CPO supply risk persists in 2H10

Plantation sector
Maintain overweight: We are keeping our overweight call on the regional plantation sector after upgrading our 2010 to 2011 crude palm oil (CPO) price forecasts by 5%.

Although the El Nino may be weakening, its adverse impact on palm oil yields is expected to be felt only in the later part of 2010 and 2011. Higher crude oil price, rising biodiesel mandates and attractive tax breaks for biodiesel in Argentina and Indonesia are expected to boost biodiesel production.

CPO price upside in the near term may be limited due to rising soybean production from South America. But we believe prices may be primed for an upswing in the later part of 2010 given the potential palm oil supply shortfall.

There is no change to our overweight stance on Singaporean and Indonesian planters or our trading buy call on Malaysian planters. For exposure to the regional palm oil sector, Singapore is our top pick, followed by Indonesia and Malaysia.

We are raising our CPO price forecasts by 5% to US$800 (RM2,560) per tonne for 2010 and US$830 for 2011 given the bigger-than-expected impact of El Nino on Malaysian estates in 1Q10, weaker palm oil production and higher crude oil price. We project average international CPO price to rise 17% in 2010 and a further 4% in 2011.

We expect the strong crude oil price and fairly tight global edible oils supplies to provide firm support to CPO price in 2Q.

Assuming crude oil price continues to trade at US$85/barrel, CPO price should see support at around RM2,485. However, the expectation of a bumper soybean harvest from South America, seasonally higher palm oil output in the coming months and the narrowing price discount between RBD (refined, bleached and deodorised) palm olein in Malaysia and soybean oil from Argentina to only US$10 per tonne as at April 8, 2010 will limit the upside potential for CPO price from the current level in the short term.

We expect CPO price to trade in the RM2,300 to RM2,700 price range in 2Q10.

We are revising our FY10 to FY12 earnings for all the planters in our universe to account for the new CPO price assumptions.

Apart from upgrading our CPO price assumption, we are also pruning our FFB (fresh fruit bunches) yield assumptions due to the dry weather experienced by the Malaysian planters in 1Q10. Our operating cost projections are also increased slightly as we expect fertiliser prices to be firmer due to higher crude oil prices. Overall, this results in changes of between -2% and +21% for our FY10 to FY12 earnings estimates for the planters.

We are upping the target prices by up to 6%. Except for Bakrie Sumatra, we are increasing the target prices for all the planters under our coverage by up to 10% to account for the earnings revisions.

There is no change to our target price basis for all the planters. We value the big-cap CPO players at 18 times P/E (price/earnings). We continue to apply a higher P/E of 20 times to Wilmar due to its integrated agri business model, exposure to China and more stable earnings base.

For exposure to the regional plantation sector, we continue to prefer large-cap liquid planters. Wilmar is our top pick in the region given its market leadership in palm oil trades and China's edible oil market, potential increase in its weighting in the MSCI and FSSTI following the rise in the stock's free float, merger and acquisition possibilities, and the benefits from a potential yuan revaluation.

For high earnings leverage to the CPO price, our picks are Indofood Agri, Golden Agri, Astra Agro, London Sumatra, Sampoerna Agro, Genting Plantations and Hap Seng Plantations. - CIMB Research, April 16
This article appeared in The Edge Financial Daily, April 19, 2010.

No major impact on Public Bank from FRS 139

Public Bank Bhd
(April 16, RM12.02)
Maintain hold at RM12.04, target price raised to RM12.50: Public Bank's 1Q10 results were slightly above our expectations, with net profit at 25% of our 2010 forecast.

Loan impairment allowance contracted sharply (-11% year-on-year, -21% quarter-on-quarter) beyond our forecast, mainly from the overseas operations, with no major impact from FRS 139 adoption.

We raise our earnings forecasts by 4% to 5% per annum, now expecting a 12% three-year net profit compound annual growth rate (CAGR). Our dividend discount model-based (DDM) target price is also upgraded slightly to RM12.50, but hold rating is retained.

It was a flattish quarter-on-quarter (q-o-q) for Public Bank. 1Q10 net profit of RM685 million rose 1% q-o-q, on flat operating income (+0.4%), while a sharp decline in loan impairment allowance (- 21%) offset higher opex (+5%).

The FRS 139 adoption had no major impact on Public Bank's profit and loss while its reserves were enhanced by 2.4%. Y-o-y, its net profit was up a stronger 16% due to loan growth (+13.6%), and higher net interest margin (+15 bps), unit trust fee income and forex profit.

