Yes, RHB DID Change Its Fair Value On JCY!

From the posting: QC And The Research Reports

• limko said...
  It is not an isolated case in OSK's report on Axiata or MMC, it is the same with RHB's report on JCY which came down from around 1.8 to 0.8 and then 0.22 back to 0.8 recently, all in matter of months if not weeks.

It was a very interesting comment because I was not aware that RHB had made such a drastic adjustment in its fair value call for JCY.

Why?

Because there wasn't a new report released on JCY! Not that I was aware of.

As far as I was aware of, RHB's downgrade of JCY to 22 sen was under the report "JCY International Berhad : Back To Black, But Disappointing Again". It was published on 28 Feb 2011. This was highlighted in the posting http://everything27.blogspot.com/2011/03/is-rhbs-downgrade-of-jcy-and-fair-value.html

Now get this.

Thanks to limko, I now realised that RHB changed its views on JCY.

And no, they did not make a new report.

Now thanks to limko, I was told to look for 5th April 2011. Yes, on 5th April, just 5 weeks after downgrading JCY to 28 sen, RHB revised its call on JCY under the report "Semiconductor: Slight Drop MoM In Feb, But Stronger YoY Growth'.

I kid you not!

Yes, surely RHB could have made a whole new report on JCY itself, right? It's a massive upgrade, yes? Why mention it in a semiconductor sector report? Is JCY even a semicond stock?

Glee!

This is seriously not right!

Here's the screen shot.

And their reasoning?

• .... JCY: Beneficiary of the industry’s consolidation. We believe JCY could benefit from the industry consolidation as this could reduce pricing pressures. In addition, JCY could potentially secure higher volume loading for new HDD components from the enlarged WD. Therefore, we have raised our FY11-13 net profit forecast by 241.5%, 224.5% and 167.8% respectively to reflect: 1) higher margin assumptions as we believe the average selling price would remain stable; and 2) higher revenue assumptions on the back of improving corporate and consumer spending. Furthermore, we have rolled forward our valuation to base year to CY11 (from FY11). Correspondingly, we have raised our fair value to RM0.81/share based on 10x CY11 EPS. We upgraded JCY to Market Perform in our strategy report dated 31 March (from underperform previously).

huh? They raised their net proft forecast for JCY by 241.5%, 224.5% and 167.8%????

WOW!

And on 31 March, RHB had upgraded JCY to a market perform????

I then had to dig up that 31 March report, titled 'Market Outlook & Strategy 2Q2011 : Climbing The Wall Of Worries'.

Page 55 of the report:

• We believe JCY could benefi t from the industry consolidation as this could reduce pricing pressures. In addition, JCY could potentially secure higher volume loading for new HDD components from the enlarged WD. Therefore, we are raising our FY11-13 net profi t forecast by 241.5%, 224.5% and 167.8% respectively to reflect: 1) higher margin assumptions as we believe the average selling price would remain stable; and 2) higher revenue assumptions on the back of improving corporate and consumer spending. Furthermore, we have rolled forward our valuation base year to CY11 (from FY11). Correspondingly, we have raised our fair value to RM0.81/ share based on 10x CY11 EPS and we, therefore, upgrade our call on the stock to Market Perform.

Seriously?

With such a massive earnings forecast upgrade, shouldn't RHB released an individual report on JCY?

I might be wrong but by mentioning JCY and revising the forecasts in other reports, it's rather snakey! Yes, it feels snakey too me! (Hey that's my flawed opinion! )

Just incredible!

***** I have to add this: I do not know and I do not care how JCY the stock will trade. I am just utterly flabbergasted on how RHB could make such a drastic change in opinion on JCY fair value.

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What Do You Look For In A Research Report?

Here's a simple question, what do you look for in a research report?

Do you hear folks moaning that the research report is written with a mission? And do you here folks moaning that they were duped into buy a stock just because of the seducing research report? But this is extremely subjective. The winners, those who made money in the stock, would argue that if not for the report, the stock would not have moved and if the stock did not move, they would not have made money.

That's really so true and it could not been highlighted any better than the recent Pacific And Orient example. KN published the report when the stock was 63 sen on July 2010. And it gave it a target of 1.65.

Buyers of stock around that price or even less than 70 sen, were laughing all the way to the bank. There is simply NO chance at all that they would come out and say that research reports are lousy!! Less than one month after the report the stock reached a high of 1.20+. It was marvelous. Sweetness! Heaven sent!

On the other hand, stock chasers at the price above 1.10. Are they happy? How could they be? P&O fell to as low as 0.71 sen last month! ( Yeah the stock has recovered a bit and it last traded at 0.82 sen. They would not have been a happy camper cos they claimed that KN said the target price was 1.65! At 1.10 plus, they argued that there is still a chance that they could be rewarded. Curses!

How?

But incredibly, as you would notice, what's most important to the market and its players is HOW THE STOCK performed.

Forget the reasoning. It doesn't matter. Yes, dump the reasoning!

What matters MOST is how the stock reacts to the research report!!!!

Seriously? That's the truth.

Yes?

Isn't that the sad truth?

Nobody cares what the pen wrote. All everyone cares about is how powderful the pen is!!

And all that matters for Pacific And Orient is how it had performed.

It did not matter a bit that Pacific And Orient earnings performance was miles behind what the research report had insinuated. Yes, it did not matter that the company earned much less.

And it certainly did not matter a single bit that the suggested possible takeover did NOT happen. (Some say, it could still happen! Me? LOL! I have no idea!)

Yes, sadly it did not matter one single bit.

What's most important is how the stock moved!

So are research reports useless? Is this posting even useless? LOLOLOL!

Ok, let's make the big ass out of you and me, and ASS-U-ME that it's not so.

So what do you look for? Let me share some flawed thinking of mine.

And oh, I do need to remind that I possess no power and certainly no magic powder. I own NO Voodoo Stick that can be used to move a stock up or down. Please get over it. If the stock moves up, don't blame. And if the stock thanks, err... Dec 25th is a long way from today.

Ok, babe?

1. THE DATE OF THE REPORT.

Date of the reports are so important dude and dudettes!

Reasoning is simple.

Time changes. What is good back then might not be good today. And needless to say vice versa!

So don't ever let an outdated report make a fool out of you and your money!

Seioursly.

Let me tell an old story told a couple of times before.

it was in 2006 or is it 2005, a forum member emailed me and asked me about a stock pick. It appeared written in a 'local pro' manner. But I recognised the style of the writing. It belonged to OSK Research!

And apparently there was this is so-called sifoo who recommended my friend to buy the stock.

And one of classical reason used to buy the stock was that the stock was trading at a low PE multiple.

But I knew INSTANTLY something was amiss for that said company was NOT doing well.

I knew that for a fact cos of the earnings reported at Bursa website.

But here it was, this so-called sifoo telling people the stock was BUY based on his LOW PE method.

Which was a complete flawed set of reasoning because the stock was doing badly financially.

And then... I noted....the DATE of the research report from OSK.

It was OUTDATED!

Incredible! That so-called LOW PE stock master, used an OUTDATED report to justify his LOW PE claim.

And naturally the stock did poorly.

Ya... low PE.

So do note the date of the report. Relying on target price set on outdated reports could really, really make your money outdated too!

2. IS THE RESEARCH HOUSE CONSISTENT ON THE STOCK RECENTLY?

Are the reports consistent on the stock? Perhaps a past example would explain it clearly why this is important. 22nd July 2009, I posted Featured Report: OSK Research On Axiata Look at the end of the posting. It tracks the recent Recommendation history and price target for the stock.

