KUALA LUMPUR, Jan 9 — This is a selection of morning calls by local research houses for the day.
From HwangDBS Vickers
The FBM KLCI tumbled to a low of 1,504.22 before recovering partly to settle at 1,514.13 on Friday, which represents a weekly decrease of 16.6-point or 1.1 per cent. Technically speaking, we expect the benchmark index to drift sideways ahead – possibly between our support and resistance lines at 1,500 and 1,530 respectively – pending the emergence of a breakout pattern.
We expect the key FBM KLCI to back off from the immediate resistance mark of 1,515 today. From a technical perspective, the benchmark index could be sliding towards the first psychological level of 1,500.
Essentially, investors may turn cautious in view of two events today: (a) a scheduled meeting between the leaders of Germany and France to talk about possible revisions to Europe’s fiscal rules; and (b) a verdict on the sodomy trial involving opposition leader Anwar Ibrahim to be delivered by the court.
Construction: 2012 – Harvest year
Confluence of earnings, newsflow and politics
Flurry of MRT awards by 1H12
Switching top pick to Gamuda from IJM
2012 – A combination of earnings, newsflow and politics. 2012 will be year of stronger earnings and heightened newsflow for the sector. With legacy jobs depleted and margins normalising, we see construction constituting 29-37 per cent of FY13F profit vs 13-26 per cent in 2011 for our core universe, making it a more leveraged proxy to the sector. This is more apparent in larger caps like IJM and Gamuda, which are more diversified. Besides the MRT, the RM12 billion KL-Singapore high speed rail, RM8bn Gemas to Johor Bahru double tracking, RM30 billion highway jobs, and another two MRT lines either receiving official approvals or awarded in 2012. Also, a key win by BN in Selangor and/or Penang could accelerate projects that had been stalled or delayed by land acquisition issues such as the LRT, MRT and Inter-State Water Transfer projects.
MRT: Key milestones in 2012. For the RM20bn SBK line, RM9 billion (45 per cent) might be awarded by April 2012, and RM17 billion (85 per cent) by October. For the RM12bn elevated portion, the strong contenders are IJM, Sunway, Muhibbah and TRC, which had been prequalified for all works (civil, depots and stations). The RM8bn tunnelling job tender will close at end-Jan 12 with an award by April. We are still optimistic the MMC-Gamuda JV will win the bid despite stiff competition. Conventional wisdom suggests it best to keep this project domestic with a stronger multiplier effect on the economy (RM16-RM24 billion based on 2-3x multiplier), especially with possibly slower GDP growth in 2012. In the event the PDP does not clinch the project, the estimated RM2 billion fee based on enlarged contract value of RM20 billion (RM0.48/share for Gamuda and RM0.33/share for MMC) is relatively less risky and will limit share price downside.
Top pick switched to Gamuda. We continue to like IJM as a defensive stock (BUY lower TP RM8.10) where its underperformance (largely due to placements at Zelan level) will reverse upon hitting peak orderbook of RM9 billion in 2012. However, expectations for Gamuda are muted, and it will see larger upside in 2012 premised on our conviction that the PDP will clinch the tunnelling job. Valuation is still testing 2008-lows of -1SD and the stock is also a laggard on a 6-months basis due to still scepticism that it can convert the tunnelling job. The share price is loosely tracking our RM3.30 bear case target (no MRT Vietnam, 20 per cent discount for Splash). We raised TP to RM4.80 (vs RM4.50) after more bullish MRT assumptions.
Notion VTec
Buy; RM1.82 Price Target: RM2.10; NVB MK
Secured 5 new customers in HDD segment
The Edge Weekly reported that Notion VTec secured five new customers in the HDD sector – NHK Spring, Minebea, Nidec, Toshiba and Seagate (via recently acquired Samsung HDD), to be serviced through its Klang manufacturing plant in the near term. This is following an earlier article noting the company’s newfound focus to maximise production of 2.5 inch HDD base plates to grow its HDD segment by 40 per cent.
From OSK
Proton Holdings
Race For Proton Heats up
THE BUZZ
Proton announced on Friday that it is in preliminary discussions with General Motors on the possibility of selling a portion (reportedly 50 per cent) of its Tanjung Malim plant. It also confirmed that its chairman, Datuk Nadzmi Mohd Salleh has submitted a bid to acquire Khazanah’s 42 per cent stake in Proton at an undisclosed price, which he claims to be in “billions of RM’’. Elsewhere, the Edge weekly reported that Tan Sri Arumugam and Gerald Lopez of Genii Capital (a private equity firm with a stake in the Lotus Renault GP Formula One team), are mulling a joint bid for Khazanah’s stake, reportedly for RM6.00 apiece. Note that a bid to acquire a stake of higher than 30 per cent would trigger a general offer. BTimes today reported that DRB has also confirmed submitting a bid at an undisclosed price sometime in mid-2011.
