Biosensors International

OCBC on 23 Mar 2012


We believe that concerns over imminent stent price cuts by the China government have manifested into Biosensors International Group’s (BIG) share price recently. Such fears have been overdone, in our opinion, as strong volume increase is expected to buffer the impact of ASP declines. China remains a high-growth market for drug-eluting stents (DES), and we are positive on BIG’s move to enhance its presence there. Besides organic growth, we also expect M&A activities to drive its earnings traction moving forward. While new DES launches by competitors will likely have some negative impact on BIG, we see its first mover advantage and strong positive clinical data as its key competitive advantage. We trim our FY13 revenue and core earnings estimates by 2.6% and 1.5%, respectively, but maintain our BUY rating with a slightly lower DCF-derived fair value estimate of S$1.92 (previously S$1.95).

ASP erosion fears overdone
Biosensors International Group’s (BIG) share price retreated by as much as 16.1% since it reported its 3QFY12 results, although the stock has since recovered partially. We believe investors could be concerned with expected stent price cuts arising from the China government’s imminent tendering process (likely to be summer 2012). Management highlighted to us that an ASP erosion of ~15% is possible, in line with market expectations. Given BIG’s consolidation of JW Medical Systems (JWMS) in 3QFY12, the group would face greater exposure to the drug eluting stent (DES) market in China. While gross margins would be impacted by lower ASPs, revenue could still grow in FY13 due to the buffer provided by expected strong volume increase. As China remains a high-growth market, we are still positive on BIG’s move to enhance its presence there.

Achieving strategic targets via Inorganic growth 
We expect inorganic growth to be its strategic focus to achieve its goal of transitioning into a global medical device platform company. Armed with a strong net cash position of US$247.6m (as at 31 Dec 2011), BIG has the ability to carry out M&A activities to expand its product portfolio, especially given its aim of broadening its offerings to include interventional non-cardiac medical devices. 

Trimming our estimates, but still sanguine on prospects
Upcoming new DES launches that adopt the biodegradable polymer stent technology by competitors would intensify competitive pressures in the industry. Nevertheless, BIG’s BioMatrix™ DES (which uses a biodegradable polymer) was already fully launched in major markets in Apr 2008. We expect its first mover advantage and proven track record of clinical trial data to provide the group with a competitive edge and buttress its continued growth. There could still be some negative impact as physicians might decide to carry a more diverse product range to increase their offerings to patients. We maintain our FY12 forecasts but trim our FY13 revenue and core earnings projections slightly by 2.6% and 1.5%, respectively. Maintain BUY with a revised DCF-derived fair value estimate of S$1.92 (previously S$1.95). 

UE E&C

OCBC on 23 Mar 2012

UE E&C’s share price has rallied strongly since the beginning of the year. YTD, its share price is up a stellar 74% against the STI’s 13%. We met with management recently and are bullish on its medium to long-term prospects. The group’s strategy of developing its design-and-build capabilities and expanding into property development has enabled it to raise/maintain its margins and provide effective cost controls. Going forward, we think the market will recognize this transformation and re-rate accordingly. Meanwhile, we refined our valuation methodology to SOTP (previously PBR) to account for its returns from development projects. Upgrade to BUY with revised fair value estimate of S$0.81 (previously S$0.65).

Surging interest
UE E&C has enjoyed keen interest since the beginning of the year. YTD, the group’s share has surged 74% against the STI’s 13%, raising its market capitalization from S$104m at the end of last year to more than S$180m currently. We met with management recently and are positive on its medium to long-term prospects. 

Moving up the value chain
The group is focused on developing its design-and-build capabilities and expanding into residential property development. By integrating architectural design with construction services (its core strength), the group is aiming to provide a one-stop shop service to its customers. More importantly, this integration enables it to charge a premium for its services and maintain effective cost controls. Similarly, UE E&C’s expansion into residential property development would provide revenue and cost synergies with its construction and engineering services. As the group has been involved in a number of property development projects over the past several years, it would have moved ahead in the learning curve (as a developer). As long as UE E&C continues to deliver on its property development projects, we think that the market will recognize its transformation and re-rate accordingly. 

Growth into adjacent businesses
Besides property development, UE E&C is looking to grow selective adjacent businesses (i.e. power solutions) that offer attractive rates of return. With a strong net cash position of S$113m as of end-Dec 11, it is also well-positioned to seek any acquisition opportunities. Meanwhile, we incorporated management guidance into our FY12-13F estimates; this lowered our gross margins assumptions to 21% (previously 24%) and decreased our FY12-13F earnings estimates by 15-20%. We also refined our valuation methodology to SOTP (previously PBR) to account for returns from its property development projects. Upgrade to BUY with revised fair value estimate of S$0.81 (previously S$0.65).

Global Palm Resources

OCBC on 23 Mar 2012


We spoke recently with management of Global Palm Resources (GPR) to get an update after ending FY11 on a pretty weak note. Going forward, GPR expects to increase new plantings to 1.0k ha, after planting 951 ha in FY11. It adds that it is on the lookout for M&A opportunities, where it has an ample net cash balance of IDR215.8b as of end FY11. But higher cost of production could crimp margins, even though CPO prices have generally remained fairly resilient thus far this year. As such, we have adjusted our margin assumptions accordingly, lowering our FY12 revenue estimate by 3.8% and earnings by 9.9%. In line with the revision, our fair value eases from S$0.195 to S$0.19, still based on 10x FY12F EPS. But as the stock is currently trading at just 0.7x its FY11 NTA, we believe that further downside is likely limited. As such, we maintain our HOLD rating.

