Kossan is as good as it gets

  Written by Financial Daily    Friday, 28 January 2011 12:02

Kossan Rubber Industries Bhd
(Jan 25, RM3.18)
Maintain buy with target price RM4.28: Kossan recorded a significantly higher revenue and net profit for 9MFY10 compared with the same period in FY09.

Revenue surged by 30% year-on-year while net profit rose even more strongly, jumping 54% year-on-year (y-o-y) to RM41.3 million from RM26.8 million recorded in 9MFY09. The higher net profit and revenue were lifted by higher sales volume and selling price, in tandem with the higher latex price and weaker US dollar against the ringgit. In addition, a good strategic move by the company to focus more on better margin products (such as nitrile gloves) has benefited its bottom line as the current cost for nitrile is more stable than the cost of latex which skyrocketed in 2010.

Kossan recorded an impressive 90% to 95% utilisation rate in FY05 to FY09 thanks to its strategy of supplying rubber gloves at optimum level. Thus, we foresee the company will benefit from any normalising of demand in the glove industry. Admittedly, there have been some oversupply issues as a result of normalising demand as distributors increased their inventory during the  H1N1 influenza A outbreak last year. However, we believe demand will keep growing in the coming years. Thus, Kossan is aiming to add more production lines, a growth of 10% to 30% for FY11 and FY12. This will help the company to cater for the rising global demand that is expected to grow by 8% to 10% in FY10/FY12.

Other than the gloves division, the technical rubber products (TRPs) division has contributed to Kossan’s earnings. This segment contributes about 20% of the group’s annual revenue. For the cumulative 9MFY10 period, this division contributed RM5.9 million (against RM1.6 million in 9MFY09) to its bottom line as demand from industrial sectors has shown encouraging improvement recently. This segment will benefit from the turnaround in the auto sector, especially from the large exporting countries. Close to 60% of TRPs sales are meant for export while the remaining 40% are sold domestically.

With up to 99% focus on the medical sector, it is not surprising to learn that the nitrile gloves segment has been contributing around 80% of Kossan’s total revenue. Currently, more than 40% of its production mix comes from nitrile and powder-free, with the balance 20% from the powdered latex gloves. The company will eventually increase its production mix to 50% nitrile gloves due to the low raw material cost compared with latex. In addition, the volatility of the latex price, especially for latex-based powdered and powder-free gloves, and the uncertain future latex price will drive customers to demand more nitrile gloves as the price is more stable. However, the company will still provide latex-based gloves as the demand for such gloves is higher than for nitrile gloves.

We are keeping our forecast unchanged as updates from management are largely in sync with our assumptions. We maintain our “buy” call on this counter with target price of RM4.28 based on an unchanged target PER of 10 times (at a 10% discount to Kossans three-year average PER of 11 times) to FY11 EPS of 42.8 sen. We remain positive on the industry’s demand side as this will be underpinned by: (i) the expected growth in the global demand for rubber gloves by 8% to 10% in FY10-FY12 on the back of resilient demand from the healthcare segment; and (ii) the expected liberalisation of the healthcare industry in major economies, especially China and India to be followed by other countries in the Americas, which would drive higher private healthcare spending. — BIMB Securities Research, Jan 27

This article appeared in The Edge Financial Daily, January 28, 2011.

Higher income distribution for Axis REIT

Axis REIT has done quite well in terms of expanding its assets portfolio over the past few years and, as a result, has been gradually raising its income distribution to unitholders. We expect this trend to continue in the current year. Based on the estimated distribution of 17.5 sen per unit for 2011, investors will earn a fairly attractive gross yield of 7.4% at the prevailing price of RM2.36.

Expanding assets portfolio
It was the first real estate investment trust (REIT) to be listed on the Bursa Malaysia in August 2005 and was reclassified as an Islamic REIT in December 2008. The trust focuses primarily on assets within the office and industrial sectors. Its properties are located in Petaling Jaya, Shah Alam, Klang, Prai, Johor and Kedah.

From the initial five properties on listing, Axis REIT now owns and manages 26 properties worth over RM1.16 billion. Five properties were acquired last year, including two logistics warehouses in Seberang Prai that were completed in 1Q10. The latest acquisitions — Tesco Hypermarket in Johor, Axis PDI Centre and Axis Technology Centre — were completed in 4Q10.

The trust’s earnings have been expanding in tandem. Income before tax (excluding fair value adjustments for assets) has grown steadily, from RM26.4 million in 2006 to RM52.6 million last year. In 2010, Axis REIT successfully renegotiated an average rental increase of 8.9% for leases due during the year, which accounted for some 18.5% of the total net lettable area under its management.

The value of its portfolio of properties too has been trending higher. For instance, in 2009 the trust recognised revaluation gains of some RM19.1
million. The valuation for its stable of properties rose by another RM45.6 million last year.

Investors made smart gains
REITs are typically viewed as low risk investments with relatively slow capital appreciation. Their main attraction is steady, higher than market average yields. Nonetheless, unitholders for Axis REIT have not done too shabbily relative to the benchmark index, the FBM KLCI, over the past year.

Indeed, investors in the REIT would have made a capital gain of 22% since the start of 2010. Over the same period, the FBM KLCI was up 19%. Including the income distributed totalling 16 sen per unit for 2010, unitholders would have made returns totalling 30%.

More yield accretive acquisitions in the pipeline
Axis REIT intends to stick to its strategy of acquiring yield accretive properties whilst promoting rental growth for existing assets through enhancements.

For the current year, there are three transactions pending completion including its first asset disposal. The trust is in the midst of completing the sale of North Port Logistic Centre for RM14.5 million on expectations that the property has limited upside to future rental growth. The sale will net gains totalling RM760,000. The trust intends to re-deploy the proceeds towards more yield accretive properties.

The two acquisitions pending completion are for a warehouse-office (D8, Port of Tanjung Pelepas) in Johor and an office building (Axis Eureka) in Cyberjaya for a combined RM81.2 million.

Furthermore, the trust is planning to add five more logistics warehouses in Johor and the Klang Valley as well as two more office blocks in Cyberjaya — estimated to be worth some RM365 million in the current year. It is also looking at the acquisition of Axis Technology Centre 2, consisting of a 6-storey office block, single-storey warehouse and car parks.

Some of the asset enhancements currently underway are the upgrade/facelift for Crystal Plaza, Fuji Xerox and Infinite Centre as well as the expansion of some 7,000 sq ft of net lettable area for a new penthouse level in Menara Axis. Other enhancements on the drawing board for the current year include that for the Cycle & Carriage complex and Kayangan Depot.

Income distribution expected to rise further in 2011
As such, we expect its earnings will continue to trend higher in 2011, lifted by full-year contributions from the five properties acquired last year as well as partial contributions from proposed new asset purchases this year.

