Friday March 22, 2013
KL Kepong solid but valuations too much
By RHB Research
Target price: RM22.00
KLK remains a solid, well-focused plantation company that we like, but valuations are too rich, in our opinion. Although it would suffer as a result of lower crude palm oil (CPO) prices, we believe this would be somewhat offset by improved margins at its downstream operations due to its integrated business model. KLK's new and expanded downstream facilities coming onstream sometime this year would also help mitigate the effect of lower CPO prices on its upstream business.
Key visit highlights from our recent meeting with Roy Lim, KLK's group plantations director, include:
1) Impressive fresh fruit brunch (FFB) production growth so far, but expected to moderate;
2) Some forward sales done for the first quarter ended Dec 31, 2012, but not much left to be unwound;
3) Bearish view on prices proven right so far;
4) Leveraging on price gap between spot and futures prices on Malaysia Derivative Exchange (MDEX);
5) Production costs expected to fall slightly year-on-year;
6) New planting on track in Indonesia, no detailed plans for Papua New Guinea land yet;
7) CPO feedstock supply important factor for KLK's new Indonesian refineries; and
8) Oleochemical expansions in Indonesia, Germany, Malaysia and China.
With CPO prices on a downtrend, KLK is seemingly focusing more on its downstream operations at this juncture. It is on track to complete its three refineries and one oleochemical plant in Indonesia by end-20Y13, while it would also complete expansions at its existing oleochemical facilities in Malaysia, Germany and China within this year.
We have revised our forecasts up by 1% to 6% for the financial year ending Sept 30, 2013 (FY09) to FY15. Post-earnings revision, we have raised our sum-of-parts-based fair value for KLK to RM22.00 from RM21.80.
There is no change to our “neutral” rating. Although KLK would suffer as a result of lower CPO prices, we believe this would be somewhat offset by improved margins at its downstream operations due to its integrated business model. KLK's new and expanded downstream facilities coming onstream sometime this year would also help mitigate the effect of lower CPO prices on its upstream business.
KLK is budgeting RM1.3bil for capital expenditure (capex) for FY09-13, which is a 52% year-on-year mp from FY12. RM600mil of this is to be spent on the downstream manufacturing expansions, RM600mil on new plantings and RM100mil on other repairs and maintenance expenses. As this is higher than our RM1bil capex assumption, we have raised our projections accordingly.
We maintain our RM800mil capex assumptions for FY09-14, however. KLK would have no problems funding these capex expansions, given its recent RM1bil Islamic medium-term note issuance. At last count, KLK's net debt was only at RM7.5mil, or a net gearing of 0.1%. We expect KLK's net gearing to remain below 10% for the next few years.
Main risks include convincing reversal in crude oil price trend resulting in reversal of CPO and other vegetable oils price trend; weather abnormalities resulting in an over or under supply of vegetable oils; revision in global biofuel mandates and trans-fat policies; and a slower-than-expected global economic recovery, resulting in lower-than-expected demand for vegetable oils.
By Affin Investment Bank Research
Target price: RM2.71
PRESS report said MRCB's joint venture had received a letter of intent for a RM850mil Klang Valley double tracking system job.
According to the report, the MRCB-DMIA Sdn Bhd joint venture had received a letter of intent from the Government to upgrade the Klang Valley double tracking (KVDT) system for around RM850mil. It added that the scope of works had not been clearly defined as a study on the KVDT system upgrade had not yet been completed.
The KVDT system was built in the 1990s and involves 150 km of double tracking for Rawang to Seremban and Port Klang to Sentul. The proposed upgrade would help to divert cargo traffic from the main KTM line between Rawang and Seremban and also provide an alternative mode of transport for commuters.
Earlier reports said a comprehensive KVDT upgrade would cost about RM5bil, including a 110 km bypass line from Serendah to Port Klang costing about RM2bil.
When translated to a letter of award, the job would help to replenish the external construction order book of MRCB, which has depleted to RM840mil as at end-
2012. The final impact on MRCB's earnings would also depend on its stake in the venture, which is still not disclosed. DMIA is reported to be owned by four
individuals, including Subramaniam Pillai Sankaran Pillai with a stake of 50.4%.
Meanwhile, the Gapurna land bank acquisition proposals are still pending approvals and expected to be completed in the second half of 2013. We believe the land bank acquisitions are long-term positive for the group, which is down to its last piece of development land in the flagship KL Sentral project. We maintain our revised net asset value-based target price of RM2.71 (implied 3% discount to RNAV) and “buy” call.
Target price: RM10.90
A RECENT company visit confirmed most of the positive themes in the group and threw up some negative surprises in its continued diversification drive. Although we are not upbeat on the recent investment in Las Vegas, it marks the start of a potential merger and acquisition (M&A) cycle.
Forthcoming capacity expansion at home is another key catalyst. We get the sense that the group will start to flex the strength of its consolidated balance sheet on multiple levels towards opportunities in gaming.
We maintain our revised net asset value (RNAV)-based target price, earnings per share (EPS) forecasts and “outperform” rating.
