Monday, March 01, 2010

MIDF Stock Selection

Sime Darby – 1HFY10 Results (Maintain NEUTRAL, Upgrade TP: RM8.70 from RM8.30)

Sime Darby registered a net earnings of RM1,112.8m in 1HFY10, which is equivalent to 48%, 39% and 45% of ours, consensus and Sime Darby’s full-year estimates respectively. Industrial division showed lower operating profit and Energy & Utilities bled red ink. However, the improved results from Plantation , Property, Motor, Healthcare and Other divisions partly mitigated the decline in 1HFY10 net earnings. The historical mean PER of Sime Darby is 17x, with a lower and an upper band of 10x and 24x respective. In view of the hitherto accommodative liquidity situation, we expect the PER rating of a key index stock such as Sime Darby to hover within the premium half of its PER band. At 66-percentile point, we arrived at a value of RM8.70 on FY11 earnings. We thereby maintain our NEUTRAL recommendation on the stock with a revised target price of RM8.70.

IJM Plantation – 9MFY10 Results (Upgrade to NEUTRAL from TRADING SELL, Maintain TP: RM2.30)

IJMP registered a net profit of RM63.7 million in 9MFY10, a decline of 44.4%yoy. The result is within expectation and represents 74% and 75% of ours and consensus FY10 forecasts respectively. Performance was impacted by lower average CPO selling price (9MFY10: RM2,205/MT; 9MFY09: RM2,874/MT) and lower year-to-date FFB (-1.9%yoy) output. However we expect IJMP to perform satisfactorily in the coming quarters owing to the current firmer undertone in CPO prices. Hence we upgrade our recommendation to NEUTRAL with a target price of RM2.30, pegged at 17x of FY11 earnings.

IJM Corp – 9MFY10 Results (Maintain BUY, Unchanged TP: RM5.45)

IJM 9MFY10 net profit of RM359.8m came in below our expectation. The net profit declined by 18%yoy despite an increase of 27%qoq. Forecast for FY11 and FY12 are maintained, backed by RM3.6b orderbook and positive exposure to the construction sector in India and potential local projects. We maintain our BUY recommendation with a target price of RM5.45 per share, based on sum-of-parts valuation. The stock represents a 23% upside from the current level.

Air Asia – 4QFY09 Results (Maintain NEUTRAL, Upgrade TP to RM1.47 from RM1.40)

AirAsia’s FY09 revenue is RM3,178.9m, within our expectations with a difference of only 0.2%, while it is above the consensus by 8.8%. AirAsia’s FY09 net profit of RM549.1m exceeded ours and consensus expectations by 20.9% and 10.5% respectively. We had overestimated their costs, especially the finance portion. We are assigning a PER of 10x based on the average PER of its peers. As the market already prices the stock close to our target price, we are maintaining our NEUTRAL recommendation, with a revised target price of RM1.47.

RHB Cap – 4QFY09 Results (Reaffirm BUY, Upgrade TP to RM6.90 from RM6.60)

4Q09 net profit of RM336.4m was higher by 0.5%qoq and 70.8%yoy. 12M09 net profit of RM1.2b was higher than 12M08 by 15%. Cumulative net profit for FY09 exceeded our expectation by 7.7% and that of consensus full year estimates by 16.6%. ROE for 12M09 was 14.5% higher than 12M08’s 14.1%. The improved profit performance was contributed mainly by stronger net interest income and Islamic banking income. We are reaffirming our BUY call on the stock with increased target price from RM6.60 to RM6.90 based on 12 times PER on FY10 EPS.

Nestle – 4QFY09 Results (Maintain NEUTRAL, Upgrade TP to RM35.30 from RM32.00)

Nestle’s FY09 net profit grew +3.2%yoy to RM351.8m, accounting for 100.9% of our full year estimates. Commendable results in 4QFY09 (+11.6%yoy or 8.1%qoq) are the key factor. Halal tax incentives and better sales mitigated lower EBIT margin on intensified marketing and additional office relocation expenses in 4QFY09. We revised upward our Target Price for Nestle to RM35.30 (from RM32.00), derived from perpetual DDM valuation with an estimated risk free rate of 4.5%. However, as upside for Nestle’s share price is only 4.1%, we maintain our NEUTRAL call.

Kulim – 4QFY09 Results (Maintain NEUTRAL, Upgrade TP to RM7.28 from RM7.00)

Kulim registered FY09 net earnings of RM142.1m or equivalent to 106% and 84% of ours and consensus estimates. The actual FY09 figure slightly exceeded our expectation (due to better than expected plantation performance in 4QFY09) but way short of consensus. The plantation division recorded lower operating profit due to the decline in CPO prices. Oleochemicals division reported a loss due to lower output prices. On the other hand, the foods & restaurants business remained profitable and expanded locally as well as abroad. The historical mean PER of Kulim is 7.7x, with a lower and an upper band of around 5x and 11x respectively. In view of the better growth prospects engendered by the recent acquisition, we expect the PER rating of Kulim to hover within the premium half of its PER band. At 75-percentile point, we arrived at a value of RM7.28 on FY10 earnings. We thereby maintain our Neutral recommendation on the stock with a revised target price of RM7.28.

