Tan Chong going full throttle

Tan Chong Motor Holdings Bhd (April 9, RM4.53)
Maintain outperform at RM4.01, target price raised to RM7: After being restrained by a family tussle which eventually led to a three-year hiatus between 2004 and 2006 in the release of new models, Tan Chong is back on an aggressive expansion track as it looks to regain lost ground.

The stars are aligned for Tan Chong against the backdrop of an upturn in consumer sentiment, the continued strength of the company's existing models and the launch of new models that will continue to propel its topline.

Meanwhile, the stronger ringgit, better sales mix and increasing economies of scale will provide another kicker to the company's earnings.

Although earnings contribution will be minimal in the early stages of Tan Chong's penetration into the Indochina markets, these moves will increase the company's visibility in the region.

More importantly, it strengthens Tan Chong's position as a representative for Nissan, not just within Malaysia, but in the region as well, allowing it to work towards becoming a regional supply chain manager for the principal. Last year, Tan Chong's share price shot up 169%, outperforming the FBM KLCI's 45% gain. So far this year, the share price has climbed another 29% versus the KLCI's 6%, stoked by active news flow on the company's expanding footprint in Indochina.

Despite the recent share price surge, we still see significant value in the stock. The company is trading at a forward price earnings (PE) of only eight times, on par with its historical average of eight times, but still at a 27% discount to its upcycle PE of 11 times.

We think this is not justified as the company is now in a much stronger position in view of its wider product range and penetration into new market segments, larger market share, and rising prominence in the region.

Its balance sheet is solid and the company's hire purchase securitisation plans help quicken its cash-to-conversion cycle and keep the gearing level at manageable levels despite its aggressive expansion plans.

More importantly, the company's earnings growth potential over the next three years, backed by its growth plans and stronger industry fundamentals, is impressive, with an earnings per share compound annual growth rate (EPS CAGR) of 47%, transforming Tan Chong into a high-growth stock.

Gross dividend yields are also decent at 4%. There could be further upside to dividends should Tan Chong targets for a 20% return on equity (ROE). We believe the market has not factored in Tan Chong's strong earnings growth potential or fully appreciated the transformation that it is going through.

We are raising our target PE for Tan Chong from 12 times, a 10% discount to UMW auto division's 13.5 times target PE, to 13.5 times. Despite its much smaller market share and earnings base, we think Tan Chong deserves to trade at the same level as UMW's auto division given its superior earnings growth prospects.

This, coupled with our 38% to 62% upward revisions in FY2010 to FY2012 earnings, raises our sum of parts-based (SOP) target price from RM4.55 to RM7.

Our target implies a whopping 75% upside from current share price level. Tan Chong is firmly an outperform and our top pick in the sector.

Investors with high risks appetite can consider Tan Chong's two call warrants. - CIMB Research, April 9
This article appeared in The Edge Financial Daily, April 12, 2010.

AmResearch: Construction sector still overweight

Construction sector
Maintain overweight: The federal government is studying a proposal to extend the new light rail transit (LRT) line between Kota Damansara and Cheras to Sungai Buloh and Kajang, according to reports.

The first additional route is Kota Damansara to KTMB station in Sungai Buloh (3km). This is to provide better integration with the northern commuter train services. The second is Cheras to Kajang (9km), which facilitates the integration of the new line with KTMB's commuter services from the south.

The third is an additional line from Uptown Damansara Utama to Kelana Jaya (4km) to overcome traffic congestion along the Lebuhraya Damansara-Puchong.

Although not entirely a surprise, we take a mildly positive stance on this piece of news. While the Cheras-Kota Damansara project has yet to be officially endorsed by the federal government, we gather that the project stands a good chance of taking off due to its significant economic linkages to the Malaysian economy.

Moreover, the proposed extensions could be crucial to the federal government's ambitious plans to develop 3,000 acres (1,214ha) of land in Sungai Buloh into a new hub within the Klang Valley in our view.

We estimate that the original 43km-long Cheras to Kota Damansara LRT line costs between RM8 billion and RM9 billion. The additional 16km route extending to Sungai Buloh and Kajang would increase the total length of the new line to 59km. This would suggest some further upside to the project's contract value and scope of works.

