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Monday March 19, 2012
ANALYST REPORTSCompiled by EUGENE MAHALINGAM and YVONNE TAN firstname.lastname@example.org
SUPERMAX CORP BHD
By JF Apex Securities
Buy (initiating coverage)
Target price RM1.94
As the largest own brand manufacturer (OBM) of rubber gloves, Supermax enjoys better command of higher selling price and margins, thus better profitability. Furthermore, passing through of additional cost (hike in raw material costs) will be easier for it than its peers.
Being an OBM also enables Supermax to promote its own brand, hence develop brand loyalty.
A ramp-up in nitrile gloves production will be a significant transformation for the group but we reckon that it will only start to contribute notable earnings by early 2014.
Another expansion of Supermax will be in the surgical gloves division. The group will be producing 336 million pairs of surgical gloves from 30 million pairs currently once the new lines are commissioned this month. The additional sales of surgical gloves would translate into approximately RM200mil in revenue for Supermax.
The company has been carrying out intensive research and development and market research in order to develop new products since last year. As a result, it will be launching its latest patented glove products to the world market beginning from the second half of this year.
We believe the new product will probably be lighter in weight and potentially pose a challenge to the 3.2g gloves made by Hartalega.
Despite being an appealing stock with the highest liquidity among its peers, Supermax has revised its dividend payout ratio to 30% of net profit from 20% originally, starting from financial year 2012 (FY12) onwards.
This will translate into an estimated higher dividend yield of 3% in FY12 for investors and further close the gap with its peers.
We believe the new surgical gloves can contribute to earnings in the near term. We also like its status as the top OBM player, which enjoys continuous demand as a result of brand loyalty and an advantage in dealing with an overcapacity situation.
By MIDF Research
Target price 51 sen
Kinsteel announced that it is streamlining its downstream business operations by reviewing various options pertaining to a 51%-owned subsidiary, Perfect Channel Sdn Bhd (PCSB). which is mainly involved in manufacturing and trading of downstream steel products (such as H and I beams, sections, bars, wire rods, nails, stretched wire and wire mesh).
In order to consolidate its downstream business, we reckon there are two viable options that Kinsteel will consider with regard to its ownership of PCSB. The options are the outright sale of the 51% stake in PCSB or shut down its manufacturing plant and focus only on its trading operations.
We believe Kinsteel will be focusing more upstream business rather than downstream. This is in tandem with its on-going cost savings exercise across its industry value chain.
Currently, Kinsteel is constructing an iron ore pelletisation plant which is expected to be fully commissioned in 2013. Kinsteel is also one of the two steel players that will operate an iron ore mining concession in Bukit Besi, Terengganu.
Once both the iron ore mining and pelletisation plants are ready, this will help Kinsteel to reduce production costs, cut reliance on imported iron ore and less exposure to raw material price fluctuations. Kinsteel's raw material costs, namely iron ore and scraps, accounted for around 54% of total production costs.
We are positive on the effort to streamline its downstream business. Although this move will impact its topline negatively, it will be marginally positive on the bottomline. This is evident as for the past few years, PCSB has experienced weaker-than-expected global steel demand and escalating material costs.
PCSB also incurred higher fuel and transportation costs as its plant is in Gurun, Kedah with no natural gas supply. Meanwhile, Kinsteel is also highly geared with a debt-to-equity ratio of 280%.
Hence, through streamlining the downstream business, we believe this may relief its debt burden.
Having said that, the steel industry outlook in 2012 remains cloudy due to easing steel demand particularly in China. Despite promising demand in the domestic market, the downside risks remain with raw material prices continuing to rise while steel products prices stay flattish.
UEM LAND HOLDINGS BHD
By Hong Leong Investment Bank Research
Overweight (initiating coverage)
Target price RM2.35
UEM Land Holdings Bhd is the flagship property development arm of UEM Group and Khazanah, which owns a 65% stake. UEM Land is the master developer and main landowner of Nusajaya, a key flagship zone of Iskandar Malaysia.
Out of the overall 23,875 acres in Nusajaya, UEM Land currently holds about 5,600 acres of the remaining landbank with a carefully-crafted master plan, which will be progressively implemented through to 2025.
Considering that Iskandar Malaysia is currently the only successful economic corridor over the past decade, we believe that the Government is highly focused on making Iskandar Malaysia a success.
The strong support from Khazanah and its execution track record has resulted in UEM Land's share price rising 450% since its listing in November 2008, and UEM Land is now the largest property stock listed on Bursa Malaysia by market capitalisation (RM10.2bil) and landbank size (10,000 acres). In December 2011, it was included in the FBM-KLCI, the benchmark equity index for Malaysia.
Having managed to deliver on its much-vaunted promise of the “2012 tipping point”, management is now in the process of diversifying its income stream and landbank.
Its first step was the acquisition of 98 acres of freehold land in Cyberjaya at end-2008, now better known as Symphony Hills.
