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Monday April 22, 2013

Earnings visibility for Gamuda


BUMI ARMADA BHD

By CIMB Research

Target price: RM4.37

Outperform (maintained)

WE continue to value the stock at 18.9 times 2014 price-to-earnings (P/E) ratio, a 40% premium over our target market P/E.

Bumi Armada's long-term earnings visibility and a strong floating, production, storage and offloading (FPSO) contract pipeline underpin our “outperform” call and 40% premium over the market.

Upstream, an international oil and gas newspaper, reported that bids for the supply of a FPSO vessel for Husky-operated Madura gas development off Indonesia's coast were submitted, during a re-tender, at prices significantly above the approved field development budget.

Bumi Armada and a three-way consortium, comprising Indonesia's Sillo Maritime and Singapore's Emas Offshore Construction and Federal Offshore Service, put in two separate proposals last week for the FPSO contract that could last up to 15 years.

Upstream wrote that both bids were more than 40% above the US$857mil (RM2.6bil) budget, approved by Indonesia's upstream regulatory body, SKK Migas.

The report suggests that the last two bidders standing are likely to be requested to re-negotiate commercial terms with Husky. This could further delay the contract award, which has been long overdue.

While we are disappointed by the Madura setback, we remain optimistic about Bumi Armada's chances to secure the Kraken FPSO contract by mid-year.

If secured, it would mark the company's first undertaking in the North Sea and in a harsh environment.

Stay invested. Despite the Madura delay, Bumi Armada's earnings visibility is good given the long-term nature of the existing six FPSO contracts.

This supports our forecast of record financial years 2013 to 2015 net profits, and a robust three-year earnings per share compounded annual rate of return of 22.6%.

LAFARGE MALAYAN CEMENT BHD

By Affin Investment Bank Research

Target price: RM8.10

Reduce (maintained)

Even six months after Hume Cement Sdn Bhd's entry into the cement market, we gather that the average selling price for ordinary Portland cement remains under pressure.

The volatility in price has caused demand to be more erratic as customers prefer to keep a lower stock level in anticipation of a downswing in price.

Naturally, should the price fall, demand will pick up on stockpiling. We are not overly concerned on the current situation as we do not expect this to prolong.

Our comfort is underpinned by the expectation that local consumption for cement will continue to hold in the medium to long term, supported by the various ongoing and planned infrastructure projects.

We expect the construction sector to grow by 10% in 2013.

Being the largest player in terms of installed capacity, geographical positioning as well as its better product offering, Lafarge has the advantage to ride on the strong demand, especially from the huge infrastructure projects.

Currently, Lafarge is the sole supplier to three mega projects KLIA2, Tanjung Bin oil terminal and Janamanjung power plant.

In our earnings model, we have factored in an average selling price of RM307 per tonne in 2013, a mere RM4 per tonne increase from the financial year 2012 average selling price (ASP).

Based on our sensitivity analysis, for every RM5 drop in ASP, earnings will be shaved by about 5%.

On a more positive note, in the first quarter of 2013, the average cost of coal has fallen by 19% year-on-year to US$91 per tonne.

Lately, the cost of coal has fallen further to US$88 per tonne. We have factored in the lower cost of coal into our forecasts, at US$90 per tonne in financial years 2013 and 2014 (In financial year 2012, the estimated average coal cost was US$105 per tonne).

To maintain its leading position and fully leverage on the construction and infrastructure upcycle, Lafarge may likely embark on a capacity expansion exercise.

We think this may likely include new machineries which may boost production and thereby increase capacity.

With zero gearing, Lafarge could easily gear up to fund its planned expansion in the future.

Meanwhile, as around 30% of the group's production is exported, Lafarge could redirect its export allocation to meet local demand as and when the need arises.

Backed by an annual free cashflow of around RM500mil, we believe the group is able to maintain a high payout ratio of 80% to 90%, despite any potential expansion exercise.

Our 38 sen dividend forecast for financial year 2013 (70% payout ratio) offers a decent yield of 3.8%.

