Top Glove: Upgrade to Buy - In top form again

By Maybank IB Research
24 Apr 2012

Upgrade to Buy. We have turned positive on Top Glove: (i) its sales
has picked up further and is almost back to its H1N1 peak; and (ii) latex
cost  (key input)  has begun its seasonal downtrend  and is likely to
sustain at lower levels due to global rubber supply surplus this year.
We  raise our FY12-14 EPS  forecasts  by 8-12% on lower latex cost
assumption. Post-revision, Top Glove trades at 13x CY13 PER, below
its 5-year average of 16x. We upgrade the stock to Buy (from Sell), with
a higher TP of MYR5.40 (+29%) on 16x PER target (previously 14x). Its
share price has fallen by 15% from its peak in Jan 2012.

Sales almost back to H1N1 peak. 2QFY12 (Dec-Feb) sales volume
(est. 6.4b pcs)  was  inching  close to its H1N1 peak  (est. 6.7b pcs)
during 1HFY10, and continues to rise. Sales volume recovery after 2
years stems from: (i)  a resumption  in buying activity from Brazil after
running down its overly high inventories in 2011 (Brazil overbought its
glove requirements during the H1N1 period in 2010); (ii) Top Glove has
been adding  nitrile capacity to compensate for the ASP-led latex
market share loss. Nitrile sales is now 2x YoY higher and accounts for
14% of total sales volume (2011: 11%).

Latex price coming off, likely to sustain at lower levels.  In Apr
2012, latex price exhibited the first post-wintering weakness, retreating
5% MoM to MYR7.40/kg. Though it has reached the floor price set by
the Thai government (at MYR7.40/kg), we believe  latex price  will
undershoot the floor price as supporting the commodity price amid a
prolonged  global rubber  supply surplus  is uneconomical.  The
International Rubber Study Group (IRSG) is projecting a rubber supply
surplus of 81k tonnes in 2012 (from a deficit of 159k tonnes in 2011).

Firm recovery in FY12. With majority of its sales in the latex segment
(74% of total sales), a surplus-led lower latex cost will help Top Glove
to at least sustain its margins. We lower our latex cost assumption by
7%, resulting in an 8-12% upward revision to our FY12-14 EPS
forecasts. We now look to a sharp 64% YoY net profit recovery in FY12
to MYR185m, higher than its pre-H1N1 net profit of MYR169m in FY09.


Sales volume on an upward trajectory again

Brazil to support volume recovery.  Top Glove’s sales volume has
picked up again since 2QFY11 (+5% QoQ) and we expect its sales to
continue its upward trajectory trend. We note that orders from the Brazil
glove distributors have just, in Feb  2012, reverted to the  H1N1 level
after running down their glove inventories in 2011. Brazil now accounts
for 15% of Top Glove’s total sales volume, compared to 10% in 2011.

New nitrile lines  to capture nitrile growth. The demand switch to
nitrile glove was prevalent in 2011, which saw Top Glove’s latex glove
export volume falling 25% YoY while nitrile grew 28% YoY. Hence, the
company has been predominantly adding new nitrile capacity to tackle
the demand switch. Over the past  1 year,  Top Glove slowly  added
around 3b pcs of nitrile capacity (7% of total capacity) and nitrile glove
now accounts for 14% of its total sales volume (FY11: 11%).

Expect overall sales to continue rising. All in, we think Top Glove’s
overall glove sales volume will continue to rise  given: (i) more nitrile
capacity scheduled to come online to cater for the greater nitrile
demand; and (ii) organic growth for latex powdered glove from the
emerging markets, albeit slow. We project 25.3b pcs sales volume in
FY12 (unchanged)  and Top Glove has  sold est. 12b pcs in 1HFY12.
We thus expect 10% HoH sales volume increase in 2HFY12.


Latex price outlook turning favourable again
Latex price ready to dip again. In Apr 2012, latex price exhibited the
first post-wintering weakness, retreating by 5% MoM to  MYR7.40/kg.
The rise in latex price  during wintering period  this year is also less
sharp than 2011, signifying  more balanced demand-supply
fundamentals.  Additionally, latex price 2012-YTD is also substantially
26% lower YoY.

And, to  potentially undershoot floor price. Though the Thai
government has set the latex floor price at MYR7.40/kg (similar to the
current spot price), we think it is very likely that the latex price will
undershoot the floor price. We believe supporting the commodity price
amid a prolonged global rubber supply surplus is uneconomical.

Global rubber supply turning surplus. Latex price recorded a peak
of MYR11/kg in 2011 due to the supply tightness. However, in view of
the rising supply (new trees planted in 2005 are ready for tapping), the
International Rubber Study Group (IRSG) is projecting  global  rubber
supply to turn a  surplus of 81k tonnes in 2012 (from a deficit of 159k
tonnes in 2011).  This is a new projection by the IRSG that was
released in Feb 2012.

Stable margins on lower  latex cost. Although  current  input cost
favors the nitrile glove sales (NBR cost at 9% discount to latex), a lower
and more stable NR latex  cost  will help  Top Glove to  sustain its
margins. However, management reckons that the glove distributors still
have the upper hands in latex powdered ASP negotiations as the
utilization of Top Glove’s latex powdered lines of 70% is still below its
ideal utilization of 80%.


