Inet Research
1. 3Q2011 Results Highlight / Review
- 3Q11 results were 10% ahead of our full-year projections on an annualised basis but we are
maintaining our forecasts in light of the uncertain stock market and economic environment, which may affect 4Q11.
- 3Q11 revenue improved by 13% YoY, largely reflecting stronger performances at the investment banking (IB) and loan & financing divisions. PBT declined by 12% YoY due to lower IB margins and higher financing costs.
- Assuming a Dec 2012 PER of 17x suggests a price target of RM2.00/share (implied PBR of 1.2x to Dec 2012). We continue to like the group’s growth potential both locally and regionally, and believe that a potential merger with RHB Capital would be positive. BUY recommendation maintained.
2. Key Investment Risks
Key investment risks for the stock include:
a) Volatile stockmarket, economic and political conditions, which would affect the group’s investment banking and financial services operations, both locally and overseas;
b) Unfavourable foreign exchange movements, which would affect the translation of foreign currency denominated revenues and earnings from Singapore, China & HK, Indonesia, and Cambodia;
c) Changes in government policies domestically and in countries where the group has operations, which may affect the competitive landscape and in turn impact margins and market share;
d) Intense competition for skilled and professional personnel in the financial services industries, which
may affect the group’s operating results.
3. Recent Developments
On 29 Sep 2011, the group submitted an application letter to BNM to seek an approval in principle to
commence negotiations with RHB Capital (RHBC) for a possible merger of businesses between OSK
investment banking (OSKIB) group and RHB banking group. On 13 Oct 2011, BNM stated that it has no
objection in principle for OSKIB to commence negotiations with RHBC for the possible merger of businesses.
The approval to commence negotiations is valid for a period of three months.
On 15 Nov 2011, RHBC managing director, Kellee Kam was quoted in The Star as saying that the merger
discussions between RHBC and OSKIB were going well and that both parties were hoping to come to an
agreement by mid-December.
The merger is expected to create synergies since RHBC’s strength is its exposure to larger capitalised
corporations and institutions whilst OSKIB’s strength lies in its retail broking business as well as the group’s
fast-growing regional investment banking business outside of Malaysia in Indonesia, Thailand, Singapore,
Cambodia and Hong Kong.
The merged entity would also be the largest investment banking group in Malaysia with a combined market
share of 13.7%, overtaking CIMB Securities’ share of 10.5%. Currently, OSKIB is the fourth largest retail
broker in Malaysia with a 6.7% market share, whilst RHBC is the third largest with a market share of 7.0%.
4. Earnings Outlook
For FY2011F, we are projecting relatively flat group revenue and lower net profit due to our assumption of
lower trading volumes and margins in 2H11.
Beyond FY2011F, OSK’s growth prospects are expected to be driven by:
i. Institutional equities, as OSKIB shifts its equities business from being 70% retail-based to a more
balanced 50:50 split between retail and institutional equities within the next three years, focusing on
small to mid-cap stocks in the region;
ii. Corporate finance, with OSKIB’s leadership position for IPOs in the region being #1 by volume in
Malaysia and Singapore and #3 in Indonesia for the year 2009;
iii. Equity capital markets, as OSKIB has one of the largest regional presence among ASEAN
investment banks tapping into a large base of institutional and retail clients across the region;
iv. Treasury, as the relatively new division has high growth potential from a low base via a
diversification of products and leveraging on the group’s regional network to identify new
opportunities;
v. Corporate loans, as the group benefits from growth in investment banking operations via bridging of
funding gaps, and more new branches at the group’s commercial bank in Cambodia;
vi. The inclusion of Thailand’s BSEC from 2012F.
5. Valuation & Recommendation
Assuming a Dec 2012 PER of 17x suggests a price target of RM2.00/share (implied PBR of 1.2x to Dec 2012).
We continue to like the group’s growth potential both locally and regionally, and believe that a potential merger with RHB Capital would be positive. BUY recommendation maintained.
Thursday 24 November 2011
Wednesday 23 November 2011
Maxwell ... Nov11
ZJ Research
Investment Highlights / Summary
• China-based sports shoes OEM and ODM. Located in Jinjiang City, which is dubbed the “Shoes Capital” of the world, Maxwell sells over 11 mln pairs of sports shoes annually. It produces for renowned brands such as Yonex, Mizuno, Fubu, Fila, Diadora, and Hush Puppies, to name a few.
• Design & develop capability differentiates Maxwell from other OEM’s. It develops 1,000 designs p.a. at present and will be increasing to 1,500 designs p.a. going forward. Facility is running at optimal capacity with plans to double in-house production to 16 million over the next two years. Excess demand is currently met by
outsourced contractors.
• Superior profitability. Maxwell generates the highest net profit margin amongst its peers on the local bourse. It registered a historical 4-year revenue and net profit CAGR of 46% and 53% respectively between FY06 and FY10. The Group has no borrowings, with balance sheet backed by NTA/share of 66 sen and net cash/share of 43 sen.
• Risks include potential loss of clients in the absence of long term contracts, quality control issues with its outsourcing and margin erosion from escalating production cost in China.
• Rising consumer spending power in emerging markets will drive Maxwell’s earnings growth forward. We estimate revenue in the next two years to continue expanding at double-digit figures while sustaining net profit margin at the 18%-level.
• Initiate coverage with a Buy recommendation and a fair value of 58 sen, derived by pegging FY11 net profit estimate against 3.5x PER multiple. It also offers attractive net dividend yield of 9.9%. We like Maxwell for its superior profitability track record, earnings growth potential and experienced management. Maxwell is currently trading at an undemanding valuation of 2.1x FY11 PER, which is also below its net cash/share of 43
sen.
OEM and ODM for sports shoes
Maxwell International Holdings Bhd (Maxwell) is an investment holding company incorporated in Malaysia on 3 November 2009, while its only whollyowned subsidiary, Jinjiang Zhenxing Shoes & Plastics Co., Ltd (Zhenxing Shoes) was incorporated in the People’s Republic of China in 1999. The subsidiary is principally involved in the design and manufacturing of sports shoes for the Chinese as well as overseas markets on an Original Equipment Manufacturer (OEM) and Original Design Manufacturer (ODM) basis. It sells in excess of 10 million pairs of sports shoes annually.
Established since1999
Maxwell was listed on the Main Market of Bursa Malaysia on 6 January 2011. The Group’s history dates back to 1999, when founder Madam Li Kwai Chun, through her company Chun Hing Industrial (Hong Kong) Ltd established Zhenxing Shoes to manufacture and sell sports shoes to domestic and overseas customers, which comprise mainly trading houses and brand distributors.
Facility located at Jinjiang City, nicknamed the “Shoes Capital”
Zhenxing Shoes is located in Jinjiang City, Fujian Province, which is dubbed the “Shoes Capital” as the city is renowned as one of the largest shoe manufacturing hubs in the world. Zhenxing Shoes commenced operations in 1999 with only one production line that had an annual production capacity of one million pairs of sports shoes. The business has since grown by leaps and bounds, having expanded from one production line to two in 2000, before adding the third line in 2006 and the fourth line in 2008. With four production lines, the Group currently boasts an annual production capacity of eight million pairs of sports shoes.
Started outsourcing in 2006 to cope with rising demand
In 2006, Zhenxing Shoes also began to outsource some of its production to external contract manufacturers in order to cope with the rising demand. Furthermore, contract manufacturing enables the Group to expand production capability rapidly without incurring heavy capex.
Founders remains hands-on as the Executive Chairman
Today, Madam Li continues to helm the Group in the capacity of the Executive Chairman of Maxwell. A citizen of Hong Kong, she has over 30 years of experience in running businesses across several industries, including footwear, textile as well as arts and crafts. She is aided by Executive Director and CEO, Mr Xie Zhen’an. Mr Xie played an instrumental role in the success of the Group, having been the General Manager of Zhenxing Shoes since inception. The remaining four directors in the 6-member board comprise nonexecutive
directors, of which two are independent directors. We note that the board is well-balanced in that there are three Malaysians (including the two independent directors) in addition to two Chinese national and a Hong Kong citizen.
Substantial shareholders include founder & OSK Technology Ventures
In terms of shareholdings, substantial shareholders in Maxwell are Madam Li and her family with 57.7%-stake, and OSK Technology Ventures Sdn Bhd with 7.2%-interest.
Maxwell, through Zhenxing Shoes, designs and manufactures a variety of sports shoes, including court shoes, running shoes and casual sports shoes for the domestic as well as overseas markets. The Group is an OEM and ODM for various internationally reknowned brands, namely:-
• Brooks,
• Diadora,
• Fila,
• Fubu,
• Hush Puppies,
• Kappa,
• Mizuno,
• Riddell, and
• Yonex.
Customers comprise trading houses and brand distributors
Maxwell’s customers comprise mainly trading houses and brand distributors that are based in China, as it does not usually deal direct with the brand owners. Presently, it has approximately 20 regular customers. These customers in turn export Maxwell’s shoes to overseas markets such as Europe, South and North America, Asia and Africa. We note that the Group’s clientele are quite well spread out, in that majority of customers do not contribute more than 10% to Maxwell’s revenue. We understand Maxwell also exports directly to overseas on a small scale, which is usually less than 10% of its revenue.
Financial Highlights
Maxwell has been chalking up commendable revenue and net profit growth over the last several years. The Group registered a 4-year revenue and net profit Compounded Annual Growth Rate (CAGR) of 46% and 53% respectively between FY06 and FY10. In FY10, it posted a net profit of RM65.1 mln on the back of RM335.9 mln turnover, translating into a net profit margin of 19.4%.
For a manufacturing entity, Maxwell’s profitability is certainly impressive with its double-digit net profit margin. Management explained that its healthy net profit margin is a result of its business practice of accepting only orders which yield a minimum gross margin of 25%. In essence, it works on a “cost plus” business model. Its bargaining power is bolstered by its D&D capability and proven track record of quality products and on-time delivery of orders.
From the historical financials, we note that Maxwell managed to grow its business considerably without sacrificing profit margin, thanks to its “cost plus” model. This is evident in its ability to sustain Gross Profit (GP) margin in excess of 27% despite production volume rising threefold to 11.3 mln pairs between FY06 and FY10. In fact, Maxwell’s GP margin had generally been trending up, rising from 27.2% in FY06 to 29.4% in FY10.
On a per pair basis, the average selling price (ASP) increased steadily from RM18.43 in FY06 to RM29.81 in FY10. Management attributed the rising ASP to increasingly complex shoe designs as well as higher raw materials costs. Meanwhile, average GP (AGP) per pair too, expanded to RM8.75 from RM5.01 during the same period.
Earnings Outlook
The global sporting goods industry is expected to expand in tandem with the projected 3%-4% annual global GDP growth in 2011 and 2012. We believe the growth in spending for sporting goods is weighted towards the emerging markets such as China and other Asian countries, bolstered by the rising consumer income in these economies.
In 2009, the per capital annual spending on footwear in the US was USD173, four times more than its counterpart in China. With the growing affluence of the Chinese consumers and rising brand awareness, Maxwell’s prospects appear to be bright over the next few years. The Group is certainly seizing the
opportunities with its planned expansion in production output and design capabilities in order to drive its earning growth going forward.
We project Maxwell FY11 revenue and net profit to climb 10.5% and 2.7% yo- y to RM371.3 mln and RM66.9 mln respectively, on the assumptions of a 2% increase in sales volume and a 5% hike in ASP. Considering that 1HFY11 net profit is currently at RM27.0 mln, our projection reflects our expectation for
a more robust performance in 2HFY11, which is usually the case. 1H results are historically weaker as there are fewer working days in 1Q due to the Chinese New Year celebrations, while orders in 2H are traditionally stronger as customers place more orders ahead of the year-end festive seasons when consumer spending is higher.
We note that the FY11 net profit included one-off listing expenses amounted to RM2.5 mln which dragged profitability down. For FY12, we forecast net profit at RM74.2 mln (+10.9% y-o-y) on the back of RM408.7 mln turnover (+10.1% y-o-y).
We expect the growth in production output in the next two years to come mostly from outsourced portion as in-house production has reached the optimal level, with new production lines to gradually commence only from 2012 onwards.
Investment Risks
Absence of long term contracts. Maxwell does not have long term contracts with its customers (i.e. the trading houses and brand distributors) and jobs are received via purchase orders from them. We understand that this is a common industry practice and is not specific to Maxwell. Customers therefore, in theory, could switch manufacturer as and when they desire. However, this usually does not happen unless Maxwell fails to deliver quality products on time or is uncompetitive in pricing, as the Group has established good and strong relationships with its customers. At present, approximately half of its business are derived from repeat customers.