The bank's y-o-y growth was boosted by lower loan impairment allowance at the overseas operations. Asset quality stayed strong with gross impaired loans ratio at a low 0.94%.

We retain our 14% loan growth projection for 2010, with 1Q10's 3.5% growth on track to meet our forecast. We expect net interest income to inch higher in 2Q10, driven by March 10's 25bps rise in the overnight policy rate.

We have lowered our 2010 credit charge assumption to 26bps from 29bps (2009: 31bps) taking a cue from 1Q10's upside surprise. In all, we have raised our earnings forecasts by 4% to 5% per annum. However, we retain our dividend forecasts, assuming a 52% to 53% net profit payout (2009: 57%, 2008: 53%, excluding share dividend).

Public Bank's near-term outlook stays positive - we expect more than 20% ROE (return on equity) into 2012, with both the domestic and overseas operations to drive earnings.

Nonetheless, this is mostly priced in, with the market valuing the stock at 14.6 times 2010 price-earnings ratio (PER) and 3.1 times book, which is at one standard deviation above its long-term mean. Dividends would be capped in 2010 by potentially higher capital requirements.

Based on our estimate, the stock would return a gross yield of 4.8% for 2010, with more attractive yield propositions elsewhere. - Maybank IB, April 16
This article appeared in The Edge Financial Daily, April 19, 2010.

Good start for Kencana's marine charter

Kencana Petroluem Bhd
(April 16, RM1.55)
Maintain buy at RM1.56 with fair value at RM2: We believe that investors should continue to ride with the upcycle in oil and gas (O&G) contract flows, as Kencana remains one of our preferred exposures to this sector.

Kencana's wholly-owned Kencana Nautilus Sdn Bhd together with logistic provider Yinson Marine Services Sdn Bhd have secured a service contract for provision of offshore support vessel in Vietnam. The contract includes providing an offshore support vessel to service drilling rigs, offshore installations, derrick barges, diving vessels and other crafts, including anchor-handling services off the coast of Vietnam.

The project owner and end user of the vessel is Petronas Carigali Vietnam Ltd, an O&G joint-venture operating company based in Ho Chi Minh City. The contract, awarded for one year with an option to extend for another year, is valued at RM33 million.

We understand that Kencana may be utilising its second deepwater-capable vessel, Gemia, for this project. Gemia, which cost RM79 million, was built by Nam Cheong dockyard. The vessel, with an engine capacity of 8,080bhp, was delivered on Jan 15 this year.

We estimate that the charter rate works out to US$2.50/bhp (RM8), which is 40% higher than the average rate of US$1.75/bhp, the rate that Tanjung Offshore secured for five of its anchor handling tug supply vessels for Malaysia-based projects since the beginning of the year.

Even with Gemia's deepwater capability, the rate appears higher than what Ezra Holdings secured recently. In fact, the rate appears to rival the market's peak in early 2008.

We are excited by the strong charter rate - it would seem that the weakness in the offshore support service market has bottomed out.

Kencana's first vessel, the 5,220bhp KPV Kapas, is still on spot charter rate offshore Terengganu and the South China Sea. But this vessel should be able to secure a long-term contract soon as the market is in recovery phase.

The stock currently trades at an attractive CY2010F PE (price-to-earnings) of 17 times, way below its 2007 peak of 25 times. We remain confident that upcoming news flow will elevate market capitalisation of more visible O&G stocks to even higher levels. - AmResearch, April 16
This article appeared in The Edge Financial Daily, April 19, 2010.

JCY - CIMB Research has Outperform on JCY, target price RM2.68

Stock Name: JCY
Company Name: JCY INTERNATIONAL BERHAD
Research House: CIMB

KUALA LUMPUR: CIMB Equities Research has initiated coverage of JCY, one of the most profitable and biggest hard disk drive (HDD) mechanical component makers in the world, with an OUTPERFORM and RM2.68 target price. It said on Monday, April 19 that its target price was based on 12x CY11 P/E. JCY should trade at least close to the current 13.5x CY11 P/E for the KLCI and a premium over the average 11x CY11 P/E for its global peers (range of 4-18x) given its healthy earnings prospects, above-industry returns and size as well as decent dividend yields. "Our 12x target P/E also places it within the range that private equity firms and rivals paid in 2007-08 for some smaller SGX-listed HDD component suppliers," it said. CIMB Research said size matters when industry consolidates further. JCY is one of the most profitable and biggest HDD mechanical component makers in the world. Given its size and financial strength, we believe it can remain relevant even if this highly competitive industry consolidates further. Another key strength of JCY is its ability to supply multi-components to customers. HDD OEMs are showing an increasing preference for such suppliers as they would only need to deal with a small pool of suppliers, thereby ensuring faster time-to-market and producing cost savings. "We project a net profit CAGR of 34% and ROEs averaging 36% for FY9/09-12, underpinned by continuous volume growth and positive operating leverage. Global HDD shipments are projected to rack up a CAGR of 12% in 2009-12, driven largely by strength in mobile and consumer electronics drives. "JCY plans to pay out as much as 50% of its net profits in dividends. Based on our net profit forecasts and assuming a 50% payout, dividend yield is estimated at 5-7% for FY10-12," it said.