Distribution per unit in the current year is estimated at roughly 17.5 sen per unit. That would earn unitholders a relatively attractive yield of 7.4%. Axis REIT is currently trading at roughly 1.2 times its net asset value of RM2.01 per unit.


Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.


This article appeared in The Edge Financial Daily, January 28, 2011.

My Stock Portfolio 16 Jan 2010

My stock portfolio date 15 January 2011.. After revise my portfolio performance compare to previous month 2-3%, my whole portfolio continue to perform well with the return close to 8.5%.. Stock market is in the bull market now and market sentiment is good ahead of general election.

YTLPOWR  Stay flat throughout the whole month. Compare to previous month, the stock price increase 0.4% and remain firm at range in between 2.4 - 2.47. After ex-date for final dividend and 1 interim dividen, the stock price remain stable. Will continue hold for long term as I am confident with its management team.  If its share price drop below 2.2, i will start accumulating again.. Making profit 40% return since acquisition..

KNM. Oil & Gas counter remain hot in the market as the government plan to have a lot of new projects that boost the oil & gas sector especially exploration of new oil field development. More contact will be awarded to local oil & gas sector and better earning prospect have boost their share price.. KNM share price increase 15.7% compare to previous month. I think KNM started to recover from bottom line and the profit start improving as the capacity and utilisation rate increase with more contracts secured globally. Making loss 39% since acquisition.

Genting, Share price increased 12.3% compare to previous month. Genting remain the top performer in my stock portfolio. Following better earning prospect from Genting Malaysia (UK casino and New work new gaming business slot machine), genting share price still reasonable compare to regional peer with P/E around 16 where by genting singapore P/E 22 and macau gaming P/E 23. Make profit 98% return since acqusition.

MEGB, Share price increase 6.3% compare to previous month. Some local fund like insider asia started to acquire masterskill share as the stock remain undervalue and potential upside is high. However, due to the US fund FMIC keep reducing its stake, and the share price retrace from highest point 2.59 since august last year to 2.15. The foundamental remain inact. Continue hold until it return to IPO level. Making loss 0.1% since acqusition.

OSKVI - Share price decline 1.2% compare to previous month. Making loss 82% since acqusition.Waiting for cut loss.

Coal shortage not affecting locCoal shortage not affecting local steel millsal steel mills

 By RISEN JAYASEELAN and YVONNE TAN  starbiz@thestar.com.my

PETALING JAYA: The reduced supply of coking coal, a key raw material used by steel mills, is not likely to affect local steel makers which mostly use scrap metal in their operations.

Australia, which supplies more than half of the world's coal exports, has been hit with massive floods that have hurt the production of the commodity, which is mostly sold to Asia's steel companies.

However, Malaysian steel makers will still have to contend with slightly higher scrap metal prices.

According to some estimates, scrap metal prices have risen following the uptrend in coking coal prices to about US$500 per tonne now from around US$400 per tonne in December.

A file picture shows a man working at a steel mill in Penang. Steel product prices are expected to soften slightly in the coming weeks.

 

But Kinsteel Bhd chief executive officer Datuk Henry Pheng reckons that the problem in Australia will create a shortage of steel products.

“With the slowdown in the supply of coking coal, we are expecting a shortage of steel. This bodes well for local producers who don't rely on coking coal as their raw material,” he said.

Kinsteel uses scrap metal as its main raw material. Pheng declined to comment on how this development would impact Kinsteel's margins.

Analysts said the outlook for local steel makers depended on whether they could pass on the slight increase in scrap metal prices to their end customers.

“The good news is that steel prices are on an uptrend. That bodes well for steel makers, despite their higher raw material costs. If steel prices keep going up, local steel companies could see a positive impact on their margins, notwithstanding the rise in raw materials,” said an analyst.

However, OSK Research steel analyst Ng Sem Guan said in a recent report that steel product prices were expected to “soften slightly” in the coming weeks largely due to a slowdown in construction activities in view of the upcoming Lunar year celebrations.

“Thus this (higher-priced products) may not significantly benefit local mills for now,” he said, without giving estimations.

As a result, he is keeping a “neutral” stance on the sector.

Meanwhile, another analyst said local steel companies were poised to benefit in the long term from the implementation of mega construction projects under the Economic Transformation Programme (ETP).

“The construction sector will be in a better position to absorb any additional cost as construction players themselves will be able to factor in the higher cost when bidding for the projects under the ETP,” said an analyst.

The ETP aims to transform the nation into a high-income nation. Some of the projects to be carried out include the RM36bil mass rapid transit network and Shell Malaysia's RM5.1bil investment to upgrade or build facilities in upstream, midstream and downstream activities.

For REITs, retail is still on shopping list for 2011

  Written by Chua Sue-Ann    Monday, 10 January 2011 13:23

KUALA LUMPUR: Moving into the New Year, analysts are still bullish on the two retail property-backed real estate investment trusts (REIT) — Sunway REIT and CapitaMalls Malaysia Trust (CMMT), which were listed in July 2010.

Both remain analysts’ top REIT picks driven by expectation that rental income from retail space will continue to grow on the back of strong domestic consumer spending and lifestyle trends. Sunway REIT also stands out for its size — it is Malaysia’s largest REIT — and gives foreign investors a more liquid exposure to the sector.

Sunway REIT was listed on July 8, 2010 with an initial fund size of RM2.4 billion and a portfolio of eight assets in the retail, hospitality and the office space sectors valued at RM3.73 billion, and a total net lettable area of 2.3 million sq ft.

The nine properties in Sunway REIT’s portfolio are Sunway Pyramid Shopping Mall, Sunway Carnival Shopping Mall, Suncity Ipoh Hypermarket, Sunway Resort Hotel and Spa, Pyramid Tower Hotel, Sunway Hotel Seberang Jaya, Menara Sunway and Sunway Tower.

CMMT, the smaller of the two retail REITs listed last year, made its debut on July 16 with three strategic properties in its portfolio valued at RM2.13 billion. The three properties — Gurney Plaza, the Sungei Wang Plaza property and The Mines — have a combined net lettable area of 1.88 million sq ft.

Sunway REIT says retail properties would continue to shine with strong capacity at Sunway Pyramid.

Sunway REIT shares closed at 88.5 sen on its first day of listing — slightly above its retail offer price of 88 sen and two sen below its institutional price of 90 sen.

The REIT’s price has been climbing steadily since mid-September, reaching an all-time high of RM1.05 on Jan 3, 2011. It closed last Friday at RM1.02, which was at a 4.6% premium to its net asset value (NAV) per unit that stood at 97.53 sen as at Sept 30.

Sunway REIT had declared income distribution per unit of 1.51 sen from distributable income for the July-September 2010 period, or the first quarter of its financial year ending June 2011 (1QFY11).  It said it was confident of achieving its profit forecast and full-year income distribution as disclosed in its prospectus.

