Gamuda Bhd
(Dec 23, RM2.61)

Reiterate trading buy at RM 2.66, target price at RM3.50: Gamuda’s first-quarter (1Q) results came in within expectation. It is a better quarter thanks to higher contribution from the property division. In 1Q, Gamuda’s revenue increased by 1.6% year-on-year (y-o-y) to RM624 million, while pre-tax profit grew at a faster pace of 15.9% y-o-y to RM83.5 million. The increase in profit before tax is due to higher contribution from all divisions.

Meanwhile, on a sequential basis, 1Q pre-tax profit grew by 3.9% to RM83.5 million primarily due to higher contribution from the property division driven by strong real estate sales since the middle of the last financial year.

Despite 1Q revenue falling by 33.8% from the preceding fourth quarter, earnings before interest and tax (Ebit) margin expanded by 4.1% to 8.8% while net profit surged by 40.1% quarter-on-quarter.

We foresee an earnings recovery story for Gamuda in the financial year ending July 2010 (FY10) as we forecast net profit to grow by an annual rate of 71.1% to RM334.2 million on the back of revenue growth of 8.4% to RM2.96 billion.

The estimates are by virtue of a better outlook for all its divisions and better profit margin in anticipation of lower operating costs.

We continue to like Gamuda for its strong order book and leadership in the construction sector in view of the  government’s pump-priming activities.

In FY11, Gamuda expects equal earnings contribution from its domestic and overseas operations. The company’s diversification strategy to venture abroad after the 1997/1998 Asian financial crisis has started to show results.

For the current FY10, a third of its earnings is derived from abroad. But for FY11, it will be 50:50. The infrastructure concession division would register steady income growth and continue to generate significant cash flow for the group.

This year, the construction division is focusing on executing two big projects namely the Rawang-Ipoh double-tracking project and Yen So Park in Hanoi, Vietnam. The projects are progressing well and is expected to be significant income contributors for FY10 and FY11.

The double-tracking project is slated for completion in 2013. Meanwhile, the company’s three projects in the Gulf states, including the Dubai Airport job are also making good progress as they near completion. Gamuda’s current RM8.5 billion order book is expected to last for two years.

Going forward, we foresee attractive valuation for shares of Gamuda and positive news flow in the form of award of new contracts for the company. We see the current correction in  the share price as an opportunity to accumulate and maintain our target price of RM3.50 based on sum-of-parts valuation. — MIDF Research, Dec 23


RHB: Hai-O results above expectations

Hai-O Enterprise Bhd
(Dec 23, RM7.85)

Maintain outperform at RM7.50, fair value raised to RM9.90: Hai-O’s first half ended Oct 31, 2009 (1HFY10) core net profit of RM38 million  (+53.9% year-on-year) was above our and consensus expectations, accounting for 56% and 55% of full-year net profit forecasts, respectively.

In its 2QFY10 results, Hai-O recorded an exceptional gain of RM600,000. Key variances include higher-than-expected operating profit margin of 19.6% in 1HFY10 (versus our full-year assumption of 15.4%) as well as higher contribution from rental income. As expected, Hai-O declared an interim gross dividend of 10 sen (less 25% tax), which is in line with our full-year expectations of 53 sen gross dividend.

The higher operating profit margin was mainly achieved from its multi-level marketing (MLM) division, which recorded 1HFY10 margin of 18% (versus our full-year assumption of 15.5%). Meanwhile, Hai-O’s other divisions, namely wholesale and retail, saw improvements in operating margin by +15.30 percentage points and +2.4 percentage points respectively. Hai-O attributed the improvement in margins on its focus to higher-margin as well as in-house brand products.

Following the better-than-expected operating profit margin, we have raised our margin assumptions for Hai-O’s MLM, wholesale and retail divisions to 16.5%-17.5%, 36%-40% and 5%-6% respectively for FY10-FY12 (versus 15.5%, 33.5% and 4% respectively previously) due to its focus on higher margin products. Subsequently, based on unchanged 50% net payout, our gross dividend assumption for FY10 has been raised to 62 sen-95 sen (from 53 sen-85 sen), translating to net dividend yield of 6.2%-9.5% for FY10-FY12.

In a separate announcement, Hai-O has proposed four exercises to be completed in sequence: firstly, a one-for-five bonus issue; secondly, a one-to-two share split; thirdly, an amendment to the Memorandum and Articles of Association and lastly, a non-conditional private placement of up to 10% of its enlarged share base.

The rationale of these exercises is to improve the liquidity and marketability of Hai-O shares as well as to attract strategic institutional investors and are targeted for completion by 2Q10. Ex-all, Hai-O’s theoretical share price would be RM2.84.

The risks to the recommendation include: (1) the termination of supply agreements from its suppliers in China; (2) a stronger-than-expected strengthening of the US dollar; and (3) a weaker-than-expected increase in consumer spending.

All in, our FY10-FY12 earnings forecasts have been raised by 11.9%-16.3%.

We raise our fair value estimate to RM9.90/share (from RM8.80) based on unchanged target price-earnings ratio (PER) of nine times CY10 earnings per share (EPS) after accounting for earnings changes. We reiterate our outperform call on the stock. — RHB Research Institute, Dec 23


MAS’ rights issue to see EPS dilution

Malaysian Airline System Bhd (Dec 23, RM3.03)

Maintain fully valued at RM3.05, 12-month target price at RM1.80: MAS’ rights issue will raise a minimum of RM2.76 billion, used mainly to fund acquisition of wide-body aircraft, working capital (including pre-delivery payments for new aircraft ordered), and repayment of bank borrowings.

The rights issue is expected to double the share base and dilute financial year ending Dec 31, 2010 (FY10) and FY11 earnings per share (EPS), but this could be mitigated by potential earnings enhancement from expansion in capacity.

Based on ballpark estimates, there could be savings of RM71 million and RM156 million in FY10 and FY11, respectively from lease charges, which we have yet to factor into our earnings forecasts.

Meanwhile, the group is expected to turn into a net cash position with RM87 million net cash in FY11 (from RM2 billion net debt). Both the rights issue and aircraft acquisition proposals are still pending shareholders’ and relevant authorities’ approvals. The exercises are expected to be completed by the first quarter ending March 31, 2010 (1Q10).

MAS had signed a memorandum of understanding with Airbus for the order of 15 A330-300s (plus 10 options) which will be delivered from 2011 to 2016. 

Apart from that, the group will also be purchasing six A380s from Penerbangan Malaysia Bhd (PMB) (to be delivered over 2011 to 2012) as well as four Boeing aircraft through a “bundling” mechanism. In total, MAS will need to pay PMB RM1.73 billion cash (and assume RM1.46 billion in liabilities) for the novation of the purchase of the A380s and bundling of the Boeing aircraft.

The acquisitions are in line with MAS’ effort to attain an optimal lease or own mix to optimise its financing structure.

We understand that the lease rentals for aircraft generally cost higher than the cost incurred from ownership. The group targets to own one-third of its aircraft fleet, one-third being leased and the remaining one-third being leased or owned.

Besides targeting to achieve the optimal own or lease mix of aircraft, it is understood that the new aircraft acquired will also be mainly used to replace the existing old aircraft. — HwangDBS Vickers Research, Dec 23