Analyst call May 7
UPDATED @ 02:15:36 PM 07-05-2012
KUALA LUMPUR, May 7 — This is a selection of morning calls by local research houses for the day.
HwangDBS Vickers
Market Preview
Asian equities will probably start off the week in a sea of red. Essentially, the bears are set to return following the outcome of the French presidential election, with the winning candidate intending to reject economic austerity measures, which in turn could derail the euro zone’s plan to resolve its sovereign debt mess.
In reaction, the DJIA Jun futures month contract tumbled to hover at a 195-point (or 1.5 per cent) discount to the spot rate this morning. This comes after Wall Street’s equity bellwethers slumped between 1.3 per cent and 2.2 per cent at the closing bell last Friday night.
From the Chartroom
The FBM KLCI rose throughout the week to close at 1,591.04 on Friday for an overall increase of 23.2-point or 1.5 per cent. But we reckon the ongoing market recovery — on the back of thin volume and broadly mixed market breadth — is probably just an intermittent technical rebound (following a recent high-to-low correction of 2.7 per cent).
Technically speaking, we are still anticipating a subsequent market pullback with the benchmark index probably slipping below 1,580 again.
Malaysian Resources Corp
1Q12 earnings are expected to be strong, improving y-o-y and q-o-q driven by property earnings from Q Sentral and Sentral Residences (c.60 per cent sold or RM1.6bn sales revenue).
There was minimal recognition in FY11. However, we expect subsequent quarters to be weaker given maiden losses and inability to capitalize interest cost for the Eastern Dispersal Link (EDL). We cut our FY12F-FY14F earnings by 19-28 per cent to reflect this, imputing RM30m start up losses for EDL for FY12F.
EDL is supposed to start collecting toll in May but this will likely be deferred till post elections. We expect compensation to be forthcoming especially with the outstanding Sukuk worth RM1.3bn which has already been placed under negative watch by RAM.
Given the sensitivity of toll rates, we do not discount MRCB selling the highway back to the government. This would be positive for its balance sheet while also proving useful in terms of raising capital for the RRIM project. Another option being explored is the implementation of a levy which will largely affect Malaysians who have PRs and commute daily to Singapore.
The stock is oversold, trading at 1.6x FY13F NTA, below mean (range of 0.9x to 4x) and 11 per cent above EPF’s offer price in March-2010. Current orderbook of RM2.2bn and unbilled sales of >RM1.6bn provides solid earnings visibility over the next 2-3 years. Tenders for RRIM should open in 3Q-4Q12 with the depot contract to be awarded soon.
Given MRCB’s strong parentage and track record in KL Sentral, we are optimistic it will carve out a choice parcel. We note that EPF has not sold down any of its holdings in MRCB. The stock is a different company now vs 2008 when it traded down to -1 SD post elections as it was perceived as a politically-linked stock and prior to the institutionalization of its shareholding.
We maintain our BUY rating but lower our SOP-derived TP to RM2.70 by removing our valuation on RRIM. While an announcement on this may be a key catalyst, earnings contribution is likely to be from FY14F at the earliest.
RHB Research
MBM Resources
MBM fixed the issue price of its 3 for 10 rights issue at RM1.42 and the exercise of the accompanying free warrants at RM3.20. The total proceeds of RM340.3m will fund a RM250m capex programme (excluding Hirotako) over the next five years.
We believe management is currently working hard on potential vehicle assembly opportunities with positive news flow likely in the coming months. There could be potential opportunities with various China commercial vehicle manufacturers.
Within the MBM Group, potential assembly opportunities exist for Hino trucks. MBM owns a 42 per cent stake in Hino Malaysia.
Among the Japanese marques there could be potential opportunities with Mazda and Mitsubishi who do not yet have major local assembly operations.
Hirotako will drive MBM’s earnings in 2012. We see demand for airbags rising going forward, driven by the Government’s push for all new cars sold locally to be fitted with dual airbags, in addition to rising consumer awareness of vehicle safety issues.
We lift our 2012-14 earnings estimates by 7.1 per cent, 3.6 per cent and 3.6 per cent respectively after revisiting our Hirotako assumptions and factoring in OMI’s new alloy wheel business.