For 1QFY11, income before taxation amounted to RM310.6 million, comprising realised net income of RM38.4 million and unrealised income of RM272.2 million arising mainly from fair value gain on investment properties. Earnings per unit totalled 11.59 sen for the quarter.

Including 1Q’s unit distribution, shareholders would have made a total gain of 17.6% compared with the initial public offering price.  

According to Sunway REIT’s prospectus, it had forecast distribution of 6.5 sen per unit for FY11. At the current price, the yield works out to 6.4%.

For 2011, Sunway REIT is upbeat that the retail market will perform better driven by strong economic fundamentals, increasing tourist arrivals, urbanisation and a young population base.

“The retail market sentiment improved in 2010 in tandem with the recovery in the domestic and global economies with an estimated 5% to 15% growth depending on retail format, location and size,” Sunway REIT said in the notes accompanying its financial results.

Sunway REIT said its retail properties would continue to shine having recorded increased visitorship and strong occupancy with Sunway Pyramid achieving an occupancy rate of 99%, Sunway Carnival 93% and Suncity Ipoh Hypermarket at 100%.

Some 278 tenancies in Sunway Pyramid, with a net lettable area of approximately 924,000 sq ft or 87% of its total net lettable area, are due for renewal in FY11, Sunway REIT said. Sunway REIT is also expecting a total rent increase of 15.8% for the three-year term.

Additionally, Sunway REIT said its hotel properties are expected to continue performing satisfactorily in line with the tourism industry’s positive outlook while its office space is expected to maintain occupancy levels with a moderate increase.

A softer office market is expected for Kuala Lumpur in the coming year due to increasing supply of office space coming on-stream. But Sunway REIT noted that there were no new supplies of office space in the vicinity of its flagship Bandar Sunway area.

The REIT said Menara Sunway and Sunway Tower have 99% and 95% occupancy rates respectively. Tenancy renewal is due for Menara Sunway but for Sunway Tower, the next renewal is only due in the middle of 2012.

Sunway REIT Management Sdn Bhd CEO Datuk Jeffrey Ng said Sunway REIT’s performance on the local bourse was in line with the company’s expectations given its market dominance of having the largest free float, total asset size and market capitalisation compared with its peers.

Ng said he expects higher trading volume this year, particularly among institutional investors, due to expected better financial performance of Malaysian REITs.

“So long as growth in revenue and net property income moves faster than any increase in interest rates, it would still be attractive to invest in REITs. We are not expecting a significant increase in interest rates,” Ng said in an email interview with The Edge Financial Daily.

Ng is, however, expecting more REIT players to enter the market, which will boost competition for quality real estate assets.

“On the acquisition front, we are actively scouting for yield-accretive acquisition opportunities and we have appetite to acquire large quality asset size of between RM500 million and RM1 billion in 2011,” Ng said.

Meanwhile, CMMT’s share price performance has also closely mirrored Sunway REIT’s.

Upon debut on July 16, CMMT shares had closed unchanged at its revised retail offer price at 98 sen, which was two sen lower than its institutional offer price of RM1.

CMMT’s shares have since moved up, hitting a high of RM1.14 on Jan 3. It closed at RM1.08 last Friday, above its NAV per unit of RM1.03 as at Sept 30.

According to CMMT’s prospectus, it had forecast a distribution per unit of 7.16 sen for the eight-month period from May 1 to Dec 31, based on the previous indicative price of RM1.08 per unit.

CMMT has also forecast a 4.1% growth in distribution to 7.45 sen for its financial year ending December 2011. Based on its last closing price, this corresponds to a yield of 6.9% in FY11, from 6.6% in FY10.

In its 3QFY10 ended Sept 30, CMMT posted net profit of RM81.29 million or 6.02 sen per unit, which comprised net property income of RM30.31 million and RM76 million from a change in fair value of its investment properties.

This was on the back of gross revenue of RM43.39 million, of which gross rental income was RM36.94 million, car park income RM2.91 million and other revenue RM3.54 million.

CMMT has yet to declare dividends. Its policy is to distribute 100% of its distributable income to unit holders for FY10 and FY11.

Subsequently, it aims to distribute at least 90% of its income to unit holders on a semi-annual basis.

Barring any unforeseen circumstances, CMMT said it expected to achieve the projected annualised distribution per unit of 7.16 sen, as stated in its prospectus.

The REIT said it was well-positioned to capitalise on the expected growth in retail consumption in Malaysia as its portfolio comprised quality shopping malls with a large and diverse tenant base.

Of the two REITs, analysts are more positive on Sunway REIT due to its size, high-quality assets and the strong Sunway branding.

However, REITs in general offer limited upside in terms of capital appreciation but high dividend yields and appeal to more defensive investors.  

OSK Research had said in a report in November 2010 that Sunway REIT was likely to offer limited price upside to its unit holders, at least in the medium-term. It added that the REIT was likely to only appeal to certain classes of investors, particularly those with a defensive investment strategy.

However, the research house said the unique mix of properties in Bandar Sunway would continue to enhance the attractiveness of each of Sunway REIT’s properties and generate upside earnings potential through higher rentals and occupancy rates than if each property were on its own.

OSK Research also noted that Sunway REIT had the right of first refusal with respect to any properties to be disposed of by its sponsor, Sunway City Bhd, which has a large and diversified portfolio of properties and many projects in the pipeline.

This year, market observers are expected to keep an eye on how the two REITs intend to grow and add more value.

These can be in the form of new assets, which are value-accretive, injected into the REITs, or opportunities to increase their income base through lease renewals at higher rental rates.

CMMT has also forecast a 4.1% growth in distribution to 7.45 sen for its financial year ending December 2011. Based on its last closing price, this corresponds to a yield of 6.9% in FY11, from 6.6% in FY10.

In its 3QFY10 ended Sept 30, CMMT posted net profit of RM81.29 million or 6.02 sen per unit, which comprised net property income of RM30.31 million and RM76 million from a change in fair value of its investment properties.

This was on the back of gross revenue of RM43.39 million, of which gross rental income was RM36.94 million, car park income RM2.91 million and other revenue RM3.54 million.

CMMT has yet to declare dividends. Its policy is to distribute 100% of its distributable income to unit holders for FY10 and FY11.

Subsequently, it aims to distribute at least 90% of its income to unit holders on a semi-annual basis.

Barring any unforeseen circumstances, CMMT said it expected to achieve the projected annualised distribution per unit of 7.16 sen, as stated in its prospectus.

The REIT said it was well-positioned to capitalise on the expected growth in retail consumption in Malaysia as its portfolio comprised quality shopping malls with a large and diverse tenant base.

Of the two REITs, analysts are more positive on Sunway REIT due to its size, high-quality assets and the strong Sunway branding.

However, REITs in general offer limited upside in terms of capital appreciation but high dividend yields and appeal to more defensive investors.  

