Small Cap Update 091210-Playing Catch Up With the Big Boys

8/8/2019 Small Cap Update 091210-Playing Catch Up With the Big Boys

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Please read carefully the important disclosures at the end of this publication.

SECTOR UPDATE

9 December 2010

CIMB Research Report

OVERWEIGHT MaintainedSmall CapPlaying catch-up with the big boys?

MALAYSIA

Nigel Foo +60(3) 2084 9293 - [email protected]

Playing catch-up? Our universe of small-cap stocks did much better in the 3Q10reporting season than in the previous quarter. Out of the 19 small caps that wecover, only 27% failed to meet our expectations compared to 33% in 2Q.Furthermore, 21% topped our expectations compared to only 17% in the previousquarter. Performance-wise, the FBM Small Cap Index (SCI) underperformed theKLCI but started to catch up in early Oct. From Oct to Nov, the SCI outperformedthe KLCI, gaining 3.4% compared to a 1.6% rise for the latter. The small capsremain attractively priced, trading at an average CY11 P/E of 8.3x (ex-MTD ACPI)compared to 14.4x for the KLCI. We continue to OVERWEIGHT the sector.Muhibbah Engineering, which we began covering in mid-Nov, replaces LatexxPartners as our top pick among the small caps.

An improved quarter. The results of the small caps in the 3Q10 reporting seasonwere much better than the previous quarter. Out of the 19 small caps that we cover,27% failed to meet our expectations, down from 33% in 2QCY10. Furthermore, 21%beat our expectations compared to only 17% in the previous quarter.

Small Cap Index (SCI) outperformed since early Oct. In Jan-Nov 10, the SCIoutperformed the KLCI, gaining 17.9% compared to a 16.8% rise for the KLCI. In3Q11, it underperformed but started to catch up from early Oct onwards. From Octto Nov, the SCI outperformed the KLCI, gaining 3.4% compared to the latters 1.6%rise.

Muhibbah is our top pick. Our search for construction laggards throws upMuhibbah Engineering, a midsized contractor that has diversified into cranes,shipbuilding and airport/road maintenance concessions. This stock is now our topsmall-cap pick. We continue to rate it a Trading Buy with a target price of RM2.00,which imputes a 20% discount to its RNAV. Muhibbahs outstanding order book ofRM3bn is good for another three years and has room for upside as the group isactively bidding for jobs, both locally and overseas.

Sector comparisons

Target Core 3-yr EPS P/BV ROE Div

Bloomberg Price price Mkt cap P/E (x) CAGR (x) (%) yield (%)ticker Recom. (Local) (Local) (US$ m) CY2011 CY2012 (%) CY2011 CY2011 CY2011

Adventa ADV MK O 2.14 3.73 103 7.1 5.5 26.9 1.0 15.0 3.0Asia File AF MK O 4.38 6.36 160 6.8 6.3 11.5 1.3 19.7 7.5

CI Holdings CIH MK O 3.65 4.75 167 13.6 12.3 10.2 4.6 35.6 3.3Daibochi DPP MK O 2.62 3.72 63 7.9 6.8 8.9 1.3 17.1 8.7RGB RGB MK U 0.06 0.06 22 13.5 7.9 162.1 0.7 5.5 0.0Eksons EKSON MK O 0.99 1.26 51 4.0 3.2 46.0 0.4 10.6 6.9JobStreet JOBS MK O 2.91 3.73 293 19.7 17.6 24.2 5.4 29.7 3.3Latexx LTX MK O 2.65 3.37 183 6.1 5.6 23.2 1.8 33.0 4.2MTD ACPI ACP MK U 0.51 0.32 37 30.5 11.5 181.4 0.7 2.4 1.8Muhibbah MUHI MK TB 1.29 2.00 162 9.7 8.5 59.0 0.9 8.8 2.3Pelikan PELI MK N 1.21 1.40 196 8.1 6.2 51.7 0.7 8.5 1.5Tomypak TOMY MK O 1.01 2.00 35 4.4 4.0 7.9 1.0 25.8 8.4Uchi UCHI MK O 1.32 1.60 157 10.0 9.1 12.8 2.7 27.8 10.6UM Land UML MK O 1.65 2.11 130 9.5 9.8 8.6 0.5 4.8 3.9Wellcall WELL MK N 1.20 1.22 50 9.1 8.2 11.2 2.0 22.1 13.1Xingquan XISH MK O 1.51 3.04 147 3.2 3.0 15.4 0.9 30.3 4.6Simple average 9.7 7.3 44.1 1.4 17.8 5.7

O = Outperform, N = Neutral, U = Underperform, TB = Trading Buy and TS = Trading SellSource: Company, CIMB Research


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Share price performance

Small Cap Index outperformed since early Oct. In Jan-Nov 10, the SCIoutperformed the KLCI, gaining 17.9% compared to a 16.8% rise for the KLCI. In3Q11, it underperformed but started to catch up from early Oct onwards.

