OCBC on 21 June 2012
1st default comes from Greece
As the debt crisis escalates in Greece, it is perhaps no surprise that the first ship order cancellation that Yangzijiang Shipbuilding (YZJ) just experienced in its history is from a Greek customer. According to Fairplay , YZJ might sell two 33,800 DWT bulkers that were ordered by FreeSeas after it defaulted on instalments totaling about US$7.4m. The first vessel has been completed and we understand that the second is near 70-80% completion.
No worries about financial impact…
The vessels were ordered at US$24.5m each at Sep 2010 from YZJ, and according to VesselValues, a newbuild Handysize bulker can sell at US$22.2m in today’s market. This is also consistent with a 10-15% drop in newbuild bulker prices according to Worldyards. Assuming that YZJ confiscated the 20% downpayment by Freeseas, this would still mean a profit of about US$2.6m for the yard, and we would not worry about the financial impact from this order cancellation.
… but does this portend of things to come?
The bigger worry, however, is whether this default is a sign of more to come. Recall that Chinese Premier Wen Jiabao had announced in Oct 2010 that state-run banks were encouraged to pledge US$5b of loans to Greek vessel owners, but according to XRTC Business Consultants (adviser to China Development Bank Corp), only US$1b of loans have been distributed since then. Fortunately for YZJ, the group’s order book exposure to Greece seems small.
Environment remains very challenging
YZJ’s share price has dropped by about 11% since we downgraded the stock on 27 Apr 2012, compared to the STI’s 4.5% fall. Meanwhile, according to Clarksons in May, almost 90% of China’s shipyards received no orders this year. We lower our peg to 6.5x (prev. 7.5x) with the increasingly dimmer outlook for the shipbuilding industry, and based on blended FY12/13F core earnings, our fair value estimate slips from S$1.23 to S$1.08. Maintain HOLD.
Monday, 25 June 2012
Suntec REIT
Kim Eng on 25 June 2012
Tax transparency. Suntec REIT recently announced that it has successfully converted the vehicle which holds Marina Bay Financial Centre Phase 1 (MBFC1) from a private limited to a LLP (limited liability partnership) structure, which grants it tax transparent status. Previously, Suntec had to pay 17% corporate tax rate on rental income generated by MBFC1. The new tax structure took effect from 16 Jun 2012.
FY12-15F DPU up by 0.8-1.5%. Based on our estimates, Suntec will enjoy tax savings of SGD2.8-5.2m for FY12-15F, adding 0.8-1.5% to our forecasted DPU. We understand that the restructuring of One Raffles Quay (ORQ) into a similar tax-efficient LLP structure may not happen in the near term and has not factored this into our estimates (estimate boost of another SGD1.7-3.3m if allowed).
Remaking of SSICEC. Suntec will be closing the Suntec Singapore International Convention and Exhibition Centre (SSICEC) for a major overhaul in October this year. The six-month closure, the first major renovation since 1997, aims to bring the 17-year-old venue up to date and will cost SGD180m. All seven floors will be spruced up, with a grand entrance added on Level Three, and restaurants and shops on
Levels One and Two. The number of meeting rooms will increase from 31 to 46, and all will be fitted with Wi-Fi connection. Remaking of SCM. Suntec will spend another SGD230m to remake Suntec City Mall (SCM). Work is scheduled to start in mid-2012 and will wrap up by mid-2015. It will increase SCM’s NLA to 980,000 sq ft from the current 855,000 sq ft. Tenant mix will also be revitalised with more higher-yield mini-anchor stores and F&B outlets. Upon completion, we expect the annual rental income of SCM to be uplifed by SGD32m, boosting from FY11’s SGD103m to SGD135m.
TP increased by ~6% to SGD1.37, maintain HOLD. After factoring in the tax savings, our target price for Suntec goes up by ~6% to SGD1.37. The stock currently trades at 0.7x FY12F book and 7% FY12F yield. Downside risks include worse-than-expected average rentals for SCM and concentration risk on Suntec City. Reiterate HOLD.
Tax transparency. Suntec REIT recently announced that it has successfully converted the vehicle which holds Marina Bay Financial Centre Phase 1 (MBFC1) from a private limited to a LLP (limited liability partnership) structure, which grants it tax transparent status. Previously, Suntec had to pay 17% corporate tax rate on rental income generated by MBFC1. The new tax structure took effect from 16 Jun 2012.