Reliance on outsourcing. Outsourcing could be considered as a doubleedged sword. On one hand, it enables Maxwell to scale up productions rapidly to meet demand without heavy capital outlay. On the other hand,
however, there are risks that the Group’s reputation and financial performance may suffer if the external contract manufacturers fail to deliver the orders on time or fail to adhere to the required quality, specifications and designs. Should this happen, the adverse impact could be material considering outsourcing constitutes approximately half Maxwell’s total output.
Nevertheless, management clarified that as there are over 3,000 shoes manufacturers in Jinjiang City and that there is no shortage of good contract manufacturers.
Rising production cost. Prices of some of Maxwell’s raw materials move in tandem with the crude oil price. Raw material costs made up 71% of total cost in FY10, up from 63% in FY06 largely due to the rising crude oil price. The other major component is labor cost, which is also on the uptrend. Labor cost contributed about 11% of total cost in FY10. In mitigation, management explained that it is able to source raw materials at competitive prices due to availability of a large pool of suppliers in Jinjiang City. More importantly, it has
been able to pass the cost increases to customers, as shown in the rising ASP over the years.
Recommendation
We initiate our coverage on Maxwell with a Buy recommendation and a fair value of 58 sen, which translates into a potential share price upside of 61%. We like Maxwell for its superior profitability track record compared to its peers, earnings growth potential, high net cash/share as well as hands-on
and experienced management team.
Maxwell’s current valuation, at prospective FY11 PER of 2.1x, is undemanding and does not reflect its earnings growth potential in our opinion. Furthermore, it also offers very attractive net dividend yield of 9.9%, assuming a 20% payout from net profit as per management guidance. Given management’s active initiatives to enhance investors’ perception and confidence toward the Group, interests in the counter may gradually pick up going forward as it delivers its earnings stream.
Moderating factors include possible profit margin erosion from higher-thanexpected escalation in production cost, muted sales growth arising from worse-than-expected slowdown in the Chinese economy, and reputation damage from quality issues arising from outsourcing. Meanwhile, emergence of more alleged financial irregularities in foreign-listed Chinese firms may also prolong the tepid response by investors.
Investment Highlights / Summary
• China-based sports shoes OEM and ODM. Located in Jinjiang City, which is dubbed the “Shoes Capital” of the world, Maxwell sells over 11 mln pairs of sports shoes annually. It produces for renowned brands such as Yonex, Mizuno, Fubu, Fila, Diadora, and Hush Puppies, to name a few.
• Design & develop capability differentiates Maxwell from other OEM’s. It develops 1,000 designs p.a. at present and will be increasing to 1,500 designs p.a. going forward. Facility is running at optimal capacity with plans to double in-house production to 16 million over the next two years. Excess demand is currently met by
outsourced contractors.
• Superior profitability. Maxwell generates the highest net profit margin amongst its peers on the local bourse. It registered a historical 4-year revenue and net profit CAGR of 46% and 53% respectively between FY06 and FY10. The Group has no borrowings, with balance sheet backed by NTA/share of 66 sen and net cash/share of 43 sen.
• Risks include potential loss of clients in the absence of long term contracts, quality control issues with its outsourcing and margin erosion from escalating production cost in China.
• Rising consumer spending power in emerging markets will drive Maxwell’s earnings growth forward. We estimate revenue in the next two years to continue expanding at double-digit figures while sustaining net profit margin at the 18%-level.
• Initiate coverage with a Buy recommendation and a fair value of 58 sen, derived by pegging FY11 net profit estimate against 3.5x PER multiple. It also offers attractive net dividend yield of 9.9%. We like Maxwell for its superior profitability track record, earnings growth potential and experienced management. Maxwell is currently trading at an undemanding valuation of 2.1x FY11 PER, which is also below its net cash/share of 43
sen.
OEM and ODM for sports shoes
Maxwell International Holdings Bhd (Maxwell) is an investment holding company incorporated in Malaysia on 3 November 2009, while its only whollyowned subsidiary, Jinjiang Zhenxing Shoes & Plastics Co., Ltd (Zhenxing Shoes) was incorporated in the People’s Republic of China in 1999. The subsidiary is principally involved in the design and manufacturing of sports shoes for the Chinese as well as overseas markets on an Original Equipment Manufacturer (OEM) and Original Design Manufacturer (ODM) basis. It sells in excess of 10 million pairs of sports shoes annually.
Established since1999
Maxwell was listed on the Main Market of Bursa Malaysia on 6 January 2011. The Group’s history dates back to 1999, when founder Madam Li Kwai Chun, through her company Chun Hing Industrial (Hong Kong) Ltd established Zhenxing Shoes to manufacture and sell sports shoes to domestic and overseas customers, which comprise mainly trading houses and brand distributors.
Facility located at Jinjiang City, nicknamed the “Shoes Capital”
Zhenxing Shoes is located in Jinjiang City, Fujian Province, which is dubbed the “Shoes Capital” as the city is renowned as one of the largest shoe manufacturing hubs in the world. Zhenxing Shoes commenced operations in 1999 with only one production line that had an annual production capacity of one million pairs of sports shoes. The business has since grown by leaps and bounds, having expanded from one production line to two in 2000, before adding the third line in 2006 and the fourth line in 2008. With four production lines, the Group currently boasts an annual production capacity of eight million pairs of sports shoes.
Started outsourcing in 2006 to cope with rising demand
In 2006, Zhenxing Shoes also began to outsource some of its production to external contract manufacturers in order to cope with the rising demand. Furthermore, contract manufacturing enables the Group to expand production capability rapidly without incurring heavy capex.
Founders remains hands-on as the Executive Chairman
Today, Madam Li continues to helm the Group in the capacity of the Executive Chairman of Maxwell. A citizen of Hong Kong, she has over 30 years of experience in running businesses across several industries, including footwear, textile as well as arts and crafts. She is aided by Executive Director and CEO, Mr Xie Zhen’an. Mr Xie played an instrumental role in the success of the Group, having been the General Manager of Zhenxing Shoes since inception. The remaining four directors in the 6-member board comprise nonexecutive
directors, of which two are independent directors. We note that the board is well-balanced in that there are three Malaysians (including the two independent directors) in addition to two Chinese national and a Hong Kong citizen.
Substantial shareholders include founder & OSK Technology Ventures
In terms of shareholdings, substantial shareholders in Maxwell are Madam Li and her family with 57.7%-stake, and OSK Technology Ventures Sdn Bhd with 7.2%-interest.
Maxwell, through Zhenxing Shoes, designs and manufactures a variety of sports shoes, including court shoes, running shoes and casual sports shoes for the domestic as well as overseas markets. The Group is an OEM and ODM for various internationally reknowned brands, namely:-
• Brooks,
• Diadora,
• Fila,
• Fubu,
• Hush Puppies,
• Kappa,
• Mizuno,
• Riddell, and
• Yonex.
Customers comprise trading houses and brand distributors
Maxwell’s customers comprise mainly trading houses and brand distributors that are based in China, as it does not usually deal direct with the brand owners. Presently, it has approximately 20 regular customers. These customers in turn export Maxwell’s shoes to overseas markets such as Europe, South and North America, Asia and Africa. We note that the Group’s clientele are quite well spread out, in that majority of customers do not contribute more than 10% to Maxwell’s revenue. We understand Maxwell also exports directly to overseas on a small scale, which is usually less than 10% of its revenue.
Financial Highlights
Maxwell has been chalking up commendable revenue and net profit growth over the last several years. The Group registered a 4-year revenue and net profit Compounded Annual Growth Rate (CAGR) of 46% and 53% respectively between FY06 and FY10. In FY10, it posted a net profit of RM65.1 mln on the back of RM335.9 mln turnover, translating into a net profit margin of 19.4%.
For a manufacturing entity, Maxwell’s profitability is certainly impressive with its double-digit net profit margin. Management explained that its healthy net profit margin is a result of its business practice of accepting only orders which yield a minimum gross margin of 25%. In essence, it works on a “cost plus” business model. Its bargaining power is bolstered by its D&D capability and proven track record of quality products and on-time delivery of orders.
From the historical financials, we note that Maxwell managed to grow its business considerably without sacrificing profit margin, thanks to its “cost plus” model. This is evident in its ability to sustain Gross Profit (GP) margin in excess of 27% despite production volume rising threefold to 11.3 mln pairs between FY06 and FY10. In fact, Maxwell’s GP margin had generally been trending up, rising from 27.2% in FY06 to 29.4% in FY10.
On a per pair basis, the average selling price (ASP) increased steadily from RM18.43 in FY06 to RM29.81 in FY10. Management attributed the rising ASP to increasingly complex shoe designs as well as higher raw materials costs. Meanwhile, average GP (AGP) per pair too, expanded to RM8.75 from RM5.01 during the same period.
Earnings Outlook
The global sporting goods industry is expected to expand in tandem with the projected 3%-4% annual global GDP growth in 2011 and 2012. We believe the growth in spending for sporting goods is weighted towards the emerging markets such as China and other Asian countries, bolstered by the rising consumer income in these economies.
In 2009, the per capital annual spending on footwear in the US was USD173, four times more than its counterpart in China. With the growing affluence of the Chinese consumers and rising brand awareness, Maxwell’s prospects appear to be bright over the next few years. The Group is certainly seizing the
opportunities with its planned expansion in production output and design capabilities in order to drive its earning growth going forward.
We project Maxwell FY11 revenue and net profit to climb 10.5% and 2.7% yo- y to RM371.3 mln and RM66.9 mln respectively, on the assumptions of a 2% increase in sales volume and a 5% hike in ASP. Considering that 1HFY11 net profit is currently at RM27.0 mln, our projection reflects our expectation for
a more robust performance in 2HFY11, which is usually the case. 1H results are historically weaker as there are fewer working days in 1Q due to the Chinese New Year celebrations, while orders in 2H are traditionally stronger as customers place more orders ahead of the year-end festive seasons when consumer spending is higher.
We note that the FY11 net profit included one-off listing expenses amounted to RM2.5 mln which dragged profitability down. For FY12, we forecast net profit at RM74.2 mln (+10.9% y-o-y) on the back of RM408.7 mln turnover (+10.1% y-o-y).
We expect the growth in production output in the next two years to come mostly from outsourced portion as in-house production has reached the optimal level, with new production lines to gradually commence only from 2012 onwards.
Investment Risks
Absence of long term contracts. Maxwell does not have long term contracts with its customers (i.e. the trading houses and brand distributors) and jobs are received via purchase orders from them. We understand that this is a common industry practice and is not specific to Maxwell. Customers therefore, in theory, could switch manufacturer as and when they desire. However, this usually does not happen unless Maxwell fails to deliver quality products on time or is uncompetitive in pricing, as the Group has established good and strong relationships with its customers. At present, approximately half of its business are derived from repeat customers.
Reliance on outsourcing. Outsourcing could be considered as a doubleedged sword. On one hand, it enables Maxwell to scale up productions rapidly to meet demand without heavy capital outlay. On the other hand,
however, there are risks that the Group’s reputation and financial performance may suffer if the external contract manufacturers fail to deliver the orders on time or fail to adhere to the required quality, specifications and designs. Should this happen, the adverse impact could be material considering outsourcing constitutes approximately half Maxwell’s total output.
Nevertheless, management clarified that as there are over 3,000 shoes manufacturers in Jinjiang City and that there is no shortage of good contract manufacturers.
Rising production cost. Prices of some of Maxwell’s raw materials move in tandem with the crude oil price. Raw material costs made up 71% of total cost in FY10, up from 63% in FY06 largely due to the rising crude oil price. The other major component is labor cost, which is also on the uptrend. Labor cost contributed about 11% of total cost in FY10. In mitigation, management explained that it is able to source raw materials at competitive prices due to availability of a large pool of suppliers in Jinjiang City. More importantly, it has
been able to pass the cost increases to customers, as shown in the rising ASP over the years.
Recommendation
We initiate our coverage on Maxwell with a Buy recommendation and a fair value of 58 sen, which translates into a potential share price upside of 61%. We like Maxwell for its superior profitability track record compared to its peers, earnings growth potential, high net cash/share as well as hands-on
and experienced management team.
