Tuesday March 5, 2013
High sugar prices hit MSM bottomline
Target Price: RM4.70
WE met up with MSM's management recently and discussed the company's financial year ended Dec 31, 2012 earnings (a disappointment as it accounted for 93% of our and only 84% of consensus estimates).
Key culprits to the poorer-than-expected earnings were the flattish revenue growth of only 0.1% (which is below management's expectation), the significantly higher raw sugar costs under the new three-year (2012 to 2014) long-term contracts (LTCs), and a lumpy RM16.6mil zakat payment causing MSM's effective tax rate to rise to a record high level of 29.2%, (effective tax rate for 2010 and 2011 was 26.2%).
We gathered that the total sales volume registered a 5.4% year-on-year (y-o-y) decline to 941,000 tonnes (7.2% below our volume sales assumption of 1.014 million tonnes). We attribute this to the removal of the 20 sen per kg subsidy by the Government announced during Budget 2013 and the cut in sugar purchases by 13 key industrial customers (Nestle, F&N, etc.) who, as of January 2011, were no longer eligible to purchase sugar at subsidised prices. Consequently, volume from the domestic, local export and molasses market fell 6.7%, 18% and 5.3% y-o-y respectively. We also understand that the 13 key industrial players are MSM's largest sales volume contributor, accounting for 75% to 79% of total sales volume.
It is recalled that MSM has locked in about 80% of its raw sugar requirements in early-2012 under the 2012-2014 LTC which had resulted in a significant increase in raw sugar cost, and thus dragged down 2012 earnings before interest, taxes, depreciation and amortisation (EBITDA) margin by 4.3% points to 13.5% and profit before tax (PBT) by 21% to RM285mil. (The new LTC is set at 26 US cents per lb versus the previous LTC price of 17.5 cents per lb and spot price of 18.5 cents per lb).
Given the softening raw sugar price, (year-to-date decrease of 6.2% to18.5 cents per lb currently) due to global raw sugar surplus of about 9 million tonnes in 2013, we believe MSM could benefit from the lower input cost. On a blended basis, we believe MSM's raw sugar cost would be lower in 2013 versus that of 2012. As such, we believe MSM's EBITDA margin will improve gradually to the region of 17% to 18% in 2013 to 2015.
Going forward, MSM will be focusing on expanding its storage facilities in tandem with its plan to increase production capacity. MSM will be raising its storage capacity by 114,000 tonnes (current capacity is 168,000 tonnes) over the next three years, while production capacity will increase by 50,000 tonnes (from Kilang Gula Felda Perlis Sdn Bhd).
However, once adequate storage facilities are in place, MSM will ramp up its total production capacity to 1.5 million tonnes by 2016 (current production capacity is 1.1 million tonnes). This would enable MSM to boost its export sales without jeopardising the domestic demand requirement. The capital expenditure (capex) planned for the expansion of its production capacity and storage facilities is estimated at RM400mil over 2013 to 2015 (largely in line with our forecast.) Note that the capex allocation also includes upgrading services for its plant and machinery, and an information technology system, namely the automated storage and retrieval system in its storage facilities to promote better operating efficiencies.
We maintain our “reduce” call with a higher target price of RM4.70.
Our topline revenue was reduced slightly by 1.5% to 5% for 2013-2015. The marginal decline in our revenue forecast was offset by the substantial savings from our lower raw sugar cost assumption. As a result, our 2013-2015 earnings per share (EPS) forecasts are lifted by 5.2%-6.8% to 34.6 sen, 35.7 sen and 36.3 sen respectively. Following the EPS upgrade, our new target price is higher at RM4.70, pegged to an unchanged price-to-earnings ratio of 13 times calendar year 2014 EPS.
Target price: RM3.80
WE maintain our “buy” rating on IJM Land with our fair value maintained at RM3.80 per share, assigning a discount of 10% to its estimated fully-diluted (FD) net asset value (NAV) of RM4.20 per share.
IJM Land launched its much-awaited Bandar Rimbayu project over the weekend. Phase one, called Chimes, consists of 526 link units to be built on 56 acres. It comes with two sizes i.e. 22'x75' and 24'x75' with prices starting from RM580,000 and RM640,000 respectively.
The project was off to a roaring start, with all of the non-bumiputra units on offer fully taken up. Over 3,000 attended the balloting exercise held during the weekend.
We are not unduly surprised by the strong takeup, given that Chimes had already garnered over 16,000 registrants prior to its debut. Judging by the strong response for Chimes, we would not be surprised if IJM Land accelerates the launch of phase two in four months' time.
We understand that phase two (roughly 500 units) would offer colonial-styled link homes that are slightly larger in built-up (22'x75 and 24'x80'). With the strong takeup, we expect prices to trend higher.
Work on a clubhouse is set to start by the middle of this month at an estimated cost of RM40mil. The successful launch of Chimes would further underpin IJM Land's strong sales pipeline.
For the nine-month period for the financial period ending March 31, 2013, new sales have reached RM1.4bil already on par with the total sales last year. We are therefore assured that the group would meet our 2013 new sales forecast.