Interest shifted towards selected small caps the past two months. We believethat investor interest in the past two months has shifted towards selected small-capstocks as the major index-linked blue chips consolidated after the strong rally in Aug-

Sep. In Aug-Sep, the KLCI surged 7.5% whereas the SCI lost 3.5%. However, fromOct to Nov, the SCI outperformed the KLCI, gaining 3.4% compared to a 1.6% rise forthe latter.

Figure 1: Performance of SCI and KLCI (Jan-Nov 2010)

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100

110

120

130

Dec-09 Feb-10 Apr-10 Jun-10 Aug-10 Oct-10

KLCI FBMSC

Source: CIMB Research

Figure 2: Performance of SCI and KLCI (end-Sep to end-Nov 2010)

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100

105

110

Sep-10 Oct-10 Nov-10

KLCI FBMSC


Weekly charts show uptrend is intact. The SCIs weekly chart shows that the indexremains in an uptrend that began at end-May. It is holding above the support trend

line, which is currently at 11,900pts. As long as this support trend line holds, the indexwill remain on its upward trajectory. We would only turn cautious on the SCI if it wentbelow its support trend line and the 40-week SMA support, which is currently at11,390pts.


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Figure 3: FBM Small Cap Indexs weekly chart (12,168)

Source: CIMB Research, Bloomberg

Same top three gainers YTD. The top three gainers in Jan-Nov 10 remain the samestocks CI Holdings, Jobstreet and Tomypak. In early Sep, the top gainer YTD wasTomypak but the stock corrected sharply in Sep-Nov, mainly due to concerns overrising raw material costs, particularly polyester prices since Sep.

CI Holdings, now the top gainer YTD. Pipping Tomypak to the top gainer spot is CIHoldings, which has gained 113.5% YTD. Looking at the losers, we are particularlydisappointed with two rubber glove stocks, Latexx and Adventa. Although they haverecovered some of the lost ground over the past two months, they remain among thebiggest losers YTD.

Top gainers the past two months include Muhibbah Engineering. In the last twomonths, the top gainers in our small-cap universe included Muhibbah Engineering,Jobstreet and Latexx Partners. We initiated coverage on Muhibbah, a midsized

construction stock in mid-Nov with a Trading Buy recommendation. The two biggestlosers in the past two months and a big letdown for us, were the flexible packagingstocks, Daibochi and Tomypak Holdings which fell 13-21% in the last two months

MACD& RSI negative divergence since 3Q09


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Figure 4: Share price performance for Jan-Nov 10 (%)

-63.6%

-33.8%

18.7%

25.6%

29.0%

47.4%

106.4%

113.5%

-1.5%

-3.9%

-8.4%

-11.4%

2.0%

13.9%

18.6%

-12.1%

-80% -60% -40% -20% 0% 20% 40% 60% 80% 100% 120% 140%

RGB

Adventa

Latexx

Asia File

Wellcall

Pelikan

Uchi

MTD-ACPI

Daibochi

Eksons

UMLand

Xingquan

Muhibbah

Tomypak

Jobstreet

CI Holdings



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Figure 5: Share price performance for end-Sep to end-Nov (%)

-0.215384615

-0.129568106

-0.125

0.044303797

0.085106383

0.106557377

0.233050847

0.433

-0.004329004

-0.005025126

-0.034391534

-0.03649635

-0.061538462

-0.0625

-0.079

-30% -20% -10% 0% 10% 20% 30% 40% 50%

Tomypak

Daibochi

Adventa

Xingquan

Wellcall

Pelikan

Uchi

CI Holdings

Eksons

Asia File

UMLand

MTD-ACPI

Latexx

Jobstreet

Muhibbah



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Analysis of 3QCY10 results season

Better than previous quarter. Our universe of small-cap stocks did much better inthe 3Q10 reporting season than in the previous quarter. Out of the 19 small caps thatwe cover, only 27% failed to meet our expectations compared to 33% in 2Q.Furthermore, 21% topped our expectations compared to 17% in the previous quarter.

Figure 6: Comparing small caps 3QCY10 quarterly results with our and consensus expectations

vs.our forecast vs.consensus

Above In line Below Above In line Below

Asia File

CI Holdings

Daibochi

RGB International NA

Ekovest NA

Eksons

Hunza Prop

Jobstreet

Latexx

Muhibbah MTD-ACPI NA

Notion

Pelikan

Suria

Tomypak NA

Uchi

Wellcall

UM Land

Xinquan NA

Source: Bloomberg & CIMB Research

But getting worse relative to consensus. However, compared to consensus, theresults trend continued to deteriorate. In Nov, 33% of the 15 companies for whichthere are consensus numbers failed to meet expectations compared to only 14% in2Q. In 1Q10, every company met consensus expectations.

