Friday, 23 December 2011

Risk-averse investors look for yields

Shares for consumer stocks such as Nestle, Dutch Lady Milk Industries, British American Tobacco (BAT), Guinness Anchor and Carlsberg Brewery have all being doing well of late, out-performing the benchmark FBM KLCI. We believe one of the key reasons behind increased investor interest in these stocks is the persistent volatility in the global financial market as well as uncertainties over the economic outlook for 2012.

News of a generous special interim dividend from Guinness would have reinforced the attraction for these traditionally defensive, high-yielding stocks. With the market outlook still hazy and bank deposit rates unlikely to see any major upward movements in the near to medium term, stocks with higher than market average yields will understandably be more appealing.

Special dividend spurs Guinness’ share price
Guinness announced a special net interim dividend of 60 sen per share this month. The company is sitting on a fairly big pile of cash — totaling some RM164 million at end-September. Distributing some of this money back to shareholders is not unexpected, particularly in view of the limited options for fresh acquisitions and the relatively cheap borrowing costs currently.

Indeed, companies with strong balance sheet and steady cash flow from operations, such as DiGi and BAT, have, in recent years, been actively shrinking their shareholders’ funds, optimising their debt-equity ratios and boosting returns to equity. Guinness shares will trade ex-entitlement for the special dividend on Jan 9, 2012.

Operationally, the company has also been doing well. Turnover was up 9.6% to RM1.49 billion while net profit increased by an outsized 18.8% to RM181.4 million in FYJune11. And in the latest 1QFY12, turnover grew a strong 21.3% over the previous corresponding quarter while net profit rose 42.7% to RM55.2 million over the same period.




Guinness attributed the strong topline growth to higher industry volumes sales, selling prices as well as market share gains. Sales may also have been boosted by speculative activities in the run up to the Budget 2012. The brewery industry was spared from any tax hikes this year, which bodes well for sales growth going forward.

The company’s stable of brand names, including Tiger, Guinness and Heineken, registered double-digit growth. It is estimated to have roughly 60% share of the local beer and stout market, up from roughly 46% a decade back, and the company believes that Tiger is now the largest beer brand in the country in terms of both volume and value sales. Margins were also boosted by improved efficiency and cost savings measures, including moves to restructure its distribution channels in 4QFY11.

We estimate earnings to total roughly RM190.8 million and RM200.9 million in FY12 and FY13, respectively. Over the past five years, Guinness’ dividend payout has averaged at a high 88%. Assuming a similar payout going forward, the company’s “regular” dividends are estimated at roughly 56 sen to 60 sen per share in FY12-FY13, respectively, based on our earnings forecast. That translates into net yields of 8.8% (including the 60 sen per share special dividend) and 4.6% for the two years at the prevailing share price of RM13.10.

On the other hand, valuations are on the high side. Following the recent price surge, Guinness’ shares are now trading at roughly 20.7 and 19.7 times our estimated earnings for FY12-FY13. Thus, whilst yields should provide support to its share price, further upside may be more limited in the near term.

Carlsberg shares rose in tandem
News of Guinness’ special dividend and share price gains have also sent prices for Carlsberg Brewery Malaysia sharply higher.

Like Guinness, Carlsberg too reported a good set of earnings for the latest quarter ended September 2011. Turnover grew 21.9% year-on-year (y-o-y) to RM401.7 million, with double-digit growth registered for both the domestic and Singapore operations. For the nine-month period, turnover was up 10.8% over the previous corresponding period.

Net profit, meanwhile, was up a stronger 43.3% y-o-y to RM48.8 million in 3Q11 and 25.4% y-o-y to RM128.8 million for the first nine months of the year. Margins rebounded in the latest quarter following higher-than-usual advertising and promotional expenses as well as additional costs for the new bottle packaging related to the company’s global rebranding exercise in 2Q11. The better margins this year may also be attributed, in part, to synergies from the company’s acquisition of Carlsberg Singapore.

Aside from growth of its flagship Carlsberg beer brand, the company also expects strong demand for its wide range of premium brands, such as Hoegaarden and Kronenbourg, to be a key driver for future growth.

We estimate net profit to total some RM156.1 million this year, up 17% from a year ago, equivalent to 51 sen per share. Looking ahead, we expect profit to grow further to about RM158.3 million in 2012.

The more modest growth expectations for next year is based on the assumption of higher raw material prices such as malt barley, and weaker ringgit exchange rate, which would be partly offset by the 3% to 4% increase in selling prices since April 2011.

