09 August 2012

Astro Malaysia IPO Update: Astro Malaysia unveils draft prospectus, plans to use 58% of the money that would potentially be raised for capital expenditure, 29.3% for repayment of bank borrowings, 8.6% for working capital and the rest for paying off its listing expenses

Astro Malaysia Holdings Bhd aims to list on the Main Market of Bursa Malaysia and has unveiled its draft prospectus on the Securities’ Commission website yesterday.

The joint principal advisers and joint managing underwriters to this pending initial public offering (IPO) exercise are CIMB Investment Bank Bhd, Maybank Investment Bank Bhd and RHB Investment Bank Bhd.

The satellite television (SatTV) and digital radio broadcaster said in the prospectus that it planned to use 58% of the money that would potentially be raised for capital expenditure, 29.3% for repayment of bank borrowings, 8.6% for working capital and the rest for paying off its listing expenses.

The draft prospectus for the sole SatTV provider in Malaysia showed that its revenues were on a steady upward trend increasing from RM3.24bil in the financial year ended Jan 31 (FY10) to RM3.66bil in the next year and eventually grew to RM3.89bil in FY12.

Net profits including minority interests, however, showed a more erratic trend initially increasing from RM613.93mil in FY10 to RM827.48mil in FY11, then declining to RM629.62mil in FY12.

Trend for earnings before interest, taxes, depreciation and amortisation (EBITDA), however, showed an increasing trend as well from RM986.2mil in FY10 to RM1.37bil in the next year and then seeing further growth to RM1.41bil in FY12.

The SatTV services provider saw net profit margins recorded in FY12 at 16.2% while EBITDA margins were at 36.4% in the same financial year as well.

“Pro forma depreciation and amortisation increased by RM100.9mil, or 40.3%, from RM250.4mil for FY11 to RM351.3mil for FY12,” it said.

“The increase was primarily attributable to depreciation arising from a higher deployment of Astro B.yond set-top boxes as a result of an increase in HD and PVR take-up by new and existing subscribers as well conversion,” it added.

Astro Malaysia, which had previously been listed under the name Astro All Asia Networks Plc, provides SatTV services to both Malaysian and Bruneian homes, the draft prospectus showed.

It also showed that total intangible assets stood at RM1.76bil against the next biggest asset component of property, plant and equipment at RM1.71bil.

Astro Malaysia’s total equity as at April 30 was a negative RM1.13bil while it said its total indebtedness, which also comprised contingent liabilities, was at RM4.56bil.

“The deficit position is primarily due to the reorganisation, whereby for accounting consolidation purposes, our acquisition of Measat Broadcast Network Systems Sdn Bhd (MBNS), our largest operating subsidiary, was accounted for as a capital reorganisation of MBNS and the difference between the consideration for MBNS and the net assets of MBNS at the date of acquisition has been taken to capital reorganisation reserve,” it explained in the draft prospectus.

“Notwithstanding the above, after taking into account the public issue, our group’s shareholders’ equity as it appears in the pro forma consolidated balance sheets as at April 30, is no longer in deficit,” it said.

It was previously reported before that the Astro relisting could be raising up to US$1.5bil (RM4.65bil).
Astro Malaysia Holdings Bhd is supported by about three million residential pay-TV users, making it the largest pay-TV operator in South-East Asia by subscriber base.

According to its draft prospectus, Astro has a market penetration of about 50% of Malaysian TV households, of which it has a market share of 99% in the residential pay-TV market in 2011.

The company surpassed its one million residential pay-TV subscriber mark in 2003, and the figure hit two million in 2007.

“Our leading position is reflected by our 156 TV channels as at June 30, of which 68 are Astro-created and branded channels.

“We distribute content to our customers via broadcast and on-demand programmes through our Direct-To-Home satellite TV, IPTV and Over-the-Top platforms, making our TV offerings increasingly platform agnostic in reaching our customers,” it said.

In the financial year ended Jan 31, the company produced about 8,000 hours of TV content and have produced or commissioned for production over 40,000 hours of TV content as at June 22, being the last practical date for certain information to be obtained and disclosed in the draft prospectus.

