A few big winners, many losers
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A few big winners, many losers

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The majority down. 62% of our 72-stock universe suffered lower ...

The majority down. 62% of our 72-stock universe suffered lower
sequential quarterly net profits, with 24% surprising on the downside.
The combined 1Q09 net profit of our research universe fell by just 3.5%
QoQ. But stripping out 5 large gainers, net profits fell a larger 13.6%
QoQ. Consumers and glove manufacturers’ defied gravity, but net
profits of virtually all stocks in nine sectors fell quarter-on-quarter.
A surprising combined result, but the devil is in the details. The
combined net profit of our research universe declined just 3.5% QoQ
despite an overwhelming 62% of companies reporting a sequential
quarterly decline. But excluding five companies, combined net profit fell
13.6% QoQ, an acceleration from previous quarters. A broad-based
earnings decline is being masked by a few companies, including some
monopolies.
Declines in nine sectors, but consumer sector unscathed. Every
stock in nine sectors, excluding monopolies Petronas Gas and KLCCP,
experienced a drop in quarterly sequential earnings. The sectors are
gaming, oil & gas, property, REITs, construction, building materials,
semi-conductors, plantations and toll roads. Consumer stocks and
glove manufacturers showed particular resilience.
An ‘energy dividend’ took effect; monopolies fared well. Lower oil
prices benefited heavy fuel users AirAsia and Tenaga. Their gains were
only partially offset by lower earnings at the oil & gas services
companies. Net profits of Telekom, Tenaga and Petronas Gas, all
effectively monopolies, improved on a quarterly basis although only
Petronas Gas raised prices in 1Q09.
The biggest disappointment and downgrade: 1Q GDP. First quarter
2009 GDP fell 6.2% YoY, against consensus expectations of a 3-4%
drop. We have revised our GDP forecasts to -3.8% in 2009 and +4.0%
YoY in 2010 (previously -1.3% and +3.5% respectively). The
government, to be ahead in the expectations game, is projecting 2009
GDP growth of -4% to -5%. The silver lining is the government is now
under greater pressure to implement its fiscal stimulus plans quickly.
A reversal of fortune ahead for construction, building materials.
Despite uniformly lower earnings this 1Q, we believe the construction
and building materials sectors are only 2-3 quarters away from
improved revenues. Share prices of stocks in these sectors will likely
be driven by newsflow from the fiscal stimulus rather than earnings.

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A few big winners, many losers A few big winners, many losers Document Transcript

  • Equity Research PP11072/03/2010 (023549) Market Strategy 2 June 2009 1Q earnings wrap A few big winners, many losers KLCI: 1,061.8 The majority down. 62% of our 72-stock universe suffered lower YE Target: 990 sequential quarterly net profits, with 24% surprising on the downside. The combined 1Q09 net profit of our research universe fell by just 3.5% Andrew Lee, CFA QoQ. But stripping out 5 large gainers, net profits fell a larger 13.6% andrew.lee@maybank-ib.com QoQ. Consumers and glove manufacturers’ defied gravity, but net (603) 2297 8680 profits of virtually all stocks in nine sectors fell quarter-on-quarter. A surprising combined result, but the devil is in the details. The combined net profit of our research universe declined just 3.5% QoQ despite an overwhelming 62% of companies reporting a sequential quarterly decline. But excluding five companies, combined net profit fell 13.6% QoQ, an acceleration from previous quarters. A broad-based earnings decline is being masked by a few companies, including some monopolies. Declines in nine sectors, but consumer sector unscathed. Every stock in nine sectors, excluding monopolies Petronas Gas and KLCCP, experienced a drop in quarterly sequential earnings. The sectors are gaming, oil & gas, property, REITs, construction, building materials, semi-conductors, plantations and toll roads. Consumer stocks and glove manufacturers showed particular resilience. 