Friday 29 June 2012

First REIT

OCBC on 29 June 2012

We conduct a scenario analysis on possible acquisition targets by First REIT (FREIT) from its sponsor Lippo Karawaci (Lippo). This works out to an estimated DPU accretion ranging from 9-13% in FY13, assuming that two hospitals are acquired for ~S$88.9m and fully-debt funded. Meanwhile, FREIT has also secured a fresh 4-year S$168m transferable term loan facility, thus allowing the group to refinance its maturing debt and to fund its future acquisitions. FREIT’s next refinancing requirement would only come in Jan 2015 (~S$49.4m). Given the ongoing macroeconomic uncertainties, we opine that investors can find investment merits offered by FREIT’s defensive income and stability from its long-term master leases. We upgrade FREIT from hold to BUY, with a higher RNAV-derived fair value estimate of S$0.96 (previously S$0.935) as we incorporate our base case assumptions for new acquisitions in our model.

Possible FY13F DPU accretion of 9-13% from new acquisitions
We conduct a scenario analysis on possible acquisition targets by First REIT (FREIT) from its sponsor Lippo Karawaci (Lippo) and highlight the resulting estimated DPU accretion to unitholders. We believe that any new acquisitions could occur in 3Q/4Q FY12, given that FREIT is already conducting feasibility studies on a number of properties. Our analysis works out to a possible DPU accretion ranging from 9-13% in FY13 (when a full-year of contribution kicks in), assuming that two hospitals are acquired for ~S$88.9m (refer to Exhibit 1). We also see minimal dilution risk at this juncture, as any acquisitions in the foreseeable future would likely be fully-debt funded. Based on our estimates, the new acquisitions could raise FREIT’s leverage ratio (debt-to-assets) to ~25.2%, still within management’s comfortable gearing ratio range of 25-30%.

No refinancing requirements until 2015
FREIT recently announced that it has secured a 4-year S$168m transferable term loan facility (TLF). Approximately S$50m would be used to refinance its outstanding debt which matures in Jun 2012, while the remainder would be used for new acquisitions. FREIT would henceforth not have any refinancing requirements until Jan 2015 (~S$49.4m). As interest on the TLF is based on a floating rate basis, FREIT is exposed to interest rate risk. The group has thus obtained an Interest Rate Derivative Facility on this TLF for a notional amount of up to S$100m, which partly hedges its exposure to an upward increase in interest rates when utilised.

Upgrade to BUY
Volatility in the macro economy and global markets is unlikely to dissipate in the near term, given concerns over the eurozone debt crisis and economic slowdown in the U.S. and China. Hence investors looking to stay invested in equities can find merits offered by FREIT’s defensive income streams and stability from its long-term master leases, in our opinion. Upgrade FREIT from hold to BUY, with a higher RNAV-derived fair value estimate of S$0.96 (previously S$0.935) as we incorporate our base case assumptions for new acquisitions in our model.

Tiger Airways

OCBC on 29 June 2012

The SGD-adjusted jet fuel price (JETKSIFC Index) is currently trading at 10% below the average of jet fuel prices in the current quarter, which is in turn 7% QoQ lower. Since fuel cost contributes to more than 40% of Tiger Airways’ (TGR) operating costs, it should be able to achieve ~S$5m of savings in fuel cost in 1QFY13. Tiger Australia will begin operations in Sydney as its second base in 2QFY13 and Tiger Singapore will be moderating its capacity expansion in FY13. With Tiger Australia flying more sectors and lowering its unit fixed cost and Tiger Singapore more focused on improving yields and load factors, TGR’s profitability is poised to considerably improve in FY13. Factoring in lower jet fuel prices and the expected improvement in TGR’s operations, we upgrade TGR’s rating to BUY and increase our fair value estimate of TGR from S$0.67/share to S$0.76/share.

Jet fuel prices finally fell
The SGD-adjusted jet fuel price (JETKSIFC Index) is currently trading at 10% below the average of jet fuel prices in the current quarter, which is in turn 7% QoQ lower than in 4QFY12. After remaining stubbornly high for more than a year, jet fuel prices have finally soften significantly. Tiger Airways (TGR) is likely to benefit from the current respite in jet fuel prices, especially with fuel cost contributing to more than 40% of its operating costs. Based on our estimation, TGR should be able to achieve ~S$5m of savings in fuel cost in 1QFY13, given the 7% QoQ fall in average jet fuel prices.

Recovery in core operations
Tiger Australia is on track to begin operations in Sydney as its second base in 2QFY13. Tiger Australia will then be able ramp up its operations to 64 sectors/day and optimise the utilisation of its 10 aircraft. Meanwhile, Tiger Singapore will be moderating its capacity expansion in FY13. In FY12, Tiger Singapore expanded capacity rapidly, after the group’s deliveries of new aircraft were directed to Singapore as a result of TGR’s flying restrictions in Australia. With Tiger Australia flying more sectors and lowering its unit fixed cost and Tiger Singapore more focused on improving yields and load factors, TGR’s profitability is poised to considerably improve in FY13.

Regional JVs in place to absorb new aircraft deliveries
TGR’s strategy of owning regional JVs is taking shape after its 40%-stake investment into South East Asian Airlines (SEAir) was finalised earlier this month, and encouraging early operating statistics from its 33%-owned PT Mandala Airlines (Mandala). These JVs are earmarked to absorb most of TGR’s aircraft deliveries in FY13, allowing Tiger Singapore to stop its forced capacity expansion.

Upgrade to BUY with higher fair value of S$0.76
We upgrade TGR’s rating to BUY and increase our fair value estimate of TGR from S$0.67/share to S$0.76/share, by increasing its P/B multiple from 2.2x to 2.5x. The upgrade is to factor in lower jet fuel prices and the expected improvement in TGR’s operations.

Midas


CIMB Research on 28 June 2012
MIDAS's share price is hovering near its all-time low of 26 cents. With recent positive developments in China's railway industry, we smell new contracts in the wind.
A high-speed rail contract award could free Midas from the shackles of its year-long nightmare. When orders return, expect margin expansion on higher utilisation and inventory rundown.
We also expect the share price to react positively once new contracts are secured. Maintain "outperform" with an unchanged target price of 41 cents, still based on 11.7 times CY2013 PE (0.5 standard deviation below historical five-year average).
Total railway fixed asset investments target has been raised to 550 billion yuan or $111 billion (from 516 billion yuan). The gradual easing of credit available to the railway industry should also bolster liquidity and lower its financing burden.
A potential reform for the Ministry of Railway will bode well for the sustainability of railway development in the longer run.
Industry observers are already expecting new orders in H2 2012. Potential contract wins will act as price catalysts as margins should expand from the current lows on higher capacity utilisation.
In addition, we expect Midas's reliance on short-term debt to finance working capital to wane as liquidity returns to the industry.
While there is a possibility that the order drought could continue into 2013, Midas's diversification into international markets and exposure to the metro segment should provide some support for its orderbook that currently stands at 650 million yuan.
Management is confident of getting at least 500 million yuan worth of orders this year. We think this provides earnings visibility for at least 1.5 years.
In the longer term, Midas also plans to venture into other industrial segments like automotive, aviation, and shipping. In addition, we are comforted by management's ambitions to move up the value chain, by providing fabricating services on top of its profile manufacturing capabilities.
At 28 cents, Midas is trading at 7.9 times CY2013 PE, near its all-time low of 6.1 times PE. While lacklustre performance could ensue in the coming months, we think that a potential contract win could catalyse its share price.
OUTPERFORM

Jardine Cycle & Carriage

Kim Eng on 29 June 2012

Background: Jardine Cycle & Carriage (JC&C) is an automotive conglomerate with an interest of just over 50% in Astra International. The latter is itself a large Indonesian conglomerate, whose core business activities span automotive, financial services, heavy equipment and mining. JC&C also has other motor interests in Singapore, Malaysia and Vietnam.

Why are we highlighting this stock? Investors have been pushing for more visibility on the stock, as it makes up a significant portion of the Straits Times Index. In addition, the recent 1:10 stock split of its subsidiary Astra International has given rise to the possibility of JC&C undergoing a stock split itself.

Trading at steep conglomerate discount. Jardine C&C trades at an average discount of 19% (Jan 2010 to-date) to its 50.1% holdings of Astra International, and this excludes its non-Astra businesses in Singapore, Malaysia, Indonesia and Vietnam.

