DiGi.Com Bhd (RM4.06) is piling up cash faster than it can return it to shareholders. The mobile operator has paid dividends exceeding annual net profit in the past five consecutive years. Even so, it is still flush with cash and remains far from its optimal capital structure.

DiGi has previously indicated that it would like to have 35% to 45% net borrowings on its balance sheet, which is equivalent to gearing (debt-to-equity ratio) of roughly 54% to 81%. However, as at end-1Q12, it had gross cash totalling RM1.52 billion and net cash of RM438.2 million. As such, we expect the company will continue to pay out all of its earnings, at least, for the foreseeable future.

Limited by the amount of retained earnings in its balance sheet for the payment of dividends, DiGi proposed a second capital management initiative last month that will seek to return RM495 million to shareholders. This comes hot on the heels of the first capital management exercise to distribute RM509 million announced in September 2011. It is currently in the process of implementing the first capital repayment and expects to disburse the second, which is pending regulatory approvals, at the latest by 1Q13.

Based on our earnings forecast, regular dividends plus the two rounds of capital distribution will total more than 51 sen per share over 2012/13. That will give shareholders a fairly attractive average net yield of more than 6.3% per year at the prevailing share price of RM4.06. The stock will trade ex-entitlement for the first interim net dividend of 5.9 sen per share on May 14.

Positive on growth prospects from several fronts
We are also sanguine on the company’s growth prospects. Despite intense competition, DiGi has been reporting higher than industry average revenue growth over the past two years, while operating margins too have gradually widened. The company expects to achieve mid to high single digit revenue growth this year and at the same time maintain margins.

For 1Q12, service revenue was up 9.6% y-o-y, driven by strong growth in data revenue, and revenue from mobile Internet in particular. Data revenue accounted for 30.7% of service revenue during the quarter. DiGi believes data will continue to be its primary driver for growth for the foreseeable future.

The company intends to pick up the momentum in expanding its 3G coverage this year, from the current 56% to 70% by end-2012. It is also in the process of swapping its entire radio access network for a brand new LTE-ready platform, slated for completion by end-2012. The new network is expected to improve both quality and capacity.

The wider 3G coverage, better quality and increased capacity will support the company’s push to gain market share, especially in signing up new smartphone and tablet users. From its current comparatively smaller presence nationwide, DiGi’s network improvements will allow the company to tap new markets, including users in secondary towns and rural areas.

DiGi also plans to convert existing occasional mobile Internet users — more than half of its subscribers are mobile Internet customers — to take up bundled packages for a range of devices. At the moment, a little over 16% of its subscribers are on the higher revenue generating post-paid plans. The company’s average revenue per user (ARPU) for post-paid subscribers stood at RM85 per month, more than double the RM41 for pre-paid users.

Earnings on an uptrend
DiGi’s network collaboration with Celcom is progressing well, having completed the first phase of site consolidation. The entire exercise is slated for completion by end-2013. As indicated previously, the collaboration is expected to result in incremental cost savings in the future, estimated to total a combined RM2.2 billion over 10 years. The two companies have also commenced joint fibre aggregation and trunk rollout.

DiGi’s 1Q12 earnings results were broadly in line with our expectations. Operating profit was up 12.1% y-o-y on the back of 9.7% growth in turnover, although net profit declined 3.2% to RM320.6 million. This was due primarily to accelerated depreciation charges amounting to about RM145 million during the quarter.

Accelerated depreciation is estimated to total some RM500 million to RM550 million for the full year but will taper off to less than RM100 million in 2013. Once the assets are fully written off, net profit will spike sharply higher.

We estimate net profit totalling RM1.32 billion this year, and rising to RM1.77 billion in 2013. This prices the stock at 24 times our estimated earnings for 2012, which will fall to roughly 17.9 times in 2013 — lower than our estimated valuations for Maxis Bhd and Telekom Malaysia Bhd.


Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.

This article appeared in The Edge Financial Daily, May 9, 2012.

KUALA LUMPUR: While there is growing concern that Bank Negara Malaysia’s prudent lending policy would affect banks’ loan growth, AEON Credit Service (M) Bhd seems unfazed.

Its share price climbed to a historic high of RM9.18 last Friday after the company announced its record net profit of RM95.6 million for FY12 ended Feb 29 compared with RM63.43 million a year ago. The stock has soared 87% over the past five months from a low of RM4.90 in early November.