Earnings outlook

Earnings upgrade of 8-12% in FY12-14. In view of the global rubber
supply surplus, we have revised our latex cost assumption lower by 7%
resulting in 8-12% upward revision to our FY12-14 EPS forecasts. We
have not imputed for any minimum wage hikes in our model. Top Glove
has around 5,500 unskilled workers being paid c.MYR600/month,
below the government’s proposed minimum wage of  MYR800-1,000.
Nevertheless,  the  company is in the midst of installing more robotic
arms at its nitrile plants to reduce its labour requirement.

Expect stronger 4QFY12. We expect its 3QFY12 core earnings to be
flattish QoQ (2QFY12: MYR38m) on marginally higher sales and stable
margins as wintering season-led latex cost increase this year is
relatively mild. However, 4QFY12 earnings could be driven by lower
latex cost. In 1HFY12, company reported a core net profit of MYR85m
(+37% YoY), against our revised full-year FY12 net profit forecast of
MYR185m, indicating our expectation of 18% HoH earnings growth.

A sharp recovery year in FY12. We now project its earnings to grow
64% YoY in FY12 on sales volume and margins recovery, coming from
a low base in FY11 (due to the collapse of H1N1-fuelled demand and
overcapacity in latex powdered segment). Our projected FY12 net profit
of MYR185m is still below its high of MYR245m in 2010 but above its
pre-H1N1 net profit of MYR169m in FY09.

Modest growth in FY13-14. For FY13-14, we project a high single digit
EPS growth of 9% p.a., derived from sales volume growth of 7% p.a..
While our FY13-14 forecasts  have not imputed for  YoY  margins
recovery, this could be off-set by an anticipated minimum wage
implementation by as early as May this year. Overcapacity at the latex
powdered segment should be absorbed in FY13-14 on  rising, albeit,
slow organic growth from the emerging markets and this should lift its
margins further.


Valuations: Back to mean. Our new target PER of 16x pegs the stock
back to its mean valuations as we believe sentiment towards the stock
has turned positive on long-term global rubber supply surplus outlook.






Share price: MYR4.43
Target price: MYR5.40

[Source]

Sunway - Property sales target is a challenge HOLD

By Am Research

23 Apr 2012

- We reaffirm our HOLD recommendation on Sunway Bhd (Sunway) with our fair value cut to RM2.70/share (from RM2.85/share previously), assigning a 25% discount to our revised sum-of-parts of RM3.60/share as we assume slower property sales for FY12F and FY13F.

- The key highlight from our meeting is that Sunway has turned more cautious on the property sector. We understand YTD sales have been rather subdued – Sunway managed to record new sales of only RM100mil (up to February) versus about RM200mil achieved in the corresponding period last year. Sales have been largely driven by terraced units in Shah Alam, commercial units at Nexis and Singapore products. 

- It seems that the weak sales were largely due to the 70% LTV ruling introduced to the market in November last year. This is not a surprise as Sunway’s pricing for its products have always been on the high side and 70% of its planned launches are priced at least RM1mil per unit. Nonetheless, we acknowledge that its developments are mostly located at favourable locations. 

- As a result, the group has deferred its initial 2012 launches to 2Q2012. Among the key launches deferred are the commercial properties in Sunway South Quay – comprising 31 units of 3-storey shop offices priced at RM6mil & above, Sunway Montana in Desa Melawati and commercial properties in Penang. 

- We therefore believe it may be a challenge for Sunway to meet its RM1.9bil sales target this year. We have cut our new property sales assumption by 20%-25% to RM1bilRM1.5bil for FY12F-FY13F. Consequently, we have slashed our earnings by 4%-5% for FY12F-FY13F to RM344.2milRM417mil.

- Having said that, the group is currently sitting on a healthy construction order book and property unbilled sales of RM2.8bil and RM2.2bil, respectively.  

- Additionally, we are quite positive on Sunway’s chances of winning one of the remaining MRT packages, given that it has the cost advantage over its competitors due to its inhouse piling capabilities. We note that piling work accounts for 20%-30% of the elevated package or circa RM200mil-RM300mil. Thus, we do not believe it would be an issue for Sunway to meet its order book renewal target of RM1.5bil.

- Sunway is currently trading at quite a steep discount (30%) to its SOP and one of the cheapest stocks in our conglomerate coverage – trading at CY12F PE of 11x vis-avis its peers of 17x. While the stock looks attractive there are no near term catalysts.

Price- RM2.52 

Fair Value- RM2.70

[Source]

Tenaga Nasioanl - Gas supply to stabilise with Petronas’ deal with Keppel BUY

By Am Research
23 Apr 2012

- We reiterate our BUY call on Tenaga Nasional, with an unchanged DCF-derived fair value of RM7.35/share, which implies a CY12F PE of 13x and a P/BV of 1.1x.

- Petroliam Nasional (Petronas) has signed an agreement to increase its supply of natural gas to Keppel Corporation’s wholly-owned Keppel Energy by 43 million cubic feet of gas per day (mmscfd) to 115 mmscfd.

- Under the 18-year agreement, Petronas will supply the gas through a new 5-kilometre pipeline that will link its peninsular gas utilisation (PGU) pipeline from a metering station at Plentong in Johor to Singapore's main gas network. Petronas Gas and Keppel Gas will jointly build the pipeline, which is scheduled for completion by the middle of next year. The gas will be used to power Keppel Energy’s 500 megawatt cogeneration plant currently under construction on Jurong Island.

