Business News

IHH valuation seen rich, kept neutral

Friday, 21 June 2013

IHH HEALTHCARE BHD

By RHB Research

Neutral (maintained)

Target Price: RM3.87

DURING a recent visit to IHH following the release of its first quarter ended March 31, 2013 (Q1’13) results, we gather that its near-term focus is to increase visitations at its newly opened hospitals.

We also find some comfort in management’s confirmation that its hospitals in Turkey are operating as usual despite the ongoing civil unrest.

We maintain our “neutral” call given the stock’s relatively rich valuation.

We bump up our target price to RM3.87 from RM3.69 previously, as we roll forward our sum-of-parts valuation to financial year ending Dec 31, 2014 (FY14).

Management reaffirmed that it is looking to implement an asset-light model going forward, using its Kota Kinabalu and Manjung new greenfield projects as a test-bed. Both new hospitals are under long-term leasing arrangements.

Should this approach prove successful, we foresee IHH’s future expansion in Malaysia following similar arrangements, which would then require significantly lower upfront capital outlay.

Currently, the group has capital commitments of over RM750mil within the country. Over the longer term, we believe there is a possibility that IHH could recapitalise its balance sheet by potentially setting up a real estate investment trust (REIT) vehicle.

Moving south to its Singapore operations, management reaffirmed that its immediate focus is to improve operations at its Mount Elizabeth Novena Hospital.

The S$2bil hospital has since operated 100 beds and is currently breaking even at earnings before interest, taxes, depreciation and amortisation (EBITDA) level vis-à-vis Q1’13’s reported EBITDA loss of RM3mil. We expect this improvement to be reflected in its Q2’13 earnings.

Management confirmed that businesses at all its 15 hospitals in Istanbul are going on as usual despite the ongoing riots in the city. None of IHH’s hospitals are located in the affected areas, with the closest being some 5km away from Taksim Square, which came under fire.

Nonetheless, we caution investors that the riot could potentially spread to other areas within Istanbul as theTurkish riot police continue to stem the ongoing protest against PrimeMinister Tayyip Erdogan.

To expand its regional presence, management highlighted that its medium-term focus will be to penetrate into Hong Kong’s private healthcare market via the 60:40 venture with New World Development Company Ltd.

This new hospital venture is estimated to cost HK$5bil. The land acquisition was recently completed and we believe the project remains on schedule to begin operations by end-2016.

Management also conceded that its existing minority stake in Apollo Hospitals does not form part of its long-term strategy.

The group is scouting for other opportunities that will allow IHH to take a more proactive role in daily operations and management.

IHH’s first majority-owned hospital in India, the 450-bed Khubchandani Hospital, is on schedule to commence operations by second half of FY14.

SAPURAKENCANA PETROLEUM BHD

By CIMB Research

Outperform

Target Price: RM4.80

WE continue to value the stock at 21.8 times 2014 price-to-earnings (P/E), a 40% premium over our 2014 target market P/E of 15.6 times but still within the historical P/E range for oil and gas big caps.

Strong order book momentum and opportunities in Brazil are the re-rating catalysts that support our “outperform” call.

The management of SapuraKencana, which was represented by Chow Mei Mei (senior VP of corporate strategy and planning) and Tengku Muhammad Taufik (chief financial controller), had meetings with 16 fund managers at our Annual Asia-Pacific Conference yesterday.

There were no surprises from the meetings. Management took the opportunity to shed more light on the ongoing production at Petronas’ Berantai marginal field, and the company’s recent integration of its rig business with Norway’s Seadrill.

Management also talked about the company’s joint bid with Seadrill for its second contract in Brazil.

We are thrilled that SapuraKencana is aggressively capitalising on Petronas’ and Petrobras’ massive capex programmes and the potential growth offered by the sector in Malaysia and Brazil, which make up a respective 44% and 23% of the RM18bil orderbook.

The company is bidding for another RM18bil worth of jobs in countries mainly outside of Southeast Asia. About 40% of the contracts that the company is gunning for are in Brazil, while another 30% are for work in India and Africa.

You should stay invested as SapuraKencana is an attractive growth story, offering a three-year earnings per share compound annual growth rate of 36.8%, superior compared with an industry average of 20.4%. Earnings visibility is excellent given a solid and long-term order book.

SapuraKencana’s RM18bil order book is at its highest ever and is also the largest in the sector. 24% of the jobs-in-hand come from Seadrill’s fleet, which consists of 13 best-in-class rigs, not inclusive of three under management. The fleet’s average utilisation rate was an impressive 98% in 2012.

SapuraKencana’s enlarged rig business now consists of 24 rigs, making it the world’s largest tender rig operator with a 56% slice of the market, a far cry from 7% before.

