Golden Agri-Resources

OCBC on 5 Nov 2014

Golden Agri-Resources (GAR) is due to release its 3Q14 results on 12 Nov, where eyes will be on its China operations, which may continue to bleed red ink due to the negative crush margins there. Previously, management mentioned during its 2Q14 results briefing that it is “actively looking for solutions”, which involves strategic sourcing opportunities and the possibility of temporarily shutting down the plant to reduce the losses. Another closely watched item would be its inventory – GAR had also previously held higher-than-usual amount of CPO stock that it took a while to clear. Until then, we maintain our HOLD and S$0.48 fair value.

Stock has performed as expected
We last upgraded our call from Sell to HOLD with a new S$0.48 fair value on 9 Oct, with a view that Golden Agri-Resources (GAR) should start to look interesting around S$0.47 or better, as some of the negative news would have been priced in. True enough, we saw the stock recover from a recent low of S$0.465 shortly after to a recent S$0.525 intraday high. 

Outlook appears to be improving
Going forward, we think that the outlook appears to be improving, driven by more positive newsflow of late - the key among them is the recovery in CPO prices. Currently, CPO prices are hovering around MYR2330/ton, or about 20% above the MYR1929 low on 29 Aug, driven by hopes that the global glut in cooking oils may soon be over. And with output likely to be affected by the spate of drier-than-usual weather in the early part of this year, market watchers believe that CPO prices should recover further to MYR2500/ton by 1Q15 . In addition, Malaysia’s plan to increase the diesel blending from 5% to 7% in Nov this year should also increase the demand for palm bio-diesel.

But eyes will be on its China operations
Having said that, we think that sentiment could still remain somewhat cautious ahead of GAR’s 3Q14 results announcement on 12 Nov, where the eyes will be on its China operations, which may continue to bleed red ink due to the negative crush margins there. Previously, management mentioned during its 2Q14 results briefing that it is “actively looking for solutions”, which involves strategic sourcing opportunities and the possibility of temporarily shutting down the plant to reduce the losses. Another closely watched item would be its inventory – GAR had also previously held higher-than-usual amount of CPO stock that it took a while to clear.

Continue to trade the range
In the meantime, we believe investors can continue to trade the range as indicated above, while we maintain our HOLD call and S$0.48 fair value.

COSCO Corp

OCBC on 4 Nov 2014

COSCO Corp reported a 17% YoY rise in revenue to S$1.16b and a 69% increase in net profit to S$7.1m in 3Q14, such that 9M14 net profit accounted for 76% and 69% of ours and the street’s estimates, respectively. With the recent announcement regarding the delay in delivery of the Sevan 650 unit, the group currently has three offshore projects that have already been cancelled or are at risk of cancellation. Looking ahead, margins may be pressured even further as the group executes lower-priced contracts. This does not augur well for a company with a net gearing of 1.3x and is still scaling the offshore learning curve. Given COSCO’s weak execution abilities, relatively poorer quality clientele, and deteriorating balance sheet amidst a slowing offshore market, we lower our P/B from 1.0x to 0.8x, resulting in a lower fair value estimate of S$0.50. Maintain SELL.

3Q14 results in line
COSCO Corp reported a 17% YoY rise in revenue to S$1.16b and a 69% increase in net profit to S$7.1m in 3Q14, such that 9M14 net profit accounted for 76% and 69% of ours and the street’s estimates, respectively. On a YoY basis, profit was higher due to lower provisions on construction contracts (S$10.6m in 3Q14 vs S$33.9m in 3Q13); a less aggressive depreciation policy also aided bottom-line. However, gross profit margin dropped significantly from 7.4% in 3Q13 to 4.9% in 3Q14 with the execution of lower margin contracts. 

Three offshore projects already cancelled or at risk of cancellation
COSCO recently announced that delivery for the Sevan 650 drilling unit has been extended to up to 36 months from Oct 2014; 2Q14 was the original delivery date. For the deepwater drillship contract (~US$630m) that was terminated by Dalian Deepwater Development, arbitration in London is still ongoing and the company is unable to quantify the financial impact of the project. As for the Octabuoy hull and topside module (~US$240m), the contract has been terminated, and COSCO Nantong has the right to either complete or not complete the project as it deems fit, and to sell the project at a public or private sale. 

Weak execution and deteriorating balance sheet in a slowing market
As at 30 Sep 2014, the group’s order book stood at US$8.9b, with progressive deliveries up to 2016. However, as the group continues to execute projects that were secured in recent years “at low contract values” due to the weak shipping market, it expects operating margins on these new shipbuilding projects to face downward pressure despite improving gains in efficiency and productivity. This does not augur well for a company with a net gearing of 1.3x (vs. 0.6x in 3Q12 and 1.0x in 3Q13) and is still scaling the offshore learning curve. Given COSCO’s weak execution abilities, relatively poorer quality clientele, and deteriorating balance sheet amidst a slowing offshore market, we lower our P/B from 1.0x to 0.8x, resulting in a lower fair value estimate of S$0.50. Maintain SELL.

StarHub

UOBKayhian on 6 Nov2014


FY14F PE (x): 23.0
FY15F PE (x): 20.8

StarHub reported net profit of S$97.7m for 3Q14, which is in line with our expectations.
Slow growth from mobile. StarHub added 11,000 post-paid subscribers and post-paid
ARPU increased 1.5% qoq to S$69/month. Post-paid subscriber base contracted by
120,000 or 11.4% qoq due to the new regulation imposed on the registration of pre-paid
SIM cards from the previous 10 to the current three SIM cards per person. Overall
mobile revenue increased by only 0.8% yoy (M1: 3.4% yoy).
Maintain HOLD as StarHub faces near-term headwinds. We are concerned by the
slowdown in mobile and intense competition for residential broadband. Our target price
of S$4.33, based on DCF (required rate of return: 6.7%, terminal growth: 1%). Our
suggested entry price is S$3.95.

Sembcorp Marine

UOBKayhian on 6 Nov 2014

FY14F PE (x): 14.4
FY15F PE (x): 13.9
Weaker operating margin. Sembcorp Marine (SMM) posted a net profit of S$132m for
3Q14 and S$386m for 9M14. 9M14 accounts for 69% of our 2014 forecast of S$556m.
Operating margin was weak at 10.0% for 3Q14 vs 11.5% for 2Q14 and 11.1% for 1Q14
because of the initial revenue recognition of two more drillships (for Sete Brasil) in
3Q14. Of the seven drillships for Sete Brasil, revenue from four units is now being
recognised. In addition, there was a forex loss of S$12.7m in 3Q14 vs a gain of
S$12.4m in 3Q13. Management expects 4Q14 to post higher earnings as the quarter
will benefit from three large upgrading projects (non-orderbook jobs) that come under
the shiprepair segment.
Cutting our target price from S$4.23 to S$4.00 which is based on 2015F PE of 15x. We
maintain our HOLD call on SMM.

Valuetronics

Kim Eng on 6 Nov 2014

• 2QFY3/15 results in line. Revenue and net profit down 0.7% and 8.4% YoY respectively.
• Continues to face fierce competition and price pressure in lighting, a de-rating catalyst. EPS trimmed by about 1%.
• Maintain contrarian SELL and SGD0.25 TP, at 4.4x FY16E EPS.

Lighting continues to languish
1H15 earnings fell 3.7% YoY to form 52% of our FY15E forecast. Consumer Electronics revenue declined a steeper 11.2% YoY and we expect the weakness to continue in the mid-term as competition in LED lighting worsens. In its results announcement, management said that they will “proactively manage our reliance on this segment” which, we believe, suggests it could reduce its exposure or even exit the business completely if things get worse. We had initially modelled in an 8% revenue decline for Consumer Electronics for FY15E-17E, but now expect an 11-12% contraction. This brings down our FY15E-17E EPS by about 1%. We also expect further margin pressure in 2H15. Consumer Electronics gross margin was an estimated 9% in 1H15, and we continue to forecast 8.2% for the full year.

Industrial growth to moderate
Industrial revenue increased 30.6% YoY to HKD468m in 1H15, in line with our forecast. This division has been strong in recent quarters, thanks to clients’ outsourcing of their production to Valuetronics from the third quarter of last year. We expect YoY growth to moderate to 10-15% by 4Q15, as the customers complete the migration of their production.

Maintain SELL
Maintain SELL with de-rating catalysts expected from further sets of weak results, especially from lighting. TP unchanged at SGD0.25 or 4.4x FY16E EPS, based on zero value for its lighting business and 4-6x PER for its non-lighting Industrial businesses.

Riverstone Holdings

Kim Eng on 6 Nov 2014

• Keen interest in company’s capacity expansion and dominance of lucrative cleanroom gloves.
• Good earnings visibility from long-term order commitments for new capacity and strong product demand.
• Maintain BUY & SGD1.21 TP (15x FY15E EPS). Catalysts from faster capacity expansion and above-average cleanroom-glove growth.

New capacity and products to lift growth
In a recent NDR for our institutional clients, management reaffirmed orders for its new capacity. It has secured long-term commitments from several customers for four of its six production lines. This leaves two to cater to smaller orders and customised products. For the moment, Riverstone is able to cherry-pick customers offering the best prices and payment terms due to strong demand for its superior products and low supply volume vs peers. In addition, its polymer-coated gloves for tablet and flat-panel display manufacturers are gaining traction. There is ample scope for growth, according to management, since these users are in the early adoption phase. Stronger growth is expected once customers are satisfied with their quality consistency. Management also shared that its newly-developed halogen-free cleanroom gloves have been approved by a customer.

