Local Equities

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BRITISH American Tobacco (M) Bhd
Target price: RM63.80 REDUCE
CIMB INVESTMENT BANK (Sept 9): Effective Sept 8, British American Tobacco’s (BAT) cigarettes will cost RM1 more; to RM13 per pack of premium cigarettes and RM11.50 per pack of value-for-money (VFM) sticks. While this steep hike will result in a substantial drop in sales volume in the immediate term, we believe there will still be a net positive impact on BAT’s FY15 earnings if the sales volume does not fall more than 16% to 17%.

We raise our FY14 to FY16 earnings forecasts by 3% to 12% to factor in the 3% to 8% sales volume drop from our existing forecast and a slight increase in operating cost. While this increases our DDM (dividend discount model)-based target price, we keep our “reduce” call as the earnings lift is insufficient to justify a ratings upgrade to a “hold”.

We maintain our view that legal volume is expected to be weak and price increases are not a long-term solution to grow earnings. Dividend yields are not attractive enough to compensate investors for the higher risk taken.

Berjaya Auto Bhd
Fair value: RM3.70 BUY
AMRESEARCH (Sept  9): We re-affirm our “buy” call on Berjaya Auto with a higher fair value of RM3.70 per share versus RM3.10 per share previously.

BAuto’s 1Q15 beat expectations. The group reported a core net profit of RM59 million, accounting for 33% and 32% of our and consensus estimates respectively. We raise our FY14F/FY15F/FY16F earnings by 14%/22%/9% respectively to factor in higher margins from better free-on-board pricing and sales mix, Japanese yen rates at RM3.12 to RM3.13 compared with RM3.18 previously, higher IAF (industrial adjustment fund) for the CKD (completely knocked down) CX5, and better-than-expected volume and margins at Berjaya Auto Philippines.

Berjaya Auto Philippines’ earnings grew 22% q-o-q, driven by strong demand for Mazda 2 and Mazda 3. Margins are set to improve given the incentives from Mazda Japan of around US$500 per car, on top of more competitive CBU (completely built up) pricing. The sales network of 14 outlets will increase by three to five outlets by end-FY15F to capitalise on strong underlying demand. Management’s volume target is raised to 3,500 from 3,200 previously (FY15F).

Dutch Lady Milk Industries Bhd
Target price: RM44.22 UNDERPERFORM
KENANGA RESEARCH (Sept 9): For its 2Q14 results, management stressed that the operating cost was lifted by high raw material prices, which was amplified by the stronger US dollar against the ringgit. As a result, gross margin saw a decline of 4 ppt to 33.1% from 37.1% in 2Q13, which dragged gross profit down 4.3% y-o-y to RM88.8 million (from RM92.7 million) despite a top line growth of 7.4%. Management said the growth was driven by higher sales volume and increase in selling prices in January 2014.

We revisit our earnings model and impute the latest round of price increases into our earnings forecast. As a result, net profits for FY14E and FY15E were nudged higher by 2.9% and 4.4% respectively. Post-earnings revisions, FY14E EPS still represents a negative growth of 18.7% while FY15 EPS is forecasted to grow 13.9%. While the price increases are positive for earnings growth, we do not think that the growth can be healthily supported by volume growth in view of the weak consumer spending.

KKB Engineering Bhd
Fair value: RM2.78 TRADING BUY
RHB RESEARCH INSTITUTE (Sept 9): KKB Engineering’s associate’s first oil and gas contract win suggests that more lucrative O&G fabrication work may be forthcoming should this contract be executed well. However, the RM14.5 million contract is still below our FY14 target, and KKB faces the risk of an earnings cut if its near-term results remain disappointing. That said, we changed KKB to a “trading buy” and raised its fair value to RM2.78 (from RM2.38) as the momentous contract win may boost market sentiment.

Last Monday, KKB told Bursa Malaysia that its subsidiary OceanMight Sdn Bhd had received a letter of award from 2H Offshore Engineering Sdn Bhd for the provision of fabrication, hook-up and commissioning services for the Tanjong Baram Wellhead Platform. Although only worth RM14.5 million, we think is KKB’s critical breakthrough into the O&G industry.

