Analyst call May 14
UPDATED @ 11:52:31 AM 14-05-2012KUALA LUMPUR, May 14 — This is a selection of morning calls by local research houses for the day.
Although Wall Street finished between flat and just marginally lower last Friday, we could see renewed selling pressures on Malaysian equities when trading resumes this week. Essentially, unresolved political stalemate (in forming a government) in Greece is expected to weigh on investors’ sentiment for the time being.
As such, the benchmark FBM KLCI may test its underlying resilience by challenging to crack below the immediate support level of 1,580 ahead.
Against a fairly quiet market backdrop, stocks that may find added trading interest today include: (a) Puncak Niaga, as it has reportedly emerged as a frontrunner to bag marginal oilfield contracts by Petronas, according to one business weekly; (b) KrisAssets, after announcing details on the proposed disposal of retail properties to facilitate the listing of a REIT by its parent IGB, including a plan to distribute the REIT units and cash proceeds to its shareholders; and (c) Kimlun, which has won a building construction contract valued at RM149m.
From The Chartroom
The FBM KLCI oscillated between 1,580 and 1,591 (notwithstanding a blip of 1,573 caused by a trading order error) last week before ending at 1,584.32, down 6.7-point or 0.4 per cent from two Fridays ago.
From a technical perspective, we reaffirm our stance that the benchmark index is in a bearish pattern already. If so, then it may be just a matter of time before the FBM KLCI slides below the immediate support level of 1,580. After which, the bellwether could pull back deeper towards the next support line of 1,555.
Axiata’s 85 per cent-owned subsidiary, Dialog, recorded Rs531 net loss (RM13m) in 1Q12 primarily due to Rs2,073m (RM50m) forex translation charge arising from a weaker rupee and Rs343m (RM8m) charge related to the acquisition of Suntel, which was completed on 21 Mar 2012.
Meanwhile, core net profit surged 85 per cent y-o-y (+14 per cent q-o-q) to Rs1,885m (RM45m) on higher revenues across the board, strong subscription growth and increase in market share.
Revenue and EBITDA were in line at 24 per cent and 26 per cent of our FY12F numbers, respectively. Higher regulatory costs (from US$1ct to US$3cts/minute) and energy prices since Feb12 dragged Dialog’s topline growth of 8 per cent q-o-q.
Dialog’s subscriber base grew 3 per cent q-o-q while ARPU increased by Rs7 to Rs346 in the quarter. This was due to higher margins and gain in market share in the industry.
Its peers are taking a more muted stance, preferring to conserve cash in an inflationary environment, which means there is unlikely to be aggressive price competition in the near future.
The coming quarters will see the full impact of higher energy costs (c.5 per cent of revenue), but contribution from Suntel (to be merged by 2Q12) will buoy FY12 earnings (revenue +9 per cent; EBITDA +7-9 per cent).
Dialog’s contribution to Axiata will be driven by steady subscription growth, resilient ARPUs, and absorption of Suntel into the former’s fixed broadband segment. We expect Dialog to account for 6 per cent of Axiata’s FY12F EBITDA of RM7,447m.
The index is likely to trade lower after it broke the tight sideways trading range identified in our previous report. To recap, the index has been trading in a tight range of 1,577-1,585 pts on 8-10 May.
Last Friday’s close below the 1,577 support level indicates a downside break and the next move is likely to be down. This confirms the selling pressure seen last Wednesday, where it failed to close above both the 2 May “Long White Day” high of 1,584 pts and the 50-day MAV line.
Note, however, that the longer-term trend remains positive as the series of higher lows since Sept 2011 is intact, with the latest low at 1,560 pts. The index is well above the rising 200-day MAV line, which is also boosted by the longer-term positive indication of a “Golden Cross” that occurred back in February.
Thus, the negative bias that arose from the false breakout of the psychological 1,600 pts in early April continued to weigh on the index. Downside risks will increase significantly should the index close below the 7 May-low of 1,570 pts and the upside bias of 2 May will be erased on a close below 1,565 pts.
Strong support remains at 1,560 pts and a successful violation of this level will confirm the lower highs of the past 2 months. Further supports lie at the 50 per cent retracement of the Feb-April rally at 1,550 pts and the 62 per cent retracement level of 1,540 pts.
Given the weak move last Friday, only a close back above 1,585 pts will signal a convincing return of buying.
Resistance levels remain at the broken supports of 1,588.50 and 1,594 pts, also Fibonacci levels of the April decline. Again, a close above the psychological 1,600 pts is required to completely erase the negative bias of the false breakout on 3 April.
Selling remains the order of the day as the month-long correction continued. The “Long Black Day” last Friday saw the commodity closing below RM3,300 support level, thus confirming the continuation of the downtrend that started on 12 April.
