RHBRI’s Monthly Stock Watch : Special Focus : Earnings Beat Our Expectation; But Global Recovery...

8/8/2019 RHBRIs Monthly Stock Watch : Special Focus : Earnings Beat Our Expectation; But Global Recovery Fears Persist -

1/106

RHBRIs Monthly Stock Watch

We have cut our target PER for

Adventa to 11x (from 13x), following

the cut in Top Gloves target PER to15x (from 17x). As a result, our

fair value has been lowered toRM4.16 (from RM4.92).

We have revised down our earnings

forecasts for FY10, FY11 and FY12,

by 0.8%, 2.2% and 7.9%respectively after: 1) revising our

SSS growth assumptions; and 2)

revising our number of new store

assumptions. After our earnings

revision, we have reduced our fairvalue of AEON to RM5.28, from

RM6.30, based on a lower target of 12x FY12/11 EPS (previously 14x).

Our PE of 12x is the lower-end of AEONs historical PE range of 12-

15x. As such, we downgraded our

call on the stock to Market Perform(from Outperform).

Changes In Recommendation And Forecast FromLast Stock Watch For August 2010

Recommendation Adjustment Reasons For Changes In

Company Current Previous Date Recommendation And Forecast

Adventa Outperform Outperform 13 Aug 2010

AEON Market Perform Outperform 27 Aug 2010

Malaysia PP 7767/09/2010(025354)

MARKETDATELINE

Special Focus :

Earnings Beat Our Expectation; But GlobalRecovery Fears Persist (See page 18)

Stock Pick Of The Month :

Paramount (See page 27)

3 September 2010

A comprehensive range of market research reports by award-winning economists and analysts are exclusively available for download

from www.rhbinvest.com


2/106

RHBRI'S MONTHLY STOCK WATCH2






Affin Outperform Outperform 23 Aug 2010

AFG Outperform Outperform 24 Aug 2010

AirAsia Outperform Outperform 12 Aug 2010

AMMB Outperform Outperform 18 Aug 2010

Ann Joo Outperform Market Perform 4 Aug 2010Resources

APM Outperform Outperform 19 Aug 2010Automotive

Holdings

Following the release of the stronger-

than-expected 2QFY10 results, weraised our FY10-12 net profitforecasts by 12.5-17.7% mainly after

adjusting for lower credit cost

assumptions. Fair value raised toRM4.10 from RM3.55 based on

unchanged target CY11 PER of 12x.

Our FY11-12 net profit forecasts have

been raised by up to 2.9% followinga downward revision in credit cost

projections to 36bps p.a. from 47-

50bps p.a. previously, partly offsetby a downward revision in loan growthassumption. Fair value raised to

RM3.50 (from RM3.40) based on


FY12/10-12 net profit forecasts raisedby 7-16%, largely to reflect higher

yields and traffic, partially offset by

higher fuel cost.

We have raised our FY11-13 net

profit projections by 4.4-5.2% afterraising our non-interest incomeforecasts by 1-1.7% while lowering

our allowance for impairment on

loans by 11-17.5%. Fair value raisedto RM6.95 (from RM6.60) based on


FY12/10-12 net profit forecasts raisedby 4.5-10.5%, largely to reflect

higher selling prices.

Correspondingly, indicative fair valuewas raised by 3.6% from RM2.74 to

RM2.84 based on 9x revised FY12/10 fully-diluted EPS of 31.6 sen.

Given the better-than-expectedearnings thus far, we raised our FY10-

12 earnings estimates by 10.1%,

6.2% and 4.2% respectively and

upgraded our indicative fair value toRM5.53 (vs. RM5.21) based on

unchanged 11x FY12/11 EPS.


3/106


4/106







CIMB Outperform Outperform 27 Aug 2010

Daibochi Outperform Outperform 11 Aug 2010

EON Cap Market Perform Market Perform 13 Aug 2010

Evergreen Outperform Outperform 17 Aug 2010

Faber Outperform Outperform 6 Aug 2010

We fine-tune and adjust our

earnings forecasts for the recentlycompleted acquisition of 19.67%stake in CIMB Niaga from Khazanah.

The overall impact, however, is

relatively insignificant to our netprofit forecasts.

We have reduced our earnings

forecasts for FY10-12 by less than

1% p.a. to input the costs of forexhedging. As such, our fair value is

reduced slightly to RM3.80 (from

RM3.83 previously). MaintainOutperform.

On the back of the stronger-than-

expected 2QFY10 results, we raisedour FY10-12 net profit forecasts by

12.2-13.9% largely after cutting ourFY10-12 projections for overheads by

6-7% p.a.. Fair value raised to

RM8.33 (from RM7.92) but MarketPerform call is unchanged.

We have increased our earningsforecasts by 7.6-21.6% for FY10-12after raising our average selling price

and effective tax rate assumptions,

while lowering operating cost slightlyto be in line with 1H results. As a

result, our fair value has been

increased to RM2.67 (from RM2.30)

based on unchanged 10x FY11 EPS.

We revised our FY10-12 revenue

projections slightly by 0.6-5.9% toreflect the higher projected non-

concession IFM business. However,we revised our FY10 property revenue

to RM79.6m (vs. RM137.8m

previously) but maintained our FY10-12 revenue projections, in-line with

managements expectations. As a

result, our FY10/FY11/FY12 net profit

forecasts were revised by -1.0%,9.0% and 5.4% respectively.

Following the earnings revision and

after updating net cash position asat Jun, our fair value for Faber has

been raised to RM3.82 from RM3.54(based on SOP valuation).


5/106







Fajarbaru Outperform Outperform 4 Aug 2010

Fajarbaru Outperform Outperform 26 Aug 2010

First Outperform Outperform 16 Aug 2010

Resources

Genting Outperform Outperform 27 Aug 2010

Genting Market Perform Market Perform 27 Aug 2010

Malaysia

FY06/10 net profit forecast raised by

9%, having revised up progressbillings and margins in 4QFY06/10.

FY06/11-12 net profit forecasts

trimmed by 2% each, having updatedcash balance as at end-FY06/10.

Post-results, we revised down our

FY10 forecasts by 14.5% and our

FY11-2 forecasts by 7-8% p.a.. Weuphold our view that FY10 is an

anomaly year for FR and continue to

project strong 3-yr earnings CAGR of 55.5% to FY12. Post earningsrevision, our fair value is reduced

slightly to S$1.30 (from S$1.35),

based on unchanged target PER of 10.5x CY11 earnings.

After imputing our revised Genting

Singapore forecasts into Gentings

model, we raise our net profitforecasts by 51.9% for FY10 and by

35-40% for FY11-12. Post-earnings

revision and after updating for thelatest market value of Landmarks,and the latest company net debt

level for Genting (ex-GM and GS),

our SOP-based fair value for Gentingis raised to RM11.00 (from RM9.30).

No change to our forecasts, post-

results. However, after adjusting forthe latest market value for Genting

HK and updating for GMs end-

2QFY10 net cash balance, our SOP-based fair value is raised slightly to

RM3.25 (from RM3.20). Note that ournet cash balance has been adjusted

for GMs investment cost for Genting

UK (RM2.1bn) and Aqueduct NewYork (RM2.3bn).


6/106







Genting Outperform Outperform 13 Aug 2010

Singapore

HL Bank Outperform Market Perform 20 Aug 2010

Hunza Trading Buy Market Perform 18 Aug 2010

Hunza Trading Buy Trading Buy 19 Aug 2010

IJM Land Outperform Outperform 26 Aug 2010

Due to better-than-expected results

in 2Q2010, we have more thandoubled our earnings forecasts, andare now expecting GS to record a

net profit of S$1bn in FY10, rising to

S$1.2bn in FY11 and S$1.4bn inFY12. Post-earnings revision, we

raise our fair value to S$2.40 (fromS$1.65), based on blended average

of EV/EBITDA (in line with 12x FY11

regional average) and DCF.

We have raised our FY06/11-12 net

profit forecasts by 11-14.8% largelyafter: 1) lowering our credit costassumptions to around 20bps p.a.

(31-37bps previously); and 2) a

reduction in our effective tax rateassumptions to 18-19% (from 25.7%

p.a.). Fair value raised to RM10.70from RM9.20, based on unchanged

target CY11 PER of 15x, while

recommendation upgraded toOutperform from Market Perform.

FY11-12 earnings forecasts areadjusted by 5-6% due to strongermargins achieved. After we update

the latest FY10 balance sheet, fair

value is raised to RM1.58 fromRM1.43, based on an unchanged

50% discount to RNAV.

FY11-FY13 net profit forecasts arerevised up by 6-33%, due to earlier-

than-expected launch of Alila II. Fair

value is kept at RM1.58, based on a50% discount to RNAV.

We adjust our FY11-12 forecasts

down by 9-36%, as we fine-tune our

assumptions for take-up rates andlaunches of some projects. Our fair

value is lowered to RM3.00 from

RM3.11, based on RNAV valuation

method.


7/106


8/106







KFC Outperform Outperform 26 Aug 2010

Kossan Outperform Outperform 7 Aug 2010

Kossan Outperform Outperform 13 Aug 2010

KPJ Outperform Outperform 7 Aug 2010

Our FY10-12 earnings projection were

revised upwards by 0.3-1.1% aftertaking into account: 1) the lessernumber of new outlets in India; 2)

higher number of drive-thru outlets

of 10 (from 5 previously) in Malaysia;and 3) higher capex of RM200m per

year (from RM89-90m previously) forFY11-12. Post earnings revision, we

have increased our fair value slightly

to RM13.07 (ex-all = RM3.27) fromRM12.97 previously. Maintain

Outperform.

