Brokers' Digest: Local Equities

-A +A

REDtone International Bhd
Target price: 77 sen MARKET PERFORM

KENANGA RESEARCH (Oct 1): REDtone announced that its external auditors have expressed a qualified opinion in their report concerning a debt owing by a third party that stood at RM15.6 million for FY14. REDtone’s board are of the opinion that the amounts are recoverable and accordingly, no impairment has been made in the financial statements.
While management strongly believes the amounts are recoverable despite being long outstanding, the news could have some negative consequences for the share price in the near term.
We understand that the group had earlier targeted to apply for a transfer to the Main Board following the release of its FY14 audited account. Nevertheless, in view of the above qualified opinion made by the external auditor, we expect some hiccups in the process. We believe REDtone’s businesses are not expected to see any material impact should the group fail to transfer its listing status.

Sime Darby Bhd
Fair value: RM11.20 BUY

AMINVESTMENT RESEARCH (Oct 1): Sime Darby has aborted its plan to acquire a 49% stake in New Britain Palm Oil Ltd (NBPOL) from Kulim (M) Bhd after holding exclusive talks with the latter. We believe the stumbling blocks could be the pricing and questions over Sime Darby’s ability to exert control over NBPOL, which is now largely independently managed apart from Kulim. We are neutral on this latest development.
At the current price of £4.175 per share, NBPOL is trading at a PER of 16 times the consensus FY14F EPS of £0.26 per share. At a premium of 30% to 50% over the current price (£5.40 to £6.30 per share), NBPOL would be valued at 21 times and 24 times its FY14F EPS — which is on the steep side. This would have translated into a purchase price of RM4.3 billion to RM5 billion for Sime Darby to assume full control of NBPOL. Nonetheless, we believe the long-term prospects remain intact, and the stock will benefit from any upticks in the crude palm oil price.

Petra Energy Bhd
Target price: RM3.02 NEUTRAL

RHB RESEARCH (Oct 1): Recall that Petra Energy had been awarded a five-year RM2.5 billion hook-up, construction and commissioning (HuCC) and topside major maintenance (TMM) contract from Petronas Carigali Sdn Bhd, from May 2013 to May 2018. The HuCC part of the contract has seen activities slowly ramping up while the TMM portion has now been activated — earlier than the expected February 2016 start date. We estimate that 11% of the total value of the complete contract will be registered in FY14. As the TMM portion of the contract is on a “call-out” basis, and given the slow ramping up of activities in the HuCC part, we believe our backloaded earnings for the contract is justified.
Petra Energy was awarded a risk service contract by Petronas to operate the Kapal, Banang, and Meranti (KBM) cluster in partnership with Coastal Energy Ltd. We believe with the early start to the TMM portion of the contract and the successful operation of the KBM cluster, Petra Energy has done well to turn itself around.

VS Industry Bhd
Target price: RM2.92 BUY

RHB RESEARCH (Oct 1): VSI’s FY14 earnings of RM53.6 million exceeded our and consensus estimates. Its exceptional performance was achieved on the back of better earnings from its Malaysian operation and tax incentives for its exported coffee machines.
Although its turnover in Malaysia grew just 5.7% y-o-y, its PBT surged 78.7% y-o-y on the back of an improved sales mix, particularly contribution from the higher-margin coffee machines.
A 3.5 sen third interim dividend was declared, which will be followed by a final dividend of 3.5 sen at a later date, bringing the total FY14 gross dividend per share to 11.7 sen. In view of the better-than-expected FY14 earnings, we raise our earnings forecasts for FY15 by 60% on contributions from the sale of existing coffee machine models, contribution from the sale of a new coffee machine model by 4QFY15, and remaining tax incentives of RM15 million that will be utilised in FY15.

