KUALA LUMPUR, Jan 26 — This is a selection of morning calls by local research houses for the day.
HwangDBS Vickers
Market Preview
At the Federal Open Market Committee (FOMC) meeting held last night, the policymakers decided to keep the federal funds rate at low levels at least through late 2014 after trimming the official economic growth projections. In reaction, major US equity indices jumped between 0.6 per cent and 1.1 per cent at the closing bell.
The outcome of the FOMC meeting suggests that the USD — which has been weakening lately — would come under persisting pressures ahead. This may prompt a shift in fund flows to Asia, where economic growth prospects remain relatively stable.
Back home, we could see a slight lift on our Malaysian bourse today, with index heavyweights such as Maybank, CIMB and Genting possibly attracting fresh buying interest. Meanwhile, KNM may be of interest too, after entering into an exclusivity agreement to conclude the proposed acquisition of a UK-based company for approximately RM120m (which will then pave the way for the development of an 80MWe waste-to-energy plant).
Wah Seong Corp
Riding on robust O&G activities in Malaysia, Australia and Gulf of Mexico. Seeking M&A to beef up non-O&G division.
Gulf of Mexico (GoM) is the next growth frontier. Wah Seong would be able to participate in projects in the Gulf with the expected commissioning of its two plants in Louisiana, US, by 2H12. These plants will be operated by a 49:51 JV with Insituform Technologies, Inc (subsidiary of US-listed Aegion Corporation). They would be Wah Seong’s base to penetrate the GoM deepwater pipe-coating market, which has long been monopolised by its rival, Bredero Shaw.
The JV will target the US and GoM markets with its deepwater thermal insulation coating services for offshore flow assurance, which is Wah Seong’s niche expertise. We understand it has been pre-qualified for some projects in the US. Brazil could be another massive market for Wah Seong to venture into after it is established in the region.
Wah Seong lost two major contracts in Australia to Bredero Shaw Oct-Nov 11. But that could be a blessing in disguise, because Bredero Shaw’s plants would be running at full capacity for the next two years, and it might not be able to take on more jobs.
We understand Wah Seong is bidding for Julimar Development Project’s pipe-coating contract. Julimar is a subsea development that will supply raw gas from the Julimar and Brunello gas fields to the Wheatstone LNG project, and a final investment decision had been made in Sep11. The project includes installation of 75km of 18-inch corrosion resistant pipeline, which is probably what Wah Seong is bidding for.
Wah Seong may also be interested in the massive Browse LNG project that would require 900km of inter-field & infield pipelines and 350km of export pipelines, to link the central gas processing and compression facility to shore. The anchor, Woodside Petroleum, has requested a year’s grace from the mid-2012 deadline to make a final investment decision. Wah Seong may be the front-runner for Browse if the project is executed sooner, as Bredero Shaw would have its hands full.
Wah Seong is likely to be busy with Malaysian contracts next year, underpinned by Petronas’ record high RM300bn 5-year capex. It has been receiving inquiries for pipe-coating jobs in Malaysia, indicating potentially robust jobs replenishment. It may also be a direct beneficiary of Petronas’ plan to replace ageing facilities; 60 per cent of Petronas’ major producing oil fields in Malaysia average 26 years old. And there is vast opportunity in the pipeline rehabilitation programme, given that c.800km of Malaysia’s pipelines are over 30 years and would need to be replaced soon.
Finally, Wah Seong is now primed to gain pipe-coating market share in Malaysia. The RM15bn North Malay basin project (construction of a 200km pipeline to transfer gas from 9 fields to Kerteh, Terengganu) may be rolled out soon, given Petronas’ ambitious timeline of first production by 2013.
Wah Seong said it might seek M&As to turn its non-O&G industrial division into a significant earnings contributor. This division accounted for less than 8 per cent of group pretax profit in 9M11. This move may be part of Wah Seong’s IPO and de-merger plan to unlock the value of its industrial division. However, with its IPO now on hold due to weak market sentiment, it may need M&A to accelerate growth in this division.
