Market Dateline PP 7767/09/2010(025354)

RHB Research Institute

RHB Equity 360°

23 July 2010 (Steel, BAT; Technical: Faber)

Top Story : Building Materials – Near-term prospects for steel sub-sector improves Neutral (up from UW)
Sector Update
Ann Joo Resources : Target PER raised from 7x to 9x Market Perform (up from UP)
CSC Steel : Target PER raised from 7x to 9x Outperform (up from MP)
Hiap Teck Venture : Target PER raised from 7x to 9x Market Perform
Kinsteel : Target PER raised from 7x to 9x Underperform
Perwaja : Target PER raised from 7x to 9x Outperform
Sino Hua-An : Target PER raised from 7x to 9x Underperform
- We believe prices of steel products will likely stage a rebound in 4Q, as: 1) steel consumption is seasonally
stronger in 4Q; 2) concerns on overcapacity in the steel sector are likely to ease in the near term; and 3)
spot price of iron ore fines (key steelmaking input for most large steel mills in the world) has bottomed.
- While the near-term outlook for the steel sub-sector is likely to improve in the near term, we reckon that it is
still too early to turn bullish on the steel sub-sector yet, as: 1) the risk of a sharper-than-expected slowdown
in the global economy remains, and this may once again hurt buying sentiment on steel products; and 2)
overcapacity (in particularly, China) remains an issue.
- We are lowering our 2010-12 net profit forecasts for steel stocks under our coverage by 2.7-17.3%, largely
to reflect lower sales volume and average selling price assumptions in anticipating for a weak 3Q.
- We are raising our 1-year target forward PER for all steel and steel-related producers under our coverage
by 2x from 7x to 9x, to reflect the improved near-term outlook of the steel product sector.
- Given the improved outlook we upgrade the steel sub-sector from underweight to Neutral. Correspondingly,
our rating for the overall building materials sector is also upgraded from underweight to Neutral.

Corporate Highlights

BAT : Within expectation Underperform

2QFY10 Results
- 1H10 net profit of RM191.9m (-7.2% yoy) was within our and consensus expectations. Declared a first
interim net dividend of 113 sen (representing 85% payout), which was in line with expectations.
- BAT’s sales volume only dropped by 0.1% (vs. industry of -2.3%) being more prepared for the less than
20s pack ban. In Jun 10, BAT has re-introduced Peter Stuyvesant as a VFM brand (vs. premium
previously), which also helped support the sales volumes.
- While it is too early to gauge the impact of the less-than-20s pack ban, management highlighted that in Jun
10, the retention rate for Dunhill brand was better than expected, supported mainly by the FIFA World Cup.
- FY10-12 EPS forecasts raised by 1.3% p.a. after: 1) changing FY10 TIV assumption to -3.5% (from -5%);
and 2) raising our premium market share assumption for BAT to 74% (from 73.3%) after 1H10 results.
- DCF-derived fair value increased to RM40.25 (from RM38.95) after the earnings changes and rolling-
forward our DCF base year from FY10 to FY11 with unchanged WACC of 7.9%. Maintain Underperform.

Technical Highlights

Daily Trading Strategy : Key immediate support is still at the 10-day SMA …
- The FBM KLCI retreated on follow-through profit-taking momentum, but the index managed to end the day
off its day low of 1,332.92 at above the 10-day SMA of 1,334 yesterday.
- This was in line with our expectation, that the 10-day SMA would buffer selling pressure on the FBM KLCI.
- However, ended with a negative candle on the chart, the index still sees risk of further weakness ahead.
- In our view, the 10-day SMA should continue to protect the short-term positive sentiment on the market.
- And as long as the SMA remains steady, bargain-hunting activities could return soon, though the short-
term sentiment may be dampen by the constant selling pressure from the T+3 and T+4 deliveries from the
1.1bn shares traded on Tuesday in the coming sessions.
- As a cautious note, investors should be ready to cut loss should the index fall from the 10-day SMA, as it
will spoil the current sentiment and drag the index towards the 40-day SMA of 1,312 and the key
psychological level at 1,300.
 Daily Technical Watch: Faber Group - Potential to regain buying support from the 10-day SMA …
- 10-day SMA: RM2.883
- 40-day SMA: RM2.75
- Support: IS = RM2.80 S1 = RM2.60 S2 = RM2.29
- Resistance: IR = RM3.04 R1 = RM3.40

