TENAGA - HwangDBS Vickers maintains Buy on Tenaga, ups target price to RM8.80

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

KUALA LUMPUR: HwangDBS Vickers Research has maintained its buy call on TENAGA NASIONAL BHD [] and raised its target price to RM8.80 from RM7.50 previously after the utility company officially received approval to increase tariff rates effective June 1.

In a note Tuesday, May 31, HwangDBS Vickers said the 7% average tariff hike was more than sufficient to offset the 28% increase in gas price.

'Future hike in fuel cost will be passed-through to users under the 6-monthly tariff review

'Approval of cost pass-through mechanism will be a key re-rating catalyst; maintain Buy with higher TP of RM8.80 implying 35% upside,' it said.

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TOPGLOV - Rubber glove makers to pay more for power

Stock Name: TOPGLOV
Company Name: TOP GLOVE CORPORATION BHD
Research House: OSK

Rubber glove sector
Maintain overweight: On May 30, the government approved an electricity tariff hike for Tenaga Nasional Bhd and a gas price hike across industries. Rubber glove manufacturers, which currently enjoy a low tariff of RM15 per mmBTU, will have to pay 7% more for gas at RM16.07 per mmBTU.

We understand that energy cost accounts for 8% to 10% of rubber glove manufacturers' total costs, with energy cost comprising both electricity and natural gas in almost equal proportions. Hence, the net impact would still be less than 1%. Glovemakers can easily pass on the extra electricity cost to their customers.

Moreover, given that the quantum and time line of the hikes of every six months has been set, even if it is implemented, the rubber glove manufacturers would be able to make adjustments to their selling prices in advance and pass on almost 100% of the cost increase to their customers.

With the continuously high latex price of above RM9 per kg (RM9.55 per kg at May 30's close), latex cost accounts for about 60% of rubber glove manufacturers' total costs. Hence, we believe that more emphasis should be placed on this cost element over others. We expect the rubber price to either continue to remain high or commence on a downtrend given that the wintering season for rubber trees is now over.

We maintain our 'overweight' call. Our top picks remain Top Glove Corp Bhd ('buy', fair value: RM6.50), Supermax Corp Bhd ('buy', FV: RM6.91) and Kossan Rubber Industries Bhd ('buy', FV: RM5) because these companies will be the main beneficiaries when the latex price eases since they have a higher natural rubber glove mix, and'' they would be the biggest gainers in the event the latex price falls as they have the largest production capacity for medical gloves. ' OSK Research, May 31


This article appeared in The Edge Financial Daily, June 1, 2011.

SIME - Sime remains a 'buy': HwangDBS

Stock Name: SIME
Company Name: SIME DARBY BHD
Research House: HWANGDBS

HwangDBS Vickers Research has reiterated its "buy" call on Sime Darby with a target price of RM9.13 in view of the better financial performance in the fourth quarter.

The research house said the improved outlook is underpinned by rising crude palm oil output, recovery in property, and continued strength in industrial and motor.

"We expect the outcome of a portfolio review to also result in a leaner and more focused Sime Darby, hence, improved long-term growth prospects, despite its size," it said in a research note today.

Sime Darby had earlier announced the signing of a memorandum of understanding (MoU) with Petronas Nasional Bhd and Marine and Heavy Engineering Holdings Bhd (MHB) to sell its Teluk Ramunia and Pasir Gudang yards for RM695 million -– above the combined book value of RM641 million.

HwangDBS said terms and conditions of the sale are to be worked out in two months' time.

The research house said Sime Darby is committed to completing the ongoing Oil and Natural Gas Corp Ltd (ONGC) and Kebabangan Northern Hub Development Project after this sale, by leasing back the yards from Petronas.

At lunch break Sime Darby's stock rose three sen to RM9.16 -- Bernama

SIME - Above expectation on industrial earnings

Stock Name: SIME
Company Name: SIME DARBY BHD
Research House: UOB

Sime Darby Bhd
(May 30, RM9.15)
Upgrade to hold at RM9.13 with revised target price of RM9.40 (from RM8): Sime Darby reported 3QFY11 net profit of RM820.1 million, a turnaround from being loss-making in 3QFY10 but down 6.5% quarter-on-quarter. Results were above expectation.

