Analyst call Oct 31
KUALA LUMPUR, Oct 31 — The following is a selection of analyst calls by local research houses for the day:
From OSK
TNB
TNB’s results were within our expectations although below consensus. This was because the utility company had to generate electricity from expensive oil and distillates as it continued to be plagued by gas supply problems. Going forward, TNB only expects this issue to be resolved in mid-2012 when the Melaka LNG plant is completed. For now, it is seeking compensation from Petronas for the additional fuel cost it has had to incur owing to the gas shortage. We trim our earnings forecasts by eight per cent and seven per cent for FY12 and FY13 accordingly. Our DCF based FV is intact at RM6.24 and we maintain our NEUTRAL call.
Petronas contract policy update.
Last Friday, Bernama reported that there is no change in Petronas’ licensing policy related to companies engaged in Malaysia’s upstream O&G industry. The report said under the Petroleum Regulation 1974, both local and foreign companies wishing to commence or even carry out any business or services related to Malaysia’s O&G upstream operations must apply for a licence from Petronas. The clarification was made following an Edge Weekly report last week that such a licence may not be required going forward in bidding for local O&G jobs.
Firstly, we note that Petronas has embarked on a long term plan to nurture the local O&G service providers, with the first few being Kencana, SapuraCrest and Dialog, which have been awarded marginal oilfields to expose these companies to upstream O&G activities. Secondly, we understand that most of the local O&G service providers currently have spare capacity as O&G activities have slowed compared with before the global economic recession in 2008 when their capacity was mostly tailored to local needs. Noting this spare capacity, it may not make economic sense for Petronas to get resources from the non-local O&G services providers whose capacity is mostly built to meet the requirements of their own countries or regions of operation. Finally, this licensing requirement does not prevent foreign companies from participating in Malaysia’s O&G sector as what is required is a partnership with a local licence holder. In fact, such participation facilitates the transfer of technology and helps enhance the competence of the local companies while at the same time allowing the foreign companies to benefit from the development of the country’s resources.
Our top picks are Kencana (Buy, FV: RM3.17) and Dialog (Buy, FV: RM3.66). With an improving global economic outlook and crude oil price having gone back to around US$90/barrel, we believe that
O&G activities will gradually pick up, which would then benefit all O&G service providers through better utilisation rates and higher sales/unit or services/hour rates. On the local front, we expect the industry to be in for more marginal oilfield developments as well as the increasing need for brownfield services to boost O&G production while waiting for the commencement of deepwater activities on a large scale after pre-development preparations are completed. We gather that the ratio between shallow waters and deepwater O&G production is still at 70:30 but over time, the deepwater portion will pick up after all the easy O&G finds deplete. Hence, we think Petronas is now preparing the local O&G supporting services providers for marginal oilfield (shallow water) developments first before embarking into the more challenging terrain (deepwater).
Golden Agri
Golden Agri’s Jakarta-listed subsidiary PT SMART posted IDR1,492.9 billion in net earnings for the 9 months ended September 2011, nearly double that reported in 9MFY10. For 3Q alone, PT SMART’s net profit stood at IDR333.7bn, down significantly from IDR575.2bn in 2Q.
On the surface, the decline in PT SMART’s earnings looks worrying but when we delve into the details, it becomes apparent that the q-o-q earnings drop was due to its downstream activities. Since the downstream segment typically makes up a small portion of Golden Agri’s overall earnings, we are not overly concerned about the decline. PT SMART’s upstream earnings actually rose by 4.4 per cent q-o-q in 3Q.
This suggests that Golden Agri’s 3Q earnings will be at worst flat on q-o-q basis. Golden Agri made USD362.9m in core earnings in 1H, of which USD157.2 million was from 2Q. Should the 3Q earnings be flat sequentially, 9M earnings will total USD520.1 million compared to our forecast of USD577.7m for the full year. This means that even if Golden Agri’s 4Q earnings plunged by 50 per cent from 3Q, it would still handily beat our forecast. We are maintaining our earnings forecast pending the release of its 3Q results on 11 Nov but believe we will raise our forecast by some 5 per cent.
Chongqing Iron & Steel
Chongqing Iron & Steel Co. Ltd’s (Chongang) core net loss of RMB319.4m for 9MFY11 was again a letdown for us and the market. The higher raw material cost translated into an unfavourable spread and the high capex incurred in its relocation also jacked up financing and depreciation costs. We expect the company to stay in the red for the next two years but are keeping our valuation parameter at 0.33x FY11 BV, or -1.5 std deviation of its historical trading range. The FV is slightly lower at HKD1.31 after our earnings downgrade.
