Friday, 30 November 2012

Neptune Orient Lines

OCBC on 29 Nov 2012

While NOL’s boost from the positive Chinese PMI data proved to be short-lived, recent data and developments within the industry remain supportive for the counter. According to the Shanghai Containerized Freight Index (SCFI), average rates are still up on a YoY basis despite continued weakness in the China-Europe and China-USA routes. In addition, average 4QCY12 bunker fuel prices have also fallen ~3.1% QoQ so far, a positive for operating margins. On the industry level, a few of the major container shipping lines have planned for rate increases, which could help alleviate the stress on profitability. This collective effort yields the most encouraging sign for NOL and we remain optimistic that the tacit agreement amongst liners follows through. Maintain BUY with an unchanged fair value estimate of S$1.38.

Boost from China PMI short-lived but investment case unchanged
China’s first manufacturing activity expansion in 13 months provided a short-lived boost for Neptune Orient Lines (NOL) last week, which saw its biggest gain in five weeks taper off subsequently. Nonetheless, recent data and developments remain encouraging and supportive for our BUY call on the counter. 

Overall shipping rates holding up well despite weakness
According to the Shanghai Containerized Freight Index (SCFI), average overall 4QCY12 rates have fallen QoQ on the back of spot freight rate declines on the two regions most affected by the slump in global trade: China-Europe and China-USA (OIR estimated -21.5% and -7.8% QoQ respectively in terms of USD/TEU). While this is not unexpected given the seasonally weaker 4QCY12, rates on the other main routes – China-South America and Intra-Asia – have held up well on a QoQ basis and were mostly stable. In addition, rates across the board remained higher on a YoY basis. Average 4QCY12 bunker fuel prices have also fallen ~3.1% QoQ so far. 

General rate increases in the works
Some wavering notwithstanding, a few of the major container shipping lines are planning general rate increases (GRI) to help soften the hurt from continued overcapacity issues ahead of the Lunar New Year period next year. For example, the Mediterranean Shipping Co. (MSC) plans to implement a US$600/TEU rate increase for the Asia-Mediterranean and Black Sea trade routes from 15 Dec. Similarly, the Transpacific Stabilization Agreement liners have also scheduled rate hikes on transpacific routes from 15 Dec. 

Collective industry efforts encouraging
The collective effort by liners to coordinate rate increases sends a positive message that the industry is unwilling to tolerate further cuts to their profitability in order to maximize capacity utilization. While this is contingent on individual liners reining in market share ambitions, we remain optimistic for a tacit agreement and follow through. Maintain BUY on NOL with a fair value of S$1.38.



Thursday, 29 November 2012

Offshore & Marine

Kim Eng on 29 Nov 2012

Drilling in on margins. Margin expectations have become a key determinant of rigbuilders’ share prices. The street was spooked by Sembcorp Marine’s (SMM) purported “10-13%” operating margin guidance, which is a sharp reduction from the previous 14-15% range. While concerns on lower margins are valid, we expect margins to stay near the 13-14% range in the near term, which is above consensus expectations. We argue that scope for margin surprises above street expectations exist. While we agree that Keppel has the potential to turn in higher operating margins than SMM, we think that the latter offers a better pure-play exposure during a positive rigbuilding cycle.

Where does scope for margin expansion lay? To state the obvious, margin expansion can come from: (1) higher pricing and/or (2) lower cost. However, the dynamics within each factor are not so straightforward.
Two key opposing forces for pricing. We see two opposing forces at work for pricing. The first being tight yard capacities. With record orderbook, rigbuilders’ 2013-2014 delivery slots are almost filled and rig owners who want early delivery may need to pay a premium. Rising dayrates for drilling rigs would incentivise rig owners to ensure early or even timely delivery (by going to established yard). Price competition from Korean and Chinese yard however places downward pressures on prices. These yards have excess capacities due to drought in shipbuilding orders and may seek to secure more offshore orders. Our view is for prices to remain steady. For the rigbuilders, these are subjected to market forces and are generally less controllable.

Singapore yards could surprise with better execution. Cost factors would be more yard specific, some of which are likely more controllable. Determinants could be (1) raw material/equipment cost, (2) labour cost, (3) efficiency gains, (4) depreciation cost and (5) product mix. Singapore rigbuilders are well-known for their execution and we believe that this is where opportunities to defend margin lies.

Other notable factors. Forex is another factor as rig contracts are typically dominated in USD while Keppel and SMM reports in SGD and incurs substantial amount of cost in SGD and other currencies. While USD has been depreciating against the SGD, the currency environment does seem to be less volatile now, while we expect steady SGD appreciation in line with MAS’ implicit core inflation target.

Still prefer SMM over Keppel. We stick to our preference for SMM over Keppel as a better pure-play O&M stock. We believe that negativities on margins have been priced in and there may be scope for outperformance above the street’s estimates. Nevertheless, the positive contract win outlook is sufficient for us to keep our Buy calls on both rigbuilders.

YHM Group

Kim Eng on 29 Nov 2012

This does not make sense. YHM has been in the top actives list, trading as high as 430% above the $0.01 share price level that it was trading at before Ezion’s proposed subscription of new shares in YHM, announced on 25 Oct 2012. The offer price of $0.0018 per share, which was then a 80.4% discount to its VWAP of $0.0092, the share price of YHM should have tanked, by logical reasoning.

No earnings and negative book. YHM’s only business is in scaffolding business for the marine sector, which is hardly profitable. The company is also in a negative equity position. It is essentially a shell company which is why Ezion was interested in acquiring it in the first place, with the purpose of injecting a new business.
Could YHM be the next Ezion? Ezion intends to transform YHM into an offshore oil and gas services player and to take up businesses that are complementary to Ezion. However, concrete plans are still patchy. While CEO Chew Thiam Keng has proven himself with Ezion’s success, if investors are betting on YHM to mirror the latter’s performance, it may be too early to judge.

Substantial shareholders have been selling. The surge in share price has allowed previous substantial shareholder, Credit Suisse to dispose of their stake in YHM. The former has notably reduced its stake from more than 18% to below 5%. Rising Flame International, YHM’s creditor, has also converted a total of $440,000 in convertible loan owed by YHM into new shares at $0.001. This is part of the condition required for Ezion’s share subscription deal. The surge in share price made the convertibles deep-in-the-money and with the conversion, it is worth SGD12.8m now, a handsome paper return of 2900%. We would not be surprised if they subsequently dispose of their stake.

Exercise due caution. We fail to see any strong fundamental reasons behind YHM’s current valuation level and would advise investors to exercise caution in trading the stock.

Wednesday, 28 November 2012

Marco Polo Marine

OCBC on 28 Nov 2012

Marco Polo Marine (MPM) reported a 3% YoY fall in revenue to S$19.8m and a 10% increase in net profit to S$3.9m in 4Q12, bringing full year revenue and net profit to S$89.8m and S$21.3m, respectively. Results were in line with our expectations; full year net profit was exactly what we had forecasted earlier. As for the long-awaited BBR listing, we think there is a possibility of it coming through in the coming months. We expect its offshore vessel fleet to grow while BBR downsizes its tugs and barges fleet. Meanwhile the ship repair business remains healthy while charter rates are expected to be stable. Rolling forward to FY13 earnings with an unchanged peg of 8x, our fair value estimate rises from S$0.53 to S$0.56. Maintain BUY.

4QFY12 results in line with expectations 
Marco Polo Marine (MPM) reported a 3% YoY fall in revenue to S$19.8m and a 10% increase in net profit to S$3.9m in 4Q12, bringing full year revenue and net profit to S$89.8m and S$21.3m, respectively. Results were in line with our expectations; full year net profit was exactly what we had forecasted earlier. Gross profit margin was 32.5% in FY12 vs 28.1% in FY11, mainly due to ship repair which performed well in the year. 

