Thursday September 20, 2012
Topline growth for BToto seen
By RHB Research Institute
Fair value: RM4.55
Market Perform (downgraded)
THE net profit for its first quarter ended July 31 was in line with expectations, accounting for 24% of our and consensus FY13 forecasts respectively.
Berjaya Sports Toto (BToto) recorded an extraordinary items gain of RM8.8mil from the sale of an unquoted investment in the quarter.
BToto declared a first interim single-tier dividend of 6.5 sen.
This translates to a net dividend payout of 78%, slightly below our 80% to 85% projection. However, we believe this will be made up in the coming quarters.
The quarter under review core net profit grew 10.6% year-on-year on a 6.4% year-on-year rise in turnover, helped along by full-quarter contributions from the new 4D jackpot game that was launched in June 2011, one month contribution from the higher sales from the new second prize for Mega 6/52 game launched in June 2012 and better luck factor, which saw the prize payout ratio fall to 64.1% (from 64.6% in first quarter of FY12).
BToto's lotto games contributed 16.2% to total sales.
While we believe there would still be topline growth for BToto, coming from the 4D jackpot games taking market share from the illegal operators as well as normal economic growth, we believe this growth could begin to moderate as punters now are able to not only switch between 4D, 4D and 6D and jackpot games, but also between number forecasting operators (NFO) picking the one which offers a higher jackpot prize.
Risks to our view. and poor luck factor and regulatory changes for NFO industry to discourage gambling in the country or to allow competitors more outlets and more game variations and hike in gaming taxes.
Given the recent rise in BToto's share price and the limited upside to our unchanged discounted cashflow-based target price of RM4.55, we downgrade our recommendation on the stock to market perform from trading buy.
Although investors will still get a one-off distribution of about 50 sen per share in the form of a special dividend from BToto's sale of STM units; as well as a distribution of all or a substantial portion of BToto's remaining units in STM Trust, which will be issued at 50 Singapore cents per unit, we believe this has been priced in to the current share price already.
Based on our analysis, we estimate that a distribution of 10% of the STM Trust units based on issue price of 50 Singapore sen would bring shareholders back to the current RM4.39 value.
Target price: 18 sen/50 sen
THE group's prior poor financial performances were partially contributed by its non-core and loss-making subsidiaries. Followed the completion of the divestment of a number of its non-core and loss-making subsidiaries, Redtone's total selling, general and administrative (SG&A) expenses are expected to be lower by 10% year-on-year to RM36mil in financial year ending May 31, 2013 (FY13).
To recap, the sold divisions accounted for about 11% of the group's FY12 total SG&A cost of RM39.9mil with barely any contribution to the top line. Going forward, the group's FY13 bottom line however, is still expected to underperform due to persisting high operating costs and stiff competitions. We expect Redtone to narrow its net loss to RM3.2mil in FY13 from RM8.7mil core net loss (ex-deconsolidation gain of RM10.9mil) a year ago, based on the existing businesses.
The recent infra and spectrum sharing agreement (NSA agreement) signed by Redtone and Maxis Bhd is expected to benefit both parties. The combined spectrum will allow both companies to offer the fastest 4G broadband speed across the country of up to 150Mbps. While Maxis is expected to benefit from the enlarged spectrum capacity, Redtone on the other hand is expected to have significant cost-savings on capex of about RM390mil.
The NSA agreement will allow both parties to maximise the usage of the scarce combined 2.6GHz spectrum, albeit the respective apparatus assignment for the 4G spectrum have yet to be assigned by Malaysian Communications and Multi-media Comission. In return, Maxis will pay Redtone an upfront payment in FY13 followed by a series of payments over the next 10 years. We understand that management is expecting the recurring income (from Maxis) to boost its financial performance significantly. Although Redtone is reluctant to divulge the exact quantum, we project that Maxis could be value Redtone's 4G spectrum at RM295mil based on our observation.
In view of the company's bottom line still expected to post a loss in FY13, Redtone is likely to be fairly valued at its net asset per share of 18 sen. Nevertheless, should we include the “Maxis factor” into our financial model; Redtone's FY13 is expected to record a net profit turnaround of RM21.1mil. This will provide a strong rerating catalyst for the stock and raise our Redtone target price to 50 sen based on a targeted FY13 price-to-earnings ratio of 11.4 times.
Target price: RM4.64
WE are initiating coverage on DiGi with a neutral rating.
Our 12-month target price of RM4.64 based on discounted cashflow valuation (weighted average cost of capital: 5.9%, terminal growth rate: 1.5%) implies a current share price level, which is a little overvalued.
Though earnings prospects look appealing for financial year 2013 onwards, we opine that current valuations have fully factored in the positive earnings growth.
Downside risks would however be offset by the attractive dividend yield of 5.6%. (1.3% capital distribution and 4.3% pure dividend yield).
We see incremental dividend yields over the longer term as we expect to see improved earnings along (and corresponding cashflows) with stagnant capital expenditure given the saturated growth in Malaysian telco industry.
Apart from that, its net cash postion would also allow the group to declare further special dividends.
Though DiGi's stated long-term dividend policy has been to “pay out a minimum 80% of net income”, its actual ordinary payout has been in excess of 100%.
The company has also either carried out a capital repayment or offered a special dividend in the past.
Our current ordinary dividend yield forecast of 5.6% (inclusive of 6.4sen capital distribution) for FY13 remains the same as last year.
The company is in the process of finalising a capital repayment totaling RM495mil or 6.4 per share and is expected to be completed by first half of FY13. This comes just after its first capital management exercise, totaling RM509mil, which was distributed in the first half.
