Silverlake Axis

UOB Kay Hian Research, Dec 12

AFTER its outperformance year to date, we think the stock's current valuations reflect its solid fundamentals and good prospects. FY2014 will be a year of new contract wins and full-year contributions from Merimen Ventures and Cyber Village. Its Chinese associate's listing could take place in the medium term when China resumes IPOs in 2014.

Downgrade to "hold" and maintain target price at S$0.91. Entry price is S$0.80.

HOLD

Yeo Hiap Seng

CIMB Research, Dec 11

WE think that there is a possibility that Far East Organization, Yeo Hiap Seng's (YHS) major shareholder, will privatise the company to facilitate its sale to a strategic buyer. The other alternative is to maintain the status quo and reallocate resources to develop the F&B brands.

We think that there is significant untapped potential in YHS's beverage brands, given that its sales growth and profitability trail F&N's despite their similar brand heritage and access to consumers.

Both YHS and F&N dominate the beverage sectors in Singapore and Malaysia, with brand histories that began before the founding of modern Singapore.

Unsurprisingly, their products occupy the best shelf spaces today. However, YHS's market share is now less than half of F&N's, although it was on a par in the early 2000s. Yeo's F&B business is operating at close to breakeven levels in terms of operating profit.

YHS's property development arm contributes the lion's share of group profit today and not its well-known F&B brands. Far East Organization, Singapore's largest private developer, won control of YHS in the mid-1990s.

We believe that its sole focus was to develop the prime piece of land that YHS's factories occupied.

Today, that piece of land is fully developed and the last of YHS's residential properties were sold in Q3 2013.

YHS is on the cusp of becoming a pure F&B player again, pushing Far East Organization to make a strategic decision on its majority 84 per cent stake.

We think that YHS's current share price does attribute value to the Yeo's brand but it does not reflect the brand's full potential. We think that it is a possibility that Far East Organization would buy the remaining 16 per cent stake and negotiate a private sale to a strategic buyer.

Alternatively, Far East Organization could also maintain the status quo and choose to unlock YHS's earnings potential on its own.

UNRATED

Keppel Corp

DMG & Partners Research, Dec 12

KEPPEL Corp said its unit, Keppel FELS, is going ahead with the construction of the Can Do drillship without a contract in hand. The drillship is expected to be completed in 2016.

Management has received positive feedback from customers as the drillship is designed for broader capabilities, including performing development and completion drilling.

As Keppel has shown strong risk management in the past, we believe the decision to build ahead of a firm order suggests the company's confidence in its design.

The value of the drillship was not disclosed, but based on recently transacted drillship prices, we estimate that it could be sold for US$720 million to US$800 million.

While the risk is higher due to the build-to-sell model, we are positive on this development as the success of this maiden project could lead to long-term market recognition of its Can Do design.

We expect the sale of the drillship to fall into our FY2014 new order forecast of S$6.5 billion. Keppel won S$6.8 billion in new contracts in FY2013 - within our upgraded forecast of S$7 billion - and we estimate that its net orderbook has reached S$15.7 billion.

We expect strong orders flow in 2014, with potential orders of five jackup options from Transocean (RIGN VX, NR), one option from ENSCO (ESV US, NR), the sale of the drillship, and the floating liquefied natural gas conversion project from Golar LNG (GLNG US, NR).

Maintain "buy" with a target price of S$12.65. We maintain our FY2013-15 EPS estimates as we expect the drillship to make up part of our S$6.5 billion new order forecast for FY2014. We also expect FY2014 margins to stay above management's long-term guidance of 10-12 per cent in view of the large number of Keppel FELS' jackup rigs due to be recognised.

BUY

ECS Holdings

OCBC on 13 Dec 2013

ECS Holdings’ (ECS) share price has surged 37.5% since we highlighted it as our top tech sector pick on 15 Jul 2013, strongly outperforming the STI’s 5.5% decline during the same period. While we like ECS for its strong management team and long-standing relationships with a number of leading IT principals, we believe its share price has outrun its fundamentals. Moreover, margin pressure remains a concern, and some of its major addressable markets also recently saw their 2014 GDP growth forecasts lowered by IMF and ADB. We thus downgrade the stock from buy to SELL, with an unchanged fair value estimate of S$0.585, pegged to 6x FY14F EPS. Despite these uncertainties, ECS will continue to deepen its relationship with its major IT principals, while targeting to expand its product range.

Downgrading ECS from Buy to SELL
ECS Holdings’ (ECS) share price has surged 37.5% since we highlighted it as our top tech sector pick on 15 Jul 2013, strongly outperforming the STI’s 5.5% decline during the same period. While we like ECS for its strong management team and long-standing relationships with a number of leading IT principals, we believe its share price has outrun its fundamentals. Moreover, margin pressure remains a concern for 2014. We thus downgrade the stock from Buy to SELL, with an unchanged fair value estimate of S$0.585, pegged to 6x FY14F EPS. Although FY13F dividend yield appears decent at 3.3%, our fair value implies potential total returns of -8.0%.

GDP growth expectations eased
Concerns over the prospective tapering of QE by the U.S. Federal Reserve took its toll on the financial markets of emerging economies in the region. During the latest updated projections from IMF and ADB, both organisations pared their growth expectations on China, Indonesia and Malaysia for 2014. These are countries which ECS has a strong presence in. Meanwhile, Thailand, another of ECS’s addressable markets, is currently facing mass anti-government demonstrations and we believe this would impact her economy adversely and dampen domestic consumption. 

Focus on expanding its product range
Despite the ongoing uncertainties, ECS will continue to deepen its relationship with its major IT principals, creating value for them via its network of more than 23,000 active channel partners. We expect ECS to benefit from new product launches from these IT vendors, such as Apple’s iPad Air and iPhone 5S. It will also aim to grow its higher-margin Enterprise Systems division, which includes networking hardware, servers, software products and enterprise storage.

