Brokers' Digest

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IOI Corp Bhd (Feb 25, RM3.72) BUY: IOI Corp’s earnings for 1HFY2009 were dragged down by the poor results of its property arm, which posted a 43% y-o-y decline in operating profit and a 29% decline in turnover. Nevertheless, its overall earnings were above expectations, thanks to the strong performance of its plantation division, the turnover of which expanded 18% y-o-y to RM1.6 billion while earnings climbed 26% y-o-y to RM1.1 billion. The improvement in the division’s turnover was due to the higher prices of crude palm oil (CPO) — the average CPO price was RM3,238 per tonne in 1H compared to RM2,572 a tonne in 1HFY2008. The higher CPO prices also helped offset a decline in CPO production, which shrank 5% y-o-y to 446,475 tonnes in 1H due to lower fresh fruit bunches yield, in line with an overall decline in the country’s palm oil production in December last year. We maintain a “buy” on IOI Corp as the privatisation of IOI Properties Bhd is expected to support the group’s share price in the near term while in the longer term, IOI Corp is expected to benefit from a recovery in CPO prices. — AmResearch (Feb 23) Coastal Contracts Bhd (Feb 25, 90 sen)BUY: The company’s outstanding order book of RM1.7 billion is expected to keep the company busy over the next three years. The orders include building new offshore support vessels, tugboats and barges. While there are cancellation risks, we believe the magnitude would depend on how slow the award of new oil and gas contracts is. As long as its customers have the financial capability, we think most clients would continue to honour their contracts, especially when they have made their purchase order at a much lower price — 20% lower — before the vessel prices increased in 2008. Coastal’s results for FY2008 were above consensus. Its 4Q revenue increased 68.3% q-o-q to RM110.9 million as four vessels were delivered in the quarter. This also led to a 39% increase in net profit q-o-q to RM31 million. Coastal has very low gearing of 5.5%, supported by its strong cash and bank balances of RM72.7 million. We maintain a “buy” on Coastal with a target price of RM1.72, based on a PER of six times FY2010 earnings. On the local front, we see new orders for ships continuing to slow down in 2010 unless Petronas and its production-sharing contractors award more jobs. — OSK Research (Feb 24) Sime Darby Bhd (Feb 25, RM5.70)BUY: Management says it has negotiated new fertiliser prices for 2HFY2009, which is 15% lower than fertiliser prices in 1H. Hence, there will be an upside to the conglomerate’s key performance indicator net profit target of RM1.9 billion for FY2009. Given its free cash flow of close to RM2 billion per annum, a net cash position and Permodalan Nasional Bhd as its major shareholder, we believe Sime will continue to pay out decent dividends of 5% to 6%. The global economic slowdown will have an impact on the group’s other divisions, such as property, heavy equipment, motor, energy and utilities. Thus, we are cutting earnings by 4% to 11% for its FY2009E to FY2011E to factor in lower non-plantation earnings. We also lower our sum-of-parts valuation by 4% to RM7.86 per share.There will be no change in our CPO price assumption of RM2,020 per tonne for FY2009E and RM1,930 a tonne for FY2010E. The plantation division will still account for the bulk of group profit and we estimate the division will account for between 65% and 67% of group profit over the next three years. Meanwhile, for the downstream segment, we are estimating a loss of RM100 million for FY2009 due to higher feedstock costs incurred by the business in 1H. In 1Q, it incurred a loss of RM28 million. — Citigroup (Feb 23) Sunway City Bhd (Feb 25, RM1.46) Market perform: The company is experiencing lower demand in most of its property projects, which has been reflected in its property sales figure — total sales dipped 29.3% to RM58 million from RM82 million in the three-month period to Dec 31, 2008. Unbilled sales dropped to RM869 million from RM1 billion a year ago. In view of the group’s weaker-than-expected property sales, we have downgraded our FY2009 to FY2011 earnings forecasts to factor in a slower take-up as well as work progress assumptions for all its projects. This would include Sunway Opus Grand in India, which is scheduled for launch by the end of this year.Despite the cut in earnings forecasts, we expect the company’s FY2009 earnings to increase by 39% due to the change in its financial year-end from June to December 2009, which reflects 18-month earnings. Nevertheless, our FY2010 to FY2011 earnings forecasts have been reduced by 0.5% to 4.8% due to the aforementioned factors. Apart from that, we have also reduced our FY2009 to FY2011 dividend forecast, from 8 to 10 sen previously to five sen. Due to the change in Sunway City’s financial year-end, we are rolling over our fair value from FY2009 to CY2009. As a result, our indicative fair value is revised up to RM1.88 per share, based on an unchanged 0.5 times p/NTA. — RHB Research (Feb 25) AEON Co (M) Bhd (Feb 25, RM3.66) BUY: Consumer spending remains robust at AEON as grocery sales continue to hold up despite bleak economic conditions. AEON’s net profit for FY2008 jumped to RM120 million from RM105 million previously. The favourable results were due to better sales at existing stores and also new store contributions. AEON’s recent purchase of land for RM27 million also confirmed the retailer’s target for profit growth of 10% per annum. Nevertheless, we have lowered the operating profit margin of its property management division for FY2009 and FY2010 to 22% and 22.5% respectively, from a previous forecast of 26%, on potentially lower consumer expenditure on products such as clothes and durables. We have also lowered our FY2009 same-store sales growth assumption for the retail and property management divisions to 0.5% and 1% respectively. However, we have tweaked retail’s operating profit margins upwards to 3.7% in both FY2009 and FY2010 to reflect the continued resilience of grocery sales. AEON is a long-term “buy” as the retailer has planned to open at least five new malls every two years. Our current forecasts only impute two in 2009 and one in 2010, which imply upside potential. We have lowered our target price marginally to RM4.60 based on a slight discount to the market at 11 times FY2010 PER. — Maybank-IB (Feb 23)MISC Bhd (Feb 25, RM8.55) HOLD: While MISC’s revenue for the nine months ended Dec 31, 2008, was above expectations, its net profit of RM1.2 billion was only 67.6% and 59.8% of our forecast and market consensus respectively. The national shipper’s weaker results were mainly due to its liner losses. Q-o-q, MISC’s revenue for 3QFY2008 ended Dec 31 lost 17.4% on the back of lower contributions from the tanker, offshore and liner divisions while Ebit margins slipped 0.8% to 9.85%, dragged down by liner losses of RM328.8 million and lower earnings from petroleum and chemical tankers. This was however partly mitigated by strong earnings growth in the offshore and heavy engineering division. The outlook for the liner division is bleak while tankers are going downhill as global trade contracts are facing recessionary pressures, with China’s exports in January down 17.5% y-o-y and imports lower by 43.1%. Container rates are thus on a free fall and as many as 392 vessels totalling 1.1 million twenty-foot equivalent units were anchored. Management has announced that its FY2009 and FY2010 results would be weaker compared with its performance in FY2008 in the light of dwindling global trade. Therefore, our earnings forecast and target price of RM7.85 are under review with a downward bias. — Kenanga Research (Feb 25)

This article appeared in The Edge Malaysia, Issue 744, March 2-8, 2009