EONCAP - OSK Research maintains Neutral on EON Cap

Stock Name: EONCAP
Company Name: EON CAPITAL BHD
Research House: OSK

KUALA LUMPUR: OSK Research is maintaining its NEUTRAL recommendation on EON CAPITAL BHD [] (EONCap) but with an unchanged RM7.30 target price to reflect the current offer price from Hong Leong Bank. "We believe that the offer is fair given the lack of other credible bidders involving a 100% stake sale via an asset and liability acquisition," it said on Monday, April 19. OSK Research said the group is still in the early stages of its strategic transformation and sustaining a higher valuation of RM7.00 to RM8.00 would imply an ROE of 12% to 14% from our current forecast 10.6% FY10 ROE, which equates to a loans growth exceeding 14%, nearly double the industry's current 7.8%. "This would certainly require a longer gestation period, given the group's lack of scalability, funding, relatively saturated domestic banking landscape and increased competition from foreign banks," it said. Meanwhile, Primus Pacific Partners Ltd had issued a two-page statement affirming that it remains committed as a long-term shareholder in EONCap and has no intention of disposing of its 20.2% stake. OSK Research said Primus's latest statement may indicate that there could have been some form of disagreement with regards to the pricing of the proposed equity option to be offered to shareholders of EONCap. Furthermore, as the offer price for EONCap at 1.42x PBV may be deemed to be at the lower end of the historical acquisition valuation price range, HLBank may be concerned over a potentially high take-up for the equity settlement option among minority shareholders giving rise to ROE dilution. "In our sensitivity analysis, we see a potential dilution in HLBank's ROEs from the current 15.5% to 13.0%, assuming that 50% of EONCap's shareholders were to opt for the equity option," it said.

POS - AmResearch maintains Buy on Pos at RM3.80

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

KUALA LUMPUR: AmResearch is maintaining its BUY call on Pos Malaysia with unchanged fair value of RM3.80/share; based on 20% discount to its DCF estimates (WACC of 9.5% and terminal PE of 14x). "However, we have lowered our FY10F EPS estimates by -20%. With the salary review from a tariff hike being a one-off, our FY11F-12F has increased 2%-10%. On net basis, our valuation remains intact," it said on Monday, April 19. AmResearch said after detailed analysis of Pos Malaysia's PROPERTIES [], we found that it holds three under-utilised pieces of land, worth an estimated RM250mil (RM0.46/share). The land with the most significant development potential is a tract next to KL Sentral - currently a PosLaju centre and warehouse for vehicles. Pos Malaysia's current 2.2-acre mail processing centre (MPC) in Bukit Raja is expected to be vacant once the national MPC in Shah Alam opens in 4Q10. "Stock represents an opportunity for a 6% yield (a conservative 40% payout) and an implied 25% return, on top of a special dividend potential arising from its land sale, with re-rating catalysts from the Government's de-regulation," it said.

PBBANK - No major impact on Public Bank from FRS 139

Stock Name: PBBANK
Company Name: PUBLIC BANK BHD
Research House: MAYBANK

Public Bank Bhd
(April 16, RM12.02)
Maintain hold at RM12.04, target price raised to RM12.50: Public Bank's 1Q10 results were slightly above our expectations, with net profit at 25% of our 2010 forecast.

Loan impairment allowance contracted sharply (-11% year-on-year, -21% quarter-on-quarter) beyond our forecast, mainly from the overseas operations, with no major impact from FRS 139 adoption.

We raise our earnings forecasts by 4% to 5% per annum, now expecting a 12% three-year net profit compound annual growth rate (CAGR). Our dividend discount model-based (DDM) target price is also upgraded slightly to RM12.50, but hold rating is retained.

