FAJAR - Big time for small-cap construction outfits

Stock Name: FAJAR
Company Name: FAJARBARU BUILDER GRP BHD
Research House: RHB

Construction sector
Maintain neutral: While large construction companies are conventionally good proxy plays to the new wave of infrastructure spending in Malaysia, it appears that the little guys, small-cap construction players, have thus far dominated the winners' lists of the key work packages of the Kuala Lumpur International Airport 2 (KLIA2) and the Ampang and Kelana Jaya LRT line extension project.

The smaller players stand a much better chance of winning new contracts thanks to lean setups that enable them to profitably execute smaller public jobs that larger players shy away from, as well as subcontracts of key large-scale projects that will soon flood the local construction market.

Based on the last traded prices, small-cap construction stocks Fajarbaru Builder Group Bhd and TRC Synergy Bhd now trade at 7.9 to 10 times and 7.5 to 8.6 times FY11/12 earnings, at a fairly substantial discount to 16.4 to 20.6 times and 16 to 19.1 times earnings for large-cap construction companies Gamuda Bhd, IJM Corp Bhd and WCT Bhd. We believe the large discount is unjustified and untenable.

Risks to our view include: (i) the government reverting to an austerity drive to rein in the budget deficit; (ii) the potential of hiccups in the rollout of the public projects; and (iii) less than robust overseas construction markets, particularly, the Gulf states.

We are neutral on the construction sector, but bullish on small-caps. Over the immediate term, we expect construction stocks in general to perform only in line with the broader market due to 'news flow fatigue'. However, we do see a bright spot in small-cap builders due to their ability to win key work packages of large-scale projects, their better chances of winning smaller contracts and subcontracts of large-scale projects, and their attractive valuations.

Our top small-cap picks are Fajarbaru (fair value: RM1.65) and TRC (FV: RM1.94). An added downside cushion to their share prices is their strong balance sheets with a net cash of RM118.8 million or 69 sen per share for Fajarbaru, and net cash of RM200.3 million or RM1.05 per share for TRC as at Dec 31. ' RHB Research, April 4


This article appeared in The Edge Financial Daily, April 5, 2011.

TENAGA - Tenaga signs deal for Manjung coal-fired power plant project

Stock Name: TENAGA
Company Name: TENAGA NASIONAL BHD
Research House: MIDF

Tenaga Nasional Bhd
(April 4, RM6.18)
Maintain buy at RM6.18 with target price RM7.98: Tenaga announced to Bursa Malaysia that its wholly owned subsidiary TNB Janamanjung Sdn Bhd (TNBJ) has signed an engineering, procurement and construction (EPC) agreement with the Consortium of Alstom Power System SA for the development of the 1,000MW Manjung coal-fired power plant.

This contract is for the construction of building structures and installation of one steam turbine, one super-critical boiler, coal and ash handling equipment, water treatment system, air quality control system as well as a waste water treatment system.

The consortium comprises: (i) Alstom Power System SA; (ii) Alstom (Wuhan) Engineering & Technology Co Ltd; (iii) Alstom Services Sdn'' Bhd; (iv) China National Machinery Import & Export Corp; and (v) CMC Machipex Sdn Bhd.

The contract price is US$810 million (RM2.45 billion), '180 million (RM772.2 million) and RM1.8 billion, or about RM5 billion in total. The project is expected to be completed and come into operation by March 2015. The development of the 1,000MW Manjung coal-fired power plant project is for a period of four years, and payments will be made in accordance with the progress of the project.

In view of the fact that'' the power plant is scheduled to start operations in 2015, we have made no changes to our'' forecasts. We have factored in a cost of'' US$1.5 million per MW of capacity for the 1,000MW plant in our balance sheet forecasts.

We expect construction to begin in FY11. We expect'' the project to be funded on a 70:30 to 80:20 debt-equity ratio, with the debt portion to be satisfied via a long-term bond issuance. Tenaga will need to cough up about RM800 million to RM900 million in equity, which seems manageable given that its cash balance has increased to RM9.2 billion as at end-November 2010.

We reiterate our 'buy' recommendation with the target price maintained at RM7.98, based on discounted cash flow valuation (weighted average cost of capital: 10.99%, terminal growth: 3%). The stock currently trades at a fair FY11 price-earnings ratio of 10 times, lower than its three-year average of 14 times. ' MIDF Research, April 4


This article appeared in The Edge Financial Daily, April 5, 2011.

AXIATA - India 3G heating up

Stock Name: AXIATA
Company Name: AXIATA GROUP BERHAD
Research House: AMMB

Telecommunication sector
Maintain neutral: With the investment in 3G entering its third year, companies are beginning to see a significant financial impact on their revenues. Broadly, the latest quarterly reports of the major players witnessed a more than 25% year-on-year growth in revenue. Much of that was due to the intensity in 3G services take-up.

