Tuesday January 15, 2013
Election dampener for property
By Maybank IB
THE General Election will continue to dampen sentiment on property stocks in the first half of this year, but a re-rating should take place post-elections with the planned roll-out of government land developments and the Klang Valley MRT2 and 3 projects.
We prefer developers with large exposure to township developments like Glomac. We also like UEM Land for its exposure to the booming Iskandar Malaysia; accumulate on weakness.
We expect the demand for affordable homes to remain strong driven by a sizeable young population. This housing segment, dominated by first-time buyers/owner occupiers, is less vulnerable to property downcycles and stricter lending rules.
Rising investments and oil & gas activities will serve as re-rating catalysts for property/land prices in Iskandar Malaysia over the long term. Recent foreign investments in Iskandar Malaysia such as those by Ascendas have raised IM's profile at the international level, reflecting its attractiveness as an investment destination.
UEM Land, as the largest land owner in IM, is the prime beneficiary of the IM boom. We expect some government land developments awards post electopmns - Kwasa's RRIM land in Sg Buloh, the Unilever land in Bangsar and the Pudu jail redevelopment.
These would provide short-term trading opportunities for property stocks. Frontrunners to win the awards include government-linked corporations such as SP Setia, UEM Land and MRCB.
Final alignment of the Klang Valley MRT 2 and Circle lines is likely to be announced in third quarter of this year (government approval is targeted for second half), and may be another rerating catalyst for selected developers. Key beneficiaries include SP Setia, YTL Land and Mah Sing.
Our top pick in the sector is Glomac. We like Glomac for its undemanding valuations and large exposure to township developments (48% of remaining gross development value).
We also like SP Setia for its proven track record and strategic landbank. However, the gradual reduction in its founder stake may affect share price performance.
As for UEM Land, it is set to benefit from the booming Iskandar Malaysia. Any selldown ahead of the elections is an opportunity to buy into the stock.
FINALISATION of new gas price and electricity tariff will be key inflexion points in 2013. Tenaga Nasional Bhd (TNB) will be the biggest beneficiary of sector reform but near term upside may be limited by a delayed tariff hike and higher capital expenditure (capex).
Petronas Gas Bhd (Petgas) is preferred as it is most leveraged to Petronas' increasing gas capex due to Gas Malaysia's resilient dividend play.
There is a more challenging outlook for YTL Power International Bhd (YTLP); privatisation is a wild card.
We expect power demand to grow by 4.5% this year, driven mainly by the cement and steel industries following the implementation of Economic Transformation Programme (ETP) projects. The rising demand will gradually reduce the reserve margin to 18% in the year 2018, so the country is building 4,500MW of new capacity. The Energy Commission (EC) has called for tenders for two new coal-fired plants.
The competitive bidding and ongoing sector reform could result in a sector consolidation and benefit players with strong balance sheets over the longer term.
The Melaka regasification plant is targeted for completion in second quarter of this year. The higher cost of liquefied natural gas (LNG) is likely to lead to a hike in electricity tariff, but that may not happen until after the General Election.
TNB will benefit the most from the sector reform but we prefer Petgas in the near-term as it is the most leveraged to larger gas supply with potential award of a third regasification plant in Pengerang, Johor this year. Gas Malaysia is a resilient yield play that will also benefit from LNG developments which will increase gas supply by 10% this year.
Malakoff Corporation Bhd (Malakoff) and 1Malaysia Development Bhd (IMDB), the largest IPPs in Malaysia, are planning for listing this year. We expect these initial public offerings (IPOs) to be well received given their large market capitalisation, resilient earnings and sustainable dividend yields. They could trigger a sector re-rating on expectations the ongoing reform efforts would make power price setting more transparent and lift returns of more efficient independent power producers (IPPs).
Additionally, replacement cost had risen by c.30% over the last five years.