Analysts, who track the stock, still see the growth potential of AEON Credit despite the sharp gain in the share price.

Kenanga Research has raised its loan growth forecast to 30% from barely 10% previously. The research firm said the 30% loan growth target for FY13 is “achievable” with the favourable outlook on its credit card, personal finance and motorcycle financing divisions.

Kenanga Research is anticipating earnings growth of 39% for FY13, which translates into a net profit of RM133.3 million or RM1.11 per share (versus 79.7 sen for FY12).

OSK Research has tweaked its earnings growth forecast after AEON Credit delivered the good set of financial results.

“We are taking the opportunity to bump up our FY13 revenue and earnings forecasts by 14.5% and 24.5% respectively, largely due to robust growth in its durable consumer financing and personal loan business,” it said in a note.

OSK Research anticipates a net profit of RM119.8 million or 99.8 sen per share for FY13 and RM153.7 million or RM1.28 per share for FY14.

HwangDBS Vickers Research revised its loan and funding growth to 23% for FY13 from 19% previously. “Growth for personal financing and credit card loans should remain robust, while Easy Payment (general and vehicle) will grow at a moderate pace due to a larger base,” said HwangDBS.

According to analysts, the management has indicated that AEON Credit plans to capitalise on the segments that the bigger banks do not traditionally compete in. HwangDBS believes that micro-loans to small and medium enterprises and the financing of super bikes and used cars would provide the new impetus for loan growth.

OSK Research said the two segments will be the new growth area. “We think that AEON Credit can focus on growing market share in these two segments while maintaining its asset quality given its solid risk containment measures, which have helped keep its non-performing loans [NPL] low,” said OSK Research.

It added that AEON Credit’s asset quality is still intact. However, its capital adequacy ratio (CAR) fell to 21.8% from 24% in the previous year, but it is still well above the 16% requirement and thus able to maintain its asset quality.

The group’s NPL was down 14 basis points to 1.8% compared with 1.94% previously, slightly below the 1.9% average industry, it said.

AEON Credit uses the Central Credit Reference Information System (CCRIS) and an internal credit-scoring model, designed to model consumer behaviour and spending patterns to ensure it engages those with favourable payment histories. This helps the company to screen the good prospective customers from bad ones.

Its collaboration with AEON Co is bearing fruit. AEON Credit could leverage AEON Co’s 900,000 strong, loyalty member programme.

AEON Credit is making use of this opportunity to persuade customers to sign up for its credit cards at renewal counters.

Analysts said another advantage is that AEON Co does not allow other credit card operators to set up booths at its shopping centres, giving AEON Credit a leg up compared to other financial institutions.

Apart from churning out strong earnings growth, AEON Credit pays steady dividend annually, which has climbed steadily in line with its earnings. The company has declared a 16.8 sen single tier final dividend, bringing the total dividend to 30 sen for FY12 — the highest payment so far.

OSK Research pegs its dividend per share (DPS) forecast at 36.4 sen and 46.4 sen for FY13 and FY14 respectively. Hwang-DBS expects net DPS of 34.5 sen for FY13 and 41.4 sen for FY14.


This article appeared in The Edge Financial Daily, April 23, 2012.

Saturday April 21, 2012

Maybank IB Initiating Coverage 5 April 2012


Brief Overview


A planter at heart. Traditionally a major timber player in Malaysia, Ta Ann has in recent years diversified and fortified its business model. Today, it has stronger earnings quality emanating from three core businesse s, with its palm oil division being its key earnings driver:

(i) Upstream palm oil business – A total land bank of ~65,000 ha in Sarawak with 30,911 ha planted (as of Dec 2011) and another ~12,000 ha of plantable reserves.
(ii) Timber – Logging concession (435,256 ha of concession area in Sarawak) with ~400,000 m3 of logs and ~210,000 m3 of plywood produced in 2011.
(iii) Forest plantation – 313,087 ha of licensed forest in Sarawak with 32,265 ha planted as of Dec 2011. Commercial harvesting is expected to begin in 2015 after its first batch of planted forest matures.

Stronger earnings quality; reduced volatility.
A dwindling quota of natural logs in Malaysia and competition from softwood has resulted in earnings cyclicality and stagnation of earnings prospects for Ta Ann in the past. Today, after years of aggressive expansion (since 2000) into oil palm plantations in Sarawak, its oil palm division dominates earnings, contributing 82% and 77% of its 2010 and 2011 PBT.