Non-Astra businesses still profitable. JC&C’s non-Astra businesses in South-East Asia involve mainly automotive dealerships and after-sales services. While they are not very significant contributors to the group’s bottomline, they provide alternative avenues for growth and should not be ignored in a valuation model.

Stock split possible to improve liquidity. Astra International recently underwent a 1:10 stock split, which resulted in its stock becoming 10x more affordable and within reach of many more retail investors. As Astra is controlled by the Jardine group, we are not ruling out the possibility of JC&C undergoing a stock split as well to increase trading liquidity and counter the prohibitively high prices currently. If this eventuates, it will likely be a positive catalyst for the stock.

Sheng Siong

Kim Eng on 29 June 2012

Geylang outlet to open next month. Sheng Siong is scheduled to open its new store in Geylang in July. It will be the group’s third outlet this year. The group’s efforts in opening a total of 5 stores since IPO should allay fears of saturation in the Singapore market. We believe that Sheng Siong is on track to meet its target of 40 outlets overtime. We have raised our FY13-14F earnings estimates by 3% to take into account the new 11,000-sq-ft outlet. Maintain BUY.

Free ads to boot. Following its IPO debut last August, Sheng Siong has gained publicity for itself and won the confidence of suppliers, giving it access to an additional advertising channel via newspapers. These advertisements are essentially financed by suppliers as the ad space is mainly devoted to promoting their products, but Sheng Siong gets to push its name out in the same space – for free.

Gross margin to ease up. Chinese New Year festive promotions at the start of the year were unavoidable for the group. But with the end of the first quarter and price wars petering out, we believe that its gross margin has bottomed out and should recover. Moreover, its two new outlets at New World Centre and Toa Payoh received favourable responses and have already started contributing positively to the topline.

One outlet affected by SERS. The Housing Board has selected six blocks of flats in Woodlands for the Selective En Bloc Redevelopment Scheme (SERS). One Sheng Siong outlet will be among those affected. However, it has another 4 years til 2016 when it has to vacate the premises. We believe this should give management more than enough time to find a new store location. The 44,441-sq-ft store contributed approximately 9.5% of sales in FY11.

Maintain BUY. Robust free cash flow and a net cash position of SGD149m make Sheng Siong a strong defensive play with a pure- Singapore retail exposure. Maintain BUY and target price of SGD0.52,

Thursday 28 June 2012

OSIM International

UOBKayhian on 28 June 2012

Investment highlights
· For OSIM stores, the group sees strong potential in China due to the rising number of middle-income consumers. Most of these customers pay cash for the chairs rather than through hire purchase. According to the CFO, the country presents another opportunity once the credit card market matures. Currently, OSIM has 270 stores in China and we expect the group to add another 25 in FY12.
· Sales of uDivine App, an improved version of uDivine massage chairs, have been encouraging in Hong Kong where sales have overtaken its predecessor. This is due to the new massage modules and the ability to synchronize with iPhone in terms of entertainment for the new massage chair. Gross margins are maintained in the 68-70% with pre-tax margins at 18-20%. On market share, OSIM currently produces the most number of massage chairs in the world, according to management.
· Brookstone reported a 45% increase in EBITDA to US$23.3m for FY11 due to improved sales. The new president and CEO for Brookstone, Stephen Bebis, hopes to list the business in three years. Bebis has held senior positions at various retailers in the US and Canada, including Golf Town, Sears and Grossman’s Lumber. To recap, OSIM has written off Brookstone’s value to zero and any listing is a potential catalyst to OSIM’s share price.
· TWG Tea is expanding aggressively with tea salon and boutiques earmarked to open in Bangkok’s Emporium, Dubai’s Dubai World and Malaysia’s Pavilion. TWG is being sold in many of the 5-star hotels in the region as well as in the first- and business-class segments of Singapore Airlines.
· On earnings outlook, the group remains optimistic as it enters 3Q12 even though the quarter is traditionally a low season for the OSIM.

Valuations
· Maintain BUY and target price of S$1.61, pegged to its 3-year historical PE of 15x. Currently, the stock is trading at 10.6x 2012F consensus earnings with a PEG of 0.60x.

Golden Agri-Resources


DMG & Partners Research on 27 June 2012
FOLLOWING our Asean Corporate Day in Singapore during which Golden Agri-Resources met up with 11 fund managers, we are maintaining our "buy" call as well as the stock's fair value of $0.97.
Golden Agri's stock price has been dragged down by weak market sentiment and a correction in palm oil price.
We believe that palm oil price has bottomed, supported by Malaysia's disappointing production and unfavourable weather in North America's current soybean planting season. Golden Agri's current cheap valuation represents a good buying opportunity.
Amid other plantation companies' guidance of weaker yields this year due to tree stress, Golden Agri is guiding for a 5-10 per cent production growth this year.
Management believes its trees are in good shape and not stressed out as its yield during the peak production in Q3 last year was not very high. Its production during seasonal peaks has been declining for the last two years as the newly mature areas came into production.
Considering that Astra Agro Lestari's (AALI) production growth came in at 4.3 per cent in the first five months of this year and picked up steam in May, Golden Agri's guidance does not seem far-fetched as the company has younger trees than AALI.
We have factored in a conservative 5 per cent production growth in our earnings forecast, which implies that there is room for upgrade.
Management remains optimistic that its new planting target of 20,000 hectares this year is achievable despite having achieved only 1,700 ha in Q1. Compared to 2011, during which the company managed to complete 1,100 ha in Q1, the new planting for this year certainly showed an improvement.
Management believes that new planting will pick up pace in the subsequent quarters. In 2011, half of the new planting took place in Q4 alone. Golden Agri has 100,000 ha of landbank with licence for planting. However, about 5 per cent were found to be of high conservation value and will need to be conserved. This still leaves sufficient landbank to sustain five years of new planting.
Of the Big Four listed plantation companies, Golden Agri is the purest palm oil stock given that other players such as Wilmar, Sime Darby and IOI Corp have sizeable non-palm oil businesses. This, together with the stock's high liquidity, makes its stock price highly sensitive to palm oil price movements.
We believe that palm oil price has bottomed largely due to Malaysia's weak production this year, which could be exacerbated by the recent dry weather.
Golden Agri is trading at around 10 times forward PE. Considering its strength and scale of operations, we find the stock inexpensive, especially in comparison with Malaysia's large cap.
BUY

CapitaRetail China Trust

OCBC on 28 June 2012

The rent from the four malls that CRCT owns in Beijing contributed 69% of 2011’s revenue. According to Savills, the supply of shopping mall space in Beijing is set to increase by a significant 17% this year, or some 1.06m sqm. Despite this increase, we believe that CRCT’s Beijing malls are well placed to compete. CapitaMall Xizhimen, is located at the transportation hub Xizhimen and sees a daily footfall of 85k-90k people, which gives it much bargaining power. CapitaMall Anzhen and CapitaMall Shuangjing are on long-term master lease structures, thus their rents should be fairly immune to the upcoming supply. While shopping mall supply could increase by ~21% in 2012 in the area, we believe CapitaMall Wangjing has an incumbent’s advantage, being voted “Most Influential Mall in Wangjing Area” by Beijing News in 2010. We maintain our BUY rating on CRCT and S$1.44 fair value.

Growth in Beijing retail space supply
Beijing’s retail market has multi prime retail areas, including Wangfujing (Dongcheng district), CBD (Chaoyang district) and Zhongguancun (Haidian district). According to Savills, the supply of shopping mall space in Beijing is set to increase by 17% this year, or some 1.06m sqm. The majority of new projects in prime areas have achieved strong pre-commitment rates of 70%-90%, while projects in non-prime areas are more likely to face pressure on the occupancy front.

CRCT’s malls enjoy good traffic flow
The rent from the four malls that CRCT owns in Beijing contributed 69% of 2011’s revenue. The remaining five malls are spread over five cities. One of the Beijing malls, CapitaMall Xizhimen, is located at the transportation hub Xizhimen and sees a whopping daily footfall of 85k-90k people, largely due to transient traffic. At a prime location, Xizhimen has substantial bargaining power. The other three Beijing malls are located in the sizable Chaoyang district (~475 square kilometers). CapitaMall Anzhen and CapitaMall Shuangjing are on long-term master lease structures, thus their rents should be fairly immune to the upcoming supply. CapitaMall Wangjing is located in an unofficial “Korea Town” and services many white-collar workers. While shopping mall supply could increase by ~21% in 2012 in the Wangjing area, we believe the mall has an incumbent’s advantage, being voted “Most Influential Mall in Wangjing Area” by Beijing News in 2010.

