Thursday 27 November 2014

Regional Oil & Gas

UOBKayhian on 27 Nov 2014

Fund managers were receptive to our views that:
• Asia is cost competitive in oil & gas (O&G) production given that it is a shallow and
midwater exploration & production (E&P) region. In the case of Southeast Asia, the cost
breakeven – in terms of Brent oil price – is US$30-40/bbl.
• Asia’s spending is driven by national oil companies (NOC) instead of international oil
companies (IOC). NOCs’ goal is to maintain/achieve self-sufficiency while IOCs
maximise profits and shareholder returns. Thus, NOCs’ spending is typically more
resilient than that of IOCs. As a whole, Asia accounts for 33% of global oil demand but
only 9% of production.
• Rising cabotage in Asia (and in key oil producer markets around the world) has
changed the competitive landscape. Each cabotage market has its own demand-supply
dynamics than may not mirror the global market.
Stock differentiation has become even more crucial. We continue to advocate a bottomup
strategy that favours companies with: a) an experienced and dynamic management,
b) a resilient business positioned in regional shallow and mid-water depths or a
cabotage market that has high barriers to entry, c) a clearly defined company-driven
growth, d) good profit margins to cushion a potential industry downturn, e) cash calls
that are strategic and EPS-accretive, and f) a healthy ROE. We believe investors will
return to stocks that deliver earnings growth amid lower oil prices.
Singapore: We like stocks that provide relative earnings resilience as well as earnings
growth. Our top picks are: Ezion (EZI SP/Target price: S$2.18), Pacific Radiance
(PACRA SP/ Target price: S$1.57), Triyards (ETL SP/ Target price: S$1.13) and
Sembcorp Industries (SCI SP/ Target price: S$5.80). 

Ezra Holdings

OCBC on 26 Nov 2014

The share price of Ezra Holdings has dropped by about 30% since the start of Sep, and has lost almost half of its value YTD. The company has been one of the hardest hit with the recent oil price fall, as it has a more deepwater-focused fleet. Its subsea segment also has exposure to the North Sea and there have been concerns about delays in project awards as well. As for the company’s operations, however, FY14 (year end Aug) has actually been a better year in terms of core earnings. Looking ahead, we believe that the company has to demonstrate sustained utilisation levels in the OSV division, as well as continued order wins for the subsea segment, especially in a lower oil price environment. Taking into account the lower P/B multiples that peers are trading at (Subsea 7 and McDermott at 0.7-0.8x, Swiber at 0.3x and POSH 0.8x), we use a 0.5x FY15F P/B for Ezra, resulting in a fair value estimate of S$0.77. Maintain HOLD.

Poor share price performance YTD
The share price of Ezra Holdings has dropped by about 30% since the start of Sep, and has lost almost half of its value YTD. Looking back, we had a Sell rating on the stock in the beginning of the year, after which the share price fell by about 30%. After an upgrade to HOLD in Apr, the stock has been pretty much range-bound before being hit by the recent oil price volatility. With the end of our blackout period on the stock and its related entities due to the listing of subsidiary EMAS Offshore, we now review our rating on Ezra Holdings.

One of the hardest hit from recent oil price drop
In terms of share price performance, the company has been one of the hardest hit with the recent oil price fall, as it has a more deepwater-focused fleet. Its subsea segment also has exposure to the North Sea and there have been concerns about delays in project awards as well. As for the company’s operations, however, we note that FY14 (year end Aug) has actually been a better year in terms of core earnings (~US$29m vs. core net loss of ~US$37m in FY13). 

Risks tilted more to the downside
Looking ahead, we believe that the company has to demonstrate sustained utilisation levels in the OSV division after having repair and maintenance issues for some vessels in 1HFY14, as well as continued order wins for the subsea segment, especially in a lower oil price environment. Investors may also be cautious about oil companies with high net gearing, given the recent drop in risk appetite in the SGD-denominated bond market. For Ezra, its net gearing stood at 1.2x as at end FY14, but the group expects it to fall to around 0.7-0.8x by end FY15. Taking into account the lower P/B multiples that peers are trading at (Subsea 7 and McDermott at 0.7-0.8x, Swiber at 0.3x and POSH 0.8x), we use a 0.5x FY15F P/B for Ezra, resulting in a fair value estimate of S$0.77. Maintain HOLD.

Mermaid Maritime

Kim Eng on 27 Nov 2014

  • FY9/14 PATMI in line. Associate AOD the main booster. First & final dividend of 0.47 USD ct.
  • Stable subsea demand with USD470m backlog.
  • Maintain BUY & SGD0.42 TP, at 9x FY9/15E EPS. Catalysts from delivery and utilisation of new assets in 2016.
AOD lifted net profit by 187% YoY
4Q14 PATMI of USD13.8m (-15.1% YoY, +6.4% QoQ) met consensus and our expectations. FY9/14 PATMI rose 187% YoY to USD45.2m forming 99% of both forecasts. Gross profit of USD57.5m was  13.5% higher YoY on the execution of more projects and higher vessel utilisation. Its 33.8%-owned associate, Asia Offshore Drilling (AOD) contributed USD31.1m (FY9/13: USD4.4m) or 79% to earnings. AOD has three jackup rigs working for Saudi Aramco for 3+1 years starting mid-2013 at lucrative day rates of USD180k/day. Operating cash flow was stable at USD28.9m vs USD25.0m a year ago.

Stable subsea exposure, long-term catalysts intact
Mermaid’s exposure to shallow waters and production phases provides some insulation against oil-price volatility. It recently had to charter in three more vessels to fulfil short-term subsea contracts, a sign of enduring demand for its services. It also chartered in an Indonesian-flagged DP2 dive support vessel (exWindermere) for five years for potential IRM work in cabotageprotected Indonesia. To us, this demonstrates its confidence in the market. A subsea order book of USD470m offers good coverage for FY9/15. Mermaid’s longer-term catalysts should come from the delivery and utilisation of two tender rigs and a DSV in 2016, allowing it to scale up further.

Our forecasts are largely intact and we introduce FY9/17E.
Maintain BUY and SGD0.42 TP, at 9x FY9/15E EPS. This is on par with what we assign to well-positioned asset owners, Ezion (BUY, TP SGD1.93), POSH (BUY, TP SGD0.92) and Pacific Radiance (BUY, TP SGD1.33).

Wednesday 26 November 2014

IHH Healthcare

UOBKayhian on 26 Nov 2014

FY14F PE (x): 52.8.
FY15F PE (x): 40.9
Results broadly in line. 9M14 adjusted net profit of Rm540.8m accounts for 71.8% of our
full-year earnings estimates. The 23% yoy increase was on the back of higher inpatient
volumes and average revenue intensity from existing and new hospital contributions.
Hospital expansions to drive organic growth. About 3,000 new beds will be added
progressively to IHH’s current 6,000-bed portfolio through several expansions, as well as
brownfield and greenfield projects. The average daily census (ADC) for Mount Elizabeth
Novena Hospital (MENH) of 180 for 3Q14 was higher than its average of 90. This
increase in average number of patients in the facility per day also implies that
utilisation for MENH is picking up.
Expect greater cost pressure. Wages are expected to continue increasing in Malaysia
and Singapore after staff cost rose by 13% on average in 3Q14. Management has
guided that after excluding extra staff cost incurred for expansions, a like for like
comparison would be around 8-9% compared with last year’s 6%. The increase is driven
mainly by higher nurse salaries and the restriction of foreign workers. Although the price
adjustments did not fully factor in the wage cost pressures, the group still managed to
increase savings on consumables which exceeded expectations by 30% ytd on the back
of efficient sourcing and procurement. In lieu of the rising cost pressure and an Apr 15
GST hike in Malaysia, the group has indicated its intention to raise prices in multiple
stages next year.
Maintain SELL at a target price of S$1.60. We continue to think valuations are
overpriced with the stock currently trading at a 2015F PE of 41x vs the peer average of
29x. Within the Singapore-listed healthcare space, we prefer Raffles Medical and QT
Vascular, for those with a more aggressive risk appetite.

Singapore Telcos

OCBC on 25 Nov 2014

For 2015, we believe that the telcos would continue to remain fairly defensive, despite challenges in both the Pay TV and broadband segments; mobile segment should still see modest ARPU growth, driven by increased data usage. While yields have fallen back to around 3.8% on average, we believe they are still fairly attractive in the current low interest-rate environment. Hence we maintain our NEUTRAL stance on the industry - SingTel [BUY, S$4.18 fair value] remains our top pick.

Still banking on data growth
With the Singapore market already close to saturation point, we believe that mobile revenue growth can only be driven by the ability of the telcos to effectively monetize the switch towards higher data usage; but this could remain a challenge as smartphone users are becoming more discerning when it comes to using data. Nevertheless, we should still see some ARPU uplifts as the telcos continue to migrate their existing subscribers to the tiered pricing plans with restrictive data bundles. However, we cannot rule out the possibility of a 4th telco emerging sometime in 2016.

