Weekly Stock Picks Commentary Report (21-25 May 2012)

Malaysia Stock Picks

Week 21 (21-25 May) Stock Picks Commentary

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Here is the stock picks commentary for Week 21 (21-25 May).

Stock Pick #1

Multi Purpose Holdings (MPHB)

Week high : RM 3.27 (Up 39 sen – 11.9%)

To recap last week- “On 8 May, MPHB's finance executives (who are involved in the corporate plan) told TheEdge that Datuk Lim Tiong Chin is negotiating for a management buyout for MPHB's stockbroking firm AA Anthony which analysts estimates to worth around RM 170 million.

On 9 May, Kenanga Research initiated coverage on MPHB and estimated its non-gaming assets to worth RM 1.44 billion (equivalent to RM 1.77 per share).

Their analysis showed that if the entire non-gaming assets are disposed under their asset rationalisation exercise, the proceeds is enough to repay their entire debts and borrowings to a net cash position of RM 805 million. This position gives them the ability to pay a special dividend of up to 56 sen per share.

Kenanga Research favours MPHB’s move to become a pure NFO play citing that this will trigger the market to re-assess MPHB’s valuation to be up to par with current favourite Berjaya Sports Toto Bhd’s valuation.

MPHB is currently traded 23% discount in terms of valuations against Berjaya Sports Toto. Market reacted positively on MPHB’s ongoing asset rationalisation exercise where non-gaming assets are planned for disposal to enable MPHB fully focus on its Number Forecast gaming business and proceeds from sale of assets will enable MPHB to pare down its borrowings or to be repaid to its shareholders.

It currently has a 100% stake in Magnum, which is one of the largest Number Forecast Operator (NFO) in Malaysia. MPHB stock rose 4.9% (14 sen) since 8 May to week’s highest RM 3.02 on the same day and closed at RM 2.91 at the end of this week.”

Subsequently this week, Multi-Purpose Holdings (MPHB) announced a proposal to list its non-gaming business on Bursa Malaysia stock exchange. Managing director Datuk Surin Upatkoon said that the demerger will allow MPHB to position itself as a "gaming-dividend" stock with a sustainable dividend payment policy of at least 80 per cent of its profit annually.

Market took this news as positive as the listing of MPHB non-gaming assets may potentially realise the value of its assets.

Take note that even though Kenanga Research estimated its non-gaming assets to worth RM 1.44 billion, the exact valuation of the assets and how much each shareholder will get from the deal are not finalised and known yet and the demerger is subject to shareholders approval.

MPHB stock price had a total surge of 11.9% from 8 May to three week high of RM 3.27 on 25 May and closed at RM 3.19 for the week.

Click Here for all latest posts on MPHB

Stock Picks #2

AirAsia Berhad (AIRASIA)

Week high : RM 3.60 (Up 21 sen – 6.2%)

On 24 May, TheStar reported that Thai AirAsia will go for an initial public offering (IPO) exercise to list on the Thailand Stock Exchange. The listing is expected to complete by end of May.

AirAsia currently owns a 49% stake in Thai Airasia and its stake will reduce to 45% after the IPO. The IPO will raise RM 450 million, offering 1.2 billion shares valued at 3.7 baht (37 sen) a share, out of which 462.5 million shares are from existing shareholders.

Market is positive on this because if the listing goes through, AirAsia has the opportunity to cash out part of its stake in Thai AirAsia. The additional funds raised in the IPO for Thai AirAsia itself is encouraging.

AIRASIA stock price rose 6.2% since 24 May to week high of RM 3.60 on 25 May and closed at RM 3.60 for the week.

Click Here for all latest posts on AirAsia

Stock Picks #3

JT International Berhad (JTINTER)

Week high : RM 7.34 (Up 52 sen – 7.6%)

On 24 May, JT International announced a special dividend totaling 62 sen (24 sen per share less 25 per cent tax and 38 sen per share, tax exempt)

Market took this news as positive on anticipation of the windfall cash payout to JT International shareholders. The ability to payout cash dividends goes a long way in demonstrating robust cash flow management of JT International.