Figure 7: Small caps 3QCY10 results vs. our and consensus expectations

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Below Exp

In Line

Above ExpOur forecast Consensus



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Figure 8: Small caps 2QCY10 results vs. our and consensus expectations

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Above Exp

In Line

Below ExpOur forecast Consensus


Changes in our stock universe. There were a few changes in our small-capuniverse this quarter. We dropped coverage on Notion VTEC, Suria Capital, HunzaProperties and Ekovest but initiated coverage on Muhibbah. The lastrecommendations before we dropped these stocks were Underperform for NotionVTEC and Ekovest, Neutral for Suria Capital and Outperform for Hunza Properties.

Figure 9: Changes in coverage (Sep-Dec 2010)

Date Recom- Comments

mendation

Initiate coverage

11-Nov Muhibbah Eng TRADING BUY TP at RM2.00, 20% discount to RNAV

Cease coverage

29-Oct Notion VTEC cease coverage Lack of visibility & limited access to management

29-Nov Ekovest cease coverage Challenges in landing major jobs,

order book only RM400m

1-Dec Hunza Prop cease coverage Lack of institutional interest

1-Dec Suria cease coverage Lack of institutional interest


Only one downgrade in Nov. Over the past three months, there was only onedowngrade. We cut Wellcall from Outperform to Neutral due to the sharp price rise forraw materials such as SMR20 which has risen more than 30% in the last 3-4 months.This leads to a margin squeeze as there is a 2-3 months lag period before Wellcall isable to pass on the cost rise to its customers. Orders for its products remain strong.But management is concerned that orders may slow down if raw material prices stayat the current high levels as customers fear that they could be caught with high-pricedinventory when prices come off eventually.


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Figure 10: Recommendation or target price changes (Sep-Nov 10)

Date Recom- Comments

mendation

Downgrades

18-Nov Wellcall OP to N TP cut from RM1.82 to RM1.22, FY10-12 EPS

cut 7-17%,target valuation changed from 30%

to 40% discount to Top Glove's 13.8x P/E target

Change in target prices28-Sep Adventa Maintain OP TP cut from RM4.45 to RM3.73, roll forward, FY10-12

EPS cut 9-12%, target valuation changed from 20%

to 30% discount to TopGlove's target P/E

26-Oct Tomypak Maintain OP TP rise from RM1.98 to RM2.00, FY10-12 EPS cut 2-24%,

rollover, target valuation maintained at 30%

discount to Daibochi's target P/E

26-Oct Daibochi Maintain OP TP rise from RM4.60 to RM4.85, FY10-12 EPS cut

2-22%, rollover, target valuation maintained at 20%

discount to target market P/E

28-Oct CI Holdings Maintain OP TP raised from RM4.20 to RM4.25, rollover to end-11,

valuation basis remains 10% discount to target market P/E

11-Nov Latexx Maintain OP TP cut from RM5.44 to RM3.37, FY10-12 EPS cut

20-32%, rollover, target remains 30% discount to TopGlove

18-Nov Jobstreet Maintain OP TP raised from RM2.66 to RM3.73, target valuation

changed from 20% premium to market to 20% discount

to peers or 22.6x P/E

16-Nov Suria Maintain N TP raised from RM1.77 to RM2.05 SOP,

FY10-12 EPS raised 12%

19-Nov Xingquan Maintain OP TP fall from RM3.49 to RM3.04,

FY11-13 EPS cut 8-13%,

19-Nov Daibochi Maintain OP TP reduced from RM4.85 to RM3.72, FY11-12 EPS

cut 10-11%, target valuation changed from

20% to 30% discount to target market P/E

24-Nov Uchi Maintain OP TP raised from RM1.58 to RM1.60, rollover, valuation

maintained at 20% discount to target market P/E

29-Nov RGB Maintain UP TP raised from 5.7sen to 6.1 sen, FY10-12 EPS reduced

11-23%, rollover, target valuation falls from 10x to 8x P/E

*TP-target price



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Valuations remain attractive. Small-cap stocks still offer value at current levels. Thesmall caps under our coverage are trading at an average CY11 P/E of only 9.7x. Ex-MTD ACPI which is trading at 30.5x CY11 P/E, our small-cap universe is trading at8.3x CY11 P/E, which is at a 42% discount to the KLCIs 14.4x P/E. Five of the 16stocks we cover are currently trading below 7x CY11 P/E. The stocks are Asia File,Eksons, Latexx, Xingquan and Tomypak.

Figure 11: CY11 P/E for selected small caps (x)

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0 10 20 30 40

Xingquan

Eksons

Tomypak

Latexx

Asia File

Adventa

Daibochi

Pelikan

Wellcall

UMLand

Muhibbah

Uchi

RGB

CI Holdings

Jobstreet

MTD-ACPI



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Some small caps still offer attractive dividend yields. Some of our small-capstocks continue to offer generous dividend yields. Gross dividend yields of above 7%are on offer from five companies Asia File, Daibochi, Tomypak, Uchi and WellcallHoldings. Wellcall still boasts the highest yield in our coverage at 13.1% for CY11.

