Malaysia KLSE Stock Technical Analysis

Berjaya Sports Toto - 1QFY10: Fewer punters?

2009-09-23T14:52:00.000+08:00

BToto’s 1QFY01 revenue went flat yoy as revenue per draw unexpectedly declined 6.6% due to weak ticket sales. No dividend was declared for the current quarter. The annualised net earning is 9.2% below our expectation.

Berjaya Sports Toto (BToto) reported a net profit of RM100.5m in 1QFY10 (+8.7% yoy, -6.3% qoq). The yoy rise in net profit was attributed to a lower estimated prize payout ratio of 61.2% vs 62.5% in 1QFY09. 1QFY10 revenue was flat yoy and 5.1% lower qoq despite there being three draws more than the year-ago quarter. Annualised net earnings are 9.2% below our estimate but 1QFY10 was expected to be a seasonally weak quarter with fewer festive days. No dividend is declared for the current quarter, which is in line with our expectation.

Gross revenue per draw unexpectedly declined 6.6% yoy (from RM22.9m to RM21.4m), as the economic slowdown probably hurt tickets sales to the blue-collar segment. Consumption falloff offset the impact of three additional draws in 1QFY10 (compared with 1QFY09). Nevertheless, we expect revenue to improve in 2HFY10 with the new launch of Power Toto 6/55 game in Nov/Dec 09 and on the back of a stronger economic recovery. We forecast gross revenue per draw to improve 1-3% on the back of this new game after factoring in cannibalisation effect on existing games.

No dividends as expected. BToto has front-loaded its FY10 dividend payout (net: 19 sen) in 4QFY09, totalling about RM238.6m, which is equivalent to 237.6% of its 1QFY10 net profit. To finance the dividend, BToto has taken a five-year term loan (RM380m) with an interest rate of about 5%. As at 31 Jul 09, its net debt stood at RM359m and its interest cover is expected to remain healthy at 18x for FY10.

Maintain BUY but no near-term upside catalyst. Based on DCF valuation (cost of equity of 8.9% and terminal growth of 1%), we value BToto at RM4.90/share, which implies prospective FY10 and FY11 PEs of 15.0x and 14.4x respectively. We like the stock as a defensive play and its gross dividend yields should remain attractive at 7-8% beyond FY10.

Astro - lower ARPU and higher churn

2009-09-18T21:18:00.000+08:00

Astro's 1H FY10 net profits were 47% of our FY10E forecast and 31% of street. 1H FY10 Pay TV revenues for Malaysia were up by 6% YoY, driven by higher subscription revenues (growing subscriber base but lower ARPU). Net adds were tracking in line with full-year guidance. ARPU was lower YoY due to lower yielding new subs, although a price hike for the sports package is expected to arrest the slide. Churn edged up for the second consecutive quarter to 11.9%.

For India, the 1H10 loss of RM54 mn was in line with our assumption of RM100 mn share of Sun Direct TV losses this year. Litigation costs from Indonesia were in line with expectations.

We continue to rate Astro UNDERPERFORM, due to its rich valuations. Our DCF-based target price of RM2.65 spells 24% potential downside from the current levels. Additionally, Astro's FY10 EV/EBITDA of 13.5x is a steep premium to global peers of 3.6x-8.5x.

Risk factors include: potential surge in premier league football content cost and HDTV rollout.

SP Setia - Expect higher earnings

2009-09-17T21:05:00.000+08:00

Stronger upcoming quarterly results but recent sales trend has softened. SP Setia’s 3QFY09 net profit could have increased 10-13% qoq and yoy due to an across-the-board higher sales in Klang Valley, Johor and Penang (please refer to table overleaf). The strong sales were mainly attributable to deferred payment scheme such as the 5/95 programme and low mortgage rate of less than 3.5%, which helped to boost the affordability of home buyers. The Group has achieved new sales of RM1.3b as of 9MFY09, which is RM100m higher than the corresponding period of 9MFY08 and exceed its full-year target of RM1.1b, and it can easily match FY08’s sales of RM1.4b.

However, we understand that the new bookings have slowed down since the 5/95 scheme ended in mid-July.

Margin likely to be 2-3ppt lower. Nonetheless, these new sales were achieved at the expense of margins. We expect FY09’s EBIT margin to decline to 16% (vs FY08’s 19%) as a result of the margin compression of around 2-3ppt from the 5/95 scheme, which requires SP Setia to absorb documentation and interest costs during the 2-year construction period. We note that EBIT margin has dropped from 17% in 4QFY08 to 15% in 2QFY09 since the introduction of the scheme earlier this year.

No new launches. Going forward, we understand that the Group has no plan for any new launches in the next 3-6 months. However, should consumer sentiment improve significantly, the Group will bring forward its launches such as: a) second block of Sky Residences which is selling at RM730-750psf (10% higher than its first block of RM680psf with 50-60% bookings), b) serviced apartments in Setia Pearl Island, which has a target selling price of RM320psf, and c) serviced apartments in Setia Walk.

Commercial project in Abdullah Hukum still preliminary. The RM5b-6b GDV mixed development project (JV with a local partner) with estimated GFA of 5-6m sf, which consists of retail, office, hotel and serviced apartments is still awaiting necessary approvals and pending land privatisation. The project is located at a 24-acre of land next to the Abdullah Hukum LRT station and nearby the Mid Valley City. We understand that the Group targets to launch the project in 2H10. Should the project materialise, we believe that it will further enhance the Group’s earnings as we still have not factored in our earnings forecast.

Sime Darby - Major catalyst underway?

2009-09-16T21:27:00.000+08:00

A potential sale of 10% stake could temporarily re-rate Sime Darby, perhaps to RM10 assuming the 26x PE peak valuation fetched during Synergy Drive initiative. However, actual synergy and share-based dilution are our concerns. Maintain SELL.

The Malaysian Insider reported that Sime Darby (Sime) was mulling a plan to offer up to 10% of its equity in new shares to an entity linked to the Chinese government. A new share placement would raise RM4.9b for Sime, based on the closing price of RM8.60/share (FY10 PE of 22x vs market FY10 PE of 17.7x). However, it was subsequently denied by Second Finance Minister Datuk Ahmad Husni Mohamad Hanadzlah although we noted that Najib had in the past weeks alluded to major investments by the Chinese government.

Potential short-term upside on newsflow. We assess that this deal is likely to materialise and could propel Sime to the mid-twenties PE multiples (i.e. peak valuation fetched during the 2007 mega merger Synergy Drive deal). Pegging a 26x FY10 PE multiple would value Sime at about RM10/share.

We view this as a potentially good re-rating catalyst for Sime as it:

Opens up greater opportunities to expand its downstream operation in China. During FY09 results briefing, management highlighted that the bulk of FY10’s RM7b capex would be used to expand its resource-based downstream activities. A tie-up with a Chinese party would nicely open up this opportunity and the RM4.9b proceeds could be utilised for the expansion.