Furthermore, construction works are scheduled to commence from the middle of this year which means it could be ahead of its completion within three years. Taken together, the latest developments validate our earlier views that progress on the two major LRT jobs are gathering momentum.

Going by track record, we believe the UEM Group, Gamuda Bhd and IJM Corp Bhd are among front runners for the LRT jobs.

We maintain our overweight stance on the construction sector and expect a re-acceleration of contract flows ahead of the 10th Malaysia Plan which is scheduled to be unveiled in June, on top of a recovery in construction margins and gradual revitalisation of order flows abroad, notably in India, the Middle East and Vietnam.

For exposure to the sector, we continue to like IJM, Gamuda, WCT, Naim Holdings Bhd and Hock Seng Lee. - AmResearch, April 9
This article appeared in The Edge Financial Daily, April 12, 2010.

RHB: Sino's valuations remain undemanding

Sino Hua-An International Bhd
(April 9, 49 sen)
Maintain outperform at 48.5 sen, fair value reduced to 59 sen: Despite rising crude steel output in China that will boost metallurgical coke consumption in China, we believe the depressed price gap between metallurgical coal (input) and metallurgical coke will remain over the medium term, as rising metallurgical coke capacity will continue to cap the pricing power of the independent metallurgical coke producers.

Not helping either is the acute shortage of metallurgical coal, which boosts prices of metallurgical coal and weakens metallurgical coke players' bargaining power.

On a brighter note, we believe prices of by-products are likely to inch up further on the back of the rising crude oil prices, which will in turn help alleviate the depressed margins for metallurgical coke.

According to reports, Sino Hua-An is mulling to set up a coke manufacturing plant in Malaysia to increase its capacity and tap into the rising demand for metallurgical coke in the Southeast Asia region.

While there is no further details on the expansion plan, we believe the above mentioned move, if it is true, will make sense to Sino Hua-An.

Nevertheless, we note that Sino Hua-An will need to fulfil several conditions before investing into a metallurgical coke plant in Malaysia.

These include increases in China's export tariff for steel that will hurt demand for metallurgical coke, higher-than-expected metallurgical coal (input) prices that will erode metallurgical coke producers' margins, and lower contribution from high-margin by-products.

We are cutting our FY10 and FY11 net profit forecasts by 21% and 98.2% to RM55 million and RM53.6 million respectively, to reflect narrower price gap between metallurgical coal and metallurgical coke.

Following the downgrade in our net profit forecasts, indicative fair value is lowered by 16.9% from 71 sen to 59 sen, based on 12 times revised FY10 earnings per share (EPS) of 4.9 sen. Despite having downgraded our indicative fair value, we are maintaining our outperform rating on the stock as valuations remain undemanding even after our fair value downgrade. - RHB Research, April 9

This article appeared in The Edge Financial Daily, April 12, 2010.

SEEK buys more JobStreet shares

JobStreet Corp Bhd
(April 9, RM1.98)
Maintain neutral at RM2, with a higher target price of RM1.80: Australian Stock Exchange-listed SEEK Ltd, which initially owned only a 10% stake in JobStreet in 2008, started accumulating more shares from February 2010.

Within a short period of about two months, SEEK has raised its shareholdings in JobStreet to 22.4% as at March 31, 2010. The recent strengthening in JobStreet's share price could have been mainly supported by SEEK's accumulation.

In 2008, SEEK purchased 10% equity stake in JobStreet through an off-market transaction for a cash consideration of RM55.1 million, or an average price of RM1.78 per share.

SEEK is the largest e-recruitment company in Australia. Its portal, seek.com.au, hosts approximately 60% of all jobs on Australia's major job sites, equivalent to some 50% of the country's overall Internet and newspaper job advertisements.

According to information provided by SEEK in 2008, in a given month, over 200,000 job advertisements were posted on seek.com.au and approximately 2.9 million job seekers visit its website. In New Zealand, more than 20,000 job advertisements were posted on seek.co.nz, nearly twice that of its nearest competitor.

According to SEEK's CEO in 2008, the online employment classifieds market in Southeast Asia is expected to enjoy significant growth over the next few years due to economic growth and the migration online of classified advertising from print.

The CEO believes that JobStreet has a strong management team which has delivered outstanding results, and SEEK's investment in JobStreet will help the company strengthen its market position in Asia on top of its existing investment in China.

