Technical | Fundamental Analysis Discussion Stocks Listed In Bursa

Sunday, May 24, 2009

Market Outlook as at 25th May 2009

Genting Bhd/Resorts World Bhd

What’s Up? … dated May 2009

Genting Bhd has invested US$100 million in bonds of rival MGM Mirage Inc, a US-based casino operator, to secure better returns for its cash. It subscribed for senior notes that are secured against the Bellagio Hotel and Casino and the Mirage Hotel and Casino, both located in Las Vegas.

Genting Overseas Holdings Ltd, a wholly-owned unit of Genting, invested US$50 million while Resorts World Ltd, a unit of Resorts World Bhd, also subscribed for the same amount. Resorts World Bhd is a subsidiary of Genting.

Half of the total US$100 million are notes that pay annual interest of 10.375 per cent and are due in May 2014. The rest carry a rate of 11.125 per cent and they mature in November 2017.

The notes are part of a US$1.5 billion sale made by MGM to partly settle some existing debt. MGM announced the completion of the exercise on May 19 2009.

The debt is also secured against high quality gaming and entertainment assets in Las Vegas. MGM, which is listed on the New York Stock Exchange, owns and operates 16 properties located in Nevada, Mississippi and Michigan in the US. It also has 50 per cent interest in four other properties in Nevada, New Jersey, Illinois and Macau. For the year to December 31 2008, MGM group made net revenue of US$7.2 billion.

Going Forward …

Genting group’s recent subscription of US$100mil senior secured MGM Mirage Inc notes has raised the possibility of Genting’s potential entry into the Macau gaming market.

It would not be surprised if the subscription was more than an interest-yielding exercise given recent press reports that the New Jersey Division of Gaming Enforcement has advised that MGM Mirage should be directed to disengage from its Macau joint venture (JV) partner Pansy Ho, who has a 50% stake in MGM Grand Macau. The verdict was in response to the Las Vegas gaming group’s application to renew its casino license for Borgata Hotel Casino in Atlantic Cit in the US.

If complications in the MGM-Pansy Ho JV led to the departure of either party, Genting group’s subscription to the bonds would not hurt its chances of potentially filling the void.

Industry observers continue to believe that an eventual presence in Asia’s gaming hub of Macau would strengthen the group’s position as a formidable regional gaming player.

It is believed that MGM may potentially divest its stake in MGM Grand Macau under regulatory pressure. Should MGM Grand Macau be up for sale as postulated, it could offer Genting an excellent opportunity to immediately access the Macau gaming market without going through the lengthy asset building process.

Project cost for the MGM Grand Macau was reported to be about US$1.3bil. Even if MGM demanded a premium on top of its 50% stake of US$0.7bil, Genting would have no problem funding the acquisition through Resorts World Bhd, which was still sitting on a huge cash pile of RM4.55bil (US$1.3bil) as at Dec 31, 2008.

The acquisition of MGM Grand Macau, if it materialises, could be a huge re-rating catalyst for both Genting and Resorts.

The notes were offered as part of a US$1.5bil placement execrcise, the proceeds of which will be used by MGM to part settle its outstanding debts and for general corporate purposes. The notes are secured by a first-priority lien on substantially all the assets of the Bellagio Hotel and Casino and the Mirage Hotel and Casino in Las Vegas.

The intention of to acquire income generative assets is certainly a step in the right direction. Bu the structure of the acquisition deal and the pricing are separate issues.

Will Resorts World be Genting’s group vehicles for assets acquistions or will it be Genting, in which the Lim family owns a direct 32% stake?

If the acquisition is done at Genting level, how will management channel Resorts World’s casino into the parent, considering the latter has never been generous with dividends?


What’s Up? … dated May 2009

Talk of a new bridge linking the eastern side of Johor to Singapore, as announced by the prime minister will undoubtedly spark interest in companies that have land or ongoing projects in the region.

DAtuk Seri Najib Razak said the new bridge would help to develop the area of Pengerang, which includes Desaru. This would also mean the further development of Johor’s Pasir Gudang, currently one of the busiest industrial areas in the state.

According to sources, the alignment of the new bridge could see a link between Desaru and Changi.

It will take eight to 10 years before this new bridge actually materializes. The Singapore government is expected to be very meticulous on the matter, and the bridge is to be funded by both parties.

What this also means is that the government has ultimately scrapped the idea of building a slanted scenic bridge to replace the overburdened Causeway that links the heart of Johor Baru to Singapore’s Woodlands.

Despite the long development period, the new bridge would give a needed push to the government’s Iskandar Malaysia project.

In addition to IJM Land (In Aug 2008, IJM Land acquired 1188 acres in Johor’s Sebana Cove marina from AMDB for a mere Rm120 million), other more immediate beneficiaries would include Tradewinds Corp Bhd, a company linked to Syed Mokhtar, and the government’s investment arm Khazanah Nasional Bhd. UEM Land Bhd would benefit as it is controlled by Khazanah.

Since late 2008, Khazanah has been in discussions with a view to acquire parcels of land in Desaru from the Johor government and private company Bagan Cerah Sdn Bhd. given its prime location as a tourist destination, private businesses have been trying to develop the area for years with little success.

When Khazanah finally does own the land in Desaru, it could put it under Iskandar Malaysia project. Access to the area has always been a prime concern, but upcoming Senai-Desaru Highway is expected to open up access to the area and ease the travelling times.

For IJM Land, the area around Sebana Cove does have one advantage, there is currently a customs, immigration and quarantine complex in the area. Thus, it would make logical sense to place the new bridge there as you already have the infra.

IJM Land has said it would not do any new launches in Sebana Cove over the next two years (2010-2011), with construction only to start around the end of the third year.

If the company gets the timing right, it could position itself to attract consumers from the Singapore market. The area itself is extremely scenic, and the appeal of owning land only a short commune away would pose a very attractive scenario for Singaporeans IJM Land’s original plan for use the area was to develop Sebana Cove into an upmarket residential area catering to Singaporeans.

As for Tradewinds, the company’s current landbank includes three parcels in Johor, Tradewinds, has joint ventures with local developers to develop the 953 acre “Pulai land’ and 704 acre Tebrau land, both of which are in the vicinity of Johor Baru city.