A check on its productivity. As the Chinese party will have more emphasis on upstream operations, this could lead to greater efficiency from Sime’s large planting acreage of 550,000 hectares.

Small stake but a strong tie-up with world’s largest palm oil producer. A 10% stake seems too small for the Chinese government (which is known to be scouring the region for controlling stakes in plantation assets) but marks a good start to secure resources for China’s edible oil as well as biofuel requirements. Sime is currently the world’s largest palm oil producer, supplying about 5-6% (or 2.5m to 3.0m tonnes p.a.) of total global CPO. For China, forming a partnership with Sime could be a way of securing feedstocks for its rising domestic demand for edible oils, animal feeds and most importantly, biofuel. China is the largest palm oil importer, consuming 14-15% of total global palm oil supply annually.

Short-term pain, long-term gain. An assumed 10% new share issue would dilute Sime’s earnings by 9% and would translate into proceeds of RM4.9b. Meanwhile, a better profit from downstream expansion would only materialise in 3-4 years.

Deal cancellation and execution risks explored. Given the modest stake involved, the potential deal draws only the minor risk of the cabinet objecting on “selling a national interest”, which is also the largest market capitalised GLC. Our assessment also takes into account that the government would still be firmly in control after the share-based expansion, given the Permodalan Nasional Berhad (52% stake) and Employees’ Provident Fund (14%) present combined stake of >60%. A more pertinent downside risk is whether Sime could extract tangible synergy from this deal.

We would look towards upgrading our SELL call should Sime clinch the deal, which could temporarily lift its valuation back to the previous peak of 26-28x PE in 2007, implying a RM10 fair price. However, without a major exercise, the shares remain fundamentally overvalued. A lacklustre performance is expected in FY10 as the plantation division continues to suffer from flat CPO prices. Hence, until a deal materialises, we retain fair valuation of RM7.60 based on 20x FY10 PE.

Berjaya Sports Toto - 1QFY10 results preview: Likely to be lifted by special draws

2009-09-15T21:54:00.000+08:00

The seasonally weak first quarter results are likely to be lifted by the utilisation of three special draws during 1QFY10. We expect revenue and net earnings to rise 8-9% and 12-14% yoy respectively. Maintain BUY. Target price: RM4.90.

Berjaya Sports Toto (BToto) will report its 1QFY10 results in the second week of Sep 09. We expect net earnings to grow 8-9% yoy but to come in flattish qoq as the positive impact from three additional special draws utilised in 1QFY10 will kick in. No dividend is expected in 1Q10.

Positive impact of three additional special draws will kick in. BToto is expected to have 42 draws in 1QFY10 vs 39 draws in 1QFY09 and 40 draws in 4QFY09. Of the 42 draws, three will be special draws (one common draw and two standalone draws) vs none in 1QFY09. Gross revenue per draw is expected to have risen at low single digits yoy but should be flattish qoq backed by the resilient blue-collar segment. Hence, we expect its revenue and net earnings to rise 8-9% and 12-14% yoy respectively, during the seasonally weak first quarter. The luck factor will potentially drive net earnings higher.

No dividends expected in 1QFY10. We do not expect BToto to declare any dividends in 1Q10 as it has front-loaded its FY10 dividend payout (net: 19 sen) in 4QFY09. Parent company BLand’s projects in Vietnam and South Korea are expected to take off in 2010, and we believe these are probably the best indicators of the period around which BLand’s future cash needs will arise. Going forward, using historical records as a gauge, we do not discount the possibility that BToto may increase its payout beyond the current level of 75%, subject to its distributable reserves. Assuming a 100% payout, there will be an incremental 10.5sen DPS, on top of an outstanding 9.4sen/share (based on our FY10 gross DPS forecast of 33sen).

Positive outlook safeguarded by the upcoming Power Toto 6/55 game. BToto is on track to launch its Power Toto 6/55 game in Nov-Dec 09 to replace the existing Toto 6/42 game. The new game, which guarantees a larger upfront jackpot of RM3m and has no cap on jackpots, could potentially raise gross revenue per draw by 1-3%, even after imputing some cannibalisation of existing games.

Although its monopoly on jackpot games will end once Magnum launches its 4D game with a jackpot element (no launch date has been announced yet), we think the impact on BToto’s revenue will be marginal, given its extensive outlet network (681 outlets, the largest among the three number forecast operators (NFO)) and higher number of jackpot game variants offered (six). Instead, we believe the NFO market as a whole will grow, based on past observations.

Maintain BUY. Based on DCF valuation (cost of equity of 8.9% and terminal growth of 1%), we value BToto at RM4.90/share which implies prospective FY10 and FY11 PE of 15.0x and 14.4x respectively. We like the stock as a defensive play and dividend yields should remain attractive at 7-8% gross beyond FY10.

WCT - Re-entering a sweet spot era

2009-09-14T21:48:00.000+08:00

We lift our target price to RM3.00 after raising 2009-11 net profit forecasts by 24-33%. Yesterday’s results briefing revealed significant variation order claims and better- than-expected orderbook replenishment prospects.

Raise job win target to RM1.5b ... Contract wins should touch the RM1.5b mark in 2009 on new contract jobs at home and overseas, which include the potential conversion of two Letter of Intent (LOI) jobs in Sabah worth RM500m into Letter of Award (LOA) contracts by year-end. Should the latter materialise, WCT’s orderbook will increase to RM3.3b from RM2.8b currently.

... exceeding 2009’s RM1b orderbook target. To-date, WCT has bagged some RM1.3b of new jobs - RM766m Medini infrastructure works in Iskandar and two additional works in their existing projects in the Middle East - RM250m Abu Dhabi F1 project and RM370m New Doha International Airport (NDIA).

Orderbook replenishment looks promising in 2010. A potential third LOI (estimated RM1b-1.5b) for an infrastructure job in Sabah could boost earnings growth in 2010-11. Besides this, the Group is also scouring for other mega projects such as an extension of two LRT lines worth RM7b-10b, further jobs in Medini, Iskandar, after the recent surprise win of ajob as well as overseas jobs in Oman and Abu Dhabi.

Overseas prospects brightening. The company assessed that the construction cycle in the Middle East has troughed. For example, the Yas Island project in UAE still requires some infrastructure works to improve road accessibility, and WCT could secure more jobs there.

Raise margin expectations; significant variation orders secured. We raise our 2009-11 EBITDA margins from 6% to 10%, to factor in recently secured variation orders at the NDIA. We estimate 30% of the RM370m job extension reflects a settlement of variation order claims. Since the RM3.2b NDIA project (80% completed to-date) has yet to recognise much profit as costs associated to the extra variation orders were frontloaded, we expect this project’s estimated net profit of RM80m (based on 5% margin) to be reflected at the project’s mid- to tail-end, thus benefitting 2010-11 earnings.

