COASTAL - Coastal a potential M&A target

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

Coastal Contracts Bhd
(April 4, RM3.41)
Maintain buy at RM3.08 with target price RM4.85: We maintain our 'buy' call on Coastal contracts for three reasons: (i) its current share price is very attractive at a price-earnings ratio of'' five times against the oil and gas industry's 12 to 14 times, which makes it an attractive takeover target; (ii) it has a strategic asset in its 40.47ha shipbuilding yard, which can be converted into an O&G facility for fabrication or even repair and maintenance jobs; and (iii) the location of the yard in Sandakan, Sabah, where most of the deepwater activities will be centred in the future.

Of course, this was considered at the end of 2008, when oil prices dropped and new orders slowed to a trickle. We see this ambition to diversify as value-adding for the company and its share price as we believe such a move would allow the stock to trade above its historical average price-earnings ratio (PER) of four to five times. Management has even made tentative moves, signing an MoU with Ramunia Holdings Bhd as well as reportedly holding talks recently with Alam Maritim Resources Bhd.

Our historical analysis shows that Coastal's performance has been consistent since the crash in crude oil price as it has been delivering quarterly results that either met or exceeded investors' expectations over the last 10 quarters.

This is in contrast to other O&G companies, whose earnings had been flat or lower quarter-on-quarter during this recovery period. We believe this gives Coastal a strong advantage in positioning the company ahead of its peers as many of them have disappointed investors in one quarter or another.

If our expectations materialise, Coastal's share price could touch our fair value of RM4.85 anytime soon, since this is based on an undemanding PER valuation of eight times FY11 earnings.

Given its impeccable track record, we do not believe Coastal's shareholders would be willing to sell its shares at the current price, which is based on a PER of five times. Hence we think this would provide further upside to its share price. ' OSK Research, April 4


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

IJM - IJM Corp gets two new toll concessions

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

IJM Corp Bhd
(April 4, RM6.45)
Maintain hold at 6.35 with target price RM6.50: Last Friday, the government gave the go-ahead to two toll concessions, which should positively boost IJM Corp's construction order book, which stands at approximately RM4.1 billion now. We estimate the order book could easily double. The impact on valuations cannot, however, be assessed in the absence of further information. We maintain our 'hold' call on IJM for now, with an unchanged RM6.50 realisable net asset value target price, which implies a 21 times 2011 earnings multiple.

Kumpulan Europlus Bhd's (K Euro) 64.2% subsidiary West Coast Expressway Sdn Bhd received a letter on April 1 from the Public Private Partnership (PPP) Unit of the Prime Minister's Department approving in principle the construction of the West Coast Expressway (Taiping-Banting) on a build-operate-transfer basis. The final approval is subject to further negotiations on the technical and financial terms, expected to be completed within six months. K Euro is a 25% associate of IJM Corp.

New Pantai Expressway Sdn Bhd (NPE) also received a letter from the PPP Unit on April 1, approving in principle the New Pantai Elevated Highway extension to Ampang.

The project will be privatised via a supplemental agreement to the original concession agreement dated March 26, 1996, and is subject to further negotiations on the technical and financial terms, to be concluded within six months. NPE is a 100%-subsidiary of IJM Corp.

The original construction value of the West Coast Expressway, when it was conceived at least a decade ago, was RM3 billion. The value should have risen substantially by now, considering the rise in construction material costs over the years. While the concession will be parked under K Euro, IJM Corp's construction unit is expected to secure the whole construction works.

The New Pantai Elevated Highway extension to Ampang could easily cost above RM1 billion, based on very preliminary assessments. Total construction value from the two projects is likely to be above RM4 billion.

The length of the construction period and when work on the two projects will start, which would impact near-term construction earnings forecasts, are unknown at this juncture.

