MRCB/Quill Capita

It is in "mature" negotiations to inject its KL Sentral flagship office – Platinum Sentral – into Quill Capita Trust Bhd in return for cash and shares. This, in turn, could lead to MRCB emerging as the single largest shareholder of Quill Capita.

At the same time, MRCB is also buying into the management company of Quill Capita called Quill Capita Management Sdn Bhd. Sources said MRCB would buy out one of the major owners of the latter.

Quill Capita Management has three shareholders -- Quill Resources Holding Sdn Bhd, a company within the Quill Group of Companies, CapitaLand RECM Pte Ltd, a unit of CapitaLand Financial, and Coast Capital Sdn Bhd, a Bumiputera party.

If the deal materialises, then it will be the first of its kind whereby an asset injection results in a new controlling shareholder of a real estate investment trust (REIT).

Currently (Jan 2014), CapitaLand via associate CapitaCommercial Trust Ltd has a 30% stake in Quill Capita. With the new shares issued to MRCB, CapitaCommercial’s stake will likely be diluted to be smaller than what MRCB will have in Quill Capita.

The injection of Platinum Sentral will also see Quill Capita’s net asset value increasing to approximately RM2bil.

The benefits of this deal include MRCB quickly having a REIT of its own. In contrast, if MRCB were to have opted to create its own REIT, that process would have taken a much longer time.

As a result of owning the REIT, MRCB will be entitled to the yield provided by the REIT plus future capital gains on its holdings. The REIT also offers MRCB the option of where to inject more of its mature property assets in the future. Currently (Jan 2014), Quill Capita offers a yield of approximately 7.07%.

Quill Capita has a market capitalisation of RM452mil. With this deal, its market cap should breach the RM1bil mark. Industry sources have pointed out that it was the larger REITs that would enjoy better valuations.

MRCB’s net gearing stood at 1.7 times, while total borrowings was at RM3.4bil as of September 2013. MRCB has long-term borrowings of RM1.62bil and short-term borrowings of RM716mil, and a senior and junior sukuk worth RM1.06bil. It has a debt-to-common equity ratio of 234.4%.

Reports have also indicated that MRCB was divesting its 30% stake in the concessionaire of the Duta-Ulu Kelang Expressway (Duke) to Ekovest Bhd for RM230mil in a cash deal.

Thus, should the sale of Platinum Sentral and Duke take place, it will bring in about RM750mil to RM1bil in cash, which will reduce the company’s debt level by 20% to 30%.

The plans to divest Platinum Sentral followed by Shell Tower and Ascott Residences would transfer about RM750mil worth of debts to the REIT, with realised gains of around RM380mil.

Quill Capita was listed on the Main Board of Bursa Malaysia on Jan 8, 2007. It acquires and invests in commercial properties primarily in Malaysia, namely, the Tesco building in Penang, and the various Quill buildings in the Klang Valley and Cyberjaya. The major tenants of the properties are mainly subsidiaries of multinational companies.

Fed Meeting 28-29 Jan (Expect Another USD10 Billion Cut)

The U.S. Federal Reserve will take center stage in the coming week with a widely expected cut to its bond-buying stimulus, responding to an improving U.S. economy but also helping fuel a dramatic emerging market sell-off.

(Argentina, Turkey and Ukraine felt the full force last week of a global flight from developing world assets as investors grew concerned about slower growth in China and U.S. monetary tightening, as well as the countries' own problems).

Fed policymakers are expected to confirm the tightening trend during their Jan 28-29 2014 meeting, notably also for being Ben Bernanke's last as chairman before vice chair Janet Yellen takes charge.

They are almost certain to make a second $10 billion cut to the bank's monthly purchase of Treasuries and mortgage-backed securities, from $75 billion now (27 Jan 2014) to $65 billion.

They are also likely to leave intact their delicately worded promise to keep interest rates low, although sharply falling unemployment has left some to doubt how long into the future that promise will hold.

Investors no longer believe the Fed when hear that proper rate tightening would happen much later in the future. Either the Fed will manage to re-establish some credibility on that front, and global emerging markets will probably find some respite in the future, or the global markets are going into a full-blown meltdown.

Toll Concessionaires

Sources say the government is looking at increasing toll rates for some of the highways as early as April 2014.

The proposed toll hike would only benefit the concessionaires if the hike was scheduled as per the concession agreement. If the hike is merely an adjustment for a backlog from previous years, concessionaires need not necessarily benefit. This is because they have already been receiving compensation from the government as the result of previous hike delays.

However regardless of the proposed toll hikes, the concessionaires would still be collecting the same amount per vehicle as it merely alters the collection of toll from motorists and government, to motorist fully.

In fact the backlog hike can potentially impact the concessionaires as traffic volume may drop. The motorists will tend to shy away from these routes thus reducing the usage of the highways.

The proposal to hike toll rates in 2014 is mainly to adjust the previous hike backlog since 2008.

XDL - rollar coastal

Based on rm0.30, XDL is trading at only 4.23 times of its annualised net profit of rm49.8 million in FY2013 ended Dec 31. Also the company has rm170 million in net cash or 23 sen per share as at Sept 30 2013.

Its earnings took a beating in FY2013. For the third quarter ended Sept 30, its sales volume nearly havlved to 800000 pairs from 1.4 million pairs in the previous corresponding period. Consequently its quarterly net profit contracted to rm13.2 million.

Its net profit for the nine months ended Sept 30 fell 92% year on year to rm37.36 million. The company attributed to its weaker earnings to higher costs and intense competition sparked by a glut of sports in China, which is its main market.

Looking ahead (Jan 2014) the company is targeting a rm10 million to rm20 million boost to its profit for FY2014 with its venture into the Malaysian market through a partnership with Universal Fitness And Leisure Sdn Bhd. Even with the more conservative estimate of rm10 million it is still a 20% boost to its profit. With that estimate earnings, the company is valued at only 3.52 times forward earnings.

The management also stated that it expects sales to rebound in 2HFY2014 as inventories begin to clear up.

Notably Malaysian listed Chinese companies tend to trade a a steep discount due to poor investor sentiment.

Abroad valuations for shoesmakers are much higher. HK listed Anta SPorts Products Ltd is valued at 18 times earnings. China listed Beijing Toread Outdoor - A is valued at 33 times.

Last week saw the is stock price hit by massive short selling causing its share price to plunge 54% to rm.300.

To recap, the rallyon XDL share price from rm0.27 to 0.63 since Dec 2013 has presented opportunity for traders to make quick profits, given that the company's rights issue was priced at rm0.35. The righs issue comes with bonus shares and free warrants All in, the cost of each share they receive is actually less than rm0.25.

Despite sitting on large pile of cash, XDL undertook rights issue. It issued 241.9 million new shares under its cash call, which is sweetened by free warrants plus 181.49 million bonus shares.

KNM NEXT~

Its prospects hinge on the Peterborough project as well as Borsig. Only after the group has got the project started off the ground and successfully listed Borsig will investors regain confidence in its stock.

Borsig GmbH …

In Dec 2013 it was reported that KNM Group Bhd has obtained credit facilities of up to €220 million (RM986 million) from a number of European banks.

