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Stocks In Focus MY (Coastal Contracts, KUB M’sia, M’sia Steel, Teo Seng) – 11/03/15
Malaysia Daily Bulletin | 11 March 2015

RHB Research Sees Value In Coastal Contracts

  • RHB Research said it sees value in Coastal Contract’s delivery track record and diversification strategy and view its decision to dispose of a potentially idle offshore asset in a favorable light.
  • The company’s management feels there would not be intense speculation in the shipbuilding market and draws confidence from its RM1.5 billion outstanding offshore support vessel orderbook which provides FY15 shipbuilding earnings visibility. Margin compressions are expected in FY16 due to the falls in vessel prices or customer enquiries.
  • The firm’s gas compression service unit (GCSU) will be finished in time for the start of the RM1.2 billion charter to Petroleos Mexicanos (Pemex) in 2H15. The research house understands that the firm’s management will receive adequate compensation if the GSCU contract is terminated in a worst-case scenario. The research house feels that the firm’s plan to dispose of the first jack-up (JU) rig vs chartering was the right decision given the current situation.

Significance: RHB Research has maintained its ‘Buy’ call on Coastal Contracts with a target price of RM4.30 and retained shipbuilding price to earnings at 9 times FY15F to be in line with regional peers that operate on a build-to-stock OSV fabrication model.

KUB-Masteel RM1b Rail JV On Track

  • KUB Malaysia (KUB) is on track to execute the proposed RM1.2 billion inter-city rail transit system project in Iskandar Malaysia in a joint venture between Malaysia Steel Works (KL) (Masteel) and KUB undertaken via Metropolitan Commuter Network, in which Masteel and KUB hold a 60 per cent and 40 per cent equity stake, respectively. The rail transit network is expected to link the Iskandar development region and Woodlands in Singapore.
  • According to KUB, the Transport Ministry has received and is reviewing the updates on the proposed project in Iskandar. KUB expects to carry out the partnership agreement made in January 2011 soon. The JV was endorsed by the Johor state government last year and the project is expected to be completed within 24 months of approval.
  • The JV is midway in talks with the Government to obtain a 37-year concession from it, which would provide it with a recurring income. Meanwhile, KUB said that it would be holding more talks with the ministry to expedite its review process, update the Economic Council on the project and recommend its re-tabling by this year. It eagerly anticipates the chance of collaborating with other agencies to facilitate the processing of the proposals.

Significance: The project, which combines KUB’s property, engineering and construction core competency and Masteel’s expertise in heavy engineering and building materials, will not only benefit the people of Johor once the rail project was finished but will be a source of recurring income for the firm if the concession is awarded.

AmResearch Positive On Teo Seng’s Growth

  • AmResearch has initiated coverage on Teo Seng Capital, a well-managed modern poultry farmer specializing in the production of eggs that is currently the third largest egg producer in Malaysia with a daily output of 3.1 million eggs. It said its investment thesis is built around the company’s favourable industry dynamics with stable growth of 3 percent to 5 percent per annum and earnings compound annual growth rate of 35 percent over the last three years which indicates the quality of its leadership.
  • The research house said it forecasts the firm’s earnings to grow by 16 percent to 26 percent from FY15 to FY17, underpinned by production capacity expansion and a consistent increase in demand. It predicts that its operating margins will stay unchanged at about 20 percent, thanks to soft commodity prices. It suggests that the addition of biogas plants may reduce operating expenses in future.
  • The research firm notes that the group lacks an institutional following as it is presently under-researched but it is of the opinion that this would change given improved corporate access, steady earnings and dividend track record.

Significance: AmResearch rates Teo Seng Capital with a ‘Buy’ call and a fair value of RM2.40 per share, based on a fully-diluted price to earnings of 13 times on FY15F net profit.

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