KPJ - KPJ Healthcare sees brighter prospects ahead

Stock Name: KPJ
Company Name: KPJ HEALTHCARE BHD
Research House: RHB

KPJ Healthcare Bhd
(June 17, RM3.34)
Maintain outperform at RM3.29 with higher fair value of RM4.25 (from RM3.50): For FY09, KPJ recorded a revenue growth of 14.9% year-on-year (y-o-y) largely due to higher contribution from all of its business segments.

Moving forward, we believe KPJ's revenue growth drivers include: the opening of at least two new hospitals per annum; expansion of its existing hospitals; enhancing its presence in medical tourism; and higher utilisation rate per patient.

We understand that KPJ is investing RM200 million to build three new hospitals, purchasing of new medical equipment and expanding its existing hospitals nationwide this year.

The construction works for its three new hospitals which are located in Bandar Baru Klang, Pasir Gudang and Muar have already started and are due for completion by end of 2011.

We believe this is in line with the management's targets to open at least two new hospitals per annum either through greenfield projects or acquisition of established hospitals which would likely be in East Malaysia, the East Coast or Iskandar region.

In FY09, over 15,000 foreigners received treatment at its hospitals and in the 1QFY10, KPJ received more than 5,000 foreigners of which 2,800 were Indonesians.

Although KPJ's focus is on positioning itself as a community healthcare provider, the company realises that there is sizeable growth potential in medical tourism.

However, management mentioned that any significant contribution from medical tourism would only come in three to five years. Currently, medical tourism accounts for less than 10% of total group revenue.

We have revised up our FY10-12 earnings forecasts by 9.7%-14.3% largely to reflect the upward change in our revenue assumptions, and lower effective tax rate and MI (minority interest) assumptions.

The risks to KPJ's earnings include lower-than-expected patient numbers which could be due to slower-than-expected economic recovery and serious disease outbreaks (such as SARS or swine flu) in Malaysia as well as slower-than-expected turnaround in loss-making hospitals.

Besides the earnings revision above, our indicative fair value has been raised to RM4.25 (from RM3.50) based on target FY11 PER of 16 times (10% discount to regional peers' average) as we roll forward our valuation year (from FY10).

We believe the M&A (merger and acquisition) activity in the healthcare sector recently supports our view that there is significant growth potential for the sector in the region.

We continue to like KPJ for its leading position and its expansion plans in Malaysia's growing healthcare market. We reiterate our outperform call on the stock. ' RHB Research, June 17


This article appeared in The Edge Financial Daily, June 18, 2010.

TGOFFS - OSK maintains 'sell' call on Tanjung Offshore

Stock Name: TGOFFS
Company Name: TANJUNG OFFSHORE BHD
Research House: OSK

OSK Investment Research has maintained its 'sell' call on oil and gas services provider, Tanjung Offshore Bhd, despite the emergence of Ekuiti Nasional Bhd (Ekuinas) as substantial shareholder.

"We are keeping our call unchanged until we see strong earnings recovery from the company, which we believe would materialise especially after it turns around its CiTECH business," it said in an equity note here today.

Ekuinas, the government-linked private equity fund management company, yesterday agreed to buy 20 per cent stake in the company for RM73.4 million, or RM1.30 per share.

The proceeds from the placement will be used to reduce Tanjung Offshore's debt and pare down its gearing to about 1.5 times from 1.9 times currently, it said.
OSK said Ekuinas was also commercially-driven, with investments focused on strong Malaysian companies with high-growth potential.

"From its recent stake buy, we believe Tanjung Offshore qualifies for this category," it said. - BERNAMA

MAS - MAS going on the offensive

Stock Name: MAS
Company Name: MALAYSIAN AIRLINE SYSTEM BHD
Research House: AMMB

Malaysian Airline System Bhd
(June 17, RM2.07)
Maintain buy at RM2.04 with fair value of RM3.50: We retain our buy rating on Malaysia Airlines (MAS) and maintain our fair value of RM3.50 per share, which continues to peg MAS at 1.8 times FY10F book value, in line with historical average.

