Brokers' Digest: Foreign Equities

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NOBLE Group Ltd
Fair value: S$1.31 HOLD
OCBC INVESTMENT RESEARCH (Oct 1): Noble has completed the sale of its agriculture business to COFCO Corp on Sept 30 at a price that is 1.15 times the 51% stake of the audited book value (FY13), or US$1.5 billion, which was in line with the company’s announcement in April (subject to final adjustments after the deferred settlement date).
Separately, China Investment Corp (CIC), through its subsidiary Best Investment Ltd, has pared its stake in Noble from 13.8% to 9.4% after selling 300 million shares at S$1.32 apiece.
The sale sent Noble’s share price tumbling 9.3% to S$1.27, before recovering slightly to close at S$1.30. Noble says it understands that the placement was part of CIC’s portfolio rebalancing exercise and CIC will continue to support Noble’s business strategy. However, CIC suffered a slight loss on the move — it had paid S$2.11 for the stake in 2009.
We opine that the sale could be due to the agriculture joint venture with COFCO — this probably reduces the need for CIC to own such a large stake in Noble. Nevertheless, we maintain our “hold” rating and fair value of S$1.31 as we believe that Noble’s core business is stabilising, although near-term catalyst may still be lacking as China’s economic growth remains splotchy.

PTT pcl
Target price: THB383 ACCUMULATE
PHILLIPCAPITAL (Oct 1): Permanent Secretary to the Ministry of Energy Areepong Bhoocha-Oom said the Energy Policy and Planning Office has given the nod to increase the price of liquefied petroleum gas (LPG) for transport by THB0.62 per kg to THB22 per kg and the price of natural gas for vehicles (NGV) by THB1 per kg to THB11.50 per kg. The new rates are effective Oct 1.
PTT is unlikely to benefit from the LPG price hike as it still has to peg it to the ex-refinery price, and any gains from the increase would likely be channelled to the state oil fund to lighten its loss burden. As at end-August, the state oil fund bore losses of about THB6.13 billion. The LPG price increase will cut the fund’s losses by THB1.2 billion per annum.
The daily LPG consumption of the transport section was 5.33 million kg in 1HFY14. In contrast, the increase in NGV price (except for public transport) should reduce PTT’s losses in NGV sales by THB2.56 billion per annum. In 1HFY14, PTT sold 8,790kg of NGV daily, of which 20% were used by taxis and other public transport.
We raise our FY14 net profit projection by 1% to THB104.588 billion.

PT BW Plantation Tbk
Target price: IDR300 SELL
UOB KAY HIAN (Oct 1): The recent transaction between PT Rajawali Corpora and BW Plantation (BWPT) is a reverse takeover (RTO) where shareholders of a private company secure control of a public company through a rights issue and then merge it with the private company. A potential placement could happen following the rights issue after the lock-up period.
Based on our check with Otoritas Jasa Keuangan (OJK), an RTO does not breach any regulations and the OJK does not regulate pricing.
We change our calculation on the equity takeover of BWPT by Pegasus CP One Ltd and Matacuna Group Ltd from asset-based (transaction value per hectare) to company-based (EV/ha).
Rajawali acquired 22% of BWPT via its vehicles, Pegasus and Matacuna, at US$10,106/ha and US$11,080/ha respectively in 2013. The current asset injection is done at US$13,564/ha, a 28% premium to the 2013 equity takeover. Post-consolidation, BWPT’s 2014F PER will fall from eight times to 28 times and the return on equity will decline from 13.3% to 4.6%.
Despite the revision in EV/planted hectare, we maintain “sell” on the back of the non-accretive acquisition. BWPT’s share price has been volatile, dropping from IDR955 to IDR466 and rebounding to IDR555. Our target price of IDR300 is pegged at US$9,600/ha, the industry’s average EV/nucleus planted area.

Kasikornbank pcl
Target price: THB264.20 BUY
RHB RESEARCH (Oct 1): With a functioning Thai government and improving business sentiment, management foresees a stronger 2H14, with the gross domestic product growing “up to 2%” for 2014. It guided for loan growth of 5% y-o-y in 3Q14 and is sticking to its target of less than 8% for the full year.
Management also expects an uptick in non-performing loans (NPLs) in 2H14, but remains confident that the gross NPL ratio will not exceed its 2014 target of 2.2%. It raised its guidance on credit cost to 85 to 90 basis points as it intends to set aside more provisions, given the slower-than-expected economic recovery.
Operation-wise, the bank is performing in line with management’s targets for the year. Its net interest margin is expected to be stable at 3.75% in 3Q14, with the 2014 average at the top end of its target range of 3.4% to 3.6%.
With no negative factors expected in Kasikornbank’s coming 3Q14 results, we keep our earnings forecast unchanged. Our target price, using the Gordon Growth Model, is raised to THB264.20 to reflect receding political and economic uncertainties. This values the stock at 2.1 times FY15 price-to-book ratio and 12.1 times FY15F PER, which is +1.5SD from its historical mean. Its share price, having risen 51% YTD, may consolidate in the near term.