Broadband price competition may start to ease 
No doubt that the competition in the broadband sector is likely to remain intense, especially in the residential segment; but we are seeing signs that there is a visible shift away from using price to grab market share. As such, ARPUs should start to stabilize and even improve slightly from here as rivals start to offer higher speeds at the same price points to compete. 

Pay TV market facing OTT challenge
With no major sporting content up for renewal, we do not expect to see any major changes in market share or ARPUs for both SingTel and StarHub. However, we do note that the market appears to be fairly saturated and believe that there is limited growth ahead. On the other hand, we think the OTT operators remain the largest threat to the incumbents, which could further restrict growth.

Yields are fairly resilient 
While there are threats to the telco sector, we believe that the medium-term outlook remains fairly stable and their abilities to generate ample free cash-flows should keep yields fairly resilient around an average of 3.8%. Maintain NEUTRAL on the sector – SingTel [BUY, S$4.18 fair value] remains our top pick.

Keppel Land

OCBC on 24 Nov 2014

Last Friday, Keppel Data Centres Holdings Pte Ltd (KDCH), a 70-30 joint venture between Keppel Telecommunications and Transportation Ltd (Keppel T&T) and Keppel Land Limited (KPLD) announced that it has entered into a sale and purchase agreement to acquire, for an amount yet to be disclosed, a data centre (Almere Data Centre 2) in Almere, the Netherlands, from the Reggeborgh Group and VolkerWessel Group. We understand that KDCH also signed, on the same day, a binding letter of intent with a major tenant who committed to lease approximately 40% of the space at Almere Data Centre 2. Almere Data Centre 2 is a purpose-built shell and core data centre facility located on freehold land adjacent to Almere Data Centre 1, a fully occupied data centre acquired in 2013 by Securus Fund, and will comprise more than 5k sqm of data centre space. Maintain BUY on KPLD with an unchanged fair value estimate of S$4.09.

Data Centre JV expands capabilities in Netherlands
Last Friday, Keppel Data Centres Holdings Pte Ltd (KDCH), a 70-30 joint venture between Keppel Telecommunications and Transportation Ltd (Keppel T&T) and Keppel Land Limited (KPLD) announced that it has entered into a sale and purchase agreement to acquire, for an amount yet to be disclosed, a data centre (Almere Data Centre 2) in Almere, the Netherlands, from the Reggeborgh Group and VolkerWessel Group. We understand that KDCH also signed, on the same day, a binding letter of intent with a major tenant who committed to lease approximately 40% of the space at Almere Data Centre 2.

Almere Data Centre 2 located 40 mins from Amsterdam
Almere Data Centre 2 is a purpose-built shell and core data centre facility located on freehold land adjacent to Almere Data Centre 1, a fully occupied data centre acquired in 2013 by Securus Fund, and will comprise more than 5k sqm of data centre space. Both facilities are located 40 minutes away from Amsterdam. Almere Data Centre 2 will be fitted out to Tier III standards with a minimum N+1 redundancy for power and cooling, and power density of up to 1.5kW psm with scalability to 2kW psm. 

Amsterdam to be a strategic data centre hub
KDCH sees Amsterdam to be a strategic hub for first tier data centres in Europe given its top notch digital infrastructure and ample opportunities to tap onto renewable wind and solar energy. According to HIS Technology, global business spending on cloud computing infrastructure and services is expected to grow 20% to US$174b in 2014, and we have seen robust demand in the European data centre market to date with colocation take-up rising 12.3% YoY. We understand that the acquisition is not expected to have a material impact on earnings this financial year; pending more details regarding this acquisition, we maintain our BUY rating on KPLD with an unchanged fair value estimate of S$4.09.

Mapletree Industrial Trust

OCBC on 21 Nov 2014

Mapletree Industrial Trust (MIT) is a Singapore-focused REIT which primarily invests in industrial real estate assets in Singapore. Its current portfolio comprises 85 industrial properties with a combined market valuation of S$3.2b, as at 31 Mar 2014. Looking ahead, although we project MIT’s distributable income to increase at a CAGR of 4.4% from FY14-FY17F, we expect flat DPU growth in FY16 and FY17 after a forecasted 3.2% rise in FY15. This is largely attributed to an enlarged unit base assumption from MIT’s Distribution Reinvestment Plan. We value MIT using the dividend discount model (DDM) and derive a fair value estimate of S$1.43 (cost of equity: 7.8%; terminal growth rate: 0.5%). We believe current valuations are fair, with the stock trading at a forward P/B ratio of 1.21x. Hence, we initiate coverage on MIT with a HOLD rating.

Singapore-focused industrial REIT with build-to-suit expertise
Mapletree Industrial Trust (MIT) is a Singapore-focused REIT which primarily invests in industrial real estate assets in Singapore, excluding properties chiefly used for logistics purposes. Its current portfolio comprises 85 industrial properties with a NLA of 14.6m sq ft. The combined market valuation of MIT’s portfolio was S$3.2b as at 31 Mar 2014, with a sizeable proportion coming from flatted factories (48.4%). MIT has also established a niche in build-to-suit (BTS) development projects, which we believe provides it with a strong competitive advantage and also better income stability and visibility.

Resilient to new JTC subletting rules, but growth to moderate
We believe a primary strength of MIT is its relative resilience to recent regulatory changes introduced by JTC. Only 6% of its GFA and gross revenue are affected by the new JTC sub-letting policy changes. Looking ahead, we expect MIT’s gross revenue to be driven by contributions from its BTS developments and continued rental reversions, albeit at more modest levels. Although we project MIT’s distributable income to increase at a CAGR of 4.4% from FY14-FY17F, we expect flat DPU growth in FY16 and FY17 after a forecasted 3.2% rise in FY15. This is largely attributed to an enlarged unit base assumption from MIT’s Distribution Reinvestment Plan.

Initiate coverage on MIT with HOLD
We value MIT using the dividend discount model (DDM) and derive a fair value estimate of S$1.43 (cost of equity: 7.8%; terminal growth rate: 0.5%). Although forecasted distribution yield of 6.9% for both FY15 and FY16 appear attractive, we believe current valuations are fair, with the stock trading at a forward P/B ratio of 1.21x. This is in-line with its average forward P/B ratio since its listing. As compared to its peers, MIT’s historical P/B ratio of 1.23x is currently the highest. Its forward yield spread with the Singapore Government 10-year bond yield has compressed to 451 bps, which is 60 bps below the average historical spread level of 511 bps. In light of the aforementioned factors, we initiate coverage on MIT with a HOLD rating.

Tuesday 25 November 2014

KrisEnergy

UOBKayhian on 25 Nov 2014


FY14F PE (x): n.a.
FY15F PE (x): 17.0

No major surprises in 3Q14 results. With the strong production volumes partially offset the impact of lower oil prices, 3Q14 revenue rose 33.4% yoy to US$18.2m. However, 3Q14 EBITDAX fell 20% yoy to US$5.5m due to a non-recurring adjustment associated with decommissioning costs at Glagah-Kambuna TAC, which ceased production in Jul 13. While lifting costs for 3Q14 fell 41% yoy to US$8.54/boe, this was primarily due to recognition of gas production volume from the Bangora gas field. We expect the average lifting cost to rise to US$13/boe in 2015 once oil production in Thailand commences.

Production to more than double by 2016. Based on Kris’s current field development plans, supported by data from NSAI’s competent person’s report, we estimate that Kris would more than double its production from 7,600 boe/day in 2014 to 20,900 boe/day in 2016 based on production from four oilfields. Its current production of 7,600 bopd is supported by production from its mature oilfields: a) Block 9, Bangladesh and b) Block 8/32, Thailand.

We estimate that Kris could turn profitable from 2015 onwards, backed by a strong revenue growth of 269.8% once the two abovementioned oilfields commence production. The company is unlikely be profitable in 2014 as its earnings profile in 2H14 should be similar to 1H14, seeing as there are no oilfields being brought into production for the year.

Maintain BUY. Our investment thesis is premised on four near/mid-term catalysts: a) immediate upside of 43% to share price once the government approves its pending transactions in Indonesia (Block A Aceh PSC and Tanjung Aru PSC), b) significant upside to its 2P reserves (75mmboe) by end-15, c) production to more than double from 7,800 barrels of oil per day (bopd) in 2014 to 21,000bopd in 2016, and d) attractive M&A target at current prices.

Riverstone Holdings

Kim Eng on 25 Nov 2014

  • Many investors learnt of cleanroom gloves for first time & Riverstone’s dominance of this lucrative segment.
  • We remain optimistic. Customised healthcare gloves for quality-conscious customers should remain competitive too.
  • Maintain BUY & SGD1.21 TP, at 15x FY15E EPS. Catalysts from higher-than-expected cleanroom glove volume.
Cleanroom gloves attracted keen interest
We hosted Riverstone to an NDR with institutional clients in Malaysia. Most were already familiar with the healthcare glove industry and showed keen interest in Riverstone’s dominance of the high-end cleanroom glove market. Management shared that its close relationships with end-users via direct supplies, ability to customise solutions, best-in-class product features and stringent qualification formed strong barriers to entry. Better-than-expected penetration of the equally profitable lower-end cleanroom glove market is expected to boost its growth. This could provide upside to our forecasts.