Speeding up expansion; Maintain BUY
Following the successful execution of its first-phase expansion, management plans to speed up machinery installation for its second phase. It hopes to commence production in early 3Q15, earlier than our 4Q15 expectation. Maintain BUY and SGD1.21 TP, at 15x FY15E EPS, its peer average.

Starhub

Kim Eng on 6 Nov 2014

• 3Q14 in line, with 9M14 profit forming 74% of our FY14E forecast.
• Weaker 4Q expected from margin pressure from popular new handset models. Trim EPS by 1-2%.
• Maintain HOLD on lack of catalysts, but supported by 4.8% yields. DCF TP down to SGD4.40 from SGD4.44.

3Q14 in line
3Q14 profit rose 2.6% YoY to SGD97.7m but 9M14 profit fell 3.8% YoY to SGD276.2m. This forms 74% of our FY14E forecast. Results were also in line with consensus. A sequentially stronger 3Q was unable to make up for a generally soft 1H. Service revenue in 3Q14 and 9M14 fell 0.6% and 1% YoY respectively, mainly due to broadband weakness and a flat mobile business. A normal quarterly dividend of 5 cts/share was declared.

Service revenue flat
Service revenue was flat as a 1% increase in mobile revenue in 3Q14 was erased by a double-digit drop in broadband revenue. This lagged M1’s 3% mobile growth. Bright spots were pay TV with positive net adds and stable ARPUs and fixed network services from a stronger enterprise business. Revenue from these two segments grew 2-3% YoY.

Weaker quarter ahead
Despite higher-than-guided EBITDA margins of 34.5% and 33.7% in 3Q14 and 9M14, StarHub maintains its full-year guidance of 32% vs our 33.4%. Margins are expected to be pressurised by the release of popular handsets such as iPhone 6 and Samsung Note 4. We lower FY14E-16E profits by 1-2% for this.

No catalysts seen
Accordingly, our DCF-based TP dips to SGD4.40 (WACC 7.7%, LTG 1%) from SGD4.44. Maintain HOLD on a lack of catalysts, but supported by yields of 4.8%. Capital management is always a possibility given its low net debt/EBITDA of 0.53x, though the company says “that is not on the horizon for now”.

Sembcorp Marine

Kim Eng on 6 Nov 2014

• 3Q14 PATMI of SGD132.0m missed on weaker margins and flat ship-repair revenue. Management expects ship repair to jump in 4Q14.
• Cut FY14E-16E EPS by 2-8% for lower margins.
• Maintain HOLD & SGD3.80 TP (0.71x FY15E EV/backlog).

Recognition issues, repair to catch up in 4Q
3Q14 PATMI of SGD132.0m, up 1.8% YoY and 0.3% QoQ, disappointed on lower margins and muted ship-repair revenue. 9M14 PATMI of SGD386.1m rose 3.4% YoY to form 67% of our FY14E and 68% of the market’s. Operating margins dipped to 10.0% (2Q14: 11.5%, 3Q13: 10.1%). This was traced to conservative recognition during the procurement phase of two Sete Brazil drillships. Repair revenue was flat at SGD157m (2Q14: SGD150m, 3Q13: SGD204m). Although management guides for a jump in 4Q14 from three large projects, one of which is worth at least SGD35m, this should just be a one-time boost, in our view.

Lack of catalysts; Maintain HOLD
SMM assuaged concerns on Brazil risks by reaffirming the on-schedule delivery of its first drillship. It also quashed news that Petrobras may reassign its FPSO topside contracts to another yard, alluding to its ongoing work on these projects. Ultimately, it needs to deliver on margins to address this overhang.

SMM was surprisingly optimistic on its order outlook, citing strong enquiries, especially for production assets. It also said its enlarged Tuas yard would allow it to capture those orders. YTD order intake of SGD4.2b formed 95% of our full-year forecast with a net order book of SGD12.6b. While we concur with its outlook for production assets, we see risks to overall 2015 orders, especially for rigs.

We cut FY14E-16E EPS by 2-8% for lower margins. Maintain HOLD and SGD3.80 TP, at 0.71x FY15E EV/backlog. This is 0.5 SD below its 10-year mean of 0.90x.

Raffles Medical Group

UOBKayhian on 3 Nov 2014

FY14F PE (x): 30.4
FY15F PE (x): 26.8
Long-term beneficiary of medical tourism. We believe RMG’s hospital expansion in
Singapore will position the group well for the good prospects in medical tourism.
Management shared that while Singapore’s hospital treatments are more expensive
(25- 30%>Thailand, 100%>Malaysia and 3x>India), Singapore will hold its own,
particularly for curative and acute treatments. Conversely, other countries such as
Thailand and Korea are preferred in areas such as aesthetic treatment. Currently, RMG
sees foreign patients from over 100 countries.
Capacity for long-term growth. Maintain BUY with a DCF-based target price of S$4.30
(no change assuming WACC of 7.9% and terminal growth of 2.5%). Our target price of
S$4.30, the implied 2015F PE is 30.3x, close to its +1SD to mean PE of 28.6x but we
think this is deserved, given its strong cash flow generation and resilient business
model. Meanwhile, 2014-16F ROE of 14.2-15.5% are also higher than its long-term
average ROE of 11.5% (1997-2013).

SMRT Corporation

UOBKayhian on 3 Nov 2014

FY14F PE (x): 24.2
FY15F PE (x): 18.8
Continuing the good work in 2QFY15. 1HFY15 net profit of 47.6m (+55% yoy) was
ahead of our estimate owing to a sharp rise in operating margin to 10.2% (1HFY14:
7.3%) on solid cost control. The fare segment (bus and rail) registered a 4% yoy rise in
turnover, boosted by higher ridership (2.3% yoy for trains and 5.2% yoy for bus) and
higher fares. An interim dividend of 1.5 cents was declared (1HFY14: 1.0 cents).
HOLD with a DCF-based target price of $1.56 (WACC: 7.9%, terminal growth: 3.0%).
SMRT looks fairly valued after rising 29% ytd. A possible entry level would be S$1.40.
We continue to prefer ComfortDelGro for its overseas growth potential, diversification
and cheaper valuation. In addition, ComfortDelGro’s FY14 PE of 20.0x is more
attractive compared to SMRT’s FY15 PE of 24.2x.

Neptune Orient Lines

UOBKayhian on 3 Nov 2014

FY14F PE (x): n.m.
FY15F PE (x): 19.0
Loss again in 3Q14. NOL recorded net loss of US$23m in 3Q14 compared with
US$20m gain in 3Q13. This was mainly due to the increase in finance cost (US$35m
compared with a gain of US$8m in 3Q13). The additional cost was also due to the
congestion in South California, which dragged down the result. Its revenue slightly slid
0.2% yoy. The steady growth of its logistics business was offset by the lower rate and
volume in the container shipping business.
Cut target price to SG$1.01, maintain BUY. By cutting the earnings forecast and
reducing the valuation multiple from 1.1x to 1.0x P/B (considering the weak industry
condition), we cut our target price to SG$1.01. We still maintain BUY as we think the
current 0.8x 2015F P/B has reflected its intention to sell the logistic business, but the
earnings forecast has not reflected the possible huge gain from the sale of the
business.

DBS Group Holdings

UOBKayhian on 3 Nov 2014

FY14F PE (x): 11.5
FY15F PE (x): 10.8
DBS Group Holdings (DBS) reported net profit of S$1,008m for 3Q14, above our
forecast of S$949m. Boost from stable margins. Loans expanded 1.7% qoq and 8.1%
yoy with growth from Singapore and Hong Kong for corporate loans and secured
consumer loans. Trade loans were flat due to a slowdown in China and lower
commodity prices. Net interest margin (NIM) edged up 1bp to 1.68% due to improved
asset yields and stable funding costs. Net interest income grew a hefty 13.9% yoy.
Maintain BUY. Our target price of S$22.68 is based on 1.51x P/B, derived from the
Gordon Growth Model (ROE: 11.0%, required return: 7.8% and constant growth: 1.5%).

SIA Engineering

Kim Eng on 5 Nov 2014

• 2QFY3/15 EPS below due to lower revenue & margins. Interim DPS cut to 6 SGD cts from seven.
• Cut FY3/15E-17E EPS by 22-25% and TP to SGD3.50 from SGD4.20, still at 20x FY3/16E P/E.
• Reiterate SELL with de-rating catalysts from further earnings contractions.

Multiple headwinds
2QFY3/15 net income fell 40.7% YoY to SGD42.1m. A 3.0% decline in revenue from lower airframe & component overhaul sales and a 1.5% rise in operating expense shaved EBIT margins to 5.6% (1QFY3/15: 7.0%, 2QFY3/14: 9.7%). Contributions from engine repair shops were down 40.1% to SGD20m. Management attributed this to an extension of the “on-wing” life of certain models and accelerated retirement of older engines. Interim DPS was cut to 6.0 SGD cts from 7.0 cts. 1HFY3/15 EPS accounted for only 41% of our below-Street FY3/15E.

