6 December 2010 Nomura NOMURA SECURITIES MALAYSIA SDN BHD ANCHOR REPORT Nomura Anchor Reports examine the key themes and value drivers that underpin our sector views and stock recommendations for the next 6 to 12 months. Any authors named on this report are research analysts unless otherwise indicated. See the important disclosures and analyst certifications on pages 105 to 108. Strategy | MALAYSIA 2011 Outlook Wai Kee Choong +60 3 2027 6893 [email protected]And the Malaysia Research Team The rally is still young Most of the characteristics of the super bull market in the early 1990s have resurfaced, with five key features clearly apparent: economic recovery, liquidity, sector rotational plays, M&A activity and rising retail participation. The excitement infused by the ongoing flurry of M&A activity in three different sectors can only be positive for market sentiment, not to mention for investment banking earnings. Set against a favourable backdrop of — 1) an ongoing consumption boom, driven by a younger and wealthier population; 2) improving commodity prices; and 3) ample liquidity supporting asset reflation evident in the buoyant property market — the bull market in Malaysia looks set to continue into 2011. Going into the New Year, we believe the property, palm oil and bank sectors will be the winners. Our top picks include CIMB, Maybank, AMMB, Media Prima, SP Setia, Sime Darby and Genting Malaysia. The 5Cs M&A euphoria — a positive new theme Consumption and asset reflation theme Index target and sector strategy TOP DOWN Stocks for action We recommend those stocks we think will be prime beneficiaries of the consumption boom in Malaysia: Maybank, AMMB, CIMB, Media Prima, SP Setia, Sime Darby and Genting Malaysia. Stock Rating Price Price target Upside (%) Maybank (MAY MK) BUY 8.44 10.70 27 AMMB (AMM MK) BUY 6.19 7.30 18 CIMB (CIMB MK) BUY 8.38 10.00 19 Media Prima (MPR MK) BUY 2.39 2.90 21 Sime Darby (SIME MK) BUY 8.63 11.10 29 SP Setia (SPSB MK) BUY 5.24 6.11 17 Genting (GENM MK ) BUY 3.22 4.12 28 Prices as of 1 December 2010 Analyst Wai Kee Choong +60 3 2027 6893 [email protected]And the Malaysia Research Team Don’t miss our companion outlook reports on Asia and Singapore, published on 6 December 2010.
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6 December 2010 Nomura
N O M U R A S E C U R I T I E S M A L A Y S I A S D N B H D
AN
CH
OR
R
EP
OR
T
Nomura Anchor Reports examine the key themes and value drivers that underpin our sector views and stock recommendations for the next 6 to 12 months.
Any authors named on this report are research analysts unless otherwise indicated. See the important disclosures and analyst certifications on pages 105 to 108.
Strategy | M A L A Y S I A 2011 Outlook Wai Kee Choong +60 3 2027 6893 [email protected]
And the Malaysia Research Team
The rally is still young Most of the characteristics of the super bull market in the early 1990s have resurfaced, with five key features clearly apparent: economic recovery, liquidity, sector rotational plays, M&A activity and rising retail participation. The excitement infused by the ongoing flurry of M&A activity in three different sectors can only be positive for market sentiment, not to mention for investment banking earnings. Set against a favourable backdrop of — 1) an ongoing consumption boom, driven by a younger and wealthier population; 2) improving commodity prices; and 3) ample liquidity supporting asset reflation evident in the buoyant property market — the bull market in Malaysia looks set to continue into 2011. Going into the New Year, we believe the property, palm oil and bank sectors will be the winners. Our top picks include CIMB, Maybank, AMMB, Media Prima, SP Setia, Sime Darby and Genting Malaysia.
The 5Cs
M&A euphoria — a positive new theme
Consumption and asset reflation theme
Index target and sector strategy
TOP DOWN
Stocks for action We recommend those stocks we think
Action The 2010 market rally shares many characteristics of the super bull market of the
early 1990s. Reminiscent of those booming days, market liquidity and trading volumes are surging, corporate activity through mergers and acquisitions is picking up. Interest is broadening to more sectors from the usual GLCs and banking stocks. We are turning even more Bullish.
Anchor themes In addition to our recently introduced ‘Malaysia’s consumption boom’ and ‘Asset reflation’ themes, a new M&A theme is emerging that will help broaden market interest to more sectors.
While the consensus earnings upgrades cycle is likely to remain in positive territory, we believe the Malaysia consumption boom story will be the next focus.
The rally is still young Malaysia Boleh #25: The favourite “5Cs” are back
The 5Cs
The 2010 market rally shares many characteristics (“C”s) of the super bull market of the early 1990s. The five bull market characteristics – economic recovery, rising liquidity, rotational interest in different sectors, buoyant M&A activity and small but rising participation from retail investors – are being found in the current market rally. Together with the forecast 13% currency appreciation, we expect 15% further upside to the market.
M&A euphoria a positive new theme
It has been a long time since the Malaysian stock market was dominated by the hubbub of M&A news and activity. The M&A euphoria has spread from the property sector to the usually quiet consumer sector. In the past four weeks alone, we have seen three major M&A announcements involving six companies.
Consumption and asset reflation themes
In addition to our recently introduced ‘Malaysia’s consumption boom’, ‘Asset reflation’ is another theme we like. Strong demand for residential properties continues to drive property sales and earnings. Malaysians are consuming more, aided mainly by improving consumer confidence.
Index target and sector strategy
Our bottom-up analysis implies that the FBM KLCI index target will hit 1,703 by end-2011. Going into 2011, we believe property, palm oil, and banks will be the clear winners. Our top picks include CIMB, Maybank, AMMB, AFG, Media Prima, SP Setia, Genting Malaysia, Sime Darby and Malaysia Airports.
N O M U R A S E C U R I T I E S M A L A Y S I A S D N B H D
Stocks for action We recommend those stocks we think will be prime beneficiaries of the consumption boom in Malaysia: Maybank, AMMB, CIMB, Media Prima, SP Setia and Genting Malaysia.
Bull market ver. 2.0 The 2010 market rally has many characteristics of the super bull market of the early 1990s. Emerging from the 2008 global financial crisis, the Malaysian stock market has rebounded by a whopping 77% from the bottom in 2009 to stage a 17% YTD increase in 2010. Back in the early 1990s, Malaysia, like everyone else in the region, was newly discovered as one of the fast-growing emerging economies.
Exhibit 1. Bull market check list
1993 Ver. 2.0
Strong FDI √ ×
Rising exports √ √
Property boom √ √
Low interest rates √ √
Foreign ownership √ ×
Infrastructure boom √ √
Strengthening ringgit √ √
“The Amah Syndrome” √ ×
Inflow of foreign capital √ √
Rotational thematic plays √ √
Large current account surplus √ √
Consensus view on bull market × √
Source: Nomura research
In the early 1990s, strong foreign direct investment (FDI) and exports growth led to strong account surpluses, which added further liquidity into the market. With interest rates at record low levels, the stock market was an ideal place for investors to seek extra returns. The general view that the ringgit was undervalued also attracted strong capital inflows into the country as economic growth prospects were underscored by the prolonged infrastructure spending up-cycle then.
Although the missing part in the current rally is Malaysia’s much smaller share of FDI flowing into the region, the Malaysian stock market boasts five important characteristics (5Cs) of a bull market reminiscent of the bull market days of the early 1990s.
1st C: Economic recovery
Malaysia’s GDP growth is firmly back on a positive trajectory. And this is the most important characteristic in our view. It allows investors to have a positive perspective on the corporate earnings outlook. It gives investors confidence to buy on intermittent market corrections. In Malaysia, signs of a lasting bull market are emerging and encouraging. We are seeing improving investor confidence and appetite for stock ideas on market weakness.
2nd C: Liquidity
As the saying goes, “no money, no talk”; liquidity is equally important. And no matter how one can slice and dice, a bull market rally will be short-lived in the absence of strong and sustainable liquidity inflow. In a relatively illiquid and under-owned market such as Malaysia, it doesn’t take a lot of liquidity for the market to shine. The ample liquidity conditions currently are ripe for a further rally in the market as market trading volumes continue to pick up.
Reminiscent of the 1990s
Strategy | Malaysia Wai Kee Choong
6 December 2010 Nomura 4
3rd C: Sector rotational plays
Another important bull market characteristic is the evidence of strong investor interest and participation rotating from one sector to another. Rotational plays on different sectors help sustain trading volume and momentum. In Malaysia, investors have been rotating their focus from banks and construction to the property sector lately.
4th C: Buoyant M&A activity and GLC divestments
Corporates are bullish on the outlook of the economy and the stock market as signalled by the spate of M&A activities taking place in the past few weeks. Controlling shareholders’ willingness to embark on M&A activities underscores our Bullish view. The improving market outlook will likely lead to more M&A activities in the coming months.
Year 2011 is likely to be another busy year for the GLCs as we expect more divestments to take place. The divestments by Khazanah so far have been well received by investors as more shares were released into the market to lift liquidity. The continuous improvement in financial performance among the GLCs will continue to allow Khazanah to lighten its stakes in the GLCs.
5th C: The “Amah Syndrome”
As Andrew Sheng (former Chairman of the Hong Kong Securities and Futures Commission) put it in his book titled From Asian to Global Financial Crisis, the two main indicators to the irrational exuberance during the super Bull Run in 1993 were: 1) the amah (domestic maid) syndrome, and; 2) when businessmen began to speculate in the stock market seeking better returns from excess cash on corporate balance sheets. In Malaysia, at least, there is a strong belief that when the amah or retail investors start to be active in the stock market, it is usually a signal that the market is near its peak. Psychologically, investors can draw comfort that the market has yet to reach its peak as none of the above-mentioned syndromes prevails in the present bull market.
Bull market Ver. 2.0
Malaysian companies have grown larger in the current bull market cycle through acquisitions and organic growth. In the banking sector, the contribution from Indonesia has been one of the key growth drivers to the Malaysian banks, especially for CIMB and Maybank. Malaysian telcos are also reaping the fruits of their early forays into the Indonesia market, which has been the main growth driver.
The recent mergers and acquisitions in the property sector will see Malaysian property companies growing to be larger companies both in land bank assets and market capitalisation terms. With trading liquidity expected to improve post mergers, the sector should be more appealing to institutional investors. Although the Malaysian market has rallied 77% over the 90 weeks from the bottom in 2009, we see further upside driven mainly by strong corporate earnings.
Exhibit 2. FBMKLCI rallies — Duration and performance
Date % Increase Weeks Rally Event
1982/83 70 50 Post US Recession
1986/87 155 71 Post US Recession
1987/90 136 119 Post Black Monday
1992/93 112 67 Foreign Fund Inflows
1998/00 205 79 Post Asian Crisis
2007/08 68 104 Liquidity Driven Surge
Average 124 82
2009/2010 77 90 Post Global Credit Crisis
Source: Bloomberg, Nomura research
Strategy | Malaysia Wai Kee Choong
6 December 2010 Nomura 5
2011 Outlook
M&A euphoria a positive new theme It has been a long time since the Malaysian stock market was dominated by the hubbub of M&A news and activities. The M&A euphoria has spread from the property sector to the usually quiet consumer sector. In the past four weeks alone, we have seen four major M&A announcements involving six property companies and a consumer group.
Property
As highlighted in our potential sector consolidation note out on 3 November, the recent spate of mergers and acquisitions and consolidation (UEM-Sunrise, IJM Land-MRCB, Sunway Holdings-SunCity) is likely to ensure: 1) continued interest and focus on the property sector in FY11F, and: 2) the emergence of larger and more liquid players which could put the Malaysian property sector on the radar for more investors.
Besides improved liquidity being a catalyst for the re-rating, we are also positive on sector fundamentals as a whole – we see favourable supply demand dynamics emerging in Malaysia residential property where demand has increased up to 6% in major cities while incoming supply growth has contracted in recent years. Latent demand remains strong where the average additions of 200k units to housing supply pa are balanced by c. 190k marriages pa. We see latent demand being unlocked from 2011F on the back of improving affordability and income levels; positive Budget 2011 measures to increase home ownership (instead of previously anticipated restrictions) are likely to spur ‘would be’ buyers out of ‘wait and see’ mode while these attractive demographics and high savings rates top off a powerful combination to propel the property sector forward in 2011F.
Banks
We see select bankers benefiting from the pick-up in M&As. CIMB, as the premier investment banking group, is the clear leader especially for deals related to the government-linked companies, in our view. Recent transactions such as the proposed UEM Land-Sunrise merger and the VGO for Parkway by Khazanah were advised by CIMB. On the other hand, we have seen deals involving companies where the EPF is the major shareholder being advised by RHB Capital, such as the MRCB-IJM Land merger proposal. Other key players are Maybank (potential adviser within the PNB stable of companies) and AMMB (potential adviser to private entrepreneur-run companies such as IOI and Berjaya Group).
The other angle worth exploring is M&As within the banking space itself. The last completed merger was Southern Bank’s acquisition by CIMB back in 2006. Since then, Hong Leong Bank has launched a bid for EON Bank group although this deal is currently subject to legal issues being ironed out. What’s next? The obvious targets are the smaller banks and here we think Alliance Financial Group could be a suitable candidate for a foreign bank looking for a presence in Malaysia. Among the mid-sized banks, we think AMMB and RHBC would make a good pair: 1) AMMB would benefit from RHBC’s larger low-cost CASA deposit base; 2) RHBC’s higher proportion of variable rate loans (~70%) would reduce the structural mismatch at AMMB, where variable rate loans are only ~50% of total loans, and; 3) this allows EPF to dilute its current 54% shareholding in RHBC to a smaller stake in a banking group that is nearly double in size.
Strategy | Malaysia Wai Kee Choong
6 December 2010 Nomura 6
2011 Outlook
Consumption boom story An ongoing theme worth revisiting
On 26 July, 2010, we launched the Malaysian consumption boom theme, highlighting that the potential impact was under-researched and overlooked by the Street, in our view. The strong 3Q earnings in the banking and property sectors reaffirmed our view that Malaysia’s augmented consumer base will continue to be a strong and growing pillar to the Malaysia consumption boom story.
Who would have imagined that Malaysia’s population would have doubled to 28mn over the past 30 years growing an average of 2.4% pa during this period? In the past decade alone, the population has grown by nearly 5mn. To put this figure into perspective, the 5mn increase is larger than the entire population of Singapore and close to Hong Kong’s population of 6.98mn.
According to government statistics, there is one birth every 58 seconds and a net increase in population of one person every 56 seconds. Malaysia’s population has been growing at a rate of about 560K per year, or nearly 2% pa from 2000 to 2010. We estimate that Malaysia’s population will probably exceed 30mn by 2015. Between 2000 and 2008, within the ASEAN region, Malaysia has the fastest growing population base.
Exhibit 3. ASEAN: Population growth 2000-2008
0.0
0.5
1.0
1.5
2.0
2.5
Bru
nei
Dar
ussa
lam
Phi
lippi
nes
Mal
aysi
a
Sin
gapo
re
Lao
PD
R
Cam
bodi
a
Indo
nesi
a
Vie
t N
am
Tha
iland
Mya
nmar
(%)
Source: UNESCAP
Large and growing Malay population
What’s more surprising and remains relatively unknown is the huge increase in the indigenous group or Bumiputera – mainly Malay – population, which now accounts for 61% of all Malaysians. This segment has more than doubled over the past 30 years, increasing from 8.1mn in 1980 to an estimated 17.0mn this year. The next largest ethnic group, the Chinese, has grown at a slower pace from 4.4mn in 1980 to an estimated 6.5mn in 2010 and now accounts for 23% of the population, down from 32% back in 1980. This decline has largely been filled by non-citizens (mainly foreign workers who now comprise nearly 9% of the nation’s headcount).
The government forecasts that the Bumiputera population will grow by about 1.7% pa over the next 5 years (similar to the growth rate from 2000-2010) to 18.5mn and will account for 62% of total population. The Chinese population is expected to grow at a slower pace of 1.2% pa to 6.7mn, but it is expected that the immigrant population will decline about 2.2% pa through 2015.
To put this figure into perspective, the 5mn increase is larger than the entire population of Singapore
Malaysia’s population will probably exceed 30mn by 2015
Bumiputera population – mainly Malays, have more than doubled over the past 30 years, rising from 8.1mn in 1980 to about 17.0mn in 2010
Bumiputera population will grow by about 1.7%pa over the next 5 years to 18.5mn
Because of the relatively strong birth rate, Malaysia has a young population base, with 50% of the population under the age of 25 years, and 73% below the age of 40. The young population tends to consume more and is a key driver of consumption growth. Furthermore, the young population profile and high rate of household formation (2% pa growth) also feeds into demand for mortgages and car financing.
Exhibit 5. Some 50% of Malaysians under 25 years of age
0-14 years32%
15-24 years18%
25-39 years22%
40-64 years23%
65+ years5%
Source: CEIC
Strong GDP per capita growth …
Even as the population is growing at a clip, Malaysia enjoys a relatively high GDP per capita in the region. Malaysia’s GDP per capita (in current terms) was US$6,897 in 2008 compares favourably with Thailand’s US$3,939 and Indonesia’s US$2,329. After PPP adjusting, GDP per capita levels for Malaysia at US$14,082 with Thailand at US$8,232 and Indonesia at US$3,980.
GDP per capita has risen at a decent pace of 9% pa since 2000. Sectors leading the growth were government services, mining/quarrying, accommodation/restaurants (ie, tourism-related sectors), agriculture, telcos, general commerce and business services. If we could distil this into three main areas, it would be government, commodities and services sector. Manufacturing however, has lagged behind, expanding at just 5% pa.