Maxwell’s current valuation, at prospective FY11 PER of 2.1x, is undemanding and does not reflect its earnings growth potential in our opinion. Furthermore, it also offers very attractive net dividend yield of 9.9%, assuming a 20% payout from net profit as per management guidance. Given management’s active initiatives to enhance investors’ perception and confidence toward the Group, interests in the counter may gradually pick up going forward as it delivers its earnings stream.
Moderating factors include possible profit margin erosion from higher-thanexpected escalation in production cost, muted sales growth arising from worse-than-expected slowdown in the Chinese economy, and reputation damage from quality issues arising from outsourcing. Meanwhile, emergence of more alleged financial irregularities in foreign-listed Chinese firms may also prolong the tepid response by investors.
Tuesday 22 November 2011
BPPlas ... Nov11
Inet Research
1. Recent Developments
- BPPlas’ latest 4th cast stretch film line is progressively being shipped and installed with first trial of production expected towards end- Dec 2011. This line is dedicated to cater to rising demand for thin gauge stretch film.
- The full impact of this line will be felt in FY12. Upon full commissioning, the production capacity of stretch film will be increased by about 19% to 51,600 mt from 43,200 mt. With the production capacity of blown lines remaining at 16,800 mt, BPPlas’ total capacity will increase to 68,400 mt from 60,000 mt.
- In addition, BPPlas is also in the midst of constructing a new factory together with sub-station and silos
to streamline its operations. The total capex for FY11 would amount to RM14m. The company does not
plan for capacity increase in FY12. The plan is to increase production efficiency. Hence, its capex for
FY12 should normalise to around RM3m.
- In 1HFY11, its sales volumes grew by 6-8%. However, BPPlas is likely to record lower yoy sales
volume and turnover in 3QFY11 due to the reduced manufacturing activities arising from the impact of
Japan’s tsunami and global economic uncertainty. In FY10, sales to Japan accounted for 16% of group
turnover. However, we expect turnover to stage a recovery in 4QFY11 due to seasonal factor.
- In terms of US$ exposure, export sales, pre-dominantly transacted in US$, accounted for about 65% of
group turnover. There is some form of natural hedging as the purchases of resin and procurement of
machines are also denominated in US$. BPPlas has taken a US$ loan equivalent to RM7.9m, which was
reflected in its balance sheet as at end-2QFY11, to hedge its trade receivables over the short-term.
- Profitability will still be adversely affected by high resin costs which averaged around US$1,400/mt in
3QFY11 as compared with the average of US$1,200 in 3QFY10. Due to the cost pass-through
arrangement with customers on a time lag basis, the rising and high resin prices will continue to exert
pressure on profit margins over the short-term. Over the medium-term, plastic resin prices are expected
to move downwards due to the huge petrochemical capacities that will come on stream from 2011
onwards and new capacities from the Middle East, which have a substantially lower feedstock cost
advantage.
- There is no new update to its venture into rubber plantation in Cambodia. To recap, BPPlas is in the
midst of applying for economic concession rights to 10,000 ha of land in Mondulkiri Province, Cambodia
via Mr. Channarith Saram for a process fee of US$2.8m. Subsequently, BPPlas has signed a LOI with
Kosmo Tropika Sdn. Bhd to establish a joint venture to undertake the business of rubber plantation in
Cambodia upon successful application of its concession rights. We have not factored in any contribution
from this new business.
2. Earnings Outlook
- We have slashed our earnings projection by 10-14% for FY11 and FY12 to factor in the slower demand
and higher resin costs.
- The demand for plastic film products is currently facing some headwinds arising from the slower global
economy. However, the long-term demand of stretch film remains favourable due to demand from a wide
range of industries and substitution advantage against other forms of pallet stabilisation. According to
Applied Market Information Ltd. (AMI), global demand for pallet stretch films is expected to grow by
more than 25% (or 800,000 tonnes) by 2015 from the current global demand of 3.3m tonnes/year, with
Asia leading the charge. About 45% (360,000 tonnes) of the projected increase in demand will be in Asia.
3. Valuation and Recommendation
- We are still maintaining our Buy recommendation for its undemanding valuations. Its net cash position of
RM58.2m already made up of 55% of its market capitalisation. It’s also trading at a 26% discount to its
NTA of RM0.80/share.
- Based on our EPS and dividend forecast of 10.4 sen and 4 sen for FY12, the stock is currently trading at
P/E and dividend yield of 5.7x and 6.8% respectively. We have arrived at a price target of RM0.94 based
on our target P/E of 9x for FY12.
1. Recent Developments
- BPPlas’ latest 4th cast stretch film line is progressively being shipped and installed with first trial of production expected towards end- Dec 2011. This line is dedicated to cater to rising demand for thin gauge stretch film.
- The full impact of this line will be felt in FY12. Upon full commissioning, the production capacity of stretch film will be increased by about 19% to 51,600 mt from 43,200 mt. With the production capacity of blown lines remaining at 16,800 mt, BPPlas’ total capacity will increase to 68,400 mt from 60,000 mt.
- In addition, BPPlas is also in the midst of constructing a new factory together with sub-station and silos
to streamline its operations. The total capex for FY11 would amount to RM14m. The company does not
plan for capacity increase in FY12. The plan is to increase production efficiency. Hence, its capex for
FY12 should normalise to around RM3m.
- In 1HFY11, its sales volumes grew by 6-8%. However, BPPlas is likely to record lower yoy sales
volume and turnover in 3QFY11 due to the reduced manufacturing activities arising from the impact of
Japan’s tsunami and global economic uncertainty. In FY10, sales to Japan accounted for 16% of group
turnover. However, we expect turnover to stage a recovery in 4QFY11 due to seasonal factor.
- In terms of US$ exposure, export sales, pre-dominantly transacted in US$, accounted for about 65% of
group turnover. There is some form of natural hedging as the purchases of resin and procurement of
machines are also denominated in US$. BPPlas has taken a US$ loan equivalent to RM7.9m, which was
reflected in its balance sheet as at end-2QFY11, to hedge its trade receivables over the short-term.
- Profitability will still be adversely affected by high resin costs which averaged around US$1,400/mt in
3QFY11 as compared with the average of US$1,200 in 3QFY10. Due to the cost pass-through
arrangement with customers on a time lag basis, the rising and high resin prices will continue to exert
pressure on profit margins over the short-term. Over the medium-term, plastic resin prices are expected
to move downwards due to the huge petrochemical capacities that will come on stream from 2011
onwards and new capacities from the Middle East, which have a substantially lower feedstock cost
advantage.
- There is no new update to its venture into rubber plantation in Cambodia. To recap, BPPlas is in the
midst of applying for economic concession rights to 10,000 ha of land in Mondulkiri Province, Cambodia
via Mr. Channarith Saram for a process fee of US$2.8m. Subsequently, BPPlas has signed a LOI with
Kosmo Tropika Sdn. Bhd to establish a joint venture to undertake the business of rubber plantation in
Cambodia upon successful application of its concession rights. We have not factored in any contribution
from this new business.
2. Earnings Outlook
- We have slashed our earnings projection by 10-14% for FY11 and FY12 to factor in the slower demand
and higher resin costs.
- The demand for plastic film products is currently facing some headwinds arising from the slower global
economy. However, the long-term demand of stretch film remains favourable due to demand from a wide
range of industries and substitution advantage against other forms of pallet stabilisation. According to
Applied Market Information Ltd. (AMI), global demand for pallet stretch films is expected to grow by
more than 25% (or 800,000 tonnes) by 2015 from the current global demand of 3.3m tonnes/year, with
Asia leading the charge. About 45% (360,000 tonnes) of the projected increase in demand will be in Asia.
3. Valuation and Recommendation
- We are still maintaining our Buy recommendation for its undemanding valuations. Its net cash position of
RM58.2m already made up of 55% of its market capitalisation. It’s also trading at a 26% discount to its
NTA of RM0.80/share.
- Based on our EPS and dividend forecast of 10.4 sen and 4 sen for FY12, the stock is currently trading at
P/E and dividend yield of 5.7x and 6.8% respectively. We have arrived at a price target of RM0.94 based
on our target P/E of 9x for FY12.
Monday 21 November 2011
Malton ... Nov11
Inet Research
1. 1QFY2012 Results Highlight / Review
- Malton’s 1QFY12 results were within our expectations as we are projecting a stronger performance in the coming quarters with the recognition of sales from on-going property development projects (Amaya Maluri, Bukit Rimau shops) and construction & project management contracts coming through.
- Revenue in 1QFY12 increased by 44% YoY whilst profits at the pre-tax and net levels more than doubled, reflecting the recognition of income from on-going projects as well as new projects such as Amaya Maluri at the main property development division. The construction and project management division also
contributed to the better financial performance, due to construction progress of external projects.
- The stock is currently trading at low PE and PB valuations whilst the group’s balance sheet position is strong, with an estimated net cash position of RM44m as at the end of Sep 2011.
- BUY recommendation maintained with an RNAV-based price target of RM1.60/share, which implies a FY12F PE of 9x and PB of 1x, based on our earnings projections.
2. Key Investment Risks
Key investment risks for Malton include:
a) Potential softening of demand in the property market in the event of economic tightening measures
imposed by the government to counter inflationary pressures, which may impact on potential buyers’
affordability; and
b) Inflated raw material input costs for the property development and construction divisions due to
supply constraints and higher prices amid economic uncertainties.
3. Recent Developments
On 10 Nov 2011, Gapadu Harta Sdn Bhd (GHSB), an indirect wholly-owned subsidiary entered into a sale and purchase agreement (SPA) with Ukay Spring Development Sdn Bhd (USDSB) for the acquisition of land
located in Ulu Kelang measuring approximately 56.05 acres for total purchase consideration of RM105m. On
12 Oct 2006, GHSB had entered into a joint venture agreement with USDSB and Mr Liong Kok Wah for the development of the same piece of land.
The SPA is conditional upon USDSB securing the written approval of the State Authority for the sale and
transfer of the Sub-divided Master Land in favour of GHSB within 2 months from the SPA date.
4. Earnings Outlook
Malton’s revenue and profit in FY12F-13F are expected to be supported by total unbilled sales from existing
property development projects of around RM250-300m currently, as well as billings from the RM175m Jaya
Shopping Centre construction project.
In addition to existing projects, new launches in the pipeline include:
o Ukay Springs initial phase, Ampang semi-detached and bungalow houses (GDV of RM120m, targeting launch in end FY2011);
o Nova Saujana serviced apartments (GDV of RM320m, targeting launch in end FY2011);
o Seri Kembangan serviced apartments (GDV of RM180m, targeting launch in end FY2011);
o Sungai Buloh commercial development (GDV of RM500m, targeting launch in early FY2012);
o Bukit Rimau semi-detached and bungalow houses (GDV of RM15m); and
o Cantonment Road, Penang high-end duplex condominiums (GDV of RM50m, targeting launch in
early FY2012).
Due to the many in-house property development projects, Malton’s construction and project management
division is currently not aggressively bidding for new external projects.
5. Valuation & Recommendation
Malton is currently trading at low PE and PB valuations whilst the group’s balance sheet position is strong,
with an estimated net cash position of RM44m as at the end of Sep 2011. We are maintaining our BUY
recommendation with an RNAV-based price target of RM1.60/share, which implies a FY12F PE of 9x and PB of 1x, based on our earnings projections.
1. 1QFY2012 Results Highlight / Review
- Malton’s 1QFY12 results were within our expectations as we are projecting a stronger performance in the coming quarters with the recognition of sales from on-going property development projects (Amaya Maluri, Bukit Rimau shops) and construction & project management contracts coming through.
- Revenue in 1QFY12 increased by 44% YoY whilst profits at the pre-tax and net levels more than doubled, reflecting the recognition of income from on-going projects as well as new projects such as Amaya Maluri at the main property development division. The construction and project management division also
contributed to the better financial performance, due to construction progress of external projects.
- The stock is currently trading at low PE and PB valuations whilst the group’s balance sheet position is strong, with an estimated net cash position of RM44m as at the end of Sep 2011.
- BUY recommendation maintained with an RNAV-based price target of RM1.60/share, which implies a FY12F PE of 9x and PB of 1x, based on our earnings projections.
2. Key Investment Risks
Key investment risks for Malton include:
a) Potential softening of demand in the property market in the event of economic tightening measures
imposed by the government to counter inflationary pressures, which may impact on potential buyers’
affordability; and
b) Inflated raw material input costs for the property development and construction divisions due to
supply constraints and higher prices amid economic uncertainties.