It was a flattish quarter-on-quarter (q-o-q) for Public Bank. 1Q10 net profit of RM685 million rose 1% q-o-q, on flat operating income (+0.4%), while a sharp decline in loan impairment allowance (- 21%) offset higher opex (+5%).

The FRS 139 adoption had no major impact on Public Bank's profit and loss while its reserves were enhanced by 2.4%. Y-o-y, its net profit was up a stronger 16% due to loan growth (+13.6%), and higher net interest margin (+15 bps), unit trust fee income and forex profit.

The bank's y-o-y growth was boosted by lower loan impairment allowance at the overseas operations. Asset quality stayed strong with gross impaired loans ratio at a low 0.94%.

We retain our 14% loan growth projection for 2010, with 1Q10's 3.5% growth on track to meet our forecast. We expect net interest income to inch higher in 2Q10, driven by March 10's 25bps rise in the overnight policy rate.

We have lowered our 2010 credit charge assumption to 26bps from 29bps (2009: 31bps) taking a cue from 1Q10's upside surprise. In all, we have raised our earnings forecasts by 4% to 5% per annum. However, we retain our dividend forecasts, assuming a 52% to 53% net profit payout (2009: 57%, 2008: 53%, excluding share dividend).

Public Bank's near-term outlook stays positive - we expect more than 20% ROE (return on equity) into 2012, with both the domestic and overseas operations to drive earnings.

Nonetheless, this is mostly priced in, with the market valuing the stock at 14.6 times 2010 price-earnings ratio (PER) and 3.1 times book, which is at one standard deviation above its long-term mean. Dividends would be capped in 2010 by potentially higher capital requirements.

Based on our estimate, the stock would return a gross yield of 4.8% for 2010, with more attractive yield propositions elsewhere. - Maybank IB, April 16
This article appeared in The Edge Financial Daily, April 19, 2010.

KENCANA - Good start for Kencana marine charter

Stock Name: KENCANA
Company Name: KENCANA PETROLEUM BHD
Research House: AMMB

Kencana Petroluem Bhd
(April 16, RM1.55)
Maintain buy at RM1.56 with fair value at RM2: We believe that investors should continue to ride with the upcycle in oil and gas (O&G) contract flows, as Kencana remains one of our preferred exposures to this sector.

Kencana's wholly-owned Kencana Nautilus Sdn Bhd together with logistic provider Yinson Marine Services Sdn Bhd have secured a service contract for provision of offshore support vessel in Vietnam. The contract includes providing an offshore support vessel to service drilling rigs, offshore installations, derrick barges, diving vessels and other crafts, including anchor-handling services off the coast of Vietnam.

The project owner and end user of the vessel is Petronas Carigali Vietnam Ltd, an O&G joint-venture operating company based in Ho Chi Minh City. The contract, awarded for one year with an option to extend for another year, is valued at RM33 million.

We understand that Kencana may be utilising its second deepwater-capable vessel, Gemia, for this project. Gemia, which cost RM79 million, was built by Nam Cheong dockyard. The vessel, with an engine capacity of 8,080bhp, was delivered on Jan 15 this year.

We estimate that the charter rate works out to US$2.50/bhp (RM8), which is 40% higher than the average rate of US$1.75/bhp, the rate that Tanjung Offshore secured for five of its anchor handling tug supply vessels for Malaysia-based projects since the beginning of the year.

Even with Gemia's deepwater capability, the rate appears higher than what Ezra Holdings secured recently. In fact, the rate appears to rival the market's peak in early 2008.

We are excited by the strong charter rate - it would seem that the weakness in the offshore support service market has bottomed out.

Kencana's first vessel, the 5,220bhp KPV Kapas, is still on spot charter rate offshore Terengganu and the South China Sea. But this vessel should be able to secure a long-term contract soon as the market is in recovery phase.

The stock currently trades at an attractive CY2010F PE (price-to-earnings) of 17 times, way below its 2007 peak of 25 times. We remain confident that upcoming news flow will elevate market capitalisation of more visible O&G stocks to even higher levels. - AmResearch, April 16
This article appeared in The Edge Financial Daily, April 19, 2010.

AmResearch sees arbitrage opportunity in APM

APM Automotive Holding Bhd
(April 15, RM4.44)
Reaffirm buy at RM4.47 with fair value of RM5.40: Our valuation continues to peg APM at ex-cash FY10F price earnings (PE) of seven times. APM is now trading at a huge 57% discount to sister company Tan Chong Motor Holdings Bhd's valuation (ex-Segambut land value) of 11.6 times FY10F earnings per share (EPS).