Angang Steel Co
We are not surprised that Angang Steel Co Ltd’s (Angang) 9MFY11 core net profit of RMB172m fell short of market expectation. The higher cost of iron ore supplied by its parent and its flat steel focused business model are largely to blame for the weak performance. Given iron ore supplied by its parent will be priced at a level similar to that in 3Q even as the spot market and steel prices are heading south, we expect a loss in 4Q. Nonetheless, we are keeping our NEUTRAL recommendation on Angang as our fair value of HKD5.26 is premised on a conservative valuation and offers limited downside risk.
Mudajaya
Last Friday, Zelan (NR) announced that it had received a Letter of Intent (LOI) from Mudajaya with regards to the 1000MW Tg Bin extension in Johor. The LOI indicates Mudajaya’s intention to subcontract out a portion of the civil works to Zelan worth not more than RM300m. This subcontract will be contingent on the Alstom-MudajayaEversendai consortium being appointed as the EPCC contractor for the Tg Bin extension. From our checks on Bursa Malaysia, neither Mudajaya nor Eversendai has made any announcements pertaining to the LOI.
Indicates that consortium is in the lead. Based this recent announcement by Zelan, we interpret that the Alstom-Mudajaya-Eversendai is in the lead to be appointed as the EPCC contractor for the 1000MW Tg Bin extension job. Apart from this consortium, we gather that there is another Japanese-led party eyeing for the job.
We believe the consortium has an edge, given that previous phases of Tg Bin were done by Alstom.
The entire EPCC value is understood to be worth around RM4.5 billion. Mudajaya will primarily be involved in the civil works portion which we believe to be worth RM675-900 million, based on 15-20 per cent of the overall EPCC value. We note that Mudajaya has a very strong track record in power plant civil works. It is currently working on the Janamanjung extension (RM720 million) and the Chhattisgarh IPP (RM3.4 billion).
Maintain BUY, FV raised to RM3.94. Despite the resignation of its former MD, Mr Ng Yin Loong, we understand that it is still “business as usual” for Mudajaya, which is currently led by Mr Anto Joseph (the previous joint-MD). We are now less concerned of the potential management transitional hiccups and lower our discount to Sum of Parts (SOP) from 50 per cent to 30 per cent. This, in turn, increases our FV from RM2.96 to RM3.94. We maintain our BUY rating on Mudajaya – highlighting that it remains an attractive possible takeover target.
Johor Tin
Johore Tin Bhd (JTB) is involved in the manufacture of various tins, cans and other containers, as well as printing tin plates via its subsidiaries. In August 2011, it ventured into the manufacturing of dairy products, including sweetened condensed milk and evaporated milk, via the acquisition of Able Dairies. We view JTB’s dairy products manufacturing business positively as the move will propel its earnings going forward. Based on our SOP valuation of JTB’s tin can business at 6.5x FY12 EPS and dairy products business at 8x FY12 EPS, we value the stock at RM1.62 and initiate coverage with a BUY recommendation.
From HwangDBS Vickers
RHB Cap
• Potential merger with OSK IB business will elevate RHB Cap in the capital markets, topping CIMB in broking
• Fundamentals intact, but valuation has reverted to “pre-M&A buzz” level
• Reiterate Buy and RM9.60 TP (25 per cent upside). RHB Cap has three months (from Bank Negara’s approval on 13 Oct) to strike a deal with OSK. Based on OSK IB’s RM1.25 billion net asset value as of Dec-10 and ascribing 1.5-2.0x BV as target M&A multiple, the deal would cost RHB Cap RM1.9-2.5 billion. If we exclude the two buildings on Jalan Ampang (OSK head office, RM227m NBV), the price tag could drop to RM1.5- 2.0 billion. We suspect the consideration would involve cash plus RHB Cap shares so that OSK IB’s core management team continues to play a significant role in the merged outfit. Our analysis shows that if RHB Cap opts for 60:40 cash:shares route, there would be mild positive impact on EPS but if funding is skewed towards shares, we expect EPS dilution. ROE would be diluted slightly by 1.6 per cent.
