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Friday November 23, 2012

Challenging outlook for KLK

MUDAJAYA GROUP BHD

By CIMB Research

Buy

Target Price: RM3.75

WE continue to tag a 40% discount to its revised net asset values, leaving our target price intact, as well as our earnings forecasts.

The stock remains a trading buy and not an outperform due to election risks.

The imminent signing of the Indian IPP's FSA remains a key share price catalyst, along with potential new contracts. Mudajaya remains one of our top picks for the sector.

Annualised FY12's nine months core net profit made up 90% of our forecasts and 98% of consensus numbers.

The results were broadly in line as we expect the group to close the year with a strong fourth quarter.

The 48% year-on-year surge in nine months FY12 revenue was anchored by the construction segment's 45% growth, thanks to local jobs and works for the Indian independent power producer.

Despite the pullback in earnings before interest taxes, depreciation and amortisation (EBITDA) margins from a high of 23% in the nine months of FY12 to 18%, core net profits booked double-digit growth.

The 2.5 sen per share second interim single-tier dividend was in line with the second interim dividends in FY11.

The margin erosion is within expectations given the completion of legacy domestic projects.

We continue to expect EBITDA margins to stabilise at 17%-18% beyond FY12, still the highest in the sector. Fourth quarter of FY12 margins should improve due to the certification of Indian works.

We remain optimistic that the Indian IPP's fuel supply agreement (FSA) can be signed on time.

Although recent press reports suggest that the negotiations could go beyond the earlier timeline of Nov 12, we take comfort in knowing that the terms of the FSA are close to finalisation.

On the infrastructure side, the group remains one of the prime beneficiaries of highway and power plant jobs.

AIRASIA BHD

By RHB Research Institute

Outperform

RHB has upgraded AirAsia to ‘outperform’ from ‘trading buy.’ RHB has upgraded AirAsia to ‘outperform’ from ‘trading buy.’

Target price: RM3.61

AIRASIA Bhd's nine-month for the financial year ending Dec 31, 2012 (FY12) core profit before tax (PBT) came in within our forecast but below market expectations.

AirAsia reiterated that low cost is its “key weapon” against any new entrant to the domestic market.

It believes that its key enemy is not a new competitor, ie Malindo Airways (Malindo), but its ability to keep its cost down.

It said that there is certain “over-reaction” by the market to the Malindo news, of which to a certain extent, has also been “blown out of proportion” by the media.

While both low-cost air travel markets in Asia and Europe are bracing for more players and hence competition, Asia is still experiencing tremendous growth vis-vis Europe that is mature and saturated that means Asia will have more room to accommodate more players and capacity vis-vis Europe.

For that reason, AirAsia believes that its overall yields and hence margins may not necessarily drop with the entrance of Malindo. Interesting enough, AirAsia in fact just decided to deploy ten new aircraft in Malaysia for FY12/FY13 vis-vis only five according to its original plan as it expects robust demand growth in Malaysia thanks largely to international traffic brought into Malaysia by AirAsia X.

While we maintain our forecasts, the risks include lower-than-expected yields achieved; higher jet fuel cost, and inability to contain outbreaks of pandemic diseases.

AirAsia's near-monopoly in the domestic low-cost air travel market will be broken with the entrance in March 2013 of Malindo.

However, we believe AirAsia has many “defences” against it including AirAsia's true-blue low-cost model (vis-vis Malindo's hybrid or value airline model), stronger balance sheet, bigger size, highly recognised “AirAsia” brand and good safety records.

With earnings risk brought about by new entrant Malindo having been more or less priced in by the market (on the back of the recent steep selldown on AirAsia shares), we are now beginning to find AirAsia's valuations fundamentally attractive.

Target price for AirAsia is RM3.61 based on 12 times FY12/FY13 earnings per share (EPS), in line with benchmark Ryanair's one-year forward target price earnings ratio (PER).

We upgrade our recommendation to “outperform” from “trading buy”.

KUALA LUMPUR KEPONG BHD

By Affin Investment Bank

Reduce

Target price: RM21.62

KUALA Lumpur Kepong Bhd's (KLK's) fourth quarter for the year ended Sept 30, 2012 (Q4'12) headline net profit declined 8.3% year-on-year mainly due to significantly lower profits from plantation (minus 39%, weaker selling prices of palm products and rubber, marginally lower fresh fruit bunch (FFB) production, and higher cost of production as well as a lower surplus of RM135.7mil from the disposal of the retailing business (RM200.6mil in Q4'11 from the disposal of Esterol), partially offset by higher profits from manufacturing (RM47.1mil versus a loss of RM49.3mil in Q4'11) and properties (RM7.3mil versus RM1.9mil in Q4'11) as well as a lower effective tax rate.

Sequentially, Q4'12 headline net profit surged by 81.2% mainly due to higher plantation profit (+24.1%,) increase in sales volume, lower cost of production and gain on fair value changes from derivative contracts of RM13.3mil versus a loss of RM1.3mil in Q3'12, as well as a surplus on disposal and lower effective tax rate, partially offset by lower profits from manufacturing (versus RM78.6mil in Q3'12) and properties (versus RM14.7mil in Q3'12).

FY12 headline net profit declined by 22.9% mainly due to lower profits from plantation (minus 25.6%), lower average selling price (ASP) compounded by higher export duties in Indonesia, higher cost of production and manufacturing (minus 17.4% in spite of a fair value gain of RM40mil due to marginally lower revenue) as well as a lower disposal gain of RM135.7mil versus a total surplus of RM244mil in FY11 from the disposal of Esterol and Barry Callebaut, partially offset by higher profit from properties (RM40mil versus RM13.3mil in FY11).

Adjusted for disposal gains and other one-off items, FY12 core net profit declined by 28.5% to RM1.068bil.

Net DPS has been cut to 65 sen (FY11: 85 sen), no doubt due to the lower profit achieved. FY12 core net profit of RM1.068bil is slightly below expectations, amounting for 92% of our forecast of RM1.17bil and 90% of consensus average of RM1.19bil. The shortfall to our forecast is attributable to the 0.9% FFB production decline (versus +1% assumed growth) as well as a slightly lower crude palm oil (CPO) ASP of RM2,829 per metric tonne (versus assumed RM2,850 per metric tonne).

On current scenario of a weak global economy and prevailing prices of commodities, the group expects lower profit for the current financial year. We believe there are challenges as demand risks remain and price upside is still uncertain.

We are keeping our forecasts, price target of RM21.62 based on a target calendar year 2013 (CY13) price-earnings of 16 times and “reduce” call unchanged pending a review of our 2013 till 2014 CPO ASP assumption of RM3,000 per tonne, with a downward bias.

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