BREAD TALK, kim eng maintain BUY with target price $0.6
-This ‘Brand wizard is also a recession warrior. Breadtalk turned in a
profit of $2.1m in 1Q09 from $0.3m in 1Q08. Results met our expectations.
Operating profit almost tripled driven by broad-based double-digit revenue
growth across all business and geographical segments despite the severe
recession. The successful turnaround of its Hong Kong food court operations
and the disposal of the loss-making J Co. Donuts business lifted
bottomline.
-Getting the house in order. The overall bakery business recorded an
operating profit of $1m largely due to a turnaround of the Singapore bakery
operations and lower raw material costs. Operating profits at restaurant
division were slightly lower yoy at $0.6m due to an impairment loss at the
Station Kitchen and startup cost for the Carl’s Junior business. Operating
profits from food courts tripled to $1.3m led by the turnaround in the Hong
Kong food courts. Its retail network continues to strengthen along with new
store additions.
-Successful cost management. The improvement in its operating margins from
1.8% to 5.7% reflects better cost efficiencies through its cost management
programme and enlarged network. Distribution and selling expenses and
administrative expenses were well-contained at 51% of its revenue, an
improvement from 54% a year ago.
-Global ambition very much alive. Robust revenue was recorded across all
geographical segments including the PRC (+34%), Hong Kong (+100%) and
Singapore (+13%). Further, the group has recently awarded the Middle East
Master Franchise to Pan Arabian Gourmet based in Bahrain. Expansion into
the Middle East market affirms the strong brand recognition in ‘BreadTalk’.
The Middle East presents tremendous opportunities that will bring the
group’s F&B presence to a global arena.
-The recipe for success. Breadtalk has proven once again that its good mix
of F&B offerings supports its strong value proposition of being resilient
in a challenging business climate. The stock has good growth prospects over
the long haul underpinned by its F&B network expansion globally. Maintain
BUY at a higher SOTP target price of $0.60 (implied FY09 PER of 16x).
CHINA HONGXING, kim eng maintain SELL with target price $0.16
-Disappointing results. CHHS’s 1Q09 net profit fell by 51% yoy to RMB 56m.
Its earnings were disappointing due to weaker-than-expected revenue and
high A&P expenditure. Its revenue was particularly weak in sports footwear
(-32%) and sports accessories (-74%), which saw declining volumes and ASPs.
Point of sales decreased from 3824 to 3785 as there were more store
closures versus store additions during the quarter.
-Weaker same-store-sales and order book. The group’s same-store-sales were
down by about 11% yoy in 1Q09 and continue to be weak. Negative outlook was
further exacerbated by the poor showing of its recent trade fair orders in
May where orders declined by 14.5% to RMB 440m. Despite orders worth RMB
2.5bn to be delivered by Sep 09, revenue recognition could be much smaller
as the orders will be repriced at lower ex-factory prices, while the
delivery of some orders will be delayed to avoid inventory pile-up.
-Depending heavily on product discounts. With inventories piling up at the
distributors front from an average of 2-3 months to 4-5 months, the group
has to continue to give product discounts to its distributors to sustain
their retail business. In general, the group will reduce its ex-factory
price from 40% to 35% of retail prices. The on-going product discounts will
continue to compress its margins.
-Not cutting back on advertising and promotion expenses. Costly A&P against
falling revenues has led to net margin compression. Selling and
distribution costs that largely comprise of A&P surged to 30% of revenue,
up from 20% a year ago. With a 5-year sponsorship deal as the official
apparel sponsor and partner of the Shanghai Masters ATP1000 games, A&P will
continue to weigh on the group’s bottomline.
-Unlikely to benefit from economic recovery. We have lowered our FY09
earnings estimates by 7% following the weak 1Q. Risks of deteriorating
earnings and defaults on advances to its distributors (~RMB 940m) prevail.
Although the group may consider resuming dividends payout, we doubt it will
be enticing given its high working capital needs. Reiterate Sell at a
target price of $0.16 pegged to its net cash per share. Facing rising
challenges in its core business, CHHS may not benefit from the expected
cyclical recovery in China.
CHINA HONGXING, uob maintain SELL with target price $0.1($0.11) EPS for FY
09-11 cut by 26-28%
-1Q09 results came in worse than expected with profit halved by turnover
drop and margin pressure. 2009 outlook remains challenging given the slow
sales and inventory glut. Maintain SELL.
-Turnover dampened by discounting. China Hongxing Sports’ (Hongxing)
turnover dropped 12% yoy due to heavier discounting to distributors. In
order to help distributors to clear inventories and compensate for the
heavy retail discounting, the Group raised the discount for wholesale from
60% to 64-65% off retail prices. Adding to the turnover decline was the 20%
plunge in sales volume of footwear.
-Decrease in number of stores. The total number of outlets decreased by 39
from 3,824 at end-Dec 08 to 3,785 at end-Mar 09, with 103 new stores opened
and 142 old stores closed.
-Gross margin rebounded. Gross margin was up 4ppt qoq to 40.2% in 1Q09 due
to the larger portion of higher-margin apparel products in sales mix and
raw material cost savings.
-EBIT margin dragged down by higher A&P expenses. EBIT margin declined 7.7%
yoy to 10.8%, attributed to the increase in advertising and promotional
(A&P) expenses. In order to promote sales, the Group increased its
marketing efforts during the period.
-Pileup of inventories at retail level. Due to sales slowdown through
overordering, inventory days of distributors doubled from 75 to over 130
days. Despite this, the Group’s inventory days remained relatively steady
at around 40 days and receivable days dropped to 39 days.
-Collection of lease prepayment from distributors. The Group received
Rmb219m of lease prepayment from distributors in 1Q09, lifting operating
cash flow to over Rmb300m.
-Flat top-line growth. The Group did not provide guidance for turnover
growth this year. We try to estimate the sales based on orderbook and store
opening plans. Orderbook for 2008 grew 8% yoy (1Q08 35%, 2Q08 46%, 3Q08
-20%, 4Q08 -14%). However, given the sales slowdown and inventory glut,
some of the orders may not be realised. The Group has cut its store opening
target from 400 to 300 for 2009. Overall, we anticipate a flat turnover for
2009 (vs -12% for 1Q09).
-Sustained margin pressure. Given the industrywide high inventory level and
intense competition in the low-end sportswear segment, the Group will
continue to provide large discounts to wholesale distributors. In addition,
higher A&P expenses will be needed to promote sales. Thus, we expect EBIT
margin to drop by 6ppt yoy to 12% this year (vs 11% for 1Q09).
-Cut 2009-11 net profit forecasts by 26-28%. Based on the
worse-thanexpected 1Q09 results, we cut our estimates on Hongxing’s 2009-11
net profit by 26-28%. This represents a 35% drop in 2009 and a 7% CAGR in
2010-11.
-Earnings Risk. The Group has paid more than Rmb1.4b of lease prepayment
for its distributors for the opening of over 454 mid-sized stores in prime
locations in 2nd- and 3rd-tier cities. Thus far, it has received almost
Rmb500m of the lease prepayment from distributors. It expects to collect
the remaining Rmb940m by end-09. However, if the distributors see liquidity
pressure, it is uncertain whether the Group could get back all the
outstanding lease prepayment as planned.
-Valuation/Recommendation. Based on our new earnings forecasts, the stock
is trading at 8x 2009 PE vs 4x for S-share consumer stocks. Given the
earnings risk, we maintain our SELL rating with an estimated fair price of
S$0.10, based on 4x 2010 PE.
EPURE, cimb maintain OUTPERFORM with target price $0.52($0.37)
- Within expectations. 1Q09 net profit of Rmb40.7m (+32.4% yoy) was within
consensus and our expectations. Though 1Q09 EPS accounts for only 15% of
our FY09 forecast, largely due to lower revenue recognised, there is no
cause of concern, given the lumpy nature of EPC earnings.
- Revenue rose 7.6% yoy, led by contributions from Hi-Standard and major
turnkey projects. Revenue from Hi-standard represented 6% of the total
while turnkey projects and services accounted for 94%.
- Gross margins improved sequentially, to 35.4% in 1Q09 from 29.5% in 4Q08.
On a full-year basis, gross margins should be stable, as quarterly gross
margins tend to fluctuate with the stage of EPC projects.