1Q results of our Research Universe An ‘energy dividend’ took effect; monopolies fared well. Lower oil Rising Falling prices benefited heavy fuel users AirAsia and Tenaga. Their gains were % of coys with rising/falling 38 62 only partially offset by lower earnings at the oil & gas services QoQ Net Profit Above Below companies. Net profits of Telekom, Tenaga and Petronas Gas, all % of coys with 1Q Net 11 24 effectively monopolies, improved on a quarterly basis although only Profit above/below Petronas Gas raised prices in 1Q09. expectations The biggest disappointment and downgrade: 1Q GDP. First quarter 2009 GDP fell 6.2% YoY, against consensus expectations of a 3-4% drop. We have revised our GDP forecasts to -3.8% in 2009 and +4.0% YoY in 2010 (previously -1.3% and +3.5% respectively). The government, to be ahead in the expectations game, is projecting 2009 GDP growth of -4% to -5%. The silver lining is the government is now under greater pressure to implement its fiscal stimulus plans quickly. A reversal of fortune ahead for construction, building materials. Despite uniformly lower earnings this 1Q, we believe the construction and building materials sectors are only 2-3 quarters away from improved revenues. Share prices of stocks in these sectors will likely be driven by newsflow from the fiscal stimulus rather than earnings. Top Stock Buys Price EPS (sen) PE EPS Growth (%) Net Yield (%) TP Jun-1 2009F 2010F 2009F 2010F 2009F 2010F 2009F IJM Corp 6.30 5.75 26.8 34.3 21.5 16.8 -27.8 28.1 4.6 Kinsteel 1.30 0.91 5.9 16.4 15.3 5.5 72.1 176.5 0.0 Lafarge 5.60 5.05 38.1 47.2 13.3 10.7 -12.0 23.9 3.0 SunCity 3.70 2.92 29.8 30.4 9.8 9.6 5.5 2.0 2.1 Telekom 3.54 2.65 18.6 19.6 14.3 13.5 -9.6 5.5 7.7 Resorts 3.10 2.85 21.7 18.4 13.1 15.5 -7.7 -15.2 1.7 Source: Maybank-IB
  • Market Strategy 62% reported lower quarterly profits The big picture surprise. The main surprise this quarter is that aggregate recurring net profits (NP) of the 72 stocks we cover fell by only 3.5% between 4Q08 and 1Q09, compared to a 10.6% QoQ drop in 4Q08, and 17.6% QoQ drop in 3Q08. This is despite the fact that within our research universe of 72 stocks that reported earnings in April and May, 62% reported lower quarterly sequential NP. Combined Net Profit of Maybank-IB coverage, 1Q09 (RM m) 16000 14,317 14,811 % chg refers to QoQ change 13,586 14000 12,210 12000 10,911 10,531 10000 5.4% 3.5% -17.6% -10.6% -3.5% 8000 6000 4000 2000 0 CY 4Q07 CY 1Q08 CY 2Q08 CY 3Q08 CY 4Q08 CY 1Q09 Source: Maybank-IB 5 large capitalization stocks made the difference. Three monopolies and two other stocks, Axiata and Air Asia, explain the anomaly of more companies with declining earnings, but total quarterly NP falling by a smaller percentage. Axiata’s NP reversed from a RM117m loss to a RM101m net profit due mainly to its Indonesian operations. Air Asia’s RM46m NP growth to RM167m was driven by air-travellers shifting to low-cost flights and lower fuel costs. Monopoly profits were sustained. Telekom Malaysia, Tenaga, Petronas Gas, KLCCP and MAHB continued to report higher quarterly profits. Telekom saw non-voice revenue grow in double digits and higher margins as high speed broadband roll-out slowed in the quarter. Tenaga benefited from lower coal costs and a shift to cheaper gas in the fuel mix while tariffs were unchanged. Petronas Gas’s Utilities division raised gas prices to its industrial users. KLCCP raised some rental rates at its ExxonMobil and Dayabumi buildings. Excluding the NP of 5 companies (Telekom, Tenaga, PGas, Axiata, Airasia) combined recurring NP plunged 13.6% QoQ, an acceleration from previous quarters. This gives us a more accurate picture as both Axiata and Air Asia experienced their earnings collapses in earlier quarters (third or fourth quarter of calendar year 2008) and their profit recovery distorts the bigger picture. A 13.6% QoQ drop in combined NP is also the highest rate of decline in the past three quarters. 2 June 2009 Page 2 of 8
