By Hwang DBS Vickers Research
(no sector recommendation)
THE implementation of Basel III (from 2013) has prompted some banks to opt for the Dividend Reinvestment Plan (DRP) which enables them to maintain high payouts without denting their capital as dividends are paid in new shares rather than in cash.
Malayan Banking (Maybank), RHB Capital, AMMB Holdings and Affin Bank all have mandates for DRP. Maybank was able to sustain strong capital ratios despite raising dividend payouts from about 60% (FY09) to about 80% (FY11), largely due to its successful DRP.
Maybank had implemented four DRP since FY10 and the average acceptance rate was 89%. The average take-ups for RHB Cap was lower (68%), while AMMB and Affin Bank have yet to implement their DRP.
Investors receive higher absolute returns despite earnings per share (EPS) and return on equity (ROE) dilution. Maybank had issued 764 million new shares pursuant to the DRP and this had enlarged its share capital by 10.8%.
The enlarged share base essentially dilutes FY12 forecast EPS by 9.7% and ROE by 0.3 percentage point. But our analysis also shows that the total absolute returns (capital appreciation plus cash dividends) over the two years (since the first DRP) are higher if shareholders accept the DRP, rather than opting for all cash.
This could be due to the fact that new shares had been issued at about 10% discount to its ex-dividend volume weighted average market price. Hence, investors are not exactly penalised by EPS and ROE dilution which is a common perception.
We prefer a balancing act. In our view, a continuously rising share base would dilute forward EPS and ROE, and could distort the estimation of the bank's fair value.
There should be a balancing act between managing the bank's capital and shareholders' return. Top picks are Maybank and Hong Leong Bank (HLB).
We still like Maybank, which offers growth and dividend yields. Valuations remain attractive at 1.9 times calendar year 2012 book value (when the sector average is 2.0 times) with a 6% dividend yield (based on a 70% payout).
We expect Maybank to continue to pay high dividends to fully utilise its Section 108 tax credit before it expires in end-December 2013, possibly dishing out 6% dividend yield, the highest among Malaysian banks. Indonesian operations (Bank Internasional Indonesia) remain at only 7% of profit before tax.
Assuming it plays catch up with CIMB, Maybank has the opportunities to unlock value in its Indonesian acquisition which has yet to show full growth potential.
On the domestic front, Maybank's strength is recurring fee income from its strong transactions banking segment.
We also like HLB as it continues to reap post-merger synergies. Although the best performer among Malaysian banks year-to-date, there is still room for further upside.
Even at this stage, post-merger traction remains under-appreciated. We remain convinced of HLB's ability to reap synergies from the EON merger via improved efficiencies and a larger presence in hire-purchase and small and medium enterprises.
HLB will likely keep its balance sheet liquid but may compromise net interest margin in the near term; the latter may be a lesser evil in keeping a quality bank intact.
HLB is also likely to benefit from the full adoption of FRS 139 by the first quarter of financial year ending June 2013. Its asset quality remains among the best in the sector, and its pure commercial banking business offers a defensive play away from volatile market-related income, while its low foreign shareholding (about 8%) would shield it from a major sell-down in times of deleveraging.
By Affin Investment Bank Research
Target Price: RM3.80
HARTALEGA'S first quarter results ended June 30 expected to be released today is likely to be within expectations.
We believe core net profit will be slightly better than the RM49mil recorded in prceeding quarter.
Although sales volume fell by about 3% quarter-on-quarter, revenue will likely be higher as a result of the weaker ringgit compared to the US dollar and higher average selling price.
Management guided that margins for the quarter were relatively stable and comparable to the preceeding quarter (earning before intertest and tax margin is at 26.6%). However, we opine that margin compression will accelerate in the second half of the current financial year ended March 30, 2013 (FY13) as nitrile latex costs begin to rise and price competition intensifies as additional nitrile glove production capacity by other glove manufacturers come onstream.
After peaking at US$2,200 per tonne in August 2011, the nitrile latex price fell to as low as US$1,300-US$1,350 per tonne in June 2012.
Since then, however, nitrile latex price has risen by 7% to 8% to US$1,400-US$1,450 per tonne currently due to customers increasing inventory at low prices, and temporary shutdown of synthetic rubber plants for maintenance.
Although supply is not an issue, management expects nitrile latex price to average at US$1,600 per tonne in FY13, slightly below our US$1,700 per tonne forecast.