Riverstone Holdings Ltd
Target price: S$0.94 BUY
UOB KAY HIAN (Oct 1): All systems in Phase 1 are ready, with production to officially begin in 4Q14. Two lines will be commissioned every month from October to December. Firm orders have been secured for the new one-billion capacity and management has found new customers from Japan, the US and Germany. We observe that the new factory has longer production lines, which can produce 25,600 gloves per hour per single line. Phase 1 will have three single lines and three double lines.
Management has initiated a new way of locking in two-year contracts with clients who have good payment records. These volume-buyers are offered one to two production lines which they can “own”, ensuring a steady supply of gloves, with pricing still done on a monthly basis. Riverstone benefits from this secure demand for its production, allowing it to plan better, reduce downtime and save costs. Thus far, three customers have signed up, with cost savings to be shared between the parties.
Despite intense competition in the healthcare industry, we think management’s focus on customisation, innovation and quality will position Riverstone above the rest and the risk of overcapacity is still relatively low due to its smaller size compared with its peers. Our model factors in a 20% revenue CAGR versus a 26% capacity CAGR.

PT Indocement Tunggal Prakarsa Tbk
Target price: IDR 25,850 BUY
BUANA CAPITAL (Sept 30): In August, Indocement enjoyed +41.7% y-o-y sales volume growth while the industry only registered +37.4% y-o-y growth, giving the company a bigger market share at 29.6% versus 28.1% a year ago. For 8M14, sales volume rose 1.1% y-o-y to reach 11.3 million tonnes, which is 59.2% of our and 59.9% of management’s forecast. However, it was slightly below the three-year 8M average of 63.1%. Thus, we adjust our FY14F sales volume to 18.5 tonnes.  
In 1H14, Indocement experienced weakening sales volume growth at -5.2% m-o-m and 3.6% y-o-y. It was due to floods, operational disruption and political uncertainty prior to the presidential election. However, Indocement’s overhauled plants have been back on line since May and its new 1.9-tonne-capacity Citeureup plant has begun operation. Thus, we believe sales volume will recover in 2H14 and reach our FY14 forecast of 18.5 tonnes.
Indocement is planning to increase capacity by 9.4 tonnes until FY17F, a project worth IDR15 trillion to IDR18 trillion.
The company has raised the average selling price (ASP) by 4% up to 1H14 to mitigate the effects of electricity tariff hikes and rupiah depreciation. We expect Indocement to increase the ASP by another 2% to maintain its more than 30% operating margin in FY14F.

Innovalues Ltd
Target price: S$0.33 BUY
MAYBANK KIM ENG (Sept 30): Management expressed confidence in 2H14 and expects to improve upon the strong performance the company has already delivered in 1H14. In addition, 2015 is set to be another record year as multiple growth drivers take shape.
Innovalues has been qualified by not just one but two major branded carmakers to supply transmission parts. It expects to begin mass production in early 2015. In our view, this is a substantial feather in its cap. Not only does it gain additional business that should contribute to top and bottom lines but also have access to the carmakers’ top-tier OEM suppliers.
Management is preparing the ground for further growth in 2016. We understand Innovalues is designing and qualifying up to 20 new products with existing and new customers. Management believes one of its new customers has the potential to rival Sensata in size and importance in a few years’ time.
We remain comfortable with our FY14E-15E EPS. The third-quarter results, to be announced on Nov 7, are expected to be a strong indicator. We will look for continued top-line and margin improvements. Our target price remains, based on 10 times FY15E PER, a 10% premium to its peers.

PetroVietnam Technical Services Corp
Target price: VND64,000 BUY
MAYBANK KIM ENG (Sept 30): PetroVietnam’s 1H14 earnings surged 45% y-o-y, led by strong performance in most of its businesses, including offshore support vessels (gross profit +17%), port and base supply (+45%), operations and maintenance services (+143%) and FSO/FPSO joint ventures (+73%).
We evaluate the company’s strong exposure to the oil and gas sector to determine the up-cycle for exploration and production activities. We forecast FY14 and FY15 core net profits to grow an average 14%, mainly driven by the FSO/FPSO sector with contributions from the new FPSO, Lam Son, which commenced in 2Q14, and general improvement in other sectors.
The catalysts include two highly possible FSO/FPSO job wins the company is bidding for, which we estimate will help raise profit by 12% per annum for FY16 and FY17, fabrication jobs at block B once the commercial issue is resolved, and the Ca Voi Xanh mega project agreement between PetroVietnam and ExxonMobil.
Although the stock has risen 112% YTD, our conservative discounted cash flow valuation — without taking into account the possible new FSO/FPSO projects — shows a 59% upside to our target price of VND64,000. At the current price of VND40,200, 2014 PER of 9.9 times also represents a steep discount compared with the VN-Index (14 times) and regional peers (22 times).

This article first appeared in The Edge Malaysia Weekly, on October 6-12, 2014.