Uninspired FY11 finish
We spoke recently with management of Global Palm Resources (GPR) to get an update after ending FY11 on a pretty weak note. As a recap, FY11 revenue of IDR345.6b was 2.6% below our estimate, while core net profit of IDR57.8b was 5.5% below. GPR has declared a final dividend of S$0.002/share, versus S$0.0016 in FY10. 

Revised planting target for FY12
The group also added just 951 ha of planting in FY11, or about 5% shy of its revised 1.0k ha target (previously 1.6-1.7k) for this year. Nevertheless, management has just bumped up its new planting target from 770 ha to 1.0k ha. All in, it expects to spend some IDR15.6b on plantation capex this year, down from IDR21.6b last year. In addition, the company has targeted IDR35.9b capex for infrastructure, up from IDR18.9b in FY11. Meanwhile, management reveals that it is still on the lookout for M&A opportunities – GPR has a net cash balance of IDR215.8b (as of end Dec 2011) which it can tap on. 

Also expecting higher cost pressures
While CPO prices have generally remained fairly resilient, management is expecting higher cost of production this year, with cash cost likely to rise to IDR3087/kg, from IDR2585/kg in 4Q11 and IDR2489/kg in FY11. GPR explained that it is due to the higher budgeted fertilizer cost for FY12 of IDR28.0b (including compost), versus IDR14.9b in FY11; this as the new plantings would need more fertilizers in the infancy stage. As such, we have adjusted our margin assumptions accordingly, lowering our FY12 revenue estimate by 3.8% and earnings by 9.9%.

Trading at 0.7x NTA
In line with the revision, our fair value eases from S$0.195 to S$0.19, still based on 10x FY12F EPS. But as the stock is currently trading at just 0.7x its FY11 NTA, we believe that further downside is likely limited. As such, we maintain our HOLD rating. 

SIA Engineering

CIMB RESEARCH on 22 March 2012


WE peg a higher PE of 15x (five-year mean) in our blended valuation following a more positive maintenance, repair and overhaul (MRO) outlook. We refine our EPS as we update some assumptions. Maintain 'outperform' with catalysts anticipated from strong earnings growth.

We believe SIA's workload alone can sustain utilisation rates at all of SIAE's six hangars. About 41 of SIA's aircraft are due for 'D' checks in 2012-13, in our estimation. These would comprise the first 'D' checks (after five years of flying) for six A380-841s and 12 B777-312s. There are also 18 B777-212s scheduled for second 'D' checks.

Management expects the hangars to be at least 70 per cent utilised in the next five years, backed by long-term contracts and current order book.

We are bullish on the MRO industry. Despite climbing oil prices, passenger load factors remained at historical highs. As aircraft utilisation rises, we expect demand for heavy maintenance services to rise.

SIAE has outperformed the market by about 11 per cent since our upgrade in February 2012. We see room for further upside given the steady growth of its MRO business. As risks of an economic downturn dissipate, we see less likelihood of capacity cuts by airlines.

In a bull market, SIAE could trade up to 19x forward P/E. We believe the market has not priced in its earnings growth of 5-7 per cent through 2014 as SIAE is trading at its March 2010 valuations when its earnings dipped 10 per cent. We prefer SIAE to ST Engineering for its more attractive valuations.
OUTPERFORM

Neptune Orient Lines

OCBC on 22 Mar 2012

The Shanghai (Export) Containerised Freight Index (SCFI) climbed 5% higher WoW in the week ended 16 Mar 2012. The increase in SCFI was driven by shipping liners’ success in getting most of the previously announced US$300/FEU hike in transpacific shipping rates. However, bunker fuel prices have averaged 8% higher QoQ thus far in 2012. Furthermore, since new deliveries of vessels are expected to increase shipping capacity this year, shipping liners’ collective discipline in managing the oversupply is key to the profitability of the entire container shipping industry. We pared Neptune Orient Lines’ (NOL) FY12 net loss estimate to US$136m, from the previous US$281m, after the latest hike in transpacific shipping rates. But we maintain our fair value estimate of S$1.38/share and HOLD rating on NOL.

Another round of successful rate hikes
The Shanghai (Export) Containerised Freight Index (SCFI) climbed 5% higher WoW in the week ended 16 Mar 2012. The increase in SCFI was driven by increases of US$239/FEU (40-foot equivalent unit) in Shanghai to U.S. west coast and US$222/FEU in Shanghai to U.S. east coast shipping rates. The general rate increase (GRI) in transpacific shipping rates indicates shipping liners have been successful in getting most of the previously announced US$300/FEU rate hike that happened on 15 Mar 2012. Going forward, shipping liners are planning another US$400/FEU hike to transpacific shipping rates on 15 Apr 2012.

Near record high bunker prices go higher
Bloomberg’s 380 Centistoke Bunker Fuel Spot Price Singapore Index (BUNKSI38), a proxy for bunker fuel prices, has been unrelenting and moved even higher since our last report on 3 Mar 2012. Thus far in 2012, BUNKSI38 has averaged 732.6, or 8% higher QoQ. In comparison, the BUNKSI38 only averaged 679.0 in 3Q08, when bunker fuel prices hit an all-time peak of 764.5 in Jul 2008 but quickly fell along with the global financial crisis in 2008.