• 24th Dec 2008. Axiata 3.58. Maintain Neutral at 4.20.


• 08th Jan 2009. Axiata 3.60. Maintain Neutral at 4.20.


• 06th Feb 2009. Axiata 3.18. Maintain Neutral at 4.20.


• 19th Feb 2009. Axiata 3.36. Maintain Neutral at 4.20.


• 28th Feb 2009. Axiata 3.06. Maintain Neutral. TP lowered to 3.00.


• 25th Mar 2009. Axiata 2.61. Take profit. Downgrade. TP lowered to 2.50.


• 30th Mar 2009. Axiata 2.38. Upgrade to Neutral. TP at 2.50.


• 28th Apr 2009. Axiata 2.10. Take profit. Downgrade. TP lowered to 1.73.


• 20th May 2009. Axiata 2.32. Upgrade to trading buy! TP at 2.70.


• 18th Jun 2009. Axiata 2.28. Trading buy maintained. TP at 2.70.


• 08th Jul 2009. Axiata 2.42. Trading buy maintained. TP at 2.70.


• 21st Jul 2009. Axiata 2.98. BUY upgrade. TP at 3.40.

On Dec 2009, OSK reckoned that Axiata was worth 4.20. It had a neutral call on it. Come Feb 2009, Axiata was worth only 3.00! Yeah, it's call is neutral! (LOLOLOL!). Then in April, Axiata is even valued worst. The call was TAKE PROFIT! ( YEAH... this is where everyone should scream their lungs out and shout O-M-G !!! What profit was there to take? It was just in Dec OSK said the stock was a neutral with a fair value of 4.20. It's now April and its a bloody TAKE PROFIT with a fair value of 1.73? Look the screenshots. This was not made up!) And a month later, Axiata value suddenly jumped from 1.73 to 2.70!!!! ( O-M-G!!!! Exactly!)

So how was that?

Unreal yes?

So I think it's good that we take a look at past recommendation history and price target for the stock. It's good to understand if the research house has been flip flopping heir recommendation on the stock. OSK example on Axiata is something we seriously want to avoid. That's junk. How could a stock value swing up and down in a 7 month period? Totally unreal!

But... that's all the past.

Can we have a real, present day example?

Fair. Let's look at RHB take on IJM Land. The report was out YESTERDAY. First, a habit of mine is, I like to take a simple look at the current one year chart of the stock. Just a habit.

The RHB report.

The next two shows the previous two reports on IJM Land.

How? What do you see?

The recommendation is still the same. It's still an OUTPERFORM but the outperform target price is now lowered to 3.28.

Sadly, RHB did not mention this (Target Price lowered) at all. And in fact what and how they said it was rather misleading (if you ask for my flawed opinion)

• Reiterate Outperform. IJMLD is also our top pick besides Mah Sing. We maintain our Outperform call with a higher FV of RM3.28 (from RM3.18), at its RNAV/share, accounting for the higher GDV estimate for the Canal City land as well as a larger share base.

The screenshot...

Here's what RHB said on Feb 2011.

Notice the difference? The 3.50 is based on 15% 10% PREMIUM to RNAV.

And the interesting thing for me in RHB's report on IJM Land yesterday was the following.

• Imminent conversion of RCULS – what’s the rationale? From our recent conversation with the management, we understand that the parent company IJM Corp will be converting its RM400m 10-year 3% RCULS soon. To recall, the RCULS arises from the reverse take-over (RTO) of RB Land in 2007, as part of the consideration. Post conversion, IJM Corp will have an additional 230m shares in IJMLD, raising its shareholding to 68-69%, from the current 61.6%. We are uncertain on the rationale of the conversion as this could be read positively or negatively. On a positive note, there could be some corporate exercise plan in the pipeline, such as privatisation of IJMLD given higher shareholding of the parent after conversion. On the other hand, the conversion of RCULS would result in dilution in earnings and shareholding of other shareholders. Barring any corporate exercise plan, we will not discount the possibility that IJM Corp may place out some shares subsequently so that its free float is kept at a reasonable level. Note that, our earnings forecasts for FY12-13 are adjusted for the larger share base as well as the interest savings on coupon payment (for the RCULS).

Ooo... !!! IJM Land shares will see another increase of 230 million shares and these shares will be granted listing on Monday, 18th April 2011.

• The longer-term picture. If it is not because of potential corporate exercise, we think investors may not like the parent’s upcoming move to convert the RCULS, as ROE, earnings and RNAV will be diluted over the short term. Having said that, we think the long-term positive earnings contribution from two upcoming big projects – Canal City and Sebana Cove, will be able to offset the impact when they come onstream from 2H2012. In fact, the higher GDV estimate from the Canal City is big enough to offset the impact of the larger share base arising from the RCULS conversion (shareholders’ equity is also adjusted) on RNAV. Our fair value, which is based on RNAV/share, is raised to RM3.28 (from RM3.18). Maintain Outperform.

Yes, they no longer use a 10% premium and in fact, the RNAV is incredibly raised from 3.18 to 3.28!!

Here's the screenshot.

Now the interesting thing for me is the ENLARGED share base.

Come Monday, including all the possible conversions of IJM Land warrants, the conversion of RCUL into shares will see IJM Land to have a share base of 1,560 million shares. In the earlier table from RHB's report on Feb 2011, IJM Land 'only' have 1,330 million shares.

The 'possible' conversion of warrants.

For the 'investors' who reckons that 'per share' is an important issue, then they should be aware of any possible dilution of 'per share' values. Simplicity? More means less share of the cake!

If one clicks on Bursa website and take a peep on IJM historical announcements, this is what they will see.

Now that's a fair bit of conversions, yes?

So if one is an investor, surely one wants to account for all these conversion of warrants.

Using the stock info from my stock quotes, this is the info on IJM Land.

And this is the info on IJM Land warrants.

Yes, present day, IJM Land 'only' have 1124 million shares and at present day, there are 205.8 million warrants. And warrants are constantly being converted to ordinary shares.

And on Monday, another 229 million 'new' shares will be listed.

That's a lot of conversion eh?

Take RHB's estimate earnings for IJM Land. It excludes the 59 million, one time disposal gain. For 2011, RHB estimate that IJM Land should earn around 140 million. Using the new possible share base of 1560 million, IJM Land eps based on an earnings estimate of 140 million is only 9 sen eps. See the huge dilution in eps?

How?

Obviously, I could go on and on. I could be asking if the RNAV calculation is even fair etc etc but for this example, the additional listing of 229 million stocks is a massive issue. Dilution of per share value would be significant.

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Why Perisai Is Rated So High By The Local Analysts?

Here's a simple question that needed to be addressed in regards to Perisai.

If the rm 210 deal involving the purchase of Garuda Energy from its ex major shareholder is so questionable, why are research analysts from folks like RHB and CIMB rating the stock so much higher?

Yes, why? Now this is a very logical question to ask, yes?

Take RHB. They gave a estimate fair value of RM1.25-1.43 per share for Garuda.

Why? For me, I would look at their reasoning.

