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Wednesday May 9, 2012
PAVILION REAL ESTATE INVESTMENT TRUST
By RHB Research House
Market Perform (Downgraded)
Target Price: RM1.22
PAVILION REIT’S (PavREIT) first-quarter net profit of RM47.8mil makes up 27.1% of our full-year net profit forecast, slightly above our and consensus full-year estimates. No dividend was declared for the quarter, as PavREIT makes its distribution semi-annually.
The higher-than-expected revenue contribution in the first quarter of financial year 2012 was mainly attributed to the increased rental revenue and sales turnover due to the Lunar New Year and Formula 1 GP events; and the increased shopper traffic from the opening of the linked bridge between KL City Centre and Pavilion, where the manager estimates traffic footfall of 15,000-20,000 people per day.
About 17% of the net lettable area (NLA) due to expire this year was renewed in the first quarter, with rental reversion of about 10%.
Occupancy rates had dropped to around 94% for Pavilion Mall due to its refurbishment works but remain stable for Pavilion Tower.
Note that the manager expects Pavilion Tower to be fully occupied by the third quarter, as a tenant has taken up about 10,000 sq ft NLA (about 6% of Pavilion Tower’s total NLA) and is expected to move in once renovation is completed in June or July.
The conversion of 68,000 sq ft of space previously occupied by TANGS has kicked off in the first quarter. The refurbishment of the space (to be known as Fashion Avenue) is expected to be completed in September, with a soft launch targeted in August. The manager is confident that the space will be fully occupied upon it is launched in September.
Our dividend discounted model-based fair value is kept at RM1.22. However, we downgrade our call on PavREIT to “market perform” (from “outperform”), as the share price has strengthened in recent weeks, hence there is now minimal potential upside to our indicative fair value of the stock.
We continue to like PavREIT due to its large asset size, quality assets and significant long-term potential as rental cycle is still in its early stages.
MSM MALAYSIA HOLDINGS BHD
By Affin Investment Bank
Target price: RM5.30
MSM Malaysia Holdings Bhd reported a year-on-year revenue growth of 5.7% to RM531.8mil for the first quarter ended March 31 on stronger export volumes and higher average selling prices.
However, earnings before interest and tax (EBIT) margin fell sharply by 7.2 percentage points to 16.2% compared with 23.4% in the same period a year ago. This was primarily attributed to the higher price of raw sugar negotiated under the new long-term contract.
According to the Minister of Domestic Trade, Consumerism and Cooperatives, the new 2012-2014 long-term contract price has been set at 26 US cents per pound, 49% higher than the previous 2009-2011 price of 17.5 US cents per pound. While the Government has raised sugar subsidy from 20 sen per kg to 54 sen, it was not enough to fully offset the incremental increase in cost.
Although no official announcement has been made, we understand that MSM is already taking delivery of raw sugar under the new long-term contract price. Recall that about 80% of MSM’s domestic raw sugar requirements are supplied by long-term contracts.
Therefore, the sharp margin compression has caused MSM’s first-quarter core net profit to decline sharply by 24.8% year-on-year to RM66.6mil. However, these results were within our expectations and accounts for 25% of both our and consensus estimates.
There was no declaration of dividend for the quarter.
On a sequential basis, core net profit for the first quarter fell 12.2% on the back of a 12.8% decline in revenue. The latter was partially due to a high base effect. We believe that the fourth quarter of 2011 was a seasonally stronger quarter as volume sales picked up in tandem with Hari Raya Haji and also in preparation for Chinese New Year celebrations.
EBIT margin for the first quarter of financial year 2012 was weaker at 16.2% versus 17.8% in the fourth quarter 2011, which was due to higher raw sugar price under the new long-term contract. It is to be noted that we have incorporated the new long-term contract price of 26 US cents per pound as well as the 54 sen per kg subsidy into our forecasts.
We are keeping our FY12-FY14 net profit forecasts unchanged. After rolling forward our valuation horizon to calendar year 2013 (CY13), we have raised our target price to RM5.30 from RM5.15 previously. This is pegged to an unchanged price-earnings target of 13 times on CY13 earnings per share.
We continue to like MSM for its attractive dividend yields of 3.7% to 4%, which is premised on a 50% dividend payout ratio, and resilient demand, given that sugar is a household staple.
The company’s key risk include a spike in global raw sugar prices and the removal of sugar subsidies without a corresponding increase in the ceiling price, in which case MSM would have to absorb the higher costs.
