Wednesday August 29, 2012
Shippers in choppy waters
FOR shipping companies across the container, dry bulk and tanker segments, the past few weeks have been very challenging as rates have fallen sharply due to the weak outlook for demand and the glut of vessels. This is not helped by the recovery in bunker fuel prices.
Shipping companies are being squeezed on both the revenue and cost fronts. We remain neutral on the sector as valuations are cheap, reflecting the current crisis. Orient Overseas (International) Ltd (OOIL) is still our top pick in the sector. We also like other quality names such as Pacific Basin Shipping Ltd and MISC Bhd.
Over the past two to three weeks, Asia-Europe (AE) container rates have tumbled to levels last seen in April. Continuing weakness in AE rates appears likely given a muted peak season, poor demand outlook, low utilisation, and shipping company, Evergreen's plans to add capacity to the trade lane. The trans-Pacific trade seems to be faring better though rates have also declined.
China's economy is going through a major slowdown. The Flash MNI China business sentiment indicator was at 46.76 points in August from 49.73 points in the final July result, while HSBC's China August Flash purchasing managers index (PMI) was at 47.8 in August, against the 49.3 final July reading.
Typically, after a relatively “quiet” May-July period, manufacturing activities would pick up pace in August and September as factories in Asia busy themselves with year-end demand but not this year, unfortunately. Bulk rates have been hit hard, especially for capesizes where rates are near global-financial-crisis lows. Rates in the smaller segments have been negatively affected by the severe drought in the United States, the monsoon season in India and export restrictions by Indonesia.
The tanker market is doing no better, with rates trending lower over the past few weeks. The very large crude carrier, suezmax and aframax tankers are unable to cover cash operating costs at this rate level. Overcapacity is a major issue. Owners are now scrapping ships that are not even 20 years old.
We remain “neutral” on all three shipping segments. If demand growth stays relatively muted, recovery could take several years as structural overcapacity will persist.
Target price: RM4.27
THE group's first-half PATAMI (profit after tax and minority interest) grew by 33% to RM134.6mil (24.7 sen per share), making up 68% and 52% of ours and consensus' estimates respectively.
We consider Mudajaya's earnings to be largely in line as start-up costs arising from the India power plant may hit the group's earnings (reported under “associate” line) in the later quarters.
For the second quarter ended June 30, the additional revenue growth (year-on-year: 57%, quarter-on-quarter: 27%) was largely derived from progress for the local power plant extension projects, namely Janamanjung and Tanjung Bin.
However, the contraction in operating profit margins to about 14% from more than 20% previously saw flattish year-on-year growth, while quarter-on-quarter PATAMI contracted by 19%.
The lower operating margins were due to lower value-added works for the India IPP (independent power producer) project, while its local projects have yet to fully take off, and coupled with finalisation of accounts for the Kuala Lumpur-Kuala Selangor Expressway which has been expensed off, pending approval for additional final claims.
We believe that operating margins should rebound about 20% in the subsequent quarters.
As indicated by the flattish Minority Interest charge, the India IPP project slowed after strong progress since the third quarter of last year.
We gather that the civil works portion has picked-up in pace to match the progress of the engineering and procurement (EP) works portion.
Currently, the civil works portion has to catch-up in speed in order to facilitate further progress for EP works.
Overall, Mudajaya has an outstanding order book of about RM2.9bil, translating to a 2.5 times financial year 2011's construction revenue and 1.9 times order book-to-market cap ratio.
The risks may include a delay in completing the India IPP project, regulatory and political risk (both local and abroad), rising raw material prices, unexpected downturn in the construction sector, and sharp depreciation in the Indian rupee and the US dollar. The positives may include completion of the India IPP project, resolution of coal supply issue and new project wins.
By OSK Research
Fair Value: RM7.53
MANAGEMENT does not see the need to aggressively acquire more market share but is focused on improving quality and service delivery. Specifically, management does not foresee any major involvement in the merger and acquisition (M&A) landscape, including the takaful business.
