Telecommunications Sector: Riding On The Data Traffic Wave

♦ Key investment themes. We see the following key investment themes for the telecommunications
sector this year:

1) Data traffic – the next wave of growth. While we expect voice revenue to see slower growth ahead, we are more optimistic with respect to broadband and data revenue. Factors such as an unusually large gap between the number of internet users in Malaysia and broadband penetration, a young demographic profile that is internet and tech savvy, an increasing range and choice of handsets and smartphones and rising popularity of social networking services all lead us to believe that the non-voice revenue segment is poised for significant growth ahead.

2) Strong cash flows, healthy balance sheets and well articulated dividend policies lend visibility to attractive yields. Cash flows for both Digi and Maxis remain strong while we expect TM’s cash flows would be sufficient to cover its capex requirements. Based on their respective dividend policies, we project FY10 net yields of between 4.8% and 6.3%. This is relatively more attractive as compared to the average net yield of 2.4% for the top 10 stocks in the FBM KLCI (within RHBRI’s coverage) and would help lend support to share prices, in our view.

3) Capital management activities still on the cards. We believe capital management would be a recurring theme for the sector this year. Digi remains committed to moving towards a more efficient balance sheet while the management of Maxis has reassured investors that the balance sheet would not be left idle. As for TM, after the generous capital repayment last year, management has yet to make any firm commitments with respect to capital management initiatives. However, we believe the door is still open as TM has the capacity to pay out cash in excess of the minimum RM700m dividends.

♦ Risk. The key risk is still, in our view, competition. Despite the number of new operators that have come into the market, we think that the direction of tariffs would still depend heavily on the pricing behaviour of the incumbent mobile operators. More importantly, while we expect tariffs to continue to remain under pressure due to competition, we do not expect irrational pricing to set-in.

♦ Recommendation. We are maintaining our Overweight stance on the telecommunications space. The sector has underperformed the benchmark FBM KLCI over the last 1-2 years, held back largely due to the market’s focus on the maturity of the voice segment of the industry, while under-appreciating the expected growth of the non-voice segment, in our view. Generally, we see the sector offering a broad appeal to investors of various risk appetites. For investors with higher risk appetites, Axiata (Outperform, FV=RM3.85) offers investors strong earnings growth and exposure to a recovery in emerging markets, where mobile penetration still remains relatively low. We believe a new economic cycle has begun and Axiata would be a major beneficiary, in our view. At the extreme, we see TM (Outperform, FV=RM3.55) maintaining its minimum dividend commitment of RM700m p.a. (or 6.3% net yield) and this should appeal to the risk adverse. For a balance, we like Digi (Outperform, FV=RM24.00) and Maxis (Outperform, FV=RM6.30) as both offer investors decent earnings growth and yields. We see further upside to yields as the balance sheets of these companies would appear to be rather underleveraged by end-2010.

By RHBINVEST
Analyst: David Chong, CFA

Steel Sub-Sector Back In The Groove

♦ Recap from our previous steel sub-sector report. We upgraded steel steel sub-sector from Underweight to Neutral in Nov 09 as we had turned more positive on the sector’s fundamentals. We also noted that a further
upgrade would be warranted if:
1. Global steel consumption recovers earlier than expected, which will eliminate concern on destocking activities, hence boosting steel producers’ pricing power and profitability; and

2. The Chinese government makes a significant inroad into the consolidation of the steel sector in China, which will eliminate excess capacity in China, and hence boosting pricing power of steel producers in the region.

♦ Upward price momentum likely to sustain in the near term. Global steel prices have been rising since Dec 09 and we believe the upward price momentum is likely to sustain over the next 2-3 months, as:

1. Global demand for steel will continue to strengthen in 2010, underpinned by higher infrastructure spending
and economic recovery (which will in turn boost demand for end products such as electrical appliances, automobiles, etc);

2. Concerns on overcapacity (that may eventually lead to destocking activities) are likely to be downplayed, at least for now; and

3. Prices of inputs, in particular, iron ore fines, metallurgical coke and scraps will likely rise further and this will lend support to steel prices.

