Thursday 25 June 2015

Singapore Press Holdings

UOBKayhian on 23 June 2015

FY15F PE (x): 23.4
FY16F PE (x): 23.4

SPH’s advertising revenue contraction appears to be tapering off. Our page monitor of The Straits Times points to an adspend contraction of 2% yoy in 3QFY15 (2QFY15: Reported -9% yoy). While we do not see any near-term share price catalysts, the annual dividend yield of 4.4% remains decent. Maintain HOLD. Target price: S$4.20. Entry price: S$4.00 and below. Focus is on property initiatives. As the media business remains a mature business, we expect SPH to rein in costs and intensify its search for new business initiatives. Seletar Mall – a 70:30 JV between SPH and United Engineers – obtained Temporary Occupation Permit (TOP) on 28 Oct 14 and opened its doors to shoppers on 28 Nov 14. The four storey family-oriented mall houses more than 130 brands and has a diverse mix of anchor tenants including premium supermarket FairPrice Finest, cineplex Shaw Theatres, food court Foodfare, Japanese casual clothing company UNIQLO, ladies-only fitness centre Amore Fitness & Boutique Spa and department store BHG. Given that the media business remains as a mature business, we expect SPH to rein in costs and intensify its search for new business initiatives. Maintain HOLD. Our target price of S$4.20 is based on a SOTP valuation. Our recommended entry price is S$4.00 and below.

DBS Group Holdings

UOBKayhian on 24 June 2015

FY15F PB (x): 1.3
FY16F PB (x): 1.2

DBS is able to weather any turbulence brought about by the normalisation of US interest rates as developed markets, such as Singapore and Hong Kong, account for 82% of its total income and 65% of total loans. Loan growth has decelerated but margins should expand in 2Q15. Maintain BUY. Target price: S$25.08. DBS would be the most resilient and better able to weather any turbulence brought about by the normalisation of US interest rates. Developed markets, such as Singapore and Hong Kong, account for 82% of its total income and 65% of total loans. Prime beneficiary of higher interest rates in Singapore. UOB Global Economics & Markets Research forecasts 3-month SIBOR to reach 1.30% at end-15 (previous: 1.0%). We estimate a 1% increase in interest rates would improve DBS’s NIM by 10bp to 1.78% and improve ROE by 0.6ppt to 11.3%. Maintain BUY. Our target price of S$25.08 is based on P/B of 1.56x, derived from the Gordon Growth Model (ROE: 11.3%, required return: 7.8% and constant growth: 1.5%).

Ezra Holdings

UOBKayhian on 25 June 2015


FY15F PE (x): 18.4
FY16F PE (x): 20.3

Ezra’s cash call has lifted its refinancing risks. However, its high gearing of 1.27x amidst the current industry downturn and a high cost structure make the situation challenging. A possible sale & leaseback of the Lewek Constellation would unlock US$200m in equity to bolster internal liquidity. On the flipside, the high vessel dayrate will add to cost burden. Subsea outlook has deteriorated. We cut FY15/FY16 earnings estimates by 35- 47%. Maintain HOLD with cum-rights target price of S$0.31. Lowering FY16-17 earnings forecasts on lower subsea turnover. We adjust our earnings to account for lower activity in Ezra’s subsea segment. We now project a subsea turnover of US$800m each for FY16 and FY17, from S$1.3b and S$1.5b for 2016 and 2017 previously. We maintain our projected turnover of US$1b for 2015. Current subsea orderbook is about US$1b. We cut our net profit forecasts for FY16 and FY17 to US$36m and US$35m from US$55m and US$66m. Our net profit forecast for FY15 remains the same at US$40m. Maintain HOLD with revised cum-rights target price of S$0.31 (ex-all S$0.175). We revise our P/B valuation yardstick to 0.3x 2016F P/B from 0.5x 2016F previously given the marked deterioration of the subsea industry in the last quarter. This translates to a revised cum-rights target price of S$0.31 (ex-all S$0.175) from S$0.54 previously. Ezra’s 1-year forward P/B bottomed at 0.26x during the Great Recession in 2008/09 which saw Brent oil price falling below US$40/bbl. The OSV-owner segment bottomed at 1-year forward P/B of 0.5x during the crisis.

CSE Global Limited

OCBC on 19 June 2015

CSE Global Limited (CSE) recently disposed its 66% stake in Power Diesel (PD), for ~S$15.5m. We estimate that PD contributes annual revenue of about S$18-20m and annual PATMI of ~S$2m. Going forward, these contributions will cease following the completion of the disposal on 12 Jun. As at 31 Mar, the book value of PD is ~S$8.8m, while the net consideration from the sale after deducting all transaction costs and fee is ~S$11.0m. This results in a net gain of ~S$2.2m and will be recorded in 2Q15. Even without contributions from PD going forward, we do not expect any change in CSE’s earnings outlook for FY15 and FY16. In fact, post disposal, we think the increase in cash holdings gives CSE even greater financial ability to acquire companies to further grow its business. As we were conservatively forecasting for flat FY15 PATMI and a modest 5% growth for FY16, we opt to keep our forecasts unchanged. Supported by a decent FY15 dividend yield of 4.4%, maintain HOLD with the same FV estimate of S$0.62.

Net gain of ~S$2.2m arising from disposal of subsidiary
CSE Global Limited (CSE) recently disposed its 66% shareholding in a subsidiary, Power Diesel (PD), for ~S$15.5m. PD is mainly involved in the business of inspection, maintenance, repair and overhaul of diesel and marine engines/equipment on onboard vessels while CSE’s key focus is on system integration works on offshore platforms. We estimate that PD contributes annual revenue of about S$18-20m and annual PATMI of ~S$2m. Going forward, these contributions will cease following the completion of the disposal on 12 Jun. As at 31 Mar, the book value of PD is ~S$8.8m, while the net consideration from the sale after deducting all transaction costs and fee is ~S$11.0m. This results in a net gain of ~S$2.2m and will be recorded in 2Q15. However, note that the net gain at completion date (12 Jun) would be lower as CSE continues to account for profits from PD for the period up to the completion date.

No change in earnings outlook; stronger balance sheet
Even without contributions from PD going forward, we do not expect any change in CSE’s earnings outlook for FY15 and FY16. Management’s previous guidance of flat to 5% growth in FY15 PATMI remains unchanged. We believe management’s strategy is to look for and secure smaller projects amidst capital expenditure reduction of big projects by the big players is likely to help cushion the impact during this difficult period in the oil & gas (O&G) industry. A check with management also gives us the confidence that CSE is on track in terms of meeting its guidance. In fact, post disposal, we think the increase in cash holdings gives CSE even greater financial ability to acquire companies to further grow its business.

Keep forecasts unchanged; maintain HOLD
While we view this disposal positively as it results in deeper pockets for M&A activities, we prefer to remain cautious given the uncertain outlook of the O&G industry. As we were conservatively forecasting for flat FY15 PATMI and a modest 5% growth for FY16, we opt to keep our forecasts unchanged. Supported by a decent FY15 dividend yield of 4.4%, maintain HOLD with the same FV estimate of S$0.62.

CapitaLand

OCBC on 23 June 2015

CapitaLand recently announced that it has agreed to wholly acquire a shopping mall in Japan for JPY3.05b (S$33.2m) in cash. The price reflects fair value, in our opinion, and we assign no accretion to RNAV on this acquisition. While China and Singapore remain core markets for the group’s retail mall business, we believe the addition of this asset is a low-risk proposition. CAPL also successfully completed the issue of S$650m in convertible bonds (due 2025) earlier this month. CAPL intends to use the proceeds to refinance the repurchases of the outstanding convertible bonds and we like that management is actively refinancing its shorter duration debt in the window before a likely Fed rate hike in 2H15, while the group’s net gearing and interest coverage ratio remains at a prudent 57% and 7.2x, respectively. Maintain BUY with an unchanged fair value estimate of S$4.07.

Acquires Vivit Minami Funabashi shopping mall in Japan
CapitaLand (CAPL) recently announced that it has agreed to wholly acquire, through the CMA Japan Trust, the entire interest of a shopping mall in Japan for JPY3.05b (S$33.2m) in cash. The mall, Vivit Minami Funabashi (Vivit), is located in Funabashi city in the Chiba Prefecture, Greater Tokyo, Japan. Vivit is currently part of a portfolio of assets held by CapitaMalls Japan Fund Pte Ltd, which is managed by a subsidiary of the group and in which CAPL has an interest of 26.29%. We understand the mall was independently valued at JPY10.5b (S$114.2m) by Cushman & Wakefield as at end FY14, and the purchase consideration was derived after accounting for the liabilities of the holding entities. The price reflects fair value, in our opinion, and we assign no accretion to the group’s RNAV on this acquisition. While China and Singapore remain core markets for the group’s retail mall business, we believe the addition of this asset, which the group is already familiar with, is a low-risk proposition that will complement the retail portfolio and provide an incremental source of stable income. The acquisition is expected to be completed on 30 June 2015.

