Monday October 8, 2012

QL’s timely opportunity

By PublicInvest Research

Outperform (maintain)

Target price: RM3.83

WE had the privilege to visit QL's Palm Biomass Pellet Plant powered by its Biogas plant located in Tawau with Chia Lik Khai, who began exploring its viability from an economics and engineering perspective for the past three years.

An operating “research and development” project coupled with proper opportunities, could potentially be a substantial future contributor for QL to sweeten our “outperform” recommendation, if steady earnings are realised. Using the empty fruit bunches (EFB) from the crude palm oil (CPO) mill as the main raw material source, the group can produce up to 25,000 MT of palm pellet capacity.

Currently, the group's aim to create renewable energy from its waste has been achieved, but contributions to the bottom-line are yet to be expected, pending the patent of the proprietary technology, marketing breakthrough and government regulations.

QL, in its efforts to recycle their waste also invested some RM14mil to develop their Palm Oil Mill Effluent Biogas plant which currently produces about 1MW (50% of total capacity) of electricity with 300,000 tonnes of EFB. The energy powers the production of the palm pellet plant to reduce the amount of biomass used for the process and to effectively produce more pellets.

A timely opportunity for QL, as the strategy paper analyses logistics cost, an issue faced by QL to export to Peninsular Malaysia due to Sabah's logistics cost to be high at estimated RM200 per tonne.

Currently the palm pellet set up has received an 100% income tax exemption for 10 years. Palm pellet can be substituted for coal and fuel oil as a burning biofuel, as well as bio-based raw material for industrial processes. The reduction of carbon emissions for every tonne of coal substituted palm pellet biofuel can reduce more than 1 tonne of carbon dioxide emissions.

In addition, the real-time treatment of EFB in palm oil mills into every tonne of palm pellet biofuel also reduces QL's EFB landfill greenhouse gas emission by an average of 1 tonne of carbon dioxide-equivalent.

We continue to assume that QL will maintain its steady earnings growth based on our sum-of-parts valuation of its three current segments of Marine products manufacturing, integrated livestock farming and palm oil activities to meet our forecast financial year 2013 (FY13) earnings estimates supporting our target price of RM3.83.

We re-iterate our valuation for QL using sum-of-parts with FY13 net profit and forward industry price-to-earnings (PE) of the respective segments. Our FY13 PE estimate for QL of 15.5 times multiple we believe is justified based on QL's strong historical earnings and growth strategies to deserve this valuation.

SEMICONDUCTOR SECTOR

By MIDF Research

Neutral (maintain)

GLOBAL semiconductor sales in August 2012 held steady despite global economic headwinds. Sales grew 0.1% month-on-month to US$24.3bil.

Growth was surprisingly led by the Americas region, arresting a three month decline as sales increased by 1.2% month-on-month to US$4.19bil. This was followed by Japan which grew 1.1% month-on-month to US$3.64bil.

Sales in the Asia-Paciρc region was ςat month-on-month, maintaining at the US$13.7bil level. Europe remained a laggard, declining by 1.8% month-on-month to US$2.77bil.

On an annual basis, global sales fell by 3.2% year-on-year with Europe, Americas and Asia-Paciρc declining 9.8% year-on-year, 8.5% year-on-year and 0.8% year-on-year respectively. Japan's year-on-year growth was ςat.

On the bright side, the cumulative sales for January to August declined by only 4.6% year-on-year. This is an improvement from the cumulative January to July decline of 4.9% year-on-year.

The uncertainty surrounding the global economic conditions are negatively affecting the growth of the industry. However, we are holding our conviction that the sub-sectors which provide components for smart devices will moderate the downward impact due to its high growth potential especially with the excitement generated by the launch of iPhone 5. Hence, we expect that there will be a modest growth momentum going into 2013 as new devices enter the market.

The Semiconductor Equipment and Materials International reported that the book-to-bill (BTB) ratio in August was below parity but maintained near the level in July.

The BTB ratio for August was 0.84. It was lower than that in June and July at 0.93 and 0.86 respectively. As we previously stated, we are not surprised by the decline in bookings for North America-based manufacturers of semiconductor equipment as it declined 9.2% month-on-month to US$1.12bil due to seasonal factors.

This is the third consecutive month of decline but the pace has slowed down when compared with the previous two months. Bookings in June and July fell by 11.7% month-on-month and 13.3% month-on-month respectively.

We anticipate that this trend will continue for the next couple of months. However, we expect the BTB ratio to begin to rise again towards the end of the fourth quarter.

