Genting Malaysia 'hold', KNM 'buy', CCK 'add', Dayang 'neutral'


  • Business
  • Tuesday, 16 May 2017

By Maybank IB Research

Hold (maintained)

Target price: RM5.40

IF an upcoming ruling from the United States’ Department of Interior (DoI) turns unfavourable, Genting Malaysia Bhd could end up writing off its US$274mil (RM1.19bil) earlier investment and forego net interest income of RM105mil, said Maybank IB Research.

On the other hand, in the event of a favourable ruling, Genting Malaysia will avoid the write-off, earn net interest income and also earn management fees of RM60mil per annum.

Genting Malaysia’s investment in the First Light Resort and Casino (FLRC) remains uncertain at present, following a court ruling in mid-2016 which has caused the construction of the FLRC to cease.

Genting Malaysia, which was appointed as the manager for FLRC, has invested about US$274mil or 20 sen per share in Mashpee Wampanoag (MW) promissory notes that carry interest rates of 12% and 18% per annum.

“Currently, we assume that Genting Malaysia will not write off the investment and will earn the interest income. But the group may not earn management fees yet,” said the research house in a note.

Recall, on Sept 18, 2015, the DoI issued a Record-of-Decisions (RoD) to hold MW reservation land in trust under Category 2 of the Indian Reorganisation Act – Tribe Living Continuously on an Existing Reservation. This enabled the MW tribe to construct the FLRC. But on July 28 2016, federal district court judge William G. Young ruled in favour of a group of Taunton residents who challenged the RoD. As a result, construction of the FLRC ceased.

However, the DoI will issue a new RoD in relation to the MW reservation land by June 19, 2017, which will decide the outcome for Genting Malaysia’s investment.

Besides Resorts World Genting, Genting Malaysia owns and operates Resorts World Casino New York City, Resorts World Bimini, Resorts World Birmingham and other casinos in the United Kingdom.

The research house has maintained its “hold” recommendation on Genting Malaysia, but lifted the target price by 2% to RM5.40.

“If the outcome is unfavourable, our target price may be trimmed by 20 sen per share.

“However, if the outcome is favourable, our target price may get a lift by 14 sen per share,” said Maybank IB Research.

KNM Group Bhd

By Hong Leong Investment Bank Research

Buy (upgraded)

Target price: RM0.32

HONG LEONG Investment Bank (HLIB) Research is optimistic on KNM Group Bhd, following an announcement by the latter to invest a further 1.3 billion baht (RM159mil) in its bio ethanol project.

The process equipment manufacturer and energy group has recently announced that it has allocated 1.3 billion baht (RM159mil) for the construction of Phase 2 fuel-grade Impress Ethanol Plant in Thailand.

“Overall, the investment is a positive to the group as the investment for the bio-ethanol project’s second phase signifies the successful implementation of the Phase 1 project, which has been completed in early May 2017. The project is expected to provide long-term recurring income to the group,” said HLIB Research in a note.

The second phase of KNM Group’s bio-ethanol project in Thailand is projected to raise the plant’s overall production capacity to a total of 500,000 litres per day. To note, the first phase of the project could only produce 200,000 litres per day.

While it is positive on the announcement by KNM Group, HLIB Research indicated that it did not rule out the possibility of delay in the commencement of the project’s second phase. This is due to the fact that the first phase has also been delayed for about a year.

However, the research house added that the risk of project cost overrun would be minimal for the process equipment manufacturer and energy group, as the engineering, procurement, construction and commissioning (EPCC) works of the plant would be carried out by the group’s internal EPCC arm.

“The earliest earnings contribution from this project is only expected in 2019. Based on assumptions of ethanol selling price of 23 baht per litre and cassava cost of 5,600 baht per tonne, the expected profit contribution of the second phase project is estimated to be RM15mil, which is in addition to first phase’s expected contribution of RM10mil.

“We believe the worse is over for the group and expect a better financial year 2017 ahead, in anticipation of stabilisation of oil prices and maiden contribution of KNM Group’s Thai bio ethanol project Phase 1 which would provide recurring earnings base for the group,” said HLIB Research.

The research house upgraded its recommendation on KNM Group to “buy” and left the target price unaltered at 32 sen.

CCK CONSOLIDATED HOLDINGS BHD

By CIMB Research

Add (initiated)

Target price: RM1.28

CIMB Research believes that Main Market-listed CCK Consolidated Holdings Bhd is an undervalued poultry player in Malaysia, as the market has overlooked several of its key advantages.

The research house also believes that CCK should trade above its peers in the industry.

“Key advantages of CCK include its wide distribution network of 57 self-owned retail outlets, which provides it with superior margins compared to its peers, and its captive market in Sabah and Sarawak, with stronger-than-average demand growth spurred by urbanisation.

