MASTEEL - OSK remains neutral on Masteel

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

Malaysia Steel Works (KL) Bhd (Masteel)
(June 3, 92 sen)
Reiterate neutral at 91.5 sen with target price of RM1: Masteel announced on June 2 that it has disposed of five million shares of RM1 each in wholly owned subsidiary, Bio Molecular Industries SB (BioM), for a cash consideration of RM1,000 to IBA Pharma SA (IBA).

The original issued and paid-up capital of BioM is 10 million shares of RM1 each.

BioM is principally engaged in the business of manufacturing and research and development of radio isotopes and radio-pharmaceuticals products for positron emission tomography (PET). The company is supposed to produce and market fluorine-labelled fluorodeoxyglucose (FDG), a diagnostic radio-pharmaceutical used in PET scans to detect and monitor the treatment of cancer.

To date, Masteel has invested about RM13.5 million in this company, which mainly covered the cost of the plant and a two-acre site in Sepang.

The new investor-cum-JV partner, IBA, is a wholly owned subsidiary of Ion Beam Application S A (IBA SA), which is listed on the pan-European stock exchange Euronet, and is a component of the BelMid Index.

IBA has undertaken to subscribe for another five million ordinary shares of RM1 each in the issued and paid-up capital in BioM upon signing the share purchase agreement with Masteel. It also agreed to absolve Masteel from the guarantee of about RM10 million for the purchase of cyclotron equipment from IBA SA for BioM.

Masteel's shareholding in BioM will be reduced to 45.34% on the completion of the above exercise plus capitalisation of additional capital injection in BioM, which we suspect will amount to RM3.5 million.

Masteel expects to incur a one-time disposal loss of about RM5.1 million from this transaction.

As we have expressed reservations on this investment since it was first announced in 2007, we are not surprised with the latest move to dispose of the stake at a loss. We have also not accounted for any contribution from this venture and think that the disposal loss can be categorised as an exceptional item, which would then not impact our core earnings estimates.

In view of this, we maintain our neutral recommendation on Masteel with a fair value of RM1. This is derived from five times EPS (earnings per share) and 0.59 times net tangible asset/share, or +1 standard deviation of the stock's historical trading band on FY10 numbers. ' OSK Research, June 3


This article appeared in The Edge Financial Daily, June 4, 2010.

BJTOTO - BToto raised to buy on emerging value

Stock Name: BJTOTO
Company Name: BERJAYA SPORTS TOTO BHD
Research House: ECMLIBRA

Berjaya Sports Toto Bhd
(June 3, RM4.37)
Upgrade to buy at RM4.24 with target price of RM4.91: We considered trimming our FY11 estimates to reflect cannibalisation from Berjaya Sports Toto's (BToto) punters shifting some of their bets to illegal sports betting during the 2010 World Cup.

Historically, this amounted to 4%-5% reduction in revenue per draw during the World Cup period. However, we noticed that the number forecasting operator (NFO) industry grew by 6% in 2006 despite the World Cup then because it was held in a different time zone, foreign workers were not deported and the regulatory environment then was favourable.

We deem the operating conditions surrounding the 2010 World Cup to be similar to that of 2006. Therefore, we maintain our earning estimates.

Although BToto is not expected to receive much from the touted 1% on retail sales commission payable by sister company Ascot Sports, we believe legalised sports betting will actually boost revenues.

Taking a leaf out of history, increased outlet visits driven by large jackpots led to higher revenues for both lotto and non-lotto games (4D, 5D and 6D).

In the same vein, we expect increased outlet visits driven by sports betting to again lead to overall revenue growth as punters who are not regular NFO punters bet on not only sports but mainstay NFO games.

More importantly, that little cannibalisation effect World Cups have had on BToto's revenue will be arrested once and for all.

We assumed a 15% reduction in revenue per draw for FY10 due to competition from Magnum's 4D Jackpot. Thereafter, we assumed 2% growth in revenue per draw (1998-2008 NFO industry compound annual growth rate: 2.6%).

Our unchanged target price of RM4.91 (terminal growth rate: 1.5%, weighted average cost of capital: 7.9%) currently offers 16% upside potential and 5.4% net dividend yields.