We reiterate our Outperform call and lift our fair value estimate to RM6.40 (from RM5.05) after ascribing a 10x PER (close to sector average) to 2012 earnings (from 8.5x).
Al-’Aqar Healthcare REIT
Al-’Aqar Healthcare REIT is currently the 5th largest MREIT in terms of asset size and is the only healthcare-focused REIT in Malaysia. To date, it owns 24 healthcare-related assets, including 3 overseas. Al-’Aqar is sponsored by KPJ Healthcare.
We believe the healthcare sector should continue to trade at premium valuations to the market, as: i) RHBRI expects Malaysia’s healthcare sector to grow by 8-10 per cent p.a., above the estimated 5 per cent GDP growth in 2013; ii) the sector’s defensive nature suits the current market theme; iii) the upcoming listing of Integrated Healthcare Holdings should spur investors’ interest in the sector; and iv) scarcity of listed healthcare-related stocks. KPJ’s current valuations of 23x reaffirm our expectation. We therefore view Al-’Aqar as a good proxy to the rising healthcare sector.
We are estimating a rather flattish EPU of 8.5 sen for FY12-13 and 8.7 sen for FY14, after taking into account rental growth of 1.5-3.0 per cent p.a. and the incremental income and new units from its ongoing acquisition.
We value Al-’Aqar at RM1.42, based on DDM with cost of equity of 7.4 per cent. Although current valuations appear rather rich for Al-’Aqar, as its P/NAV of 1.07x is at a premium to the MREIT sector average of 1.02x, its valuations are still cheaper compared to regional healthcare REITs – First REIT and Parkway Life REIT, which trade at P/NAV of 1.12x and 1.24x, respectively.
KFCH
The corporate exercise is coming close to fruition with the JCorp board now finalising the sale and purchase agreement (SPA), sources said. A government linked investment company (GLIC) would be part of the special purpose vehicle (SPV) in the buyout exercise.
The GLIC would be the second biggest shareholder in KFC/QSR after JCorp, upon completion of the deal. (Star)
This reaffirms our view that the deal is close to completion, and is on track to be completed before 21 May deadline. We believe the GLIC is likely to be one of the big GLC-funds, i.e. Tabung Haji, EPF, PNB or KWAP, and mainly to give the SPV, Massive Equity (MESB), a firmer footing in terms of funding.
Yum! had previously expressed its concerns with regards to the amount of debt that MESB would be raising, as it feared that this might hamper expansion plans for the franchise. We expect the announcement of the SPA signing to be within these next two weeks.
MPHB
According to a media report, MPHB is in talks with bankers to explore a new payment gateway, through online banking. The talks are still preliminary at this juncture. (The Edge Weekly)
Positive, if this were to come through. We believe controls for this type of gateway would have to be tight in order to ensure no Muslims are able to participate in it. However, we believe any decision or changes to be made with regards to regulations of the gaming industry would not happen until after the elections.
Sime Darby
Sime’s JV company, Malaysia-Sinohydro Corp has submitted claims amounting to RM670m for the civil works of the Bakun hydroelectric dam to state-owned Sarawak Hidro. The claims are still subject to negotiations and the ultimate decision will come from the Finance Ministry. (Financial Daily)
We have not imputed any earnings from this contract into our forecast for Sime. However, should the amounts prove to be uncollectible, Sime may have to make some provisions for its 35.7 per cent stake in the claims.
DRB-Hicom
DRB-Hicom reportedly has no plans to dispose of Lotus Group following a closed door meeting between DRB MD, the British Business Secretary, and South Norfolk MP. The report said that KPMG had identified China’s Youngman Automobile Group Co, Genii Capital (owner of the Renault Formula One racing team) and private Arabian investor as potential buyers. (BT)
Lotus is not scheduled to break even until 2014 based on its current business plan that calls for the introduction of four to five new models in the coming years beginning with the new Esprit in 2013, in addition to the in-house development of a V8 engine. We believe the situation remains fluid with DRB’s management not likely to rush into a decision on Lotus.