Figure 12: CY10 gross dividend yield for selected small caps (%)

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1.8

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3.9

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RGB

Pelikan

MTD-ACPI

Muhibbah

Adventa

CI Holdings

Jobstreet

UMLand

Latexx

Xingquan

Eksons

Asia File

Tomypak

Daibochi

Uchi

Wellcall


Figure 13: Wellcalls 1-year forward gross dividend yield forecast

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Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10



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This months top pick

Muhibbah is a construction laggard. Our search for construction laggards throwsup Muhibbah Engineering, a midsized contractor that has diversified into cranes,shipbuilding and airport/road maintenance concessions. In addition to riding on theimproving outlook for project flows in both the local and overseas markets, Muhibbahmay soon see a resolution to the payment issue for the Asia Petroleum Hub (APH)project, which has been a major drag on its share price. The groups outstanding order

book of RM3bn is good for another three years and has more room for upside as it isactively bidding for jobs, both locally and overseas.

Our top pick this month. Muhibbah is our top pick among our small cap universe thismonth. In mid-Nov, we initiated coverage with a Trading Buy recommendation andtarget price of RM2.00, which imputes a 20% discount to its RNAV. In addition to thelikely resolution of the APH project, the share price could be catalysed by (i) better-than-expected quarterly performances, (ii) more contract wins, and (iii) a recovery ininvestor sentiment on the stock as its foreign shareholding has plunged from 41% in2007 to a low of 6% now.

Figure 14: Performance of Muhibbah relative to KL Con/IJM Corp from end-08-Nov 10)


Figure 15: Muhibbah Engineerings 1-year forward P/E (x)

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12.0

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27.0

32.0

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Dec-07 Apr-08 Aug-08 Dec-08 Apr-09 Aug-09 Dec-09 Apr-10 Aug-10 Dec-10


Muhibbah

Kl construction Index

IJM


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Figure 16: Muhibbah Engineerings weekly price chart


Investment highlights of our other small-cap stocks

Outperform recommendations

Adventa

We expect OBM to increase from 54% of sales currently to 70% of sales over the nextfew years. Adventa is also expanding its distribution of dialysis machines tocomplement its glove manufacturing capabilities. We continue to rate the stock anOutperform. Our target price is maintained at RM3.73, based on a 30% discount toTop Gloves 13.8x target P/E. Potential re-rating catalysts include 1) higher OBMglove sales, 2) establishment of own distribution channels, and 3) better product mixfrom the companys new nitrile manufacturing facility

Figure 17: Adventas 1-year forward P/E (x)

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Asia File

Asia File continues to underperform the market, which we think is unwarranted.Although revenue from its main market, Europe is flat, the group is still recordinggrowth, thanks to expansion in the local, Asia and US markets. Its acquisition ofPlastoreg three years ago has made the group the worlds largest OEM producer ofdividers and indices. This has helped the company make headway with majorstationery suppliers in the US and Europe over the past 1-2 years. We maintain ourearnings forecasts and target price basis of 30% discount to our regional sector P/E

target of 13x. This gives us an unchanged target price of RM6.36. The stock remainsan Outperform. It could be catalysed by i) more orders from US and EU customers, ii)signs of economic recovery in Europe and iii) gross dividend yield of above 7%.

Figure 18: Asia Files 1-year forward P/E (x)

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CI Holdings

CI Holdings' (CIH) Tropicana Twister has taken Malaysia's beverage market by storm.Already, it is the bestselling chilled orange juice brand with 40% market share. Tosupport new product launches and make its products more accessible, CIH has been

expanding its distribution network. The company plans to expand its distributionoutlets from 42,000 to 45,000 by Jun 11. We maintain our EPS forecasts and targetprice of RM4.75, pegged to an unchanged target market P/E of 13.8x. CIH remains aBuy, underpinned by the potential re-rating catalysts of 1) additional capacity, 2)increasingly marketable product line, and 3) M&A.

Figure 19: CI Holdings 1-year forward P/E (x)

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Daibochi

The price rise for raw materials like polyester over the past few months is a shorttermconcern given the 1-2 month lag before price increases can be passed on. Businessremains strong in view of the resilient Asian consumer market. 90% of its revenuecomes from the food & beverage (F&B) market. We continue to rate Daibochi anOutperform and our top pick for the packaging sector. Our target price is unchangedat RM3.72, based on a 30% discount to our 13.8x target market P/E. Potential re-rating catalysts include a decline in raw material costs and new contracts from major

non-F&B companies. Furthermore, the share price is backed by the high grossdividend yield of 8% for FY11.

Figure 20: Daibochis 1-year forward P/E (x)

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Eksons

Plywood earnings are stable, aided by strong demand from the Middle East, Africaand Asia. Eksons is not directly affected by the sluggish Japan and US housingmarkets. Property earnings contribution from The Atmosphere project has uststarted to contribute towards the companys bottomline. This should provide some

earnings stability for the group over the next two years. We maintain our EPSforecasts and continue to apply the 3-year average P/NTA of 0.6x to the stock, leadingto an unchanged target price of RM1.26. Eksons remains an Outperform, with thepotential share price triggers being i) higher sales for its property project, ii) a pickup inplywood prices and iii) its attractive valuations of 0.5x P/BV and 4x CY11 P/E.