As for the recent shares acquisition, we speculate that SEEK could be averaging down its investment cost in JobStreet and putting itself in a better position to enjoy JobStreet's 33% dividend payout policy.

There have been a few rounds of meetings between JobStreet and SEEK. It is unlikely that a major business tie-up will be announced soon.

As SEEK already owns more than 20% of JobStreet, we believe it is a matter of time the two companies will embark on business ventures together.

In view of JobStreet's rather expensive FY10 price-earnings ratio (PER), we are maintaining our neutral stance. Based on FY10 earnings, we increase our fair value to RM1.80 by pegging the stock's historic high 18.5 times PER compared to 15 times previously as expectations of SEEK buying more shares and a strong equity market are likely to support a higher valuation. - OSK Research, April 9
This article appeared in The Edge Financial Daily, April 12, 2010.

POS - OSK Research maintains Buy on Pos at RM3.53

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

KUALA LUMPUR: OSK Research is still maintaining its Buy on Pos Malaysia with a target price of RM3.53 after it cautioned analysts at a briefing last week that they may have been overly-bullish in their forecasts.

OSK Research said on Monday, April 12 that Pos Malaysia believed discounts on bulk mail to cushion the impact of a sharp contraction in volume has to be taken into consideration.

On the other hand, staff costs for 2010 will be lower than expected as the new salary scheme only takes effect from July 1.

"With these new assumptions, we now have nudged up our FY10 earnings estimate by 15%, while slashing FY11 and FY12 earnings by 26% and 13% respectively.

"Revaluation of its government landbank and speculation on potential partners aside, we derive a SOP TP of RM3.53 with our BUY call maintained," it said.

TCHONG - Tan Chong going full throttle

Stock Name: TCHONG
Company Name: TAN CHONG MOTOR HOLDINGS BHD
Research House: CIMB

Tan Chong Motor Holdings Bhd (April 9, RM4.53)
Maintain outperform at RM4.01, target price raised to RM7: After being restrained by a family tussle which eventually led to a three-year hiatus between 2004 and 2006 in the release of new models, Tan Chong is back on an aggressive expansion track as it looks to regain lost ground.

The stars are aligned for Tan Chong against the backdrop of an upturn in consumer sentiment, the continued strength of the company's existing models and the launch of new models that will continue to propel its topline.

Meanwhile, the stronger ringgit, better sales mix and increasing economies of scale will provide another kicker to the company's earnings.

Although earnings contribution will be minimal in the early stages of Tan Chong's penetration into the Indochina markets, these moves will increase the company's visibility in the region.

More importantly, it strengthens Tan Chong's position as a representative for Nissan, not just within Malaysia, but in the region as well, allowing it to work towards becoming a regional supply chain manager for the principal. Last year, Tan Chong's share price shot up 169%, outperforming the FBM KLCI's 45% gain. So far this year, the share price has climbed another 29% versus the KLCI's 6%, stoked by active news flow on the company's expanding footprint in Indochina.

Despite the recent share price surge, we still see significant value in the stock. The company is trading at a forward price earnings (PE) of only eight times, on par with its historical average of eight times, but still at a 27% discount to its upcycle PE of 11 times.

We think this is not justified as the company is now in a much stronger position in view of its wider product range and penetration into new market segments, larger market share, and rising prominence in the region.

Its balance sheet is solid and the company's hire purchase securitisation plans help quicken its cash-to-conversion cycle and keep the gearing level at manageable levels despite its aggressive expansion plans.

More importantly, the company's earnings growth potential over the next three years, backed by its growth plans and stronger industry fundamentals, is impressive, with an earnings per share compound annual growth rate (EPS CAGR) of 47%, transforming Tan Chong into a high-growth stock.

Gross dividend yields are also decent at 4%. There could be further upside to dividends should Tan Chong targets for a 20% return on equity (ROE). We believe the market has not factored in Tan Chong's strong earnings growth potential or fully appreciated the transformation that it is going through.

We are raising our target PE for Tan Chong from 12 times, a 10% discount to UMW auto division's 13.5 times target PE, to 13.5 times. Despite its much smaller market share and earnings base, we think Tan Chong deserves to trade at the same level as UMW's auto division given its superior earnings growth prospects.

