTarget Price: 10.12

Maybank (Buy)
Interest in Philippines & Saudi Banks?
  • Dailies reported that Maybank is interested in Al-Amanah IslamicInvestment Bank of the Philippines,the country's only Islamic commercial bank and acquire additional 17.17% stakein Saudi Arabia-based Anfaal Capital for RM8.6m.
  • As at Dec 2010, Al-Amanah had a book value of RM38.8m while it recordeda loss of RM2.7m for the year.
  • Thus, any deal would have minor impact on financials.
  • Positive about its intention to focus on Islamic banking while Al-Amanahcould (given the proper framework) could flourish and has first mover advantage.
  • Meanwhile, the increase stake in Anfaal Capital would also facilitatemore cross-border activities. 
  • Maintain Buy.
  • Target price maintained RM10.12 based on Gordon Growth with ROE of 15.6%and WACC of 9.9%.

Source: HLIB Research - 12 April 2012

Construction (Overweight) - Bridging to Bangladesh

Stock Name: MRCB
Research House: HLGPrice Call: BUYTarget Price: 2.50

Stock Name: SENDAI
Research House: HLGPrice Call: BUYTarget Price: 2.00

Stock Name: IJM
Research House: HLGPrice Call: HOLDTarget Price: 5.77

Construction (Overweight)
Bridging to Bangladesh
  • The Government of Malaysia (GoM) has inked a MoU with Bangladesh for the construction of a 6.15kmbridge across the Padma River for US$2.9bn(RM8.7bn). The Padma Multipurpose Bridgewill connect the south-west region of Bangladesh to the rest of thecountry and will be the largest bridge project in the country.
  • The project will be undertaken by a consortium of 5 contractors and willnegotiate directly with the Bangladeshi Government after the GoM haveshortlisted the contractors. The contenders are understood to be currentlyundertaking the second Penang Bridge project. Thecompanies slated for selection are United Engineers, MRCB (BUY, TP: RM2.50),PAG Consult (NR) and Eversendai (BUY, TP: RM2.00). Although IJM (HOLD, TP:RM5.77) has not been mentioned in the news, we believe that they could also beone of the contenders.
  • With the current pullback in construction stock prices, we believe thatit poses an opportunity to accumulate. Thus, we maintain our OVERWEIGHT stanceon the sector.

Source: HLIB Research - 12 April 2012