Figure 21: Eksonss 1-year forward P/E (x)

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Jobstreet

We remain positive over Jobstreet as it has been raising its marketing spend tocapture market share, especially in its weakest core market, Singapore. The effortshave largely paid off down south as the job posting deficit of 4-5K relative to its largerrival has been closed. Job posting volumes are also rising in its other two coremarkets where its lead over rivals has not been eroded. Although there is a moredownbeat feel in the 4Q job outlook, most respondents are still positive about the joboutlook. We retain Jobstreet as an Outperform given the potential re-rating catalysts of

further market share gains and earnings surprises. Our target price is intact atRM3.73, still pegged to 22.6x P/E or a 20% discount to its peers.

Figure 22: Jobstreets 1-year forward P/E (x)

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Latexx

Latexxs JV with Dutch R&D company Budev B.V. has been established for almostone year and we believe the collaboration to commercialise low-protein gloves willbegin to bear fruit when latex prices moderate. This will give Latexxs JV, Total Glove,a rubber glove product that can be sold alongside its nitrile gloves. Latexx remains an

Outperform. Our target price is unchanged at RM3.37, based on a 30% discount toTop Gloves 13.8x target P/E or 9.7x P/E. Potential re-rating catalysts for the stockinclude margin improvement from a better product mix, accelerated take-up of itsultra-light nitrile gloves and commercialisation of its protein reducing technology.

Figure 23: Latexxs 1-year forward P/E (x)

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Tomypak

90% of Tomypaks revenue is derived from the resilient F&B sector, which should be astable revenue base for Tomypak in the long term. Rising raw material prices likepolyester in the past few months should lead to some profit margin squeeze thisquarter but profit margins should normalise once raw material prices stabilise. Wecontinue to value the stock at a 30% discount to Daibochis target P/E. Our targetprice is unchanged at RM2.00. The stock remains an Outperform in view of thepotential catalysts of i) profit margin recovery from 1Q11 onwards, ii) stronger-than-

expected revenue, and iii) attractive P/E valuations.

Figure 24: Tomypaks 1-year forward P/E (x)

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Uchi

Due to the outperformance in FY10, Uchi has raised its revenue growth guidance inUS$ terms from 25-30% to 33-34%. While it is still too early to provide any forecastsfor FY11 as it is meeting clients in early Dec, early indications appear to be positive.Some of its customers are placing orders as far ahead as Apr while some of the leadtimes from its customers are also increasing. We maintain our Outperform call in view

of the potential re-rating catalysts of any better-than-expected FY11 guidance,stronger-than-expected order flows and higher contribution from higher-marginproducts. Our target price remains RM1.60, still based on 11x P/E or a 20% discountto our target market P/E of 13.8x.

Figure 25: Uchis 1-year forward P/E (x)

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UM Land

We like UM Land for its underlying contribution from townships and earnings kickerfrom niche condo projects. The group has just launched the RM274m Suasana BukitCeylon condo in Kuala Lumpur and will shortly launch the RM144m Puteri Harbourcondo project in Iskandar Johor. We retain our Outperform recommendation andRM2.11 target price, which we continue to base on a 50% discount to its RNAV. Theshare price could be catalysed by 1) robust sales by property developers in general,2) more land acquisitions and 3) a good response to the launch of two new projects.

Figure 26: UM Lands 1-year forward P/E (x)

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Xingquan InternationalXingquans new factory is expected to start production in 1Q11 and will expand thegroups annual production capacity to 10m pairs of shoes and 28 pairs of shoe soles.We continue to like Xingquan for its niche in outdoor shoes, which is a less saturatedmarket than for performance sports shoes. Xingquan remains an Outperform with anunchanged target price of RM3.04, based on 6x CY12 P/E. The stock offers one of themost attractive valuations in our regional footwear coverage as it is trading at hugediscounts of 70-80% to its bigger peers. Potential re-rating catalysts include better-

than-expected trade fair orders and sharp declines in raw material prices.

Figure 27: Xingquans 1-year forward P/E (x)

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Neutral recommendations

Pelikan

Managements focus in 2011 is to merge Pelikans and Herlitzs operations, leading tocost savings and economies of scale. Herlitz, which was acquired in 2010, is one ofEuropes largest and oldest stationery players. While there could be strong synergiesand cost savings in areas such as distribution, logistics, production and branding withHerlitz, we believe it will take time and a lot of effort to extract economies of scale and

synergies. Pelikan continues to be a Neutral. We maintain our target price of RM1.40,based on 7.2x P/E or a 45% discount to the regional sector target P/E of 13x. Until wesee strong signs of demand recovery in Europe, we prefer Asia File which offers anattractive dividend yield of 7% and has been gaining market share in the US andEurope.