Semiconductor Industry Association's recent numbers suggest that the sector remains steady for now despite the global economic headwinds. As a result, the sector has become more cautious about the threat of weakening near-term semiconductor demand. Nevertheless, the excitement generated by the recent launch of Apple's iPhone 5 should moderate the impact for chip suppliers with exposure to the new gadget, as sales for the device has been strong.

In particular, a number of ρrms, including Qualcomm, Broadcom, and Skyworks Solutions should have chips incorporated into the iPhone 5 and should beneρt from the popularity of the gadget. Hence, we are maintaining our “neutral” view of the sector. In addition, we believe that the launch of the anticipated Windows 8 operating system by Microsoft will release some pent-up demand for PCs.

AXIATA GROUP BHD

By RHB Research Institute

Outperform (maintain)

Target price: RM7.15

MANAGEMENT stressed there are no immediate plans in the short term for mergers and acquisitions with regards to the US$1.5bil (RM4.8bil) sukuk facility established by Axiata in July.

While Axiata had recently used the facility to raise a 1 billion yuan (RM489mil) sukuk on Sept 11, we understand that the funds will be used for Robi's capital expenditure upon conversion to US dollars.

We gather that the sukuk facility enables Axiata to be prepared for corporate exercises, which may involve market consolidation in its regional markets (such as Sri Lanka and Bangladesh).

Celcom's management said the focus for Celcom remained its mobile business, and that the high speed broadband strategy was meant to be a complementary product to retain its enterprise and corporate customers. This is understandable given Celcom's strength in the mobile market for enterprise and corporate customers.

In Indonesia, management is unperturbed over Etisalat's sale of its 9.1% stake (775 million shares worth US$509mil) in XL Axiata in September, reducing Etisalat's holding to 4.2% (about 358 million shares worth US$253mil).

In Sri Lanka, translation risk of earnings from Dialog should be lower in the second half, which is positive for Axiata, given that the rupee has stabilised since early second quarter.

Management remains sanguine on growth prospects for Dialog, citing its market leadership position that should enable it to capture the growing wealth of the country in a post-war environment.

After updating our valuation parameters and ascribing a higher enterprise value/earnings before interest, taxes, depreciation, and amortisation (EV/EBITDA) multiple of eight times (previously 6.5 times) to XL, we raise our fair value on Axiata to RM7.15 (previously RM6.60) and maintain our “outperform” recommendation.

The revised EV/EBITDA multiple ascribed for XL is on par with that of Axiata, which we believe is fair given XL's strong data growth prospects and steady margins. We continue to like Axiata for decent growth prospects from regional exposure and cheaper valuations against domestic peers.

LAFARGE MALAYAN CEMENT BHD

By Maybank Investment Bank Research

Buy (Uprade)

Target price: RM10.10

LAFARGE Malayan Cement (LMC) has turned debt free in the third quarter 2012 and with its already very high cash position (28 sen per share), it will keep piling up its cash generating power.

We see the prospect of a capital repayment or significantly higher dividend yields than the current 4% or 4.7% net. Additionally, earnings are also protected from the falling coal cost. We maintain our earnings forecasts but raise LMC to a “buy” (from “hold”) with a higher RM10.10 target price (+19%) on 21 times 2013 PE (17 times previously).

LMC has paid its last bullet of RM105mil floating rate note in September, making it zero-gearing and sitting on a historical high cash pile of RM240mil (or 28 sen per share).

This is despite the fact that it re-geared to the 16% net gearing level (or raised RM566mil borrowing) in 2007 for a capital distribution of 20 sen per share.

In our view, a capital repayment is highly likely given that: (i) LMC has the track record of undertaking capital repayment when it turned zero-net gearing (in 2007); (ii) French parent prefers its subsidiaries to upstream cash; (iii) LMC has low capex obligation (due to overcapacity and peers' expansion) and strong cashflow generation ability (free cashflow yield of 5%); and (iv) debt-funded capital repayment will enhance return over equity (10% currently). Assuming LMC gears up to 16% net gearing level again (or raises RM500mil borrowing), this indicates 58 sen per share capital distribution potential (or 6.2% yield).

Including our expectation of 38 sen per share dividend for 2012 (16 sen has been paid as interim in the first half 2012), total net yield would be 10.2%. Nevertheless, we expect a decision on this would only be made at its upcoming board meeting next month.

We maintain our below-consensus forecasts, which already incorporate for a stronger second half amid the falling coal cost and higher average selling price. Though valuation is rich at 2013 PE of 19.6 times, we believe the market will pay a higher premium for LMC given the prospects of a higher dividend payout and capital repayment. We now peg LMC at 21 times 2013 PE (similar to its peak in 2010) and derive our new target price of RM10.10 (+19%).

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Monday October 8, 2012

QL’s timely opportunity