Maintain Buy and RM9.60 TP based on the Gordon Growth Model and assuming 5 per cent growth, 11 per cent cost of equity, and 16 per cent ROE. Our target price implies 1.7x FY12F BV. RHB Cap’s fundamentals have not changed and it remains one of the cheapest banks in the sector. Its current valuation (1.3x FY12 BV) has reverted to pre-M&A excitement levels stirred by Maybank and CIMB.
From RHB
Axiata
Axiata’s 67 per cent-subsidiary, XL Axiata (XL), posted 9MFY11 core net profit of Rp2.14 billion (+1.3 per cent yoy), representing only 67 per cent and 62 per cent of our and consensus full-year estimates respectively.
The key variance was a one-off severance payment amounting to Rp213bn in 3Q for outsourcing of XL’s managed network services. Excluding this one-off provision, XL would have recorded 9MFY11 net profit of Rp2.35bn (+11 per cent yoy). This would have been in line with our but still lower than consensus expectations.
Management expects revenue growth to see a marginal negative impact, as the regulator had instructed the industry to deactivate/unregister value added services (VAS) such as MMS subscription, ringtones, games or wallpapers for all subscribers by 18 Oct.
Nonetheless, according to management the impact is not too significant as VAS contributes only 3-4 per cent on net basis to total revenue.
Apart from that, management explained that it is more efficient to outsource XL’s managed services. Doing so allows XL to focus on its core business and avoid being bogged down by technological upgrades.
However, we believe cost savings may be limited, as XL will simply be spending more on opex instead of capex.
Maintain Market Perform call with unchanged SOP fair value of RM5.35. We see limited upside to Axiata’s regional growth prospects, which are moderating, while simultaneously facing lingering regulatory risks in India and Bangladesh. However, the stock is backed by strong free cash flow as evidenced by management’s commitment to progressively increase the dividend payout ratio.
Genting Singapore
LVS, the operator of Marina Bay Sands (MBS) recorded gross gaming revenue (GGR) of US$651.9 million (or US$7.1 million/day), adjusted property EBITDA of US$413.9 million (or US$4.5 million/day) and EBITDA margin of 52.2 per cent in 3QFY11. Both the top and bottomline saw improvement, on a qoq as well as yoy basis. Converted to SGD, MBS’ GGR/day was up 4.1 per cent qoq and 50.6 per cent yoy, while EBITDA/day was down 1.3 per cent qoq, but up 62.1 per cent yoy, due to changes in luck factor.
Despite the strong qoq volume growth in 3Q, management has not seen any plateauing in Oct and indicated that it was just the opposite; (2) One of the main drivers of VIP volume growth is Singapore’s strong tourist arrivals, particularly from China; (3) Management maintains that there has been no change in its marketing strategy, but acknowledges that synergies come from having multiple gaming properties in Asia; (4) Bad debt provision as a percentage of revenue has risen to 3.7 per cent in 3Q (from 3 per cent in 2Q), due to the higher VIP volume; (5) MBS continues to ramp up via the hiring of more dealers for its mass tables, as it is running at high utilisation rates of 80 per cent+ for its mass tables and slots during weekends and public holidays.
No change to our forecasts. However, due to the recent uptick in market activity, regional valuations have risen slightly and we have thus updated our CY12 EV/EBITDA target to 11x CY12 (from 10x), to be in line with current valuations. This has resulted in an increase to our fair value (based on average of 11x FY12 EV/EBITDA and DCF) to S$1.80 (from $1.70). Maintain Market Perform.
Bank Rakyat Indonesia
Rakyat’s 3Q11 results were above expectations. Net profit for the quarter of IDR3,646(+3.4 per cent qoq and +55.9 per cent yoy) lifted 9M11 earnings to IDR10,431 billion (+56.7 per cent yoy) reaching 79.5 per cent of our previous 2011 forecast. Key earnings drivers include wider NIMs, higher non-interest income, well contained operating expenses, flat loan loss provisioning offset by a normalisation of effective tax rates (to 24.4 per cent for the quarter up from 15.6 per cent for 1H11).
Maintain Market Perform. We revise our fair value estimate to IDR6,700, based on a target PER of 11x (unchanged) applied to revised 2012 EPS estimate. While RHBRI remains a firm believer in the longer-term intrinsic prospects for the Indonesian banking sector, we remain cautious in the near term on the back of our bearish house view on the outlook for the global economy.
* 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.