We believe Allianz is making the right move to strengthen its market foothold as it already has strong, prudent cost controls and underwriting policies in place. It is also targeting organic growth. Allianz Life, for instance, targets to increase its current 5,300 agent base to around 10,000 by 2015, mostly to drive the growth of the life business segment in east Malaysia.
Allianz is enhancing its asset quality and tightening underwriting standards in preparation for the tariff removal by 2016. Management hinted that it is still maintaining strong capital adequacy ratio and also alleviate concerns of Malaysian Motor Insurance Pool as any potential losses, which can occur on an ad-hoc basis, have been partially taken into account. Also, management is prioritising the enhancement of customer services to retain as much customer loyalty as possible, while maintaining a close watch on pricing movements and aggressively expanding its agency force. Should the detariffication materialises, management is confident to be able to limit the spike of the combined ratio to around the 90% level and targets to maintain the lead in pricing power and enhanced distribution coverage, when some of the major peers may be limited by cost factors in the midst of M&A consolidation.
Management has clarified with us that the sharp spike in management expenses ratio from 17.7% in the first quarter of ended March 31 to 20.4% in the following quarter is not significant because of concern as the base of earned premiums was smaller, as an effect of more written premiums being ceded to reinsurance in preparation of the potential detariffication event by 2016. The actual increase in management expenses was at reasonable levels meant for the expansion of the group's distribution channels and infrastructure. Likewise, the offset in the compression in commission ratio was due to the same reason. We remained comfortable as management has indicated that the overall combined ratios are expected to be maintained at current levels moving forward.
We remain convinced of the management's focus and the company's strong fundamentals. We are rolling over our forecasts to the financial year ending Dec 31, 2013 and assuming a revised 13% growth in gross written premiums for general insurance and 12.5% growth for the life insurance.
We maintain a “buy” call, with the fair value raised to RM7.53, based on a sum-of-parts valuation attributed to an industry price-to-earnings of 15 times for general insurance, and price over embedded value of one time on an embedded value of RM650mil for Allianz' life insurance.
Target price: RM9.30
RHB Capital's second-quarter and first-half results were within expectations driven by strong loan growth and stable net interest margin (NIM). Its asset quality remains robust.
After a contraction in the first quarter, RHBC made a come back with a 9% quarter-on-quarter loan growth (strongest among peers for the second quarter so far) from corporate loans, believed to be Economic Transformation Programme (ETP) driven.
NIM remained stable at 2.4%.
RHB Capital had decided to moderate fixed deposit growth to manage cost of funds but on the asset side, competitive pressures prevail.
Most approvals have been obtained for the proposed OSK Investment Bank acquisition.
The transaction should be completed by the fourth quarter, and the contribution to improve profits for its international segment should kick in from the financial year 2013.
Although the ownership policy in Indonesia has been issued, what remains uncertain is whether RHB Capital can acquire more than 40% of Bank Mestika.
Now, management remains committed to secure a presence in Indonesia and is willing to take the first 40% stake pending further discussions with Indonesian regulators.
The long stop date for the conditional sales and purchase agreement has been extended to Nov 30, but there may be a further extension to complete the transaction.
Our view is that although deposit growth of 2% in the first half is short of management's target of 12% for the financial year 2012, the aim this year is to manage liquidity with loan-to-deposit ratio at below 90% (second quarter 2012: 88%).
Focus will be on growing CASA (current and savings account) to ensure NIM remains at best stable amid competition.
Its loan and investment banking mandates pipeline is strong and should continue to drive momentum in the second half.
Corporate loans would be a third of total loans, retail and Islamic loans combined would be another 50%, and the remaining portion should be business banking. We raise our target price to RM9.30 (previously RM9.10) after rolling over our valuation base to the financial year 2013.
Our target price is based on the Gordon Growth Model with the following assumptions: 14.5% return on equity, 5% growth and 11% cost of equity.