strategy note - must-own stocks for long-term investing

Malaysia│Equity research│October 9, 2015

Strategy Note

IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH CERTIFICATIONS, ARE PROVIDED AT THE END OF THIS REPORT.

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Malaysia Strategy Must-own stocks for long-term investing

■ What stocks should investors buy for 3-5 year horizons when it is difficult enough to outperform in 6-12 months?

■ Based on a matrix taking into consideration management, financials, valuation and growth, we come out with a list of top choices for each sector.

■ Greatest upside come from companies that 1) are smaller in size, 2) have ambitious and aggressive management and 3) trade at attractive valuations.

■ Top-5 stocks with greatest long-term share price upside are Only World Group (OWG), MyEG, GHL Systems, Hovid and RHB Capital.

Taking a long-term investment approach While analysts typically have three-year earnings forecasts for companies under coverage, it is standard practice to have price targets of only 6-12 month time horizons. It is rare to have price targets of 18 months or further out due to the volatility of share prices and demands from investors. It is our challenge to develop a methodology that will help determine which stocks to choose for relatively long 3-5 year investment horizons, and to estimate their share price upsides.

What determines share prices in long term? Short-term share price movements are a function of the direction of sector and broader market trends, quarterly results performance, corporate newsflow and analyst recommendations and coverage. We believe long-term share price is determined more by fundamentals of the stock such as management capability, financial strength, relative valuations and earnings prospects. These are the four factors we focus on in this report.

Smaller caps with ambitious management tops This exercise is not meant to pick the best sectors to overweight or underweight, but to choose the one stock within each sector that we believe investors with very long-term investment holding periods should buy. Based on the bottom-up approach, naturally it is smaller caps that should enjoy stronger EPS growth and therefore higher long-term price upside. Also, we believe those with aggressive and ambitious management that trade on attractive valuations have the potential to provide the highest returns.

Long term large cap and smaller cap picks Note that our assumptions for the longer term are biased towards a more positive macro outlook without any major company-specific negative shocks. That means there could be downside to our targets should any unforeseen developments take place. For larger caps, the top-3 stocks with the highest potential share price upsides are RHB Cap, Hartalega and Gamuda. For smaller caps, it is OWG, Myeg and GHL Systems.

Figure 1: Long-term stock-picking by sector

SOURCES: CIMB, COMPANY REPORTS

SOURCE: COMPANY DATA, CIMB FORECASTS

Highlighted companies

GHL Systems Bhd

ADD, TP RM1.65, RM1.09 close

GHL is entering an exciting growth phase with its physical and online merchant acquisition strategy following the implementation of

transaction payment acquisition model in Malaysia and Philippines this year. We expect GHL to benefit from the Malaysian

government’s ETP initiatives to promote e-payment adoption.

MY E.G. Services

ADD, TP RM3.92, RM2.68 close

We like MyEG's management for its innovative and entrepreneurial ability to add commercial value to its e-government

services. Over the next few years, strong earnings growth will be driven, in our view, by the foreign workers working permit renewal

services and the custom service tax monitoring project.

Only World Group Holdings ADD, TP RM3.66, RM2.27 close

We like OWG for its captive market business model in Genting Highlands and Komtar. This superior long-term economic moat will drive

explosive earnings growth over the next few years, in our view, as the new 20th Century Fox theme park and Komtar comes onstream

and matures.

Analyst

Terence WONG, CFA

T (60) 3 2261 9088 E [email protected]

2018 target 2020 target

Sector Companies Price (RM) price (RM) 2018 upside price (RM) 2020 upside

Autos Berjaya Auto 1.83 3.58 95.6% 4.17 127.9%

Banks RHB Capital 6.13 13.12 114.0% 15.28 149.3%

Construction Gamuda 4.55 6.40 40.7% 7.20 58.2%

Consumer QL Resources 4.12 5.52 34.0% 7.58 84.0%

Gaming Genting Malaysia 4.48 6.00 33.9% 7.00 56.3%

Gloves Hartalega 4.73 7.30 54.3% 8.30 75.5%

Healthcare Hovid 0.46 1.00 117.4% 1.30 182.6%

Media Astro 2.96 4.06 37.2% 4.40 48.6%

Plantations Genting Plant 10.30 14.72 42.9% 15.78 53.2%

Property Eco World 1.38 2.47 79.0% 3.37 144.2%

REIT Axis REIT 1.69 2.04 20.7% 2.43 43.8%

Small caps MyEG 2.68 6.65 148.1% 9.65 260.1%

Technology GHL Systems 1.09 2.40 120.2% 3.65 234.9%

Telcos Axiata 6.21 7.00 12.7% 9.00 44.9%

Timber Ta Ann 3.79 5.40 42.5% 6.00 58.3%

Transport Malaysia Airports 5.40 7.40 37.0% 7.69 42.4%

Utilities Tenaga 12.28 16.06 30.8% 18.40 49.8%

Others Only World Group 2.27 8.67 281.9% 14.66 545.8%

Average 74.6% 125.5%

http://www.efa.biz/


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TABLE OF CONTENTS

Long-term investments ............................................................................................................. 4

Stock selection criteria .............................................................................................................. 4

Which companies come out tops? ............................................................................................. 5

Banking sector ........................................................................................................................ 11

Construction sector ................................................................................................................. 14

Gaming sector ........................................................................................................................ 19

Gloves sector ......................................................................................................................... 21

Healthcare sector.................................................................................................................... 25

Media sector ........................................................................................................................... 27

Plantation sector ..................................................................................................................... 30

Property sector ....................................................................................................................... 34

Smallcaps sector .................................................................................................................... 40

Technology sector .................................................................................................................. 43

Telecommunication sector ...................................................................................................... 47

Timber sector ......................................................................................................................... 50

Transport sector ..................................................................................................................... 52

Utilities sector ......................................................................................................................... 56

Others .................................................................................................................................... 59

Company Briefs…................................................................................................................... 61


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Figure 2: Must-own stocks for long-term investing


Price Target Price P/BV (x)Recurring ROE

(%)

Dividend Yield

(%)

(local curr) (local curr) CY2015 CY2016 CY2016 CY2016 CY2016

Astro Malaysia ASTRO MK Add 2.96 3.70 3,635 24.8 19.7 10.0% 22.17 98.5% 4.1%

Axiata Group AXIATA MK Add 6.21 6.60 12,765 24.2 23.7 -6.3% 2.50 11.8% 3.5%

Axis REIT AXRB MK Add 1.69 3.79 437 8.6 8.5 -3.2% 0.92 11.1% 10.6%

Berjaya Auto BAUTO MK Add 1.83 3.04 492 9.0 8.2 3.5% 3.18 49.6% 5.2%

Eco World Development Group Bhd ECW MK Add 1.38 1.90 770 46.7 27.2 192.4% 0.99 2.7% 0.7%

Gamuda GAM MK Add 4.55 5.88 2,585 16.2 15.8 2.8% 1.71 11.1% 2.5%

Genting Malaysia GENM MK Add 4.48 5.00 5,997 18.4 15.4 14.3% 1.42 8.5% 2.2%

Genting Plantations GENP MK Add 10.30 10.50 1,891 35.9 24.6 -7.5% 1.91 6.1% 1.6%

GHL Systems Bhd GHLS MK Add 1.09 1.65 166 45.9 26.3 51.0% 2.61 7.3% 0.0%

Hartalega Holdings HART MK Hold 4.73 4.62 1,832 29.5 23.5 11.1% 5.02 22.2% 1.7%

Hovid Bhd HOV MK Hold 0.46 0.42 86 16.0 14.2 2.7% 1.77 13.3% 2.5%

Malaysia Airports Holdings MAHB MK Hold 5.40 5.43 2,115 58.8 38.8 15.5% 1.04 1.9% 0.8%

MY E.G. Services MYEG MK Add 2.68 3.92 758 24.5 14.4 63.2% 7.16 57.6% 1.1%

Only World Group Holdings OWG MK Add 2.27 3.66 99 22.0 13.9 38.7% 2.39 14.6% 0.7%

QL Resources QLG MK Add 4.12 4.93 1,214 24.5 20.8 7.9% 2.98 15.4% 1.2%

RHB Capital Bhd RHBC MK Add 6.13 9.00 3,746 7.4 6.8 -1.8% 0.75 12.3% 4.0%

Ta Ann TAH MK Hold 3.79 3.35 332 11.8 9.5 5.6% 1.20 12.0% 5.5%

Tenaga Nasional TNB MK Add 12.28 16.38 16,363 10.2 9.6 0.7% 1.25 15.2% 2.5%

Average 24.1 17.8 26.7% 3.4 16.7% 2.1%

Company Bloomberg Ticker Recom. Market Cap (US$ m)Core P/E (x) 3-year EPS CAGR

(%)


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Must-own stocks for long-term investing

Long-term investments

Background

The purpose of this report is to identify stocks that investors can buy and hold for long periods of time without worrying too much, while at the same time enjoying significant price appreciation. The idea behind this report first emerged two years ago ahead of the 2013 general elections, when investors that were tired of the short-term political risks wanted us to generate a list of stocks that funds could hold for 2-3 years or longer without causing sleepless nights. Some investors requested stocks with even longer holdings periods of 3-5 years. The list we generated was intuitively derived from the top blue chips of each sector, companies that had size, scale and track records to be considered "safe" investments.

While these safe investments likely protected investors from downside risks, whether they would have provided the best long term returns is another matter. As a result, this time around we attempt to approach the issue more systematically and to develop a stock picking model based on criteria that we believe will have the greatest impact on share prices, not in the immediate to short term, which is anything from weeks to a year, but in the medium to long term which should be anywhere from 2-5 years. Although some investors also hold stock beyond the 5-year or even 10-year period, they far less common.

Definition of “long term”

Different investors have different definitions of "long term." For analysts, target prices are typically within 6-12 months or by calendar year-end. Occasionally, it is 15 months and, really stretching it, analysts have a price target for 18 months down the road, which could be next year-end's target price. As a result, the analysts' definition of “long term” is perhaps one year, while the definition of “medium term” is generally half a year and the definition of “short term” is a few weeks to perhaps three months. Warren Buffet, on the other hand, often holds stocks for 30 years or longer and prefers never to sell. Such a definition of “long term” does not exist in analysts' vocabulary. If it did, many brokers could go out of business.

But in this report, we hope to stretch the time horizon longer to at least 2-3 years, or even 3-5 years, and that requires a different kind of stock-picking discipline. A long-term stock-picking methodology has several advantages over its relatively short-term counterparts, including looking beyond immediate- to short-term hiccups suffered by certain companies, or even short- to medium-term down cycles suffered by certain sectors. Another advantage, in our view, of the methodology that we have applied is that it places heavy emphasis on the quality of the management of a firm, which we believe getting right means half the battle being won.

Stock selection criteria

Methodology

Short-term share price movements (6-12 months) are a function of many factors including the direction of the sector and broader market, quarterly results performance, corporate newsflow and analyst recommendations and coverage. A buoyant stocks market in general lifts all boats, while a buoyant sector will help rerate all stocks within that sector. Strong earnings results that


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beat analysts’ expectations often lead to immediate share price outperformance, too. Positive corporate developments, whether relating to the award of new contracts and projects, favourable M&A activity or positive policy measures, also help build momentum for a stock's price ascent. Finally, a favourable rating from analysts or a new initiation could boost interest and funds flow into a stock. Likewise, the reverse is true for all these factors, as well.

The above are some of the factors that analysts pay close attention to in order to pick stocks that will outperform or underperform during a one-year period. But long-term share price performance (2-5 years) strips out a lot of these "noises" and "bumps" that often gets analysts and investors excited or depressed for days, week or perhaps even months, and we have identified four key criteria that we believe are of highest importance. These are 1) management capability, 2) financial strength, 3) relative valuations and 4) earnings prospects.

Management capability can be broken down into five areas, i.e. corporate governance, ambition, execution, innovation and transparency. A company that practices strong corporate governance and is transparent provides investors greatest comfort against corporate transgressions. A firm with management that has high ambitions, strong execution and practices innovation is primed for robust growth, especially over the longer term.

Financial strength of a company determines its ability to weather downturns and “black swan” events. It also helps determine a company's capacity to fund organic growth, pay dividends and take advantage of emerging opportunities. We measure financial strength by looking at a company's ROE, net gearing and profit margins.

Relative valuations are traditional financial measures used by analysts to determine whether or not a company's share price is attractively priced. Common measures used which we have also included are sum-of-parts (SOP) or revalued net asset value (RNAV), dividend yield, price to earnings ratio (P/E) and price to book values (P/BV). These financial measures are used by analysts to set price targets for stocks.

Earnings growth over the long term or the compounded annual growth rate (CAGR) is crucial in facilitating share price outperformance. As Albert Einstein said, "compound interest is the 8th wonder of the world." A company that can grow at a brisk pace of 25%-35% per annum will double its earnings every 2-3 years. The share price of a stock generally moves in line with its earnings, and this is particularly true over the long term.

In our stock-picking matrix, for simplicity we have assigned equal weighting to all four criteria. While it is debatable whether that should be the case and whether it will result in a correct prediction of the long-term outlook of a company, this entire exercise can be considered very subjective in nature in the first place and is meant to give investors food for thought and a rough means of coming to a stock-picking conclusion. It is certainly not an exact science.

Which companies come out tops?

Highest-rated company in each sector

All in, we have rated 18 sectors ranging from the major ones such as banks, plantations, telecommunications and utilities to far smaller ones such as properties, gloves, technology, autos and smaller caps. The scoring we have undertaken is not strictly comparable between different sectors but is comparable within the same sector, as different analysts have different relative scores assigned to the various criteria and sub-criteria. Not surprising is that many of the companies which top their sectors in this exercise coincide with our top sector picks, too. If this were not the case, it would mean that our existing favourite sector picks were short term in nature.

However, for several sectors the second-placed company scored closely behind the top-placed company. These include Maybank in the banking sector, Mah Sing in the property sector, Cypark in the utilities sector, Inari in the


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technology sector band Berjaya Food in the consumer sector. That means our top companies based on the four criteria in banks (RHB Cap), property (Eco World Development), utilities (Tenaga), technology (GHL Systems) and consumer (QL Resources) have strong competition and that the second placed companies could also be worth investing in for the long term.

Figure 3: Stocks to invest in for 3-5 year horizon


Figure 4: Stocks to invest in for 3-5 year horizon


Autos Banks Construction Consumer Gaming Gloves Healthcare Media Plantations

B Auto RHB Cap Gamuda QL Gent M'sia Hartalega Hovid Astro Genting Plants

Management

-Corp governance 4.00 4.50 4.00 4.50 3.00 4.00 4.00 3.00 4.00

-Ambition 4.00 4.50 4.00 4.50 3.00 5.00 5.00 3.50 4.00

-Execution 4.50 3.00 4.00 4.50 4.00 4.00 4.00 4.00 3.50

-Innovation 4.00 4.00 4.00 4.00 3.00 4.00 4.00 3.50 2.00

-Transparency 4.00 4.00 4.00 4.50 2.00 4.00 4.00 3.00 4.00

Average 4.10 4.00 4.00 4.40 3.00 4.20 4.20 3.40 3.50

Financials

-ROE 4.50 3.00 4.00 4.00 3.00 5.00 4.00 4.00 2.00

-Gearing 5.00 3.50 4.00 3.50 5.00 5.00 5.00 3.50 4.00

-Profit margins 4.50 3.50 4.00 3.50 3.00 5.00 4.00 4.00 3.00

Average 4.67 3.33 4.00 3.67 3.67 5.00 4.33 3.83 3.00

Valuation

-SOP/RNAV 4.00 - 4.00 - 3.00 - 3.00 - 4.00

-Div yield 3.50 3.00 3.00 3.00 1.00 3.50 3.00 3.00 2.00

-P/E 4.00 4.50 4.00 4.50 3.00 3.00 3.00 3.00 2.00

-P/BV 3.00 4.50 3.00 3.50 3.00 2.00 4.00 3.00 3.00

Average 3.63 4.00 3.50 3.67 2.50 2.83 3.25 3.00 2.75

Growth

-short term 4.00 4.00 3.00 4.50 3.00 4.00 4.00 3.50 3.00

-long term 4.00 5.00 5.00 5.00 3.00 5.00 4.00 3.50 4.00

Average 4.00 4.50 4.00 4.75 3.00 4.50 4.00 3.50 3.50

Total average 4.10 3.96 3.88 4.12 3.04 4.13 3.95 3.43 3.19

Property REITs Small caps Technology Telcos Timber Transport Utilities Others

Eco World Axis REIT Myeg GHL Systems Axiata Ta Ann M'sia Airports Tenaga OWG

Management

-Corp governance 4.00 4.00 3.00 4.00 4.00 3.00 4.00 4.00 3.00

-Ambition 5.00 4.00 4.00 4.50 4.00 3.00 5.00 3.00 5.00

-Execution 5.00 4.00 4.00 4.00 3.50 4.00 4.00 3.00 4.00

-Innovation 5.00 3.00 5.00 4.00 3.00 4.00 5.00 3.00 5.00

-Transparency 4.00 4.00 3.50 4.00 4.00 3.00 4.50 3.00 4.00

Average 4.60 3.80 3.90 4.10 3.70 3.40 4.50 3.20 4.20

Financials

-ROE 1.00 3.00 5.00 3.50 3.00 3.00 4.00 4.00 4.00

-Gearing 3.00 2.50 5.00 4.00 2.50 3.00 1.00 5.00 3.00

-Profit margins 2.00 3.00 5.00 3.50 3.50 3.00 3.00 4.00 4.00

Average 2.00 2.83 5.00 3.67 3.00 3.00 2.67 4.33 3.67

Valuation

-SOP/RNAV 4.00 3.50 3.00 - 3.00 3.00 4.00 4.00 4.00

-Div yield 1.00 4.00 1.00 2.00 3.50 4.00 5.00 2.00 1.00

-P/E 2.00 3.50 3.00 4.00 1.00 3.00 5.00 5.00 4.00

-P/BV 3.00 3.50 1.00 3.00 2.00 3.00 5.00 4.00 3.00

Average 2.50 3.63 2.00 3.00 2.38 3.25 4.75 3.75 3.00

Growth

-short term 5.00 3.50 5.00 3.50 2.00 3.00 5.00 3.00 5.00

-long term 5.00 4.00 5.00 5.00 4.00 3.00 2.00 3.00 5.00

Average 5.00 3.75 5.00 4.25 3.00 3.00 3.50 3.00 5.00

Total average 3.53 3.50 3.98 3.75 3.02 3.16 3.85 3.57 3.97


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Share price upside in long term

Note that for this exercise we take an optimistic view about the country’s longer-term macro outlook (particularly in view of turbulent environment this year) and also a positive bias on the prospects for various sectors. We believe that within the next five years, cyclical sectors such as properties, construction, technology, etc. should enjoy an upturn, while for more defensive sectors such as consumer, REITs and utilites, the environment should remain stable. Hence, the upside to our long-term share price targets carry with it a key caveat that Malaysia does not suffer major external shocks and the various sectors we cover enjoy steady progress or at least a stable outlook. While this is an unlikely scenario, as there are always negative surprises, it is a simple way to derive a reasonably realistic target price so many years out. But what it means is that there could be downside to our targets should any unforeseen developments take place.

The upside to share prices for the top stocks in each sector ranges from 40-50% to a few hundred percent. Not surprisingly, stocks from the larger and more mature sectors suffer lower growth prospects and therefore will likely offer investors lower upside, too. RHB Cap is perhaps the only exception, as despite its large market cap and position within the mature and highly competitive banking sector, the group is trading on low valuations, and we are excited about long-term prospects. RHB Cap is ranked 5

th highest on our list in

terms of upside to long-term target price. The other four stocks ahead of it are all smaller caps, and Only World Group is in pole position.

We included Only World Group under the “others” sector category, as the company is a unique combination of captive F&B and a tourism play on Genting Highlands and Penang. If the company executes well, the upside to share price, according to our calculations, is massive over the next 3-5 years. The second-highest comes from MyEG under the small cap sector category. Although the stock has appreciated many fold over the past three years, we believe the company’s outlook remains bright and it has several aces up its sleeve. In third place is GHL Systems under the technology sector as its new business model of acquiring merchants and sharing in the fees charged for credit card usage could potentially transform the company tremendously in the coming years. Fourth place goes to drug maker Hovid, but a major assumption is that the clinical trials for its Tocovid Suprabio vitamin will enjoy some positive progress.

Figure 5: Long-term stock picking by sector


2018 target 2020 target

Sector Companies Price (RM) price (RM) 2018 upside price (RM) 2020 upside

Autos Berjaya Auto 1.83 3.58 95.6% 4.17 127.9%

Banks RHB Capital 6.13 13.12 114.0% 15.28 149.3%

Construction Gamuda 4.55 6.40 40.7% 7.20 58.2%

Consumer QL Resources 4.12 5.52 34.0% 7.58 84.0%

Gaming Genting Malaysia 4.48 6.00 33.9% 7.00 56.3%

Gloves Hartalega 4.73 7.30 54.3% 8.30 75.5%

Healthcare Hovid 0.46 1.00 117.4% 1.30 182.6%

Media Astro 2.96 4.06 37.2% 4.40 48.6%

Plantations Genting Plant 10.30 14.72 42.9% 15.78 53.2%

Property Eco World 1.38 2.47 79.0% 3.37 144.2%

REIT Axis REIT 1.69 2.04 20.7% 2.43 43.8%

Small caps MyEG 2.68 6.65 148.1% 9.65 260.1%

Technology GHL Systems 1.09 2.40 120.2% 3.65 234.9%

Telcos Axiata 6.21 7.00 12.7% 9.00 44.9%

Timber Ta Ann 3.79 5.40 42.5% 6.00 58.3%

Transport Malaysia Airports 5.40 7.40 37.0% 7.69 42.4%

Utilities Tenaga 12.28 16.06 30.8% 18.40 49.8%

Others Only World Group 2.27 8.67 281.9% 14.66 545.8%

Average 74.6% 125.5%


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Auto sector

Berjaya Auto tops the scoring

Berjaya Auto scores the highest in our long-term auto sector stock-picking matrix mainly because its high scores in the management, financials and growth categories. A relatively newcomer to the auto industry – its history basically only began in 2008 when it was awarded the rights by Mazda Japan to distribute specific models of Mazda completely built-up (CBU) vehicles, spare parts, accessories and tools in Malaysia – Berjaya Auto has been outperforming its more experienced competitors in the local market in terms of brand awareness, sales volume growth, and financial strength, which we believe can be attributed mainly to the strength of its management team.

DRB-Hicom came in second in our scoring, mainly due to what we see as its undemanding valuation and long-term growth outlook. DRB is currently trading at a steep discount to its net asset value, which we believe is due to investors’ concerns on the current state of its subsidiary Proton, which is still in the red. However, we believe DRB’s management is moving in the right direction in turning around Proton, and we expect it to break even by FY17. Coupled with other growing and profitable businesses under its staple, we believe the long-term growth outlook for the conglomerate is positive.

UMW Holdings came in third due to its favorable scores in the management and valuation categories. One of the success stories of the government’s GLC transformation program, UMW has in place a strong management team, proven by its ability to grow the company over the years to become a diversified conglomerate, with businesses ranging from automotive to oil & gas to aeronautics, while maintaining a decent dividend yield of 5-6%. However, the subdued growth outlook, mainly due to its size, is the pulling factor on its scoring. Tan Chong, meanwhile, has an experienced management team. However, it scores unfavorably in the valuation and financial categories.

Figure 6: Long-term stock-picking matrix


Berjaya Auto DRB-Hicom UMW Tan Chong

Management

-Corp governance 4.00 3.50 4.00 3.50

-Ambition 4.00 4.00 3.50 4.00

-Execution 4.50 3.50 3.50 3.50

-Innovation 4.00 3.50 3.50 3.50

-Transparency 4.00 3.00 3.50 3.50

Average 4.10 3.50 3.60 3.60

Financials

-ROE 4.50 3.00 3.50 3.00

-Gearing 5.00 3.00 3.50 3.00

-Profit margins 4.50 3.50 3.00 3.00

Average 4.67 3.17 3.33 3.00

Valuation

-SOP 4.00 4.00 3.00 3.00

-Div yield 3.50 3.00 3.50 3.00

-P/E 4.00 4.00 3.50 3.00

-P/BV 3.00 4.50 3.50 3.50

Average 3.63 3.88 3.38 3.13

Growth

-short term 4.00 3.00 3.00 3.00

-long term 4.00 4.00 3.00 3.00

Average 4.00 3.50 3.00 3.00

Total average 4.10 3.51 3.33 3.18


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Berjaya Auto

Berjaya Auto is led by its chief executive officer and executive director, Dato’ Sri Ben Yeoh Choon San, a highly experienced figure in the Malaysian automotive scene. He started his career with Cycle and Carriage Berhad in 1972 as a technical executive, and after stints with a few other auto companies, he joined Proton in 1987 as the general manager of Business Operation and International Export. During his tenure with the Proton group, he was involved in technical services, manufacturing, sales and marketing including international business development, primarily the export of Proton products to the UK, Europe, Australia and Oceania markets. He left Proton in 1996 as executive director/chief operating officer of Proton Corporation Sdn Bhd (a wholly owned subsidiary of Proton).

In 2000, he was appointed as the managing director of Hyumal Motor Sdn Bhd and has been associated with Hyundai’s motor business operated under Hyundai-Berjaya Corporation Berhad and subsequently Hyundai-Sime Darby Corporation Bhd from 2000 to 2007. With the Hyundai franchise, he revived and modernized the Inokom plant in 2000, taking over the responsibility of managing the plant for the production of quality passenger cars. He led the team that was responsible for turning around the sales performance of Hyundai’s passenger vehicles in the Malaysian market, and managed its distribution and retail operations in Malaysia between 2000 and 2007. Hyundai sales picked up rapidly under his leadership from 1,300 units in 2001 to 24,300 units in 2004, leading to successful sale of Berjaya’s Hyundai franchise to Sime Darby in 2004 for a valuation of RM1.1bn. With over 40 years of experience in the automotive industry, encompassing the various fields of retail, distribution and manufacturing, we believe his experience and expertise, coupled with the capabilities of other key members of management, played a major role in securing the distributorship of Mazda vehicles in Malaysia and subsequently in the Philippines from Mazda Japan.

Since joining Berjaya Auto in 2008, Dato’ Sri Ben Yeoh has replicated his previous success with Hyundai and has grown Mazda to be where it is today. Since obtaining the rights to distribute Mazda cars in Malaysia, Berjaya Auto has registered outstanding growth that has far outpaced the industry’s and its competitors’ growth rates. From a mere 886 units sold in Malaysia in FY4/09, Berjaya Auto grew its sales of Mazda vehicles in Malaysia to 12,209 units in FY4/15, translating into a six-year compounded annual growth rate (CAGR) of 54.8%. This success has been replicated in the Philippines. Starting with 657 units of Mazda vehicles sold in FY4/13, Berjaya Auto delivered 3,561 units of Mazda vehicles in FY4/15, translating into a two-year 132.81% CAGR.

This success can be attributed to a few factors, in our view. We believe the most important factor has been the highly capable and experienced management team that is highly familiar with the local automotive scene and ever changing consumer demand trends, allowing it to come up with the best strategy for success. We also believe management has been helped by the improving brand awareness of Mazda worldwide. Mazda has seen a turnaround over the past few years, with strong sales growth not just in Japan but also around the world. This can be attributed to its attractive new model designs, which is guided by its “KODO: Soul of Motion” principle, and also to its own unique SKYACTIV technology, resulting in one of the most fuel-efficient internal combustion engines available in the market.

We also like Berjaya Auto’s asset-light business model, which we believe is the right strategy to allow it to sustain its strong growth with limited capital outlay. Its partnership with Mazda Japan for its assembly operations allows Berjaya Auto to limit its capital expenditure for its manufacturing facility and remain focused on growing its sales. The asset-light business model is further evidenced at the dealership level. Currently, Berjaya Auto only owns 8 of the total 72 dealers of Mazda in Malaysia, with the remaining owned by third parties. This allows Berjaya Auto to expand its sales and services outreach faster without having to fork out huge capital outlays, as the dealers themselves will have to bear the costs of building and preparing the new sales and service centers.


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Figure 7: Total vehicle sales (units) in Malaysia


Figure 8: Total vehicle sales (units) in the Philippines


Long-term target price for Berjaya Auto

We believe Berjaya Auto will be able to sustain its growth momentum in the next few years under the leadership of Dato’ Sri Ben Yeoh and his highly capable management team. Underpinned by Mazda’s strong and growing brand equity, attractive design and leading-edge technology, and the right business model, we believe Berjaya Auto is a stock to be held over the long term with substantial price appreciation potential. As the values of auto companies move in tandem with its earnings outlook, Berjaya Auto’s target price in the next three or five years will depend on its projected earnings at that particular point in time.

Berjaya Auto currently trades at 9.0x CY16F P/E, which we believe is unjustified given its positive growth outlook and strong financials. We expect Berjaya Auto to continue to deliver strong sales volume growth in both Malaysia and the Philippines, which should translate into higher earnings, and a higher stock price in the future. Assuming a conservative 8% annual revenue growth from FY19 onwards with a 9% net profit margin, based on our current target price basis of 14.0x CY19F P/E, and a 10% premium over the sector average due to BAuto’s higher growth trajectory, we believe the three year-target price for BAuto shares could increase to RM3.58 by 2018. Based on the same assumptions, a five-year target price for the stock, derived from 14.0x CY21F P/E, could increase to RM4.17 by 2020.

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886

2,113

4,826

5,909

8,142

9,497

12,209

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11

Banking sector

The highest score for RHB Capital

Among the Malaysian banks, RHB Capital has the highest score, as it excels in the growth category and does fairly well in most of other categories. We think that it will have the best growth prospects in the long term (with the highest score of 5) given its drive for regional expansion, backed by a strong management team and EPF, Malaysia’s national pension fund, as its shareholder. It also has the highest score for valuation as the stock is trading below its FY16F BV/share and at a single-digit FY16F P/E.

Overall, Maybank is ranked second (behind RHB Capital), emanating from its outstanding marks for management, valuation and growth categories. For the management category, we gave high scores to Maybank, Public Bank and RHB Capital. Meanwhile, Public Bank and BIMB ruled in the financial category, as the two command the best ROEs in the sector.

Figure 9: Long-term stock-picking matrix - banks


RHB Capital is our long-term pick

RHB Capital is our long-term pick, as we believe that the group will turn in the strongest earnings growth among the Malaysian banks over the next 3-5 years, via organic growth and M&As. Potential earnings catalysts include (1) the IGNITE 17 transformation programme, and (2) the drive for regional expansion. Despite the above potential, the stock is trading at attractive valuation with end-FY16F P/BV of only 0.7x and FY16F P/E of only 7x.

RHB

Capital Maybank AMMB Alliance BIMB Affin Public

Management

-Corp governance 4.50 4.50 3.00 4.00 3.00 3.00 5.00

-Ambition 4.50 4.00 3.50 3.00 3.00 3.50 3.00

-Execution 3.00 4.00 3.00 3.50 3.00 3.00 5.00

-Innovation 4.00 4.00 3.00 3.00 3.00 2.00 3.00

-Transparency 4.00 4.00 4.00 3.00 3.00 1.00 4.50

Average 4.00 4.10 3.30 3.30 3.00 2.50 4.10

Financials

-ROE 3.00 3.50 3.00 3.00 4.50 1.00 4.50

-Gearing 3.50 4.00 3.00 3.50 4.00 4.00 4.00

-Profit margins 3.50 3.50 3.00 3.50 3.50 2.00 3.50

Average 3.33 3.67 3.00 3.33 4.00 2.33 4.00

Valuation

-SOP - - - - - - -

-Div yield 3.00 4.50 3.00 3.00 3.00 4.50 3.00

-P/E 4.50 3.50 4.00 3.00 3.00 5.00 1.00

-P/BV 4.50 3.50 4.00 3.00 3.00 5.00 1.00

Average 4.00 3.83 3.67 3.00 3.00 4.83 1.67

Growth

-short term 4.00 4.00 2.00 3.00 3.00 1.00 2.00

-long term 5.00 4.00 2.00 3.00 3.00 2.00 2.00

Average 4.50 4.00 2.00 3.00 3.00 1.50 2.00

Total average 3.96 3.90 2.99 3.16 3.25 2.79 2.94


12

Transformation programme laid out until 2017

RHB Capital has a comprehensive transformation programme, dubbed IGNITE 2017, in place until 2017. We are positive on the implementation of exercise as it aims at improving the areas that RHB Capital is traditionally weak in, like Islamic banking, SME, wealth management and treasury. The 17 initiatives for the programme are:

1. Affluent segment strategy – leveraging on strong relationship with SME owners and the senior managers of corporates to increase market share

2. Mass affluent segment strategy – deepening share of wallet by offering attractive products and a positive digital experience for customers.

3. SME growth strategy – building proposition around SME ecosystem to capture end-to-end value chain and strengthening credit capabilities

4. Asset management strategy – rapid expansion of agency force and leveraging on RHB Group distribution network

5. Regional treasury strategy – establishing Singapore as non-Ringgit hub with country-specific strategies

6. Singapore growth strategy – focusing on growth through regional treasury, SME and collaboration with its investment bank

7. Corporate and investment banking (CIB) growth strategy – rewiring CIB across the region and increasing the share of wallet through regional collaboration

8. Tactical cost savings – reducing non-payroll cost of 10%

9. Productivity improvements

10. Network strategy and optimisation – optimising network across the group and reducing the cost to serve through “EASY-nisation” (embedding the EASY model in the bank branches)

11. Talent management – engaging, sustaining and developing its talent pool into high-performing teams

12. Capital optimisation – reducing capital consumption through model refinements and migration to internal rating-based (IRB) approach

13. RAROC (risk-adjusted return on capital) and profitability enhancements – RAROC analysis and portfolio improvement strategies

14. CONNECT and RHB Way – delighting customers through personalising its service, making it simple and fast.

15. Central client onboarding – delivering quality and seamless customer interactions across the group

16. Enhancing customer experience through operational efficiency – enabling RHB Way through operational improvements and innovations

17. Digital and payments strategy – delivering segment-driven ecosystem through digital and payments innovation with industry collaboration.

With the above strategies, we believe that the group would be achieve the following in the longer term:

Better profitability from the Islamic banking operations

An increase in market share in the SME segment, though it will still trail the larger players such as Public Bank.

Higher contributions from treasury business, partly via cross-selling from other business segments.

Increased contributions from wealth management business

Enhanced IT capabilities for branch and mobile banking – the group has successfully exploited the technology for fast loan approval in its EASY outlets and it has plans to replicate the model for RHB Bank branches.


13

The next Malaysia-based regional bank

For the past 5-6 years, RHB Capital has been indicating to the market its aspirations of becoming a regional banking group, following the footsteps of Maybank and CIMB. The bank already has a banking operation in Singapore with seven branches, and it has another two Thailand. After acquiring OSK Investment Bank in 2012, its investment banking unit has emerged as a regional player, with operations in Malaysia, Singapore, Indonesia, Thailand Hong Kong. We see a good chance for the group to transform into a regional player, supported by (1) EPF as its major shareholder, and (2) a solid management team, led by the Group MD, Datuk Khairulssaleh Ramli, who was the ex-CFO of Maybank and the ex-president director of Maybank-owned Bank Internasional Indonesia.

To expand its reach, RHB Capital proposed to acquire an 80% stake in Indonesia-based Bank Mestika. However, this was called off in Jul 14, as the group was not able to secure the approval from the regulators in Indonesia for the deal. Management guided that the group will focus on organic growth in the next few years, but it is still keen on expanding in the region via M&As. The next target market would be Indonesia, and the group is also eyeing an entry into the Philippines and China in the longer term.

Aiming high for ROE

We are encouraged that the management is guiding for higher ROE target of 13% in 2017 and 15% in 2020 (vs. 11.5% in 2014). Under the company’s planning, this would be achieved via:

Boosting revenue from key growth areas

Managing cost and enhancing productivity

Optimising capital and balance sheet

Delivering superior customer experience

Building ecosystem for digital and payments enablement

Engaging and developing its talent into high performance teams

In our view, the above targets are challenging, especially when the sector’s ROE is falling due to:

The slow top-line and earnings growth given the unfavourable operating environment, plagued by slow loan growth and margin contraction

The cap to the dividend payout ratio at 40-50% for most banks due to the higher capital requirement under the BASEL III accords.

The 13% ROE target is above our projection of 11.5% for FY17. If the group manages to achieve the target, there could be upside of 13-15% to our FY17 net earnings forecast.

Long-term target price for RHB Capital

Despite its ambitious plans to grow regionally and well-diversified business portfolio, RHB Capital is trading below its BV/share and at single-digit FY16F P/E. In our view, this is mainly because its FY15-17F ROE of 11-12% (based on our projection) is below the sector’s 13-14%. Another drag on its valuation is the overhang for its dilutive rights issue exercise.

Using the same DDM model, we derive an estimated target price of RM13.12 for 2018, translating to upside of 115%. This is based on the assumptions of: (1) five-year CAGR of 9% for net earnings growth in 2015-2020; (2) 11.8% cost of equity; and (3) a 4% long-term growth rate. We think that the target price is reasonable, as it only implies a FY19 P/E of 10x and end-FY18 P/BV of 1.2x. Using the same parameters and extending the horizon to 2020, the estimated target price for RHB Capital would be at RM15.28 in 2020.


14

Construction sector

The blue chips have similar qualities on certain criteria

Gamuda scores the highest in our long-term stock-picking matrix compared to the other major player IJM Corp, though we also acknowledge that these two blue chips of the construction sector do have equal qualities on certain aspects. There is no doubt that on the levels of management, execution, and corporate governance, both companies' scores are equally strong if we set it against other smaller non-infra conglomerates. In fact, both Gamuda and IJM Corp can be considered as among the earlier pure contractor pioneers which took on major infrastructure projects especially during the boom days of Malaysian construction 10-20 years ago. Both companies also managed to diversify through various types of civil and infra works, including privatisation/concession-based projects for highways and water infrastructure, started and expanded its property development business and ventured overseas.

Gamuda

However, what sets them apart, in our view, is Gamuda's higher score in terms of innovation due to its proven capability to better leverage its strength and expertise into executing larger-scale projects over longer periods of time. This can be attributable to the leadership of founder and Group Managing Director Dato' Lin Yun Ling, with his 35 years of experience in civil engineering and construction. He joined Gamuda in 1978 and the group has since carved major milestones.

To highlight some key examples, he was instrumental to the group's securing 1) its first domestic water concession Sungai Selangor phase 3 (SSP 3) in 2000 apart from several highway concessions prior to that, 2) its first major MRT project – 43km Kaohsiung MRT in Taiwan in 2002, 3) its first (and the world's first) major storm-water/flood mitigation and underground highway project in 2004 in Kuala Lumpur (RM1.9bn), which was featured in the extreme engineering slot of the Discovery Channel, and 4) its first overseas 800-acre township in Hanoi (RM8bn GDV) in 2007; currently, Gamuda has over RM50bn of total unsold GDV, 32% of which are overseas). Other major overseas construction jobs include two highway build-operate-transfer (BOT) jobs in India, Dukhan Highway in Qatar, and as one of the major contractors for the mammoth New Doha International Airport (NDIA).

Pioneering role

Gamuda’s job track record over the past decade or more has not only become more specialised, but it has also evolved from turnkey works to higher-level project management. Case in point is Gamuda's arguably pioneering role in the Malaysian construction space in the areas of holistic public transport planning, on grade and underground rail development and tunneling, and integrated flood mitigation jobs. Its approach in maintaining closer collaboration with the government (federal and state) by initiating major transformative public transport proposals has landed the group two project delivery partner (PDP) roles which, in a way, have entirely changed the way government jobs are rolled out. It has also become an ideal model for future mega government contracts, in our view.


15

King of PDP

Gamuda's success story in implementing PDP-driven jobs has echoed in other parts of the country, too. On top of its existing PDP roles for two major MRT projects, it has recently expanded substantially beyond Klang Valley by securing the RM10bn Transport Master Plan (TMP) for the entire state of Penang. This is a multi-year project with a time-frame stretching beyond 2020 and could translate to a total project value of over RM30bn. It looks likely to emerge as the single largest non-cash land reclamation swap deal and over time, could present Gamuda with a sizeable land bank ownership potential, likely surpassing existing players in the state, in our view.

This, we believe, gives a better sense on how the group could maximise profit margins by benefitting from PDP fees, property development earnings, and potential land sale. For cash contract PDP-type work such as the MRT, construction margins are much higher. Putting the timeline in perspective, Gamuda's PDP earnings stream stretches over five years from 2015 for MRT or up to 2030 if other phases of the Penang TMP are implemented.

Tunneling specialist

Apart from being the leader in project management capabilities for multi-billion ringgit projects, Gamuda's track record in its own mega turnkey contracts also speaks for itself in terms of quality, scale and engineering capabilities. Among local industry players today, Gamuda is recognised for its superior tunnel boring expertise. Major projects currently underway and in the past include: 1) RM12.5bn Gemas-JB double tracking project – 329km of new electrified rail double track to northern Peninsula Malaysia; 2) RM1.9bn SMART tunnel project – Klang Valley's first major tunneling and flood mitigation project; 3) Malaysia's first RM23bn Mass Rapid Transit (MRT) project – 9.5km of tunneling; 4) The upcoming RM28bn MRT 2 project – 10km of tunneling works; and in the future, potentially 5) The over RM30bn MRT 3 – entirely tunneling works; 6) RM8bn Gemas-Johor rail double tracking project; and 7) A portion of the RM27bn Pan-Borneo Highway.