3. Recent Developments
On 10 Nov 2011, Gapadu Harta Sdn Bhd (GHSB), an indirect wholly-owned subsidiary entered into a sale and purchase agreement (SPA) with Ukay Spring Development Sdn Bhd (USDSB) for the acquisition of land
located in Ulu Kelang measuring approximately 56.05 acres for total purchase consideration of RM105m. On
12 Oct 2006, GHSB had entered into a joint venture agreement with USDSB and Mr Liong Kok Wah for the development of the same piece of land.
The SPA is conditional upon USDSB securing the written approval of the State Authority for the sale and
transfer of the Sub-divided Master Land in favour of GHSB within 2 months from the SPA date.
4. Earnings Outlook
Malton’s revenue and profit in FY12F-13F are expected to be supported by total unbilled sales from existing
property development projects of around RM250-300m currently, as well as billings from the RM175m Jaya
Shopping Centre construction project.
In addition to existing projects, new launches in the pipeline include:
o Ukay Springs initial phase, Ampang semi-detached and bungalow houses (GDV of RM120m, targeting launch in end FY2011);
o Nova Saujana serviced apartments (GDV of RM320m, targeting launch in end FY2011);
o Seri Kembangan serviced apartments (GDV of RM180m, targeting launch in end FY2011);
o Sungai Buloh commercial development (GDV of RM500m, targeting launch in early FY2012);
o Bukit Rimau semi-detached and bungalow houses (GDV of RM15m); and
o Cantonment Road, Penang high-end duplex condominiums (GDV of RM50m, targeting launch in
early FY2012).
Due to the many in-house property development projects, Malton’s construction and project management
division is currently not aggressively bidding for new external projects.
5. Valuation & Recommendation
Malton is currently trading at low PE and PB valuations whilst the group’s balance sheet position is strong,
with an estimated net cash position of RM44m as at the end of Sep 2011. We are maintaining our BUY
recommendation with an RNAV-based price target of RM1.60/share, which implies a FY12F PE of 9x and PB of 1x, based on our earnings projections.
Friday 18 November 2011
Century ... Nov11
Mercury Security Research Report
Century’s 9M/FY11 results (9-month period ended 30th September 2011) were roughly within our earlier expectations.
“Results were within expectations”
For 3Q/FY11 ended 30th September 2011, group revenue of RM79.4 million was better by 11.0% y-o-y. Group 3Q/FY11 NPATMI (net profit after tax and minority interest) of RM9.0 million was also better by 11.0% y-o-y. The improved performance was mainly due to the increased business activities from Total Logistics Services particularly from new contract logistics customers.
During 9M/FY11, the group recorded revenue and NPATMI of RM220.5 million and RM24.1 million, respectively. This was better by 6.7% and 8.6% versus 9M/FY10. This was mainly due to the increased business activities from a few new contract logistics corporate customers (e.g. Celcom Axiata, F&N Diaries and Midea Scott & English).
OUTLOOK/CORP. UPDATESWe remain optimistic on Century’s overall group performance during its FY11 and FY12 in spite of the global economic situation. The group’s promising Procurement Logistics, Third Party Logistics (3PL) and Oil & Gas (O&G) Logistics business segments are expected to perform reasonably well.
“Concern - external environment”
According to the IMF’s September 2011 World Economic Outlook (WEO), projections indicate that global growth will moderate to about 4% through 2012, from over 5% in 2010. Real GDP in the advanced economies is projected to expand at an anaemic pace of about 1.5% in 2011 and 2% in 2012, helped by a gradual unwinding of the temporary forces that have held back activity during much of the second quarter of 2011.
However, IMF assumes that European policymakers contain the crisis in the euro area periphery, US policymakers strike a judicious balance between support for the economy and medium-term fiscal consolidation, and that volatility in global financial markets does not escalate. Moreover, the removal of monetary accommodation in advanced economies is now expected to pause. Under such a scenario, emerging capacity constraints and policy tightening, much of which has already happened, would lower growth rates in emerging and developing economies to a still very solid pace of about 6% in 2012.
“Domestic growth still holding”
Malaysia had reported a reasonable 2Q/2011 unemployment rate of 3.0% and CPI of 3.4% (September 2011). In early September 2011, Bank Negara Malaysia (BNM) had maintained its accommodative overnight policy rate (OPR) at 3.0%. Meanwhile, Malaysia’s GDP growth in 2Q/2011 amounted to 4.0%, amidst more uncertainty in the developed regions (US, Europe and Japan).
Century’s management continues to take the necessary measures to remain resilient, including focusing on providing value-added logistics solutions as well as maintaining cost efficiencies. The continued expansion of the group’s customer base for its supply chain solutions is encouraging. Century’s solid financial position and low gearing enables the group to maintain consistently strong results as well as embarking on strategic acquisitions to enhance its earnings growth.
The group plans to expand its supply chain solutions offering, and are also focusing on increasing its participation in the O&G logistics activities, including diversification upstream and downstream. In O&G logistics, Century currently provides floating storage and transportation services for international oil trading companies. Century also provides procurement logistics services to various multi-national electrical and electronics customers.
“Vessel acquisition”In October 211, Century’s 51%-owned subsidiary, Century Onsys S/B acquired MT Qaseh (a 7119 Dead Weight Tonnes oil products tanker) for a total cash consideration of USD4.75 million. The vessel was acquired from Pengkalan Megaria S/B, a 100% subsidiary of Export-Import Bank of Malaysia Bhd. This acquisition will enable Century to expand further downstream in its oil and gas logistics activities. Century is confident that together with the expertise of Onsys Energy S/B, the other shareholder in Century Onsys, the group would be able to expand further its logistics services to marine transport. The vessel will be reflagged to Malaysia and is expected to ply the oil transport market within Malaysian waters.
“Minimal impact from Thailand floods”
In recent months, there have been widespread floods in central Thailand. More recently, the large water mass has headed towards the Gulf of Thailand, causing the closure of various highways and industrial parks. In mid-October, the waters reached Ayuttaya, which is situated somewhat north of Bangkok. Century has a distribution centre in Rojana Industrial Park, Ayutthaya, Thailand held under Century Resources (Thailand) Ltd, a 90%-owned subsidiary of Century Logistics S/B, which in turn is a wholly-owned subsidiary of the group. Access to the Rojana Industrial Park was closed for a period of time, probably weeks.
Nevertheless, the impact resulting from the floods is expected to be minimal as Century’s facility consists of an elevated building. The local staffs had prepared precautionary measures including the protection of assets and had also deferred the deliveries of goods and assets from a new corporate customer. The facility’s “Property All Risk” insurance policy that is in place, includes flood coverage as well. As such, no financial losses are expected.
VALUATION/CONCLUSION
“Consistent dividend payout”
Earlier on, Century’s board of directors had declared a single tier interim dividend of 5 sen per share for its FY11. In September 2011, Century had paid out this interim dividend, totalling RM4.02 million. Given Century’s strong earnings performance, we expect Century to maintain its recent dividend payout track record of at least 20% of its annual net profits for its FY11 and FY12.
With an adjusted beta (correlation factor) of 0.38 to the KLCI, Century (-11.8%) has outperformed the KLCI (-3.1%) this year. Market conditions have also been volatile in recent months, impacted by the Arab Spring uprisings, the major Tohoku natural disaster in Japan, debt-ceiling issue in the US and sovereign debt issue in Europe. As Century is not an especially large market-cap stock at the moment, this may put a dampener on its market visibility and trading volume.
“Maintain Buy Call”
Based on our forecast of Century’s FY12 EPS and an estimated P/E of 5.5 times (within its historical range), we set a FY12-end Target Price (TP) of RM2.46. This TP represents an attractive 49.2% upside from its current market price. Our TP for Century reflects a P/BV of just 0.9 times over its FY12F BV/share. The local Transportation Service sector’s average P/E and P/BV is 22.2 times and 1.4 times, respectively.
“Really attractive valuations”
We like Century due to its calculated growth strategy, undemanding P/E and P/BV valuations, and reasonably attractive dividend yield and ROE. With a strong management team, minimal gearing levels, tight cost-control and an efficient operational structure, Century is well poised to have a positive year ahead. The group is largely unaffected by the turmoil and weakness in the US and EU market due to its minimal exposure to those regions. Century is also currently exploring new business opportunities within Asia, particularly in China and Sri Lanka.
Nevertheless, there are possible routine risks to the logistics sector such as slowing global economic growth rates, natural disasters and armed conflicts. As such, we have been prudent and cautious with our forecasts. The sector may also be affected by foreign exchange fluctuations, coupled with volatility in the EU region and the weak GDP growth in the US that could dampen sentiment, demand and hence international trade levels.
Century’s 9M/FY11 results (9-month period ended 30th September 2011) were roughly within our earlier expectations.
“Results were within expectations”
For 3Q/FY11 ended 30th September 2011, group revenue of RM79.4 million was better by 11.0% y-o-y. Group 3Q/FY11 NPATMI (net profit after tax and minority interest) of RM9.0 million was also better by 11.0% y-o-y. The improved performance was mainly due to the increased business activities from Total Logistics Services particularly from new contract logistics customers.
During 9M/FY11, the group recorded revenue and NPATMI of RM220.5 million and RM24.1 million, respectively. This was better by 6.7% and 8.6% versus 9M/FY10. This was mainly due to the increased business activities from a few new contract logistics corporate customers (e.g. Celcom Axiata, F&N Diaries and Midea Scott & English).
OUTLOOK/CORP. UPDATESWe remain optimistic on Century’s overall group performance during its FY11 and FY12 in spite of the global economic situation. The group’s promising Procurement Logistics, Third Party Logistics (3PL) and Oil & Gas (O&G) Logistics business segments are expected to perform reasonably well.
“Concern - external environment”
According to the IMF’s September 2011 World Economic Outlook (WEO), projections indicate that global growth will moderate to about 4% through 2012, from over 5% in 2010. Real GDP in the advanced economies is projected to expand at an anaemic pace of about 1.5% in 2011 and 2% in 2012, helped by a gradual unwinding of the temporary forces that have held back activity during much of the second quarter of 2011.
However, IMF assumes that European policymakers contain the crisis in the euro area periphery, US policymakers strike a judicious balance between support for the economy and medium-term fiscal consolidation, and that volatility in global financial markets does not escalate. Moreover, the removal of monetary accommodation in advanced economies is now expected to pause. Under such a scenario, emerging capacity constraints and policy tightening, much of which has already happened, would lower growth rates in emerging and developing economies to a still very solid pace of about 6% in 2012.
“Domestic growth still holding”
Malaysia had reported a reasonable 2Q/2011 unemployment rate of 3.0% and CPI of 3.4% (September 2011). In early September 2011, Bank Negara Malaysia (BNM) had maintained its accommodative overnight policy rate (OPR) at 3.0%. Meanwhile, Malaysia’s GDP growth in 2Q/2011 amounted to 4.0%, amidst more uncertainty in the developed regions (US, Europe and Japan).
Century’s management continues to take the necessary measures to remain resilient, including focusing on providing value-added logistics solutions as well as maintaining cost efficiencies. The continued expansion of the group’s customer base for its supply chain solutions is encouraging. Century’s solid financial position and low gearing enables the group to maintain consistently strong results as well as embarking on strategic acquisitions to enhance its earnings growth.
The group plans to expand its supply chain solutions offering, and are also focusing on increasing its participation in the O&G logistics activities, including diversification upstream and downstream. In O&G logistics, Century currently provides floating storage and transportation services for international oil trading companies. Century also provides procurement logistics services to various multi-national electrical and electronics customers.
“Vessel acquisition”In October 211, Century’s 51%-owned subsidiary, Century Onsys S/B acquired MT Qaseh (a 7119 Dead Weight Tonnes oil products tanker) for a total cash consideration of USD4.75 million. The vessel was acquired from Pengkalan Megaria S/B, a 100% subsidiary of Export-Import Bank of Malaysia Bhd. This acquisition will enable Century to expand further downstream in its oil and gas logistics activities. Century is confident that together with the expertise of Onsys Energy S/B, the other shareholder in Century Onsys, the group would be able to expand further its logistics services to marine transport. The vessel will be reflagged to Malaysia and is expected to ply the oil transport market within Malaysian waters.