Technology Sector

OCBC on 13 Dec 2013

The prospects of the cyclical tech sector are strongly intertwined with the global macroeconomic trends and outlook. Looking ahead to 2014, global economic growth is expected to outshine that of 2013. Hence, worldwide semiconductor sales, overall IT spending and the revenue of major EMS/ODM players are expected to experience positive growth in the coming year. Nevertheless, we believe uncertainties and downside risks remain, which may continue to affect business and consumer sentiment and thus the earnings visibility of tech companies. In light of the aforementioned factors, we maintain our NEUTRAL rating on the tech sector. Under our coverage, we downgrade ECS Holdings from buy to SELL, with an unchanged fair value estimate of S$0.585, as we believe its share price has outrun its fundamentals. Venture Corp [BUY; FV: S$8.50] is our new top pick in the sector, given its diverse customer base, strong balance sheet and sustainable dividend yield (FY13F: 6.7%).

Economic recovery to boost prospects, but fragility remains
The prospects of the cyclical tech sector are strongly intertwined with the global macroeconomic trends and outlook. Looking ahead to 2014, most of the major economies are expected to deliver growth at a faster pace as compared to 2013, with the exception of Japan and China, based on projections from IMF. Global semiconductor sales, overall IT spending and the revenue of major EMS/ODM players are expected to experience positive growth in 2014. Notwithstanding this optimistic outlook, we believe uncertainties and downside risks remain. This may continue to affect business and consumer sentiment and thus end user demand, resulting in cloudy earnings visibility for major tech companies and their suppliers. 

Maintain NEUTRAL
In light of the aforementioned factors, we maintain our NEUTRAL rating on the tech sector. Over the longer-term, we are still positive on the sector, as technology will continue to play an integral role in business processes and people’s lifestyle. Spending on IT will trend up more robustly once the global economy recovers on a firmer footing.

Venture Corp our new top pick in tech sector
Under our coverage, ECS Holding’s share price has appreciated 37.5% since we highlighted it as our top tech sector pick on 15 Jul 2013, strongly outperforming the STI’s 5.5% decline during the same period. We now downgrade ECS from buy toSELL, with an unchanged fair value estimate of S$0.585, as we believe its share price has outrun its fundamentals, while margin pressure remains a concern for 2014. With this downgrade, we replace ECS with Venture Corp (VMS) as our new top pick in the sector. We like VMS [BUY; FV: S$8.50] for its diverse customer base, strong balance sheet and sustainable dividend yield (FY13F: 6.7%).

Hospitality Sector

OCBC on 12 Dec 2013

The dreariness that characterized the Singapore hospitality industry over 2013 looks set to continue into 1Q14 with the subdued global business sentiment, a strong Singapore dollar and increasing competition with an expanding supply of hotels. Our channel checks indicate that hotel bookings up to Feb 2014 are still weak, despite an expected pickup to the number of MICE events for 2014. We project that for end-2012 to end-2015, hotel room demand will grow at a CAGR of 5.4%, while hotel room supply will expand at a CAGR of 6.5%. Given this, the industry is facing a mild oversupply situation. We project that 2014 RevPAR growth for the industry will be in the low single-digit percentages at best, and do not rule out another year of contraction. We are maintaining our NEUTRAL rating on the Singapore hospitality sector and do not see any significant growth catalysts in the short-term. Our top pick is Global Premium Hotels [BUY, FV: S$0.33]. The 1H14 opening of its second mid-tier hotel, Parc Sovereign Tyrwhitt, could boost GPH’s net income by ~17% in 2014.

What ails thee…
2013 has not been an easy year for Singapore hoteliers, with revenue per available room (RevPAR) for 10M13 falling by 1.1%. While the decline does not look significant, note that the figures may have been skewed upwards by the continued strong performance of the IRs’ hotels (e.g. MBS experienced RevPAR growth of ~10% for 9M13), which account for ~8% of the total stock. CDL Hospitality Trusts’ Singapore hotels experienced a RevPAR decline of 7.7% for 9M13 and FEHT’s Singapore hotels have been missing their IPO revenue forecasts. Key reasons for the challenging hospitality environment include: 1) growing hotel room supply, 2) a strong SGD relative to most regional currencies and 3) negative business sentiment, especially regionally, leading to smaller travel budgets. 

Oversupply situation for 2013-2015
The Singapore Sports Hub is scheduled to open in Apr 2014, and a marquee event on its calendar will be the Women’s Tennis Association Championships to be held yearly in Oct from 2014 to 2018. We forecast that events held at the Sports Hub could add around 2% to hotel room bookings on a stabilized annual basis, e.g. after 1-2 years of gestation, by pulling in ~310k visitor arrivals. However, this would be just to support the growth in room demand that we are anticipating. Specifically, we project that for end-2012 to end-2015, hotel room demand will grow at a CAGR of 5.4%, while hotel room supply will expand at a CAGR of 6.5%. This mild oversupply situation will continue to place pressure on RevPAR. 

Substantial supply growth for Mid-tier hotels
For 2013, we expect the growth in hotel room supply to be 5.8% YoY. For 2014, YoY growth is expected to be even higher at 7.1%. Breaking down the projected growth in hotel room supply for end-2012 to end-2015, we note that the 52% of the new room supply is from the Mid-tier: Economy (+3.6% p.a.), Mid-tier (+10.9% p.a.) and Luxury and Upscale (+4.7% p.a.). Note that CDLHT and FEHT have substantial exposure to Mid-tier/Upscale hotels and Global Premium is mainly an Economy-tier play.

