Tee International

OCBC on 16 Apr 2015

Tee International (TEE) reported that its 3QFY15 PATMI dipped 76.5% YoY to S$0.13m mostly due to weaker gross margins, and higher admin and finance expenses. 9MFY15 PATMI cumulates to S$2.9m, down 5.6% YoY, which we deem to be below expectations. We revise our FY15 forecast downwards to S$6.0m and introduce FY16 estimates of S$8.8m. Looking ahead, the group expects the competitive operating environment to stay challenging and will take a prudent stance in evaluating growth prospects in Singapore and the region. That said, while management are cautious on the muted property market in Singapore and Malaysia, they are confident of the long term prospects of the real estate market in Thailand, New Zealand and Australia; and the group’s real estate subsidiary, Tee Land, has recently acquired another hotel in Sydney, Australia, and a property in Christchurch, New Zealand. We have a HOLD rating on TEE with a fair value estimate of S$0.24.

3QFY15 PATMI down 77% YoY to S$0.13m
Tee International (TEE) reported that its 3QFY15 PATMI dipped 76.5% YoY to S$0.13m mostly due to weaker gross margins, and higher admin and finance expenses. In particular, we note that admin expenses increased 14.5% YoY (S$0.7m) given marketing costs incurred for a property development project in Malaysia by TEE Land. 9MFY15 PATMI cumulates to S$2.9m, down 5.6% YoY, which we deem to be below expectations. We revise our FY15 forecast downwards to S$6.0m and introduce FY16 estimates of S$8.8m. The group’s order book for the engineering segment now stands at S$410m, and major projects include Marina One, Tampines Hub and Changi Airport, as well as MDIS Educity@Iskandar, St Regis and The Parisian in Macao.

Expanding into the energy infrastructure space
TEE also recently expanded into the energy infrastructure space and, in Feb 2015, entered into a JV agreement to construct a 25 MW green-field power plant in Iligan, Philippines and a power sales agreement to supply power to a nearby cement plant and to the City of Iligan, Mindanao. The total off-take of the two power sales agreement will amount to 20 MW out of the total 25 MW capacity. We understand that the group is looking to further expand their energy portfolio in the Philippines.

Rated HOLD with S$0.24 FV estimate
Looking ahead, the group expects the competitive operating environment to stay challenging and will take a prudent stance in evaluating growth prospects in Singapore and the region. That said, while management are cautious on the muted property market in Singapore and Malaysia, it is confident of the long term prospects of the real estate market in Thailand, New Zealand and Australia; and the group’s real estate subsidiary, Tee Land, has recently acquired another hotel in Sydney, Australia, and a property in Christchurch, New Zealand. We have a HOLD rating on TEE with a fair value estimate of S$0.24.

SPH

OCBC on 15 Apr 2015

SPH reported a 2QFY15 PATMI of S$69.6m, down 14.4% mostly due to the absence of divestment gains recognized in 2QFY14; but partially offset by higher income from investments, a stronger share of results of JV/associates and a higher operating profit of S$68.0m over 2QFY15 which increased 27.1% YoY. We judge these results to be broadly within expectations, and 1HFY15 revenues and operating profit now makes up 47.1% and 48.8% of our full year forecast, respectively. We like that management has successfully managed cost-side pressures over the quarter; and staff costs, material and production costs, and operating other expenses all similarly fell 6.3%, 17.0% and 21.6% YoY, respectively. An interim dividend of 7.0 S-cents per share was declared. Maintain HOLD with an unchanged fair value estimate of S$3.85.

2QFY15 results mostly in line
Singapore Press Holdings (SPH) reported a 2QFY15 PATMI of S$69.6m, down 14.4% mostly due to the absence of divestment gains recognized in 2QFY14; but partially offset by higher income from investments, a stronger share of results of JV/associates and a higher operating profit of S$68.0m over 2QFY15 which increased 27.1% YoY. Topline for the quarter dipped 3.0% YoY to S$270.3m mainly as media revenues continue to slip (down 7.1% to S$202.8m), with advertisement and circulation revenues both falling 8.0% and 7.7%, respectively. The impact of the weaker media numbers, however, was partially negated with contributions from the newly-opened Seletar Mall and revenues from the property segment increased 17.2% to S$60.6m. We judge these results to be broadly within expectations, and 1HFY15 revenues and operating profit now makes up 47.1% and 48.8% of our full year forecast, respectively. In addition, the board declared an interim dividend of 7.0 S-cents per share, which is similarly within expectations and unchanged from that in the same period last year.

Cost pressures were well managed
We like that SPH has successfully managed cost-side pressures over the quarter; and staff costs, material and production costs, and operating other expenses all similarly fell 6.3%, 17.0% and 21.6% YoY, respectively. The group’s staff headcount was kept mostly flat at 4,310 as at end 2QFY15 versus 4,316 at 2QFY14. Newsprint prices continued to inch down to S$573/MT versus S$586/MT in 4QFY14, and average monthly consumption also fell to 6,811 MT from 7,847 MT. While display and classified ad revenues in 2QFY15 fell 8.2% and 8.4% YoY, respectively, management indicated that they are seeing signs of the ad spend outlook stabilizing and that the Singapore Adex benchmark registered a YoY uptick in the month of Feb-15 after four consecutive declines. We opt to maintain our HOLD rating with an unchanged fair value estimate of S$3.85, but would keep a close eye on more visibility for a turnaround in the group’s core media business which could be a key positive catalyst ahead.

Soilbuild Business Space REIT

OCBC on 15 Apr 2015

Soilbuild Business Space REIT (Soilbuild REIT) reported its 1Q15 results which met our expectations. Gross revenue jumped 10.5% YoY to S$18.6m and DPU was up 4.5% to 1.633 S cents, underpinned by additional rental revenue from three new acquisitions in 2Q14 and 4Q14. Operationally, Soilbuild REIT maintained its portfolio occupancy rate of 100% (as at 31 Mar 2015), while positive rental reversions of 9.3% for lease renewals were achieved in 1Q15. Notwithstanding the healthy 100% tenant retention rate in 1Q15, management cautioned that this is unlikely to be sustained for the rest of the year due to macroeconomic headwinds and supply concerns. In terms of capital management, Soilbuild REIT has hedged 81.9% of its total debt, and its aggregate leverage stands at 38.5%. We maintain our BUY rating and S$0.93 fair value on Soilbuild REIT, as the stock still offers an attractive FY15F distribution yield of 7.7%.

1Q15 results within our expectations
Soilbuild Business Space REIT (Soilbuild REIT) reported its 1Q15 results which met our expectations. Gross revenue jumped 10.5% YoY to S$18.6m, underpinned by additional rental revenue from three new properties acquired in 2Q14 and 4Q14. This formed 24.8% of our FY15 forecast. DPU was up 4.5% YoY to 1.633 S cents and constituted 25.3% of our full-year estimate. Operationally, Soilbuild REIT maintained its portfolio occupancy rate of 100% (as at 31 Mar 2015), while positive rental reversions of 9.3% for lease renewals were achieved in 1Q15. Although 18.4% of Soilbuild REIT’s NLA is expiring in FY15, this is an improvement from the 29.7% figure at the start of the year, which reflects management’s proactive renegotiation efforts.

Industry headwinds may weigh on occupancy rate
Notwithstanding the healthy 100% tenant retention rate in 1Q15, management cautioned that this is unlikely to be sustained for the rest of the year. We believe this can be attributed largely to macroeconomic headwinds and increased competitive pressures from the large upcoming supply of factory space in Singapore. The bulk of Soilbuild REIT’s remaining lease expires in FY15 and comes from its West Park BizCentral and Tuas Connection properties. 