  • Market Strategy Combined NP excluding monopolies, Axiata & AirAsia, 1Q09 (RM m) % chg refers to QoQ change 14000 12,214 13,098 11,118 11,510 12000 10,307 10000 8,906 8000 9.9% 7.2% -12.1% -10.5% ‐13.6% 6000 4000 2000 0 CY 4Q07 CY 1Q08 CY 2Q08 CY 3Q08 CY 4Q08 CY 1Q09 Source: Maybank-IB The Energy Dividend (RM m) Lower oil prices are a double-edged sword, but are net positive. QoQ chg in NP Two substantial beneficiaries of lower oil prices in 1Q were AirAsia and Higher NP from Tenaga, A’Asia 421.8 Tenaga, whose NP rose by RM422m in total. Offsetting that was lower Lower O&G services NP -79.5 NP from the oil and gas services companies, which lost an aggregate 342.3 RM79.5m QoQ. But if one considers the lower plantation earnings to be Lower plantation NP -285.4 related to the lower oil price (due to the correlation of CPO prices to oil) Net oil price dividend 56.9 then the lower plantations NP almost fully offsets the ‘energy dividend’. Looking ahead, Air Asia and MAS will have to deal with more expensive jet fuel in the current quarter. Tenaga, however, will continue to benefit as coal prices have not followed crude oil prices up. Furthermore, any tariff review which could reduce electricity tariffs will be implemented in July or August at the earliest. The entire plantations sector will likely report sequential quarterly profit growth as CPO prices are so far 35% above the RM1,929/t average price in 1Q09. 2 June 2009 Page 3 of 8 View slide
  • Market Strategy Sector comments Across-the-board decline in 9 sectors. Every single stock under our coverage in 9 sectors saw reduced profits – plantations, REITs, gaming, property (except KLCCP), construction, building materials, semi-conductors, toll roads and oil & gas (except Petronas Gas). The consumer sector was largely unscathed. Net profits in our consumer sector coverage fell just 2.6% QoQ. Strong consumer franchises such as Carlsberg, Nestle, JT International and British American Tobacco continued to show QoQ profit growth. The full tally of sector profits and QoQ changes is listed on page 8. Rubber gloves – positive outlook reaffirmed The result season reaffirmed our positive outlook on the rubber gloves manufacturing industry. Top Glove, Hartalega and Kossan’s resilient businesses stand out in the midst of the global economic slowdown. Sales volume and earnings continued to rise YoY, driven by capacity expansion programs. EBIT margins also expanded, testament to the ability to pass on costs (i.e. energy, latex). Malaysia’s gloves manufacturers, especially the established players with >1b gloves capacity p.a. will continue to dominate the global OEM market, growing organic and inorganically. Their advantages – engineering capability, product-quality, pricing-strategy, economies of scale, operational efficiencies and balance sheet strength – will prove difficult for new and small players to emulate and replicate. Hartalega (HART MK; Buy; TP: RM4.00) is our top pick in the sector. It is the most efficient with the best profit margin in the gloves manufacturing industry. Kossan (KRI MK; Buy; TP: RM4.00) is also on our Buy list. As for Top Glove (TOPG MK; TP: RM6.00), we advocate a switch to Hartalega on valuation grounds as the stock price is approaching our TP. Maintain Overweight on the sector. Combined NP of Rubber gloves manufacturing sector 1Q09 (RM m) 80 76 % chg refers to QoQ change 68 70 59 58 60 51 52 50 40 -13.8% 3.1% 11.2% 15.9% 11.9% 30 20 10 0 CY 4Q07 CY 1Q08 CY 2Q08 CY 3Q08 CY 4Q08 CY 1Q09 Source: Maybank-IB 2 June 2009 Page 4 of 8 View slide
