DIALOG (FV RM3.07- BUY) Company Update: All Progessing Well

By OSK Research Report

10 May 2012

All is Well

Recently, we met up with Dialog’s management, from which we gather that the 

company is making good progress in its Pengerang deepwater terminal and Balai 

marginal oilfields projects. Dialog has reclaimed more than 150 acres of land to 

construct the terminal, which is more than sufficient for Phase 1. Meanwhile, the 

Balai marginal oilfield’s pre-development stage is slated for completion by 2013, if 

not this year. Overall, we see the company’s prime projects being well on track 

and progressing as scheduled. Maintain Buy.

Recently, we met up with Dialog’s management, from which we gather  that  the company is making good progress in its Pengerang deepwater terminal and Balai marginal oilfields projects. Dialog has reclaimed more than 150 acres of land to construct the terminal, which is more than sufficient  for Phase 1. Meanwhile, the Balai marginal oilfield’s pre-development stage is slated for completion by 2013, if not this year.  Overall, we see the company’s prime  projects  being well on track and progressing as scheduled. Maintain Buy.

Good progress at  Pengerang  terminal. To recap, Dialog  has  to reclaim  about 500 acres of land and has to date reclaimed more than 150 acres, which is sufficient to build its phase 1 centralized tankage facility (CTF). Phase 1 would have a storage capacity of 1.3m cubic meters out of a total planned 5.0m cu m for the entire CTF project. We also understand that with the portion of land reclaimed to date, the capacity of phase 1 can be extended by another 1.0m cu m if required. Otherwise, the existing capacity of 1.3m cu m for phase 1 is targeted to be ready by 2014, with construction slated to be completed by end-2013.

Balai marginal oilfield also  on track. We understand that Dialog together with its partners, Roc Oil Malaysia and Petronas Carigali, expects to complete the predevelopment stage by 2013, if not this year. Dialog’s portion of the risk-sharing contract in the Balai marginal oilfield is 32%, while Roc Oil and Petronas Carigali hold 48% and 20% respectively.  For this contract, which is for a period of 15 years, the 3  parties are expected to rent a drilling rig together with a work barge from a third party, rather than owing these assets This will create new job opportunities for the other O&G services providers.

Company with a balanced risk appetite. Despite starting off in a relatively prudent and slow pace, we believe the company has  made steady  progress throughout the years, largely owing to its  solid  management team. In comparison with its smaller peers, we have  great  confidence that Dialog  would  be able to deliver on its Pengerang CTF and Balai marginal oilfield projects, especially since management has conducted extensive studies even before kicking off preliminary works. Thanks to its good balance of recurring income and higher risk projects,  Dialog would  also have an attractive risk-return profile going forward.

Maintain Buy. Our fair value for Dialog remains unchanged at RM3.07, based on a sumof-the-parts valuation. It  has been  our favourite defensive O&G stock for some time  in light of its steady business model, which provides a good cash flow.

Fair value: RM3.07

Price: RM2.22

[Source]

Sunway Berhad: Maintain HOLD - Bags MYR1.2b MRT Contract

By Maybank IB Research

10 May 2012

A major boost to orderbook. Sunway’s latest MYR1.17b win for the KVMRT Sg Buloh-Kajang viaduct works will boost its outstanding order book by  41% to MYR4b, and enhance  earnings  visibility over the 

medium term. We maintain  our  earnings forecasts for now having imputed job win  potential to the tune of MYR1.5b for this year. Our RNAV-based TP is unchanged at MYR2.62. Maintain HOLD. 

MYR1.17b for Viaduct 4 works. Four new work packages – Viaduct 1, Viaduct 4, Viaduct 7 and Depot 1 (Sg Buloh Depot) (see Table 1)  –awarded by MRT Corp yesterday are worth a total MYR3.2b. Sunway is the winner of the Viaduct 4 package (6.6km in length) worth MYR1.17b 

and is awaiting for the official award. The scope of works comprises the construction of the viaduct guideway and other associated works from Section 17 to the Semantan portal. This win is not a total surprise to us as Sunway is the largest piling contractor in Malaysia.

Enhances earnings visibility.  This job win will raise  Sunway’s outstanding orderbook  for  construction by 41% to MYR4b, from MYR2.8b  at  end-Dec  2011, providing medium-term earnings  visibility 

and growth for its construction business. Assuming a net margin of 5-7%, we estimate this new contract will contribute MYR58m-MYR82m in net profit (EPS of MYR0.05-0.06), to be recognised into 2016.