Maintain BUY
In terms of capital management, Soilbuild REIT has hedged 81.9% of its total debt. Its average all-in interest cost stands at 3.28%, as at 31 Mar 2015, a slight uptick of 9 bps versus end-2014. Current aggregate leverage ratio has also increased from 35.4% (as at 31 Dec 2014) to 38.5%, as this includes the interest free loan from its sponsor and deferred payment in relation to the Solaris upfront land premium to be paid to JTC. On the acquisition front, management plans to complete the purchase of 72 Loyang Way by end 2Q15 (total acquisition cost of S$98.1m), and we believe this would be financed by both debt and equity. Pending the finalisation of the funding structure, we have not incorporated this acquisition in our model. Maintain BUY and S$0.93 fair value on Soilbuild REIT, as the stock still offers an attractive FY15F distribution yield of 7.7%.

First REIT

OCBC on 15 Apr 2015

First REIT (FREIT) posted its 1Q15 results which turned out to be in-line with our expectations. Gross revenue and DPU rose 10.1% and 3.5% YoY to S$24.7m and 2.06 S cents, respectively, driven by stable organic growth and a full-quarter of contribution from Siloam Sriwijaya which was acquired in Dec 2014. Meanwhile, Siloam International Hospitals, which is the operator of FREIT’s Indonesian hospitals, recently reported a robust set of FY14 results. Gross operating revenue increased by 33% to IDR3,341b, while EBITDA accelerated 56% to IDR466b. Looking ahead, we expect FREIT to maintain its core focus on the Indonesian healthcare market, given the favourable demand and supply dynamics, rising middle-class population and healthy pipeline of potential acquisition targets from Siloam International Hospitals. FREIT will also explore asset enhancement initiatives in Indonesia. Maintain BUY and S$1.50 fair value estimate on FREIT.

1Q15 results in-line with our expectations
First REIT (FREIT) posted its 1Q15 results which turned out to be in-line with our expectations. Gross revenue jumped 10.1% YoY to S$24.7m, driven by stable organic growth and a full-quarter of contribution from Siloam Sriwijaya which was acquired in Dec 2014. This formed 24.6% of our S$100.5m FY15 forecast. NPI grew 9.3% to S$24.2m, a slightly slower pace than topline as higher property operating expenses were incurred due to Sarang Hospital, property tax, insurance and building audit fees. DPU for the quarter came in at 2.06 S cents. This represented a YoY growth of 3.5% and constituted 24.8% of our full-year projection.

Siloam Hospitals reported strong results
Siloam International Hospitals, which is the operator of FREIT’s Indonesian hospitals and a subsidiary of FREIT’s sponsor Lippo Karawaci, recently reported a robust set of FY14 results at the end of last month. Gross operating revenue increased by 33% to IDR3,341b, while EBITDA accelerated 56% to IDR466b. This was underpinned by continued traction in demand for quality healthcare services throughout Indonesia. Operationally, Siloam International Hospitals registered a solid 34% and 24% jump in its inpatient admissions and outpatient visits, respectively.

Maintain BUY
Looking ahead, we expect FREIT to maintain its core focus on the Indonesian healthcare market, given the favourable demand and supply dynamics, rising middle-class population and healthy pipeline of potential acquisition targets from Siloam International Hospitals. FREIT will also explore asset enhancement initiatives over the next few years for the following assets: Siloam Hospitals Surabaya, Siloam Hospitals Kebon Jeruk, and Imperial Aryaduta Hotel & Country Club. Given this in-line set of results, we maintain our projections on FREIT. The stock is currently trading at 5.8% FY15F distribution yield. Maintain BUY and S$1.50 fair value estimate on FREIT.

SPH REIT

OCBC on 14 Apr 2015

SPH REIT reported a stable set of 2QFY15 results, with gross revenue and DPU increasing by 2.8% and 0.7% YoY to S$52.5m and 1.40 S cents, respectively. This was within our expectations. During 1HFY15, SPH REIT achieved positive rental reversions of 11.6% at Paragon. On the other hand, negative rental reversions of 8.8% were registered for The Clementi Mall. This was largely due to a strategic move by SPH REIT to offer a popular F&B outlet competitive rental rates, which management believes will be mitigated by the outlet’s appeal to draw more shoppers to the mall. Overall rental reversions of 11.0% were recorded for SPH REIT’s combined portfolio. Looking ahead, Singapore’s retail operating environment remains challenging, but this is buffered by SPH REIT’s healthy gearing ratio of 26.0%. We maintain our forecasts, HOLD rating and S$0.99 fair value estimate on SPH REIT.

2QFY15 results within our expectations
SPH REIT reported a stable set of 2QFY15 results, with gross revenue and DPU increasing by 2.8% and 0.7% YoY to S$52.5m and 1.40 S cents, respectively. This came in within our expectations. Growth was driven by higher rental income achieved at both Paragon (revenue +3.1%; NPI +4.1%) and The Clementi Mall (revenue +1.3%; NPI +1.9%). For 1HFY15, gross revenue rose 2.3% to S$103.1m, forming 50.1% of our FY15 forecast; while DPU of 2.73 S cents represented a slight growth of 1.5% and constituted 50.8% of our full-year projection. 

Tenancy fine-tuning affected rental reversions at Clementi Mall
During 1HFY15, SPH REIT achieved positive rental reversions of 11.6% at Paragon, which we believe reflects the scarcity premium of prime retail space despite industry headwinds. On the other hand, negative rental reversions of 8.8% were registered for The Clementi Mall’s rental renewals/new leases. Notwithstanding the disappointing headline figure, this was contributed by only six leases which formed 2% of The Clementi Mall’s NLA. Management further explained that out of these six leases, five had actually achieved positive rental reversions. The only negative reversion was due to a strategic move to offer a popular F&B outlet competitive rental rates, which SPH REIT believes will be mitigated by its appeal to a wider base of shoppers. Overall rental reversions of 11.0% were recorded for SPH REIT’s combined portfolio.

Muted outlook; valuations unappealing
Looking ahead, Singapore’s retail operating environment remains challenging, but this is buffered by SPH REIT’s healthy gearing ratio of 26.0%. 54.7% of its total debt is on a fixed rate basis. Management is cognisant of the recent spike in the SOR and SIBOR, and highlighted that it will continue to monitor the situation before deciding on whether to increase its hedges. Its average cost of debt stands at 2.5%, versus 2.35% as at 1QFY15. We maintain our forecasts, HOLD rating and S$0.99 fair value estimate on SPH REIT. The stock is trading at FY15F P/B ratio of 1.14x and distribution yield of 5.0%, which does not appear attractive, in our view.

M1

OCBC on 14 Apr 2015

M1 Ltd reported its 1Q15 revenue +22.7% YoY to S$294.8m, again driven by higher handset sales, where demand for the new Apple iPhone 6 and 6+ remained strong. EBITDA was stable at S$83.3m (+2.2%), with service EBITDA margin remaining firm at 40.8% versus 40.0% in 1Q14. Also aided by lower taxes (down 9.4%), net profit grew 6.7% to S$45.7m. On the whole, we deem the results to be in line with our expectations, as revenue met 28% of our full-year forecast, while earnings met 25%. Going forward, M1 has reiterated its previous guidance of achieving “moderate” earnings growth this year, citing continued growth in mobile data usage as well as new services in its fixed services segment. While we maintain our HOLD rating and S$3.66 fair value, we note that the stock has done reasonable well (+8.9% YTD versus STI’s +3.5%) and is currently trading near the top-end of its 5-year EV/EBITDA range.

Decent start to the year
M1 Ltd reported its 1Q15 results last evening, with revenue jumping 22.7% YoY to S$294.8m, again driven by higher handset sales, where demand for the new Apple iPhone 6 and 6+ remained strong. EBITDA was stable at S$83.3m (+2.2%), with service EBITDA margin remaining firm at 40.8% versus 40.0% in 1Q14. Also aided by lower taxes (down 9.4%), net profit grew 6.7% to S$45.7m. On the whole, we deem the results to be in line with our expectations, as revenue met 28% of our full-year forecast, while earnings met 25%.