OSK Research
Technical analyser
FKLI
The 5 Aug gap resistance of 1,532.5 pts held strong, as the index failed to close above this level despite testing it multiple times in the past three weeks. Again, the index has yet to erase the negative bias from the “Bearish Engulfing” pattern of 4 Jan.
Nonetheless, this rebound is still in progress, and to keep the upward bias intact, the index has to nullify this weak bias by closing above 1,532.50 pts — also a Fibonacci level of the July-Sept decline.
Failure to break higher, followed by a close below last Friday’s low of 1,515 pts, could see the start of a correction, with a close below the 200-day MAV line at the psychological 1,500-pt level as confirmation.
The rebound since the September bottom is still intact as long as the index stays above the latest low of 1,440 pts, with support also expected at 1,480 pts — the 62 per cent retracement of the December rally.
FCPO
The commodity found support at the RM3,100 psychological level last week, which was also the 50 per cent retracement of the late-Dec rally. This extends the higher lows from Oct 2011 at RM2750, RM2970 and RM3100.
However, the price needs to close above the early Jan high of RM3244 to keep this upward bias intact. A close above the RM3200 resistance level, which was the gap of 13 Jan, will be a good start.
Otherwise, a close below RM3134 should see a continuation of selling from the Jan high, which has to be confirmed by a close below RM3100. This may also nullify the positive indication from the 50-day and 200-day MAV line crossover.
WTI Crude Futures
The commodity is now below the psychological USD100 level after failing to violate the USD103.37 resistance level earlier this month. It nonetheless found support at USD97.40, just below the 50-day MAV line, a level that has to hold if the 4-month rally is to continue.
JCY International
JCY’s share price may trade higher after closing firmer yesterday. Earlier this month, we highlighted the possibility of this stock making a short-term top at RM1.26, after forming the “Tweezer Top” of 5-6 Jan.
We had advised that liquidation can be made on a rebound towards RM1.20. It did fall, and after 2 weeks, it appeared to have made a bottom last week. In fact, buying is still strong as the stock made a shallow pullback, retracing 38 per cent of the Dec 2011 rally at RM1.04.
Yesterday’s firm close above the RM1.20 resistance level, also above the high of last week, suggests that another leg of rally may have started. Thus a purchase can be made on another close above RM1.20, with a stop on a close below RM1.04. A more conservative trade may be to wait until the stock closes above the 52-week high of RM1.26.
First target is RM1.45, the low of May 2010, and a measured move based on the Dec rally may see it testing RM1.60, the high of June 2010.
Note that the volume is declining as the rally progresses, which is not healthy for the rally.
So it is preferable that volume picks up on the breakout. Again, sustained selling will only happen on a break of support, which now lies at RM1.04.
SKP Resources
SKP’s share price needs to stay above the psycholgoical RM0.40 to keep its rally intact. We highlighted this stock in our Hot Stock report earlier this month. The trade has worked out nicely as the stock has closed above the first target of RM0.33. However, a short-term top could be in the making after a “Shooting Star” was formed yesterday.
The stock also closed right at the psychological RM0.40, above which it traded intraday, increasing the potency of the “Shooting Star”. However, weakness is not confirmed, which requires a close below yesterday’s low of RM0.39.
Liquidation can be made when it happens or otherwise, an aggressive trade may be to liquidate on a rebound towards the intraday high of RM0.415.
Support is expected at the RM0.32 to RM0.34 zone, which is a 50 per cent to 62 per cent retracement of the Jan rally. The intraday high of the Feb 2010 spike was also at RM0.33. However, look for the stock to continue to climb should it stay above RM0.40.
Again, the next target remains at RM0.48, which is a measured move based on the 2009-2011 rally.
RHB Research
Pavilion REIT
Pavilion REIT (PavREIT) is currently the second largest MREIT in terms of market cap and asset size, with a market cap of RM3.3bn and asset size of RM3.5bn (Sunway REIT: RM4.4bn; CMMT: RM2.8bn).
It has two assets — Pavilion KL Mall, which is worth RM3.4bn, and Pavilion Tower (office) worth RM128m. PavREIT’s main earnings contributor is the Pavilion KL Mall, as the mall at present contributes about 98 per cent of PavREIT’s total income.
