Brokers' Digest: Foreign Equities

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Vard Holdings Ltd
Target price: S$0.94 HOLD
OCBC INVESTMENT RESEARCH (Sept 23): Vard Holdings’ share price has fallen 19% since it announced on Aug 5 that it received an additional tax claim of NOK200 million (including penalties and accrued interest) from the tax authorities in Brazil. This is with regard to the transfer pricing of design and equipment packages delivered from its Norwegian entities to its Brazilian yard Vard Niteroi in FY10. According to Vard, the diverging assessment originated from conflicting Brazilian transfer pricing rules, which were only aligned as from FY13. Vard will file an appeal against the ruling.
We believe another reason for Vard’s poor share price performance was the sharp drop in oil prices. Brent crude oil prices have tumbled 15% to US$97.70 per barrel from the year-to-date peak of US$115.10/bbl, driven by a stronger US dollar and easing geopolitical tensions.
On a positive note, average anchor handling tug supply (AHTS) vessel spot rates in the North Sea rebounded strongly y-o-y in August due to the peak summer period. However, average platform supply vessel (PSV) rates deteriorated. Similarly, utilisation rates increased for AHTS vessels (y-o-y basis for August) but declined for PSVs, highlighting a possible oversupply situation for the latter.

PT Astra International Tbk
Target price: IDR7,350 NEUTRAL
RHB OSK RESEARCH (Sept 22): Astra International is facing growing competition, especially in the low multi-purpose vehicle (MPV) segment. This was indicated by the higher discount offered on its most popular model, Toyota Avanza, which saw its price cut widen to IDR20 million per unit in September from IDR18 million in June. In contrast, there was no discount on its competing model, Honda Mobilio. Honda sold the Mobilio for
IDR162 million to IDR201 million, head-to-head with the Avanza, which was priced at IDR164 million to IDR210 million. Due to the discount, the Avanza was sold cheaper than the Mobilio by IDR11 million to IDR18 million. Despite the attractive price cut, Astra’s car market share still slipped to 51.5% in 8M14 from 52.6% in 8M13.
We envision competition in Indonesia’s automotive market intensifying, which may accordingly put pressure on Astra’s Ebit margin. Tata Motor is aggressive in penetrating Indonesia’s market, offering six models, comprising mini trucks, compact cars, MPVs and sport utility vehicles. Mitsubishi will be launching a low-specification MPV designed specifically for Indonesia’s market and road conditions.
We cut our FY14/15F earnings estimates to IDR19.8 trillion/IDR22.4 trillion (-7.9%/10.4%) in anticipation of narrower Ebit margins.

Philippine Long Distance Telephone Co (PLDT)
Target price: PHP3,390 HOLD
SB EQUITIES (Sept 24): We recently had a telephone interview with management, which said its rival, Globe Telecom, continued to engage in aggressive below-the-line marketing strategies despite achieving its desired market share. Because of this, PLDT said it will respond to its rival’s every move in order to protect its market share. As a consequence of its efforts, it sees an increase to its 2015 capital expenditure guidance as it anticipates a considerable jump in network traffic.
We expect margins to come under pressure in the short term because of this move. While there should be some improvement in PLDT’s top line due to higher usage that will be brought on by new promotions, we believe that the risk of margin contraction is high as we anticipate heightened marketing expenses, lower yields and higher handset subsidies.
As for the risk of its dividends being reduced due to potentially heightened capex, we believe that the chances of PLDT cutting its payouts are low considering that its balance sheet can still take on borrowings to fund additional capex.

Central Pattana pcl
Target price: THB58 OUTPERFORM
KASIKORN SECURITIES (Sept 24): Unlike in 4Q13, when political instability weighed on consumption sentiment, we expect much better momentum in 4Q14, based on the normal high season for retailing. We talked to management recently about the overall traffic at Central Pattana’s malls and it guided that it has started returning to normal levels since July, supported by the recoveries in consumer confidence and tourism. In addition, its newest mall, CentralPlaza Salaya, which opened in mid-August, attracted very good response from shoppers, with better-than-expected traffic of 40,000 people per day (versus 20,000 to 30,000 people per day on average at other malls).
The recovery in economic sentiment should allow Central Pattana to raise its rental rates by 5% to 6% this year (versus only 0.8% in 1H14). Thanks to scheduled contract renewals at four malls, the company is expected to increase their rents by 7% on average.
Meanwhile, due to the poor sentiment early this year, the company launched only two new malls, but it should get back on track with the opening of three malls with a net lettable area of 142,500 sq m next year and four malls in 2016 with an NLA of 162,700 sq m. We expect Central Pattana to continue delivering earnings growth of 15.1%, 10.3% and 11.1% in 2014 to 2016E.