The facilities comprise a term loan of €60 million to fully discharge and settle its existing term loan for its acquisition of Borsig GmbH in 2008. They also include a bank guarantee of up to €160 million for general corporate and working capital requirements of the Borsig group and to refinance existing bilateral guarantee facilities.

The participating financial institutions are UniCredit Bank AG as arranger and UniCredit Luxembourg SA as agent. The credit facilities have a maximum tenure of five years.

The facilities would “enhance the financial debt maturity profile of the group and improve its financial ratios as well as give rise to substantial savings in terms of interest expenses due from the credit facilities’ lower financing cost”.

In 2008, KNM acquired German engineering and manufacturing supplier Borsig for €350 million. The acquisition took place just as the global financial crisis began unravelling.

Although KNM’s revenue more than doubled in the year of the acquisition and its net profit leapt 80%, its profit margin dipped from 15.2% to 13.3% and its return on equity almost halved from 34% to 19%. Sales in Europe fell from RM1.49 billion in 2008 to a low of RM1.07 billion in 2010. It has not recovered until now (Jan 2014).

With the acquisition of Borsig, KNM’s total debt-to-equity ratio shot up from 54.4% to 80.4% in 2008. As at Sept 30 2013, the ratio had fallen to 44.82%. Borsig has been KNM’s cash cow throughout the crisis. The years following the acquisition saw a streak of profit depression in all its geographical segments; Europe alone had been consistently profitable.

When KNM recorded its first loss as a public-listed company in 2011, the losses were from Asia and America.

The outlook is still cloudy (Dec 2013) for KNM. Market observers are concerned about KNM’s erratic earnings track record.

Borsig Listing …

KNM had proposed to list Borsig on the Singapore bourse in 2013, with an indicative valuation of between RM1.8 billion and RM1.9 billion. But analysts viewed the valuation as too high.

Borsig’s listing plan has been delayed indefinitely. The capital raised from the listing could be used for KNM’s RM2.3 billion renewable energy plant project in Peterborough, UK, which was also delayed due to funding problems.

Renewable Energy Plant Project In Peterborough …

KNM is also undertaking a waste to energy power plant project in Peterborough in the UK that is worth about rm2.4 billion. It has yet to start due to lack of funding. KNM acquired a 55 acre tract in Peterborough for rm122.7 million with Exim Bank as the lead bank.

While there has been no word from the group on the scrapping of the project. KNM had sold its 80% stake in Energy Park Investments Ltd, the project owner of the Peterborough renewable energy plant. KNM is a turnkey contractor for the project.

It continued to face a delay in securing a financial close for its rm2.3 billion renewable energy plant project in Peterborough, the UK.

Earlier source says Exim Bank of Malaysia which is the lead arranger for a syndicated loan to fund 80% of the Peterborough project, is still looking for another partner bank to provide KNM with the funding requirement. It is learnt that KNM’s management had hoped to secure the financial close by end of 2012.

Initially, Deutsche Bank Bhd was supposed to be the partner bank but it is no longer in the picture. Exim Bank is now (May 2013) trying to rope in another bank to provide the syndicated loans.

The Peterborough plant is touted as an anchor project for KNM as it represents 47% of the group’s outstanding order book of rm4.9 billion. However it was reported in Feb 2013 that the Peterborough project has been delayed.

Excluding the UK project, KNM’s order book stands at rm2.1 billion including the rm308 million TAIK-NK sulphur recovery unit project in Russia.

KNM’s balance sheet will be stretched if it was to undertake the project.

At the end of first quarter 2013, the group had a net gearing ratio of 0.41 times but this could rise significantly to 1.03 times should KNM proceed with the first phase of the project, assuming a 80:20 debt and equity financing as guided by management.

SILK

An oil concessionaire and Malaysia’s second largest offshore supply vessel owner SILK is poised to win a tender called by Petronas for medium to large OSVs.

Petronas issued the invitation to bid in Dec 2013 and requires ships big enough to operate in and pull rigs in deep waters.

SILK owns 21 ships of which three were ordered in March 2013.

While other OSV operators like Perdana, Icon Offshore and lama may also participate in the tender, industry observers noted that these companies are not as well equipped as SILK.

Should SILK clinch the OSV contract, it will most likely be a catalyst for SILK, which depends on its oil and gas division to boost its earnings.

Its oil and gas division is the main contributor to the group’s total revenue accounting for some 80%.

Moving forward, the group expects its 37km Kajang SILK Highway to continue to record accounting losses as the existing high financing and amortization costs weigh it down. Nevertheless, an increase in traffic volume and the paring down of its borrowing costs will ensure its losses decline.

The group’s highway division is expected to remain cash flow positive as a result of the restructuring of the company long term debt undertaken in 2008. As part of the restructuring, SOIL ventured into oil and gas support services with the acquisition of AQL Aman Sdn Bhd the holding company of Jasa Merin which is the company bidding for Petronas contract.

RedTone

Tan Sri Syed Mokhtar has been named the successful bidder by the MCMC to build, operate and manage the infra for the DTTB service in Malaysia. It beat Redtone and i-Media. The concession is for a period of 15 years.

While the news appears to be unfavorable to Redtone, the group could be better off by not securing the DTTB contract given that some of the key criteria have come in at the lower end.

Full roll out of the DTTB service is projected to be in the third quarter of 2014 in few test areas and full nationwide coverage is only expected to be completed by 2017.

Meanwhile the government was quoted as saying that it will only end its analogue TV broadcast services by 2020. The successful bidder can only commence billing charges after the ASO, thus making the return on investment a big challenge.

Following the renewed approval from its shareholders, Redtone started to execute its share buyback account to re accumulate its shares since Nov 2013. The group has, thus accumulated a total of 1.67 million shares with an estimated average price of rm0.67 per share as of Jan 9 2014.

It is confident of achieving 50% quarter on quarter growth in profit before tax for the second quarter ended Nov 30 2013 of FY2014, underpinned by the healthy growth of its core businesses, ongoing various synergic benefits created under the network sharing and alliance agreement with MAXIS Bhd.

TDM - first harvest 2015

The group’s interests lie in twp core segments within and outside Terengganu – plantations and healthcare.

For its plantation division, its Indonesian operation is expected to contribute between 40 and 45% to the group's earnings over the next five years from Jan 2014.

The company has invested between RM250 million and RM300 million over seven years on its 40,000 ha plantation in Indonesia. 12,000 ha had been planted with oil palm trees while 500 ha had matured.

TDM, capitalising on the maturation of these oil palm trees, the group would set up a 60-tonne palm oil mill costing RM80 million to correspond with the first harvest which was expected by 2015.

The group is the first plantation company in the East Coast to achieve 100 certification for its mills and estates," he said after the Roundtable on Sustainable Palm Oil (RSPO) certificate presentation. The group's plantation arm received the RSPO certification in November 2013.

TDM also has two oil palm mills in Sungai Tong and Kemaman, Terengganu.

Its plantation division has been the major contributor to the group's revenue of about 90% compared with its healthcare unit.

TDM’s majority shareholder is Terengganu Inc Sdn Bhd, which is the state government’s investment arm. Terengganu Inc whose chairman is MB Datuk Seri Ahmad Said, holds a 47% stake in the plantation and healthcare company.

TDM, which derives 77% of its income from the plantations segment, owns two palm mills and manages 32000ha of oil palm plantations in Terengganu.

