Business

Saturday February 7, 2009

Broker's Call

Compiled by TEE LIN SAY


ETI Tech Corp Bhd (RM1.96 as at Feb 5)

ETITECH :  [Stock Watch]  [News]

SELL

Results: For the first quarter ended Nov 30, 2008, revenue was up 8.78% to RM19.48mil, while net profit was almost unchanged at RM4.23mil from RM4.37mil.

Comment by Standard & Poor’s: ETI Tech’s first quarter results were within our expectations.

Revenue declined 14.8% quarter-on-quarter (q-o-q) to RM19.5mil due to slower domestic orders amid a seasonally weaker quarter.

Lower sales, coupled with higher overhead cost, led to a 20.8% q-o-q drop in earnings. Net profit stood at RM4.2mil as operating margins contracted to 22.3%, down from 23.2% in the preceding quarter.

The company had expanded its workforce to focus on the development of its original brand manufacturers (OBM) products – a segment it intends to grow as it gradually scales back on low-margin OEM products.

Management expects the second quarter to be a relatively flat quarter, before the ramp-up in orders in the second half of 2009, to be driven by its OBM products namely, its Nano mobile chargers, green power generators and 52V batteries for electrical scooters.

ETI Tech has, over the past few months, strengthened its distribution channels through the appointment of Compugates for its Nano series and Singapore-listed TSH Corp Ltd to market its batteries for electric bicycles.

Management reiterated its long-term focus to remain on product development while production will be outsourced to third parties.

Recommendation: We are maintaining our earnings forecast for financial year (FY) 2009 and FY10, despite management’s aggressive 3-year sales target of RM100mil with TSH. Given the limited track record of the new product, we prefer to err on the conservative side and monitor the group’s performance for the time being before reviewing our earnings forecast.

We maintain our SELL recommendation but raise our 12-month target price to RM1.90 (from RM1.80). Revision to our target price is due to the roll-over of our valuation period from 2008 to 2009.

C.I. Holdings Bhd (98 sen as at Feb 5)

CIHLDG :  [Stock Watch]  [News]

BUY

Results: For the second quarter ended Dec 30, 2008, revenue was up 22.76% to RM85.91mil while net profit was up 23.66% to RM4mil.

Comment by CIMB Securities: Broadly in line. C.I. Holdings’ (CIH) second quarter net profit surged 24% year-on-year (y-o-y) to RM4mil, bringing the first half net profit to RM8.5mil. At 45% of our full-year forecast, it can be considered in line with our expectations given the likelihood of a stronger second half.

However, at 60% of consensus forecast, it was above consensus expectations. One thing that did surprise us was the gross interim dividend per share of 2 sen, which is the first interim dividend proposed by CIH since its return to profitability.

The second quarter of 2009 (2Q09) is CIH’s tenth straight quarter of profits. Similar to 1Q09, the bulk of the growth in 2Q09 came from strong sales of Tropicana Twister juices which were launched in March last year. The Tropicana Twister, a PepsiCo product, contributed 10% to Permanis’s sales, which in turn made up an estimated 90% of CIH’s sales.

Although Tropicana is relatively new to the local market, it is now the leader of the fruit juice market with a 26% share, possibly at the expense of F&N’s Fruit Tree. The second biggest player is Malaysia Milk Sdn Bhd’s Marigold Peel Fresh which has around 21% market share.

Improved brand visibility is another positive. Currently, there are no less than 12,000 Pepsi and Tropicana chillers nationwide, up from around 10,000 in October 2008. There is certainly potential to increase sales of the chillers as CIH covers approximately 30,000 licensed retail outlets in Malaysia.

Comparatively, F&N, whose bestseller is Coca-Cola, services more than 40,000.

Pepsi carbonated drinks remained the backbone of CIH with an estimated net profit contribution of 70% in 2Q09. However, we expect future growth to come from non-carbonated drinks, i.e. Tropicana, Lipton, Sting, Gatorade, Chill and Bleu, as the company leverages its new RM30mil Bangi facility to grow products that were previously contract-packed.

Recommendation: Imputing the interim dividend, we increase our FY09 to FY11 DPS forecasts from 4 sen to 6 sen, raising yields from 4.2% to 6.3%.

As the impact on our EPS forecasts is not substantial, our target price is maintained at RM1.64, pegged to a price earnings of 15 times (x) based on a 20% discount to the average valuation of bigger food & beverage producers.

We continue to rate CIH a BUY as the stock could be in for a re-rating given a stronger product line and a wider distribution network.

Kwantas Corp Bhd ( RM1.70 as at Feb 5)

KWANTAS : [Stock Watch] [News]

SELL

Comment by TA Securities: Why the disastrous 1Q09 performance? We were initially rather perplexed as to why Kwantas reported a stark contraction in the first quarter to Sept 30, 2008 earnings.

Recall that net profit declined sharply to RM2.6mil in 1Q09, versus RM35mil profit in the preceding quarter.

We gathered several factors were the culprit behind the poor performance, the key being, 1) sharp slowdown in sales volume, particularly its margarine and shortening products, 2) price discounting demanded by the Chinese buyers due to sharp decline in crude palm oil price, and 3) raw material procured at a much higher price compare with market price.

The first two factors alone cumulatively resulted in a 64% drop in revenue from the group as China operation, which in the past few years has been the major source of growth for the group.

After the disastrous performance in 1Q09, we understand that business in China has been turning around in Q2. Initial feedback from management indicates that sales from its factories in Guangzhou, where the margarine, shortening and soap noodles plants are located received higher orders.

The improvement in Q2 is not surprising since the sector as a whole was buoyed by modest recovery in CPO price and inventory replenishing activity.

Margin could remain under pressure: Although the prospect of organic topline growth improved, we do not expect a radical reversal in fortune for the group. Margin could still come under pressure due to high material cost.

We understand that a portion of the external raw material supply was locked in when the CPO price was trading at a much higher level compared with the market price. Management indicated that these contracts with external parties will be honoured even though CPO price is less than RM2,000 per tonne currently.

Since the pricing power has yet to tilt in favour of producers given the still precarious demand outlook, we think Kwantas would have no choice but to sacrifice its margin.

Earning outlook: The issue is, we are unable to ascertain how much of these high priced raw materials are still sitting in the groups inventory. Hence, while we think the underlying long term outlook remains solid, the short to medium term earnings uncertainty has risen.

Downstream manufacturing business should make Kwantas less susceptible to fluctuation in CPO price but at this juncture, its earnings outlook appears to be the least favourable among the plantation stocks under our coverage.

Maintain sell: No change in our earnings estimate. 2Q09 results should give a better picture of how the group will perform in the next few quarters. Target price remains at RM1.86 and the stock remains a SELL.

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