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Market Dateline PP 7767/09/2010(025354)

RHB Research Institute

RHB Equity 360°


6 May 2010 (Hiap Teck, Construction, Unisem, Faber; Technical: Evergreen)

Top Story : Hiap Teck – Focus remains on domestic demand Outperform


Visit Note
- Despite demand and margins for pipes in the domestic market have improved significantly, Hiap Teck’s
capacity utilisation is currently constrained by inconsistent HRC supply domestically. To ensure consistent
HRC supply, Hiap Teck is now planning to secure local HRC by giving advance payment to the Megasteel.
- Management indicates that export demand is likely to remain weak in the near term, as: 1) Demand in the
US market has yet to gain traction; and 2) The ongoing investigation by the Australian government into the
imports of steel pipes from Malaysia will result in Australian stockists staying away.
- Management believes that there will be a few more months (likely to involve a few more rounds of technical
audits) before Hiap Teck can become the approved vendor to MITCO for high-grade ERW pipes, given the
stringent quality control required as well as the company’s lack of experience for these pipes.
- Management indicated construction of the blast furnace would start by end-2010 and complete by 2013.
- We are lowering our FY07/10-12 net profit forecasts by 5.5-6.7% p.a., to reflect higher interest expense
arising from its RM110m investment into a 55% stake in Eastern Steel.
- Fair value is lowered by 6.7% from RM1.80 to RM1.68 based on 9x revised CY10 EPS of 18.7 sen.

Economic Highlights

Budget Deficit : More leeway for government spending without worsening its budget deficit
Economic Highlights (published 5 May 2010)
- With the Government scrapping its plan to restructure fuel subsidy in May, some investors are concerned
that the move may lead to a higher-than-expected budget deficit in 2010. However, we believe the
Government would still be able to reduce its budget deficit according to the plan to 5.6% of GDP in 2010,
as it has changed the petroleum income tax to a current year assessment system. The move would help to
cushion a decline in petroleum income tax as a result of a drop in crude oil prices in 2009, as prices have
since recovered. This will be aided by a recovery in corporate income tax and a pick-up in individual
income and other taxes during the year.
- Indeed, a smaller-than-expected drop in oil revenue could help the Government to reduce its budget deficit
more than expected in 2010. However, we believe the Government will choose to maintain its budget deficit
target of 5.6% of GDP and cut its operating expenditure by a smaller magnitude than its initial plan.
Already, the Government has proposed a supplementary budget totalling RM12bn for 2010.

Sector Call

Construction : The Government rolls out PFI projects Neutral


Sector Update
- TRIplc (formerly known as U-Wood), Menang and Crest Builder announced that they had secured
concessions by way of Private Finance Initiative (PFI) to build and maintain branch compuses of Universiti
Teknologi Mara (UiTM).
- This follows news reports on 5 May that the Government had given out six concessions based on the PFI
model for UiTM branch compuses and that another five will be awarded under Phase 2 of the programme.
- It is good news that the Government has finally got the ball rolling on PFI projects. However, we were taken
by surprise by the unfamiliar names appearing on the winners’ list, particularly TRIplc, a PN17 company
pending regularisation of its financial condition, and Menang a PN1 company in default on payments.
- Maintain Neutral.

Corporate Highlights

Unisem : Strong start to the year Outperform


1QFY10 Results
- 1Q net profit of RM41.6m (+18.6% qoq, +280.3% yoy) accounted for 30.9% and 29.6% of our full-year net
profit forecast and market consensus respectively. Revenue grew 3.9% qoq and 82.2% yoy to RM329.3m
mainly due to stronger sales for broad-based packages on the back of stronger-than-expected demand for
technology-based products (i.e. smartphones and consumer electronics) from China. Furthermore, EBITDA
margin increase 1.3%-pts qoq and 15%-pts yoy to 26.7% due to higher contribution from its higher-margin
chip packages as well as lower operating costs.
- Unisem has proposed a bonus issue on the basis of 3 for every 10 shares and a rights issue of warrants on
the basis of 1 for every 4 shares (after the proposed bonus issue). Ex-bonus, Unisem’s theoretical share
price would be RM2.50. The proposed warrants would raise up to RM421.34m assuming they are
exercised at a price of RM2.60. We estimate the new warrants would fully dilute Unisem’s ex-bonus FY11
EPS by 12.1% to 25.6sen. However, we will only adjust our forecasts after approval of the proposals.
- We have revised our FY10-11 EBITDA margin assumptions to 27.5% and 28% (vs. 26% and 27%
previously) after factoring: 1) higher contribution from Chengdu plant; and 2) stronger demand for its
higher-margin QFN and module packages; and 3) lower operating costs. As such, we have raised up our
FY10-11 net profit by 12.5% and 5.9% respectively.
- We have raised our fair value to RM4.06/share. Reiterate our Outperform call on the stock.