Some 50% of the population under the age of 25 years
Strategy | Malaysia Wai Kee Choong
6 December 2010 Nomura 8
Exhibit 6. Malaysia: Nominal GDP growth 2000-2009
0
2
4
6
8
10
12
Gov
ernm
ent
serv
ices
Min
ing
&qu
arry
ing
Gen
eral
com
mer
ce
Agr
icul
ture
Com
mun
icat
ion
Who
lesa
le,
reta
il tr
ade
Rea
l est
ate
&bi
z se
rvic
es
Nom
inal
GD
Pgr
owth
Fin
ance
&in
sura
nce
Tra
nspo
rt &
stor
age
Util
ities
Con
stru
ctio
n
Man
ufac
turin
g
(%)
Source: Bank Negara Malaysia
… strong surge in the number of middle class consumers
After 20 years of strong economic growth and development, not only did GDP per capita rise at a healthy pace, income levels are now more evenly distributed compared to 1990. Some 55% of households now earn at least RM2,500/month compared to 60% of households earning less than RM1,000/month back in 1990. This has given rise to a much bigger middle-income consumer group and a meaningful bankable population. Among the three major ethnic groups, Bumiputera household incomes are growing the fastest, growing at a rate of 6% pa from 1999-2009. As a result, the income gap between the Chinese and Bumiputera households narrowed to 35% in 2007 from 43% in 1999.
Exhibit 7. Malaysia: Mean Monthly Gross Household Income 1970-2000 (RM)
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
1970 1979 1989 1999 2009
Bumiputera Chinese Indian
12%7%
8%
6%
1:2.29Income disparity ratio of Bumiputera to Chinese
Income disparity ratio of Bumiputera to Indians
1:1.77
1:2.04
1:1.54
1:1.74
1:1.29
1:1.74
1:1.36
1:1.38
1:1.10
CAGR of Bumiputera monthly gross household income
Mea
n in
com
e (
RM
)
Source: 10th Malaysia Plan
Some 5% of households now earn at least RM2,500/month compared to 60% of households earning less than RM1,000/month back in 1990
Strategy | Malaysia Wai Kee Choong
6 December 2010 Nomura 9
Exhibit 8. Malaysia: Distribution of households by income 1990, 2009 (%)
0
5
10
15
20
25
30
35
40
< 5
00
500
- 9
99
100
0-14
99
150
0 -
1999
200
0-24
99
250
0 -
2999
300
0-34
99
350
0 -
3999
400
0-49
99
500
0 -
6999
700
0-99
99
> =
1000
0
% o
f ho
useh
olds
1990
2009
Bottom 40% Middle 40% Top 20%
Source: 10th Malaysia Plan
Positive effects of high commodity prices
The effects of high palm oil prices have finally reached the smaller rural planters. Based on statistics provided by Federal Land Development Authority, the average income of FELDA’s settlers has risen more than three times since the start of the commodities in 2007. Consumption spending, which has traditionally been stronger in urban areas is now being felt in the rural cities, as seen in recent car sales data.
Exhibit 9. FELDA settlers average income rise in tandem with CPO prices
0
500
1,000
1,500
2,000
2,500
3,000
3,500
2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: Federal Land Development Authority
Strategy | Malaysia Wai Kee Choong
6 December 2010 Nomura 10
Actionable ideas
Stock and Sector recommendations To ride on the consumption, asset reflation and M&A themes, we are recommending CIMB, Maybank, Media Prima, Genting Malaysia, SP Setia, Axiata, Evergreen Fibreboard, AMMB, UEM Land, Sime Darby, AFG and Malaysia Airports as our top Buy ideas.
Exhibit 10. Sector allocation
Source: Nomura research
Index target and sector strategy
Our bottom-up analysis implies that the FBM KLCI index target will hit 1,703 by end-2011. Going into 2011, we believe property, palm oil, banks will be the clear winners. Our top picks include CIMB, Maybank, AMMB, AFG, Media Prima, SP Setia, Genting Malaysia, Sime Darby and Malaysia Airports.
In our view, the price-to-book valuation for the Malaysian market, while approaching +1sd above the historical mean, could stay high, as we saw in the liquidity-driven bull market days of 2007 and early 2008. After a 65% jump in FY10F EPS, consensus market EPS growth is estimated at 12.6% for FY11F and 10.7% in FY12F.
Exhibit 11. Malaysia – 12 month forward P/E
9
10
11
12
13
14
15
16
17
18
Jul-0
0
Jul-0
1
Jul-0
2
Jul-0
3
Jul-0
4
Jul-0
5
Jul-0
6
Jul-0
7
Jul-0
8
Jul-0
9
Jul-1
0
12mth fwd P/E(x) +1 stdev
Mean -1 stdev
(x)
13.8x
15.3x
Current P/E = 14.95x
12.4x
Source: FTSE, ExShares, Nomura Strategy Research
Exhibit 12. Malaysia – Trailing P/B
1.2
1.4
1.6
1.8
2.0
2.2
2.4
2.6
2.8
Jul-0
0
Jul-0
1
Jul-0
2
Jul-0
3
Jul-0
4
Jul-0
5
Jul-0
6
Jul-0
7
Jul-0
8
Jul-0
9
Jul-1
0
P/B - 1 stdev
Mean +1 stdev
Current P/BV = 2.27x
1.8x
2.0x
2.3x
(x)
Source: FTSE, ExShares, Nomura Strategy Research
Strategy | Malaysia Wai Kee Choong
6 December 2010 Nomura 11
Exhibit 13. Malaysia – Dividend yield
0
1
2
3
4
5
6
Jul-0
0
Jul-0
1
Jul-0
2
Jul-0
3
Jul-0
4
Jul-0
5
Jul-0
6
Jul-0
7
Jul-0
8
Jul-0
9
Jul-1
0
Div Yield (%) -1 stdev
Mean +1 stdev
(%)
2.0%
3.4%
2.7%
Current dividend yield = 2.73%
Source: FTSE, ExShares, Nomura Strategy Research
Exhibit 14. Malaysia – ROE
7
9
11
13
15
17
19
21
Jul-0
0
Jul-0
1
Jul-0
2
Jul-0
3
Jul-0
4
Jul-0
5
Jul-0
6
Jul-0
7
Jul-0
8
Jul-0
9
Jul-1
0
(%)
Source: FTSE, ExShares, Nomura Strategy Research
Exhibit 15. Malaysia – Revision index
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
Jun-
95
Jun-
96
Jun-
97Ju
n-98
Jun-
99
Jun-
00Ju
n-01
Jun-
02
Jun-
03
Jun-
04Ju
n-05
Jun-
06Ju
n-07
Jun-
08Ju
n-09
Jun-
10
Rev
isio
n in
dex
0
100
200
300
400
500
600
MS
CI
Mal
aysi
a
Revision index (12m MA)
MSCI Malaysia
18 mths
13 mths
Source: IBES, Nomura International (HK) Ltd. - Quantitative Research
Exhibit 16. Malaysia – Earnings revisions
(35)
(30)
(25)
(20)
(15)
(10)
(5)
0
5
10
15
Jan
-07
Ap
r-07
Jul-
07
Oct-
07
Jan
-08
Ap
r-08
Jul-
08
Oct-
08
Jan
-09
Ap
r-09
Jul-
09
Oct-
09
Jan
-10
Ap
r-10
Jul-
10
Oct-
10
Earnings Revision
(%)
Current ER = 6.06%
(%)
(35)
(30)
(25)
(20)
(15)
(10)
(5)
0
5
10
15
Jan
-07
Ap
r-07
Jul-
07
Oct-
07
Jan
-08
Ap
r-08
Jul-
08
Oct-
08
Jan
-09
Ap
r-09
Jul-
09
Oct-
09
Jan
-10
Ap
r-10
Jul-
10
Oct-
10
Earnings Revision
(%)
Current ER = 6.06%
(%)
Source: FTSE, ExShares, Nomura Strategy Research
Exhibit 17. Malaysia – Fund flows
(2,000)
(1,000)
0
1,000
2,000
3,000
4,000
Apr
-03
Dec
-03
Aug
-04
Apr
-05
Dec
-05
Aug
-06
Apr
-07
Dec
-07
Aug
-08
Apr
-09
Dec
-09
Aug
-10
Cum
ulat
ive
net
inflo
w (
US
$mn)
0
100
200
300
400
500
Ben
chm
ark
(US
$, M
SC
I in
dex)
MSCI Malaysia (RHS)
Cumulative Malaysia
Source: Bloomberg, EPFR Global, Nomura International (HK) Ltd Quantitative Research
Exhibit 18. Malaysia – Portfolio investment
(60,000)(50,000)(40,000)(30,000)(20,000)(10,000)
010,00020,00030,00040,000
1Q 2
005
2Q 2
005
3Q 2
005
4Q 2
005
1Q 2
006
2Q 2
006
3Q 2
006
4Q 2
006
1Q 2
007
2Q 2
007
3Q 2
007
4Q 2
007
1Q 2
008
2Q 2
008
3Q 2
008
4Q 2
008
1Q 2
009
2Q 2
009
3Q 2
009
4Q 2
009
1Q 2
010
2Q 2
010
(RMmn)
Source: Bank Negara Malaysia, Nomura Research
Strategy | Malaysia Wai Kee Choong
6 December 2010 Nomura 12
Malaysia by Sector
Sector views Banks Loan growth for end-2010 is on track to reach double-digit territory for the second time over the past 10 years. Unlike the 2008 loan growth of 13%, this year’s growth has been driven largely by the consumer sector, which accounts for nearly 60% of incremental growth. The bulk of this growth comes from mortgages, which comprise roughly half of consumer loans outstanding. Going forward, we remain Bullish on the consumer sector. The debt service ratio is comfortable, at 25% of average household income. Household savings in the form of financial assets are huge and outnumber household liabilities by 2.5x to 1. The population has doubled to 28mn over the past 30 years, growing an average of 2.4% pa since 1980. Due to the relatively large household size of about 4.5 persons per household (3.5 in Singapore, 2.9 in Hong Kong), we view that household formation as remaining firm, underpinning demand for mortgages and car loans. As for the business sector, much hinges on the successful execution of the economic transformation programme, where the government envisages total investments of >US$440bn over the next ten years. We have not factored in the potential infrastructure projects in our forecasts given the uncertainty in timing as well as execution. However, if these projects do materialise, it would be a boon to loan growth. For 2011, assuming a constant RM7bn increase in loans per month (RM4.5bn from consumer, RM2.5bn from businesses), we would arrive at a loan growth of about 10%. Nominal GDP growth is expected to be 9% next year, thus a 10% loan growth rate is not unreasonable. Our bottom-up forecast suggests growth of 11%.
The central bank has raised interest rates three times in 2010, bringing the Overnight Policy Rate to 2.75% from 2.00%. For 2011, our economics team believes that Bank Negara will continue its normalisation process, taking the OPR to 3.25%, representing an increase of 50bps. The real policy rate will fall next year – we forecast CPI to rise to 3.3% in 2011 from 1.7% this year. Furthermore, global uncertainty (which was the main factor behind BNM’s current rate pause) should subside. That said, the key risk to this view is further strengthening of the ringgit, which acts to tighten monetary conditions and reduce the need for OPR hikes.
Rate hikes from current levels are positive for banks. They enjoy a temporary lift to margins as lending rates reprice faster than deposit rates. Banks with ample liquidity or a low loan-deposit ratio (Public Bank), a high proportion of variable rate loans (AFG) and a high CASA base (Maybank, AFG) should benefit from a margin perspective. In contrast, higher rates will likely have a negative impact on AMMB as 50% of its loans are on a fixed-rate basis. However, we would note that AMMB has been positioning its balance sheet for a rise in interest rates and thus the hikes may not have as great an impact.
In recent months, banks have started to compete aggressively again in mortgages and auto loans. Recall, back in November 2009, the domestic banks reduced the discount on mortgages to BLR minus 1.8-1.9%. This held true until August 2010, when banks Bank began offering mortgages at BLR minus 2.2%. This means that the incremental margins for housing loans will come under pressure. Thus, we expect net interest margins to remain stable as rising interest rates should offset industry competitive pressure.
Amid ample liquidity, the Malaysian asset reflation theme is manifesting itself in strong property demand while the stock market is near historical peaks. Moreover, there are several high-profile deals on the table, such as the privatisation of Plus Expressways and acquisition of Sunrise by UEM Land. Add to this mix the ongoing divestment of the government's stakes in government-linked entities, as well as firming commodity prices, and we believe the capital markets will continue to excite investors and corporates next year. As we see it, the Quantitative Easing programme in the US is expected to result in favourable liquidity conditions globally and, in particular, the ASEAN economies, given a strong domestic demand growth outlook driven by the rise of the
Strategy | Malaysia Wai Kee Choong
6 December 2010 Nomura 13
middle class. For Malaysia in particular, we think the commodities boom should be an added bonus. Taken together, we see brightening prospects for the capital markets next year. First, strong market liquidity should put downward pressure on bond yields and boost bond prices. Second, the movement of liquidity should result in better FX flows, leading to improved FX income for the banks. Third, tighter corporate spreads and ample liquidity should result in greater disintermediation in the banking space, as companies increasingly tap into the bond market to secure long-term funding at relatively low interest rates.
So far, banks have been surprising on the upside with regards to loan losses. For 1H10, we estimate that average credit losses came in at 54bps versus our earlier forecast of 71bps (FY09: 90bps). While selective banks have been implementing the new accounting standard FRS139, the overall impact to loan-loss provisions have been minimal in spite of the higher headline NPL ratios. This was attributed to the sector build-up of loan loss coverage prior to implementation of FRS139 as banks front-loaded the bulk of the provisioning for problem loans. We believe that asset quality will remain robust but the improvement is unlikely to be as dramatic. We have lowered our credit cost forecast to 52bps for FY10F and 45bps for FY11F-FY12F.
The Basel Committee on Banking Supervision recently announced its final recommendation on capital requirements. Key takeaway from the announcement is that banks are given a long lead-time to implement these capital requirements. Furthermore, the deductions from capital are likely to be less than earlier expectations. Under the original recommendation, Maybank was to deduct its entire investment in associates, MCB of Pakistan and An Binh Bank of Vietnam, with a (written-down) book value of RM2.47bn, which is equivalent to 1pp of capital. Under the revised measure, the deduction for its investments is reduced to circa 0.3pp. There will be also be some prudent recognition of minority interest, versus zero recognition under the original document. The excess capital above the minimum of a subsidiary will now be deducted in proportion to the minority interest share. Public Bank, where minorities own a 27% share of Public Financial Holdings (HK), was estimated to see a 0.5pp reduction from the de-recognition of minority interests. Under the new guideline, the impact is reduced to 0.3pp, on our estimates.
What remains to be seen is how much countercyclical buffer will be imposed by Bank Negara. For banks like Maybank, CIMB and Public Bank, there is also expected to be an additional capital requirement for systemically important banks. In our view, the banks best-positioned to implement Basel III are AMMB and AFG, where current core Tier-1 capital ratios are in excess of 10%, even after applying a 2.5% counter-cyclical buffer.
Property As highlighted in our potential sector consolidation note out on 3 November, the recent spate of mergers and acquisitions and consolidation (UEM-Sunrise, IJM Land-MRCB, Sunway Holdings-SunCity) is likely to ensure 1) continued interest and focus on the property sector in FY11F and 2) the emergence of larger and more liquid players which could put the Malaysian property sector on more investors’ radars. Besides improved liquidity being a catalyst for the re-rating, we are also positive on sector fundamentals as a whole – we see favourable supply demand dynamics emerging in Malaysia residential property where demand has increased up to 6% since 2000 in major cities while incoming supply growth has contracted in recent years. Latent demand remains strong where the average addition of 200k units to housing supply pa are balanced by c. 190k marriages p.a. We see latent demand being unlocked from 2011F on the back of improving affordability and income levels; positive Budget 2011 measures to increase home ownership (instead of previously anticipated restrictions) are likely to spur ‘would be’ buyers out of ‘wait and see’ mode while these attractive demographics and high savings rates top off a powerful combination to propel the property sector forward in 2011F.
Strategy | Malaysia Wai Kee Choong
6 December 2010 Nomura 14
Construction The Malaysian construction sector has had a good run (YTD, IJM is up 30%, Gamuda is up 40% and WCT is up 14% whilst the KLCI index is up 17%) on the back of excitement surrounding mega projects such as MRT. Although MRT is a real possibility, the execution challenges will be high and earnings support should take a long time to come. Similarly most of the other domestic projects are long term contracts. We believe the run-up is now ahead of fundamentals, with sector looking expensive on P/E CY11F valuations (IJM 18x, Gamuda 23x and WCT 19x).
Order inflow and improving margins should lead construction businesses to report healthy growth. Similarly, strong property sales over the past 12 months will flow down to the bottom-line in CY11F, in our view. Overall, we expect a strong earnings CAGR (FY10-12F) for all three players – 30% for Gamuda, 32% for IJM and 25% for WCT. But the run-up has mostly priced in these expectations, in our view.
MRT’s inclusion in the government’s budget speech and Economic Transformation Programme suggests an announcement on the project could be forthcoming. But implementing such a massive project will be a challenge and concerns over funding and foreign competition may evolve over a period of time. On property, our channel checks suggest things may be cooling a bit after the recent momentum. Thus, we think the risks are more on the downside to our and the Street’s earnings assumptions.
We remain NEUTRAL on IJM, Gamuda and WCT, hence on the entire Malaysian construction space. Among the domestic players, we continue to prefer IJM for its diversified business model and exposure to plantations and property businesses, as compared to the construction-dominated businesses of Gamuda and WCT. The positive news flow seems to be priced in, as the stocks are trading rich, more expensive than their regional peers; investors may look to pare weightings.