Oil palm – leading earnings growth
From logger to planter. Ta Ann was one of the earliest among listed Malaysian loggers to venture into the palm oil industry, a vision that will continue to reward shareholders for the foreseeable years. Palm oil provides a steady and growing income source, and has diversified Ta Ann‟s earnings base from pure timber since 2006.

Consistent planting programme, from a low base. 
The pure Sarawak planter started its maiden plantation in 2000 and accelerated its planting programme after 2004 (see Figure 2). Ta Ann has planted on average 3,300 ha per year since 2004, compared to an average
new planting area of 1,000 ha between 2000 and 2003. As of 31 Dec 2011, Ta Ann has 30,911 ha of oil palm planted area in Sarawak. This planted acreage puts Ta Ann on par with the likes of TSH Resources (Buy), TH Plant (Hold), and IJM Plantations (Not Rated).



High proportion of immature estates
average age ~5 years. Ta Ann has a relatively higher proportion of immature estates at 39% in 2010 (31 Dec 2011: 33%) compared to its peers (see Figure 4). Its oldest estate is merely 12 years old, and only 14% have reached peak production age (i.e. over 9 years of age - see Figure 1). Hence, with its young weighted age profile of ~5 years, it will continue to enjoy exponential growth at least for the next four years (even if new planting stops now), providing visibility in FFB output and earnings growth




18% 3-year forward FFB growth CAGR.
Given its young palm tree profile, we forecast Ta Ann‟s FFB production to grow at a robust 18% 3-year (2011-14) CAGR, which is among the highest in our universe of coverage (TSH: 19%; SOP: +12%). We expect its FFB production to grow to 760,031 tonnes by 2014 (+65% from 2011 levels). We forecast
the following yearly FFB production and growth:

• 2012: 541,207t (+18% YoY)
• 2013: 653,976t (+21% YoY), and
• 2014: 760,031t (+16% YoY).

The relatively lower FFB production growth of 18% in 2012 stems from a higher base following an impressive 47% growth in FFB output in 2011 to 457,973 tonnes. (Note that our 2012 forecast is approximately 9% below Ta Ann‟s internal forecast of 595,599t. Should Ta Ann‟s internal forecast
materialise, there is further upside to our earnings forecast.)

Double digit FFB growth to last till 2017.
We forecast Ta Ann‟s FFB production to grow at double-digit rates yearly till 2017. This assumes 3,000 ha of yearly new planting between 2012 and 2015, consistent
with the recent historical average. Even without new planting from 2012 onwards, Ta Ann will still enjoy double digit FFB growth till 2014 (see Figure 6).

High yields on peat soil. 
Its young palm trees achieved a high FFB yield of 22t/ha/yr in 2011, ahead of our estimates given its place in the yield curve cycle (see Figure 3). We understand its best performing estate achieved >30t/ha/yr. This could be due to the more fertile peat soil and higher density of planted oil palm trees per hectare. 84% of its
planted area is on peat soil, with the remaining land on mineral soil. Ta Ann has applied appropriate land preparation procedures as peat soil necessitates higher compaction. Ta Ann also constructed extensive
drainage since peat area is flatter compared to mineral land.

Investor interest in café operator, OldTown Bhd (RM1.46) has perked up in recent days. This could be due to a variety of factors, including the company’s relatively defensive business profile, upbeat prospects for earnings growth and yields as well as fairly modest valuations.

The company’s normalised net profit (after adjusting for one-off and other items) grew an estimated 15% last year, and we believe a similar double-digit earnings growth rate is sustainable for the foreseeable future. That compares well against the stock’s prevailing valuations.

The stock is trading at roughly 11.2 times our estimated earnings for 2012 and 9.6 times for 2013. In addition, shareholders will earn dividend yields estimated at 4.5% to 5.2% for the two years. While its shares may consolidate in the near term, following a good run-up, OldTown should see more upside in the long run.

Double-digit earnings improvement is expected from both the company’s key business units — the café operation and beverage manufacturing.

Plans to open 30 to 40 new cafés
OldTown added 21 outlets to its café chain in 2011, bringing the total to 196, including those in Singapore, Indonesia and China. This was slightly off the pace of an annual net add of 33 outlets on average in the previous three years, and is likely due in part to the company’s restructuring and listing exercise in mid-2011. However, OldTown fully intends to pick up the pace going forward.