Key catalysts for PavREIT’s future growth include: 1) Strong management team; 2) Proactive asset enhancement initiatives; 3) Injection of new retail assets; and 4) Potential development of the surrounding areas.
We value PavREIT at a target yield of 5 per cent, close to KLCCP’s 5-year average yield of 4.72 per cent. Hence, our fair value is RM1.18, based on our FY12 DPU estimate. Initiate coverage with Outperform recommendation.
LPI
For FY12, LPI’s management expects gross premiums to grow 15-16 per cent, in line with our assumptions, and below the ~20 per cent achieved in FY11.
Management expects a lower claims ratio for FY12, positively impacted by the increase in its MAT portfolio coupled with economies of scale as it continues to grow its gross premiums. We believe there is a downside risk due to further potential losses arising from the Malaysian Motor Insurance Pool (MMIP).
We understand that BNM has no issues with LPI’s ICAR, and as such, we believe there is a high likelihood of 100 per cent dividend payout for FY12 onwards.
LPI’s consistent dividend payouts and attractive yields of 5.7-7 per cent p.a. are supported by its stable cashflow outlook and current net cash position. We believe this will support the share price at current levels, implying a FY12 PER of around 16x and fair value of RM13.60, based on our upgraded earnings estimates. Upgrade to Market Perform (from underperform).
Sime Darby
Sime Darby has entered into an agreement to acquire a 95 per cent stake in PT Indo Sukses Lestari Makmur (PTIS) for US$4.356m (RM13.5m). PTIS is involved in development of industrial plantation forest and rubber tapping. PTIS is in the process of obtaining the Timber Forest Product Exploitation Business License (IUPHHK Licence) from the Ministry of Forestry for approximately 10,000 ha of concession area.
We are slightly puzzled by this acquisition, given that management has not really emphasised its intention to expand into the timber and rubber industries, and there are no details on the concession and land use for us to assess the landbank pricing of US$435.60/ha (RM1,350/ha).
No change to our forecasts as the investment amount is minimal, while development cost would be spread out over 15 years. Fair value remains at RM10.40. Maintain Outperform.
KNM
KNM has entered into a 3-month exclusivity agreement (until 25 Apr) for the proposal to acquire 100 per cent of UK-based Poplar Holdings Ltd for GBP25m (approx. RM120m). Poplar owns 55 acres of vacant development land in Peterborough, UK. KNM paid an exclusivity fee of GBP0.5m (or RM2.4m).
The parties are targeting to sign a definitive agreement for the transaction by 8 Feb and to seek shareholders approval by 3 Apr. (Bursa)
Neutral. KNM had on 21 Dec 2010 entered into an EPC contract worth GBP450m (equivalent to RM2.2bn at the time) to develop an 80MW waste-to-energy plant on the land (under the Peterborough project). However, the project appeared to have stalled due to lack of financing amidst the credit crunch in the EU.
We believe this latest proposal is KNM’s attempt to get the project off the ground, but given the UK’s weak economic outlook, we are not hopeful and are currently reviewing our forecasts in relation to the Peterborough project.
UP, FV = RM0.71
KPJ
According to the Business Times, Khazanah Nasional is planning the listing of Integrated Healthcare Holdings (IHH) in the 2H 2012. The BT article also stated that Khazanah is looking to raise more than US$3bn from the planned listing.
Khazanah has not disclosed any details on the listing, but if the article is correct, the timeline for the listing would appear to have slipped from the mid-2012 date that had been widely expected in the market.
We also believe the listing will likely be larger than the reported RM9bn figure, and probably closer to the RM11bn mark given the assets have grown (organically within the Pantai-Parkway group of hospitals) and via acquisitions (after the increase in the stake in India’s Apollo Hospitals (from 8.8 per cent to 12.2 per cent) and recent acquisition of a 75 per cent stake in Turkey’s Acibadem hospital group) since the 2010 takeover.
In any case, the listing of IHH will, in our view, set a new and higher benchmark valuation for the healthcare sector, which in our view will be positive for KPJ.
OP, FV = RM4.71
* 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.
