www.dbsvickers.com ed: JS / sa: WMT KLCI KLCI KLCI KLCI : 1,877.05 1,877.05 1,877.05 1,877.05 Analyst Bernard CHING +603 2604 3918 [email protected]Malaysian Research Team +603 2604 3333 [email protected]Market Key Data EPS Gth (%) EPS Gth (%) EPS Gth (%) EPS Gth (%) PER (x) PER (x) PER (x) PER (x) 3.9 Div Yield (%) Div Yield (%) Div Yield (%) Div Yield (%) 9.8 2013 8.7 17.8 3.3 2014F 7.8 16.5 3.1 2015F 7.3 15.3 3.2 Source: AllianceDBS TOP STOCK PICKS Price Price Price Price Mkt Cap Mkt Cap Mkt Cap Mkt Cap Target Price Target Price Target Price Target Price Performance (%) Performance (%) Performance (%) Performance (%) RM RM RM RM US$m US$m US$m US$m RM RM RM RM 3 mth 3 mth 3 mth 3 mth 12 mth 12 mth 12 mth 12 mth Rating Rating Rating Rating Big cap Public Bank 20.00 22,036 22.60 1.9 20.6 BUY Sapura Kencana 4.34 8,182 5.55 0.5 7.2 BUY Gamuda 4.75 3,463 5.50 2.8 (2.1) BUY IJM Corp 6.70 3,091 7.85 5.9 13.0 BUY Genting Plant 11.46 2,760 13.35 5.9 15.1 BUY Small cap Dayang 3.79 983 4.55 0.8 15.8 BUY Coastal Contracts 5.07 848 6.00 1.4 88.5 BUY MKH Berhad 4.21 555 5.85 30.4 134.1 BUY Padini Holdings 2.01 416 2.55 3.1 9.8 BUY Globetronics 4.61 407 5.00 26.3 89.7 BUY Structural change / M&A HLFG 16.98 5,624 18.80 13.1 16.8 BUY RHB Capital 8.94 7,164 10.00 5.2 4.1 BUY MMC Corporation 2.45 2,347 4.95 (12.5) (10.6) BUY Bursa Malaysia 8.10 1,358 10.10 6.6 (3.3) BUY TA Enterprise 1.01 544 1.20 20.2 41.3 BUY Source: AllianceDBS DBS Group Research . Equity 25 Jul 2014 Malaysia Market Focus Malaysia Strategy Refer to important disclosures at the end of this report Time to be cautious and selective • Macro conditions have improved • But valuations are not exciting amid limited earnings growth potential • Domestic growth drivers weak due to measures to rein in high indebtedness • Be cautious and selective, focus on stocks with inorganic growth drivers Macro conditions have improved. Concerns over QE tapering and slowdown in global growth have largely receded. With market expectations of continued easing of monetary policies, liquidity conditions are friendly towards equity markets again, particularly emerging markets. Though not expensive, Malaysia’s market valuation is not compelling. With earnings growth estimated to moderate to 7.3% in 2015, there is little upside to FBMKLCI which trades at 15.3x CY15 PE. We project FBMKLCI to hit 1,910 by end 2014, based on 15.5x 2015 earnings, in line with historical mean. Domestic growth drivers are expected to be weak due to government measures to rein in burgeoning fiscal and household debts which have led to cost-push inflation and weak consumer sentiment. Be cautious and selective. Public Bank Public Bank Public Bank Public Bank is our top defensive pick for its strong deliverables. Within the big cap space, we also like Genting Plantations Genting Plantations Genting Plantations Genting Plantations (strong FFB growth and downstream venture). Look for stocks with inorganic growth drivers for alpha. We favour oil & gas and construction stocks. Our picks are SapuraKencana SapuraKencana SapuraKencana SapuraKencana (solid growth from Seadrill and Newfield acquisitions), Dayang Enterprise Dayang Enterprise Dayang Enterprise Dayang Enterprise (earnings visibility from Pan Malaysian jobs), Coastal Contracts Coastal Contracts Coastal Contracts Coastal Contracts (strong orderbook and venture into drilling rigs), IJM Corp IJM Corp IJM Corp IJM Corp (more job flows), and Gamuda Gamuda Gamuda Gamuda (most leveraged MRT proxy). Selective small/mid-caps stocks. In this space, we lean towards MKH MKH MKH MKH (resilient property earnings as strong FFB growth), Padini Padini Padini Padini (store expansion and resilient sales) and Globetronics Globetronics Globetronics Globetronics (strong growth from new LED sensor business). Structural changes/M&A plays. We like HLFG HLFG HLFG HLFG (potential privatization), RHBC RHBC RHBC RHBC (undervalued and poised to be re-rated in the on-going M&A exercise involving CIMB and MBSB), MMC MMC MMC MMC (unlocking value through the listing of Malakoff), Bursa Bursa Bursa Bursa Malaysia Malaysia Malaysia Malaysia (revamp in fees and cost structure), and TA Enterprise TA Enterprise TA Enterprise TA Enterprise (potential sale of its broking business).
