Thursday June 21, 2012

Nestle will continue to impress

ANALYST REPORTS

Hold (from sell)

Target price: RM54.20

NESTLE (M) Bhd's ongoing heavy capital expenditure (capex) is supporting the group's earnings momentum, particularly with an upcoming plant in Shah Alam, which should provide additional capacity. It is also positive that export growth continues to maintain a steady double-digit pace. We raise our capex assumptions for the financial year ending Dec 31 (FY12) to RM180mil (from RM139mil) and lift our terminal growth assumption by 0.5% to 1%. Our discounted cash flow (DCF)-derived target price is correspondingly raised to RM54.20 from RM52.40, while 2013 net yields of 4% provide support to the share price.

Nestle has earmarked RM180mil for capex in 2012, including additional capacity spread across its business units as well as its typical renovation, upkeep and maintenance costs. This is double the group's capex of RM93mil in 2011. Only RM12mil of the budgeted capex was spent in first quarter 2012.

In 2013 and 2014, the group will also invest a sizeable amount of money on a piece of land measuring 40,600 sq m which it acquired from British American Tobacco in 2010 for RM36mil.

Located adjacent to its existing Batu Tiga factory, the land was acquired together with industrial buildings and warehouses. The upcoming plant will allow the group to reorganise and optimise its manufacturing facilities, currently running at a 90% utilisation rate. No details have been provided, but we assume capex for 2013-2014 to be in the range of RM150mil to RM160mil per annum, using Nestle's existing factory in Petaling Jaya (50,342 sq m) as a gauge.

Export sales grew at a faster pace of 21% year-on-year in 2010 and 2011 compared with domestic sales growth of 4% and 16% year-on-year in 2010 and 2011 respectively, due to a low base effect. While more than 50% of Nestle's exports are to Asean countries, there is still much potential outside Asean given that Nestle Malaysia is being positioned as the halal food hub for the group. For first quarter 2012, export sales grew 10% year-on-year, while domestic sales grew 8%. Overall, the domestic-export contributions to total revenue in first quarter remain unchanged at 75:25.

From 2008 to 2010, the group invested more RM500mil on additional capacity, on top of its annual upkeep and maintenance expenses for quality assurance. New manufacturing lines include coffee creamer and soluble coffee lines catering mainly to the export market.

We raise our 2013-2014 earnings forecasts by 2% to 3% after raising our assumption on export sales, in particular. With long-term earnings growth to be supported by capacity expansion over the next few years, we lift our terminal growth assumption in our DCF valuation by 0.5% to 1%. Our DCF-derived target price is correspondingly raised to RM54.20 (+3.4%). Our new target price pegs Nestle at 23.3 times 2013 earnings.

DIALOG GROUP BHD

By CIMB Research

Outperform (long term)

Target price: RM2.93

AN upstream newspaper quoted Dialog's partner in marginal field development, Australia's Roc Oil, that it expected test production at its first Malaysian risk service contract (RSC) for the Balai cluster field development to commence as early as this October, 14 months after the signing of the RSC.

The Balai cluster is being developed by BC Petroleum, a joint-venture formed to operate the 15-year RSC awarded to Roc (48%), Dialog (32%) and Petronas Carigali (20%) in August last year.

We are encouraged that the Balai development is on track and the article's upbeat tone echoes Roc's optimism during its presentation at our Asean conference on June 13.

Four wells have been drilled so far and production is expected to start by end-2013, giving Dialog a new source of recurring income, in addition to the contributions from Kertih, Tanjung Langsat and Pengerang concessions.

The company is also hopeful of securing a portion of construction works for Petronas' US$20bil refinery and petrochemical integrated development in Pengerang.

CIMB Research has advised it to stay invested. Among the oil & gas companies, Dialog is the biggest beneficiary of the Economic Transforma-tion Programme given its exposure to the developments in Balai and Pengerang.

The company is set to scale new net profit highs in the financial year ended June 20 (FY12) to FY14, giving a three-year earnings per share compounded annual growth rate of 20.9%.

PACIFIC & ORIENT BHD

By Kenanga Research

Outperform

Target price: RM1.30

IN the last four years, Pacific & Orient Bhd (P&O) has undergone a massive change in its business direction, and since then engineered a major turnaround in its fortune and profitability. As a general insurer, P&O is now posting strong profits. However, it is still trading at low valuations and is hence primed for a re-rating in our view.