SOURCE: CIMB RESEARCH, COMPANY DATA

Gamuda IJM Corp MRCB Muhibbah Mudajaya Benalec Salcon Sunway WCT YTL Corp

Engineering

Management

-Corp governance 4.00 4.00 3.00 4.00 2.00 2.00 4.00 4.00 3.00 4.00

-Ambition 4.00 4.00 3.00 4.00 2.00 2.00 3.00 3.00 2.00 4.00

-Execution 4.00 4.00 3.00 3.50 2.00 3.00 4.00 4.00 2.00 3.50

-Innovation 4.00 3.00 2.00 3.00 2.00 3.00 3.00 3.00 2.00 3.50

-Transparency 4.00 4.00 2.00 4.00 2.00 2.00 4.00 3.00 2.00 2.50

Average 4.00 3.80 2.60 3.70 2.00 2.40 3.60 3.40 2.20 3.50

Financials

-ROE 4.00 4.00 3.00 4.00 2.00 3.00 3.00 3.00 3.00 3.00

-Gearing 4.00 3.50 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00

-Profit margins 4.00 3.50 3.00 3.00 2.00 2.00 4.00 4.00 3.00 3.00

Average 4.00 3.67 3.00 3.33 2.33 2.67 3.33 3.33 3.00 3.00

Valuation

-SOP 4.00 4.00 3.00 4.00 3.00 3.00 4.00 4.00 3.00 4.00

-Div yield 3.00 3.00 2.00 3.00 3.00 1.00 3.00 3.00 2.00 4.00

-P/E 4.00 4.00 2.00 4.00 2.00 2.00 3.00 3.00 3.00 3.00

-P/BV 3.00 3.00 2.00 3.00 2.00 2.00 3.00 3.00 3.00 3.00

Average 3.50 3.50 2.25 3.50 2.50 2.00 3.25 3.25 2.75 3.50

Growth

-short term 3.00 3.00 2.00 3.00 1.00 3.00 3.00 3.00 2.00 3.00

-long term 5.00 4.00 3.00 4.00 2.00 3.00 4.00 3.00 2.00 4.00

Average 4.00 3.50 2.50 3.50 1.50 3.00 3.50 3.00 2.00 3.50

Total average 3.88 3.62 2.59 3.51 2.08 2.52 3.42 3.25 2.49 3.38


16

Long-term target price for Gamuda

A big chunk of Gamuda's RNAV comes from its outstanding land bank of over 3,900 acres locally and overseas, which constitutes 60% of its RNAV. The balance is made up of concessions (30%) and construction (10%). Gamuda is at an early stage of its earnings growth recovery cycle following a steep depletion in order book in FY15, and we believe we are observing signs of a bottoming of the weak domestic property market. Gamuda’s order book is bound to play catch up, in our view, and could increase by more than sevenfold in 2016 with MRT 2. The shares currently trade at a steep 30-40% discount to RNAV but should trade at narrower discount once major jobs in the sector are in full swing, in our view.

Working on assumptions of: 1) 5% appreciation in land values p.a. over the next 2-5 years for its domestic land bank (especially in new growth area in Rawang ie. South West of Klang Valley, with the expectations the property market should recover); 2) a low-base recovery effect for its Hanoi and Ho Chi Minh City property ventures, which should translate to improving land values of 5% p.a.; 3) a higher construction burn-rate and a higher blended pretax margin of 10% due to a ramp-up in order book and stronger progress billings from MRT 2; and 4) DCF-value for the RM16bn PDP portion of MRT 2, we arrive at a 2018 indicative target price of RM6.40 based on an unchanged 10% discount to RNAV.

Assuming that the execution of the Penang TMP kicks-off with the RM5.3bn high-priority LRT project and is completed within the next 5-6 years, this could translate to new potential reclaimed land bank of c.800 acres based on RM150 psf break even reclamation cost. Imputing this component based on the group's 60% stake in the PDP JV would raise the target price further to RM7.20 based on a similar discount to RNAV.


17

Consumer sector

QL Resources scores the highest

QL Resources tops the scoring in our long-term consumer sector stock-picking matrix mainly owing to its high scores in the management and growth categories. Its management has exhibited great ambition and executional capability to bring the group to where it is today, underscored by consistent revenue and profit growth over the past 27 years since its inception. Berjaya Food came at second place due to its scores in the financials and valuation categories, as we believe its current valuation does not justify its positive growth outlook.

Carlsberg and 7-Eleven are tied at third. 7-Eleven scored favorably in the management and growth segments, while Carlsberg gained high points in the financials and valuation segments, due to its strong balance sheet and decent dividend yield. F&N is next with satisfactory scores in the financials and valuation segments, while GAB’s strength lies in its strong financials with high ROE and low gearing. BAT scores the highest in the financials segment with high ROE and profit margins coupled with low gearing, but scored unfavorably in the valuation segment due to its demanding valuation. Nestle’s scores are pulled down mainly by what we see as its demanding valuation and a lack of transparency from management.



QL Resources

QL Resources is led by Dr. Chia Song Kun, the group managing director, who is the driving figure that has propelled the company from local feedstuff trader to multinational agro-food corporation. It is now among Asia’s largest egg producers and surimi manufacturers and is building a presence in the sustainable palm oil sector with activities including milling, plantations and biomass clean energy. It was founded in 1987 by Dr. Chia and Chia Seong Pow, currently its executive director, but its history can be traced back to the late 1970s. Prior to founding QL, Dr. Chia and his brothers supplied local feed millers with harvested calcium-infused shells of dead molluscs. The success of this modest business enabled them to expand their product range and open new branches across Malaysia. After establishing a core business in feedstuff trading the company diversified into food for human consumption. Today, QL’s

Management 7-Eleven BAT Berjaya Food Carlsberg F&N GAB Nestle QL

-Corp governance 4.00 4.00 4.00 4.00 4.00 4.00 4.00 4.50

-Ambition 5.00 3.50 4.00 3.50 3.50 3.50 4.00 4.50

-Execution 4.00 3.50 4.00 3.50 4.00 3.50 4.00 4.50

-Innovation 3.50 4.00 4.00 3.50 3.50 3.50 4.00 4.00

-Transparency 3.50 3.00 4.50 3.00 3.00 3.00 2.00 4.50

Average 4.00 3.60 4.10 3.50 3.60 3.50 3.60 4.40

Financials

-ROE 4.50 5.00 3.50 5.00 4.00 5.00 5.00 4.00

-Gearing 4.50 5.00 3.50 5.00 4.00 5.00 3.00 3.50

-Profit margins 3.00 4.00 4.00 3.50 4.00 3.50 3.50 3.50

Average 4.00 4.67 3.67 4.50 4.00 4.50 3.83 3.67

Valuation

-SOP/RNAV

-Div yield 3.00 3.50 3.50 4.00 3.50 3.50 3.00 3.00

-P/E 3.00 3.50 4.50 4.00 4.00 3.50 3.00 4.50

-P/BV 2.00 2.00 4.00 3.00 4.00 3.00 2.00 3.50

Average 2.67 3.00 4.00 3.67 3.83 3.33 2.67 3.67

Growth

-short term 4.50 3.00 4.00 3.00 3.00 3.00 3.00 4.50

-long term 3.50 3.00 4.50 3.00 3.00 3.00 3.00 5.00

Average 4.00 3.00 4.25 3.00 3.00 3.00 3.00 4.75

Total average 3.67 3.57 4.00 3.67 3.61 3.58 3.28 4.12


18

three principal activities are marine product manufacturing, integrated livestock farming, and palm oil activities.

Under Dr. Chia’s leadership, QL has grown to become a multinational agro-food corporation with operation centres in Malaysia, Indonesia, Vietnam, and China. It is Malaysia’s largest fishmeal manufacturer and producer of surimi-products, and Asia’s largest surimi producer. Its products are distributed globally across Asia, Europe and North America. QL has also risen to become one of Malaysia’s leading operators in animal feed raw materials and poultry farming. It is among ASEAN’s leading poultry egg producers with a group production rate of 4.5m eggs per day. About 40m day old chicks (DOC) are produced across poultry farms in Malaysia and Indonesia. QL is one of the biggest distributors of animal feed raw materials in Malaysia, with an annual volume of 800,000 MT.

From initially milling palm oil and estate ownership, QL has expanded its capabilities into biomass clean energy. It has two independent crude palm oil (CPO) mills in Sabah, and its first CPO mill in Eastern Kalimantan, Indonesia, was commissioned in FY13. It also owns a 1,200 hectare palm oil estate in Sabah, as well as 15,000 hectare plantation in Eastern Kalimantan, Indonesia.

Despite regional and global financial crises, Dr. Chia and his team has been successfully sustained consistent growth of QL’s earnings over the past 27 years. We attribute this mainly to its diversified revenue streams, and we expect the diversification to lead to a sustainable earnings growth in the future.

Figure 12: QL's revenue and net profit


Long-term target price for QL Resources

We believe QL will be able to sustain its earnings growth over the next few years under the leadership of Dr. Chia and his management team. We expect this to be driven by its consistent expansion and diversification. Hence, we believe QL is the stock to be held over the long term by inventors that could offer substantial price appreciation. As the value of consumer companies typically move in tandem with their earnings outlook, QL’s target price in the next three to five years will very much depend on its earnings-harnessing capability during that time frame.

Based on our forecast, QL’s revenue will hit RM3.8bn in FY3/19 and RM4.2bn in FY3/20, generating 24.0sen in EPS in CY19. Based on these figures, and attaching a 23x CY19F P/E, QL’s target price would increase to RM5.52 in three years. For a five-year target price, if we assume a highly conservative revenue growth forecast of 8.0% for FY3/21 and FY3/22, the EPS for CY21 would be 32.9sen. And if we attach a P/E multiple of 23x CY21F P/E, the target price for QL in 2020 would be RM7.58.

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Revenue (RM m) LHS Net profit (RM m) RHS


19

Gaming sector

Genting Malaysia marginally pips Sports Toto

Genting Malaysia (GENM) marginally beats Berjaya Sports Toto (BST) in the gaming sector stock-picking matrix. GENM beats BST in the growth category given what we see as the exciting long-term growth prospects of Genting Highlands when the 20

th Century Fox Theme Park is completed in late 2016.

BST comes in a close second mainly due to its strong free cashflow and high ROE, which translates into strong dividend yields. The numbers forecast operator (NFO) industry is highly regulated, and only three licences have been given out. This will continue to underpin and protect BST’s cashflows and ROEs, in our view, which we do not believe are likely to be under threat in the foreseeable future.

In the financials category, BST wins out given the strong free cashflow and high dividend payout of at least 80% of group annual profits annually. This creates a sector-beating ROE profile at over 40%. In the financials category, the ROE drag at Genting and Genting Malaysia is caused by management’s tendency to hoard cash and pay little dividends. The numbers forecast operator (NFO) sector’s growth matrix (both long and short term) is plagued by the continued strength of the illegal market and poor enforcement efforts. NFO sales continue to contract at low single-digit rates and sector revenues have been declining since 2009. However, the balance sheets of the NFO operators remain very healthy and both Magnum and BST are paying solid dividend yields of 7-8%. The management scores in the gaming universe are quite similar. The extremely rigid regulatory environment in Malaysia due to the sensitivities of gaming renders very limited potential for management teams to be innovative and creative in their business expansion plans. The Genting Group of companies also tends to lack transparency in its operating disclosures due similar sensitivities, in our view.

Figure 13: Gaming long-term stock-picking matrix


Genting Malaysia

GENM is led by Tan Sri Lim Kok Tay (KT Lim), the second son of Tan Sri Dato Seri Lim Goh Tong, the founder of the Genting Group. GENM tops the scoring in the growth category. Tan Sri KT Lim is the brainchild behind the aggressive RM5bn Genting Integrated Tourism Plan, which a goal of transforming Genting

Genting Genting Msia Magnum BJ Toto

Management

-Corp governance 3.00 3.00 3.00 2.00

-Ambition 3.00 3.00 3.00 3.00

-Execution 3.00 4.00 4.00 4.00

-Innovation 3.00 3.00 3.00 3.00

-Transparency 2.00 2.00 3.00 3.00

Average 2.80 3.00 3.20 3.00

Financials

-ROE 2.00 3.00 3.00 5.00

-Gearing 4.00 5.00 3.00 5.00

-Profit margins 3.00 3.00 3.00 2.00

Average 3.00 3.67 3.00 4.00

Valuation

-SOP/RNAV 2.00 3.00 3.00 3.00

-Div yield 1.00 1.00 5.00 5.00

-P/E 1.00 3.00 2.00 3.00

-P/BV 4.00 3.00 2.00 3.00

Average 2.00 2.50 3.00 3.50

Growth

-short term 2.00 3.00 1.00 1.00

-long term 3.00 3.00 2.00 2.00

Average 2.50 3.00 1.50 1.50

Total average 2.58 3.04 2.68 3.00


20

Highlands from a domestic casino into a world-class international destination. The new GITP will feature more gaming capacity, a 10,000-seat arena, a central retail complex, a new cable car system, parking for 3,000 cars and a 1,500+ room six-star hotel. In addition, it recently expanded the current First World Hotel by 1,300 rooms. GENM has a resilient and defensive business model. It is insulated from the anti-corruption crackdown in China, as its customers are primarily local mass market and Asean-based VIPs. With the GITP ready, it will further expand its customer base to include international visitors. In our view, GENM’s execution track record is much better domestically compared to its overseas operations. The performance of its UK and Bimini operations are patchy, at best. The UK VIP business lacks critical mass, which lends swings to volatile earnings performance quarterly, and we believe it will take many years to build up a strong database of VIP customers. The Bimini operations are still loss-making but is making baby improvement steps with the new hotel and jetty up and running. The US operations in New York is a consistent cash cow, but the disappointment of not winning any of the New York bids seems to have cast some doubt in investors’ minds about. GENM’s execution ability in the US. Its overseas business still only contributes 20% of GENM’s EBITDA, so the success of the GITP is more important to overall group profitability. We believe that the economic moat behind GENM’s business model is the fact that it remains a domestic casino monopoly and it is highly unlikely that new casino licences will be issued in Malaysia. With the 20

th Century

Fox theme park being 1) the first-of-its kind in the world and 2) strategically located in a cool climate location like Genting Highlands, this is a huge competitive advantage that sets it apart from other theme parks in Malaysia.

Figure 14: Genting Integrated Transformation Plan (GITP)


Long-term target price for Genting Malaysia

We believe that investors will reward GENM with a higher EV/EBITDA multiple when the GITP comes onstream and starts to mature. We currently value GENM’s Malaysian earnings at 9x EV/EBITDA. If this re-rates over the longer term to the regional average of 10.5x by FY18, GENM could reach RM6.00, Using similar assumptions, by 2020, GENM’s target price could reach RM7.00.

1,300 rooms by end-14

New casino and Towers 3 & 4 of First World Hotel


21

Gloves sector

Stick to the market leader

Hartalega scores the highest among our sector top picks over the next 3-5 years. Hartalega tops the scoring in our long-term rubber gloves sector stock-picking matrix because it scores highly in the financial category and joint-first in the management and growth categories with Karex. We like Hartalega for its strong growth prospect on the back of new capacity expansion and its market-leader position in the nitrile glove space. Apart from that, we see Karex as another attractive play in the rubber gloves sector due to its position as the world’s largest condom manufacturer with rising production capacity. We like Karex’s management for its strategy to move up the value chain through original brand manufacturer (OBM) business.

Kossan scores highest for short-term growth given our view that Kossan will be the least impacted by the inflow of new capacity, given its more balanced rubber gloves product mix. Top Glove is still playing catch-up in the nitrile space given its gradual capacity expansion, however management is seeing better traction for its nitrile product in the market. We think Supermax trades at a discount relative to its peer due to its weaker corporate governance and lack of transparency. While management seems ambitious to promote its OBM business, we see limited growth upside given its weaker execution track record.

Figure 15: Long-term stock picking matrix


Hartalega

The history of the Hartalega group can be traced back to 1981 when Hartalega Sdn Bhd was established by Mr Kuan Kam Hon and his brother Mr Kuan Kam Peng. The group began their glove manufacturing operations in 1988 and within the same year, made its foray into the overseas market by exporting to the US.

Since inception, Hartalega has focused on R&D on automation systems to improve production efficiency and effectiveness of the group’s latex manufacturing operations. The company has one of the most advanced glove research and development facilities with full automation and precise simulation facilities which have allowed it to produce high-quality and differentiated gloves.

Hartalega Top Glove Kossan Supermax Karex

Management

-Corp governance 4.00 4.00 4.00 2.00 4.00

-Ambition 5.00 4.00 5.00 5.00 5.00

-Execution 4.00 4.00 4.00 2.00 4.00

-Innovation 4.00 3.50 4.00 2.00 4.50

-Transparency 4.50 4.00 3.50 2.00 4.00

Average 4.30 3.90 4.10 2.60 4.30

Financials

-ROE 5.00 3.50 4.50 3.00 4.50

-Gearing 5.00 4.00 4.50 3.50 5.00

-Profit margins 5.00 3.00 4.00 3.50 4.50

Average 5.00 3.50 4.33 3.33 4.67

Valuation

-SOP/RNAV

-Div yield 3.50 4.00 3.00 4.00 3.00

-P/E 3.00 3.50 3.00 3.50 3.00

-P/BV 3.00 4.00 3.00 4.00 3.50

Average 3.17 3.83 3.00 3.83 3.17

Growth

-short term 4.00 3.50 4.50 3.00 4.00

-long term 5.00 4.00 4.00 3.00 5.00

Average 4.50 3.75 4.25 3.00 4.50

Total average 4.24 3.75 3.92 3.19 4.16


22

Hartalega was the first glove manufacturer to invest heavily into nitrile gloves. In 2002, the company invested in the R&D of thin nitrile gloves for potential entry into the healthcare sector given that the synthetic gloves were primarily used in industrial applications due to their heavy weight and thickness that made them not suitable for medical purposes. Following extensive R&D processes, Hartalega successfully introduced the world first 4.7 gram nitrile glove that emulates the elasticity and softness of natural rubber, without protein allergy risk to its users. We see this is testament to the group strong execution capability and vision for growth.

Throughout the years, the company has grown by leaps and bounds to become the world’s largest nitrile glove manufacturer with an annual turnover of RM1.1bn as of FY15. Revenue from nitrile segment accounts for 91% of its sales in FY15 and the remaining comes from natural rubber gloves. We expect nitrile glove demand to outpace natural rubber glove demand due to the switch from natural rubber to nitrile gloves in developed countries which consume >60% of rubber gloves globally. We think this is mainly due to stronger health awareness in the developed markets.

Aggressive capacity expansion

In order to meet the rising global demand for nitrile gloves, Hartalega is building six manufacturing plants at its Next Generation Integrated Glove Manufacturing Complex (NGC), which will house a total capacity of 28.5bn pieces p.a. over the next five years. The complex is built on a 112-acres site located in Sepang, Selangor. Compared to its historical expansion, NGC is the company’s largest expansion ever. In the past, the company increased its capacity by 1-2bn pieces p.a., but in FY16, it is looking to increase its annual capacity by 5-6bn pieces p.a. Hartalega has been commissioning two lines per month since Jan-15, and our research shows the company has been running on 18 lines of Plant 1 & 2 as of September 2015. Following the capacity expansion, we expect group earnings to grow at a 3-year CAGR of 24%.

Figure 16: Hartalega’s production capacity growth


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Figure 17: NGC plant 1 & 2

SOURCE: CIMB RESEARCH, COMPANY REPORTS

Market leader in efficiency

Hartalega has always stayed ahead of its competition by developing proprietary machinery and systems like the double former dipping lines, robotic glove stripping system and the glove puller and stacker system. Overall, this help to reduce its dependency to labor and improve the group’s production efficiency.

The company machines are also far more efficient than its competitors. For example, Hartalega has the fastest production lines in the industry, its’ most advanced production line yield 12% higher rate of output against the industry fastest. Meanwhile its average production line speed is also 60% higher than industry average.

Apart from that, the company aspires to improve its production efficiency through automation, as Hartalega is targeting to improve its productivity by 45% better than the industry average following the full commissioning of the NGC plant.

Figure 18: Average production line speed Figure 19: Fastest production line speed

SOURCE: CIMB RESEARCH, COMPANY DATA SOURCE: CIMB RESEARCH, COMPANY DATA

Long-term target price for Hatalega

We expect Hartalega to remain as the market leader in the rubber gloves sector due to its strength in product and engineering innovations. Despite concerns on downward pressure towards nitrile average selling prices following the industrywide capacity expansion, we believe Hartalega will emerge as the strongest given that it has the highest margin, hence more buffer to absorb the pricing pressure. Nonetheless, we also expect the higher sales contributions from new production lines will partially cushion the impact of pricing pressure

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24

given that most new production lines run more efficiently and are highly automated.

Hartalega is trading at 24x CY16F P/E which we think is currently fair value. However, as we have projected an annual capacity increment of about 22.5% over the next five years assuming a gradual decline in margin following ASP erosion and 80% utilization rates, plus using Hartalega’s historical mean P/E of 21x, our three-year target price rises to RM7.30. Using similar assumptions except for an additional 5% annual capacity expansion beyond FY20, our five-year target price rises to RM8.30.


25

Healthcare sector

Hovid tops the list

Hovid is our top long-term pick for the healthcare sector, as it scores well in the management, financials and growth categories. Hovid has an ambitious management team and is one of the most innovative local generic drug makers. It also has a healthy balance sheet and strong earnings growth potential, driven by strong demand for drugs from its export destinations.

Pharmaniaga comes in second due mainly to its high manufacturing profit margin. It has a strong relationship with the Ministry of Healthcare of Malaysia (MOH), which we believe should help to grow its sales to MOH hospitals and clinics. Its management is also fairly ambitious in expanding the business beyond Malaysia.

KPJ also has an ambitious management and strong earnings growth potential. However, its valuation is unattractive given its CY16F P/E of 30x. This is the key factor that has dragged down its overall score. Although hospitals have defensive earnings, hospitals are capital intensive and have long payback periods. In the long run, investors would be better off to bank on businesses with faster payback, in our view.

Figure 20: Long-term stock picking matrix - Healthcare


Hovid Bhd

Hovid started off as a herbal tea maker in 1941 and began producing generic drugs in the 1980s. It prides itself on having the largest export sales among Malaysia-listed pharma companies. It also has a strong R&D capability, as it is the only Malaysia-listed drug maker that holds patents.

The key difference between Hovid and its local peers is that half of its sales are derived from exports, while those of its peers come mainly from the domestic market. The big exposure to the export markets gives Hovid an edge in growing its earnings, as export demand rises much faster than that in Malaysia. On top of that, the competition between pharmaceutical companies in Hovid’s key export markets, such as Nigeria, Cambodia, and the Philippines, is less intense and the availability of drugs is inferior to Malaysia’s. By exporting drugs to these countries, Hovid can extend the life cycle of its products, as drugs that are no longer popular Malaysia could sell well in these markets.

KPJ Healthcare Pharmaniaga Hovid

Management

-Corp governance 4.00 4.00 4.00

-Ambition 4.00 4.00 5.00

-Execution 3.00 3.00 4.00

-Innovation 3.00 3.00 4.00

-Transparency 4.00 3.00 4.00

Average 3.60 3.40 4.20

Financials

-ROE 3.00 5.00 4.00

-Gearing 3.00 3.00 5.00

-Profit margins 3.00 5.00 4.00

Average 3.00 4.33 4.33

Valuation

-SOP 3.00 3.00 3.00

-Div yield 3.00 4.00 3.00

-P/E 2.00 3.00 3.00

-P/BV 2.00 3.00 4.00

Average 2.50 3.25 3.25

Growth

-short term 4.00 3.50 4.00

-long term 4.00 3.50 4.00

Average 4.00 3.50 4.00

Total average 3.28 3.62 3.95


26

Hovid could also be sitting on a gold mine if its clinical trials on Tocovid Suprabio are successful. The Tocovid Suprabio is a type of vitamin E that may reduce brain damage caused by strokes. According to the US Center for Diesase Control and Prevention, stroke is the fourth-leading cause of death in US and approximately 49% of its populations are exposed to at least one of the three key risk factors that can lead to stroke. Hovid holds the formulation patent for Tocovid Suprabio. Earlier test have produced strong statistical evidence of the effectiveness of Tocovid in decreasing brain damage caused by strokes. At this juncture, it is conducting a Phase-2 trial on Tocovid and is hopeful to launch the drug in the next three to five years.

Figure 21: Tocovid in blister pack Figure 22: Tocovid in bottle

SOURCES: COMPANY REPORT SOURCES: COMPANY REPORT

Long-term target price for Hovid

Hovid recently commenced the operation of its new tablet and capsule plant located in Chemor, Perak. Tablet and capsule (T&C) products account for about 60% of Hovid’s revenue, and the plant will boost its T&C production capacity by 30%. Hovid is also building another T&C plant that will further boost its capacity by another 70%.

In recent years, Hovid had been facing severe capacity constraint which had hampered its earnings growth. This, coupled with the strong demand growth from the export markets, led us to believe that the first plant could be fully utilized by 2018 while the second could run at full capacity in 2020. These could raise Hovid’s earnings in 2018 and 2020 by 30% and 100% from 2015’s level.

These earnings forecast do not reflect the potential of Tocovid being sold as a drug for stroke patients in the US. Approximately 49% of the US population, or 154m Americans, are exposed to at least one of the three key risk factors that can lead to stroke – high blood pressure, high LDL cholesterol, and smoking. If Tocovid is approved by 2020 and assuming that 1% of the high-risk group spends US$2 per day (equivalent to 200mg of Tocovid at the current retail price) on Tocovid for protection of their brain cells, this would translate into annual sales of US$1.1bn in the US alone. Assuming a 30% profit margin, the potential earnings contribution per year works out to US$337m, or RM1.5bn at the current exchange rate.

Hovid will also have the exclusive rights that will last for at least three years if Tocovid is approved by the US FDA. By attaching a 20% chance of success of the drug being approved and a discount rate of 10%, Tocovid would have a present value at least of RM610m by 2018 and RM740m by 2020.

Also, if Hovid’s current P/E of 17x for the remaining business remains unchanged over the next few years, Hovid’s share price could increase to RM1.00 by 2018 and RM1.30 by 2020, which includes the potential value of Tocovid.


27

Media sector

Prefer the defensive

Astro tops the scoring in our long-term media sector stock-picking matrix because it scores the highest in three of four categories: management, financials and growth. Astro offers the highest earnings growth prospect in the sector due to its three-year EPS CAGR of 21%. However, it shares the lowest score in the valuation segment given its rich multiple; however, we think the multiple is justify due to its position as the dominant pay-TV operator in Malaysia with over 98% of pay-TV market share or 4.6m households.

Meanwhile, Star Media group came in second after scoring the highest in the valuation category. Star offers an attractive dividend yield of 7.3%, the highest in the sector and the strongest growth among the newspaper players. In addition, Media Prima also offers an attractive valuation at current levels supported by its healthy balance sheet and strong free cash flow position. However, we view Media Prima management to be very conservative and less aggressive on seeking growth. MCIL has finally embraced the digital space following its entry into e-commerce and the online news platform; however, this is not enough to offset the decline in the contribution of its print segment.

Figure 23: Long-term stock picking matrix


Astro Malaysia

Astro Malaysia is a holding company with operations in: 1) direct-to-home (DTH) multi-channel subscription TV (pay TV); 2) terrestrial FM and DTH radio; and 3) publications and digital services. Astro Malaysia is 41% owned by billionaire Tan Sri Ananda Krishnan mainly through his investment vehicle in Usaha Tegas Sdn Bhd (UTSB) and its partners. UTSB also controls Bursa Malaysia-listed telecommunication service provider, Maxis Bhd and oil & gas marine support operator Bumi Armada Bhd. We believe companies in this group are known for their strong management teams and execution.

The company began broadcasting in 1996 with an initial list of 22 TV and eight radio channels following the launch of Malaysian first satellite service. During the launch, Astro was the second pay-TV provider in the country after Mega TV. Despite the strong competition by Mega TV, Astro rose to become the leading pay-TV operator in the country following its strategy to invest in better and

Astro Star Media Media Prima MCIL

Management

-Corp governance 3.00 3.00 3.00 3.00

-Ambition 3.50 3.50 2.50 3.00

-Execution 4.00 3.00 2.00 2.50

-Innovation 3.50 3.00 2.50 2.50

-Transparency 3.00 3.00 3.00 2.50

Average 3.40 3.10 2.60 2.70

Financials

-ROE 4.00 3.50 2.50 3.00

-Gearing 3.50 3.50 3.00 2.50

-Profit margins 4.00 3.00 3.00 3.00

Average 3.83 3.33 2.83 2.83

Valuation

-SOP - - - -

-Div yield 3.00 4.00 3.50 3.00

-P/E 3.00 3.00 3.00 3.00

-P/BV 3.00 3.00 3.00 3.00

Average 3.00 3.33 3.17 3.00

Growth

-short term 3.50 3.00 2.50 2.50

-long term 3.50 3.00 2.50 2.50

Average 3.50 3.00 2.50 2.50

Total average 3.43 3.19 2.78 2.76


28

more diversified content that allowed Astro to offer more channels compared to Mega TV.

Through its sister company, MEASAT Broadcasting Network Systems (MBNS), Astro Malaysia holds a renewable 25-year licence until 2022. This gives it the right to offer direct-to-home (DTH) broadcast services and an unlimited number of channels on an exclusive basis for 20 years until 2017 and thereafter, on a non-exclusive basis for the remaining duration of its licence. DTH broadcasts through satellite, where end-users receive signals via parabolic dishes and the signals are converted using set-top-box (STB). Today’s Astro has about 179 TV channels including 49 High-Definition (HD) channels, delivered via DTH, IPTV and over the top (OTT) platforms.

The company was relisted in 2012 in order to raise proceeds to fund its subscriber-acquisition drive through the STB swap program. During the two-year period, Astro successfully swapped out about 2.1m STBs and replaced them with the new B.yond boxes that allow subscribers to enjoy more value-added services such as HD, Video-on-Demand and PVR.

Astro is targeting to reach 80-85% Malaysian TV household penetration over the next three to five years, driven by strong customer growth from its prepaid TV service, NJOI. Currently, Astro has about 65% of Malaysian TV household penetration, comprising 50% of subscribers on the pay platform and the remaining 15% on NJOI. Although NJOI customers contribute lower ARPU compared to subscribers on the pay-TV platform, they provide a huge base of customers that could potentially switch to the pay platform. For example, 35K NJOI customers switched to the pay platform in FY15. This is positive for Astro given that it does not need to subsidize the STBs to these customers and it gains a steady flow of ARPU from them.

Figure 24: Astro pay-TV and NJOI household penetration


Embracing the digital platform

We also like Astro management for its active strategy to address the shift in consumption habits among the next generation of subscribers. For example, Astro launched its Astro-on-the-Go (AOTG) mobile platform back in 2012, targeting both its own subscribers and non-Astro subscribers. AOTG allows users to watch selected Astro Malaysia programming including live sports and VOD on non-TV platforms such as PCs, tablets, iPhones and Android devices.

According to an independent market research group, Informate Mobile Intelligence, Malaysia is ranked third-highest among the surveyed markets for average daily smartphone usage of about 3.3 hours. Meanwhile, a separate Nielsen survey highlighted that average usage of smart mobile devices is catching up to the average TV consumption.

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Management explained that the main reason for Astro entering the individual and smart device space is to address the changes in technology and consumer needs. For example, as households members spend more time on their smart mobile devices individually, there will be more demand for content given that different individuals would want to watch different programs. This is expected to help boost Astro ARPU.

The company aims to grow AOTG downloads to 2.5m in FY16 with a weekly viewing time of 180 minutes (vs 1.4m in FY15 with a weekly viewing time of 96 minutes). We think this is achievable given that Astro has about 4.6m households with an average of four persons per household and Astro also estimated that an average Malaysian households consumes seven hours of content on a daily basis.

Figure 25: Smartphone usage across markets Figure 26: Smart devices usage is closing the gap with TV

SOURCE: CIMB, INFORMATE MOBILE INTELLIGENCE SOURCE: CIMB, NIELSEN, 4As

For 1HFY16, Astro’s EBITDA improved from 24.7% to 25.7% on the back of stronger sales following a recovery in pay-TV subs addition, higher ARPU and better adex growth, while it also benefited from lower D&A expenses. As a result of higher operating leverage, its core net profit grew by 23.1% from RM266m to RM328m.

We are encouraged to see Astro’s pay-TV sub addition back on the growth track after recording a net addition of 15k subs in the quarter. This is an encouraging reversal compared to the 5k subs loss in 1QFY16. Management is maintaining its 50k target for new pay-TV subs in FY16. We think this is achievable given that Astro has about 1m NJOI subs that may potentially switch to the pay-TV platform.

Long-term target price for Astro

We expect Astro to maintain its position as the dominant pay-TV operator in Malaysia in years to come mainly due to its strength in content delivery and content creation. While we see potential competition from OTT players such as Netflix and iflix taking away some market share from Astro, we are confident that Astro will stay as the main home entertainment provider for Malaysian households given its strong content ownership, as the company has produced over 50,000 hours of TV content across all genres and in various languages.

Astro shares are currently trading at 9x EV/EBITDA, 1-standard deviation below its historical mean of 10.2x. Assuming Astro successfully raised blended ARPU by 1-2% annually, raised its customers base through its pay-TV platform and NJOI by 80-100k per annum and experienced steady growth in adex revenue of 9%, our three-year and five-year. target price would rise to RM4.06 and RM4.40, respectively.

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30

Plantation sector

Stands out for its growth potential

We gave Genting Plantation the highest scores in our long-term plantation stock-picking matrix primarily because of its strong output growth prospects and strong balance sheet. The group scored higher than its peers in the growth category as it has the highest ratio or 55% of total planted oil palm estates under the immature and young category. This is due largely to its aggressive new plantings and acquisitions in Indonesia since 2005. The aggressive new planting has allowed the group to build up 60,645 ha of planted oil palm estates in Indonesia, trumping its own planted oil palm estates area in Malaysia of 59,255 ha. The group also scored well in the financial categories due to its lower gearing against its peers and higher profit margin. The recent issuance of RM1bn Sukuk Murabahah by the group has helped the group to boost its cash reserves to RM2.07bn, while its net gearing ratio was only 2% as at 30 June 2015.

KL Kepong achieved the second-highest score in our stock matrix due to its younger estates and strong balance sheet. This is also due to its expansion into Indonesia to grow its palm oil estates. The group is now looking for new areas in which to grow, as it has planted most of its land bank in Indonesia. It has recently expanded into Liberia.

IOI Corp scores highly on management and financials but lower on valuations and growth. Its 32%-owned associates Bumitama Agri has young estates but the group does not have control over the estates. However, we are positive on steps taken by the group to grow its business through the acquisition of Unico-Desa and downstream assets.

Sime Darby ranks highly on management and valuations, but the scores were brought down by its weaker financials and growth prospects against peers due to its large assets base. Hap Seng Plantations has the highest score on valuations due to its low EV/ha for planted assets and high dividend yields but this was offset by its unexciting growth prospects as management has been more conservative.

FGV’s inability to enhance earnings from its acquisitions of a series of assets since its IPO, as well as weak output growth from its aging estates, are our key concerns on the company.

Figure 27: Plantation : Long-term stock-picking matrix


Sime IOI KLK Genting Plants FGV HS Plants

Management

-Corp governance 3.50 4.00 4.00 4.00 1.00 4.00

-Ambition 3.00 4.00 3.50 4.00 3.00 1.00

-Execution 3.00 3.50 3.00 3.50 1.00 3.00

-Innovation 2.00 3.00 2.00 2.00 1.00 1.00

-Transparency 4.00 3.00 3.00 4.00 3.00 3.00

Average 3.10 3.50 3.10 3.50 1.80 2.40

Financials

-ROE 2.00 4.00 3.00 2.00 1.00 2.00

-Gearing 3.00 2.50 4.00 4.00 3.00 4.00

-Profit margins 2.00 3.00 3.00 3.00 1.00 3.00

Average 2.33 3.17 3.33 3.00 1.67 3.00

Valuation

-SOP 4.00 3.00 3.00 4.00 3.00 4.00

-Div yield 4.00 3.00 3.00 2.00 3.00 4.00

-P/E 2.00 2.00 3.00 2.00 2.00 3.00

-P/BV 3.00 2.00 2.00 3.00 4.00 4.00

Average 3.25 2.50 2.75 2.75 3.00 3.75

Growth

-short term 2.00 2.00 3.00 3.00 1.00 3.00

-long term 3.00 3.00 3.00 4.00 2.00 2.00

Average 2.50 2.50 3.00 3.50 1.50 2.50


31

Genting Plantations

Genting Plantations is the plantation arm of Genting group and one of the fastest-growing plantation companies on Bursa Malaysia. The company was incorporated in 1977 under the name Asiatic Development to spearhead Genting’s plantation business. It was listed on 30 August 1982 and has since grown leaps and bounds to its current ranking as the third-largest palm oil listed company by market capitalization on Bursa Malaysia, after IOI Corp and KL Kepong. Its market cap has grown 5.7x over the past ten years, outpacing the 216% rise in its net profit due to higher CPO production, CPO selling prices and property contributions. We looked back into the history of Genting Plantations to appreciate the success story of the group so far.

Figure 28: Genting Plantations market capitalisation (RMm) Figure 29: Genting Plantations net profit trend (RMm)

SOURCES: CIMB, COMPANY REPORTS SOURCES: CIMB, COMPANY REPORTS

The group ventured into the palm oil business in April 1980, through the successful acquisition of Rubber Trust Group, which owned some 13,700 ha of plantation land in Peninsular Malaysia. In the following year, the group acquired Ko Rubber Companies, which own about 10,000 ha of plantation land.

The Genting group started to make inroads into Sabah in 1985, through the acquisition of Asiatic SDC, whose estates were subsequently transferred to Genting Plantations in 1991, in a rationalization exercise. Since then, the group snapped up lands in Sabah up until 2004, to grow its business and boost its earnings.

In June 2005, Genting Plantations expanded its palm oil business overseas to Indonesia via joint ventures. Its first was with the Sepangjang group on a 70/30 basis to develop 76,000 ha of land. It has subsequently entered into other joint ventures. In a short span of nine years, the group has built up its planted oil palm area in Indonesia to 60,645 ha. The expansion over the years resulted in the group raising its land bank to 245,504 ha, an impressive 18-fold increase since 1980.

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Figure 30: Genting Plantations' planted oil palm estates from 1988 (ha)


Apart from plantation, the group has also been involved in property development since 1993, mainly to unlock the value of its plantation land ripe for development. The group’s biggest property project is the Genting Indahpura project in Kulai Johor. In recent years, the group has also sold some lands in Johor and Kedah, which helped to boost its property earnings. It has also entered into a JV to develop the Johor Premium Outlet, which has yielded good returns for the group.

The group has also ventured into the biotechnology industry in 2006, initially focusing on whole genome sequencing of palm oil. The biotech business is still loss-making due to R&D costs.

Figure 31: Breakdown of Genting Plantations' 2014 sales (RMm)

Figure 32: Breakdown of Genting Plantations' 2014 EBIT (RMm)


Genting Plantations earnings were impacted by weaker CPO prices and lower property earnings in 1H15. However, we project stronger earnings in 2H, as we expect CPO prices to recover as well as stronger production. The group has toned down its FFB output growth guidance this year from 10% to 7%, due mainly to weaker yield achievement from its Sabah estates.

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33

Long-term target price for Genting Plantations

We believe Genting Plantations will be able to potentially double its earnings over the next 5-10 years when all its young and immature estates in Indonesia have reached their prime yielding age. Currently, 55% of the group’s estates are in the young and immature stage, and most of these estates reside in Indonesia. We are confident the group can replicate its success in its plantation business in Malaysia over to its Indonesian estates. This is due to its consistent track record in achieving high FFB yields at its Malaysian estates of 21.4-24.2 tonnes/ha over the past five years.

In view of its strong organic growth prospects, we believe Genting Plantations should be a stock for investors to hold over the long term, and we expect the price appreciation to be substantial during the next bull run on CPO prices. Apart from young estates, we also like the group due to the strategic location of its estates in Peninsular Malaysia, some of which are ripe for development.

Assuming the CPO price improves by 2018 to RM2,800 per tonne and the group achieves FFB output growth of 10% per annum over the next three years, plus land values appreciate at a moderate pace of 5% per annum, our three-year target price, which is based on SOP, rises to RM14.72. Using similar assumptions stretching the earnings to 2020, the target price for Genting Plantations rises to RM15.78.

Figure 33: Age profile of Genting Plantations OP estates Figure 34: Age profile of Genting Plantations' Indonesian estates


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Prime 1 16%

Prime 214%

Past Prime 12%

> 25 years3% Title:

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Immature50%Young

47%

Prime 1 3%


34

Property sector

Top two companies scores nearly equal

Eco World tops the scoring in our long-term property sector stock-picking matrix primarily because its scores highly in the management and growth categories. It would have scored higher if not for its shortfall in the financial and valuation categories, as the company only burst on to the scene in 2013/14 and can be considered a relatively new company that has yet to fully establish itself. As a result, Mah Sing Group is a very close second in terms of scoring, and its recent decision to cancel two land purchases and cut is sales target for 2015 are key factors that dragged down its scores in the management and growth categories.