Beijing a focal point for brand penetration
As the capital, Beijing is still a key city for international brand penetration. Apart from new entrants, many established retailers like Chloe, Valentino, Godiva and Tesco are pursuing aggressive expansion. The good positioning of CRCT’s malls, especially Xizhimen, places them in good stead to attract quality retailers even as retail space supply grows.

Maintain BUY
We maintain our BUY rating on CRCT and S$1.44 fair value. CRCT is offering a fine FY12F dividend yield of 7.1%.

OKP Holdings

OCBC on 28 June 2012

OKP Holdings (OKP) announced it is investing S$111,111 in a 10% stake of CS Land Properties Pte. Ltd. (CSLP), a wholly-owned subsidiary of the China Sonangol group. As part of the investment agreement, OKP will provide CSLP with a loan facility of up to S$20m for a maximum period of six years and at an annual interest rate of 2% above SIBOR. CSLP is seeking to redevelop the site at the former Amber Towers, which it acquired at a cost of S$161.6m, into a premium condominium project. Management previously stated it is going into property development so as to better utilise its strong net cash position. Since the investment in CSLP is not expected to have any material impact on OKP’s financials for FY12, we maintain our HOLD rating on OKP and our fair value estimate of S$0.53/share.

10% stake investment in CSLP
OKP Holdings (OKP) announced it has subscribed for 111,111 ordinary shares, or a 10% stake, at S$1/share of CS Land Properties Pte. Ltd. (CSLP), a wholly-owned subsidiary of the China Sonangol group. As part of the investment agreement, OKP will use part of its S$90m net cash position to provide CSLP with a loan facility of up to S$20m for a maximum period of six years and at an annual interest rate of 2% above SIBOR. CSLP has already drawn down ~S$18.4m of this loan facility.

Redeveloping Amber Towers
On top of the increased collaboration between OKP and the China Sonangol Group, a substantial shareholder with a 14.1% stake in OKP, the investment in CSLP paves the way for OKP’s maiden foray into property development. CSLP is seeking to redevelop the site at the former Amber Towers, which it acquired at a cost of S$161.6m, into a premium condominium project. The acquisition price translates into a psf ppr of S$1,118 and the 40,708 sq ft freehold site can be redeveloped to a GFA of ~145,000 sq ft.

OKP’s strategy in property development
Instead of deviating from its core business of public infrastructure construction, management previously stated it is going into property development so as to better utilise its strong net cash position. Furthermore, it will only invest in minority stakes in property developing JVs in order to limit its exposure to this more volatile sector. However, the S$20m loan facility OKP is providing to CSLP will invariably increase its risk exposure. Nevertheless, the loan’s interest rate is favourable to OKP, and OKP or its associates are likely receive the relevant construction contract.

Maintain HOLD
OKP said the investment in CSLP is not expected to have any material impact on its financials for FY12. Thus, we maintain our HOLD rating on OKP and our fair value estimate of S$0.53/share.

Sembcorp Marine

OCBC on 27 June 2012

Sembcorp Marine’s (SMM) stock has underperformed Keppel Corporation’s (KEP) since we switched our preference from SMM to KEP in late Feb. However, we believe that this trend may reverse in the coming months, and now favour SMM. Although there is a possibility of further market volatility due to Eurozone concerns which may affect the higher-beta SMM (pure O&G play) more, 1) we still hold a positive view on the premium offshore rig market, 2) SMM is likely to catch up in the orders front, 3) SMM’s earnings are expected to pick up in 2H12, and 4) so-called “speculative builds” at SMM are probably better-termed “opportunistic builds”. We roll over our valuation to blended FY12/13F core earnings with an unchanged peg of 14x for the offshore & marine business (ex-Cosco), and update the market value of Cosco Corp in our SOTP valuation. As such, our fair value estimate rises from S$5.13 to S$5.71. Maintain BUY.

SMM has underperformed KEP…
Sembcorp Marine’s (SMM) share price has dropped by about 13.9% vs Keppel Corp’s (KEP) 8.7% fall since we switched our preference from SMM to KEP in late Feb (24 Feb 2012 report). We believe this is partly due to several reasons: 1) risk-off sentiment particularly in May which has affected the higher beta SMM stock, 2) earnings disappointment for SMM in its 1Q12 earnings, and 3) recovery in sentiment amongst property stocks (KEP has a property arm).

… but the trend may reverse in the months ahead
However, we believe that this trend may reverse in the coming months, and now favour SMM. Although there is a possibility of further market volatility due to Eurozone concerns which may affect the higher-beta SMM more, we think that the recent sell-down in the stock is unwarranted, as: 1) we still hold a positive view on the premium offshore rig market, 2) SMM is likely to catch up in the orders front in the months ahead (partly due to Petrobras orders), 3) SMM’s earnings are expected to pick up in 2H12, and 4) so-called “speculative builds” at SMM are probably better-termed “opportunistic builds”.

Newbuild enquiries remain healthy
Enquiries for newbuild rigs remain healthy as major oil companies take a long-term view on oil prices in their capital expenditure plans and hence are much less affected by short term fluctuations in oil prices. The utilisation levels and dayrates for premium rigs remain strong and the outlook for this sub-sector is still positive.

Order book provides defensiveness
Sembcorp Marine’s net order book of S$7.4b provides good earnings visibility at a time when uncertainty in the global economy has resulted in a general lack of clarity in corporate earnings outlook. We roll over our valuation to blended FY12/13F core earnings with an unchanged peg of 14x for the offshore & marine business (ex-Cosco Shipyard Group), and update the market value of Cosco Corp in our SOTP valuation. As such, our fair value estimate rises from S$5.13 to S$5.71. Maintain BUY.

Lippo Malls Indo Retail Trust

OCBC on 27 June 2012

Lippo Malls Indonesia Retail Trust’s (LMIRT) financial flexibility and debt maturity profile is expected to be enhanced with the proposed issuance of two fixed-rate notes under its S$750m guaranteed Euro MTN programme. For FY12, we are positive that the REIT will continue to perform, given the strong domestic consumption in Indonesia. We note that LMIRT’s unit price has fallen 10.5% from its last peak in 24 Apr in tandem with the broader market, despite the expected resilience from its underlying portfolio. This presents a favourable entry point for investors, in our view. As such, we maintain our BUY rating on LMIRT with unchanged fair value of S$0.43.

Notes from MTN programme to provide financial flexibility
Lippo Malls Indonesia Retail Trust’s (LMIRT) financial flexibility and debt maturity profile is expected to be enhanced with the proposed issuance of two fixed-rate notes under its S$750m guaranteed Euro MTN programme. The REIT announced last evening that the S$200m notes and S$50m notes will mature on 6 Jul 2015 and 6 Jul 2017 respectively, and will bear a competitive rate of 4.88% and 5.875% to its existing S$147.5m secured borrowing rate of ~4.6%. This is despite the notes being unsecured obligations of LMIRT. According to the announcement, proceeds will be utilized for corporate funding purposes, including financing acquisitions and asset enhancement works. We believe LMIRT will first use the funds on major refurbishments of Gajah Mada Plaza and Ekalokasari Plaza, as announced in its 2011 annual report.

Good performance likely to be sustained
For FY12, we are positive that LMIRT will continue to perform, given the strong domestic consumption in Indonesia. Real retail sales have consistently been raking in double-digit YoY growth since Nov 2011 (Apr 2012: 10.5%), while the current expectation is that sales will further improve in the following 3-6 months, based on the retail sales survey by Central Bank of Indonesia. This is likely to drive the shopper traffic at its malls and keep its tenant retention rate at high levels (Dec 2011: 80.0%). Already, we note that LMIRT’s portfolio occupancy as at 31 Mar was at 94.5%. This is above the industry average of 87.6%.

Maintain BUY
We continue to like LMIRT for its strong financial position (aggregate leverage at 9.2%, with no refinancing needs until 2014), growth potential and sound industry fundamentals. The unit price has fallen 10.5% from its last peak in 24 Apr in tandem with the broader market, despite the expected resilience from its underlying portfolio. This presents a favourable entry point for investors, in our view. As such, maintain BUY with unchanged fair value of S$0.43.

