MAS - MAS upgraded to 'neutral' by OSK

Stock Name: MAS
Company Name: MALAYSIAN AIRLINE SYSTEM BHD
Research House: OSK



OSK says that Malaysia Airlines (MAS) second quarter (Q2) core earnings were below its and consensus estimates, attributed to higher fuel expenses and additional provisions in its books.

OSK noted that despite the earnings cut, it is upgrading MAS to "neutral" as it sees the company as being in a better position come financial year 2011.

It added tha pegging the counter at 18 times price earnings (PE) on financial year 2011 earnings, OSK derived a new target price of RM2.10 from RM1.50. - Reuters

MAS - MAS remains Outperform by CIMB Research

Stock Name: MAS
Company Name: MALAYSIAN AIRLINE SYSTEM BHD
Research House: CIMB

KUALA LUMPUR: CIMB Research is maintaining its Outperform recommendation on MALAYSIAN AIRLINE SYSTEM BHD [] (MAS) with a RM3 target price despite the disappointing 2Q ended June 30, 2010

It said on Tuesday, Aug 17 that in 2Q, MAS suffered a core net loss of RM465 million, which took cumulative losses to 67% of its full-year forecast of RM1 billion loss.

'Although the 2Q loss was 42% lower year-on-year, it was more than double 1Q's loss which surprised us as we had anticipated a sequential reduction in losses. The culprits were catch-up maintenance and other lumpy provisions which more than offset higher cargo profits and the recovering passenger topline,' it said.

CIMB Research said as a result of these provisions, it cut its FY10-11 EPS by 10%-14% but retain its FY12 estimate.

'We also maintain our target price of RM3, pegged to an unchanged 6x CY12 core EPS. The stock remains an OUTPERFORM given the potential catalysts of a global yield recovery and a structural cost reduction from FY11 onwards. Investors should accumulate on any price weakness,' it said.

CIMB Research said MAS reported a net loss of RM535 million in 2Q mainly due to the RM217 million marked-to-market (MTM) losses as spot/forward oil prices dropped between March 31 and June 30, 2010, in contrast to the RM1.3 billion MTM gains posted last year when oil prices rose in 2Q09.

'What's behind the higher costs in 2Q? We were taken by surprise by the quarter-on-quarter cost increase of almost RM500 million, ahead of the RM250 million on-quarter revenue rise. The main component was the catch-up provision for maintenance of 18 leased aircraft which MAS intends to return to the lessor.

'MAS had underprovided for costs as spare parts and labour charges have since increased. Given that a further 13 leased aircraft may be similarly returned, another catch-up provision is likely in 2011. We have imputed this into our revised forecasts,' it said.

CIMB Research said MAS did very well in cargo, with 2Q revenue rising 73% on-year on the back of a 44% increase in demand and 21% rise in cargo yield. Cargo profits almost doubled on-quarter to RM49 million and turned around from the RM48 million loss last year.

It added that passenger yield anaemic so far. 2Q pax revenue only rose 15% on-year, with revenue per km demand up 18% on-year but pax yield still 2.2% lower on-yea. Over the past three quarters, MAS's pax yield has barely budged from its lows whereas SIA's yield has recovered a cumulative 19% due to its higher business mix.

'MAS will make yield recovery a more urgent task for 2H. It underperformance vis-''-vis SIA is not unexpected and does not dampen our enthusiasm for the fleet renewal story,' it said.

JTINTER - Winston's continued growth fires up JT International

Stock Name: JTINTER
Company Name: JT INTERNATIONAL BHD
Research House: INTER PACIFIC

JT International Bhd
(Aug 13, RM5.65)
Maintain outperform at RM5.60 with target price RM6.20: We reiterate 'outperform' with our target price at RM6.20 based on our discounted cash flow valuation with weighted average cost of capital of 8%. We continue to like JTI given its (i) growing market share; (ii) resilient quality, cash nature of its business; (iii) zero gearing; and (iv) high dividend yield of 5.4%. However, our key concerns are: (i) expectation of higher excise duty in the upcoming Budget 2011; and (ii) enforcement will remain a challenge with higher illicit trade and contraband.

JTI's annualised 1HFY10 net profit of RM71.3 million surpassed both our estimates and consensus, which accounted by 57.4% and 60% respectively. As expected, JTI declared a first interim dividend of 15 sen per share during the quarter under review. This is on track to meet our full year gross dividend per share estimate of 30 sen per share which translates to a yield of 5.4%.

In 2QFY2010, net profit swelled by 12% year-on-year on the back of a 3.3% y-o-y increase in revenue to RM298.5 million, mainly attributed to improved sales volume driven by its value-for-money (VFM) Winston label, which expanded its market share by 1.2 percentage points to 10.7%, and higher excise-led price increase led by JTI's lower marketing and operating expenditure. Adding on, the earnings before interest, tax, depreciation and amortisation (Ebitda) margin was up 0.5 percentage points 16.2% y-o-y from 15.7% in 2QFY2009. However on a q-o-q basis, both net profit and revenue slipped by 11.1% and 4.7% respectively, mainly due to lower sales volume and higher marketing expenditure.