New deliveries may cause overcapacity
According to the SCFI, Asia-Europe freight rates have slid 2% since the last round of successful GRI. While a 2% drop is typically insignificant, it prompts doubts on 1) whether the GRI recorded YTD is sustainable and 2) the likelihood of further GRI in the coming months. Since new deliveries of vessels are expected to increase shipping capacity this year, shipping liners’ collective discipline in managing the oversupply is key to the profitability of the entire industry.

Maintain HOLD
We pared Neptune Orient Lines’ (NOL) FY12 net loss estimate to US$136m, from the previous US$281m, after the GRI in transpacific rates. However, we had previously raised our fair value estimate of NOL to S$1.38/share to account for the shipping rate hikes. Thus, we maintain our fair value estimate and HOLD rating on NOL.

Starhill Global REIT

Kim Eng on 23 Mar 2012

Deserving better. A prime retail play trading at sharp discount to book value, Starhill Global REIT deserves better in our opinion. For one, its key assets are in the coveted Orchard Road area, where tight supply and the entry of new international retailers should give it greater bargaining power in terms of leasing its space. Buy Starhill for the potential of rental upside in Singapore and income stability in Malaysia and Australia.

Courting greater upside. A number of Starhill’s major leases (42% of gross rent) are due to expire next year. Chief among them is its master lease with Toshin at Ngee Ann City mall that has an option for renewal. If Starhill wins its fight at the Court of Appeal for a transparent rent review mechanism, its ability to maximise the potential for rental increase at the mall would be assured. Currently, the 225,000-sq-ft space is estimated to be leased at low teens per square foot to Toshin, which then subleases it to luxury brands like Chanel, Louis Vuitton,

Burberry and Tiffany & Co. In prime Orchard Road, the average retail rent currently stands at $35.50 psf per month. Race for prime space. Of the major retail projects (ie, more than 80,000 sq ft) in the pipeline between now and 2015, only 16% of the 2.8m sq ft of new supply is in Orchard Road and the rest in non-prime areas. Several international retailers such as Abercrombie & Fitch and Michael Kors opened their maiden stores in Orchard Road last year and other new-to-market brand names are said to be hunting for prime retail space. We expect Starhill to benefit from the scarcity of new prime retail space, asset enhancement initiative at Wisma Atria and healthy retail sales growth in Singapore.

No refinancing needs until 2013. Starhill’s next major refinancing is due next year ($558m, or 64% of borrowings), while only $27m is due this year. Gearing is relatively low at 30.8%, implying debt headroom of $436.3m for acquisitions before hitting its maximum target of 40%.

Buy prime assets at a discount. Considering its prime assets in Singapore, Kuala Lumpur and Perth, as well as a healthy balance sheet, Starhill’s steep 30% discount to its NAV does not seem justified to us. Moreover, its distribution per unit yield of 6.7% is also the highest among its peers. Maintain Buy with a target price of $0.80.

Dukang Distillers

Kim Eng on 23 Mar 2012

Background: Formerly known as Trump Dragon Distiller Holdings, Dukang Distillers engages in the manufacture, sale, and distribution of Baiju products in the PRC. Previously, the group sold only its house brand, “Siwu” Baiju, in Henan, catering to the mass-to-mid market. In 2009, the group acquired Luoyang Dukang Holdings, which provided the company with the window of opportunity for expanding into the mid-to-high end segment of the Baiju market and beyond the Henan province. The group went on conduct TDR listing and raised RMB297m to aid the expansion. Moreover, Dukang leveraged on the listing to extend its product series into OEM sake through

Shift in product strategy. Dukang is orienting the Luoyang series towards the mid-to-high end market and Siwu to the mass-mid end segment. Luoyang’s regular and premium series currently command gross margins of 53% and 55.4%, respectively, as opposed to 26.2% and 32.5% for the Siwu series as of 2Q12.

From 50% to 100% production capacity. After undergoing the consolidation of Luoyang Dukang and utilising an extra 50% capacity with 1,470 fermentation pools for the series, Luoyang Baiju has become the group’s primary driver. It has achieved sales of RMB 312.9m that constitutes 68.9% of the group’s revenue as of 2Q12. This performance is in sync with the increase in the number of distributors from 80 to 114 in Henan Province and from 22 to 56 across the rest of China as of September 2011.

Letter of intent signed with Lotte Beverage. In Nov 2011, the group signed a letter of intent with Lotte Chilsung Beverage Corporation (over US$30b sales annually), a South Korean beverage company, to distribute the Luoyang series through Lotte’s distribution network of over 90 sales branches.

Valuation. The group holds a strong balance sheet, backed by a strong net cash position of RMB709.3m, thanks to positive operating cash flows and TDR proceeds from 2011. Compared to peers trading at 28x PE, the group is trading at a huge discount of 9.4x its historical PE.

STX OSV

AMFRASER on 21 March 2012

WON two contracts totalling NOK1,150 million (S$253 million) for a subsea support vessel for Island Offshore for delivery in Q1 2014, and for an Offshore Subsea Construction Vessel for DOF for delivery in Q2 2013 (NOK650 million).


Good sign of vessel financing recovery in OSV (offshore supply vessel) market. These are two large and complex vessels which we had hoped would be part of FY2011 order wins.


