Is KNM securing jobs for a RAPID-like project?

Stock Name: KNM
Company Name: KNM GROUP BHD

Research House: MIDF

Price Call: BUY

Target Price: 3.20

KNM Group Bhd
(July 26, RM1.90)
Maintain buy at RM1.75 with target price RM3.20: KNM Group announced yesterday that it and Zecon Bhd have entered into heads of agreement (HoAs) with Gulf Asian Petroleum Sdn Bhd (GAP) to undertake the engineering, procurement, construction and commissioning (EPCC) works for: (i) a petroleum refinery and a polypropylene plant (with a capacity of 150,000 to 200,000 barrels crude oil per day and 400,000 to 525,000 tonnes per year of polypropylene) worth RM15 billion; and (ii) a petroleum product storage terminal facility comprising four terminals (with total storage capacity of 2.328 million cu m) and supporting infrastructure and auxiliaries worth RM2 billion.

The refinery and polypropylene plant and the storage facility are GAP's plan for its integrated petroleum complex (IPC) located at Teluk Ramunia, Johor. The refinery and polypropylene plant is expected to be completed in 40 months and the storage facility in 18. KNM's management indicated that the Johor government has approved a 263ha parcel of land in Teluk Ramunia for the project, and GAP is in discussion with the state government for its equity participation.

We are wary of the viability and execution risks of this IPC development given GAP's unknown track record plus huge investment costs. Given the sizeable project value of RM17 billion and the fact that Asia Petroleum Hub, which is involved in a multibillion-dollar oil terminal in Johor has been placed under receivership recently, we are especially concerned over the funding. GAP might be too ambitious to build another refinery and petrochemicals integrated development (RAPID)-like project, which in contrast is backed by a financially strong Petroleum Nasional Bhd. We are also sceptical that the contract terms and project financials can be finalised and fulfilled within three months. Note that the RAPID project is still at the detailed feasibility study stage and the final decision will only be known end-2011 or early-2012.

Given that the HoAs are basically non-binding, we are taking a more conservative stance of keeping our earnings forecast unchanged at the moment until any letters of award are secured by KNM and pending further details from the management.

We maintain 'buy' with unchanged target price of RM3.20 based on unchanged 14 times FY12 price-earnings ratio, which is within its historical band. KNM's total outstanding order book remains healthy at about RM5.5 billion as at May 2011. Re-rating catalysts include the potential recognition of a RM2.2 billion contract awarded by Peterborough Renewable Energy Ltd starting July 2011, which was delayed from the initially targeted April/May. ' MIDF Research, July 26


This article appeared in The Edge Financial Daily, July 27, 2011.

Public Bank's 2Q11 results show no surprises

Stock Name: PBBANK
Company Name: PUBLIC BANK BHD

Research House: RHB

Price Call: BUY

Target Price: 16.00

Public Bank Bhd
(July 26, RM13.48)
Maintain outperform at RM13.36 with fair value of RM16: Public Bank's 2Q11 results were within our and consensus expectations with 1H net profit of RM1.7 billion (+20% year-on-year [y-o-y]) accounting for 50% of our and consensus full-year estimates. Public Bank declared a single-tier dividend per share of 20 sen (2Q10: 25 sen, gross).

Net interest income for 2Q11 rose 5% quarter-on-quarter and 10% y-o-y on the back of continued loan growth (+3.4% q-o-q; +13.2% y-o-y) and net interest margin expansion (+9 q-o-q; +11 basis points [bps] y-o-y). Non-interest income remained healthy (+9.3% q-o-q; +16.2% y-o-y) and increased to 21.7% of total operating income, thanks to the mutual fund operations and stronger dividend income. Overheads were under control, resulting in CIR improving to 29.4% from 30.4% in 1Q11 (2Q10: 31.6%). Credit cost was stable at 10 bps against 1Q11: nine bps (2Q10: 12 bps). Generally, the results were solid, albeit without any major surprises.