The group also has made inroads into Indonesia with 8000ha of planted oil palm land. About half of its oil palm trees are at peak yield age, between nine and 18 years with the rest being mainly immature trees.

In the healthcare segment, TDM is gaining a foothold as the leading private healthcare provider in the East Coast. It operates four specialist hospitals with another two under construction.

TDM has a dividend policy of declaring at least 30% of its earnings as dividends.

To recap, the shares in TDM during July 2013, which have gone from a share split exercise, have been in the limelight as investors picked up the stock leading up to the Kuala Besut by election in Terengannu. Investors snapped up TDM shares in anticipation of the ruling coalition BN victory in Kuala Besut. The preservation of the status quo allows the state government to proceed with existing investment initiatives.

Protasco - De Centrum City

It is a defensive stock given that the company profits highly from its road maintenance and construction division.

Protasco is maintaining about 14000km of federal and state roads under long term maintenance contracts and concession. The outstanding value for these road maintenance and construction works stands at rm1.7 billion which would provide earnings visibility to group for the coming three years from 2013.

Protasco’s crisis is the civil unrest in Libya , which led to the company halting operations in Malaysia in 2011. Protasco has written off rm40 million in provisions over the past two years from 2013 which the company is seeking to claim form the Libyan government.

In spite of the imminent risks, it is not deterred from its work there and is in fact facing considering extending its stay beyond the completion of the suspended works.

It has also announced its intention of getting into the oil and gas sector, and has proposed to acquire a 76% stake in PT Anglo Slavic Indonesia for rm171 million which is waiting due diligence and is expected to be completed in Oct 2013. The acquisition of an upstream oil and gas company will also open up opportunities to provide the downstream services to other concession holders. Protasco plans to get involved in the constructing part of exploration and supply of accessories and equipment.

Also, Protasco owns approximately 100 acres of freehold land in Kajang for a mixed development known as De Centrum City. The land’s GDV alone is worth about 15 times more than the company’s market cap of rm420 million as at 31 July 2013.

This RM10 billion De Centrum integrated development in Bangi is essentially the redevelopment of its 100-acre University Kuala Lumpur (IUKL) land acquired at a very low price more than a decade ago.
Property development is still a small part of its business but the group intends to make the segment one of its core businesses. The construction business will remain the largest contributor, contributing rm99.5 million or 96% of its operating profit.

It owns a 40ha plot in Kajang of which it plans a mixed development worth a GDV of rm6.6 billion.

Protasco is in a net cash position of about rm105 million. Cash and its equivalent stood at rm147.13 million as at end FY2012 while total borrowings amounted to rm42.3 million.

Its healthy balance supports its aggressive business expansion. Debt to equity ratio stood at 0.697 times as at end FY2012.

It has an unofficial dividend payout policy of 60% of net income every year.

Tey Por Yee became the second largest shareholder with a 15.13% stake in Adison. Tey is also the CEO, MD and executive director of Nextnation, a director of Protasco Bhd and former executive provider of Petrol One Res Bhd.

Thong Guan - expecting double digit growth

It is a beneficiary of strengthening USD and expanding production capacity with its products being exported globally. Its packaging division is similar to Scientex's packaging division without the property division.

Thong Guan Industries Berhad is one of Asia Pacific’s largest plastic packaging companies with over 30 years of experience and distinguished track records. The Company is one of the largest producers of cast pallet stretch film and garbage bags in this region with an annual combined production output in excess of 100,000 metric tons.

The Company’s core manufacturing operations are situated in northern Malaysia, Kedah that covers an area of over 30 acres, with established manufacturing operations in China and Thailand. Dato Ang and family controls 39.8% stake in the Company.

The Company also produces coffee and tea which are mainly sold locally and in SEA countries.

The Company made its highest quarterly earnings in 3Q2013, mainly buoyed by increase in export volume and selling prices. Earnings were also buoyed by higher margin of stretch film and other plastic products as well as the appreciation of the USD vis a vis the Ringgit.

Its 9MFY2013 net profit already reached RM21.85mil. To recap, revenue rose with 4-year CAGR of 10.4% while net profit rose with 4-year CAGR of 22.4% due to expanding margins.

Its 3QFY2013 earnings were boosted by its stretch film, PVC food wrap, garbage bag, industrial bags division, compounding division.

The Group's operations in Sabah has also been profitable as well. The food, beverage and other consumable business unit has continued to grow and is expected to continue its steady progress despite suffering a drop in profitability.

Observers are expecting double digit growth in its net profit whereas PER’13-14 remains at a paltry 6.5x-5.5x, which is considered undervalued currently (Jan 2014). This stock should trade at double digit PER in view of its resilient market and growth prospects.

By comparing Scientex (PER of 9x - lower due to property division chich commands lower PER), Daibochi (PER of 16x) and Tomypak (PER 10-11x) with Thong Guan trading at a PER of 5.5x-6.5x currently (20 Jan 2014).

Its net cash stood at about RM30mil.

However the stock is illiquid.

SBC Corp - propose a dividend policy

It currently (Jan 2014) has unbilled sales of RM200 million, which could last until 2015.

SCB Corp's revenue will start to surge when its three main projects - Kiara East, Bandar Utama in Batang Kali and Jesselton Quay in Sabah - kick in. The projects would contribute around RM400 million annually over the next seven years from Jan 2014.

SBC Corp has continuously given out dividends for the past 10 years prior to 2014 at an average of 4.65% yield.

Moving forward, the group will propose a dividend policy starting from the financial year 2014, based on favourable future earnings outlook.

Its future earnings will be underpinned by solid unbilled sales and new launches in Klang Valley.
SBC Corp Bhd’s unbilled sales stood around RM200mil … considering the group’s market capital of merely RM206mil that is equivalent to the group’s 1.57 times financial year 2013 (FY13)’s topline.

On top of that, Kiara East mixed development will render RM180mil revenue annually to the group over the next seven years from Jan 2014 which is said to have gross development value of RM1.5bil with total size of 20 acres.

Ho Hup

Its share price seems to have yet to factor in the potential earnings for its 60 acres of prime land near Bkt Jalil.

The company expects to make a profit of at least rm500 million in coming years from Jan 2014 from a joint development project with Malton on 50 acres of the tract. However, it is trading at a market cap of only rm155 million way below the value of its land bank that could fetch an average price of rm300 psf.

There has been speculation that Datuk Thong Kok Khee, a substantial shareholder and non executive director of Ho Hup, has major plans for the company considering that his investment vehicle is Insas Plaza Sdn Bhd. There is talks that Thong may be interested in making Ho Hup a property and construction arm of Insas Bhd.

Ho Hup do not discount the possibility of future cooperation, provided that it benefits the company.

The PN17 company plans to apply for an up liftment from the status as early as the first quarter of 2014. It is currently on a roll of reporting four consecutive quarters of profits.

The company’s property development division looks more promising because of its prime land in Bukit Jalil, which Ho Hup owns through its wholly owned subsidiary, BJDSB.

Of the 60 acres, 10 acres will be exclusively developed by BJDSB while the rest is part of a joint development between Ho Hup and Malton. Ho Hup’s priority is developing the 10 acres, with the first phase slated to be launched later 2014.

