Analyst calls for April 13
KUALA LUMPUR, April 13 — This is a selection of morning calls by local research houses for the day.
From HwangDBS Vickers
Tenaga Nasional
Strong turnaround in 2QFY12 with increasing gas supply and RM2 billion compensation. Negotiating for additional gas supply, but tariff hike unlikely due to upcoming election. Positives largely priced in, downgrade to Hold; TP remains at RM7.00.
AMMB Holdings
AMMB Holdings: Kurnia deal will give AmG lead in general and motor insurance
Transaction valued at RM1.6 billion (2.0x BV)
Will enlarge general and motor insurance market share, customer base, and agency force
Will boost recurring fee income over medium term
The deal. AmG Insurance, a 51 per cent-owned subsidiary of AMMB, will acquire Kurnia Insurans (Kurnia) for RM1.55 billion from Kurnia Asia Berhad (KAB). This translates into 2.0x BV based on Kurnia’s RM779 million net asset value. Jerneh Insurance was sold to US insurer ACE Ltd for 2.2x BV and PacificMas sold its insurance business for 1.6x BV. AMMB will fund its share (RM791 million) with internal funds and borrowings. Post-acquisition, AmG Insurance will lead in general and motor insurance with enlarged 13 per cent and 22 per cent market shares, respectively. It will have access to Kurnia’s 5,500-strong agency force and 3 million policyholders, which means ample cross-selling opportunities. The deal is subject to KAB shareholders’ approval and expected to be completed by 3Q 2012.
Marginal impact. Management expects the acquisition to have a positive impact on earnings after two years, but minimal impact on capital. KAB’s claims ratio is higher than AmG Insurance, but management expects that to improve over time. We estimate 2.6 per cent enhancement on AMMB group’s FY13F earnings, based on Kurnia’s 2011 net profit of RM87 million, excluding integration costs. Consequently, we expect AMMB’s recurring non-interest income to accelerate.
Maintain Hold; stock is trading above TP. Our RM5.80 TP is based on the Gordon Growth Model and assumes 15 per cent ROE, 5 per cent growth, and 12 per cent cost of equity. Though the deal is positive, it is not sufficient for a re-rating, in our view.
Kurnia deal will give AmG lead in general and motor insurance
Transaction valued at RM1.6 billion (2.0x BV). Will enlarge general and motor insurance market share, customer base, and agency force. Will boost recurring fee income over medium term.
Zhulian Corp
Meeting expectations
At a Glance
1Q12 result was within expectation; declared 1st interim single-tier 3 sen DPS
Expect FY12F to post record high earnings despite fragile global economy
Maintain Buy and RM2.30 TP
Zhulian recorded RM28.4 million profit in 1Q12 (+22 per cent y-o-y, -1.4 per cent q-o-q), within expectation at 27 per cent of our FY12F profit of RM106.6 million. Revenue jumped to RM112 million (+30 per cent y-o-y, +29 per cent q-o-q), driven by stronger local (due to higher demand for food & beverage and nutritional products) and export sales (mainly to Thailand) which grew 24 per cent and 34 per cent q-o-q, respectively.
EBIT margin decreased 6.5 ppts q-o-q and 1.4 ppts y-o-y following a change in sales mix likely to lower margin products and the 1 per cent depreciation of the USD. This has led to earnings decreasing 1 per cent q-o-q albeit the 29 per cent increase in revenue. The Group has also declared a first interim single-tier dividend of 3 sen, which translates into 1.6 per cent net yield.
From RHB Equity
Kurnia Asia
KIMB valued at 2.05x 6MFY11 P/BV. Kurnia announced that it has entered into a sales and purchase agreement with AmG for the disposal of KIMB for RM1.55 billion or RM1.03/share. This values KIMB at a P/BV of 2.05x 6MFY11 P/BV, in line with our expectations. Note that the price of RM1.55 billion is subject to adjustments based on the change in KIMB’s net asset value after the agreement of the final completion accounts. Post disposal, Kurnia would be left with net cash of approximately RM1.2 billion or RM0.79/share. The sale is expected to be completed by 3QFY12.
RM578.4 million of proceeds earmarked for utilization. Kurnia intends to EPS chg (per cent) 22.0 utilise 37 per cent or RM578.4 million of the proceeds for various purposes, of which the Var to Cons (per cent) most substantial is the repayment of its bank borrowings of RM360 million. It also PE Band Chart intends to utilise RM100 million to invest in its Indonesian and Thailand operations. The remainder would be used to pay various fees and for working capital purposes.
RM971.6 million for investments or acquisitions. The company has yet to decide what it plans to do with the rest of the proceeds, which amounts to approximately RM0.65/share. Based on the announcement, Kurnia stated that it will utilise the proceeds for investments or acquisition of new businesses within 18 months from the receipt of the proceeds. We believe it is too early to speculate on the direction that Kurnia intends to pursue with regards to new businesses.