India boasts one of the largest mobile markets in the world with over 800 million subscribers, and growth is still strong given that penetration lags behind other countries with large populations. According to consultant Frost and Sullivan, the mobile market is expected show a compound annual growth rate in the range of 11.4% over the 2011/16 period.

Out of this total subscriber base, more than 70% use voice solely. They have not 'discovered' the full potential of mobile connectivity. By a rough calculation, fewer than 200 million (less than 14% of the total population) use data services at least once a month. Because of this, the impact of 3G services will become greater in the next two to three years.

Not even 2% of the country has proper Internet connections of any type. If you consider the broadband connections the figures are even more dismal. Thus, the untapped potential of Internet access demand is great. And that is why the next Internet revolution is said to take place on phones ' which offer a more flexible access to users.

This is also the reason the mobile handset market, especially the smartphone segment, expects revenue to rise from US$255 billion (RM772.6 billion) to US$350 billion. The smartphone market is expected to grow tenfold to 30 million units by 2016 from just about 2.9 million units currently.

Axiata Group Bhd stands to benefit as Indians use more and more 3G services. We foresee a heated price war in the near term. This would in turn suppress unit prices of 3G data packages. Despite this, given the tremendous size of the population, in the medium term, the financial impact would still be healthy for Idea Cellular Ltd.

We prefer to see Axiata increase its stake in Idea from the current 19%, leading to equity accounting of the stake in Axiata's books which would allow for a consolidated accounting. There is a need for Idea to raise more money to finance its capex for 3G business, which may be contributed by Axiata in the form of more equity.

We maintain our recently downgraded view of'' 'neutral' on the telecommunication sector. We propose a switch of focus to our top pick in the sector, Axiata ('buy'; fair value: RM6.24), from Telekom Malaysia Bhd ('hold'; FV: RM4), which we downgraded recently. Our view on DiGi.Com Bhd ('hold'; FV: RM27.35) and Maxis Bhd ('hold', FV: RM5.49) remains. We believe the sector's performance would be sustained by the lack of decent yielding big-cap stocks on Bursa Malaysia, following the privatisation of PLUS Expressways Bhd. ' AmResearch, April 4


This article appeared in The Edge Financial Daily, April 6, 2011.

SUNWAY - ECM Libra maintains 'buy' call on Sunway

Stock Name: SUNWAY
Company Name: SUNWAY HOLDINGS BHD
Research House: ECMLIBRA

KUALA LUMPUR: ECM Libra Investment Research has maintained a "buy" call on Sunway Holdings Bhd with its target price remaining at RM2.60.

The recommendation was premised on strong earnings growth of 20.7 per cent in the financial year 2011, plans for more landbank acquisitions, strength in securing overseas construction contracts and re-rating from the merger with Sunway City Bhd, ECM Libra Investment said in a research note today.

"With a strong brand name, we think the group is poised to benefit from the impending roll out of contracts in 2011 both from the Ninth Malaysia Plan as well as the Mass Rail Transit (MRT) project."

Apart from the tunneling portion, civil works for the MRT project would only be open to local contractors, it said.

It added that the completion of the merger exercise with Sunway City in mid this year could assist the group participate in larger scale projects. - BERNAMA

COASTAL - Coastal advances at mid-morning

Stock Name: COASTAL
Company Name: COASTAL CONTRACTS BHD
Research House: OSK

KUALA LUMPUR: COASTAL CONTRACTS BHD [] shares advanced on Monday, April after the Edge Weekly reported that Coastal was eyeing a strategic shareholder to diversify into the fabrication business.

At 10.30am, Coastal was up 13 sen to RM3.21 with 1.91 million shares done.

OSK Research maintained its Buy call on Coastal with a fair value of RM4.85, and said the news was not only within its expectation, but in fact it had envisaged something even bigger for the company.

'We believe Coastal could be a potential merger and acquisition target since its share price valuation is appealing and it owns a strategic asset in its 100-acre yard which sits tight in a strategic area, and which is currently being coveted by many O&G operators for conversion to facilitate fabrication or repair and maintenance jobs,' it said on April 4.

BSTEAD - ECM Libra keeps 'buy' call on Boustead

Stock Name: BSTEAD
Company Name: BOUSTEAD HOLDINGS BHD
Research House: ECMLIBRA

ECM Libra Investment Research is maintaining a trading "buy" call on Boustead Holdings with a target price of RM5.96 per share.

