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

RHB Research Institute

RHB Equity 360°

26 May 2010 (Market, Consumer, Steel, Kencana, Sunway, MPI, HSL, KFC, Kinsteel, Perwaja, KNM;
Technical: Genting Malaysia)

Top Story : Shifting Trends – Seeking shelter in domestic plays

Market Update
- The FBM KLCI has erased all its gains and more during the first five months of 2010 since turning
downwards on 13 May. We expect the market to remain volatile, with the risk on the downside.
- We have used historical valuations and market data in order to find possible fundamental support levels for
the FBM KLCI: 1) Average one-year forward PER for FBM KLCI stocks since 2000 is estimated to be
around 15x, and one standard deviation (SD) below the mean is estimated to be around 13.3x, which is
coincidentally the same valuation at the next technical support of 1,154 for the FBM KLCI; and 2) Annual
returns for the FBM KLCI over the last 32 years have averaged around 13% and 1SD below the mean
would imply a pullback of around -17.6%. However, we note that a 1SD fall has only occurred seven times
over the last 32 years. As it stands, the FBM KLCI has already fallen by 7.2% from the peak this year.
- Having painted a near-term bearish picture for the market, we highlight that the correction is driven more by
external factors relating to fears over global macroeconomic conditions especially in the EU. We
acknowledge that these concerns could result in some of our earnings forecasts coming under pressure.
Therefore, in our view, companies that have little or hedged exposure to overseas markets or imported
costs are likely to be more resilient. These domestic plays include Maxis, TNB, PLUS, Allianz, AEON, KFC,
KPJ and B-Toto.

Sector Call

Consumer – Tobacco: Industry changes from AFTA-Cept Neutral

Sector Update
- No competition arising from AFTA-Cept yet in Malaysia market. Players believe that other regional players
are deterred from entering the market due to its floor price policy. Following the liberalisation, both BAT and
JTI may introduce new cigarette brands into the market to gain further market share.
- Some players have started / will be starting to import cheaper tobacco leaves. Both BAT and JTI may
import tobacco leaves from neighbouring ASEAN countries soon as leaf cost from these countries is lower
than in Malaysia. Philip Morris has already stopped sourcing for local tobacco leaves.
- Both BAT and JTI will not be phasing out their production facilities in Malaysia. However, Philip Morris has
since closed its Ipoh plant in Malaysia, which is currently manufacturing Sampoerna cigarettes. Possibility
of Philip Morris completely pulling out its manufacturing activities from Malaysia.
- Illicit market seems to have stabilised, but QoQ results expected to be weaker from stock rotation.
However, no significant one-off write-offs are expected.
- No changes to our earnings forecasts for BAT. Maintain DCF-based fair value for BAT at RM38.95 (based
on WACC of 8.2%). Reiterate Underperform call on BAT. Maintain Neutral stance on the consumer sector.

Building Materials : Steel sub-sector running out of steam Neutral (from OW)
Sector Update
Ann Joo Resources: Target PER lowered to 7x from 12x Underperform (down from OP)
Perwaja : Target PER lowered to 7x from 12x Underperform (down from OP)
Kinsteel : Target PER lowered to 7x from 12x Underperform (down from OP)
CSC Steel : Target PER lowered to 7x from 9x Market Perform (down from OP)
Hiap Teck Venture : Target PER lowered to 7x from 9x Market Perform (down form OP)
Sino Hua-An : Target PER lowered to 7x from 12x Underperform (down from MP)
- We are turning bearish on the steel sub-sector, as: 1) Prices of key steelmaking inputs, in particular, scraps
and iron ore are falling and lower input prices will weigh down on steel prices; 2) Concerns on overcapacity
in China has heightened; and 3) Risk of slowdown in global economy has heightened. This will affect
buying sentiment on consumer goods and property, hence filtering down to steel consumption.
- However, we remain positive on the sector’s longer-term outlook, as: 1) Prices of iron ore are like to to
trend up over the longer-term (on shortages), and higher iron ore prices will lend support to steel product
 prices; and 2) The Chinese government’s continuous efforts to curb overcapacity in the country’s steel
sector, and lower capacity in China’s steel sector will help boost the pricing power of the steel producers.
- We are lowering our 2010-12 net profit forecasts for steel stocks under our coverage by 4.0-28.3%, largely
to reflect: 1) Lower sales volumes assumptions; and 2) Lower average selling price assumptions.
- We have rolled forward our valuation base year from CY10 to CY11. Also, to reflect the sector’s near-term
weak prospects, we have lowered our target 1-year forward PER for the sector by 2-5x to 7x.
- Given the weaker 2H outlook, we downgrade the steel sub-sector from overweight to Underweight.
Correspondingly, our rating for the building materials sector is downgraded from overweight to Neutral.