Surprises came from stronger than expected contributions from the industrial divisions, which were not affected by the flooding in Queensland, Australia.

There is a proposed disposal of two yards to Petroliam Nasional Bhd (Petronas) and Malaysia Marine & Heavy Engineering Holdings Bhd (MMHE) for a total cash consideration of RM695 million. We view this positively as it can reduce Sime's earnings volatility and enable management to focus on its key competent divisions, especially on the growth of its plantation division.

We upgrade the stock to 'hold' from 'sell' with a higher target price of RM9.40 as we roll over to 15 times FY13F price-earnings ratio (PER). We have adjusted up our FY11, FY12 and FY13 earnings forecasts by 7.6%, 6.3% and 10.2% to an earnings per share of 51.3 sen, 56.6 sen and 62.8 sen. The adjustment is made mainly to factor in better contribution from the motor and industrial divisions.

Sime has entered into two non-binding MoU to sell its two fabrication yards for a total case consideration of RM695 million. The MoU is only for the takeover of assets under the two yards, which means the recently won RM1.15 billion Petronas contract to fabricate KBB topsides for the Kebabangan Northern Hub Development Project will remain under Sime. Sime will continue with this by leasing the space from Pasir Gudang yard. Management is guiding for an operating margin of 8% to 12%. Based on our earlier estimation based on pre-tax profit margin of 10% and equally spread over the 29 months, the potential earnings enhancement is about 1% to 1.2% for FY12/14.

The disposal is not a surprise as there has been market talk that MMHE is keen on Sime's oil and gas assets. We are positive on the O&G exit as it will remove concerns over potential losses and earnings volatility from this division and allow the group to focus on its core businesses.

Apart from the O&G shipyard disposal, Sime still has some non-core small businesses up for disposal. Dunlopillo Holdings is in the process of being divested and so is the 30% stake in Continental Sime Tyre. Sime will keep its existing power business and continue exploring new opportunities in Malaysia and Singapore.

Sime has been granted 220,000ha under a 63-year concession by the Liberian government to develop oil palm and rubber plantations. Sime plans to invest US$3.1 billion (RM9.4 billion) over the next 15 years. Sime aims to complete the planting of oil palm by 2022 or 2023, ahead of the initial timeline target of 2030. There will be about 55 estates and around 20 palm oil mills built. Cost of production in Liberia is about 10% to 15% higher than Malaysia's average. The first crude palm oil (CPO) production is expected to commence in 2013.

Share price catalyst: CPO price surging more strongly than expected. ' UOB Kay Hian, May 30


This article appeared in The Edge Financial Daily, May 31, 2011.

SIME - Strategic refocusing but fairly valued

Stock Name: SIME
Company Name: SIME DARBY BHD
Research House: OSK

Sime Darby Bhd
(May 30, RM9.15)
Maintain sell at RM9.13 with higher target price of RM8.47 (from RM7.90): We are maintaining our 'sell' call on Sime Darby with fair value raised to RM8.47. Its strategic refocusing and our raising of earnings forecast notwithstanding, we believe Sime is at best fairly valued. While we readily admit that the company's fundamentals are the best in a long while, the stock is already trading at mid-teens forward price-earnings ratio. The company's growth for the next'' two to three years will also be driven by non-plantation cyclical segments such as industrial and motor, which are essentially trading and distribution businesses.

Sime's 9MFY11 core net profit of RM2.35 billion, when annualised, was within both our forecast but 5.5% below consensus. However, with the earnings momentum shown by its industrial and motor segments, we believe Sime's 4Q showing will be better.

Sime's plantation segment produced 7.4 million tonnes of fresh fruit bunches (FFB) and appears to be on track to hit our forecast of 9.7 million tonnes for FY11. Its Indonesian operation reported a 37.4% surge in March production while the Malaysian plantations suffered a 2.1% decline. Sime still has some 60,000ha of landbank in Indonesia, of which 24,000ha is ready for planting. The group also made progress in Liberia, where it planted its first oil palm tree on May 19. The company is targeting 5,000ha of new planting this year.