But the real jewels in Tradewinds’ crown could be the 2004 acre plot in Sedili, located in Kota Tinggi area and sitting just north of Desaru.

Looking at the bigger picture, other Iskandar Malaysia linked companies such as UEM Land Bhd, which owns the massive Nusajaya development in western Johor, and Mulpha Land Bhd, among others, would also stand to benefit in the long term from this new bridge.

Ultimately, an increased number of linkages between the two countries can only b beneficial. It signifies increased co-existence between the two countries, which is gratifying after the crooked bridge became a sore point.

Singapore would want to leverage on the vast amounts of land that Johor has, which would add value to tourists wanting to visit its casinos.

But critics say that building a bridge in the area would not necessarily facilitate a surge of activity. Take a look at the Second Link. Most were expecting that after it was ready, the area surrounding it would develop at a fast pace. But so far, nothing much has moved on the ground there. However, there is no denying that the government has a big plans for the area.

Essentially, there are plans to link the East Coast Highway all the way down along the east coast of Johor, but that is part of the next Malaysia Plan.

“Incremental Development”

KPS/JAKS/KHSB/Puncak Niaga

Officials from the Selangor and Federal governments will meet to thrash out details and work towards completing the water restructuring in the state by end-June 2009.

Energy, Green Technology and Water Minister Datuk Peter Chin Fah Kui is not opposed to the idea of a re-valuation of the water assets owned by the state and the four water concessionaries.

Under the nationwide restructuring of the water sector in peninsular Malaysia and Labuan, the Minister of Finance Inc-owned PAAB will buy over all water assets in the state. Thus far, PAAB has signed agreements for the takeover of water assets in Malacca, Negri Sembilan and Johor.

The restructuring of water assets in Selangor led by the state government was supposed to have been completed in March 2009 but hit a snag when the four concessionaries did not agree to an offer of RM5.7bil made by the state in February 2009.

Subsequently, PAAB was roped in to begin negotiations with the concessionaries.

The setting up of a joint task force and the meeting between Khalid and Chin give renewed hope to the restructuring as Selangor has the most fragmented water industry with the most number of players.

The four concessionaries are Syarikat Bekalan Air Selangor (Syabas), Puncak Niaga (M) Sdn Bhd, Syarikat Pengeluar Air Selangor Sdn Bhd (Splash) and Konsortium ABBAS Sdn Bhd.

Valuation of water assets was the biggest issue for the concessionaries in not accepting the offer made by the state. The negotiations would look at the whole package, the assets and other costs.

There was a lot of wastage and all parties involved should look into bringing the percentage to a more acceptable level of 25% from the current 37% nationwide.

Corporate Development


What’s Up? … dated May 2009

It is in talks with banks to refinance its RM150 million bonds by year-end (2009), as it prepares for future launches and landbank expansion.

Although the interest costs from servicing the bonds were “not very high”, CHHB saw the need to re-profile its debt to match its future cash flow. It needs to re-profile this RM150 million and work on growing its core business and bring in cash flow.

Rrefinancing is to match its future cash flow with its financing requirements.

The company did not plan to borrow heavily for the refinancing exercise despite CHHB’s low gearing of 0.5 times. It is in talks with a couple of banks to explore several options to refinance the bonds. The cash flow from CHHB’s properties alone will be enough to provide a significant part of that refinancing required.

CHHB sought the indulgence of the end beneficiaries of the bonds for the interest payment of RM16.23 million, due May 6, 2009, to be deferred until Dec 31, 2009. It would seek its bondholders’ consent to transfer properties equivalent to RM16.23 million in value in lieu of payment of interest.

CHHB deputy chairman and former managing director Tan Sri Lee Kim Yew was the only beneficial holder of the bonds. Lee owns a 32% stake in CHHB as at April this year (2009).

The RM150 million 3% to 8% redeemable secured bonds will mature on Dec 31, 2009. The bonds are secured by CHHB’s existing properties, including its Palace of The Golden Horses, which is valued at over RM400 million .The interest payments on the bonds are payable semi-annually in May and November. Since the bonds were issued on April 26, 1996, the company had paid interests totalling RM118.5 million.

CHHB would launch two projects, one residential and one commercial, when market conditions improved next year-end (2009).

For the year ended Dec 31, 2008, CHHB posted a net profit of RM13.6 million, down 86% from RM100.48 million in FY07. Revenue rose 9% to RM240.97 million.

Net cash from operations stood at RM40.2 million. It had RM347.71 million in total borrowings and RM685.79 million in shareholders’ fund.


What’s NEXT! … dated May 2009

TSH Resources Bhd, which bought two Indonesian plantation companies last year, is on the lookout for additional oil palm land in the republic. The move is part of its long-term plans to grow gradually from being a small plantation-based company to a mid-sized player.

They are currently exploring opportunities (in Indonesia and Malaysia) and are in talks with a few companies. They are not expanding 100,000ha right away, but slowly and gradually around 5,000ha to 6,000ha in Malaysia and 15,000ha to 20,000ha per year in Indonesia.

TSH has a landbank of almost 80,000ha, of which less than 10 per cent is in Malaysia, mainly in Sabah.

In June 2008, TSH bought the entire paid-up capital of the Singapore-based Martinique Cove Pte Ltd, which owns 90 per cent of Indonesian plantation company PT Mitra Jaya Cemerlang. The acquisition added 15,000ha to TSH's landbank.

In December 2008, the group bought the entire stake of another Singapore company, Elaeis Pte Ltd, which owns 90 per cent of the Indonesia-based PT Farinda Bersaudara. This added 13,000ha to its landbank.

On its lower net profit last year, he attributed it to unrealised foreign currency losses of RM31.7 million.

Over the next few years, some of our oil palm trees will start to mature, bringing in more cash flow and revenue for them to repay loans as well as (gaining from the) strengthening crude palm oil prices of up to RM2,700 from RM1,800 a tonne before.

On its cocoa plantations, it had no plans to expand the business, which contributes some 10 per cent of revenue.

TSH Resources Bhd, which owns 65 per cent of Ekowood, had no plans to divest its stake as the latter was still a good company. It had registered profits for the past five years.

