Saturday March 8, 2008

Brokers' call

LEADER UNIVERSAL HOLDINGS BHD NO BUY OR SELL AS IT’S BOND

Comment by Aseambankers Fixed Income Research:

The recently released full-year 2007 (unaudited) results for Leader highlighted another solid year. The cable & wire division continues to be the main contributor to revenue, while the power generation segment continues to drive operating profit.

Certain quarters view Leader’s cable and wire business as “risky”, as its client base is highly concentrated in the power and telecommunication sectors. While we agree that the Group’s cable business does show a high degree of customer concentration, we also acknowledge that these consist of strong credit names like TNB and Telekom. The refurbishments and maintenance of power and telco assets of these two companies alone is enough to sustain Leader’s cable and wire segment. Meanwhile, according to 2006’s figure, about 31% of the segment’s products were exported to over 30 countries around the world.

Leader’s customer concentration has not stifled its ability to pass on price increases to its customers, as reflected in the 100ppt increase in operating profit margins in FY07. For 2007, the segment had benefited from higher sales volume as well as high metal prices. The segment’s focus on high margin products and better cost controls has churned out higher OPDIT margin compared to FY2006.

Meanwhile, the group’s sole power plant (35MW Diesel Fired) in Cambodia has been a key source of profitability. On average, the power business has contributed about RM37m annually over the past five years. In early 2007, Leader won the bid to develop a 200MW Diesel power plant in Cambodia. The project is expected to take-off in 2009 and will require Leader to spend about USD50m between 2009-2010. We view this positively as Cambodia (B+/B3/Stable) has thus far been a reliable pay master despite its low international credit rating, with no restriction on the repatriation of profits from the country.

On its balance sheet, the group’s declining debt level coupled with increasing shareholders’ funds has resulted in a steadily declining gearing to 0.97x currently from a high of 1.29x back in FY2003. With its cash pile of RM213m, we do not foresee any problem for the group to repay its RM30m IMTN maturing in 2008 as well as the RM10m and RM30m due in 2009 and 2010 respectively. Even after the repayment of these IMTNs, we reckon that Leader will still have more than RM100m (approx.) left in its coffers. If we are to conservatively assume that Leader’s net profit for 2008 and 2009 to be equal to its 3-year average of RM24m annually, its cash balance will swell to about RM148m, which is just about enough to meet the funding needs of the new power plant in Cambodia.

We think that Leader will probably engage the debt market to meet the funding needs of this particular project.

Meanwhile, Leader’s cash flow generating ability has been impressive, churning positive numbers since 2003, culminating in a five year high of RM197m in FY2007. Assuming this trend persists, we reckon that the Group’s cash generating ability will be more than sufficient to meet its debt-obligations as they fall due.

In November 2007, MARC placed Leader’s long-term outlook on a “Developing Outlook” on concerns over the implications of the Cambodian power plant project on Leader’s cash flow and cash flow coverage. However, based on Leader’s improving credit metrics, we think that the outlook deserves a revision to “Stable”. However, we do not think that the rating will be upgraded in the short-term.

SEMICONDUCTOR SECTOR

COMMENT By TA Research: Semiconductor sales were essentially flat, growing by 0.03% y-o-y (on 3-month MA basis) in January to US$21.5bil in January 08. Compared to December 07 figures, this represents a 3.6% decline. This is the worst decline compared to the previous three years, despite January being a typically weaker month versus December.

As an example, January 07 showed a m-o-m decline of 1.2%, Januanry 06 (-1.5%) and January 05 (+0.1%). The flat y-o-y growth was also rather glaring compared to past 3 years January months y-o-y performance. January 07 figures showed a 9.3% y-o-y growth, January 6 (+6.9%) and January 5 (+18.2%).

Given the weaker than seasonal growth trend this time around, we continue to remain cautious on the semiconductor industry. To note, average monthly and y-o-y growth/decline for the month of January for the past 7 years stood at -2.3% and +8% respectively.

Driving the decline in chip sales was America, which posted a 6.9% y-o-y decline, followed by Europe at 1.2%. Sales in Japan however, grew by 8% whilst Asia Pacific sales were largely flat with a 0.004% growth.

According to SIA, the flat growth was attributable to a very competitive environment which resulted in continued price erosion. Excess inventory in the system now stands at US$3.4bil vs US$3.9bil in 4Q07, US$4.1bil in 3Q07 and US$5bil in 2Q07.

Though we note that this signals a downtrend, we would also bear in mind that the third and fourth quarter normally sees seasonally stronger demand for end electronics products, hence a period where we should see significant exhaustion of inventories.

The remaining excess inventory in the system as of the 1Q08 therefore is a signal that the coming months may see conservative inventory build up by E&E manufacturers.