Power We approach 2011 with a Neutral stance on the Malaysian power sector, reflecting our view on Tenaga as Malaysia’s dominant genco and the industry’s sole downstream offtaker. While electricity consumption demand has picked up strongly in 2010 and momentum will likely remain healthy into the coming year, this is being driven primarily by low margin industrial segment sales. Moreover, with gas supplies to the power industry capped and tariffs stagnant, we see increased near-term margin pressure given upwardly trending coal costs and the fact that, at the margin, incremental demand will likely be met with more costly coal-fired generation. Over a more extended horizon, an increased dependence on internationally sourced coal, in the absence of an automatic tariff setting mechanism and a credible regulatory environment, creates scope for amplified volatility and a downward bias in TNB’s operating margins, in our view. Moreover, with elections looming we believe the implementation of structural reforms to natural gas prices, TNB’s tariff setting mechanism and the balance of risks in the industry – in our view a precondition to a sustainable re-rating of TNB – are unlikely over the near term
For upstream IPPs, an increasingly constrained investment universe following the privatisation of Tanjong, highly insulated PPAs mean little exposure to more robust volume trends. However, reserve margins are once again approaching levels conducive to future capacity win opportunities, with government looking to allocate an additional 1000MW of coal fired capacity by early 2011. Moreover, given the strength of Malaysia’s consumption rebound in 2010 and with Bakun’s 1,800MW capacity no longer destined to service Malaysia’s shores, we see little alternative to regulators extending substantially all of the c.4,100MW of first generation PPAs due to mature over 2014/16F
Strategy | Malaysia Wai Kee Choong
6 December 2010 Nomura 15
Telcos In FY11, we continue to see: 1) reasonable revenue and earnings growth outlook, ranging from 3-17%; 2) solid cashflows with 5-9% FY11F FCF yield, and; 3) reasonable risk-return profile. Although a pick-up in the competitive intensity appears likely, driven by the WiMAX service providers and the overall higher broadband coverage by all operators, we do not think an aggressive price war is likely. Also, we expect investment levels to decline across all major operators and incremental areas of cost reduction likely to be further explored. On the regulatory front, we expect MCMC’s proposal on spectrum re-farming to be the key development (expected around 1Q11) and depending on the outcome (auction, beauty pageant etc.) there could implications for the wireless operators over the medium term. On a relative basis, we favour Axiata over DiGi and TM – all rated BUYs, followed by Maxis – rated NEUTRAL.
Plantations We recently upgraded our view of the plantation sector to Bullish on the back of our higher CPO price assumptions. We think tighter supply/demand fundamentals for the vegetable oil complex, higher crude oil prices and increased flows into the commodities space provide support for higher CPO prices and our more positive view on the sector. Our sector pick is Sime Darby, which we think offers cheaper exposure to strong plantation earnings, as well as upside from management turnaround
Rubber gloves Going into FY11F, we see demand rebounding as customers work off excess inventory accumulated from the 2009 H1N1 crisis (even up to 1Q10 this year), companies like Supermax continue to see orders rebounding up to March delivery – regardless of high latex prices. While high latex prices may dampen sentiment, price hikes of anywhere between 6-8% have been instituted and we flag that demand (in terms of number of pieces sold) is still up anywhere from 20-50% for the glove makers we cover – evidencing a continued structural demand which we believe has been largely overshadowed by high latex prices and ringgit appreciation headwinds, not unlike the 2008 cycle which saw latex prices hit highs then. It is in these headwinds, the ringgit appreciation and latex price highs, that we see potential opportunities for consolidation – a theme that may likely occur next year (similar to the consolidation when the ringgit was depegged in 2005, reducing the number of Malaysian manufacturers from >100 to 60 in the span of a year or so) should cost and forex headwinds persist – as larger players with more resilient long term margins see cheap acquisition opportunities in smaller players with smaller number of lines and lower margin resilience; inevitably ensuring that world demand continues to remain in the hands of the famous five (Top Glove, Supermax, Kossan, Siam Sempermed (unlisted), Hartalega. For larger potential upside in the next two-three months, we recommend Supermax and Kossan given a higher exposure in the nitrile segment, which is comparatively benefiting more owing to all-time high latex prices.
Airlines We see two key themes emerging in the Malaysian airline sector in 2011F: 1) continued ringgit appreciation (Nomura’s new forecasts are RM2.80 in FY11F – an 13% strengthening from current levels) benefiting Malaysian-based airlines arising from a US$-skewed debt and cost structure, and; 2) continued flow-throughs from intra-ASEAN travel leading to our overall passenger forecasts of 6-10% growth for MAS and AirAsia. Lower hedging proportions of c. 33% of our airlines may turn out to be in their favour arising from a depreciating US dollar, which offsets any increase in oil prices (Nomura forecasts US$95/bbl in 2011F). We like MAS in the Malaysian space as we see: 1) its 3Q10 profit turnaround to continue seeing exponential upside (from years of restructuring and unprofitability) with its new fleet delivery in FY11F which is likely to strengthen its product offering; 2) greater yield and profitability upsides arising from the said new fleet offering, and; 3) as potentially a laggard play for airlines given its highest underperformance among Asian airlines this year.
12 Media Prima MPR MK 759 2.39 2.90 21 0.7 260 18 18.3 15.5 2.3 2.1 2.7 3.2 19 14
Source: Bloomberg, Nomura research. Prices as at 1 December, 2010
Exhibit 22. Valuation methodology and investment risks
Company Valuation methodology Investment risks
AEON Credit Service
We peg a fair P/E of FY12F 10x for ACSM, a 29% discount to the current market P/E of 14x.
Select commercial banks are aggressively competing in the micro-lending space, which may negatively affect ACSM’s market share and profit margins, in our view. Any sudden increase in funding costs will result in narrower margins. Provision for bad and doubtful debts (and bad debt recovery) is a function of domestic economic growth
AirAsia We value AirAsia on FY11F BVPS applied to a target multiple of 1.2x, the average levels it has traded at for the past few years
Upside risks include: 1) better-than-expected improvement in its associates’ financial performance, yield improvement and passenger growth numbers and eventuation of listings; 2) US dollar appreciation from our assumptions of a strengthening ringgit (Nomura’s house view is for RM3.18 in 2010F, 2.80 in 2011F and 2.65 in 2012F), and; 3) ASEAN Open Skies liberalisation occurring earlier than anticipated by 2015; we currently do not assume any impact from ASEAN open skies given that agreements are largely still in the negotiation stage
Alliance Financial Group
Our Gordon-growth-based price target is derived after imputing an FY12 ROE forecast of 13.8% and rolling forward to FY12F book value of RM 2.29. This implies an FY12F P/BV of 1.7x, which is mid-way between the post-crisis mean and +1 standard deviation P/BV
Downside risks include: 1) higher-than-expected loan charge-offs and sluggish loan growth if the domestic economy recovers more slowly than expected, and; 2) delay in further policy rate hikes by Bank Negara, which could result in lower margin expansion than forecast
AMMB Holdings
Our Gordon growth-based price target is based on cost of equity of 9.75%, a terminal growth rate of 4% and a risk-free rate of 3.75% (all unchanged from previous assumptions). Our new price target is based on our new ROE forecast of 14.7% and implies an FY12F P/B of 1.9x. This falls between the post-crisis mean of 1.5x and +1 standard deviation level of 2.2x
Key downside risks include: 1) Weaker-than-expected economic growth which could result in slower loan growth and higher credit costs, and; 2) sharper-than-anticipated interest rate hikes that would cause NIMs to contract given the large fixed-rate hire purchase portfolio which accounts for 40% of total loans
Axiata Group Our price target is based on a sum of the valuations of subsidiaries and associates. We use DCF methodology for valuing the four key subsidiaries: Celcom, XL, AxB, and Dialog using WACCs of 7.7%, 12.6%, 7.7%, and 8.0%, respectively; our terminal growth rates are 2.5%, 3%, 1.5%, and 1.5%, respectively
Key downside risks include aggressive price competition; weaker-than-expected take-up of wireless broadband in Malaysia; and tariff wars and regulatory risks in Indonesia, India, Sri Lanka and Bangladesh
Berjaya Sports Toto
To derive our price target, we apply a 16% historical average discount to our 12-month forward DCF-derived RNAV. To derive our intrinsic value, we discount its future cashflows by a weighted average cost of capital (WACC) of 7.8%. The WACC is derived from a cost of equity of 8.2%, a risk-free rate of 3.75%, an equity risk premium of 4.5% and beta of 0.983
Economic downturns and further regulatory changes, such as higher taxes and betting duties, are key downside risks
British American Tobacco
We currently assume a risk free rate of 3.7%, with an equity risk premium of 5.2%, a beta of 0.45 and a terminal growth rate of 0.5%. The implied P/E of 16.8x for FY11F is in line with its historical average P/E of 16.8x
Upside risks to our PT and earnings forecasts include a halt in industry volume contractions, lower-than-expected downtrading and illicit trade, and a likelihood of BAT being able to recover market share in the value-for-money segment of the market
Bursa Malaysia
Our Gordon-growth based price target assumes an FY10F ROE of 22%, dividend payout of 90%, terminal growth rate of 4.2% and cost of equity of 7.8%
Risks: 1) Reversal of liquidity trends, resulting in a fall in equity and derivative trading volumes, and; 2) Weaker-than-expected economic growth, which will cause corporate earnings to slow
CIMB Group Holdings
Our Gordon growth-based target price implies a FY11F price to book multiple of 2.5x. The higher price target is driven by our higher earnings estimates; we keep our cost of equity (9.25%) and terminal growth rates (4.25%) unchanged.
Downside risks to our call include a reversal in sentiment, leading to a downswing in capital markets. This would likely impact CIMB's earnings. A weaker economic growth outlook in Malaysia and/or Indonesia could result in lower loan growth and higher credit costs for both businesses
Strategy | Malaysia Wai Kee Choong
6 December 2010 Nomura 18
Company Valuation methodology Investment risks
Digi.Com We derive our price target using DCF valuation, assuming 7.8% WACC, 8.5% cost of equity, 5% cost of debt and 15% gearing. Our terminal growth rate is at 1%
Key risks to our rating and price target for DiGi include a continued macro slowdown, increased competition, pricing pressure and weaker-than-expected take-up of broadband services
Evergreen Fibreboard
We value EVF by ascribing to our 2011F EPS estimate a P/E multiple of 11x , which is +1 standard deviation above the company's average historical 12 month forward P/E (actual earnings)
Downside risks include: 1) a slower-than-expected economic recovery, particularly in Asia; 2) higher-than-expected cost increases, and; 3) large sudden currency swings
Gamuda We value Gamuda using a SOTP methodology. We value its construction business at 15x and its water assets at their NAV. We apply a 10% discount to our NAV estimates for its property business and expressway BOT assets.
A delay in the award of key mega-projects may impact our order inflow assumptions, thereby affecting construction revenues and earnings negatively. Delays in upcoming launches due to a correction in property markets and/or lower margins would result in downside risks to our property revenues and earnings estimates. Any regulatory action directed towards decreasing/abolishing tolls from concession assets could also hurt revenues and earnings. Gamuda being awarded the MRT project in capacity of project manager with further increase in project cost would result in upside risk to construction revenues and earnings estimate. Very high margins from the new and upcoming property projects could also lead to upward revision of revenues and earnings
Genting Bhd In deriving our price target, we value GENT’s listed assets using our price targets for GENM and GENS. Other components of the RNAV were the discounted cash flow (DCF) values of its non-listed assets such as the casino management, power generation and oil & gas businesses. Shareholders’ funds were added to the computation but costs of its listed assets were deducted
Downside risks could come from regulatory issues related to its gaming business, with its gaming licence renewable on a quarterly basis. Competition from regional casinos is an emerging threat. New large-scale casino developments have started operations in Singapore and are reaching completion in Macau. Disease outbreaks could impede overseas and/or local arrivals. On the power side, GENT is required to operate its existing plants at a minimum availability level for dispatch based on its PPAs. Failure to meet these obligations would mean lost revenue and penalties. Risks to its plantation division earnings include CPO price volatility and lower-than-expected yields. Upside risks include a recovery in the valuations of global gaming companies, better-than-expected news flow on its Singapore IR project (GENS) and favourable regulatory policies, which could lead to a re-rating of GENT shares
Genting Malaysia
We are setting our price target based on the stock’s average historical discount to DCF-based RNAV since 1997. On average, GENM shares have traded at a 12%discount to DCF-based RNAV since then. Applied to our DCF-derived RNAV estimate for FY11F, this translates into a price target of RM4.12/share. GENM’s intrinsic value, if measured by the discounted cashflow (DCF) model, comes to RM4.69/share (before discounts), on our estimate. In deriving this value, we have discounted its future cashflow by a weighted average cost of capital (WACC) of 9.7%. The WACC is derived from a cost of equity of 9.7%, risk-free rate of 3.75%, equity risk premium of 4.5% and beta of 1.32
Risk: Although we believe that to a large extent fear of potential loss of revenue to the two Singapore casinos has been largely priced in, a sharper-than-expected fall in GENM’s revenue would likely see the shares trading at a sharper discount to RNAV. Conversely, a lower-than-expected loss in revenue could be an upside risk to our estimates and price target. Historically, the shares have traded at up to a 45% discount to RNAV in 1998 and 34% discount in 2001
IJM Corp We value IJM using a sum-of-the-parts (SOTP) methodology (unchanged). We value its construction, plantation and industrial businesses at 15x and apply a 10% discount to our NAV estimates for its IJM Land and BOT assets.
Delays in the awarding of key mega projects may affect our order inflow assumptions, which could have a negative impact on construction revenue and earnings. Delays in upcoming launches due to correction in property markets and/or lower margins could also result in downside risks to our property revenue and earnings estimates. Moreover, any regulatory action directed towards decreasing/abolishing tolls from concession assets could hurt revenue and earnings. Very high margins from property and construction projects, and progress on the IJM Land-MRCB merger could lead to upward revision of revenues and earnings
IOI Corp Our PT is derived by pegging our rolling 12M-fwd P/E to 18x and rolling forward to FY11F from 15x, being +0.6sd from its mean P/E of 15x
Upside risks for IOI include better-than-expected FFB yields while a downside risk would be larger-than-expected global vegetable oil production, thus hurting CPO prices
Kossan Rubber Industries
We peg Kossan’s target 10x FY11F P/E at a ~30% historical discount to Top Glove’s FY11F P/E of 14.5x and apply this to our FY11F EPS forecast
Potential downside to our view includes delays / hiccups to the new product launch, which could affect Kossan’s strategy to gain market share from other nitrile players and the higher-end segment. Industry downsides are similar to those that apply to Top Glove
Kuala Lumpur Kepong
We now value KLK at 18x FY11F EPS, slightly above +1sd above its five-year historical average of 17.5x. This is justified, in our view, since KLK has the strongest mature hectarage growth among Malaysian planters (mature area expected to expand by >6% pa through to FY12F, on our estimates)
The key downside risk to our call is if global vegetable oil (mainly including palm oil) production comes in higher than expected in 2011, lowering realised CPO prices below our assumption
Malaysia Airports Holdings
Our target price is derived by summing: (i) the discounted free cashflow to equity for domestic operations until Feb 2034; (ii) the residual cash held; (iii) proceeds from the sale of Sepang International Circuit in 2019 discounted at a risk free rate of 3.79%; (iv) our fair value estimate of its KLIA land bank assuming 2,730 acres is leased out for 60 years at RM20/sqm/year in 2015. NPV calculations are discounted to 2011-end, and use cost of equity of 9.78%, except for the SIC sale which uses the risk free rate of 3.79%
Downside risks for MAHB include: (i) extraordinary events such as disease, terrorism and natural disasters affecting passenger traffic; (ii) significant KLIA 2 construction delay; (iii) further significant investments overseas
Strategy | Malaysia Wai Kee Choong
6 December 2010 Nomura 19
Company Valuation methodology Investment risks
Malaysian Airline System
We value MAS at the average of FY11-12F book value pegged to a target midcycle valuation of 1.8x P/BV, as we believe mid-FY11-12F will be a defining period for MAS as its fleet rejuvenation is expected to take firm hold by then
Key downside risks to our view include further delays of MAS’s fleet deliveries and stronger-than-expected competition from low cost carriers and other full service carriers. Other downside risks include: current sentiment on the uncertainty of the strength of the economic rebound, political and environmental (ie, plane delays from natural disasters) headwinds, as well as oil price uncertainty could persist for the next few quarters, dampening possible performance. Also, in a worst-case scenario, assuming zero hedging (as hedging policy varies), we highlight a potential 15% earnings impact from each 1% movement in the US dollar
Malayan Banking
Our Gordon-growth based price target is derived after imputing a FY12F ROE forecast of 16.2%. Our price target implies a P/BV of 2.5x, which is just above its post-crisis average P/BV of 2.4x
Risks: 1) weaker-than-expected economic growth could result in slower loan growth and higher credit costs; and 2) Bank Negara curbs on mortgage LTV would result in slower growth in the consumer space
Maxis Our DCF-based valuation methodology uses a WACC of 7.4%, an 8.5% cost of equity, 5% cost of debt, a 1.5% terminal growth rate and 20% gearing
Key upside risks include a strong pickup in broadband growth and active capital management. Key downside risks include aggressive price competition, weaker-than-expected take-up of wireless broadband and further sell-off by Binariang GSM (BGSM)
Media Prima Our DCF-based price target uses a discount rate of 10.3% (risk -free rate 3.75%, beta of 1.3x and terminal growth rate of 2%)
Risks include the following: 1) if the global recovery is slower than expected, consumer demand/sentiment and ultimately advertising spending will follow; 2) forex changes – a sharp depreciation in the ringgit would lead to significantly higher costs of programming content and newsprint; and; 3) competition – if competitors become more aggressive in gaining TV adex market share, it may result in greater discounting for ad space
Malaysian Resources Corp
We peg MRCB’s price target at parity to our RNAV-based fair value, derived from: 1) the net present value of profits from its property segment at 10% discount rate; 2) valuing the construction profits at 15x P/E based on the multiples used for other construction stocks in our rating universe, and; 3) valuing the two toll concessions using a 10% discount rate
Downside risks exist should: 1) project billings be delayed; 2) landbank / orderbook replenishment remain weak; or 3) slowdown in the economy, double dip or recessionary scenario moving forward. Upside risks include faster than expected orderbook wins and faster progress billing pace
PLUS Expressways
We value PEB: 1) using an FCFE model to calculate the NPV of the Malaysian concessions and PLUS BKSP; using a cost of equity of 9.00% and 12.74%, respectively, and; 2) subtracting the net debt held at parent company level from this total
Downside risks: 1) Non-cash compensation for toll rate variations, and; 2) government intervention / regulatory changes that are not NPV-neutral. Upside risks: 1) a significantly higher competing offer
Public Bank Our Gordon-growth based price target is derived after imputing an FY11F ROE of 24.9%, cost of equity of 8.5%, terminal growth rate of 1.8% and risk-free rate of 3.75%
Key downside risks: 1) weaker-than-expected economic growth could result in slower loan growth and higher credit cost, and; 2) a high counter-cyclical capital buffer imposed by regulators would be negative on capital adequacy. Upside risks: better-than-expected loan growth benefiting from continued strength in the domestic consumer business
QSR Brands Our SOTP valuation is arrived at by ascribing: 1) a 22.2x multiple to the FY11F PAT of the Indian operations, based on the three-year India consumer stock average multiple, and; 2) the rest of the businesses at 12x FY11F PAT based on the midway of the stock's historical mean and -1SD level. Our fair value is based on the average ofFY11F-12F fair value, given we believe the company's growth profile is likely to be different by FY12F, as India's growth is likely to be more meaningful then as the Malaysian operations mature and growth stabilises for Malaysia
Downside risks to our PT include: 1) non-renewal of the franchise licence with Yum! after the 10+10 year contract period; 2) deteriorating domestic consumer confidence on concerns of a double dip in QSR’s key markets; 3) fewer-than-expected store openings; and 4) a sharp and sustained spike in input costs
Sime Darby We value Sime Darby using an SOTP valuation: 1) ascribing a P/E multiple of 18x to its plantations division FY11F PAT, 14x to heavy equipment FY11F PAT, 15x to automobiles FY11F PAT, 10x to Utilities FY11F PAT, and 8x to others; and 2) valuing the property business at RNAV
Risks to the group include poor execution of its restructuring, weaker-than-expected CPO production and a sharp fall in CPO prices
SP Setia We peg SPSB’s price target at parity to our RNAV-based and diluted fair value (after accounting for any warrants conversion), derived from a combination of a net present value of profits from on-going projects at a discount rate of 9% and revaluation surplus of land values above their book value
Risks to our PT include: 1) any project delays or disappointing take-up rates could dent our earnings forecasts. Profit margin could also vary at different stages of billing – a slower actual schedule might result in a difference between actual reported net profit and our estimates. Project delays could arise from longer-than-expected approval/completion on land acquisition and building designs; 2) Project concentration in Johor / Klang Valley - While the company has stepped up its diversification efforts in recent years by securing projects in Vietnam and China, the bulk of its portfolio still consists of projects in Malaysia, and in particular, residential projects in Johor and Klang Valley. Its operational as well as stock performance is therefore closely tied to the Johor and Klang Valley residential markets, and; 3) double dip or recessionary scenario occurring moving forward
Supermax Corp
We peg Supermax’s target P/E of 11.5x at a 21% discount to Top Glove, derived from its historical discount of ~30% to Top Glove; however, we argue that it should see an upward re-rating given its write-off of the APLI investment.
