Friday February 15, 2013

Positive view on MMC water deal

By Affin Research

Add (maintain)

Target price: RM2.80

THE group announced that Muscat City Desalination Co S.A.O.C., a 45%-owned associate of Malakoff (which in turn is a 51%-owned subsidiary of MMC), had signed a 20-year water purchase agreement with Oman Power and Water Procurement Company S.A.O.C. for the sale and purchase of potable water and making available the guaranteed contracted net desalination capacity of 42 million gallons per day (equivalent to 191,000 cu m per day) from the project.

The project was awarded on a build, own and operate basis utilising reverse osmosis technology. The targeted commercial operation date of the project is in the fourth quarter of 2014. We are positive on the above contract win as it demonstrates the group's ability to export its water management expertise across regions. Pending management guidance, we are unable to gauge the potential earnings impact and size of investment. Nevertheless, we note that earnings impact may not be material as 51% of MMC's nine-months financial year 2012 profit before tax is derived from its Malaysian-based port and power generation business.

We maintain “add” with an unchanged RM2.80/share target price.

We would accumulate on share price weakness as MMC's earnings prospects are expected to improve with the rollout of the MRT project complementing the tail-end progress billing for the double tracking project.

Mega job: Engineers with the tunnel boring machine for the MRT project. Affin Research says MMC’s earnings prospects are expected to improve with the rollout of the MRT project.

Key re-rating catalysts for the stock are further unlocking of key assets; Malakoff is expected to be listed on Bursa Malaysia by May, the sale of landbank in Senai and Tanjung Bin and paring down borrowings. Key risk to the stock is potentially dilutive acquisitions, not ruling our further related-party transactions.

KLCC PROPERTY HOLDINGS BHD

Maybank IB Research

Buy (unchanged)

Target price: RM6.61

THE listing of KLCC stapled REIT (KLCCSR) by the end of the first half of this year, taking over KLCC Property (KLCCP) listing status, will provide investors with an alternative yield play.

Although it will not enjoy the tax incentives of a pure REIT, shareholders will still be able to reap an additional 9-11 sen dividend per share under the new corporate structure, closing the yield gap with M-REITs.

We raise our financial year 2013 and 2014 earnings forecasts by 27% and 32% respectively.

Our new discounted cashflow (DCF)-based target price is RM6.61 (+23 sen). A stapled REIT structure will mitigate the cash outflows (e.g. management fees to third parties under a conventional REIT) but more importantly, it allows KLCCSR to continue participating in property development a source for future asset injections. This is particularly important as it is getting tougher for M-REITs to find good-quality, yield-accretive acquisitions due to demanding prices from sellers and stiffer competition from other asset owners.

Management has committed to paying 90% or more of KLCCSR's consolidated distributable income (40% previously) as dividends. This would lower the yield gap between KLCCSR and large-cap M-REITs to -17.5bps (financial year 2013) and +18.3bps (financial year 2014), from -168bps and -160bps before the corporate exercise.

Despite owning one of the world's iconic buildings, KLCCP (in its current form) has hardly re-rated in the past due to its uncompetitive dividend yield.

There are ongoing discussions with its 40% JV partner in Suria KLCC Mall (CBRE Global Investors) for the potential injection of the mall into the REIT.

The deal could take place by the second quarter or third quarter of 2013, at the earliest. Should the injection be fully funded by debt, a 100%-owned Suria KLCC could boost KLCCSR's financial year 2013 and 2014 distribution per unit by 2.7 and 3.2 sen respectively, but net gearing would surge to 0.33 times (from 0.18 times).

We upgrade our earnings forecasts to factor in a 100% stake in the Petronas Twin Towers, a “zero” tax rate for KLCC REIT, a higher dividend payout of 90%-95% for KLCCP and 100% for KLCC REIT, and a larger share base of 1.8 billion (from 1.2 billion).

We now use DCF (previously revised net asset value/RNAV) to value KLCCSR. It now offers a net yield of 4.9% (FY14), versus large-cap M-REITs' 4.7%.

DIALOG GROUP BHD

By CIMB Research

Outperform

Target Price: RM3

IN our sums-of-part (SOP)-based target price calculation, we continue to value Dialog's businesses at 18.6 times price earnings (P/E), a 40% premium over our calendar year target market P/E of 13.3 times. Attractive prospects for marginal and mature fields are the potential rerating catalysts that support our “outperform” call.

Upstream, an international oil & gas newspaper, wrote that Australia's Roc has started drilling a third well in its pre-development phase on the Balai cluster, off Sarawak. The well is located in the Spaoh field. Roc had earlier completed the drilling in the Balai field. The Balai cluster risk service contract (RSC) consists of four fields, namely Balai, Spaoh, Bentara and West Acis. The RSC is operated by BC Petroleum, which is a 48:32:20 joint venture between Roc, Dialog and Petronas Carigali.

The pre-development phase is slated for completion by end-June 2013 after which the RSC partners will make a decision about whether to move forward with full-field development (FFD).

We are encouraged that the pre-development works at the Balai cluster are in full swing, paving the way for production by year-end should the partners proceed with the FFD.

About 30km from the Balai cluster, Dialog is working on its second upstream venture, an enhanced oil recovery project. It is aimed at extracting more hydrocarbons from the mature Bayan field. It is a 50:50 JV with US-based Halliburton.

Stay invested. Things can only get more exciting with more ageing fields up for redevelopment and more marginal fields set for development. We expect Dialog to scale new net profit highs in financial year ending June 2012-2014, giving a three-year earnings per share compounded annual growth rate of 15.6%.

NOTION VTEC BHD (NVB)

By Maybank IB Research

Hold (from Sell)

Target price: RM0.76

ITS first quarter of the financial year ending September 2013 (FY13) core earnings are likely to come in sequentially weaker but still within our and market expectations. Having fallen 28% in three months, we think NVB's share price has already reflected the downturn in electronics sales (personal computers or PCs, camera) and the fire incident in December 2012 thus the upgrade to a “hold”.

Nevertheless, the outlook for global hard disk drives (HDD) sales remains subdued at this stage and with little catalyst in sight, we peg NVB to a lower price-earnings ratio of 5.5 times 2013 (1sd below mean) from 6 times previously, to derive our target price of RM0.76 (-10%).

The first quarter of FY13 results will be released on Feb 21. We expect core net profit to be significantly weaker quarter-on-quarter (q-o-q) (fourth quarter FY12: RM17mil) as sales could be 25% lower q-o-q due to direct competition from tablets/smartphones which has affected the sales of HDD-based PCs. NVB's bottomline may also be in the red given the potential write-off for the fire damage, which could amount to RM50mil.

About 35% of NVB's production of camera parts at the rear building (in total, accounts for 10% of group revenue) has been resumed and full restoration may take up to four months. Common facilities such as the lapping, final washing and water treatment facilities have since been restored and the main plant is now operating close to full capacity.

NVB's sales orders peaked in Aug 2012 and have trended downwards since then, especially for its HDD segment. Seagate expects flattish HDD shipments in the near term, but has also indicated a possible resurgence in the second half of 2013 as the company rolls out HDD for tablets, which hopefully NVB can capitalise on.

Additionally, the key swing factor for HDD sales lies in PC sales and International Data Corp expects PC shipments to grow 3% year-on-year (y-o-y) in 2013 (2012: -3% y-o-y).

We maintain our earnings forecasts for now, which project a 17% fall core earnings per share in FY13, which has not included losses from the one-off fire damage.

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Friday February 15, 2013

Positive view on MMC water deal