Analyst call April 30
UPDATED @ 11:53:39 AM 30-04-2012
KUALA LUMPUR, April 30 — This is a selection of morning calls by local research houses for the day.
HwangDBS Vickers
Market Preview
A mild technical rebound could be in the offing for our Malaysian bourse today. This follows a cumulative decline of 31.1-point or 1.9 per cent in the FBM KLCI in the past seven days. Nevertheless, the benchmark index may struggle to rise towards the immediate resistance level of 1,580 for the time being.
Meanwhile, Wall Street saw minimal gains last Friday. Key US equity indices were up between 0.2 per cent and 0.6 per cent at the closing bell lifted mainly by better corporate earnings performances.
Back home, two merger pacts are expected to come under the limelight today. Media reports said the share swap exercise between MAS and AirAsia — already a done deal — would be unwound, with an announcement likely to be made as early as this week.
Separately, the proposed merger between the businesses of OSK Holdings and RHB Capital has moved a step forward after getting the Ministry of Finance’s approval.
From the Chartroom
The FBM KLCI was under pressures last week as it retreated to finish at 1,567.80 on Friday. This translates to a weekly loss (of 24.0-points or 1.5 per cent) for the second week in a row.
From a technical perspective, the FBM KLCI is expected to show a negative bias going forward, probably dropping towards the support lines of 1,555 and 1,530 soon.
Dialog Group
We attended the ground-breaking of the Pengerang deepwater terminal project (1st phase) last Thursday. It was officiated by the Johor Chief Minister. The land reclamation covering 150 acres is completed, with some land treatment work going on. Physical construction will start by June, and the project is on track for Dec13 completion.
We understand that 80 per cent of the 1.3m cubic m capacity will be absorbed by long-term customers.
Pengerang’s sheltered harbour with 24m water depth makes it an ideal choice for an O&G petrochemical hub, emulating the success of Rotterdam port. Petronas’ RM60bn Refinery & Petrochemical Integrated Development (RAPID) project will be supported by the terminal when commissioned by 2016. The management has earmarked an area in Pengerang for fabrication, likely to capture the strong services demand for RAPID, leveraging on Dialog’s integrated technical services
We are optimistic of Dialog’s long-term prospects, as its tank terminal capacity will almost triple to 2.8m cubic metres from 1m cubic metres within three years. The RM5bn Pengerang project — stretched over seven years — is a major transformation for Dialog, and will drive earnings going forward.
The recent share price weakness offers a good entry opportunity. Reiterate BUY and RM2.95 TP.
RHB Research
Banks — Neutral
Mar system loan growth improved marginally to 12.2 per cent yoy from +11.9 per cent yoy in Feb as loan growth for businesses picked up pace (+12.5 per cent yoy vs. Feb ’12: +11.7 per cent yoy). Household loan growth, however, moderated further to 11.9 per cent yoy from +12.1 per cent yoy in Feb. We note that Mar’s household loan growth is the slowest reported since Mar ’10.
Mar system loan applications increased by 14.2 per cent yoy but approvals eased by 2.1 per cent yoy. MoM, loan applications and approvals jumped 40.7 per cent and 52.8 per cent respectively, although the stronger mom figures tend to be a reflection of the seasonally slower month of Feb.
The higher applications in Mar were mainly due to the business segment (+36.9 per cent yoy; +68.8 per cent mom) while loan applications from households were up 14.5 per cent mom but down 7 per cent yoy.
As for loan approvals, approvals for business loans were up 5 per cent yoy (+91.2 per cent mom) but household loan approvals fell 9.5 per cent yoy (+23.9 per cent mom).
System-wide gross and net impaired loan ratios improved mom to 2.54 per cent (Feb: 2.69 per cent) and 1.74 per cent (Feb: 1.85 per cent) respectively. We note a drop in loan loss coverage ratio to 92 per cent from 97.5 per cent at end-Feb mainly due to a drop in collective allowance (-12.4 per cent mom).
We believe this reflects the reversal in excess collective allowances to shareholders’ equity following the full adoption of MFRS139 by certain banks with financial years ending 31 Dec.
Maintain Neutral stance on the sector, with Maybank and Public Bank as our top picks.
MPI
MPI expects the sector to rebound in the coming quarters following positive indications by its customers. Going forward, MPI has guided for double-digit revenue growth for 4QFY06/12 on qoq basis and expects to return to the black, reversing three quarters of consecutive losses.
In addition, MPI expects stronger contribution from Suzhou going forward on the back of strong demand for its X3 Thin MLP chips. We understand that Suzhou has qualified with a major customer and will begin the first batch of packages for the smartphone segment by end 2012.