OSK Research had said in a report in November 2010 that Sunway REIT was likely to offer limited price upside to its unit holders, at least in the medium-term. It added that the REIT was likely to only appeal to certain classes of investors, particularly those with a defensive investment strategy.

However, the research house said the unique mix of properties in Bandar Sunway would continue to enhance the attractiveness of each of Sunway REIT’s properties and generate upside earnings potential through higher rentals and occupancy rates than if each property were on its own.

OSK Research also noted that Sunway REIT had the right of first refusal to any properties to be disposed of by its sponsor, Sunway City Bhd, which has a large and diversified portfolio of properties and many projects in the pipeline.

This year, market observers are expected to keep an eye on how the two REITs intend to grow and add more value.

These can be in the form of new assets, which are value-accretive, injected into the REITs, or opportunities to increase their income base through lease renewals at higher rental rates.

REIT time

Written by Goola Warden    Tuesday, 11 January 2011 11:03

The market rally since the darkest days of the global financial crisis has gone on for much longer than many investors expected. At 3,229 now, the Straits Times Index (STI) is fast closing in on its all-time high of 3,831, set in October 2007. One way to ratchet down the risk profile of your investment portfolio is to hunt for promising real estate investment trusts (REITs).

Offering a risk-return balance between bonds and equities, these high-dividend-yielding instruments have proven to be reliable investments. In the past 12 months, the FTSE REIT Index rose 11.6%, almost matching the STI’s 11.7% gain. But that’s before dividends. Including their substantial distributions per unit (DPUs), REITs actually returned an average of 18% over the last 12 months, pipping the STI’s with-dividend return of 14%.

More importantly, there was apparently very little downside with the REITs. The two worst-performing REITs in the past year, Ascendas India Trust and CapitaRetail China Trust, still managed to return 7.2% and 3.6% respectively, including dividends. Meanwhile, CapitaCommercial Trust (CCT) and Parkway Life REIT, the two best performers, returned 41% and 37% respectively, easily matching many of the best STI stocks.

Then, there is the low interest rate environment. Not only is that spurring investors to hunt for yield with instruments such as REITs, it has also enabled the REITs to cut their financing costs. “Given the current low interest rate environment, S-REITs have taken the opportunity to refinance, lengthen their debt-maturity profile as well as widen their sources of debt, hence enjoying savings in interest,” brokerage firm DBS Vickers said in a recent report.

Yet, the risks are slowly mounting for the REIT sector too. Notably, the 10-year Singapore government bond yield, the benchmark for REIT yields, has been rising steadily. It is now hovering at 2.7% versus 1.9% in November. The five-year Singapore government bond yield has climbed even more sharply, to 1.36% from 0.86% in November and just 0.63% in October.

Christopher Gee, head of equity research at JP Morgan Singapore, says that makes this a potentially perilous time for REIT investors. “The danger is there,” he said. “Interest rates will go up at some stage. All REITs are interest-rate sensitive. Generally, REITs don’t res­pond well to an interest-rate rise.” In fact, Gee isn’t that keen on most of the property sector at the moment. “The big macro picture is too hard to call,” he said. “We are not in favour of developers and I’m not that keen on REITs either.”

Indeed, much like stocks, REITs aren’t particularly cheap at this stage. “REITs are trading slightly above their historical mean price-to-book value (P/BV),” said CIMB Research in a recent note. The key for investors now is to evaluate REITs carefully and be mindful of the risks.

One risk analysts see is acquisitions. While it is a means for REITs to expand their portfolios and cash flows, much depends on whether the deals are priced at terms that enable them to immediately increase their DPUs. But that is sometimes only achieved with a degree of financial engineering. For instance, the acquisition of one-third stakes in Marina Bay Financial Centre (MBFC) Phase 1 by K-REIT Asia and Suntec REIT were yield-accretive only because of “income support” from their parents for five years.
What happens when the “income support” period expires? Much depends on whether MBFC Phase 1 will be able to generate sufficiently high rentals by then. CIMB fears that more of such deals for REITs could be in the offing. “Although low interest rates are positive for the sector, the new negative is potential non-accretive acquisitions,” the brokerage firm said.

While REITs are still less risky than stocks, investors ought to take a bottom-up approach in making their picks now, analysts said. JP Morgan’s Gee said performance in the property sector in 2011 is likely to be driven by specific micro-level dynamics more than anything else. In the REIT space, his preferences for this year are the smaller REITs that are able to generate growth and give a decent yield.


Sizing up the REITs
There are currently 24 REITs listed in the Singapore market. Their assets are spread across shopping malls, offices, hotels, factories and warehouses. There are even two that own healthcare-related properties such as hospitals. Their yields range from 4.9% for CapitaMall Trust (CMT) to more than 9% for some of the smaller industrial property trusts. The size of their portfolios varies too, from S$8.1 billion (RM19.2 billion) for CMT to just S$359 million for First REIT.

Besides acquisitions, the key method by which REITs improve their cash flows and DPUs is through asset enhancement. That includes the refurbishment of their properties to garner higher rentals as well as the expansion of the lettable area of their buildings. Reflecting the scale of its portfolio perhaps, CMT has a string of asset enhancement programmes underway.

For instance, its Jurong Entertainment Centre has essentially been torn down and is being rebuilt into a new mall called JCube, which will include an Olympic-sized ice-skating rink. It is scheduled for completion in early 2012. CMT will also begin enhancement works on its Atrium@Orchard in 1Q2011, which will see the expansion of its gross floor area and a significant enlargement of its retail space. Among CMT’s other key assets is a major stake in Raffles City, atop the City Hall MRT station. Its most recent acquisition was Clarke Quay, a clutch of touristy bars and food joints on the banks of the Singapore River.

CMT is among the REITs that analysts see benefiting from surging tourist arrivals in Singapore. “Tourism numbers are at record levels of nearly 12 million for 2010,” noted a CLSA strategy report dated Jan 3. “The expected continued increase in tourist arrivals in 2011 and beyond makes this the most significant, yet underappreciated, theme, in our view.” Based on CLSA estimates, tourism receipts hit a new high of S$18 billion last year. The tourism sector will be one of the key drivers for the Singapore economy in the next five years, according to the report.

“We forecast tourism receipts to realise a 20% [compound annual growth rate] over the next five years to reach S$37 billion by 2015, with the sector contributing 5.4% to our 2015 GDP estimate, well above the current 2.7%,” CLSA stated. It also believes that the official forecast for tourist arrivals of 17 million by 2015 and tourist receipt target of S$30 million will be surpassed. CLSA forecasts visitor arrivals of 18.5 million and tourism receipts of S$37 billion by 2015.

The biggest beneficiaries are likely to include the local retail sector and retail property owners such as CMT, according to CLSA. The REIT has a reasonable debt-to-asset gearing of 36%, and CLSA sees its book value gradually rising through revaluation gains. CLSA has a “buy” recommendation on CMT, with a price target of S$2.25.