Ekowood reported RM2.3 million net loss in the first quarter ended March 31 2009 against RM3.4 million net profit in the same quarter last year, hurt by lower sales volume. Ekowood derives four-fifths of its revenue from overseas markets spanning Europe, the US and Asia.


Johor Land Bhd (JLand) has decided to abort its plan to acquire 50.98% equity in Windsor Trade Holdings Sdn Bhd (WTHSB) for RM15mil cash.

The decision was reached after considering the current global economic slowdown.

He said JLand had earlier proposed to buy the stake in WTHSB to diversify its business activities to improve its earnings base.

However, it wants to focus on its core business of property development as the segment is becoming more challenging now.

It has a 1,102.79ha land-bank and are looking at RM7bil in gross development value (GDV) when the land is developed over the next 10 to 15 years. At present, JLand is undertaking three property projects – Taman Bukit Dahlia, Bandar Tiram and Bandar Dato’ Onn.

The 168.75ha Taman Bukit Dahlia in Pasir Gudang, expected to be completed by 2010, will have 4,100 units of mixed properties. The self-contained Bandar Tiram township on a 485.62ha site, with 12,300 units and RM2.6bil GDV, is due for completion by 2020.

JLand’s latest project, Bandar Dato’ Onn is located 12km from Johor Baru City Centre. It is sited on 612.69ha and is to be developed over the next 10 years. The project boasts 17,800 properties and a GDV of RM4bil.

The company would be launching the Bandar Dato’ Onn Regional Commercial Centre this year. Covering 47.75ha, the centre will provide about one million sq m of floor area, making the township the largest commercial centre in Johor Baru district.

Financial Results … For the year ended Dec 31, JLand recorded pre-tax profit of RM25.29mil on revenue of RM138.69mil compared with RM8.29mil and RM63.36mil respectively in 2007.


What’s Up? … dated May 2009

Following the commencement of Hovid Bhd’s new Carotech plant in Lumut, Perak, in January 2009, capacity has increased from 90,000 to 120,000 tonnes of biodiesel per annum.

The positive impact of the higher capacity is already showing. For the quarter ended March 31, revenue increased 51% to RM80mil while net profit rose 72% to RM5.4mil. Over the nine-month period, revenue increased 12% to RM168mil but it recorded a net loss of RM7mil compared with a net profit of RM13mil previously.

This was attributed to the foreign exchange (forex) loss from the translation of its US$55mil loan. Over the nine month period, Hovid has recognised a total forex loss amounting to RM22.2mil.

Hovid took up the loan to construct the Carotech plant two years ago and there was also higher interest and depreciation following the completion of the new plant.

Hovid owns 58% in listed Carotech Bhd, which produces biodiesel and phytonutrients.

Ho, together with the Malaysian Palm Oil Board, is currently conducting a 3-year clinical trial on tocotrienols and its benefits on the brain. Through this trial, Ho will gain exclusive rights to commercialise any resultant patents.

Hovid is already producing its own brand of tocotrienol supplements, Tocovid. It has over 2,000 products registered under its brand and is keen to tie up with a multinational company to market tocotrienols globally.

Carotech uses crude palm oil (CPO) as feedstock, which it refines to produce methyl ester (biodiesel) and phytonutrients in the form of tocotrienols and tocopherols (vitamin E compounds) and carotene, a vitamin A compound. Hovid presently produces 80% of the world’s tocotrienol supply.

Each time Carotech extracts phytonutrients from palm oil, it inevitably produces biodiesel. Although a by-product of Carotech, due to interest, it now contributes some 70% to Carotech revenue.

In the case of Hovid, biodiesel contributes 40% to revenue.

CPO prices are negatively correlated to the production of biodiesel. Hence, high CPO prices will see the production of biodiesel being less viable.

This has been a huge reason for the loss of investor interest in Hovid and Carotech as CPO prices took off beginning 2006 to reach a peak of RM4,330 per tonne in March 2008. It presently stands at about RM2,789 per tonne.

Value Play < -- > Betting On The “Next Phase Of Growth” Companies

“Incremental Development”

RHB Capital Bhd

Financial Results …

RHB Capital Bhd’s net profit was slightly higher at RM228.64 million compared with RM222.42 million a year ago, due to higher net interest income.

Revenue was lower at RM1.35 billion compared with RM1.5 billion a year ago. Earnings per share was 10.6 sen versus 10.3 sen.

The higher profit was mainly due to higher net interest income by RM43.2 million, impairment loss no longer required of RM20.1 million and higher income from Islamic banking business by RM4.4 million; partly offset by lower other operating income by RM30.2 million, higher allowance for losses on loans and financing by RM22.8 million and higher other operating expenses by RM10.3 million respectively.

When compared to the fourth quarter ended Dec 31, 2008, the group recorded a profit before taxation of RM315.0 million, up 20% from RM262.0 million in 4Q. The higher profit was mainly due to lower other operating expenses by RM59.6 million, lower allowance for losses on loans and financing by RM36.0 million.

There was also lower impairment loss by RM27.2 million; partly offset by lower other operating income by RM51.0 million and lower income from Islamic banking business by RM20.2 million respectively.

Comments …

RHB Capital Bhd (RHB Cap) showed a marginal growth in profits, partly due to some significant reclassification of its securities held-for-trading and also higher net interest income.

It posted a net profit of RM228.64 million which is marginally higher than the RM222.42 million a year earlier. This was achieved on the back of lower revenue of RM1.35 billion compared with RM1.5 billion a year earlier. Earnings per share was 10.6 sen versus 10.3 sen.

Interestingly, the balance sheet showed some marked movements where a portion of its securities held-for-trading were reclassified to securities available-for-sale or held-to-maturity. This is allowed under the Revised BNM/GP8 guidelines, effective July 1, 2008 to Dec 31, 2009, that allow banks a one-time movement of their securities.

According to RHB Cap’s balance sheet as at March 31, 2009, securities held-for-trading dropped to RM1.2 billion from RM5.3 billion as at Dec 31, 2008. Securities available-for-sale increased to RM9.9 billion (from RM6.2 billion as at Dec 31, 2008) while securities held-to-maturity rose to RM10.1 billion (from RM9.6 billion as at Dec 31, 2008).

In tandem with the reclassification of securities, RHB Cap in its changes to the equity statement registered an unrealised net loss of RM72.2 million on revaluation of securities available-for-sale. This amount is, however, in the balance sheet and will not reflect on the income statement.