We upgrade our net profit forecasts for 2009-2011 by 24-33%, factoring in higher orderbook replenishment of RM1.5b (previously RM1b), variation orders and higher margins at NDIA.

UEM Land - 2Q09 results preview: A lacklustre performance in 2009

2009-09-11T22:31:00.000+08:00

We expect 2Q09 net profit to improve qoq, mainly contributed by improved residential property sales. We expect lower 2009 earnings mainly due to lower land sales. Accumulate on weakness as share price softens. HOLD.

Earnings mainly contributed by improved residential property sales. 2Q09 net profit could have increased as much as 25% qoq due to the following: a) a low base in 1Q09, b) higher sales from residential projects such as Horizon Hills, East Ledang and Nusa Idaman, and c) contribution from Southern Industrial & Logistics Clusters (SiLC) in respect of industrial land sales as the manufacturing industry begins to recover.

JV with Limitless on Puteri Harbour will start soon. The layout plan for a canal housing precinct in Puteri Harbour, with GDV of RM1.5b over 111 acres (JV between UEM Land and Limitless on 40:60 basis), has been submitted to the local authorities for approval. Physical work should start as early as end- 09 and be fully completed in about eight years.

Land sale to Malaysian Biotechnology Corporation. Following the announcement of a collaboration between the government-owned Malaysian Biotechnology Corporation (MBC) and the Group (40:60) to develop a biotechnology hub in Nusajaya, the sale of 61 acres of industrial land in SiLC to MBC will generate about RM41m sales for the Group. However, only 30 acres of land sales, equivalent to RM20m, will be booked in 2H09.

Uphill task to achieve 2009 target. The Group may have difficulty achieving its 2009 target ROE of 6%, equivalent to RM100m net profit. This is mainly due to lower land sale contributions following Damac’s cancellation of its RM396m land purchase in Puteri Harbour (44 acres) and weakening global economic outlook which has affected land acquisitions by foreign investors in 2009.

Land sales expected to pick up in 2010. Earnings outlook for 2010 will be improved as top line is supported by a pick-up in residential property and industrial land sales. We also understand that the Group is negotiating to sell the following: a) a piece of land in Puteri Harbour with about 40 acres to a government corporation with an indicative price of RM40psf, and b) a piece of land in Nusajaya with about 60 acres to the state government at an indicative price of RM11psf.

Maintain HOLD with fair price of RM1.60. Our revised fair price is based on a 20% discount to our RNAV of RM2.00/share, which assumes an average value of RM13psf for the Nusajaya land. As an indication, we provide a sensitivity analysis (refer to table on the right) of UEM Land’s RNAV to various land price assumptions.

Alliance Financial Group - 1QFY10: Unexciting performance

2009-09-10T22:29:00.001+08:00

1QFY10 net profit of RM46m, down 63% yoy on lower net interest margin and additional provisions for CLO, as well as impairment for investment securities. Maintain SELL and fair price of RM2.00, based on 1.05x P/B.

Alliance Financial Group Bhd (AFG) reported 1QFY10 net profit of RM46.2m, down 63% yoy but much higher than RM0.8m in the previous quarter. The results were in line with our expectation. It declared an interim single tier dividend of 1.3sen/share.

FY10 will be another unexiciting year for AFG. Main focus for the management will be managing capital and liquidity, controlling nonperforming loans (NPL) and rationalising operations to improve efficiency as well as be more cost effective.

Another round of additional provisions could be the last time. 1QFY10 could be the final quarter for provisioning for its exposure to collaterised loan obligation (CLO). AFG has a total outstanding exposure of RM250m to CLO, including the high default risk Idaman Capital with a total exposure of RM240m.

Credit growth focusing on consumer. Despite the very stringent credit screening, AFG still managed to report a loan growth of 2% at end-FY09. This is on track to meet our expectation of 8% for FY10, focusing on crossselling higher yielding products to existing customers.

Net interest margin stabilising. NIM fell in 1QFY10 on the sharp 150p cut in OPR since Nov 08, but this is likely to stabilise from 2QFY10 onwards after the fixed deposits are fully repriced. Non-interest income is unexciting as the broking business and investment banking activitites are still slow.

Maintain SELL with a fair price of RM2.00, which implies a target P/B of 1.05x derived from the Gordon Growth Model. We are reviewing our fair price based on PE and P/B valuations given improved market liquidity. More details available after an analyst briefing.

Unisem - Feverish Chengdu

2009-09-09T22:08:00.000+08:00

Timely expansion in China combined with global demand recovery ensure an impressive CAGR of 90% for 2009-11. Catalysts are above-consensus earnings, IPO-worthy Unisem Chengdu and cheap valuations. Initiate with BUY Initiating coverage with a BUY call and a target price of RM2.26, based on a three-year historical average PE of 9.0x (which encompasses a full business cycle from its peak in 2007 to the trough in 4Q08 and 1Q09). This implies a target P/BV of 1.4x, which is also the midpoint between the average P/BV of 1.8x during the 2003-04 recovery and the average P/BV of 1.0x in 2007’s mini-upcycle.

Explosive earnings recovery, led by global demand recovery and the doubling of capacity at Unisem Chengdu by 4Q09. Unisem’s net profit is set to jump 186% and 110% in 2010 and 2011 to RM119m and RM153m respectively. Meanwhile, 3Q09 earnings could present a pleasant surprise – jumping 16% qoq to RM28m - as utilisation rates could reach 85%, up from 75% in 2Q09 and 50% in 1Q09. Operating margins should widen with better utilisation and favourable product mix (higher sales of BGAs and QFN packages).

IPO-worthy Unisem Chengdu a key earnings driver. Unisem Chengdu’s EBIT contribution is set to rise to an equivalent of RM65m in 2010, driven by the potential tripling of capacity by end-10 from early-09, to account for about 50% of Unisem’s 2010 earnings. Currently, Unisem China’s EBIT margin is already matching that of Unisem’s much more mature Ipoh plant, and benefits directly from highly generous support and incentives at the Chengdu Hi-Tech Zone, which houses established MNCs like Intel, Motorola and Ericsson.

Less susceptible to global semiconductor cycles, ... We estimate over 50% of Unisem’s sales in Chengdu are destined for domestic customers and 75% of Unisem Chengdu’s end products are consumed in the region, which is less susceptible to weaker consumer spending in developed markets.

… although recovery is on the way. Meanwhile, global semiconductor chip sales recovered significantly in 2Q09, and should move up another notch in 3Q09, partially led by Asia Pacific. Interestingly, our study of Unisem’s top key customers in 2Q09 reveals that they have registered top-line growth of 8- 32% and their inventories to sales ratio has been declining and is slightly above historical means, suggesting that inventories will have to increase by the same magnitude in subsequent quarters.

Cheap for emerging Malaysian IC assembly and test bellwether. Unisem trades at 6.3x and 0.7x PE and P/B respectively, well below its regional peers (refer overleaf) and the average after Y2K and the Asian financial crisis (sixyear historical average of 16.9x forward PE and 1.1x forward P/B). Unisem has rallied before to 2.6x P/B in the 2003-04 upcycle and 1.3x P/B in 2007. A hypothetical IPO of Unisem Chengdu could lift valuations to RM2.65.

