KUALA LUMPUR, March 7 ― This is a selection of morning calls by local research houses for the day.
From RHB Research
Sector update — Telcos
We downgrade the sector to Neutral from Overweight following the downgrade of TM to Neutral (previously Buy). 4QCY12 was a subdued quarter for the telcos largely due to costs and taxation.
Three (DiGi, Maxis, TdC) out of five companies under coverage missed our expectations. The best performer was TM, while Axiata was within our expectations.
The sector saw stronger sequential revenue growth in 4Q. Maxis had a strong 4Q partly due to the maiden full-quarter contribution of roaming fees from U Mobile. The launch of new smartphones led to stronger sequential revenue growth for DiGi (+3 per cent) and Celcom (+2 per cent).
Aggressive handset subsidies continue to be the main culprit for the erosion in most cellcos’ EBITDA margins. TM’s EBITDA margin weakened quarter-on-quarter mainly due to higher maintenance costs, while TdC faced higher Astro customer installation costs.
We only have a Buy call on TdC for its cheaper valuations compared to its domestic peers and strong growth prospects in the regional bandwidth business.
Sector update — Plantations
Most speakers at POC 2013 were aligned with our view that the first half of the year will see prices strengthening, on the back of the low production season, resulting in a drawdown of CPO stock levels in Malaysia. We believe that production tends to bottom out in February or March, and the inventory downcycle tends to hit a trough in May or June. This means we have another three to four months of easing inventory. Looking at the quantum of decline, the average decline since 1988 was 399k tonnes from peak to trough. Malaysia’s inventory peaked at 2.63 million tonnes in December 2012. This will put inventory level at 2.23 million tonnes by May or June.
As for the 2H2013, most of the speakers were also in agreement with our belief that prices would weaken during this period, as production levels start ramping up towards the peak production season again.
We maintain our Neutral call on the plantation sector on the regional basis. We maintain our belief that 1H2013 CPO prices will be stronger than 2H2013. We continue to prefer the more integrated players in Malaysia, and the strong growth companies in Singapore and Indonesia.
Our top picks for the sector are Sime Darby, SOP, First Resources, Golden Agri and Astra Agro.
Sunway is a cheaper and lower risk Iskandar play. The company is an entrepreneurial-driven company. Compared to UEMLD’s current PE of 22x, Sunway is only at 8x. UEMLD also has higher election risk.
We believe the amount of time to transform Sunway Iskandar into a proper township will be shorter, compared to 15-20 years taken for Bandar Sunway KL, as basic infra has already been put in place, and Singaporeans and corporates are already looking to relocate due to price disparity and proximity.
Phase 1 of Sunway Iskandar will be launched in end 2013. It has a GDV of RM350-400 million.
We maintain our Buy rating, with an unchanged fair value of RM3.25. Stripping off the equity value of Sunway REIT, Sunway’s property development, construction and trading divisions are valued at only 5.5x. This is simply unwarranted, given the size, prospects and landbank of the company.
Management expects nitrile prices to stabilise between US$1,200-1,500/tonne on expectations of ample supply coming into the market. An additional 250,000 tonnes of new nitrile production capacity came into the market in FY12.
With nitrile material suppliers operating at only 65-75 per cent of their full capacity currently, any surge in demand for nitrile raw material can be accommodated easily.
Despite intensifying competition within the nitrile glove segment, management has remained steadfast in focusing its new capacity to the production of nitrile gloves given the relatively-higher margins and less-volatile raw material prices.
Management guided for another 5.4 billion pieces in nitrile glove production capacity via the construction of two new plants at Lot 6058 and 6059. Upon full-commissioning by 2H, Supermax’s nitrile glove production capacity would increase to 12.3 billion pieces p.a. (from 6.9 billion).
No change to our earnings forecasts. We expect Supermax to deliver strong earnings growth for FY13, driven by the additional nitrile glove capacity onstream from 2H onwards. We thus maintain our Buy call on the stock with an unchanged fair value of RM2.68 (CY13 PER of 13x).
Puncak Niaga said its board could not accept the offer from KDEB to acquire 100 per cent of PNSB and 70 per cent of SYABAS, as it is incomplete and inconclusive.
We are not surprised as in our past few reports, we ruled out the possibility of any deal being concluded as the polls near.
The company is still open to further discussions with KDEB, and we think this, together with growing contributions from its O&G division and undemanding valuation may help to keep investor sentiment warm.
Puncak Niaga is still a Trading BUY with its FV still at RM2.00. This implies a mere 3x forward FY13 EPS.
From HwangDBS Vickers
Sector update — Plantations
Notwithstanding the positive long-term prospects of CPO prices from a growing population and lack of arable land; most speakers acknowledged that there are more downside catalysts to CPO prices in the near-to-medium term. Record high inventory, growing supply from Indonesia due to aggressive expansion, moderate growth of oleochemical demand as well as subdued demand from biofuel are among the critical factors highlighted in the POC 2013 which are set to pressure CPO prices further.
While CPO prices have been trading at an unusually high discount to soybean prices, there is talk that the CPO price trend may have decoupled from crude oil price, given impending weaker demand for biodiesel as a result of relatively lower crude oil price, as well as trade barriers arising from government regulations. Impending anti-dumping measures in the EU (which accounts for 85 per cent of global biodiesel import) against biodiesel exporting countries (due by May13) could be a game-changer for CPO price outlook as there has been a marked increase in the price band since 2007 when CPO prices had a higher correlation to energy prices.
We expect palm oil supply to remain strong from Indonesia and Malaysia. We maintain our CPO price forecast of RM2,640 and RM2,610 for CY13 and CY14, respectively, as we take into account significant inventory carry-over from 2012 and further stock build-up in 2013. We expect palm oil price to maintain its upward trajectory towards the end of Apr13, on seasonally lower production; before succumbing to the higher inventory in 2H13 (on seasonal peak production).
We believe most Malaysian planters under our coverage are fairly valued, with the exception of KLK which in our view has some downside potential.
* 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.