That was derailed by the euro crisis which froze the financing markets (recall the Eksportfinans issue) for shipowners, which delayed orders to yards. The final signature on these contracts indicates that financing may be flowing again, hopefully as a sign of more to come.


Eleven per cent of our order win assumption, but only 20 per cent of required H1 2012 wins. STX OSV needs to win another NOK9.4 billion to meet our revenue assumption for the year.
However, we believe that STX OSV needs to win around NOK6 billion within the first half of the year to be able to recognise enough revenue to meet our FY2012F revenue forecast.



Seventy-two per cent of FY2012F revenue secured, up from 67 per cent as of last month, according to our revenue-allocation model for each ship in the order book. Time is running out - there is a lag time of one-to-two months between contract signing and actual revenue recognition. Further, as revenue recognition follows an S-curve, the percentage recognised in earlier quarters is already low. These are the operational issues we see being a downward risk to our revenue forecast.



Sharp revaluation in the last quarter has lifted STX OSV from our deep-value list. When we initiated coverage of STX OSV at $1.13, this was equivalent to 5-6x forward P/E, making it one of the cheapest stocks in our selection.



This is no longer the case. On a forward basis, the stock is currently trading at 9.8x, making it that much riskier for investors. It is also no longer especially cheap within its sector, now trading at 11x.



Fast approaching our market-neutral discounted cash flow value of $2.09, using a beta of 1.4, risk premium 6 per cent, for a total discount rate of 13.7 per cent, nine-year second-stage growth of 7 per cent to 2025F, and terminal growth of 2.5 per cent.



Raise fair value to $2.00, maintain 'buy', maintain caveat: Alongside the sector recovery, we raise our peg from 10x to 11x FY2012F EPS, reaching a fair value of $2.00. Including the 5 per cent dividend yield estimate, there is an upside of 17 per cent to warrant the buy call.


However, we repeat the same caveat as in the last update - much of the revenue is unsecured - failure to win sufficient contracts early enough would cause the company to miss the forecast.

The financing problems are not over in Europe, and high-beta STX OSV stands particularly at risk should the market get the jitters again.
BUY

Fragrance Group

Kim Eng on 22 Mar 2012

Background:

Fragrance Group has two business divisions – property development and hotel. Its property development division offers homes at affordable prices and has launched more than 50 projects, the latest being Parc Rosewood at Woodlands. Its hotel division operates under the Fragrance brand, which has 22 hotels islandwide catering predominantly to budget travellers. Parc Sovereign Hotel, a new hotel brand set up recently, is situated in the heart of Bugis.

Recent development:
Fragrance Group has proposed to spin off and list its hotel division as a separate entity called Global Premium Hotels (GPH). The market value of its Fragrance hotels as at last September was $635.2m. Upon completion of the restructuring, the group stands to reap a net gain of approximately $464.0m. It said the proceeds will be used for property development. Fragrance Group is expected to own more than 50% of GPH.

Spin-off is positive, but valuation is a tad too expensive

The spin-off is positive for Fragrance Group, as it allows the sale of its 22 tourist-class hotels, which have consistently returned gross and net margins of 85% and 50%, respectively. The resources can then be channelled to its property development business. However, valuation is looking a tad too expensive at this point. We estimate the book value of the consolidated entity post the spin-off, assuming Fragrance Group retains 55% of GPH, is $0.29 per share. Taking into account development profits, in particular its 60% stake in Parc Rosewood, last month’s best-selling project, our estimate of Fragrance’s RNAV post spin-off is $0.41 per share. Current stock price implies a 15% premium over its RNAV, compared to its peers that are trading at a discount. A plus for the spin-off is an improved balance sheet – a turnaround from a net gearing of over 104% to almost net cash. This puts the group on a strong footing to landbank in the years ahead.

ST Engineering

Kim Eng on 22 Mar 2012

The big picture.

Investors buy ST Engineering (STE) for its attractive 5% dividend yield. On its part, the company continues to deliver on its earnings despite a challenging environment. However, share price upside is limited by a lack of fresh catalysts. While we believe that the negative press on its India defence issue is overblown, any pullback on the back of this presents a good entry point. Fundamentally, the stock remains a Hold as the forward PER of 17x represents full value.

India debarment not a big deal.

STE’s defence-related subsidiary ST Kinetics was blacklisted by India’s Criminal Bureau of Investigation in connection with a corruption probe at India’s defence procurement agency. STE said there is no evidence implicating them. However, with a reputation to protect, we understand its insistence in clearing its name. Though India has never been a major contributor to its defence earnings, the country’s potential as a major arms buyer is significant. A clean reputation is useful in bidding for defence contracts globally.

Yields sustainable.

Following its 7% growth in net earnings for FY11, STE declared a final and special dividend totalling 12.5 cents per share for a full-year payout of 15.5 cents per share, or a yield of 4.9%. Exdate is 25 April 2012. Even though STE expects to maintain its healthy payout ratio of 90% of earnings, we note that it was cash-flow-negative in 2011 due to higher working capital on negative variances in receivables and advances, as well as higher capex. We expect this situation to normalise in FY12. Cash and equivalents stands at $1.36b.

Neutral, all things considered.

STE’s $12.3b orderbook supports earnings across the different divisions. It also has a healthy mix of commercial and military contracts. The company expects to achieve higher earnings for FY12, which is in line with our forecast of a modest 7% earnings growth. This will support its dividend payout and mitigate any downside. However, a lack of clear catalysts also limits upside, hence our Hold recommendation on the stock. Our target price of $2.88 remains pegged at 15x forward earnings, in line with its historical mean.

