By InsiderAsia
- Strong growth in derivatives trading volume
- Equities trading volume holding up despite uncertainties
- Bursa remains good proxy for domestic economy
- Upgrade to BUY after recent price correction
Bursa Malaysia’s earnings results for 3QFYDec11 came in ahead of our expectations.
Revenue from both equities and derivatives trading were higher than our forecast. Trading revenue totaled RM62.3 million in 3Q11, up from RM58.4 million in the immediate preceding quarter – and accounted for roughly 65% of the company’s operating revenue.
Revenue from equities trading was higher q-q at RM48.9 million. Even though the daily trading volume was down slightly, to an average of 1.02 billion shares in 3Q11 from 1.04 billion shares in 2Q11, daily trading in value terms was higher at an average of RM1.89 billion compared with RM1.64 billion in 2Q11. This is attributed, in part, to a shift in investor focus to bigger capitalized stocks during the quarter.
Revenue from derivatives trading continued to trend higher, to RM13.6 million in 3Q11, up from RM13.4 million in 2Q11. The number of contracts traded daily rose to 34,169, on average, up from 32,316 in 2Q11 and well above the 25,111 transacted in 3Q10. For the first nine months of this year, a total of 6.33 million contracts were traded, compared with 6.15 million for the whole of 2010.
Bursa attributes the strong derivatives volume growth to improved accessibility and visibility of its products following the migration to the Globex trading platform in September 2010. The company is seeing new traders for its product offerings and believes that it is on target to hit 50,000 contracts daily by 2013.
The stronger derivatives trading volume was also likely due, in part, to heightened volatility in the cash market during the quarter, which would have prompted more price risk management and hedging activities.
Meanwhile, stable revenue in 3Q11 was flattish from the immediate preceding quarter at RM29 million. Stable revenue accounted for some 30% of Bursa’s total operating revenue during the quarter. Stable revenue
consists, primarily, of listing fees, fees for information and broker services as well as fees for depository services.
Non-operating revenue, primarily rental and interest income, increased to RM11.2 million in 3Q11, up from RM8.6 million in 2Q11. This was due, mainly, to the company’s stronger cash position as well as higher returns on investment.
In all, operating and non-operating revenue totaled RM107.3 million in 3Q11, up from RM101.1 million in 2Q11 and RM86.8 million in 3Q10. Operating expenses too increased by at a slightly slower pace than that for revenue. Depreciation was also lower following the cessation of accelerated depreciation for Bursa Trade Derivatives. As a result, net profit increased to RM38.6 million in 3Q11, compared with RM35.7 million in 2Q11 and RM27.7 million in 3Q10.
Outlook and Recommendation
Outlook for the global economy has deteriorated quite sharply over the past few months. Widening of the sovereign debt crisis in the euro zone and disagreements between member countries on the best course forward have further dented investor confidence.
The debt crisis is now threatening to engulf the bigger countries like Italy and Spain. Despite aggressive bond buying by the European Central Bank, yields on new issues by the most debt-laden countries have stayed high. This translates into additional burden on governments trying to bring down their debts. Expectations for a default by Greece are growing.
The resulting austerity programmes in Europe is starting to hurt. A gauge for manufacturing activities in the euro zone contracted in September, falling to the lowest level in more than two years.
The rest of the world is struggling to cope with uncertainties in Europe as well as slowing global demand. Growth in the US remains sluggish while that in emerging economies including China, Brazil and India is also cooling under tighter monetary policies.
The global economy appears likely to soften in 2012, which could translate into slower growth for corporate earnings – and lower expectations for stock gains.
Indeed, risk aversion has grown as uncertainties persisted – sending prices for a broad range of risky assets sharply lower as investors seek shelter in the safest of assets, the US dollar and treasury bonds. Even traditional havens, such as gold, were not spared in the global rout.
Emerging markets too came under heavy selling pressure. The FBM KLCI fell by more than 12% q-q in 3Q11, sending the benchmark index into negative territory for the year-to-date.
Sentiment and share prices rebounded somewhat in October, but visibility remains limited. Positively, the domestic economy should be relatively resilient, supported by domestic consumption and rollout of projects under the Economic Transformation Programme.
Nevertheless, we are assuming trading volume and value on the local bourse to average lower in 4Q11, compared with that in 3Q11 – and to remain slow in the early part of 2012 before picking up in the later part of the year. Thus, we forecast revenue from equities trading to be slightly lower next year, unless sentiment improves faster than expected.
We are however, assuming that the growth in the derivatives market will continue with rising visibility of the Bursa Malaysia Derivatives and its products on Globex. Bursa has been undertaking market awareness
programmes to promote its range of products to global investors.
The company is also pursuing the Dual Licensing Fast Track programme that would allow equity dealers to offer derivatives products. Additionally, Bursa is undertaking more roadshows to attract greater retail participation in the equities and derivatives markets, in both major and smaller cities across the nation.
Stronger revenue from derivatives is expected to offset the slightly lower revenue from equities in 2012.
We are revising up our net profit estimate for 2011 to RM145.3 million after taking into account the better-than-expected 3Q11 results. Net profit is forecast to improve slightly to RM146.1 million or 27.5 sen per share next year. That translates into forward P/E of roughly 23.1 times.
Bursa’s share price has corrected in line with the recent broader market sell off. The stock is now trading well below the year-high of RM9.02. In view of the lowered valuations, we are upgrading our recommendation from HOLD to BUY. We believe the stock should be among the first to rally in the event of a sustained turnaround for the global market.
The company remains financially sound and in a net cash position. It had resources available for use totaling RM547 million at end-September 2011. We estimate a final dividend of roughly 12.7 sen per share for 2011 to be announced in 4Q11, on top of an interim dividend of 13 sen per share that was paid in August.
Dividends are estimated to total 25.8 sen per share in 2012. This will earn shareholders a decent net yield of 4.1% at the current share price.