GAMUDA BHD

By Kenanga Research

Outperform (maintain)

Target Price: RM4.49

Gamuda has released an amended announcement on its recent arbitration loss with Wayss & Freytag and clarified that the total cost of the arbitration to its joint venture MMCEG-Gamuda entity should stand at RM183.8mil.

As we understand from Gamuda's amended announcement, this total cost to be incurred by the MMCEG-Gamuda joint venture on the Wayss & Freytag case is higher by 75% than the previously announced RM105.3mil.

However, the impact on Gamuda's earnings would be rather minimal as we further factor in an additional order of interest cost of RM14.1mil for Gamuda's 50% portion (previously already factored in RM77.8mil losses), whereby the total interest cost of RM28.2mil is based on the interest of 4% per annum on the sum of RM96.3mil calculated from the date of termination of the sub-contract to the date of the award.

Going forward, we reiterate our view that a similar case is less likely to occur in the current MMC-Gamuda KVMRT JV as the current Project Delivery Partner set-up has better control over the sub-contractors through a key performance indicators monitoring process, i.e. progress milestone.

This time around, MMC-Gamuda is also taking direct charge of the tunnelling portion for MyRapid Transit (MRT), which provides it with greater control on this high-risk portion of the project, which tends to be prone to delays.

Gamuda's current order book remains healthy at RM4.2bil, which should last until 2017. Its outlook remains bright, given that it will be in the running for the tunnelling works for the upcoming MRT line 2 and 3.

We have reduced our financial year 2013 estimates by 2% to RM521.9mil as we factor in the additional one-off litigation cost of RM14.1mil arising from the arbitration. However, there is no impact to our financial year 2014 estimates.

No changes to our target price of RM4.49 based on an unchanged 14 times financial year 2014 price-to-earnings ratio. Our targer price offers an attractive 9% capital upside. Risks include delays in construction projects and rising building material costs. AEON CREDIT SERVICE (M) BHD

By RHB Research Institute

Neutral (maintain)

Target price: RM15.80

AEON Credit's financial year 2013 earnings were within consensus and our full-year forecasts, at 105.4% and 107.2% of both numbers respectively. Revenue and core net profit surged 35.7% and 41.1% year-on-year.

The company has recommended a 19.5 sen single-tier final dividend, bringing its financial year 2013 dividends to 35.5 sen.

We have lifted our fair value to RM15.80, pegged to 14 times financial year 2014 earnings per share versus 12.3 times previously, implying a 0.7 times price-earnings to growth.

This is given Aeon Credit consistent earnings expansion.

However, the stock has run ahead of its valuation and now offers very little upside.

Aeon Credit's financial year 2013 core net profit surged 41.1% year-on-year and 4.1% quarter-on-quarter respectively.

This is largely due to a stronger revenue growth of 35.7% (versus 27.7% in 2012), higher earnings before interest and tax margins of 52% (versus 49% in 2012), and a significant 38.9% growth in interest income (versus 28.5% in 2012).

Financing receivables also grew at a strong 58% year-on-year to RM2.36bil versus RM1.52bil in the preceding year.

Aeon Credit's capital adequacy ratio (CAR) has dropped to below 18% based on our estimates, and is dangerously close to the 16% minimum required by Bank Negara. As such, a planned capital-raising exercise likely to involve a rights issue and debt raising is on the cards. We believe that Aeon Credit aims to boost its CAR to 25% to 26%, in keeping with our assumption of future receivables growth of more than 20%.

We have upgraded our fair value to RM15.80, pegged to a 14 times forward 2014 earnings per share (previously 12.3 times).

Our assumptions for the stock's forward price-to-earnings is based on the mother share's two-year price to earnings of 21.6 times, and applying a discount on loss of control versus the previous fair value, which was pegged at 17.6 times.

Although our fair value translates into an implied 0.7 times price-to-earnings growth, given our belief that Aeon Credit will continue to chalk up strong earnings growth and high return on equities, we see a very small upside at this juncture as the stock price has run ahead of its valuations.

At the current price, Aeon Credit's dividend yield of less than 3% makes the stock less appealing.

All said, anticipation of margin compression may take the shine off this stock despite the prospects of increasing business volume.

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