#Brokers Digest* Local Equities

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BERJAYA Sports Toto Bhd
Target price: RM4.10 HOLD
ALLIANCE DBS RESEARCH (June 18): 4QFY14 core profit of RM69 million took full-year earnings to RM335 million. This is only 94% and 90% of our and consensus estimates. The major variation was the higher prize payout, although we understand the group made (undisclosed) charitable donations in the quarter. Gaming revenue per outlet per draw fell 3.2% y-o-y.

BToto has proposed a fourth interim dividend of seven sen per share, taking total dividend payout for FY14 to 26.5 sen. This implies a 106% payout ratio based on core earnings. However, 9.5 sen was distributed in the form of 30.6 million treasury shares. BToto is left with only 2.9 million treasury shares, so we believe the generous payout is unlikely to recur.

The stock lacks near-term re-rating catalysts and there are downside risks to earnings. These include the possible non-renewal of Berjaya Philippines’ gaming concession, which expires in August 2015, and the implementation of goods and services tax on NFO operations.

IJM Plantations Bhd
Target price: RM3.81 HOLD
HONG LEONG INVESTMENT BANK (June 17): We expect Indonesia to remain the main driver for IJMP’s overall fresh fruit bunch (FFB) output growth, underpinned by more planted areas reaching maturity (5,000ha to 8,000ha a year over the next three years). We projected overall FFB production to grow 10% to 13% in FY03/15-17 (versus 9.3% to 10% previously), underpinned by a 26% to 43% increase in FFB production in Indonesia over the next three years. We are raising our FY03/15-16 net profit forecasts by 5.3% and 12% respectively, largely to account for higher FFB yield and lower production cost assumptions for its Indonesian operations.

Based on our sensitivity analysis, every RM100 per tonne increase in our average CPO price assumption will raise our FY03/15-17 net profit forecasts by 8.3% to 8.6%. We raise our target price on the stock by 12.1% to RM3.81, based on unchanged 17 times revised FY03/16 EPS of 22.4 sen. Although we like its strong balance sheet and young age profile, we believe IJMP’s strong near-term earnings growth prospects have been priced in.

Westports Holdings Bhd
Target price: RM2.85 BUY
MAYBANK IB RESEARCH (June 18): China’s Ministry of Commerce blocked the formation of the P3 alliance on June 17 as it thinks the proposed vessel-pooling accord will restrict competition on the busiest Asia-Europe routes. The P3 members (Maersk, MSC and CMA CGM) have announced that the P3 plan will now be scrapped.

Despite its solid earnings delivery and strong non-P3 volume growth, Westports’ share price performance has been lacklustre since its listing in October 2013 because of concerns about P3. Given the latest development, we believe Westports will see an overdue re-rating. it trades at an implied forward PER of 18 times, below its regional peers’ average of 22 times.

We are reversing the potential impact and raising our full-year container volume growth to 10% and 9% for FY14 and FY15 respectively. Consequently, our FY14-FY16 EPS forecasts are raised by 2%, 4% and 4% respectively and our discounted cash flow-derived target price is nudged up to RM2.85, indicating a forward PER of 19 times.

Top Glove Corp Bhd
Target price: RM4.48 HOLD
CIMB RESEARCH (June 17): Top Glove’s 9MFY14 net profit came in below expectations, at 69.2% and 66% of our and consensus full-year forecasts respectively. Meanwhile, 9MFY14 revenue dropped 3.9% y-o-y owing to lower selling prices while core net profit declined 4.6% because of the poorer performance from China and the higher effective tax rate. Thus, we are reducing our FY14-FY16 net profit forecasts by 5% to 8%, trimming our target price, still based on 14.5 times PER (about 20% discount to Hartalega). We maintain a “hold” on Top Glove but prefer Kossan.

Top Glove declared its first dividend for FY14, a single-tier dividend per share of 7 sen, in line with our forecast. We think that Top Glove has been able to contain its operating costs quite well through aggressive cost-optimisation initiatives. This can be seen from the stronger Ebitda margin, although it was impacted by the large foreign exchange loss in 9MFY14. The higher Ebitda margin was also driven by higher sales contribution from nitrile.