However come wonder how the company would finance such capital intensive projects. The company’s cash and bank balances as at Sept 30 2013 stood at rm4.04 million. Combined with the rm8 million in gross proceeds from its rights issue to fund future projects, this is only amounts to rm124 million.

The development of the shops and offices as well as SOVO is self funded, that is with funds generated from the project itself. As for its JV project with Malton, Ho Hup does not need to raise capital as it will be financed by its partner.

For its construction division, the group has submitted bids for projects worth rm6 billion.

Its current order book stood at rn750 million.

With its Bukit Jalil development gaining traction, the company points out that its property development division may generate the bulk of its revenue in the coming years from Jan 2014.

It will be 70% to75% revenue contribution from property development and 25% to 30% from construction activities in the long term of three years.

IOI Corp (After Demerger With IOI Properties) ...

After the demerge with IOI of its property arm, IOI Corp became a pure palm oil player with both upstream and downstream operations.

IOI Corp is currently (Jan 2014) trading at a forward PER of around 16.7 times.

Without the property arm to help boost earnings, its net profit is expected to be smaller in the coming years from Jan 2014. In FY2013 ended June 30 the property division contributed about 33% to the group’s earnings, second only to the plantation arm’s 41%.

Notably, plantation companies have been affected by the high palm oil inventory levels, which translated into weak CPO prices and impacted its net profits. As a result, most plantation counters saw volatility in their share prices.

As the company realigned its focus to the plantation segment, IOI Corp will be more aggressive in looking for plantation landbank opportunities locally and overseas.

In Oct 2013, it had acquired Unico-Desa Plantations.

It now (Jan 2014) has a total of 230000ha in Malaysia and Indonesia of which 163000ha in Malaysia and 13000ha in Indonesia have been planted. Its Singapore based associate Bumitama Agri Ltd has some 115000ha land in Indonesia, 36000 of which IOI Corp has interest in.

Critics however said that IOI Corp’s oil palm trees are relatively prime with an average age profile of about 12 years,

Going forward, IOI Corp’s balance sheet will look cleaner post demerger as it plans to use rm1.8 billion of the proceeds to pare down its debt levels. Post – demerger, the company’s net borrowings will be reduced to some rm2.02 billion equivalent to net gearing of 32%.

It should also be noted that in times of volatile CPO prices, the earnings of fully integrated players have not been as badly affected as the pure upstream plantation companies.

IOI Corp would have to bank on further acquisitions of significant tracts of plantation land or an uplift in CPO prices as r rating catalysts.

Signature - served niche market

It served a niche market, supplying kitchen fittings to only high end property projects. But with more developers fitting out the kitchens on mid range residential properties these days, its market has grown by leaps and bounds.

It is now supplying to developments for residential properties that are priced from rm700000 to rm800000. Indeed, it sees an inclination for fully furnished homes in the next one to two years from Jan 2014.

Demand for built in finishing will remain intact. The company has enough projects to keep it busy until 2016/2017.

As at Sept 30 2013, it had cash and bank balances of rm17.13 million versus borrowings of rm19.36 million.

It has outstanding order book of rm200 million. It has also tenders worth rm600 million.

Its clients include Tropicana, SP Setia and UEM Sunrise which own large landbank there in Johor have invited the company to bid for future projects. With project coming onstream in 2014, it expects the segment to contribute 70% to the group’s earnings. The remaining 30% is seen coming from its retail segment.

It has also diversified into interior design.

The group hopes to expand its presence in Indonesia. The market for project based work in Indonesia is still in the early stages of growth with the trend yet to catch on among the consumers there.

It had disposed seven acres of land in Kota Damansara for rm75 million. It will receive rm50.38 million cash in the deal while the remaining sum will be settled in the form of shop offices of 8 units.

After disposing the above land which is its headquarter, it had bought another factory cost the company rm79 million.

Sona - NEXT?

To recap in Oct 2013, it was reported that it is closed to making its QA, and the target company is Singapore-listed RH Petrogas Ltd, an O&G company controlled by Sarawak tycoon Tan Sri Tiong Hiew King. Tiong is chairman of RH Petrogas via a 10% placement of shares, as well as acquiring some of its assets, which are offshore O&G blocks.

However later it was reported that Sona will not be taking up any stake in Singapore-listed RH Petrogas Ltd. RH Petrogas. Tiong, whose flagship company is the unlisted Rimbunan Hijau Group, was not too keen on diluting his interest in RH Petrogas.

Sona is now (Oct 2013) in the midst of evaluating other assets. It has moved on from RH Petrogas.

In July 2013, Sona is looking at a few proposals, among them from African exploration and production vendors, to make its first qualifying asset (QA) either in the late development or production life cycle of the oil and gas (O&G) sector.

Africa makes up some 8% of the world’s oil reserves. Meanwhile, gas reserves make up some 7% of the world. There were some 10 countries in Africa which Sona Petroleum was looking at including Chad , Tanzania and Nigeria . In its prospectus, Sona Petroleum said it was looking at the markets of South-East Asia, the Middle East and Africa to make its first QA.

Sona Petroleum raised RM550mil from its IPO, where 90% of the proceeds was put into a trust. Under the Securities Commission’s guidelines, at least 80% of the amount in the trust should be used for the QA, and this acquisition had to be completed within 36 months from the close of the IPO.

Meanwhile a continued depreciation of the ringgit against the US dollar will adversely impact SPACs as the proceeds raised from their IPO will be worth less in US dollar terms than when they were initially listed.

SPACs could be vulnerable to the depreciation of the ringgit as a weakening currency may affect their financial capability to acquire strategic assets. In 2013 alone, CLIQ and Sona have raised rm363 million and rm550 million respectively from the capital markets.

As both companies are planning to acquire overseas assets, any deals will likely to concluded in US dollars. The strengthening of the US currency means these SPACs will have fewer dollars to utilize after conversion from the ringgit. Neither SPAC has made an asset acquisition since listing.

Understanding SPACs ...

As corporation with no operation or income generating business at the point of its IPO, a SPAC is required to make an acquisition within 36 months of its listing. In the meantime, its cash is exposed to foreign exchange risks such as a depreciating ringgit.

SPACs are bound by regulatory guidelines that require them to maintain the IPO proceeds in the local currency. The IPO proceeds are kept in a trust account. It then utilize the money for investments that are deemed acceptable by SC, namely MGS and fixed deposits.

Under Section 6.02 of the SC’s Equity Guidelines, SPACs are only permitted to invest in MGS, money market instruments and AAA rated papers. They are not allowed to hedge their foreign exchange exposure by buying streonger currencies against a weakening ringgit.

The unique structure of a SPAC is meant to safeguard the gross proceeds, which is held in a truct account and controlled by an appointed custodian.

The weakening financial markets present buying opportunities for SPACs, which are now (Sept 2013) able to purchase assets that have gone down in value. The company can choose to either identify cheaper assets or take up a smaller stake in any particular asset.

With rm495 million in its coffers, Sona’s proceeds are worth US148.44 million as at Aug 28 2013.

A&M - undervalued

It has been sitting on a 775.2ha parcek of remote Carey land in jugra, Selangor. The land was purchased in the 1990 and had been left idle with no development.

With the completion of the Carey Iskand access Interchange of the South Klang Valley Expressway in 2015, A&M stands to benefit.

Plans are afoot to undertake a rm10 billion GDV integrated property development.