CapitaCommercial Trust

OCBC on 21 Mar 2012

Summary: Domestic office rentals peaked in 2H11 and, from channel checks, we judge that Grade A office rentals has declined a further 3-5% in 1Q12. We now forecast office rentals to fall 10-15% in FY12 and believe office capital values could come under pressure ahead. For CCT’s Grade A portfolio, an average cap rate of 4.0% was used by independent valuers in Dec 11, while cap rates around 4.15%-4.5% were used over Jun 08 – Dec 10 (excluding 6BR, HSBC building). In terms of share price, we see key risks stemming from fair value write-downs as the sector softens further, though any price downside is likely capped by a currently undemanding valuation (0.7x PB) and a fairly attractive yield (6.1%) for high-quality Grade A office exposure. Downgrade to HOLD with a lower fair value estimate of S$1.14 versus S$1.29 previously, to reflect softer cap rate assumptions. 

Expect office rentals to dip in FY12
Domestic office rentals peaked in 2H11 and, from our channel checks, we believe that Grade A office rentals has declined a further 3-5% in 1Q12. Given continued macroeconomic uncertainties and an ample office pipeline of 4.2m sqft NLA in FY12-13, we now forecast office rentals to fall 10-15% in FY12.

Downside for distributable income likely limited
That said, we think the downside for CCT’s FY12 distributable income is likely limited. Only 7.9% of CCT’s portfolio gross rental income, primarily at 6BR and One George, is due for renewal in FY12 (29.9% in FY13). Also, despite a forecasted decline in office rentals, we would still likely enter a phase of positive rental reversions in 2H12 as leases signed during the previous trough in 2H09-2H10 are renewed at market levels.

Capital values to face headwinds
However, we believe office capital values could come under pressure with softening rentals expectations, accompanied by cap rates expansion, as major players in the market re-evaluate the office cycle. For CCT’s Grade A portfolio, an average cap rate of 4.0% was used by independent valuers during the latest appraisal in Dec 11, while cap rates in the range of 4.15% to 4.5% were used over Jun 08 – Dec 10 (excluding 6BR, HSBC building). Moreover, we think the recent Twenty Anson acquisition was somewhat aggressive at S$2.1k psf (S$430m) since Capital Tower nearby (also owned by CCT) was valued independently at S$1.6k psf in Dec 11.

Risks from fair value writedowns - DOWNGRADE to HOLD
For CCT’s share price, we see key risks stemming from fair value write-downs as the domestic office sector softens further, though any price downside is likely capped by a currently undemanding valuation (0.7x PB) and a fairly attractive yield (5.7%) for high quality Grade A office exposure. Downgrade to HOLD with a lower fair value estimate of S$1.14 versus S$1.29 previously, to reflect softer cap rate assumptions.

Office Reit

OCBC on 21 Mar 2012

Over 2H11, we saw office rents peak as Grade A rents declined 0.5% QoQ in 4Q11 while Grade B rents fell by 0.4%. We expect further rental dips in FY12 and believe, from our channel checks, that Grade A rents has already fallen 3-5% QoQ in 1Q12. Going forward, we think office capital values could come under pressure with declining rentals, accompanied by cap rate expansion, as major players re-evaluate the office cycle. In general, while the downside from current levels of distributable income is likely capped as we enter a phase of renewing leases signed over the previous trough (2H09-2H10), we see key risks to share prices stemming from fair value write-downs should capital values ease significantly. That said, this is mostly balanced out by currently undemanding valuations (sector average PB: 0.7x) and relatively robust balance sheets (sector average gearing: 35%). Maintain NEUTRAL on the office REITS. Downgrade CCT to HOLD (FV: S$1.14); maintain HOLD on Suntec (FV: S$1.10). Our top pick is FCOT (BUY, FV: S$0.94)

Office rentals peaked in 2H11
Over 2H11, we saw office rents peak as Grade A rents declined 0.5% QoQ in 4Q11 while Grade 
B rents fell by 0.4%. Vacancy rates also increased – Grade A vacancies came up from 10.9% (3Q11) to 11.6% (4Q11); CBD vacancies from 7.7% to 8.8%. We also judge pre-leasing activity at major new buildings to be somewhat sluggish (One Raffles Place - 42% pre-committed, MBFC T3 - 62%). 

Too early to call office bottom
We expect further rental dips in FY12 and believe, from our channel checks, that Grade A rents has already fallen 3-5% QoQ in 1Q12. Given continued macroeconomic uncertainties and an ample office pipeline of 4.2m sqft NLA in FY12-13, we now forecast office rentals to fall 10-15% in FY12 and believe that it is too early to call a bottom for rentals at this juncture. 

Office capital values to come under pressure
Going forward, we think office capital values could come under pressure with softening rentals expectations, accompanied by cap rates expansion, as major players re-evaluate the office cycle. Major office transactions have been limited year to date, with CCT’s purchase of 20 Anson at S$430m (S$2.1k psf) in Feb 12 as the first sizable transaction. We also note that Robinson Point is reportedly on the market for about S$306m (S$2.3k psf). In our view, the transaction price for this asset, if sold, could be a touchstone for office capital values ahead, particularly if put against Robinson Centre next door which sold for S$2.2k psf (S$293m) only in Oct 11.