Monday, 24 October 2011
Wednesday, 19 October 2011
BStead ... Oct11
CIMB Research Report
Results highlights
• Below. At 33% of our full-year forecast and 36% of consensus estimates, Boustead’s 1H11 core net profit, which excludes RM94.6m gain from the disposal of plantation assets, was below our and consensus estimates. The variance stemmed mainly from lower heavy industries profit. Factoring in higher cost and slower progress billings for heavy industries, we slash our FY11-13 core EPS by 10-31%.
Our RNAV-based target price falls from RM6.45 to RM6.33 as we update our RNAV for the current value of listed assets and reduce the target price for Affin (AHB MK, Underperform) from RM3.57 to RM3.40. We continue to rate Boustead a HOLD as there are no immediate catalysts. For big-cap exposure to conglomerates, investors should opt for Sime Darby (SIME MK, Trading Buy).
• Key surprises. 2Q core net profit fell 38% yoy and 19% qoq due to a plunge in heavy industries contribution. 1H heavy industries EBIT fell 49% yoy, mainly because of cost escalation for certain commercial shipbuilding projects and slower progress billings. Work on the six naval vessels remained at the preliminary stage as the company is still waiting for the government to finalise the value and duration of the project. Meanwhile, the finance division was negatively affected by higher interest expense.
• Cushioned by maiden contribution from Pharmaniaga. Pharmaniaga, which became a subsidiary of Boustead at the end of 1Q11, helped the pharmaceutical division to post a pretax profit of RM36.3m compared to a RM1.1m loss last year. 1H plantation EBIT almost doubled yoy as the 38% rise in CPO price more than
offset a 1% drop in FFB crop. Property EBIT rose 8% due to higher progress billings while earnings from manufacturing and trading gained 13%, thanks to higher sales volume and stockholding gains for petrol retailer, BH Petrol.
Recommendation
Maintain HOLD with lower target price. Factoring in higher cost and slower progress billings for heavy industries, we slash our FY11-13 core EPS by 10-31%. Our target price falls from RM6.45 to RM6.33 as we update our RNAV for the current value of listed assets and reduce the target price for Affin (AHB MK, Underperform) from RM3.57 to RM3.40. We continue to rate Boustead a HOLD as there are no
immediate catalysts. For big-cap exposure to conglomerates, investors should opt for Sime Darby (SIME MK, Trading Buy).
Results highlights
• Below. At 33% of our full-year forecast and 36% of consensus estimates, Boustead’s 1H11 core net profit, which excludes RM94.6m gain from the disposal of plantation assets, was below our and consensus estimates. The variance stemmed mainly from lower heavy industries profit. Factoring in higher cost and slower progress billings for heavy industries, we slash our FY11-13 core EPS by 10-31%.
Our RNAV-based target price falls from RM6.45 to RM6.33 as we update our RNAV for the current value of listed assets and reduce the target price for Affin (AHB MK, Underperform) from RM3.57 to RM3.40. We continue to rate Boustead a HOLD as there are no immediate catalysts. For big-cap exposure to conglomerates, investors should opt for Sime Darby (SIME MK, Trading Buy).
• Key surprises. 2Q core net profit fell 38% yoy and 19% qoq due to a plunge in heavy industries contribution. 1H heavy industries EBIT fell 49% yoy, mainly because of cost escalation for certain commercial shipbuilding projects and slower progress billings. Work on the six naval vessels remained at the preliminary stage as the company is still waiting for the government to finalise the value and duration of the project. Meanwhile, the finance division was negatively affected by higher interest expense.
• Cushioned by maiden contribution from Pharmaniaga. Pharmaniaga, which became a subsidiary of Boustead at the end of 1Q11, helped the pharmaceutical division to post a pretax profit of RM36.3m compared to a RM1.1m loss last year. 1H plantation EBIT almost doubled yoy as the 38% rise in CPO price more than
offset a 1% drop in FFB crop. Property EBIT rose 8% due to higher progress billings while earnings from manufacturing and trading gained 13%, thanks to higher sales volume and stockholding gains for petrol retailer, BH Petrol.
Recommendation
Maintain HOLD with lower target price. Factoring in higher cost and slower progress billings for heavy industries, we slash our FY11-13 core EPS by 10-31%. Our target price falls from RM6.45 to RM6.33 as we update our RNAV for the current value of listed assets and reduce the target price for Affin (AHB MK, Underperform) from RM3.57 to RM3.40. We continue to rate Boustead a HOLD as there are no
immediate catalysts. For big-cap exposure to conglomerates, investors should opt for Sime Darby (SIME MK, Trading Buy).
Tuesday, 18 October 2011
Supermx ... Oct11
CIMB Research Report
Investment highlights
• Maintain HOLD. The main takeaway from Supermax’s 2Q11 results briefing yesterday was the company’s commitment to raising its minimum dividend payout from 20% to 30% from FY12 onwards. After incorporating this assumption, we raise our FY13 gross DPS by 12% but lower FY12 by 7% as we had factored in 33% payout for that year. We make no changes to our other numbers or target price of RM3.64, which is based on a forward P/E of 9.8x or a 25% discount to Top Glove’s 13.1x target P/E. Supermax remains a HOLD as it lacks catalysts and its cheap valuations are offset by overcapacity and weak demand for natural rubber (NR) gloves. For exposure to gloves, we recommend Hartalega which has superior
yields, margins and profitability.
• Switching takes a breather. As highlighted in previous notes, the cost differential between nitrile and NR is narrowing. In Apr 2011, the cost of production for nitrile gloves was as much as 40% below their NR equivalents. But this difference has narrowed to c. 5%. Nitrile capacity remains at 33% of Supermax’s total capacity, similar to 1Q11’s level but higher than 2Q10’s 19%. We sense that Supermax has stopped switching NR lines to nitrile but is ready to do so if input prices change.
• Weak demand for NR gloves. Supermax’s overall utilisation in 2Q11 was 71%. But we estimate that the utilisation rate for its NR plants was much lower at around 55- 60%. These numbers assume 90-100% utilisation of the company’s nitrile plants and a 33% nitrile capacity mix.
• Glove City deferred to FY14. Due to gas shortages, Supermax has deferred the construction of its Glove City project to FY13 and expects this project to start contributing to earnings in FY14. This uncertainty clouds the company’s longer-term growth prospects.
