LOH&LOH - Loh & Loh - RM4.85 GO price not good enough

Stock Name: LOH&LOH
Company Name: LOH & LOH CORPORATION BHD
Research House: MAYBANK

Loh & Loh Corporation Bhd
(Sept 30, RM4.75)
Buy (under review) at RM4.49 with target price of RM4.85 (GO price): PetroSaudi's offer for UBG shares, which came after more than nine months (since mid-January), has triggered multiple general offers (GO) affecting UBG's subsidiaries, Loh & Loh and Putrajaya Perdana. The GO price for Loh & Loh is a disappointment as it did not consider its strong order book and its potential in water infrastructure. The ball is in the authorities' court to approve this deal, as it does not require shareholders' approval.

PetroSaudi International's offer to UBG's major shareholders became unconditional on Wednesday. Accordingly, it made a RM2.50 offer on Wednesday to UBG major shareholders to take over their combined 89.8% stake in UBG. This has triggered a mandatory GO for the remaining 10.2% UBG shares, and also 19.7% of Loh & Loh and 14.2% of Putrajaya Perdana shares not owned by UBG. The offer price for Loh & Loh and Putrajaya Perdana shares is RM4.85 each.

The offer prices for all three stocks are the same as when Abu Dhabi-Kuwait Malaysia Investment Corp (ADKM) injected Loh & Loh and Putrajaya Perdana into UBG in July 2008 in return for new UBG shares. At that time, the deal also resulted in GOs for all three companies: RM2.50 for UBG and RM4.85 each for Loh & Loh and Putrajaya Perdana. The deal then resulted in ADKM emerging as the largest shareholder of UBG (52.6%), which in turn ended up with 80.3% of Loh & Loh and 85.9% of Putrajaya Perdana.

PetroSaudi's offer price seems to have disregarded the value created in Loh & Loh, where the BVPS has risen 24% from RM2.57 as at end-2007 (to which the GO by ADKM was cross referenced), to RM3.19 as at end-2009. Also, PetroSaudi's offer values Loh & Loh at just 0.33 time, as a ratio of its outstanding construction order book, against 0.42 time in the ADKM offer, 21% lower. This is derived using RM330 million in market value at the RM4.85 offer price over RM1 billion estimated outstanding order book now, against RM780 million during ADKM's offer.

PetroSaudi's offer values Loh & Loh at 9.2 times 2011 PER based on our earnings estimates, significantly below its peers in niche construction services. A close comparison is Hock Seng Lee, which has a niche in marine engineering, now trading at 11.9 times 2011 PER. Excluding a huge cash reserve of RM113 million in Loh & Loh as at June 2010, the offer values the stock at just six times 2011 PER. Loh & Loh's expertise is in water infrastructure works with a huge potential in water infrastructure and the construction of hydroelectric dams in Sarawak. ' Maybank IB Research, Sept 30


This article appeared in The Edge Financial Daily, October 1, 2010.

KENCANA - Kencana's record 4Q fuels a record FY10

Stock Name: KENCANA
Company Name: KENCANA PETROLEUM BHD
Research House: CIMB

Kencana Petroleum Bhd
(Sept 30, RM1.66)
Maintain outperform at RM1.66 with target price of RM2.28: As previewed, Kencana posted a record 4QFY2010 net profit of RM42 million, taking full-year bottom line to an all-time high of RM136 million. At 3% above our full-year forecast, we consider the performance to be in line with our expectations.

However, it exceeded the consensus estimate by 6%. Similar to last year, the dividend announcement will be made at a later date.
The company is reaping the benefits from moving up the value chain, evident from the double-digit bottom line growth despite a top line contraction.

We maintain our forecasts and target price of RM2.28 as we continue to apply our target market PER of 13.8 times to the stock. Kencana remains an 'outperform', premised on the potential re-rating catalysts of active order book replenishment and mergers and acquisitions.

Its 4Q net profit rose 37% year-on-year (y-o-y), helping Kencana to cap the year on a strong note. FY2010 net profit grew 15% y-o-y, despite a 5% fall in revenue, as Kencana took on more works for higher-end structures which gave better margins.

The double-digit growth in FY2010 was mostly supported by two factors: (i) Completion of the US$136 million (RM420 million) construction of KM1, work on which started in January 2008; and (ii) Commencement of marine support operations, formerly the missing link in the company's offshore operations. During the year, Kencana launched two AHTS vessels, the 67%-owned 5,500HP KPV Kapas and wholly owned 8,080HP KPV Gemia.

