Limited growth seen for Bintulu Port

BINTULU PORT HOLDINGS BHD

By CIMB Research

Hold (Initiating coverage)

Target price: RM7.30

BINTULU Port Holdings Bhd’s (Biport) Bintulu Port has an entrenched position as it is the largest container port in East Malaysia and Malaysia’s sole liquified natural gas (LNG) export gateway. It is also an important port for palm oil exports.

Despite its solid business position and an attractive net yield of around 5.3%, we see limited share price upside due to its modest near-term earnings growth and relatively pricey valuations. The stock is also very illiquid. We begin coverage with a hold call and discounted cashflow-based target price of RM7.30 based on a weighted average cost of capital of 8%.

Bintulu Port is the world’s second largest LNG export terminal, after Qatargas’s terminal. A substantial proportion of its revenue is derived from LNG vessel calls, providing it with stable and lucrative earnings over the years. Capacity is a constraint on earnings growth from this division but the business is still expected to generate a sizeable portion of Biport’s earnings.

The huge investments pouring into Sarawak and the entry of several energy-intensive industries will benefit Biport in the medium to long term. The import of raw materials and export of finished goods will require port services. Biport has already been asked to develop and manage the new Samalaju Port, located nearby the Samalaju Industrial Park where several huge projects are currently under construction.

While the Samalaju Port will require substantial capex in the early years, management is committed to paying at levels similar to 2011. Last year, Biport declared a quarterly interim net dividend of 7.5 sen and a final net dividend of 7.5 sen, bringing total net dividends to 37.5 sen. We believe that it will be able to sustain this amount as it is generating healthy cashflow each quarter. As far as we know, there are no intentions to raise this dividend figure.

As Sarawak Corridor of Renewable Energy (Score) projects are still in progress, we see limited growth for Biport’s earnings in the next one to two years. Projects at Score will take several years to complete and reach full production capacity. The construction of the Samalaju Port will also take several years to complete, limiting Bintulu Port’s ability to handle large amounts of cargoes.

MALAYSIAN PACIFIC INDUSTRIES BHD

By Kenanga Research

Outperform (from market perform previously)

Target price: RM3.45

We attended MPI’s third-quarter ended March 31, 2012 post result briefing last week and came back with a firm view that the industry is on track to recover in second half of 2012. Management is guiding for a better fourth quarter with revenue targeted to grow by 10% quarter-on-quarter while the bottom line is expected to return to the black.

For the full year, we expect the overall sales to drop by 17% year-on-year to RM1.17bil in the current financial year ending June 30, 2012 (FY12) due to the lower sales volume. Gross margin is likely to lower to 2% in FY12 from 9% that recorded in FY11 due mainly to the higher raw material prices.

We expect the group’s total earnings to be in the red of RM23.8mil in FY12, compared with FY11 (RM58.7m) due to lower earlier sales in the first three quarters, which were caused by the disruption of supply chain in the hard disk drive segment and the global economic uncertainty.

The main changes in our FY12 assumptions are the US dollar-against-ringgit foreign exchange (forex) rate (from RM2.95 to RM2.90) and higher gold and copper price assumptions.

We have also cut our FY13 estimate net profit to RM42.4mil from RM49.3mil after adjusting for our new US dollar-against-ringgit forex assumption of RM2.85 (from RM2.90 previously) to align it with the in-house forecast. In line with the earnings downgrade, we have also downgraded our MPI target price to RM3.45 (from RM3.90 previously) based on an unchanged targeted price over forward net tangible assets of one time. In view of the current stock price is currently offering an upside of 15.7% to our target price, we are raising our rating on MPI to an outperform (from market perform previously), based on our in-house stock rating definition.

EP MANUFACTURING BHD

By OSK Research

Trading buy (upgraded)

Target price: 94 sen (fair value)

EP Manufacturing (EPMB) posted a set of results that were in line with our estimates and consensus. For the quarter, the group chalked up revenue that amounted to RM137.7mil, higher 10% year-on-year (y-o-y), thanks to higher productivity that was spurred by the new Preve and Myvi models. However, on a quarter-on-quarter (q-o-q) basis, revenue came in lower possibly due to the more conservative production numbers committed by the national automakers in anticipation of the lower demand as a result of the more stringent financing measures introduced recently.

Thanks to a higher productivity volume achieved, coupled with the significant reduction in losses for its water division, EPMB’s EBIT earnings grew by 19% y-o-y and 130% q-o-q. However, its bottomline of RM8.7mil came in rather flattish y-o-y due to higher tax expenses incurred. Note that in fourth quarter ended Dec 31, 2011, EPMB recorded a substantial tax credit amounting to RM6.4mil.

While we view the first-quarter ended March 31 results as very encouraging owing to the higher productivity and better economies of scale achieved, we think future earnings will be depressed by high financing costs for the acquisition of Maju Expressway which remains loss making.

As the share price has been beaten down following the acquisition announcement, we upgrade EPMB to a trading buy with our fair unchanged at 94 sen.

NESTLE (M) BHD

By Affin Investment Bank

Add (maintained)

Target price: RM60.90

Last week, Nestle reported a healthy set of first-quarter ended March 31 results. From the analyst briefing held last Friday, we gathered that revenue growth of 8.5% year-on-year (y-o-y) was supported by domestic sales growth of 8% y-o-y and export sales growth of 10% y-o-y.

Gross profit margin was lower by 0.6 percentage point, largely due to higher costs of key commodities (such ascrude palm oil, wheat flour and milk solids). Although the average price of cocoa beans fell by 30% y-o-y in first quarter, strong demand for cocoa powder (a byproduct of cocoa beans and a key ingredient for Milo) have driven up prices substantially.

That said, Nestle was able to offset the higher input costs via its internal savings programme, thus keeping earnings before interest and taxes margin stable at 18.3%.

Price increases are typically a last resort – Nestle recently raised prices of Milo products by 4% to 5% in January 2012. Management guided that going forward, they had no plans for another price increase this year, indicating that input costs were currently at a manageable level.

Nestle’s holding company, Nestle S.A. recently announced that they would be acquiring Pfizer’s infant nutrition business for US$11.9bil. Executive director Marc Seiler indicated that although they have no news yet on the potential impact on Nestle Malaysia, an infant nutrition division would complement Nestle’s current products range. Given that approvals for the acquisition will take another six to 12 months, any contribution from the addition of Pfizer Malaysia’s infant nutrition business would only be seen in financial year ending Dec 31, 2013 (FY13) onwards.

We also garnered further details regarding the new accounting treatment for revenue and Malaysian Financial Reporting Standards (MFRS) 112: Income Taxes. For the former, Nestle now deducts certain allowances and discounts related to trade and consumer promotions from sales, rather than classify it as cost of sales and other expenses. These allowances and discounts account for around 10% of revenue – consequently, we have adjusted our FY12 to FY14 revenue and cost of sales forecasts to account for the new method of presentation.

This, however, has no impact on operating profit and subsequent lines on the income statement. As for MFRS 112, which recognises deferred tax assets from unutilised tax incentives, management guided that the impact on the full-year effective tax rate is still uncertain. We have thus kept our effective tax rate unchanged at 16% (lower than the corporate tax rate due to halal and investment tax incentives).

Maintain add, with an unchanged target price of RM60.90. We like Nestle for its effective cost management, high dividend yields and low demand risk for its products. That said, should the Government begin rolling back subsidies, and commodity prices continue to climb, a slowdown in consumer spending and higher input costs would put pressure on Nestle’s margins