Accelerating
Both the Hang Seng property sector and commodities surge.
Laurence Balanco (852) 26008576 laurence.balanco@clsa.com
In recent weeks we have highlighted the commodity market’s breakout and acceleration and we have recently seen the Hang Seng Property Index surge to new highs for 2009 on strong volume. B arring any surprises from the USA (the S&P500 needs to remain above the 50-day EMA), we expect a quick blowoff move up in both markets. Aggressive traders can look at taking some long trades here, but long-term investors should consider using a melt-up phase to reduce exposure.
Surging higher. Recent price action in the Hang Seng property sector has been positive. We’ve seen an aggressive rise of over 7% on strong volume (above the 90-day average). As such, we would fully expect a quick blowoff move up 11-18% to 33,600-35,900. We do not expect to see significantly more than this level attained in the near term, as we are nearing the completion of the pattern off the March low. It would take a reversal below 27,870 to invalidate the bullish near-term outlook.
Property stock review. We review the top four stocks in the Hang Seng property sector, which accounts for 80% of the index, in order to highlight key support and resistance levels. Sun Hung Kai Properties (16 HK - HK$126.80) offers the most upside until chart resistance at HK$143.00-144.00, up 12%. Hang Lung Properties (101 HK - HK$31.40) shows the least amount of upside to next resistance at HK$33.90-34.00, a 7% rise. See yesterday’s Price Action Asia for details.
Acceleration the sign of maturity. A sudden acceleration in trend and volume is typically a sign of a trend ending. An acceleration of a trend typically indicates an exponential influx of new buyers, while unusually high volume signifies that a “new generation” is buying, which means that the latest surge of new buyers will run into losses on only a small decline. The problem is in knowing how far the acceleration phase will take price action, but a red flag should be raised nevertheless. We believe some commodities and the Hang Seng Property Index have entered an early phase of acceleration. Tactically, we think aggressive traders can look at taking some long trades in these markets, but long-term investors should consider using a melt-up phase to reduce exposure and lock in profits.
Focus on copper and crude. Price action in copper futures (HG1- US$302) overnight was strong, ending a brief two-month consolidation pattern below US$295 resistance. The next upside target is US$325, a resistance level that includes the highs and lows from August-September 2008 and the 78% retracement level of the 2008 decline. Crude oil continues to work its way higher after breaking out of a three-month consolidation pattern earlier this month. Next resistance is at US$82.70, the 62% retracement level of the 2008 decline, and then the measured move objectives at US$92.00-95.00. It is worth noting that BHP (BHP AU - A$39.83) has managed to push above resistance provided by the upper boundary of a more than two and a month old consolidation pattern. The breakout suggests an upside target around the A$44.00 area. I would not expect to see price action push significantly higher than this level in the near-term, as we are nearing the completion of the pattern.
Commodities: Enter the laggards. Coffee, rice and cattle futures are set for base breakouts and further gains in the near term. Stocks in Asia that could benefit from such breakouts are BISI International (BISI IJ - Rp1,900) and Australian Agricultural (ACC AU - A$1.49)
A-share breakout revisited. A break above the 3,000-3,100 resistance zone for the Shanghai Composite (last - 3,070) would be considered bullish and the market should be bought in anticipation of a move to new recovery highs for 2009 - above 3,478.
Minggu, 25 Oktober 2009
Danareksa Energi Mega Persada (ENRG IJ, Rp310 BUY) Strong Production Growth
Weak financial results but strong production growth
The company’s financial performance was weak in 1H09 and revenues fell 21.1% yoy to Rp701.6bn as the realized oil price slumped 52.7% yoy to an average of $51.9/bbl from $109.7/bbl in the same period last year. As a result, the company fell into the red, recording a net loss of Rp244.7bn. As for earnings before tax, they were also affected by higher financing costs due to the company’s US$450 debt raising efforts last year. Yet all is not bad. Despite lower capex, EMP will still be able to increase production volume in 2009. As the operator of its assets, gross production was boosted 18.8% yoy in 1H09 (note that production volume for MedcoEnergi fell 17.0% yoy in 1H09). And going forward, EMP should start to gain momentum as gas from the Kangean block starts to be monetized in 4Q10, giving a timely boost to earnings in 2010, which we expect to reach Rp201.9bn. Production growth should continue and we expect 19.6% growth in 2010 to 37.1 mboepd from an estimated 31.0 mboepd in 2009.