K1 Ventures Limited


Kim Eng on 28 June 2012

K1 Ventures Limited announced yesterday evening that it has received a voluntary conditional cash offer for all of its shares, from GKB Holdings at SGD0.135 per share. The offer price represents a 19.5% premium above its last price of SGD0.113 and a 22.7% premium above its NTA of SGD0.11. The offer is conditional  upon GKB Holdings receiving at least 90% of voting rights by the close of the offer. The intention of GKB Holdings is to delist k1 Ventures given its low trading liquidity and high compliance costs to maintain listing status of the latter.

The current major shareholders of k1 Ventures are Kephinance Investment Pte Ltd (36.02%), Greenstreet
Partners L.P. (14.1%) and BV Singapore Holdings Ltd (12.24%), and they have given irrevocable
undertakings to accept the offer. They have also undertaken to waive their rights to receive the offer price in
cash and would instead receive ordinary shares in GKB Holdings under a share swap agreement. GKB
Holdings is an investment holding company incorporated on 25 June 2012 and its major shareholders are
also the current major shareholders of k1 Ventures.

Keppel Corp holds a 36% stake in k1 Ventures through its wholly-owned subsidiary, Kephinance Investment Pte Ltd. If the privatisation is successful, Keppel Corp would eventually end up with an effective stake of 45% in k1 Ventures, through Kephinance.

The impact on Keppel Corp is marginal. At a price of SGD0.135 per share, k1 Ventures would only account for 5.9 SG cents of our SGD12.70 SOTP target price for Keppel Corp. After the privatisation, Keppel’s effective stake would increase from 36% to 45% and this would account for 7.3 cents of Keppel Corp’s target price.

Neptune Orient Lines

Kim Eng on 28 June 2012

Freight and fuel show signs of improvement. Leading indicators for freight rates and fuel prices have given us cause for optimism about Neptune Orient Lines’ (NOL) fortunes in 2Q12. The China Containerized Freight Index (CCFI) has risen 30% QoQ during the quarter with a corresponding drop in bunker prices by almost 10% QoQ.

They signal a scenario that, in our view, would make things more manageable in the near term for the world’s seventh-largest container shipping line by capacity. It might even achieve a breakeven for the remaining three quarters of the year after a poor 1Q12.

Rough seas or safe landing ahead? The uncertain economic outlook has put a wedge between analyst opinions. While the main concerns are centred on Europe, fears of a global fallout continue to cloud visibility on freight rate assumptions. Our assumptions of plateauing rates following the surge in 2Q12 are guided by recent reports of only a partial success in implementing peak season surcharges.

Capacity glut still an overhang. Based on industry forecasts, overcapacity looks set to last until the end of 2013. With capacity increases of almost 10% each for 2012 and 2013, and the world economy still in an uncertain state, it would be difficult to justify a bullish outlook for the container shipping industry until the capacity situation moderates in 2014.

Narrow forecasted loss, but maintain SELL. Improved top-line drivers of higher freight and lower fuel cost assumptions will help to stabilise NOL’s prospects in the near term. However, there remains the scourge of overcapacity, not to mention our skepticism about the industry’s ability to continue relying on liner cooperation to sustain a freight rate recovery. Our valuation remains pegged at 0.8x FY12F P/BV. Maintain SELL.

Wednesday 27 June 2012

K-Reit


CIMB Research on 26 June 2012
WE are net positive on K-Reit's acquisition of another 12.4 per cent in Ocean Financial Centre (OFC), with increased control and good placement price outweighing slight negatives from higher asset leverage. The placement price of S$1.17 (15 per cent premium to volume- weighted average price) could provide a benchmark for the share price.
We raise our distribution per unit estimates and dividend-discount-model-based target price (discount rate: 8.2 per cent), factoring in accretion from the purchase. Maintain "outperform" on favourable risk-reward. We see catalysts from an earlier bottoming of the office market and tax savings.
K-Reit announced the acquisition of an additional 12.4 per cent stake in OFC for S$261.6 million (S$2,380 psf) or S$285.7 million ($2,606 psf) including S$24.1 million in income support till December 2017 from Avan Investments.
This acquisition will take its stake in OFC to 99.9 per cent. The equity cost of S$228 million will be funded by a mix of debt (S$158.2 million) and equity (S$70.2 million private placement at S$1.17 apiece to Ong Holdings, 14.6 per cent premium to VWAP of S$1.02, though still below NAV at 0.9 times P/B).
Overall acquisition price and terms were fairly similar to that for K-Reit's acquisition of its initial 87.5 per cent stake back in October 2011. Slight difference came from a lower support quarterly net property income of S$27.6 million (previous quarter: S$30.5 million) and rental of S$13-S$14 psf.
Positives came from increased control and stake in the asset and premium on the placement price (which could set a target/support for share price).
We understand that K-Reit had approached the vendor for the purchase who apparently paid a premium to VWAP due to his confidence in K-Reit. Slight negatives, however, came from a fairly high aggregate leverage of 43.9 per cent (previously 41.8 per cent) after the deal.
Overall, we are net positive on the deal, as we see advantages from increased control in OFC and good placement price, outweighing slight negatives from higher asset leverage.
OUTPERFORM

HYFLUX

DBS on 26 June 2012


HYFLUX is one of the seven pre-qualified groups to remain in the running for the independent water project (IWP) in Oman. Partnering with Hyflux are Mitsui Corporation and Al Tahir Group.
We believe Hyflux stands a good chance of winning the project, estimated at US$350 million-US$400 million, given its strong track record in large-scale desalination projects in Algeria and Oman. Apart from financial support from Mitsui, Al Tahir, an established and leading construction & engineering conglomerate in the Sultanate of Oman, would provide better domain knowledge and network.
The IWP is to be constructed next to the existing Ghubrah power and desalination plant. The first phase will produce 138,000 cubic metres per day, with capacity to increase to 191,000 cubic metres per day by 2014.
We do not have a confirmation of the tender results date but considering that this plant has to be ready by 2013, we believe construction should begin in 2012 and hence the tender results should be concluded over the next couple of months.
Year-to-date, Hyflux has already met our new win assumption of S$500 million with the Dahej project (engineering procurement and construction contract of US$420 million) in India. Hence, any new wins here on will provide upside to our FY2013/14 forecast earnings.
We have good visibility for Hyflux's FY2012 earnings, maintain "buy". We do not foresee any significant earnings surprises as FY2012 will be driven by Tuaspring (S$1.05 billion), government-backed and due for completion in 2013. Our forecast assumes 50 per cent completion in 2012. Earnings upside could come from faster than expected execution of Tuaspring or any other new contracts.
BUY

Stamford Tyres Corp

Uobkayhian on 27 June 2012

Valuation
· Current dividend yield of 5%. The stock is trading at 7.1x FY12 PE, while its dividend yield is maintained at 5%, representing a dividend payout of 36.1%.
Investment Highlights
· Increasing vehicle population in overseas markets. While operations in Singapore contribute 36% of FY12’s revenue, the group maintains their expansion plans in Malaysia, Thailand, India and South Africa. Total vehicle production in South Africa and India grew yoy by 12.8% and 10.7% respectively in 2011. The group will continue to expand their Southeast Asia (SEA) retail business through a partnership with B-Quik in Thailand to supply SSW wheels and other tyres. B-Quik provides vehicles maintenance services through its 100 retail stores. For Malaysia and South Africa, the aim is to increase sales in Falken tyres to dealers.
· Grow with its principals. The group is working with Sumitomo Rubber Industries to expand into new markets with good growth potential, and one of which could be India. The group may need to redevelop their product specifications for this market based on their previous experience in India.
· Sale proceeds of Sumitomo Rubber Industries Tyre Pacific (SRITP) in China. About half of the sales proceeds would be used to expand its South Africa and India operations, while the balance is used to beef up the Singapore warehouse facilities. The group still maintains its local distributorship for Dunlop in Shanghai, Beijing and Guangzhou, but cited problems including difficulties in obtaining credit for business transactions and the protective market for local tyre distributorship in China.
· Falling rubber prices. The group appears to be unable to capitalise on this as tyre manufacturers are slow to cut prices and there is a three months lead time for any adjustments.
Financial Highlights
· Revenue for FY12 grew 6.7% yoy (FY11 grew 10% yoy) to S$364.1m. SEA region, which contributed 75.9% of FY12 revenue, grew by 5.6%. Gross profit rose by a slower 1.1% yoy to S$80.4m due to higher cost of sales, which increased by 8.3%. However operating expenses increased by 7.4% to S$69.3m in FY12 as a result of rising rentals for industrial space in Singapore, as well as FX loss of S$2.9m due to the appreciation of Singapore dollar against South African Rand.
Our View
· We think expanding into retail in SEA is a good move to tap on their existing experience in Singapore and also this could help to forecast their inventory levels and improve margins.
· The group is intending to increase its equity in South Africa to increase its ability to borrow in local currency. However the group is still subjected to FX risk as payables are largely in US dollar and receivables are in respective local currencies. In addition, net gearing appears to be rather high at 113% for FY12. We understand that long-term loans outstanding have increased from S$6.6m to S$24m currently (in FY13) which net gearing is likely to even higher.