Weakness was highlighted by the commodity’s failure to cover the gap created during last Friday’s second trading session. It also stayed below the 50-day MAV line.
Thus, the commodity is expected to trade lower but support should come at RM3,262, which is the 62 per cent retracement level of the Feb-April rally.
The level also lies between the Dec 2011 and Nov 2011 high of RM3,250-RM3,270 and support can be reasonably expected to come within this area.
A failure to find support at these levels will decrease significantly the possibility of an upward continuation of the uptrend since Oct 2011. The next support is the March low of RM3,224.
Note, however, the commodity is still above the 200-day MAV line and the daily RSI is at the most oversold level in almost a year. Therefore, a return of buying cannot be discounted altogether, but the likelihood of such a development will depend on whether the commodity can close above RM3,300.
The next resistance is located at last Friday’s high of RM3,330, followed by RM3,370 — the intraday support and resistance level of the past week.
We see clearer skies ahead as SIA’s management appears more optimistic on the outlook, citing improved bookings and the likelihood of yields improving after 6 consecutive months of decline. While high jet fuel price continued to dampen earnings, it sees other expenses remaining under control and continuing to improve.
Despite cutting earnings by 6 per cent to factor in higher jet fuel prices, we remain positive on SIA and maintain our BUY call, but at a lower FV of SGD12.13, premised on 1x FY13 BV. Buffered by its net cash hoard of SGD3.9bn, SIA should be able to weather the headwinds should the outlook deteriorate.
Golden Agri Resources
We are maintaining our Buy call on Golden Agri, with an unchanged FV of SGD0.97. Given the stock’s high sensitivity to CPO price, it is not surprising that the counter has been weighed down by falling CPO price.
Still, with its stronger q-o-q earnings, undemanding valuation and CPO price now close to bottoming, we believe the downside for Golden Agri is limited. Golden Agri is the most compelling Buy among the large cap plantation companies under our coverage.
In annualised terms, Golden Agri’s 1QFY12 core earnings were within our expectation, which says a lot given that 1Q tends to be a weak quarter. Compared to consensus forecast, which is 5.1 per cent above our forecast, Golden Agri’s numbers were also within estimates.
In contrast with 4QFY11, during which Golden Agri’s results were weighed down by heavy fertilizer application, its manuring activity was lighter in 1Q as the bulk of the task was carried out in 4Q. This helped the company register a 103.5 per cent sequential growth in earnings.
Golden Agri’s 1Q profit was also helped by stronger profitability at its refining business, which received a boost from the lowering of Indonesia’s export duty on refined palm oil.
Products which commanded 3 per cent-5 per cent margin previously now fetch a 10 per cent margin. Golden Agri did not see as much benefit from the export duty change in the 4Q due to forward sale.
The company’s nucleus FFB production grew by 2.1 per cent against last year, which fell short of its full-year expectation of 5 per cent-10 per cent. It expects to see most of the growth in 2H, making up 60 per cent of its full-year production.
The company planted on 1,700 ha in 1Q while clearing 1,500 ha for replanting. This resulted in a marginal increase in total hectarage including plasma, while its nucleus hectarage declined slightly from 361,060 ha in 4QCY12 to 360,703 ha.
We are making no change to our forecast. The stock is trading at only 11.5x FY12 and 10.8x FY13 earnings based on our conservative CPO price assumption of RM3,000 for CY12 and RM3,100 for CY13.
We are reiterating our Buy call on Kencana Agri with an unchanged FV of SGD0.45. After last year’s poor performance, we believe the company is on track for much better showing this year with the completion of much-needed infrastructure and a lower yield drag arising from a higher proportion of prime age trees.
Kencana remains one of the best long-term growth stocks, with about 80 per cent of trees yet to reach peak maturity. This means sustained production growth for the next 7 years from its existing trees.
Annualised core earnings fall short. In annualized terms, Kencana’s 1Q core earnings were significantly short of our forecast of USD19.1m. However, we are maintaining our forecast as we believe its financial performance will get significantly better in the remaining quarters.
We remain convinced that Kencana’s profitability will improve for the rest of the year. Note that the company has 12,068 ha of prime trees, which make up 51.0 per cent of its total mature hectarage. This compares with 4QFY11, during which Kencana only had 8,386 ha of prime trees, or 39.3 per cent of its total mature area.
The higher percentage of prime trees means it will experience a lower yield drag this year, and hence see more robust profits.
Kencana’s production grew by 6.0 per cent to 81,003 tonnes. Compared to our production forecast of 438,916 tonnes of FFB, the 1Q production only made up 18.4 per cent of our forecast.
In comparison, its 1QFY11 production comprised 24.1 per cent of the company’s FY11 production. We believe a significant pick-up will materialize in 2H.
