Brokers' Call

  • Business
  • Saturday, 03 Jan 2009


COMMENT by HwangDBSVickers: Despite little detail on the terms at this juncture, the long-awaited financial restructuring plan includes a framework for review of aeronautical charges. We believe this new structure could result in higher passenger service charges and landing charges.

Malaysia’s current passenger service charges are among the lowest in the region and have not been revised since June 2002, while landing charges have not been increased for 26 years. The higher charges will also reflect increases in costs going forward. Even with the revenue-sharing arrangement with the Government, the net impact should still be positive for MAHB. The lease rental payment to the Government will also likely resume and partly mitigate the positive impact of higher passenger service charges.

MAHB will pay a share of its revenue to the Government, which is expected to bear part of future airport capital expenditure using the fund. We understand MAHB will fund the capex for projects that are financially self-sufficient. For now, we maintain our forecast pending the release of more details.

Based on MAHB’s typical annual capex of RM150mil-RM250mil, the Government would need to take a 5%-8% cut of the group’s FY2009 forecast revenue of RM1.6bil (derived based on existing charges that are likely to be revised upwards) assuming the Government has to fund half of the normal capex amount.

Recommendation: We maintain our BUY call and price target of RM3.90 for now, based on 1.3x CY2009 price/net tangible asset. MAHB is trading at low 7x CY09 earnings per share and 0.8x price/book value, below its peers’ 11x and 1.0x, respectively. The group also offers an appealing 7% net dividend yield.

PROTON HOLDINGS BHD (RM1.81 as at Dec 31)

COMMENT by OSK Research: Proton’s Gen 2 model will be assembled in Iran from April 2009 by a local partner – Zagross Khodro – in an agreement signed recently for the supply of automotive parts, allowing the assembly of the Gen 2 through a completely knocked down (CKD) arrangement. This is the third of a series of agreements aimed at enabling Zagross, Proton’s sole distributor in Iran, to assemble the Gen 2. The previous two agreements were on licensing and technical assistance and purchase of equipment.

Proton would also be opening an office in Iran in March 2009. With the CKD operation in Iran, Proton will be able to price its cars more competitively and, more importantly, improve on its after-sales services in the country.

Proton’s plan to set up a Gen 2 plant, initially planned for commencement at end-2007, is finally taking the form of a firm agreement to begin production of the CKD Gen 2 from March 2009. Proton had ventured into the Iranian market in 2002 with the entry of the Wira, and has so far only managed to sell about 10,000 units of the model given its uncompetitive pricing.

Checks reveal that the Waja (a CKD) model is selling for RM84,000 while the Toyota Camry (CKD) is priced at RM100,000. Given the choice, rationally speaking, one would tend to choose the latter model. Hence, although we anticipate that the price of the new CKD Gen 2 could be much lower than the current Waja’s and the existing Gen 2 completely built units (CBUs), it may still be deemed unattractive in comparison to other marques in the country as well as the cheaper priced Iranian national car, which averages at RM45,000 to RM50,000, based on a Peugeot or Renault platform.

With a production capacity of 50,000 units per annum, Zagross had been able to sell 17,000 units of Proton cars last year. Nonetheless, it is still Proton’s largest export market. Given the highly competitive industry against Iran’s two largest national automakers, which currently controls 94% of the total domestic car production (SAIPA produced 482,000 units while Iran Khodro made 450,000 cars last year), we believe that competition will continue to be tough amid the current economic environment.

Furthermore, the need to conserve cash ahead during such a difficult time in Iran (where cars are mostly transacted in cash amid the high inflation rate of 28.3%), will prove to be a difficult entry in the near-term where an average person in Iran earns US$500 a month.

Recommendation: Given the population of more than 70 million people and the vast number of ageing cars averaging 15 to 20 years old, Iran is considered the most preferred market for Proton with potential growth opportunities over the longer term should Proton be able to leap ahead of other automakers. The establishment of joint ventures with global original equipment manufacturers and Iran’s local auto manufacturers dating back to the 1970s has contributed to Iran’s success in the auto industry as the biggest auto manufacturer in the Middle East, with a total production volume of 1.15 million units last year catered to the domestic and export markets. However, the level of nationalism protection by the government with 100% in import duties and poor road infrastructure will make it a tough market for Proton. Leaving our earnings and export assumptions unchanged, we continue to maintain our NEUTRAL call with a target price of RM1.81 based on 12-month EPS of 36.2 sen pegged at a PE multiple of 5x.

EASTERN & ORIENTAL BHD (43 sen as at Dec 31)

COMMENT by Kenanga Research: On the possible joint-development of Seri Tanjung Pinang 2 (STP2), we expect the reclamation cost of 740 acres to be a hefty RM3.9bil (reclamation cost: RM120 psf) or RM600mil p.a. over six years. Based on Eastern & Oriental internal net gearing limit of 1.0x and current net gearing of 0.8x, it will only be able to borrow a further RM188mil. Cash balance is at RM167mil. We expect current gearing levels to be maintained because of: i) heavy working capital requirements of St Mary and STP1 condominium project; ii) softer sales in FY2009 to FY2010. Hence, financial muscles are vital to kick-start STP2.

We believe a new partner is needed to expedite STP2 developments. On its own, the company could reclaim the 740 acres in parts. But with financing constraints, this strategy could extend the reclamation period beyond the concession expiry in 2017. Reclamation cost could also increase if undertaken in several stages (higher mobilisation costs).

We favour tying up with a new partner to reduce project risks. The strategy also allows the company to keep a “light enough” balance sheet or enough room to capitalise on various market trends/bargain-value assets. No detail of potential partners has been disclosed, but we believe a private equity fund is more likely than another developer. Globally, many developers are struggling to juggle with their own projects.

The company has a single digit PER of 8x for FY2009E and 9x for FY2010E, in line with sector’s average of 9x and 8x, respectively. On a PER valuation basis, Eastern & Oriental’s fair value at 8x PER based on FY2010E EPS of 4.6 sen is 36.8 sen. However, it is not reflective of the true value of a property development company, seeing that landbank values are realised over several years throughout the property cycle.

The company is trading 71% below its NTA per share of RM1.45. Its 0.3x P/BV is one of the lowest versus peer average of 0.7x. We believe that the deep discount is unwarranted given i) its basket of prime niche landbank; ii) strong branding as a high -end developer; and iii) Malaysia’s land values are supported by steady organic growth.

Recommendation: We are reiterating a BUY recommendation with new target price of RM1.95 (previous RM3.54). Nevertheless, we have conservatively toned down the company’s valuations using more conservative land prices to reflect a subdued 2009 property market. STP2 valuations are also excluded until reclamation works commence. Even so, our fully diluted RNAV reveals a rich upside.

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