Relative performance to FBM KLCI
There will be dividends for shareholders. In its press release yesterday, Kurnia stated that it does intend to reward shareholders, although it is still assessing its plans for the optimal utilisation of the proceeds. We believe that Kurnia could go the way of CI Holdings (not rated), which paid out 90 per cent of its proceeds from the sale of Permanis to Asahi. Assuming a 90 per cent payout of the balance of the proceeds, we estimate that the dividends would be approximately RM0.52/share. This would leave Kurnia with approximately RM194 million for the acquisition of new businesses. Do note that this is mainly our own assumptions.
Risks: 1) cancellation of the planned disposal; and 2) lower-than-expected dividend payouts.
Forecasts. No change to our earnings forecasts.
Investment case. We are positive on KIMB’s valuation of 2.25x FY10, or 2.05x 6MFY11 book value as it is in line with insurance M&A valuations in recent years. Notwithstanding the uncertainty pertaining to utilisation of the remainder of proceeds, we are changing our recommendation on Kurnia to Trading Buy (from market perform) with a new fair value of RM0.65/share, which represents Kurnia’s net cash post disposal and utilisation of proceeds.
AMMB Holdings
Acquiring KIMB for RM1.55 billion. AMMB announced yesterday that its 51 per cent-owned subsidiary, AmG Insurance (“AmG”), has entered into a sales and purchase agreement with Kurnia Asia (“KAB”) for the acquisition of KAB’s 100 per cent equity interest in Kurnia Insurans (Malaysia) Bhd (“KIMB”).
The total cash consideration is RM1.55 billion, subject to adjustments on completion (as per Table 2). AmG will raise the funds via capital injection from both AMMB and IAG, who owns the balance 49 per cent in AmG. AMMB’s portion of RM791 million will be funded via internal funds and borrowings.
Acquisition is a combination of similar businesses, resulting in the largest general insurer. Both KIMB and AmG have a rather similar business profile, with the bulk of premiums derived from motor. The merged entity will become Malaysia’s largest domestic general insurer with combined gross written premium of over RM1.7 billion (13 per cent market share) and the largest motor insurer with a market share of 22 per cent.
Pricing appears fair. The acquisition price translates to a P/BV acquisition multiple of 1.99x, based on KIMB’s 31 December 2011 figures. This is at the lower end of the 2-2.5x P/BV range of recent M&A deals and close to the proposed 1.9x book during the AMMB-MAA negotiations. It is also close to the RM1.5 billion (2x P/BV, based on 30 Jun figures) that we had estimated in our 20 December 2011 report. Hence, we think the price is fair.
Briefing highlights. AMMB cited the following potential benefits from the acquisition: 1) enlarged scale presents opportunities for cost synergies (e.g. rationalisation of branches) and supply chain operational efficiencies; 2) more resilient and competitive entity in the face of industry consolidation and liberalisation; 3) cross-selling opportunities to KIMB’s 3m policy holders; and 4) accelerated recurring non-interest income growth. The integration process is expected to take two years.
Inclusive of integration cost (no figure quoted), management said the deal is EPS and ROE neutral in the first year but accretive after that.
Management said KIMB’s capital met regulatory requirements while the deal is not expected to impact AMMB’s capital ratios.
Approvals and timeline. The proposal is subject to approval from, among others, the shareholders of KAB, and is expected to be completed in 3QCY12.
Risks. These include: 1) slower-than-expected loan growth; 2) weaker-than-expected NIMs; 3) deterioration in asset quality; and 4) changes in market conditions that may adversely affect investment portfolio.
Forecasts. No change to our earnings forecasts. Ex-integration costs, we estimate the acquisition impacts the group’s earnings by 1-2 per cent.
Investment case. Fair value of RM6.75 (based on unchanged target CY12 PER of 13x) and Market Perform call maintained.
Tenaga Nasional Berhad
We deem TNB’s 1HFY12 core net profit of RM867 million (-31.2 per cent yoy) to be within our and consensus expectations despite accounting for only 40 per cent and 41 per cent of FY12 estimates respectively. We expect a stronger 2H due to improved gas supply.
The gas supply situation has improved, with TNB now receiving about 1,050-1,100 mmscfd. But management does not expect improvement beyond current levels. However, the Government has agreed to allow TNB to implement the fuel cost sharing mechanism up to September.
Still positive on TNB given better earnings visibility with the improved gas supply and fuel cost sharing mechanism in place until the Malacca LNG regasification plant comes online in September.
Maintain Outperform with unchanged fair value of RM7.60 based on target FY13 PER of 15x.