JTINTER stock price surged 7.6% since 24 May to week high RM 7.34 on 25 May and closed at RM 7.27 for the week.

Click Here for all latest posts on JT International

On Other stocks:

JCY International-

“To recap, on last week commentary, we wrote that On 17 May, JCY International quarterly earnings surged 1,209% to RM 163 million on better HDD component selling prices and higher sales volume due to shortages in supply from Thailand floods

Take note that even though JCY net profit recovered strongly compared to previous year, current quarter’s net profit (RM 163 million) is rather flattish if compared with its preceding Q4 2011’s net profit (RM 162 million).

Surge in net profit from Thailand floods had started since Q4 of 2011. Market talk has it that the benefit from this event could have peaked and whether or not such robust results can be sustained and replicated for the next quarters ahead is questionable.

JCY stock price dropped 2.6% since 17 May to a week low of RM 1.47 on 18 May. Nonetheless, JCY stock price had surged by 268% since Oct 2011 when Thailand’s flood took effect from around 40 sen in Oct 2011 to RM 1.47 closing on 18 May.”

Click here to read Week 20’s stock picks commentary report

Subsequently, this week on 21 May, CIMB reports that JCY's competitors revealed that their capacity in Thailand will be back in full swing by the end of the third or fourth quarter 2012.

Market took this news negatively as they earlier questioned whether the benefit from the Thailand flood event could have peaked and whether or not such robust results can be sustained and replicated for the next quarters.

As a result, JCY stock price dropped further this week to a total drop of 18% since they announced their quarter results on 17 May to RM 1.33 closing and week low on 25 May.

JT International (JTINTER) proposes special cash dividend of 62 sen per share (24 sen per share less 25 per cent tax and 38 sen per share, tax exempt)

(JTINTER closing stock price yesterday (24.5.2012) was RM 6.82)

JT International Bhd (JTI) is proposing a special cash dividend of 24 sen per share less 25 per cent tax and 38 sen per share, tax exempt, the company said in a statement to the stock exchange.

Meanwhile, for the first quarter ended March 31 2012, JT International posted a net profit of RM37.75 million versus a net profit of RM34.51 million in the same period a year ago.

Source: www.btimes.com.my

Summary of Analyst Report: British American Tobacco (M) Bhd (BAT) fair value at RM 54.22, Neutral- OSK Research

British American Tobacco (M) Bhd (BAT) posted revenue of RM1.07bil (representing a growth of 2.4% both year-on-year and quarter-on-quarter) and earnings of RM220.8mil (growth of 19.9% year-on-year and 13.5% quarter-on-quarter) for the second quarter ended June 30.

The company eked out marginal revenue gains despite stagnant shipment volume as it sold more premium segment cigarettes.

First half 2012 earnings totalled RM415.4mil (growth of 14.5% year-on-year) on the back of slightly stronger sales volume and substantially lower operating expenses. The first six months profits represented 56.5% and 55.6% of our and consensus estimates respectively.

The vast improvement in the first-half earnings came from a RM58.5mil reduction in operating expenses, of which RM13mil arose from cost recognition timing differences while the bulk of the remaining RM45.5mil reduction was attributed to lower provisions for staff incentives (for example, bonuses) and savings arising from BAT's move to outsource its distribution network in the fourth quarter of 2011.

Cost savings from a change in the company's distribution model is likely to have led to a RM15mil to RM16mil cost reduction, indicating that RM20mil to RM30mil of the remaining cost reduction probably came from lower allocation for staff compensation.

The revenue drivers were, and remained, unexciting. BAT sold 2.17 billion sticks during the second quarter (a drop of 1.2% year-on-year), boosting the second-half shipments to 4.34 billion sticks (a growth of 1.6% year-on-year).

The company's first-quarter volume picked up 4.5% year-on-year after a weak first quarter in 2011, during which sub value-for-money (VFM) brands were sold below the minimum retail price of RM7 per 20-stick pack.