- Balance sheet strengthened as net cash shot up to Rmb505.9m (Rmb381.3m in
4Q08) because of stronger operating cash flow and lower capex. The group
also pared down loans to Rmb264.8m in 1Q09 from Rmb343.9m in 4Q08.
- Recurring income through BOT projects. Whenever opportunities arise, the
group will try to build up its recurrent income through BOT projects.
Currently, it has four such projects one in Guangxi, two in Xi’an and one
in Shaanxi. Epure recently took a 15% equity stake in a Lanzhou BOT
project. We believe its net-cash position will allow it to raise its
exposure to BOT projects gradually.
- Positive outlook intact. On the back of increased government efforts, as
well as contracts expected to come from the construction of new plants and
the upgrading and replacement of old and inefficient plants, management
expressed a positive outlook for the water industry.
- Maintain Outperform; higher target price of S$0.52 (from S$0.37). We have
kept our forecasts intact. However, we roll forward our P/E target to CY10,
now pegging it at 10x (8x previously) to reflect an industry-wide
re-rating. As a result, our target price rises from S$0.37 to S$0.52. Epure
has a high-earnings-visibility business and solid track record in
sustaining its margins. Maintain Outperform.
EU YAN SANG, ocbc maintain HOLD with target price $0.37($0.3)
-3Q09 in line with expectations. Eu Yan Sang International Ltd (EYS)
leveraged on its seasonally strong quarter to deliver a credible set of
3Q09 results. Both sales and earnings were in line with our projection,
with its 9M09 earnings forming 80% of our full-year estimate. Revenue grew
10.7% YoY to S$67.9m. Net profit surged 191.7% to S$3.8m in the absence of
impairment charges relating to the disposal of Red White and Pure.
Stripping away the impact of one-off items and eliminating the impact of
losses from discontinued operations included in 3Q08, core operating profit
would have risen by 6.6% but net profit would have fallen by 15.3%.
Effective tax rate swelled to 38.7% from 29.5% due to losses at its foreign
subsidiaries which could not be offset against group profits.
-Growth in sales across key markets. The group registered higher sales
across all its key markets despite the soft retail climate. In particular,
Malaysia turned in an outstanding 17% YoY growth in revenue thanks to
strong hamper sales during the Chinese New Year season. Singapore recorded
a 7% improvement in sales, while Hong Kong delivered a 4% growth in
turnover. The group’s robust sales growth was boosted by the opening of new
stores. It opened one new store in Malaysia and two in Hong Kong in 3Q09,
bringing the net increase in store count for 9M09 to 10 retail outlets.
-Improvement in credit metrics. Cash flow strengthened significantly thanks
to the group’s sound performance. Operating cash inflow grew to S$13.9m
from S$0.4m a year ago. Operational metrics similarly showed encouraging
improvements. Cash conversion cycle improved to 90 days from 109 days,
inventory days declined to 163 days from 171 days, while net gearing
dropped to 6% from 21% on an annualized basis. Management has heightened
its vigilance over receivables and cash conservation in light of the
tightening credit market. We understand that the group has not had to write
off any receivables thus far.
-Maintain HOLD with a higher fair value estimate. Although EYS has
performed reasonably well, management remains cautious over its outlook
given the jittery economic conditions, which could dampen consumer
spending. We are leaving our estimates intact as the group is on track to
meet our S$13.1m net profit estimate for FY09. Our valuation parameter has
been raised to 10x (from 8x) along with the re-rating of its peers,
bringing our fair value estimate to S$0.37 (from S$0.30). We maintain our
HOLD rating on the stock.
GENTING SP, cimb maintain UNDERPERFORM with target price $0.51(from $0.36)
- Broadly in line. After stripping out some S$79m of EI comprising largely
forex and fair value gains, Genting Singapore’s (GS) annualised 1QFY09 core
net loss made up only 20% of our full-year loss projection and 74% of
consensus. But we regard this set of results to be largely within our
expectations given that GS is expected to book-in significant pre-operating
costs for its Sentosa IR project towards year-end. The absence of a
dividend was not a surprise.
- Operationally weak. 1QFY09 revenue fell 36% yoy, reflecting i) the
recessionimpacted lower business volumes and drops/head (-18% yoy) and ii)
the closure of two provincial casinos in 2QFY08. The topline weakness was
further exacerbated by the poorer luck and negative forex effect (-22%
yoy). Despite 2008’s cost streamlining exercise, 1Q09 EBIT remained in the
red, largely reflecting i) the weaker topline, ii) Sentosa IR’s S$14.5m
pre-operating expenses booked during the quarter and iii) the
non-recurrence of 1Q08’s S$2m deferred consideration on the disposal of its
international betting operations.
- Looking ahead towards 1Q2010. GS’ UK operations will remain unexciting
amidst the lacklustre economic condition. Hence, the spotlight will be on
the Sentosa IR project which appears on track for a soft opening by 1Q2010.
To-date, GS has committed S$4.67bn to the project and it recently drawdown
another S$425m from its secured loan facility. 3QFY09 could play host to
two key project milestones – i) the revelation of a firmer opening date and
ii) its application for a casino licence.
- Reiterate UNDERPERFORM despite higher target price. No change to our
FY09- 11 earnings forecasts. But our sum-of-parts RNAV-based target price
is raised to S$0.51 from S$0.36 previously as we now peg a higher 13x
EBITDA multiple (10x before) to its Sentosa IR component, following the
higher market P/E and the recent re-rating in gaming stocks. Despite the
target price upgrade and the stock’s unique exposure into Singapore’s
duopolistic gaming hub, GS remains in our UNDERPERFORM list given its rich
valuations at >3x P/BV and >15x EV/EBITDA. Even looking beyond the
loss-making 2009 and breaking-even 2010, the stock is currently trading at
25x FY11’s EPS. Potential de-rating catalysts include i) prolonged weakness
over at in UK and ii) weaker-than-expected regional tourism activities.
Investors seeking for a cheaper, indirect entry into Singapore gaming and
tourism potential should consider GS’ parent, Genting Bhd (GENT MK,
Outperform).
GENTING SP by cl
-1Q09 results. Genting Singapore (GTG) reported a revenue decline of SGD49
mil (SGD105.37mil, -36% Y/Y), largely due to exchange rate weakening of GBP
for Stanley Leisure (accounting for 16-17% of the revenue decline) as well
as c.10% decline in visitors in UK (Stanley Leisure + Rank) (accounting for
another 2-3% of the revenue decline). Reduction of win percentage by 3%
also contributed to weaker top-line. On the brighter side, cost of sales is
down 38%, due to cost reduction exercises (reduced headcount in UK by 700
people, reduced promotion and hospitality cost etc).
-Reduction in other operating income is due to lower interest income, given
a reduction in cash balance of SGD1.1bil (Mar-09), as opposed to SGD1.5bil
(Mar- 08).
-Loss in PBT in 1Q09 (SGD30.4 mil loss) compared to 1Q08 (SGD4.1 mil
profit), is a combination of weaker revenue, as well as a fair value loss
of SGD6.7 mil recognized this quarter (compared to a fair value gain of
SGD19 mil recognized in 1Q08), and higher operating cost of SGD7 mil due to
pre-operations expense in Resorts World Sentosa (RWS).
-On RWS. Outstanding long-term borrowings have increased, and are now
SGD1.74 bil, due to draw-down of the term loans for Resorts World in
Sentosa (RWS). Marina Bay Sands is looking at 1,000 tables, so it’s quite
reasonable to expect RWS to compete toe-to-toe (compared to 520 tables in
Genting Highlands). Note that Singapore casinos have 2 key restrictions in
the gaming license i.e. size of casino is restricted to 15,000sqm in net
gaming space, and no more than 2,500 slot machines.
-RWS is slated for launch by 1Q10, and management continues to guide for 15
mil p.a. visitor arrivals. As a benchmark, this is c.20% lower than the 19
mil p.a. visitor arrivals currently seen in Genting Highlands. The existing
Sentosa Island is already seeing up to 6 mil p.a. of visitor arrivals based
on existing tourist attractions, so management is looking to more than
double-up the existing tourist arrivals in the island.