Effectively, as a result of the reclassification of its securities held-for-trading, the bank did not record any net gain or loss arising from changes in the fair value of the securities in its profit and loss statement.

RHB Bank Bhd continued to be the group’s most significant contributor, registering a pre-tax profit of RM317 million, up 26% from the previous corresponding period.

RHB Bank’s risk-weighted capital-adequacy ratio (RWCR) stood at 13.03% and core capital ratio at 9.12% as at March 31, 2009.

Meanwhile, RHB Investment Bank Bhd recorded a profit before taxation of RM18.5 million, 39% lower than a year earlier.

The loan loss allowance was higher by 15%, or RM22.8 million, to RM174.9 million as a result of further pre-emptive specific provision made during the period under review in the light of weaker economic conditions.

Nevertheless, the group’s net non-performing loan (NPL) ratio was marginally higher at 2.57% as at March 31, 2009 compared to 2.24% as at Dec 31, 2008.

Other than some moderation in the mortgage, hire purchase and credit card segments, there are no major signs of deterioration in the group’s asset quality and the group remains confident of its overall portfolio.

Loan loss coverage remained high at 85% as at March 31, 2009, lower than the 90% as at Dec 31, 2008 due mainly to an increase in non-performing loans by RM264.5 million to RM3.1 billion as at March 31, 2009 and contraction in loan base by RM389.7 million to RM62.8 billion.


What’s Up? … dated May 2009

Perwaja received a writ of summons and a statement of claim from Petronas for the sum of RM85.8mil together with a claim for interest with reference to the total amount invoiced for the supply of gas by Petronas to the company. The company has made full provision for the difference between Perwaja’s price and Petronas’ price for the financial year ended Dec 31, 2008.

Perwaja Holdings Bhd is open to an amicable resolution of its present dispute with Petroliam Nasional Bhd (Petronas) on the difference in natural gas pricing computation.

Perwaja had “entered an appearance to the suit filed by Petronas” and its lawyers had advised the company not to make any statements on the merits of the dispute as it was now pending in court.

Perwaja said that without prejudice and without any admission of liability as to the allegations in the statement of claim in the suit, it had made of payment of RM40.3mil to Petronas on May 19. “This sum is in addition to the earlier payments made in March and April 2009, before service of the suit, amounting to RM45.5mil.

On May 12, Perwaja had received a writ of summons and a statement of claim from Petronas for RM85.8mil together with a claim for interest with reference to the total amount invoiced (but disputed by Perwaja) for the supply of gas by Petronas to the company.

Meanwhile, Deputy International Trade and Industry Minister Datuk Jacob Dungau Sagan was quoted in a news report as saying that the ministry was studying the matter and would look for the best solution to resolve the dispute.

The dispute would not have any impact on the company’s profit and loss and cash flow accounts as it had made sufficient provisions to meet any liability of over RM20mil that might arise from the claim.

It wants to negotiate for a better pricing formula based on the government’s announcement last year (2008) that the natural gas price would be at 70% discount to the international market price.


What’s Up? … dated May 2009

MMC will secure a substantial construction contract either in the form of the light rail transit (LRT) extension lines or the Gemas-JB double-tracking rail project.

There might be an inflow of engineering contracts to MMC being awarded before the end of 2009. While competition is tough for all these projects, MMC with its track record is hopeful that it can at least secure part of these contracts.

The expected contract include the Bakun energy transmission grid worth RM9 billion to RM10 billion, LRT line extensions (RM3 billion-RM4 billion each) new LRT line (RM15 billion-RM30 billion) and the Gemas-JB double-tracking rail project (RM8 billion-RM10 billion).

Given the collapse in global trade during the months of December to February and the subsequent extended factory shutdowns during the period, we expect MMC to report a poor quarter for its upcoming 1QFY09 financial results.


What’s Up? … dated May 2009

Tenaga Nasional Bhd (TNB) is expected to enjoy an improved cost structure given that coal prices have remained at low levels since February 2009.

About 28% of TNB’s fuel mix comes from coal, the bulk of which is imported mainly from Indonesia, Australia and South Africa. Coal prices in the last couple of months have hovered above US$60 per tonne.

For every US$1 change in coal price, its profit forecast would be revised by RM29mil.

With the easing of prices, TNB has more flexibility in terms of cashflow management.

In April 2009, the company had repurchased and planned to cancel US$39.1mil nominal value of the US$150mil 7.5% debentures due 2096, reducing its total debt by almost 1% to RM23.2bil while foreign currency exposure, in US-denominated debt, fell to 25.4% from 26.1% previously, based on total borrowings and exchange rates as of end February 2009.

Earlier 2009, it had repurchased and cancelled US$165mil notes expiring 2011 at a coupon rate of 7.625%.

Lowering its borrowings now would pave the way for TNB to take on further leverage in the future. It has indicated that it planned to raise ringgit-denominated loans in the next 12 months to finance a US$2bil submarine transmission line bringing electricity to Peninsular Malaysia from Sarawak.

Based on cable costs of RM9bil over a seven-year construction period, TNB’s estimated annual capital expenditure was at RM154mil, which was a “very small” amount. Its stake in the project is expected at 40% with a debt-to-equity ratio of 70:30.

Meanwhile, TNB is due for negotiation with Petroliam Nasional Bhd and the Government on the review of gas prices and electricity tariff in less than two months.

Moreover, lower coal cost, coupled with savings from recent cut in gas cost and demand recovery on the back of the government’s stimulus spending, would bode well for TNB’s earnings for year ending Aug 31, 2010.

Telekom (TM)

Financial Results …

It has posted an unaudited net profit of RM27.7mil for the first quarter ended March 31, down 75.8% from RM114.4mil in the previous corresponding period.

The drop in net profit was mainly attributed to higher unrealised exchange loss on foreign currency borrowings of RM175.5mil compared with a gain of RM118.8mil previously.

The company’s revenue for the quarter had increased 5% to RM2.1bil compared with RM2bil previously, mainly attributed to higher revenue from data, Internet and multimedia and other telecommunications-related services.

Earnings per share for the quarter was 0.8 sen compared with 15.1 sen.