Better outlook for oil price
We increase our oil price assumption to take into account the latest oil price developments. Our oil price assumptions are now US$57/b (from US$55/b) for 2009, US$62/b (from US$60/b) for 2010 and US$70/b (from US$60/b) for 2011 onward.
Gearing to decline starting 2010
We expect EMP’s debt to equity ratio to increase to 1.8x at YE09 from 0.70x at YE08, yet still way below the 4.5x level at YE05 when the company acquiring huge reserves from Kangean. Looking further ahead, we expect the gearing to drop to 1.5x at YE11 and then to 1.3x at YE12, on the expectation of higher oil prices and an increase in production volume.
New TP at Rp 425, BUY
Although we now expect the company to book losses of Rp257.9bn in FY09 (vs. our earlier forecast of net profits of Rp297.5bn), the company should be back in the black in 2010. For FY10, we forecast earnings of Rp201.9bn or down from our earlier forecast of Rp250.8bn, mainly due to higher forecast production costs. Also, we have now opted to value the company based on its free cash flow to the firm (FCFF), as this better reflects the company’s current high leverage. In addition, we also apply a higher cost of equity of 22% (vs. 20% previously) to capture the higher risk of E&P activities from new exploration assets. This pushes up our WACC to 14.7% from 13.6% previously. Our new TP of Rp425 reflects P/BV of 1.8x and 1.7x in FY09-10F. Potential upside from the current share price is 37.1%. BUY.
The company’s financial performance was weak in 1H09 and revenues fell 21.1% yoy to Rp701.6bn as the realized oil price slumped 52.7% yoy to an average of $51.9/bbl from $109.7/bbl in the same period last year. As a result, the company fell into the red, recording a net loss of Rp244.7bn. As for earnings before tax, they were also affected by higher financing costs due to the company’s US$450 debt raising efforts last year. Yet all is not bad. Despite lower capex, EMP will still be able to increase production volume in 2009. As the operator of its assets, gross production was boosted 18.8% yoy in 1H09 (note that production volume for MedcoEnergi fell 17.0% yoy in 1H09). And going forward, EMP should start to gain momentum as gas from the Kangean block starts to be monetized in 4Q10, giving a timely boost to earnings in 2010, which we expect to reach Rp201.9bn. Production growth should continue and we expect 19.6% growth in 2010 to 37.1 mboepd from an estimated 31.0 mboepd in 2009.
Better outlook for oil price
We increase our oil price assumption to take into account the latest oil price developments. Our oil price assumptions are now US$57/b (from US$55/b) for 2009, US$62/b (from US$60/b) for 2010 and US$70/b (from US$60/b) for 2011 onward.
Gearing to decline starting 2010
We expect EMP’s debt to equity ratio to increase to 1.8x at YE09 from 0.70x at YE08, yet still way below the 4.5x level at YE05 when the company acquiring huge reserves from Kangean. Looking further ahead, we expect the gearing to drop to 1.5x at YE11 and then to 1.3x at YE12, on the expectation of higher oil prices and an increase in production volume.
New TP at Rp 425, BUY
Although we now expect the company to book losses of Rp257.9bn in FY09 (vs. our earlier forecast of net profits of Rp297.5bn), the company should be back in the black in 2010. For FY10, we forecast earnings of Rp201.9bn or down from our earlier forecast of Rp250.8bn, mainly due to higher forecast production costs. Also, we have now opted to value the company based on its free cash flow to the firm (FCFF), as this better reflects the company’s current high leverage. In addition, we also apply a higher cost of equity of 22% (vs. 20% previously) to capture the higher risk of E&P activities from new exploration assets. This pushes up our WACC to 14.7% from 13.6% previously. Our new TP of Rp425 reflects P/BV of 1.8x and 1.7x in FY09-10F. Potential upside from the current share price is 37.1%. BUY.
Indopremier Kundur Site Visit –Tin Solder Factory
Tin Solder Business Factored in
We visited TINS’s production and processing facilities at Kundur, where they built a tin solder factory in their efforts to venture into downstream tin products. The factory has the capacity to produce 2100Mt/year and is expected to start commercialization in 2010. TINS is planning to expand the capacity to 4,200 Mt/year in 2012. Used for circuit boards of electronic products, tin solder industry faces good prospects as electronics usage continues to grow and many manufacturers are switching from lead to higher tin usage. Tin solders are generally priced at US$2,000/Mt above LME price and has a floor value, offering better margins and earnings stability. Factoring in the tin solder business in our forecasts, we expect contributions of 4% to revenue till FY12 and 8% subsequently.
