RHB Equity 360° 11 August 2009

RHB Equity 360°

11 August 2009



Top Story : Banks – Earnings and fair values upgraded Overweight

Sector Update

- NPLs – story of demise exaggerated. Revised down our gross NPL ratio from a 2%-points rise to a 0.5%-point rise in 2009.

- Improving non-interest income prospects.

- Loan growth above expectations. Raised our assumption to 6% for 2009 but maintain 7-8% for 2010.

- Earnings and fair value for banks upgraded by 15-21%. New forecasts are generally above consensus.

- Sector PER valuations back to undemanding low-teens levels with aggregate net profit growth of 11% in 2010.

- Other positives: low level of foreign shareholdings, largest weighting in the FBM KLCI, potential more active capital management in 2010, increased risk appetite and lower than expected rise in NPLs.

- Historical trend suggests that valuations tend to overshoot in the early stage of an economic recovery.

- Maintain Overweight. Top picks (in order of preference) are BCHB, AMMB and Public Bank.





Sector Update


Oil & Gas : Notes from O&G Day – Newfield Exploration Co, View from the inside Overweight

Sector Update

- Newfield Exploration Company is a US E&P company founded in 1989 and listed on New York Stock Exchange (NYSE) in 1993. While Newfield’s international foray commenced back in 1997 (i.e. Bohai, China), the company has only been active in Malaysia waters beginning 2004.

- The company considers crude oil price of US$60/barrel a generous threshold in which most conventional E&P projects would begin to flow again. However, the company remains cognisant on viability of development of larger oil fields (which requires heavier capex spending) given the still tight financing environment and risk of crude oil price trending downwards.

- While US rig count has plunged by 50% since Nov 08, decline in number of active rigs in Asia is minimal given still resilient E&P activities by cash rich national oil majors and international oil companies.

- While costs of exploration and production have risen sharply over the past 3-4 years, according to Newfield, the current E&P costs remain stubbornly high despite the fact that crude oil price is still 50% lower than its high of US$147/barrel in Jul 08.

- We expect stronger contract flows ahead as most conventional E&P projects are able to proceed again at current oil price of above US$60/barrel. Reiterate Overweight. Top picks: Wah Seong and Kencana.



Plantation : Strong growth in exports, disappointing production Overweight

Sector Update

- Malaysia’s CPO production rose by 3% mom in July 09, while exports rose by a large 13.2% mom, resulting in a decline in CPO stock levels to 1.33m tonnes (down 5.7% mom from 1.41m tonnes in June 09). As such, stock/usage ratio fell by 0.6%-pts to 7.4% (from 8% in June 09) in July 09. If weather-related problems persist and El Nino becomes more severe, the traditionally higher CPO production levels expected during the peak production period of July-Oct/Nov may not materialise, and stock/usage ratios may remain weak.

- Over the recent month, there have been five main developments affecting the palm oil industry, including: 1) Crude oil price strengthening; 2) US soybean crop – turning out well, but delayed; 3) Malaysian CPO production – affected by weather; 4) El Niño strengthening and intensifying; and 5) Sustained large discounts between CPO and competing vegetable oils.

- We maintain our tactical Overweight stance on the sector, and continue to advise investors to adopt a trading strategy in the short term. We have updated our graphical monitors of CPO price versus share prices, highlighting potential trading opportunities in the market at current levels. The stock whose share price is closest to reflecting current CPO prices is IOI Corp, while the stock whose share price is furthest away would be IJMP. No change to our forecasts and recommendations of Outperform for IOIC, KLK, Sime Darby and CBIP, Market Perform for Genting Plantations and Underperform for IJMP.





Corporate Highlights



Media Prima : Taking NSTP private? Outperform

News Update

- According to the Financial Daily, Media Prima is believed to have proposed to take NSTP private via a share swap exercise. Further, the daily had learnt that the NSTP board had approved in principle a proposal to exchange each share of the company for one Media Prima share.

- In our view, by privatising NSTP, this would allow Media Prima to fully consolidate NSTP’s strong earnings growth next year (almost six-fold) as well as control over its cash flows.

- Assuming the report is true, we estimate this move could enhance Media Prima’s FY10 and FY11 EPS by around 4% and 2% respectively, while its proforma 1Q09 net gearing ratio would fall to 0.58x from 0.71x, by our estimates.

- It was reported that minority shareholders could potentially oppose a share swap as NSTP has assets that, if unlocked, are worth much more than its share price.

- No change to our earnings forecasts for now.

- Maintain fair value of RM1.84 and Outperform call on the stock.



Glomac : Sells Office Building In Kelana Jaya Outperform

News Update

- Glomac sells its office building in Kelana Jaya to Koperasi Kakitangan Bank Rakyat Berhad (SekataRakyat) for RM22.6m (or RM463 psf) and this will result in disposal gain of RM4.6m.

- The company has also proposed a special gross dividend of 1 sen/share for FY04/09, bringing total net dividend for FY09 to 5.9 sen. This translates into a net yield of 5.1%.

- The disposal and proposed special dividend are in line with our expectation. We are positive on the deal as: a) disposal price is 13-126% higher than the current asking price of RM204.3-410 psf for office space in Kelana Jaya; b) enhance FY10 earnings with a disposal gain of about RM4.6m; c) bulk of the cash proceeds will be used as the group’s working capital (after paying the special dividend).

- No change in our normalised earnings forecasts. Indicative fair value is maintained at RM1.23, based on 0.65x P/NTA. Maintain Outperform rating on the stock.



AirAsia : Plans to replicate business model in Vietnam hit a snag Underperform

News Update

- AirAsia and Vietnam Shipbuilding Industry Group have terminated a Letter of Intent signed in Aug 07 for the purpose of setting up a 30:70 low-cost carrier in Vietnam called Vina AirAsia.

- The latest development may be an indication of the still high entry barrier to the airline sector in certain countries in the region. Gaining entry to a new market is one key challenge, the ability to make money from the new market is another. AirAsia’s operations in Thailand and Indonesia have yet to turn in meaningful profits after 4-5 years.

- Forecasts are maintained as we did not reflect any contribution from Vietnam.

- Indicative fair value is RM1.09. Maintain Underperform.



Axiata : XL 2Q09 results – Further operational improvements qoq Underperform

Company Update

- XL reported 2Q results were broadly within our expectations. Although 1H core pre-tax profit of Rp84.4bn only accounted for 21% of our full-year estimate, we are keeping our numbers unchanged for now on expectations that earnings in the coming quarters would pick up.

- Qoq, revenue rose 14% on stronger usage with both minutes and sms traffic rising by 14% and 48% qoq respectively. 2Q EBITDA jumped 31% qoq as EBITDA margin improved by 5.7%-pts qoq.

- XL’s focus remains on improving the utilisation of its network and to monitise the traffic volumes. Average voice revenue/minute has increased by around 12% after hitting a trough in Feb ’09, although the sustainability of this trend would depend on the competitive landscape.

- No change to our earnings forecasts at this juncture.

- SOP-derived fair value of RM2.45 and Underperform call maintained.