Healthcare segment to thrive
At a time of aggressive capacity expansion by all the major healthcare glove makers in Malaysia, management believes it can sustain its ASPs and margins through: 1) constant customisation and innovation to offer product differentiation; and 2) serving quality rather than cost-conscious customers. Higher elongation gloves for better comfort and low-chemical-content gloves that reduce
allergic reactions are examples of its differentiated products. Undervalued with strong catalysts
Riverstone’s 12x FY15E EPS trails peers’ 15x average, although it is has the strongest EPS growth prospect. Maintain BUY with SGD1.21 TP, at 15x FY15E EPS, on par with the peer average. We expect catalysts from better-than-expected cleanroom glove volume, with higher ASPs and margins.

Friday 21 November 2014

Yoma Strategic Holdings

OCBC on 20 Nov 2014

Yoma announced that it will take a 9.0% stake in a special purpose company, MC-Jalux Airport Services Co., Ltd. (MJAS), alongside JALUX Inc. (45.5%) and Mitsubishi Corporation (45.5%). MJAS has signed a 30-year concession agreement for the operation and maintenance of Mandalay International Airport, which is scheduled to commence around Mar-2015. In addition, Yoma also completed a rationalization of its Myanmar automotive businesses with First Myanmar Investment Company Limited (FMI) and will acquire FMI’s 30% and 20% stakes in Myanmar Motors and Summit SPA Motors Limited, respectively. Finally, management also announced that it has acquired an additional 20% stake in KOSPA Ltd, a JV established to distribute food produce in Myanmar using vehicles with refrigeration capacity to improve the quality of products being transported to markets. Pending more color regarding the financial impact of these businesses, in particular the airport concession, we opt to keep our fair value estimate of S$0.74 unchanged. Maintain BUY.

Partnership finalizing 30-year concession to operate airport
Yoma announced that it will take a 9.0% stake in a special purpose company, MC-Jalux Airport Services Co., Ltd. (MJAS), alongside JALUX Inc. (45.5%) and Mitsubishi Corporation (45.5%). MJAS has signed a 30-year concession agreement with Myanmar’s department of Civil Aviation (DCA) for the operation, rehabilitation and maintenance of airport facilities, including terminal buildings and runway (excluding air traffic control), at Mandalay International Airport. Operations are scheduled to commence around Mar-2015. Both JALUX and Mitsubishi will contribute to the partnership with their significant experience in airport operations and infrastructure development while Yoma, being a leading Myanmar corporation, will provide the project with real estate development and local expertise.

To acquire stakes in automotive businesses from FMI
In addition, Yoma also completed a rationalization of its Myanmar automotive businesses with First Myanmar Investment Company Limited (FMI) and will acquire FMI’s 30% and 20% stakes in Myanmar Motors and Summit SPA Motors Limited, respectively. Myanmar Motors is an investment holding company involved in operating Volkswagen’s service centre, vehicle leasing and distribution of automotive tires and parts in Myanmar. Summit SPA Motors is a JV established with Sumitomo Corporation in 2014 to distribute Hino trucks and buses and operate authorized service stations in Myanmar. The aggregate value of these transactions is S$2.7m, and Yoma will own 100% and 40% in Myanmar Motors and Summit SPA Motors Limited post-transaction.

Increasing JV interest in cold chain related business
Finally, the group also announced that it has acquired an additional 20% stake in KOSPA Ltd, a JV established to distribute food produce in Myanmar using vehicles with refrigeration capacity to improve the quality of products being transported to markets. There are no material terms to the acquisition as KOSPA is a new set-up; post-transaction, KOSPA will be a 50% JV of Yoma. Pending more color regarding the financial impact of these businesses, in particular the airport concession, we opt to keep our fair value estimate of S$0.74 unchanged. Maintain BUY.

Midas Holdings

OCBC on 19 Nov 2014

Midas Holdings Ltd’s (Midas) 3Q14 results were way below our expectations. While revenue grew 7.7% YoY to RMB324.2m on the back of higher revenue from its Aluminium Alloy Extruded Products Division, Midas’ PATMI plunged 91% to RMB1.5m due to higher start-up and finance costs arising from its new plants. Higher start-up expenses will drag down its performance in the next 12-18 months. Reflective of this, we cut our FY14F and FY15F PATMI forecasts by 33.4% and 38.2% respectively. With a 0.6x target blended FY14/15F P/B (-1SD to 5-year historical P/B average), we lower our FV from S$0.50 to S$0.30, and downgrade to HOLD.

PATMI hurt by jump in start-up and finance costs
While 3Q14 revenue grew 7.7% YoY to RMB324.2m on the back of higher revenue from its Aluminium Alloy Extruded Products Division, Midas’ PATMI plunged 91% to RMB1.5m due to higher start-up and finance costs arising from its new plants. These were due to higher administrative and finance expenses, which jumped 42.1% and 117.0% YoY to RMB36.5m and 35.5m, respectively, eroding the 6.2 ppt gain in gross profit margin to 27.0%. A 96.9% YoY drop in the share of profits of an associate also contributed to lower PATMI. For 9M14, Midas’ revenue rose 21.6% to RMB957.3m, but PATMI dropped by a significant 19.3% to RMB21.3m, and these formed 70.5% and 56.2% of our FY14 projections, respectively.

Uncertain outlook for its aluminium light alloy business
Of the two new plants in Luoyang and Liaoyuan, the latter was part of its strategy to diversify away from its reliance on China railway projects by going into aluminium plates and sheets production through its subsidiary, Jilin Midas Light Alloy (JMLA). Midas is targeting to commence production for its Luoyang and Liaoyuan plants in 2Q15 and 4Q15, respectively. Until then, start-up expenses will continue to drag down earnings without topline revenue contributions. When commercial production starts, capitalized finance costs will further impact profit through depreciation expenses. Meanwhile, JMLA has yet to secure contracts. Being the supplier of basic materials, we expect the business model to be low margin and high volume. The outlook remains uncertain on JMLA’s ability to gain market share in this competitive market. Hence, we expect revenue contribution to be slow in 2015 and will not be able to offset its operating expenses meaningfully.

Lower estimates; downgrade to HOLD
With the reasons mentioned, we think earnings will continue to be subdued for the next 12-18 months. Hence, we cut our FY14F and FY15F PATMI forecasts by 33.4% and 38.2% respectively. With a 0.6x target blended FY14/15F P/B (-1SD to 5-year historical P/B average), we lower our FV from S$0.50 to S$0.30, and downgrade to HOLD.

Tuesday 18 November 2014

Olam International

UOBKayhian on 17 Nov 2014

FY14F PE (x): 16.0
FY15F PE (x): 13.9
Below expectation. Olam reported 1QFY15 net profit of S$44.3m (up 391% qoq, -2.9%
yoy) or net core profit of S$32.2m (-33.7% qoq and -29.5% yoy) excluding the disposal
gains of S$12.1m from the sales of dairy processing facility in Cote d’Ivoire. The first
quarter is usually the weakest quarter for Olam.
Strategic plan update. Three more divestment initiatives are expected to be completed
in FY15 to release further cash of S$313.1m and to generate a divestment gain of about
S$22.4m. Net gearing of 1.85% as at end-Sep 14 was marginally higher than 1.82% as
at end-FY14.
Maintain earnings forecast. We are maintaining earnings expectation as the first quarter
is usually the weakest quarter for Olam and volume could pick up to compensate the
weaker margins and the loss of volume from discontinued operations over the next three
quarters.

Singapore Banks

Kim Eng on 18 Nov 2014

  • EPS growth prospects plus potential fund inflows from oil & gas sector. Raise EPS by up to 10% and TPs.
  • UOB could be re-rated further after management assurances. Weaker liquidity profile well-cited. Upgrade to BUY from HOLD.
  • Upgrade sector to OVERWEIGHT from Neutral. DBS our top pick, followed by UOB. Still cautious on OCBC.
Sector raised to OVERWEIGHT
We believe a sector re-rating is afoot after three quarters of positive earnings surprises, from strengthening NIMs and asset resilience. Earlier wariness over China exposures proved unfounded. As the oil & gas sector’s outlook dims, we expect banks to benefit from fund reallocations, given a dearth of catalysts for the other major sectors. Higher interest rates starting mid-2015 should provide another source of catalysts. These are behind our sector upgrade to OVERWEIGHT from Neutral.
Upgrade UOB to BUY; DBS still top pick
We believe the market has priced in UOB’s less-favourable funding profile. We cut its NIMs as it is not that well-positioned for higher rates. Still, we anticipate catalysts from stronger deposit growth and improving housing-loan quality. DBS remains our top pick as it should be best-positioned to benefit from rising rates. We stay cautious on OCBC.
Raising TPs and EPS. We raise FY14E-16E EPS by up to 10%, for better NIMs and non-interest income. We also incorporate Wing Hang Bank for OCBC. We bump up TPs for all three, without changes to our valuation methodologies.