We have cut our FY10-12 revenueprojections by 1.5-4.3% after pushing

expectations regarding contribution

from its 16 double-former lines fromits new factory to 4Q10 (previously

3Q10). At the same time, we havealso lowered our FY10-12 EBITDA

margins to 16.0-18.4% from 17.7-

19.2% largely to reflect the time lagin passing on the higher latex cost

as well as weakening US$.

Consequently, our FY10-12 earningsforecasts have been lowered by 10.1-12.8%. Our indicative fair value has

been lowered to RM5.81 (from

RM6.70) based on unchanged targetFY11 PER of 13x.

We have cut our target PER for

Kossan to 12x (from 13x), followingthe cut in Top Gloves target PER to

15x (from 17x). As a result, our fair

value has been lowered to RM5.36from RM5.81 previously.

We raised our indicative fair value

to RM4.51 (from RM4.25), based on

revised target FY11 PER of 17x, afterimputing a 10% discount to the

regional peers average of 18.5x.


9/106







Kurnia Market Perform Outperform 1 Sep 2010

LPI Capital Market Perform Outperform 1 Sep 2010

Mah Sing Outperform Outperform 27 Aug 2010

MAS Underperform Underperform 17 Aug 2010

Our FY10-12 earnings forecasts were

revised downwards by 24-43% p.a.after we adjusted the followingassumptions: 1) 5% premium growth

for FY10 (from 8% previously); 2)

NEP/NWP for FY10-12 to 92% (from106.5-107% previously); 3) higher

management expense ratios of 21%,20% and 19% for FY10-12, from

17.5% previously; 4) commission

ratio of 11% for FY10-12 (from 10%previously); and 5) a higher effective

tax rate of 35% for FY10 (from 25%

previously). After the earningsrevision, we reduced our fair valueto RM0.44 based on unchanged

target PER of 9x FY12/11 EPS. We

also downgraded ourrecommendation on the stock to

Market Perform (from Outperformpreviously).

Our fair value was adjusted after LPIcompleted its bonus issue and rights

issue, which increased its number of

shares outstanding to 222.0m. Ournew fair value is to RM12.01 (fromRM19.23 before adjusting for bonus

and rights issues). We downgraded

our call on the stock to MarketPerform as we believe there is

minimal upside to its share price.

We adjust our FY10-12 earningsforecasts after fine-tuning our

assumptions for take-up rate and

timeline of property launches. Thenet impact on earnings is -14% to

+7% change in net profit. Fair valueis lowered slightly to RM2.06 from

RM2.09.

We now project MAS to report

RM141.1m net loss in FY12/10 (vis-

-vis RM381.4m net profit previously)

while FY12/11-12 net profit forecastsare trimmed by 4%, having reduced

our assumptions on yields.


10/106







Maxis Outperform Outperform 1 Sep 2010

MCIL Outperform Outperform 26 Aug 2010

Media Prima Outperform Outperform 24 Aug 2010

MNRB Market Perform Underperform 26 Aug 2010

FY10-12 net profit forecasts were

revised downwards by 5.6-6.3% toaccount for: 1) lower ARPUassumptions; and 2) higher

administrative expenses.

Correspondingly, DCF-derived fairvalue has been lowered by 7.3%

from RM6.20 to RM5.75(WACC=8.4%, TG=1.5%).

We have raised our FY11-13 EBITmargin assumptions to 14.5-15.5%

largely to reflect the higher-than-

expected margin achieved by MCILthus far. As a result, our FY11-13earnings forecasts have been raised

by 3.8-4.6% respectively. Our fair

value has been raised slightly toRM1.21 (from RM1.16), which is

based on unchanged target CY11 PERof 13x.

We have lowered our FY10-12earnings forecasts by 5.2-19.2%

largely to reflect lower EBITDA

margins and higher effective tax rateassumptions. As such, we havelowered our fair value to RM2.57

(from RM2.80), which is based on

unchanged target FY11 PER of 15x.

We adjusted downwards the

reinsurance claims ratio in FY11 to

68% from 70% previously, in view of better claims experience in 1Q FY03/

10. As a result, our earnings forecast

for FY11 was raised by 33.5% toRM64.9m. We also introduced our

FY13 forecast. We maintained ourfair value of RM2.98 based on

unchanged 0.7x FY03/10 NTA.

However, as there is an upside of 15% to its current share price coupled

with the better-than-expected results,

we upgraded our call on the stock to

Market Perform (from underperformpreviously).


11/106







MPI Market Perform Market Perform 25 Aug 2010

MRCB Trading Buy Trading Buy 25 Aug 2010

Notion Vtec Underperform Outperform 3 Aug 2010

Notion Vtec Underperform Underperform 5 Aug 2010

Paramount Outperform New coverage 25 Aug 2010

We cut our FY11-12 EPS forecasts

by -11.5% and -1.9% respectively,mainly to reflect: 1) weaker chipsdemand from its power supply chips

(PC segment); 2) higher operating

costs stemming from its capacityexpansion in Ipoh and Suzhou; and

3) lower margin assumptions due tostill higher product sales mix of lower

margin legacy packages.

Consequently, our fair value waslowered to RM6.35/share (vs. RM6.80

previously) based on unchanged 11x

CY11 EPS.

FY12/10-12 net profit forecasts cut

by 12-14%, having reflected larger

losses from associates and a highereffective tax rate.

We cut our FY9/10-12 EPS forecasts

by 21.1%, 36.2% and 47.4%

respectively, after factoring in 25-35% lower sales i.e. lower shipments

of the HDD components and lower

margins i.e. lower utilisation rates.As a result, our fair value was cut toRM2.07 based on our new forecasts

and a more conservative target of

8x FY9/11 PER (vs. 10x previously).

We cut our FY10-12 earnings

projections by 22.2%, 25.4% and

28.4% respectively to reflect: 1) lowersales from the HDD segment i .e.

lower contribution from the 2.5

baseplate; 2) lower margins due tohigher costs; and 3) lower utilisation

rate. Accordingly, we trimmed our fairvalue to RM1.54/share (from

RM2.07) based on 8x FY9/11 FD EPS.

We initiate coverage with a fair value

of RM5.80, based on 35% discount

to RNAV.


12/106







Parkson Outperform Outperform 19 Aug 2010

Parkson Outperform Outperform 26 Aug 2010

Petra Perdana Underperform Underperform 26 Aug 2010

Quill Capita Outperform Market Perform 30 Jul 2010

Sapuracrest Market Perform Market Perform 2 Sep 2010

Our FY10-12 earnings were increased

by 0.9-4.2% after accounting for thechanges in assumptions forMalaysias SSS growth, Vietnams

SSS growth and new store

assumptions, and Chinas new storeassumptions. Our SOP-derived fair

value for Parkson is thus increasedto RM7.72 (from RM7.45) after the

earnings revision. Maintain

Outperform.

Our forecasts are tweaked upwards

slightly by less than 1% for FY12-13after incorporating the expectedrental yield from its mall opening.

Maintain Outperform with an

unchanged SOP- derived fair valueof RM7.72.

We cut our FY10 EPS forecast

significantly to factor in the 2Q loss.

We reiterated our Underperform callon the stock with a new fair value of

RM0.50 (vs. RM1.15 previously)

based on unchanged target FY11 PERof 10x.

Recommendation was upgraded as

value emerged after fair valueupgraded to RM1.23 from RM1.17

as we rolled forward the base year

for valuation purpose to FY12/11

from FY12/10.

Given that the new drilling charter

rates are lower than our initialassumptions, we lowered our FY01/

12-13 revenue forecasts slightly by0.7-0.6% p.a.. Our changes are only

impacted in F12-13 as the contracts

will take effect late-CY10.Consequently our FY12-13 EPS

forecasts were reduced by 1.9% and

1.8% respectively. Our fair value was

trimmed to RM2.41/share (vs.RM2.46 previously) based on 13x

FY01/12 PER.


13/106







Sime Darby Underperform Underperform 5 Aug 2010

Sime Darby Market Perform Underperform 27 Aug 2010

Sime Darby Market Perform Market Perform 1 Sep 2010

Sino Hua-An Underperform Underperform 25 Aug 2010

Post-visit, we revised our forecasts

down by 5.2% for FY10, 0.1% forFY11 and 1.7% for FY12. Post-earnings revision, we lowered our

SOP-based fair value to RM8.00

(from RM8.15).

Post-results, we tweaked our forecastsfor FY11-12 downwards slightly by

around 2% and introduced our FY13

forecast. However, we raised our fairvalue to RM8.35 (from RM8.00), after

updating for Simes latest net debt

balance and after reducing ourholding company discount to 20%(from 25%). We believe the worst is

over for Sime and expect it to trade

in line with the market now. As such,we upgrade our recommendation to

Market Perform (from Underperform).

We have lowered our holding

company discount further to 15%

(from 20%) to account for reduced

caution on Sime Darbys corporate

governance issues, as the new CEO

continues to encourage improving

investor sentiment with positive

feedback from the media and

analysts. As a result, our fair value

has been raised to RM8.90 from

RM8.35 previously.