Corporate Highlights

Kencana : Bags US$15.5m contract Outperform

News Update
- Kencana announced yesterday that it had received a letter of award from Larsen & Toubro for the
fabrication, load-out and sea-fastening of six-legged jackets and piles of an offshore platform in offshore
India. The contract is worth US$15.5m and is expected to be delivered in 2Q11.
- No change to our forecasts as we have already assumed RM1.0-1.3bn new orders per annum flowing in
over the next 24 months to replenish existing ones.
- Maintain Outperform and fair value of RM1.88/share, which is based on 16x FY11 PER.

Sunway Holdings : 1QFY12/10 net profit more than doubles from a year ago Outperform
1QFY10 Results
- Excluding RM4.6m gains on derivatives, adjusted 1QFY12/10 net profit of RM35.3m came in within our
expectation but beat the market.
- 1QFY12/10 net profit more than doubled from a year ago on stronger performance across the board except
for quarry operation.
- Sunway is eyeing new jobs worth a total of RM16bn in the local and overseas markets and is confident
about bagging RM1.5bn annually. YTD, Sunway has secured RM198m.
- Maintain Outperform. Fair value is RM1.69.

MPI : FY11 earnings growth to be driven by X3-MLP Outperform

3QFY10 Results
- 9M06/10 results were in line with our but above market consensus, accounting for 74.6% and 82.7% of our
full-year forecast and market consensus respectively. 3Q06/10 reported turnover of RM353.7m (+2.0%
qoq, 75.7% yoy) was mainly due to higher MLP sales stemming from stronger-than-expected demand from
the automotive segment and consumer electronics.
- Going forward, management expects X3-MLP capacity to ramp up to 1m/day and to go into high volume
production by 4QFY10. Note that X3-MLP is the smallest package (approx. 50% of current MLP footprint)
and would be used in mobile phone applications (i.e. for transient voltage suppression technology).
- MPI announced a second interim dividend of 15 sen, bringing gross DPS to-date to 33 sen or yield of 5.5%.
- No changes to our earnings forecasts. Maintain Outperform call with fair value of RM8.46/share.

HSL : 1QFY12/10 net profit grows by 30% yoy Outperform (up from MP)
1QFY10 Results
- 1QFY12/10 results came in within expectations.
- YTD, HSL has secured about RM310m worth of new jobs. With about another RM300m worth of new jobs
that are “almost in the bag”, it now appears that HSL is likely to land about RM600m new jobs in FY12/10.
- At present, HSL’s outstanding construction orderbook stands at about RM1.3bn.
- Value has emerged after the recent correction in share price. Upgrade Outperform. Fair value is RM1.61.

KFC : Resilience from quick service restaurant business Outperform

1QFY10 Results
- 1Q10 net profit of RM34.2m was in line expectations. Yoy, net profit increased by 19.3% mainly from higher
revenue generated by KFC Malaysia (+17.5% yoy), which recorded same store sales growth of 8% yoy and
opened 5 new outlets during the quarter.
- We expect FY10-12 SSS growth of 7% p.a. for Malaysia restaurants and opening of 40 new outlets for
Malaysia, 1-3 new outlets in Brunei, 2 new outlets in Singapore and 10-12 new outlets in India for FY10-12.
- No changes to our earnings forecast. Maintain Outperform call with fair value of RM9.63.

Kinsteel : In line; anticipating weaker 2H Underperform (down from OP)

1QFY10 Results
- 1QFY12/10 reported core net profit of RM22.6m came in at 27.1% of our full-year consensus. However, we
consider this within our expectation as we expect Kinsteel’s performance to weaken in 2H on the back of
weaker restocking activities arising from weak price outlook.
- Results came in below consensus, accounting for only 22.0% of the full-year market consensus.
- Fair value is RM0.64 based on 7x FY12/11 fully-diluted EPS of 9.4 sen. Note that the earnings and ratings
were downgraded in the sector update today.

