Business

Analyst calls for Nov 28

November 28, 2012

KUALA LUMPUR, Nov 28 — This is a selection of morning calls by local research houses for the day.

HwangDBS Vickers

After slipping under the psychological mark of 1,600 yesterday, the key FBM KLCI could drop further today as market momentum remains on the downside. From a technical perspective, the next support line for the benchmark index is currently seen at 1,575.

Meanwhile, major equity bellwethers on Wall Street slid between 0.3 per cent and 0.7 per cent last night. Essentially, investors’ sentiment was clouded by the slow progress in the US fiscal cliff negotiations, which then negated the European agreement reached to extend financial aid to Greece.

Back home, the limelight today will likely be on the following stocks: (a) KLCC Property, after it has unveiled details to form a stapled REIT structure in Malaysia; (b) MAS, as the national airline has announced capital restructuring and rights issue proposals after its bottomline returned to the black; and (c) Petronas Chemicals, given its below par earnings released yesterday evening.

Petronas Chemicals; Hold (Upgrade from Fully Valued); RM6.09

Price target: RM5.90; PCHEM MK

Market weakness priced in 3Q12 result missed expectations. Persistent weak external outlook will continue to dampen demand. Share price has fallen 13 per cent since February; upgrade to HOLD with RM5.90 TP.

Malaysian Airline System; Fully Valued; RM1.01

Price target: RM0.90; MAS MK

MAS reports RM64m core net loss for 3Q12, better than expected. There are signs of progress, but also risks in proposed RM3.1bn rights issue via par value reduction. Maintain Fully Valued rating and RM0.90 TP due to the Group’s weak balance sheet.

Sime Darby; Hold; RM9.50

Price target: RM9.75 (Prev: RM10.10); SIME MK

1QFY13 earnings came in at RM990m, within our expected range of RM980m-1bn range; but below consensus’ on annualised basis. Pretax profit fell 12 per cent y-o-y, but net profit only fell 8 per cent due to lower effective tax rate (19.4 per cent). New KPI target: RM3,200bn earnings for FY13, based on RM2,700/MT CPO and 2.5m MT CPO output. HOLD for 6 per cent return; adjusted TP to RM9.75 after imputing new CPO export tax structure.

KLCC Property: Goodies galore

Positive on stapled REIT structure, largest MREIT with RM15b combined asset size

FY13-14F DPS + 42-88 per cent to attractive 4.0-5.9 per cent yield

Upgrade to BUY with SOP-based TP of RM6.90 (RM5.55 post-restructuring) for 23 per cent upside

REIT-ing it up. KLCCP is proposing to establish a stapled security (KLCC REIT + KLCCP), a first in Malaysia (but widely popular in Australia) and more efficient structure than standalone REITs given no holding company discount (case in point: Sunway & IGB). This involves injection of 3 commercial assets in KLCC with long triple-net leases ie Petronas Twin  Towers (PTT) after purchasing Petronas’ 49.5 per cent minority stake, Menara Petronas 3 (MP3) and Menara ExxonMobil into the REIT, and RCULS conversion (Petronas’ stake would increase to 75.5 per cent from 52.6 per cent as share base doubles to 1.8b). The restructuring is positive given tax savings (REIT will make up 70 per cent of total asset value), higher distribution payout (90 per cent from 45 per cent currently), plugging of PTT income leakage to minorities (MI) and removal of uncertainties over RCULS conversion. Suria KLCC and Mandarin Oriental will not be injected into the REIT for now (to market’s disappointment) given MIs’ preference for direct stakes in the operating vehicles (40 per cent and 25 per cent respectively).

Strong growth uptick. Conversion to a stapled security could see 10-23 per cent boost to FY13-14F earnings from lower tax and MI charges (assuming restructuring completes by end-2Q13). Similarly, DPS could rise by 42-88 per cent to 18 sen and 26 sen respectively, as c.70 per cent of KLCCP’s REIT earnings would be tax-free with at least 90 per cent distribution payout and full consolidation of PTT’s resilient cashflows.

Upgrade to Buy.  We switched our valuation model to SOP (combination of RNAV at 15 per cent discount and DDM) from just RNAV – arriving at revised TP of RM6.90 (RM5.55 post-restructuring) for potential 23 per cent upside. KLCC stapled security will boast super-prime assets with resilient earnings and stable growth, and potential to be included in FBM30 given its large market cap of RM11b (assuming 1x P/NAV).

