Felda to use 350,000ha land in IPO

Malaysia’s Federal Land Development Authority (FELDA) will inject 350,000 hectares of plantation land into its commercial arm’s listing which will take place by mid-2012, its chief said on Friday, in what is likely to be the country’s biggest IPO next year.

Felda Global Group’s listing, which is expected to raise between RM5 billion-RM6 billion (US$1.6 billion-US$1.9 billion), is drawing drawn wide interest at a time when appetite for initial public offerings has been hit by market volatility.

Analysts have also said the IPO could be a political landmine for the government amid criticism that it would sideline FELDA settlers, a key vote bank for Prime Minister Datuk Seri Najib Razak.

Felda Global Group managing director Datuk Sabri Ahmad declined to estimate how much the IPO would raise but said it would exclude the half million hectares of land belonging to the settlers’ cooperative.

"Tanah peneroka (settlers’ lands) are not touched at all,” Sabri told Reuters in an interview.

“The settlers’ land will continue to be their land, but we will continue to buy and process their crop.”

In addition, the co-operative would be one of the key shareholders of the listed entity, he added.

Felda Global’s listing is part of the authority’s plan to monetise its assets, after it earlier floated its sugar arm MSM Malaysia Holdings Bhd.

Prime Minister Datuk Seri Najib Razak announced FELDA Global’s listing in his recent budget speech earlier this month, saying it would create another blue-chip plantation firm and attract investors to the local bourse.

Local blogs have said the Felda Global listing would raise about RM5 billion-RM6 billion, overtaking oilfield services provider Bumi Armada’s US$858 million IPO earlier.

Sabri, a palm oil industry veteran, said Felda Global Group aimed to become a global agribusiness firms similar to the likes of US based Archer-Daniels-Midland Co , Bunge Ltd and Cargill Inc .

Sabri said the proceeds from the IPO would be used to expand Felda Global’s core business in Southeast Asia, which include cultivating and processing oil palm, rubber and sugar cane.

“We will later look at Africa and Brazil but we will focus on Southeast Asia first,” he said.

Local media said the selection of investment banks for the IPO was ongoing.

Sabri declined to comment on the bank selection process. He said Felda Global would be among the ten largest companies listed on the Malaysian stock exchange .

At present, the 10th largest company in Malaysia is power producer Tenaga Nasional Bhd with a market value of about US$9.6 billion. - Reuters

UOA Development shares extend rebound

KUALA LUMPUR: Shares in UOA Development Bhd have begun to recover after slumping up to 55% from its initial public offering price.

Investor interest has been gaining momentum in the last week as heavy trade buoyed the stock, which saw its volume peak at 39.9 million shares last Thursday.

UOA Development re-emerged on the top actives list yesterday, and was the fifth most actively traded stock with 35.43 million shares changing hands. It added 19 sen or 12.6% to close at RM1.70 yesterday.

“The stock sank due to the broader decline in the equity market. Property stocks tend to be hit the hardest as they have a higher beta and are more sensitive [to changes in the market],” an analyst with Affin Investment Bank told The Edge Financial Daily.

The stock, which listed on the Main Market on June 8, had plunged to a low of RM1.16 at end-September following months of steady decline. While the stock has since rebounded 46.6% from its lows, its current price is still 34.6% lower than its IPO price of RM2.60.

Affin Investment has maintained its “buy” call and target price of RM2.07 for the stock, a 20% discount to its revalued net asset value (RNAV).

“UOA Development may have been harder hit (relative to its peers in the industry) as there is a common misconception that the company has a heavy reliance on its Bangsar South development,” said the analyst.

According to the research house, the company currently has six projects under development across Kepong, Bangsar South, Segambut, Setapak and the KLCC area.

“Bangsar South does provide strong support to its earnings and sales though the company has several standalone projects too,” said the analyst.


Together, these projects have an estimated gross development value of RM2.07 billion. The company recently entered into a sale and purchase agreement to acquire a 9.8-acre (3.97ha) parcel of land in Kepong for RM72.8 million.