Reiterates moderate earnings growth outlook 
Going forward, M1 has reiterated its previous guidance of achieving “moderate” earnings growth this year, which we understand to be within the single-digit range, driven by continued growth in data usage. M1 noted that post-paid users on average used about 3.2GB of data per month, with about 20% of its tiered-pricing customers exceeding their data bundles (typically around 3GB). Meanwhile, M1 is also positive on its fixed services segment, where it expects to grow share in the government and corporate sectors, citing the launch of new services like ultra-high speed broadband plans, data centre and cloud-based applications. However, it did note that the ARPUs for its residential broadband business could slip in the coming quarters, as customers gyrate back towards the mass-market plans amidst stiff competition in the market.

Maintain HOLD with unchanged S$3.66 FV
As the numbers came in largely within expectations, we opt to keep our FY15 estimates unchanged for now. As such, our DCF-based fair value remains at S$3.66, coupled with an expected dividend of S$0.185, we maintain HOLD on the stock. Separately, we note that the stock price has done reasonable well – up 8.9% YTD versus +3.5% for the STI. It is also currently trading at 11.1x EV/EBITDA, versus its 5-year average of 8.9x, which is very close to the 11.4x high. As such, investors may consider taking some profit should the share price fail to clear S$4.00 in the near future.

Aviation Sector

OCBC on 13 Apr 2015

The recently surfaced safety concerns over Thailand’s aviation industry resulted from issues found through the audit conducted by UN’s International Civil Aviation Organisation (ICAO). The unsatisfactory audit result triggered responses including bans on new charter flights and additional ramp inspections by countries in the region. We believe the impact on Singapore-based carriers from the bans of approving charter flights and additional flights to the three countries is likely to be short-term. SIA will face negative impact through its JV NokScoot while Tigerair is likely to see little positive impact from limited route exposure. As such, we keep our rating and FV unchanged for both SIA [HOLD; FV:S$11.59] and Tigerair [SELL; FV:S$0.29] and continue to hold an UNDERWEIGHT rating on the aviation sector as outlook remains uncertain for the industry on overcapacity reason as well as expected lower air travel demand.

Safety concerns over Thai aviation – what’s going on?
The recently surfaced safety concerns over Thailand’s aviation industry resulted from issues found through the audit conducted by UN’s International Civil Aviation Organisation (ICAO). ICAO first commenced the audit in Jan-15, raised safety concerns and rejected Thai Department of Civil Aviation’s (DCA) one-year plan sent to ICAO in early Mar-15 in a bid to address those problems. The latest demand from ICAO requires DCA to adjust the plan by 2-Jun for ICAO’s review. The unsatisfactory audit result and rejection of DCA’s initial rectification plan triggered China, South Korea, and Japan to put restrictions and bans on approving all Thai-registered carriers’ applications for new charter flights while Singapore and Australia have both increased number of ramp inspections and scrutiny over any additional flight requests by Thai-registered carriers. However, Japan has agreed to give temporary reprieve to allow Thai-registered charter flights to operate into Japan from 11-Apr to 31-May but not permitted to change aircraft types or routes. 

Short-term impact on Singapore-based airlines
We believe the impact on Singapore-based carriers from the safety concerns raised by ICAO is likely to be short-term especially since Thailand’s government has shown commitment and took initiatives with the target to resolve all the issues by end of the year. For SIA, it will feel the negative impact through its JV, NokScoot, with charter flights to Japan either cancelled or rescheduled onto Scoot’s flights. With an initial launch date in May-15, NokScoot also had to suspend ticket sales to South Korea since operating permit is unlikely to be approved on time. This meant that NokScoot’s launch date is delayed indefinitely until Thailand resolve its safety problems and restrictions/bans are lifted. Separately, while the foreign-registered carriers stand to benefit from the current situation, we think the impact will be limited for Tiger Airways (Tigerair) because the only outbound direct flight destination from Thailand is Singapore. Hence, we believe it is unlikely to see affected passengers flying to China, South Korea and Japan shifting to Tigerair’s flights that currently require one or more stopovers to these destinations.

Maintain UNDERWEIGHT on Aviation Sector
As we believe from the onset that NokScoot’s first scheduled flight launch date is uncertain until approval is officially granted by South Korea, we were right not to include any contributions from NokScoot in our current SIA model. Hence, we keep our forecasts unchanged and maintain HOLD on SIA with a FV estimate of S$11.59. For Tigerair, the uncertain and limited impact arising from the bans does not justify changes to our forecasts and we think the recent share price run-up is overdone. Moreover, as we are still cautious over Tigerair’s near-term outlook, maintain SELL with an unchanged FV estimate of S$0.29. Keeping our view on depressed yields arising from overcapacity and lower air travel demand on slowing economic growth, we maintain UNDERWEIGHT on aviation sector.

Singtel

OCBC on 10 Apr 2015

Singtel recently announced that it will be paying US$810m for a 98% equity stake in Trustwave (enterprise value around US$850m). Trustwave is the largest independently managed security services provider in North America with presence in Europe and Asia Pacific. Management believes that Trustwave will significantly enhance Singtel’s cyber security capabilities, and establish the telco as a global managed security services provider; this as Singtel sees demand for always-on cyber security managed services to increase significantly. As Trustwave is likely to be EPS accretive from the third year onwards, we hold off making any adjustments to our estimates ahead of Singtel’s FY15 results due in early May. Nevertheless, our SOTP-based fair value improves from S$4.16 to S$4.31, boosted by the higher share prices of its listed associates. But given the limited near-term upside, maintain HOLD.

Acquiring Trustwave for US$810m
Singtel recently announced that it will be paying US$810m for a 98% equity stake in Trustwave (enterprise value around US$850m), excluding net debt. Trustwave is the largest independently managed security services provider in North America with presence in Europe and Asia Pacific. It has a broad portfolio of services across three main areas – threat management, vulnerability management and compliance management. 

Building up its managed security services capabilities
According to Singtel, Trustwave will significantly enhance Singtel’s cyber security capabilities, and establish the telco as a global managed security services provider; this as Singtel sees demand for always-on cyber security managed services to increase significantly. Citing a market research done by Gartner in 2014, the market for such services is likely to grow at a CAGR of 15% to US$24.2b from 2014 to 2018. Although the main market is still likely to be in North America, Singtel is also hopeful that it can bring Trustwave to Asia Pacific and the other emerging markets, thus further strengthening its own enterprise business offerings. 

Earnings accretive from third year onwards
Subject to approval by US authorities, the deal is expected to be finalized in the next three to six months. Singtel said it will finance the deal with internal funds, likely via a mixture of cash and debt; we note that Singtel has recently raised about S$300m via the issue of fixed rate notes. On Trustwave itself, Singtel revealed that it expects Trustwave to post revenue of US$216m in 2014 with an EBITDA margin of 6%. However, it expects Trustwave to be earnings accretive from the third year onwards. 

Maintain HOLD with higher S$4.31 FV
As such, we do not expect Trustwave to have any immediate impact on earnings but expect the acquisition to be a long-term positive as Singtel moves away from being a pure carrier into a value-added services provider. We also intend to hold off making any adjustments to our estimates ahead of Singtel’s FY15 results due in early May. Nevertheless, our SOTP-based fair value improves from S$4.16 to S$4.31, boosted by the higher share prices of its listed associates. But given the limited near-term upside, maintain HOLD.

Ezra Holdings

OCBC on 9 Apr 2015

Ezra Holdings reported a 1% YoY fall in revenue to US$302.0m but saw a 99% fall in net profit to US$138k in 2QFY15. We do note, however, that 2QFY14 was boosted by one-offs. On a recurring income basis, we estimate a net loss of about US$8m in 2QFY15 vs. net profit of US$3m a year ago. In the Offshore Support segment, weakness in shallow water PSVs and AHTS vessels continued to persist, and this is likely the most challenging segment going forward. For subsea, the group views its assets as key enablers that will see continued demand. On the group level, Ezra has come to the end of its subsea capex cycle, and will seek to deleverage. We also expect more asset sales, along with fundraising to refinance debt. As we switch to a SOTP-based valuation from our previous P/B valuation to take into account the group’s various entities, our fair value estimate slips from S$0.60 to S$0.47. Maintain HOLD.