Faber : Expect more property earnings in 2HFY10 Outperform


1QFY10 Results
- 1QFY12/10 net profit of RM14.4m (+98.1% yoy) accounted for 15.0% and 14.6% of our and consensus full-
year estimates respectively. We consider this to be in line with expectations as we expect higher property
revenue in the 2HFY10 and higher overseas contribution, especially India for the IFM segment, which
would boost margins moving forward.
- Qoq, IFM revenue fell 28.6% on the back of the recognition of revenue from the UAE contract arising from
new variation orders in 4Q09. Revenue from the property segment also fell 95.7% qoq largely due to lower
progress billings. As a result, 1Q10 earnings fell 65.8% qoq.
- The company recently launched its joint venture with DBKL of Phase 1A residential development in Taman
Desa and following that, the company plans to launch its Phase 1A (Fleet) by 3Q2010. We thus expect
Faber to recognise around RM31m EBIT mostly in 2HFY10, vs. an operating loss of RM1.7m in the 1Q.
- We have left our FY10-12 forecasts unchanged for now.
- Our SOP-based fair value has been raised slightly to RM3.40 (from RM3.30) after updating Faber’s net
cash position as at Mar ’10. Maintain Outperform.

Technical Highlights

Daily Trading Strategy : The FBM KLCI is ready to trigger a correction now …
- Yesterday’s breakdown from the 10-day SMA has confirmed our earlier worry that the “double top”
formation on the FBM KLCI near the 1,347 previous high level would trigger a pullback on the local market.
- But as the bargain-hunting activities returned mildly from yesterday’s low near the 40-day SMA of 1,327,
with a positive candle on the chart, the market may attempt to stage a technical rebound today.
- Having said that, we believe that the recent retreat from the “double top” formation region of 1,347 – 1,350
has damaged the technical landscape. And this means the index is more ready to trigger a correction now.
- Moreover, as we maintain that the 10-day SMA will become a support-turn-resistance level for the FBM
KLCI, rebound should be capped by the 10-day SMA at 1,339 and a 5.25-pt gap near 1,341.90.
- Immediate lower support is seen at the 40-day SMA, followed by the 1,305 and 1,300 levels.

Daily Technical Watch: Evergreen – Further retreat if it fails to recover back above RM1.59 and 10-day SMA
- 10-day SMA: RM1.592
- 40-day SMA: RM1.633
- Support: IS = RM1.34 S1 = RM1.10
- Resistance: IR = RM1.59 R1 = RM1.75 R2 = RM1.86

Bulletin Board
Co/Sector News Impact Recom
Sime Darby According to an email reply sent out to analysts, Based on Sime’s 35.7% stake, the provision OP, FV =
Sime Darby noted that the main civil works for made so far of RM130m would be equivalent to RM9.70
the Bakun dam project was awarded to the RM364m for the entire 100% stake. This means
Malaysia-China Hydro Joint venture back in Sep that should there be a cost overrun of RM1bn,
2002, in which Sime has a 35.7% stake. The this would result in Sime’s share coming to
construction works are split into two main RM357m. Deducting the RM130m provision
packages - electromechanical works and the already made, this would mean another RM227m
main civil structure works. At present the project in provisions, which would shave off 7-9% from
works are 96% complete. Sime has been Sime’s bottomline in FY10.
receiving periodic payments and agreed claims
from the Government. In the past, some cost
overruns were incurred due to increase in
material costs and variations in design but these
have been dealt with, while Sime has made
provisions of RM130m for its share of cost
overruns so far. According to the email, Sime is
still trying to gather information on the validity of
the media report, which it will release once
obtained. (Sime Darby email)

Important Dates

Company Entitlement details Ex-date Payment date


New entitlements
Hektar REIT First interim dividend of 2.5 sen gross 18-May-10 7-Jun-10
ECS ICT Special single tier dividend of 4 sen 27-May-10 15-Jun-10
Pharmaniaga Final gross div of 27 sen + special div of 10 sen, less 25% tax 10-Jun-10 15-Jul-10
Genting Plantations Final dividend of 5.25 sen less 25% tax 28-Jun-10 15-Jul-10
Genting Malaysia Final dividend of 4.3 sen less 25% tax 28-Jun-10 21-Jul-10
Genting Bhd Final dividend of 4.2 sen less 25% tax 28-Jun-10 27-Jul-10

Going “ex” on 10 May


Guan Chong Second interim dividend of 0.75 sen sen less 25% tax 10-May-10 19-May-10
Titan Chemicals Final tax exempt dividend of 4.5 sen 10-May-10 25-May-10
Nestle (M) Final dividend of 100 sen single tier tax exempt 10-May-10 26-May-10
Atrium Reit First interim income distribution of 2.1 sen 10-May-10 27-May-10
Malaysia Smelting Corp Final dividend of 3 sen less 25% tax 10-May-10 28-May-10

...For more details, see individual reports attached

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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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