CSE Global

Kim Eng on 27 June 2012

Background: CSE is a global provider of technological solutions for the industrial automation, telecom, environmental and healthcare markets. Industrial automation and telecom solutions are targeted at the oil & gas industry, focusing on the information, communication and networking needs of offshore platforms and onshore refineries. Environmental solutions include specialised furnace systems (eg incineration) to industrial and municipal customers. Healthcare solutions focus mainly on electronic patient care record management in the UK.

Why are we highlighting this stock? CSE’s new group CEO Mr Alan Russel Stubbs has recently purchased 54,000 shares at SGD0.805, shortly after CSE announced that it will receive SGD21.4m from the sale of one of its associate companies in Malaysia, eBworx. It will also record a one-time gain of SGD10.3m in 2Q12 from this sale. In our view, this suggests scope for CSE to use the proceeds of the sale to restore its dividend to SGD0.04/share after it was cut in half last year.

Risk profile improving after 2Q11 loss. After an excellent multi-year track record of execution and consistently strong growth, CSE’s FY11 profits fell 49%, mainly due to execution problems at two Middle East telecom projects. A provision of SGD21.7m was made in 2Q11 to account for total cost overruns on these two projects, which are due to complete in 3Q11. Since then, CSE has fully recovered, reporting a net profit of $12.6m in 1Q12, flat YoY but up 34% QoQ. So far, the provision has been sufficient to contain the cost overruns.

2012 looks set to be a record year. Average new orders received as at 1Q12 stood at SGD130m, up about 20% from a year before. Consensus expects CSE to earn SGD58m on average in 2012, above the 2010 peak of SGD52.5m. As a measure of street confidence, even the lowest 2012 estimate of SGD55m exceeds the 2010 earnings peak. Of course, 2012 will be helped by a relatively recent acquisition,

Australian telecom specialist ASTIB. Still trading at crisis valuations despite improved fundamentals. Despite the earnings recovery, CSE trades at 1.9x book value, near the low of the Great Financial Crisis in 2008 and at one standard deviation off its mean of 3.3x.

Singapore Exchange

Kim Eng on 27 June 2012

The winner may be the loser. The bidding war for the London Metal Exchange (LME) has ended with the Hong Kong Stock Exchange (HKEx) agreeing to pay GBP1.39b (SGD2.8b) for the world’s largest venue for trading metals-based derivatives. Singapore Exchange (SGX) was widely rumoured to be among the suitors, but with this price tag, we think the winner may actually be the real loser. This deal values LME at 180x PER or 18x P/BV (estimated 60x PER even after LME raise exchange fees next month).

Highlights value of derivatives market. What this deal does highlight is the value of derivatives trading, which has seen a significant upturn in trading volume over the past decade, from 2b to 25b contracts in 2011. SGX has been growing this segment for the past few years and now has a series of metal futures in partnership with LME for trading during Asian hours on its own platform. Unlike fluctuating securities revenue, derivatives revenue saw steady increase for the past 11 quarters.

Staying to steer the ship. SGX recently announced that CEO Magnus Bocker has renewed his three-year contract first signed in December 2009. This is an important development in our view, as it will give continuity to the initiatives implemented since he took office. Many of them, such as retail investor education and tighter rule enforcement, need time to bear fruit.

New mainboard rules for mining companies. SGX has proposed specific mainboard criteria for mining companies, following similar rules for a Catalist listing last year. This may help attract mining companies, especially from Australia, which are seeking access to capital markets in Asia outside of their home country.

Healthy dividend yield, maintain Buy. With a depressed SDAV of SGD1.3b, we believe SGX’s earnings are closer to its bottom baseload, providing a good opportunity for long-term accumulation. Furthermore, with a cashed-up balance sheet, sustainable dividend yield will remain healthy at around 4-5% at current price. Maintain BUY with a target price of SGD7.43 pegged at 25x FY6/13F PER.

Tuesday 26 June 2012

UOL Group

OCBC on 26 June 2012

We believe that mass-market prices would be underpinned by an environment of continued low rates and abundant liquidity in FY12, and favor developers with ample land-bank outside the central region (OCR). With only one domestic site in UOL’s land-bank currently, we believe that land acquisitions would now be key requirements for share price outperformance ahead. UOL’s management has a strong track record of timing the property cycle well with spot-on execution at launches and we think this is a key strength of the company. However, with limited exposure to a still healthy mass-market residential segment, we downgrade UOL to HOLD with an unchanged S$4.80 fair value estimate (30% discount to RNAV).

Land-banking key for share price outperformance
We believe that mass-market prices would be underpinned by an environment of continued low rates and abundant liquidity in FY12, and favor developers with ample land-bank outside the central region (OCR). With only one domestic site in UOL’s land-bank currently, we view land acquisitions to be key requirements for share price outperformance ahead. Management has indicated that they are actively looking out for acquisition opportunities and, with an ample supply of residential sites in the government land sales (GLS) programme, we see good odds that UOL would acquire new sites in the remainder of FY12.

Good execution at two key launches
Over the last six months, we saw UOL execute strongly on its two key residential launches in Singapore. The 577-unit Archipelago is now 70% sold at around S$1.0k-S$1.1k psf, and the 244-unit Katong Regency is fully sold. The remaining site in its landbank is a 137,561 sq ft freehold residential site at St. Patrick’s Road, acquired for S$172m in Dec 11, via an en-bloc transaction. In China, we expect the residential sales environment to remain challenging. We see a muted take-up rate for the Esplanade in Tianjin, and management is expected to take a tentative approach whereby it would first launch a limited number of units to test the market.

Downgrade to HOLD with unchanged S$4.80 FV
UOL has a strong track record of timing the property cycle well with spot-on execution at launches and we think this is a key strength of the company. Also, the group’s balance sheet is relatively healthy (cash S$334.2m and net gearing 33% as of end 1Q12) against potential macro-economic shocks from residual European uncertainties. However, we are cognizant that there is limited exposure to a still healthy mass-market residential segment for the remainder of FY12. Downgrade to HOLD with an unchanged S$4.80 fair value estimate (30% discount to RNAV).

Keppel Land

OCBC on 26 June 2012

MBFC Tower 3, which obtained TOP in 1Q12, is currently ~67% committed. We believe that the divestment of its stake to K-REIT is unlikely in FY12 as 1) Keppel Land (KPLD) has a rich cash hoard of S$1.6bn with a net gearing of 16%, and 2) it would likely take some time to reach a 80% - 90% committed leasing level suitable for divestment. We favor KPLD’s strong balance sheet position which would keep it in good stead against potential macro-economic shocks ahead. However, we note that the outlook for the office sector remains soft and that a majority of its residential exposure is prime, which would likely face headwinds in the remainder of FY12. Maintain HOLD with an unchanged fair value estimate of S$3.32 (35% discount to RNAV).

MBFC T3 divestment unlikely this year
MBFC Tower 3, which obtained TOP in 1Q12, is currently ~67% committed. We believe that the divestment of its stake to K-REIT is unlikely in FY12 as 1) Keppel Land (KPLD) has a rich cash hoard of S$1.6bn with a net gearing of 16%, and 2) it would likely take some time to reach a 80% - 90% committed leasing level suitable for divestment as leasing demand in the office sector is still relatively soft.