Also, unknown is the internal rate of return for both concessions, which we believe is in the region of 12% to 15%. We are also unsure on traffic risk, and the potential sharing of such risk with the government, since infrastructure projects will be under taken via the PPP method as highlighted under the 10th Malaysia Plan. ' Maybank IB Research, April 4


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

MUDAJYA - Mudajaya close to securing Janamanjung works

Stock Name: MUDAJYA
Company Name: MUDAJAYA GROUP BHD
Research House: OSK

Mudajaya Group Bhd
(April 5, RM5.00)
Maintain buy at RM4.90 with target price RM7.44: Tenaga Nasional Bhd recently signed an engineering, procurement, construction and commissioning (EPCC) agreement with the Consortium of Alstom Power System SA for the expansion of the 1000MW Janamanjung coal-fired power plant. The portions of the contract are valued at US$810 million (RM2.5 billion), '180 million'' (RM771 million) and RM1.8 billion. The plant is expected to be fully commissioned by March 2015.

This recent award to the Alstom consortium is positive for Mudajaya. In our previous reports, we had highlighted that Mudajaya is likely to participate in the civil works for Janamanjung should the Alstom consortium win the EPCC job. We expect the consortium to subcontract the civil works to Mudajaya. Generally, the civil works for a coal-fired power plant make up 15% to 20% of the overall EPCC value.

Hence, based on the RM5 billion EPCC value for Janamanjung, the civil works portion would work out to RM750 million to RM1 billion. This should represent a healthy replenishment for Mudajaya's order book as one of its major projects, the KL-Kuala Selangor Expressway (RM958 million), is nearing completion. Management guides that the subcontract award could be out as soon as within a month.

Earlier this year, the Energy Commission had issued a request for proposal to Tanjung'' Bin and Jimah for another 1000MW expansion. Both parties have until mid-April to submit their proposals.

We understand that Mudajaya has been in talks with an EPCC contractor to participate in the civil works for this 1000MW expansion.

The actual award of the Janamanjung civil works to Mudajaya is expected to provide the upside to our earnings estimates, mainly from FY12 onwards, as we have only imputed a conservative RM200 million in annual order book replenishment.

For now, we are leaving our forecasts and RM7.44 fair value unchanged, which is based on a 20% discount to our sum-of-parts value based on 12 times FY11 earnings and a free cash flow to equity valuation of its Chhattisgarh IPP at 16% equity cost. ' OSK Research, April 5


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

TAANN - It's a sellers' market in timber

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

Timber sector
Maintain overweight: Sentiment for the timber sector has improved considerably since the earthquake and tsunami in Japan on March 11. The current situation has a more significant impact on the timber market than the 1995 Kobe earthquake. In 1995, inventory was high, the log supply was consistent, Indonesia was still a fairly dominant supplier to Japan and Japan still had ample domestic production capacity.

We believe tropical log prices will remain firm at above US$200 (RM606) per cu m (currently estimated at US$245 per cu m), even when log production starts to pick up, largely thanks to the robust demand from India and China. Due to the current favourable outlook for plywood demand and prices, there is a possibility that the Sarawak Forestry Department may not extend the 50% log export quota once it expires in June.

We believe it is a sellers' market now for plywood, given the anticipated increase in demand from Japan, low inventory level, limited increase in supply, and disruption in Japan's domestic plywood production. In our view, the favourable outlook for plywood will finally see plywood sales contribute more positively to timber players' earnings, unlike previous years when they incurred losses or only made a small profit from their plywood divisions.

We have revised our FY11/13 earnings forecasts for the timber companies under our coverage, having updated for: (i) higher log prices; (ii) higher plywood prices and utilisation rate; and (iii) higher cost of production for logs and plywood.

The risks include: (i) lower than expected improvement in Japan's housing starts; and (ii) price discounting from neighbouring countries with lower cost of production, resulting in lower exports from Malaysia to its major export markets.

We downgrade our call on WTK Holdings Bhd to 'market perform' (from 'outperform' previously) due to the limited upside to our fair value. WTK's share price has rallied by 65% since the Japan earthquake.

Top picks are Jaya Tiasa Holdings Bhd and Ta Ann Holdings Bhd. All in all, we reiterate our 'overweight' call on the timber sector. Top picks are Jaya Tiasa ('outperform'; fair value: RM7.84) and Ta Ann ('outperform'; FV: RM7.99) as there will be a significant boost to their earnings from the plantation division going forward due to increasing fresh fruit bunches production, apart from strong earnings contributions from the timber division. ' RHB Research, April 5


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

TAANN - It's a sellers' market in timber

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

Timber sector
Maintain overweight: Sentiment for the timber sector has improved considerably since the earthquake and tsunami in Japan on March 11. The current situation has a more significant impact on the timber market than the 1995 Kobe earthquake. In 1995, inventory was high, the log supply was consistent, Indonesia was still a fairly dominant supplier to Japan and Japan still had ample domestic production capacity.