From the posting RHB Clarifies Its Statement On Perisai

♦ A good deal. After meeting with management yesterday, we realised that all our concerns as highlighted in our RHB Equity 360 report were factually inaccurate and the report has been withdrawn. In fact, the proposal appears to be a good deal for Perisai, given: 1) the availability of the asset coincides with the long-term charter contract; and 2) the bare boat charter of US$25m p.a. for a period of 2+1+1 years is expected to be net cashflow positive to Perisai.

♦ Not the same asset. We note that Perisai’s management took a prudent view in early-2010 and chose not to speculate on the market demand for jack-up rigs at that point, and decided to sell Garuda Energy. Moreover, management clarified that Garuda Energy owned the shell of a used jackup rig at the point of sale in 2010. Today, the asset has been refurbished by the vendor and is undergoing conversion into a Mobile Offshore Production Unit (MOPU).

♦ Arms length transaction. We understand the negotiations were conducted at arms length (and this is not a related party transaction as the vendor had in 2010 sold out of Perisai to Ezra Holdings). Moreover, Perisai will only pay the balance of US$66m purchase price (nett of the US$4m deposit) upon delivery of the MOPU to the charter client as per the specifications of the client and Perisai. Any cost overruns will be fully borne by the vendor. Therefore, we believe there is no corporate governance issue with the proposal, which has been negotiated to the benefit of Perisai shareholders, and is still subject to a due diligence exercise.

♦ Risks. We believe the cyclical risks are inherent in all industry players, but for Perisai, the risk is mitigated by this long-term contract as well as longer-term expectations of jobs in Malaysia’s marginal fields. A reversal in the crude oil price uptrend would however affect the vessel assets that were recently acquired from Ezra. In our view, despite net gearing of 0.7x end-2010, Perisai should have no problem raising funding for the RM150m cash portion of the purchase price given the ready long-term contract.

My comments: Again as stated before the potential is a mere USD25 per annum revenue. (revenue and not profit). I am also curious the statement 'NOT the same asset'. Look that asset is going to be 'refurbished' (Yes, going to be refurbished. The rig is not even fully converted yet! and yes, Perisai is buying a refurbished unit. A reconditioned unit.). So doesn't the 'refurbished' unit comes from the very same asset???

♦ Potential for upside. Our back-of-the-envelope calculation suggests net profit contribution from the charter to be around RM40-50m, vs. the FY10 reported net profit of RM10.3m and FY11 consensus net profit of RM30m (which excludes the Intan acquisition as well as this proposal). As this proposal is only expected to be completed in the 4Q11, the full-year impact would be in FY12, lifting the current consensus FY12 net profit estimate to around RM70-80m. Assuming 846m enlarged share capital, this suggests an FY12 EPS of 8.3-9.5 sen or a PER of 10.6x. Tentatively assuming a target PER of 15x, i.e. in line with our target for the market, this implies a fair value estimate of RM1.25-1.43/share.

My comments: RHB is now declaring that the NET PROFIT contribution from the charter works out to be RM 40-50 million and the very basis of their reasoning that Perisai should be worth around RM 1.25 to 1.43 per share.

Now that's their reasoning and based on their estimated earnings they reckon Perisai should be worth that high.

Simple question to ask is what if their estimate is way too optimistic?

Ah... why such a question?

Reasoning is simple also.

The higher the estimate the higher the assumed fair value is.

Yes?

From my flawed mindset, I would ask the following questions...

The obvious glaring thing for me is that Perisai's own comments is that Garuda is only giving them a USD 25 million revenue per annum. To be exact, let me paste again.

• 9) The expected revenue of USD25 million is based on the bareboat charter to be entered between the Target Company and GEM.

Using a slightly higher USD exchange rate conversion of 3.1 to the Ringgit, this would be about rm 77.5 million expected revenue per annum.

And is 'expected' revenue only. Sometimes the figure can be lower.

Now what's RHB estimated PROFIT? Let me quote them again:

• Our back-of-the-envelope calculation suggests net profit contribution from the charter to be around RM40-50m,

rm 40-50 million per annum??

Take the lower number, 40 million.

So RHB is saying from a revenue of 77.5 million, the net profit contribution should be at least 40 million????

WOW!

Isn't that an extremely profitable business?

But is the charter of a MOPU such a profitable business???

Is that possible?

Now the following document is posted by Perisai: PERISAI-announcement(290311).doc

• The bareboat charter of MOPU business is a competitive industry, with other players operating in the Malaysian market. Competitive factors include price and quality of services as well as the quality and availability of MOPUs.

Those were Perisai's own words.

The bareboat charter of MOPU is a competitive industry!

If that's the case... how did RHB analyst come out with an estimate net profit contribution of at least rm 40 million??

Hey in terms of net profit margins, RHB is saying a net profit margin of 40/77.5 = 52%!!!!

A 52% net profit margin estimation when Perisai declared that "The bareboat charter of MOPU is a competitive industry"!

WOW! WOW! and WOW!

Think about that.

And the other silly question I would ask is if Garuda's earnings potential is good, ie 40-50 million per annum, why is Nagendram selling Garuda to Perisai for only 210 million????

How?

Think about it. Is RHB estimate way too optimistic?

What if.... Perisai's earnings from this charter business is only worth say 10 million per annum. Adding in Intan Offshore possible earnings contributions and Perisai's own business, perhaps a 40 million net earnings is pssible.

Now the problem with a 40 million estimate, based on an extremely enlarged new share base of 845.791 million shares, this would work out to an eps of only 5 sen per share!

And get this... if I use a 15x multiple on Perisai, this would equate to rough estimate of only 75 sen!

Ok. Of course that's a flawed simple thinking.

However, you can play around the numbers yourself. Yes, PLEASE DON'T USE MY FLAWED ESTIMATE OF 40 MILLION! :=)

You could use a net profit estimate of 50 million. This would equate to an eps of only 6 sen!

What about CIMB Research? Here's a snap shot.

• Perisai is paying US$70m (RM210m) in cash and shares for Garuda Energy (L) Ltd, owner of a jack-up rig that is being converted into a MOPU, which will be supplied to an oil major. We estimate that Garuda will contribute RM40m p.a. to Perisai’s bottomline effective 4Q11. In view of this, we raise our EPS forecasts by 25.0% for FY11, 76.8% for FY12 and 67.6% for FY13.

Same.

CIMB also is using the estimate value of Rm 40 million!

How?

Ah.. perhaps their (RHB and CIMB) estimates are all spot on... and my posting is simply flawed!

Yes, that is is very much possible but whatever it is, best you think about it.

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RHB Clarifies Its Statement On Perisai

In the earlier posting, Perisai: Life Is Too Damn Good!, I highlighted the following: In a news flash yesterday morning from the Edge (strange I can't find the url of the article but that article can be viewed here: http://my.news.yahoo.com/flash-rhb-research-raises-concerns-over-perisais-acquisition-20110329-181406-445.html )

• RHB Research said on Wednesday, March 30 that this was an unusual transaction which brings the former CEO back into the company, and more so given Perisai had sold Garuda to him in mid-2010 for just US$5 million cash.
  
  In early-2010, Garuda had acquired a jack-up rig for US$5m cash, which Perisai now appears to be targeting in this acquisition. Other than a change in name (from Hercules 191 to Rubicone) the rig is currently being converted into a MOPU.
  
  The rig has also been chartered out to Gryphon on a 2+1 year bareboat charter basis for US$25 million per annum.
  
  “We are concerned about the transaction and the new issue of shares, which will give Nagendran a 13.5% stake at a 20% discount to the current share price of 81 sen.
  