- Recall that Tenaga has been suffering from a natural gas shortfall since early last year due to Petronas’ unscheduled upstream maintenance works, which at one point forced Tenaga to temporarily purchase electricity from YTL Power’s Singapore-based Power Seraya plant. But this sale to Keppel underpins our confidence that Petronas’ gas supply issues should be fully alleviated with the 500mmscfd Lekas re-gassification plant in Malacca, which commences operation in August this year. Out of this capacity, 200mmscfd will be supplied to the power sector.

- We remain positive on Tenaga due to:- (1) Stabilising natural gas supply will provide clearer earnings visibility, (2) Falling global coal and US-based natural gas prices, which will positively transform the company’s cost structure. A US$10/tonne decrease in coal costs will raise FY13F net profit by 14%, (3) Likelihood that Petronas and the government will continue to bear the higher liquefied natural  gas costs from the Malacca regassification plant in the near term (due to political factors), which could mitigate further fuel cost pressures, (4) New plant-ups to replace the first generation independent power producers, with expiring power purchase agreements likely to reduce capacity payments. In an open tender environment with Tenaga as the bidder and sole off-taker, fixed power purchase costs are likely to decline.

- The stock currently trades at a P/BV of 1x, at the lower range of 1x-2.6x over the past 5 years. Earnings-wise, Tenaga offers an attractive CY12F PE of 11x compared with the stock’s three-year average band of 10x-16x.

Price: RM6.52

Fair Value: RM7.35

[Source]

UMW Holdings: Upgrade to Buy - Set To Accelerate

By Am Research
23 Apr 2012

Upgrade to Buy with a higher TP of MYR8.35, ahead of recoveries at
the automotive and O&G sectors, and on the back of a 10-11% rise in
2012-13 net profit forecasts. The disruption to the regional auto supply
chain has abated while its O&G segment is at the cusp of a revival.
With market already absorbing the anticipated weak 1Q12 earnings
and its 2011 kitchen-sinking exercise, UMW now offers a recovery play
angle with modest growth (3-year EPS CAGR of 20%) and
undemanding valuations, supported by a decent dividend yield (6%).

Auto to surge ahead. We have raised our forecasts for Toyota vehicle
sales by 2-9% in 2012-13 to reflect an improved sales order outlook,
fuelled by its interesting launches ahead. Judging from its 1Q12 vehicle
sales, Toyota was less affected by the supply chain disruption owing to
its enhanced parts network. It is also more immune to the tightening of
HP lending criteria due to the generally stronger purchaser credit
profile. With minimal price discounting, UMW should be able to sustain
its 16% pretax margin. Earnings from 38%-owned Perodua are also set
to improve, largely on higher vehicle sales (+2-5% YoY) in 2012-13.

Expect a  rejuvenated  O&G. This is in lieu of the: (i) absence of
impairment or write-offs, which severely afflicted its 2011 performance,
(ii) reduced losses from 23%-owned WSP on improved ASP, unit sales
and margins, and (iii) stronger contributions from its drilling rigs
operations following a higher charter contract rate (+27%) secured for
its Naga 3 rig recently. Meanwhile, UMW will make an announcement
by end-April on the WSP privatisation offer by HDS Investment.

Net earnings  lifted  by 10-11% in 2012-13, incorporating  the higher
profits from auto (+5-11%) and O&G (loss in 2011) divisions. We now
expect UMW to register a higher net profit of MYR723m in 2012 and
MYR812m in 2013. Consequently, we also raise our DPS forecasts to
41sen in 2012 and 46sen in 2013, on a 50% payout assumption. This
translates into a decent yield of >6%, which would provide support to
UMW’s share price. Our new target price is based on a higher 12x PER
for 2013 (11x previously), to reflect UMW’s historical mean PER. Based
on the last closing price, this offers a decent 11% upside to our TP.


Share price: MYR7.51
Target price: MYR8.35


[Source]

Gamuda: Buy

By Maybank IB Research
23 Apr 2012

Enhanced visibility. MMC-Gamuda JV's MYR8.28b win for the KVMRT Sg Buloh-Kajang (SBK) tunnelling works has enhanced its earnings visibility into 2017, and should provide for earnings growth, at
least, into FY13-14. We raise our earnings forecasts marginally which have earlier imputed MYR3b job win potential for FY12. Our MYR4.10 RNAV-based target price is unchanged. Trading at just 12.3x one-year
forward earnings (16x mean), the stock is undervalued. Maintain Buy.

MYR8.28b, the magical number. MMC-Gamuda JV had on 19 Apr accepted an award from Mass Rapid Transit Corporation  S/B for the KVMRT SBK underground works package for a contract sum of MYR8.28b. The final contract value is in line with recent press reports, i.e. of  MYR8.2b. The work comprises the design and construction of tunnels, 7 underground stations and other underground works totaling 9.5km in length, from Semantan North Portal to Maluri South Portal. Based on Gamuda‟s 50% share in the JV, this win has  tripled its outstanding order book to MYR5.84b from MYR1.7b as at Jan 2012.