We have now imputed a slightly higher net loss of RM9.7m for FY06/12 but increased our FY06/13 net profit forecast slightly by 2.1 per cent. Fair value is relatively unchanged at RM4.09.
Daibochi
Daibochi highlighted that it has been “invited” as one of the 20 members of Nestlé’s food and safety committee. This accreditation by the Nestlé Group could potentially be a platform for the company Daibochi to expand its business with the Nestlé global group and elsewhere.
Separately, Daibochi indicated that prices of raw materials, except form ink, solvent and aluminium were expected to rise in the coming quarter in tandem with the increase in commodity prices. Nonetheless, the company expects this to be gradual and will put in place cost efficiency measures in order to mitigate this.
However, due to the recent run-up to the share price, we downgrade our call on Daibochi to Underperform (from market perform). Fair value is RM2.78.
OSK Research
Technical Analyser
FKLI
The negative bias seen on Thursday has prevailed and the index is likely to trade lower, although more is needed to confirm the continuation of the correction.
As mentioned in our previous report, a close below 1,571.50 pts should see sellers taking over. The black candle that formed last Friday extends the correction, which was triggered by the false breakout above the 1,600 psychological level on 3 April. Note too that the index is below the 50-day MAV line, for four days running.
Thus, the index is expected to trade lower. But a new leg of the down move requires a confirmation in the form of a close below 1,560 pts, round about the low of 12 March and last Tuesday’s “Hammer”.
Should the down move be confirmed, strong support is expected at 1,550 pts, which will retrace 50 per cent of the Feb-April rally, followed by the 62 per cent retracement level of 1,540 pts.
Nonetheless, a return of selling cannot be ruled out altogether, owing to the most oversold daily RSI that now matches the low recorded Nov 2011. The longer-term trend is up too as the index is well above the rising 200-day MAV line, also on the back of the longer-term positive indication of a “Golden Cross” back in February.
This is only confirmed on a close above 1,580 pts, with a cross back above the 50-day MAV line. This will also see a close above the prior 4-day high of 1,578.50 pts.
Resistance levels are expected at the broken supports of 1,588.50 and 1,594 pts. A close above the psychological 1,600 pts is still required to completely erase the negative bias since 3 April.
FCPO
The commodity’s consolidation continued as it traded in a tight range last Friday. Thus, the upside bias from the “Long White Day” candle of last Wednesday remains and an upward move is still expected today.
The follow-through buying expected from the “Long White Day” candle is still not forthcoming but the upside bias is reinforced by the higher close, above the psychological RM3,500. It also formed the positive “Hammer” in the weekly chart.
This shows that the buying support — signalled by the “Butterfly Doji”-like candle of 19 April — and the most oversold daily RSI in two months were underpinning the price of the commodity.
Thus, the commodity is expected to trade higher on the resumption of the rally, possibly ending the correction that started on 12 April. Again, the longer-term trend is up, judging from the series of higher lows — the latest at RM3,334 and RM3,439.
Resistance is expected at the low of 3-5 April at RM3,532, the low of 6-10 April at RM3,562 and thereafter, the round figure of RM3,600. A close above RM3,562 will significantly increase the possibility of an upward continuation, as the rebound would have regained more than 62 per cent of the recent decline. It is imperative for the commodity to stay at least above RM3,500 today as the failure to do so could indicate a false start to the rebound and a return of selling. Support lies at RM3,458, a violation of which could signal a continuation of the decline. Further support is located at RM3,400 — a 38 per cent retracement of the Feb-April rally.
Daya Materials
Daya may trade higher after the firmer close on Friday. The stock was highlighted in early February for its likelihood of continuing its upward move. However, such a move did not materialise. Instead, the stock went into a correction.
Nevertheless, this did not erase the upward trend that started since Oct 2011, as the low in March did not violate the low of Dec 2011. The continuation of the uptrend is likely signalled last Friday, when the stock closed the highest in 11 months.
The “Long White” candle breakout looks good as it occurred on a Friday and was accompanied by increased buying interest, as seen from the high volume. Thus, purchases can be made above RM0.225, with a close below the “Long White” low of RM0.21 as the stop loss.
The Price target is the 2011-high of RM0.30, provided that the April 2011 high — which will regain 50 per cent of the 2009-11 decline — is successfully violated. A close below RM0.21 will invalidate the upward bias.
Strong support is at the 6- month low of RM0.185, a violation of which signals the end of the 7-month rally.
Bumi Armada
BAB’s share price may trade higher if it breaks above the psychological level. The stock has fallen sharply in the past week, following the multiple failed test of RM4.50 in April.
Nonetheless, the longer-term uptrend is still intact as the stock has not made a lower low, which requires a close below the January-low of RM3.85. Thus, a return of buying cannot be ruled out altogether, especially with the daily RSI recording the lowest reading since Sept last year.
