Market Strategy - Cut in subsidies

The government announced that it would cut subsidies for sugar, petrol, diesel and liquefied petroleum gas (LPG). This would result in higher prices: sugar (+25 sen/kg or 15%), LPG (+10 sen/kg or 5.7%), RON95 (+5 sen/litre or 2.8%), RON97 (+5 sen/litre or 2.4%), diesel (+5 sen/litre or 2.9%). According to The Star, the subsidy cuts would amount to RM750m savings for the government this year. This works out to 0.5% of the estimated federal government operating expenditure (or 3.6% of initial estimates of subsidies for 2010).

Although small at this time relative to the total government expenditure at this point, this could signal a gradual reduction in subsidies. It could indicate that a tariff hike for Tenaga (Buy; RM10.80 TP) could be forthcoming. The subsidy cuts would also allow funds to be channelled to projects that help improve public transportation such as the MRT. The price increases could result in a lift in inflation and dent consumer sentiment but the extent should not be significant at this point. We expect some minor disruption in traffic volume growth for PLUS in 2H with the marginal increase in fuel and diesel prices. PLUS has already chalked up an impressive YTD
traffic volume growth to May 2010 of 9.8% y-o-y for its core highways of North-South Expressway; New Klang Valley Expressway; Federal Highway Route 2 and Seremban- Port Dickson Highway. Management is guiding for traffic volume growth of 3-4% for 2010 while our forecast is more conservative at 2%.

We are already expected a slower 2H on the back of this fuel price hike and the higher base effect in 2009. Reiterate Buy with an unchanged target price of RM4.00. For Gamuda (Buy, TP RM4.35), we see the gradual cut in subsidies as a potential signal that the government is serious
in implementing the RM36bn MRT project. Recall, that the MMC-Gamuda JV has said it will commit RM3bn in funding together with a RM1.8bn performance bond to see initial works of this MRT take off. But balance of the funding has to be from the government which will likely be from the eventual cut of subsidies.

Report from
HWANGDBS Vickers Research Sdn Bhd (128540 U)

Tenaga Nasional - Proxy for stronger GDP growth

Proxy for stronger GDP growth
• 3QFY10 result was within expectation
• Demand growth and locked-in coal cost support stronger earnings
• Maintain Buy for attractive valuation and potential upside from tariff hike

Stronger 3Q on power demand growth. TNB’s 3Q revenue improved 10.3% y-o-y following 5.3% power demand growth supported by improvements at petrochemical and steel sectors. However, EBIT was flat due to a 12% rise in operating expenses as a result of higher offtake from coal fired plant, higher IPP payment (+6%), and RM63m provision in 3Q for general expenses. TNB recorded RM569m forex translation gain in 3Q as a result of a stronger ringgit against the US$ and Yen (+5%). Excluding the forex impact, 9M10 core net profit of RM2.1b is within our expectation, but at the lower end of market estimates.

Tariff hike is imminent, but timing uncertain. A tariff hike is imminent for TNB given higher coal costs and potential cuts in gas subsidy, but the timing is uncertain. Gas price to the power sector is currently subsidized at RM10.70/mmbtu (37% below current price of RM17/mmbtu); the government is looking at cutting this. We expect 2% net tariff hike to cater for higher capacity payment, an increase in gas cost to be fully passed-on, but coal cost will rise by 10% for FY11F due to limited supply. We estimate every 1ppt increase in gas cost will erode FY11F EPS by 1.6%, while a 1ppt increase in tariff will raise EPS by 9.1%.

Attractive valuation. Maintain Buy for TNB with a target price of RM10.80/share based on last 3-year average forward PE of 14x. TNB is trading at attractive 11x FY11F PE and 1.2x P/BV against its 10-year historical averages of 20x and 1.5x, and peers’ averages of 14x and 1.4x. Foreign shareholding in TNB has improved from 9.4% in Dec 09 to 10.7% in Jun 10.

Analyst
June Ng +603 2711 2222
june@hwangdbsvickers.com.my

From
HWANGDBS Vickers Research Sdn Bhd (128540 U)

KNM Group - Signs of better times?

