Business





Saturday May 17, 2008

Brokers' call

Compiled by TEE LIN SAY


Water Sector

COMMENT by AmResearch: In this report, we strive to highlight how the various moving parts in the water industry may converge in light of a changed political backdrop given the confusion over the regulatory jurisdiction along the water supply chain.

The new Water Acts has already been enforced since January 2008, where water issues will be under the purview of both the Federal and state governments. The former via Water Asset Management Co Bhd (WAMCO) is taking ownership of water assets from the various states, with legislative power under National Water Services Commission (SPAN) to regulate the industry (e.g. water tariffs).

The states of Negri Sembilan, Johor and Malacca have agreed on the re-nationalisation program with other states to follow suit. The state governments, however, retain control over raw water resources.

For the water concessionaires, the renegotiation risks have risen as SPAN is now entrusted to approve all water matters including tariffs. This shift in the balance of power has weakened the bargaining leverage of the water concessionaires.

Consolidation appears imminent particularly in the state of Selangor where the ownership of water assets is fragmented. The change in state government in Selangor should not affect Kumpulan Darul Ehsan Bhd's (KDE) role in pushing for the consolidation of water assets since it is the state investment arm.

The recent Selangor state government's pronouncement of free water supply of up to 20 cu m is likely to be a non-event since the state government will be compelled to compensate SYABAS for the subsequent loss of revenue.

The same can be said for any proposed reduction in water tariffs subject to the water concessionaires satisfying the key performing indicators.

It is important to note that the Pahang-Selangor raw water project is finally taking off, given that it is a demand driven initiative. The outcome for the tunnelling package of the interstate raw water transfer project will be finalised very soon. Hence, we believe there is greater urgency to kick-start Langat 2, as both the Pahang-Selangor portions have to run concurrently by next year.

To be sure, the new Selangor Chief Minister has given the go-ahead for KDE to commence the Langat 2 project. KDE is currently working with the project consultants on the final project design, with land acquisition for Phase 1 (497 ha) to be completed by August 2008.

Risk of the project being high jacked from KDE is minimal in our view; as (i) the Federal government had on Feb 5 2008 already awarded the capex/O&M works to KDE; and (ii) KDE owns 50% of the land required for Langat 2.

Recommendation: We reaffirm our BUYs on Kumpulan Perangsang Selangor Bhd (KPS) and Puncak Niaga Bhd with target prices of RM2.62 per share and RM4.20 per share respectively. With Langat 2, KPS is on the cusp of transforming into a leading water utility with a dominant 71% market share of Klang Valley’s water supply.

There is further restructuring upside for KPS via the divestment of non-core assets (such a move will help KPS realise up to RM.1.54/share). The market should re-focus on Puncak as the restructuring of the entire supply chain to re-nationalise water concession assets presents an excellent avenue for it to realise its deep embedded value (DCF = RM7/share).

Maintain BUY on Jaks Resources Bhd with an unchanged target price of RM1 per share, based on 8x FY09F EPS. Jaks remains in poll position to secure construction/pipeline works for phase 1 of Langat 2 worth RM2.5bil, given its status as the only integrated water engineering specialist capable of delivering large diameter pipes of 3m for raw water transfer.

Jaks also has operational scalability (current utilisation of its mild steel pipe plants is only 40%). Furthermore, KPS’ recent acquisition of a 10% stake in Jaks.

MISC Bhd (RM9.50 as at May 13)

LAST Monday, MISC announced its full year results for the year ended March 2008. Comment by OSK Research: Although MISC’s full year core results were within our expectations; it was 13% below consensus, as we believe market did not factor in the full impact from fuel costs.

Better liner and offshore business profits helped to offset pressures from lower rates and high fuel prices. Tanker rates have since turned for the better and we upgrade our day rates for MISC’s very large crude containers (VLCCs) although fuel cost will remain a concern.

Rolling over to FY09 as a base year for our valuation, Sum of Parts fair value is raised to RM10. Insufficient upside for an upgrade and we maintain our Neutral call.