Maintain NEUTRAL on office REITS
In general, while the downside from current levels of distributable income is likely capped as we enter a phase of renewing leases signed during the previous trough (2H09-2H10), we see the key risk to share prices stemming from fair value write-downs should capital values ease significantly. That said, this is mostly balanced out by currently undemanding valuations (sector average PB: 0.7x) and relatively robust balance sheets (sector average gearing: 35%). Maintain NEUTRAL on the office REITS. Downgrade CCT to HOLD (FV: S$1.14); maintain HOLD on Suntec (FV: S$1.10). Our top pick is FCOT (BUY, FV: S$0.94) due to its diversified regional exposure and attractive valuation (0.4x PB; 7.9% FY12 yield).

Oil & Gas sector: A busy first quarter in 2012

OCBC on 21 Mar 2012

The oil and gas scene in Singapore witnessed a busy first quarter this year in terms of new contracts secured, M&A news and other corporate actions such as fund raising. This was driven by macro events such as tensions in the Middle East, unplanned outages and monetary actions by central banks, which were all manifested in the high oil price. Taking stock, we see that the outperformers YTD are STX OSV (54%), Sembcorp Marine (39%) and Ezion Holdings (42%). This compares with the STI’s 14% rise. Looking ahead, we are still constructive on the sector given the superior earnings visibility for certain stocks and solid industry fundamentals. Our preferred picks are Keppel Corporation, STX OSV and Ezion Holdings.

Starting the year with a bang
When we wrote our Oil and Gas strategy report “Taking a well-deserved rest before the next lap” in early Dec last year, there was a palpable sense that the brief respite in the last few months of 2011 would soon be overshadowed by macro headlines and corporate actions. Indeed, the sector came back into focus the first trading day of the year, as WTI crude hovered above the US$100/bbl benchmark. The subsequent rally in crude prices drove interest in oil and gas plays, and high trading volumes were accompanied by strong price gains.

What’s the story so far?
The oil and gas scene in Singapore witnessed a busy first quarter this year in terms of new contracts secured, M&A news and other corporate actions such as fund raising. This was driven by macro events such as tensions in the Middle East, unplanned outages and monetary actions by central banks, which were all manifested in the high oil price. 

Leaders and laggers back home
Back home, the outperformers YTD are stocks such as STX OSV (54%), Sembcorp Marine (39%) and Ezion Holdings (42%). This compares with the STI’s 14% rise and underperformer KS Energy’s 7% decline.

Bolstered by solid industry fundamentals
We switched our preference from Sembcorp Marine to Keppel Corporation [BUY, FV: S$12.27] after we downgraded the former to HOLD in late Feb. However, we are still constructive on the rig builders for their superior earnings visibility and solid industry fundamentals. We continue to like STX OSV [BUY, FV: S$2.25] for its resilient industry positioning and excellent operational capabilities. Meanwhile, Ezion Holdings [BUY, S$1.05] remains as our preferred small-mid cap pick given management’s focus on securing projects with decent ROEs and its ability to do so given its wide network of contacts in various parts of the world. 

Ho Bee Investment

Kim Eng on 21 Mar 2012

Sell 50% of The Metropolis, make $300m. Home curbs appear to have spawned an office boom of late, judging from the take-up of recent launches. At Tanjong Pagar, Far East Organization’s PS100, integrated with its new Oasia Downtown Hotel, was 100% sold in a single weekend at $3,000 psf on average. Elsewhere, Paya Lebar Square and Robinson Square, both substantially sold by now, also achieved new benchmark prices of $1,700 psf and $2,800 psf, respectively. It makes sense for Ho Bee to consider selling, fully or partially, its 1.2m-sq-ft office space at The Metropolis to tide it over difficult times in the high-end residential market. After all, market price is currently about $1,500 psf versus its low breakeven of $820 psf.

A bonus for Sentosa Cove developers. Sentosa Cove boasts a few exceptions. A well-known exception is that foreigners are allowed to own landed homes there. A lesser-known exception is the exemption of provisions under the Residential Property Act for developers. This exempts developers from the two-year deadline to sell all units after completion, which is increasingly a concern for other high-end developers with completed unsold units given the severe slowdown in the segment. However, sales are still severely lacking in Sentosa Cove.

Bungalow sold for $39m. A bungalow in Sentosa Cove was sold for a record $39m last month. The 99-year leasehold landed property sits on an area of 15,930 sq ft, implying a per-square-foot price of $2,448. While the transaction is positive for the residential enclave in the east of Sentosa Island, we believe that the optimism is confined to the landed home segment where ownership is open to foreigners, and is unlikely to spill over to the non-landed segment where Ho Bee operates in.

Cheap but beware the headwinds. Ho Bee is trading at a discount of 57% to RNAV and 41% to book. We remain neutral on Ho Bee in view of near-term headwinds, locally and in China, where its exposure is now over 40% of its RNAV. Maintain Hold with a target price of $1.27, pegged at a 60% discount to its RNAV of $3.18.

Q&M Dental

Kim Eng on 21 Mar 2012

Background: Q&M Dental is Singapore’s largest private dental healthcare group, with three dental centres and 46 dental outlets in Singapore, two outlets in Malaysia and nine in China. It also has a team of more than 130 qualified dentists and oral health therapists. The company was founded in 1996 and listed on the SGX Mainboard in November 2009.

