UMW results above consensus


  • Business
  • Tuesday, 27 Nov 2012

UMW Holdings Bhd

By Kenanga Research

Outperform (maintain)

Target price: RM12.37

UMW'S results for the first nine months of 2012 came in above ours and consensus expectations.

The nine-month net profit of RM743.4mil accounted for 89% and 83% of ours and the street's 2012 full-year estimates.

The strong earnings were attributable to the turnaround of its oil and gas division and higher sales of vehicles.

A dividend of 15 sen was declared.

We are keeping our financial year 2012 dividend forecast at 31.9 sen (40% dividend payout).

Year-on-year, the nine-month revenue and net profit soared by 51% and 67% to RM11.8bil and RM743.4mil respectively.

This was mainly due to a better performance across all the divisions.

Its oil and gas division made a turnaround from a loss to a RM45mil profit at the pre-tax level.

Its automotive division pre-tax margin has also improved from 15% to 16% due to a favorable model mix and lower selling and distribution expenses.Quarter-on-quarter, its third quarter net profit of RM299mil increased by 33% despite a 4% drop in revenue.

The decrease in the revenue was mainly due to the absence of NAGA-1 revenue contribution following the dry-docking procedure, lower demand for heavy equipments in India and lower Toyota sales during the quarter as customers opted for wait-and-see stance prior to Budget 2013 announcement.

However, the net profit grew by 33% due to lower distribution expenses recorded and the margin improvement in its oil & gas division.

The oil and gas division is expected to contribute positively in financial year 2013, as NAGA-1 will commence operation by December 2012 together with the other three rigs currently in operation.

We have raised our financial years 2012 to 2013 net profit estimates by 11.5% and 10.7% respectively as we had factored in a higher Toyota and Perodua's market shares.

We are maintaining our Outperform recommendation with a potential capital upside of 24%.

We have raised our target price by 11% from RM11.18 to RM12.37 based on an unchanged 14 times financial year 2013 estimated price-to-earnings ratio.

The risks include slower than expected growth in the auto sector and a global recession.

Guan Chong Bhd

By Hwang-DBS Vickers Research

Hold (maintain)

Target price: RM1.95

Lower average selling prices for its cocoa products due to softening demand in Europe and the United States and incremental expenses for Batam plant expansion (second line was commissioned end-June) hurt Guan Chong Bhd's third quarter ended Sept 30, 2012 margins.

This drove down earnings before interest, tax, depreciation and amortisation (EBITDA) yield (based on production tonnage) to RM1,033 per tonne and net profit to RM27.4mil (-22% quarter-on-quarter; +5.7% year-on-year), despite higher sales of RM348.5mil (+11% quarter-on-quarter; -4.7% year-on-year).

Moving into the fourth quarter, we expect net profit to climb to RM33mil driven by higher sales volume (from backlog orders) and stable margins.

Guan Chong has started to secure forward contracts recently to sell cocoa butter ingredients after being quiet for most of this year because of unfavourable pricing (butter ratio at 1.0 times or below, depressed cocoa bean prices of US$2,000 to US$3,000 per tonne).

The secured orders to date to be delivered progressively next year will absorb half of its total annual capacity of 200,000 tonnes. But it remains to be seen if demand will pick-up amid the uncertain global economic backdrop.

We forecast 150,000 tonnes sales for financial year ending Dec 31, 2013. We cut financial year 2012 forecast to 2014 forecast earnings by 2% to 6% after assuming weaker cocoa bean costs, average selling prices and EBITDA yields following the nine-month financial year 2012 results.

We also nudged down our target price to RM1.95. Guan Chong's downside risk is supported by 2013 forecast net yield of 3.6%.

KPJ Healthcare Bhd

By PublicInvest Research

Outperform (maintain)

Target Price: RM7.14

KPJ Healthcare Bhd announced that it would be acquiring a 23.4% stake in Vejthani Public Company Ltd (VPCL), the operator of Vejthani Hospital in Bangkok.