At the prevailing price of RM8.40, Carlsberg’s shares are trading at lower valuations than Guinness — at roughly 16.5 and 16.2 times 2011-2012, respectively.

Although Carlsberg’s balance sheet is not as strong as that of Guinness’ — it had net debt totalling RM11.5 million at end-September — gearing is only a marginal 2%. In the absence of major capex going forward and steady cash flow from operations, the company is well able to afford a high dividend payout ratio.

Carlsberg paid out all of its earnings in 2010. But assuming a lower 70% payout ratio for 2011-2012, gross dividends are estimated to total 47.6 sen to 48.3 sen per share for the two years. That would still earn shareholders decent net yields of about 4.3% at the current share price.

Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.


This article appeared in The Edge Financial Daily, December 23, 2011.




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Carlsberg brewing Asahi Super Dry locally

Carlsberg Brewery Malaysia Bhd (Dec 22, RM8.40)
Maintain market perform at RM8.40 with fair value of RM8.05: Carlsberg has recently been awarded the rights to locally manufacture, sell and distribute Asahi Super Dry after a recent agreement with the brand’s owner, Asahi Breweries.

Through Carlsberg’s subsidiary, Luen Heng (LHFB), Carlsberg started the local distribution of Asahi Super Dry since July 2010. Now, Carlsberg will be manufacturing Asahi Super Dry locally. We had previously highlighted Carlsberg’s plans to locally manufacture one or two of the beers that are distributed by LHFB, although, we had initially speculated that one of the beers was going to be Stella Artois.

Asahi Super Dry was previously an imported premium beer. As such, its pricing was also at the high end of the local beer market at about 50% higher than the mainstream Carlsberg Green Label and Tiger Beer. However, now that Carlsberg is manufacturing Asahi Super Dry locally, we believe its price levels would go down to more competitive locally brewed premium beer levels, which are currently priced at a 20% premium to the mainstream brands. As such, Asahi Super Dry would now compete directly in the premium beer segment which is currently dominated by Heineken.

Given that Asahi Super Dry would be manufactured locally, we believe its margins would also be better given that Carlsberg does not need to pay import duty on the beer. However, we highlight that Asahi Super Dry was previously in the imported premium beer segment, together with the likes of Hoegaarden and Stella Artois etc, which combined, accounts for less than 5% of the overall beer market. As such, despite Asahi Super Dry’s more competitive pricing, we do not expect the beer to provide any significant earnings impact for Carlsberg in the near-term.


Risks to our view. 1) Sharp drop in TIV (total industry volume); 2) Continued decline in Carlsberg’s market share (as opposed to our flat market share assumption); and 3) possibility of excise duty hike going forward.

No change to our earnings forecast.

Our DCF-derived (discounted cash flow) fair value remains unchanged at RM8.05. Although we remain positive on Carlsberg’s earnings growth outlook for 2012, underpinned mainly by the Euro 2012 which would provide a sales boost in 2Q and 3Q, we believe its share price has fully reflected this. We reiterate our “market perform” call. — RHB Research, Dec 22


This article appeared in The Edge Financial Daily, December 23, 2011.




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Basel III for Malaysian banks

Banking sector
Bank Negara Malaysia (BNM) will raise the minimum Tier-1 capital ratio to 6% (from 4% currently under Basel II requirement) and common equity Tier-1 capital ratio to 4.5% (from 2% currently under Basel II), while maintaining total CAR (capital adequacy ratio) at 8%. In addition, banks are required to keep 2.5% capital conservation buffer overand- above the regulatory minimum.

Separately, BNM will also consider introducing a countercyclical capital buffer (between 0% to 2.5% of risk-weighted assets to be held in common equity) in line with Basel III, which is over and above the conservation buffer. The higher capital requirements will be implemented gradually beginning 2013 through 2015, and the capital conservation buffer between 2016 and 2019.

Banks will be required to report their leverage ratio positions calculated according to Basel III rules from June 2012. BNM will consider enhancing the liquidity coverage ratio and implement a net stable funding ratio (an incentive for banks to fund activities with more stable sources). The rules will likely be implemented from 2015 and 2018, respectively. All banks are expected to comfortably meet the 3% leverage level.