Soft 2QFY15 results
Ezra Holdings reported a 1% YoY fall in revenue to US$302.0m but saw a 99% fall in net profit to US$138k in 2QFY15. We do note, however, that 2QFY14 was boosted by a US$16.6m share of gain from the disposal of Lewek Champion by EOC. On a recurring income basis, we estimate a net loss of about US$8m in 2QFY15 vs. net profit of US$3m a year ago. 

Offshore support – most challenging segment
In the Offshore Support segment, weakness in shallow water PSVs and AHTS vessels continued to persist; overall vessel utilisation was about 78-80% in the quarter. Management deems this segment to be the most challenging going forward, as charterers now focus on utilisation levels rather than on charter rates, which are down about 20-35% vs. a year ago. Given such a backdrop, we believe customers of the OSV division are likely to seek downward revisions in charter rates.

Subsea – group sees continued demand
As for the subsea segment, management is still optimistic about this segment’s growth to the group, as it views its assets as key enablers that will see continued demand, unlike mid-tier assets in the market that have been badly hit. However, given the competitive environment, we believe there is likely to be pricing pressure which would affect new tender awards.

Seeking to deleverage, exploring fundraising
On the group level, with the completion of Lewek Constellation, Ezra has come to the end of its subsea capex cycle. As such, it will seek to deleverage and focus on free cash flow generation, with net gearing to peak at its current 1.15x. We also expect more asset sales, especially of non-core assets. According to Reuters, the group is also exploring fundraising options to refinance debt, and this includes equity, equity-linked solutions. Meanwhile as we switch to a SOTP-based valuation from our previous P/B valuation to take into account the group’s various entities, our fair value estimate slips from S$0.60 to S$0.47. Maintain HOLD.

Wheelock Properties

OCBC on 8 Apr 2015

The group is undergoing a re-tenanting exercise at Scotts Square retail mall with several new F&B and fashion-house names (including London Fat Duck, Time & Flow, Alexander McQueen, Delvaux, and the Pedder Group) as management attempts to rejuvenate the mall going into the new leasing cycle. We understand that extensive advertising and promotion programs are in store for FY15 to improve foot traffic for the retail mall, which has faced headwinds since its opening given its unique positioning as a smaller high-end boutique mall beside larger neighbors with more F&B and retail options. While we expect to see continued sequential pressure on the mall’s performance in 1H15, we note that the group has already conservatively written down the valuation of the mall by S$52m (17%) and is in a solid financial position to ride out current headwinds. Maintain BUY with an unchanged S$2.27 fair value estimate.

Rejuvenating Scotts Square mall with new tenants
The group is undergoing a re-tenanting exercise at Scotts Square retail mall with several new F&B and fashion-house names (including London Fat Duck, Time & Flow, Alexander McQueen, Delvaux, and the Pedder Group) as management attempts to rejuvenate the mall going into the new leasing cycle. We understand that extensive advertising and promotion programs are in store for FY15 to improve foot traffic for Wheelock’s retail mall, which has faced headwinds since its opening given its unique positioning as a smaller high-end boutique mall beside larger neighbors with more F&B and retail options. To recap, the occupancy rate and average monthly rents have dipped QoQ from 93% and ~S$21 psf in 3Q14 to 88% and ~S$16 psf in 4Q14 respectively; and we expect to see continued sequential pressure on Scotts Square mall’s performance in 1H15 as the management engineers a turnaround. Note that the group has already conservatively written down the valuation of the mall by S$52m (17%) to reflect the difficult operating conditions in its initial leasing cycles.

Maintain BUY with unchanged S$2.27 fair value estimate
That said, we believe the group is in a solid financial position to ride out current headwinds in the domestic residential segment and at Scotts Square mall. As at end FY14, the group’s balance sheet remains in a solid position with S$408.5m in cash and a low net gearing of 8.0%. In addition, we note that the group’s key associate Hotel Properties Ltd continues to actively diversify into prime projects overseas, recently announcing that it would acquire a 30% stake in two properties, Ludgate House and Sampson House, located in Bankside, London. Both assets are acquired with an existing consented scheme comprising ~552k sq ft NIA of private residential accommodation, 285k sq ft of offices and 36k sq ft of retail and leisure space. Maintain BUY with an unchanged S$2.27 fair value estimate.

Triyards Holdings

OCBC on 7 Apr 2015

Triyards Holdings reported an 18% YoY fall in revenue to US$61.1m and a 34% drop in net profit to US$5.1m in 2QFY15, such that 1HFY15 net profit of US$13.3m accounted for 49% of our full year estimate; but still in line with expectations. Following new order wins that were announced in Jan and Mar this year, the group also announced last evening new contracts worth about US$100m, bringing new order wins since the start of this year to US$275m vs. US$170m for CY14. On the balance sheet front, net gearing remains healthy at 0.4x. Oil and gas counters are trading at depressed valuations and we lower our P/E from 6x to 5x, but we increase our FY16 earnings by ~25% with the group’s recent order wins. As such, our fair value estimate slips from S$0.65 to S$0.60, but given the upside potential of ~56%, we maintain our BUY rating on the stock.

2QFY15 results in line
Triyards Holdings reported an 18% YoY fall in revenue to US$61.1m and a 34% drop in net profit to US$5.1m in 2QFY15, such that 1HFY15 net profit of US$13.3m accounted for 49% of our full year estimate; but still in line with expectations. Gross profit margin was 22.4% in the quarter, comparable to 1QFY15, and higher than the 18.1% seen in 2QFY14. The newly-acquired Strategic Marine had its numbers consolidated with the group’s since mid Oct last year, and we estimate that the impact was ~US$20m in the topline and less than a million for the bottom-line. 

Clinches US$100m of new orders; YTD wins US$275m
Following new order wins that were announced in Jan and Mar this year, the group announced last evening new contracts worth about US$100m comprising a liftboat, a high speed aluminium craft project and a fabrication project. This brings new order wins since the start of this year to US$275m vs. US$170m for CY14.

Upcoming tender pipeline
Besides small tenders (US$10-15m) whose results will be coming up in May, there is a possibility that the group may win more projects from Ezion. Triyards has also been receiving more enquiries relating to Diving Support Vessels, and the price range is US$120-160m for a larger vessel and US$60-80m for a smaller one. Finally, there is also the potential for another one to two liftboats in the horizon. Including the backlog of Strategic Marine (~US$50m), the group’s net order book stood at about US$370m as at end Feb, of which about 60% should be recognised in the next two quarters.

A cheap stock for a decent company
On the balance-sheet front, net gearing remains healthy at 0.4x. Oil and gas counters are trading at depressed valuations and we lower our P/E from 6x to 5x, but we increase our FY16 earnings by ~25% with the group’s recent order wins. As such, our fair value estimate slips from S$0.65 to S$0.60, but given the upside potential of ~56%, we maintain our BUY rating on the stock.

OSIM International

OCBC on 7 Apr 2015

OSIM International Ltd’s (OSIM) share price has fallen by 10.3% from S$2.08 since 17 Mar. In view of this recent weakness, the group engaged in a buyback of around 1.3m shares at S$1.865/share yesterday evening, seeking to support the price level. Although there are no concrete explanations for the weakness, we note the latest changes to share ownership that involved The Capital Group Companies, whom pared its stake in OSIM slightly from 5.021% to 4.994%. We also think the weak start for Chinese macro data suggests the group may likely see a modest performance ahead for one of its key markets. In addition, with TWG Tea’s ongoing expansion plans particularly in China, downside risks could come from unexpected non-performing store closures and slowdown in pace of new store openings. We are maintaining our HOLD rating with fair value estimate of S$1.97.

Engaged in share buyback amid recent weakness
OSIM International Ltd (OSIM) was down ~3.1% yesterday while the counter had gone ex-dividend. Moreover, its share price has fallen by 10.3% from S$2.08 since 17 Mar. In view of this recent weakness, the group engaged in a buyback of around 1.3m shares at S$1.865/share yesterday evening, seeking to support the price level. Although there are no concrete explanations for the weakness, we note the latest changes to share ownership, such as The Capital Group Companies whom pared its stake in OSIM slightly from 5.021% to 4.994%, by selling 212.5k shares at S$2.0057/share on 30 Mar. We also think the weak start for Chinese macro data suggests the group may likely see a modest performance in China.