UOA Dev scores highly in the financial management and valuation categories, as it is one of few developers to hold substantial net cash, while its dividend yields are a mouth-watering 6-7%. But management is very conservative and growth is low on its list of priorities. E&O holds high ambitions, but execution has historically been one of its key weaknesses. UEM Sunrise and SP Setia are owned by government-linked investment companies, and such a structure is often disadvantaged compared to their more aggressive entrepreneur-driven counterparts.



Eco World Development Group

Eco World is led by non-executive chairman Tan Sri Liew Kee Sin, who was previously the founder, CEO and president of Malaysia's preeminent developer, SP Setia. Several hundred of SP Setia's staff have joined Eco World, and the latter has aggressively built up its land bank to over 7,000 acres with GDV of RM75bn in just two to three years. In the group's first full year of operations, it chalked up sales of RM3.2bn for the period to FY10/14, second only to Mah Sing's RM3.43bn. Eco World is targeting sales of RM3bn in FY15 and RM4bn in FY16 and appears on track to meeting these targets. Although the RM3bn figure is slightly lower than FY14's figure, it is commendable nonetheless, as most other developers have slashed their sales targets due to the very difficult property market conditions.

Eco World Mah Sing UOA Dev E&O UEM Sunrise SP Setia

Management

-Corp governance 4.00 4.00 3.00 3.00 3.00 3.00

-Ambition 5.00 4.00 2.00 3.00 1.00 1.00

-Execution 5.00 3.50 3.00 2.00 2.00 2.00

-Innovation 5.00 4.00 3.00 4.00 2.00 2.00

-Transparency 4.00 4.50 4.00 3.50 3.00 2.00

Average 4.60 4.00 3.00 3.10 2.20 2.00

Financials

-ROE 1.00 4.00 3.00 3.00 2.00 3.00

-Gearing 3.00 4.00 5.00 3.00 3.00 3.00

-Profit margins 2.00 3.00 5.00 3.00 3.00 3.00

Average 2.00 3.67 4.33 3.00 2.67 3.00

Valuation

-SOP/RNAV 4.00 2.00 4.00 4.00 5.00 3.00

-Div yield 1.00 4.00 5.00 3.00 2.00 4.00

-P/E 2.00 4.00 5.00 3.00 3.50 3.50

-P/BV 3.00 3.00 3.00 3.50 5.00 4.00

Average 2.50 3.25 4.25 3.38 3.88 3.63

Growth

-short term 5.00 2.00 1.00 2.00 2.00 3.00

-long term 5.00 3.50 2.00 4.00 3.00 2.00

Average 5.00 2.75 1.50 3.00 2.50 2.50

Total average 3.53 3.42 3.27 3.12 2.81 2.78


35

To fully appreciate Eco World's potential, we need to look at Tan Sri Liew's achievements at SP Setia. SP Setia was a role model for many developers, as this small-to mid-sized firm in the 1990s morphed into Malaysia's largest, best-managed and most aggressive developer within 10 years. Its efforts at distinction in all its endeavours was equally matched by its strong execution skills. It is still the only developer to have made a successful transition in its geographical diversification from within Malaysia (from original base of Klang Valley to other key domestic markets such as Johor, Penang and Sabah) to other parts of Asia, Australia and Europe. SP Setia can be considered Malaysia's only truly multinational property company.

SP Setia has won countless awards over the years and even bagged the prestigious FIABCI Prix d’Excellence World’s Best Master Plan Development Award twice. This is considered the Oscars for the property industry. SP Setia was also innovative and the market leader on several other fronts. It was the first developer to extend the warranty period from the typical 12 months after completion to 36 months. During the 2008-09 global financial crisis (GFC) when buyer confidence was weak, SP Setia was also the first developer to introduce the 5/95 financing plan, which enabled house buyers to put down only 5% of the cost on signing the sales and purchase agreement, with no interest payments during construction.

SP Setia was basically a selling machine that could push out sales rain or shine. This was the case during the 1997-98 Asian financial crisis and again during the GFC. This strong marketing prowess has now been exported to Eco World. Success on the sales front will eventually be translated into a corresponding surge in the revenue and profits, in our view. From a mere RM7m in 1993, SP Setia's net profit went up more than 50x to RM394m in FY12. Likewise for Eco World, although the group's profits are low, as the company just underwent a major restructuring, growth will be very strong in the coming years, we believe, due to the huge sales achieved starting from last year.

Figure 36: SP Setia revenue and profit trends


Thus far this year Eco World has been able to achieve RM2.37bn in sales for the 10M to Aug. The group undertook four maiden launches in mid-2015 and was one of the few developers to enjoy overnight queues this year. Besides domestic sales, Eco World's sister company Eco World International (EWI) has projects in Australia and the United Kingdom. Tan Sri Liew's ultimate goal is to merge the two companies into a single entity, which will likely become Malaysia's largest developer by market cap.

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Figure 37: Eco Sanctuary launch crowd Figure 38: Eco Tropics launch queue

SOURCE: CIMB RESEARCH, COMPANY SOURCE: CIMB RESEARCH, COMPANY

Figure 39: Eco Business Park III launch crowd Figure 40: Eco Terraces launch crowd


Long-term target price for Eco World

We believe Tan Sri Liew will be able to replicate his past success at SP Setia with Eco World, but within a much shorter time frame. He should be able to achieve this, in our view, given the vast experience gained over the years and the high-quality management that moved from SP Setia to Eco World. Hence, we believe Eco World should be the stock for investors to hold over the long term and the price appreciation could be substantial. As property developers are measured based on assigning discounts (during property slumps) or even premiums (during property booms) to RNAV, our target price for Eco World target price three or five years down the road will depend on the discount/premium and RNAV at that time.

Eco World is currently trading at a steep discount to RNAV, and assuming that discount narrows over time because the property market improves from the current depressed state and land values continue to appreciate, we could derive a higher target for Eco World over time. Assuming the property market outlook improves by 2018 and the discount to RNAV assigned to Eco World also narrows from 30% to 20%, plus land values appreciate at a moderate pace of 5% per annum, our three-year price target rises to RM2.47. Using similar assumptions but further narrowing the discount to RNAV from 20% in 2018 to parity (historically the leading developer can command premiums of 20-40% in buoyant property market conditions) in 2020, our target price rises to RM3.37.


37

REIT sector

Axis REIT comes out on top

Axis REIT scores the highest in our long-term REIT sector stock-picking matrix due to its management team’s strength, attractive valuation, and positive growth outlook. Its management has demonstrated a high level of ambition in setting long-term targets and has done well in its execution, resulting in a sustainable long-term growth for Axis REIT since its listing. In second place is KLCC Stapled Security, mainly due to the quality of its management and a favorable growth outlook, although it received lower scores in the valuation segment. Sunway REIT scores favorably in the management category, but valuation-wise it does not look attractive to us. The scores for CMMT are quite similar to those for Sunway REIT, with a quality management but lacking long-term growth excitement.

Pavilion REIT meanwhile scores lower in the management segment mainly due to a lower level of transparency, while IGB REIT scored the lowest due to what we view as its lack of transparency.



Axis REIT

Axis REIT is led by its chief executive officer and executive director Dato’ George Stewart LaBrooy, a prominent figure in the Malaysian REIT scene, who has been at the helm of the company since 2008. He was one of the key figures in the formation of Axis REIT, when in 2003 he spearheaded a project to identify suitable properties to be injected into Malaysia’s first REIT, which was successfully concluded on 3 Aug 2015 when Axis REIT was listed on Bursa Malaysia. He is also the chairman of the Malaysian REIT Managers Association, an organization he helped set up in 2010 to give the Malaysian REIT Managers a single voice in engaging with the regulators and Ministry of Finance in proposing changes to the industry to promote its growth.

Under his leadership, Axis REIT has grown to become one of the best-managed and constantly growing REITs in Malaysia. Apart from being Malaysia’s first REIT, Axis REIT was also the first conventional REIT to convert

Axis KLCC SS Sunway REIT CMMT Pavilion IGB REIT

Management

-Corp governance 4.00 4.00 3.50 3.50 3.50 3.50

-Ambition 4.00 3.50 4.00 3.50 3.50 3.00

-Execution 4.00 4.00 3.00 3.50 3.00 4.00

-Innovation 3.00 3.00 3.00 3.00 3.00 3.00

-Transparency 4.00 3.50 3.50 3.50 3.00 2.00

Average 3.80 3.60 3.40 3.40 3.20 3.10

Financials

-ROE 3.00 3.00 3.00 3.00 3.00 3.00

-Gearing 2.50 2.50 2.50 2.50 2.50 2.50

-Profit margins 3.00 3.00 3.00 3.00 3.00 3.00

Average 2.83 2.83 2.83 2.83 2.83 2.83

Valuation

-SOP 3.50 3.00 3.00 3.00 3.00 3.00

-Div yield 4.00 3.00 3.00 3.00 3.00 3.00

-P/E 3.50 3.00 3.00 3.00 3.00 3.00

-P/BV 3.50 3.00 3.00 3.00 3.00 3.00

Average 3.63 3.00 3.00 3.00 3.00 3.00

Growth

-short term 3.50 3.00 3.50 3.00 3.00 3.00

-long term 4.00 3.50 3.00 3.00 3.00 3.00

Average 3.75 3.25 3.25 3.00 3.00 3.00

Total average 3.50 3.17 3.12 3.06 3.01 2.98


38

into an Islamic REIT, when it became the world’s first Islamic industrial/office REIT in December 2008. Axis REIT is currently the largest business space and industrial REIT listed on Bursa Malaysia. It was also the pioneer in many other innovative undertakings to improve its business efficiency and better reward shareholders, as it was the first publicly listed company in Malaysia to adopt cloud computing and was the first REIT to introduce a income distribution reinvestment scheme. Axis REIT was also a founding member of the Malaysian REIT Managers Association. These initiatives have been recognized by industry players and investors, leading to Axis REIT being presented with many awards recognizing its achievements, including being named the winner of Best Practices Award from Asian Public Real Estate Association.

The company’s good management practices have led to strong financial gains for Axis REIT since its listing. Its assets under management have jumped from RM296m from the time of its listing to RM2.04bn currently, a 691% increment. Consequently, its space under management has jumped from 978,000 sq. ft. to 7.02m sq. ft. currently, 718% growth. It now has 34 properties under management from five at the time of listing. The valuation gain registered since listing stands at RM276m. All of these have translated into a handsome gain for investors, especially long-term unit holders. Investors who have held on to Axis REIT since listing would have been rewarded with a total return of 307%.

We believe Axis REIT has the best transparency with respect to the investment community. It is one of the few REITS that consistently holds briefings for analysts and fund managers after its quarterly financial results announcements, which give investors a very clear idea of the direction of the company. It is also the most aggressive acquirer of assets among the REITs in Malaysia. In the past five years alone, from 2010 to 2014, it has acquired a total of 15 properties and disposed of three properties for handsome gains. This, in our view, proves the strength of the management team in putting in place a very active acquisition strategy and strong network of contacts scouting for value-accretive assets for them to buy.

We believe Axis REIT’s growth and will continue in the years to come, under the prudent management of Dato’ George Stewart LeBrooy and his highly capable team. They have continued with their policy of finding and acquiring quality yield-accretive assets in 2015. They completed the acquisition of a property in 1H15, with the acquisitions of another two properties currently ongoing. Management has also identified another seven acquisition targets with a total estimated value of RM270m, and is currently performing assessments for those targets. Having crossed the RM2bn mark, management has underlined that its next goal is to achieve RM3bn in assets under management within three years. We believe this target is well within reach.

Figure 42: Axis REIT space under management (m sq. ft.)


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Long-term target price for Axis REIT

Given management’s track record, we believe Axis REIT will be able to sustain its impressive performance in the years to come. We believe its target to continue to acquire yield-accretive assets in the coming years to achieve RM3bn in assets under management within three years from 2015 underlines its commitment to achieve sustainable growth with the purpose of consistently rewarding unit holders. As such, for investors looking for consistently growing cash flow returns through dividends with stable price appreciation, we believe Axis REIT is the stock to hold over the long term. As REITs are valued using the dividend discount model, our target price for Axis REIT target price three or five years down the road will depend on its earnings and the distributions it will able to generate at those particular points in time.

Assuming constant 3.0% yoy annual revenue growth, based on DDM (cost of equity 8.1%) valuation, our target price for Axis REIT would increase to RM2.04 in three years. Using the same assumptions, our five-year target price would increase to RM2.43.


40

Smallcaps sector

MyEG comes out on top

MyEG’s earnings are recurring and defensive; the car road tax and insurance renewal is done annually, which is why the company even recorded revenue and earnings growth during the 2008-2009 global financial crisis. MyEG came out at the top in our scoring for the long-term small cap sector stock-picking matrix primarily because its scored highly in the financials and the growth areas. The score could have been much higher, as the stock trades at high P/E and PBV valuations. Prestariang was a close second mainly due to lower growth scores. The company is too dependent on long-term contracts from governments, and any delays could hurt its earnings, like what happened in 2014. In that year, there was a delay in getting jobs for the IC Citizen project, and this affected earnings during that financial year. Prestariang recorded high numbers in financials backed by its healthy net cash balance sheet and high 60% net dividend payout ratio.

Figure 43: Small Cap sector long-term stock-picking matrix

SOURCES: CIMB

Management

MyEG is led by its major shareholder and Managing Director, TS Wong. The company’s strength lies in its innovative and entrepreneurship ability to offer new e-government services to the public and add commercial elements to the services offered. For example, in 2008, MyEG started the government’s online renewal e-service for the car road tax. The e-government charge was only RM2.75 per transaction, but the company added another RM6-8 per transaction to include courier charges. In addition, MyEG also offered online car insurance renewal services with almost all the insurance companies. The average online insurance cost per transaction purchased through MyEG is RM400, and at 10% commission, average commission is around RM40 per online transaction. Today, MyEG is the largest independent insurance agent selling car insurance. Greater economies of scale have helped the company secure higher commission from the insurance companies.

MYEG Prestariang IFCA Signature Kawan Daibochi Thong Guan Asia File Tomypak Wellcall

Management

-Corp governance 3.00 4.00 3.00 4.00 4.00 4.00 3.00 3.00 2.00 2.50

-Ambition 4.00 4.00 5.00 4.00 4.00 4.00 4.00 3.50 3.00 3.00

-Execution 4.00 3.50 3.50 4.00 4.00 4.00 3.00 4.00 3.50 4.00

-Innovation 5.00 5.00 4.00 3.00 4.00 3.00 3.00 4.00 3.00 4.00

-Transparency 3.50 4.00 3.50 4.00 3.50 3.50 3.00 3.00 3.00 3.00

Average 3.90 4.10 3.80 3.80 3.90 3.70 3.20 3.50 2.90 3.30

Financials

-ROE 5.00 4.00 4.00 3.50 3.50 3.00 3.00 4.00 3.00 4.00

-Gearing 5.00 5.00 5.00 3.00 3.00 3.00 3.00 5.00 5.00 5.00

-Profit margins 5.00 4.00 4.00 3.00 3.00 2.00 2.00 3.00 2.00 3.00

Average 5.00 4.33 4.33 3.17 3.17 2.67 2.80 3.88 3.23 3.83

Valuation

-SOP 3.00 4.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00

-Div yield 1.00 3.00 1.00 3.00 3.00 3.00 3.00 4.00 4.00 3.00

-P/E 3.00 3.00 3.00 5.00 3.00 3.00 3.00 4.00 4.00 3.00

-P/BV 1.00 1.00 1.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00

Average 2.00 2.75 2.00 3.50 3.00 3.00 3.00 3.50 3.50 3.00

Growth

-short term 5.00 3.00 3.00 5.00 4.00 3.00 3.00 2.00 3.00 2.00

-long term 5.00 4.00 4.00 3.00 4.00 3.00 3.00 2.00 3.00 2.00

Average 5.00 3.50 3.50 4.00 4.00 3.00 3.00 2.00 3.00 2.00

Total average 3.98 3.67 3.41 3.62 3.52 3.09 3.00 3.22 3.16 3.03

Recommendation Add Add Add Add Add Hold Add Add Add Add


41

Figure 44: MYEG’s revenue and net profit (RMm)


The company has applied the same principle in its foreign workers annual working permit renewal services (FWPR). Foreign workers working permits are renewed annually, and MYEG today handles all renewals nationwide. The company gets RM35 per FWPR transaction from the government. In addition, MyEG offers the service to employers to purchase online compulsory foreign workers insurance, and the company gets RM65-70 in commission from selling these insurance policies. Through selling online insurance, MyEG is able to raise revenue per foreign worker from RM35 to around RM100.

From FY2016 onwards, MyEG’s FWPR and selling online foreign workers insurance will be the largest revenue contributor to the company, generating close to RM250m revenue annually, by our estimate. At 45-50% net profit margin, FWPR should generate RM112-125m net profit annually to the company, almost doubling FY15 net profit. In FY2016, we are targeting MyEG revenue to reach RM405m (up 186% yoy) and net profit at RM168m (up 129% yoy).

Long-term target price for MyEG

According to management, the company is working to launch another major project in mid-2016, the custom service tax monitoring (CSTM) project. The CSTM involves MyEG putting its own dongle in food and beverage (F&B) and retail outlets to track sales receipts on a live basis. Phase 1 involves linking around 50,000 F&B outlets nationwide, while Phase 2, which will begin one year later, will target the retail sector, comprising 500,000 outlets. If CSTM takes off as scheduled, MyEG’s 2018 net profit could be around RM380m equating to 31.7sen in EPS. If we assume a 21x P/E target, which is in line with the peers, MyEG’s share price in 2018 could be RM6.65.

This does not include potential revenue from the card payment and terminal business into which management is looking to venture once the CSTM is launched. In May-2015, MyEG proposed to buy a 55% stake in Cardbiz Holding S/B, which is involved in IT and credit card rental services. This indicates MyEG’s bigger plans in this market segment, in our view. With the CSTM in place linking all F&B and retail outlets nationwide, MyEG has the CSTM infrastructure in place that would allow the company to compete with the major banks on credit card and debit card services. MyEG is working together with RHB Bank in this business venture. In 2014, credit card transactions in Malaysia were around RM91bn, and if MyEG could get 10% market share in three years, this would be around RM9bn worth of transactions. Assuming 2% commission charges, potential revenue is RM180m annually. Assuming 50% net profit margin, this business could contribute RM90-100m to the bottom line. If MyEG’s Group earnings grow a conservative 10% annually in FY2019 and

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42

FY2020 and adding potential earnings from the card business, MyEG’s 2020 net profit could be around RM550m, or 46sen in EPS. If we continue to assume the 21x P/E target, which is in line with its peers, our share price in 2020 could be RM9.65.

Figure 45: Malaysia credit card transaction (RMbn)

SOURCES: CIMB, BNM

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43

Technology sector

Riding on the e-payment bandwagon

GHL Systems scored the highest score in our long-term technology stock-picking matrix due to higher point from management and growth categories. We see GHL as an attractive proxy for the growing transition to e-payment solution across Asean countries. Apart from that, we see Inari-Amertron as another attractive play in a different segment of technology, the semiconductor space, after coming in a very close second after GHL. Inari score the highest in the financials category due to its strong earnings prospects, three-year projected EPS CAGR of 31% and healthy net cash position.

MPI came in third with a good score in the financials and valuation segments given its healthy net cash position and strong free cash flow generation. Unisem is another experienced player in the semiconductor industry with an improving balance sheet position. MPI and Unisem are benefiting from the shift in product portfolios toward miniaturization packages given the rising popularity of smartphones and tablets. Despite this, both companies are playing second fiddle to their Taiwanese tier-1 peers that are enjoying better economies of scale and more advanced technology capability. Finally, Uchi enjoys one of the highest operating margins in the sector and offers an attractive dividend yield of 6-7% on the back of a healthy balance sheet with a net cash position. However, the niche product segment and lack of expansion drive by management are capping the company’s growth prospects, in our view.



TPA is the game changer for GHL

GHL was loss-making between 2008 and 2011 due to the combination of a challenging domestic environment and losses at regional operations. However, the company successfully returned to the black in 2012 following the introduction of a new shareholder and management team at end-2010. The new management team, led by CEO Raj Lorenz, who has more than 25 years of experience in the domestic banking and payment solution industry, began to turn GHL around by closing its unprofitable operations in China and Indonesia and instituting other operational improvements.

GHL Systems Inari-Amertron MPI Uchi Unisem

Management

-Corp governance 4.00 3.50 3.50 3.00 3.00

-Ambition 4.50 4.00 3.00 2.00 3.00

-Execution 4.00 4.00 3.00 3.00 3.00

-Innovation 4.00 4.00 3.00 3.00 3.00

-Transparency 4.00 3.50 2.50 2.50 2.50

Average 4.10 3.80 3.00 2.70 2.90

Financials

-ROE 3.00 4.00 3.00 3.00 2.50

-Gearing 4.00 4.50 4.00 3.50 3.50

-Profit margins 3.50 3.50 3.00 3.50 3.00

Average 3.50 4.00 3.33 3.33 3.00

Valuation

-SOP - - - - -

-Div yield 2.00 2.50 3.00 4.00 3.00

-P/E 4.50 4.00 3.50 3.00 3.00

-P/BV 3.00 3.00 3.50 3.00 3.50

Average 3.17 3.17 3.33 3.33 3.17

Growth

-short term 3.50 3.50 3.00 3.00 3.00

-long term 5.00 4.00 3.00 3.00 3.00

Average 4.25 3.75 3.00 2.50 3.00

Total average 3.75 3.68 3.17 2.97 3.02


44

A key strategy for the new management team was to break away from its traditional business model and become a direct merchants acquirer. This is how the transaction payment acquisition (TPA) business model was born. GHL carried out it first TPA model following the acquisition of e-pay in 2014. E-pay is the pioneer of electronic mobile prepaid and e-billing in Malaysia and it owns one of the most comprehensive electronic payment service networks in Malaysia, with over 18,000 locations. Under e-pay’s business model, GHL earns a fixed-amount fee for every transactions using the e-pay network.

Figure 47: Target market segment


Currently, GHL is in the midst of implementing another TPA model called the credit card TPA. Under the credit card TPA arrangement, GHL will acquire the smaller third- and fourth-tier merchants that are underserved by the banks. Although the turnover value for these merchants are relatively lower compared to tier 1 and 2 merchants, we see huge market potential given the tier 3 and 4 merchants make up 90% of the entire market. The merchants who make up these groups often do not have an e-payment solution on their premises, given that it falls outside a bank’s target due to the lack of scale and throughput value. Nevertheless, GHL is confident that it can cater to these merchants with its low-cost solution.

Figure 48: Asean market potential


GHL as an attractive proxy for e-payment growth in Asean, in our view, driven by rising population income and better broadband infrastructure to facilitate the e-payment ecosystem. We see huge growth potential for e-payment services due to a combination low credit card penetration and the high number of cash transactions in the region.

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According to a Frost and Sullivan report, Malaysia has relatively lower credit card penetration of 17% compared to developed countries like Singapore (58%), United Kingdom (69%) and the US (67%). This is also reflected in the number of Malaysia POS terminals per capita at 8 units vs 30 units in Singapore.

One of the major drivers for GHL is the Malaysian government’s initiatives to create an integrated payment ecosystem under its Entry Point Project (EPP) 4 within the Financial Services National Key Economic Area (NKEA). This EPP aims to reduce the dependence on cash transactions from 91% to 63% by 2020 and increase the number of e-payments to 200 per capita per year from 44 in 2010.

To ensure the success of e-payment adoption, Malaysia’s central bank, BNM, is implementing a new payment reform framework under which banks are targeted to promote POS terminal growth from 250k in 2014 to 800k in 2020. Also, debit card transaction volume is targeted to increase from 69m in 2014 to 1bn in 2020.

Figure 49: BNM POS terminal target Figure 50: BNM’s debit card transaction target


Based on the latest payment indicator data from June 2015, we gather that about 42m debit cards have been issued, more than 5x the 8m credit cards issued. However, the total transaction value for debit cards is RM8.4bn, significantly lower than credit cards’ RM55.5bn during Jan-Jun 2015. The overall transaction volume for credit cards was also almost 4x that of debit cards. This is significantly different from developed countries, where the volume of debit card transactions is higher.

We therefore see huge room for growth in Malaysian debit card transaction volume and value as consumers become more educated on the benefits of cashless payments and the infrastructure improves through higher POS terminal penetration. We estimate that by 2020 when total debit card transactions reach 1bn, the potential market size for debit card transactions could be as big as RM1.6bn (vs RM150m in 2014), assuming 100bp MDR per transaction.

Long term target price for GHL

In our view, GHL offers high risk and reward opportunity for investors, but we recognize that execution is a key factor to determine GHL’s success in the TPA business. Nevertheless, we believe GHL has the qualified and experienced management team to steer the company to a greater height. We currently value the stock at RM1.65, based on a 23x CY17F P/E, a 30% premium to the sector average. We think this justifiable given GHL’s stronger earnings growth and attractive market opportunities in ASEAN due to the lack of regional e-

Title:

Source:


0

100

200

300

400

500

600

700

800

900

2015F 2016F 2017F 2018F 2019F 2020F

Contact POS terminals Contactless POS terminals

147 182 266

454

759

1,135

1,583

-

200

400

600

800

1,000

1,200

1,400

1,600

1,800

-

200

400

600

800

1,000

1,200

2014 2015F 2016F 2017F 2018F 2019F 2020F

RM milTransaction vol

Debit card transaction (mil) Est debit card mkt size (RM mil)


46

payment providers. We project 66.5% earnings CAGR for FY14-17, significantly higher than its global peers’ 25.2%.

However, if we look at GHL for a longer horizon of between 3-5 years period, we see further upside potential, as we expect GHL to have a bigger base of physical and online merchants in Asean with steady monthly throughput. Assuming GHL acquires a monthly average of 2k merchants from Malaysia and the Philippines and a monthly throughput of about RM15k and RM10k for each market, plus a MDR of about 200bps, our three-year target price rises to RM2.40. Using similar assumptions from 2018 to 2020, our five-year target price risesto RM3.65.


47

Telecommunication sector

Axiata scores the highest

Axiata has the highest score in our long term telecommunication sector stock-picking matrix mainly because we rate it highly in the growth and valuation categories. It would have scored higher if not for its shortfall in the financial category, as some of its overseas investments have yet to reap the full fruits of its labour (Bangladesh, India, Cambodia), while others (Indonesia, Malaysia) are going through a rough patch in the short term. Its other three peers are all focused on the Malaysian market only and therefore lack in terms of their long-term growth prospects vs Axiata, in our view. Maxis comes in second in our rankings, as it scores well in the financials category (highest EBITDA margin), much of it attributable to its position as the mobile market leader (high-ARPU customers) as well as to its optimal gearing structure (high ROE).

Although TM is on par with Axiata in terms of valuation, it trails its peers in the financials category given the lower EBITDA margin of its Fixed Line business and still relatively high-cost structure. DiGi’s management is as good as its peers in terms of execution and corporate governance and it is superior to its peers in the financials category (healthy EBITDA margin, high ROE). However, its valuations are relatively expensive and it also ranks poorly in terms of short- and long-term growth, as we believe it will be the most impacted by more intense mobile competition once TM-P1 enters the market in 2016, given its high prepaid revenue mix.



Axiata Group

Since 2008, Axiata Group has been led by CEO Dato’ Sri Jamaludin Ibrahim, who lists impressive credentials in the private sector (CEO of Maxis, CEO of Digital Equipment Malaysia). Since coming on board, he has implemented a strong performance-based culture in Axiata, with one of the key focus areas being talent management. On the back of this and Axiata’s transformation into one of the largest Asian telecommunications groups, it has been able to successfully attract and hire many highly capable local and international hires. These include Mohd Khairil Abdullah, CEO of Axiata Digital Services (formerly Partner at Bain & Company); Rene Werner, Group Chief Strategy Officer (formerly Head of M&A Strategy at Deutsche Telekom); and Chari TVT, Group

Axiata Maxis TM DiGi

Management

-Corp governance 4.00 4.00 4.00 4.00

-Ambition 4.00 3.00 4.00 3.00

-Execution 3.50 4.00 3.50 4.00

-Innovation 3.00 3.50 3.00 3.50

-Transparency 4.00 4.00 4.00 4.00

Average 3.70 3.70 3.70 3.70

Financials

-ROE 3.00 4.00 3.00 4.50

-Gearing 2.50 2.50 3.00 3.50

-Profit margins 3.50 4.50 3.00 4.00

Average 3.00 3.67 3.00 4.00

Valuation

-SOP 3.00 2.00 3.00 1.00

-Div yield 3.50 4.00 3.50 4.00

-P/E 1.00 1.00 1.00 1.00

-P/BV 2.00 1.00 2.00 1.00

Average 2.38 2.00 2.38 1.75

Growth

-short term 2.00 2.00 1.50 1.00

-long term 4.00 1.50 2.00 1.00

Average 3.00 1.75 1.75 1.00

Total average 3.02 2.78 2.71 2.61


48

Chief Financial Officer (formerly VP, Sales at HP Financial Services Asia Pacific & Japan).

From the de-merger exercise in 2008, the company has grown its number of subscribers over sixfold from 40m to more than 260m at end-2014, through organic expansion and M&As. Besides operating in the more advanced Malaysia and Singapore markets, Axiata also offers investors exposure in the emerging markets as a significant mobile player in Indonesia (XL), India (Idea), Bangladesh (Robi), Sri Lanka (Dialog) and Cambodia (Hello), which are fast-growing and have bright long-term growth prospects given their lower penetration.

Currently, Axiata’s net profits are still largely derived from its Malaysian operations. Celcom and Holdco (interest expenses on group debt, regional tower operations, start-up losses for digital businesses) contributed 68% of Axiata’s net profit in FY14. We expect this will drop to 45% by FY17 as XL’s earnings rebound (13%) and Idea’s contribution rises (18%) due to its fast growth. Dialog (7%) and Robi (11%) will also become more significant earnings contributors to the Group, we forecast.

Figure 52: Axiata’s normalised net profit breakdown, FY14 Figure 53: Axiata’s normalised net profit breakdown, FY17F


Besides improving existing operations, Axiata is also doing a couple of things on a groupwide level which may help to create some value over the longer term. For example, it has established a regional tower company, eDotco, which consolidates all the towers across its market of operations (except Indonesia, due to local ownership requirements). This could potentially be spun off into a separately listed company possibly in 2017-18 once tenancy ratios have been raised and overall cost efficiency and profitability have been improved.

There could also be potential value creation from participating in market consolidation. Subsidiary Hello Cambodia acquired Latelz in 2013 to become the second-largest player in Cambodia. Then in Apr 2014, XL acquired no 5 player Axis in March 2014 to strengthen its No 2 market position. Recently, Axiata announced that Robi has entered into discussions with Airtel to merge their operations in Bangladesh. Market consolidation could help to enhance the profitability in these markets by reducing competition or through cost synergies.

Long-term target price for Axiata

Axiata currently trades at FY16F EV/OpFCF of 14.2x. Our 12-month target price is RM6.60, based on SOP valuation methodology. This implies FY16F EV/OpFCF of 15.8x, which is more in line with its Malaysian telco peers.

We forecast EBITDA (including associate’s pretax profit) to grow 20.3% between 2015-18 and 36.5% between 2015-20. Coupled with a decline in capex intensity (capex-to-sales) from 24.5% in FY15 to 16.7%/15.2% in

67.7%

-0.5%

13.5%

5.8%

5.9%

7.6%

Celcom + HoldCo + Others XL Idea M1 Dialog Robi

44.5%

12.9%

17.7%

6.7%

7.4%

10.7%

Celcom + HoldCo + Others XL Idea M1 Dialog Robi


49

FY18/20, we forecast OpFCF to grow 62.8% between FY15-18 and 99.7% between FY15-20. Given our view that its regional businesses would have reached greater maturity in three to five years, we believe Axiata should then trade at lower EV/OpFCF multiples to factor in slower future growth beyond 2018/20.

Assuming a target EV/OpFCF multiple of 12x, we derive a fair value of RM7.00 in 2018 and RM9.00 in 2020, both of which imply decent dividend yields of 4.4% p.a.


50

Timber sector

Diversification to palm oil is the best bet

In the long run, the Sarawak timber players need to diversify their earnings base as a result of dwindling log production from the natural forest. Fortunately, most of them have already diversified into oil palm plantations in the early 2000s. Oil palm would have been the biggest contributor to their earnings if not for the current downcycle in commodity prices.

Among the two timber players under our coverage, Ta Ann is our long-term pick due mainly to its more superior execution capability and attractive valuations over Jaya Tiasa.

Figure 54: Long-term stock-picking matrix - Timber


Ta Ann

Ta Ann started as an integrated timber player in Sarawak. Like its local peers, it is facing structural challenges such as declining log production from the natural forest, rising awareness on sustainably-produced timber products, and increased substitutions for tropical timber products. We believe Ta Ann is better prepared than its peers to face these challenges.

Ta Ann was one of the earliest timber players in Sarawak that ventured into forest plantation. As at 2014, it had planted 36,044ha of forest. Although this is only about a tenth of the size of its timber concession, more logs can be harvested from planted forest than in natural forest. Ta Ann’s management reckons that it could sustain its current log production volume in the foreseeable future by harvesting its planted forest, which could begin in the next two years. Timber products that are sourced from plantation forest could also gain wider acceptance as they are perceived to be sustainably produced.

Jaya Tiasa Ta Ann

Management

-Corp governance 3.00 3.00

-Ambition 3.00 3.00

-Execution 2.00 4.00

-Innovation 3.00 4.00

-Transparency 3.00 3.00

Average 2.80 3.40

Financials

-ROE 2.00 3.00

-Gearing 2.00 3.00

-Profit margins 2.00 3.00

Average 2.00 3.00

Valuation

-SOP 2.00 3.00

-Div yield 1.00 4.00

-P/E 3.00 3.00

-P/BV 3.00 3.00

Average 2.25 3.25

Growth

-short term 2.00 3.00

-long term 3.00 3.00

Average 2.50 3.00

Total average 2.39 3.16


51

Figure 55: Ta Ann’s planted forest - 1 Figure 56: Ta Ann’s planted forest - 2

SOURCE: CIMB RESEARCH, COMPANY REPORTS SOURCE: CIMB RESEARCH, COMPANY REPORTS

Ta Ann has also planted 39,500ha of oil palm plantations as part of its strategy to broaden its sources of earnings. We believe its oil palm estates were better managed than those of its peers, judging from its FFB yield that is 15% above Sarawak’s industry average. Ta Ann also has good potential to expand its planted area as it has about 60,000ha of unplanted landbank in Sarawak.

Figure 57: Maturity profile of Ta Ann's oil palm estates (average age of 7-8)

Figure 58: FFB yield of Ta Ann and Sarawak average

SOURCES: CIMB, COMPANY REPORTS SOURCES: CIMB, MPOB

Long-term target price for Ta Ann

Oil palm plantations would have been the biggest earnings contributor to Ta Ann if not for of the downcycle in commodity prices. We believe that CPO prices will recover in the next 3-5 years as new supply declines. Assuming that CPO prices will recover to its 10-year average of RM2,500 per tonne in 2018-2020 (current CPO futures indicate that CPO price could rebound to RM2,500 by Mar 2016) and Ta Ann’s FFB production grow at about 10% p.a., Ta Ann could deliver an EPS of RM0.45-0.50 in the next three to five years. However, its growth potential will be weaker by then and its valuation multiple should fall to about 12x, in line with the planters, with limited growth potential. Based on a P/E of 12x, we believe Ta Ann’s share price could rise to RM5.40 by 2018 and RM6.00 by 2020.

Title:

Source:


Mature, 30,355ha, 77%

Immature, 6,602ha, 17%

Young, 2,570ha, 6% Title:

Source:


10.0

12.0

14.0

16.0

18.0

20.0

22.0

2010 2011 2012 2013 2014

Ta Ann Sarawak(tonnes per ha)


52

Transport sector

MAHB is our top long-term pick

Among the four transport companies under consideration, we rank MAHB only slightly higher than Westports and MISC, but significantly above AirAsia X. Our ratings of the top three companies are above the average of three points, and within a tight dispersion of between 3.13 and 3.41 points.

MAHB’s ratings were marked down for its relatively weak financial performance in the next 2-3 years in light of the capacity cuts and network rationalisation of major airlines in Malaysia, languid passenger traffic expansion as a result of the declining purchasing power of Malaysians, as well as the commissioning of KLIA2 from May 2014, which caused a step-up in operating costs, depreciation, and interest expense. As a result, P/E valuations will remain steep in the forecast period, in our view, despite the share price having corrected more than 40% since late-2013.

Having said that, we expect MAHB’s earnings to bottom out in 2015, and recover gradually thereafter as passenger volume expansion continues. Hence, we think that MAHB’s share price has also hit bottom, as it is currently being valued at a P/BV of around 1x presently. The ultimate prize is the eventual raising of the KLIA2 passenger service charges (PSC) to close the current gap with the PSCs at the Main Terminal Building (MTB). This could be a major catalyst to earnings. MAHB also has sufficient land area to build more terminals in the future to cater to long-term passenger and air traffic growth.

Westports is very well run and managed, but its scores have been moderated by its expensive valuations and constrained long-term growth, as its facilities will likely be fully built-up in the next five years and fully utilised in approximately the next 10 years.

MISC is currently enjoying the fruits of the tanker rate boom and incoming LNG assets, with some asset acquisitions being planned. But MISC is not our top long-term pick because the cyclicality of the shipping business is never easy to predict, and we are expecting the tanker rate boom to come to a dramatic end in 2017.

Finally, AAX is faced with very tough conditions and competition is intense. It has never been profitable at the core earnings level since starting business in 2007, except for one year in 2010.


53


SOURCES: CIMB

Malaysia Airports Holdings Berhad (MAHB)

MAHB is the operator of all of Malaysia’s airports (with the exception of Senai), with its 25-year concession ending in 2034. The turning point for MAHB came in 2009 when it successfully negotiated a new operating agreement with the government. This agreement ensured that MAHB will be allowed to raise Passenger Service Charges (PSC) every five years at the cumulative rate of inflation, be properly compensated should the government prevent the scheduled PSC hike in the public interest, and also be compensated should the government require MAHB to bear the burden of uneconomic airports. In exchange, MAHB will be released from its previous liabilities to the government, which was too heavy, and the government will be paid a much more affordable share of revenue until the end of the concession in 2034. Please refer to our detailed report, Get in for the long haul, dated 7 October 2013 for more details on the restructuring agreement.

It is currently negotiating with the government to extend the concession until 2069, but progress has been made despite several years of negotiation. Nevertheless, we are confident that the concession will be extended, with the only uncertainty being the new terms and conditions attached to the renewal.

MAHB has been enjoying the fruits of the success of the AirAsia group since it was reborn under the leadership of Tan Sri Tony Fernandes in 2002. At first, AirAsia operated from Subang airport, then moving to the KLIA MTB. Once the purpose-built Low Cost Carrier Terminal (LCCT) was ready, AirAsia moved there, and last year, it moved to the new KLIA2 terminal, which was built as the LCCT replacement. AirAsia has been a phenomenal success, and the Malaysian business alone is expected to contribute 18m departing passengers to MAHB this year, not including the contributions from Thai AirAsia, Indonesia AirAsia, and Philippines AirAsia. AirAsia X, which is AirAsia’s sister company, is expected to contribute some 2m departing passengers to MAHB. These are significant chunks of the 43m departing passengers expected to travel through MAHB’s airports in Malaysia in 2015.

Other airlines have also contributed to MAHB’s growth over the past decade – with MAS generally expanding to short-haul regional destinations although it has cut back on long-haul intercontinental flights, and relative newcomer

Transport

AirAsia X MAHB MISC Westports

Management

-Corp governance 4.00 4.00 4.00 4.00

-Ambition 4.00 4.00 3.50 4.00

-Execution 2.00 3.00 3.00 5.00

-Innovation 5.00 3.00 3.00 3.00

-Transparency 3.50 4.50 3.00 4.50

Average 3.70 3.70 3.30 4.10

Financials

-ROE 1.00 2.50 3.00 4.00

-Gearing 5.00 3.00 4.00 3.00

-Profit margins 1.00 2.00 3.50 5.00

Average 2.33 2.50 3.50 4.00

Valuation

-SOP 0.00 3.00 5.00 3.00

-Div yield 1.00 3.00 3.00 4.00

-P/E 0.00 2.00 3.00 2.00

-P/BV 2.00 4.00 4.00 1.00

Average 0.75 3.00 3.75 2.50

Growth

-short term 0.00 3.00 2.00 3.00

-long term 1.00 5.00 3.00 2.00

Average 0.50 4.00 2.50 2.50

Total average 1.82 3.30 3.26 3.28

https://brokingrfs.cimb.com/IvVUTh2bX6LcRTAEyXQXTYQMtCXS43rlCwKe9yN3h3wM7fJdJIbrjQ_92Eu8jzURA9P1EerA0.pdf


54

Malindo Air also contributing capacity. Competition has generally caused airfares to decline, which also acts as a stimulus to passenger traffic.