Thus, we revert back to our earlier buy call. We would also like to point out that BToto's share price is resilient during recessionary periods and periods of low consumer confidence due to its stable earnings (assuming stable prize payout ratios) and attractive dividend yields.

With the upcoming subsidy rationalisation programme, BToto will provide a 'safe harbour' for investors. ' ECM Libra Investment Research, June 3


This article appeared in The Edge Financial Daily, June 4, 2010.

HLBANK - Strong showing from banks in April

Stock Name: HLBANK
Company Name: HONG LEONG BANK BHD
Research House: AMMB

Banking sector
Downgrade to neutral (from overweight): Industry loans growth stable at 10% year-on-year (y-o-y) in April 2010, broadly unchanged from March 2010's +9.8% y-o-y.
Again, most of the growth was derived from the household segment, which reported growth of 12.2% y-o-y in April (March: 11.8% y-o-y). Business segment's loans growth slowed down somewhat to 4% in April from March 2010's 4.3% y-o-y.

Loans applications turned in a healthy growth rate of 26.8% y-o-y in April, comparable to the 23% growth recorded in March.

As for loans approved, the growth rate picked up again to a robust 26.7% y-o-y increase in April, which is certainly much higher than the 12.9% y-o-y and 11.8% y-o-y growth rates seen in March and February 2010, respectively.

Both the loan application and approval growth rates are surprisingly strong, and we had expected these to start to normalise given that the low base effect of 1Q09 will now be replaced by a more regularised base from March 2009.

The business segments are the main drivers in April 2010, with business applications growth rate strengthening to 40.2% y-o-y (March: +16.8% y-o-y), and business loans approved growth accelerating to +32.4% y-o-y (March: +4.8% y-o-y).

We understand the industry non-performing loans (NPL) figures would be somewhat of a hybrid, given that some banks are now reporting impaired loans based on FRS139, while others have yet to cross over to FRS139.

Nevertheless, as a gauge, April 2010's gross non-performing loans/impaired loans nudged up by RM357 million month-on-month (m-o-m), from a previous reduction of RM1.7 billion m-o-m in March 2010.

Gross NPL/impaired loan ratio is still somewhat stable at 3.5% in April (March: 3.5%), given higher loan base. Net NPL ratio is unchanged as well at 1.8% in April (March: 1.8%). Loan loss cover strengthened though to 97.8% in April, if compared to 95.9% in March.

April 2010's banking industry data indicates that loan growth is likely to remain healthy. However, we expect these to be largely discounted in our forecasts, as we now project 9.8% (previous 8%) calendarised loan growth for the seven banks under our coverage.

Looking ahead, we expect asset quality trends to be skewed by changes to accounting basis, when the other banks (AFG, HLBB, Maybank) adopt FRS139. Thus, a more relevant comparison will likely be possible only from the September 2010 banking statistics.

We are downgrading our sector rating to neutral from overweight. This is mainly due to our earlier downgrade on CIMB to hold from buy previously. Our sector top pick is still RHB Capital and HLBB. RHBCap in our view is still a laggard, trading at P/BV (price-to-book value) of only 1.4 times. We maintain our fair value on RHBCap at RM7.20 per share.

We remain positive on HLBB as we expect higher value extraction should its merger with EONCap goes through. We maintain buy on HLBB with unchanged fair value of RM10.90 per share. ' AmResearch, June 3


This article appeared in The Edge Financial Daily, June 4, 2010.

RHBCAP - Strong showing from banks in April

Stock Name: RHBCAP
Company Name: RHB CAPITAL BHD
Research House: AMMB

Banking sector
Downgrade to neutral (from overweight): Industry loans growth stable at 10% year-on-year (y-o-y) in April 2010, broadly unchanged from March 2010's +9.8% y-o-y.
Again, most of the growth was derived from the household segment, which reported growth of 12.2% y-o-y in April (March: 11.8% y-o-y). Business segment's loans growth slowed down somewhat to 4% in April from March 2010's 4.3% y-o-y.

Loans applications turned in a healthy growth rate of 26.8% y-o-y in April, comparable to the 23% growth recorded in March.