Figure 28: Pelikans 1-year forward P/E (x)

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Wellcall

Demand for its industrial hoses remains strong, with an order backlog of 2-3 months

for extrusion hoses and around two months for mandrel. But Wellcall is concerned thatif raw material prices stay high, orders may slow down as customers fear that theycould be caught with high-priced inventory when prices come off eventually. Rawmaterial prices like SMR20 have risen more than 30% the past three months and areat all-time high prices. This should lead to short-term profit margin squeeze forWellcall given the 2-3 months lag before it can pass on the cost increase. Despite itshigh dividend yields, Wellcall remains a Neutral as there are no re-rating catalysts insight. Our target price is RM1.22, based on a 40% discount to Top Gloves 13.8xCY12 target P/E. For exposure to small-cap stocks in the rubber sector, we preferglove producers, Latexx and Adventa.

Figure 29: Wellcalls 1-year forward P/E (x)

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Underperform recommendations

RGB International

RGBs earnings remain in the red but quarterly losses are smaller due to surprisinglystrong machine sales and improvements in Bavet. However, RGBs main TSM arm isstill hobbled by idle machines and underperforming sites. RGB stays an Underperformwith an unchanged target price of RM0.06, based on 8x P/E or a 50% discount topeers. For gaming exposure, we prefer Genting.

Figure 30: RGBs 1-year forward P/E (x)

-47.0

-37.0

-27.0

-17.0

-7.0

3.0

13.0

23.0

33.0

43.0



MTD-ACPI

The groups outstanding order book of only RM900m can sustain it for just anotheryear or so. Over the past year, it has not secured any construction jobs, whetheroverseas or locally. Its largest construction job is the East Coast Expressway 2,(Package 10), which is expected to be fully completed by FY12. MTD-ACPI remainsan Underperform. We maintain our target price of RM0.32, which is based on anunchanged 30% discount to the stocks average 12-month P/BV of 0.6x. Continuous

quarterly losses and depleting order book are potential de-rating catalysts.

Figure 31: MTD-ACPIs 1-year forward P/E (x)

-50.0

-45.0

-40.0

-35.0

-30.0

-25.0

-20.0

-15.0

-10.0

-5.0




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[ 20 ]

CIMB Research Report COMPANY UPDATE

Syariah-compliant stock

TRADING BUY MaintainedMuhibbah Engineering

RM1.30 @05/12/10

Dig in Target: RM2.00

Construction

MALAYSIA

MUHI MK / MUHI.KL Sharizan Rosely +60 (3) 2084 9864 [email protected]

Maintain TRADING BUY. We continue to like this midsized contractor for itsearnings and recovery story. Muhibbahs share price is down more than 70% fromthe historical high of RM4.24 reached in Jul 07. We reiterate our TRADING BUYcall and target price of RM2.00, which imputes a 20% discount to its RNAV. Factorsthat could catalyse the stock include (i) a resolution to the APH project, (ii) contractwins, and (iii) a recovery of investor sentiment on the stock.

Diversified earnings. Though infrastructure construction remains the majorcontributor at 65% of revenue, Muhibbah has a fairly diversified business model thatprovides exposure to oil & gas and airport/road maintenance concessions. The

groups outstanding order book of RM3bn is good for another three years and hasmore room for upside as it is actively bidding for jobs, both locally and overseas.

APH resolution is a major catalyst. We continue to believe that there is a strongchance of a resolution to the APH project. We do not discount the possibility of ashareholding restructuring that could bring in additional funds to revive the project.This should be positive for the recovery in investor sentiment and is the mainpremise of our Trading Buy stance. The stock is trading at attractive CY11-12 P/Esof 9-10x. Share price weakness presents a buying opportunity.

Financial summary

Stock Information

Market cap: RM518m/US$164m

12-m price range: RM1.39

RM0.84

3-m avg daily vol: 4.9m

No. of shrs (m): 398

Est. free float (%): 73.0

Conv. secs (m): None

Major shareholders (%):

- Mac Ngan Boon 17.3- Lembaga Tabung Haji 9.9

FYE Dec 2008 2009 2010F 2011F 2012F

Revenue (RM m) 2,033.5 2,252.0 1,756.6 1,931.9 2,028.4

EBITDA (RM m) 55.2 76.2 86.7 130.5 146.6

EBITDA margins (%) 2.7% 3.4% 4.9% 6.8% 7.2%

Pretax profit (RM m) 44.9 68.2 65.5 95.6 107.0Net profit (RM m) 21.8 12.7 31.6 52.7 60.3