Gamuda Bhd
Fair value: RM5.40 BUY

AMINVESTMENT RESEARCH (Sept 30): Gamuda’s core FY14 net profit rose 9% y-o-y on higher construction and property earnings. The work progress for KVMRT Line 1 under the MMC-Gamuda joint venture has reached 52% and 35% for the tunnelling and project delivery partner (PDP) components respectively. Core property earnings surged 19% y-o-y on the strong pre-sales trajectory in the last two financial years and stable margins. New property sales fell 55% y-o-y to RM300 million in 4Q, nudging total new sales upwards by 3% to RM1.8 billion.
Gamuda has been reshaping its landbank by acquiring strategic township land during the current lull. More landbanking moves are possible within a year — about RM1.3 billion has been set aside in search of more land, including in Penang. Gamuda’s track record as the PDP for KVMRT1 puts it in good stead to bid for a similar role under the Penang government’s transport master plan, which could be awarded by mid-2015. The recent change in Selangor’s menteri besar could bring renewed hopes of resolving the protracted water impasse for SPLASH.

Coastal Contracts Bhd
Target price: RM5.94 OUTPERFORM

KENANGA RESEARCH (Sept 29): Coastal announced that it has secured the sale of seven offshore support vessels (OSVs) worth a cumulative RM444 million. All these vessels are expected to be delivered in FY14 and FY15. We are positive on this contract as it shows that Coastal is able to secure contract wins in a consistent manner. This current sale award brings its cumulative FY14 vessel sales to RM802 million and shipping order book to RM1.4 billion.
This contract comes within our assumed RM1.2 billion shipbuilding order replenishment. The shipbuilding division is currently riding the cyclical upward trend. Although net margins have normalised to between 15% and 25% from FY12 onwards, the shipbuilding industry is still considered lucrative. Coastal’s maiden jack-up rig is due for delivery by end-2H14. There have been no contracts awarded as yet, but these assets will spearhead the company’s move into asset-ownership model versus the previous build-and-sell model. The long-term earnings of Coastal’s jack-up rig compression unit will kick-start in FY15.

UMW Oil & Gas Corp Bhd
Target price: RM5.18 ADD

CIMB INVESTMENT RESEARCH (Sept 29): The management of UMW-OG took delivery of the US$217 million Naga 6 at a Shenzhen yard recently. The jack-up will be mobilised to Vietnam on Sept 30 to service a 250-day, US$46.5 million contract from PetroVietnam, with PC Vietnam Ltd and Petronas Carigali Sdn Bhd as end-clients. Work will begin in mid-October.
We are also encouraged by Naga 6’s daily charter rate of US$150,000 to US$160,000, after deducting mobilisation costs, as it is higher than the current market average of US$140,000 to US$150,000. All of UMW-OG’s jack-ups are contracted, except Naga 8, the construction of which is expected to be completed in September 2015.
UMW-OG’s only other jack-up that is still at the yard is Naga 7, which will start servicing a 120-day, US$20 million contract from Frontier Oil Ltd in the Philippines in January 2015. It aims to venture beyond Southeast Asia in FY15 and targets the Middle East as a potential key market.

Genting Malaysia Bhd
Target price: RM5.15 BUY

MAYBANK INVESTMENT BANK RESEARCH (Sept 29): The poor 2Q14 Ebitda of RM460.4 million was due to low VIP win rates at Resorts World Genting (RWG) and Genting UK (GENUK). We estimate that 2Q14 group Ebitda would have been about RM665 million or 45% higher on normalised VIP win rates at RWG and GENUK. Therefore, we believe investors should not be overly concerned.
We are increasingly convinced that GENM will win a prized upstate New York commercial casino licence as it is offering the highest amount of investment into the project, highest amount of licensing fees and/or tax rates and highest number of jobs and salaries. Despite committing to investing more and paying more licensing fees, we estimate that an upstate New York licence will accrete at least a net 47 sen per share.
Winners will be announced by November at the latest. In the unlikely event that GENM does not win a single licence, our base case SOP-based target price of RM4.70 still offers a 13% upside.