We believe tropical log prices will remain firm at above US$200 (RM606) per cu m (currently estimated at US$245 per cu m), even when log production starts to pick up, largely thanks to the robust demand from India and China. Due to the current favourable outlook for plywood demand and prices, there is a possibility that the Sarawak Forestry Department may not extend the 50% log export quota once it expires in June.

We believe it is a sellers' market now for plywood, given the anticipated increase in demand from Japan, low inventory level, limited increase in supply, and disruption in Japan's domestic plywood production. In our view, the favourable outlook for plywood will finally see plywood sales contribute more positively to timber players' earnings, unlike previous years when they incurred losses or only made a small profit from their plywood divisions.

We have revised our FY11/13 earnings forecasts for the timber companies under our coverage, having updated for: (i) higher log prices; (ii) higher plywood prices and utilisation rate; and (iii) higher cost of production for logs and plywood.

The risks include: (i) lower than expected improvement in Japan's housing starts; and (ii) price discounting from neighbouring countries with lower cost of production, resulting in lower exports from Malaysia to its major export markets.

We downgrade our call on WTK Holdings Bhd to 'market perform' (from 'outperform' previously) due to the limited upside to our fair value. WTK's share price has rallied by 65% since the Japan earthquake.

Top picks are Jaya Tiasa Holdings Bhd and Ta Ann Holdings Bhd. All in all, we reiterate our 'overweight' call on the timber sector. Top picks are Jaya Tiasa ('outperform'; fair value: RM7.84) and Ta Ann ('outperform'; FV: RM7.99) as there will be a significant boost to their earnings from the plantation division going forward due to increasing fresh fruit bunches production, apart from strong earnings contributions from the timber division. ' RHB Research, April 5


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

JTIASA - It's a sellers' market in timber

Stock Name: JTIASA
Company Name: JAYA TIASA HOLDINGS BHD
Research House: RHB

Timber sector
Maintain overweight: Sentiment for the timber sector has improved considerably since the earthquake and tsunami in Japan on March 11. The current situation has a more significant impact on the timber market than the 1995 Kobe earthquake. In 1995, inventory was high, the log supply was consistent, Indonesia was still a fairly dominant supplier to Japan and Japan still had ample domestic production capacity.

We believe tropical log prices will remain firm at above US$200 (RM606) per cu m (currently estimated at US$245 per cu m), even when log production starts to pick up, largely thanks to the robust demand from India and China. Due to the current favourable outlook for plywood demand and prices, there is a possibility that the Sarawak Forestry Department may not extend the 50% log export quota once it expires in June.

We believe it is a sellers' market now for plywood, given the anticipated increase in demand from Japan, low inventory level, limited increase in supply, and disruption in Japan's domestic plywood production. In our view, the favourable outlook for plywood will finally see plywood sales contribute more positively to timber players' earnings, unlike previous years when they incurred losses or only made a small profit from their plywood divisions.

We have revised our FY11/13 earnings forecasts for the timber companies under our coverage, having updated for: (i) higher log prices; (ii) higher plywood prices and utilisation rate; and (iii) higher cost of production for logs and plywood.

The risks include: (i) lower than expected improvement in Japan's housing starts; and (ii) price discounting from neighbouring countries with lower cost of production, resulting in lower exports from Malaysia to its major export markets.

We downgrade our call on WTK Holdings Bhd to 'market perform' (from 'outperform' previously) due to the limited upside to our fair value. WTK's share price has rallied by 65% since the Japan earthquake.