EPS (sen) 5.5 3.2 7.9 13.3 15.1

EPS growth (%) (68.9%) (41.8%) 149.0% 67.0% 14.3%

P/E (x) 23.7 40.8 16.4 9.8 8.6

Core EPS (sen) 2.5 3.8 7.9 13.3 15.1

Core EPS growth (%) (85.9%) 51.7% 111.0% 67.0% 14.3%

Core P/E (x) 52.5 34.6 16.4 9.8 8.6

Gross DPS (sen) 4.7 3.0 2.5 3.0 3.5

Dividend yield (%) 3.6% 2.3% 1.9% 2.3% 2.7%

P/BV (x) 1.2 1.1 0.9 0.9 0.9

ROE (%) 5.3% 2.8% 6.0% 8.8% 10.1%

Net gearing (%) 6.9% 10.7% 45.8% 55.5% 65.5%

P/FCFE (x) 6.4 10.1 4.7 3.9 3.6

EV/EBITDA (x) 11.6 8.9 11.1 8.1 7.9

% change in EPS estimates N/A N/A N/A

CIMB/Consensus (x) 0.72 1.00 1.04

Source: Company, CIMB Research, Bloomberg

Price chart Corporate profile

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4

1.5

Dec-09 May-10 Oct-10

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

V ol um e 1 0m (R .H .S ca le ) M uh ib ba h E ng ine er in g

Source: Bloomberg

Set up in 1972 as a marine and civil engineering construction company, MuhibbahEngineering was listed on the Main Board of Bursa Malaysia in 1994. Over the years,it expanded into infrastructure construction, cranes, shipyard and airports as well asroad maintenance concessions. Through its construction, cranes and shipbuildingbusinesses, it offers exposure to the oil and gas segment. This, plus its concessions,gives it a diversified business model. The groups earnings are also diversifiedgeographically as it has exposure to 14 countries the US, UK, Denmark, Germany,

Syria, Sudan, Bahrain, Qatar, UAE, Yemen, Cambodia, Malaysia, Singapore andAustralia.


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[ 21 ]

Financial tables

PROFIT & LOSS KEY RATIOS(RM m, FYE Dec) 2008 2009 2010F 2011F 2012F (FYE Dec) 2008 2009 2010F 2011F 2012F

Revenue 2,034 2,252 1,757 1,932 2,028 Revenue growth (%) 44.1 10.7 (22.0) 10.0 5.0

Operating expenses (1,978) (2,176) (1,670) (1,801) (1,882) EBITDA growth (%) (48.0) 38.0 13.9 50.5 12.3

EBITDA 55 76 87 131 147 Pretax margins (%) 2.2 3.0 3.7 4.9 5.3

Depreciation & amortisation (30) (25) (40) (43) (46) Net profit margins (%) 1.1 0.6 1.8 2.7 3.0

EBIT 25 51 46 87 100 Interest cover (x) 2.5 5.7 4.7 3.7 3.4

Net interest & invt income (7) (6) (7) (20) (25) Effective tax rates (%) 22.4 57.6 27.0 27.0 27.0 Associates contribution 27 23 26 29 32 Net dividend payout (%) 62.9 70.5 23.3 16.8 17.1

Exceptional items 0 0 0 0 0 Debtors turnover (days) 100.4 136.0 211.1 223.1 247.0

Others 0 0 0 0 0 Stock turnover (days) 34.3 34.4 48.2 56.9 70.3

Pretax profit 45 68 65 96 107 Creditors turnover (days) 109.4 128.6 157.1 147.0 166.1

Tax (10) (39) (18) (26) (29)

Minority interests (13) (16) (16) (17) (18)

Net profit 22 13 32 53 60

Adj. wt. shares (m) 398 398 398 398 398

Unadj. year-end shares (m) 398 398 398 398 398

BALANCE SHEET KEY DRIVERS(RM m, end Dec) 2008 2009 2010F 2011F 2012F (FYE Dec) 2009 2010F 2011F 2012FFixed assets 481 515 463 485 503 Outstanding orderbook (RM m) 3,118 2,946 3,346 3,746Intangible assets 24 22 22 22 22 Construction margins (%) 2.0% 5.0% 6.0% 7.0%

Other long-term assets 170 190 187 183 177

Total non-current assets 675 727 672 689 702

Cash and equivalents 213 197 257 334 434

Stocks 223 202 262 340 442

Trade debtors 739 940 1,092 1,270 1,475

Other current assets 742 411 485 576 687

Total current assets 1,916 1,750 2,097 2,520 3,038

Trade creditors 784 803 709 846 1,000

Short-term borrowings 135 86 355 423 500

Other current liabilities 1,002 829 709 846 1,000

Total current liabilities 1,921 1,717 1,773 2,116 2,499

Long-term borrowings 115 171 232 315 427

Other long-term liabilities 25 36 42 50 60

Total long-term liabilities 141 207 274 365 487

Shareholders funds 441 451 603 594 600

Minority interests 88 102 118 135 153

NTA/share (RM) 1.05 1.08 1.46 1.44 1.45

CASH FLOW 12M - FORWARD FD CORE P/E (X)(RM m, FYE Dec) 2008 2009 2010F 2011F 2012F

Pretax profit 45 68 65 96 107

Depreciation & noncash adj. 30 25 40 43 46

Working capital changes (132) 224 (9) (2) 3

Cash tax paid (19) (11) (7) (7) (8)

Others (20) (17) (19) (8) (7)

Cash flow from operations (96) 289 71 121 141Capex (138) (67) (70) (69) (68)

Net investments & sale of FA (3) 9 36 (15) (52)

Others 20 24 34 50 74

Cash flow from investing (121) (34) 0 (34) (46)

