KUALA LUMPUR, Feb 2 — This is a selection of morning calls by local research houses for the day.
HwangDBS Vickers
Market Preview
As major US stock indices rose between 0.7 per cent and 0.9 per cent overnight due to positive outlook from manufacturing data released in the US, UK, China and Germany, we believe investors would be keenly following news on Greece.
The focus is on Greece’s expected completion of a debt writedown with private investors and an accord on a US$171bn (RM520bn) euro zone bailout by the end of this week.
With most Asian indices registering positive gains yesterday, we reckon that our benchmark index FBMKLCI should be raring to go after a one-day break, with the immediate resistance of 1,530 within its sight.
Stocks that should attract interest today include: (a) Tebrau Teguh, which was appointed to develop 413 acres of land in Pengerang, Johor, despite an offer of only RM0.76 for a 33 per cent stake, which would trigger a mandatory takeover offer; (b) IJM and Ahmad Zaki, after confirming that they had officially received the letters of acceptance from MRT Corp; and (c) Southern Steel, after reporting a net loss of RM5m in the Oct-Dec quarter, which was below consensus expectations.
Sector Update
Banks
2011 loan growth hit 13.6 per cent as per our forecast led by retail and business loans.
BNM maintained OPR at 3 per cent; expect 2012 loan growth to remain robust amid slight moderation.
Top picks: MAY for dividend yield and HLB for post-merger synergies.
Growth led by both retail and business loans. 2011 loan growth hit 13.6 per cent as per our forecast, boosted by 1.5 per cent growth in Dec-11. Overall, retail loans grew 12 per cent while business loans grew by a strong 15 per cent in 2011.
Looking at the retail segments, purchase of non-residential properties grew the fastest at 21 per cent followed by personal loans at 20 per cent, while mortgages — the largest component in the industry — grew 13 per cent.
Forward indicators moderated slightly as loan applications and approvals in Dec-11 fell 2 per cent m-o-m and 3 per cent m-o-m respectively, partly due to the seasonally slower year-end.
Deposit growth led by CASA. Total deposits grew 14 per cent in 2011, in tandem with loan growth, and were led by both CASA (+14 per cent) and fixed deposits (+11 per cent). As of Dec-11, loan-to-deposit ratio of 77 per cent was relatively stable from a year ago.
Asset quality improved further, with gross NPL ratio inching down to 2.6 per cent from 2.7 per cent a month ago.
Interest rates continued to accommodate growth. Bank Negara Malaysia (BNM) has maintained the Overnight Policy Rate (OPR) at 3 per cent. To pre-empt the downside risks to growth, we expect BNM to shift to an easing mode and lower OPR by 50 bps to 2.5 per cent by end 1Q12.
Expect loan growth a tad slower in 2012. We expect loan growth to moderate slightly to 13 per cent in 2012, mainly driven by corporate and consumer segments, while the wild card will be working capital loans for projects under the ETP.
Our picks. We prefer MAY (Buy, TP RM10.60) for its resilient transactional banking income and dividend yields. We also like HLB (Buy, TP RM16.00) for the potential synergies as a newly merged entity, via improved NIMs and presence in auto and SME segments.
Tenaga Nasional
TNB and Petronas are to invest in a Sabah gas power plant and LNG terminal. The gas-fired power plant will be majority-owned by TNB, with Petronas taking the lead to set up the LNG terminal. These projects are targeted for completion in 2015.
Guan Chong
The fragile global economy can indirectly affect demand for cocoa ingredients. We cut FY12F net profit by 2.6 per cent and FY13F by 0.5 per cent, after imputing: (i) lower output of 126k MT (from 150k MT) this year and 143k MT (from 164k MT) next year; and (ii) tighter EBITDA margins of 10.8 per cent (from 11.2 per cent) and 10.5 per cent (from 10.8 per cent) respectively. The net impact was partly offset by stronger DBS’ forecast USD:MYR exchange rates of RM3.15 (from RM2.78) and RM3.05 (from RM2.75) respectively.
Guan Chong (GC) is expected to meet our full-year FY11 net profit estimate of RM118.8m (+18.9 per cent y-o-y), but lacks orders visibility post-FY11.
It normally enters into forward contracts with buyers (to sell cocoa butter and cocoa powder/cake products) to secure sales upfront. But with annual production capacity set to expand from 140k MT end-FY11 to 200k MT mid-FY12, it may be challenging for GC to ramp up output immediately.