It has been reported that the Carey Island land was purchased more than 30 years ago for less than rm1 psf. As at Sept 30 2013, its net asset value was rm1.47 per share. The land was valued at more than rm50 psf or rm4.2 billion, valuing A&M at about rm11.50 a share.

But the valuation may be on the high side as the land is classified as agricultural and will need to undergo lengthy approval processes for status conversion. Its lease expires in 2105.

The agricultural land can be revalued as long as it is not classified in the books as being held for future conversion and development.

A&M’s Carey Island land has a net book value of rm12.3 million which is below the current (Jan 2014) book value.

PNBS has a 5.8% stake in A&M in 2009 but cease to be a substantial shareholder at end 2011.

Things may be changing as A&M shareholders may be in for an unexpected boost once the Carey Island access interchange is ready in 2015.

Its low entry cost of less than rm1 psf will enable it to earn superior margins.

Ng together with his family controls 71.56% stake in the company.

A&M also has an 8ha plot in Bukit Kemuning, Shah Alam, 72ha in Morib and 1.2ha in Mont Kiara.

It is expected to see a significant growth in earnings on the back of planned launches.

Its current (Jan 2014) unbilled sales stood at rm45 million.

With cash and cash equivalents of rm85 million as at Sept 30 2013, it is in prime location to acquire more land.

Based on its net gearing of 0.5 times, it would be able to raise some rm340 million via borrowings.

It has a negligible debt of rm66000 in total borrowings as at Sept 30 2013.

BREM - undervalued

It was reported that its tracts in KL and Klang should be worth five times more ... its net asset per share was worth RM8.32 versus RM2.79 currently, if a revaluation of its landbank was carried out.

Brem has since refuted the report. It said it wishes to advise that neither the directors nor the major shareholders had any communication with the writer of the said article.

The contents of the article, including the valuation of the group’s landbank and possible bonus shares issue, are purely the writer’s personal opinion, analysis and prediction which do not in any way represent the opinion of the company.

There is no bonus issue proposal as at the date of this announcement.

At rm1.92 the stock is trade at 0.69 times its latest unaudited net tangible asset (NTA) of rm2.79 per share as at Sept 30 2013.

Based on the list of properties it included in its annual report for the financial year ended March 30 2013, there may be an upside to its reported book value.

It could have not done revaluation exercises. The Mukim of Kapar land – its valued at only 4.3 sen psf and it was acquired in 1994. The 109.71 acr land in Kapar, Klang is only carried at rm204000.

The company also has multiple tracts in Mukim of Batu, KL, held under its 75% owned subsidiary. It is unclear whether the plots are contiguous with each other but one of the tracts, PT 25794 is said to be already under development.

More importantly, the average net book value of the eight plots of freehold land covering 34.368 acres in total and located in the Segambut area appear undervalued at rm73.55 psf. By comparison, IJM land and FCE Holdings bought the four parcels of land in Segambut at rm280 psf.

The tracts in Mukim of Batu alone could fetch another rm1.84 in net asset value for every Brem share.

However, very often a small cap developer should get a 30% to 40% discount to its RNAV.

Brem – a niche property developer behind the Bukit Prima Pelangit project in Segambut Dalam, which is adjacent to Mont Kiara township – is controlled by Datuk Khoo Chai Kaa.

Its current construction orderbook will last it for another four years is about rm260 million of which the gross development value exceeds rm650 million.

On May 31 2013, its 51% owed subsidiary, PNG Water managed to reinstate a concession terminated on March 31 2013. Brem expects the water supply and services sector to contribute consistent revenue and profit to the group.

The group’s net audited net debt position at rm117.88 million as at March 31 2013. Some rm142.88 million of land held for property development and rm111.9 million net carrying amount of a long term leasehold land and building of a subsidiary are also pledged to financial institutions for banking facilities.

Its 1HFY2014 net profit rose 82.23% year on year to rm18.81 million on the back of 76.3% year on year growth in revenue to rm92.23 million.

The company’s other business segments include civil engineering and construction (which contributed 10.24% to its 1HFY2014 revenue), property investment and investment holding (7.55%) and water supply and services (15.3%).

It is expected that there will be stable revenue and profit derived from the water supply and services sector. For the property investment and investment holding sector, the rental receivable in Kepong Brem Mall is expected to continue to contribute positively to the results of the group.

Some 71.34% of the company’s shares are held by its top 30 shareholders as at Aug 7 2013. Some 51.61% of its shares are in the hands of four shareholders, the largest of whom are Khoo and Lee with a combined 38.14% stake.

Engtex Group Bhd

A successful consolidation of the Selangor water industry could lead Engtex, already the country’s largest pipe maker by market capitalisation, even higher.

As the newly-structured water industry should involve the long-overdue replacement of the country’s aging water pipelines, Engtex by virtue of its track record and expertise is bound to get a slice of this.

Of the 130,000km of pipes in Malaysia, a third were made of asbestos cement, which has been known to cause cancer. Assuming that just half of the asbestos cement pipes are replaced with mild steel and ductile iron pipes, the industry is looking at a potential RM5bil market.
Meanwhile, the Langat 2 project, which is crucial to the state’s impending water crisis, will also require some 50,000 tonnes of pipes worth RM200mil. Engtex is touted as a frontrunner to clinch pipe supply jobs for Langat 2.

There is also Petronas’ Rapid project which will require some RM200mil worth of pipes.

On the east coast, Engtex is targeting some RM100mil in pipe orders for Kuantan Port City, a RM4bil industrial and logistics hub to be developed by 2020.

On top of these, some RM800mil in new pipes for housing projects and mega projects such as Johor’s Iskandar Malaysia is needed annually.

Daya Materials Bhd - more contracts and record profits

With an existing orderbook of RM1.5bil, there are possibilities for more contracts and record profits.

It won two major charter contracts from Norway. The earnings from these contracts are set to be realized in 2014.

In the 2000s, Daya has been more focused on the downstream oil and gas (O&G) segment. It chugged along, growing organically until 2013, when it entered the offshore construction segment.

It formed Daya Offshore Construction Bhd (DOC) in September 2012. The arrival of vessels Siem Daya 1 and Siem Daya 2 proved to be Daya’s inflection point.

On Aug 16 2013, Daya clinched a seven year charter contract from Technip for the provision of a subsea construction vessel. This project will run for 100 to 175 days per annum commencing in 2014 with an estimated value of RM250mil to RM440mil.

On Sept 3 2013, Daya won again with Technip, when it secured another three-year contract for a period of 100 to 175 days with an estimated value of RM100mil to RM176mil.

Contributions from the North Sea are set to climb starting from the first quarter of 2014, as contributions from Siem Daya 1 and Siem Daya 2 kick in. Daya’s revenue could further increase should Reach Energy Bhd, in which Daya has made an investment as an initial investor, acquire O&G assets overseas.

Reach Energy is set to become Malaysia’s fourth special purpose acquisition company once it gains the approval for a listing from the Securities Commission.

Puncak Niaga/KPS - five possibilities

The intervention of the federal government in Selangor’s water restructuring exercise is seen as a positive light.

The notification implies there will be no changes to Selangor government rm9.7 billion takeover offer.

Following the news, sources clarified that the federal government may consider taking over the administration of water operations and not the water assets a widely interpreted.