Successfully issued S$650m in convertible bonds due 2025
In addition, the group also successfully completed the issue of S$650m in convertible bonds earlier this month. The newly issued CB has a coupon of 2.8% and is due in 2025, and the group intends to use the proceeds to refinance the repurchases of the outstanding S$1.2b 2.875% CB due 2016 and S$1.3b 3.125% CB due 2018. We like that management is actively refinancing its shorter duration debt in the window before a likely Fed rate hike in 2H15, while the group’s net gearing and interest coverage ratio remains at a prudent 57% and 7.2x, respectively. Maintain BUY with an unchanged fair value estimate of S$4.07 (25% discount to RNAV).

Healthcare Sector

OCBC on 22 June 2015

While our local bourse has been rather lacklustre, the healthcare sector has been largely rewarding as the FTSE ST Health Care Index (FSTHC) has delivered a 36% gain YTD compared to -2.1% by the STI benchmark. However, broad-based valuations currently seem stretched, as the index is trading above 1 s.d. of its two-year historical forward P/E average with a six-year historical high forward P/E of 26.5x. We keep our NEUTRAL stance on the sector as we think such premium valuations are warranted only to a certain extent, while a deeper look into specific companies suggest growth stories may already be priced in and a potential correction could be due. An overview of the subsectors, namely hospital players as well as healthcare equipment manufacturers, suggests that 1) higher expenses and near term margin pressure may be incurred in the near term during gestation stage, and 2) expectations could be running ahead of fundamentals.

Rewarding sector but valuations seem stretched 
While our local bourse has been rather lacklustre, the healthcare sector paints a starkly different picture as the FTSE ST Health Care Index (FSTHC) has delivered a 36% gain YTD compared to -2.1% by the STI benchmark. The often-quoted supportive long-term outlook for healthcare plays amid uncertain times has made them a comparably rewarding haven for investors. However, we note that broad-based valuations currently seem stretched as the index is trading above 1 s.d. of its two-year historical forward P/E average with a six-year historical high forward P/E of 26.5x. We keep our NEUTRAL stance on the sector as we think such premium valuations are warranted only to a certain extent, while a deeper look into specific companies suggest growth stories may already be priced in and a potential correction could be due.

Clear growth story for hospital players but margin pressure in near-term
We had previously covered several healthcare companies’ plans to expand in China given the attractive growth prospects, but also highlighted operational risks and early stage of plans as caveats for a more optimistic stance. Under our coverage, share price for Raffles Medical Group [HOLD, $4.17] has had a largely sustained run-up since its confirmation on a Shanghai Hospital, which is slated for completion by mid-18. While this is a positive development, in the meantime, its 1Q15 results showed that higher expenses such as staff costs would likely be incurred due to other upcoming projects (Holland Village project to be ready by 1Q16 and Raffles Hospital extension by 1Q17). Peers such as IHH Healthcare Berhad [non-rated] could also face similar near-term pressures on operating margins due to on-going expansion plans in Malaysia and Turkey. With both stocks trading at more than 1 s.d. above their two-year historical forward P/E average, current valuations are becoming less attractive. 

Are expectations running too fast? 
We reiterate that a fundamental growth story would take time to materialise for Biosensors International Group [SELL, $0.60]. In addition, Boston Scientific’s Synergy stent may also take the lead, as it could be the first resorbable stent to receive FDA approval by end-15. The recent MERS outbreak in South Korea and depreciation of MYR against the USD have also led attention to healthcare suppliers, as Riverstone, UG Healthcare (UGHC) and Medtecs International [non-rated] have seen their share price rise to new levels, gaining 65%, 31%, 23% YTD respectively. We think the above factors are temporary while the companies’ own growth story may be priced in. As such, there could be some potential selloff ahead as peers like Hartalega have showed a hint of price correction.

Golden Agri-Resources

OCBC on 17 June 2015

Golden Agri-Resources (GAR) could continue to see a somewhat muted near-term outlook; this as the recent rally in CPO (crude palm oil) prices is expected to run out of steam, damped by falling demand for palm oil after Ramadan and also higher production as the industry heads into the peak production period. Furthermore, with the prices of substitute vegetable oils like corn and soy likely to fall further in the coming months due to oversupplied conditions, we fear that this could also weigh on substitution demand for palm oil. Having said that, current El Nino phenomenon is expected to bring much drier conditions to Indonesia, which could affect CPO production. Still, experts believe that any impact is likely to come later (probably end 2015 or early 2016). As such, we maintain our SELL rating on GGR with an unchanged S$0.35 fair value (based on 13.5x FY15F EPS).

CPO price rally seen fizzling out
According to a Reuters report, the recent rally in CPO (crude palm oil) prices to a 3-month high could be running out of steam and has stubbornly stayed below this year’s peak of MYR2400/ton (hit in early Mar); this as the buying ahead of the Muslim festival of Ramadan peters out and the industry heads into the peak production period. But we also noticed that the USD has appreciated 6% against the MYR since end Apr. Another reason we note could be due to the continued softening in the prices of substitute vegetable oils like soy and corn, no thanks to the bumper harvests in the US and South America. 

Brazil corn crop could worsen market glut
In a separate Bloomberg report, the upcoming corn harvest from Brazil is expected to be bigger than ever, where market watchers believe it could flood an already oversupplied global corn market and depress prices further. We note that the corn futures are back to near 5-year lows (corn prices have slumped 24% in the past year). Meanwhile, the price differential between soy and CPO prices has also narrowed significantly to below US$300/ton, thus reducing the substitute demand for CPO. And as long as the differential stays below the near-15 year average of US$376/ton, it could continue to weigh on CPO demand.

El Nino effects are more pronounced this year
Having said that, much drier conditions are expected with the coming of the El Nino phenomenon in Indonesia, with some experts even saying the effects could last well into 2016. While some plantation stocks have run up on this news, any impact on production is likely to come later; this as it usually takes as long as 6-9 months for the tree stress to show up. Hence, we believe that unless we see a strong recovery in demand, the near-term outlook for Golden Agri-Resources (GAR) remains somewhat muted. As such, we maintain our SELL rating on the stock with an unchanged fair value of S$0.35 (still based on 13.5x FY15F EPS).

Mapletree Greater China Commercial Trust

OCBC on 16 Jun 2015

Mapletree Greater China Commercial Trust (MGCCT) announced its proposed acquisition of a 100% interest in Sandhill Plaza for a purchase consideration of CNY1,888.1m (~S$412.2m). This translates into an initial NPI yield of 3.85%. Sandhill Plaza is a premium quality business park situated within the Zhangjiang Hi-Tech Park in Shanghai. Management intends to fund this acquisition with existing banking facilities. We expect positive rental reversions ahead, as the current passing rent at Sandhill Plaza is ~10% below the average rental of its Comparable Basket. Management is targeting to grow the NPI yield of this asset to above 5%. We raise our FY16 and FY17 DPU projections by 2.4% and 3.1%, respectively, and lift our fair value estimate from S$1.07 to S$1.11. Coupled with MGGCT’s recent share price correction, we now see value emerging. The stock also offers a prospective FY16F distribution yield of 7.1%. Upgrade from HOLD to BUY.

Proposed acquisition of Sandhill Plaza Business Park in Shanghai
Mapletree Greater China Commercial Trust (MGCCT) announced that it has entered into a conditional sale and purchase agreement with an unrelated third party vendor to acquire a 100% interest in Sandhill Plaza for a purchase consideration of CNY1,888.1m (~S$412.2m). This translates into an initial NPI yield of 3.85%. Sandhill Plaza is a premium quality business park with a total GFA of 83,801.48 sqm. It is situated within the mature northern zone of the Zhangjiang Hi-Tech Park, which is part of the Free Trade Zone in Shanghai. Sandhill Plaza also has good connectivity, as it is within walking distance to a subway line and within 30-minutes’ drive to Pudong International Airport and Lujiazui CBD. Management intends to fund this acquisition with existing banking facilities. Thereafter, MGCCT’s gearing ratio is expected to increase from 36.2% to 40.6%. 