And things could get worse if the global economy remains weak; some customers deferred shipments during the 2008/09 crisis, and net profit plunged 52 per cent y-o-y and EBITDA margin fell to 3.7 per cent in FY08.
We downgraded our target valuation to 8x FD FY12F PE (from 10x previously) to reflect GC’s higher earnings risk profile. The stock remains a Buy as current valuation (at FY12F FD PE of 6.7x) is undemanding. Downside will be limited too by its 5.3 per cent FY12F dividend yield (based on 30 per cent dividend payout).
Meanwhile, the overhang in share price (after rebounding from a low of RM1.99 in Dec last year to RM2.33 currently) could ease off following the sell-down by LTAT, which has ceased as a major shareholder at the end of Dec 2011.
Southern Steel Bhd
2QFY12 registered RM5.5m net loss as costs rose faster than revenue. Revenue grew 26 per cent q-o-q led by higher exports, but costs rose 34 per cent. Average scrap price was 6 per cent lower in 2QFY12, but we suspect the company might have been utilising its scrap inventory purchased at higher prices previously.
Gross profit margin fell to 3 per cent from 9 per cent a quarter ago. Net gearing improved marginally to 1.09x from 1.12x the quarter before. No dividend was declared in the quarter.
We cut FY12F/13F earnings by 21 per cent/16 per cent after imputing higher scrap costs. Average scrap price recovered by 7 per cent m-o-m in Jan-12, but finished goods prices for bars and rods only recovered 2 per cent. Hence, spreads between raw materials and finished goods could be under pressure in the near term.
We remain optimistic the slew of construction and infrastructure projects under the Economic Transformation Plan would lift steel consumption, as well as spreads between raw materials and finished goods along with higher bar and rod prices. Southern Steel has c.60 per cent share of the wire mesh market.
Maintain Buy rating and RM2.60 TP pegged to 1.2x FY12 NTA.
OSK Research
Technical Analyser
FTSE Bursa Malaysia KLCI
Another sell-off occurred early this week but the decline was again quickly reversed. Still, a break above the 1,524 and 1530-pt resistance levels is required to confirm the return of buying.
As the index continued its sideways move below the 1,530-pt level, the risk of a sudden sell-off remains high. It happened on 16 Jan and again this week. Similar to the selling on 16 Jan, the latest sell-off found support at just below 1,510 pts, the high of 16 Aug 2011.
The weak candle of 30 Jan, akin to a “Shooting Star”, failed to induce further selling and instead was followed by the positive “Hammer”-like candle. The “Hammer” reduced significantly the negative bias of the “Shooting Star”. But again, a close above 1,524.10 pts is still required to confirm the return of buying.
This level was the high of the 2-day “Doji” of 10-11 Jan, where a break above will be positive for the rebound — as this shows that buyers are trumping sellers after the choppy sideways trade since the start of the year.
This should keep the series of higher lows since the September bottom intact, with the latest low at 1,510 pts — the low of both 16 and 31 Jan. It also increases the likelihood of erasing the negative bias of the “Long Black” candle of 4 Jan, which emerged after the 1,530-pt resistance was tested on the last day of 2011.
The sideways move of the past four weeks has also eased the early-year daily RSI overbought conditions. Thus, the index is primed for a new up leg, as long as it stays above 1,510 pts. It has also stayed above the 200-day MAV line more than a month now.
The resistance at 1,530-1,545 pts — the gap of 5 Aug — looms if the 1524.10-pt resistance level is broken. Should the index fail to progress at any of these levels, support is expected at the 1,510-pt level and a stronger one at the psychological 1,500-pt level, just below the 200-day MAV line.
A close below should see the index trading lower and confirm the negative bias of 4 Jan.
The next support is at 1,480 pts, a Fibonacci retracement level of the late-December rally. A close below the 1,450-pt level is likely to signal the end of the rebound since the September low.
Note that a breakout, either way, could see a sustained move as the Bollinger Band has contracted significantly.
Strategy
February Outlook
While we were correct in our Sell call on the KLCI for January, the market has still performed better than our expectations while global markets have rallied. Rather than doggedly sticking to our Bearish view, we are now keeping a close eye on the market with a potential upgrade to NEUTRAL if markets continue to rally in the first half of February.
An upgrade would put the spotlight back on Construction and Oil & Gas stocks, with some spillover to Financials. For now, we remain upbeat on Consumer stocks, with expectations of strong results in an otherwise lacklustre results season.
Top Buys for February are KPJ, MBSB, QL, Media Chinese and Padini.