Malaysia Construction - Optimism piling up

2009-09-08T21:58:00.000+08:00

We upgrade our call on the construction sector to OVERWEIGHT due to: a) more mega projects awarded, b) sustained margin recovery, and c) regional property prospects have improved. Top picks are Gamuda and WCT.

Contract awards to pick up. The government’s fiscal spending (for the Ninth Malaysia Plan (9MP) 2006-10 and the two fiscal stimulus packages) has lagged, having spent only RM140.3b of RM230b (61%) allocated under 9MP. As we approach the end of the 9MP period and planned fiscal stimulus timeline, we expect the government to expedite contract awards over the next two years as construction typically forms 3-4% of total GDP.

Several mega projects in the offing. Following the award of mega projects such as Pahang-Selangor interstate water transfer tunneling job and Medini infrastructure work, tenders for three key mega projects, namely, work on the a) remaining portion the RM6b Pahang-Selangor interstate water transfer, b) RM2b LCCT terminal in Sepang and c) RM7b-10b extension of two LRT lines would follow suit. With the bulk of the construction and infrastructure jobs to be awarded in 2009-10, the sector’s orderbook is projected to double to RM43b by end-10. We also foresee plenty of jobs in the pipeline in Sarawak and Iskandar Malaysia, South Johor.

Margin recovery amid lower building material costs and variation order claims. We expect operating margins to recover from as low as 3% in 3Q08 to 8% this year as steel prices have halved to RM2,000/tonne from a peak of over RM4,000/tonne in 3Q08, as well as recent successful variation order claims from overseas and local projects such as Gamuda and WCT JV project, New Doha International Airport (NDIA), and MRCB’s power transmission jobs. Furthermore, we believe the sector’s earnings are sustainable through 2010-11, supported by a sufficient domestic orderbook (our RM13.0b cumulative orderbook assumption for construction companies under our coverage accounts for one-third of the RM43.4b estimated domestic construction jobs).

Recovery of property demand, positive development in water sector and gradual recovery in Vietnam economy spell better times ahead for selected construction players with interests in these segments. Key beneficiaries include IJM (via its 66%-owned IJM Land) and Gamuda where 20% of its FY08 revenue was contributed by its property development division. The possible resolution of water concession will see Gamuda receiving RM632m cash offer and Gamuda and WCT are expected to benefit from Vietnam’s economic recovery with projects such as Yenso Park and Platinum Plaza.

We upgrade our rating on the construction sector to OVERWEIGHT. The above-mentioned catalysts suggest that the construction business will trade at a peak cycle PE valuation of 23x against current PE of 18x. Our top sector picks are Gamuda (BUY/Target: RM3.70) and WCT (BUY/Target: RM3.00). Positive newsflow will also support IJM (HOLD/Fair: RM6.35) and Sunway Holdings (HOLD/Fair: RM1.55).

AirAsia - Delaying aircraft reduces gearing to just 1.9x

2009-08-24T21:33:00.000+08:00

AirAsia has provided the perfect catalyst for an upgrade. With the delay in delivery and additional RM500m in proceeds from a share placement, AirAsia will be able to position itself to grow without risking deterioration in its balance sheet. Given the lowered balance sheet risk and enhanced profitability from lowered interest expenses, we upgrade the stock to a BUY with a target price of RM1.84.

Delay of eight aircraft in 2010 will reduce capex by RM1.1b and debt by RM0.88b. AirAsia surprised the market by announcing plans to delay the delivery of eight aircraft in 2010 from 24 to 16 and the possibility of delaying another eight aircraft due for delivery in 2011-14. Previously, the company had maintained that it had no plans to delay delivery. We assume that part of the delivery slated for 2010 will be pushed to 2011 and 2012, by which time the balance sheet would have strengthened adequately. AirAsia also has plans to raise RM500m via a private placement. The net result is a 10% reduction in 2010’s interest expenses, an improvement in interest cover to 2.5x from 1.7x and reduction in gearing from 3.5x to 1.9x.

Load factors will improve. AirAsia’s load factor improved from 69.5% in 1Q09 to 74.8% in 2Q09. We believe AirAsia will be able to achieve higher loads and still achieve about 14% growth in passenger traffic for 2010 with this delay in delivery. By end-09, Air Asia will have 58 aircraft and the progressive delivery of 14 new aircraft will allow for a more gradual buildup in capacity. We have lowered our capacity growth assumption from 14% to 12% for 2010 but maintained passenger traffic growth assumption at 14%.

We estimate AirAsia will issue 400m new shares at RM1.25 each. We also upgrade 2009 net profit estimate by 4.2% to RM638m and 2010 net profit estimate by 13%. 2010 book value, net of dilution, is estimated at RM1.19. The potential impairment in receivables from its Thai associate and Indonesian joint venture still remains a risk.

Our previous target price of RM0.99 was based on peer group EV/EBITDA multiple of 6.9x. Applying the same valuation method, we now derive a target price of RM1.84. This represents a 55% premium to 2010’s book value and just 10.5x average two-year forward PE (excluding deferred tax write-backs). Upgrade to BUY.

Mah Sing - Plans RM690m project in Cyberjaya

2009-08-20T21:12:00.000+08:00

Overwhelming response for Southgate project since its launch in 1Q08. To date, three of the blocks within Southgate, namely Vox, Vivo and Vertex have achieved 90% sales. Adding the en-bloc sale to Felda, the Southgate project has contributed about RM389m of sales (RM163m sales achieved from three blocks) for the Group. This represents about 87% of total RM448m GDV of Southgate within just one and a half year since it was launched in 1Q08.

2009 sales target met. The Group has achieved RM543m of sales to date with the en-bloc sale, thereby exceeding its 2009 sales target of RM453m as well as consistently reaching its average yearly sales target of RM500m over the past few years. In addition, this will enhance Mah Sing’s unbilled sales to RM800m.

Township development in Cyberjaya. The 115 acres of land in Cyberjaya will be developed into mid- to high-end gated residential development named Garden Residence with estimated GDV of RM690m (total housing of 760 units). Garden Residence will consist of 2-storey and 3-storey superlink houses, semi-detached and bungalows where pricing range from RM688,800 to RM1.4m or equivalent to RM234-RM438psf. The project is slated for launching in 2010.

Fast turnaround strategy still works under this project. We believe Mah Sing’s land acquisition strategy of switching from small parcels of matured areas to sizeable new township such as Cyberjaya will not affect its fast turnaround strategy as we believe that the project is still highly cash generative mainly due to: a) the project itself is already zoned for residential use and hence, the Group is able to fast track its marketing campaign as earlier as next year, and b) the project itself is saved from low cost components and infrastructure requirements which will save the Group’s land and construction cost.