  “This will dilute current major shareholder Ezra Holdings' 19% stake to 17%. Moreover, we believe there is a corporate governance issue relating to the effective purchase of the asset at 14x premium to the original disposal price of the same asset,” it said.

Apparently, RHB now said they were wrong!

♦ A good deal. After meeting with management yesterday, we realised that all our concerns as highlighted in our RHB Equity 360 report were factually inaccurate and the report has been withdrawn. In fact, the proposal appears to be a good deal for Perisai, given: 1) the availability of the asset coincides with the long-term charter contract; and 2) the bare boat charter of US$25m p.a. for a period of 2+1+1 years is expected to be net cashflow positive to Perisai.

♦ Not the same asset. We note that Perisai’s management took a prudent view in early-2010 and chose not to speculate on the market demand for jack-up rigs at that point, and decided to sell Garuda Energy. Moreover, management clarified that Garuda Energy owned the shell of a used jackup rig at the point of sale in 2010. Today, the asset has been refurbished by the vendor and is undergoing conversion into a Mobile Offshore Production Unit (MOPU).

♦ Arms length transaction. We understand the negotiations were conducted at arms length (and this is not a related party transaction as the vendor had in 2010 sold out of Perisai to Ezra Holdings). Moreover, Perisai will only pay the balance of US$66m purchase price (nett of the US$4m deposit) upon delivery of the MOPU to the charter client as per the specifications of the client and Perisai. Any cost overruns will be fully borne by the vendor. Therefore, we believe there is no corporate governance issue with the proposal, which has been negotiated to the benefit of Perisai shareholders, and is still subject to a due diligence exercise.

♦ Risks. We believe the cyclical risks are inherent in all industry players, but for Perisai, the risk is mitigated by this long-term contract as well as longer-term expectations of jobs in Malaysia’s marginal fields. A reversal in the crude oil price uptrend would however affect the vessel assets that were recently acquired from Ezra. In our view, despite net gearing of 0.7x end-2010, Perisai should have no problem raising funding for the RM150m cash portion of the purchase price given the ready long-term contract.

♦ Potential for upside. Our back-of-the-envelope calculation suggests net profit contribution from the charter to be around RM40-50m, vs. the FY10 reported net profit of RM10.3m and FY11 consensus net profit of RM30m (which excludes the Intan acquisition as well as this proposal). As this proposal is only expected to be completed in the 4Q11, the full-year impact would be in FY12, lifting the current consensus FY12 net profit estimate to around RM70-80m. Assuming 846m enlarged share capital, this suggests an FY12 EPS of 8.3-9.5 sen or a PER of 10.6x. Tentatively assuming a target PER of 15x, i.e. in line with our target for the market, this implies a fair value estimate of RM1.25-1.43/share.

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Is RHB's Downgrade Of JCY And Fair Value Call Of Only 22 sen Too Harsh?

Posted this afternoon: How Was JCY's Earnings?

In that posting, I highlighted a snapshot of RHB's report on JCY's earning review. The recommendation and target price was a shocker for many.

Yes, as you can see RHB downgraded JCY to an underperform and gave JCY a target price of a mere 22 sen.

Why so low?

Is RHB over reacting?

Now if it was me.. here's what I will do.

Compare the recent earnings of JCY and then compare it with RHB's estimates.

Let's see.....

End Nov 2010, JCY reported a net loss of 22 million for its fy 2004 Q4 earnings.

On Friday, JCY said it made a net profit of 7.512 million for its fy 2011 Q1. Yes, a net profit of only 7.512 million.

And assuming ( I know.. I will make an ass of u and me! :P ) an annualised earnings estimate, at best we can assume that JCY will make 7.5 x 4, which works to a mere 30 million.

Now RHB's estimate earnings is 44 million. Which is much better than using an annualised estimate.

So is RHB's estimate a bit harsh?

Yes? Or maybe fair?

If it's fair... then based on a 10x earnings multiple, 22 sen is not too harsh is it?

And compare the issues JCY is having as per RHB's report:

1. lower revenue (-16.9% yoy);
2. higher cost of sales due to rising raw material prices (+12% pts yoy); and
3. stronger RM vs. US$.

And RHB's outlook for the HDD sector.

• we believe the outlook for the industry is waning as there could still be excess HDD inventory due to the persistent weaker-than-expected demand for desktop PCs and netbooks compounded by the rising demand for alternative storage (i.e. solid state drives (SSD).

Weaker demand for desktop? Is that true? How many are buying a desktop nowadays? And what about laptops too? Are the price of the new laptops getting cheaper?

Or how about the external HDD market? The prices are falling like crazy yes? And if the prices are getting cheaper, how much can these HDD makers make?

And the USD vs RM issue.

Does the USD look like getting some strength against the RM anytime soon?

And then you have raising raw material cost.

How are all these reasonings given by RHB Research? Are they too conservative?

And if the answer is no... what if RHB's projection is true?

And let's stretch it a bit more.... say RHB estimate is off. Let's say it's off by 100 percent! :)

Which means, let's assume JCY makes 88 million instead of 44 million. Now JCY has 2044 million shares. Based on earnings of 88 million, this would equate to an eps of around 4 sen only. An eps of 4 sen. How much do you think it's fair value?

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Is The Downgrade From RHB On Notion Vtec Fair?

Yesterday I blogged on Notion Vtec because the stock price had been falling rather dramatically in the posting Some Comments On Notion Vtec and apparently RHB had downgraded Notion Vtec.

And the Edge Financial Daily even highlighted this issue yesterday: Notion VTec top loser on downgrade

Here's the link to RHB's report: Notion Vtec Berhad : Not As Good As Hoped - 03/08/2010

• ♦ Warning for 3Q results. The market yesterday beat us to the punch, de-rating Notion’s share price by 10.3%. We believe 3QFY9/10 results (to be announced on 5 Aug) are likely to be worse than expected due to higher costs incurred from the RM80m expansion of the 2.5” Hard-Disk Drive (HDD) baseplate capacity and lower revenue after adjusting for the weaker US$ vs. RM. Conditions are not expected to improve in 4QFY9/10.
  
  ♦ Outlook dimmed due to competition and weak demand. The outlook for 4QFY9/10 and beyond now appears more negative compared to the more bullish view after our visit to the company in May. We note that major HDD manufacturers including Western Digital and Seagate recently guided that lower-than-expected HDD demand caused by EU debt problems and slow US recovery has been compounded by capacity oversupply in the industry. Aggressive competition has thus resulted in falling prices and diminishing margins. The upside from Samsung’s aggressive expansion plans in the 2.5” HDD segment also appears to have evaporated
  
  ♦ Forecasts cut. We have cut our FY9/10-12 EPS forecasts by 21.1%, 36.2% and 47.4% respectively, after factoring in 25-35% lower sales and lower margins. We had originally expected baseplate capacity to rise from 350-400/month currently to 1m/month by end-FY10, 5m/month in FY11 and 7m/month in FY12, but the likelihood now is that the company will stop at 2m/month in FY11 while further capacity expansions will be on hold for now. We note that 80% of the capex has already been spent. For FY10, revenue has also been affected by the -7.7% YTD decline in the US against the ringgit. However, we note that we are still looking at the RM/US$ exchange rate coming back to around RM3.20-3.30 by year end.
  
  ♦ Risks to our view. 1) Recovery in demand if US economic growth strengthens earlier than expected; and 2) Fluctuations in RM/US$ exchange rate.
  
