Tambun Indah - The 2nd Penang Bridge To Narrow Property Price Gap

Visit Note

• Given the upcoming completion of the 2nd Penang Bridge in Sept 2013 and the establishment of industrial parks, Tambun Indah (TI) has 660 acres of land on the mainland to tap on the strong growth potential. TI’s key project is Pearl City located at Seberang Perai South.
• Ahead of the completion of the 2nd Bridge, demand for properties on the mainland is already gaining momentum. TI’s sales of RM347m in 2011 were more than double from RM137m in 2010. We expect TI’s sales to hit RM400m this year. Sales in 1H already reached RM212m.
• TI’s dividend stands out, anchored by solid balance sheet and earnings growth. On the back of our estimated earnings growth of 66%, 25% and 23% for FY12-14, based on the company’s dividend payout policy of 40-60%, our DPS forecasts translate into a fairly attractive net dividend yield of 11%, possibly the highest in the sector. TI paid 3.8sen in FY11.
• There is no research house covering TI currently, which probably explains the company’s relatively undemanding PER valuations of about 4x. TI’s growth and dividend angle have been substantially under-appreciated by the market. We value the stock at RM0.95 at 40% discount to RNAV.

Source: RHB Research - 11 Oct 2012

Media - Hoping For A Seasonally Strong Finish (Neutral)

Sector Update

• The latest figures from Nielsen suggest that the sector still lacks catalysts. According to Nielsen’s figures, Aug’s gross advertising expenditure (adex) saw momentum losing steam after registering 2.7% yoy decline (Jul: +2.3% yoy), mainly due to a decline in print adex.
• However, we believe the sector has bottomed and expect adex to remain somewhat stable in 2H due to the recent Merdeka and Malaysia Day celebrations, as well as a seasonally robust 4Q. But the sector still is still bogged down by a cautious mood among advertisers.
• Maintain Neutral on sector as macro uncertainties may still weigh down advertisers’ sentiment. We prefer MCIL for attractive dividend yields and relatively resilient adex growth from exposure to the less vulnerable print segment.

Source: RHB Research - 11 Oct 2012

Banking - Heavyweights To Deliver (Overweight)

Sector update

• The call on the sector remains a macro call, given that banks are often viewed as proxies to the economy. We think the sector would be a beneficiary from our expectations of GDP accelerating to 5.4% in 2013 from 5% this year.
• Malaysian banks earnings are still very much domestic-centric, where domestic demand is resilient, capital market activities have been surprisingly robust and asset quality largely benign. This will help earnings stay resilient. In addition, consensus earnings estimates have been creeping up this year after steep cuts made last year. We think the upgrade cycle still has legs.
• We project 2012-13F net dividend yields of 3.8-4.2% for the sector, which compares well with the FBM KLCI. This, we think, would help provide support to share prices when markets are volatile.
• Finally, we think the sector is trading at attractive valuations (both on PER and P/BV metrices) relative to the FBM KLCI and other heavyweight sectors. For funds benchmarked to domestic indices, we think the confluence of factors such as inexpensive valuations, heavyweight sector and ample liquidity in the system means that the sector should not be ignored.
• Overweight stance maintained with Maybank, Public Bank and CIMB as our top picks.

Source: RHB Research - 11 Oct 2012

Plantation – Share Prices Not Reflecting CPO Price Movement – Is A Correction Coming? (Neutral)

