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Wednesday January 2, 2013

More growth seen in DiGi this year

DiGi.Com

By Affin Research

Buy (maintained)

Target price: RM6.04

ALTHOUGH DiGi's stock price has appreciated 38.6% year-to-date, DiGi remains a key pick for the telco sector moving into 2013.

Our buy rating is premised on DiGi's continued growth story and strong capital management initiatives.

Both factors, in our view, are likely to drive stock price towards our discounted cash flow target price of RM6.04 (based on a weighted-average cost of capital of 6.3% and growth of 1%).

As at the third quarter (Q3) of 2012, DiGi's revenue market share expanded to 28%, up from 27.5% from end 2011 (27% as at end 2010).Growth has largely been driven by its above peer average net adds over the past two years which was also accompanied by a fairly stable, if not, higher average revenue per user (ARPU).

We believe that its growth month-on-month momentum will persist as it consolidates its market share in the youth and Malay ethnic group segments, two key growth areas.

We understand that DiGi's market share in the Malay ethnic market segment remains below average and has recently only hit double digit market share.

On the one hand, while this is extremely low, especially for an established telco player, this also leaves significant scope for growth in the near future. We believe that improving its 3G footprint would be key to driving this growth.

Management targets to accomplish more than 70% population coverage by end of next year (it is about 63% currently) and thus enabling DiGi to offer their services across new markets, and particularly in new areas of coverage.

The roll out of 3G coverage also enhances DiGi's postpaid proposition, which should further aid ARPU enhancement.

With its revenue and growth trajectory intact, we are forecasting core dividend per share (DPS) to improve in financial year (FY) 2013. Although our FY13 DPS assumption is based on a 100% dividend payout, we nevertheless suspect that there is potential for upside to our DPS forecast of 22.6 sen for FY13.

Management has reaffirmed its commitment to optimising shareholder returns which thus leaves upside risk. A potential way of extracting more returns for shareholders is via a business trust structure, an option that management is already evaluating.

Key investment risk includes irrational competition which could potentially lead to higher handset subsidies and lower tariffs.

This could be sparked off by the recent round of lower interconnect rates, although we believe that the incumbents are likely to remain rationale.

The awarded LTE spectrum would also raise the number of players in the market, although being a niche high end product, impact from the smaller players are likely to be less meaningful.

BANKING

By RHB Research

Overweight (maintained)

Maybank, Public Bank and CIMB are the top picks of RHB Research. Maybank, Public Bank and CIMB are the top picks of RHB Research.

NOVEMBER 2012 banking system loan growth moderated to 11.2% year-on-year and 0.5% month-on-month from 11.8% year-on-year and 0.4% month-on-month recorded in October 2012.

Business loans outstanding expanded by 10.6% year-on-year, compared with 11.8% year-on-year as at end-October 2012.

The slower pace of growth was attributed to higher repayments during the month (RM59.6bil vs RM54.1bil in October 2012), partly mitigated by stronger disbursements (RM59.6bil vs October 2012: RM52.3bil).

Meanwhile, household loans continued to expand at a steady pace of 11.6% year-on-year (October 2012: +11.8% year-on-year).

Absolute applications fell month-on-month to RM53.1bn (-18% year-on-year) from RM63.7bil in October 2012. This was due to a drop in applications from both businesses (RM20.5bil vs. October 2012: RM27.2bil) and households (RM32.6bil vs. October 2012: RM36.6bil).

System loan approvals, however, rose slightly month-on-month to RM34.7bil (+5.5% month-on-month; -3.2% year-on-year) thanks to higher approvals for business loans (+29% month-on-month; -8.8% year-on-year), partly offset by lower approvals for household loans (-10.8% month-on-month; +3% year-on-year). Year-to-date annualised system loans growth stood at 10.4%, in line with our 10%-11% estimate.

System gross impaired loans saw a marginal uptick, up 0.5% month-on-month (-15.6% year-on-year) to RM22.9bil vs. RM22.8bil as at end-October 2012. System-wide gross and net impaired loan ratios, however, remained relatively unchanged month-on-month at 2.08% (October 2012: 2.08%) and 1.41% (October 2012: 1.4%) respectively.

Despite the slight uptick, we are not overly concerned with respect to asset quality at this juncture as we believe the macro environment remains supportive of asset quality (that is, low interest and inflation rates as well as healthy employment levels). Loans loss coverage ratio also remains high at 101.9% (October 2012: 102.4%).

Average lending rates of commercial banks in November was down 11 basis points (bps) month-on-month to 4.65%, as compared to 4.76% in October. The average base lending rate of commercial banks and three-month fixed-deposit rates were unchanged month-on-month at 6.53%/2.98% respectively but the three-month interbank rate rose 4bps month-on-month to 3.21%. Thus, interest spread declined to 1.44% from 1.59% in October 2012.

Total system deposits grew 11.3% year-on-year (+0.6% month-on-month) with year-on-year growth broad-based. The banking system's loans-to-deposit ratio was unchanged month-on-month at 81.6%.