FY12-15F DPU up by 0.8-1.5%. Based on our estimates, Suntec will enjoy tax savings of SGD2.8-5.2m for FY12-15F, adding 0.8-1.5% to our forecasted DPU. We understand that the restructuring of One Raffles Quay (ORQ) into a similar tax-efficient LLP structure may not happen in the near term and has not factored this into our estimates (estimate boost of another SGD1.7-3.3m if allowed).
Remaking of SSICEC. Suntec will be closing the Suntec Singapore International Convention and Exhibition Centre (SSICEC) for a major overhaul in October this year. The six-month closure, the first major renovation since 1997, aims to bring the 17-year-old venue up to date and will cost SGD180m. All seven floors will be spruced up, with a grand entrance added on Level Three, and restaurants and shops on
Levels One and Two. The number of meeting rooms will increase from 31 to 46, and all will be fitted with Wi-Fi connection. Remaking of SCM. Suntec will spend another SGD230m to remake Suntec City Mall (SCM). Work is scheduled to start in mid-2012 and will wrap up by mid-2015. It will increase SCM’s NLA to 980,000 sq ft from the current 855,000 sq ft. Tenant mix will also be revitalised with more higher-yield mini-anchor stores and F&B outlets. Upon completion, we expect the annual rental income of SCM to be uplifed by SGD32m, boosting from FY11’s SGD103m to SGD135m.
TP increased by ~6% to SGD1.37, maintain HOLD. After factoring in the tax savings, our target price for Suntec goes up by ~6% to SGD1.37. The stock currently trades at 0.7x FY12F book and 7% FY12F yield. Downside risks include worse-than-expected average rentals for SCM and concentration risk on Suntec City. Reiterate HOLD.
Friday, 22 June 2012
Hutchison Port Holdings Trust
DBS Vickers Securities on 21 June 2012
ASIA-US trades help prop up Yantian volumes year-to-date (YTD) in 2012. Continuing with the trend seen in April, Yantian Port operating data for May was again encouraging, with volumes growing 5.1 per cent year-on-year (y-o-y).
YTD volume growth at Yantian Port now stands at 2.1 per cent and is trending in line with our estimates even before the traditional peak season has started.
We think export bookings to the US are still holding up, though the European market remains weak and could weaken further.
Slow growth in volumes a reality but a repeat of 2009 - negative trade volume growth - is unlikely. According to our economists, the prospect of a Greek exit from the eurozone does not have to be another "Lehman moment" for Europe or the rest of the world.
The key driver for the sharp decline in container trades in 2009 was the credit crunch, which rendered trade financing very difficult.
The risk of a credit crunch remains lower this time around than in 2008-09, as liquidity is abundant in Asia and markets have had two years to think about the current situation and prepare for it.
Also, in 2008, the crisis was about US dollars, this time it's mainly the euro, which is not as important to Asia's trade financing as the US dollar.
FY2012-2013 distribution per unit (DPU) should still be sustainable even in bear-case scenarios. Under our base-case scenario, we expect the trust to meet its DPU guidance of 6.6 US cents for FY2012, after taking into account some degree of capex deferral.
We also devise two sets of pessimistic scenarios, but according to our calculations, unless tariff rates are affected materially, DPU for FY12/13 will still be above the (annualised) FY2011 DPU of six US cents.
But despite these largely secure cash flows, the trust is trading in excess of 9 per cent yield, which makes it one of our top large-cap high yield picks in Singapore.
BUY
Olam International
Citi Investment Research on 20 June 2012
THE firm yesterday announced the departure of its CFO Krishnan Ravi Kumar, Olam's CFO since 1996.
We believe Mr Ravi is pursuing a new career outside the agri-commodity sector. He will continue in his role till end-July.
The replacement: Olam's executive director Shekhar Anantharaman will take on the role as the executive director for finance & business development.
Mr Shekhar is among the founding team at Olam with 20 years at the firm, with tenures in finance, treasury, and operations at two of Olam's key segments - the edible nuts, spices & vegetable ingredients and packaged foods businesses.
The concern: While Olam has a deep management bench, investors will likely fret about this development somewhat given Mr Ravi's tenure and seniority.
