KPJ Healthcare 'neutral, Public Bank 'buy', Cocoaland 'hold', BAT 'sell'

KPJ Healthcar BHD

By PublicInvest Research

Neutral (maintained)

Target price: RM4.01

KPJ Healthcare Bhd’s proposed share split exercise is expected to improve the trading liquidity of the company and appeal to a wider base of public shareholders, according to PublicInvest Research.

The Main Market-listed KPJ has proposed a one-for-four share split recently. The exercise is expected to adjust the market price of the shares, resulting in them becoming more affordable.

PublicInvest Research noted that the Malaysia’s largest private healthcare group’s existing shareholders would obtain a larger number of shares with maintained percentage of share ownership.

“Despite no direct change to fundamentals, we are positive on the share split as this will serve to enhance liquidity and marketability of the shares in the long-run. The share split is expected to be completed by the third quarter of 2017, after gaining approval from shareholders,” said the research house in a note.

If the proposed exercise includes the outstanding warrants and outstanding Employee Share Option Scheme (Esos), the enlarged number of issued shares is projected to stand at 4.76 billion units, upon completion of the share split.

However, if none of the outstanding warrants and outstanding Esos are exercised, the proposed share split will result in enlarged share units of 4.26 billion.

As at April 18 2017, the issued ordinary shares of KPJ stands at 1.06 million units. Apart from that, there are 86.58 million outstanding warrants and 38.7 million outstanding Esos.

KPJ has a network of 20 hospitals nationwide and two in Indonesia. The private healthcare provider also owns an education arm through KPJ International University College of Nursing and Health Sciences.

“On a per share basis, net asset per share is expected to adjust from RM1.52 as at end-2016 to RM0.44, based on enlarged base of 4.76 million shares,” said PublicInvest Research.

The research house reiterated its “neutral” recommendation on KPJ’s shares, with a target price of RM4.01.

Public Bank Bhd

By AmInvestment Bank

Buy (upgraded)

Fair value: RM22.30

AMINVESTMENT Bank has upgraded its “buy” recommendation on Public Bank Bhd and lifted the fair value to RM22.30 per share from RM20.30. The revision was on the back of the rollover of AmInvestment Bank’s valuation to financial year 2018 (FY18).

The research unit also expects the banking institution to achieve a return of equity (ROE) of 14.3% in FY18. To note, the figure is higher than the sector’s average ROE of 10% to 11%.

“Public Bank reported a marginally higher core net profit of RM1.25bil in the first quarter of financial year 2017 (1Q17), which grew by 1.5% on a year-on-year comparison. The rise in earnings was mainly driven by higher net interest income and Islamic banking income, partially offset by higher overhead expenses and lower non-interest income from a drop in investment income and foreign exchange profit.

“Earnings in 1Q17 were within expectation, making up 23.2% and 23.8% of our and consensus estimates respectively for FY17 net profit,” said the research house in a note, while adding that it would maintain its earnings forecast on Public Bank.

Deposits and loans of Public Bank grew moderately in 1Q17. The banking institution’s deposit growth was registered at 3.1% year-on-year (y-o-y). Total loans of Public Bank also grew modestly by 7% y-o-y in 1Q17.

“Even though domestic loans growth decelerated to 6.1% y-o-y compared with 7.2% y-o-y in the preceding quarter, it continued to stay ahead of the domestic industry’s growth rate. Meanwhile, overseas loans registered a growth of 19.1% y-o-y in 1Q17,” said AmInvestment Bank.

Public Bank’s net interest margin continued to rise and improved further in 1Q17 by nine basis points quarter-on-quarter (q-o-q) to 2.31%. AmInvestment Bank indicated that the increase in net interest margin has been contributed by management of funding cost, which saw a lower interest expense from customer deposits on a q-o-q basis.

The bank’s overall gross impaired loan ratio remained healthy at 0.5% with a marginally higher loan loss cover of 103.9%. Its capital ratio was also stable, with Common Equity Tier 1 ratio at 11.4%.