Maintaining NEUTRAL for 2014
While 2014 should see more MICE events YoY given that biennial events are generally held in even-numbered years, our industry sources indicate that hotel bookings up to Feb 2013 are still soft, with limited visibility beyond that. With no significant catalysts in sight over the short-term, we continue to anticipate a weak outlook for Singapore tourism in 2014. We project that 2014 RevPAR growth for the industry will be in the low single-digit percentages at best, and do not rule out another year of contraction. We are maintaining our NEUTRAL rating on the Singapore hospitality sector. Our top pick is Global Premium Hotels [BUY, FV: S$0.33]. The 1H14 opening of its second mid-tier hotel, Parc Sovereign Tyrwhitt, could boost GPH’s net income by ~17% in 2014.

Industrial REITs

OCBC on 11 Dec 2013

Industrial REITs continued to turn in firm results in 3Q13. However, subsector portfolio occupancy encountered a marked sequential decline of 2.9ppt to 94.8%. For 2014, we are keeping our cautious view on the industrial REIT subsector, as we believe industrial rents may stay relatively flat amid the influx of industrial supply and scale back in leasing enquiries for factory space. We also highlight again the possibility that industrial REITs may continue to face difficulties in acquiring industrial properties that are yield-accretive. Nevertheless, more industrial REITs are turning to asset enhancement initiatives/(re)developments to grow their income, and this should help to cushion the moderating growth trend. We are maintaining our NEUTRAL view on the industrial REIT subsector. We choose Ascendas REIT [BUY, S$2.45 FV] and Cache Logistics Trust [BUY, S$1.30 FV] as our preferred picks due to their strong earnings visibility, robust financial position and compelling yields.

Firm 3Q13 results, with some positive surprises
Industrial REITs continued to turn in firm results in 3Q13, still benefiting from higher rents and contribution from completed acquisitions and development projects. Ascendas REIT and Soilbuild REIT surprised with better-than-expected results. However, subsector DPU growth was rather modest at 4.3%, partially impacted by divestments and a larger unit base.

Subsector occupancy saw a marked decline
Leasing activity was healthy in 3Q, with positive rental reversions still achieved by some of the industrial landlords. However, subsector portfolio occupancy encountered a marked sequential decline of 2.9ppt to 94.8%. Looking ahead, we believe portfolio occupancies at some of the REITs may continue to face downward pressures, as a number of REITs have guided for non-renewal of tenants and conversion of master leases/single-user asset into multi-tenancies. 

Rental market likely muted in 2014
For 2014, we are keeping our cautious view on the industrial REIT subsector. The rental market has essentially been on an uptrend since the trough in 3Q09. However, we are skeptical of the sustainability of the growth momentum in the factory and warehouse market. Leasing enquiries for factory space has tapered, according to property consultant CBRE. The influx of factory and warehouse supply from 2013-2016 is also expected to cap the growth in rents or even exert downward pressures in our view. On a more positive note, demand for business park space has held steady in 3Q13 and is likely to remain positive in the short to medium term, with potential upside in the rents over the next 6-12 months. We maintain our view that the industrial property rents, on the whole, will remain stable in 2013, while rents in 2014 may likely be flat to slightly downside biased.

Increasingly difficult to find yield-accretive properties
We also highlight again the possibility that industrial REITs may continue to face difficulties in acquiring industrial properties that are yield-accretive. Singapore warehouse and factory prices have recently witnessed yet another set of record highs in 3Q13. Furthermore, the Singapore government has been imposing a number of cooling measures over the year. All these developments serve to dampen the market sentiment and transaction activity in our view, as industrial REITs are likely to be more selective on their acquisition targets. 

Maintaining our cautious stance
With the potential reduction of the US stimulus programme and accompanying hike in cost of debt funding, we believe earnings accretion from investments may also be eroded, while the existing portfolio assets may be susceptible to devaluation. Nevertheless, more industrial REITs are turning to asset enhancement initiatives/(re)developments to grow their income, and this should help to cushion the moderating growth trend. We are maintaining our NEUTRAL view on the industrial REIT subsector. We choose Ascendas REIT [BUY, S$2.45 FV] and Cache Logistics Trust [BUY, S$1.30 FV] as our preferred picks due to their strong earnings visibility, robust financial position and compelling yields.

Singapore Aviation Support Services

Uobkayhian om 11 Dec 2013

The three companies within aviation support services will face higher labour costs due to
upcoming increases in labour levies and a lower dependency quota. SIAEC and SATS
will be most impacted. In addition, government bond yields have risen on expectation of
the Fed tapering and this has pressured ST Engineering (STE) and SIA Engineering
(SIAEC). Among the three, we still favour SATS due to its relatively higher yield, and are
now less negative on STE. Maintain UNDERWEIGHT. 

SIA Engineering (SIE SP/SELL/Target S$4.65). While management is optimistic of
long-term prospects, we are concerned over its weak revenue growth. Wage costs are
elevated and growing faster than revenue, highlighting an inability to pass on cost
increases. Additionally, we expect stiffer competition in the line maintenance segment
(accounted for 76% of 1HFY14 operating profit) as it has recently ventured into the
segment. We value SIAEC on a DDM basis (COE: 6.9%, terminal growth: 1%). 

SATS (SATS SP/HOLD/Target: S$3.24). Operationally, SATS faces the highest risk
from rising labour costs. However, it is diversifying its operations and we are enthused
by the potential for catering revenue from the Singapore Sports Hub, which is expected
to be operational in Apr 14. There is a high likelihood that SATS may form a tripartite
cargo handling JV with Oman Air and Oman International Airport, which would give it
access to the fast-growing Middle Eastern aviation market. Our DDM-based valuation is
based on required return of 7.0% and terminal growth of 1.5%. SATS currently has the
most attractive yield spread within the sector, at 2.73%, vs STE’s 1.90% and SIE’s
2.24%. 

ST Engineering (STE SP/SELL/Target: S$3.65). We expect earnings over the next two
quarters to be impacted by the political gridlock in the US and concern over imminent
tapering of quantitative easing by the Fed. About 27% of STE’s revenue comes from the
US. Our target price is based on COE of 6.6% and terminal growth of 1.5%. The
relatively low premium to the 10-year SGS could be due to the fact that it is AAA-rated,
majority owned by Temasek and that about 40% of its revenue is driven by defense
works, which carry little default risk. At S$3.83, we envision a 4.7% downside risk.