OSK Research
Technical Analyser
FKLI
The upward bias “Long White Day” of last Wednesday is still exerting its influence on the index, which closed higher last Friday. The index stayed above the 50-day MAV line for the third day and 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. However, selling pressure was detected last Friday, as seen from the “Upper Shadow”.
Thus, the index has to close above the “Long White Day” high of 1,584 today to keep the rebound arising from the oversold daily RSI intact. 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 above the 1,600 psychological level on 3 April. A failure to confirm the upward bias of the “Long White Day” mayembolden sellers. Downside risks will increase if the index closes below the 2-day low of 1,577 pts.
Further support levels are at 1,571.50 and 1,566 pts, both are important intraday levels in the past six days. Strong support remains at 1,560 pts and a successful violation of this level will confirm the weakness. 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.
FCPO
The correction that started since the peak of 12 April continued as the commodity closed lower. It also formed the “Long Black” candle in the weekly chart. The low of last Friday is just a whisker away from the measured move target of RM3,332, also the low of late-March. The commodity has also stayed below the 50-day MAV line for two days running.
Thus, the commodity is expected to trade lower but support is still expected at the measured move target of RM3,332 — the late-March low and also the 50 per cent retracement level of the Feb-April rally. Support is also expected at the psychological RM3,300, followed by the 62 per cent retracement level at RM3,262.
A retracement up to RM3,262 is still considered positive for an upward continuation, based on Fibonacci analysis. Immediate resistance is at RM3,370, an intraday support and the resistance level of the past two days and if the sentiment is weak, the commodity should not close back above this level today.
Further resistances are located at the round figure of RM3,400 and RM3,440, the gap of last Thursday and also the low of 19 April. Note that the sentiment may well turn positive in the event of a close above RM3,400 today, owing to the lowest daily RSI reading in 7 months. At the end of the day, the longer-term trend is still up as the commodity is well above the 200-day MAV line.
UM Land Bhd
UM Land may trade higher after closing at a 4-year high. Purchases can be made above RM1.63 with a close below RM1.53 as a stop loss. The measured move price target is RM2.10, provided that the resistance of RM1.85 is convincingly broken.
Alliance Financial Group Bhd
AFG may trade higher if it breaks above the 10-year high of RM4.00. Purchases can be made on close above RM4.00 with a stop loss of RM3.70. An aggressive trade may choose RM3.88 as the stop loss. The price target is RM4.70, with resistance also expected at RM4.30.
Metro Kajang Holdings Bhd
Metro Kajang may trade higher if it can close above its 14-year high of RM2.10. Last Friday’s price range of above the gap of RM2.06 is also positive. Purchases can made if it closes above RM2.10 or on pullback towards the stop loss level of RM1.90. The price target is RM2.70, with resistance also expected at RM2.50.
Multi-Purpose Holdings Bhd
MPHB has to close above RM3.00 to keep climbing higher. Purchases can be made if this happens with last Friday’s gap of RM2.90 as a stop loss. The price target is RM3.50 provided that the 2011 high is broken convincingly. The failure to close above RM3.00 could see sellers returning, and strong support is located at RM2.68.
VS Industry Bhd
VS Industry may trade higher after closing the highest in 3 months. The high volume also suggests firm buying support. Purchases can be made above RM1.62 with a stop loss on close below last week’s low of RM1.58. Conservative traders may wait until RM1.70 is broken before entering, with RM1.52 as a stop loss. The price target is RM2.00, with resistance expected at RM1.80.
Uchi Technologies Bhd
Uchi may trade higher if it can close above 7-month high of RM1.25.
Purchases can be made if this happens with a stop loss on close below last week’s low of RM1.20. The price target is RM1.40, with a possible test of the 2011-high of RM1.50. Strong support lies at RM1.10.
Kulim
StarBiz reported that the buyout of KFC Holdings and QSR Brands by a Johor Corp-led consortium is coming closer to fruition, with the Johor Corp board now finalizing the sale and purchase agreement.
The sale of QSR by Kulim to its parent company, Johor Corp, was to be completed in April and hence, it is taking longer than expected. However, we remain confident that the transaction will be completed in due time.
