Thursday May 17, 2012

TM remains top pick

By CIMB Research

Outperform (maintain)

Target price: RM6.20

TELEKOM Malaysia Bhd (TM) remains an “outperform” with a higher discounted cashflow-based target price as we lower its weighted average cost of capital for its active capital management. It is one of our top picks due to its continued strong growth and positive earnings surprises.

Investors we met with were concerned about competition from 4G or long-term evolution. However, we think that wireless and fibre broadband are complementary as it is less cost-competitive given the scarcity of spectrum.

TM thinks that wireless broadband presents an opportunity to wholesale backhaul to the wireless operators.

TM is also trying to up-sell its services to maximise revenue and we do not expect any major asset disposals. We sense limited scope for special dividends in financial year ending Dec 31 as it sold all its substantial non-core assets and operational gains are unlikely to be very significant.

The only significant non-core asset that was not sold is the Multimedia University but TM is expected to hold on to this as a contribution to society.

Beyond Unifi, TM expects information, communications and technology and business process outsourcing to be its growth driver. This includes cloud computing, data centre, disaster recovery and telecommunication presence, which will be mainly targeted at the 400,000 small and medium enterprises that TM currently addresses.

It wants to add services to the infrastructure that it has built up. Meanwhile, TM is also working with 25 property developers to roll out fibre to new homes. The fibre is installed by TM-appointed installers and borne by the developer at discounted price. This will lower TM's cost and speeds up the rollout.

The telecommunication company is looking to raise the Unifi average revenue per user. It intends to do so with special offers for its premium pay TV content, in order to bolster the take-up of paid channels. The current take-up of paid channels is less than 20%.

TM is offering RM30 per month for 30 paid channels, which cost RM3 to RM9 per channel per month. Eighty-eight per cent of its fibre broadband users are on the lowest package.

It had said that take-up had been encouraging although no actual numbers were disclosed. TM earlier launched the “Super Speed me” campaign to encourage its subscribers to upgrade to a higher plan by paying the existing rates for three months.

Any upgrades would come at no cost to TM, as it does not have to incur commissions or install new equipment except for copper broadband users upgrading to fibre. In this case, TM will bear the cost of installation but still save on dealer commissions.

TM has not ruled out any mergers and acquisitions and will consider buying local or overseas companies if there are synergies with its business or they help it to acquire the necessary skills. However, no details were revealed on its acquisition targets.

MASTERSKILL EDUCATION GROUP BHD

By OSK Research

Sell (maintain)

Target price: RM0.81

IN Masterskill Education Group Bhd's (Masterskill) disappointing financial year ended Dec 31, 2011 (FY11) results, earnings dived 62.7% year-on-year. With its first-quarter ended March 31 results due to be released on May 28, we carried out our on-the-ground check on its operations.

The company's numbers are likely to be significantly weaker in the first half owing to the absence of a major enrolment during this period. We expect the group to report core losses of between RM3mil and RM5mil for the first quarter and break even at best in the next.

As the next major enrolment would only be in July and Sept, its share price is likely to retrace further in tandem with its dwindling earnings.

Therefore, we are maintaining our cautious stance given a potential earnings letdown in FY12 as its student base shrinks and its share price softens further on weakening fundamentals. With the company yet to turn around anytime soon, we maintain our “sell,” at a revised target price of RM0.81, based on 0.7 times FY12 price-over-net-tangible asset per share (P/NTA)

Its student base shrank 22.7% from 18,000 in FY10 to 14,000 in FY11 due to two negative regulations relating to its diploma in nursing programme during the year. These were a reduction in the National Higher Education Fund Corp's loan allocation from RM60,000 previously to RM45,000, and the increase in minimum entry requirements from three Sijil Pelajaran Malaysia credits to five credits.

As a result, the company's FY11 earnings plunged 62.7% year-on-year to a record low of RM38.1mil since listing in mid-2010.

We are revisiting our model to lower our core assumptions as well as update the FY11 numbers retrospectively with the release of the company's 2011 Annual Report. We are now modelling for zero growth in its student base for FY12 and a sub-par 5% growth for FY13.

We are also slashing our core earnings forecasts by 90.9% for FY12 and 89.6% for FY13 to RM4.5mil and RM5.4mil respectively. While there is speculation that the company may pay a bumper dividend, we believe that it is unlikely at the moment, until management revives its core operations.

The company's earnings have been on a downtrend since its listing in mid-2010. In terms of its valuation, Masterskill's historical P/NTA ranges from 0.87 times to 3.64 times, and in view of the likelihood of it posting a record-low FY12, we are attaching a 20% discount to its lowest historical valuation.

As there is an absence of re-rating catalysts in the near term and the potential downside, we are maintaining our “sell” call, at a revised target price of RM0.81, instead of RM0.84 previously. As recent news of the potential entry of Ekuinas may not suffice in propping up the share price at current levels, we advise investors to take profit.