UOB

Kim Eng on 18 Nov 2014

  • Raise EPS by 6-9% for better non-interest income.
  • Housing slippage and less-favourable funding profile well-cited. Upgrade to BUY from HOLD with new SGD26.70 TP from SGD25.30, still on 12x FY15E EPS. Catalysts from stronger SGD deposit growth and improving housing NPLs.
  • For sector exposure, prefer DBS. Best-positioned to benefit from rising rates.
Concerns priced in; Raise to BUY
We raise UOB from HOLD to BUY as we believe investors have more than priced in its housing-loan slippage and less-favourable funding profile. UOB’s PER and P/BV valuation premiums over peers have largely fallen well below their means since Jan 2005.
We cut FY14E-16E NIMs to capture stiffer competition. However, we raise EPS by 6-9% for better non-interest income. Accordingly, we lift TP to SGD26.70 from SGD25.30, still at 12x FY15E EPS. This is 0.5SD below its mean since Jan 2005 and implies 1.5x FY15E P/BV, slightly above its 10-year mean.
Tighter liquidity will not break the bank
We understand its housing defaults are isolated to loans originated in 2011 for some individuals for one high-end property development in Sentosa. If the sector’s housing-NPL ratio reverts to its peak after the AFC, the risk for UOB’s EPS is estimated at 17%, not much worse than for its peers.
Also, while SGD liquidity is tightening, Standard Chartered, with a 10% SGD deposit market share, may turn less aggressive as its global ambitions hit a stumbling block.
In the sector, we still prefer DBS, as it should be best-positioned for higher rates.

KS Energy

OCBC on 18 Nov 2014

KS Energy reported a 34.2% YoY rise in revenue to S$58.5m and a net loss of S$0.6m in 3Q14 vs. a PATMI of S$0.2m in 3Q13. This brings 9M14 PATMI to S$46.4m, boosted by a rig sale in 2Q14. Core PATMI in 9M14 is estimated to be about S$3m, slightly below our expectations, mainly due to a one-off payment by KS Drilling post the rig sale in 2Q14. If not for the dividend payment, 3Q14 PATMI would have been S$1.9m. Looking ahead, the group is taking delivery of a rig from Cosco in 4Q14 but there has not been any official announcement of a charter contract yet. With the fall in oil prices which could potentially lead to lower charter rates during contract renewals, as well as the recent de-rating of the broader sector, we lower our peg from 0.8x to 0.65x P/B, resulting in a lower fair value estimate of S$0.48 (based on FY15F book). Downgrade to HOLD.

3Q14 PATMI affected by one-off payment
KS Energy (KSE) reported a 34.2% YoY rise in revenue to S$58.5m and a net loss of S$0.6m in 3Q14 vs. a PATMI of S$0.2m in 3Q13. This brings 9M14 PATMI to S$46.4m, boosted by a rig sale in 2Q14. Core PATMI in 9M14 is estimated to be about S$3m, slightly below our expectations. Profit after tax in 3Q14 was a respectable S$3.3m but PATMI slipped due to the reallocation of profits to shareholders from 80% of the profits of a subsidiary (KS Drilling) to 50%. This arose due to the one-off payment of preferred dividends by KS Drilling totaling S$8.6m, post the gains on disposal of a rig in 2Q14. If not for the dividend payment, 3Q14 PATMI would have been S$1.9m.

One Kurdistan land rig may remain idle
Revenue growth for the drilling business was flat on a sequential basis as two land rigs were idle due to tensions in Kurdistan. We understand, however, that one of the two land rigs has resumed work, while visibility is poor for the second rig.

Waiting for charter contract for Cosco rig
The group is also taking delivery of a jack-up rig from Cosco in 4Q14 but there has not been any official announcement of a charter contract yet. Should there be a contract with favourable rates, the group should see a positive impact on next year’s earnings, but given the tight timeline we prefer to assume a conservative half a year’s contribution to earnings in 2015, not forgetting there may be depreciation costs should the rig remain idle prior to deployment. 

Lowering fair value, wait for more visibility post 4Q
We like that KSE is seeing operationally stable quarters, but with the fall in oil prices which could potentially lead to lower charter rates during contract renewals or maybe even rig impairments later, and together with the recent de-rating of the broader sector, we lower our peg from 0.8x to 0.65x P/B, resulting in a lower fair value estimate of S$0.48 (based on FY15F book). Downgrade to HOLD.

Libra

OCBC on 18 Nov 2014

Libra recently announced that it has been awarded S$9.5m of M&E contracts, which brings its order book up to an estimated S$94.4m year-to-date. This is ~3.0x of last year’s revenues (FY13: S$31.5m) and represents good momentum for the group which has announced S$21.6m of new contracts over the last two months. The latest awards comprise a S$5.4m M&E sub-contract for a proposed condo project at Tampines St 86 (to be completed in Jul-16), and a S$4.1m sub-contract for a teaching facilities building (Block 8A) at Temasek Polytechnic (to be completed in Aug-15). We believe the new management team is gaining traction in terms of growing business volumes, while leveraging on tailwinds from the firm public construction outlook. Since our initiation on Libra as our top pick in the small cap space on 27 Oct, its share price has appreciated 7.5% to date and we continue to see value at current levels given significant potential for earnings and dividends growth ahead. Reiterate BUY with an unchanged fair value estimate of S$0.33.

Awarded S$9.5m of M&E contracts
Last Friday evening, Libra announced that it has been awarded S$9.5m of M&E contracts, which brings its order book up to an estimated S$94.4m year-to-date. These latest contract wins comprise a S$5.4m M&E sub-contract for the supply, fabrication, delivery and installation of air-conditioning and mechanical ventilation system for a proposed condo project at Tampines St 86, and a S$4.1m sub-contract for the electrical, air-conditioning and mechanical ventilation system, building management system, and lab equipment for proposed additions and alterations involving the new erection of a teaching facilities building (Block 8A) at Temasek Polytechnic. The group has commenced work on the first contract, which is scheduled to be completed in Jul-16, and the second contract is expected to be completed in Aug-15.

Positive order book momentum so far
The current order book of S$94.4m is approximately 3.0x of last year’s revenues (FY13: S$31.5m) and represents good momentum for Libra which has announced S$21.6m of new contracts over the last two months. Management has indicated that the latest contract wins are expected to contribute to its earnings over FY14-15. That said, the rate of order book replenishment year to date is in line with our expectations, and we leave our FY14 and FY15 PATMI forecasts unchanged at S$4.7m and S$7.8m, respectively. 

New management gaining traction
We believe the new management team is gaining traction in terms of growing business volumes and strengthening margins through active rationalization of business operations, while leveraging on tailwinds from the firm public construction outlook (forecasted at S$14b-18b per annum over FY15-16). Since our initiation on Libra as our top pick in the small cap space on 27 Oct, its share price has appreciated 7.5% to date and we continue to see value at current levels given significant potential for earnings and dividends growth ahead. Reiterate BUY with an unchanged fair value estimate of S$0.33.

Olam

OCBC on 17 Nov 2014

Olam posted a muted start to FY15. While 1QFY15 revenue eased 0.5% YoY to S$4298.6m, EBITDA fell 11.9% to S$219.4m; Olam attributed the fall to adverse price movement in its hazelnuts and dairy business, coupled with execution challenges in upstream dairy. Reported net profit edged 3.1% lower to S$44.3m; but operational PATMI slipped 29.4% to S$32.2m. As a whole, revenue met 20% of our FY15 forecast, but operational PATMI only met 7%, which we deem to be below our expectations (first quarter earnings typically make up about 11% of full-year). We are paring our FY15F earnings by 4% to account for the weaker 1Q showing; this also reduces our fair value from S$2.38 to S$2.30 (still based on 12.5x FY15F EPS). However, due to the fall in share price over the last quarter, we think that valuations are not as stretched as before. Hence we upgrade our call to HOLD.

Muted start to FY15
Olam posted a muted start to FY15. While 1QFY15 revenue eased 0.5% YoY to S$4298.6m, EBITDA fell 11.9% to S$219.4m, it attributed the fall to adverse price movement in its hazelnuts and dairy business, coupled with execution challenges in upstream dairy. Reported net profit edged 3.1% lower to S$44.3m; but operational PATMI slipped 29.4% to S$32.2m. As a whole, revenue met 20% of our FY15 forecast, but operational PATMI only met 7%, which we deem to be below our expectations (first quarter earnings typically make up about 11% of full-year). 