From our understanding, Kulim has not identified any asset to acquire using the proceeds from the sale of QSR, which increases the likelihood that Kulim will return the cash to shareholders in the form of a special dividend, much like what it did with the proceeds from sale of Natural Oleochemicals.
To recap, Kulim stands to receive RM1.1bn from sale of its QSR stake, which if fully paid out as dividend, will result in a special dividend of 87 sen per share.
Of the two parcels of oil palm plantation assets amounting to 13k ha in total which Kulim is acquiring from Johor Corp, one parcel was completed at end-2011 with the second parcel of 7k ha still outstanding. The additional 6k ha has helped boost Kulim’s 1Q production by 4.7 per cent over last year.
Kulim’s 50.7 per cent stake in London Stock Exchange-listed New Britain Palm Oil (NBPO) has been watered down to 49.5 per cent following the issue of 3.3m new NBPO shares for the acquisition of the remaining 20 per cent stake in Kula Palm Oil. With that, NBPO ceases to be a subsidiary of Kulim.
We believe the impact on Kulim’s bottom-line will be negligible, though revenue will fall substantially as NBPO will now be equity-accounted only.
We continue to like Kulim, being the cheapest large-scale plantation company in Malaysia. Kulim is the fourth largest plantation company by planted hectarage with 118.6k ha of oil palm planted area. However, unlike the other big names, Kulim only trades at forward PERs of 10.0x and 8.9x based on FY12 and FY13 earnings.
Our FV remains at RM5.47, which still includes QSR’s contribution, but could be adjusted downwards should there be a special dividend after the completion of the QSR sale.
Malaysia Smelting
The Star reported on Saturday that the Indonesian government has imposed a 20 per cent tax on some raw metal ore exports, and will prohibit shipments of raw materials unless miners submit plans to build smelters. The export ban will definitely affect mining companies, especially for those having long-term agreements with external parties.
The rules are a precursor to a total ban on raw material exports by 2014. According to the report, tin ore is among the metals in the export ban list and Malaysia Smelting Corporation (MSC) operates its tin mining activities in Indonesia via its subsidiary, PT Koba Tin.
We believe PT Koba Tin’s tin mining operations in Indonesia will not be affected by the Indonesian Government’s latest move. The export tax is only applicable to unprocessed and non-value added raw metal ore. Since MSC has its own tin smelting plant in Bangka Island and produces concentrated tin metal ingots which are considered value-added products, the ruling does not affect MSC in any way.
In fact, the ban on raw tin ore exports was already implemented by the Indonesian government a few years back. Therefore, we think it would be appropriate for us to maintain the status quo for MSC and not change any of our assumptions.
As stated in our initiation report, MSC’s Indonesian operations are currently undergoing a restructuring exercise. As such, we anticipate some gestation activities to take place at PT Koba Tin and thus, it is expected to post negative results in 1HFY12.
Based on the movement of LME tin prices, we note that the price of tin is averaging at USD23,000 a tone in 1QFY12 which is below our assumption of USD24,000 a tonne for FY12 and thus, we expect lower contributions from another MSC subsidiary, Rahman Hydraulic Tin SB, which has tin mining operations in Perak, Malaysia.
We have already factored in a weaker start to FY12 but remain positive on PT Koba Tin’s ability to turnaround in 2HFY12. Moreover, tin prices may surge in the medium term as the reinstallation and refurbishment of electrical and electronic production facilities, which were devastated by the massive earthquake in Japan and severe floods in Thailand, will lead to a surge in demand for solder and hence, tin.
Reiterate BUY, unfazed by potential weaker start. While there are still no new developments on the extension of PT Koba Tin’s Contract of Work (CoW) or mining concession which will expire in March 2013 and potential award of new mining concessions in the Democratic Republic of Congo, we choose to maintain the status quo for MSC as per our initiation report.
Although we are anticipating a weaker 1HFY12, we still think that MSC justifies our BUY recommendation with its FV remained unchanged RM5.60, given that: (i) it is trading way below its peers on the basis of both book value and earnings multiple, (ii) the discount rate used in our DCF valuation is very conservative, which is twice the group’s actual WACC, and (iii) the potential turnaround of PT Koba Tin in 2HFY12, which could boost the performance of MSC moving forward.
* 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.