“Based on our existing position, we believe we are well positioned to capitalise on the potential growth of the Malaysian economy and a young population demography that is open to the adoption of new technologies,” it said.

This was based on the Independent Market Research (IMR) Report that forecast Malaysia's nominal gross domestic product to grow at a compounded annual growth rate (CAGR) of 8% from 2011 to 2016, and the expected growth of Malaysian average monthly household income at a CAGR of 5.3% from 2011 to 2016.

“We believe this economic growth will contribute to higher consumer spending in media, expansion of the advertising market and an increase in residential pay-TV subscriber penetration from 50% of Malaysian TV households in 2011 to 63% in 2014,” it said.

In its draft prospectus, Astro mentioned several strategies to maintain its leadership in the consumer media entertainment sector in Malaysia, notably to leverage on new technologies to develop products that enhance reach and service proposition.

“We will continue to capitalise on the emergence of new technologies and develop new products to expand our customer reach and enhance our service proposition to consumers,” it said, along with its plans to pursue a targeted acquisition strategy to grow its subscriber base.

Astro's radio comprises nine commercial stations available over FM, DTH satellite TV, IPTV and mobile platforms as well as the Internet, which includes the highest-rated radio stations in Malay, Chinese, Indian and English languages in terms of listenership.

In April, the company's radio operations recorded about 13 million weekly listeners, capturing 52% share of listenership in Malaysia. It also commands 53% share of the radio advertising expenditure for the three months ended April 30.
Source: www.thestar.com.my

01 August 2012

Lafarge, Malaysia's largest cement producer by capacity confirmed raising cement prices

The usually staid cement industry got a bit hot under the collar recently when rumours surfaced of a hike in prices that will, in fact, take effect today.

The Master Builders Association Malaysia (MBAM) kicked up a fuss last week after it was notified by one its members, which happens to be a large listed developer, that one of the “major” local cement manufacturers had all but decided to raise the list price of cement in the Klang Valley.

A few days earlier, the Building Materials Distributors Association of Malaysia came out to say that the price for a 50kg bag of cement was set to climb RM1 and the price per tonne RM20, according to market talk.

This means a 6% increase from the current prices of RM16.75 per 50kg and RM320 per tonne. The last time prices were higher was in March 2011, also by 6%.

Naturally, those who would be affected were up in arms, alleging that collusion and even an artificial shortage had taken place among the six producers, namely YTL Cement Bhd, Tasek Corp Bhd, Cement Industries of Malaysia Bhd, Lafarge Malayan Cement Bhd, CMS Cement Sdn Bhd and Holcim (M) Sdn Bhd.

Then yesterday, Lafarge let the cat out of the bag when the country's largest cement producer by capacity confirmed it was raising prices.

“The decision was made unilaterally and taking into consideration our increasing costs associated with manufacture and delivery of cement, which we have endeavoured to absorb over the years,” its executive director, Chen Theng Aik, was quoted as saying by a local daily.

He also refuted claims of collusion, insisting that a shutdown of its facilities for maintenance earlier this year had led to lower production.

When contacted, MBAM president Matthew Tee said the organisation, which represents the local construction industry, had made its stand and was sticking to it.

In a statement last week, MBAM appealed to the Domestic Trade Ministry to look into the matter, saying the increase in price would “definitely” result in a spike in the price of all concrete and cement-based products, and inevitably the cost of construction.

“Contractors will be impacted as they have signed fixed-price contracts with project developers. Ultimately, the price increase will be passed on to end-purchasers and house buyers.

“We see no reason for the said increase as production costs have not gone up but in fact fuel and energy costs have come down this year. We would like to draw the attention of the Malaysia Competition Commission to investigate whether the major cement manufacturer is making use of its dominant position to lead in the said price increase and thus control the market price.”

Tee also told StarBiz by phone that the association did not oppose a price rise per se, but rather the lack of “due and proper notice.”

“As long as there is proper notice, and based on fair market conditions, we are OK with higher prices,” he said, noting that the two sides had in the past engaged each other on this very issue.

He also questioned the view that Lafarge's decision was motivated by supply and demand, stressing that price hikes should not be done erratically. “What if it goes up again in September, or later?”