More land acquisition on the pipeline. We understand that the Group is still scouring for more landbank (perhaps up to four more parcels) which are targeted for commercial and residential developments. The Group also intends to continue its deferred payment scheme (5/95 programme) as it expects the property market’s full recovery in 2H10.

We have revised up our 2009-11 net profit forecasts by 3-19% after factoring in the en-bloc sales of RM226m. However, we do not factor in the Cyberjaya development as details of the launch are not being given yet.

We upgrade our call to BUY with target price of RM2.30. Based on our target price, Mah Sing trades at 13x 2010F PE, which reflects its mid-cycle valuation. Our PE valuation for Mah Sing also reflects the Group’s asset-light and quick turnaround business model.

Genting - A lacklustre 2009; look to 2010 and beyond

2009-08-19T21:10:00.000+08:00

We expect Genting’s 2Q09 results, due by end-Aug 09, to be flat qoq but substantially lower yoy, mainly dragged down by its leisure and plantation divisions. We expect the leisure division’s core earnings to decline 10-15% yoy but to remain flat qoq, mainly due to lower visitor arrivals amid the H1N1 pandemic, while plantation earnings should fall 67% yoy but be marginally higher qoq (+2%) due to lower CPO production and prices. The power division will improve as regional economies recover gradually. The maiden cash flow contribution from the Tangguh liquefied natural gas (LNG) plant in Indonesia will be delayed further to 1Q10 and Resorts World Sentosa’s (RWS) pre-opening expenses are expected to accelerate in 2H09.

A lacklustre 2009… We do not foresee any excitement for 2009, mainly due to RWS’ pre-opening expenses, adverse operating conditions in the UK, and the effect of the economic crisis on visitor arrivals and spending, which was further compounded by the H1N1 pandemic. We estimate RWS will incur S$200m in pre-opening expenses, mostly to be recognised in 2H09 mainly on recruitment (10,000 staff), training, sales and marketing programmes prior to RWS’ opening in 1Q10.

… so look to 2010 and beyond. We expect Genting’s earnings growth to gain momentum in 2010 and 2011, boosted by RWS’ contributions. We forecast Genting’s 2010 and 2011 EBIT growth at 80% and 17% yoy, mainly as RWS’ contribution to group EBIT rises to 32.9% and 37.5% respectively (reversing losses in 2009).

We have raised our 2010 and 2011 earnings forecasts by 18% and 19% respectively, as RWS will enable 54.4%-owned Genting Singapore (GENS) to book net earnings of S$295m and S$444m in 2010-11. However, we have lowered our 2009 earnings estimate for Genting by 10.3%, taking into account lower average selling prices (ASP) and production at its plantation unit, as well as an increase in RWS’ pre-opening costs to S$200m.

Raising target price to upcycle valuations. We have raised our target price to RM7.60, after imputing GENS’ target price of S$0.95 (based on cost of equity of 9.2% and zero terminal growth after RWS’ concession period) into Genting’s RNAV valuation while lowering its holding company discount to 10% from 20% previously. At RM7.60, it would trade at 16.0x and 5.6x 2010 PE and EV/EBITDA respectively, vs global peers’ average of 40.2x and 12.7x. Key re-rating catalysts for this stock: issuance of casino licence by the Singapore government, an earlier-than-expected opening of RWS (instead of in 1Q10), a further delay in Marina Bay Sands’ opening, and a better regional economic outlook, which would drive Singapore’s tourist arrivals.

AirAsia - Impressive 14x rise in net profit

2009-08-18T21:07:00.000+08:00

The 14-fold rise in 2Q09 net profit is impressive considering this was achieved by cutting ticket prices by 19% to RM160 per pax and with no fuel hedging yield. This has paid off as EBIT margin rose to 33.6% vs 13.8% in 2Q09. This stands in stark contrast to SIA’s –2.5% in 1QFY10 and Cathay Pacific’s –11% for 1H09. In 1H09, pre-tax profit rose 313% to RM342.3m and net profit doubled to RM$342.3m. Out full-year estimate is now raised from RM639m to RM659m.

Limited runway capacity at LCCT. A main reason behind the delay in aircraft delivery was the shortage of parking slots. As at end-June, AirAsia is short of one slot. However, AirAsia indicated it will be offered 6-8 additional parking slots by 2010. It is also negotiating for lower handling charges with MAHB.

Associate and JV still at a loss. Both the Indonesian associate and Thai jv reported a combined loss of RM30m. Thus, there is a risk that the receivables amounting to RM890m could potentially be impaired. However, CEO Tony Fernandes indicated this should be gradually repaid over the next three years.

We raise our FY09 net profit estimate by 3% to take into account lower 1H09 costs and higher ancillary income. Our FY10 net profit number remains unchanged. Key risk is higher fuel prices and the potential impairment in receivables from its Thai jv and Indonesian associate which amount to about 30 sen/share.

Last week, we raised the stock to a BUY with a RM1.84 target price. Although we remain concerned about impairment charges, AirAsia has delivered stellar results, but trades at significant PE discount to full-service peers. While this could be due to potential impairment of its book value, we believe such a high discount is unwarranted.

Bumiputra-Commerce Holdings - ROE to hit 18% by 2011

2009-08-17T21:09:00.000+08:00

ROE to hit 18% by 2011. Bumiputra-Commerce Holdings’ (BCHB) 2009 upgrade is very much within ours and market expectation, but the surprise is the 18% ROE target for 2011, which is well over the target for 2009. We think this is achievable given the combination of strong earnings growth and capital management. As at end-Jun 09, CIMB Bank’s CAR was 12.7% and RWCR was 13.8%.

Loan growth on track. Ytd, loan growth reached 11.6%. Excluding CIMB Thai, total loan book grew about 4.5%, slightly ahead of management’s fullyear target of 8%. We expect a 10% growth (excluding CIMB Thai) for 2009. Management highlighted that CIMB Niaga’s loan growth will make a U-Turn from a contraction of 2.2% in 1H09 to a low-teen growth by end-09. Coupled with the strong approvals for mortgages, BCHB’s full-year loan growth is ontrack to meet our expectation. Strong pipeline of deals should ensure noninterest income contribution from investment and treasury operations.

Losing deposit to recent aggressive government unit trust launches. Deposit growth is likely to be behind target due to the aggressive launch of higher-yielding national unit trust funds.
CIMB Niaga to perform better in 2H09. Despite the strong 20% jump in earnings in 1H09, management expects 2H09 to be better for CIMB Niaga, with growth supported by a) much stronger loan growth with stable margin, b) synergistic benefit from the merged entity, and c) streamlining of the investment and treasury system and operation to boost non-interest income (now only at 20% of total income vs group of 40%). In 1H09, CIMB Niaga contributes about 18% of group profit before tax.