MAS is expected to introduce a new class of product, namely 'premium economy' seats for its incoming A380 fleet in FY12. MAS' new A380s will entail its first, four-class seating configuration ie first, business, premium economy and economy classes.

Introduction of premium economy emulates moves by FSC (full service carrier) peers like Qantas, British Airways and Air France. Premium economy seats are typically 35%-85% more expensive than economy but 65% cheaper than business class'' and with several extra offerings versus typical economy seats.

MAS aims to capture market share from Middle Eastern carriers for long-haul routes between Asia and Europe. Notably, business class seating of Middle Eastern carriers entail relatively smaller seat pitch compared to MAS' and other carriers' business class configuration.

Additionally, MAS is one of the first Asian carriers to introduce premium economy class in its fleet.

The significance of this move is that MAS seems to be switching to an offensive strategy which has not been the case over the past half decade, given MAS' constraint in its financial restructuring and setbacks of an old operating fleet.

Separately, MAS is planning to order either the A350 or B787, on top of existing firm orders for B737-800s, A330s and A380s. The new aircraft type is positioned in between the A380 and A330 fleet which entail a large gap in terms of seating capacity (525 seats for A380s versus 295 seats for A330s).

Our projections are maintained at this juncture as MAS' A380 fleet is only expected to arrive in FY12F while the number of additional fleet to be ordered is still uncertain at this juncture.

Nonetheless, over the longer term, we would expect structural yield enhancement from market share wins and potential uptrading from existing economy seats.

Valuation-wise, MAS has been a laggard in the sector's cyclical recovery where it is still trading at a deep 50% discount to historical average PBV of 1.8 times. Regional peers on the other hand have, since late 2009, converged to historical average valuations. ' AmResearch, June 17


This article appeared in The Edge Financial Daily, June 18, 2010.

GAB - World Cup kick for GAB

Stock Name: GAB
Company Name: GUINNESS ANCHOR BHD
Research House: INTER PACIFIC

Guinness Anchor Bhd
(June 17, RM7.61)
Maintain neutral at RM7.63 with higher target price of RM7.90 (from RM7.20): Guinness Anchor Bhd (GAB) recorded higher net profit in the past two World Cup seasons. Being supported by its strong portfolio brands like Tiger, Guinness, Heineken, Anchor and super-premium Kilkenny coupled with its strong advertising and promotional activities via the RM10 million nationwide promotional programme that was carried out, we believe GAB is well-positioned to sustain their market position. Room to further alleviate their market share remains high as they continue to invest in brand building. Accordingly, our earnings forecast for FY10-FY11 has been revised upwards by 5%-8% and our target price raised to RM7.90 (previously RM7.20) based on our discount dividend model with weighted average cost of capital at 9.1%. We reiterate neutral.

GAB expects sales to increase between 10% and 15% during the ongoing FIFA World Cup 2010 season. This was based on the RM10 million nationwide promotional programme carried out by GAB. Positive contribution from 2010 World Cup is viewed as the 'icing on the cake' from its already good financial year ending June 30, 2010. GAB's optimism was reflected by its bottling line which has been operating at full capacity to cater for the increase demand, with production volume up 15% to ensure no shortages during the 2010 World Cup. GAB reported that sales have been overwhelming since the kick-off of 2010 World Cup, especially during the opening match in Penang and Klang Valley. ' Inter-Pacific Research, June 17


This article appeared in The Edge Financial Daily, June 18, 2010.

TOPGLOV - top Glove's topline growth offsets lower margin

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

Top Glove Corporation Bhd
(June 17, RM12.84)
Maintain trading buy at RM12.86 with lower target price of RM14.20 (from RM14.68): Strong glove sales momentum sustained with volumes increasing 25% year-on-year (y-o-y) or 1% quarter-on-quarter (q-o-q) in 3QFY10, supported especially by the emerging markets.