Industry Outlook – Recovering Consumption
There has been a recovery in global demand for tin in 2Q09 as consumption rose 28.6% QoQ to 81,400 Mt, driven mainly by China. Nevertheless, there is still an oversupply in the market and LME inventory reached a high of 26,450 Mt. Based on CRU’s report, increased consumption in China and USA in the future could be offset by higher supply from China and Indonesia. However, because of bad weather and recent police crackdown, Indonesia’s production could be lower than expected. We expect refined tin prices to stabilize around US$15,000/Mt for FY10, but as the world economy picks up going forward, there is potential for higher prices.
Stronger Profitability Ahead
TINS’ profitability suffered since 3Q08 as a result of falling tin prices, with gross margins falling to 6% and 11% in 4Q08 and1H09 respectively. The winding down on inventory with high costs carried over from last year depressed margins as they had to be sold at lower LME prices. Going forward, we expect margins to improve as tin prices have recovered above COGS. Higher proportion of offshore production could also boost margins as its costs are relatively fixed and the social costs associated with illegal mining can be avoided. In FY10, we expect better margins from higher ASP and contributions from tin solder segment.
Valuation – TP Rp 2,555 BUY
Although we factored in the tin solder business, we have revised down our assumptions of tin prices and sales volume, cutting our TP slightly from Rp2,625 to Rp2,555. Using risk-free rate of 9.97%, risk premium of 5.26% and beta of 1.19, our TP is derived by applying WACC of 15.51%. With 17.5% potential upside, we maintain our BUY rating. Our TP implies 11.9x FY10 PER and 6.95x FY10 EV/EBITDA.
We visited TINS’s production and processing facilities at Kundur, where they built a tin solder factory in their efforts to venture into downstream tin products. The factory has the capacity to produce 2100Mt/year and is expected to start commercialization in 2010. TINS is planning to expand the capacity to 4,200 Mt/year in 2012. Used for circuit boards of electronic products, tin solder industry faces good prospects as electronics usage continues to grow and many manufacturers are switching from lead to higher tin usage. Tin solders are generally priced at US$2,000/Mt above LME price and has a floor value, offering better margins and earnings stability. Factoring in the tin solder business in our forecasts, we expect contributions of 4% to revenue till FY12 and 8% subsequently.
Industry Outlook – Recovering Consumption
There has been a recovery in global demand for tin in 2Q09 as consumption rose 28.6% QoQ to 81,400 Mt, driven mainly by China. Nevertheless, there is still an oversupply in the market and LME inventory reached a high of 26,450 Mt. Based on CRU’s report, increased consumption in China and USA in the future could be offset by higher supply from China and Indonesia. However, because of bad weather and recent police crackdown, Indonesia’s production could be lower than expected. We expect refined tin prices to stabilize around US$15,000/Mt for FY10, but as the world economy picks up going forward, there is potential for higher prices.
Stronger Profitability Ahead
TINS’ profitability suffered since 3Q08 as a result of falling tin prices, with gross margins falling to 6% and 11% in 4Q08 and1H09 respectively. The winding down on inventory with high costs carried over from last year depressed margins as they had to be sold at lower LME prices. Going forward, we expect margins to improve as tin prices have recovered above COGS. Higher proportion of offshore production could also boost margins as its costs are relatively fixed and the social costs associated with illegal mining can be avoided. In FY10, we expect better margins from higher ASP and contributions from tin solder segment.
Valuation – TP Rp 2,555 BUY
Although we factored in the tin solder business, we have revised down our assumptions of tin prices and sales volume, cutting our TP slightly from Rp2,625 to Rp2,555. Using risk-free rate of 9.97%, risk premium of 5.26% and beta of 1.19, our TP is derived by applying WACC of 15.51%. With 17.5% potential upside, we maintain our BUY rating. Our TP implies 11.9x FY10 PER and 6.95x FY10 EV/EBITDA.
DBS Tambang Batubara Bukit Asam (Rp14,550; Buy; TP Rp18,550; PTBA IJ)
Permit obtained for new railway project
It was reported that Tambang Batubara Bukit Asam (PTBA) has obtained the permit from the Ministry of Transportation to build the new railway that connects PTBA mine in Tanjung Enim to a port in Lampung.
The development of this railway project with a total length of 307km and capacity of 20mn tons p.a. will be performed by a consortium made up of PTBA (10%), Transpacific Railway Infrastructure (80%) and China Railway Engineering Corporation (10%), with total investment of US$1.06bn. China Railway Engineering Corporation also appointed as the Engineering, Procurement and Construction ( EPC ) contractor and as operator and maintenance (O&M) for this project. The project will be funded by debt (70%) and internal cash (30%).