JTI reported that overall tobacco industry volume contracted by 1.1% y-o-y in 1HFY2010. Decline in total industry volume was due to the continued moderate growth of illicit trade from 38.7% in August 2009 to 37.1% by end-2009. However, JTI's market share was elevated to 19.6% in 1HFY2010 from 18.4% in 1HFY2009. We note that Winston's continued growth further strengthened JTI's position in the VFM segment, previously dominated by rival British American Tobacco's Pall Mall. Also, given the recent post-excise hike, it saw consumers' downgrading from the premium segment to the VFM segment. ' Inter-Pacific Research, Aug 13


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

CENTURY - Century Logistics a record first half

Stock Name: CENTURY
Company Name: CENTURY LOGISTICS HOLDINGS BHD
Research House: OSK

Century Logistics Holdings Bhd
(Aug 13, RM1.72)
Maintain buy at RM1.62 with higher target price of RM2.24 (from RM2): Century recorded its highest semi-annual revenue and earnings (in 1HFY2010) of RM75 million and RM7.6 million respectively, which were higher year-on-year (due to the low base in 1HFY09) as well as year-to-date and quarter-on-quarter (revenue q-o-q: 26%; earnings q-o-q: 14%). With 1HFY10 top and bottom line numbers already representing 51% to 53% of our and consensus' full-year forecast, we deem the numbers in line. On a q-o-q basis, margins contracted slightly owing to higher costs of goods from the assembly segment.

For 2Q, revenue from all three segments (OEM, third party logistics and oil & gas) was predominantly driven by higher sales from the OEM assembly division (which manufactures TV sets) ahead of the FIFA World Cup in South Africa (q-o-q: 152%, y-o-y: 132%, YTD: 78%).

On the logistics side, demand for trade activities continued to be driven by the larger number of shipments handled for its new and current customer base, while O&G logistics continued to see healthy turnover for ship-to-ship transfer, thanks to spillover demand from Singapore, Asia's largest bunker market.

For 2H, management is taking a prudent stance to its upcoming expansion plans in anticipation of slowing growth, notably at its logistics and assembly division. Management's immediate focus is centred on cost cutting, optimisation of its own warehouses and setting up a new production line (from which capacity will increase to 50% by end-2010).

With the results in line with our numbers, we continue to maintain our earnings estimates. We have rolled over our valuation base to reflect FY2011 earnings, as we continue to peg the counter at six times PER, which is a slight discount on the sector PER of seven times, after taking into consideration the dilution effect from the exercise of its warrants. This gives a fair value of RM2.24 (from RM2), which provides an attractive net dividend yield of 5% (FY2010F) and 6.2% (FY2011F). Maintain 'buy'. ' OSK Research, Aug 13


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

UMW - UMW oil & gas division's woes

Stock Name: UMW
Company Name: UMW HOLDINGS BHD
Research House: KENANGA

UMW Holdings Bhd
(Aug 13, RM6.33)
Maintain hold at RM6.30 with reduced target price of RM6.10 (from RM6.60): NAGA 2 and NAGA 3 are expected to negatively affect UMW's earnings performance as they remain warm-stacked. If not deployed, the two rigs will incur substantial operating costs. UMW has been unable to secure a contract at a reasonable rate since the rig market is currently facing an oversupply, pushing utilisation down in the offshore market rig segment, leading to downward pressure on day rates. However, NAGA 1's contract (which is due to expire soon ) is likely to be extended at possibly higher day rates.

Wuxi Seamless Oil Pipe Company (WSP) has been affected by duties in the US, the moratorium on exploration in the Gulf of Mexico and unfavourable market conditions. The countervailing and anti-dumping policies imposed on WSP's seamless pipes, coupled with the decline in oil prices are likely to continue to negatively affect its overall profitability. The US accounted for 34.3% of WSP's net revenue in FY2008; it now accounts for only 9% of its net revenue. Moreover, its domestic sales have declined as well due to oversupply and a decrease in average selling prices. Profit turnout in WSP in FY2010 is highly unlikely, and we expect it to register a loss of US$40 million and a profit of US$5.8 million in FY2011.With weaker offshore rig fleet utilisation in the market, we have lowered our'' FY2010 net forecast by 6.23% to RM452.5 million as day rates are under tremendous downward pressure. We believe the demand for jack-up rigs will be relatively flat for FY2010. We do not expect a profit turnout by UMW's O&G division for FY2010 as outlook remains bleak for WSP, and NAGA 2 and NAGA 3 jack-up rigs are not expected to be in operation until at least 1Q2011.