Potential for rental growth
On a pro forma basis, DPU for the 12 months ended 31 Mar 2015 would remain relatively flat (from 6.543 S cents to 6.55 S cents) after this acquisition. Management clarified that the pro forma figures are not reflective of the potential of the asset, as operationally, the property had not yet stabilised during that period, with an average occupancy of just 73%. As at 31 Mar 2015, Sandhill Plaza’s occupancy rate had improved to 96.2%. Major tenants include Broadcom, Disney and Borouge. Future growth would likely come from positive rental reversions, in our view, as the current passing rent at Sandhill Plaza (~CNY4.82 psm per day) is ~10% below the average rental of its Comparable Basket (Premier Grade A, higher quality specs buildings). Management is targeting to grow the NPI yield of this asset to above 5%.

Recent share price weakness presents buying opportunities
We incorporate this acquisition in our model, and raise our FY16 and FY17 revenue/DPU projections by 5.7%/2.4% and 7.6%/3.1%, respectively. Correspondingly, our fair value estimate is lifted from S$1.07 to S$1.11. Coupled with MGGCT’s recent share price correction, we now see value emerging. The stock also offers a prospective FY16F distribution yield of 7.1%. Upgrade from HOLD to BUY.

Thursday 18 June 2015

TAT HONG HOLDINGS LTD

UOBKayhian on 18 June 2015

 (TAT SP) China’s Tower Crane Business Driving The Company
VALUATION
  • Tat Hong (TAT) is trading at 0.5x FY15 P/B and 66.9x FY15 PE. 
FINANCIAL HIGHLIGHTS 
  • FY15 net profit fell 85.1% to S$4.9m mainly due to non-cash goodwill impairment of S$30.8m on its Australian entities. Excluding the impairments, core net profit would have been S$35.7m, similar to the S$35.8m achieved in FY14. Revenue fell 11% yoy to S$608.6m as all business segments except tower crane operations booked lower income. Revenue from crane rental business fell 9% yoy to S$237.6m due to the completion of several projects in Singapore and Australia. Tower crane rental business racked up a 8% yoy growth in revenue to S$96.6m as a result of continued participation in infrastructure, large commercial and power plants projects. Gross profit fell 14% to S$212.1m and gross profit margin deteriorated 1.1% to 34.8% (FY14: 35.9%), attributable to lower utilisation rates, higher provision for stock obsolescence and crane repositioning costs incurred in Australia. 
  • Year of balance sheet strengthening. Tat Hong managed to unlock S$89.1m in FY15 from the disposal of properties and equipment and from the divestment of noncore assets. After repaying loans and other financial obligations, net gearing declined to 0.77x, down from 0.87x a year earlier. The company also generated a strong free cash flow of S$115.1m which grew its cash and cash equivalents to S$93.3m as compared with S$58.6m in FY14. 
OUR VIEW
  • Headwinds likely to continue in Australia. We expect the weakness in the Australia market to impact performances of the crane rental, general equipment and distribution businesses going forward. According to the Australian Government’s update on the Resources and Energy Projects, the downturn in commodity prices may cause mining companies to reduce exploration and capital development expenditure. With the recent completion of the two large LNG projects in Queensland, collectively worth AUD$39b, the value of committed projects is also set to decline as new projects are being increasingly delayed due to adverse market conditions. 
  • China could be the only bright spot. The Chinese government is likely to increase infrastructure investment to spur the economy and thus drive demand for Tat Hong’s tower cranes. This is the only segment that achieved revenue growth in FY15 (8% yoy) and saw a doubling of reportable segmental profit of S$22.1m in FY15 as compared with S$10.6m in FY14. Tat Hong also added 25 new tower cranes in the year to 934 units and to 188,399 tonne-metres.
  • Announced a spin-off of its China tower crane business Although it remains at an exploratory stage, Tat Hong believe that the listing of the business on an approved exchange will provide access to additional source of funding to capitalise on growth opportunities in China.

First Resources

UOBKayhian on 18 June 2015

FY15F PE (x): 16.4
FY16F PE (x): 12.9

Reiterate BUY on FR for its good track record of delivering good productivity, it being a beneficiary of the new policies in Indonesia and high leverage on CPO price movements. Based on our re-rated valuation, FR offers 59% upside from its current share price level if a strong El Nino occurs. Its FFB production growth is on track to meet our expectation of 9-11% for 2015. Going forward FR will slow down in new planting activities and focus on sustainability. Target price: S$2.40. Maintain BUY with a lower target price of S$2.40, based on 15x 2016F PE. We like FR as it is a beneficiary of Indonesia’s new export levy and biodiesel policies. It also has a good track record of delivering better-than-industry FFB yield and OER. In the event of El Nino, its sector valuation would usually expand closer to 1SD above its mean valuation. Based on a rerated valuation, the implied target price is S$3.19, and there will be 59% of potential upside to FR’s share price.

Tuesday 16 June 2015

Silverlake Axis

UOBKayhian on 12 Jun 2015

FY15F PE (x): 23.4
FY16F PE (x): 20.3

Why did the IPTs arise? As of FY14, revenue from new Interested Person Transactions (IPT) mandates and ancillary transactions of RM120.5m represented 24% of full-year revenue. Management guided that the IPTs arose due to the following: a) SILV’s chairman, Mr Goh Peng Ooi, has private entities which provide IT modules and services that SILV may not want to specialise in. For example, instead of buying and developing SILV’s capabilities to serve the stockbroking business, the group uses products and services from the private entities of Mr Goh, b) Mr Goh’s private entities are resellers of SILV’s software. An example would be the Middle East and North Africa (MENA) markets where SILV has no intention on building a marketing team to venture into. However, Mr Goh’s private entities would conduct business in those markets, and c) Mr Goh’s private entities purchase SILV’s software for long-term R&D related activities or for testing of new concepts where SILV might not be interested to be part of. Fundamentals remain intact. SILV’s business model remains unchanged, deriving more than 40% of revenue from its solid recurring segment (maintenance and enhancement services). As of 9MFY15, the group achieved operating margin of 66.6%, higher than peers’ average of 46.3%. Essentially, the group continues to generate cash and pays out consistent dividends. We estimate an operating cash flow of RM325m in FY16. Maintain BUY and DCF-based target price of S$1.66. SLV remains on our BUY list for its superior business model (with high recurring earnings) and strong cash flows. Looking from a longer-term perspective, we think SILV was oversold and this presents investors with a solid buying opportunity

M1

UOBKayhian on 15 June 2015

FY15F PE (x): 17.2
FY16F PE (x): 16.7

Keeping abreast with the latest technology. M1 has completed the upgrade of its 4G network to Long Term Evolution-Advance (LTE-A) in Dec 14, doubling download speed to 300Mbps using carrier aggregation. The network supports voice-over-LTE (VoLTE), which provides faster connection and better quality of voice calls. M1 has also deployed 4G small cells to improve data throughput within buildings to the same level as outdoor. Out of the quagmire but not out of the woods. M1 remains susceptible to regulatory risks in Singapore, with mobile accounting for 81.5% of its service revenue in 1Q15. Nevertheless, we are on longer bearish on M1 after share price corrected 18% post announcement of its 1Q15 results. Upgrade to HOLD. Our target price is S$3.60, based on DCF (required rate of return: 7.2%, terminal growth: 1.0%).

Thai Beverage PLC

OCBC on 15 June 2015

We witnessed Bank of Thailand (BOT) had maintained its policy rate at 1.5% for the second successive month, after having made two rate cuts in Mar and Apr this year. While Thailand saw a slowdown in its economy during the first four months, BOT expects a gradual improvement to growth over 2015, driven by increased disbursement of public investment as well as tourism. They have also deemed the risk of deflation to be low at the moment. Recently, speculation about an imminent coup arose, but we have previously commented that the group’s spirits business have shown to be broadly resilient despite the political uncertainties in Thailand. The outlook for alcoholic segments also remains positive, thus we continue to believe that the spirits and beer segments will help drive Thai Bev’s topline and bottomline performance. As there is still sufficient upside at current price levels, we maintain our BUY rating with fair value estimate of S$0.83.