Business demarcation accounts for fall in chartering revenue
Revenue from shipbuilding and repair increased 32.8% to S$69.3m while shipchartering registered a 22.8% fall to S$20.5m in FY12. MPM has been reflagging its vessels to Indonesian flag and parking them under its 49%-owned associate, BBR, due to the Indonesian cabotage rule. Now the shipping business of MPM has been confined to waters outside of Indonesia while BBR assumes the Indonesian chartering business.

BBR banking on offshore sector growth Indonesia
We think there is a possibility of a BBR listing on the Jakarta Stock Exchange in the coming months. It currently has 35 pairs of tugs and barges and three offshore support vessels (OSV), but the former is expected to decrease over time as proceeds from sales will be used to fund the growth of the OSV fleet. As the OSV fleet grows, BBR may be able to brand itself as an entity for investors to gain exposure to Indonesia’s growing offshore sector. There are currently relatively few of such companies listed in Indonesia.

Maintain BUY
Management mentioned that it is still receiving enquiries for ship repair, outfitting and conversion services. As for the chartering side, MPM expects charter rates for offshore vessels as well as tugs and barges to remain stable. Rolling forward to FY13 earnings with an unchanged peg of 8x, our fair value estimate rises from S$0.53 to S$0.56. Maintain BUY.

Downstream Oil & Gas

OCBC on 27 Nov 2012

The shift in oil demand growth from OECD countries to non-OECD countries, coupled with an increasing refining overcapacity has put pressure on global refinery utilization rates and refining margins. Against this backdrop, Singapore said that it has no plans to attract any more green-field refinery investments, and will focus on getting existing refineries to upgrade or expand their facilities to produce higher-value petrochemicals, fuels and lubricants. We believe the net effect will be fewer jobs and even stiffer competition for the EPC contractors. As such, we maintain our UNDERWEIGHT on the sector. We like PEC (BUY; FV: S$0.76) for its attractive valuations, but would avoid Rotary (SELL; FV: S$0.34) as we believe the risk of further cost over-run is still relatively high.

Oil demand has peaked in developed countries
According to some observers, oil demand in the developed countries may have already peaked and is currently on a long-term downtrend (IHS, The Economist). Indeed, oil demand in the OECD countries has been sluggish over the past several years, resulting in massive refining overcapacity. The key reasons for the declines are: (i) aging population and slowing growth rates, (ii) saturated car ownership rates, (iii) tighter fuel efficiency standards, and (iv) use of new technologies like hybrid electric vehicles. 

Developing countries continue to add refining capacity
Meanwhile, the developing world has been adding new refining capacity to meet its growing domestic oil demand. For example, China’s refining capacity jumped by 51% since 2005 to 10.8m barrels daily in 2011, while its oil consumption increased by 41% to 9.8m barrels daily over the same period. In the Middle East, some countries (i.e. Saudi Arabia, UAE) are embarking on refinery projects to produce higher valued derivatives for the export market – a marked departure from its traditional role of just selling crude oil overseas. These new refineries are massive in scale and could easily outperform the older ones in Europe and America. Also, the refineries benefit from significant cost savings due to proximity to the crude oil producing regions (in the case of Middle East) or to the end-market (in the case of China). 

Global margin squeeze
The shift in oil demand growth from OECD countries to non-OECD countries, coupled with an increasing refining overcapacity has put pressure on global refinery utilization rates and refining margins. Against this backdrop, Singapore said that it has no plans to attract any more green-field refinery investments, and will focus on getting existing refineries to upgrade or expand their facilities to produce higher-value petrochemicals, fuels and lubricants. We believe the net effect will be fewer jobs and even stiffer competition for the EPC contractors. As such, we maintain our UNDERWEIGHT on the sector. We like PEC (BUY; FV: S$0.76) for its attractive valuations but would avoid Rotary (SELL; FV: S$0.34) as we believe the risk of further cost over-run is still relatively high.

Pacific Andes

OCBC on 27 Nov 2012

Pacific Andes Resources Development (PARD) delivered a disappointing set of 4Q results, dragged down by lower earnings from China Fishery Group (CFG). Net earnings plunged to HK$8.9m, down from HK$146.1m in 3Q12. As a result of this, dividend per share was slashed from 1.08 S cents (which traditionally accounted for about one-third of its earnings) to 0.3 S cent (14.5% of earnings). Outlook is muted, and management is exploring new growth areas. While the Supply Chain Management (SCM) operation is still relative stable, the fishing operation appears to be under pressure. Overall, in view of the weaker outlook, we have cut our estimates for FY13 from HK$839m to HK$638m. In addition, we have also dropped our DPS projection to be the same as this year’s payout at 0.3 S cent. Using the same valuation peg, but moving to blended FY13/14 earnings, we dropped our fair value estimate from 17.8 cents to 14.3 cents. Downgrade to HOLD.

Sharp drop in 4Q earnings
Pacific Andes Resources Development (PARD) delivered a sharply below expectations set of 4Q results. Net earnings plunged to HK$8.9m, down from HK$146.1m in 3Q12. This meant full year earnings of HK$627.7m, way below market expectations of HK$755.3m. Management explained the main reason for the sharp decline in earnings was largely due to lower-than-expected earnings from China Fishery Group (CFG), which was dragged down by several factors including lower activity in the North Atlantic as well as lower catch volume in the South Pacific Ocean. In addition, overall average selling price (ASP) also fell 3%. This led to a sharp decline in margins. For PARD, operating margin fell from 10.2% in 4Q11 and 12.5% in 3Q12 to 6.4% in 4Q12. Other margins fell in tandem. 

CFG disappointed, massive cut in dividend payout 
CFG disappointed and posted net earnings of US$78.1m for FY12 versus US$103.7m in the previous year. This also translated into lower dividend payout of 1.9 S cents for CFG shareholders versus 4.5 S cents previously. Similarly, PARD shareholders will also see a cut in dividend payout from 1.08 S cents (which traditionally accounted for about one-third of its earnings) to 0.3 S cent (14.5% of earnings).

Cut FV to 14.3 cents; downgrade to HOLD
The key challenge is the lower activity in the South Pacific, which is unlikely to pick up any time soon. In addition, there has also been a 70% cut in Total Allowable Catch (TAC) in Peru for the upcoming fishing season. While the Supply Chain Management (SCM) operation is still relative stable, the fishing operation appears to be under pressure to find new areas of growth. Overall, in view of the weaker outlook, we have cut our net earnings estimates for FY13 from HK$839m to HK$638m. In addition, we have also dropped our DPS projection to be the same as this year’s payout of 0.3 S cent. Using the same valuation peg, but moving to blended FY13/14 earnings, we dropped our fair value estimate from 17.8 cents to 14.3 cents. Downgrade to HOLD.

Mapletree Logistics Trust

OCBC on 27 Nov 2012

Mapletree Logistics Trust (MLT) recently announced its intention to acquire Mapletree Wuxi Logistics Park in China from its Sponsor. The purchase consideration of RMB116m was at a 2.5% discount to the average valuation of RMB119m by two independent valuers. Management guided that the acquisition is expected to be accretive at the DPU level, with an initial NPI yield of 8.0%. This is higher than the implied yield of 6.0% for MLT’s existing China portfolio. Separately, MLT also updated that the divestment of 30 Woodlands Loop in Singapore to Accenovate Engineering Pte Ltd will not proceed. This was because the buyer’s application to purchase the property was not approved by JTC Corporation as it did not meet its evaluation criteria. We have earlier assumed the divestment to be completed by Feb 2013, as previously guided by MLT. We now factor the China warehouse acquisition into our forecasts and reverse the divestment of 30 Woodlands Loop as the sale will not be completed. Accordingly, our fair value inches up slightly from S$1.24 to S$1.25. We maintain BUY on MLT.