“Minimal impact from Thailand floods”
In recent months, there have been widespread floods in central Thailand. More recently, the large water mass has headed towards the Gulf of Thailand, causing the closure of various highways and industrial parks. In mid-October, the waters reached Ayuttaya, which is situated somewhat north of Bangkok. Century has a distribution centre in Rojana Industrial Park, Ayutthaya, Thailand held under Century Resources (Thailand) Ltd, a 90%-owned subsidiary of Century Logistics S/B, which in turn is a wholly-owned subsidiary of the group. Access to the Rojana Industrial Park was closed for a period of time, probably weeks.
Nevertheless, the impact resulting from the floods is expected to be minimal as Century’s facility consists of an elevated building. The local staffs had prepared precautionary measures including the protection of assets and had also deferred the deliveries of goods and assets from a new corporate customer. The facility’s “Property All Risk” insurance policy that is in place, includes flood coverage as well. As such, no financial losses are expected.
VALUATION/CONCLUSION
“Consistent dividend payout”
Earlier on, Century’s board of directors had declared a single tier interim dividend of 5 sen per share for its FY11. In September 2011, Century had paid out this interim dividend, totalling RM4.02 million. Given Century’s strong earnings performance, we expect Century to maintain its recent dividend payout track record of at least 20% of its annual net profits for its FY11 and FY12.
With an adjusted beta (correlation factor) of 0.38 to the KLCI, Century (-11.8%) has outperformed the KLCI (-3.1%) this year. Market conditions have also been volatile in recent months, impacted by the Arab Spring uprisings, the major Tohoku natural disaster in Japan, debt-ceiling issue in the US and sovereign debt issue in Europe. As Century is not an especially large market-cap stock at the moment, this may put a dampener on its market visibility and trading volume.
“Maintain Buy Call”
Based on our forecast of Century’s FY12 EPS and an estimated P/E of 5.5 times (within its historical range), we set a FY12-end Target Price (TP) of RM2.46. This TP represents an attractive 49.2% upside from its current market price. Our TP for Century reflects a P/BV of just 0.9 times over its FY12F BV/share. The local Transportation Service sector’s average P/E and P/BV is 22.2 times and 1.4 times, respectively.
“Really attractive valuations”
We like Century due to its calculated growth strategy, undemanding P/E and P/BV valuations, and reasonably attractive dividend yield and ROE. With a strong management team, minimal gearing levels, tight cost-control and an efficient operational structure, Century is well poised to have a positive year ahead. The group is largely unaffected by the turmoil and weakness in the US and EU market due to its minimal exposure to those regions. Century is also currently exploring new business opportunities within Asia, particularly in China and Sri Lanka.
Nevertheless, there are possible routine risks to the logistics sector such as slowing global economic growth rates, natural disasters and armed conflicts. As such, we have been prudent and cautious with our forecasts. The sector may also be affected by foreign exchange fluctuations, coupled with volatility in the EU region and the weak GDP growth in the US that could dampen sentiment, demand and hence international trade levels.
Thursday 17 November 2011
PBA ... Nov11
Mercury Securities Research Report
PBA’s 3Q/FY11 results (quarter ended 30th September 2011) were generally in-line with our earlier expectations.
“3Q Results in-line with expectations”
PBA’s 3Q/FY11 revenue of RM59.3 million was higher by 20.8% y-o-y. Group NPAT (net profit after tax) of RM5.8 million was higher by 139.6% y-o-y. The better performance was mainly due to the improved sale of water revenue from trade consumers.
“Strong demand from trade consumers”
However, the group’s 3Q/FY11 revenue had decreased by 8.2% from the preceding 2Q/FY11. The group NPAT had also decreased by 52.4% q-o-q as compared to the preceding 2Q/FY11. This was largely due to the lower levels of revenue from trunk main contributions (TMC).
OUTLOOK/CORP. UPDATES
In tandem with growth in the domestic economy (in GDP terms), we expect that the group’s water revenues would grow as well. Water is a relatively inexpensive expenditure, and we foresee that the demand would grow steadily, especially for trade (commercial / industry) users. Nevertheless, PBA’s management is aware and mindful of both economic conditions and escalating costs.
“Steady domestic demand growth”
Malaysia had reported a reasonable 2Q/2011 unemployment rate of 3.0% and CPI of 3.4% (September 2011). On 11th November 2011, Bank Negara Malaysia (BNM) had maintained its accommodative overnight policy rate (OPR) at 3.0%. Meanwhile, Malaysia’s GDP growth in 2Q/2011 amounted to 4.0%, amidst volatile global financial markets and also economic weakness in the developed regions (US, Europe and Japan).
The influx of FDI (foreign direct investment) into various high-tech and manufacturing sectors within the state of Penang would lead to higher water usage by trade consumers. According to PBA’s FY10 annual report, there are more than 67 thousand registered trade consumers in Penang State, while registered domestic users number around 440 thousand. In 2010, trade consumers accounted for 40.2% of water consumption in the state.
“New Costs”
In June 2011, PBAPP (Perbadanan Bekalan Air Pulau Pinang S/B) a wholly-owned subsidiary company of PBA, had been charged by the Penang State Government for Water Intake Fees at RM0.03 per cubic metre of production volume with effect from 1st January 2011 (i.e. backdated). The amount of water intake fees for the year is estimated by PBA to be approximately RM10.9 million. This fees is payable for the period 2011-2013.
PBAPP was awarded by the Minister of Energy, Water and Communication in June 2011 a Service License issued pursuant to Section-9 of the Water Services Industry Act (WISA) 2006. The License shall be effective from 1st June 2011 to 31st May 2014. The License Fee is calculated based on 1% of the revenue from the sale of water by the subsidiary.
In June 2011, PBAPP had entered into a Facility Agreement and a Leasing Agreement with Pengurusan Asset Air Bhd (PAAB) to enable PBAPP to carry out water supply services on the land leased from PAAB. The amount of leasing charges is RM14.56 million per annum for a period of 45 years with effect from 1st August 2011. The land leased has a net book value of RM655.3 million at the date of the agreements. To recap, PAAB would act as the “debtor” for federal loans. In return, PBAPP would alienate some of its land to PAAB and pay an annual lease to PAAB.
“Working with PAAB”
Upon notification by PAAB and subject to PBAPP’s ability to secure the costs of fund equivalent or lower than that secured by PAAB and provided the approval of Suruhanjaya Perkhidmatan Air Negara (SPAN) has been obtained, PBAPP shall have the first right to construct, upgrade, and refurbish at its own costs and expense the Water Assets and New Water Assets for water supply services. PBAPP, being the state water operator, would be allowed to focus solely on providing water treatment and distribution services, while the Malaysian Federal Government will be fully responsible for the source work of water supply projects.
“Share buybacks”
During the nine month period ended 30th September 2011 (9M/FY11), PBA repurchased 1,000 of its issued shares from the open market at an average price of RM0.99 per share (9M/FY10: 1,000 shares at average price of RM0.85). The shares repurchased are being held as treasury shares in accordance with Section 67A of the Companies Act, 1965.
VALUATION/CONCLUSIONPBA’s Board of Directors had declared an interim tax exempt dividend of 3.5% (1.75 sen gross) amounting to approximately RM5.8 million for its FY11 ending 31st December 2011.
PBA’s shares will trade ex-dividend on 25th November 2011. The last date of share lodgement is 30th November 2011 while the dividend would be payable on 23rd December 2011. Meanwhile, we expect that PBA would be giving a dividend payout of around 30% for its FY11 and FY12.
“Reasonable dividend payouts”Even with an adjusted beta (correlation factor) of 0.68 to the KLCI, PBA (+13.5%) has managed to outperform the KLCI (-3.1%) this year. Market conditions have also been volatile in recent months, impacted by the Arab Spring uprisings in the Middle East/North Africa, sovereign debt issue in Europe, debt ceiling issue in the US and Tohoku natural disaster in Japan. Nevertheless, as PBA is not a large market-cap stock, this may put a dampener on its market visibility and trading volume.
“Maintain Buy Call”
Based on our forecast of PBA’s FY12 EPS and an estimated P/E of 10 times (within its historical range), we set a FY12-end Target Price (TP) of RM1.16. This TP offers a 15% upside from its current market price. Our TP for PBA reflects a P/BV of just 0.55 times over its FY11F BV/share. Meanwhile, the local Water Services sector’s average P/E and P/BV is 17.8 times and 2.3 times, respectively.
“Wise long-term planning”PBA’s management had prepared-well for the coming years, with the implementation of new trade tariffs and WCS (Water Conservation Surcharge). It has also planned ahead in terms of capital expenditure (capex) and measures needed to lower NRW levels. We are pleased that PBA practises an open-tender system for its maintenance, machinery, pipe-laying and even for its annual report. In the long run, this practice usually leads to improved cost savings.
“Undemanding valuations”
We find that PBA’s P/E and P/BV valuations are quite undemanding within its sector, while it has reasonable dividend yields. Meanwhile, the group’s gearing levels are very minimal, and we expect that it would turn into a net cash position during its FY11.
“Risk factors”
Nevertheless, PBA’s businesses also face routine risks such as a possible slower rate of economic growth, weak trade consumer demand, foreign exchange fluctuations and rising costs — e.g. electricity, oil/gas, water treatment (chemicals), pipe replacement (steel/ductile iron/others) and bottling (plastic). We also note that PBA holds investments in the equity markets that are managed by external fund management companies. As in any investment, there would be risks from equity market fluctuations as well.
PBA’s 3Q/FY11 results (quarter ended 30th September 2011) were generally in-line with our earlier expectations.
“3Q Results in-line with expectations”
PBA’s 3Q/FY11 revenue of RM59.3 million was higher by 20.8% y-o-y. Group NPAT (net profit after tax) of RM5.8 million was higher by 139.6% y-o-y. The better performance was mainly due to the improved sale of water revenue from trade consumers.
“Strong demand from trade consumers”
However, the group’s 3Q/FY11 revenue had decreased by 8.2% from the preceding 2Q/FY11. The group NPAT had also decreased by 52.4% q-o-q as compared to the preceding 2Q/FY11. This was largely due to the lower levels of revenue from trunk main contributions (TMC).
OUTLOOK/CORP. UPDATES
In tandem with growth in the domestic economy (in GDP terms), we expect that the group’s water revenues would grow as well. Water is a relatively inexpensive expenditure, and we foresee that the demand would grow steadily, especially for trade (commercial / industry) users. Nevertheless, PBA’s management is aware and mindful of both economic conditions and escalating costs.
“Steady domestic demand growth”
Malaysia had reported a reasonable 2Q/2011 unemployment rate of 3.0% and CPI of 3.4% (September 2011). On 11th November 2011, Bank Negara Malaysia (BNM) had maintained its accommodative overnight policy rate (OPR) at 3.0%. Meanwhile, Malaysia’s GDP growth in 2Q/2011 amounted to 4.0%, amidst volatile global financial markets and also economic weakness in the developed regions (US, Europe and Japan).
The influx of FDI (foreign direct investment) into various high-tech and manufacturing sectors within the state of Penang would lead to higher water usage by trade consumers. According to PBA’s FY10 annual report, there are more than 67 thousand registered trade consumers in Penang State, while registered domestic users number around 440 thousand. In 2010, trade consumers accounted for 40.2% of water consumption in the state.
“New Costs”
In June 2011, PBAPP (Perbadanan Bekalan Air Pulau Pinang S/B) a wholly-owned subsidiary company of PBA, had been charged by the Penang State Government for Water Intake Fees at RM0.03 per cubic metre of production volume with effect from 1st January 2011 (i.e. backdated). The amount of water intake fees for the year is estimated by PBA to be approximately RM10.9 million. This fees is payable for the period 2011-2013.
PBAPP was awarded by the Minister of Energy, Water and Communication in June 2011 a Service License issued pursuant to Section-9 of the Water Services Industry Act (WISA) 2006. The License shall be effective from 1st June 2011 to 31st May 2014. The License Fee is calculated based on 1% of the revenue from the sale of water by the subsidiary.
In June 2011, PBAPP had entered into a Facility Agreement and a Leasing Agreement with Pengurusan Asset Air Bhd (PAAB) to enable PBAPP to carry out water supply services on the land leased from PAAB. The amount of leasing charges is RM14.56 million per annum for a period of 45 years with effect from 1st August 2011. The land leased has a net book value of RM655.3 million at the date of the agreements. To recap, PAAB would act as the “debtor” for federal loans. In return, PBAPP would alienate some of its land to PAAB and pay an annual lease to PAAB.