YTL Corp

Financial Results …

YTL Corp Bhd’s net profit more than doubled to RM484.4mil for the third quarter ended March 31 from the RM202.5mil it posted in the previous corresponding period.

The group attributed the increase to the fair value gain on investment properties. It also attributed the performance to the recognition of the excess of fair value of a newly acquired associate’s identifiable assets, liabilities and contingent liabilities over the cost of investment.

YTL Corp recorded revenue of RM1.99bil, up 21.5% against the RM1.6bil a year ago, due to the consolidation of the newly acquired PowerSeraya in Singapore by YTL Power International Bhd.

Earnings per share was 31.8 sen compared with 13.48 sen in the previous corresponding period.

Going forward, the further diversification of our income streams into the Singapore power and real estate investment trust industries will complement the group’s utilities in Britain, Australia and Indonesia; cement businesses in China and Singapore; and investments in high-end real estate in Singapore.


What’s Up (1)? … dated May 2009

It plans to spin off subsidiary Packet One Networks (M) Sdn Bhd (P1) under a separate listed entity within the group next year. The listing would enable its subsidiary to tap funds for future development and further growth.

The group had “some initial discussions” with investment banks.

P1 had been making steady progress and was expected to be earnings before interest, taxes, depreciation and amortisation (ebitda) positive by year-end (2009). It is expecting P1 to be cash-flow positive next year and eventually listed.

The group has already raised funds for the P1’s WiMAX (Worldwide Interoperability for Microwave Access) roll-out for phase one and two.

P1’s WiMAX target is to cover 65% of the population by 2012, from the current 25%.

What’s Up (2)? … dated May 2009

The group’s forward planning might see Green Packet conduct fund-raising activities to raise capital for growth and expansion opportunities. Green Packet announced a renounceable rights issue of up to 208.3 million shares together with up to 208.3 free detachable new warrants on the basis of one rights share and one warrant for every two existing ordinary shares held. However, the price per unit for the rights issue is yet to be confirmed.

The proposed rights issue is expected to raise RM98.8mil to RM104.2mil based on the indicative issue price of 50 sen per rights share.

On its financial performance, the group is expecting to be “still in loss-making position” this financial year ending Dec 31.

Financial Results … For the three months ended March 31, Green Packet posted a higher net loss of RM22.2mil against a net loss of RM2.7mil in the previous corresponding period. Its revenue was RM41.5mil compared with RM22.3mil previously.

Its performance was affected by heavy advertising expenditure activities coupled with subscriber acquisition cost incurred by the broadband business.

Axiata Group

What’s Up? … dated May 2009

Its Indonesian unit XL. May sell its telecommunications tower business in smaller chunks to make it easier for interested buyers to secure financing for the acquisition.

However, its official said that they are in no hurry to sell. Its tower or network business is already in operations and managed as an independent unit.

After several delays, XL announced in Feb 2009 that its planned to sale 7000 towers had been shelved, citing unfavourable market conditions. Bids that came in were lower than expected and interested parties had problems securing financing at acceptable rates, given the sudden tightening of liquidity globally.

There are no plans for another auction at the moment, SL has always maintained that another auction could happen when conditions are right.

XL’s tower business unit is generating revenue for the company. The 3479 towers it leased out in 1Q2009 raked in RM50 million during the quarter. In the same period, XL paid 108 billion rupiah to leas some 1519 towers from others.

Still, proceeds from a tower sale would help XL fund expansion and repay the RM6.77 billion interest billion debt it was carrying on its books as at end March 2009. XL needs to raise between US$300 million and US$600 million for its business in 2009.

Its Indonesian unit was capable of operating without raising capital. Excel requires capital expenditure of US$600mil to US$700mil annually and can generate operating cashflow of some US$400mil.

Expectations are that a rights issue would be chosen, given that both its major shareholders, Axiata and Emirates Telecommunications Corp Ltd, have committed to take up in full their respective portion in the event of a cash call is made. Axiata owns 83.79% of XL and Etisalat 16%.

A decision on how XL would fund its capital requirements in 2009 will be made end June 2009. A big part of the consideration would be to improve XL’s capital structure although credit facilities remain an option.

The main reason for mooting the tower sale plan is to allow XL the freedom to focus on acquiring and retaining customers without having to worry about building and maintaining the network.

There will be no further capital-raising activities at the group level. Axiata completed its RM5.25bil rights issue exercise, which was oversubscribed by about 6%, early May 2009.

Financial Results …

It posted an unaudited net profit of RM63.9mil for the first quarter ended March 31, down 84.1% as compared with RM402.7mil it posted in the previous corresponding period.

The decline was mainly due to the foreign exchange loss of RM216.2mil for this quarter, as opposed to RM42.4mil foreign exchange gains reported previously.

The drop was also attributed to the higher finance cost in this quarter by RM166.7mil predominantly arising from the amount owing to Telekom Malaysia and loans for the Idea Cellular Ltd acquisition amounting to RM112.4mil.

The group posted revenue of RM2.9bil for this quarter, a growth of 5.3% from RM2.7bil it posted in the previous corresponding period as the result of higher contribution from Celcom (M) Bhd and TM International (Bangladesh) Ltd.

Earnings per share was 2 sen for this quarter as compared with 11 sen previously and it proposed no dividend for this quarter, same as the last time.

Overall performance in this quarter was also affected by negative contribution from Dialog and higher share loss from its jointly-controlled entity.


Financial Results …

Its net profit for the third quarter ended March 31 was down 33.7% at RM503.28mil against RM758.61mil in the previous corresponding period following higher loan-loss provisions, impairment costs and higher interest expense.

However, revenue was 14.2% higher at RM4.27bil against RM3.74bil while earnings per share stood at 10.31 sen against 15.54 sen.

For the nine months to March 31, the group posted a net profit of RM1.81bil against RM2.23bil before, impacted by lower contribution from the investment banking and insurance operations.

Total revenue was higher at RM7.22bil compared with RM6.65bil in the same period last year.

This was underpinned by growth in revenue across almost all business segments, including Islamic banking (+31.2%), corporate banking (+28.9%), investment banking and treasury (+28.7%), consumer banking (+3.9%), insurance (+5.1%) and international operations (+51.9% – including PT Bank Indonesia Internasional).