Acquisition of China warehouse
Mapletree Logistics Trust (MLT) recently announced its intention to acquire Mapletree Wuxi Logistics Park (MWLP) in China from its Sponsor. The purchase consideration of RMB116m (~S$22.8m) was at a 2.5% discount to the average valuation of RMB119m by two independent valuers. Management guided that the acquisition is expected to be accretive at the DPU level, with an initial NPI yield of 8.0%. This is higher than the implied yield of 6.0% for MLT’s existing China portfolio. According to MLT, MWLP is located in Wuxi New District where it enjoys good connectivity, hence making it suitable as a distribution centre for both domestic and overseas market. At present, we understand that MWLP is leased to a strong tenant base of reputable companies including Wuxi Hi-tech, Kerry Logistics and Fiege International Freight Forwarder. The transaction is in line with our view that MLT will seek to expand its presence in overseas market such as China. Upon completion, it will represent MLT’s third acquisition from its Sponsor’s development pipeline.

Sale of Woodlands property will not proceed
Separately, MLT also updated that the divestment of 30 Woodlands Loop in Singapore to Accenovate Engineering Pte Ltd will not proceed. This was because the buyer’s application to purchase the property was not approved by JTC Corporation as it did not meet its evaluation criteria. MLT expressed disappointment with the unsuccessful sale but said it will continue to optimize the property’s yield while actively explore divestment or other value-enhancing opportunities. We have earlier assumed the divestment to be completed by Feb 2013, as previously guided by MLT.

Maintain BUY
We now factor the China warehouse acquisition into our forecasts (expected to complete by Mar 2013). We also reverse the divestment of 30 Woodlands Loop as the sale will not be completed. Accordingly, our fair value inches up slightly from S$1.24 to S$1.25. Aggregate leverage is expected to reach 37.3% based on MLT’s estimates, assuming the acquisition is fully funded by debt. Maintain BUY.

Keppel Corporation

OCBC on 27 Nov 2012

In our year-end report on Keppel Corporation (KEP) last year, we highlighted that order flows for jack-up rigs would slow while prospects for semi-submersible rigs look increasingly brighter. The year played out as expected, with the group securing three jack-up rigs and seven semi-sub orders so far this year. This has been a front-end loaded year due to property, while O&M margins continued to normalize. Meanwhile KEP has started to improve the competencies and productivity of its regional satellite yards to meet heavier workload requirements. The group’s net order book stood at S$13.1b as at end Sep with deliveries extending to 2019. We roll forward our valuations to FY13 earnings in which we are expecting lower operating margins mainly due to the O&M segment and comparatively lower property earnings contribution; as such, our fair value estimate slips from S$13.34 to S$12.49. Maintain BUY.

2013 will still see new orders; ultra-deepwater in focus
In our year-end report on Keppel Corporation (KEP) last year, we highlighted that order flows for jack-up rigs would slow while prospects for semi-submersible rigs look increasingly brighter. The year played out as expected, with the group securing three jack-up rigs and nine semi-sub orders so far this year. Looking ahead, we expect continued new order flow in 2013 due to strong industry fundamentals, including a tightening in the ultra-deepwater segment.

2012 has been front-ended loaded due to property; O&M was relatively stable
Overall, this has been a front-end loaded year as lumpy earnings from the property division boosted net profit in 1H12. Net profit from O&M remained relatively stable each quarter in 9M12, though operating margin in the division has more than halved from 26.0% in 3Q11 to 12.9% in 3Q12 as margins continue to normalize. Recall that margins were impressive around the 20+% range from 4Q10 to 4Q11 as high profit margin contracts, secured largely before the crisis, were executed, along with productivity gains. 

Improving regional satellite yards
Meanwhile KEP has started to improve the competencies and productivity of its regional satellite yards to meet heavier workload requirements. Increased focus will be placed on productivity and R&D efforts to sustain growth for the future. This is a good strategy to pursue so that more work can be outsourced to regional yards in the future to free up space in the Singapore yards.

Maintain BUY
After securing S$8.8b of orders in 9M12 (5% higher than in 9M11), the group’s net order book stood at S$13.1b as at end Sep with deliveries extending to 2019. Looking ahead, we are expecting new order wins of about S$5b in 2013 from the Caspian Sea, West Africa, Brazil and other regions. We roll forward our valuations to FY13 earnings in which we are expecting lower operating margins mainly due to the O&M segment and comparatively lower property earnings contribution; as such, our fair value estimate slips from S$13.34 to S$12.49. Maintain BUY.

Mapletree Logistics Trust

Kim Eng on 28 Nov 2012

Buying Mapletree Wuxi Logistics Park. Mapletree Logistics Trust (MLT) recently announced that it intends to acquire Mapletree Wuxi Logistics Park (MWLP) from its sponsor for CNY116m (SGD22.8m) with an initial NPI yield of 8%. The purchase will be funded by debt and gearing is expected to increase marginally to 37.3% upon completion. Following this, we estimate that MLT still has debt headroom of SGD197m before hitting an aggregate leverage ratio of 40%.

Likely to be yield-accretive. MWLP is currently leased to reputable local and international companies, including Wuxi Hi-tech, Kerry Logistics, Fiege International Freight Forwarder and Konoike, with typical
2-3 year lease term. We expect MLT to complete the acquisition by end- March 2013 with an initial passing rent of SGD0.40 psf per month (or CNY0.73 psm per day). At the existing 2QFY3/13 portfolio yield of 6.5% and fully debt-funded, we think this acquisition will be yield-accretive.

30 Woodlands Loop divestment is off. MLT also said that the divestment of 30 Woodlands Loop to Accenovate Engineering Pte Ltd will not be completed. JTC Corporation has informed that the buyer’s application to purchase the property was not approved as it did not meet the evaluation criteria (value-add etc). Had the transaction gone through, MLT would have booked a net disposal gain of ~SGD4.96m, given that the sale consideration for this property was SGD15.5m. A-REIT encountered a similar disapproval for the divestment of Goldin Logistics Hub on 26 Nov and we suspect that these may be “soft” government attempts to put a lid on the already overheated industrial property prices.

Acquisition hotspots. MLT has previously opined that it will focus more on acquiring assets in China and South Korea, and less in Japan. We understand that there is a scarcity of modern logistics facilities in China but with only six properties (excluding MWLP), we doubt that MLT can scale fast enough to stand against big boys like Global Logistic Properties, which thrive on “network effect” and operational synergies.

Trading yield looks tight for further compression. From our estimates, the implied cap rate for MLT (based on 2QFY3/13 results) is 6.1%. The counter currently trades at 6.4% FY3/13 DPU yield, which we believe is almost near the end of its yield-compression cycle. MLT has risen 12% since our BUY call in Jun 2012 when we initiated coverage. For now, maintain HOLD with a TP of SGD1.14. We prefer A-REIT (TP: SGD2.65) which has more room for yield compression.

Tuesday, 27 November 2012

CDL Hospitality Trusts

OCBC on 26 Nov 2012

Being both a dividend play and one of the most liquid hospitality counters with good exposure to Singapore, CDLHT saw its unit price climb 36% end-2011 to a one-year high in mid Oct. However, moderation in the industry’s pace of growth, first seen in 2Q12, increased further in 3Q12 and CDLHT’s unit price has fallen 9% from the recent high. Our outlook for the hospitality industry remains cautious for the early part of 2013 but more positive in the longer term. On another note, given the high prices at which hotel sites have been sold for recently, the size of new hotel rooms in the future may become smaller. This will favor existing hotel assets and incumbents such as CDLHT. We maintain our fair value of S$1.91 on CDLHT and HOLD rating.