We revised upward our target PER to 14 times (from 12 times) of FY15 estimates, which is at the lower end of its O&G peers’ PER range of 14 times to 25 times.

Mah Sing Group Bhd
Target price: RM2.90 BUY
HONG LEONG INVESTMENT BANK (Sept 9): Mah Sing Group intends to brand its RM9.3 billion Puchong project, situated behind IOI Mall, as Manhattan Puchong, where people can live, work and play within a fully integrated development. We understand the Subang Jaya Municipal Council plans to widen the existing dual carriageways and build new interchanges to enable effective traffic dispersal. The site is located close to four LRT stations.

Mah Sing is also highly confident of securing the 170-acre MOU land, which would bring its Puchong landbank up to 250 acres, surpassing IOI Properties Group Bhd (90 to 100 acres) and Glomac Bhd (200 acres). We view this positively as the MOU land could boost our RNAV estimate by a further 9.3% to RM3.96. We also learnt that Mah Sing was able to secure the generous deferred payment terms from the Puchong landowner, thanks to its track record of quick turnaround time and sales generation.

Eversendai Corp Bhd
Target price: 98 sen HOLD
MAYBANK IB RESEARCH (Sept 9): Eversendai Corp has secured mechanical and steel structure packages contract worth RM72 million for Petronas’ Terengganu Gas Terminal Project — Phase 2. Eversendai’s scope of work includes supply and installation of steel structures as well as fabrication and erection of piping and mechanical equipment. The job is scheduled to commence in 3Q14 and be completed in April 2016.

Including the related-party liftboat jobs and this recent win, new YTD wins now total RM1.1 billion. This is higher than the amount it has secured in the past two years (FY12: RM924 million, FY13: RM669 million) and will provide earnings clarity for FY15 to FY16. Its total outstanding order book stands at RM1.7 billion presently. Assuming a 10% net margin for this recent win, we forecast net profit contribution of RM1 million to RM4 million per annum from FY14 to FY16. Although the new wins YTD have exceeded our expectation of RM1 billion for FY14, we are keeping our earnings forecast unchanged due to its recent weak margins.

Genting Malaysia Bhd
Target price: RM4.41 HOLD
KENANGA RESEARCH (Sept 9): Last Monday, Genting Malaysia announced that its wholly-owned unit GENM Capital Bhd had received approval from the Securities Commission Malaysia (SC) for the establishment of a medium-term note programme (MTN) with an aggregate nominal value of RM5 billion.

This does not come as a surprise, given that its current net cash of RM3.32 billion (as at June 2014) is insufficient for the RM5 billion 10-year refurbishment programme under the Genting Integrated Tourism Plan (GITP). This will transform Genting Malaysia’s financial position from net cash to net debt of RM1.68 billion or net gearing of 0.11 times based on June 2014 figures. 
We are not concerned as it has a strong operating cash flow of RM2 billion and above. The GITP programme will turn the highland resort into a family leisure resort.

GHL Systems Bhd
Target price: RM1.60 ADD
CIMB INVESTMENT BANK (Sept 9): GHL Systems is entering an exciting growth phase with its merchant acquisition strategy following the completion of the e-pay integration. We like its strong regional presence to capitalise on the growing transition to e-payment solutions across Asean.

We initiate coverage on GHL Systems with an “add” call and RM1.60 target price, based on 23.8 times CY16 PER, about 40% premium to the payment sector PER of 17 times, in view of its strong earnings EPS CAGR of 75.2% in FY13 to FY16 and attractive PER growth of 0.48 times. This provides investors with 54% upside.

Another growth driver for GHL is the Malaysian government-led initiative to create an integrated payment system within the Financial Services National Key Economic Area. The government is planning to reduce total cash transactions from over 90% to 63% by 2020. To encourage non-cash transactions, Bank Negara Malaysia plans to have 1.3 million point-of-sale terminals by 2020 from just over 230,000 now. GHL should benefit from the estimated 10-fold surge in e-payment transactions.  