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Malaysia Strategy Refer to important disclosures at the end of this report
Time to be cautious and selective
• Macro conditions have improved
• But valuations are not exciting amid limited earnings growth potential
• Domestic growth drivers weak due to measures to rein in high indebtedness
• Be cautious and selective, focus on stocks with inorganic growth drivers
Macro conditions have improved. Concerns over QE tapering and slowdown in global growth have largely receded. With market expectations of continued easing of monetary policies, liquidity conditions are friendly towards equity markets again, particularly emerging markets.
Though not expensive, Malaysia’s market valuation is not compelling. With earnings growth estimated to moderate to 7.3% in 2015, there is little upside to FBMKLCI which trades at 15.3x CY15 PE. We project FBMKLCI to hit 1,910 by end 2014, based on 15.5x 2015 earnings, in line with historical mean. Domestic growth drivers are expected to be weak due to government measures to rein in burgeoning fiscal and household debts which have led to cost-push inflation and weak consumer sentiment. Be cautious and selective. Public BankPublic BankPublic BankPublic Bank is our top defensive pick for its strong deliverables. Within the big cap space, we also like Genting PlantationsGenting PlantationsGenting PlantationsGenting Plantations (strong FFB growth and downstream venture). Look for stocks with inorganic growth drivers for alpha. We favour oil & gas and construction stocks. Our picks are SapuraKencanaSapuraKencanaSapuraKencanaSapuraKencana (solid growth from Seadrill and Newfield acquisitions), Dayang EnterpriseDayang EnterpriseDayang EnterpriseDayang Enterprise (earnings visibility from Pan Malaysian jobs), Coastal ContractsCoastal ContractsCoastal ContractsCoastal Contracts (strong orderbook and venture into drilling rigs), IJM Corp IJM Corp IJM Corp IJM Corp (more job flows), and GamudaGamudaGamudaGamuda (most leveraged MRT proxy). Selective small/mid-caps stocks. In this space, we lean towards MKHMKHMKHMKH (resilient property earnings as strong FFB growth), PadiniPadiniPadiniPadini (store expansion and resilient sales) and GlobetronicsGlobetronicsGlobetronicsGlobetronics (strong growth from new LED sensor business). Structural changes/M&A plays. We like HLFGHLFGHLFGHLFG (potential privatization), RHBC RHBC RHBC RHBC (undervalued and poised to be re-rated in the on-going M&A exercise involving CIMB and MBSB), MMCMMCMMCMMC (unlocking value through the listing of Malakoff), Bursa Bursa Bursa Bursa MalaysiaMalaysiaMalaysiaMalaysia (revamp in fees and cost structure), and TA EnterpriseTA EnterpriseTA EnterpriseTA Enterprise (potential sale of its broking business).
Market Focus
Malaysia Strategy
Page 2
1H2014 m1H2014 m1H2014 m1H2014 market review
Similar to other emerging markets, FBMKLCI started the year on
a weak note as concerns over QE tapering and hard landing in
China led to foreign equity net outflows. Malaysian equities
rebounded marginally in 2Q14 on improved global sentiment
and receding selling pressure from foreign investors. In 1H14, the
FBMKLCI posted a marginal gain of 0.8%. Encouraging 1Q14
GDP growth of 6.2% was a bright spot for the market as the
strong recovery in net exports mitigated the moderating
domestic growth drivers. Furthermore, foreign net equity flows, a
bane to the market since 2H13, have turned positive over the last
3 consecutive months.
