Business

Analyst calls for January 3

January 03, 2013

KUALA LUMPUR, Jan 3 — This is a selection of morning calls by local research houses for the day.

From HwangDBS Vickers

Sector update — Oil and gas

Malaysia’s oil production has declined for the third consecutive year while Petronas’ 9M12 earnings dipped 5per cent year-on-year. Should the proposed 30per cent dividend payout cap be enforced, increasing earnings would be a priority for Petronas given its c.35per cent contribution to the government coffer. Therefore, we expect Petronas’s record 5-year capex of RM300 billion to drive the booming O&G sector and ultimately spill over to local offshore service providers with established track records.

Although contract flow had been slower than expected this year, there will be more robust news flow next year. As Malaysia’s second deepwater field Gumusut-Kakap will be producing by mid-2013, the 3rd Malikai contract is expected to be awarded next year. Petronas may award the RM10 billion Pan-Malaysia hook-up commissioning contract by 1Q13. The RM60 billion Refinery & Petrochemical Integrated Development (RAPID) will reach final investment decision by mid-2013 as well, which should benefit fabricators. And there may be more newsflow on marginal fields and mature field redevelopment.

SapuraKencana is our top pick in the sector given its strong earnings visibility with a RM13.5 billion order book and unrivalled integrated services across the value chain. It is the cheapest large-cap O&G stock in Malaysia, trading at 19x PE (vs peers’ 23x). Dayang is our small-mid cap pick for its superior execution track record and strong order book (RM1.2 billion; 3x FY11 sales). It is a rare O&G player that pays good dividend yield (4.1per cent for FY12) given its solid balance sheet (RM106 million net cash).

From RHB Research

E&O

The influx of liquidity is favourable to E&O, as a branded high-end lifestyle property developer.

Four major catalysts to re-rate the stock: (i) Having the premium projects at the three key property hotspots in Malaysia – Penang, Klang Valley and Johor Medini, E&O rightly captures the upmarket segment driven by foreign buyers; (ii) STP2 will take off post general election. Scarcity of land and rising land values on the Penang island, as well as the record pricing at Andaman – Quayside Ph. 2 of STP1 will significantly boost the prospect and the upside in GDV for the 760-acre land (to be reclaimed) at STP2; (iii) More solid earnings growth as buyers’ profile shifts, as dependency on local buyers will be gradually reduced; and (iv) M&A or GO by Sime Darby is always a wild card in future. RM2.30/share acquisition cost for Sime signals the upside value of the stock.

Unbilled sales currently stand at RM960 million, giving >1 year of earnings visibility.

We initiate coverage on E&O with a Trading Buy rating. We value E&O at RM2.08, based on a conservative 40per cent discount to RNAV that takes into account the election risk. The STP2, which makes up RM1.17 or 34per cent of our RNAV/share estimate, will be a big catalyst once it crystallises. This, we believe, has yet to be reflected in the street’s valuations.

Adventa

4Q12 net profit of RM11.5 million was above expectations as we had underestimated Adventa’s ability to retain savings arising from the lower latex prices.

EBIT margin grew by 4per cent-pts quarter-on-quarter on the back of lower average latex price of RM5.94/kg (vs. RM6.79/kg in 3Q), resulting in a higher 4Q net profit of RM11.5m (vs. RM5.2m in 3Q).

FY13-14 numbers raised by 18.6-21.2 per cent after increasing ASPs by 3 per cent p.a.

Fair value maintained at RM2.00, based on a 5 per cent discount to Aspion’s takeover offer.

Following the completion of the deal, Adventa announced that the share will go ex- for the distribution of an amount equivalent to RM1.70/share on January 4.

Post-disposal, Adventa would utilise the remaining RM61.1 million to reinvent itself as an intergrated healthcare player with a focus on distribution of medical products, sterilisation services and peretonial dialysis home-treatment services.

With the completion of the disposal of its glove business, we are ceasing coverage on the stock.

IJM

After much delay, IJM’s 22.7per cent-owned associate Kumpulan Europlus (Europlus) yesterday finally signed the concession agreement with the Government for the RM7.07 billion toll road West Coast Expressway (WCE).

Based on IJM’s guidance, in terms of construction work, the privatised highway covering 316km (224km tolled and 92km toll-free) from Banting in Selangor to Taiping in Perak will double its existing construction orderbook of RM3.3 billion to RM6-7 billion.

Forecasts are maintained as we have already assumed IJM to secure RM4.5 billion worth of new contracts in FY03/13-15 (or RM1.5 billion per annum), as compared with potential RM3-4 billion worth of construction works from WCE.

Fair value is raised from RM4.56 to RM4.88, having raised our 1-year forward target PER for IJM’s construction business to 13x from 11x to reflect IJM’s improved construction earnings visibility with the signing of the WCE concession agreement.  Maintain Underperform.

Notion Vtec

Notion Vtec (NVtec) announced a fire had occurred at a rear building of its main manufacturing plant in Klang, Selangor on December 31, 2012.

A site examination indicated around 100 CNC machines out of the group’s total 1,500 CNC machines (around 6.7 per cent) were lost in the fire. The affected area was 21,000 sq ft (5.25 per cent) out of the main manufacturing plant’s built-up area of 400,00 sq ft. There was also substantial damage to goods of KPSB and NVSB yet to be ascertained.

The fire resulted in a temporary capacity loss of 90 per cent of KPSB which contributes 10 per cent of NVtec’s revenue as well as some operational disruptions to NVSB. NVtec indicated that the affected assets (CNC machines and damaged goods) are adequately covered by insurance. The group has also taken insurance coverage for consequential business losses arising from the fire.

We maintain our Market Perform call on NVtec with a lower fair value of RM0.83 (previously RM1.05) based on 6x (previously 7x) of its CY13 EPS. A lower PER is used to reflect higher operational and reputational risks associated with the fire incident. However, we believe yesterday’s 18 per cent plunge in its share price had already reflected the operational and potential reputational implications from the fire incident.

* 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.

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