Weaker Food Staples & Packaged Food 
By segments, Edible Nuts did better, aided by strong performance from upstream Almonds, US Peanuts; but it did see some weather-related impact on its Hazelnuts business, which may continue into 2QFY15. Confectionary business was fairly stable, and likewise for Industrial Raw Materials. But Food Staples & Packaged Food turned in a weaker showing (revenue, volume and EBITDA all slipped), impacted by sharply lower milk prices and yields in Uruguay dairy farming. And management notes that the execution challenges in upstream dairy could continue into 2QFY15. 

More divestments expected in 2Q15
Going forward, Olam will continue to make the divestments as outlined in its FY14-16 Strategy Plan. Three announced initiatives, which are expected to be completed in 2QFY15, are likely to release further cash of ~S$313.1m, generate a (one-time) P&L gain of S$22.4m, and add S$118.8m directly to its capital reserves. Olam still has a target of being FCFF positive, although 1QFY15 FCFF was a negative S$54.6m (FCFE was a large S$160.3m negative due to the net interest paid). 

Easing FV to S$2.30; upgrade to HOLD
We are paring our FY15F earnings by 4% to account for the weaker 1Q showing; this also reduces our fair value from S$2.38 to S$2.30 (still based on 12.5x FY15F EPS). However, due to the fall in share price over the last quarter, we think that valuations are not as stretched as before. Hence we upgrade our call to HOLD.

Hotel Properties Limited

OCBC on 17 Nov 2014

HPL reported 3Q14 PATMI of S$15.1m, down 70.0% YOY mostly due to the absence of contributions from the Tomlinson Heights condominium, which achieved TOP over in 1Q14, and lower share of results from associates/JV, which decreased S$25.3m to S$0.3m as the Interlace achieved TOP in Sep-13. That said, the figures from the hotels and resorts division remained healthy, with the Group’s resorts in Maldives and Bali putting in higher contributions over the quarter. 9M14 PATMI now makes up 88% of our full year forecast and we judge 3Q14 figures to be in line with expectations. Our investment thesis for HPL continues to be underpinned by significantly under-valued prime Orchard assets in the group’s real estate portfolio portfolio which are ripe for potential redevelopment. To reflect the uncertainty of redevelopment ahead, however, we opt to assign a punitive 35% discount to HPL’s RNAV of S$8.20 per share, which yields a fair value estimate of S$5.32. Maintain BUY.

3Q14 PATMI down due to absence of Tomlinson Heights contributions
Hotel Properties limited (HPL) reported 3Q14 PATMI of S$15.1m, down 70.0% YOY mostly due to the absence of contributions from the Tomlinson Heights condominium, which achieved TOP over in 1Q14, and lower share of results from associates/JV, which decreased S$25.3m to S$0.3m as the Interlace achieved TOP in Sep-13. The YoY dip in 3Q14 earnings was also aggravated by a S$12.6m non-recurring gain in 3Q13 from the disposal of investment assets in Kensington Square, London. That said, the figures from the hotels and resorts division remained healthy, with the Group’s resorts in Maldives and Bali putting in higher contributions over the quarter. In terms of the top line, 3Q14 revenues dipped 18.9% to S$146.0m, again due to the impact from Tomlinson Height’s TOP earlier this year. 9M14 PATMI now makes up 88% of our full year forecast and we judge 3Q14 figures to be in line with expectations.

Soft marketing started for London units
Management noted that the group’s hotels and resorts typically perform well in the last quarter of the year, though possible headwinds could appear through political uncertainties and the potential escalation of the Ebola outbreak. In London, the group has commenced soft marketing of apartments at Burlington Gate and Campden Hill and income from these will be recognized on a COC basis on completion. In Singapore, however, the group highlights that sentiments in the residential market remain weak, with both transaction volumes and prices declining.

Maintain BUY with unchanged S$5.32 FV estimate
The group’s balance sheet remained firm as at end Sep 2014 with S$129.3m in cash and 49.2% net gearing. Our investment thesis continues to be underpinned by significantly under-valued prime Orchard assets in the group’s real estate portfolio portfolio which are ripe for potential redevelopment. To reflect the uncertainty of redevelopment ahead, however, we opt to assign a punitive 35% discount to HPL’s RNAV of S$8.20 per share, which yields a fair value estimate of S$5.32. Maintain BUY.

Wheelock Properties

OCBC on 17 Nov 2014

3Q14 PATMI came in at S$11.0m, down 7.2% YoY mostly due to lower progress recognition from Ardmore Three, higher admin expenses and FX losses during the quarter. We judge this quarter’s earnings to be within expectations and 9M14 PATMI now makes up 92.0% of our full year forecast, including the S$109.4 accounting gain in 2Q14 which resulted from moving the group’s HPL stake from AFS assets to an interest in an associate. Wheelock Place continues to enjoy strong occupancy (99.7% as at end 3Q14) and positive rental reversion over the quarter, with the blended monthly rent now ~S$13.50 psf per month. Scotts Square retail’s occupancy remained flat QoQ at 93% as at end 3Q14, though we note that average monthly rent dipped marginally from ~S$22 psf as at end 2Q14 to ~S$21 psf as at end 3Q14. Management reports that the exercise to rejuvenate the mall with stronger international luxury labels and F&B concepts is in process. Maintain BUY with an unchanged fair value estimate of S$2.38.

3Q14 results broadly in line
3Q14 PATMI came in at S$11.0m, down 7.2% YoY mostly due to lower progress recognition from Ardmore Three, higher admin expenses and FX losses during the quarter. 3Q14 revenue decreased 17.4% YoY to S$22.8m similarly due to the weaker contributions from Ardmore Three. We judge this quarter’s earnings to be within expectations and 9M14 PATMI now makes up 92.0% of our full year forecast, including the S$109.4 accounting gain in 2Q14 which resulted from moving the group’s stake in Hotel Properties Ltd (“HPL”) from AFS assets to an interest in an associate.

Rejuvenating Scotts Square with stronger brands
Wheelock Place continues to enjoy strong occupancy (99.7% as at end 3Q14) and positive rental reversion over the quarter, with the blended monthly rent now ~S$13.50 psf per month. Scotts Square retail’s occupancy remained flat QoQ at 93% as at end 3Q14, though we note that average monthly rent dipped marginally from ~S$22 psf as at end 2Q14 to ~S$21 psf as at end 3Q14. Management reports that the exercise to rejuvenate the mall with stronger international luxury labels and F&B concepts is in process, and they will roll out advertising and promotion initiatives over the rest of the year to heighten awareness and entice shoppers for festive shopping. 

Persistent residential headwinds in Singapore
We note persistent headwinds in the domestic residential sector, particularly in the high-end segment, and the sales status at the group’s Scotts Square residential towers remained stagnant over the quarter with 79% of total units sold (268 units sold out of 338 total units). Management indicates that their current focus is to lease unsold units, and 33 units have been leased to date with average rentals above S$5.2k pm. At Ardmore Three, three units out of the total 84 units have been sold to date (ASP: S$3.2k psf) while the 698-unit The Panorama is now 40% sold (282 units sold). Maintain BUY with an unchanged fair value estimate of S$2.38.

Dyna-Mac Holdings

OCBC on 17 Nov 2014

Dyna-Mac Holdings reported an 18.9% YoY rise in revenue to S$79.4m and a 43.6% increase in net profit to S$7.6m in 3Q14, bringing 9M14 net profit to S$20.8m, accounting for 72% of our full year estimate. Core PATMI met 75% of our full year figure, in line with expectations. There is still room for the Malaysian yard to grow, and a partnership structure with Keppel in Brazil (similar to Keppel Subic in the Philippines) is possible should there be local content requirements. Looking ahead, the group is still upbeat on order wins in 2015 despite lower oil prices, as it services the production stage of the oil and gas value chain. Enquiries also “remain high”, and we expect more firm orders that will add to its S$223m net order book. With the share price correction, we upgrade the stock to BUY with an unchanged S$0.445 fair value estimate and forecasted dividend yield of ~5.3%.

3Q14 results in line
Dyna-Mac Holdings reported an 18.9% YoY rise in revenue to S$79.4m and a 43.6% increase in net profit to S$7.6m in 3Q14, bringing 9M14 net profit to S$20.8m, accounting for 72% of our full year estimate. Stripping out one-off items, core PATMI met 75% of our full year figure, in line with expectations. Revenue was higher as more projects were executed in the Singapore and overseas yards, but gross margin was lower at 22.2% in 3Q14 vs 30.2% in 3Q14 due to higher recognition of costs from overseas yards.

Room for Malaysian yard to grow
The Malaysian yard, which is still under development, saw a utilitisation rate of about 30% for the year, compared to almost full utilisation rates for the two Singapore yards, Chinese yard and the Philippines yard (Keppel Subic). A similar partnership structure with Keppel in Brazil is possible, should there be local content requirements for Brazil work.