Chinese sales remain muted
Conditions for residential sales in China stay challenging with about 300-400 units sold YTD (190 units in 1Q12) for KPLD. While take-up rates remain low, we believe that prices and sales levels are likely near a trough, barring a wide-spread macro shock, as the impact of current buyer restriction curbs reaches a stable state.

Leasing strategy going ahead at the Reflections
In Singapore, The Luxurie, Reflections at Keppel Bay and Marina Bay Suites are 61%, 75% and 75% sold, respectively, as of end May 12. Management has set aside 150 units at the Reflections as serviced residences, and we understand ~45 units have been tenanted at ~S$6 psf per month. We note management did not bid in the recent GLS tender for a Sengkang site beside its current project, The Luxurie, and believe this could indicate a cautious stance on the residential space and that management is bidding its time replenishing land-bank.

Maintain HOLD at S$3.32 fair value estimate
We favor KPLD’s strong balance sheet position (S$1.6bn cash with 16% net gearing), which would keep it in good stead against potential macro-economic shocks ahead. However, we note that the outlook for the office sector remains soft and that a majority of its residential exposure is prime, which would likely face headwinds in the remainder of FY12. Maintain HOLD with an unchanged fair value estimate of S$3.32 (35% discount to RNAV).

City Developments Ltd

OCBC on 26 June 2012

We forecast that an environment of continued low interest rates and abundant liquidity would support prices and demand for mass-market units in FY12. By our estimates, a significant 51% of CDL’s unsold domestic residential landbank, in terms of gross development value (GDV), fall into the outside central region (OCR), which points to ample landbank for continued residential sales in the remainder of FY12. Moreover, with earnings buttressed by diversified hotel and commercial exposures, we believe CDL warrants a re-rating and reduce its RNAV discount to 20% (from 30% previously). Upgrade to BUY from Sell, with an increased fair value estimate of S$11.53 versus S$8.92 previously.

Low interest rates to underpin mass-market prices in FY12
We forecast that an environment of continued low interest rates and abundant liquidity would support prices and demand for mass-market and shoebox units in FY12. By our estimates, a significant 51% of CDL’s unsold domestic residential landbank, in terms of gross development value (GDV), fall into the outside central region (OCR), which points to ample landbank for continued residential sales in the remainder of FY12. Moreover, with healthy sales seen over the FY10-11, we calculate that progress billings in excess of S$2.0b from already sold units would underpin earnings for the CDL’s residential segment ahead.

Strategic land-banking continues
We like that management is continuing to strategically acquire land-bank. It recently acquired, from a GLS tender, a 18,341 sqm site in Buangkok Drive/Sengkang Central (max allowable GFA of 55,023 sqm). The site is about 5 to 10 minutes from the Buangkok MRT station and is accessible to the Tampines Expressway and the Kallang-Paya Lebar Expressway. CDL’s top bid of S$301m translates to a land price of S$508 psf, which is 37% above the second highest bidder. We estimate breakdown and selling average prices of S$920 psf and S$1,050 psf (based on prices at The Luxurie), respectively, which points to a 14% profit margin.

Upgrade to BUY with increased S$11.53 fair value estimate
CDL also has a strong balance sheet position, with S$2.6b in cash and a low net gearing ratio of 21% (as of end 1Q12). Interest cover is at a solid 16.5 times. In addition, with earnings buttressed by diversified hotel and commercial exposures, we believe CDL warrants a re-rating and reduce its RNAV discount to 20% (from 30% previously). Upgrade to BUY from Sell, with an increased fair value estimate of S$11.53 versus S$8.92 previously.

COSCO Corp

OCBC on 26 June 2012

With Yangzijiang experiencing its first order cancellation, we now fear a similar deterioration of COSCO Corp (COSCO)’s order-book. First, COSCO’s order-book contained 47 bulk carriers, which may be susceptible to cancellations. Secondly, many of its customers are based in Europe, making COSCO vulnerable to macro-economic risks from the region. Thirdly, it has a high concentration risk arising from Sevan Drilling’s order of two rigs worth about US$1b. The payment terms for one of the rigs have also been recently changed to a more back-end schedule. As Sevan Drilling uses innovative cylindrical designs for its rigs, there may not be a ready secondary market for such rigs should a default occurs. Given the gloomy outlook, we downgrade COSCO to SELL with S$0.84 fair value estimate.

Will ship defaults hit COSCO Corp?
With Yangzijiang experiencing its first order cancellation (for two bulk carriers by a Greek customer), we now fear a similar deterioration of COSCO Corp (COSCO)’s order-book. First, its orderbook contained 47 bulk carriers, which may be susceptible to cancellations should the operating conditions for bulk shippers worsen. The Baltic Dry Index is at a 25-year low and a quick recovery is unlikely. Secondly, many of its customers are based in Europe (and may therefore rely on Eurozone banks for financing). This makes COSCO vulnerable to macro-economic risks from the region. Thirdly, it has a high concentration risk arising from Sevan Drilling’s order of two rigs worth about US$1b. As Sevan Drilling uses innovative cylindrical designs for its rigs, there may not be a ready secondary market for such rigs should a default occur.

Sevan Drilling to delay payments?
According to Sevan Drilling, the payment terms of Sevan Drilling Rig 4 contracted with COSCO Shipyard has been changed to a more back-ended schedule, i.e. 5% on contract execution in May 2011, 5% around Mar 2012, and the balance of 90% on delivery in 2Q12. The original schedule was 5% on contract execution, 15% prior to steel cutting and balance 80% on delivery. (We checked with COSCO yesterday, but the group was unable to confirm this.) Similarly, other customers may also negotiate for more back-ended payment schedules. This would mean that COSCO’s credit risk (and possibility fx/cashflow risk) may be higher than expected.

Downgrade to SELL; FV S$0.84
With the gloomy outlook, we lowered our PBR peg for COSCO to 1.4x (previously 1.6x) and our fair value estimate to S$0.84 (previously S$0.98). Downgrade to SELL.

Frasers Commercial Trust

UOBKayhian on 26 June 2012

Price $0.965
Target $1.08

What’s New
· Re-iterate BUY with higher target price of S$1.08 (previously S$1.07), implying 11.9% upside from current price.
· Refinances S$500m term loan. Frasers Commercial Trust (FCOT) has entered into: a) a S$320m, three-year transferable term loan facility with interest rate pegged to the Singapore Swap Offer Rate (SOR) plus a margin of 1.55% p.a., and b) a S$185m, five-year transferable term loan facility with interest rate pegged to SOR plus a margin of 1.83% p.a. (excluding upfront costs). The new facilities will be primarily used to refinance FCOT’s existing S$500m term loan facility, which is yielding 2.65% p.a. above SOR.

Stock Impact
· Interest savings exceed expectation. Following the refinancing exercise, we expect an approximate 100bps interest cost reduction on FCOT’s Singapore dollar-denominated term loans, higher than previously expected. All-in financing cost for the group’s Singapore dollar-denominated debt is expected to fall from about 3.6% to about 2.6%.
· Reduced refinancing risk. FCOT has successfully spread out its debt maturity profile by entering into three- and five-year term loans, effectively reducing refinancing risk. Prior to refinancing, all of its debt was structured to mature at the same time.
· To redeploy S$360m from KeyPoint divestment. FCOT will be looking to redeploy S$360.0m of proceeds from the divestment of KeyPoint, subject to the approval of unit-holders at an upcoming EGM. In our view, FCOT could: a) acquire Alexandra Point or Valley Point from its sponsor, valued at S$162m and S$195m respectively, or b) redeem the convertible perpetual preferred units (CPPUs), which are yielding 5.5% p.a..
· Revitalisation of China Square Central. FCOT, together with Far East Organization and The Great Eastern Life Assurance Co Ltd has unveiled a collaborative effort to revitalise the area surrounding China Square Central (CSC). We believe this initiative is likely to improve CSC’s connectivity with Telok Ayer MRT as well as adjoining developments Far East Square and Great Eastern Centre.

Earnings Revision.
· Raised DPU forecast. We have raised our FY13F DPU forecast by 1.3% to account for higher-than-expected interest savings arising from the refinancing exercise.

Valuation
· Re-iterate BUY with higher target price of S$1.08 (previously S$1.07), implying 11.9% upside from the current price and FY13 DPU yield of 8.0%. Our target price is based on an 8.7% discount rate and long-term growth rate of 2.0%.