Olam's aggressive growth pipeline in acquisitions and greenfield projects also means investors will be keen to track growth in management bandwidth post Mr Ravi's departure.
Global financial crisis (GFC) vs now: Its recent share buyback programme (which commenced on June 8, its first buyback ever with 20.1 million shares or 0.89 per cent of its issued shares purchased up to June 19) has helped somewhat.
Olam's valuation for its equity is close to that seen during the GFC in part due to the various difficulties that Olam (and the sector) has encountered in the past few quarters, as well as the increased gestation period on some of its fixed-assets linked investments (ie, it will take longer for growth to come from investments such as its US$1.3 billion greenfield fertiliser project in Gabon).
In contrast, Olam's debt is trading close to par vs large 40-50 per cent discounts seen during the GFC. Olam repurchased debt in H1 2009 during the GFC period, which helped mark the bottom for equity valuations then.
While it is not likely that Olam repurchases debt at current prices, Olam has more options in this cycle as it has lower leverage this time around, with adjusted net gearing of 0.4 times (or 1.9 times nominal net debt/equity) which leaves it room to fund further equity buybacks (it raised $740 million in new equity in June 2011).
Its current gearing level of 0.4 times is also favourable when compared to the 0.7 times in adjusted net gearing at end-FY08 during the GFC period.
BUY
Ntegrator International
Kim Eng on 22 June 2012
Background: Ntegrator is a telecommunications network specialist and systems integrator that counts M1, and more recently SingTel, as key customers. Its core businesses include the design, installation and implementation of data, video, fibre, wireless and cellular network infrastructure as well as voice communications systems. Other than Singapore (where key customers such as M1 and SMRT contributed 45% of last year’s sales), it has also operations in Thailand, Vietnam, Myanmar and most recently, as far afield as Peru in South America.
Why are we highlighting this stock? One, Ntegrator is a beneficiary of SingTel’s recent outsourcing trend, which started at the beginning of 2012. It recently announced a managed services contract from Huawei to manage SingTel’s outsourced copper voice and data network infrastructure in Singapore. Two, Ntegrator is a potential play on growth in the Indo-China region, as it has long had a presence in emerging markets such as Vietnam and Myanmar that are building up their telecom infrastructure.
Recovery story. Following a horrendous FY10 and a slight recovery in FY11, Ntegrator should do better in FY12, going by its recent strong flow of contracts. However, it may not resume its dividends following a pause in FY11, as it may want to retain cash for working capital.
Benefiting from 4G, Pay TV in Singapore. Other than the managed services contract, Ntegrator has also clinched another contract from SingTel to provide DSL hardware, which we think is part of SingTel’s efforts to improve its glitch-ridden DSL-based pay TV network. In addition, it has also been tapped by Huawei to supply and install fibre optic termination frames for M1. These contracts will contribute in FY12.
Hot links to Myanmar and Vietnam. Ntegrator has long had a presence in up-and-coming Indochina markets Thailand, Myanmar and Vietnam. In Myanmar, it is reported to have close links to the Ministry of Defense, with one cellular equipment contract announced just in Mar 2012. Vietnam, where repeat customer Viettel is the biggest telco, accounted for 31% of its revenue in FY11.
With share overhang lifted, all warrants should be converted. Two big shareholders sold down their stakes in Mar-Apr 2012. The stock’s subsequent rebound to a high of SGD0.06 triggered off a flurry of warrant conversions. We reckon all of its 277.7m warrants outstanding as at Dec 2011 are likely to be converted, following which Ntegrator will receive more than SGD5m in cash, beefing up its working capital warchest to take on additional projects.
However, overhang saga could still have a Part 2. At this stage, we are not clear why the two big shareholders – venture capitalist McLean Watson and EDB GIP investment fund Fortune Technology Fund – decided to sell out. Although Fortune has exited both its share and warrant stakes, McLean Watson still retained a stake of 44.6m warrants as at Jun 2012, or an equity stake of 6.5% on the expanded share base.
Background: Ntegrator is a telecommunications network specialist and systems integrator that counts M1, and more recently SingTel, as key customers. Its core businesses include the design, installation and implementation of data, video, fibre, wireless and cellular network infrastructure as well as voice communications systems. Other than Singapore (where key customers such as M1 and SMRT contributed 45% of last year’s sales), it has also operations in Thailand, Vietnam, Myanmar and most recently, as far afield as Peru in South America.