Growth expected to be firm in Thailand for the year
Bank of Thailand (BOT) kept its policy rate at 1.5% for the second successive month, following two rate cuts in Mar and Apr this year. Thailand’s economy slowdown during the first four months was attributable to lackluster private consumption and export sentiments. BOT believes a gradual improvement to growth will be underpinned by increased disbursement of public investment as well as tourism. On another note, consumer prices fell for five straight months, as it fell 1.3% YoY for May according to the Ministry of Commerce. But the risk of deflation was deemed to be low as headline inflation is expected to pick up in 2H15 on higher consumption and rising food prices. BOT will keep an accommodative monetary policy stance to allow further rate cuts if necessary. OCBC Treasury Research expects Thailand’s GDP to grow by 3.5% this year, vs. 0.7% in 2014. 

Alcoholic segments likely to hold steady
While recent speculation about an imminent coup was since denied, it has been widely opined that long-term political stability in Thailand still remains elusive. Looking back, we had commented that the group’s spirits business have shown to be broadly resilient despite the political uncertainties in Thailand. Given the broader economy’s growth this year, EIU data stated that average growth for beer and spirits sales will be positive. Thus we continue to believe that the group’s alcoholic segments will help to drive topline and bottomline growth. Expansion through non-alcoholic products is also on-going, with 100Plus and Jubjai as some of the latest offerings. According to EIU, demand for ready-to-drink tea could potentially see rapid growth in Thailand, which has positive implications for NAB’s sales albeit profitability will still take a while to return. We keep in mind that overall results will typically taper off on a quarterly basis, but we think performance could improve YoY. 

Maintain BUY
As there is still sufficient upside at current price levels, we maintain our BUY rating with fair value estimate of S$0.83.

Aviation Sector

OCBC on 12 June 2015

Middle East Respiratory Syndrome (MERS), which is caused by a coronavirus from the same family as SARS, and first identified in 2012, is threatening to deal yet another blow to the aviation industry. Just this morning, South Korea reported four new cases of MERS, taking the total to 126 cases (with ten fatalities), and is also the country facing the largest outbreak outside of Saudi Arabia. We believe MERS will certainly affect the aviation industry, especially the airline businesses, given that MERS is both deadly and contagious. In view of various responses from both public authorities and commercial businesses, we believe the impact from the outbreak is likely to be short-term in nature and contained at South Korea. On these reasons, we opt to keep our forecast unchanged for both SIA [HOLD; FV: S$11.59] and Tigerair [SELL; FV: S$0.30] for now. However, in view of weaker global economic growth as World Bank on 10 Jun cuts its forecast for 2015 from 3.0% to 2.8% as well as persistent overcapacity reasons, maintain UNDERWEIGHT on aviation sector.

MERS and the affected countries
Severe Acute Respiratory Syndrome (SARS) gave global aviation industry a huge blow back in 2003. Today, Middle East Respiratory Syndrome (MERS), which is caused by a coronavirus from the same family as SARS, and first identified in 2012, is threatening to deal yet another blow to the aviation industry. There is currently no cure or vaccine for MERS, which has a fatality rate of around 35%, according to World Health Organization (WHO). Just this morning, South Korea reported four new cases of MERS, taking the total to 126 cases (with ten fatalities), and is also the country facing the largest outbreak outside of Saudi Arabia. Thousands are still in quarantine while the number of schools in South Korea closing rose to more than 2000, including 22 universities. Closer to home, Hong Kong also yesterday reported four suspected cases of MERS at clinics after it issued a “red alert” advisory (defined as significant threat) on 9 Jun against non-essential travel to South Korea. Within the Asia-Pacific region, other countries have only recommended travelers to take precautionary measures.

Impact mostly on South Korea
We believe MERS will certainly affect the aviation industry, especially the airline businesses, given that MERS is both deadly and contagious. However, at the present moment, we think that the impact will still be very much localized at South Korea. Also, WHO has yet to recommend any curbs on travel or trade as a result of the MERS outbreak in South Korea. According to an article by The Wall Street Journal, the South Korea government stated that about 54,400 foreign tourists (~7% of total foreign visitors over an equivalent period last year) had canceled their trips to South Korea as of 8 Jun, since MERS was first confirmed. Even the CEO of Cathay Pacific Airways Ltd made remarks stating a drop in bookings from Hong Kong to cities of South Korea in light of the outbreak. Back home, Singapore Airlines (SIA) announced 10 Jun that it will waive cancellation fees and administration fees for refunds, rebooking and rerouting for customers holding tickets on SIA’s flights to or from Seoul’s international airport. SIA’s fully owned Scoot will also allow passengers to rebook travel dates or reroute to other destinations free of charge, subject to payment of fare differences. 

Maintain UNDERWEIGHT on Aviation Sector
In view of various responses from both public authorities and commercial businesses, we believe the impact from the outbreak is likely to be short-term in nature and contained at South Korea. On these reasons, we opt to keep our forecast unchanged for both SIA [HOLD; FV: S$11.59] and Tigerair [SELL; FV: S$0.30] for now. However, in view of weaker global economic growth as World Bank on 10 Jun cuts its forecast for 2015 from 3.0% to 2.8% as well as persistent overcapacity reasons, maintain UNDERWEIGHT on aviation sector.

Thursday 11 June 2015

Noble Group

OCBC on 11 Jun 2015

Noble Group (Noble) recently saw a sharp pullback in its share price to hit a six-year low of S$0.64; this as sentiment is likely weighed by the on-going uncertainty over its accounting practices as well as the weaker outlook for commodities in general. Although there was a spate of insider and institutional buying over the past two weeks, it did little to prop up the share price. And with the cautious outlook likely to persist, we now reduce our valuation peg on the stock from 13.5x to 8x (1 SD below the 10-year average) FY15F EPS, and this reduces our fair value from S$1.05 to S$0.61. We are retaining our HOLD rating as current valuations are not pricey on a historical basis as Noble now trades at just 0.7x book value.

Hits 6-year low
Noble Group (Noble) recently saw a sharp pullback in its share price to hit a six-year low of S$0.64; this could be in belated response to an “open letter from investor Michael Dee, who continues to question the company’s business model and accounting practices. As we had articulated in our previous reports, we believe that it will still take time for the company to regain the market’s confidence even though it has made efforts to improve transparency and disclosures in the wake of the negative reports from Iceberg Research and Muddy Waters. 

Also likely weighed by weaker commodities outlook
But more importantly, we believe that the recent pullback could be due to a weaker outlook for commodities, which comes on the heels of a “new normal” for China i.e. slower economic growth. Also adding to the volatility is the growing uncertainty over the direction of crude oil prices – note that Noble has a significant exposure to the energy market (its Energy segment made up 84% of 1Q15 revenue).

Recent buying fails to prop up share price
Also notable is the spate of insider and institutional buying interest over the past two weeks. From company filings, Prudential Singapore increased its stake from 6.9871% to 7.2019% after buying 14.481m shares at S$0.787 each on 29 May; chairman Richard Elman bought 3m shares at S$0.7574 each to up his stake from 21.0154% to 21.0599% on 2 Jun. Interestingly, Invesco first upped its stake from 4.99178% to 5.00935% on 2 Jun (+1.184m shares at S$0.763 each) and then reduced it back to 4.81905% (-12.824m shares at S$0.7276 each) the next day.

Reducing FV to S$0.61
In the wake of the more cautious outlook, we now reduce our valuation peg on the stock from 13.5x to 8x (1 SD below the 10-year average) FY15F EPS, and this reduces our fair value from S$1.05 to S$0.61. We are retaining our HOLD rating as current valuations are not pricey on a historical basis as Noble is currently trading at 0.7x book value.

Venture Corp

OCBC on 10 June 2015

According to the World Semiconductor Trade Statistics (WSTS), the semiconductor market is forecasted to maintain steady growth of 3.4% in 2015 to US$347b, 3.4% in 2016 to US$359b and 3.0% in 2017 to US$370b. As highlighted in our previous report, we maintain our view that Venture Corporation Ltd’s (VMS) next wave of growth is likely to come from its Test & Measurement, Medical & Life Science and Others, which makes up a significant ~32% of its total revenue. While we do not expect a significant jump in revenue, we think the growth from particularly the Medical and Life sciences (ML) segment will be steady and meaningful. With a customer base that is likely to comprise of large MNCs in its ML segment, we think VMS will benefit from the increased IT spending by healthcare providers and through deeper collaboration with its customers. We keep our forecasts unchanged as this trend is within our expectation. However, the recent correction presents buying opportunity with an attractive FY15F dividend yield of 6.5%. Hence, we upgrade to BUY on VMS, with the same FV of S$8.41.