Loan growth for 2Q stood at 13.2% y-o-y (+3.4% q-o-q) with the main growth drivers'' residential (+16.8% y-o-y) and non-residential (+22.6% y-o-y) mortgages as well as hire purchase (+10% y-o-y). Annualised group loan growth stood at 13.6%, driven by the domestic segment (14.5% annualised) while loan growth from overseas (3.2% annualised) was partly impacted by adverse foreign exchange translation. Although annualised loan growth was slightly below the 14% to 15% growth target set, we expect the target to be met with stronger growth in the quarters ahead. Customer deposits grew 4.4% q-o-q (+7.9% y-o-y) due to higher fixed (+3.2% q-o-q), demand (+5% q-o-q) and money market (+13.8% q-o-q) deposits and with that, group loans-deposit ratio improved to 87.3% as at end-June 2011 from 88.1% as at end-March 2011.

Asset quality remained intact with new impaired loan formation (annualised) improving slightly to 27 bps, compared with 29 bps in 1Q11 (2Q10: 79 bps). Absolute impaired loans fell 5% q-o-q and the gross impaired loans ratio improved to 0.96% as at end-2Q11 from 1.05% as at end-1Q11. Tier-1 and risk-weighted capital ratios rose by 70 bps each to 10.2% and 13.7% respectively.

We have retained our fair value of RM16 (based on target FY12 price-earnings ratio of 15 times) and 'outperform' call on the stock. We continue to like the stock for its above-industry growth and asset quality. Public Bank'' is the best proxy to the domestic economy in terms of loan growth. ' RHB Research, July 26


This article appeared in The Edge Financial Daily, July 27, 2011.

Expect good 2Q11 results for MAHB

Stock Name: AIRPORT
Company Name: MALAYSIA AIRPORT HOLDINGS BHD

Research House: MAYBANK

Price Call: BUY

Target Price: 7.55

Malaysia Airports Holdings Bhd
(July 26, RM6.50)
Maintain buy at RM6.50 with revised target price of RM7.55 (from RM7.12): MAHB will release its 2Q11 results tomorrow. The second quarter is seasonally the weakest for the year. Based on the operating statistics published, we expect a core net profit (less foreign exchange translation and all other non-cash items) of RM110.5 million (+24.5% year-on-year [y-o-y], -1.4% quarter-on-quarter [q-o-q]). We maintain our 'buy' call with a higher discounted cash flow-based target price of RM7.55, after imputing for a higher passenger growth of 10% in 2011 (previously 8%). Our new target price offers undemanding 15.2 times 2012 earnings.

For the first five months of 2011, passenger numbers were higher than expected, with a better mix profile. Growth was 13.3% y-o-y, substantially above management's guidance of 8% growth in 2011. Cargo was down by 2.6% y-o-y, which is in line with the global soft trend. International passengers make up 48.5% of total passengers, a 0.3 percentage point rise y-o-y. These factors will underpin strong profit growth as international passengers pay higher service charges.

KLIA continues to surprise positively by delivering an impressive 15.7% y-o-y passenger growth (5M 2010: +13.8% y-o-y). If KLIA can maintain this growth momentum for the remainder of the year, it will probably register traffic of 38 to 39 million passengers; thus making it the 25th to 27th busiest airport in the world ' up from 31st in 2010.

KLIA 2 may face another delay and we think it will be completed in 2013 as opposed to the guided 3Q11. This is not major and is expected for a project of this scale. The cash flow impact is small, but the depreciation charge of KLIA 2 will only commence in 2013 and thus impact our 2012/13 earnings.

We have tweaked numbers by +0.7%, +14% and -4.3% for 2011 to 2013 after imputing a higher passenger traffic growth and the new estimated KLIA 2 completion date. MAHB is trading at attractive levels compared with global peers: 10.1 times price-to-cash flow ratio (11% discount to peers), 8.9% return on capital (26% higher) and it is lowly geared at 0.39 times against a peer group average of 0.66 times. ' Maybank IB Research, July 26


This article appeared in The Edge Financial Daily, July 27, 2011.

OSK keeps 'trading buy' on KNM Group

Stock Name: KNM
Company Name: KNM GROUP BHD

Research House: OSK

Price Call: TRADING BUY

Target Price: 2.80

OSK Research is maintaining its trading buy on KNM Group with the fair value remaining unchanged at RM2.80.