♦ Global steel consumption to improve in 2010. We believe global demand for steel products is likely to
improve in 2010, underpinned by higher infrastructure spending (arising from the implementation of stimulus packages by world’s major ecoonomies) and improved consumer sentiment (arising from economic recovery) that will boost demand for end products such as electricial appliances, automobiles, etc. This is evidenced in World Steel Association’s projection, which anticipates global steel consumption to rise by 9.2% to 1,206m tonnes in 2010, underpinned by the implementation of economic stimulus plans and economic recovery.

♦ Concerns on overcapacity likely to be downplayed, at least for now. Given the improved global steel consumption outlook, we believe the concerns on overcapacity (which may then result in another round of
destocking activities, hence weighing down on international steel prices) are likely to be downplayed in the near term. Also, The Chinese government has recently stepped up its efforts to curb excess capacity in China’s steel sector (the world’s largest steel producer and consumer). While this may not immediately reduce the country’s excess steel capacity in the near term, we believe this will at least help restoring steel stockists confidence, hence sustaining restocking activities in the country.

♦ Rising input prices lend support to steel prices. Prices of iron ore fines, scraps and metallurgical coke (that are the key ingredients in producing steel) have risen by 13-30% since Dec 09. This will lend support to steel prices, as steel producers are likely to pass down the higher production cost by raising steel prices. While higher steel prices (driven by higher input costs) may not translate directly to higher profitability among the steel producers, we note that this will spur inventory replenishing activities by steel stockists in anticipation of higher steel prices airising from higher input costs. Also, we believe that prices of these inputs will continue to trend up further in the near term, as:

1. Supply of scraps is likely to remain tight during winter season in the Northern hemisphere, traditionally the
low season for scrap collection activities; and

2. Global steel consumption recovery (which in turn translates to higher demand for iron ore) will boost prices of iron ore further.

Metallurgical coke sector
♦ Margins of independent metallurgical coke players to improve on better pricing power. Apart from greater demand outlook, we believe the pricing power of independent metallurgical coke producers is likely to improve in the near-term, thanks to the improved global steel consumption outlook that will result in higher capacity utilisation at steel mills globally, hence boosting pricing power of independent metallurgical coke
producers.

Zooming in to Malaysia
♦ Demand outlook for Malaysian long steel producers will improve further in 2010. We remain optimistic
on the demand outlook of Malaysian long steel product sector on:

1. The implementation of stimulus packages in the ASEAN region; and

2. Malaysian long steel producers’ edge over the international competitors in the ASEAN market, given: (1) The favourable tariff structure, i.e. 0-5% import duty for long steel products imported from the ASEAN region
vis-à-vis a 10-15% import tariff for non-ASEAN steel producers; and (2) The close proximity between
Malaysia and the other ASEAN countries, that means shorter delivery time and lower transportation cost.

♦ Demand outlook for Malaysian flat steel producers to improve too. We are turning more bullish on the
demand outlook for Malaysian flat steel product sector (which consists of mainly steel pipe and cold rolled coil producers), as:

1. Rising flat steel product prices encourages inventory replenishing activities by steel stockists; and

2. Steel pipe producers’ price competitiveness in the US market has improved significantly, following the recent heavy import duties slapped by the US Commerce Department on steel pipes imported from China.

♦ More M&A activities in the pipeline? Following Hiap Teck Venture’s move to expand vertically and rumours
on a possible merger between Southern Steel and Ann Joo Resources, we believe more merger and acquisition
(M&A) activities may be brewing, given the improved market condition (that translates to higher valuations) and improved fundamentals (that strengthens steel players’ balance sheet, hence ability to expand).

Forecasts & valuations
♦ Target forward PER for long steel product sector raised by 2x to 12x. We are raising our 1-year target forward PER for the long steel product players (consisting of Ann Joo Resources, Kinsteel and Perwaja) by 2x
from 10x to 12x to reflect the improved outlook of the steel product sector, in line with its historical forward PER of 12x during the peak of the steel cycle.

♦ Target forward PER for flat steel product sector raised by 2x to 9x. We are raising our 1-year target forward PER for the flat steel product players (consisting of CSC Steel and Hiap Teck Venture) by 2x from 7x to
9x to reflect the improved outlook of the steel product sector, in line with its historical forward PER of 9x during the peak of the steel cycle.