The performance for the nine months translates to an annualised net return on equity of 12.1% with net assets per share of RM4.22 as at March 31.

Meanwhile, loans to the business sector grew 9.2% driven by strong corporate loans growth but offset by a contraction in small and medium enterprise loans.

Strong demand was also recorded in Islamic automobile financing and securities financing while income from investments and deposits was also higher during the period.

Loans growth at Maybank’s overseas operations (excluding PT Bank Indonesia) was 39% on an annualised basis with Singapore operations registering a 7% rise (in Singapore dollar terms). Loans growth for PT Bank Indonesia was 9.3% year-on-year (in rupiah terms).

However, the group registered further improvement in asset quality with net non-performing loan ratio at 1.73% as at March 31 compared with 1.92% at end-June 2008. The group’s risk weighted capital ratio (RWCR) stood at 12.10% as at March. However, following the completion of the rights issue on April 30, the RWCR for the group stood at 14.76% at the end of April.

Its Prospects … dated May 2009

It has been pretty muted since it shocked the market with its overpriced and ill-timed purchase of Bank Internasional Indonesia (BII). Its share price got hammered on concerns over capital raising and lower dividends and before it had any chance of gaining ground, the global financial turmoil set in, dragging prices down across the board.

Within less than two months in 2008, the traditionally sedate Maybank had made three acquisitions for RM12.5bil, the most controversial being the RM8.6bil (4.65 times price to book value) it paid for BII. It has issued RM9.1bil in hybrid securities to fund these acquisitions which are bringing in profits except that some other big charges have to be factored into its Indonesian business.

There is a looming goodwill impairment estimated within the range of RM700mil to RM2bil.

BII earned a net profit of RM170mil in 2008. However, there are interest charges of around RM540mil based on a 6% coupon rate on the RM9.1bil of hybrid securities issued. Assuming a 15% long-term return on investment (ROI) of RM8.6bil, there is already a shortfall of RM1bil compared with the RM170mil it is getting. However, Maybank’s new management at BII will probably set ROI targets only at year-end (2009).

However, BII only makes up 12% of Maybank’s asset base; it is still the domestic operations that will be the mainstay and therefore, its health will be closely monitored.

Financial Results … For the third quarter ended March 31, the Maybank group recorded a drop of 34% in its net profit to RM503mil compared with the previous corresponding period while for the nine months, it registered a decline of 18% to RM1.8 bil, due to lower contributions from investment banking, insurance and takaful, higher provisions and interest expense, impairment cost for MCB Bank and forex losses.

Concerns are over, among other things, the weaker performance of overseas operations (NPLs are up 23% quarter-on-quarter to RM1.14 billion); a significant jump in provisions for loan losses by RM464mil; weaker ROEs from its pricey acquisition and possibility of further impairment charge for its stake in MCB Bank in Pakistan (RM242mil in the first quarter), given the political developments in that country.

There is concerned about a potential further write-off on the BII investment by the fourth quarter. Management indicated that Indonesia’s market discount rate has shot up to 20%, from 16%, when the acquisition took place recently. Despite no further details, it is believed the write-off should be in range of RM700mil-800mil and could offset more than one quarter of Maybank’s profit, resulting in under-performing consensus’ FY09E net profit of RM2.332bil.

Going Forward …

After the acquisition spree in 2008, Maybank decided to take a pause and spend time to grow the businesses. Back to the drawing board, it has come up with a two-phase transformation plan that will position it among the top five banks in the region by 2015.

Called LEAP 30 (lead, execute, achieve and progress), the programme essentially has three major thrusts – domestic leadership, regional growth and talent management. A rights issue of RM6bil provides capital for the initiatives over the next two to three years.

Currently BII, among the top seven or eight banks in Indonesia, it has a strong franchise in the business segment and aims to build its consumer (residential and auto) and small and medium enterprises (SME) sectors.

The most closely watched figure over the next three months (June – Aug 2009), when Maybank announces its full year results, will be the goodwill impairment charge on the BII acquisition. Maybank is not expected to make a loss from the impairment charge (where cashflow is discounted to arrive at the appropriate asset value) at BII.

To some extent, that is reflected in the improved share price of BII. Concerns over impairment charge is based on a company’s projection of cashflow and the market value of an investment is partly reflected in its share price. Nevertheless, the assumptions, for example, the discount rate, for the impairment charge will be scrutinised as in the case of Maybank’s 20% stake in MCB Bank of Pakistan, the discount rate of 21% was considered aggressive.

Of immediate urgency, however, is to ensure that domestic operations can withstand the prolonged effects of the financial crisis.

Maybank’s net non-performing loans (NPLs), as at end March 2009, stands at 1.73%.

With the completion of the whopping RM15bil capital raising exercise, the management is now able to focus squarely on the task of growing the bank.

The Concerns …

Concerned arose about Malayan Banking Bhd’s (Maybank) high profile overseas acquisitions even after the completion of the bank’s RM6bil rights issue.

The concerns centre on the total impairment charges for financial year 2009, with forecasts varying widely from RM700mil to RM2bil.

This is not helped by the current (May 2009) dire global economic conditions that could stress earnings even further, not to mention that the bank’s most expensive acquisition is in Indonesia – a country not spared from the crisis.

*** In 2008, Maybank made acquisitions of a 97.5% stake in Bank Internasional Indonesia Tbk (BII) amounting to RM8.6bil, a 15% stake in Vietnam’s An Binh Bank for RM430mil and 20% in Pakistan’s MCB Bank Ltd for RM2.17bil ***

The concerns over impairment have become more acute following the drop in BII’s share price. BII is currently trading at a 20.6% discount at 405 rupiah per share compared with the acquisition price of 510 rupiah per share. However, the lowest point was 280 rupiah per share from March 17 to 19 2009.

Of the two smaller acquisitions, the MCB stake is also considered as high risk; however, that was more of a timing issue on the back of the current economic crisis.

However, industry observers said that the impairment should not be determined from the share price movements of the two entities but on their respective cashflow generation ability.

BII remains profitable although results were weaker quarter-on-quarter due to the absence of a RM43mil exceptional non-operating income from the sale of its Hong Kong subsidiary and non-operating office in Mumbai that was booked in the previous quarter. Associate profit of RM29mil was largely from MCB.