BUMI ARMADA BHD
By CIMB Research
Target price: RM4.80
BUMI Armada Bhd is entering the Mexican market where it has clinched a US$65mil contract for the supply of a workboat. Though smallish, the contract could set the stage for the company’s floating, production, storage and off-loading (FPSO) entry into the world’s seventh-largest oil producer.
Similar to its strategy in Brazil, Bumi Armada is using its offshore support vessel (OSV) operations to explore (FPSO) works in Mexico.
We continue to value the stock at 18.2 times calendar year 2013 (CY13) price/earning ratio (P/E), which is a 40% premium over our target market P/E.
Its RM7.8bil order book and four anticipated FPSO contract wins support our forecast of record net profits in financial year ending Dec 31, 2012 till 2014 (FY12-14) and a 31.8% three-year earnings per share (EPS) compounded annual growth rate. We therefore maintain an “outperform” on the stock.
Bumi Armada has secured a US$65mil (RM198mil) contract for the provision of an accommodation workboat to Trese, a Mexico-based company specialising in drilling, vessel chartering and accommodation services. The contract is for five years from May 7, 2012, with the option to extend for another five years.
The company will deploy Armada Firman 3 to execute the contract. Although the contract does not expand Bumi Armada’s order book significantly, it is a nice surprise and could be a precursor to more excitement.
The contract marks Bumi Armada’s fourth OSV contract to date. Earlier, the company landed contracts worth RM870mil from Petrobras and Lukoil for the supply of a pipelay barge, a platform support vessel and an anchor-handling towing support vessel in Brazil and the Caspian Sea.
Including the new contract, Bumi Armada’s order book now stands at RM7.8bil, of which an estimated 11% comes from OSV activities. The company has extension options worth RM3bil.
Investors should take advantage of the recent share price weakness to accumulate the stock. Earnings visibility is good, given the long-term nature of contracts, especially for the FPSO operations. Our forecasts assume four new FPSO contracts, of which we expect two to be awarded this year.
MULTI-PURPOSE HOLDINGS BHD
By Kenanga Research
Target price: RM3.72
WE see three key catalysts in Multi-Purpose Holdings Bhd (MPHB) at this juncture, which is likely to re-rate the stock further.
First, the stock is cheap. Second, it is transforming into a clean-cut number forecast operator (NFO) play. And third, there could be a special dividend to reward investors. MPHB is now in the middle of an asset rationalisation exercise to dispose off non-gaming assets. The proceeds should be enough to raise its already-attractive dividend payout as well as a one-off special dividend payment of 56 sen.
More importantly, with the disposal, it will become a pure NFO play, which will force the market to push its valuation probably up to par with current favourite Berjaya Sports Toto Bhd’s valuation, which is 23% discount now.
In addition, at its current price of RM2.88, one is actually buying the stock for almost free the worth of its non-gaming assets of RM1.77. Hence, the stock is clearly undervalued at this stage.
We are thus initiating coverage on MPHB with an “outperform” conviction. Our target price of RM3.72 per share is a 10% discount to its revised net asset value.
Through its subsidiaries, MPHB is involved in the gaming, stockbroking, financial services, hospitality and property sectors. About 75% of MPHB’s earnings are derived from its NFO business, with the insurance unit being the second-largest earnings contributor at about 12%.
Its hospitality and property division contributes about 10% to the group, with stockbroking being the smallest unit.
MPHB is trading at 11.2 times calendar year 2012 price/earnings ratio, a 23% discount to another listed NFO player, Berjaya Sports Toto Bhd. This, we believe, has been mainly due to MPHB being an investment company, which typically commands lower valuation compared with a single-purpose business entity.
Since Dec 2011, MPHB has completed the disposals of Menara MPHB and Flamingo Downtown in Pudu, Kuala Lumpur. Apart from the re-rating catalyst, MPHB is expected to raise funds from the disposal exercise. We have estimated that based on net book value, its non-gaming assets are worth about RM1.44bil.
If MPHB were to use the proceeds to redeem all its outstanding debts, it will become a net cash company. With a net cash of RM805mil, MPHB would be able to distribute 56 sen as a special dividend to reward shareholders, in addition to its already-attractive regular gross dividend yield of 6% to 7%.
We expect core earnings to grow at 14% three-year compound annual growth rate over the next three years, mainly led by its NFO business under wholly-owned Magnum Corp Sdn Bhd.
Our earnings model still includes contributions from the non-gaming businesses at this juncture, although as mentioned, their disposals are likely to result in a better valuation for the stock. The asset rationalisation exercise is the key to unlocking MPHB’s value.
We believe it is a good time to buy MPHB now at its undemanding valuation before it gets re-rated after the completion of the exercise.
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