“We are neutral on the proposed acquisition as we think the acquisition price of RM170 psf is reasonable, and we believe there is a ready demand for new residential properties in the Kepong locality,” said Affin in a report issued earlier this week.

The company had gross cash and equivalents of RM368.37 million, with minimal borrowings of RM20.88 million as at end-June.

Director David Khor told the media that the recent purchase was part of five or six projects planned for next year.

The company recorded RM533 million in sales for 1HFY11, as it saw a higher contribution from its residential segment than its commercial segment. Contribution from its residential segment rose to 59% from 25%.

This article appeared in The Edge Financial Daily, October 21, 2011.

REITs attractive in turbulent market

KUALA LUMPUR: As market volatility drive investors toward defensive stocks, real estate investment trusts (REITs) have come under renewed interest as investors look to reduce risk of capital loss and seek stable returns.

Among the Malaysian REITs that have seen better days since the global market selldown in early August are Sunway REIT (SunREIT), Axis REIT and CapitaMalls Malaysia Trust (CMMT).

The three REITs have seen higher volumes traded since late July with their respective unit prices hitting their peak in August, while still maintaining high level of interests recently.

This appears to coincide with the weak and volatile sentiment in markets worldwide that drove investors to the sidelines.

Yesterday, CMMT’s share price closed at RM1.30 (RM1.95 billion market cap), up from about RM1.02 in the beginning of the year. CMMT is a purely retail properties-based REIT while SunREIT’s portfolio comprises retail, hospitality and office properties.

SunREIT and Axis REIT closed yesterday at RM1.14 and RM2.46, respectively, giving them a market cap of RM3.07 billion and RM924.7 million. The former had gained about 10.7% year-to-date (YTD) while Axis was up about 3.8% YTD.

At yesterday’s prices, CMMT and Axis were traded at about 6% and 7.1% annualised yield for FY11 ending Dec 31, while SunREIT was priced at 5.8% historical yield for FY11 ended June 30.

Nevertheless, not all REITs have fared well, with some registering a drop in their unit prices YTD. While lower unit prices could mean higher dividend yield, note that some have returned flat or lower dividend payments.

Hektar REIT, which owns several small malls, saw its unit price falling 6.7% YTD to close at RM1.26 yesterday. While its annualised dividend yield was widened to 7.93% for FY11 ending Dec 31, its dividend payment for 1HFY11 was flat at five sen per unit.

The unit price of hospital-backed REIT Al Aqar KPJ REIT meanwhile has also fallen about 4.5% YTD to RM1.07 yesterday. The REIT recently distributed 5.17 sen as the first income distribution for FY11 ending Dec 31, despite earlier proposing to pay 3.3 sen.

UOA REIT, which owns several office blocks, had hit a six-month high of RM1.48 on July 26 before market pressures pushed down its prices to RM1.33 yesterday, falling about 11.3% YTD. UOA’s 1HFY11 dividend has dropped to 4.89 sen (annualised yield of 7.4%) from 5.15 sen previously.

Analysts stress that the two most important factors to consider when evaluating the prospects of a REIT are the property segment it occupies and its proposed expansion plan to grow value and dividend returns.

REITs backed by office properties are currently not the flavour of the month due to the oversupply of office spaces and consequently, an expected pressure on earnings growth.

Instead, many analysts prefer retail REITs particularly those that own quality retail malls in good locations.

Although retail REITs are still relatively attractive, analysts warn that this segment could in the longer term face higher supply and increased competition for tenants.

“Retail spaces should see some incoming supply but it will still be a better bet than office REITs,” said a property analyst.

Axis REIT has also been featured as analysts’ top picks for REITs who like its mix of office and industrial real estate.

“Aside from the industrial properties which we like, Axis REIT is secured by strong tenants and have an aggressive expansion plan,” said the analyst.

Maybank IB Research analyst Wong Wei Sum noted that some REITs are currently looking attractive due to their more stable income stream and dividend yield at an average of 6% to 7%.

Nevertheless, as REITs return to focus, a fund manager pointed out that the increased interest can mostly be attributed to funds but not retail investors.