♦ Target forward PER for Sino Hua-An raised by 2x to 12x. We are raising our 1-year target PER for Sino
Hua-An by 2x from 10x to 12x to reflect the improved price bargaining power of independent metallurgical coke supppliers in China arising from the improved demand outlook for steel.

♦ Earnings forecasts. Maintained, we believe our earnings forecasts have adequately reflected the sector’s
improved outlook.

♦ Ann Joo Resources. We believe Ann Joo will experience a margin boost in the coming quarters, given its high inventory level of 4-5 months (which was mostly acquired at low prices). Besides, Ann Joo is well positioned to benefit from the rising long steel product demand arising from the implementation of stimulus packages in the Southeast Asia region (including Malaysia). Indicative fair value is raised by 20.1% from RM2.94 to RM3.53 following an upgrade in our target forward PER for the long steel product sector from 10x to 12x. Upgrade from Market Perform to Outperform.

♦ CSC Steel. Indicative fair value is raised by 29.1% from RM1.27 to RM1.64 following an upgrade in our target
forward PER for the flat steel product sector from 7x to 9x. Upgrade from Underperform to Outperform.

♦ Hiap Teck Venture. Indicative fair value is raised by 28.8% from RM1.56 to RM2.01 following an upgrade in
our target forward PER for the flat steel product sector from 7x to 9x. Upgrade from Underperform to Outperform.

♦ Kinsteel. We believe Kinsteel will benefit from the rising domestic long steel product demand arising from the pending implementation of stimulus packages as well as a pick-up in property development activities (indicated by a surge in property launches since 2H09). Indicative fair value is upgraded by 19.6% from RM1.07 to RM1.28 following an upgrade in our target forward PER for the long steel product sector from 10x to 12x. Upgrade from Market Perform to Outperform.

♦ Perwaja. We believe Perwaja will enjoy a strong turnaround in FY12/10, underpinned by: (1) Rising steel prices that will boost its profitability significantly (given that its production cost will remain relatively unchanged, thanks to the low iron ore pellet contract price that will last until end-1HFY12/10); and (2) Improved demand for upstream steel product in the Southeast Asia region arising from the acute shortage of upstream steelmaking capacity in the region. Indicative fair value is raised by 19.9% from RM1.61 to RM1.93 following an upgrade in our target forward PER for the long steel product sector from 10x to 12x. Upgrade from Market Perform to Outperform.

♦ Sino Hua-An. Apart from benefiting from the recent widening price gap between metallurgical coal (input) and metallurgical coke (output) that will boost its profitability, we believe Sino Hua-An’s profitability will be further boosted by higher prices of major by-products (i.e. tar oil and crude benzene), of which prices correlate to crude oil prices that are anticipated to trend up further in the near term. Indicative fair value is raised by 20.3% from RM0.59 to RM0.71 following an upgrade in our target forward PER from 10x to 12x. Maintain Outperform.

Risks
♦ Risks for steel sector. Risks for the steel sector include: (1) Oversupply in China that results in dumping activities by Chinese steel producers in the international market; and (2) Steep contraction in global steel consumption that will weigh down on international steel prices.

♦ Risk for metallurgical coke sector. Risks for the metallurgical coke sub-sector include: (1) Increases in China’s export tariff for steel that will hurt demand for metallurgical coke; (2) Higher-than-expected
metallurgical coal (input) prices that will erode metallurgical coke producers’ margins; and (3) Lower\ contribution from high-margin by-products. Sector rating

♦ Upgrade steel sub-sector to Overweight, top picks are Ann Joo, Hiap Teck, Perwaja and Sino Hua-An. Given the improved near-term outlook, we are upgrading the steel sub-sector from Neutral to Overweight. Correspondingly, our rating for the overall building materials sector is also upgraded from Underweight to Neutral. For exposure in the building materials sector, our top picks are Ann Joo Resources (OP, FV = RM3.53), Hiap Teck Venture (OP, FV = RM2.01), Perwaja (OP, FV = RM1.93) and Sino Hua-An (OP, FV = RM0.71).