  ♦ Downgrade. Although the camera segment remains resilient and will provide some support to revenue growth, the focus will likely remain on the negative outlook for PC sales growth and the oversupply of HDDs. Our fair value has been cut to RM2.07 based on our new forecasts and a more conservative target FY9/11 PER of 8x (vs. 10x previously). Although yesterday’s share price fall suggests that the market has already factored in this negative view, we believe there is still downside risk given the uncertain earnings outlook. We thus downgrade our call on the stock to Underperform from Outperform.

Here's Notion Vtec numbers..

As it is Notion Vtec's most recent 4 quarters or trailing twelve months earnings is already some 50.553 million.

RHB's earnings forecast for Notion fy 2010 has been cut from 53.6 mil to just 41.25 mil.
RHB's earnings forecast for Notion fy 2011 has been cut from 72.4 mil to just 44.8 mil.

Of course the cuts are drastic.

RHB mentioned Western Digital itseself had been guiding lower earnings forecasts.

From yesterday posting: Some Comments On Notion Vtec

• So Western Digital says it expects the coming quarter, Q1 eps to be around 80 to 90 sen.
  Wastern Digital Q4 EPS was 1.23. (Street was expecting 1.35)
  From an eps of 1.23 to an eps of just 80-90 sen is rather a huge decline, yes?

RHB also mentioned the following factors.

1. higher costs incurred from the RM80m expansion of the 2.5” Hard-Disk Drive (HDD)
2. revenue has also been affected by the -7.7% YTD decline in the US against the ringgit.
3. Aggressive competition has thus resulted in falling prices and diminishing margins

Are the reasoning valid?

Yes, some would point out that they DID NOT like the TIMING of the downgrade!

On 16th July, which was not long ago, Notion Vtec was trading at 2.99. Why didn't RHB Research warn the investing public then? Why ONLY release the report when Notion Vtec had fallen to a low of 2.35? Notion closed yesterday at 2.11.

Isn't the timing of the downgrade way too late?

And the previous RHB Research report was made on 20th May 2010:hNotion Vtec Berhad : Set To Deliver - 20/5/2010

Yeah.. anothe massive complaint then because Notion price in May was 2.73 and RHB gave Notion an Outperform with a target price of 4.68!

Yes the grouse and utter frustration is understandable because the investing public were told by RHB Research that Notion Vtec is deemed to have a GREAT FUTURE on 20th May 2010. It's now only the beginning of August!

How can a company value diminish from 4.68 to 2.07 in just 2 months?

How can?

Here's the first two paragraphs of the RHB's report in May 2010.

• ♦ On track to deliver 2.5’’ baseplate target. According to management, construction work on its new 150k sq ft plant is near completion. The new plant which is expected to house most of the base plate production capacity is set to commence production by Sep-10. Note that management expects capex of around RM80m to ramp up the base plate capacity to 1m/month, 5m/month, and 7m/month by FY10-12 respectively from 350-400k/month (currently) vs. 100k/month in Jan-10, pending the arrival of additional equipment and machinery i.e. die casting and computer numerical control (CNC) machines. Additionally, management is planning to increase the total workforce to 3,000 by 2011 (vs. 1,900 currently).
  
  ♦ Riding on volum e loading for Western Digital (WD). The company expects stronger volume loading in 2H2010 from WD on the back of strong demand for HDD components i.e. antidisks, disc clamps, and spacers as well as WD’s market share gain. Recall that WD overtook Seagate as the number one HDD vendor in 1Q10. WD now expects to increase its total HDD shipments by more than 20%. While Notion’s current capacity for these components is 800-900k/month, management is expecting to increase capacity to 1.5-2.0m/month by end-2010....

Ah... apparently RHB Research was guided by Notion's management notes in May.

And the warrants issue. Sorry but let me repeat this again.

• Did you see OSK's report on Notion Vtec dated 16th July 2010. Notion then was 2.99 and since the conversion price for the warrants was priced at 2.55, OSK shouted out very loud that one was getting free warrants that was 'in the money'! It's now 3rd August 2010, and the warrants are no longer in the money! :P), perhaps one should use 169 million shares as the potential share base for Notion Vtec. This is to prevent the investor from being shocked by the dilution in earnings.

Putting the quality issue of OSK aside ( LOL! Yeah, what's new mate? :P) these warrants went ex yesterday, 3 Aug 2010. Entitlement is based on a 1 for 5. And some 34,003,503 were issued. With the conversion price at 2.55, some might want to account for the possible dilution in eps caused by conversion of the warrants.

Ok, let's take Western Digital's guidance numbers as a guide. Western Digital says it expects its earnings per share to drop from 1.23 to around 80-90 sen. Now the worse case 80 sen eps would represent a decline of 34.9%!!

And we do have to factor in the current strength in the Ringgit versus USD (is the Ringgit really strong or the USD really weak? :P ). What would be your guesstimate of the impact on Notion since Notion's products are priced in the USD? Would you say maybe a 5% impact caused by the exchange rate? Fair assumption? Or perhaps the impact is minimal? ( Why? Because if you look at the latest report pdf file from Notion, Notion currently has an existing USD50 million hedged to its USD receivables. )

But then ... some might argue that perhaps RHB is being far too negative. Why? Notion Vtec does NOT cater to HDD segment only!

From Notion's last earnings report.

• In Q2FY2010, HDD parts revenue recorded RM26.9 million (Q1FY2010: RM19.1 million), camera parts recorded RM20.4 million (Q1FY2010: RM26.7 million) whilst the industrial/automotive revenue was at RM9.2 million (Q1FY2010: RM10.5 million). The product mix for the Q2FY2010 was HDD:Camera:Industrial/Automotive of 48%:36%:16% compared to previous quarter's mix of 34%:47%:19%. The HDD revenue increased by 40% whilst the camera sector was lower by 24% compared to Q1FY2010.

Hmmm.... HDD revenue increased by 40% in Q2Fy2010!

And what about me?

If I have to throw in a dart, I would say perhaps an earnings of 32 million for Notion for its fiscal year 2011. LOL! Yes, that low. :P

LOL! Stop starring la. I am NOT a Sotong and that's my darts figure and surely I could be dead wrong. :P

Now RHB's earnings per share is based on just 154 million. The last approved placement share of 15.4 million shares, which has not been placed out yet, has been currently discounted by RHB.

Let's see two scenarios. One with 154 million share base and the other with 169 million shares.

1. With 154 million share base, an earnings of 32 million equates to an eps of 20.7 sen.
2. With 169 million share base, an earnings of 32 million equates to an eps of 18.9 sen.

And what would be the fair PEx multiple you would use?

And so far, apparently RHB is the ONLY research house to downgrade Notion's Vtec earnings.

Now in the posting Update On Notion VTec. on 4th May 2010, I noted some of the other earnings forecast made on Notion Vtec.

• RHB's 2011 net earnings forecast for Notion is 56 million. (LOL! Downgraded since then)
• Kenanga's 2011 net earnings forecast for Notion is 62 million.
• CIMB's 2011 net earnings forecast for Notion is 80.8 million.
• And here comes the champion... OSK... OSK's 2011 net earnings forecast for Notion is 95.0 million.

How?

You want to BUY Notion now because you think Notion has dropped a lot?

Or you want to do a wait and see. Yeah, wait for Notion's quarterly earnings notes, which should be announced this month, first.

How?

Read more...