JP Morgan’s Gee also has an “outperform” call on CMT, but he prefers Frasers Centrepoint Trust (FCT), which is linked to the Fraser & Neave group. “The basic non-discretionary consumer spending story will continue to do well,” he said. “FCT is lower-risk, and has been left behind by the larger-caps. The REIT’s four malls are located in suburban neighbourhoods. It is currently trading at a yield of 5.4% versus CMT’s 4.6%.

Perhaps the most direct tourism play in the REIT sector is CDL Hospitality Trusts, which owns 12 hotels and a shopping arcade. “We are only starting to see improvement in revpar (revenue per available room) and room rates. These have not been fully reflected in the stock,” Gee said. “Occupancy rates have been very good and hoteliers have significant pricing power.” OSK-DMG says CDL Hospitality Trusts is “well-positioned to ride the multi-year tourism boom”. Its debt-to-asset ratio is particularly low at 21% currently. If it were prepared to take that gearing level up to 45%, it would have room to raise its debt level from S$250 million currently to some S$800 million. It is currently trading at a forecast yield of 5.2%.


Upturn in office sector
OSK-DMG also likes Suntec REIT for its “foothold in the iconic Marina Bay corridor and favourable valuations”. After the MBFC acquisition, 30% of its net property income (NPI) will be from Grade A space through its one-third stakes in One Raffles Quay and MBFC Phase 1. A further 59% of its NPI comes from Suntec City, which includes retail space and Grade A offices.

According to DTZ Research, the pace of office rental growth gathered momentum in 4Q2010. Average gross rents in prime Raffles Place offices rose 7.1% quarter-on-quarter (q-o-q) to S$9 per sq foot a month. In 3Q2010, rental values rose 6.3% q-o-q. For 2010, average prime gross rents in Raffles Place increased 13.9%, said DTZ. “Despite earlier concerns of the hollowing-out effect when occupiers upgrade to new buildings, we notice that the vacated space is being taken up readily by existing tenants wanting to expand or occupiers from other buildings,” said DTZ in a report.

Now, available office space is expanding, with about three million sq ft of new supply likely to be completed in 2011. DTZ estimates that 8.2 million sq ft of net lettable space will be available between 2011 and 2015. OSK-DMG said it is likely to be absorbed by demand.

In the latest Global Financial Centres Index, a twice-yearly index ranking of 75 international financial centres produced by London think-tank Z/Yen, Singapore was identified as one of the financial centres that will become more significant in future, and survey respondents also picked the city-state as one of the financial centres where their companies are most likely to set up an office.

“We expect Suntec REIT to be a major bene­ficiary of the strong growth outlook in the prime office sector, with its Suntec City office occupancy having chalked up five straight quarters of growth to reach 98.1% in 3Q2010,” OSK-DMG said in its report. The REIT also provides an attractive prospective yield of 6.5% for FY2011, compared with its office peers’ ave­rage of 5.6% as well as a yield spread of 400 basis points, the report added. With a debt-to-asset ratio of 40%, however, it has higher gearing than its peers CCT and K-REIT.


Industrial REITs in vogue
Industrial property REITs tend to trade at higher yields and lower P/BVs than the other sectors. One reason is that the leasehold tenure for industrial property is often shorter than that of other asset classes. Industrial property land tenure is usually 30 years+30 years. Usage of industrial space is also more strictly regulated than commercial and retail.

On the other hand, rents for industrial properties tend to be more stable than offices, for example. In its strategy for 2011, CIMB has one REIT among its top picks, Cache Logistics Trust, citing its defensive, low-beta qualities. “Despite recent attention on industrial REITs, Cache has lagged peers, likely owing to its much smaller market cap,” CIMB said in its report.

Since its initial public offering last April at 88 cents, it has climbed 10% and is now trading at a forward yield of 8.8%. “Acquisition announcements could catalyse this stock, particularly when P/B valuations are less demanding than its peers’,” CIMB says in its report. It reckons that S$220 million worth of acquisitions over 2010/11 could boost DPU materially, in view of Cache’s small portfolio and significant debt headroom.

As the stock market moves into perhaps a tougher year in 2011, the right REITs might still help investors achieve a good balance of risk and return.

Tambun Indah Land oversubscribed by 14.9 times

Written by Sharon Tan    Tuesday, 11 January 2011 11:18

KUALA LUMPUR: Property developer Tambun Indah Land Bhd’s initial public offering (IPO) of 11.05 million shares was oversubscribed by 14.9 times where 10,751 applications for 175.7 million shares with a total value of RM123 million were received.

“We are extremely pleased with the oversubscription for our IPO, as this is a strong indication of investors’ confidence in our track record and capabilities as a niche property developer in bringing innovative concepts and building high-quality homes in mainland Penang.

“We anticipate that the property market in mainland Penang will continue to see positive prospects, particularly as investors are seeking high-value properties with high capital appreciation potential,” said Tambun Indah managing director Ir Teh Kiak Seng.

Tambun Indah is known for its first gated-and-guarded community Taman Tambun Indah and Palm Villas. The company is said to have a gross development value of RM1 billion in the pipeline up to 2016.

Scheduled to be listed on the Bursa Malaysia Main Market on Jan 17, its IPO consists of a public issue of 32 million new ordinary shares and an offer-for-sale of 22.1 million vendor shares at an IPO price of 70 sen each.

Of the 32 million new ordinary shares under the public issue, 11.05 million shares were allocated for the Malaysian public; 11.05 million shares for eligible directors, employees and business associates of the group; and 9.9 million shares for private placement.

Tambun Indah’s IPO will raise RM22.4 million, of which, RM12.70 million will be for working capital, RM7.1 million for repayment of borrowings and the remaining RM2.6 million to defray listing expenses.

RHB Research maintains Top Glove FV at RM4.10

KUALA LUMPUR: RHB Research Institute is maintaining its fair value for Top Glove Corp Bhd at RM4.10 based on unchanged target CY11 PER of 12.5 times.

“We believe the near-term outlook for Top Glove remains challenging given the longer time frame now required to pass on the higher cost and lower proportion of cost increase that can be passed on to its customers as demand for rubber gloves continues to remain weak,” it said on Wednesday, Jan 12.
RHB Research said there was no change to its Underperform call on the stock.

To recap, 1Q11 revenue rose 4.1% on-year on the back of the upward revision in selling prices to partially pass on the rising latex cost and weakening RM. 1Q11 net profit, however, fell 45% on-year due to margin contraction (EBITDA margin fell 9.5%-pts on-year) resulting from the time lag in passing on the higher latex cost and weakening US$.

During a briefing on Tuesday, RHB Research said Top Glove management mentioned that the time lag could continue for the next 1-2 quarters ahead as latex price is still at a high (currently at RM9.81/kg).

