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DNP Holdings (Hwang DBS Vickers) buy; target price RM2.10

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PPB Group (RM17.62; Hold; Price Target: RM17.50; PEP MK)
Possible impact of Wilmar’s tax fraud allegations

PPB’s 18.4% associate Wilmar is under investigation for possible tax-fraud allegations to the tune of Rp3.6t or c.US$395m. According to Indonesian media, this involves allegations that Wilmar International colluded with two senior officials from the corruption-plagued Directorate General of Taxation.

Wilmar has clarified that the value added tax restitution claims are typically payable for domestic purchases; and restitution of value added tax payments arises out of refunds for exports of palm oil out of Indonesia. The group’s Indonesian subsidiaries are collectively the biggest exporters
of Indonesian palm oil; and these subsidiaries collectively exported more than US$3bn worth of palm oil in each of the last 3 financial years, thereby entitling these subsidiaries to claim the 10% value added tax paid on the cost of these sales for each of those years. The group maintained that it had complied and are in compliance with relevant Indonesian tax laws and categorically denied any allegations of collusion with tax officials as referred to in the media

Assuming a worst case scenario where this Rp3.6t or c.US$395m are to be taken into account in Wilmar’s books, the impact on PPB’s FY10 earnings would be 9.4% lower at RM2.05bn (including one-off gain from sale of sugar business). Our plantation analyst believes it is premature to conclude such adverse impact will materialize. We maintain our Hold rating and TP of RM17.50 for PPB based on our SOP value.

EON Capital (RM6.98; Hold; Price Target: RM7.30; EON MK)
More sparks

Following the adjournment of EON Cap’s Board meeting to deliberate on Hong Leong Bank’s RM5.06bn offer, the Board meeting will be reconvened on or before 21 May 10 to consider, among other things, the following:

(i) the independent financial advisor’s (IFA) opinion; and

(ii) finalization of the terms of the proposed distribution of the proceeds that would be received from Hong Leong Bank Berhad to the shareholders of EONCap pursuant to EONCap’s acceptance of the offer in the event that the offer is approved for acceptance by the shareholders of the EON Cap and approved by the regulatory authorities.

It was not clearly stated what the content of the IFA report was but it is believed that the full report would be tabled in the upcoming Board meeting. Assuming the IFA report stated that Hong Leong Bank’s valuation of EON Cap is too low, this would put the Board of EON Cap in a difficult position i.e. it appears that the Board is agreeable to the said offer by Hong Leong Bank, yet the IFA report, which offers an independent opinion to the rest of the (minority) shareholders say otherwise. Even then, we believe the Board could still proceed to bring the offer up to the all shareholders at an upcoming EGM, which is supposed to be tabled by end May or early June.

We can think of the possible scenarios that could be concluded from the upcoming Board meeting:
(i) the Board could renegotiate with Hong Leong Bank further on the offer either in terms of pricing or to bring up the matter of including an equity element to the offer,

(ii) reports have said that Hong Leong Bank believes provisions for certain accounts were insufficient, which means there is a possibility for further adjustments to the offer price

(iii) call off negotiations talks

We reaffirm our EON Capital’s fair value to the offer price of RM7.30. We think the offer price is fair given EON Capital’s ROE profile of 10-11%. Clearly, as before, should the deal fall through, EON Cap’s share price could correct to its fundamental value of RM6.30 (Gordon Growth Model) in our
opinion.

Wah Seong (RM2.50; Hold; Price Target: RM2.60; WSC MK)
Lost out on Socotherm acquisition

According to a media release by ShawCor Ltd, parent company of Bredero Shaw (world’s largest applicator of pipeline coatings for the oil and gas industry), the Board of Directors of Socotherm has accepted an offer for a Euro 75m (c.RM306m) share capital investment from a consortium of ShawCor Ltd and two PE investors (4D Global Energy Advisors and Sophia Capital). The consortium will hold a 95% stake in Socotherm upon the completion of the exercise.