Malaysia 1H14 equity performance
15000
15500
16000
16500
17000
17500
18000
1,750
1,800
1,850
1,900
1,950
Jan
-14
Fe
b-1
4
Ma
r-1
4
Ap
r-1
4
Ma
y-1
4
Jun
-14
FBM KLCI (LHS) FBM Small Cap (RHS)
Source: Bloomberg Finance L.P
Foreign equity flows turned positive again
0.1
(3.4)
(0.1)
1.2 1.6
3.2
0.7
(3.8)
(0.3)
1.5 0.7 0.8
0.2
1.3
3.4
1.6
0.5
(0.8)
3.3
1.2 1.3 1.5
(0.3)
0.8
2.5 1.7
4.8 5.4
3.9
(3.5)
(0.3)
(6.8)
0.8
(0.8)
(3.1)
(1.6)
(3.6)
(1.6)
(0.5)
0.7
3.1
0.6
-8.0
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
Jan-11
Apr-11
Jul-11
Oct-11
Jan-12
Apr-12
Jul-12
Oct-12
Jan-13
Apr-13
Jul-13
Oct-13
Jan-14
Apr-14
RM bn
Source: Bursa Malaysia
Over 1H14, big cap stocks in Malaysia underperformed mid and
small cap stocks. The FBM Small Cap index surged 14.3%,
continuing its rally post general election in May 2013 as
investors’ risk appetites improved. Hence, valuations have now
become increasingly stretched. The P/BV multiple of FBM Small
Cap Index increased from 0.8x before May 2013 to 1.1x at end
June 2014. Accordingly, the P/BV valuation gap between FBM
Small Cap Index and FBMKLCI has narrowed from 1.4x to 1.2x
over the same period.
P/B valuation gap of small cap stocks narrowing
Source: Bloomberg Finance L.P
Sector wise, the technology (+22.6%), property (+10.6%),
construction (+8.9%) and plantation (+3.2%) sectors posted
SapuraKencanaSapuraKencanaSapuraKencanaSapuraKencana • Solid orderbook of RM27bn and new recurring income streams. Solid orderbook of RM27bn and new recurring income streams. Solid orderbook of RM27bn and new recurring income streams. Solid orderbook of RM27bn and new recurring income streams. SapuraKencana’s orderbook of RM27bn provides good
earnings visibility. Of this, 60% are long term contracts ranging from 2-10 years with options for extensions. Besides
that, the group’s venture into the upstream production segment is slated to bear fruit starting 1QFY15 with the inclusion
of the Newfield business and also growing contributions from the Berantai marginal fields.
• Well positioned for more Well positioned for more Well positioned for more Well positioned for more contracts contracts contracts contracts with expanding asset base. with expanding asset base. with expanding asset base. with expanding asset base. The group is well positioned in the market to secure more
work, especially in the transport & installation market space. Its outstanding orderbook will ensure a steady flow of work
and new assets will help to grow this further. So far, 2 new heavy lift pipe lay barges have been delivered along with
new drilling assets, all of which were immediately chartered out.
• MMMMaintain BUY and RM5.55 TP. aintain BUY and RM5.55 TP. aintain BUY and RM5.55 TP. aintain BUY and RM5.55 TP. Our TP is based on FY15F EPS and 22x PE. In the immediate term, earnings growth will be
driven by contribution from the Newfield acquisition as well as delivery and subsequent charter of new installation assets.
Dayang Dayang Dayang Dayang
EnterpriEnterpriEnterpriEnterprisessessesses
• Orderbook Orderbook Orderbook Orderbook of RM4of RM4of RM4of RM4bn.bn.bn.bn. DEHB is now at an inflection point which will herald a new era of strong growth trajectory. As the
biggest winner of RM10bn Pan Malaysia hook-up commissioning (HUC) contracts awarded in mid-13, DEHB is now the
undisputed leader in HUC and topside major maintenance (TMM) services in Malaysia, thanks to its excellent track
record. 1QFY14 earnings have started to show the potential from new contracts with 36% y-o-y net profit growth.
• Perdana Petroleum stake gives an additional boost.Perdana Petroleum stake gives an additional boost.Perdana Petroleum stake gives an additional boost.Perdana Petroleum stake gives an additional boost. DEHB’s 25%-stake in Perdana Petroleum Bhd (PETR MK) is poised to
accelerate its growth momentum given the expected high utilization of PETR’s 18 vessels in FY14 and the tightening
supply of accommodation vessels. Given that c.85% of its fleet is under long-term charters, PETR is still on the lookout
for more work barges to cater to rising demand. We estimate PETR will contribute 12% and 14% of DEHB’s FY14 and
FY15 earnings, respectively. The 25% stake is extremely synergistic for Dayang, which requires a steady supply of
workboats to carry out its HUC and TMM services.
• Maintain BUY with RM4.55 TPMaintain BUY with RM4.55 TPMaintain BUY with RM4.55 TPMaintain BUY with RM4.55 TP based on 18x FY15 EPS. We continue to like DEHB for its clear earnings visibility, solid
balance sheet (4% net gearing), and good execution track record. Its record high order book will keep the company busy
for the next five years and transform the O&G niche service provider into one of the largest in Malaysia.