Sector Update

• Malaysia's CPO production jumped 20.4% mom in Sep, higher-than-consensus expectations of 18-19%, and 2011's 12% mom rise after the Hari Raya period in Aug 2011. Exports rose by a smaller 4.5% mom, and closing CPO stock levels rose by 17.4% mom to 2.48m tonnes in Sep, This led to a spike in the annualised stock/usage ratio to 14.1% (from 12.2% in Aug), which is above the historical 10-year average of 9.3% and also above the historical peak of 12.7%.
• CPO prices have fallen from RM2,900-3,000/tonne in early Sept to RM2,200-2,300/tonne currently. We expect prices to remain weak in the next 1-2 months and only start to pick up moderately once the peak production period is over in Nov/Dec, which could see prices rising back to closer to the RM3,000/tonne level.
• Should prices stay at current levels for the rest of the year, we estimate the average price for 2012 may turn out to be RM2,800-2,900/tonne instead.
• We are leaving our 2013CPO price forecasts of RM2,900/tonne unchanged.
• Despite the 25% fall in CPO prices since early-Sep, the plantation index has only fallen by 5.6%. While we concur that CPO prices will bounce back towards the year-end, we believe that share prices of the plantation stocks we cover are currently only reflecting CPO prices of RM2-700-3.000/tonne.
• We believe it is therefore possible for share prices to fall a little further to reflect a larger fall in CPO prices before rebounding as per our expectation of CPO prices. We maintain our NEUTRAL call on the sector.

Source: RHB Research - 11 Oct 2012

Latexx Partner: M(ission)&A(ccomplished)

Rubber Gloves

Solid interest in glove players. Takeover offers for Latexx Partner and Adventa at 12-13x forward PERs are much higher than the 8-9x their relatively larger peers (i.e. Supermax, Kossan) are currently trading at. Additionally, we believe that the recent rebound in latex prices will short-lived; we expect prices to trend down over the medium term on a soft global auto sales outlook. There is also an increasing investor interest in cheaper healthcare alternatives. Stay Overweight.

Latexx Partner: Takeover at 10x fwd PER. Semperit Investment Asia (SIA) yesterday offered to acquire all the remaining ordinary shares and warrants (2007/2017) in Latexx Partner (Latexx). The offer price is MYR2.30/Latexx share and MYR1.77/warrant representing premiums of 28% and 36% respectively to their last traded prices, implying a consensus 2013 fully-diluted PER of 12x (10x if without conversion of warrants) and an 2012 P/B of 1.9x.

SIA has secured a 47% stake in Latexx. Chairman and CEO Mr. Low Bok Tek has agreed to divest his entire shareholding of 29% in Latexx, as well as 35m warrants. Additionally, another eight major shareholders have entered into put and call option agreements with SIA for an additional 9% shareholding and 10m warrants. Upon full conversion of the warrants, SIA would have secured 47% of Latexx. It will not maintain the listing status of Latexx if free float falls below 25%.

Other recent notable M&As. To recap, Southern Capital Group offered to buy Adventa out at 13x fwd PER in Jul 2012. Thereafter, 30% of YTY’s (Not Listed) stake was sold to Indorama in Indonesia in Aug 2012 at an undisclosed price.

Upside for larger, cheaper peers. Glove players such as Supermax and Kossan, which are similar to or larger in size than Latexx and Adventa in terms of capacity, currently trade at forward PERs of 8-9x. We believe there will be a re-rating for the listed players and the valuation gap will eventually close.

Insignificant M&A from now. With Adventa, Latexx and partial of YTY taken off the market, we do not foresee any major M&As in Malaysia in the next 1-2 years. If any, it would be Top Glove buying smaller unlisted competitor(s) to increase market share. To recap, Top Glove acquired a small latex glove player at a historical GMP of 1.5x P/B in Jul 2012.

Source: Maybank Research - 9 Oct 2012

Prai power plant bid to be known today

Malaysia Power Sector

Local media reported that the Energy Commission will announce the winner of the 1,000 to 1,4000MW Prai combined cycle power project today. Both Tenaga (Hold; RM7.00 TP) and 1MDB (not listed) are said to be the likely winners of this project. Assuming an investment cost of US$1.5m/MW for this project based on recent transactions, we estimate total investment of RM5.6bn. The project is likely to be mostly debt funded with estimated debt:equity ratio of 80:20. If TNB is the winner of the Prai power plant bid, we expect the equity portion of the project to be funded by internal cashflow and the group’s net gearing to remain adequate at 0.4x after the new investment. Maintain HOLD rating for TNB on reasonable valuation and longer-term upside from PPA negotiations.

More interestingly, the outcome from the competitive bidding would be used as the benchmark for review of renewal for the existing first generation power purchase agreements (PPA) that will expire from year 2016 onwards.