Recent developments
Approximately 60 analysts and fund managers turned up for Supermax’s 2Q11 results briefing yesterday. The presentation was chaired by its executive chairman and group MD Dato’ Seri Stanley Thai, who was flanked by ED Datin Seri Cheryl Tan and group accountant, Andrew Lim. We left feeling neutral about Supermax’s prospects. Supermax’s commitment to raising its dividend payout next year is a positive surprise
but is offset by the subdued picture for NR glove demand.
Dividend commitment. Supermax will raise its dividend payout from 20% of net profitto 30% from FY12 onwards. This is slightly below our assumption of a 33% payout in FY12 but higher than our assumption of a 27% dividend payout in FY13. After rebasing Supermax’s dividend payout in FY12 and FY13 to 30%, we reduce our FY12 gross DPS by 7% to 15 sen but raise FY13 by 12% to 18 sen.
Switching momentum slowing. The moderation of NR latex prices and higher nitrile prices have slowed the industry’s switch from NR to nitrile gloves. As a result, Supermax is keeping its nitrile mix at 33% for now although we sense the company isready to switch more of its NR lines to nitrile if the cost difference between nitrile and NR starts to widen again.
Earnings outlook
Glove City on hold. Due to gas shortages, Supermax is deferring the start of its Glove City project to 2H13 when the company expects the gas situation in Malaysia to normalise. It expects the project, which will increase its capacity to 15bn pieces of gloves over 10 years, to start contributing to earnings in FY14. We believe that this uncertainty clouds the company’s longer-term prospects.
Utilisation low due to plant shutdowns. Supermax sold 3.13bn pieces of gloves in 2Q on the back of an overall utilisation rate of 71%. 1H 11 sales volumes were 6.5bn pieces of gloves, implying a utilisation rate of 73%. 2Q utilisation was 6% pts lower qoq and 10% pts lower yoy. We believe the lower utilisation is a result of weak demand for NR gloves and an industry glut.
FY11 guidance confirmed. During the briefing, the company confirmed the RM100m-120m FY11 net profit guidance provided in its 2Q results release. It is confident of meeting the high end of the range as it expects 2H11 to be better. As for FY12earnings, Supermax will make an official announcement after its 4Q11 results release next year.
Recommendation
Maintain HOLD. The main takeaway from Supermax’s 2Q11 results briefing yesterday was the company’s commitment to raising its minimum dividend payout from 20% to 30% from FY12 onwards. After incorporating this assumption, we raise our FY13 gross DPS by 12% but lower FY12 by 7% as we had factored in 33% payout for that year. We make no changes to our other numbers or target price of RM3.64,
which is based on a forward P/E of 9.8x or a 25% discount to Top Glove’s 13.1x target P/E. Supermax remains a HOLD as it lacks catalysts and its cheap valuations are offset by overcapacity and weak demand for natural rubber (NR) gloves.
Investment highlights
• Maintain HOLD. The main takeaway from Supermax’s 2Q11 results briefing yesterday was the company’s commitment to raising its minimum dividend payout from 20% to 30% from FY12 onwards. After incorporating this assumption, we raise our FY13 gross DPS by 12% but lower FY12 by 7% as we had factored in 33% payout for that year. We make no changes to our other numbers or target price of RM3.64, which is based on a forward P/E of 9.8x or a 25% discount to Top Glove’s 13.1x target P/E. Supermax remains a HOLD as it lacks catalysts and its cheap valuations are offset by overcapacity and weak demand for natural rubber (NR) gloves. For exposure to gloves, we recommend Hartalega which has superior
yields, margins and profitability.
• Switching takes a breather. As highlighted in previous notes, the cost differential between nitrile and NR is narrowing. In Apr 2011, the cost of production for nitrile gloves was as much as 40% below their NR equivalents. But this difference has narrowed to c. 5%. Nitrile capacity remains at 33% of Supermax’s total capacity, similar to 1Q11’s level but higher than 2Q10’s 19%. We sense that Supermax has stopped switching NR lines to nitrile but is ready to do so if input prices change.
• Weak demand for NR gloves. Supermax’s overall utilisation in 2Q11 was 71%. But we estimate that the utilisation rate for its NR plants was much lower at around 55- 60%. These numbers assume 90-100% utilisation of the company’s nitrile plants and a 33% nitrile capacity mix.
• Glove City deferred to FY14. Due to gas shortages, Supermax has deferred the construction of its Glove City project to FY13 and expects this project to start contributing to earnings in FY14. This uncertainty clouds the company’s longer-term growth prospects.
Recent developments
Approximately 60 analysts and fund managers turned up for Supermax’s 2Q11 results briefing yesterday. The presentation was chaired by its executive chairman and group MD Dato’ Seri Stanley Thai, who was flanked by ED Datin Seri Cheryl Tan and group accountant, Andrew Lim. We left feeling neutral about Supermax’s prospects. Supermax’s commitment to raising its dividend payout next year is a positive surprise
but is offset by the subdued picture for NR glove demand.
Dividend commitment. Supermax will raise its dividend payout from 20% of net profitto 30% from FY12 onwards. This is slightly below our assumption of a 33% payout in FY12 but higher than our assumption of a 27% dividend payout in FY13. After rebasing Supermax’s dividend payout in FY12 and FY13 to 30%, we reduce our FY12 gross DPS by 7% to 15 sen but raise FY13 by 12% to 18 sen.
Switching momentum slowing. The moderation of NR latex prices and higher nitrile prices have slowed the industry’s switch from NR to nitrile gloves. As a result, Supermax is keeping its nitrile mix at 33% for now although we sense the company isready to switch more of its NR lines to nitrile if the cost difference between nitrile and NR starts to widen again.
Earnings outlook
Glove City on hold. Due to gas shortages, Supermax is deferring the start of its Glove City project to 2H13 when the company expects the gas situation in Malaysia to normalise. It expects the project, which will increase its capacity to 15bn pieces of gloves over 10 years, to start contributing to earnings in FY14. We believe that this uncertainty clouds the company’s longer-term prospects.