Debt raised/(repaid) 298 (203) 39 45 50

Equity raised/(repaid) 5 3 4 4 4

Dividends paid (19) (12) (10) (12) (14)

Cash interest & others 233 (268) (335) (154) (175)

Cash flow from financing 518 (481) (303) (117) (135)

Change in cash 301 (226) (232) (29) (40)

Change in net cash/(debt) 3 (23) (270) (75) (89)

Ending net cash/(debt) (37) (59) (330) (404) (494)

7.0

12.0

17.0

22.0

27.0

32.0

37.0

42.0

47.0


Source: Company, CIMB Research, Bloomberg


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[ 22 ]

Appendix

Technical outlook for Muhibbah Engineering

About to take off? Muhibbahs share price has been consolidating sideways sincemid-2009. However, the share price experienced a short but strong rally in Oct. Sincethen, it has been consolidating sideways again. The medium-term outlook lookspositive as long as the stock does not fall below RM1.10, which is the 10-week SMA. Itshould challenge its first major resistance at RM1.50, which is the 23.6% Fibonacciretracement level of the 2007-08 sharp downtrend. Muhibbahs share price fell from2007s RM4.28 peak and only bottomed out at RM0.65 at end-08, an 85% decline.The 38.2% retracement is at RM2.03.

Figure 1: Muhibbah Engineerings weekly chart (RM1.41)

Source: Bloomberg

Figure 2: Muhibbah Engineerings daily chart (RM1.41)

Source: Bloomberg

First resistance at RM1.50


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[ 23 ]

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[ 24 ]

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RECOMMENDATION FRAMEWORK #1*

STOCK RECOMMENDATIONS SECTOR RECOMMENDATIONS

OUTPERFORM: The stock's total return is expected to exceed a relevantbenchmark's total return by 5% or more over the next 12 months.

OVERWEIGHT: The industry, as defined by the analyst's coverage universe, isexpected to outperform the relevant primary market index over the next 12months.

NEUTRAL: The stock's total return is expected to be within +/-5% of a relevantbenchmark's total return.

NEUTRAL: The industry, as defined by the analyst's coverage universe, isexpected to perform in line with the relevant primary market index over the next12 months.

UNDERPERFORM: The stock's total return is expected to be below a relevantbenchmark's total return by 5% or more over the next 12 months.

UNDERWEIGHT: The industry, as defined by the analyst's coverage universe,is expected to underperform the relevant primary market index over the next 12months.

TRADING BUY: The stock's total return is expected to exceed a relevantbenchmark's total return by 5% or more over the next 3 months.

TRADING BUY: The industry, as defined by the analyst's coverage universe, isexpected to outperform the relevant primary market index over the next 3months.

TRADING SELL: The stock's total return is expected to be below a relevantbenchmark's total return by 5% or more over the next 3 months.

TRADING SELL: The industry, as defined by the analyst's coverage universe,is expected to underperform the relevant primary market index over the next 3months.

* This framework only applies to stocks listed on the Singapore Stock Exchange, Bursa Malaysia, Stock Exchange of Thailand and Jakarta Stock Exchange. Occasionally, it is permitted for the total expected returns to betemporarily outside the prescribed ranges due to extreme market volatility or other justifiable company or industry-specific reasons.

CIMB Research Pte Ltd (Co. Reg. No. 198701620M)


25/25

RECOMMENDATION FRAMEWORK #2**

STOCK RECOMMENDATIONS SECTOR RECOMMENDATIONS

OUTPERFORM: Expected positive total returns of 15% or more over the next12 months.

OVERWEIGHT: The industry, as defined by the analyst's coverage universe,has a high number of stocks that are expected to have total returns of +15% orbetter over the next 12 months.

NEUTRAL: Expected total returns of between -15% and +15% over the next12 months.

NEUTRAL: The industry, as defined by the analyst's coverage universe, haseither (i) an equal number of stocks that are expected to have total returns of+15% (or better) or -15% (or worse), or (ii) stocks that are predominantlyexpected to have total returns that will range from +15% to -15%; both over thenext 12 months.

UNDERPERFORM: Expected negative total returns of 15% or more over thenext 12 months.

UNDERWEIGHT: The industry, as defined by the analyst's coverage universe,has a high number of stocks that are expected to have total returns of -15% orworse over the next 12 months.

TRADING BUY: Expected positive total returns of 15% or more over the next 3months.

TRADING BUY: The industry, as defined by the analyst's coverage universe,has a high number of stocks that are expected to have total returns of +15% orbetter over the next 3 months.

TRADING SELL: Expected negative total returns of 15% or more over the next3 months.

TRADING SELL: The industry, as defined by the analyst's coverage universe,has a high number of stocks that are expected to have total returns of -15% orworse over the next 3 months.

** This framework only applies to stocks listed on the Hong Kong Stock Exchange and China listings on the Singapore Stock Exchange. Occasionally, it is permitted for the total expected returns to be temporarily outside theprescribed ranges due to extreme market volatility or other justifiable company or industry-specific reasons.

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