“Retail investors largely lack an understanding of REITs but REITs is quite useful to have in your portfolio when the market is unpredictable,” he said.

This article appeared in The Edge Financial Daily, October 21, 2011.

BAT’s profit down slightly for 9MFY11

PETALING JAYA: British American Tobacco (M) Bhd (BAT) recorded slightly lower net earnings for the nine-month period ended Sept 30, 2011 at RM538.97 million, down by RM9.42 million from RM548.39 million during the same period last year. Revenue, however, increased to RM3.14 billion from RM3 billion last year.

According to the announcement posted on Bursa Malaysia’s website yesterday, the lower profit is believed to be due to its higher cost of sales of RM2.02 billion or 64.5% of its revenue, up from RM1.87 billion or 62.1% of the group’s total revenue during the corresponding period last year. Profit margin was lower during the period at 17.2% from 18.2% previously.

Gross profit decreased by 2% during 9MFY11 to RM1.12 billion from RM1.14 billion recorded during the same period last year. This decline was attributed to the lower volume and loss of margin from the 14-stick pack, partially offset by higher net pricing and increased contract manufacturing volumes. Operating expenses were lower at RM376.3 million from RM395.4 million previously.

“During the period, the group changed its distribution model from company-owned distribution to exclusive third party distributorships for three of its biggest areas; the Klang Valley, Penang and Johor Bahru. This decision resulted in organisational restructuring which includes a voluntary separation scheme (VSS) and reorganisation of certain employees.

The financial impact of RM12 million as a result of this organisational restructuring has been recognised in 3Q11,” BAT stated.

The group has managed to increase its market share to 60.6% of the total cigarette market up to August this year, which is an increase of 0.6% compared with the same period last year.

In August alone, the group’s market share stood at 62% of the total cigarette market, up from 58.7% in January 2011, due to stronger enforcement by the authorities to curb sub-value for money cigarettes selling at lower than the government mandated minimum price.

“Dunhill, the largest cigarette brand in the market, supported by the launch of its capsule products, was the key driver behind the group’s performance, growing by 0.8 percentage points compared with the same period last year to register a market share of 44.1% for year-to-date August 2011,” the group stated.

Despite the lower net earnings in 9MFY11, the group said its profit outlook for 2011 has improved against the previous quarter as no excise duty hike was announced at the tabling of Budget 2012. Analysts initially expected the government to increase the duty for cigarettes and other tobacco products next year, in order to reduce its fiscal deficit.

“However, the prevailing high incidence of illicit cigarette trade and pricing activities of certain sub-value for money brands selling below the government mandated minimum price remain a concern. The support of the government in addressing this concern is vital,” BAT said.

Earnings per share decreased to RM1.89 per share from RM1.92 during the corresponding period last year. However, the board of directors has declared a third interim dividend of 60 sen per share, tax exempt under the single-tier tax system, amounting to RM171.3 million in respect of FY11 ending Dec 31. For 9MFY11, total dividends proposed/declared amounted to RM2.10 per share compared with RM1.77 previously.

BAT’s share price closed flat yesterday from Tuesday’s closing price of RM43.60. It has lost some 4.17% of its value since Jan 3, 2011 when it was traded at RM45.49. It touched its

year-to-date low at RM42.98 on Sept 23, and has since increased by 1.44% to yesterday’s closing price.

This article appeared in The Edge Financial Daily, October 21, 2011.

Rubber glove stocks rally on lower latex prices

KUALA LUMPUR: Investors flocked to rubber glove counters yesterday as the FBM KLCI continued to slide on weakening global economic sentiments.

The bellwether FBM KLCI index lost 9.07 points to close at 1,441.18 points, but rubber glove manufacturers bucked the trend and were among the top gainers on the local market yesterday.

Supermax Corp Bhd strengthened 9% or 27 sen to RM3.22 while Latexx Partners Bhd and Adventa Bhd gained 14 sen each to RM1.63 and RM1.67 respectively.

Top Glove Corp Bhd and Hartalega Holdings Bhd added one sen each to RM4.13 and RM5.51 respectively while Kossan Rubber Industries Bhd moved up eight sen to RM2.80.

