GAMUDA - Research houses mixed on Gamuda

Stock Name: GAMUDA
Company Name: GAMUDA BHD
Research House: KENANGA

OSK Research has maintained its "buy" call on Gamuda Bhd with a higher target price at RM4.96 from RM4.78 previously, as it expects the firm's construction margins to expand, going forward.

In a note today, OSK said it viewed the Gamuda-MMC Bhd's joint venture as the lead contender in the race for the mass rail transit's (MRT) underground portion where tenders would be called in the fourth quarter.

"Given the high risk and technically challenging nature of this package, we expect margins to be high at 15 per cent (pre-tax level).

"We are raising our financial year 2011 earnings by two per cent to reflect this," it said.

ECM Libra has maintained its 'hold' call on Gamuda with unchanged target price at RM3.99.

It said the cost of MRT tunnelling contracts was expected to be higher-than- expected.

ECM Libra said it viewed the risk of rising building material prices largely due to volatile crude oil price movements.

Meanwhile, Kenanga Research has downgraded Gamuda's financial year 2011 earnings by two per cent to RM402 million.

It, however, expected a stronger second half performance, which would be driven by higher construction revenue recognition and increased property income.

It has maintained its "hold" call on Gamuda, with unchanged target price of RM4.12. -- Bernama

GAMUDA - Research houses mixed on Gamuda

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

OSK Research has maintained its "buy" call on Gamuda Bhd with a higher target price at RM4.96 from RM4.78 previously, as it expects the firm's construction margins to expand, going forward.

In a note today, OSK said it viewed the Gamuda-MMC Bhd's joint venture as the lead contender in the race for the mass rail transit's (MRT) underground portion where tenders would be called in the fourth quarter.

"Given the high risk and technically challenging nature of this package, we expect margins to be high at 15 per cent (pre-tax level).

"We are raising our financial year 2011 earnings by two per cent to reflect this," it said.

ECM Libra has maintained its 'hold' call on Gamuda with unchanged target price at RM3.99.

It said the cost of MRT tunnelling contracts was expected to be higher-than- expected.

ECM Libra said it viewed the risk of rising building material prices largely due to volatile crude oil price movements.

Meanwhile, Kenanga Research has downgraded Gamuda's financial year 2011 earnings by two per cent to RM402 million.

It, however, expected a stronger second half performance, which would be driven by higher construction revenue recognition and increased property income.

It has maintained its "hold" call on Gamuda, with unchanged target price of RM4.12. -- Bernama

MISC - AmResearch downgrades MISC to Hold from Buy, lowers FV to RM7.30

Stock Name: MISC
Company Name: MISC BHD
Research House: AMMB

KUALA LUMPUR: AmResearch has downgraded MISC BHD []'' to Hold from Buy previously and lowers its discounted cashflow-derived fair value to RM7.30 a share from RM11.80 a share.

The research house said on Friday, March 25 that it had cut its earnings projections and attached a higher 10% discount to its sum-of-parts valuation from 5% previously given deteriorating shipping fundamentals.

'We have cut our projections by 48-57% over FY11F-13F after factoring in lower tanker and container rates as well as higher bunker fuel cost assumptions. Reflecting our bearish view, our projections are now 32%-34% below consensus estimates over the FY11-13 forecast period,' it said.

AmResearch said tanker rates have been weaker than expected, as seen by the absence of winter peak in 4QCY10.'' Accelerating fleet growth and a shift forward in delayed orders means oversupply will worsen over the next 2 years.

The research house added that Clarksons projects global tanker fleet growth at 6.4% in 2011 and 6.7% in 2012 versus the past 4-year average fleet growth of 5.8%.

'MISC's valuation is already rich at 30x FY12F earnings, versus the broader market's PER of 14x. MISC's status as a high-beta cyclical stock positions it unfavourably in the current volatile market environment. At just 21% YoY EPS growth and 114% premium valuation to the KLCI, MISC is likely to underperform the index over the next 12 months,' it said.

SEG - RHB Research positive on SEGi dividend plan, FV RM4.44

Stock Name: SEG
Company Name: SEG INTERNATIONAL BHD
Research House: RHB

KUALA LUMPUR: RHB Research Institute is positive on SEG International's plans to pay out 50% of its earnings as dividends.

RHB Research said on Friday, March 25 it was maintaining its FY11-13 annual gross dividends of 17 sen to 30 sen a share, which translate to gross yields and net payout ratios of 3.7%-6.5% and 49.6%-51.0% respectively.

It has a fair value for SEGi at RM4.44.

SEGi announced on Thursday it has set a dividend policy to distribute a minimum of 50% of the group net profits to its shareholders, with effect from the financial year ending Dec 31, 2011.

SEGi said the board''believes that the dividend payout of a minimum of 50% of its net profits is within the group's financial capability considering its future earnings growth.

KOSSAN - HDBSVR ups Kossan TP to RM3.90

Stock Name: KOSSAN
Company Name: KOSSAN RUBBER INDUSTRIES BHD
Research House: HWANGDBS

KUALA LUMPUR: Hwang DBS Vickers Research has raised the Target Price for Kossan to RM3.90 after rolling forward its valuation base to FY12F, based on 8.5 times PE.