SapuraKencana Petroleum Bhd
Target price: RM5.59 BUY
MIDF RESEARCH (June 17): SAKP announced three new contracts and a contract extension for its tender assist drilling rigs. The jobs are from Petronas Carigali, Chevron Thailand and BP Trinidad & Tobago. The contracts are worth a collective US$700 million or approximately RM2.3 billion.

Petronas Carigali awarded SAKP with two new contracts for its tender assist drilling rigs — the SKD T-9 and SKD T-10. Both rigs will be used for Petronas Carigali’s drilling campaigns offshore Malaysia. Another new contract for its tender assist drilling rig, the SKD T-18, was awarded by Chevron Thailand for its drilling campaign in Thailand.

We remain bullish on SAKP and reiterate our “buy” recommendation with an unchanged target price. Our target price is premised on PER 2016 of 23 times and EPS 2016 of 24.3 sen. We are bullish on SAKP for its strong quality and well-diversified orderbook, healthy earnings and consistent job wins. Our target PER is relatively conservative, and is based on the lowest average monthly forward PER over the past year.

Berjaya Auto Bhd
Fair value: RM2.82 TRADING BUY
KENANGA RESEARCH (June 17): Berjaya Auto’s 4Q14 core net profit came in at RM50.4 million, bringing its FY14 net profit to a record high of RM141.9 million. The results were a tad higher than our full-year projection and the consensus estimates by 29% and 14% respectively, deviated by stronger-than-expected earnings contribution from its associate Mazda Malaysia Sdn Bhd, and higher-than-expected margins owing to favourable MYR/JPY rates and better sales mix.  

Post-results, our FY15 earnings forecast has been revised upwards by 30% to account for higher revenue, underpinned by stronger sales assumption following the group’s attractive new model pipelines and sustainable EBIT margin of 11.2% on the back of the favourable exchange rate and lower import duties. We have nudged up our target price after we rolled over to FY15 with a higher targeted PER of 13 times to align with its industry peers’ valuation.

Can-One Bhd
Fair value: RM3.43 TRADING BUY
PUBLIC INVESTMENT BANK (June 16): Can-One is not waiting around to see whether the sale of Kian Joo’s assets and liabilities to Aspire Insight is completed successfully or not, as it made a move late last week to solidify its earnings prospects going forward. With 80% in hand, the group announced an acquisition of the remaining 20% in F&B Nutrition Sdn Bhd (F&B) for RM112.9 million via the issuance of 39.753 million shares at RM2.84 apiece. The price tag implies a valuation of about 15 times for the entire business.

We are making a “trading buy” call on the stock. Full value to all holdings. Its collective stakes in Kian Joo Can and F&B are worth RM1.05 billion. Setting off the group’s huge borrowings of RM388.2 million (as at March 31, 2014) against that amount leaves us with a residual of RM658.5 million, valuing Can-One at RM3.43 per share on the enlarged share base. If the Aspire Insight deal collapses and Kian Joo reverts to RM2.80 per share, Can-One is still worth about RM2.75.

Sime Darby Bhd
Target price: RM10.40 NEUTRAL
RHB RESEARCH (June 17): Sime Darby has entered into a sale and purchase agreement (S&P) with B. Grimm Power Ltd for the disposal of a 100% stake in Sime Darby Power Co Ltd (SDPC), Sime Darby LCP Power Co Ltd (SDLP), and Sime Darby O&M (Thailand) Co Ltd (SOMT), for a total cash consideration of US$162.9 million (RM522.9 million). The disposals are expected to be completed this month.

The disposals do not come as a surprise, as Sime Darby sold off its Malaysian power plant in April for RM300 million in a bid to dispose of its non-core assets. We maintain our sum-of-parts (SOP)-based fair value of RM10.40 and our “neutral” recommendation. Although we are still positive on the plantation sector as a whole, the weaknesses at Sime Darby’s heavy equipment and motor division could be a threat to earnings growth, despite its sensitivity to crude palm oil (CPO) prices. Hence, we advocate shifting away from the more integrated players to the purer planters, which would benefit more significantly from CPO price movements.