New orders picking up

• Order book at year-high of RM2.4b; eyeing several sizable contracts in SEA and Europe
• To take advantage of tax incentives by bringing more production home
• Maintain Hold; re-rating hinges on contract flows in 2H10

Signs of better times? KNM has secured RM1.0b worth of jobs thus far, double what it secured in 1H09. Its current order book is at the year-high of RM2.4b compared to RM1.8b in the beginning of the year. Its average selling price (ASP) has also improved moderately to close to RM20,000/MT from a low of RM18,500 in 2009 (record high of RM22,500 in 2008). We understand KNM is eyeing several sizable contracts (>RM100m) in South East Asia and Europe. We expect accelerating oil & gas activities for the rest of this year to drive future demand for process equipment.

Extending market reach, benefit from tax incentive. KNM may add two more plants to extend its global market presence. But the investments would be small at c.RM40m with a potential JV local partner. KNM expanded its Saudi Arabia capacity recently, bringing total group capacity to 157,300MT/year (+6.8%). Meanwhile, works are currently underway to upgrade its Kuantan plant to undertake manufacturing of BORSIG’s boilers for the global market. There is also a plan to package BORSIG’s membrane equipments in Malaysia to take advantage of the RM1.4b tax incentive and improve overall cost efficiency.

Maintain Hold and RM0.55 TP. We are maintaining our earnings assumptions at this juncture, as utilisation rate remains low at 60% and margins are still expected to be sluggish in 2Q10. Re-rating catalyst for the stock would depend on job orders in 2H10. We reiterate our Hold rating for KNM with a target price of RM0.55, pegged to 9.0x FY11F PE. The counter is currently trading at 8.4x FY11F PE against the sector’s 8.8x and the region’s 15.0x.

Sector Focus - Property Fighting For A Home

Fighting For A Home

• Recent launches sold via balloting due to overwhelming response
• Robust demand even at new benchmark prices
• Developers’ margins to pick up with higher selling prices & incentive roll-backs
• Recovery in sales & margins yet to be reflected in share prices.Maintain positive view on Malaysian property sector. Top pick: SP Setia.
  

Sales going strong at record prices. Huge turnouts seen at property launches over the last three weekends:

1. Desa Parkcity’s Casaman. All 147units were snapped up within five hours despite record pricing of RM1.7m–RM2.1m/unit for 2/3- storey link houses. More than 650 registrants were present for the balloting exercise, each armed with a bank draft for RM50-100k.
2. Boustead’s Surian condos at Mutiara Damansara (311 units at RM600psf). 80% sales were achieved after last weekend’s balloting (all non-Bumi units taken up). This was despite the high 50% Bumi quota (vs 30% typically) and large built-up areas of 1679-2443sf, priced at RM926k-1.3m/unit (most of the 850- 1400sf were sold prior to the ballot).
3. Sime’s Reika link houses at USJ Heights (107 units; RM982k/unit; land size: 24’ x 80’). Achieved 75% take up last weekend, at 19-22% higher ASP vs launch of Kayangan Puteri in Nov09 (RM808-838k).
4. Desa Parkcity’s Westside One condos (338 units; RM600psf). Approximately 90% of non-Bumi units were booked over just one weekend (built-up area : 969-2066sf).

In Penang, E&O’s Quayside Resort condos (RM685psf, 298 units) reached 65% sales (soft-launched in Oct09) – setting the stage for the launch of its second tower in Singapore soon at ~RM750psf. Later this month, SP Setia will also be conducting a balloting exercise for its Setia EcoPark Phase 8C semi-detached (24 units; RM1.8m/unit vs RM1.2m for Phase 8B launched in end-Oct09).

Positive outlook still not reflected in share prices. Malaysian property sector is trading at 0.74x P/BV (0.56x P/RNAV), still below 0.77x historical mean despite recovery in sales and margins. Malaysian property sector is trailing way behind regional peers in terms of share price recovery post-financial crisis. We remain positive on Malaysian property sector; top pick: SP Setia (sector leader, largest residential developer by sales). We also like E&O, DNP, and Sunrise for their prime landbank, strong brandname and attractive valuation. As for SunCity, its upcoming RM3bn REIT should help unlock value and strengthen its balance sheet.

