Brokers' Digest: Local Equities

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Local Equities

AEON Co (M) Bhd
Target price: RM3.65 HOLD
MAYBANK RESEARCH (Sept 17): The weakness in AEON’s 2QFY14 results was largely due to factors such as higher advertising and promotional expenses incurred for its 30th anniversary celebration, higher electricity costs after the average 17% tariff hike in January, store renovation expenses, and opening costs associated with its Bukit Mertajam store.
Generally, sales have held up with growth in same-store sales of 4% y-o-y in 2Q14, aided in large part by new store openings. Results in 3QFY14 are likely to remain seasonally weak and there will still be renovation costs, but to a lesser extent. However, a strong y-o-y pick-up should be seen in 4QFY14, particularly since 4QFY13 had been a weak quarter. Property management income has thus far sustained its momentum and will continue to do so given the steady pace of new store openings.
Taking into account the potential for a stronger 4Q14, we have raised our FY14 net profit forecast by 5% while trimming our FY15 forecast by 1% to account for slower retail sales next year.

Berjaya Food Bhd
Fair value: RM3.05 HOLD
AMRESEARCH (Sept 17): We reaffirm our “hold” recommendation on BFood with an unchanged fair value of RM3.05 per share, pegged to a PER of 25 times CY15F earnings.
BFood registered 1QFY15 core net profit of RM6 million, which is in line with our expectations. Core net profit for the quarter accounts for a small fraction of our full-year estimate of RM34 million at 18%. This is because our estimate includes the seven months earnings contribution from the full consolidation of Starbucks Coffee Sdn Bhd (BStarbucks) from end-September onwards. Post the completion of the acquisition of BStarbucks, we expect this high-growth segment to contribute to 54% of revenue in FY15F.
BFood’s 1QFY15 top-line growth was driven by higher revenue generated at all of its key operating markets and maiden contribution from Kenny Rogers Roasters in Cambodia, despite the Muslim fasting month during the quarter. While the stock is trading at a high forward PER of 30 times FY15F, the full-year earnings contributions from the consolidation of BStarbucks will be reflected from FY16F onwards.

MISC Bhd
Fair value: RM7.21 NEUTRAL
RHB RESEARCH (Sept 15): The outlook for petroleum shipping is looking positive as supply remains tight, notably on Aframaxes and very large crude carriers where MISC stands to benefit.
Five of MISC’s LNG vessels are near contract expiry, from 2014 to 2017. With spot rates on a downward trend in the near term, the secured rates could be US$48,000 a day — about 40% lower than its previous rates. We estimate that earnings over the next few years could be flattish at best. The LNG division is expected to contribute to 78% and 70% of earnings in FY14F and FY15F respectively.
We nudge up our FY14 earnings by 7% on higher petroleum tanker earnings but lower our FY15 earnings by 4% on lower-than-expected contribution from Cendor and the tank terminal side. We raise our SOP fair value to RM7.21 as we reduce our net debt by 28%. This gives it an implied 16.2 times FY15 PER — near the tanker shipping players’ average of 16.9 times FY15 PER.

YTL Power International Bhd
Target price: RM1.84 BUY
AFFIN INVESTMENT BANK (Sept 17): We believe YTLP’s 10 sen dividend per share is sustainable given our annual free cash flow forecast of RM403 million to RM566 million over FY15E to FY17E. If this is boosted by the RM150 million to RM165 million in dividend contribution from YTLP’s associates, it would imply an “all-in” free cash flow of around RM550 million to RM730 million.
The Edge reported that a total of 3,000mw of coal-fired capacity that is being built by Malakoff and 1MDB may be delayed, putting the national grid in a possible power crunch position around 2016.
We opine that YTLP is set to benefit from the delays at Malakoff’s new plant. With YTLP’s current 1,200mw power purchase agreements (PPAs) expiring in September 2015, an extension to the PPAs would be a natural choice for the country to maintain the 2016/17 reserve margin at above 20% to 25%. We think there is a good chance of a PPA extension for YTLP, and hence now factor in a five-year extension to YTLP’s PPAs.