Although typically glove manufacturers are able to pass on the higher cost, the time lag for Top Glove to pass on the higher cost is now longer (currently 3-6 months, as compared to 1-2 months previously) as customers are less willing to absorb higher prices given the ample capacity available in the industry following the H1N1 pandemic last year.

Apart from the longer time lag, Top Glove is now only able to pass on a lower proportion of the cost increase to their customers (previously around 80% is passed on, as compared to 60% currently).

“Nevertheless, they opined that latex prices should start to ease in the next 3-4 quarters ahead as fresh new supply would be coming into the market from Malaysia, Cambodia and Vietnam and seasonality effects,” said RHB Research.

Asian steelmakers face input cost rise, eye price hikes

Written by Reuters    Tuesday, 11 January 2011 17:02

MUMBAI: Japanese and Korean steelmakers are seen posting weak December quarter profits as tepid demand and rising raw material costs hurt margins, but mills in China and India could outperform, helped by stronger domestic growth, according to a Reuters report on Tuesday, Jan 11.

A reduction in stockpiles in China and rise in global steel prices in recent months have helped lift prices in Asia, and companies are expected to push through further price hikes during the first half of the year to cover rising input costs.

Steel mills in Asia are staring at cost increases following floods at Australian coal mines, forcing them to scour for new suppliers, and coking coal prices are expected to rise a fifth to $300 a tonne, the highest in nearly two years.

South Korea's POSCO , the world's No.3 steelmaker, will be the first major Asian producer to report quarterly earnings on January 13 and is likely to report among the biggest declines in earnings. POSCO is forecast to post a 40 percent drop in operating profit to 956 billion won, according to the consensus forecast of 13 analysts polled by Thomson Reuters I/B/E/S. However, earnings could miss those forecasts after POSCO cut its outlook in October. Starmine SmartEstimates, which gives greater weight to recent forecasts from top-ranked analysts, points to a 17 percent downside surprise and an operating profit of around 793 billion won.

Analysts believe POSCO's profit may have bottomed out in the fourth quarter, and would recover in the first quarter, helped by higher steel prices globally and consumption of cheaper raw materials purchased in the preceding quarter.

"I do not expect POSCO earnings to rebound sharply, but they would post gradual recovery in the first half," said Kim Mi-hyun, an analyst at NH Investment & Securities in Seoul.

"The key is raw materials prices. Unless they rise sharply, it would not be difficult for POSCO to pass along raw materials costs on to customers in the second quarter, when there is high seasonal demand," she said.

Japanese steel mills, which supply to some of the world's top car makers, are also expected to report profit declines, hurt by the yen's ascent, a slide in domestic car sales and weakness in export prices in Asia, their main export region.

"The yen's strength was a pain, although buoyant exports of specialty steel to the U.S. on the back of strong car sales there may have helped raise output at Nippon Steel and Kobe Steel," said Kazuhiro Harada, analyst at Nikko Cordial. Profits at Nippon Steel Corp are seen down 8 percent in the December quarter according to the average of two analysts' forecasts, while JFE Holdings earnings could slip 41 percent in the period, based on the average of three analysts. Most Japanese analysts do not forecast quarterly profits.

Sumitomo Metal Industries Ltd , Japan's third-biggest steelmaker, could also slash pretax profit estimate for the year to March 2011 after trouble at a blast furnace cut output and affiliate Sumco posted large losses.

PROFITS UP IN CHINA, INDIA China's Baosteel , the world's No.2 steelmaker, is forecast to post a modest 7 percent rise in quarterly net profit, according to the average of 21 analysts polled by Thomson Reuters I/B/E/S, far less spectacular than a 12-fold increase in profit in the first six months of the year. The figures are derived from subtracting nine month profits from full-year forecasts.

"In the fourth quarter it is clear that costs have grown faster than steel prices," said Helen Lau, steel analyst with UOB Kay Hian in Hong Kong.

With Beijing tightening monetary policy and iron ore prices at high levels, analysts are pessimistic about the year ahead for the country's steelmakers.

"I don't see things improving given there will be no fundamental improvement in steel demand, with CONSTRUCTION [] of low-cost housing unable to offset overall decline in the property market. Raw materials prices will continue to increase as demand recovers over the rest of the world," Lau said.

Preliminary figures showed its net profit in 2010 reached 12.81 billion yuan up 120 percent, Baosteel said on Monday. [ID:nTOE709062]

The company said it will raise its key product prices for the second straight month in February, driven more by rising costs than a pickup in demand. [ID:nTOE70A01E]

Indian steel firms are seen posting higher volumes during the quarter, helped by continuing demand from construction and auto sectors, but rising input costs may hurt profitability, analysts said.

Tata Steel , the world's No. 7 steelmaker, is forecast to more than double profit from a year earlier, when it had posted its first profit after the global demand slump.

However, margins at European unit Corus, which accounts for two-thirds of its global capacity, are likely to be squeezed due to lower steel prices in Europe and higher raw material costs.

Oct-Dec Yr ago Reporting date Baosteel (yuan) 2.26 bln 2.11 bln end-March POSCO (won) 0.96 trln 1.59 trln Jan 13 Nippon Steel(yen) 39.95 bln 43.32 bln Jan 28 JFE (yen) 30.90 bln 53.10 bln Jan 28 Tata Steel(rupees) 11.09 bln 4.32 bln mid-Feb

Notes: For Baosteel and Tata Steel, estimates are net profit; for POSCO, estimates are operating profit; for Nippon Steel and JFE, estimates are pretax recurring profit. ($1=1125 Won=6.62 Yuan=45.4 rupees) - Reuters

RAM Ratings: YTL Power Generation’s debt-servicing ability to stay strong

Written by Joseph Chin of theedgemalaysia.com    Wednesday, 05 January 2011 14:50

KUALA LUMPUR:  RAM Rating Services expects YTL Power Generation Sdn Bhd’s (YTLPG) debt-servicing ability to stay strong, with an average projected pre-financing operating cashflow of RM400 million annually throughout the tenure of its RM1.3 billion debt notes proramme (2003/2014).

The ratings agency said on Wednesday, Jan 5 this would translate into a minimum projected debt-service coverage ratio (DSCR) of 1.29 times (without cash balances).

“Unlike the other independent power producers (IPPs) within RAM Ratings’ portfolio, YTLPG does not have to meet any post-distribution DSCR; the company only has to achieve a DSCR of at least 1.25 times prior to any distribution,” it said in a ratings announcement.

“Despite the possibility of sizeable distributions to its holding company, YTLPG’s management is viewed to be unlikely to make distributions to the extent of jeopardising the company’s debt-servicing ability.”

YTLPG is a unit of YTL POWER INTERNATIONAL BHD [] which owns and operates two combined-cycle, gas-turbine power plants in Paka, Terengganu (808 MW), and Pasir Gudang, Johor (404 MW).