Utilisation low due to plant shutdowns. Supermax sold 3.13bn pieces of gloves in 2Q on the back of an overall utilisation rate of 71%. 1H 11 sales volumes were 6.5bn pieces of gloves, implying a utilisation rate of 73%. 2Q utilisation was 6% pts lower qoq and 10% pts lower yoy. We believe the lower utilisation is a result of weak demand for NR gloves and an industry glut.
FY11 guidance confirmed. During the briefing, the company confirmed the RM100m-120m FY11 net profit guidance provided in its 2Q results release. It is confident of meeting the high end of the range as it expects 2H11 to be better. As for FY12earnings, Supermax will make an official announcement after its 4Q11 results release next year.
Recommendation
Maintain HOLD. The main takeaway from Supermax’s 2Q11 results briefing yesterday was the company’s commitment to raising its minimum dividend payout from 20% to 30% from FY12 onwards. After incorporating this assumption, we raise our FY13 gross DPS by 12% but lower FY12 by 7% as we had factored in 33% payout for that year. We make no changes to our other numbers or target price of RM3.64,
which is based on a forward P/E of 9.8x or a 25% discount to Top Glove’s 13.1x target P/E. Supermax remains a HOLD as it lacks catalysts and its cheap valuations are offset by overcapacity and weak demand for natural rubber (NR) gloves.
Monday, 17 October 2011
Poh Kong ... Oct11
By Mercury Securities Sdn Bhd
Poh Kong’s 4Q/FY11 results (quarter ended 31st July 2011) were generally slightly above our earlier expectations.
“Strong Q4 performance”
Poh Kong's revenue of RM183.1 million during 4Q/FY11 was higher by 38.8% y-o-y versus the corresponding 4Q/FY10. The increase in revenue was partly attributed to the effect from the group’s 35th Anniversary promotional activities and also the increase in gold price on top of its existing stores registering higher sales. The group's 4Q/FY11 net profit after tax (NPAT) of RM12.2 million was higher by 56.4% y-o-y.
“Best Ever” full year results
The group achieved FY11 revenue of RM692.5 million, which we believe is their highest ever full year revenue. FY11 revenue was higher by 23.4% y-o-y. The group also achieved its “record NPAT” of RM41.6 million, which was higher by 28.0% y-o-y.
OUTLOOK/CORP. UPDATES
Poh Kong’s management plans to continue its drive to build market share by enhancing and differentiating its product offerings to its targeted market segments. The group actively evaluates various initiatives and opportunities to attract new customers through the introduction of new product lines/designs and enhanced customer service.
“Domestic Demand still holding well”
Malaysia had reported reasonably stable CPI of 3.3% (August 2011) and unemployment rate of 3.0% (2Q/2011). In early September 2011, Bank Negara Malaysia (BNM) had maintained its overnight policy rate (OPR) at 3.0%. According to BNM, Malaysia’s 2Q/2011 GDP rose by 4.0%, following a revised 4.9% GDP growth in 1Q/2011. A steady economic growth would also lead to higher consumer optimism and hence assist to raise domestic consumption, including spending on retail gold or jewellery products.
Malaysia Retailers Association (MRA) said in its latest Malaysia Retail Industry Report, that local retailers saw sales rise by 9.1% in the April-June 2011 (2Q/2011) period as they offered attractive discount to lure shoppers. Malaysia’s retail sales growth has been revised upwards to 6.5% from 6.0% previously, following an encouraging 8.2% growth in 1H/ 2011. This growth will bring estimated total retail sales for the year to RM82 billion. Retail sales grew 8.4 % in 2010, with total sales value estimated at RM77 billion. Nevertheless, rising costs and discounts may see retailers' profit margins being squeezed.
“Gold Prices – above US$1600/ounce”
Reflecting concerns in Europe, the spot rate for gold traded on the NYMEX (New York Mercantile Exchange) has dropped to around US$1635/troy ounce after reaching a high of around US$1921/troy ounce recently. According to the World Gold Council, robust gold market fundamentals, including evidence of stronger demand for gold jewellery in China and India, have continued to support gold prices. Gold plays a role in hedging and has been regarded as a safe, long term investment that provides protection against unforeseen risks in the economic cycle.
Large jewellers like Poh Kong do have revenues coming from sales of gold bars, though its management has not given any guidance on the quantum. Gold bars, which are 999.9% pure gold, are available in 1g, 5g, 10g, 20g, 50g and 100g weight denominations. Gold wafers are sold in the denominations of 25g, 50g and 100g. More often than not, gold jewellery are bought largely for ornamental usage e.g. for wedding dowry, ceremonial/formal functions and as gifts to spouses or close family members.
Besides gold wafers, gold bars and gold-based jewellery, there are also other gold-investment options. Consumers nowadays have the option of investing in gold via commercial banks (via “gold investment accounts”) or even via MLM (multilevel-marketing) companies that may offer gold-based investment products (e.g. gold coins and gold bars). In some countries, gold-related investments could also be done via gold ETFs (exchange traded funds), gold certificates and gold-based derivatives.
Currently Poh Kong has no plans to expand its outlets to overseas locations. In terms of revenue, about 80% of Poh Kong’s revenue is derived from gold, with the remainder 20% from gem stones (e.g. diamonds). From the gold-revenue segment, about 75% is derived from yellow-gold sales while 25% is from white-gold sales. The ‘Malay and Indian’ market clientele traditionally prefers yellow-gold based ornamental products.
Poh Kong practices the 4 core business principles of quality, value, trustworthiness and choice, to target its market segments. This incorporates values such as design, craftsmanship, reputation, and competitive pricing. The group constantly evaluates its operational efficiency/costs, capital expenditure, outlet-expansion plans, gearing, cash flow needs and gold inventory levels. The group constantly selects stores to refurbish and also find strategic locations for outlets across the country which has the best potential for higher revenue growth and consumer demand. On the marketing side – the group’s intensified efforts in A&P (especially during festivals), merchandising and product launches, sponsorships and road shows during the year would help to maintain the group’s market leading position.