Another industry player pointed out that once Lafarge began charging its new rates, the rest were sure to follow suit, if past experience was anything to go by.

So far, only Sarawak-based CMS Cement has said publicly it will keep prices as they are. The other firms did not immediately respond to queries from StarBiz.

Meanwhile, the Cement and Concrete Association of Malaysia (CNAC) has steered clear of the debacle, saying it has no role whatsoever in the setting of prices by its members.

“I have made it quite clear. Pricing is not a matter for CNAC to collate as that would be against competition laws. Each company has the right to raise prices on its own volition,” executive director Grace Okuda explained.

On the repercussions of this for property developers, Real Estate and Housing Developers Association president Datuk Seri Michael Yam said any increase in building material costs would, due to the compounding effect, lead to more expensive homes and offices.

“We are concerned because there is only so much the customer can bear,” he said, but added he was cognisant cement companies were entitled to a return on their business.

Be that as it may, analysts are of the opinion that the price rise was driven by market forces as massive infrastructure projects, including the Klang Valley My Rapid Transit and extension of the Light Rail Transit, get under way, giving a fillip to demand.

One industry watcher rubbished claims that more costly cement would cause a plunge in consumption or some such adverse reaction.

“The market will adjust itself. Supply and demand will take precedence at the end of the day,” he said.

Source: www.thestar.com.my

31 July 2012

Malaysia will increase shipping quotas for tax-free crude palm oil (CPO) by up to two million tonnes this year to help planters cope with an expected increase in output, sources said as the world's No. 2 supplier struggles to maintain export momentum

Malaysia will increase shipping quotas for tax-free crude palm oil (CPO) by up to two million tonnes this year to help planters cope with an expected increase in output, sources said as the world's No. 2 supplier struggles to maintain export momentum.

The move will lift Malaysia's total duty-free CPO export quota to five million tonnes this year and comes after top importer India this month raised base import prices of refined palm oil, encouraging more crude palm oil shipments.

Both Malaysia and India are trying to retain market share after top palm oil producer Indonesia slashed in September export taxes of refined palm oil, used as a cooking oil, to boost its own processing industry.

“We are doing this on a case-by-case basis for local firms since production is starting to rise in the second half of this year and exports are a bit slow,” said one government official who declined to be named due to the sensitivity of the issue.

“It is a stock management effort. This is in an interim response to Indonesia at the moment. We are still formulating a comprehensive response,” the source added.

Malaysia said Jakarta's export tax cut had eaten into its own refined palm oil shipments and hurt its processors. India shares these concerns, especially as it has spent billions to build up its edible oil manufacturing sector.

Benchmark Malaysian palm oil prices rose 1.6% yesterday, driven partly by concerns of the US drought crimping soyoil supplies and also news of the higher quotas from Malaysia, traders said.

The five million tonnes set aside for export account for 27% of Malaysia's 2012 output of 18.4 million tonnes, potentially lifting local delivered prices of CPO and narrowing their discount to the Indonesian export grade.

The tax-free export quota appears to have turned into a stock management tool for the government.

Production has risen consistently since March this year and is expected to go as high as 1.9 million tonnes in September, the Malaysian Palm Oil Board estimates, which is well within the peak yield season for oil palms.

On the other hand, exports have fallen 18.6% during July 125 to below 990,000 tonnes compared with the preceding month due to a lull in Asian demand, data from cargo surveyors show, which has stirred concerns about oversupply.

“The extra allocation of two million tonnes will benefit the planters more than the refiners,” said a trader with a local refinery. - Reuters

“I am sure that this will be subject to abuse.”

Many traders have criticised the quota system for its lack of transparency, saying licence holders offer tax-free CPO to domestic refiners, allegations planters deny.

Refiners also complain that the export quota create an artificial supply squeeze, raising feedstock prices and lowering margins further.

Some traders said the extra export quota would help support palm oil prices in what is likely to be an election year. Many voters are also small oil palm farmers. - Reuters

Source: www.thestar.com.my

26 July 2012

Summary of Analyst Report: Sunway Bhd target price RM.2.93, Buy - Hong Leong Investment Bank Research

Sunway's share price has been relatively muted after it was revealed that the company (by May) had not launched any new property projects while guiding down its new launches from RM1.5bil to RM800mil (based on effective stake).