BII reported a net profit of 4.2 billion rupiah for the quarter ended March 31, 2009, compared with 197.9 billion rupiah in the same period last year. However there could be some pressure on Maybank’s share price by end-August 2009 when Maybank releases its full year results possibly along with details of goodwill impairment.

Maybank will unveil the goodwill impairment issue related to BII and MCB upon the release of its fourth quarter 2009 results that are due out end-August 2009.

Maybank CEO Datuk Seri Abdul Wahid Omar said that the bank will stick to its payout ratio of 40% to 60% of profit after tax.

Of the RM6bil raised by its rights issue, RM3bil went towards preserving Maybank’s international credit ratings following the major acquisitions, with the remainder going to “organic growth”.

The second quarter ended Dec 31, 2008, Maybank’s non-performing loans (NPLs) from the Singapore operations went up 27%, Hong Kong, 136% and Labuan, 72%. As of end March, NPLs for Singapore are up 46.99%, Hong Kong, 142% and Labuan, 80.55%.

The P/B of Maybank May 2009 was at a low of 1.4 times compared to its historical average since 2004 of two times. This is aggravated by the current tough economic environment in the region. The potential risk is that P/B is not going to appreciate to two times soon. That is the view for the next six to 12 months.

Investor Alert

“Incremental Development’


What’s Up? … dated May 2009

Idaman Unggul Bhd has found a potential investor for its wholly owned subsidiary Lambang Pertama Sdn Bhd (LPSB), which was used as a special vehicle to take over Idris Hydraulic (Malaysia) Bhd (IHMB) about five years ago.

Idaman had been in discussions with for the proposed disposal of LPSB.

Idaman had received a letter from Rabobank International expressing its interest to be an off-shore consultant in relation to the restructuring of the company’s loan stocks via the disposal of LPSB group as well as looking into the funding requirement for the group.

However, Idaman made no mention of the status of a share purchase agreement dated Dec 31, 2008 whereby it agreed to sell LPSB to Satin Court Sdn Bhd for RM400 million cash. Presumably, that deal had fallen through.

As part of the restructuring of IHMB, LPSB was used in 2003 as the vehicle to issue about RM233.99 million redeemable secured loan stocks (RSLS) and acquire the restructured IHMB group that was earmarked for disposal. The RSLS would be redeemed from the proceeds of the disposal of the assets. After several extensions, the RSLS expired.

One of the primary residual assets in IHMB is Forest Management Unit (FMU) timber rights for 100 years under the sustainable forest management licence agreement entered into between IHMB and the Sabah government on Sept 10, 1997, consisting of an area of 234,552ha of permanent forest reserve in Sabah.

For the year ended Dec 31, 2008, LPSB posted a net loss of RM13.08 million and audited consolidated net loss of about RM255.7 million.

Idaman was on Feb 29, 2008 classified as an affected listed issuer pursuant to the Amended Practice Note 17/2005 (PN17) and paragraph 8.14C of the Listing Requirements of Bursa Malaysia Securities Bhd. It is still in the midst of formulating a regularisation plan.


What’s Up? … dated May 2009

It proposed par value reduction exercise was defeated. This was because preferential shareholders did not agree to the proposal and their votes were more significant.

Nevertheless, there were encouraging signs from the preferential shareholders who had stated a condition for them to pass the resolution at the next meeting. They asked for the rights to convert their preferential shares to ordinary shares.

So far, the turnaround programme, had resulted in reduction of losses by 80%, increased coal transportation contracts, reduced gearing to among the lowest in Malaysian public-listed services companies, repayment of Islamic bonds of RM96mil out of RM120mil four years ahead of time, won an award at the 5th Malaysia Canada Business Council’s Business Excellence Awards 2008, among others.

On the plans to revive the company’s current core business, four new vessels had been ordered in the third quarter of 2008. Even under the prevailing tough funding conditions, the management was nevertheless able to structure vendor financing for these vessels costing about US$90mil even though MMM’s market capitalisation was under US$22mil at that time. These vessels were expected to come on stream in the middle of 2009 in quarterly instalments but the earthquake in Sichuan, China, last year had disrupted the shipbuilder’s operations.


What’s Up? … dated May 2009

Although it has a good eight months to restructure its debts and exit PN17 status, this may not be quite enough.

Given that a receiver and manager from UHY has been appointed to the company, the priority now is obviously to help lenders recover as much of their loans as possible.

The receiver is already exploring a few options, including evermaster’s assets comprising land, buildings and subsidiaries and even giving up its listing status.

According to the receiver, some of Evermaster’s major shareholders have notified him of a plan to bring in strategic investors who may inject capital into the company.

“There was talk of bringing in investors a long time ago. The investors were supposed to have com in before the receivership. Nonetheless, we are evaluating the affairs of the company. If major shareholders’ proposals of settlement are credible, and if Evermaster is viable as a going concern, then hopefully we can continue running the company to maximise returns for the lenders”.

It should be noted that two directors of Evermsater had disposed of substantial shareholdings in the company in Jan 2009, suggesting that the plan to bring in strategic investors could be meaningless.

Evermaster had announced that it had defaulted on Islamic debt securities totaling Rm16.88 million. It has also defaulted on a Murabahah MONI) amounting to Rm40 million. In the even that the commercial papers are cancelled, Evermaster has to immediately repay some rm56 million.

The properties owned by Evermaster’s subsidiaries are unlikely to fetch high selling prices. The company owns several parcels of vacant land, a timber complex and a warehouse, an office building, a sawmill and factory and staff quarters.

For the company to give its listing status for a RTO, it needs shareholders approval.


Latexx Partners

Its Past ...

It was the first rubber glove manufacturer to be listed on Bursa Malaysia, but it had to muddle through several years of heavy losses that resulted in it being overtaken by rivals that were listed later.

It was held back by losses for five years, between 2000 and 2004 by which time, its net tangible assets had shrunk to just 19 sen a share. It has erased the accumulated losses. The years of losses coincided with the time when Low Bok Tek, who was managing director for 14 years between 1987 and 2001, left the company.

Low would not say why he left. At that time, there were eight brothers, including Low, in the company, and it was probably difficult for so many to agree on any matter. This might have been difficult for Low who, as the CEO, was not the eldest. He is number six among the brothers.

