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Thursday, June 9, 2011

Stock picks (CIMB)

We have made significant changes to our top 10 picks. Recall that we replaced MAS with our top property pick Mah Sing in May as MAS is facing headwinds from rising fuel prices.

In this report, we are adding Telekom Malaysia ™ as we believe it will outperform on the back of favourable newsflow such as its wholesaling of HSBB to Celcom and P1 and the likely distribution of proceeds from its sale of Axiata shares to shareholders.

Sime Darby is replaced by Petronas Chemical as we are lukewarm about plantation stocks and optimistic about the latter’s strong earnings prospects. For exposure to the banking sector, we recommend Public Bank.

In the oil & gas sector, Perisai displaces Kencana, which offers less share price upside, having been a major outperformer. We are bullish about Perisai which offers significant upside potential.

In the construction space, we are keeping WCT but replacing Gamuda with Muhibbah as newsflow from new contract wins for the above-ground portion of MRT Phase 1 will lead to a re-rating of the winners. Gamuda remains an outperform but the market is well aware of its role as project development partner and its high likelihood of securing the tunnelling portion. The market can only guess which contractor will secure the above-ground jobs, the logical winners being the second-tier established contractors.

Stocks that we are keeping as top picks include Axiata, MRCB, Sapura Crest and WCT.

A capital management story in Axiata
Axiata is shaping up nicely as a good capital management story as its net debt/EBITDA is falling rapidly. We project that Axiata will be in a net cash position by FY12, even assuming a 60% dividend payout ratio this year. It has the potential to return a substantial chunk of its excess cash this year as it has excess cash of RM0.66/share and RM1/share assuming a target net debt/EBITDA of 1.0x fo FY11 and FY12. We also believe that Axiata is doing sufficiently well to cushion the erosion of its voice revenues with its data initiatives. Celcom is looking to expand its revenues from small screens which are more profitable than large screens while XL’s data strategy is to focus on ease of use and user experience. Axiata is one of our preferred picks in the sector. We maintain our SOP-based target price at RM6.08. The potential re-rating catalyst is dividend surprise given its strong FCF generation.

Mah Sing is top property pick
Mah Sing is poised to record accelerating earnings growth in the coming years on the back of the record RM1.5bn sales chalked up in 2010 and the RM2bn-2.5bn targeted for 2011. Up to the second week of May, sales were brisk at RM975m. This does not include more than RM400m bookings that should be converted into sales shortly. Newsflow on landbanking will also be robust as the group is aiming to buy 2-3x the RM4bn GDV landbank it secured last year. Mah Sing remains our top pick in the property sector with an unchanged target price of RM3.30 based on our target market P/E of 14.5x. Potential re-rating catalysts include continued strong sales and landbanking exercises.

MRCB is top GLC construction pick
MRCB remains our key GLC construction pick and should benefit from key entry point projects, particularly the RM8bn-10bn Klang River rehabilitation project and the RM10bn Sg. Buloh development. Revelation of more details of these mega jobs should whip up investor interest in MRCB and provide more visibility on the prospects for the group’s property and construction division. MRCB’s ability to top up its order book remains intact and RM1bn worth of new contracts are targeted for 2011. The group has a fairly good chance of getting a slice of the RM1.7bn Phase 2 of the LRT extension works and the RM10bn-11bn non-tunnelling works for the MRT SBK Line. We reiterate our Trading Buy call and target price of RM3.00 which remains pegged to a 10% RNAV discount. The stock could be catalysed by (i) project awards, (ii) increased positive newsflow on ETP, and (iii) progress of the Sg. Buloh land.

Muhibbah is sole company with dual exposure to construction and O&G
Muhibbah Engineering offers exposure to the construction sector, growing global demand for cranes via Favelle Favco and the pick-up in oil and gas capex, both locally and abroad. Prospects for 2011 and beyond lie in the implementation of 10MP and the ETP and the rollout of various oil and gas infrastructure projects. Positive newsflow in 2H11 is backed by the group’s bids for RM3bn worth of contracts, the highest in two years. Potential mid-large scale oil & gas related projects include Vale’s iron ore facility in Perak, the Gorgon project in Australia and Dialog’s petroleum terminal facility in Johor. Other mega jobs such as the MRT and seven new highways offer good opportunities too. Muhibbah Engineering replaces Gamuda as one of our top picks for the sector. We maintain our Trading Buy and RM2.75 target price (20% discount to RNAV). Potential re-rating catalysts include (i) project wins, and (ii) a favourable outcome for the APH project.