  • Market Strategy Telecommunications – TM preferred Earnings recovered QoQ. NP spiked 93% QoQ to RM576m after the low 4Q08. Axiata was the star performer, reversing its RM117m loss to a RM101m NP, citing the end of a price war in Indonesia and the benefits of strengthened foreign currencies, primarily the Indonesian Rupiah as drivers. Telekom Malaysia raised NP 49% QoQ as it mitigated a 6.5% drop in voice revenues by registering resilient data and Internet revenues (-1.3% QoQ only) and cost savings that raised EBITDA margins by 8.3%-pts QoQ to 38.8%. Still just halfway there. 1Q09 NP, however, is only 64% of the 1Q08 level. Although 1Q09 NP at both DiGi.Com (-6.3% YoY) and Telekom Malaysia (-17.2% YoY) were slightly weaker YoY, the main culprit, contributing 82% of the decline, was Axiata. It will be a challenge for Axiata to return to 1H08 NP levels as the competitive intensity in Indonesia and Sri Lanka continues to ratchet up. Asian celcos’ worst nightmare – more funds needed. Axiata and its Indonesian subsidiary Excelcomindo confirmed our contention that the latter requires a further infusion of capital. Excelcomindo believes it should add USD300-600m (RM1.5-2.1b) in new funds, of which 83.8%- owner Axiata’s share would be RM1,257-1,760m. EBITDA/sub is falling. DiGi and Celcom displayed continued EBITDA/sub declines. DiGi managed to post flat QoQ EBITDA/sub at just over RM75 but this was well below 1Q08’s RM85. Celcom posted its largest QoQ EBITDA/sub decline of 4.5% in 1Q09 to RM72 – raising fears that future EBITDA growth could be muted. At Axiata (i.e. Celcom and other operating subsidiaries), EBITDA/sub declined from a high of RM34 in 4Q07 to RM26 in 1Q09. Axiata’s earnings growth rates need to pick up substantially and swiftly to attract more investor attention given its low absolute EBITDA/sub level. Back the quasi-monopoly. We remain upbeat on TM’s prospects, taking a contrarian stand against consensus expectations. First, we expect core data and internet revenue growth (+17% YoY in 1Q) will off-set expected voice revenue declines. Second, TM offers a minimum RM700m p.a. net dividend that offers a 10.2% gross dividend yield, ahead of DiGi’s 8.3%. This contrasts starkly to the expected earnings stagnation or disappointments that DiGi and Axiata offer. Telecommunications: Local Celcos’ EBITDA/sub (RM) Digi.Com Celcom Axiata RM 100 80 60 40 20 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 Source: Maybank-IB 2 June 2009 Page 5 of 8
  • Market Strategy Combined NP of Telco sector 1Q09 (RM m) 930 1000 907 % chg refers to QoQ change 900 830 800 693 700 576 600 500 -2.5% -8.4% -16.5% 400 299 92.7% 300 200 -56.9% 100 0 CY 4Q07 CY 1Q08 CY 2Q08 CY 3Q08 CY 4Q08 CY 1Q09 Source: Maybank-IB THE BUY LIST THE SELL LIST Name Mkt Cap TP Name Mkt Cap TP AEON Credit 354 3.16 AirAsia 3,087 1.12 AEON Co 1,481 4.70 Asiatic 4,088 3.80 Alam Maritim 680 1.55 Axiata 19,339 2.18 Axis REIT 371 1.78 BCHB 30,615 6.80 Bintulu Port 2,400 6.70 Bursa 3,765 3.76 Sports Toto 6,377 5.40 Digi.Com 18,038 19.60 CB Ind Product 406 3.60 Dialog 1,597 1.20 Guinness 1,843 6.50 EON Capital 2,704 3.40 Hartalega Hldgs 804 4.00 F&N Hldgs 3,173 6.70 HSL 484 1.17 Genting 20,186 4.40 IJM Corp 5,322 6.30 IOI Corp 28,232 3.50 KFC 1,368 7.90 KL Kepong 12,276 9.80 KLCC Prop 2,914 3.60 KNM Group 3,572 0.80 Kossan Rubber 560 4.00 MISC 31,247 7.50 Kinsteel 830 1.30 MPI 1,081 4.20 Litrak 1,140 2.88 Media Prima 990 1.00 MAHB 3,960 4.00 Public Bank 30,375 7.60 Petra Perdana 771 3.24 Proton 1,637 2.50 PLUS 16,500 3.80 Petronas Gas 19,392 8.80 QL Resources 898 3.46 SapCrest 1,853 1.00 Quill Capita 341 1.10 Shell 3,270 7.80 RCE Capital 395 0.85 SP Setia 3,823 2.00 JTI 1,182 5.30 Star 2,334 2.54 Resorts World 16,289 3.10 Tan Chong 1,142 1.05 SunCity 1,353 3.70 TH Plantations 809 1.38 Sunrise 827 1.90 Tj Offshore 338 1.30 Telekom 9,373 3.54 Unisem 570 0.77 Tanjong 5,444 17.60 Wah Seong 1,223 1.80 Lafarge 4,164 5.60 Top Glove 1,768 6.00 WCT 1,622 2.20 Sunway Hldgs 647 1.55 Total mkt cap 92,867 250,756 Source:Maybank-IB 2 June 2009 Page 6 of 8