Midas Holdings

DBS Group Research, Dec 10

MIDAS won its first HSR contract (168 million yuan, S$34.6 million) in more than two years in October, as China resumed its high-speed railway (HSR) development programme, with more likely to come.

We believe the group could win a substantial order arising from the recent second rolling stock tender for 314 train sets, or about 2,500 train carriages.

Over the next two years, we believe more than 700 train sets could be further tendered for, resulting in further wins for Midas in the HSR segment.

At the same time, we expect (China) metro orders to continue flowing in and overseas orders, which have grown substantially in 2013, to continue to be robust as Midas looks to maintain a more diversified earnings base.

Hence, we project Midas's earnings to improve from RMB 61 million in FY13 to RMB 209 million in FY14, on higher revenue as well as better margins.

With 2013 at its end, and having introduced FY15F estimates, we roll over our valuation multiple for the stock to 1.2 times FY14F P/BV to derive a new TP of S$0.64.

Trading at just one time FY13 P/BV, we believe current valuations are attractive for a stock whose earnings are poised for a strong rebound into FY14F and FY15F.

BUY

Oilfield Services

UOB KayHian, Dec 10

INVESTORS can no longer ignore oilfield services in 2014. New sizeable market-cap OSV (offshore support vessel) stocks will place this sector firmly on investors' radar screen.

Apart from Pacific Radiance (PacRa SP), these stocks include:

(a) soon-to-be-listed Robert Kuok's PACC Offshore Services Holdings (POSH),

(b) Jaya Holdings (Jaya SP), which is likely to make a comeback with a probable new industry-operator major shareholder at its helm, and

(c) a potential listing of Miclyn Express Offshore (MIO AU) on Singapore Exchange (SGX), after its delisting from the Australian Stock Exchange (ASX).

Pacific Radiance (not rated; market cap: S$653 million). Recently listed on SGX, Pacific Radiance has two principal businesses: (i) offshore support services (OSS); (67 per cent of H1-13 turnover), and (ii) subsea services (26 per cent of H1-13 turnover).

The group has a fleet of 131 OSVs, of which 60 are wholly-owned and 71 are operated by associates and joint ventures (JVs). There are 17 new vessels pending delivery.

As of end-3Q13, NBV of its own fleet was US$466m (including US$58m relating to vessels under construction).

Pacific Radiance is managed by a team of industry veterans, headed by executive chairman Pang Yoke Min who was the co-founder of Jaya and its managing director from 1981 to 2006.

POSH (pending listing in 1Q14; expected market cap: >S$1 billion). POSH, the oilfield services arm of the Robert Kuok group, is targeting for a listing on SGX in Q1-14.

POSH is an OSV provider. It also handles transportation, towing, mooring and installation services as well as services for oil spill and salvage operations. POSH has a fleet of 114 vessels, while 14 vessels are on order.

As of end-2012, its fleet NBV (net book value) was US$767 million (including US$166 million relating to vessels under construction).

POSH operates mainly in Asia, but has presence in Africa, Europe and India.

Jaya Holdings (not rated; market cap: S$521m). According to industry sources, a new industry-operator major shareholder is likely to emerge. Australia's Mermaid Marine (MRM AU; market cap: A$728 million) is rumoured to be the successful bidder for Deutsche Bank's 53 per cent stake in Jaya. Jaya has gone through numerous major shareholder changes in the last decade (Sime Darby in 2004, Nautical Offshore Services in 2006, and Deutsche Bank in 2011).

A new industry-operator major shareholder should augur well for the group. Jaya is an OSV provider as well as a shipbuilder. It has a fleet of 28 OSVs, while seven vessels are pending delivery. It also operates two OSV shipyards.

As of end-Jun 13, NBV of fleet was US$406 million (of which US$45 million related to vessels under construction). Geographically, Asia contributed 64 per cent of OSS revenue, Africa per cent,and others 16 per cent.

Telecommunications sector

Phillip Securities Research, Dec 9

THE telecommunications sector under our coverage consists of SingTel ("Accumulate", target price $3.61), StarHub ("Accumulate", target price $4.52) and M1 ("Accumulate", target price $3.55). StarHub and M1 are pure plays to the Singapore market, while SingTel has exposure to the Asia-Pacific region through its regional mobile associates.

M1 replaces SingTel as our most preferred stock in the sector. We like M1 over SingTel and StarHub as M1 stands to gain the most from improving mobile dynamics in Singapore, and benefits from growth in its fibre broadband. Mobile accounts for a higher revenue proportion for M1 than for its peers. With its fibre broadband offering, M1 continues to grow its fixed services revenue.

Adverse foreign exchange movements continue to have a negative impact on SingTel's earnings.

However, its earnings remained stable y-o-y in the last quarter because of effective cost-management strategy.

We remain cautiously positive on the sector as the telco stocks continue to provide attractive dividend yields and stable earnings growth.

We see data monetising gaining good traction in Singapore and expect it to continue into FY2014. More subscribers have taken up 4G tiered plans and are increasingly exceeding their data allowances.

SingTel and M1 reported improvement in Ebitda margin on service revenue while Ebitda margin for StarHub remained stable in the last quarter.

Earnings growth was stable across the three telcos in the current FY. Despite expectations of the Fed tapering in the near term, we think the telcos continue to be attractive investments, providing earnings as well as dividend growth potential.

Commodities Sector

OCBC on 10 Dec 2013

As expected, the commodities sector performed relatively poorly against the broader market for most part of 2013, after we maintained our Underweight rating from 2012. While some of the commodity plays have staged a recovery in 2H13, we note that valuations are still looking pretty inexpensive. From this perspective, we upgrade our rating from Underweight to NEUTRAL. Although we do not see any stock that stands out at the moment, there may be some potential upgrades should there be an over-correction in the market on the back of the Fed tapering.

