Negative Signal From Rights Issue
IOI is proposing to issue a renounceable rights issue of 420.989m shares at RM2.90 each at a ratio of 1 rights share for every 15 existing held. The issue price of RM2.90 is a 38.3% discount to its theoretical 5 day VWAP ex-rights price of RM4.70. We view IOI Corp’s proposed rights issue negatively, interpreting it as a signal of more subdued outlook going forward given its past tendency of issuing debt to fund its expansion and allowing degearing to be taken care of by its cash flow and bond conversion. Maintain Sell on negative sector outlook and lofty valuation of 20x forward earnings.
RECOMMENDATION
Capex needs. Proceeds will amount to RM1.221bn, which will be used for capex and repay borrowings. We believe part of the proceeds will go to the building of new 300k tonnes refinery capacity in Rotterdam and additional 100k specialty fats capacity at Pasir Gudang, Johor. On top of that, IOI is also developing 60k hectares of land in Kalimantan into oil palm plantation, the work of which has already begun.
Financial impact. The rights issue will help to lower net gearing from 42.5% to 26.3% which is a good thing while EPS dilution for FY10 is minimal at an estimated 6.5%. Signals tough times ahead? In the past decade, IOI always issued debt for expansion purposes, which also helped raise its gearing level for a more optimal capital structure. Anytime it issues new debt, its gearing rises to uncomfortably high levels but was quickly brought down due to its strong cash generation and strong stock price performance, which resulted in conversion of its convertible bonds into shares.
So, the raising of rights issue makes us suspect that IOI's management may be concerned that its future cashflow generation may be weaker than before. Without the rights issue, its gearing will linger at the current levels much longer than desired. While the previous debt raising exercise was a bullish signal, the rights issue is a negative signal sent out by management.
Tuesday, September 15, 2009
Macroeconomics
Macroeconomics
· In US, President Obama said recent data suggest that US economy is returning to growth and the administration must avoid removing stimulus programs prematurely. The White House expects the $787bn stimulus to add as many as 3% points to growth in Jul through Sep, and it credited the initiative with creating or saving as many as 1.1m jobs.
· The Euro industrial output fell 0.3% in July as the economy struggles to recover. Manufacturers across Europe are cutting costs and output to improve earnings as domestic and foreign spending on machinery, cars and metals continue to contract. Employment has declined for consecutive 4Qs and the jobless rate rose to the highest in more than 10 years in Jul.
· Bank of Japan will probably keep their benchmark interest rate near zero this week and maintain emergency lending programs as the economy recovery shows signs of losing momentum.
· At home, Malaysia’s CPI likely fell for a 3rd straight month in Aug but at a slightly slower pace than in July. Aug CPI likely fell 2.35% from a year earlier following a fall of 2.40% in Jul. Aug’s decline was largely due to the lingering base effect from last year when global food and energy costs were spiking, but that this month’s consumer prices might grow due to taxi and bus fare hikes.
· In US, President Obama said recent data suggest that US economy is returning to growth and the administration must avoid removing stimulus programs prematurely. The White House expects the $787bn stimulus to add as many as 3% points to growth in Jul through Sep, and it credited the initiative with creating or saving as many as 1.1m jobs.
· The Euro industrial output fell 0.3% in July as the economy struggles to recover. Manufacturers across Europe are cutting costs and output to improve earnings as domestic and foreign spending on machinery, cars and metals continue to contract. Employment has declined for consecutive 4Qs and the jobless rate rose to the highest in more than 10 years in Jul.
· Bank of Japan will probably keep their benchmark interest rate near zero this week and maintain emergency lending programs as the economy recovery shows signs of losing momentum.
· At home, Malaysia’s CPI likely fell for a 3rd straight month in Aug but at a slightly slower pace than in July. Aug CPI likely fell 2.35% from a year earlier following a fall of 2.40% in Jul. Aug’s decline was largely due to the lingering base effect from last year when global food and energy costs were spiking, but that this month’s consumer prices might grow due to taxi and bus fare hikes.
MLabs enters MOU for bioethanol plant
MLabs enters MOU for bioethanol plant
It has enter into a MOU to set up a 100,000mt/annum bioethanol plant and crop cultivation with 2 other parties. It expects Chinese investors to participate and enter into off-take agreements.
Anybody know well about this stock? Penny Stock?
It has enter into a MOU to set up a 100,000mt/annum bioethanol plant and crop cultivation with 2 other parties. It expects Chinese investors to participate and enter into off-take agreements.
Anybody know well about this stock? Penny Stock?