Tweaking forecasts. Our earnings model has already imputed MYR3b job win  potential in FY12, with recognition to start  in FY13. With this confirmation of the KVMRT SBK tunnelling works, we raise our earnings forecasts by a marginal 1% p.a.. Our major assumptions are: 1) 5% works recognition in FY13 and 15% in FY14, based on our construction S-curve interpretation, 2) 12% pretax margin for the entire contract with just 5% margin in FY13 and 8% in FY14, with 3) the works and margin recognition to rise as construction phase progresses.

Other updates. We gather another MYR290m new property sales in Feb-Mar, bringing total sales for FY12 todate to MYR1.16b (domestic: MYR850m, Vietnam: MYR310m), meeting 58% of its MYR2b target for
FY12. Negotiations  with PLUS for LITRAK stake sale is still ongoing. Our estimates are for slightly above  MYR1b in cash (48sen/sh)  to Gamuda  if it sells its entire  45.9% stake in LITRAK at our  MYR4.20
DCF-based target price, in addition to its 30% direct stake in SPRINT. We expect some repayment to shareholders if the sale goes through.


Share price: MYR3.57
Target price: MYR4.10

[Source]

Pavilion Reit - Exceptional FY13F, with upcoming Fashion Avenue and tenancy renewal BUY

By Am Research

20 Apr 2012

- We upgrade our rating on Pavilion REIT (PavREIT) from a HOLD to a BUY and raise our fair value to RM1.33/unit (vs. RM1.15/unit previously) based on a 5% discount to our DCF value of RM1.40/unit.

- Following a meeting with the management, we raise our earnings estimates for FY12F and FY13F by 1% and 2%, respectively, translating into a marginally higher DPU of 6.2 sen and 7.3 sen, underpinned by organic growth and acquisition. We assume a 99% payout ratio. 

- The Fashion Avenue (NLA: 68,000sf) is targeted to be opened by early September 2012. So far, there is a circa 90%  of precommitted tenants. The full impact of the Fashion Avenue and an estimated average rental rate of RM16psf, compared with under-RM10psf previously, would be seen in FY13F.

- Additionally, at least 67% of tenants are due for renewal in FY13F. We expect a 12%-15% rental reversion because tenants are committed to a 3-year tenancy during the infant stage of the mall. In our model, we forecast a higher weighted average rental rate of RM19psf for FY13F, vs. RM17psf for FY12F. 

- In order for Pavilion Mall to sustain its attractiveness, circa 5% of the tenants are changed on a yearly basis to provide a fresher appeal and a newer look to the mall. Tenants are also required to refurbish their space every 6 years.

- Elsewhere, management expects Farenheit 88 to stabilise its tenancy within 3 years by FY13F. PavREIT would acquire the mall if the owner decides to sell. As such, this may be PavREIT’s first asset injection that could take place by FY14, given that the mall is deemed fit.

- Pavilion extension (NLA:250,000sf, GFA:4,000sf), which consists of up to 8 levels,  will be adjoining the existing mall at levels 1, 2 and 3. Additionally, the mall’s appeal would be enhanced by a proposed glass-covered structure running from La Bodega towards the fountain. The extension is currently in the soil testing stage. Construction is to begin in 3QFY12. Management intends to acquire the extension immediately upon completion in FY16. 

- As Pavilion mall took a year to stabilise the tenancy, the extension is expected to take 6 months, given the maturity of the mall. Management expects full tenancy for the extension, underpinned by a long waiting list of over 400 applicants. 

- Management targets a distribution growth of 5% organically. However, FY13F will be an exceptional year, and as such, we are shifting our valuation basis to FY13F. Given this, PavREIT is attractive and we expect more news flow to excite the market. At current level, PavREIT has a dividend yield of 5.4% and 6.4% (vs CMMT: 5.6% and 5.9%) for FY12F and FY13F, respectively, and DPU growth of 18% in FY13F; hence, our BUY rating.

Price- RM1.15 

Fair Value- RM1.33

[Source]

Capitamall M’sia Trust - Results largely in-line with positive rental reversion on newly acquired malls BUY

By Am Research
20 Apr 2012

- We re-affirm our BUY rating on CapitaMall Malaysia  Trust (CMMT) and raise our fair value to RM1.68/unit (vs.RM1.15/unit previously), based on a 10% discount to our DCF value of RM1.86/unit. We have raised our earnings assumption by 5% from FY15F onwards accounting for organic growth. Taken together with the DPU estimate of 7.9 sen for FY12F, our fair value implies a total return of 17% over the current price. 

- CMMT’s 1QFY12 net income came in at RM35mil, which is largely in line with our and street’s estimates, making up 22% and 24%, respectively.

- CMMT recorded an increase of RM19mil (+35.3%) of gross rental income over 1QFY11, which was mainly contributed by its recent acquisition of the East Coast Mall and Gurney Plaza Extension as well as the completion of the asset enhancement works at Gurney Plaza last year. Additionally, higher rental rates were achieved from new and renewed leases.

- During 1QFY12, the portfolio incurred higher property expenses attributed to higher utility and marketing expenses, and reimbursable staff cost. Hence, net property income grew by 11.4% QoQ and 32.4% YoY.

- Portfolio occupancy remains strong at nearly 100%. Occupancy at The Mines saw a marginal drop this quarter from 98.8% to 97.3% because of renovation works and reshuffling of trade mix. However, management is confident that the occupancy rate will revert to nearly 99% as they are in the midst of closing a deal.

