In our May 11, ‘09 report we stated our views on the proposed new fund-raising framework from Bursa and SC, which will also involve the merger of the Main and Second Boards come Aug 3.
We now turn our attention to the Second Board companies that stand to benefit from the merger. Out of the almost 230 Second Board companies, we only cover 5, or 3.3%, out of our 151-stock universe. A quick comparison using Bloomberg numbers reveals that Second Board companies on average trade at a slight discount to Main Board companies although the discount is slight, particularly in the Property and Construction sectors. While the discount may narrow after the merger of the Boards, we believe a rally in Second Board stocks is unlikely as constraints such as earnings visibility and thin liquidity remain. Out of our 5 stocks, we have Defensive Buy calls on HELP, Kawan Food and LTKM. However, more interest may be focused on the Second Board companies hogging the news of late, including Scomi Engineering, Ramunia and Fajar Baru, none of which are under our coverage.
HELP (BUY, TP RM1.55) is principally involved in the provision of tertiary and vocational education services with exposure in Malaysia, Indonesia, Vietnam, China, Middle East and Cambodia. Comparatively, HELP is the most profitable listed education company in Malaysia given its strong management team and well-strategised expansion plan. HELP is progressively expanding its student capacity by opening new campuses and via acquisitions of its rivals. Supported by its excellent track record, well mapped out expansion plan and strong balance sheet, we believe HELP is on the right track to becoming the region’s leading education player. We have a BUY recommendation at a target price of RM1.55 based on an income residual valuation.
Kawan Food (BUY, TP RM0.87) is the leading frozen food producer in Malaysia with
approximately 50% of the total Malaysian market share. We like Kawan Food for its resilience
as sales are largely unaffected by the economic slowdown, as more frozen food is consumed
when people choose to dine at home. Furthermore, its expansion to Nantong, China, will help
the company capture China’s huge market as we see a growing fad for frozen food among the
urban Chinese. The China plant is currently undergoing trial production and is set to start in
3QCY09. We maintain our BUY recommendation with a TP of RM0.87.
LTKM (BUY, TP RM1.27) is the largest single farm player with production capacity of 1.3m
eggs per day. We are covering this company under the CMDF-Bursa Research Scheme.
Although the earlier increase in corn and soybean prices have eroded the margins of the
smaller poultry farmers but being one of the largest egg producers, LTKM sees this as an
opportunity to capture a larger market share. Hence, we are recommending a BUY on this
stock at a TP of RM1.27.
Magna Prima (NEUTRAL, TP RM1.90) is a smallish property player which has recently
turned around. However, the outlook Magna Prima has turned uncertain with the recent departure of its CEO, Mr. Lim Ching Choy, an ex-banker with experience in turning around Mah Sing previously. Nonetheless, Magna Prima’s earnings in the near-term will continue to be underpinned by its Magnaville, Dataran Otomobil and U1 Shah Alam projects, which have a combined unbilled sales and outstanding construction orderbook of >RM200m. Two main catalysts for future earnings growth would be the successful launching of its RM600m Magna City project and the impending mixed development project along Jalan Ampang in KLCC. With the uncertain outlook direction of the company, we have a Neutral call on Magna Prima for now with a TP of RM1.90.
Imaspro (SELL, TP RM0.79) is principally involved in manufacturing and trading
agrochemical products such as pesticides and insecticides. As at FY08 (ended June), more than 50% of its sales were generated from the overseas market, with Australia and Vietnam as the largest overseas destinations. However, its high dependence on export sales and imported raw materials exposes the company to forex volatility. In addition, the volatility in raw material prices and selling prices has also subjected its earnings to volatility and cyclicality, as can be seen in its 1HFY09 results. As such, we have SELL recommendation on the stock, which makes it the only Sell call among the 2nd Board companies in our Universe.
Scomi Engineering (Not Rated), a 70% subsidiary of Scomi Group is a specialised
engineering company with 2 core operations: 1) the manufacture of OCTG pipes to the oil and gas industry; 2) the design and manufacture of coaches, rail wagons and monorail systems as well as specialised vehicles. The Group has been in the corporate limelight since ’08 after making inroads to construct India’s first monorail line with JV partner Larsen & Toubro. The RM1.85bn monorail project to be constructed in Mumbai is targeted for completion by 2011. Given its recent pace in India, the Group may potentially secure another monorail job in
Bangalore worth RM8.45bn, with another Indian Partner, Geodesic Techniques. The said project is believed to have received preliminary approval from the respective state government. Going forward, revenue from its transportation division will potentially outpace that from its oil and gas division, as the Group actively bids for railway infrastructure works across the Asian and Middle East regions. Nonetheless, despite its revenue growth, the Group remains in a difficult position as margins are contracting margins on higher cost of materials
and manpower, and its debt leverage position (financing costs). This saw its net profit for FY08
falling 70% despite a 17% growth in revenue. Nonetheless, the company’s profits rebounded
in 1QFY09 given the progress in the Mumbai monorail project. Its overseas revenue sources
continue to dominate for the company, which currently trades at 8.64x prospective PER.
Ramunia Holdings (Not Rated), is an oil and gas platform fabricator with a yard located on
the South-East tip of Johor at Teluk Ramunia. Its yard space of 176 acres is the largest
amongst the 7 major O&G fabricators in Malaysia. After a capacity upgrade in 2008,
Ramunia’s yard fabrication capacity rose to some 80,000 tonnes per annum. The company
has been in the news since MISC proposed a Reverse TakeOver of the company in January
2008 by injecting its own fabrication yard, MMHE, into Ramunia. The RTO was subsequently
called off by MISC and Ramunia’s share price languished. Recently, its volume and share
price picked up when Sime Darby proposed to buy all of Ramunia’s assets and liabilities for
RM232m, which looks likely to be accepted by Ramunia’s shareholders. With the sale,
Ramunia will end up with RM46.2m in cash and a 20% stake in an enlarged Sime Darby
Engineering, which is also involved in O&G fabrication. It is hoped that its clean-up in its balance sheet will allow Ramunia to acquire other businesses in the O&G industry. Ramunia reported a loss for FY08 and currently trades at a PBV of 3.1x.
Fajarbaru Builder Group (Not Rated) is primarily involved in construction and has an outstanding orderbook of RM505m. Some of these projects are the current LCCT expansion and subcontracting works for the Seremban–Gemas Double Track. Investor interest in Fajarbaru may have emerged recently on rumours that the company has been pre qualified for the new LCCT at KLIA (RM2bn). From our casual meetings with management, it appears upbeat on securing some small–mid scaled jobs under the Government’s stimulus package.The current CEO of Fajarbaru is Dato Low Keng Kok, who held the same position at Road Builder before it was privatised by IJM. Based on consensus estimates, Fajarbaru is trading at 8.4x FY09 earnings.