Why are we highlighting this stock? One, Ntegrator is a beneficiary of SingTel’s recent outsourcing trend, which started at the beginning of 2012. It recently announced a managed services contract from Huawei to manage SingTel’s outsourced copper voice and data network infrastructure in Singapore. Two, Ntegrator is a potential play on growth in the Indo-China region, as it has long had a presence in emerging markets such as Vietnam and Myanmar that are building up their telecom infrastructure.
Recovery story. Following a horrendous FY10 and a slight recovery in FY11, Ntegrator should do better in FY12, going by its recent strong flow of contracts. However, it may not resume its dividends following a pause in FY11, as it may want to retain cash for working capital.
Benefiting from 4G, Pay TV in Singapore. Other than the managed services contract, Ntegrator has also clinched another contract from SingTel to provide DSL hardware, which we think is part of SingTel’s efforts to improve its glitch-ridden DSL-based pay TV network. In addition, it has also been tapped by Huawei to supply and install fibre optic termination frames for M1. These contracts will contribute in FY12.
Hot links to Myanmar and Vietnam. Ntegrator has long had a presence in up-and-coming Indochina markets Thailand, Myanmar and Vietnam. In Myanmar, it is reported to have close links to the Ministry of Defense, with one cellular equipment contract announced just in Mar 2012. Vietnam, where repeat customer Viettel is the biggest telco, accounted for 31% of its revenue in FY11.
With share overhang lifted, all warrants should be converted. Two big shareholders sold down their stakes in Mar-Apr 2012. The stock’s subsequent rebound to a high of SGD0.06 triggered off a flurry of warrant conversions. We reckon all of its 277.7m warrants outstanding as at Dec 2011 are likely to be converted, following which Ntegrator will receive more than SGD5m in cash, beefing up its working capital warchest to take on additional projects.
However, overhang saga could still have a Part 2. At this stage, we are not clear why the two big shareholders – venture capitalist McLean Watson and EDB GIP investment fund Fortune Technology Fund – decided to sell out. Although Fortune has exited both its share and warrant stakes, McLean Watson still retained a stake of 44.6m warrants as at Jun 2012, or an equity stake of 6.5% on the expanded share base.
Super Group
Kim Eng on 22 June 2012
Institutional investments sent share prices up and up. Super’s share price has rallied very strongly, up 65% YTD. We believe this was largely fuelled by an increase in institutional shareholdings, as funds exhibited a lower risk appetite and flocked to defensive businesses. For example, company filings revealed that Capital Group bought 3.2m shares on the open market between 7 May and 14 May, and this alone accounted for more than 80% of stock turnover during the period.
Higher-than-expected sales from ASEAN markets. The stronger-than-expected sales from emerging ASEAN markets have been a positive surprise in 1Q12, despite some lingering negative impact from last year’s Thailand floods. We have raised our revenue growth assumptions for the branded consumer segment, expecting at least 11-12% CAGR over the next three years.
Thailand, Malaysia the key growth drivers. These markets have been Super’s key growth drivers over the past few quarters, being both the largest revenue contributors as well as showing the highest percentage growth. In mid-2011, Super took back the sole distributorship in Malaysia, and sales in the country have since grown at double digits. This alleviates some of our concerns about its sole distributorship model in most of its markets.
New markets to conquer. Super currently has a low market presence in Indonesia, the Philippines, Vietnam, Cambodia, China and Japan. These countries provide scope for market share gains going forward, although the group would still derive the bulk of its revenue from its five key markets where it is ranked top three in terms of market share.
Stock has re-rated, maintain HOLD. Back in 2010, Super traded at a sharp 40% discount to its peers. With a renewed focus on its core branded consumer business and a new engine of growth from ingredients sale, the stock has re-rated. Going forward, however, stock price gains will likely have to be more earnings-driven. We raise our earnings forecasts by 6-10%, with a new TP of SGD1.95, based on a higher-than-historical 17x PER. We continue to like Super’s long-term fundamentals, but do not see current valuations as an attractive entry price. Maintain HOLD.