Malaysian banks are relatively small and have less complex activities compared with global banks. However, as Malaysian banks evolve to be regional players (as in the case of Maybank and CIMB), it will be crucial for them to be able to absorb external shocks and contagion risks. As such, BNM will assess at a later date the need for additional loss-absorbency requirements as required under Basel III (ranging from 1% to 3.5% comprising common equity, depending on the bank’s systemic importance).

We like AFG (Buy, TP:RM4.30) for its scalable domestic franchise and non-interest income traction, which ensures sustainable earnings and ROE. Among large caps, we prefer Maybank (Buy, TP:RM10.60) for its resilient transactional banking income and dividend yields. We also like HLB (Buy, TP:RM16.00) for merger synergies. — HwangDBS Vickers Research, Dec 22


This article appeared in The Edge Financial Daily, December 23, 2011.




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RAM sees moderate performance for banks

The performance of the Malaysian banking industry is likely to be moderate next year in line with the economy, says RAM Holdings' Group chief economist Dr Yeah Kim Leng.

He said loan growth is expected to ease to nine per cent next year after expanding at 12-13 per cent annually in 2010 and 2011.

Yeah said deposit growth is projected to ease slightly to eight per cent in 2012 from an estimated 11.6 per cent rise in 2011.

"Although the banks' interest margin and non-interest income are expected to come under pressure due to a more challenging economic and business environment, we do not expect any severe erosion of their profitability and asset quality," he told Bernama today.

However, Yeah said, the strategies outlined for the banking industry in the Financial Sector Blueprint 2011-2020 will provide firmer indications of the sector in the long run and position the industry on a stronger footing.

He said Malaysia's banking and financial services are largely driven by domestic demand and monetary conditions. However, these drivers are partly influenced by the external economy and the extent to which consumer confidence and investor sentiments are affected by uncertainties in the global economy.

"As demonstrated by its resilience during the recession in 2009 and given its enhanced balanced sheet strength and ample liquidity in the economy, the banking industry is well-placed to weather any global credit crunch, liquidity shock and financial market turbulence that may intensify in 2012," he said.

Yeah said banks could face major challenges relating to uncertainties in the external environment, especially the increased risk of a double-dip in the eurozone economies and its knock-on effects on the domestic economy.

"A more pronounced slowdown in the domestic economy may increase financial distress among highly-indebted companies and households, leading to a rise in loan delinquencies.

"However, we do not expect a full blown global recession in 2012 and the Malaysian economy in general and the banking industry in particular are well-placed to ride through the turbulence next year," he said.

He said among the key factors supporting the local economy and the banking industry are several positive factors buttressing domestic consumption and investment that in turn underpin banking activities in the country.

"These include steady employment and income increases, rising private investment, moderately strong commodity prices, high private sector savings and liquidity, increasing number of middle- and upper-income households and growth-accommodative fiscal and monetary policies," he said.

Yeah said the continuing deleveraging in the advanced economies together with the ongoing eurozone debt crisis have increased the attractiveness of Islamic finance.

On the risks of Malaysian banks' exposure abroad, Yeah said the current volatile global economic conditions should not pose a danger to well-managed and well-capitalised entities.

On concerns Maybank and CIMB in Indonesia may be forced to sell down their stakes, Yeah said, if that does not result in losses, then there is little negative financial impact on them.

"They would have to re-strategise on how to operate within the new equity and regulatory framework and perhaps look at other more welcoming countries to execute their regionalisation or internationalisation plans," he said.

On whether interest rate direction would affect banks' incomes, he said it would not be too adversely affected as the interest margin, or the spread between lending and deposit rates, is usually maintained regardless of the direction of change in the official policy rate.

"The impact also depends on the relative amount of fixed versus floating lending rate and the extent to which the banks' portfolio are shielded against interest rate risks," he said.

Meanwhile, an analyst from investment house, who declined to be named, said the local banking industry development next year will depend much on external environment.

"Economic growth for Malaysia is likely to moderate and we expect loan growth to moderate alongside. "Competition for funds remains stiff and margin pressure is likely to remain," he said.

He said positively, the Malaysian economy is largely domestic-driven so it is likely to be more sheltered from the external effects, adding, project take- off under the Economic Transformation Programme will provide support to the banking system.

On further liberalisation of the banking industry, he said, competition will increase but Malaysian banks are well-capitalised and more than ready to cope any competition that arises.