Exciting 1H12, tempered 2H 
Singapore’s hospitality industry posted excellent performance in 1Q12, clocking RevPAR growth of ~15% YoY in 1Q12, according to the STB. Being both a dividend play and one of the most liquid hospitality counters with good exposure to Singapore, CDLHT saw its unit price climb 36% end-2011 to a one-year high of S$2.10 as of 18 Oct 12. However, moderation in the industry’s pace of growth, first seen in 2Q12, increased further in 3Q12. 3Q12 RevPAR for CDLHT declined 0.9% (versus +7.5% YoY in 1H12), and its unit price has fallen 9% from the recent high. With information from multiple sources, we estimate that RevPAR for most Singapore hotels in 3Q12 was generally flat YoY. Our outlook for the hospitality industry remains cautious for the early part of 2013, especially since odd numbered years tend to see fewer MICE events.

Incumbents’ advantage
We estimate that for 2012-2014, overall hotel room stock will grow at 4.8% p.a. while hotel demand will grow faster at 6.4% p.a. We remain positive on the long term growth prospects of CDLHT. We note that hotel sites have been sold at high prices in the past several months. Earlier in Nov, a record price of S$1,167 psf ppr was set for hotel land in Singapore; Resorts World Sentosa’s subsidiary made the top offer for the GLS Jurong Town Hall Road site. In 2Q12, RB Capital’s winning bid for a 99-year leasehold, GLS hotel site at Rangoon Road/Farrer Park Station Road was at $1,079 psf ppr. Due to these high prices the size of future hotel rooms may shrink to ensure a reasonable profit margin. Such a phenomenon would favor existing hotel assets as these would be preferred by business travelers. Incumbents such as CDLHT will have an advantage. 

Maintain HOLD
We keep our fair value of S$1.91 on CDLHT and HOLD rating. An acquisition or better-than-expected hospitality numbers in the near term could serve as price catalysts. We believe that a possible acquisition target over the next year is W Hotel Sentosa Cove.

M1

Kim Eng on 27 Nov 2012

No catalysts despite near-term earnings recovery. M1 disappointed in 3Q12 due to elevated subscriber acquisition costs. Even though we expect 4Q12 to recover on the back of greater 4G tiered plan takeup, we do not see any positive catalysts for FY13. Capex is the main problem, and will cap dividend upside. Nevertheless, M1 is lik kely to continue paying a good dividend, albeit flat vs FY11. Although M1 iss no longer our top telco pick (now favour StarHub), it is still worthwhile ho olding on to for the dividend. It
currently yields a supportive 5.5%.

3Q12 recap. M1’s 3Q12 results disappoin nted because of higher than expected subscriber acquisition costs (SA AC) that depressed EBITDA margin by 2.3 ppt/6.4 ppt YoY/QoQ. SAC ros e 16%/29% QoQ/YoY due to a higher mix of high-end smart devices for re econtracting mobile customers. As a result, net profit fell 6%/20% QoQ/YoY Y. On the bright side however, management pointpointed strong growth in tiered 4G plans as the main driver in future.

Strong 4G adoption since Sept launch. M1 launched its 4G price plans on 15 Sep 2012, and has reported a strong ssubscription rate. According to the company, it added 43,000 4G subscribers in the first month following launch. Assuming no churn-outs, that would be more than three times the number of post-paid net-adds it experienced d in the whole of 3Q12. This is consistent with our expectations that M1 wiwill experience a strong 4Q12 following a weak 3Q12.

Mobile data to accelerate. Data accounted for 38% of service revenue in 3Q12, and can be expected to accelerate in n 2013 as LTE adoption picks up. As 3G and 4G plans are priced the same, subscribers will increasingly opt for 4G as LTE compatible handsets beccome available. Further, M1’s network is the only one that has nationwide coverage currently. Lastly, M1 is also keeping churn low, as most of 4G n net-adds has been recontracts and 10-15% of that has upgraded their plans. .

But no scope for dividend surprise. While M1 has opted to maintain FY12 DPS at SGDx, the same as FY11, we do not see scope for dividend upside in FY13 as capex will remain high. F FY12 capex is expected to rise from 10% of revenue to 12% of revenue (SGGD120m), and FY13 capex is likely to remain high as a 4G spectrum auction is expected to be held next year. Still, DPS is likely to be maintained, supporting downside at the yield of 5.5%.

Monday, 26 November 2012

Global Palm Resources

OCBC on 23 Nov 2012

Global Palm Resources (GPR) has slashed its planting target by >60% to 300-400 ha for 2012 as it now faces increasing difficulties in its negotiation with the local population. Instead, management continues to be on the lookout for acquisitions to boost its plantation size; and believes that the process to be easier now with the drop in CPO (crude palm oil prices). Nevertheless, we note that rising inventory levels could remain an issue which could see stockpiles rising further in 4Q12 and even 1Q13 due to continued strong CPO production and muted demand. Unless there is a sharp recovery in CPO prices or a sizable brown-field acquisition, we do not see any catalyst in sight. Maintain HOLD with an unchanged fair value of S$0.19 even as we roll forward our 10x peg from blended FY12/FY13 to FY13F EPS.

Slashes new planting target by >60%
Global Palm Resources (GPR) has added just 33 ha of new plantings in 3Q12, bringing the YTD total to 292 ha. According to management, the delay was due to the “increasingly more difficult” negotiation process with the local population. As a result, GPR has slashed its new planting target for 2012 to about 300-400ha, or more than 60% versus its initial target of 1000 ha. Note that GPR also slashed its planting target last year from 1.6-1.7k to 1.0k ha. Currently, it has about 2.6k ha available for planting. GPR adds that it is still exploring various opportunities for acquisitions, and it expects the process to be easier now with the drop in CPO (crude palm oil) prices. GPR is currently sitting on about IDR247.5b of net cash (as of end Sep). 

Rising inventory levels another concern
Meanwhile, we note that GRP has ended with significantly higher ending inventory of CPO of 3.4k tonnes at end Sep, versus 1.1k tons at end Jun. Management attributed the large increase to market uncertainty over the past few months and also the high production of CPO since Aug; this resulting in a “wait –and-see” approach by buyers in a “downward trending market”. While GPR said that it has started to clear the excess inventory, the continued high production of CPO (which is likely to continue into Feb) could see its stock pile inching higher in 4Q12 and even 1Q13.

Still no catalyst in sight
9M12 revenue of IDR263.7b (down 1%) met 70% of our FY12 forecast, while net profit fell 5% to IDR48.5b, or 80% of our full-year forecast. As such, we will not be adjusting our estimates. Unless there is a sharp recovery in CPO prices or a sizable brown-field acquisition, we do not see any catalyst in sight. Maintain HOLD with an unchanged fair value of S$0.19 even as we roll forward our 10x peg from blended FY12/FY13 to FY13F EPS.

Karin Technology

OCBC on 23 Nov 2012

We expect Karin Technology (Karin) to be a key beneficiary of recent new product launches by Apple, given the latter’s leadership position in the smartphones and tablets space. Karin has the license to sell the full range of Apple products through its In-Smart retail stores in Hong Kong, which includes the iPhone 5, iPad Mini and fourth-generation iPad. However, the limiting growth factors would be supply constraints and low margins on these products, in our opinion. Management would also strive to increase focus on higher margin network security products and enterprise software solutions to mitigate this. We maintain our HOLD rating and S$0.25 fair value estimate on Karin, still based on 6x FY13F core EPS. Prospective FY13F dividend yield remains attractive at 8.2%.

