Upside Potential For Dairy Players
Shares of dairy companies Dutch Lady Milk Industries and Fraser & Neave Holdings (F&N) have seen strong gains in the year-to-date as a result of investor expectations that low raw material prices will lead to a rise in profit margins. Industry players mentioned that any transfer of cost savings from lower material costs to the end consumers would depend on factors such as competitive pressures and exchange rate.
CIMB Research commented that F&N could still deliver on a bottom line basis due to the launch of new products and lower raw material costs, despite the impending goods and services tax making the future operating environment a challenging one. It adds that a future drop in the value of the ringgit for the company will be easily offset by the steep drop in milk prices.
Other analysts opined that interest in Dutch Lady and F&N shares could also be boosted by their dividend growth prospects. Dutch Lady has experienced strong dividend growth of 20.6 percent annualised in the five years prior while F&N has undergone a more modest dividend growth of 3.2 percent, according to Bloomberg data. Nevertheless, fund managers are wary of both companies since they are trading at historic highs and tagged with high valuations.
Significance: CIMB Research has rated F&N stock an ‘’Add’’ with target price of RM24.52, noting that there could be upside potential to its forecast earnings should raw material costs drop even more. At the same time, Kenanga Research has given Dutch Lady a ‘’Market Weight’’ rating with a target price of RM44.22.
Eco World To Ink Deal On RM8b BBCC Project
Eco World Development Group (Eco World), UDA Holdings (UDA) and the Employees Provident Fund board (EPF) will be signing a tripartite agreement for a 40:40:20 joint venture to develop the RM8 billon Bukit Bintang City Centre (BBCC) project, which will consist of an integrated residential and commercial development.
The company also disclosed it will be signing a memorandum of understanding with Mitsui Fudosan of Japan to jointly develop the shopping and retail aspect of the project.
Eco World had been selected by UDA Holdings to be part of the redevelopment project because of its financial strength, the experience of its staff who had worked on the London-based Battersea project, a project of similar size, while they were with SP Setia as well as UDA Holdings’ inability to find another appropriate partner.
Significance: The project is part of the Economic Transformation Programme under the New Economic Model which aims to transform the Klang Valley into the Greater Kuala Lumpur economic district and Malaysia into a high-income nation by 2020. Eco World said that it does not think it will face problems in selling the properties on the project even though the area was where the Pudu prison was once situated.
Kossan To Finish Works On Two New Plants Next Year
Kossan Rubber Industries is expected to complete the construction of two new plants, which expand the glove maker’s total annual production capacity by 18 percent to about 26 billion pieces by next year. This is to cater to additional orders the group recently received from an existing customer, which it did not have the capacity to fulfil before the construction of the two plants. The group’s entire capacity has already been sold to its existing and new customers.
The company is expected to release the results for 4Q14 on 25 February. Maybank Investment Bank Research (MaybankIB) foresees that it will be reporting a stronger net profit growth of 8 percent quarter-on-quarter for the period in view of a robust sales volume growth. It has increased its sales volume growth forecast for the company from 18 percent to 22 percent since the new capacities planned to commence this year were two to three months earlier than anticipated.
The group’s capital expenditure for 2015 and 2016 is estimated to be around RM70 million to RM90 million per year for the building of new plants and the revamp of old production lines. The brokerage said that the group has the resources to fund it internally based on its projected operating cash flow of RM196 million and RM252 million for 2015 and 2016, respectively.
Significance: Maybank IB has made a ‘Buy’ call on Kossan with a target price of RM 5.90 since it feels that the company’s earnings growth may surpass its competitors due to the timing of its new capacity.