“Apart from that, CCK has a stronger pricing power, leading to less cyclical and volatile earnings unlike its peers,” said CIMB Research, adding that CCK is projected to record a 3-year earnings compounded annual growth rate of 19.1% over the financial years of 2017 to 2019 (FY17-FY19).

Segmental revenue wise, about 61.5% of CCK’s FY16 revenue is contributed by its retail arm. Its second-largest revenue contribution came from the poultry segment, at 29.4%. Geographically, 81.7% of CCK’s revenue in FY16 came from Malaysia.

The integrated poultry supply chain operator is Sarawak’s largest poultry player and commands 35% of the state’s poultry market share. Besides Sarawak, it also has exposure in the poultry markets of Sabah and Indonesia. CCK’s key advantage is its retail arm and strong branding.

CIMB Research said with Malaysia’s demand for poultry goods in the country is set to rise, especially in Sabah and Sarawak, CCK stood to be a key beneficiary of these macro trends as it had a monopoly in Sarawak.

“Expansion of food and beverage chains and new mall openings should translate to higher demand for its products, in our view. CCK is also expanding capacity across its integrated supply chain to cater to the expected demand growth,” said the research house in a note.

CIMB Research has initiated coverage on the integrated poultry supply chain operator, with an “add” recommendation and a target price of RM1.28. The target price is a 30% discount to CIMB Malaysia’s consumer sector target price-earnings ratio of 21.6 times.

DAYANG ENTERPRISE HOLDINGS BHD

By PublicInvest Research

Neutral (maintained)

Target price: RM1.17

DAYANG Enterprise Holdings Bhd’s dividend-in-specie proposal with regard to Main Market-listed Perdana Petroleum Bhd has been received positively by PublicInvest Research.

The exercise is intended to lift the trading suspension of Perdana Petroleum and to ensure at least 25% public spread requirement by Bursa Securities. Currently, Perdana Petroleum’s public shareholding stands at only 2%, with Dayang holding about 98% stake in the former.

Dayang, an oil and gas maintenance and support services provider, has recently proposed a distribution of up to 292.2 million ordinary shares in Perdana Petroleum by way of dividend-in-specie to the shareholders of Dayang.

The shares represent about 37.5% equity interest in Perdana Petroleum and will be paid out of Dayang’s retained earnings. If the proposal materialises, Dayang will control 60.5% equity interest in Perdana Petroleum.

“Perdana Petroleum continues to reflect positive results with a 55.3% year-on-year higher contribution from the marine charter division in FY16 compared to the corresponding year, which will continue to elevate both Dayang and Perdana Petroleum’s performances.

“We are, however, still expecting losses from Perdana Petroleum in the interim, and thus the lesser consolidation of Perdana Petroleum to Dayang’s results is negligible at this juncture and has no effect on our current valuations,” said PublicInvest Research in a note.

“We thus view this strategy positively and believe this move will help the group better manage Perdana Petroleum as a strategic shareholder.”

The share distribution exercise is expected to be completed by the third quarter of FY17. Perdana Petroleum will continue to be listed on the Main Market even after the exercise.

“The group anticipates more maintenance jobs ahead as Petronas recalibrates its budget. It is poised as a contender to win more awards with the group’s RM5bil tender book and sustained by long-term call-out contracts worth RM2.5bil to last at least until 2018 with extension options up to 2019.

“We believe Dayang has the capabilities to ensure better vessel utilisation management of Perdana Petroleum, going forward,” stated PublicInvest Research, adding that Perdana Petroleum’s average utilisation would increase further to mid-60% range for FY17, compared to 58% in FY16.

AGRIBUSINESS INDUSTRY

By CIMB Research

MALAYSIA’S palm oil stocks grew 3% month-on-month (m-o-m) (-11% year-on-year or y-o-y) to 1.6 million tonnes as at end-April, the highest level year-to-date.

CIMB Research said this was 4% below its forecast as well as 3% and 2% below Reuters and Bloomberg consensus’ forecasts, respectively.

“We believe the lower-than-expected stockpile was due to higher-than-expected domestic disappearance of 272,000 tonnes (+32% m-o-m) and lower-than-expected output. The lower inventory against our and consensus forecasts could be supportive of near-term crude palm oil (CPO) prices,” it said.

CIMB Research said CPO production, which rose 6% m-o-m in April, was lower than its prediction of a 9% m-o-m growth in output and this could be due to heavier-than-usual rainfall in some estates, leading to lower yields.

“On a y-o-y basis, both fresh fruit bunches yield and CPO output rose 19% in April. This represents the fifth consecutive month of y-o-y gains in output and lends further support to the view that the yields of Malaysian oil palm estates are starting to recover from the El Nino effect (drought in 2015),” the research house said.

CIMB Research said its initial estimates show that palm oil stocks would increase 3% m-o-m in May to 1.65 million tonnes and is expecting May production and exports to rise 4% and 8% m-o-m.

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