Semiconductor industry forecasted to grow steadily
According to the World Semiconductor Trade Statistics (WSTS), the semiconductor market is forecasted to maintain steady growth of 3.4% in 2015 to US$347b, 3.4% in 2016 to US$359b and 3.0% in 2017 to US$370b. The growth in 2015 will be largely driven by smartphones and automotive with the Asia-Pacific (7.0%) and Americas (3.7%) regions in the front seats while Europe (-3.6%) and Japan (-9.5%) is forecasted to show decline given their weaker currencies against USD. Beyond that, all regions are expected to record positive growth rates in 2016 and 2017. In addition, technology market watcher, Gartner, released encouraging 1Q15 data on worldwide server revenue, which grew 17.9% YoY to US$13.4b on the back of a 13.0% growth in shipments to 2.7m units.

Medical/Life sciences segment to drive growth
As highlighted in our previous report, we maintain our view that Venture Corporation Ltd’s (VMS) next wave of growth is likely to come from its Test & Measurement, Medical & Life Science and Others, which makes up a significant ~32% of its total FY14 revenue. While we do not expect a significant jump in revenue ahead, we think the growth from particularly its Medical and Life science (ML) segment will be steady and meaningful. From our checks, one of VMS’ key ML customers is U.S. based Illumina, which VMS worked with to launch a relatively low-cost desktop DNA sequencer in 2014. Notably, Illumina posted a strong set of 1Q15 results, and stated in their press release guiding for ~20% total revenue growth for FY15, which we expect VMS to benefit from it. Furthermore, according to Gartner, healthcare providers’ spending on IT products and services are expected to grow 7.0% to US$1.2b in India and 0.8% to US$2.9b in Middle-East and North Africa. With a customer base more than just Illumina for its ML segment, we think VMS will benefit from these increased spending and through deeper collaboration with its customers.

Upgrade to BUY on recent correction
We keep our forecasts unchanged as this trend is within our expectation. However, the recent correction presents buying opportunity with an attractive FY15F dividend yield of 6.5%. Hence, we upgrade toBUY on VMS, with the same FV of S$8.41.

Tat Hong

OCBC on 9 June 2015

Local crane players such as Tat Hong, Tiong Woon and Hiap Tong Corporation have been facing declines in earnings. Tat Hong’s core market Australia has a persistent muted outlook while other peers’ key market Singapore remains challenging amid an oversupply situation. Tat Hong does seem to have some stability in other markets like Hong Kong, Thailand and Malaysia. The group’s tower crane rental business in China is the only business segment that grew over FY15 on the back of large commercial and power plant projects. Nonetheless, these companies are pushing for cost cutting measures to help tide them over tough times. On expectations for a stagnant year ahead, we have reduced our FV estimate for Tat Hong from S$0.63 to S$0.60 and we keep our HOLD rating. While there is a lack of catalysts, we keep in mind that the group is still exploring a potential spin-off of its tower crane rental business.

Key markets AU and SG for players drags growth
For local crane players such as Tiong Woon [non-rated], Singapore contributes more than 50% of their total revenue. As these companies have been facing declines in earnings, there is a general consensus on the challenging local scene, with Hiap Tong Corporation [non-rated] citing an oversupply of cranes and a slowdown in demand. For Tat Hong, its core market Australia contributes about 46% of the group’s revenue. A persistent muted outlook there is mainly attributable to a slowdown in economic growth and mining activity. 

Other markets provide some stability 
Certain markets seem to be relatively stable, such as Hong Kong and Thailand, wherein Tat Hong had maintained its level of crane rental revenue on the back of on-going projects. Tat Hong has had higher value infrastructure projects from Malaysia such as the Sabah Ammonia and Urea Plant. Forming 16% of total revenue, Tat Hong’s tower crane rental business in China remained the only segment that grew, although there was a slight 3% decline in revenue in 4QFY15 due to completion of projects and timing factor. Operations continue to be supported by large commercial and power plant projects. 

Cost cutting efforts to continue
Companies are pushing for cost cutting measures to help tide them over tough times. Tat Hong’s recently announced FY15 results was hit by a S$30.8m goodwill and asset impairment by the group’s Australian entities, albeit offset by gains on disposals (~S$26m) and foreign exchange gain (~S$11.1m). FY15 revenue was down 11% to S$608.6m and PATMI declined 85% to S$4.9m. Excluding one-offs, estimated core PATMI was at ~S$11m. The group intends to look at optimizing the mix and size of their fleet, as well as controlling the level of operating expenses. Net gearing had improved to 0.77x from 0.87x.

Maintain HOLD
On expectations for a stagnant year ahead, we reduce our fair value estimate from S$0.63 to S$0.60, based on 0.6x FY16F P/B, and keep our HOLD rating. While there is a lack of catalysts, we keep in mind that the group is still exploring a potential spin-off of its tower crane rental business.

Wednesday 10 June 2015

Telecommunications Sector

UOBKayhian on 10 June 2015

U-turn from SMRT. SMRT Corporation has announced its decision not to proceed to exercise its option to subscribe for shares in ConsisTel’s subsidiary OMGTEL, who is bidding to be the fourth mobile operator in Singapore. SMRT has reviewed its capital allocation priorities and decided not to make the passive investment. Management will continue to focus on its core business of rail engineering. The about-turn from SMRT highlights potential hiccups that MyRepublic and ConsisTel could encounter when raising funds in preparation for the upcoming spectrum auction. Not out of the woods. We believe the government intends to facilitate the entry of a fourth mobile operator. A new entrant would spur competition in the mobile market and consumers would benefit through more attractive pricing and innovative services. IDA has yet to release its assessment of the submissions to its original industry consultation. It has also not announced the framework for the upcoming spectrum auction, including qualifying criteria for new entrants. Maintain MARKET WEIGHT. We have to keep a close watch as events unfold. SingTel remains a safer bet and we are no longer bearish on M1.

Lippo Malls Indonesia Retail Trust

OCBC on 8 June 2015

Indonesia’s retail sales momentum remained solid, increasing 23.6% YoY in Apr, despite some uncertainties over its economic outlook. Lippo Malls Indonesia Retail Trust’s (LMIRT) recent 1Q15 results has reflected this positive retail sales trend, as its gross revenue and DPU grew 24.7% and 16.2% YoY to S$42.0m and 0.79 S cents, respectively. LMIRT has ample opportunities for inorganic growth ahead, as its sponsor Lippo Karawaci currently has 15 malls in the pipeline. Looking ahead, LMIRT believes the prospects for quality retail spaces in Indonesia remains bright over the next 12 months. Meanwhile, management has sought to reduce risks for unitholders, having hedged ~93% of its estimated net cash flows in IDR for the next two years. 100% of its borrowings are also on a fixed rate basis or hedged with interest rate swaps. We make no changes to our forecasts, HOLD rating and S$0.35 fair value estimate.

Indonesia’s retail sales momentum still solid
Despite some uncertainties over Indonesia’s economic outlook, the retail sales momentum remained solid, increasing 23.6% YoY in Apr, after growth of 10.9%-19.3% in Jan to Mar. Lippo Malls Indonesia Retail Trust’s (LMIRT) recent 1Q15 results has reflected this positive retail sales trend, as its gross revenue and DPU grew 24.7% and 16.2% YoY to S$42.0m and 0.79 S cents, respectively. In addition, rental reversions remained robust, coming in at 9.5%, while portfolio occupancy stood at 94.2%. LMIRT has ample opportunities for inorganic growth ahead, as its sponsor Lippo Karawaci currently has 15 malls in the pipeline. Lippo Karawaci has plans to expedite the development of its pipeline projects as well as asset enhancement projects in existing malls. 

Prudent capital management in place
Looking ahead, LMIRT believes the prospects for quality retail spaces in Indonesia remains bright over the next 12 months, as both local and foreign retail players are still active. The average asking base rent in greater Jakarta rose 4.4% YoY to IDR315,898 psm per month in 1Q15, and Colliers International expects the asking base rent to increase on a full-year basis. Out of LMIRT’s 17 retail malls, 10 are located in greater Jakarta. Meanwhile, management has sought to reduce risks for unitholders, having hedged ~93% of its estimated net cash flows in IDR for the next two years. 100% of its borrowings are also on a fixed rate basis or hedged with interest rate swaps. With ~S$200m of debt maturing in Jul this year, LMIRT is in the process of refinancing this with either a term loan or fixed rate note issuance. Cost of debt is expected to remain stable.

Maintain HOLD
We make no changes to our forecasts, HOLD rating and S$0.35 fair value estimate. LMIRT is currently trading at FY15F P/B ratio of 0.86x and offers a distribution yield of 8.2%. The former is approximately one standard deviation above its 5-year forward mean of 0.77x, while the latter is in-line with its 5-year forward average of 8.1%.