By RHBinvest
Analyst: Chye Wen Fei

EP Manufacturing

Target RM0.59
Previous RM0.52
Price RM0.43

During our recent visit to EPMB, management further clarified that the new localization programmes for the Myvi and Alza which the company recently secured would substantially broaden its revenue base come 2010. With the new guidance and a slight tweak in our model, we have raised our revenue and net profit estimates by
11% and 42% respectively for FY10. We see EPMB potentially exhibiting strong bottom-line numbers, for which we expect a growth of 87.2% for FY10 on better financial leverage and the economies of scale achieved in its production line. Following the upward earnings revision, our TP is increased to RM0.59 from RM0.52 with our BUY call reaffirmed.

Counting on Perodua. We recently visited EP Manufacturing. As we stated in our last report, EP Manufacturing had recently secured a new contract from Perodua for the manufacture of the cross member structure (a structure that holds the engine) for both the Myvi and Alza after investing over RM40m-60m in dies, moulds and R&D. Previously EPMB had only secured Perodua’s localization programme for the Viva’s cross member, from which it collects an estimated RM700-800 per car, along with the other parts it supplies. The further localization of the Myvi and Alza would see EPMB increasing the supply of auto-parts to both models from 33 parts to 103 parts in total, almost tripling its revenue collected per Myvi from 2010 onwards.

Doubling revenue from Perodua. Given the new assumptions that we had not earlier gauged, we are substantially increasing our revenue contribution from Perodua. We estimate that revenue contribution from Perodua would increase from RM74m (as collected in FY08) to as much as RM196m in FY10 on the back of the higher average revenue per Perodua vehicle supplied (from RM477 in FY09 to RM1115 per vehicle). The growing revenue from Perodua will increase its proportionate share of EPMB’s total revenue from
15%-17% in FY08-09 to over 35% from FY10 onwards.

Upbeat on the Alza. We perceive that EPMB’s management is optimistic on Perodua’s recently launched Alza, for which management said the demand has been encouraging as the booking period is stretched as far as 4 months. While there have been concerns over the potential cannibalization on Myvi sales, we think the impact will not be severe as vehicle sales for the Myvi have remained uninterrupted to date despite the recent launch of the Alza. Perodua anticipates that bookings could average well above 4000 units per month for FY10, beating Exora’s monthly average sales to date since its launch earlier this year.

52 week H
L Price (RM) 0.60 0.12

Major Shareholders (%)
Mutual Concept 37.21
DBS Asset Management 7.01
Abdullah Bin Hamid 5.09

By OSK188
Analyst: Ahmad Maghfur Usman

Rubber Glove

♦ Yoy growth in value. Last year, Malaysia’s export of rubber gloves reached an all-time high of RM6.8bn (+20% yoy) due to stronger US$ and sustained demand from US and Europe. As for 2009, for the period between Jan-Mar, Malaysia’s export for rubber gloves reached RM1.7bn (+12.4% yoy). The US continued to be the largest single buyer of Malaysian gloves, accounting for 39.3% of Malaysia’s total glove exports for the period between Jan-Mar.

♦ Demand to stay resilient. We expect demand for gloves to remain strong as the possibility of more H1N1- type flu outbreaks in the future is another catalyst for demand. Given that gloves are the most basic and affordable form of protection against viruses in the healthcare industry and coupled with the rising awareness in healthcare standard for the populated countries (e.g. China and India), should translate into a further boost in demand for medical gloves moving forward.

♦ … but not without some headwinds. While demand prospects remain favourable, some headwinds appear to
be developing. Latex prices are currently trending upwards (YTD=+69.6%). However, given that most of the glove manufacturers practice an efficient costing/pricing mechanism, using the average latex price for the previous month to set the current month’s selling price. This enables the glove manufacturers to pass on the higher latex cost to customers, albeit with a slight time lag. As for the volatility of the US$ against RM, past trends suggest that glove manufacturers have the ability to adjust their prices, for currency effect normally 1-2 months later. Any time lag in passing on the cost increase, however, would be mildly negative but
not significant.

♦ Risks. The risks include: 1) sharp surge in raw material (latex) and/or energy (natural gas) prices, which may result in margin squeeze; 2) an appreciating RM against the US$; and 3) execution risk from capacity expansion.