While global markets rallied in Jan 2012 to post their best January performance since 1994, Malaysia languished as an exception among all the major markets in East Asia, thus strangely validating our Sell call on the Malaysian market in January.
Globally, the economic outlook in the US remained stable, with 66 per cent of companies that reported earnings thus far beating estimates. While the situation was different in Europe, with the European Financial Stability Fund (EFSF) losing its AAA rating with S&P, nonetheless, the slush of liquidity unveiled by the Long Term Refinancing Operation (LTRO) allowed European markets to rally accordingly as bond yields in Italy declined dramatically.
While we were correct in our calls for the market in Jan 2012, calling a SELL on the broad market and choosing “alternative” Buys as our Top 5 Buys for the month, still the market performed better than we had expected while global markets soared despite a patchy month of headlines.
While equity markets do tend to outperform in January given the rebalancing of portfolios in a new year, the strength of the market thus far has taken us by surprise.
Be prepared for an upgrade. If indeed the KLCI performs well over the next 15 days in line with a global rally, we would be forced to rethink our bearish view for 1H12. Instead, we may upgrade our call on the market to a NEUTRAL from the current Sell, and may well promote more cyclical sectors such as Oil & Gas and Construction.
While the market may subsequently turn south after a 1Q rally, still the flush of liquidity in the system may keep it resilient for most of the year. For now, we remain Defensive with Consumer stocks and other defensive mid-cap plays likely to outperform still in the short term.
Top Buys are Defensives, with good results expected. With February being a results seasons month, we go back to fundamentals to select our Top Buys. Four of our Top 5 “Alternative” Buys outperformed the KLCI in January, namely Sarawak Oil Palms, Supermax, JCY and Old Town.
For February, we like KPJ (driven by the upcoming listing of IHH), MBSB, QL and Media Chinese (all three expected to post strong results for 4Q2011) and Padini (investors continue to scour the market for cheap and good consumer stocks).
Genting Malaysia Bhd — Hot stock
In our previous analysis on 8 Nov 2011, we advised traders to accumulate Genting Malaysia’s shares during the consolidation phase in the RM2.96-RM3.93 range and wait for a possible re-test of the RM4.60 historic high in the future.
After nearly two months, the RM3.93 level was finally violated with very strong volume yesterday. The stock is now expected to continue extending its upward move within the uptrend channel. We are still eyeing the RM4.26 and RM4.60 levels as the upside targets.
This is why we advised traders to accumulate its shares at price between the RM2.96 and RM3.93 in our previous analysis dated 8 Nov 2011. Our intention was to bet on a breakout from the consolidation phase as the stock’s mid-term uptrend remains firmly intact.
Yesterday, Genting Malaysia finally violated the RM3.93 major resistance level, accompanied by very strong volume. The violation marks the end of the consolidation phase, which lasted more than one year, and also signals a continuation of the rally that started in March 2009.
We are still eyeing the RM4.26 and RM4.60 levels as the upside targets, both of which also represent subsequent major resistances for the stock. The time required for reaching either the RM4.26 level or the RM4.60 level may be a few months ahead, judging from the movement of the stock, which has been slowly trending higher along the uptrend channel.
From the current level, look for an immediate strong support at the RM3.93 level. The next strong support is detected at the RM3.19 level, followed by the RM2.96 level, which represents the floor of the previous consolidation range.
In the longer run, Genting Malaysia’s share price is expected to continue appreciating as long as it maintains its posture within the identified uptrend channel.
Sector Update
Breweries
Malaysian brewers have outperformed the KLCI since our OVERWEIGHT call in mid-September last year. Within the consumer sins sector, we liked — and still like — the breweries over the tobacco players for their defensive demand.
However, in view of share price appreciation of Guinness Anchor Bhd (GAB) and Carlsberg, we are downgrading Carlsberg to NEUTRAL but maintain BUY on GAB. GAB appears to enjoy demand that is more defensive within this already defensive sector. With just 1 BUY remaining, we are now downgrading Breweries to NEUTRAL.
Within the consumer sins sector, we have been OVERWEIGHT on breweries for resilient and stable demand, which we find attractive under uncertain economic conditions. Since our 15 Sep sector report, both GAB and Carlsberg have outperformed the market, seeing their share prices surging by 24 per cent and 32 per cent respectively. GAB, one of our top 10 defensive picks, saw its share price soaring by as much as 35 per cent to RM13.50 in mid-December, close to our RM14.20 FV.