Coastal Coastal Coastal Coastal
ContractsContractsContractsContracts
• Healthy orderbook for shipbuilding business. Healthy orderbook for shipbuilding business. Healthy orderbook for shipbuilding business. Healthy orderbook for shipbuilding business. Coastal Contract’s net profit is set to grow by 18% CAGR over the next 3
years, underpinned by record high offshore support vessel (OSV) newbuild orderbook of RM2.2bn and venture into new
businesses.
• Venturing into drilling rig business. Venturing into drilling rig business. Venturing into drilling rig business. Venturing into drilling rig business. Capitalising on strong demand for premium jack-up rigs, Coastal has two rigs on
order and plans to get another. First rig will be delivered in late FY14 and hopes to secure a long term charter by 1Q15.
This will raise EBIT by RM66m or 33%. Second rig to be delivered in 2H15.
• More potential contracts from Pemex. More potential contracts from Pemex. More potential contracts from Pemex. More potential contracts from Pemex. Coastal secured a RM1.24bn contract from Pemex for a 8+4 years charter of its
gas compression. The contract will commence in mid FY15. With Pemex reportedly seeking up to 8 units, Coastal stands
a good chance of securing more contracts from Pemex.
• Valuation Valuation Valuation Valuation is undemanding is undemanding is undemanding is undemanding at 12.7x FY15 earnings. BUY with TP of RM6.00 based on 15x FY15 earnings.
IJM CorpIJM CorpIJM CorpIJM Corp • WCE in the bag. WCE in the bag. WCE in the bag. WCE in the bag. It is now official that IJM will be undertaking RM2.8bn worth of works on the RM5bn WCE. Apart from
its already awarded portion, IJM will also be bidding for the open tender portion (RM2.2bn) where we expect its overall
work undertaken on the WCE to hit RM3.5bn (70% of project value).
• Acquires SILK Highway. Acquires SILK Highway. Acquires SILK Highway. Acquires SILK Highway. IJM has also proposed to acquire the SILK Highway for RM398m. We believe this acquisition will
complement its existing highway network in the Klang Valley (NPE, Besraya and LEKAS) by connecting them together.
Although SILK Highway is loss making, we expect it to return to the black once its scheduled 38% toll hike takes place in
mid-2015.
• MMMMaintain BUY, RM7.70. aintain BUY, RM7.70. aintain BUY, RM7.70. aintain BUY, RM7.70. Our TP is based on SOP methodology and implies 18x/16x FY15F/16F PE. This is slightly higher
than its mean of 15x, but we feel it is justified given the sizable contracts for the WCE and SILK Highway acquisition will
GamudaGamudaGamudaGamuda • Awaiting line 2. Awaiting line 2. Awaiting line 2. Awaiting line 2. The CEO of MRT Corp mentioned that the Government has approved the 2nd MRT Line (RM25bn) from
Sg Buloh to Serdang and is awaiting an official announcement. Given swift execution on the existing SBK line, we reckon
that the MMC-Gamuda JV will likely reprise its PDP role for Line 2. With sunk cost already incurred for the tunnel boring
machines for the SBK line, this provides the JV an edge to bid for Line 2.
• Water woes. Water woes. Water woes. Water woes. Investors have turned cautious on Gamuda following concerns that the Selangor Government may
forcefully acquire 40% owned SPLASH 90% below its book value. We think this concern may have been overplayed as
past experience such as the windfall tax on IPPs and toll rate restructuring were all proposed but never implemented. We
reckon that a higher and more palatable offer for SPLASH will be the end game.
• Maintain BUY, RM5.50 TP. Maintain BUY, RM5.50 TP. Maintain BUY, RM5.50 TP. Maintain BUY, RM5.50 TP. Our TP is based on the SOP method which implies FY14/15 PE of 18.1x and 15.7x
respectively. This compares to its 5 year mean of 19.x respectively. Any sell down from the water woes should provide a
good buying opportunity.
Public BankPublic BankPublic BankPublic Bank • Expect resilient share price performance. Expect resilient share price performance. Expect resilient share price performance. Expect resilient share price performance. Our RM23.00 TP is based on the Gordon Growth Model and assumes 8.4%
cost of equity (previously 9.5%), 3% long-term growth and 21% ROE. The Group stands out for its undisputed earnings
track record, best-in-class cost to income ratio and unrivalled asset quality. Despite the announcement of its proposed
RM5bn rights issue, PBK’s share price has remained resilient, a testimony of investors’ conviction on the growth
prospects of the bank
• Stable prospectStable prospectStable prospectStable prospectssss ahead; ahead; ahead; ahead; poised to poised to poised to poised to defy headwinds. defy headwinds. defy headwinds. defy headwinds. PBK’s consumer loan growth did not weaken following Bank
Negara’s tightening measures over the last three years, although we expect demand from pockets of speculative and
high-end properties to soften. As PBK’s key portfolio is in the mass market, we expect loan growth to remain resilient.
