News Item: : Brokers' Call
(Category: Publication - The Star)
Posted by Web Master
Saturday, 06 October 2007
COMMENT by Aseambankers: We expect government development spending to accelerate as only a quarter of the total development allocation of RM200bil for the 9th Malaysia Plan (9MP) period has been spent as at August of this year.
In terms of yearly spending, only 90% of the 2006 development allocation has been spent. For this year, only a third has been spent.
For 2008, government development expenditure is expected to be marginally lower by 2.1% to RM40bil, while construction sector real gross domestic product (GDP) is expected to grow by 6.3%.
Presumably, Private Finance Initiative (PFI) projects would take off in a more meaningful way to fuel sectoral growth in 2008, while project awards by the government and implementation would also accelerate.
The country could enter another construction boom if all proposed projects (including private sector projects and those under Private Finance Initiative or PFI) are to take off on time. We note that at least RM165bil worth of infrastructure and development projects have already been identified by the government and the private sector, which are expected to kick-off by the turn of this decade.
The last construction sector peak was in 1994-96, led by buildings and transportation-related construction jobs. This time around, we foresee high impact and chunkier projects in the rail, water, and oil and gas sectors, and the government’s regional development efforts, to be the key drivers.
We are positive over the prospects of this sector. We continue to favour contractors with niches and long-drawn experience, good delivery track records, proven management, and healthy balance sheet.
Amidst uncertainties on the external front, which may derail the country’s economic growth path, and with a general election looming, we are of the view that the downside risks for construction-related stocks should be quite limited. Positive news flows for new project awards and implementations should provide the upside potential.
Our compiled list of new jobs announced by public-listed construction groups showed that there were RM20.3bil new local jobs for the year-to-date, of which 37% were government and the balance were private sector/privatisation jobs.
This was quite in line with official records, where the value of new local jobs reported to the Construction Industry Development Board (CIDB) was RM19.5bil in the first half of 2007 (1H07). Incidentally, CIDB records also include new jobs secured by non-listed contractors.
With 1H being seasonally slower in nature, the momentum of awards should pick up in 2H07. CIDB targets RM57bil new jobs for the construction sector in 2007, up 3.4% y-o-y (2006: +3% y-o-y to RM55.1bil).
Private financing initiative jobs are expected to lead sectoral growth next year. The government development expenditure for next year is expected to be marginally lower by 2.1% to RM40bil under Economic Report 2007/08.
Meanwhile, construction sector real GDP is estimated to grow by 6.3% in 2008 (2007: +5.2%).
Presumably, PFI projects would take off in a more meaningful way to fuel sectoral growth in 2008.
While Budget 2008 offered no new major infrastructure projects, project awards by the government and project implementations could accelerate.
At least RM165bil projects have been identified. This includes Iskandar Development Region, Northern Corridor Economic Region, East Coast Economic Region, and Sabah and Sarawak Economic Regions. The critical question is the implementation timeline.
This could lead to a sectoral boom at the turn of this decade.
Besides these regional developments, there are also the rail, water, oil and gas sectors. The last sector peak was in 1994-96, with major projects being the KL City Centre, KL International Airport, KL LRTs and intra-urban expressways – essentially, buildings and transportation-related construction projects. This time around, we foresee high impact and chunkier projects in the rail, water, and oil & gas sectors and the government’s regional development efforts to be the key drivers.
Our top picks. Top on the list of beneficiaries are contractors with niches and long-drawn experience, good delivery track records and strong balance sheets.
Recommendation: Top picks are Gamuda Bhd, WCT Engineering Bhd, Hock Seng Lee Bhd and Loh & Loh Corp Bhd.
Other potential beneficiaries are IJM Corp Bhd, UEM Builders, MTD ACPI Engineering Bhd, and Muhibbah Engineering Bhd.
The Eastern Corridor Economic Region will throw more limelight on Ahmad Zaki Resources Bhd. Two direct beneficiaries are the cement and steel boys. Potential beneficiaries in the cement industry are Lafarge Malayan Cement Bhd, YTL Cement Bhd and Cement Industries of Malaysia Bhd.
In the steel products sector, we like Kinsteel Bhd, Lion Industries Bhd, Southern Steel Bhd and Ann Joo Resources Bhd.