- The proposed plan to convert the huge car park space (NLA: 100,000sf or +23%) into retail space at East Coast  Mall is currently pending planning approval. 

- Meanwhile, shopper’s traffic was rather stable with 12.9mil visitors registered during the quarter, accounting  for an increase of 17% YoY. 

- The portfolio also showed a positive rental reversion of 5.6%, mostly contributed by East Coast Mall with a rental reversion of +12.1%, followed by Gurney Plaza at +10.4%. Further to that, 1QFY12 DPU of 2.1 sen exceeds 1QFY11 DPU of 1.90 sen by 10%. 

- At projected dividend yields of 5.6% and 5.9% for FY12F and FY13F, respectively, valuation is not cheap. Nevertheless, we believe CMMT has a solid strategy to grow DPU. It has consistently outperformed market expectations, given its quality retail portfolio, strong parentage and more importantly, ready access to a large pool of established retailers. We believe CMMT offers a low risk exposure to the retail REIT sector. 

Price- RM1.43 

Fair Value- RM1.68

[Source]

PPB Group - Massimo bread rolling out nationwide steadily HOLD

By Am Research
20 Apr 2012

- Maintain HOLD on PPB Group Bhd, with an unchanged fair value of RM17.45/share, which is based on a PE of 19.5x on FY12F EPS. 

- In the past five years, PPB’s historical PE band ranged from a low of 19.0x to a high 22.1x. Average PE was 20.6x. PPB’s 18%-owned associate, Wilmar International, is currently trading at 15x FY12F fully diluted EPS and 13.5x FY13F fully diluted EPS.

- We visited PPB’s Massimo bread factory yesterday. We found the plant to be clean and modern. Most of the processes are automated and the only labour-intensive segment is the packing section. 

- The bread factory cost RM120mil to build. We reckon that the bulk of the cost was attributed to the heavy machinery and equipment, some of which were brought in from the US. 

- There are no plans yet to increase the selling price of Massimo’s wheat germ bread. We reckon that PPB’s strategy is to improve its market share first even though it may result in the erosion of operating margins. The selling price of Massimo wheat germ is RM2.50 for a 400gm loaf. This is just 10 sen more expensive than the white bread.

- PPB has started selling Massimo bread to other markets such as Ipoh, Penang, Malacca and Seremban. This would allow the group to expand its market penetration beyond the Klang Valley. 

- The group also plans to increase the number of its products. Currently, PPB sells the wheat germ loaf, white bread loaf and cream rolls. There are two types of single cream rolls and two types of double cream rolls. 

- We understand that consumers have responded well to PPB’s bread products. Word of mouth has been instrumental in the acceptance of the bread. PPB has also advertised in newspapers and television to promote the bread.  

- There is no expansion plan yet. Presently, the bread factory has the capacity to produce 10,000 loaves per hour and 24,000 cream rolls every hour. The bread factory encompasses an area of 22,000 sq metres, which is the size of two football fields.  

Price- RM16.72 

Fair Value- RM17.45

[Source]

Mixed news on 19 Apr 2012

Proposal with minimal Govt funding favoured for high-speed KL-S'pore rail bids

PETALING JAYA: The private sector will be invited to come out with a proposal that requires minimal Government funding for the development of the high-speed rail (HSR) project linking Kuala Lumpur and Singapore if the project gets the green light.

Land Public Transport Commission (SPAD) chief executive officer Mohd Nur Ismal Mohamed Kamal said if the project received the go-ahead from the Government, the authorities would favour a proposal from private parties that would involve the smallest amount of financial assistance from the Government.

“But we also know that a rail project can seldom sustain itself financially. No operator can bear the cost of infrastructure, land acquisition, signalling system and rolling stock from the collection of fares alone as it will never pay for itself.

“Rail projects will require some forms of assistance from the Government, but we are looking at the least form of assistance,” he told the press at an editors' briefing on SPAD's plan and key projects yesterday,

Briefing by SPAD officials for media editors: From left SPAD chief development officer Azmi Abdul Aziz, SPAD chief executive officer Mohd Nur Ismal Mohamed Kamal and SPAD chief operating officer Azhar Ahmad. - Starpic by AZLINA BT ABDULLAH

Ismal said the HSR project was now in the second phase of a feasibility study that looked into the actual corridors and alignment. This is expected to be completed by year-end.

“This study will provide a more detailed economic impact of the HSR and its engineering challenges,” he said.

He said this time around, the HSR study would be more comprehensive in looking at matters that largely revolved around national interest in contrary with previous HSR proposals that came from the private sector.

It was reported that the idea on the HSR came from Performance Management and Delivery Unit laboratory.

On the comparison with KTMB services when its double-tracking is completed, Ismal said the KTMB services would cater to the mass market and freight transportation, while the HSR was targeted at the high and middle-income markets.

SPAD was also in the midst of finalising plans for the Bus Rapid Transit (BRT) project for the Klang Valley, which should draw interest from construction companies because it entails building extra bus lanes in the city centre.

“We have already embarked on the traffic impact assessment study, which is expected to be completed by year-end and we plan to start physical work early next year.

“The project will take 12 to 18 months to be completed and will be fully funded by the Government. It will have to go through an open tender procurement process,” he said.