Following the permit, what lies ahead next for the consortium is the signing of the EPC and O&M contracts, expected to be done by end 2009, and to obtain funding for the project in the next one year. The development will take three years, thus the railway project is expected to commence in 2013 as previously targeted.
The permit is a positive development for this project and for PTBA, as the project is strategically important for PTBA in enhancing its sales volume in years ahead.
It was reported that Tambang Batubara Bukit Asam (PTBA) has obtained the permit from the Ministry of Transportation to build the new railway that connects PTBA mine in Tanjung Enim to a port in Lampung.
The development of this railway project with a total length of 307km and capacity of 20mn tons p.a. will be performed by a consortium made up of PTBA (10%), Transpacific Railway Infrastructure (80%) and China Railway Engineering Corporation (10%), with total investment of US$1.06bn. China Railway Engineering Corporation also appointed as the Engineering, Procurement and Construction ( EPC ) contractor and as operator and maintenance (O&M) for this project. The project will be funded by debt (70%) and internal cash (30%).
Following the permit, what lies ahead next for the consortium is the signing of the EPC and O&M contracts, expected to be done by end 2009, and to obtain funding for the project in the next one year. The development will take three years, thus the railway project is expected to commence in 2013 as previously targeted.
The permit is a positive development for this project and for PTBA, as the project is strategically important for PTBA in enhancing its sales volume in years ahead.
CLSA Excelcomindo still struggling, BUY TLKM
Our research assistant Vera Ongyono has just written her first report: Excelcomindo (EXCL IJ). Free float in this telco operator is less than 1%, so it is not really investable for most investors, but Vera’s report provides an interesting insight into the third largest mobile operator in Indonesia (and also the most aggressive). The company has 17% market share of the subscriber market but only 9% share of the profits.
EXCL’s balance sheet is the weakest amongst the big three, carrying net debt of Rp15tn as of 1H09. A US$300mn rights issue will alleviate the immediate cash draught. However, as EXCL has almost Rp1.3tn of debt maturing this year itself and plans to spend USD300m in capex. Unless there is a significant price increase without customers lost, EXCL’s operating cash flow may not be able to cover its capital expenditure.
Mobile tariff in Indonesia has dropped off from US$0.12/min to US$0.02/min, literally from one of the highest in the world to one of the cheapest within 6 months. No wonder that EXCL only generated Rp2.2tn in operating cash flows out of Rp10.7tn capex investment last year.
Clearly, the cash bleeding can’t go on forever. In fact, after years of price war, price has finally started to show an improvement. Rev/min has finally risen albeit very slowly. With 9 mobile companies still operating in Indonesia, expect price recovery (i.e. price increase without losing subscribers) to be gradual at best.
Rival Indosat is faring bit better, but is clearly still struggling as well. Even during the peak season in Sept09 for Ramadhan, this second largest mobile operator was not able to improve its operating profit (see analyst Wili comment for Indosat’s weak 9M09 results.
We prefer dominant Telkom Indonesia (TLKM IJ) as it has the strongest balance sheet and brand equity. Profitability has already improved and sub growth is likely to follow. BUY TLKM
EXCL’s balance sheet is the weakest amongst the big three, carrying net debt of Rp15tn as of 1H09. A US$300mn rights issue will alleviate the immediate cash draught. However, as EXCL has almost Rp1.3tn of debt maturing this year itself and plans to spend USD300m in capex. Unless there is a significant price increase without customers lost, EXCL’s operating cash flow may not be able to cover its capital expenditure.
Mobile tariff in Indonesia has dropped off from US$0.12/min to US$0.02/min, literally from one of the highest in the world to one of the cheapest within 6 months. No wonder that EXCL only generated Rp2.2tn in operating cash flows out of Rp10.7tn capex investment last year.
Clearly, the cash bleeding can’t go on forever. In fact, after years of price war, price has finally started to show an improvement. Rev/min has finally risen albeit very slowly. With 9 mobile companies still operating in Indonesia, expect price recovery (i.e. price increase without losing subscribers) to be gradual at best.
Rival Indosat is faring bit better, but is clearly still struggling as well. Even during the peak season in Sept09 for Ramadhan, this second largest mobile operator was not able to improve its operating profit (see analyst Wili comment for Indosat’s weak 9M09 results.
We prefer dominant Telkom Indonesia (TLKM IJ) as it has the strongest balance sheet and brand equity. Profitability has already improved and sub growth is likely to follow. BUY TLKM
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