Taking cues from macro data for key market, China 
China, being one of OSIM’s key markets, saw its retail sales rise 10.7% YoY in Jan and Feb this year according to the National Bureau of Statistics. With this data point reportedly coming in lower than consensus expectations and other weaker economic indicators may put a dent in confidence towards growth for OSIM here. We previously highlighted that the group had closed 32 non-performing OSIM outlets in China last year. In addition, there are also on-going expansion plans particularly in China for the group’s TWG Tea business, whereby management had mentioned that at least three stores are needed in a city to achieve breakeven. In the meantime, start-up costs, wages and rental costs may continue to hold back any significant bottom-line growth for this segment. Downside risks could come from unexpected non-performing store closures for TWG Tea and slowdown in pace of new store openings.

Maintain HOLD
We keep in mind that the group is still in the midst of two legal disputes, thus they may eventually incur legal costs, and potentially evoke kneejerk reactions to its share price. With 1QFY15 results to be announced in a month’s time, we are maintaining our HOLD rating with fair value estimate of S$1.97.

NOL

OCBC on 6 Apr 2015

We believe the liner industry is likely to be weak in 2015; and near-term headwinds are expected to persist for Neptune Orient Lines Limited (NOL) for various reasons, including depressed rates on overcapacity issue. With no recovery expected in the near-term, we think selling its logistics business (APLL), which has been the only positive contributor to bottom-line over the past three years, has a net negative impact as we estimate the loss of earnings to more than offset savings in interest expenses. However, in the longer-term (i.e. at least until FY16 onwards) when the shipping industry starts to experience recovery, with the proceeds from the proposed divestment, we think NOL will then be well-poised to ride the growth cycle on stronger balance sheet from reduced gearing. We have yet to factor the financial impact from the divestment in our forecasts but if we do, based on a higher FY15F NBV and 0.80x P/B (discounted for near-term weakness and slower longer-term recovery without APLL), we derive a FV of S$1.15. However, with the divestment still pending approvals, maintain HOLD on NOL as our FV remains unchanged at S$1.01 on a blended basis.

Industry weakness likely to persist in 2015
We believe the liner industry is likely to be weak in 2015; and near-term headwinds are expected to persist for Neptune Orient Lines Limited (NOL) for various reasons: 1) lower growth in world trade volume as IMF cut its forecasts by 1.1 ppt to 3.8%, 2) overcapacity likely to continue in 2015 on 7.8% growth in world cellular fleet in 2015, which leads to, 3) depressed freight rates since container shipping demand will be lower than capacity growth, and lastly, 4) the U.S. West Coast (USWC) labour negotiations that started in May-14 were only completed on 20-Feb-15 for a new five-year labour contract; and as a result, we expect the USWC port to take at least six to eight weeks to work through the large backlog of containers built up.

Well-poised for recovery in the longer-term
With no recovery expected in the near-term, we think selling its logistics business (APLL), which has been the only positive contributor to bottom-line over the past three years, has a net negative impact as we estimate the loss of earnings to more than offset savings in interest expenses. However, in the longer-term (i.e. at least until FY16 onwards) when the shipping industry starts to experience recovery, with the proceeds from the proposed divestment, we think NOL will then be well-poised to ride the growth cycle on stronger balance sheet from reduced gearing. With IMF forecasting world trade volume to grow by 5.3% in 2016 and cellular fleet projected to grow by 5.3% (Alphaliner’s forecasts) as well, the data gives a good indication that shipping industry is likely to gradually recover from 2016 onwards. Furthermore, NOL now has a modernised fleet, which are fuel-efficient after its US$4b fleet renewal programme and cost savings are already showing over the past few quarters. 

Blended FV on pending divestment approvals
We have yet to factor the financial impact from the divestment in our forecasts but if we do, based on a higher FY15F NBV and 0.80x P/B (discounted for near-term weakness and slower longer-term recovery without APLL), we derive a FV of S$1.15. However, with the divestment still pending approvals, maintain HOLD on NOL as our FV remains unchanged at S$1.01 on a blended basis

Ascendas REIT

OCBC on 1 Apr 2015

Ascendas REIT (A-REIT) announced on 30 Mar 2015 that it has acquired a property, the Kendall, from its sponsor Ascendas Group for a purchase consideration of S$112m. The initial NPI yield of this property works out to be 6.8% (based on total acquisition cost). This compares favourably against our original FY15 NPI yield forecast of 6.3% for A-REIT’s existing portfolio. As part of its capital recycling exercise, A-REIT also announced that it has accepted an offer from JTC Corporation for the return of its 26 Senoko Way property for a consideration sum of S$24.8m. We expect these two developments to have an overall slight positive impact to A-REIT’s unitholders, and raise our FY16 DPU forecast by 0.8%. Our DDM-derived fair value estimate inches up marginally from S$2.42 to S$2.43. At 1.3x FY16F P/B ratio, we do not find A-REIT’s valuations attractive. Maintain HOLD.

Acquisition of The Kendall Science Park property…
Ascendas REIT (A-REIT) announced on 30 Mar 2015 that it has acquired a property, the Kendall, from its sponsor Ascendas Group for a purchase consideration of S$112m (total acquisition cost is S$113.7m after transaction fees). We view this as a timely acquisition as A-REIT would not be liable to pay any stamp duties on this property (concession lapsed on 31 Mar 2015). The Kendall is a 6-storey multi-tenanted building located within the Singapore Science Park II, has a remaining land lease tenure of 64 years, and is easily accessible via Pasir Panjang Road and the Haw Par Villa Circle Line Station. It is not subjected to the tightened anchor tenant policy by JTC; it has an NLA of 16,824 sqm and current occupancy is healthy at 93.2%. The initial NPI yield of this property works out to be 6.8% (based on total acquisition cost). This compares favourably against our original FY15 NPI yield forecast of 6.3% for A-REIT’s existing portfolio. The property would be financed by existing debt facilities.

…and divestment of 26 Senoko Way
As part of its capital recycling exercise, A-REIT announced last evening that it has accepted an offer from JTC Corporation for the return of its 26 Senoko Way property (NLA of 10,723 sqm and comprises a 2-storey building with a 4-storey extension block). JTC would pay A-REIT a consideration sum of S$24.8m, which represents a 60% premium over its original acquisition price of S$15.5m in 2007. The proposed divestment is expected to be completed by Apr 2015.

Maintain HOLD
We expect these two developments to have an overall slight positive impact to A-REIT’s unitholders, and raise our FY16 DPU forecast by 0.8%. Our DDM-derived fair value estimate inches up marginally from S$2.42 to S$2.43. At 1.3x FY16F P/B ratio, we do not find A-REIT’s valuations attractive. Maintain HOLD.

Hotel Properties Limited

OCBC on 31 Mar 2015

HPL announced that it has acquired a 30% interest in Bankside Quarter (Jersey) Limited (BQJ) to purchase two properties, Ludgate House and Sampson House, located in Bankside, the London Borough of Southward, London, England. BQJ will acquire both assets for a consideration of GBP308m, and HPL intends to finance its share of the investment through third-party loan financing and internal resources. The properties are located in Bankside, which is at the heart of the SouthBank and Bankside Cultural Quarter, and the freehold site is approximately 5.3 acres. We understand that the properties are acquired with an implementable existing planning permission comprising ~552k sq ft NIA of private residential accommodation, 285k sq ft of offices and 36k sq ft of retail and leisure space, and that BQJ will review and evaluate the scheme after the acquisition is completed. Pending completion of this acquisition and more color regarding redevelopment, we opt to keep our fair value estimate of S$5.32 unchanged. Maintain BUY.

