Thursday July 5, 2012

Perdana divestment positive

Analyst Reports

Outperform (Upgraded)

Target Price: 86 sen

THE sale of Perdana's 26.9% stake in Petra Energy to Wah Seong is long overdue as it lost control of the latter in financial year ended Dec 31, 2009 (FY09). The block is valued at RM97mil, which is set to help Perdana trim its debt and return to profitability.

We raise our FY12 to FY14 earnings per share (EPS) to account for interest savings. Our target price increases as we update our revised net asset value calculation. Given that the stake sale is almost a done deal, removing the risk we had factored in earlier, and there is the possibility of a turnaround in second quarter of 2012, we upgrade Perdana from “trading buy” to “outperform”.

Perdana has signed an agreement to sell its 26.9% stake in Petra Energy (Not Rated) to Wah Seong (Outperform) for RM97mil or RM1.68 per share, 3.7% above Petra Energy's net tangible assets and Perdana's cost of RM1.62 per share (see our separate note on Wah Seong). The block was put up for sale through a restricted tender process in April.

We reiterate our positive view on the divestment, which is long overdue as Perdana lost control of Petra Energy in FY09 to Shorefield Resources, which has a 27.3% stake. Shorefield is owned by Sarawak-based businessman Datuk Bustari Yusof. Proceeds from the divestment will help Perdana reduce its borrowings and return to profitability. Of the RM97mil proceeds, RM65.5mil will be used to pare down debt, RM28.5mil for working capital and RM3mil for expenses. We expect net gearing to drop from 0.6 times as at March 31 to 0.4 times by end-FY12. For FY12-14, EPS is expected to be boosted by 3-6%, more than offsetting the associate income forgone. On top of that, Perdana is likely to return to the black in the second quarter after a string of quarterly losses. We note that substantial shareholder Dayang (not rated) has been buying actively.

We advise investors to accumulate. Marine support remains the weakest segment in the oil and gas sector but we are encouraged by Perdana's potential turnaround in the second quarter.

WCT BHD

By Hwang-DBS Vickers Research

Buy (Maintained)

Target Price: RM3.75

WCT'S RM5.5bil tender book, a strong balance sheet and efficient cost structure, could see it clinch more jobs in the next two years. Year-to-date contract wins is RM704mil. Larger jobs in the pipeline are My Rapid Transit stations, PLUS highway widening, and expressways in the United Arab Emirates and Oman.

WCT is keen to get its maiden railway project, something it lacks in its 31-year history. Its current strategy is to maintain construction margins going forward. This is achievable in the near term given accelerating recognition for its Qatar building job (RM1.1bil outstanding).

WCT will launch RM1bil worth of properties in financial year ending Dec 31's forecast (FY12F). Its target sales are RM700mil; year-to-date RM370mil. Its RM493mil unbilled sales are anchored by Bandar Parklands and 1 Medini. WCT successfully raised prices at its second launch of 1 Medini (45% sold) to RM550 per sq ft (psf) versus RM450 for the first launch where 100% of the development sold). Opportunistic landbanking in recent years has also created a mix of products. Its 56-acre land in Bandar Bukit Tinggi may be launched this year and is earmarked for high-end homes. This will benefit from the matured surrounding township and nearby AEON Mall. For affordable homes, it has a project in Rawang with a gross development value (GDV) of RM4bil.

WCT has 1.7 million sq ft of retail space now with the opening of Paradigm Mall. The mall has achieved 91% occupancy and RM6 psf blended rental rate with strong footfall post-opening of Tesco and GSC Cinemas. Occupancy rate could rise to 95% when a key retailer takes another 20,000 sq ft. We raised FY12F to FY14F net profit by 1% to 6% after including Paradigm Mall and KLIA 2 concession. In FY14F, we expect investment properties to generate RM124mil income (5% of revenue). Its 57-acre OUG land (of RM4bil GDV) will include another one million sq ft mall and other residential or commercial developments.

Valuations are compelling at 13 times FY13F price-to-earnings (PE) and 1.1 times price-over-net tangible asset (P/NTA), which are at mean levels.

WCT has announced the following related to the ongoing arbitration for the Nad Al Sheba Dubai racecourse project.

First, the dispute and claims of the joint venture (JV) between WCT and Arabetec had been revised several times and is about 2.8 billion emirati dirhams currently.

Second, Meydan has taken the position that the case has expired by effluxion of time. After deliberation, the Arbitration Tribunal had on June 9 rejected conclusively Meydan's submission that the arbitration proceedings have expired.

Third, the JV had received a civil suit/counter claim from Meydan on June 26, 2012 for a sum of 3.5 billion emirati dirhams. Lastly, WCT will continue to pursue its claim pursuant to the on going arbitration proceedings and will take all necessary steps to defend and/or oppose the civil suit filed by Meydan. Based on our conversation with management, we think there are no little grounds for Meydan's civil suit. This is because there is an ongoing valid and binding arbitration between Meydan and the JV, and it is clearly stated in the contract that any disagreements shall be settled via this process.