On the Rapid Transit System project, which links Johor Baru and Singapore, Ismal said: “The project will be funded by both Malaysia and Singapore. As of now, the tender for consultancy services for the alignment and design of the project is closed,” he said.

These three projects were part of SPAD's 50 priority projects from a total of more than 200 projects that has already gained traction or will begin this year.

“The development of the 50 projects is on-going. Some of the projects are still in the concept stage and haven't obtained the commitment from the Government.

“But, we are pushing forward the projects for the development of public transport. We are doing our best to convince the Government that in certain cases that are no other available options but to put in the infrastructure,” he said.

On the mass rapid transit, Ismal said the study for the second and third lines would start early next month.

_________________________________________________________________________________

Property continues climb

The price of homes expected to advance 5% to 10% this year

PETALING JAYA: Overall price appreciation for residential properties is expected to range between 5% and 10% this year, according to CIMB Research.

In a report, the research unit said residential properties' price appreciation could be even higher but it believed that the Government would continue to remain vigilant on “runaway” property prices.

CIMB Research said in terms of house price appreciation, despite the slower real GDP (gross domestic product) growth projection of 3.8% compared with 5.1% in 2011, it believed that 2012 would be another good year due to several factors.

“Buying momentum continued to be strong, driven by inflationary fears.

“Supply growth should remain depressed as developers have only just started to focus more on affordable homes costing not more than RM500,000 in the Klang Valley.

“Major infrastructure improvements in the Klang Valley such as the MRT (My Rapid Transit), River Rehabilitation and covered walkway projects will help boost property prices.”

CIMB Research said although the residential property market would continue to set new records in 2012, it was expected that there would be a slowdown in the increase in overall transaction values in 2012 after two years of high growth that averaged around 30%.

“In view of credit-tightening measures by the central bank, we believe that the growth in transaction value should slow to 10% to 12% this year.”

CIMB Research noted that in 2011, the growth of residential property supply in Malaysia fell to 1.5%, which was the lowest on record.

The slowdown in supply growth was most pronounced in the big three markets (Johor, Penang and Klang Valley), which recorded an average growth of 1.2%.

The only states to buck the slowing trend were Terengganu, Kelantan and Perlis.

“If supply growth continues to lag behind population growth, house prices can only head in one direction.”

It was noted that major developers such as SP Setia Bhd, UEM Land Holdings Bhd, Mah Sing Group Bhd and UOA Development Bhd were all gunning for sales records this year and growth rates ranging from 10% to 35%.

It was also pointed out that the risks to CIMB Research's volume and price projections for 2012 included the global economic outlook and the local stock market performance.

However, CIMB Research is not optimistic about the commercial property market in the Klang Valley as oversupply will plague the sector for many years to come.

It noted that occupancy rates for the office and retail sector had started to drop.

Meanwhile, future supply of hotel rooms (under construction) in the Klang Valley is likely to depress occupancy rates in the coming years.

According to CIMB Research, UOA Development would be the biggest winner in a Klang Valley property boom as the company has no exposure elsewhere.

The research unit is also optimistic about the prospects for Johor, particularly Nusajaya, as 2012 would see the completion of various catalyst projects.

“The biggest beneficiaries of a property boom in Johor would be UEM Land due to its vast holdings in Nusajaya and SP Setia which is the dominant developer in the state.”

CIMB Research maintained its “trading buy” call on the property sector, but pointed out that property stocks could be sold down heavily in the event of an unfavourable general election outcome.

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Analysis: Spluttering economies to curtail earnings horizon

LONDON (Reuters) - Exuberant global markets have taken a reality check this month on chronic U.S., Chinese and European growth concerns, and investors should hold companies' relatively rosy profit outlooks up for scrutiny too.

"Cheap" valuations based on historical price/earnings ratios have kept many investors bullish on world equities over the past three years despite what now appears to be routine economic disappointment and seemingly shorter business and profit cycles.

But there is growing anxiety that temporary sentiment and stock price boosts related to central bank money printing and emergency lending bear little relation to the long-term profit outlook, among non-financial firms at least.

Even though 12-month forward price/earnings ratios for world equity look good value, periodic pops in prices have increasingly not been matched by rises in earnings projections which have started to move sideways.

As ever, either the price in this P/E ratio is indeed cheap or earnings projections need a reality check too and historic valuation averages are restored by a drop in the profit outlook.

Macroeconomic hopes hinge on a U.S. recovery gaining more traction, a soft landing of Chinese growth to about 7.5 percent from the double digits of the past decade and a resolution of euro zone's systemic sovereign debt and banking problems.

All three of these, however, were in doubt again in April and the anxiety knocked some 5 percent off MSCI's world equity index from their March peaks. That leaves stocks still up 8 percent on the year but, just like last year, the price momentum and direction seems to have stalled.

Even though bouts of central bank money-printing and cheap lending in the United States, Europe and elsewhere periodically offer a fillip, as the European Central Bank's money flood did again spectacularly in the first quarter, the effect on the real economy and market prices tends to fade fast.

In the event, the P of the PE ratio advances and retreats, but not the E - leaving bulls to state their case continuously on each pullback but pessimists to question the whole construct.

"Do people really think E would be as good without the massive QE (quantitative easing)around the world?" asked hedge fund manager Stephen Jen at SLJ Macro Partners.