Buying support is seen returning too, as it has failed to close below the psychological RM4.00 on the highest volume since Nov 2011.
Thus, a speculative purchase can be made above RM4.00 with consecutive closes below RM4.00 as the stop loss. A conservative trade may wait until it closes above last Friday’s high of RM4.17 before entering.
The price target is the psychological RM5.00, based on the width of the 2011 consolidation, provided that the all-time high of RM4.50 is violated convincingly.
The trade may not work out should the stop loss be triggered. Strong support is at RM3.85, a violation of which may spell the end of the rally since Sept 2011.
SapuraKencana Petroleum
SapuraKencana Petroleum (SKP), a merger between SapuraCrest and Kencana, would become one of the largest 30 Malaysian companies by market capitalisation.
SKP would be a full-fledged EPCIC O&G provider and thanks to this business model, it is bound to target bigger and more lucrative O&G projects in and outside Malaysia. We initiate coverage with a Buy call. Based on our FV of RM2.88 for SKP, both Kencana and SapuraCrest should be worth about RM3.61 and RM5.64 respectively.
AXIATA Group
Idea Cellular, Axiata’s 19.7 per cent associate in India, reported a stronger 7 per cent q-o-q (+26.8 per cent y-o-y, YTD: +26.0 per cent y-o-y) increase in revenue for 4QFY12 to INR53.7bn from INR50.3bn in 3QFY12.
This came on the back of higher minutes of usage (+9.1 per cent q-o-q) and a jump in subscriber addition (+5.9 per cent q-o-q), while EBITDA came in flat q-o-q (+26.2 per cent y-o-y, YTD: +34.3 per cent y-o-y).
Overall, FY12 earnings fell 20 per cent due to higher 3G-related interest and amortisation expenses. The telco’s headline earnings grew 19 per cent q-o-q (-12.9 per cent y-o-y, YTD: -19.6 per cent y-o-y) as a result of the 21 per cent q-o-q decline in interest expense.
Idea held a conference call following the release of its 4QFY12 results on 27 April. As expected, regulatory issues hogged discussions. The telco said it had 2.6m active 3G subscribers as at end-March (+8.3 per cent q-o-q) with an incremental APRU of INR91.
However, 3G revenue contribution is still insignificant as 3G users account for less than 3 per cent of its total base. Idea’s stable average revenue per minute (ARPM) of INR0.42 reflects the relatively stable competition in the market over the past few quarters.
Its voice revenue expanded and estimated 6 per cent q-o-q (+23.3 per cent y-o-y) while non-voice revenue grew 11.1 per cent q-o-q (+49.4 per cent y-o-y), making up 14.3 per cent of service revenue vs. 13.7 per cent a quarter ago. When annualised, Idea’s core earnings were in line with our projection.
We are maintaining our BUY rating on Axiata, pending the release of its 1QFY12 results next month. While the negative newsflow out of India is negative for sentiment on the stock, Idea contributes less than 10 per cent of Axiata’s core earnings and only 6 per cent of our SOP, on which we had earlier tagged a 20 per cent discount to factor in regulatory risks in India.
Stripping out Idea’s SOP, our fair value on Axiata drops to RM5.45. This is still above the current share price, implying that the market may have priced in greater regulatory risks for the group. We advise the more risk-averse investors to switch out to TM (FV: RM5.90) — our other top pick — for exposure to Malaysia telecoms.
Plantations — Neutral
Felda Global Ventures Holdings (FGVH) filed its draft prospectus with the Securities Commission late last week. FGVH has 355,864 ha of plantation estates in Malaysia.
Although no price has been mentioned, there will be 2.19bn new shares to be issued out of the total of 3.65bn shares to be listed.
Unlike the recent Bumitama IPO in Singapore, whose private placement was more than 30x oversubscribed, our initial feel is that interest in FGVH’s IPO will not be as strong based purely on fundamentals.
Out of the 323,587 ha of oil palm area in Malaysia, 54,560 ha are over 25 years old and another 116,380 ha are 21-25 years old. This means 52.8 per cent of FGVH’s planted oil palm area will need to be replanted in the immediate future up to the next 5 years.
The replanting will keep FGVH’s profitability under pressure as replanting costs are charged out to P&L under Malaysia’s accounting practice. From our understanding, cost of replanting is rather similar to the cost of greenfield development, which is around RM15k per ha up to maturity i.e. spread over 3 years. This means FGVH will need to spend about RM2.6bn on replanting over the next 5 years.
Yield-wise, FGVH’s FFB yield of 19.3 tonnes per ha is quite similar to Malaysia’s national average of 19.7 tonnes.