  • Market Strategy Sector Quarterly Recurring Net Profit, Maybank-IB research universe Sector CY 4Q07 CY 1Q08 CY 2Q08 CY 3Q08 CY 4Q08 CY 1Q09 Financials 2332.2 2441.1 2723.0 2229.3 2289.2 2182.3 Plantations 1928.2 2153.6 2134.4 1908.6 868.6 583.2 Energy utilities 959.8 788.2 515.1 16.6 499.5 802.6 Telcos 929.6 906.6 830.4 693.4 299.0 576.3 Transport 623.4 833.3 632.4 384.9 386.6 488.6 Construction, infra., Bldg mat 821.6 713.3 852.4 921.2 752.0 414.4 Oil & gas 393.0 516.6 587.1 378.3 535.3 579.9 Property & REIT 159.9 164.7 183.8 170.7 174.7 165.5 Consumer and autos 4346.4 4930.8 5504.5 4690.2 4310.7 4197.3 Gaming 826.8 718.0 657.4 622.5 649.3 531.5 Media 96.9 68.6 85.6 84.1 81.1 10.7 Technology 109.2 31.3 52.9 52.4 -2.9 -77.0 Manufacturing 59.0 50.9 52.5 58.3 67.6 75.6 Sum RM (m) 13586.2 14316.9 14811.4 12210.4 10910.7 10530.9 QoQ changes (%) Financials 4.7% 11.6% -18.1% 2.7% -4.7% Plantations 11.7% -0.9% -10.6% -54.5% -32.9% Energy utilities -17.9% -34.7% -96.8% 2908.2% 60.7% Telcos -2.5% -8.4% -16.5% -56.9% 92.7% Transport 33.7% -24.1% -39.1% 0.4% 26.4% Construction, infra., Bldg mat -13.2% 19.5% 8.1% -18.4% -44.9% Oil & gas 31.4% 13.6% -35.6% 41.5% 8.3% Property & REIT 3.0% 11.6% -7.1% 2.4% -5.3% Consumer and autos 13.4% 11.6% -14.8% -8.1% -2.6% Gaming -13.2% -8.4% -5.3% 4.3% -18.1% Media -29.2% 24.9% -1.9% -3.5% -86.8% Technology -71.4% 69.0% -0.9% -105.5% 2568.1% Manufacturing -13.8% 3.1% 11.2% 15.9% 11.9% Sum 5.4% 3.5% -17.6% -10.6% -3.5% Total excl 3 monopolies 11748.1 12630.3 13482.5 11569.0 10236.3 9173.3 QoQ changes (%) 7.5% 6.7% -14.2% -11.5% -10.4% Total excl 3 monopolies, Airasia, Axiata 11118.2 12214.3 13098.3 11510.4 10307.1 8905.6 QoQ changes (%) 9.9% 7.2% -12.1% -10.5% -13.6% Source:Maybank-IB 2 June 2009 Page 7 of 8
  • Market Strategy Definition of Ratings Maybank Investment Bank Research uses the following rating system: BUY Total return is expected to be above 10% in the next 12 months HOLD Total return is expected to be between -5% to 10% in the next 12 months SELL Total return is expected to be below -5% in the next 12 months Applicability of Ratings The respective analyst maintains a coverage universe of stocks, the list of which may be adjusted according to needs. Investment ratings are only applicable to the stocks which form part of the coverage universe. Reports on companies which are not part of the coverage do not carry investment ratings as we do not actively follow developments in these companies. Some common terms abbreviated in this report (where they appear): Adex = Advertising Expenditure FCF = Free Cashflow PE = Price Earnings BV = Book Value FV = Fair Value PEG = PE Ratio To Growth CAGR = Compounded Annual Growth Rate FY = Financial Year PER = PE Ratio Capex = Capital Expenditure FYE = Financial Year End QoQ = Quarter-On-Quarter CY = Calendar Year MoM = Month-On-Month ROA = Return On Asset DCF = Discounted Cashflow NAV = Net Asset Value ROE = Return On Equity DPS = Dividend Per Share NTA = Net Tangible Asset ROSF = Return On Shareholders’ Funds EBIT = Earnings Before Interest And Tax P = Price WACC = Weighted Average Cost Of Capital EBITDA = EBIT, Depreciation And Amortisation P.A. = Per Annum YoY = Year-On-Year EPS = Earnings Per Share PAT = Profit After Tax YTD = Year-To-Date EV = Enterprise Value PBT = Profit Before Tax Disclaimer This report is for information purposes only and under no circumstances is it to be considered or intended as an offer to sell or a solicitation of an offer to buy the securities referred to herein. Investors should note that income from such securities, if any, may fluctuate and that each security’s price or value may rise or fall. Opinions or recommendations contained herein are in form of technical ratings and fundamental ratings. Technical