The airport operator currently has ample capacity on its hand to accommodate future passenger and air traffic growth. KLIA has three runways, even though the original two were not even fully utilised before the third one was ready for use from May 2014. It has two terminals – the MTB, which can accommodate 25m passengers per year (mppa) and the KLIA2, with a 45mppa capacity. KLIA MTB is expected to handle 24mppa this year, implying a high utilisation, but the passenger handling capacity is comfortably more than 25m, as the terminal is expansive and remote parking facilities are hardly ever used. Furthermore, the airlines based at MTB are generally expanding at a very slow rate. The KLIA2 terminal is expected to handle 26mppa this year, which implies only 58% utilisation, which is low enough to handle the faster traffic growth expected from the LCCs that are based there.

Airports usually suffer in the initial years of the commissioning of a new facility, as capacity expands in a big step up, but passenger traffic expands at its usual organic rate, leading to a decline in airport utilisation. MAHB is no exception, as can be seen in the big decline of its earnings from 2Q14 onwards when the KLIA2 facility was commissioned. The full-year cost impact from the opening of KLIA2 will be felt in 2015, and the negative impact to MAHB’s earnings is exacerbated by the ongoing capacity cuts implemented by MAS from August onwards. As a result, traffic growth at the higher-yielding MTB is being compromised and the traffic mix is moving unfavourably towards the lower-yielding KLIA2.

KLIA2 is low yielding because it has carried over the discounted tariffs of the LCCT that were first introduced in 2007 as a concession given by the government to facilitate AirAsia’s growth and also to acknowledge the less comfortable LCCT facility compared to the MTB. Although KLIA2 is now a much better facility, it has applied the same tariffs as were prevailing at the now-closed LCCT, because of AirAsia’s successful lobbying.

When KLIA2 was first opened, the Deputy Ministry of Transport said that a review of KLIA2’s PSC charges will take place at the first anniversary of its opening, i.e. in May 2015. But a hike in KLIA2’s PSC did not take place in May, and is unlikely to take place anytime this year, in our view, given the worsening economic situation and the cost-of-living pressures faced by Malaysian consumers, with GST implemented from April 2015 and the imported inflation caused by the weakening ringgit.

However, we do not think that this situation will continue indefinitely. Ultimately, it is unfair for MAHB to be charging LCCT-equivalent PSC tariffs at the KLIA2, which is more costly to build and also much more comfortable for passengers. While we cannot predict when the government will approve a PSC tariff hike at KLIA2, we are confident that it will happen in the medium term, which would significantly boost its earnings. The most important uncertainty is the terms and conditions attached to the renewal of the concession from 2035 to 2069.

Long-term target price for MAHB

The tariffs that currently apply to at the KLIA2 are RM6 for domestic departures and RM32 for international departures; these are the tariffs that are paid by the passenger. MAHB had a right back in February 2014 to raise the PSC charges which the government did not want passed through to passengers. So, under the operating agreement signed in 2009, the government has had to compensate MAHB for the difference in tariff.

Effectively, MAHB is earning RM7 for each domestic departure from KLIA2, against RM10 for domestic departures from MTB, while it is earning RM35 for each international departure from KLIA2, against RM71 from the MTB.

Assuming that at the beginning of 2017 MAHB gains the right to raise the KLIA2 tariffs to a rate which is approximately 20% lower than the equivalent


55

MTB tariffs, then the new KLIA2 tariffs would be RM8 for domestic departures, and RM60 for international departures.

Our EPS forecasts could more than double in 2017, and our end-2015 group DCF-based target price could rise to RM7.36 (excluding dividend of around RM0.04/share expected to be declared for 2015), which is 36% higher than our current target price of RM5.43. A full tariff equalisation would yield even more upside for MAHB to more than RM8.13, although we think this is unlikely.

On the back of the same assumptions, our end-2018 group DCF-based target price could rise to RM7.40 (including dividends paid between 2015 and 2018), and our end-2020 group DCF-based target price could rise to RM7.69 (including dividends paid between 2015 and 2020).

Figure 60: Passenger service charges at Malaysia’s airports


Figure 61: Group DCF for MAHB based on different PSC tariffs at KLIA2 (current DCF is RM5.43)


Figure 62: Discounted cashflow valuation (RM m) - current


7 8 9 10

35 5.43 5.45 5.48 5.52

40 5.81 5.84 5.87 5.91

45 6.23 6.26 6.30 6.33

50 6.58 6.61 6.64 6.67

55 6.93 6.96 6.99 7.02

60 7.34 7.36 7.39 7.43

65 7.73 7.75 7.78 7.82

70 8.04 8.07 8.10 8.13

Domestic PSC at KLIA2

Inte

rnational P

SC

at

KLIA

2

Malaysia - PV of free cash flow (2016-2034) 6,618

Malaysia - PV of free cash flow (2035-2069) 2,371

Perpetuity (2070 onwards)

Less : Net debt -2,726

DCF value of Malaysia business (RM m) 6,263

Value of 100% of ISG (€ m) 625

RM:€1 4.30

DCF value of 100% of ISG (RM m) 2,688

Total DCF value of the MAHB group (RM m) 8,950

No of shares (m) 1,652

NPV per share (RM/share) 5.43


56

Utilities sector

Sector reform continues

We believe the regulatory framework for the Malaysian utilities sector will continue to evolve in the next few years as the regulator carries on with the reform initiated a few years ago. Future reform could range from more transparent regulations for natural monopolies and greater competition among the utilities players to wider-reaching changes such as disintegration of natural monopolies and the opening of the sector to foreign players. All these will create opportunities and risks for the investors.

Tenaga is on top of our long-term utilities sector stock-picking list due mainly to its relatively cheap valuation. We expect the teething issues faced by the incentive based regulation (IBR) for Tenaga’s will be resolved in the next few years. This should increase the confidence on Tenaga’s earnings and allow investors to better appreciate the value of the stock.

Cypark comes in second, as it has a strong earnings growth potential, driven by the government’s plan to expand the renewable energy sector. Cypark’s valuation is also very attractive, in our view, as it trades below its book value.

The third place goes to YTL Power, which scores well in the financials and valuations categories. We believe reform in the Malaysian utilities sector poses little risk to YTL Power because its key assets are located in the UK and Singapore. While it may seem to be exiting the Malaysian power scene, its strong balance sheet gives it a slight advantage over most of its peers in the bidding for new power plant projects in the future. However, we think its earnings growth potential is not as strong as Cypark’s while its long-term earnings are not as resilient as Tenaga’s, as its Singapore assets are exposed to intense competition.

Figure 63: Long-term stock-picking matrix - Utilities


Although PetGas does not face material competition and has arguably the most resilient earnings among the stocks in our utilities portfolio, it lacks earnings growth opportunity, in our view. On top of that, its current P/E of 22x may revert to its long term average of 17x in the next three to five years. These are the reasons why we rank PetGas as number four on our list.

TNB PetGas YTL Power Malakoff Gas Malaysia Cypark

Management

-Corp governance 4.00 5.00 3.50 4.00 4.00 3.00

-Ambition 3.00 2.00 3.50 4.00 2.00 5.00

-Execution 3.00 3.00 4.00 3.00 3.00 3.00

-Innovation 3.00 4.00 3.00 3.00 4.00 3.00

-Transparency 3.00 3.00 2.00 4.00 4.00 3.00

Average 3.20 3.40 3.20 3.60 3.40 3.40

Financials

-ROE 4.00 5.00 3.50 3.00 3.50 4.00

-Gearing 5.00 5.00 3.50 2.00 5.00 2.00

-Profit margins 4.00 4.00 3.50 3.50 3.50 3.00

Average 4.33 4.67 3.50 2.83 4.00 3.00

Valuation

-SOP 4.00 2.00 3.00 3.00 3.00 4.00

-Div yield 2.00 2.00 4.50 4.00 4.00 2.00

-P/E 5.00 2.00 4.00 2.00 2.00 5.00

-P/BV 4.00 2.00 3.00 2.50 2.00 5.00

Average 3.75 2.00 3.63 2.88 2.75 4.00

Growth

-short term 3.00 2.00 2.00 3.00 1.00 4.00

-long term 3.00 2.00 2.00 2.00 2.00 3.00

Average 3.00 2.00 2.00 2.50 1.50 3.50

Total average 3.57 3.02 3.08 2.95 2.91 3.48


57

Gas Malaysia is our long-term top Reduce due to significant earnings risk arising from potential regulatory reform. The IBR for the gas sector is likely to be implemented in 2016 and will eventually lower Gas Malaysia’s current return of 13% closer to its cost of capital of 7-8%.

Tenaga Nasional

Tenaga runs the power transmission and distribution (T&D) network and owns about 55% of the generation capacity in Peninsular Malaysia. It is one of the largest stocks by market cap on Bursa and a proxy for the Malaysian economy as electricity demand tracks closely with the country’s economic activities.

Over the past 10 years, Tenaga’s net profit has grown at a CAGR of 14%, outpacing Malaysia’s average real GDP growth of c.5% in this period. The key earnings growth driver was the introduction of incentive-based regulation (IBR) in 2014, which regulates the pass-through of fluctuation in fuel costs to the consumers via tariff revision. This would make Tenaga’s earnings neutral from any fluctuation in fuel prices.

Figure 64: Tenaga's earnings have been volatile in the past


The skeptics have pointed out that tariff revision under the IBR still requires the approval of the Cabinet, just as before the IBR was introduced, and therefore contains political elements which weaken the predictability of the amount of tariff revised. This risk is often used to justify Tenaga’s wide valuation discount against the IPPs and its peers in the developed countries.

In the past, tariff hikes have stirred up controversy as they are perceived to be avoidable since indigenous natural gas was the key fuel in power generation. It was also perceived that the IPPs were the beneficiaries of a tariff hike.

While these issues could still surface, we believe that the resistance would be milder going forward. Firstly, Malaysia increasingly relies on imported coal and LNG for power generation. This weakens the argument that tariff hikes are avoidable when international fuel prices rise. Secondly, all first-generation IPPs will expire in the next 2-3 years and the remaining IPPs are far less profitable than the former. This will remove the perception that tariff hike benefits the IPPs. On top of that, we expect overall household income and spending to continue to grow, which would lower the electricity bill as a proportion of total spending.

In the long run, we believe that consumers will accept market-based pricing of electricity tariff, such as those in the developed countries. When this happens, investors will have stronger confidence in Tenaga’s neutrality to fluctuations in fuel prices. This will narrow the valuation discount gap between itself and that of its peers, in our view.

Title:

Source:


-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14

(Tenaga's reported net profit - RM m)


58

Long-term target price for Tenaga

We believe Tenaga will trade at a slight premium over its book value in the long run. This is because the IBR will ensure that the earnings from its T&D assets stay close to their cost of capital while competition from other IPPs cap the return from its generation assets.

Conservatively, we expect Tenaga to generate at least RM6bn of annual net profit over the next five years. This could raise its adjusted book value to RM82bn by 2018 and RM94bn 2020. At 1.1x P/BV (similar to its current level), Tenaga’s share price could rise to RM16.06 by 2018 and RM18.40.by 2020.

Figure 65: Book value of Tenaga


RM m Target price based on 1.1x P/BV

Current

Reported Shareholders' equity 46,729 9.11

Adjustments:

Overstated pension liability* 10,210

Understated tax assets* 7,457

Adjusted shareholders' equity 64,396 12.55

By 2018** 82,396 16.06

By 2020** 94,396 18.40

*Estimates; **Assuming average annual net profit of RM6bn in the next 5 years


59

Others

Only World Group (OWG) – multibagger in the making

OWG operates food service outlets, primarily in Genting Highlands, which is a captive and monopolistic market. Its greatest strength is the captive market in Genting Highlands. We estimate that its Genting food service outlets (FSO) generate average annual sales per outlet of RM2.8m, which is only 10% lower than KFC Malaysia but more than 50% higher than Starbucks at RM1.8m, Kenny Rogers Roasters at RM1.2m, Old Town at RM1.1m, and OWG’s own non-Genting FSOs of RM0.5m. This demonstrates the superior long-term economic moat of an almost monopolistic market in Genting Highlands. In addition, certain outlets like Marrybrown and jR Curry operate 24 hours a day to cater to late-night casino patrons, which further improves revenue per outlet.

Compared to other mall-based FSOs, it is unlikely for Genting Malaysia to raise its rents significantly for two reasons: 1) unlike a shopping mall, Genting Malaysia’s business model is not reliant on rental income; it is first and foremost a casino – 95% of Genting Malaysia’s revenues in Genting Highlands are derived from gaming; and 2) increasing visitation is key to Genting Malaysia’s success, so the availability of F&B facilities is paramount.

In Dec-12, OWG won a tender to undertake the revitalisation project for the Komtar Tower (the tallest building in Penang), which involves a transformation of the building’s top five floors into high-end commercial retail, F&B and a tourist observation deck. In exchange, it was granted an up-to 60-year concession to operate the F&B and other outlets on these floors. The crown jewel, in our view, is the potential tourist receipts from the observation deck, given that Penang is a major tourist destination.

We are also positive on Komtar as another growth driver. we believe there are several factors that could help make this project a success:-

1) Support of the Penang state government. Given that this refurbishment project is an initiative of the state government, we can expect support from the state in terms of holding official banquets, dinners and exhibitions at Komtar;

2) Feeder traffic from Star Cruises. Star Cruise Libra and SuperStar Aquarius sails from Port Swettenham, Penang, and the cruise terminal is only a 10-15 minute drive from Komtar. Given the strong business relationship with Genting, we expect Star Cruises to include a cruise itinerary that would feature a visit to Komtar.

3) Domestic tourism. The weakening ringgit is likely to force many Malaysians to travel locally in 2015-16, which augurs well for tourism in Penang and by extension, visitation to Komtar. In addition, Visit Malaysia Year 2014 has been extended into 2015 and has been designated Malaysia Year of Festivals 2015.

Over the longer term, we believe that OWG could be a “multi-bagger” when the GITP and Komtar come onstream and mature. It is not easy to get long-term profit projections right to the dollar. However, in response to multiple requests by institutional investors, we have attempted to estimate what OWG might be worth in the longer term. As such, we try to impute additional net profit estimates (not in our forecasts yet), when Komtar and GITP are fully rolled out and matured. This does not include: 1) any additional space that OWG might be able to secure at Komtar, 2) any earnings contribution from potential M&A activities, and 3) any additional ventures that OWG may undertake and replicate in other states.


60

Based on our initial estimates, we believe that OWG could be worth RM8.67/share in 2018, based on the following assumptions:

1) Incremental GITP net profit of RM17m, based on our estimate that 85% of OWG’s net profit in FY13 (RM17m) came from Genting Highlands (before the indoor parks were shut for the GITP renovation). Assuming that OWG is able to secure a space in Sky Avenue/Plaza similar to its existing space, we believe it should be able to replicate the same business model to generate similar profits;

2) Around 500,000 visitors per attraction per year (there are four attractions in Komtar) at blended ticket rate of RM20/ticket and pretax margin of 20%. These are very conservative estimates, as Ripley’s Believe It or Not in

Genting Highlands earned pretax margins of 24-48% in FY12-14;

3) Higher ticket rates. We have assumed a blended ticket rate of RM15 for level 64 of Komtar. Management intends to drive blended ticket rates higher as the development matures. Our incremental net profit assumes a blended ticket rate of RM20;

4) F&B profits based on OWG operating 80% of the F&B space in Komtar (c.40,000 sq ft) at pretax profit of RM5 per sq ft per month. This is also very conservative, in our view, as we estimate that OWG generates pretax profit per sq ft of c.RM50/month in Genting Highlands!

5) Digiphoto contributes c.RM3m in net profit to OWG at Genting Highlands. We assume this is replicable at Komtar.

6) Escape Room earnings. 10 rooms to be added to Genting Highlands. Each participant pays RM45 and an average of five participants play in a single session. Based on 80% utilisation of available rooms per annum, Genting could generate RM6.5m in revenue. Based on 40% gross margin and 24% tax rate, this would add RM2m to Escape Room’s existing profit guarantee of RM2m. Similar business models are replicated in RWS and RWM with similar RM2m in net profit p.a. accruing to Escape Room per country. New licensed outlets in other countries generate another RM2m in net profit. OWG’s 60% share of RM8m in incremental net profit amounts to RM4.8m.

Figure 66: OWG’s potential target price in 2018


Assuming that EPS growth moderates from 60% per annum (as per our current forecasts for FY15-17) to 30% per annum in FY19-20, then net profit in FY20 rises to RM120m, which gives a 2020 target price of RM14.66.

FY17 net profit 36.67

Add: GITP 17.00

Komtar

Themed attractions 6.08

Higher ticket rates 1.75

F&B 1.90

Digiphoto 3.04

Escape Room 4.80

Net profit 71.24

EPS 0.39

P/E 22.5

Target price 8.67


61

Company Briefs… .

TV - Satellite│Malaysia│Equity research│October 9, 2015

Company Note


Powered by EFA

Astro Malaysia Staying dominant

■ Astro is the dominant pay-TV operator in Malaysia with 4.6m customers.

■ Management aims to transform Astro into a platform-agnostic content provider that delivers the best content across all platforms.

■ Its consistently strong free cash flow could lead to dividend upside in FY1/16 and in future years.

■ Astro is our top pick in the media sector. It is also our long-term pick with 2018 and 2020 target price of RM4.06 and RM4.40, respectively.

Rose to dominance Astro began broadcasting in 1996 as the second pay-TV provider in Malaysia after Mega TV with 22 TV and eight radio channels. Despite the strong competition, it rose to be the leading pay-TV operator following its strategy to invest in quality and diversified content, which enabled it to cater to various market segments. Today, it has about 179 TV channels including 49 high-definition (HD) channels, delivered via direct-to-home (DTH), IPTV and over the top (OTT) platforms.

Astro is backed by Tan Sri Ananda Krishnan Astro Malaysia is 41% owned by billionaire Tan Sri Ananda Krishnan mainly through his investment vehicle in Usaha Tegas Sdn Bhd (UTSB) and its partners. UTSB also controls Bursa Malaysia-listed telecommunication service provider, Maxis Bhd and oil & gas marine support operator Bumi Armada Bhd. We believe companies in this group are known for their strong management teams and execution.

Targeting 80-85% of Malaysian households Astro targets to reach 80-85% of Malaysian TV households over the next 3-5 years, driven by resilient subs growth from its prepaid TV service NJOI. As at Jul 2015, it has reached 65% of Malaysian TV household. While NJOI customers contribute lower ARPU, it provides a huge base of potential customers who could switch to the pay platform. For example, 35K NJOI customers switched to the pay-TV platform in FY15.

Becoming a platform agnostic content provider We also like Astro for its active strategy in addressing the shift in consumption habits among the next generation of subscribers. For example, it launched its Astro-on-the-Go (AOTG) mobile app in 2012 as part of its strategy to deliver content across all platforms. AOTG allows users to watch selected Astro programmes including live sports and video-on-demand (VOD) on non-TV platforms e.g. PCs, tablets, iPhones and Android devices.

Long-term target prices Our target price is based on DCF. Assuming Astro successfully raises its blended ARPU by 1-2% annually, increases its customer base by 80-100k p.a., and experiences steady growth in adex revenue of 9%, our three- and five-year forward target price would rise to RM4.06 and RM4.40, respectively.


ADD (no change) Current price: RM2.96

Target price: RM3.70

Previous target: RM3.70

Up/downside: 25.0%

Reuters: ASTR.KL

Bloomberg: ASTRO MK

Market cap: US$3,635m

RM15,397m

Average daily turnover: US$2.59m

RM10.67m

Current shares o/s 5,202m

Free float: 41.5%

Key changes in this note

No changes

Price performance 1M 3M 12M

Absolute (%) 2.1 -2.0 -7.2

Relative (%) -4.5 -1.8 0.1

Analyst

Mohd Shanaz NOOR AZAM


Financial Summary Jan-14A Jan-15A Jan-16F Jan-17F Jan-18F

Revenue (RMm) 4,791 5,231 5,560 5,911 6,398

Operating EBITDA (RMm) 1,586 1,808 1,929 2,047 2,162

Net Profit (RMm) 447.9 519.4 630.3 795.5 922.2

Core EPS (RM) 0.09 0.10 0.12 0.15 0.18

Core EPS Growth 7.0% 16.0% 21.4% 26.2% 15.9%

FD Core P/E (x) 34.35 29.62 24.41 19.34 16.68

DPS (RM) 0.09 0.11 0.12 0.15 0.18

Dividend Yield 2.91% 3.72% 4.10% 5.17% 5.99%

EV/EBITDA (x) 11.32 9.71 9.26 8.92 8.40

P/FCFE (x) 26.11 10.49 49.46 38.63 15.44

Net Gearing 415% 301% 347% 406% 398%

P/BV (x) 25.09 22.17 22.17 22.17 22.17

ROE 80% 79% 91% 115% 133%

% Change In Core EPS Estimates 0% 0% 0%

CIMB/consensus EPS (x) 0.98 1.04 1.06

90.0

94.4

98.9

103.3

107.8

2.70

2.90

3.10

3.30

3.50

Price Close Relative to FBMKLCI (RHS)

Source: Bloomberg

5

10

15

20

Oct-14 Jan-15 Apr-15 Jul-15

Vol m

http://www.efa.biz/


63

Figure 1: Astro pay-TV and NJOI household penetration

SOURCE: CIMB RESEARCH, COMPANY

Figure 2: Smartphone usage across markets Figure 3: The gap between usage of smart devices and TV viewership is narrowing


Figure 4: Astro’s ARPU trend Figure 5: Astro’s churn rate trend


-

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014F 2015F 2016F

(%)('000)

TV household Astro Pay-TV household (include NJOI) Penetration rate (%)

Title:

Source:


4.7

4.2

3.3 3.1

2.8 2.8

2.4

2.0 2.0 1.9 1.8 1.8

-

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Average smartphone usage (hour/day)

85

89

91

96

99

101

75

80

85

90

95

100

105

FY11 FY12 FY13 FY14 FY15 FY16F

ARPU (RM)

10.0

7.0 7.6

9.9 9.9 10.0

-

2.0

4.0

6.0

8.0

10.0

12.0

FY11 FY12 FY13 FY14 FY15 FY16F

Churn rate (%)


64

BY THE NUMBERS

Share price info

Share px perf. (%) 1M 3M 12M

Relative -4.5 -1.8 0.1

Absolute 2.1 -2.0 -7.2

Major shareholders % held

Astro Networks (M) Sdn Bhd 42.4

Pantai Cahaya Bulan Ventures 8.3

All Asia Media Equities 7.8


0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

140.0%

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17

P/BV vs ROE

Rolling P/BV (x) (lhs) ROE (rhs)

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0


12-mth Fwd FD Core P/E vs FD Core EPS Growth

12-mth Fwd Rolling FD Core P/E (x) (lhs)

FD Core EPS Growth (rhs)

Profit & Loss

(RMm) Jan-14A Jan-15A Jan-16F Jan-17F Jan-18F

Total Net Revenues 4,791 5,231 5,560 5,911 6,398

Gross Profit 2,853 3,178 3,381 3,593 3,856

Operating EBITDA 1,586 1,808 1,929 2,047 2,162

Depreciation And Amortisation (839) (935) (863) (800) (757)

Operating EBIT 747 873 1,066 1,247 1,405

Financial Income/(Expense) (182) (145) (212) (169) (154)

Pretax Income/(Loss) from Assoc. 4 (7) 4 4 4

Non-Operating Income/(Expense) 0 0 0 0 0

Profit Before Tax (pre-EI) 569 721 858 1,082 1,255

Exceptional Items 0 0 0 0 0

Pre-tax Profit 569 721 858 1,082 1,255

Taxation (121) (207) (232) (292) (339)

Exceptional Income - post-tax 0 0 0 0 0

Profit After Tax 448 514 626 790 916

Minority Interests 0 6 4 5 6

Preferred Dividends 0 0 0 0 0

FX Gain/(Loss) - post tax

Other Adjustments - post-tax 0 0 0 0 0

Net Profit 448 519 630 796 922

Recurring Net Profit 448 519 630 796 922

Fully Diluted Recurring Net Profit 448 519 630 796 922

Cash Flow


EBITDA 1,586 1,808 1,929 2,047 2,162

Cash Flow from Invt. & Assoc.

Change In Working Capital (197) 479 53 62 111

(Incr)/Decr in Total Provisions

Other Non-Cash (Income)/Expense

Other Operating Cashflow 543 (12) (671) (659) (143)

Net Interest (Paid)/Received (182) (145) (212) (169) (154)

Tax Paid (121) (207) (232) (292) (339)

Cashflow From Operations 1,628 1,922 867 989 1,636

Capex (741) (720) (556) (591) (640)

Disposals Of FAs/subsidiaries (192) 0 0 0 0

Acq. Of Subsidiaries/investments

Other Investing Cashflow (31) 489 0 0 0

Cash Flow From Investing (964) (231) (556) (591) (640)

Debt Raised/(repaid) (75) (225) 0 0 0

Proceeds From Issue Of Shares 0 0 0 0 0

Shares Repurchased 0 0 0 0 0

Dividends Paid (448) (572) (630) (796) (922)

Preferred Dividends

Other Financing Cashflow 0 0 0 0 0

Cash Flow From Financing (523) (796) (630) (796) (922)

Total Cash Generated 141 895 (319) (397) 74

Free Cashflow To Equity 589 1,467 311 398 996

Free Cashflow To Firm 932 1,941 586 631 1,217


65

BY THE NUMBERS


Balance Sheet


Total Cash And Equivalents 1,105 1,354 1,038 645 723

Total Debtors 992 827 879 934 1,011

Inventories 18 13 14 15 16

Total Other Current Assets 552 113 113 113 113

Total Current Assets 2,666 2,307 2,044 1,707 1,864

Fixed Assets 2,157 1,881 1,715 1,688 1,773

Total Investments 0 0 0 0 0

Intangible Assets 1,870 1,956 1,956 1,956 1,956

Total Other Non-Current Assets 410 588 1,440 1,444 1,448

Total Non-current Assets 4,437 4,425 5,111 5,088 5,177

Short-term Debt 302 400 400 400 400

Current Portion of Long-Term Debt

Total Creditors 1,426 1,736 1,841 1,959 2,148

Other Current Liabilities 19 72 72 72 72

Total Current Liabilities 1,747 2,208 2,313 2,431 2,620

Total Long-term Debt 3,362 3,103 3,103 3,103 3,103

Hybrid Debt - Debt Component

Total Other Non-Current Liabilities 1,378 706 1,029 556 619

Total Non-current Liabilities 4,740 3,809 4,132 3,659 3,722

Total Provisions 0 0 0 0 0

Total Liabilities 6,486 6,017 6,445 6,091 6,343

Shareholders' Equity 613 694 694 694 694


Total Equity 617 714 710 705 698

Key Ratios

Jan-14A Jan-15A Jan-16F Jan-17F Jan-18F

Revenue Growth 12.3% 9.2% 6.3% 6.3% 8.2%

Operating EBITDA Growth 17.2% 14.0% 6.7% 6.1% 5.6%

Operating EBITDA Margin 33.1% 34.6% 34.7% 34.6% 33.8%

Net Cash Per Share (RM) (0.49) (0.41) (0.47) (0.55) (0.53)

BVPS (RM) 0.12 0.13 0.13 0.13 0.13

Gross Interest Cover 2.79 3.50 3.88 5.35 6.36

Effective Tax Rate 21.3% 28.7% 27.0% 27.0% 27.0%

Net Dividend Payout Ratio 78.7% 78.7% 73.1% 73.1% 73.1%

Accounts Receivables Days 66.40 63.43 55.97 56.12 55.49

Inventory Days 3.87 2.71 2.25 2.25 2.20

Accounts Payables Days 265.2 281.0 299.6 300.0 294.9

ROIC (%) 16.9% 13.7% 21.8% 21.7% 24.9%

ROCE (%) 19.6% 23.0% 26.8% 31.1% 35.0%

Return On Average Assets 10.5% 11.9% 14.6% 17.3% 19.8%

Key Drivers

Jan-14A Jan-15A Jan-16F Jan-17F Jan-18F

Adex Revenue Growth (%) 19.7% -2.4% 14.1% 13.7% 9.0%

ARPU (% Change) 3.0% 5.0% 3.3% 2.2% 5.9%

No. Of Subscribers (% Change) 5.1% 2.3% 2.3% 2.2% 2.7%

Adex/total Revenue (%) N/A N/A N/A N/A N/A

Programming Costs Change (%) 13.1% 17.0% 4.1% 8.2% 11.0%

Telco - Mobile│Malaysia│Equity research│October 9, 2015

Company Note


Powered by EFA

Axiata Group A leading Asian telco powerhouse

■ Led by highly-experienced CEO Dato’ Sri Jamaludin and has been able to successfully attract/hire capable local and international talent.

■ Exposure to some of the fastest-growing emerging mobile markets in Asia.

■ Beyond organic growth, Axiata is looking to create value from driving in-market consolidation and expanding its tower business.

■ Our top pick and only Add in the telco sector. It is also our long-term pick with 3- and 5-year target prices of RM7.00 and RM9.00, respectively.

Highest score in long-term telco stock-picking matrix Axiata has the highest score in our long-term telecommunication sector stock-picking matrix mainly because we rate it strongly in the growth and valuation categories. It would have scored higher if not for its shortfall in the financial category as some of its overseas investments have yet to harvest the full fruit of its labour (Bangladesh, India, Cambodia) while others (Indonesia, Malaysia) are going through a rough patch in the short term.

Led by highly-experienced Dato’ Sri Jamaludin Axiata Group is led by CEO Dato’ Sri Jamaludin Ibrahim, who comes with impressive credentials in the private sector (CEO of Maxis, CEO of Digital Equipment Malaysia). He implemented a strong performance-based culture in Axiata, with one of the key focus areas being talent management. On the back of this and Axiata’s transformation into one of the largest Asian telecommunications groups, it has been able to successfully attract and hire many highly-capable local and international individuals.

Axiata offers exposure to fast-growing emerging markets Besides operating in the more advanced Malaysia and Singapore markets, Axiata also offers investors exposure to the emerging markets as a significant mobile player in Indonesia (XL), India (Idea), Bangladesh (Robi), Sri Lanka (Dialog) and Cambodia (Hello), which are fast-growing and have bright long-term growth prospects given their lower penetration. We forecast the combined contribution from XL, Idea, Dialog and Robi to rise from 27% in FY14 to nearly half (49%) of group net profit by FY17.

Expanding the tower business and driving in-market consolidation Axiata’s regional tower company, edotco, currently has 14.7k towers and aims to grow this to 20k-25k by end-2016. This could be spun off via an IPO in 2017-18 once it has raised tenancy ratios and improved profitability. Axiata also continues to drive in-market consolidation. Recently, Axiata announced that Robi entered into discussions with Airtel to merge in Bangladesh. Market consolidation could help to enhance profitability by reducing competition or through cost synergies.

Long-term target prices Our 12-month SOP-based target price is RM6.60, which implies FY16 EV/OpFCF of 15.8x. As the company increases EBITDA and reduces capex intensity, we forecast OpFCF to grow 62.8% between FY15 and FY18 and 99.7% between FY15 and FY20. Assuming a lower target EV/OpFCF multiple of 12x to account for the greater maturity of the regional businesses, we derive target prices of RM7.00 in 2018 and RM9.00 in 2020, both of which imply decent dividend yields of 4.4% p.a.





Up/downside: 6.3%

Reuters: AXIA.KL

Bloomberg: AXIATA MK


RM54,065m


RM51.86m


Free float: 43.5%


No changes.


Absolute (%) 5.8 -1.6 -11.7

Relative (%) -0.8 -1.4 -4.4

Analyst

FOONG Choong Chen, CFA


Financial Summary Dec-13A Dec-14A Dec-15F Dec-16F Dec-17F

Revenue (RMm) 18,371 18,712 19,800 20,865 21,986



Net Profit (RMm) 2,550 2,349 2,205 2,248 2,487

Core EPS (RM) 0.31 0.26 0.26 0.26 0.29

Core EPS Growth (5.3%) (15.8%) (1.7%) 2.0% 10.6%

FD Core P/E (x) 19.99 23.75 24.17 23.70 21.43

DPS (RM) 0.22 0.22 0.22 0.24 0.28

Dividend Yield 3.54% 3.54% 3.54% 3.81% 4.44%

EV/EBITDA (x) 7.52 8.04 7.95 7.62 7.31

P/FCFE (x) 46.4 NA NA 111.9 17.7

Net Gearing 32.8% 38.9% 47.4% 53.3% 57.7%

ROE 13.3% 11.1% 10.5% 10.6% 11.6%



91.0

95.0

99.0

103.0

107.0

5.50

6.00

6.50

7.00

7.50


Source: Bloomberg

10

20

30


Vo

l m

http://www.efa.biz/


67

Figure 1: Results comparison


Figure 2: SOP-based target price is RM6.60


FYE Dec (RM m) 2QFY15 2QFY14 yoy % 1QFY15 qoq % 2QFY15 2QFY14 yoy % Prev.

chg chg Cum Cum chg 2015F Comments

Revenue 4,707 4,730 (0.5) 4,751 (0.9) 9,458 9,245 2.3 19,734 Higher Celcom device sales & growth at other subsidiaries yoy

Operating costs (2,992) (2,988) 0.1 (3,010) (0.6) (6,002) (5,714) 5.0 (12,628)

EBITDA 1,715 1,742 (1.6) 1,741 (1.5) 3,456 3,531 (2.1) 7,106 Below. 1Q15 at 23.0%/23.2% of CIMB/consensus FY15 forecast

EBITDA margin (%) 36.4 36.8 36.6 36.5 38.2 36.0

Depn & amort. (1,000) (879) 13.8 (984) 1.7 (1,984) (1,717) 15.5 (4,057) In line.

EBIT 715 863 (17.2) 757 (5.5) 1,472 1,814 (18.8) 3,052 Below. 1Q15 at 21.2%/20.1% of CIMB/consensus FY15 forecast

Interest expense (173) (196) (11.6) (179) (3.0) (352) (386) (8.7) (757)

Interest & invt inc 51 49 2.9 60 (15.6) 110 104 6.1 214

Associates' contrib 139 97 43.8 134 3.5 273 189 44.8 548 Above. Expect Idea earnings to be lower in coming quarters

Forex (78) (319) (75.4) (158) (50.4) (236) (158) 49.9 -

Exceptionals 131 32 315 75 74.3 206 (23) 1,001 -

Pretax profit 784 526 49.1 690 13.7 1,474 1,541 (4.3) 3,057

Tax (155) (122) 26.7 (154) 0.5 (308) (407) (24.2) (806) Lower than expected. Expected to normalise

Tax rate (%) 19.7 23.2 22.3 20.9 26.4 26.4

Minority interests (19) 51 (136.9) 49 (138.7) 30 (4) 855.4 (69)

Net profit 611 455 34.2 585 4.4 1,196 1,130 5.8 2,182

Core net profit 586 627 (6.5) 556 5.4 1,142 1,251 (8.7) 2,182 Below. 1Q15 at 23.9%/21.6% of CIMB/consensus FY15 forecast

EPS (sen) 7.1 5.3 33.5 6.8 4.3 13.9 13 5.3 27.2

Core EPS (sen) 6.8 7.3 (7.0) 6.5 5.3 13.3 15 (9.2) 27.2

Net DPS (sen) 8.0 8.0 - - nm 8.0 8.0 - 23.1 Dividends are paid half-yearly

Market cap Stake Forex Value Value/share

FY16

EV/EBITDA Valuation

Assets Country Local curr (m) (%) rate (RM m) (RM) (x) Methodology

Celcom Malaysia 29,807 100.0% 1.00 29,807 3.48 9.3 DCF (WACC: 7.5%, TG: 1.0%)

XL Axiata Indonesia 35,287,497 66.4% 3,500 6,698 0.78 6.5 DCF (WACC: 9.6%, TG: 3.0%)

Idea India 719,240 19.9% 16.0 8,955 1.05 7.1 Based on CIMB's TP of Rs200

M1 Singapore 2,885 28.7% 2.90 2,401 0.28 9.1 Based on CIMB's TP of S$3.10

Dialog Sri Lanka 113,931 85.0% 34.0 2,847 0.33 6.0 Based on 6x EV/EBITDA

Robi Bangladesh 127,394 91.6% 20.0 5,834 0.68 6.0 Based on 6x EV/EBITDA

Smart Cambodia 3,115,937 90.0% 1000 2,804 0.33 6.0 Based on 6x EV/EBITDA

Total value 59,346 6.93

Adjust: Net Cash/(Debt) * (2,695) (0.31)

SOP-based TP 56,651 6.62 Target price rounded down to RM6.60

*Ex-XL, Dialog and Robi's net cash/(debt)


68

Driven by revenue recovery at Celcom and XL.

Capex will be driven by 3G/4G network rollout.

BY THE NUMBERS

Share price info


Relative -0.8 -1.4 -4.4

Absolute 5.8 -1.6 -11.7


Khazanah 38.1

Employees Provident Fund 11.8

Amanah Saham Bumi 6.6


0.00%

2.29%

4.57%

6.86%

9.14%

11.43%

13.71%

16.00%

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50


P/BV vs ROE


-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

0.0

5.0

10.0

15.0

20.0

25.0

30.0





Profit & Loss

(RMm) Dec-13A Dec-14A Dec-15F Dec-16F Dec-17F


Gross Profit 7,271 6,999 7,294 7,774 8,229


Depreciation And Amortisation (3,435) (3,672) (4,229) (4,297) (4,314)

Operating EBIT 3,836 3,327 3,065 3,478 3,916


Pretax Income/(Loss) from Assoc. 255 339 586 492 608

Non-Operating Income/(Expense) (350) (214) 0 0 0

Profit Before Tax (pre-EI) 3,282 2,904 3,094 3,293 3,752


Pre-tax Profit 3,533 3,114 3,094 3,293 3,752

Taxation (794) (770) (787) (874) (1,008)

Exceptional Income - post-tax

Profit After Tax 2,739 2,344 2,306 2,419 2,745

Minority Interests (189) 4 (101) (170) (257)

Preferred Dividends


Other Adjustments - post-tax

Net Profit 2,550 2,349 2,205 2,248 2,487

Recurring Net Profit 2,648 2,239 2,205 2,248 2,487

Fully Diluted Recurring Net Profit 2,648 2,239 2,205 2,248 2,487

Cash Flow


EBITDA 7,271 6,999 7,294 7,774 8,229


Change In Working Capital (196) 1,867 0 0 0



Other Operating Cashflow (212) (1,636) (1,636) (1,636) (1,636)


Tax Paid (397) (909) (787) (874) (1,008)

Cashflow From Operations 5,648 5,584 4,093 4,470 4,704

Capex (4,117) (3,748) (4,859) (4,394) (4,100)

Disposals Of FAs/subsidiaries 47 115 0 0 0

Acq. Of Subsidiaries/investments (463) (3,043) 0 0 0


Cash Flow From Investing (5,367) (6,347) (4,509) (4,146) (3,860)

Debt Raised/(repaid) 860 481 267 152 2,166


Shares Repurchased

Dividends Paid (2,986) (1,885) (1,884) (1,884) (2,109)

Preferred Dividends

Other Financing Cashflow (133) 861 0 0 0

Cash Flow From Financing (2,134) (397) (1,617) (1,732) 57

Total Cash Generated (1,853) (1,160) (2,033) (1,408) 902

Free Cashflow To Equity 1,141 (283) (149) 476 3,011

Free Cashflow To Firm 1,099 (27) 362 1,119 1,726


69

Net debt/EBITDA is manageable at 1.25x.

Due to loss of subscribers at Celcom.

Driven by margin improvement at XL.

BY THE NUMBERS


Balance Sheet


Total Cash And Equivalents 6,433 5,116 3,266 1,859 2,761

Total Debtors 2,680 3,062 3,202 3,604 3,567

Inventories 63 80 80 96 89



Fixed Assets 17,107 19,933 20,563 20,661 20,447

Total Investments 6,999 7,505 8,091 8,583 9,191


Total Other Non-Current Assets 603 557 557 557 557


Short-term Debt 1,684 1,949 1,949 1,949 1,949


Total Creditors 6,109 8,375 6,150 8,244 6,868





Total Other Non-Current Liabilities 2,325 4,066 5,103 2,035 2,074




Shareholders' Equity 19,622 20,745 21,066 21,291 21,415

Minority Interests 1,757 1,813 1,914 2,085 2,342

Total Equity 21,379 22,558 22,980 23,375 23,757

Key Ratios

Dec-13A Dec-14A Dec-15F Dec-16F Dec-17F

Revenue Growth 4.07% 1.86% 5.82% 5.38% 5.37%

Operating EBITDA Growth (2.48%) (3.75%) 4.22% 6.58% 5.85%



BVPS (RM) 2.30 2.42 2.45 2.48 2.50





Inventory Days 1.96 2.22 2.33 2.46 2.45


ROIC (%) 13.2% 10.1% 7.5% 7.7% 9.2%

ROCE (%) 11.8% 9.9% 8.9% 9.6% 10.3%


Key Drivers


Group Mobile Subscribers (m) 12.44 12.45 12.35 12.97 13.50

Group Fixed Voice Subscribers (m) N/A N/A N/A N/A N/A

Grp fixed brdband subscribers (m) N/A N/A N/A N/A N/A

Group Pay TV Subs (m) N/A N/A N/A N/A N/A

Group Mobile ARPU (US$/mth) 47.0 46.0 47.6 47.6 46.5

Grp fixed voice ARPU (US$/mth) N/A N/A N/A N/A N/A

Grp fixed brdband ARPU (US$/mth) N/A N/A N/A N/A N/A

Group Pay TV ARPU (US$/mth) N/A N/A N/A N/A N/A

REIT│Malaysia│Equity research│October 9, 2015

Company Note


Powered by EFA

Axis REIT Malaysia’s most aggressive REIT

■ Axis REIT is arguably the best-managed REIT in Malaysia and is also the most aggressive acquirer of assets.

