OSK Stock Picks for June 2011

The KLCI performed as expected as a reasonable stream of results provided a stable floor while strong news flow drove up Bigger Caps. For June, while the 4 upcoming IPOs and the KLCI review may draw some attention, OSK believe all eyes will be on the potential tussle between CIMB and Maybank over the control of RHB Cap.

OSK Research

Outlook: Possibly not as quiet as expected

With a total of 4 IPOs going for listing in June and July, it was expected that the market to be somewhat quiet as investors stored away funds to subscribe to the IPOs or buy into them when traded. Despite concerns that the amount of funds raised by the 4 IPOs, namely UOA Development, MSM Malaysia, Axis International REIT and Bumi Armada, would suck the liquidity out of the market, but the amount of funds (RM7.7bn) is far less than that raised in 2010 with the listing of MMHE and Petronas Chemicals (RM14bn). Thus, there should not be much of an issue on the liquidity of the market post the 4 IPOs.

Funds to be raised by IPOs in 2011 (Source: Company Data, OSK)

Together with the KLCI review

Another market's attention factor is the upcoming KLCI review, which are to be announced on 6 or 7 June and become effective in the 3rd week of June. In this review, OSK see MMHE and UEMLand possibly replacing PLUS and MAS, which will be privatized and has fallen below the Top 40 stocks by market cap respectively.

OSK Research, Bloomberg

Banks and Situational

Given what may still be a lackluster broader market in June, we are focusing on a number of situational stocks that should see better news flow during the month.

1. First, we have UEMLand who will likely joining KLCI before end June.
2. We also have KimLun Corporation which may see a pick up news flow on Iskandar Malaysia during the month.
3. Next, we have Khazanah's Pos Malaysia stake sale completed in the 3rd week of June coupled with details of what DRB-Hicom plans to do with the company.
4. Finally, we have 2 smaller banks, namely RHB Cap and Alliance Financial Group that should see sentiment on improved M&A rumors.

Source: OSK Research

New IPO: UOA Development Berhad

Being one of the most established developer in Klang Valley, UOAD is going to be a darling property stocks for investors once listed. The strong "UOA" brand name as a developer of high end residential and commercial properties, makes it stands out from its competitors.

What's so interesting about UOAD?

Based on the IPO price of RM2.90 per share, the company is listing with a market capitalization of RM3.5bn, which eventually will place UOAD to be the 4th largest property company in Bursa Malaysia. The top 3 are UEMLand, SP Setia and IJMLand.

Don't forget about UOA REIT, which is the real estate investment trust of UOA Group in Malaysia. In other words, whatever properties that was construct by UOAD may inject into REIT one day. With UOAD being granted a "Right of First Refusal" to inject its completed commercial buildings into UOA REIT, it definitely provides UOAD the opportunity to redeploy its capital where the proceeds from asset injections will be re-utilized for future development projects. This would act like a "ready-exit" strategy for UOAD's asset. Not good enough?

Source: OSK Research

By managing its construction works in-house, this gave UOA a very competitive cost advantage, resulting in gross development margins of 50%, which is way above the industry average. They got their own team of architects, planning experts, M&E and civil engineers and quantity surveyor, hence, giving UOAD the edge to respond wisely and promptly to any unforeseen changes.

At last but not least, of course, is UOAD's flagship integrated property development project - Bangsar South. RM8bn, 60-acre located near Federal Highway and Mid Valley. According to HL Research, the land was acquired in 2005 for RM46psf, and its Horizon project has commanded pricing of RM600psf despite its leasehold status. In short, strategic location with huge value enhancement potential.

Fair Value?

OSK gave RM3.57
RHB gave RM3.45

HLIB gave RM2.57

Source: HLIB Research