“Working with PAAB”
Upon notification by PAAB and subject to PBAPP’s ability to secure the costs of fund equivalent or lower than that secured by PAAB and provided the approval of Suruhanjaya Perkhidmatan Air Negara (SPAN) has been obtained, PBAPP shall have the first right to construct, upgrade, and refurbish at its own costs and expense the Water Assets and New Water Assets for water supply services. PBAPP, being the state water operator, would be allowed to focus solely on providing water treatment and distribution services, while the Malaysian Federal Government will be fully responsible for the source work of water supply projects.
“Share buybacks”
During the nine month period ended 30th September 2011 (9M/FY11), PBA repurchased 1,000 of its issued shares from the open market at an average price of RM0.99 per share (9M/FY10: 1,000 shares at average price of RM0.85). The shares repurchased are being held as treasury shares in accordance with Section 67A of the Companies Act, 1965.
VALUATION/CONCLUSIONPBA’s Board of Directors had declared an interim tax exempt dividend of 3.5% (1.75 sen gross) amounting to approximately RM5.8 million for its FY11 ending 31st December 2011.
PBA’s shares will trade ex-dividend on 25th November 2011. The last date of share lodgement is 30th November 2011 while the dividend would be payable on 23rd December 2011. Meanwhile, we expect that PBA would be giving a dividend payout of around 30% for its FY11 and FY12.
“Reasonable dividend payouts”Even with an adjusted beta (correlation factor) of 0.68 to the KLCI, PBA (+13.5%) has managed to outperform the KLCI (-3.1%) this year. Market conditions have also been volatile in recent months, impacted by the Arab Spring uprisings in the Middle East/North Africa, sovereign debt issue in Europe, debt ceiling issue in the US and Tohoku natural disaster in Japan. Nevertheless, as PBA is not a large market-cap stock, this may put a dampener on its market visibility and trading volume.
“Maintain Buy Call”
Based on our forecast of PBA’s FY12 EPS and an estimated P/E of 10 times (within its historical range), we set a FY12-end Target Price (TP) of RM1.16. This TP offers a 15% upside from its current market price. Our TP for PBA reflects a P/BV of just 0.55 times over its FY11F BV/share. Meanwhile, the local Water Services sector’s average P/E and P/BV is 17.8 times and 2.3 times, respectively.
“Wise long-term planning”PBA’s management had prepared-well for the coming years, with the implementation of new trade tariffs and WCS (Water Conservation Surcharge). It has also planned ahead in terms of capital expenditure (capex) and measures needed to lower NRW levels. We are pleased that PBA practises an open-tender system for its maintenance, machinery, pipe-laying and even for its annual report. In the long run, this practice usually leads to improved cost savings.
“Undemanding valuations”
We find that PBA’s P/E and P/BV valuations are quite undemanding within its sector, while it has reasonable dividend yields. Meanwhile, the group’s gearing levels are very minimal, and we expect that it would turn into a net cash position during its FY11.
“Risk factors”
Nevertheless, PBA’s businesses also face routine risks such as a possible slower rate of economic growth, weak trade consumer demand, foreign exchange fluctuations and rising costs — e.g. electricity, oil/gas, water treatment (chemicals), pipe replacement (steel/ductile iron/others) and bottling (plastic). We also note that PBA holds investments in the equity markets that are managed by external fund management companies. As in any investment, there would be risks from equity market fluctuations as well.
Wednesday 16 November 2011
Supermx ... Nov11
CIMB Research Report
Results highlights
• Upgrade from Hold to BUY. Lower costs should provide some bounce to Supermax’s earnings, which have already hit trough. We are upgrading the stock as its established brand and own distribution network will help it ride out the next 1-3 years of excess capacity better than its peers. At 72% of our FY11 forecast, 9M11 core net profit was in line with our expectations as well as that of the market. We fine-tune our EPS for a lower dividend payout. Our target price (9.8x forward P/E) rises from RM3.64 to RM4.38 as we roll it forward to end-2013. We upgrade Supermax from Hold to BUY.
• Higher sales and margins. 9M11 revenue increased 8.7% yoy to RM750.7m due to a full-quarter contribution from new lines commissioned in the final two weeks of 2Q. Another factor was the 9% pt rise in 3Q utilisation to 80% as Supermax overcame a labour shortage in 2Q by hiring replacements. Earnings were also given a boost by lower input costs. At RM8.63/kg, average natural rubber (NR) latex price was 11% lower in 3Q than 2Q. Average nitrile costs rose by 12% qoq to RM6.43/kg in 3Q. Even so, because 65% of the gloves that Supermax sells are made of NR, 3Q EBITDA margins increased by 6.6% qoq to 17.1%. The better operating performance was enough to offset a 4% pt qoq increase in Supermax’s effective tax rate, leading to a 16.0% qoq rise in 3Q core net profit.
• Lower latex prices. We agree with Supermax’s view that earnings will improve in the quarters ahead as NR latex prices stabilise. Supermax expects NR latex prices to fall to RM7/kg by end-2011 (current: RM7.96/kg) due to more latex supply from maturing plantations in Cambodia and Vietnam. Supermax is confident of achieving an FY11 net profit of RM100-120m, as guided in late Aug 2011. The company is
actively adjusting ASPs to mitigate the impact of volatile raw material prices and exchange rates.
Recommendation
Expanding capacity. Supermax is at an advanced stage of expanding its surgical glove capacity from 2.5m pairs per month to 28m pairs per month. The facility is expected to be completed by the end of 2011. The company indicated that the new capacity will add US$67.2m in revenue (implied ASP: US$0.2/pair) and US$10.1m in net profit to the group in FY12.
Over the next two years, Supermax intends to build two additional plants in Meru, Klang where it has 10 acres of land adjacent to its existing facilities. By building on an existing site, it will have no problem accessing gas. The two plants will add a total of 3.9bn gloves p.a. to the group’s capacity by the end of FY13. The company is also upgrading old lines to improve efficiency.
Stable costs will boost earnings. We believe that less volatile NR latex prices will lead to an earnings re-rating as a result of a) better margins and b) higher demand. Stable costs will enable Supermax to pass on a higher portion of its costs to customers, clawing back lost profits when raw material costs were on the uptrend.
Currently, Supermax is passing on 75% of the cost increase, higher than the 70% passed on in the 2Q. In normal conditions, Supermax is able to pass on 90% of the cost increase.
Also, we believe that less volatile raw material costs will entice distributors to restock their inventories. We gather that inventories are at an all-time low of 1-2 months due to the recent wild swings in rubber prices. This has prompted distributors to hold back their purchases and wait for NR prices to stabilise. With NR latex prices stabilising at around the RM8/kg level, we believe that distributors will be more comfortable about
taking aggressive inventory positions.
Defensive business model and strategy. With its own distribution network, established brand and focus on the dental market, we believe Supermax will ride out the next 1-3 years of excess capacity better than its peers. By owning the network and brand, Supermax controls both the manufacturing and distribution portions of the
value chain. Unlike Top Glove which is integrating vertically upwards by buying rubber plantation land, Supermax is investing downstream to enhance its marketing and distribution capabilities.
We are in favour of this strategy as it enables Supermax to bypass distributors and sell directly to the end-user. This means that unlike its larger rival, Supermax does not have to dance to the tune of distributors who may not have the customer’s long-term interests in mind. Note that Supermax sells nearly 70% of the gloves under its own brand, which can add up to 5% pts to the company’s profit margins.
Focused strategy shields Supermax from competition. Supermax will also be less affected by the industry’s overcapacity because of its focus on the US dental market where it has a 9.2% market share and is the 2nd largest player. This puts its ahead of its peers for several reasons a) Supermax has built a dominant position and reputation in this market, giving it first-mover advantage, b) when the company switches customers from NR to nitrile, Supermax will not cannibalise its own products and c) by focusing on a sub-segment of the examination glove industry, Supermax faces less competition by serving a niche market.
Cheaper entry than Top Glove. We believe Supermax provides a cheaper entry into the glove sector than Top Glove. The stock trades at just 8.7x FY12 P/E or more than half of Top Glove’s forward P/E of 19.0x. We do not believe that Top Glove’s premium is justified given the company’s lower ROEs and earnings growth. Supermax is also just as liquid as Top Glove, as both stocks have an average daily turnover of about
US$1m and a free float of c.50%.
EPS tweaked for lower dividend payout. While earnings met our expectations, dividends did not. Supermax declared a 3 sen dividend, which was lower than our 5 sen expectation. It also indicated that a 3 sen final dividend is likely, which is again below our 6 sen expectation. We now lower our FY11 DPS forecast from 11 sen to 6 sen. Also adjusted is our FY12-13 dividend payout from 30% to 20% (% of net profit),
as guided by Supermax. This leads to a 0.22-1% increase in our FY11-13 EPS forecasts due to a higher earnings retention ratio.
Results highlights
• Upgrade from Hold to BUY. Lower costs should provide some bounce to Supermax’s earnings, which have already hit trough. We are upgrading the stock as its established brand and own distribution network will help it ride out the next 1-3 years of excess capacity better than its peers. At 72% of our FY11 forecast, 9M11 core net profit was in line with our expectations as well as that of the market. We fine-tune our EPS for a lower dividend payout. Our target price (9.8x forward P/E) rises from RM3.64 to RM4.38 as we roll it forward to end-2013. We upgrade Supermax from Hold to BUY.
• Higher sales and margins. 9M11 revenue increased 8.7% yoy to RM750.7m due to a full-quarter contribution from new lines commissioned in the final two weeks of 2Q. Another factor was the 9% pt rise in 3Q utilisation to 80% as Supermax overcame a labour shortage in 2Q by hiring replacements. Earnings were also given a boost by lower input costs. At RM8.63/kg, average natural rubber (NR) latex price was 11% lower in 3Q than 2Q. Average nitrile costs rose by 12% qoq to RM6.43/kg in 3Q. Even so, because 65% of the gloves that Supermax sells are made of NR, 3Q EBITDA margins increased by 6.6% qoq to 17.1%. The better operating performance was enough to offset a 4% pt qoq increase in Supermax’s effective tax rate, leading to a 16.0% qoq rise in 3Q core net profit.
• Lower latex prices. We agree with Supermax’s view that earnings will improve in the quarters ahead as NR latex prices stabilise. Supermax expects NR latex prices to fall to RM7/kg by end-2011 (current: RM7.96/kg) due to more latex supply from maturing plantations in Cambodia and Vietnam. Supermax is confident of achieving an FY11 net profit of RM100-120m, as guided in late Aug 2011. The company is
actively adjusting ASPs to mitigate the impact of volatile raw material prices and exchange rates.
Recommendation
Expanding capacity. Supermax is at an advanced stage of expanding its surgical glove capacity from 2.5m pairs per month to 28m pairs per month. The facility is expected to be completed by the end of 2011. The company indicated that the new capacity will add US$67.2m in revenue (implied ASP: US$0.2/pair) and US$10.1m in net profit to the group in FY12.
Over the next two years, Supermax intends to build two additional plants in Meru, Klang where it has 10 acres of land adjacent to its existing facilities. By building on an existing site, it will have no problem accessing gas. The two plants will add a total of 3.9bn gloves p.a. to the group’s capacity by the end of FY13. The company is also upgrading old lines to improve efficiency.
Stable costs will boost earnings. We believe that less volatile NR latex prices will lead to an earnings re-rating as a result of a) better margins and b) higher demand. Stable costs will enable Supermax to pass on a higher portion of its costs to customers, clawing back lost profits when raw material costs were on the uptrend.
Currently, Supermax is passing on 75% of the cost increase, higher than the 70% passed on in the 2Q. In normal conditions, Supermax is able to pass on 90% of the cost increase.
Also, we believe that less volatile raw material costs will entice distributors to restock their inventories. We gather that inventories are at an all-time low of 1-2 months due to the recent wild swings in rubber prices. This has prompted distributors to hold back their purchases and wait for NR prices to stabilise. With NR latex prices stabilising at around the RM8/kg level, we believe that distributors will be more comfortable about
taking aggressive inventory positions.
Defensive business model and strategy. With its own distribution network, established brand and focus on the dental market, we believe Supermax will ride out the next 1-3 years of excess capacity better than its peers. By owning the network and brand, Supermax controls both the manufacturing and distribution portions of the
value chain. Unlike Top Glove which is integrating vertically upwards by buying rubber plantation land, Supermax is investing downstream to enhance its marketing and distribution capabilities.