Maintain BUY with a target price of RM12.00 based on 2.3x P/BV, which is more in line with BCHB’s historical 1-year forward PE of 13.9x (based on a 10-year average). BCHB is an excellent proxy to a rising market given its higher weightage in FBM30 of 10.69% (from 5.47% previously), and its high beta.

AMMB Holdings - 1QFY10: Set to outperform

2009-08-14T21:39:00.000+08:00

AMMB Holdings (AMMB) reported a record profit of RM258.2m for 1QFY10. This is above our expectation. The variance is due mainly to stronger-than-expected contributions from the investment banking (IB) divisions.
Management still cautious, but talking about potential upside. Despite the strong 1QFY09 results (annualised net profit of RM1b), management is sticking to its profit guidance of RM800m-900m for FY10. Management is waiting for more convincing economic indicators behind the recent improvement. However, economic activities and the job market are likely to to pick up, we expect management guidance to be revised up by the 2QFY10 results briefing.

Non-interest income still the key upside. Performance in 1QFY10 is likely to continue. This is in line with management’s expectation based on deals in the pipeline. We are likely to see higher income generated from the following: a) brokerage income on higher trading value, b) initial public offerings, and c) higher advisory fees from debt and capital raising exercises.

NPL up, but still below expectation. Despite the uptick in non-performing loans (NPL) of RM95m qoq, NPL is below management expectation. Net NPL ratio inched down from 2.6% as at FY09 to 2.4%. Although we are still sticking to gross NPL expectation of 4.3%, this could be lower with the improvement in the economy and the job market. There could be potential upside to AMMB on lower credit charges.

We lift our FY10 and FY11 net profit forecasts by an average of 11% to an EPS of 32.3 sen and 37.0 sen respectively. We have factored in higher contributions from IB and Islamic banking (mainly from Islamic bonds issuance). We also factor in higher loan growth for FY10 from 5% to 7% considering the recent pick-up in property sales and potentially better demand for auto loans.

We upgrade AMMB from HOLD to BUY with a target price of RM5.10 (previously RM4.05) based on 1.58x P/BV (1 standard deviation from P/BV since FY06, i.e. talks with ANZ start). At RM5.10, AMMB is valued at 1-year forward PE of 13.9x (1 standard deviation from FY06 PE). We are valuing AMMB higher than its fair value based on Gordon Growth Model (fair at 1.23x BV or RM4.05) given its rising earnings growth and strong market liquidity.

AMMB is our top mid-cap pick as it offers undemanding valuation with rising earnings growth momentum. Greater impact from ANZ is likely to kick in in FY11 onwards with better market conditions and AMMB would be ready to be more aggressive with its strong capital base (Tier-1: 9.4%, risk-weighted capital ratio: 14.7%).

Sime Darby - FY09 earnings to be hit by low CPO price

2009-08-14T21:34:00.000+08:00

We expect Sime Darby’s (Sime) 4QFY09 and FY09 results to meet our expectations. Any surprise would be on the downside, coming from potential provisioning/losses at its projects in Qatar.

Lower contribution from plantation division. Sime’s plantation division is its largest division, contributing about 60% of the Group’s pre-tax profit. This division is expected to deliver better qoq results in 4QFY09, due to higher production and average selling price (ASP) of crude palm oil (CPO). However, we believe Sime’s 4QFY09 CPO ASP will be below the industry’s average as it had already locked-in sales for its 4Q production earlier, in late-1Q09. 4QFY09 earnings will be lower yoy due to a 28% yoy decline in CPO ASP. For FY09, contribution from this division will be lower due to the following factors:

a) Lower CPO ASP. Based on Malaysian Palm Oil Board’s (MPOB) spot prices, the ASP for FY09 was 23% lower than FY08.

b) Higher fertiliser cost. Operating profit margin will be affected by record high fertiliser costs in 2QFY09 and 3QFY09.

c) Only marginal increase in production. Total production was up only marginally by 4%, driven mainly by its Indonesian estates. However, it was lower-than-expected due to the bad weather in Kalimantan in 3QFY09.

Contribution from manufacturing division to improve in 4QFY09. The manufacturing division’s operating profit margin would be hit by high cost, but is likely to turn in a small profit or break-even, with the bulk of the high-priced inventories brought forward being recognised in 3QFY09. This division is contributing about 20% of Sime’s total operating profit.

Property sales pick-up in 4QFY09 to cushion weaker sales 1Q-3QFY09. The property division is likely to perform better in 4QFY09 due to sales pickup since Mar 09. However, for FY09, operating profit contribution will be at least 15-20% yoy lower due to the lacklustre 1HFY09. For FY09, Sime has sold about RM1b worth of properties from its existing stocks through three major selling campaigns (Parad of Home) since 1 Jun 08. Of these, 60% was locked-in at end-3QFY09 and 4QFY09. Thus, 4QFY09 performance is likely to be better qoq but flat yoy.

Momentum slows at heavy equipment division. We are still expecting lower qoq contribution from this divison due to margin squeeze, although this may be somewhat mitigated by the strengthening of the Australian dollar in 4QFY09 vs 3QFY09. Also, as commodity prices moved up in 2Q09, the risk of order cancellations is now lower. For full-year FY09, this division likely to be helped by the good results in 1QFY09.

Sime is still expensive after we raise its fair price to RM7.60, pegged to 20x FY10 PE. The strong support from government-linked funds have been the driving force behind the rise in Sime’s share price. At the current price of RM8.37, the stock trades at 23x FY10 PE, which is higher than its historical average of 20x. Even pegging it to 20x FY10 PE, Sime’s target price of RM7.60 is still well below its current trading price of RM8.31. Maintain SELL.

KLCC Property - Result within expectations

2009-08-12T20:56:00.000+08:00

KLCC Property’s net profit for 1QFY10 came in at RM60.4m, slightly up 4.3% yoy, mainly contributed by higher rental income from offices, a retail mall and car park management. Results are in line with our and consensus estimates. Rental rates at Menara ExxonMobil were revised from RM5.20psf currently to market rates of RM7psf. KLCC Property’s revenue stood at RM217.1m, slightly up by 1.4% yoy and 2.6% qoq.

Strong office rentals likely to compensate for slowdown in retail mall and hotel operations. We believe a potential slowdown at the Suria KLCC retail mall and Mandarin Oriental Hotel in FY10 due to a sluggish economy is compensated for by the strong rental reversion from the office segment. KLCC Property has locked in rental income under long-term leases with bluechip tenants for Petronas Twin Tower (Petronas), Menara Maxis (Tanjong), Menara ExxonMobil (ExxonMobil) and Dayabumi (MISC) where default risks are minimal. Moreover, the next rental revision for Petronas Twin Tower, due in Oct 09, is expected to increase rental by 9% to RM9psf. Long-term office rentals are likely to contribute about 51% of FY10 EBIT.

We maintain our target price at RM3.40 based on a 35% discount to our RNAV of RM5.37/share (which implies 0.6x target FY10F P/B against the historical average of 0.8x).