Hence, the first-quarter volumes were still some 3.6% off the more normalised first quarter of 2010. In the second quarter, total industry volume (cigarettes from BAT, JT International and Philip Morris) rose by a much tamer 0.4% year-on-year following a 7.7% year-on-year jump in the first quarter.

The first batch of data on illicit cigarette from March to May show that 34.7% of the cigarettes consumed in the country were smuggled, down slightly by 0.1 percentage points from that of October to December 2011, and a 2.6 percentage point drop year-on-year.

The Government's decision not to increase excise duties in the previous Budget but to step up enforcement efforts and distribute cash payouts as part of its election campaign seemed to have helped curb the sale of illicit cigarettes.

The volume of cigarettes consumed (legal and illegal combined) was pretty much flat year-to-date. As expected, the premium segment's market share rose 3.9 percentage points, perhaps suggesting that consumers uptraded after receiving the Government's payouts.

Dunhill, the firm's flagship premium brand, saw market share grow by 3.1 percentage points compared with the first half of 2011.

Much of the market share growth was contributed by the traditional full-flavour Dunhill brand (a favourite among rural and elderly folks) rather than Dunhill Light or Dunhill Menthol. This further indicated that the Government payouts are encouraging aid recipients (mainly rural folk and senior citizens) to switch from illicits to legal Premium sticks.

BAT's share of the premium segment remained at 72% but saw its VFM market share ease by 1.3 percentage points to 41.3%.

Source: www.thestar.com.my

Further upside for BAT is unlikely given its lofty valuations following its 13% year-to-date surge in share price and an uncertain near term outlook, advise investors to take profit, target price RM53.55 - Affin Investment Bank

(BAT opening stock price today (26.4.2012) was RM 55.12 )

British American Tobacco (M) Bhd's (BAT) results for its first quarter ended March 31, 2012 (Q1'12) on Monday painted a positive picture for 2012 volume sales.

Total industry volume (TIV) sales grew by 7.7% year-on-year (+17.9% quarter-on-quarter), driven by stronger enforcement against illegally priced local cigarettes and smuggling activities, and the absence of an excise duty hike during Budget 2012.

That said, we think further upside for BAT is unlikely given its lofty valuations following its 13% year-to-date surge in share price and an uncertain near term outlook. Unlike the brewery sector (which has enjoyed six consecutive years of tax reprieve), tobacco companies have faced increasing regulatory measures to reduce smoking habits.

The absence of an excise tax increase in Budget 2012 came as a surprise, as the tobacco sector has faced successive excise tax increases in the preceding eight years since 2003. We believe a second tax reprieve this year is unlikely and the question here is not whether the Government will raise excise tax, but rather when and by how much. Our financial years 2012 to 2014 earnings forecasts impute an annual excise tax increase of two sen per stick.

Any excise duty hike would likely push the price of a premium 20s pack beyond the psychological threshold of RM10, potentially prompting smokers to switch to lower priced cigarettes. Downtrading activities could be further exacerbated by continuing sales of local sub-value-for-money cigarettes below RM7 per pack.

We gather that illegal pricing activities have not been completely eradicated and are picking up again.

Another potential obstacle includes plain packaging for cigarette packs. Australia is the first country in the world to implement the new measure when it passed a bill to make plain packaging law in November 2011.

However, we believe that such a law, if implemented in Malaysia, would be detrimental to legal tobacco products as the ease of replicating plain packaging would only fuel the proliferation of illicit cigarettes.

Separately, the Health Ministry also recently announced that they were considering reducing the nicotine content in cigarettes to curb smoking addiction. A reduction in nicotine content would more likely affect smoker preference rather than earnings.

The impact from a shift in preference is difficult to quantify at this juncture.

We maintain neutral on the tobacco sector, with a reduced recommendation for BAT (target price RM53.55) and add rating for JT International Bhd (JTI) (target price RM7.90). For now, we advise investors to take profit on BAT and switch to JTI, given its undemanding valuations and a potentially higher dividend payout.

Source: www.thestar.com.my