Brokers' Digest: Local Equities

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ASTRO Malaysia Holdings Bhd
Target price: RM3.75 NEUTRAL
MIDF RESEARCH (Sept 22): Astro’s earnings for 2QFY15 ended July 31, 2014, grew 39.3% y-o-y to RM137.8 million. On a cumulative basis, the 1HFY15 earnings amounted to RM266.1 million, an increase of 25% y-o-y, which makes up 48.8% of our full-year estimate. The growth was mainly due to the double-digit improvement in the top line and better profit margin.
The group’s 1HFY15 revenue grew 12.5% y-o-y to RM2.6 billion, driven mainly by higher contribution from the television and radio segments. Higher subscription revenue was led by higher ARPU (average revenue per user) of RM98 from RM94.90 in 1HFY14. Concurrently, its subscriber base expanded by 126,800 to 3.5 million. Meanwhile, the improvement in advertising revenue was due to the festive seasons and the World Cup.
The improvement in revenue from the radio segment was led by price adjustments and inventory strategies. Its share of radio advertising expenditure improved slightly to 56% from 55% in 1HFY14. Cumulatively, Astro declared a dividend of 4.5 sen, 45% of our full-year forecast of 10 sen.

Berjaya Sports Toto Bhd
Target price: RM3.95 HOLD
MAYBANK IB RESEARCH (Sept 22): BST’s 1QFY1/15 core net profit of RM78.4 million was below expectations at 21% of our full-year estimate and 20% of consensus. The earnings shortfall was due to the higher-than-expected estimated prize payout ratio of 61%. Dividend per share of 5.5 sen for 1QFY4/15 was within expectations at 26% of our full-year estimate.
While we expect the prize payout ratio to normalise in the long run, we noted that Sports Toto Malaysia’s (STM) revenue for 1QFY1/15 fell 8% y-o-y. This was due to still-poor consumer sentiment. With the spectre of continuous government subsidy rationalisation, we do not expect STM’s sales to recover strongly in the near future.
We leave our earnings estimates unchanged for now. We still see no compelling reason to buy BST yet. There is uncertainty on how the GST will be applied to NFOs (number forecast operators). We estimate that if BST were to absorb the GST, it will lower earnings by 10% to 12% per annum. Maintain “hold” and a target price of RM3.95.

Sunway Bhd
Target price: RM3.90 BUY
RHB RESEARCH (Sept 22): Sunway plans to list its construction and precast business unit, and the listing vehicle will be named Sunway Construction Group Bhd (SCG). Upon listing, Sunway will retain at least a 51% stake in the company. The new SCG shares will be distributed through dividend-in-specie to Sunway’s shareholders, based on an entitlement of one SCG share for every 10 Sunway shares held.
Assuming a 13 times PER on estimated profit after tax and minority interests of RM120 million, SCG could be worth RM1.56 billion, which translates into RM1.21 per share. As management emphasised that the allocation of proceeds for working capital purpose is limited and gearing for SCG will be minimal, about 35% of the proceeds will be paid out as special cash dividend. This works out to about 25 sen to 30 sen per share.
Sunway, our top pick for the sector, has a strategic business structure that allows it to unlock asset values from time to time, which benefits the shareholders over the long term.

British American Tobacco (M) Bhd
Target price: RM67.15 HOLD
ALLIANCE DBS RESEARCH (Sept 23): BAT announced that the price of all its cigarette brands will revert to pre-hike levels effective Sept 22. To recap, the tobacco leader raised prices by RM1 per pack on Sept 8 to mitigate rising operating costs due to inflationary pressure.
We were surprised by this move because it is so close to the Budget 2015 report, which could include a hike in cigarette excise duty and lead to higher costs for BAT. The management said the rationale for reversing its pricing decision was to ensure the group remains competitive. We suspect this dramatic move is in response to competitor Philip Morris’ decision to maintain selling prices after BAT and JT International Bhd hiked prices in the past two weeks.
Nevertheless, this decision will not affect our earnings projection as BAT will manage the higher costs through its internal efficiency improvement programme. Our target price implies 20 times PER and 5% yield for each of FY14 and FY15.