The motor segment continued to do well, with segment earnings before interest and tax (Ebit) surging 28.6% quarter-on-quarter. Year-to-date, Ebit is now up 89.8% from last year. The strong performance was mainly due to strong sales of BMW, which make up 63% of its Ebit. Sales were boosted by new launches such as the new generation X3 and 5-series plus 320i M Sport and Executive Edition. The new generation 3-series should hit the market in 2012. This will help to keep its momentum going, particularly in the China market, which now makes up 45% of the motor segment's revenue.

Sime Engineering has entered into a MoU with Petroliam Nasional Bhd (Petronas) and Malaysia Marine & Heavy Engineering Holdings Bhd (MMHE) to dispose of its Teluk Ramunia yard for RM296 million and Pasir Gudang yard for RM399 million for strategic reasons. Even if the sale goes through, Sime is still obliged to complete its existing Petronas jobs. We view the disposals positively as it is a clear sign of strategic refocusing (on oil palm downstream and power).

We have raised our earnings forecast for FY11 from RM3.04 billion to RM3.23 billion to factor in a still-strong motor segment performance while our FY12 forecast is pushed up to RM3.56 billion from RM3.29 billion previously. ' OSK Research, May 30


This article appeared in The Edge Financial Daily, May 31, 2011.

IJMLAND - IJM Land - right on target

Stock Name: IJMLAND
Company Name: IJM LAND BERHAD
Research House: AMMB

IJM Land Bhd
(May 30, RM2.80)
Maintain buy at RM2.80 with fair value of RM4: We reaffirm our 'buy' rating on IJM Land with our fair value unchanged at RM4, based on an unchanged 10% discount to our fully-diluted net asset value (NAV) estimate of RM4.46.

IJM Land's 4QFY11 net profit came in at RM44 million, bringing its full-year earnings to a record RM218 million (two times FY10), meeting our bullish estimate but way ahead of consensus' by 25%. This underscores our strong belief in management's delivery capabilities. The company announced a dividend of four sen per share (FY10: two sen per share).

Although earnings were against the preceding quarter, this was due to the lumpy recognition of the earlier sale of the Aeon Mall in Melaka.

Our earnings estimates for FY12F and FY13F remain largely unchanged at RM285 million and RM314 million. Earnings will be underpinned by strong unbilled sales of about RM1 billion and a new sales assumption of RM1.5 billion over RM1.5 billion to RM2 billion of planned launches for FY12F. We introduce our FY13F earnings at RM340 million, representing 8% year-on-year growth.

The group plans to launch RM1.5 billion to RM2 billion worth of properties ' including Light Collections 3, The Address. New sales remain solid, amounting to RM450 million in the first three months of CY11. We believe the group would be able to register stronger sales against last year's robust RM1.5 billion.

IJM Land is moving to capitalise on the maturity of its Seremban II township by divesting 15 to 20 acres of commercial land to Mydin hypermarket. This should accelerate the development potential of the remaining 300 acres of commercial land.

Infrastructure and earthworks for its 50%-owned Canal City (1,877 acres) are slated to start soon. Acquired for about RM50 psf, Canal City is scheduled for launch in 2012 to take advantage of the lack of affordable landed homes priced below RM350,000 in the suburbs.

IJM Land's valuations are very attractive ' trading on forward multiples of 11 to 13 times over FY12F to FY14F, and a 37% discount to fully-diluted NAV. Despite its deep value, IJM Land's share price needs to get a kick from a meaningful land deal to reinvigorate excitement over the stock. This may soon take place. ' AmResearch, May 30


This article appeared in The Edge Financial Daily, May 31, 2011.

MHB - Game-changing value accretion for MMHE from Sime Darby's yard

Stock Name: MHB
Company Name: MALAYSIA MARINE AND HEAVY ENG
Research House: AMMB

Malaysia Marine and Heavy Engineering Holdings Bhd
(May 30, RM7.47)
Maintain buy at RM7.30 with higher fair value of RM8.25 (from RM8.10): We maintain our 'buy' on Malaysia Marine & Heavy Engineering Holdings Bhd (MMHE) but with a higher fair value of RM8.25 (against RM8.10 previously), based on an unchanged FY12F price-earnings ratio (PER) of 25 times.

