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Thursday April 19, 2012

Upside potential for AEON

AEON CO (M) BHD

By Maybank IB Research

Hold (from Buy)

Target price: RM8.70

WE downgrade our recommendation from “buy” to “hold” due to little upside catalyst at this stage and low dividend yield as support. However, AEON's share price is up an impressive 33% year-to-date and has breached our target price of RM8.70.

We forecast revenue growth of 6.8% for the group in 2012, in line with the 6% industry growth expected by the Retail Association of Malaysia.

There is room for expansion into the east coast and East Malaysia. Currently, all stores and shopping centres under the group are located in the west coast of Peninsular Malaysia.

The markets in Sabah and Sarawak are not entirely underserved, with the dominant players and first movers being Parkson, Giant and The Store.

AEON's foray into these two East Malaysian states will put it in direct competition with existing and upcoming shopping centres, given the first-mover advantage by its competitors. Parkson Holdings already has a presence in the biggest mall in both Kota Kinabalu and Kuching.

Nevertheless, AEON has the advantage of the strong branding of its Jusco stores as well as proven management capabilities. Although the group has not yet set any specific timeline for expansion, market evaluation and feasibility studies have been carried out.

While we are pleased that the group is considering expansion into East Malaysia, armed with a strong balance sheet, we are neutral on this development pending further announcements. However, we believe that it may be a while before it pushes into Sabah and Sarawak.

The company is in the midst of acquiring land in Sungai Petani (Kedah), Bukit Mertajam (Penang) and Kulai (Johor). With construction taking typically 1.5 to two years to complete, these stores may open only in 2014 to 2015.

For 2013, two stores will be opened but the respective locations have yet to be identified.

The group should able to fund new store expansions without raising additional funds. It has zero debt, net cash of RM341mil (as at end-Dec 2011), and annual operating cashflow of more than RM300mil.

If it expands into East Malaysia, we believe the strategy would be to buy land and construct its own malls rather than rent space in existing ones.

We maintain our earnings forecasts and RM8.70 target price. The stock currently trades at 16 times one-year forward price to earnings ratio, its highest valuation since 1997, while dividend yields of less than 2% are not attractive.

PETRONAS DAGANGAN BHD

By CIMB Research

Outperform (maintain)

Target price: RM21.80

We continue to value Petronas Dagangan Bhd at 18.2 times calendar year 2013's price earnings ratio (PE), 40% premium over our target market PE to reflect its earnings visibility and attraction as a growth and dividend stock. Petronas Dagangan remains an “outperform” and our big-cap oil and gas top pick.

On April 9, it was reported that Esso station operators claimed that their businesses had been adversely affected and they were turning in losses because they had not received RON95 and diesel supplies from the oil company. Esso's situation was company-specific and not industrywide.

Management assured us that there was no product shortage at its stations and that it was business as usual. The company has also not been materially affected by the recent 10 sen per litre increase in the selling price of RON97 petrol to RM2.90 per litre. This premium fuel makes up less than 5% Petronas Dagangan petrol sales.

Management is confident of meeting its goal of an additional 74 stations this year, totalling the number of stations to 1,042 by year-end. It aims to take over Malaysia's retail leadership from Shell.

In 2011, Petronas Dagangan's retail sales volume amounted to an estimated 6.4 billion litres compared with about 7.2 billion litres for Shell.

Concerns over high price impact on global economy, crude demand and signs of Iran’s willingness to engage talks on its nuclear plan have softened crude oil price — AP

Of the additional 74 stations, seven are sizeable ones located in Kuching, where Shell currently has a bigger presence. The seven stations will be bought from a local owner and are already operational and profitable.

Management also confirmed that it has received from the Government most of the RM2.5bil subsidy receivables, which work out to around four months' worth of subsidies.

Petronas Dagangan looks set to wrest the top spot in the retail segment from Shell in two to four years and unseat Shell in the lubricant segment in four years. It is already in the top spot in the liquefied petroleum gas and commercial segments.

The company's capex for its financial year ending Dec 31, 2012 (FY12) will be about RM500mil, which will be spent mostly on the new stations and the upgrade of existing ones.

We advise investors to accumulate Petronas Dagangan's shares as it offers both growth and dividends. The aggressive retail expansion supports our forecasts of new net profit highs in FY12 till FY14 and a three-year earnings per share compounded annual growth rate of 14.1%.

The company has a 50% dividend policy with quarterly payments. Its dividend yield tops the oil & gas list locally.