Uzma Bhd
Target price: RM4.68 ADD
CIMB RESEARCH (Sept 22): The Edge reported that Uzma CEO Datuk Kamarul Redzuan expects the group to sustain an annual revenue growth rate of at least 40% for the next three years. He plans to expand its drilling and well services (DWS) division significantly, in particular, and use most of the proceeds from its recent rights issue to grow this segment.
Given its deep knowledge of the reserves of domestic marginal oilfields, having been hired by Petronas to conduct studies on these oilfields, we are confident that it will be able to undertake the Tanjung Baram risk service contract successfully and will not be surprised if it gets more RSC awards due to its capability.
MMSVS Group Holding Co Ltd complements Uzma’s DWS division, giving it the largest fleet of hydraulic workover units in Asean and allowing it to have a complete value chain for well services, while Premier Enterprise Corp (M) Sdn Bhd complements its existing chemical services, expanding its domestic market share to more than 50%.

Carlsberg Brewery Malaysia Bhd
Target price: RM12.21 MARKET PERFORM
KENANGA RESEARCH (Sept 24): Carlsberg received two bills of demand from the Selangor state director of Royal Malaysia Customs on Sept 19. The demands include excise duty amounting to RM35.7 million, sales tax amounting to RM13.8 million and penalty amounting to RM6.9 million for the period of July 1, 2011 to Jan 14, 2014.
The group does not admit liability and will seek the advice of its legal and taxation team before making a decision.
We were taken by surprise by the bills of demand that amounted to RM56.4 million over a period of 30 months. The claims would drag down FY14E net profit of RM192.7 million by 30% if Carlsberg recognises the full amount of the excise duty and sales tax.
We leave our earnings forecast unchanged pending further development of the dispute. Maintain our RM12.21 target price, based on 18.5 times FY15E PER, on par with its three-year mean PER. Upside is limited but the 5% dividend yield is expected to support the share price.

Berjaya Auto Bhd
Target price: RM4.44 ADD
CIMB RESEARCH (Sept 22): Armed with a new technology and a line of exciting models, BAuto has grown the Mazda brand, becoming the fastest growing auto company in Malaysia in the last few years. With new models, more localisation and its entry into the Philippines, growth is set to accelerate.
Its sales volume growth in Malaysia has been outstanding, recording a FY09 to FY14 five-year CAGR of 60.7%. Its venture into the Philippines has also been successful, with Mazda’s sales volume jumping 60% y-o-y in FY13. We forecast BAuto’s three-year FY14 to FY17 net earnings CAGR to be sustained at 27.2%, on the back of a 24.9% CAGR on revenue over the same period.
We initiate our coverage on BAuto with a target price of RM4.44 per share, based on 14 times earnings, attaching a 10% premium over the average PER of its industry peers. We believe this is more than justified given that BAuto offers a much higher growth trajectory compared with the rest of its peers for the next few years.

Gamuda Bhd
Target price: RM5.30 BUY
MAYBANK IB RESEARCH (Sept 23): Management is still awaiting the government’s formal go-ahead for the KVMRT Line 2 project while preliminary works have started. Major contract awards are still targeted to start in 1H2016, while the first full-year earnings contribution to Gamuda would be in FY17. The estimated construction value is still RM25 billion, comprising RM10 billion for the underground portion and RM15 billion for the elevated portion.
Elsewhere, RM300 million worth of property sales have been locked in in 4QFY14, which brought sales to RM1.8 billion, slightly short of its internal target of RM1.9 billion. The RM2 billion sales target for FY15, comprising RM1.65 billion domestic and RM350 million in Vietnam, will likely be revised down due to cooling measures in Malaysia.
Management is still positive the SPLASH impasse will be resolved with the federal government’s intervention. This offers hope that the eventual takeover price could be better than initially expected.
We maintain our earnings forecasts. Foreign shareholding has stabilised at 29% at end-August 2014 versus 39% at end-December 2013.

