Thursday February 7, 2013

Hartalega still an out-performer

Analyst Reports


By CIMB Research


Target price: RM5.66

A second interim dividend of 3.5 sen (year-to-date: 7 sen) was in line. Hartalega remains an “outperform” and would be catalysed by successful expansion, and entries into China and India.

Our target price is still based on 14.15 times forward price-to-earnings (PE), in line with our target for Top Glove Corp Bhd.

For the nine months ended Dec 31, 2012, revenue rose by 10% year-on-year to RM762mil due to a 23% rise in glove sales following a 9% drop in selling prices. Nitrile gloves continued to dominate sales and made up 93% of total output. Total costs rose by 9% to RM514mil due to the higher output and also an increase in labour costs as a result of Malaysia's minimum wage.

However Hartalega offset the higher cost with efficiency gains, and earnings before interest, tax, depreciation and amortisation (Ebitda) rose by 14% to RM248mil.

Glove weights at the company fell by 1% to 2%, illustrating the group's continuous drive for leaner production. After stripping out the impact of forex and derivative hedging, core net profit rose by 11% to RM172mil.

Hartalega is now operating at full capacity with utilisation at over 90%. The elasticity of glove demand appears to be positive as glove sales rose by 23% after the company lowered selling prices by 9%.

Hartalega aims to triple its annual capacity to 30 billion gloves by 2020. With its plants now operating at 90% utilisation, the capacity expansion is much needed.

Management has already planted itself in India and China where the consumption of examination gloves is expected to rise in tandem with higher incomes and hygiene awareness. For example, the per capita consumption of gloves in China is only two annually compared to 100 in the United States, and 50 in Europe.


By Maybank IB

Overweight (unchanged)

WE received mixed responses during our recent Singapore-Hong Kong marketing on the Malaysian oil and gas (O&G) sector.

Investors were generally focused on five key stocks SapuraKencana, Bumi Armada, Dialog, Petronas Gas and Perisai and Petronas' domestic agenda.

The big picture for 2013 is that capex spending is set to intensify and contract flows are on an uptrend across the various value chains The big picture for 2013 is that capex spending is set to intensify and contract flows are on an uptrend across the various value chains

Valuations vis-a-vis regional peers remain a key setback to many funds increasing their exposure to the sector.

We remain “overweight” on the sector, as we expect stronger job flows this year after a lacklustre 2012. Bumi Armada, Dialog and SapuraKencana are our key “buys” for 2013.

A majority of the fund managers we met largely concurred with our view that Malaysia's O&G sector is single-handedly driven by Petronas' energy security agenda.

The big picture for 2013 is that capex spending is set to intensify and contract flows are on an uptrend across the various value chains.

There was, however, scepticism over project implementation, owing to the delays and re-tenders of some projects last year.

There were many questions on Petronas' policy direction post the general election, as investors were concerned about the continuity and implementation of its domestic programmes.

Our view is that regardless of the outcome of the elections, Petronas' agenda will be intact, largely on energy security concerns. The immediate need is to arrest declining hydrocarbon production.

To this end, it is targeting production growth of 3.5% per annum over the next five years. Also, Petronas is key to government's income.

Over the last seven years, it has consistently contributed an average one-third of government revenue, or RM54bil per annum.

Five stocks SapuraKencana, Bumi Armada, Dialog, Petronas Gas and Perisai gained the most traction.

Investor interest was centred on the acquisition of Seadrill's tender rig businesses (SapuraKencana), new floating production storage offloading (FPSO) job wins and any M&A angle (Bumi Armada), Petronas' Rapid project at Pengerang (Dialog), gas plays and monopoly businesses (Petronas Gas) and domestic contract flows, drilling rigs and FPSOs (Perisai).

Valuations are still a key stumbling block to increasing exposure to Malaysian O&G stocks.

While some seasoned fund managers, notably in Singapore, are unfazed by the premium valuations, many (especially in Hong Kong) are still finding valuations of Malaysian O&G stocks relatively demanding vis-a-vis those of regional peers.

We sense more contract awards in the offing.

Following the slew of offshore support vesseel contracts awarded recently, we expect the award of RM10bil worth of hook-up, construction and commissioning (HUCC) projects to follow.

Fabrication jobs are expected to come in strongly in the second half of 2013. We expect more order flows from Petronas' Rapid project post the elections. Our three key stock picks are SapuraKencana, Bumi Armada and Dialog.


By AmResearch

Hold (maintain)

Target price: RM19.18

WE re-affirm our “hold” recommendation on Fraser & Neave Holdings with an unchanged fair value of RM19.18 per share based on a sum-of-parts valuation.