♦ No change to our net profit forecasts. No change to our earnings forecasts for now.

Valuations and Recommendation
♦ Top Glove – maintaining its position as world’s largest glove producer. We continue to like Top Glove (Outperform, FV=RM11.60) for its position as world’s largest glove producer. Top Glove’s annual production capacity is expected to reach 35.3bn pieces by end-FY10, from 31.5bn pieces currently following the completion of its two new factories as well as additional eight new lines at F18. The extra capacity is to support the strong orders that are coming from Latin America and Europe following the possibility of more H1N1-type flu outbreaks in the future. With its healthy cash pile of RM222.0m (14.5 sen/share) as at end-Nov, Top Glove remains on the lookout for potential acquisitions. Given its healthy cash pile of RM237.1m as at end-Nov, we believe the company would not have too much problems with financing its future acquisitions internally. Our fair value is based on CY10 target PER of 15x.

♦ Kossan – laggard amongst its peers. We believe Kossan’s (Outperform, FV=RM8.65) lagging performance vs. peers for the YTD was due to its poor performance in its TRP segment earlier this year, unfavourable hedging
policies and two fire incidents. Operation-wise, it remains business as usual for Kossan. Kossan plans to increase its current annual production capacity of 11.1bn pieces to 14.5bn pieces by end-2010 and further to 18bn pieces by end-2011. Kossan is currently trading at CY10 PER of 6.5x, which, in our view is undemanding given FY08-11 net profit CAGR of 37.1%. Coupled with the recovery in the demand for its TRP products on the back of recovering economy in 2010 and resilient demand for medical gloves, should bode well for Kossan. Our fair value is based on CY10 target PER of 11x.

♦ Adventa – largest surgical glove producer in Malaysia. We continue to favour Adventa (Outperform, FV=RM3.48) for its niche position as the largest surgical glove producer in Malaysia. The management is looking to aggressively expand its surgical gloves production from 250m pairs currently to 350m pairs by early 2010 and 450m pairs by end-2011. In addition, the company plans to ramp up its dental and examination gloves by building a new factory in Kluang, Johor, which will house 7 double former lines (+1.5 bn pieces). The commercial production for the new factory is expected to start by 2Q-2010, which will increase the current annual production capacity of 3bn pieces to 4.5bn pieces by end-2010. In 2011, the management plans to add another 5 double former line (+1.0 bn pieces), which will increase Adventa’s annual capacity production for dental and examination gloves to 5.5bn pieces by end-2011. These aggressive capacity expansion plans are steps for the company to take advantage of the rising awareness in hygiene standards following the H1N1 pandemic as well as to further its foothold in Latin America as the company recently gotten the approval to export its gloves to Brazil. We recently upgraded our fair value after revising our target CY10 PER for Adventa to 10x (from 8x).

♦ Market Perform for Hartalega. We like Hartalega for its position as the second largest nitrile glove manufacturer in Malaysia and the second largest in the world. Management has mentioned the construction of
Plant 5 is almost completed and that the commercial production for two new lines at Plant 5 (+0.6 bn pieces) is set to start in Feb ’10. This will increase Hartalega’s annual production capacity to 6.8bn pieces by end-FY10 from 6.2bn pieces currently. Following that, management intends to put in another ten new lines at this plant and decommissioning ten of its old lines in Plant 1 and replacing them with six high-capacity new lines. This would effectively raise Hartalega’s annual production capacity further to 10bn pieces by end-FY12. Management also plans to increase its natural rubber gloves production to 30% of sales vs. 20% currently to take advantage on the growing demand from developing countries (i.e. China and India). However, given the limited potential upside to our fair value, which is based on our expected market returns, we have downgraded our Outperform call to Market Perform while maintaining our fair value of RM6.23 based on unchanged CY10 target PER of 11x.

By RHBInvest
Analyst: David Chong, CFA

Taliworks Corporation

Recommendation: BUY
12-Month Target Price: MYR1.90


• Taliworks reported 9M09 revenue and net profit of MYR114.2 mln (- 44.1% YoY) and MYR26.6 mln (-17.8% YoY), respectively. The earnings were largely in line with our expectations.