Downside to our call is industry-related similar to Top Glove, as well as adverse and rapid currency movements that could affect income from its overseas distribution arms
Strategy | Malaysia Wai Kee Choong
6 December 2010 Nomura 20
Company Valuation methodology Investment risks
Telekom Malaysia
Our DCF-based valuation methodology uses a WACC of 7.7%, an 9.0% cost of equity, 5% cost of debt, a 1% terminal growth rate and 25% gearing
Key downside risks include competition from cellular operators, and weaker -than-expected pick up of HSBB
Tenaga Nasional
We value TNB using 14.5x forward P/E multiple applied to our FY12F normalised EPS estimate
We believe the key downside risks to our view include weaker-than-anticipated volumes and higher-than-expected coal costs without an upward adjustment to Tenaga’s tariffs. On the upside, an automatic pricing mechanism and or base tariff review should support a strong re-rating of this name
Top Glove Corp
We value Top Glove by ascribing an FY11F P/E of 11.8x to FY11F EPS, close to its three-year average P/E and equal to the one-year forward market P/E of 14.5x
Downside to our call is mostly industry-related and includes: 1) overcapacity and price wars occurring sooner than expected (ie, by end-FY10); 2) if the government removes natural gas subsidies on an immediate basis instead of a gradual approach, and 3) a sharp, quick appreciation of the ringgit
UEM Land Holdings
We peg ULHB’s price target at parity to our RNAV-based fair value, derived from a combination of a net present value of profits from on-going projects at a discount rate of 10% and revaluation surplus of its landbank above its book value
Risks include: 1) slowdown in the economy, double dip or recessionary scenario moving forward; 2) negative newsflow on land sales / deals progress; 3) any reversal in the positive tone and progress in Malaysia-Singapore relations as negotiations continue; 4) political events, eg, election upsets that could encroach on UEM Land’s position as a strategic Khazanah holding and change the regulatory environment; and 5) delayed launches / project delays which could lead to earnings downsides as Nusajaya is less concentrated than the markets of Selangor and KL
WCT We value WCT’s construction business at 15x FY11F earnings, and apply a 10% discount to our NAV estimates for the property development business and BOT assets. We have built in the contribution from the new LCCT concession and other recent project awards into our forecasts
A delay in the award of key mega-projects may impact our order inflow assumptions, thereby affecting construction revenues and earnings negatively. Delays in upcoming launches due to correction in property markets and/or lower margins would result in downside risks to our property revenues and earnings estimates. Any regulatory action directed towards decreasing/abolishing tolls from concession assets could also hurt revenues and earnings. Very high margins from property and construction projects could lead to upward revision of revenues and earnings
YTL Power International
We value YTLP using a SOTP valuation based on COE of 9.0% for Malaysia, and 17% for Indonesia. We value Wessex Water at 1.08x FY11F RAB and PowerSeraya at 11.5x EV/EBITDA
Key risks include the Malaysian regulatory environment and exchange rate risk, specifically relating to YTLP's Wessex Water in the UK
Action At current levels, it appears the market is pricing in the listing of Thai and Indonesia
AirAsia by 3Q11 as a certainty, and implying a listing multiple of at least 22x P/E. We do not expect 3Q10 earnings to disappoint given strong seasonality, but at 8x EV/EBITDA (on par with EasyJet and at an 18% premium to Ryanair) we believe it is priced for execution perfection in FY11F, while local niche budget carrier Firefly is stepping up domestic competition with its competitive fares; any potential delays in listing may trigger a de-rating of AirAsia. Maintain REDUCE.
Catalysts Potential re-rating catalysts include better-than-expected performance from
associates (Thai AirAsia and Indonesia AirAsia) and passenger and yield numbers.
Anchor themes
We expect Malaysian airlines to be beneficiaries of the consumption boom and ringgit appreciation, although FY11F may see domestic competitive pressures.
High hopes, priced for perfection High hopes for associates’ listings at current level
We believe AirAsia’s current share price factors in certainty of the listings of both associates at at least 22x P/E (trailing), assuming AirAsiaX is listed at 16x P/E. We, on the other hand, believe it is still too early to accurately price in any certainty. An improving capital market outlook leads us to shift from valuing AirAsia on an adjusted BVPS basis (adjusted for receivables due, where repayment was contingent upon the listing of the associates) to normal BVPS. However, we believe any news on a potential delay or any event affecting the associates’ operations or a deterioration in economic conditions could trigger a fairly quick de-rating of the stock.
Competition is dynamic and will only grow
While AirAsia has postponed the delivery of seven planes scheduled for 2011, MAS recently announced Firefly’s expansion plan for 30 737-800s to be added to its fleet in the next five to six years, with the first two to be on the KL-Kota Kinabalu and KL-Kuching routes, which we think contribute at least 15% of AirAsia’s total revenues. News flow on AirAsia has been positive, with the announcement of new routes such as KL-Haneda and KL-Seoul. However, we believe investors need to focus on the earnings impact: these routes do not contribute directly to AirAsia’s earnings given they are operated by unlisted AirAsiaX.
Maintain REDUCE, valuation on par with global peers
We are already 10% higher than consensus, we think owing to our in-house forex assumptions which we have revised up by 7-9% from our earlier forecasts. On EV/EBITDA, AirAsia is trading at par/premium to its global peers, suggesting little room for upside. Instead, given competition is not static, we believe there is potential downside risk arising from stiff competition in the domestic market, which contributes some 60% of its total revenues.
Upside/downside -32.6%Difference from consensus -37.9%
FY11F net profit (RMmn) 882Difference from consensus -0.5%Source: Nomura
Nomura vs consensus We are at the higher end, given we like the business model, but high expectations are in the price, while competition and moderating growth point to earnings pressure in FY11F.
Maintained
REDUCE
N O M U R A S E C U R I T I E S M A L A Y S I A S D N B H D
AirAsia Berhad Jacinda Loh
6 December 2010 Nomura 23
No positive contribution seen from Thai and Indonesia associates since start-up in 2004; earnings accretion from untapped potential in Thailand and Indonesia unlikely at least until FY12F
Lowering finance costs by 13% on seven plane delay
Our top small-cap pick Loan growth to pick up next year, in our view
At present, management appears to be adopting a more cautious approach to loan growth and seems focussed on growing fee income revenue, which at 12% of gross income is far lower than the sector average of 18%. Emphasis will be on broadening the fee/commission from wealth management, treasury, remittances and derivatives. Current loan growth is 6% y-y (Industry: +12%), which is all the more disappointing as AFG is operating off a small base. However, we view this as a temporary concern given the senior management changes in 2010. The encouraging part is that asset quality has been very strong even during this transition phase. The bank remains one of the most under-leveraged in the sector, with a core equity Tier 1 ratio of 12.8%. Once the new management is comfortable with the credit risk and a clearer picture emerges on external environment, we can expect healthier loan growth. AFG could potentially be an acquisition target, in our view. The bank is part of the Temasek stable of banks. We see DBS – also a Temasek-linked company – as a potential suitor given its stated intentions of increasing its revenue base in the Asean region.
NIMs will see a lift next year
Our economics team expects Bank Negara to raise the overnight policy rate to 3.25% in 2011. This is positive for AFG as more than 80% of its loan portfolio is on variable rate basis, while about 35% of its total deposits are low-cost CASA which does not reprice. Meanwhile, asset quality should remain robust with the NPL ratio forecast to trend lower to 3.6% in FY12F from 3.8% in FY11F.
Valuations now marginally above mid-cycle level
We see ROE expanding to 14% by FY13F after factoring in loan growth of 12-13% over the next 3 years, 13bps expansion in NIMs and credit costs contained at 30bps. Our target price of RM3.90 implies an FY12F P/BV of 1.7x, which is mid-way between the post-crisis mean and +1 standard deviation P/BV.
Upside/downside 26.6%Difference from consensus 13.4%
FY12F net profit (RMmn) 468.2Difference from consensus 4.3%Source: Nomura
Nomura vs consensus We think AFG can surprise positively on loan growth, asset quality and net interest margins.
Maintained
BUY
N O M U R A S E C U R I T I E S M A L A Y S I A S D N B H D
Action Loan growth should gather momentum in 2011 when the new management team is
comfortable with credit risks and external environment, in our view. AFG is one of the most under-leveraged banks in the sector, with a core equity Tier 1 ratio of 12.8%. Reiterate BUY.
Catalysts Further OPR hikes by the Central Bank would benefit AFG. We consider AFG a
potential M&A play if other banks in the region look to establish a Malaysian presence.
Anchor themes
Malaysia’s strong population growth rate is feeding into the consumption boom. The young population base and surge in the middle class are creating a large bankable population. Household debt has risen but household financial assets are currently 2.5x debt levels, suggesting leverage levels are still comfortable.
Resilient top-line growth Pre-provision earnings to stay strong
AMMB’s recent results showed resilience in margins that helped it post the highest quarterly pre-provision profit of RM646mn. We forecast an average PPOP growth of 12% pa over the next two years on loan growth of 10% and steady net interest margins. NIMs have been surprising on the upside: 1) management has been actively hedging off interest rate risks on its fixed-rate loan portfolio; 2) there has been strong growth in low-cost CASA deposits – nearly double the industry rate over the past six quarters and 3) it has maintained pricing discipline in hire purchase in the face of stiffening competition.
Sturdy asset quality
So far, the rate of NPL formation has been under control. After peaking at 2% at the depth of the recession in 4Q FY09, it has been on an improving trend and averaged 0.9% over the past four quarters. Credit costs have been low at just 57bps in 1H FY11 (in line with our forecast of 60bps). The recent RM66mn impairment charge for securities and foreclosed asset recorded in 2Q FY11 is expected to be one-off. We estimate the credit charge for FY12-13 to average 44bps.
Valuations are still reasonable
The stock is trading at a FY11F P/BV of just 1.7x. We expect ROE to trend higher to 14.9% by FY13F, in line with management’s forecast of 15% in 2 years. Our target price of RM7.30 implies a FY12F P/BV of 1.9x, which falls between the post-crisis mean of 1.5x and +1 standard deviation level of 2.2x.
Upside/downside 17.9%Difference from consensus 11.3%
FY12F net profit (RMmn) 1,658Difference from consensus 10.0%Source: Nomura
Nomura vs consensus Consensus is underestimating asset quality and NIM resilience, in our view.
Maintained
BUY
N O M U R A S E C U R I T I E S M A L A Y S I A S D N B H D
Action Contrary to earlier fears, AMMB’s net interest margins have held up better than
expected, while asset quality remains robust. Business loan volumes are gaining traction and leading top-line growth. Valuations are still at relatively attractive levels and we expect the re-rating to continue. BUY reaffirmed.
Catalysts Consistent outperformance in net interest margins and asset quality would lead to
an upward re-rating of the stock.
Anchor themes
Malaysia’s strong population growth rate is feeding into the consumption boom. The young population base and surge in the middle class are creating a large bankable population. Household debt has risen but household financial assets are currently 2.5x debt levels, suggesting leverage levels are still comfortable.
Consistent execution to continue Data growth remains a key for XL and Celcom
XL’s strong execution in FY10 is likely to continue in FY11F and we see another 13-15% growth in revenue and EBITDA with scope for upside surprises. Data is already a key revenue contributor – 41% of total revenue versus 38% in FY08 and we expect it to drive the medium-term growth trend at XL. Barring a drastic pick-up in cellular competition, we see limited risks to XL’s operational outlook.
Celcom is likely to increase its visibility in the Smartphone segment, where both Maxis and Digi have so far been more active. Increasing broadband coverage beyond current 70-75% levels and more aggressive broadband pricing appear likely – drive broadband growth and offset competition from WiMAX operators.
Cost management will be a key focus area across the group and could be a driver for possible margin surprises ahead, in our view. We expect Celcom to progress on executing its network sharing plans with Digi. In our opinion, XL could possibly continue to drive revenue growth ahead of expenses – further margin uplift, and margins at other subsidiaries could hold stable.
Limited M&A initiatives, near-term
We believe disposal of smaller assets is likely to be explored over the next 12-18 months. However, a material M&A initiative may not unfold in the near term. As such, we see limited cash flow risks over the medium term and see potential upside to our 4-5% yield forecasts.
Axiata remains our key regional pick
At 13x FY11F PE, Axiata’s valuation remains attractive compared to 13-14x for regional peers. It remains our key regional telco pick.
Upside/downside 28.0%Difference from consensus 20.4%
FY11F net profit (RMmn) 3,044Difference from consensus 0.1%Source: Nomura
Nomura vs consensus Our above-consensus price target is driven by the expectation of continued growth at Celcom and XL, and easing investment risks.
Maintained
BUY
N O M U R A S I N G A P O R E L I M I T E D
Action For FY11F, we continue to see growth in Axiata’s earnings, led by: 1) solid revenue
and earnings growth at XL; 2) potential upside to Celcom’s data growth, as it gets more active with Smartphones and broadband; and 3) possible upside surprise on margins, driven by continued cost saving initiatives. Axiata’s 13% average earnings growth over FY11F-12F will be one of the highest in regional telcos, according to our estimates. We also see upside bias to our 4-5% dividend yield forecast. BUY.
Catalysts Continued operational strength in domestic and overseas businesses remains a
potential catalyst. FY10F dividend timing could positively surprise.
Anchor themes
Celcom is likely to provide a consistent cash flow stream; XL to provide the revenue / earnings growth appeal; trends at subsidiaries, associates can improve.
Sector fundamentals weak Continue to expect further industry contraction
We like BAT for its strong management, ability to execute and decent dividend yield (5-6% historically). However, we think that poor industry fundamentals make it hard to justify the recent run-up in valuations (close to 19x P/E in October). Total industry volumes have been falling for six consecutive years (as much as 10.7% in 2009) – mainly on higher selling prices (annual excise duty hikes by the government) and consistently high illicit trade. We continue to expect a contraction in industry volumes (-1.5% for 2010F and -3% for 2011F), and remain Bearish on the tobacco sector.
Recent surprise excise duty hike doesn’t help
The Deputy Finance Minister on 4 October confirmed an excise duty hike for tobacco which took most by surprise. The 3sen per stick increase (to 22sen in excise duties per stick) we believe is higher than what most would have hoped (given the relatively tame 1sen increase last year). This we believe will continue to drive down industry volumes and promote illicit trade (due to higher cigarette prices). The earnings impact should, however, be relatively muted given that the excise duty hike will be passed through, although we note that the company has taken a smaller margin increase than usual (negative for earnings).