Sarawak Cable Bhd
Fair value: RM1.70 HOLD
AMRESEARCH (June 17): We place our “fair value” rating for SCable under review, pending further details on the proposed acquisitions that were announced yesterday. SCable has accepted a conditional offer from HNG Capital Sdn Bhd for the former to purchase 100% equity interests in Universal Cable (M) Bhd and Leader Cable Industry Bhd for RM210 million.

The offer will fortify SCable as the leading cable manufacturer in the country with an estimated market share of more than 50%. We understand that following the acquisition, SCable will essentially supply all the cables for the 500kV job on a consolidated basis. The acquiree companies are two of the top suppliers in Peninsular Malaysia. Margins are likely to be similar with that of SCable’s existing power cable business.

Note that non-independent and non-executive director Datuk Seri H’ng Bok San is the controlling shareholder of HNG. If accepted, we expect the share sale agreement to be finalised within 3Q before SCable seeks shareholders’ approval in an extraordinary general meeting.

Hong Leong Industries Bhd
Target price: RM6.86 TRADING BUY
UOB KAY HIAN (June 16): HLI and Narra will seek shareholders’ approval for a series of restructuring exercises, which will see a backdoor listing of HLI’s infrastructure business into Narra. We see a “trading buy” opportunity as there could be significant upside to our sum-of-parts (SOP) valuation should Narra’s current implied valuation hold up. The implied post-exercise value of Narra at RM4.49 per HLI share is well above our RM2.30 for HLI. Narra’s implied post-exercise market cap is RM2 billion, implying a share price of RM4.16.

While we doubt Narra’s present lofty valuation can sustain after the exercise, we acknowledge that it could fetch a valuation that is significantly above our appraised valuation. Should Narra’s valuation hold up after the restructuring, our adjusted SOP valuation and target price for HLI would be RM10.39 and RM9.26 respectively. This compares with our target price of RM6.86, which assumes Narra shares at RM2.30 per HLI share and a 20% holding company discount to our SOP valuation of RM5.70 for HLI’s remaining assets.

Alliance Financial Group Bhd
Target price: RM5.40 BUY
AFFIN INVESTMENT BANK (June 17): We are of the view that AFG’s stock price decline is overdone since news of Alliance Bank Malaysia group CEO’s resignation was made public on June 5. The banking group is backed by a solid management team and has a proven track record in the delivery of results and its relationship management. Management is striving to achieve key performance indicators for FY15 by replicating FY14’s loan growth of 14.1% y-o-y in FY15E, and achieving a higher return on equity of above 14% in FY15E. With the share price correction, which has provided investors an upside of 15% to our target price of RM5.40, we revise our rating from “add” to “buy”.

We continue to like the stock, given the attractive dividends, with a net yield of 4.8% to 5.8% in FY15-FY17, subsequent to a slight increase in the payout ratio from 50% to 60% (which was announced during the last results quarter). Management is more proactive and will continue to focus on achieving near-term strategic priorities, such as a 30% non-interest income ratio.

Malaysia Airports Holdings Bhd
Target price: RM10.55 BUY
HONG LEONG INVESTMENT BANK (June 16): MAHB released weak statistics for May, showing passenger movement growth of only 2.1% y-o-y, owing to the impact of the MH370 crisis and kidnappings in Sabah, capacity rationalisation (especially on domestic routes) and high base effect (strong traffic during the election in May 2013). Nevertheless, year-to-date passenger growth remained strong at 13.5% y-o-y versus HLIB’s forecasted +12.8% y-o-y for FY14.

KLIA experienced a decrease of -11% on China sector routes alone (about 10% of the overall passenger movement) after the MH370 and kidnapping of Chinese incidents. We believe MAS as the main airline operator in KLIA’s main terminal building (-3.2% y-o-y in May) severely affected MAHB.

Since mid-May, local airlines — MAS, AirAsia Group (including AirAsia X) and Malindo — have been aggressive in their marketing campaigns to fill up increasing flight capacity. Hence, we expect a recovery in June-July (impact normalisation) and MAHB remains the major beneficiary.

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