The PPA extension is a win-win situation for both TNB and IPPs, as TNB will secure reliable power supply at relatively low replacement cost, while IPPs will see upside in earnings from the extension that is not reflected in their current valuations. We expect the PPAs to be extended on similar fuel cost arrangements, whereby TNB will be responsible to procure adequate fuel for the power plants. However, the agreed IRR for the new PPAs are likely to be much lower, with estimated IRR of high single-digits as compared to the high-teens under the previous agreements.

Source: HwangDBS Research - 9 Oct 2012

Property - A Game Between Risk And Return (Neutral)

Some recovery but fundamentals still not supportive for a re-rating. While a few positive indicators could have prompted us to upgrade the sector, we still think the fundamentals are not strong enough to warrant a re-rating. Valuations too are not sufficiently cheap to shout for a bargain buy. Given RHBRI’s GDP growth forecasts of 5% and 5.4% for 2012-13, commercial and residential property sales growth is estimated at 13.1% (from est. 10.5% in 2012) and 10.3% (from est. 9.0%) for 2013. These projections are much lower compared to the corresponding growth of 15.9% and 22.1% in 2011.

What are the positive drivers? The property market has actually started to adapt to the credit tightening measures since 3Q. The recovery was driven by liquidity flow as well as low interest rates in the region. As at Aug12, YTD residential property, nonresidential property and real estate loans grew 13.6%, 22.4% and 35%, signaling the significance of liquidity. Meanwhile, Malaysia HPI is expected to rebound slightly from 3Q onwards. The index only grew by 0.2% qoq in the 2Q, the slowest since 4Q08.

The negative headwinds. The policy to cool the property market continues to take a toll. For YTD loan approvals, residential and non-residential property loans still see a contraction of 5.1% and 0.6%. Other challenges ahead include the potential impact on the physical market when the recent RPGT hike takes effect from Jan 2013, the timing of the 13th general election, and the noise from the unsettled European debt crisis. We are mindful that the power of liquidity may neutralise the overall negative impact. Given the scenario, developers will therefore be very selective in their product launches. Opportunities lie in the mid/mid-to-high-end housing segment pricing at < RM600k/unit, given the recent increase in income limit under the My First Home Scheme. Other residential and commercial products within matured townships will also do well.

Risks. Downside to GDP growth dampening demand for property.

Maintain Neutral. The sector will only be re-rated if there is a surprise interest rate cut, upside in GDP growth, higher-than-expected liquidity flow or the revelation of MRT Line 2/circle line/high-speed rail link. Currently, the property stocks under our coverage are trading at 40% discount (from 37% in June) to RNAV on average, and below their longterm average PE. We therefore believe there is some room for share price to rebound towards our fair value, especially the underperformed stocks. Fundamentally strong value developers are perferred. Our top picks are IJM Land, UOA Dev and Sunway.

Source: RHB Research - 5 Oct 2012

RHB Research - Market Outlook & Strategy 4Q2012

Stormier Outlook; Equity Still Stands Up Against Alternative Asset Classes

We are of the view that it could still be a choppy few months for the equity market in the 4Q given weakening economic fundamentals in the major world economies and fears of an imminent general election on the home front. Whilst more rounds of quantitative easing have been unveiled in the developed world, the big question in investors’ minds is how all these quantitative easing measures will translate to better global economic outlook. Having said that, equity still stands up vis-a-vis the unappealing returns of the alternative asset classes, such as cash and bonds and any good news is still likely to prompt a rally in equities.

Thus far, Malaysia has fared relatively well in the global financial crisis, and this is partly on account of low reliance on foreign funding of its banking system and more importantly, the progess in the implementation of the Economic Transformation Programme to boost domestic demand and cushion the economy against the downside risk from the external sector. As a result, the economy has bucked the trend and its real GDP growth is projected to pick up to +5.4% in 2013, from +5.0% estimated for 2012. This will translate to sustained earnings growth of around 6.0% in 2013 to create new shareholders’ values for investors.

