Personally I like L&G, especially L&G-LA. What do you think???
Personal Finance
Written by Madiha Fuad and Janice Melissa Thean of The Edge Malaysia
Monday, 24 March 2014 00:00
INVESTORS have to look harder for undervalued gems this year. Stock picking is more challenging, compared with a year ago, after last year’s rally, say fund managers, who find that valuations have become rather stretched for many counters.
Some say, share prices have mostly factored in earnings prospects and that it is time for companies to deliver corporate results, to justify the premium valuations.
The stale bulls are concerned that earnings growth may be disappointing, as consumers start tightening their belts, while companies are facing higher costs, as a result of the government’s subsidy cuts.
Expectations that Petroliam Nasional Bhd will continue spending on capital expenditure, has helped sustain the bullishness on the local oil and gas sector, which is seen as one of the sweet spots on Bursa Malaysia.
Meanwhile, the construction industry is also a sector to watch, with the government expected to implement a slew of infrastructure projects.
Export-oriented sectors, such as glove makers and the electrical and electronics industry, could benefit from the strong US dollar.
On the external front, the improved economic conditions in the US and Europe, and the weaker ringgit, may augur well for export-oriented companies.
Below are 10 stocks that are worth watching.
StemLife Bhd
Cash-rich StemLife Bhd attracted some attention, after Singapore-listed Cordlife Group Ltd bought a stake in the largest cord blood banking facility in Malaysia.
Cordlife acquired a 31.82% stake from StemLife directors, Loh Yoon Kwai and Lim Jit Soon, as well as managing director Datuk Low Su-Shing and deputy managing director Datuk Lim Oi Wah. The latter two have ceased to be substantial shareholders of StemLife.
Other major shareholders include Tan Sri Vincent Tan’s Berjaya Corp Bhd with a 12.12% stake, Capital Group International Inc with 11.31%, and Emerging Markets Growth Fund with 5.05%.
As StemLife is said to have a 60% market share in Malaysia and a 40% stake in StemLife Thailand, the stake acquisition would allow Cordlife to break into new markets and fend off competitors, as demand for such services in the region, grows.
Previously trading at a weighted average of 26 sen, StemLife’s share price rose to a three-year peak of 50.5 sen last October (2013), when Cordlife first emerged as a substantial shareholder. On Jan 15, the stock closed at 44.5 sen, translating into a market capitalisation of RM110.1 million.
With cash of up to RM73.7 million as at its 3QFY2013 ended Sept 30, and an issued share capital of 247.5 million, each share is backed by 29.7 sen cash.
Founded in 2001, StemLife has been posting stable earnings, after a bleak period, when the group fell into the red in 2009 and 2010. Since then, the group has recovered, posting a net profit of RM3.1 million in FY2011 and RM5.7 million in FY2012. Earnings per share were 1.9 sen and 3.28 sen, respectively.
Gamuda Bhd
The stock rallied last year (2013), but many believe that the rally still has legs, because the company is said to be packed with growth catalysts — not only the contracts it has in hand, but also more construction jobs that it is expected to win. Its coffers will get a big boost, should it sell its 40% stake in water treatment concessionaire, Syarikat Pengeluar Air Sungai Selangor Sdn Bhd.
Gamuda is perceived to be on its way to getting the nod for the RM25 billion Mass Rapid Transit (MRT) Line 2, by the cabinet.
On top of that, it is seen as the front runner for the high-speed rail project.
In May 2013, Gamuda unveiled the MRT Line 2 plans under the KL Transport Master Plan. The 56km MRT Line 2 (also known as the Orbital Line) will stretch from Sungai Buloh to Putrajaya, and will have 35 stations. The plan has gone through feasibility studies and is awaiting cabinet approval, said to come in 1Q2014.
UOB Kay Hian Research expects the contracts to be awarded by mid-2015, and believes that Gamuda can again, take on the personal development planning (PDP) role for MRT Line 2.
“[This] would enable it to earn a 6% PDP fee, or an estimated RM750 million [50% stake]. Given its role in MRT Line 1, Gamuda is also likely to secure the tunnelling packages for Line 2, as it would have significant cost advantage, compared with other players,” says the research house.
Meanwhile, Gamuda has acquired an additional 40% stake in Kesas Expressway, raising its holdings to 70%, in the toll road concessionaire.
In October 2013, Gamuda offered to acquire the remaining 70% stake that it does not own in Kesas, for RM875 million, valuing the concessionaire at about RM1.25 billion. It later upped its offer to RM980 million.
Amcorp Properties Bhd and Permodalan Nasional Bhd, which collectively hold a 40% stake, accepted the offer. But the Selangor State Development Corp, which holds a 30% stake, did not take it up.