Perwaja : In line; expecting weaker 2H Underperform (down from OP)

1QFY10 Results
- 1QFY12/10 reported core net profit of RM22.7m accounted for 30.1% of our full-year forecast. However,
we consider this within our expectation as we expect Perwaja’s performance to weaken in 2H on the back
of weaker restocking activities in 2H arising from weak price outlook.
- Fair value is RM1.12 based on 7x FY12/11 fully-diluted EPS of 15.9 sen. Note that the earnings and ratings
were downgraded in the sector update today.

KNM : Not out of the woods yet Underperform

1QFY10 Results
- Stripping out the tax incentive arising from the purchase of Borsig of around RM40m, 1QFY12/10 core net
profit of RM0.3m came in below expectations. The variance was largely due to: 1) lower-than-expected
demand from China, Europe and Middle East; and 2) lower utilisation rates. Note that 1QFY12/10 average
utilisation rates declined to 45% (vs. 55% in 4QFY12/09 and 70% in 1QFY12/09).
- We have cut our FY10-12 core EPS forecasts by 22.1%, 21.8% and 27.0% respectively after factoring in:
1) lower average utilisation rates; and 2) lower contribution from China, Europe and Middle East.
- Accordingly, our fair value is cut to RM0.40 (from RM0.51/share previously). Nevertheless, we highlight the
potential for continued downward pressure on KNM’s share price in the near term due to the fall-out from
the aborted privatisation proposal by BlueFire Capital Group (Bidco). Reiterate Underperform.

Technical Highlights

Daily Trading Strategy : More corrections expected going forward…

- In line with our expectation, upon losing the key support near 1,300 recently, the FBM KLCI headed
towards the 1,250 level. The index ended at 1,250.13 yesterday.
- Although yesterday’s closing may indicate a small chance for a technical rebound due to the formation of
the “8 to 10 candles” pattern on the chart, plus the “extremely oversold” position on the 14-day RSI – its
lowest level since Sep 2002, our view on the FBM KLCI remains unchanged.
- The index remains vulnerable to further downside risk. If it loses the 1,250 level, it will likely extend this
downswing to the next psychological support at 1,200.
- As we highlighted earlier on the futures market (FKLI), where a loss of the 1,270 level would prompt a
steeper selldown on the cash index (FBM KLCI) soon. The FKLI closed 31pts lower to 1,241 yesterday.
- Combined with rising geopolitical tension in Korean Peninsula, as well as deepening European debt crisis
on top of the cloudy recovery in the US economy, we believe the local market will remain under pressure.
- As such, we expect more correction ahead towards the 23.6% Fibonacci Retracement (FR) and 38.2% FR
levels from 1,229 to 1,154 region soon..

