Broker's Digest: Local Equities

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Target price: RM1.05 HOLD
ALLIANCEDBS RESEARCH (Aug 26): Eversendai secured a RM113 million contract to renovate Khalifa Olympic Stadium in Qatar. Its job scope includes the re-engineering and dismantling of the existing light arch and ancillary steel structures.

Eversendai’s YTD order book replenishment stands at RM1.1 billion, compared with our full-year assumption of RM1.2 billion. Its order book balance is now at RM1.7 billion, which implies a comfortable cover of 1.7 times FY13 revenue. Some of the jobs it is eyeing are structural steel works for the Refinery and Petrochemical Integrated Development, and oil and gas structures as part of its new business segment ventures.

While Eversendai’s strong order book replenishment this year prompted an earnings upgrade, we are keeping our earnings estimates pending the release of its quarterly results. There is downside risk from continued variation orders in 2Q for its jobs in Qatar and India. Our target price is intact at RM1.05, and assumes 10 times FY14 earnings and mark-to-market value for its 21% stake in Technics Oil & Gas Ltd.

Favelle Favco Bhd
Target price: RM3.81 BUY
MIDF RESEARCH (Aug 26): Favelle Favco’s 2Q14 earnings surged to RM26.4 million, registering a growth of more than 100% y-o-y. Cumulative 6M14 earnings of RM38.4 million came in within expectations, accounting for 56% and 53% of ours and consensus full-year forecasts.

This is its best quarterly earnings performance since it was listed in 2006. As at Aug 20, the group’s outstanding order book stands at an all-time high of RM1.02 billion, the majority of which consists of oil and gas cranes for the offshore oil and gas exploration and production activities. The remainder is from the shipyard, construction and wind turbine industries.

We upgrade Favelle Favco to “buy” from “neutral”, with an unchanged target price of RM3.81 per share. This is based on FY15 EPS of 34.6 sen, which is pegged at 11 times earnings. The earnings multiple is conservative and at a discount to our house’s small to mid-cap oil and gas service providers’ target earnings of 14 times.

IOI Properties Group Bhd
Target price: RM2.80 OUTPERFORM
KENANGA RESEARCH (Aug 26): IOI Properties’ FY14 core earnings of RM479 million are broadly within expectations, at 106% of our estimates, but fell slightly short of street estimates at 93%. We reckon that the market may have overestimated billings or development margins.

The group has declared an interim single-tier dividend of eight sen, which is a positive surprise. It works out to a payout ratio of 53% based on our core earnings computations, or 28% of reported profit after tax. The implied yield of 3.4% is on par with the average yield of sizeable developers.

Among the sizeable developers, IOI Properties’ stock is one of the biggest laggards. The stock suffered from earnings disappointments vis-à-vis street’s estimates in previous quarters and has seen selling pressure at below its reference price of RM2.51. We believe earnings expectations are at more manageable levels given their high township exposure. We believe investors will re-look the stock given its maiden dividends, while prospects of a firm dividend policy will re-rate the stock further.

MY EG Services Bhd
Target price: RM3.47 ADD
CIMB RESEARCH (Aug 25): MyEG’s FY14 revenue was up 43.7% y-o-y (net profit growth of 43.6%), driven by sales growth in its existing and new services such as foreign workers permit renewal. MyEG’s revenue would have been higher if the nationwide voluntary vehicle transfer service operations had started in March instead of July. The total dividends declared in FY14 were 2.5 sen, which translates into a 30% net dividend payout ratio.

MyEG is waiting for the government’s final approval of its new concession terms proposal for the Custom Service Tax Monitoring System (CSTM) project.
We also understand that MyEG has started a pilot study for the road diagnostic system project. The kit, which will be installed in commercial buses, will track indicators such as the condition of the vehicle/driver and driving patterns. If all goes well, this government-led project could be fully implemented in 2015.

Suria Capital Holdings Bhd
Target price: RM3.50 BUY
RHB RESEARCH (Aug 26): Suria Capital’s RM30.9 million 1H14 net profit (+10.9% y-o-y) came in within our and street estimates, meeting 47% of our full-year forecast. The numbers in 1H14 were mainly lifted by the strong 1Q but slowed down in 2Q due to higher operating expenses.