There are five positives in the latest scenario …

1. The Federal government’s intervention will jump start the restrusturing;
2. It leaves more room for Puncak and Gamuda to re negotiate the exit price for its water assets.
3. Puncak (owner of PNSB and SYABAS) may be able to get its proposed valuation top up/compensation;
4. Gamuda could get a valuation upside for 40% owned SPLASH;
5. The construction of the Langat 2 water treatment plant and major large diameter pipe works can begin.

The direct beneficiaries from a negotiation of the takeover valuations are Puncak Niaga and Gamuda.

The larger diameter pipe laying works will spill over to pipe players such as Engtex.

Nonetheless, the Selangor state government’s move to invoke Section 114 of Water Services Industrial Act to get the federal government in could deal a big blow to the water players.

The main contentions of the Selangor offer included the absence of payment of surplus of assets and the 12% return of equity evaluation of the equity portion. With the invocation, it is uncertain if the terms of the offer still stand.

While the invocation might expedite the restructuring exercise, it is unlikely that the players will receive an offer that meets their expectations.

YTL Power - heavy capex for YES 4G

The group is at the tail end of a heavy capex cycle for its YES 4G telecommunications division. Estimate it had ploughed in almost rm2.1 billion to build its YES network and infra.

Together with the award of the 1BestariNet project by the government, the management is well leveraged to focus on average revenuer per user – estimated at rm50 to rm60 at this juncture.

Progressively, revenue per available room enhancement should help narrow the divisional pre tax loss of rm270 million in the financial year end June 30 2013. However do not expect this division to break even in the next two years from Jan 2014 as competition among telecommunications players within the 4G arena is intensifying.

Wholly owned subsidiary Singapore unit YTL PowerSeraya Pte Ltd continues to be the main earnings anchor – accounting for 74% and 54% of FY2013 revenue and profit before tax respectively.

Re rating include the presence of stronger economic recovery in Singapore, meaningful M&As and a more active capital management.

A key upside will be earnings accretive M&A including bidding for Track 3B 2000MW Greenfield cola fired power plant.

A&M - sitting 775.2ha land which was purchased less than RM1 psf

It has been sitting on a 775.2ha parcek of remote Carey land in jugra, Selangor. The land was purchased in the 1990 and had been left idle with no development.

With the completion of the Carey Iskand access Interchange of the South Klang Valley Expressway in 2015, A&M stands to benefit.

Plans are afoot to undertake a rm10 billion GDV integrated property development.

It has been reported that the Carey Island land was purchased more than 30 years ago for less than rm1 psf. As at Sept 30 2013, its net asset value was rm1.47 per share. The land was valued at more than rm50 psf or rm4.2 billion, valuing A&M at about rm11.50 a share.

But the valuation may be on the high side as the land is classified as agricultural and will need to undergo lengthy approval processes for status conversion. Its lease expires in 2105.

The agricultural land can be revalued as long as it is not classified in the books as being held for future conversion and development.

A&M’s Carey Island land has a net book value of rm12.3 million which is below the current (Jan 2014) book value.

PNBS has a 5.8% stake in A&M in 2009 but cease to be a substantial shareholder at end 2011.

Things may be changing as A&M shareholders may be in for an unexpected boost once the Carey Island access interchange is ready in 2015.

Its low entry cost of less than rm1 psf will enable it to earn superior margins.

Ng together with his family controls 71.56% stake in the company.

A&M also has an 8ha plot in Bukit Kemuning, Shah Alam, 72ha in Morib and 1.2ha in Mont Kiara.

It is expected to see a significant growth in earnings on the back of planned launches.

Its current (Jan 2014) unbilled sales stood at rm45 million.

With cash and cash equivalents of rm85 million as at Sept 30 2013, it is in prime location to acquire more land.

Based on its net gearing of 0.5 times, it would be able to raise some rm340 million via borrowings.

It has a negligible debt of rm66000 in total borrowings as at Sept 30 2013.

Breaking News - Puncak Niaga/KPS

Puncak Niaga has been notified by KDEB that there will be no further discussions on the proposal to purchase the equities of PNSB and SYABAS for the foreseeable future. This means that all previous offers made by the Selangor government to Puncak Niaga and Gamuda Bhd may have to come to an end.

The statement comes after the Selangor state and federal government decided to evoke Section 114 of the Water Services Industry Act 2006 (WASIA).

The section reads; The minister may … direct the National Water Services Commission to assume control of the whole of property, business and affairs of a licensee and carry on the whole of the licensee’s business and affaris.

The state government has agreed to give full cooperation to the federal government to use Section 114 … which, among others, stipulate the National Water Services Commission (SPAN) appoint two administrators on behalf of the water concessionaires to handle the restructuring of the water services industry of the state.

Dividend Yield Companies ... Is It Still Attractive Going Forwards !!

M-REITs

The MREITs is poised for a quiet 2014 due to the low cap environment for both office/industrial and retail properties.

The US bond yields rose (on anticipation of the United States Federal Reserve tapering its quantitative easing measures) to a high of 4.1% from 3.1% in mid-2013.

This will limit growth prospects and share price performance, which hinges on new asset acquisition.

The reversal in bond yields has also caused MREIT spread to expand. MREITs could be facing weaker rental reversions as tenants combat rising cost issues and office space glut in the Klang Valley.

Meanwhile M-REITs may see yields moving towards the historical average spread over 10-year Malaysian Government Securities yields of 314 basis points (+70basis points).

The re-entry point would be when the bond market/yields start showing signs of stabilisation, probably in second half of 2014 as uncertainty over the US Fed’s monetary policy subsided.

Electricity tariff and assessment rate hikes in 2014 were negative for M-REITs as oversupplied office market made it difficult to pass on the extra costs presently.

REITs with solid fundamentals, visible asset pipelines from sponsors and good valuation buffers to cushion the impact of a sudden surge in bond yields would be prefer.

Blue Chips

The past 12 months (Jan – Dec 2013) had seen a great run for the stock market, with the FTSE Bursa Malaysia FBM KLCI registering more than 10% gain for 2013.

But the surge in blue chip stock prices had pushed dividend yield for quality companies down to their lowest level since 2009.

Yield play has lost some of its appeal, with prices of REITs taking a hit in 2HFY2013 amid a switch to the bond market.

The yield of benchmark 10-year MGS is expected to be at between 4.2% and 4.25% in 2014.

Yield-hungry stock investors were better off chasing smaller companies with consistent generous payouts.

Although the spread between Malaysian REITS and MGS had been consistently narrowing due to abundant liquidity hunting for yield, trends were now (Jan 2014) reversing with data showing expansion in yield spreads going forward.

About EcoWorld ... Trades At Whopping PER Of 46 Times 2013 Earnings .

For the 12 months ended September 30 2013, Eco World’s net profit was up by more than 300% to RM24.26 million from RM7.20 million in the same period the previous year.

Despite the profit increase, Eco World now (06 Jan 2014) trades at a PER of 45.82 times. Meanwhile, SP Setia, the country’s top developer, trades at a P/E ratio of 16.45 times, and its forward P/E ratio for this year is 13.23 times.

The benchmark FTSE Bursa Malaysia KLCI currently (06 Jan 2014) trades at a PER of 17.71 times.