Daily Technical Watch: Genting Malaysia – Losing RM2.68 will mark a fresh selling mode ahead …
- 10-day SMA: RM2.784
- 40-day SMA: RM2.829
- Support: IS = RM2.44 S1 = RM2.20 S2 = RM1.90
- Resistance: IR = RM2.68 R1 = RM2.96 R2 = RM3.20
 Bulletin Board
Co/Sector News
Plantations According to Dr Vengeta Rao, secretary general
of the Roundtable for Sustainable Palm Oil
(RSPO), certified sustainable palm oil (CSPO)
shipments are expected to increase to 2.5m
tonnes by the end of the year (from 1m tonnes
last year). The RSPO is also subcontracting the
certification process out to Accreditation Services
International for one and a half years. (Business
Times)
TNB Sarawak Energy is said to be exploring the
potential for long-term transmission of hydro
power from Sarawak to Peninsular Malaysia
given its huge hydro potential. However, TNB’s
CEO said that at this stage, there was no
concrete proposal. (StarBiz)
TNB TNB plans to bid for two or three power
generation projects in the Middle East and South
Africa, together with local and foreign partners.
(Business Times)
QL QL has received approval from the Ministry of
Resources Justice and Human Rights to incorporate a
wholly-owned subsidiary i.e. PT QL Agrofood in
Indonesia with share capital and paid up capital
of US$5m and US$4.5m respectively (financed
via internally-generated funds and borrowings).
This is for the expansion of its ILF business in
Indonesia. (Bursa)
Ann Joo Ann Joo Resources is bullish on the outlook of
Resources the steel industry in 2010-2011, underpinnned
the by roll-out of stimulus packages in many
countries. (Starbiz)
MISC MT Bunga Kelana 3, an Aframax petroleum
tanker owned by MISC collided with a bulk carrier
in Singapore Straits. There was no report of
injury to crew members but the collision caused
2,000 tonnes of crude oil to spill into the sea.
(Star)
Important Dates
Impact Recom
Positive, as RSPO-certified oil is in high demand OW
currently. Previously, the main reason for the
minimal RSPO-certified oil in the market was due
to the lengthy process required for the
certification process and the backlog of
certification applications at RSPO. However, with
the subcontracting of the certification process to
an external party, this will hopefully clear the
backlog, making the certification process faster.
TNB CEO’s comment is consistent with what we OP, FV =
understand from management and hence, the RM10.40
6,000MW plant up required by 2020 (as
mentioned in the recent analyst briefing).
We understand that TNB does not plan to hold OP, FV =
>40% equity stake in the projects, if its bids are RM10.40
successful. At around US$2bn/project and
assuming: 1) project financing of 70%; and 2)
equity stake of 40%, TNB’s portion works out to
be around US$240m. Notwithstanding its plans
to expand its Janamanjung plant, we think this
amount should be manageable for TNB given
improving electricity demand, rising cash pile
(RM7bn as at end-Feb ’10) and falling gearing
level (2Q10: 0.56x vs. 2Q09: 0.76x).
Positive. QL plans to replicate its successful OP, FV =
Malaysia strategy in ILF division into Indonesia. RM4.60
We believe that any contribution to earnings
would likely start by FY12 onwards. Our capex
assumption of RM150m for FY11 has already
taken this expansion into account.
We concur with Ann Joo's long-term positive UP, FV =
outlook on the long steel product sector. RM2.25
However, we believe its 2H performance will
likely to weaken on: 1) Falling key steelmaking
input prices; 2) Increased concerns on over-
capacity; and 3) Heightened risk of a global
economic slowdown in 2H, which will weigh down
on both demand and prices of steel products.
Impact on earnings will not be significant given UP, FV =
that MISC will still have 28 Aframax petroleum RM8.02
tankers in operation. We believe the damage to
the tanker and cost to clean up the spill may also
be partially covered by insurance.
 Company Entitlement details Ex-date Payment date
New entitlements
Majuperak Holdings Dividend of 1% to ICPS shareholders 15-Jun-10 16-Jul-10
SLP Resources Single tier final dividend of 1 sen 6-Jul-10 28-Jul-10
Daya Materials First and final dividend of 3.2% less 25% tax 24-Jun-10 16-Jul-10
MPI Second interim dividend of 15 sen tax exempt 9-Jun-10 25-Jun-10
Cocoaland Holdings Interim dividend of 5% less 25% tax 8-Jun-10 30-Jun-10
Hong Leong Industries Second interim dividend of 10 sen tax exempt 9-Jun-10 28-Jun-10
Yee Lee Corporation First & final div of 4 sen tax-exempt + 1 sen less 25% tax 23-Jul-10 10-Aug-10
Lion Diversified Interest Payment on 5-year 4% ICULS 2008/2013 8-Jun-10 16-Jun-10
Time Engineering Final gross dividend 1.333 sen less 25% tax 18-Jun-10 30-Jun-10
Emivest Final dividend of 4 sen less 25% tax 27-Jul-10 25-Aug-10
Malayan Flour Mill Final div of 5 sen less 25% tax + Special div of 10 sen less 25% tax 21-Jun-10 5-Jul-10
TMC Life Sciences Single-tier dividend of 3% 23-Jun-10 28-Jul-10
Maxis Final single tier tax exempt dividend of 3 sen 24-Jun-10 15-Jul-10
Going “ex” on 27 May
GHL Systems Bonus issue on the basis of 1-for-20 27-May-10 -
Lii Hen Industries Final single tier div of 1.5 sen + Special single tier div of 3 sen 27-May-10 10-Jun-10
ECS ICT Special single tier dividend of 4 sen 27-May-10 15-Jun-10
Dialog Interim dividend of 1.3 sen less 25% tax 27-May-10 15-Jun-10
Esso Malaysia Final Dividend of 12 sen less 25% tax 27-May-10 21-Jun-10
Mamee-Double Decker Final dividend of 5 sen plus special dividend of 2 sen tax exempt 27-May-10 25-Jun-10
Shangri-La Hotels Final dividend of 5 sen less 25% tax 27-May-10 29-Jun-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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