Latexx’s losses between 2000 and 2004 were sizeable, from RM41.5mil in 2000, about RM20mil each in 2001 and 2002, RM13mil in 2003 and RM700,000 in 2004.

Cumulatively, these losses bled Latexx which was then still a small company.

Resulting from the losses, Latexx lacked working capital to do business. Hence, Latexx was operating at only about 20% of its plant capacity when Low returned to the company in 2004 after working out an agreement with his brothers that he would take over.

Low then set about to improve manufacturing operations, and put some money into company. He then talked to the banks about credit lines, and to restructure the heavy borrowings.

A debt restructuring exercise, after some initial difficulties, was eventually worked out with creditor bankers. Stemming from that, RM51mil of debts were converted into new Latexx shares with free warrants. Following that, Citibank Bhd owned 15.4% of Latexx, as well as warrants in 2007 when it took the stocks in settlement of debts. It ceased to be a substantial shareholder a month later.

Low bought a substantial position in Latexx from his brothers and the creditor banks. He currently owns direct and deemed interests of 30.3% in the company.

Going Forward …

Now, the company is operating comfortably with RM20.5mil cash, against borrowings of RM48.8mil. That’s a net debt-to-equity ratio of just 22%, one of the lowest in the industry.

With the company back in the black, cashflow generated and borrowings will enable Latexx to reclaim a position higher up the industry ranks in terms of size and profitability.

The company earned a net profit of RM15.6mil in 2008, and RM9.1mil in the first quarter (Q1) 2009.

All of Latexx’s five plants are located on a single piece of land in Taiping, and a sixth plant being built on adjacent land will increase total plant capacity to 7.5 billion pieces next year and nine billion in 2010.

Corporate Round Up


It posted net loss of RM53.85 million in the third quarter ended March 31, 2009 due to the worsening economy.

Its revenue fell to RM201.33 million from RM363.28 million a year ago. Loss per share was 27.63 sen compared with earnings per share of 4.64 sen per share. Despite the losses, it declared dividend of 10 sen per share.

For the nine months, it made net loss of RM40.78 million compared with net profit of RM84.48 million in the previous corresponding period. Revenue also declined to RM888.94 million from RM1.17 billion.

Despite the nine-months of losses, it expected the fourth quarter ended June 30 to be better as “our business volume has shown signs of gradual recovery since the end of the quarter under review”.


PPB Group Bhd’s net profit fell 29% to RM271.83 million in the first quarter ended March 31 from RM383.1 million a year ago due to higher raw material costs incurred by the sugar refining and flour and milling divisions.

Its associate company, Wilmar International Ltd contributed RM255 million to the group.

Its revenue was RM772.51 million, down 4% from RM808.88 million while earnings per share was 22.93 sen against 32.32 sen a year ago.

The decline in its revenue was due to lower revenue recorded by the flour and animal feed milling, chemicals trading and property investment divisions.


PLUS Expressways Bhd (5052), Malaysia's biggest toll road operator, plans to sell about RM600 million worth of of Islamic bonds, known as sukuk, to repay maturing debt.

The money may be used to repay RM550 million of senior sukuk due this month (May 2009). PLUS has another RM558 million of bonds maturing in 2010 and another RM1.36 billion in 2011.

A Musharakah is a type of trust certificate based on a profit-sharing contract that complies with syariah law's ban on interest and speculation.

Reliance Pacific

International Trade and Industry Deputy Minister Datuk Mukhriz Mahathir has resigned as a non-independent and non-executive director of Reliance Pacific Bhd.

Reliance Pacific announced his resignation from the board on May 19.

Mukhriz held a direct stake of 6.25 million shares and an indirect stake of 38.92 million shares in the company.

Kian Joo

Kian Joo Can Factory Bhd recorded a net profit of RM11.94mil for the first quarter ended March 31, down 17.9% from RM14.55mil in the previous corresponding period due to high carried forward material costs and lower revenue.

Its revenue fell by 5.3% to RM187.48mil for the quarter under review from RM198mil previously.


QL Resources Bhd net profit for the fourth quarter (4Q) ended March 31, 2009, fell 10.5% to RM18.84 million from RM21.1 million a year ago due to lower margins from its surimi (semi-processed raw fish paste) and decrease in catch from deep sea fishing activities.

Revenue grew 3.8% to RM319.21 million from RM331.88 million. For the full year, its net profit rose to RM89.33 million from RM80.8 million in FY08, while revenue increased to RM1.4 billion from RM1.31 billion.

Earnings per share rose to 27.19 sen from 24.49 sen a year earlier. The company proposed a final dividend of seven sen per ordinary share of 50 sen each.

Sales for its marine products manufacturing division increased 10% year-on-year due to higher contribution from its surimi-based products.

Its integrated livestock activities also registered a 10% increase in sales due to higher unit value of animal feed raw materials in the earlier quarters.

However, the company's palm oil activities registered a 11% decrease in sales due to lower crude palm oil prices.


Samchem Holding Bhd

It aims to double its overseas revenue contribution to 10%, or over RM40mil, in three years from 5% now.

The group continued to see rising demand for industrial chemicals in the medium and long term, especially in the emerging markets of South-East Asia.

It wants to expand on its distributorship in Vietnam, China and Indonesia moving forward.

The group would raise a minimum of RM11.04mil or a maximum of RM15.2mil from the IPO. It would also raise RM13.85mil for promoters in the offer-for-sale shares.

Of the proceeds raised, RM4mil would be allocated for working capital, including financing its new marketing office and warehouse in Vietnam, RM3mil for acquisition of plant and machinery, RM500,000 for purchase of trucks and RM3.5mil to defray the listing expenses.

Meanwhile, Samchem also planned to construct a chemical blending and drumming plant as well as a drum recycling plant in Telok Gong, Klang by the end of next year. The former is to cater to the demand for customised solvents and the latter to enable the group to produce its own reconditioned drums. Both plants would create a new revenue stream for the group.

With direct presence in Malaysia, Vietnam, China and Indonesia, the group currently markets over 400 industrial chemical products to over 2,500 clients in the region.

Samchem posted net profit of RM12.23mil and revenue of RM355.37mil for the year ended Dec 31, 2008.

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