Featured Report: RHB On Sino Hua-An

I got a copy of Sino Hua-An research report. Since I had blogged many times on this stock before, I was rather interested to read what this pro had to say.

Firstly, my past postings on Sino Hua-An can be read here. (Latest posting is listed first)

1. Update On Sino Hua-An
2. Massive Losses Posted by Sino Hua-An
3. Sino Hua An Q3 Earnings.
4. Still Who Wants Huann?
5. Who wants Sino Hua-An?
6. More On Sino Hua-Ann
7. Regarding Sino Hua-An

I was surprised by the 'upgrade'!

As you can see RHB Research upgraded Sino Hua-An to OUTPERFORM. What I am baffled by is the timing and pricing of this UPGRADE. As you can see, Sino Hua-An opening price is at 0.52. And the target price is a mere 0.60.

I was left scratching my head.

This is an EIGHT SEN stock upgrade!

I am very sure sceptics will be baffled and left wondering why RHB would be bothered with such a minuscule upgrade and considering the fact that Sino Hua-An stock priced had rallied rather so strongly since March 2009.

The following chart shows the recent performance of Sino Hua An.

Here is RHB's reasoning for its upgrade on the stock.


And then I was left more confused with what RHB analyst said next.

• Earnings forecasts. We are lowering FY12/09 net profit forecast by 23.0% to RM38.7m to reflect lower average selling price assumptions for Sino Hua-An’s by-products.

WOW!

RHB Research is lowering the fy12/09 net profit forecast by 23% to rm38.7m!!!!!

( Recap: For the first quarter fy2009, Sino Hua An reported a net loss of 23.6 million. See Update On Sino Hua-An )

The stock is estimated to make less money by some 23%.

Yet the stock is upgraded to OUTPERFORM!

Fair value upgraded price is 60 sen.

A mere 8 sen from 52 sen.

So how my dearest?

Are you enjoying what you are reading?

Do you want to buy this stock as recommended by RHB for a gain of 8 sen?

Read more...

WCT: Two Extremely Contrasting Views

During Invest Malaysia 2009, WCT had a presentation which attracted a lot of people.

I got hold of CIMB Research report dated 2nd July 2009 on WCT.

The opening line.

• Notes from Invest Malaysia 2009
  WCT’s presentation at the Invest Malaysia conference yesterday attracted more than 100 fund managers and buy-side analysts. The presentation was made by ED Loh Siew Choh who gave a thorough rundown of the group’s operations and outlook.

Oh... only buy-side analysts?

I chuckled. How come no sell-side analysts?

Anyway. as it is, WCT was trading around 2.10. CIMB's target price was a rather very optimistic price of 3.65!

I was shocked because I had read that RHB had WCT as underperform with a fair value of only 1.10.

So the sell-side analyst had WCT at 1.10, while the buy-side had it at 3.65!!!

I was bemused by the contrasting difference between them, while acknowledging the fact that opinions do differ in the share market.

Anyway, let's look at the chains from May 2009.

WCT reported its earnings on 21 May 2009. It was disappointing.

Quarterly rpt on consolidated results for the financial period ended 31/3/2009

RHB was disappointed with the earnings. WCT reported earnings of 39.2 million. Last year same quarter it was some 55.5 million. And RHB felt that earnings could be weak in the coming quarters and was worried about the depleting orderbook.

• 1QFY12/09 net profit came in at 26-29% of our full-year forecast and the full-year market consensus. However, we consider the results within expectations as we expect slightly weaker quarters ahead on depleting construction orderbook. There was no additional adjustment made during the quarter with regards to the terminated Meydan Racecourse project.

And here are risks and how RHB valued WCT.

• Risks. The risks include: (1) New contracts secured in FY12/09-10 coming in below our target of RM1bn per annum; and (2) Potentially more provisions from the troubled Meydan Racecourse contract.
• Negative outlook. We find it difficult to turn positive on the construction sector over the short term as: (1) Small projects will dominate the list of public projects to be implemented locally; and (2) The flow of private sector jobs will remain weak in the absence of funding or reasonably priced funding on the back of the global credit crunch.
• Maintain Underperform. Indicative fair value is RM1.31 based on 7x fully-diluted FY12/10 EPS of 18.6sen (see Table 5), at a discount to our benchmark 1-year forward target PER of 8-10x for the construction sector to reflect WCT’s higher earnings risks arising from potentially

A few days later on the 25th May, RHB downgraded WCT further! RHB gave it a massive underperform rating with a fair value of only 1.10.

And this is despite WCT's conference call where WCT talked about the potential in Sabah where it could get 'a couple of billion ringgit' of LOI

• Sabah LOI worth “a couple of billion ringgit”? WCT hinted that the potential infrastructure jobs in Sabah of which it has received Letters of Intent (LOI) early this year may be worth “a couple of billion ringgit”. Assuming that the projects are to get off the ground, WCT’s share of work may amount to at least RM1bn. WCT is confident that the formal awards of the contracts could happen within the next six months, or as early as Sep 09. WCT remained tight-lipped as to the job scope. However, during our private meeting with WCT earlier, it did hint that the jobs are meant to address basic infrastructure that is still lacking in the state, particularly, “road network and water supply”. On the overseas front, WCT expects “substantial” additional work at New Doha International Airport (NDIA) in Qatar largely due to design changes. It maintained its new orderbook guidance of RM1bn in FY12/09 that is consistent with our assumption.

RHB then gave its reasons against bigger construction players.

• Sector’s fundamentals remain weak. Large construction players including WCT of which modus operandi, setup as well as economics are suited more to doing larger projects, are likely to get little out of the two recently announced stimulus packages. This is because the key focus of the stimulus packages is largely on small projects that are easy to roll out such as schools, hospital, quarters, low-cost housing, roads and bridges that will benefit mainly small contractors.

And lastly here's RHB reasoning.

• Negative outlook. We find it difficult to turn positive on the construction sector over the short term as: (1) Small projects will dominate the list of public projects to be implemented locally; and (2) The flow of private sector jobs will remain weak in the absence of funding or reasonably priced funding on the back of the global credit crunch.
• Maintain Underperform. Indicative fair value is cut by 16% from RM1.31 to RM1.10 based on 7x revised fully-diluted FY12/10 EPS of 15.8sen, at a discount to our benchmark 1-year forward target PER of 8-10x for the construction sector to reflect WCT’s higher earnings risks arising from potentially more provisions from the troubled Meydan Racecourse contract.

Now CIMB.

On 22 May 2009.

CIMB's valuation.

• Maintain TRADING BUY. Our forecasts are unchanged, as is our RNAV-based target price of RM2.60 which we continue to peg to a 40% discount to RNAV. We continue to premise our TRADING BUY call on the potential re-rating catalysts of (i) a revival of newsflow on contracts over the coming months and (ii) investors’ renewed appetite for higher-beta stocks. Its sustainable dividend yield of almost 5% is the highest in our construction universe. CY09-10 P/Es of around 9x are still among the lowest in our coverage.

CIMB used a RNAV valaution. Ah.

a 40% discount to RNAV.

Do note that CIMB did not talk about WCT's current issue between WCT and Arabtec.

A couple of days later, CIMB had the following.

CIMB's Comments and valuations.

