Friday 12 September 2014

Singapore Press Holdings

UOBkayhian on 12 Sep 2014

FY14F PE (x): 24.0
FY15F PE (x): 22.6


4QFY14’s adspend contraction mirrors 3QFY14’s. Our monthly page monitor of The Straits Times suggests advertising spending (adspend) remains weak, with a contraction of 9% yoy in 4QFY14 (June-Aug 14). This mirrors 3QFY14’s actual contraction of 9.1% yoy (2QFY14: -7.3%, 1QFY14: -2.9% yoy). Singapore Press Holdings (SPH) had earlier attributed 3QFY14’s large contraction to fewer property launches and car ads. We are maintaining our FY14 net profit forecast of S$335m, implying a net profit of S$75.2m vs a reported net profit of S$89.6m for 3QFY14.


Seasonally, the 4Q of any financial year is weaker than 3Q. Despite a large top-line contraction, operating profit has been maintained on cost cutting. Earlier SPH had reported a 7.5% yoy increase in recurrent EBIT despite a 4.9% yoy decline in group revenue. We expect a final DPS of 14 S cents (FY13 final DPS: 15 S cents). Flat share price but dividend yield is decent. SPH’s print revenue is expected to perform in tandem with Singapore’s muted GDP growth which is projected at 3.5% for 2014 and 3.8% for 2015. Traditionally, share price has had a good correlation with domestic economic growth. Share price is expected to be flat, but annual dividend yields of 4.4-4.6% for FY15-16 are decent amid a low interest-rate environment. Maintain HOLD. We maintain our target price of S$4.20 which is based on sum-of-theparts (SOTP) valuation. Our recommended entry price is S$4.00 and below.

Sembcorp Marine

DBS GROUP RESEARCH, Sept 11
SEMBCORP Marine has acquired Houston-based design and engineering solution provider SSP Offshore's SSP Floater technology and entire portfolio of proprietary SSP solutions and the company has released further details of the capex plan for Integrated Yard @ Tuas.
Semb Marine has signed a sales and purchase agreement with SSP Offshore to acquire its flagship SSP Floater technology, the next-generation circular hull form, and entire portfolio of proprietary SSP solutions including driller, FPSO and offshore logistic hub for US$21 million.
This is a positive move that will sharpen Semb Marine's technological capabilities and competitive advantage in the long term.
Semb Marine revealed plans to spend S$711 million for a highly-automated steel fabrication facility and Phase II development of the Integrated Yard @ Tuas.
Upon completion in Q3 2015, the new steel facility will have a tonnage capacity of more than three times that of the existing hull shop at the group's Tanjong Kling yard, and will eventually be the central kitchen for steel fabrication for all three phases of the new Tuas yard.
Phase II development at the Tuas yard has commenced at the 34.5 hectare site, and is scheduled for completion by the first quarter of 2017. This involves the construction of three dry docks as well as finger pier, quays and wharves which offer a total berthage of about two km, with maximum water depth ranging from nine metres to 18 metres.
These investments are expected to be funded by its recently announced S$600 million bond issue and internally generated funds. Semb Marine's balance sheet remains healthy with S$880 million net cash as of end-June. We expect the company to stay net cash, albeit declining, these two years on the back of high capex and weakening payment terms.
The rig-building sector is dampened by fears of cuts in E&P capex and short-term oversupply of rigs, but we believe Singapore rig-builders are better positioned to ride the market conditions, with efforts to move up the value chain and establish a presence in protected markets. We maintain "buy" with a target price of S$4.82.
BUY

Hyflux

Kim Eng, 12 Sep 2014

  • Initiate with HOLD. TP at SGD1.07, 25x FY16E P/E, comparable to closest peer, United Envirotech. For sector exposure, we recommend HanKore and SIIC.
  • Long-term bullish on Hyflux’s membrane-based desalination. Medium-term earnings weakness.
  • Catalysts are renewed order-win momentum and big-scale asset recycling.
Initiate with HOLD, TP SGD1.07
We like Hyflux’s expertise in membrane-based desalination technology, which we believe is a solution to the global water shortage. However, medium-term earnings weakness could weigh on stock sentiment. Intense competition for EPC projects could crimp margins, reducing Hyflux’s margin for error. Furthermore, valuations are unattractive at 1.7x FY16E P/BV and 26.7x FY16E P/E, against sector averages of 1.6x FY16E P/BV and 20.7x FY16E P/E. We believe it is too early to buy.

Next catalysts
We believe big order wins are Hyflux’s most important catalysts. There are USD8b worth of projects that could be up for grabs in the next 12 months. Hyflux also has potential for further asset recycling, with its SGD1b portfolio of plants and concessions. Any large-scale asset recycling should be positive for its share price.

Risks
Upside risks include a strong order comeback in the Middle East and Africa. Downside risks include failure to clinch key projectssuch as the Changi NEWater plant and bigger-than-expected margin declines due to price wars, in which case, large contract wins may not sustain its re-rating.

Venture Corp

OCCB on 11 Sep 2014

IDC reported that enterprise wireless local area network (WLAN) market grew 7.7% YoY in 2Q14 while worldwide Ethernet switch (ES) market increased 6.2%, led by 21% growth in Asia Pacific ex Japan and 13.9% growth in Western Europe. We believe the growth in cloud deployments and worldwide network demand from datacentres will continue to drive investments in these two markets into FY15. Although Eurozone’s Manufacturing PMI of 50.7 (Jul-14: 51.8) is at its 13-month low in Aug-14, U.S. manufacturing PMI increased 1.9 ppt in Jul-14 to 59.0% while Markit’s Aug-14 Asia Sector PMI showed increased business activity. We think the positive signs showing in U.S. and Asia are likely to sustain for 2H14. Hence, we expect VMS to benefit alongside with its customers who are based in U.S. and Asia and we continue to retain our forecast. Given the recent decline in share price, we upgrade VMS to BUY on valuation grounds, with an unchanged fair value of S$8.24 (15x blended FY14/15F EPS), supported by an attractive FY14F dividend yield of 6.3%.