We believe after a phase of correction and consolidation, the market will come back as the huge bond purchase programmes in the Eurozone and the US will push investors out of low-yielding cash and bonds over time into riskier assets such as equities. As the general election could be delayed to March 2013, our end-2012 FBM KLCI target remains unchanged at 1,690. Assuming global situations stabilise in six to nine months time and the global economic recovery is intact, our end-2013 FBM KLCI target is 1,815, based on 15x 2014 earnings.

Whilst our core strategy remains defensive, we believe investors would still need to accumulate fundamentally-robust stocks on weakness in order to outperform the market. In addition, as the search for yield will likely remain a key driver for both retail and institutional investors in the 4Q, high divided-yielding stocks will also continue to outperform the market, in our view. Sector-wise, our key overweights are telecommunications and banking, although we also have an overweight stance on the utilities and healthcare sectors.

Source: RHB Research - 4 Oct 2012

Banking - Non-Household Loans Flat MoM

Loan growth tapers off. Annualized loan growth for Jan-Aug 2012 tapered off for the second month running to 11.4% from 12.7% in Jan-June and 11.9% in Jan-July. The moderation was largely led by slower non-household (HH) loan growth, mitigated by faster momentum for HH loans. Our loan growth forecast of 11.1% for 2012 and 10.2% for 2013 are maintained. Our BUYs are HL Bank, HL Financial Group and Public Bank and we maintain a SELL on CIMB.
 
Annualised loan growth of 11.4% (11.9% in Jan-July). HH loan growth has continued to be resilient and continues to expand at a steady pace of 1% MoM. As such, annualized HH loan growth was a faster 10.7% in the first 8 months of 2012 vs 10.4% in Jan-July. Non-HH loans, however, have been flat MoM for the past two months already, leading to a tapering off of annualized non-HH loan growth off to 12% from 13.7% in the first 7 months.
 
Loan applications down again. Total loan applications were down again in Aug (-10.8% MoM, -8.8% YoY), this being the third consecutive month of sequential decline (July: -5% YoY, -18% MoM). The decline was across most loan classes (except HP) and mortgage loan applications dropped for the third consecutive month. Channel checks with the banks do point to the fact that property loan applications have in fact moderated and that it takes on average about 6 months before these numbers translate to loan outstanding numbers. As such, we would expect HH loan growth to moderate further in 2013.
 
Spreads were stable but remain low. The spread between average lending and fixed deposit rates rose a marginal 3 bps to 1.69%, but this is after having contracted a hefty 18bps MoM to 1.66% in July, an all-time low. Most banks continue to guide for margin compression due mainly to the replacement of older mortgage loans in their portfolio with newer ones at lower yields.
 
HH NPLs rise. While industry NPLs continue to trend down both in absolute and percentage terms, August saw an uptick in absolute NPLs across most consumer segments ie hire purchase, mortgages, personal loans, credit cards and share financing. Ratio-wise, the industry’s gross NPL ratio improved marginally to 2.17% in Aug from 2.18% in July.

Banking - Aug ‘12 System Data –Loan Growth And Leading Indicators Moderated Further

Aug ‘12 system loan growth moderated to +12.3% yoy (+0.6% mom), as compared to Jul ’12: +13% yoy (+0.5% mom). As highlighted in our report last month, we believed the impressive headline yoy growth for Jul was partly skewed by base effect, specifically, the lower base for business loans. In addition, we believe the festivities in Aug led to slower disbursements, which fell to RM75.8bn from RM82.8bn in Jul ’12. Thus, all in, loans to businesses expanded by a more moderate pace of 13.2% yoy (Jul ’12: +14.4% yoy) while household loan growth sustained a stable pace of 11.7% yoy, largely unchanged from Jul ’12.

