#Brokers Digest* Foreign Equities

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PT Malindo Feedmill Tbk
Target price: IDR3,300 BUY
MAYBANK KIM ENG (June 18): We expect a 14% feed volume growth in FY14 amid the expected completion of two new feed mills in the next 12 months, which will add about 60% of capacity y-o-y. We expect the utilisation rate of both mills to reach 85% to 90% in two years. This new capacity will mostly be reflected in the volume in 4Q14 to 2Q15.

The rupiah averaged IDR11,520/USD in April and May, depreciating 3% from 1Q14. Given that Malindo Feedmill has 20 to 35 inventory days, we believe margins may be at risk in 2Q14 and 3Q14 as the company needs to repurchase raw materials at a higher currency rate. Meanwhile, soya bean meal price has surged 11% YTD to US$468 per bushel. However, we believe the 4Q14 and 1Q15 outlook will be positive owing to the average selling price (ASP) increase and additional capacity kicking in in 2H14.

We lower our earnings forecasts by between 17% and 30% in FY14F to FY16F to factor in the expected surge in raw material costs in 1H14 and higher operating expense, particularly labour and electricity costs. We remain positive about Malindo Feedmill, given its steady revenue growth with the ability to increase ASPs, it has underperformed the Jakarta Composite Index by 20% in the past 12 months and its attractive valuations — it trades at 17 times FY14F and 12 times FY15F.

First Resources Ltd
Target price: S$2.80 BUY
UOB KAY HIAN (June 18): First Resources harvested 165,821 tonnes of fresh fruit bunches (FFB) in May, which was 3.1% lower m-o-m but 4.5% higher y-o-y. The m-o-m decline was due to four less harvesting days in May. For 5M14, total FFB production was up 10.1% y-o-y with nucleus FFB production increasing 9.7% y-o-y. Although 5M14 production growth was higher than our expectation of 6.7% for the full year, we are maintaining the growth assumption as 2H14 will be affected by the higher base in 2H13.

We are not concerned about the lower oil extraction rate (OER) of 22.1% in May versus its usual more than 23% because First Resources’ OER is now diluted by the higher third-party FFB purchased and FFB from newly mature trees. Third-party FFB purchases increased over the past two years from less than 5% in 2012 to about 14% to 15% of total FFB processed currently. Crude palm oil production rose 3.4% y-o-y in May and 10.7% y-o-y in 5M14 on the back of higher FFB processed.

For 2Q14, we expect total production to grow 5% to 6% y-o-y or 3% to 4% q-o-q. Production in 3Q14 will be crucial as this is usually the peak production period in a palm tree annual cycle, which may not materialise this year due to the drier weather. We have factored in this seasonal and weather impact.

Chow Tai Fook Jewellery Group Ltd
Target price: HK$9.10 NEUTRAL
BOCOM INTERNATIONAL (June 18): Chow Tai Fook posted a net profit growth of 32% in financial year 2014 ended March 31 (FY14) — in line with our and market expectations. Growth in 2H decelerated sharply to 2% from 92% in 1H mainly due to slower revenue growth, with same-store sales growth easing to 8% following the gold rush in 1Q and a notable decline in operating margin on higher China hedging loss and negative sales channel mix.

Looking at FY15E, while we are less concerned about margins, the top line is our key watch amid lower travel flow and consumption by Chinese tourists in Hong Kong and the continued cautious consumer climate in China.

Furthermore, we believe the sector’s sustained negative newsflow in the coming few months due to last year’s high base effect looks set to continue to affect the investment appetite in the sector. Coupled with unattractive valuation versus the sector average of 9.6 times and 8.5 times for FY14 and FY15E respectively, we believe Chow Tai Fook’s valuation premium, due to its market leadership, better market diversification and sales mix, is fairly priced in.

Chow Tai Fook announced recently that it has proposed to acquire Hearts On Fire for US$150 million. Our preliminary stance is “neutral” in view of the likely limited synergistic benefit to the group and its low brand awareness.

Khon Kaen Sugar Industry pcl
Target price: THB17.50 TRADING BUY
BUALUANG SECURITIES (June 17): KSL posted a 2Q14 net profit of THB627 million, up 47% q-o-q and 7% y-o-y. Stripping out a THB10 million profit from investments in derivative instruments for the quarter, core profit would be THB617 million, up 44% q-o-q and 62% y-o-y. The results were in line with our estimates and the street.

We expect KSL’s profit to rise q-o-q and y-o-y in 3Q14, driven by the high season for the sugar business and the fact that some sugar deliveries were delayed. We assume a smaller global supply surplus this year. There could be scope for an upside to the sugar price if the El Nino effect were to result in a poor Brazilian sugar harvest.

We have cut our sugar sales volume assumption by 12% to 740 kilotons to factor in a lower 2Q14 sugar sales volume than modelled, but our FY14 cost of sales and selling, general and administrative expense assumptions also fell. Thus, our FY14 earnings forecast stands at THB2.075 billion.

With the peak earnings quarter ahead and improved sugar demand supply dynamics, we expect the share price to rise in the months ahead. Moreover, expectations for firmer sugar prices next year, coupled with better performance by the ethanol and power businesses, should lend support to the stock. Our “trading buy” rating stands with a target price of THB17.50, pegged to a PER of 15.8 times.