Recovery in late 2H13
As expected, the commodities sector performed relatively poorly against the broader market for most part of 2013, after we maintained our Underweight rating from 2012. Against the STI’s 0.4% showing until 6 Dec 2013, the commodities stocks under coverage fell by an average of 6%. They had also fallen by as much as 19% at their lowest versus the STI’s 6% slide before staging a recovery in late 2H13. 

Developed economies slowly recovering
Part of the recovery was buoyed by news that economies are slowly recovering, led by the US. According to the IMF (International Monetary Fund) in its latest World Economic Outlook (WEO) report out in Oct, it now expects World Output to grow 3.6% in 2014, up slightly from the likely 2.9% growth in 2013. However, it warns that downside risks remain.

Slower Chinese economy may be a drag on commodities
Some of the “fresh” risks include slowing growth in China, which may affect many other economies, notably the commodity exporters among the emerging and developing economies. However, IMF believes slower near-term growth is a worth-while trade-off as there will be positive net effects in the longer term, which should lead to more stable demand for commodities.

Upgrade to NEUTRAL
While market sentiment may remain somewhat cautious until investors get a better handle on the magnitude and extent of the Fed tapering (widely expected to take place sooner rather than later), we believe that further signs of a firmer recovery in the US economy could lead investors to adopt a more “risk on” approach. And with the valuations of some of the commodity plays still looking relatively inexpensive, we could see potential upgrades for some of them if there is an over-correction in the market. Hence we also upgrade our rating from Underweight to NEUTRAL

Healthcare Sector

OCBC on 9 Dec 2013

Despite continued macroeconomic uncertainties in 2013, quality healthcare companies such as Raffles Medical Group (RMG), IHH Healthcare Berhad and Riverstone managed to showcase their resilience and defensive qualities with their robust financial performance. Nevertheless, not all healthcare companies enjoyed similar success stories in 2013, as Biosensors International Group (BIG) disappointed with a sharp 1HFY14 earnings dip. Looking ahead, positive fundamentals which are structural and entrenched in nature will continue to drive growth in 2014. However, key risks would stem from intensifying competition and continued depreciation of emerging market currencies (especially the IDR). We are also cautious on medical device and pharmaceutical companies with significant exposure to the Chinese market due to ongoing regulatory price controls. Maintain OVERWEIGHT on the healthcare sector, with a preference towards healthcare service providers. Our top sector pick is RMG [BUY; FV: S$3.61]. We also have a SELL rating on BIG with a fair value estimate of S$0.80.

Quality healthcare companies continued to deliver growth
Despite continued macroeconomic uncertainties in 2013, quality healthcare companies such as Raffles Medical Group (RMG) and IHH Healthcare Berhad (IHH) managed to showcase their resilience and defensive qualities. Revenue for RMG and IHH rose 10.7% and 17.8% (excluding non-recurring recognition of sale of medical suites), while core earnings were up 14.0% and 45.2%, respectively, for 9MCY13. Both healthcare service providers saw an increase in patient loads and higher revenue intensities, despite the weakening currencies of regional emerging countries such as the IDR against the SGD. Another notable strong performer was Riverstone Holdings, which registered a stellar 34.3% PATMI growth for 9MCY13, underpinned by rising demand for its high-quality healthcare gloves. Nevertheless, not all healthcare companies enjoyed similar success stories in 2013, as Biosensors International Group (BIG) disappointed with a sharp 59.0% plunge in its core PATMI to US$23.6m on the back of a 3.8% fall in its revenue to US$159.7m for its 1HFY14 results. This was attributed to ASP pressures and lower licensing and royalties revenue.

Outlook still positive, but prefer healthcare service providers
Looking ahead, dynamics in the healthcare sector continue to be driven by positive fundamentals which are structural and entrenched in nature. Issues such as an aging population, increasing disease burden, rising affluence in the region and strengthening medical tourism trend imply that the underlying growth drivers would likely persist in the long run. However, we are more cautious on medical device and pharmaceutical companies with significant exposure to the Chinese market. This is because ongoing regulatory price controls may continue to exert pressure on margins and cast an overhang on the share prices of these companies in the near future, in our view.

Maintain OVERWEIGHT
We maintain our OVERWEIGHT rating on the healthcare sector. Key risks would stem from intensifying competitive pressures and continued depreciation of emerging market currencies (especially the IDR). Under our sector coverage, we have aSELL rating on BIG with a fair value estimate of S$0.80. We believe its near-term financial performance would remain lacklustre given industry headwinds and margin pressure. Our top pick in the sector is RMG, where we have a BUY rating and S$3.61 fair value estimate. We like RMG for its healthy balance sheet, capable management team, robust growth prospects and strong brand equity.

Raffles Medical Group

OCBC on 6 Dec 2013

Raffles Medical Group (RMG) has come a long way in contributing to the healthcare scene of Singapore since it was co-founded by its current Executive Chairman Dr. Loo Choon Yong. The group has established a solid track record, delivering a 13.1% and 17.8% CAGR in its revenue and core PATMI from 2007 to 2012, respectively. In a bid to continue its growth trend, RMG has earmarked plans to expand both locally and overseas in China. This would be funded by internal resources (currently in a healthy net cash position) and debt. We like RMG for its capable management team, robust growth prospects and strong brand equity. Our core EPS projections imply a CAGR of 12.7% from FY12-14F. Maintain BUY and S$3.61 fair value estimate on RMG, pegged to 29x FY14F EPS.