Eastern & Oriental Bhd
Trading at a weighted average of RM1.95, E&O’s share price jumped from RM1.65 to RM2.20 in 2013. It closed at RM1.94 on Jan 15.
An imminent catalyst for E&O, is its increase in its asset value from the Seri Tanjung Pinang 2 (STP2) land reclamation project.
STP2, which covers 760 acres and has high development potential and a lucrative profit margin, is the primary valuation driver.
“As STP2 will be reclaimed in two phases, it appears unlikely that E&O would need to do a rights issue,” says AmResearch, in a note. It adds that E&O is also committed to maintaining its 30% dividend policy.
With Sime Darby Bhd as its parent company, with a 32% stake, E&O has various opportunities to tap the vast landbank of its major shareholder.
E&O has just started to access Sime Darby’s landbank. It recently entered into a memorandum of agreement to acquire 135 acres of prime residential land, said to be earmarked for a lifestyle and wellness-themed project, in Sime Darby’s City of Elmina development, located along the Guthrie Corridor Expressway.
E&O also has strong pre-sales in the pipeline, comprising several major projects, such as Avira Wellness Resort in Iskandar Malaysia and Princess House redevelopment in London.
“We expect the initial 200 units of linked houses [at Avira Wellness Resort] to be fully taken up. Additional sales of RM200 million, will be easily achieved,” says AmResearch.
The research house reasons that if this materialises, it would provide a significant boost to the Avira project, which has a gross development value of more than RM3 billion.
The positive outlook for Avira, is because of the expected strong reception for its phase 1, which comprises 208 terraced houses.
E&O’s healthy balance sheet is reflected in its net gearing of 33%, as at its 1QFY2014. The group also has unbilled sales of RM550 million, as at end-August.
Muhibbah Engineering (M) Bhd
Big things are expected of this mid-cap outfit, which in the week prior to Jan 20, alone, has seen its share price jump more than 12%, to reach a new high of RM2.58 at Jan 16’s close. Its market capitalisation was RM1.09 billion.
In 2013, Muhibbah received a fabrication licence from Petroliam Nasional Bhd, which enables it to participate in major offshore and onshore fabrication works, for Petronas and other major oil companies in Malaysia.
This sent its share price soaring more than 83%, over the span of a month, to RM2.60 on July 25. But the stock is still on analysts’ recommendation list, with a target price of RM3 or higher.
Muhibbah has an integrated business model that includes construction, ship building and crane manufacturing. It is now poised to become a strong proxy to the oil and gas sector.
CIMB Research believes that Muhibbah’s turnaround prospects look exciting, backed by Petronas’ RM60 billion annual capex, which should benefit the group’s crane and shipyard divisions.
All eyes are on Petronas’ refinery and petrochemicals integrated development project in Pengerang, Johor, which should see a final investment decision in April. CIMB Research says that Muhibbah’s opportunities in the project, remain intact.
Muhibbah also has a 62% stake in Favelle Favco Bhd — a crane operator. Favelle Favco entered the China market in early 2012, and hopes to deliver up to 15 cranes a year, from its operations in China, which could amount to RM100 million a year.
Muhibbah now has an order book of RM2.1 billion.
The company pulled itself out of the red in 2013, and reported a net profit of RM60.64 million, for nine months ended Sept 30 — up 15% from the year before.
Its earnings per share stood at 4.86 sen. Muhibbah is currently sitting on cash of some RM310.68 million, but has borrowings amounting to RM234.43 million.
Brahim’s Holdings Bhd
The halal in-flight caterer has done well in terms of share price, having gained more than 198% in 2013, but analysts tracking the stock still see upside in the stock.
It achieved a new high of RM2.24 on Jan 9, 2014, following news of a collaboration with All Nippon Airways (ANA).
The stock closed at RM2.03 on Jan 16, giving it a market capitalisation of RM457.86 million.
Just over a week prior to Jan 20, the company announced a collaboration agreement with ANA, for the provision of in-flight halal meals to ANA’s Asian routes and Middle Eastern airlines, at Haneda and Narita airports.
It is said that the partnership could provide a gross contribution of about RM5 million in the first year, and this could double in the second year.
This will allow Brahim’s to move away from its dependence on Kuala Lumpur International Airport’s traffic flow, and thus, reduce concentration risk of its earnings base, according to Alliance Research.
The research house has a “strong buy” on the stock, and recently raised its target price to RM2.67. Hong Leong Investment Bank Research has a “buy” call on Brahim’s, with a target price of RM2.64.