KNM - Update from OSK research
The Star’s online report yesterday said Chevron has announced that the Gorgon gas project has been approved and will be developed off northwest Australia. Chevron will partner with ExxonMobil and Royal Dutch Shell to develop the gas field. The report also said the project has appeared to be more certain after PetroChina agreed to buy 2.25m tonnes of LNG p.a. from the gas field.
Approval is good news for Malaysian companies too. We believe the main beneficiaries will include Wah Seong and KNM, which have put in their bids for jobs in the Gorgon project. We understand that Wah Seong stands a very good chance of winning at least part of the pipe coating jobs since it is one of the two main bidders for the project, other than Bredero Shaw. As for KNM, we understand from the company’s management that it too is bidding for higher-end process equipment jobs. The group has significant presence in Australia through its subsidiary, KPL. Maintain Buy on Wah Seong (TP: RM2.78) based on a PER of 12x FY10 EPS) and KNM (TP: RM1.01), based on PER of 10x FY10 EPS).
My View (3.24pm, 15/09/2009) :-
"I guess uptrend on KNM stock soon or later once the project approved. KNM is cheaper than Wah Seong"
OSK-Multi Currency Settlement Facility (MCSF)
OSK Investemetn bank has recently launched MCSF which enables foreign share trading settlement in foreign currencies.
Pls read from below link:-
http://www.osk188.com/adminv2/UserFiles/OSK188-Malaysia/Banner/GCCI-GC-0078_MCSF%20Website%20Info.pdf
Pls read from below link:-
http://www.osk188.com/adminv2/UserFiles/OSK188-Malaysia/Banner/GCCI-GC-0078_MCSF%20Website%20Info.pdf
Strong BUY - KNM TP RM1.20
Expect Better Quarters Ahead
We lift our call on KNM Group to 5-STARS (Strong Buy) from 4-STARS (Buy) previously, with a higher 12-month target price or MYR1.00 (from MYR0.95).
We see signs of life in terms of orderbook replenishment for KNM, with orders totaling MYR400 mln coming in in the first two months of 2H09, vs. MYR300 mln achieved in the whole of 1H09. Hence, we think 2Q09’s relatively weak performance should represent the bottom for KNM, and we expect the company to deliver better numbers from 3Q09 onwards, providing the catalyst for an upward re-rating.
KNM reported 1H09 net profit of MYR169.9 mln (+13% YoY), on a 3.7% increase in revenue to MYR964.7 mln. The results made up 43% of our 2009 forecast, which we consider to be in line, as 2H09 is likely to be stronger for the group on increased billings, new contract awards and a pickup in activity.
QoQ revenue and net profit again contracted by 16% and 28% respectively, on lowered billings and EBIT margins. Lower tax rates helped to offset a weakerthan-expected topline. Profit margins, while in line with our previous assumptions, were mainly boosted by 1Q09 one-off gains. 2Q09 operating margin was lower than we had expected, due mainly to lowered revenue.
KNM’s Chad JV will net the company a USD220-mln (MYR790 mln) EPCC contract to build up production facilities in the Sedigi oilfield development. We acknowledge the higher country risk associated with the venture, but we takecomfort from management’s successful risk management track record with previous acquisitions.
Overall, we trim our 2009 earnings forecast by 5%, following a cut in our margin assumptions given the lower 2Q09 margins. We maintain our long-term positive outlook on KNM Group, as we believe orderflow will pick up again, driven by rising oil prices and as global demand recovers.
Investment rationale
Order flow appears to have picked up in 3Q09, and this should drive a rebound in profits for 2H09 and 2010 onwards, and provide the impetus for a re-rating. The outlook for KNM remains upbeat, premised on our positive medium-term outlook on oil prices. We now value KNM based on its Malaysian peer valuations (vs. global peers previously) as we feel this is more reflective of KNM’s fair value. We note that global peer valuations have risen to 18x 2010 EPS, vs. 12.4x 2009 EPS previously. Nevertheless, we do not expect KNM to reach these levels, given its previous investor concerns on the forced-selling of shares pledged by management and its
smaller market capitalization. With domestic peers now trading at 8.6x 2010 EPS, and rolling forward our valuation base year to 2010, we raise our 12-month target price to MYR1.20 (from MYR0.95).
Risks
Downside risks include a prolonged weakness in energy prices, which may force cutbacks on capital expenditure by the oil majors, thus impacting KNM’s ability to sustain its orderbook. A related risk is the large value of goodwill that KNM continues to carry on its books from the Borsig acquisition. Finally, management/succession risk lies in the fact that Lee Swee Eng, KNM’s co-founder and managing director, has very much been the driving force behind KNM’s
success, in our opinion.
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