KNM is undertaking the refinery/polypropylene and storage projects at Teluk Ramunia, Johor, and the research house said this could be a potentially positive contribution to the existing orderbook.

"Currently, we believe KNM Group's orderbook is still above RM5 billion while the tenderbook is over RM17 billion," OSK Research said.

KNM announced yesterday that it and Zecon Bhd have entered into two agreements with Gulf Asian Petroleum SB (GAP)for the refinery/polypropylene and storage projects at Teluk Ramunia, Johor.

The company said it would form a consortium with Zecon Bhd and Korean/Chinese contractors to undertake the engineering, procurement and construction (EPC) of the projects.

But more information is needed to gauge the financial impact on KNM, according to OSK Research.

"KNM will need to arrange a sukuk issuance of up to RM1.5 billion to cover the project financing during construction, while GAP will arrange a financial guarantee from a local investment fund of up to RM1.5 billion during the construction period, to be converted into a long-term loan thereafter and a facilitation fund of up to RM300 million," OSK Research said.

OSK Research believes KNM would have the financial muscle to take up the preliminary investment of RM240 million as its net gearing is still below 1x.

"Based on its 1QFY11 results, it had net debts of RM534.6 million with total debts of RM1 billion and cash equivalents of RM479.5 million. Hence, this also led to a net gearing of 0.3 times," OSK Research said.

Although these projects could potentially contribute positively to its FY12-15 earnings, OSK Research said it is keeping the FY12 forecast unchanged for now, pending more financial guidance from management.

"Also, due to past events, we harbour some doubts on whether the project will take off," it added.

Other than that, OSK Research believes that securing the project financing itself has some uncertainty given the huge sum needed. -- Bernama

Ivory Properties up on nod for Bayan Mutiara development

Stock Name: IVORY
Company Name: IVORY PROPERTIES GROUP BERHAD

Research House: AMMB

Price Call: BUY

Target Price: 2.40

KUALA LUMPUR: Ivory PROPERTIES [] Bhd shares advanced on Tuesday, July 26 after it received the approval to undertake a mixed development over 102.56 acres on Penang island, which would make it the largest developer on the island.

At 10.35am, Ivory added two sen to RM1.20 with 1.64 million shares done.

The Penang Development Corporation (PDC) on Monday had approved the purchase and development of the land in Bayan Mutiara, near the Penang Bridge.

Of the 102.56 acres, it said 67.56 acres are existing land and 35 acres are to be reclaimed for a proposed mixed development

AmResearch in a note July 26 maintained its BUY rating on Ivory Properties and raised its fair value from RM1.70/share to RM2.40/share ' based on an unchanged 40% discount to our revised NAV estimate of RM4.00/share.

'We raised our NAV estimate from RM2.50/share to RM4.00/share to account for a significant accretion to its assets value from the successful tender for the sea-fronting Bayan Mutiara land (102.7acres) in Penang,' it said.

KNM, Zecon rise on RM17b refinery, storage facility job

KUALA LUMPUR: KNM and Zecon shares advanced on Tuesday, July 26 after they inked heads of agreements with Gulf Asian Petroleum Sdn Bhd to undertake the projects worth RM17 billion at Teluk Ramunia.

At 10.25am, KNM added 10 sen to RM1.85 while Zecon rose 10.5 sen to 58.5 sen.

The agreements were to build a 150,000/200,000 bpd petroleum refinery and 400,000/525,000 mtpa polypropylene unit for GAP with a total project value of US$5 billion (RM15 billion).

The other project is to construct a petroleum product storage terminal facility comprising four terminals with a total storage capacity of 2.328 million cubic metres, with supporting infrastructure and auxiliaries worth RM2 billion.

For the refinery project, KNM said it would together with Zecon and/or a Korea or Chinese contractor set up a consortium to undertake the refinery project.

ECM Libra Research has upgraded KNM to Trading Buy from Hold with higher target price of RM2.25 from RM1.68 previously.

However, it cautioned that KNM has an existing orderbook of RM5.4 billion that had yet to yield steady profits.