Expects growth in Networking & Communications segment
Semiconductor Industry Association (SIA) reported last week that sales in Jul-14 grew 14.9%, 11.2% and 8.1% YoY in Europe, Asia Pacific and Americas, respectively. According to IDC, enterprise wireless local area network (WLAN) market grew 7.7% YoY in 2Q14 while worldwide Ethernet switch (ES) market increased 6.2%, led by growth of 21% in Asia Pacific ex Japan and 13.9% in Western Europe. Correspondingly, Venture Corp (VMS) reported 6.5% YoY growth in its 2Q14 Networking & Communications (N&C) segment revenue to S$100.2m. We believe the growth in cloud deployments and worldwide network demand from datacentres will continue to drive investments in these two markets into FY15. With VMS’ N&C segment making up ~16.7% and ~16.3% of its 2QFY14 and 1HFY14’s total revenue, respectively, we think VMS is poised to capture the growth expected in this segment.

Generally positive outlook likely to sustain
Markit reported Eurozone’s Manufacturing PMI of 50.7 (Jul-14: 51.8) is at its 13-month low in Aug-14, as companies faced slower increases in both total new orders and new export business. According to Institute for Supply Management (ISM), U.S. Aug-14 PMI increased 1.9 ppt in Jul-14 to 59.0%, which is the highest since recording 59.1% in Mar-11, indicating continued expansion in manufacturing. Markit’s Aug-14 Asia Sector PMI also showed increased business activity, led by technological equipment producers, who saw the strongest output expansion in seven months. Based on our estimates as at its 2QFY14 results, with ~50%, ~10% and ~40% of VMS’ customers to be based in U.S., Europe and Asia Pacific, respectively, we believe the positive data points in U.S. and Asia would offset Eurozone’s decline and benefit VMS. We expect the positive outlook to sustain for the remaining 2H14.

Upgrade to BUY based on valuations
Hence, we expect VMS to benefit alongside with its customers who are based in U.S. and Asia and we continue to retain our forecast. Given the recent decline in share price, we upgrade VMS to BUY on valuation grounds, with an unchanged fair value of S$8.24 (15x blended FY14/15F EPS), supported by an attractive FY14F dividend yield of 6.3%.

StarHub

OCBC, 10 Sep 2014

StarHub Ltd’s share price has seen a decline of as much as 5% after the telco posted a 6% YoY fall in 2Q14 earnings (still just 0.6% shy of our forecast), as well as lowering its FY14 service revenue guidance from single-digit growth to maintain at about 2013’s level (although it has maintained its service EBITDA margin at 32%). But closer to S$4, we believe that the yield looks more attractive. Hence, we are upgrading our call from Sell to HOLD on valuation ground, although our DCF-based fair value remains unchanged at S$3.81. Having said that, we note that the prospects for StarHub remain muted for now.

5% slide post 2Q14 results
StarHub Ltd’s share price has seen a decline of as much as 5% after the telco posted a 6% YoY fall in 2Q14 earnings (still just 0.6% shy of our forecast), as well as lowering its FY14 service revenue guidance from single-digit growth to maintain at about 2013’s level (although it has maintained its service EBITDA margin at 32%). As mentioned in our post-results report, the move came as no surprise to us as we were already poised to pare our estimates should its broadband outlook not improve.

Upgrade to HOLD on valuation ground
Also in our previous report, we said that we would revisit the stock closer to S$4 as the yield would recover back to 5%. And true enough, StarHub recently hit a low of S$4.02. While the stock has recovered somewhat since then, we believe that at current price, its yield is still the most attractive among the three telcos. Although we are retaining our DCF-based fair value at S$3.81, we upgrade our call from Sell to HOLD on valuation ground; this as we also do not expect local interest rates to see a sharp jump in the near- to medium-term. 

Prospects remain muted for now
Having said that, we note that the prospects for StarHub remains muted. Besides the still intense competition in the broadband space, the pretty saturated Pay TV space, we believe that the road to lifting mobile ARPUs is likely to be a long one, despite efforts by the telcos to monetize data usage via tiered pricing plans. A recent research by Adobe found that as WiFi becomes more available and a lot of mobile plans become more penalizing, people are learning how to switch over to WiFi on their phones. It added that “the telcos through their data plans are essentially teaching people how to avoid mobile data charges.”

United Overseas Bank

OCBC, 10 Sep 2014

UOB Malaysia is a key component of UOB Group’s strategy in the region and several group initiatives including FDI Advisory have the potential to strengthen its regional businesses by extending its range of banking services to clients, with a key aim to be a primary bank for its corporate customers. Recent price correction has thrown up opportunities to re-invest in the stock, especially with the more optimistic outlook and the re-rating of banking stocks in the region. We are raising our valuation peg and our fair value estimate moves up from S$23.87 to S$25.00. Together with a 3% dividend yield and a potential total return of 12%, we are upgrading the stock to a BUY.

Deepening its intra-Asian roots 
Continuing with its focus of tapping on rising intra-regional trades, UOB recently shared more details of this strategy at its Corporate Day; this by leveraging on the potential for further trade flows within the region including further cooperation within the ASEAN Economic Community (AEC). 

UOB Malaysia – still a key market, but cost could move higher 
Going forward, with the investment in infrastructure investments, management expects the cost-to-income ratio to move up from prevailing low rates of 34.1%-37.2% (FY09-13) in Malaysia, which is lower than at the group’s level (41.8% as of 2Q14). Corporate/Business banking will remain key; as there is still a sizeable pool of companies in Malaysia and the economy is still growing at a healthy rate. OCBC Treasury Market Research & Strategy is projecting GDP growth of 5.3% for 2014, up from 4.7% in 2013. For the Malaysian economy, we believe growth will be supported by exports recovery and a healthy and stable financial market. Outbound trades from Malaysia have also been growing, and there has been a recent improvement in non-commodity exports. UOB Malaysia generated average ROE of 17.5% from 2001-2013, and is ranked 7th in terms of gross loans (>5% market share) in Malaysia. It posted net profit of RM1342m in FY13 and this accounted for 15% to UOB Group’s PBT in FY13 – the largest of its overseas operations. In terms of 5-yr CAGR, PBT stood at 18% and total assets was 20%. NPLs were manageable at 1.7% (gross). We also like its FDI Advisory framework, which has a long term effect of further entrenching its clients for more banking services and business flows. 