Once the general election is out of the way, Genting is poised to ride a long-term re-rating of Genting Malaysia (GENM) whose Genting Highlands Resort is expected to embark on a new cycle of capacity expansion not seen since 2006.
We believe that GENM will take over from Genting Singapore (GENS) as the main driver of group earnings where GENM's significance is amplified by the management fees it directly contributes to Genting's bottomline.
The clincher in the decision to enter the Vegas market was the land valuation. At US$4mil per acre, it is believed that the investment risk will be manageable and the long-term 15% internal rate of return hurdle achievable.
Although we are less sanguine about the Vegas opportunity, we believe it signals new confidence in M&A activity where Genting is financially and strategically well positioned across the group in GENM and GENS.
Genting will continue to look at new businesses to diversify from gaming, which is confusing and surprising.
However, the bulk of its balance sheet will still go towards gaming opportunities and we believe that its valuations are at levels where the risk-reward is attractive. At five times financial year ending 2014 (FY14) enterprise value to earnings before interest, tax, depreciation and amortisation (EV/EBITDA), Genting is trading at a 44% discount to the regional sector average and is the cheapest gaming-based conglomerate with a global presence.
A key factor in this valuation is the strength of its balance sheet where only Genting and SJM Holdings are in a sizeable net cash position of over US$2bil (RM6.24bil).
The biggest surprise from our meeting was that despite the renaissance in gaming opportunities around the world and the recent Las Vegas investment, Genting is still looking to diversify from gaming and leisure.
It currently has three main pillars of investment gaming, plantations and energy and is looking for a fourth business.
The investment strategy here is to have an active private equity portfolio, which currently comprises 20 to 30 small investments. Small enough to fall under the radar, the investments span a broad range of sectors and even include a stake in a Sri Lankan bank.
The biggest investment to emerge at this stage is in TauRx Therapeutic, a life sciences company that is focused on the development of treatments and diagnostics for Alzheimer's disease. Genting's participation in its recent round of funding has made it the largest shareholder with a total exposure of US$120mil (RM374mil). TauRx has started its third stage of testing in clinical trials and will know next year whether its treatments are successful.
Unexpected investments such as TauRx could emerge again if other investments in Genting's portfolio become serious enough to warrant further funding like TauRx. While Genting is primarily focused on rates of return, i.e. exceeding its IRR hurdle rate of 15%, investors could find the entire private equity approach a little disconcerting.
However, they can draw some comfort from the fact that Genting's investment horizon is conservative and very long term, as illustrated by the number of decades it took to build up the business in Genting Plantations as well as in power and oil and gas assets overseas.
All of its non-gaming investments were developed organically rather than through M&As. It is, therefore, unlikely that Genting will divert a significant amount of resources overnight to a new business. We expect it to restrict itself to a measured pace of investment.
Target price: RM1.85
GUAN Chong's full-year 2012 net profit of RM118.8mil (-5.6% year-on-year) came in broadly in line with ours but was below market expectations, making up 94% and 89% of both numbers respectively.
The main culprits were mainly the lower average selling price of cocoa achieved, a higher finance cost and higher operating expenses.
The group's 2012 revenue was up by 4.3% to RM1441.5mil, thanks to higher sales volume (+23%) but partially offset by a lower average selling price (-12.7% to RM1,329/tonne).
The full-year net margin was lower at 8.2% from 9.1% a year ago, largely due to the higher finance cost and tax expenses.
Guan Chong is in the midst of raising its industrial chocolate capacity to 10,400 tonnes (from the current 2,400 tonnes) to capitalise on the rising demand in emerging markets.
The new plant, which is located in Tanjung Pelapas, Johor, is expected to be completed in April and will become one of the largest industrial chocolate plants in Malaysia upon completion.
We believe that the additional capacity raised could potentially lure some global food & beverages (F&B) players to set up their regional hubs in Iskandar Malaysia. Note that a capex of RM45mil has already been incurred in FY12 for the new plant.
Despite volatile cocoa prices, the demand for cocoa products remains robust. This can be seen from Guan Chong's ability to secure its first order from one of the leading global F&B manufacturers, at 800 tonnes of cocoa products.
The order is expected to kick start at the end of the first quarter of 2013.
Moving forward, we expect Guan Chong to secure more businesses from the global F&B manufacturer, underpinned by its enlarged capacity as well as the strong industrial chocolate demand.
Post-FY12 results, we have trimmed our 2013 net profit by 6.5% to RM134.9mil from RM144.3mil after imputing in a lower average selling price and higher operating expenses.
Correspondingly, our target price has been cut to RM1.85 (from RM2.00) based on a two-year average forward FY13 price-to-earnings ratio of 6.6 times (6.9 times previously).
Dividend-wise, we have trimmed our 2013 net dividend per share to 7.5 sen (from 8 sen previously) based on an unchanged targeted dividend payout ratio of 26.5%, which translates to a net dividend yield of 4.2%.
In view of the unattractive capital upside, we are closing our trading position and will visit the stock again should the value re-emerge.