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Monday May 28, 2012

Higher price target for JTI

JT INTERNATIONAL BHD (JTI)

By MIDF Research

Neutral (maintain)

Target price: RM6.90

JTI'S earnings for the first quarter ended March 31 grew 9.4% year-on-year (y-o-y) to RM321.4mil. This is well within expectations, accounting for 25.1% and 29.1% of ours and consensus estimates respectively. The increase in earnings was driven mainly by higher sales volume, offset partially by higher marketing and operating expenditures.

JTI declared a surprising special dividend of 24 sen per share less 25% tax, and 38 sen per share tax exempt, under the single-tier system. This would translate into a 107.8% dividend-payout ratio of estimated financial year ending Dec 31, 2012 earnings per share.

JTI's revenue recorded a double-digit growth of 10.5% y-o-y to RM321.4mil, attributed mainly to a 9.4% growth in sales volume. To recap, the company's sales volume in the first quarter ended March 31, 2011 was very depressed as it was severely affected by the blatant violation of the Government mandated minimum cigarette price. Several brands belonging to small manufacturers were sold below the mandated minimum price.

JTI maintained its market share at 19.8%, a mere 0.1 percentage point (ppt) drop compared with the previous year. Winston, the leader in the value for money segment, saw a 0.4 ppt drop in its market share to 9.8% from 2011, while its Mild Seven brand recorded a strong 0.4 ppt growth to 4.3% in its market share from 2011.

There was no cigarette excise increase in Budget 2012, with the Government acknowledging the severity of the illicit trade problem. The positive impact was seen immediately, with the level of illicit trade based on the Illicit Cigarettes Survey declining 1.5% ppt to in Wave 3. Nonetheless, as the level is still above the 30% mark, we expect illegal cigarettes to continue being a major threat to the legitimate cigarette manufacturers.

We maintain our neutral call for JTI with a higher target price of RM6.90, derived from 12 times price-to-earnings ratio 12, based on its historical average seven-year price-earnings multiple.

The higher target price was due to us adopting a different method of valuation from discounted cashflow to historical earnings multiple. We believe this reflects the value of the stock more accurately.

EVERSENDAI CORP BHD

By Hong Leong Investment Bank Research

Buy (maintain)

Target price: RM2

Eversendai secured another smallish contract of RM14mil (which was unannounced) for Tokuyama's polycrystalline silicon plant in Samalaju, bringing year-to-date job wins up slightly to RM772mil. Outstanding order book of RM1.9bil is a record high, translating to about 1.85 times financial year ended Dec 31, 2011 (FY11) revenue and about 1.52 times order book-to-market cap ratio. Fifty-two per cent of the projects are in the Middle East, 29% in Malaysia and 19% from India.

During the first quarter, the Rawang plant's utilisation rate more than doubled year-on-year from 24% to 56%. This is due to the two power plant projects in Janamanjung and Tanjung Bin. We believe that there will be additional orders for the power plants as construction progresses. Eversendai is also interested at undertaking fabrication works for the My Rapid Transit stations as it is designed using steel structures. The company is also bidding directly for the Warisan Tower project along with an international contractor.

On its Indian plant, so far, 25 acres out of 40 acres have been cleared. The remaining 15 acres of land is still pending for the “proper” land title. A fabrication facility in India will allow the company to secure more projects in India at a competitive pricing.

We understand that the company is in discussion to secure two building structure projects worth about RM500mil in resource-rich Azerbaijan. This region will be the next green field that Eversendai is eyeing.

We believe that Eversendai's earnings will most likely beat our estimates. However, we remain conservative and keep our earnings forecasts unchanged. Target price of RM2 based on 12 times average FY12 to FY13 earnings is maintained.

KUALA LUMPUR KEPONG BHD (KLK)

By Maybank IB Research

Hold (unchanged)

Target price: RM21.10

KLK's second-quarter ended March 31 core net profit of RM215mil met just 15% of our financial year ending Sept 30 (FY12) net profit forecast, and was also below street estimates. We trim our FY12 to FY14 core net profit estimates by 3.5% to 4.6% on lower plantation and manufacturing contributions. Our revised target price is RM21.10 (previously RM21.90) on an unchanged 16 times FY13 price-to-earnings ratio. We maintain a hold.

