Brokers Digest: Local Equities

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FELDA Global Ventures Holdings Bhd
Target price: RM4 MARKET PERFORM
KENANGA RESEARCH (Sept 2): Felda Global Ventures Holdings (FGV) proposed to acquire Asian Plantations Ltd (APL) for £120 million (RM628 million) cash. We are neutral on the news of the proposal. Effective valuation works out to be around RM25,500 per hectare, which we think is fair as it is near to the landbank valuation there. Additionally, APL owns a 60-tonne per hour palm oil mill.

On the positive side, FGV’s landbank should increase 7% to 380,526ha from 355,864ha currently. However, we gather that APL made a loss of US$10.4 million (RM33.1 million) in FY13, possibly due to its young estate profile, with only 32% matured so far. Hence, we expect earnings contribution to come in only from FY16E onwards as more trees mature.

Recall that in the recent results announcement, management believes that the market conditions and crude palm oil price are challenges facing the plantation industry, and FGV’s performance is likely to be affected accordingly.  

Mah Sing Group Bhd
Target price: RM2.58 HOLD
UOB KAY HIAN RESEARCH (Sept 2): Mah Sing’s 1H14 results were in line with expectations. Net profit came in at RM168.8 million, representing 50% of our 2014 estimate. In 1H14, the group clinched a commendable RM1.55 billion in property sales, lifting unbilled sales to RM4.8 billion and ensuring earnings visibility over the next three to four years. In 2Q14, Mah Sing registered about RM781 million in property sales, driven mostly by Southville City @ KL South in Bangi, Icon City in Petaling Jaya and The Meridin @ Medini. Sales were achieved on the back of successful launches of RM2.2 billion worth of projects, which saw a cumulative take-up rate of 71%. 

We downgrade the stock to “hold” with a target price of RM2.58, which is based on a 30% discount to RNAV and implies nine times 2015 forecast earnings. We believe Mah Sing’s focus on township developments will ensure decent take-ups and smooth earnings delivery.

Muhibbah Engineering (M) Bhd
Target price: RM3.22 NEUTRAL
RHB RESEARCH (Sept 3): Muhibbah has been awarded the job to construct, fabricate and install a new aromatics chemical complex as well as facilities for the Lemongrass project in Kuantan by BASF Petronas Chemicals, a joint venture by BASF SE and Petronas Chemicals. We are positive about this as it indicates the company’s contract wins are trickling in. We estimate this contract raised Muhibbah’s outstanding order book to RM1.8 billion. This is still less than one times its FY13 revenue. We note that Muhibbah’s current tender book stands at RM7 billion, with half of the bids made up by the Refinery and Petrochemical Integrated Development (RAPID) project. We have only assumed contract wins of about RM100 million from the RAPID project in FY14. We keep our earnings forecasts at this juncture as the contract value is within our FY14 and FY15 estimates.

As a holder of a fabrication licence from Petronas, we believe the company will be a major beneficiary of the RAPID jobs and offshore fabrication projects.

SapuraKencana Petroleum Bhd
Target price: RM7 ADD
CIMB RESEARCH (Sept 3): SapuraKencana’s exploration and production (E&P) unit has made another gas find — its biggest — capping a successful five-well exploration campaign at SK408. Separately, the company added three new offshore construction and subsea services (OCSS) contracts worth RM392 million, taking its order book to RM28.2 billion.

We welcome both announcements, although we flagged them in earlier notes. The latest gas discovery came less than three months after SapuraKencana made four gas discoveries in SK408, bringing the total gas discovered to more than three trillion cubic feet. We expect the first gas from all five discoveries to come through in no earlier than 1QFY18, potentially providing significantly longer earnings visibility.

SapuraKencana remains our top pick among the oil and gas big caps. We advise investors to accumulate the stock as SapuraKencana offers solid order book and earnings visibility, supported by its E&P venture and two long-term contracts in Brazil as well as various OCSS and drilling contracts.

CIMB Group Holdings Bhd
Target price: RM7.40 HOLD
ALLIANCEDBS RESEARCH (Sept 2): CIMB Group’s 1HFY14 net profit of RM2.02 billion is 43% of our FY14 estimate. Second-quarter earnings fell 11% q-o-q due to lower non-interest income (-21%) and higher provisions (+21%). The softer non-interest income was led by weak treasury and markets due to low volatility, and weak investment banking (IB) activity due to low equities volume and deals as well as higher cost base. Net interest margin ticked up q-o-q, but fell y-o-y. Although expenses were flat q-o-q, cost-to-income ratio rose to 59% on weaker revenue.

Group pre-tax profit was dragged by CIMB Niaga, but operations in Singapore and Thailand continued to grow steadily while Malaysia’s was flat. Loan growth was flat due to weak corporate loans. Deposits grew 2.5% q-o-q, led by wholesale deposits. Furthermore, the Indonesian market will remain challenging in 2HFY14.

Although management expects the IB, treasury and market businesses to pick up, they remain as wild cards.

Harbour-Link Group Bhd
Target price: RM2.20 OUTPERFORM
KENANGA RESEARCH (Sept 2): Harbour-Link recorded a core net profit of RM11.9 million in 4QFY14, bringing FY14 core earnings to RM32.7 million. It is slightly above our expectation at 107.9% of full-year forecast due to higher-than-expected net margins achieved (actual 7.1% versus forecast 6.6%), coupled with slightly higher-than-expected top line growth.

The group’s maiden property project in Bintulu, with an estimated total gross development value (GDV) of RM1 billion, is an industrial and commercial development. Response to Phase 1 (GDV: RM120 million) has been encouraging, with 60% take-up and 40% completion rates. However, strong earnings growth is only expected in FY16 as the group plans to recognise property earnings on a completion basis.

The outlook for Harbour-Link’s engineering division remains bright, with the current order book standing at RM120 million and tender book at RM1 billion. The group also intends to bid for tank terminal works in Petronas’ Refinery and Petrochemical Integrated Development project in Johor.

This story first appeared in The Edge weekly edition of Sept 08-14, 2014.