We are in favour of this strategy as it enables Supermax to bypass distributors and sell directly to the end-user. This means that unlike its larger rival, Supermax does not have to dance to the tune of distributors who may not have the customer’s long-term interests in mind. Note that Supermax sells nearly 70% of the gloves under its own brand, which can add up to 5% pts to the company’s profit margins.
Focused strategy shields Supermax from competition. Supermax will also be less affected by the industry’s overcapacity because of its focus on the US dental market where it has a 9.2% market share and is the 2nd largest player. This puts its ahead of its peers for several reasons a) Supermax has built a dominant position and reputation in this market, giving it first-mover advantage, b) when the company switches customers from NR to nitrile, Supermax will not cannibalise its own products and c) by focusing on a sub-segment of the examination glove industry, Supermax faces less competition by serving a niche market.
Cheaper entry than Top Glove. We believe Supermax provides a cheaper entry into the glove sector than Top Glove. The stock trades at just 8.7x FY12 P/E or more than half of Top Glove’s forward P/E of 19.0x. We do not believe that Top Glove’s premium is justified given the company’s lower ROEs and earnings growth. Supermax is also just as liquid as Top Glove, as both stocks have an average daily turnover of about
US$1m and a free float of c.50%.
EPS tweaked for lower dividend payout. While earnings met our expectations, dividends did not. Supermax declared a 3 sen dividend, which was lower than our 5 sen expectation. It also indicated that a 3 sen final dividend is likely, which is again below our 6 sen expectation. We now lower our FY11 DPS forecast from 11 sen to 6 sen. Also adjusted is our FY12-13 dividend payout from 30% to 20% (% of net profit),
as guided by Supermax. This leads to a 0.22-1% increase in our FY11-13 EPS forecasts due to a higher earnings retention ratio.
Monday 14 November 2011
HEKTAR ... Nov11
CIMB Research Report Investment highlights
• Maintain BUY. The main positive surprise from Hektar’s analyst briefing was the significant increase in shoppers’ footfall in Subang Parade, after the opening of an 8-screen MBO cinema targeted at the young crowd. We maintain our BUY call, earnings forecasts and DDM-derived target price of RM1.50. We are encouraged by the company’s asset enhancement initiatives and like its decision to open a cinema in Subang Parade which should increase footfall and turnover. The absence of a clear acquisition pipeline points to an unexciting 3-year EPU CAGR of about 3% but this is compensated by Hektar’s above-industry-average dividend yields of about 8-9%, which are a strong attraction in volatile market conditions. Another catalyst
could be upward rental reversions in 2012 for one-quarter of its NLA.
• Cinema pulling in the young crowd. Subang Parade’s new 8-screen cinema which opened its doors on 16 Sep has already had a positive effect on shoppers’ footfall, especially with its intended target market of the youth. Consistent with the company’s aim to make the mall more youth-oriented, we understand that there are
plans to bring in more youth-oriented fashion houses and F&B outlets like Starbucks and Carls Junior.
• Utilising excess space in Mahkota Parade. Hektar is planning to add tenants to its new entertainment zone in Mahkota Parade. In the pipeline are some bistro pubs and clubs that are targeted to start business in early 2012. This will boost the mall’s occupancy rate which stood at 96.2% as at Sep 2011.
Recent developments
Hektar’s 3Q11 analyst briefing was chaired by Encik Nubly, Senior Manager for Strategy who said that Hektar was committed to paying 90% of its distributable income as dividends. We left the briefing encouraged by the various asset enhancement initiatives undertaken by the company.
Drawing the younger crowd with a new cinema. For Subang Parade, it was a strategic decision by Hektar’s management to replace Toys "R" Us with a new-screen MBO cinema that would allow it to capture the younger population of Subang Jaya who previously had to go The Summit or Sunway Pyramid in order to catch the latest movies on the screen. Since its opening on 16 Sep, we gather that it has successfully
attracted the younger crowd in the Subang Jaya vicinity. To better match the younger age profile of cinemagoers, the company intends to reposition the third floor of Subang Parade with a youthful theme. This is done by relocating some of the tenants targeting the older age group from the third floor to the second floor. The benefit of this move will be reflected in higher shoppers’ footfall and an increase in retail activities on the previously quiet third floor. There are also plans to bring in more youth-oriented fashion houses and F&B outlets like Starbucks and Carls Junior to nearby the cinema area.
Fixed or floating loan? We gathered that Hektar has received an offer to refinance its RM184m bank loan due Dec 2011 at the same floating rate (cost of funds + 0.75%). However, Hektar is still contemplating whether to borrow half the amount using floating rate while fixing the rate for the balance of the loan. Currently, the interest rate for the fixed rate loan is 40bp premium over the floating rate loan, i.e. 4.7%. We estimate an earnings setback of ~3% for our FY12 estimates and target price cut to RM1.47, if Hektar refinances wholly to a floating rate loan while an equal split between floating and a fixed rate of 4.7% would lead to an earnings cut of ~4% for FY12 and see our target price being reduced to RM1.45. We are maintaining our estimates pending finalisation of the refinancing package. Refinancing at a higher interest rate would not have any impact on our BUY recommendation.
Earnings outlook
Another 19k increase in NLA in 4Q. 4Q will see the addition of another 19k sq ft to Hektar’s existing overall portfolio NLA of 1.1m sq ft, out of which 10k sq ft will be from the opening of the eighth cinema screen in Subang Parade and 9k sq ft will come from the Market Place in Subang Parade.
Dividend on track. Hektar declared a DPU of 7.5 sen for 9M11. During the briefing, it reiterated its commitment to pay 90% of its distributable income as dividends. With 4Q11 earnings being boosted by the increase in occupancy rates for Subang Parade after the opening of the cinema and the addition of a new F&B outlet in Market Place, Hektar is on track to meet our FY11 DPU forecast of 10.8 sen.
Recommendation
Maintain BUY. We maintain our BUY call and make no changes to our earnings or DDM-derived target price of RM1.50. We are encouraged by the company’s asset enhancement initiatives and like its decision to open a cinema in Subang Parade which should increase footfall and turnover. The absence of a clear acquisition pipeline points to an unexciting 3-year EPU CAGR of about 3% but this is compensated by Hektar’s above-industry-average dividend yields of about 8-9%, which are a strong attraction in volatile market conditions. Another catalyst could be upward rental reversions in 2012 for one-quarter of its NLA.
• Maintain BUY. The main positive surprise from Hektar’s analyst briefing was the significant increase in shoppers’ footfall in Subang Parade, after the opening of an 8-screen MBO cinema targeted at the young crowd. We maintain our BUY call, earnings forecasts and DDM-derived target price of RM1.50. We are encouraged by the company’s asset enhancement initiatives and like its decision to open a cinema in Subang Parade which should increase footfall and turnover. The absence of a clear acquisition pipeline points to an unexciting 3-year EPU CAGR of about 3% but this is compensated by Hektar’s above-industry-average dividend yields of about 8-9%, which are a strong attraction in volatile market conditions. Another catalyst
could be upward rental reversions in 2012 for one-quarter of its NLA.
• Cinema pulling in the young crowd. Subang Parade’s new 8-screen cinema which opened its doors on 16 Sep has already had a positive effect on shoppers’ footfall, especially with its intended target market of the youth. Consistent with the company’s aim to make the mall more youth-oriented, we understand that there are
plans to bring in more youth-oriented fashion houses and F&B outlets like Starbucks and Carls Junior.
• Utilising excess space in Mahkota Parade. Hektar is planning to add tenants to its new entertainment zone in Mahkota Parade. In the pipeline are some bistro pubs and clubs that are targeted to start business in early 2012. This will boost the mall’s occupancy rate which stood at 96.2% as at Sep 2011.
Recent developments
Hektar’s 3Q11 analyst briefing was chaired by Encik Nubly, Senior Manager for Strategy who said that Hektar was committed to paying 90% of its distributable income as dividends. We left the briefing encouraged by the various asset enhancement initiatives undertaken by the company.
Drawing the younger crowd with a new cinema. For Subang Parade, it was a strategic decision by Hektar’s management to replace Toys "R" Us with a new-screen MBO cinema that would allow it to capture the younger population of Subang Jaya who previously had to go The Summit or Sunway Pyramid in order to catch the latest movies on the screen. Since its opening on 16 Sep, we gather that it has successfully
attracted the younger crowd in the Subang Jaya vicinity. To better match the younger age profile of cinemagoers, the company intends to reposition the third floor of Subang Parade with a youthful theme. This is done by relocating some of the tenants targeting the older age group from the third floor to the second floor. The benefit of this move will be reflected in higher shoppers’ footfall and an increase in retail activities on the previously quiet third floor. There are also plans to bring in more youth-oriented fashion houses and F&B outlets like Starbucks and Carls Junior to nearby the cinema area.
Fixed or floating loan? We gathered that Hektar has received an offer to refinance its RM184m bank loan due Dec 2011 at the same floating rate (cost of funds + 0.75%). However, Hektar is still contemplating whether to borrow half the amount using floating rate while fixing the rate for the balance of the loan. Currently, the interest rate for the fixed rate loan is 40bp premium over the floating rate loan, i.e. 4.7%. We estimate an earnings setback of ~3% for our FY12 estimates and target price cut to RM1.47, if Hektar refinances wholly to a floating rate loan while an equal split between floating and a fixed rate of 4.7% would lead to an earnings cut of ~4% for FY12 and see our target price being reduced to RM1.45. We are maintaining our estimates pending finalisation of the refinancing package. Refinancing at a higher interest rate would not have any impact on our BUY recommendation.
Earnings outlook
Another 19k increase in NLA in 4Q. 4Q will see the addition of another 19k sq ft to Hektar’s existing overall portfolio NLA of 1.1m sq ft, out of which 10k sq ft will be from the opening of the eighth cinema screen in Subang Parade and 9k sq ft will come from the Market Place in Subang Parade.
Dividend on track. Hektar declared a DPU of 7.5 sen for 9M11. During the briefing, it reiterated its commitment to pay 90% of its distributable income as dividends. With 4Q11 earnings being boosted by the increase in occupancy rates for Subang Parade after the opening of the cinema and the addition of a new F&B outlet in Market Place, Hektar is on track to meet our FY11 DPU forecast of 10.8 sen.
Recommendation
Maintain BUY. We maintain our BUY call and make no changes to our earnings or DDM-derived target price of RM1.50. We are encouraged by the company’s asset enhancement initiatives and like its decision to open a cinema in Subang Parade which should increase footfall and turnover. The absence of a clear acquisition pipeline points to an unexciting 3-year EPU CAGR of about 3% but this is compensated by Hektar’s above-industry-average dividend yields of about 8-9%, which are a strong attraction in volatile market conditions. Another catalyst could be upward rental reversions in 2012 for one-quarter of its NLA.
Friday 4 November 2011
Scientex ... Nov11
Scientex Bhd, a major stretch film producer which has gone big into property development, has mixed property offerings to mitigate a potential slowdown in the sector, said managing director Lim Peng Jin. It has projects worth RM2.1 billion in outstanding gross development value (GDV).
Scientex has offerings in the affordable segment, a category major developers such as S P Setia Bhd and Mah Sing Group Bhd are shifting into in view of the larger untapped demand there.
The company’s volume products in Pasir Gudang and Kulai in Johor, said Lim, feature affordable double-storey terrace houses within the price range of RM110,000 to RM150,000 a unit.
Scientex saw operating profit contribution from its property division overtake its manufacturing unit for FY11 ended July 31. Property contributed RM62 million or 63% of the group’s total operating profit of RM97.4 million with the remaining RM35.4 million from the manufacturing of stretch film and strapping band.
This came despite property contributing less to the group’s total revenue. Revenue from the property unit made up 27%, or RM218.56 million, of Scientex’s total revenue of RM804.02 million. This translated into an operating profit margin of 44.5% for Scientex’s property business, which is considered lucrative given its wide offerings between high-end and volume products.
Scientex’s net profit for FY11 rose 28% to RM77.25 million from RM60.32 million a year earlier, while revenue increased 15.7% to RM804.02 million from RM694.82 million. Earnings per share rose to 35.9 sen from 28 sen previously.
The company has a relatively healthy balance sheet, with virtually zero net gearing as at July 31, 2011. Cash flow remains strong with net cash generated from operating activities rising 41.4% to RM110.53 million for FY11 from RM73.14 million a year earlier.
Scientex has offerings in the affordable segment, a category major developers such as S P Setia Bhd and Mah Sing Group Bhd are shifting into in view of the larger untapped demand there.