RHB Equity Focus

The combined 12 National Key Economic Areas (NKEAs) has almost hit their Key Performance Indicators (KPIs) with an overall achievement rate of 94 per cent year-to-date this year. Last year, most of the 12 NKEAs also achieved a good set of KPIs with the overall achievement rate of 123 per cent, except the palm oil & rubber sector, which fell behind targets slightly.

The ETP is yielding some positive results and moving in the right direction in encouraging private investment.

As it stands, the private investment’s share of GDP increased to 16.8 per cent in the first nine months of 2012, the highest in 14 years and from 13.4 per cent in 2011 and a low of 8.2 per cent in 2002.

However, more need to be done in order to sustain the real private investment, if the country wants to achieve a high income nation by 2020. As it stands, the projects announced by Pemandu appears to have lost some momentum in 2012 but could be temporary.

Large scale investment in property, though could help to boost the economy in the near term, could lead to a property glut in the country, if demand failed to pick up to meet the large increase in supply.

Malaysia could potentially achieve a high income economy earlier than 2020 if the economy continues to sustain at the current pace of growth, according to Pemandu.

Sime Darby

Sime Darby’s 1QFY06/13 core net profit was in line with our and consensus estimates, coming in at 24-26 per cent of FY06/13 forecasts. In 1QFY13,

Core net profit fell 13 per cent yoy in 1QFY13 on the back of a 4 per cent yoy rise in turnover. The fall in profit was due to weaker performance at its plantations, heavy equipment and motor divisions; offset by stronger margins in the property and the energy & utilities division; as well as lower effective tax rates.

Five key briefing takeaways. (1) Sime sets KPI net profit target of RM3.2bn for FY06/13; (2) Lower CPO sales volume despite higher production is part demand-driven, part-tactical decision; (3) Production cost 10 per cent lower yoy in 1QFY06/13; (4) Bottoming out of mining industry in Australia; and (5) Margin squeeze in motor division.

We maintain our Outperform recommendation on the stock and raise our SOP-based fair value to RM10.30 (from RM10.25).

Related story: Sime Darby – Sells Land in Johor and Gets Concession To Build and Maintain University Campuses (8 Nov  2012)

MAS

9MFY12/12 core net loss of RM572.7m came in within expectations.

MAS spoke about its continued efforts to boost revenues, efficiency and productivity, and cut costs, that struck us as nothing more than what an airline will do in its normal course of business.

MAS proposes: (1) A reduction of the par value of its shares to 10sen from RM1; and (2) A renounceable rights issue to raise up to RM3.1bn cash.

We view the corporate exercise positively, although we do expect a negative knee-jerk reaction from the market as we believe most investors are not quite in the mood for a massive cash call against a backdrop of a weak equity market of late.

Recall, we have long listed “a massive balance sheet recapitalisation” as one of the bullets MAS has to bite to effect a turnaround.  However, this will have to be complemented with bold operational changes.

Fair value is cut to RM0.83 from RM1.00.  Maintain Underperform.

Related story: MAS Results/Briefing Note – 2QFY12/12 Net Loss More Than Halves QoQ (15 Aug 2012)

Eversendai

Eversendai is in the midst of “sorting out paper works for a few more jobs” and is hopeful to conclude them before the year is over.

Eversendai also expects to conclude by 1Q2013 the acquisition of a small stake in an SGX-listed smallish but established topside fabricator to help expanding its core competence into the oil & gas sector.

Eversendai reiterated its goal to double its turnover to RM2bn over the next five years, backed by sustained organic growth coupled with potential M&A.

Fair value is RM2.14.  Maintain Outperform.

Related story: Eversendai Briefing Note – Oil & Gas M&A In The Pipeline (12 Sep 2012)

Ann Joo Resources

AJR disappointed with a core net loss of RM53.1m in 9MFY12/12, vis-à-vis our full-year forecast of RM53.7m net profit and the full-year consensus net profit of RM62.2m.  

AJR said that domestic sales are stable and are showing signs of picking up, underpinned by projects under ETP. However, margins are expected to remain under pressure as selling prices continue to trend lower.

Margins of AJR’s manufacturing division also continue to come under pressure due to dumping of wire rod by Chinese producers.

We now project a net loss of RM36.4m for FY12/12 vis-à-vis RM53.7 net profit mainly due to lower sales volumes and selling prices. Net profit forecasts for FY12/13-14 are also cut by 45-63 per cent, having reduced our assumptions on sales volumes and selling prices.

Fair value is cut to RM1.14 (from RM1.36). Maintain Underperform.

* 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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