'We raised FY11-12 EPS by 10%-11% after revising up GP margins to 14% (from 13%) on the back of Kossan's good cost management.

'Kossan's earnings are proven to be resilient despite being hit by rising latex costs and a weakening US dollar. A key re-rating catalyst for Kossan would be re-emergence of the demand cycle to lift valuations,' it said.

BHIC - BHIC continues ascend

Stock Name: BHIC
Company Name: BOUSTEAD HEAVY INDUSTRIES CORP
Research House: HWANGDBS

KUALA LUMPUR: BOUSTEAD HEAVY INDUSTRIES CORP []oration Bhd (BHIC) extended its gains in early trade on Friday, March 25.

At 9.30am, BHIC was up 11 sen to RM4.05 with 12,000 shares traded.

HwangDBS Vickers Research on March 24 initiated coverage on the stock with a Buy rating and target price RM6.55.

The research house said BHIC was a a bargain for its strong earnings visibility.

It said BHIC had a monopoly in naval vessel contracts, and enjoyed strong government patronage, especially from the Royal Malaysian Navy.

It also said that as one of seven Petronas-licensed fabricators, BHIC was poised to benefit from the booming O&G industry.

'With Petronas emphasizing more on the local front, and strong news flow on marginal oil field and brownfield services, and deepwater development, fabricators will be the first beneficiary of the cycle,' it said.

GAMUDA - CIMB Research maintains Outperform on Gamuda, TP RM5.60

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

KUALA LUMPUR: CIMB Equities Research said although Gamuda's annualised 1HFY7/11 core net profit made up 99% of its forecast and 98% of consensus, it'' considered the performance to be above expectations.

It said on Friday, March 25 that it expects 2H11 to be stronger due to the gradual rise of CONSTRUCTION [] margins as key projects enter their mature phase.

'The reason for the deviation was our underestimation of EBIT margin. We now up our FY11-13 EPS forecasts by 8-10%, which raises our RNAV-based target price from RM5.45 to RM5.60,' it said.

CIMB Research said these strong results could catalyse the stock, along with project awards and newsflow on the MRT project for which Gamuda is the PDP and potentially the contractor for the tunnelling works.

'The RM6bn-7bn tunnelling portion for the SBK line is expected to be awarded in early 2012. We reiterate our OUTPERFORM call,' it said.

JCY - More tsunami woes for HDD parts

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

Technology sector
Maintain underweight: Japanese hard disk drive (HDD) component makers, including hard disk media maker Showa Denko (SDK) and HDD-use substrate makers Furukawa Denko and Kobe Steel, have all reported damage to facilities as well as injuries to their employees due to the earthquake and tsunami on March 11.'' Certain facilities have since resumed operations but production volume is likely to be limited due to constraints in electricity, raw materials and fuel supply.

SDK is the world's second largest hard disk media maker by volume behind Western Digital (WD), with about 25% global market share. It fabricates 22 million disks a month with production facilities in Singapore, Taiwan and Japan. Operations at its sites in the Tohoku and Kanto regions were suspended from March 14 to 16.

Certain facilities have since resumed operations but the group says production volumes are likely to be limited for the time being due to various constraints. We understand that SDK is discussing shipment schedules with individual customers, and the potential production shortfall at its plants in Japan would be mitigated by capacity expansion at its Singapore facilities (monthly output to increase 13.6% to 25 million disks).

We do not see significant earnings risks for HDD component manufacturers under our coverage given that major HDD makers such as WD, Seagate and Hitachi (with a combined global market share of 80%) rely mostly on their respective in-house hard disk media production, with each producing approximately 80% to 90% of their own requirements.

Eng Teknologi Sdn Bhd ('neutral', fair value: RM1.73), JCY HDD Technology Sdn Bhd ('neutral', FV: 58 sen) and Notion VTec Bhd ('neutral', FV: RM1.85) all have minimal exposure at less than 7% contribution of their revenue from smaller manufacturers such as Toshiba and Samsung, which typically outsource more than 70% of their hard disk media production to third-party component makers like SDK and Fuji Electric.

Nonetheless, we do not discount the potential downgrade to our earnings forecasts should the disruption prolong as we opine that the top three HDD makers would not have instantly available capacity to absorb the potential shortfall in SDK's hard disk drive media production over the long run.

But disruption at Furukawa Denko and Kobe Steel could prove costly. Furukawa Denko and Kobe Steel together dominate the entire HDD-use aluminum substrate market with a more than 95% global market share. Their substrate plants are located in Tochigi, Japan with Kobe Steel capable of producing 30 million and Furukawa Denko at 20 million units a month. Operations at Kobe Steel's Monka substrate plant have resumed, with management confirming that its facilities sustained no damage although it conceded that production is likely to be affected due to limited electricity supply. Meanwhile, restoration is progressing at Furukawa's plant as damaged equipment is replaced and production facilities repaired.

Given the de facto duopoly posed by these 2 HDD-use substrate manufacturers, we opine that a protracted disruption in production would likely spark an industry-wide substrate shortage, which would lead to lower output for most HDD makers.