 

COCOALAND HOLDINGS BHD

By KAF-Seagroatt & Campbell Securities

Hold (initiated)

Target price: RM2.80

COCOALAND Holdings Bhd’s earnings are anticipated to remain stable, underpinned by its growing exports market and premiumisation push, according to KAF-Seagroatt & Campbell Securities.

This was despite the expectations of the snacks and candy manufacturer’s margins to moderate due to stabilising foreign exchange rates and uptick in input costs.

KAF-Seagroatt & Campbell Securities said that Cocoaland is well-poised to leverage on its export-driven growth, given its recent capacity expansions, strong brand recognition and widening geographical footprint.

“Following record earnings in the financial years of 2015 and 2016 (FY15-FY16), we expect Cocoaland’s earnings growth to remain muted. This will be primarily underpinned by rising demand from its overseas markets for its core product, fruit gummies which contributed 45% of its FY16 revenue.

“Exports constitute 55% of revenue with half of that denominated in US dollar and 30% in yuan,” said the research house in its note.

On top of its ongoing efforts to improve its product mix, the snacks and candy manufacturer is also looking to introduce more value-added confectionery moving forward via its own brands. Currently, proprietary brands such as Lot 100, Koko Jelly and Cocopie, comprise 65% of Cocoaland’s total sales with the remainder being original equipment manufacturer products. The company has long-term contract manufacturing relationships with various consumer multi-national corporations, namely F&N, GSK and Suntory.

KAF indicated that with foreign exchange rates stabilising and input costs on the rise, more subdued margins is foreseen moving ahead. The research house also noted that the situation could be exacerbated by higher advertising and promotional expenses or price discounts and the foreign worker levy payment in FY18.

Earlier in FY15-16, Cocoaland’s earnings doubled as earnings before interest, tax, depreciation and amortisation (Ebitda) margins jumped 10 percentage points to 25%. The significant jump in Ebitda was primarily attributed to the US dollar’s strong appreciation against the ringgit and the low commodity price environment in the past two years.

“Cocoaland is cash rich with zero borrowings. This, together with its low capex requirements and strong operating cash flows, is supportive of its dividend payouts for average forward yields of 4%,” said the research house.

KAF initiated the coverage on Cocoaland with a “hold” recommendation and a target price of RM2.80.

British American Tobacco (M) Bhd

By UOB Kay Hian Research

Sell (downgraded)

Target price: RM40

BRITISH American Tobacco (M) Bhd’s (BAT) financial results for the first quarter of financial year 2017 (1Q17) were below expectations, primarily attributed to lower sales volume, according to UOB Kay Hian Research.

The cigarette manufacturer and retailer’s 1Q17 core net profit of RM120.4mil represented merely 17% and 16% of UOB Kay Hian Research’s and the consensus’ 2017 forecasts.

“BAT’s 1Q17 net profit was well below our and street estimates. Sales did not stage a recovery, declining 24.5% year-on-year (y-o-y) and 8.3% quarter-on-quarter (q-o-q) as illicit cigarette incidence spiked to 57.1% in December 2016.

“In view of the continued downtrend in sales volume in 2017 as opposed to our previous expectation of a sales volume recovery in 2017, we cut our 2017-2019 net profit forecasts by 26%, 19% and 21% respectively after adjusting our key assumptions,” said UOB Kay Hian in its note.

BAT’s 1Q17 domestic sales and duty-free sales volume were down by 23.1% y-o-y and 11.7% q-o-q, driven by the spike in illegal cigarette incidence. The slide in sales volume was in line with the decline of the total industry volume by 14.2% y-o-y.

The research house noted that the cigarette manufacturer and retailer’s restructuring is expected to end by the second half of this year and to result in cost savings.

“We opine that BAT’s overall cost would be cheaper even after factoring in higher import costs as its sister companies’ regional plants, which are operating at a much larger scale, are more efficient,” said UOB Kay Hian Research.

As of Feb 7, BAT was still the biggest cigarette manufacturer in Malaysia. However, its market share declined to 53.5% from 54.3% in 4Q16, due to market share erosion from BAT’s biggest brand, Dunhill

UOB Kay Hian Research downgraded its recommendation on BAT to “sell” and also lowered the target price to RM40, from RM46 previously. The changes were driven by the earnings revision made by the research unit.