Still expecting to secure orders
Looking ahead, the group is still upbeat on order wins in 2015 despite lower oil prices, as it services the production stage of the oil and gas value chain. Enquiries also “remain high”. It has a net order book of S$223m with deliveries till 2016, and the group has also secured letters of intent (LOI) for the construction of FPSO modules from repeat customers. Two of the contracts are likely to be inked by the end of this year, and we estimate a combined contract value of about S$100-150m. YTD, the group has secured contracts of $92m, excluding the LOIs. 

Upgrade to BUY
Dyna-Mac’s share price has corrected 14% since our last hold rating on the company in early Sep, and now with the potential upside of more than 20% (this includes dividends) to our unchanged fair value estimate of S$0.445, we upgrade the stock to BUY. The group has also paid out dividends of S$0.02/share per year in the past two years, and we expect the same for FY14, translating to an attractive dividend yield of about 5.3%.

ECS

OCBC on 17 nov 2014

Last Friday night, ECS announced that VST Holdings Limited (“VST”), which has 89.5% shareholdings in ECS, intends to make an unconditional cash offer of S$0.68/share for all the remaining ordinary shares it does not currently own. Taking into account its latest 3Q14 results, we retain our forecasts and reinstate our previously under review FV of S$0.68. We believe the offer by VST presents a good opportunity for investors to exit the illiquid market for ECS shares at a premium to the traded price on 22-Sep (last trading date prior to suspension). Furthermore, VST does not intend to take any steps to restore public float to lift the suspension of trading. Hence, with the offer price of S$0.68/share meeting our FV estimate, we think the offer is fair and recommend shareholders to accept the offer.

VST Holdings Limited to make cash offer for ECS
Last Friday night, ECS announced that VST Holdings Limited (“VST”), which has 89.5% shareholdings in ECS, intends to make an unconditional cash offer of S$0.68/share for all the remaining ordinary shares it does not currently own. Separately, VST also proposed to pay holders of outstanding options a cash amount by which the offer price (S$0.68/share) is in excess over the exercise price of the options, provided that the option holders do not exercise their options by the close of the unconditional cash offer. Note that VST intends to delist and make ECS its wholly-owned subsidiary. That is if entitled to, VST will exercise its rights of compulsory acquisition of the remaining ordinary shares.

Latest 9M14 results update
For 9M14, ECS’ PATMI came in slightly below our expectation as it formed 72.0% of our FY14 projections while revenue was in-line at 74.1% of our FY14 projections. ECS’ 9M14 revenue declined 1.1% to S$3.1b while PATMI grew 1.2% to S$26.2m as its strategy to shift focus from the lower margin DT segment to higher margin ES segment appears to be paying off. Furthermore, we think ECS is on track to meet our FY14’s PATMI projection as we expect PATMI to grow further with strategy to focus on higher margin segment.

Unchanged FV; ACCEPT the offer
Taking into account its latest results, we retain our forecasts and reinstate our previously under review FV of S$0.68. The cash offer of S$0.68 proposed by VST represents a premium of 11.48% over its last traded price on 22-Sep (last trading date prior to suspension), and 9.15% to its 6-month volume weighted average price up to 22-Sep. We believe the offer by VST presents a good opportunity for investors to exit the illiquid market for ECS shares. The average daily trading volume for ECS during the 6-month period up to 22-Sep was only ~102,297 shares, representing less than 0.04% of the total number of issued ordinary shares. Furthermore, VST does not intend to take any steps to restore public float to lift the suspension of trading. Hence, with the offer price of S$0.68/share meeting our FV estimate, we think the offer is fair and recommend shareholders to accept the offer.

SATS

OCBC on 14 Nov 2014

SATS reported a 3.3% YoY decline in its 2QFY15 PATMI to S$47.1m on the back of a 2.2% drop in revenue to S$442.2m. For 1HFY15, revenue and PATMI which declined 1.0% and 4.7% YoY to S$877.4m and 90.4m formed 49.0% and 50.0% of our FY15 forecasts, respectively. We think the aviation industry will continue to be challenging, as airlines continue to rationalize capacity to match the slowing demand. In addition, the negative pressures arising from overcapacity of airline caterers at Narita Airport in Japan will continue to put a strain on Tokyo Flight Kitchen’s profitability as competition continues to intensify. We continue to think SATS will be able to maintain a decent level of dividend pay-out given its healthy balance sheet. However, with a challenging outlook and a change in analyst coverage, we roll forward to 17.5x target blended FY15/16F PER, which is 0.5x standard deviation above its 5-year historical average PER. Consequently, we derive a lower FV of S$2.92 (previous: S$3.20). With an attractive FY15F dividend yield of 4.5%, maintain HOLD on SATS.
2QFY15 results declined YoY but within expectation
SATS reported a 3.3% YoY decline in its 2QFY15 PATMI to S$47.1m on the back of a 2.2% drop in revenue to S$442.2m. The latter was largely attributable to weaker result from its Japan subsidiary Tokyo Flight Kitchen (TFK) as well as loss of contributions from its Australian subsidiary which was divested in Jul-14, resulting in a 4.7% YoY drop in 2QFY15 Food Solutions (FS) segment revenue. The decline was further aggravated by the weakening of Japanese Yen. For 1HFY15, revenue and PATMI which declined 1.0% and 4.7% YoY to S$877.4m and 90.4m formed 49.0% and 50.0% of our FY15 forecasts, respectively. The decline in FS segment revenue was partly offset by a 2.0% YoY increase in Gateway Services (GS) 1HFY15 revenue on the back of cargo tonnage growth in Singapore. 

Outlook ahead remains challenging
We believe the aviation industry will continue to be challenging, as airlines continue to rationalize capacity to match the slowing demand. This resulted in YoY decrease for passengers, flights and unit services handled in 2QFY15. The main uplift in 3QFY15 came from cargo/mail processed as volume increased 5.6% YoY to 393.1k tonnes. SATS stated rising manpower costs remains a challenge but will accelerate its productivity improvement initiatives going forward. Profit after tax from overseas GS segment associates and JVs dropped 15.9% YoY for 1HFY15 to S$18m. In addition, the negative pressures arising from overcapacity of airline caterers at Narita Airport in Japan will continue to put a strain on TFK’s profitability as competition intensifies.

Lower FV; maintain HOLD
We continue to think SATS will be able to maintain a decent level of dividend pay-out given its healthy balance sheet. However, with a challenging outlook and a change in analyst coverage, we roll forward to 17.5x blended FY15/16F PER, which is 0.5x standard deviation above its 5-year historical average PER. Consequently, we derive a lower FV of S$2.92 (previous: S$3.20). With an attractive FY15F dividend yield of 4.5%, maintain HOLD on SATS.

ComfortDelGro

OCBC on 14 Nov 2014

ComfortDelGro’s (CDG) 3Q14 results were largely in-line with our expectations. PATMI grew 5.3% YoY to S$80.8m on the back of a 6.0% increase in revenue to S$1,037.3m. Top line growth was mainly driven by Bus (+4.9%), Rail (+21.4%) and Taxi (+7.9%) segments. For 9M14, CDG’s revenue and PATMI rose 9.0% and 8.1% YoY to S$3,004.4m and S$219.8m, forming 75.9% and 78.2% of our FY14 projections, respectively. Outlook remains relatively stable with Singapore and UK Bus segment as well as Singapore Taxi segment expected to drive revenue growth. While we think CDG’s 3Q14 results are largely in-line with expectations, we adjust our FY14 PATMI forecast upwards by 2.2% to factor in the outlook guidance from management. Consequently, our DDM-derived fair value estimate increases from S$2.92 to S$3.03, maintain BUY.

9M14 PATMI formed 78% of our FY14 projections
ComfortDelGro’s (CDG) 3Q14 results were largely in-line with our expectations. PATMI grew 5.3% YoY to S$80.8m on the back of a 6.0% increase in revenue to S$1,037.3m. Top line growth was mainly driven by the Bus (+4.9%), Rail (+21.4%) and Taxi (+7.9%) segments. However, Bus revenue growth in UK (+12.4%) and Singapore (+11.5%) were offset by a decline from Australia (-17.3%) due to loss of Regions 1 and 3 operations. The Rail segment saw increase in average daily ridership from both North-East Line (NEL) and Downtown Line (DTL), further boosted by higher average fares. For 9M14, CDG’s revenue and PATMI rose 9.0% and 8.1% YoY to S$3,004.4m and S$219.8m, forming 75.9% and 78.2% of our FY14 projections, respectively. For the past four fiscal years, 4Q had traditionally been the weaker quarter and hence, we view 9M14 PATMI meeting 78.2% of our FY14 projections to be largely in-line.