• Comments
  Positive revelations. We were positively surprised by the value of the potential new contract in Sabah, indications for which have more than doubled from an estimated RM500m to RM1bn-2bn (see our 5 May 09 update). We estimate that WCT stands a good chance of scoring five potential new jobs worth at least RM3bn (Figure 2). An immediate boost to the order book would come from the Sabah project.
  LRT upgrade/extension. As for the LRT upgrade/extension, indications from WCT tie in with our recent findings. Our industry checks reveal that selected tenders for the project will be called as early as Jul 09 and preliminary works could start in 4Q09. The scope of works will cover four extension tracks involving two ends each for the Star LRT line and Putra LRT line. The total distance will be 40-50km, which translates roughly into RM110m construction cost per km. The project will be on a selected open tender basis which is likely to involve four contractors for each extension and one key subcontractor. Conservatively, assuming the RM7bn worth of works is split equally among four contractors, WCT’s potential share works out to be RM1.8bn. If WCT participates as a key subcontractor and assuming that 20% of RM7bn is subcontracted, its potential share of works is RM1.4bn. Indications are that the LRT extension/upgrade will span three years.
• Valuation and recommendation
  TRADING BUY reafirmed. We left the briefing feeling more optimistic about WCT’s odds of emerging a key winner of government pump priming as it has a strong chance of bagging a local infrastructure job worth RM1bn-2bn in the coming months. For now, we leave our forecasts unchanged but stress that there is upside to our assumption of RM1.5bn of new contracts over the next two years. We roughly estimate that every RM500m increase in contracts at a pretax margin of 15% and a 2-year profit recognition would raise our RNAV estimate by 25sen
  Our RNAV-based target price is kept at RM2.60, which we continue to peg to a 40% discount to RNAV. Our TRADING BUY call is premised on the potential re-rating catalysts of (i) a revival of newsflow on contracts over the coming months and (ii) investors’ renewed appetite for higher-beta stocks. Its CY09-10 P/Es of around 10x are still among the lowest in our coverage.

Note RNAV computation is the same. Hence I am not highlighting again. It's still a buy with a target price of 2.60 based on 40% discount to RNAV.

Then came Invest Malaysia. Now here are the notes from CIMB.

Comments
Prospects continue to be bright. There were no major surprises from the presentation apart from the revelation that WCT is in talks on a new highway job in Qatar. We had expected potential new jobs in the Gulf states to come from Yas Island. Locally, WCT’s optimism over increased pump-priming in 2H09 ties in with our bullish view on the construction sector as laid out in our 1 July 09 sector note. Expectations are high that the RM7bn-10bn LRT upgrade/extension in the Klang Valley will be the first mega project to kick-start pump-priming, followed by several fast-track jobs outlined under the stimulus packages and 9MP. WCT is expecting an LOA for an infrastructure job in Sabah. We think that the award will come soon as the project is among the priority jobs to be fast-tracked

Valuation and recommendation
Maintain OUTPERFORM and RM3.65 target price. Our forecasts are unchanged, as is our RNAV-based target price of RM3.65, pegged to an unchanged 20% discount to RNAV. The stock is one of our top picks in the construction sector. Order book visibility is intact, underpinned by the rollout of major projects in 2H09 and potential new jobs from the Gulf region. WCT has an outstanding order book of RM2.2bn. A favourable decision on the outstanding Meydan arbitration would be a positive surprise and is a potential re-rating catalyst, along with (i) the award of an infrastructure contract in Sabah, (ii) potential new jobs in the Middle East, and (ii) intensified pump-priming newsflow in 2H09.

WOW!

RNAV-based target price is now at 3.65.

Now I do not like the way they write pegged to an unchanged 20% discount to RNAV.

Why?

Because RNAV is now changed. RNAV is adjusted higher and the discount used is 20% compared to 40%!

Here's the table.

See how RNAV has increased to 4.168 billion compared to 3.944 billion?

See how discount used is only 20%?

The sell-side see WCT at 1.10 while the buy-side see WCT at 3.65.

So how now my dearest? One see 1.10. Other see 3.65. What do you see in this deep blue sea?

Read more...

What's Said About WCT

From CIMB.



From RHB

Read more...

Regarding RHB's report on Parkson

Was reading the report on Parkson Holdings dated 17th March from RHB Research.

The following are some key issues pointed out in the report.

• Same-store sales (SSS) growth to remain strong. In 2007, Parkson recorded same-store sales growth of 18.4% for its China operations, 8% for Parkson Malaysia and 37% for Parkson Vietnam. Parkson China remained the main income driver, contributing more than 90% to the groupfs operating income in FY07. Its stellar performance was in tandem with the burgeoning retail sales in China, which grew 16.8% in 2007 underpinned by improved consumer confidence and rising rural income. Going forward, we expect China retail sales to remain robust in the advent of the Beijing Olympics. However, we reduce our SSS growth projections for China to 17% (from our earlier projections of 20%) for FY08-10, to be in line with management guidance of 15-18% p.a.. As for Parkson Vietnam, we raise our SSS growth projections to 25-27% (from our earlier projections of 20%) for FY08-10. The compelling SSS growth in Vietnam is mainly attributable to the low-base effect. We maintain our SSS growth projections of 6% for Parkson Malaysia for FY08-10.
  
  Average 10-13 new stores per year to be opened in FY08-10. Over the next three years, Parkson plans to open an average 5-7 new stores per year in China, 2-3 in Malaysia and 4 in Vietnam. This is higher than our original assumptions of 4-5 new stores per year for China and 0-1 for Malaysia for the FY08-10 period. Specifically for 2008, Parkson plans to open 7 new stores in China, 5 in Malaysia and 4 in Vietnam. In China, Parkson and its 53.1%-owned Hong Kong-listed Parkson Retail Group (PRG) could expand its presence via: 1) acquisition of Parkson's managed stores; 2) purchase of minority stake in stores which are not wholly-owned by the group; or 3) acquisition of competitors' stores. Currently, Parkson has 12 managed stores, which could be part of its acquisition targets going forward. According to management, it would consider paying an average of 10x earnings for the managed stores. Alternatively, Parkson could also acquire the minority stakes of the 9 Parkson stores which are not fully owned, to fuel growth. PRG is already in the midst of acquiring the minority 49% stake in Xi'an Chang'an Parkson, pending the procurement of the requisite confirmation letters from all minority shareholders. We expect PRG to conclude this deal in 1H2008. On the domestic front, Parkson plans to open one new store each in Kuching, Kuantan, Melaka, Kuala Terengganu and Kota Baru this year. Given the more aggressive store expansion plans, we now increase our new store assumptions to 5-7 stores per year (from 4-5) for China, and 1-5 stores (from 0-1) for Malaysia for FY08-10. We maintain our assumption of 3-4 new stores per year to be opened in Vietnam in FY08-10.
  
  Margin improvement on the way. Parkson has been adopting an asset-light approach when setting up new stores in China, i.e. leasing the property instead of acquiring. This would allow the company to expand expeditiously without locking up too much capital. Capex for FY08-10 is projected at RM106-182m p.a., which is mainly for new stores and refurbishment. New stores are estimated to break even after 2 years of operation. Parkson has a high operating leverage in which fixed costs (rental and staff costs) account for a significant 29% of the group's total operating expenses. As such, according to management, SSS growth of 18% for its China operations would translate into a higher EBIT growth of more than 30%. Our forecasts have already factored this in, as we have projected higher EBIT growth of 30-50% p.a. over the next three years, compared to revenue growth of 20-40%.
  
  Risks
  
  Risks to our view. A sharp slow down in consumer spending in China, Malaysia and Vietnam.
  