Target Price: RM6.00
A BUSINESS weekly quoted Top Glove Corporation Bhd managing director Kim Meow Lee as saying that Top Glove has included Africa as a new growth area and that he had visited several African countries to identify suitable sites to venture into rubber plantation land there.
No decision has yet to be made.
Due to the increasing awareness of hygiene and greater attention of healthcare in Africa, Top Glove has identified several promising markets here to expand its customer base, including Nigeria, Zambia, South Africa and Kenya. Currently, Top Glove distributes its products via existing glove importers.
We are neutral on this latest news due to the fact that while rubber plantations will help ensure a consistent supply of latex, however, investment in rubber plantations especially green field will likely yield zero or minimal returns in the early years since the gestation period for rubber trees is six years.
Thus far, Africa only accounts for less than 5% to its revenue, we believe venturing into rubber plantations here is not warranted and also considering that Top Glove had already recently ventured into a greenfield rubber plantation.
Top Glove has set aside RM450mil over the next 14 years to establish a greenfield plantation in Indonesia. In the first six to seven years, Top Glove is expected to spend a total of RM240 mil or RM20mil-RM30 mil per annum to clear the land and fully cultivate its rubber estates in Indonesia.
This means that the RM240mil investment will likely yield zero or minimal returns in the short term since the gestation period for rubber trees is six years.
While we believe the declining trend in raw material prices could improve the glove makers' margins, including that of Top Glove, there are also headwinds ahead, which include the strengthening trend in the ringgit vs the US dollar, higher natural gas prices and the minimum wage policy.
We understand that 50% of its workforce or 3,850 workers falls below the new minimum wage of RM900/month and expect their salaries to increase by 50%.
Ceteris paribus, assuming a no cost pass-through' scenario, the minimum wage policy is expected to hit Top Glove's bottom line by 9% based on our back-of-the-envelope calculation.
Furthermore, feedstock latex price is expected to move upwards in the first quarter of 2013 due to the low production period.
There are no changes to our financial year 2013/2014 (forecasts.
We are maintaining our target price of RM6 based on 15x financial year 2014E earnings per share (EPS).
THE sector remains an overweight'. Industry mergers and acquisition (M&As) as well as attractive dividend yields could further catalyse the sector.
Dividend yields are 6 to 7%. Daibochi Plastics remains our top pick in the sector. We like the company's long-term growth strategy to diversify from the food & beverages (F&B) sector.
The flexible plastic packaging (FPP) sector outperformed the market last year as investors hunted for yields and sought defensive businesses.
In 2013, these two factors could help the sector continue outperforming the market.
Last year's earnings recovery was mainly due to stable raw material prices. In 2011, the sector was hit by sharp rise in polyester and adhesive prices and the FPP players had to adsorb part of higher raw material costs.
Raw materials account for around 75% of the sector's production costs. Some of the raw materials, derivatives of crude oil were also affected by crude oil price trading sideways for the past one to two years.
Our stocks in the flexible plastic packaging (FPP) sector, Daibochi Plastics and Tomypak Holdings outperformed both the KLCI and FBM Small Cap Index last year.
The growth prospects this year are different for Daibochi and Tomypak. Tomypak's management remains focused on the F&B sector, targeting the local and regional F&B market, while Daibochi is taking a different path.
The F&B sector still remains Daibochi's bread and butter but the company is looking to diversify to other sectors such as medical-glove, tobacco and E&E manufacturers. In addition, it is also looking to further expand its export market in Australia.
Both Daibochi and Tomypak pay dividends on a quarterly basis. Dividend policy wise, Daibochi has set its policy at minimum 60% of net profit while Tomypak does not have a fixed policy.
We forecast 40% payout ratio for Tomypak but this could be higher as its balance sheet carries minimal debt.
We continue to like the sector's exposure to the defensive F&B sector with growth potential from export market and non-F&B sector. Further industry M&As should see continued investor interest in the sector.
Moreover, dividend yields are attractive at 6 to 7%.