We expect the automotive and M&E division to buoy earnings despite the negative outlook for UMW's O&G division. The expected losses in the O&G division should be mitigated by the company's'' solid and sustained performance in the automotive division, supported by favourable currency movements, higher economies of scale on increased sales volume, improving macroeconomic factors and robust demand on new facelift and variant models from Perodua and Toyota. We are revising upwards our FY2010 sales forecast to 91,000 units (Toyota) from 85,915 units and 185,000 (Perodua) from 165,942 units originally, attributable to strong sales performance in 1H2010.

Maintain 'hold' with a revised target price of RM6.10 (previously RM6.60) based on 10 times PER for the automotive division and 10 times for the O&G division. ' Kenanga Investment Research, Aug 13


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

PETRA - Petra Perdana prudent move to cancel vessel

Stock Name: PETRA
Company Name: PETRA PERDANA BHD
Research House: ECMLIBRA

Petra Perdana Bhd
(Aug 13, RM1.38)
Maintain hold at RM1.35 with revised target price of RM1.26 (from RM1.20): Petra Perdana announced last Thursday it is cancelling the order of one AHTS (anchor handling tug and supply, 12,240bhp vessel) from Nam Cheong Dockyard (the group's new major shareholder). The US$8.85 million (RM28.3 million) deposit it paid will therefore be refunded to Petra. The group says the cancellation is in the best interests of the company in view of low fleet utilisation and the possibility of prolonged low drilling activities. Following this, a change was announced in the group's utilisation of proceeds for the private placement. Part of the private placement was meant to fund the delivery of this vessel. With the cancellation, RM19.78 million of the proceeds will now be earmarked for working capital purposes.

Given the group's tight cash flows this year, we see the move as a prudent one. Taking on more vessels would only stress the group financially no matter how it is financed. Recall that Petra is suffering this year as they try their best to meet operating lease payments, while AHTS fleet utilisation at some 65% is not conducive to profitability. A new vessel sitting idle would only eat into earnings.

Given our assumption that vessel was to be funded off balance sheet and achieve only 65% capacity utilisation at a low charter of US$1.70 per bhp per day, we were forecasting that Petra was going to make a loss on this vessel in FY2011. Removing the vessel from our model actually turns out to be earnings enhancing for the group in FY2011 (+5%) and very slightly negative for FY2012 (-0.3%).

For now, the group's rights issue is still pending so more earnings dilution is to come. We continue to see a difficult operating scenario for Petra and still forecast only a breakeven situation for FY2010. While FY2011 is looking much better for the group, we choose to stay cautious at this time as there could be a downside to our estimates should charter jobs not be awarded in time. We maintain our 'hold' call on the group with a revised target price of RM1.26, is based on an 11 times historical average PER pegged to FY2011 EPS (previously RM1.20). ' ECM Libra Investment Research, Aug 13


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

BHIC - AmResearch: Maintain Hold on BHIC, unchanged FV of RM4.40

Stock Name: BHIC
Company Name: BOUSTEAD HEAVY INDUSTRIES CORP
Research House: AMMB

KUALA LUMPUR: AmResearch is maintaining its Hold rating on BOUSTEAD HEAVY INDUSTRIES CORP [] Bhh (BHIC) with an with an unchanged fair value of RM4.40/share, based on a FY10F PE of 12x at a 10% premium to the stock's three-year average of 11x.

In a research note issued on Monday, Aug 16, the research house said this implied a 20% discount to its unchanged Sum-of-Parts valuation of RM5.50/share.

BHIC announced last Friday its 60%-owned Boustead DCNS Naval Corp Sdn Bhd was awarded a contract from the government to provide in-service support maintenance services for two Scorpene submarines.

'Contract value is worth RM1.3bil comprising of 193 million euros (RM791mil) for procurement of material and equipment and RM532mil for local content. This is higher than the earlier indicative 'ceiling price' of RM600mil mentioned in the Government's letter of intent back in June last year,' it said.

AmResearch said this was in line with its forecast assumption of RM265mil annually as highlighted in its earlier reports.

'As the six-year contract is expected to expire in Nov 30, 2015, we expect the recognition of 10-months of progress work starting on Dec 1, 2009 to materialise in 3QFY10,' it said.

CBIP - AmResearch maintains Buy on CBIP at RM3.31

Stock Name: CBIP
Company Name: CB INDUSTRIAL PRODUCT HOLDING
Research House: AMMB

KUALA LUMPUR: AmResearch is maintaining its Buy call on CB INDUSTRIAL PRODUCT HOLDING [] Bhd (CBIP) at RM3.31 with a fair value of RM3.85.

'We maintain a Buy on CBIP for its undemanding valuations and proven track record in the mill CONSTRUCTION [] business,' it said in a research note issued on Monday, Aug 16.