In tandem with latex price trends, average glove selling price was 30% y-o-y or 11% q-o-q higher to US$26 (RM84.76) per thousand pieces. Due to both factors and adverse impact on US currency depreciation, Top Glove's revenue grew 49.4% y-o-y or 9% q-o-q to RM555.9 million. ''

Top Glove's earnings before interest and tax (Ebit) margin declined to 15% in 3QFY10 from average of 18.6% in the past three quarters.

We believed that higher volatility in latex price and forex market signified the lag effect in passing on the costs. Noted also, production utilisation rate was lower to 75% from 2QFY10's 80%.

We reckon the additional production capacity growth might be faster than the glove sales order. Nonetheless, y-o-y, EBIT margin was still at par with that in 3QFY09 despite average latex price surged 71.7% y-o-y while US currency depreciated by 9.5% y-o-y, reflecting company's cost passing power remained intact.'' ''

A total of five new factories are targeted to be completed by FY11. All in, Top Glove's total glove production capacity will increase by 8.25 billion pieces or about 25% to 33 billion.

To be on the conservative side, we are keeping our earnings forecast unchanged, reflecting the risk of lower margin due to potential excess production capacity, and higher energy and labour costs going forward.

After all, the government has planned to scrap subsidies on energy products gradually. Beyond 2015, we expect glove makers to face a more volatile cost environment as natural gas will be priced at market rate. ''

In addition, a higher levy may also be charged on foreign workers. On the mitigating side, glove demand could be stronger particularly from the developing countries. In addition, glove makers' business model of passing on costs to the consumers is expected to be intact, and this will also cushion the downside. ''

First interim single-tier dividend of 14 sen per share was declared with ex-date and payable date on July 2 and July 23, 2010 respectively.

We continue to like Top Glove for its market leadership which commands about 22% of the global glove market share and its net cash position with good earnings quality.

Currently, Top Glove's net cash is about 90 sen per share, the highest in the industry. Furthermore, there is no significant sign indicating glove demand slowing down.

We are rolling over our valuation into FY11 earnings, based on lower PER of 16 times (17 times previously) in order to factor in potential risks mentioned above. Consequently, we are revising marginally our target price downwards to RM14.20 (from RM14.68). ' MIDF Research, June 17


This article appeared in The Edge Financial Daily, June 18, 2010.

SPSETIA - OSK Research maintains take profit call on SP Setia

Stock Name: SPSETIA
Company Name: SP SETIA BHD
Research House: OSK

KUALA LUMPUR: OSK Investment Research has maintained its take profit recommendation call on SP SETIA BHD [] at RM4.03 with a CY10 target price of RM3.59 and said the company's 1HFY10 annualised results came in 17% below expectation and 11% below consensus.

Although the pace of progress billings on its high unbilled sales continues to pick up, the research house on Friday, June 18 said it preferred to leave its earnings forecasts unchanged for now.

"1HFY10 year-on-year turnover and net profit improved significantly by 19% and 25% respectively on the back of much improved new property sales and higher progress billings.

"An interim dividend of six sen (an improvement from five sen in 2QFY09) has been declared for 2QFY10. Maintain take profit with a CY10 target price of RM3.59 based on 1.69 times CY10 P/NTA," it said.

IJM - RHB Research ups IJM Corp fair value

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

IJM Corporation Bhd
(June 16, RM4.84)
Maintain market perform at RM4.82 with fair value raised to RM5.01 (from RM4.88): IJM has been awarded by Jabatan Kedua Sdn Bhd the Package 3B of The Second Penang Bridge, namely the 5.7km dual-lane Batu Kawan Expressway for RM350 million. Assuming an earnings before interest and tax (Ebit) margin of 8%, the latest contract will fetch a total Ebit of RM28 million over the construction period of 31 months from June 2010. This is the second key job IJM has secured in FY03/11, on the heels of the two work packages of the Murum access road worth a total of RM247 million secured back in April 2010.