Plantations posted earnings before interest (EBIT) of RM298mil in the second quarter representing 91% of group EBIT. The year-on-year decline of 21% was largely due to fair-value gains on outstanding derivative contracts of RM70mil in the second quarter. Adjusting for this, recurring EBIT was 2.4% lower year-on-year (y-o-y). Fresh fruit bunch (FFB) production was lower quarter-on-quarter (q-o-q) due to seasonal factors, while the increase in cost of production also impacted results.

KLK achieved a crude palm oil (CPO) average selling price of RM2,803 per tonne in the second quarter, below Malaysian Palm Oil Board's spot price of RM3,218 a tonne. This could be due to previously locked-in CPO sales, and partly due to increases in Indonesian export taxes in the second quarter ended March 31, which lowered net receipts given that about 40% of KLK's FFB production comes from Indonesia.

The manufacturing division saw EBIT of RM49mil on flattish revenue. However, its second-quarter performance was boosted by FRS139 fair-value gains estimated at RM69mil. While we trim our FY12 earnings forecasts, we still expect a better second half on stronger FFB production and the absence of losses as well as a one-off gain of US$41mil (RM123mil) following the disposal of its retail business for about US$155mil (RM465mil).

PPB GROUP BHD

By HwangDBS Vickers Research

Fully valued (maintain)

Target price: RM12.90

PPB declared a 15% lower first-quarter net profit of RM179mil year-on-year (y-o-y). This is only 15% of our financial year ending Dec 31 (FY12) forecast net profit due to disappointing Wilmar earnings. Associate profit fell 30% to RM200mil largely due to losses at its oilseeds and grains merchandising and processing segment.

Its first-quarter flour revenue grew 30% y-o-y to RM436mil led by higher sales volume. But earnings before interest (EBIT) grew only 10% to RM44mil because margins weakened to 10% versus 11.8% in the first quarter of FY11, due to higher wheat prices and more intense competition.

We cut FY12 to FY14 forecast earnings by 11% to 18% after imputing revised earnings for Wilmar.

PPB had RM879mil net cash at the end of first quarter ended March 31, but is unlikely to pay higher dividends because of capital expenditure commitments to grow it flour business regionally. We lowered dividends for FY12 to FY14 forecast to 27 sen to 33 sen per share (32% to 33% payout), which imply about 2% yields.

Maintaining fully valued, we cut target price to RM12.90 after accounting for a lower target price for Wilmar. There is no re-rating catalyst for the stock, and the outlook for Wilmar its earnings anchor is bleak. However, its flour expansion programme in China has received two more approvals, taking the total to six out of seven subsidiaries. To recap, PPB is getting 20% equity interest in selected Wilmar subsidiaries in China in exchange for 20% interest in FFM Bhd.

TA ANN HOLDINGS BHD

By Kenanga Research

Outperform (maintain)

Target price: RM6.10

Results were below expectations due to weaker timber segment. Its first-quarter ended March 31 earnings of RM11mil only made up 6% each of the consensus' and our forecasts of RM177mil and RM179mil respectively. The first-quarter export log price of US$203 per cu m was 15% below our estimate of US$240 per cu m. The blended plywood price of US$563 per cu m was also 9% below our estimate of US$618 per cu m.

No dividend was announced in the first quarter, which is in line with its historical practice.

Quarter-on-quarter (q-o-q), the earnings dropped by 59%. The main culprit was the timber division, which barely broke even this quarter, followed by seasonally lower fresh fruit bunches (FFB) production in the first quarter at 89,122 tonne, a 16% drop q-o-q and higher fertiliser cost.

Year-on-year (y-o-y), earnings fell 57% on lower crude palm oil (CPO) prices realised at RM3,138 per tonne and the absence of earnings from the timber division.

We are still positive on the plantation division as for the financial year ending Dec 31 (FY12), the FFB are expected to grow 30% y-o-y to 596,000 tonnes. We are less optimistic on timber as the division is expected to barely break even in FY12.

We have revised down our FY12 to FY13 estimated net profit by 21% to 17% (RM141mil) after cutting timber product prices by 6% to 8% and increasing our FFB cost per tonne by 9% due to higher fertiliser prices.

The plantation division outlook still looks good as its young age profile of 5.5 years old means a strong three-year FFB compounded annual growth rate of 21% is achievable. The 1-for-5 bonus issue should keep the share price supported.

We have lowered our target price by 21% to RM6.10 from RM7.75. Our valuation is based on unchanged 13.4 times forward price-to-earnings ratio on lowered FY12 earnings per share of 45.7 sen from 57.9 sen.

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