AmResearch said The Edge Weekly reported that CB Industrial Product Holding Bhd (CBIP) may be selling its PLANTATION [] assets.

Currently, CBIP's plantation assets are held by associates, a joint venture and a subsidiary. CBIP's plantation landbank amount to about 9,656 ha (joint venture's and subsidiary's stake).

'We view the proposed disposal of plantation assets positively. Although CBIP would lose earnings contribution from the plantation division, which is a source of recurring income, we believe that it would allow the group to be more focused on its mill construction business,' it said.

AmResearch said CBIP would also be selling its plantation assets at a period when CPO prices are high ' currently hovering between RM2,600/tonne to RM2,700/tonne.

The research house said with the proceeds from the disposal of the plantation assets, CBIP would be able to expand the production capacity of its mill construction business. This would help compensate for the loss in earnings of the plantation division.

Currently, CBIP builds between 12-15 mills a year. The plantation division is expected to account for 30%-40% of FY11F EBITDA.

AmResearch estimates the value of the plantation division at RM235mil based on FY11F PE of 8x on the subsidiary's earnings. From a replacement cost perspective, the plantation division (only subsidiary's and joint venture's stake) could fetch a value of RM245 million based on landbank value of RM35,000/ha. CBIP's investment cost in the associates was RM49 million.

The price of greenfield plantation landbank in Sarawak is about RM5,000/ha to RM7,000/ha. The price of prime landbank in Sabah is more than RM60,000/ha presently.

'We believe that the buyers may be plantation companies in Sarawak such as SARAWAK OIL PALMS BHD [], TRADEWINDS PLANTATION BHD [] or even timber companies with plantation operations like JAYA TIASA HOLDINGS BHD [],' it said.

PENERGY - OSK Research maintains Neutral on Petra Energy

Stock Name: PENERGY
Company Name: PETRA ENERGY BHD
Research House: OSK

KUALA LUMPUR: OSK Research maintains Neutral on Petra Energy and upgraded its target price for Petra Energy to RM1.44 (previously RM1.15) based on a higher PER valuation of 10x (previously 8x). However, it is not changing its earnings forecast.

The research house said the upgrading of the target price was based on the improved outlook for brownfield services providers.

'This is on the basis that: 1) greater emphasis is being placed on environment concerns, especially after the BP oil spill; 2) modern TECHNOLOGY [] has to date made further drilling possible below the rock level in the sea to extract O&G, and 3) we gather from our sources that Petronas and its PSC contractors will continue spending a portion of their capex on rejuvenating existing and old platforms,' it said in a research note issued on Monday, Aug 16.

OSK Research said its valuation for Petra Energy based on 10x PE is also higher than that of Petra Perdana at 9x as it is more positive on the group's provision of brownfield services rather than vessel chartering based on the present O&G operating environment.

'In fact, this is also reflected in its current share price, whereby Petra Energy is trading at FY11 PE of 10x compared to Petra Perdana at FY11 PE of 7x,' it added.

Last Friday, Petra Energy announced that it had received three letters of awards from Petronas Carigali to provide hook-up and commissioning services to 3 oilfield projects, which include the PL-353, PL-357 and PL-70 SKO pipeline rejuvenation project, ERB West Development project (Phase I) and Phase II for the Betty Revisit 4 project.

OSK Research said works on all these three jobs began between April and July 2010 and are expected to last until end-2010. Cumulatively, all these three jobs are worth about RM26.4 million.

JTINTER - JT International results as expected: OSK

Stock Name: JTINTER
Company Name: JT INTERNATIONAL BHD
Research House: MIDF



Financial results of JT International Bhd, the second largest tobacco manufacturer in Malaysia, are within expectation for the first half of the current financial year, say research firms.

OSK Research Sdn Bhd attributed the 19.6 per cent increase in JTI's total market share to its flagship value-for-money cigarette brand, Winston.

JTI also declared a first interim dividend of 15 sen per share, less 25 per cent tax, which is half of OSK's full-year estimated 30 sen per share.

"We are maintaining our dividend estimates as we are keeping our expectations in line with the management guidance of not declaring any special dividend for this financial year," it said in a research note.

However, JTI's second quarter financial year 2010 earnings before interest tax (EBIT) margin was 15.1 per cent lower compared with 16.2 per cent previously due to higher marketing expenditure incurred in the second quarter.

Earnings in the first half of this year were higher by 13.3 per cent to RM71.3 million as compared with RM63 million previously.

"The increase in both revenue and earnings were mainly driven by higher sales volume and higher cigarette prices," it said in its research note.

With an estimated long-term maintainable dividend per share of 33 sen and a required return of 6.16 per cent, MIDF said it will maintain its "Neutral Buy" with a target price of RM5.36. - Bernama