Yeo Hiap Seng

Kim Eng on 26 June 2012

Background: Yeo Hiap Seng (YHS) is a wellestablished F&B company, building on its roots as a soya sauce maker. Today, the group is engaged in the manufacture and distribution of a wide variety of still drinks and canned food, predominantly under its in-house Yeo’s brand. In addition, YHS is the exclusive agent for many renowned international brands in Singapore, such as Pepsi, Evian and Red Bull. It has also developed quality condominiums,such as Jardin and Gardenvista.

Why are we highlighting this stock? YHS is currently undergoing a restructuring. It is in the process of privatising its Malaysian-listed subsidiary Yeo Hiap Seng (Malaysia) Bhd (YHSM) by way of selective capital reduction. Substantial shareholder Orchard Parade Holdings (OPH) is also transferring a 35% stake in the company to its own parent company, Far East Organization (FEO), and distributing its remaining 14.5% stake to its minority shareholders as dividend in specie.

F&B margins have improved. Excluding fair value gains on its available-for-sale financial assets, YHS reported a core PATMI of SGD15.1m in 1Q12. The F&B division contributed SGD4.0m, as net margins improved from 2.8% in 1Q11 to 3.9% in 1Q12. Nonetheless, management expects margins to be squeezed by competitive selling prices over the next 12 months, but will continue to focus on operating efficiency and production processes to enhance the division’s profitability.

Corporate restructuring underway. YHS has proposed to privatise the 61.1%-owned YHSM by way of selective capital reduction at a cash consideration of MYR3.60 per share. This will value YHSM at 22.5x FY11 PER and 2.1x FY11 P/BV. Concurrently, YHS’s substantial shareholder OPH intends to divest a 35% stake in YHS to its own parent company FEO at SGD1.80 per YHS share as part of an asset swap.
This values YHS at 25x FY11 PER and 2.1x FY11 P/BV. Eventually, FEO will have a direct 66.2% stake in YHS. In addition, OPH will distribute its remaining 14.5% stake in YHS to its minority shareholders as dividend in specie.

Potential takeover target? In this part of the region, YHS and competitor Fraser and Neave (FNN SP) together have the lion’s share of the F&B market. Besides the bottling facilities and well-established brands, both companies have extensive distribution networks. In 2010, Japanese brewer Kirin acquired a 14.9% stake in FNN from Temasek Holdings at a valuation of 25x PER. Hence, we will not be surprised if YHS does attract the interest of bigger players, such as Danone, Kraft or Unilever. However, as part of its 5-year exclusive bottling agreement, PepsiCo has preferential rights if FEO and OPH intend to lower their collective stakes to below 51%.

Raffles Medical Group

Kim Eng on 26 June 2012

Cheapest hospital stock now, upgrade to BUY. The 11% dip in share price from its February high of SGD2.44 has resulted in Raffles Medical Group (RMG) emerging as the cheapest hospital stock in the region. We believe that the defensive nature of its hospital earnings is a strong attribute in an uncertain market. We upgrade our recommendation from HOLD to BUY, given its widening valuation discount relative to peers. Our DCF-based target price is lowered marginally to SGD2.71 after some minor adjustments.

Premium valuations intact. Despite the recent sell-off in equity markets, hospital stocks have managed to hold on to their premium valuations, trading at above-market average PERs of about 26x. Aside from defensive earnings, anticipation of renewed interest in the healthcare sector could have provided stock support, in the hope of a positive re-rating in valuations for the sector.

No competition from Novena suites. Parkway Pantai’s 333-bed Mount Elizabeth Novena Hospital is expected to open next month with 180 beds operating initially and the rest to come on-stream by the end of the year. Though this marks one of the biggest increases in private hospital beds in more than 10 years, we do not expect any major negative impact on RMG as the new hospital targets the high-end segment of the market.

Cost containment manageable. RMG’s greatest challenge lies in managing staff cost, which is estimated at 48% of its total revenue. The Singapore government intends to increase healthcare professionals’ wages by an average of 20% by 2014. RMG would need to respond correspondingly with a competitive compensation structure to retain and attract staff. Nevertheless, we note that it still has room to raise its charges and intends to do so, given that its average surgical cost is lower than that of Singapore General Hospital, a public hospital.

Strongest balance sheet. RMG has the strongest balance sheet among its peers, being the only one in a net cash position. Even after accounting for capex for its expansion plans, we expect it to remain in a net cash position, helped by its strong operating cash flow generating capability. Upgrade to BUY.

Monday 25 June 2012

Dyna-Mac Holdings

OCBC on 25 June 2012

Dyna-Mac Holdings Ltd (DMH) provides engineering, procurement and construction services to the offshore oil & gas industry. Its principal activities are the fabrication and assembly of topside modules for FPSO and FSO in Singapore. Having delivered more than 154 topside modules, the group has established itself as a specialist its field. DMH’s main yard has a waterfront shoreline and is integrated with a load-out bay. This enables completed topside modules to be easily transported to nearby shipyards for installation onto an FPSO. We value DMH at 10x blended FY12-13F earnings estimate and obtain a fair value estimate of S$0.34. Initiate with HOLD.

FPSO Fabricator
Dyna-Mac Holdings Ltd (DMH) provides engineering, procurement and construction services to the offshore oil & gas industry. Its principal activities are the fabrication and assembly of topside modules for FPSO and FSO in Singapore. Other activities include ad-hoc general engineering and fabrication projects for specialized structures and semi-submersibles and sub-sea products such as manifolds, buoys, process piping and tanks.

Good Track Record
Having delivered more than 154 topside modules, the group has established itself as a specialist in the fabrication and assembly of topside FPSO and FSO modules. We think that its track record of consistent execution and timely delivery of products would help it secure more contracts in the future.

Integrated sea front yard facilities
DMH’s main yard has an uninterrupted waterfront shoreline and is integrated with a load-out bay. This enables completed topside modules to be easily transported to nearby shipyards for installation onto an FPSO. Besides time savings, the close proximity also implies lower risks and closer collaboration between shipyards. Due to the difficulties in securing waterfront land, we believe its main yard provide it with a key competitive advantage against its competitors.

Revenue and earnings to rebound in FY12-13F
After a weaker-than expected financial performance in FY11, we believe that DMH’s revenue and earnings will rebound in FY12-13F. This is because its order-book is at an all-time high (S$201m as of 20 Apr 2012) and the majority of its projects are expected to be completed by end FY12F. We value DMH at 10x blended FY12-13F earnings estimate and obtain a fair value estimate of S$0.34. Initiate with HOLD.

CapitaLand

OCBC on 25 June 2012

Last Friday, CapitaLand (CAPL) announced that its President and CEO, Mr Liew Mun Leong, would retire in 12 months. Mr. Liew has already served two extensions and we believe his retirement is not a surprise. We believe current prices represent an attractive proposition at 0.75x book and 0.62x our RNAV estimate. In our view, the share price has likely baked in excessively pessimistic expectations for Chinese residential ASPs and capitalization rates. Moreover, CAPL’s diversified exposure and a solid balance sheet (S$6.0b in cash and a benign net gearing of 31%) point to a significant degree of resilience, in terms of earnings and liquidity, even in our bear case scenario of a wide-spread economic crisis. Maintain BUY with an unchanged fair value estimate of S$3.21.

CEO to retire in 12 months
Last Friday, CapitaLand (CAPL) announced that its President and CEO, Mr Liew Mun Leong, would retire in 12 months. A Board Succession Committee would review internal and external candidates and it is understood a successor could be named in as soon as three months. Mr. Liew has already served two extensions and we believe his retirement is not a surprise. In addition, with a significant 12-month notice period, this is likely to have limited impact on the share price.

China still key driver of share price
While CAPL is widely diversified geographically and across different property segments, its Chinese exposure, making up the largest 38% component of assets, constitutes a key driver of the share price. We have seen a challenging environment for residential sales in China over the last two quarters, with only 350 units sold in total, and a take-up rate of ~65% of units launched. Going forward, we expect this to continue in FY12 but believe conditions in China have likely reached a trough in terms of prices and volume, barring a wide-spread macro shock. In Singapore, about 25% of the 509-unit Sky Habitat has been sold at a median psf ~S$1.6k, which underscores a difficult market for units at price quantums above the S$1.0m range.