Kencana will open another new chapter this year with the start of its drilling business. KM1 is on a five-year, RM827 million Petronas Carigali drilling contract. Management confirmed that the contract started on Sept 2 and the rig starts drilling this week for a daily charter rate of US$130,000 per day, higher than the average global rate of US$114,617.

Also, this year, investors can look forward to a potential third marine support asset after the two AHTS vessels. It is no secret that Kencana is keen to own a pipelay barge following the JV breakdown with Global Offshore Malaysia Sdn Bhd in June.

Among the listed oil & gas companies, Kencana's news flow has been the most active year-to-date. Since April, it has secured nine new contracts worth a collective RM772 million. The new jobs take the company's outstanding order book to RM2.4 billion. This compares with its all-time high of RM2.8 billion recorded in October to December 2008. ' CIMB Research, Sept 30


This article appeared in The Edge Financial Daily, October 1, 2010.

BSTEAD - Boustead - a sleeping giant awakens

Stock Name: BSTEAD
Company Name: BOUSTEAD HOLDINGS BHD
Research House: HWANGDBS

Boustead Holdings Bhd
(Sept 30, RM4.91)
Initiate coverage with buy call at RM4.45 with target price of RM6.60: We initiate coverage of Boustead with a 'buy' rating and RM6.60 target price based on 20% discount to sum-of-parts (SOP) value. Our core investment thesis is three-fold:

1) More proactive management. Major shareholder, LTAT, is looking to raise Boustead's free float by cutting its 60% stake to 50% by end-2010. It also recently bought 86.1% of Pharmaniaga Bhd, a government healthcare service provider, which would allow for vertical integration within the group and aid in the 55% EPS growth for FY2011F. We think the market has not priced in the significant earnings accretion. On the cards is also the potential sale of its Indonesian plantation estates (about 18,000ha) that are capping its current blended FFB yield at 16.7 tonnes per hectare.

2) GLC-property proxy. Its property arm is due for a major transformation as LTAT is currently finalising two lucrative government land deals ' (i) 60 acres of Jalan Cochrane land and (ii) the 245-acre Batu Cantonment army base in Jalan Ipoh, both in Kuala Lumpur. Both developments will have a MRT station. We estimate these projects could add RM2.05 per share, raising our SOP value to RM10.35. This excludes more recently the rights to claim highly valuable land in Penang. Execution risk is minimal premised on its highly successful development in Mutiara Damansara.

3) Surge in contracts for BHIC. BHIC is expected to capitalise on the next batch of six out of 27 patrol vessels from the Royal Malaysian Navy. If the initial six vessels were a benchmark, this contract could be worth at least RM6.7 billion, almost triple its RM2.5 billion order book value. Our new order win assumptions are conservative at RM800 million per year for FY2010 to FY2012F.

Boustead's valuation is appealing at a one-year forward PER of seven times and 0.9 time P/NTA, while offering a 5% yield. These are roughly at its historical mean levels, but we expect valuations to expand when the market recognises the earnings-accretive Pharmaniaga acquisition and the formalisation of the two key land deals.

Boustead's current RM4.2 billion market capitalisation implies its lucrative plantation assets, growing property business, and trading arm, are currently trading at only six times CY2011 earnings. ' HwangDBS Vickers Research, Sept 30


This article appeared in The Edge Financial Daily, October 1, 2010.

SAPCRES - SapuraCrest's results within expectations

Stock Name: SAPCRES
Company Name: SAPURACREST PETROLEUM BHD
Research House: INTER PACIFIC

SapuraCrest Petroleum Bhd
(Sept 30, RM2.39)
Maintain outperform at RM2.36 with target price of RM2.90: We reiterate our 'outperform' recommendation with SapCrest's potential earnings catalysts coming from: (i) active order book replenishment; (ii) success in new markets; and (iii) growing fleet of strategic assets. We therefore maintain our target price at RM2.90 with FY2011 EPS of 16.9 times and FY2011 PER of 17.1 times.

SapCrest's 1HFY2011 net profit came within our and consensus expectations, accounting for 48%. SapCrest declared a single-tier interim dividend of three sen per share during the quarter under review.