Bus, Rail and Taxi segments likely to remain as revenue drivers
For the larger contributors, CDG’s management guided for revenue from Singapore’s bus, rail and taxi segment as well as the UK’s bus segment to increase. Singapore’s bus segment is likely to see increasing ridership and average fares but also higher staff salaries while contribution from Metroline West in the UK is the key driver for UK bus revenue growth. On the other hand, Automotive Engineering Services (AES) and Australia’s bus segment are likely to see decreases. Australia’s decline is mainly due to the loss of regions 1 and 3 and the slightly lower margin seen in region 4 while the drop in AES segment will largely be due to lower diesel sales. While Taxi revenue in Singapore is expected to increase due to fleet renewal commanding higher rental income, taxi revenues from other countries are expected to be maintained.

Increase FV; maintain BUY
While we think CDG’s 3Q14 results are largely in-line with expectations, we adjust our FY14 and FY15 PATMI forecasts upwards by 2.2% and 4.0% respectively to factor in the outlook guidance from management. Consequently, our DDM-derived fair value estimate increases from S$2.92 to S$3.03, maintain BUY.

United Envirotech

OCBC on 14 Nov 2014

CITIC Ltd and KKR & Co will form a consortium (CKM) to jointly offer S$1.65 cash/share to buy out all existing United Envirotech Ltd (UEL) shareholders; this valuing UEL at S$1.9b. While the bid has already received 51% acceptance from UEL's major shareholders, including KKR and CEO Dr Lin, the offer is conditional on getting regulatory approvals in China. We understand from management that this process could take some 4-6 months to complete. Furthermore, CKM intends to keep UEL listed on the SGX. We believe that the emergence of CITIC as its major shareholder is likely to have a positive impact on UEL in the medium to long run. The pre-conditional offer price of S$1.65 is about 15% above our fair value of S$1.43 (based on 24x FY15F EPS), which we believe looks attractive. But based on its current prospects, it may be slightly rich. For now, we are maintaining our HOLD rating on the stock and move our fair value up to S$1.65; but we believe that investors should be looking to take profit if the share price jumps sharply above the offer level.

Pre-conditional buy-out offer at S$1.65 
CITIC Ltd and KKR & Co will form a consortium (CKM) to jointly offer S$1.65 cash/share to buy out all existing United Envirotech Ltd (UEL) shareholders; this valuing UEL at S$1.9b. While the bid has already received 51% acceptance from UEL's major shareholders, including KKR and CEO Dr Lin, the offer is conditional on getting regulatory approvals in China. We understand from management that this process could take some 4-6 months to complete. Furthermore, CKM intends to keep UEL listed on the SGX. And after the deal is concluded, CKM could also obtain more shares via a private placement, with amounts ranging from S$50m to S$150m, which UEL can use to expand its water treatment business. 

Overall positive impact 
We believe that the emergence of CITIC as its major shareholder is likely to have a positive impact on UEL. For one, the SOE status of CITIC could help UEL open more doors and expand its reach into other regions of China. Secondly, CITIC could also give UEL a cheaper access to capital, riding on its credit rating in China. Last but not least, UEL could enjoy some very low hanging fruits in the form of ready waste-water treatment projects in related companies under the CITIC umbrella. For CITIC, we believe that the track record that Dr Lin and his team has established will allow it to have a viable and profitable water treatment business. 

Offer looks attractive but fairly rich based on current prospects
The pre-conditional offer price of S$1.65 is about 15% above our fair value of S$1.43 (based on 24x FY15F EPS), which we believe looks attractive. But based on its current prospects, it may be slightly rich, versus its peers, as it would mean that UEL would need to show a much stronger earnings growth (we are already projecting nearly 100% growth in FY15, 35% in FY16). For now, we are maintaining our HOLDrating on the stock and move our fair value up to S$1.65; but we believe that investors should be looking to take profit if the share price jumps sharply above the offer level.

Singtel

OCBC on 13 Nov 2014

SingTel posted 2QFY15 revenue of S$4309.4m, +3.5% YoY and 3.9% QoQ, while reported net profit jumped 19.3% YoY and 24.4% QoQ to S$1038.3m, boosted by an exceptional gain of S$62.2m; underlying net profit rose 10.7% YoY (+11.1% QoQ) to S$979.0m. 1HFY15 revenue though was flat at S$8457m, meeting 50% of our FY15 forecast, while reported net profit slipped 0.5% to S$1873m; underlying profit grew 4.4% to S$1860m, also 50% of our full-year estimate. SingTel declared an interim dividend of S$0.068/share, unchanged from a year ago. SingTel has kept its guidance for FY15 largely unchanged, except that it now expects a wider negative EBITDA versus 20% narrower previously. We are maintaining our BUY on the stock with an improved SOTP-based fair value of S$4.18 (versus S$4.08 previously.

2QFY15 results in-line
SingTel posted 2QFY15 revenue of S$4309.4m, +3.5% YoY and 3.9% QoQ, aided by first-time contributions from the digital acquisitions – Adconion and Kontera; excluding these two, revenue growth would have been 2.5% YoY. Reported net profit jumped 19.3% YoY and 24.4% QoQ to S$1038.3m, boosted by an exceptional gain of S$62.2m; excluding it, underlying net profit would have risen 10.7% YoY (+11.1% QoQ) to S$979.0m. 1HFY15 revenue though was flat at S$8457m, meeting 50% of our FY15 forecast, while reported net profit slipped 0.5% to S$1873m; underlying profit grew 4.4% to S$1860m, which also met 50% of our full-year estimate. SingTel declared an interim dividend of S$0.068/share, unchanged from a year ago. 

Outlook remains largely unchanged
Going forward, SingTel has kept its guidance largely unchanged. It expects group revenue and EBITDA (excluding acquisitions) to be stable; capex to stay at S$2.3b; ordinary dividend from associates to be ~S$1b. For Singapore and Australia Consumer and Group Enterprise, revenue is likely to remain stable and EBITDA to increase by low single-digit level. However, it did downgrade its Digital Life outlook, as it now expects negative EBITDA to increase to S$200-250m versus its earlier guidance of a 20% narrower negative EBITDA; although it expects revenue to exceed S$300m (earlier guided for 50% growth). 

Probably some near-term respite from falling AUD
From the analyst call, SingTel appears to be slightly more positive about its Optus business, although SingTel is still guiding for Australia mobile service revenue to decrease by low single digit level. Meanwhile, we note that the AUD/SGD is also rebounding from recent S$1.11 low, which appears to be the floor for now. We are maintaining our BUY on the stock with an improved SOTP-based fair value of S$4.18 (versus S$4.08 previously), mainly due to slightly less bearish cashflow projections for the Australian business.

Biosensors

OCBC on 13 Nov 2014

Biosensors International Group (BIG) reported another set of torrid results which fell short of our below-consensus forecasts. 2QFY15 core PATMI plunged 61.6% YoY to US$4.4m due to a decline in revenue and compression in margins. We expect industry headwinds from intense competition and ASP erosion to remain in the near future, especially in China. Given this poor set of results and weak margins outlook, we slash our FY15 and FY16 revenue /core PATMI forecasts by 6.2%/33.1% and 5.7%/24.6%, respectively. Rolling forward our valuations to 20x blended FY15/16F core EPS, we derive a lower fair value estimate of S$0.54 (previously S$0.68), partially offset by a stronger USD-SGD assumption of 1.29 (previously 1.25). Maintain SELL.

2QFY15 results significantly below expectations
Biosensors International Group (BIG) reported another set of torrid results which fell short of our below-consensus forecasts. 2QFY15 core PATMI plunged 61.6% YoY and 55.3% QoQ to US$4.4m. The decline was underpinned by a 9.9% YoY dip in revenue to US$74.8m and compression in its operating margin by 10.1 ppt to 13.5%. The fall in revenue was in turn driven by a 45.1% slide in its licensing and royalties revenue from Terumo to US$5.9m and weakness in its drug-eluting stent (DES) business in China. This was partially offset by a single-digit YoY growth in its DES volume and revenue outside of China. For 1HFY15, revenue slipped 2.9% to US$155.0m and formed 45.4% of our FY15 forecast. Core PATMI of US$14.3m translated into a decline of 39.5%, and constituted just 31.0% and 28.2% of ours and Bloomberg consensus’ full-year estimate, respectively.

Outlook remains dampening
We expect industry headwinds from intense competition and ASP erosion to remain in the near future, especially in China, and this is likely to stifle BIG’s product gross margins. BIG’s new CEO Mr. Jose Calle Gordo assumed his role in Sep this year, and one of his key initiatives would be to bring down the overall cost structure of the group. We believe this would be a gradual process, given that BIG is scaling up its own sales force in Japan to mitigate the insipid performance of Terumo and also continuing its R&D spending on new clinical trials for its next-generation BioFreedom™ drug coated stent.

Maintain SELL
Given this poor set of results and weak margins outlook, we slash our FY15 and FY16 revenue /core PATMI forecasts by 6.2%/33.1% and 5.7%/24.6%, respectively. Rolling forward our valuations to 20x blended FY15/16F core EPS, we derive a lower fair value estimate of S$0.54 (previously S$0.68), partially offset by a stronger USD-SGD assumption of 1.29 (previously 1.25). Since we last reiterated our ‘Sell’ rating on BIG, its share price has taken another 23.5% tumble. With our reduced fair value and lack of re-rating catalysts in the near-term, we maintain our SELL rating on BIG.