Medium term re-rating likely; upgrade to BUY 
Post its recent results, the stock fell from the recent high of S$24.24 to a recent low of S$22.53. We are seeing value emerge again in the stock, especially with the more optimistic outlook and the recent re-rating of banking stocks in the region. Based on comparables’ average Price/Book of 1.4x, we are raising our valuation from S$23.87 to S$25.00. Together with a 3% dividend yield and a potential total return of 12%, we are upgrading the stock to a BUY.

Thursday 11 September 2014

Riverstone Holding

UOBKayhian, 11 Sep 2014

FY14F PE (x): 14.4
FY15F PE (x): 12.1
Expansion on track. Management highlighted that its capacity expansion is on track,
with the first phase (consisting of 1.0b gloves per annum) to be completed by end-14.
The first two lines will be commissioned by end-September, whilst the remainder will be
commissioned in the remaining months. The added capacity will boost its production
capacity from 3.2b gloves to 4.2b gloves (+31%) by end-14 but the full impact on
earnings will only be felt in 2015F.
On track to deliver 3-year net profit CAGR of 16%. We project a 3-year net profit CAGR
of 15% in 2013-16. Our model factors in gross margin assumptions of 26-28% to
account for the potential margin impact from the change in product mix. We have also
assumed new borrowings of RM20m annually beginning 2H15 as funding for phases 3-
5 of the group’s new factory.
On our conviction BUY list. We remain bullish with a target price of S$1.14, pegged at
the sector’s historical mean PE of 14x to our 2015F EPS of 8.4 S cents. Valuations are
undemanding at 12x 2015F PE despite the group’s higher margins and comparable
ROE vs peers’. Our target PE is also in line with the mean transaction multiple of 13.7x
for recent M&As within the glove industry

Sembcorp Marine

Kim Eng on 11 Nov 2014

  • SGD711m capex for new steel fabrication yard and Phase II of integrated yard at Tuas. Funded by SGD600m bonds.
  • EPS cut by 3.2-3.5% and SOTP-based TP to SGD3.80 from SGD4.04 for bond issue and lower net cash.
  • Maintain HOLD on muted near-term order outlook.
What’s New
SMM is investing SGD222m in a new steel fabrication facility. This will be located at its Tuas integrated yard and completed by 3Q15. SMM has also commenced the construction of Phase II (34.5ha site) of its integrated yard, which would add three dry docks to its existing four VLCC docks by 1Q17. Estimated cost for Phase II is SGD489m, bringing total capex to SGD711m. It will issue SGD600m of bonds (SGD275m/7-year/2.95%, SGD325m/15-year/3.85%) to fund this.

What’s Our View
SMM says the steel fabrication facility will more than double its efficiency from automation and process improvements. It will function as a central kitchen for steel fabrication for all three phases of its integrated yard. Phase II of the yard’s development would add three dry docks, two with 150,000 dwt capacity and one dedicated to offshore. This would allow SMM to serve a broader spectrum of commercial vessels and offshore units. The investment is part of SMM’s multi-year plan to consolidate its shipyards into one. It demonstrates SMM’s optimism on the industry’s outlook. The new facilities should improve productivity and position them to meet the demand for bigger and more
complex vessels.

Incorporating interest cost from the bonds, we cut FY15E-16E EPS by 3.2-3.5%. We have not accounted for positive effects of efficiency gain. Our SOTP-based TP falls to SGD3.80 from SGD4.04 as we incorporate capex and new debt. Maintain HOLD on muted near-term order outlook.

Wednesday 10 September 2014

GuocoLand

UOBKayhian on 10 Sep 2014

FY15F PE (x): 21.3
FY16F PE (x): 19.1
Resolution of Beijing Dongzhimen project dispute. GuocoLand announced that it had
obtained a favourable judgment following a six-year appeal on the ownership of the
Beijing Dongzhimen project in China. The Hainan High Court has effectively restored
GuocoLand's ownership of its stake in the project, revoking decisions by the Hainan
Haikou Intermediate People's Court and the Industrial and Commercial Administrative
Bureau of Hainan Province.
Litigation overhang removed; RNAV accretion of 34 cents/share (9%). The resolution
dispute removes the long-drawn overhang on the stock. We estimate this could result in
an RNAV accretion of 34 cents/share, or a 8.9% increase in our RNAV estimate to
S$3.30/share. The Beijing Dongzhimen project has a total GFA of 600,000sqm
comprising residential units (9.3%), offices (23.5%), retail space (27%), a hotel (10%),
car parks (17.2%) and a transport hub (13%).
Upgrade to BUY with raised target price of S$2.48 (from S$2.27), pegged at 25%
discount to our raised RNAV of S$3.30/share (from S$3.03) as we factor in the
contribution from the Beijing Dongzhimen project. GuocoLand is trading at a deep 35%
discount to its RNAV.

Croesus Retail Trust

DBS GROUP RESEARCH, Sept 9
CROESUS Retail Trust (CRT) announced the acquisition of One's Mall for 11 billion yen (S$131 million) which represents a 5.2 per cent discount to the 11.6 billion yen independent valuation, and an initial NPI yield of 5.8 per cent.
One's Mall is a freehold, large-scale retail complex with a net lettable area of 52,844 square metres located in Inage Ward within Chiba City, which is 40 km south-east of Tokyo.
As of end-June 2014, occupancy and weighted average lease expiry (WALE) stood at 99.4 per cent and 5.8 years respectively.
The mall is located next to a major arterial road and is in an area served by three major train lines. It also provides exposure to a trade area which has a higher population/household growth and larger proportion of high-income households than the national and prefecture average.
The mall's key tenants include Daiei, Central Sports, Toys 'R' Us, Nitori and Sports DEPO.
The acquisition of One's Mall will be funded via the recently completed S$72.2 million share placement - 78.9 million shares at an issue price of S$0.915 per share, new Japanese local bank debt of 6.15 billion yen (includes 650 million yen payment of consumption tax which will be repaid within 12 months from completion of the acquisition) at an interest rate of 1.29 per cent, and 500 million yen from the S$100 million worth of bonds issued in January 2014.
Post-acquisition, total NLA will increase 27 per cent to 251,013 square metres with exposure to the top ten tenants dropping from 71 per cent of NLA to 69 per cent. WALE will also decline to 9.1 years from 10 years.
In addition, we estimate 0.1 per cent/0.8 per cent uplifts to FY2015/2016F DPU with gearing increasing marginally to 52 per cent (51.2 per cent including 650 million yen consumption tax) from 51.7 per cent at end-FY2014.
We continue to like CRT for its exposure to the Japanese retail market and the prospects of further cap rate compression. Maintain "buy" with target price of S$1.10.
BUY