A construction-led year. Sunway has won MYR1.46b in construction jobs YTD (including MYR42.4m  in  foundation works from Tropicana Golf & Country Resort, MYR250m Sunway Velocity Mall substructure works),  nearing our MYR1.5b  job win assumption for  the full year. However, the positive in the construction business is somewhat offset by  slowing demand in its property development business. As at  endFeb 2012, Sunway recorded MYR100m in property sales meeting just7% of its  effective sales target of MYR1.4b  for 2012 and 8% of  our MYR1.2b forecast for the full year.

Share price: MYR2.37

Target price: MYR2.62 (unchanged)

[Source]

Hartalega Holdings - Within expectations

By Kenanga Research

9 May 2012

Period    4QFY12/FY12

Actual vs.  Expectations

- Within ours and the consensus expectations. 

- The FY12 net profit made up 95% and 97% of ours and the consensus’ forecasts of RM212.3m and RM206.6m respectively.

Dividends   

- 4Q12: 6 sen net dividend

- FY12 to date: 18 sen net dividend

- Translating to a 2.3% net dividend yield.

Key Result Highlights

- QoQ earnings were flat while EBITDA margins were seen to be lower from 32% to 28%, mainly due to the higher nitrile latex cost as well as competitive sales pricing as more nitrile glove supplies from its competitors kick in. Meanwhile, Hartalega also registered a net gain in foreign exchange of RM782,000, which constitutes a small 0.9% of its profit before tax. 

- YoY earnings increased by 6% but the net profit margins fell from 26% to 22% due to higher feed cost as well as higher taxation, which increased by 7%. 

- We expect lower margins in the coming quarter due to more supplies of nitrile gloves and the timing difference from the depreciation of the USD.

Outlook   Neutral. Higher nitrile glove capacity may erode Hartalega’s lucrative margins. Nonetheless, due to Hartalega’s efficiency and cost structure, we believe Hartalega will still maintain its market leader position in the nitrile segment despite a more competitive sales environment.

Change to Forecasts
We maintain our earnings for FY13.

Rating  

- MARKET PERFORM

- Our Market perform rating is maintained as the current share price implies a 6% upside to the stock as measured against our TP of RM8.32. 

Valuation:We are keeping our target price unchanged at RM8.32. Our valuation is based on 12x FY13 EPS.

Risks:Higher nitrile latex price ahead 

Price: RM7.84

Target Price: RM8.32

[Source]

Berjaya Corporation Berhad Update - Expanding portfolio

By CIMB Research Report
7 May 2012


Investment highlights 
Buying stake in Atlan. B-Corp may end up with a 25% stake in Bursa-listed Atlan Holdings after offering to buy an additional 15.8% stake. The RM4.25 offer price for the duty-free operator is, in our view, fair as it values it at 9.4x FY12 P/E, lower than its 5-year historical average of 15x. We are overall neutral on this surprising deal as the impact on the bottomline is minimal. Our target price is cut from RM0.98 to RM0.89 as we have widened our SOP discount from 50% to 55% to factor in election risks, particularly for the gaming operations. The stock remains a Hold as it is unlikely to outperform in such an environment. For big-cap exposure to conglomerates, investors should opt for Sime Darby (SIME MK, Trading Buy).
Earnings accretive. Although our net profit forecasts could rise by 9-12%, the impact on our FY12-14 FD EPS forecasts is only 3.5-6.4% due to the enlarged share base as the RM170m payment for the second tranche will be via 5% ICULS with warrants (it paid RM85m cash for the first tranche). The contribution from Atlan could be partly used to offset the ICULS interest which amounts to RM8.5m per annum. In our computations, we assumed 5% growth for Atlan for FY12-14 but excluded FY12’s RM57m one-off items.
Cutting target price. Although we maintain our numbers pending completion of the deal, our target price is cut from RM0.98 to RM0.89 as we have widened our SOP discount from 50% to 55% to factor in election risks, particularly for the gaming operations. On completion of the acquisition, our target price could be further reduced to RM0.85 to reflect the higher share base.


Earnings outlook 
Caught by surprise. The proposal caught us by a surprise even though we see
potential for synergies between the two companies as Atlan is, like B-Corp, involved in
property and leisure, in addition to its duty-free  operations. Apart from the RM85m
paid for the 7.9% Atlan shares, B-Corp will issue RM170m irredeemable convertible
unsecured loan stocks (ICULS) together with 170m detachable warrants as payment
for another 40m shares, valuing Atlan at RM4.25 per share.  We think that the
acquisition price is fair as it values Atlan at 9.4x FY2/12 P/E, lower than its 5-year
historical average P/E of 15x.
Background on Atlan. Atlan Holdings, which is listed on the Main Market of Bursa
Securities, is involved in duty-free trading and retailing, property development and
investment, hospitality as well as manufacturing of automotive component parts. It
holds 81% of Duty Free International Limited. It also manages the Zon Johor Bahru
Duty Free Complex, the Zon Regency Hotel by the sea in Johor Bahru and the
international ferry terminal at Johor Bahru duty-free zone. It operates a golf club, Black
Forest Golf & Country Club, which is located near the Malaysia-Thailand border at
Bukit Kayu Hitam, Kedah.
Earnings accretive. Although our net profit forecasts could rise by 9-12%, our FY12-
14 FD EPS forecasts rise by only 3.5-6.4% due to the enlarged share base. Note that
we have assumed 5% growth for Atlan for FY12-14 and excluded RM57m one-offs
(mainly gain on disposal of land and reorganisation cost). The contribution from Atlan
could be partly used to offset the ICULS interest which amounts to RM8.5m per
annum.
Gearing to rise. As at Jan 2012, B-Corp’s net gearing stood at 0.44x. It will rise to
0.47x after this acquisition.