Despite the contraction in the Malaysian economy from 1Q09-3Q09, q-o-q volume growth in Malaysia’s malt liquor market (MLM) stayed in positive territory at a stable 0.95 per cent to 1.05 per cent.
MLM volume did shrink in 1999 and 2005-07, but the contractions were driven largely by beer excise duty hikes rather than a slowdown in economic activity. With Malaysia having the world’s highest beer duties on a GDP-adjusted basis and beer duty hikes being an inefficient way of increasing government proceeds, we are of the opinion that there will not be a duty hike this year.
Hence we believe that MLM volume will continue to see positive growth, even against a weak economic backdrop this year. Other factors that should support brewers under such a scenario would be lower raw material prices and the downward substitution from more expensive alcoholic beverages (e.g. whisky, vodka) to the cheaper beer.
Among the two brewers, GAB has a stronger foothold in the off-trade (e.g. beers sold in supermarkets for home consumption) and traditional on-trade channels (e.g. coffee shops, restaurants and neighbourhood pubs) while Carlsberg places greater emphasis on the modern on-trade channel (e.g. trendier bars and clubs).
We believe that off-trade and traditional on-trade consumption are more resilient due to their lower selling prices and higher patronage from habitual drinkers rather than social drinkers. That said, some social drinkers may also downtrade to the more affordable neighbourhood pubs.
Since Carlsberg acquired its Singapore distributors in 2009, the company has been extracting more than 20 per cent of its revenue from Singapore, where tourism is a major factor driving beer consumption growth.
Tourist arrivals move in tandem with consumers’ discretionary income, giving us reason to believe that its Singapore exposure gives rise to greater demand volatility in Carlsberg’s products, which will benefit the company during an economic upcycle.
We continue to like GAB for its defensive qualities and maintain our FV at RM14.20 based on our FCFF-valuation (WACC at 8 per cent, terminal growth at 2 per cent).
Following Carlsberg’s share price run-up, we are downgrading the stock to NEUTRAL with an unchanged FV of RM8.57 (WACC at 9 per cent, terminal growth at 2 per cent).
With just 1 BUY for the sector, we are now downgrading Breweries to NEUTRAL.
Rubber Gloves
Last week, the media reported that the Thai Cabinet had approved a plan to increase the price of locally grown natural rubber to THB120 (RM11.84)/kg. This plan was proposed by the National Rubber Policy Committee, which is chaired by Deputy Prime Minister and Finance Minister Kittirat Na Ranong.
Although this price is only applicable to hard rubber, we can infer that the support price for latex is RM7.10/kg, with latex consisting of 60 per cent hard rubber content and 40 per cent water. This plan was followed by a spike up in latex prices from RM6.30 in mid-January to the current RM7.44.
Our take: The Thai Government intervention is through the Bank of Agriculture and Agricultural Cooperatives offering soft loans of THB5bn to local agricultural institutes and another THB10bn soft loan to the Rubber Estate Organisation, both at 0 per cent interest to help them purchase natural rubber from the local rubber farmers.
Of course, the main reason for the intervention was due to the poor rubber prices arising from: (i) the global economic slowdown; (ii) the flooding crisis in Thailand that temporarily suspended its production of automobiles and parts, and (iii) slower automotive growth in China.
Also, China had slowed down its purchase of Thai natural rubber and instead had switched to cheaper Indonesian rubber.
Latex price may stay above RM7.00 in the shorter term. This is due to the uplift in sentiment for the commodity created by the Thai Government.
In our view, unless the Thai Government continues to support the price of rubber in the longer run, the price would still be ultimately decided by demand and supply. Also, there will continue to be an oversupply of rubber in the global market as existing rubber plantations are likely to resume their usual production after the wintering season.
Although the cost spike is not good for all rubber glove manufacturers since they will experience a time lag in passing on this negative cost impact to their customers, we gather that most rubber glove manufacturers have been seeing increasing rubber glove sales orders during this period, as their customers appear to be replenishing their inventories after having kept minimal stock levels earlier in anticipation of further drops in latex prices.
Maintain Overweight. Our top pick remains Supermax (BUY, FV: RM2.75) and we like the company for its attractive valuation and the fact that it operates in a rather recession-resilient industry.
Also, there have been isolated cases of bird flu in Asia. Although this has not reached alarming levels as yet, healthcare MNCs may prepare themselves by gradually stocking up rubber gloves to avoid buying them at a “cut throat” price if a pandemic breaks out.