The company carried out new planting on 954 ha in 1Q, bringing its nucleus planted hectarage to 43,668 ha. On y-o-y basis, its planted hectarage increased by a commendable 22.3 per cent.
Kencana remains one of the best long-term growth stocks under our coverage, with an estimated 80 per cent of its trees below peak maturity. Its stock price under-performance in the past 12 months has made its valuation more compelling.
The stock is trading at an EV of USD10,739 per planted ha. Although its PE based on FY12 appears high at 17.3x, this will contract to just 10.3x based on FY13 earnings.
CSC Steel Holdings
CSC Steel got off to a weak start in 1QFY12 as its net profit of RM5.6m fell below our and consensus estimates. This could have been due to sluggish demand, a struggling global economy and the persistent unfavorable spread between Hot and Cold Rolled Coils.
Being cautious on the near term outlook, we are revising lower our FY12 and FY13 earnings forecasts, as well as our valuation parameters.
We derive a new FV of RM1.33 based on 0.64x FY12 BV, and downgrade CSC Steel to a NEUTRAL.
Although CSC Steel returned to the black in 1QFY12 with net profit of RM5.6m (+>100 per cent q-o-q, -76.9 per cent y-o-y), its numbers still indicate a very weak start as they were way below our and consensus estimates.
The weak results can again be attributed to the continuing sluggishness in steel demand. We had earlier anticipated a short-term spike in steel prices but it turned out that the momentum was not that impressive.
A quick look at the international Hot Rolled Coils (HRC) and Cold Rolled Coils (CRC) prices showed us that the margin between CRC-HRC remained slim, and thus continued to erode CSC Steel’s bottom line.
We believe that CSC Steel will still face challenges in the near term, at least in the upcoming 2QFY12, as market sentiment remains weak.
Domestically, the company is still experiencing inconsistent raw materials supply while globally, the slowdown in China’s economic growth and the protracted European debt crisis are likely to adversely affect buying sentiment. Overall, we are cautious on CSC Steel’s performance, which prompts us to revise our FY12 and FY13 earnings forecasts downwards by 14.9 per cent and 9.9 per cent respectively.
We had earlier pegged the counter’s valuation based on book value so as to better reflect its financial strength. However, amidst the ongoing challenges in the steel sector and the feeble global economy, we are revising our valuation parameter lower to a -0.5 standard deviation of its 5-year PBV trading band (previously at mean), from which we derive a FV of RM1.33 based on 0.64x FY12 BV.
Despite the hurdles to earnings, CSC Steel possesses a large cash pile of RM224.4m on its balance sheet, which will allow it to honour its dividend payout mandate of 50 per cent.
With that, we are downgrading CSC Steel only to NEUTRAL, and will revisit the counter when the market environment improves.
Malaysia Building Society
MBSB’s 1QFY12 total income and earnings were within our expectations, accounting for 22.7 per cent and 22.0 per cent of consensus and our forecasts respectively.
Asset quality improved, as evidenced by its improved net impaired loans ratio of 7.3 per cent in the current quarter versus 8.5 per cent in the preceding period. We expect the group’s sequential performance to be better supported by its corporate and retail businesses.
Maintain BUY, with an unchanged fair value (FV) of RM2.70, premised on 2.6x FY12 PBV.
Malaysia Smelting Corporation
Malaysia Smelting Corp (MSC) turned around in 1QFY12, although its RM5.7m core net profit represented only 6.5 per cent of our full-year estimates. We expect its smelting plant and mining operation in Malaysia to continue to generate promising return. However, PT Koba Tin is still mired in losses arising from the closure of expensive pits, which led to lower tin volume and higher unit costs.
We see the losses easing on the commissioning of cheaper pits but the renewal of its mining right remains a hurdle. We see its associate contribution improving after the resolution of shipment issues encountered in 1Q. Hence we maintain our BUY recommendation, with a FV of RM5.60.
At the Monetary Policy Committee (MPC) meeting on Friday, Bank Negara Malaysia (BNM) decided to maintain the Overnight Policy Rate (OPR) at 3.00 per cent for the sixth consecutive time since the 25bps hike in May 2011.
This was very much in line with our house view and market expectations based on the Bloomberg median forecast.
In the monetary policy statement, the central bank acknowledged the continued rise in uncertainties in regard to the global economy, with recent developments suggesting a re-emerging of stresses in the international financial markets.
In our view, the domestic economy will be able to sustain its momentum, with growth led by the further roll-down of major projects under key government initiatives such as the Economic Transformation Programme (ETP).
With regard to inflation, while the central bank expects price levels to moderate in 2012, upside risks to inflation could emerge arising from the higher levels of global energy and commodities prices.
BNM’s decision to maintain policy rates unchanged for the sixth time running coincided with similar decisions made by most central banks around the region in recent days.
