Monday July 16, 2012

Wah Seong’s outlook piping hot

Outperform (Maintain)

Target Price: RM2.52

PIPE coater Wah Seong is set for a“smokin” hot timegiven its potential exposure to marginal field development via its prospective 26.9% equity in Petra Energy, as revealed during a recent meeting.

It is also eyeing the RM15bil North Malay Basin contract to pump up its order book.

We continue to value the stock at our calendar year 2013 (CY13) target market price earnings of 13 times.

The equity stake in Petra is longer-term positive and adds to the appeal of Wah Seong whose pipe coating order book prospects remain bright.

We left our recent meeting with Wah Seong's management feeling more positive on the company's earnings outlook. Petra is believed to be tying up with Coastal Energy to undertake a marginal field contract for Petronas.

Last week, Coastal sealed an agreement with the national oil company to develop the Kapal, Banang and Meranti (KBM) cluster located offshore Peninsular Malaysia.

Fresh from securing Petronas Carigali's US$75mil pipe coating contract in Turkmenistan recently, the management is now eyeing the pipe coating portion of the North Malay Basin which could be worth at least RM600mil.

In Australia, potentially on offer is Chevron's Gorgon Phase 2. As at 31 Mar 12, Wah Seong had RM1.2bn worth of jobs in hand. We reiterate our positive view on the Petra purchase which is aimed at diversifying Wah Seong's earnings base through long-term contracts for integrated brownfield and maintenance jobs.

Furthermore, if Petra works with Coastal on KBM, Wah Seong could enjoy additional net profit of RM24mil per annum effective FY15, which is beyond our forecast period.

Stay invested. Wah Seong's equity stake in Petra is a big plus, in our view. Also, Wah Seong's contract pipeline remains strong given the pipe coating opportunities in Malaysia and Australia.

PARKSON HOLDINGS BHD

By HwangDBS Vickers Research

Buy

Target price: RM5.40

PARKSON Holdings Bhd's share price has tanked from its peak this year of RM5.86 in February to RM4.30 (minus 27%), before recovering to RM4.67 now.

This follows the slump in 51.5%- owned Hong Kong listed subsidiary Parkson Retail Group (PRG) shares which fell 32% to HK$6.86 this year prior to a rebound to HK$6.95 as retail spending in China slows.

From a valuation perspective, Parkson Holdings's one-year forward rolling P/E (price-to-earnings) ratio has dropped to 11.4 times, below its mean of 14.4 times but still higher than its record low of 6.3 times. Its share price would be RM5.91 if it reverts to its historical mean, and could fall to RM2.59 at trough P/E.

More interestingly, the stock is now trading close to its historical low price-to-book-value (P/BV) multiple, implying relatively limited downside (to RM3.73 versuss upside potential to RM6.81).

Meanwhile, PRG the driving force of Parkson Holdings's valuation and earnings profile is also hovering near its historical low P/E and price to book value (P/BV) bands.

We tweaked financial year ended June 31, (FY12F) forecast to FY14 forecast earnings by 1% to 5% after imputing new DBSV forex assumptions.

We also nudged up our revised net asset value (RNAV) - based target price to RM5.40 (from RM5.30, after rolling over valuation window to FY13), implying 19.1% total potential return.

We still like Parkson Holdings as a proxy to rising consumer spending, tapping on the huge long-term growth potential in China and South-East Asia.

MALAYSIA SMELTING CORP BHD

By OSK Research

Buy (Maintain)

Fair value: RM5.50

WE had earlier warned investors of a potential earnings downgrade as tin prices fell on renewed concerns over Europe's growing sovereign debt crisis.

The current tin price of US$18,500 and first half 2012 average of US$21,821 are significantly lower than our projection for US$24,000 a tonne.

This prompts us to revise down our tin price estimate to US$20,000 and US$22,000 a tonne for the financial year 2012 (FY2012) and FY2013 respectively.

On top of the tin price revision, we also incorporate higher mining costs at PT Koba Tin as the sharp plunge in tin prices may have caught the company's management off-guard.

As the shift from a higher cost mining pit to one of lower cost spurred by falling tin prices may take time and affect the company more severely, we are prompted to slash our forecast FY2012 earnings forecast drastically by 55.1% to RM39.5mil.

Notwithstanding declining tin prices, the company has actually made efforts to expand its tin business.

In the first half, it made several announcements which were positive for the group's long-term prospects, such as extending Rahman Hydraulic Tin Sdn Bhd's mining concession until 2030 and entering into a strategic alliance agreement with Optimus Synergy Limited to pursue the extension of its contract of work in Bangka Island.

Another positive announcement was the joint venture with Mineral Mining Resources Ltd for a 40% stake in Africa Smelting Corp as a first step towards venturing into the Democratic Republic of Congo's tin smelting industry. We are delighted with these developments as the company's enlarged footprint in the tin market certainly puts it in a better position to capitalise on any tin price appreciation,

which we are confiden may happen anytime soon, riding on the recovering demand for tin soldering in the electronic industry, which accounts for almost 50% of the world's total tin consumption.

We are toning down MSC's fair value to RM5.50 after the revisions in earnings and tin price estimates.

That said, we still think MSC justifies a buy recommendation. Given its ongoing expansion plans and solid fundamentals, the stock is still trading at a cheaper valuation versus its peers in China and Indonesia.