Revenue boost from new Apple product launches
Backed by its license to sell the full range of Apple products through its In-Smart retail stores in Hong Kong, we expect Karin Technology (Karin) to leverage on Apple’s leadership position in the smartphones and tablets space. Apple managed to retain its number one position for tablet shipments by capturing 50.4% of the global market share in 3QCY12, according to research firm IDC. However, this was lower than the 65.5% share in 2QCY12, which we believe signifies increasing competitive pressures and a delay in purchases in anticipation of the iPad Mini and fourth-generation iPad launch by Apple. For iPhone 5, Hong Kong, which contributed 95.5% of Karin’s FY12 topline, was one of the first Asian countries to sell the product during its worldwide launch on 21 Sep 2012. We understand that Karin is currently carrying the aforementioned products (as well as preceding versions) in its retail stores. Besides sales to locals, the Apple products are also a draw for mainland tourists because of the absence of sales tax (other than on alcohol and tobacco) in Hong Kong. However, the limiting growth factors would be supply constraints and low margins on these products, in our opinion.

Opportunities within IT Infrastructure segment
Although the expected increase in revenue contribution from Karin’s lower-margin Consumer Electronics Products segment would likely put some pressure on its gross margin, we believe that management would seek to partially mitigate this by driving higher sales from network security products and enterprise software, which carries higher margins. Research firm Gartner has forecasted worldwide spending on IT security to rise 8.4% to US$60b in 2012, with a further growth trajectory of 9.4% CAGR to US$86b from 2012 to 2016. We expect Karin to be a key beneficiary, given its strong portfolio of vendor products which addresses this space, such as Blue Coat, Check Point, F5 and McAfee. 

No changes to estimates, fair value and HOLD rating
We maintain our HOLD rating and S$0.25 fair value estimate on Karin, still based on 6x FY13F core EPS. Prospective FY13F dividend yield remains attractive at 8.2%.

Sheng Siong Group

Kim Eng on 26 Nov 2012

Going undercover. The recent Olam-Muddy Waters scandal has prompted us to go “undercover” and conduct site visits to selective Sheng Siong outlets. As our earnings assumptions are based on sales per square foot of store space, we visited the three outlets that opened this year and checked out two previously non-performing stores to see if they are now up to scratch. We also sought to verify the claim that “Sheng Siong’s prices are the street’s lowest”. Our findings were highly encouraging and we believe that Sheng Siong is on track to meet our earnings expectations this year and achieve decent growth next year.

The Sheng Siong experience. Sheng Siong’s ability to maximise store space is complemented by its close attention to specific customer demographics. For instance, we saw bags of instant coffee placed right next to the counter in the 24-hour outlet in Geylang, while more Western than Chinese products were displayed in the Upper Thomson store. Larger outlets have neat rows of shelves displaying the products advertised in newspapers or on TV, while the arrangement of the fresh food sections is modelled after the wet market.

Consistent electronic price tagging. In the outlets we visited, all dry goods and a number of fresh food items have electronic price tags and barcodes attached, whereas a couple of promotional items have iPadsized tags. We are in favour of such tagging as it enables quick price changes for items on demand and also ensures high inventory turnover.

Low prices, high efficiency. Offering the lowest prices in Singapore’s supermarket hemisphere, Sheng Siong impresses us with its willingness to invest in technology to improve efficiency. The workers, too, were constantly restocking the shelves to ensure that they were filled. We continue to like Sheng Siong for its high growth potential. We are pegging the counter to Dairy Farm International’s 12-month forward P/E of 27.0x with a 20% discount, and upgrading to SGD0.60. Maintain BUY.

Friday, 23 November 2012

Petra Foods

OCBC on 22 Nov 2012

Petra Foods (PF) is one of the world’s largest producers and suppliers of cocoa ingredients, and it counts a stable group of chocolate confectionery conglomerates as its key clientele. It also has a Branded Consumer division, where it is a first mover into emerging Asia consumer demand. Given its competitive advantage via an extensive distribution network and strong brand equity, PF has achieved a dominant market share of more than 50% and 10% in the growing markets of Indonesia and the Philippines respectively despite a gradual influx of well-known international players. Combined, these two divisions form a formidable “twin-engine” growth strategy for the future. We initiate coverage with a BUY rating and a fair value estimate of S$2.98, based on 24x 12-month forward PE.

Global cocoa player with an edge
Established in 1984, Petra Foods (PF), through its Cocoa Ingredients division (~70% revenue contribution), is one of the world’s largest producers and suppliers of cocoa ingredients. PF also has a Branded Consumer division (~30% revenue contribution), where it is a first mover into emerging Asia consumer demand. Combined, these two divisions form a formidable “twin-engine” growth strategy for the future. 

First mover into EM Asia consumer demand; poised to grow
Selling own-brand chocolates and distributing third party products under its Branded Consumer division, PF’s extensive distribution network and strong brand equity give it a competitive advantage and create high barriers of entry. As a result, PF has achieved a dominant market share of more than 50% and 10% in its key markets of Indonesia and the Philippines respectively despite a gradual influx of well-known international players. This segment has grown strongly with rising EM Asia consumer demand (FY2004-11 revenue CAGR: 20.2%), and is expected to continue posting double-digit growth figures going forward.

Stable conglomerate clientele
Utilizing its extensive technical expertise and high degree of sophistication in producing quality cocoa derivative products – which cannot be easily replicated – PF has kept international giants like NestlĂ©, Cadbury, the Mars Group, Meiji Group etc. as its key clients even with the emergence of increased competition, and this has formed a supportive base for its earnings. 

Track record speaks for itself
Since its listing in FY04 to FY11, PF has achieved considerable growth momentum, attaining CAGR of 23.7% for revenue and 18.3% for EBITDA. With an experienced management team running the Group, PF’s core competencies should remain. 

Initiate with BUY
We initiate coverage with a BUY rating and a fair value estimate of S$2.98, based on 24x 12-month forward PE.

Bumi Armada

OCBC on 22 Nov 2012

Bumi Armada’s 3Q12 revenue and net profit increased by 14% and 3% YoY to RM462m and RM95m respectively. On a nine-month period, revenue was flat at RM1.2b, while net profit increased by 18% to RM277m. Despite the increases, the results were very much below expectations as 9MFY12 net profits formed only 68% and 60% of ours and the street’s full year estimates. As the group had not secured any new FPSO contracts year-to-date, we believe it may be hard to meet the street’s expectation of two FPSO contract wins (and our projection of just one win) in 2012. Looking ahead, we continue to project one FPSO contract win per year for FY13-14F and believe our estimate is conservative (versus the street’s). We adjusted our model for 3Q results, but kept our FY13F estimates largely unchanged. As we roll forward our estimates for FY13F, our fair value estimate rises slightly to RM3.48 (previously RM3.36), still on 20x PER. Maintain HOLD.

3Q12 results below
Bumi Armada’s 3Q12 revenue and net profit increased by 14% and 3% YoY to RM462m and RM95m respectively. On a nine-month period, revenue was flat at RM1.2b, while net profit increased by 18% to RM277m. Despite the increases, the results were very much below expectations as 9MFY12 net profits formed only 68% and 60% of ours and the street’s full year estimates. As the group had not secured any new FPSO contracts year-to-date, we believe it may be hard to meet the street’s expectation of two FPSO wins (and our projection of just one win) in 2012. 

Segmental review
During the quarter, FPSO revenue increased by 11% QoQ to RM191m, attributable to sustained high uptime for its fleet and day-rate increase on Armada Perksa. OSV revenue increased by 25.4% QoQ to RM153m, on higher utilization rate (3Q12: 87%; 2Q12: 82%) and increased fleet tonnage (Armada Tuah 107, Armada Tuah 301 and Armada 302). T&I (Transport and Installation) revenue increased by 29% YoY to RM118m due to contribution from the LukOil contract and charter hire with Momentum Engineering secured by Amada Installer.