Hiap Teck Venture Bhd
Target price: 92 sen BUY

AFFIN HWANG CAPITAL (Sept 29): Hiap Teck’s 4Q14 revenue grew 3.7% y-o-y, underpinned by its trading division. Volume from its trading business grew 12.6% y-o-y but was offset by lower average selling prices on stiff competition. Contribution from its manufacturing business fell slightly, also due to price competition.
Despite the revenue growth, the group’s pre-tax profit was down 43% y-o-y on the back of pricing pressure. Ebitda margin fell 1.6 percentage points y-o-y to 2%.
We expect international prices to remain under pressure on the back of a moderating global economic growth. However, we believe the impact will be partially cushioned as we expect domestic demand for steel products to remain buoyant on the back of existing and upcoming construction and infrastructure projects. Maintain “buy” with an unchanged target price of 92 sen, still based on 12 times CY15 PER.

Sasbadi Holdings Bhd
Target price: RM2.25 BUY

ALLIANCE DBS RESEARCH (Sept 29): Sasbadi’s proceeds from its initial public offering puts it in a prime position to embark on earnings-accretive mergers and acquisitions in the fragmented educational publishing industry. In addition, there is a huge potential in the untapped educational services market, in particular hands-on learning centres that foster creative thinking and innovation, where Sasbadi could be the missing piece of the puzzle in Malaysia’s education industry.
We forecast Sasbadi’s FY15 to FY17 core profit after tax will expand at a three-year CAGR of 22%, underpinned by earnings accretive M&As. Valuation is undemanding at 11 times, 9 times and 7 times FY15 to FY17 EPS, while yields are attractive at 5% to 7%.
We initiate coverage of Sasbadi with a high-conviction “buy”. Our target price implies 16 times FY15 EPS, and suggests a total return of 55% from the last close of RM1.50.

Cypark Resources Bhd
Target price: RM3.09 ADD

CIMB INVESTMENT RESEARCH (Sept 30): Revenue in 3Q14 increased 24% y-o-y to RM66.6 million, driven by growth in its landscaping, infrastructure and construction division, which almost tripled y-o-y to RM13.1 million during the quarter. Its renewable energy (RE) division continued to post strong growth, expanding 56% y-o-y during the quarter and implying more sales of electricity to the grid.
Cypark’s Ladang Tanah Merah concession is expected to start soon. The concession period is for 25 years, during which Cypark will open, maintain and close the landfill in Negeri Sembilan. The waste will also act as feedstock for the next phase of Cypark’s project, which is to generate electricity using biogas or biomass. The electricity generated will then be sold to Tenaga Nasional Bhd.
We continue to be positive about Cypark’s RE prospects, underpinned by the country’s RE aspirations. Given Cypark’s position as the only major RE developer, we believe it is in a prime position to capitalise on any new RE projects.

Kuala Lumpur Kepong Bhd
Target price: RM21.40 HOLD

UOB KAY HIAN RESEARCH (Sept 30): Management is expecting crude palm oil price to pick up to about RM2,250 to RM2,300 per tonne in the coming months after the peak production season. Biodiesel demand plays an important role in supporting the CPO price. At the current crude oil price, the wide gap between the CPO price and crude oil price has led to more demand for biodiesel.
The refining margin in Indonesia has since normalised, and it is now feeling the margin pressure that Malaysia is experiencing. KLK has two refineries in commission in Indonesia with a total capacity of 3,000 tonnes per day. Back in February, KLK entered into a joint venture with UEM Sunrise Bhd to develop two projects in Iskandar Malaysia. Management is expecting contribution from these two projects to come in in two to three years’ time and this would be a focus for KLK going forward, in addition to its Bandar Seri Coalfields township development. We are expecting its property division to contribute 5% to FY14’s total Ebit.

This article first appeared in The Edge Malaysia Weekly, on October 6-12, 2014.