Maintain REDUCE – valuation not compelling
Valuation of 17.6x FY11F P/E (+0.7SD) and a low dividend yield of 5.4% versus historical yield (below its -1SD of 5.5%) are difficult to justify in light of the weak industry fundamentals (our outlook for industry volume contraction and illicit trade continuing) and the lower margins post the small-pack ban (June 2010) still weighing on the stock. The stock reached a peak of RM49.94 in October, up from its recent trough of RM42 in May (+16.7%, but underperforming the index by 1.8%). The stock has since retreated (underperforming the index by 14%), but we would need it to pull back further before we would recommend holding the company for its dividend yield.
Upside/downside -4.9%Difference from consensus -1.5%
FY11F net profit (RMmn) 715Difference from consensus -2.5%Source: Nomura
Nomura vs consensus We are largely in agreement with the street’s negative view on the stock, although our earnings estimates are lower on more conservative margin estimates.
Maintained
REDUCE
N O M U R A S E C U R I T I E S M A L A Y S I A S D N B H D
Action Although we like BAT Malaysia as a company, we think the poor fundamentals of
the Malaysian tobacco industry make an unappealing investment case. Industry volumes have been contracting for six consecutive years, and we expect this trend to continue on annual strong excise duty hikes (making cigarettes more expensive for consumers) and the enduring problem of illicit trade (e.g., sale of unlicensed competing cigarettes). Maintain REDUCE rating on unappealing valuation.
Catalysts Weaker-than-expected total inventory volumes, coupled with the full impact of the
small-pack ban (lower margins) on earnings are negative catalysts.
Anchor themes
Continued contraction of the legal tobacco industry volumes, weaker margins following the small-pack ban, and stiff competition for a shrinking pie, remain key negative themes for the industry.
British American Tobacco (M) Ken Arieff Wong
6 December 2010 Nomura 35
Contraction in sales caused by lower-than-expected price hikes coupled with our assumptions of tobacco industry sales volume contraction
2011 = 2007 + the 90s? Capital markets entering a sweet spot
Amid ample liquidity, the Malaysian asset reflation theme is manifesting itself in strong property demand, while the stock market is near historical peaks. Moreover, there are several high-profile deals on the table, such as the privatisation of Plus Expressways and the acquisition of Sunrise by UEM Land. Add to this mix the ongoing divestment of the government's stakes in government-linked entities as well as firming commodity prices, and we believe the capital markets will continue to excite investors and corporates next year. This scenario reminds us of the liquidity-led rally of 2007 and the property/stock market boom of the mid-1990s.
CIMB recorded consensus-beating results
CIMB's 9M10 net profit was 74% of consensus full-year forecast. Given the 4Q10 is likely to be stronger with the completion of the two mega IPOs (AIA HK and Petronas Chemicals), the full year results are likely to come in ahead of expectations. Management has retained its FY10F ROE guidance of 16% but highlighted a promising 4Q following its best quarter of IPOs ever. Special dividend of RM1bn declared which we believe was due to the minimal impact from implementing Basel II and greater clarity over Basel III, and this is positive for the stock
We expect decent FY11 loan growth albeit with NIM squeeze
We expect GFY10F loan growth of 14% for the group, led by a strong 23% y-y growth at CIMB Niaga and a 15% expansion in domestic consumer loans. Corporate loans, however, are expected to lag at 8% y-y. The key drivers for FY11F growth of 13% will still be Indonesia and domestic consumers, particularly the mortgage segment. However, we factor in a 6bps decline in NIMs owing to stiff competition in these same growth segments. We expect asset quality to be stable.
Upside/downside 19.3%Difference from consensus 14.5%
FY11F net profit (RMmn) 4,650Difference from consensus 6.0%Source: Nomura
Nomura vs consensus Consensus appears divided on the growth outlook for the stock. We are more optimistic on domestic capital markets prospects.
Maintained
BUY
N O M U R A S E C U R I T I E S M A L A Y S I A S D N B H D
Action Capital markets in 2011 are expected to be buoyant against the backdrop of
positive GDP growth and ample liquidity in Malaysia/South East Asia. Group asset quality and growth momentum have been stronger than anticipated. While P/BV at 2.4x has moved above the +1 standard deviation level, we believe the stock could well trend closer to its post-crisis peak of 2.9x given the strong capital markets.
Catalysts Stronger-than-expected capital markets revenue and asset quality should continue
to underpin CIMB’s stock performance.
Anchor themes
Liberal US monetary policy coupled with the commodities boom form positive macro conditions for Malaysian economic growth and capital markets. The Malaysia market has lagged some of its Asean peers such as the Philippines, Indonesia and Thailand.
Relatively more opportunities Smartphones and broadband to deliver data growth
Smartphones remain critical to Digi’s appeal in the postpaid segment and we expect the company’s involvement to expand to more brands and tariff options.
In wireless broadband, Digi has made steady gains in net-adds and revenue, but we expect to see a lot more activity in FY11F. In 2Q10, Digi’s 8% broadband revenue share (within the top three operators) was an improvement from 2Q09, but still below its 25-26% cellular revenue share – potential reason to advance broadband network roll-out and provide relatively more aggressive tariffs, we believe. Given Digi’s under-geared balance sheet and strong 7% FCF yield, we believe the company is well placed to tap available opportunities in cellular and broadband segments.
Costs to be closely monitored; margins could surprise
For 9M10, despite data revenue contribution increasing 400bps to 23%, Digi was able to improve EBITDA margins by 50bps y-y to 45%. This was driven by various opex initiatives and looking ahead, we see scope for possible margin surprise. Digi could start making some progress in executing its network sharing plans with Celcom, while also exploring incremental cost reductions such as traffic, staff etc.
Conservative guidance with capital management?
Based on our current estimates, with a 130-135% total dividend payout (8% yield) in FY10, Digi's balance sheet gearing will reach the lower end of its 0.5x to 0.8x net-debt/equity target. However, moving ahead, in the absence of another capital management in FY11, its gearing could fall below target. As a result, we expect Digi to maintain its capital management initiatives over the medium term, despite a relatively more cautious tone from management. Maintain BUY.
Upside/downside 20.9%Difference from consensus 22.4%
FY11F net profit (RMmn) 1,186Difference from consensus -1.5%Source: Nomura
Nomura vs consensus Our price target is higher than consensus, as we see limited downside risks of higher capex.
Maintained
BUY
N O M U R A S I N G A P O R E L I M I T E D
Action For FY11F, we expect Digi to focus on three key areas: 1) Smartphones, which
have already led postpaid growth and delivered positive surprises in 9M10, 2) broadband – could see a lot more activity, as net-adds/revenue remain below peers and there is a rising threat from WiMAX operators and 3) incremental cost reduction opportunities. These initiatives could deliver positive surprises to our revenue and earnings forecasts. Also, capital management remains a possibility.
Catalysts Capital management, operational improvement in cellular and broadband metrics
stand as potential catalysts.
Anchor themes
The focus for Malaysian telcos is on driving data growth, both on handsets and WBB. Broadband penetration remains low providing solid growth opportunity.
Earnings uptrend intact Asian exposure and Indonesia to support sales growth
Although MDF export prices are slowly approaching the peaks seen in 2008, sentiment among buyers is still weak and furniture inventories are relatively low, leaving room for upside. We think EVF’s 85% revenue exposure to Asia will continue to support high utilisation rates (85-90%) and its ability to raise export prices to counter the weakening USD (albeit with a two-three months delay). Full contribution from Indonesia (9%) capacity will likely support sales volume growth.
We expect cost pressures to remain in check
Average wood costs will likely remain supported by rubber prices but are only 25% of total costs. Increasing oil prices will likely cause resin production costs (20% of total costs) to rise, but a stronger ringgit should mitigate this. Management is confident about passing on raw material costs, based on recent feedback from customers. Our shipping team expects overall freight rates to decline in 2011, due to stronger supply growth.
Low net gearing accommodative of positive catalysts
We expect net debt/equity to drop 35% to 0.28x by the end of 2010, and for EVF to reach a net cash position by early 2012F. With no major capex required, EVF may use its stronger balance sheet for acquisitions (land or plants) or higher dividends in 2011-2012F.
Still appealing at 5x FY2011F P/E
The stock looks attractive at 5.2x FY2011F P/E, versus its historical mean 12-month forward consensus P/E of 7.2x. Compared with its closest peer Vanachai (VNG TB) (2011F P/E of 7x with EPS growth of 7%), it looks relatively undervalued.
Upside/downside 121.2%Difference from consensus 16.6%
FY11F net profit (RMmn) 139.2Difference from consensus 4.4%Source: Nomura
Nomura vs consensus We are more optimistic than consensus on Evergreen’s sales and margin recovery.
Maintained
BUY
N O M U R A S E C U R I T I E S M A L A Y S I A S D N B H D
Action We expect EVF’s top-line growth in 2011F to be supported by higher volumes
(boosted by the Indonesian plant) and ability to pass on both higher raw material prices and USD weakening (due to its 85% sales exposure to Asia). A stronger balance sheet in 2011 should make catalytic asset acquisitions or dividend increases more feasible. Asia’s third largest MDF producer looks attractive at 5x 2011F P/E. Reiterate BUY.
Catalysts Improving sales and margins, acquisition of land for raw material supply, expansion
via acquisitions.
Anchor themes
Medium density fibreboard is the fastest-growing primary wood product. We expect demand to improve the most in those regions emerging fastest from the recession.
Evergreen Fibreboard Bhd Muzhafar Mukhtar
6 December 2010 Nomura 44
Financial statements
EPS growth to moderate after rebound in 2010F, but still solid
Running too fast for comfort It has been all about MRT, MRT and MRT
Gamuda is up 30% y-t-d (vs a 16% rise in the KLCI), spurred by excitement over the MRT project. Its inclusion in the Economic Transformation programme and subsequent news flow indicates that the Malaysian government may announce the MRT project next month with the budget. However, in our view, implementing such a massive project would still be a challenge and concerns over funding and foreign competition may evolve over a period of time.
Earnings support will come only long term
Gamuda is targeting ~RM14bn (34%) of the ~RM40bn project, with the added responsibility of project supervision. Even including MRT’s share of the pie to Gamuda, the potential addition to market cap should be only RM1.2bn, on our estimates, of which ~RM1bn has been added over the past month’s run-up in stock price. However, the earnings contribution from MRT will start only after a year or so.
Last time as well, run-up was followed by consolidation
During the double-tracking project as well, Gamuda followed a similar pattern. However, the share price consolidated after the project was awarded. Increasing liquidity helped by inclusion in the KLCI 30 index (FII holdings have not moved much over the past four months) and positive news flow may support near-term valuations, in our view.
Maintain NEUTRAL, as risk/reward remains unfavourable
Although Gamuda remains the best proxy to the Malaysian construction story, it is trading at 23x CY11F (34% higher than 1x SD) and looks expensive compared to its local and region peers. The key near-term catalyst for the stock would be MRT, new land bank and launch of its Vietnam property project. However, our earnings growth estimate of 30% in FY11F already builds in these bullish assumptions and any slip up could lead to a downward revision, in our view.
Upside/downside 8.0%Difference from consensus -8.1%
FY11F net profit (RMmn) 346.9Difference from consensus -10.3%Source: Nomura
Nomura vs consensus We believe MRT upside is being priced in at current levels. News flow may remain positive, but the project will have its own implementation risks, in our view.
Maintained
NEUTRAL
N O M U R A S I N G A P O R E L I M I T E D
Action Gamuda has risen ~14% over the past five months on excitement around the MRT
project and increased liquidity following inclusion in the KLCI 30 Index. While Gamuda remains the best proxy to the Malaysian construction story, its valuation looks expensive to us (it has been trading at ~25x FY11F P/E for over a month now). However, the MRT may be approved, leading to positive news flow, which along with liquidity, may support near-term valuation. Maintain NEUTRAL.
Catalysts Positive catalysts will be news flow regarding the MRT project, and other awards in
Malaysia, India and the Middle East. On the downside, a slowdown in property momentum and delay in awards may exert pressure on stock prices.
Anchor themes
The government plans to achieve construction sector growth of 5-6% over the next two years, compared with 2-3% sector growth seen over the past few years.
US$650mn EBITDA priced at 6x Resilient mass market business
Despite competition from the two newly opened casinos in Singapore, we believe GENM’s core Malaysian gaming business is intact. It chalked up a commendable 2.7% y-y growth in gaming revenue to RM1.2bn in 2Q, bringing 1H to 8.2% y-y growth. Thanks to a better luck factor, its EBITDA margin was unchanged at 39%.
EBITDA expansion in 2011F
Stripping out the effect of poor luck factor and weaker sterling against the Singapore dollar, business volume in its recently acquired UK casino business showed further improvement in 3Q earnings. We reiterate our view that a price tag of 1.2x the written-down book value of the UK assets is a decent price for GENM to gain access to the UK casino market, with over 30% market share. We see scope for positive surprises to consensus and our assumed EBITDA contribution in 2011F. Similarly, we think its new US slot machines business could spring surprises in EBITDA contribution from 2H11F.
Favourable outlook
As the novelty starts to wear off in Singapore, we think growth in visitor arrivals for GENM will pick up in 2011F. GENM at one stage had lost more customers in the southern region, but we believe the trend has stabilised. Longer term, we think affordability could be an issue for Malaysian punters, since it costs more to gamble in Singapore. Malaysia’s casino is highly correlated to GDP growth, and given the relationship between gaming revenue and GDP, we see continued upside surprises in consensus and our gaming revenue assumptions. Despite having a sustainable, growing EBITDA of US$650mn, GENM is priced at a modest-looking 6x FY11F EV/EBITDA, on our estimates.
Net debt/equity (%) net cash net cash net cash net cash
Earnings revisions
Previous norm. net profit 1,274 1,353 1,455
Change from previous (%) - - -
Previous norm. EPS (RM) 0.22 0.24 0.26
Source: Company, Nomura estimates
Share price relative to MSCI Malaysia
1m 3m 6m
(7.7) 7.3 15.0
(9.4) 6.5 20.6
(5.8) 2.6 (2.1)
Hard
Source: Company, Nomura estimates
6,039
51.7
3.64/2.51
7.99
Absolute (RM)
Absolute (US$)
Relative to Index
Estimated free float (%)
Market cap (US$mn)
Major shareholders (%)
Genting 48.3
52-week range (RM)
3-mth avg daily turnover (US$mn)
Stock borrowabili ty
2.32.52.72.93.13.33.53.73.9
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80859095100105110115
Price
Rel MSCI Malaysia(RM)
Closing price on 1 Dec RM3.22
Price target RM4.12(set on 25 Nov 10)
Upside/downside 28.0%Difference from consensus 13.9%
FY11F net profit (RMmn) 1,353Difference from consensus -1.0%Source: Nomura
Nomura vs consensus We continue to believe GENM’s recent acquisition of the UK business will spring surprises, starting in 2011. EBITDA expansion should lead to street upgrades.
Maintained
BUY
N O M U R A S E C U R I T I E S M A L A Y S I A S D N B H D
Action Malaysia’s GGR has been resilient in 2010 despite competition from the two newly
opened casinos in Singapore. GENM should comfortably see decent organic growth, with meaningful contributions from the newly acquired UK and US operations seen kicking in from 2H11. Despite its sustainable and growing EBITDA of US$650mn, GENM is at a modest-looking 6x FY11F EV/EBITDA, on our estimates. BUY.
Catalysts We see further street upgrades to reflect the turning around of the UK business and
to take into account the newly acquired US business.
Anchor themes
We believe GENM offers investors good exposure to the strong and rising domestic consumption story. Competition for its mass market business is likely to be short-lived. Its domestic operation should continue to generate strong cashflows.
Genting Malaysia Bhd Wai Kee Choong
6 December 2010 Nomura 50
We are projecting a decline in FY10F revenue, as we have projected a loss in mass market share
Focus shifts to IJM Land In-line 2Q results (up 32% y-y), led by plantations
IJM delivered 2Q earnings of RM88mn (up 32% y-y) and PBT of RM167mn (up 28% y-y), in line with our estimates. The positive results were mainly led by plantation (PBT up 171% y-y), due to higher CPO prices. Construction PBT and margins improved with the clearing of low-margin jobs. Property PBT fell 48% q-q and 10% y-y. The industry segment disappointed due to lower selling prices, while infrastructure was steady at 10% q-q growth.
Launches on track, queuing for awards and CPO upside
IJM’s upcoming launches in Penang and development in the Sebana Cove and Canal City projects are on track. In construction, it is bidding for most mega jobs and should get a decent share of the MRT project, we believe. This should also boost demand for building materials and help IJM’s industrial division sales. We expect next year’s earnings growth to be supported by stronger CPO prices.
IJM Land-MRCB merger; possible upside to valuation
A key catalyst for the stock would be progress on the proposed IJM Land-MRCB merger; the signed MOU was announced on 23 November. The proposed deal values IJM Land (IJMLD MK, RM3.08, not rated) at a 19% premium to its current price and 34% premium to our implied valuation. (The proposal values IJM Land at RM4bn (RM3.65/share)).
IJM remains our preference, given its diversified model
As reflected by results, IJM’s diversified model helped it to deliver strong growth. We expect the industrial and plantation divisions to continue doing well in an inflationary scenario. In our view, IJM is the way to take advantage of improving news flow and momentum across construction in Malaysia & India, given its diversified exposure. We remain NEUTRAL, but prefer IJM to its peers.
Upside/downside 0.1%Difference from consensus -1.0%
FY12F net profit (RMmn) 477.8Difference from consensus 50.0%Source: Nomura
Nomura vs consensus We believe the stock has limited upside given rich valuations. We build in lower IJM Land contribution for FY11, as we believe 1Q was a one-off exceptional quarter for the segment.