For its ports, total tonnage handled decreased 1% y-o-y in 1H on lower palm oil throughput. For containers, there was a 10% y-o-y increase in the total 20-foot equivalent unit (TEU) in the current quarter and a 15% y-o-y rise in 1H14, mainly attributed to the higher transhipment volume.

Logistics and bunkering improved y-o-y, reporting a profit instead of a loss, mainly on an increase in fuel volume. Ferry terminal operations’ top line improved as more revenue was generated from ferry transport and cruise ship passenger fees, retail space rental and an indoor soccer centre. Our fair value of RM3.50 implies 14 times FY15 earnings, which we deem fair given its property joint venture. The port sector’s average earnings multiple is 14 times.

UMW Oil & Gas Corp Bhd
Target price: RM5.15 BUY
MAYBANK IB RESEARCH (Aug 26): UMWOG’s 2Q14 core net profit of RM57 million (+7% q-o-q) took 1H14 core earnings to RM110 million, accounting for 38% of our initial full-year forecasts. While 2Q core net profit grew 7% q-o-q, we deem the results to be moderately below our expectation, with performance impaired by lower utilisation of Naga 3, which underwent 23 days of repair works in May.

We lower FY14 earnings forecast by 8% to account for lower utilisation of the Naga 3 (-10% due to repair works) and Naga 5 rigs (-17% due to mobilisation to Myanmar for its next contract). We now expect Naga 3 and Naga 5 to operate 330 days and 150 days respectively, down from 365 days and 180 days each.

We expect a stronger 2H14 compared with 1H14 on account of higher utilisation of Naga 5, maiden contribution from
Naga 6, and full utilisation from Naga 3 following its repair works. Overall, we continue to like UMWOG for its direct exposure to the jack-up drilling space regionally.

AMMB Holdings Bhd
Target price: RM7.60 NEUTRAL
MIDF RESEARCH (Aug 25): The group reported a 1QFY15 net profit of RM536.9 million, mainly due to the recognition of a divestment gain — net gain of RM208 million — from the sale of shares in AmLife and AmFamily Takaful to MetLife.

This was lower than our earlier estimated gain of RM530 million, mainly due to the deduction of costs and other direct expenses (RM87 million), restructuring and investment expenses (RM101 million), and provision for contingency and risk (RM81 million). Stripping out all exceptional items in 1QFY15, net profit was RM329 million after minority interest. Profit after tax and minority interest accounted for 17.1% of our estimated earnings for FY15.

The group’s strategy to focus on growing more mortgage loans and wholesale banking loans, which are of higher credit quality, will result in a narrower margin as these loans generally command lower lending rates. Our revised target price of RM7.60 (from RM8 previously) implies a return on equity of 13.4% compared with 14% previously.

Felda Global Ventures Holdings Bhd
Target price: RM3.97 HOLD
MAYBANK IB RESEARCH (Aug 26): FGV’s 1H14 core net profit of RM256 million (+28% y-o-y) met 37% and 35% of our and consensus full-year estimates. The poorer-than-expected results were largely due to its weak 1H14 fresh fruit bunch (FFB) output of 2.372 million metric tons (mt) (-3.5% y-o-y), and relatively high all-in cost of production per tonne of crude palm oil (CPO) of RM2,112/mt (-2% y-o-y).

Due to the dry weather, which affected its plantation estates in Peninsular Malaysia, FGV now guides for a 3% y-o-y decline in 2014 FFB output (previously +4.5% y-o-y versus our assumption of +6.8%).

We cut our 2014 EPS forecasts by 39% premised on a 3% y-o-y decline in FFB output, and lower 2014 CPO average selling price assumption of RM2,500/tonne (previously RM2,600/tonne), given the recent correction in spot CPO price. We also cut our 2015/16 FFB output forecasts by 4.5% and 2.3% respectively. We lower our SOP-based target price to RM3.97 (from RM4.48) following revised assumptions. Given limited upside, the stock remains a “hold”.