Energy Development Corp
Fair value: PHP7.95 BUY
COL FINANCIAL PHILIPPINES (June 17): Given that the entire Burgos Wind Project is scheduled for completion in 1Q15 and that the transmission lines needed to ensure commercial operations are already available, we believe that the project will succeed in obtaining the feed-in tariff. Assuming an average utilisation rate of 30%, we estimate that it will generate PHP3.3 billion in revenue in 2015, representing 9.3% of EDC’s revenue for the said year.

The transfer of the Northern Negros surface power generation facility to the Nasulo site was successful. Once operational, the additional power generation facility will increase Palinpinon’s capacity by 10.4% to 216mw. It will also boost revenue by PHP770 billion annually.

On June 6, EDC announced that the rehabilitation of the Bacman unit 2 turbine was complete and that the unit was already delivering power to the grid. The completion of the rehabilitation of unit 2 came six months ahead of our expectation. Together with unit 1, which has been operational since January this year, we estimate that Bacman will generate revenue of PHP2.9 billion in 2014 and PHP3.6 billion in 2015.

We are raising our 2014E and 2015E net income forecasts for EDC by 37.9% and 33.9% respectively to PHP8.4 billion and PHP11.1 billion to account for its new power projects, namely the Burgos Wind Project and the Nasulo Geothermal Project, and the earlier-than-expected completion of EDC’s Bacman plant rehabilitation.

CIFI Holdings Group Co Ltd
Target price: HK$1.60 BUY
ABC INTERNATIONAL (June 17): CIFI’s pre-sales grew 76% and 61% y-o-y in 2012 and 2013 respectively to RMB9.5 billion and RMB15.3 billion, outperforming its peers. Pre-sales momentum continued in 5M14 and increased 44% y-o-y, despite a challenging year in 2014.

In 2013, CIFI introduced two major joint-venture partners, Henderson and Greenland, to various projects in Shanghai, Hangzhou and Hefei. Apart from reducing individual project risk, these two renowned partners could help enhance the brand value of the JV projects and expand the group’s financing channels.

CIFI also differentiates itself from other high-growth small and mid-cap players by its strong balance sheet. CIFI’s net gearing in 2013 was 72.2%, lower than other developers that use a high asset turnover model such as Sunac, Kaisa and Future Land. Financing cost is also trending down for the group. Yield of bonds issued in January was 8.99%, much lower than the 12.25% for the previous batch issued.

We derive CIFI’s end-FY14E NAV based on the discounted cash flow method with a 10.5% weighted average cost of capital. Our target price of HK$1.60 is based on the average NAV discount of 60% among the mid and small-cap developers. Based on CIFI’s outstanding pre-sales and improved finance cost, we deem its current valuation of 3.6 times FY14E PER with a 6.2% FY14E dividend yield as highly attractive.

Frasers Centrepoint Trust
Fair value: S$2.08 BUY
OCBC INVESTMENT RESEARCH (June 18): FCT announced that it has completed the acquisition of Changi City Point (CCP) from its sponsor’s joint venture, Ascendas Frasers Pte Ltd. According to the circular for unitholders, CCP is expected to generate a net property income yield of 5.43% and to contribute positively to its distribution per unit (DPU), assuming that the transaction is funded via a combination of debt and equity.

FCT has since launched a private placement of 88 million new units at an issue price of between S$1.79 and S$1.835 per unit upon getting unitholders’ approval for the related-party transaction. We note that the issue price was later fixed at the top range of S$1.835, backed by strong demand from new and existing Asian and European institutional investors. This represents a slight 3.6% discount to the volume weighted average price for the full market day prior to the placement announcement. Based on our projections, the CCP deal is expected to add an annualised 0.12 Singapore cents to FCT’s DPU. FCT’s gearing ratio, meanwhile, is likely to increase from 27.7% as at March 31 to 30.3%.

In connection with the placement, FCT has also declared an advance distribution of 2.288 Singapore cents per unit for the period of April 1 to June 9, payable on or around July 17. This translates into a respectable yield of 6.4%.

Del Monte Pacific Ltd
Target price: S$0.665 ACCUMULATE
PHILLIP CAPITAL (June 18): DMPL reported results for the January to April period, following a shift in its fiscal year. Excluding sales from Del Monte Foods Inc (DMFI), revenue was lower at US$86.2 million due to lower sales in the Philippines. Management said this was due to oversold inventories to the general trade accounts in 4QCY13, leading to the sales reduction. However, its S&W business continues to grow and deliver strong results.

Management seeks to drive sales growth and better margins at DMFI through several initiatives, including ramping up trade promotions and reducing TV adverts, changing to more prominent product labels on retail shelves, reducing product prices towards pre-acquisition pricing levels before FY11, and an IT system migration to SAP for better productivity and cost savings.

With the significant restructuring at DMFI, FY15 will be a transition year. We expect profitability to return to normal beginning FY16. With the strong management team in DMFI retained and synergies from vertical integration, we remain positive on DMPL’s growth.

Management shared further updates on the pending equity financing — US$180 million will be raised through a rights issue and another US$350 million will be raised through preference shares. Taking into consideration the dilution effect and preference dividends to be paid, which were bigger than previously expected, we revised our target price to S$0.665 and downgraded our rating to “accumulate”.

This story first appeared in The Edge weekly edition of June 23-29, 2014.