• Sustainable earnings. Sustainable earnings. Sustainable earnings. Sustainable earnings. As in its previous results, we do not expect earnings surprises especially in terms of growth, and
sustainability of market share especially in mortgages, auto and SME segments. Contribution from its asset management
business should be sustained and will continue to differentiate it from its peers.
Genting Genting Genting Genting
PlantationsPlantationsPlantationsPlantations
• At inflection pointAt inflection pointAt inflection pointAt inflection point. Genting Plantations (GENP) is ripe for 31% earnings CAGR over the next 3 years (based on current
CPO price projections). Own FFB output should likewise expand 11% CAGR over the next 3 years – thanks to rising
contribution from Indonesia. GENP has gradually picked up speed in new planting there since 2007; and contribution is
forecast to expand 46% CAGR through 2016F. By then, FFB output from Indonesia should account for c.39%
• AAAAdding value upstreamdding value upstreamdding value upstreamdding value upstream. GENP has begun using its biomarker to screen the seedlings for its new planting. The results
have yielded good results so far; and the group has decided to employ only screened seedlings from now. GENP is also
teaming up with DuPont to develop a faster way to screen seedlings; and the pipeline may be announced soon. New
planting using Lonsum and Socfindo seedlings in Indonesia has also been screened using the group’s biomarker.
• Adding value downstreamAdding value downstreamAdding value downstreamAdding value downstream. Genting Plantations is retrofitting its biodiesel plant in Sabah to be able to produce high-
value added palm oil derivatives in partnership with Elevance Renewable Sciences. Commercial production is expected to
begin in 2017
• Plenty of land bank leftPlenty of land bank leftPlenty of land bank leftPlenty of land bank left. GENP currently has c.60k ha of oil palm plantable reserve in Indonesia; which should keep the
group busy for the next 10 years. In Kulai GENP also has 5,000 acres of property land bank, where they can utilise c.100
acres p.a. In Batu Pahat the group owns 3,000 ha of property land bank, of which it can utilise c.200 acres p.a. For
commercial development, the group’s land is currently valued at RM30-40/sg ft (vs. RM5-12 employed in our valuation).
• UndervaluedUndervaluedUndervaluedUndervalued. We value the counter at RM13.35/share, based on SOP. We believe double-digit growth, strong balance
sheet and an 18% potential upside (excluding 1% dividend yield) still warrant a BUY rating.
MKHMKHMKHMKH • Earnings growth will accelerateEarnings growth will accelerateEarnings growth will accelerateEarnings growth will accelerate at the Property and Plantation divisions close to 2016, as completion of MRT stations in
Kajang drive up property sales and the oil palms enter prime age; we are projecting 32% earnings CAGR over FY13-16F
• Property business is enjoying allallallall----time high unbilled salestime high unbilled salestime high unbilled salestime high unbilled sales and is on track to achieve record high sales target of RM800m
for FY14 (vs Rm580m in FY13)
• Impressive FFB production growthImpressive FFB production growthImpressive FFB production growthImpressive FFB production growth set to increase plantation’s contribution to 33% and 38% of Group earnings in FY14
and FY15, respectively, making MKH the cheapest plantation proxy at 8x PE vis-a-vis peers' average of 16x
• Maintain highMaintain highMaintain highMaintain high----conviction BUY with RM5.85 TPconviction BUY with RM5.85 TPconviction BUY with RM5.85 TPconviction BUY with RM5.85 TP as we believe that MKH is a rare gem that offers both deep value and
strong earnings growth unrivalled by peers
PadiniPadiniPadiniPadini • Entering another earnings upcycle.Entering another earnings upcycle.Entering another earnings upcycle.Entering another earnings upcycle. We like Padini on 3 investment angles, i.e. (1) strong store space expansion of 13%
CAGR, (2) SSS growth of 5% p.a. for FY14 and FY15, and (3) extensive distribution network and diversified brand
portfolio. On this note, we anticipate Padini to enter another 3-year earnings upcycle between FY14 and FY16 with
earnings CAGR of17%.
• Solid fundamentals with unjustified cheap valuation. Solid fundamentals with unjustified cheap valuation. Solid fundamentals with unjustified cheap valuation. Solid fundamentals with unjustified cheap valuation. Padini’s extensive distribution network and strong local knowledge
are its solid competitive advantages against its foreign competitors. This coupled with its diversified brand portfolio
would enable the company to capitalise on the structural discretionary consumption growth driven by the country’s
young population. Valuation (9x FY15 P/E- ex-cash) and yield are very compelling with the company consistently
generating high ROE of more than 24% over the past 6 years.