KFCH: India expansion on track

Stock Name: KFC
Company Name: KFC HOLDINGS (M) BHD

Research House: RHB

Price Call: HOLD

Target Price: 4.25

KFC Holdings (M) Bhd
(July 25, RM3.87)
Maintain market perform at RM3.94 with fair value of RM4.25: KFCH currently has nine outlets in India, with three or four more in the advanced stages of construction. It targets to have 17 outlets by year-end, which is broadly in line with our assumptions of 16 stores by end-FY11. Based on the current progress of store openings, we believe KFCH should be able to achieve this target, although we do highlight that for 2012, KFCH would need to almost double its number of stores in India to 30 from 17, as per its agreement with Yum! As we have previously noted, KFCH's store openings in India have been challenging given the various issues with the renovation of the location, and also various approvals that caused some hiccups in its store openings.

KFCH in January 2010 bought Paramount International College for RM6.5 million and renamed it KFCH International College. KFCH College currently has two campuses, the first campus is in Puchong and a new campus in Bandar Dato' Onn, Johor, was launched in April. Its Johor campus is expected to be completed by 2015 and will bring total intake capacity to 12,000 students per year. The college's main courses include restaurant management, culinary arts and hotel management. KFCH is expecting to spend about RM25 million for refurbishment of the Puchong campus and initial renovations for the Johor campus. We expect contribution from KFCH College to the group's revenue and bottom line to be negligible in the near term. We believe KFCH's venture into the education business will help generate a skilled workforce for its restaurant operations.

KFCH plans to offer delivery service sometime in 2012, with a trial run in a few selected outlets in 3QFY11. Delivery service has been successful in Singapore, accounting for 14% to 15% of total revenues of its Singapore operations. But we believe that the delivery logistics will be different in Malaysia, given the smaller geographical size. Other than the delivery service, KFCH will continue to introduce three or four new products per annum, such as its Ole Pocketful and egg tarts.

Risks include: (i) bird/swine flu escalation; (ii) escalation of corn and soyabean prices, which would eat into margins; and (iii) deteriorating consumer spending power, resulting in lower same-store sales (SSS) growth.

We make no change to our earnings forecasts. We are positive that KFCH is continuing to offer new products and packages to drive its sales growth. But, we believe current valuations for KFCH imply limited upside to its share price, while we continue to be cautious on its shares, given the various repeated related party transactions with parent company Johor Corp. Our fair value is maintained at RM4.25, based on 17 times FY12 earnings per share. We reiterate our 'market perform' call on the stock. ' RHB Research, July 25


This article appeared in The Edge Financial Daily, July 26, 2011.

Rubber gloves: YTY still single, available

Stock Name: TOPGLOV
Company Name: TOP GLOVE CORPORATION BHD

Research House: MAYBANK

Price Call: SELL

Target Price: 4.40

Rubber gloves sector
Maintain neutral: YTY Industry Holdings Sdn Bhd has rejected Latexx Partners Bhd's offer to merge their businesses. Given its strong nitrile capacity, YTY continues to appeal to the bigger glove producers (Top Glove Corp Bhd, Hartalega Holdings Bhd) and private equity funds. With the Latexx-YTY deal off, we believe the bigger glovemakers will take another look at YTY for the overnight capacity/earnings enhancement and longer-term value creation potential. While pricing can be the deterrent, it is still earnings accretive. We believe mergers and acquisitions in the sector are not over yet.

On July 21 (a day before the deadline for Latexx to execute the sales and purchase agreement), Latexx went back to YTY and indicated its intention to make a revised offer (from the original RM1.25 billion), based on its findings from the 45-day due diligence. YTY rejected the offer on the very next day (July 22). We are puzzled about the rejection as, at the indicative revised offer price, we understand that Latexx is still the highest bidder for YTY among the glovemakers and private equity funds.

In our view, YTY shareholders are still keen to sell the business but the sale could be hampered by the fact that it could still be much cheaper for the other glovemakers to build new production lines from scratch rather than to pay an estimated nine times forward price-earnings ratio (PER) at a RM1.25 billion price tag. We also do not see any technology value-add to the acquirers as YTY's technology is similar to the industry with semi-auto stripping and packaging systems (except for Hartalega, which has the most advanced technology).