■ It is currently the largest business space and industrial REIT in Malaysia.

■ It has sustained strong growth since listing in 2005, with its assets under management growing 691% to RM2.04bn currently.

■ Axis REIT is our top pick for the REIT sector and is also our long-term pick with 2018 and 2020 target prices of RM2.04 and RM2.43, respectively.

Tops in long-term REIT stock picking matrix Axis REIT scores the highest in our long-term REIT sector stock picking matrix due to its management team’s strength, attractive valuation and positive growth outlook. Its management has demonstrated a high level of ambition in setting long-term targets and has done well in its execution, resulting in sustainable long-term growth for Axis REIT since its listing. Maintain Add, with further asset injections as potential catalysts.

Axis REIT is led by Dato’ George Stewart LaBrooy Axis REIT is led by its chief executive officer and executive director, Dato’ George Stewart LaBrooy, a prominent figure in the Malaysian REIT scene, who has been at the helm of the company since 2008. He was one of the key figures in the formation of Axis REIT, when in 2003 he spearheaded a project to identify suitable properties to be injected into Malaysia’s first REIT. Under his leadership, Axis REIT has grown to become one of the best-managed and constantly growing REITs in Malaysia.

Strong growth since listing Axis REIT is currently the largest business space and industrial REIT listed on Bursa Malaysia. Its assets under management have jumped from RM296m from the time of its listing to RM2.04bn currently, a 691% increment. Consequently, its space under management has jumped from 978,000 sq. ft. to 7.02m sq. ft. currently, a 718% growth. It now has 34 properties under its management from five at the time of listing. The valuation gain registered since listing stands at RM276m.

Best transparency and the most aggressive We believe Axis REIT has the best transparency towards the investment community. It is one of the few REITS that consistently holds briefings for analysts and fund managers after its quarterly financial results announcements, which give investors a very clear idea of the direction of the company. It is also the most aggressive acquirer of assets among the REITs in Malaysia. In the last five years alone, from 2010 to 2014, it has acquired in total of 15 properties and disposed of three properties for handsome gains.

Long-term target prices Assuming a constant 3.0% yoy annual revenue growth, based on a DDM (cost of equity 8.1%) valuation, Axis REIT’s target price should increase to RM2.04 in three years’ time, a 21% upside over its current price. Using the same assumptions, its five-year target price should increase to RM2.43, providing a 44% upside over its current price.





Up/downside: 124.3%

Reuters: AXSR.KL

Bloomberg: AXRB MK

Market cap: US$437.1m

RM1,851m


RM1.70m


Free float: 83.8%


No changes.


Absolute (%) 4.3 -1.8 -7.2

Relative (%) -2.3 -1.6 0.1

Analyst

Azman HUSSIN



Gross Property Revenue (RMm) 142.0 165.2 170.1 175.2 180.5

Net Property Income (RMm) 121.3 141.2 145.5 149.8 154.3

Net Profit (RMm) 84.5 104.4 105.7 106.9 111.3

Distributable Profit (RMm) 84.5 106.0 107.4 108.7 113.1

Core EPS (RM) 0.19 0.21 0.20 0.20 0.21

Core EPS Growth 8.0% 13.1% (6.6%) 1.1% 4.1%

FD Core P/E (x) 9.13 8.07 8.64 8.54 8.20

DPS (RM) 0.19 0.22 0.18 0.20 0.21

Dividend Yield 11.0% 13.0% 10.6% 11.9% 12.4%

Asset Leverage 34.3% 34.3% 39.4% 38.7% 38.8%

BVPS (RM) 2.20 1.86 1.83 1.85 1.84

P/BV (x) 0.77 0.91 0.92 0.92 0.92

Recurring ROE 8.5% 10.4% 10.6% 10.8% 11.2%

% Change In DPS Estimates 0% 0% 0%

CIMB/consensus DPS (x) 1.97 2.10 2.05

95.0

98.0

101.0

104.0

107.0

1.500

1.600

1.700

1.800

1.900


Source: Bloomberg

2

4

6

8

10


Vol m

http://www.efa.biz/


71

Figure 1: Results Comparison


Figure 2: Axis REIT space under management (m sq. ft.)


FYE Dec (RM m) 2Q

FY15

2Q

FY14yoy % chg qoq % chg

2QFY15

cum

2QFY14

cumyoy % chg

Prev.

FY15F Comments

Revenue 41.3 35.1 17.8 1.8 82.0 70.7 16.0 170.1 Higher revenues due to the new acquisitions

Operating costs (10.2) (7.8) 30.3 -5.5 (21.0) (17.3) 21.9 (38.1)

EBITDA 31.1 27.2 14.2 4.4 60.9 53.4 14.0 132.0

EBITDA margin (%) 75.3 77.6 74.3 75.6 77.6

Depn & amort. 0.0 0.0 nm nm 0.0 0.0 nm 0.0

EBIT 31.1 27.2 14.2 4.4 60.9 53.4 14.0 132.0

Interest expense (7.5) (5.6) 34.4 4.4 (14.7) (11.2) 31.8 (27.7)

Interest & invt inc 0.1 0.2 -48.4 -40.9 0.3 0.4 -20.5 1.4

Associates' contrib 0.0 0.0 nm nm 0.0 0.0 nm 0.0 None as expected

Exceptionals & revaln 8.2 0.0 #DIV/0! nm 8.7 1.6 439 0.0 Revaluation gains

Pretax profit 31.9 21.9 45.8 36.8 55.2 44.3 24.7 106

Tax 0.0 0.0 nm nm 0.0 0.0 nm 0.0 None due to 99% dividend payout

Tax rate (%) 0.0 0.0 nm nm 0.0 0.0 nm 0.0

Minority interests 0.0 0.0 nm nm 0.0 0.0 nm 0.0 None as expected

Net profit 31.9 21.9 45.8 36.8 55.2 44.3 24.7 106

Distr profit 23.8 20.8 14.4 0.1 47.5 42.1 12.7 107 In line

Core net profit 23.7 21.9 8.4 4.0 46.5 42.7 9.05 106 In line

DPU (sen) 4.3 4.8 -9.5 4.9 8.4 10.1 -16.4 17.9

Title:

Source:


0

1000

2000

3000

4000

5000

6000

7000

8000

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014


72

BY THE NUMBERS

Share price info


Relative -2.3 -1.6 0.1

Absolute 4.3 -1.8 -7.2


Employees Provident Fund (EPF) 10.8

Tew Peng Hwee 6.0


0.0%

7.5%

15.0%

22.5%

30.0%

37.5%

45.0%

0.000

0.200

0.400

0.600

0.800

1.000

1.200


P/BV vs Asset Leverage

Rolling P/BV (x) (lhs) Asset Leverage (rhs)

0.00%

2.80%

5.60%

8.40%

11.20%

14.00%

0.000

0.050

0.100

0.150

0.200

0.250


Dividend Yield vs Net DPS - (RM)

DPS (lhs) Dividend Yield (rhs)

Profit & Loss


Rental Revenues 142.0 165.2 170.1 175.2 180.5

Other Revenues 0.0 0.0 0.0 0.0 0.0

Gross Property Revenue 142.0 165.2 170.1 175.2 180.5

Total Property Expenses (20.7) (23.9) (24.7) (25.4) (26.2)

Net Property Income 121.3 141.2 145.5 149.8 154.3

General And Admin. Expenses 0.0 0.0 0.0 0.0 0.0

Management Fees (10.0) (10.0) (9.9) (10.0) (10.0)

Trustee's Fees (0.5) (0.5) (0.5) (0.5) (0.5)

Other Operating Expenses (2.8) (2.9) (3.0) (3.1) (3.2)

EBITDA 107.9 127.8 132.1 136.2 140.7

Depreciation And Amortisation (0.1) (0.1) (0.1) (0.1) (0.1)

EBIT 107.9 127.7 132.0 136.2 140.6

Net Interest Income (23.3) (23.3) (26.3) (29.3) (29.3)

Associates' Profit

Other Income/(Expenses) 0.0 0.0 0.0 0.0 0.0

Exceptional Items

Pre-tax Profit 84.5 104.4 105.7 106.9 111.3

Taxation 0.0 0.0 0.0 0.0 0.0

Minority Interests

Preferred Dividends

Net Profit 84.5 104.4 105.7 106.9 111.3

Distributable Profit 84.5 106.0 107.4 108.7 113.1

Cash Flow


Pre-tax Profit 84.5 104.4 105.7 106.9 111.3

Depreciation And Non-cash Adj. 23.4 23.4 26.4 29.3 29.3

Change In Working Capital

Tax Paid

Others 12.5 (0.1) (0.1) (0.1) (0.1)

Cashflow From Operations 120.5 127.7 132.0 136.2 140.6

Capex (15.0) (15.0) (15.0) (9.0) (8.0)

Net Investments And Sale Of FA 0.0 0.0 0.0 0.0 0.0

Other Investing Cashflow 0.0 0.0 0.0 0.0 0.0

Cash Flow From Investing (15.0) (15.0) (15.0) (9.0) (8.0)

Debt Raised/(repaid) 0.0 0.0 132.0 0.0 0.0

Equity Raised/(Repaid) 0.0 0.0 0.0 0.0 0.0

Dividends Paid (84.5) (118.8) (96.7) (108.7) (113.1)

Cash Interest And Others (23.3) (23.3) (26.3) (29.3) (29.3)

Cash Flow From Financing (107.9) (142.1) 9.0 (138.0) (142.4)

Total Cash Generated (2.4) (29.4) 126.0 (10.8) (9.8)

Free Cashflow To Firm 106.8 114.1 118.4 128.5 134.0

Free Cashflow To Equity 82.1 89.4 222.7 97.9 103.3


73

BY THE NUMBERS


Balance Sheet



Intangible Assets 0 0 0 0 0

Other Long-term Assets 16 31 54 84 92


Total Cash And Equivalents 40 25 128 128 118

Inventories

Trade Debtors 27 27 27 27 27

Other Current Assets 0 0 0 0 0

Total Current Assets 67 52 155 155 145

Trade Creditors 24 24 24 24 24

Short-term Debt 341 341 341 341 341


Total Current Liabilities 365 365 365 365 365

Long-term Borrowings 208 208 340 340 340

Other Long-term Liabilities 27 27 35 57 57

Total Non-current Liabilities 235 235 375 397 397

Shareholders' Equity 1,002 1,002 988 997 995

Minority Interests

Preferred Shareholders Funds

Total Equity 1,002 1,002 988 997 995

Key Ratios


Gross Property Revenue Growth 6.7% 16.3% 3.0% 3.0% 3.0%

NPI Growth 7.8% 16.4% 3.0% 3.0% 3.0%

Net Property Income Margin 85.4% 85.5% 85.5% 85.5% 85.5%

DPS Growth 5.5% 18.7% (18.6%) 12.5% 4.1%


Effective Tax Rate 0% 0% 0% 0% 0%

Net Dividend Payout Ratio 100% 114% 91% 102% 102%

Current Ratio 0.18 0.14 0.42 0.42 0.40

Quick Ratio 0.18 0.14 0.42 0.42 0.40

Cash Ratio 0.11 0.07 0.35 0.35 0.32


Key Drivers


Rental Rate Psf Pm (RM) N/A N/A N/A N/A N/A

Acq. (less development) (US$m) N/A N/A N/A N/A N/A

RevPAR (RM) N/A N/A N/A N/A N/A

Net Lettable Area (NLA) ('000 Sf) 5,372 5,372 5,372 5,372 5,372

Occupancy (%) 97.0% 97.0% 97.0% 97.0% 97.0%

Assets Under Management (m) (RM) N/A N/A N/A N/A N/A

Funds Under Management (m) (RM) N/A N/A N/A N/A N/A

Autos│Malaysia│Equity research│October 9, 2015

Company Note


Powered by EFA

Berjaya Auto Strong and sustained growth

■ Has arguably the best management team in the Malaysian auto industry led by Dato’ Sri Ben Yeoh, its CEO.

■ Successfully grown the Mazda brand in Malaysia, registering a 6-year CAGR of 54.8% to 12,209 units in FY4/15.

■ Equally successful in distributing Mazda vehicles in the Philippines, recording a 2-year CAGR of 132.8% to 3,561 units in FY4/15.

■ Berjaya Auto is our top pick for the Malaysian auto sector. It is also our long-term pick with 2018 and 2020 target price of RM3.58 and RM4.17, respectively.

Highest score in long-term auto stock pick matrix Berjaya Auto scores the highest in our long-term auto sector stock pick matrix mainly because its high scores in the management, financials and growth categories. A relatively newcomer to the local auto industry, Berjaya Auto has been outperforming its more experienced competitors in the local market in terms of brand awareness, sales volume growth, and financial strength. We believe this can be attributed mainly to the strength of its management team.

Led by Dato’ Sri Ben Yeoh Choon San Its chief executive officer and executive director Dato’ Sri Ben Yeoh Choon San has over 40 years of experience in the automotive industry. His experience and expertise, coupled with the capabilities of other key members of the management team, played a major role in securing from Mazda Japan the distributorship of Mazda vehicles in Malaysia, and subsequently in the Philippines.

Outstanding growth since obtaining the Mazda brand Since obtaining the rights to distribute Mazda cars in Malaysia, Berjaya Auto has registered outstanding growth that far outpaced those of the industry and its competitors. From a mere 886 units of sales in Malaysia in FY4/09, Berjaya Auto has grown its sales of Mazda vehicles in Malaysia to 12,209 units in FY4/15, translating into a 6-year compounded annual growth rate (CAGR) of 54.8%.

Success replicated in the Philippines This success has been replicated in the Philippines. Starting with 657 units of Mazda vehicles sold in FY4/13, Berjaya Auto delivered 3,561 units of Mazda vehicles in FY4/15, translating to a 2-year 132.81% CAGR.

Long-term target prices Assuming a conservative 8% annual revenue growth rate from FY19 onwards with a 9% net profit margin, and based on our current target price basis of 14.0x CY19 P/E (10% premium over the sector average due to its higher growth trajectory), we believe Berjaya Auto’s target price should increase to RM3.58 by 2018. Based on the same assumptions, our 2020 target price, derived from 14.0x CY21 P/E, should increase to RM4.17.





Up/downside: 66.0%

Reuters: BJAU.KL

Bloomberg: BAUTO MK


RM2,086m


RM6.04m


Free float: 37.8%


No changes.


Absolute (%) -18.7 -23.1 -17.4

Relative (%) -25.3 -22.9 -10.1

Analyst

Azman HUSSIN


Financial Summary Apr-14A Apr-15A Apr-16F Apr-17F Apr-18F

Revenue (RMm) 1,451 1,830 2,355 2,762 2,903

Operating EBITDA (RMm) 175.5 292.0 303.0 354.0 372.7

Net Profit (RMm) 130.6 215.4 223.9 258.2 272.7

Normalised EPS (RM) 0.12 0.19 0.21 0.23 0.24

Normalised EPS Growth 147% 55% 11% 7% 6%

FD Normalised P/E (x) 15.20 9.76 8.82 8.23 7.79

DPS (RM) 0.05 0.10 0.10 0.10 0.11

Dividend Yield 2.87% 5.27% 5.19% 5.46% 5.74%

EV/EBITDA (x) 9.89 5.94 4.63 3.75 2.90

P/FCFE (x) NA 11.43 7.11 6.44 6.08

Net Gearing (53%) (57%) (84%) (96%) (104%)

P/BV (x) 6.01 4.37 3.73 2.97 2.42

ROE 52.0% 52.5% 43.3% 40.9% 34.9%

% Change In Normalised EPS Estimates 0% 0% 0%

Normalised EPS/consensus EPS (x) 1.02 0.98 0.92

81.0

99.8

118.5

137.3

1.60

2.10

2.60

3.10


Source: Bloomberg

5

10

15


Vol m

http://www.efa.biz/


75

Figure 1: Berjaya Auto’s total vehicle sales (units) in Malaysia


Figure 2: Berjaya Auto’s total vehicle sales (units) in the Philippines


Title:

Source:


886

2,113

4,826

5,909

8,142

9,497

12,209

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000


Title:

Source:


657

2,283

3,561

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

FY13 FY14 FY15


76

BY THE NUMBERS

Share price info


Relative -25.3 -22.9 -10.1

Absolute -18.7 -23.1 -17.4


Berjaya Group 50.5

Podium Success 5.8



0.0%

7.5%

15.0%

22.5%

30.0%

37.5%

45.0%

52.5%

60.0%

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00


P/BV vs ROE


0%

20%

40%

60%

80%

100%

120%

140%

160%

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0


12-mth Fwd FD Normalised P/E vs FD Normalised EPS Growth

12-mth Fwd Rolling FD Normalised P/E (x) (lhs)

Diluted Normalised EPS Growth (rhs)

Profit & Loss

(RMm) Apr-14A Apr-15A Apr-16F Apr-17F Apr-18F


Gross Profit 266 134 431 505 531

Operating EBITDA 175 292 303 354 373


Operating EBIT 170 286 292 339 355

Financial Income/(Expense) (1) (0) 0 0 0



Profit Before Tax (pre-EI) 180 301 310 359 380

Exceptional Items

Pre-tax Profit 180 301 310 359 380

Taxation (46) (78) (78) (90) (95)


Profit After Tax 134 223 233 270 285

Minority Interests (3) (7) (9) (11) (13)

Preferred Dividends



Preference Dividends (Australia)

Net Profit 131 215 224 258 273

Normalised Net Profit 134 223 233 270 285

Fully Diluted Normalised Profit 131 215 224 258 273

Cash Flow


EBITDA 175.5 292.0 303.0 354.0 372.7


Change In Working Capital



Other Operating Cashflow (49.3) 20.8 71.8 82.3 84.5

Net Interest (Paid)/Received (1.1) 0.0 0.0 0.0 0.0

Tax Paid (41.1) (90.7) (77.6) (89.9) (95.1)


Capex (5.5) (8.6) (25.0) (25.0) (25.0)

Disposals Of FAs/subsidiaries 8.1 0.0 0.0 0.0 0.0

Acq. Of Subsidiaries/investments 0.0 (36.1) 0.0 0.0 0.0


Cash Flow From Investing 5.7 (38.3) (19.3) (16.6) (12.9)

Debt Raised/(repaid) (129.0) 0.0 0.0 0.0 0.0

Proceeds From Issue Of Shares 58.9 4.5 0.0 0.0 0.0

Shares Repurchased

Dividends Paid (14.1) (98.1) (119.5) (114.0) (114.0)

Preferred Dividends

Other Financing Cashflow (2.3) 0.0 0.0 0.0 0.0

Cash Flow From Financing (86.5) (93.6) (119.5) (114.0) (114.0)

Total Cash Generated 3.2 90.3 158.4 215.9 235.2

Free Cashflow To Equity (39.3) 183.8 277.9 329.9 349.2



77

BY THE NUMBERS


Balance Sheet



Total Debtors 54 105 72 109 81

Inventories 288 216 379 523 426


Total Current Assets 528 601 945 1,342 1,451

Fixed Assets 20 23 54 65 72




Total Non-current Assets 86 131 135 166 199

Short-term Debt 0 0 0 0 0


Total Creditors 134 121 158 329 132



Total Long-term Debt 0 0 0 0 0


Total Other Non-Current Liabilities 65 61 152 200 291



Total Liabilities 260 236 495 768 739

Shareholders' Equity 344 477 559 703 862


Total Equity 354 496 584 740 911

Key Ratios

Apr-14A Apr-15A Apr-16F Apr-17F Apr-18F

Revenue Growth 36.3% 26.1% 28.7% 17.3% 5.1%

Operating EBITDA Growth 115% 66% 4% 17% 5%


Net Cash Per Share (RM) 0.16 0.25 0.43 0.62 0.83

BVPS (RM) 0.30 0.42 0.49 0.62 0.76

Gross Interest Cover 156 3,007 N/A N/A N/A




Inventory Days 74.23 54.21 56.59 73.00 73.00


ROIC (%) 104% 108% 112% 145% 185%

ROCE (%) 52.3% 68.7% 54.1% 51.3% 43.0%


Key Drivers

Apr-14A Apr-15A Apr-16F Apr-17F Apr-18F

ASP (% chg, main prod./serv.) N/A N/A N/A N/A N/A

Unit sales grth (%, main prod./serv.) 16.6% 27.1% 33.2% 14.1% 10.0%

Util. rate (%, main prod./serv.) N/A N/A N/A N/A N/A

ASP (% chg, 2ndary prod./serv.) N/A N/A N/A N/A N/A

Unit sales grth (%,2ndary prod/serv) -5.1% 57.0% 39.5% 30.0% 10.0%

Util. rate (%, 2ndary prod/serv) N/A N/A N/A N/A N/A

ASP (% chg, tertiary prod/serv) N/A N/A N/A N/A N/A

Unit sales grth (%,tertiary prod/serv) N/A N/A N/A N/A N/A

Util. rate (%, tertiary prod/serv) N/A N/A N/A N/A N/A

Property Devt & Invt│Malaysia│Equity research│October 9, 2015

Company Note


Powered by EFA

Eco World Development Group Bhd Malaysia’s most ambitious developer

■ Arguably the best management team in the property industry and the country’s most aggressive and ambitious developer.

■ On track to meeting FY15 sales target of RM3bn; likely to emerge as Malaysia’s top developer in 2015.

■ Sister company EWI is equally aggressive in terms of sales and, when eventually merged with Eco World, will create a mega property company.

■ Our top pick and only Add in the property sector. It is also our long-term pick, with 2018 and 2020 target prices of RM2.47 and RM3.37, respectively.

Tops in long-term property stock-picking matrix Eco World tops the scoring in our long-term property sector stock-picking matrix primarily because it scores highly in the management and growth categories. It would have scored higher if not for its shortfall in the financial and valuation categories as the company only burst onto the scene in 2013/14 and can be considered a relatively new company that has yet to fully establish itself.

Eco World is led by Tan Sri Liew Kee Sin Eco World is led by non-executive chairman Tan Sri Liew Kee Sin, who was previously the founder, CEO and president of Malaysia's pre-eminent developer, SP Setia. Several hundred of SP Setia's staff have joined Eco World and the latter has aggressively built up its land bank to over 7,000 acres with GDV of RM75bn in just 2-3 years.

Will likely end 2015 as the top-selling developer Eco World is targeting sales of RM3bn in FY15 and RM4bn in FY16 and appears on track to meeting these targets. Although the RM3bn figure is slightly lower than FY14's figure of RM3.19bn, it is commendable nonetheless as most other developers have slashed their sales targets due to the very difficult property market conditions. With RM3bn Malaysian sales, Eco World will also likely emerge as the top-selling developer in Malaysia for 2015.

Eco World and sister company eventually to be merged? Thus far this year, Eco World has been able to achieve RM2.37bn in sales for the 10M (Oct 14 to Aug 15). Besides domestic sales, Eco World's sister company Eco World International (EWI) has projects in Australia and the United Kingdom. Tan Sri Liew's ultimate goal is to merge the two companies into a single entity, which will likely become Malaysia's largest developer by market cap.

Long-term target prices Assuming the property market outlook improves by 2018 and our discount to RNAV assigned to Eco World also narrows from 30% to 20% plus land values appreciate at a moderate pace of 5% per annum, our 3-year price target rises to RM2.47. Using similar assumptions but further narrowing the discount to RNAV from 20% in 2018 to parity in 2020, Eco World's target price rises to RM3.37.





Up/downside: 37.9%

Reuters: ECOW.KL

Bloomberg: ECW MK


RM3,263m


RM2.69m


Free float: 33.4%


No changes.


Absolute (%) 3.0 -6.1 -23.6

Relative (%) -3.6 -5.9 -16.3

Analyst

Terence WONG, CFA


Financial Summary Oct-13A Oct-14A Oct-15F Oct-16F Oct-17F

Total Net Revenues (RMm) 155 137 1,384 1,442 2,220


Net Profit (RMm) 22.8 7.0 39.1 108.6 175.7

Core EPS (RM) 0.037 0.011 0.026 0.046 0.074

Core EPS Growth 163% (69%) 131% 75% 62%

FD Core P/E (x) 36.9 121.1 61.8 36.7 22.7

DPS (RM) 0.005 - 0.010 0.010 0.010

Dividend Yield 0.33% 0.00% 0.72% 0.72% 0.72%

EV/EBITDA (x) 28.11 78.33 76.06 33.77 18.91

P/FCFE (x) 40.2 29.5 NA 167.8 251.0

Net Gearing 12.3% 57.4% 61.2% 62.7% 60.3%

P/BV (x) 2.64 2.58 1.03 1.00 0.95

ROE 7.39% 2.16% 2.25% 3.39% 5.27%



78.0

85.5

93.0

100.5

108.0

115.5

123.0

1.10

1.30

1.50

1.70

1.90

2.10

2.30


Source: Bloomberg

5

10

15

20


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79



Figure 2: Eco World Development's RNAV


FYE Oct (RM m) 3Q

FY15

3Q

FY14yoy % chg

2Q

FY15qoq % chg

3QFY15

cum

3QFY14

cumyoy % chg

Prev.

FY15F Comments

Revenue 454.3 27.3 1,564.0 417.8 8.7 1,030.1 68.4 1,406.0 519.0 9M is nearly double full year forecast

Operating costs (434.7) (14.6) 2,877.7 (391.4) 11.1 (976.4) (60.8) 1,505.8 (463.7)

EBIT margin (%) 4.3 46.5 6.3 5.2 11.1 (53.1) 10.7 Narrow margins due to high start-up costs

EBIT 19.5 12.7 53.8 26.4 (26.1) 53.7 7.6 606.9 55.3

Interest expense (4.9) (0.4) 1,125.5 (9.7) (49.6) (18.2) (0.9) 1,934.0 (7.4) Total borrowing fell 11% to RM1.55bn

Interest & invt inc 1.1 0.2 453.5 1.0 12.4 3.5 1.0 253.9 4.2 Total cash jumped 186% to RM620m

Associates' contrib 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Exceptionals 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Pretax profit 15.7 12.5 25.9 17.7 (11.0) 39.0 7.7 407.0 52.1 Made up 75% of our full year forecast

Tax (6.3) (1.6) 296.3 (5.9) 8.1 (14.9) (2.6) 472.2 (13.0) Above statutory tax rate due to certain

Tax rate (%) 40.3 12.8 33.2 38.1 33.8 12.9 25.0 non tax-deductible expenses

Minority interests 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Net profit 9.4 10.9 (13.8) 11.8 (20.4) 24.2 5.1 373.8 39.1 Made up 62% of our full year forecast

Core net profit 9.4 10.9 (13.8) 11.8 (20.4) 24.2 5.1 373.8 39.1

EPS (sen) 0.4 4.3 (90.5) 0.8 (48.1) 1.7 2.0 (15.0) 7.7

Core EPS (sen) 0.4 4.3 (90.5) 0.8 (48.1) 1.7 2.0 (15.0) 7.7

Note that 3QFY14 is period ending Sep 2013

Type Location Size/units Area (sq. ft.) Price (RM psf) Stake Value (RM m)

EcoTropics Johor 743.60 ac 32,391,216 22.00 100% 712.6

EcoBusiness Park 3 Johor 248.00 ac 10,802,880 22.00 100% 237.7

0-lot bungalows Saujana, Selangor 6 3,600,000 100% 21.6

EcoSanctuary Selangor 308.72 ac 13,447,843 60.00 100% 806.9

EcoSky Jalan Ipoh, Kuala Lumpur 9.60 ac 418,176 500.00 100% 209.1

EcoMajestic Semenyih, Selangor 1,073.10 ac 46,744,236 40.00 100% 1,869.8

EcoBotanic Iskandar Malaysia, Johor 325.10 ac 14,161,356 80.00 100% 1,132.9

EcoBusiness Park 1 Senai, Johor 612.00 ac 26,658,720 23.00 100% 613.2

EcoBusiness Park 2 Johor 383.60 ac 16,709,616 23.00 100% 384.3

EcoSpring Iskandar Malaysia, Johor 613.80 ac 26,737,128 25.00 100% 668.4

EcoTerraces Penang Island 12.80 ac 557,568 100.00 100% 55.8

EcoMacalister Penang Island 1.10 ac 47,916 500.00 100% 24.0

EcoMeadows Seberang Prai, Penang 75.70 ac 3,297,492 60.00 100% 197.8

Semenyih Selangor 492.66 ac 21,460,139 30.00 100% 643.8

Pudu Jail privatisation Kuala Lumpur 19.40 ac 845,064 2,000.00 40% 676.1

EcoMarina Batu Kawan, Penang 470.00 ac 20,473,200 39.00 100% 798.5

Placement proceeds 638.3

Fixed assets 4.2

Investment properties 0.0

Others 0.0

Net current assets less dev. prop. 190.9

Long term borrowings + payables (3,122.4)

Total RNAV 6,763.4

No. of shares (m) 2,364.3

RNAV per share (RM) 2.86

Warrants @ RM2.08 525.4

Fully diluted number of shares (m) 2,889.7

Fully diluted RNAV per share (RM) 2.72


80

BY THE NUMBERS

Share price info


Relative -3.6 -5.9 -16.3

Absolute 3.0 -6.1 -23.6


Sinarmas Harta 32.0

Eco World Development Holdings Sdn Bhd

23.3

Liew Tian Xiong 11.3


0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50


P/BV vs ROE


-500%

214%

929%

1,643%

2,357%

3,071%

3,786%

4,500%

0

20

40

60

80

100

120

140





Profit & Loss

(RMm) Oct-13A Oct-14A Oct-15F Oct-16F Oct-17F

Total Net Revenues 155 137 1,384 1,442 2,220

Gross Profit 31 13 55 163 292



Operating EBIT 31 13 54 162 291






Pre-tax Profit 28 11 52 145 234

Taxation (5) (5) (13) (36) (59)


Profit After Tax 23 7 39 109 176


Pref. & Special Div 0 0 0 0 0

FX Gain/(Loss) - post tax 0 0 0 0 0


Net Profit 23 7 39 109 176



Cash Flow


EBITDA 31 13 55 163 292

Cash Flow from Invt. & Assoc. 0 0 0 0 0

Change In Working Capital (7) (143) 3 (211) (185)

Straight Line Adjustment 0 0 1 1 1



Other Operating Cashflow


Tax Paid (5) (10) (13) (36) (59)

Cashflow From Operations 15 (143) 40 (108) (15)

Capex (0) (5) (4,770) (3) (3)

Disposals Of FAs/subsidiaries

Disposals of Investment Properties


Other Investing Cashflow 1 1 9 15 7

Cash Flow From Investing 1 (4) (4,762) 11 4

Debt Raised/(repaid) 5 175 2,108 120 27

Proceeds From Issue Of Shares 0 0 2,798 0 0

Shares Repurchased

Dividends Paid (2) 0 (9) (9) (9)

Preferred Dividends

Other Financing Cashflow (0) (2) 122 0 0

Cash Flow From Financing 3 173 5,018 112 19


81

BY THE NUMBERS


Balance Sheet



Properties Under Development 79 40 42 74 78

Total Debtors 45 232 226 261 362

Inventories 40 50 462 481 741


Total Current Assets 202 379 1,075 1,168 1,540

Fixed Assets 1 4 7 10 12

Total Investments 302 303 5,070 5,070 5,070



Total Non-current Assets 303 307 5,077 5,080 5,083






Total Long-term Debt 15 141 2,258 2,387 2,421

Hybrid Debt - Debt Component 0 0 0 0 0


Total Non-current Liabilities 88 213 2,331 2,460 2,495


Total Liabilities 183 361 2,876 2,873 3,080

Shareholders' Equity 319 326 3,154 3,254 3,421

Minority Interests 2 (0) 122 122 122

Total Equity 322 326 3,276 3,375 3,542

Key Ratios

Oct-13A Oct-14A Oct-15F Oct-16F Oct-17F

Revenue Growth 112% (12%) 912% 4% 54%

Operating EBITDA Growth 144% (58%) 318% 197% 79%



BVPS (RM) 0.52 0.53 1.33 1.38 1.45



Net Dividend Payout Ratio 7.6% NA 22.7% 8.2% 5.0%


Inventory Days 104.4 132.7 70.3 135.1 115.8


ROIC (%) 18.4% 7.3% 14.5% 43.8% 44.7%

ROCE (%) 8.47% 3.03% 1.85% 2.95% 5.02%


Key Drivers

Oct-13A Oct-14A Oct-15F Oct-16F Oct-17F

Unbooked Presales (m) (RM) N/A 3,190.0 3,000.0 4,000.0 5,000.0

Unbooked Presales (area: m sm) N/A N/A N/A N/A N/A

Unbooked Presales (units) N/A N/A N/A N/A N/A

Unsold attrib. landbank (area: m sm) 4.2 6.1 20.2 22.3 22.3

Gross Margins (%) 20.3% 9.6% 4.0% 11.3% 13.1%

Contracted Sales ASP (per Sm) (RM) N/A N/A N/A N/A N/A

Residential EBIT Margin (%) N/A N/A N/A N/A N/A

Investment rev / total rev (%) N/A N/A N/A N/A N/A

Residential rev / total rev (%) N/A N/A N/A N/A N/A

Invt. properties rental margin (%) N/A N/A N/A N/A N/A

SG&A / Sales Ratio (%) N/A N/A N/A N/A N/A

Construction│Malaysia│Equity research│October 9, 2015

Company Note


Powered by EFA

Gamuda On a longer-term growth cycle

■ Gamuda has superior capability in executing larger-scale projects.

■ Secured major project management roles under the PDP model.

■ Longer-term earnings visibility underpinned by MRT and Penang TMP.

■ Indicative 2018 target price of RM6.40 and 2020 target price of RM7.20.

■ Long-term upside of 45-60% based on 10% RNAV discount. Maintain Add.

Highest score in our long-term selection matrix Gamuda scores the highest in our long term stock picking matrix. What sets it apart is its innovative qualities, backed by its proven capability to better leverage its strength and expertise in executing larger-scale projects over longer periods of time. This can be attributable to the leadership of founder and group MD Dato' Lin Yun Ling - 35 years of experience in civil engineering and construction. He joined Gamuda in 1978 and the group has since achieved major milestones.

Pioneering role in the domestic construction space Its job track record over the past decade or so has not only become more specialised, but it has also evolved from turnkey works to higher-level project management scope. Arguably, Gamuda still commands a pioneering role in the Malaysian construction space in the areas of holistic public transport planning, rail development and tunneling, and integrated flood mitigation jobs. Order book growth of more than 7-fold is set by mid-2016, driven by MRT 2.

Biggest PDP for large scale projects Gamuda's success story in implementing PDP-driven jobs has been echoed in other parts of the country too. On top of its existing PDP roles for two major MRT projects, it has recently expanded in a big way beyond the Klang Valley by securing the RM10bn Transport Master Plan (TMP) for the entire state of Penang. Putting the timeline in perspective, Gamuda's PDP earnings stream stretches over five years from 2015 for MRT or up to 2030 if other phases of the Penang TMP are implemented.

Tunneling specialist Gamuda's own track record in mega turnkey contracts also speaks for itself in terms of quality, scale and engineering capabilities. Current and previous major projects include 1) RM1.9bn SMART tunnel project - Klang Valley's first major tunneling and flood mitigation, 2) Malaysia's first RM23bn Mass Rapid Transit (MRT) project - 9.5km of tunneling, 3) the upcoming RM28bn MRT 2 project - 10km of tunneling works, and in future, potentially 4) the over RM30bn MRT 3 - entirely tunneling works.

Gamuda's long term target price Based on a 1) 5% appreciation in land values p.a. in the next 2-5 years for its domestic and overseas land bank, 2) higher construction burn-rate, and 3) DCF-value for the RM16bn PDP portion of MRT 2, we arrive at a 2018 indicative target price of RM6.40 based on an unchanged 10% discount to RNAV. Imputing the estimated new land bank from phase 1 of Penang TMP would raise the target price to RM7.20 based on a similar discount to RNAV. The 3-5 year target price offers 45-60% potential upside.





Up/downside: 29.2%

Reuters: GAMU.KL

Bloomberg: GAM MK


RM10,947m


RM18.18m


Free float: 75.7%


No change


Absolute (%) 3.4 -2.8 -5.4

Relative (%) -3.2 -2.6 1.9

Analyst

Sharizan ROSELY


Financial Summary Jul-14A Jul-15A Jul-16F Jul-17F Jul-18F

Revenue (RMm) 2,230 2,400 2,684 2,952 3,243


Net Profit (RMm) 719.4 682.1 668.5 725.6 813.6

Core EPS (RM) 0.32 0.28 0.28 0.30 0.34

Core EPS Growth 3.4% (12.1%) (2.0%) 8.5% 12.1%

FD Core P/E (x) 14.11 16.05 16.38 15.09 13.46

DPS (RM) 0.12 0.12 0.12 0.12 0.12

Dividend Yield 2.54% 2.54% 2.54% 2.54% 2.54%

EV/EBITDA (x) 27.17 21.19 20.46 18.54 16.84

P/FCFE (x) 8.42 12.48 27.48 27.97 22.39

Net Gearing 30.0% 47.2% 46.5% 45.0% 42.7%

P/BV (x) 1.97 1.73 1.72 1.69 1.66

ROE 13.7% 11.5% 10.5% 11.3% 12.5%



93.0

98.6

104.1

109.7

3.70

4.20

4.70

5.20


Source: Bloomberg

5

10

15

20

25


Vo

l m

http://www.efa.biz/


83

Figure 1: List of PDP-type jobs and its value


Figure 2: RNAV


Title:

Source:


23,000

28,000

10,000

9,000

27,000

0 5,000 10,000 15,000 20,000 25,000 30,000

MRT 1

MRT 2

Penang TMP phase 1

LRT 3

Pan-Borneo Highway

DCF value Gamuda's Value

Concession assets (RM m) stake (%) (RM m)

LDP/Litrak 1,973.0 45% 887.9

SAE 1,400.0 70% 980.0

Sprint 2,307.6 52% 1,206.9

SSP1&3 (Splash) 2,800.0 40% 1,120.0

Gamuda Water 500.0 80% 400.0

PPH, India 152.9 50% 76.5

DE, India 108.2 50% 54.1

SMART 963.3 50% 481.6

MRT SBK line PDP 490.6 50% 245.3

Land size Value

Property (acres) RM psf

Kota Kemuning 10 30.0 50% 6.5

Valencia 0 100.0 99% 0.0

Bandar Botanic 30 45.0 100% 58.8

Bandar Nusajaya 400 40.0 50% 348.5

Jade Hills 180 45.0 100% 352.8

Madge Mansions 0 30.0 100% 0.0

The Robertsons 0 250.0 100% 0.0

Yenso, Hanoi 400 140.0 100% 2,439.4

Celadon City, HCMC 170 157.8 100% 1,168.5

New land - Kelana Jaya 5 450.0 100% 98.0

New land - Serai 770 40.0 100% 1,341.6

New land - Kundang 90 20.0 100% 78.4

New land - T12 1530 38.2 100% 2,545.9

New land - KK257 257 40.0 100% 447.8

Sabah Land 18 20.0 100% 15.7

Toa Payoh land 3 50.0 50% 3.3

CY16

(RM m) P/E (x)

Construction 201.0 15 100% 3,014.5

Quarry 13.8 13.5 100% 186.1

Property investments, JVs and associates 1,665.7

Net current assets net of dev. prop. (4Q15) 622.8

Total debt 4Q15 (4,135.4)

Total RNAV 15,711.1

Shares outstanding (m) 2,405.9

FD RNAV/share (RM) 6.53

RNAV discount 10%

Target price (RM) 5.88


84

BY THE NUMBERS

Share price info


Relative -3.2 -2.6 1.9

Absolute 3.4 -2.8 -5.4


EPF 10.6

Amanah Raya Trustees 8.2

Generasi Setia 5.5


0.0%

4.2%

8.3%

12.5%

16.7%

20.8%

25.0%

0.00

0.50

1.00

1.50

2.00

2.50

3.00


P/BV vs ROE


-20.0%-13.0%-6.0%1.0%8.0%15.0%22.0%29.0%36.0%43.0%50.0%

0.02.04.06.08.0

10.012.014.016.018.020.0





Profit & Loss

(RMm) Jul-14A Jul-15A Jul-16F Jul-17F Jul-18F


Gross Profit 2,230 2,400 2,684 2,952 3,243



Operating EBIT 414 496 574 635 697

Financial Income/(Expense) 1 (56) (14) (14) (14)



Profit Before Tax (pre-EI) 845 858 879 1,024 1,120


Pre-tax Profit 852 858 879 1,024 1,120

Taxation (117) (133) (191) (279) (287)


Profit After Tax 735 725 688 745 833





Net Profit 719 682 669 726 814



Cash Flow


EBITDA 441 600 613 674 737


Change In Working Capital (657) 164 (15) 5 48



Other Operating Cashflow 251 52 52 52 52


Tax Paid (138) (88) (191) (279) (287)

Cashflow From Operations (129) 671 444 439 536

Capex (14) (10) (13) (14) (14)


Acq. Of Subsidiaries/investments 0 0 0 0 0

Other Investing Cashflow 0 (1,403) 0 0 0

Cash Flow From Investing 593 (1,413) (13) (14) (14)

Debt Raised/(repaid) 732 1,620 (34) (33) (33)



Dividends Paid (262) (285) (289) (289) (289)

Preferred Dividends

Other Financing Cashflow (1,243) (143) (82) (89) (144)

Cash Flow From Financing (774) 1,191 (405) (411) (466)

Total Cash Generated (310) 449 27 14 56

Free Cashflow To Equity 1,195 877 398 391 489

Free Cashflow To Firm 529 (619) 482 473 568


85

BY THE NUMBERS


Balance Sheet


Total Cash And Equivalents 920 1,369 1,396 1,410 1,466

Total Debtors 1,817 1,455 1,428 1,441 1,455

Inventories 295 186 176 167 159

Total Other Current Assets 1,684 2,221 2,221 2,221 2,221


Fixed Assets 285 312 342 372 402



Total Other Non-Current Assets 4,191 5,162 5,059 5,084 5,110


Short-term Debt 792 777 769 769 769


Total Creditors 959 1,582 1,595 1,609 1,623











Total Equity 6,234 6,693 6,657 6,768 6,922

Key Ratios

Jul-14A Jul-15A Jul-16F Jul-17F Jul-18F

Revenue Growth (42.6%) 7.6% 11.8% 10.0% 9.8%

Operating EBITDA Growth (24.2%) 35.9% 2.3% 10.0% 9.3%



BVPS (RM) 2.31 2.63 2.65 2.69 2.74





Inventory Days N/A N/A N/A N/A N/A

Accounts Payables Days N/A N/A N/A N/A N/A

ROIC (%) 8.89% 6.83% 7.50% 8.43% 9.20%

ROCE (%) 5.66% 5.57% 5.45% 5.98% 6.46%


Key Drivers


Outstanding Orderbook 3,000 1,800 600 4,400 4,700

Order Book Depletion 1,200 1,200 1,200 1,200 1,200

Orderbook Replenishment - - 5,000 1,500 1,500


Unit sales grth (%, main prod./serv.) N/A N/A N/A N/A N/A



Unit sales grth (%,2ndary prod/serv) N/A N/A N/A N/A N/A


Gaming│Malaysia│Equity research│October 9, 2015

Company Note


Powered by EFA

Genting Malaysia Genting Highlands – from good to great

■ GITP to transform Genting Highlands into world-class international destination

■ Resilient business model: customers mainly local mass market and ASEAN VIPs

■ The 20th Century Fox theme park located in Genting’s cool climate will be the first-

of-its kind globally, which is a huge competitive advantage

■ GENM to be re-rated with higher EV/EBITDA multiple when GITP comes onstream

■ GENM is our top pick and only Add in the gaming sector. It is also our long-term pick with 2018 and 2020 target prices of RM6.00 and RM7.00 respectively.