OUR TAKE
Plant sale to General Motors to boost cash pile. We understand that Naza is keen to set up a production plant to localise production of the Chevrolet marquee. The disposal price is rumoured to be RM800m, with General Motor subsequently pouring in an additional RM300 million for plant and machinery equipment. The partial sale of the Tanjung Malim plant would boost Proton’s coffers given its onerous capex needs amid a turnaround for Lotus.
NAP a stumbling block to GM. Obtaining a manufacturing licence is fiercely protected under the National Automotive Policy, which stipulates that a manufacturer would be required to manufacture hybrids or either luxury vehicles priced at least at RM150,000 each. As such, the General Motors (GM) deal could be a joint collaboration with Naza as this may automatically qualify GM for a manufacturing licence. If the Tanjung Malim plant is not sold as planned, another possibility is to set up a JV for joint production similar to that which Proton is looking to establish with Mitsubishi Motor Corp, under which Proton will produce 60,000 Mitsubishi cars annually for the ASEAN region.
GM will not go big in Malaysia. Like Mitsubishi, GM intends to stamp a bigger presence in the ASEAN market. However, should the giant automaker set foot in Malaysia, we believe the production would be most likely be CKD-based, given that GM already has a sizeable production hub Thailand’s Rayong province employing 1703 people. This plant has an annual capacity for 180,000 cars and is also an engine hub predominantly catering to exports. The plant currently manufactures the Chevrolet Cruze, Captiva SUV, Chevrolet Lumina, GM’s compact car, Aveo, and the upcoming Colorado pick-up. The upcoming Colorado and a diesel engine production had involved massive investments amounting to USD470 million.
From RHB
Petronas Gas
Getting ready for incoming LNG regasification plants
Outperform
Company Update
In late Dec-11, the company announced: 1) a new network code to accommodate third party access (TPA) to the PGU system; and 2) three new wholly-owned subsidiaries in relation to regas terminals in Sg. Udang, Pengerang and Lahad Datu.
We learnt from management that the tariffs under the new network code for the TPA system are similar to that of the previous 4th GPTA regime; just that it is presented on a different basis.
We have tweaked our WACC assumptions to 7.8 per cent (from 8.63 per cent previously) which incorporates a higher debt to equity ratio for the company given the numerous projects the company will be undertaking.
We maintain our Outperform call on the stock with a higher fair value of RM16.39 (from RM14.50 previously) based on unchanged DCF method.
Corporate Highlights
WCT
FY12/11 new contract wins fall short of RM2 billion target
Market Perform
Company Update
- WCT was unable to meet its new construction orderbook guidance of RM2 billion for FY12/11. It only managed to secure RM187 million.
- The key culprits were its unsuccessful bids for Yas Mall in Abu Dhabi, Four Seasons Hotel in Bahrain, Madinah Airport in Saudi Arabia, airport extension in Brunei and “Package B” of the LRT line extension project.
- We are cutting FY12/12-13 net profit forecasts by 7-12 per cent, having reflected an actual new construction orderbook secured of only RM187 million in FY12/11 (vis-à-vis our previous assumption of RM1.5 billion), partially mitigated by an upward revision in property profits.
- Fair value is reduced by 5 per cent from RM2.08 to RM1.97. Maintain Market Perform.
Macro: Ringgit – Is Malaysia vulnerable to Eurozone’s credit crunch?
Economic Highlights (published 9 Jan 2012)
- According to some reports, Malaysia is one of the countries that have high exposure to European bank claims but Bank Negara Malaysia said that the figure was incorrect.
- Although Malaysia’s exposure to external claims has certainly increased lately, we believe it is unlikely to result in a credit crunch in the country even if European banks were to withdraw their funds from Malaysia.
- However, the ringgit could suffer greater volatility if there is a sudden pullout of funds from the Malaysian market due to the sizeable inflow of foreign capital into the country in 2011, particularly foreign portfolio investment that is short-term in nature.
- As a whole, we believe the reversal of foreign capital this time around is likely to be gradual and we expect the ringgit to face some weakness in the near term and possibly weaken to around RM3.20-3.25/US$, if foreign portfolio investors continue to leave the country. Once the Eurozone is able to resolve its debt crisis and outflow of foreign portfolio investment normalises, we expect the ringgit to be supported fundamentally at around RM3.00/US$. The sharp fluctuation of the ringgit in a short period of time, however, will likely dampen economic and business activities.