CB INDUSTRIAL PRODUCT HOLDING

By UOB Kay Hian

Not Rated

WE were invited to visit a Modipalm mill constructed by CB Industrial Product Holding (CBIP) located at Jengka 21, Pahang, which uses CBIP's patented continuous sterilisation (CS) process.

Questions raised during the visit were mainly on the advantages of Modipalm over conventional mills.

Further growing its order book by targeting to secure projects worth about RM500mil from plantation companies such as Felda Ventures Hldg Bhd, Kuala Lumpur Kepong Bhd and TSH Resources Bhd.

CBIP is expected to ride on the expanding plantation sector in Indonesia and Africa. A mill is required for every 7,000-8,000ha of oil palm trees.

Given the huge planting activities in recent years, demand for palm oil mills has also increased.

Also, CBIP is targeting Papua New Guinea as a new emerging market to grow its orderbook.

Since June 12, CBIP has made several announcements on contracts it had been awarded to by Wilmar International Ltd, Sime Darby Bhd and PT Astra Agro Lestari Tbk.

According to the mill manager, the mill's oil extraction rate (OER) was about 23.34% in 2011, the highest in Malaysia as compared with conventional mills that have an average OER of 21%.

CBIP's Modipalm CS system offers better OER and lower oil losses from condensation as well as unquantified oil loss (for example oil and loose fruit spillage).

Compared with conventional mills, CBIP management indicates that its CS system could increase OER by 1 to 2 percentage points.

Based on our estimates, a 1 percentage point improvement in OER would lift net profit by 5%-10%, which is substantial enough for planters to consider implementing the system.

Based on our observation, Modipalm mill requires less labour as compared with a conventional mill.

Most of the processes for CS system are automated and only one worker is required to ensure the supply of fresh fruit bunch (FFB) to the steriliser using conveyors.

According to management, CS system could reduce the number of operators per shift to 8 to 12 people versus 15 to 30 people in conventional sterilisation mills, depending on the mill capacity.

The management indicates that its Modipalm mill could save about RM3.75 per FFB tonne on labour costs as less manpower is required.

We noticed that a Modipalm mill eliminates the use of cages, railway track and tractors that are required for conventional steriliser mills.

Instead, a FFB feeding conveyor is used to transport the FFB straight into the steriliser.

According to CBIP, its Modipalm mill could result in RM2.17 per FFB tonne of savings on maintenance costs.

2012 profit to come from strong engineering orders but net profit will be lower than 2011 due to the absence of its plantation earnings (39% of 2011 profit before tax).

Nevertheless, management has guided that the mechanical and engineering division would continue to perform on the back of strong unbilled sales, focus on high-margin mechanical supply business, and recurring income from replacement and upgrading works.

As at the end first quarter of 2012 (Q1'12), CBIP has about RM356mil of unbilled sales.

Of this, about RM150mil will be recognised during the remaining months in 2012.

Also, it has secured about RM76mil worth of new contracts in Q2'12.

Its focus on high-margin mechanical supply business, which has a 20 to 25% operating margin versus palm oil mill construction's margin of 15 to 20%. In Q1'12, CBIP recorded a much higher operating margin of 17.9% mainly due to the rising mechanical supply business (about 35% to 40% of sales from mechanical supply business versus 25% to 30% previously).

CBIP expects to further expand its mechanical supply business and targets to further increase the total sales portion coming from mechanical supply business from 35 to 40% in Q1'12 to 50% in the coming year. Besides growing its order book, CBIP is also targeting to grow recurring contribution from different segments such as replacement and upgrading works for older and underperforming mills.

Currently this segment is contributing about 10% of CBIP's revenue. Post-disposal of its Malaysia plantation assets, CBIP has about 8,000ha of landbank in Kalimantan.

CBIP started planting in 2010, and this landbank is expected to start contributing in 2014.

It has also acquired about 29,273ha of plantation landbank in Kalimantan, which increases its total landbank in Kalimantan to 37,273ha.

The management expect to start planting on its newly acquired landbanks in 2013 and it targets to plant about 5,000ha-8,000ha every year.

During the visit, management indicated that CBIP targets to increase its plantation landbank in Indonesia to 100,000ha.

It is also looking to acquire another 30,000 to 40,000ha of landbank near its existing landbank in Kalimantan Tengah.

Based on the latest land transactions in Kalimantan Tengah, unplanted area without “Izin Lokasi” (location permit) is worth about RM448 to RM621 per ha.

CBIP has a dividend policy of paying out one-third of its net profit.

However, in 2011, CBIP declared a tax-exempt dividend of 35sen per share (about 90% of payout ratio), well above its dividend policy, due to the high level of cash on hand (RM58.1mil or 21.1 sen per share in 2011).

As CBIP's cash position would remain high after the disposal of its plantation assets (net proceeds of RM268.1mil or 97sen per share), there might be another year of payout that is greater than its policy dividend in 2012.

Assuming a payout ratio of 90% (similar to 2011's) and consensus earnings per share (EPS) of 31.3sen, CBIP might pay out about 28.2sen per share in 2012, representing a dividend yield of 10.5%.

Based on consensus, CBIP is expected to deliver EPS of 31.3sen, 33sen and 36sen for 2012, 2013 and 2014 respectively.

At RM2.71, CBIP is currently trading at eight times 2013 forecast price-to-earnings ratio

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Monday July 16, 2012

Wah Seong’s outlook piping hot