Institutional investments sent share prices up and up. Super’s share price has rallied very strongly, up 65% YTD. We believe this was largely fuelled by an increase in institutional shareholdings, as funds exhibited a lower risk appetite and flocked to defensive businesses. For example, company filings revealed that Capital Group bought 3.2m shares on the open market between 7 May and 14 May, and this alone accounted for more than 80% of stock turnover during the period.
Higher-than-expected sales from ASEAN markets. The stronger-than-expected sales from emerging ASEAN markets have been a positive surprise in 1Q12, despite some lingering negative impact from last year’s Thailand floods. We have raised our revenue growth assumptions for the branded consumer segment, expecting at least 11-12% CAGR over the next three years.
Thailand, Malaysia the key growth drivers. These markets have been Super’s key growth drivers over the past few quarters, being both the largest revenue contributors as well as showing the highest percentage growth. In mid-2011, Super took back the sole distributorship in Malaysia, and sales in the country have since grown at double digits. This alleviates some of our concerns about its sole distributorship model in most of its markets.
New markets to conquer. Super currently has a low market presence in Indonesia, the Philippines, Vietnam, Cambodia, China and Japan. These countries provide scope for market share gains going forward, although the group would still derive the bulk of its revenue from its five key markets where it is ranked top three in terms of market share.
Stock has re-rated, maintain HOLD. Back in 2010, Super traded at a sharp 40% discount to its peers. With a renewed focus on its core branded consumer business and a new engine of growth from ingredients sale, the stock has re-rated. Going forward, however, stock price gains will likely have to be more earnings-driven. We raise our earnings forecasts by 6-10%, with a new TP of SGD1.95, based on a higher-than-historical 17x PER. We continue to like Super’s long-term fundamentals, but do not see current valuations as an attractive entry price. Maintain HOLD.
Thursday, 21 June 2012
Starhub
CIMB RESEARCH on 20 June 2012
CLEARING the airwaves for 4G: The reserve price has not been determined. We do not expect runaway bids as there is ample spectrum unless: the telcos try to bid for more spectrum than optimum, or new players enter the fray, which is unlikely.
The sector remains a "neutral". This development does not change our view of StarHub as our top pick.
Singapore's telco regulator Infocomm Development Authority (IDA) issued a consultation paper on April 10 outlining its plans to re-farm and auction the 1800MHz, 2.3GHz and 2.5GHz spectrum bands.
The auction is likely to be held in H1 2013, way ahead of the expiry of these spectrum allocations in 2015 and 2017, to allow telcos to plan ahead. The much-prized 700MHz band is not being put on the block as it is still being coordinated with Singapore's neighbours. The 900MHz band will also not be included in the re-farming for 4G, as the IDA feels that it is geared towards re-farming for 3G.
We do not anticipate aggressive bids as there is ample spectrum, unless: all three telcos bid for more than 2x20MHz, which is the optimum required; or new contenders emerge, which we think is unlikely given Singapore's small population with a very mature and competitive market.
There were no new takers for the residual 3G spectrum in 2010. The 3G auction in 2001 and 2010 were awarded at reserve price as there was sufficient spectrum for the three incumbents.
Higher capex in 2013: This auction will raise the telcos' outlay in 2013. Based on the price per population per MHz paid for 2x5MHz in the 1800MHz band in 2011, we estimate the 4G spectrum to cost about $138 million. This could raise the 2013 capex for M1, SingTel and StarHub by 131 per cent, 6 per cent and 56 per cent respectively, and increase their 2013 net debt/Ebitda by 0.47 times, 0.02 times and 0.19 times to 0.84 times, 1.17 times and 0.73 times respectively.
Rolling out 4G will not spike up capex as it is an add-on to the 3G network. All three telcos are already rolling out 4G using their existing 2.3GHz and 2.5GHz spectrum. The spectrum re-farm will enable them to use 1800MHz for 4G.
Stay invested in StarHub as we do not think its potential to increase dividends will be affected by the higher capital outlay, thanks to its strong balance sheet and free cashflows. However, uncertainties over this auction may cause StarHub to delay an increase in dividends.
CLEARING the airwaves for 4G: The reserve price has not been determined. We do not expect runaway bids as there is ample spectrum unless: the telcos try to bid for more spectrum than optimum, or new players enter the fray, which is unlikely.
The sector remains a "neutral". This development does not change our view of StarHub as our top pick.