In May 2011, Poh Kong announced a proposal to undertake an Islamic Commercial Papers/Islamic Medium Term Notes (ICP/IMTN) Programme (up to RM150 million in nominal value), to be guaranteed by Danajamin Nasional Berhad. Pursuant to this announcement, Danajamin Nasional Berhad will provide a guarantee facility to Poh Kong’s payment obligations under the proposed ICP/IMTN Programme.
VALUATION/CONCLUSION
“Consistent DPS but dwindling Dividend Payout Ratio”
Poh Kong’s board of directors (BOD) had proposed a first and final dividend per share (DPS) of 1.4 sen single tier for its FY11 ended 31st July 2011. The proposed dividend will be subject to shareholders' approval at the next AGM to be held on a date to be announced later. The entitlement and payment dates for the dividends would also be announced later. Poh Kong’s future dividends would be largely determined by the performance and cashflow needs of the group. We note that the group’s dividend payout ratios have been dwindling over the past few years due to its constant annual DPS despite of its rising earnings.
Even with an adjusted beta (correlation factor) of 0.76 to the KLCI, Poh Kong (-18.4% YTD) had underperformed the KLCI (-8.7% YTD) this year. Market conditions have also been volatile in recent months, impacted by the political uprisings in the Middle East/North Africa, debt ceiling issue in the US, sovereign debt issue in Europe and the Tohoku disaster in Japan. As Poh Kong is not a particularly large market-cap stock, this may put a dampener on its market visibility and trading volume.
“Upgrade to Buy Call”
Based on our forecast of Poh Kong’s FY12 EPS and an estimated P/E of 4.5 times (within its historical range), we set a FY11-end Target Price (TP) of RM0.53. This TP offers a 32.1% upside from its current market price, and represents an upgrade to a Buy Call. This upgrade is due to its price being near to its 52-week low and also the improved results. Our TP for Poh Kong reflects a P/BV of 0.56 times over its FY12F BV/share. Meanwhile, the local “Clothes & Accessories” sector’s average P/E and P/BV is 9.3 times and 0.8 times, respectively.
“Poh Kong – a Value Buy”
We find that Poh Kong’s FY12F P/E and P/BV valuations are very undemanding, while it has reasonable net gearing ratio, dividend yield and ROE. We are pleased with Poh Kong’s positive performance during its FY11. Nevertheless, the group also face routine business risks such as any future economic downturn, consumer pessimism, uneven monthly sales (due to festive seasons), fluctuating raw material prices and foreign exchange rates and strong competition from its peers. Going forward, the group’s upside would be largely dependent on its management’s marketing and growth strategy, and also on the overall economic conditions.
Poh Kong’s 4Q/FY11 results (quarter ended 31st July 2011) were generally slightly above our earlier expectations.
“Strong Q4 performance”
Poh Kong's revenue of RM183.1 million during 4Q/FY11 was higher by 38.8% y-o-y versus the corresponding 4Q/FY10. The increase in revenue was partly attributed to the effect from the group’s 35th Anniversary promotional activities and also the increase in gold price on top of its existing stores registering higher sales. The group's 4Q/FY11 net profit after tax (NPAT) of RM12.2 million was higher by 56.4% y-o-y.
“Best Ever” full year results
The group achieved FY11 revenue of RM692.5 million, which we believe is their highest ever full year revenue. FY11 revenue was higher by 23.4% y-o-y. The group also achieved its “record NPAT” of RM41.6 million, which was higher by 28.0% y-o-y.
OUTLOOK/CORP. UPDATES
Poh Kong’s management plans to continue its drive to build market share by enhancing and differentiating its product offerings to its targeted market segments. The group actively evaluates various initiatives and opportunities to attract new customers through the introduction of new product lines/designs and enhanced customer service.
“Domestic Demand still holding well”
Malaysia had reported reasonably stable CPI of 3.3% (August 2011) and unemployment rate of 3.0% (2Q/2011). In early September 2011, Bank Negara Malaysia (BNM) had maintained its overnight policy rate (OPR) at 3.0%. According to BNM, Malaysia’s 2Q/2011 GDP rose by 4.0%, following a revised 4.9% GDP growth in 1Q/2011. A steady economic growth would also lead to higher consumer optimism and hence assist to raise domestic consumption, including spending on retail gold or jewellery products.
Malaysia Retailers Association (MRA) said in its latest Malaysia Retail Industry Report, that local retailers saw sales rise by 9.1% in the April-June 2011 (2Q/2011) period as they offered attractive discount to lure shoppers. Malaysia’s retail sales growth has been revised upwards to 6.5% from 6.0% previously, following an encouraging 8.2% growth in 1H/ 2011. This growth will bring estimated total retail sales for the year to RM82 billion. Retail sales grew 8.4 % in 2010, with total sales value estimated at RM77 billion. Nevertheless, rising costs and discounts may see retailers' profit margins being squeezed.
“Gold Prices – above US$1600/ounce”
Reflecting concerns in Europe, the spot rate for gold traded on the NYMEX (New York Mercantile Exchange) has dropped to around US$1635/troy ounce after reaching a high of around US$1921/troy ounce recently. According to the World Gold Council, robust gold market fundamentals, including evidence of stronger demand for gold jewellery in China and India, have continued to support gold prices. Gold plays a role in hedging and has been regarded as a safe, long term investment that provides protection against unforeseen risks in the economic cycle.
Large jewellers like Poh Kong do have revenues coming from sales of gold bars, though its management has not given any guidance on the quantum. Gold bars, which are 999.9% pure gold, are available in 1g, 5g, 10g, 20g, 50g and 100g weight denominations. Gold wafers are sold in the denominations of 25g, 50g and 100g. More often than not, gold jewellery are bought largely for ornamental usage e.g. for wedding dowry, ceremonial/formal functions and as gifts to spouses or close family members.
Besides gold wafers, gold bars and gold-based jewellery, there are also other gold-investment options. Consumers nowadays have the option of investing in gold via commercial banks (via “gold investment accounts”) or even via MLM (multilevel-marketing) companies that may offer gold-based investment products (e.g. gold coins and gold bars). In some countries, gold-related investments could also be done via gold ETFs (exchange traded funds), gold certificates and gold-based derivatives.