The latest contract has boosted its year-to-date new contracts secured to RM597 million and its outstanding construction order book by about 10% to RM4 billion. We are positive on the latest development.

No change in our earnings forecasts that already assume IJM to secure RM2 billion worth of new jobs in FY03/11.

The risks include: (1) new contracts secured coming in below our target of RM2 billion per annum; and (2) steep increases in input costs.

We are neutral on the construction sector. On one hand, we foresee improved investors' risk appetite for construction stocks following: (1) the massive underperformance of the sector vis-a-vis the market in 4Q2009 and 1H2010; and (2) A better sector news flow and new expectations on the heels of the recent announcement of the 10th Malaysia Plan (10MP). On the other hand, certain negative elements remain such as: (1) the still slow pace of the roll-out of public projects, a highly competitive market and declining dominance of established players in large-scale projects locally; and (2) the not-so-rosy outlook and increased operating risks in key overseas markets.

Indicative fair value is raised by 3% from RM4.88 to RM5.01 as we roll forward the base year for valuation purpose from FY03/11 to FY03/12.

Our indicative fair value for IJM is based on 16 times fully diluted FY03/12 EPS of 31.3 sen, at two times multiple premium above our one-year forward target PER for the construction sector of 10-14 times to reflect: (1) IJM's group earnings that are resilient as reduced construction profits in the event of sharp increases in construction input costs will be cushioned by higher plantation profits during a commodity price upcycle; and (2) IJM's largely trouble-free position as it is not involved in any major arbitration cases in the overseas market. ' RHB Research Institute, June 16


This article appeared in The Edge Financial Daily, June 17, 2010.

PLUS - Small investment to complete PLUS' value chain

Stock Name: PLUS
Company Name: PLUS EXPRESSWAYS BHD
Research House: MAYBANK

PLUS Expressways Bhd
(June 16, RM3.33)
Maintain buy at RM3.33 with target price of RM4.20: PLUS' acquisition of Teras Teknologi will enable it to derive some future cost savings from the procurement of toll systems and equipment, and raise its value chain in providing total toll-related solutions. The pricing seems fair for a related party transaction. No change to our forecasts as the earnings increment is marginal. PLUS remains a buy for its rising dividend yield potential with a discounted cash flow-based target price of RM4.20.

PLUS has proposed to acquire a full stake in Teras Teknologi Sdn Bhd from its parent, UEM Group, for RM44 million cash. Established in 1994 as an information and communications technology (ICT) provider, Teras also offers facilities management, outsourcing, e-commerce services and Internet services. It supplies, install and maintain toll systems and equipment for highways. Teras introduced the Toll Revenues and Collection System, Touch 'n Go and non-stop vehicle on-board unit known as SmartTAG to Malaysia.

Teras' businesses are divided into three market segments: (i) transportation which deals with the payment systems, (ii) property which provides safety and security solutions, and (iii) e-Business which provides and manages enterprise-wide solutions. Nonetheless, we suspect that its revenue driver is in the transportation segment. Its clients for toll systems and equipment are not confined within the PLUS group, but includes other toll operators in Malaysia.

PLUS will be paying 10 times historical earnings, and one time P/B for Teras which reported a net profit of RM4.4 million in 2009, and net assets of RM50.1 million as at Dec 31, 2009. As Teras has since paid a dividend of RM6 million in March 2010, PLUS will be buying Teras' adjusted net assets of RM44.1 million. We understand that a major portion of the net assets comprise receivables, and a financial due diligence has been conducted on Teras by PLUS. This gives us some comfort against the likelihood of potential investment write-downs by PLUS later.

Teras fits into PLUS' requirements for diversification into related businesses. We believe that PLUS can derive some cost savings from the future procurement and maintenance of toll equipment under Teras. Teras will also complement PLUS in the bidding for overseas tolled road concessions as PLUS will be able to offer itself as a 'total solutions' provider. ' Maybank IB Research, June 16


This article appeared in The Edge Financial Daily, June 17, 2010.