In our view, we envisage inflation to likely slow to 2.5 per cent for 2012 corresponding to the higher base effect as well as falling growth dampening inflationary pressures, and potentially creeping higher in 2H12.
As such, we expect the OPR to remain unchanged in 2012 as the current level of 3 per cent continues to be at an accommodative level towards promoting growth, while ensuring adequate levels of price stability.
Moving forward, in line with both the meager manufacturing as well as trade performance in March, we forecast GDP growth to come in at 4.5 per cent YoY in 1Q12.
Despite the slowdown, however, this is not a cause for concern at all, as it is still near the trend-wise growth of 5 per cent. Full-year, we maintain our forecast at 5 per cent for 2012.
The Star reported that construction works for the new Samalaju Port are scheduled to commence early next year. This follows revelations that Bintulu Port Holdings (B Port) would fund the RM1.8bil new port via a combination of debt and equity, including a sum of RM300mil for investments in port equipment.
B Port has been tasked with building, owning and operating Samalaju Port on some 450ha of land. The port is envisaged to serve a growing catalogue of energy-intensive industries operating in Samalaju Industrial Park, specifically for the import of raw materials and export of finished products.
The exact financial structure would be announced soon after deliberation with B Port’s major shareholders, i.e. Petronas (32.79 per cent), Sarawak State Financial Secretary (30.68 per cent) and Kumpulan Wang Persaraan (KWAP: 9.52 per cent).
PriceWaterhouseCoopers (PWC) had recommended the funding structure after it was appointed by B Port to carry out a detailed study on the project’s financial viability last year.
Part of the project’s funding would come from federal grants. Earlier reports had indicated that the Federal government had early this year approved a RM500mil facilitation fund to kick-start the project’s dredging and early-phase development cost.
We gather that B Port is currently optimising the design of a new port to lower its development cost. Based on the port’s design and layout plan as approved by the Sarawak State Planning Authority, Samalaju Port can handle 18 million tonnes of cargo compared with B Port’s current capacity of 16 mil tonnes for non-liquefied natural gas cargos. This could be further expanded to 30 million tonnes.
Site works for the new port are well under way. B Port is also on track to award a RM200mil contract for interim facilities later this month. Eleven local contractors have already been shortlisted to construct a 300m-long berth for barges with a depth of 7m. When fully completed, these facilities are scheduled to be commissioned by 1Q 2013.
For the main construction package at Samalaju Port, we gather home-grown contractors such as Hock Seng Lee (HSL) would be suitably positioned to bid for it. Notably, HSL has a prior track record of developing the RM300mil Tg.Manis deep sea fishing port, supported by its dredging expertise.
Apart from Samalaju port, we foresee a step-up in job flow visibility in the coming months as the development pace within SCORE heightens. Notably, other major contracts that are on the cards are: (i) 500kv Sarawak backbone transmission line (RM3bil); (ii) Balance of works for the Kuching sewerage system (~RM1.7bil); and Balingian coal-fired plant (RM2.5bil).
HSL, Sarawak Cable and Press Metal remain as our top picks for leverage to SCORE. Within this space, we also have BUYs on Naim Holdings, KKB Engineering and B Port.
It was announced on Bursa that IGB’s 75 per cent-owned KrisAssets will sell MidValley Megamall and Gardens Mall for RM4.6bil to IGB REIT. The deal values the two malls at a whopping RM1,815psf — an about 25 per cent discount to Pavilion Mall’s valuation of RM2,400psf — and would result
in a revaluation gain of RM1.3bil to KrisAssets or RM992mil (or RM0.67/share accretion) to IGB.
We understand the acquisition of the mall will be satisfied via the issuance of 3,400 million units in IGB REIT and the balance of RM1.2bil via cash.
Of the 3,400 million units, 2,730 million units will be distributed to its entitled shareholders and KrisAssets has proposed an offer for sale of the remaining 670 million units via an IPO of IGB REIT, of which 469 million units will be offered to institutional funds.
The 2,730 million units form part of KrisAsset’s proposed distribution to its entitled shareholders amounting to RM3.9bil. The remaining RM1.27bil would comprise special dividend and capital repayment which translates into an attractive RM2.88/share.
Based on IGB’s 75 per cent-stake, the company stands to get a handsome cash payoff of RM951mil or RM0.64/share.
Nonetheless, IGB would need a delicate balance between a special dividend and deploying freed capital to fund development projects overseas.
As we have highlighted earlier, IGB is exploring development opportunities in London and Taipei, whereby we understand that IGB would require about RM1bil to fund the acquisition of a site in London.
IGB rose by close to 20 per cent after our upgrade in January, but has been hovering at RM2.75-RM2.80/share over the past two months given the weak sentiment in the market.
We expect the stock to trade at a narrower discount — now at about 39 per cent — given the good valuation given to its prime assets.
* 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.