Quality healthcare play
Since Raffles Medical Group (RMG) was co-founded in 1976 by its current Executive Chairman Dr. Loo Choon Yong and his partner Dr. Alfred Loh, it has come a long way in contributing to the healthcare scene of Singapore. Starting out with just two clinics, RMG now runs a wide network of clinics and a full fledged 200-beds hospital offering a diverse spectrum of medical services. It has established a solid track record, as illustrated by the 13.1% and 17.8% CAGR in its revenue and core PATMI from 2007 to 2012, respectively. The group also managed to deliver positive core earnings growth during the last financial crisis in 2008 and 2009 (35.0% and 18.2%, respectively).

Looking for expansion locally and overseas
RMG has earmarked plans to scale up its operations both locally and abroad. It is currently finalising plans for its Raffles Hospital extension, which will see a boost in its gross floor space from the present 307,875 sf to 410,283 sf when completed (expected in late 2015 or early 2016). Meanwhile, management also signed a Letter of Intent and framework agreement in Feb and Sep this year for the proposed development of an integrated international hospital in Shenzhen (>200 beds) and Shanghai (>300 beds), respectively. This would allow RMG to tap on the growing Chinese healthcare market. We estimate total capex for these three projects to amount to S$480-520m, and funded by internal resources and debt. As at 30 Sep 2013, RMG was in a healthy net cash position of S$141.7m. It will receive gross proceeds of S$120m in 4Q13 from the sale of its Thong Sia commercial podium.

Maintain BUY
We like RMG for its capable management team, robust growth prospects and strong brand equity. Our core EPS projections imply a CAGR of 12.7% from FY12-14F. Maintain BUY and S$3.61 fair value estimate on RMG, pegged to 29x FY14F EPS. Key risks to our estimates include fiercer-than-expected competitive pressures and continued weakening of the IDR.

CDL Hospitality Trusts

OCBC on 5 Dec 2013

CDL Hospitality Trusts (CDLHT) has entered into conditional land and business sale agreements with Xanadu Holdings Pvt Ltd for the acquisition of Jumeirah Dhevanafushi in the Maldives at US$59.6m (~S$74.8m). Based on the purchase price and assuming that CDLHT owned the property from 1 Jan 2013, the pro forma annualised net property income yield of the property for the nine months ended 30 Sep 2013 would be 6.2%. While management indicated that the 4Q13 and 1Q14 performance for its Singapore hotels is still lackluster, this is within our expectations. We roll over our DDM model to FY14 numbers. Despite using a more conservative risk free rate of 3.0% (instead of 2.4% previously), our FV increases from S$1.83 to S$1.84 and we maintain our BUY rating on CDLHT.

Second property in the Maldives
CDLHT has entered into conditional land and business sale agreements with Xanadu Holdings Pvt Ltd for the acquisition of Jumeirah Dhevanafushi, a top-end 5-star resort in the Maldives, at US$59.6m (~S$74.8m). Based on the purchase price and assuming that CDLHT owned the property from 1 Jan 2013, the pro forma annualised net property income yield of the property for 9M13 would be 6.2%. On a pro forma annualised basis for 9M13, this translates to a DPS accretion of 2.2%, with potential improvement as the property is gestating (it only opened on 1 Nov 2011). The acquisition will be fully funded by debt, bringing gearing up from 28.1% to 30.6%. CDLHT’s business trust (HBT) will be activated and upon the completion of the acquisition, the HBT lessee will lease the property from the H-REIT (CDLHT’s REIT). The vendor is not related to the hotel manager, Jumeriah, which is most well-known for operating the Burj Al Arab. Jumeriah will continue to operate the hotel under a management contract with HBT.

~9% NPI yield more likely after stabilisation
We understand that the valuers were using a 9% capitalisation rate and management expects the stabilised NPI yield to be in the region of 9%, hopefully within 2-3 years. 1Q and 4Q are traditionally strong quarters for tourism in the Maldivies; roughly, over a third of revenues comes from 1Q, less than one third comes from 2Q and 3Q combined, and one third comes from 4Q. Hence, the 6.2% yield calculated based on 9M13 performance is conservative. The property generally sees strong occupancy of over 80%. About a fifth of revenue from the property comes from F&B. The GOP margin is ~40%. We assume the acquisition will be completed on 1 Jan 2014. 

FV of S$1.84
While management indicated that the 4Q13 and 1Q14 performance for its Singapore hotels is still lackluster, this is within our expectations. We roll over our DDM model to FY14 numbers. Despite using a more conservative risk free rate of 3.0% (instead of 2.4% previously), our FV increases from S$1.83 to S$1.84 and we maintain our BUY rating on CDLHT.

Yoma Strategic Holdings

OCBC on 4 Dec 2013

Yoma reported that its consortium, Digicel Asian Holdings, comprising Digicel Group, First Myanmar Investment Co., Ltd and Yoma Strategic Holdings Ltd, has signed an agreement with Ooredoo Myanmar to develop, construct and lease telecommunications towers in Myanmar. We understand from management that detailed terms regarding ownership and capital outlay for the consortium are still being negotiated and will be announced in due time. Digicel Asian Holdings’ company in Myanmar, Myanmar Tower Company, will construct multi-tenancy towers in Myanmar and aim to work with multiple telecommunications operating companies, including Ooredoo’s to facilitate its commitment to rapidly achieve coverage across the country after winning a coveted telecommunication license earlier this year. Maintain HOLD with an unchanged fair value estimate of S$0.84.

Agreement with Ooredoo
Yoma reported that its consortium, Digicel Asian Holdings, comprising Digicel Group, First Myanmar Investment Co., Ltd and Yoma Strategic Holdings Ltd, has signed an agreement with Ooredoo Myanmar to develop, construct and lease telecommunications towers in Myanmar. We understand from management that detailed terms regarding ownership and capital outlay for the consortium are still being negotiated and will be announced in due time. Digicel Asian Holdings’ company in Myanmar, Myanmar Tower Company, will construct multi-tenancy towers in Myanmar and aim to work with multiple telecommunications operating companies, including Ooredoo’s to facilitate its commitment to rapidly achieve coverage across the country after winning a coveted license earlier this year. 