APM announced recently that dealings with sister company - revenue from Tan Chong - had exceeded its earlier estimated value (which is 10% of APM's total revenue) as stated in its circular. APM will have to seek, at its next meeting with shareholders, approval to increase its intended related party transaction limit to over 20% of its revenue. This will not disrupt operations in any way.

What this means is that contribution from Tan Chong increased substantially in 1Q10, reinforcing our earlier view that inventory replenishment activities by auto manufacturers, especially Tan Chong given its very conservative CKD (completely knocked-down) kit orders in FY09, will likely give APM's earnings a boost for the next few quarters.

Inventory levels at auto manufacturers - Tan Chong (+34% q-o-q) and Proton (+9% q-o-q) - indicate signs of an uptick in 4Q09 but inventory days are still lean at 30% to 40% lower than peak levels in 4Q08. Tan Chong will increase its production to two shifts by June while Perodua will raise its production of the Alza by 50% to 6,000 units/month. Additionally, Perodua announced record sales in March of 18,500 units which brings its 1Q10 sales to 47,755 units. Annualised (at 191,000), this would be 9% higher than even Perodua's own projection.

Our projections for APM remain 44% to 55% higher than consensus, and we expect 1Q10 earnings, which will be announced next month, to strongly outperform conservative consensus estimates of just RM83 million net profit for FY10F versus our RM118 million projection. We would not be surprised if APM's earnings were to account for as much as one third of consensus' estimate in 1Q10.

APM is positioned favourably as a cheap play into a strong cyclical recovery in the auto sector. Its net cash (RM1.40/share) accounts for over 30% of market cap. Ex-cash, APM trades at just five times FY10F earnings.

More importantly, APM is lagging its peers in Thailand, which trade at a range of nine to 14 times FY10F EPS. APM is trading at 44% to 64% discount despite its superior return on equity (ROE), strong free cash flow, growing dividends and a solid balance sheet.

The recent strong run-up in Tan Chong's share price and generally other auto manufacturer's, positions APM as a favourable arbitrage opportunity as it would be the ultimate beneficiary of any rise in sales for auto manufacturers and an earlier play into such catalysts. APM's discount to auto manufacturers has now expanded to 41% versus a historical average discount of 29%. - AmResearch, April 15


This article appeared in The Edge Financial Daily, April 16, 2010.

Selldown in Supermax unjustified, says CIMB

Supermax Corporation Bhd
(April 15, RM6.93)
Maintain buy at RM6.98 with target price of RM9.65: Supermax is scheduled to release its 1QFY10 results on Monday. Although no new capacity came onstream during the quarter, we estimate that net profit more than doubled year-on-year to around RM50 million, thanks to strong demand.

Given the expected stronger contributions in the coming quarters, we are likely to raise our FY10 to FY12 earnings forecasts by 23% to 25% when the results are announced. For now, we also retain our target price of RM9.65, which is pegged to a 20% discount to Top Glove's target price to earnings (P/E) of 16.5 times.

We think that the recent selldown of Supermax is unjustified given the resilient demand for rubber gloves and glove manufacturers' ability to pass on cost increases, be it latex, energy or even a weaker US dollar. We maintain our buy call on Supermax, premised on the potential re-rating catalysts of the anticipated strong 1Q results, continuing uptick in glove demand and upcoming capacity expansion. Supermax remains one of our top picks for the sector.

Our positive stance remains. Rubber glove stocks have come under selling pressure of late as investors fret about a repeat of the share price collapse in 2008 when investors assumed that record latex prices, high energy prices and a weakening US dollar would dampen glove makers' earnings significantly. We think that the recent selldown of the stocks is unjustified, given the resilient demand for rubber gloves and glove manufacturers' ability to pass on cost increases. Moreover, glove manufacturers proved their resilience against the 2008-2009 global economic turmoil and earnings continued to rise despite the weakening US dollar and high costs during 2008. On average, the total net profit of the companies in our coverage increased 19.5% in FY08 and 65.3% in FY09. We strongly believe that industry prospects remain favourable and Supermax is one of the key beneficiaries.

Given the additional capacity coming in during 2Q, we expect Supermax's core net profit to grow by at least 25% this year. The company's return on equity (ROE) improved to an impressive 27% last year. The company is also strengthening its balance sheet position, with net gearing falling to 31.5% in 2009 from 90% the year before. - CIMB Research, April 15


This article appeared in The Edge Financial Daily, April 16, 2010.