Hong Leong Bank Bhd
Target price: RM14.74 BUY
ALLIANCE DBS RESEARCH (Sept 23): Credit card and loan-related fees remain HLB’s core recurring non-interest income. Treasury/trading and forex fees comprise close to 25% of non-interest income. Watch the wealth management space as HLB has started to build traction, especially after establishing a regional wealth management and private banking platform in Singapore, which will gain prominence.
HLB has tagged the small medium enterprise (SME) segment as a key growth driver, in addition to wealth management and Islamic banking. We understand HLB has a large pool of underserved small SME clients that it can leverage on. This segment will be a focus in FY15.
Post the acquisition of EON Capital Bhd, we believe HLB is now realigning its business strategies. Hence, it should now start to show a stronger set of earnings with wealth management and SME business as key drivers. Our target price of RM14.74 implies two times CY15 book value, which is justified by the sustainable 15% return on equity trend.

Kulim (M) Bhd
Target price: RM3.70 TRADING BUY
MIDF RESEARCH (Sept 22): In July, Kulim intends to sell its entire 9% stake in New Britain Palm Oil (NBPO) to Sime Darby Bhd. At this juncture, the proposed sale is still in the discussion stage. If the sale of its entire NBPO stake goes through, we expect Kulim’s cash pile to increase by more than six times. As at December 2013, Kulim’s cash position was at RM377 million.
We believe part of the proceeds from the NBPO sale will be utilised to finance the development of the newly acquired 40,645ha greenfield plantation land in Central Kalimantan, Indonesia. Kulim targets to plant 400ha by year-end. The remainder of the cash is expected to be distributed as a special dividend.
As a precedent, recall that Kulim announced a special dividend payout of 90.94 sen in 2012 pursuant to the disposal of its food and beverage businesses. Apart from the expectation of a special dividend distribution, we also believe the divestment of NBPO will help Kulim improve its gearing ratio.

Matrix Concepts Holdings Bhd
Target price: RM3.48 OUTPERFORM
KENANGA RESEARCH (Sept 22): On Sept 19, Matrix announced that it will be acquiring a 164-acre industrial parcel in Seremban adjacent to Bandar Sri Sendayan for RM71.5 million.
The land has a potential gross development value of RM170 million. We believe the new acquisition would be sold on a developable land basis based on RM31.70 per sq ft on a net land basis, equivalent to 75% of gross land. We believe there would be ready buyers given that Matrix’s industrial land is highly sought after due to the infrastructure in Sendayan TechValley and its close proximity to the Greater Klang Valley and KLIA.
We believe Matrix will be able to sustain similar 2Q14 performance in subsequent quarters given that billings for some of its projects have already picked up pace. Its unbilled sales of RM434.7 million would also provide at least one-year visibility for the group. Hence, we are maintaining our FY14E and FY15E earnings of RM167.2 million and RM190.2 million respectively, underpinned by strong billings and sales take-up rates.

OCK Group Bhd
Target price: RM1.65 BUY
RHB RESEARCH (Sept 24): Domestically, despite some delays, management is hopeful of the Malaysian Communications and Multimedia Commission awarding the first phase of the TIME 3 extension in the coming weeks. OCK remains upbeat about venturing into Myanmar, and indicated that discussions are showing progress. Besides that, OCK’s transfer to the Main Board is on track and will likely take place in November.
Management said OCK is making progress in discussions with a local partner to set up a joint-venture telecommunication tower business in Myanmar. We believe having local knowledge may help OCK mitigate the risk of a lack of infrastructure as well as political risk.
We maintain our “buy” call on OCK with an unchanged target price of RM1.65 based on a target FY15 earnings multiple of 18.5 times. We like OCK for its strong growth prospects, diversification into less developed foreign markets, growing recurring revenue base, and above-industry average return on equity.

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