AirAsia - 1Q12 set to outperform aviation peers BUY

By Am Research
15 May 2012


1Q12 set to outperform aviation peers

- We maintain BUY on AirAsia Bhd (AA) with an unchanged fair value of RM4.20/share, ahead of 1Q12 results announcement on 23 May. Our fair value continues to peg AA at 12x FY12F earnings. From an operating perspective, AA defied industry trends in 1Q12, registering a 12% YoY growth in raw passenger traffic to 4.8mil (Malaysian operations). Traffic in terms of RPK (revenue-passengerkilometre) grew by 9% given shorter average stage length. Loads were maintained at 80.3% (1Q12) versus 80.1% (1Q11). 

- Growth was driven by the introduction of new routes, e.g. KL-Danang, KL-Semarang, KL-Surat Thani and KLPalembang. AA’s 1Q12 operating statistics underpin  our view that demand for low cost flights remains resilient compared to FSCs. MAS as a comparison has shown a 10% RPK contraction and 5% load factor deterioration in 2M12. 

- We foresee yield improvement in FY12F driven primarily by the exit of Firefly’s jet operations from November 2011. As a yardstick, AA’s yields grew 8% YoY in 4Q11, reversing a 2%-21% YoY yield contraction in the past 2 years. Assuming a seasonal contraction of 8% in 1Q vs. 4Q (historical 3-year trend), we estimate 1Q12 yields at 15.5sen/RPK, implying an 11% YoY growth.

- Despite a 10% higher fuel price YoY, we estimate that 1Q12 core earnings may register flattish YoY growth at RM160milRM170mil. Buffers to the higher fuel prices are:- (1) An 11% YoY yield growth, partly inflated by the absence of fuel surcharge in 1Q11; (2) 9% YoY pax traffic expansion. At our estimated net profit, AA’s 1Q12 will account for 21%-22% of our FY12F earnings of RM767mil and 17%-18% of consensus FY12F estimates of RM920mil (consensus numbers may have included TAA and IAA contribution).

- Fuel price is a key risk to our projections. In 1Q12, jet fuel averaged US$132/barrel vs. our full-year forecast of US$125/barrel (ex-hedging). However, jet fuel price peaked in March and has now eased to US$125/barrel levels (See Chart 1). Any further easing of jet fuel price underpins AA’s earnings expansion in subsequent quarters. Every US$1/barrel drop in jet fuel improves earnings by 1.4%.

- Thai AirAsia (TAA) performed well in 1Q12 – RPK +14% YoY, pax traffic +17% and load factor +1.3pp YoY to 85.6%. Indonesia AirAsia (IAA), however, saw loads contract 2ppts to 77% given IAA’s initiative to strengthen its Surabaya hub by improving connectivity, resulting in a +19% YoY capacity.

- From a valuation standpoint, AA is cheap at an implied 10x FY12F earnings (ex-associate value of RM0.96/share). LCC peer, RyanAir in comparison trades at 13x forward PE.

Price RM3.58 

Fair Value RM4.20

[Source]

IGB Corporation - RM0.67/share accretion to IGB! BUY

By Am Research
14 May 2012

RM0.67/share accretion to IGB!

- We reaffirm BUY on IGB, with an unchanged fair value at RM3.50/share based on a 22% discount to our NAV estimate of RM4.50/share.

- It was announced on Bursa that IGB’s 75%-owned KrisAssets will sell MidValley Megamall and Gardens Mall for RM4.6bil to IGB REIT. The deal values the two malls at a whopping RM1,815psf – an about 25% discount to Pavilion Mall’s valuation of RM2,400psf – and would result in a revaluation gain of RM1.3bil to KrisAssets or RM992mil (or RM0.67/share accretion) to IGB.

- We understand the acquisition of the mall will be satisfied via the issuance of 3,400 million units in IGB REIT and the balance of RM1.2bil via cash. 

- Of the 3,400 million units, 2,730 million units will be distributed to its entitled shareholders and KrisAssets has proposed an offer for sale of the remaining 670 million units via an IPO of IGB REIT, of which 469 million units will be offered to institutional funds.

- The 2,730 million units form part of KrisAsset’s proposed distribution to its entitled shareholders amounting to RM3.9bil. The remaining RM1.27bil would comprise special dividend and capital repayment which translates into an attractive RM2.88/share. 

- Based on IGB’s 75%-stake, the company stands to get a handsome cash payoff of RM951mil or RM0.64/share.

- Nonetheless, IGB would need a delicate balance between a special dividend and deploying freed capital to fund development projects overseas. 

- As we have highlighted earlier, IGB is exploring development opportunities in London and Taipei, whereby we understand that IGB would require about RM1bil to fund the acquisition of a site in London.

- IGB rose by close to 20% after our upgrade in January, but has been hovering at RM2.75-RM2.80/share over the past two months given the weak sentiment in the market.

- We expect the stock to trade at a narrower discount – now at about 39% - given the good valuation given to its prime assets.

Price RM2.74 

Fair Value RM3.50 


[Source]

Bursa gets request to cancel trade of KLK shares at RM17

KUALA LUMPUR: Bursa Malaysia had received a request to cancel trade or trades arising from a participant's error, which saw Kuala Lumpur Kepong Bhd shares done at RM17 on Friday.

"The Exchange will make a decision of the request and will communicate the decision to cancel the trade or otherwise to all in due course," it said in a statement.

Dealers said that more than 447,000 shares of KLK were sold at RM17, or 27.6% below Thursday's close of RM23.50, around 3.04pm, which they said could be a technical glitch.

At 3.04pm, the KLCI fell 14.17 points to 1,573.89 but managed to stage a mild recovery. KLK accounts for 2.43% of the 30-stock KLCI.

KLK closed four sen lower at RM23.46.

[Source]

Follow up 17 May 2012:

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.