Maintain BUY - attractive risk-reward
We believe current prices represent an attractive proposition at 0.75x book and 0.62x our RNAV estimate. In our view, the share price has likely baked in excessively pessimistic expectations for Chinese residential ASPs and capitalization rates. Moreover, CAPL’s diversified exposure and a solid balance sheet (S$6.0bn in cash and a benign net gearing of 31%) point to a significant degree of resilience, in terms of earnings and liquidity, even in our bear case scenario of a wide-spread economic crisis. Maintain BUY with an unchanged fair value estimate of S$3.21.

Olam International Limited

OCBC on 22 June 2012

Olam International Limited (Olam) has announced that its CFO Krishnan Ravi Kumar has resigned to pursue a new career outside the Agri-commodity sector. Shekhar Anantharaman will be moving into a new and enhanced role as Executive Director – Finance and Business, where he will lead the group’s overall strategy and new business development activities and also oversee the corporate finance & accounts, and investor relations. We do not see the resignation as having a material impact on its daily operations as Shekhar is also a veteran in Olam, having spent 20 years there. Meanwhile, we continue to believe that the fundamental picture remains unchanged – the share price could continue to remain volatile in view of the ongoing issues in Europe and also sluggish economic growth in China. Maintain HOLD with S$1.86 fair value.

Resignation of CFO
Olam International Limited (Olam) has announced that its CFO Krishnan Ravi Kumar has resigned to pursue a new career outside the Agri-commodity sector. Ravi has led the corporate finance and treasury function for Olam for nearly 20 years. Meanwhile, Shekhar Anantharaman will be moving into a new and enhanced role as Executive Director – Finance and Business, where he will lead the group’s overall strategy and new business development activities and also oversee the corporate finance & accounts, and investor relations.

Profit-taking on news
Following the announcement of the news, Olam saw a 5.4% fall in its share price yesterday. However, we do not see the resignation as having a material impact on its daily operations as Shekhar is also a veteran in Olam, having spent 20 years there. As such, we believe that the resignation news is probably just an excuse to take profit on the stock’s recent jump of 23% over the last two weeks.

Share buyback in progress
Speaking of the recent rally, it is likely due to the announcement of the company’s share buyback program. As a recap, Olam commenced its share buyback program on 8 Jun, where it can buy up to 10% of its issued share capital, or 244.2m shares, at a maximum price of 105% of the average closing price of the last five market days at the time of acquisition. As of 19 Jun, Olam has bought back some 21m shares.

Neutral on buyback
While share buybacks generally reflect the company’s confidence in its prospects, we are somewhat neutral in this instance, given the company’s high net gearing ratio of 2.2x (end Mar); book value per share (S$1.03) is also way below the current price. Meanwhile, we continue to believe that the fundamental picture remains unchanged – the share price could continue to remain volatile in view of the ongoing issues in Europe and also sluggish economic growth in China. Maintain HOLD with S$1.86 fair value.

CapitaMall Trust

OCBC on 22 June 2012

CapitaMall Trust (CMT) recently announced that it would issue HKD1.15b 3.76% Fixed Rate Notes due 2022 under its USD2.0b Euro-Medium Term Note Program. The proceeds would be swapped into SGD190.1m at a fixed 3.45% rate and used to partially refinance the S$783m secured term loan maturing in Oct 2012. We note that CMT’s refinancing is going smoothly with interest costs mostly in line with its current average of 3.3% (end 1Q12), which would consolidate its balance sheet position and lengthen the average term to maturity of its debt structure. In addition, with the strategic divestment of Hougang Plaza and enhancement works at Bugis+ on track to complete in Jul 2012, we believe that management is executing well on strengthening CMT’s balance sheet and optimizing its asset portfolio. Maintain BUY with a fair value estimate of S$2.02.

Refinancing – so far so good
CapitaMall Trust (CMT) recently announced that it would issue HKD1.15b 3.76% Fixed Rate Notes due 2022 under its USD2.0b Euro-Medium Term Note Program. The proceeds would be swapped into SGD190.1m at a fixed 3.45% rate and used to partially refinance the S$783m secured term loan maturing in Oct 2012. We note that CMT’s refinancing is going smoothly with interest costs mostly in line with its current average of 3.3% (end 1Q12), which would consolidate its balance sheet position and lengthen the average term to maturity of its debt structure.

Hougang Plaza divestment further consolidates balance sheet
CMT also recently completed the sale of Hougang Plaza for S$119.1m, resulting in a divestment gain of S$83.8m. Proceeds would likely be used to repay debt and fund potential acquisitions. In our view, with S$1.2b of cash already on its balance sheet and its share price trading at a relatively tight yield of 5.6%, we think CMT’s deployment of the sales proceeds could potentially shed further light on the odds of making a bid for its parent’s stake in the ION ahead.

Bugis+ on track to complete enhancement works
Bugis+ remains on track to complete AEI works by Jul 2012 and its major anchor tenant, Uniqlo, recently began operations. We believe that over 90% of tenants, including Sephora and Aeropostale, would begin sales over the next few months. The yield on cost (including AEI) for Bugis+ is estimated at ~5.8%, in line with that of Bugis Junction, and is significantly improved from the 3.8% passing yield seen when Bugis+ was first acquired as Illuma.

Maintain BUY at fair value estimate of S$2.02
We continue to like CMT’s significant exposure to sub-urban retail rentals, which was relatively resilient during the last downturn. Note that, despite seeing gross turnover fall as much as 21% in some trade categories over FY09, rental reversions remained positive at 2.3% across the portfolio with occupancy rates close to 100%. Maintain BUY with a fair value estimate of S$2.02.

Valuetronics Holdings Limited

OCBC on 21 June 2012

We believe that Valuetronics Holdings Limited (VHL) remains poised to leverage on the growth potential of the LED lighting market, given the positive sentiment from its largest customer within this space. We expect sustained orders for VHL in the near-to-mid term, although a likely trade-off from higher volume orders would be a compression in its gross margin. Meanwhile, downside risks from macro headwinds remain. We estimate that VHL’s Licensing segment would breakeven only in FY14, although operating losses are likely to narrow in FY13. We opine that VHL offers a good investment opportunity for investors looking for small-cap companies with attractive dividends. Coupled with cheap valuations as the stock trades at 4.1x FY13F PER, versus our projected EPS CAGR of 7.6% from FY12-14F, we maintain BUY and S$0.315 fair value estimate on VHL.

LED market has good growth potential despite pricing pressure
We believe that Valuetronics Holdings Limited (VHL) remains well-positioned to leverage on the increasing penetration rates of LED lighting. This is driven by increasing urbanisation and growing demand for environmentally-friendly lighting solutions. Many governments are also phasing out inefficient lighting technologies, thence leading to faster adoption of LED-based lighting solutions. A study conducted by the US Department of Energy has highlighted the potential of LED lighting to conserve energy and enhance lighting quality and performance vis-à-vis that of many conventional lighting technologies. Given that sentiment from VHL’s largest customer is still positive on this front, we believe this would lead to sustained orders for VHL in the near-to-mid term. A likely trade-off to this would be a compression in its gross margin from the higher volume orders, coupled with pricing pressures typical for LED products.

Licensing division likely to breakeven in FY14
Despite the positive outlook from its largest customer, downside risks from macroeconomic headwinds cannot be negated. While the U.S. reported a 5.3% YoY increase (-0.2% MoM) in retail sales for May, this was the lowest YoY growth reported since Aug 2010. Concerns over the eurozone debt turmoil and tepid labour market have undoubtedly stymied consumers’ ability and willingness to spend. We reckon this could have some adverse impact on VHL’s Licensing segment, although we still forecast sales to grow in FY13 and FY14 as the group expands its product portfolio and sales channels. We also expect smaller operating losses for the segment in FY13, and estimate breakeven to occur in FY14.

Reiterate BUY given cheap valuations and attractive yield
We opine that VHL offers a good investment opportunity for investors looking for small-cap companies with attractive dividends (last declared DPS of 17 HK cents, implied yield of 11%, trades ex-div on 23 Jul 2012). Current valuations are also cheap, in our opinion, with the stock trading at 4.1x FY13F PER, against our projected EPS CAGR of 7.6% from FY12-14F. Reiterate BUY and S$0.315 fair value estimate.