Esprit Holdings Ltd
Target price: HK$10.25 SELL
CANTOR FITZGERALD (Sept 24): Esprit did an admirable job stabilising its business. It returned to profitability and positive cash-flow generation in FY14, helped mostly by cost controls, but the top line still came in slightly below our and consensus’ expectations. The more difficult task of business model transformation, however, is still ahead, and management is justifiably cautious, expecting next year to be “volatile” as the company moves into high gear in implementing significant organisational, process and mindset changes. An investors’ meeting this morning shed more light on the plan and rationale, but we think there will likely be not only execution risks but also continued company-specific structural challenges.
We maintain our “sell” recommendation, although we raise our target price to HK$10.25, based on lower assumptions on spending and capital expenditure.
For FY15, management has a long list of initiatives, including having a lean supply chain, category management, centralised merchandising and simplification of product flow. Also planned are product range reduction (reducing its stock keeping unit by more than half by spring/summer 2015 from 2013), fast-to-market product development and product replenishment, optimising stock management and new pricing strategy going from “cost plus” to “market pricing” and from “promotional” to “everyday low prices”.

Hoa Sen Group
Target price: VND55,300 BUY
SSI RESEARCH (Sept 23): We recommend a “buy”, premised on the idea that Hoa Sen’s gross profit margin could improve. When examining its gross profit margin history, we realised that the 3Q14 figure was at the bottom (10.5%). We believe that the decline in 3Q14 was because the company had to buy a large quantity of cold-rolled coils, as its in-house CRC production capacity could only satisfy 61% of production demand. From September 2014, when two new rolling lines commenced operation, its CRC capacity was raised from 580,000 tonnes per annum to 980,000 tonnes. As a result, it can now fully satisfy production demand.  
Hoa Sen’s 2014 revenue will reach VND14,868 billion, a 26.4% y-o-y increase — a result of a 31.5% increase in sales volume (791,315 tonnes) and a 3.9% decline in average selling price. Net profit will reach VND401 billion, a 31% y-o-y decline, translating into an EPS of VND4,164.
We expect 2015 revenue to grow 19.3% y-o-y, reaching VND17,738 billion, thanks to an 18.2% growth in sales volume. Net profit will reach VND537 billion, a 33.9% y-o-y growth, translating into an EPS of VND5,576.

Orbis Gold Ltd
Target price: A$0.64 SPECULATIVE BUY
CANACCORD GENUITY (Sept 23): We maintain our “speculative buy” rating for Orbis Gold. The company’s Natougou project in Burkina Faso is emerging as among the best in its peer group, driven by the potential for a +200,000 oz per annum project with low operating costs. We view the financing announced with Greenstone Resources LP as a positive for the company, in particular that it was completed at a significant premium to market. The funding gives Orbis Gold good breathing space from a balance sheet perspective to complete the Natougou definitive feasibility study and continue exploration efforts at its other prospects in Burkina Faso.  
Our target price is based on a fully diluted NAV, comprising our Natougou project NPV, a nominal value ascribed to Nabanga and exploration potential, and net cash. We have updated our model for additional equity dilution and capital raised, assuming that the transaction is approved by the shareholders. In addition, we have also made a slight revision to our project development financing assumptions, now modelling a A$90 million equity to be raised at A$0.28 in mid-2015. As a result of the changes, our target price is raised to A$0.64 from A$0.57 per share.

Samsung Techwin Co Ltd
Target price: KRW55,000 BUY
DAISHIN SECURITIES (Sept 23): Samsung Techwin’s 3Q14 results are expected to miss our and consensus’ forecasts, with sales of KRW689.3 billion (-4.7% q-o-q) and an operating profit of KRW16.8 billion (-26.5% q-o-q). The earnings shortfall is attributable to a delay in new orders for high-speed chip mounters and the ongoing restructuring of its security solution division. We revise downwards our EPS forecasts for 2014 and 2015 to 49.5% and 16% respectively. The earnings weakness in 2Q14 reflected an increase in capital expenditure for long-term growth, and therefore investors are advised to take a longer-term approach on Samsung Techwin.
Sales from new high-speed chip mounter orders are expected to be booked from 2Q15 onwards. Samsung Electronics’ strategic shift towards mass market smartphones from premium models and Samsung Electro-Mechanic’s new Vietnamese plant dedicated to lower-end handset components will be the main catalysts.
The security solution division is expected to show some earnings improvement in 2015 as its distribution network overhaul winds down in 2014. It is expected to deliver an operating profit of KRW69.1 billion in 2015, a 305.8% increase y-o-y. In 2015, company-wide operating profit is also expected to rebound from a low in 2014 to KRW141.1 billion (+95.4% y-o-y).

This article first appeared in The Edge Malaysia Weekly, on September 29-October 05, 2014.