• BUY with RM2.55 TP. BUY with RM2.55 TP. BUY with RM2.55 TP. BUY with RM2.55 TP. Padini is our high-conviction BUY with TP of RM2.55, pegged to 14x FY15F EPS. Our target PE is
reasonable as it implies 12x ex-cash PE and falls within +1 and +2 SD of its 5-year historical PE band, and is well
supported by the expected earnings upcycle in FY14-FY16.
GlobetronicsGlobetronicsGlobetronicsGlobetronics • Strong growth in sensor business. Strong growth in sensor business. Strong growth in sensor business. Strong growth in sensor business. GTB continues to see improved loadings for proximity sensors (built into smartphone
and tablets) from its Swiss customer. In addition, the company has also recently started mass production of a new LED
sensor module which may be built into a new wearable device. The sensor division now accounts for 30-40% of GTB’s
revenue and will be the key growth driver going forward.
• Quartz devices and LQuartz devices and LQuartz devices and LQuartz devices and LED/SSL divisions remain solid. ED/SSL divisions remain solid. ED/SSL divisions remain solid. ED/SSL divisions remain solid. Current monthly production volumes for its quartz devices and
LED/SSL divisions remain solid, rising by 20% y-o-y given robust demand and new product transfers by existing key
customers such as Epson Toyocom and Cree.
• MaintMaintMaintMaintain BUY and RM5.00 TP ain BUY and RM5.00 TP ain BUY and RM5.00 TP ain BUY and RM5.00 TP pegged to 18x FY15 EPS which is +1 SD of the 10-year historical P/E band. We believe this
is reasonable given GTB’s strong earnings growth (3-year earnings CAGR of 18%) and healthy balance sheet. Moreover,
there is also further upside to our forecasts, which could potentially come from new products wins and stronger-than-
Financial GroupFinancial GroupFinancial GroupFinancial Group
• UnderUnderUnderUnder----appreciated high quality laggardappreciated high quality laggardappreciated high quality laggardappreciated high quality laggard. With the strong foundation laid (post-EON), the Group’s banking operations are
poised to leverage on an enlarged base. Focus over the next 12-18 months will be on Islamic banking, wealth
management and SMEs. Success of these strategies will provide a good boost to earnings.
• HLA HLA HLA HLA –––– AAAAn overlooked jewel. n overlooked jewel. n overlooked jewel. n overlooked jewel. Higher standards of living, and low insurance penetration rate (3% of GDP) in Malaysia
should drive demand for life insurance products. HLA’s premium growth will be led by its strong distribution network
which includes 9,500 agents (fourth largest in Malaysia) and direct access to HLB’s network for distribution of
bancassurance products and cross-selling opportunities. We expect sequential improvement in underwriting margins, as
HLA grows the more profitable investment-linked products. An IPO could further unlock value once HLA becomes
sizeable, in our view. Assuming HLA is valued at 2.0x BV (insurance M&As in the last two years were priced at 1.4-2.9x
BV), this could unlock RM2.2bn and add RM1.00 to our SOP-derived TP for HLFG.
• Maintain BUY and RM18.80 TPMaintain BUY and RM18.80 TPMaintain BUY and RM18.80 TPMaintain BUY and RM18.80 TP,,,, based on SOP. HLFG has low trading liquidity and is trading at a discount (c.15%
holding company discount) to HLB. The previous offers to privatise HL Cap and Guoco are seen as a prelude to further
corporate streamlining, which could include a privatisation offer for HLFG. The previous two offers were priced at 30-
40% premiums to their 6-month average prices
RHB CapitalRHB CapitalRHB CapitalRHB Capital • Turning around. Turning around. Turning around. Turning around. RHBC should see its final days of high provisions as asset quality issues should have been settled. Cost
synergies should also start to materialise in subsequent quarters. Elsewhere, revenues should start to pick up in the next
few quarters after a fairly weak 1Q14. Improving loan loss coverage ratio as asset quality issues are resolved and model
risk adjustments are imputed would be an added catalyst.
• Potential restructuringPotential restructuringPotential restructuringPotential restructuring. CIMB, RHBC and MBSB had entered into a 90-day exclusive agreement to negotiate for a
proposed merger and creation of a mega Islamic bank. We estimate the enlarged banking group would have combined
assets valued at RM613bn (US$188bn; as at 31 Mar 2014). The merged entity would displace Maybank’s #1 ranking in
Malaysia (by total assets) with total assets of RM578bn (US$177bn) to become Malaysia’s largest banking entity.