We are now projecting Sino Hua-An

to register a net profit of RM18.2m

(vs. a net loss of RM7.4m earlier) in

FY12/10 largely to reflect a widerspread between metallurgical coal

and metallurgical coke prices. FY12/

11-12 net profit forecasts are also

raised by 21.9-25.8% to RM40.4m

and RM43.7m respectively to reflect

a wider spread between metallurgical

coal and metallurgical coke prices.

Indicative fair value was raised by

19.0% from RM0.27 to RM0.32

based on 9x revised FY12/11 EPS of

3.6 sen.


14/106







Star Outperform Market Perform 18 Aug 2010

Suncity Outperform Outperform 23 Aug 2010

Suncity Outperform Outperform 1 Sept 2010

Sunrise Outperform Outperform 27 Aug 2010

We have revised up our FY10/FY11/

FY12 ad revenue growth to 9.6%/4.6%/3.5% (vs. 6.5%/4.5%/3.3%

respectively) following the strong ad

revenue achieved by Star thus far.

As a result, our FY10-12 earnings

forecasts have been raised by 7.2-

8.0%. As a result, our indicative fair

value was raised to RM4.20 (from

RM3.86), based on unchanged target

FY11 PER of 15x. We have upgraded

our call on the stock to Outperform

from Market Perform previously.

FY10-12 net profit forecasts are

reduced by less than 1%, as we

adjust our balance sheet post REIT

listing, based on the proforma

provided by management. Fair value

is revised down to RM5.20 from

RM5.33, based on an unchanged

15% discount to RNAV.

No change in earnings forecasts, but

we adjust our RNAV estimates toinclude Sunway Giza and Sunway

Hotel Hanoi (acquisition completed

in June 2010) as investment

properties, and contribution from a

new Penang land and Tianjin Eco City

to projects DCF. As such, our fair

value is raised to RM5.45 from

RM5.20, based on an unchanged

15% discount to its RNAV of RM6.41/

share.

Our FY11-12 earnings forecasts are

adjusted slightly by -1% to -5% as

we revise our assumptions for take-

up rate. Fair value is, however, raisedto RM2.88 from RM2.76, after we

update the latest FY10 balance

sheet.


15/106







Ta Ann Market Perform Outperform 30 Aug 2010

Tanjong Trading Buy Market Perform 2 Aug 2010

Tanjong Market Perform Trading Buy 3 Sep 2010

Top Glove Market Perform Outperform 7 Aug 2010

UMW Outperform Outperform 23 Aug 2010

We reduced our earnings forecasts

by 14-42% for FY10-12 afteradjusting for plywood average sellingprice and cost of production, log

production, log export quota and

updated RM/US$ exchange rateassumptions. Following that, our

SOP-based fair value is reduced toRM5.80 (from RM6.95) based on

unchanged 12x FY11 EPS for timber

and plantation divisions.

We raised our fair value to Tanjong

Capitals privatisation offer price of RM21.80 and upgrade ourrecommendation to Trading Buy from

Market Perform.

Due to the limited upside to the

privatisation offer price of RM21.80,we downgrade our recommendation

to Market Perform from Trading Buy.

We have cut our FY10-12 earnings

projections by 0.2-8.1% largely to

reflect the lower FY10-12 EBITDAmargin assumptions of 17.7-18.2%(vs. 17.8-19.9%) on the back of the

time lag in passing on higher latex

costs as well as weakening US$against RM. At the same time, we

cut Top Gloves target PER to 15x

from 17x previously, which is in-line

with our target market PER. As such,our fair value has been lowered to

RM6.90 (from RM8.20) and thus,

downgraded our call to MarketPerform from Outperform previously.

Our fair value is lowered to RM7.27

(previous RM7.50) as we decrease

the oil and gas divisions contributionto FY11s net profit to 10% and

reduce its PER assumptions to 10x

(versus previous 30% contribution

and PER of 14x); as we expect near-term weakness to continue. We

increase the contribution from the

automotive and heavy equipmentdivisions to 80% and 8% (previously

56% and 5%) given these divisions strong performance.


16/106







Unisem Market Perform Market Perform 3 Aug 2010

Wah Seong Underperform Market Perform 13 Aug 2010

Wah Seong Underperform Underperform 26 Aug 2010

We increased our FY10 revenue

growth forecast to 47% (vs. 40%previously) to reflect stronger-than-expected demand for QFN and

module packages as near-term

visibility remains positive. However,we are less optimistic about longer-

term earnings given negativeguidance from industry players which

also reflects our view that the global

economy is entering a period of slower growth. Hence, we cut our

FY11-12 revenue forecasts to 5%

from 10%. Consequently, our FY11-12 EPS forecast was trimmed by 1.9-11.5% p.a.. Accordingly, our fair value

was lowered to RM2.31/share (from

RM2.36 based on unchanged 11xFY11 EPS).

We trimmed our FY10-12 net profit

forecasts by 18.5%, 14.4% and 6.9%

respectively, on the back of full-yearFY10 earnings looking soft and no

visible M&A deals in the near term.

As a result, we downgraded our callon the stock to Underperform at arevised fair value estimate of

RM2.04/share (based on an

unchanged 13x FY11 PER).

FY10-12 revenues and engineering

divisions PBT margin assumptions

were revised down due to thesluggish outlook for new contract

awards. The cuts reduced FY10-12

EPS projections by 21.1%, 7.3% and1.9% respectively. We downgraded

our fair value of the stock to RM1.89/share (based on an unchanged 13x

PER).


17/106







Wellcall Underperform Market Perform 16 Aug 2010

WTKH Outperform Market Perform 24 Aug 2010

YTL Power Market Perform Market Perform 20 Aug 2010

We have revised our FY10 earnings

projection down to reflect the highereffective tax rate that we now expectthe company to incur in 4QFY10. At

the same time, we have raised our

FY11 and FY12 effective tax rateassumptions to 25% p.a. (vs. 7.5%

p.a. previously), resulting in adownward revision of 18.9% p.a. for

FY11 and FY12. Consequently, our

fair value has been lowered toRM1.08 (from RM1.33) based on

unchanged FY11 target PER to 9x

while our recommendation on thestock has been downgraded toUnderperform from Market Perform.

We have cut our FY10 earningsforecasts by 12.8% after adjusting

for lower log supply and revised RM/US$ exchange rate assumptions,

although partly offset by higher

average selling price assumptions forits log and plywood products. We

have also adjusted our FY11-12

forecasts by -5.3% and 4.5%respectively. Indicative fair value wasraised to RM1.60 (from RM1.25)

after rolling forward our valuation

base year to FY11, based on 12xtarget PER. Thus, we upgraded our

call on the stock to Outperform (from

Market Perform).

We have raised our FY06/11-12 net

profit forecasts by 6.4% p.a. mainly

after we lowered our interest expenseprojections. However, we have

lowered our FY11-12 net DPSprojections to 13.1 sen p.a. from 15

sen p.a., in line with the full-year

DPS declared for FY10. Our SOP-derived fair value has been raised

slightly to RM2.20 from RM2.15 after

an update for the full-year results.


18/106




Earnings Beat Our Expectation; But GlobalRecovery Fears Persist

2Q Earnings Slightly Above Expectations

The 2Q results report card was slightly better than our expectation. This wasreflected primarily in the banking results , which were largely boosted bylower-than-expected allowances for impairment on loans. Overall, unlike the previousquarter, there were more companies reporting results that exceeded our expectationsduring this results reporting season compared with those that were below forecasts.Nonetheless, the bulk of the corporate results that we covered came in within ouras well as market expectations. Of the 105 companies that we covered, 63 of theresults (60% of the total) were within our expectations, 23 above projections (21.9%of the total) and 19 below forecasts (18.1% of the total) (see Table 1). Against theconsensus numbers, 50.5% of the reported earnings were within expectations, 21.9%above and 27.6% below projections (see Table 2).

The overall upgrade to downgrade ratio improved slightly to 0.9 time during

the current reporting season, from 0.8 time in the previous quarter. Despite theslightly better-than-expected 2Q results, we still see a risk of earnings disappointmentin the quarters ahead on account of : (i) A sharper-than-expected slowdown inexternal demand caused by the slowdown in the US and Chinese economies as wellas the debt crisis in Europe, and as effect of the global stimulus spending packagesdissipates; (ii) Impact from a stronger ringgit vis-a-vis the US dollar and the euro;and (iii) Unforeseen write-downs of companies similar to Sime Darbys cost overrunsfor its engineering and utilities division.

Sequentially, net EPS for the FBM KLCI stocks under our coverage wassustained at +6.2 % qoq in the 2Q (+6.4% in 1Q; see Chart 1). However, on ayoy comparison, net EPS for the FBM KLCI stocks under our coverage accelerated

to +60.8% in the 2Q, from +31.7% in the 1Q. The sustained strong growth in EPSmeasured on a yoy basis, however, reflected partly a low base effect, although itpoints to sustained recovery in corporate earnings. Overall, the strong earningsmomentum in the just concluded results reporting season was consistent with therecovery in the economy, where real GDP was sustained at a stronger-than-expectedgrowth of 8.9% yoy in the 2Q, compared with +10.1% in the 1Q.