SapuraKencana Petroleum Bhd
Target price: RM5.55 BUY
ALLIANCEDBS RESEARCH (Aug 25): It was reported in The Edge that SapuraKencana Petroleum (SAKP) made a massive gas discovery in its SK408 production sharing contract. This comes shortly after a 1.5 trillion cu ft (tcf) find was made at four wells in June. The new find reportedly has more than 1tcf of gas in a single well.

The news on the gas discovery bodes well for SAKP given that the oil reserves of its upstream assets are declining. We highlight that it could be three to five years before the gas production commences. Therefore, there is no immediate impact on earnings.

SAKP is trading at an attractive 15 times FY15 earnings multiple compared with large-cap peers, which average at above 20 times. The outlook for the group continues to be bright with an order book in excess of RM25 billion, providing excellent earnings visibility. We expect exciting times ahead for the group with the maiden RM4.2 billion Petrobras contract kick-starting this quarter and healthy earnings from upstream production.

Malaysian Resources Corp Bhd
Target price: RM2.48 OUTPERFORM
KENANGA RESEARCH (Aug 25): For 1H14, MRCB registered core earnings (continuing operations) of RM29.1 million, accounting for 58% and 44% of our and consensus full-year estimate of RM49.6 million and RM65.7 million respectively. Our estimates are lower than consensus as we anticipate higher depreciation for 2H14 due to the commencement of toll collections in the Eastern Dispersal Link highway.

MRCB saw its 1H14 earnings soar substantially by 164% y-o-y while revenue only improved 18%. The significant growth in earnings was mainly driven by the sale of the Duta-Ulu Kelang Expressway whereby MRCB registered gains of RM94.9 million. Its property division’s operating profit of RM65.8 million saw huge improvements (+49%) in 1H14 underpinned by strong revenue growth (+62%).

We continue to maintain our long-term “outperform” call on MRCB as its long-term prospects in property development remain intact.

AirAsia Bhd
Target price: RM2.88 ADD
CIMB RESEARCH (Aug 25): AirAsia did poorly in 1H14 due to excessive new aircraft deliveries and the delayed fleet sale plan, but it is taking action and the surplus fleet will be reduced in 2H14, potentially leading to better results.

Up to eight of AirAsia’s 80 planes were idle in 1H14, due to the fast pace of Airbus deliveries, delays in starting operations in India, and preparation for disposal. This caused poor earnings since these planes did not generate any revenue but depreciation and interest expense continued to be charged. One sale was ultimately concluded on Aug 7 and three more planes may be sold. The remaining four planes will be reactivated in 3Q14 and finally generate some revenue.

Profitability will improve in 4Q14, stretching into 1Q15, even though 3Q will not see the full benefits of these moves. If Malaysia Airlines cuts capacity and helps restore industry yields to sensible levels, it could add a second powerful tailwind to AirAsia’s profits over the next two quarters.

Wah Seong Corp Bhd
Fair value: RM2.40 BUY
RHB RESEARCH (Aug 26): Wah Seong’s 1H14 core profit of RM66 million quadrupled from that in 1H13. The key takeaway from the 1H14 review was the rise in group pre-tax profit margins to 10% compared with 3% in 1H13, and revenue growth of 31% y-o-y. Oil and gas (O&G) revenue doubled on continuing execution of the two major pipe-coating projects such as the North Malay Basin, which was completed in 2Q, and the Polarled project (at 35% completion).

Wah Seong’s outstanding order book now stands at RM1.5 billion while its O&G tender book is RM3.5 billion (group level: RM5 billion). Management said RM500 million worth of O&G and engineering contracts over 20 projects were secured YTD, or nearly 60% of our FY14 order book assumptions.

Our fair value of RM2.40 is supported by a two-year forward earnings CAGR of 74% and is in line with small to mid-cap O&G valuations. We like Wah Seong for its scarcity premium on its pipe-coating capabilities. However, inadequate order book replenishment remains a risk.

This story first appeared in The Edge weekly edition of Sept 01-07, 2014.