Tuesday 9 September 2014

OUE Hospitality Trust

OCBC on 9 Sep 2014

We expect OUE Hospitality Trust (OUEHT) to benefit from a seasonally higher hospitality demand in 2H14. A check on the preliminary hotel statistics published by Singapore Tourism Board painted an improved hospitality outlook in Jul – RevPAR grew by 5.4% MoM to S$223.4, while average occupancy rate increased to 90% from 84.9% in Jun. We also note that the number of tourist arrivals from Asia registered a 16.7% MoM increase in Jul. Given that Asia formed ~74% of OUEHT’s Mandarin Orchard Singapore (MOS) customer profile for 1H14, we believe that OUEHT is likely to put on a better showing in 2H should the demand be sustained. On the valuation front, however, we believe OUEHT is fairly priced at current level. As such, we maintain our HOLD rating and S$0.85 fair value on OUEHT.

Anticipating a better 2H14
We expect OUE Hospitality Trust (OUEHT) to benefit from a seasonally higher hospitality demand in 2H14. A check on the preliminary hotel statistics published by Singapore Tourism Board (STB) painted an improved hospitality outlook in Jul – RevPAR grew by 5.4% MoM to S$223.4, while average occupancy rate increased to 90% from 84.9% in Jun. While the international tourist arrivals to Singapore declined by 2.5% for the first seven months of 2014, we note that the number of arrivals in Jul represented a 19.2% MoM jump to 1.4m. More importantly, the arrivals from Asia registered a 16.7% MoM increase in Jul. Given that Asia formed ~74% of OUEHT’s Mandarin Orchard Singapore (MOS) customer profile for 1H14, we believe that OUEHT is likely to put on a better showing in 2H should the demand be sustained. 

Recent interim results met expectations
In 2Q14, OUEHT delivered a consistent set of results. NPI and income available for distribution came in at S$25.2m and S$21.1m respectively, which was 1.2% and 2.5% higher than its respective prospectus forecasts. DPU for the quarter was also 2.5% above its forecast at 1.64 S cents. For 1H14, DPU amounted to 3.32 S cents, meeting 49.5% of our full-year distribution projection. While 2Q RevPAR of S$242 missed its prospectus forecast of S$258, we understand that this was partly due to the accelerated renovation schedule in the quarter to capture the expected uptick in hospitality demand in 2H. As at Jul, 160 out of a total of 430 guestrooms have completed refurbishments. This would allow OUEHT to leverage on the newly renovated rooms to attract customers seeking a premium accommodation in Orchard Road area, in our view.

Maintain HOLD on valuation grounds
We are making minor adjustments to our FY14 forecasts since the interim results were largely consistent with our expectations. There is no change to our fair value of S$0.85. Maintain HOLD as OUEHT appears to be fairly priced at current level.

United Overseas Bank

UOBKayhian on 9 Sep 2014

FY13 PE (x): 11.0

Malaysia is UOB’s largest overseas market. UOB (Malaysia) contributed to 14.4% of
total income and 15.5% of group PBT in 2013. It has achieved stellar growth post
financial crisis. UOB (Malaysia) has grown both loans and deposits at a 4-year CAGR
of 22%. It has a market share of 5.1% for loans and 4.6% for deposits.
UOB (Malaysia) is highly profitable and cost efficient. It achieved net interest margin of
2.09% (UOB Group: 1.72%) and return on equity of 17.6% (UOB Group: 12.3%) in
2013, while cost-to-income ratio was low at 34.8% (UOB Group: 43.1%). It has a strong
deposit franchise with CASA ratio of 27.6% (UOB Group: 41.9%), above the industry
average of 26%. Asset quality is healthy with gross NPL ratio at 1.7%.
Malaysia and China are significant overseas growth drivers. UOB generated growth
from Malaysia and Greater China, where pre-tax profits have grown at a 5-year CAGR
of 18.8% and 122.4% respectively (35.4% if we ignore the low base in 2008). UOB
(Malaysia) will continue to be a key pillar of UOB’s overseas operations due to the
extensive scale and longstanding customer relationships for both wholesale banking
and retail banking.

BreadTalk Group

DMG & PARTNERS RESEARCH, Sept 8
BREADTALK, the most successful F&B retailer in Singapore, has its ubiquitous brands found in every corner of the island. It also owns one of the largest bakery chains in China, with a footprint in 57 cities.
Over the last decade, the company has built up scale and we believe it is now on the cusp of reaping this advantage to achieve profit growth.
We initiate coverage on this under-researched company with a "buy", with our S$2.00 TP implying a 50 per cent upside.
Multiple dough for growth. BreadTalk Group (BreadTalk) operates a multi-format food and beverage (F&B) business, which has created various avenues of growth for the company.
In our view, most of its brands are well-known and are market leaders in their respective categories. For example, the company's new JV with Minor International would be a key driver for its expansion in Thailand, especially for its Din Tai Fung franchise.
Regional footprint appeals to potential acquirers. BreadTalk has more than 850 outlets under its umbrella. This includes more than 400 outlets in China, where it has presence in 57 cities. We believe this network is difficult to replicate and holds substantial appeal for potential acquirers.
Minor International's 11 per cent investment in the company is a testament to that - and any further corporate action would be a bonus for BreadTalk shareholders.
Substantial upside for margin improvements. Since listing in 2003, it has grown its number of outlets at an unprecedented pace to 850 from 28 in 11 years.
We believe capex expenses and start-up costs have weighed down on profitability and a moderation of these expenses, as well as greater business scale in China, would present substantial upside for its net margin to improve from 2.5 per cent currently.
Time to roll in the dough, initiate with "buy". Our S$2.00 TP is based on a 7.5x FY2015F EV/Ebitda, a methodology we believe better reflects underlying cash earnings.
Even then, this is almost a 50 per cent discount to regional peers which are trading at an average of a 14.4x EV/Ebitda.
Our SOP cross-check, which leans heavily on the replacement cost for its retail network, derives a value of S$1.76/share.
BUY