ratings may differ from fundamental ratings as technical valuations apply different methodologies and are purely based on price and volume-related information extracted from Bursa Malaysia Securities Berhad in the equity analysis. Accordingly, investors may receive back less than originally invested. Past performance is not necessarily a guide to future performance. This report is not intended to provide personal investment advice and does not take into account the specific investment objectives, the financial situation and the particular needs of persons who may receive or read this report. Investors should therefore seek financial, legal and other advice regarding the appropriateness of investing in any securities or the investment strategies discussed or recommended in this report. The information contained herein has been obtained from sources believed to be reliable but such sources have not been independently verified by Maybank Investment Bank Bhd and consequently no representation is made as to the accuracy or completeness of this report by Maybank Investment Bank Bhd and it should not be relied upon as such. Accordingly, no liability can be accepted for any direct, indirect or consequential losses or damages that may arise from the use or reliance of this report. Maybank Investment Bank Bhd, its affiliates and related companies and their officers, directors, associates, connected parties and/or employees may from time to time have positions or be materially interested in the securities referred to herein and may further act as market maker or may have assumed an underwriting commitment or deal with such securities and may also perform or seek to perform investment banking services, advisory and other services for or relating to those companies. Any information, opinions or recommendations contained herein are subject to change at any time, without prior notice. This report may contain forward looking statements which are often but not always identified by the use of words such as “anticipate”, “believe”, “estimate”, “intend”, “plan”, “expect”, “forecast”, “predict” and “project” and statements that an event or result “may”, “will”, “can”, “should”, “could” or “might” occur or be achieved and other similar expressions. Such forward looking statements are based on assumptions made and information currently available to us and are subject to certain risks and uncertainties that could cause the actual results to differ materially from those expressed in any forward looking statements. Readers are cautioned not to place undue relevance on these forward- looking statements. Maybank Investment Bank Bhd expressly disclaims any obligation to update or revise any such forward looking statements to reflect new information, events or circumstances after the date of this publication or to reflect the occurrence of unanticipated events. This report is prepared for the use of Maybank Investment Bank Bhd's clients and may not be reproduced, altered in any way, transmitted to, copied or distributed to any other party in whole or in part in any form or manner without the prior express written consent of Maybank Investment Bank Bhd and Maybank Investment Bank Bhd accepts no liability whatsoever for the actions of third parties in this respect. This report is not directed to or intended for distribution to or use by any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. Published / Printed by Maybank Investment Bank Berhad (15938-H) (Formerly known as Aseambankers Malaysia Berhad) (A Participating Organisation of Bursa Malaysia Securities Berhad) 33rd Floor, Menara Maybank, 100 Jalan Tun Perak, 50050 Kuala Lumpur Tel: (603) 2059 1888; Fax: (603) 2078 4194 Stockbroking Business: Level 8, MaybanLife Tower, Dataran Maybank, No.1, Jalan Maarof 59000 Kuala Lumpur Tel: (603) 2297 8888; Fax: (603) 2282 5136 http://www.maybank-ib.com 2 June 2009 Page 8 of 8