Wednesday June 27, 2012

Felda Global Ventures aiming to be among world's top five commodities giants

Fair Value: RM5.44

Outperform

WITH a strong net cash position of RM3bil upon its listing, Felda Global Ventures Holdings Bhd (FGVH) is actively looking for more plantation asset acquisitions in the South-East Asian and African regions, as well as expansion of its downstream business with the aim of becoming amongst the world's top five commodities giants by 2020.

About 85.5% of its initial public offering (IPO) proceeds have been allocated for these purposes. The group plans to replicate Felda's business model in Africa, given the favourable environment for oil palm plantings. Apart from oil palm, FGVH is also aiming for rubber plantings in Myanmar and Cambodia, thanks to these countries' recent liberalisation policies.

In the downstream segment, the group is targeting to establish footprints in China, India and Myanmar, which are the world's major vegetable oil consuming countries.

The group also recently tied up with Louis Dreyfus, a world leader in the processing of agricultural products and the merchandising of a diverse range of commodities, to explore investment opportunities in downstream activities.

In the sugar segment, FGVH unit MSM Malaysia Holdings Bhd is reportedly planning a RM100mil agricultural land acquisition in Indonesia, Myanmar and/or Cambodia to plant sugar cane.

The downstream segment, which is in the production of soybean and canola products, incurred a gross loss of RM240mil in 2011 as a result of higher cost incurred in soybeans and canola seeds, impairment of property, plant and equipment and fair value loss from exchange currency.

To stop further bleeding, the company's wholly-owned subsidiary, TRT-ETGO has entered into a tolling agreement in December 2011 with Bunge ETGO, a joint venture with Bunge Ventures Canada, one of the world's leading companies in soy products and soft oils.

The 49:51 joint-venture company will supply the soybeans and canola seeds to TRT-ETGO, which will be processed into soybean and canola products. Under the tolling agreement, TRT-ETGO will receive tolling fees, comprising a monthly fixed fee, a variable fee and the reimbursement of certain operating cost incurred from Bunge ETGO.

This could protect the company's risk exposure to the hefty cost of sales from the purchase of soybeans and seeds.

FGVH is scheduled for a listing tomorrow on Bursa Malaysia Main Market.

MASTERSKILL EDUCATION GROUP BHD

By RHB Research Institute

Market Perform (Upgraded)

Fair Value: 88 sen

MANAGEMENT has introduced initiatives to attract more students to counter declining student enrolment. These include reducing the fees for diploma programmes to RM40,000 for a three-year course (from RM50,000) from April 2012 onwards and aggressive marketing of its degree courses.

We view management's proactive stance in reacting to changing market conditions positively and believe that the 20% reduction in course fees could help boost demand for its nursing and other diploma courses.

With average fees of about RM80,000 for a four-year degree course, having a higher proportion of degree students (first quarter of financial year 2012: 7.2% of total students) could provide Masterskill with a more stable recurrent income stream.

The impact of the new initiatives will only be seen from second half of financial year (FY12) onwards, as Masterskill's major student intakes are in second half (June/July and Sept/Oct).

Earnings for the second quarter are expected to be similar to first quarter, given minimal changes in student numbers and the cost base remaining high due to high depreciation and staff costs.

Although most costs are fixed in nature, management believes that there are still opportunities to lower its cost base that includes consolidating its campuses. With the lower student numbers, management now has an opportunity to reduce the teaching staff cost as it is easier for them to meet the 1:20 lecturer-student ratio set by the Malaysian Qualifications Agency.

However, the management is wary on slashing capacity too drastically and will defer the decision until there is better visibility on the new student enrolment trends post-course fee reductions.

Risks include worse-than-expected student enrolment going forward; and a change in the Government's policies that further restricts the entry requirements into nursing programmes.

We have revised our earnings for FY12-FY14 after reviewing our student growth assumptions for FY13-FY14 to 10% per annum (from 3%) as we expect a boost in enrolment due to the lower fees and after fine-tuning our costs assumptions.

We now estimate a smaller net loss of RM700,000 for FY12 (from RM5.5mil) and net profit of RM4.7mil and RM10.4mil for FY13 and FY14 respectively (from net loss of RM1mil and net profit of RM300,000).

We have upgraded our call on Masterskill to “market perform” from underperform, as we believe that much of the bad news is already in the price; and there is limited downside going forward, given that the share price is close to its all-time low of 87 sen.

Our fair value estimate for Masterskill is raised to 88 sen from 85 sen, after rolling-over our valuation basis to a target price-to-book of 0.7 times on FY13 book value of equity per share of RM1.27 (from 0.7 times FY12 book value of RM1.25).

The key swing factor for earnings, going forward, will be the strength of student enrolment at its next major intakes in second half 2012.

STEEL SECTOR

By OSK Research

Neutral (maintain)

MAEGMA Steel HRC Sdn Bhd, which is launching its Maegma project, has signed a gas sales agreement (GSA) with Petroliam Nasional Bhd (Petronas) on Monday.

This is for its integrated steel mill to be built in Tanjung Hantu, Lumut, Perak, which is expected to be in operation by June 2015.