FY3/15E weakest in a decade, valuations stretched
With its workload shrinking at a time of rising operating costs, we expect earnings to remain depressed. Airlines are scaling back capacity to combat a regional surplus. We lower our FY15E-17E EPS by another 22-25% and expect FY3/15E DPS to be cut to a mere 16 SGD cts from FY3/14’s 25. Earnings are set to be the weakest in adecade.

Although SIAEC’s forward-looking management may continue to roll out initiatives to develop its business, we doubt these will be material, near term. Valuations are stretched at 30x FY3/15E P/E and 3.3% yields against its cyclical earnings contractions. We lower our TP to SGD3.50 from SGD4.20 as we roll over to 20x FY3/16E P/E, 0.5 SD above 10-year mean. Reiterate SELL.

COSCO

Kim Eng on 4 Nov 2014

• 3Q14 PATMI of SGD7.1m (+69.2% YoY, -50.0% QoQ) missed expectations due to margin shortfall.
• Gross margins of 4.9% the lowest in history. Cut FY14E-16E EPS by 23-77%.
• Reiterate SELL. TP cut to SGD0.54 from SGD0.67, now at 0.9x FY15E P/BV, -1SD of 10-year mean.

Deteriorating execution
3Q14 PATMI of SGD7.1m (+69.2% YoY, -50.0% QoQ) missed consensus and our expectations. 9M14 PATMI rose 31.0% YoY to SGD34.1m to form only 67% of both FY14E. This was due to  weak 3Q14 gross margins of only 4.9% (2Q14: 8.0%, 3Q13: 7.4%), the lowest in its history. Cosco cited the execution of multiple first-time orders, lower-priced shipbuilding contracts and labour costs which rose c.5% YoY.

2015 could be difficult year
We believe 2015 would be a more difficult year for Cosco which has failed to improve in its execution. Higher labour, raw-material and interest costs, dovetailing with lower-priced contracts,  could further sap its margins. Problems have also surfaced in three contracts worth USD1.3b: 1) the Octabuoy semi-sub hull and topside built for ATP UK is up for sale due to default by the client; 2) a DP3 drillship has been terminated by client on grounds of delay; and 3) deferment of the delivery of a drillship built for Sevan Drilling on mutual grounds. Cosco would not disclose uncollected payments but we see provisions for these contracts if they cannot be sold to cover its incurred costs or booked profits, if any.

We cut FY14E-16E EPS by 23-77% for lower gross margins, now assumed at 7.0/6.2/6.7% from 9.5/9.2/10.2%. TP has also been cut to SGD0.54, or 0.9x FY15E P/BV, -1SD of its 10-year mean. It  was previously SGD0.67, at 1.1x trough P/BV. Reiterate SELL given a deteriorating outlook, high net gearing of 1.2x and negative operating cashflow.

SMRT

Kim Eng on 3 Nov 2014

• 2Q above on better costs. Fare-based business reverted to +SGD5.5m EBIT, lifting net income by 76% YoY to SGD25.3m.
• EPS raised by 82%. Still, stock could stay range-bound in absence of clarity over rail transition.
• Maintain HOLD & base-case SGD1.36 TP.

Positive cost trends…
2QFY3/15 net income rose 75.5% YoY to SGD25.3m as its fare-based business reverted to operating profits of SGD5.5m from SGD6.8m losses. This was aided by stronger cost control and higher fares since Apr 2014. Interim DPS was raised to 1.5 SGD cts from 1 ct a year ago. 1H EPS forms 70% of our original forecast.
Rising staff costs at its rail segment appear to have been reined in with a stabilising headcount and productivity measures. Along with falling oil prices, energy costs declined 8.7% YoY. Bus depreciation charges declined 2.0% YoY as the estimated useful life of its buses was raised. While plans to develop its engineering arm are positive, we do not think contributions will be significant, near term.

No updates on rail transition were provided.
…but not a stock driver; Maintain HOLD.
We raise FY3/15E-17E EPS by 82% to reflect its better-than-expected cost trends. While its better profitability is a positive, we expect the stock to remain range-bound in the absence of clarity on the rail transition. Hence, our unchanged HOLD rating and base-case TP of SGD1.36. We have assumed: 1) its rail and bus operating assets will be sold to the regulators for SGD1.0b; 2) contractual agreements under the previous regime will be written off; and 3) 10% margins for bus and rail, including rental margins after transition

DBS

Kim Eng on 3 Nov 2014

• 3Q14 beat again, with fees & trading gains. Third consecutive outperformance.
• NIM improved. Fee income lifted by IB. Strong credit quality. Ample SGD liquidity.
• Reiterate BUY & SGD23.40 TP, at 13x FY15E EPS. Our preferred pick. Best positioned to benefit from rising rates.

Beat expectations
3Q14 core PATMI was up 8.4% QoQ and 16.9% YoY to SGD1.01b, to beat consensus and our estimate of SGD950m. Variances included stronger-than-expected fees and trading gains (+54% QoQ, +44% YoY). As with peers, fees performed better than expected (+10.3% QoQ, +20.1% YoY), especially from IB. UOB’s was up 15.8% QoQ and 16.8% YoY, OCBC’s up 15% and 16%. 9M14 earnings form 78.6% of our full-year estimate.

The positives
First, NIM inched up 1bp QoQ and 8bps YoY to 1.68%, the highest in nine quarters. This was helped by stable funding costs (-1bp QoQ, +2bps YoY) and wider average asset yields (unchanged QoQ, +10bps YoY). Second, loans grew 1.7% QoQ or 8.3% YoY, at the lower end of guidance. This was led by SGD consumer and corporate loans. Third, SGD deposits grew 1.0% QoQ or 0.9% YoY to SGD137.3b, with a 77.6% LDR (UOB: 95.9%, OCBC: 80.2%). Asset quality was also resilient, with expected pockets of weakness in South and Southeast Asia, mainly India and Indonesia.

Maintain BUY; Top sector pick
DBS stands to gain the most with its solid deposit franchise when interest rates rise, in our opinion. Forecasts are unchanged pending sector review. Reiterate BUY and SGD23.40 TP, based on 13x FY15E EPS, consistent with its historical mean since Jan 2005.

UOB

Kim Eng on 31 Oct 2014

• 3Q beat expectations, from fees and trading & investment income.
• Stable NIM & credit quality. Improving SGD funding profile. Stronger-than-expected loan growth of 11.0% YoY.
• Maintain HOLD. EPS and TP at 12x FY15E P/E unchanged. Top sector pick: DBS.

Beat expectations
3Q14 core PATMI of SGD866m (+7.2% QoQ, +25.5% YoY) beat consensus and our estimates, from fees (+15.8% QoQ, +16.8% YoY), and net trading & investment income of SGD258m (+3.2% QoQ, +80.4% YoY). 9M14 core earnings form 81.8% of our FY14E. After a weaker 2Q14, operating trends turned more positive. The market should view this set of results positively.

Encouraging trends
First, 3Q14 NIM stabilised at 1.71% (2Q14: 1.71%, 3Q13: 1.71%), as active liability management helped to contain cost of funds at 1.01%. Management expects NIM to hold up as higher funding costs are being compensated by wider loan yields. Second, after a weaker 2Q14, asset quality was stable. While Singapore housing NPLs, largely from one key project in Sentosa, edged higher by 12.3% QoQ for the second successive quarter, management does not foresee more to come. Third, SGD deposits expanded 5.0% QoQ and 2.2% YoY to SGD111.0b. This took SGD loan-deposit ratio to 95.9% (Jun 2014: 100.1%, Mar 2014: 95.4%, Dec 2013: 95.4%). Fourth, net loan growth was a stronger-than-expected 1.5% QoQ or 11.0% YoY, against our 8% for FY14E.

Reiterate HOLD
We leave our forecasts unchanged pending our sector review. TP still at SGD25.30, based on 12x FY15E P/E, 0.5SD below its rolling P/E mean since Jan 2005.

OCBC

Kim Eng on 31 Oct 2014

• No surprises. NIM weaker but expected. Credit quality strong. Ample 80.2% SGD LDR, with decent loan growth.
• The extraction of synergies from WHB remains an uncertainty.
• Maintain HOLD & SGD10.10 TP, at 1.24x FY15E P/BV. Top sector pick DBS.

No surprises
3Q14 results broadly met our expectation, stripping out SGD38m contributions from OCBC Wing Hang and a one-off gain of SGD391m from Bank of Ningbo. Core PATMI, excluding OCBC Wing Hang, was SGD803m, up 5.8% YoY but down 12.8% QoQ. The QoQ weakness arose from lower life-insurance profits and a higher effective tax rate.

Operating trends within guidance
As expected, NIM was weaker at 1.68%, down 2bps QoQ though up 5bps YoY. Management earlier guided for a weaker 2H14 due to deposit competition. Evidently, cost of funds rose to 1.10% (+6bps
QoQ, +8bps YoY). Organic loans grew 1% QoQ and 11% YoY, powered by Greater China (+3%, +19%), Malaysia (+3%, +18%) and Indonesia  (+2%, +15%). There were no asset-quality issues with a marginal increase in absolute NPLs. Asset quality in Greater China remained sound, with an NPL ratio of 0.3% at end-September. Post-merger CET1 was comfortably high at 13.2% (Jun 2014: 14.7%, Mar 2014: 14.4%). SGD liquidity remained strong with an 80.2% LDR (Jun 2014: 81.6%, Mar 2014: 78.8%, Dec 2013: 80.3%).