Monday 8 June 2015

Singtel

OCBC on 5 Jun 2015

Singtel held its Investor Day 2015 on 3 Jun, where analysts and investors got to meet and get updates from both Singtel management as well as management teams from their regional associates. Key takeaways include the potentials in its Enterprise and also the various strategies by its regional associates to grow their business and capitalize on changing consumer behaviors in the various countries. Meanwhile, Singtel’s share price saw a pretty steep correction over the last week or so, falling to as low as S$3.91 on Wednesday, in line with the sell-off in the broad market. But we believe that value is emerging (especially below S$4) and as we adjust our SOTP-based fair value up from S$4.31 to S$4.40 to reflect the higher prices of its listed associates, we also upgrade our call to BUY.

Singtel Investor Day 2015
Singtel held its Investor Day 2015 on 3 Jun, where analysts and investors got to meet and get updates from both Singtel management as well as management teams from their regional associates. From the breakout sessions with the various associates, we were able to get a better sense of the operating environments as well as their strategies to grow their businesses and capitalize on changing consumer behaviors in the various countries. 

Sees more potential in its Enterprise business
The presentation kicked off with a presentation of its Enterprise business, its enhanced capabilities and strategy to harness the potentials in this segment – namely in Cyber Security, Enterprise Cloud and Singapore’s Smart Nation program. As a recap, Singtel had earlier guided for its ICT revenue to grow by mid-single digit level in FY16, versus +6% in FY15. It had also guided for the group revenue to increase by mid-single digit level; EBITDA to increase by low single-digit level. 

Downplays threat from 4th telco in Singapore
Over in its Consumer business in Singapore, Singtel has downplayed the threat from the emergence of a fourth telco in Singapore. Although two companies – Consistel and MyRepublic – have expressed interest, it notes that both of them do not have any experience in running a mobile network/business. Management notes that the outcome could also depend on several factors, including IDA’s auction (likely in 2H15), a level playing field and level of investment (scale of a few hundred million). Market watchers believe that a new entrant would be able to garner less than 10% of market share from the incumbents; but do not rule out a near-term disruption in pricing. 

Upgrade to BUY with new S$4.40 FV
Separately, Singtel’s share price saw a pretty steep correction over the last week or so, falling to as low as S$3.91 on Wednesday, in line with the sell-off in the broad market. But we believe that value is emerging (especially below S$4) and as we adjust our SOTP-based fair value up from S$4.31 to S$4.40 to reflect the higher prices of its listed associates, we also upgrade our call to BUY.

M1

OCBC on 5 Jun 2015

M1 Ltd recently saw a sharp sell-down in its share price, dropping nearly 20% from its 52-week high of S$3.99 to its current price around S$3.21; investors likely spooked by rising interest concerns as well as talks of the emergence of a fourth telco in Singapore. M1 – being the smallest here – is seen to be most at risk of losing market share. Having said that, we note that the company’s outlook for 2015 still happens to be the most optimistic among its peers. In the wake of the recent sell-off, we note that M1’s forecast dividend yield is back up to around 5.8% - the highest among its peers (StarHub would be second around 5%). And while rising interest rates is probably a given, the extent of the rate hikes remains uncertain, given the still splotchy pace of economic recovery in the US. And as the current share price also offers a decent 14% capital appreciation to our unchanged S$3.66 fair value, we upgrade our call to BUY.

Sharp correction post 1Q15 results
M1 Ltd recently saw a sharp sell-down in its share price, dropping nearly 20% from its 52-week high of S$3.99 to its current price around S$3.21. While the sell-down emerged shortly after the telco reported its 1Q15 results, these were in line with our forecasts. Instead, we suspect the market may be spooked by rising interest rate concerns, especially after the stock’s sharp outperformance both against its peers as well as the STI index.

Talks of 4th telco also weighing on sentiment
We believe that the growing talks of the emergence of a fourth telco in Singapore could also be weighing on sentiment; this as M1may be most at risk of losing market share to a new entrant. For one, M1 has the smallest market share among the three incumbents. Second, M1 tends to target the younger consumers, who are more likely to be price sensitive and also probably more attracted to talks of MyRepublic’s plan to offer unlimited data packages should it become the fourth telco here.

Outlook still most upbeat among peers
Having said that, we note that the company’s outlook for 2015 still happens to be the most optimistic among its peers. Recall that M1 is guiding for “moderate” earnings growth this year (likely to be in the low teens), versus its peers’ single-digit level sort of growth. M1 is also positive on its fixed services segment, where it expects to grow share in the government and corporate sectors, citing the launch of new services like ultra-high speed broadband plans, data centre and cloud-based applications. 

Upgrade to BUY - current yield at 5.8%
In the wake of the recent sell-off, we note that M1’s forecast dividend yield is back up to around 5.8% - the highest among its peers (StarHub would be second around 5%). And while rising interest rates is probably a given, the extent of the rate hikes remains uncertain, given the still splotchy pace of economic recovery in the US. And as the current share price also offers a decent 14% capital appreciation to our unchanged S$3.66 fair value, we upgrade our call to BUY.

Ezra Holdings

OCBC on 5 Jun 2015

Following the announcement by Ezra Holdings on 30 May 2015 that it is proposing to raise gross proceeds of about US$300m from a rights issue and convertible bonds issue, the group’s share price has retreated 22% in three trading sessions. The market has already been expecting potential fundraising moves by Ezra, given its upcoming financial obligations, but the amount that is expected to be raised could have surprised the market. We assume that the maximum 2.02b new shares are issued in the rights issue in our ex-rights SOTP valuation, update the market values of the group’s listed entities, such that our fair value estimate (ex-rights) is S$0.25, while the cum-rights value is S$0.32 (takes into account a larger net debt position which would be alleviated by the rights issue). Given that the share price has corrected to S$0.305 vs. our cum-rights fair value of S$0.32, we raise our rating to HOLD.

Price decline following proposed rights and bonds issue
Following the announcement by Ezra Holdings on 30 May 2015 that it is proposing to raise gross proceeds of about US$300m from a rights issue and convertible bonds issue, the group’s share price has retreated from S$0.39 on 29 May to close at S$0.305 yesterday, down 22% in three trading sessions. The market has already been expecting potential fundraising moves by Ezra, given its upcoming financial obligations, but the amount that is expected to be raised could have taken the market by surprise.

Most of the proceeds for repaying debt
About 62% of the gross proceeds will be used to repay S$225m of fixed rate notes due Sep 2015, and 35% to repay S$150m of perpetual securities. In the event Ezra only undertakes the rights issue and not the bonds issue, it will use the net proceeds from the rights issue to partially repay the S$225 million fixed rate notes due Sep 2015. Apart from this, the group will utilise internal cash resources and available credit lines for funding the repayment of the S$225m fixed rate notes.

HOLD with S$0.32 fair value (to drop to S$0.25 post rights)
As at 25 May 2015, Mr. Lee Kian Soo and Mr. Lionel Lee held ~24.7% of the existing share capital of Ezra, and given that both have undertaken to fully subscribe for the rights issue, and the remaining 75.3% will be fully underwritten by Credit Suisse and DBS, it is quite likely that the group would be able to raise the proposed US$150m from the rights issue, should shareholders approve it in an EGM to be convened. We assume that the maximum 2.02b new shares are issued in the rights issue in our ex-rights SOTP valuation, update the market values of the group’s listed entities, such that our fair value estimate (ex-rights) is S$0.25, while the cum-rights value is S$0.32 (takes into account a larger net debt position which would be alleviated by the rights issue). Given that the share price has corrected to S$0.305 vs. our cum-rights fair value of S$0.32, we raise our rating to HOLD.

Telco Sector

OCBC on 5 Jun 2015

Relatively decent start to 2015, with both M1 and Singtel posting earnings that were within forecast; StarHub missed due to margin erosion. Still, outlook for the three remains fairly upbeat, although we foresee some risks in the medium to long term. The key among them includes rising interest rates and the possibility of a 4th telco in Singapore. As such, we are maintain our NEUTRAL rating on the sector; but we do see potential value emerging at lower levels and advocate a bottoming picking approach. Singtel remains our top pick; M1 is also looking interesting around current levels as its yield has increased to 5.8% after the recent sharp pullback.

Mostly decent start to 2015
For the first quarter of CY15, revenues for the three telcos were somewhat higher than expected, driven by still strong demand for the new Apple iPhone 6 and 6+, but only M1 and Singtel managed to post earnings that were within expectations, as StarHub reported a worse-than-expected showing.