Both system applications and approvals continued to ease mom. Absolute applications eased to RM55.4bn in Aug ’12 (-8.8% yoy) from RM62.1bn in Jul ’12 as applications from both businesses (-8.6% mom; -12.4% yoy) and households (-12.4% mom; -5.9% yoy) fell mom. As mentioned above, we believe this was partly due to the festivities. Similarly, system loan approvals moderated mom to RM30.4bn (-11.8% yoy) from RM32.7bn in Jul ’12 with lower approvals noted for both loans to businesses (-6.3% mom; -21% yoy) and households (-7.7% mom; -4.2% yoy). We are leaving our 2012F system loan growth projection of 10-11% unchanged. We expect system loan growth to moderate ahead with part of the moderation due to base effect. Apart from that, the slowing growth in loan approvals also suggests moderating growth ahead.

Asset quality stable mom at RM23.4bn (-14.4% yoy). Thus, systemwide gross and net impaired loan ratios were relatively unchanged at 2.17% (Jul ’12: 2.18%) and 1.48% (Jul ’12: 1.49%) respectively. Loan loss coverage ratio further improved to 101.7% from 100.9% at end-Jul ’12 mainly due to higher collective allowance set aside.

ALR stabilised. After the sharp 17bps mom plunge in ALR last month, Aug ’12 saw the ALR of commercial banks stabilise (+1bp mom to 4.72%). The longer-term trend shows that the ALR has been trending down, which suggests that margins would continue to remain under pressure ahead. The average BLR of commercial banks and 3-month FD rate remained unchanged mom at 6.53% and 2.98% respectively.

LD and capital ratios. Total system deposits grew 13.5% yoy (+0.6% mom) while the banking system’s LDR was stable mom at 82.1%. Both core capital and RWCR for the banking system were marginally down mom, with system core capital ratio at 12.7% as at end-Aug ’12 (end-Jul ‘12: 12.9%) while RWCR stood at 14.6%, down 10bps mom.

Investment case. Our Overweight stance is unchanged with Maybank, Public Bank and CIMB as our top picks for the sector.

Source: RHB Research - 1 Oct 2012

Banking - Loan growth intact but applications and approvals moderated

Loans grew 0.6% m-o-m; 12.4% y-o-y in Aug-12 (Jul-12: 0.5% m-o-m; 12.9% y-o-y) bringing YTD-Aug loan growth to 7.6%. The business sector continues to drive growth, while retail sector growth lagged due to the softer property market and effects of the responsible lending guidelines by BNM.

Loan applications and approvals continued to moderate in Aug-12, but the softer momentum was expected. Nevertheless looking at the 6-month moving average trends for business loans applications and approvals, business loans pipelines still appears healthy. We maintain our full year 2012 loan growth assumption at 12%.
Deposits grew in tandem with loans (0.6% m-o-m; 13.5% y-o-y; YTD 5.8%) and was generally led by CASA (0.1% m-o-m; 10.8% y-o-y; YTD 4.4%) and fixed deposits (0.6% m-o-m; 9.5% y-o-y; YTD 4.6%). CASA to total deposits remained unchanged at 25%.

Interest spreads continued its downtrend y-o-y with average lending rates down 33 bps y-o-y while 3-month
FD rates unchanged at 3%, implying NIM pressure exists. The banking system remained well-capitalised with risk-weighted capital ratio and core capital ratio at 14.6% and 12.7% (Jul-12: 14.4% and 12.7%) respectively.

Our top picks are MAYBANK (TP: RM11.10) and HLBANK (TP: RM17.00). We like MAY which offers growth and dividend yields. Valuations remain attractive at 1.9x CY12 BV (sector average: 2.0x) with 6% dividend yield (based on a 70% payout). We also like HLBANK as it continues to reap post-merger synergies. The key risk to our forward earnings for banks would be timing of ETP projects and excessive pressure on NIM.

Source: HwangDBS Research - 1 Oct 2012

Guan Chong Berhad - Sweet Like Chocolate

• Current valuations are undemanding, trading at 7.2x FY12 and 6.5x FY13 PER vs an average PER of 12x for the small/mid-cap consumer sector and 19x for Petra Foods listed on SGX.
• We believe GCB would be rerated to at least 8x FY13 PER as its liquidity improves, translating to a TP of MYR2.46 (+23% upside). The GCB-WA, trading at a 2% premium with 2.8x gearing, offers a cheaper entry.

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Source: Maybank Research - 26 Sep 2012