This, coupled with our 38% to 62% upward revisions in FY2010 to FY2012 earnings, raises our sum of parts-based (SOP) target price from RM4.55 to RM7.

Our target implies a whopping 75% upside from current share price level. Tan Chong is firmly an outperform and our top pick in the sector.

Investors with high risks appetite can consider Tan Chong's two call warrants. - CIMB Research, April 9
This article appeared in The Edge Financial Daily, April 12, 2010.

HUAAN - RHB: Sinos valuations remain undemanding

Stock Name: HUAAN
Company Name: SINO HUA-AN INTERNATIONAL BHD
Research House: RHB

Sino Hua-An International Bhd
(April 9, 49 sen)
Maintain outperform at 48.5 sen, fair value reduced to 59 sen: Despite rising crude steel output in China that will boost metallurgical coke consumption in China, we believe the depressed price gap between metallurgical coal (input) and metallurgical coke will remain over the medium term, as rising metallurgical coke capacity will continue to cap the pricing power of the independent metallurgical coke producers.

Not helping either is the acute shortage of metallurgical coal, which boosts prices of metallurgical coal and weakens metallurgical coke players' bargaining power.

On a brighter note, we believe prices of by-products are likely to inch up further on the back of the rising crude oil prices, which will in turn help alleviate the depressed margins for metallurgical coke.

According to reports, Sino Hua-An is mulling to set up a coke manufacturing plant in Malaysia to increase its capacity and tap into the rising demand for metallurgical coke in the Southeast Asia region.

While there is no further details on the expansion plan, we believe the above mentioned move, if it is true, will make sense to Sino Hua-An.

Nevertheless, we note that Sino Hua-An will need to fulfil several conditions before investing into a metallurgical coke plant in Malaysia.

These include increases in China's export tariff for steel that will hurt demand for metallurgical coke, higher-than-expected metallurgical coal (input) prices that will erode metallurgical coke producers' margins, and lower contribution from high-margin by-products.

We are cutting our FY10 and FY11 net profit forecasts by 21% and 98.2% to RM55 million and RM53.6 million respectively, to reflect narrower price gap between metallurgical coal and metallurgical coke.

Following the downgrade in our net profit forecasts, indicative fair value is lowered by 16.9% from 71 sen to 59 sen, based on 12 times revised FY10 earnings per share (EPS) of 4.9 sen. Despite having downgraded our indicative fair value, we are maintaining our outperform rating on the stock as valuations remain undemanding even after our fair value downgrade. - RHB Research, April 9

This article appeared in The Edge Financial Daily, April 12, 2010.

JOBST - SEEK buys more JobStreet shares

Stock Name: JOBST
Company Name: JOBSTREET CORPORATION BHD
Research House: OSK

JobStreet Corp Bhd
(April 9, RM1.98)
Maintain neutral at RM2, with a higher target price of RM1.80: Australian Stock Exchange-listed SEEK Ltd, which initially owned only a 10% stake in JobStreet in 2008, started accumulating more shares from February 2010.

Within a short period of about two months, SEEK has raised its shareholdings in JobStreet to 22.4% as at March 31, 2010. The recent strengthening in JobStreet's share price could have been mainly supported by SEEK's accumulation.

In 2008, SEEK purchased 10% equity stake in JobStreet through an off-market transaction for a cash consideration of RM55.1 million, or an average price of RM1.78 per share.

SEEK is the largest e-recruitment company in Australia. Its portal, seek.com.au, hosts approximately 60% of all jobs on Australia's major job sites, equivalent to some 50% of the country's overall Internet and newspaper job advertisements.

According to information provided by SEEK in 2008, in a given month, over 200,000 job advertisements were posted on seek.com.au and approximately 2.9 million job seekers visit its website. In New Zealand, more than 20,000 job advertisements were posted on seek.co.nz, nearly twice that of its nearest competitor.

According to SEEK's CEO in 2008, the online employment classifieds market in Southeast Asia is expected to enjoy significant growth over the next few years due to economic growth and the migration online of classified advertising from print.

The CEO believes that JobStreet has a strong management team which has delivered outstanding results, and SEEK's investment in JobStreet will help the company strengthen its market position in Asia on top of its existing investment in China.

As for the recent shares acquisition, we speculate that SEEK could be averaging down its investment cost in JobStreet and putting itself in a better position to enjoy JobStreet's 33% dividend payout policy.