Mobile market still stable…
Still, we note that the mobile market remains largely stable, with post-paid subscribers inching up another 0.7% in the quarter. However, post-paid ARPUs for all three slipped QoQ, which the telcos attributed mainly to seasonality; but we note that 1Q ARPUs were also lower as compared to those in the Sep quarter. In addition, even though more subscribers are now on the tiered pricing plan, the number of them exceeding their data bundles continues to remain low (mostly in the low 20%). 

but can it accommodate a fourth player?
And with the road to monetizing the increase in data usage likely still a pretty long and arduous one, the introduction of a fourth player into Singapore’s well penetrated mobile market is probably not going to help the situation – especially after a potential new entrant like MyRepublic announced its intention to offer unlimited data packages as its main selling point. OMGTel! has also thrown its hat into the fray, although it did not reveal details about its plans. 

Maintain NEUTRAL – bottom picking preferred 
Although we are maintaining our NEUTRAL rating on the sector for now, we note that there are several potential downside risks. The key among them is rising interest rates, which could erode the attractive of the telcos’ dividend yields. Another risk is the inability to raise ARPU or even suffer ARPU deterioration with the introduction of a new telco in the medium term. And as before, the intense competition in the broadband space is likely to remain and weigh on margins. Still, we believe value could be found in this segment; and would advocate bargain hunting on any significant pullbacks. Singtel remains our top pick; M1 is also looking interesting around current levels as its yield has increased to 5.8% after the recent sharp pullback.

UOB

OCBC on 5 Jun 2015

UOB’s shares have declined to a recent low of S$22.60 on recent market concerns that the local banks may not be able to enjoy higher interest margins for this year. While the outlook for Singapore is fairly positive for the rest of this year, there are some challenges in Malaysia and Indonesia. We expect loans growth to moderate from the strong double-digit growth rates experienced in FY01-FY14 to mid-single digit level in FY15. We mentioned in our 1Q results report that a better level to accumulate UOB shares is below S$23.80. Recent price weakness has opened up opportunities as we see value emerging. With 2-year earnings CAGR of 6%, 1.2x book, 11.0x FY15 earnings and with a dividend yield of 3.3%, valuations are not expensive. We are upgrading UOB to a BUY and maintaining our fair value estimate of S$25.20.

Post results decline in share price
Since touching a recent high of S$25.05 in late Apr 2015, the stock has declined to a recent low of S$22.60. US Federal Reserve Chair Janet Yellen said on 22 May 2015 that she expects to raise rates this year if the economy meets her forecasts for a rebound. However, recent soft economic data seem to point to the possibility of a delay in rate increase. As a result of this, local banking stocks have eased off from recent highs on market concerns that the local banks may not be able to enjoy higher interest margins for this year. On this front, we expect net interest margins (NIMs) to stay relatively flat for the rest of the year from the levels seen in 1Q15. 

Outlook remains challenging, but modest growth is still attainable
While the outlook for Singapore is fairly positive for the rest of this year, management has shared during the 1Q results briefing that the environment in Malaysia and Indonesia is challenging. We expect loans growth to moderate from the strong double-digit growth rates experienced in FY01-FY14 to mid-single digit level in FY15. We are also expecting technology and staff costs to remain elevated, but this should eventually be compensated by higher cross-selling of products and services in the region. 

Upgrade to BUY
We mentioned in our 1Q results report that a better level to accumulate UOB shares is below S$23.80. As such, recent price weakness has opened up opportunities as we see value emerging. We are projecting earnings compounded annual growth rate (CAGR) of 6% from FY14-FY16 for UOB. Although we are expecting costs to go up, bringing cost-income ratio from the current level of 42% to about 44% by FY16, this will be absorbed by income growth as well as a projected decline in impairment charges in FY16, down from the recent peak of S$635m in FY14. At current price of S$22.80, valuations are not demanding at 1.2x book, 11.0x FY15 earnings and with a dividend yield of 3.3%. We are upgrading UOB to a BUY and maintaining our fair value estimate of S$25.20.

Friday 5 June 2015

Suntec REIT

UOBKayhian on 5 Jun 2015

FY15F PE (x): 25.3
FY16F PE (x): 21.5

Concerns over Suntec City Mall AEI have been overdiscounted. Phase 3 of the AEI attained TOP in Feb with 80% precommitted occupancies brought the overall committed occupancies for Suntec City Mall to 93.6% (4Q14:91.3%). Overall committed passing rent of S$12.15 psf pm was below the initial guidance of S$12.59 psf pm due to a challenging retail climate. However, we believe that the allure of Suntec City’s enviable position, boosted by the newly-completed South Beach project and proximity to the Esplanade, Promenade and City Hall MRT stations will draw footfall and tenants. The present weak retail environment may see a longer-than-expected asset stablisation period, but prospects for rental strong rent reversions in the next leasing cycle remain intact due to its relatively low passing rents for a better location compared with many suburban malls that have passing rents of over S$15 psf pm. Challenging retail environment, but expect some reprieve in 2H15. Management has raised concerns of an increasingly challenging retail climate, partly attributed to the tightening of labour laws that have contributed towards increased operating costs and a shortfall in visitor arrivals especially, Chinese tourists, with The Singapore Tourism Board’s (STB) latest figures showing a 6% yoy decline in visitor arrivals for 1Q15. However, STB forecasts a 0-3% growth in visitor arrivals for 2015 supported by a slew of events like the 2015 SEA Games, SG50 celebrations, and Formula One. Upgrade to BUY with an unchanged target of S$2.08 post the 14% drop in share price over the past four months. Our valuation is based on DDM (required rate of return: 7.1%, terminal growth: 2.2%).

Starhill Global REIT

OCBC on 4 Jun 2015

We visited Starhill Global REIT’s (SGREIT) recently acquired Myer Centre Adelaide (MCA) property in Adelaide last week. The purchase price was A$288m (~S$302.4m). MCA has a net lettable area of 602,000 sq ft and is well-located in the Rundle Mall precinct in the Adelaide CBD area. The mall started bustling with crowds during the lunchtime period. We believe there is ample potential for rental income to be increased in the future, as management intends to carry out a tenant repositioning exercise, while there is also ~114,000 sq ft NLA of vacant space on levels 4 and 5 which has not been utilised. Looking ahead, we are positive on Adelaide’s retail market, and believe there is room for further cap rate compression. The retail sales outlook appears buoyant, while another growth driver may come from the expansion of international retailers into Adelaide. Reiterate BUY and S$0.93 fair value estimate on SGREIT.

Site visit to recently acquired Myer Centre Adelaide
On 18 May 2015, Starhill Global REIT (SGREIT) completed the acquisition of Myer Centre Adelaide (MCA), a freehold property in South Australia, for A$288m (~S$302.4m). Last week, OIR went on a site visit to the property. MCA is well-located in the Rundle Mall precinct in the Adelaide CBD area. We noticed that the mall started bustling with crowds during the lunchtime period, with a good mix of office workers and students. MCA has a net lettable area (NLA) of 602,000 sq ft and comprises a retail centre (95% occupancy rate), three office buildings (93% occupancy rate) and four basement levels with 467 carpark lots. This asset was purchased at an initial NPI yield of 6.6% and will be funded via a combination of internal working capital and external borrowings. We believe there is ample upside potential for rental income to be increased in the future, as management intends to carry out a tenant repositioning exercise, while there is also ~114,000 sq ft NLA of vacant space on levels 4 and 5 which has not been utilised (pending AEI).

Firm prospects for Adelaide’s retail market
Looking ahead, we are positive on Adelaide’s retail market, and believe there is room for further cap rate compression. The retail sales outlook appears buoyant, given the low interest rate environment and fuel prices, robust housing market and weak A$ which would stifle overseas travel by locals. CBRE expects retail sales growth in Australia to come in between 4%-5% this year, with South Australia growing above average. Another growth driver may come from the expansion of international retailers into Adelaide, although we believe this is still at a nascent stage. For example, Tiffany & Co. opened its first flagship store in the Adelaide CBD area in late 2014. Colliers International highlighted that Rundle Street Mall remains the prime location in the Adelaide CBD and demand from tenants continues to be robust.

Reiterate BUY
SGREIT remains as one of our preferred picks within the S-REITs sector. We like its attractive valuations (FY15F P/B ratio of 0.94x and distribution yield of 5.9%) and strong management team. ReiterateBUY and S$0.93 fair value estimate on SGREIT.