[Source]

Dropped deal won’t affect AirAsia, say analysts

They see challenging times ahead for MAS, but business as usual for the low-cost carrier

PETALING JAYA: While analysts remain sceptical about Malaysia Airlines' (MAS) turnaround plan, some of them opine that AirAsia Bhdwill not be impacted by the unravelling of the share-swap deal betweenKhazanah Nasional Bhd and AirAsia.

Analysts expect MAS to have a challenging time ahead, but they said it would be business as usual for AirAsia.

“Reversal of the share swap could dampen sentiment in MAS shares. MAS will need to move on from here, and its immediate problem is to solve its cashflow,” an analyst said, adding that there were many areas where MAS and AirAsia could work together to save cost.

To recap, last August, major shareholders of MAS and AirAsia agreed to swap shares, with Khazanah agreeing to sell 20.5% of its over 68% stake in MAS to Tune Air Sdn Bhd, while Khazanah bought a 10% stake in AirAsia from Tune Air. As part of the deal, Khazanah was to possibly take a 10% stake in AirAsia's sister company, long-haul low-cost carrierAirAsia X.

It was reported that the Malaysian Airlines System Employees' Union (Maseu) had met with Prime Minister Datuk Seri Najib Tun Razak to express its objection to the comprehensive collaboration framework (CCF) between the two airlines, which involved the share swap.

Kenanga Research believes that the cancellation of the share-swap deal would not bring any material impact to its forecasts. “However, the sentiment in MAS will be negatively affected as the management risks losing the value-added contribution from AirAsia's Tan Sri Tony Fernandes to turn around the operations of MAS.”

“Furthermore, with jet fuel prices hovering at US$130 (RM390) to US$140 (RM420) per barrel, coupled with the low seasons in the first and second quarters, MAS is likely to face a challenging time turning around its earnings in the current financial year ending Dec 31, 2012 (FY12),” it said.

Separately, Kenanga said there were more expectations and surprises for AirAsia in FY12 apart from its CCF with MAS, such as the launch of Japan AirAsia and listing of Thai AirAsia and Indonesia AirAsia.

“At first glance, the share swap will only bring the additional benefits for AirAsia via maintenance and bulk purchasing. Nonetheless, we opine that the cancellation of the share swap will less likely affect its business fundamentals throughout FY12 and FY13 (as compared with MAS),” Kenanga said.

OSK Research said the cancellation of the share-swap deal would not come as a surprise as MAS's unionised workforce had been applying intense pressure to call off the deal. But OSK said it saw some drawbacks in this development as some areas in the CCF between the two competing carriers might not present win-win situations for both airlines.

“As a case in point, the CCF for aircraft purchases may not benefit AirAsia as it already enjoys an upper hand in purchasing Airbus planes (being one of Airbus's top customers). Furthermore, with no equity interest aligned, given the reversal of the share swap, we think the CCF would not be the ultimate goal sought by a stronger carrier,” it said.

Earlier, OSK said AirAsia would still benefit from the capacity cuts by MAS, which was unlikely to boost its capacity anytime soon in view of its ailing financial condition.

“Furthermore, we think the share-swap reversal could boost the sentiment in AirAsia, as foreign investors prefer the low-cost carrier as a standalone business without any link to the Malaysian Government,” it added.

[Source]

Glove makers to gain from wage rule in long run

PETALING JAYA: While the new minimum wage will dent glove makers’ earnings in the near term, it is expected to be beneficial for the industry in the long run, CIMB Research said.

“It will encourage glove makers to reduce their use of low-skilled labour and improve their manufacturing processes by using more advanced technology and methods.

“Also, we believe that wage inflation will make the smaller glovemakers less competitive and catalyse consolidation in the sector. This will strengthen the positions of the large glove makers, favouring those with more efficient processes such as Hartalega (Holdings Bhd),” the brokerage said in a note to clients.