Boustead Holdings is in the news following speculation that the group and its parent, Lembaga Tabung Angkatan Tentera, may acquire ExxonMobil International Holdings Inc's 65 per cent stake in Esso Malaysia Bhd.

"We are neutral on the news as we feel Boustead should stay focused on key cash cows, like their plantation and heavy engineering segments, and also newly acquired Pharmaniaga," said ECM Libra Investment Research in a research note today.

Meanwhile, HwangDBS Vickers Research is also maintaining its "buy" call on the group with a target price of RM7.90 per share.

It said the proposed acquisition could increase the group's scale in the business significantly.

"Assuming a 100 per cent acquisition and 70 per cent funded by debt, it could see a net profit enhancement of RM200 million, based on Esso's financial year 2010 net profit of RM268 million," it added. -- Bernama

IJM - Maybank IB Research maintains Hold call on IJM Corp

Stock Name: IJM
Company Name: IJM CORPORATION BHD
Research House: MAYBANK

KUALA LUMPUR: Maybank Investment Bank Bhd Research has maintained its Hold recommendation on IJM CORPORATION BHD [] at RM6.35 with unchanged target price of RM6.50.

It said the two toll concessions, given the go-ahead by the government last Friday, should positively boost IJM Corporation's CONSTRUCTION [] order book, which stands at approximately RM4.1 billion now.

'We estimate order book could easily double.

''The impact on valuations cannot however be assessed in the absence of further information,' it said in a note Monday, April 4.

IJM - IJM up in early trade

Stock Name: IJM
Company Name: IJM CORPORATION BHD
Research House: MAYBANK

KUALA LUMPUR: IJM CORPORATION BHD [] shares advanced in early trade on Monday, April after its unit New Pantai Expressway Sdn Bhd (NPE) received the go-ahead from the Public Private Partnership Unit of the Prime Minister's Department for the proposed New Pantai elevated highway extension to Ampang-Kuala Lumpur.

At 9.45am, IJM Corp was up 10 sen to RM6.45.

Maybank Investment Bank Bhd Research has maintained its Hold recommendation on IJM Corp at RM6.35 with unchanged target price of RM6.50.

It said the two toll concessions, given the go-ahead by the government last Friday, should positively boost IJM Corp's CONSTRUCTION [] order book, which stands at approximately RM4.1 billion now.

'We estimate order book could easily double.

''The impact on valuations cannot however be assessed in the absence of further information,' it said in a note Monday, April 4.

TAANN - AmResearch 'neutral' on timber sector

Stock Name: TAANN
Company Name: TA ANN HOLDINGS BHD
Research House: AMMB

AmResearch has maintained a "neutral" call on the timber sector and "hold" on Jaya Tiasa Holdings Bhd as well as Ta Ann Holdings Bhd with a fair value of RM7.11 per share and RM7.10 per share
respectively.

AmResearch in a research note today said a further sector earnings upgrade appears to be unlikely due to the tight supply of logs despite an expected increase in demand from Japan.

It said the supply of logs may not be able to keep up with the
anticipated increase in demand from Japan, as individual company's were limited by the concession hectarage.

For Ta Ann Holdings, it said the company's net profit for the financial year 2011 was projected to rise by 56 per cent to RM120 million from RM77.2 million in the financial year 2010.

Its domestic log production is expected to increase by 13 per cent to 500,000 cubic meters in the current financial year from 442,334 cubic meters previously, AmResearch said.

Meanwhile, it said Jaya Tiasa's financial year 2011 net profit was forecast to surge to RM127 million from RM24.4 million previously.

Earnings per share is projected at 46.7 sen for Ta Ann Holdings and 47.4 sen for Jaya Tiasa with gross dividend yield per share offered at 2.2 per cent by Ta Ann Holdings and at least 0.5 per cent by Jaya Tiasa. --Bernama

TENAGA - Tenaga remains a long term buy, says OSK Research

Stock Name: TENAGA
Company Name: TENAGA NASIONAL BHD
Research House: OSK

KUALA LUMPUR: OSK Research has maintained its buy recommendation on TENAGA NASIONAL BHD [] with a fair value of RM7.54 after Tenaga awarded the Janamanjung 1x1000MW coal-fired power plant extension to a consortium led by Alstom for a total of RM5.02 billion.

It said this was largely within its expectations and that it saw some subcontracts coming the way of local CONSTRUCTION [] companies such as Mudajaya.

'We estimate that Tenaga will enjoy some RM2 billion in savings over the lifetime of the plant but make no changes to our estimates as this has been built in.

'Without clarity on tariff hikes, Tenaga remains a Long Term Buy. The company will be announcing a biogas JV with Sime Darby today,' it said in a note Monday, April 4.