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Wednesday, March 14, 2018

Kossan Rubber 'add', MAHB 'sell', Magnum 'buy'

Wednesday, 14 Mar 2018
by analyst reports



By CIMB Research


Target Price: RM9.57

KOSSAN Rubber Industries Bhd has entered into a sale and purchase agreement with Perbadanan Kemajuan Negeri Perak to acquire two plots of land for a total of RM82.4mil.

The land, totalling about 824.1 acres, is located in Batang Padang, Mukim Bidor, Perak.

CIMB Research deemed the acquisition price at RM100,000 per acre as attractive. One parcel is 6.7 acres of leasehold commercial land and valued at RM0.7mil, while the other is leasehold industrial land of 817.4 acres. Leases for both will expire on Nov 22, 2114.

CIMB said the parcels have been earmarked for capacity expansion for Kossan’s glove manufacturing business.

It estimated the additional capacities would be able to host up to 59 glove plants with an annual capacity of 4.5 billion pieces per plant.

In total, it could add capacity of up to 360 billion pieces per annum assuming that both parcels are maximised to host glove plants.

Kossan believes the land acquisition is attractive in terms of its strategic location (less than two hours from Port Klang), easy availability of workforce in the area and sufficient utility sources (natural gas, water and electricity).

However, CIMB said any capacity expansion on the land parcels is unlikely to happen in the near term given that Kossan has yet to begin expansion works at Bestari Jaya (56 acres).

The research house reckoned this should be viewed as a long-term investment by Kossan.

Kossan aims to build four new plants in phases in Bestari Jaya with a total potential production capacity of 18 billion pieces per annum.

CIMB expects Kossan to start the development in 2019 at the earliest, to be built in stages, with targeted completion in 2023.

Also, on Aug 30, 2017, the group acquired a 98 acres in Kuala Langat, Selangor for RM96mil, although Kossan has yet to make an official statement on its expansion plans for this, CIMB added.

It expects Kossan to fully fund the recent acquisition through bank borrowings. Assuming that this acquisition is fully funded by bank borrowings, the group’s net gearing ratio will rise to 0.23 times.

However, the extra interest cost may lower CIMB’s FY18-20 forecast estimates by 1.3% to 1.7%.

It maintained an “add” call on Kossan shares with an unchanged target price of RM9.57 (22.4 times 2019 price-earnings ratio (PE), a 20% discount to CIMB’s target PE for Hartalega).

All in all, CIMB said it remained upbeat on Kossan on the back of its cheaper valuations compared to peers (Top Glove and Hartalega) and expectations of sequentially stronger earnings delivery in 2018 on the back of its 3 billion (pieces) per annum plant coming online gradually in the first quarter this year.

Downside risks to its recommendation include lower average selling price from stiff pricing competition and further delays in its expansion plans.




By Maybank IB Research


Target price: RM2.25

MAYBANK IB Research reiterated that Magnum Bhd’s operating environment is recovering. It pointed out that Magnum will also revert to its more than 80% core dividend payout ratio policy going forward, despite the tax penalty overhang.

As such, Maybank IB has tweaked its earnings per share estimates on Magnum by 2%-3% higher, which would lift its dividend per share estimates by 8% and lift its end-FY18 discounted cash flow-based target price by 7% to RM2.25 per Magnum share.

The research house gave a “buy” call on Magnum shares with catalysts including a sharp reduction in tax penalty of RM476.5mil or 33 sen per share and spinning off its U-Mobile business.

Revenue from numbers forecast operator grew 5% year-on-year (FY17: -1% y-o-y) which is a major positive reversal after years of decline.

Magnum said the recovery started in the second quarter of 2017 following the nationwide crackdown on illegal gambling.

Maybank IB said Magnum’s FY18 is off to a good start thanks to jackpot games (18% of FY17 revenue), which saw 1Q18 to date revenue surged 33% y-o-y

Maybank IB said Magnum had secured enough financing to pay the tax penalty without jeopardising its dividends. This reassures that Magnum’s dividend yields will stay above 6% per annum going forward.