Acquires 30% stake in two London properties
HPL announced that it has acquired a 30% interest in Bankside Quarter (Jersey) Limited (BQJ) to purchase two properties, Ludgate House and Sampson House, located in Bankside, the London Borough of Southward, London, England. BQJ will acquire both assets from The Carlyle Group for a consideration of GBP308m, and HPL intends to finance its share of the investment through third-party loan financing and internal resources. We understand BQJ has already paid GBP15.4m (5% of the purchase price), and the remaining GBP292.6m will be transferred on the date of completion expected in May 2015.

Site is acquired with existing planning permission for redevelopment
The properties are located in Bankside, which is at the heart of the SouthBank and Bankside Cultural Quarter and is accessible through rail and underground connections at London Bridge, Waterloo, Southwark and Blackfriars stations. In addition, the Blackfriars Station southern entrance provides direct access to Bankside. The acquired properties stand on a rectangular freehold site approximately 5.3 acres in land area. Ludgate House, a 9-storey building, comprises ~172k sq ft of office space and is tenanted by United Business Media until Mar 2015, and Sampson House, a 6-storey building, comprises ~355k sq ft leased out to IBM until Dec 2015 (with a mutual break in June 2018). We note that the properties are acquired with an implementable existing planning permission obtained by the seller which consists of ~552k sq ft NIA of private residential accommodation, 285k sq ft of offices and 36k sq ft of retail and leisure space, and that BQJ will review and evaluate this planning permission for redevelopment after the acquisition is completed. 

Further diversification of asset portfolio
Given persistent headwinds in the Singapore residential space, we like that management continues to actively diversify their asset portfolio into high quality assets overseas. Pending completion of this acquisition and more color regarding redevelopment, we opt to keep our fair value estimate of S$5.32 unchanged. Maintain BUY.

Biosensors International Group

OCBC on 30 Mar 2015

We acknowledge that Biosensors International Group (BIG) has announced a series of positive news over the past two months, which includes expanding its endovascular product portfolio through a distribution agreement with Veryan Medical for the latter’s BioMimics 3DTM, as well as progress made with the completion of patient enrolment for its LEADERS Free Japan Trial and CREDIT II Stent Trial. However, we do not see immediate catalysts, and in view of the group’s largely weak earnings performance, we think the group’s recent share price run-up seems a tad too quick. The counter is now trading at around 29x FY15F P/E, more than three s.d above its two year historical P/E average. Thus we are keeping our SELL rating with fair value estimate of S$0.60 for now.

Series of positive news…
Over the past two months, Biosensors announced a series of positive news, such as a distribution agreement entered with Veryan Medical Ltd. for the latter’s BioMimics 3DTM, which will complement Biosensors’ portfolio of products in the area of peripheral arterial disease. The group had stated that they expect to commence active promotion of BioMimics 3D in 1Q15, for certain international markets excluding the USA and Japan. This was followed by the completion of patient enrolment for the LEADERS Free Japan Trial, a trial that aims to confirm that the safety and efficacy of BioFreedomTM in Japanese patients is equal to that observed in patients of other ethnicities. Most recently, we received an update on the group’s presence in China as its wholly-owned subsidiary JW Medical Systems announced completion of patient enrolment in CREDIT II Stent Trial, which involves the EXCEL II coronary stent.

…but no immediate catalyst
We highlight that the primary endpoint data for the LEADERS Free trial is expected in late 2015, with follow up planned out to two years. We may see upside arising from potentially favourable results, which could possibly show that BioFreedom offers the benefits of a drug eluting stent but with a shorter dual anti-platelet therapy (DAPT) requirement. 

Share price run-up a tad too quick
Biosensors’ share price was initially supported by share buybacks but we think the recent share price run-up seems a tad too quick. The counter is now trading at around 29x FY15F P/E, more than three s.d above its two year historical P/E average.

Maintain SELL for now
As the group’s latest earnings performance was still largely weak and in view of its current valuation level, we are keeping our SELL rating with fair value estimate of S$0.60 for now. Key upside would come from the group’s ability to sustain its decent operating margin at ~20% as well as progress in approvals for the group’s medical devices.

First REIT

OCBC on 27 Mar 2015

We visited two of First REIT’s (FREIT) properties in Indonesia this week – Siloam Hospitals Makassar (SHMK) and Siloam Hospitals Manado & Hotel Aryaduta Manado (MD Property). The hospitals are operated by Siloam International Hospitals and are generally well maintained, equipped with modern medical equipment and have high visitor and patient traffic. Both hospitals are currently participating in the government health insurance programme, which we expect to drive demand for more healthcare services and drugs. Meanwhile, Siloam International Hospitals has projected for solid net operating revenue and EBITDA growth of 49% and 92% in FY15, respectively. Taking into account the robust long-term growth prospects of the Indonesian healthcare market and encouraging signs of Jokowi’s efforts to intensify the implementation of its universal health insurance programme, we raise our terminal growth rate assumption on FREIT from 1% to 1.5%. Consequently, our DDM-derived fair value increases from S$1.40 to S$1.50. Maintain BUY on FREIT.

Site visit to two properties in Indonesia
We visited two of First REIT’s (FREIT) properties in Indonesia this week – Siloam Hospitals Makassar (SHMK) and Siloam Hospitals Manado & Hotel Aryaduta Manado (MD Property). SHMK is a 7-storey hospital located in the integrated township of Tanjung Bunga, South Sulawesi Province; while MD Property is an 11-storey integrated hospital and 5-star hotel located in the North Sulawesi Province. Both assets were acquired by FREIT on 30 Nov 2012 from its sponsor Lippo Karawaci. The hospitals are operated by Siloam International Hospitals (listed subsidiary of Lippo Karawaci) and are generally well maintained, equipped with modern medical equipment from international brands such as Philips and Mindray, and have high visitor and patient traffic. Both hospitals are currently participating in the government health insurance programme administered by the Badan Penyelenggara Jaminan Sosial (BPJS) Kesehatan. This is expected to drive demand for more healthcare services and drugs. We estimate SHMK and MD Property to contribute 5.7% and 8.4% to our gross revenue forecast for FY15. 

Siloam Hospitals projecting solid growth ahead
According to a press release published by Siloam International Hospitals earlier this year, it highlighted that its net operating revenue and EBITDA are projected to jump 49% and 92% to IDR3.68t and IDR868b in FY15. From a longer-term perspective, Siloam International Hospitals estimates that its net operating revenue would increase at a CAGR of 35%-38% from FY13 to FY17, while its EBITDA growth during the same period is projected to come in between 58% to 62%.

Reiterate BUY
Taking into account the robust long-term growth prospects of the Indonesian healthcare market and encouraging signs of Jokowi’s efforts to intensify the implementation of its universal health insurance programme, we deem it justifiable to raise our terminal growth rate assumption on FREIT from 1% to 1.5%. Consequently, our DDM-derived fair value estimate increases from S$1.40 to S$1.50. Supported by a still decent FY15F distribution yield of 6.1%, we maintain our BUY rating on FREIT.

Venture Corp

OCBC on 26 Mar 2015

The World Semiconductor Trade Statistics (WSTS) reported that the world semiconductor market grew 9.9% to US$336b in 2014, mainly driven by 18.2% growth in memory product category as annual sales increased across all geographical regions. WSTS goes on to forecast steady but moderate growth of 4.9% to US$352b and 3.1% to US$363b in 2015 and 2016, respectively, for all product categories and regions. In the longer-term, IDC forecasts a CAGR of 3.1% from 2014 to 2019, reaching US$389b in 2019. On these data, we have reasons to believe the industry outlook remains positive over the next few years on moderate growth projections. As we think VMS has more room to grow in its TMO segment, our current assumptions forecast for 10.2% and 9.2% growth in FY15 and FY16 PATMI, respectively. Consequently, our FV remains unchanged at S$8.41. But given that the share price has increased steadily to S$8.53, we downgrade VMS to HOLD on valuation grounds.