RM5.6m FX loss
Despite the higher revenue in almost all its business segments, EBITDA margin fell to 52% in 3Q12 (2Q12: 63%), largely due to RM5.6m of FX losses on translation and derivatives (2Q12: RM9.6m of FX gains). This arose as its charter contracts are typically denominated in USD and any unsettled balances at quarter-end would be translated into the reporting currency using the prevailing rate, resulting in unrealized fx gains or losses. 

FPSO contracts to come in 2013? 
We adjusted our model for 3Q results, but kept our FY13F estimates largely unchanged. In view of the global uncertainty, we believe our projection of one FPSO win per year for FY13-14F is conservative (versus the street's expectation of two wins per year). As we roll forward our estimates for FY13F, our fair value estimate rises slightly to RM3.48 (previously RM3.36), still on 20x PER. Maintain HOLD.

Goodpack Ltd

Kim Eng on 23 Nov 2012

Steady 1Q13 results. Our recent discussions with management suggest that business conditions remain difficult for Goodpack, as a result of an overall slowdown in activities in China as well as Europe. Nonetheless, we think the decent growth in the recent seasonally weaker 1Q13 results proves that Goodpack has a resilient business model.

Recurring net profit still grew 15%. Stripping out a USD0.6m gain from disposal of PPE in the corresponding period last year, recurring income still grew 15% to USD13m, despite a US1.5m swing in foreign exchange gain. This appears to be operating leverage from better trade lane matching, as revenue grew 11% against logistics costs of 6%.

Europe and China are slow. The former makes up about 20% of group revenue and is especially slow due to weaker demand for commercial vehicles. Over in China, overall manufacturing activities have slowed down, impacting demand for both synthetic rubber and natural rubber. In terms of product verticals, natural rubber has seen more slowdown due to the narrower application and Goodpack’s bigger market share. On the auto parts market, progress has been disappointingly slow, as customers are more pre-occupied with their slowing business.

Additional business from synthetic plants in Singapore. Management shared that two of the six new synthetic rubber plants in Singapore should come onstream in 3QFY13F. With a combined capacity of 150,000 tpa,
we estimate this will be a requirement of about 30-50k new boxes. Out of the 6 plants, Goodpack has signed with 4 so far, which should again add on to this requirement. Goodpack’s IBC fleet is currently estimated at 2.8m and addition this year should be around 250k.

Earnings usually come back stronger. With the likely slower progression on the auto-front, we trim our FY14F-FY15F earnings by 5- 9% while keeping FY13F largely unchanged. This is still a resilient business which we think investors should hold over the longer-term. Key catalyst still remains progress on the auto-parts vertical. On the other hand, slower demand and subsequently capex for new boxes may lead to
dividend surprises, given its low-gearing of 15% currently. Maintain BUY with a TP of SGD2.25, now pegged to 20x PER.

Thursday, 22 November 2012

Tat Hong Holdings

UOBKayhian on 22 Nov 2012

Valuation
·          Tat Hong (TH) is trading at 10.7x FY13F PE based on Bloomberg’s consensus estimates with a dividend yield of 2.3%.
·          Share price catalysts include an improvement in margins, utilisation rates and strong quarterly earnings for the next two years. With the new funding in place, TH should be looking to expand its fleet of mobile and tower cranes. The company placed out 70m shares at S$1.20/share in Sep 12. 
Investment Highlights
·          Recovery from slump. The group went through a rough patch in FY11 with earnings falling drastically as its Australian operations were hit by floods, keen competition had eroded margins and TH had to take a S$6.9m impairment provision for its investment in China. Net profit fell 33% yoy to S$26.0m from S$38.6m in FY11, a far cry from the record earnings of S$89.8m in FY08. However, net profit has resumed an uptrend with 1HFY13 net profit escalating more 87.9% yoy to S$38.4m.
·          Construction boom provides earnings visibility. Heavy equipment owners like TH will benefit from the construction boom more than main contractors, according to several channel checks. As the government rolls out infrastructure projects such as Thomson Line MRT, North-South Expressway and HDB projects concurrently, it will inevitably squeeze limited resources and increase cost pressure. According to management, TH has cranes booked for the next 18 months, which is likely to increase utilisation rates and improve margins. Rental rates have also improved 15% from the trough in 2008.
·          Increasing fleet size to cater for stronger demand. The company will be looking to expand its existing fleet by 40-50 cranes, with capex for the next financial year budgeted at S$70m-80m. We estimate TH can recover its investment in less than four years after incorporating depreciation, maintenance and other operating costs. Utilisation rates have improved from about 60% in 2008 to the maximum 75-80%.
1HFY13 Results
·          Revenue grew 26% yoy to S$431.3m in 1HFY13, driven by stronger demand from all its business segments. Gross margin improved by 2.0ppt to 38.2% with gross profit jumping 33.1% yoy to S$164.8m, mainly attributable to higher rentals and utilisation rates from both the crawler/ mobile crane rental and tower crane rental divisions.
·          However, operating costs rose 26.6% yoy to S$111.8m from higher administrative expenses, distribution costs and an unrealised net forex loss of S$8.5m. Net profit increased 87.9% yoy to S$38.4m from S$20.4m in 1HFY12.

MAPLETREE Logistics Trust

DBS Group Research on 20 Nov 2012
MAPLETREE Logistics Trust (MLT) announced that it is proposing to acquire Wuxi International Logistics Park (WILP) from its sponsor Mapletree Investments Pte Ltd. The purchase price of 116 million yuan ($22.8 million) implies an initial yield of 8.0 per cent, and is higher than the implied net property income yield of 6.0 per cent for its China properties. We note that MLT has the financial capacity to fund these acquisitions, and gearing is expected to stay relatively stable at 37.3 per cent (assuming 100 per cent debt funding).
While the acquisition is accretive, impact on DPU is estimated to be minimal at less than one per cent. Completion of this deal is expected in March 2013, and will grow MLT's portfolio to 111 properties with a total appraised value of $4.2 billion.
This acquisition highlights management's emphasis on bringing the trust back on the growth track and is in line with MLT's investment strategy in expanding its presence in "growth markets" like China. The proposed acquisition of WILP will be the trust's third acquisition from its sponsor's development pipeline, and is leased to a strong pool of tenants including Wuxi HiTech, Kerry Logistics, Fiege International Freight Fowarder and Konoike Logistics.
"Buy" maintained, $1.22 target price based on discounted cash flow. No change to our earnings estimates as we have previously forecasted close to $200 million worth of acquisitions in our numbers. Yields of close to 6.5 per cent remain attractive, in our view, for its large-cap, quality sponsor status. Further re-rating catalyst is likely to hinge on the manager's continued ability to continue sourcing for accretive acquisitions - either from its sponsor or from third party sources - to grow its portfolio and distributions meaningfully.
BUY

IHH Healthcare

CIMB Research on 20 Nov 2012
CALL it expensive or its valuations unjustified, but IHH has been defying the odds. In the last three months, it had debuted on two exchanges and stayed well above its IPO price. The question is, how defensive can the stock be after the results?
We are expecting a core EPS of 1.5 sen for Q3 2012 and 4.6 sen for nine-month 2012 (25 per cent and 77 per cent of FY2013 estimates respectively). FY2013 EPS has been reduced to factor in higher operating expenditures related items. Reiterate "outperform" rating and sum-of-parts target price ($1.53), with catalysts expected from ramp-up of Novena Hospital, and revenue intensity in all three key geographies.
Since listing, its stock price has not fallen below its IPO price for a single day, despite general misgivings about its valuations and growth potential. The healthcare company will be announcing Q3 2012 results next week.
During its results announcement, we will be watching out for: 1) Mount Elizabeth Novena's performance; and 2) the Acibadem Group in Turkey as Q3 is its off-season.
Even if results do fall below expectations, we don't anticipate a share-price collapse. In our opinion, the stock's ownership spread across various long investors underscores investors' confidence in IHH's sustained profitability and long-earned position as a world premier private-healthcare operator.
While investors are generally sold to the huge demand from medical travel and demographic changes like ageing populations, we think positive surprises may yet spring from IHH's ongoing integration and execution of other KPIs of Acibadem. There is a fair amount of synergies and value which may not be fully extracted this year, which should flow through in subsequent years.
We like the sector's defensive attributes and IHH's size in this sector. Further, we believe asset-recycling opportunities could emerge for its Malaysian assets in due course, with the freed capital to be redeployed to growth frontiers in Greater China.
OUTPERFORM