Singapore's telco regulator Infocomm Development Authority (IDA) issued a consultation paper on April 10 outlining its plans to re-farm and auction the 1800MHz, 2.3GHz and 2.5GHz spectrum bands.
The auction is likely to be held in H1 2013, way ahead of the expiry of these spectrum allocations in 2015 and 2017, to allow telcos to plan ahead. The much-prized 700MHz band is not being put on the block as it is still being coordinated with Singapore's neighbours. The 900MHz band will also not be included in the re-farming for 4G, as the IDA feels that it is geared towards re-farming for 3G.
We do not anticipate aggressive bids as there is ample spectrum, unless: all three telcos bid for more than 2x20MHz, which is the optimum required; or new contenders emerge, which we think is unlikely given Singapore's small population with a very mature and competitive market.
There were no new takers for the residual 3G spectrum in 2010. The 3G auction in 2001 and 2010 were awarded at reserve price as there was sufficient spectrum for the three incumbents.
Higher capex in 2013: This auction will raise the telcos' outlay in 2013. Based on the price per population per MHz paid for 2x5MHz in the 1800MHz band in 2011, we estimate the 4G spectrum to cost about $138 million. This could raise the 2013 capex for M1, SingTel and StarHub by 131 per cent, 6 per cent and 56 per cent respectively, and increase their 2013 net debt/Ebitda by 0.47 times, 0.02 times and 0.19 times to 0.84 times, 1.17 times and 0.73 times respectively.
Rolling out 4G will not spike up capex as it is an add-on to the 3G network. All three telcos are already rolling out 4G using their existing 2.3GHz and 2.5GHz spectrum. The spectrum re-farm will enable them to use 1800MHz for 4G.
Stay invested in StarHub as we do not think its potential to increase dividends will be affected by the higher capital outlay, thanks to its strong balance sheet and free cashflows. However, uncertainties over this auction may cause StarHub to delay an increase in dividends.
Super Group
DMG & PARTNERS RESEARCH on 20 June 2012
SINCE our upgrade to "buy" in February 2012, Super's share price had returned +42 per cent to close at all-time highs of $2.21 recently. This translates to a blended FY12-13F 17 times price-to-earnings ratio (P/E), suggesting limited room for near-term upside.
We see some headwinds from higher Robusta coffee bean prices that averaged about US$2,125/tonne in May, which lifted the year's average to about US$2,000/tonne.
We factor in potentially higher raw material costs for Q3 2012 production and revised down our FY2012-2013 estimates by 4 per cent, and 3 per cent respectively.
We continue to like Super for its dominant position in South-east Asia's instant coffee market, brand-building efforts and strong cash flow generative characteristics, but reason its risk-reward trade-off is fair at current levels. We are now "neutral" at a lower target price of $2.12 (previously $2.18), pegged to 15 times blended FY13-14F P/E.
Spike in Robusta bean prices in May: Coffee bean prices peaked above US$2,200/tonne in May and have since softened.
We estimate Q3 2012 input costs to be about US$2,100/tonne, which is higher than about US$1,900/tonne for Q1 2012.
Sugar prices were softer at about US$560/tonne and palm oil prices were stable at about US$1,000/tonne in May (YTD12: US$605 and US$1,020 respectively).
Fine-tuning estimates. In view of recent spike in Robusta bean prices, we fine-tune our FY12 earnings estimates down by 4 per cent to $68 million, and now expect Q2-Q4 2012 quarterly earnings to grow slightly slower at 19 per cent-74 per cent-41 per cent year-on-year to $16 million-$16 million-$19 million (previously $16 million-$18 million-$19 million) respectively.
Key risks: Upside potential to our "neutral" call includes better margins from an improved product mix and higher dividend payout ratios. Downside risks include sharp spike in input prices, ie Robusta coffee beans, palm oil and sugar.
NEUTRAL
SINCE our upgrade to "buy" in February 2012, Super's share price had returned +42 per cent to close at all-time highs of $2.21 recently. This translates to a blended FY12-13F 17 times price-to-earnings ratio (P/E), suggesting limited room for near-term upside.
We see some headwinds from higher Robusta coffee bean prices that averaged about US$2,125/tonne in May, which lifted the year's average to about US$2,000/tonne.