Telecom Sector

OCBC, 8 Sep 2014
FOR Q2 CY2014, it was a pretty muted quarter for the telcos, with all of them reporting results that were within our expectations, despite the weaker revenues and earnings - SingTel saw a 2 per cent y-o-y earnings drop while StarHub reported a 6 per cent decline, but M1 saw a 12 per cent jump.
Nevertheless, we had two telcos trimming their FY guidance - SingTel now expects core revenue to remain stable but cuts Ebitda growth guidance from single-digit previously to stable; StarHub now expects stable revenue versus low single-digit growth previously, but keeps 32 per cent service Ebitda margin.
Intense broadband competition ahead. One main reason for the lower profitability is likely due to the still intense competition in the fibre broadband market, with the smaller players (including M1) using low pricing to snatch market share away from the incumbents. As such, sliding average revenues per user (ARPUs) are seen across the board in Q2 CY2014 and could continue to edge lower in the coming quarters.
Still a long road to monetise data. Meanwhile, the telcos may still have a long run ahead of them trying to monetise data to make up for the fall in voice and SMS usage. While there are more subscribers shifting to the tiered pricing plans with more restrictive data bundles, we note that the percentage of these subscribers who exceed their data caps continue to remain below 20 per cent.
In addition, the recent news that MyRepublic (MR) is interested in being the fourth telco here could bring about more competition, especially after MR said it intends to offer unlimited data packages.
2014 Fifa World Cup came and gone. Over in the Pay TV space, the 2014 Fifa World Cup took centre stage in June, but with insipid results.
The event drew only 100,000 subscribers and generated just S$10 million of revenue for SingTel, the exclusive content broadcaster here. Meanwhile, the threat of over-the-top content providers remains ominous and could limit the pay TV market size here.
Maintain "neutral". With earnings growth likely to stagnant this year, we maintain our "neutral" view on the sector for now, supported by still decent yields.
NEUTRAL

SIA Engineering

Kim Eng 9 Sep 2014

  • Maintain SELL and TP of SGD4.20 (20x FY3/15E P/E). Changi Airport’s flight traffic shrank 2.6% YoY in July. Worsening pressure on MRO demand.
  • MAS could accelerate the retirement of its B777s to focus on regional routes, in our view. SAESL’s workload to be hit.
  • Rich valuations yet to price in coming slowdown.
Deteriorating business conditions
Recent signs of deteriorating business conditions include:
  • Further decline in Changi’s traffic. Airline capacity at Changi Airport continued to soften, with flight traffic down 2.6% YoY in July. As airline capacity changes are good leading indicators of MRO demand, we see intensifying pressure on SIAEC’s business. Amid regional overcapacity, airlines are unlikely to add meaningful capacity. Furthermore, unlike the opening of integrated resorts in early 2010 that powered a post-GFC traffic recovery, no similar impetus is on the horizon this time around.
  • MAS’s restructuring. Khazanah recently highlighted that Malaysia Airlines (MAS) will rationalise its network to focus on regional routes. The airline will reconfigure its fleet accordingly. This could mean an accelerated retirement of its B777s, used primarily on long-haul routes. If so, SAESL’s workload could be affected, as it is the engine shop for these aircraft.
Yet to price in slowdown
Despite the above negative developments, the stock has bounced off its recent low of SGD4.51, now trading at 22x FY3/15E P/E. This is not justified, in our view. We believe the market has not priced in its impending slowdown, with the spectre of earnings disappointments ahead. Maintain SELL and TP of SGD4.20, set at 20x FY3/15E P/E, 1 SD above its 10-year average.

Monday 8 September 2014

United Overseas Bank

Kim Eng on 8 Sep 2014

  • Broadly positive management tone at Corporate Day.
  • Discipline and steadfastness in building niches. Fine-tuning existing capabilities.
  • But no immediate catalysts. Maintain HOLD. No change to EPS or TP (12x FY15E P/E). Sector pick is DBS.
Messages from UOB Malaysia’s Corporate Day
UOB hosted a Malaysia Corporate Day last week to showcase its Malaysian operations, a consumer- and SME-centric bank which accounts for 16% of group PBT. UOB Malaysia is the seventh-largest bank in Malaysia by loans and deposits. While loan growth is slowing, management expects to reap further fruits of its labour.  Efforts made years ago to deepen relationships with clients  through customised banking solutions via its regional platform should continue to show results. It is focusing on finding and  creating niches, while fine-tuning capabilities to meet market  demands.

Guiding for weaker ROEs on rising costs
Management expects easing ROEs in Malaysia (FY13: 17.6%, FY12:  17.8%, FY11: 18.6%) due to necessary franchise investments,  possibly in Islamic banking. There are limited excesses for pruning  given its already lean cost structure. The saving grace is potentially stronger NIM and fee-based income ahead. No immediate catalysts, maintain HOLD

After its recent price correction, UOB’s P/E and P/BV premiums  over peers have largely reverted to their averages in the past 10  years. UOB has been priced at its P/E mean since 2005 and at a  slight discount to its historical P/BV mean. Still, maintain HOLD in  the absence of near-term re-rating catalysts. TP is unchanged at  SGD25.30, 12x FY15E P/E or 0.5SD below its rolling P/E mean since
2005.

