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Investors’ Corner (Kwantas Corp, Cahya Mata Sarawak, Sarawak Oil Palms, PPB Group)
Malaysia Investors' Corner | 03 December 2011
By: Gerald Teo
Articles (40) Profile

Kwantas Corporation
Price – $2.13
Target – $1.84

Kwantas’ upstream segment recorded an increase of 77.4% in operating profit y-o-y to RM23.1m. Surprisingly, q-o-q harvest declined by 10%, which we suspect could be due to lower number of harvest days. The lower crops and slight decline in average CPO price q-o-q explained the 17.5% contraction in earnings in 1Q12. The oleochemical division continued to post a disappointing result despite the increase in revenue of 7.7% y-o-y to RM58.9m. This may be due to low operating margin in light of the price control measures introduced by the Chinese government since the beginning of this year. We maintained a target price of RM1.84, based on PE ratio of 6x, which is close to the historical trough PE ratio of 5.6x. Given the downside of 15.8%, we maintain our SELL recommendation on Kwantas. Key re-rating catalyst is a convincing turnaround in the downstream segment. – TA Securities (30 Nov)

Cahya Mata Sarawak
Price – $2.08
Target – $2.27

Cahya Mata Sarawak’s (CMS) annualised 9M11 core net profit was 43% above our forecast as we had underestimated EBIT margins which surged due to the reacquisition of CMS Roads and CMS Pavement Tech. The strong construction margins are reflective of the road projects in the Score region, which the group clinched over the past 6-9 months. Manufacturing EBIT margin remained strong at 23% in 9M11. We raise our FY11-13 EPS forecasts by 3%-15% to reflect the better-than-expected margins. We make no changes to our assumption of RM200m-300m new contracts, which should be achievable given the favourable prospects in the Score development region. We would not discount more contract wins as Score is likely to roll out more infrastructure/road jobs in the coming months. This outlook continues to bode well for the group’s manufacturing and construction materials divisions. Maintain HOLD. – CIMB (29 Nov)

Sarawak Oil Palms
Price – $4.66
Target – $5.60

About 51% of Sarawak Oil Palms’ (SOP) planted areas consist of young and prime crops. In addition, another 43% of total planted areas comprise immature palms. Going forward, backed by its favourable age profile, production yield will continue to improve as immature areas coming into maturity as well as rising yield of the newly matured palms. In Oct-11, SOP also entered a joint-venture with Pelita Holdings to develop an area under Native Customary Rights of around 1,645 ha into an oil palm plantation. This would increase its total landbank to 74,298 ha. We have increased our CPO price assumption to RM3,200 mt for FY11 and keeping our assumption of average CPO price of RM3,100 mt in our FY12 forecasts. Annualised 9M11 net profit is 28% above our earnings forecast for FY11. This is attributed to higher average CPO prices and higher CPO production against our assumption. We have increased our net profit forecast by 25% and 8% for FY11 and FY12 to factor in higher CPO output. Maintain BUY. – Netresearch-Asia (29 Nov)

PPB Group
Price – $16.10
Target – $19.08

Though we remain optimistic about PPB’s food related business, global conditions merit increased caution in our outlook for profit growth and margins. PPB could well absorb higher interest rates. However, an increase in interest rates in its major markets would likely depress consumption of food related items. PPB’s balance sheet is very strong with total debt/equity ratio below 5% even though the company is not trading at bargain levels on many of its valuation metrics. The Kuok Group have been making money in the agriculture segment for decades which in our opinion has very good medium and long term prospects. Investors will have to prepare for some margin volatility along the way, however, as prices are likely to fluctuate substantially over the next few quarters ahead. Investors will be attracted by the current year dividend yield of 3% as well as the prospects of upside earnings surprises from Wilmar. Maintain BUY. – Wilson & York (22 Nov)

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