The lower revised target was mainly due to the postponement of about RM300mil gross development value (GDV) based on 60% stake for Sunway Geo located at South Quay and RM180m GDV based on 60% stake in Tianjin, China.

The former is due to the slower take-up rates for its existing projects i.e. LaCosta Condominium (GDV: RM242mil, 51% take-up), while the latter is due to tightening policies in China.

Although investors may perceive this negatively, Sunway tends to launch its products at a premium of some 10% to 30% compared with its neighbouring developments, hence the take-up rate for new launches has been slower compared with the rest of its peers.

Before the merger, its take-up rate had been approximately 60% to 70%, and only jumped up to 90% in the financial year ended June 30, 2011 (FY11) after the merger.

We applaud the management's decision to roll back its new launches. Firstly, it will avoid having unnecessary working capital tied in.

Secondly, with a higher take-up rate target, it will translate to faster monetisation of its development projects.

Hence, we believe that we are beginning to see the positive changes arising from the merger in the form of prudent risk-adjusted development ventures to ensure that shareholders' interests are protected.

So far, Sunway's new major launch has been from Pasir Ris, Singapore, with a GDV of some RM266mil (based on 30% stake).

The balance of launches will be sporadic around Penang, Ipoh, Equine Park, etc, places where the management is confident about take-up rates.

Despite the lower target of new launches, it does not indicate that Sunway's new property sales will be badly affected.

As of the second half of 2012, the company has already achieved new property sales of about RM600mil, a sharp increase of RM426mil in new sales achieved for the second quarter compared with only RM174mil new sales in the first quarter.

By simply annualising the new sales figure, which works out to new sales of some RM1.2bil, we believe Sunway will exceed their new sales target of RM800mil and touch close to the previous new sales target of RM1.4bil.

We estimate that Sunway has an unbilled property sales of about RM2.1bil, translating to 2.3 times FY11's property revenue.

By assuming just the book value of the property and property investment division, our base case valuation for Sunway works out to RM2.48.

Including dividend yield of 2.3%, there is still 10.6% upside from the current price level, hence we believe that the company remains undervalued.

Earnings for FY12 and FY13 have been cut by 3.5% and 12% respectively to reflect slower property earnings contribution while introducing our forecast for FY14.

Source: www.thestar.com.my

Summary of Analyst Report: Axis Real Estate Investment Trust's (REIT) target price RM 3.35, Buy - Hwang DBS Vickers Research

Axis Real Estate Investment Trust's (REIT) acquisition line-up remains strong with agreements for three properties signed (offering 8% to 9% net property income yields), while two more are likely to be firmed up by end-2012.

A majority of the properties under negotiation are tenanted to companies within Axis' current customer base, while Axis Technology Centre 2 (ATC2 an office/warehouse block) is a private equity project by the promoter that is likely to be injected.

Gearing will potentially hit 35% by end-2012, and we think a placement is foreseeable in early 2013.

The REIT will be seeking approvals for renewal of its Income Distribution Reinvestment Plan (up to 2.2 sen of the second quarter of 2012 distributions), additional equity placements (up to 91 million units), management fees payable in units (up to 2 million units) and acquisitions and disposal of properties.

Asset enhancement initiatives for Infinite Centre and Wisma Bintang are on track, and should see strong gains in valuations and rentals when completed (estimated by 2013), which is factored into our forecast.

The REIT is also applying for MSC Malaysia status for various properties, which could result in rental premiums if received due to strong demand from companies.

After modifying our assumptions to account for Kayangan Depot disposal, acquisition of Wisma Academy & Annex and potential acquisitions in the financial year ending Dec 31, 2013 (FY13) (we now assume ATC2 will be acquired in the second half of 2013 instead of in the second half of 2012 at 8% net property income yield), FY12 to FY14 forecast earnings are adjusted by -0.3% to 1.3%.

Long-term growth drivers are intact with strong contribution from ATC2, leading us to lift our target price to RM3.35 (but beta adjusted to 0.6 from 0.5).