Singapore Telcos

OCBC on 21 Nov 2012

Out of the three telcos, StarHub again posted 3Q12 results that were above our forecast, aided by a stronger-than-expected margin recovery (mainly coming from lower traffic expenses). Both M1 and StarHub are still guiding for relatively stable outlook for 2012, albeit with potential erosion in service EBITDA margins. However, SingTel surprised by guiding for consolidated group revenue to see a low single-digit (versus single-digit growth previously), mainly dragged down by continued weakness in Australia. However, we think that all the three telcos should continue to generate very positive operating cashflows and this should keep their healthy dividend payouts intact. Further yield compression could also be another price catalyst over the next 12 months. Hence we maintain our OVERWEIGHT rating and keep M1 as our top pick.

StarHub again above forecast
Out of the three telcos, StarHub again posted 3Q12 results that were above our forecast, aided by a stronger-than-expected margin recovery (mainly coming from lower traffic expenses). M1 and SingTel both posted results that were slightly below our estimates, with the former citing continued upfront smartphone subsidy expensing for the shortfall, and the latter hit by weaker Optus performance and also a slide in regional currencies against the SGD.

Review of Singapore mobile operations
On the core post-paid mobile market, SingTel continues to dominate with ~48% share, then StarHub with ~28% and M1 ~26%. But we note that post-paid subscriber base grew 55k QoQ to 4180k, even though the market already has a penetration rate of nearly 150%, with some 70% of post-paid subscribers using smartphones. Monthly ARPUs are relatively stable; but could see increases once LTE (or 4G) takes off from 1Q13, aided by the introduction of more LTE-enabled phones and also tiered pricing plans with less generous data bundles.

Biggest surprise from SingTel
Both M1 and StarHub are still guiding for relatively stable outlook for 2012, albeit with potential erosion in service EBITDA margins. However, SingTel surprised by guiding for consolidated group revenue to see a low single-digit (versus single-digit growth previously), mainly dragged down by continued weakness in Australia. However, we think that all the three telcos should continue to generate very positive operating cashflows and this should keep their healthy dividend payouts intact.

Maintain OVERWEIGHT
While the three telcos have performed reasonably well this year, led by StarHub, we continue to like their defensive business against the still-uncertain economic backdrop. Further yield compression could also be another price catalyst over the next 12 months. Hence we maintain our OVERWEIGHT rating and keep M1 as our top pick.

Ezion Holdings

OCBC on 21 Nov 2012

Ezion Holdings (Ezion) has performed very well so far this year, with its stock price up about 99% YTD. The good showing is mainly due to the clinching of contracts at attractive rates of return, smooth execution of projects, and commendable quarterly earnings. As we expected last year, 2012 was no less eventful than 2011 for Ezion, which continued to secure liftboat and service rig contracts for work in various parts of the world, and embarked on new initiatives such as its proposed acquisition of YHM Group. Looking ahead to 2013, we expect more news flow as additional assets are deployed, solidifying its earnings base. Though 2012 has been a fantastic year, we believe that the best is yet to come, assuming no major change to its current operational status quo. Maintain BUY with S$1.70 fair value estimate.

What a run!
Ezion Holdings’ (Ezion) stock price has performed very well in the past few months, rising more than 89% since early Jun. In comparison, the STI and the FTSE Oil and Gas Index have appreciated by about 9.6% and 6% respectively over the same period. YTD, Ezion is up about 99%. The good showing is mainly due to the clinching of contracts at attractive rates of return, smooth execution of projects, and commendable quarterly earnings. 

What does 2013 hold?
As we expected last year, 2012 was no less eventful than 2011 for Ezion, which continued to secure liftboat and service rig contracts for work in various parts of the world, and embarked on new initiatives such as its proposed acquisition of YHM Group, as well as the roping in of industry veteran Mr. Tan Boy Tee. Unlike some of its SGX-listed peers, the group also did not serve up earnings disappointments in the past year. Looking ahead to 2013, we expect more news flow as additional assets are deployed, solidifying its earnings base.

1st O&M company to issue perpetual securities
The company also undertook a perpetual securities issue (S$125m of 7.8% subordinated perps) in Sep, becoming the first O&M company in Singapore to issue such securities. This projects the management’s strong sense of confidence in the company’s growth, while the good take-up of the securities reflected investors’ faith in earnings sustainability. 

Broke the S$1b mark this year, ambitions for more
Ezion Holdings has been our small-mid cap pick since we highlighted it in our year-end strategy report last year, but after breaking the S$1b market cap mark this year, it is now better regarded as a mid-cap counter. Though 2012 has been a fantastic year, we believe that the best is yet to come, assuming no major change to its current operational status quo. Maintain BUY with S$1.70 fair value estimate.

Neptune Orient Lines

Kim Eng on 22 Nov 2012

Seemingly damning statement – but is it that bad? A.P. Moller- Maersk has announced plans to move away from the shipping segment to focus future investments in other businesses such as oil, drilling rigs and ports. While Maersk’s statement is certainly influenced by its poor profitability in shipping, we see this more as a move towards diversifying its capital base than emphasising a write-off of container shipping. Our call on NOL being a prime pick for a container shipping recovery remains unchanged. Reiterate BUY, Target Price SGD1.46.

NOL vs Maersk: Key differences. Maersk Line is primarily focused on the Asia-Europe trade (~40% by volume in FY2011, FY2010), which is currently reeling from the European crisis and correspondingly weak
freight environment - a segment in which NOL only has ~16% of its volumes. Maersk also has its other core businesses anchored in a currently-favoured environment: oil and gas. NOL, however, is not without diversification avenues – it aims to grow its Logistics business to comprise 30% of its revenues from its current level of ~15%.

NOL: still our pick as a recovery proxy. We believe NOL’s strength in the Trans-pacific trade will be a key contributor to a profitable 2013 for the company, providing a springboard to an even better 2014 when the capacity situation abates. For now, the Trans-pacific trade is seeing further signs of strengthening as a USD400 per 40-foot box increase in Asia-USWC freight looks to at least gain some traction from a recovering US housing market and co-operation between liners.

News more sensational than substantial - reiterate BUY. Maersk’s seeming pessimism in the container shipping segment should be seen in perspective against their other business choices primarily anchored in oil and gas. Coupled with their existing containership orderbook representing 17% of its current capacity, this shift away from further investment in container shipping should not be seen as surprising. We reiterate our BUY recommendation on NOL, premised on a demand-led recovery in container trade spearheaded by the US economy.

Wednesday, 21 November 2012

Ying Li International Real Estate

UOBKayhian on 20 Nov 2012

Valuation
·      Maintain BUY and target price of S$0.42, pegged at a 35% discount to our RNAV of S$0.65/share, larger than the 24.1% average discount of Chinese developers under our coverage.