RAM Ratings had reaffirmed the AA1 rating of YTLPG’s RM1.3 billion medium-term notes programme (2003/2014) with a stable outlook.

It said YTLPG’s power purchase agreement (PPA) with TENAGA NASIONAL BHD [] shielded it from demand risk as the latter was obliged to take or pay for a minimum quantity of 7,450 GWh of electricity per annum, at a rate of 15.50 sen/kWh.

As such, the take-or-pay minimum quantity assured YTLPG an income of at least RM1.1 billion per annum. During the period under review, the company had continued performing within expectations, having kept its operating parameters within the requirements of its PPA.

However, RAM Ratings said similar to other IPPs, YTLPG remains exposed to site-concentration and regulatory risks.

Baltic Dry Index plunges amid overcapacity and growth fears

 Written by Chong Jin Hun    Tuesday, 04 January 2011 12:22

KUALA LUMPUR: The Baltic Dry Index (BDI), a barometer of global shipping prices for dry-bulk cargoes including coal, iron ore, and grain, fell 41% to close at 1,773 points on its last trading day for the year on Christmas Eve compared with a high of 2,995 in September.

Analysts said dwindling demand for dry-bulk cargo such as iron ore and an oversupply of vessels have resulted in lower charges for transporting these items. This has lent credence to expectations that dry-bulk shipping companies’ profitability in the near future could be under threat as vessel capacity supply grows faster than the growth in dry-bulk cargo consumption.

“Supply of ships will increase this year and iron ore imports will be less,” an analyst from TA Securities Holdings Bhd told The Edge Financial Daily yesterday.

Among the notable regional dry-bulk shipping services providers are Malaysian-listed Malaysian Bulk Carriers Bhd, and Hong Kong-listed China Cosco Holdings Co Ltd and Pacific Basin Shipping Ltd.

The analyst said lower demand for iron ore, the raw material for steel production, comes at a time when rapidly growing China is tightening its monetary policy to combat inflation. This has led to expectations of lower demand for steel to spur the construction and real estate development sectors in the world’s second largest economy.

According to the analyst, more shipping capacity is expected as new vessels ordered in 2007 are due for delivery this year.

Credit Suisse, in a note dated Nov 23, said it had revised downwards its average BDI forecast for 2011 and 2012 from 2,500 points to 2,300 points after taking into account the demand-supply dynamics.

According to the research house, dry-bulk demand growth is expected to slow to 5.5% and 4.3% in 2011 and 2012 respectively, compared to an almost 9% expansion anticipated in 2010.

Meanwhile, vessel-supply expansion is expected to rise to 13.3% for last year, compared with about 10% a year earlier. For this year and 2012, capacity is expected to grow around 12% and 13%, respectively.

“Freight rates could trend significantly lower on accelerating deliveries,” said Credit Suisse which recommends investors “underweight” the Asian dry-bulk shipping sector. This is in anticipation of weaker profitability for the sector as shipping rates fall.

According to the research house, ship owners can ease the vessel-oversupply environment by cancelling their orders or scrapping existing ships.

But cancellations are deemed economically unviable due to high penalties imposed for terminating purchases, and as such, shipping companies tend to scrap depreciated old vessels that contribute to the excess supply in the market.

“With the BDI remaining significantly above operating cash costs since early 2009, owners have little incentive to cancel their vessel orders. Instead, delivery delays have been the most preferred means for owners facing financing difficulties,” Credit Suisse said.

On a broader scale, the BDI is also seen as a global economic growth indicator. This is because dry-bulk cargoes comprise essential inputs for the production of building materials as well as electricity generation, both of which are also deemed important indicators of world economic fortunes.

As such, a decline in the barometer could offer a glimpse of the world economic landscape in the months ahead.

The BDI had touched a high of 11,793 points on May 20, 2008, at a time when China was importing more commodities to fuel its economic growth while shipping capacity faced supply constraints.

On Dec 5 that year, the BDI plunged to a low of 663 when news of the US financial crisis rocked global markets.

Two years down the road, the external landscape suggests that global uncertainty is far from over.

As advanced countries are grappling with high jobless rates, tight credit and high levels of debt, the spotlight inevitably falls on emerging economies as the primary drivers of global growth.

Traditional major importing nations such as the US and Europe are now looking abroad to boost exports in anticipation that domestic demand may not be enough to sustain growth at home.

Meanwhile, capital flows from advanced economies into emerging Asian markets have also been a widely debated topic. This in anticipation that demand for regional assets such as stocks, bonds and real estate will fuel inflation.

Asian currencies, including the ringgit, have traded stronger versus a weaker US dollar while regional equity markets and real estate prices have risen as investors seek better returns in countries with higher interest rates and growth prospects.

This comes as investors weigh the effects of further quantitative easing in the US which, essentially, increases the supply of the US dollar and, hence, devalues the greenback.

As such, Asian central banks have been closely watched as policymakers in the region weigh the risks of slowing economic growth versus escalating inflation.

China, Australia and India have embarked on pre-emptive monetary tightening in anticipation of rising consumer prices.

Against the current macro backdrop, it is worth watching how global shipping firms navigate rougher waters in the year ahead.

While an overcapacity of ships is the primary reason for the plunge in the BDI, investors will also see if it is an ominous sign of another economic slowdown ahead.

Tambun Indah looks to mainland for growth

By Sharen Kaur

PENANG-BASED Tambun Indah Land Bhd plans to grow by focusing on mainland projects where property prices are much lower than those on Penang island.
The property developer plans to raise some RM22.4 million from an initial public offering (IPO) to repay loans and fund existing projects. Its shares will be listed on the Main Market of Bursa Malaysia.

Managing director Teh Kiak Seng said there is ample land for bigger developments on the mainland.

"The younger generation are moving from the island to the mainland as properties there cost 10 times more. So we have great potential to grow," he said yesterday in Kuala Lumpur, after signing an underwriting agreement with MIMB Investment Bank Bhd.

Set up in 1995, Tambun Indah has plans for seven property projects worth RM1.1 billion over the next six years.

The projects include 2,532 units of bungalows, semi-detached homes, terrace houses, condominiums, apartments and shop-offices.

Under its IPO, Tambun Indah is making a public issue of 32 million new shares of 50 sen each. This comprises 11.05 million shares for the Malaysian public, 11.05 million shares for directors, employees and business associates, and 9.9 million shares for identified investors via private placement.

At an issue price of 70 sen a share, its IPO will raise RM22.4 million.

So far, the company has sold over 2,800 units of residential properties, worth more than RM800 million.

Its ongoing projects include Juru Heights, Seri Palma, Carrisa Park and Pearl Garden.

Power price hike may erode steel millers' profit

In view of the burgeoning fuel costs, RHB Research says Malaysia's steel millers' profit margin is at risk of being eroded.


The temporary coking coal supply disruption from Australian floods is unlikely to have a big impact on steel millers in Malaysia but analysts say the impending price hike in electricity and natural gas tariff will erode their profits.