Recent developments: Q&M recently proposed a share split of one ordinary share into two in a bid to improve liquidity and broaden its shareholder base. Having completed the purchase of a property in Clementi which was leased for its dental operations, it is proposing another similar acquisition of a property in Jurong Gateway, which is currently owned by Group CEO, Dr Ng Chin Siau.

Revenue growing in tandem with expansion. In its latest full-year results, Q&M saw FY11 revenue grew by 22% YoY to $47.8m while net profit rose by 14% YoY to $4.6m as its network of dental outlets continued to expand. The lower growth in net profit vis-à-vis revenue was due to an increase in headcount, as well as higher depreciation and rental charges, following the opening of new outlets. The group added six new clinics and a centre in FY11.

Government subsidy scheme a boon. Q&M would be a beneficiary of the enhanced Community Health Assist Scheme, under which needy patients are subsidised by the government for seeking treatment at private dental clinics. The group has 49 clinics registered under the scheme.

Overseas markets to be key growth drivers. Q&M is eyeing Malaysia and China as key markets that will drive its next phase of growth. In Malaysia, it plans to establish up to 15 dental outlets by 2015, while the target for China is 50 dental clinics and 20 labs by the same year.

Future expansion plans priced in. The market appears confident about Q&M’s expansion plans in Malaysia and China, as evidenced by the relative resilience of the company’s share price at valuation levels that seem steep to us. The stock is trading at 46x FY11 PER and 7.9x P/NTA. While we are impressed by management’s execution skills, we remain cautious on the stock’s valuation as we believe that future prospects and risks have been priced in.

Roxy-Pacific Holdings

OCBC on 20 Mar 2012



In Feb 12, ROXY had a strong month of sales. Treescape is now 78% sold at a median price of S$1.4K psf. Also, sales at Nottinghill Suites picked up with an additional 16% sold in Feb 12 (now 60% sold). Currently, we judge that ROXY warrants a lower RNAV discount at 30%, versus 40% previously, due to its more favorable risk profile. First, we see limited risk from long-term residential uncertainties on existing landbank as most remaining sites would likely be launched in 1H12. Second, revenues from FY12-15 are underpinned by S$599m of progress billings (4.5x FY11 development revenues) from already sold units. Finally, a significant portion of value (46% of RNAV) is anchored on Grand Mercure Roxy Hotel, which we value at a fairly conservative 460k per room. Upgrade to BUY and raise our fair value estimate to S$0.62 (using a lower RNAV discount of 30%) versus $0.45 previously.

Positive sales in Feb 12
From the recent URA sales figures for Feb 12, we saw that ROXY had a strong month of sales.
Their newly launched project at Telok Kurau, Treescape, is now 78% sold at a median price of S$1.4K psf. Also, sales at Nottinghill Suites, which was previously subdued, picked up with an additional 16% sold in Feb 12, and the project is now 60% sold. We continue to hold a positive view of management’s ability to sell units in the current environment. Moreover, we now believe that ROXY would launch subsequent projects expediently in 1H12, Eon Shenton (70 Shenton Way), Millage (55 Changi Rd) and Natura@Hillview (Hillview Terrace), and would likely achieve positive results.

More favorable risk profile
At the current juncture, we judge that ROXY now warrants a lower RNAV discount at 30%, versus 40% previously, due to its more favorable risk profile. First, we see limited risk from long-term residential uncertainties on existing landbank as most remaining sites would likely be launched in 1H12. Second, Roxy’s development revenues from FY12-15 are underpinned by S$599m of progress billings (4.5x FY11 development revenues) from already sold units. Finally, a significant portion of value (46% of RNAV) is anchored on Grand Mercure Roxy Hotel, which we value at a fairly conservative 460k per room. We continue to have a favorable view on the domestic hospitality segment and expect overall hotel room demand to grow at 6.4% p.a. from 2012 to 2015 - significantly underserved by an expected hotel room supply CAGR of only 3.8% p.a.

Higher fair value estimate of S$0.62
From our discussions with ROXY, we also understand that it is currently seeking to add to its hotel portfolio going forward, which we believe reflect management’s propensity to seek out high-return risk-adjusted opportunities through changing property cycles. We now upgrade ROXY to a BUY and raise our fair value estimate to S$0.62 using a lowered RNAV discount of 30%. Our previous fair value was S$0.45 (40% RNAV discount).

Plastoform Holdings

UOBKayhian on 19 Mar 2012

What’s New

•  Extends deadline to be taken off the SGX watch-list. Plastoform Holdings (Plastoform) has received approval from the Singapore Exchange (SGX) to extend its deadline to submit an application to be taken off the SGX watch-list by about 12 months to 4 Mar 13.
• Moving up the value chain with new products. Plastoform is moving up the value chain and transforming itself from an original equipment manufacturer (OEM) to an original design manufacturer (ODM) of PC speakers. The group has rolled out new products such as Bluetooth speakers.
• Turnaround in 4Q11. Plastoform reported a net profit of HK$17.7m in 4Q11, its first profitable quarter since 2007. Strong demand for its in-house-designed wireless lifestyle audio products lifted revenue by 56.4% yoy to HK$151.1m, with 90% of the growth driven by increased sales from the ODM business.
• Rights issue. Plastoform raised S$15.2m in a rights issue in Feb 12, with the proceeds used for working capital as well as to lift its share in the rapidly expanding wireless lifestyle audio product market.