SP SETIA BHD

By RHB Research

Market perform (maintain)

Target price: RM4.03

SP Setia Bhd has successfully replenished its landbank in Penang island with the acquisition of a 21.3-acre piece of freehold land, for a total consideration of RM185.6mil or RM200 per sq ft. The land is near Tanjong Bungah and Batu Ferringhi, and is 15-minutes away from Georgetown.

It will be funded by internal funds, and completion is expected to be in the second half of financial year ending Oct 31 (2HFY12). The land is currently vacant except for some existing makeshift houses, which will be cleared for development.

The land price is reasonable, and within the range of RM150 to RM230 per sq ft. Although the property sector has slowed down, land prices in general are still sticky downwards, and have appreciated significantly over the years.

Recall that Ivory Properties won the bid for 102.6-acre land, which is made up by the 67.6-acre existing land and 35-acre land to be reclaimed in Bayan Mutiara in southeast of Penang island at RM240 per sq ft last year.

Also, 4ha of seafront land in Queensbay area at Bayan Lepas was sold to Asia Green Development by CP Land at a record price of RM420 per sq ft last year. In addition to the location, SP Setia's parcel is First-Grade land, which is a special title in Penang. This means that the land does not carry a specific category of usage, and therefore does not need to be converted for housing development.

It is estimated that the land would yield a gross development value of RM1.1bil. Given the gently undulating landscape, natural waterfall and river-way, SP Setia will develop the land into a mixed residential project, comprising terraced houses and condos.

It will be branded with an “Eco” theme; hence the products are likely to be priced at a premium. Our forecasts are unchanged, and is pending on guidance of the timing of launch.

SP Setia's risks include a downside to economic growth, and dampening demand for properties. As a result of the incremental value in revised net asset value (RNAV), our fair value is raised slightly to RM4.03, from RM4 previously. This is based on a 10% discount on RNAV.

Although the equity market as well as property stocks have corrected recently, we do not think the potential upside is attractive enough at the current SP Setia's share price. Also, the stock is still trading at an expensive 23 times price-earnings ratio. We therefore maintain our “market perform” call on the stock.

MALAYSIAN AIRLINE SYSTEM BHD

By Maybank IB Research

Sell (from Hold)

Target price: RM1

WE expect the first quarter ending March 31 for Malaysian Airline System Bhd (MAS) to be severely loss-making due to the impact of a 20% higher fuel price year-on-year (y-o-y) and a weak yield environment. The remainder of the year looks equally grim and we think MAS is struggling to get its turnaround strategy in place.

We have cut our earnings forecasts due to higher-than-budgeted fuel price and a tougher yield environment.

Therefore, we have downgraded the stock to “sell,” with a revised target price of RM1 from RM1.55 previously, pegged to 10 times 2013 price-earnings ratio, which is the mid-level valuation of the aviation cycle.

Its first-quarter passenger load factor contracted by 3 percentage points y-o-y to 73%, while its cargo load factor declined by 1.6 percentage points to 66.9%. The overall load factor made up of both passenger and cargo was down by 2.4 percentage points y-o-y to 70.9%.

MAS has terminated many underperforming routes in early February as part of its business turnaround plan. However, this did not translate to any improvements in the load factors. This is a negative indicator that the underlying demand is very weak.

Our estimate for the group's first-quarter core net loss to be RM332mil, which is a decrease of 0.9% y-o-y after filtering for unrealised foreign exchange and derivative elements, which are non-cash in nature.

Fuel prices could also contribute to the loss, as it has risen 20% y-o-y. Furthermore, the yield environment was soft due to the challenging global economy and a more competitive market.

We estimate a cash burn rate of about RM200mil in the first quarter alone and this will bring MAS' cash balance down to about RM800mil. If this continues and its cash balance falls below RM400mil, then the company will be left in a very worrying situation.

We understand that it is proposing to raise RM1.5bil of bridging loans and RM3bil of perpetual bonds in order to finance its capital expenditure and working capital, which could be its lifeline.

We have revises our 2012 breakeven expectation to a loss and lowered our 2013 earnings estimate by 58%. Our initial jet fuel cost assumption of US$125 per bbl was too low and we have adjusted it to US$128.4 per bbl for 2012, before reverting back to US$125 per bbl in the subsequent years.

At this fuel cost assumption, MAS will be loss making in the first half of of this year as its cost structure is not nimble enough to deal with the current market environment. It should be in better shape in the second half when it removes most of its old aircraft from the fleet. We estimate a core net loss of RM541mil in 2012.

We think that MAS will stand a good chance to breakeven next year. Its fleet will be completely brand new and this will bring down unit cost by a considerable amount.

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Thursday May 17, 2012

TM remains top pick