We have raised MMHE's FY12F to FY14F earnings by 2% to 5% as we accelerate the recognition of the group's order book due to its expanding fabrication capacity.

We are excited by MMHE entering into a MoU with Sime Darby Engineering to acquire its 130-acre Pasir Gudang yard for RM399 million cash, as it will radically transform Malaysia's fabrication landscape.

Including Petroliam Nasional Bhd's (Petronas) Teluk Ramunia yard, MMHE will have access to the country's largest domestic fabrication yard of 672 acres, which is 3.5 times Kencana Petroleum Bhd's current 192 acres.

In comparison with MMHE's current market capitalisation of RM12 billion, its existing yard is being valued at RM720 psf ' 10 times the RM70 psf being paid for the Pasir Gudang yard.

While the Pasir Gudang yard will be partly utilised for its existing Oil and Natural Gas Corp and Kebabangan jobs, we believe the Pasir Gudang and Petronas' Ramunia yards offer ample additional fabrication capacity which will underpin MMHE's re-accelerating earnings momentum and growing deepwater expertise.

MMHE remains one of our top picks for the oil and gas sector due to:

(1) Capacity expansion stemming from Sime Darby Engineering's Pasir Gudang yard, which will accelerate order book recognition, drive margin efficiencies and enhance MMHE's deepwater capabilities.

(2) Further upgrades in consensus margin assumptions given the possibility of a quick turnaround from the reaping of 'low-hanging fruit' efficiencies under the new managing director/CEO from Technip's subsea division.

(3) Significant additions to the group's net order book of RM3 billion from the prolific wave of upcoming projects by 2H11 as half of MMHE's Pasir Gudang yard will be unutilised when the topside structure of the Gumusut-Kakap floating production storage semi-submersible is lifted onto its hull.

(4) New margin benchmarks for MMHE's tenders of over RM5 billion'' comprising more complex structures than the jobs undertaken by other domestic operators.

The stock currently trades at an attractive FY12F PER of 22 times, below SapuraCrest Petroleum Bhd's peak of 29 times in 2007. ' AmResearch, May 30


This article appeared in The Edge Financial Daily, May 31, 2011.

TAANN - Ta Ann's 1QFY11 within expectations, better quarters ahead

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

Ta Ann Holdings Bhd
(May 30, RM6.61)
Maintain outperform at RM6.52 with fair value of RM6.52: Ta Ann's 1QFY11 net profit of RM26.6 million came in at 15% to 19% of our full-year forecast and market consensus. This is within our expectations as we anticipate much stronger quarters ahead, underpinned by the surge in log and plywood prices after Japan's earthquake in March as well as increasing fresh fruit bunches (FFB) production volume at its plantation division.

Net profit for 1QFY11 more than tripled to RM26.6 million (from RM8 million a year ago) as a result of higher selling prices for logs (+39%), plywood (+39%), and crude palm oil [CPO] (+44%). FFB production volume was also higher by 36% due to an increase in mature hectarage, but sales volume for logs was down by 31% and plywood 30% due to lower log production volume.

Net profit for 1QFY11 decreased by 11.9% quarter-on-quarter (from RM30.2 million previously) mainly due to lower export log sales (-30%), plywood sales (-11%) and FFB production volume (-19%). The decline in sales volume was partially cushioned by higher selling prices for logs (+10%), plywood (+11%), and CPO (+17%).

The decline in sales volume of its timber division was largely due to the seasonally wet weather conditions that hampered log harvesting.

We are of the view that Ta Ann's prospects continue to be promising on the back of rising FFB production volume for the next few years.

Increasing mature oil palm hectarage will be the main driver for Ta Ann's earnings, contributing more than 60% of earnings for FY11 (from 36% for FY09). We expect earnings from its logging division to remain strong due to robust demand from India (its main export market) and China.

With rising plywood prices after the Japan earthquake in March, its previously loss-making plywood division (due to the high production cost of its Tasmanian operations) will likely be able to turn around in 2011.