This means that Eco World's earnings must go up at least three times for its P/E ratio to be in line with the market's average.

World's premium attraction is its landbank.

Prior to gaining control of the listed entity, the privately-held Eco World had purchased a staggering 1,214ha in Johor and Kuala Lumpur for more than RM600 million, some of it from DRB-HICOM Bhd.

The gross development value of this landbank is estimated at RM30 billion, eclipsing that of some established listed entities.

Beyond that, the company has been linked to be a proxy of Liew senior, and the controlling stakeholder of DRB-HICOM.

Nothing has materialised thus far, but there is enough spice to keep the market guessing and punters speculating.

Tenaga - cost pass through

The 15% electricity tariff hike in Peninsular Malaysia since Jan 1 2014 this year marked the beginning of a fuel cost-pass-through mechanism executed by Tenaga.

The Energy Commission and MyPower Corp, the regulators set up to drive reforms in the Malaysian electricity supply industry, decided that a full fuel cost-pass-through mechanism will be implemented eventually, which means consumers will ultimately have to bear with changes in the fuel cost.

The cost-pass-through mechanism is definitely positive for Tenaga which will reduce its earnings exposure risk to fuel costs making operational efficiency the key deciding factor to its bottom-line.

Under the plan set by MyPower, prices for piped gas, imported liquefied natural gas (LNG) and coal will be reviewed half-yearly while the base tariff will stay until 2017 for the next review.

While a review on the tariff structure is expected every six months, expect the existing tariff to stay at least throughout 2014 given the wave of subsidiy cuts, resulting in rising living cost and inflationary pressure.

O&G Supporting Companies - more contracts to come in 2014

Around RM30 billion of domestic contracts were dished out in 2013, a far cry from the RM10 billion contract wins in 2012. More contracts are to come in 2014.

Offshore support vessel (OSV) and jack-up rig contracts could be in the forefront as many OSV contracts have been up for tender since the end of the third quarter 2013. The jack-up rig scene would continue to heat up as many of the Malaysian new jack-up rigs would be entering the market come mid-2014.

Assuming a positive decision on the final investment decision for the RAPID project, the downstream-related stocks would enjoy renewed investors' interest. The final investment decision for RAPID project is expected by the first quarter of 2014.

Given its significance to the Malaysian economy, all efforts will be taken to ensure that the project is good-to-go.

In anticipation of a more positive outlook for Pengerang, Dialog Group Bhd would likely move ahead with the LNG terminal for the Pengerang project.

Compugates

Five years after undergoing a RTO, it is new ventures in agriculture, property development and house brand consumer electronic products.

It is growing the company’s premium gaharu tea business, which will sustain the company’s profitability in the long term.

It is also unlocking the value of its two parcels of land in Dengkil – a 10ha leasehold agricultural land with a market value of rm60 million and a 15.2ha piece of commercial land with a market value of rm100 million.

On news reports that Compugates is going into a JV arrangement to develop the land with Tan Sri Halim Saad’s companies, it has talked to Halim but nothing has come out of the talks yet.

The company has been working on diversifying its business. It is still working on expanding its core business of distributing consumer electronics and telecommunication services with new products.

Other developments include its venture into the integrated, standalone solar powered systems for households and public facilities that are out of the main power grid’s reach.

Goh and Chan have reduced their combined stake from 31.91% stake to 26.9%.

The company has been making losses for the past few years … but managed to return to the black in the third quarter 2013 with a net profit of rm5.37 million despite a sharp drop in revenue due to reduction of sales and marketing cost.

What's NEXT For Market as at 06 Jan 2014 ..

Index linked stocks and blue chips may continue to rule the market on Monday (06 Jan 2014) if they are still considered as overbought due to their rise over the past month (Dec 2013) on window dressing activities.

The fell of the local market (27 Dec 2013 – 03 Jan 20014) was in line with most regional markets which were consolidating after rising to their highs in recent weeks on more positive global economic data.

But in addition to these two factors, the local market sentiment may be hit if senior government politicians and their followers heed UMNO Selangor's proposal to demonstrate outside Catholic churches during their prayers on Sunday (05 Jan 2014) as this may stir up unwarranted religious tension in Malaysia.

The KLCI was expected to go into range bound profit taking ahead of the upcoming CNY after breaching the 1850 support, dampened by slow manufacturing data from China, regional currency concerns.

Despite the weakness there is no technical evidence of a serious downleg.

Though Bursa may fall further due to global risk aversion, investors can consider accumulating more on weakness as the bulls would start charging again soon, riding on the January effect when fund managers usually start building up their portfolios.

Investors are advice to look at loner term. Using a classical 10 year secular bull market theory (the bulls are getting stronger on the last five years prior to 2014 as momentum rise), 2014 should represent the sixth year of Bursa bull market which means investors could be looking at very strong gains years ahead after a temporary sideways consolidation (as seen in KLSE 1987 – 1992 before the roaring bulls occur in 1993. 1994 and 1995).

Technically as long as the KLCI stayed above the six year uptrendline (using the low of 2009, 2011 and 2013) near 1750 level, the secular bull market could be expected to continue.

Based on the daily chart, the FBM KLCI had now (06 Jan 2014) fallen below the immediate 14-day simple moving average (SMA) and the 21-day SMA, but the bull run that started at the tail-end of the collapsed of Lehman Brothers and the subprime crisis in October 2008 at the 801.27 points level, still is constructive.

The index will consolidate below its resistance of 1840 to neutralize the overbought gains after falling 43 points from the new record high of 1882 level.

The KLCI will re challenge the 1882 resistance level once profit taking is fully absorbed.

Initial support is seen at the 50-day SMA of 1,820, followed by the 1,800 points. A crack of the lower 100-day SMA of 1,792 points would see the 200-day SMA of 1,769 points and the 1,747-1,750 points band becoming vulnerable.

A breach of the 1,882.20-point barrier would open the gate for the bulls to explore unknown territory.

Potential headwinds for the market include gradual withdrawal of foreign liquidity pursuant to the commencement of QE3 tapering as well as Malaysia’s weak albeit improving current account situation may put a cap to the prevailing above mean market valuation going forward.

Going Into 2014 …

The global economic outlook is improving with the US economy showing good signs of recovery.

The improving global economy has given the US Fed enough confidence to start reducing its asset purchase programme with effect from Jan 2014.

Meanwhile investors should start looking at export oriented industries and companies that are poised to beneficiaries of the recovering global economy.

Despite that, the overall view of the Malaysian market in 2014 will be a volatile journey.

Firsts half of 2014 will be cautious mainly on concerns over the impact of US QE tapering. QE tapering may have a negative impact on the Malaysian bond market which may result in weakness in the ringgit.
Equities with high foreign shareholdings may also be negatively affected.

Other short term headwinds will be the continuation of subsidy rationalization and credit tightening which may impact domestic consumption growth and the full impact of BNM Malaysia’s measures to cool personal and property borrowings.

Inflation will remain elevated through to 2015 with further subsidy rationalization and the implementation of GST in April 2015.

Second half of 2014 is more positive. Expect corporate earnings growth to drive better market performance in the second half 2014.

For the emerging markets, 2014 could be an important year for many emerging markets, establishing trends that could play out through much of the remainder of the decade.

The Chinese government initiatives announced in late 2013 could have far reaching significance. The proposed changes intended to facilitate sustainable economic growth in China.