He expects interest rates to remain stable at least for first half 2012. -- BERNAMA



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RAM Ratings reaffirms Maybank IB’s AAA/P1 ratings

KUALA LUMPUR (Dec 23): RAM Ratings has reaffirmed Maybank Investment Bank Bhd’s (Maybank IB) respective long- and short-term financial institution ratings at AAA and P1.

It said on Friday that the long-term rating had a stable outlook.

Maybank IB is the main investment-banking arm of the MALAYAN BANKING BHD [] universal-banking group (Maybank).

RSM Ratings said Maybank IB’s ratings mirrored its parent’s AAA/Stable/P1 ratings from RAM Ratings.

Maybank is Malaysia’s largest financial-services group that commands the lion’s share of loans and deposits in the domestic banking system, it said.

The rating agency said Maybank IB was expected to gradually derive synergistic benefits from Maybank’s recent acquisition of Kim Eng Holdings Limited (Kim Eng) - a Singapore-based regional securities and investment-banking group.

“Given Kim Eng’s established presence in several markets in ASEAN, Maybank IB stands to gain access to a wider distribution network, along with a regional platform to expand its investment-banking services.

“Maybank IB is a key component of the Group’s Global Wholesale Banking strategy that targets the cross-selling of innovative products and services among its corporate/commercial clients,” it said.

RAM Ratings said Maybank would readily extend its support to Maybank IB should the need arise.

It also said Maybank IB’s position in the domestic investment-banking arena strengthened year-on-year in the first 8 months of 2011.

The bank came in second in the league table for the domestic debt-capital market, with 26.1% of total deals by value; this represents an improvement over its fourth position last year, it said.

Lifted by higher corporate-advisory fees, the bank achieved respective pre-tax profits of RM153.8 million and RM85.1 million for FYE 30 June 2011 and the 3 months ended 30 September 2011, it said.

“As an investment bank, however, Maybank IB’s financial performance is susceptible to the vagaries of the capital markets.

“On a separate note, the Bank is entirely supported by tier-1 capital, which provides the strongest loss-absorption capacity; its tier-1 risk-weighted capital-adequacy ratio stood at a strong 22.6% as at end-September 2011,” it said.



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Greenyield posts net profit RM2.19m in 1Q

KUALA LUMPUR (Dec 23): GREENYIELD BHD [] net profit for the first quarter ended Oct 31, 2011 rose to RM2.19 million from RM786,000 a year earlier, due mainly to higher revenue.

It said on Friday that its revenue for the quarter rose to RM13.58 million from RM8.02 million in 2010.

Earnings per share rose to 1.32 sen from 0.48 sen, while net assets per share was 29.17 sen.

Reviewing its performance, Greenyield said the increase in revenue was due mainly to strong demand of PLANTATION [] related products and services from overseas market.

On its outlook, Greenyield described its financial prospects as challenging.

“The group will source and implement logical and available measures to minimise the impact of all known factors affecting the profit margin,” it said.



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KL shares firmer at midday

Share prices on Bursa Malaysia ended the morning session firmer, despite regional markets winding down ahead of the festive holidays, dealers said.

Window dressing activities dominated trade as investors sought after quality stocks for their portfolio ahead of the year-end.

At 12.30pm, the FBM KLCI ended at 1,494.94, up 3.48 points.

The Finance Index rose 21.89 points to 13,391.85, the Plantation Index increased 25.53 points to 7,948.78 but the Industrial Index softened by 1.93 points to 2,664.75. The FBM Emas Index added 23.96 points to 10,238.89, FBM Mid 70 Index gained
21.511 points to 11,257.98 but the FBM ACE Index declined 4.410 points to 4,023.39.

Gainers led losers 304 to 279 while 320 counters were unchanged. Turnover stood at 451.738 million shares worth RM363.868 million.

Among actives, Astral Supreme Bhd added one sen to 19.5 sen, Perisai Petroleum Teknologi rose 4.0 sen to 72.5 sen and TMC Life Sciences Bhd-Warr increased 2.5 sen to 14 sen.

In heavyweights, Maybank declined one sen to RM8.44, Sime Darby eased two sen to RM8.98 and CIMB firmed nine sen to RM7.09. -- BERNAMA



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Malaysian Resources buoyed by EPF deal

Malaysian Resources Corp, a property and construction group, rose 1 per cent to RM2.09, set for its highest close since Aug. 24.

The company won a RM.9 million contract to upgrade the Employees Provident Fund’s building in eastern Sabah state, it said in a statement. -- Bloomberg



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