FY12 forecast distribution per unit is raised to 19.4 sen after including management fees payable in units (estimated to be 15% of management fees) and disposal gain on Kayangan Depot.

Source: www.thestar.com.my

Summary of Analyst Report: Oldtown Bhd fair value RM 2, Buy - OSK Research

We expect Oldtown's second-quarter results to exceed our previous estimates, coming in at RM11mil to RM12mil. These numbers are likely to be driven by stronger sales for its fast moving consumer goods (FMCG) products in China, surging 58% in first half compared with first half 2011, as well as better-than-expected food and beverages (F&B) sales due to promotions such as its newly-introduced set lunch menu.

Moving towards the end of financial year ending Dec 31, 2012 (FY12), management is guiding for an internal FY12 net profit target of some RM40mil but we believe it could surpass this target by some 5%.

We are taking the opportunity to raise our FY12 and FY13 core earnings forecasts by 6.3% and 13.4% respectively, mainly based on our expectation of a higher utilisation rate at its upcoming FMCG plant in FY13, higher average selling prices for its FMCG products, and higher average spending per customer.

We believe that its appointed distributors will substantially stock up on Oldtown coffee products next year once its new factory in Ipoh starts to cater to increasing demand, which will in turn contribute to a sharp spike in sales in first half of FY13.

Despite our positive view, our earnings revision for FY12 is minimal as we think that the company's third quarter earnings may be subdued since the period coincides with the Ramadan month, during which its F&B business experiences a seasonal slowdown versus other quarters.

Also, we do not see a significant rise in contributions from its FMCG segment as the company's existing plant is running close to full capacity (95%-96%). That said, we gather that management will beef up advertising and promotions during the quarter to boost sales. It recently introduced the “Rendang Delight Menu,” which we gather was well received.

All in all, we continue to like Oldtown's exciting growth prospects, supported by potentially major developments next year. We are reiterating our “buy” recommendation on the stock, with a revised fair value of RM2.00, as we roll over our valuation to 13 times FY13 earnings per share. Our fair value implies a potential return of 19.4% (including prospective dividend yield).

Source: www.thestar.com.my

AirAsia Bhd carried 8.258 million passengers in its second quarter of 2012, up 13%, from 7.347 million passengers last year

AirAsia Bhd carried 8.258 million passengers in its second quarter of 2012, up 13 per cent, from 7.347 million passengers last year.

The budget carrier said in a statement that the capacity increased by 13 per cent to 10.462 million seats, while load factor was 79 per cent compared to 80 per cent last year.

AirAsia added seven aircraft, raising its fleet to 100.

The airline strengthened its Malaysian operations in the domestic and international market by increasing frequencies on Kuala Lumpur-Terengganu, KL-Langkawi, KL-Vientiane, Langkawi-Singapore, KL-Saigon and utilising one new aircraft that was delivered end-May 2012.

In Malaysia alone, there was an increase of 10 per cent in the number of passengers carried to 4.90 million, from 4.47 million last year. The load factor was 80 per cent compared to 81 per cent in 2011.

Its affiliate Thai AirAsia carried 1.93 million passengers, an increase of 20 per cent compared to last year's 1.61 million.

AirAsia said the increase was supported through an extended capacity of 19 per cent with new Chiang Mai-Macau route and additional frequency for its Bangkok-Trang route for the quarter.

It posted a strong load factor of 79 per cent in second quarter, an increase of one percentage point year-on-year.

Indonesia AirAsia posted a stronger load factor of 78 per cent, or increased two percentage point year-on-year, as the result of capacity expansion followed by strong passenger demand.

Passengers carried increased by 15 per cent to 1.44 million, from 1.25 million last year, whereas capacity increased by 12 per cent year-on-year.

It continued to strengthen its hub via the introduction of Bandung-Penang, Bandung-Pekanbaru and Denpasar-Yogyakarta. It also added frequency for Bandung-KL and Denpasar-Surabaya.

Source: www.btimes.com.my

First day trading of IHH Healthcare Bhd's stocks registered 10.4% and 10.1% premium in Malaysia and Singapore, respectively

IHH Healthcare Bhd, the world's third largest initial public offering (IPO) this year, defied overall weak market sentiments to stage a sound trading debut in Malaysia and Singapore yesterday.