A number of major emerging markets will see major elections in 2014 – Indonesia, South Africa, Thailand and India in the first six months of 2014. As the electoral cycle peaks, the administrations may feel more able to address barriers to long term growth and retreat from populist measures.

WCT (Risks Already Factored In AT Current Valuations)

At rm2.14 it is valued at only 10.4 times forward earnings and 1.15 times book value.

At these valuations, which are well supported by fundamentals, WCT could be a stock worth holding. While there is poor visibility on order book replenishment at the moment, any news of potential jobs would be a re rating catalyst for the stock.

In the meantime, the group’s rm3 billion order book ensures that its earnings can be sustained in 2014.

In Dec 2013, the EPF has trimmed its holdings by more than 12 million shares or 1.13% bringing its stake to 10.97%. Tabung Haji has been a net buyer buying up some 16 million shares in the same period to 9.21%.

Meanwhile, its founder and largest shareholder, Taing Kim Hwa picked up about 250000 shares in the open market in late Dec 2013.

The immediate potential catalyst for WCT is the rm1 billion tender for a road project in Oman. However, there is a little uncertainty over the project which was supposed to be awarded late 2013, but has since been delayed.

WCT’s current (01 Jan 2014) share price has already factored in the possibility that it will not get the job. That goes to say even if WCT fails to bag the Oman job, its share pr ice should not drop further. The Oman job would be a nice bonus, but the bulk of its order book replenishment will likely come from local jobs that have higher margins.

For 2014, should be slightly better for WCT as there are quite a number of projects that it can benefit from and it is one for the more cost competitive players out there.

Potential projects for WCT are the final phase of the Gemaas-Johor Baru double tracking and electrification works, the Putrajaya building works and the next MRT line.

However, it is not going to be an easy year for the construction sector.

It has a healthy order book of rm3 billion.

The negative sentiment on the property sector has also weighed down on WCT. However WCT could be sheltered from the worst of it. Many of the group’s developments are in Medini, Johor, which has been designated as a special economic zone in Iskandar Malaysia and is exempted from Budget 2014’s various property cooling measures.

Its recurring income base is posed to widen in 2014 with the opening of the Gateway@KILA2 mall at the new LCCT, which is scheduled to open by May 2014. If not opened, WCT should receive compensation for any delays.

All in all, WCT current (06 Jan 2014) valuations with most of the risks already factored in and earnings secured.

MAS - Uncertainty

Its higher loads were achieved at the expense of yields.

It was reported improved load factor for the month Nov 2013 up 1.6% year on year to 76.4%. The higher load factor was attributed to higher passenger loads to 80% despite the sharp increase in passenger capacity.

While MAS has succeeded in driving loads to record highs in recent months, this was accompanied by a sharp deterioration in yields.

MAS’ strategy of passenger price discounting had significantly improved load factor, but did not result in economies of scale as unit costs did not budge.

MAS is still trying to find its footing following its entry into the oneworld alliance with more efforts focusing on costs only in 2014.

The group’s fourth quarter was said to be strongest quarter due to stronger traffic with the approach of the holiday season, but observers remain sceptical of the group’s cost cutting efforts in 2013.

In effective cost management, forex volatility and jet fuel prices amidst a competitive operating environment are key risks to MAS’ turnaround plans.

Unisem (Despite Cost Cutting Measures)

The worst maybe over for the company.

After two consecutive years of financial losses, management guided that the worse could be over as the group has restructured itself and is in a position to sail back into profitability in 2014.

Over the past few quarters, management has focused on product discontinuation of low volume products and has sought to raise average selling prices (ASPs) for others. Unisem had also further rationalised its headcount in Batam and decided to shut its Wales operations.

Unisem anagement’s decision to close its Europe plant was due to: 1) Wales being no longer profitable; and 2) having adopted a new business strategy where management are more focus towards top tier and mid customer rather than new entrants in the industry.

Collectively, Batam and Wales have been a drag to Unisem to the tune of RM15mil to RM20mil in losses over the past few years.

The management guided that the turnaround in Batam plant was already bearing fruit and had turned earnings before interest, tax, depreciation and amortisation (EBITDA) positive in November 2013.

Expect Unisem to register its final quarter of loss in 4Q13 on further restructuring charges, but expect a sharp turnaround in profitability in 2014 due to Unisem’s leaner operating structure.

Without losses from Wales and Batam as well as continued profitability from its Ipoh and China units, Unisem can achieve a FY14 net profit.

Nevertheless, despite being in the same industry, the performance of UNISEM and MPI could not be more different. This is because the two semiconductor players focus on different areas of the industry.

Both companies are export based with exposure to the US dollar, yet UNISEM continues to be loss making while MPI’s earnings are rising.

The divergent fates of the two companies could be attributed to their product mix.

Unisem caters for the auto industrial, communications, PC and consumer electronics segments whereas MPI focuses on the smartphone and tablet and PC segments, where demand is higher and the profit margins better.

That is what makes UNISEM different from other companies in the industry.

The smartphones and tablet segment contributed 36% to MPI’s revenue in 1QFY2014 ended Sept 30, up from 33% a year ago, while UNISEM, its consumer segment was its largest revenue contributor, accounting for 29% in 3QFY2013 ended Sept 30.

The areas UNISEM focuses on may have contributed to its lower utilization rate. By comparison, MPI’s utilization rate has been improving over the last two quarters – it was 82% to 83% in 1QFy2014.

For companies in the semiconductor industry, the most important thing is to boost their utilization rate. The threshold differs from company to company but generally, UNISEM’s utilization rate is lower which is possibly why there has been no profit translation.

It was reported that MPI’s successful transition to high margin businesses and stringent cost controls should continue to keep the company in the black.

Based on sales by end product, the revenue of MPI’s smartphone and tablet division grew while that of its PC division expanded. Whereas UNISEM says the continued poor performance was due to low sales volume and a drop in average selling prices.

UNISEM still lacks re rating catalysts for now (Nov 2013) and that most of the negative factors including its bleak near term outlook should have been priced in

Ho Hup (Betting For Turnaround)

Observers expect a strong turnaround for Ho Hup Construction Company Bhd for financial years 2013, 2014 and 2015 respectively.

It is poised to make a comeback after an extended break from the property and construction scene, following a lengthy corporate turnaround exercise.

The financial regularisation exercise is near completion to uplift Ho Hup Construction from the PN17 status, which will enable the company to reap benefits from the development of its crown jewel, the 60-acre (approximately 24 hectares prime land in Bukit Jalil, Kuala Lumpur.

The commercial freehold land of 10 acres (four hectares) belonging to Bukit Jalil Development Sdn Bhd's and 50 acres (20 hectares) of joint development land, is the main driver for the company's future earnings.

While Ho Hup Construction will have the sole development right to Bukit Jalil Development's land, a joint development agreement was signed between it and Malton Bhd for the joint development land.

Under the joint development agreement Ho Hup construction will be entitled to 18 per cent of the gross development value (GDV) of RM2.1 billion or a minimum of RM220 million from Malton, as well as a cash advance of RM80 million.

Currently (Dec 2013), a revised master plan for the joint development land has been submitted and is pending approval, with the revised GDV estimated at more than RM4.0 billion from RM2.1 billion at present.