Compared to a net loss last year (estimated at about RM15 million to RM20 million), we are now projecting Ta Ann's plywood division will record a net profit of about RM10 million to RM15 million in 2011.

We maintain our forecasts. The risks to our view include: (i) timber and CPO price falling; (ii) a slower-than-expected recovery in Japan's economy; and (iii) bad weather conditions that will hamper log production volume.

Our sum-of-parts-based fair value for Ta Ann is RM8.44 based on unchanged 12 times FY11 timber division earnings and 13 times FY11 plantation division earnings. We maintain our 'outperform' call on the stock. ' RHB Research, May 30


This article appeared in The Edge Financial Daily, May 31, 2011.

MASTEEL - Slow start to 2011 for Masteel after strong 4QFY10

Stock Name: MASTEEL
Company Name: MALAYSIA STEEL WORKS (KL)BHD
Research House: OSK

Malaysia Steel Works (KL) Bhd
(May 30, RM1.23)
Maintain neutral at RM1.29 with target price of RM1.34: After beating its bigger peers in the preceding quarter, Masteel started 2011 with feeble earnings, posting a net profit of RM6.2 milllion, 53.4% lower quarter-on-quarter despite being almost flat year-on-year.

We suspect the low inventory level of less than two months as at end-December 2010 may have limited the benefits of the time lag of cheaper feed materials compared with its competitors, which keep more stocks as most of the raw material in 1Q was marked to the current market price, which has been surging since early 2011.

Therefore, earnings before interest, tax, depreciation and amortisation (Ebitda) margin slipped to only 5.3% despite escalating average selling prices (ASPs). Also, the Lunar New Year celebration in February resulted in 1Q revenue dropping by 4.6%.

Our observation suggests that activities in the local steel market remain lacklustre. Although steel demand usually picks up during the April to June period, we think this is a sign that the implementation of various mega projects introduced under the Economic Transformation Programme (ETP) remains slow.

Nonetheless, as Masteel's earnings record in the past may have showed a less consistent trend compared with its peers', we prefer to monitor the company's earnings for another quarter or two before altering our original projections. This is despite the 1Q numbers coming behind our and street estimates when annualised.

We also have some reservations on the company's recent announcement of a 60:40 joint-venture agreement to supply to and operate a 106.5km rail transit network in Iskandar Malaysia and Woodlands in Singapore.

While the Johor government and the co-chairman of Iskandar Regional Development Authority endorsed the proposal in April 2011, the company is still in the process of acquring approvals from various government agencies, which we think may take a while.

Hence we have not incorporated any earnings contribution for this project.

With the company's medium-term earnings visibility remaining poor, plus the unexciting 1Q figures, we maintain our 'neutral' rating on Masteel with a fair value of RM1.34. ' OSK Research, May 30


This article appeared in The Edge Financial Daily, May 31, 2011.

MHB - Earnings forecast upgrade for MMHE

Stock Name: MHB
Company Name: MALAYSIA MARINE AND HEAVY ENG
Research House: OSK

OSK Research has upgraded Malaysia Marine and Heavy Engineering Holdings Bhd's(MMHE) financial year 2012 earnings forecast by 14 per cent.

This follows the company's announcement that it has entered into a memorandum of understanding (MoU) with Sime Darby Engineering for the acquisition of a fabrication yard in Pasir Gudang for RM399 million.

OSK Research said the acquisition enables MMHE to capitalise on the expanded yard capacity and hence, develop the flexibility to undertake a larger number of project bids, to enlarge its share of domestic and regional contracts.

"We view this acquisition positively as MMHE can now double its annual capacity to 129,700 tonnes," it said in a research note today.

The research house said the acquisition is timely as the company has strong orders but lacks sufficient yard space to perform its fabrication jobs due to an existing high utilisation rate of above 80 per cent.

Currently, MMHE possesses a RM3.1 billion orderbook and a tenderbook worth RM5 billion, a portion of which management expects to realise by the next quarter.

Following the earnings forecast upgrade, OSK has maintained a "buy" call on MMHE but upgraded the fair value of the company to RM8.23 from RM7.20 previously. --Bernama