As for loans approved, the growth rate picked up again to a robust 26.7% y-o-y increase in April, which is certainly much higher than the 12.9% y-o-y and 11.8% y-o-y growth rates seen in March and February 2010, respectively.

Both the loan application and approval growth rates are surprisingly strong, and we had expected these to start to normalise given that the low base effect of 1Q09 will now be replaced by a more regularised base from March 2009.

The business segments are the main drivers in April 2010, with business applications growth rate strengthening to 40.2% y-o-y (March: +16.8% y-o-y), and business loans approved growth accelerating to +32.4% y-o-y (March: +4.8% y-o-y).

We understand the industry non-performing loans (NPL) figures would be somewhat of a hybrid, given that some banks are now reporting impaired loans based on FRS139, while others have yet to cross over to FRS139.

Nevertheless, as a gauge, April 2010's gross non-performing loans/impaired loans nudged up by RM357 million month-on-month (m-o-m), from a previous reduction of RM1.7 billion m-o-m in March 2010.

Gross NPL/impaired loan ratio is still somewhat stable at 3.5% in April (March: 3.5%), given higher loan base. Net NPL ratio is unchanged as well at 1.8% in April (March: 1.8%). Loan loss cover strengthened though to 97.8% in April, if compared to 95.9% in March.

April 2010's banking industry data indicates that loan growth is likely to remain healthy. However, we expect these to be largely discounted in our forecasts, as we now project 9.8% (previous 8%) calendarised loan growth for the seven banks under our coverage.

Looking ahead, we expect asset quality trends to be skewed by changes to accounting basis, when the other banks (AFG, HLBB, Maybank) adopt FRS139. Thus, a more relevant comparison will likely be possible only from the September 2010 banking statistics.

We are downgrading our sector rating to neutral from overweight. This is mainly due to our earlier downgrade on CIMB to hold from buy previously. Our sector top pick is still RHB Capital and HLBB. RHBCap in our view is still a laggard, trading at P/BV (price-to-book value) of only 1.4 times. We maintain our fair value on RHBCap at RM7.20 per share.

We remain positive on HLBB as we expect higher value extraction should its merger with EONCap goes through. We maintain buy on HLBB with unchanged fair value of RM10.90 per share. ' AmResearch, June 3


This article appeared in The Edge Financial Daily, June 4, 2010.

AXIATA - OSK Research maintains buy call on Axiata

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

KUALA LUMPUR: OSK Research has maintained its buy call on Axiata Group Bhd at RM3.77 with target price RM4.80 and said the company remains its top Malaysian and regional telecoms exposure on account of its positive longer-term prospects and strong operational execution.

"Axiata is currently on its Phase 2 transformation programme to become a regional champion by 2015.

"Its key earnings catalysts are: (i) the continuing strong growth at XL; and (ii) sustained performance of Celcom; and (iii) good group-wide cost management initiatives," it said in a note Friday, June 4.

EVERGRN - Evergreen's outlook remains favourable

Stock Name: EVERGRN
Company Name: EVERGREEN FIBREBOARD BHD
Research House: RHB

Evergreen Fibreboard Bhd
(June 2, RM1.43)
Maintain outperform at RM1.43 with a lower fair value of RM2.30 (from RM2.35): Evergreen expects 2Q10 results to be stronger by circa 5% quarter-on-quarter, due mainly to higher sales volume coupled with higher average selling prices. Its current capacity utilisation rate is above the 80% level while average selling prices have since strengthened by 3% in 2Q10 versus 1Q10. Total cost of production has dropped by 2.5% in 2Q10.

Evergreen will be commissioning its currently dormant Indonesian plant in 2H10. To be conservative, we have only assumed contributions from Indonesian operations to start from FY11 onwards. If the plant is commissioned on time in 2H10, this would potentially raise our FY10 forecast by 5%.

Evergreen expects growth to mainly come from an improvement of market share in the region as well as reduction in cost of production. Moving forward, Evergreen plans to grow both its Thailand and Indonesia market shares to 5% (from <2%) and 10% (from 6%), respectively in the near term.

