Systems integration services provider Mesiniaga looks set to deliver improved results in the final quarter of the year despite recording a 35% decline in profit in the third quarter, Affin Research said.
The research house said its optimism is based on Mesiniaga's past performance - as the company had traditionally performed better in the second and fourth quarters of the year - and an anticipated strong fourth quarter performance.
It said the July-September results would have come in better, if not for the delay in the company executing a government contract worth RM2mil.
Affin said Mesiniaga's second and fourth quarter earnings had consistently contributed 60% to profits for the past four years.
Affin, which has a “buy” recommendation on the stock, and expects Mesiniaga to generate about RM11mil on pre-tax profit in the fourth quarter, supported by several contracts brought forward from the third quarter and a strong order book of RM200mil. Contracts from the government and public sectors account for 98% of the company's revenue.
Mesiniaga has been consistently paying dividend per share of 16 sen since year 2001.
Tenaga Nasional Bhd (TNB)
Standard & Poor's (S&P) believes that TNB is due for a tariff re-rating, given that tariffs have remained unchanged since 1997 on government concerns over the inflationary knock-on effects of higher electricity prices.
It said TNB's management team had made “commendable strides'' in keeping operational costs in check, as a result of cost saving measures taken as well as cash flow improvement initiatives combined with piecemeal government assistance.
The Khazanah Nasional Bhd-led efforts to restructure government-linked companies (GLC) also appear to be focusing on implementing lasting changes and generating comprehensive improvements to TNB's business culture, it added.
S&P has a “buy” recommendation on TNB, given its 12-month target price of RM11.50, which translates to a potential upside of 15%. The target price is based on S&P's discounted cash flow estimate of RM11.35, which is then added to their forecast for the net dividend for the year ending Aug 31, 2006 of RM0.15.
It said it had yet to factor in higher electricity tariffs in the forecast model, which means there could be further upside should a tariff revision materialise for the national utility company.
S&P's main concern is TNB's inability to adjust its product pricing to match costs, given the fact that electricity tariffs are government-controlled, while a large-proportion of operating costs are market-based.
It said the balance had been tilted towards social concerns rather than achieving a sustainable market return on TNB's assets and investments but added that this could change in the future.
Risks to the recommendation and target price would include market disappointment from a prolonged delay to TNB's tariff adjustment, market sentiment over the perceived pace of organisational change, weaker than expected electricity demand growth, the continued rise in fuel prices, and the weakness of the Malaysian ringgit, resulting in additional forex losses.
ESTHETICS INTERNATIONAL GROUP Bhd (EIG)
EIG raised prices for its Dermalogica franchise to dealers and consumers by 3% to 5% in the middle of this year due to margin erosion as a result of higher transportation costs.
While the price increases have dampened demand, AmResearch Sdn Bhd believes that the EIG management team would carry out promotions to drive sales and sustain revenue.
The company has exclusive rights to distribute Dermalogica products in South-East Asia and Hong Kong.
The company is also entitled to use the Leonard Drake trademark at its professional care service centres via its business arrangements with Dermalogica Inc., United States.
Meanwhile, the company has put on hold plans to move into the male market, despite having done a concept study for the setting up of a professional skin care centre for men under its own range of professional skin care products, Belle Lina.
AmResearch believes that this decision was prompted by a need to raise awareness of the Belle Lina brand name before attempting to venture on a large scale into the male market.
As a result of the freeze, growth in the Dermalogica and Belle Lina franchises this year and 2006 would continue to come from the opening of skin care centres in new shopping malls on the west coast of the peninsula, it added.
Revenue from the provision of professional services under Leonard Drake and Belle Lina is projected to grow 7-8% annually in financial years ending Jan 31, 2007 and Jan 31, 2008 respectively via the company's distribution activities.
The aggressive marketing of its in-house brand, Clinelle, has raised contribution from the company's distribution division to 70% of total revenue from 60% previously.
AmResearch expects EIG to improve its turnover by 23.1% to RM99.3mil for financial year 2006. Turnover growth would come primarily from a projected 33% increase in
The research house has a “buy” recommendation on EIG for its attractive dividend yield, of 9% and 12% for financial years 2006 and 2008 respectively.
Notion VTEC, an established manufacturer of hard disk drive (HDD) components, has also ventured into non-HDD products such as digital cameras and automotive engine components.
Having suffered a net loss of RM1.2mil in the ended Sept 30, 2002, Notion did well to record a net profit of RM3.9mil in 2003, and substantially increased its net profit to RM11.7mil in 2004 due to the strong demand for storage capacity in recent years.
Notion is currently building a new factory in Klang to cater for this growth.
S&P recommends a “hold” on the stock and has a 12-month target price of 80 sen,based on 10 times projected year 2006 earnings, which is higher than the median price earnings multiple of most HDD component suppliers.
The research house also expects Notion to grow its net profit by 36% in 2006 on the back of rising orders, especially from HDD customers.
However, due to a dilution from new initial price offer shares, earnings per share is expected to grow at a slower rate of 13% in 2006 compared with 31% in 2005.
Risks to S&P's recommendation and target price include an unexpected industry downturn that could lead to pricing pressures and negatively affect the company's bottomline. A sharper-than-expected weakening of the US dollar against the Malaysian ringgit could also have an impact, as almost all of the company's group revenue is based on the greenback.
A possible global shift to flash memory products away from HDDs is another risk.
Kumpulan Europlus Bhd (KEB)
KEB's main earnings contributor is Talam Corp Bhd, a major developer of affordable housing in Malaysia.
The investment holding company is currently involved in the construction of two highways and a flood mitigation project, but Seagroatt & Campbell Securities Sdn Bhd (S&C) expects earnings to come onstream only from the year ending Jan 31, 2008.
S&C expects KEB to record a 69% decrease in revenue to RM66mil this year and a net loss after tax of RM22.1mil, based on pessimistic a forecast for its quarterly results, the slowdown in construction works and the softening property market.
It said KEB was a “hold'' on the back of the existence of outstanding caveats against the company. KEB is valued at RM0.63 per share on a price/book ratio basis.
The research house is pegging KEB's estimated 2005 book value/share of RM1.13 to the industry price/book ratio of 0.67, and applying a 20% discount to the industry price/book ratio account for the company's weak prospects for this financial year, to arrive at a fair value of RM0.63 a share.
It said inflationary pressures brought on by high oil prices posed investment risks as it might cause potential investors to put on hold the purchase of durable big-ticket items such as houses.
An increase in interest rates could also dampen interest in the property market as an investment option.
S&C also said the final concession terms for the infrastructure projects KEB was involved in might not be favourable to the company, which may result in the cancellation of the proposed equity stake acquisition by IJM Corp Bhd.
We're sorry, this article is unavailable at the moment. If you wish to read this article, kindly contact our Customer Service team at 1-300-88-7827. Thank you for your patience - we're bringing you a new and improved experience soon!
What do you think of this article?