RHB Research Institute analyst Toh Woo Kim said most steel millers in Malaysia use electric arc furnaces except for Ann Joo Resources Bhd.

"But then, Ann Joo had already secured their coke supply. So, this temporary coking coal supply disruption from Australia is unlikely to have a big impact," Toh added.

He is maintaining a "market perform" call on Ann Joo's shares and values the stock at RM3.14.

Yesterday, Ann Joo's shares rose 1 sen to close at RM2.92.

Toh said he is not too bullish on the steel sector as steel prices are closely tracked and no millers can really charge a premium.

"World prices of crude oil, natural gas and coal are already on the rise. So, it is really up to the government how they want to implement the reduction in subsidies," Toh said.

He added that steel millers had appealed to the government to consider their competitiveness against rival neighbouring countries when deciding on electricity and natural gas tariff hikes.

Toh said they had appealed to extend off-peak electricity pricing to the weekends and not just limit it to night time.

In view of the burgeoning fuel costs, Toh said Malaysia's steel millers' profit margin is at risk of being eroded.

OSK (Asia) Securities analyst Ng Sem Guan has a "neutral" take on the local steel sector.

"Demand for steel is still sluggish as the implementation of mega projects has yet to be seen. Also, raw material prices have been inching up," he said.

Ng gave an example of steel scrap, which is usually priced higher in the winter as it costs more to collect and ship out the scrap in the cold.

On Ann Joo, Ng said he is maintaining a "neutral" call and values the stock at RM2.76.

He said Ann Joo has yet to operate its blast furnace and is still using electric arc furnace to make steel.

"Even when Ann Joo starts up their blast furnace, they'll be sourcing coke, which is actually a finished product of coking coal. They'll source the coke from China and Japan. Australia does not export coke."

Aussie coal supply woes may affect power tariffs 

Tenaga Nasional Bhd (TNB) is likely to be affected by higher coal prices following massive floods in Australia and this may strengthen its case for higher power prices.
Australia, the world's second biggest exporter of thermal coal, has been hit by devastating floods over an area the size of France and Germany combined.

Thermal coal is used to fuel power plants while coking coal is used by steel mills to fuel their furnaces. Australia is also the world's biggest exporter of coking coal.

Coal prices for delivery in March have already risen to some US$130 (RM398) a tonne, according to Bloomberg data. It was around US$100 (RM306) a tonne at the start of December last year.

TNB (5347) purchases about 17 per cent of its coal from Australia. The bulk of its coal comes from Indonesia.
Currently, about 40 per cent of Malaysia's generation capacity comes from coal-fired plants.

"Thermal coal prices have been steadily increasing over the past few weeks due to the overall demand and supply disruptions, which has resulted with the tightness in the market.

"The massive flood situation in Australia is the latest supply disruption for seaborne coal trade and it is expected that thermal coal prices will be affected by the situation," TNB said in reply to questions from Business Times.

On December 10, TNB president and chief executive officer Datuk Seri Che Khalib Mohamad Noh said the group was still able to absorb the increase in fuel prices but should they continue to rise, the power company's bottom line will definitely be hurt.

"There is no way we are able to sustain and absorb these additional costs," he had said then, noting that a revision request will be made to the government.

But analysts don't think the government would agree to a tariff hike as it could be preparing for an early general election, as widely expected.

"I'm sure that TNB will continue to make their case but I think they will only get it after the election," said OSK Research's head of research Chris Eng.

http://www.btimes.com.my/Current_News/BTIMES/articles/xtahan/Article/index_html

Local steel companies face tough outlook

By HANIM ADNAN
mailto:nem@thestar.com.my
PETALING JAYA: Local steel players will continue to face tough market conditions in 2011, with increasing competition from regional and China-based steel players.

The implementation of the Asean Free Trade Area (FTA) and Asean-China FTA, which started in January last year, had these other steel players ramping up their capacities to take advantage of the new markets.

The Asean-China FTA is to date the world’s largest FTA, set to liberalise billions of dollars in goods and investments covering a market of 1.7 billion consumers.

Chow Chong Long ... ‘The focus will be on the trading of spot iron ore price this year.’

Furthermore, prices of major raw materials like iron ore, coking coal and scrap metal are expected to rise this year, in view of the continued oligopoly by top global iron ore producers - Vale SA of Brazil, BHP Billiton and Rio Tinto Group – as well as the short supply of coking coal and scrap.

“The three mining companies hold considerable bargaining clout, controlling two-thirds of the US$88bil global seaborne iron ore trade,” said Malaysian Iron and Steel Industry Federation (MISIF) president Chow Chong Long.

Between now and the middle of this year, iron ore price is expected to trade at between US$170 to US$180 per tonne free-on-board (FOB) compared with last year’s average of about US$144 per tonne FOB.

“The focus will be on the trading of spot iron ore price this year. It will be on an uptrend but prices are not likely to escalate by 50%-80%, like what was experienced in 2008,” he added.

Chow told StarBizWeek that local steel players should continue to explore new markets like the Middle East, Vietnam and Indonesia rather than focusing on traditional markets like Europe or the US which were still grappling with their economic recovery.

“The Middle East economy is picking up especially with the rise in crude oil prices while Vietnam and Indonesia are expected to have good sustainable growth in steel consumption,” he added.

He noted that recent global developments such as the quarterly price increases in iron ore, deepening euro sovereign debt crisis, potential slowdown in China as well as rising costs from the removal of subsidies in Malaysia, had severely affected local steel companies.

Exacerbating the problem is the fact that these steel companies have become increasingly export-driven.
Malaysia exports about 2.5 million tonnes of steel products, especially long-steel products, annually to Asean countries.

Of the long-steel products exports, billet is the largest item, representing 603,890 tonnes in 2009.
According to Chow, Asean steel players including those from Malaysia are fast losing their indigenous identities due to the implementation of the Asean FTA, Asean-China FTA and other FTAs in the pipeline.

“Asean steel producers are already facing a difficult situation with the flooding of steel products from China into the Asean markets. “China’s ability to export steel products at much lower prices compared with their Asean peers had lately brought not only complaints but also threats of trade and other dumping actions,” he said.

However, on the local front, Chow expects domestic steel consumption to improve by the second half of this year.

“Most of the projects under the Government’s Economic Transformation Plan are expected to be rolled out in the second half, including the proposed RM36bil Klang Valley mass rapid transit (MRT),” he added.
In its latest sector report, AmResearch said: “The Federal Government’s renewed push on infrastructure spending and urban renewal spur domestic steel consumption.

“Maiden contracts for the Klang Valley light rail transit extension works could be dished out by year-end, with the larger MRT works poised to kick off beginning 2011.

“Also on the cards are the construction of six new highways, in addition to several mega developments in the pipeline such as the RM26bil KL International Financial District,’’ it said.