Ramunia Holdings Bhd(RM as at Oct 4) Hold
THE fabricator of oil & gas structures made net profit of RM5mil in 3QFY07, down 27% quarter on quarter (q-o-q) and 21% y-o-y, owing to higher operating costs.
Comment by Aseambankers: Despite reporting higher revenue of RM197mil in 3QFY07 (+33% q-o_q and 84% y-o-y) on higher order book recognition, earnings before interest and tax (EBIT) fell 21% q-o-q and 48% y-o-y to RM7mil, dragged down by higher operating expenses due to poor execution abilities.
Operating margins fell to 3.6% in 3QFY07 (its lowest since listing in 2005) vs 6% in 2QFY07 and 12.8% in 3QFY06. For the nine months of financial year 2007 net profit of RM18.7mil was below our initial expectations of RM40mil for FY07 (Oct).
Following the 3QFY07 setback, we have lowered our net earnings forecasts to RM29mil for FY07 and RM54mil for FY08 respectively.
We are now assuming lower EBIT margins of 5.8% and 7.2% for FY07-08 vs. 9.5% and 10.9% previously. The substantial cut in forecasts (especially for FY08) also reflects concerns over near-term execution of projects.
Recommendation: We are cutting net earnings forecasts by 26% for financial year 2007 (FY07) and 43% for FY08 after lowering our margin assumptions.
Downgrade to Hold from BUY with a revised target price of RM1.23 (vs RM1.60 previously). Nevertheless, we are still confident that the company will clinch significant rig manufacturing orders amidst the present scenario of high oil prices and tight supply situation, which would boost its position to become a more sophisticated international rig/ floating production, storage and offloading facilities (FPSO) builder.
Tenaga National Bhd (RM as at Oct 4)
Comment by Kenanga Research: Tenaga National Bhd is among several bidders for Philippines’ TransCo Concession. It will likely hold a minority stake in the San Miguel Corp (SMC)-led consortium, as it is more interested in acquiring the operations and maintenance (O&M) contract for TransCo Concession.
O&M contracts mimic consultancy-like earnings as human capital is the main cost component. Thus, these contracts can achieve net margins of up to 50%. This is an apt arrangement given Tenaga’s expertise in managing power grids.
The power company reported two peak unit demands in the fourth quarter of 2007 (4Q07), which is unexpected. Historically, one peak demand is achieved per financial quarter, at most. This was mainly attributed to higher industrial, commercial and domestic electricity consumption. The highest peak grew 4.9% to 13,620MW from the previous peak demand.
We have revised financial year 2007 estimates (FY07E) recurring net profit by 9.9% to RM2.9bil based on higher than anticipated unit electricity demand, especially from the commercial sector which grew 6.2% y-o-y compared to our forecast of 5%. (Recurring profit excludes FOREX gains, gain on disposal of land and deferred tax).
Also, we have factored in a lower effective tax rate of 18%, compared to our conservative tax rate of 27%, to reflect a more realistic rate.
Recommendation: We maintain our target price of RM14.88, which is less than 1% of our revised discounted cash flow (DCF) valuation of RM14.95, while maintaining our conservative 5% long-term growth and 9% weighted average cost of capital (WACC). FY07E and FY08E recurring profit earnings ratio (PER) is compelling at 10 times (x) and 11x, respectively.
This is a good trading opportunity given that the Tenaga is trading 57% below our target price. It is reassuring to note that foreign shareholding is still above 25% as at Aug 31, 2007, which supports our confidence in Tenaga’s fundamentals. Maintain BUY.
Boustead Heavy Industries Corp Bhd (RM as at Oct 4)
Comment by ECM Libra: BHIC was borne after the former PSCI went through a restructuring scheme and debt settlement. It emerged as the major shareholder with a 65% stake. Financials are stronger after the restructuring while order book and business activities are increasing.
It owns four shipyards and commands virtual monopoly in shipbuilding and ship repair for the Royal Malaysian Navy (RMN) and other counterparts in the maritime defence sector.
BHIC is now on a clean slate after its restructuring exercise in August this year. Financials are stronger with minimal debt, and it is in a net cash position.
Group performance is set to turnaround in FY07. Net profits are expected to soar by 132% to RM30mil, further surging by 335% to RM130.7mil in FY08, through its share from associated company and operating profits.