 Stock Impact

• Requirements for removal from the watch-list. Under rules of the listing manual, a company may apply for removal from the watch-list if it records a consolidated pre-tax profit from operations for its latest financial year and whose average market capitalisation is at least S$40m over 120 trading days. The group’s current market capitalisation is S$41.9m.
• On track for turnaround. Since Sep 11, Plastoform has seen a significant ramp-up in orders from top-tier customers such as Logitech. Going forward, the group will continue to restructure its business operations and allocate resources to focus on ODM products.

 Valuation

• Plastoform is trading at 3.0x P/B, above peers’ average of 1.5x. We do not use the PE ratio as a basis for comparison as the group recorded losses in the last financial year.

Construction Sector

DMG & PARTNERS SECURITIES on March 2012

IS the productivity drive a bane to the construction sector? The government has been reiterating its call for companies to boost productivity and be more innovative to attract locals to enter industries that were previously viewed as not Singaporeans' 'first choice' when it comes to their job search.

The construction sector is caught in the above struggle to woo locals to join the sector, as well as to increase productivity.

Construction companies could face rising labour and administrative/marketing costs in its bid to attract locals into the industry, as well as the need to provide for higher expenditure on the purchase of machinery or equipment in order to automate labour- intensive tasks.

An example of how companies in the sector can attract new blood is the offering of scholarships of tertiary education to students studying construction-related courses and tailored career management programmes to the scholarships' recipients when they join those companies.

All these would come at an additional cost to companies. While these measures might push up costs of construction, any increases are likely to be reflected in increases in tender prices when companies tender for their projects.

In addition, to offset the increase in costs, companies may utilise the various productivity schemes in place to automate certain tasks and reduce manpower via the purchase of equipment/machinery.

With the various infrastructure and construction projects coming up such as the North-South Expressway, we maintain our 'overweight' recommendation on the sector. Our top picks within the sector are Lian Beng Group (buy, target price $0.71) and OKP Holdings (buy, target price $0.80).
OVERWEIGHT

Kencana Agri

DBS VICKERS SECURITIES on 19 March 2012

VULNERABLE earnings amid high cost base: While Kencana's growth plans are encouraging, the high costs base relative to its current production is a concern. In 2011, Kencana reported general and admin (G&A) expenses of US$12.5 million but produced only 317,000 metric tonnes (MT) of own fresh fruit bunches (FFB) and gross profit of US$35.5 million.

This compares to First Resources which had US$13.1 million in G&A expenses in 2009 but produced 1.4 million MT of own FFB and gross profit of US$130.5 million.

While Kencana has sufficient debt facilities and repayment for some of its loans only occurs when the trees start production, financial leverage will increase the risk of PE de-rating especially in event of collapse in CPO prices or production issues.

We estimate net debt/equity ratio to jump from 55 per cent in FY2011 to 69 per cent in FY2013F, as the group's FY2012-2014F operating cashflow is insufficient to fund its capex/new planting plans.

Discounted cash flow (DCF) based target price lowered to $0.30 from $0.35 as we reduce our FY2012-2014 earnings forecasts by 22-34 per cent to account for higher production costs and lower FFB/ CPO output post-Q4 2011 results.

It is also our opinion that the high FY2012 price-to-earnings (P/E) multiple does not reflect the risk associated with limited trading liquidity and tight share register.
FULLY VALUED

Singapore Airlines

Kim Eng on 20 Mar 2012

Good news, bad news. Singapore Airlines’ (SIA) loads have levelled off and the worst appears to be over with signs of an economic pickup. But high fuel prices will continue to weigh on earnings. In fact, with the economic recovery likely to nudge up fuel prices, earnings may be muzzled over the next 12 months. SIA is best-positioned to emerge into strength. We maintain our Buy call and target price of $14.40.

Loads have bottomed out. February load factors showed that passenger loads were maintained in the high seventies. Both capacity and traffic were up, thanks to the Singapore Airshow during the month. Cargo surprised with a pickup in both loads and traffic, but load factors remained weak, in the low sixties. SIA had cut cargo capacity by 20% since mid-February. In summary, the data gives us confidence that traffic has bottomed out and is well-positioned for an eventual recovery.

Costs up due to fuel. Jet fuel prices are at a 12-month high at US$137/bbl. While the stronger S$ and SIA’s recent move to raise fuel surcharges may offer some respite, fuel is still a major drag on earnings. We anticipate that jet fuel will remain at this level or trend higher, dashing hopes for some recovery in earnings. We are factoring in jet fuel at US$135/bbl for FY Mar13 (US$128/bbl previously), which results in our FY Mar13F earnings being cut by 25% to $787.9m.

Trying to succeed where others have failed. Scoot, SIA’s budget long-haul carrier, will begin flight operations around June. While it is difficult to see how the business can succeed when rival AirAsia X is rationalising capacity, we believe that Scoot is positioning itself for an imminent recovery in the global economy. Besides, there may be resident Singaporeans who are likely to embrace this model.

Still the best for recovery. We expect SIA to end the current financial year with a solid quarter and to build through the recovery cycle. However, the near-term earnings risk from fuel prices remains. With operating earnings volatile, we retain our asset-based valuation of SIA. Our target price is unchanged at $14.40, based on median 1.2x P/BV. Maintain Buy.