• Maintain BUY and RM10.00Maintain BUY and RM10.00Maintain BUY and RM10.00Maintain BUY and RM10.00 TPTPTPTP. Taking the cue from the HLB-EON M&A transaction which priced EON at 1.4x BV, we
applied a 10% premium to the RHBC’s current valuation which lifts our TP to RM10.00 (stand-alone TP was RM9.10).
MMCMMCMMCMMC • Earnings momentum to pick upEarnings momentum to pick upEarnings momentum to pick upEarnings momentum to pick up.... MMC’s earnings for 2Q14 should rebound strongly as the maintenance at Tanjung Bin
was completed end-February. Additionally, berths 13 and 14 for PTP have been completed raising total installed capacity
to 10.5m TEU. It is targeting 9m TEU in 2014 (vs 7.6m in 2013) but there could be some downside with the abortment
of the P3 alliance.
• Increasing infrastructure exposure.Increasing infrastructure exposure.Increasing infrastructure exposure.Increasing infrastructure exposure. For YTD 2014, MMC has won two new infrastructure jobs worth RM668m without its
usual JV partner Gamuda. The first was Langat 2 Water Treatment Plant Phase 1 worth RM338m and the recent
RM300m civil and infrastructure facilities Pengerang Cogeneration plant for the RAPID project. With the eventual listing
of Malakoff and Johor Port, MMC’s holding company status will rise but its increased presence as an infrastructure proxy
should narrow the discount. For FY13, construction contributed 22% of net profit, the second highest after Johor Port
at 24% and the next major catalyst is the formalisation of PDP role for MRT Line 2.
• BUY, TP RM4.95.BUY, TP RM4.95.BUY, TP RM4.95.BUY, TP RM4.95. In our view, the market is still ignoring the deep intrinsic value of MMC due to lackluster earnings
delivery and delays in listing of its subsidiaries. We expect stronger momentum going forward with the conclusion of
maintenance works at Tanjung Bin and increased throughput for PTP. At the current price, the market is assigning a
residual value of just RM1.3bn (assuming listing of Malakoff at RM10bn) which is the implied value the market is
assigning to its ports, construction, water and 4,556 acres of land bank.
Bursa MalaysiaBursa MalaysiaBursa MalaysiaBursa Malaysia • Low hanging fruitLow hanging fruitLow hanging fruitLow hanging fruit. We believe a revamp in fee structure is on the cards, given that the last revision on listing fees was
2008, and taking the cue from Singapore’s SGX revision in Jul 2013. A 40% increase in listing fees would raise FY15F
earnings by 8%.
• Streamlining regulatory and surveillance roles. Streamlining regulatory and surveillance roles. Streamlining regulatory and surveillance roles. Streamlining regulatory and surveillance roles. In our view, shifting the regulatory functions from Bursa to the Securities
Commission would eliminate duplications and conflict of interests for Bursa, currently a regulator and also a listed entity.
There should be immediate cost savings equivalent to 7% of earnings.
• Enhancing liquidityEnhancing liquidityEnhancing liquidityEnhancing liquidity; in line with the government’s efforts to liberalise capital markets. Bursa can enhance its retail
participation by offering incentives for share splits and by encouraging companies to voluntarily raise free floats. Many
strong listed companies in Malaysia are tightly held by their founders. In Indonesia, companies with a free float of over
40% will qualify for a 5% tax reduction. If GST replaces stamp duty (like in Singapore), it could lighten investors’ tax
burden. GST is levied on transaction costs and should be lower than the stamp duty currently levied on contract value.
Maintain BUY with DDM-based RM10.10 TP.
TA EnterpriseTA EnterpriseTA EnterpriseTA Enterprise • Deserves scarcity premiumDeserves scarcity premiumDeserves scarcity premiumDeserves scarcity premium.... TAE’s stockbroking franchise stands out among the remaining players because of its sizeable
market share and strong retail base. Consolidation among brokers had been apparent with increased competition
where valuations benchmarks were set between 1.1-1.9x BV.
• Improving property sales will continue to lift profits. Improving property sales will continue to lift profits. Improving property sales will continue to lift profits. Improving property sales will continue to lift profits. Development of its prime land bank in KL could raise our SOP
valuation. It owns 7 acres of very valuable land in key growth areas in the Klang Valley (2 acres in KLCC and 3 acres in
Bukit Bintang) as well as overseas in Canada and Australia.
• BUY withBUY withBUY withBUY with RMRMRMRM1.201.201.201.20 TPTPTPTP. The stock is trading at 0.9x BV. This is clearly not justified with the expected increase in
profitability from higher property income and scarcity premium with more consolidation in the broking industry taking
place.