F&N's first quarter financial year 2013 net profit came in at RM57mil. We view that the results to be in line with ours, and consensus' estimates, constituting 26% and 21%, respectively.

FIrst quarter net profit grew 18% quarter-on-quarter and 37% year-on-year. The underlying strength is attributed to Dairies Thailand's business recovery back to the pre-floods level coupled with higher volume in Indochina.

More importantly, Diaries Thailand has successfully penetrated Myanmar and is expected to intensify its efforts within Indochina.

Profitability for Diaries Malaysia increased due to higher exports and favourable raw material prices, despite a slight 3% decline quarter-on-quarter in revenue impacted by intense price competition.

For the soft drinks division, profitability was maintained. Growth would continue to be well driven by star performers 100 Plus and Seasons, as well as its enlarged portfolio of products, with MyCola and 100PLUS Edge recently launched in November 2012.

Dairies Malaysia started operating at its new manufacturing facility, Pulau Indah, in December 2012 (production capacity increased by 20%). The packing of the remaining production equipment from the previous manufacturing facility is expected to be completed by the second quarter financial year 2013.

The redevelopment of Section 13 is envisaged to commence by the middle of financial year 2013.

Thai tycoon Charoen has won majority control of F&N Singapore. He owns 74% through combined holdings via Thai Beverage PCL and TCC Assets Ltd.

The takeover offer is now unconditional and the deadline for acceptance of the offer has been extended to Feb 18. Given the change in ownership structure, Kirin Holdings has decided to sell its 15% stake in F&N Singapore.

Charoen intends to keep F&N Singapore listed. But should Charoen receive sufficient acceptance to shrink F&N Singapore's public float below 10%, he may decide otherwise.

We see a greater emphasis on F&N's (56% owned by F&N Singapore) soft drinks division.

This is underpinned by cross-selling of products moving downstream and both parties cementing a stronger position in South-East Asia, leveraging on each other's distribution channel.

The stock is trading at 30 times earnings for its financial year 2013, higher than its five-year peak of 28 times. Valuation is on par with Nestle Malaysia Bhd's 28 times.


By AffinInvestment Bank

Add (maintain)

Target price: RM3.70

AIRASIA BHD is expected to release its fourth quarter for the financial year ended Dec 31, 2012 results on Feb 27.

Based on the robust fourth quarter operating statistics, we expect the fourth quarter revenue to come in stronger than the RM1.2bil registered in the third quarter.

In the fourth quarter, the number of passengers carried by Malaysia AirAsia (MAA) grew by an impressive 7.8% year-on-year and 10.1% quarter-on-quarter to 6.1 million.

Year-on-year, growth in capacity (+8.6%) had outpaced the 7.8% growth in RPK, which led to a marginal drop in load factor to 82.4%, however, still high and comparable to its peers (Cebu Pacific and Tiger Airways).

The strong traffic growth was fuelled by additional frequencies on existing popular routes and the introduction of several new routes including KLLombok, KLKunming, KLNanning and KLSolo.

The Malaysian operation took delivery of another five new aircraft during the quarter, taking total fleet to 64.

In the fourth quarter, Thai AirAsia (TAA) launched three new routes to Mandalay, Wuhan and Xian. Riding on the strong demand for Chinese routes, TAA registered a commendable 22.5% year-on-year growth in the number passengers carried.

Notwithstanding the strong traffic growth, load factor only edged up marginally to 83% as capacity expanded by 15% year-on-year. The associate took delivery of two aircraft during the quarter, taking total aircraft under TAA to 27.

Similarly, Indonesia AirAsia (IAA) also registered an impressive operating statistics.

The number of passengers carried in the quarter surged by 31.7% year-on-year to 1.6 million. This is on the back of increased frequencies on popular routes and the launch of seven new routes during the quarter.

Among the routes are from Surabaya to Semarang, Johor Baru and Jakarta. Load factor edged down slightly to 75%.

With an impressive operating statistics coupled with a flattish jet fuel price year-on-year (an average of US$125 per barrel), we expect AirAsia to post a stronger core net profit in the fourth quarter, which could exceed RM200mil.

We make no changes to our earnings forecasts pending results announcement. We maintain “add” recommendation and target price of RM3.70 based on 12 times calendar year 2013 earnings per share.

This is equivalent to an implied valuation of 8.1 times enterprise value per earnings before interest, tax, depreciation and amortisation and 1.8 times price per book value.

Historically, the group has shown strong resilience against adverse market conditions and industry competitions.

Also, we admire AirAsia's far-sighted and prudent management style in steering the company during past industry-wide turbulence and good execution of the group's regional growth strategy.

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