Reiterate HOLD
We leave our forecasts unchanged pending our sector review. Reiterate HOLD with a SGD10.10 TP, at 1.24x P/BV, 1SD below its mean since 2005.

SMRT

OCBC on 3 Nov 2014

SMRT reported an impressive set of 2QFY15 results that beat our expectations. Its 2QFY15 PATMI jumped 75.5% YoY to S$25.3m on the back of a 6.0% increase in its revenue to S$314.0m. SMRT’s Fare Business turned profitable from operating losses of S$6.8m and S$1.1m in 2QFY14 and 1QFY15 respectively, to record an operating profit of S$5.5m in 2QFY15. The significant improvement in its Fare Business was mainly due to higher ridership and average fares as well as productivity gains and disciplined cost management. We expect energy costs to come down further on recent oil price decline and Kallang Wave Mall rental income to further improve Non-Fare Business profitability. Hence, we increase our PATMI forecasts and upgrade to BUY with an increased DDM-derived fair value estimate of S$1.70 (prev: S$1.65).

2QFY15 earnings above expectations once again
SMRT reported an impressive set of 2QFY15 results that beat our expectations. Its 2QFY15 PATMI jumped 75.5% YoY to S$25.3m on the back of a 6.0% increase in its revenue to S$314.0m. The above-expectations performance for its first two quarters led to a 5.2% increase in SMRT’s 1HFY15 revenue to S$611.1m and a 54.9% increase in its PATMI to S$47.6m. The latter formed 57.1% of our FY15 forecast and 58.9% of Bloomberg’s consensus. SMRT’s Fare Business turned profitable from operating losses of S$6.8m and S$1.1m in 2QFY14 and 1QFY15 respectively, to record an operating profit of S$5.5m in 2QFY15. The significant improvement in its Fare Business was mainly due to higher ridership and average fares as well as productivity gains and disciplined cost management. Non-Fare Business’ 2QFY15 operating profit increased 4.4% YoY to S$27.2 mainly driven by taxi, rental and advertising.

Expects current level of earnings to sustain
We think the current level of earnings is sustainable if management continues to maintain profitability in its Fare Business going forward as we believe current ridership and average fares will sustain. We expect management to continue to focus on cost management mainly through efficient scheduling of drivers. With the recent oil price slide, we expect further improvements to SMRT’s Bus and Rail operating margins since electricity and diesel costs constitute an average of 16% of total expenses. Furthermore, with improved occupancy rate at 90% with an average lease period of three to six years, we believe there will be further increase in rental income from Kallang Wave Mall, contributing to revenue of Non-Fare Business going forward.

Upgrade to BUY
With the above-expectations performance in 1HFY15, and expectations of sustained earnings, we increase our FY15 and FY16 PATMI forecasts by 9.9% and 2.4%, respectively. Consequently, our DDM-derived fair value estimate increases from S$1.65 to S$1.70. With the recent drop of 4.8% in its share price since our last update on 31-Jul, we think the current price is attractive with a total potential upside of 16.5%. Hence, we upgrade from Hold to BUY rating on SMRT.

Neptune Orient Lines

OCBC on 3 Nov 2014

Neptune Orient Lines Limited (“NOL”) reported net loss of US$23.1m for its 3Q14 results, a significant reversal from its 3Q13 PATMI of US$20.0m. NOL’s 9M14 net loss of US$174.8m suggests our FY14 forecast net loss of US$268.7m could be overly conservative, and we consequently lower our forecast to net loss of US$250m. Also, NOL’s logistics segment saw an 8% increase in revenue to US$399m. We continue to believe that pressures on freight rates will not ease anytime soon and trade volume in 2015 will not be encouraging. Taking into account our conservative forecasts, we narrow our FY14 and FY15 net loss forecasts by 6.9% and 4.4% for FY14 and FY15 respectively. Hence, we lower our FV from S$0.90 to S$0.84 based on a lower 0.92x FY14F P/B (one standard deviation below its 3-year historical P/B average). Maintain HOLD.

Losses for 3Q14 despite peak season
Neptune Orient Lines Limited (“NOL”) reported net loss of US$23.1m for 3Q14, a significant reversal from 3Q13 PATMI of US$20.0m. NOL’s 9M14 net loss of US$174.8m suggests our FY14 forecast net loss of US$268.7m could be overly conservative, and we consequently lower our forecast to net loss of US$250m. While we expected higher revenue in 3Q14 being the peak season for the industry, we saw revenue remained unchanged from the same period a year ago at US$2.06b, which is ~3.5% below our forecast. Note that while 3Q14 revenue for its liner segment declined 2% YoY to US$1,680m on lower volume and freight rate pressures, its 3Q14 core EBIT increased to US$6m from 3Q13’s US$3m due to management focus on operational efficiency. The management’s costs management efforts were also dampened by the increased costs from Southern California port congestion. Also, NOL’s logistics segment saw an 8% increase in revenue to US$399m.

Profitability remains depressed on freight rates pressures
We continue to believe that pressures on freight rates will not ease anytime soon due to the oncoming supply of new vessels growing at 8.0% in 2015, as forecasted by Alphaliner. Moreover, we do not think trade volume going into 2015 will be encouraging. That said, we think management’s efforts on managing costs through network optimization as well as more fuel efficient fleet will continue to see cost savings. While 9M14 already saw cost savings of US$290m, we expect further increase in the savings for the remaining FY14. However, we believe port congestions at Southern California will persist into 4Q14 resulting in higher operating costs, eroding cost savings, putting pressure on profitability.

Lower FV; maintain HOLD
Taking into account our conservative forecasts, we narrow our FY14 and FY15 net loss forecasts by 6.9% and 4.4% for FY14 and FY15 respectively. Furthermore, with net gearing of 213% as at end 3Q14, we remain worried of its financial situation amid such challenging environment. Consequently, we lower our FV from S$0.90 to S$0.84 based on a lower 0.92x FY14F P/B (one standard deviation below its 3-year historical P/B average). Maintain HOLD.

OUE Commercial REIT

OCBC on 3 Nov 2014

OUE-CT reported 3Q14 distributable income and DPU of S$12.2m and 1.40 S-cents, respectively, which are 3.2% and 2.9% ahead of the IPO Forecasts and broadly in line with our expectations. In addition, 3Q14 gross revenue of S$19.5m was 1.8% ahead of the IPO Forecast, while the NPI of S$14.9m for the quarter also exceeded the Forecast by 6.3%. Overall portfolio occupancy improved to 97.2% as at end 3Q14, versus 96.8% as at end 2Q14, and management indicates that they have seen positive rental reversions at both portfolio assets, OUE Bayfront and Lippo Plaza, over the quarter. We understand that the REIT manager is currently focused on proactive leasing and cost management. For instance, we note that the REIT had incurred lower utilities expenses in 3Q14 following cost-saving initiatives to purchase OUE Bayfront’s utility consumption in bulk. Looking ahead, any future acquisitions of pipeline assets will likely come in FY15 and after. Maintain BUY with an unchanged fair value estimate of S$0.88.

3Q14 figures broadly in line
OUE-CT reported 3Q14 distributable income and DPU of S$12.2m and 1.40 S-cents, respectively, which are 3.2% and 2.9% ahead of the IPO Forecasts and broadly in line with our expectations. In addition, 3Q14 gross revenue of S$19.5m was 1.8% ahead of the IPO Forecast, while the NPI of S$14.9m for the quarter also exceeded the Forecast by 6.3%. Overall portfolio occupancy improved to 97.2% as at end 3Q14, versus 96.8% as at end 2Q14, and management indicates that they have seen positive rental reversions at both portfolio assets, OUE Bayfront and Lippo Plaza, over the quarter. OUE Bayfront remains 100% occupied as at end 3Q14, with average passing rents for the office component increasing to S$10.68 psf from S$10.66 psf last quarter. Management reports that newly committed rents for OUE Bayfront over 3Q14 ranged from S$12.50 to S$15.20 psf which is, on average, 10.2% higher than preceding rentals. Lippo Plaza had its occupancy rate improve to 94.4% as at end 3Q14 from 93.6% last quarter and similarly saw renewal rents in 3Q14 increase 5.6% versus preceding rents. 

Maintain BUY with FV estimate of S$0.88
OUE-CT’s aggregate leverage increased slightly to 39.8% (versus 39.5% as at end Jun-14) while average cost of debt dipped marginally to 2.57%. We understand that the REIT manager is currently focused on proactive leasing and cost management. For instance, we note that the REIT had incurred lower utilities expenses in 3Q14 following cost-saving initiatives to purchase OUE Bayfront’s utility consumption in bulk. Looking ahead, any future acquisitions of pipeline assets will likely come in FY15 and after. We believe OUE-CT represents attractive relative value versus its office S-REIT peers; despite providing one of largest exposure to the premium office space in Singapore, OUE-CT offers a consensus forward yield of 7.0% - the third highest in its peer group (average: 6.5%). Its price-to-book ratio of 0.74 is also lowest amongst peers. Maintain BUY with an unchanged fair value estimate of S$0.88.

