RANHILL BHD Consensus net profit estimate FY06/04: RM69.40 million
JP Morgan Research
Comment: We are initiating coverage on Ranhill Bhd (Ranhill) with an overweight rating, as we believe that Ranhill is a small capital stock with the makings of an infrastructure giant the likes of Gamuda Bhd and Roadbuilder (M) Holdings Bhd. The company has 29 years of experience in providing engineering, procurement and construction management services in the construction industry.
In this role, the company has worked on most of the major construction projects in Malaysia, including the North-South Expressway, Petronas Twin Towers, the Kuala Lumpur International Airport and the Sungai Selangor Water Supply Scheme Phase 2.
The company is now leveraging on its engineering expertise to secure contracts on a turnkey construction basis, boosting its revenues and earnings more than tenfold. Its current RM2 billion-construction order book looks set to grow further as the company bids for a total of RM7.5 billion in new projects, mainly in water supply-related works.
By virtue of its relationship with Ranhill Utilities Bhd, Ranhill is also likely to have captive most of the capital works required over the 30-year water concession. This amounts to a total of RM13.6 billion, of which RM1.5 billion has already been awarded to Ranhill.
We believe that Ranhill's small market capitalisation in relation to its order book reflects the fact that it is under-covered and under-owned by foreign investors, partly due to its low free float of 40 per cent. This could change in the next 1-2 years, if the company realises its ambitions and delivers on its RM7.5 billion-project pipeline.
With the recent proposed acquisition of EPE Power Corp Bhd and its relationship with sister company Ranhill Utilities; we believe the company is also well placed to benefit from the next wave of infrastructure spending in Malaysia.
Recommendation: We are initiating coverage on Ranhill with an overweight rating. We see fair value at RM7.60 based on 11x FY04 price earnings, a slight discount to the sector average.
SKP Resources Bhd Consensus net profit estimates FY03/03: RM9.5 million
Comment: SKP's products are mainly sold to multinational companies (MNC) such as Pioneer Electronics Asiacentre Ltd, Fujitsu Component (M) Sdn Bhd and Sharp-Roxy Electronics Corporation (M) Sdn Bhd, which have been with SKP since 1994. The products are delivered to the multinational customers in Johor and Singapore by vans, lorries or trucks.
The MNCs use SKP's products as inputs into their electronic and electrical products, which are exported indirectly to the United States (US), Europe and Japan. Sales to the multinational companies are denominated in US dollars.
US dollar sales make up approximately 23 per cent and 17 per cent of SKP's revenue for FY 03/02 and four months ended July 2002 respectively.
The plastics industry is fragmented, characterised by many small- and medium-sized firms, which are mainly family-owned but have foreign partners. The listed major players in the industry are HIL Industries Bhd, Mah Sing Plastic Industries Sdn Bhd and VS Industry Bhd while some of the unlisted producers include Eully Plastic Industries Sdn Bhd, Lee Huat Plastic Industries Sdn Bhd and Tylon (M) Sdn Bhd.
These companies supply casings and precision parts for consumer electronics, telecommunication equipment and office automation equipment. Within the plastic industry, original equipment manufacturer parts are the fastest growing sub-sector.
This is reflected in the positive relationship between the revenue of the plastic products industry and the growth of the export of manufactured goods.
Outlook: SKP's prospects are not expected to be exciting due to the uncertain outlook for the electrical and electronic sector. Furthermore, Malaysia is going through a structural change due to the attractiveness that China offers as the new hub for foreign investments.
The country is losing its cost-competitiveness and share of foreign direct investment to China due to the latter's low cost. Hence, the risk of MNCs relocating arises. To face these challenges, SKP plans to establish itself as a "one-stop service centre". This is aimed to give more value to its customers.
Under the one-stop service centre concept, SKP's customers will be able to get all the required services under one roof and will not have to co-ordinate the transfer of moulds or semi-finished plastics from one supplier to the other for finishing works.
According to SKP, this is beneficial to the customers as it eliminates repeated handling by different parties and wastage, hence reducing transportation costs and production lead time. SKP's directors expect the one-stop service centre to be fully implemented by 2005.
Recommendation: We attach a fair value of RM1.94 for SKP. This is derived by applying a 9.8x price earnings ratio (PER), which is 20 per cent below the average PER of companies in similar business on SKP's FY3/04's earnings per share of 19.9 sen. We applied a 20 per cent discount due to the many risks faced by SKP as mentioned above.
Our fair value of RM1.94 provides an upside of 44 sen or 30 per cent above its initial public offering price of RM1.50.
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