Given that the company is still in a net cash position after two rounds of capital repayment, we do not rule out the likelihood of special dividend or further capital repayments in the near term.
The group is embarking on network collaboration with Celcom, which includes sharing of sites and backhauls transmission to ensure both parties are able to carry higher traffic volumes. The entire exercise is slated for completion by end-2013. As indicated previously, the collaboration is expected to result in incremental cost savings in the future, totaling RM2.2bil over 10 years, starting from 2015 with an average of RM150mil to RM250mil per year.
In addition, both parties have also commenced joint fibre aggregation and trunk rollout.
Besides that, a network modernisation initiative that involves replacing its entire radio access network for a brand new long-term evolution (LTE)-ready platform is on target and is slated for completion by end-2012. The new network is expected to deliver highspeed broadband and next generation services with the introduction of a portfolio of bandwidths. The LTE-ready network will ensure faster roll-out of broadband services through wider coverage and enable to deliver substantially faster speed at affordable prices.
DiGi became the fourth operator to enter the Malaysia's 3G arena with the launch of 3G broadband in the fourth quarter of 2008. The delayed entry places it behind the competition as its population coverage is still low, standing at 60% compared with Celcom 81.7% and Maxis 81%.
The company intends to pick up momentum in expanding its 3G population coverage this year to 70% and over 80% by 2015.
We also see downside risks to our target price arising mainly from price competition amongst its peers. This could revole primarily in the mobile-internet and wireless broadband segments due to the arrival of several new players namely, U-mobile and YTL Communications as well as Wimax players like Green Packet's P1.
DiGi shares are trading at FY13 price over earnings (PE) ratio of 23.2 times and enterprise value over earnings before interest, tax, depreciation and amortisation (EV/EBITDA) of 12.3 times expensive relative to regional peers (average FY13 PE: 14.1 times, average EV/EBITDA: 6.3x) and local telco players (average FY13 PE: 21.9 times, average EV/EBITDA: 10 times)
RUBBER GLOVE SECTOR
By MIDF Research
MALAYSIA's rubber glove export continued its uptrend for the first seven months of 2012. According to the July 2012 external trade statistics released recently by the Department of Statistics, the volume of rubber glove export for the month of July 2012 grew 11.8% year-on-year to 46,052 tonne.
Year to date, Malaysia exported in total 309,061 tonnes of rubber gloves up until July, translating to a 10.9% year-on-year growth. Meanwhile, the export value of rubber glove for July increased 6.6% to RM924mil. Cumulatively, up until July, Malaysia's rubber glove export value registered a year-on-year growth of 9.2% to RM6.08bil.
Historically, gloves' demand has been growing on an average of 8% annually for the past few years. Therefore, we expect demand growth for the remainder of the year to be sustained due to a few factors: low latex price, leading to a lower pricing for the rubber glove products; relatively low nitrile butadiene price, resulting in lower nitrile glove products: growing demand from emerging markets, as a consequence of higher healthcare standards; and nature of demand for glove, which is deemed a necessity in the healthcare industry.
In 2011, the global demand for rubber gloves stood at around 150 billion pieces, with 61% of the total amount supplied by Malaysian producers. We expect the Malaysian producers to continue to command the lion's share of the market in the years to come.
Latex price has retreated by 33.3% from its one-year peak price, and retreated 26.8% from its highest price in 2012, with a current price of RM5.82 per kg. On a yearly basis, the average price for latex is has plunged by 30.7% in third quarter of 2012 compared with the same period last year. The softening demand has been caused primarily by the reduction in demand from downstream tire makers affected by the economic slowdown in China, the world's largest consumer of rubber. The ongoing debt crisis in the eurozone and the uncertainty it creates throughout the global economy has further eroded demand for this commodity. We expect the latex price to hover between RM5.50RM6.50 for the upcoming months, due to a weaker demand for the commodity. This development is positive to the natural rubber (NR) glove producers, as latex costs normally account for up to 60% of their total production costs. Even if the price intervention mentioned by the Malaysian, Thai and Indonesian governments were to materialise, we are not convinced that it will have a sustainable substantial impact on the latex price, as we believe the price will eventually be determined by market forces.
Consistent with the comparatively lower crude oil price, the price for the main raw material for nitrile gloves, natural butadiene rubber has been on a downtrend for the past few months. Based on the China nitrile butadiene rubber (NBR) 1500 Guangzhou Market Price, NBR price has fallen 34.5% from its peak price for the past one year, and 10.4% from its highest level for 2012, trading at US$3,539 per tonne as of July 2012.
As of natural latex, the easing of NBR prices has been caused primarily by the slowdown in the world economy. With no indication of a major global economic recovery in the near future, we are of the opinion that NBR price will continue to be depressed in upcoming months. This would bode well for the NBR glove producers, as nitrile usually accounts for up to 50% to 60% of the total production costs of NBR gloves.
We believe the US dollar will still linger around the RM3 per US dollar benchmark in the mid-term. Therefore, we see not significant risk of erosion of revenue and earnings for the industry players as a result of a weaker US dollars in the upcoming months.
Taking into consideration the factors mentioned above, we are upgrading our recommendation to positive for the sector. With the easing of latex and nitrile prices, sustainable demand growth, and relatively stronger US dollar, we anticipate that the profitability of the rubber glove producers to improve substantially in second half of this year.
We are reiterating our buy calls for all the stocks under the sector, except for Top Glove, which has been put under review due to the significant movement in stock price for the past few months. We expect the glove players will each benefit significantly from the much improved operating environment. At the current prices, we believe each one of them still offers significant appreciation potential over the coming 12 months.