SapuraKencana and Seadrill, via their 50:50 joint venture Sapura Navegacao, are currently working on their second bid in Brazil after securing a US$1.4bil contract from state-owned Petrobras in Nov 2011. Management revealed that the JV has been shortlisted for the second contract, along with Subsea 7 and Technip.

The value of the contract was not disclosed.

Engineering capability is an area that management aimed to strengthen in order to enable it to compete more effectively with well-known engineering outfits such as Technip and McDermott.

Berantai offers a sustainable income given SapuraKencana’s 50:50 risk service contract with UK-based Petrofac for eight years effective Jan 2011.

Financial year ending January 31, 2015 will see the first full-year contributions from Berantai as well as the Seadrill integration. Berantai started production in Oct 2012 and is already a commercial success.

Interest among international fund managers has been on the rise.

Excluding Seadrill’s 12% stake, foreign shareholding stands at 23%, substantially higher than 13% in May 2012 when SapuraKencana was listed.

POS MALAYSIA BHD

By HwangDBS Vickers Research

Buy (maintained)

Target Price: RM4.98

Still plenty of potential.

We acknowledge the strong performance of Pos Malaysia’s share price since mid-2012 and we believe there is more upside to be realised from:

·Further synergies with DRB-Hicom particularly KL Airport Services Sdn Bhd

·Development of prime landbank; 20.3 ha of landbank is still carried at book value and development potential is yet to be fully accounted in Pos Malaysia’s valuation.

·M&A activities

·Potential special dividends as its section 108 tax credit will expire by end-2013 (RM210mil as of first quarter 2013).

Also, Pos Malaysia has declared its final net dividend per share of 7.1 sen (1.4% net yield).

Revision in international mailing tariffs.

Pos Malaysia recently raised rates for international mailing services by zero to 50%, based on the rationale to re-align postal rates with increasing operations costs.

However, earnings impact is likely to be minimal based on its marginal contribution to group earnings. We think this could be a prelude to a revision in PosLaju’s rates due to rising costs.

Assuming 25% higher average sellings prices accompanied by 5% volume drop, financial year 2014 to 2016 courier earnings before interest and tax forecast is projected to increase by 4% in financial year 2014 to 2016, backed by its major domestic market share, competitive pricing and high courier traffic.

Pos Malaysia’s valuation of 14 times calendar year 2014 price to earnings is at a discount as compared to its Singapore-listed peer at15 times.

Pos Malaysia has a net cash position of RM1.21 per share as at end fourth quarter financial year 2013, which could also provide additional upside in dividend distribution(s).

Maintain buy at RM5.60 target price based on sum-of-parts valuation.

GAMUDA BHD

By Maybank Investment Bank Research

Buy (maintained)

Target price: RM5.30

WE maintain our “buy” call.

Third quarter financial year 2013 results, to be released next week, are expected to meet expectations and the group should be on-track for record core profits this financial year.

Elsewhere, domestic property sales continue to be strong and the internal sales target for the current

financial year may be raised. The government’s approval for the Klang Valley MRT 2 & 3 lines is still expected in July 2013. There is no change to our earnings forecasts and RM5.30 target price which is based on 16.5 times 2014 price to earnings ratio.

One-off charge. The results could include a one-off charge of RM119mil relating to arbitration losses for the Dukhan Highway and SMART projects.

This is not unexpected; imputed in our earnings model. Excluding this one-off, core net profit should improve quarter-on-quarter and year-on-year (Q2FY7/13: RM157mil; Q3FY7/12: MYR138mil), on-track to meet our MYR611mil forecast for FY7/13. Earning growth drivers should be the construction and property divisions on higher works recognition and progress billings, and supported by stable margins.

Strong property sales. Nine-month financial year 2013 new domestic sales was RM1bil (Nine month financial year: RM930mil) which implies strong RM400mil new sales in the third quarter.

Horizon Hill in Iskandar Malaysia continues to be the star performer, contributing at least 70% of the new sales in nine-month financial year 2013, and having exceeded the internal RM500mil sales target for financial year 2013.

The group’s RM1.4bil 2013 sales target for all its property projects may be raised. Landbanking activity will continue, above the RM620mil 724-acre mixed development land acquisition in Rawang last week.

The government’s approval for the KVMRT 2 & 3 lines is still expected in July 2013. MRT Corp, at a separate forum last week, believes that the Land Public Transport Commission (regulator) would meet with the government soon to obtain approvals for the Sg Buloh-Serdang (radial; KVMRT 2) and Circle (KV MRT 3) lines. Riding on its experience in the KVMRT 1 project, we expect MMC-Gamuda to feature again as both project delivery partner and main contractor for the tunnelling works. KVMRT 2 could cost RM24.9bil versus an estimated RM22.2bil for KVMRT 1.

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