World semiconductor market grew 9.9% in 2014
The World Semiconductor Trade Statistics (WSTS) reported that the world semiconductor market grew 9.9% to US$336b in 2014, mainly driven by 18.2% growth in memory product category. Annual sales increased across all geographical regions – Americas (12.7%), Asia Pacific (11.4%), Europe (7.4%) and Japan (0.1%). Market watcher IDC reported the PC market declined 0.8% in 2014. Accordingly, Venture Corp (VMS) also reported a 5.8% growth in its FY14 revenue, mainly driven by a 23.4% growth in its test & measurement/medical & life science/others (TMO) segment, which more than offset the 17.5% drop in revenue from computer peripherals & data storage segment. Note that VMS management had earlier guided they expect growth to be driven by the TMO segment going forward, especially from the medical & life science area.

Industry outlook still positive
WSTS goes on to forecast steady but moderate growth of 4.9% to US$352b and 3.1% to US$363b in 2015 and 2016, respectively, for all product categories and regions. Automotive and communications segments are likely the main growth driver going forward. IDC also forecasted for more moderate growth of 3.6% in 2015, as the DRAM (memory) market stabilizes. In the longer-term, IDC forecasts a CAGR of 3.1% from 2014 to 2019, reaching US$389b in 2019. The trend going forward is likely a decline in the PC market but tremendous growth in the smart devices (i.e. smartphones) market. And according to IDC, IT investment by the Western European healthcare sector is forecasted to grow 10.6% to US$14.6b by 2018. Separately, Gartner projects a 6% growth in IT spending in Southeast Asia region to reach US$52b in 2015 and US$62b by 2018. 

Downgrade to HOLD on valuation grounds
On these data, we have reasons to believe the industry outlook remains positive over the next few years. As we think VMS has more room to grow in its TMO segment, our current assumptions forecast for 10.2% and 9.2% growth in FY15 and FY16 PATMI, respectively. Consequently, our FV remains unchanged at S$8.41. But given that the share price has increased steadily to S$8.53, we downgrade VMS to HOLD on valuation grounds.

Noble Group

OCBC on 25 Mar 2015

Noble Group has initiated legal proceedings against Arnaud Vagner, a HK resident, and Enlighten Ace Ltd, a Seychelles company, at the HK High Court for conspiracy to injure Noble Group; this in response to the third report issued by Iceberg Research where it alleged that Noble has under-stated its debt and gearing numbers, and that the commodity trader is only worth S$0.10/share after taking in all the write-downs. On our part, we have taken a look at the reports and these allegations (which Iceberg said were based on publicly available information) are nothing new. Nevertheless, concerns over fair values are likely to remain, given the more muted outlook for commodities in general. As such, we think that we are likely to see more near-term volatility in the company’s share price as it will take time for Noble to regain market confidence. While we maintain HOLD with an unchanged S$1.05 fair value (based on 13.5x FY15F EPS), we would prefer to buy in at S$0.85 or better.

Initiates lawsuit against Iceberg Research

Noble Group has initiated legal proceedings against Arnaud Vagner, a HK resident, and Enlighten Ace Ltd, a Seychelles company, at the HK High Court for conspiracy to injure Noble Group. This is in response to the third report issued by Iceberg Research where it alleged that Noble has under-stated its debt and gearing numbers, and that the commodity trader is only worth S$0.10/share after taking in all the write-downs. Noble has also called Iceberg Research’s allegations as “inaccurate, unreliable and misleading”.

Allegations are nothing new 
On our part, we have taken a look at the reports and these allegations (which Iceberg said were based on publicly available information) are nothing new – in fact, some of the practices stem from the way how trading houses operate. Nevertheless, concerns over fair values are likely to remain, given the more muted outlook for commodities in general. Recall that Noble had to take a US$356m write-down in the value of Yancoal on its balance sheet to US$322m in 4Q14. However, Noble stressed that the current depressed market value of Yancoal's shares do not appropriately reflect the value and quality of its mines, given the two key shareholders own 91% of the shares.

Near-term volatility to remain
As such, we think that we are likely to see more near-term volatility in the company’s share price as it will take time for Noble to regain market confidence. Despite insider buying interest over the past few weeks, we also saw Invesco buying and then selling some 15m shares between 16 and 19 Mar for a loss of S$1.1m. On the bonds side, we note that the yields on Noble’s bonds have also risen sharply, suggesting that the market sentiment is still very cautious. As we had already revised our forecasts after its 4Q14 results, we will not make any adjustments now. Maintain HOLD with an unchanged S$1.05 fair value (based on 13.5x FY15F EPS). But due to the on-going uncertainty, we would prefer to buy in at S$0.85 or better.

Yangzijiang Shipbuilding

OCBC on 24 Mar 2015

Since we upgraded our rating to Buy in Nov last year, the share price of Yangzijiang Shipbuilding (YZJ) has appreciated by ~10% compared to the STI’s ~4% rise over the same period. In comparison, most of the other O&M stocks under our coverage have seen a significant drop in their value with the oil price rout, and the FTSE Oil and Gas index has dropped by about 13% over the same period. Besides the group’s small exposure to the oil and gas segment, we note that expectations for its core bulk carrier and containership markets have already been low for long. In addition, the group’s good track record and cash pile instill confidence in customers to place orders with them. Meanwhile, the SGD has depreciated about 10% against the RMB since Jul 2014, and as we update our SGD/RMB assumptions, our fair value estimate rises from S$1.33 to S$1.42. Maintain BUY.

Outperformer in current environment
Since we upgraded our rating to Buy in Nov last year, the share price of Yangzijiang Shipbuilding (YZJ) has appreciated by ~10% compared to the STI’s ~4% rise over the same period. The group also declared a 5.5 S cents dividend in its FY14 results that was released in late Feb. In comparison, most of the other O&M stocks under our coverage have seen a significant drop in their value with the oil price rout, and the FTSE Oil and Gas index has dropped by about 13% over the same period.

Low expectations had been priced in
There are several possible reasons for the outperformance, with the most important one likely being YZJ’s small exposure to the offshore oil and gas sector – the group is currently building its first jack-up rig, though it will further develop its LNG carrier capabilities. The group’s core bulk carrier market is also in the doldrums, but expectations for this market have already been low for a long time. Containerships, another key segment, is also weak but there could still be some orders for large, fuel-efficient vessels. 

In a good position to weather the storm
YZJ had an order book comprising 118 vessels worth a total of US$4.75b as at 27 Feb 2015. For FY15, the group is hoping to secure new orders worth about US$2b vs. US$1.8b that was clinched last year, and we believe that YZJ’s good execution track record and significant cash pile (including the held-to-maturity assets) instill confidence in customers to place orders with them.

Upside of ~16%
Meanwhile, the SGD has depreciated about 10% against the RMB since Jul 2014, and as we update our SGD/RMB assumptions, our fair value estimate rises from S$1.33 to S$1.42 (based on 1SGD = 4.5RMB). In our SOTP valuation, we use an 8x P/E for the shipbuilding segment and a 0.85x P/B for the held-to-maturity segment, lower than the average 1.15x valuations of Chinese banks. Maintain BUY with 16% upside (this includes a dividend yield of ~4%).

Keppel Land

OCBC on 23 Mar 2015

We are now closing in on the second closing date (26 Mar 2015) for KepCorp’s offer. As at last Friday evening, it was reported that KepCorp has cumulated 87.5% of KepLand’s shares and requires an additional 2.5% to delist the company, which is quite achievable, in our view. In addition, we note that time is still on KepCorp’s side as they have the option to further extend the closing date. After the 90% level is achieved, we believe residual minority shareholders who are holding out may be more inclined to subsequently accept, given 1) the disincentive of holding illiquid delisted shares, and 2) at that juncture, a higher likelihood of a compulsory acquisition and a S$4.60 price. Our main recommendation is for KepLand shareholders to ACCEPT THE OFFER. We also suggest that shareholders divest a portion of their positions in the market at current levels above S$4.55, which is sufficiently close enough to the S$4.60 offer price, and partially hedge against a lower S$4.38 offer price.

