HLIB Research Summary - 11 Nov 2014

Plantations (NEUTRAL  çè)

Inventory rises for the 4^th month

• Inventory increased for the 4^th consecutive month, by 3.7% mom to 2.17m tonnes mainly on weaker exports, which more than offset a 0.2% mom decline in output.
• While production has already reached its peak (and will start trending down from Nov, in our view), we believe CPO stockpile will likely remain high in Nov, as lower CPO output will likely be offset by the absence of seasonal restocking activities, CPO’s narrow discount against the soy oil, and the economic viability of voluntary biodiesel demand amidst current low crude oil price.
• Maintain NEUTRAL stance on the sector.

KLK (HOLD çè)

 Teams up with Astra Agro Lestari

§       KLK entered into a JV agreement with PT Astra Agro Lestari Tbk (AALI), which AALI will acquire a 50% stake in PT Kreasijaya Adhikarya (which is involved in the business of refinery and trading of refined palm oil products) for RM81.2m.

§       Positive, as the latest move (by teaming up with AALI) will ensure the supply of quality feedstock for its refinery. This is particularly important for KLK as its own oil palm estates in Indonesia could only supply up to 60% of the CPO feedstock required for its refineries in Indonesia .

§       Maintain earnings forecasts, TP of RM20.41, as well as HOLD recommendation on the stock

MAHB (BUY çè)

Funding for the Remaining 40% ISGA

• MAHB announced rights issue exercise of 274.8m rights shares on the basis of 1 for 5 existing MAHB shares.
• Based on illustrative price of RM4.80, MAHB will raise RM1.3bn funds, which RM1.2bn will be used to fund the acquisition of the remaining 40% stake in ISGA from Limak.
• Net EPS dilution impact for FY15 and FY16 are -10.5% and -8.9% respectively.
• Remained positive on MAHB’s long-term earnings growth. Maintained BUY with unchanged TP of RM8.90 (RM8.10 post the completion of ISGA acquisition).

MAHB (BUY çè)

An Improvement in Oct 2014

• MAHB’s reported turnaround in pax growth at +0.1% yoy in Oct, after negative growth in the past 2 months.
• Growth mainly driven by international segment – Australia , New Zealand and India sectors.
• The seat capacity offered by airlines in Nov and Dec are +6.7% yoy, promising continued positive passenger growth for the remainder of the year.
• Remained positive on MAHB’s long-term earnings growth. Maintained BUY with unchanged TP of RM8.90 (RM8.10 post the completion of ISGA acquisition).

IOIPG (BUY çè)

Proposed Rights Issue

• IOIPG proposed renounceable rights issue of 539,835,787 new shares at RM1.90 on the basis of one right for every 6 IOIPG shares.
• Based on the issue price of RM1.90, IOIPG would raise RM1,025.7m. We understand that bulk of the raised fund will be used for for its townships in both Bangi and Sepang, as well as for the integrated development in Putrajaya.
• Basic dilution of the proposed exercise is about 14% and will reduce our TP from RM3.94 to RM3.38. However, we believe the dilution will be mitigated by incremental earnings from IOIPG’s future investment opportunities. Gross gearing will be slightly reduced from 0.18x to 0.17x post the rights issue exercise.
• We are positively surprised on the proposed exercise as it strengthens the balance sheet and provides shareholders to participate at a 30% discount to market price.
• To note, the proposed rights will be fully underwritten by its major shareholders. The proposed exercise is expected to be completed by 1QCY15.
• Maintain TP at RM3.94 (10% discount to RNAV, 17.3x CY15 P/E). Our TP will be adjusted to RM3.38 post the rights issue exercise. Maintain BUY.

DRB (BUY çè)

One More Step Towards Integrated Logistics

• DRB proposed to acquire 100% Gading Sari for RM72m or RM4.80/share.
• Gading Sari is a private air transportation company providing services to Poslaju. The acquisition is line with DRB to develop integrated logistic services via KLAS.
• Relatively negative on the expensive valuation at 10x P/NTA (2013) and 32.7x P/E (2013). DRB may need to pay premium for the company’s Air Operator Certificate (AOC).
• Maintained BUY with unchanged TP of RM3.00 (Based on SOP).

CBIP (HOLD çè)

Good fundamentals priced-in

• We continue to see bright earnings visibility at the oil mill engineering division offsetting the higher tax expense. This is underpinned by its all-time-high order book, the increasing harvesting areas of oil palm plantations as well as management’s ongoing efforts in expanding the division’s capacity.
• While management remains confident in securing sizeable contracts to replenish order book for the SPV division, we believe 2015 will be a relatively quiet year for this division. In our opinion, potential new contracts may not arrive in time to replenish its depleting order book given the lumpy and irregular nature of this division’s contract flow.
• Management highlighted that planting development works will continue (albeit at slower pace of ~3,000 ha p.a. vs. 6,000 ha p.a. previously), although there are still uncertainties on foreign shareholding cap in Indonesia .
• We reduced our FY12/15-16 net profit forecasts by 18.4-25.9%, largely to reflect: (i) higher tax expense; and (ii) lower earnings at the SPV, which more than offset slightly higher contract wins and EBIT assumptions at the palm oil mill engineering division.
• SOP-derived TP on the stock is lowered by 6.2% (from RM2.27) to RM2.13, post adjustments made in our valuation methodology for its plantation assets in Malaysia and net profit forecasts. Maintain HOLD recommendation.

Economics

Oct-14 PMI: Mixed Bag of Results

• Global PMI in October continued to show weak global growth momentum with greater growth differentials across regions. Manufacturing PMI was stable at low level of 52.2 (Sep: 52.2) while services PMI fell to a six-month low of 53.7 (Sep: 55.2).
• Fears of growing dimness in the Euro zone and China that would weigh on the US-led recovery continued to mount. Downside risks to global growth persisted during the month, with recent financial market volatility, falling energy prices and US braving a rate hike next year. Meanwhile, we expect the world economy to grow by 3.6% next year (2014f: +3.3%).
• Mixed bag of PMI results across Malaysia ’s top trading partners in October suggested an uneven and less-favourable growth outlook for exports and IPI in the months ahead. Together with softer domestic financial activities and lower commodity prices, we expect GDP growth to slow to 5.6% in 2H14 (1H: +6.3%) and 5.0% in 2015 (2014f: +6.0%).
• A more dovish tone in November’s MPS also lends support to our expectations of OPR pause throughout 2015.  

Traders Brief

Must break above 10-d SMA for resumption of uptrend

• For a resumption of an upward momentum towards 1850, KLCI must rebound quickly to surpass 10-d SMA (now at 1838) levels. Otherwise, a crack of the lower 1818 (20-d SMA) and 1824 zones will trigger more selldown towards 1800 zones.
• Closed positions: We had closed our SELL positions on BORNOIL and YGL after hitting our R1/R2 targets on 10 Nov.
• Today’s recommendation: Trading BUY on SKPETRO

Trading idea - SKPETRO

SKPETRO: Double Positive Divergence

• Share price is expected to go higher mainly because share price made lower low while all indicators (MACD & RSI) made higher low on hourly as well as daily chart, triggering double Positive Divergences which indicate weakness in the downtrend momentum and selling pressures are exhausted.
• Further upside targets are at RM3.28 and RM3.41, with a long-term objective of RM3.62. Critical supports are pegged at RM3.06 and RM3.00. Cut loss at RM2.94.