As for the industry, the risk to our view would include: (i) further artificial support of rubber prices by the Indonesian and Malaysian governments, and (ii) the RM continues to strengthen against the USD (already strengthened to RM3.05 level from RM3.15-3.20 recently).
Penny Stocks
In this report, we analyse penny stocks and look at the technical picture of some of the stocks that have captured market interest recently. A change in trend could be in store for these stocks — after spending the whole of last year (if not longer) consolidating sideways at very low levels — though further confirmation is still needed. The possible trend change should see the end of the bottoming process.
Compugates
Strong interest. The stock has been on a sideway-consolidation trend since bottoming in mid-2009. It traded between RM0.06-RM0.075 for most part of the period.
However, the high interest in the stock since late last year suggests accumulation, which may subsequently lead to a change in trend. In fact, the stock has responded well and now is trading at a 3-year high, with the recent peak higher than the high of late 2011.
Therefore, it is expected to trade higher and positions can be initiated above the stop-loss level of RM0.06. A strong move may even see it avoid a close below last week’s low of RM0.08, which also can be employed as an aggressive stop. The obvious resistance is the psychological RM0.10, which is not too far away but a violation could see it test the 5-year high of RM0.18.
Tiger
Higher lows. The stock is on a long-term downtrend since peaking in late 2007. Selling momentum has eased as the trend progressed and the higher lows since the low of Oct 2011 may lead to a change in trend. The buying spike in late 2011 also suggests an accumulation process may be ongoing.
The change in trend is not confirmed, as it requires a close above RM0.14, the highest close for November. Thus, a position can be initiated when this happens with a stop loss on close below RM0.10, the low of Dec 2011.
A more aggressive trade may choose to enter into a speculative position now, especially with the 4-week high close last Monday, in anticipation of a change in trend. The price target is the psychological RM0.20, just above the high of 2011 and a strong move could even see a test of the 2010-high of RM0.27.
Should the stop loss be triggered, the stock is likely to continue its downtrend or at best move sideways.
TechnoDex
Bottoming. Similar to Tiger, this stock is on a longer-term downtrend since peaking in early 2010. It appears to have reached a bottom after the selling spike in May last year. Downward momentum has eased since then and it is holding above the strong support of RM0.07.
Coupled with the higher low in January, the possibility of a change in trend is not much higher. This should be confirmed on a close above the 10-month high of RM0.105 and positions can be initiated on the occurrence of such a breakout.
The price target is RM0.15, the low of 2009, and a strong move could see it regaining 50 per cent of the 2010-11 decline at the RM0.20 psychological level. A close below RM0.07 can be taken a stop loss, while a more aggressive trade may choose last week’s low of RM0.085 as the stop loss instead.
Plastrade
Multi-year bottoming pattern. The stock has been trading sideways for almost three years now, which came after the price declined from its 2006 peak. The long sideways move, with the stock staying above the 3-year support of RM0.055, indicates that selling pressure has eased.
In fact, buying activity may have taken over as the stock closed above the psychological RM0.10 last week, the highest close in two years. Thus, the price is expected to climb higher and positions can be initiated at the current level with a stop on close below RM0.055.
A more aggressive trade may opt for RM0.09, which is the low of last week, as a stop loss instead. The price target is the 5-year high of RM0.15 and if this is violated, look for a test of the psychological RM0.20, which is also the 6-year high.
Maybank
Maybank’s share price may trade higher if it can hold above its support level. The share price has been trending lower since printing a high in April 2011, as illustrated by the 9-month downtrend line. The 100-day MAV line is similarly in a declining mode. However, the stock seems to have found short-term support at RM8.17.
Despite the host of “Black” candles since the start of the year, the stock could not break below the support level, which was tested four times last month. Last Tuesday saw another successful hold of the support level and the high volume recorded suggests that accumulation may be taking place.
However, the upward bias is not confirmed, which requires a close above RM8.30. This would see the price trading at a 1-month high, above the “Long White” candle of 14 Jan and the 100-MAV line.
When this happens, positions can be initiated with a stop loss on close below RM8.17. The price target is the psychological RM9.00, which capped the share price’s ascend several times in 2011, provided that the RM8.50 resistance is broken.
A close below RM8.17 should see the continuation of selling, with support expected at RM8.00 and the September-low of RM7.50.
The Media Shoppe
TMS’ share price needs to stay above the psychological RM0.45 to keep its rally intact. The stock rallied sharply last week, more than quadrupling in just five days. However, a short-term top could be in the making after a “Shooting Star” was formed yesterday.