Dyna-Mac Holdings

OCBC on 5 Sep 2014

We expect Dyna-Mac Holdings to be a key beneficiary of recent FPSO order wins by its key customers such as Bumi Armada Berhad and BW Offshore. Dyna-Mac stands a strong chance to secure contracts for the engineering, procurement and construction (EPC) work of the topside modules, in our view. Although crude oil prices have dipped recently, we remain positive on the long-term outlook on the oil and gas sector. SBM Offshore, currently the largest FPSO player globally, estimates that there would be 12 and 13 FPSO awards in 2014 and 2015, respectively. As Dyna-Mac’s share price has appreciated 14.5% since we last reiterated our ‘Buy’ rating on 18 Aug 2014, we believe potential total returns are now limited at 6.9%. Hence, we downgrade Dyna-Mac to HOLD on valuation grounds, with an unchanged fair value estimate of S$0.445. Notwithstanding our downgrade, we believe Dyna-Mac’s share price will continue to be supported by its healthy FY14F dividend yield of 4.6%.

Likely beneficiary of key customers’ recent order wins
Bumi Armada Berhad, one of Dyna-Mac Holdings’ key customers, recently announced the signing of the Angola Block 15/06 FPSO project worth ~MYR9.6b from Eni Angola S.p.A., and the receipt of a Letter of Intent together with its JV partner for the Madura FPSO project in Indonesia amounting to ~MYR3.76b. Given that Bumi Armada has mentioned before that its high-end modules fabrication work will be performed by Dyna-Mac, we expect future contract wins by the latter in the foreseeable future. Meanwhile, BW Offshore signed a contract in May this year with Premier Oil for a FPSO to operate on the Catcher oil field in the UK North Sea. We believe Dyna-Mac stands a good chance to secure the order for the engineering, procurement and construction (EPC) of the topside modules, as BW Offshore highlighted that the conversion and integration of the FPSO will be carried out in Singapore.

FPSO tendering activities still healthy
Crude oil prices have dipped recently due to the USD appreciating and the easing of geopolitical tensions. Nevertheless, we remain positive on the long-term outlook on the oil and gas sector, given our expectations that global oil demand will continue to grow. The current order backlog for floating production systems consists of 65 units, of which 37 are FPSOs. SBM Offshore, currently the largest FPSO player globally, estimates that there would be 12 FPSO awards in 2014 (5 handed out in 1H14), versus 10 awarded in 2013. This is projected to further increase to 13 awards in 2015.

Share price has performed well; downgrade to HOLD
Dyna-Mac’s share price has appreciated 14.5% since we last reiterated our ‘Buy’ rating on 18 Aug 2014, far surpassing the FTSE Oil and Gas Index and STI’s -0.5% and 1.0% respective movement during the same period. At its current price level, potential total returns appear limited at 6.9%, versus our unchanged fair value estimate of S$0.445 (pegged to 15x blended FY14/15F EPS). Hence, we downgrade Dyna-Mac to HOLD on valuation grounds. Notwithstanding our downgrade, we believe Dyna-Mac’s share price will continue to be supported by its healthy FY14F dividend yield of 4.6%.a

Friday 5 September 2014

Sheng Siong Group

CIMB Research, Sept 4
SHENG Siong did a share placement yesterday (Sept 3, 2014), issuing 120 million shares at S$0.67/share, adding ~S$79 million (net of fees) of capital and causing 8.7 per cent dilution. Outstanding shares rise to 1,504 million (previous: 1,384 million).We trim our FY15 EPS by 8 per cent.
Our immediate reaction is a negative, since this creates immediate dilution without any foreseeable earnings upside. We see this as a replenishment of its cash pile. H1 FY14 ending net cash (S$95 million) will dwindle down to ~S$30 million, after paying for Tampines (~S$65 million). This placement takes the post-Tampines cash pile back to S$110 million, giving them the means to bid for sites, if needed. Sheng Siong still has to pay for J9 (~S$55 million by 2017) in future. We expect the funds to be used for selective acquisition of new sites for growth, or sites on some of the existing outlets with expiring leases. Sheng Siong will not be committing more funds into the China JV at this juncture. We view acquisition of existing sites as a defensive strategy to ensure that they can retain shop space in the face of competition. It will not boost earnings. We see that strategy as a necessity but we are not too hot on it. We are more excited about new store growth, if it happens, since that will add to earnings. S$80 million will probably buy it another 2 stores (~20,000 square feet each), assuming capital values of ~S$2,000/sq ft. Sheng Siong has 33 stores now. Buying retail stores is an asset-heavy strategy that is equivalent to putting capital into hard assets that generate ROEs of 4-6 per cent, versus a business ROE of 25 per cent ROE ie not good The question is whether it will be buy new or existing stores, management sounds like they do have new store targets.
We maintain our "add" rating only because share price has tumbled, reacting to the dilution. Our fully-diluted target price is revised to S$0.73 (from S$0.79), factoring in the effect of the placement. Our grouse with Sheng Siong is that it did not have store growth to drive earnings. This placement is clearly in preparation of store growth and we will not be too negative, despite the dilution.
ADD

Yoma Strategic Holdings

DBS Group Research, Sept 4
YOMA has finalised its 1-for-3 rights issue to raise circa S$164 million to kick-start the Landmark development and to acquire more land in Pun Hlaing. This issue of 432.5 million rights shares (at S$0.38/share) will enlarge its share base by 33.5 per cent. Yoma's chairman Serge Pun undertakes to subscribe all excess entitlements on top of his own. Previous indication is for the exercise to be completed by end-September, subject to SGX (Singapore Exchange) and shareholders' approval.
The entire rights proceeds will be utilised for 1) 1st land payment for Landmark (S$54 million); 2) 70 per cent interest in development rights to 10.8 million square feet of land in Pun Hlaing (S$95.9 million); and 3) acquisition of an authorised dealer of New Holland tractor and farm equipment for S$14.8 million. The S$0.8 million shortfall will be funded internally.
We are positive that funding is available now to kick-start the long-awaited Landmark project. We look forward to milestones such as a successful extension of master lease, partnerships with more branded hoteliers or retailers, and possibly sales of apartments. Near term, we expect this rights issue to sustain interest in the stock. We have tweaked our fair value to S$0.88 from S$0.90 to account for a 135 million new share placement in July. Maintain "buy".
BUY

Midas Holdings

OCBC on 4 Sep 2014

China Railway Corporation (CRC) recently announced the tender for 776 sets of cab integrated radio communication equipment (CIR), implying that the total number of MUs likely to be released for tenders in 2014 is 388 since two CIRs are needed for each MU with eight carriages. The total value expected is ~CNY70b and likely to be shared between China CNR Corporation (CNR) and CSR Corporation (CSR). We believe Midas Holdings (Midas) is poised to benefit since majority of its revenue is generated through contracts with CNR and CSR. Furthermore, we believe winning a global award from Siemens’ Rail Systems Division allows Midas to have more international recognition and improves its position to compete in the global railway market. The award also gives Midas an edge over its competitors to win new contracts from Siemens in the future. We believe it is still too early to determine any impact from the award and with the recent tenders already factored in our model, we maintain BUY with an unchanged fair value of S$0.50.