The restoration timeline to resume full production remains uncertain at this juncture, but early indications are that the going is more negative end as power supply remains a major concern.

On a relative basis, JCY has the highest earnings downside exposure given its full-fledged HDD component production while its peers Notion Vtec and Engtek have more diversified earnings, with the camera division contributing more than 45% to the former's revenue while the latter's presence in industrial products and original design and contract manufacturing may provide a buffer to any earnings shortfall from its HDD division.

Nonetheless, we maintain our earnings forecasts and valuation basis for now, pending more affirmative indications from'' Japanese manufacturers. Downgrades to our recommendations are likely if operating conditions deteriorate further on a less conducive production environment.

We believe that any potential earnings disappointments in the coming quarters as well as moderating industry growth would continue to dampen sentiment. Manufacturers involved in the semiconductor and HDD industries would have difficulty matching their sales performance in 1Q10, during which they performed remarkably well in a traditionally weak period riding on the economic rebound in 2H09.

Hence, given the lack of a re-rating catalyst over the near term with valuations nowhere near their trough, we reiterate our 'underweight' call on the sector. ' OSK Research, March 24


This article appeared in The Edge Financial Daily, March 25, 2011.

BHIC - BHIC no longer a diamond in the rough

Stock Name: BHIC
Company Name: BOUSTEAD HEAVY INDUSTRIES CORP
Research House: HWANGDBS

Boustead Heavy Industries Corp Bhd
(March 24, RM3.94)
Initiating coverage at RM3.80 with buy rating and target price of RM6.55: BHIC specialises in the construction of naval vessels, defence services, and oil and gas fabrication. It completed a major restructuring in 2007 and is now on a strong footing to bag major contracts, given its track record in delivering government and private sector jobs. We expect a significant re-rating from its bargain basement valuation of seven times FY12 earnings per share and 1.5 times price-to-book value, on the back of two-year EPS compound annual growth rate of 39%. Its balance sheet is also healthy with 0.24 times net gearing.

BHIC enjoys strong government patronage, especially from the Royal Malaysian Navy (RMN). Its current RM1.7 billion order book could more than double upon conversion of the letter of intent for the next next offshore patrol vessels (OPV), assuming 30% of the work is subcontracted to BHIC. This will provide strong earnings visibility for the next seven years. The company entrenched its execution record after delivering the first batch of six OPVs in December 2010. We also expect more contract wins from its current RM1 billion tender book. BHIC can also leverage on its global defence partners ' DCNS, Rheinmetall and MTU Friedrichshafen ' via joint ventures to penetrate other military segments. It is possible in the medium term for BHIC to increase its stake in BN Shipyard given the role of BHIC as the listed heavy engineering proxy of Boustead Holdings and the complementary roles played by both BN Shipyard and BP Shipyard operationally. Our new order win assumptions are conservative at RM600 million per year for FY11/13F while the six OPV contract assumption is tagged at RM7 billion.

As one of seven Petronas licensed fabricators, BHIC is poised to benefit from the booming oil and gas industry. With Petronas emphasising the local front, and strong news flow on marginal oil field and brownfield services and deepwater development, fabricators will be the first beneficiary of the cycle. ' Hwang-DBS Vickers Research, March 24


This article appeared in The Edge Financial Daily, March 25, 2011.

SIME - Sime Darby: Writeback of RM100m for MOQ project

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

Sime Darby Bhd
(March 24, RM9.15)
Maintain outperform at RM9.15 with fair value of RM10.60: Sime Darby has signed a close-out agreement on March 17 for the completion of its Maersk Oil Qatar (MOQ) project which stipulates that: (i) In full and final settlement of all claims (including back charges and other claims), Sime paid a net close-out sum of US$41.9 million (RM127 million) to MOQ on March 21; (ii) Sime will be relieved of all remaining works under the contract save for providing outstanding final documentation and warranty obligations, the warranty period will be reduced to 18 months (from 24 months); and (iii) the performance bond amount for the warranty period is reduced to 2.5% of the contract price (US$16 million), from 10% (US$63 million) previously.

Despite having to pay the net close-out sum of US$41.9 million, the terms of this agreement will result in a positive profit and loss impact for Sime of RM100 million. This is in view of the fact that Sime had already provided a total of RM300 million for this project, RM159 million of which was in 3QFY10.

Assuming this is a taxable gain, we estimate the writeback will have a +2.4% impact on our FY11 forecasts. We expect the writeback to be done in 3QFY11ending June.

Risks include: (i) a convincing reversal in crude oil price trend resulting in reversal of crude palm oil and other vegetable oil price trends; (ii) weather abnormalities resulting in an over- or under-supply of vegetable oils; (iii) increased emphasis on implementing global biofuel mandates and trans-fat policies; and (iv) a slower than expected global economic recovery, resulting in lower than expected demand for vegetable oils.

As we consider this to be an exceptional item, we have not made any changes to our core net profit forecasts for Sime.

We maintain our 'outperform' recommendation with RM10.60 fair value. ' RHB Research, March 24


This article appeared in The Edge Financial Daily, March 25, 2011.