Currently Poh Kong has no plans to expand its outlets to overseas locations. In terms of revenue, about 80% of Poh Kong’s revenue is derived from gold, with the remainder 20% from gem stones (e.g. diamonds). From the gold-revenue segment, about 75% is derived from yellow-gold sales while 25% is from white-gold sales. The ‘Malay and Indian’ market clientele traditionally prefers yellow-gold based ornamental products.
Poh Kong practices the 4 core business principles of quality, value, trustworthiness and choice, to target its market segments. This incorporates values such as design, craftsmanship, reputation, and competitive pricing. The group constantly evaluates its operational efficiency/costs, capital expenditure, outlet-expansion plans, gearing, cash flow needs and gold inventory levels. The group constantly selects stores to refurbish and also find strategic locations for outlets across the country which has the best potential for higher revenue growth and consumer demand. On the marketing side – the group’s intensified efforts in A&P (especially during festivals), merchandising and product launches, sponsorships and road shows during the year would help to maintain the group’s market leading position.
In May 2011, Poh Kong announced a proposal to undertake an Islamic Commercial Papers/Islamic Medium Term Notes (ICP/IMTN) Programme (up to RM150 million in nominal value), to be guaranteed by Danajamin Nasional Berhad. Pursuant to this announcement, Danajamin Nasional Berhad will provide a guarantee facility to Poh Kong’s payment obligations under the proposed ICP/IMTN Programme.
VALUATION/CONCLUSION
“Consistent DPS but dwindling Dividend Payout Ratio”
Poh Kong’s board of directors (BOD) had proposed a first and final dividend per share (DPS) of 1.4 sen single tier for its FY11 ended 31st July 2011. The proposed dividend will be subject to shareholders' approval at the next AGM to be held on a date to be announced later. The entitlement and payment dates for the dividends would also be announced later. Poh Kong’s future dividends would be largely determined by the performance and cashflow needs of the group. We note that the group’s dividend payout ratios have been dwindling over the past few years due to its constant annual DPS despite of its rising earnings.
Even with an adjusted beta (correlation factor) of 0.76 to the KLCI, Poh Kong (-18.4% YTD) had underperformed the KLCI (-8.7% YTD) this year. Market conditions have also been volatile in recent months, impacted by the political uprisings in the Middle East/North Africa, debt ceiling issue in the US, sovereign debt issue in Europe and the Tohoku disaster in Japan. As Poh Kong is not a particularly large market-cap stock, this may put a dampener on its market visibility and trading volume.
“Upgrade to Buy Call”
Based on our forecast of Poh Kong’s FY12 EPS and an estimated P/E of 4.5 times (within its historical range), we set a FY11-end Target Price (TP) of RM0.53. This TP offers a 32.1% upside from its current market price, and represents an upgrade to a Buy Call. This upgrade is due to its price being near to its 52-week low and also the improved results. Our TP for Poh Kong reflects a P/BV of 0.56 times over its FY12F BV/share. Meanwhile, the local “Clothes & Accessories” sector’s average P/E and P/BV is 9.3 times and 0.8 times, respectively.
“Poh Kong – a Value Buy”
We find that Poh Kong’s FY12F P/E and P/BV valuations are very undemanding, while it has reasonable net gearing ratio, dividend yield and ROE. We are pleased with Poh Kong’s positive performance during its FY11. Nevertheless, the group also face routine business risks such as any future economic downturn, consumer pessimism, uneven monthly sales (due to festive seasons), fluctuating raw material prices and foreign exchange rates and strong competition from its peers. Going forward, the group’s upside would be largely dependent on its management’s marketing and growth strategy, and also on the overall economic conditions.
Tuesday, 11 October 2011
Salcon ... Oct11
Inet Research
1. Recent developments
- Salcon announced that its wholly-owned Salcon Engineering Berhad through its consortium Hydrotek-Salcon Consortium has been awarded with a project for the construction of reservoirs for Phet Kasem and Rat Burana distribution pumping stations and related works in Bangkok, Thailand from Metropolitan Waterworks Authority, Thailand.
- This contract, with a value of RM22.0m
(THB215.7m), is expected to be completed in within 2 years from Notice to Proceed.
- This project, which is under the Eight Bangkok Water Supply Improvement Project, is funded by
Japan International Cooperation Agency (JICA).
- This represents Salcon’s 4th project in Thailand after the Min Buri water distribution pumping station,
supply and installation of trunk mains and the construction of Sam Lae Raw Water Pumpting Station.
- The pace of the secure of new projects has picked up in 2HFY11 after a slower progress in 1HFY11. In
Jul-11, Salcon secured a maiden project in India worth RM16.2m for providing and laying of raw water
pumping main in Davanagere City, Karnataka, India.
- Subsequently in early Sep-11, Salcon secured a sub-contract project for the upgrading, repairing works
and its related works of Sg. Chukai, Kemaman, Terengganu (Chukai flood mitigation plan), with a
project value of RM20.4m.
2. Earnings Outlook
- This new project will take Salcon’s outstanding orderbook to RM1.3bn. The unbilled sales of RM322m
represents a turnover cover of 1.2x based on the turnover of RM271.8m for its construction division for
FY10.
3. Valuation and Recommendation
- We are maintaining our Buy recommendation on the stock for its growing recurring earnings stream from
concession business and strong orderbook.
- The stock is currently trading at 44% discount to its NTA of RM0.75/share, which does not reflect the
promising long-term prospects of its growing concession-based business in China and the doubling in
design capacity of its China concession by end-FY11.
1. Recent developments
- Salcon announced that its wholly-owned Salcon Engineering Berhad through its consortium Hydrotek-Salcon Consortium has been awarded with a project for the construction of reservoirs for Phet Kasem and Rat Burana distribution pumping stations and related works in Bangkok, Thailand from Metropolitan Waterworks Authority, Thailand.