Malaysia Banking Turning more positive

2009-08-07T20:44:00.000+08:00

Loans growth to pick up in 2H09. Loans growth in Jun 09 slowed down to 8.3% yoy from 8.9% in May due to a contraction in business loans. Business loans make up about 45% of total banking loans. A shrink in credit extended to the manufacturing and commercial sectors will continue to put pressure on loans growth. However, loans growth momentum is expected to pick up in 2H09 due to the strong recovery in loan applications and approvals since March.

Mortgage approvals at new high. After six months of decline, approvals for mortgages start moving up since Mar 09 and have hit a new high of RM7.1b (+14% mom and 34% yoy) in June. This is attributable to the recent pick-up in new launches after developers have been holding back since 2Q08. This will translate into stronger loans growth in 2010.

Proactive measures to mitigate deterioration in asset quality. Nonperforming loans (NPL) were down by RM423m qoq due to a drop in household NPLs. After two consecutive quarters of uptick, mortgage NPL eased by RM258m qoq in 2Q09. We are unlikely to see a sudden surge in NPL as previously expected because BNM and banks have been active in restructuring stress loans to reduce the monthly repayments. BNM is also reactivating the Corporate Debt Restructuring Committee (CDRC) for the resolution of distressed debts of large corporations.

Capital still strong. Capitalisation for the sector remained healthy as evidenced by both the risk weighted capital ratio and core capital ratio of 14% and 12.3% respectively. In June, aggregate capital base had increased 1% as a result of capital management exercises by several institutions. The net non-performing loans ratio remained stable at 2.2% while the aggregate loan loss coverage ratio also stayed high at 89.5%.

We are reviewing our UNDERWEIGHT weighting on the banking sector. We are now turning more positive as earning risks are declining as domestic economic activities start to pick up on the back of more aggressive government spending to boost business and consumer confidence. We also take into consideration significantly improved liquidity with the launches of Amanah Saham funds (the extremely well received RM3.33b launch and last week, the RM10m 1Malaysia Fund).

AMMB - Potential higher dividend payout

2009-08-06T21:33:00.000+08:00

Greater opportunities in non-interest income, driven by: a) improvement in equity trading volume – a boost to brokerage income, b) removal of 30% bumiputera requirement in initial public offerings (IPO), which will boost IPO demand, and c) higher advisory fees following the easing in regulations for debt and capital raising exercises.

Lower default risk, but greater impact in FY11. Although management maintains its net non-performing loans guidance of 4% for FY10, default risk is now lower with the improved economic outlook and return of employment opportunities.

Better HP margin. The recent hike in hire purchase (HP) rates is definitely a positive for AMMB given its 40% exposure to auto loans. With the adjusted HP rates, AMMB can now focus on growing this business segment.

Potential higher dividend payout from active capital management. For FY10, we expect DPS of 10 sen, based on a 35% payout, higher than FY09’s 8 sen. With its excess capital, AMMB could declare even better dividends. A dividend policy may be announced after this financial year, with a payout likely to be in the range of 40-50%.

We lift our FY10 net profit forecast slightly by 4.8% from RM845m to RM885.4m to factor in the slightly improvement in loans growth of 5% (previously 3%).

Upgrade to HOLD with fair price of RM4.05. Our fair price is derived from the Gordon Growth Model (ROE: 13%, payout ratio: 40% (previously 35%) and required return: 10%). This implies a forward P/B of 1.23x, in line with its historical average P/B valuation. AMMB is our top mid-cap pick as it offers the cheapest valuation with potential earnings upside from the strengthening capital market and improved HP margins.

British American Tobacco - 2Q09: Sharp volume contraction

2009-08-05T21:31:00.000+08:00

2Q09: Net profit of RM201.2m (1H09: RM407.2m) was in line with consensus and 51% of our full-year forecast. Gross profit fell 7.5% yoy and 6.8% qoq to RM377.0m, but net profit improved 3.1% yoy due to sharply lower operating costs (-22% yoy and -19.4% qoq), which we attribute partly to lower A&P expenses. Product mix improved as its Global Drive Brands’ (GDB) market share rose 3.1ppt to 54.7% in 1H09. An interim dividend of 113 sen/share (gross yield: 3.4%) was declared, similar to 2Q08’s.

BAT’s sales volume contracted 13.9% vs industry’s 11%, worse than our original projection of a 10% contraction, due to consumer down-trading and the initial kneejerk reaction to the implementation of pictorial health warnings in March. We maintain our forecast for sales volume to contract by 6.5% yoy in FY09 as 2H09’s volume decline should moderate as the economy picks up, although we acknowledge the potential downside to our forecast.

Much more moderate excise duty hike anticipated. Going forward, we think it is unlikely for the government to repeat the past two years’ hefty excise duty hike of 20-25% on cigarettes. Instead, the duty should be around 10-15% as the government may be compelled to limit the high incidence of illicit trade (which could potentially be higher than 30%). Currently, the excise duty is 18 sen/stick.

Carlsberg Malaysia - Singapore acquisition

2009-08-04T21:44:00.000+08:00

Carlsberg Malaysia has entered into an MoU with parent, Carlsberg A/S, to acquire 100% of Carlsberg Singapore for RM370 mn. This related party transaction will be put up for minority shareholder vote in late October. We view the deal positively, the price tag is fair, offers significant potential upside to future earnings and allows Carlsberg Malaysia to diversify geographically.

The price tag of RM370 mn implies a transaction P/E of 15.4x, based on Carlsberg Singapores actual FY08 net profit. However, at an analyst briefing Wednesday, management indicated that merger synergies could conservatively amount to RM22 mn in 2010E. The potential synergies are likely to result from Malaysia assuming contract manufacturing for Singapore (versus an external producer in Thailand) and lower logistics cost. Malaysia will not require any additional capex to take on the Singapore manufacturing contract.

Taking the contribution from Carlsberg Singapore and potential merger synergies into account, there is as much as 47% potential upside to Carlsberg Malaysias FY10E net profit, translating into a P/E of 11.3x. This is 23% below the markets FY10E P/E of 14.7x. Even if the merger synergies are half of what is expected, there is as much as 22% potential to Carlsberg Malaysias FY10E net profit.

Carlsberg Malaysia had slashed its FY08 dividend payout to just 37% (from 99.5% in FY07) when it decided to look out for potential acquisitions. One of the terms of the transaction is a proposal for a dividend payout of 50-70%, which implies FY10E net dividend yield of 4.4-6.2% based on the prospective post-acquisition net profit base. This is attractive compared with the markets net yield of 3.6%.

We upgrade Carlsberg Malaysia to an OUTPERFORM from Underperform with a new target price of RM5 (from RM2.80 previously). This spells 18% potential upside from current levels. Despite having risen 10% Wednesday, the stock has underperformed the market by 18% since our February 2009 downgrade.

