SEMICONDUCTOR By RHB Research Overweight (upgraded)
We note that more positive industry data have emerged with the latest equipment orders marking the second consecutive book-to-bill ratio above parity and the positive trend of new orders of electronics and computers from the United States.
More importantly, major IC manufacturers recently have provided positive revenue guidance for the coming quarter.
China is expected to remain resilient and the pick-up in the United States will offset EU's decline. While there may be concerns on the sector's outlook due to the European Union s (EU) descent into a recession and China's economic slowdown, we believe that the growth momentum of the semiconductor market is sustainable.
In our view, the EU's decline will be offset by the recovery in the United States while chip demand from China should remain resilient, driven by tech hungry consumers and the proliferation of the IT market.
We note that new orders of computers and electronic products in February declined by just 0.9%, from a decline of 12.4% year-on-year (y-o-y) and 18.7% y-o-y in January and December, respectively. The second consecutive month of y-o-y positive trend points to a better outlook for the end-demand segments for PCs and consumer electronic products.
According to Gartner, the semiconductor assembly and test services (SATS) market is expected to pick up strongly in 2012 by 4.1%, underpinned by: (1) normalisation of inventory levels; (2) rising demand for packaging, driven by pick up in consumer demand; and (3) demand for lower cost and advanced processes.
Risk to our view is weaker-than-expected recovery in the global chip sales in the second half of 2012.
We believe recent industry data and indication by the major tech players support our view that the sector has reached a trough and is on the path to recovery. Thus, to reflect the beginning of the industry growth cycle, we have raised our benchmark forward price per book value (P/BV) to 1.2 times (from 1 time previously), which is one standard deviation above Unisem's five-year historical average forward P/BV.
Our fair value estimates for Unisem and MPI are raised to RM1.84/share and RM4.08/share (from RM1.53 and RM3.40) respectively. Thus, we are upgrading Unisem and MPI to outperform (from market perform previously).
We reiterate our view that chip demand is on track for a stronger growth in the second half of 2012, underpinned by the resilient recovery in the US economy as well as improving consumer and business sentiment as these will drive chip sales going forward.
Thus, in anticipation of the pick-up in chip demand in the medium term, we upgrade our call on the sector to overweight from neutral.
We are mildly positive on Maxis' stepped-up aggression in defending its receding market share particularly in the prepaid segment as we believe that the incremental growth could be offset by thinner margin resulting from the exceptional low rates offered.
Maxis recently launched a new prepaid plan package, Hotlink Bagus that offers five services, namely voice, short message services, Internet, international direct dialling (IDD) and roaming, all under one plan that features lower call rates.
Noteworthy, local call rates are reduced further by around 17% if the subscribers maintain a minimum RM10 of credit balance.
Hotlink Bagus also offers an extra 40% discount on calls through the Bagus 5 Pass.
We view that Hotlink Bagus is a strategy to defend its prepaid market share.
We understand that upon the successful subscription of the Bagus 5 plan, the free 10MB data must be redeemed within 24 hours and is only valid for three days upon redemption.
Besides, subscribers would also enjoy the 40% cheaper call rates for both on-network and off-network.
In our view, Hotlink Bagus' cheaper rates seem to compete with market rates, while the bonuses offered under the Bagus 5 Pass are part of Maxis' strategy to win back its market share in the prepaid segment.
As the number of foreign workers in the country is growing due to increased construction activities following the roll-out of mega projects, we believe that Maxis is acting at the right time in expanding its market share in voice revenue among the foreign workers.
Currently, it only commands a weak presence of less than 20% share in the foreign workers segment.
With the lowest IDD call rate compared to its peers, we believe Maxis may win back a significant market share given the high price sensitivity among the foreign workers.
All in all, we believe that Maxis' aggressiveness in defending its eroding market share, particularly in the prepaid market could drive incremental growth but could put further stress on its margins due to intense competition.
On its dividend payout, we believe the RM1bil cash balance from the RM2.45bil sukuk musharakah (where RM1.45bil used for refinancing of existing loans) paves the way for Maxis to maintain its dividend per share of 40 sen in financial year 2012 ending Dec 31, of which, based on our estimates, represents a more than 100% payout.
Going forward, should Maxis decide to maintain its dividend payout, it may need to gear up more given that our financial years 2014 and 2015 assumption on free cashflows of RM2.5bil and RM2.6bil (after interest payments) may not be sufficient to fund its annual dividend payment of a total RM3bil.