The stock also closed below the psychological RM0.45, which was tested in the prior two trading days. The failure to close above RM0.45, despite trading above the level on an intraday basis, increases the potency of the “Shooting Star”. However, weakness is not confirmed, which requires a close below Tuesday’s low of RM0.405.
Liquidation can be made when this happens or otherwise, an aggressive trade may involve liquidation on a rebound towards the intraday high of RM0.475.
Support is expected at the RM0.28-RM0.325 zone, which is a 50 per cent to 38 per cent retracement of the January rally. Strong support is also expected RM0.25, the gap of 20 Jan.
Accumulation can be undertaken at these levels in anticipation of a continuation of the rally. However, look for the stock to continue its climb should the price stay above RM0.45, with resistance expected at its all-time high of RM0.50.
AirAsia
AirAsia’s passenger traffic and RPK grew 12 per cent and 13.7 per cent respectively in 2011, continuing with its strong momentum in 4Q with 11 per cent-12 per cent q-o-q growth, beating IATA’s global traffic estimate of 5.9 per cent RPK growth.
While we expect the group’s full-year results to miss our estimates by 7 per cent, the fact that the airline is expected to outpace consensus estimates and the industry’s overall earnings are the reasons why AirAsia remains a BUY in our list. Maintain FV of RM4.57, premised on 12x PE.
The stock is now trading at an attractive 37 per cent and 27 per cent discount to its peers’ PE and EV/EBITDA.
AirAsia carried 4.8m passengers in 4Q, up 9.3 per cent and 11.8 per cent y-o-y and q-o-q respectively, while RPK grew by 5.7 per cent and 11.1 per cent. The load factor of 81.6 per cent in 4Q2011 was weaker than the 82.5 per cent recorded in the previous corresponding quarter owing to the weaker macroeconomic environment. Nonetheless, given the floods in Thailand late last year, we consider AirAsia’s stats mpressive.
For the full year, the low-cost carrier carried 18m passengers for a 12 per cent growth, with its RPK keeping pace at 13.7 per cent. Against our forecasts, this was still a marginal shortfall of 1 per cent and 2 per cent respectively although on the brighter side, its superior capacity utilisation led to its 2011 full-year load factor coming in at 80 per cent and beating our expectation for 77 per cent.
Thailand’s passenger numbers remained strong despite the floods, rising 13.1 per cent and 4.5 per cent q-o-q in terms of passenger carriage and RPK respectively. Indonesia was the only country that showed q-o-q weakness in passenger numbers.
Although it was a typically weaker quarter for that country, the 10 per cent q-o-q drop in passengers carried and RPK reflect our concerns over stiff competition in the domestic segment.
4Q earnings preview: We see yields (revenue/RPK) remaining flat y-o-y but higher by 5 per cent q-o-q given the seasonally stronger quarter. While the expectation was for yields to have come in stronger q-o-q, we foresee the floods in Thailand as well as the weaker macro picture to have capped any further upside from Firefly’s exit from the competition.
On the back of higher q-o-q yields and RPK, a 1 per cent drop in jet fuel price, we estimate AirAsia’s 4Q revenue to jump by 16 per cent while net profit should surge 46 per cent q-o-q. However, on a y-o-y basis, although revenue is expected to be higher by 6 per cent, we anticipate AirAsia’s bottom line to shrink by 22 per cent, attributed to the 39 per cent increase in jet fuel price.
This will result in the group’s expected earnings for 2011 of RM812m missing our estimates by 7 per cent, but still 8 per cent above consensus estimate of RM753m.
Maintain earnings and BUY call, with our FV unchanged at RM4.57, premised on 12xFY12 PE, a 37 per cent discount to its peer average valuation of 14.8x.
RHB Research
Hiap Teck — Top Story
We believe Hiap Teck’s manufacturing division will continue to be weak due to lacklustre domestic demand in the absence of significant water-related projects. This is evidenced by its low-capacity utilisation rate of 50 per cent.
Demand for steel slabs produced by Eastern Steel is not likely to be an issue as there is a ready buyer. We estimate that Phase 1 of the blast furnace project could contribute roughly RM35-46m to Hiap Teck’s FY07/14 net profit.
Captive raw material from securing iron ore mining concession will transform Hiap Teck into an integrated steel producer, although actual award of the mining concession could take some time.
Our FY07/12-14 net profit forecasts are raised by 12-28 per cent, having reflected interest savings arising from the private placement and rights proceeds.
