Brokers' Digest

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Guinness Anchor Bhd (March 12, RM5.50)BUY: The company highlighted its commitment to production quality and an effective supply chain system to enhance its competitiveness, which was attested by its winning the Guinness League of Excellence Award for three consecutive years, from 2006 to 2008.

Performance in 1HFY2009 was strong, with revenue and gross profit growing 12.7% and 15.8% respectively. GAB has consistently grown its market share for the past seven years. It currently enjoys over 50% share of the beer and stout market.

GAB reported a turnaround with healthy double digit growth in 1HFY2009, attributed to a successful marketing strategy, which has seen it lead the stout market consistent with our FY2009 forecast. We believe GAB is on track, having achieved almost 60% of our pre-tax profit forecast for 1HFY2009.

Although the current economic slowdown is expected to dampen consumer spending, we foresee GAB sustaining its market leadership and market share expansion. It is currently trading at FY2009 PER of 11.5 times, with expected net EPS growth of 10.8%. We maintain our “buy” recommendation. — INET Research (March 11)Kuala Lumpur Kepong Bhd (March 12, RM10)BUY: We believe KLK’s healthy balance sheet with estimated FY2009 net gearing of 10% will help the group ride out the current economic uncertainties, capitalise on any acquisition opportunities and benefit from a potential improvement in crude palm oil (CPO) prices in 2H2009.

Operating cash flow is forecast at RM900 million in FY2009, which should be sufficient to finance an annual capex of RM400 million. We estimate gross DPS at 50 sen for FY2009F, compared with 70 sen last year. This implies a net dividend payout of 51%, which is in line with its payout of more than 50% the past four financial years.

Improvement in CPO prices in 2H2009 is expected to be underpinned by the normalisation of FFB (fresh fruit bunches) production in the first half of this year and a recovery in demand from China. The group reckons CPO prices will rise further and sustain at RM2,000 per tonne in the second half of the year.We maintain our “buy” call on KLK, with unchanged fair value of RM11.90 a share, based on CY2009F’s PER of 15 times on plantation earnings. After fine-tuning our earnings forecast, KLK’s net profit for FY2009F and FY2010F was lowered by 2% each. — AmResearch (March 12)Tanjong plc (March 12, RM14)BUY: The stock is currently trading close to its historical low of 8.1 times FY2009 PER and 1.3 times PBV. Given its stable and solid dividend track record and earnings stream, coupled with the fact that the group will only have to bear a one-off windfall tax payment, we believe its current discounted trough valuations are unwarranted.

The eventual spin-off of its power or gaming division, which management remains keen on exploring, could provide an added catalyst as part of the cash proceeds could be returned to shareholders as a special dividend.

Tanjong’s core operating earnings and cash flow from its relatively resilient power and gaming assets remain largely intact. Like its Malaysian power plants, its overseas power plants in Egypt, Bangladesh, Sri Lanka and Pakistan operate on a guaranteed availability off-take arrangement.

Given the low reserve margins in Egypt and negative reserve margins in Bangladesh, we believe there should be minimal risk of any potential downward re-negotiation for its overseas PPAs (power purchase agreements). Tanjong will also stand to benefit from the appreciation in the US dollar from revenue translation gain from its overseas power assets, which are estimated at RM30 million to RM40 million on a net basis. — OSK Research (March 10)Hiap Teck Venture Bhd (March 12, 64 sen)UNDERPERFORM: Despite facing weaker demand, margins at the American Petroleum Institute (API) pipe segment remain relatively stable at an Ebit level of 18% to 20% as competition within the API pipe segment is much less intense than the standard steel pipe market.

Imported API pipes are subject to a high 50% import tariff, so we are cutting FY2007-2009 net profit forecast by 73.8% to reflect weaker sales volumes at both the trading and manufacturing divisions. We are also cutting FY2007/09 operating margins at both the divisions. FY2007/2010-11 net profit forecasts have been raised by 2.4% and 3.9% respectively to RM44.3 million and RM58.4 million, largely to reflect a higher sales volume at the trading division.

Indicative fair value for Hiap Teck has been lowered by 13.9% from 79 sen to 68 sen based on six times revised average CY2009-2010 EPS of 11.3 sen, which is a discount to the three-year average market capitalisation weighted historical one-year forward PER of seven times for the steel sub-sector. The stock was downgraded from “market perform” to “underperform” as valuations have become rich following the downgrade in our indicative fair value. — RHB Research (March 10)Malaysian Resources Corp Bhd (March 12, 79.5 sen)UNDERWEIGHT: MRCB posted a 12.7% drop in turnover of RM788.5 million, compared with RM903.7 million a year ago. Furthermore, MRCB reported a higher net loss of RM39.3 million in 4QFY2008, which was mainly due to provisions for remedial works, writedowns and provisions for diminution in value of its landbank and unsold property inventories. Given the poor results, MRCB did not declare any dividends.

Based on the latest figures, MRCB has an outstanding order book of RM1.8 billion, of which 77% or RM1.4 billion is from the engineering and construction division. This relatively healthy order book will help to sustain long-term earnings. 

Some of the risks in this counter include slower earnings from its property division in FY2009 and a high net gearing of 0.8 times, compared to its peers such as Gamuda Bhd (0.22 times), IJM Corp Bhd (0.49 times) and WCT Bhd (0.34 times).

We remain “underweight” on the construction sector. MRCB is valued at 89 sen based on a five-year average PER of 23.4 times at 10% discount due to gloomy equity and economic outlook that is pegged to FY2009F consensus PER of 3.8 sen. This translates to an upside potential of over 7%. MRCB’s share price appears to be moving in line with its fundamentals. — MIMB Investment Bank (March  11)LCL Corp Bhd (March 12, 33.5 sen)TRADING BUY: LCL announced that it had been awarded an interior fit-out (IFO) job worth S$43.1 million (RM103.7 million) for Singapore’s Marina Bay Sands Pte Ltd (MBS). Works will commence in May this year and is expected to be completed by December 2009.

The IFO job boosts LCL’s outstanding order book from RM440 million to RM543 million, and will provide support to the company’s FY2009 net earnings.

Assuming a 7% net margin, this contract could boost LCL’s FY2009 net earnings by RM7.7 million. However, we are maintaining our earnings forecasts as they have already factored in RM120 million in new IFO jobs annually for FY2009 and FY2010.

The stock is down 90% from its 2007 peak. It is trading at only 1.8 times CY2009 PER, excluding valuation order claims and 0.2 times price-to-book value. Foreign shareholding has plummeted from over 40% at end-2007 to below 10%. Further share price weakness offers investors opportunities to accumulate.

LCL remains a “trading buy”, with its target price unchanged at 94 sen as we maintain our valuation basis of 60% discount to the construction sector’s 11 times target PER. The large discount for LCL reflects its small market cap and Middle East worries. — CIMB Investment Bank (March 12)

This article appeared in The Edge Malaysia, Issue 746, March 16-22, 2009