-Junket commissions can be expected to be on par with Macau and Resorts
(1.25% - 1.5% range), but likely to be at a discount since RWS is
positioned as a destination casino, and that could make junket rates more
competitive.
-Universal Studios Theme Park, will be launched in a big-bang, and not in
phases, and will likely be opened in time with the casino.
GENTING SP, ocbc maintain SELL with target price $0.45($0.33)
-Muted 1Q09 results. Genting Singapore (Genting) posted a weak set of 1Q09
results last evening, with revenue dropping 37.6% YoY to S$105.4m;
management attributed the drop to several factors, key among which would be
poor luck factor (accounted for 20% of the decline), weaker pound against
the SGD (16-17%) and reduced patronage volume (2%). Although gross profit
improved by 2.9% to S$7.7m, EBITDA tumbled 80.7% to S$2.1m, as it had to
incur higher pre-operating expenses of S$7.1m (versus none in 1Q08) for
Resorts World @ Sentosa (RWS). And also because of fair value adjustments
of -S$8.0m, net profit slipped into the red to the tune of S$31.9m, versus
a gain of S$6.0m in 1Q08 (includes fair value adjustments of +S$18.8m).
However, if we strip out these adjustments as well as forex impact, Genting
would have posted a smaller loss of S$23.9m, although still wider than the
net loss of S$12.7m in 1Q08.
-Outlook for UK operations still uncertain. However, outlook for its UK
operations remains uncertain, hampered by both the economic slump there as
well as several new measures by the UK government to raise gaming taxes.
These measures include a higher license fee for gaming machines and higher
tax on the gains from poker games which ranges from 15-50% depending on the
magnitude of the win. Management expects these measures to have a marginal
￡1.2m impact on the profitability of its UK operations, which should be
mitigated by its ongoing cost reduction measures.
-RWS on track for 1Q10 launch. As for Singapore, RWS is still targeting for
a soft launch in 1Q10, and will try for the early part of 2010;
construction is progressing well and it has awarded S$4.67b of the S$6.59b
project costs. It also drew down another S$425.0m in 1Q09, bringing the
total to S$1.025b. By the opening, its capex is projected to be less than
S$6.0b, of which S$2.0b is equity funded and the rest by bank borrowing. On
the licensing front, we understand that Genting has already received the
draft application and can start the application proper in 3Q09.
-Bets placed too early? As revenue and net loss met 18% and 24% of our FY09
estimates, we are leaving our numbers unchanged. But we are raising our
fair value from S$0.33 to S$0.45 to reflect the improving risk aversion in
the overall market. However the recent sharp rally may have run ahead of
fundamentals. As such, we maintain our SELL rating.
HONG LEONG ASIA, csfb maintain NEUTRAL with target price $1.20($0.7) EPS
for FY 09/10 raised by 11% and 7%
- HLA reported 1Q09 revenue growth of 4% YoY, with earnings declining 23%
YoY to S$23.2 mn. However, excluding negative goodwill provision for the
Tasek acquisition and impairment losses (largely to Karimun), core earnings
would have declined 58% YoY.
- The consolidation of Tasek boosted building materials revenues, and
helped mitigate the unit sales volume decline at both Yuchai (-5% YoY) and
Xinfei (-19% YoY). As expected, higher distribution (+36% YoY) and R&D
expenses (+58% YoY) dampened margins.
- Looking ahead, China.s stimulus measures should buoy Xinfei.s sales
volumes (via the electrical appliances subsidy programme), with Yuchai
gaining share given its focus on more economical, light engine models. In
Singapore, public sector projects will drive construction sector orders
amid rising competition.
- We have factored in stronger volume assumptions at Yuchai, thus raising
FY09/10E earnings by 7-11%. Consequently, while our SOTP-based target price
rises to S$1.20, our rating stays at NEUTRAL given low stock liquidity and
uninspiring small-cap earnings profile.
LI HENG, uob maintain BUY with target price $0.29($0.23)
-Li Heng reported 1Q09 net profit of Rmb10.2m, -95.5% yoy. We expect better
results from 2Q09 onwards, and raise our target price to S$0.29 based on
0.6x 2009F P/B. Maintain BUY.
-Results. Li Heng reported 1Q09 net profit of Rmb10.2m, down 95.5% yoy. A
sharp plunge in selling prices, severe margin erosion and a Rmb20.8m net
forex loss together accounted for the plunge in net profit. Revenue
declined 41.2% yoy to Rmb472.5m on a 23.1% yoy increase in sales volume as
a result of capacity increasing from 92,400tpa to 167,200tpa. But this was
more than offset by a 52.2% yoy decline in average selling price (ASP).
-The sharp decline in 1Q09 gross margin was due to the plunge in both Li
Heng’s ASP and raw material prices. The company keeps two months of
feedstock, indicating that it buys raw materials at higher historical
prices but sells its products at lower current prices.
-Stock Impact. Selling prices of nylon products have started to rise since
Apr 09, and the trend has maintained so far in May. This was confirmed by
Li Heng. Prices of its orders to be delivered in May saw an increase of an
average 7-8% mom. Such an increase would lift its gross margin to 15-16%.
On the other hand, the trend of a depreciation in the S$/Rmb appeared to
have reversed in 2Q09. Given an already low base of below Rmb4.5/S$ as of
1Q09, we expect no further forex loss – if not a small forex gain – to be
booked in the future.
-Overall, we expect Li Heng’s operating profit and net profit for 2Q09
onwards to rise substantially on the back of higher selling prices, wider
margins and lower expenses as a result of no further forex loss expected.
-Li Heng’s polyamide chip production facilities are expected to be
completed by end-3Q09, and to start contribution in 4Q09. The facilities
will have a daily capacity of 200mt, or an annual capacity of approximately
70ktpa. The chip products will be used in-house as feedstock for the
company’s yarn products. Producing chips in-house instead of purchasing
from external suppliers is projected to save costs by 5-10%, which would
raise gross margin by around 3%. However, under the current highly
challenging and uncertain operating environment, this may not be possible
yet. Hence, we have not incorporated the impact of the self reliance on
nylon chips in our earnings model.
-Valuation/Recommendation. We are keeping our earnings forecasts for Li
Heng, and raise our target price to S$0.29 based on 0.6x 2009F P/B.
Maintain BUY.
MIDAS, cimb downgrade to NEUTRAL with target price $0.7
- In line. 1Q09 net profit of S$8.5m (+11.2% yoy) was within our estimate
and consensus and constituted 23.3% of FY09 forecast. Revenue fell 13.1%
yoy to S$31.4m due to lower average selling prices of aluminium extrusion
profiles due to falling raw material prices and lower contribution from the
PE Pipe and Agency divisions. 1Q09 gross margin was 42.7%, up from 39.7% in
4Q08 and 36.0% in 1Q08. An interim dividend of S$0.0025 was declared for
the quarter.
- Aluminium Alloy Division is main feature. This division will feature
prominently in FY09 onwards as demand remains strong for aluminium
extrusion profiles. Its revenue mix has grown to 94.6% from 87.7% in 4Q08
and almost all the gross profit contribution. The rise in gross margin is
due to its cost-plus pricing model, where it charges customers a fixed
processing fee and margins would rise on lower aluminium prices and
vice-versa.
- Order book. Jilin Midas as an order book of S$100m, while NPRT has
Rmb4.5bn, which will be delivered from FY09 to FY11. Jilin Midas is
actively pursuing an additional S$200m-300m of orders for aluminium
extrusion profiles from customers and will also be expanding capacity to
30,000 mt by early FY10. NPRT’s capacity is currently being increased from
100 to 500 traincars. The bulk of its Rmb4.5bn order book of 768 traincars
will be delivered in FY10. NPRT is also pursuing a number of projects –
Hangzhou and Suzhou metro projects – which may involve another 400
traincars worth Rmb3bn-4bn.
- Downgrade to Neutral. We reduced our revenue but raised our margin
assumptions while we maintain our FY09-11 EPS forecasts. However, despite
the improved investor appetite, the share price has run its course with
little upside potential left. While we continue to like Midas’s business
model and business prospects to benefit from China’s increased rail
infrastructure spending, there is no compelling reason to raise the target
price. Our DCF-derived target price is unchanged at S$0.70 (WACC of 11.2%,
TG 2%), translating to a CY10 P/E of 11.8x, which is reasonable given its
smaller size relative to its H-share peers.
