RHBRI's Stock Watch (December 2011)

In contrast, the better-than-expected results of Maybank came mainly from lower-than-expected credit cost and minority interest charged, partly offset by weaker-than-expected non-interest income. In addition, the change in accounting treatment for the recognition of profit equalisation reserve also helped lift earnings.

The stronger-than-expected revenue growth of DiGi, on the other hand, came from stronger data and prepaid voice, aided by festivities, as well as improvement in consensus, were above our forecast on account of better-than-expected EBITDA margins on the back of lower other operating costs and supplies & materials expenses, as well as lower effective tax rate.

During the quarter, BAT experienced stronger-than-expected industry volume growth, while earnings of Genting Plantations were boosted by stronger-than-expected increase in FFB production.

The Under-performers...

Sector-wise, earnings of the semiconductor, building materials, construction, motor, transportation, oil & gas and healthcare continued to disappoint. In addition, the insurance sector which reported stronger-than-expected results in the previous two quarters, succumbed to higher-than-expected claims ratio (as in the case of MNRB Holdings and Kurnia Asia) and lower investment income (LPI Capital) and disappointed this time round.

In the semiconductor/IT sector, both MPI and Unisem sufferred from lower revenue and EBITDA margins on account of lower contribution from higher margin chip packages. The results of Notion Vtec, however, were above our forecast due to better EBITDA margins and operating income from the sales of raw material scrap.

Within the building materials sector, steel players continued to suffer from downturn in the industry and margin contraction as a result of lower selling prices of steel products. Out of the five steel manufacturers we cover, two earnings were below forecasts (CSC Steel and Ann Joo Resources), one in line (Kinsteel) and two above projections (Hiap Teck and Perwaja). In addition, the two cement manufacturers (Lafarge and YTL Cement) also experienced lower-than-expected sales volume and prices on account higher cement price rebates.

Of the eight construction stocks that we cover, two results were below our expectations (MRCB and TRC Synergy) and the other six within our forecasts (Gamuda, IJM, WCT, HSL, Fajarbaru and Eversendai). The variance of MRCB’s earnings against our forecast came largely from lower-than-expected billings for both construction and property divisions, and to a ceratin extent, the lower-than-expected margins. The earnings of TRC Synergy, on the other hand, were dragged down by higher start-up costs from infrastructure projects, particularly the RM950m “package A” main contract of the Kelana Jaya LRT Line extension project.

Similarly, results of the oil & gas sector were also below forecasts as four out of the 10 stocks we cover reported disappointing results (MMHE, Wah Seong, KNM and Perdana Petroleum), five within expectations (Petronas Chemicals, Petronas Gas, Wah Seong, Kencana and SapCrest) and one above forecast (Dayang Enterprise). As mentioned earlier, earnings of MMHE were below projection due to a drop in revenue from the E&C division. During the quarter, Wah Seong’s results were dragged down by forex losses on its contracts on hand and higher-than-expected minority interest, while that of KNM by provisions, likely for cost overruns incurred under legacy contracts won in 2009 to 1H FY2010. The earnings of Perdana Petroleum were hit by lower utilization of the company’s vessels and losses from associate,

Petra Energy due to the Kumang Cluster project. In contrast, Dayang’s earnings were above forecast, boosted by better-than-expected margins from the marine charter division and lower-than-expected interest cost.

Market Strategy: Stay Defensive

Despite the deepening euro debt crisis and a struggling US economy, global equities have been more resilient than what we had expected. However, in the absence of a concrete solution for the euro debt crisis and given that US politicians are too divided to resolve a dispute over taxes and spending, concerns are growing that things could turn from bad to worse in the months ahead. Consequently, we believe investors are still in for a volatile year ahead. Under such circumstances, we continue to advise caution, and this is reflected in our top picks, which include companies with stable cash flows and above-market yields.

Source: RHBRI report