Chart 1Net EPS Changes On A Sequential And Yoy Comparisons

%

+6.2

+60.8

Note : Net EPS Changes For RHBRI Covered Stocks In FBM KLCI

-6 0

-4 0

-2 0

0

2 0

4 0

6 0

8 0

1 Q C Y 0 6

2 Q C Y 0 6

3 Q C Y 0 6

4 Q C Y 0 6

1 Q C Y 0 7

2 Q C Y 0 7

3 Q C Y 0 7

4 Q C Y 0 7

1 Q C Y 0 8

2 Q C Y 0 8

3 Q C Y 0 8

4 Q C Y 0 8

1 Q C Y 0 9

2 Q C Y 0 9

3 Q C Y 0 9

4 Q C Y 0 9

1 Q C Y 1 0

2 Q C Y 1 0

qoq y oy

+6.4

+31.7

Although the bulk of

earnings was withinexpectations, there were

more companies

reported earnings that

were above than below

our forecasts

The upgrade to

downgrade ratioimproved slightly to 0.9

time in the 2Q

Earnings growth might

have peaked on a yoy

basis, although the

recovery momentum issustained


19/106




Most of the bigger cap companies reported earnings that were within orabove (Genting Berhad, Sime Darby, Axiata, Petronas Gas and YTL Power)our expectations . In this results reporting season, the only big cap stock thatreported disappointing earnings was Maxis on account of lower-than-expectedrevenue as well as higher-than-expected administrative and network operationexpenses. The better-than-expected earnings of Genting Berhad came mainly fromits leisure and hospitality division on account of stronger-than-expected contributionfrom Resorts World Sentosa in Singapore. This was on the back of better luck in

the premium players business, which led to much higher EBITDA margins vis-a-visour forecast, as well as the positive effective tax rate in the 2Q (due to S$86.8mdeferred tax writeback). The key variances of Sime Darbys earnings against ourforecast, on the other hand, came largely from higher turnover and improvement inEBIT from higher margins in the plantation, property and energy & utilities divisions.

Table 1Comparison Of Actual Earnings Reported For 2QCY10 Against RHBRIs Forecasts

Covered Stocks Covered In Line Above Below Total reported

Building Material 8 5 2 1 8Semiconductor/ IT 4 1 2 1 4Oil & Gas 7 2 1 4 7

Timber 4 2 1 1 4Consumer 1 1 1 0 1 1 1Gaming 3 1 1 1 3Media 3 2 1 3Motor 5 3 2 5Construction 8 7 1 8Infrastructure 2 2 2Transportation 6 4 2 6Telecommunication 4 2 1 1 4Power 3 2 1 3Banks & Finance 9 4 5 9Insurance 4 1 1 2 4Property 1 1 8 3 1 1Plantation 6 5 1 6Manufacturing 7 4 3 7

Total 105 63 23 19 105% of total reported 60.0 21.9 18.1 100

Table 2Comparison Of Actual Earnings Reported For 2QCY10 Against Market Consensus

Covered Stocks Covered In Line Above Below Total reported

Building Material 8 4 1 3 8Semiconductor/ IT 4 1 1 2 4Oil & Gas 7 3 1 3 7Timber 4 2 1 1 4

Consumer 1 1 8 1 2 1 1Gaming 3 1 1 1 3Media 3 2 1 3Motor 5 3 2 5Construction 8 5 3 8Infrastructure 2 1 1 2Transportation 6 4 2 6Telecommunication 4 1 1 2 4Power 3 2 1 3Banks & Finance 9 4 5 9Insurance 4 2 2 4Property 1 1 7 3 1 1 1Plantation 6 3 1 2 6Manufacturing 7 4 3 7

Total 105 53 23 29 105

% of total reported 50.5 21.9 27.6 100.0

Among the bigger cap

companies, results of

Genting, Sime Darby,

Axiata, PGas and YTL

Power were above our

expectations


20/106


21/106




In contrast, the oil & gas, transportation, manufacturing and insurancesectors reported earnings that were generally below our expectations . Of the seven oil & gas companies we covered, four results came in below forecasts(Kencana Petroleum, Wah Seong, Petra Perdana and KNM) and two within expectations(SapuraCrest and Dialog) and one above forecast (Petronas Gas). Earnings of Kencana Petroleum were dragged down by higher-than-expected operating expenses,Wah Seong by lack of oil & gas contracts, Petra Perdana by higher costs (lease rental

charges, mobilisation cost for new vessels as well as repair and maintenance cost),and KNM on continuing difficult operating conditions and low utilisation rates.

In the transportation sector, earnings of both Malaysia Airline System (MAS) andMalaysia Airports were below forecasts. The former was on account of slower-than-expected recovery in yields and the latter from the share of losses in an associatecompany (the adoption of FRS 139 that required MAHB to recognise concessionpayable by the associate company at fair value and subsequently at amortised cost).The other transportation and logistics companies such as MISC, AirAsia, ILB andFreight Management reported earnings that were generally within our expectations.

For the manufacturing sector, results of three (BP Plastics, Wellcall Holdings and

Adventa) out of the seven stocks we covered came in below our expectations andthe rest were within forecasts (Top Glove, Kossan Rubber, Hartalega and VS Industry).Earnings of BP Plastics were weighed down by higher-than-expected input costs andhence weaker margins, while that of Wellcall Holdings and Adventa by higher-than-expected effective tax rate.

In the insurance sector, results of LPI Capital and Kurnia Asia were below forecasts.The former was on account of lower-than-expected investment income at the grouplevel and the latter on the back of slower-than-expected premium growth as well ashigher-than-expected increases in unearned premium reserves, management expenseratio and effective tax rate. The earnings of MNRB, however, were above ourexpectation largely due to better reinsurance claims ratio, while results of Allinaze

were within our forecast.

Earnings Growth Revised Up

Following the better-than-expected 2Q earnings, our 2010s net EPS growth forthe FBM KLCI stocks under our coverage has been revised up to +23.5% (seeTable 3), from +18.3% two months ago. This was largely on account of the upwardrevision in earnings in the banking, telecommunications and gaming sectors (seeTable 4). However, our 2011s net EPS growth forecast was adjusted downto +12.3% , compared to +14.4% previously, largely on the back of a higher baseeffect.

The manufacturing

earnings were generallyweighed down by higher

costs and effective tax

rate

Two out of the four

insurance results we

covered were below our

forecasts

The variance of MAS

earnings in the

transportation sector

came from slower-than-

expected recovery in

yields

In contrast, higher costs

and the lack of contracts

weighed down earnings of

the oil & gas companies

FBM KLCI RHBRIs Basket

COMPOSITE INDEX @ 1,431.962009a 2010f 2011f 2012f 2009a 2010f 2011f 2012f

1 Sept 2010

Table 3 Earnings Outlook And Valuations

EBITDA Growth (%) -6.6 25.8 10.9 7.3 -2.2 22.5 11.0 7.3Pre-Tax Earnings Growth (%) -10.0 37.9 17.3 9.2 -2.7 29.8 16.8 9.9Normalised Earnings Growth (%)* -10.2 29.8 12.6 9.3 -6.5 28.1 13.4 9.9Normalised EPS Growth (%)* -14.9 23.5 12.3 9.3 -10.1 21.6 13.3 9.9Prospective PER (x)* 20.0 16.0 14.2 13.1 19.0 15.4 13.5 12.2Price/EBITDA (x) 10.4 8.3 7.5 7.0 8.6 7.9 7.1 6.6Price/Bk (x) 2.5 2.3 2.2 2.0 2.0 2.1 1.9 1.8Price/NTA (x) 3.2 2.7 2.5 2.3 2.3 2.4 1.3 1.2Net Interest Cover (x) 5.9 6.0 9.2 10.3 6.9 7.8 8.9 10.3Net Gearing (%) 61.3 52.6 47.7 43.8 50.2 41.8 42.5 38.1EV/EBITDA (x) 8.2 6.6 5.9 5.5 8.0 6.7 5.9 5.4ROE (%) 12.4 14.7 15.2 15.5 11.7 13.7 14.2 15.0

* Exclude Mas earnings in 09-11

2010s net EPS for the FBM

KLCI revised up to

+23.5%, but 2011s net

EPS growth was adjusted

down to +12.3%


22/106




Based on the latest FactSet Asian and IBES consensus numbers, the local market istrading at comparable valuations vis-a-vis the Singapore and Indonesian markets(see Table 5). Whilst it is still trading at a premium vis-a-vis other regional peers,this, in our view, is a reflection of high domestic liquidity and strong participation bythe Government-linked funds, and will unlikely change in the foreseeable future. Itis, however, still a very under-owned market by foreign investors althoughthe non-strategic foreign equity ownership of the Malaysian market has picked upslightly to 20.8% at end-July 2010, form 20.4% at end-January after having fallensharply from a recent high of 27.5% at end-April 2007.

