Business





Saturday September 6, 2008

Brokers' call

Compiled by CECILA KOK


SARAWAK ENERGY BHD (RM2.35 as at Sept 4)             

COMMENT by CIMB Research: Excluding the RM41mil deferred tax assets recognised during the second quarter (2Q) of 2008, Sarawak Energy Bhd’s annualised first-half (1H) of financial year (FY) 2008 core net profit was disappointing, as it accounts for only 35% of our forecast and 33% of consensus.

The poorer-than-expected results were mainly due to higher-than-expected generation costs and lower contributions from its associates. Not surprisingly, no dividends were declared, as per previous years.

Year-to-date revenue rose 6% year-on-year (y-o-y), led by higher industrial and commercial tariffs since April 2007. The 4% quarter-on-quarter (q-o-q) growth in revenue is probably due to stronger electricity sales after 1Q’s lower base owing to festive shutdowns.

However, 1H08 EBIT fell 3% y-o-y as the operational efficiencies gained in 1Q were more than offset by 2Q08’s much higher generation costs, which probably arose from the high diesel costs and the slower-than-expected phasing out of its older diesel-generated power plants. This is further confirmed by the 8% point q-o-q contraction in EBIT margins.

Our FY2008 to FY2010 earnings forecasts are cut by 8.8% to 10.7% to account for: i) a 2% to 5% point cut in our margin assumptions to reflect higher generation costs; and ii) reduced associates’ contributions. Although the expected commissioning of the first unit of the new coal-fired Mukah plant next month should offset partly the margin squeeze from higher fuel costs, the two months’ impact will not materially buoy margins for FY2008.

We now expect margin improvements to kick in gradually from FY2009 onwards instead of 4Q08.

Recommendation: Following the earnings downgrade, our target price for the end of 2008 is reduced from RM3.55 to RM3.10 as we continue to value the stock at a 20% premium over our target market P/E.

Reiterate BUY with the key share price triggers being: i) more clarity on its involvement in the Bakun and undersea cable projects; ii) more details on its role in Score; iii) further plantups of hydroelectric plants; and iv) more FDIs and setting-up of industries in Sarawak. We continue to like Sarawak Energy for its monopoly over power-related matters in Sarawak, which is likely to be the country’s key supplier of new power in the longer term.

JERNEH ASIA BHD (RM1.50 as at Sept 4)             

COMMENT by Standard & Poor’s: Jerneh reported a net profit of RM400,000 in 2Q2008 which was below our expectations. Cumulative 1H2008 results decreased 59.3% y-o-y to

RM3.9 mil from RM9.5mil in 1H2007, accounting for 13.9% of our original full-year forecast.

Results were dampened by poor investment return and significant associate losses. The company recorded investment income losses of RM4mil in 1H08 in tandem with the downturn in capital markets versus net gains of RM7.2mil in 1H07.

Associate losses were RM8.8mil in 1H08, albeit lower y-o-y, as compared to net losses of RM9.4mil in 1H07 due to ongoing reserving for its regional and domestic takaful operations.

Nevertheless, core operating results were in line with expectations, with gross profit increasing 6.5% y-o-y.

Operating revenue rose 6.1% y-o-y to RM110mil (48% of our full-year forecast) driven mainly by higher premium income and better results from its insurance brokerage (+20.6% y-o-y) and credit and leasing (+20.4% y-o-y) divisions.

Our net profit projections for 2008 and 2009 are lowered by 46.6% and 32.5% respectively, after adjusting our assumptions to account for lower investment income and higher associate losses.

Recommendation: We retain our HOLD recommendation, but lower our 12-month target price to RM1.70 from RM1.90. Our target price is based on P/NTA, and we have applied a multiple of 0.7x (0.8x previously) to our updated NTA figure.

The P/NTA multiple is reduced to reflect the illiquid nature of the stock and an expected longer gestation period for its domestic takaful operations and new insurance venture in Indonesia.

However, we continue to view Jerneh’s regional expansion plans positively over the long term and expect its domestic operations to provide support to the group’s bottom line.

Risks to our recommendation and target price include: (i) slower-than-expected growth in premiums; (ii) a sharp deterioration in claims ratios; (iii) lower-than-expected investment income; and (iv) slower-than-expected turnaround in its overseas operations.

KWANTAS CORP BHD (RM2.87 as at Sept 4)             

COMMENT by TA Research: Kwantas reported a 94% y-o-y increase in FY08 earnings to RM150.7mil, well within our estimates.

The improved earnings came on the back of 75.7% y-o-y increase in revenue to RM3.4bil, reduced interest cost as well as lower effective tax rate.

Average crude palm oil (CPO) selling price increased 54.7% to RM2,831 per tonne. The downstream manufacturing business benefited from higher selling prices and increased volume, particularly its shortening/margarine as well as refined soya bean oil produced at its plant in Guangzhou.

Meanwhile, the biomass energy business posted lower operating profit of RM2.9mil (-17% y-o-y) due largely to 8.6% decline in revenue.

Based on data made available in Bursa Malaysia, we estimate fresh fruit bunch (FFB) production grew by approximately 3.4% y-o-y to 633,000 tonnes.

We believe higher mature acreage is the main contributor to the increase in production. Up to 3Q08, the latest data made available to us, mature area has increased by 1,125 ha to 13,494 ha.

CPO production meanwhile grew only by a marginal 1.5% to 130,000 tonnes.

The China downstream business recorded a sharp 45% increase in revenue y-o-y to RM851.7mil.

As highlighted above, this was due to higher selling prices as well as volume. The management indicated demand is still strong despite the concern of an economic slowdown. The plants there too benefited from hedging of feedstock since last year, resulting in an exceptionally high profit margin in FY2008.

Nonetheless, this factor should normalise in FY09. On the contrary, we understand that the refining margin in the Malaysian operation has narrowed due to effect of rising feedstock cost.

We understand that the commissioning of the 250 tonnes fatty acid production in Zhangjiagang had to be postponed due to the Olympics.

The construction of the two soap noodle plants in Guangzhou and Zhangjiagang respectively too have been completed and currently undergoing testing, but yet to commence commercial operation.

According to the management, there is no indication yet from the authority on when the group could begin operation of the fatty acids plant. We feel the delay could well extend into 4Q of the calendar year or early next year.

Recommendation: We have trimmed FY2009 and FY2010 earnings forecasts by 7.2% and 4.5% respectively to take into account: i) the delay in commissioning of the fatty acids and soap noodles plants, ii) lower profit margin assumption (4.2% vs. 4.4% previously) for the China manufacturing business as feedstock price likely to reflect the actual market price ahead, and iii) higher fertiliser cost.

Consequently, target price has been adjusted lower to RM4.55, based on 8.6x fair PER. The stock is trading at 5x forward PER despite the company’s low sensitivity to CPO price, thanks to extensive exposure to downstream business, should mitigate earnings volatility. Kwantas remains a BUY.

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