Maintained
NEUTRAL
N O M U R A S I N G A P O R E L I M I T E D
Action Adjusted for one-off gains, IJM’s 2Q earnings of RM88mn were in line with our
estimates. 1H FY11 forms 48% of our full-year estimate. The positive results were mostly led by a sharp pick up in plantation earnings (up 171% y-y). Also in the news was a proposed IJM Land-MRCB merger that values IJM Land at 34% above our implied value. We expect the stock to react positively to these developments and maintain it as our preference in the Malaysian construction sector. NEUTRAL.
Catalysts Positive catalysts include news flow regarding the MRT project and other awards in
Malaysia, India and the Middle East. On the downside, slowdown in property momentum and delay in awards may exert pressure on stock prices.
Anchor themes
The government plans to achieve construction sector growth of 5-6% over the next two years, compared to 2-3% sector growth seen over the past few years.
Lagging in production growth No longer the market favourite; maintain NEUTRAL.
Although we expect CPO prices to remain strong through 2011 (we assume CPO prices of RM2,625/mT in 2010F and RM3,000/mT in 2011F), we are NEUTRAL on the stock given limited growth potential from its plantations division in the near term, coupled with an uncompelling valuation. Our price target of RM6.20 represents potential upside of 7% from current levels at relatively fair valuations of 17x rolling 1-yr forward earnings.
Limited growth in CPO production; property to support
IOI’s mature hectarage growth looks increasingly capped, and we expect it to post a CAGR of only 3.2% over FY10-13F (ex Indonesia). IOI’s FFB yields have generally been one of the strongest in the industry, and would likely have very little room for upside through operational improvements. These would translate to a low CPO volume growth, with a large part (~78%) of the trees already of prime yielding age, leaving less ability for the company to offset any unexpected CPO price decline. Earnings will be buffered by the property business, which is gradually becoming a large part of overall earnings mix, comprising 23% of FY10F earnings vs 12% in FY09.
Downstream division could see weaker margins
We note that earnings at IOI’s resource-based manufacturing division could come under pressure, especially with current high feedstock prices. The division’s operating margin was weak in the most recently reported quarter due lower refining margins and weak end-product prices (e.g., glycerine) at its Oleochemicals division. This may be further exacerbated if Asian currencies continue the same strength seen in 2010 (Nomura has a bullish view on Asian currencies in 2011) given that a considerable amount of sales for the downstream division is done in Europe (i.e., euro-denominated).
Upside/downside 6.7%Difference from consensus 11.1%
FY12F net profit (RMmn) 2,373Difference from consensus 4.6%Source: Nomura
Nomura vs consensus We are more bullish on our FY11-12F forecasts for CPO prices, which translates to higher earnings forecasts for plantation companies under our coverage.
Maintained
NEUTRAL
Action We are Bullish on the regional palm oil sector, as we are positive on palm oil prices
through 2011. IOI has one of the highest betas for large Malaysian planters, offering good leverage to stronger CPO prices. However, IOI Corp’s growth in CPO production will likely lag the industry, in our view, which may make IOI less attractive relative to peers. Maintain NEUTRAL on fair valuation.
Catalysts Sustained high CPO prices, a pick-up in FFB yields and overall improving outlook
for commodities could sustain a further re-rating of the sector.
Anchor themes
Tighter global vegetable oils outlook, stronger crude oil prices and a weaker US$ lead us to expect higher CPO prices for next year – a key driver for upstream earnings and valuations.
N O M U R A S E C U R I T I E S M A L A Y S I A S D N B H D
Hey, steady Eddy Most resilient margins amongst glovemakers
Smaller sequential earnings swings during periods of escalating latex prices and RM appreciation have demonstrated Kossan’s relative margin resilience among the three glovemakers we cover. Its technical rubber products arm (although small at 5-10% of revenue) also likely has helped to sustain margins (as the company occupies a niche segment in this country). Visibility is c. two months while it is running at full capacity. Similar to other glovemakers, it also reports double-digit growth (12%) in y-y volumes sold – evident of the structural growth of the industry, which we believe has largely been overshadowed by the cost headwinds at the moment.
On track with its plans to grow its high-margin nitrile business
Management’s value-driven strategy, instead of a capacity-driven one, has also contributed to margin resilience, we believe (as it refines its customer base towards what it deems as the more value-sensitive than price-sensitive customers). Continuous refining of its existing products (improving on its CheMax 7th Sense range, for example) combined with higher output and selling more high-margin nitrile gloves is expected to differentiate its business from its competitors. The margin lift of 10% experienced when it first launched CheMax 7th Sense has reaffirmed management’s value-driven focus.
BUY at a price target of RM4.76
Currently at 7x FY11F P/E, Kossan is also trading below its historical mean of 9.9x. We base our price target to an FY11F P/E of 10x, which is pegged at a historical 30% discount to Top Glove’s FY11F P/E of 14.5x.
Upside/downside 46.9%Difference from consensus 7.0%
FY11F net profit (RMmn) 151.6Difference from consensus 12.9%Source: Nomura
Nomura vs consensus Our FY11F earnings forecast is above consensus, as we expect Kossan’s value-driven strategy to continue to bear fruit despite current persisting cost headwinds.
Maintaining
BUY
N O M U R A S E C U R I T I E S M A L A Y S I A S D N B H D
Action Among the three glove makers, Kossan showed the lowest sequential earnings
contraction of c9% (3Q10), largely due to its historical strategy of more measured capacity expansion and locking in as much demand from the beginning of the year. Management believes its value-driven strategy (vs a capacity-driven one) is likely to stand it in good stead, especially in the face of cost headwinds. BUY.
Catalysts Better-than-expected demand for its new special purpose glove that captures
market share from the higher-end surgical segments.
Anchor themes
While easy wins are over, we believe value remains as structural demand growth is still evident. Since initiation, the largest glovemakers in the world are our top picks for more resilient margins, diversified revenue base and efficient cost structures.
Market favourite but priced-in We like KLK but think current valuations are fair
Following our marketing, it is clear that KLK is the market darling, with most investors very positive. On our Bullish sector outlook, it is hard to fault the fastest growing large-cap planters in Malaysia, but we think valuations are fairly priced after the recent run-up. We value KLK at 18x FY11F EPS, which is already slightly above +1SD its five-year historical average, but justified in our view, given KLK’s strong mature hectarage growth amongst the Malaysian planters. Mature area should grow at >6% pa through to FY12F. Our PT of RM21.70 implies upside of 6%; and we are NEUTRAL on fair valuation of 17x FY11F EPS.
Expect high CPO production growth on newly maturing area
We expect strong CPO production growth of 7.6-7.3% pa over FY11-12F, given our expectations of 10,000ha maturing each year and contributing meaningfully to volumes, and a relatively younger tree age profile ramping up yields, as they reach peak production age. We also see FFB yields steadily improving to 23mT/ha over FY11-12F, after a temporary blip in FY10F, due to weather-related disruptions.
Manufacturing and retail division performance improves
KLK’s downstream division has shown a 19% y-y growth in revenues and earnings of RM112mn in 9M10, from a loss a year ago, due to the improving performance of its oleochemical business boosting margins. The retail division (Crabtree & Evelyn) is also likely to end the year in the black, versus a loss last year, likely due to the closure of its unprofitable stores (mostly in the US, post restructuring). However, we are still cautious on the retail division, and would look for two-three sequential quarters of steady earnings, before building in significant upside to these numbers, given margin improvement headwinds.
Upside/downside 5.5%Difference from consensus 18.7%
FY11F net profit (RMmn) 1,287Difference from consensus 10.9%Source: Nomura
Nomura vs consensus We are more bullish on our CPO price outlook, which has led to our higher-than-consensus earnings forecasts for the company.
Maintained
NEUTRAL
Action We believe KLK has the best growth potential within the Malaysian plantation large-
caps and good leverage to the current CPO price strength. We also note solid downstream earnings and an improving outlook at its retail division. However, we believe that KLK’s recent run-up may have priced in our better outlook assumption for the sector. Maintain NEUTRAL on fair valuation.
Catalysts Sustained high CPO prices, a pick-up in FFB yields and an overall improving
outlook for commodities could sustain a further re-rating of the sector.
Anchor themes
Tighter global vegetable oils outlook, stronger crude oil prices and a weaker US$ lead us to expect higher CPO prices for next year – a key driver for upstream earnings and valuations.
N O M U R A S E C U R I T I E S M A L A Y S I A S D N B H D
Kuala Lumpur Kepong Ken Arieff Wong
6 December 2010 Nomura 62
Financial statements
EPS growth strong on higher CPO prices and better production
Banker to the masses Loan growth expected to accelerate next year
We view the 1Q FY11 anaemic loan growth of 1% q-q – attributed to lumpy corporate repayments – as unrepresentative of the full-year loan growth trend. Loan growth in other segments has been strong: 14% y-y growth in domestic consumer segment, 39% y-y growth in Indonesia and a decent 7% y-y growth in Singapore. Excluding the domestic commercial/corporate, loan growth was 11% y-y and within striking distance of our full-year loan growth estimate of 12%. Management guidance is that there was some pick-up in loan drawdown momentum in October, which could continue into 2011.
Net interest margin likely to remain stable
In FY10, Maybank’s NIMs received a 5bps boost from the three Overnight Policy Rate hikes totalling 75bps. For FY11F, we forecast margins will remain flat. Our economics team expects Bank Negara to resume rate hikes next year. This should be positive for Maybank given its high proportion of CASA deposits (37% of total deposits) which do not reprice when interest rates rise. However, given ongoing competition in the domestic consumer, Singapore and Indonesia we conclude that margins will remain relatively flat.
Asset quality: approaching the bottom for FY11F
Post implementation of stricter accounting standards for NPL recognition, there was a 7bps increase in impaired loans ratio to 4.7%. This was largely attributed to asset quality weakness at BII where NPL ratio rose to 3.5% from 2.9%. While worse than expected, we believe it is near the inflexion point because: 1) corporate NPL in the transport sector is not likely to repeat – these are legacy corporate accounts granted prior to Maybank’s entry; 2) SME/commercial loan growth has been reined in to exercise greater control over underwriting quality and 3) seasonal downturn in collections from auto loans given the Lebaran (Eid Al-Fitr) holidays.
Upside/downside 26.8%Difference from consensus 5.9%
FY12F net profit (RMmn) 5,014Difference from consensus 5.7%Source: Nomura
Nomura vs consensus Consensus is mixed on Maybank’s ability to sustain double-digit profit gains from here.
Maintained
BUY
N O M U R A S E C U R I T I E S M A L A Y S I A S D N B H D
Action We like Maybank’s visible consumer franchise in Malaysia; it is well positioned to
ride the consumer spending boom. The dividend policy is likely to stay high as there is now greater clarity on Basel III coupled with the dividend reinvestment programme. BUY reaffirmed.
Catalysts Gains in consumer market share in mortgages, auto loans and credit cards will
boost overall loan growth
Anchor themes
Malaysia’s strong population growth rate is feeding into the consumption boom. The young population base and surge in the middle class are creating a large bankable population. Household debt has risen but household financial assets are currently 2.5x debt levels, suggesting leverage levels are still comfortable.
MAHB: “free” option on landbank Capacity expansion and commercialisation focus
With traffic at the LCCT (15mn for 2010F) already close to the critical mass required to support KLIA 2 (~18mn by our estimates), and still growing at double digits, MAHB’s greater capacity post-KLIA 2 and its increasing focus on monetising traffic should allow it to achieve EPS growth of 38% in 2013F following the 12% dip in 2012F (due to the higher depreciation and interest charges from KLIA 2).
Landbank development overlooked, underestimated
MAHB is unlocking its 16,156-acre landbank at KLIA, with the initial development of 2,730 acres by 2015. We believe the market has assigned zero value to this, and that concerns regarding the viability of this initiative are overstated: passenger traffic at KLIA should reach 40-50mn pa by 2015, third-party demand to develop the land is already demonstrably present and actual risk for MAHB is minimal since it is pursuing a landlord/minority partner strategy.
Traffic outlook positive for 2011
We expect domestic (2011F: 5.2%) and regional GDP growth (Asia-Pacific: 6.7%) to continue to drive traffic, which should also be boosted by the increasing liberalisation of ASEAN air transport and growing tourism (Malaysia was the 9th most-visited country in 2009).
Risk-reward looks attractive
With a defensive business model and limited downside risk for passenger traffic (a key earnings driver), we believe the “free” option on the landbank, a big source of potential re-rating, is attractive. On our estimates, the landbank is worth at least RM1.7bn, implying MAHB’s domestic operations are at just 10x FY11F P/E. Including the land in its BVPS also implies a P/B of 1.2x, vs a peer average of 1.6x.
Upside/downside 37.3%Difference from consensus 34.5%
FY12F net profit (RMmn) 413.5Difference from consensus -1.3%Source: Nomura
Nomura vs consensus We believe the landbank potential at KLIA is grossly undervalued, if valued at all.
Maintained
BUY
Action With a defensive business model and a positive outlook for MAHB’s key earnings
driver (passenger traffic growth), the downside risk for core earnings appears limited, making the “free” option on its 16,156-acre landbank especially attractive. On our estimates, the landbank is worth at least RM1.7bn, implying the market is valuing MAHB’s core operations at 10x FY11F P/E, versus a peer average of 22x, or a P/B of 1.2x versus a peer average of 1.6x.
Catalysts Unlocking of land bank value in KLIA, progress on KLIA 2 construction, ASEAN air
transport liberalisation (Open Skies), profitability of foreign airports.
Anchor themes
Air traffic growth is closely correlated with GDP. Above average growth rates in ASEAN and the rest of Asia, as well as growing tourism, should result in strong airport passenger throughput growth in Malaysia.
N O M U R A S E C U R I T I E S M A L A Y S I A S D N B H D
MAS fly more Operational statistics — best since 15 years
September 2010 operating statistics saw load factors at their best levels in 15 years, mainly driven by the international sector, where the full-year passenger number looks set to return to the 2006-07 peaks of around 8.5mn. Admittedly, yield growth has been slow (7% y-y), but the company’s recently instituted price hikes should have an impact in coming quarters, in our view.
FY10F breakeven – exponential upside from FY11F Given solid, consistent operating statistics during its non-peak quarters, MAS recorded a profit turnaround for 3Q10 (from a 2Q10 loss of RM250mn due to redelivery provisions), which we believe will continue in the coming quarter. Continued new fleet delivery in FY11F, announcement of a new eastern hub in Kota Kinabalu (to benefit from East Malaysia travel), expansion of its 30-plane budget airline Firefly and our stronger in-house ringgit assumptions (+7-9% from our previous forecast) point to exponential earnings upside for FY11F.
Easing earnings uncertainty in FY11F MAS has restructured its fuel hedge, reducing the hedging proportion to 33% for FY11F at US$93/bbl, from 40% at US$100/bbl previously, alleviating one of the most-cited concerns on the name. MAS was also excluded from the list of airlines found to have breached EU competition laws on cargo price-fixing and fined a total of €799mn. It has also provided the bulk of one-off redelivery provisions for FY10F (27 planes at around RM200mn), leaving only four planes to provide for in FY11F.
Maintain BUY and PT of RM2.65 We reaffirm our BUY rating on MAS in anticipation of a solid earnings recovery. We value MAS at the average of FY11-12F P/BV of 1.8x (unchanged), as we believe mid-FY11F to FY12F will be a defining period for MAS.
Upside/downside 25.0%Difference from consensus 17.8%
FY11F net profit (RMmn) 690Difference from consensus 84.3%Source: Nomura
Maintained
BUY
Action MAS shares have lagged other airline shares, despite positive data points, such as
loads continuing to hit 15-year highs and gradual yield improvements. We see the 3Q10 profit turnaround continuing into FY11F coupled with a new fleet arrival. Moreover, with our conducive ringgit appreciation outlook (+7-9% from our previous estimates), we expect a material incremental earnings jump in FY11-12F. Maintain BUY, with PT of RM2.65.
Catalysts Catalysts include a better-than-expected rebound in passenger numbers and
substantive yield improvement continuing even in a seasonally weak 1Q11F.
Anchor themes
With Asian economies expected to recover at a much faster pace, airlines with Asian hubs should see an earlier recovery than global peers. Malaysian players stand to benefit from the consumption boom and RM appreciation theme in FY11F.
N O M U R A S E C U R I T I E S M A L A Y S I A S D N B H D
Nomura vs consensus
Consensus NPAT is wide-ranging. We expect the fleet turnaround to gather momentum and generate a leg up on yield, plus MAS to benefit from ringgit appreciation and the consumption boom.
Potential for operational uplift? Can it improve its operational trends?
Since 4Q08, Maxis has lost about 4% revenue market share to its cellular peers, reaching 42% (2Q10) from 46%. Its recent trends have not been encouraging either – 2% y-y revenue growth in 1H10 has lagged peers and so has its 2% EBITDA decline.
However, Maxis’ RM1.4bn investment plan in FY10 is ahead of peers (RM700mn to RM1.0bn) and this could improve its network quality and support a more robust subscriber growth. In broadband, Maxis could get more active – drive higher network coverage and offer more aggressive price plans. Also, it could gain more traction with its integrated services – fixed line telephony and broadband, which currently generate only 2% of total revenue.
In order to tap these opportunities, effective execution will be a key necessity, as we expect the market to be relatively more competitive, driven by incumbents and the recent service launch by YTL.
Ordinary dividend may not be incrementally attractive
Maxis’ 6% ordinary dividend remains appealing, but may not be incrementally attractive, in our view. As such, we expect the company to be more active with capital management over the next 12 months. This remains feasible, as even with a RM50¢/share total dividend (8-9% yield) for FY10, Maxis’ FY11F gearing will remain reasonable i.e. ~1.3x net-debt / EBITDA, below its stated 1.75-2.0x target.
Valuation remains expensive at 17x FY11PE
Maxis’ 17x FY11F PE is at a 23% premium to regional telcos, which are trading at 13-14x. Its 9.6x FY11F EV/EBITDA remains expensive too and in the absence of any near-term catalysts, we maintain our NEUTRAL rating.