Sarawak Cable Bhd
Fair value: RM1.60 HOLD
AMRESEARCH (Sept 15): We maintain “hold” on SCable with an unchanged SOP-based fair value of RM1.60 per share. SCable announced on Sept 12 that it had accepted the conditional offer made by HNG Capital Sdn Bhd for the proposed acquisition of the latter’s 100% stakes in Universal Cable (M) Bhd and Leader Cable Industry Bhd for RM210 million.
Following the acceptance, SCable made a payment of RM2.1 million in earnest deposit to HNG.
While details of the deal have yet to be firmed up, The Edge reported earlier that SCable may issue up to 10% of new shares to fund the acquisitions. It may also borrow RM110 million, with the remaining RM60 million to be offset by debts owed by HNG to the two companies.
UCMB has three factories in Nilai and one in Johor, while LCIB has one in Kedah. We expect SCable’s market share in Malaysia to grow to 50% with the acquisitions. As the details have not been firmed up, we have not factored in the proposed acquisitions into our model.

Uzma Bhd
Target price: RM4.40 BUY
UOB KAY HIAN (Sept 15): Uzma bought MMSVS for US$29.7 million. MMSVS provides services related to the repair and maintenance of exploratory and production wells utilising hydraulic workover units (HWUs). MMSVS has a fleet of seven HWUs and one truck mounted service rig that can work onshore and offshore.
All of MMSVS’ assets are currently under operation and have a young average age of less than five years old. We expect MMSVS to generate a net profit of RM3 million to RM4 million in 2014 and RM10 million in 2015/16, assuming the assets are fully mobilised and have a 15% net margin.
We advocate investors to remain invested in Uzma as it still offers growth in the short to medium term. Backed by a management team with strong entrepreneurial skills and focused growth in its target market, we believe the company could eventually further expand its regional footprints in Southeast Asia and maximise the synergies from its recently acquired companies. Target price unchanged at RM4.40, pegged to 16 times 2016F PER.

Benalec Holdings Bhd
Target price: RM1.25 OUTPERFORM
KENANGA RESEARCH (Sept 15): Benalec announced that it is proposing to issue up to RM200 million nominal value of seven-year redeemable convertible secured bonds (CB). We were not surprised at the news as the CB is mainly to strengthen its cash flow for the smooth execution of its massive reclamation projects in Melaka that was secured in FY14.
Assuming the CB is fully converted before FY16, with an assumption of a conversion price of RM1.05, our FY16E EPS will be diluted by 20% to 7.2 sen from 8.8 sen currently. This will translate into FY16E PER of 12.9 times from the current implied FY16E PER of 10.5 times.
Our forecasted FY16 EPS may be accretive if the group inks the land sale deal with 1MY Strategic Oil Terminal for 1,000 acres in Tanjung Piai before FY16. Assuming Benalec inks the deal at a price tag of RM60 psf or a total of RM2.6 billion, and with a 25% net margin, our FY16 net profit estimate may be revised by 92%, exceeding the dilution impact.

CB Industrial Product Holding Bhd
Target price: RM5.75 BUY
ALLIANCE DBS RESEARCH (Sept 15): CBIP’s current order book remains strong at RM465 million and we think new contract wins could reach RM300 million this year. In the near term, CBIP could benefit from an increase in mature palm oil areas in Malaysia and Indonesia, which is forecast to average 458,000ha per year for 2014 to 2016. This could translate into 5.3 million fresh fruit bunch output, which requires at least 21 processing mills per year.
We also anticipate sizeable contracts from its major customers Sime Darby — from the development of its estates in Liberia — and FGV, from the possible replacement of its older conventional mills. However, CBIP could face earnings risk of about 11% for FY15/16 from higher effective tax rates. This is from the expiration of its pioneer status for Modipalm by February 2015. But application is in the works for a renewal of the pioneer status for its waste management system.
We maintain our “buy” recommendation with a higher target price of RM5.75.