Shares register 10.4pc and 10.1pc premium in Malaysia and Singapore, respectively

The hospital operator, the second largest in the world by market value after United States' HCA Holdings Inc, opened simultaneously in both markets at a 9.6 per cent premium over the offer prices of RM2.80 and S$1.113 (RM2.81), respectively.

In Malaysia, the shares rose to as high as RM3.19 before ending the day at RM3.09, fetching a 10.4 per cent, or 29 sen, premium.

Some 390.3 million shares changed hands, making IHH, which is controlled by state investment firm Khazanah Nasional Bhd, the day's most actively traded counter.

"It is a very decent debut, considering its rich valuation and the fact that the market has been weak in the last few days," said Choo Swee Kee, executive director at fund management firm TA Investment Management Bhd, which manages some RM700 million in investments.

The FTSE Bursa Malaysia KLCI benchmark index , which had been on a four-day losing spell, gained 0.15 per cent to close at 1,635.09. Most other markets in Asia, including Singapore, ended the day lower.

IHH will be included in the 30-stock FBM KLCI from August 1, taking the place of MMC Corp Bhd.

IHH shares in Singapore rose to as high as S$1.245 before closing at S$1.225, fetching investors a 10.1 per cent premium.

Managing managing director Lim Cheok Peng, in a press conference here minutes after the debut, said the group was "quite happy" with the opening price and urged investors to hold the shares for the long-term.

In three to five years, the group hoped to have doubled in size and profitability and to replace HCA as the world's number one hospital operator, he added.

"This stock is not for speculation. I would urge you to grow with IHH and I am sure you will be rewarded in the longer term," he remarked.

Most analysts who track the stock have a positive recommendation on it, with their fair values ranging from as low as RM3.15 (Affin Research) to as high as RM3.49 (Hong Leong Investment Bank).

ECM Libra has a "hold" call on it with a target of RM2.94. At RM2.80 a share, IHH is priced at 38.9 times Hong Leong's earnings estimates for the group for this year.

Analysts consider it to be the most expensive healthcare stock among its top peers globally.

The group, in its IPO prospectus, announced plans to add another 3,300 hospital beds over the next three to five years to its current 4,900 beds, to cash in on a growing affluent community in the region that wants better healthcare.

To date, it has spent about 75 per cent of the more than RM6 billion needed for those plans, Lim said.

It is looking for hospital opportunities in China, where it already has eight clinics based in Shanghai, Chengdu and Hong Kong. "At the moment, we are entering into a contract to run two hospitals in Shanghai. We are also bidding for private hospitals that the government is tendering out in Hong Kong," he added.

The IPO, which raised RM6.3 billion, is the third biggest so far this year after social media group Facebook and oil palm operator Felda Global Ventures Holdings Bhd (FGV).

Private equity manager Abraaj Capital exited its investment in IHH through the IPO.

FGV, which was listed here last month, surged 18 per cent on its opening before closing at a 16 per cent premium over its offer price.

Source: www.btimes.com.my

25 July 2012

Summary of Analyst Report: Kuala Lumpur Kepong's (KLK) target price RM 21.62, Reduce - Affin Investment Bank Research

Kuala Lumpur Kepong's (KLK) realised crude palm oil (CPO) selling prices have been consistently lower than the Malaysian Palm Oil Board (MPOB) averages and those of its peers due to the dilutive impact of the Indonesian export duties.

KLK's three refineries coming on stream in Indonesia this and next year will allow the group to recoup the Indonesian CPO price “discount” of about RM500 per tonne.

However, the latest move by the Indian government to effectively raise import duty on refined palm olein imports by about RM134 per tonne is expected to cut refining margins, thereby lengthening the payback period for the three refineries.

Margins from existing Malaysian refining operations may also be affected but there will be offset from higher CPO prices as Indian refiners import more.

Meanwhile, the total immature areas of 34,495 ha imply that total mature areas adjusted for replanting of older palms could potentially increase by over 20% in the next three years.