MIDAS, csfb maintain OUTPERFORM with target price $0.8($0.75) EPS for FY
09/10 raised by 2% and unchanged
- Midas delivered March 2009 quarter results which were broadly in line
with our estimates, with revenues at S$31.4 mn (-13% YoY) and earnings of
S$8.5 mn (+11% YoY), driven primarily by the core aluminium alloy extrusion
business.
- Gross margins at 42.1%, improved from 39.7% in 4Q08, and 36% a year ago,
on the back of lower aluminium prices and given Midas. cost-plus model,
while operating cash flows were strong at S$15 mn, with Midas ending the
quarter at S$12 mn net cash. As expected, a first interim dividend of S0.25
cents/share was declared.
- The Puzhen JV is expected to start delivery of its 768 train cars from
2H09, and looks to fulfil an estimated Rmb4.5 bn order book by end-2011E.
This implies that earnings at Puzhen should accelerate strongly in FY10E.
- Against positive railway industry macros, supported by China.s stimulus
package, rising capacities from Midas. new extrusion line (from 4Q09)
should drive a stronger FY10E earnings momentum. We factor in stronger
extrusion margins, raising earnings by 2%. Our new SOTP-based target price
is S$0.80. We maintain our OUTPERFORM rating.
MIDAS, dbs maintain BUY with target price $0.82($0.6)
-Midas reported 1Q09 earnings that were in line with expectations, as
earnings rose by 11% yoy to S$8.5m. Whilst revenue declined by 13% yoy, due
mainly to lower ASPs for their aluminium extrusion products as a result of
lower raw material prices and lower contribution from the PE pipe business.
Gross profit still rose by 2% yoy to S$13.2m as G.P. margin improved to 42%
from 36%. Railway related projects accounted for nearly 70% of total
revenue. Otherwise, despite associate NPRT reporting a small loss, lower
operating costs and lower taxes helped lift net earnings to 11% growth.
Operating cashflow was a healthy S$15m and the Group invested a further
S$16m to expand its capacity and capabilities. Company remains in a net
cash position.
-Looking ahead, we expect Midas to win more rail-related projects in the
coming months as China executes on its infrastructure projects. Potential
projects up for grabs include the Beijing-Shanghai high-speed railway line
and metro projects in Shanghai, Hangzhou, Guangzhou and Xi ‘an. We also
expect a stronger contribution from NPRT, which had no deliveries scheduled
in 1Q, but has a backlog of 768 train cars to be delivered from 2H09
onwards.
-Maintain BUY, target price raised to S$0.82, as we raise our valuation
multiple to 15x FY09/FY10 earnings for Midas, still at a 25% discount to
HK-listed CSR Zhuzhou Times Electric, which has been re-rated strongly in
recent weeks to 20x FY09 PER.
MIDAS, ocbc downgrade to HOLD from BUY with target price $0.64($0.63)
-Better bottomline. Midas Holdings (Midas) posted 13% YoY decline in 1Q09
topline to S$31.4m but bottomline delivered a 11% YoY uptick to S$8.5m. The
bottomline improvement was on the back of better margins from the all its
divisions. In particular, aluminium prices continued to stay low while the
ASP of its products have still not tailed off in the same magnitude. Midas’
associate, Nanjing Puzhen (NPRT), did not have any accretive contribution
due to the timing of delivery of train car bodies. However, with its
backlog order of 768 train cars, management is confident of meeting
expectations for FY09 contributions.
-Cost-plus vs. back-to-back. Midas signs two types of contracts with its
customers. For back-to-back contracts, Midas locks the prices of raw
materials in after securing the contract thus profit margins are protected.
However, these contracts come with a premium which is required by the
aluminium suppliers. Cost-plus approaches profitability in absolute terms
where Midas marks up its profits with an absolute amount instead of a
margin. As aluminium prices remain low, either contract types could lead tolower absolute dollars for Midas, translating to a lower topline but
possibly better margins.
-Competition? Recently, China Zhongwang Holdings (Zhongwang) was listed in
the Hong Kong and have garnered a significant amount of interest, raising
US$1.26b (world’s largest IPO YTD). Although the Zhongwang had indicated
that it has been engaged in the rail industry, we understand that it
currently has a lower grading certification from only one of the three
major train manufacturers which it obtained in end 2008. Midas has
indicated that it has not encountered Zhongwang in their past bids for
projects in a significant way. As such, we think that Zhongwang is
positioning to enter the rail industry but currently does not pose a
significant challenge to Midas at this juncture. However, we acknowledge
Zhongwang’s significantly stronger balance sheet and do not discount a
faster-than-anticipated penetration into the market.
-Downgrade to HOLD on valuation. Despite higher margins, the net effect of
low ASPs edges our estimates downwards. However, we are rolling our
valuation forward to FY09/10F (prev FY09F) with a similar peg of 12x and
our fair value is now S$0.64 (prev. S$0.63). With its aggressive share
price run up, we are downgrading Midas to a HOLD. 2010 will see earnings
kicker from its 3rd line, bigger and better margined NPRT contributions and
margin enhancers from its complementary downstream activities.
MIIF, mac maintain OUTPERFORM with target price $0.59
- MIIF announced its first quarter result with profit before revaluation of
S$23m compared to our half year S$36.5m, thus it appears slightly stronger.
The dividends declared from CAC (Leisureworld) and Taiwan Broadcasting
(TBC) were as expected. The surprise was Arqiva paid a dividend of S$3.8m
which is not normal, and forex hedge gain was S$7m, instead of our forecast
of S$3m for the half year.
- MIIF has now recognised some of its assets are over leveraged, and the
cashflow, which would otherwise go to dividends, needs to be hoarded for
debt reduction. This is directly impacting MEIF, and is most likely going
to occur in Arqiva, depending on ownership change. As these two assets
accounted for 50% of the cashflow in 2008, a cut quickly translates into a
lower dividend. At this stage, we have factored in a cut to S$0.04 from our
pervious forecast of S$0.06. The extent of the cut is still a little
unknown as Arqiva ownership is uncertain.
- The management change in recent months at MIIF, combined with further
dividend pressure, has renewed the focus on asset realisation. Management
is testing the value of all its assets with progress known possibly by the
interim result. We think the bias will be to realise the non core assets
like MEIF, CAC and Arqiva ahead of the Asian assets, with sale of MEIF
being the most attractive, given the ‘black box’ nature of the investment.
-Earnings and target price revision. No change to our earnings estimates
and S$0.50 target price.
PAN UNITED, ocbc downgrade to HOLD from BUY with target price $0.52($0.47)
-Slowing faster than expected. Pan-United Corp (PAN) reported 1Q09 revenue
of S$128.3m (+10% YoY, -12% QoQ) and PATMI of S$9.9m (-15% YoY, -22% QoQ).
The better topline was contributed mainly by greater volume of Ready Mixed
Concrete (RMC) sold but softening prices and thinner margins took a toll on
PAN’s profit. While we signalled a slowing down in our previous reports, we
did not expect the collapse of RMC prices of this magnitude.
-Forecasts for RMC business. Business for the RMC business continues to be
strong with infrastructure developments continuing on their run in 2009
(Exhibit 1 shows sustained volumes). However, competition and the fall in
raw material costs have pressured selling prices. While the fluctuation
clauses work to help buffer rising costs in the commodity boom cycle, it
also works in a counter cycle to align prices to the current market
environment. On top of decreasing ASPs for RMC, we also think that some
competition has entered the market with “low-ball bids” to win some future
work despite attaining thinner margins. Over the rest of 2009, we are
expecting margins to eventually stabilise and possibly trend upwards again
as commodity prices start its trek up. While the thinning margins will work
against PAN’s earnings in the near future, we think that it will eventually
weed out weaker players who have no scalability to compete.
-Port and Shipping. Management has signalled that the pick up in these two
divisions will help buffer the fall in bottomline contribution from its key
RMC business. In particular, the fully utilisation of its larger fleet of
tugs and barges will help prop up bottomline as charter incomes from
Singapore flagged vessels are tax exempt. The port in China is also seeing
signs of life with China’s stimulus package flowing through the system.