We also believe that Evergreen may try to further reduce its cost of production through the securing of rubberwood log supply by acquiring rubber plantation land and/or the acquisition or commissioning of a third glue plant. Any acquisitions of existing MDF players would only take place earliest in 2012, if opportunities present themselves.

Given its stronger financial position currently, Evergreen highlighted that it may pay out more interim dividends in FY10 and FY11. Evergreen also targets to be in a net cash position by end-2011 (from 0.4 times net gearing currently). Following the management's commitment to paying out higher dividends in FY10-FY11, we have increased our net dividend payout assumption to 40%-45% in FY10-FY11 (from 25%), which would bring dividend, payouts back to '06 levels of 40% (before the acquisition of Takeuchi MDF and Hume Fibreboard). This translates to a very respectable 6%-7% net dividend yield for FY10-FY11 (from 3%-4% previously).

The risks to our view include: (1) sharp drop in MDF price; (2) sharp increase in log costs; (3) further escalation of crude oil related glue and logistics costs; and (4) strengthening of the ringgit which could reduce the company's export competitiveness.

We reduced our earnings forecasts by 1.4%-3.2% for FY10-FY12 per annum after updating our US dollar to ringgit assumptions; our FY09 numbers; and increasing our dividend payout assumptions.

Post earnings revision, we value Evergreen at RM2.30 (from RM2.35) based on unchanged target PER (price-earnings ratio) of 11 times FY12/10 earnings (which is at a three times PE discount to the timber sector due to its smaller market capitalisation). Maintain our outperform recommendation on the stock. ' RHB Research Institute, June 2


This article appeared in The Edge Financial Daily, June 3, 2010.

SAPCRES - SapuraCrest taps Mideast IPF market

Stock Name: SAPCRES
Company Name: SAPURACREST PETROLEUM BHD
Research House: RHB

SapuraCrest Petroleum Bhd
(June 2, RM1.95)
Reiterate outperform at RM1.96 with fair value of RM2.66: SapuraCrest announced that it had entered into joint venture (JV) with Al Rayan Investment (ARI) with an initial investment of RM308,700. We understand that SapuraCrest will have a 49% stake in this JV while ARI will own the remaining 51%.

Note that ARI was incorporated in Qatar in 2007 as a limited liability company and is a wholly owned subsidiary of Masraf Al-Rayan (Qatar's fourth-biggest lender by market cap). The businesses of ARI include real estate investment, private equity and investments and financial advisory services.

We are positive on the latest development as the JV would enable SapuraCrest to tap into the growing IPF (installation of pipelines and facilities) demand stemming from the resilient E&P (exploration and production) spending in the Middle East. Recall that SapuraCrest had secured few sizeable contracts from India (RM185 million Mumbai High South and RM255 million North Field projects) via the 40:60 JV with Larsen & Toubro. However, unlike the Acergy JV and L&T JV, this JV will not own an IPF vessel.

Risks to our view are: (1) rising costs of materials, labour and assets; 2) potential margin squeeze for the IPF division due to price competition for new contracts; and (3) potentially, more open competition from larger global players.

We maintain our forecasts, as it is premature to include earnings contribution from the JV.

We reiterate that medium-term earnings visibility remains bright on the back of: (1) RM9.1 billion effective order book and stronger order book replenishment from overseas (India and Australia) for its IPF division; (2) better cost control given ownership of its own IPF vessels as well as cost pass-through contract; and (3) stronger growth in rates for its drilling division.

Potentially, as we see more contracts secured, there may be upside to our fair value of RM2.66 per share, which is based on 16 times FY11 EPS (earnings per share). Hence, given still potential upside of 36% to our fair value, we reiterate our outperform call on the stock. ' RHB Research Institute, June 2


This article appeared in The Edge Financial Daily, June 3, 2010.

AIRASIA - Tax allowance extension is good news for AirAsia

Stock Name: AIRASIA
Company Name: AIRASIA BHD
Research House: OSK

AsiaAsia Bhd
(June 2, RM1.20)
Reiterate trading buy at RM1.25 with target price of RM1.48: AirAsia announced on Bursa Malaysia that the company has received the approval of the finance ministry vide its letter dated May 27, 2010 for an extension of investment allowance incentive for a period of another five years from July 1, 2009 until June 30, 2014.