Kossan Rubber Industries - Punished by forex contracts

2009-08-03T21:21:00.000+08:00

Share price dips on concerns of forex losses, which have already been factored in the consensus forecasts, provide buying opportunity. Strong core earnings in 2010. Maintain BUY and target price of RM4.24

Share price battered after hitting a 52-week high. Kossan hit a 52-week high following a slew of earnings surprises by other glove manufacturers. We believe the surge in net profits of Top Glove and Supermax, +61% yoy and 90% respectively, was mainly due to additional orders from customers which held back purchases in 1Q (prior to the H1N1 viral outbreak) in anticipation of lower latex prices. Buyers are now refilling orders as glove prices are expected to increase. Current latex prices have risen 10% from the low in 2Q09.

Undue selling pressure from concerns on forex losses. The market appeared surprised by last week’s revelations that Kossan had booked an estimated RM12m in hedging-related forex losses in 1Q09 (84% of 1Q net profit), causing the share price to fall by 10%. The forex loss was recognised as ‘other expenses’ and/or as other costs items in Kossan’s accounts during the February reporting season. The 4Q09 accounts also revealed that Kossan had entered into forex contracts, hedging 67% of 4Q08’s receivables (amounting to RM107m) at an average of RM3.37/US$. The differential between 1Q09’s average and hedged exchange rates (i.e. when the US dollar appreciated) triggered the loss.

Diminishing forex losses in subsequent quarters, from balance estimated forex exposure equivalent to RM120m-140m ... Assuming that the company’s currency hedging policy covers 12-14% of 2009 revenues, the outstanding hedging contracts (which we understand is structured to expire in Nov 09 or earlier) amount to around RM120m-140m. Hence, 2Q09’s realised forex loss should be significantly lower qoq at around RM9m, even assuming the same face amount of exposure as in 1Q09, as the greenback has retreated over 2% from 1Q09 average rate.

with potential gains should the Ringgit appreciate. Based on our above assumptions, Kossan would realise a cumulative hedging loss of RM14.5m in 2009 if the Ringgit averages at RM3.55/US$. Should the Ringgit appreciate above the RM3.37/US$ mark before the hedging contracts expire, Kossan will recognise a gain on the outstanding forex exposure.

M&A opportunities and locking in long-term contracts. As the present market dynamics still favour a market consolidation, rubber companies like Kossan could be in the position to acquire smaller privately-held but profitable manufacturers. We also reckon that Kossan is likely to enter into long-term contracts with its buyers, thus raising its earnings visibility.

IJM Plantations - Expecting lower 1QFY10 results

2009-07-29T22:22:00.000+08:00

1QFY10 results likely to be lower qoq and yoy, due to lower CPO ASP. Sell into strength; expect the share price to retreat due to weakness in CPO prices. Maintain SELL, fair price of RM2.55 based on 15x FY10 PE.

Substantially lower yoy. Yoy, 1QFY09 net profit contraction can be as high as -60% due to : a) lower CPO average selling price (ASP) (estimated: -32% yoy) , b) an estimated 9% yoy fall in production and c) higher operating cost as fertiliser cost has risen by an estimated 11% yoy.

Qoq mitigated by higher production, but still be affected by higher cost. On a qoq basis, 1QFY09’s lower CPO ASP should be partially mitigated by higher production. However, due to slightly higher operating cost (fertiliser application only started in CY2Q), we expect net profit to still be slightly lower compared to RM8.5m in 4QFY09.

Production picking up but still slow. Fresh fruit bunches (FFB) production has started to pick up as shown by the qoq growth, but still slower than expected. Heavy rainfall in 1Q09 had actually affected the formation of FFB and lowered OER. For FY10, we expect a production growth of only 4.9% vs 5.8% for FY09.

Earnings forecasts maintained as we expect higher production to come onstream in late-2QFY10 and 3QFY10. Maintain SELL, fair price of RM2.55 based on 15x FY10 EPS. Sell into strength; expect the share price to retreat due to weakness in CPO prices amid concerns of high inventories (see our sector report dated 23 Jul 09 “Cloudy Outlook On Shockingly High Inventory”). Post-rights issue, IJMP’s target price is RM1.90 based on 15x diluted FY10 EPS of 12.7sen.

DiGi.Com - 2Q09: Unsustainable premium

2009-07-28T22:53:00.000+08:00

2Q09 net earnings declined significantly (-21.4% yoy; -14.9% qoq) and EBITDA margin fell further to 43.3%. Trading at a high premium given its weak market position. Maintain SELL with fair price at RM20.00/share.

1H09 net earnings 3.8% and 7.7% below our and consensus estimates respectively. DiGi.Com (DiGi) reported a lower 2Q09 net profit of RM234.5m (-21.4% yoy; -14.9% qoq), attributed to 3G spectrum cost amortisation and accelerated depreciation charges (up RM25.8m). EBITDA margin declined further to 43.3% from 44.6% in 1Q09, due to higher leased line costs, A&P expenses and doubtful debts. Revenue fell 1.1% qoq, the second consecutive quarterly contraction, affected by weak macro factors and competitive pressure. On an annualised basis, 1H09 revenue fell short of our forecast by 4.5%

Lower net subscriber adds and ARPU. Net subscriber adds for 2Q09 totalled 75,000, 19.4% below 1Q09’s 93,000. This suggests DiGi’s subscriber’s market share could have shrunk by another 0.5-0.75ppt to 24.25 - 24.50% in 2Q09. The previously strong subscriber growth at the postpaid segment tapered off to 0.9% qoq as DiGi ceded market share in the youth and migrant worker segments to mainly Celcom. Blended ARPU fell by another RM2 qoq to RM54, which management attributed to weak macro factors. We expect DiGi to intensify its A&P activities, suggesting significant risks of further EBITDA margin compression. We have forecast EBITDA margin of 42% for 2009.

Insignificant contribution from 3G broadband wireless. DiGi acknowledged that the 3G broadband wireless subscriber base and revenue (undisclosed) were insignificant. Based on other operators’ past records in this segment, we estimate subscriber numbers at less than 20,000. There is no change in annual 3G capex guidance of RM300m-400m for the next 3-4 years. DiGi is expected to launch 3G services for mobile phones (smallscreen) by end-09, which have higher growth potential as compared with 3G broadband wireless services (big-screen).

Maintain SELL with a fair price of RM20.00 (cost of equity of 8.7% and terminal growth of 1%). We remain concerned about DiGi’s declining trends in net subscriber adds, blended ARPU and EBITDA margin. DiGi is trading at a 17% premium to regional peers even though it has limited domestic growth potential and the weakest market positioning among the three celcos.

DiGi has declared an interim single-tier dividend of 49 sen/share, which translates into 75% of net earnings, in line with its dividend policy (net payout ratio of 75%), and constitutes about 48% of our 2009 dividend forecast. Management has guided that the capital structure optimisation exercise would be completed by 2010, which could point to special dividend payouts in 2009-10. As at 2Q09, DiGi is in net debt position of RM173.6m.