All in, production capacity will be the main constraint for FY13 earnings growth.
Currently, Hartalega has 45 lines running at a utilisation rate of about 85%, which is higher than its historical average of 77%.
The company will only add on three to five new production lines from Plant 6 in FY13, starting from the third quarter.
We estimate the new production lines will raise annualised production capacity by 12%-17%. However, on a prorated basis, production capacity would only increase by 4%-6%.
By Kenanga Research
OUT of the seven planters under our coverage who will release their quarterly results this month, we expect five of them to report earnings which will trail consensus estimates.
This will likely be due to a lower-than-expected fresh fruit bunch (FFB) production in the first half of calendar year 2012 (1HCY12) due to the worse-than-expected tree stress condition. Hence, we believe the consensus may cut their earnings significantly post-second quarter of calendar year 2012 (2QCY12), resulting in weaker planters' share prices. We have cut our earnings for financial year 2012/2013 estimated (FY12/13E) for all planters under our coverage by 5% to 21% after assuming lower crude palm oil (CPO) prices and FFB yields.
Average CPO prices have to be higher than RM3,300 just to maintain 2011 earnings. Recall that 2011 supernormal profit for planters was achieved at a margin of about RM2,200 per tonne of CPO (CPO price at RM3,219, cost at RM1,000). As the cost per tonne of CPO is expected to surge by RM200 to RM1,200-RM1,300, we estimate that CPO prices will need to reach another new high of RM3,300 in 2012 for most planters just to maintain their same earnings achieved in 2011. Such a scenario is unlikely in our view and hence there will be comparatively less exciting earnings to be reported for FY12E.
CPO prices may suffer short-term pressure as Malaysia Palm Oil Board's (MPOB) July 2012 CPO stocks report could swell above 2 tonnes. We expect July 2012 stocks level to surge 16% month-on-month (m-o-m) to 1.97 million tonnes but this could cross the 2 million psychological range especially if the export numbers turned out to be weaker than expected. We have assumed that CPO exports will tumble by 14% m-o-m to 1.32 million tonnes while production will grow strongly by 12% m-o-m to 1.65 million tonnes in July. The July 2012 inventory data is expected to be released on Aug 10.
The latest Southern Oscillation Index reading of +0.9 (as of July 29) suggests that a strong El Nino event is now unlikely. In addition, Oil World estimates show that the total production of eight major oils for the 2012/13 season appears to be enough to satisfy demand.
Potentially weak 2QCY12 results, limited CPO prices upside and a weakening El Nino underpin our decision to downgrade the sector to “neutral” for the next three to six months. Key catalysts to upgrade the sector again would be a sustained CPO price surge, which could be caused by a quantitative easing (QE3) rollout or a sustained weather disruption. Another catalyst for the sector will be the possible removal of the windfall tax in Budget 2013.
The average age profile for TSH Resources Bhd and United Malacca Bhd (UMCCA) at 6.2 and 7.6 years old respectively, which are the youngest among pure planters under our coverage. Due to the huge amount of plantation lands coming into maturity, we expect the double-digit FFB growth rate for TSH and UMCCA to be sustained.
Out of the seven planters under our coverage who will release their quarterly results in August, we expect five of them to report earnings which will trail the consensus estimates. Malaysia's CPO production declined 9% year-on-year (y-o-y) to 7.81 million mt due to the tree stress effect as well as lag effect from the El Nino in early 2010. The tree stress condition turned out to be worse than expected with the first half of 2012 (1H12) CPO production coming in at 7% below our estimate of 8.31 million tonnes.
As a result, we have adjusted down the FFB yield for all planters under our coverage by 6% to 8%. Together with our lower CPO price assumptions, we have cut our FY12/13E earnings by 3% to 21% for the planters under our coverage.
We have raised the forward price-to-earnings ratio (PER) for Kuala Lumpur Kepong Bhd (KLK) to 19 times from 17.5 times. The company deserves a higher forward PER due to its consistent performer status, which we define as “stocks that only registered a maximum of one negative total return in the past 8 years”. In addition, KLK's average age profile of about 11 years is also the youngest among the big caps compared to IOI Corp Bhd (approximately 14 years old) and Sime Darby Bhd (approximately 13 years old) based on our estimate.
We have raised the forward PER for UMCCA to 15.3 times from 14.1 times. The company deserves a higher forward PER due to its young oil palm age profile of approximately 8 years old, which is among the youngest among all planters under our coverage.
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