We understand that Wah Seong is among the potential bidders for Socotherm and the latest development certainty does not bode well for the company. Wah Seong was looking to leverage on Socotherm’s European market presence to expand their global reach. Nevertheless, it remains to be seen if Socotherm could convince their clients that the restructuring could turnaround the company which has previously been delivering sub-par performance. We believe any spill over of orders might still benefit Wah Seong (third largest pipe coaters in the world) that holds a good performance track record.

We feel that this is a missed opportunity for the company as it could be a potential re-rating catalyst for the stock. We maintain our Hold call and SOP-derived target price of RM2.60/share on the company at this juncture. Wah Seong is currently trading at rich valuation of 14x CY11F PE against the sector’s average of 9x.

Highlights

MISC (RM8.73; Buy; Price Target: RM9.10; MISC MK)

Synergistic VTTI acquisition

• Integration of tank terminals and shipping business provides cross-selling opportunities
• Expanding tank terminal capacity to 7.2m cbm by 2013 with guaranteed recurring income from Vitol
• At steady state earnings of US$50-80m, VTTI could be worth RM0.50-0.80/MISC share

Jobstreet (RM2.03; Buy; Price Target: RM3.30; JOBS MK)
Strong 1Q10; higher dividends

• 1Q10 net profit of RM8.7m was above our and market expectations
• More visible and higher dividends with dividend policy revised to 50% payout and paid on a quarterly basis
• FY10-11F earnings raised by 5-10%
• Maintain Buy with higher TP of RM3.30

Results Snapshots

Malaysian Resources Corp (RM1.55; Buy; Price Target: RM2.25; MRC MK)
Earnings momentum will pick up

• 1Q10 is not representative of FY10 performance
• EPF raised stake in MRCB after GO lapsed
• Maintain Buy rating and SOP-derived RM2.25 TP

DNP Holdings (RM1.21; Buy; Price Target: RM2.10; DNP MK)
Cheap + net cash

• 3QFY10 result was below expectation
• Turned net cash, strong position to replenish landbank
• Cut FY10-12F earnings by 8-13% due to launch delays; TP nudged down to RM2.10, maintain Buy

Malaysian Bulk Carriers (RM2.99; Fully Valued; Price
Target: RM2.30; MBC MK)

1Q10 results within expectations
• 1Q10 core net profit fell 18% q-o-q to RM47.7m, within our and market expectations
• Earnings were dragged down by lower contribution from POSH, as EBIT remained strong
• Maintain Fully Valued rating and RM2.30 TP

At a Glance
• 1Q10 is not representative of FY10 performance
• EPF raised stake in MRCB after GO lapsed
• Maintain BUY rating and SOP-derived RM2.25 TP

Comment on Result
MRCB announced 1Q10 net profit of RM9.8m (-21% q-o-q, >+100% y-o-y) on the back of 24% revenue growth to RM189.7m. 1Q10 earnings fell q-o-q due to the timing of profit recognition. Construction margins were largely flat q-o-q at 5.0%, while property margins were lower at 26% vs 35% in 4Q09 - 4Q09 property profit included one-off gains for Lot G and was also buoyed by completion of MIDA and SSM office.

Balance sheet at end 1Q10 reflected 0.4x net gearing (vs 1.0x in previous quarter), reflecting the RM510m rights issue proceeds. Of this, RM315m has been earmarked for investment in prime land, RM15m for environmental engineering and infrastructure, and RM50m for building services. The balance RM92m is for investment in Nu Sentral and working capital. EPF has raising its stake in MRCB to 41.7% currently even after the GO lapsed.

1Q10 may appear to be below expectations, but we expect stronger earnings in the quarters ahead to make up for this. This will come from the ramped “S” curve construction progress at KL Sentral for Lots A, 348, E and G that recently breached the 10% mark for meaningful earnings recognition, and its RM1.6bn external orderbook.

Recommendation
MRCB remains one of our high conviction picks for the sector. The key catalyst is it leveraging on the EPF-Government JV for participation in 3,000 acre RRIM land. Another key catalyst is more high margin environmental-related projects which could see a chunkier allocation during the 10MP. Reiterate BUY.
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