Unisem posted the strongest sequential growth in the recent 4QCY07 results with an 18% turnover rise and 46% increase in earnings. This is followed by MPI and Globetronics with topline growth of 9.9% and 4.9% respectively.

Unisem's growth was largely driven by its recent acquisition of Unisem Mauritius and good volume ramp up in Chengdu (doubled the third quarter's volume).

Unisem and MPI both guided for a sequential revenue decline of between 10% to 15%. MPI in particular expressed its concerns on a potential industry slowdown stemming from a slowing US economy.

Unisem on the other hand, despite its expectation of a sequential decline for 1Q08, is optimistic for 2008 in view of full-year contribution from Unisem Mauritius (acquired in mid-July 07),potential production ramp up in Chengdu and cost saving synergies from the acquisition.

Meanwhile, Globetronics sees a modest 7% topline growth this year, which is close to SIA forecast of a 7.7% growth in global chip sales for 2008.

Recommendation: We leave the earnings forecasts for semiconductor stocks under our coverage unchanged. Our net profit forecasts for Unisem, MPI and Globetronics are currently 4.2%, 2.5% and 9.5% below consensus.

Valuations of back-end semiconductor stocks have seen depression (currently at an average 10.6x FY08 PER), but we note that this is still higher than the trough of 8.9x seen in 1998.

Of the 3 semiconductor stocks tracked by TA, only Unisem has a BUY rating whereas MPI and Globetronics are rated SELL. In view of potential macro headwinds and tough industry outlook ahead (eg: strengthening ringgit) we downgrade the semiconductor sector to Underweight from Neutral previously.LION FOREST INDUSTRIES BHD (98 sen as at March 6)

COMMENT By Standard & Poor’s:

Having sold off its 97.8% stake in Sabah Forest Industries (SFI) in March 2007, Lion Forest Industries' primary businesses are now the trading of building materials and steel products, as well as tyre manufacturing in China.

Its first half 2008 results were below our expectations largely on account of an unrealised forex loss of RM11.5mil on proceeds receivable from the disposal of SFI.

Revenue, at RM86.6mil in 2QFY08, was flat q-o-q, with relatively unchanged contributions from the major divisions. At the operating level, the tyre division continued to be loss-making as expected, with the loss widening to RM4.8mil versus RM3.6mil in 1QFY08, this being the result of higher raw material cost.

Earnings were essentially shored up by interest income and contributions from the sale of lubricants and building materials. Stripping out the unrealised forex loss, pre-tax profit would have been relatively flat q-o-q.

We have raised our interest income forecast but are now incorporating the unrealised forex loss, which we believe is likely to persist as a result of the strengthening of the MYR versus the US$. Overall, our FY08 net profit forecast is revised down to RM1mil from RM6.8mil previously, while our FY09 forecast is unchanged at RM7.3mil.

Recommendation: We maintain our Hold call on LFI but with a reduced 12-month target price of RM1.10 versus RM1.45 previously.

Our 12-month target price is based on P/NTA, the multiple for which we have reduced to 0.3x from 0.4x previously. The larger discount mainly reflects our caution over LFI’s move to acquire Silverstone’s debts, which we view as a possible precursor to acquiring the company.

While Silverstone is operationally profitable and the acquisition of its debts at a discount could potentially turn the company around, the business is competitive and operating margins have historically been less than 10%.

Meanwhile, we also do not foresee any earnings excitement for LFI’s tyre operations in China, which also operate in a very competitive environment.

Risks include LFI’s inability to turn around the performance of its tyre operations in China. Also a risk, in our opinion, is the utilisation of proceeds from the SFI sale for low-yielding businesses.

LEADER UNIVERSAL HOLDINGS BHD (91 sen as at March 6)Comment by Aseambankers Fixed Income Research:

Meanwhile, the group’s sole power plant (35MW diesel fired) in Cambodia has been a key source of profitability. On average, the power business has contributed about RM37mil annually over the past five years. In early 2007, Leader won the bid to develop a 200MW diesel power plant in Cambodia.

The project is expected to take off in 2009 and will require Leader to spend US$50mil between 2009-2010. We view this positively as Cambodia (B+/B3/Stable) has thus far been a reliable pay master despite its low international credit rating, with no restriction on the repatriation of profits from the country.

On its balance sheet, the group’s declining debt level coupled with increasing shareholders’ funds has resulted in a steadily declining gearing to 0.97x currently from a high of 1.29x back in FY2003. With its cash pile of RM213mil, we do not foresee any problem for the group to repay its RM30mil IMTN maturing in 2008 as well as the RM10mil and RM30mil due in 2009 and 2010 respectively. Even after the repayment of these IMTNs, we reckon that Leader will still have more than RM100mil left in its coffers. If we are to conservatively assume that Leader’s net profit for 2008 and 2009 to be equal to its 3-year average of RM24mil annually, its cash balance will swell to about RM148mil, which is just about enough to meet the funding needs of the new power plant in Cambodia.