Its catalyst would come from increased business activities from maintenance/repairs, shipbuilding, oil and gas, and other key defence-related industries.
The Group's principal activities include heavy engineering construction, ship repair and shipbuilding, contractor and commission agent, supplying equipment and machinery in relation to naval ships and property holding.
BHIC’s most prestigious assets are the four main shipyards within the Boustead Holdings group. Its other main businesses are defence-related activities relating to weapons, missile maintenance and repair, naval and defence communications system, telecommunications products and services.
The businesses are held under BHIC Defence Technologies Sdn Bhd, a wholly-owned subsidiary. Through the previous privatisation agreement, BHIC is assured of securing new contracts to build another 21 patrol vessels for RMN. It also stands to benefit from maintenance and repair jobs for RMN. These jobs can amount to RM150mil a year and net margins are generally higher than shipbuilding, in the region of 20%-30%.
As the group targets to raise the local content on shipbuilding to 50% (minimum requirement is 30%), we expect net margin to rise above 15% as more parts and supplies will be manufactured within the group of companies.
Overall margins are expected to rise with better utilisation of resources and cost optimisation measures. For example, from 16% in FY07, EBITDA margin is projected to jump to 29% in FY08.
We expect BHIC to eliminate its accumulated losses of RM177mil (as at Aug 13 2007) by 2009 or even earlier. Given the huge amount of losses in its books (BHIC and Boustead Naval Shipyard Sdn Bhd), the group is unlikely to pay taxes in the next few years.
While management has not disclosed any dividend policy, we believe it will be announced in future when earnings flow through.
There are some risks involved however for the company. One of them is cost overruns. The other is the rapid changes in construction technology, oil and gas fabrication requirements and increases in labour cost and raw materials. A third is delays in securing government contracts.
Recommendation: Overall comparison with domestic and international peers reveals that BHIC is grossly undervalued. Given its smaller size compared with larger local and international peers, we ascribe a 25% discount to industry average and arrive at a fair value or target price of RM6.65 (PER: 12.6x) FY08 earnings. A BUY.
This news item is from MTD ACPI Engineering Berhad
( http://www.mtdacpi.com/news.php?extend.5 )
(Category: Publication - The Star)
Posted by Web Master
Saturday, 06 October 2007
COMMENT by Aseambankers: We expect government development spending to accelerate as only a quarter of the total development allocation of RM200bil for the 9th Malaysia Plan (9MP) period has been spent as at August of this year.
In terms of yearly spending, only 90% of the 2006 development allocation has been spent. For this year, only a third has been spent.
For 2008, government development expenditure is expected to be marginally lower by 2.1% to RM40bil, while construction sector real gross domestic product (GDP) is expected to grow by 6.3%.
Presumably, Private Finance Initiative (PFI) projects would take off in a more meaningful way to fuel sectoral growth in 2008, while project awards by the government and implementation would also accelerate.
The country could enter another construction boom if all proposed projects (including private sector projects and those under Private Finance Initiative or PFI) are to take off on time. We note that at least RM165bil worth of infrastructure and development projects have already been identified by the government and the private sector, which are expected to kick-off by the turn of this decade.
The last construction sector peak was in 1994-96, led by buildings and transportation-related construction jobs. This time around, we foresee high impact and chunkier projects in the rail, water, and oil and gas sectors, and the government’s regional development efforts, to be the key drivers.
We are positive over the prospects of this sector. We continue to favour contractors with niches and long-drawn experience, good delivery track records, proven management, and healthy balance sheet.
Amidst uncertainties on the external front, which may derail the country’s economic growth path, and with a general election looming, we are of the view that the downside risks for construction-related stocks should be quite limited. Positive news flows for new project awards and implementations should provide the upside potential.
Our compiled list of new jobs announced by public-listed construction groups showed that there were RM20.3bil new local jobs for the year-to-date, of which 37% were government and the balance were private sector/privatisation jobs.
This was quite in line with official records, where the value of new local jobs reported to the Construction Industry Development Board (CIDB) was RM19.5bil in the first half of 2007 (1H07). Incidentally, CIDB records also include new jobs secured by non-listed contractors.
With 1H being seasonally slower in nature, the momentum of awards should pick up in 2H07. CIDB targets RM57bil new jobs for the construction sector in 2007, up 3.4% y-o-y (2006: +3% y-o-y to RM55.1bil).
