Hicom Power sale is positive

DRB-Hicom not wasting time to kick-start restructuring plans

DRB-HICOM BHD By CIMB Research Outperform (maintained)

Target Price: RM3.80 DRB-HICOM Bhd is not wasting any time to kick-start its restructuring plans.

The sale of Hicom Power for RM575mil is positive as it would reduce gearing and is the first step in re-aligning the group towards its goal of being a regional automotive conglomerate.

We maintain our Outperform call. Our target price, which is based on a 20% discount to revised net asset value, is raised as we valued Hicom Power at its net tangible asset.

Our earnings per share is cut following the loss of its contribution to the concession division. Key catalysts to follow are more divestments of non-core assets and a Proton-VW collaboration.

DRB-Hicom is selling 100% of Hicom Power (HP) for RM575mil to Malakoff, the power unit of MMC. The price does not include the RM95mil cash in HP. HP was valued via discounted with 10% to 12% weighted average cost of capital , which is appropriate since it is an operations and maintenance (O&M) company with a contract on the 2,100MW coal-fired Tanjung Bin plant running back-to-back with the power purchase agreement from 2006 to 2032.

DRB-Hicom expects to record RM446mil profit from the sale or 23 sen earnings per share. Gearing is expected to fall from 1.12 times to 0.95 times.

HP is a non-core asset. It was injected into DRB-Hicom for 377 million new shares at 77.5 sen each by Tan Sri Syed Mokhtar as part of his takeover of DRB-Hicom in 2008. The sale of HP to raise cash and reduce borrowings is positive and we believe the valuation is fair.

The only other benchmark for an O&M company is Malakoff’s purchase of Teknik Janakuasa (TJSB) for RM421m in 1998. At that time, TJSB had 13 years remaining on its contract on 1,303MW. HP has 20 years remaining for 2,100MW.

Although the sale was expected following its reference in the analyst luncheon with Datuk Seri Che Khalib Mohamad Noh two days ago, we didn’t expect it to happen so quickly. His guided valuation of RM700mil included the RM95mil cash in HP. As an O&M company, HP’s net profit fluctuates between RM30mil and RM75mil.

The interest savings from the sale are estimated at RM37mil. The cuts to our earnings per share forecasts are therefore marginal. MAH SING GROUP BHD By Maybank Research Hold (maintained)

Target price: RM2.30 WE are neutral on Mah Sing’s latest land acquisition in Medini, Johor. Our concerns lie with its relatively highly-geared balance sheet, which is about 0.6 times post land acquisitions in Bangi and Medini, and stiff competition at Medini/Nusajaya owing to the presence of most of the major property players.

We raise our earnings forecasts by 4.7% and target price to RM2.30, 9 sen higher, based on an unchanged 35% discount to revised net asset value (RNAV) of RM3.54.

Mah Sing has proposed to acquire a 8.2-acre, 99-year leasehold plot in Medini North from Iskandar Investment Bhd (IIB) for RM74.7mil cash or RM34.90 per sq ft, around 40% more than the RM24.70 per sq ft paid by Sunway and RM25 per sq ft E&O paid last year for land in Medini.

The surge in land cost may be attributed to the rapid progress in the area.

Mah Sing is planning a mixed development project called The Meridin @ Medini for the site.

It will comprise serviced apartments, offices, small office versatile office and retail units. Total gross development value (GDV) is estimated at RM1.1bil or an average selling price (ASP) of RM605 per sq ft (assuming an efficiency ratio of 85%).

Phase one of Meridin’s studio or small office home office units will be launched by the second half of 2013 at a price of RM288,000 per unit (500 sq ft) or RM576 per sq ft onwards, close to the RM550 per sq ft ASP of WCT’s 1Medini Residences’ (Tower B).

Assuming a pre-tax margin of 25% and five-year development period, we expect the project to enhance our financial year 2014 earnings forecasts by 4.7% and RNAV by 14 sen higher to RM3.54.

Post-acquisition, Mah Sing’s total landbank and remaining GDV will increase by 0.5% and 7.3% respectively.

Net gearing is expected to surge to about 0.6 times post land acquisitions in Bangi and Medini (payment is staggered over five years), from 0.3 times as at June 2012.

We remain concerned about MSGB’s relatively high debt levels, which could leave it vulnerable to a slowing market, especially for highrise properties.

Also, we are wary of intensifying competition in Nusajaya or Medini and investors’ ( especially Singaporeans’) preference for landed properties.

E&O and Sunway intend to launch their landed property projects by the first half of 2013. ALAM MARITIM RESOURCES BHD By OSK Research Buy Target Price: RM1.25 ALAM Maritim’s jointly controlled entity, Alam Swiber DLB (L) Inc has secured an agreement with Newcruz Offshore Marine Pte Ltd for the charter of a pipelay barge identified as 1MAS-300. The deal is worth RM18mil.

The contract is valued at RM18mil for a firm charter of 175 days only, commencing by the third week of October. We are making no changes to our earnings estimate as we had earlier assumed some job replenishments for Alam’s pipelay barge and associated vessels.

Including the contract, Alam has already secured three contracts worth RM137mil in a short span of three months since August.

We continue to believe that the company’s turnaround prospects could be intact provided that it could continue to secure new contracts and improve the execution of its operations, and strengthen its earnings track record in the coming quarters.

Moving forward, we expect more projects to be handed out to Alam Maritim in the next six months in anticipation of more activities in the oil and gas sector (O&G) next year.

In line with our overweight call on the O&G sector, we believe that Alam Maritim’s valuations could re-rate towards 10 times to12 times forward earnings if it is able to improve its earnings track record in the coming quarters.

Despite making no changes to our earnings estimate, we are revising our fair value upwards to RM1.25 as we rollover our valuations to 12 times financial year 2013 earnings. SCIENTEX BHD By Kenanga Research (Take Profit) Fair Value: RM3.03 THE stock is now trading at 5.8 times and 7.6 times price earnings ratio (PER) based on post-acquisition (of two subsidiaries from GW Plastics) and pre-acquisition financial year 13 earnings per share respectively.

As compared to the plastic packaging industry’s average financial year 2013 PER of 8.0 times, the stock is hence pretty much fairly valued at this juncture.

We believe the stock will have further upside only upon completion of the acquisition, when investors will have a clearer picture on the advantages of the acquisition and may thus be willing to pay higher premium on the stock.

Thus, we believe investors who have exposure in this stock should take profit at the current market levels and also given that there are other plastic packaging stocks which will likely play the same catch-up game to close their gaps with Scientex.

As a result, we suggest investors to switch to the other industry incumbents such as Tomypak.