Closing in on second closing date
We are now closing in on the second closing date (26 Mar 2015) for KepCorp’s offer. As at last Friday evening, it was reported that KepCorp has cumulated 87.5% of KepLand’s shares. Looking ahead, we highlight two key thresholds: first – the 90% threshold – after which KepLand will likely be delisted from the exchange in accordance to listing rules as its free float falls under 10%. Given the offerer’s stated intentions, we see it unlikely that KepCorp will restore the float to keep KepLand listed. Note that, at this level, KepCorp’s offer price remains at S$4.38. Second - the 95.5% threshold – whereby KepCorp would have received acceptances from 90% of the shares not already held before the offer. Past this threshold, KepCorp will be able to compulsorily acquire all remaining KepLand shares and its offer price will be raised to S$4.60.

More likely than not that KepLand will be privatized
While we are only four days away from the deadline, we continue to judge it more likely than not that KepLand will eventually be privatized. KepCorp requires an additional 2.5% of acceptances to delist KepLand, which is quite achievable, in our view. In addition, time is still on KepCorp’s side as they have the option to further extend the closing date; under the takeover code, the latest closing date will be the 60th day after the posting of the offer document. After the 90% level is achieved, we believe residual minority shareholders who are holding out may be more inclined to subsequently accept, given 1) the disincentive of holding illiquid delisted shares, and 2) at that juncture, a higher likelihood of a compulsory acquisition and a S$4.60 price. Our main recommendation is for KepLand shareholders to ACCEPT THE OFFER. We also suggest that shareholders divest a portion of their positions in the market at current levels above S$4.55, which is sufficiently close enough to the S$4.60 offer price, and partially hedge against a lower S$4.38 offer price.

Aviation & Shipping Sectors

OCBC on 20 Mar 2015

The aviation and shipping sectors saw a weak end to CY14 with mostly disappointing results. The cost savings on lower oil prices expected by most investors have yet to show in 4QCY14 financials due to hedging activities. We continue to hold the view that the aviation sector will still face headwinds from overcapacity in Southeast Asia, putting a downward pressure on yields in 2015. The liner industry is also expected to see depressed yields on overcapacity reasons and higher costs from port congestion in the U.S. Furthermore, the expected slowdown in global economic growth also casts uncertainties over air travel demand and trade volume. Hence, on these grounds, we maintain our UNDERWEIGHT rating on both the Aviation and Shipping sectors, with ratings on SIA [HOLD; FV:S$11.59], Tiger Airways [SELL; FV:S$0.29], SIAEC [SELL; FV:S$3.80], STE [HOLD; FV:S$3.33], SATS [HOLD; FV:S$2.98], NOL [HOLD; FVS$1.01].

Review of CY14 results
Singapore Airlines’ (SIA) [HOLD; FV:S$11.59] 9MFY15 core PATMI declined 27.8% YoY from large losses of Tiger Airways (Tigerair) [SELL; FV:S$0.29], strengthening of USD against SGD and large hedging positions that offset decline in fuel costs as well as weaker performance from its associates and JV companies. Tigerair’s 9MFY15 saw a series of impairment charges but excluding one-off items, core bottom-line improved 27.9% YoY, although still in loss position. Tigerair also repaired its balance sheet as it completed a rights issue exercise as part of its turnaround strategy. Singapore Engineering’s (SIAEC) [SELL; FV:S$3.80] 9MFY15 PATMI came in below expectations as it declined 29.2% YoY on lower maintenance checks. Similarly, ST Engineering’s (STE) [HOLD; FV:S$3.33] reported below expectations FY14 results with a 8.4% drop in FY14 net profit. On the other hand, SATS Ltd’s (SATS) [HOLD; FV:S$2.98] 9MFY15 results did better than we expected, as it grew 4.6% YoY on tight cost management, favorable business mix and productivity gains. Finally, for the shipping sector, Neptune Orient Lines Limited (NOL) [HOLD; FV:S$1.01] disappointed with FY14 results slightly below our expectation as net loss widened on depressed yields and volume from its liner segment. However, the focus is now on the proposed sale of NOL’s logistics arm for US$1.2b, which had been the sole positive contributor to NOL’s bottom-line over the past three years.

Maintain UNDERWEIGHT on Aviation Sector
Overcapacity in Southeast Asia is still the major headwind for the aviation sector as it puts a downward pressure on yields. However, we expect to see the easing of overcapacity over the longer-term as airlines delay deliveries of aircraft over the next few years. In Jan-15, IMF cut the growth forecast of world GDP for both CY15 and CY16 by 0.3%, which casts a shadow over the demand for air travel. Consequently, outlook remains muted for the service providers. Hence, we maintainUNDERWEIGHT rating on Aviation Sector.

Maintain UNDERWEIGHT on Shipping Sector
We believe the operating environment in the liner industry is still challenging due to port congestion in the U.S. which leads to higher costs and overcapacity, which casts downward pressure on freight rates. The expected slowdown in world growth also means uncertainty over trade volume. Hence, maintain UNDERWEIGHT on the Shipping Sector with no clear indication of recovery in the near-term.

Tiger Airways

OCBC on 17 Mar 2015

Tiger Airways (Tigerair) showed strong discipline in capacity management as it reported a 4.3 ppt YoY increase in its Feb-15 passenger load factor (PLF) to 78.9%. Feb-15 was the eighth consecutive month that Tigerair showed YoY improvement in its PLF, indicating consistent efforts put in to manage capacity. . However, we still think there are much more to be done for Tigerair’s turnaround through the alliance with Scoot. The uncertainty over air travel demand from the expected slowdown in global economy also gives us a good reason to remain cautious on near-term outlook. Looking ahead, at least until end-FY16, we think Tigerair will benefit from the lower jet fuel costs given its hedging exposure. We updated our model and as a result, our projection for FY16 forecast improves from net loss of S$0.7m to net profit of S$50.6m. While the Scoot-Tigerair alliance is making good progress, we think Tigerair’s turnaround still has some way to go. With uncertain near-term outlook, and the recent run-up in share price likely overdone, we reiterate SELL, even as our FV increases from S$0.23 to S$0.29 (8.0x FY16F EV/EBITDA).

Outlook remains uncertain 
Tiger Airways (Tigerair) showed strong discipline in capacity management as it reported a 4.3 ppt YoY increase in its Feb-15 passenger load factor (PLF) to 78.9%. Feb-15 was the eighth consecutive month that Tigerair showed YoY improvement in its PLF, indicating consistent efforts put in to manage capacity. We believe the encouraging operating statistics shown over the past few months are sustainable with management likely to continue to focus on capacity management as part of its turnaround strategy. However, we still think there are much more to be done for Tigerair’s turnaround through the alliance with Scoot to capture interlining traffic growth. The uncertainty of air travel demand from the expected slowdown in global economy also gives us a good reason to remain cautious over Tigerair’s near-term outlook. Note that Tigerair saw four consecutive quarters of YoY decline in its passenger volume.

Cheaper fuel lifts FY16 PATMI forecast
Looking ahead, at least until end-FY16, we think Tigerair will benefit from the lower jet fuel costs given its hedging exposure. With Brent crude price fluctuating around the US$60/barrel range for the past one month, we updated our model with the assumption that jet fuel price for FY16 to be US$75/barrel, implying a crack spread of US$15/barrel. Similar to Singapore Airlines hedging policy, we think Tigerair also hedged on a declining wedge basis. On this rationale, with an average hedging exposure of 35%, we forecast Tigerair to be 55%, 50%, 40%, 20% and 10% hedged on jet fuel for each quarter from 4QFY15 to 4QFY16, respectively, at an average price of US$111.68/barrel. As a result, our projection for FY16 forecast improves from net loss of S$0.7m to net profit of S$50.6m.

Raise FV; maintain SELL
While the Scoot-Tigerair alliance is making good progress, we think Tigerair’s turnaround still has some way to go. With the uncertain near-term outlook, and the recent run-up in share price likely overdone, we reiterate SELL, even as our FV increases from S$0.23 to S$0.29 (8.0x FY16F EV/EBITDA) on cheaper jet fuel.