Rejuvenation under second-generation leadership Genting Malaysia (GENM) is led by Tan Sri Lim Kok Tay (KT Lim), the second son of Tan Sri Dato Seri Lim Goh Tong, founder of the Genting Group. GENM tops our scoring in the growth category. Tan Sri KT Lim is the brainchild behind the aggressive RM5bn Genting Integrated Tourism Plan (GITP) which will transform Genting Highlands from a domestic casino into a world-class international destination.

World’s first 20th Century Fox theme park The new GITP will feature the world’s first 20

th Century Fox theme park, more gaming

capacity, a 10,000 seat arena, a central retail complex, a new cable car system, parking for 3,000 cars and a 1,500+ room six-star hotel. In addition, it recently expanded the First World Hotel by 1,300 rooms.

Resilient business model In our view, GENM has a resilient and defensive business model. It is insulated from the anti-corruption crackdown in China as its customers are primarily local mass market and ASEAN-based VIPs. With the GITP ready, it will further expand its customer base to include international visitors.

Sustainable economic moat We believe that the economic moat surrounding GENM’s business model is its domestic casino monopoly. It is highly unlikely that new casino licences will be issued in Malaysia. With the 20th Century Fox theme park being 1) the first-of-its kind in the world and 2) strategically located in a cool climate location like Genting Highlands, this is a huge competitive advantage that sets it apart from other theme parks in Malaysia.

Long-term target prices We believe that investors will reward GENM with a higher EV/EBITDA multiple when the GITP comes onstream and starts to mature. We now value GENM’s Malaysian earnings at 9x EV/EBITDA. If this re-rates over the longer term to the regional average of 10.5x by FY18, GENM could reach RM6.00. Using similar assumptions, by 2020, GENM’s target price could reach RM7.00. The 3-year and 5-year target prices would offer investors 34-56% upside.





Up/downside: 11.6%

Reuters: GENM.KL

Bloomberg: GENM MK


RM25,401m


RM18.54m


Free float: 50.7%


No change.


Absolute (%) 12.8 6.7 10.9

Relative (%) 6.2 6.9 18.2

Analyst

Marcus CHAN, CFA



Revenue (RMm) 8,328 8,356 8,802 9,912 11,435


Net Profit (RMm) 1,603 1,449 1,444 1,728 2,145

Core EPS (RM) 0.28 0.24 0.24 0.29 0.36

Core EPS Growth 9.8% (14.2%) (0.3%) 19.6% 24.1%

FD Core P/E (x) 15.75 18.36 18.42 15.40 12.40

DPS (RM) 0.10 0.10 0.10 0.10 0.11

Dividend Yield 2.12% 2.12% 2.17% 2.23% 2.39%

EV/EBITDA (x) 10.14 10.38 10.20 8.24 6.36

P/FCFE (x) 20.54 74.07 40.19 13.03 10.51

Net Gearing (11.1%) (9.7%) (10.2%) (17.6%) (25.7%)

P/BV (x) 1.72 1.61 1.52 1.42 1.30

ROE 11.8% 9.1% 8.5% 9.5% 10.9%



94.0

99.0

104.0

109.0

114.0

119.0

3.70

3.90

4.10

4.30

4.50

4.70


Source: Bloomberg

10

20

30

40


Vol m

http://www.efa.biz/


87



Figure 2: RNAV breakdown


2QFY15 2QFY14 yoy % qoq % 2QFY15 2QFY14 Prev. Comments

FYE Dec (RM m) chg chg Cum Cum FY15F

Revenue 1983 4408.8 (55.0) (5.3) 4076 3937 8,802 Poor performance in UK

Operating costs (1547) (2986.6) (48.2) 4.2 (3032) (2871) (6,368)

adj EBITDA 436 1422.2 (69.3) (28.3) 1044 1066 2,434

EBITDA margin (%) 22.0 32.3 25.6 27.1 27.7 lower margin due to GST impact in 1H15

Depn & amort. (163.3) (448.9) (63.6) 2.9 (322.0) (301.8) (630)

EBIT 272.7 973.3 (72.0) (39.3) 722.0 763.7 1,804

Interest expense (7.8) (114.1) (93.2) 0.0 (15.5) (21.2) (37.9)

Interest & invt inc 22.9 162.0 (85.9) 7.0 44.3 99.2 98.0

Exceptionals (16.7) (99.2) (83.2) (235.8) (4.4) (59.8) -

Pretax profit 286.4 931.0 (69.2) (38.2) 746.4 782.0 1,864

Tax (47.9) (234.2) (79.5) (59.1) (164.9) (189.4) (429)

Tax rate (%) 16.7 25.2 22.1 24.2 23.0

Minority interests (7.6) (273.9) (97.2) (300.0) (11.5) (20.2) (2,229)

Net profit 230.9 422.8 (45.4) (34.0) 570.0 572.4 1,444

Core net profit 247.6 522.0 (52.6) (26.7) 574.4 632.1 1,444 40% of full-year forecast

EPS (sen) 10.0 10.0 0.0 69.8 23.4 10.8 23.9

Core EPS (sen) 10.7 12.4 (13.2) 88.7 23.6 11.9 23.9

Method

No. of

shares % stake market Exchange Target

2016

EBITDA Value

('m) price rate (RM/US$) EV/EBITDA RMm

Malaysia EV/EBITDA 9.0 2,175 19,578.4

US EV/EBITDA 6.0 352 2,109.5

UK EV/EBITDA 6.0 301 1,805.5

Genting HK 7,771 17.81% USD 0.35 4.00 1,937.6

Net cash at March 2015 1,124.0

Miami Land 4.00 2,000.0

Total RNAV 28,555.0

Fully-diluted no. of shares 5,713.5

RNAV/share 5.00


88

BY THE NUMBERS

Share price info


Relative 6.2 6.9 18.2

Absolute 12.8 6.7 10.9


Genting Berhad 49.3


0.00%

2.80%

5.60%

8.40%

11.20%

14.00%

0.00

0.50

1.00

1.50

2.00

2.50


P/BV vs ROE


-30.0%-21.0%-12.0%-3.0%6.0%15.0%24.0%33.0%42.0%51.0%60.0%

0.002.004.006.008.00

10.0012.0014.0016.0018.0020.00





Profit & Loss



Gross Profit 8,328 8,356 8,802 9,912 11,435


Depreciation And Amortisation -478 -600 -630 -662 -695

Operating EBIT 1,931 1,810 1,804 2,166 2,663

Financial Income/(Expense) 16 64 60 66 111


Non-Operating Income/(Expense) -87 0 0 0 0


Exceptional Items -94 0 0 0 0

Pre-tax Profit 1,767 1,874 1,864 2,232 2,774

Taxation -182 -431 -429 -513 -638


Profit After Tax 1,584 1,443 1,435 1,719 2,136





Net Profit 1,603 1,449 1,444 1,728 2,145



Cash Flow


EBITDA 2,409 2,410 2,434 2,828 3,357


Change In Working Capital 44 -237 43 107 147




Net Interest (Paid)/Received 43 64 60 66 111

Tax Paid -415 -431 -429 -513 -638


Capex -1,419 -1,500 -1,500 -500 -500



Other Investing Cashflow 0 0 0 0 0

Cash Flow From Investing -1,419 -1,500 -1,500 -500 -500

Debt Raised/(repaid) 568 -10 -9 -9 -8



Dividends Paid -414 -423 -423 -463 -468

Preferred Dividends

Other Financing Cashflow -44 237 -43 -107 -147

Cash Flow From Financing 110 -196 -476 -579 -623

Total Cash Generated 836 173 196 1,471 1,917

Free Cashflow To Equity 1,294 359 662 2,041 2,532

Free Cashflow To Firm 751 407 709 2,088 2,578


89

BY THE NUMBERS


Balance Sheet



Total Debtors 485 526 555 624 720

Inventories 88 118 124 140 162

Total Other Current Assets 1,449 742 782 880 1,015


Fixed Assets 6,088 7,042 7,912 7,750 7,556





Short-term Debt 197 187 178 169 161


Total Creditors 1,616 1,451 1,528 1,721 1,986











Total Equity 15,478 16,503 17,516 18,798 20,466

Key Ratios


Revenue Growth 5.5% 0.3% 5.3% 12.6% 15.4%




BVPS (RM) 2.60 2.78 2.95 3.16 3.44





Inventory Days N/A N/A N/A N/A N/A

Accounts Payables Days N/A N/A N/A N/A N/A

ROIC (%) 15.9% 12.5% 12.1% 13.5% 16.9%

ROCE (%) 12.2% 10.4% 9.8% 11.1% 12.8%


Key Drivers


VIP Chip Volume (% Change) N/A N/A N/A N/A N/A

VIP Chip Win Percentage (%) N/A N/A N/A N/A N/A

Mass mkt chip drop (% chg.) N/A N/A N/A N/A N/A

Mass mkt chip win (%-tage) N/A N/A N/A N/A N/A

Slot Handle (% Change) N/A N/A N/A N/A N/A

Slot Hold Percentage (%) N/A N/A N/A N/A N/A

Net Win Per Slot (% Change) N/A N/A N/A N/A N/A

Net Win Per Table (% Change) N/A N/A N/A N/A N/A

No. Of Slots 3,000 3,000 3,000 3,600 4,154

No. Of Tables 600 600 600 650 750

Plantations│Malaysia│Equity research│October 9, 2015

Company Note


Powered by EFA

Genting Plantations Potential to double its current earnings

■ Genting Plantation is among the fastest-growing big cap plantation companies in Malaysia due to its aggressive expansion into Indonesia.

■ The group more than doubled its planted oil palm estates over the past nine years. This bodes well for future output growth prospects of the group.

■ We project stronger 2H earnings performance driven by higher output and prices.

■ Our top pick and only Add call in the Malaysian plantation sector with 2018 and 2020 target prices of RM14.72 and RM15.78 per share.

Top marks in long term stock picking matrix for planters We gave Genting Plantation the highest score in our long term plantation stock picking matrix primarily because of its strong output growth prospects and balance sheet. The group has the highest ratio or 55% of total planted oil palm estates under the immature and young category and its net gearing ratio was only 2% as at end-June 2015.

One of the fastest-growing planters on Bursa Malaysia Genting Plantations is the plantation arm of Genting group and one of the fastest-growing plantation companies on Bursa Malaysia. The company was incorporated in 1977 and listed in 1982. It is the third largest palm oil listed company by market capitalisation on Bursa Malaysia, after IOI Corp and KL Kepong. Its market cap has grown 5.7x over the past ten years, outpacing the 216% rise in its net profit.

Expansion into Indonesia to fuel future output growth Genting Plantation ventured into Indonesia in mid-2005 and built up its planted oil palm estates in Indonesia to 60,645ha over the past nine years. This has allowed the group to more than double its planted estates from 58,318ha as at end-2005 to 119,900ha as at end-2014. The group has the potential to double its earnings when all its young and immature estates in Indonesia reach their prime yielding age.

Project stronger 2H earnings Genting Plantations’ earnings were affected by weaker CPO prices and lower property earnings in 1H15. However, we project stronger earnings in 2H as we expect CPO prices to recover as well as stronger production. The group has toned down its FFB output growth guidance this year from 10% to 7%, due mainly to weaker yield from its Sabah estates.

Long term target prices Assuming the CPO price improves by 2018 to RM2,800 per tonne and the group achieves FFB output growth of 10% p.a. over the next three years, plus land values appreciate at a moderate pace of 5% p.a., our 3-year target price, which is based on SOP, rises to RM14.72. Using similar assumptions stretching the earnings to 2020, Genting Plantations’ target price rises to RM15.78. The 3-year and 5-year target prices would offer investors 43-53% upside from the current level.





Up/downside: 1.9%

Reuters: GENP.KL

Bloomberg: GENP MK


RM8,009m


RM3.38m

Current shares o/s 773.7m

Free float: 26.9%


No change


Absolute (%) 4.4 1.6 5.9

Relative (%) -2.2 1.8 13.2

Analyst

Ivy NG Lee Fang, CFA



Revenue (RMm) 1,384 1,643 1,664 1,931 2,186


Net Profit (RMm) 227.8 377.2 201.6 317.0 386.8

Core EPS (RM) 0.38 0.50 0.29 0.42 0.51

Core EPS Growth (12.4%) 30.5% (42.4%) 45.8% 22.0%

FD Core P/E (x) 26.95 20.89 36.66 25.14 20.60

DPS (RM) 0.48 0.10 0.16 0.16 0.16

Dividend Yield 4.65% 0.97% 1.55% 1.55% 1.55%

EV/EBITDA (x) 18.37 14.20 24.54 16.35 13.51

P/FCFE (x) 384.7 37.7 NA 92.4 44.6

Net Gearing (1.75%) (1.19%) 1.06% 1.68% 0.24%

P/BV (x) 2.27 2.04 2.00 1.91 1.80

ROE 8.4% 10.3% 5.5% 7.8% 9.0%



98.0

103.0

108.0

113.0

118.0

123.0

8.70

9.20

9.70

10.20

10.70

11.20


Source: Bloomberg

1

1

2

2

3


Vol m

http://www.efa.biz/


91

Figure 1: Genting Plantations' planted oil palm estates since 1988 (ha)


Figure 2: Age profile of Genting Plantations estates Figure 3: Breakdown of Genting Plantations' 2014 EBIT (RM m)


Figure 4: SOP valuation


Title:

Source:


-

20,000

40,000

60,000

80,000

100,000

120,000

140,000

Title:

Source:

Please fill in the values above to have them entered in your reportImmature27%

Young 28%

Prime 1 16%

Prime 214%

Past Prime 12%

> 25 years3%

Title:

Source:


371.2

27.7

155.1

(50.4) (4.5)

(100.0)

(50.0)

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

400.0




Segments Stake Method Value (RM'm)

Plantations 100% 2016 P/E of 20x 5,329.7

Property 100% RNAV 2,390.0

Biotech 100% 1x NBV 279.7

Net cash/ (debt) As at 30 Jun 2015 (100.7)

SOP value for Genting Plantations 8,111.4

No of shares (m) 773.7

SOP per share (RM) 10.50


92

BY THE NUMBERS

Share price info


Relative -2.2 1.8 13.2

Absolute 4.4 1.6 5.9


Genting 53.5


Kumpulan Wang Persaraan 5.0


0.0%

2.7%

5.3%

8.0%

10.7%

13.3%

16.0%

0.00

0.50

1.00

1.50

2.00

2.50

3.00


P/BV vs ROE


-50%

-36%

-23%

-9%

5%

19%

33%

46%

60%

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0





Profit & Loss



Gross Profit 526 625 633 734 831



Operating EBIT 361 481 241 398 488

Financial Income/(Expense) 23 21 15 11 10




Exceptional Items (102) 0 0 0 0

Pre-tax Profit 300 520 274 428 518

Taxation (80) (136) (69) (107) (127)


Profit After Tax 220 384 206 321 391

Minority Interests 8 (7) (4) (4) (4)




Net Profit 228 377 202 317 387



Cash Flow


EBITDA 429.3 558.9 327.5 493.6 592.9


Change In Working Capital 13.6 (101.9) (7.9) (24.2) (10.3)




Net Interest (Paid)/Received 10.2 32.0 26.9 23.9 23.1

Tax Paid (76.2) (136.0) (68.6) (107.0) (126.8)


Capex (423.3) (306.0) (300.0) (300.0) (300.0)


Acq. Of Subsidiaries/investments 0.0 0.0 0.0 0.0 0.0

Other Investing Cashflow (5.2) 0.0 0.0 0.0 0.0


Debt Raised/(repaid) 106.2 162.3 (27.4) 0.0 0.0


Shares Repurchased 0.0 0.0 0.0 0.0 0.0

Dividends Paid (318.7) (362.3) (77.0) (123.8) (123.8)

Preferred Dividends

Other Financing Cashflow 177.6 119.8 0.2 5.0 5.0


Total Cash Generated (120.8) (33.2) (126.4) (32.6) 60.1

Free Cashflow To Equity 20.3 209.3 (49.5) 86.2 178.9

Free Cashflow To Firm (68.3) 47.0 (22.1) 86.2 178.9


93

BY THE NUMBERS


Balance Sheet


Total Cash And Equivalents 931 1,077 955 925 989

Total Debtors 234 265 265 298 343

Inventories 89 105 124 163 180



Fixed Assets 1,110 1,339 1,552 1,757 1,952










Total Long-term Debt 861 1,000 1,000 1,000 1,000



Total Non-current Liabilities 869 1,011 1,011 1,011 1,011





Total Equity 3,604 4,153 4,239 4,438 4,707

Key Ratios


Revenue Growth 12.2% 18.7% 1.3% 16.0% 13.2%

Operating EBITDA Growth 1.6% 30.2% (41.4%) 50.7% 20.1%


Net Cash Per Share (RM) 0.083 0.064 (0.058) (0.096) (0.014)

BVPS (RM) 4.53 5.04 5.14 5.40 5.74



Net Dividend Payout Ratio 110% 20% 57% 39% 32%


Inventory Days 46.13 34.87 40.47 43.86 46.16


ROIC (%) 11.1% 14.0% 6.1% 9.7% 11.2%

ROCE (%) 8.7% 10.5% 5.1% 7.8% 9.1%


Key Drivers


Planted Estates (ha) 116,941 119,900 129,900 139,900 149,900

Mature Estates (ha) 74,504 87,406 97,406 107,406 117,406

FFB Yield (tonnes/ha) 21.7 20.1 18.1 19.2 19.0

FFB Output Growth (%) 9.5% 8.6% 6.7% 15.5% 11.3%

CPO Price (US$/tonne) 857 840 670 750 800

IT Services│Malaysia│Equity research│October 9, 2015

Company Note


Powered by EFA

GHL Systems Bhd Riding on the e-payment wave

■ Proxy to e-payment adoption in ASEAN.

■ Strong physical and online presence via TPA model. GHL could deliver 10k-12k merchants in 2016 and 4k-5k online merchants by 2018.

■ Benefits from central bank’s payment reform initiatives that boost POS-terminal adoption and debit card transactions.

■ GHL is our sector top pick. Also our long term pick with 2018 and 2020 target prices of RM2.40 and RM3.65, respectively.

Tops the technology long-term scoring matrix GHL Systems scored the highest points in our long term technology stock picking matrix due to more points in management and growth categories. We see GHL as an attractive proxy to the transition towards e-payment solutions in ASEAN which is supported by rising population income and better broadband infrastructure.

GHL is led by highly experienced management team GHL returned to the black in 2012 after suffering 4-years of successive losses following the entry of a new shareholder and management team in 2010. The new management team, led by CEO Raj Lorenz, who has more than 25 years of experience in the banking and payment solution industry, began to turn GHL around by closing its unprofitable operations in China and Indonesia and instituting other operational improvements.

TPA the game changer GHL carried out it first transaction payment acquisition (TPA) model after the acquisition of e-pay in 2014. Under e-pay, GHL earns a fixed fee for every transaction that uses the e-pay network. The company is in the midst of replicating its TPA model into a credit and debit card TPA model that will allow it to earn merchant acquisition fees for signing on merchants. We expect GHL to deliver 3-4k card TPA merchants by end-2015.

New growth driver in online merchant acquisition We are also excited about GHL’s new driver, its online merchant acquirer business through e-GHL, an online payment gateway for small and medium enterprises. As of Aug 2015, GHL has an online base of about 590 merchants. It aims to grow it to 4k-5k merchants in the next three years and become one of the largest online merchant acquirers in the region.

Long term target prices Assuming GHL acquires 1k merchants per month from Malaysia and the Philippines each and earns a monthly throughput of about RM15k and RM10k for each market, plus a MDR of about 200bp, our 3-year target price rise to RM2.40. Using similar assumptions from 2018 to 2020, our 5-year target price rises to RM3.65. The 3-year and 5-year target prices would offer investors 140-265% upside.





Up/downside: 51.1%

Reuters: GHLS.KL

Bloomberg: GHLS MK


RM705.0m


RM1.41m


Free float: 35.3%


No change.


Absolute (%) 9.0 2.8 29.8

Relative (%) 2.4 3.0 37.1

Analyst




Revenue (RMm) 67.2 165.4 200.4 246.4 320.5

Net Profit (RMm) 5.26 6.81 15.04 26.27 44.54

Core EPS (RM) 0.012 0.018 0.024 0.041 0.070

Core EPS Growth 12.2% 49.7% 31.7% 74.6% 69.6%

FD Core P/E (x) 90.42 60.41 45.86 26.27 15.49

Price To Sales (x) 7.09 3.53 3.44 2.80 2.15

DPS (RM) - - - - -

Dividend Yield 0% 0% 0% 0% 0%

EV/EBITDA (x) 42.45 22.18 20.14 14.17 9.04

P/FCFE (x) NA NA 137.5 67.8 38.3

Net Gearing (24.5%) 0.3% (1.8%) (5.5%) (10.5%)

P/BV (x) 8.48 3.09 2.90 2.61 2.23

ROE 10.8% 6.9% 6.5% 10.5% 15.5%



70

90

110

130

150

0.50

0.70

0.90

1.10

1.30


Source: Bloomberg

10

20

30


Vol m

http://www.efa.biz/


95

Figure 1: TPA drivers


Figure 2: Average days for submission-installation Figure 3: TPA sales submissions and installations


Figure 4: BNM POS terminal target Figure 5: Debit card transaction volume & est market size for GHL


158

379

242

323

136

27

181194

295

200

0

50

100

150

200

250

300

350

400

May-15 Jun-15 Jul-15 Aug-15 Sep-15

merchants

Submissions Installations

280330

430

560

690

800

0

100

200

300

400

500

600

700

800

900

2015F 2016F 2017F 2018F 2019F 2020F

('000)

POS terminals

147 182 266

454

759

1,135

1,583

-

200

400

600

800

1,000

1,200

1,400

1,600

1,800

-

200

400

600

800

1,000

1,200

2014 2015F 2016F 2017F 2018F 2019F 2020F

RM milTransaction vol

Debit card transaction (mil) Est debit card mkt size (RM mil)


96

BY THE NUMBERS

Share price info


Relative 2.4 3.0 37.1

Absolute 9.0 2.8 29.8


Simon Loh Wee Hian 36.2

Cycas 28.5


-8.0%

-5.6%

-3.1%

-0.7%

1.8%

4.2%

6.7%

9.1%

11.6%

14.0%

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50


P/BV vs ROE


-500%-250%0%250%500%750%1,000%1,250%1,500%1,750%2,000%

050

100150200250300350400450500





Profit & Loss


Total Net Revenues 68.2 169.6 204.6 250.6 324.7

Gross Profit 41.3 71.6 78.3 101.5 137.2

Operating EBITDA 10.9 26.3 34.1 47.7 72.8


Operating EBIT 3.2 15.2 19.3 34.4 58.0

Financial Income/(Expense) 0.1 (0.9) (0.5) (0.2) (0.1)

Pretax Income/(Loss) from Assoc. 0.0 0.0 0.0 0.0 0.0

Non-Operating Income/(Expense) 0.0 0.0 0.0 0.0 0.0

Profit Before Tax (pre-EI) 3.3 14.3 18.8 34.1 57.8

Exceptional Items 0.0 (2.9) 0.0 0.0 0.0

Pre-tax Profit 3.3 11.5 18.8 34.1 57.8

Taxation 1.9 (4.8) (3.8) (7.8) (13.3)


Profit After Tax 5.2 6.7 15.0 26.3 44.5

Minority Interests 0.1 0.1 0.0 0.0 0.0

Preferred Dividends



Net Profit 5.3 6.8 15.0 26.3 44.5

Recurring Net Profit 5.3 9.7 15.0 26.3 44.5

Fully Diluted Recurring Net Profit 5.3 9.7 15.0 26.3 44.5

Cash Flow


EBITDA 10.89 26.34 34.05 47.69 72.76


Change In Working Capital (16.08) (37.47) (14.79) (19.43) (31.33)



Other Operating Cashflow 0.71 (3.20) 0.00 0.00 0.00

Net Interest (Paid)/Received 0.06 (0.93) (0.48) (0.24) (0.12)

Tax Paid (0.47) (2.67) (3.76) (7.85) (13.30)

Cashflow From Operations (4.89) (17.93) 15.02 20.17 28.01

Capex (1.90) (1.25) (10.00) (10.00) (10.00)


Acq. Of Subsidiaries/investments (2.02) (1.40) 0.00 0.00 0.00


Cash Flow From Investing (3.85) 16.81 (10.00) (10.00) (10.00)

Debt Raised/(repaid) 0.00 (5.54) 0.00 0.00 0.00


Shares Repurchased

Dividends Paid 0.00 0.00 0.00 0.00 0.00

Preferred Dividends

Other Financing Cashflow (2.17) (6.55) 0.00 0.00 0.00

Cash Flow From Financing 7.31 25.69 0.00 0.00 0.00

Total Cash Generated (1.43) 24.57 5.02 10.17 18.01

Free Cashflow To Equity (8.74) (6.66) 5.02 10.17 18.01

Free Cashflow To Firm (8.59) 0.45 6.50 11.86 20.00


97

BY THE NUMBERS


Balance Sheet


Total Cash And Equivalents 14.1 38.1 43.1 53.3 71.3

Total Debtors 14.2 52.2 59.6 69.4 85.3

Inventories 6.6 51.1 62.0 76.2 99.1

Total Other Current Assets 0.6 7.8 7.8 7.8 7.8

Total Current Assets 35.5 149.3 172.6 206.8 263.5

Fixed Assets 32.8 49.2 44.5 41.1 36.3

Total Investments 0.0 0.0 0.0 0.0 0.0

Intangible Assets 4.2 109.5 109.5 109.5 109.5

Total Other Non-Current Assets 2.4 9.4 9.4 9.4 9.4

Total Non-current Assets 39.5 168.1 163.3 160.0 155.2

Short-term Debt 0.0 27.4 27.4 27.4 27.4


Total Creditors 12.1 51.9 55.4 60.0 67.4

Other Current Liabilities 2.9 2.2 2.2 2.2 2.2

Total Current Liabilities 15.0 81.5 85.0 89.6 97.0

Total Long-term Debt 0.4 11.5 11.5 11.5 11.5


Total Other Non-Current Liabilities 3.5 1.2 1.2 1.2 1.2

Total Non-current Liabilities 3.8 12.6 12.6 12.6 12.6

Total Provisions 0.0 0.0 0.0 0.0 0.0

Total Liabilities 18.9 94.1 97.6 102.2 109.6

Shareholders' Equity 56.2 223.1 238.1 264.4 308.9

Minority Interests (0.1) 0.1 0.1 0.1 0.1

Total Equity 56.1 223.2 238.3 264.5 309.1

Key Ratios


Revenue Growth 26% 146% 21% 23% 30%



Net Cash Per Share (RM) 0.031 (0.001) 0.007 0.023 0.051

BVPS (RM) 0.13 0.35 0.38 0.42 0.49



Net Dividend Payout Ratio NA NA NA NA NA


Inventory Days 101.4 107.6 163.5 169.6 170.6


ROIC (%) 7.2% 24.9% 6.4% 11.0% 17.3%

ROCE (%) 6.7% 10.0% 7.5% 12.3% 18.4%


Key Drivers


ASP Change (%, Main Product) N/A N/A N/A N/A N/A

Unit sales growth (%, main prod) N/A N/A N/A N/A N/A

No. Of Lines (main Product) 3 3 3 3 3

Rev per line (US$, main prod) N/A N/A N/A N/A N/A

ASP chg (%, 2ndary prod) N/A N/A N/A N/A N/A

Unit sales grth (%, 2ndary prod) N/A N/A N/A N/A N/A

No. Of Lines (secondary Product) 5 5 5 5 5

Rev per line (US$, 2ndary prod) N/A N/A N/A N/A N/A

Rubber Gloves│Malaysia│Equity research│October 9, 2015

Company Note


Powered by EFA

Hartalega Holdings Still the market leader

■ Hartalega is the world’s largest nitrile glove manufacturer.

■ Success due to visionary leaders and strength in R&D that enables it to improve production efficiency and stay ahead of peers.

■ It plans to raise its installed capacity from 15bn to 42bn p.a. over the next five years following its expansion drive at NGC.

■ Hartalega is our long-term pick with 2018 and 2020 target price of RM7.30 and RM8.30, respectively.

Led by visionary entrepreneurs Hartalega was established in 1981 by Mr Kuan Kam Hon and his brother Mr Kuan Kam Peng as a new venture into the rubber gloves business. Despite the lack of industry experience, the two entrepreneurs saw the opportunity to sell rubber gloves during the early years of the AIDS epidemic. The founders successfully built Hartalega into a major player, partly due to their drive towards efficiency through innovation and R&D.

First to introduce nitrile gloves Hartalega was the first glove manufacturer to invest heavily into nitrile gloves back in 2002. It invested in the R&D of thin nitrile gloves for potential entry into the healthcare sector. Following extensive R&D, it introduced the world first 4.7 gram nitrile glove that emulates the elasticity and softness of natural rubber without the protein allergy risk to users. We see this as a testament to it strong execution capability and vision for growth.

In the midst of expansion In order to meet the rising global demand for nitrile gloves, Hartalega is building six manufacturing plants at its Next Generation Integrated Glove Manufacturing Complex (NGC) which will house a total capacity of 28.5bn pieces p.a. within the next five years. Overall, we expect group earnings to grow at a 3-year CAGR of 24%

Most efficient rubber gloves manufacturer Hartalega has stayed ahead of competition by developing proprietary machinery and systems such as the double former dipping lines, robotic glove stripping system, and the glove puller and stacker system. Hartalega’s average production line speed is estimated to be 60% faster than industry average. Overall, its focus on automation helps to reduce its dependency on labour and improves its production efficiency.

Long-term target prices Using its historical mean P/E of 21x, and assuming – 1) annual capacity increment of ~22.5% over the next five years, 2) gradual margin decline of 1-2% p.a. following ASP erosion, and 3) 80% utilisation rate – our three-year forward target price rises to RM7.30. Using similar assumptions plus an additional 8% annual capacity expansion beyond FY3/20, our five-year forward target price is RM8.30.


HOLD (no change) Current price: RM4.73



Up/downside: -2.4%

Reuters: HTHB.KL

Bloomberg: HART MK


RM7,761m


RM6.85m


Free float: 30.2%


No changes.


Absolute (%) 12.4 5.5 37.3

Relative (%) 5.8 5.7 44.6

Analyst



Financial Summary Mar-14A Mar-15A Mar-16F Mar-17F Mar-18F

Revenue (RMm) 1,107 1,146 1,458 1,873 2,217


Net Profit (RMm) 232.8 209.7 282.1 344.9 394.6

Core EPS (RM) 0.14 0.13 0.17 0.21 0.24

Core EPS Growth (0.7%) (10.0%) 35.4% 22.3% 14.4%

FD Core P/E (x) 33.51 37.24 27.50 22.49 19.66

DPS (RM) 0.07 0.06 0.09 0.11 0.11

Dividend Yield 1.40% 1.34% 1.82% 2.22% 2.29%

EV/EBITDA (x) 21.62 24.07 17.01 13.96 12.15

P/FCFE (x) 210.8 NA 67.0 38.4 44.8

Net Gearing (17.6%) (5.0%) 4.4% 8.4% 2.1%

P/BV (x) 8.23 6.11 5.48 4.88 4.30

ROE 27.1% 18.8% 21.0% 23.0% 23.3%



89.0

106.5

124.0

141.5

159.0

3.10

3.60

4.10

4.60

5.10


Source: Bloomberg

2

4

6

8

10


Vol m

http://www.efa.biz/


99

Figure 1: Hartalega’s production capacity


Figure 2: Average production line speed Figure 3: Fastest production line speed


Figure 4: NGC plant 1 & 2


11,787 12,522

18,426

24,993

29,739

34,258 35,307

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000


18,000

28,000

-

5,000

10,000

15,000

20,000

25,000

30,000


(pcs/hr/line)

mean production line spped

40,000

45,000

37,000

38,000

39,000

40,000

41,000

42,000

43,000

44,000

45,000

46,000


(pcs/hr/line)

Fastetst production line speed


BY THE NUMBERS

Share price info


Relative 5.8 5.7 44.6

Absolute 12.4 5.5 37.3


Kuan family 55.1

EPF 7.9

BNP Paribas 6.8


0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00


P/BV vs ROE


-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

0.0

5.0

10.0

15.0

20.0

25.0

30.0





Profit & Loss

(RMm) Mar-14A Mar-15A Mar-16F Mar-17F Mar-18F


Gross Profit 411 1,146 539 667 761



Operating EBIT 306 274 380 467 529

Financial Income/(Expense) 1 1 (6) (9) (6)





Pre-tax Profit 309 277 374 458 523

Taxation (76) (67) (92) (112) (128)


Profit After Tax 233 210 283 345 395





Net Profit 233 210 282 345 395



Cash Flow


EBITDA 351.2 319.7 459.9 565.6 641.6


Change In Working Capital (36.6) (65.3) 56.8 (42.4) (34.8)




Net Interest (Paid)/Received 4.9 1.3 (5.9) (9.0) (5.6)

Tax Paid (70.5) (69.6) (91.7) (112.2) (128.2)


Capex (105.9) (38.6) (400.0) (300.0) (200.0)


Acq. Of Subsidiaries/investments (89.1) (384.1) 0.0 0.0 0.0

Other Investing Cashflow (9.2) 4.9 0.0 0.0 0.0


Debt Raised/(repaid) (7.5) 1.6 96.6 100.0 (100.0)



Dividends Paid (107.6) (105.0) (141.1) (172.5) (177.6)

Preferred Dividends


Cash Flow From Financing (65.5) 116.6 (44.5) (72.5) (277.6)

Total Cash Generated (21.3) (95.5) (25.3) 29.5 (4.5)

Free Cashflow To Equity 36.8 (210.5) 115.8 202.0 173.0

Free Cashflow To Firm 44.3 (212.1) 25.4 111.2 279.2


BY THE NUMBERS


Balance Sheet



Total Debtors 149 199 190 243 288

Inventories 98 120 120 157 189



Fixed Assets 634 822 1,151 1,352 1,439




Total Non-current Assets 692 1,069 1,400 1,601 1,688












Shareholders' Equity 942 1,269 1,416 1,588 1,805


Total Equity 944 1,271 1,418 1,591 1,808

Key Ratios

Mar-14A Mar-15A Mar-16F Mar-17F Mar-18F

Revenue Growth 7.3% 3.5% 27.2% 28.4% 18.4%

Operating EBITDA Growth 4.6% (9.0%) 43.8% 23.0% 13.4%


Net Cash Per Share (RM) 0.10 0.04 (0.04) (0.08) (0.02)

BVPS (RM) 0.57 0.77 0.86 0.97 1.10

Gross Interest Cover 987 2,536 62 51 86




Inventory Days 48.50 N/A 47.69 41.81 43.37

Accounts Payables Days 50.65 N/A 52.84 54.68 56.72

ROIC (%) 35.7% 24.6% 22.5% 22.7% 22.2%

ROCE (%) 33.6% 23.5% 26.1% 27.2% 27.7%


Key Drivers


ASP (% chg, main prod./serv.) -12.1% -16.4% 1.4% -0.8% -1.1%


Util. rate (%, main prod./serv.) 86.3% 87.0% 84.0% 83.0% 80.0%




Unit raw mat ASP (%chg,main) N/A N/A N/A N/A N/A

Unit raw mat ASP (%chg,2ndary) N/A N/A N/A N/A N/A

Pharmaceuticals│Malaysia│Equity research│October 9, 2015

Company Note


Powered by EFA

Hovid Bhd Our drug of choice

■ Hovid has an ambitious management team and is the only Malaysia-listed pharma company that holds patents

■ It is supported by a healthy balance sheet and has strong earnings growth potential, driven by strong demand for drugs from its export destinations.

■ We maintain our Hold call, but raise our SOP-based TP to RM0.45 on roll forward.

■ Hovid is our long-term pick for the healthcare sector. Our prospective target prices for 2018 and 2020 are RM1.00 and RM1.30, respectively.

Top long-term pick for the healthcare sector Hovid is our top long-term pick for the healthcare sector, as it scores well in the management, financials and growth categories of our stock-picking matrix. Hovid has an ambitious management team, one of the most innovative R&D teams in Malaysia, a healthy balance sheet and strong earnings growth potential, driven by strong demand growth from the export markets. Hovid derives more than half of its sales from markets outside of Malaysia.

Aggressive expansion in production capacity Hovid has recently commenced the operation of its new tablet and capsule (T&C) plant and is building another T&C plant that will boost its current T&C capacity by 30% and 70% by 2018 and 2020, respectively. The first plant could be fully utilized by 2018 while the second could run at full capacity in 2020. These could raise Hovid’s earnings in 2018 and 2020 by 30% and 100% from 2015’s level.

Tocovid Suprabio Hovid could also be sitting on a gold mine if its clinical trials on Tocovid Suprabio are successful. Tocovid Suprabio, for which Hovid holds the formulation patent, is a type of vitamin E that may reduce brain damage caused by strokes. According to the US Center for Disease Control and Prevention, approximately 49% of its population is exposed to at least one of the three key risk factors that can lead to stroke. Hovid expects Tocovid to be approved by the US FDA in three to five years.

Potential value of Tocovid Suprabio If Tocovid is approved by 2020 and assuming that 1% of the high-risk group spends US$2 per day (equivalent to 200mg of Tocovid at the current retail price) on Tocovid for protection of their brain cells, this would translate into annual sales of US$1.1bn in the US alone. Assuming a 30% profit margin, the potential earnings contribution per year works out to US$337m, or RM1.5bn at current exchange rate.

Long-term target prices Hovid will also have the exclusive rights that will last for at least three years if Tocovid is approved. A 20% chance of success of the drug being approved and a discount rate of 10% value of Tocovid at RM610m by 2018 and RM740m by 2020. Also, if Hovid’s current P/E of 17x for the remaining business remains unchanged over the next few years, Hovid’s share price could increase to RM1.00 by 2018 and RM1.30 by 2020.