MISC’s full year results were within our expectations although 13% below consensus as we believe the consensus did not take into account the full impact of high oil prices on MISC’s profits.

Balance sheet remained healthy with net gearing at 30% and a final dividend of 20 sen was again declared. Exceptional items including RM127.2mil from the sale of ships and RM69.2mil from the sale of investment properties were realised in the fourth quarter.

Year on year was impacted by generally lower tanker rates and higher fuel. The 9.7% full year decline in core net profits was a result of lower tanker rates for much of the earlier part of FY07 as well as higher bunker fuel prices that eroded operating margins by over 4 percentage points. Full impact was nonetheless offset by higher profits from the liner, Malaysia Marine and Heavy Engineering Sdn Bhd (MMHE) and offshore businesses.

As mentioned in our previous notes on MISC, tanker rates had begun their recovery in the third quarter, but revenue recognition was only in the fourth quarter, which coupled with better MMHE profits led to a 31% jump in quarter on quarter profits.

The rise in tanker rates continued especially for VLCCs where rates have again breached the US$150,000 per day level. We are revising our rate assumption for MISC’s VLCCs but downgrade earnings for the liner and MMHE businesses due to higher oil and steel prices. Net effect is a 3% to 4% downgrade in profits.

Recommendation: For our fair value, we roll over to FY09 numbers to value MISC. Despite the slight drop in forecasts, the rolling over effect raises our Sum of Parts fair value to RM10. Nonetheless, there remains limited upside and unless VLCC rates sustain well into June, we maintain our Neutral call for now.

Carlsberg Brewery Malaysia Bhd (RM4.08 as at May 12)

CARLSBERG faces a challenging operating environment in 2008 with strong competition from Guinness Anchor Berhad (GAB) and a new third local brewery as well as increasing costs of production and packaging.

Comment by Standard & Poor's: The company is mitigating the tough operating environment with a more favourable product mix and better cost efficiency. It is aiming for a larger market share in the premium beer segment as well as optimising its sales and distribution channels to improve freshness and quality of its products.

For the first quarter ended March 2008, the company reported a marked improvement in its revenue and profits over the previous year’s corresponding quarter when it was undergoing restructuring.

A key concern is the possibility of an increase in excise duty on beer and stout after a two-year respite. Due to the high excise duty, smuggled and counterfeit beer and stout are still significant issues.

Key risks to our recommendation and target price include (i) increase in excise duty on alcoholic drinks, (ii) unexpected increase in raw materials and packaging costs and (iii) lower consumer demand as a result of economic slowdown and higher food and fuel prices.

Recommendation: We initiate coverage on Carlsberg with a Hold recommendation and a 12-month price target of RM4.50. Our target price is based on dividend discount model (DDM) valuation. The target price includes projected dividends in the next 12 months.

At the current price, Carlsberg is trading at a PER of 15.4x FY08 estimated earnings. The company has a healthy balance sheet with a near zero gearing position and a cash position of RM216.8mil (71 sen per share) in FY07. This will enable it to continue with its high dividend payout policy.

Carlsberg is a good defensive play in a volatile equity market with its low beta and a gross dividend yield of 8.6% (based on current price of RM4.08 and forecast dividend of 35 sen). However, it is facing stiff competition from Guinness Anchor Bhd, increasing raw materials and packaging costs and uncertainty in excise duties.

The Carlsberg companies are committed to operating its business in a manner that is environmentally sound and socially responsible.

TRC Synergy Bhd (RM1.75 as at May 12) 

THE government’s reprioritising of yet-to-be awarded projects to take into account needs versus feasibility in view of rising raw material costs is already anticipated to result in delays and perhaps cancellation of selected projects still in the pipeline as already seen in the Penang bridge delay and the scrapping of the bullet train project to Singapore.

Further, the move by 2 opposition states to favour the open tender system looks likely to drive down contract values in the states concerned, with some quarters not discounting implications for the entire industry as a whole.

Comment by Net Research: In all, this will result in an even more competitive environment where the more cost efficient companies with proven track record and strong balance sheets will have an edge over less efficient, smaller players and structurally, in our view, could pave the way to a consolidation period.