The company will invest RM4.5bil in the first phase to build the plant, which will have the capacity to produce some 1.5 million tonnes per year of thin metal sheets, or hot roll coils (HRC). Maegma Steel is a private company linked to Tunku Datuk Yaakob Tunku Abdullah.

Tunku Yaakob of Negri Sembilan's royal family's plan for the HRC plant is not new to the market as he has been mulling the project since 2000 but it was put on hold as the company failed to secure gas supply.

The GSA signing with Petronas certainly marks a significant milestone for the project. Maegma's other reasons for cheer will be the ongoing works on the distribution centre in Teluk Rubiah belonging to the world's largest iron ore exporter, Vale SA.

As this project is only few kilometers by road from the proposed HRC plant in Tanjung Hantu, it will facilitate ease of sourcing of key feed material.

While we remain unsure whether Vale's proposed pelletisation plant will materialise, we are certain that this iron ore giant may at least use the port to transship its iron ore pellets, which are feed materials for Maegma's plant.

Over the weekend, we witnessed piling works in progress at the upcoming port, which is likely to be in operation slightly ahead of the targeted commissioning date of the new HRC plant.

We understand from sources that the Maegma project is divided into three areas iron ore making through direct reduction (DRI), steelmaking through a standard smelt shop and a continuous flat-bed casting plus hot-rolling mill.

While the process seems unique as DRI is the only feed compared with the normal integration process that usually goes through the blast furnace or electric arc furnace (EAF) route, we may see the project encountering a technical learning curve.

However, we are certain that the DRI process will give rise to additional cost savings to EAF, whose main feed is scrap metal, which is normally priced at a premium to the DRI production cost.

Furthermore, iron ore pellets the purer form of ore compared with scrap metal is also likely to lead to better HRCs versus the pure EAF mill.

Meanwhile, Megasteel Sdn Bhd, a subsidiary of Lion Corp, is the only HRC producer in Malaysia. Thus the Maegma plant will be an additional source of HRC for local consumers.

Workers handling steel pipes at a factory in Johor. OSK Research remains cautious of the gloomy outlook for the steel industry, especially since steel demand is only projected to pick up after the conclusion of Malaysia’s next general election.

The import of flat steel products has been taxed at 25% from Aug 1, 2009 onwards except for those with specific grades that are not manufactured locally for the local market, raw material used for the production of finished goods for the export market, and products used as raw material to produce duty-free finished goods.

We reckon that Malaysia imported an average 800,000 tonnes of HRC from 2005 to 2010, but the implementation of the Malaysia-Japan Free Trade Agreement will see the abolishment of duty on flat steel products from Japan from 2016, while those from other countries will drop to 1% to 10% from 2018 onwards.

This will pose a challenge to local flat steel producers, who will face head-on competition from the anticipated imports.

While the Maegma steel plant is expected to widen the options, particularly for HRC users like cold rollers, pipe makers, automotive industry, white goods producers and others, it is only expected to be commissioned by June 2015.

We remain cautious of the gloomy outlook for the steel industry, especially since steel demand is only projected to pick up after the conclusion of Malaysia's next general election, which may then see Economic Transformation Programme projects eventually taking shape.

These aside, we are also wary that the recent sharp plunge in steel scrap price which has consolidated at US$450 to US$400 a tonne may eventually lead to negative sentiment in the steel market spilling over to the prices of locally finished steel products. As such, we reiterate our “neutral” rating for Malaysia's steel sector.

SHIPPING SECTOR

By CIMB Research

Neutral (upgrade from underweight)

A CLIENT asked last week how it felt to be staring at never-ending gloom in the shipping sector. Not elating, for sure, but opportunities are aplenty for investors who look beyond the immediate horizon.

Last week, MISC Bhd's share price rose 8% after falling 41% in the past year. Could this signal the start of a sector-wide share price recovery? Perhaps, but investors will have to wait 1 years or more to reap the fruits.

Given the sharp fall in share prices, we have upgraded our sector view to “neutral” from “underweight”, and highlight quality names such as MISC, Pacific Basin Shipping Ltd and Orient Overseas (International) Ltd (OOIL) for the long haul.

Asia-Europe container rates weakened for the seventh consecutive week by 2% to 2.4%. Maersk's unilateral US$350 per twenty-foot equivalent unit (TEU) hike on June 15 did not seem to have made much of an impact on the broader market.

Some carriers are planning to hike Asia-Europe rates by US$400 to US$500 per TEU on July 1 but prospects for success look highly uncertain. Asia-Europe rates may continue sliding for the rest of the year in the absence of a good peak season and if capacity is not withdrawn.

Meanwhile, transpacific rates, which had risen strongly over the preceding two weeks, also weakened 0.7% to 2.2% week-on-week last week although we do expect a reasonably good US peak season over the next three months to keep rates relatively high.

Market conditions remain challenging but those investing in good quality companies at cheap valuations would ultimately do well over the longer term.

Pacific Basin, OOIL and MISC remain our preferred long-term bets. We have “neutral” ratings on all three.

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Wednesday June 27, 2012

Felda Global Ventures aiming to be among world's top five commodities giants