Table 4Sector Weightings & Valuations

EPS Growth EPS Growth PER (%) (%) (x)

Covered Stocks Mkt Cap Weight Before After Before After RecomRMbn % FY10 FY10 FY11 FY11 FY10 FY11 FY12

Banks & Finance 2 0 6. 3 26.0 19.7 24.0 14.4 13.4 14.9 13.1 11.8 OverweightTelecommunications 1 1 0. 5 13.9 16.8 23.2 11.3 11.5 17.2 15.4 14.2 Overweight

Power 63.7 8.0 29.6 14.6 10.2 11.0 13.3 11.9 10.8 OverweightConstruction 20.5 2.6 30.2 27.8 7.8 8.3 17.6 16.2 15.4 OverweightMotor 19.6 2.5 61.4 58.9 10.4 10.2 10.3 9.3 8.0 OverweightProperty 17.6 2.2 20.1 10.4 17.8 14.7 13.6 11.7 10.8 OverweightMedia 14.3 1.8 39.6 35.4 7.0 11.4 13.1 11.7 10.7 OverweightPlantation 1 1 0. 7 14.0 0.3 5.4 24.2 17.9 19.2 16.1 15.3 NeutralGaming 58.1 7.3 21.1 52.8 6.0 0.2 12.6 12.5 11.4 NeutralTransportation* 57.2 7.2 41.3 36.9 16.3 14.7 21.4 18.7 13.5 NeutralOil & Gas 30.9 3.9 8.0 10.6 12.9 15.9 16.1 13.9 12.7 NeutralConsumer 30.5 3.8 7.9 7.9 6.7 11.9 15.9 14.9 13.0 NeutralInfrastructure 22.3 2.8 -1.1 2.0 47.8 49.0 16.4 11.0 10.1 NeutralBuilding Materials 11.5 1.4 11.0 14.6 23.2 18.5 11.3 9.9 9.7 NeutralManufacturing 7.6 1.0 31.4 23.8 19.0 20.0 11.8 9.9 8.9 NeutralSemiconductors & IT 4.6 0.6 63.6 32.7 22.2 7.8 7.9 8.0 7.2 Neutral

Insurance 3.9 0.5 18.8 11.3 9.8 9.8 9.1 8.3 6.8 NeutralTimber 3.4 0.4 87.6 75.4 39.8 41.8 11.3 8.0 7.1 Neutral

793.3 100.0* Exclude MAS earnings in 2010-2011Note : RHBRIs basket

Table 5

Regional ComparisonsMalaysia Singapore Thailand Philippines Indonesia Hong Kong Taiwan Korea

FactSet Asian Consensus Trends report dated 28 July 2010

EPS growth (%)2 0 0 9 a 5.0 -0.7 44.0 30.5 39.7 8.5 37.8 41.42 01 0 f 22.8 12.5 16.5 14.4 30.8 23.2 76.4 69.82 01 1 f 12.5 8.6 15.2 9. 2 17.8 17.4 12.3 5.3

PER (X)2 0 0 9 a 18.2 16.3 11.8 13.0 16.0 16.1 22.5 14.22 01 0 f 14.9 14.5 12.1 12.7 15.4 13.8 13.3 9.12 01 1 f 13.3 13.4 10.5 11.7 13.1 11.8 11.9 8.7

IBES Consensus dated 19 August 2010

EPS growth (%)2 0 0 9 a - 20 . 6 -1 1 .6 28.3 20.4 5.2 17.8 73.0 - 14 . 32 01 0 f 27.5 22.9 17.0 28.4 29.2 20.9 1 19 . 9 60.32 01 1 f 15.2 12.2 17.3 9.0 22.3 10.6 13.8 9.0

PER (X)2 0 0 9 a 19.5 17.3 14.6 16.6 20.1 16.8 31.9 25.72 01 0 f 14.8 13.8 12.5 13.0 15.3 12.3 14.3 9.52 01 1 f 12.8 12.3 10.7 11.9 12.5 11.1 12.1 8.6

Performance (%)2008 (yoy) - 39 . 3 -4 9 .2 - 47 . 6 -48 .3 - 50 . 6 -4 8 .3 - 46 . 0 - 40 . 72009 (yoy) 45.2 64.5 63.2 63.0 87.0 52.0 78.3 49.72010 (ytd)* 12.5 2.9 25.2 17.7 23.7 -5.7 -6.3 4.9

* as at 1 September 2010 closings

Valuations are comparable

to Singapore and

Indonesian markets,

although it is still a very

under-owned market by

foreign investors


23/106




The gradual increase in foreign participation in the local markets was partly onaccount of a strengthening ringgit on the back of rising currency yields, improvingmacroeconomic fundamentals as well as the recent liberalisation moves by theCentral Bank to allow international trade to be settled in ringgit. Year-to-date, theringgit has strengthened by about 9.5% vis-a-vis the US dollar, and hit near a 13-year high of RM3.12/US$ recently (see Chart 2). This has enticed foreign portfolioinflows, particularly into the short-term debt market with foreigners owing over 25%

of Malaysian government securities.

As international trade is now allowed to be settled in ringgit and the use of domesticcurrency in the settlement of trade with its major Asian trading partners is likely toincrease over time, and as China has also allowed the ringgit to be traded vis-a-vis the yuan in its interbank market, we expect the ringgit to be well supportedmoving forward. In addition, the ringgits fundamentals are also underpinned bysustained current account surplus in the balance of payments and rising foreignexchange reserves of the country, and we expect the ringgit to remain relativelyfirm and could trade at around RM3.10/US$ in 2011. Meanwhile, expectations of

a relatively firm to appreciating currency tend to be supportive of greaterforeign participation in the local capital markets (For an analysis of thestronger ringgit and the equity market, refer to our Market Update on SensitivityAnalysis dated 23 August 2010).

In addition, the country has been approved as an investment destinationunder the Chinas Republics Qualified Domestic Institutional Investor (QDII)scheme in June 2010. Malaysia is the first emerging market and the 11th memberof a small group of Chinas QDII approved investment destinations which comprisesAustralia, Canada, Hong Kong, Germany, Japan, Luxembourg, Singapore, SouthKorea, the UK and the US. In China, domestic funds are not allowed to investoutside the country and only those approved under the QDII scheme can do portfolio

investments overseas, which is governed by a quota system. Currently, some41.8% (US$20bn) of the quota (US$47.8bn) remains to be invested.

Global Recovery Fears Persist

Despite the sustained 8.9% yoy economic growth in the Malaysian economy in the2Q, albeit more moderate than the record of +10.1% registered in the 1Q, worriesabout the sustainability of the global economic recovery persist. Whilst industrialproduction and services activities have recovered globally from low levels in 2009,the pace of recovery is fast losing momentum (see Charts 3-4). As it stands, theUS economic growth has slowed sharply from an annualised pace of 3.7%in the 1Q to 1.6% in the 2Q (see Chart 5). The pace of deceleration is worryingamid plunging home sales and the still weak labour market conditions. Added tothe pessimism was the most recent congressional testimony from Federal ReserveChairman Ben Bernanke that the outlook was unusually uncertain.

Prospects of a relatively

firm to appreciating ringgit

will induce greater foreign

participation

Foreign participation could

also increase gradually

over time as it has been

listed as Chinas QDII

destination

Ringgit has hit near a 13-

year high of RM3.12/US$

recently

Economic Worries re-

emerged as US growth is

losing momentum

MYR/US$

Chart 2Significant Appreciation Of The Ringgit Against The US Dollar

3.12

2 . 9

3 . 0

3 . 1

3 . 2

3 . 3

3 . 4

3 . 5

0 3 / 0 1 / 2 0 1 0

1 7 / 0 1 / 2 0 1 0

3 1 / 0 1 / 2 0 1 0

1 4 / 0 2 / 2 0 1 0

2 8 / 0 2 / 2 0 1 0

1 4 / 0 3 / 2 0 1 0

2 8 / 0 3 / 2 0 1 0

1 1 / 0 4 / 2 0 1 0

2 5 / 0 4 / 2 0 1 0

0 9 / 0 5 / 2 0 1 0

2 3 / 0 5 / 2 0 1 0

0 6 / 0 6 / 2 0 1 0

2 0 / 0 6 / 2 0 1 0

0 4 / 0 7 / 2 0 1 0

1 8 / 0 7 / 2 0 1 0

0 1 / 0 8 / 2 0 1 0

1 5 / 0 8 / 2 0 1 0

2 9 / 0 8 / 2 0 1 0


24/106




At the same time, the economic recovery in Japan appears to have stalledwith real GDP growth plunging from an annualised rate of 4.4% to 0.4% during thesame period (see Chart 6). Apart from contractions in public investment andinvestment in the housing sector, household spending decelerated to a mere 0.1%in the 2Q, from +2.2% in the 1Q. This was made worse by a softer growth inexports, which is further threatened by weakening external demand and a strongyen that has hit a 15-year high of 84 yen vis-a-vis the US dollar.

Although the recovery in Euroland has accelerated from an annualised rate of 0.8%in the 1Q to a 4-year high of 4.0% in the 2Q, powered by Germany with 9.0% growth

in the 2Q on account of a surge in exports and consumer spending, conditions inthe highly-indebted European countries are fast deteriorating . This was onthe back of a combination of an austerity-induced slowdown and debts, public andprivate, which threaten their banking systems, local governments and Treasuries.

A Sharper Economic Slowdown In The 2H

Whilst we believe the risk of a global double-dip recession is manageable, we seea sharper slowdown in the global economy in the second half that couldpersist into the first half of 2011 before the recovery starts to build momentum inthis new global economic growth cycle. This is attributable mainly to the austeritydrive to reduce fiscal deficit in the highly-indebted European countries, credit tightening

to cool down property prices in China, and as worldwide stimulus spending dissipates.Overall growth will, however, be supported by sustained growth in emerging anddeveloping countries, particularly in Asia and better business and consumer confidenceworldwide that has already spurred pockets of investments, leading to a gradualimprovement in labour market conditions.

