Market Dateline PP 7767/09/2010(025354)

RHB Research Institute

RHB Equity 360°

2 September 2010 (Earnings review, Banks, Sunway, Kencana, SapuraCrest; Technical: Gamuda)

Top Story : Earnings Review/Strategy – Earnings beat our expectation; but global recovery fears persist
Strategy Update
- The 2Q report card was slightly better than our expectation. This was reflected primarily in the banking
results, which were largely boosted by lower-than-expected allowances for impairment on loans. Of the 105
companies that we covered, 63 (60% of the total) were within our expectations, 23 above projections
(21.9% of the total) and 19 below forecasts (18.1% of the total).
- Sequentially, net EPS for the FBM stocks under our coverage was sustained at +6.2% qoq in the 2Q
(+6.4% in the 1Q). However, on a yoy comparison, net EPS for the FBM KLCI stocks accelerated to
+60.8% in the 2Q, from +31.7% in the 1Q, pointing to sustained recovery in earnings.
- 2010’s net EPS for the FBM KLCI stocks under our coverage has been revised up to +23.5%, from +18.3%
two months ago. This was largely on account of the upward revision in earnings in the banking, telecoms
and gaming sectors. However, our 2011’s net EPS growth forecast was adjusted down to +12.3%,
compared to +14.4% previously, largely on the back of a higher base effect.
- Meanwhile, investors in emerging markets appear to have ignored warning signals coming from the
developed world due partly to funds switching out from developed to emerging markets. As a result,
equities in the emerging markets continued to trend up. In our view, this may not be sustainable given
slowing economic growth. Consequently, we continue to believe that the equity market may move into a
phase of greater volatility in the months ahead.
- Nevertheless, we see potential for the FBM KLCI to trade up to 1,450 by end-2010, based on unchanged
14.5x 2011 earnings. As we head towards 2011, we believe there is still room for the market to trend higher
given our view that the global economic recovery is more sustainable than feared. This would imply
sustained corporate earnings growth will continue to create shareholders’ value for investors. On this basis,
a mid-cycle PER of 15x on 2012 earnings would translate into an end-2011 FBM KLCI target of 1,640.
- Overall, we believe it is a good time for investors to do some top slicing, which would provide more room
for investors to accumulate fundamentally-robust stocks on weakness.

Sector Call

Banks : 2QCY10 report card – Lower impairment allowances for loans help beat forecasts Overweight
Sector Update
- 2QCY10 earnings gathered further momentum, with five of the eight banking stocks that we cover reporting
quarterly numbers that beat our as well as consensus expectations.
- The most common variance was due to lower-than-expected impairment allowances for loans (Affin, AFG,
AMMB and HL Bank). Other causes for the stronger-than-expected results were: 1) strong non-interest
income contribution (AMMB); 2) overheads that were well controlled (EON Cap); and 3) lower-than-
expected effective tax rate (HL Bank).
- Following from the above, 2QCY10 reporting season resulted in another quarter of record aggregate profit
(+5.3% qoq; +33.5% yoy) being reported for the domestic banking system.
- In our view, the positives from the recent round of results outweighed the negatives, and include: 1) loan
growth gathered further momentum; 2) NIM expansion (+6bps qoq; +9bps yoy); 3) absolute overhead level
was broadly stable qoq. Consequently, CIR fell to 47.2% from 48.4% in 1QCY10 on an enlarged income
base; and 4) lower loan loss provisions (-0.9% qoq; -51.1% yoy).
- Non-interest income, however, was down marginally qoq and yoy. In addition, absolute gross impaired
loans rose 1.6% qoq (+18.8% yoy) with another two banks, AMMB and AFG, adopting FRS139 during the
quarter while annualised net impaired loan formation increased by another 22bps qoq to 138bps.
- The 2QCY10 results coupled with BNM’s recent banking stats for Jul has helped reinforce our Overweight
stance on the sector.

Corporate Highlights
Sunway Holdings : Secures a RM70m Putrajaya infrastructure contract Outperform
News Update
- Sunway has secured a RM69.9m infrastructure contract in Putrajaya.
- The latest contract has boosted Sunway’s YTD new contracts secured to RM607m and its outstanding
construction orderbook by 3.5% to RM2.1bn.
- On an EBIT margin of 7-8%, the contract will fetch total EBIT of RM4.9-5.6m over the construction period.
- No change in our forecasts that assume Sunway to secure RM1.5bn worth of new contracts in FY12/10.
- Fair value is RM2.35. Maintain Outperform.

Kencana : New contract awards Market Perform

News Update
- Kencana announced yesterday that it had won two Hook-up and Commissioning (HUC) jobs amounting to
RM32m for fields located offshore Malaysia. This is its 8th contract win since Apr. Although small, we are
positive on the win as we were guided that HUC projects typically command premium net margins of 15%
vs. traditional fabrication works that have net margins of around 10%. Assuming 15% margin, the contract
awards would generate net profits of RM4.8m.
- No change to forecasts at this juncture, as our assumptions already factor in new contracts for FY10-12.
- While things are looking increasingly positive for Kencana, we opt to be conservative at this juncture in
terms of valuations as we are still wary on the slow pick-up in offshore greenfield activity. Our FY11-12
forecasts already incorporate the prospective earnings uplift from the start-up of KM-1. We maintain our
Market Perform call on the stock and fair value of RM1.56/share based on an unchanged 13x FY11 PER.