DBS

OCBC on 3 Nov 2014

3Q14 net earnings came in at S$1.01b, up 17% YoY. Net Interest Margin improved from 1.60% in 3Q13 and 1.67% in 2Q14 to 1.68% in 3Q14. Non-interest Income grew 23% YoY or 21% QoQ to S$912m, giving total 3Q income of S$2.51b. Investment Banking did well and saw a more than doubling in earnings to S$94m (YoY), while Wealth Management jumped 39% to S$142m. After a slower 3Q, management is now guiding for 7-7.5% loans growth in 2014, followed by 8-10% growth in 2015. It is also expecting NIM to stabilize at current level. For Investment Banking, the indication is that its pipeline remains healthy. Overall, we are expecting an almost 10% earnings growth in FY14, followed by 6% in FY15. We are raising our fair value estimate from S$19.90 to S$21.10. DBS remains a BUY and is our top pick in the sector.

3Q earnings came in ahead of market expectations 
DBS concluded the banking sector’s result season with a stronger-than-expected set of earnings. 3Q14 net earnings of S$1.01b, up 17% YoY, were better than Bloomberg’s poll of S$975m. Net Interest Margin (NIM) improved to 1.68% in 3Q14, up from 1.60% in 3Q13 and 1.67% in 2Q14. Loans grew 8% (from a year ago) to S$262b. Net Interest Income rose 14% YoY or 3% QoQ to S$1.60b in 3Q14. Non-interest Income improved 23% YoY or 21% QoQ to S$912m, giving total 3Q income of S$2.51b. For Fee Income, Investment Banking did well and saw a more than doubling in earnings to S$94m (YoY), while Wealth Management jumped 39% YoY to S$142m. Total AUM for HNW amounted to S$77b (pre-Societe Generale Private Banking Asia) or S$89b (post).

Guiding for 8-10% loans growth in 2015
After a slower 3Q, management is now guiding for 7-7.5% loans growth in 2014, followed by 8-10% growth in 2015. Growth will remain board-based, and despite the softness in the local property market, it expects its Singapore mortgage book to grow by S$3.7b-S$3.8b in 2014. It is also expecting NIM to stabilize at around current level. On the Investment Banking side, which saw a strong 3Q, the indication is that its pipeline remains healthy. It is also seeing traction from its growing corporate relationships in China for more corporate activities. Cost-to-income ratio is likely to stay near current level of 45%. Staff headcount has increased 9% YoY to 20,678 by 3Q14. 

DBS remains our top pick in the sector; BUY
We have revised up our estimates, mainly on the Non-interest Income side to reflect the healthy guidance from management. Overall, we are expecting almost 10% growth in FY14 followed by 6% in FY15. Using the same valuation metric, but on a blended basis as we head into the final quarter, our fair value estimate moves up from S$19.90 to S$21.10. DBS remains a BUY and is our top pick in the sector.

OSIM International

OCBC on 31 Oct 2014

OSIM International Ltd (OSIM) announced a set of disappointing 3Q14 results which fell short of ours and the street’s expectations. Revenue grew 3.4% YoY to S$158.2m but PATMI tumbled 27.8% to S$16.4m. Management attributed this to the general market weakness, coupled with higher start-up expenses and legal costs from TWG-Tea’s expansion. Looking ahead, we expect cost pressures to persist in the near future and slash our FY14 and FY15 PATMI forecasts by 15.4% and 19.9%, respectively. We also cut our fair value from S$3.21 to S$1.90 after rolling forward our valuations to 14x FY15F EPS (previously 20x blended FY14/15F EPS). Although OSIM’s share price has plunged 18.0% since it reported its results, we believe the weak sentiment and lack of near-term catalysts may cap its upside potential. Hence, we downgrade OSIM to HOLD.

3Q14 results below our expectations
OSIM International Ltd (OSIM) announced a set of disappointing 3Q14 results which fell short of ours and the street’s expectations. Revenue grew 3.4% YoY to S$158.2m despite lower sales to Brookstone following a change in ownership. What caught us by surprise was the 27.8% YoY tumble in PATMI to S$16.4m. Management attributed this to the general market weakness, including China and Hong Kong, coupled with higher start-up expenses and legal costs from TWG-Tea’s expansion. Development costs had to be incurred on supporting infrastructure such as central kitchens, offices, warehouses and the training of staff as it opens TWG-Tea stores in new areas. For 9M14, revenue and PATMI of S$513.5m and S$74.8m represented growth of 9.5% and 1.1%, but only formed 70.0% and 63.4% of our FY14 forecasts, respectively. An interim DPS of 1 S cent was declared, similar to 3Q13.

Near-term cost pressures may persist
Looking ahead, as OSIM will likely continue its aggressive expansion plans for TWG-Tea, we expect cost pressures to remain in the foreseeable future, although we are still optimistic on its medium-to-long-term contribution to OSIM’s bottomline. China will be a key area of focus given its immense consumer market. Management intends to open two stores in Shanghai and one in Guangzhou in 4Q14. It will also add at least one outlet in Beijing in 1H15. Meanwhile, with regards to its core OSIM business, management has plans to launch a new flagship massage chair in 1H15.

Lack of near-term catalysts; downgrade to HOLD
We slash our FY14 and FY15 revenue/PATMI forecasts by 5.7%/15.4% and 10.0%/19.9%, respectively, following this poor set of results. Given the headwinds facing the group, we also apply a lower PER target peg of 14x (approximately equivalent to its 5-year average forward PER), from 20x previously. Rolling forward our valuations to FY15F EPS, our fair value drops from S$3.21 to S$1.90. Although OSIM’s share price has plunged 18.0% since it reported its results, we believe the weak sentiment and lack of near-term catalysts may cap its upside potential. Hence, we downgrade OSIM to HOLD.

Starhill Global REIT

OCBC on 31 Oct 2014

Starhill Global REIT (SGREIT) reported a decent 5.0% YoY growth in its 3Q14 DPU and this was within our expectations. Its Singapore portfolio continued to gain good traction, as NPI in 3Q14 rose 3.8% YoY to S$26.0m. Office leasing demand continues to be healthy, and we expect this momentum to remain robust. There was also good growth emanating from Australia. China, however, remained a drag to SGREIT (NPI -20.4% YoY), given intense competition and the austerity drive by the government. Overall portfolio occupancy was 99.1% (-0.3 ppt QoQ). SGREIT’s financial position remains strong, with a gearing ratio of 29.1%. 100% of its debt has also been fixed/hedged. We tweak our assumptions following a change in analyst coverage, but our DDM-derived fair value estimate remains unchanged at S$0.90. Maintain BUY on SGREIT, as valuations remain attractive, with the stock trading at FY15F P/NAV of 0.86x and distribution yield of 6.6%.

3Q14 DPU came in within expectations
Starhill Global REIT (SGREIT) reported a decent 5.0% YoY growth in its 3Q14 DPU to 1.27 S cents despite a marginal 0.4% dip in gross revenue to S$48.6m. This was aided by a solid 3.5 ppt YoY increase in its NPI margin to 81.4%. 9M14 DPU of 3.76 S cents represented an uplift of 5.0% if we exclude a one-time payout of 0.19 S cents/unit for the receipt of accumulated rental arrears (net of expenses) from the Toshin master lease in 1Q13. This was within our expectations, forming 73.2% of our FY14 projection.

Growth supported largely by Singapore and Australia assets
SGREIT’s Singapore portfolio continued to gain good traction, as NPI in 3Q14 rose 3.8% YoY to S$26.0m. Although revenue at Wisma Atria (retail) was relatively flat (+0.1% YoY) and tenants’ sales slipped 8.7% YoY, management highlighted to us that 8% of the mall’s NLA was undergoing renovation (~1.5 months of impact), while there was also one unit (~1% of NLA) which was vacant but has since been committed. The weaker tourism expenditure also had a negative impact. Nevertheless, positive rental reversions of 6.7% were still achieved at Wisma Atria (retail). Office leasing demand continues to be healthy, and we expect this momentum to remain robust. There was also good growth emanating from Australia, and this was underpinned by a 6.12% rental uplift from its key tenant David Jones in Aug this year. China, however, remained a drag to SGREIT (NPI -20.4% YoY), given intense competition and the austerity drive by the government. Overall portfolio occupancy was 99.1% (-0.3 ppt QoQ).

Maintain BUY
SGREIT’s financial position remains strong, with a gearing ratio of 29.1% and interest coverage ratio of 5.1x. 100% of its debt has been fixed/hedged, thus mitigating the impact of interest rate fluctuations on its distribution. We tweak our assumptions following a change in analyst coverage, but our DDM-derived fair value estimate remains unchanged at S$0.90. Maintain BUY on SGREIT, as valuations remain attractive, with the stock trading at FY15F P/NAV of 0.86x and distribution yield of 6.6%.

UOB

OCBC on 31 Oct 2014

UOB’s 3Q14 net earnings of S$866m came in higher than Bloomberg’s poll of S$736m. Better Fee and Other Incomes were partly mitigated by higher impairment charges. Overall group NPL has stabilized at 1.2%. Net Interest Margin (NIM) is likely to hold steady at 1.71%. Management is cautiously optimistic about its prospects, in particular on wealth management and fee income, while mindful of the slowdown in China and the rest of Asia. Taking into account the softer global outlook, we have revised our earnings projections and valuations, and lowering our fair value estimate for UOB from S$25.00 to S$24.20. With a dividend yield of 3.3% and medium term potential total return of 11%, we are retaining our BUY rating.

