BIMB 'buy', YTL 'hold', Johor Tin 'outperform'

BIMB HOLDINGS BHD

Buy (maintained)

Target price: RM5.05

We has kept its “buy” call on BIMB Holdings Bhd with a target price of RM5.05.

The research firm said there was uncertainty regarding the potential corporate re-organisation of its financial holding company structure that could be a key stock overhang for now.

A swift resolution of this could spark a re-rating, it said.

A number of banks in Malaysia such as RHB Bank Bhd, Alliance Financial Group Bhd and Affin Hwang Investment Bank have recently announced corporate exercises that involved the collapsing of their respective financial holding company structure.

“This essentially entails the transferring of the listed entity from the financial holding company to the bank.

“Financial holding companies that have existing financial holding company debts would have to undertake a dilutive rights issue to repay such debts in the process,” the research house said.

In BIMB’s case, the group has an outstanding 10-year sukuk amounting to roughly RM1.2bil, which means it would have to either undertake a one-for-four rights issue or dispose of its stake in Syarikat Takaful to redeem the sukuk at an earlier-than-scheduled date.

Nevertheless, we said BIMB’s share price has priced in the dilution if such an exercise was to be carried out.

“Given the group’s relatively-high holding company fully-loaded CET1 of 12.6%, we believe that it should be sufficient to meet Bank Negara’s minimum capital adequacy ratio requirements for a financial holding company in 2019.

“As such, the group should have no issues maintaining its current financial holding company structure and to gradually pay off its sukuk without having to raise a dilutive rights issue.

“But it should carefully assess whether there is an urgency to carry out such a dilutive exercise that is punitive to shareholders if existing capital base is sufficient to meet Bank Negara’s capital adequacy ratio for financial holding company in 2019,” it said.

On its oil and gas (O&G) exposure, BIMB’s total O&G loans account for 8.7% of its total loans books (RM3.5bil), while sukuk exposure stood at about 2% of its total investment securities portfolio (about RM308mil).

Of the 8.7% O&G loan exposure, nearly 90% were consumer loans (personal and mortgages) to O&G employees in relatively large corporate firms.

YTL CORP BHD

Hold (maintained)

Target price: RM1.44

AFFIN Hwang Capital has maintained its “hold” call on YTL Corp Bhd, with a lower target price of RM1.44 from RM1.70 previously.

Despite forecasting an improvement in financial year 2018 (FY18) forecast earnings, Affin Hwang believed the current share price has priced in the earnings growth expectations.

The improvement was mainly due to the forecast low-base effect in FY17.

“We cut forecast dividend payment per share (DPS) to 7 sen in FY17-FY19, following the 30% to 34% cut in our forecasts earnings per share, due to weaker results from the cement operations,” the research house said.

Affin Hwang said there could also be more downside risks if YTL Power lowered its DPS below 10 sen, as a 0.5 sen decline in YTL Power’s DPS would lead to a 0.2 sen reduction in YTL Corp’s DPS.

In the meantime, the house said the cement business remained challenging in FY17 due to overcapacity and weak demand from the property segment.

Although the research house expects a higher demand from infrastructure and property in FY18, it believed the incremental demand is not sufficient to absorb the overcapacity, limiting the upside of recovery in earnings.

“Given that more than 30% of our realisable net asset value (RNAV) is derived from its cement operations, changes in the segment will have a significant impact on our realisable net asset value (RNAV).

Apart from the construction job for the Tanjung Jati “A” power plant project (which Affin Hwang expects YTL Power to achieve financial close by year-end), it also believed that YTL Corp could benefit from rail-related infrastructure projects in Malaysia, given its track record in delivering the Express Rail Link.

“We expect close to RM120bil worth of rail-related contracts will be awarded from the second half of 2017 onwards.

“However, the earnings upside from these contracts are unlikely to compensate for the weaker results overall,” it added.

JOHORE TIN BHD

Outperform

TargetpPrice: RM1.86

PUBLIC Investment Bank (PublicInvest) has initiated coverage on Johore Tin Bhd (JTB) with an “outperform” call and a target price of RM1.86, implying an upside of 36.8% from its last traded price.

“We like JTB for its growth opportunities in the milk powder segment, increasing food and beverage contributions from potential capacity expansion plans in the sweetened condensed and evaporated milk segments, and growth opportunity in the American continent from new ventures in Mexico as well as healthy balance sheet,” PublicInvest said.

As such, the research house believed that JTB deserved a higher price to reflect its underlying value.

On JTB’s milk powder segment, the management expects utilisation rate of its new milk powder packing factory to increase from 35% in FY17 up to 70% in FY19.

“At the current capacity utilisation of 15%-16%, we estimate this segment currently generates an operating profit of about RM2mil-RM3mil in the first quarter of FY17.

“If it manages to achieve a 75% utilisation, operating profits may grow exponentially to between RM50mil and RM55mil, although this will take a good three to four years to attain.

“We anticipate the addition from the profit of Able Food may potentially double the group’s bottom line (which was just RM35.6mil in FY16),” PublicInvest said.

In the next six to eight months, JTB plans to upgrade its machinery and production lines for the sweetened condensed and evaporated milk businesses.