Brokers' Digest

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IOI Corp Bhd (March 25, RM3.96)NEUTRAL: We met up with IOI for an update on operations, and were told that all divisions have been facing macro headwinds and earnings contraction. Capital expenditure has been scaled back by nearly 20% to RM400 million to preserve cash. At core FY6/2009E PER of 14 times (excluding RM343 million impairment charges), we believe most of the negative news has been priced in. We maintain a “neutral” rating on the stock, with a target price of RM4.

IOI’s plantation profit should remain intact as more than 70% of its FY2009 production has been sold forward at RM2,800 per tonne. The new planting target for its Indonesian expansion stays at 10,000ha per annum and will contribute meaningfully in five years. It has been reported that IOI expects crude palm oil (CPO) prices to average RM2,000 per tonne in 2009.

The appointment of new CFO Rupert Khoo and the cancellation of the purchase of Menara Citibank signal an improvement in management quality, which had been a cause for concern. We will turn more positive when IOI’s share price falls below RM3.50, implying a CPO price of RM1,700 per tonne, as we expect prices to stay at RM1,700 to 1,900 per tonne in 2Q-3Q2009 before rebounding in 4Q2009. — Merrill Lynch (March 20) TM International Bhd (March 25, RM2.29)HOLD: TMI announced that it would raise RM5.25 billion via a five-for-four rights issue of 4.7 billion new shares at RM1.12 each to pare down debts. This 125% dilution is worse than expected. Following the 15% drop in its share price since the announcement, the rights issue is at a whopping 51% discount (versus the expected 30% or 40%) to the benchmark price of RM2.28. TMI’s share base would expand by 125% to 8.4 billion shares.

The RM5.25 billion cash raised would lower TMI’s interest expenses by RM300 million a year. On half-year impact, FY12/2009F net profit could improve by 12% while TMI’s net gearing would fall from 93% to 35% and net debt/Ebitda would drop to 1.3 times from 2.5 times. However, with its weak overseas operations seeking funding, there remains a risk that TMI may gear up again to finance those units.

We lowered our sum-of-parts price target for TMI to RM2.70 (RM1.80 ex-rights price) on the back of lower valuation for Celcom. We maintain our “hold” call on TMI. On ex-right basis, TMI is trading at 14 times FY2009F EPS, at a premium to regional mobile operator. SingTel is trading at 12 times CY2009F EPS despite its better fundamentals. — HwangDBS (March 25)PLUS Expressways Bhd (March 25, RM2.95)BUY: In its monthly filing with the stock exchange, PLUS said traffic volume at its North-South Expressway, North Klang Valley Expressway, Federal Highway Route 2 and Seremban-Port Dickson Highway contracted 11.3% in February 2009 from a year ago. On the other hand, traffic at Elite (North-South Expressway Central Link) and Linkedua (Malaysia-Singapore Second Crossing) recorded 4.8% and 5.8% growth respectively. However, traffic at the Kulim-Butterworth Expressway contracted 8%.

The drop in traffic was not surprising due to the higher base last year. This was because Chinese New Year fell in January this year. In January this year, PLUS saw 15.5% y-o-y growth in traffic. Year to date, traffic growth is up 1.4%. We expect it to contract 2% this year.

We maintain our “buy” recommendation on the stock. Investors can expect a minimum net yield of 16 sen a year or a net yield of 5.4% over the next three years. Near-term catalysts include better-than-expected traffic volume, further government assurance on toll compensation and a takeover offer, if extended, by the government. — Citigroup (March 24)MISC Bhd (March 25, RM8.50)UNDERPERFORM: MISC’s chemical shipping business is likely to experience more downward rate pressure in the near term from its spot exposure and may incur a full-year loss for the second year running. However, the company may be cushioned by its strong position in palm oil trading, where fundamentals are superior to the trades in general chemical and soyabean oil. A sharp decline in bunker price will help reverse the cost-driven pressure on profitability. Therefore, we think MISC may be able to narrow its chemical division’s loss in the coming financial year. 

We are tweaking our PER-based sum-of-parts target price to RM6.40 from RM6.60 due to a 9% reduction in FY3/2011 EPS. We have raised our FY2009-2010 forecast by 8% to 16%. These adjustments are due to the reclassification of exchange translation items from the profit and loss statement to the balance sheet. We have lowered its net dividend per share assumptions for FY2009-2010 to 25 sen (from 35 sen) but left FY2011 DPS at 35 sen, based on a 50% to 60% payout. De-rating catalysts include falling petroleum and container shipping rates, though continued growth in its heavy engineering and offshore segments could offset weaknesses elsewhere. — CIMB (March 23) Kencana Petroleum Bhd (March 25, RM1.20)BUY: We maintain our “buy” call on Kencana, with an unchanged fair value of RM1.70 per share, pegged to a CY2009F PER of 11 times. The company’s 1HFY7/2009 net profit of RM60 million was within expectations, accounting for 48% of both our FY2009F earnings of RM127 million and street estimates of RM125 million. Net profit in 1HFY2009 surged 52% y-o-y even though revenue decreased 30% to RM593 million. The stronger bottom line stemmed from a 7% point surge in Ebitda margin to 7% and a 10% point drop in effective tax rate to a normalised 24%.

Kencana’s estimated order book of RM1.4 billion as at end-January 2009 is the same as our FY2009F’s revenue. This does not include the recent five-year rig charter contract between Petronas Carigali Sdn Bhd and Kencana Mermaid Drilling, which is 25%-owned by Kencana. The group’s first tender-assisted rig is scheduled for completion by October this year. 

The stock currently trades at a bargain CY2009F’s diluted PER of eight times. We believe it should trade at a premium to industry’s CY2009 PER of seven times, given Kencana’s strategic positioning, which will benefit from the offshore fabrication up cycle in Malaysia and the region. — AmResearch (March 25) Malayan Banking Bhd (March 25, RM4.26)NEUTRAL: We believe there are still headwinds facing Maybank, especially potential goodwill impairment charges. Its 1HFY2009 results have not yet reflected the impact of the recent cut in interest rates by the central bank. We expect to see a rise in non-performing loans domestically as well as regionally. However, asset-quality deterioration is expected to rise in 2H2009, given the lag in impact from the downturn.

Management has indicated there could be impairment charges arising from its regional acquisitions. In 1HFY2009, Maybank took a RM242 million charge for its associate in Pakistan. We anticipate more such charges. There could also be a significant goodwill impairment charge for its Indonesian subsidiary. However, management indicates that it does not expect to incur a loss for FY6/2009. We have raised FY6/2009F net profit by 19% on lower loan loss provisions, although the underlying profit has been lowered by 9%, with a 12-month target price of RM4.63 based on a price-to-book value methodology. We maintain our “neutral” call on Maybank. — Macquarie Research (March 24)

This article appeared in The Edge Malaysia, Issue 748, March 30-April 5, 2009