Index

Chart 3Global Manufacturing And

Services Activities Heading South

30

35

40

45

50

55

60

65

05 06 07 08 09 10

P M IServices

P M IManufacturing

Chart 4Industrial Production In Major Economies

Turning Down

% yoy

-50

-40

-30

-20

-10

0

10

20

30

40

05 06 07 08 09 10

US Eurozone

Japan China

Chart 5US Economic Growth

Deccelerating

% yoy

-8

-6

-4

-2

0

2

4

6

8

10

05 06 07 08 09 10

GDPExports

consumer spending

Chart 6Japans Economic Recovery

Has Stalled

% yoy

-10

-8

-6

-4

-2

0

2

4

6

05 06 07 08 09 10-50

-40

-30

-20

-10

0

10

20

30

40

50

GDP (LHS)

Household spending (LHS)

Exports (RHS)

% yoy

There is a real risk of a

sharper- than-expected

global economic slowdown

in the 2H, although we

believe the risk of a

double-dip recession ismanageable

Tightening measures in the

highly-indebted European

countries are beginning tobe felt

Economic recovery in

Japan has stalled


25/106


26/106




Market Strategy : Top Slicing And Accumulate On Weakness

Whilst we acknowledge that the long-term economic picture remains positive for theequity market, the revival of a double-dip recession fear can have a disproportionateimpact on the market in the foreseeable future. Under such circumstances, it maybe timely for investors to be vigilant and do some top slicing on stocks wherevaluations have become rich in the run-up of the market. This would then provide

more room for investors to accumulate fundamentally robust stocks on weakness.A list of our top picks is reflected in Table 6.

Good time to do some top

slicing, which would

provide more room for

investors to accumulate

f u n d a m e n t a l l y - r o b u s t

stocks on weakness

Table 6RHBRIs Top Picks

Fair Mkt EPS EPS GWTH PER P/BV P/CF GDYFYE Price Value Cap (sen) (%) (x) (x) (x) (%)

1/9/2010 (RM/s) (RM/s) (RM Mil) FY11 FY12 FY11 FY12 FY11 FY12 FY11 FY11 FY11

Maybank Jun 8.49 9.86 60 , 09 2 61.9 69.6 14.7 12.4 13.7 12.2 2.0 n.a. 4.1C I M B D ec 7.80 8.40 57 , 18 6 56.3 64.5 17.2 14.6 13.9 12.1 2.0 n.a. 1.6Tenaga Aug 9.00 10 . 2 0 3 9 , 00 2 78.7 90.8 15.8 15.4 11.4 9.9 1.3 4.7 3.5Gamuda Jul 3.55 3.85 7, 20 7 16.1 16.3 17.9 1.5 22.1 21.7 1.9 55.7 3.4

M R C B D ec 1.69 1.94 2, 30 1 6.4 6.7 23.5 4.9 26.5 25.3 1.7 16.5 0.0Media Prima D ec 2.07 2.57 1, 95 7 16.4 19.7 24.5 19.9 12.6 10.5 1.9 6.3 5.4K P J D ec 3.41 4.51 1, 79 9 26.6 29.9 10.7 12.2 12.8 11.4 2.0 10.1 4.7Mah Sing D ec 1.84 2.06 1, 53 0 17.2 21.2 22.8 23.2 10.7 8.7 1.5 20.7 3.7Faber D ec 2.68 3.82 9 7 3 26.4 45.7 0.5 73.5 10.2 5.9 1.8 6.2 3.0HSL D ec 1.56 1.95 8 6 8 16.2 17.7 21.4 8.9 9.6 8.8 2.0 11.3 1.6


27/106




Paramount Corp

More Than Just A Pure Developer

Executive Summary

A property and education player. Apart from being a property developer mainly in the northernPeninsular Malaysia region, Paramount also has education business under its KDU brandname, and strategicinvestment in insurance business (Jerneh). In 2005, Paramounts maiden project in the Klang Valley Kemuning Utama, has received overwhelming success. The company has won various FIABCI propertyawards in the past. Paramounts education division has also expanded considerably, with a PBT CAGR of 31% since 2005. New campus will be set up in Glenmarie in 3 years time.

Investment case: a) The potential disposal of its 20% stake in Jerneh Insurance is likely to yield a cashflow of about RM120m (assume at 2.2x book), translating into a cash flow of about RM1 per share. While

there is a likelihood for a special dividend for shareholders, part of the proceeds would allow Paramountto embark on more aggressive landbank acquisitions plan; b) The soon-to-be-completed landbankacquisition in Cyberjaya and Glenmarie will boost development GDV by RM1bn, apart from the launch of Banyan Hills in Kedah in early 2011, with a GDV of RM885m; c) The education business is a crown jewel.With increasingly generous valuations that the market attaches to the education sector, we reasonablyexpect Paramounts valuations to be re-rated similarly.

Risks and concerns. The risks include: 1) hiccups in the acquisition of landbank in Cyberjaya andGlenmarie; 2) disruption in the disposal of Jerneh; 3) delays in launches and approvals; 4) country risks;and 5) stock illiquidity.

Earnings outlook. We estimate a decent 3-year earnings CAGR of 15%, driven by: a) new property

launches that are worth RM1.9bn; and b) moderate growth in the education sector. While earnings growthis decent, given Paramounts strong cash position (net cash of RM175m) in addition to the proceeds fromthe potential disposal of Jerneh, the company should have sufficient financial strength to replenish itslandbank, hence strengthen its property development in the future.

Valuation. We value Paramount shares at RM5.80, based on a 35% discount to RNAV. We like Paramountfor its attractive valuations given its existing business units and investments. Given 70:30 contribution fromits property development and education, at current market PE for both sectors, the weighted average FY11PE is estimated at 9.2x, vs 6.8x currently. In addition, valuations are well supported by an attractive grossyield of 7%, with a potential surprise on special dividend from the disposal of Jerneh. With a potential 33%upside to our indicative fair value, we reiterate our Outperform rating on the stock.

Table 1 : Investment Statistics (PARAMON; Code: 1724) Bloomberg : PAR MK

Net Net

FYE Turnover profit EPS Growth PER C.EPS* P/CF P/NTA ROE Gearing GDY

Dec (RMm) (RMm) (sen) (%) (x) (sen) (x) (x) (%) (%) (%)

2009 404.9 57.5 52.9 36.1 8.3 - 4.0 0.9 11.4 Net cash 6.4

2010f 440.9 69.6 58.3 10.3 7.5 - 7.7 1.0 12.8 Net cash 6.7

2011f 472.6 76.1 63.8 9.4 6.9 - 7.0 0.9 13.2 Net cash 7.3

2012f 518.8 86.6 72.6 13.8 6.0 - 6.3 0.8 14.0 Net cash 8.3

Main Market Listing /Trustee Stock/Syariah Approved Stock By The SC

* Consensus Based On IBES Estimates

Share price : RM4.38Fair value : RM5.80


28/106




Potential disposal of Jerneh to yield RM1/share . Paramounts entry into the insurance business canbe traced back to 1981, when Paramount acquired a 49% equity interest in Nanyang Insurance CompanyBerhad (NIC), mainly involving in the underwriting of general insurance business. Subsequently, NICbecame a subsidiary of Paramount in 1983, and changed its name to Paramount Assurance Berhad (PAB).In 1999, in line with Bank Negara Malaysias (BNM) directive on the merger of insurance companies, PABs

general insurance operation merged with that of Jerneh Insurance Berhad (JIB), resulting in PAB holdinga 20% stake in JIB. PAB then changed its name to Paramount Global Assets Sdn Bhd (PGA). Theremaining 80% stake in JIB is owned by Jerneh Asia Berhad (JAB), which is 37% owned by Kuok Brotherscurrently.

To recap, in Dec last year, JAB announced that BNM has no objection in principle for JAB to commencepreliminary negotiations with the potential buyers of JIB. The potential disposal of JIB has made anotherstep forward. In May 2010, JAB and PGA have jointly submitted an application to BNM for the approvalof the Minister of Finance to enter into an agreement with a potential buyer for the proposed disposal of JIB. Given the chronology of the events, we believe the deal will be sealed quite soon.

While pricing for the disposal is widely speculated by the market at this juncture, assuming the deal is

priced at 2.2x price to book, Paramounts 20% stake in JIB would translate into a consideration of almostRM120m, giving a cash flow per share of close to RM1. Below are the list of valuations for sometransactions of insurance business in the past (cited from some media reports):

(i) G Team Resources & Holding Sdn Bhds recent offer for Oriental Assurance Bhd stood at 1.35x priceto book;

(ii) Allianz acquired Commerce Assurance for a price of about 2.5x 3x NTA in 2007; and

(iii) Sompo Japan Insurance bought Berjaya General for 2x NTA in 2006.

Any cash repayment? While Paramount has yet to officially make plans for its sale proceeds, we

believe the company is likely to reward shareholders with some cash repayment or via special dividend.Note that, Paramount currently offers a gross dividend yield of about 7%, with a gross dividend payoutof 54%. Assuming a payout ratio of 50% over the next three years, coupled with an estimated specialgross dividend of RM0.30 per share, this will translate into a gross yield of 14% in FY11.