Investors flocked to these counters as headwinds came to an end with latex prices falling from the all-time high of RM10.93 per kg in April to close at RM7.99 per kg yesterday.

Analysts also noted that the strengthening greenback against most currencies and softening supply have brought glove makers back in favour. The ringgit weakened to 3.129 yesterday against the US dollar from 2.939 seen on July 27.

Given the improving factors, glove makers are expecting better profitability moving forward.

Top Glove announced on Tuesday that it is expecting 20% revenue growth for FY12 ending Aug 31 on the back of growing demand and new capacity. For FY11, Top Glove’s net profit fell 54% to RM115.2 million, dragged down by high latex prices and the strong dollar.

Top Glove is currently adding new production lines that would increase its total capacity to 42 billion gloves per annum. Its chairman Tan Sri Lim Wee Chai had forecast latex prices falling to RM7 per kg in the next three to six months, depending on weather conditions.

Lim’s view is echoed by Supermax executive chairman and group managing director Datuk Seri Stanley Thai who said latex prices are expected to retreat further to between RM6 and RM6.50 per kg in 1QFY12.

Thai said global demand and consumption would continue to grow next year at between 8% and 12% per annum, considering gloves are recession-proof as they are used in the healthcare sector.

An analyst noted that investors view rubber glove stocks as defensive counters during bearish market conditions.

“Whether in times of recession or not, the healthcare sector will always have demand for gloves. As such, investors flock to these counters especially given the lack of opportunities in the market,” said OSK Research analyst Jason Yap.

Based on Bloomberg data, Hartalega had 10 “buy” calls and one “neutral” call with a median target price of RM6.98. There were no “sell” recommendations on the stock.

Top Glove had nine “sell”, eight “neutral” and four “buy” calls, with a median target price of RM4.02. Kossan had a median price of RM3.26 with seven “buy” and eight “neutral” recommendations.

Supermax had four “buys”, two “sells” and six “neutrals” with a median target price of RM3.49. Adventa attracted one “buy” and “sell” each and two “neutral” calls, with a median price of RM1.64.

This article appeared in The Edge Financial Daily, October 21, 2011.

Kencana expanding its yard capacity

Kencana Petroleum Bhd (Oct 20, RM2.55)

Maintain buy at RM2.51 with fair value of RM3.54: We maintain our “buy” call on Kencana Petroleum with an unchanged fair value of RM3.54, pegged to a CY12 price-earnings ratio (PER) of 22 times to the merged Kencana-SapuraCrest Petroleum Bhd earnings.

The Edge Financial Daily reported that Kencana is in talks with unidentified parties to acquire over 130 acres of land beside its main fabrication yard in Lumut, Perak. One of its neighbours is Lumut Maritime Terminal Sdn Bhd, which is jointly-owned by Integrax Bhd and the Perak government.

Kencana’s fabrication yard currently measures 192 acres. This means that the yard could be potentially increased by 68% to 322 acres. But this will still be smaller than Malaysia Marine and Heavy Engineering Sdn Bhd’s combined yard space of 502 acres, including the proposed acquisition of Sime Darby’s 130-acre yard in Pasir Gudang.

Assuming land acquisition at RM20 psf, the entire cost could easily reach RM100 million, which is the guidance from management on Kencana’s capital expenditure programme. After the merger with SapCrest, this could mean that the combined net gearing could reach one times.

The purpose of the land expansion is to create depth in the group’s fabrication capability and enable a streamlined process which will lead to efficiencies of scale. But the group’s existing yard is only 50% to 60% utilised based on the group’s current order book. This means that Kencana is confident of securing significant fresh orders by early next year.

Kencana is said to be in talks with unidentified parties to acquire
over 130 acres beside its main fabrication yard in Lumut.

We still view the group’s order book prospects as bright, given Petroliam Nasional Bhd’s spending programme of RM300 billion over the next five years, which includes enhanced oil recovery and marginal field jobs. Among its many domestic

developments, Petronas’ RM15 billion fast-track project to develop gas reserves from a cluster of fields in the North Malay basin, off Peninsular Malaysia, is expected to translate into another round of fresh contracts soon.