The acquisition of almost 8 million preference shares in VPCL would be settled by a cash consideration of 605.6 million baht (RM60.5mil), of which 90% is financed through external borrowings and the remaining by internal funds.

A 500-bed private hospital, Vejthani treats over 300,000 patients in Bangkok annually.

It is one of the smaller players in Thailand's medical tourism industry, compared to the well-known Bumrungrad and Bangkok Dusit hospitals.

However, this does not lessen Vejthani's status as a quality healthcare provider as it has been accredited by the Joint Commission International award among others.

Vejthani Hospital is renowned for its plastic surgery, orthopaedic, dental and cancer departments.

VPCL reported an audited profit before tax of 77.6 million baht (RM7.7mil) for the financial year ended Dec 31, 2011.

Although the price paid by KPJ may seem relatively high with a historical price to earnings ratio of over 33 times, VPCL is expecting a jump in earnings this year, as evidenced by a nine-month earnings before interest, taxes, depreciation and amortisation (EBITDA) of 241.2 million baht as at September 2012, and expected full-year EBITDA of 321.6 million baht (RM32.1mil).

We also understand from management that the purchase consideration represents a forward price to earnings of 17 times, which we deem a reasonable price to pay for a stake in a rising player in the burgeoning Thai medical tourism industry.

Although immaterial to financial year ending Dec 31, 2012 earnings, the acquisition of Vejthani represents a small step for KPJ into regional expansion, and we particularly like the company's conservative approach in acquiring a smaller stake to gain familiarity with the industry dynamics before venturing in a bigger way.

We reiterate our “outperform” call for KPJ with a target price of RM7.14.

PLANTATIONS (regional)

By Maybank Kim Eng

Neutral (unchanged)

Indonesia's wage hike will hurt Malaysian planters too, over time, especially those in Sabah.

Indonesia's minimum wage increase has averaged between 10% to 15% per annum, over the last few years but the hikes for 2013 announced last week are phenomenal for some provinces (29% to 49% higher), especially east Kalimantan.

Plantation companies with significant exposure to east Kalimantan include QL, BW Plant, IJM Plant, and TSH. KL Kepong, London Sumatra and Salim Invomas have smaller exposures.

Last week, the Ministry of Manpower announced a minimum wage hike for 15 (out of 33) provinces in Indonesia, ranging from a low of 8% to a high of 49%.

We understand the other provinces will also announce their new minimum wages in due course.

Of the 15 provinces, four have announced exceptional increases in minimum wages, namely East Kalimantan (+49% y-o-y), Jakarta (+44%), Riau Islands (+34%), and Bengkulu (+29%).

Our recent channel check with the Indonesian-listed palm oil companies reveals that the current average labour cost per worker is around 2 million-2.5 million rupiah per month, already above the new minimum wage requirement.

Nevertheless, the new level of minimum wages could spark worker demands for salary adjustments going forward, especially in east Kalimantan.

Note that we have already incorporated annual salary adjustments of 11% to 15% for companies under our coverage.

Moreover, plantation estates will typically improve labour productivity and efficiency to mitigate this wage increase.

In the case of estates in east Kalimantan, we may expect relatively more margin erosion given the huge jump in wage costs.

Labour costs typically account for 30% to 40% of estate costs in Indonesia.

On a worst-case scenario, a 49% wage increase could potentially raise overall estate costs by 15% to 20%, which will erode profit margins.

However, the extent of the impact on overall profitability and financials depends largely on each firm's overall exposure to east Kalimantan.

Pending clearer guidance from management of QL and TSH, we leave our earnings forecasts unchanged.

This is a long-term structural issue for Malaysian plantation estates in that Indonesia's rapid increase in minimum wages will continue to erode Malaysia's attractiveness as an employment destination for foreign workers.

It is an open secret that plantation estates in Malaysia are facing labour shortages, and the industry is heavily reliant on foreign labour.

Plantation estates in Malaysia will now find it even more difficult to retain and recruit Indonesian workers, especially estates in Sabah (as it borders east Kalimantan).

This in turn will lead to an even higher wage bill for estates in Sabah over time.

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