A need to replenish landbank . Compared to sector peers, Paramount is relatively less aggressive inits property development. Historically, its property development is mainly in the northern region of Peninsular Malaysia Bandar Laguna Merbok Kedah, where property sales are relatively slower comparedto Klang Valley and Penang. In 2005, Paramounts maiden township project Kemuning Utama in ShahAlam, has seen overwhelming response, and the project has received FIABCI-Malaysia Property Awardsin 2005. To date, minimal remaining development area as well as GDV is left for the two township projects(Kemuning Utama is left with medium and low cost component). In Paramounts existing portfolio, it is

left with a few tracts of landbank in Klang Valley, except for the 493-acre piece of land in Kedah, whichwill be developed into Banyan Hills township with a GDV of RM885m, scheduled to be launched in early2011. Given limited landbank in hand, we reasonably believe Paramount will embark on more aggressivelandbank acquisition plans going forward.

Table 2Relative Performance To FBM KLCI

FBM KLCI

Paramount


29/106




We expect Paramount to utilise part of the proceeds from the potential disposal of Jerneh for its landbankacquisitions. The company has entered into conditional sale agreement (SA) to acquire 2 plots of land inCyberjaya (in June 2010) and Glenmarie (in Nov 2009), which cost RM78.4m and RM62.4m, respectively.Even with the yet-to-be-completed landbank acquisitions, we still think the likelihood for a special dividendis promising, considering Paramounts current net cash position of RM175.4m.

The Cyberjaya land This freehold land has a size of 50.01 acres. The purchase consideration of RM78.4mtranslates into RM36 psf. It will be a quick turnaround project as the land is ready to be used fordevelopment. The acquisition is currently pending i) State consent to transfer; ii) Layout plan approval; andiii) Issuance of title, and will be completed tentatively in 1Q2011. The land has a direct frontage to the mainroad, easily accessible by a network of highways the North-South Expressway, the North South CentralLink, LDP and the toll free B15 highway. The northern boundary of the land abuts on the 98 acresdevelopment by UEM Land Symphony Hills. Paramount plans to develop its piece of land into a mixedand exclusive mid-upper to high-class secured and guarded residential landed development, as well as ahigh-rise condo with a total GDV of RM527m. The project will not have any low cost component. It istargeted to be launched in 3Q2011, spanning over a development period of 68 years.

The Glenmarie land The purchase consideration of RM62.4m translates into RM66 psf. The land has afreehold tenure, with a size of 21.7 acres. The acquisition is currently pending sub-division of the landapproval from Pejabat Tanah Petaling, and is expected to be completed by end 2010. The land is sited closeto the Bukit Jelutong/Shah Alam interchange of the New Klang Valley Expressway (NKVE). Kuala Lumpurcity centre and Klang town centre are about 30km and 12km away. Paramount plans to allocate 10 acresfor the building of a new campus for KDU College, and the remaining part measuring 11.7 acres will bedesignated for mixed development, comprises commercial development and condominiums. The condo willserve as hostels for the students while the commercial development will provide convenience to the studentsand surrounding offices and industrial workers. The projects GDV is estimated at RM500m (for propertydevelopment). We believe the project will commence by mid-2011, and the new KDU campus is scheduledto be set up in 2012.

Chart 1Location Of Cyberjaya Land

Source : Company

Chart 2Location Of Glenmarie Land

Source : Company


30/106




KDU a crown jewel. Paramount entered into the education business in 1983, with the setting up of thefirst purpose-built campus in Petaling Jaya under KDU College Sdn Bhd (KDU). Due to the success of thecampus in PJ, the company expanded to Penang in 1991. In 1996, KDU opened a branch campus in Sibu,East Malaysia. However, it exited in 2003 as the campus was not profitable. In 2001, KDU moveddownstream by setting up a private primary and secondary school, namely Sekolah Sri KDU under KDUSmart School Sdn Bhd. The following year, Paramount also ventured into the provision of executiveeducation and professional development programmes, under KDU Management Development Centre Sdn

Bhd. In 2003, Paramount made its first entry into China to establish its language training school to offera range of English courses. Due to tough competition, Paramount is currently in talks to some potentialbuyers to dispose of the loss-making language centre in China.

Paramounts education business is a crown jewel. The division currently contributes about 30% to total PBT,with a PBT margin of 20-25%. The property division makes up the remaining 70% contribution. Revenuefor the education segment experienced a CAGR of 13.5% while PBT dropped slightly to RM21.4m in FY09,due to temporary hiccup in KDU College, arising from a change in twinning partners. Nevertheless, its PBTin 1H10 has recovered yoy, grew 5% to RM13m (vs RM12.4m in 1H09). Note that, FY09 PBT of RM21.3mrecorded by KDU is comparable to that of Help International, which is currently trading at 15.5x FY11 PE.In our opinion, given the increasing generous valuations that the market attaches to the education sector,we hence reasonably expect valuations for Paramount, as a whole, to be re-rated similarly.

Listing of KDU a wild card. The potential listing of Paramounts education business is always a wildcard. Although the listing may not materialise soon, we believe this is always in managements plans, asthe investors community generally dislikes diversified business (for example, Kulim, which is planning tocarve out its food business or equity stake in QSR & KFC). As Paramount will relocate its KDU campus toGlenmarie in 3 years time, we think the listing will be a long-term story. The campus will be constructedin phases, as part of the effort to catch up with its peers which have just expanded. At a PE of 15.5x (similarto Help International), Paramounts KDU would worth about RM282m, slightly more than half of Paramountscurrent market cap of about RM520m.

Table 2Valuations Comparison For The Education Sector

Company FYE Price Market Cap FY10 PE FY11 PE FY10 DY FY11 DY(RM) (RM mil) (x) (x) (%) (%)

Help International O c t 4.00 355.1 18.2 15.5 0.8 0.8SEG International # D ec 2.30 573.8 5.3 - - -Masterskill Education D ec 4.00 1,639.6 13.8 11.5 3.7 3.7Market cap weighted average 12.5 12.2

# Based on annualised EPSSource: Bloomberg

Construction division big revenue, small margin. Apart from property development and educationdivisions, Paramount is also involved in construction, which is mainly project-based. The division contributed11% to total revenue but only 9% to PBT in FY09. Hence, profit margins are rather low for the division.Indeed, the division sank into losses in FY08 (PBT at RM1.16m), mainly due to escalating building materialprices and hence eroded profit margins in a competitive bidding environment. In FY09, revenue for thedivision fell 40% to RM43m, due to acute shortage of work because of the global financial crisis. Newbuilding projects in the office, retail and leisure segments were scarce. However, PBT recovered to RM7.3m,due to compensation received for an external project, recognition of project management fees from a jointventure project and recovery of bad debts written off previously. Going forward, we expect the division toimprove further, on the back of improving economy and hence larger number of development projectsavailable in the market. Currently, about 60% of its construction contracts come from external sources.Outstanding orderbook stood at RM236m, which has an earnings visibility of 2 years. Some current projectsinclude: (i) Structural works for basement car park, ground slab, 6-storey podium car park block for aproject by Wing Tai opposite KLCC; (ii) Construction project for another Wing Tais residential project atU-Thant; (iii) Kenny Heights in Sri Hartamas; (iv) Ideal CEO in Penang; and (v) Ideal Cygal Residences

in Penang.


31/106


32/106




New properties in Cyberjaya should do well . Given the general positive outlook for the property sector,we believe the upcoming launch of Paramounts project in Cyberjaya will do well. Property demand hasgradually spilt to Cyberjaya, from Kuala Lumpur city centre, Mont Kiara/Damansara, Cheras and Puchong.Mah Sings launch of Garden Residence in Cyberjaya has received good take-up rates so far. Since its pre-sale in Jan 2010, total sales have met 60% of the targeted sales of RM410m for FY10. A 2-storey superlinkhouse that costs RM689k initially is now selling for RM769k per unit. As Paramounts project will be launchedonly in 2011, we are less concerned with the competition from its peers, as UEM Land has also recentlylaunched its Symphony Hills project in Cyberjaya, which is next to Paramounts site.

Banyan Hills sales will be moderate. Paramount will launch its Banyan Hills project by end of 2010 orearly 2011. Total development area is 493 acres, comprises residential and commercial components. As theproject is located in Sungai Petani, Kedah, we believe take-up rate for this project will be rather slow,compared to property sales in the hotter Klang Valley and Penang region. Nevertheless, given Paramountsestablished township Bandar Laguna Merbok in the neighbourhood, sales for Banyan Hills will not be toochallenging. Furthermore, property prices are also catching up. A bungalow in Bandar Laguna Merbok whichcosts RM500k in the past few years is now worth about RM1m. We think Banyan Hills will take over as abread and butter project after its close-to-completion Bandar Laguna Merbok as well as Kemuning Utamatownship (which is left with only medium and low cost component).

Other projects. Paramount will develop some industrial properties on its Lot 7 & 9 land in KotaDamansara, but timeline is still unknown at this juncture. Previously, Paramount launched its SurianIndustrial Park project in the same area in early 2009. It comprises 38 units of 2-storey semi-detachedshowroom/office/cum warehouse industrial units. Sales were slow initially, but picked up sharply towardsthe end of 2009 as the economy recovers. The project is now sold out. Average price per unit is roughlyRM3m, with a built-up area of 6,000 sqf, equipped with lift. Given the successful launch of this project, salesfor Lot 7 & 9 are expected to do well, as economic growth continues its momentum. As for the land inSection 13, PJ, development will only be carried out beyond 2013, once the new KDU campus in Glenmarieis up. Currently, part of the KDU campus has been relocated to Sec 13 temporarily.