On Monday, Prime Minister Datuk Seri Najib Tun Razak announced the details of the country’s wage floor for the private sector, with the monthly benchmark set at RM900 for Peninsular Malaysia and RM800 for Sabah, Sarawak and Labuan.

This translates to an hourly rate of RM4.33 and RM3.85 respectively.

Some analysts say the new minimum wage rule may encourage glove makers to reduce their use of low-skilled labour and improve their manufacturing processes by using more advanced technology and methods.

The policy applies to all workers in the private sector, save for those in domestic services, but it will only take effect six months after the Minimum Wages Order is gazetted.

The law, which will be reviewed every two years, affords some flexibility to employers as they can absorb a certain amount of allowances and fixed cash payments in calculating the new wages.

According to CIMB Research’s forecasts, the minimum wage could shave some 1% to 7% off glove makers’ financial year 2013 core net profit, but the brokerage has kept its “neutral” rating for the sector and estimates for the companies under its coverage as they may yet find ways to mitigate the impact of higher staff costs.

Other research houses have also maintained their ratings pending further clarification from the companies and the actual gazetting of the law.

Among the glove makers, Hartalega is the least affected by the setting of a wage floor due to its highly automated production facilities and high margins relative to its peers.

“We believe Hartalega will emerge the strongest from the higher wages as its operations are already lean and management is working hard to further automate its manufacturing process.

“With the highest margins (lowest post-tax cost base), technologically advanced manufacturing process and an aggressive eight-year expansion plan, Hartalega has the most wiggle room in the sector to price gloves competitively and gain market share,” CIMB Research said.

Management was aggressively working on further automating the stripping and packaging portions of its manufacturing process to reduce the use of low-skilled labour and optimise operating expenditure, it added.

CIMB Research said Top Glove Corp Bhd would be the hardest hit as a result of low margins and an oversupply for its gloves that could take two to three years to work off.

“We believe it would be challenging for management to pass on the cost of the minimum wage to customers. This would put further pressure on margins and Top Glove’s high-volume low-price model.”

Top Glove shares have reflected this, with the counter losing 13 sen, or 2.72%, to RM4.65, making it one of the day’s top losers.

In contrast, Kossan Rubber Industries Bhd and Supermax Corp Bhddipped one and two sen respectively to RM3.24 and RM1.87 yesterday, while Hartalega was unchanged at RM7.80.

For Supermax, CIMB Research said the manufacturer was ramping up nitrile production to 53% of capacity by financial year 2013. This could help curb rising staff costs, the brokerage added, as the cash cost of producing nitrile gloves was 20% lower than natural rubber.

Kossan, meanwhile, is poised to tap on the growth in China, where glove usage is a mere two gloves per person per annum versus 50 in Europe and 96 in the United States. Kossan entered the market in financial year 2012 via its 53%-owned Cleanera HK Ltd.

Moving forward, HwangDBS Vickers Research expects the additional staff costs to be passed on to customers over time.

Affin Investment Bank, in a report, also noted that Top Glove had previously said it would likely pass on 80% to 90% of the higher costs by increasing prices, which could prompt other glove makers to do the same.

[Source]

Minimum wage policy to impact glove and plantation industry

HDBSVR sees glove makers affected by minimum pay plan

KUALA LUMPUR: Hwang DBS Vickers Research expects the minimum wage for the private sector to affect the glove manufacturers of whichTop Glove to be impacted the most while Hartalega to be the least affected.

“We maintain Hold for Top Glove (TP: RM4.80), Hartalega (TP: RM7.70) and Kossan (TP: RM3.30). We expect the additional staff costs to be passed to customers over time, but in the immediate term, we expect earnings and margins to be dampened,” it said on Wednesday. The minimum wage for the private sector was set at RM900 per month for employees in the peninsula, and RM800 for workers in Sarawak, Sabah and the Federal Territory of Labuan. There will be a six-month grace period for implementation from the date the Minimum Wage Order is gazetted. The government has also provided some flexibility whereby some allowances or fixed cash payments are allowed to be absorbed in the calculation for minimum wage. HDBSVR said its sensitivity analysis showed staff costs would increase by 17%-22% while earnings could fall by 5%-19%, if minimum wage of RM900 per month is implemented assuming no change in average selling prices. “Based on our estimates, Hartalega's salary costs could rise by RM10mil a year (+17%) and this would lower FY13F net profit by 5%. For Top Glove, staff costs could rise as much as RM39mil (+22%), denting FY13F earnings by 19%.

“Meanwhile, we estimate Kossan's annual salary costs to increase by RM18mil (+17%) and net profit to fall by 13%. However, if fixed allowances or cash payments are allowed in the calculation for minimum wages, the impact will be softened,” it said.

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

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