Upside/downside 2.8%Difference from consensus 0.9%
FY11F net profit (RMmn) 2,368Difference from consensus -4.3%Source: Nomura
Nomura vs consensus Our NPAT estimates are below consensus, as we believe the risk to Maxis’ margins are to the downside.
Maintained
NEUTRAL
Action We believe Maxis could get more aggressive to gain higher market share in FY11F
even at the cost of margins. With its planned RM1.4bn capex in FY10 (higher than peers) and initiatives in delivering demand-based fixed line services, driving y-y subscriber growth could be relatively easier, in our view. However, execution will be a challenge in the face of competition from incumbents, as well new (WiMAX) entrants. We see Maxis’ 6% ordinary yield as reasonable, but potential capital management (with 8-9% yield) should drive incremental interest.
Catalysts Capital management; operational improvement in cellular and broadband metrics.
Anchor themes
With a saturated cellular market, incremental subscriber growth is limited. Maxis’ focus will be to drive data usage and take leadership in Broadband.
Watch this space TV adex gaining further market share
Excluding Astro, overall TV adex jumped 21% to RM2.1bn y-y in 9M2010, outpacing newspaper adex increase of 15%. TV adspend now accounts for 37% this year from 36% in 2009 and 30% back in 2005. By comparison, GDP growth was 7.6% over the same period. For FY11F, we expect TV adex increase of 10% to continue to outpace print’s adex growth of 5%.
Print segment: adex growth offset by rising costs
Media Prima’s top selling newspaper, Harian Metro, has seen its circulation rise nearly 20% y-y to ~415K/day. However, we estimate a mere 3% growth in pretax earnings for the print segment given the rising newsprint costs, now at US$720/tonne from <US$600/tonne a year ago.
Potential increase in the dividend payout
Management has raised the upper limit of its dividend policy to 75% from 50%. Media Prima’s free cash flow is expected to be higher than its net profit while net gearing is forecast to fall to 0.2x by end 2011. Thus, the group can certainly afford to raise its payout ratio to 75%, which would offer a yield of 5% next year.
Target price of RM2.90 implies 21% upside
Our DCF-based price target of RM2.90 is based on a discount rate of 10.3% (risk free rate 3.75%, beta of 1.3x and a terminal growth rate of 2%). Media Prima is at an FY11F EV/EBITDA of 7.4x, compared with the regional average of 7.7x. On a P/E basis, it is also attractively valued at 15.1x FY11F P/E compared with the regional average of 18x, in our view.
Upside/downside 21.3%Difference from consensus 4.3%
FY11F net profit (RMmn) 174.2Difference from consensus -9.4%Source: Nomura
Nomura vs consensus Our FY11F net profit is 4% higher than consensus primarily on the back of stronger top line growth.
Maintained
BUY
N O M U R A S E C U R I T I E S M A L A Y S I A S D N B H D
Action We think the TV division will precipitate 18% growth in Media Prima’s net earnings
for FY11F, while the print segment grapples with rising newsprint costs. Dividends could surprise on the upside given the group’s strong free cash flow and low net gearing.
Catalysts Continued high utilisation of ad space by top-tier advertisers should improve overall
margins and potential ad rate hikes in the TV segment.
Anchor themes
Malaysia’s strong population growth rate is feeding into the consumption boom. Coupled with healthy economic growth, adex spend is expected to remain strong into 2011. We expect to see TV gaining adex market share at the expense of print.
Media Prima Julian Chua
6 December 2010 Nomura 77
Could be revised to 75% based on new dividend policy
Activity (days)Days receivable 120.1 146.5 84.1 86.2 85.9 Days inventory na na na na naDays payable na na na na naCash cycle na na na na naSource: Nomura estimates
Few upside catalysts Better value found in Maybank and CIMB
Public historically enjoyed very strong quality growth coupled with highly efficient operations. It has the lowest cost-income ratio (~33%) of any bank. This, however, comes at a steep premium – the stock trades at a FY11F P/BV of 3.2x. While we like the bank’s ability to execute, we think its historical advantages over its peers are narrowing. For example, both Maybank and CIMB now expect mid-teens level consumer loan growth, which is similar to Public’s current domestic run-rate of about 16%. In terms of asset quality, Maybank and CIMB’s credit costs (at 47bps and 44bps respectively for FY11F) are also trending nearer to Public at ~40bps.
Basel III compliance: a non-issue for the near term
Although the long lead-time to comply means that there is unlikely to be near-term capital raising, the level of countercyclical buffer and additional capital for systemically important banks is unknown. Public’s core Tier 1 ratio at 7.1% currently is just above the 7% minimum excluding the countercyclical buffer. This means Public Bank will retain its dividend payout levels of 50-55% to support a loan/asset growth of about 15%. Management has highlighted the possibility of a fresh cash call in 2015-2016 if Bank Negara imposes a higher-than-expected countercyclical buffer.
Bank aiming for a loan growth target of 15% for FY11F
Management remains bullish on the domestic consumer business, which will continue to drive the group loan growth next year. However, due to the stiffening competition in the mortgage and auto space, the bank expects NIMs to compress by 10-15bps. Our FY11F loan growth forecast of 13% is lower than management’s target of 15%, as we believe competition in the mortgage market is intensifying.
Upside/downside 7.0%Difference from consensus 2.6%
FY11F net profit (RMmn) 3,296Difference from consensus -2.0%Source: Nomura
Nomura vs consensus While the Street likes Public’s strong operating metrics (high loan growth, low credit costs, efficient business), we consider this largely priced-in.
Maintained
NEUTRAL
N O M U R A S E C U R I T I E S M A L A Y S I A S D N B H D
Action On a YTD basis, Public Bank has lagged its large bank peers, Maybank and CIMB.
While earlier concerns of near-term capital raising have abated with the long lead-time to comply with Basel III, we do not foresee major changes to the bank’s dividend policy just yet. Maintain NEUTRAL.
Catalysts Favourable developments on the Basel III front, including a more modest counter-
cyclical buffer, could lead to an upward re-rating of the stock.
Anchor themes
Malaysia’s strong population growth rate is feeding into the consumption boom. The young population base and surge in the middle class are creating a large bankable population. Household debt has risen but household financial assets are currently 2.5x debt levels, suggesting leverage levels are still comfortable.
Public Bank Julian Chua
6 December 2010 Nomura 80
Forecast dividend payout at the upper end of management’s guidance
Love the unloved BUY on CPO outlook and restructuring
We are Bullish on Sime Darby with a BUY rating on an improved outlook for the palm oil sector (we recently upgraded CPO prices by 5-12%) as well as improving sentiment surrounding the group’s restructuring. Sime Darby’s strong liquidity and large index-weighting could be also seen as a good proxy to improving sentiment on Malaysia. Risks to the group include poor execution of its restructuring and a sharp fall in CPO prices.
Writedown woes behind us – look to the future
The new group CEO at the FY10 results briefing had come out to reassure investors that there would be no more write-downs stemming from the four infamous projects (where write-downs amounted to close to RM2.1bn in FY10/June). Other businesses within the group, including plantations, heavy industrials, autos and property remain unaffected operationally, and as the group moves away from the issues, we believe that the market will re-focus itself on the growth drivers of the company.
Focus on low hanging fruit, but execution will be key
Recently appointed CEO Dato’ Bakke Salleh has management experience across various industries. Focus for the group will be in four steps: to turnaround the Energy & Utilities business, maximise potential across businesses, improve corporate culture and review the group’s portfolio mix. With the E&U turnaround underway, we believe that the next focus will be enhancing the business. Dato’ Bakke identified low-hanging fruit, such as improving Sime’s low CPO oil extraction rates, where a 1% increase could improve plantation EBIT by 1.7% on our estimates.
Upside/downside 28.6%Difference from consensus 31.7%
FY12F net profit (RMmn) 3,744Difference from consensus 9.3%Source: Nomura
Nomura vs consensus We think the street may be under-estimating the restructuring potential of the group post its large write-downs last year.
Maintained
BUY
Action We are bullish on Sime Darby on the back of our improved outlook for CPO prices
and compelling valuations. We believe that the company provides a compelling re-rating story post its Oil & Gas issues last fiscal year, as the new management gets underway with its plans. Further, Sime Darby’s non-plantations business enjoys a healthy outlook from exposure to strong Asian economic performance.
Catalysts Proof of the new management’s ability to improve performance and drive efficiency,
as well as sustained high CPO prices will likely support a re-rating.
Anchor themes
Tighter global vegetable oils outlook, stronger crude oil prices and a weaker US$ lead us to expect higher CPO prices for FY11 – a key positive driver for upstream earnings and valuations.
N O M U R A S E C U R I T I E S M A L A Y S I A S D N B H D
Sime Darby Ken Arieff Wong
6 December 2010 Nomura 83
Sharp drop from more than RM2bn in the energy division writedowns, which should no longer recur.
Hitting the right notes Well ahead of RM2bn sales target
SP Setia reported YTD sales of RM2.1bn as of end-September, exceeding its October year-end target of RM2bn. The icing on the cake came in early October, when SP Setia took the top spot in the Edge Malaysia’s Property Developers Awards 2010, regaining the lead it had commanded between 2005 and 2008. Sustainable core sales of at least RM2.5bn may be expected, according to management, with a potential for RM3bn if macro conditions remain favourable (core sales have not included overseas projects). Based on this sales target, we think at least 20% pa EPS growth is achievable for FY11F-12F.
New launches to continue driving sales
Despite having already hit its FY10F target, SP Setia continued to push on with the official launch on 21 October of its RM5bn GDV Setia City commercial/retail/hotel development within Setia Alam, which saw well over 1,000 people queue up to bid for 48 shophouse units. Sales here should reaffirm SP Setia’s execution capability for large-scale mixed developments, especially ones located outside of the city centre, boding well for the upcoming KL Eco City launch. At the recent KL Property Fair, the company saw its newly launched 102 terrace housing units hit a 90% take-up in two days. We believe that the September acquisition of 259 acres of land in Johor suggests the company is confident in the Johor market.
Maintain BUY, with PT of RM6.11
We believe the upcoming KL Eco City launch and news on plans for the recently acquired Johor landbank (SP Setia targets completion of the acquisition by FY11F) remain key catalysts for P/BV expansion. Given its diversified exposure with arguably the best execution track record amid the property up-cycle and strong demand, we believe the stock will trade closer to the implied P/BV of 2.8x (versus levels as high as 3x in previous up-cycles).
Upside/downside 16.5%Difference from consensus 23.1%
FY11F net profit (RMmn) 241.8Difference from consensus 3.4%Source: Nomura
Nomura vs consensus With its diversified exposure, continued launches and recent Johor land acquisition, we think SP Setia is the best all-round play into the Malaysian consumption boom.
Maintained
BUY
N O M U R A S E C U R I T I E S M A L A Y S I A S D N B H D
Action SP Setia’s 11-month sales of RM2.1bn exceeded its full year target of RM2bn,
while sustainable core sales target of RM2.5bn can be expected, according to management (potentially RM3bn if macro conditions remain favourable). Based on this target, we think at least 20% EPS growth for FY11F-12F is achievable. Our PT implies a P/BV of 2.7x, which we think is fair given our Bullish view on Malaysia residential and the company’s record sales and healthy pipeline. The shares have traded as high as 3x in past up-cycles.
Catalysts The launch of KL Eco City, continued momentum from Setia City and Setia Alam,
and announcement of plans for the newly acquired Johor land in FY11F.
Anchor themes
Compelling demographics and improving affordability are driving a consumption boom in Malaysia which is likely to fuel property demand for the next decade.
Turnaround continues Demand rebound seen for FY11F
Visibility remains for three months ahead and we expect a strong rebound in 1Q11F as some of its products are oversold until Jan-Mar 2011. Prices have also been raised overall by 8-10% to offset the escalating latex price and RM appreciation (both appreciating 4% in 3Q10). A rebound in demand, especially from European customers, should propel margin rebounds moving forward; average volumes (measured in pieces of gloves sold) in the past few quarters rose 20% y-y with no sequential contraction seen. Utilisation rates remain at 80-90%, as industry headwinds in the form of cost and revenue pressures of latex appreciation and RM appreciation have seen most other players delaying expansion plans.
Diverse product mix and brand strategy
Management expects to beef up its nitrile powder-free production to attain a more diversified product mix (from the current 21% to 30% of its total capacity) given the continued volatility of natural rubber prices. However, natural rubber latex production will continue to be a focus should cost headwinds reverse, returning the price premiums of nitrile gloves to historical levels (currently c. on par with natural rubber latex now). It is the only manufacturer to pursue an own-brand manufacturing strategy, with 6 distribution centres in the US, Brazil and Europe.
BUY opportunity at 7x FY11F P/E for second largest glovemaker
At 7x FY11F P/E currently, Supermax’s valuation is + 1SD from its historical mean. However, we see a 3-year EPS CAGR of 17% and more improved operations arising from its write-off of an ailing investment in APLI driving a continued re-rating of the stock, and we believe that current single digit P/E multiples are attractive entry points for the world’s second largest glovemaker.
Upside/downside 62.4%Difference from consensus 16.9%
FY11F net profit (RMmn) 204.0Difference from consensus 14.8%Source: Nomura
Nomura vs consensus We believe its pricing ability should remain intact into FY11F, which should help it deliver on its earnings guidance of 15-20% growth.
Maintained
BUY
N O M U R A S E C U R I T I E S M A L A Y S I A S D N B H D
Action Supermax is experiencing a demand rebound moving into early FY11F delivery and
at its recent 3Q10 results it introduced an earnings growth target of 15-20% for FY11F despite current RM appreciation and latex price headwinds. Its niche in producing dental gloves and its own-brand manufacturing presence is likely to ensure a stable earnings outlook. A 7x P/E for FY11F and a 3-year EPS CAGR of 17% remain compelling for the world’s second largest glovemaker. Maintain BUY.
Catalysts Catalysts for this stock are better-than-expected growth from its distribution arms
and positive demand uptake following US healthcare reforms.
Anchor themes
While easy wins are over, we believe value remains as structural demand growth is still evident. Since initiation, the world’s largest glovemaker is our top picks for more resilient margins, diversified revenue base and efficient cost structures.
With bulk of the fibre being rolled out this year end i.e.750k premises, reaching 1.1mn premises (our estimate) by FY11 remains achievable, and this should improve HSBB’s addressable market and a pick-up in subscriber net-adds appears likely, in our view. Also, altering HSBB’s price and content strategy to stimulate higher HSBB take-up rates could be explored, in our view. In turn, this could provide upside to our modest 1% (FY11) and 3% (FY12) revenue contribution forecasts.
Separately, TM's legacy DSL service (Streamyx) is likely to be expanded to interior areas and could see continued subscriber growth despite DSL to fibre migration in the most urban areas. In areas where Streamyx to HSBB migration is limited or HSBB does not exist, we expect TM to re-work its Streamyx pricing, bundling and service quality issues to fend off competition from wireless alternatives.
Voice expected to decline; data offers opportunity
Although the pace of voice revenue decline has slowed to 6% y-y decline in 1H10, the risk remains to the downside, as voice usage and fixed line subs are expected to decline, in our view. Hence, data and internet growth is likely to be the key focus area on both the copper and the newly rolled out HSBB network. We forecast 10-12% growth in data and internet traffic during FY11-12F — higher growth will be a positive in our view.
Room for medium-term capital management
With an estimated >7% FCF yield in FY11F versus a 6% dividend yield (implied by RM700mn dividend) and strong balance sheet at 1.1x net-debt/EBITDA, we see room for capital management over the medium term. We believe the risk to TM’s capex remains to the downside and a higher than ordinary payout remains feasible.
Upside/downside 16.3%Difference from consensus 24.6%
FY11F net profit (RMmn) 574Difference from consensus 0.0%Source: Nomura
Nomura vs consensus Our price target is above consensus, as we expect TM’s revenue and earnings to benefit from growth in data, while capex levels are likely to decline.
Maintained
BUY
N O M U R A S I N G A P O R E L I M I T E D
Action In FY11, with the expected expansion in TM’s fibre (HSBB) build out to 1.1mn
premises, a pick-up in HSBB’s take-up rates appears likely. We also expect TM to review its HSBB price-content mix (lower price and higher content) to make it more appealing vis-à-vis the wireless alternatives. Also, we remain positive on HSBB’s wholesale agreements being worked out in 1H11 and see upside to our HSBB net-adds and revenue over FY11-12. TM’s gearing remains reasonable at 1.0x and capex is likely to decline – we see room for capital management. Maintain BUY.
Catalysts Solid HSBB net adds and payout of a special dividend could be positive catalysts.
Anchor themes
We expect data and non-voice growth to offset the decline in voice revenue. Low broadband penetration implies solid growth potential – both fixed and wireless.
Lack of credible catalysts Approaching another capex cycle
On the back of a rebound in power demand in 2010 (+9%y-y) and with Bakun no longer destined to serve Peninsular Malaysia, the focus has once again turned to adding capacity. TNB is expected to add a further 1600MW to its capacity base over FY10/16F, with scope for an additional 1,000MW by 2016 should it successfully bid for the government’s second coal-fired capacity allocation in FY11F.
Cost pressure looming
With Malaysia’s generation mix increasingly tilted towards coal-fired capacity and management’s coal cost guidance for FY11F raised to US$100/MT-US$102/MT (US$88.2/MT in FY10), notwithstanding the partially alleviating impact of a strengthening ringgit, we expect increased margin pressure in the coming financial year should tariffs remain unchanged.
Tariff outlook uncertain, ROICs lagging
With Malaysia’s election looming we believe the implementation of structural reforms to natural gas prices and TNB’s tariff setting mechanism, both in our view prerequisites for a sustainable re-rating of this name, is an increasingly remote upside risk. An escalating fixed cost base and a diminishing contribution margin led by higher coal costs and disproportionate volume growth in the low margin industrial consumer segment does not bode well for a narrowing spread between TNB’s ROIC (~6%) and WACC (~8.4%) in FY11F.