For 1HFY2011, despite a decline in revenue, net profit swelled by 33.2% year-on-year (y-o-y), thanks to better margins from the installation of pipelines and facilities (IPF), up four percentage points (ppts) to 9.2% y-o-y, and drilling, up 7.87 ppts to 42.4% y-o-y. The Petronas Carigali Sdn Bhd Umbrella project win and commendable JV contribution bumped up IPF margins, while improved drilling margins were caused by higher drilling charter rates for T9 and Teknik Berkat.

With its order book standing at RM10 billion, SapCrest's earnings visibility appears to be good, at least for the next two years. However, there are risks should there be a delay in the installation contracts, especially if the direction of crude oil prices remains uncertain. Any review of the safety standards of offshore facilities could potentially also escalate cost estimates and affect the viability of new projects. Nonetheless, by including the full five-year Pan Malaysian pipe-laying contract, its gross order book would be bigger at RM13 billion.

SapCrest has been awarded new drilling contracts for two of its drilling rigs, T-6 and T-10. The T-6 contract from Carigali Hess Operating Company Sdn Bhd and Carigali PTTEPI Operating Company Sdn Bhd is worth US$85 million (RM269.5 million), translating to a daily charter rate of US$101,000 (previously US$99,000). The contract duration is 28 months with an option for two extensions of three months each. Seadrill UK, meanwhile, has chartered T-10 on a bare boat basis for 24 months for US$49 million (RM155.3 million), a lower charter rate of US$68,000 per day (previously US$88,000 per day). We believe the new charter rates are fair and within our earnings forecast for FY2011 to FY2012. ' Inter-Pacific Research, Sept 30


This article appeared in The Edge Financial Daily, October 1, 2010.

TENAGA - ECM Libra keeps 'buy' call on TNB

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



ECM Libra Investment Research has maintained a "buy" call for Tenaga Nasional Bhd (TNB) shares with an upward target price of RM10.10 from RM9.90 previously.

"Our target price is reinforced as it implies a decent 23 per cent discount to end-financial year 2011 discounted cash flow-based target price of RM13.08," it said in a research note today.

According to ECM Libra, the recent pullback in TNB share price gives investors the opportunity to accumulate TNB shares.

The research house has revised TNB's 2011 and 2012 financial year unit demand growth assumption higher from three to four per cent, due to the average coal price assumption in ringgit remaining relatively stable at slightly under RM300 per metric tonne.

"We also understand that the slower July 2010 unit demand growth of six per cent year-on-year was due to lower steel smelting activities but are not overtly concerned as we believe that the steel sector is at the cusp of an upcycle driven by building projects in the United States and capacity cuts in China," it said.

ECM Libra expect that TNB's financial year 2010 core net profit to come in within expectations at RM2.6 billion to RM2.7 billion.

"TNB will also record financial year 2010 forex gains of RM600 million to RM700 million," it said. - BERNAMA

SILKHLD - MIDF maintains 'buy' call for Silk

Stock Name: SILKHLD
Company Name: SILK HOLDINGS BERHAD
Research House: MIDF



MIDF Research is maintaining its "BUY" recommendation for Silk Holdings Bhd (SHB) with a target price of RM0.46 as the company's earnings prospects was fairly bright, driven by the expected growth in the oil and gas sector.

Silk Holdings is responsible for the construction of Kajang Dispersal Link Expressway, upgrading and widening of existing roads and, the design and construction of a new alignment.

In a research note today, MIDF said the valuation was based on a discounted cash flow valuation for the highway subsidiary, using a weighted average cost of capital of 4.38 per cent.

The justification also included 10 times the price earnings ratio for the projected financial year 2011 for the highway operator's oil and gas division.

"The oil and gas division continues to be the group's focus, contributing 81 per cent to group revenue, as it continued to secure new, medium and long-term contracts," it said.

The research house expects to see further growth in the oil and gas division as the RM3 billion Petronas platform maintenance contract and the RM2 billion Exxonmobil enhanced oil recovery project would support major and supporting players such as Silk Holdings. - BERNAMA

JCY - OSK Research Neutral on JCY International

Stock Name: JCY
Company Name: JCY INTERNATIONAL BERHAD
Research House: OSK

KUALA LUMPUR: OSK Research is maintaining its Neutral view on hard disk drive (HDD) manufacturer JCY International.

In a research note issued on Friday, Oct 1, the research house said at the current price, JCY is trading close to the 10 times historical peak PER valuation of Notion and Engtek over the last five years and 11 years respectively.