-Share price run up lowers yield. We have refined our estimates and DDM
parameters (Ke 15% to 10%) with changes in required returns. Our DDM fair
value is now S$0.52 (prev. S$0.47). While PAN’s share price has risen, it
continues to lag the FSSTI in price movements. Investors have typically
piled into the company for its good dividend yields. However, the rise in
its share price has caused FY09 yield to fall to ~6.8% while the stock
trades at ~8x FY09F PER (above 7.3x FY08 PER where earnings grew at a much
faster pace). With the limited upside, we are downgrading our rating to a
HOLD.
PETRAFOOD, cimb downgrade to UNDERPERFORM from NEUTRAL with target price
$0.58($0.4)
- In line. 1Q09 net profit of US$4.3m (+49% yoy) was in line with our
expectations, forming 20% of our estimate and 23% of consensus. The
improvement was led by growth in both the CI and Branded Consumer segments,
and the end of hedge charges for the CI segment. CI revenue grew 14.3% yoy
to US$217.8m, while Branded Consumer sales rose 8.5% to US$64m. EBITDA rose
27.6% yoy to US$12.9m on sales growth and the end of hedge charges which
had dragged down 1Q08 EBITDA by US$2m.
- Higher ASP and EBITDA/tonne in CI non-Europe. Despite a 4% decline in
volume to 52.8k tonnes, CI non-Europe revenue and EBITDA were up a strong
35% and 148% yoy to US$144m and US$7.7m respectively on the back of higher
ASPs and sales of premium products. EBITDA/tonne surged to US$185 from
US$77. Meanwhile, CI Europe lost US$2.1m, as the business was still limited
to producing generic and semi-finished products.
- Branded Consumer division weighed down by regional currencies. 1Q09
localcurrency sales increased 29.5% with Indonesian sales rising 25% and
sales in other regional markets up 42%. Gross margins slid to 28.9% from
30.9% on the back of higher contributions from third-party brands (new
large agencies secured) that offer lower gross margins but do not require
advertising and promotional assistance.
- Low refinancing risks. Petra reported credit headroom of US$194m,
equivalent to 37% of available credit lines. Short-term funding also
improved to 44% of total borrowings from 79%, reducing near-term
refinancing risks. With only US$48m due for refinancing vs. our forecast of
at least US$47m in annual cash flow from operations, we believe refinancing
risks are low.
- Downgrade to Underperform from Neutral; but target price raised to S$0.58
(from S$0.40). We are maintaining our FY09-11 EPS forecasts. Significant
contributions from its upgraded European plant are only expected from
mid-FY10 onwards, at the earliest. Taking into account the market? receding
risk aversion and peer valuations, our target price has been raised to
S$0.58, based on 8x CY10 P/E (from S$0.40, 6x CY10 P/E). We apply a 20% P/E
discount to peer valuations given Petra? smaller operations and
less-scalable business. With downside potential to our target price, we
downgrade the stock to Underperform from Neutral.
SIA, ubs maintain BUY with target price $14
- Q409 was likely a tough quarter for Singapore Airlines. Singapore
Airlines (SQ) is expected to release Q4 & FY09 results on May 14th (5pm).
Our FY09 estimates (in-line with consensus) imply a small ($120m) Q4
profit. However, recent weak traffic data leads us to think forecasting
risk is to the downside & we wouldn? be surprised if the Q4 net result was
as low as breakeven.
- Dividend decision a key investor focus. Management said last year that
barring extraordinary events, the aim was to sustain an S$1/share dividend.
Therefore, our forecast dividend of S$0.70 assumes the financial crisis is
deemed as ?xtraordinary? That said, the dividend is a highly subjective
decision and we think the lazy nature of the balance sheet means that SQ
could comfortably allow financial leverage to increase. In our view,
investors will be watching this decision carefully as an indictor of
shareholder focus.
- Are SQ? problems structural or cyclical? The recent traffic statistics
indicate that the group is losing market share. This is surprising given
the strength of the franchise and may indicate structural problems with the
business model (e.g. Has the recent product upgrade left the company with
too many premium-class seats during a downturn?).
- Valuation SQ looks cheap but company specific uncertainty has increased.
Increased investor conviction that the global economy will start to recover
in H209 and attractive valuation are supportive for the share price.
However, a disappointing dividend and/or evidence of structural problems
could change investor perceptions. Our S$14 price target is based on the
UBS VCAM model.
SINGTEL, cimb maintain OUTPERFORM with target price $3.05
- Above expectations. FY09 core net profit was 4% above CIMB-GK and
consensus forecasts due to higher-than-expected margins at both SingTel
Singapore and Optus, and lower-than-expected tax. More importantly, 4QFY09
core net profit was 9% above our forecast and consensus. This was despite
Telkomsel’s muted 1QFY09 and rupiah weakness. As expected, a DPS of 6.9cts
was declared (unchanged yoy) to bring the total to 12.5cts (unchanged yoy)
for a 58% payout (54% in FY08).
- Guidance blurred by currencies. SingTel did not issue group guidance for
FY10. It only said revenue and EBITDA will be affected by exchange-rate
movements for the A$ and currencies of its regional associates. At the
SingTel level, it expects growth to slow and margins to decline. FY10
revenue growth is expected to slow to “a single digit level” vs. 13.1% in
FY09, driven by its IT and Engineering division and first-time
contributions from NGNBN. EBITDA margins could decline to 36-38% from 39%
in FY09 on higher contributions from its lower-margin IT businesses. At
Optus, FY10 revenue and EBITDA are expected to grow at single digits,
driven by mobile and wireless broadband. This compares with the 7.2% and
3.2% revenue and EBITDA growth respectively in FY09. Dividends from
associates are expected to be lower in FY10 due to weaker profits in 2008
from Telkomsel and Globe. SingTel has maintained its 45-60% payout policy.
- We reiterate OUTPERFORM on SingTel given the strong growth at Bharti,
recovery at Telkomsel, and strengthening A$ and Rp. Maintain forecasts and
target price of S$3.05 (sum-of-the-parts valuation) pending a conference
call later this morning.
SINGTEL, dbs upgrade to BUY from HOLD with target price $3.05($2.75) EPS
for FY 09/10 revised by unchange and 6%
-Underlying net profit of S$949m (-0.9% yoy) was up 15% qoq mainly due to
three reasons (i) Singapore EBITDA of S$578m (+3% yoy) improved 3.1%
sequentially despite weak economy as corporate data and mobile services
showed no weakness while costs were lower (ii) Excluding tax credits, tax
rate for Singapore was around 10%, lower than our 17% expectations (iii)
Optus EBITDA (+8.5% yoy) improved 14.5% sequentially due to significant
improvement in both revenue and margins in the mobile segment.
-Singapore guidance. Single digit growth in Singapore revenue, 36- 38%
EBITDA margins lower than 39% in FY09, implying flat EBIDTA. Capex below
S$800m compared to s$736m in FY09, as such management expects slight
decline in free cash flow. Australia guidance. Low single digit growth in
operating revenue and EBITDA, with growth in mobile and wireless broadband.
Capex of about A$1.1b, mainly in mobile network, compared to A$1.0b in
FY09. Free cash flow is expected to be stable. Associate guidance. Growth
in local currency earnings of Bharti and Telkomsel. Management expects
lower ordinary dividends from the regional mobile associates as Telkomsel
and Globe reported lower profits in 2008.
-We have revised up our FY10F and FY11F estimates by 6% each. Upgrade to
BUY with revised TP of S$3.05.
SINGTEL, ocbc maintain BUY with target price $3.18($3.09)
-Singapore operations have done well. SingTel’s Singapore operations
performed strongly (as we had expected after seeing upbeat quarterly
results from its peers earlier), with 4Q09 operating revenue up 12.7% YoY
(telco business rose 4.5%) and underlying net profit up 32.0%. Going
forward, SingTel guides for operating revenue to grow at single-digit
level, driven by increased contribution from its IT & Engineering business
(SCS) and first time revenue from the NBN rollout. However, EBITDA margin
is expected to decline to 36-38% (mainly due to the lower-margin IT
business), while capex is likely be below S$800m (including S$170m for a
satellite).