Private financing initiative jobs are expected to lead sectoral growth next year. The government development expenditure for next year is expected to be marginally lower by 2.1% to RM40bil under Economic Report 2007/08.
Meanwhile, construction sector real GDP is estimated to grow by 6.3% in 2008 (2007: +5.2%).
Presumably, PFI projects would take off in a more meaningful way to fuel sectoral growth in 2008.
While Budget 2008 offered no new major infrastructure projects, project awards by the government and project implementations could accelerate.
At least RM165bil projects have been identified. This includes Iskandar Development Region, Northern Corridor Economic Region, East Coast Economic Region, and Sabah and Sarawak Economic Regions. The critical question is the implementation timeline.
This could lead to a sectoral boom at the turn of this decade.
Besides these regional developments, there are also the rail, water, oil and gas sectors. The last sector peak was in 1994-96, with major projects being the KL City Centre, KL International Airport, KL LRTs and intra-urban expressways – essentially, buildings and transportation-related construction projects. This time around, we foresee high impact and chunkier projects in the rail, water, and oil & gas sectors and the government’s regional development efforts to be the key drivers.
Our top picks. Top on the list of beneficiaries are contractors with niches and long-drawn experience, good delivery track records and strong balance sheets.
Recommendation: Top picks are Gamuda Bhd, WCT Engineering Bhd, Hock Seng Lee Bhd and Loh & Loh Corp Bhd.
Other potential beneficiaries are IJM Corp Bhd, UEM Builders, MTD ACPI Engineering Bhd, and Muhibbah Engineering Bhd.
The Eastern Corridor Economic Region will throw more limelight on Ahmad Zaki Resources Bhd. Two direct beneficiaries are the cement and steel boys. Potential beneficiaries in the cement industry are Lafarge Malayan Cement Bhd, YTL Cement Bhd and Cement Industries of Malaysia Bhd.
In the steel products sector, we like Kinsteel Bhd, Lion Industries Bhd, Southern Steel Bhd and Ann Joo Resources Bhd.
Ramunia Holdings Bhd(RM as at Oct 4) Hold
THE fabricator of oil & gas structures made net profit of RM5mil in 3QFY07, down 27% quarter on quarter (q-o-q) and 21% y-o-y, owing to higher operating costs.
Comment by Aseambankers: Despite reporting higher revenue of RM197mil in 3QFY07 (+33% q-o_q and 84% y-o-y) on higher order book recognition, earnings before interest and tax (EBIT) fell 21% q-o-q and 48% y-o-y to RM7mil, dragged down by higher operating expenses due to poor execution abilities.
Operating margins fell to 3.6% in 3QFY07 (its lowest since listing in 2005) vs 6% in 2QFY07 and 12.8% in 3QFY06. For the nine months of financial year 2007 net profit of RM18.7mil was below our initial expectations of RM40mil for FY07 (Oct).
Following the 3QFY07 setback, we have lowered our net earnings forecasts to RM29mil for FY07 and RM54mil for FY08 respectively.
We are now assuming lower EBIT margins of 5.8% and 7.2% for FY07-08 vs. 9.5% and 10.9% previously. The substantial cut in forecasts (especially for FY08) also reflects concerns over near-term execution of projects.
Recommendation: We are cutting net earnings forecasts by 26% for financial year 2007 (FY07) and 43% for FY08 after lowering our margin assumptions.
Downgrade to Hold from BUY with a revised target price of RM1.23 (vs RM1.60 previously). Nevertheless, we are still confident that the company will clinch significant rig manufacturing orders amidst the present scenario of high oil prices and tight supply situation, which would boost its position to become a more sophisticated international rig/ floating production, storage and offloading facilities (FPSO) builder.
Tenaga National Bhd (RM as at Oct 4)
Comment by Kenanga Research: Tenaga National Bhd is among several bidders for Philippines’ TransCo Concession. It will likely hold a minority stake in the San Miguel Corp (SMC)-led consortium, as it is more interested in acquiring the operations and maintenance (O&M) contract for TransCo Concession.
O&M contracts mimic consultancy-like earnings as human capital is the main cost component. Thus, these contracts can achieve net margins of up to 50%. This is an apt arrangement given Tenaga’s expertise in managing power grids.