Meanwhile, Leader’s cash flow generating ability has been impressive, churning positive numbers since 2003, culminating in a five year high of RM197mil in FY2007. Assuming this trend persists, we reckon that the group’s cash generating ability will be more than sufficient to meet its debt-obligations as they fall due.

COMMENT By K&N Kenanga: FY07 revenue of RM696mil was in line with our expectation but net profit of RM16.8mil was 51.1% above our forecast, mainly due to a very strong 4Q that contributed about half of FY07 net profit.

Q-o-q revenue increased 11% but pre-tax profit soared 149.5% to RM10.4mil, boosted by stronger demand and higher average selling price of paper milling products. EBIT margin improved to 7.4% vis-à-vis 4.8% in 3Q as higher average selling price had more than offset increased raw material cost. Though still in the red, pre-tax loss of the paper packaging was stable at RM2.4mil.

Y-o-y, FY07 recorded net profit of RM16.8mil – an impressive turnaround from net loss of RM23mil in FY06. The turnaround was attributed to increased demand of paper products and higher average selling price which was on a steady upward trend since end of 2006. Higher production also led to improved economies of scale that brought down unit cost.

Proposed first and final tax exempt dividend of 2.5 sen, translating into an attractive yield of 7.2%. Group has been consistently paying tax exempt dividend of 2.0 – 2.5 sen for the past few years. We believe a higher dividend is possible given the confirmed turnaround and strong cash flow generated by the group.

The group’s paper products should continue to enjoy rising demand on the back of robust domestic GDP growth of 6.1% in 2008. We expect the paper packaging division to further improve in 2008 and make a turnaround in late FY08 or early FY09 should the current favourable operating environment continues. Management is also confident that the good performance will continue in 2008.

Risks to our forecasts however include possible hike of LNG gas which could increase production cost and sudden slowdown of domestic economy which could upset manufacturing and consumption growth, resulting in a lower demand for paper products.

Recommendation: Upgrade FY08 net profit projection by 125.4% to RM30.2mil on the confirmed turnaround of Muda. We also introduce our FY09 net profit forecast of RM34.8mil. Reiterate BUY with revised target price of RM0.68 (+51.1%) based on industry average P/NTA of 0.5x, implying a 1 year forward PER of only 6.4x. Note that we have removed the 25% valuation discount premised on group’s turnaround. Yield is attractive at 8.7%.WAH SEONG CORP BHD (RM2.18 as at March 6)

COMMENT By Aseambankers: Wah Seong is committed to achieving its US$1bil sales target by 2012, as it aspires to turn into a global energy player by then. To reach the milestone, it needs to grow by 15% p.a. over the next 5 years.

Growth will come mainly from its O&G division, spearheaded by its pipecoating, fabrication and rental services operations. On the former, despite the Nord Stream setback, Wah Seong is confident of growing its pipe-coating operations over the next few years, underpinned by the multitude of projects to be developed in Asia over 2008-14.

They comprise of Turkmenistan Block 1 Gas Development project, Gumusut Shallow & Deepwater pipeline project, China East West Pipeline (Phase 1), Myanmar-China pipeline project (>1,000km), Nabuco Gas pipeline project (3,326km), China East West pipeline (Phase 2-3; 7,000km), East Siberia pipeline project (1,919km), Kazakhstan-China pipeline project (2,800km), Gorgon LNG project (260km), Browse LNG project (2,500km) and?Asia Pacific deepwater development program (800-1,000km).

As for its fabrication operations via Jutasama, it aims to invest RM10mil - RM15mil for capacity expansion to support its rising works whilst beefing up design engineering capabilities for higher ASPs jobs. Total tenders to-date have reached RM1bil. Its compressor rental unit is seeing growth as well.

Wah Seong is in advanced stages of negotitions for a LT 5+5 year gas compression rental contract worth RM200mil, which will raise rental capacity by 10-15k p.a.

In total, it will spend about RM220mil raised from the rights issue on the RM70mil for the deepwater flow assurance coating plant in Kuantan, RM86mil to purchase 50,000bhp of existing gas compressors from Weatherford Inc, RM30mil – RM50mil p.a. to support its long-term plan to raise its gas compressor rental fleet by 10-15k p.a.

On its non O&G division, the listing exercise for these operations on the Main Board is expected to be completed by 4Q08.

Despite the favourable outlook for the O&G service providers, the company is also cautious on the key challenges ahead such as manpower constraints, wage inflation, and escalation in raw materials.

Recomendation: Overall, we are maintaining our forecasts, projecting a 2-year net profit CAGR of 17% over FY08-09. Maintain Buy, with an unchanged RM2.65 scenario-based target price.

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