AEONCR - OSK maintains buy call on AEON Credit

Stock Name: AEONCR
Company Name: AEON CREDIT SERVICE (M) BHD
Research House: OSK

AEON Credit Service (M) Bhd
(June 16, RM3.94)
Maintain buy at RM3.83 with target price of RM4.95: Revenue for 1QFY11 rose 2.9% year-on-year (y-o-y) but dipped -0.2% from the previous quarter.

Revenue growth was largely contributed by the easy payment business for financing consumer durables and motorcycles. This was in line with its growing trade receivables which were higher by 7.8% y-o-y. Revenue from its credit card and personal financing operation was flattish.

Profit before tax was higher by 8.6% y-o-y and lower by -5.4% quarter-on-quarter (q-o-q). It was marginally lower compared to the previous quarter, mainly attributed to higher operating expenses, which spiked up by 5.1% q-o-q and 21.4% y-o-y.

Net profit jumped 8.2% y-o-y but fell -7.7% q-o-q compared to that in the preceding quarter due to a higher effective tax rate of 25.4% versus 23.5% in the last quarter. The rate was higher than the statutory tax rate as certain expenses were not deductible for tax purposes.

As Malaysia recorded a strong 10.1% growth in 1Q GDP, AEON Credit is confident that the continued expansion in domestic and external demand will benefit the company. As it expects to sustain its growth momentum, we are maintaining our buy call on AEON Credit with a target price of RM4.95 (based on a historical two-year PE band of 8.5 times over FY11 EPS). ' OSK Investment Research, June 16


This article appeared in The Edge Financial Daily, June 17, 2010.

ADVENTA - Adventa's earnings not so elastic

Stock Name: ADVENTA
Company Name: ADVENTA BHD
Research House: CIMB

Adventa Bhd
(June 16, RM3.15)
Maintain outperform at RM3.17 with target price of RM4.45: Adventa's 2QFY10/10 results missed expectations as annualised 1H net profit made up only 75% of our estimate and consensus. The absence of dividends was no surprise.

Although 2H earnings should be stronger, we think the company will find it a stretch achieving our forecast given the time lag in price adjustments and delay in the delivery of equipment for its new plants.

Factoring in lower sales volumes, higher latex prices and a weaker US dollar, we cut our FY10-12 earnings by 9%-17%. This takes our target price from RM5.44 to RM4.45, still pegged to a 20% discount to Top Glove's target P/E of 16.5x. Despite the earnings hiccups, we are still positive on this rubber glove manufacturer and continue to rate it an outperform. Potential rerating catalysts for the stock include earnings improvement supported by the recovery in demand after the rubber wintering season as well as further capacity expansion.

As we noted in our 1QFY10/10 results note, Adventa anticipated margin compression in 2QFY10 due to the time lag in adjusting average selling prices (ASPs) for higher latex prices. Recall that latex prices went as high as RM7.72/kg in April compared to an average of RM5.91/kg in 1QFY10. On top of that, the US dollar eased 2% against the ringgit to RM3.31. The sharp movement in latex prices and depreciating US dollar led to an Ebit margin contraction from 14% in 1Q to 11% in 2Q. This pushed Adventa's 2Q net profit down by 31% quarter-on-quarter.

Despite the earnings hiccups, we remain positive on Adventa's long-term prospects for capacity expansion and development of its other business segments which will turn it into a significant healthcare products supplier in the region. Our outperform call remains intact. However, the stock is no longer one of our top picks in view of the disappointing results and lower upside than Latexx Partners (outperform), whose premium products are driving earnings and Supermax (outperform) which is seeing strong earnings contributions from its own brand and distribution centres. ' CIMB Research, June 16


This article appeared in The Edge Financial Daily, June 17, 2010.