For the current year, the company plans to add 20 to 30 new outlets locally, about half of which will be opened under its franchise scheme, which allows it to expand quickly and gain market share without overtaxing the balance sheet.
At the same time, the company is in the process of applying for halal certification for all 183 cafés in the country, hopefully before the end of this year.

It has secured certification for some 25 outlets to date. The food processing centres and beverage manufacturing are already certified. If successful, this will significantly expand its target market, which at the moment is predominantly Chinese.

For overseas expansion, two or three new outlets are planned for Singapore and and five to eight in Indonesia. A second outlet in Guangzhou, China, opened in March 2012.

Recall that OldTown signed up a master franchisee for the Guangzhou and Macau provinces last year. The target is to open some 36 cafes by 2015. A new food processing centre in Guangzhou, in which OldTown has a 19% stake, is planned by end-2012. In addition, the company is exploring the possibility of appointing licensees for other provinces in China to further expand its footprint. Licensing, like the local franchise model, limits the company’s investment risk.

In all, we are likely to see 30 to 40 new outlets per year, locally and overseas, going forward. The new outlets and organic growth — same store growth is estimated to average some 2% to 3% — are expected to underpin a 15% to 20% annual earnings growth.



Beverage manufacturing has a huge target market
The café chain accounted for roughly 62% of OldTown’s total revenue in 2011, with the balance coming from the beverage manufacturing arm. The latter is also expected to grow in tandem for the foreseeable future.

OldTown is estimated to have over 42% market share in the instant white coffee mix segment domestically. While it will likely continue to fare well, the higher growth potential should come from exports, which currently account for half of the company’s beverage manufacturing revenue.

The OldTown brand of instant coffee mixes has done particularly well in Hong Kong, where it is ranked second in terms of market share, and Singapore.

Building on its success, OldTown has pushed into the mainland Chinese market, where the potential demand is much larger. Initial sales figures have been encouraging. Its products are sold through three distributors via major retailers such as Walmart, Jusco and Carrefour in coastal cities including Beijing, Shanghai and Guangdong.

The company has also set its sights on two other coffee drinking countries in the region, South Korea and Vietnam. Statistics suggest that per capita coffee consumption in South Korea is five times the average for the Asia-Pacific region and double that of Malaysia, and growing, driven by the younger generation of consumers. Vietnam is one of the world’s largest exporters of coffee beans but consumption has been lagging and therefore presents good growth potential.

With a much larger addressable market, OldTown believes the beverage manufacturing business can maintain growth at a high double-digit clip. Sales grew at an average compound growth rate of nearly 34% per year in the past three years.

The manufacturing facility for coffee and milk tea mixes was running at roughly 83% utilisation at end-2011 and is expected to hit maximum capacity this year. To cater for the expected growth, OldTown is in the process of building a new factory in Ipoh, which will double the existing capacity once it is up and running, slated for 3Q12. Capital expenditure is estimated at some RM48.7 million, for infrastructure and machinery. The facility can be expanded further to up to five times the current level by adding more production lines at fairly marginal cost.

Modest valuations should translate into further gains
We estimate net profit at RM43.2 million this year, up 18% from our estimate of normalised earnings of RM36.6 million in 2011, and further expand to RM50.4 million in 2013. That implies the stock is trading at a price-earnings ratio of roughly 11.2 times 2012 and 9.6 times 2013 — fairly modest compared with the prevailing consumer sector’s average valuations.

Based on the company’s minimum 50% net profit payout ratio, dividends per share are estimated at 6.5 sen and 7.6 sen per share for the two years. That translates into pretty attractive net yields of 4.5% to 5.2% at the current share price.

Certainly there are risks, even though the sector is generally viewed as relatively resilient. Consumer spending is expected to remain quite robust. However, it could weaken if the global economic growth outlook deteriorates significantly or if inflation eats into disposable incomes.

The rapid expansion in OldTown’s café operations also raises difficulty in terms of quality control. Deterioration in food quality or poor service at even a few outlets could hurt the brand name and sales across the whole chain. Furthermore, competition in both the café chain and beverage manufacturing is intense and consumer preferences can be very fickle.

On balance though, we suspect that OldTown should continue to perform fairly well over the next two to three years. Its balance sheet is strong with net cash totalling RM72.6 million as at end-2011.


Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.

This article appeared in The Edge Financial Daily, April 20, 2012.