Due to a lack of historical valuation given that JCY was only listed earlier this year, it is still too early to gauge the valuation range that the market is ascribing to the Malaysia's largest HDD components manufacturer.

'As the valuation of the other HDD component makers have fallen slightly, we are valuing JCY based on 8.0 times FY11 PER, from which we derive a fair value of RM1.15. For now, we think JCY's share price could be supported by the decent 6% FY10 net dividend yield based on a 48% dividend payout.

'However, this is not attractive enough to alter our Neutral view given the potential of more earnings disappointments for the next two quarters,' it said.

Meanwhile, the six-month moratorium on the company's IPO shares ended last month. While JCY's shares have fallen by about 30% from the IPO price, which we believe is mainly due to an unattractive offer price and disappointing results.

SAPCRES - CIMB Research maintains Outperform on SapuraCrest

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

KUALA LUMPUR: CIMB Research is maintaining its Outperform on SAPURACREST PETROLEUM BHD [] and its top oil & gas pick.

The research house said in its report issued on Thursday, Sept 30 that factors which could catalyse the stock are 1) active order book replenishment, 2) success in new markets, i.e. the Middle East, and 3) a growing fleet of strategic assets.

SapuraCrest posted a 2QFY1/11 net profit of RM53 million, taking the first-half bottomline to a record RM104 million.

CIMB Research said at 49% of its full year forecasts and 48% of consensus estimate, we consider the performance to be broadly in line with expectations. Also not surprising is an interim DPS of 3 sen, which matches last year's payout.

'We maintain our earnings forecasts but raise our target price from RM3.02 to RM3.13 as we roll it over to end-CY12 and apply our revised target market P/E of 13.8x from 15x previously,' it said.

MMCCORP - PM says MRT among large projects, MMC Corp shares up on upgrade

Stock Name: MMCCORP
Company Name: MMC CORPORATION BHD
Research House: CREDIT SUISSE

KUALA LUMPUR: Shares of MMC Corp rose in the morning session on Friday, Oct 1 after Credit Suisse upgraded it to an Outperform and raised the target price to RM3.80.

At 11.17am, MMC Corp was up 12 sen to RM3.12 with 4.13 million shares done.

The positive sentiment was also boosted by a wire report that the government would soon announce seven large projects including the mass rail transit (MRT) soon in Kuala Lumpur.

Prime Minister Datuk Seri Najib Razak was quoted saying the government was ready to announce the seven huge projects soon. 'The MRT will be one of our largest projects and it will have a huge impact to the country's economy,' he said.

Meanwhile, Credit Suisse upgraded MMC Corp to an Outperform (from Neutral), as the market had underappreciated two key developments on the stock. They were the South Johor land and the Kuala Lumpur MRT. It viewed MMC as a laggard play on these developments.

AXIATA - Axiata's XL looking better

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

Axiata Group Bhd
(Sept 29, RM4.40)
Maintain buy at RM4.44 with higher target price RM5.10 (from RM4.95): Street projects 1H2010: 2H2010 earnings before interest, taxes, depreciation and amortisation (Ebitda) of 52:48 compared to 41:59 in 2009 and 50:50 in 2008. Competition peaked in 2H2008, and is unlikely to repeat in 2H2010. DBS Vickers projects 49:51 Ebitda for 1H2010: 2H2010, and estimates that XL's 2H2010 revenue could grow by 19% year-on-year (y-o-y), with Ebitda margin at 49%.

These may still be conservative against 1H2010 revenue growth of 35% y-o-y and 52% Ebitda margin.

With Telkomsel as quality leader in the market, XL and Indosat compete for price leadership. However, XL's focus on small screen data results against Indosat's focus on large screen data results in: (i) lower FY2010F capex-to-sales of 31% (against 44% for ISAT); and (ii) lower network costs as percentage of revenue of 31% (versus 36% for ISAT).

DBS Vickers raised XL's FY2010F to FY2012F net profit by 7% to 31%, and upgrades its fair value to IDR6,800 versus IDR5,900 previously.

We raise Axiata's FY2010F to FY2012F net profit by 2% to 7% after factoring in DBS Vickers' upgrades for XL. Axiata continues to do well in Malaysia, especially in the broadband segment, while it capitalises on economic recovery in Sri Lanka. In Bangladesh, Axiata has found an effective balance between subsidising and profit margin. ' HwangDBS Vickers Research, Sept 29


This article appeared in The Edge Financial Daily, September 30, 2010.