Therefore, we are initiating coverage on P&O with an “outperform” call and a target price of RM1.30, which implies an upside of 41% from its current share price of92 sen.

It is the No. 1 insurer in the market for motorcycle business. In our view, its continuing quota share arrangement of 20% in this segment business with Hanover Re of Germany reflects sound confidence in P&O's business model.

Motorcycle insurance is the most profitable motor segment with huge growth potential leverage on the country's steady 5% growth in gross domestic product annually for 2010 to 2015. There is also an earnings upside to its claim ratio as the Government may restructure the current tariff and loading ceiling with an adjustment price mechanism.

Therefore, the current and next two years would see the group's earnings jumping up by a three-year compounded annual growth rate of 14% in the financial year ended Sept 30, 2011 (FY11) to FY14, driven by huge profits from the group's motorcycle premium operation, which is benefiting from 2010's surge in premium rates.

The stock is currently trading at just 3.5 times to its core FY13 earnings and at just 0.77 times of its FY13 book value. There could be upside to our profit forecasts as Hanover Re could potentially return its excess profits to P&O starting from 2013 as part of its previous quota share arrangement.

We based our target price of RM1.30 on undemanding FY13 earnings price earnings ratio of 5 times, which is a very conservative view compares to other Malaysian general insurers.

Although there is already substantial price upside to its fundamental, the stock will be worth even more on a merger and acquisition (M&A) basis. On this basis, we value P&O in the range of 2 to 2.5 times its FY13 book value, which is a similar valuation to recent transactions on similar M&A deals.

AHMAD ZAKI RESOURCES BHD

By OSK Research

Trading buy

Target price: 90 sen

AHMAD Zaki Resources Bhd's (AZRB) outstanding construction order book stood at RM1.88bil as of March 2012, with RM765mil worth of new jobs secured, solely from the v6 viaduct package of the Klang Valley My Rapid Transit (KV MRT) Sungai Buloh-Kajang (SBK) line. We expect the division to pick up momentum as physical works on the KV MRT progress further.

Management says the group is actively pursuing more tenders in second half 2012. Some of the jobs it is eyeing are the RM200mil worth of station packages on the SBK line, foundation works for Kuala Lumpur International Financial District worth more than RM1bil, as well as jobs relating to the potential redevelopment of some old buildings along Jalan Sultan Ismail.

Our checks with sources indicate that the group may be keen on the proposed refurbishment of the former MAS headquarters. We understand that the project, worth over RM600m in total, could also involve the construction of a new building next to the existing tower. We are forecasting an order book replenishment of RM500mil per annum for both FY13 and FY14, with our FY12 target unchanged at RM1bil.

In 2007, AZRB received the Letter of Intent for the development of the proposed RM1.7bil East Klang Valley Expressway on a build-operate-and-transfer basis. However, the proposed project hit a snag following the change in Selangor's state government in 2008.

The 40km expressway, which has since been renamed Kuala Lumpur Outer Ring Road (KLORR), is an orbital ring road in the greater Kuala Lumpur area that will serve as an alternative to Middle Ring Road 2. We expect more developments relating to this project in second half 2012.

On the proposed development of a 300-bed teaching hospital for International Islamic University Malaysia in Kuantan, management has reaffirmed that progress is largely on track. Given the concession nature of the proposed project, we understand that the recurring revenue from its maintenance component alone would be to the tune of RM30mil-RM35mil per annum for a total of 21.5 years upon full operation.

In FY11, AZRB's bunkering division contributed some 40% of the group's bottomline. Going forward, we expect the contribution from this division to remain fairly stable at 5% growth per annum as we believe the local O&G industry is still resilient, driven mainly by Petronas' exploration activities.

We continue to like AZRB, from which we expect positive news, especially in relation to KLORR. Hence, we maintain our “trading buy” call on the stock. After rolling forward our valuation to FY13 based on an unchanged 10 times one-year forward price earning ratio, our fair value now stands at 90 sen.

The stock remains a “trading buy” for now as we are still cautious on the impact of political risk.
NESTLE : [Stock Watch] [News]
DIALOG-OR : [Stock Watch]
P&O : [Stock Watch] [News]

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Thursday June 21, 2012

Nestle will continue to impress