Analyst
Yee Mei Hui +603 2711 1332
meihui@hwangdbsvickers.com.my
Report from
HWANGDBS Vickers Research Sdn Bhd (128540 U)

Berjaya Sports Toto - Dealt Another Blow

FULLY VALUED RM4.22 (Downgrade from Buy)
Price Target : 12- month RM 4.00 (Prev RM 4.80)
Reason for Report : Corporate Update
Potential Catalysts: Strong growth for 4D and lotto games; award of Vietnam NFO licence to associate

Pool betting duty raised to 8% from 6%, from Jun10

• 12-13% impact to FY11-13F earnings
• But potential support from bumper dividends
• Downgrade BST to Fully Valued (from Buy), TP cut to RM4.00 (from RM4.80)

Higher gaming tax. The government has recently turned hawkish on the gaming sector, due to political pressure and urgent need to source for income to narrow the widening budget deficit (although impact to government’s coffers will be small). After last week’s retraction of sports-betting licence granted to Ascot Sports (supposed to be injected into related party Berjaya Corp with BST acting as distribution agent), pool betting duty for NFOs has been raised to 8% from 6% (on net gaming revenue) effective 1 Jun 2010. The last gaming tax hike was in 1998 (from 7% to 8% of gross revenue), while pool betting duty was standardized to 6% from 6-12% in 2003. Higher gaming tax could lead to less attractive prize payout which would encourage punters to switch to illegal operators. NFOs could end up with lower revenue and margin compression.

Downgrade to Fully Valued, TP cut to RM4.00. We estimate the pool betting hike will reduce BST’s FY11-13F earnings by 12-13% (yet to factor in potential lower payout and loss of market share to illegal operators). This will bring down our valuation (based on dividend discount model) by 14% to RM4.00. Least affected NFO will be Tanjong (2-4%) as gaming only contributes 21% of EBIT.

Potential bumper dividends could provide some support. BST may declare higher dividends (but on weaker earnings) to help parent Berjaya Land finance the repayment of RM711m convertible bonds due in Aug 2011. This will be supported by its new RM800m medium-term-notes program (expected to draw-down initial RM500m by end- 10 to refinance debts and for working capital). We have only assume 75% payout (based on BST’s dividend policy).


Analyst
Yee Mei Hui +603 2711 1332
meihui@hwangdbsvickers.com.my

Report from
HWANGDBS Vickers Research Sdn Bhd (128540 U)

Today's Market Preview (30-06-2010)

Green Packet - WiMAX embedded Intel chip is here!

Green Packet (RM1.00; Buy; Price Target: RM1.75; GRPB MK)
WiMAX embedded Intel chip is here!

In a full-page advertisement in The Star newspaper today, Intel introduces the arrival (in Malaysia) of its WiMAX-embedded processor, the Intel Core i5. P1, the WiMAX subsidiary of
GRPB, is a partner while Acer, Asus, Dell, Lenovo, MSi and Toshiba are the manufacturers of WiMAX-embedded notebooks/netbooks (WENB).

A phrase in the ad says “Why just WiFi when you can also WiMAX?” clearly states that the WENB also come with WiFi capability. We foresee WiMAX as a standard feature in future notebooks/netbooks, much like the path that WiFi took years ago. We also understand that WENB sold in Malaysia would be set to P1’s WiMAX service by default, though users have
the choice to change WiMAX operators on their own. This is not only a strong endorsement for P1, but also helps to channel subscribers to P1. The timing of this announcement is within our expectation (of mid-2010), and is positive for P1 and GRPB.

Meanwhile, our sum-of-parts price target of RM1.75 for GRPB is under review pending the official announcement and further detail of GRPB’s and P1’s tie-up with SK Telecom (SKT).
As mentioned in our earlier comment a month ago, the price target for GRPB could be lowered to c. RM1.60 due to the dilutive effect of SKT’s acquisition of c. 25% stake in P1. Nevertheless, our BUY call is intact.

Report from
HWANGDBS Vickers Research Sdn Bhd (128540 U)