Monday May 14, 2012

MAHB entering new growth phase

By UOB Kay Hian

Buy

Target price: RM6.50

WE believe the growth of Malaysia Airports Holdings (MAHB) will be driven by stronger rental revenue in 2013 with the completion of Kuala Lumpur International Airport 2 (KLIA2).

In addition, increasing visibility on MAHB's landbank development potential combined with its defensive qualities make this stock more appealing.

MAHB is entering a new growth phase.

We expect MAHB to achieve earnings per share (EPS) growth of 12.3% this year, and subsequently grow at a healthy three-year compound annual growth rate (CAGR) of 13.2%.

The new RM3.9bil low cost carrier terminal, also known as KLIA2, should commence operations in April 2013.

Most importantly, KLIA and KLIA2 will have a combined capacity of 70 million pax per annum (25 million per annum from KLIA, 45 million per annum from KLIA2) and a net leasable area (NLA) of 700,000 sq ft, which would contribute about 26% of total revenue and 43.8% of earnings before interest and taxes (EBIT) in 2013.

The industry fundamentals are also in favour as Malaysia's tourism is growing at a commendable rate.

Tourist arrivals grew 7.3% in 2009, and at a CAGR of 12% for the past 10 years.

As a growing low-cost carrier hub, Malaysia has an estimated domestic growth of 5.5%.

Furthermore, the recovery in airline passenger volumes is also supportive of international passenger growth.

We expect passenger traffic to grow 9% to 11% in 2012 to 2014, driven by exposure to traffic across the Asean region.

Meanwhile, there is implied land value that is totally unaccounted for as MAHB has about 16,500 acres of land available for development at KLIA, which was previously lying dormant and mostly utilised for oil palm plantation.

We gather that 2,750 acres have been identified for initial commercial development over the next five years.

We think this should be the re-rating catalyst for the stock over the next two years, especially after the completion of KLIA2.

Even if we only value the 2,750 acres of land based on potential lease income shared with the Government, we estimate the landbank's net present value (NPV) to be around RM427mil, or about 6% of MAHB's current market capitalisation.

To put that into perspective, if the option value is subtracted from MAHB's market capitalisation, it would imply that the market is only assigning a value of RM5.41 per share, or 15 times 2013 earnings for the airport business (and the Malaysian airport business is as good as a monopoly).

There is also the factor of MAHB's investment in Turkey.

MAHB has a 20% equity stake in Sabiha Gokcen International Airport (SGIA), Turkey which costs RM114.9mil.

Thus far, it has been making losses and the investment has been fully written off from MAHB's book.

Excluding the fair value accounting, the operational loss is about RM20mil per year.

Based on our estimates, if the Turkey airport begins contributing before 2016, the NPV enhancement to the total sum-of-the parts (SOTP) could potentially increase from 14 sen to 25 sen per share.

We believe the downside of this investment is limited, given that MAHB no longer carries the investment cost in its book and these airports are already cash-flow positive at this juncture.

On the contrary, the upside could be boundless if the turnaround is earlier than expected.

We also expect MAHB's cash flow to strengthen once KLIA2 begins operation in 2013, hence enhancing the ability to increase dividend payout.

Our 2012-14 forecast imputes dividend per share to increase from 19 sen per share to 30 sen per share, implying a payout increase from 55% to 70%.

Amid prospects of a slowing corporate earnings momentum and the global uncertainty, we believe defensive business models such as airport management would stimulate interest.

Subsequently, MAHB's business model could gradually lean more on recurring rental income.

In our view, ever since PLUS Expressways Bhd was delisted, we have seen more interest shifting towards MAHB, which has an effective monopoly in the airport management segment and defensive margins.

Our target price of RM6.50 per share implies a 2013 price-to-earnings ratio (P/E) of 18 times and a net dividend yield of 3.3%.

Our target price is derived from the discounted cash flow of both KLIA and KLIA2's operations, NPV enhancement from its overseas airport investments and the implied option value of the 2,750 acres of landbank.

It should be noted that our 2014 earnings forecast of RM518.1mil is above consensus of RM444.7mil, as the market has underestimated the impact from greater rental rates in KLIA2 and its full impact in 2014.

Dialog Group Bhd

By CIMB Research

Outperform

Target price: RM2.93

THE delayed contribution from Phase 1 of the Pengerang terminal in Johor, is behind Dialog's results letdown, with net profit for the nine months ended March 31, 2012 coming in at only 60% of our full-year forecast and 63% of consensus estimate.

But our optimism is intact as the earnings shortfall is purely a timing issue.

We continue to value the businesses at 18.2 times price-to-earnings ratio (P/E), which is a 40% premium over our 2013 target market P/E of 13 times.

The potential contracts for Petroliam Nasional Bhd's (Petronas) RM60bil integrated refinery and petrochemical complex, known as Rapid, in Pengerang, Johor and marginal fields underpin our outperform call.

The contributions from Fitzroy Engineering and the Tanjung Langsat terminal pushed the group's third quarter net profit up 8% year-on-year to RM41mil, leading to a 19% surge in nine-month net profit to RM127mil.

But it was short of our expectations as Dialog will only start booking contribution from land reclamation and engineering works at the 170-acre Phase 1 of the Pengerang terminal in the fourth quarter.

We maintain our financial year 2013 to 2014 earnings per share (EPS) but cut financial year 2012 EPS by 14% for delayed Phase 1 contributions.

The good news is that now that Phase 1's land reclamation and engineering works are completed, Dialog can begin working on the RM1.9bil construction of tanks and jetties in July or August.

Land reclamation and engineering works for the 200-acre Phase 2 have also started.

Separately, management is hopeful of securing part of the construction works for Petronas's Rapid project located next door.