  Mitigating factors. China's retail sales grew by 20.2% per month in January and February 2008, which indicates that consumer spending in China remains robust at the moment. As such, we believe a sharp drop in consumer spending in China is unlikely to occur in the near term. Post-2008, we expect retail sales to moderate slightly and have projected a lower SSS growth for China of 16% for 2009-10 from the estimated 17% in 2008. As for Malaysia, consumer spending in 2008 should remain relatively stable, given that the expectation of a petrolprice hike after the general election could now be delayed. Post-2008, we expect consumer spending to remain resilient, underpinned by increasing consumerism of the relatively young population. As for Vietnam, we expect to see an influx of foreign investments in Vietnam over the next few years, which would create job opportunities,thus boosting consumer spending power.

Their investment justification is reasoned as follows.

• Investment case. We continue to like Parkson for its exposure to fast growing economies, i.e. China and Vietnam. Given its size and extensive network in China, Parkson should appeal to world class brand merchandisers who intend to start retail businesses in China. This is particularly important to Parkson as having the right portfolio of brands is one of the core competencies in setting up a department store in China. Specifically, we believe 2008 will be an exciting year for Chinese retailers like Parkson due to the potential growth in GDP and consumer spending brought about by the Beijing Olympics. According to ArgMax.com's research, "Prior to the Olympics and during the Olympic year, the host countries would experience higher than average GDP growth, maxing out at nearly 1.5% above average GDP in the 3rd year before the Olympics. However, the growth rates are lower in the years after the Olympics". According to the Beijing Municipal Statistics Bureau, the Olympics is expected to add no less than 2 percentage points a year to the nationfs GDP growth for the seven years to 2008 and to create as many as 2.1m new job opportunities. As such, we continue to be positive on the retail industry prospects in China over the next 3 years.
  
  Over in Vietnam, Parkson is one of two foreign retail operators who have been granted a licence to set up department stores in Vietnam before it is opened up to other foreign operators in 2009. This will provide the group the first mover advantage to position itself to enlarge its size and market share to be more competitive against other foreign department store operators in future years. As such, with the first mover advantage and using an identical business model as the one adopted in China, we believe Parkson would be able to reap similar successes in Vietnam within the next few years. Parkson Malaysia, meanwhile, should continue to record stable consistent growth over the three years, underpinned by the increasing consumerism of the relatively young population.

Caught the early morning news on Nike. Nike Profit Tops Forecasts on Strong Overseas Sales

• The company has seen rapid growth in emerging markets for its Nike footwear as it ramps up for the Beijing Olympics and robust demand for its smaller, non-Nike brands. It claims sports items are relatively immune to economic downturns, but has been controlling inventory in a challenging U.S. marketplace as athletic shoe retailers struggling.

Sales in Asia were simply astounding.

Which reflected what's said in the ArgMax.com's research mentioned in the RHB report. "Prior to the Olympics and during the Olympic year, the host countries would experience higher than average GDP growth, maxing out at nearly 1.5% above average GDP in the 3rd year before the Olympics. However, the growth rates are lower in the years after the Olympics".

I believe that one should not discount this issue if one wants to be a long term investor in Parkson. At this moment of time, sales are simply booming in China but would there be a possibility that it could slow down after the Olympics? However, I reckon that most that have actually shopped and witnessed what's happening in Parkson stores in China would very much argue that sales should still continue to boom.

Parkson's potential in Vietnam as first mover as pointed out by RHB is most interesting.

And of course the statement by the management on same store sales is most interesting.

• According to management, SSS is expected to grow at 15-18% in China, 6% in Malaysia and 25-30% in Vietnam in 2008.

As projections tend to be rather optimistic by most management, a same store sales projection of 6% reflects my pessimistic view on Parkson Malaysia.

Anyway, here is a screen shot of how RHB is valuing Parkson Holdings.

Would you be a buyer of Parkson Holdings?

Read more...

Some Musings on KNM Reports

Mentioned in RHB research report this morning.

• 
  

Management is giving guidance that FY08-09 net earnings to be around rm450million and rm700 million respectively.

And here is the financial statistics posted by RHB.

This is incredible really.

For its fy 2007, KNM earned a very impressive 188 million. However the management is guiding net earnings of a whopping 450 million.

This as stated in the table above, equates to a growth of a whopping 135.3%!

Yes, KNM has made several acquisitions and was awarded several new projects but for the management to guide that the company net earnings would grow by some 260 million or 135.3% is really amazing!

As it is, based on current or trailing earning, as stated by RHB, KNM trades at 27 times multiples.

Risk is rather obvious if KNM fails to deliver such loft projections!

If you ask me, I better be mighty aware of the lofty guidance made by the company!

Anyway RHB has stated the following risk involved.

• 
  

OSK carried the following comments:

• No cannibalisation from Belgium’s Ellimetal. Early this year, KNM announced an acquisition of a Belgian process equipment manufacturer for €20m (RM96m). Management yesterday clarified that there will be no direct competition against KNM’s current business due to overlapping in product offerings, as 70% of Ellimetal’s sales are directed to European customers for projects in the EU countries. To note, Ellimetal adopts high level of automation in its manufacturing of process columns and reactors, and hence management expect some synergies to improve production method in Malaysia.
  
  Focus on future high demand sector. KNM has also recently entered into an operating agreement with David K Stevens (DKS) to undertake sulphur technology business, which we think is crucial for KNM to enter the environment industry especially when there are very limited players equipped with this technology. To elaborate, sulphur technology is a unique method used for recovering sulphur and energy from acid gases captured during the processing of high sulphur oil and natural gas. DKS, who is a patent holder for sulphur removal and recovery technology for the oil and gas applications, has extensive experience in this field. We foresee additional growth to come from here driven by rising global warming issues going forward.
  
  Potential 2nd biodiesel project. Management yesterday has also announced that it is likely to secure a 2nd biodiesel project from Midwest BD (MBD) Biodiesel Ltd of Australia to do design and EPCC works for a biodiesel plant in Townsville, Queensland. It is estimated to have a capacity of 250,000 tonne p.a., using Algae as feedstock and Axen’s technology. Although the value of the contract was not disclosed, mirroring the previous contract that KNM secured from Mission Biofuels with similar capacity, we believe the 2nd contract could worth about RM120m. We have correspondingly factored this into our projections. Note that, our forecasts already included our earlier expectations of another 3 biodiesel plants from Mission Biofuel. Lower earnings estimates. We are delaying our profit contribution from Borsig by one month and hence lower overall GP margin for the process equipment segment. We also raise our estimates for depreciation slightly while keep our forecast for effective tax rate at 13%. As guided by the management, tax rate could be lower due to reinvestment allowances for its acquisitions of Borsig as well as Ellimetal.
  
  Downgrade to Neutral. The net impact of our earnings adjustment is an 8% drop from our previous forecast. We are taking a prudent stance on KNM’s ability to integrate Borsig, given that it is the biggest ever acquisition thus far. Besides that, considering the current weak market sentiment, we lower our rating to Neutral from Trading Buy. Our revised fundamental fair value is at RM5.25, derived backwards from our fully diluted exrights & bonus based on 16x valuation multiple for the whole O&G sector. For a better comparison with our previous Trading Buy target of RM7.90, lower earnings forecasts reduce the fair value to RM7.20.

Ah, there's a bonus + rights issue being planned.

Here is how OSK made their calculations.

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