SLICED AND DICED

Of course, there are many ways to dissect valuations and many regional and national comparisons.

For one thing, many investors are currently overweight U.S. equity on a belief that a steady if unspectacular recovery there contrasts to economic contraction and systemic problems in Europe and the slowdown in China and the emerging markets.

But, just as vastly superior growth in emerging markets last year did not stop their emerging equity universe significantly underperforming, questions of valuation and the best models to use have prompted some strategists to question a U.S. bias.

Richard Cookson, chief investment officer at Citi Private Bank, reckons the U.S. market may be cheap when comparing a forward P/E ratio of 12 with a trailing P/E of 15, but he said forward earnings are just a guess and take no account of whether you are at the top or bottom of the profits cycle.

"The problem with using either of these valuation metrics is that they're pretty rubbish as a guide to future returns," he said. "The consensus has completely failed to predict any fall in profits over the past 30 years."

Cookson said he prefers the U.S. Shiller P/E model that works like a moving average of the past 10 years of profits to iron out the cycle and combined with dividend yields works well as a guide to implied 10-year returns.

At 22.2, however, the Shiller P/E is pretty expensive compared with the average since 1950 of 18.7. And while this partly relates to impressive U.S. corporate margins, these margins - as measured by profits as a percentage of nominal gross national product - are already at record highs of over 7 percent.

As margins have a pretty strong tendency to revert to their average over time, this leaves U.S. stocks "dangerously exposed", Cookson said, adding that far cheaper equivalent European valuations at least pay investors for taking the greater systemic and growth risks there.

Citi's implied long-term equity return in core Europe at 11.8 percent, for example, is more than twice that in the U.S. at 4.6 percent. And it's hard to imagine a scenario where a full-scale euro meltdown - if that's what such low euro zone equities imply - would not send systemic shockwaves across the Atlantic too.

What's more, ThomsonReuters data shows that margin gains from cost-cutting in jobs, pay and other expenses was a significant part of the U.S. profit recovery since 2009 but that this route to bottom-line improvement is reaching its limits.

Only 41 of S&P500 firms releasing first quarter earnings this month are expected to report higher margins despite lower revenue, down from 86 in 2009. And 102 companies are expected to show lower earnings despite rising revenue, up from 54 in 2009.

The U.S. does not have to return to recession for investors to wonder where the extra juice for earnings growth is going to come from.

UOB Kay Hian Research maintains market weight on construction stocks

KUALA LUMPUR: UOB Kay Hian Malaysia Research is maintaining its market weight view of the construction stocks as valuations have passed their peaks.

It said on Wednesday this was inspite of the rich pipeline of mega construction jobs and robust orderbooks which would sustain earnings for the next two years.

“Sentiment would be dampened as the market would eventually price in a higher risk premium to reflection the election risk in the coming quarters,” it said in a research note.

UOB Kay Hian Research said the mass rapid transit (MRT) non-tunnelling packages were expected to stir newsflow.

“We expect at least three packages, namely V1, V2 and V7 of the KV MRT Sungai Buloh-Kajang (SBK) line, to be awarded by May 12 and each package is estimated to be worth about RM1 billion.

“Year-to-date, RM12 billion worth of jobs have been awarded and this has exceeded the total projects awarded in 2011 whereby the MRT tunnelling contract alone made up 68% of the total awarded contracts,” it said.

The research house said that the excitement over MRT 2 & 3 would only surface by end of 2012.

To recap, the MRT 2 & 3 lines were unveiled under the KL Transport Master Plan and were targeted for implementation in the second half of 2013.

MRT 2 would be 41km with 30 stations and MRT 3 would be 46km with 24 stations. Both lines are undergoing feasibility tests which include studies on alignment, station location and interchanges. The results were expected to be revealed by the second half of 2012.

UOB Kay Hian Research said it found smaller sized contractors such as Muhibbah (MUHIBAH) and Favelle Favco (FAVCO) decent.

Muhibbah had an outstanding orderbook of RM2.37 billion and traded at consensus 2012F PE of 7.0 time.

Also, Muhibbah's 55%-owned subsidiary Favelle Favco appeared fundamentally healthy and it was trading at only 5.0 times price-to-earnings even if based on the assumption of zero growth in 2012.

“This cash-rich subsidiary (cash represents about 24% of market capitalisation) supplies specialised cranes to the oil and gas industry and should have secured modest growth for the next few years,” said the research house.

[Source]

UOA Development Bhd - Possibility of Reversal Remains

By OSK Research

19 Apr 2012

The share price of UOA development has been trending lower since its debut in June 2011. However, the downward momentum has eased recently, possibly due to accumulation at these low levels. This may lead to a change in trend but more is still needed to confirm the end of the downward trend.

We featured UOA Development late last year in anticipation of a change in trend. An expected and apparent upward move did not happen but the sideways move since the low in Dec 2011 still keeps this possibility alive. To recap, accumulation is likely to have taken place during the bottom of Oct 2011, as seen from the heavy volume for the stock. Buying support is also seen from the series of higher lows, at RM1.15, RM1.30 and RM1.40. The stock has also responded well to the buying support at the latest bottom in early April, as it had closed at the highest level in more than 3 months.