- This contract, with a value of RM22.0m
(THB215.7m), is expected to be completed in within 2 years from Notice to Proceed.
- This project, which is under the Eight Bangkok Water Supply Improvement Project, is funded by
Japan International Cooperation Agency (JICA).
- This represents Salcon’s 4th project in Thailand after the Min Buri water distribution pumping station,
supply and installation of trunk mains and the construction of Sam Lae Raw Water Pumpting Station.
- The pace of the secure of new projects has picked up in 2HFY11 after a slower progress in 1HFY11. In
Jul-11, Salcon secured a maiden project in India worth RM16.2m for providing and laying of raw water
pumping main in Davanagere City, Karnataka, India.
- Subsequently in early Sep-11, Salcon secured a sub-contract project for the upgrading, repairing works
and its related works of Sg. Chukai, Kemaman, Terengganu (Chukai flood mitigation plan), with a
project value of RM20.4m.
2. Earnings Outlook
- This new project will take Salcon’s outstanding orderbook to RM1.3bn. The unbilled sales of RM322m
represents a turnover cover of 1.2x based on the turnover of RM271.8m for its construction division for
FY10.
3. Valuation and Recommendation
- We are maintaining our Buy recommendation on the stock for its growing recurring earnings stream from
concession business and strong orderbook.
- The stock is currently trading at 44% discount to its NTA of RM0.75/share, which does not reflect the
promising long-term prospects of its growing concession-based business in China and the doubling in
design capacity of its China concession by end-FY11.
Friday, 7 October 2011
SCIENTX ... Oct2011
Scientex Berhad - TA Securities.
1. Review
Scientex Berhad will announce its FY11 results sometime next week. We continue to like Scientex for its diversified two core business operations; i) manufacturing and ii)property coupled with expansion plans that will sustain growth over the mid-to-long term.
Some recap, Scientex has reported a 33% growth in net profit to RM57mn for 9M11. The growth was mainly contributed by the property division which saw a 62% growth in revenue. To add, margin of property soared by 7p.p. thanks to favourable product mix.
On a negative note however, Scientex was impacted by the depreciation of USD which led to a contraction in margin. 80% of its products are exported whilst 65% of its purchases are denominated in USD.
2. Outlook
Going forward, we are positive on Scientex thanks to its mid and long term expansion plans. For its manufacturing line, Scientex will raise production capacity to 120k MT, or a 20% increase by FY12 which will put Scientex as the fifth largest stretch film producer in the world. It will also increase its strapping band production capacity to 24k MT by end-2011, or a 50% growth.
Over the long term, Scientex has entered into an S&P agreement for the purchase of land opposite its current
facility for RM12mn. Thus, we expect capacity to doubleup in 3-5 years time.
This is positive as we expect Scientex to benefit from economies of scale and improved margin. We believe that demand of stretch film is on the rise.
Scientex has also shown defensiveness in its property division with an almost fully-take up rate of its
developments. To add, its high-end property developments command a strong 35-45% margin.
According to the management, its property division’s revenue may contribute up to 30% of total revenue by
FY12 as compared to 25% in the previous year. We believe its Taman Mutiara Mas and Taman Muzaffar
Heights will contribute strongly in FY11 as seen in 9M11. Going forward, Scientex has enough landbank to keep them busy until 2019, a total GDV of RM2.1bn.
3. Results Preview
We have fine-tuned our earnings estimates for Scientex for FY11 and we are leaving FY12-13 estimates unchanged. We cut our earnings estimates for FY11 by 4.8% to RM75.8mn. The adjustment was
made to impute slightly weaker margin for the manufacturing division due to the impact from USD
and higher raw material prices whilst offset by better property contribution.
Hence, for the FY11, we expect Scientex to report a net profit of RM75.8mn, or a 22% growth against FY10. In our assumption, we expect the property division to contribute 25% to total revenue or RM195mn and RM575mn for manufacturing.
We are expecting equal contribution from the property and manufacturing division to the EBITDA for FY11. This is mainly thanks to better margin of high-end property developments.
4. Valuation
We derive a new target price of RM2.90 based on Sum-of- Parts valuation method. We have cut our sectors target PER in line with the recent downgrade of FBMKLCI. Hence, we attach a 7x FY12 PER (from 9x previously) to the property segment and 6x (from 8x previously) for the manufacturing segment. Maintain Buy.
1. Review
Scientex Berhad will announce its FY11 results sometime next week. We continue to like Scientex for its diversified two core business operations; i) manufacturing and ii)property coupled with expansion plans that will sustain growth over the mid-to-long term.
Some recap, Scientex has reported a 33% growth in net profit to RM57mn for 9M11. The growth was mainly contributed by the property division which saw a 62% growth in revenue. To add, margin of property soared by 7p.p. thanks to favourable product mix.
On a negative note however, Scientex was impacted by the depreciation of USD which led to a contraction in margin. 80% of its products are exported whilst 65% of its purchases are denominated in USD.
2. Outlook
Going forward, we are positive on Scientex thanks to its mid and long term expansion plans. For its manufacturing line, Scientex will raise production capacity to 120k MT, or a 20% increase by FY12 which will put Scientex as the fifth largest stretch film producer in the world. It will also increase its strapping band production capacity to 24k MT by end-2011, or a 50% growth.
Over the long term, Scientex has entered into an S&P agreement for the purchase of land opposite its current
facility for RM12mn. Thus, we expect capacity to doubleup in 3-5 years time.
This is positive as we expect Scientex to benefit from economies of scale and improved margin. We believe that demand of stretch film is on the rise.
Scientex has also shown defensiveness in its property division with an almost fully-take up rate of its
developments. To add, its high-end property developments command a strong 35-45% margin.
According to the management, its property division’s revenue may contribute up to 30% of total revenue by
FY12 as compared to 25% in the previous year. We believe its Taman Mutiara Mas and Taman Muzaffar
Heights will contribute strongly in FY11 as seen in 9M11. Going forward, Scientex has enough landbank to keep them busy until 2019, a total GDV of RM2.1bn.