We believe Maxis could maintain its dividend per share (DPS) of 40 sen, representing more than 100% of dividend payout ratio (DPR), assuming that Maxis borrows RM1bil in FY14 and FY15.
We have revised our valuation from the discounted cash flow (DCF) method to dividend discount model (DDM) with a revised target price of RM5.69.
Maxis remains a hold given its limited expected total return.
TOBACCO SECTOR By Affin Investment Bank Maintain neutral
BRITISH AMERICAN TOBACCO (M) BHD's (BAT) results for its first quarter ended March 31, 2012 (Q1'12) on Monday painted a positive picture for 2012 volume sales.
Total industry volume (TIV) sales grew by 7.7% year-on-year (+17.9% quarter-on-quarter), driven by stronger enforcement against illegally priced local cigarettes and smuggling activities, and the absence of an excise duty hike during Budget 2012.
That said, we think further upside for BAT is unlikely given its lofty valuations following its 13% year-to-date surge in share price and an uncertain near term outlook. Unlike the brewery sector (which has enjoyed six consecutive years of tax reprieve), tobacco companies have faced increasing regulatory measures to reduce smoking habits.
The absence of an excise tax increase in Budget 2012 came as a surprise, as the tobacco sector has faced successive excise tax increases in the preceding eight years since 2003. We believe a second tax reprieve this year is unlikely and the question here is not whether the Government will raise excise tax, but rather when and by how much. Our financial years 2012 to 2014 earnings forecasts impute an annual excise tax increase of two sen per stick.
Any excise duty hike would likely push the price of a premium 20s pack beyond the psychological threshold of RM10, potentially prompting smokers to switch to lower priced cigarettes. Downtrading activities could be further exacerbated by continuing sales of local sub-value-for-money cigarettes below RM7 per pack.
We gather that illegal pricing activities have not been completely eradicated and are picking up again.
Another potential obstacle includes plain packaging for cigarette packs. Australia is the first country in the world to implement the new measure when it passed a bill to make plain packaging law in November 2011.
However, we believe that such a law, if implemented in Malaysia, would be detrimental to legal tobacco products as the ease of replicating plain packaging would only fuel the proliferation of illicit cigarettes.
Separately, the Health Ministry also recently announced that they were considering reducing the nicotine content in cigarettes to curb smoking addiction. A reduction in nicotine content would more likely affect smoker preference rather than earnings.
The impact from a shift in preference is difficult to quantify at this juncture.
We maintain neutral on the tobacco sector, with a reduced recommendation for BAT (target price RM53.55) and add rating for JT International Bhd (JTI) (target price RM7.90). For now, we advise investors to take profit on BAT and switch to JTI, given its undemanding valuations and a potentially higher dividend payout.
Sunway Real Estate Investment Trust (REIT) By CIMB Research Outperform Target price: RM1.41
We initiate coverage with an outperform rating and a target price based on its dividend discount model value, which implies a total return of 18%.
Rerating catalysts are yield-accretive acquisitions, further asset enhancement initiatives and higher rentals for Sunway Putra Place after its refurbishment.
With a total portfolio value of RM4.4bil, Sunway REIT is the largest Malaysian REIT (M-REIT) by asset size.
Its market cap of RM3.4bil is the largest in the M-REIT universe, after Pavilion REIT.
In terms of trading liquidity, it is also the most liquid M-REIT, after Pavilion REIT, given the average daily value traded of RM1.6mil over the past three months.
With the bulk of its assets located in the vibrant, integrated township known as Sunway Integrated Resort City (SIRC), Sunway REIT is well-placed for growth as a number of new developments are expected to drive a 3-year CAGR of 9% in SIRC.
This should underpin an organic distribution per unit compound annual growth rate of 5% for Sunway REIT.
Sunway REIT is targeting to increase its asset value by 59% from RM4.4bil to RM7bil in three to five years' time.
Its comfortable asset leverage of 35.3% gives it RM340mil additional debt headroom before it hits its internal gearing threshold of 40%.
Its sponsor and major shareholder Sunway Bhd has RM3bil completed properties and properties under construction that could be injected into Sunway REIT.
Sunway REIT is targeting to double net property income (NPI) contribution from Sunway Putra Place to RM60mil after its renovation.
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