Up/downside: -2.2%

Reuters: HOVI.KL

Bloomberg: HOV MK


RM362.3m


RM2.08m


Free float: 62.5%


No changes


Absolute (%) 3.4 0.0 27.8

Relative (%) -3.2 0.2 35.1

Analyst

SAW Xiao Jun, CFA


Financial Summary Jun-14A Jun-15A Jun-16F Jun-17F Jun-18F

Revenue (RMm) 183.5 188.4 230.7 257.3 273.5


Net Profit (RMm) 18.08 21.21 23.40 26.36 27.76

Core EPS (RM) 0.024 0.027 0.030 0.035 0.036

Core EPS Growth (7.0%) 13.8% 10.3% 14.0% 5.3%

FD Core P/E (x) 25.80 22.88 20.94 18.54 17.67

DPS (RM) 0.010 0.014 0.010 0.010 0.010

Dividend Yield 2.17% 2.93% 2.17% 2.17% 2.17%

EV/EBITDA (x) 10.39 10.27 8.94 7.90 7.35

P/FCFE (x) 69.8 89.4 519.2 63.5 40.4

Net Gearing (10.0%) (3.8%) (2.7%) (2.7%) (4.7%)

P/BV (x) 2.18 1.95 1.86 1.69 1.54

ROE 11.6% 12.3% 12.5% 13.3% 12.8%



91.0

102.7

114.3

126.0

137.7

149.3

161.0

0.300

0.350

0.400

0.450

0.500

0.550

0.600


Source: Bloomberg

10

20

30

40


Vol m

http://www.efa.biz/


103



Figure 2: SOP valuations (end-CY16 target price)


FYE Jun 30 4Q 4Q yoy % qoq % 4QFY15 4QFY14 yoy % Prev. Comments

(RM m) FY15 FY14 chg chg Cum Cum chg FY15F

Revenue 42.7 48.0 (11) (12) 188.4 183.5 3 197.8 Weaker revenue in 4Q15 due to implementation of GST

Operating costs (34.9) (38.4) (9) (15) (155.6) (148.7) 5 (161.7) In line with lower revenue

EBITDA 7.8 9.7 (20) 1 32.8 34.8 (6) 36.1 Made up 91% of our forecast

EBITDA margin (%) 18.2 20.1 (10) 15 17.4 19.0 (8) 18.3 EBITDA margin in 4Q improved qoq

Depn & amort. (1.5) (2.2) (31) (7) (6.0) (8.6) (30) (6.5) Lower product development cost write-off in FY15

EBIT 6.3 7.5 (16) 3 26.8 26.2 2 29.6

Interest expense (0.2) (0.3) (50) nm (0.8) (1.4) (39) (1.4) Expect higher interest expense in FY16 as the group gears up for expansion

Interest & invt inc 0.2 0.0 >100 nm 0.2 0.0 >100 0.0

Associates' contrib - - 0 0 - - 0 -

Exceptionals - - 0 nm 1.4 - nm - Refers to gain on disposal of a subsidiary

Pretax profit 6.3 7.2 (12) (16) 27.5 24.8 11 28.2 Accounted for 97% of full year forecast

Tax (1.4) (2.6) (47) (1) (6.3) (6.6) (4) (7.1) Effective tax rate close to the the statutory rate

Tax rate (%) 22.4 36.7 (39) 17 22.9 26.4 (13) 25.0

Minority interests (0.1) 0.1 nm >100 0.0 (0.3) nm (0.2)

Net profit 4.8 4.6 4 (20) 21.2 18.0 18 20.9 Include gain from disposal of a subsidiary

Core net profit 4.8 4.6 4 3 19.8 18.0 10 20.9 Made up 95% of our full year forecast

EPS (sen) 0.6 0.6 2 (22) 2.8 2.4 17 2.7

Core EPS (sen) 0.6 0.6 2 1 2.6 2.4 10 2.7

Segment Method RM m

Pharmaceutical business 16.6x CY16 P/E 450

64

Sum-of-parts 513

No. of shares after warrant conversions (m) 1,143

Target price 0.45

Assuming all outstanding warrants (359m)

are exercised at RM0.18 per warrantProceeds from warrant conversion


104

BY THE NUMBERS

Share price info


Relative -3.2 0.2 35.1

Absolute 3.4 0.0 27.8


Ho Sue San @ David Ho Sue San 37.5


0.00%

3.20%

6.40%

9.60%

12.80%

16.00%

0.00

0.50

1.00

1.50

2.00

2.50


P/BV vs ROE


0%

900%

1,800%

2,700%

3,600%

4,500%

0.0

5.0

10.0

15.0

20.0

25.0





Profit & Loss

(RMm) Jun-14A Jun-15A Jun-16F Jun-17F Jun-18F


Gross Profit 51.3 34.1 60.1 67.2 71.3



Operating EBIT 26.6 28.1 32.4 36.3 38.2

Financial Income/(Expense) (1.4) (0.7) (1.4) (1.4) (1.4)




Exceptional Items (0.4) 0.0 0.0 0.0 0.0

Pre-tax Profit 24.8 27.5 31.1 35.0 36.8

Taxation (6.5) (6.3) (7.5) (8.4) (8.8)


Profit After Tax 18.3 21.2 23.6 26.6 28.0

Minority Interests (0.2) 0.0 (0.2) (0.2) (0.2)

Preferred Dividends



Net Profit 18.1 21.2 23.4 26.4 27.8



Cash Flow


EBITDA 32.64 34.12 39.78 44.48 47.13


Change In Working Capital (9.17) 1.83 (9.93) (6.41) (3.87)



Other Operating Cashflow 2.97 (3.92) 0.00 0.00 0.00

Net Interest (Paid)/Received (2.42) (0.66) (1.37) (1.37) (1.37)

Tax Paid (4.76) (8.54) (7.46) (8.39) (8.84)


Capex (6.28) (29.66) (20.00) (20.00) (20.00)



Other Investing Cashflow (2.31) (2.26) 0.00 0.00 0.00


Debt Raised/(repaid) (3.15) 7.17 0.00 0.00 0.00


Shares Repurchased

Dividends Paid (11.25) (7.64) (7.84) (7.84) (7.84)

Preferred Dividends

Other Financing Cashflow 0.50 (1.04) (5.10) 0.00 0.00

Cash Flow From Financing (13.55) 1.64 (12.94) (7.84) (7.84)

Total Cash Generated (2.87) 0.44 (11.92) 0.47 5.21




105

BY THE NUMBERS


Balance Sheet



Total Debtors 40.5 35.3 50.9 56.7 60.3

Inventories 26.5 27.1 33.3 37.1 39.5



Fixed Assets 98.4 128.7 125.7 138.2 149.8





Short-term Debt 3.9 7.3 3.9 3.9 3.9


Total Creditors 24.8 11.2 28.1 31.4 33.4











Total Equity 166.2 186.3 194.7 213.4 233.6

Key Ratios

Jun-14A Jun-15A Jun-16F Jun-17F Jun-18F

Revenue Growth 6.4% 2.7% 22.5% 11.5% 6.3%




BVPS (RM) 0.21 0.24 0.25 0.27 0.30





Inventory Days 72.90 60.09 64.75 67.63 69.16


ROIC (%) 12.1% 12.2% 12.8% 13.0% 12.5%

ROCE (%) 14.2% 14.0% 15.0% 16.1% 15.6%


Key Drivers


ASP (% chg, main prod./serv.) 0.0% 5.1% 8.6% 1.4% 1.3%






R&D Cost/sales (%) 0.0% 0.0% 0.0% 0.0% 0.0%

Airports│Malaysia│Equity research│October 9, 2015

Company Note


Powered by EFA

Malaysia Airports Holdings Holding out for a better future

■ We maintain our Hold call on MAHB given weak near-term earnings performance, and an unchanged DCF-based target price.

■ However, with the share price already reflecting current challenges, there is potential for medium-term upside if PSC tariffs at KLIA2 are increased.

■ The biggest uncertainty for the stock is whether the terms of the concession extension from 2034-2069 will be the same as that of the present concession.

■ Yet, we believe that MAHB and the government will negotiate a win-win solution.

Near-term ailments MAHB’s stock has declined close to 40% since peaking in late-2013 due to a variety of factors, including capacity cuts and network rationalisation of major airlines in Malaysia, the step-up in costs after the commissioning of KLIA2 from May 2014, and dilution from two equity issues in 2014 and 2015.

Traffic growth grinds to a snail’s pace Passenger traffic at MAHB’s Malaysian airports grew just 1.9% yoy during 8M15, against 4.7% growth in 2014 and 18.4% growth in 2013. The strong 2013 traffic growth was driven by the entry of Malindo from March 2013 which triggered a strong capacity response from incumbents MAS and AirAsia. Demand responded enthusiastically to the decline in domestic airfares.

Downhill from 2014 onwards A much slower pace of passenger traffic growth last year was caused by the MH370 and MH17 incidents which discouraged tourist inflows into Malaysia, coupled with airlines reigning in capacity growth to limit fare deterioration. This continued into 2015, and MAS began cutting its capacity earnestly from August onwards. Looking into 2016, the weaker ringgit will likely discourage Malaysian outbound tourists, leading to weak passenger traffic growth forecasts of less than 5%.

Jump in operating costs The opening of KLIA2 from May 2014 caused operating and interest costs to surge from a quarterly average of RM540m in 2013 to almost RM700m in the past four quarters. This could not be recouped given the weaker traffic growth, even with government compensation from Feb 2014 onwards equivalent to about 10% of the current PSC. Our FY15 core earnings forecasts are 70% lower than the peak in FY12, while our FY15 core EPS forecasts are 77% lower given the two equity issues in 2014 and 2015.

There is hope in the medium term We expect MAHB’s earnings to bottom out in 2015, and recover gradually thereafter with slow passenger volume expansion. MAHB’s share price has probably also hit bottom, as it is currently being valued at a P/BV of only 1x. The ultimate prize is the eventual raising of the KLIA2’s PSC to close the current gap with the PSCs at the Main Terminal Building (MTB). This can enhance earnings substantially and lift our target price to above RM7.





Up/downside: 0.6%

Reuters: MAHB.KL

Bloomberg: MAHB MK


RM8,960m


RM8.12m


Free float: 38.5%


No change.


Absolute (%) 21.1 -10.3 -20.3

Relative (%) 14.5 -10.1 -13.0

Analyst

Raymond YAP, CFA



Revenue (RMm) 4,099 3,344 3,885 4,238 4,422

Operating EBITDA (RMm) 692 695 1,329 1,468 1,622

Net Profit (RMm) 389.2 748.6 (32.4) (6.6) 100.8

Core EPS (RM) 0.25 0.13 0.09 0.14 0.20

Core EPS Growth (13.9%) (46.4%) (31.3%) 51.5% 47.2%

FD Core P/E (x) 21.50 38.35 55.29 38.85 26.39

DPS (RM) 0.11 0.05 0.04 0.04 0.05

Dividend Yield 2.06% 1.02% 0.82% 0.72% 0.85%

EV/EBITDA (x) 15.15 17.44 9.61 8.43 7.32

P/FCFE (x) NA 10.23 NA 25.66 24.09

Net Gearing 73.7% 57.7% 44.7% 40.4% 34.4%

P/BV (x) 1.50 1.06 1.03 1.04 1.04

ROE 7.17% 3.20% 1.89% 2.68% 3.95%


CIMB/consensus EPS (x) (0.37) (0.03) 0.32

73.0

84.3

95.5

106.8

118.0

3.90

4.90

5.90

6.90

7.90


Source: Bloomberg

5

10

15


Vo

l m

http://www.efa.biz/


107

Figure 1: MAHB's group core net profit (RM m)


Figure 2: MAHB's total pax traffic (m) - in Malaysia


Title:

Source:


-

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

1QFY082QFY083QFY084QFY081QFY092QFY093QFY094QFY091QFY102QFY103QFY104QFY101QFY112QFY113QFY114QFY111QFY122QFY123QFY124QFY121QFY132QFY133QFY134QFY13

(40.0)

(20.0)

-

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

1QFY08 1QFY09 1QFY10 1QFY11 1QFY12 1QFY13 1QFY14 1QFY15

Title:

Source:


0

1

2

3

4

5

6

7

8

9

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

J 09

F MAM J J AS O ND J 10

F MAM J J AS O ND J 11

FMAM J J AS O ND J 12

F MAM J J A SO ND J 13

F MAM J J A SO ND

y oy growth % - LHS Tota l pax (m )

0

1

2

3

4

5

6

7

8

9

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

J 09

FMAMJJAS ONDJ 10

FMAMJJAS ONDJ 11

FMAMJJAS ONDJ 12

FMAMJJASONDJ 13

FMAMJJASONDJ 14

FMAMJJASONDJ 15

FMAMJJA

yoy growth % - LHS Total pax (m)


A low level of profits is expected for the second year running in FY15 as the impact of capacity cuts by MAS is

felt, on top of the higher cost base after the commissioning of KLIA2 on 2 May 2014. The P&L consolidates a

100% stake in Istanbul Sabiha Gokcen from 1 January 2015 onwards.

Operating cash flow growth will be driven mainly by Istanbul Sabiha

Gokcen.

BY THE NUMBERS

Share price info


Relative 14.5 -10.1 -13.0

Absolute 21.1 -10.3 -20.3


Khazanah Nasional 36.6


Permodalan Nasional Berhad 11.8


0.0%

2.4%

4.8%

7.2%

9.6%

12.0%

0.00

0.50

1.00

1.50

2.00

2.50


P/BV vs ROE


-60%

-45%

-30%

-15%

0%

15%

30%

45%

60%

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0





Profit & Loss



Gross Profit 692 695 1,329 1,468 1,622

Operating EBITDA 692 695 1,329 1,468 1,622


Operating EBIT 414 290 652 736 833


Pretax Income/(Loss) from Assoc. (39) (53) 8 8 8



Exceptional Items 68 581 (158) (180) (180)

Pre-tax Profit 551 834 96 163 271

Taxation (162) (86) (128) (169) (170)


Profit After Tax 389 749 (32) (7) 101





Net Profit 389 749 (32) (7) 101



Cash Flow


EBITDA 692 695 1,329 1,468 1,622


Change In Working Capital 191 (720) (220) 166 (7)





Tax Paid (162) (86) (128) (169) (170)

Cashflow From Operations 753 410 417 883 876

Capex (1,918) (685) (362) (412) (312)

Disposals Of FAs/subsidiaries 6 (49) (1,144) 0 0



Cash Flow From Investing (1,939) (731) (1,213) (412) (312)

Debt Raised/(repaid) 700 1,048 (179) (124) (193)

Proceeds From Issue Of Shares 0 980 1,316 0 0


Dividends Paid (53) (12) (87) (73) (64)

Preferred Dividends

Other Financing Cashflow

Cash Flow From Financing 647 2,016 1,050 (197) (258)

Total Cash Generated (538) 1,695 254 274 306

Free Cashflow To Equity (485) 727 (975) 348 370

Free Cashflow To Firm (1,157) (169) (179) 1,084 1,167


We forecast group net debt-to-equity ratio to be at a healthy level of 45% by

end-FY15.

These are the key drivers for the Malaysian business only.

Book value per share of RM5.22 forecast for end-FY15 means that MAHB is currently trading at a P/BV of

1.2x.

BY THE NUMBERS


Balance Sheet


Total Cash And Equivalents 345 2,041 2,295 2,569 2,875

Total Debtors 558 717 833 909 948

Inventories 122 154 154 154 154



Fixed Assets 324 363 363 363 363



Total Other Non-Current Assets 902 1,347 2,206 2,214 2,222


Short-term Debt 200 706 706 706 706


Total Creditors 917 2,976 2,872 3,114 3,147





Total Other Non-Current Liabilities 1,058 5,196 5,196 5,196 5,196






Total Equity 4,689 7,422 8,619 8,539 8,576

Key Ratios


Revenue Growth 15.5% (18.4%) 16.2% 9.1% 4.3%




BVPS (RM) 3.60 5.11 5.22 5.17 5.19


Effective Tax Rate 29% 10% 134% 104% 63%



Inventory Days 11.83 19.01 22.02 20.36 20.09


ROIC (%) 4.30% 2.36% 2.89% 3.12% 3.63%

ROCE (%) 5.40% 2.75% 4.74% 5.18% 5.93%


Key Drivers

(RM) Dec-13A Dec-14A Dec-15F Dec-16F Dec-17F

Int'l Passenger Traffic Growth (%) 16.8% 4.9% 2.3% 4.6% 5.3%

Domestic Pax Traffic Growth (%) 19.9% 4.5% 2.7% 4.2% 4.3%

International Flight Traffic Growth (%) 14.1% 7.3% 2.0% 3.5% 3.8%

Domestic Flight Traffic Growth (%) 14.1% 7.3% 2.0% 3.5% 3.8%

Int'l Pax Service Charge 65.0 71.0 71.0 71.0 71.0

Dom Pax Serv Charge 9.0 9.0 10.0 10.0 10.0

Unit Meals Produced (% Change) N/A N/A N/A N/A N/A

Technology - Others│Malaysia│Equity research│October 9, 2015

110

MY E.G. Services Innovation is the key

■ One of the country’s main e-government services provider. Strength lies in its innovation and entrepreneurship ability to add commercial elements to services.

■ Main earnings growth drivers will be the foreign workers working permit renewal services (FWPR) and the custom service tax monitoring (CSTM) projects.

■ MyEG is our one of our top picks among small caps and is our top long-term pick. 2018 and 2020 target prices are RM6.65 and RM9.65 respectively.

Led by managing director TS Wong MyEG is led by its major shareholder and managing director, TS Wong. The company is Malaysia’s main e-government services provider. Its strength lies in its innovative and entrepreneurship ability to offer new e-government services to the public and add commercial elements to services offered.

Turning point was the road tax renewal services in 2008 An example was in 2008 when MyEG started the government e-service online renewal for car road tax. The e-government charge was only RM2.75 per transaction but the company added another RM6-8 per transaction to include courier charges. MyEG also offered online car insurance renewal services with nearly all the insurance companies. The average commission was RM40 per insurance renewal.

Innovation in the FWPR services MyEG has applied the same principle in its FWPR services. These permits are renewed annually and today, MYEG handles all renewals, nationwide. The company gets RM35 per FWPR transaction from the government. MyEG offers employers the option of buying compulsory foreign workers insurance online and the company gets RM65-70 commission from selling this. Through selling online insurance, MyEG is able to raise revenue per foreign worker from RM35 to c.RM100.

CSTM project launch in mid-2016 The company is working to launch the custom service tax monitoring (CSTM) project in mid-2016. The CSTM involves MyEG placing its own dongle in F&B and retail outlets to track sales receipts on a live basis.

Long-term price target If CSTM takes off as scheduled, MyEG’s 2018 net profit should be c.RM380m or 31.7sen EPS. Phase 1 involves linking F&B outlets nationwide, i.e. about 50,000 outlets while Phase 2, which will take-off a year later, will target the retail sector, i.e. 500,000 outlets. Assuming a 21x P/E target in line with its peers, MyEG’s target price in 2018 should be RM6.65. With the CSTM linking all F&B and retail outlets, MyEG can compete with major banks in credit card and debit card services.

To expand commercial service revenue If MYEG can corner 10% market share in a RM91bn credit card market in three years and its core earnings rise a conservative 10% p.a. in FY19 and FY20, on top of potential earnings from the card business, MyEG’s 2020 net profit could be c.RM550m or 46sen EPS. If we continue to assume the 21x P/E target in line with its peers, MyEG’s target price in 2020 could reach RM9.65.





Up/downside: 46.3%

Reuters: MYEG.KL

Bloomberg: MYEG MK


RM3,212m


RM12.67m


Free float: 52.3%


No change.


Absolute (%) 2.3 4.7 54.9

Relative (%) -4.3 4.9 62.2

Analyst

Nigel FOO



Revenue (RMm) 110 142 438 541 1,106


Net Profit (RMm) 50.1 68.0 194.2 252.4 416.2

Core EPS (RM) 0.04 0.06 0.16 0.21 0.35

Core EPS Growth 43% 36% 186% 30% 65%

FD Core P/E (x) 64.19 47.29 16.56 12.74 7.73

DPS (RM) 0.010 0.017 0.040 0.060 0.090

Dividend Yield 0.37% 0.63% 1.49% 2.24% 3.36%

EV/EBITDA (x) 51.07 37.71 15.11 11.48 6.77

P/FCFE (x) 157.3 45.4 25.0 19.2 9.7

Net Gearing (2.2%) (21.5%) (7.4%) (21.5%) (33.3%)

P/BV (x) 18.21 14.34 8.93 5.99 3.88

ROE 31.7% 33.9% 66.5% 56.3% 61.0%


78

103

128

153

178

1.30

1.80

2.30

2.80

3.30


Source: Bloomberg

10

20

30


Vol m


111



Figure 2: MyEG quarterly revenue and net profit (RM m)


FYE Jun (RM m) 4QFY15 4QFY14 yoy % chg qoq % chg3QFY15

cum

3QFY14

cumyoy % chg

Prev.

FY15F Comments

Revenue 45.1 35.4 27.4 15.6 141.5 109.9 28.8 155.0 Below, some delay in the full implementation of FWPR

Operating costs (18.4) (14.7) 25.2 5.1 (57.0) (45.5) 25.3 (67.4) In line with revenue growth

EBITDA 26.7 20.7 29.0 24.2 84.5 64.4 31.2 87.6 Below, FWPR only started in May

EBITDA margin (%) 59.2 58.5 1.2 7.4 59.7 58.6 1.9 56.5 In line, greater economies of scale

Depn & amort. (4.0) (3.5) 14.3 60.0 (15.3) (13.2) 15.9 (12.4) In line, no major new capex

EBIT 22.7 17.2 32.0 19.5 69.2 51.2 35.2 75.2 Below, CSTM has not started yet

Interest expense (0.2) (0.3) (33.3) (33.3) (1.0) (1.0) 0.0 (0.5) RM125m net cash as at end-Mar or RM0.10 net cash/share

Interest & invt inc 0.2 - #DIV/0! - 0.0 0.5 (100.0) 0.0 Limited investment income

Pretax profit 22.7 16.9 34.3 18.2 68.2 50.7 34.5 74.7 Below, took FWPR some time to hit full operations

Tax 0.2 (0.3) 166.7 300.0 0.2 (0.6) nm (0.4) MSC status, tax free

Tax rate (%) (0.9) 1.8 (149.6) (269.2) (0.3) 1.2 nm 0.5 MSC status

Net profit 22.9 16.6 38.0 19.9 68.4 50.1 36.5 74.3 Below, FWPR to play a major role in 2016

EPS (sen) 1.9 1.1 73.5 19.9 5.7 4.2 36.5 6.2 Below, but full-year FWPR contribution from FY2016 onwards

Title:

Source:


5.82.8

5.8 6.37.9

5.46.7 7.2 8.1

6.58.1

9.510.9

8.511.2

13.716.6

1214.1

19.1

22.9

0

10

20

30

40

50

60

4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15

Net profit Revenue Net profit margin (%)


112

BY THE NUMBERS

Share price info


Relative -4.3 4.9 62.2

Absolute 2.3 4.7 54.9


Wong Thean Soon 40.8

Utilico Emerging Markets Limited 7.0


0.0%

7.8%

15.6%

23.3%

31.1%

38.9%

46.7%

54.4%

62.2%

70.0%

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0


P/BV vs ROE


0%

33%

67%

100%

133%

167%

200%

0.0

5.0

10.0

15.0

20.0

25.0

30.0





Profit & Loss


Total Net Revenues 110 142 438 541 1,106

Gross Profit 63 84 211 270 435



Operating EBIT 51 69 195 253 417





Exceptional Items

Pre-tax Profit 51 68 195 253 417

Taxation (1) (0) (0) (0) (0)







Net Profit 50 68 194 252 416



Cash Flow


EBITDA 62.9 84.0 211.1 270.0 434.5


Change In Working Capital (11.8) (2.3) (2.3) (2.3) (2.3)



Other Operating Cashflow 0.0 0.0 0.0 0.0 0.0


Tax Paid (0.4) (0.4) 0.0 0.0 0.0


Capex (30.0) (10.0) (80.0) (100.0) (100.0)





Debt Raised/(repaid) 0.0 0.0 0.0 0.0 0.0



Dividends Paid (10.6) (20.4) (58.3) (75.7) (124.9)

Preferred Dividends







113

BY THE NUMBERS


Balance Sheet



Total Debtors 19.1 18.4 56.9 70.4 143.8

Inventories 0.0 0.0 0.0 0.0 0.0



Fixed Assets 76.5 74.1 208.0 291.2 373.7





Short-term Debt 8.9 4.4 4.4 4.4 4.4


Total Creditors 16.4 7.1 21.9 27.1 55.3











Total Equity 176.6 224.2 360.1 536.8 828.2

Key Ratios


Revenue Growth 44% 29% 210% 24% 104%




BVPS (RM) 0.15 0.19 0.30 0.45 0.69





Inventory Days - - - - -


ROIC (%) 35% 40% 109% 75% 97%

ROCE (%) 28.6% 31.9% 54.1% 43.1% 49.8%


Key Drivers


ASP (% chg, main prod./serv.) 0.0% 0.0% 0.0% 0.0% 0.0%







Unit raw mat ASP (%chg,2ndary) N/A N/A N/A N/A N/A

Total Export Sales Growth (%) N/A N/A N/A N/A N/A

Export Sales/total Sales (%) N/A N/A N/A N/A N/A

Food & Beverages│Malaysia│Equity research│October 9, 2015

Company Note


Powered by EFA

Only World Group Holdings Potential multi-bagger in the making

■ We like OWG’s captive market business models – Genting Highlands and Komtar.

■ The superior long-term economic moat in Genting Highlands is built on minimal competition, which translates to superior sales per outlet vs. peers

■ Komtar’s revitalisation project is likely to be successful due to support from the Penang state government, feeder traffic from Star Cruises and tourist visitations

■ OWG is one of our top small-cap picks with the highest absolute upside by percentage at 280% in 2018 and 550% in 2020.

Captive market business model OWG operates food service outlets, primarily in Genting Highlands, which is a captive and monopolistic market. The company’s greatest strength is the captive market in Genting Highlands. We estimate that its Genting food service outlets (FSO) generate average annual sales per outlet of RM2.8m, which is only 10% lower than KFC Malaysia but more than 50% higher than Starbucks, at RM1.8m. This demonstrates the superior long-term economic moat of an almost monopolistic market in Genting Highlands.

Higher margins in Genting Highlands Compared to other mall-based FSOs, we believe it is unlikely that Genting Malaysia will raise its rents significantly for two reasons: 1) unlike a shopping mall, Genting Malaysia’s business model is not reliant on rental income; it is first and foremost a casino – 95% of its revenues in Genting Highlands are derived from gaming; and 2) increasing visitation is key to Genting Malaysia’s success, so the availability of F&B facilities is paramount.

Komtar: the next growth driver In Dec-12, OWG won a tender to undertake the revitalisation project for the Komtar Tower (the tallest building in Penang). The crown jewel, in our view, is the potential tourist receipts from the observation deck, given that Penang is a major tourist destination. The factors that could underpin Komtar’s success are 1) support of the Penang government, 2) feeder traffic from Star Cruises, and 3) stronger tourist visitations arising from the weaker ringgit.

2018 target price OWG could be worth RM8.67/share in 2018, based on the following assumptions: 1) incremental net profit of RM17m from additional space in Sky Plaza, thus replicating the profits it currently generates in Genting Highlands; 2) 500k visitors per attraction per year in Komtar at a blended rate of RM20/ticket and pretax margin of 20%; 3) higher ticket rates for the Komtar observation deck; 4) additional F&B profits from Komtar; 5) Digiphoto profits; and 6) Escape Room’s earnings from aggressive expansion.

2020 target price Assuming that EPS growth moderates from 60% p.a. (from our current forecasts for FY15-17) to 30% per annum in FY19-20, then net profit in FY20 rises to RM120m, which gives us a 2020 target price of RM14.66 (>500% upside), driven by P/E expansion and the currently low earnings base, as the twin growth drivers have yet to come onstream.





Up/downside: 61.4%

Reuters: OWG.KL

Bloomberg: OWG MK


RM420.0m


RM0.75m


Free float: 30.9%


None


Absolute (%) -1.7 -11.7

Relative (%) -8.3 -11.5

Analyst

Marcus CHAN, CFA



Revenue (RMm) 83.1 86.9 110.4 154.5 188.9


Net Profit (RMm) 14.55 14.23 23.60 36.67 45.49

Core EPS (RM) 0.08 0.08 0.13 0.20 0.25

Core EPS Growth (27.7%) (2.2%) 65.9% 55.4% 24.0%

FD Core P/E (x) 28.87 29.52 17.80 11.45 9.23

DPS (RM) - - 0.032 0.050 0.061

Dividend Yield 0.00% 0.00% 1.40% 2.18% 2.71%

EV/EBITDA (x) 16.50 15.81 11.20 7.37 5.86

P/FCFE (x) NA NA NA 24.43 14.88

Net Gearing (1.3%) (16.1%) 17.8% 8.4% (2.5%)

P/BV (x) 5.05 2.92 2.60 2.22 1.88

ROE 35.0% 12.5% 15.4% 20.9% 22.1%



67

127

187

247

307

367

0.60

1.10

1.60

2.10

2.60

3.10


Source: Bloomberg

10

20

30

40

Dec-14 Mar-15 May-15 Jul-15

Vol m

http://www.efa.biz/


115

Figure 1: OWG's potential TP in 2018-2020




RMm

FY17 net profit 36.67

Add: GITP 17.00

Komtar

Themed attractions 6.08

Higher ticket rates 1.75

F&B 1.90

Digiphoto 3.04

Escape Room 4.80

Net profit 71.24

EPS 0.39

P/E 22.5

2018 target price 8.67

2020 net profit @ 30% EPS growth p.a 120

EPS 0.65

P/E 22.5

2020 target price 14.66

FYE Jun (RM m) 4QFY15 3QFY15 qoq % 4QFY15 Proforma Prev.

chg Cum FY14 FY15F Comments

Revenue 20.4 22.7 (10.1) 86.9 83.1 78.9 Down qoq on negative impact of GST on consumer spending and fewer holidays in 2Q

Cost of sales (15.8) (14.5) 9.0 (30.3) (57.7) (54.6)

EBITDA 4.6 8.2 (43.9) 25.2 25.4 24.3

EBITDA margin (%) 22.5 36.1 29.0 30.6 30.8

Depreciation (0.3) (2.5) (88.0) (4.9) (4.8) (5.0) In line

EBIT 4.3 5.7 (24.6) 20.3 20.6 19.3

Net interest expense (0.3) (0.3) 0.0 (1.3) (0.5) (0.4)

Pretax profit 4.0 5.4 (25.9) 19.0 20.1 18.9

Tax (1.1) (1.3) (15.4) (4.8) (5.5) (4.7)

Tax rate (%) 27.5 24.1 25.3 27.4 24.9

Minority interests 0.0 0.0 (0.1) 0.0 0.0

Net profit 2.9 4.1 (29.3) 14.2 14.6 14.2

Core net profit 2.9 4.1 (29.3) 14.2 14.6 14.2 In line at 100% of full-year forecast

EPS (sen) 1.6 2.2 (29.3) 7.7 7.9 7.7

Core EPS (sen) 1.6 2.2 (29.3) 7.7 7.9 7.7


116

BY THE NUMBERS

Share price info


Relative -8.3 -11.5

Absolute -1.7 -11.7


Dato Richard Koh and Datin Chew Lean Hong

69.1


0%

67%

133%

200%

267%

333%

400%

467%

533%

600%

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50


P/BV vs ROE


-40%

-16%

8%

32%

56%

80%

0.0

5.0

10.0

15.0

20.0

25.0





Profit & Loss



Gross Profit 33.5 38.0 53.1 79.8 95.5



Operating EBIT 20.6 20.3 33.4 50.6 62.0

Financial Income/(Expense) (0.6) (1.3) (1.6) (1.2) (0.8)




Exceptional Items

Pre-tax Profit 20.1 19.0 31.8 49.3 61.2

Taxation (5.5) (4.8) (7.6) (11.8) (14.1)


Profit After Tax 14.5 14.2 24.2 37.5 47.1

Minority Interests (0.6) (0.8) (1.6)

Preferred Dividends



Net Profit 14.5 14.2 23.6 36.7 45.5



Cash Flow


EBITDA 25.47 25.17 40.26 59.55 71.48


Change In Working Capital -6.75 -0.46 -2.29 -4.31 -3.34



Other Operating Cashflow -0.07

Net Interest (Paid)/Received -0.58 -1.31 -1.58 -1.22 -0.84

Tax Paid -5.40 -4.78 -7.64 -11.84 -14.07


Capex -19.20 -43.00 -70.00 -20.00 -20.00


Acq. Of Subsidiaries/investments -5.40


Cash Flow From Investing -18.17 -43.00 -75.40 -20.00 -20.00

Debt Raised/(repaid) 0.82 -5.00 25.00 -5.00 -5.00

Proceeds From Issue Of Shares 45.09 0.00 0.00 0.00

Shares Repurchased

Dividends Paid -5.90 -9.17 -11.37

Preferred Dividends

Other Financing Cashflow -0.02 1.52 0.00 0.00 0.00

Cash Flow From Financing 0.80 41.60 19.10 -14.17 -16.37

Total Cash Generated -4.69 17.22 -27.54 8.02 16.85

Free Cashflow To Equity -4.67 -29.38 -21.65 17.19 28.22

Free Cashflow To Firm -4.34 -23.07 -44.31 24.28 35.06


117

BY THE NUMBERS


Balance Sheet



Total Debtors 14.4 15.1 19.2 26.9 32.8

Inventories 1.3 1.4 1.8 2.5 3.0



Fixed Assets 77.3 115.4 184.0 195.0 205.5





Short-term Debt 1.7 1.7 1.7 1.7 1.7


Total Creditors 7.7 8.0 10.2 14.2 17.4











Total Equity 84.5 145.3 163.6 191.9 227.6

Key Ratios


Revenue Growth (6.5%) 4.6% 27.0% 40.0% 22.2%

Operating EBITDA Growth (21.2%) (1.2%) 60.0% 47.9% 20.0%


Net Cash Per Share (RM) 0.01 0.13 -0.16 -0.09 0.03

BVPS (RM) 0.45 0.78 0.87 1.02 1.21



Net Dividend Payout Ratio NA NA 25.0% 25.0% 25.0%


Inventory Days 4.85 10.06 10.00 10.26 10.65


ROIC (%) N/A 23.5% 26.7% 25.8% 29.4%

ROCE (%) 37.3% 14.3% 17.9% 22.9% 25.1%


Key Drivers



Unit sales grth (%, main prod./serv.) -6.5% 4.6% 27.0% 40.0% 22.2%

Util. rate (%, main prod./serv.) 100.0% 100.0% 100.0% 100.0% 100.0%




ASP (% chg, tertiary prod/serv) N/A N/A N/A N/A N/A







Company Note


Powered by EFA

QL Resources Uninterrupted growth

■ QL is one of the best-managed companies in the consumer sector, led by its group managing director Dr. Chia Song Kun.

■ It has sustained consistent revenue and earnings growth for the last 27 years.

■ It is Asia’s largest surimi producer and is among ASEAN’s leading poultry egg producers, with a group production of 4.5m eggs per day.

■ QL is our top pick for the consumer sector. It is also our long-term pick with 2018 and 2020 target prices of RM5.52 and RM7.58, respectively.

Tops in long-term consumer stock picking matrix QL tops the scoring in our long-term consumer sector stock picking matrix mainly due to its high scores in the management and growth categories. Its management has exhibited great ambition and executional capability to bring the group to where it is today, underscored by consistent revenue and profit growth over the past 27 years since its inception. Our target price is based on 23x CY16P/E, based on sector average. Maintain Add, with strong earnings growth from new ventures as potential catalysts.

QL is led by DR. Chia Song Kun QL is led by Dr. Chia Song Kun, the group managing director, who is the driving figure that has propelled the company from local feedstuff trader to multinational agro-food corporation. It is now among Asia’s largest egg producers and surimi manufacturers and is building a presence in the sustainable palm oil sector with activities including milling, plantations and biomass clean energy. Under Dr. Chia’s leadership, QL has grown to become a multinational agro-food corporation.

Asia’s largest surimi producer QL is Malaysia’s largest fishmeal manufacturer and producer of surimi products, and Asia’s largest surimi producer. It is also one of Malaysia’s leading operators in animal feed raw materials and poultry farming, and is among ASEAN’s leading poultry egg producers with a group production rate of 4.5m eggs per day. About 40m day old chicks (DOC) are produced across poultry farms in Malaysia and Indonesia. QL is one of the biggest distributors of animal feed raw materials in Malaysia.

Expanding into biomass clean energy From initially milling palm oil and estate ownership, QL has expanded its capabilities into biomass clean energy. It has two independent crude palm oil (CPO) mills in Sabah, and its first CPO mill in Eastern Kalimantan, Indonesia, was commissioned in FY13. It also owns a 1,200 hectare palm oil estate in Sabah, as well as a 15,000 hectare plantation in Eastern Kalimantan, Indonesia.

Long-term target prices Based on our forecast, QL’s revenue will hit RM3.8bn in FY3/19 and RM4.2bn in FY3/20, generating 24.0 sen in EPS in CY19. Based on these figures, and attaching a 23x CY19 P/E, QL’s target price would increase to RM5.52 in three years’ time. For its five-year target price, if we assume a highly conservative revenue growth forecast of 8.0% for FY3/21 and FY3/22, the EPS for CY21 would be 32.9 sen. If we attach a P/E multiple of 23x CY21 P/E, QL’s target price in 2020 would be RM7.58.





Up/downside: 19.8%

Reuters: QRES.KL

Bloomberg: QLG MK


RM5,142m


RM4.58m


Free float: 39.0%


No changes.


Absolute (%) 3.0 5.4 20.8

Relative (%) -3.6 5.6 28.1

Analyst

Azman HUSSIN


Financial Summary Mar-14A Mar-15A Mar-16F Mar-17F Mar-18F

Revenue (RMm) 2,457 2,708 3,024 3,300 3,561


Net Profit (RMm) 159.9 191.4 219.1 255.4 295.6

Core EPS (RM) 0.13 0.15 0.18 0.20 0.24

Core EPS Growth 21.4% 14.5% 19.7% 16.6% 15.8%

FD Core P/E (x) 32.15 28.09 23.47 20.13 17.39

DPS (RM) 0.035 0.043 0.049 0.057 0.066

Dividend Yield 0.85% 1.03% 1.19% 1.39% 1.61%

EV/EBITDA (x) 18.70 17.07 14.15 12.37 10.88

P/FCFE (x) NA 89.27 31.16 23.66 21.10

Net Gearing 29.8% 37.1% 32.2% 26.3% 18.6%

P/BV (x) 4.00 3.60 3.25 2.91 2.60

ROE 14.7% 13.5% 14.6% 15.2% 15.8%



94.0

110.1

126.1

3.00

3.50

4.00


Source: Bloomberg

1

2

3

4

5


Vol m

http://www.efa.biz/


119



Figure 2: QL's revenue and net profit


FYE Mar (RM m) 1QFY16 1QFY15 yoy % qoq % Prev.

chg chg FY16F Comments

Revenue 655.3 653.6 0.3 (1.0) 3,024 Stronger revenue driven by MPM and ILF

Operating costs (574.6) (585.2) (1.8) (0.5) (2,374)

EBITDA 80.7 68.3 18.1 (4.2) 407 Lower operating costs

EBITDA margin (%) 12.3 10.5 1.9 (0.4) 12

Depn & amort. (23.6) (18.9) 25.1 4.8 (88) PPE of RM1265m as at end-June 2015

EBIT 57.1 49.5 15.4 (7.5) 304

Interest expense (9.1) (5.8) 56.0 (10.4) (27) Total borrowings of RM742.2m as at end-June 2015

Interest & invt inc 1.1 1.6 (32.7) (27.8) 3 Total cash of RM206.3m as at end-June 2015

Associates' contrib 3.7 5.1 - - 18 Contribution from Boilermech and Lay Hong

Exceptionals - - - - -

Pretax profit 52.8 50.3 4.9 (10.8) 287 18% of our full year estimate

Tax (11.1) (10.2) 8.9 (7.8) (48)

Tax rate (%) 21.0 20.2 0.8 0.7 20

Minority interests (0.8) 0.2 (542.0) 73.5 (6)

Net profit 40.9 40.4 1.4 (12.4) 219

Core net profit 40.9 40.4 1.4 (12.4) 219 Accounted for 19% of our full-year estimate

EPS (sen) 3.3 3.2 1.4 (12.4) 18 Based on shares outstanding of 1248m

Core EPS (sen) 3.3 3.2 1.4 (12.4) 18 Based on shares outstanding of 1248m

Title:

Source:


0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0

200.0

0.0

500.0

1,000.0

1,500.0

2,000.0

2,500.0

3,000.0

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Revenue (RM m) LHS Net profit (RM m) RHS


120

BY THE NUMBERS

Share price info


Relative -3.6 5.6 28.1

Absolute 3.0 5.4 20.8


CBG Holdings 38.7

Farsathy Holdings 11.2

Juw Teck Cheah 0.8


0.00%

2.50%

5.00%

7.50%

10.00%

12.50%

15.00%

17.50%

20.00%

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00


P/BV vs ROE


0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

0.0

5.0

10.0

15.0

20.0

25.0





Profit & Loss



Gross Profit 482 545 602 679 749



Operating EBIT 222 252 304 346 391





Exceptional Items 0 0 0 0

Pre-tax Profit 204 246 287 331 383

Taxation (37) (50) (56) (65) (77)


Profit After Tax 167 196 230 266 306



FX Gain/(Loss) - post tax 0 0 0 0 0


Net Profit 160 191 219 255 296



Cash Flow


EBITDA 299.6 338.1 407.3 463.0 517.7

Cash Flow from Invt. & Assoc. 0.0 0.0 0.0 0.0 0.0

Change In Working Capital 24.3 (67.3) 88.7 (45.7) (74.0)

(Incr)/Decr in Total Provisions 0.0 0.0 0.0 0.0 0.0

Other Non-Cash (Income)/Expense 0.0 0.0 0.0 0.0 0.0

Other Operating Cashflow 26.8 36.3 90.1 99.1 107.7


Tax Paid (30.0) (36.9) (56.1) (65.1) (77.2)


Capex (188.3) (261.9) (300.0) (200.0) (150.0)



Other Investing Cashflow (23.2) (32.7) 0.0 0.0 0.0


Debt Raised/(repaid) (217.7) 69.4 (31.0) 0.0 (50.0)



Dividends Paid (46.7) (47.7) (61.4) (71.5) (82.8)

Preferred Dividends 0.0 0.0 0.0 0.0 0.0


Cash Flow From Financing 33.3 20.0 (92.3) (71.5) (132.8)


Free Cashflow To Equity (85.4) 57.6 165.0 217.3 243.7



121

BY THE NUMBERS


Balance Sheet



Total Debtors 272 307 333 396 463

Inventories 229 335 291 314 337


Total Current Assets 881 973 943 1,077 1,221

Fixed Assets 1,043 1,239 1,436 1,518 1,541





Short-term Debt 386 431 400 400 350

Current Portion of Long-Term Debt 0 0 0 0 0





Hybrid Debt - Debt Component 0 0 0 0 0




Total Liabilities 896 1,083 1,080 1,102 1,045



Total Equity 1,346 1,499 1,669 1,863 2,087

Key Ratios


Revenue Growth 14.5% 10.2% 11.7% 9.1% 7.9%

Operating EBITDA Growth 16.1% 12.9% 20.4% 13.7% 11.8%



BVPS (RM) 1.03 1.14 1.27 1.42 1.59





Inventory Days 41.43 47.56 47.25 42.13 42.31


ROIC (%) 10.9% 12.0% 11.5% 12.3% 13.0%

ROCE (%) 11.5% 11.8% 12.8% 13.6% 14.3%


Key Drivers


ASP (% chg, main prod./serv.) -11.7% -11.8% 2.0% 2.0% 2.0%



ASP (% chg, 2ndary prod./serv.) 7.7% 28.6% 10.0% 6.0% 5.0%



ASP (% chg, tertiary prod/serv) 6.3% 1.0% -11.8% 2.4% 2.3%






Banks│Malaysia│Equity research│October 9, 2015

Company Note


Powered by EFA

RHB Capital Bhd The best long-term bet for Malaysian banks

■ RHBCap is our long-term pick with a long-term target price of RM13.12 in 2018 and RM15.28 in 2020.