The power company reported two peak unit demands in the fourth quarter of 2007 (4Q07), which is unexpected. Historically, one peak demand is achieved per financial quarter, at most. This was mainly attributed to higher industrial, commercial and domestic electricity consumption. The highest peak grew 4.9% to 13,620MW from the previous peak demand.
We have revised financial year 2007 estimates (FY07E) recurring net profit by 9.9% to RM2.9bil based on higher than anticipated unit electricity demand, especially from the commercial sector which grew 6.2% y-o-y compared to our forecast of 5%. (Recurring profit excludes FOREX gains, gain on disposal of land and deferred tax).
Also, we have factored in a lower effective tax rate of 18%, compared to our conservative tax rate of 27%, to reflect a more realistic rate.
Recommendation: We maintain our target price of RM14.88, which is less than 1% of our revised discounted cash flow (DCF) valuation of RM14.95, while maintaining our conservative 5% long-term growth and 9% weighted average cost of capital (WACC). FY07E and FY08E recurring profit earnings ratio (PER) is compelling at 10 times (x) and 11x, respectively.
This is a good trading opportunity given that the Tenaga is trading 57% below our target price. It is reassuring to note that foreign shareholding is still above 25% as at Aug 31, 2007, which supports our confidence in Tenaga’s fundamentals. Maintain BUY.
Boustead Heavy Industries Corp Bhd (RM as at Oct 4)
Comment by ECM Libra: BHIC was borne after the former PSCI went through a restructuring scheme and debt settlement. It emerged as the major shareholder with a 65% stake. Financials are stronger after the restructuring while order book and business activities are increasing.
It owns four shipyards and commands virtual monopoly in shipbuilding and ship repair for the Royal Malaysian Navy (RMN) and other counterparts in the maritime defence sector.
BHIC is now on a clean slate after its restructuring exercise in August this year. Financials are stronger with minimal debt, and it is in a net cash position.
Group performance is set to turnaround in FY07. Net profits are expected to soar by 132% to RM30mil, further surging by 335% to RM130.7mil in FY08, through its share from associated company and operating profits.
Its catalyst would come from increased business activities from maintenance/repairs, shipbuilding, oil and gas, and other key defence-related industries.
The Group's principal activities include heavy engineering construction, ship repair and shipbuilding, contractor and commission agent, supplying equipment and machinery in relation to naval ships and property holding.
BHIC’s most prestigious assets are the four main shipyards within the Boustead Holdings group. Its other main businesses are defence-related activities relating to weapons, missile maintenance and repair, naval and defence communications system, telecommunications products and services.
The businesses are held under BHIC Defence Technologies Sdn Bhd, a wholly-owned subsidiary. Through the previous privatisation agreement, BHIC is assured of securing new contracts to build another 21 patrol vessels for RMN. It also stands to benefit from maintenance and repair jobs for RMN. These jobs can amount to RM150mil a year and net margins are generally higher than shipbuilding, in the region of 20%-30%.
As the group targets to raise the local content on shipbuilding to 50% (minimum requirement is 30%), we expect net margin to rise above 15% as more parts and supplies will be manufactured within the group of companies.
Overall margins are expected to rise with better utilisation of resources and cost optimisation measures. For example, from 16% in FY07, EBITDA margin is projected to jump to 29% in FY08.
We expect BHIC to eliminate its accumulated losses of RM177mil (as at Aug 13 2007) by 2009 or even earlier. Given the huge amount of losses in its books (BHIC and Boustead Naval Shipyard Sdn Bhd), the group is unlikely to pay taxes in the next few years.
While management has not disclosed any dividend policy, we believe it will be announced in future when earnings flow through.
There are some risks involved however for the company. One of them is cost overruns. The other is the rapid changes in construction technology, oil and gas fabrication requirements and increases in labour cost and raw materials. A third is delays in securing government contracts.
Recommendation: Overall comparison with domestic and international peers reveals that BHIC is grossly undervalued. Given its smaller size compared with larger local and international peers, we ascribe a 25% discount to industry average and arrive at a fair value or target price of RM6.65 (PER: 12.6x) FY08 earnings. A BUY.
This news item is from MTD ACPI Engineering Berhad
( http://www.mtdacpi.com/news.php?extend.5 )