Oil and gas online new portal Upstream recently reported that Petronas is negotiating with Kencana and SapCrest to fabricate and install two wellhead platforms for the Bunga Dahlia and Teratai fields, connected to nine fields in Blocks PM301 and PM302 and in the Bergading contract area.

Separately, we understand that Petronas Carigali Sdn Bhd could be opening up for tender three central processing platform projects, each worth over RM1 billion, for the Dulang, Semarang and Bokor oil fields.

The stock currently trades at an attractive CY12F PER of 17 times, below its 2007 peak of 22 times. — AmResearch, Oct 20

Slow construction progress to hurt Ann Joo’s earnings

Ann Joo Resources Bhd (Oct 20, RM2.11)

Maintain neutral at RM2.12 with target price of RM2.16: Ann Joo Resources is expected to announce its 3QFY11 results in November. We are expecting it to record lower 3QFY11 net profit by 7% to 10% against its 2QFY11 net profit of RM35.5 million.

This is due to:

i) higher input costs aggravated by a weakened ringgit against the US dollar and an increase in scrap prices by 27% year-on-year (y-o-y ) during the quarter;
ii) slower revenue growth attributed to weak domestic demand following slower construction activities during Ramadan and Hari Raya Aidilfitri.

Ann Joo’s domestic market contributes roughly 60% of its top line with the remaining 40% from the export market. We believe Ann Joo’s export market rebounded in 3QFY11 as long steel demand resumed after the political unrest in the Middle East and North Africa and post-Japan earthquake. Due to Ramadan and Hari Raya, domestic sales are unlikely to be higher in 3QFY11.

Management has hinted that the RM650 million blast furnace project is likely to take off next year instead of this year. This has no impact on our projections as we will not impute any contribution until the blast furnace begins production.

We reaffirm our expectation that local steelmakers’ exports will continue to be weak for the rest of this year due to mounting concerns over the global headwinds which will affect top line growth and margins. Billet and steel bar prices continue to fall. Billet prices have fallen 4.3% and steel bars by 3.4% in the last two weeks alone. Billet is now US$667.50 (RM2,090) per tonne and bars US$705.

We would not be surprised if Ann Joo, one of the country’s major steel players, sees weak earnings in 4QFY11 due to the decline in prices and demand.

At this juncture, we are maintaining our “neutral” recommendation with a target price of RM2.16 pending the announcement of its 3QFY11 results. We set Ann Joo’s target price by pegging its FY12F earnings per share of 36 sen to a price-earnings ratio of six times, which is one standard deviation below its five-year average PER. — MIDF Research, Oct 20

Sunny days ahead for Sunway

Sunway Bhd (Oct 20, RM2.26)

Maintain buy at RM2.30 with fair value of RM3.31: While investors are generally positive on the company’s prospects, the main concern is uncertain macro outlook for the economy and the property sector.

Sunway expects the property market to soften over the next six months but it believes that the accommodating interest rate environment and demographic factors will continue to sustain fairly good demand.

With the Sunway City-Sunway Holdings merger completed in late August, Sunway is still in the process of integrating the group’s businesses, which it expects to complete by 2012. We gather that there are several projects in the pipeline involving collaboration between its property development and construction divisions. We believe it should reap cost synergies and value add for the propery division.

Based on management’s guidance, we are trimming our earnings forecast for FY11 by 4.4%, taking into account the one-off merger cost of about RM20 million and the higher finance cost arising from the RM900 million loan taken to finance the cash portion of the merger.

Sunway expects 2HFY11 earnings to be stronger than in 1HFY11, fuelled by higher progress billings from its property development division and higher revenue recognition by its construction division.

We maintain our “buy” recommendation on Sunway. It is our top pick among mid- to big-cap property companies, due to its attractive valuation and relatively defensive earnings from its property investment segment. Adding to the stock’s appeal is the strong order book replenishment in its construction division. — OSK Research, Oct 20