However, the upward bias seen in the past  six months remains unconfirmed as the stock has yet to make a higher  high, despite the rising trend of the broader market in the past four months. Thus, the stock has to violate the RM1.60 resistance level – the high of Jan 2011 and also the low of Aug 2011 – to affirm the upward bias. This will also see the 200-day MAV line broken, which is usually interpreted as a longer-term positive indication. Positions can be initiated if this happens with a stop loss on close below RM1.40. An aggressive trader may even accumulate now in anticipation of a successful breakout.

Firm resistance is expected at RM1.70, the high of Oct 2011, and RM2.05 – the gap of early August. Both levels are coincidently the Fibonacci levels of the June-Oct 2011 decline. A close above RM2.05 will significantly increase its chances of reaching the price target of RM2.60, which is coincidentally the IPO price. The trade will not work out should the stop loss be triggered, after which we may see the stock returning to its current sideways move. Strong support is expected at the September-low of RM1.15, a violation of which will likely invite further selling.

Resistance- RM1.60

Support- RM1.40

Bursa Malaysia - Growing steadily and surely BUY

By Am Research
18 Apr 2012

- We are re-initiating coverage on Bursa Malaysia Bhd (Bursa)with a BUY recommendation and a fair value of RM8.50/share, based on itstrend-average PE of 30x on FY12F's EPS. 

- We expect average daily trading value (ADTV) to potentially expand sequentially each quarter from 1Q12's RM2.0bil given: - (1) our higherend-2012 FBM KLCI target of 1,690 and intact economic fundamentals; (2) IPOs topick up in 2H12 with several prolific listings including Felda Global Ventures Holdings and Integrated Healthcare; and (3) encouraging number of new structured warrants being listed (3-year CAGR of 65%).

- We forecast net profit at RM151mil (+3%) for FY12F and at RM172mil(+14%) for FY13F, based on a conservative ADTV of RM2.0bil and RM2.2bil(FY11:RM1.8bil), respectively. Velocity is expected to be a tad higher at 36%compared with FY11's 34%.

- We are positive on the derivatives market and are projecting FY12F average daily contracts traded (ADC) to grow by 18% to 40,679 contractsfrom 34,474 contracts in FY11. This is underpinned by:- (1) open interest beingat an all-time high; (2) launch of the new derivatives clearing system andderivative products; and (3) overhaul of participant-ship structure.

- The international exposure gained from the strategic partnershipwith CME Globex at end-2009 has seen increasing foreign interest in the derivatives market. Year-to-date (YTD) ended 29 Feb 2012, foreign institutions madeup 27% of the FCPO market trades and 43% of the trades on FKLI. Foreignretailers were also drawn to the market, making up 1% of the FCPO trades inFY11. Wereckon that Bursa's derivatives business has yet torealise the fullpotential of this partnership.

- We believe Bursa will continue with its generous dividend policy,supported by its strong balance sheet (cash-toequity ratio of 1.5x) andcash-in-hand of ~RM500mil. We have assumed a dividend payout ratio of 91%-94%for FY12F and FY13F, with gross DPS at 26.5 sen and 29.5 sen, respectively.This translates into dividend yields of 3.8% and 4.2%.

- We expect Bursa's cost structure to remain stable, with staffcosts being the main expense. We also expect Globex fees to stay elevated,following the 319% increase in FY11. However, we are not too concerned as ahigher service fee resulting from the high volumes of contracts traded can beeasily offset by the parallel increase in derivative trading revenues.

Price- RM7.00 

Fair Value- RM8.50

[Resource]

IGB Corporation - Going ahead with REIT of MidValley retail assets BUY

By AmResearch
17 Apr 2012

- It was announced yesterday that IGB's 75%-owned, KrisAssets has proposed to set up a retail REIT (IGB REIT), comprising its two valuableassets i.e. MidValley Megamall and MidValley Gardens. 

- We understand CIMB Investment Bank, Credit Suisse and HongLeong Investment Bank have been appointed as joint global coordinators andjoint book-runners for this proposed IPO. 

- Although not mentioned, we believe both assets would be ableto gain valuation of at least RM4bil or at a cap rate of 6%.

- As we have highlighted in our previous reports, the monetisationmove would unleash a significant revaluation surplus from assets re-pricing,and free up capital for redeployment. 

- The establishment of a REIT would optimise the ownership structureof its prime properties. This move, we believe, is triggered by the highimplied capital values evident in the recent listing of Pavilion REIT andCapitaMall Trust and a flat interest rate cycle. 

- IGB may rake in between RM465mil and RM1.4bil cash, depending on its equity stake in the REIT. We would expect a special dividend and IGB would deploy the freed capital to fund development projects overseas whereby it is looking at opportunities in London and Taiwan.

- There is a further RM1.05bil revaluation surplus in IGB's under-appreciated portfolio of well-occupied office buildings (2.2msf), which are carried in its book at low historical costs. The retail REIT may be the trail blazer for IGB tolaunch an office REIT further out.  

- A hospitality REIT for its hotel assets would complete there-pricing of its assets, transforming IGB to an asset-light fee-based entity with controlling stakes in three listed asset-specific REITs. 

- We maintain our BUY rating on IGB Corp with our fair value unchanged at RM3.50/share based on a 22% discount to our NAV estimate ofRM4.50/share.

Price- RM2.83 

Fair Value- RM3.50

[Source]