Attractive business opportunity
We believe this business provides the scope for an attractive return on invested capital for the consortium. To recap, Myanmar authorities awarded in Jun this year two telecommunications licenses to Norway’s Telenor and Qatar’s Ooredoo. As part of the reported requirements, winners of the tender must launch their services within nine months of the licence being granted and install a network to cover a quarter of the country within a year, and three-quarters within five years. Given that this is a mostly green-field project in an undeveloped country, we believe that it makes tremendous sense for both telecommunication players, and for the local telecommunication companies as well, to outsource the build-out and share resources to manage costs and gain strategic synergies. 

Soon to get more color for Landmark site
Now that it is less than a month away from the long-stop deadline for the Landmark site acquisition, we believe that the group will soon provide more color regarding the site. While another extension of the long-stop deadline appears possible at this time, which may be a temporary speed-bump for the share price, we continue to see good odds that the group will ultimately acquire the site successfully. Maintain HOLD with an unchanged fair value estimate of S$0.84.

Singapore Telecommunication Sector

OCBC on 3 Dec 2013

Going into 2014, we believe that there is a possibility of investors switching out of more defensive stocks into the cyclical ones as the developed economies continue to improve. And because of their outperformance in 2013, dividend yields have fallen to around 4.5%, making them merely “decent” when compared to the STI’s 3.5%. In summary, we think that the telcos will likely see just limited growth in the mobile market; stiffer competition in the broadband market; and a relatively unexciting Pay TV market. As such, earnings growth is not likely to be exciting. Hence we maintain our NEUTRAL rating on the sector.

Very modest mobile growth likely
As the mobile penetration rate has already hit some 157% in Sep, we suspect that the market here is fast approaching saturation point, with demand coming from LTE-enabled tablets. As such, we believe that mobile revenue growth is likely to remain modest, driven mainly by ARPU uplifts as the telcos migrate more existing subscribers to the tiered pricing plans with more restricted data bundles.

Broadband getting very competitive 
The opening up of the broadband market has resulted in increased competition, with many new players trying to garner market share via low pricing strategies. With the exception of M1, both SingTel and StarHub have started to see some ARPU erosion; but they believe that prices will reach a floor soon, given the structure of the NBN. Separately, we understand that the corporate take-up rate continues to remain quite slow for M1 and StarHub.

Pay TV market may shift in StarHub’s favour
Lastly, for Pay TV, the MDA has mandated SingTel to cross-carriage the 2013-2015 Barclays Premier League (BPL) content on StarHub’s platform. This initially sparked off a series of rebates among the two providers, with StarHub offering up to S$600. Latest change by SingTel to move all subscribers to its S$59.90 pricing could see another migration of subscribers back to StarHub.

Yields are just decent 
With the US economic recovery slowly but surely picking up steam, the market is increasingly of the view that global interest rates will rise; although latest Fed stance remains somewhat accommodative. Nevertheless, we note that the recent share price rallies have dropped dividend yields to around 4.5%, making them just decent. As such, we maintain our NEUTRAL rating on the sector.

Oil and Gas Sector

OCBC on 2 Dec 2013

The FTSE Oil and Gas index has performed more or less in-line with the broader market this year. Still, it is among the top three best-performing FTSE sub-indices YTD, along with the FTSE Telecommunications and FTSE Maritime indices. Stepping into 2014, we continue to advocate a focused stock-picking strategy, overweighting companies that are operating in sub-sectors with more favourable demand-supply dynamics, and those with strong balance sheets and order books. The local rigbuilders are expected to continue securing orders at a pace that will at least match this year’s, while the offshore support vessel sub-sector should also see continued recovery as the market situation gradually tilts in favour of vessel owners. Maintain OVERWEIGHT on the oil and gas sector, preferring Keppel Corporation [BUY, FV: S$12.87], Sembcorp Marine [BUY, FV: S$5.68], Ezion Holdings [BUY, FV: S$2.57] and Nam Cheong Ltd [BUY, FV: S$0.37].

Index mostly in-line with market; among top three best performing sub-indices
The FTSE Oil and Gas index has performed more or less in-line with the broader market this year. Still, it is among the top three best-performing FTSE sub-indices YTD, along with the FTSE Telecommunications and FTSE Maritime indices. On the other hand, price performances of individual stocks have differed greatly, with the key outperformers being Kreuz Holdings (+95% YTD) and Ezion Holdings (+45% YTD) in the Offshore & Marine space.

Positive on the rig building sector and certain OSV segments
Stepping into 2014, we continue to advocate a focused stock-picking strategy, overweighting companies that are operating in sub-sectors with more favourable demand-supply dynamics, and those with strong balance sheets and order books. The local rigbuilders are expected to continue securing orders at a pace that will at least match this year’s, while the offshore support vessel sub-sector should also see continued recovery as the market situation gradually tilts in favour of vessel owners – the Indonesian and Malaysian OSV sectors are especially looking relatively promising. Meanwhile, subsea tendering activity remains firm.

Solid long-term fundamentals; near term driven by macro events
We believe that the offshore sector has strong long-term fundamentals as countries have an interest in fulfilling as much domestic demand as possible in order to boost energy security. Investors should be mindful, however, that macro events remain a key driver of the broader sector in the near term. Going into 2014, we remain OVERWEIGHT on the oil and gas sector, as we expect that the favourable oil price environment will continue to be conducive for capital expenditure. Our preferred picks are Keppel Corporation [BUY, FV: S$12.87], Sembcorp Marine [BUY, FV: S$5.68], Ezion Holdings [BUY, FV: S$2.57] and Nam Cheong Ltd [BUY, FV: S$0.37].