This is supported by healthy unbilled sales of circa RM1.4bil. We expect Bandar Rimbayu to be self-sustaining, providing annual recurring sales of over RM1bil when this green township matures similar to what S P Setia has enjoyed with its highly-successful Setia Eco Park development.
From a valuation standpoint, IJM Land is currently trading at a steep 49% discount to its estimated FD NAV. While sales are still strong with exciting projects in the pipeline, we expect the stock to trade sideways amid election risks.
RUBBER GLOVE SECTOR
THE 2012 fourth quarter results were largely within expectations. All four rubber glove stocks that we cover reported results within ours and the market's expectations in the just concluded results reporting season.
Sales volume largely grew quarter-on-quarter across all the companies led by Kossan (+17% quarter-on-quarter; 40% year-on-year), Supermax (+13% quarter-on-quarter; 10% year-on-year), Hartalega (+7% quarter-on-quarter; +29% year-on-year) and Top Glove (+6% quarter-on-quarter; +23% year-on-year) due to capacity expansions as well as higher demands fueled by the lower average selling prices (ASPs) due to the easing input of raw material prices.
The average bulk latex prices declined by 5% quarter-on-quarter (from an average of RM6.20 per kg in the third quarter of 2012 to RM5.88 per kg in the fourth quarter of 2012) while nitrile prices fell by 9.3% quarter-on-quarter. Year-to-date 2012, the average input latex and nitrile prices declined by 20%.
Due to the implementation of the minimum wage policy starting Jan 1, 2013 and the low latex production in the first quarter of 2013, rubber glove players could face a margin compression in the first quarter of 2013. Latex prices have been trading at a stable rate of between RM5.50 per kg and RM6.00 per kg over the last six to nine months, which augur well for rubber glove players.
However, in anticipation of a lower latex production between February and May, the latex price is expected to move upwards. Moreover, the lag effect in passing on the higher cost to customers via higher ASPs could crimp the margins of rubber glove players in the short term.
Meanwhile, in a bid to mitigate the effects of the minimum wage policy, most rubber glove players have adjusted upwards their ASPs by 2% to 4%. In addition, most of the players have invested in the automation and computerisation of their manufacturing processes and have gradually reduced their reliance on manual workers to minimise the adverse effect of the minimum wage policy.
Some of the automations put in place include the automated mechanical stripping system (removing gloves off hand moulds) and glove puller and stacker system. The benefits from automation will take some time to mitigate the effects of the minimum wage policy.
Similarly, the increase in ASPs may not be enough to counter the average increase of between 30% and 50% in wages. Foreign workers to pay levy instead of employers with immediate effect. Recall that the Cabinet has decided on Jan 30, 2013 that foreign workers should pay the levy instead of employers.
The decision is to be enforced with immediate effect on new foreign workers and those who wish to renew their work pass, employment pass or temporary work visit pass. The levy imposed on foreign workers in the rubber glove industry is expected to be RM1,250 per month.
This cost savings to employers, however, is of little cushion to the additional 30% to 50% increase in wages that they have to absorb from the implementation of the minimum wage policy above.
Based on our back-of-the-envelope calculation, assuming a no cost pass through scenario, and taking into account the minimum wage policy and cost savings on foreign workers levy, the overall impact is expected to hit Top Glove, Kossan Rubber, Hartalega and Supermax's bottomlines by between 7% and 10%.
Note that labour accounts for 9% of the overall production cost.
Generally, a weakening ringgit is positive for glove makers. Since sales are US dollar-denominated, theoretically, a depreciating ringgit against the dollar will lead to higher revenue for glove makers. The ringgit is currently hovering between RM3.08 and RM3.11 per US dollar.
By RHB Research
Buy (upgraded from Sell)
Target price: RM1.91
WE upgrade our call to “buy” (from sell) and lift our fair value by 119% to RM3.42 following the company's analysts' briefing last Friday during which favourable guidance on earnings outlook was issued. We also like the company for its initiatives to try shaking off its Sarawak-centric and owner-operator image or model. If we liken Naim to Hokey Pokey, the plain vanilla ice cream basically comes free at this price.
Naim guided another record year in terms of property sales in financial years ended Dec 31, 2012 and 2013, underpinned by new launches worth RM900mil of which half will come from shops, offices and condominium units at its RM2bil integrated development Bintulu Paragon in Bintulu, with the balance from landed and high-rise residential units and shops in Kuching and Miri.
Naim guided new construction contract wins of about RM500mil in 2012/13 that are most likely to come from “infrastructure works in Sarawak, particularly, road jobs”. At present, its outstanding construction order book stands at RM978mil.
We believe two key reasons behind Naim's discount valuations to the sector and market are it being a Sarawak-centric company and its business model that is perceived to be deeply entrenched “owner-operator”.
These are changing with Naim's expansion to Peninsular Malaysia as well as the hiring of more professional managers. Financial years 2012/2013 net profit forecast is fine-tuned up by 3%.
Fair value is rationalised up by 119% to RM3.42 based on 10 times 2012/2013 eanings per share from RM1.56 based on sum-of-parts previously. From an alternative valuation standpoint, an investor who acquires Naim shares at the current level is effectively getting Naim for merely the price of its 33.6% stake in topside maintenance specialist Dayang Enterprise Holdings Bhd. We upgrade the stock to “buy” from “sell”.