9M12 Results
·      Ying Li posted a net profit of Rmb54.6m for 9M12, reversing from a loss of Rmb33.4m in 9M11, as revenue rose on strong property sales. Revenue jumped more than three- fold yoy to Rmb426.4m mainly due to sales from the IFC office space and several investment property units. Gross margin improved from 33.2% in 9M11 to 44.0% due to its low-cost structure coupled with strong demand for its Grade A office units.
·      Selling expenses escalated to Rmb31.2m (+156.7% yoy) on higher sales and marketing costs for Ying Li International Plaza. Cash level rose to Rmb484.4m from Rmb342.8m in 9M11 as the group collected presales from Ying Li International Plaza and rental deposits.

Our view
·      2012 earnings to fall but cash flow to improve. We postpone the profit recognition of Ying Li’s International Plaza to 2013-14 as the group intends to accelerate its construction for presales instead of handing over and booking in the profit this year. Currently, more than 95% of all four phases have been sold with pre-sales proceeds of Rmb717m. With the cash in hand, a S$100m loan facility by Standard Chartered Bank and trade receivables of Rmb278m, Ying Li has more than adequate cash to refinance its S$200m convertible bonds (CB) due Mar 13, if necessary.
·      As a recap, Ying Li issued the CB to buy a plot of land for the Chongqing Financial Street project. The CB holders have a put option for the company to redeem in Mar 13. Along with the sales of the IFC office space, Ying Li can generate over Rmb1b in cash in 2013. We view the postponement of profit recognition as positive, despite taking a hit in the P&L statement, as it will alleviate concerns over whether the company can refinance these bonds.
·      We expect revenue of Rmb651.5m for 2012 with a core profit of Rmb125.0m if we exclude non-recurring property revaluation gains. This is driven by strong sales of the office units in the IFC and retail units in San Ya Wan. Ying Li remains focused on developing the retail mall in Ying Li International Plaza and with the retail malls from IFC and Future International, the group may launch these assets into a commercial REIT.

Nera Telecommunication

DMG on 20 Nov 2012
NERA Telecommunications announced yesterday that Northstar Group, a fund that manages US$1.2 billion in committed equity capital dedicated to South-east Asia, has agreed to buy over the group's parent Eltek Asa's 50.05 per cent stake at S$0.49 per share. As a result of the transaction, Northstar will also extend its offer to the rest of Nera's shareholders at the same price. Northstar's offer price is at a 5.8 per cent discount to the last transacted price and amounted to only 8.4 times FY2012 forecast PE and 7.3 times FY2013 forecast PE or 8.2 per cent on dividend yield basis... We recommend investors to reject Northstar and continue to hold on to their shares.
The investment case for Nera: 1) long and established track record, 2) zero borrowings with solid cash hoard and consistent delivery of results, 3) profitable growth and impressive ROE of more than 30 per cent. The counter remains as a top pick in the Singapore technology sector. Reiterate "buy" with target price of S$0.66 based on its five-year historical average of 9.8 times FY2013 PE.

BUY

Yoma Strategic Holdings

OCBC on 20 Nov 2012

Yoma is acquiring an 80% interest in a 10-acre site in central Yangon for S$99.16m. We believe this to be a reasonable price in the lower half of our range of estimates. The development is envisioned to be a mixed-use project consisting of residential, retail, hospitality and commercial components with a GFA of approximately two million sq ft. Under the existing share issue mandate, Yoma will undertake a 1-for-4 rights issue for up to ~289m new shares to finance the acquisition at a 25%-35% discount to the closing price at a date to be determined. The timing of the issue, dependent on shareholder approval of the acquisition, is likely to be in 1Q13. In addition, Yoma also announced that it would carry out a private placement of 193m new shares at S$0.525 each to raise S$101m. After accounting for the accretion from this acquisition and potential dilution from the capital raising, our fair value estimate, based on a scenario-based RNAV methodology, increases marginally to S$0.52 from S$0.51. Maintain HOLD.

Proposed acquisition of central Yangon site
Yesterday, Yoma proposed to acquire from SPA (Myanmar) Ltd, an 80% interest in a 10-acre site in central Yangon for S$99.16m (US$81.28m). We believe this to be a reasonable price in the lower half of our range of estimates. The development, situated between Trader’s Hotel and Bogyoke Aung San Market, is envisioned to be a mixed-use project consisting of residential, retail, hospitality and commercial components with a GFA of approximately two million sq ft.

An envisioned iconic mixed development
The site currently holds FMI Centre Tower and the former Railway Headquarters – a well-known heritage building in Yangon. Under current plans, the Railway Headquarters would be converted into a luxury hotel, to which a condominium building would be adjoined. The development would also consist of a 4-star hotel and serviced apartment complex, two Grade A office towers with over 700k sq ft of GFA, and a retail mall with over 400k sq ft GFA.

1-for-4 rights issue likely to be in 1Q13
Under the existing share issue mandate, Yoma will undertake a 1-for-4 rights issue for up to ~289m new shares to finance the acquisition at a 25%-35% discount to the closing price at a date to be determined. The timing of the issue, dependent on shareholder approval of the acquisition, is likely to be in 1Q13. 

Private placement to raise an additional S$101m
In addition, Yoma also announced that it intends to carry out a private placement of 193m new shares at S$0.525 each that would raise S$101m. Note these placement shares are entitled to participation in the proposed rights issue. This is to further finance the project development, estimated at US$330m-S$350m and expected to be carried out in phases. 

Maintain HOLD at S$0.52 FV
After accounting for the accretion from this acquisition and potential dilution from the capital raising, our fair value estimate, based on a scenario-based RNAV methodology, increases marginally to S$0.52 from S$0.51. Maintain HOLD.

Nam Cheong Limited

OCBC on 20 Nov 2012

Nam Cheong is a dominant offshore support vessel (OSV) builder in Malaysia with an estimated 75% of domestic market share. It has an OSV yard in Malaysia, but it typically outsources the construction for majority of its vessels to third-party yards in China. This helps it scale up its production capability quickly without having to incur additional capital expenditures. Also, Nam Cheong benefits from local cabotage laws and is able to issue “letters of authorization”, allowing vessel operators to bid for Petronas’ contracts before acquiring the necessary vessels, making it the choice OSV yard in Malaysia. We also believe the group will benefit from Petronas’ RM300b capex over FY11-15F and value its shares at 8x FY13F EPS. Initiate with BUY with fair value estimate of S$0.28.

Dominant market position in Malaysia
Nam Cheong has a very strong market position in Malaysia (estimated 75% domestic market share for OSV shipbuilding) due to its effective outsourcing strategy and home ground advantages. In addition, we feel that it could be a key beneficiary of Petronas’ RM300b capex plans for FY11-15F. 

Effective outsourcing strategy
The group has an OSV yard in Sarawak, Malaysia, but it typically outsources the construction for the majority of its vessels to third-party yards in Fujian, China. This enables Nam Cheong to scale up its production capability quickly without having to incur additional capital expenditures. Also, it is able to take advantage of the lower labour costs in China. 

Home ground advantages
Among other criteria, Malaysia’s cabotage laws require the vessels operating in local waters to be registered in Malaysia or carry the country’s flag. This represents a significant barrier of entry and reduces competition from foreign OSV yards. In addition, Nam Cheong is also able to issue “letters of authorization” that allows operators to bid for Petronas’ contracts before acquiring the necessary vessels, making it the choice OSV yard in Malaysia.

Key beneficiary of Petronas’ RM300b capex plans
In 2011, Petronas announced that it will invest RM300b in capital expenditure over the next five years to upgrade asset integrity, enhance yield of existing assets and drive its growth. We believe this would likely result in increased investments across the broad Malaysian oil & gas sector and Nam Cheong could benefit from rising OSV demand. 

Initiate with BUY; FV: S$0.28
We compared Nam Cheong against a group of mid-cap offshore companies listed on SGX (see below) and value its shares at 8x FY13F EPS, roughly in-line with its peers. Initiate with BUY with a fair value estimate of S$0.28.