3Q14 earnings of S$866m was better than expected
UOB delivered 3Q14 net earnings of S$866m, up 19% YoY and 7% QoQ, higher than Bloomberg’s poll of S$736m. The variance was chiefly due to better-than-expected Fee and Other Incomes, which led to a 7% QoQ or 32% YoY jump in 3Q Non-interest Income to S$816m. However, this was partly mitigated by higher impairment charges, which almost doubled YoY or +8% QoQ. For the 9-month period, total impairment charges amounted to S$469m, up from S$290m a year ago. This was due to some non-performing accounts in Singapore, Thailand and Indonesia. Although overall group NPL ratio was stable at 1.2%, Singapore and Indonesia saw increases in QoQ NPLs. In Singapore, this was largely housing-related, in particular for high-end residential project in Sentosa. Net Interest Margin (NIM) held stable at 1.71% in 3Q14. For Fee income, strong double-digit growth rates were seen for its fund management, investment-related and loan-related activities. 

NPL may have stabilized
Management is cautiously optimistic about its prospects, in particular on wealth management and fee income, while mindful of the slowdown in China and the rest of Asia. On the NPL front, while some areas showed some weaknesses, the situation appears to have stabilized. On NIM, it expects margin to hover at current levels, with some possibility of pricing up in the short term for its loans book. We expect the current disciplined cost management measures to remain in place with cost-to-income ratio of 41.8% in 9M14 and likely to end the year slightly above 42%. 

Retain BUY, but lowering FV from S$25.00 to S$24.20
Since the start of Oct, and with the lowering of global economic growth forecasts (including projections by the IMF), market sentiment has weakened, especially with the more cautious outlook for the region. In tandem with this, banking stocks’ valuations have similarly eased off. Taking the softer outlook into consideration for both our earnings projections and valuations, we are lowering our fair value estimate for UOB from S$25.00 to S$24.20. With a dividend yield of 3.3% and medium term potential total return of 11%, we are retaining our BUY rating.

Yoma Strategic Holdings

OCBC on 30 Oct 2014

2QFY15 PATMI increased 222% YoY to S$10.8m, mostly due to S$8.1m of fair value gains recognized from completed units in Star City’s Building A5 retained as investment properties (up from S$6.42 in 1QFY15) and S$1.9m from an FX gain in USD monetary assets. Overall, we judge these figures to be mostly in line with our expectations; after netting out the FX gain, 1HFY15 results constitute 57% of our full year forecast. In terms of the topline, 2QFY15 revenue increased 52.9% to S$41.2m as the group recognized higher sales from property developments and land development rights from Star City. Due to a slower global economic outlook, we raise our discount rate from 10% to 12% to reflect higher market risk and also temper our price projections by 5% to 10% across Yoma’s projects. We maintain a BUY rating but our fair value estimate falls from S$0.82 to S$0.74.

Boost from FV gains from investment properties
2QFY15 PATMI increased 222% YoY to S$10.8m, mostly due to S$8.1m of fair value gains recognized from completed units in Star City’s Building A5 retained as investment properties (up from S$6.42 in 1QFY15) and S$1.9m from an FX gain in USD monetary assets. Overall, we judge these figures to be mostly in line with our expectations; after netting out the FX gain, 1HFY15 results constitute 57% of our full year forecast. In terms of the topline, 2QFY15 revenue increased 52.9% to S$41.2m as the group recognized higher sales from property developments and land development rights from Star City. 

Sale of Zone C LDRs to third party investment
Sales in Star City remain firm; as at end Sep-14, 528 units have been sold in Zone A. Yoma has also sold 856 units in Zone B and received booking deposits for an additional 106 units since its launch in Apr-13. Total revenue from Zone A cumulates to S$61.5m as at end Sep 14, though only S$37.8m has been recognized to date. We expect the remaining S$22.7m to be booked over the next 3 – 9 months. In addition, the 150 units in Building A5, retained as investment properties, are expected to provide stable recurring income ahead. Yoma will launch Zone C in 2HFY15 and has similarly arranged to sell the LDRs to a third party investor and manage the construction and sale of the units. As a result, Yoma booked S$25.2m for the LDR sale in 2QFY15 and will also receive S$1.5m over the next eight quarters, in addition to a share of the profits of the eventual sale of Zone C apartments. 

Lower fair value estimate to S$0.74
Due to a slower global economic outlook, we raise our discount rate from 10% to 12% to reflect higher market risk and also temper our price projections by 5% to 10% across Yoma’s projects. We maintain aBUY rating but our fair value estimate falls from S$0.82 to S$0.74.

Mapletree Greater China Commercial Trust

OCBC on 29 Oct 2014

Mapletree Greater China Commercial Trust (MGCCT) reported its 2QFY15 results which exceeded its IPO forecast but were in-line with our expectations. DPU of 1.606 S cents represented a growth of 10.4% and came in 11.6% ahead of its projection. Overall portfolio occupancy remains unchanged QoQ at a healthy 99.2%. Positive rental uplift of 21% and 32% were achieved at FW’s retail and GP’s office segments, respectively, for 1HFY14. Management assured us that it does not expect its performance to be adversely affected by the Hong Kong demonstrations. In fact, some of its F&B tenants actually saw an increase in reservations as some consumers switched locations from the impacted areas. Overall tenants’ sales at FW grew 3.6% to HK$2.5b in 1HFY15 although footfall inched down slightly by 1.7% to 19.2m. We reiterate our BUY rating and S$1.00 fair value estimate on MGCCT.

2QFY15 results met our expectations
Mapletree Greater China Commercial Trust (MGCCT) reported its 2QFY15 results which exceeded its IPO forecast but were in-line with our expectations. Revenue rose 6.9% YoY to S$67.5m (9.2% above its projection) due to positive rental reversions from Festival Walk (FW) and Gateway Plaza (GP). DPU of 1.606 S cents represented a growth of 10.4% and came in 11.6% ahead of its forecast. For 1HFY15, revenue increased 7.7% to S$131.3m and constituted 47.8% of our FY15 estimate. DPU growth of 11.1% to 3.162 S cents (10.5% above MGCCT’s IPO forecast) formed 50.0% of our full-year figure. 

Operating metrics exhibit resilience and comfort
Overall portfolio occupancy remains unchanged QoQ at a healthy 99.2%. Positive rental uplift of 21% and 32% were achieved at FW’s retail and GP’s office segments, respectively, for 1HFY14. 87% of MGCCT’s expiring leases for FY15 have already been committed. Its financial position also remains solid, with a comfortable gearing ratio of 37.7% and all-in average cost of debt of just 2.1%. YTD, MGCCT had already hedged ~90% of its HKD forecasted distributable income. During 2QFY15, it further hedged >70% of its 2HFY15 CNY distributable income and >80% of its 1HFY16 HKD distributable income, thus mitigating its FX volatility.

Maintain BUY
The pro-democracy protests in Hong Kong have put the spotlight on companies with large exposure there. MGGCT assured us that it has seen minimal impact for FW as it is not located in the affected areas. Going forward, it also does not expect its performance to be adversely affected by these demonstrations. In fact, some of its F&B tenants actually saw an increase in reservations as some consumers switched locations from the impacted areas. Overall tenants’ sales at FW grew 3.6% to HK$2.5b in 1HFY15 although footfall inched down slightly by 1.7% to 19.2m. We retain our projections as results were within our expectations. Since our ‘Buy’ initiation on 3 Oct this year, MGCCT’s share price has appreciated 6.1%, outperforming the STI’s and FTSE ST REIT Index’s -0.5% and 1.1% movement during the same period. We reiterate our BUY rating and S$1.00 fair value estimate.

Hutchison Port Holdings Trust

OCBC on 28 Oct 2014

HPHT reported 3Q14 PATMI of HK$490.7m (EPU: 5.63 HK-cents), which dipped 9.0% YoY mostly due to continued cost pressures and a higher effective tax rate after YICT’s tax credit was used up in 4Q13; partially offset by HK$30m of exchange gains from RMB-denominated monetary assets. Accounting for divestment gains, we estimate that 9M14 PATMI constitutes 76.3% of our full year forecast, which we judge to be mostly within expectations. Maintain HOLD with an unchanged fair value estimate of US$0.68. While conditions remain mixed due to an uncertain outlook and persistent cost pressures, we see the downside to be limited here due to an attractive FY14F dividend yield of 8.0%. A potential positive catalyst could also come in the form of higher-than-expected tariff increases ahead.

3Q14 earnings in line with expectations
HPHT reported 3Q14 PATMI of HK$490.7m (EPU: 5.63 HK-cents), which dipped 9.0% YoY mostly due to continued cost pressures and a higher effective tax rate after YICT’s tax credit was used up in 4Q13; partially offset by HK$30m of exchange gains from RMB-denominated monetary assets. Accounting for divestment gains, we estimate that 9M14 PATMI constitutes 76.3% of our full year forecast, which we judge to be mostly within expectations. The trust reported 3Q14 revenues at HK$3,422.0m, up 1.7% mostly due to higher container throughput at HIT and YICT.