Also, Dialog's pre-development works at Balai cluster fields with its partners Roc Oil and Petronas Carigali are ongoing.

The expected completion date is in February 2013.

The company plans to bid for two or three more marginal field jobs in 2012.

Wilmar International Ltd

By OSK Research

Buy

Fair value: S$4.90

WE are upgrading Wilmar International from neutral to buy, but at a lower fair value of S$4.90 versus S$5.22 earlier, as we trim our financial year 2012 profit forecast to US$1.39bil from US$1.48bil previously.

Although Wilmar's core earnings of US$205.6mil for the first quarter ended March 31 disappointed, we view the sell-down on Thursday as excessive.

The Singapore-listed Wilmar is 18.3% owned by PPB Group Bhd.

Wilmar is an integrated agribusiness with activities including oil palm cultivation, oilseeds crushing, edible oils refining, sugar milling and refining, specialty fats, oleochemicals, biodiesel and fertilisers manufacturing and grains processing.

The weakness in the first quarter results was due to a further deterioration in the group's oilseeds and grains segment, which reported a loss of U$52.5mil.

The management attributed the loss to poor timing of soybean purchases, much like what happened in late 2010 when soybean prices rallied.

This means Wilmar did not lock in soybean purchases early enough and had perhaps underestimated the upside potential of soybean price.

The management also admitted that had the purchase been timely, the segment would have been profitable.

We are conservatively cutting our margin assumption to a US$5 loss per tonne (from US$10 profit per tonne) until the segment returns to profitability.

Also, its sugar milling made a US$59.9mil loss, which is not surprising given that the first quarter is the off-harvesting season in Australia.

However, other segments actually performed better than expected.

The plantation segment fared well, and Wilmar bucked the recent trend of declining profits among plantation companies.

We believe the group benefited from an improving age profile whereby the percentage of its trees at prime age increased to 32.1% of its total planted area against 25.2% in the first quarter last year.

Wilmar has about 18,000 ha more trees at prime age during the quarter while the number of young trees falling by 9,000 ha, which consequently reduced the yield drag.

We are maintaining our forecast for the plantation segment.

The palm and laurics segment, which includes Wilmar's palm oil refinery business, finally reaped the benefits from Indonesia's lower export duty on refined palm oil by registering a 53% year-on-year jump in profits.

As margin improved to US$45.5 per tonne, we are raising our margin assumption to US$40 from US$30 per tonne previously.

As Wilmar is adding 50% more capacity to its refinery in Indonesia this year, there is potential for a further upgrade.

PROPERTY SECTOR

By ECM Libra Investment Research

Neutral (maintained)

THE property market, which experienced double digit growth last year, is expected to cool down in 2012 on the back of the uncertain global economic outlook as well as new lending policies introduced by the central bank.

The implementation of the 70% maximum loan-to-value (LTV) ratio for financing of the third house could also contribute to the slowdown.

These have led several property developers to revise the timing and scale of their new launches.

While most developers have announced several new project launches and higher property sales target at the start of the year, we observed that some have deferred launches and guided a lower sales target in anticipation of softer demand.

However, we await the release of property companies' first quarter 2012 financial results (due this month) to have a better gauge on their sales performance.

However, despite stricter lending guidelines, we noted that loans approved by commercial banks for the purchases of both residential and non-residential properties rose sharply between January and March 2012.

Although there was a significant 26% month-on-month drop in January's approvals for residential loans, we reckon that was due to the shorter working days brought about by Chinese New Year holidays.

Residential property loan approvals in February and March grew month-on-month by 25% and 19% respectively, to RM6.8bil and RM8.1bil.

We also understand that based on industry checks, demand for property especially for residentials remained stable. Buyers are adopting a wait-and-see approach but certain types of residential property (such as landed homes) in selected locations (Klang Valley, Penang and Johor) are in high demand.

Property prices are expected to continue to escalate due to the scarcity of prime land and as land prices, building materials and labour costs increase.

The all-house price index in 2011 gained 10% year-on-year to 154.6 points, a significant increment compared to a gain of 7% in 2010.

For the residential sector, existing units in the first quarter of 2012 increased 0.4% quarter-on-quarter to 4.5 million units, contributed by the completion of 18,082 units in the quarter. Residential units in Selangor formed 29% of the total, followed by Johor (15%), Kuala Lumpur (9%) and Perak (9%), respectively.

By types, terraced units formed 40.5% of the total.

Meanwhile, the national office occupancy rate may come under pressure in 2012, as 2.2 million sq metre of space under construction will progressively be completed.

This will add 11% to the existing supply of 17.1 million sq m.

In Kuala Lumpur, office occupancy decreased marginally to 80.5% in the first quarter of 2012 (from 80.9% a year earlier). Office space under construction in Kuala Lumpur amounted to 1.1 million sq metre (16% of existing supply of 7 million sq metre).

Regarding UEM Land Holdings Bhd, we view positively its progress and developments in Nusajaya, Johor which should reach its “tipping point” by end-2012.

However, we are concerned with Nusajaya's ability to attract sufficient human traffic to the area as well as the sudden increase in development projects in Iskandar Malaysia.

We maintain a hold call on UEM Land with revised net asset value (RNAV)-based target price of RM2.25, which presents 11% upside.

At its current price, the stock is trading at 23.7 times price-to-earnings ratio (P/E) for financial year 2012.

As for Sunway Bhd, we maintain a hold call with a target price of RM2.65.

We are positive on Sunway's medium to long term earnings visibility through its property development projects, construction orderbook of RM3bil, and stable recurring income from property investments and real estate investment trust (36.7% stake in Sunway REIT).

At its current price, the stock is trading at 7.1 times PE for financial year 2012.

-ENDS.

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Monday May 14, 2012

MAHB entering new growth phase