This is indeed a piece of good news for AirAsia as 60% of its qualifying capital expenditure (capex)'' incurred from July 1, 2009 to June 30, 2014 will enjoy permanent tax savings. While the investment allowance can only be set off against 70% of statutory income for each year of assessment, we think the company may begin to record deferred tax assets (positive tax) in the coming quarter by topping up this extended allowance with regular capital allowance. AirAsia has begun to record some reversal of capital tax allowance since 3QFY09 after the company decided to slow down on the delivery of new aircraft.

As the investment allowance is granted only for aircraft based in Malaysia, we suspect this may lead to the company parking more aircraft under its books. However, we are uncertain whether the aircraft that are subsequently leased to its associates can enjoy similar incentives.

Apart from that, should any aircraft be sold or leased within five years, there would be a claw-back of the investment allowance utilised on the said aircraft. This may discourage AirAsia from selling and leasing back the new aircraft in order to fully capitalise on the tax incentive.

As we have been valuing AirAsia based on profit before tax (PBT) to exclude the implications of deferred tax recognition and our original estimates already incorporated a positive tax of RM20 million for FY10, we are keeping our projection. Together with this piece of good news, we also excited with the potential announcement of some corporate exercises pertaining to its plans for AirAsia X and Indonesia AirAsia soon. The board is also in talks with new investors to buy out the majority stake in its Indonesia associate, which was put up for sale by the original investors.

With the corporate exercises in the pipeline and as the share price offers some upside after the recent weakness, we maintain our trading buy recommendation with an unchanged fair value of RM1.48, derived from nine times FY10 EPS (earnings per share core- PBT level). ' OSK Research, June 2


This article appeared in The Edge Financial Daily, June 3, 2010.

TENAGA - Maybank IB downgrades Tenaga to sell, cuts target price to RM7.35

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

KUALA LUMPUR: Maybank Investment Bank Bhd Research has downgraded TENAGA NASIONAL BHD [] to a sell at RM8.29 and cut its target price for the stock to RM7.35 (from RM11.80).

It said in a note Thursday, June 3 that after three months since the Energy minister mentioned a need to educate the public to justify higher electricity prices, there was no sign of higher base tariffs, suggesting it was low on the government's priorities.

A recent Pemandu proposal is for a gas and corresponding electricity hike without a change in the base tariff to raise ROA, it said.

Maybank IB Research said incremental electricity demand will have to be coal-generated, which is more costly (than gas) and results in a more volatile cost structure.

Existing coal plants could operate at 90% capacity by 2015 and industry reserve margins below 20% by then, raising the possibility of power shortages, it said.

The research house said feed-in tariffs, the price at which Tenaga buys excess renewable energy from third parties, may be imposed on Tenaga without sorting out a base tariff hike.

"We are removing our assumed 4% tariff hike from our forecasts, reducing our discounted cash flow-based target price to RM7.35, with earnings falling by 18% and 11% in FY11-12," it said.

AIRASIA - AirAsia a 'buy' as tax savings a boost

Stock Name: AIRASIA
Company Name: AIRASIA BHD
Research House: OSK

The extension of the tax allowance for budget carrier AirAsia Bhd is indeed good news as 60 per cent of its qualifying capital expenditure incurred from July 1 2009 to June 2014 will enjoy permanent tax savings.

OSK Research, in a note today, said as the investment allowance was only granted for aircraft based in Malaysia, this may lead to the company parking more aircraft under its books.

The approval is subject to the condition that the capex will exclude any aircraft not based in Malaysia and should any aircraft be sold or leased within five years.

In such a case, there will be a clawback of the investment allowance used on the aircraft and this may discourage the airline from selling and leasing back new aircraft to fully capitalise on the tax incentive.
"Together with this piece of good news, we are also excited with the potential announcement of some corporate exercise pertaining to its plan for AirAsia X and Indonesia AirAsia," it said.

Thus, OSK said it was maintaining its "BUY" recommendation, with an unchanged fair value of RM1.48 on AirAsia, supported with the corporate exercise in the pipeline and as the share price offered some upside after the recent weakness. - Bernama