Thursday 4 June 2015

Singapore Telecommunications

UOBKayhian on 4 June 2015

FY16F PE (x): 25.3
FY17F PE (x): 27.3

Consumer Singapore: Prepared to defend its turf. Management highlighted the difficult operating environment confronting the potential fourth mobile operator. The new entrant would be regulated based on quality of service, which is audited by iDA on a regular basis for both in-building and outdoor coverage. iDA is unlikely to institute a regulatory framework for national roaming given that Singapore is a small island nation. We like SingTel due to growth of its regional mobile associates. We also see the stock as a hedge against regulatory uncertainties in Singapore as overseas businesses accounted for 75.1% of group PBT in FY15. Our target price for SingTel is S$4.80 based on DCF (required rate of return: 5.45%, terminal growth: 1.0%)

Ezra Holdings

OCBC on 3 Jun 2015

Ezra Holdings has proposed a renounceable rights issue of up to 2.02b new shares at an issue price at a discount of not more than 50% to the theoretical ex-rights price for each rights share, on the basis of up to 200 rights shares for every 100 existing ordinary shares, as at a books closure date to be determined. It has also proposed an issue of fixed rate convertible bonds due 2020 with an aggregate principal amount of up to S$200m (~US$150m), convertible into new shares at a conversion price to be determined. Total estimated net proceeds is about US$289.5m, and an EGM will be convened to seek shareholders’ approvals. The market has already been expecting potential fundraising moves by Ezra, given its upcoming financial obligations. In our SOTP valuation, we assume that the maximum 2.02b new shares are issued in the rights issue, and as such lower our fair value estimate from S$0.47 to S$0.26. Downgrade to SELL on valuation grounds.

To undertake rights issue first
Ezra Holdings has proposed a renounceable rights issue of up to 2.02b new shares at an issue price at a discount of not more than 50% to the theoretical ex-rights price for each rights share, on the basis of up to 200 rights shares for every 100 existing ordinary shares, as at a books closure date to be determined by the directors of the company. As at 25 May 2015, Mr. Lee Kian Soo and Mr. Lionel Lee held ~24.7% of the existing share capital of Ezra. They have undertaken to fully subscribe for the rights issue. The remaining 75.3% will be fully underwritten by Credit Suisse and DBS. Estimated gross and net proceeds of the rights issue are US$150m and US$145.3m, respectively.

Next, convertible bonds 
Ezra has also proposed an issue of fixed rate convertible bonds due 2020 with an aggregate principal amount of up to S$200m (~US$150m), convertible into new shares at a conversion price to be determined. The conversion price will be at a premium of at least 15.0% to the last closing price of Ezra’s shares on a “price fixing date” to be determined later, and rounded down to the nearest whole multiple of 0.5 cents. The convertible bonds issue is expected to take place after the pricing of the rights issue.

Estimated net proceeds of US$289.5m
An EGM will be convened to seek shareholders’ approval for both the rights and bonds issues. Total gross and estimated net proceeds are US$300m and US$289.5m, respectively; Ezra plans to use 62% of the gross proceeds to repay S$225m of fixed rate notes due in Sep this year, and 35% for repayment of S$150m worth of perpetual securities. The market has already been expecting potential fundraising moves by Ezra, given its upcoming financial obligations. In our SOTP valuation, we assume that the maximum 2.02b new shares are issued in the rights issue, and as such lower our fair value estimate from S$0.47 to S$0.26 due to the dilutive effect. Downgrade to SELL on valuation grounds.

KSH

OCBC on 2 Jun 2015

KSH reported that PATMI for FY15 (ending Mar 2015) decreased 7.0% to S$41.7m versus S$44.8m in FY14. This was mainly due to reduced contributions from both the construction and development businesses, lower fair value gains on investment assets and higher personnel expenses, but partially offset by higher interest income. We judge these results to be broadly within expectations. Management indicates that the construction sector continues to face headwinds in the form of rising costs and, in addition to private construction projects, the group will maintain a dual focus on tendering for public projects for which demand is anticipated to stay strong due to government infrastructure initiatives. As at end FY15, the group’s construction order book stands at a respectable level of around S$420m. A final cash dividend of 1.50 S-cents was proposed, which brings the total dividend distribution for FY15 to 2.75 S-cents per share. Maintain BUY with an unchanged fair value estimate of S$0.71.

FY15 PATMI down 7.0% to S$41.7m
KSH reported that PATMI for FY15 (ending Mar 2015) decreased 7.0% to S$41.7m versus S$44.8m in FY14. This was mainly due to reduced contributions from both the construction and development businesses, lower fair value gains on investment assets and higher personnel expenses, but partially offset by higher interest income. In terms of the topline, the group booked S$246.1m in revenues over FY15, down 15.7% again mostly due to lower numbers from the construction segment. We judge these results to be broadly within expectations. A final cash dividend of 1.50 S-cents was proposed, which brings the total dividend distribution for FY15 to 2.75 S-cents per share.

Actively diversifying business portfolio
Amidst a slowdown in the domestic residential sector, KSH has actively diversified its business exposure overseas (China, Australia, Malaysia and the UK) and into investment assets that yield recurring income as well. In addition to its acquisition of Prudential Tower as part of a consortium, KSH has acquired in Apr 2015 a stake in a freehold asset on Glenthorne Road, London, which will be redeveloped into an 85-room serviced apartment.

Riding on firm outlook for public construction
Management indicates that the construction sector continues to face headwinds in the form of rising costs. The group intends to leverage on its strong track record and BCA A1 rating and, in addition to private construction projects, will maintain a dual focus on tendering for public projects for which demand is anticipated to stay strong due to government infrastructure initiatives. In line with this, we note that the group has recently won a S$33.2m contract from NUS – a repeat customer - to build a 3-storey University Sports Centre Building. As at end FY15, the group’s construction order book stands at a respectable level of around S$420m. Maintain BUY with an unchanged fair value estimate of S$0.71.

United Envirotech

OCBC on 2 Jun 2015

United Envirotech Ltd (UEL) reported its FY15 results, which came in mostly within our expectations. Revenue jumped 73% to S$349.0m, which exceeded our forecast by about 22%, mainly due to higher-than-expected EPC revenue. While reported NPAT jumped 195% to S$59.3m, we estimate that core earnings (excluding one-off gains and forex) came in around S$42.1m, or about 5% above our forecast. UEL declared a final dividend of S$0.005/share. Going forward, management remains upbeat about its prospects, where it expects to benefit from the stronger government policy support in the water treatment sector and greater need for membrane-based water treatment solutions for the treatment and recycling of water in China. We have adjusted our FY16 estimates up by an average of 30% and this also bumps up our fair value from S$1.70 to S$1.74, still based on 28x FY16F EPS. Maintain HOLD; key risk would be potential share placements to increase the free float (currently around 12.3%).

FY15 core earnings mostly in line
United Envirotech Ltd (UEL) reported its FY15 results, which came in mostly within our expectations. Revenue jumped 73% to S$349.0m, which exceeded our forecast by about 22%, mainly due to higher-than-expected EPC (+43% at S$199.4m) and new membrane (S$47.3m) revenue; treatment revenue +63% to S$102.2m. While reported NPAT jumped 195% to S$59.3m, we estimate that core earnings (excluding one-off gains and forex) came in around S$42.1m (still +106%), or about 5% above our forecast. UEL declared a final dividend of S$0.005/share, versus S$0.003 the previous year.

Positive on its fully integrated model
Going forward, management says it will continue to harness its strength as a fully-integrated water solutions provider; and it is particularly upbeat about its newly-acquired membrane manufacturing business, Memstar. UEL intends to double its existing membrane capacity from 5mil m2 to 10mil by the end of FY16; this to cater to stronger demand from countries like China and USA. It further believes that the company will benefit from the stronger government policy support in the water treatment sector and greater need for membrane-based water treatment solutions for the treatment and recycling of water in China.

More involvement from CITIC
Meanwhile, the management team from CITIC was also present at the analyst briefing to further elaborate on the group’s strategy for UEL and its intention to grow the environmental business. As articulated in our previous reports, we believe that the SOE status of CITIC should help UEL open more doors and expand its reach into other regions of China; another benefit would be the access to cheaper funding on CITIC’s 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.

HOLD with higher S$1.74 fair value
We have adjusted our FY16 estimates up by an average of 30% and this also bumps up our fair value from S$1.70 to S$1.74, still based on 28x FY16F EPS. Maintain HOLD; key risk would be potential share placements to increase the free float (currently around 12.3%).