Outbound cargoes to the EU slowed over latest quarter
While outbound cargoes to the US continued its uptrend in 3Q14, we saw a slowdown in the outbound volumes to the EU due to a decline in demand and weaker new orders. Over the quarter, YICT’s throughput increased 12.4% YoY as transshipment and US cargoes grew, and throughput at HIT similarly increased 2.1% due to higher transshipment volume, offset in part by weaker intra-Asia cargoes. 3Q14 average revenue per TEU in HK grew YoY due to favorable throughput mix from liners while average revenue per TEU in China fell due to a higher mix of transshipment throughput handled.

Starting tariff negotiations with shipping lines
Maintain HOLD with an unchanged fair value estimate of US$0.68. While conditions remain mixed due to an uncertain outlook and persistent cost pressures, we see the downside to be limited here due to an attractive FY14F dividend yield of 8.0%. A potential positive catalyst could also come in the form of higher-than-expected tariff increases ahead. We understand that HPHT is starting negotiations with the shipping lines though management has indicated that they expect clients to be resistant to a sizeable increase due to profit headwinds currently. HPHT also clarified that discussions are still in an early stage and more color on the magnitude of the increase could come in 4Q14.

CapitaRetail China Trust

OCBC on 28 Oct 2014

CapitaRetail China Trust (CRCT) reported a solid set of 3Q14 results, with DPU growing by 10.3% YoY to 2.35 S cents on the back of a 30.2% jump in its gross revenue to S$51.4m; in-line with our expectations. CRCT delivered a robust 22.6% rental reversion, and this was also the third consecutive quarter which it saw a rental uplift of more than 20%. Although we expect near-term pressure on CapitaMall Minzhongleyuan’s performance due to a road closure to facilitate the construction of subway Line 6 for two years from Aug 2014, this mall’s positioning and accessibility will be enhanced once the subway line is completed. We fine-tune our assumptions following a change in analyst coverage. Our DDM-derived fair value estimate increases marginally from S$1.55 to S$1.58. However, we maintain HOLD on CRCT, as we believe its sturdy financial performance and growth prospects have been priced in by the market.

3Q14 results within expectations
CapitaRetail China Trust (CRCT) reported a solid set of 3Q14 results, with DPU growing by 10.3% YoY to 2.35 S cents on the back of a 30.2% jump in its gross revenue to S$51.4m (+32.3% YoY in CNY terms). The latter was driven by new contribution from its acquired CapitaMall Grand Canyon, completion of asset enhancement works at CapitaMall Minzhongleyuan and organic rental growth from its other multi-tenanted malls. For 9M14, revenue and DPU increased by 26.7% and 7.6% to S$150.6m and 7.34 S cents, such that these figures constituted 76.2% and 75.7% of our FY14 estimates, respectively. These were within our expectations. 

Strong positive rental reversions
Overall portfolio occupancy stood at 97.6% as at 30 Sep 2014, a slight decline from the 98.1% recorded as at 30 Jun 2014. During 3Q14, CRCT delivered a robust 22.6% rental reversion, and this was also the third consecutive quarter which it saw a rental uplift of more than 20%. This was driven largely by CapitaMall Wangjing and CapitaMall Grand Canyon, both of which turned in rental growth of 32.3% from their preceding rental rates. Shopper traffic and tenants’ sales at its malls increased by 3.8% and 16.1% YoY, respectively, with the latter outperforming the overall China retail sales growth of 11.9% during the same period. On the flip-side, we expect near-term pressure on footfall, tenants’ sales and occupancy rates at CapitaMall Minzhongleyuan. This is attributed to the closure of the adjacent Zhongshan Avenue to facilitate the construction of subway Line 6 for two years from Aug 2014. Nevertheless, this mall’s positioning and accessibility will be enhanced once the subway line is completed.

Maintain HOLD
We fine-tune our assumptions following a change in analyst coverage. Our DDM-derived fair value estimate increases marginally from S$1.55 to S$1.58. However, we maintain HOLD on CRCT, as we believe its sturdy financial performance and growth prospects have been priced in by the market. Its share price has appreciated 19.2% YTD.

Raffles Medical Group

OCBC on 28 Oct 2014

Raffles Medical Group (RMG) reported a double-digit YoY growth in both its topline and bottomline for its 3Q14 results, which was within our expectations. Although foreign patient figures saw an improvement with a single-digit growth in 3Q14, as compared to a flat performance in 2Q14, management highlighted that there was a decline in its Indonesian patients. This was largely attributed to the weak IDR versus the SGD. Given the expected bump up in salaries of nurses in the public healthcare sector, RMG also intends to raise the wages of its nurses to stay competitive, but intends to pass on some of these costs to its patients. We trim our FY14 and FY15 PATMI forecasts by 2.0% and 2.4%, respectively, on more moderated revenue growth assumptions. But as we roll forward our valuations to 30x FY15 EPS, our fair value inches up from S$3.90 to S$3.95. Maintain HOLD.

3Q14 results in-line with our expectations
Raffles Medical Group (RMG) reported a double-digit YoY growth in both its topline and bottomline for its 3Q14 results. Revenue was up 11.1% to S$94.5m due to a higher patient load, addition of specialist consultants and increased provision of healthcare insurance services. This is further segregated into a 16.4% and 7.3% jump in revenue from its Healthcare Services and Hospital Services divisions, respectively. PATMI rose 11.3% to S$15.4m, implying a net margin of 16.3% (flat YoY). For 9M14, revenue increased 8.6% to S$274.6m, and constituted 72.1% of our FY14 forecast. PATMI rose 9.2% to S$45.6m, or 67.1% of our full-year projection. This was within our expectations, as 4Q is traditionally RMG’s strongest quarter (9M13 PATMI made up 68.9% of FY13’s core PATMI).

Single-digit foreign patients’ growth, drag from Indonesia
RMG’s Hospital Services segment registered its third consecutive quarter of single-digit YoY revenue growth in 3Q14. Although foreign patient figures saw an improvement with a single-digit growth, as compared to a flat performance in 2Q14, management highlighted that there was a decline in its Indonesian patients in 3Q14. This was largely attributed to the weak IDR versus the SGD. Overall growth in foreign patient loads was still possible due to RMG’s efforts to diversify its foreign patient base, with good traction coming from Indo-China and Middle-East.

Maintain HOLD
In Aug this year, Singapore’s Minister for Health Mr. Gan Kim Yong highlighted that nurses in public healthcare and MOH-subvented Intermediate and Long Term Care institutions will receive a 5-20% increase in their monthly base salaries in two stages in 2014 and 2015. Moreover, a new annual Nurse Special Payment of half a month’s pay will be introduced with effect from Dec this year. RMG updated us that it will also raise the wages of its nurses to stay competitive, but intends to pass on some of these costs to its patients. We trim our FY14 and FY15 PATMI forecasts by 2.0% and 2.4%, respectively, on more moderated revenue growth assumptions. But as we roll forward our valuations to 30x FY15 EPS, our fair value inches up from S$3.90 to S$3.95. Maintain HOLD.

Frasers Centrepoint Trust

OCBC on 27 Oct 2014

Frasers Centrepoint Trust’s (FCT) FY14 DPU of 11.187 S cents (+2.4%) matched our 11.2 S cents forecast, and was its eighth consecutive year of growth since its IPO. Overall portfolio occupancy stood at a healthy 98.9% (+0.4 ppt from 3QFY14). FCT also recorded positive average rental reversions of 10.9% and 6.5% in 4QFY14 and FY14, respectively. We remain confident on the prospects of Causeway Point, Northpoint and Changi City Point, but expect the leasing environment to remain challenging at Bedok Point. We fine-tune our assumptions marginally following a change in analyst coverage. Our FY15F DPU forecast of 11.8 S cents translates into a growth of 5.5% and implies another record year on the cards. We continue to like FCT for its resilient portfolio, defensive earnings and FY15F distribution yield of 6.1%. Maintain BUY and S$2.08 fair value estimate.

Record FY14 DPU, in-line with expectations

Frasers Centrepoint Trust (FCT) reported 4QFY14 revenue of S$46.7m, up 16.1% YoY, attributed largely to the acquisition of Changi City Point on 16 Jun 2014. DPU dipped 6.5% to 2.785 S cents, as 4QFY13 DPU included 0.35 S cents of retained cash from previous quarters. Excluding this one-off item, DPU for 4QFY14 would have increased by 5.9% YoY. For FY14, FCT’s revenue rose 6.8% to S$168.8m, or 97.3% of our estimate. Full year DPU of 11.187 S cents (+2.4%) matched our 11.2 S cents forecast, and was FCT’s eighth consecutive year of growth since its IPO.

Operating statistics still healthy
Overall portfolio occupancy stood at a healthy 98.9% (+0.4 ppt QoQ). FCT also recorded positive average rental reversions of 10.9% and 6.5% in 4QFY14 and FY14, respectively, although the latter was softer than the 7.7% reversion achieved in FY13. Despite a 3% YoY and 2% QoQ decline in shopper traffic in 4QFY14, FCT’s portfolio tenants’ sales inched up 0.6% for 11MFY14. This reflects the resiliency of its suburban malls, which depend more on non-discretionary spending. We remain confident on the prospects of Causeway Point, Northpoint and Changi City Point, but expect the leasing environment to remain challenging at Bedok Point. Average rental rates at Bedok Point may continue to ease, but we expect NPI to improve in FY15 due to management’s efforts to turn the mall around (occupancy at Bedok Point rose from 77.0% in 2QFY14 to 98.2% in 4QFY14). FCT will continue to work closely with its anchor tenants to carry out more advertising and promotion activities.