Lack of credible catalysts; Maintain NEUTRAL
Despite our continued positive stance on TNB’s undemanding valuations (12.8x/1.1x FY12F PER/PB) and its leverage to an appreciating ringgit, we see no credible near-term catalyst to support a sustainable re-rating. Maintain NEUTRAL.
Key financials & valuations31 Aug (RMmn) FY10 FY11F FY12F FY13FRevenue 30,320 32,013 33,121 34,431Reported net profit 3,202 3,190 3,053 3,100
52-week range (RM)3-mth avg daily turnover (US$mn)
Employees Provident Fund
Stock borrowability
11,647
40.1
9.24/7.8120.07
Absolute (RM)Absolute (US$)
Relative to Index
Estimated free float (%)
Market cap (US$mn)
8
8
9
9
10
Dec
09
Jan1
0
Feb
10
Ma
r10
Apr
10
Ma
y10
Jun
10
Jul1
0
Au
g10
Se
p10
Oct
10
No
v10
80
85
90
95
100
105
Price
Rel MSCI Malaysia
Closing price on 1 Dec RM8.47
Price target RM9.60(set on 29 Oct 10)
Upside/downside 13.3%Difference from consensus -6.3%
FY12F net profit (RMmn) 3,053Difference from consensus -5.4%Source: Nomura
Nomura vs consensus Our above consensus FY11F profit reflect anticipated paper-revaluations gain on TNB’s yen and US$ debts; on a normalised basis our forecasts modestly below consensus.
Maintained
NEUTRAL
N O M U R A I N T E R N A T I O N A L ( H K ) L I M I T E D
Action While TNB will likely benefit from an appreciating ringgit through its US$ and yen
debt and the containment of internationally sourced coal costs, with elections looming we believe the implementation of structural reforms to natural gas prices and TNB’s tariff setting mechanism – a precondition to a sustainable rerating of this name – are unlikely over the near term. We maintain our NEUTRAL stance.
Catalysts Although unlikely over the near-term given looming elections, we believe reform to
Malaysia’s tariff setting mechanism would underpin a sharp re-rating of TNB.
Anchor themes
We are broadly more positive on Indonesian and Philippine power markets given tight supply, robust medium-term consumption growth expectations and, for the latter, an unregulated generation sector and pro-investment regulatory regime.
Tenaga Nasional Daniel Raats
6 December 2010 Nomura 95
…even factoring unflattering return metrics
Valuations are in very attractive risk-reward territory, in our view
“Free” lunch ahead Undervalued landbank, beneficiary of warming Mal-Sing
relations
UEM Land’s 8,379-acre landbank can be monetised for anywhere between RM12psf and RM180psf, according to our estimates. Strategic land sales have historically contributed 16-79% of the top-line. While management emphasises its commitment to three avenues of earnings, namely property, residential development and construction, we believe the absence of a long-standing track record versus peers is likely to ensure that the most credible form of valuation in the near- to mid-term will be in bulk based on its landbank value. Budget 2011 announcements increasing home affordability for houses priced < RM350,000 are likely to benefit the Johor market and UEM Land’s new projects in that price range, in our view.
Potential upside from land swap, landbank purchase, Sunrise deal
Recent newsworthy deals between the governments of Malaysia and Singapore (ie, railway land swap, wellness project development) have been cited as the biggest breakthroughs in Sing-Malay bilateral relations in four decades with expected record Singapore investments in the Iskandar Development Region this year. This, we believe, bodes well for UEM Land’s landbank capital appreciation and proposed residential developments in the long term. We estimate that full acceptance and consolidation of Sunrise’s projects could lift RNAV / PT by 8% to RM3.11. We also expect consolidated earnings to double while FY11F P/E halves.
BUY and RNAV-based PT of RM2.88
Our RNAV-based valuation is based on recently transacted land values in the area, as well as the NPV of on-going projects. Our PT of RM2.88 implies a price tag of RM28psf in the Johor market, where land sales range from RM12psf (for raw land) to RM180psf (for prime commercial land) of late.
Upside/downside 35.2%Difference from consensus 53.2%
FY11F net profit (RMmn) 117.7Difference from consensus 7.7%Source: Nomura
Nomura vs consensus Consensus is split. We are positive on the unlocking of landbank value on political breakthroughs and the Johor market, which is a key beneficiary of the Budget 2011 home ownership measures.
Maintained
BUY
N O M U R A S E C U R I T I E S M A L A Y S I A S D N B H D
Action Our BUY call is premised on an undervalued landbank, which we think will re-rate
on warming Sing-Malay relations. Our PT of RM2.88 implies a RM28psf price tag on its 8,379-acre landbank in Johor, where land sales range from RM12psf to RM180psf of late. As Khazanah’s flagship development arm, it stands to benefit from development of the land swap parcels, which we estimate to be worth 16% more than UEM Land’s current market cap. Implied upside of 35% to our PT exists on a potential full incorporation of Sunrise’s projects into UEM’s RNAV.
Catalysts Continued news flow on catalytic developments, land sales and further JV tie-ups,
plus positive outcomes of further warming of Sing-Malay relations.
Anchor themes
Compelling demographics and improving affordability are driving a consumption boom in Malaysia, which is likely to fuel property demand for the next decade.
Look beyond FY10F (where property development is still in gestation period) to a pick-up in sales / launches as well as continued landbank monetizing via strategic tie-ups and outright sales
Has run its course, time to pause 3Q FY10 below expectations; construction disappointed
WCT reported 3Q earnings of RM31mn (down 8% y-y and 10% q-q). 9M FY10 earnings were 10% below Street expectations. Construction disappointed with a 16% drop y-y and 3% drop q-q in op profit. Property development op income was up y-y and q-q and margins improved. 9M formed only 67% of full-year consensus estimates and could lead to possible earnings downgrades.
Property development & management to grow over time
Property development op income improved 204% y-y and 79% q-q to RM29mn in 3Q and operating margins improved sequentially by 4ppt to 34%. WCT is gearing up for new launches and targeting new landbank as its existing property projects mature. WCT’s venture into high-margin luxury and commercial property development should provide margin uptick in the property segment, in our view. WCT is also trying to increase its property management earnings, but significant inflection in these earnings will take some time, in our view.
One of the few companies with healthy accretion to OB
Construction disappointed in 3Q with reduced earnings. Margins improved which could be due to strong JV contribution as reflected by a sharp rise in minority interest income. However, WCT has won sufficient projects over the past year. With recent project wins worth RM1.48bn, WCT looks on track to deliver RM2bn in inflows, as guided for initially. WCT may also get a good share in LRT packages, Pahang Selangor piping works and Iskandar shopping mall tenders, to be announced soon. We believe healthy accretion in the order book should ensure strong construction earnings growth medium term.
We see limited upside, maintain NEUTRAL
Valuations at 18x CY11PE, (at 0.4 SD above historical mean) look expensive, trading close to upcycle range. Maintain NEUTRAL. IJM remains our top pick among local players due to its diversified model.
Net debt/equity (%) 22.7 net cash net cash net cash
Earnings revisions
Previous norm. net profit 152.3 190.9 238.1
Change from previous (%) - - -
Previous norm. EPS (RM) 0.19 0.24 0.30
Source: Company, Nomura estimates
Share price relative to MSCI Malaysia
1m 3m 6m
(4.2) 4.2 11.7
(6.0) 3.4 17.1
(2.4) (0.5) (5.5)
Hard
Source: Company, Nomura estimates
738
48.2
3.27/2.48
2.76
Absolute (RM)
Absolute (US$)
Relative to Index
Estimated free float (%)
Market cap (US$mn)
20.7
Major shareholders (%)
Employees Provident Fund 21.7
52-week range (RM)
3-mth avg daily turnover (US$mn)
WCT Capital
Stock borrowabili ty
2.4
2.6
2.8
3.0
3.2
3.4
De
c09
Jan
10
Feb1
0
Mar
10
Apr
10
May
10
Jun1
0
Jul1
0
Aug
10
Sep
10
Oct
10
No
v10
90
95
100
105
110
115
Price
Rel MSCI Malaysia(RM)
Closing price on 1 Dec RM2.96
Price target RM3.50(set on 27 Oct 10)
Upside/downside 18.2%Difference from consensus -4.1%
FY11F net profit (RMmn) 190.9Difference from consensus 7.3%Source: Nomura
Nomura vs consensus We believe the stock has limited upside on rich valuations. We have already built in strong earnings growth for FY11 and FY12, and we believe risks are on the downside.
Maintained
NEUTRAL
N O M U R A S I N G A P O R E L I M I T E D
Action WCT reported weak 3Q FY10 earnings with 9M at 10% below Street expectations.
Construction disappointed with reduced earnings. WCT is looking to increase its exposure and earnings stream from property development and investment assets, but that will take some time, in our view. Trading at 18x CY11 P/E, close to its upcycle range, WCT looks expensive to us. Considering possible Street earnings downgrades post results, we maintain NEUTRAL on WCT.
Catalysts Positive catalysts including newsflow regarding the MRT project and other awards
in Malaysia, India and the Middle East. On the downside, slowdown in property momentum and delay in awards may pressure the stock.
Anchor themes
Malaysia plans to achieve construction sector growth of 5-6% over the next two years, compared to 2-3% growth delivered by the sector over the past few years.
Pankaj Suri, Nishit Jalan, Raashi Gupta, (Associates) — all enquiries arising from this note should be directed to Wai Kee Choong.
Any Authors named on this report are Research Analysts unless otherwise indicated
ANALYST CERTIFICATIONS
We, Wai Kee Choong, Julian Chua, Jacinda Loh, Ken Wong, Muzhafar Mukhtar, Daniel Raats, B. Roshan Raj, Andrew Kam Wing Lee and Tanuj Shori, hereby certify (1) that the views expressed in this Research report accurately reflect our personal views about any or all of the subject securities or issuers referred to in this Research report, (2) no part of our compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this Research report and (3) no part of our compensation is tied to any specific investment banking transactions performed by Nomura Securities International, Inc., Nomura International plc or any other Nomura Group company.
Conflict-of-interest disclosures Important disclosures may be accessed through the following website: http://www.nomura.com/research/pages/disclosures/disclosures.aspx . If you have difficulty with this site or you do not have a password, please contact your Nomura Securities International, Inc. salesperson (1-877-865-5752) or email [email protected] for assistance. Online availability of research and additional conflict-of-interest disclosures Nomura Japanese Equity Research is available electronically for clients in the US on NOMURA.COM, REUTERS, BLOOMBERG and THOMSON ONE ANALYTICS. For clients in Europe, Japan and elsewhere in Asia it is available on NOMURA.COM, REUTERS and BLOOMBERG. Important disclosures may be accessed through the left hand side of the Nomura Disclosure web page http://www.nomura.com/research or requested from Nomura Securities International, Inc., on 1-877-865-5752. If you have any difficulties with the website, please email [email protected] for technical assistance. The analysts responsible for preparing this report have received compensation based upon various factors including the firm's total revenues, a portion of which is generated by Investment Banking activities. Industry Specialists identified in some Nomura research reports are senior employees within the Firm who are responsible for the sales and trading effort in the sector for which they have coverage. Industry Specialists do not contribute in any manner to the content of research report in which their names appear. Distribution of ratings (Global) Nomura Global Equity Research has 1878 companies under coverage. 48% have been assigned a Buy rating which, for purposes of mandatory disclosures, are classified as a Buy rating; 41% of companies with this rating are investment banking clients of the Nomura Group*. 37% have been assigned a Neutral rating which, for purposes of mandatory disclosures, is classified as a Hold rating; 54% of companies with this rating are investment banking clients of the Nomura Group*. 13% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; 16% of companies with this rating are investment banking clients of the Nomura Group*. As at 30 September 2010. *The Nomura Group as defined in the Disclaimer section at the end of this report. Explanation of Nomura's equity research rating system in Europe, Middle East and Africa, US and Latin America for ratings published from 27 October 2008 The rating system is a relative system indicating expected performance against a specific benchmark identified for each individual stock. Analysts may also indicate absolute upside to price target defined as (fair value - current price)/current price, subject to limited management discretion. In most cases, the fair value will equal the analyst's assessment of the current intrinsic fair value of the stock using an appropriate valuation methodology such as discounted cash flow or multiple analysis, etc. STOCKS A rating of 'Buy', indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months. A rating of 'Neutral', indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months. A rating of 'Reduce', indicates that the analyst expects the stock to underperform the Benchmark over the next 12 months. A rating of 'RS-Rating Suspended', indicates that the rating and target price have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances including when Nomura is acting in an advisory capacity in a merger or strategic transaction involving the company. Benchmarks are as follows: United States/Europe: Please see valuation methodologies for explanations of relevant benchmarks for stocks (accessible through the left hand side of the Nomura Disclosure web page: http://www.nomura.com/research);Global Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia, unless otherwise stated in the valuation methodology. SECTORS A 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next 12 months. A 'Neutral' stance, indicates that the analyst expects the sector to perform in line with the Benchmark during the next 12 months. A 'Bearish' stance, indicates that the analyst expects the sector to underperform the Benchmark during the next 12 months. Benchmarks are as follows: United States: S&P 500; Europe: Dow Jones STOXX 600; Global Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia.
Strategy | Malaysia Wai Kee Choong
6 December 2010 Nomura 106
Explanation of Nomura's equity research rating system for Asian companies under coverage ex Japan published from 30 October 2008 and in Japan from 6 January 2009 STOCKS Stock recommendations are based on absolute valuation upside (downside), which is defined as (Price Target - Current Price) / Current Price, subject to limited management discretion. In most cases, the Price Target will equal the analyst's 12-month intrinsic valuation of the stock, based on an appropriate valuation methodology such as discounted cash flow, multiple analysis, etc. A 'Buy' recommendation indicates that potential upside is 15% or more. A 'Neutral' recommendation indicates that potential upside is less than 15% or downside is less than 5%. A 'Reduce' recommendation indicates that potential downside is 5% or more. A rating of 'RS' or 'Rating Suspended' indicates that the rating and target price have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances including when Nomura is acting in an advisory capacity in a merger or strategic transaction involving the subject company. Securities and/or companies that are labelled as 'Not rated' or shown as 'No rating' are not in regular research coverage of the Nomura entity identified in the top banner. Investors should not expect continuing or additional information from Nomura relating to such securities and/or companies. SECTORS A 'Bullish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positive absolute recommendation. A 'Neutral' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a neutral absolute recommendation. A 'Bearish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a negative absolute recommendation. Explanation of Nomura's equity research rating system in Japan published prior to 6 January 2009 (and ratings in Europe, Middle East and Africa, US and Latin America published prior to 27 October 2008) STOCKS A rating of '1' or 'Strong buy', indicates that the analyst expects the stock to outperform the Benchmark by 15% or more over the next six months. A rating of '2' or 'Buy', indicates that the analyst expects the stock to outperform the Benchmark by 5% or more but less than 15% over the next six months. A rating of '3' or 'Neutral', indicates that the analyst expects the stock to either outperform or underperform the Benchmark by less than 5% over the next six months. A rating of '4' or 'Reduce', indicates that the analyst expects the stock to underperform the Benchmark by 5% or more but less than 15% over the next six months. A rating of '5' or 'Sell', indicates that the analyst expects the stock to underperform the Benchmark by 15% or more over the next six months. Stocks labeled 'Not rated' or shown as 'No rating' are not in Nomura's regular research coverage. Nomura might not publish additional research reports concerning this company, and it undertakes no obligation to update the analysis, estimates, projections, conclusions or other information contained herein. SECTORS A 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next six months. A 'Neutral' stance, indicates that the analyst expects the sector to perform in line with the Benchmark during the next six months. A 'Bearish' stance, indicates that the analyst expects the sector to underperform the Benchmark during the next six months. Benchmarks are as follows: Japan: TOPIX; United States: S&P 500, MSCI World Technology Hardware & Equipment; Europe, by sector - Hardware/Semiconductors: FTSE W Europe IT Hardware; Telecoms: FTSE W Europe Business Services; Business Services: FTSE W Europe; Auto & Components: FTSE W Europe Auto & Parts; Communications equipment: FTSE W Europe IT Hardware; Ecology Focus: Bloomberg World Energy Alternate Sources; Global Emerging Markets: MSCI Emerging Markets ex-Asia. Explanation of Nomura's equity research rating system for Asian companies under coverage ex Japan published prior to 30 October 2008 STOCKS Stock recommendations are based on absolute valuation upside (downside), which is defined as (Fair Value - Current Price)/Current Price, subject to limited management discretion. In most cases, the Fair Value will equal the analyst's assessment of the current intrinsic fair value of the stock using an appropriate valuation methodology such as Discounted Cash Flow or Multiple analysis etc. However, if the analyst doesn't think the market will revalue the stock over the specified time horizon due to a lack of events or catalysts, then the fair value may differ from the intrinsic fair value. In most cases, therefore, our recommendation is an assessment of the difference between current market price and our estimate of current intrinsic fair value. Recommendations are set with a 6-12 month horizon unless specified otherwise. Accordingly, within this horizon, price volatility may cause the actual upside or downside based on the prevailing market price to differ from the upside or downside implied by the recommendation. A 'Strong buy' recommendation indicates that upside is more than 20%. A 'Buy' recommendation indicates that upside is between 10% and 20%. A 'Neutral' recommendation indicates that upside or downside is less than 10%. A 'Reduce' recommendation indicates that downside is between 10% and 20%. A 'Sell' recommendation indicates that downside is more than 20%. SECTORS A 'Bullish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positive absolute recommendation. A 'Neutral' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a neutral absolute recommendation. A 'Bearish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a negative absolute recommendation.
Strategy | Malaysia Wai Kee Choong
6 December 2010 Nomura 107
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Strategy | Malaysia Wai Kee Choong
6 December 2010 Nomura 108
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