-Stable Australia operations. Australia operations also did okay, with 4Q09
operating revenue up 8.7% YoY in AUD terms, while net profit climbed 17.1%;
besides higher mobile revenue, Optus also managed to improve its overall
operational EBITDA margin to 27.8% (vs. 23.2% in 3Q09) despite higher
iPhone subsidies. For FY10, management believes that its operating revenue
and EBITDA will grow at low single-digit levels, driven by growth in mobile
and wireless broadband. Capex is expected to be around A$1.1b.
-More cautious outlook on associates. As for its regional associates,
pre-tax contribution fell 18% YoY in 4Q09, mainly due to the weaker
regional currencies against SGD and also weaker Telkomsel showing. Going
forward, SingTel guides for its two largest associates - Bharti and
Telkomsel - to grow in local currency terms. However, ordinary dividends
from the regional associates are expected to be lower, and overall
contributions will continue to be impacted by any adverse forex movements.
-Maintain dividend policy of 45-60% payout. SingTel is committed to an
optimal capital structure while maintaining financial flexibility as it
continues to review new investment opportunities in Asia and emerging
adjacent markets. Nevertheless, it will maintain its dividend payout ratio
of 45-60% of underlying net profit. As a recap, SingTel declared a final
dividend of S$0.069 (payable in Aug 09) for FY09, bringing its total payout
to S$0.125 (unchanged from last year), or 58% of its earnings (nearly the
top end of its 45-60% guidance). We have revised our FY10 estimates up
slightly (around 3% to reflect its resilient business) and introduced our
FY11 estimates. We have also bumped up our SOTP fair value from S$3.09 to
S$3.18 to reflect the recovery in equities of its associates. Maintain BUY
SSH CORP, ocbc maintain HOLD with target price $0.16($0.11)
-Soft 3Q09 in a challenging industry. SSH Corporation (SSH) reported a 14%
YoY fall in 3Q09 revenue to S$53.5m as the group continued to feel the
impact from the economic downturn. Net profit fell 69% YoY to S$2.1m, lower
than expected, with gross profit margins affected by a provision for
inventories write-down of S$2.7m and higher other operating expenses
arising from provision for impairment loss on leasehold property and
foreign exchange losses. Gross profit margin for 3Q09 was 22%, lower as
compared to 26% in 3Q08. Peers in the same industry have similarly been
affected by the challenging business conditions with companies such as
Hupsteel expecting to report a loss in its upcoming results and Asia
Enterprises posting a 66% YoY fall in net profit for the past quarter.
-Industry outlook remains bleak. From what we gather, steel distributors
and end-users are likely to continue de-stocking amid scarce signs of a
sustained recovery. Steel prices may also experience more downside risk if
iron ore prices continue its downtrend in the face of weak demand. Steel
demand in most sectors, (with the exception of the infrastructure industry
aided by government expenditure), has to stabilize first, probably in the
later part of this year, depending on a myriad of factors such as the
efficacy of government stimulus packages worldwide, consumer sentiments,
corporate investments and bank lending activities. SSH also said that the
global economic slowdown has resulted in several projects being deferred
amid softer prices for steel. The group’s revenue has been affected mainly
by lower steel prices and lower demand for its products.
-Maintain HOLD. This latest set of results is a reflection of general
business conditions across the industry, as seen by results of SSH’s peers.
If we were to exclude the provision for inventory write-down and property
impairment, net profit would have been S$5.4m instead of S$2.1m. The group
expects the rest of FY09 to remain challenging, which is the consensus view
among most industry players. We are revising our earnings estimates
downwards with the lower than expected results and now peg our fair value
to 0.6x FY10F NTA (in line with peers) with lower earnings visibility and
also fewer available consensus EPS estimates for the group’s peers. As such
our fair value is raised to S$0.16 (prev S$0.11). Maintain HOLD.
STARHUB, mac maintain OUTPERFORM with target price $2.45
- Recent press reports suggest that potential regulatory actions may lie
ahead in the pay TV market. Short on details, a range of outcomes are
possible, but we believe that these developments could potentially lead to
deflation in content costs, a theme we alluded to in our earlier report,
Value emerges as cable risks fade, 14 October 2008. We reiterate
Outperform.
-The latest MSCI rebalancing exercise saw StarHub being added to the MSCI
AP ex-Jap index. Weighting of 0 .35 equals 2.5 days?volume buying.
- Regulator evaluating pay TV market Local paper The Straits Times reported
that media regulator Media Development Authority (MDA) has undertaken a
study of the pay TV market. One of the objectives of the study is to see
how consumers can be protected from increasing prices due to pay TV
competition.
- Corroborates with other news reports The current news is corroborated by
a prior report in TV Sports Markets (February 2009), which reported that
the MDA is considering potential legislative action to prevent further
escalation in cost of English Premier League (EPL) football rights.
- What can the regulator do? Possible overhaul can take various forms and
we are not clear on the scope and impact. Potential options would include
price caps (at retail or broadcaster level), encouraging/mandating content
sharing and/or revisiting content exclusivity provisions.
- Implications? A range of outcomes (positive and negative) are possible.
We believe that the major impetus behind the study to prevent escalation in
costs of popular EPL rights and regulation designed to encourage/mandate
content sharing between SingTel/StarHub for sports properties is positive.
STRAITS ASIA, dbs maintain BUY with target price $1.55($1)
-Straits Asia (SAR) reported its 1Q09 net earnings of US$35.5mn, a 10%
q-o-q decline and came in inline with our estimate. Total revenue decline
by 8% q-o-q to US$139.6mn due to lower sales volume of 1.6mn tons (-21%
q-o-q) amid better ASP (+17% q-o-q). We expect production in coming
quarters to pick up to achieve the full-year target of 10mn tons.
-Production cost dropped by 11% q-o-q due to lower production volume (-13%
q-o-q) despite a slight increase in production cash cost (+3% q-o-q).
-SAR balance sheet remains firm with total cash balance of US$183mn and net
gearing ratio of 26%.
-Generally the 1Q09 results is inline with our expectations, hence we are
maintaining our view that SAR profit in FY09 will still be growing as a
result of higher sales volume and ASP. We expect sales volume to reach 10mn
tons with an ASP of US$78/ton for FY09.
-We are maintaining our forecast for SAR, however, we raised our TP to
S$1.55 as we have lowered our WACC to 11.4% due to lower risk premium
assumption. Hence, we reiterate our BUY recommendation on the counter.
WILMAR, am fraser maintain BUY with target price $5.05
-Maintain a BUY on Wilmar International with higher fair value of
S$5.05/share based on a PE of 15x on FY10F EPS of 24 cents US/share. Wilmar
released its 1QFY09 results this morning. Group results showed 11% growth
in 1QFY09 net profit - compared to consensus and our projections, which
were expecting 19% to 26% decline in net earnings for the full year.
-We have raised FY09F-FY10F earnings forecasts by 6% to 12% to account for
higher-than-expected pretax margins coming from its merchandising and
processing and consumer products divisions. In spite of lower selling
prices, pretax margins expanded mainly due to lower freight costs and
export duties, well-timed purchases of feedstock and decline in raw
material costs (consumer products division).
-We do not know how much trading gains were included in Wilmar’s 1QFY09
profitability. In FY08, Wilmar recorded net gains on non-physical delivery
forward contracts (paper trades) of US$191mil, which were 11% of pretax
profit.
-Pretax margin of the palm and laurics sub-segment of its merchandising and
processing division climbed 104% YoY from US$27/tonne in 1QFY08 to
US$55/tonne in 1QFY09 (4QFY08 US$32/tonne). This is in spite of average
selling price declining 32% from US$888/tonne in 1QFY08 to US$602/tonne in
1QFY09. Sales volume shrank 16% from 4.6 million tonne in 1QFY08 to 3.9
million tonne in 1QFY09.
-Although turnover of its plantation division slid 41% YoY to US$211mil in
1QFY09, Wilmar’s estimated average selling price of RM2,275/tonne was
higher than MPOB’s (Malaysian Palm Oil Board) average of RM1,919/tonne -
because it had sold forward some of its FY09F production.
-Wilmar is evaluating feasibility of listing its China operations in Hong
Kong or Shanghai. While it would enjoy oneoff exceptional gains from
partial disposal of its China operations, we believe the listing exercise,
if any, would dilute the attractiveness of Wilmar’s shares.
-Investors wanting direct exposure to the group’s China operations would be
able to buy the listed subsidiary in Hong Kong or Shanghai in the future.