Perisai is O&G stock with highest upside
Perisai – Following last year’s restructuring, Perisai enjoys clearer earnings visibility. It is set to benefit from opportunities in deepwater and marginal fields. Furthermore, skilled new management is firmly in place and is backed by major shareholder Ezra’s (EZRA SP, Outperform) operational strength. Currently, Perisai’s only revenue-generating asset is a pipelay barge, Enterprise 3, which is chartered to SapuraCrest until Jun 2013. An ongoing asset injection of a vessel operator, Intan Offshore, by asset-rich Ezra will give Perisai a new revenue stream come Jun. The acquisition of Garuda, which owns a mobile offshore production unit (MOPU), will enlarge Perisai’s asset base further. We maintain our target price of RM1.40, based on our target market P/E of 14.5x. Perisai remains an Outperform, with the potential re-rating catalysts being 1) a marginal field venture, and 2) fleet expansion.

PChem to ride on rising oil prices
PChem’s earnings are set to rise as a result of wider margins driven by high oil price and 11% volume growth. Newsflow on the company’s capacity expansion and upgrade of existing facilities will improve sentiment further. On top of this, industry margin for olefins, which is PChem’s key earnings driver, is likely to rebound sharply from the current bottom and head for a peak in 2013. We reiterate our Outperform call and target price of RM9.70, based on 10x CY12 EV/EBITDA to reflect its superior growth and profitability. Key potential catalysts include wider margins as a result of high oil price and volume growth.

Rock-solid bank in Public Public Bank – We like Public Bank for its quality and strong management, which is reflected in its top-of-the class asset quality, superior operating efficiency and swift loan growth of 13-14%. This is evident from its position as the only local bank that has consistenty recorded strong quarterly net earnings growth of 18-25% yoy since the economic recovery in 1Q10. We are projecting net earnings growth of 13-17% for FY11-13, underpinned by (1) loan growth of 13-14%, (2) expansion of non-interest income, and (3) lower credit costs. We maintain our target price of RM16.00 (pegged to 10% premium over the DDM value) and our Outperform call on Public Bank, premised on the potential re-rating catalysts of (1) above-market loan growth, (2) swifter expansion in China in the longer term, (3) better-than-expected growth in non-interest income, and (4) potential increase in dividend payout.

SapCrest is top pick in O&G sector
SapCrest – We like SapuraCrest for its direct involvement in marginal field development and its growing fleet of assets. For the Berantai marginal field development, which comes under the ETP, SapuraCrest has started on the transport & installation works, helped by its in-house pipelay barges. 1HFY1/12 results should include a modest maiden contribution from the project. Once the field starts producing, the company will enjoy recurring fees until the end of the 9-year project. We maintain our forecasts and target price of RM5.12 as we value the stock at a 40% premium over our 14.5x target market P/E given the strong prospects for the sector and SapuraCrest’s superior growth relative to the market. The stock remains an Outperform, with the potential share price triggers being 1) more marginal field work, 2) success in new markets, and 3) more offshore assets.

TM is top telco pick Telekom Malaysia is an excellent play on fixed broadband and data, which is one of the fastest-growing telco segments in Malaysia. In our view, the market has not fully factored in the strong take-up of Telekom’s Unifi high-speed broadband (HSBB) service and wholesale revenue from Maxis and eventually Celcom and P1. Capex is peaking this year, resulting in FCF yields of 9-12% for FY12-13 and gross dividend yield of 6-10%. Likely stock catalysts are Unifi’s strong take-up, the inking of agreements to wholesale HSBB to Celcom and P1, earnings surprise and the sale of Axiata shares. TM is our top Malaysian telco pick, followed by Axiata.

WCT is well positioned for construction boom
WCT still has an edge in open tenders as it remains one of the efficient contractors and boasts a strong track record. Local project flows in 2011 are likely to be as good as in 2010 for WCT. It is targeting RM2bn worth of new jobs this year, backed by the ETP and 10MP. WCT has also prequalified for the RM10bn-11bn MRT elevated works. Despite the Middle East tensions, we remain optimistic about the group’s prospects in the Gulf region, especially in Qatar and Abu Dhabi. We maintain our Outperform rating and target price of RM4.15, which is pegged to an unchanged 10% discount to its RNAV. Factors that could trigger a re-rating include (i) project wins, and (ii) ebbing Middle East concerns. The stock remains one of our top picks for the construction sector.

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