Other than oil palm plantations, FGVH also has rubber plantations amounting to 9,472 ha, all of which are located in Peninsular Malaysia. Under its downstream business, FGVH owns a soybean & canola crushing and refining facility in Canada and an oleochemical plant in the United States.
FGVH owns 5 palm oil refineries in Malaysia with production of 1.6m tonnes of refined palm oil products although these assets are at associate levels. FGVH also owns sugar business in Malaysia under listed MSM Holdings in which it owns a 51 per cent stake.
All in all, FGVH will be the second-biggest listed plantation company in Malaysia by planted hectarage after Sime Darby and the third-biggest in the world after Sime Darby and Golden Agri.
FGVH is headed by Datuk Sabri Ahmad, who was formerly CEO of Golden Hope. Datuk Sabri is a highly respected figure in the palm oil industry and has a fair chance in wooing investors.
Despite the headwinds, we believe that if FGVH’s IPO is priced correctly, the take-up rate will be fair. Given the high price multiple of the large listed plantation companies in Malaysia in the range of 16-18x, we believe it will not be difficult to command 12-13x PE, which is a premium to the large listed Indonesian players.
Evergreen Fibreboard
The Edge Daily reported today that with regards to Evergreen Fibreboard’s (EFB) joint venture (JV) partner, Dynea Chemicals OY’s (Plaintiffs), suit for damages of up to USD50m (RM152m) for an alleged breach of their JV agreement and breach of technology transfer agreement, management thinks the sum is highly exaggerated.
We note that if EFB loses the lawsuit, it would potentially have a material impact on the financials of the group of up to USD50m (RM150m), which will render the company to be in losses as our earnings forecast for FY12 and FY13 stands at RM77.0m and RM88.8m respectively.
However, in its announcement to Bursa, EFB’s management (after obtaining legal advice and based on the information provided) is of the opinion that EFB is in a robust position to defend against the Plaintiff’s allegations and claims.
In the announcement, management added that the lawsuit does not specify or particularise what technology EFB has breached, rendering the fibreboard manufacturer unperturbed.
We are maintaining our earnings forecast as fundamentals of the company remain unchanged. Our NEUTRAL recommendation and fair value (FV) of RM1.05 is maintained despite the 16.7 per cent potential upside from our FV due to the uncertainty arising from the lawsuit.
We will revisit our recommendation on the stock once we obtain more information regarding the lawsuit.
Malaysia Airline System
The Edge reported that according to sources, the controversial share swap between Khazanah Nasional and Tune Air SB in respect of their shareholdings in MAS and AirAsia respectively has been called off.
This latest development is seen as a response to pressure being piled on by MAS’ unionised workforce, but the sources also indicate that the comprehensive collaboration framework (CCF), which spells out the areas in which both airlines would work together for their mutual benefit, remains intact.
Another matter that is likely to be deliberated at MAS’ next board meeting is a proposal to issue RM3bn worth of Islamic perpetual bonds that will help bridge the gap for its RM6bn capex requirement this year. (Source: The Edge Weekly)
After hearing much speculation on this issue of late, the cancellation of the share swap deal would not come as a surprise as MAS’ unionised workforce has been applying intense pressure to call off the deal. But we see some drawbacks in this development as some areas in the CCF between the two competing carriers may not present win-win situations for both airlines.
As a case in point, the CCF for aircraft purchases may not benefit AirAsia as it already enjoys an upper hand in purchasing Airbus planes (being one of Airbus’ top customers). Furthermore, with no equity interest aligned given the reversal of the share swap, we think the CCF would not be the ultimate goal sought by a stronger carrier.
We had earlier suspected that MAS could likely issue convertible bonds to spur interest take-up as an alternative to a rights issue. Though close enough to our view, we think that the issuance of a perpetual bond would make sense for MAS as this will give it the flexibility to manage its debt while attempting a turnaround.
RM3bn might just be enough to get things started, but MAS would need to manage its operations in the most prudent manner when utilising this amount. Note that MAS will also see an additional RM1bn coming from the refund for its RM3bn pre-deposit payment. More positively, the issuance of a perpetual bond (at a rumoured coupon rate of 6 per cent) would allow the debt to be classified as equity due to its perpetual nature from a shareholder’s stand point of view, although such an issuance would be dilutive to its earnings base.
Our fundamental view on MAS remains unchanged. It is facing turbulent times amid an environment of high jet fuel prices and intensifying competition.
We maintain our SELL call on MAS with an unchanged FV of RM0.90, premised on 8x FY13 EV/EBITDA.
* These recommendations are solely the opinion of the respective research firms and not endorsed by The Malaysian Insider. The Malaysian Insider shall not be liable for any loss arising from any investment based on any recommendation, forecast or other information contained here.