Reiterate BUY
From a financial position perspective, FCT had a comfortable gearing ratio of 29.3%, with an average all-in cost of borrowing of just 2.51%. We fine-tune our assumptions marginally following a change in analyst coverage. Our FY15F DPU forecast of 11.8 S cents translates into a growth of 5.5% and implies another record year on the cards. We continue to like FCT for its resilient portfolio, defensive earnings and FY15F distribution yield of 6.1%. Maintain BUY and S$2.08 fair value estimate.

Cache Logistics Trust

OCBC on 27 Oct 2014

Cache Logistics Trust’s (CACHE) 3Q14 DPU of 2.14 S cents (+0.7% YoY) was in-line with our expectations. We like management’s execution capabilities as seen in its successful attempt to refinance S$375m of its existing loan facilities this month at an all-in margin savings of ~100 bps. Nevertheless, the large supply of warehouses coming into the market in 2015 still provides a cause of concern, as ~24% of CACHE’s leased area will expire in FY15. This situation may be exacerbated by CACHE’s strategy to transit to a more multi-tenanted lease profile going forward to reduce its concentration risk. In our view, the pressure on industry rentals and occupancy rates may result in greater volatility in CACHE’s share price, especially if its operating statistics exhibits signs of deterioration in the year ahead. Hence, we lower our fair value from S$1.25 to S$1.13 on higher discount rate assumptions to reflect the marginally increased risk profile ahead. Maintain HOLD.

3Q14 results in-line with expectations
Cache Logistics Trust (CACHE) reported a stable set of 3Q14 results which were in-line with our expectations. Revenue and DPU climbed 0.4% and 0.7% YoY to S$20.8m and 2.14 S cents, respectively. For 9M14, revenue growth of 3.3% to S$62.2m formed 72.7% of our FY14 forecast, while DPU of 6.427 S cents (-1.2%) constituted 74.0% of our full-year projection. CACHE’s portfolio occupancy was steady at 99.5% (2Q14: 99.6%), while balance sheet remains healthy with a gearing ratio of 28.8%, as at 30 Sep 2014. We like management’s execution capabilities as seen in its successful attempt to refinance S$375m of its existing loan facilities this month at an all-in margin savings of ~100 bps. Its weighted average debt maturity has also been extended from 1.6 years to 4.2 years and it no longer has any debt due until Oct 2017. 70% of its debt has been hedged, as at 30 Sep 2014.

Management proactive, but supply concerns weigh 
Approximately 24% of CACHE’s leased area will expire in FY15. While we appreciate management’s efforts to actively secure forward renewals in advance (expiry profile was 34% at start of the year), the large supply of warehouses coming into the market in 2015 still provides a cause of concern. This situation may be exacerbated by CACHE’s strategy to transit to a more multi-tenanted lease profile going forward to reduce its concentration risk.

Maintain HOLD
Given the likely oversupply scenario as highlighted earlier, we believe the pressure on industry rentals and occupancy rates may result in greater volatility in CACHE’s share price, especially if its operating statistics exhibits signs of deterioration in the year ahead. Hence we see the need to raise our cost of equity assumption from 8.0% to 8.9% to reflect the marginally increased risk profile ahead. As a result, our DDM-derived fair value on CACHE slips from S$1.25 to S$1.13. Although FY14F and FY15F distribution yield remains attractive at 7.3%, we maintain our HOLD rating on CACHE, given the lack of near-term catalysts.

Libra Group

OCBC on 27 Oct 2014

We initiate coverage on Libra Group as our conviction BUY in the small-cap space with a fair value estimate of S$0.33. Based on an analysis of this M&E specialist’s order book, upcoming FY14 earnings is forecasted to increase a whopping 8.0 times YoY to S$4.7m. We further forecast FY15 earnings to grow 68.0% YoY to S$7.8m as the new management team, who took over operations in 1Q14, continues to expand and position the company to capitalize on the healthy public construction outlook. We highlight that this under-the-radar company is already showing initial signs for an earnings upswing: 1H14 earnings had jumped 218.1% YoY to S$3.0m. We believe Libra represents good value here at only 2.7x FY15 forward P/E (versus a peer average of 7.4x), and particularly so as the group’s dividend yield is forecasted to jump dramatically from 1.6% last year to 8.1% in FY14 and 9.7% in FY15. Our fair value estimate of Libra is based on an undemanding 4.8x forward FY15 PE, which represents a 35% discount versus its peer average. Increased visibility of Libra’s earnings and dividends growth ahead will likely form compelling re-rating catalysts for its share price, in our view.

Earnings forecasted to grow 8x in FY14 and 68% in FY15
We initiate coverage on Libra Group Ltd (“Libra”) as our conviction BUY in the small-cap space with a fair value estimate of S$0.33. Given our analysis of this M&E specialist’s order book, upcoming FY14 earnings is forecasted to increase a whopping 8.0 times YoY to S$4.7m. We further forecast FY15 earnings to grow 68.0% YoY to S$7.8m as the new management team, who took over operations in 1Q14, continues to expand and position the company to capitalize on the healthy public construction pipeline. Our fair value estimate of Libra is based on an undemanding 4.8x forward FY15 PE, which represents a 35% discount to the industry peer average of 7.4x.

Already showing initial signs of earnings upswing
We highlight that this under-the-radar company is already showing initial signs for an earnings upswing: 1H14 earnings had jumped 218.1% YoY to S$3.0m. The new management team, which includes majority shareholder and executive Chairman/CEO Mr Chu Sau Ben, took over day-to-day operations in 1Q14 and is rapidly gaining traction in terms of growing business volumes (including the upstream main contractor segment), leveraging on the firm public construction outlook in Singapore (forecasted at S$14b-18b per annum over FY15-16), and strengthening margins through active rationalization of business costs and operations. 

Good value here with key re-rating catalysts ahead
We believe Libra represents good value here at only 3.4x FY14/15 blended P/E and 2.7x FY15 forward P/E (versus a peer average of 7.4x FY15 PE). In addition, Libra’s dividend yield is forecasted to jump dramatically from 1.6% last year to 8.1% in FY14 and 9.7% in FY15. Looking ahead, we expect increased visibility of Libra’s earnings and dividends growth – particularly through new order wins and upcoming FY14 results – to form compelling re-rating catalysts for its share price. Initiate with BUY and S$0.33 fair value estimate.

Ascendas REIT

OCBC on 24 Oct 2014

Ascendas REIT (A-REIT) reported a resilient set of 2QFY15 results which met ours and the street’s expectations. DPU grew 1.7% YoY to 3.66 S cents on the back of a 8.6% increase in gross revenue to S$164.8m. Looking ahead, we believe its occupancy (2QFY15: 85.6%, -2.5 ppt QoQ) may bottom-out soon. Management reiterated its guidance of a mid-to-high single digit positive rental reversion for FY15, with 8% of its property income due for renewal for the remainder of the financial year. We retain our forecasts as results were within expectations. Given our unchanged S$2.45 fair value estimate and forecasted 6.4% distribution yield for FY15, we maintain BUY on A-REIT, with potential total returns of 13%.

2QFY15 results on track
Ascendas REIT (A-REIT) reported a resilient set of 2QFY15 results which met ours and the street’s expectations. DPU grew 1.7% YoY to 3.66 S cents on the back of a 8.6% increase in gross revenue to S$164.8m. The latter was driven by new acquisitions and positive rental reversions of 6.3%, although this was softer than the 11.8% reversion achieved in 1QFY15. Management maintained its guidance of a mid-to-high single digit positive rental reversion for FY15, with 8% of its property income due for renewal for the remainder of the financial year. For 1HFY15, A-REIT’s revenue and DPU rose 8.4% and 2.1% to S$328.0m and 7.30 S cents, and this met 49.5% and 49.4% of our FY15 projections, respectively. As A-REIT has switched to a semi-annual distribution, the entire 7.30 S cents DPU would be paid out on 28 Nov.

Occupancy may trough soon
A-REIT’s overall occupancy slipped 2.5 ppt QoQ to 85.6%. This was attributed largely to two properties: i) conversion of C&P Logistics Hub from a single-tenanted building (STB) to a multi-tenanted building (MTB) in July this year (occupancy: 66.4%), and ii) Aperia, which was acquired in Aug 2014 (occupancy: 27.7%). Nevertheless, we note that occupancy for MTBs (same store basis) was fairly stable at 86.0% (1QFY15: 86.5%). A-REIT remains confident on the performance of Aperia going forward, and believes it will be able to bring it to a stabilised state within one year of acquisition. Leases signed recently (S$5 psf pm) are already higher than the initial stages (S$4 psf pm). In addition, A-REIT has been going through a transitional period of converting its STBs to MTBs and hopes to improve its occupancy rates after the cycle is completed.

Maintain BUY
We retain our forecasts as results were within expectations. Given our unchanged S$2.45 fair value estimate and forecasted 6.4% distribution yield for FY15, we reiterate BUY on A-REIT, with potential total returns of 13%.