SEMICONDUCTOR SECTOR

By RHB Research

Overweight (Maintained)

May chip sales slightly weaker year-on-year (y-o-y) but registered third consecutive month-on-month (m-o-m) growth.

May global chip sales (based on a three-month moving average) of US$24.4bil were down 3.4% y-o-y, slightly weaker than April's decline of 2.9% y-o-y. This was on account of continuing weakness in chip sales in European Union, declining 13.6% y-o-y in May compared with moderate declines in the United States and Asia of 3.2% and 1.9% y-o-y respectively, while Japan remained flat. On the other hand, May chip sales grew by 1.4% m-o-m, the third consecutive monthly growth which suggests that global chip sales are improving, albeit modestly.

We gather that major packaging and test players remain optimistic about stronger sales in second half of 2012. Advance Semiconductor Engineering (ASE) highlighted that the concerns on global economic growth had yet to affect orders and capacities were fully utilised. Likewise, Siliconware Precision Industries (SPIL) reiterated that demand remained “brisk” for the third quarter calendar year 2012 based on orders and feedback by customers.

According to IC Insights, worldwide sensor market is expected to register a 2011-2016 compound annual growth rate (CAGR) of 18% driven by the rising adoption of devices with the ability to operate automatically based on detection of movements, surroundings and user interfaces. Note that accelerometers, gyroscope and pressure sensors are based on micro-electro-mechanical-system (MEMS) core structure used to detect changes within a designated proximity. Already, MEMS-based devices account for 70% of the total sensor market (the remaining non-MEMS devices include actuators, surface-acoustic wave filters, micro fluidic). Thus, we believe the proliferation of MEMS structures into devices should help drive demand for integrated circuits.

Risks to our view include: weaker-than-expected global economic recovery, increase in raw material costs, and sharp fluctuation in foreign exchange rates.

We believe that the sector is on track for a gradual recovery. Positive outlook by peers in the packaging and test services also supports this view. Although data points indicate an uneven recovery, we believe global economic recovery is unlikely to be derailed and this should support the demand for chips, underpinned by stronger consumer and corporate information technology spending. Against the backdrop of chip demand recovery, we are reiterating our “overweight” stance on the sector.

Unisem (M) Bhd remains buoyant on the prospects in China given the shift towards high-end devices and stronger adoption of smartphones. We raise our fair value to RM1.90 per share from RM1.84 previously based on unchanged 1.2 times price-to-book value. We reiterate our “outperform” recommendation on the stock.

Malaysia Pacific Industries Bhd's move to reduce contribution from legacy packages and to focus on advance packages could result in temporary loss of orders before the full transition occurs. We now forecast a net loss of RM26.4mil for financial year ended Jun 31, (FY06/12) as we do not think the expected earnings recovery in the fourth quarter FY06/12 would fully offset the loss incurred in previous quarters. Although we are reducing our earnings estimate for FY06/13, we had raised our fair value to RM4.12 per share. Therefore, we maintain our “outperform” recommendation.

We are optimistic on Notion Vtec Bhd given that it has secured new volume orders for the hard disk drive segment as it benefits from higher outsourcing requirement. Our fair value is raised to RM1.51 per share. We maintain our “outperform” call on the stock.

Wah Seong Corp Bhd

By BIMB Securities Research

Trading Buy

Target Price: RM2.28

Subsequent to its successful bid for the 26.9% stake in Petra Energy from Perdana Petroleum, Wah Seong has announced the pricing details of the deal at RM1.68 per share, or a 5.5% premium over Petra Energy's net asset value.

While we are positive on this deal as a way of earnings base diversification, we are less sanguine on the on-going US$25mil (RM78.8mil) Atama Resources deal, as the operating risk is high.

Overall, with its balance sheet's improvement over the last few years, we foresee no significant (if any) credit metrics deterioration from these deals. However, reservations over the group's further investment requirements could create some uncertainty over the group's credit profile.

We maintain our forecast and trading buy call at target price of RM2.28.

The purchase price of RM1.68 is slightly lower than the indicative price of RM1.70 and represents a mild premium of 5.5% against Petra Energy's net asset value.

The total gross purchase consideration of RM96.9mil is digestible even after we factored in Wah Seong's early investment commitment in Atama Resources of US$25mil, considering its strong liquidity level with cash holding of about RM580mil and balance sheet flexibility which has strengthened over the past few years.

Pending Perdana Petroleum's shareholders approval, the transaction is expected to be closed in the third quarter of financial year ending Dec 31.

We reckon this acquisition by Wah Seong will allow it to entrench its business within the oil and gas value chain, considering Petra Energy's strong exposures particularly in the brownfield services segment.

This transaction may also allow Wah Seong to diversify its earnings base and risk as most of its current oil and gas businesses are relying heavily on one-off contract which is susceptible to contract delay and industry contraction. As a second largest shareholder, we expect the group to have at least a representative on Petra Energy's board.

Nevertheless, we are less sanguine on its investment in Atama Resources given the high operating risk involved in developing a greenfield plantation asset in a country that inherited high political risk.

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Thursday July 5, 2012

Perdana divestment positive

Analyst Reports