What Wilmar would provide post-listing is direct investment exposure
largely to palm and consumer business in Malaysia and Indonesia. China is
estimated to account for nearly half of the group’s pretax profit.
WILMAR, cimb maintain OUTPERFORM with target price $5.30
-We attended Wilmar’s post-results briefing yesterday. Questions fielded
centred on the group’s plan to list its China operations, the
sustainability of its strong 1Q09 profit margins from merchandising and
processing, its CPO price outlook and future plans.
-Listing plan for China operations. Wilmar is evaluating the feasibility of
listing its China operations in either Hong Kong or Shanghai. By doing so,
Wilmar hopes to 1) unlock shareholders’ value; and 2) increase its presence
in China’s food market. On the first point, management highlighted that
large consumer products companies listed in Hong Kong and China trade at
25-26x and 40x P/Es, respectively, much higher than Wilmar’s current-year
P/E valuation of 16x, based on our earnings estimates. Secondly, a Hong
Kong/China listing will allow Chinese investors to participate in the
group’s China growth plans. There are also strategic benefits of a listing
in Hong Kong, according to Wilmar. Also, the group may consider selling the
majority stake of its China operations to a local Chinese party to improve
the growth prospects of its business in China. There are currently
restrictions on the expansion of operational capacity by foreign-owned
companies in China in certain business segments. In terms of time line, the
group had approached its investment bankers last week and gathers that it
can list its China operations in Hong Kong in as short a time as six
months, while it takes a much longer time to list in China. We understand
that the China operations posted net profit of US$600m last year. Assuming
the market accords this listing the same P/E valuation of 25x as for large
consumer products companies listed in Hong Kong, the listing could possibly
command a market cap of US$15bn.
-Wilmar indicated that it may sell 20-30% of the shares either through new
issues or existing shares. This suggests that it could potentially raise
US$3bn-4.5bn. Wilmar will consider distributing part of the proceeds as
dividend and spend the rest on business expansion through M&As or organic
growth. There are no plans to distribute the shares of the group’s China
operations as dividend-in-specie to existing shareholders. Also, Wilmar has
no plans to move its listing to Hong Kong from Singapore because it feels
that Chinese investors may be willing to pay a premium for consumer
products companies but not plantation assets, which are better appreciated
by Singapore investors.
-Outlook for processing and consumer products margins. Strong 1Q09 margins
for its palm and laurics operations were due to the timely purchases of raw
materials and sales. However, sales volume declined 16% yoy in 1Q09 due to
lower palm oil production and more cautious merchandising activities
following increased industry defaults as at end-2008. 1Q09 pretax margin
for oilseeds and grains of US$47/tonne was also much better than 4Q08’s
US$16 due partly to a 7% qoq jump in sales volume. Lastly, pretax margin
for its consumer products surged to a record high since listing of
US$106.40/tonne due to lower feedstock costs. In general, the group says it
will be challenging to maintain its 1Q09 profit margins since feedstock
costs have been rising. However, it is positive on its sales volume growth
for processing. Lastly, the group has raised the price of its cooking oil
products in China by 15-16% in the past two days due to rising feedstock
prices. In the past year alone, Wilmar had cut prices three times in China,
with the latest cut at end-Feb 09 by 10-12%.
WILMAR by cl
-Good 1Q09 results. Wilmar reported 1Q09 net profits of US$380m, up 10.8%
yoy. This represents 33% of consensus estimates. Revenues were down 30.6%
yoy and 20% of consensus as the company faced lower agricultural commodity
prices. The company’s gross margins grew from 12.6% in 1Q08 to 16.5% in
1Q09 thanks to margin expansion in its palm & laurics business (good timing
of purchase and sale of products) and consumer products business (end of
Chinese government price intervention scheme). The company also saw its
admin expenses halving as a result of the reduction in CPO export taxes (no
Indonesian export duty in 1Q08 vs. 10% in 1Q08) and lower freight costs.
Management indicated that they remain cautiously optimistic on the group’s
prospects for the full year. Wilmar will continue to grow its current
operations and seek attractive investment opportunities.
-Listing of China business. The company also indicated that it is
evaluating the feasibility of listing its China operations, which represent
40% of its total assets, either in Hong Kong or Shanghai. Wilmar is looking
to float 20-30% of its China consumer business, which generated US$600m in
profits last year. The company could raise as much as US$3-4B. The company
has just started speaking with investment bankers. It is most likely to
list in HK first, which it could potentially do in 6 months. Listing in
China would take 4-5 years. In the future Wilmar could sell up to 51% of
its China business, so it becomes a China owned company, which will put
less restrictions on its China operations.
-By business segment. The company’s palm & laurics volumes were down 16%
yoy in 1Q09. This was due to the low levels of production in 1Q09 and a
high risk environment. The company expects to see growth in this segment
for the full year.
- The oilseeds and grains volumes grew by 25% yoy in 1Q09. This was
unusually high due to a shortage of beans in China. The company does expect
to see good growth in this segment as meat consumption in China continues
to grow but it is unlikely to be as high as the 25% in the first quarter.
- Wilmar expects 10-15% growth in its consumer pack business in 2009. The
company just increased its cooking oil prices by 14-15% 2 days ago, which
will help maintain its margins.
-Other. The company’s cash position remains very healthy with 23% net
gearing and US$2.6B in cash on its balance sheet. Company expects its
restructuring to be completed the latest by 3Q2010 (reach 24% free float
from the current 17.7%). However, it will very likely be done before that.
WILMAR, csfb maintain NEUTRAL with target price $4.54($3.84) EPS for FY
09/10 raised by 18% and 18%
- Wilmar.s 1Q FY09 results were ahead of market expectations . net profit
was 32% of full-year consensus figures.
- Despite a 31% YoY drop in Wilmar.s revenue, 1Q FY09 net profit was up by
11%, with EBIT margins improving 3.9 p.p. to 11.3%. The standout performers
were the palm oil refining and consumer product divisions.
- Wilmar is looking to list 20%-30% of its China operations in Shanghai or
Hong Kong. This will clearly create excitement in the market, as its China
division has the strongest growth prospects. We estimate that 55% of
Wilmar.s earnings are from China. Wilmar is the leading oilseed crusher,
edible oils processor, and consumer pack oils merchandiser in China.
- We maintain our NEUTRAL rating, as earnings visibility is difficult. We
have revised up our FY09E and FY10E earnings forecasts by 18%, and have
therefore, upgraded our P/E-based target price to S$4.54 from S$3.84. In
view of the volatile markets, our .blue sky. target price would be S$5.30,
with a trough target price of S$3.10.
WILMAR, db maintain HOLD with target price $3.30
-Palm & laurics drives 1QFY09 results; ahead of expectations. Wilmar’s 1Q
net profit of US$380m, up 11% YoY, was ahead of DB’s expectations. This was
due to stronger-than-expected contribution from the palm & lauric division
(PBT US$55.15/tn vs. US$27.09 last year). Timely purchases of raw materials
i.e palm oil,drove margins - unsustainable in coming quarters. Revenue was
weak, down 31% YoY to US$4.95bn.
-Why it is important to be ‘more Chinese’ when growing bigger in China.
Wilmar’s intention to list its China operation drew most questions at the
analyst briefing. Management hopes to list its China operations (c.U$600m
in profits in FY08, formidable dominance in basic food distribution &
processing - #1 positions in oilseed crushing, edible oil processing,
consumer pack oils, specialty fats & oleo-chem, growing rice & flour
merchandiser) in HK this year. This exercise should 1) unlock value of its
China operations - management believes a HK listing would accord a higher
valuation, 2) allow Wilmar to have a stronger Chinese ‘identity’ at a time
when food security is of increasing importance and 3) offer Chinese
institutions the opportunity to own part of China’s leading basic food
processor and mechandiser.
-Listing could raise c.US$4bn; or >US$0.30/share dividend. Wilmar intends
to list 20-30% of its China operations. Assuming a 20x PER multiple (high
end of Chinese food operators), the listing could raise US $2.4-3.6bn, we
estimate. Wilmar intends to return to shareholders a portion of the
proceeds in the form of dividends.Despite trading at 20-40% valuation
premium against global peers, an accelerated listing timeline in
combination with a potential sharper-than-expected recovery in the Chinese
economy could lift valuations beyond fundamentals in the near term.