The group also has a plantable reserve of 22,048 ha and will be converting 5,000 ha of aging and low-yielding rubber areas into oil palm plantations in the next four years.

More areas in Indonesia coming to maturity and reaching prime age as well as yield improvements are expected to contribute to fresh fruit bunches (FFB) production growth of 6%-10% in financial years 2012 to 2014.

Its capital expenditure in financial year 2012 is budgeted at RM1.1bil (more than doubled the RM477mil in financial year 2011 and RM366mil in financial year 2010) for new planting as well as new and expansion of palm oil mills and oleochemicals plants.

Funding is not an issue, given the profitability of its operations as well as the group's cash reserve of over RM1.4bil and low net gearing of less than 0.1 times as at end-March.

It should be noted that corn and soybean prices have recently hit record highs following reports of a worsening draught in the US Midwest.

CPO futures, however, have yet to show signs of a bullish rally as supply remains ample while production is still on an uptrend.

We continue to monitor the outlook as high prices of corn and soybeans could turn down quickly if weather patterns in the US Midwest and South-East Asia improve.

Overall, while we continue to like KLK's good management and long-term growth prospects, at the current price and implied 2013 price-earnings of 17.7 times, our “reduce” call is maintained.

Source: www.thestar.com.my

Summary of Analyst Report: Digi target price RM 4.05, Underperform - CIMB Research

Revenue and depreciation surprises were behind DiGi's first half (ended June 30) core net profit shortfall of 5% relative to our forecast and 9% relative to market.

The company's revenue was hit by a ban on bulk short-messaging service (SMS) and its decision against selling wireless broadband while competition in international direct dialling (IDD) service is eating into its margins.

The 5.9 sen dividend per share (142% payout) for the second quarter was within expectations and was higher than last year's 3 sen (99% payout).

We have cut financial years 2012 to 2014 earnings per share but raised our discounted cashflow target price for a lower weighted average cost of capital of 10.7% (previously 11.6%) to reflect its high dividend payout, which has improved capital structure efficiency.

But DiGi is still an “underperform” call for us due to stiff IDD competition.

Meanwhile, DiGi's service revenue inched up only 0.8% quarter-on-quarter due to a ban on bulk SMS and its decision not to offer the lower-yielding wireless broadband which dented revenue.

While earnings before interest, taxes, depreciation and amortisation (EBITDA) margin was reduced by 1 percentage point, IDD competition had little impact on DiGi's revenue.

DiGi is benefiting from good price elasticity in the IDD space where lower prices have stimulated usage but have resulted in higher international traffic costs.

Also, DiGi's voice usage is being cannibalised by over-the-top applications such as Viber and WhatsApp.

Despite higher IDD usage, minutes of use were unchanged quarter-on-quarter in the second quarter, after falling 1.5% in the first quarter.

Lastly, its revenue and EBITDA growth rates are rapidly slowing.

In our core net profit, we have deducted RM24mil accruals that were written back.

Not surprisingly, DiGi noted that IDD is seeing stiff competition from the mobile virtual network operators, U Mobile and Maxis.

Competition is also intense in bundled offerings with pressure on handset subsidies.

DiGi may have to raise its marketing costs to counter rising competition and defend its market share.

DiGi has maintained its guidance of mid-to-high single-digit revenue growth versus industry revenue growth of mid-single-digit growth, an unchanged EBITDA margin year-on-year, and capital expenditure of RM700mil to RM750mil.

Chief financial officer Terje Borge had hosted an investors briefing in conjunction with the results announcement.

There were no major surprises and most of the questions centred on the competition in both IDD and product bundling, its ability to maintain its growth and updates on its network swap-out and collaboration with Celcom.

We are lowering our financial years 2012 to 2014 core net profit estimates by 4% to 7% after shaving our revenue forecasts for the weaker-than-expected revenue and raising our estimates for depreciation and amortisation.

Our dividend per share estimates are also revised downwards by 4% to 8%.

We believe that DiGi's revenue will remain under pressure due to competition in the IDD segment.

Maxis is intent on capturing its fair share of the market, which places substantial risks on DiGi, which derives about 20% of its revenue from IDD.

Source: www.thestar.com.my