Strategy for 2014

OCBC on 29 Nov 2013

While the Singapore stock market is likely to end 2013 flat, the economic outlook for 2014 could mean Asian and Singapore equities are worth a re-look. We expect developed markets’ issues which dominated global headlines in the last two years to remain, largely centering on slowing economic growth, debt and high unemployment. However, the recent 3Q corporate results in Singapore point to a cautious optimism for 2014, and this could mean high single-digit earnings growth for the benchmark STI stocks. We continue to have an OVERWEIGHT for the Banking and Oil & Gas sectors, and are selectively positive on certain Property stocks and REITs. The Straits Times Index (STI) is currently trading at undemanding valuations of 13.7x FY14 earnings, 1.35x book and with decent dividend yield of 3.3%. Our stock picks for 2014 in the big cap space CapitaLand, CapitaCommercial Trust, DBS, Ezion Holdings, Keppel Corporation, Keppel Land, Sembcorp Marine, Starhill Global, Suntec REIT and UOB. In the mid-cap space, our stock picks are KSH, Nam Cheong and Sheng Siong Group.

Singapore market failed to hold on to May’s gains in 2013
As the year draws to a close, some of this year’s blockbuster movies titles aptly capture the mood for the Singapore. It is almost a Hunger Game as the “starving” Singapore market kicked off the year well and hit a recent high in May 2013, but the market lacked an Iron Man’s will to hold on to the gains. Key developments in the US, including Fed tapering and the debt crisis, captured headlines and equities fell in Singapore.

Improving outlook for 2014
While there are larger global issues, mainly from the developed markets, which will continue to dominate headlines in 2014, we believe that the outlook is slowly and gradually improving. The recent 3Q13 corporate results in Singapore also point to a cautiously optimistic guidance from companies and high single-digit earnings growth is likely for 2014. Banks surprised on the upside in 3Q13 and we are expecting the stronger balance sheets to place banks on firmer footing entering into 2014. For Property, the residential subsector was affected by cooling measures and we expect prices for mass-market units to drop by 5%-15%. However, developers with strong balance sheets and diversified exposure to the region should be able to differentiate and also tap on business or land banking opportunities during a slowdown. The Oil & Gas sector has consistently been on our favourite list and is entering 2014-2017 with robust order books, especially for the bellwethers Keppel Corporation and Sembcorp Marine.

Fundamentally, the STI is well supported by undemanding valuations
The Singapore market, based on the benchmark Straits Times Index (STI), is currently trading at 13.7x FY14 earnings and we believe this is reasonable. The recent historical PER (2007-now) ranges from as low as 9x during the 2008 financial crisis to as high as 18x, but the average is hovering slightly above 14x. In addition, price-to-book is not demanding at 1.35x and average dividend yield is decent at 3.3%.

Stock picks strategy preferred
Our big cap stock picks for 2014 are CapitaLand, CapitaCommercial Trust, DBS, Ezion Holdings, Keppel Corporation, Keppel Land, Sembcorp Marine, Starhill Global, Suntec REIT and UOB. In the mid-cap space, our stock picks areKSH, Nam Cheong and Sheng Siong Group.

Dyna-Mac Holdings

OCBC on 29 Nov 2013

Dyna-Mac Holdings looks set for a busy year ahead in 2014, buoyed by improving prospects in the FPSO market and a robust net order book of S$346m (as at 13 Nov 2013), thanks to YTD order wins of ~S$320m. There are positive developments happening for its major customers; while Dyna-Mac is also actively pursuing six to seven FPSO projects which it is confident of winning. If successful, this may culminate in healthy order wins amounting to ~S$280-350m for FY14, according to our estimates. We update our model and assumptions following a change in analyst coverage; and now forecast revenue and PATMI growth of 20%/-7% for FY13 and 4%/15% for FY14, respectively. Rolling forward our valuations to 16x FY14F EPS, we derive a higher fair value estimate of S$0.47 (previously S$0.44). Upgrade Dyna-Mac from Hold to BUY.

A bustling year ahead in 2014 for Dyna-Mac
Dyna-Mac Holdings looks set for a busy year ahead in 2014, buoyed by improving prospects in the Floating, Production, Storage and Offloading (FPSO) market and a robust net order book of S$346m (as at 13 Nov 2013), thanks to YTD order wins of ~S$320m. Based on our understanding, Dyna-Mac is currently actively pursuing six to seven FPSO projects which it is confident of winning. If successful, this may culminate in healthy order wins amounting to ~S$280-350m for FY14, according to our estimates.

Positive developments for major customers
Bumi Armada Berhad (BAB), one of Dyna-Mac’s top three customers, was recently awarded a Letter of Intent from EnQuest for the Kraken FPSO project. Upon confirmation of this contract, BAB will award the FPSO conversion project to Keppel Corp and the topside modules fabrication orders to Dyna-Mac, as mentioned by BAB’s management during its 3Q13 analyst conference call. During the call, BAB also highlighted that it has emerged as the winner of the Madura FPSO bid in Indonesia, although it still needs to obtain regulatory approval from Indonesia’s SKK Migas. There are also positive developments at another of Dyna-Mac’s major customer, SBM Offshore, which nailed US$7.5b of orders in 1H13, driven largely by two FPSO awards from Petrobras in Mar (of which Dyna-Mac will supply topside modules to). SBM Offshore also sees strong demand for FPSOs and associated products in the medium term with an encouraging pipeline of projects.

Upgrade to BUY
We update our model and assumptions following a change in analyst coverage; and now forecast revenue and PATMI growth of 20%/-7% for FY13 and 4%/15% for FY14, respectively. Maintaining our target PER peg of 16x (approximately 0.25 standard deviation below its historical average forward PER to account for possible delays in global FPSO tenders) and rolling forward our valuations to FY14F EPS, our fair value estimate is raised from S$0.44 to S$0.47. Coupled with a prospective FY13F dividend yield of 5%, we upgrade Dyna-Mac from Hold to BUY.