Hiap Teck
API Pipes Hit US Shores
Hiap Teck’s domestic steel pipes sales have remained weak as water-related projects have yet to get off the ground in a major way. Capacity utilisation rate remains subdued at only about 50 per cent.
On a brighter note, Hiap Teck’s export sales are slowly picking up, partially thanks to its maiden sales of API-certified steel pipes to the US. As at end-Mar, Hiap Teck already sent out five shipments of about 3,000 tonnes each of API pipes to the US.
The first phase of Hiap Teck’s blast furnace projects (held under 55 per cent-owned Eastern Steel) is on track for completion by Sep 2013. At present, the RM754 million project boasting a capacity of 700,000 tonnes of steel slabs per annum is 10-12 per cent completed.
FY07/12-14 net profit forecasts are cut by 12-14 per cent largely to reflect higher input costs.
Fair value maintained at RM0.64 based on 0.5x book value of RM1.28. Maintain Market Perform.
Axis REIT
Proposed Acquisition In Nilai Industrial Area
Axis REIT has proposed to acquire two parcels of land together with industrial and ancillary buildings (combined built up of approximately 192,677sqf) in Nilai Industrial Area for RM26.5 million.
Aggregate monthly rental for the property is RM221,000, translating into an estimated gross rental of about RM1.15 psf. We are positive on the acquisition as it has a projected net yield of 9 per cent, higher than the estimated borrowing costs of about 4-5 per cent and current net yield of 6 per cent for the REIT.
The acquisition will be fully funded by debt and thus gearing is estimated to increase to 25.5 per cent, still below the SC’s gearing cap of 50 per cent. The acquisition is expected to be completed in 2HFY12.
We raise our net earnings forecasts for FY12-14 marginally by 0.5-1.7 per cent p.a. to factor in the incremental revenue and higher finance cost. Our DDM-based fair value is revised slightly to RM2.80 (from RM2.76). Maintain Market Perform.
From OSK Research
Nascent Uptrend
Globetronics could be in its initial uptrend phase after confirming a higher low last month. The high volume that accompanied the rise adds stronger conviction to the rally, which is likely to end the long-term downtrend.
Globetronics Technology Bhd
The stock’s downtrend since early 2010 could be over after the steady rise in the past four months. The downtrend is quite pronounced, as illustrated by the lower highs right up to Jan 2012. The gradually descending 200-day MAV line also indicates the same negative trend.
But things took a turn in January as the price rallied for a couple of days and printed a 6-month high. The move was also accompanied by significant volume, the highest in almost 2 years, which is a sign of firm buying interest. The rise was preceded by easing downward momentum, which led to a false breakdown in December 2011. The inability of a new low to elicit further selling was a telling sign that the downtrend may end. This upward move was soon confirmed by a new rally high being set in March. Note that the “Golden Cross” occurred in late March and the 50-day MAV line crossing above the 200-day MAV line is usually taken as a longer-term positive indication. Furthermore, the 200-day MAV line is rising too.
All these factors point to a higher price and a good upward continuation should not see the stock closing below RM1.08, the broken resistance and also the high of January. Thus, purchases can be made at the current level or on a pullback towards the stop-loss level of RM1.08. A more conservative trader may opt for a close below the psychological RM1.00 as the stop loss. The price target is RM1.37 and a strong rally could even see the stock testing the psychological RM1.50, provided that the 1½ -year high of RM1.26 is successfully violated. All three resistance levels coincide with the Fibonacci levels of the 2010-2011 decline.
However, a close below RM1.00 will significantly reduce the possibility of an upward continuation. Strong support should come at the February-low of RM0.92, a violation of which will likely signal the end of the 4-month rally.
Johore Tin
Johore Tin experienced a sharp run-up in its share price during the February-March 2012 period. The stock then started consolidating sideways within the RM1.17-RM1.34 range after hitting the RM1.34 peak. However, its upward momentum has started to pick up since Monday, which saw the share price rebounding strongly off the RM1.17 level, and the stock closed at RM1.37 yesterday. Judging from the strong rebound in its trading volume yesterday, it seems that the stock’s consolidation phase for the February-March 2012 rally is already over.
Hence, we advise traders to accumulate shares between the current level and the RM1.17 level. We are eyeing its RM1.72 historic high as the upside target. The RM1.17 strong support floor would be the obvious cut-loss level as a break below it would trigger a major breakdown.
Prior to reaching our RM1.72 price target, an immediate resistance can be seen at the RM1.37 level. To the downside, look for an immediate support at the RM1.28 level, followed by the very strong RM1.17 support level. The near-term technical outlook of Johore Tin is now aligned with the bullish bias and the daily RSI at the 74.6 pt-level. Considering the RSI is still below the 88-pt peak reached in March, there is still room for further upside extension.
* 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.