For the nine months ended Sept 30, 2013, Brahim’s announced a net profit of RM10.19 million, or 4.74 sen per share, up from RM3.86 million, or 1.96 sen, a year ago.
Brahim’s also operates restaurants and cafes in KLIA and the low-cost carrier terminal, but the bulk of its earnings comes from in-flight catering for Malaysian Airline System Bhd (MAS). The national carrier accounts for 80% of Brahim’s revenue. It currently provides in-flight meals to 37 airlines.
Apart from the tie-up with ANA, Brahim’s is also expected to see an earnings boost, when klia2 opens in May.
The company is beginning to diversify its business, as it is building sugar refineries in Sarawak and Sabah, which should commence production by 2015.
Another draw would be the fact that it is a well-managed company, and will benefit from a rise in passenger traffic during Visit Malaysia Year 2014, say analysts.
Ho Hup Construction Co Bhd
Ho Hup Construction Co, currently a PN17 company, sits on a clean balance sheet with low borrowings, after a cash call.
Having reported profits for four consecutive quarters, the company is qualified to seek an upliftment from its PN17 status, which may happen this year.
Getting out of PN17 status would be a major boost for Ho Hup, as it would be able to compete for tenders on an equal footing with other bidders. Ho Hup has had to rely on joint-venture partners, to win tenders, or had to play a sub-contractor’s role, throughout its time as a PN17 company.
Post-restructuring, the company may receive a fresh inflow of capital, which will enable it to undertake landbanking activities to boost its property development business. The company is making inroads into property development, with its 60 acres of prime land in Bukit Jalil.
According to Kenanga Research, the freehold commercial land is the main driver of Ho Hup’s future earnings. The company has sole development rights to 10 acres of the tract, while the rest is part of a joint development (JD) between Ho Hup and Malton Bhd.
A revised master plan for the JD land, has been submitted for approval. With the revised GDV estimated at more than RM4 billion, compared with RM2.1 billion currently, Ho Hup’s entitlement may rise to close to RM500 million.
“The realised net asset value of Ho Hup, could be between RM1.55 and RM2.55 per share, or RM2.05 on average, as the asking prices for land in Bukit Jalil are between RM250 and RM400 psf,” says Kenanga Research.
Ho Hup is trading at a market capitalisation of about RM155 million.
Supermax Corp Bhd
Prospects look bright for the glove industry. The weak ringgit is expected to be the tailwind for glove makers, such as Supermax Corp Bhd.
Furthermore, Supermax’s capacity expansion plans for 2014, could augur well for its earnings, as higher output would help ease its bottleneck.
Taking the new capacity into account, analysts foresee mid-teen earnings growth in the next two years.
Supermax is expecting to commence commercial operations of its two new plants, by the end of 1QFY2014. Given the strong demand for nitrile gloves, the company is seen to be facing a two-month oversold position, according to Kenanga Research.
The stock has also seen the re-emergence of Employees Provident Fund as a substantial shareholder, with a 5.5% stake.
The glove maker’s share price has rallied since end-2013, doubling to a three-year high of RM3.01 on Jan 9, before retreating to RM2.85 on Jan 16.
As the stock is trading at 12 times FY2014 earnings, compared with the 15 times of its peer Kossan, analysts expect the valuation gap to narrow with time.
“We believe (that) the valuation gap will narrow, considering that Supermax’s capacity and net profits are at levels similar to Kossan’s,” said Kenanga Research.
Supermax’s big plans for its Glove City and Supermax Business Park, saw the company cough out RM1.3 billion, over 11 years.
The first phase of Glove City, comprising six large plants with a total capacity of 24.6 billion pieces, is expected to be ready in 1HFY2015. An estimated RM95 million was allocated for capital expenditure.
Supermax Business Park is expected to be developed in 2HFY2014. The project will be located at a new site, measuring 100 acres. An integrated glove manufacturing complex (IGMC) will take up 60 acres. Capex for the first phase of the IGMC, is expected to be at RM70 million.
“We are not overly concerned about funding, considering that Supermax has a net gearing of 12% as at Sept 30, 2013, and operating cash flow, which we forecast, will average RM115 million per annum,” Kenanga Research said in a note.
It noted that additional profits from the sale of factories built for the supporting businesses, could be ploughed back into the capex for the IGMC.
Tenaga Nasional Bhd
Tenaga Nasional Bhd’s share price has soared, following the tariff hike. The stock shot up close to 21% over a month, hitting an all-time high of RM11.80 on Jan 8.
The tariff hike is expected to lift the utility group’s earnings. On top of that, TNB will no longer need to shoulder any rise in fuel cost, as the government has in place, a fuel pass-through mechanism. Its expenditure will come down substantially, going forward.