■ The group has a comprehensive transformation programme called IGNITE 17.

■ It still aspires to be a regional banking group in the longer term.

■ The management is targeting higher ROE of 13% in 2017 and 15% in 2020.

■ The stock remains an Add and our top pick given the bright earnings outlook and attractive valuation.

Our long-term pick for Malaysian banks RHB Capital is our long-term pick as we believe that the group would turn in the strongest earnings growth among Malaysian banks in the next 3-5 years, via organic growth and M&As. The earnings catalysts would be the IGNITE 17 transformation programme and the drive for regional expansion. Also, it is trading at attractive P/E and P/BV valuations.

Transformation programme laid out until 2017 The group has a comprehensive transformation programme, dubbed IGNITE 17, in place until 2017. We are positive on this as it aims to improve the areas that RHB Capital is traditionally weak in, like Islamic banking. Under the stewardship of the Group MD, Datuk Khairussaleh Ramli (DKR), we see a good chance of the group extracting value from IGNITE 17. DKR was the ex-CFO of Maybank who contributed to the successful transformation of Maybank in 2010-2013.

The next Malaysia-based regional bank In the past 5-6 years, the group has voiced its ambitions of becoming a regional banking group. The bank already has a banking operation in Singapore with seven branches and another two branches in Thailand. The next target market would be Indonesia though its plan to acquire Bank Mestika was aborted in Jul 14. The group is also eyeing entry into the Philippines and China in the longer term.

Aiming high for ROE We are encouraged that the management is targeting higher ROE of 13% in 2017 and 15% in 2020 (vs. 11.5% in 2014). The management expects to achieve this by boosting revenue from key growth areas, actively managing its costs and optimising its capital structure. The 13% ROE target in 2017 exceeds our projection of 11.5% for FY17. If the group manages to achieve this, there could be 13-15% upside to our FY17 net earnings forecast.

Our top pick for the sector Our DDM-based target price (COE of 11.8%; LT growth of 4%) is intact. The stock is our top pick for the sector, predicated on the re-rating catalysts of (1) the benefits from the transformation programme, (2) the expansion in investment banking market share, and (3) the drive for regional expansion in the longer term. Our DDM-based target price is estimated to be RM13.12 in 2018 and RM15.28 in 2020.





Up/downside: 46.8%

Reuters: RHBC.KL

Bloomberg: RHBC MK


RM15,867m


RM5.83m


Free float: 37.1%


No change


Absolute (%) 3.2 -14.5 -29.6

Relative (%) -3.4 -14.3 -22.3

Analyst

Winson NG, CFA



Net Interest Income (RMm) 3,275 3,291 3,398 3,580 3,803

Total Non-Interest Income (RMm) 2,676 2,944 3,260 3,580 3,915

Operating Revenue (RMm) 5,951 6,235 6,658 7,160 7,718

Total Provision Charges (RMm) (448.0) (206.3) (329.0) (327.3) (370.1)

Net Profit (RMm) 1,831 2,038 2,141 2,325 2,542

Core EPS (RM) 0.73 0.80 0.83 0.90 0.98

Core EPS Growth (4.36%) 9.59% 4.22% 8.27% 9.33%

FD Core P/E (x) 8.44 7.70 7.39 6.82 6.24

DPS (RM) 0.16 0.06 0.25 0.27 0.29

Dividend Yield 2.66% 0.98% 4.05% 4.40% 4.81%

BVPS (RM) 6.57 7.31 7.55 8.20 8.91

P/BV (x) 0.93 0.84 0.81 0.75 0.69

ROE 11.5% 11.5% 11.2% 11.4% 11.5%



74.0

82.8

91.5

100.3

109.0

5.50

6.50

7.50

8.50

9.50


Source: Bloomberg

2

4

6

8

10


Vol m

http://www.efa.biz/


123

The best long-term bet for Malaysian banks

Figure 1: 17 key initiatives under the IGNITE 17 transformation programme

SOURCES: COMPANY REPORTS


124

BY THE NUMBERS

Share price info


Relative -3.4 -14.3 -22.3

Absolute 3.2 -14.5 -29.6


EPF 41.0

Aabar Investments 21.9

OSK Holdings 9.8


0.00%1.80%3.60%5.40%7.20%9.00%10.80%12.60%14.40%16.20%18.00%

0.000.200.400.600.801.001.201.401.601.802.00


P/BV vs ROE


-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00





Profit & Loss


Net Interest Income 3,275 3,291 3,398 3,580 3,803

Total Non-Interest Income 2,676 2,944 3,260 3,580 3,915

Operating Revenue 5,951 6,235 6,658 7,160 7,718

Total Non-Interest Expenses (3,052) (3,411) (3,456) (3,671) (3,905)

Pre-provision Operating Profit 2,899 2,824 3,203 3,489 3,813

Total Provision Charges (448) (206) (329) (327) (370)

Operating Profit After Provisions 2,451 2,617 2,874 3,162 3,443


Operating EBIT (incl Associates) 2,452 2,618 2,874 3,162 3,444

Non-Operating Income/(Expense) 19 117 14 (28) (20)



Pre-tax Profit 2,471 2,735 2,889 3,134 3,424

Taxation (627) (672) (722) (784) (856)

Consolidation Adjustments & Others


Profit After Tax 1,844 2,063 2,167 2,351 2,568


Pref. & Special Div 0 0 0 0 0

FX And Other Adj. 0 0 0 0 0

Net Profit 1,831 2,038 2,141 2,325 2,542


Balance Sheet Employment


Gross Loans/Cust Deposits 88.4% 90.7% 81.6% 81.6% 81.4%

Avg Loans/Avg Deposits 84.5% 89.6% 85.7% 81.6% 81.5%

Avg Liquid Assets/Avg Assets 32.1% 28.9% 30.1% 31.5% 31.2%

Avg Liquid Assets/Avg IEAs 34.8% 31.3% 32.3% 33.6% 33.2%

Net Cust Loans/Assets 62.6% 64.1% 62.0% 62.6% 63.0%

Net Cust Loans/Broad Deposits 77.0% 78.6% 74.4% 74.7% 74.7%

Equity & Provns/Gross Cust Loans 15.5% 14.4% 13.6% 13.4% 13.3%

Asset Risk Weighting 46.9% 46.7% 46.8% 46.8% 46.8%

Provision Charge/Avg Cust Loans 0.255% (0.021%) 0.202% 0.183% 0.183%

Provision Charge/Avg Assets 0.156% (0.014%) 0.129% 0.116% 0.116%

Total Write Offs/Average Assets 0.266% 0.388% 0.144% 0.132% 0.134%


125

BY THE NUMBERS


Balance Sheet


Total Gross Loans 124,717 145,249 163,019 179,287 196,486

Liquid Assets & Invst. (Current) 43,746 43,003 42,915 45,918 49,415

Other Int. Earning Assets 0 0 0 0 0

Total Gross Int. Earning Assets 168,463 188,252 205,934 225,205 245,900

Total Provisions/Loan Loss Reserve (2,184) (1,766) (1,901) (2,030) (2,162)

Total Net Interest Earning Assets 166,280 186,486 204,033 223,174 243,739


Other Non-Interest Earning Assets 9,574 11,358 10,543 11,505 12,108

Total Non-Interest Earning Assets 14,812 16,632 15,817 16,779 17,382

Cash And Marketable Securities 9,999 16,237 31,574 34,252 37,623

Long-term Investments 0 0 0 0 0

Total Assets 191,090 219,354 251,424 274,205 298,744

Customer Interest-Bearing Liabilities 137,741 157,134 193,399 212,716 233,927

Bank Deposits 17,597 21,972 16,336 17,191 18,092

Interest Bearing Liabilities: Others 12,154 14,225 13,928 14,223 14,196

Total Interest-Bearing Liabilities 167,492 193,331 223,663 244,130 266,216

Bank's Liabilities Under Acceptances 2,269 3,315 3,463 3,810 4,175

Total Non-Interest Bearing Liabilities 4,386 3,814 4,660 4,932 5,162




Total Equity 16,943 18,894 19,637 21,334 23,191

Key Ratios


Total Income Growth 23.2% 4.8% 6.8% 7.5% 7.8%

Operating Profit Growth 14.3% (2.6%) 13.4% 8.9% 9.3%

Pretax Profit Growth 3.6% 10.7% 5.6% 8.5% 9.2%

Net Interest To Total Income 55.0% 52.8% 51.0% 50.0% 49.3%

Cost Of Funds 2.14% 2.28% 2.10% 2.03% 2.02%

Return On Interest Earning Assets 3.94% 3.94% 3.59% 3.41% 3.36%

Net Interest Spread 1.79% 1.66% 1.48% 1.38% 1.33%

Net Interest Margin (Avg Deposits) 2.37% 2.23% 1.94% 1.76% 1.70%

Net Interest Margin (Avg RWA) 3.69% 3.43% 3.09% 2.91% 2.84%

Provisions to Pre Prov. Operating Profit 15.5% 7.3% 10.3% 9.4% 9.7%

Interest Return On Average Assets 1.72% 1.60% 1.44% 1.36% 1.33%




Key Drivers


Loan Growth (%) 9.2% 17.0% 10.8% 10.0% 9.6%

Net Interest Margin (%) 1.9% 1.7% 1.6% 1.5% 1.4%

Non Interest Income Growth (%) 43.2% 10.0% 10.7% 9.8% 9.3%

Cost-income Ratio (%) 51.3% 54.7% 51.9% 51.3% 50.6%

Net NPL Ratio (%) 2.8% 2.0% 2.3% 2.4% 2.4%

Loan Loss Reserve (%) 63.7% 61.1% 53.0% 49.5% 47.2%

GP Ratio (%) 1.1% 1.0% 0.9% 0.9% 0.9%

Tier 1 Ratio (%) 13.7% 13.0% 12.3% 12.3% 12.3%

Total CAR (%) 24.5% 25.1% 22.8% 22.0% 21.2%

Deposit Growth (%) -0.4% 14.1% 23.1% 10.0% 10.0%

Loan-deposit Ratio (%) 86.8% 89.5% 80.6% 80.7% 80.4%

Gross NPL Ratio (%) 2.8% 2.0% 2.3% 2.4% 2.4%

Fee Income Growth (%) 89.4% 9.0% 12.0% 11.0% 10.0%


Company Note


Powered by EFA

Ta Ann Diversification is the best bet

■ Our long-term pick in the timber sector due mainly to its more superior execution capability and attractive valuations compared to its peers.

■ One of the earliest timber players in Sarawak to venture into forest plantations.

■ Also diversified into oil palm plantations as part of its strategy to broaden its sources of earnings.

■ Maintain Hold but with a higher SOP-based target price of RM3.80 as we roll valuations forward.

■ Our long-term target prices are RM5.40 by 2018 and RM6.00 by 2020.

Top long-term pick for the timber sector In the long run, all Sarawak timber players need to diversify their earnings base as log production from the natural forest dwindles. Ta Ann is one of the earliest timber players to venture into forest and oil palm plantations. It is our top long-term pick for the timber sector due mainly to its more superior execution capability and attractive valuations compared to its peers.

Forest plantations for sustainability We believe Ta Ann is better prepared than its peers to face the structural challenges in the timber industry. It has planted 36,044ha of forest and its management reckons that that it can maintain its current log production volume in the foreseeable future by harvesting its planted forest. Timber products that are sourced from plantation forest could also gain wider acceptance as they are perceived to be sustainably-produced.

Diversification into oil palm plantations Ta Ann has also planted 39,500ha of oil palm plantation as part of its strategy to broaden its sources of earnings. We believe its oil palm estates are better managed than those of its peers, judging from its FFB yield that is 15% above Sarawak’s industry average. Ta Ann also has the potential to expand its planted area as it has about 60,000ha of unplanted landbank in Sarawak.

Oil palm to drive future earnings growth Oil palm plantations would have been the biggest earnings contributor for Ta Ann if not for the downcycle in commodities. We believe that CPO prices should recover in the next 3-5 years as new supply reduces. Assuming that CPO prices will recover to the 10-year average of RM2,500 per tonne in 2018-2020 (current CPO futures indicate that CPO prices could rebound to RM2,500 by Mar 2016) and its FFB production grows at about 10% p.a., Ta Ann could deliver an EPS of RM0.45-0.50 in the next 3-5 years.

Long-term target prices Ta Ann’s share price could reach RM5.40 by 2018 and RM6.00 by 2020, based on P/E of 12x, which is in line with the P/E of planters with limited growth potential. This is conservative as Ta Ann still has large tracts of unplanted landbank that should allow it to grow beyond 2020. Despite being conservative, our estimates suggest that the stock still offers investors 44% upside in 3 years’ time and 60% upside in 5 years’ time.





Up/downside: 0.3%

Reuters: TAAN.KL

Bloomberg: TAH MK


RM1,404m


RM0.61m


Free float: 43.0%


No changes.


Absolute (%) 5.9 -0.8 0.0

Relative (%) -0.7 -0.6 7.3

Analyst

SAW Xiao Jun, CFA



Revenue (RMm) 770 1,021 1,059 1,125 1,234


Net Profit (RMm) 92.5 122.5 118.6 148.3 164.6

Core EPS (RM) 0.17 0.29 0.32 0.40 0.44

Core EPS Growth 9.6% 71.5% 9.7% 25.1% 11.0%

FD Core P/E (x) 22.29 13.00 11.85 9.47 8.54

DPS (RM) 0.05 0.20 0.21 0.26 0.29

Dividend Yield 1.32% 5.28% 5.49% 6.87% 7.62%

EV/EBITDA (x) 12.39 6.72 6.69 5.14 4.34

P/FCFE (x) 7.67 9.25 11.03 8.64 7.57

Net Gearing 24.8% 18.1% 12.7% 4.8% (2.4%)

P/BV (x) 1.39 1.33 1.27 1.20 1.13

ROE 6.4% 10.5% 11.0% 13.0% 13.6%



92.0

95.6

99.2

102.8

106.4

110.0

3.10

3.30

3.50

3.70

3.90

4.10


Source: Bloomberg

1

1

2


Vol m

http://www.efa.biz/


127

Figure 1: Results Ccomparison


Figure 2: SOP valuations (end-2016 target price)


FYE Dec 31 2Q 2Q yoy % qoq % 2QFY15 2QFY14 yoy % Prev. Comments

(RM m) FY15 FY14 chg chg Cum Cum chg FY15FRevenue 256.9 245.8 5 16 479 458 5 1,001 Higher timber revenueOperating costs (187.0) (181.3) 3 13 (352) (333) 6 (798) In line with higher revenueEBITDA 69.9 64.5 8 23 127 124 2 203 Above expectation due to strong timber earningsEBITDA margin (%) 27.2 26.2 nm nm 26 27 (3) 20

Depn & amort. (20.1) (21.1) (5) 1 (40) (39) 3 (78) Higher depreciation charges due to commissioning of a new palm oil millEBIT 49.8 43.3 15 35 87 86 1 124

Interest expense (6.3) (5.8) 7 26 (11) (10) 9 (7) Within expectationInterest & invt inc 1.9 1.8 4 3 4 3 23 5

Associates' contrib - - nm nm - - nm -

Exceptionals - - nm nm - - nm -

Pretax profit 45.4 39.3 15 35 79 78 1 122 Boosted by strong timber earnings

Tax (12.4) (11.0) 13 42 (21) (21) (0) (31) Effective tax rate in 1Q was broadly in line with statutory rate

Tax rate (%) 27.4 27.9 (2) 6 27 27 (1) 26

Minority interests 0.5 1.4 (67) (78) 3 1 98 2 Plantations subsidiaries were not profitable in 1Q

Net profit 33.4 29.8 12 24 61 58 4 92 1H15 net profit made up 65% of our full year forecast

Core net profit 33.4 29.8 12 24 61 58 4 92 Expect timber to drive earnings in 2H15

EPS (sen) 9.0 8.0 12 24 16.3 15.8 4 25

Core EPS (sen) 9.0 8.0 12 24 16.3 15.8 4 25

Segment Method RM m

Plantations 11.2x CY16 P/E 701.1

Timber 8.0x CY16 P/E 816.1

Planted forest Historical cost 91.9

Net debt at holding co. level (34.6)

SOP 1,574.5

Discount of 10% (157.4)

Adjusted SOP 1,417.0

No. of shares 370.5m

Target price 3.80


128

BY THE NUMBERS

Share price info


Relative -0.7 -0.6 7.3

Absolute 5.9 -0.8 0.0


Mountex Sdn Bhd 20.8

Employees Provident Fund Board 10.0


0.0%2.0%4.0%6.0%8.0%10.0%12.0%14.0%16.0%18.0%20.0%

0.000.200.400.600.801.001.201.401.601.802.00


P/BV vs ROE


-100%

-56%

-11%

33%

78%

122%

167%

211%

256%

300%

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0





Profit & Loss


Total Net Revenues 784 1,021 1,079 1,142 1,254

Gross Profit 190 278 389 407 466



Operating EBIT 64 165 150 205 239






Pre-tax Profit 113 169 146 198 232

Taxation (20) (44) (31) (47) (57)



Minority Interests (0) (2) 4 (3) (10)

Preferred Dividends



Net Profit 93 122 119 148 165



Cash Flow


EBITDA 136.6 243.3 235.6 290.6 326.3


Change In Working Capital 82.4 12.9 (1.3) (3.2) (5.0)



Other Operating Cashflow 75.2 20.5 0.0 (0.0) (0.0)

Net Interest (Paid)/Received (0.6) 4.3 (4.0) (6.4) (7.4)

Tax Paid (18.0) (32.3) (31.4) (46.8) (56.8)


Capex (127.2) (95.2) (71.5) (71.5) (71.5)


Acq. Of Subsidiaries/investments (0.3) 0.0 0.0 0.0 0.0



Debt Raised/(repaid) 34.3 (6.3) 0.0 0.0 0.0

Proceeds From Issue Of Shares

Shares Repurchased

Dividends Paid (37.5) (74.3) (74.1) (77.1) (96.4)

Preferred Dividends







129

BY THE NUMBERS


Balance Sheet



Total Debtors 56 61 42 44 49

Inventories 122 121 119 127 136



Fixed Assets 887 904 856 815 775





Short-term Debt 241 127 139 139 139













Total Equity 1,039 1,088 1,131 1,205 1,284

Key Ratios


Revenue Growth (2.5%) 32.6% 3.7% 6.2% 9.7%

Operating EBITDA Growth (14.8%) 78.1% (3.2%) 23.4% 12.3%


Net Cash Per Share (RM) (0.69) (0.53) (0.39) (0.16) 0.08

BVPS (RM) 2.72 2.85 2.97 3.17 3.35





Inventory Days 97.37 59.63 63.37 61.23 60.92


ROIC (%) 4.4% 11.7% 10.5% 14.4% 17.0%

ROCE (%) 4.3% 10.4% 9.3% 11.9% 13.2%


Key Drivers


Planted Estates (ha) 37,267 39,527 41,527 43,527 45,527

Mature Estates (ha) 28,209 30,355 34,631 37,267 39,527

FFB Yield (tonnes/ha) 19.7 19.2 18.3 18.8 19.7

FFB Output Growth (%) 4.6% 6.1% 5.8% 13.9% 12.1%

CPO Price (US$/tonne) 857 821 670 750 800

Power│Malaysia│Equity research│October 9, 2015

Company Note


Powered by EFA

Tenaga Nasional Beneficiary of ongoing sector reform

■ Expect IBR teething issues to be resolved gradually and tariff hikes in the future to be less controversial than in the past.

■ These could boost investor confidence in Tenaga’s earnings and result in better appreciation of its stock value.

■ Tenaga’s valuation is attractive as it trades close to its adjusted book value.

■ Maintain Add. Tenaga is also our sector top pick. Our long-term target prices for Tenaga are RM16.06 by 2018 and RM18.40 by 2020.

Underappreciated value Tenaga is at the top of our long-term utilities sector stock picks list due to its cheap valuation. We expect the teething issues faced by the incentive-based regulation (IBR) governing Tenaga to be resolved in the next few years. This should increase investor confidence in Tenaga’s earnings and result in better appreciation of the stock’s value.

IBR was a significant earnings booster Over the past 10 years, Tenaga’s net profit has increased at a CAGR of 14%, outpacing Malaysia’s average real GDP growth of c.5% during the same period. The key earnings growth driver was the introduction of IBR in 2014, which regulates the pass-through of fluctuations in fuel costs to the consumers via tariff revision. This prevents Tenaga’s earnings from being affected by any fluctuation in fuel prices.

Scepticism about IBR The sceptics pointed out that tariff revision under the IBR still requires the approval of the Cabinet (just like before the IBR was introduced) and therefore, contains political elements. In the past, tariff hikes stirred up controversies, as they are perceived to be avoidable because indigenous natural gas was the key fuel used in power generation. It was also the perception that the IPPs were the beneficiaries of a tariff hike.

Sector reform will continue While these controversies could surface in the future, we think that resistance will be milder going forward. Firstly, Malaysia increasingly relies on imported coal and LNG for power generation. This weakens the argument that tariff hikes are avoidable when international fuel prices rise. Secondly, all first-generation IPPs will expire in the next 2-3 years and the remaining IPPs are far less profitable than the former. This would remove the perception that tariff hikes benefit the IPPs.

Expect slight valuation premium We believe that Tenaga will trade at a slight premium over its book value in the long run. This is because the IBR will ensure that the earnings from its transmission and distribution (T&D) assets will stay close to their costs of capital, while competition from other IPPs cap the return from its generation assets.

Long-term target price We expect Tenaga to generate at least RM6bn of annual net profit in the next five years. We estimate that this will raise its adjusted book value to RM82bn by 2018 and RM94bn by 2020. Based on 1.1x P/BV (similar to the current level based on adjusted book value), Tenaga’s share price could rise to RM16.06 by 2018 and RM18.40 by 2020.





Up/downside: 33.4%

Reuters: TENA.KL

Bloomberg: TNB MK


RM69,304m


RM109.3m


Free float: 52.7%


No changes.


Absolute (%) 11.4 -2.5 -1.9

Relative (%) 4.8 -2.3 5.4

Analyst

SAW Xiao Jun, CFA


Financial Summary Aug-13A Aug-14A Aug-15F Aug-16F Aug-17F

Revenue (RMm) 35,857 40,859 43,705 40,730 43,589


Net Profit (RMm) 5,356 6,467 6,647 7,142 7,279

Core EPS (RM) 0.96 1.09 1.18 1.27 1.29

Core EPS Growth 19.9% 13.0% 8.4% 7.5% 1.9%

FD Core P/E (x) 12.78 11.31 10.43 9.70 9.52

DPS (RM) 0.25 0.29 0.30 0.32 0.34

Dividend Yield 2.04% 2.36% 2.48% 2.60% 2.73%

EV/EBITDA (x) 7.81 7.17 6.61 6.04 5.76

P/FCFE (x) 51.9 NA NA 102.5 43.8

Net Gearing 35.1% 39.9% 43.3% 41.1% 37.9%

P/BV (x) 1.84 1.60 1.44 1.30 1.18

ROE 14.4% 15.2% 14.5% 14.1% 13.0%


94.0

99.0

104.0

109.0

114.0

119.0

124.0

9.80

10.80

11.80

12.80

13.80

14.80

15.80


Source: Bloomberg

20

40

60

80


Vol m

http://www.efa.biz/


131

Figure 1: Tenaga's earnings have been volatile in the past


Figure 2: Tenaga’s book value


Title:

Source:


-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14

(Tenaga's reported net profit - RM m)

RM m Target price based on 1.1x P/BV

Current

Reported Shareholders' equity 46,729 9.11

Adjustments:

Overstated pension liability* 10,210

Understated tax assets* 7,457

Adjusted shareholders' equity 64,396 12.55

By 2018** 82,396 16.06

By 2020** 94,396 18.40

*Estimates; **Assuming average annual net profit of RM6bn in the next 5 years


132

BY THE NUMBERS

Share price info


Relative 4.8 -2.3 5.4

Absolute 11.4 -2.5 -1.9


Khazanah Nasional Berhad 31.2

EPF 13.7

Skim Amanah Saham Bumiputera 7.3


12.50%12.80%13.10%13.40%13.70%14.00%14.30%14.60%14.90%15.20%15.50%

0.000.200.400.600.801.001.201.401.601.802.00


P/BV vs ROE


0.0%

3.6%

7.1%

10.7%

14.3%

17.9%

21.4%

25.0%

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0





Profit & Loss

(RMm) Aug-13A Aug-14A Aug-15F Aug-16F Aug-17F


Gross Profit 10,446 12,054 13,596 15,050 15,817


Depreciation And Amortisation (4,540) (4,873) (5,551) (6,057) (6,521)

Operating EBIT 5,907 7,181 8,045 8,993 9,296

Financial Income/(Expense) (669) (618) (780) (1,181) (1,311)




Exceptional Items

Pre-tax Profit 5,925 7,115 7,372 7,925 8,104

Taxation (542) (688) (726) (783) (825)


Profit After Tax 5,383 6,427 6,647 7,142 7,279

Minority Interests (27) 40 0 0 0

Preferred Dividends



Net Profit 5,356 6,467 6,647 7,142 7,279



Cash Flow


EBITDA 10,446 12,054 13,596 15,050 15,817


Change In Working Capital (154) (604) (1,810) (363) (216)



Other Operating Cashflow 243 (321) (217) (208) (198)

Net Interest (Paid)/Received (478) (474) (1,021) (1,122) (1,152)

Tax Paid (849) (690) (726) (783) (825)


Capex (8,570) (10,007) (10,653) (10,854) (11,086)

Disposals Of FAs/subsidiaries


Other Investing Cashflow 111 (3,429) 0 0 0

Cash Flow From Investing (8,460) (13,435) (10,653) (10,854) (11,086)

Debt Raised/(repaid) 569 3,144 (653) (1,044) (756)


Shares Repurchased

Dividends Paid (1,393) (1,412) (1,718) (1,804) (1,895)

Preferred Dividends

Other Financing Cashflow 169 309 0 0 0

Cash Flow From Financing 156 2,041 (2,371) (2,848) (2,651)

Total Cash Generated 906 (1,430) (3,203) (1,128) (311)

Free Cashflow To Equity 1,318 (327) (1,484) 676 1,584

Free Cashflow To Firm 1,493 (2,766) 461 3,024 3,644


133

BY THE NUMBERS


Balance Sheet



Total Debtors 7,179 7,132 7,629 7,110 7,609

Inventories 617 887 723 612 648

Total Other Current Assets 174 3,876 3,876 3,876 3,876


Fixed Assets 75,461 83,045 88,797 93,943 98,757





Short-term Debt 1,149 2,480 2,680 2,180 1,680


Total Creditors 6,613 7,974 6,495 5,503 5,821

Other Current Liabilities 3,052 3,010 3,010 3,010 3,010






Total Provisions 29,475 30,767 29,905 29,062 28,517




Total Equity 37,971 43,459 48,387 53,725 59,109

Key Ratios

Aug-13A Aug-14A Aug-15F Aug-16F Aug-17F

Revenue Growth 4.0% 14.0% 7.0% (6.8%) 7.0%




BVPS (RM) 6.68 7.66 8.53 9.48 10.43





Inventory Days 9.42 8.74 8.96 8.57 7.48


ROIC (%) 8.21% 8.95% 8.84% 9.13% 8.94%

ROCE (%) 8.10% 9.07% 9.30% 9.69% 9.44%


Key Drivers

Aug-13A Aug-14A Aug-15F Aug-16F Aug-17F

Power Despatched (GWh) 99,924.2 102,413.0 107,361.6 105,627.9 108,902.4

Capacity (MW) N/A N/A N/A N/A N/A

Average Capacity Utilisation (%) N/A N/A N/A N/A N/A

Avg tariff/ASP per kwh (% chg) N/A N/A N/A N/A N/A

Fuel Cost Per Kwh (% Change) -7.0% 15.3% -14.5% -4.2% 8.2%

Industry Reserve Margin (%) N/A N/A N/A N/A N/A


134

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CIMB Securities (Thailand) Co., Ltd. may act or acts as Market Maker and issuer including offering of Derivative Warrants Underlying securities of the following securities. Investors should carefully read and study the details of the derivative warrants in the prospectus before making investment decisions.

AAV, ADVANC, AMATA, ANAN, AOT, AP, ASP, BA, BANPU, BBL, BCH, BCP, BDMS, BEAUTY, BEC, BECL, BH, BJCHI, BLAND, BMCL, BTS, CBG, CENTEL, CK, CPALL, CPF, CPN, DELTA, DEMCO, DTAC, EARTH, EGCO, ERW, GFPT, GLOBAL, GLOW, GUNKUL, HANA, HMPRO, ICHI, INTUCH, IRPC, ITD, IVL, JAS, KBANK, KCE, KKP, KTB, KTC, LH, LHBANK, LOXLEY, LPN, M, MAJOR, MC, MINT, MONO, NOK, PACE, PS, PSL, PTT, PTTEP, PTTGC, QH, RATCH, RCL, ROBINS, RS, S, SAMART, SAPPE, SAWAD, SCB, SCC, SF, SGP, SIRI, SOLAR, SPALI, SPCG, STEC, STPI, SVI, TCAP, THAI, THCOM, TICON, TISCO, TMB, TOP, TPIPL, TRC, TRUE, TTA, TTCL, TTW, TUF, U, UNIQ, UV, VGI, WHA

Corporate Governance Report:

The disclosure of the survey result of the Thai Institute of Directors Association (“IOD”) regarding corporate governance is made pursuant to the policy of the Office of the Securities and Exchange Commission. The survey of the IOD is based on the information of a company listed on the Stock Exchange of Thailand and the Market for Alternative Investment disclosed to the public and able to be accessed by a general public investor. The result, therefore, is from the perspective of a third party. It is not an evaluation of operation and is not based on inside information.

The survey result is as of the date appearing in the Corporate Governance Report of Thai Listed Companies. As a result, the survey result may be changed after that date. CIMBS does not confirm nor certify the accuracy of such survey result.

Score Range: 90 - 100 80 - 89 70 - 79 Below 70 or No Survey Result

Description: Excellent Very Good Good N/A

United Arab Emirates: The distributor of this report has not been approved or licensed by the UAE Central Bank or any other relevant licensing authorities or governmental agencies in the United Arab Emirates. This report is strictly private and confidential and has not been reviewed by,


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deposited or registered with UAE Central Bank or any other licensing authority or governmental agencies in the United Arab Emirates. This report is being issued outside the United Arab Emirates to a limited number of institutional investors and must not be provided to any person other than the original recipient and may not be reproduced or used for any other purpose. Further, the information contained in this report is not intended to lead to the sale of investments under any subscription agreement or the conclusion of any other contract of whatsoever nature within the territory of the United Arab Emirates.

United Kingdom: In the United Kingdom and European Economic Area, this report is being disseminated by CIMB Securities (UK) Limited (“CIMB UK”). CIMB UK is authorized and regulated by the Financial Conduct Authority and its registered office is at 27 Knightsbridge, London, SW1X7YB. This report is for distribution only to, and is solely directed at, selected persons on the basis that those persons: (a) are eligible counterparties and professional clients of CIMB UK; (b) have professional experience in matters relating to investments falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended, the “Order”), (c) fall within Article 49(2)(a) to (d) (“high net worth companies, unincorporated associations etc”) of the Order; (d) are outside the United Kingdom, or (e) are persons to whom an invitation or inducement to engage in investment activity (within the meaning of section 21 of the Financial Services and Markets Act 2000) in connection with any investments to which this report relates may otherwise lawfully be communicated or caused to be communicated (all such persons together being referred to as “relevant persons”). This report is directed only at relevant persons and must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this report relates is available only to relevant persons and will be engaged in only with relevant persons.

Where this report is labelled as non-independent, it does not provide an impartial or objective assessment of the subject matter and does not constitute independent “investment research” under the applicable rules of the Financial Conduct Authority in the UK. Consequently, any such non-independent report will not have been prepared in accordance with legal requirements designed to promote the independence of investment research and will not subject to any prohibition on dealing ahead of the dissemination of investment research. Any such non-independent report must be considered as a marketing communication.

United States: This research report is distributed in the United States of America by CIMB Securities (USA) Inc, a U.S. registered broker-dealer and a related company of CIMB Research Pte Ltd, CIMB Investment Bank Berhad, PT CIMB Securities Indonesia, CIMB Securities (Thailand) Co. Ltd, CIMB Securities Limited, CIMB Securities (India) Private Limited, and is distributed solely to persons who qualify as “U.S. Institutional Investors” as defined in Rule 15a-6 under the Securities and Exchange Act of 1934. This communication is only for Institutional Investors whose ordinary business activities involve investing in shares, bonds, and associated securities and/or derivative securities and who have professional experience in such investments. Any person who is not a U.S. Institutional Investor or Major Institutional Investor must not rely on this communication. The delivery of this research report to any person in the United States of America is not a recommendation to effect any transactions in the securities discussed herein, or an endorsement of any opinion expressed herein. CIMB Securities (USA) Inc, is a FINRA/SIPC member and takes responsibility for the content of this report. For further information or to place an order in any of the above-mentioned securities please contact a registered representative of CIMB Securities (USA) Inc.

CIMB Securities (USA) Inc does not make a market on the securities mentioned in the report.

Other jurisdictions: In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is only for distribution to professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.

Corporate Governance Report of Thai Listed Companies (CGR). CG Rating by the Thai Institute of Directors Association (Thai IOD) in 2014. AAV – Very Good, ADVANC – Very Good, AEONTS – not available, AMATA - Good, ANAN – Very Good, AOT – Very Good, AP - Good, ASK – Very Good, ASP – Very Good, BANPU – Very Good , BAY – Very Good , BBL – Very Good, BCH – not available, BCP - Excellent, BEAUTY – Good, BEC - Good, BECL – Very Good, BGH - not available, BH - Good, BIGC - Very Good, BJC – Good, BLA – Very Good, BMCL - Very Good, BTS - Excellent, CCET – Good, CENTEL – Very Good, CHG – not available, CK – Very Good, CPALL – not available, CPF – Very Good, CPN - Excellent, DELTA - Very Good, DEMCO – Good, DTAC – Very Good, EA - Good, ECL – not available, EGCO - Excellent, GFPT - Very Good, GLOBAL - Good, GLOW - Good, GRAMMY - Excellent, HANA - Excellent, HEMRAJ – Very Good, HMPRO - Very Good, ICHI - not available, INTUCH - Excellent, ITD – Good, IVL - Excellent, JAS – not available, JUBILE – not available, KAMART – not available, KBANK - Excellent, KCE - Very Good, KGI – Good, KKP – Excellent, KTB - Excellent, KTC – Good, LH - Very Good, LPN – Very Good, M - not available, MAJOR - Good, MAKRO – Good, MBKET – Good, MC – Very Good, MCOT – Very Good, MEGA – Good, MINT - Excellent, OFM – Very Good, OISHI – Good, PS – Very Good, PSL - Excellent, PTT - Excellent, PTTEP - Excellent, PTTGC - Excellent, QH – Very Good, RATCH – Very Good, ROBINS – Very Good, RS – Very Good, SAMART - Excellent, SAPPE - not available, SAT – Excellent, SAWAD – not available, SC – Excellent, SCB - Excellent, SCBLIF – Good, SCC – Very Good, SCCC - Good, SIM - Excellent, SIRI - Good, SPALI - Excellent, STA – Very Good, STEC - Good, SVI – Very Good, TASCO – Good, TCAP – Very Good, THAI – Very Good, THANI – Very Good, THCOM – Very Good, THRE – not available, THREL – Good, TICON – Good, TISCO - Excellent, TK – Very Good, TMB - Excellent, TOP - Excellent, TRUE – Very Good, TTW – Very Good, TUF - Good, VGI – Very Good, WORK – not available.

Rating Distribution (%) Investment Banking clients (%)

Add 58.1% 6.0%

Hold 30.4% 3.5%

Reduce 10.9% 1.0%

Distribution of stock ratings and investment banking clients for quarter ended on 30 September 2015

1528 companies under coverage for quarter ended on 30 September 2015


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CIMB Recommendation Framework

Stock Ratings Definition:

Add The stock’s total return is expected to exceed 10% over the next 12 months.

Hold The stock’s total return is expected to be between 0% and positive 10% over the next 12 months.

Reduce The stock’s total return is expected to fall below 0% or more over the next 12 months.

The total expected return of a stock is defined as the sum of the: (i) percentage difference between the target price and the current price and (ii) the forward net dividend yields of the stock. Stock price targets have an investment horizon of 12 months.

Sector Ratings Definition:

Overweight An Overweight rating means stocks in the sector have, on a market cap-weighted basis, a positive absolute recommendation.

Neutral A Neutral rating means stocks in the sector have, on a market cap-weighted basis, a neutral absolute recommendation.

Underweight An Underweight rating means stocks in the sector have, on a market cap-weighted basis, a negative absolute recommendation.

Country Ratings Definition:

Overweight An Overweight rating means investors should be positioned with an above-market weight in this country relative to benchmark.

Neutral A Neutral rating means investors should be positioned with a neutral weight in this country relative to benchmark.

Underweight An Underweight rating means investors should be positioned with a below-market weight in this country relative to benchmark.

*Prior to December 2013 CIMB recommendation framework for stocks listed on the Singapore Stock Exchange, Bursa Malaysia, Stock Exchange of Thailand, Jakarta Stock Exchange, Australian Securities Exchange, Taiwan Stock Exchange and National Stock Exchange of India/Bombay Stock Exchange were based on a stock’s total return relative to the relevant benchmarks total return. Outperform: expected to exceed by 5% or more over the next 12 months. Neutral: expected to be within +/-5% over the next 12 months. Underperform: expected to be below by 5% or more over the next 12 months. Trading Buy: expected to exceed by 3% or more over the next 3 months. Trading Sell: expected to be below by 3% or more over the next 3 months. For stocks listed on Korea Exchange, Hong Kong Stock Exchange and China listings on the Singapore Stock Exchange. Outperform: Expected positive total returns of 10% or more over the next 12 months. Neutral: Expected total returns of between -10% and +10% over the next 12 months. Underperform: Expected negative total returns of 10% or more over the next 12 months. Trading Buy: Expected positive total returns of 10% or more over the next 3 months. Trading Sell: Expected negative total returns of 10% or more over the next 3 months.

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