We are rationalising our valuation method in order to better reflect the recent cash call and investment in the blast furnace project that is not likely to contribute to Hiap Teck’s earnings within the next 1-2 years.
Indicative fair value is adjusted to RM0.64 (from RM0.70) based on 0.5x book value of RM1.28 (post-rights issue). Upgrade to Market Perform.
Sector Update
Banks – Underweight
Banking system loans ended 2011 on a strong note, up 13.6 per cent yoy (+1.5 per cent mom) vs. +12.8 per cent yoy in Nov ’11, mainly due to sharply higher disbursements to businesses. Both total applications and approvals, however, declined marginally mom mainly due to the business segment.
Absolute gross impaired loans for the banking sector improved further to RM26.8bn (-1 per cent mom). Together with the expansion in loan base, system-wide gross and net impaired loan ratios improved to 2.67 per cent (Nov ’11: 2.74 per cent) and 1.83 per cent (Nov ’11: 1.95 per cent). Loan loss coverage ratio rose to 99.6 per cent as at end-2011, up from 88.4 per cent at end-2010 (end-Nov ’11: 96.3 per cent). This was mainly due to higher individual allowances.
While these figures suggest that asset quality remains intact, we do note that gross impaired loans for the purchase of securities jumped 130 per cent qoq (not too significant to system, at just 1.7 per cent of system impaired loans).
Also, there was a significant increase in individual impairment allowance mom (+2.6 per cent qoq). These suggest that 4Q11 could be the start of the credit cost upcycle but how this impacts share prices ahead would largely boil down to how the numbers fare relative to expectations, in our view.
No change to our Underweight stance on the sector. Public Bank remains our top pick but we downgraded HL Bank to Underperform as we think share price has run ahead of fundamentals.
MPI
MPI expects 3QFY06/12 revenue to be flat or at best record modest growth on qoq basis. This is contrary to some of its peers that 1QCY12 revenue would decline 5-10 per cent qoq.
In addition, the company highlighted that key customers Texas Instruments, Freescale have indicated that the industry is on the verge of bottoming-out in 1QCY12.
Thus, this supports our view that the sector may have passed (or is close to) its worst and poised for a recovery in the 2H2012. Fair value of RM3.47 and forecasts maintained.
Kimlun Corporation
Since its listing in end-Jun 2010, Kimlun’s share price rallied from a low of 86.5 sen in early Jul 2010 to an all-time high of RM1.99 in early-Apr 2011 before consolidating above the 23.6 per cent FR level of RM1.75 over the next three months.
The stock’s price, however, failed to sustain above the 23.6 per cent FR level of RM1.75 and turned bearish when it fell through that level in mid-Jul 2011. From there on, the stock’s price resumed its downtrend (below the SMAs) to a year-low of 99.5 sen by end-Sep 2011.
Grossly oversold, the stock’s price staged a recovery to a high of RM1.65 by end-Oct 2011 before consolidating towards the 10-day SMA. On 27 Jan, however, the stock’s price breakout above the SMAs and subsequently gapped up to close at a day-high of RM1.55 on 30 Jan, registering a 19-sen gain over the two-day period.
Yesterday, the stock’s price saw a pullback to a day-low of RM1.48 (from its open of RM1.55) before closing at RM1.50 with a relatively low trading volume of 1.5m shares.
Noticeably, the increasing divergence of the MACD line above the signal line signifies that the short-term outlook is increasingly positive. Furthermore, the medium-term outlook is now turning positive with both the MACD and signal lines crossing into the positive region.
This is further substantiated by the crossing of the 10-day SMA (RM1.404) above the 40-day SMA (RM1.395), indicating that the stock’s price would likely trend higher over the medium term.
Nevertheless, the sharp spike in Kimlun’s share price resulted in both the RSI (63.678 pts) and Stochastic crossing into the overbought region earlier. Thus, the stock’s price may continue to consolidate now that both indicators are normalising.
Despite the sharp spike in Kimlun’s share price and the relatively high trading volume registered over the past few days, we expect the stock to continue consolidating in the immediate term given signs of normalising buying momentum (as indicated by the RSI and Stochastic indices).
Nevertheless, the stock’s increasingly positive short-term outlook (as indicated by MACD) and the likelihood of the stock’s medium-term outlook turning positive (as indicated by the MACD and SMA), suggest that any consolidation would likely be temporary and the stock’s price would quickly resume its uptrend in the short term.