Bursa Malaysia Bhd

By AmResearch

Buy

Target price: RM8.50

We are re-initiating coverage on Bursa Malaysia Bhd (Bursa) with a “buy” recommendation and a fair value of RM8.50 per share, based on its trend-average price earnings ratio (PE) of 30 times of financial year ending Dec 31, 2012 (FY12) forecasted (FY12F) earnings per share (EPS).

We expect the average daily trading value (ADTV) to potentially expand sequentially each quarter from the RM2bil in the first quarter of 2012, given our higher end-2012 FBM KLCI target of 1,690 and intact economic fundamentals; initial public offerings (IPOs) to pick up in second half of 2012; and encouraging number of new structured warrants being listed.

Net profit is forecasted at RM151mil for FY12 and at RM172mil for FY13, based on a conservative ADTV of RM2bil and RM2.2bil respectively.

We are positive on the derivatives market and are projecting FY12 average daily contracts traded to grow by 18% to 40,679 contracts from 34,474 contracts in FY11. This is supported by open interest being at an all-time high; launch of the new derivatives clearing system and derivative products; and overhaul of participantship structure.

We reckon that Bursa's derivatives business has yet to realise the full potential of the partnership with CME Globex at end-2009. This has seen increasing foreign interest in the derivatives market.

We believe Bursa will continue with its generous dividend policy, supported by its strong balance sheet and cash-in-hand of RM500mil. We have assumed a dividend payout ratio of 91%-94% for FY12 and FY13, with gross dividend per share at 26.5 sen and 29.5 sen, respectively.

We expect Bursa's cost structure to remain stable, with staff costs being the main expense. We also expect Globex fees to stay elevated, following the 319% increase in FY11. However, we are not too concerned as a higher service fee resulting from the high volumes of contracts traded can be easily offset by the parallel increase in derivative trading revenues.

The main contributors to operating revenue include securities clearing fees; derivatives trade fees, listing fees, depository services and information services. Securities clearing fees is the largest revenue source for Bursa, contributing about 42% of its FY11 operating revenue.

Trade fees on derivatives make up 9% of Bursa's FY11 total operating revenue and two-thirds of its derivatives market trading revenue. Listing fees are the third largest contributor to operating revenue at 10% for FY11.

Depository services account for 8% of the operating revenue in FY11. Information services make up 5% of Bursa's FY11 operating revenue.

Oil and Gas sector

By BIMB Securities Research

Overweight (maintain)

The first quarter of 2012 witnessed a healthy replenishment of orderbook by domestic players with total contracts secured of RM2.3bil. Though the monthly trend indicated lower orderbook replenishment both in value and number of contracts, we are not overly worried as we have pointed out earlier that contract flow would see significant pick-up towards the second half of 2012.

Notwithstanding whether the Government will approve the RM2bil dividend cut as proposed by Petronas' this year and cap its dividend payout at 30%, for it to sustain its production and reserves building exercises, in the recent update on economic transformation programme, it continues to pinpoint oil and gas sector will remain as a core industry in driving the nation's overall economic transformation exercise.

The oil and gas sector is projected to grow at a 5% annually until 2020, which would double the sector's gross national income contribution to RM241bil. Therefore, we would expect the Government to provide the necessary support to the sector thus ushering Petroleum Nasional Bhd's (Petronas) capex plan.

The Government has already approved several initiatives, which include Petroleum Income Tax Act, launch of the Global Incentives for Trading Programme and the formation of Malaysian Petroleum Resources Corp. All these initiatives lead towards the growth and transformation of the sector.

With the conclusion of the new gas supply agreement with Petronas, Gas Malaysia has cleared the main gate for its proposed initial public offering (IPO) which is targeted in second quarter of 2012 where its valuation is expected to be benchmarked against Petronas Gas possibly at high teens price to earnings ratio and to generate significant excitement among market players.

Throughout March, oil price was well supported and traded at monthly average of US$123.60 per barrel, a 17% jump since the end of last year. However, concerns over high price impact on global economy, crude demand and signs of Iran's willingness to engage talks on its nuclear plan have softened crude oil price.

Market forces also challenge the sustainability of spot price, but forward prices remain at above US$90, which is critical to support Petronas' capex.

We continue to view the sector as “overweight”. We maintain “buy” on Dayang with a target price of RM2.59, Dialog with target price of RM2.71, Uzma with a target price of RM2.70 while we view “trading buy” on Wah Seong with a target price of RM2.38, “neutral” on Bumi Armada with target price of RM4.65 and “sell” on MMHE with target price of RM4.76.

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