Kinsteel – 4QFY09 Results (Reaffirm BUY, Unchanged TP: RM1.20)

4Q09 net profit of 41.1% was higher by 216.2% compared to 3Q09. 12M09 net profit of RM18.2m was 43.1% lower than 12M08. 2009 was impacted by lower average selling prices for steel products. 12M09 net profit exceeded our expectation of a loss of RM3.2m and was better than consensus estimates of a net profit of RM4.2m. We make no changes to our forecast for FY10. We reaffirm our buy call on the stock with an unchanged Target Price (TP) unchanged at RM1.20, pegged at 8 times FY10 EPS.

Century – 4QFY09 Results (Maintain BUY, Revised TP: RM2.25 from RM2.32)

Century Logistics’ performed better than expected. FY09 net profit of RM20.9m is 14.6% and 20.6% better than ours and consensus estimates respectively. The economic recovery continues to benefit Century as increased business activities from new and existing customers resulted in a higher revenue of RM210.9m for FY09, a 28.7% yoy increase. We maintain our BUY recommendation for Century as we expect the company to continue with its good performance in FY10 as the economic recovery continues. However, we revise our target price slightly RM2.25 (from RM2.32 previously) to better reflect the start of slower growth and the moderation of restocking activities.

Hock Seng Lee (HSL) – 4QFY09 Results (Maintain BUY, Upgrade TP to RM1.40 from RM1.34)

HSL FY09 net profit came in within our expectation. Overall, FY09 results were impressive as compared to the preceeding year. We raise our FY10 net profit forecast by 4% as HSL will benefit from increased infrastructure spending and the development of SCORE. The group remained in a net cash position. We reiterate our BUY call with an increase in target price of RM1.40 from RM1.34 based on 12x FY10 PER. The stock offers a 12-month potential return of 12% (including dividend yield of 1.7%).

YTL Power– 2QFY10 Results (Maintain BUY, Unchanged TP: RM2.45)

YTL Power announced its 2Q10 result which was below ours and market’s expectation. 1H10 earnings came in at RM481.3m, accounting for 43% of our full year estimate of RM1.13b. The shortcoming was due to a lower than expected gross margin. A slight revision (-7%) made to our forecasts with EPS for FY10 and FY11 at 15.4 sen and 17.8 sen respectively. • Maintain BUY on YTL Power with target price unchanged at RM2.45/share based on DCF with a 10% hurdle rate.

Ann Joo – 4Q09 Results (Maintain NEUTRAL, TP: RM2.80)

4Q09 net profit after tax of RM22.8m was lower by 50% than the preceding quarter. In 4Q09, average selling steel prices was lower

and margin fell to 10.8% (vs. 14.0% in 3Q09). 12M09 net profit after tax of RM31.6m was lower by 77.3% compared to 12M08 due to lower

average selling prices of steel products. 12M09 net profit after tax accounted for 70% of our forecast and 51% of consensus estimates. We are reaffirming our NEUTRAL call on the stock with an unchanged target price of RM2.80 based on 8 times PER on FY10 EPS.

Lion Industries – 2QFY10 Results (Upgrade to BUY from NEUTRAL, Revised TP: RM2.10 from RM1.70)

2Q10 net profit of RM83.4m was higher by 19.7% compared to 1Q10. 6M10 net profit of RM153.2m accounted for 73.5% of forecast and 64% of consensus full FY10 estimates. Lower revenue due to decline in selling prices for steel products was offset by stronger contribution from associate companies and lower finance cost. For 6M10, share of profit from associate companies was by higher by 154.1%yoy to RM86.5m (vs RM34m in 6M09). We are upgrading our call on the stock to BUY (from NEUTRAL) with target price increased from RM1.70 to RM2.10 based on 6 times PER on FY10 EPS.

KPJ – 4QFY09 Results (Upgrade to BUY from NEUTRAL, Revised TP: RM2.94 from RM2.71)

KPJ Healthcare (KPJ) continues to deliver commendable earnings growth of +25.1%yoy in 4QFY09, translating into 18.9%yoy growth to

RM101.9m for the full year. The FY09 core earnings were slightly above expectation, accounting for 107.5% of our estimated FY09 number. This was due to higher than expected revenue and lower minority interest dilution in 4QFY09. Upgraded to BUY with higher Target Price of RM2.94, derived from 14x revised EPS10 of 21 sen. We believe that our valuation on KPJ is fair, taking into account that regional peers are trading at PER and P/BV range of 11.4x-20.3x and 1.8x-4.2x respectively. Also, KPJ has a relatively higher prospective dividend yield of 4.4% in FY10 compared with peers’ average.

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