Table 3Paramounts Landbank And Remaining GDV

Landbank Land cost Tenure Development area Total Remaining GDV(RM psf) (acre) acreage (RM mil)

Current FutureNorthern RegionBandar Laguna Merbok n.a. Freehold 35.6 75.2 110.8 7 1Bukit Banyan 1.55 Freehold 0 492.5 492.5 8 8 5

Klang ValleyKemuning Utama 7 Freehold 68.7 206.2 274.9 3 1 0Surian Industrial Park 8 0 Leasehold 13.2 0 13.2 1 2 3Section 13, PJ 1 9 0 Leasehold 0 5.2 5.2 4 0 0Lots 7&9, Kota Damansara 9 8 Leasehold 0 9.4 9.4 1 0 0Glenmarie 6 6 Freehold 0 21.7 21.7 5 0 0

Cyberjaya 3 6 Freehold 0 5 0 5 0 5 2 7Source: Company

FINANCIAL OUTLOOK

In a net cash position. Paramount is one of the few developers with net cash position. As at 2Q10, netcash stood at RM175.4m. It is important to note that, if the disposal of JIB materialises, the companys cashposition will be further strengthened, potentially by another RM120m. Although part of the internal fundswill be used to finance its expansion for the education division, we strongly believe Paramount will still haveplenty of room to gear up, either for property projects or landbank replenishment.

3-year earnings CAGR of 15%. Earnings growth going forward is expected to be decent, mainlyunderpinned by: a) New property launches that are worth RM1.9bnBanyan Hills (RM885m), Cyberjaya(RM527m) and Glenmarie (RM500m); b) Moderate growth from the education sector; and c) Outstandingorderbook of RM236m for the construction division, which can last for 2 years.


33/106




Generous dividend payout. Over the past years, Paramount has been gradually raising its gross dividendpayout, from 26% in 2006 to 54% in 2009. Payout ratio is likely to sustain at least at 50% going forward.Based on our earnings forecast, 50% payout would translate into a DPS of 31.9 sen for FY11, representing

a yield of about 7%. The attractive yield is well supported by the potential divestment of its 20% stake inJIB. A surprise would be a special dividend following the disposal, which may significantly boost its yieldto above 10%.

Potential bonus issue / share split? As management recognises the concern on the stocks liquidity,which would affect investors interest on the stock, we believe bonus issue or perhaps share split could beon the cards. In our opinion, the company will have the capability to undertake a bonus issue exercise,as an effort to improve the stocks liquidity. Based on Paramounts latest 2Q2010 balance sheet, it hasretained earnings of about RM369m, which is sufficient to do a 3-for-1 bonus issue (at maximum level).Certainly, management will still preserve part of the retained earnings for future dividend distribution, andhence may not stretch the ratio.

Risks and concerns. Key risks include: 1) hiccups in the potential divestment of Paramounts 20% stakein JIB; 2) termination of the acquisitions of new landbank; 3) delays in launches and approvals; 4) hikein building material costs; and 5) stock iliiquidity.

VALUATION

Attractive current valuations. Paramount is currently trading at a forward PE of 6.8x (FY11). Apart fromthe strong catalyst from the disposal of JIB, its property development is picking up with the new landbankacquisition, boosting development GDV to more than RM1bn over the next 3 years. We also strongly believeits education business should warrant an overall re-rating for Paramount as a whole. To highlight, marketvaluations are increasingly higher for the education sector with a market cap weighted average PE of about12x for FY11. Assigning a FY11 PE of 8x for Paramounts property development division (in line with its peersof similar size), given its 70:30 contribution from property development and education segment, theweighted average PE is estimated at 9.2x for FY11 (vs current FY11 PE of 6.8x), suggesting an upside of 35%. At 9.2x PE, the implied fair value for Paramount would be RM5.87.

Reiterate Outperform rating, 33% upside to fair value. We value Paramount at RM5.80, based on35% discount to RNAV (see Table 4). In addition to the consideration of the upcoming potential monetisationof its stake in Jerneh, the discount is in line with our rate applied to other peers, according to theirrespective size, market cap, location of landbank as well as at the current stage of property cycle. Toreiterate, we like Paramount for four key reasons: i) Potential disposal of Jerneh which may give a cashflow of RM120-130m, or close to RM1 per share; ii) Stronger contribution from property development goingforward, underpinned by its projects in the pipeline which are worth RM1.9bn GDV, and unbilled salescurrently stood at RM251m, providing about one year of visibility; iii) The education business - KDU isundervalued, in view of the current generous market valuations attached to the education sector; and iv)attractive dividend yield of about 7%, plus potential surprise on special dividend following the disposal of Jerneh. We reiterate our Outperform rating on the stock.

Chart 7Breakdown Of Revenue Contribution FY09

In %

Chart 8Breakdown Of PBT Contribution FY09

In %

Source: Company Source: Company

Property

dev elopment,

65%

Construction,11%

Education,

24%

Property

development ,

50 %

Construction,

9%

Education,

27 %

Inves tment,

9%

Prop.

Inves tment ,

5%


34/106




Table 4Property Sector Valuations

EPSMkt EPS growth PER P/NTA P/CF GDY Discount

FYE Price cap (sen) (%) (x) (x) (x) (%) Rec. (%)(RM/s) (RM mil) FY10 FY11 FY10 FY11 FY10 FY11 FY10 FY10 FY10

SP Setia O c t 4.58 4 65 7. 0 18.6 21.7 15.7 16.7 24.7 21.1 2.11 19.9 2.0 M P 0IJM Land Mar 2.23 2 47 0. 7 12.1 17.3 22.7 43.2 18.5 12.9 1.71 5.8 1.0 O P 0Suncity D ec 3.92 1 84 2. 2 34.8 38.7 9.0 11.1 11.3 10.1 0.79 3.2 9.2 O P 1 5Mah Sing D ec 1.84 1 53 0. 1 14.0 17.2 23.6 22.8 13.1 10.7 1.67 -5 6 .5 3.1 O P 0Sunrise Jun 2.00 9 90 . 8 29.9 33.2 10.6 11.1 6.7 6.0 0.81 9.6 2.1 O P 3 0Y N H De c 1.70 6 89 . 0 16.1 20.8 25.2 28.8 10.5 8.2 0.92 16.9 2.4 M P 4 0Paramount D ec 4.38 5 22 . 5 58.3 63.8 10.3 9.4 7.5 6.9 0.96 7.7 6.7 O P 3 5Glomac Apr 1.37 4 07 . 1 13.9 15.4 22.1 10.4 9.8 8.9 0.72 8.5 6.2 O P 3 0Hunza Jun 1.38 2 68 . 2 27.6 20.9 3.4 - 24 . 2 5.0 6.6 0.58 4.8 4.1 T B 5 0Simple average 11.9 10.2 1.1 2.2 4.1

Table 5RNAV Breakdown

Property Development Tenure Remaining Remaining Equity NPV @ 9.1%size (acres) GDV (RM mil) interest (RM mil)

Northern RegionBandar Laguna Merbok Freehold 75.2 7 1 1 0 0 % 12.3Bukit Banyan Freehold 492.5 8 8 5 1 0 0 % 54.0

Klang ValleyKemuning Utama Freehold 206.2 3 1 0 1 0 0 % 43.5Surian Industrial Park Leasehold 0 1 2 3 1 0 0 % 16.9Section 13, PJ Leasehold 5.2 4 0 0 1 0 0 % 38.4Lots 7&9, Kota Damansara Leasehold 9.4 1 0 0 1 0 0 % 12.2

Glenmarie Freehold 21.7 5 0 0 1 0 0 % 48.5

Cyberjaya Freehold 5 0 5 2 7 1 0 0 % 54.6

Total projects DCF 280.3Land held for development (book value) & property dev. costUnbilled sales 22.6

Total value for property development 530.2

Education EPS PE target Equity value(RM mil) (RM) (x) (RM mil)

FY11 net earnings 18.2 0.15 12.0 218.5

Investment assets / properties Tenure NBV Land area Market value(RM mil) (sqf) (RM mil)

Jerneh* - 54 .2 - 119.3Sekolah Sri KDU campus Leasehold 64.0 5 20, 57 9 86.0KDU College SS22 Freehold 8.2 1 16, 08 2 45.0KDU Penang campus Freehold 29.5 8 6, 0 4 6 49.0Sub-total 299.3

Total value (RM mil) 1,048.0Net current assets less property development (RM mil)Long term liabilities (RM mil) (87.4)Total RNAV (RM mil) 1,064.6Shares base (mil) 119.3RNAV per share (RM) 8.93

Discount 3 5 %Fair value per share (RM) 5.80

Note: The negative EPS growth in FY10 for Suncity was due to change of FYE in FY09 (FY09 has 18 months period)Source: RHBRI


35/106




Table 6Earnings Forecasts

FYE Dec (RMm) FY09a FY10F FY11F FY12FRevenue 404.9 440.9 472.6 518.8Operating profit 71.9 88.4 95.8 108.9Interest expenses (2.4) (3.1)

RHBRI’s Monthly Stock Watch : Special Focus : Earnings Beat Our Expectation; But Global Recovery...

Documents

Transcript of RHBRI’s Monthly Stock Watch : Special Focus : Earnings Beat Our Expectation; But Global Recovery...