The company’s volume products in Pasir Gudang and Kulai in Johor, said Lim, feature affordable double-storey terrace houses within the price range of RM110,000 to RM150,000 a unit.
Scientex saw operating profit contribution from its property division overtake its manufacturing unit for FY11 ended July 31. Property contributed RM62 million or 63% of the group’s total operating profit of RM97.4 million with the remaining RM35.4 million from the manufacturing of stretch film and strapping band.
This came despite property contributing less to the group’s total revenue. Revenue from the property unit made up 27%, or RM218.56 million, of Scientex’s total revenue of RM804.02 million. This translated into an operating profit margin of 44.5% for Scientex’s property business, which is considered lucrative given its wide offerings between high-end and volume products.
Scientex’s net profit for FY11 rose 28% to RM77.25 million from RM60.32 million a year earlier, while revenue increased 15.7% to RM804.02 million from RM694.82 million. Earnings per share rose to 35.9 sen from 28 sen previously.
The company has a relatively healthy balance sheet, with virtually zero net gearing as at July 31, 2011. Cash flow remains strong with net cash generated from operating activities rising 41.4% to RM110.53 million for FY11 from RM73.14 million a year earlier.
Thursday 3 November 2011
JobStreet ... Nov11
As prospects of a global economic slowdown in 2012 loom large, JobStreet is facing concerns that its earnings could be impacted from weaker business sentiment and a soft job market.
JobStreet’s online advertising site, JobStreet.com, has over 1.9 million registered jobseekers in Malaysia alone.
Malaysia is JobStreet’s main geographical segment, contributing over 60% of the group’s earnings and turnover. It also has presence in Singapore, the Philippines, Indonesia and is in the process of developing a presence in Thailand, India and Japan.
For 2QFY11ended June 30, JobStreet’s net profit rose 20.14% to RM13.35 million from RM11.11 million a year ago driven by higher sales from higher recruitment activities.
Pre-tax profit grew 12.51% to RM17.7 million from RM15.73 million a year ago on the back of 21.8% revenue growth to RM36.22 million from RM29.74 million a year ago.
During the quarter, JobStreet’s operating expenses increased by 26.4% due to higher staff costs and marketing expenses, the group said in the notes to its financial results.
Earnings per share was 4.2 sen and net assets per share was 59 sen as at June 30.
Quarter-on-quarter, JobStreet’s net profit climbed 18.26% to RM13.35 million from RM11.29 million while revenue grew 7.73% to RM36.22 million from RM33.62 million in the preceding quarter.
For the six-month period, JobStreet’s net profit grew 24.64% to RM24.64 million from RM19.8 million while revenue increased 21.76% to RM69.85 million from RM57.36 million a year ago.
JobStreet’s earnings in the next two years could face downside risks.
As at June 30, 2011, the company had net cash and equivalents of RM83.06 million, which translates into 25.5 sen per share. That accounted for 43% of its net assets per share of 59 sen.
Malaysia, JobStreet’s core market, currently appears less vulnerable to external turbulence as it is supported by the government’s Economic Transformation Programme (ETP), which aims to create 3.3 million new jobs by 2020.
Still, macro-economic challenges exist, and JobStreet is also facing higher competition and lower pricing for job postings from its main regional competitor, Hong Kong-based JobsDB Inc, which operates online recruitment websites in Southeast Asia, Australia and China.
JobStreet’s single largest shareholder is Australia-based recruitment website SEEK Ltd, which held a 22.3% stake as at May 9, 2011.SEEK’s 69%-owned subsidiary, SEEKAsia Ltd, however, also holds an 80% stake in JobsDB. In July 2011, SEEKAsia increased its shareholding in JobsDB to 80% from the 60% block it acquired in December 2010.
JobStreet will continue to compete with JobsDB by leveraging its competitive advantage in Southeast Asia, ensuring quality customer service and keeping costs low.
JobStreet’s online advertising site, JobStreet.com, has over 1.9 million registered jobseekers in Malaysia alone.
Malaysia is JobStreet’s main geographical segment, contributing over 60% of the group’s earnings and turnover. It also has presence in Singapore, the Philippines, Indonesia and is in the process of developing a presence in Thailand, India and Japan.
For 2QFY11ended June 30, JobStreet’s net profit rose 20.14% to RM13.35 million from RM11.11 million a year ago driven by higher sales from higher recruitment activities.
Pre-tax profit grew 12.51% to RM17.7 million from RM15.73 million a year ago on the back of 21.8% revenue growth to RM36.22 million from RM29.74 million a year ago.
During the quarter, JobStreet’s operating expenses increased by 26.4% due to higher staff costs and marketing expenses, the group said in the notes to its financial results.
Earnings per share was 4.2 sen and net assets per share was 59 sen as at June 30.
Quarter-on-quarter, JobStreet’s net profit climbed 18.26% to RM13.35 million from RM11.29 million while revenue grew 7.73% to RM36.22 million from RM33.62 million in the preceding quarter.
For the six-month period, JobStreet’s net profit grew 24.64% to RM24.64 million from RM19.8 million while revenue increased 21.76% to RM69.85 million from RM57.36 million a year ago.
JobStreet’s earnings in the next two years could face downside risks.
As at June 30, 2011, the company had net cash and equivalents of RM83.06 million, which translates into 25.5 sen per share. That accounted for 43% of its net assets per share of 59 sen.
Malaysia, JobStreet’s core market, currently appears less vulnerable to external turbulence as it is supported by the government’s Economic Transformation Programme (ETP), which aims to create 3.3 million new jobs by 2020.
Still, macro-economic challenges exist, and JobStreet is also facing higher competition and lower pricing for job postings from its main regional competitor, Hong Kong-based JobsDB Inc, which operates online recruitment websites in Southeast Asia, Australia and China.
JobStreet’s single largest shareholder is Australia-based recruitment website SEEK Ltd, which held a 22.3% stake as at May 9, 2011.SEEK’s 69%-owned subsidiary, SEEKAsia Ltd, however, also holds an 80% stake in JobsDB. In July 2011, SEEKAsia increased its shareholding in JobsDB to 80% from the 60% block it acquired in December 2010.
JobStreet will continue to compete with JobsDB by leveraging its competitive advantage in Southeast Asia, ensuring quality customer service and keeping costs low.
Wednesday 2 November 2011
IPO ... Parkson Holdings/Parkson Retail Asia
Parkson Holdings Bhd has priced its regional retail arm Parkson Retail Asia Pte Ltd (PRA) at an IPO price of S$0.94 (RM2.33) per share.
The IPO valued the whole of PRA at S$636.7 million, which is 18.2 times its net profit of S$35 million for FY11 ended June 30. However, the size of the IPO that will comprise the issuance of 80 million new shares is smaller than previously anticipated.
PRA’s listing on the Singapore Exchange (SGX) will involve an offering of 147 million shares — 80 million new shares to be issued by PRA and 67 million existing shares by the vendors Parkson Holdings and its Indonesian partner PT Mitra Samaya.
PRA would issue new shares representing up to 18.9% of the company’s enlarged capital. But now with only 80 million new shares to be issued, this works out to only 11.8% of PRA’s enlarged capital of 677.3 million shares. PRA’s shares base before IPO was 597.3 million.
PRA — 90.1% owned by Parkson Holdings and 9.9% by Mitra before the IPO — is a department store operator with operations in Malaysia, Vietnam and Indonesia.
136.15 million or 92.6% of the PRA IPO shares will be offered by way of an international placement to investors, which includes institutional and other investors in Singapore. The remaining 10.85 million shares, excluding up to 3.5 million shares reserved for the directors, management and employees of the Parkson Asia group, will be offered to the public.
Parkson Holdings said the IPO is expected to raise total gross proceeds of S$138.2 million. Based on the 80:67 ratio of the new shares and offer for sale shares, S$75.2 million of the total proceeds will go towards PRA for business expansion with the rest going to Parkson Holdings and Mitra.
PRA proposes to utilise a total of S$69.2 million in net proceeds to open new stores in Malaysia, Indonesia, Vietnam and Cambodia (S$60 million), information technology investment (S$5 million), and part of maintenance capital expenditure in Malaysia, Vietnam and Indonesia (S$4.2 million).
Parkson Holdings, which stand to receive S$56.7 million from the IPO proceeds, has yet to announce how it would utilise the money. The company would inform shareholders at a latter date.
PRA posted a S$35 million net profit in the 12 months through June, up from S$22.4 million a year earlier.
The IPO valued the whole of PRA at S$636.7 million, which is 18.2 times its net profit of S$35 million for FY11 ended June 30. However, the size of the IPO that will comprise the issuance of 80 million new shares is smaller than previously anticipated.
PRA’s listing on the Singapore Exchange (SGX) will involve an offering of 147 million shares — 80 million new shares to be issued by PRA and 67 million existing shares by the vendors Parkson Holdings and its Indonesian partner PT Mitra Samaya.
PRA would issue new shares representing up to 18.9% of the company’s enlarged capital. But now with only 80 million new shares to be issued, this works out to only 11.8% of PRA’s enlarged capital of 677.3 million shares. PRA’s shares base before IPO was 597.3 million.
PRA — 90.1% owned by Parkson Holdings and 9.9% by Mitra before the IPO — is a department store operator with operations in Malaysia, Vietnam and Indonesia.
136.15 million or 92.6% of the PRA IPO shares will be offered by way of an international placement to investors, which includes institutional and other investors in Singapore. The remaining 10.85 million shares, excluding up to 3.5 million shares reserved for the directors, management and employees of the Parkson Asia group, will be offered to the public.
Parkson Holdings said the IPO is expected to raise total gross proceeds of S$138.2 million. Based on the 80:67 ratio of the new shares and offer for sale shares, S$75.2 million of the total proceeds will go towards PRA for business expansion with the rest going to Parkson Holdings and Mitra.
PRA proposes to utilise a total of S$69.2 million in net proceeds to open new stores in Malaysia, Indonesia, Vietnam and Cambodia (S$60 million), information technology investment (S$5 million), and part of maintenance capital expenditure in Malaysia, Vietnam and Indonesia (S$4.2 million).
Parkson Holdings, which stand to receive S$56.7 million from the IPO proceeds, has yet to announce how it would utilise the money. The company would inform shareholders at a latter date.
PRA posted a S$35 million net profit in the 12 months through June, up from S$22.4 million a year earlier.
Tuesday 1 November 2011
Asia Media ... Nov11
TA Securities Research.
Results Review
- Asia Media Group Berhad announced its 3QFY11 results of RM3.401mn, which although represents a
sequential decline of 18.8% but grew a superb 63% YoY. Cumulatively, its 9MFY11 earnings came in inline
at 74% of our full year’s forecast.
- The sale of airtime decreased slightly in 3Q but revenue from the programme sponsorship and creative
production increased 95% and 25% YoY.
- Overall earnings margin in 3Q registered a YoY expansion of 7.8% to 40.4%.
Impact
- No impact to our earnings forecasts.
Outlook
- The group plans to launch a terrestrial digital TVstation by as early as the first quarter of next year.
- It is planning to recruit as many as 100 people ‐ (newscasters, talk show hosts, and technical support
people) and plan to rent a studio in Damansara for the live TV version.
- The group is still on track in its plan to submit its listing application to Bursa Malaysia for its migration
to the Main Board.
Valuation
- We maintain our target price at RM0.32/share using an FY12 target PER of only 4x.
- Maintain Buy on the stock, TP: RM0.32
Results Review
- Asia Media Group Berhad announced its 3QFY11 results of RM3.401mn, which although represents a
sequential decline of 18.8% but grew a superb 63% YoY. Cumulatively, its 9MFY11 earnings came in inline
at 74% of our full year’s forecast.
- The sale of airtime decreased slightly in 3Q but revenue from the programme sponsorship and creative
production increased 95% and 25% YoY.
- Overall earnings margin in 3Q registered a YoY expansion of 7.8% to 40.4%.
Impact
- No impact to our earnings forecasts.
Outlook
- The group plans to launch a terrestrial digital TVstation by as early as the first quarter of next year.
- It is planning to recruit as many as 100 people ‐ (newscasters, talk show hosts, and technical support
people) and plan to rent a studio in Damansara for the live TV version.
- The group is still on track in its plan to submit its listing application to Bursa Malaysia for its migration
to the Main Board.
Valuation
- We maintain our target price at RM0.32/share using an FY12 target PER of only 4x.
- Maintain Buy on the stock, TP: RM0.32
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