However, to build YTY's capacity overnight (11% of global nitrile glove market share) will create a huge supply glut in the industry. Given that the other glovemakers are all vying for bigger market shares, they may relook at YTY. Acquisition of YTY should result in an overnight capacity enhancement, enlarged earnings base and longer-term value creation via economies of scale and pricing power.

Potential buyers are Top Glove and Hartalega, given their respective valuations, ambitions and businesses. Based on our estimation, at a RM1.25 billion price tag for YTY, Top Glove could still see a huge earnings per share enhancement of 45% (YTY's profitability is almost on par with the former) while Hartalega may see a moderate 8% accretion. Nevertheless, we maintain our calls on Top Glove (sell, target price: RM4.40) and Hartalega (buy, TP: RM6.80), as the possibility of an acquisition may be premature. ' Maybank IB Research, July 25


This article appeared in The Edge Financial Daily, July 26, 2011.

Rubber gloves: YTY still single, available

Stock Name: HARTA
Company Name: HARTALEGA HOLDINGS BHD

Research House: MAYBANK

Price Call: BUY

Target Price: 6.80

Rubber gloves sector
Maintain neutral: YTY Industry Holdings Sdn Bhd has rejected Latexx Partners Bhd's offer to merge their businesses. Given its strong nitrile capacity, YTY continues to appeal to the bigger glove producers (Top Glove Corp Bhd, Hartalega Holdings Bhd) and private equity funds. With the Latexx-YTY deal off, we believe the bigger glovemakers will take another look at YTY for the overnight capacity/earnings enhancement and longer-term value creation potential. While pricing can be the deterrent, it is still earnings accretive. We believe mergers and acquisitions in the sector are not over yet.

On July 21 (a day before the deadline for Latexx to execute the sales and purchase agreement), Latexx went back to YTY and indicated its intention to make a revised offer (from the original RM1.25 billion), based on its findings from the 45-day due diligence. YTY rejected the offer on the very next day (July 22). We are puzzled about the rejection as, at the indicative revised offer price, we understand that Latexx is still the highest bidder for YTY among the glovemakers and private equity funds.

In our view, YTY shareholders are still keen to sell the business but the sale could be hampered by the fact that it could still be much cheaper for the other glovemakers to build new production lines from scratch rather than to pay an estimated nine times forward price-earnings ratio (PER) at a RM1.25 billion price tag. We also do not see any technology value-add to the acquirers as YTY's technology is similar to the industry with semi-auto stripping and packaging systems (except for Hartalega, which has the most advanced technology).

However, to build YTY's capacity overnight (11% of global nitrile glove market share) will create a huge supply glut in the industry. Given that the other glovemakers are all vying for bigger market shares, they may relook at YTY. Acquisition of YTY should result in an overnight capacity enhancement, enlarged earnings base and longer-term value creation via economies of scale and pricing power.

Potential buyers are Top Glove and Hartalega, given their respective valuations, ambitions and businesses. Based on our estimation, at a RM1.25 billion price tag for YTY, Top Glove could still see a huge earnings per share enhancement of 45% (YTY's profitability is almost on par with the former) while Hartalega may see a moderate 8% accretion. Nevertheless, we maintain our calls on Top Glove (sell, target price: RM4.40) and Hartalega (buy, TP: RM6.80), as the possibility of an acquisition may be premature. ' Maybank IB Research, July 25


This article appeared in The Edge Financial Daily, July 26, 2011.

Eng Tek climbs after getting TYK offer

Stock Name: ENG
Company Name: ENG TEKNOLOGI HOLDINGS BHD

Research House: OSK

Price Call: HOLD

Target Price: 2.50

Eng Teknologi Holdings Bhd, a Malaysian electronic components maker, rose to its highest level in almost a year in Kuala Lumpur trading after receiving a buyout offer from TYK Capital Sdn Bhd at RM2.50 a share.

The stock climbed 1.8 per cent to RM2.32 at 9:06 a.m. local time, set for its highest close since July 28, 2010. -- Bloomberg