As such, we expect the stock’s price to continue climbing towards the immediate resistance region of RM1.60-1.65 in the short term. Any further breakout above the RM1.65 resistance would then propel the stock’s price towards the 23.6 per cent FR level of RM1.75 and the psychological resistance of RM2.00 over the medium term.
Thus, we advise investors to buy/accumulate within the RM1.46-1.55 region in anticipation of the stock’s price resuming its climb in the short term.
While we expect good support at the 40-day SMA of RM1.40, breaching this level would turn the immediate outlook negative. Hence, investors should cut loss if the price breaches RM1.40.
Overall, we see a good risk to reward ratio for investors with an entry price of RM1.50 given that the upside to the resistance of RM1.65 and RM1.75 is 15 sen and 25 sen respectively while the downside to the cut loss level of RM1.40 is capped at 10 sen.
AmResearch
Petronas Gas
We maintain our BUY recommendation on Petronas Gas (PGas) with a higher sum-of-parts- (SOP) based fair value of RM17.62/share vs. RM15.30/share previously. This implies an FY12F PE of 22x.
Our higher SOP largely stems from a 1ppt increase in our terminal growth rate to 5 per cent for the group’s core gas processing and transportation cash flows and 40 per cent increase in the DCF of the Lekas regassification terminal (RGT) in Malacca.
We have also raised FY12F-FY14F net profits by 2 per cent-4 per cent by incorporating the contributions of the group’s RM1.2bil investment in the Lekas RGT. While details are still sketchy after our recent company visit, the group’s parent Petronas is actively evaluating the viability of additional regassification projects in Pengerang, Lumut and Lahad Datu after the completion of the Lekas terminal by August this year.
The RM60bil Refinery and Petrochemicals Integrated Development (RAPID), encompassing power generation capacity of 1,200MW and other manufacturing processes in Pengerang, Johor, is likely to involve an RGT project that is much larger than the over RM2bil Malacca terminal.
The group is also interested in additional power generation projects after the 60 per cent-owned 300MW Kimanis power plant is completed by the end of 2013. As a benchmark, a 1,000MW combined-cycle gas-fired power plant will cost around RM3bil-RM3.5bil.
The stock is currently trading at an attractive CY12F PE of 20x, below its 2009 peak of 22x. We expect further newsflow on LNG projects to further catalyse the stock’s re-rating process.
Tenaga Nasional
We reiterate our BUY call on Tenaga Nasional, with an unchanged DCF-derived fair value of RM6.95/share, which implies a CY12F PE of 12x and a P/BV of 1.3x.
The Star reported that Tenaga and Petronas will be investing up to RM2bil in a 300MW gas-fired power generation plant and regassification terminal (RGT) in Lahad Datu. The power-generation plant will be majority-owned by Tenaga while Petronas will largely undertake the construction of the RGT.
Assuming construction cost of RM3.5mil/MW, we estimate that the Lahad Datu power plant would cost up to RM1bil while the RGT account for the balance investment.
The plant, which will be using liquefied natural gas (LNG) from Sabah, is expected to be completed in 2015. The environmental impact assessment has commenced and the engineering design will be completed soon.
Recall that Tenaga had originally planned to construct a 300MW coal-fired power plant in Lahad Datu five years ago. But this was eventually aborted due to environmental concerns.
The current 200MW capacity in the East Coast of Sabah stems from costly diesel plants.
Given that diesel plants are not as reliable as either gas or coal plants, Tenaga is currently dismantling and transferring a 70MW gas/distillate dual-fired plant from Langkawi to Tawau.
We are mildly positive on this development as the current costly diesel fuel in Sabah is subsidised by the government. A shift towards gas-fired capacity would mean a more market-based gas pricing mechanism in the longer term.
The LNG for the Lahad Datu plant is likely to be at market prices, which should be borne by higher electricity tariffs, government or Petronas. Recall that the government had announced that gas subsidies were to be gradually reduced by RM3/mmbtu every six months until December 2015.
We maintain FY12F-FY14F earnings forecasts, with the expectation that the upcoming national election will provide clarity to the timing of Tenaga’s tariff adjustment to compensate for its higher fuel costs.
This includes the supply of 200mmscfd of gas at market price to the power sector from the 500mmscfd Lekas re-gassification plant in Malacca, currently postponed from July to August this year.
The stock currently trades at a P/BV of 1.1x, at the lower range of 1x-2.6x over the past 5 years. Earnings-wise, Tenaga offers an attractive CY12F PE of 11x compared with the stock’s three-year average band of 10x-16x.
* 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.