• The lower revenue and net profit were mainly due to the absence of contribution from the construction division. The Padang Terap project is still on hold, mainly due to delay in land acquisition by the authorities. Management expects the project to be completed by 2010.

• Meanwhile, Taliworks’ water business remained resilient, contributing pretax profit of MYR40.2 mln in 9M09 (-0.6% YoY). Furthermore, its waste management division in China reported a pretax profit of MYR2.7 mln (+21.7% YoY), attributed mainly to a tariff hike and higher production growth.

• Taliworks’ 55%-owned jointly-controlled entity, Cerah Sama Sdn. Bhd. registered a higher net profit of MYR6.7 mln in 9M09 (+12.4% YoY), driven by improved traffic volume and write back of impairment upon
its disposal of investments in SILK Holdings (SIB MK, MYR0.35, Not Ranked).

• Our net profit forecast for 2009 is largely unchanged. We increase our earnings forecast for 2010 by 15.2%, taking into account the delayed contribution from the Padang Terap project.

• We upgrade our recommendation to Buy (from Hold) with an unchanged 12-month target price of MYR1.90 due to increased upside following the recent share price weakness.

• Our target price is based on discounted cash flow (DCF) analysis (WACC: 11.2%-12.4%, terminal growth: 3%). At our target price, Taliworks would trade at 21.2x 2010 EPS, comfortably within the midpoint of its five-year trading range.

• We like Taliworks for its healthy balance sheet and recurring income derived from its concession businesses. In addition, Taliworks targets to increase its overseas revenue contribution to 50% (from 6% in
2008). In our view, this is a strategic move as it would reduce Taliworks’ dependence on earnings from local water concessions and mitigate domestic regulatory risks. We believe Taliworks is wellprepared for any expansion opportunities, given that it has MYR180.0 mln of unutilized proceeds raised from the issuance of convertible bonds. The group will focus on investments related to concessionbased businesses with attractive valuations.

• Risks to our recommendation and target price include regulatory issues related to its concessions, which could lead to lower water tariffs or toll rates. Higher costs have been built into the concessions pricing mechanism but there is no guarantee that Taliworks will be able to attain stated price increases and/or avert collection difficulties.

52-week Share Price Range (MYR) 1.35-1.98

Major Shareholders:
Lim Chee Meng and family 52%
Kumpulan Perangsang Selangor 19%

By Standard & Poors
Analyst: Chok Wai Lee, CFA

Scientex

Recommendation: BUY
Price: MYR1.42 12-Month
Target Price: MYR1.70

• Scientex turned in encouraging 1QFY10 (Jul) results, with net profit rising 69% YoY to MYR12.7 mln. The net profit exceeded our expectations, reaching 30% of our previous FY10 projection.

• Both the manufacturing and property development divisions recorded healthy sales and profit growth. Revenue and operating profit of the manufacturing business grew 4% YoY and 60% YoY respectively, while the property arm saw sales and operating profit expand by 28% YoY and 44% YoY respectively.

• The manufacturing division, which produces industrial packaging products such as stretch films, strapping bands and raffia tapes, is benefiting from the recovery in global industrial activity with demand increasing steadily. Management had anticipated this earlier, adding several production lines in FY09. Contributions from the new capacity will be seen in FY10 results.

• Meanwhile, despite the continued soft property market in Johor, we understand sales of Scientex’s properties have been brisk, mainly due to its successful strategy of selling lower-priced houses to young
professionals who are starting a family. The group has been averaging sales of above 100 units per month in the last three months.

• Given the robust results and positive outlook, we raise our FY10 and FY11 net profit projections by 16% and 10% to MYR48.4 mln and MYR53.5 mln respectively.

• We maintain our Buy recommendation on Scientex but raise our 12- month target price to MYR1.70 (from MYR1.50) on the back of our earnings upgrade.

• We derive our target price by ascribing a target PER multiple of 7x (unchanged) against its CY10 earnings, inclusive of a projected dividend. The target PER multiple is benchmarked against its manufacturing peers and is also within the 5x-8x PER valuation range for property companies under our coverage.