By TA Securities


Target price: RM8.61

MALAYSIA Airports Holdings Bhd’s (MAHB) February operating data depicts a seasonally strong traffic volume during the Chinese New Year (CNY) period, said TA Securities.

Total passenger movement last month surged 4.7% year-on-year (y-o-y) to 7.7 million passengers, led by the international segment, which grew 10.7%.

Surprisingly, the domestic segment recorded a contraction of 1.3% y-o-y in February, despite the impact from CNY. MAHB’s management attributed this to a reduction in domestic airlines’ seats offered during the season and fewer operational days of 28 in February.

Cumulatively, the first two months of 2018 passenger movement expanded to 3% y-o-y from 1.5% a month ago.

The South-East Asia and the Middle East sectors registered positive growth in passenger movement.

There was a 39.1% increase in Chinese passengers during the CNY period.

As such , TA said it has maintained its 2018 growth assumption of 3% versus the management guidance of 6.3%.

Growth in Istanbul Sabiha Gokcen’s (ISG) passengers remained strong at 15.5% in February. ISG airport recorded a passenger growth of 15.5% y-o-y (-12.0% m-o-m) to 2.4 million passengers in February underpinned by both the international (+15.8% y-o-y) and domestic (+15.4%) segments.

Despite a strong cumulative growth of 20.5% (vs TA’s forecast of 10%) y-o-y for the first two months of 2018, TA does not expect ISG to turn around in 2018.

Nonetheless, TA said MAHB’s earnings prospect is encouraging on the back of increase in capacity by Malaysian airline operators, especially AirAsia

image:, a potential increase in non-aeronautical contribution typically from duty-free sales and rental income; and development within Aeropolis.

Other supporting factors to 2018 traffic volume from a high base include the opening of 20th Century Fox theme park in Genting Highlands this year which will likely attract “must-see” foreign visitation and a short-term effect from 14th general election, which would temporary boost domestic traffic volume during the election campaign period.

In terms of MAHB’s share price, TA said the counter is trading at an expensive forward price-earnings ratio of 55 times, given its small earnings base and tiny dividend yield.

TA said it maintained a “sell” call on MAHB with unchanged discounted cash flow valuation of RM8.61 per share, based on a discount rate of 10.7%.



UOB Kay Hian Malaysia Research


IN February, Malaysia’s palm oil inventory declined 2.8% month-on-month (m-o-m) to 2.48 million tonnes (+69.8% year-on-year).

UOB Kay Hian Malaysia Research said the decrease was mainly due to lower production of crude palm oil (CPO) due to fewer harvesting days.

However, the research house said that the inventory of 2.48 million tonnes was higher than market expectations of 2.39 million tonnes.

It expects CPO production to increase m-o-m in March on more harvesting days. CPO production is also likely to improve y-o-y this month as the lagged impact from the severe drought tapers off while fresh fruit bunches (FFB) production is expected to normalise from the second quarter this year.

CPO production is expected to fully recover from the 2015 El Nino impact by end-2Q18.

In February, CPO exports rose 65.2% m-o-m and more than 100% y-o-y after Malaysia decided to suspend the export duty at the expense of lower processed palm oil exports (-31.7% m-o-m, -11.0% y-o-y).

However, UOB said CPO exports could drop in the next two to three months after India raised import duty.

India is the largest palm oil importer and about 18% of Malaysia’s palm oil exports in January-February went to India.

UOB said China’s palm oil imports could slow down due to high inventory levels.

As of March 2, 2017, China’s palm oil inventory was 731,400 tonnes, or 1.4-1.6 months of consumption, rising 9.6% from end-2017 inventory of 667,200 tonnes.

UOB said it maintained an “underweight” on the plantation sector saying there would be significant CPO price weakness going into 2018 as palm oil is likely to see an oversupply by mid-2018.

It has a “sell” call on counters such as Sime Darby Plantation, IOI Corp and TH Plantations.

UOB said it reckons that CPO prices could trend at RM2,400-RM2,700 per tonne in February-April.


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