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DBSV recommendations are based an Absolute Total Return* Rating system, defined as follows:
STRONG BUYSTRONG BUYSTRONG BUYSTRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)
BUY BUY BUY BUY (>15% total return over the next 12 months for small caps, >10% for large caps)
HOLDHOLDHOLDHOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)
FULLY VALUEDFULLY VALUEDFULLY VALUEDFULLY VALUED (negative total return i.e. > -10% over the next 12 months)
SELL SELL SELL SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)
Share price appreciation + dividends GENERAL DISCLOSURE/DISCLAIMER GENERAL DISCLOSURE/DISCLAIMER GENERAL DISCLOSURE/DISCLAIMER GENERAL DISCLOSURE/DISCLAIMER This report is prepared by AllianceDBS Research Sdn Bhd (“ADBSR”) (formerly known as HwangDBS Vickers Research Sdn Bhd), a subsidiary of Alliance Investment Bank Berhad (“AIBB”) and an associate of DBS Vickers Securities Holdings Pte Ltd (“DBSVH”). This report is solely intended for the clients of DBS Bank Ltd and DBS Vickers Securities (Singapore) Pte Ltd, its respective connected and associated corporations and affiliates (collectively, the “DBS Vickers Group”) only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of ADBSR. The research set out in this report is based on information obtained from sources believed to be reliable and ADBSR, its holding company AIBB, their respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the “Alliance Bank Group”) do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to change without notice. This document is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. The Alliance Bank Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The Alliance Bank Group, along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. The Alliance Bank Group may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking/corporate advisory and other banking services for these companies. They may also have received compensation and/or seek to obtain compensation for broking, investment banking/corporate advisory and other services from the subject companies. Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed and it may not contain all material information concerning the company (or companies) referred to in this report. The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by the Alliance Bank Group (and/or any persons associated with the aforesaid entities), that: (a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and (b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk
assessments stated therein.
Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report. DBS Vickers Securities (USA) Inc ("DBSVUSA")"), a U.S.-registered broker-dealer, does not have its own investment banking or research department, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months.
ANALYST CERTIFICATIONANALYST CERTIFICATIONANALYST CERTIFICATIONANALYST CERTIFICATION The research analyst primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report. As of the date the report is published, the analyst and his/her spouse and/or relatives who are financially dependent on the analyst, do not hold interests in the securities recommended in this report (“interest” includes direct or indirect ownership of securities).
COMPANYCOMPANYCOMPANYCOMPANY----SPECIFIC / REGULATORY DISCLOSURES SPECIFIC / REGULATORY DISCLOSURES SPECIFIC / REGULATORY DISCLOSURES SPECIFIC / REGULATORY DISCLOSURES
1.1.1.1. DBS Bank Ltd., DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”), their subsidiaries and/or other affiliates do not have a proprietary position in the securities recommended in this report as of 23 Jul 2014.
2.2.2.2. DBS Bank Ltd., DBSVS, DBSVUSA, their subsidiaries and/or other affiliates may beneficially own a total of 1% of any class of common equity securities of the company mentioned as of 25 Jul 2014.
3.3.3.3.
Compensation for investment banking services:Compensation for investment banking services:Compensation for investment banking services:Compensation for investment banking services:
DBS Bank Ltd., DBSVS, DBSVUSA, their subsidiaries and/or other affiliates may have received compensation, within the past 12 months, and within the next 3 months may receive or intends to seek compensation for investment banking services from the
Market Focus
Malaysia Strategy
Page 20
company mentioned.
DBSVUSA does not have its own investment banking or research department, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.
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MalaysiaMalaysiaMalaysiaMalaysia This report is distributed in Malaysia by AllianceDBS Research Sdn Bhd ("ADBSR") (formerly known as HwangDBS Vickers Research Sdn Bhd). Recipients of this report, received from ADBSR are to contact the undersigned at 603-2604 3333 in respect of any matters arising from or in connection with this report. In addition to the General Disclosure/Disclaimer found at the preceding page, recipients of this report are advised that ADBSR (the preparer of this report), its holding company Alliance Investment Bank Berhad, their respective connected and associated corporations, affiliates, their directors, officers, employees, agents and parties related or associated with any of them may have positions in, and may effect transactions in the securities mentioned herein and may also perform or seek to perform broking, investment banking/corporate advisory and other services for the subject companies. They may also have received compensation and/or seek to obtain compensation for broking, investment banking/corporate advisory and other services from the subject companies.
Wong Ming Tek, Executive Director, ADBSR
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