• Scientex continues to demonstrate resilience in its earnings delivery. We continue to like the group for its experienced leadership and bright prospects, underpinned by the rising demand for its industrial packaging products and residential houses. We also note that its balance sheet is lean and healthy, backed by a NTA/share of MYR1.80 and a net gearing of 0.1x as at October 2009.

• On Oct. 19, 2009, Scientex proposed to acquire Johline Realty Sdn Bhd (JRSB) for a cash consideration of MYR65.3 mln. JRSB owns two parcels of land totaling 156 acres in Mukim Pulai and Mulim Plentong, Johor. Scientex intends to replicate its success in its Pasir Gudang andKulai projects on this new acquisition, although incremental contributions are only expected in FY11 or FY12.

• Risks to our recommendation and target price include a reversal in the demand uptrend for its manufacturing division and softer-thanexpected take-up rates for its property launches.

52-week Share Price Range (MYR) 0.82 - 1.42

Major Shareholders:
Scientex Holdings Sdn Bhd 17%
Scientex Leasing Sdn Bhd 10%
Lim Teck Meng Sdn Bhd 7%

By Standard & Poors
Analyst: Alexander Chia, ACA

Tecnic Group Bhd

 Tecnic Group Berhad (TGB) bagged yet another strong quarter, driven mainly by higher sales
volume from its plastic injection moulding division. Revenue increased by 28.6% to RM39.1 million while pre-tax profit surged 94.7% to RM3.7 million.

 Compared to the previous corresponding quarter, pre-tax margins improved, from 6.9% to 9.7% on
better costs control and favourable revenue mix of higher margin products. Despite generally higher oil prices which affected resin prices, TGB has been able to pass on most of the cost escalation to its clients due to its material cost lock-in at point of order.

 The taxation charges remain negligible due to availability of tax benefits through unabsorbed losses brought forward and capital allowances and reinvestment allowances of subsidiaries.

 No dividend was announced in the reporting quarter. We expect a dividend of 3 sen for the full financial year.

 Its net asset per share strengthened to RM1.67 from RM1.58. Due to strong operational cashflows,
its balance sheet has turned into a net cash position. This has primed its balance sheet forfuture funding requirements, especially for capacity expansion. Early this year, TGB purchased a plot of 5 acres land in Nilai for such purpose.

 We are re-iterating our BUY recommendation on TGB as it remains undervalued despite its
commendable performance. Trading at a PER of 6.1x on FY10 earnings, TGB is a strong buy.

 Revenue grew strongly by 31.0% to RM100.5 million as sales volume mainly from its plastic injection moulding division maintained its expansion path by focusing on higher-end products in the automotive, electrical and electronic, industrial and consumer industries. TGB also has its patented proprietary “Triple Lock Pail” for stringent and demanding industrial usage.

 Pre-tax profit grew at a more aggressive pace of 74.1% to RM10.1 million boosted by higher margin as better cost control and favourable product mix kicks in which resulted in a 260 basis point rise in
the 9M09 pre-tax margin.

 Going forward, TGB would continue to focus on expanding its customer base, establishing new products and improving on overall efficiency to maintain its competitive edge.

Recommendation
 TGB is enjoying the fruits of its strategy in focusing on value-added comprehensive services to higher-end clients which had steered it away from the high-volume low-margins business model usually associated with plastic-based companies. It is forging ahead towards higher revenue and earnings base supported by a growing diverse set of clientele ranging from automotive, consumer to healthcare comprising both local manufacturers and multinationals based in Malaysia.

 Its share valuation remains undemanding with PERs of 6.7x and 6.1x on FY09 and FY10 net earnings respectively. Although we expect some consolidation in FY10 after a strong period of growth, there could be room for surprise upside given the momentum TGB is enjoying. Hence, we are maintaining our BUY recommendation on TGB.

52-weeks share price range (RM0.70-RM1.90)

Major Shareholders: %
Gan Kim Huat 22.8
Zenith Highlight Sdn Bhd 13.5
Fantastic Revenue Sdn Bhd 9.9

By Netresearch-Asia
Analyst: Lim Boon Ngee

Temperature to rise 3 celsius