Thong Guan Industries Bhd
Target price: RM3 BUY
CIMB RESEARCH (Sept 15): We maintain our EPS forecasts, but with the ex-date just over for the proposed ICULS (irredeemable convertible unsecured loan stock)/warrants, we revise our target price to ex-all price at RM3, based on a 30% discount to its fully diluted RM4.28 SOP per share. Potential re-rating catalysts include stronger group Ebitda margins and regional M&A developments.
Over the next few years, TGI will focus less on top-line growth and more on bottom-line growth. It will produce more high value-added products. It is committed to RM100 million capex over the next few years, which should boost group production capacity by 40% to 170,000 tonnes annually in three to four years’ time.
TGI has been putting more effort into R&D over the past few years, offering high value-added services and products to its customers. The company is setting up a US$2 million R&D centre at its Sungai Petani plant, to be ready by year-end. This will be the first-of-its-kind R&D centre in Asia-Pacific, equipped with sophisticated and advanced equipment from Europe.

IHH Healthcare Bhd
Target price: RM4.50 HOLD
PUBLICINVEST RESEARCH (Sept 15): IHH announced on Sept 12 that the group has entered into a sale and purchase agreement with Fortis Healthcare Singapore Pte Ltd to acquire Radlink-Asia Pte Ltd, an investment holding company principally involved in the provision of healthcare services in Singapore. The purchase consideration of S$137 million is subject to further adjustments upon completion of the proposed acquisition.
Details are scarce on the proposed acquisition, and the financial performance of Radlink-Asia is not available. Nonetheless, we believe the latter’s profit, if any, would not be significant relative to the group’s bottom line.
We are keeping our earnings estimates unchanged pending further information on Radlink-Asia, although we believe earnings contribution from the acquisition will not be significant. Our target price remains unchanged at RM4.50, pegged to FY15 blended EV/Ebitda valuations. The group will continue to see strong revenue growth underpinned by its capacity expansion, especially as more beds are added in 2015, with the newly opened hospitals expected to contribute to the group’s revenue.

Hong Leong Bank Bhd
Target price: RM15.40 HOLD
UOB KAY HIAN (Sept 17): Amid intense deposit competition, and hence net interest margin (NIM) compression, and with its below-industry loan-to-deposit ratio of 80%, Hong Leong Bank (HLB) is in a strong position to preserve its NIM better than its peers. This was partially evident in its recent 4QFY14 and FY14 results where it delivered a stronger net interest income growth of 6.3% versus the sector’s 3.4%, while FY14 NIM declined by a smaller 5bps versus peers’ compression of 8bps to 12bps.
HLB’s current core tier-1 equity ratio of 7.8% at a fully loaded bank level is among the lowest in the industry and poses the greatest risk of an imminent capital raising exercise. We estimate this would entail a RM1.9 billion equity-raising exercise, which could lead to an 11% dilution to its current share base.
Despite HLB being in a stronger position to defend its NIM and profitability, we are still expecting a relatively muted net profit growth of 5.6% for FY15 versus 13.3% in FY14.

MMC Corp Bhd
Target price: RM2.81 MARKET PERFORM
KENANGA RESEARCH (Sept 15): We noticed that MMC is gaining interest recently due to the group’s 2Q14 earnings recovery driven by Malakoff’s Tanjung Bin power plant recovery and KVMRT1 construction progress.
With Malakoff’s earnings recovery, we believe the probability of its listing of Malakoff has increased. One of the push factors is that Malakoff’s Junior Sukuk of RM1.8 billion with 6.3% interest rate due by September 2015, if it is not redeemed, will result in higher interest costs.
MMC’s other key divisions have been gaining momentum, thanks to the KVMRT1 progress and growing port activities in PTP. However, we are maintaining our “market perform” call on MMC with a revised target price of RM2.81. We are cautious about the potential delay in the 1,000mw Tanjung Bin extension, which may affect the stock’s sentiment in the near term.
Even though it may not impact Malakoff’s discounted cash flow valuation, we prefer to remain conservative here as we would prefer that there is more clarity on the issue to avoid impact on investors’ sentiment.

This article first appeared in The Edge Malaysia Weekly, on September 22-28, 2014.