System core capital ratio was down 20bps month-on-month to 13.4% but risk-weighted capital ratio was unchanged month-on-month at 15.3%. Our overweight stance is unchanged with Malayan Banking Bhd, Public Bank Bhd and CIMB Group Holdings Bhd as our top picks for the sector.

AEON Co (M) BHD

By Kenanga Research

Underperform (maintain)

Target Price: RM 11.30

AEON Co. (M) Bhd has entered into a joint development and sale and purchase agreement with Lebar Daun Development Sdn Bhd and Perbadanan Kemajuan Negeri Selangor (PKNS) on a piece of vacant land held in Bandar Shah Alam that measuring approximately 7.602 ha or 818,273.2 sq ft at the purchase price of RM90mil.

The purpose of the proposed land acquisition is to construct and operate a shopping centre and a departmental store cum supermarket.

The amount of the acquisition is based on the rate of RM110 per sq ft on an estimated area of 818,273.2 sq ft of the sale property after considering the valuation carried out by the company's valuer, VPC Alliance (KL) Sdn Bhd.

The acquisition will be fully funded by cash and internal generated funds. The company will not be assuming any liabilities including contingent liabilities and guarantees pursuant to the acquisition.

We understand the key rationale of the proposed acquisition is to accelerate the expansion of its retail business through opening of new shopping centres and outlets.

While we believe the upcoming new store on the newly acquired land will enhance its retail business going forward, we have yet to impute the potential earnings' impact into our financial model for conservative purpose.

The proposed land acquisition cost of RM90mil via internal fund is not a concern to us judging the group has recorded a strong cash position of RM343mil as of nine-month 2012.

The company's outlook remains neutral as the group may potential affected by the global economy weakness despite Aeon continues to expand its outlet network in the next three years.

We maintain financial year 2012 (FY12) and financial year 2013 estimated (FY13E) net profit at RM223.2mil to RM251.8mil.

We believe the company will maintain its 3% same store sales growth (SSSG) rate in FY13, a similar pace that targeted to record in FY12.

Maintain target price of RM11.30, based on FY13E price-earnings ratio of 15.8 times, 2SD above from its historical five-year mean. The risks include delay in expansion of new outlets and weakness in global economy uncertainties.

RUBBER GLOVES

By OSK Research

Overweight (maintained)

WE think that the global demand for rubber gloves remains positive, with an expected annual growth rate of 8% per annum, mainly driven by rising global public awareness of hygiene standards.

Even without imputing any “unpleasant catalysts” (ie pandemic breakouts), we think the resilient demand for gloves is mainly due to the following - post-H1N1 breakout, consumers have continued using gloves after becoming used to them, the stringent hygiene requirements in the developed nations and escalating hygiene awareness in developing countries.

We think that the operating environment is in favour of glove makers and thus, we remain upbeat on the sector.

This is mainly due to the demand for rubber has stayed sluggish due to the slow recovery in global vehicle sales, and therefore, the price of latex will remain weak, as well as weakening crude oil prices have led to lower butadiene prices and hence, lower nitrile prices, and the stabilised US dollar/ringgit exchange rate.

We still think that the increment in labour costs and gas prices may not significantly impact the earnings of the glove makers. The big four under our coverage -Top Glove, Supermax, Kossan and Hartalega have rolled out their expansion plans to increase their production capacities and achieve better product mixes to capture larger shares in both the natural rubber and nitrile gloves markets.

By 2013, Top Glove is expected to hit a total capacity of 44.8 billion pieces per annum and focus on expanding its nitrile production; Supermax plans to produce 21.5 billion pieces per anum and has indicated plans to achieve a product mix of 52% in nitrile and 48% in natural rubber late. Kossan aims to achieve an annual capacity of 14 billion pieces (it already has a balanced product mix).

Meanwhile, Hartalega is still the largest nitrile glove producer, with an annual capacity of 11.2 billion pieces, and is projected to reach total capacity of about 13.5 billion pieces a year by 2013 upon the completion of the company's Plant 6.

In short, by 2013, there will additional annual capacity for at least 14 billion pieces from the big four, and we believe this figure is growing.

Besides the capacity increase, Top Glove has ventured upstream into rubber plantations to secure a stable supply of raw materials.

Meanwhile, Supermax is focusing on expanding its downstream distribution network, Kossan is putting efforts into niche market products that might fetch better margins, and Hartalega is creating more value through production technology innovation.

In 2012, we saw two listed rubber glove companies being taken private. We think that the market will consolidate further as the smaller players are losing out to big companies in terms of capacity and efficiency as well as in terms of technology to produce better quality products.

We are maintaining our overweight recommendation on the sector due to the following factors - the steady easing of raw material prices, US dollar/ringgit remaining competitive and stable, global demand remaining positive and escalating costs may not significantly affect glove makers.

Top Glove and Hartalega have outperformed their peers while Supermax is still lagging and currently trading at an undemanding price-to-earnings ratio (PE) of 10 times.

This makes Supermax our top pick, with a fair value of RM2.70, pegged to a 13 times financial year 2013 PE.

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