Recent release of tenders positive for Midas
China Railway Corporation (CRC) announced on 22-Aug the first round tender released in 2014 for 232 multiple units (MUs). More recently, CRC announced the tender for 776 sets of cab integrated radio communication equipment (CIR), implying that the total number of MUs likely to be released for tenders in 2014 is 388 since two CIRs are needed for each MU with eight carriages. The total value expected is ~CNY70b and likely to be shared between China CNR Corporation (CNR) and CSR Corporation (CSR). We believe Midas Holdings (Midas) is poised to benefit since majority of its revenue is generated from manufacturing MUs’ car body through contracts with CNR and CSR. With most railway spending likely to occur in late 2014, we expect higher contribution to Midas in 1H15, which is the likely delivery date.

Winning Siemens’ global award improves competitiveness
Midas’ subsidiary, Jilin Midas Aluminium Industries Co., Ltd (JMAI), recently emerged as the overall 2014 winner of ‘Carbody’ category for an award by Siemens’ Rail Systems Division (Siemens). This award is to recognize JMAI’s work for Siemens in 2013 (evaluated against its global peers). We believe winning the award allows JMAI to have more international recognition for supplying aluminium alloy extruded products and component modules, which improves JMAI’s position to compete in international markets (i.e. exports out of China). Also, JMAI will receive a much better Supplier Classification Factor (SCLF), which is used as one of the criteria for Siemens when making sourcing decision. The improved SCLF gives JMAI an edge over its competitors to win new contracts from Siemens in the future. However, we note that although the award puts JMAI in a better position in securing new contracts, it is still too early to determine any impact on its future earnings.

Positive outlook with improved competitiveness; maintain BUY
As we think it is too early to determine any impact of winning the award and given that we did expect railway spending of CNY800b in China for 2014 to be on track, our model has already captured the positive effect of the recent tenders. Hence, we maintain BUY with an unchanged fair value of S$0.50.

Singapore Post

OCBC, 3 Sep 2014

Singapore Post (SingPost) has obtained approval for the revision of rates for domestic and international postage services with effect from 1 Oct 2014. The rate increases vary for different weights and types of articles, ranging from 12.5 – 20% for domestic mail less than 1kg and 7.7 - 33% for international airmail. We estimate a total impact of about S$17.5m per year, which is about 2.1% of FY14 revenue. The group will also give out free stamps to households and a 5% rebate on franked mail to businesses for a year, and is likely to cost about S$4-5m. We view the postage rate increase as overdue, especially if more wage increments are to be awarded to well-deserving employees in the future. We tweak our FY15- FY18 PATMI estimates up by 2- 5.5% to account for the higher postage rates and our fair value estimate rises from S$1.71 to S$1.78. Maintain HOLD.

IDA approves postage rate revisions
Singapore Post (SingPost) has obtained approval for the revision of rates for domestic and international postage services with effect from 1 Oct 2014. The rate increases vary for different weights and types of articles, ranging from 12.5 – 20% for domestic mail less than 1kg and 7.7 - 33% for international airmail. This is the first effective postage rate increase in eight years despite cost increases of nearly 50% since the last revision in 2006. Similarly, international airmail postage rates have not been revised since 2006 despite terminal due rates having risen by up to 42.6% and will rise by an additional 37% by 2017.

Impact on group revenue not significant
Only regulated mail will enjoy the rate increases, and this is about 60% of domestic mail and 30% of international mail. For international mail, only outgoing mail will be affected. Domestic mail revenue in FY14 was S$253m, and we estimate a ~S$14m revenue impact per year, keeping in mind that about 10% of domestic mail is fee-based. International mail revenue in FY14 was S$189m, and we estimate a ~S$3.5m revenue impact per year. This translates to a total impact of about S$17.5m per year (2.1% of FY14 revenue), close to management’s guidance of S$16m. 

One-off costs with free stamps and rebates
To mitigate the impact of new postage rates on the public, SingPost will give out about 10m stamps to households and also offer a 5% rebate on franked mail for businesses for a year. This is likely to cost about S$4-5m for the one-year period. Hence the group will only see the full impact of rate increase from Oct 2015 (2HFY16 onwards). 

Higher FV of S$1.78
With rising costs, the operating profit margin for the mail segment has dropped steadily from 36.7% in FY11 to 29% in FY14. We view the postage rate increase as overdue, especially if more wage increments are to be awarded to well-deserving employees in the future. In Feb this year, SingPost also launched a S$10m Inclusivity Fund to help about 3,400 employees (72% of workforce) who earn below $2000. We tweak our FY15- FY18 PATMI estimates up by 2- 5.5% to account for the higher postage rates and our fair value estimate rises from S$1.71 to S$1.78. Maintain HOLD.

Soilbuild Business Space REIT

OCBC on 3 Sep 2014

Soilbuild Business Space REIT (Soilbuild REIT) proposed to acquire a light industrial building located at 20 Kian Teck Lane in Singapore for a total cost of S$24.4m. We view the acquisition positively as the long leaseback term will add certainty to Soilbuild REIT’s income stream and provide further diversification to its portfolio assets. Based on our projections, the property is likely to generate an initial NPI yield of 7.5%. This, we note, is higher than its portfolio yield of c. 6.0%, thus likely making the deal DPU-accretive. Given that the acquisition is expected to complete in 4Q this year, we now incorporate its financial impact into our forecasts. However, there is currently no change to our fair value of S$0.88 on Soilbuild REIT. Maintain BUY as upside potential remains compelling.