Bulletin Board

Co/Sector News Impact Recom

Plantations Argentina has slapped more anti-dumping duties
on China products yesterday, threatening to
escalate a trade dispute with China which has
banned Argentine soyoil imports. According to
the report, the Argentinean president’s visit to
China last week failed to get the government to
lift the ban on Argentine soyoil which was
imposed in late-March. (Reuters)
Petronas Petronas Gas hopes to conclude its study to set
Gas up a new liquefied natural gas (LNG)
regassification plant by year-end. The plant has
to be ready by 2014. Construction would take
one-and-a-half to two years, and the plant would
have an annual capacity of at least 3m tonnes.
(BT)
Petronas Petronas Gas is mulling the possibility of
Gas introducing third-party access (TPA) agreement
where other transporters or shippers, apart from
Petronas, are allowed to supply gas to Petronas
Gas using the company's Peninsular Gas
Utilisation (PGU) network, and would be charged
a structured zonal-based tariff. (BT)
This would have a positive impact of CPO prices, N
as a continued ban in China of Argentine soyoil
products could lead to a continued shift in
demand in China to CPO. However, this is
somewhat neutralized in this crop year, due to
the abundant crops of soybean coming out of
Brazil and US.
We estimate the plant would cost around MP, FV =
US$200/tonne (or a total of RM2bn) based on RM10.71
PTT’s THB30bn 5m tonnes p.a. (tpa) plant in
Thailand. The structure of the plant within the
supply chain still has to be decided and will likely
be based on either: 1) a throughput agreement
similar to Petronas Gas’ current agreement with
Petronas; or 2) a sale & purchase agreement in
which the plant owner would have to bear the risk
of LNG price fluctuations. We note that Petronas
Gas is already the owner and operator of the
Peninsular Gas Utilisation pipeline, transmitting
natural gas to industrial customers and power
generation plants. We expect the LNG
regassification plant in Melaka to connect to the
PGU pipeline. In any case, the project ensures
that Petronas Gas will still have a role to play
even after the natural gas supply from offshore
Terengganu is depleted.
Positive. This option is already provided for under MP, FV =
the fourth Gas Processing & Transmission RM10.71
Agreement (GPTA), but has yet to be executed.
Additional throughput volumes from other parties
would be positive for Petronas Gas which
currently derives 100% of its throughput volumes
and the bulk of its earnings from Petronas under
the GPTA. However, this would depend on
liberalisation of natural gas supply and market
pricing for natural gas (currently subsidised at
RM10.70/mmbtu).

Important Dates

Company Entitlement details Ex-date Payment date

New entitlements
Cycle & Carriage Bintang Interim dividend of 5 sen less 25% tax 4-Aug-10 24-Aug-10
UOA REIT Interim income dist of 4.19 sen taxable + 0.96 sen tax exempt 4-Aug-10 30-Aug-10
 Tower REIT Interim income distribution of 4.5 sen 5-Aug-10 23-Aug-10
Atrium REIT Second interim income distribution of 2.15 sen 5-Aug-10 27-Aug-10
BAT (M) First interim dividend of 113 sen tax exempt under single tier 10-Aug-10 20-Aug-10
United Kotak Final tax exempt dividend of 6 sen 26-Aug-10 9-Sep-10
Teo Seng Capital Final single tier dividend of 0.85 sen 3-Nov-10 16-Nov-10

Going “ex” on 26 Jul

Kossan Rubber Industries Bonus issue on the basis of 1-for-1 26-Jul-10 -
NPC Resources Final single tier dividend of 3 sen 26-Jul-10 10-Aug-10
Mintye Industries First and final dividend of 10 sen less 25% tax 26-Jul-10 11-Aug-10
Perstima Final dividend of 27 sen less 25% tax 26-Jul-10 12-Aug-10
Y.S.P Southeast Asia Holding First and final single tier dividend of 6 sen 26-Jul-10 18-Aug-10
Thong Guan Industries First and final tax exempt dividend of 4 sen 26-Jul-10 18-Aug-10
KSL Holdings First and final dividend of 5 sen less 25% tax 26-Jul-10 25-Aug-10

...For more details, see individual reports attached

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