A major turning point came when it successfully merged with Sunrise Bhd, massively upgrading its capabilities in the high-rise, luxurious segment and adding prime landbank in the KLCC area, Mont'Kiara, and Vancouver, Canada.
A giant by market cap, UEM Land is now the premier government-linked developer in Malaysia, thanks to a combination of vast landbank, strong government backing, and professional management.
This has helped UEM Land become the largest developer by market cap and the most liquidity proxy to the property sector, with strong participation from foreign and local institutions.
Interestingly, all this has taken place even before UEM Land fully stepped into the mature phase of its life-cycle. This can be seen in the quality of earnings fundamentals that have yet to catch up to SP Setia.
For this to materialise, the Iskandar Regional Development Authority and UEM Land need to continue attracting foreign investment and grow demand for UEM Land's residential products, in order for Nusajaya and Iskandar Malaysia to achieve critical mass.
We expect positive newsflow to continue. The nature of UEM Land makes it very much a news-driven stock and thus far news flow has by and large been encouraging. A notable moment includes the bilateral agreement between the governments of Malaysia and Singapore in May 2010, signalling warmer Malaysia-Singapore relations, which should make UEM Land the largest beneficiary.
Also, the synergistic and successful acquisition of Sunrise in November 2010 will not only expand UEM Land's presence in Kuala Lumpur but will also help it better realise the value of its prime waterfront land strip in Puteri Harbour, without having to resort on land sales or joint ventures.
Given the Government's strong commitment in promoting Iskandar Malaysia and UEM Land's strong ties to Khazanah, we expect more positive news flow ahead. In particular, we expect them, together with Malaysian Resources Corp Bhd and SP Setia, to be among the prime contenders in the land-allocation exercise for the 3,300-acre RRI land in Sg Buloh, as well as a number of other high-profile land privatisation developers on the cards.
EVERSENDAI CORP BHD
By Affin Investment Bank
Target price RM2.33
We believe structural steel turnkey contractor Eversendai is still under-appreciated and under-valued by the market. In spite of steady margin and profit delivery, the stock is still trading at a calendar year 2012 price earnings ratio of 10.1 times compared with the sector range of 10.9 times to 16 times.
In addition to its new listing status, we believe key concerns are earnings delivery, its geographical business exposure, earnings visibility, and dividend yield. We believe these key concerns are being addressed and expect the discount-to-sector valuation to narrow in the coming months.
The group delivered FY11 profit forecasts; aiming at growth of at least 10% per annum.
Despite the upheavals in the Middle East and the eurozone crisis, Eversendai delivered a turnover of RM1.03bil and net profit of RM119.5mil in FY11 in line with guidance from management.
Going forward, management is targeting 10% per annum growth in turnover and net profits on steady net margins of about 11%.
Through expansion of existing core businesses (structural steel, power plant and oil and gas, as well as civil engineering) as well as venture into related businesses (including oil and gas fabrications works) through mergers and acquisitions or otherwise, management intends to grow turnover to RM2bil by FY15.
In FY11, the group targeted new contract wins of RM1.5bil and secured RM1.06bil in new contracts 48% from the structural steel segment, 37% from civil engineering and 15% from power and oil and gas.
Based on its track record and tender success rate as well as pick-up in activities in key markets, the group is again targeting RM1.5bil in new contract wins and 10% growth in turnover in FY12.
FY12 year-to-date, the group has secured RM467mil worth of new contracts with another two to three projects valued at about RM150mil awaiting conversion from letter of intent to letter of administration.
Billings available for booking in FY12 include about RM787mil from contracts secured before FY12 and part of the RM467mil secured year-to-date.
TOP GLOVE CORP BHD
By BIMB Securities Research
Target price RM5.66
Top Glove's first half ended Feb 29 net earnings of RM84.9mil is in line with our estimates, making up 49.7% of our full-year forecast.
The improved earnings can be attributed to an increase in glove demand and downtrend in latex prices.
Most recently, intervention from the Thai government to support the price of rubber has propped up natural latex prices to stay above RM7 per kg in the short term.
Earlier, most rubber glove buyers around the world have been keeping their inventory low (two months compared with their usual inventory level of about four months). This level has been maintained despite latex price dropping to below RM7 per kg as they anticipate further decline in latex price.
Now that a floor price has been determined, expectation may no longer hold. Hence we expect buyers to increase their inventory level back to their normal level as current latex price is around its floor level. With this, demand for rubber gloves shall return to normal.
(We make) no change in our forecast. Despite the strong second quarter (ended Feb 29) we are maintaining our financial years 2012 and 2013 net earnings estimates at RM170.8mil and RM183.4mil respectively given the stabilised latex price and demand.
Meanwhile, the company's financial position has improved with net cash per share of 48 sen compared with the previous quarter of 34 sen.
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