CSE Global

OCBC on 13 Nov 2014

CSE Global Limited’s (CSE) 3Q14 results were in-line with our expectations. Revenue grew 15.2% YoY to S$112.3m, while core PATMI from continuing operations jumped 39.6% YoY to S$9.4m due to better operating margins from good cost control and a big decline in finance expenses. Despite headwinds in the oil and gas sector, CSE still managed to boost its new order wins for 3Q14 by 29.1% YoY to S$119.3m. Looking ahead, CSE reiterated its target of growing its core PAT by 10-15% organically in FY14. We keep our PATMI projections largely unchanged, but raise our fair value estimate from S$0.64 to S$0.68 as we roll forward our valuations to 9x FY15F EPS. We like CSE for its attractive FY14F dividend yield of 4.0% and forecasted ROE of 17%, but believe current valuations are fair, with the stock trading at FY14F and FY15F PER of 10.5x and 9.2x, respectively. Maintain HOLD.

3Q14 results within expectations
CSE Global Limited’s (CSE) 3Q14 results were in-line with our expectations. Revenue grew 15.2% YoY to S$112.3m on higher sales achieved in Asia Pacific and the Americas regions, but partially offset by weakness in its Europe/Middle East/Africa market. Correspondingly, CSE’s core PATMI from continuing operations jumped 39.6% YoY to S$9.4m. This was attributed to topline growth, better operating margins from good cost control and a big decline in finance expenses. CSE’s 9M14 revenue grew 9.2% YoY to S$313.6m while core PATMI from continuing operations increased 4.7% to S$25.0m. This formed 77.2% and 72.8% of our FY14 projections, respectively. 

Strong order wins
Despite headwinds in the oil and gas sector emanating from a plunge in oil prices and reduction in capex by oil majors, CSE still managed to boost its new order wins for 3Q14 by 29.1% YoY to S$119.3m, such that 9M14 contracts secured rose 6.3% to S$288.1m. The bulk of the orders won came from projects in the Gulf of Mexico. Its outstanding order book stood at S$201.7m as at 30 Sep 2014 (end 2Q14: S$194.7m). Another positive highlight of 3Q14 came from the positive S$8.8m of operating cashflow generated, an improvement from the S$10.0m of cash consumed from operating activities in 1H14. Looking ahead, CSE reiterated its target of growing its core PAT by 10-15% organically in FY14.

Roll forward valuations and maintain HOLD
CSE’s business model entails focusing on maintenance projects which provide the group with a more resilient recurring income stream. While we raise our FY14 and FY15 revenue forecasts by 2.6% and 1.8%, respectively, our PATMI projections are kept largely unchanged, as we also assume higher tax expenses given its increasing exposure to higher tax regions like the U.S. Rolling forward our valuations to 9x FY15F EPS, we derive a higher fair value estimate of S$0.68 (previously S$0.64). Although we like CSE for its attractive FY14F dividend yield of 4.0% and forecasted ROE of 17%, we believe current valuations are fair, with the stock trading at FY14F and FY15F PER of 10.5x and 9.2x, respectively. Maintain HOLD.

UOL

OCBC on 13 Nov 2014

UOL reported 3Q14 PATMI of S$102.6m, which increased 9.6% YoY mostly due to higher share of profits from JV and associates (UIC, SingLand, and the Archipelago and Thomson Three projects), partially offset by higher marketing expenses and pre-opening costs for Pan Pacific Hotel and Serviced Suites Tianjin. We judge 3Q14 results to be marginally above expectations, driven by stronger-than-anticipated profit margins from the Esplanade. In Sep 2014, the group also launched Seventy St Patrick’s with 59% of total units sold as at end 3Q14, and we understand the Upper Paya Lebar condominium project will likely be launched in 1Q15 ahead. Maintain BUY on UOL. We update our model for latest valuations of listed holdings and project ASPs, and our fair value estimate rises from S$6.95 to S$7.18 (20% discount to RNAV).

3Q14 results marginally above expectations
UOL reported 3Q14 PATMI of S$102.6m, which increased 9.6% YoY mostly due to higher share of profits from JV and associates (UIC, SingLand, and the Archipelago and Thomson Three projects), partially offset by higher marketing expenses and pre-opening costs for Pan Pacific Hotel and Serviced Suites Tianjin. 3Q14 topline increased 65.6% YoY to S$433.5m as the Esplanade in Tianjin, China achieved TOP and hence full profit recognition over the quarter. Marketing and distribution expenses in 3Q14 increased 12.3% YoY to S$9.6m mainly due to showflat costs for the launches of Riverbank@Fernvale and Seventy St. Patrick’s while other operating expenses similarly rose 14.0% YoY to S$20.3m given pre-opening costs for Pan Pacific Hotel and Serviced Suites Tianjin. Finance expenses fell 32.5% YoY to S$5.3m from lower interest rates and increased capitalization of borrowing costs. We judge 3Q14 results to be marginally above expectations, driven by stronger-than-anticipated profit margins from the Esplanade. 

Raising FV estimate from S$6.95 to S$7.18
In Sep 2014, the group launched Seventy St Patrick’s and achieved a decent take-up rate with 59% of total units sold (110 sold out of 186 total units) as at end Sep 2014. The median price achieved was S$1.6k psf, which was in line with our expectations. The group had acquired three land sites over the year – two in Singapore at Upper Paya Lebar and Prince Charles Crescent and one in Bishopsgate, London – and we understand that the the Upper Paya Lebar condominium project will likely be launched in 1Q15. In addition, the One KM retail mall in Katong is expected to have its official opening on 30 Nov 2014. The group continues to hold a strong balance sheet with 35% gearing and S$276.1m in cash and bank balances. Maintain BUY on UOL. We update our model for latest valuations of listed holdings and project ASPs, and our fair value estimate rises from S$6.95 to S$7.18 (20% discount to RNAV).

Golden Agri-Resources

OCBC on 13 Nov 2014

Golden Agri-Resources (GAR) is probably seeing its worst set of results since 1Q09, with reported NPAT plunging 86% YoY (-84% QoQ) to just US$4.4m in 3Q14, despite revenue rising 17% YoY (-10% QoQ) to US$1844.1m. According to management, the main drag again came from its Oilseeds segment, which turned in a negative EBITDA of US$18m, hit by continued losses at its China crushing facilities. As such, 9M14 NPAT slipped 28% to US$135.5m; core earnings fell nearly 14% to US$175.7m, meeting just 57% of our full-year estimate. GAR declared an interim dividend of 0.408 S cent, versus 0.585 S cent for 9M13. Accounting for the sharp miss in 3Q14 and potentially a disappointing 4Q14, we see the need to slash our FY14 core earnings by 28% (also cutting our FY15 by 19%). Hence even as we push out our 13.5x valuation peg from blended FY14/15F EPS to FY15F EPS, our fair value slips from S$0.48 to S$0.44. Downgrade to SELL.

Worst showing since 1Q09
Golden Agri-Resources (GAR) is probably seeing its worst set of results since 1Q09, with reported NPAT plunging 86% YoY (-84% QoQ) to just US$4.4m in 3Q14; this despite revenue rising 17% YoY (-10% QoQ) to US$1844.1m. But if we add back forex losses of US$29.3m and exclude one-off disposal gain of US$7.6m, earnings would have been around US$26m; which is still down 28% YoY, also 47% QoQ. According to management, the main drag again came from its Oilseeds segment, which turned in a negative EBITDA of US$18m, hit by continued losses at its China crushing facilities. As a result, 9M14 NPAT slipped 28% to US$135.5m; core earnings fell nearly 14% to US$175.7m, meeting just 57% of our full-year estimate. GAR declared an interim dividend of 0.408 S cent, versus 0.585 S cent for 9M13.

Likely another harsh quarter ahead
While ASPs for CPO appear to be stabilizing around US$828/ton, GAR notes that CPO production is likely to not grow as fast in 4Q14 as some of its plantations are starting to show signs of tree stress from the drought earlier in the year. Management also warns that it may see some fair value losses from biological assets (but this has no impact on our core estimates). More worrying is its China crushing operations - GAR expects to see losses although it has taken steps to reduce utilisation to stem the red ink, as it may need to endure another quarter of high cost feedstock. And as feared, inventory rebounded back to 550k tons in 3Q14, versus 456k ton in 2Q14.

Revert to SELL with S$0.44 FV
Accounting for the sharp miss in 3Q14 and potentially a disappointing 4Q14, we see the need to slash our FY14 core earnings by 28% (also cutting our FY15 by 19%). Hence even as we push out our 13.5x valuation peg from blended FY14/15F EPS to FY15F EPS, our fair value slips from S$0.48 to S$0.44. Downgrade to SELL.