There have been a few rounds of meetings between JobStreet and SEEK. It is unlikely that a major business tie-up will be announced soon.

As SEEK already owns more than 20% of JobStreet, we believe it is a matter of time the two companies will embark on business ventures together.

In view of JobStreet's rather expensive FY10 price-earnings ratio (PER), we are maintaining our neutral stance. Based on FY10 earnings, we increase our fair value to RM1.80 by pegging the stock's historic high 18.5 times PER compared to 15 times previously as expectations of SEEK buying more shares and a strong equity market are likely to support a higher valuation. - OSK Research, April 9
This article appeared in The Edge Financial Daily, April 12, 2010.

More jobs flowing into Naim's Dayang

Naim Holdings Bhd
(April 8, RM3.40)
Maintain buy at RM3.44, fair value of RM4.60: This pegs the stock at an unchanged 25% discount to its estimated sum-of-parts (SOP) value of RM6.14 per share.

In an announcement to Bursa Malaysia on Wednesday, Naim's 36%-onwed associate Dayang Enterprise Holdings Bhd said it has received an oil and gas-related job from Sarawak Shell Bhd. The contract is valued at RM400 million and is to be undertaken over a period of five years.

The scope of works would include the provision of topside maintenance services. This represents the third contract secured by Dayang for FY10, taking total new orders secured to date to RM77 million against an outstanding order book of circa RM700 million to RM800 million.

The earlier two contracts involved a workboat charter for reservoir management to Brunei Shell, and the hook-up and commissioning activities at the Tangga Barat site.

More importantly, the latest development underscores Dayang's expanding order flows and further solidifies the group's position as a leading provider of oil and gas services within Sarawak's shores.

We project Naim's share of associate earnings from Dayang to expand RM17 million to RM24 million in FY10 to FY12 against RM15 million in FY08 amid its burgeoning contract pipeline. This would be further underpinned by full-year contributions from Syarikat Borcos.

We continue to like Naim as an excellent proxy play on the Sarawak Corridor of Renewable Energy (Score) ahead of the Sarawak state elections that are due by May 2011.

Naim's earnings deliverance is on the ascendancy. We project a record core net profit of RM86 million for FY10, rising to RM98 million to RM128 millio in FY11 to FY12 respectively. Valuations are undemanding at FY10 to FY11 price earnings (PEs) of eight times to nine times, at the lower end of its historical PE band of seven times to 13 times.

Near-term key re-rating catalyst would include new contract wins,and stronger than expected property pre-sales. - AmResearch, April 8


This article appeared in The Edge Financial Daily, April 9, 2010.

Maybank IB sees strong finish to IJM's FY10

IJM Corp Bhd
(April 8, RM4.88)
Upgrade to buy at RM4.80 with higher target price of RM5.50: We believe near-term news flow on potential awards could intensify in the months leading to the announcement of the 10th Malaysia Plan, and as IJM begins bidding more aggressively for contracts in India.

The outlook for the non-construction divisions remains positive. We revise our earnings forecasts, and raise our target price following a change in methodology.

In our view, IJM's recent lacklustre order flow in India was due to a deliberate decision by the management to cut back on tenders amid an environment of high operating costs.

Cost escalation clauses stipulated in government contracts failed to fully compensate contractors for the spike in raw material prices, namely steel and cement, in 2007 and 2008.

With the recent normalisation of building material prices and borrowing costs, we believe the management will resume normal bidding for Indian jobs. We assume construction pre-tax margins of 2% in FY10 and 3.5% in FY11.

We expect IJM's construction margin to remain depressed in FY11, given the still significant legacy contracts on the books, about a third of IJM's RM3.2 billion order book as at March. We forecast the construction division to account for only 12% of IJM's FY11 earnings.

We expect the property and building materials divisions to remain as IJM's main earnings contributors, accounting for 31% and 30% of IJM's FY11 earnings respectively, while plantations and infrastructure would account for 17% and 10% respectively.

Our revised FY10 net profit implies earnings of RM100 million in 4QFY10, which is up 20% quarter-on-quarter, driven by stronger plantation earnings given the higher CPO price. - Maybank IB, April 8


This article appeared in The Edge Financial Daily, April 9, 2010.