Top picks are Jaya Tiasa Holdings Bhd and Ta Ann Holdings Bhd. All in all, we reiterate our 'overweight' call on the timber sector. Top picks are Jaya Tiasa ('outperform'; fair value: RM7.84) and Ta Ann ('outperform'; FV: RM7.99) as there will be a significant boost to their earnings from the plantation division going forward due to increasing fresh fruit bunches production, apart from strong earnings contributions from the timber division. ' RHB Research, April 5


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

HARTA - Rubber glove prices to bounce back

Stock Name: HARTA
Company Name: HARTALEGA HOLDINGS BHD
Research House: CIMB

Rubber gloves
Maintain overweight: Taking our cue from higher latex prices, we raise our CY11/13 price assumptions by 5% to 7% for nitrile and 9% to 10% for rubber latex. This reduces our FY11/12 sector net profit by 8% to 9%. Despite the earnings cut and the disappointing results season, we continue to rate the sector an 'overweight' as the headwinds have left the sector's CY12 price-earnings ratio (PER) at 8.5 times or about 30% below the KLCI's 12.7 times PER.

This is despite a three-year earnings per share (EPS) compound annual growth rate of 11%, which is supported by 8% to 15% annual demand growth. Kossan Rubber Industries Bhd replaces Hartalega Sdn Bhd as our top pick, given Hartalega's margin compression and better upside for Kossan.

Potential re-rating catalysts for the sector include higher outsourcing and lower input costs.

Annualised net profit for the companies under coverage missed expectations, coming in at just 78% of our estimates and 82% of consensus. Results were weighed down by a 64% year-on-year (y-o-y) slump in Top Glove Corp Bhd's 2QFY11 net profit due to higher input cost and weak demand.

Sector revenue for the quarter fell 2% quarter-on-quarter (q-o-q) because of higher sales of nitrile gloves which have lower selling prices. On a y-o-y basis, revenue rose 16% due to capacity expansion. But rising costs pulled the sector net profit down 24% q-o-q and 220% y-o-y.

After peaking at RM10.89 per kg on Feb 22, rubber latex price fell 21% in two weeks to RM8.56 per kg on the back of growth concerns. The fall was accentuated by disruptions to global supply chains after Japan's earthquake. But the rubber price fall was short-lived as prices bounced back with a vengeance, rising 24% in just over a week to RM10.65 per kg as at April 4.

Nitrile latex producers raised prices around the same time (by about 10% in March) as midstream refiners battled with a Brent price of above US$100 per barrel. Even so, the volatility of rubber has renewed interest in glove stocks, which have been out of favour lately.

Glovemakers can mitigate the cost volatility by diversifying their product mix. While customers in regulated markets such as the US and EU are unlikely to change buying behaviour, emerging market end-users are more fickle. Glovemakers with a balanced product mix such as Kossan (40:60 nitrile:rubber mix) are best positioned to meet demand from growth markets in emerging Asia and Latin America.

We like Kossan and Hartalega. Kossan is the most balanced glovemaker, has consistently met expectations and offers more upside than Hartalega. Despite offering 21% EPS growth for FY12, the stock trades at only 6.5 times forward PER. While it is true that Hartalega will continue to benefit from the switch to synthetics, we expect its margin to contract in FY12 as refiners start raising prices. ' CIMB Research, April 5


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

WTK - WTK slides after RHB downgrade

Stock Name: WTK
Company Name: WTK HOLDINGS BHD
Research House: RHB

WTK Holdings Bhd, a Malaysian timber producer, fell in Kuala Lumpur trading as RHB Research Institute Sdn Bhd cut its rating on the stock because of its limited upside after rallying 65 per cent since the Japan earthquake on March 11.

The shares slid 1.9 per cent to RM2.04 at 9:22 a.m. local time, set for their steepest decline since March 31.

The stock rating was reduced to “market perform” from “outperform,” RHB said in a report today. -- Bloomberg

PCHEM - Petronas Chems price estimate raised

Stock Name: PCHEM
Company Name: PETRONAS CHEMICALS GROUP BHD
Research House: CREDIT SUISSE

Petronas Chemicals Group Bhd’s share-price estimate was raised to RM8.50 from RM7.50 at Credit Suisse Group AG to reflect higher earnings forecasts, bolstered by higher oil prices.

The company’s 2012 earnings estimate was raised 21 per cent while its forecast for 2013 was increased 8 per cent, Paworamon Suvamatemee, an analyst at Credit Suisse, wrote in a report today.

The stock was maintained as “outperform.” The shares have gained 36 per cent this year, the second-best performer on the Kuala Lumpur benchmark stock index. -- Bloomberg

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.