3. Results Preview
We have fine-tuned our earnings estimates for Scientex for FY11 and we are leaving FY12-13 estimates unchanged. We cut our earnings estimates for FY11 by 4.8% to RM75.8mn. The adjustment was
made to impute slightly weaker margin for the manufacturing division due to the impact from USD
and higher raw material prices whilst offset by better property contribution.
Hence, for the FY11, we expect Scientex to report a net profit of RM75.8mn, or a 22% growth against FY10. In our assumption, we expect the property division to contribute 25% to total revenue or RM195mn and RM575mn for manufacturing.
We are expecting equal contribution from the property and manufacturing division to the EBITDA for FY11. This is mainly thanks to better margin of high-end property developments.
4. Valuation
We derive a new target price of RM2.90 based on Sum-of- Parts valuation method. We have cut our sectors target PER in line with the recent downgrade of FBMKLCI. Hence, we attach a 7x FY12 PER (from 9x previously) to the property segment and 6x (from 8x previously) for the manufacturing segment. Maintain Buy.
Thursday, 6 October 2011
Unimesh ... Oct2011
Unimech Group Berhad - By ZJ Research.
2QFY11 Results Review
• Unimech Group Berhad (Unimech) produced another set of consistent results with 2QFY11 net profit coming in at RM5.4 mln, taking 1HFY11 net profit to RM9.5 mln. The results were within our expectations with 1HFY11 profit reaching 53% of our full year projection.
• Unimech’s 1HFY11 turnover and net profit increased 33.8% and 20.0% y-o-y to RM96.7 mln and RM9.5 mln respectively, mainly on higher demand for its valves, fittings and related products. The industrial valves and related products division remains the largest business segment, contributing 79% to Group revenue and and 89% to operating profit in 1HFY11. To recap, Unimech’s other key businesses include heat and steam engineering systems; manufacture of electronic products and electronic automation control systems; as well as
design, fabrication and assembly of pumps.
• Sequentially, 2QFY11 revenue declined a modest 4.3% on lower contribution from the industrial valves and related products division. However, despite the lower turnover, net profit surged 35.6% to RM5.4 mln, due to higher gross profit margin achieved during the quarter under review. The improved performance in 2QFY11 made up for the lower margin experienced in 1QYF11, and as a result, Unimech’s 1HFY11 operating profit margin was sustained at 16.8%, which is comparable to the 17% margin achieved a year ago.
• Meanwhile, Unimech’s operations also remain firmly supported by a solid balance sheet with a low net gearing of 0.26x and a NTA/share of RM1.22 as at end-June 2011.
• With 1HFY11 results in line with our expectations, we continue to maintain our current FY11 revenue and net profit estimates of RM182.1 mln and RM17.9 mln respectively.
• No dividend was declared for the quarter under review.
Recommendation
We maintain a Buy recommendation on Unimech, but lower our fair value to RM1.05 (from RM1.18).
Our fair value is derived from ascribing a PER of 8x (from 9x) against our FY11 net profit projection.
The reduced benchmark PER is in tandem with the lower average PER of small-cap companies in the
industrial products segment, following the recent sell down in the broader equity market.
We continue to like Unimech for its earnings growth prospects, underpinned by the steady rise in the
demand for its industrial valves and related products. Its consistency in earnings delivery is also
another plus point for the Group.
We view the recent fall in Unimech’s share price as a reflection of the uncertain macroeconomic
environment and poor investor sentiment, as the Group’s fundamentals remain intact and backed by
solid a balance sheet. Valuation, at prospective FY11 PER of 6x and P/BV of 0.6x, remains
undemanding, in addition to the attractive potential net dividend yield of approximately 5%.
2QFY11 Results Review
• Unimech Group Berhad (Unimech) produced another set of consistent results with 2QFY11 net profit coming in at RM5.4 mln, taking 1HFY11 net profit to RM9.5 mln. The results were within our expectations with 1HFY11 profit reaching 53% of our full year projection.
• Unimech’s 1HFY11 turnover and net profit increased 33.8% and 20.0% y-o-y to RM96.7 mln and RM9.5 mln respectively, mainly on higher demand for its valves, fittings and related products. The industrial valves and related products division remains the largest business segment, contributing 79% to Group revenue and and 89% to operating profit in 1HFY11. To recap, Unimech’s other key businesses include heat and steam engineering systems; manufacture of electronic products and electronic automation control systems; as well as
design, fabrication and assembly of pumps.
• Sequentially, 2QFY11 revenue declined a modest 4.3% on lower contribution from the industrial valves and related products division. However, despite the lower turnover, net profit surged 35.6% to RM5.4 mln, due to higher gross profit margin achieved during the quarter under review. The improved performance in 2QFY11 made up for the lower margin experienced in 1QYF11, and as a result, Unimech’s 1HFY11 operating profit margin was sustained at 16.8%, which is comparable to the 17% margin achieved a year ago.
• Meanwhile, Unimech’s operations also remain firmly supported by a solid balance sheet with a low net gearing of 0.26x and a NTA/share of RM1.22 as at end-June 2011.
• With 1HFY11 results in line with our expectations, we continue to maintain our current FY11 revenue and net profit estimates of RM182.1 mln and RM17.9 mln respectively.
• No dividend was declared for the quarter under review.
Recommendation
We maintain a Buy recommendation on Unimech, but lower our fair value to RM1.05 (from RM1.18).
Our fair value is derived from ascribing a PER of 8x (from 9x) against our FY11 net profit projection.
The reduced benchmark PER is in tandem with the lower average PER of small-cap companies in the
industrial products segment, following the recent sell down in the broader equity market.
We continue to like Unimech for its earnings growth prospects, underpinned by the steady rise in the
demand for its industrial valves and related products. Its consistency in earnings delivery is also
another plus point for the Group.
We view the recent fall in Unimech’s share price as a reflection of the uncertain macroeconomic
environment and poor investor sentiment, as the Group’s fundamentals remain intact and backed by
solid a balance sheet. Valuation, at prospective FY11 PER of 6x and P/BV of 0.6x, remains
undemanding, in addition to the attractive potential net dividend yield of approximately 5%.
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