SapuraCrest : Charters for T-6 and T-10 drilling rigs Market Perform
News Update
- Sapuracrest announced yesterday that two of its drilling rigs, the T-6 and T-10 that faced expiring contracts
in FY10, have been awarded new contracts. The T-6 was awarded a US$85m (RM269.5m) 28-month
contract from existing client CPOC; while the T-10 was chartered by Seadrill UK on bareboat basis for the
duration of 24 months at a contract value of US$49m (RM155.3m).
- T-6 rates sustained but T-10 rates are lower. The T-6 contract translates to a charter rate of US$99k per
day (slightly lower than the previous US$101k day rates). However, the T-10 rates are now around
US$65k; 29% less than the previous per day charter rate of US$92k. We suspect this could be due to the
new contract being on bare-boat basis rather then on a full service basis. The new T-10 charter rates are
lower than our assumed per day charter rates of RM104.1m p.a..
- FY12-13 EPS forecasts trimmed by 2.1% and 2.0% respectively as the contracts will take effect late-CY10.
- Fair value trimmed to RM2.41 (vs. RM2.46 previously) based on FY01/12 PER. Maintain Market Perform.

Technical Highlights

Daily Trading Strategy : Supports seen near the 10-day SMA and 1,400…
- Despite the last-minute push-up from its day low of 1,425.10 (+2.61 pts), the FBM KLCI still ended the day
with an “evening star” candle to suggest a potential pullback today.
- This means if profit-taking activities on the key heavyweights intensify, the benchmark could ease to retest
the immediate downside support near the 10-day SMA of 1,405 and the 1,400 psychological level soon.
This is followed by a resistance-turn-support level at 1,390.
- However, so long as it can sustain at above these levels with robust daily turnover at between 800m –
1.0bn shares, buying momentum can return swiftly to lead another rally, in our view.
- On the upside, the FBM KLCI will head towards yesterday’s high of 1,436.73 and 1,450 if the buying
resumes quickly today on the back of the overnight Wall Street and European markets’ strong rally.

Daily Technical Watch : Gamuda – Bullish scenario ahead with a fresh rally underway…
- 10-day SMA: RM3.402
- 40-day SMA: RM3.353
- Support: IS = RM3.33 S1 = RM3.06 S2 = RM2.59
- Resistance: IR = RM3.64 R1 = RM4.10 R2 = RM4.65
 Bulletin Board

Co/Sector News Impact Recom

AEON AEON Co Ltd, will bid for the Thai, Malaysian Neutral. We believe it is still too early to make MP, FV =
and Singaporean operations of French retailer any assumptions out the outcome. We believe RM5.28
Carrefour. The purchase would almost triple its two scenarios could happen: 1) AEON Co. injects
outlets in the three Southeast Asian nations. Malaysia’s Carrefour stores into AEON (M), in
(Reuters) which case we expect a corporate exercise by
the latter to raise cash; 2) Aeon Co. retains
management of Malaysia’s Carrefour. Either way,
we are leaving our forecasts unchanged for now,
pending more information on the matter.
Petra Petra Perdana’s shareholders have approved the Positive. Post the rights issuance, assuming the UP, FV =
Perdana proposed renounceable rights issue of new company sticks to plans of utilising around 75% RM0.50
ordinary shares together with free detachable of the proceeds for debt repayment, cumulative
warrants. The renounceable rights issue, on a debt will be reduced by RM39.6m-52m, and net
basis to be determined later, is expected to raise debt will be pared down to around 0.4-0.3x.
proceeds of RM53-69.56m. (Business Times)
Naim Naim Holdings has finally announced the Positive. Management told us that they will have NR
Holdings contract win for Sabah Oil and Gas Terminal a 30% stake in the JV that won the project with
(SOGT) project from Petronas Carigali S/B Samsung Engineering. The company also guided
yesterday. (Bursa Malaysia) for PBT margins of 12% for the project. As such
this will lift its net earnings by around RM29m
p.a.. The project is slated to be completed by
end-2013. We expect oil and gas awards to gain
momentum going into the tail-end of FY10. While
this bodes well for the sector, we expect the new
wins to impact companies’ earnings only in FY11.

Important Dates

Company Entitlement details Ex-date Payment date

New entitlements
KPJ Interim dividend of 3.25 sen less 25% tax 28-Sep-10 14-Oct-10

Going “ex” on 3 Sep

Tai Kwong Yokohama Share split on the basis of 1-into-2 3-Sep-10 -
LNG Resources Interim tax exempt dividend of 1 sen 3-Sep-10 21-Sep-10
Telekom Malaysia Interim gross dividend of 13 sen less 25% tax 3-Sep-10 24-Sep-10
Aliran Ihsan Resources Single tier second interim dividend of 13 sen 3-Sep-10 30-Sep-10

...For more details, see individual reports attached

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The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more over a period of three months, but fundamentals are not
strong enough to warrant an Outperform call. It is generally for investors who are willing to take on higher risks.

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

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