Nevertheless, we believe that TRCS’ resilience in the medium term is underpinned by a number of positive factors: The Group’s order book to-date of around RM1.4bil with an estimated unbilled portion of RM970mil will keep the company busy for the next 2 to 3 years.

Seven out of eight projects were secured within the last 24 months, with the 3 most recent projects awarded between December 07 and April 08 comprising: Kuala Terengganu Airport upgrading works (RM202mil), construction of Putrajaya’s government quarters (RM115.5mil) and the construction of University KL in Pasir Gudang (RM196.5mil).

A number of mitigating factors against rising raw material costs include: 1) contracts recently secured which have factored in the prevailing costs of raw materials, 2) escalation clauses for cost overruns 3) 2 to 3 months of forward buying of raw materials and 4) gains from design optimisation and efficiency measures.

Strong balance sheet with relatively low borrowings and strong cash position of around RM190mil from progressive billings.

TRCS has to-date tendered for around RM1.5bil worth of projects. Management’s internal target to secure annual contract values of between RM300mil to RM600mil is believed to be still on track.

Notwithstanding current issues faced by the industry presently, 2 key potential earnings upside for the group in the longer term could come from: TRCS’ investment in Petroblu (26%), currently mandated by the Brunei government to carry out pre-feasibility, feasibility and engineering studies for a proposed US$1.5bil to US$3.5bil oil refinery.

Contingent upon the completion of the studies in 12 months, potential construction opportunities for the Group could significantly lift earnings from FY10 onwards.

SCORE – the proposed growth corridor in Sarawak to spearhead the development of the state, where a series of programmes have been earmarked to lift the state into an industrialised status by 2030. TRCS has already a proven track record in Sarawak and is well positioned to benefit from this development.

Recommendation: We are upgrading our FY08 forecasts to take into account the revenue enhancement from the works on Kuala Terengganu airport and construction of University KL during the year.

This spike in revenue will followed by a dip in FY09 in the worst case scenario of assuming that no new projects will be awarded in the next 12-18 months, which we believe is highly unlikely. We anticipate upgrades in earnings for FY09.

In our view, risks to earnings for TRCS would be in the form of delay in award of projects. The stock is currently trading at FY08 and FY09 PERS of 5.3 x and 6.9x respectively, and on a fully diluted basis PERs of 6.7x and 8.6x respectively. Maintain Buy.

Malaysian Plantations

Malaysian Plantations: Industry Flash Malaysian Palm Oil Board Statistics: Closing Stock down by 2% on a month on month basis.

Comment by Citi Research: Crude Palm Oil (CPO) production grew 2.5% month-on-month to 1.33 million tonnes in April. On a year-on-year basis, production increased 17.9% due to weather effects and tree stress in the first half of 2007.

Palm-oil exports rose 1.1% m-o-m to 1.26 million tonnes. The increase was mainly due to higher exports to Pakistan (44% to 120,522 tonnes), Denmark (27,961 tonnes vs. 4,868 tonnes in March) and Iran (26,153 tonnes versus 5,065 tonnes in March). On a year-to-date basis, exports rose 16.6% due to higher exports to China (16% to 1,239,300 tonnes), US (68% to 317,631 tonnes) and Ukraine (715% to 130,762 tonnes).

Closing stock in April 2008 declined 2% m-o-m to 1.79 million tonnes. The stock usage ratio is down to 1.4x versus 1.5x in March. Vegetable oils have appreciated over the last one week.

Current CPO price at RM3,481per tonne versus RM3,380 per tonne a week ago. This was driven by the rally in crude oil price, potentially escalating strike in Argentina resulting in a slowdown in exports of soya oil (Argentina is the largest exporter of soya oil globally) and lower USDA soybean stock guidance.

Recommendation: We remain bullish on the plantation sector and maintain Buy ratings on all covered plantation stocks. Citi is calling a buy on Sime Darby Bhd (RM15.78), IOI Corp Bhd (RM10.62), KL Kepong Bhd (RM22.08) and IJM Plantation Bhd (RM7.25).

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