Pantech Group Holdings Bhd
Fair value: RM1.25 BUY
RHB RESEARCH INSTITUTE (Sept 9): We upgrade Pantech to “buy” from “neutral” with an unchanged fair value of RM1.25. The recent selldown in its share price makes the shares more attractive, at a reasonably low PER and attractive dividend yield.

We continue to like Pantech for its solid business model and believe that the RAPID project should continue to serve as an immediate catalyst to spur its earnings, with potential M&As as its inorganic growth drivers. We think Pantech is ready to benefit from the upcoming RAPID project, notably in the area of pipes, fittings and flanges. Through our channel checks, the RAPID project is progressing and more activities shall be seen in the immediate to medium term. Pantech is also focusing on expanding its footprint into the international oil and gas (O&G) segment through the network from Nautic Steel. We believe there may be some inorganic growth through M&As, as that is the fastest way to grow. Pantech has been actively looking for the right candidate to match its successful investment in Nautic Steel.

Press Metal Bhd
Target price: RM8.87 TRADING BUY
KENANGA RESEARCH (Sept 9): We hold a bullish view on aluminium prices, premised on the increasing popularity of aluminium in the auto industry as an alternative to steel, growing demand in emerging markets, and declining global production rates. Thus, we expect aluminium prices to increase to an average US$1,900/tonne (+3%) in FY14E and US$2,100/tonne (+11%) in FY15E. Based on our sensitivity analysis, every US$100/tonne increase in aluminium prices could directly translate into a 5% increase in Press Metal’s bottom line.

On top of margin expansion, we also expect superior revenue growth of 25% to RM3.9 billion in FY14E on additional capacity expansion. Press Metal has continued to ramp up production at the Samalaju plant by 33% to its full rated capacity of 320,000 tonnes/year of aluminium production. As for FY15E, we expect revenue growth of 16% to RM4.5 billion, driven mainly by rising aluminium prices and a shift towards value-add alloyed aluminium products, which command a 15% to 20% price premium above the market price of aluminium.

Tasco Bhd
Target price: RM3.90 BUY
RHB RESEARCH INSTITUTE (Sept 9): We visited Tasco recently and gauged that its business volume has been growing in tandem with the regional economic growth. The company reported strong earnings growth of 74% y-o-y in 1QFY15 of RM10 million, which came in above our expectations. Its 1QFY15 strong numbers were partly due to an urgent shipment from a client in the air freight division, and business from new customers in its warehousing division.

Tasco’s new high-specification warehouse in Shah Alam is currently fully utilised. The earnings boost of RM12.3 million (RM4.9 million previously) from its contract logistics in the 1QFY15 was attributed to new clients secured, which should further increase earnings over the ensuing quarters. Its new clients have a high inventory turnover business model.

Tasco’s earnings have benefitted from the strong trade numbers in 1H2014. Downside risks that could squeeze margins are the government’s subsidy rationalisation scheme and the implementation of the Goods and Services Tax next April.

UMW Oil & Gas Corp Bhd
Target price: RM5.15 BUY
MAYBANK IB RESEARCH (Sept 9): UMW Oil & Gas has secured a drilling charter from PetroVietnam to deploy its Naga 6 jack-up (JU) rig off the coast of Vietnam. The contract valued at US$46.5 million is for 250 drilling days on four firm wells and will commence operations in early October. Following that, it has two extensions: (i) three optional wells (55 days) and (ii) three wells (277 days).

Strictly based on the contract, this translates into a daily charter rate (DCR) of US$186,000. However, we understand that the firm contract includes mobilisation fees and withholding tax elements. As such, the net DCR should range from US$160,000 to US$170,000, which is comparable to the prevailing short-term charter rates in the region.

With the successful delivery of Naga 6, all of UMW Oil & Gas’ rigs are now fully contracted, except for Naga 8, which will only be ready by 3Q15. Similarly, we expect Naga 8 to be easily chartered out at decent DCR. UMW Oil & Gas’ tender pipeline is strong with over 25 ongoing bids.

This story first appeared in The Edge weekly edition of Sept 15-21, 2014.