WILMAR, dbs maintain BUY with target price $5.15($4.55) EPS for FY 09/10
raised by 26% and 22.3%
-1Q09 earnings ahead of expectations. Wilmar reported net profit of
US$409.9m in 1Q09 (+9.5% q-oq, +19.2% y-o-y), mainly on the back of strong
contribution from the group’s palm and lauric M&P business. Revenues were,nevertheless, lower by 14.9% q-o-q and 30.6% y-o-y to US$4,958.1m, on lower
prices and seasonally lower volumes.
-Listing of China subsidiaries explored. The management announced their
intention to list the group’s China subsidiaries separately in either Hong
Kong or Shanghai; although timing wise, a Hong Kong listing may be looked
at earlier. We are quite positive on this prospect, as in addition to
unlocking value, we believe it would increase the group’s visibility and
strengthen its brand equity in China.
-Forecasts raised on CPO prices and M&P margin. We upgrade our FY09F and
FY10F CPO prices to RM2,300 and RM2,300 from RM1,900 and RM2,000,
respectively, to reflect tight vegetable oil supply this year. While we
still expect margins to taper off over the following quarters, we have also
raised palm & lauric M&P pretax margin to 4.5% from 3.8% on the back of
strong results.
-Buy rating reiterated. Our changes resulted in revised TP of S$5.15/share
(based on DCF, WACC 10.5%, terminal growth rate 3%). While the recent price
surge has reflected the good results, we continue to like the group’s
ability to deliver; and given 16% upside on our revised TP, we reiterate
our Buy call.
WILMAR, mac upgrade to OUTPERFORM from NEUTRAL with target price $5 EPS for
FY 09 raised by 31%
- Wilmar’s results from the past nine months indicates that it has been
able to not only circumvent some of the harshest conditions in credit and
commodity markets but it has also continued to maintain strong
profitability levels. Moves to add “domestic-ownership” to its Chinese
units could allow it to outgrow other large foreign competitors there which
are increasingly becoming constrained by new rules. We are raising the
rating on the stock back to Outperform (Neutral previously) with a new
target price of S$5.00.
- Sources of outperformance in 1Q09 was in margins at all its key
divisions. At oilseeds (US$55/ton), palm merchandising (US$47/ton, highest
post RTO) and in consumers oilpacks (with a rather pleasing US$106/ton, the
first time it has gone above US$100/ton post its RTO).
- There was some shortfall in volumes. Consumer oilpacks and its palm
merchandising division saw volumes decline 16% and 15% YoY, respectively,
as opposed to our expectation for growth of 10% and 5%, respectively.
Oilseeds merchandising volumes continue to power ahead, with volume growth
of 25% YoY.
- Balance sheet benign. Net gearing was 25%, which leaves it plenty of room
to manage its business even in a firmer agricultural price environment. Its
cash conversion cycle reverted back to its more normal 60 days (from 45
days at end-2008), which to us implies that heightened risk levels seen
across 2H08 have begun to normalise.
- Drop-off in fertilisers. Another key takeaway lies in the point that its
fertiliser unit (’others’) saw a loss (of US$14m) vs a profit in 1Q08.
Write-offs in fertilisers as well as poorer YoY demand may show up as lower
yields amongst agriculture producers in the next 6-12 months.
-Earnings and target price revision. We have raised our earnings forecast
for 2009 by 31%. Our target price of S$5.00 implies PER of 15x (versus
S$3.00 on 12x earnings previously).
WILMAR, ssb maintain BUY with target price $5.30($4.33)
- Raising net profit estimate and target price — Net impact from our
revision in PBT/tonne and volume assumptions for the merchandising &
processing and consumer products division result in a 13%-16% increase in
FY09E-FY11E net profit estimates. In line with the increase in earnings and
pegging a higher P/E multiple for consumer products segment (based on
current sector average) our SOTP valuation has also been raised by 22% to
S$5.30.
- Revising upwards merchandising & processing margins — Given strong 1Q09
performance, we are adjusting upwards our PBT/tonne estimate. We do not
expect margins in the following quarters to be as good as 1Q but our FY09E
PBT/tonne appears conservative at this juncture. For palm & laurics, we
have raised our assumption from US$22/t to US$30/t. While for oilseeds &
grains we have raised our assumption from US$23/t to US$29/t.
- Raising margins for consumer products too — PBT margin for this division
was exceptional at US$106/t (the highest ever achieved historically).
Again, we do not expect 1Q09 margin to be sustainable. The higher margin in
1Q was due to lower feedstock prices. We are revising upwards PBT/tonne for
this division to US$55/t from US$38/t previously.
- Lowering sales volume assumption — We are revising downwards sales volume
by 4% for the palm & laurics segment. Volume was down by 16% in 1Q09 as
management adopted a cautious risk management stance following increased
industry defaults at end-2008. We still expect a recovery in volume in
subsequent quarters and now assume a 10% growth in FY09E. We are also
cutting our sales volume assumption for consumer products by 15%.
- Listing in China — Wilmar plans to list 20-30% of its China business.
This is to unlock shareholders value and, according to management, is a
strategic plan to have Chinese investors participate in the growth. China
contributed close to US$600m in profit last year (40% of group profits). We
believe Wilmar could potentially raise US$2.4-3.6bn assuming 20x P/E and
between US$3-4.5bn if assuming a P/E of 25x. The cash raised could be used
to pay out more dividends or for expansion. Preference would be to list in
Shanghai (takes a longer time) but we believe management is realistic about
the situation and might list in Hong Kong instead which could be as soon as
6 months down the road.
WILMAR, uob maintain BUY with target price $4.80(3.50)
-Earnings above our expectation on better margins. Margins to weaken in
next few quarters but earnings growth to be supported by volume. Unlocking
value from strong China operations through listing in Hong Kong.
-Results. 1Q09 results are stronger than expected, driven by improvements
in margins for its refineries and consumer pack businesses. The company has
announced the potential listing of its China operations in Hong Kong in six
months’ time at the earliest.
-Stock Impact. This set of strong results will lead to another upgrade on
Wilmar’s earnings.
-Better-than-expected CPO ASP. Crude palm oil (CPO) price is likely to hold
steady with a small correction in 2H09 due to higher production. While
management does not expect a big correction, we expect a much lower CPO
price of RM2,200/tonne for 2H09 vs RM2,800/tonne now. Based on the
stronger-than-expected ytd price performance, we are raising our CPO price
forecast for 2009 to RM2,200/tonne, or US$620/tonne.
-Crushing margin growth unlikely to continue. The superb margin growth in
1Q09 for refinery and consumer products is unlikely to continue but we
still expect to see growth from this business on the back of volume growth.
Wilmar has guided for a volume growth of 10-15% for 2009. Despite weaker
margin ahead, margin is likely to be above our expectation.
-To list China operations on Hong Kong Stock Exchange. For 2008, the China
operations generated about US$600m net profit. Based on PE of 15x, this
will translate into a potential market cap of US$9.0b. Management intends
to float 20-30% to the market, which could bring in cash proceeds of
US$1.8b-2.7b. There will be higher dividend from the initial public
offering (IPO) proceeds and no dividend in-specie. Reasons for the listing
are as follows Unlock shareholder value, and Strategic to have Chinese
investors participate in growth. The listing of the China operations would
be positive given the unit’s high growth, reasonable margins and large
market share. Wilmar targets to have the China operations listed in Hong
Kong within six months. Eventually, Wilmar could do a dual listing or move
on to a Shanghai listing in the next 2-3 years.
-Earnings Risk. Our revised earnings forecasts for 2009 and 2010 by 11% and
10% respectively factor in the following a) higher CPO price assumption for
2009, and b) better refinery and crushing margins. A potential special
dividend from the Hong Kong IPO proceeds will be another share price
catalyst.
-Valuation/Recommendation. Maintain BUY. We have switched our valuation
method from P/B for the downcycle back to PE for an uptrend. Target price
revised to RM4.80 based on 15x 2010 PE, which is in line with the PE
multiple for big-cap peers on an uptrend. Wilmar remains our top pick for
the sector given its information and network advantages, which enable it to
deliver margins that are better than the industry average.