Maybank Investment Bank Research says, the market consensus has yet to incorporate the full earnings accretion from the tariff hike, despite the share price rally. It also points out that the reduced earnings risk has not been fully priced in.
Effective Jan 1, the tariff will go up 14.9% in Peninsular Malaysia and 16.9% in Sabah, with the implementation of the incentive-based regulation mechanism.
The stock closed at RM11.46 on Jan 16, giving it a market capitalisation of RM64.68 billion. Of the analysts covering the stock, AmResearch has the highest target price of RM14.90.
Some may find it pricey, noting that the stock climbed from RM7 level, early last year (2013). However, it is a component stock that is on many watch lists, especially institutional funds, waiting to bargain-hunt on its share price weakness.
AmResearch says that TNB maintains its near-monopoly status in the transmission and distribution of electricity in Peninsular Malaysia, and thus, has a natural advantage in competitive bids for new power generation.
This year, the Energy Commission is expected to call a tender for two gas-fired power plants under Track 4A and Track 4B, with a total capacity of 2,000mw.
This follows the competitive bid for the RM11 billion Project 3B, for which YTL Power International Bhd has been tipped as the front runner.
AmResearch notes that the competitive bidding process to build new power plants, will drive down TNB’s cost structure.
AmResearch estimates TNB’s net profit to grow to RM4.9 billion, or 87.6 sen per share, for the financial year ending Aug 31, 2014.
Petra Energy Bhd
Increasing focus on domestic oil and gas production by enhancing oil recovery, developing small fields and increasing exploration activities to locate new fields, are seen to bode well for Petra Energy Group.
The risk service contract (RSC), in which Petra Energy has a 30% stake, and partner, Coastal Energy KBM Sdn Bhd, holds 70% interest, saw its first oil output from the Kapal, Banag and Meranti (KBM) cluster fields.
The KBM cluster, operated by Coastal Energy, has been developed since June 2012.
The first oil production at the KBM cluster, is a major milestone for the consortium. Some industry players say that this could possibly pave way for it to secure more RSCs in the future.
The stock has been climbing, but it has underperformed, compared with its peers.
Although Petra Energy posted a net loss of RM4.1 million in 3QFY2013 ended Sept 30, analysts remain optimistic, as the company continues to work on a wide range of substantive plans to improve its performance, particularly in the subsea business.
The brown field service provider acknowledges that this year is a little slow-moving, but is nonetheless looking ahead to the year’s final quarter, as it is continuously looking to enhance its capabilities to expand into relevant market sectors.
Petra Energy attributes its 3QFY13 loss to lower contribution from its integrated brown field maintenance and engineering services segment.
The group saw a 28% y-o-y decline in revenue to RM115 million, from RM159.8 million a year ago. However, this is expected to improve.
Besides development and production from the KBM cluster, the group is eyeing support services that could add to its bottom line. These include maintenance activities, such as marine support and operations.
The group’s order book currently stands at RM3 billion, while the tender book is worth RM1.9 billion.
Land & General Bhd
With mid-cap property stocks being all the rage recently, Land & General Bhd (L&G) could also be to investors’ liking, especially with its landbank that is deemed undervalued.
L&G had a renounceable rights issue of irredeemable convertible unsecured loan stocks, last year.
The stock began to gain momentum, soon after the rights issue, which picked up in December last year. Since then, the stock has risen 27.03%, to close at 47 sen on Jan 16.
L&G has been growing its bottom line in double digits, for the past four financial years, save for FY2011. In 9MFY2014 alone, the property developer’s net profit, more-than-tripled to RM33.52 million, on the back of RM229.96 million in revenue.
“L&G’s name carries the baggage of its past, as the huge conglomerate was saddled with high debts, during the Asian financial crisis of 1997. This hindered the take-up for its first new launch in 2009 — 8trium@Bandar Sri Damansara — which L&G had to work hard to prove itself,” said HwangDBS Vickers Research, in a December note.
“Demand for its projects has gradually improved, as seen from the more-than 90% sales for Elements@Ampang and Damansara Foresta Phase 1.”
The research house says that L&G’s landbank is grossly undervalued. It adds that the property developer’s net book value for its landbank for future development, is RM111.8 million.
However, the market value for L&G’s landbank came to a total of RM890.8 million. A prime example would be the Bandar Sri Damansara clubhouse, which had a net book value of RM2 psf, against the market value of RM250 psf.
HwangDBS notes that L&G has unbilled sales of RM800 million, which is four times greater than the revenue generated by the company’s property development segment in FY2013. This does not include its future launches, that have a total gross development value of RM1.5 billion.
This story first appeared in The Edge weekly edition of Jan 20-26, 2014.