Sale-and-leaseback agreement
Soilbuild Business Space REIT (Soilbuild REIT) proposed to acquire a light industrial building located at 20 Kian Teck Lane in Singapore last week. The total cost of the transaction was estimated at S$24.4m, including the purchase consideration of S$22.4m, upfront land premium of S$1.7m and other expenses. We understand the vendor is Speedy-Tech Electronics Ltd, an indirect wholly-owned subsidiary of Integrated Micro-Electronics listed on the Philippine stock exchange. Upon completion of the transaction, Soilbuild REIT will lease the property back to Speedy-Tech, which will undertake to commit 100% occupancy of the building on a 10-year triple-net lease.

More details on acquisition
We view the acquisition positively as the long leaseback term will add certainty to Soilbuild REIT’s income stream and provide further diversification to its portfolio assets. Based on our projections, the property is likely to generate an initial NPI yield of 7.5% with an annual rental escalation of 2.5%. This, we note, is higher than its portfolio yield of c. 6.0%, thus likely making the deal DPU-accretive. Management guided that it intends to fund the acquisition fully by drawing down part of the S$100m term loan facility that was signed in May 2014. Accordingly, Soilbuild REIT’s aggregate leverage is expected to increase from 30.3% as at 30 Jun to 32.0%.

Maintain BUY
Given that the acquisition is expected to complete in 4Q this year, we now incorporate its financial impact into our forecasts. In 2H14, we believe Soilbuild REIT’s portfolio performance will remain robust, supported by healthy organic growth and new contributions from its recently announced acquisitions. We continue to like Soilbuild REIT for its young portfolio assets, strong financial position and proactive management. There is currently no change to our fair value of S$0.88 on Soilbuild REIT. Maintain BUY as upside potential remains compelling.

Thursday 4 September 2014

Sin Heng Heavy Machinery

Phillip Securities Research, Sept 3
SIN Heng Heavy Machinery (SHHM) announced its Q4 FY14 results on Aug 28, 2014.
Although rental activities slowed on the lag in new major project starts in Singapore, rental segment margins increased to 39.5 per cent from 33.8 per cent because of a concentration of higher tonnage cranes, and a drop of maintenance expenses because of an even younger fleet. This bodes well as activity is to pick up in H2 FY14.
On outlook, trading revenue from regional expansion has potential for light growth and we expect a stabilisation of rental top-line due to several big projects being available for bidding in 2nd half of 2014 including the Thomson line and Changi T4.
Taken together, we revise our low-teens FY15 earnings growth rate with the following: 4 per cent and 9 per cent increases in rental and trading revenues, leading to a +4 per cent adjusted earnings growth.
We shifted from a residual model methodology of valuation to a historical PE peg method because of the interrelated segment strategies utilised by SHHM. They partake of a certain region's crane demand activity via combinations of trading and renting, depending on their optimisation of earnings versus time and opportunity.
Hence, it is possible they can increase trading at the expense of rental or vice versa, depending on earnings optimisation. So not only can the rental fleet frequently change in size - making the use of their intrinsic worth in valuations difficult; their increase or decrease in a current period also may not be accurate estimators of gross profit growth. Hence, we find it preferable to use a pure earnings measure.
We maintain "accumulate", but with a lowered TP of S$0.225 on FY15 adjusted PE of 9.0x (which is their historical to reflect modelling a more conservative rental earnings growth rate).
We continue to be positive on SHHM because of: (1) Expected rental pickup in Singapore; (2) regional growth potential and business motilities in South-east Asia. We maintain an "accumulate" rating TP of S$0.225 based on FY15 adjusted PE of 9.0x, which is its historical average adj. PE. This implies an upside of 13.5 per cent including dividends.
Key upside/ downside risks: Further delays in Singapore infrastructure projects (MRT lines, Changi T4, Jurong Island facilities upgrading) later in the year will affect rental top-line.
Execution risks - the inability to realise top-line increases in revenue due to their relatively nascent regional expansion activities may drag net income due to increased expenses.
Any unexpected macro risk may adversely affect broad market sentiment, or delay regional construction activities, which will affect profitability. However, SHHM does benefit from growing their businesses in regions with higher-than-average committed government infrastructure spending as well as being in a favourable spot in the crane replacement cycle.
ACCUMULATE

Singapore Post

DBS Vickers Research, Sept 3
SINGPOST received approval for 12-30 per cent rate hike across domestic and international mail from Oct 1, 2014 - the first hike in eight years to mitigate cost increase.
Annual revenue set to improve S$12 million to S$16 million but most of it will flow to the bottom line; our FY15/16 forecast EPS is raised 3 per cent/5 per cent conservatively.
Maintain "buy" with revised DCF (discounted cash flow) based (weighted average cost of capital 6.3 per cent, terminal rate 2 per cent) TP of S$2.12. Offers potential return of 25 per cent.
Rate hike in response to declining domestic mail volume and rising costs. Since 2008, according to SingPost, labour and fuel costs have gone up ~30 per cent each, inflation has risen 26 per cent while terminal dues for international mail have risen 43 per cent and will further rise 37 per cent by 2017. About 60 per cent of the domestic mail and ~30 per cent of international outgoing mail is still regulated across which SingPost has raised postal rates by 12-30 per cent, in our estimates.
The hike will be effective from Oct 1, 2014, and SingPost will absorb the cost increase for SMEs in the first year.
Based on last year's volume, SingPost believes that annual revenue impact could be ~S$16 million; however, the actual impact may be ~S$12 million due to rebates to SMEs in the first year.
Given that the mail segment is a high-margin business, this should translate into 3 per cent/5 per cent higher FY15/16 forecast EPS conservatively.
SingPost should command premium valuation for three reasons. Assuming it makes S$300 million worth of acquisitions at 12-15x PE, it may add S$20-25 million or 15-20 per cent to our FY16 forecast earnings. Secondly, SPOST is incurring ~S$15 million developmental expenses each year, mainly in hiring and training people which could continue for 2-3 more years.
We expect SingPost to register healthy growth beyond that.
Lastly, higher e-commerce volumes could surprise in FY16 forecast as we have assumed only ~S$50 million worth of business from its Chinese e-commerce partner in our forecasts.
BUY