We factor in potentially higher raw material costs for Q3 2012 production and revised down our FY2012-2013 estimates by 4 per cent, and 3 per cent respectively.
We continue to like Super for its dominant position in South-east Asia's instant coffee market, brand-building efforts and strong cash flow generative characteristics, but reason its risk-reward trade-off is fair at current levels. We are now "neutral" at a lower target price of $2.12 (previously $2.18), pegged to 15 times blended FY13-14F P/E.
Spike in Robusta bean prices in May: Coffee bean prices peaked above US$2,200/tonne in May and have since softened.
We estimate Q3 2012 input costs to be about US$2,100/tonne, which is higher than about US$1,900/tonne for Q1 2012.
Sugar prices were softer at about US$560/tonne and palm oil prices were stable at about US$1,000/tonne in May (YTD12: US$605 and US$1,020 respectively).
Fine-tuning estimates. In view of recent spike in Robusta bean prices, we fine-tune our FY12 earnings estimates down by 4 per cent to $68 million, and now expect Q2-Q4 2012 quarterly earnings to grow slightly slower at 19 per cent-74 per cent-41 per cent year-on-year to $16 million-$16 million-$19 million (previously $16 million-$18 million-$19 million) respectively.
Key risks: Upside potential to our "neutral" call includes better margins from an improved product mix and higher dividend payout ratios. Downside risks include sharp spike in input prices, ie Robusta coffee beans, palm oil and sugar.
NEUTRAL
High dividend yield picks
OCBC on 20 June 2012
The win of the pro-bailout parties in Greece has been overshadowed by concerns about Spain and Italy. Despite the EUR100b bank bailout, Spain’s 10-year bonds reached record highs on Monday, rising above 7%. Investors are still cautious and a risk-off environment is likely to persist. We believe that high yield stocks like REITs and Telcos will continue to outperform as they have so far this quarter. In particular, stocks with strong financial positions and high earnings quality will be better positioned. We are still OVERWEIGHT on the Telecommunications and REITs sectors. We have ranked all the stocks under our coverage by expected FY1 dividend yield. Our high dividend yield plays are Cache, CDLHT, CMT, M1 and SingPost.
Uncertain environment for Europe continues
The win of the pro-bailout parties in Greece this past Sunday has been overshadowed by concerns about Spain and Italy. On Monday, Spain’s benchmark 10-year bond yields reached record highs above 7% despite the recent EUR100b bank bailout. Italy's 10-year bond yields rose above 6%. The crisis in Europe is likely to take years to resolve.
Asia still fragile
The slow recovery in the US and the reduced consumer demand in Europe are affecting Asian countries with significant export-exposure. Earlier this month, the People’s Bank of China made its first rate cut since 2008, reducing key rates by 25 bps. The surprise move was read as a sign of how poorly the Chinese economy has been performing. Yesterday, the commerce minister of China said that the country is heading for a rebound this month following government measures to promote growth, but it remains to be seen if China has indeed bottomed out.
Hunt for yields
With the mixed and fluid global economic backdrop, investors are still cautious and we expect a risk-off environment to persist. High dividend yield stocks have performed well this quarter, with the Telcos and REITs being two of the three top performers among the 14 FTSE ST sector indices. The FSTTC Index (Telecoms) and the FSTREI Index (REITs) moved 2.4% and -0.4% respectively since the end of Apr. The other top performer was the FSTTC Index (Technology), which climbed 0.8%. The STI has declined 4.6% over the same period. We believe that high dividend yield stocks will continue to show strength.
Strong financial positions for our dividend picks
After ranking the stocks under our coverage by estimated FY1 dividend yield, we further screened for preferred stocks which have good financial positions and high quality earnings. We are still OVERWEIGHT on the Telecommunications and REITs sectors. Our high dividend yield picks are Cache, CDLHT, CMT, M1 and SingPost .
The win of the pro-bailout parties in Greece has been overshadowed by concerns about Spain and Italy. Despite the EUR100b bank bailout, Spain’s 10-year bonds reached record highs on Monday, rising above 7%. Investors are still cautious and a risk-off environment is likely to persist. We believe that high yield stocks like REITs and Telcos will continue to outperform as they have so far this quarter. In particular, stocks with strong financial positions and high earnings quality will be better positioned. We are still OVERWEIGHT on the Telecommunications and REITs sectors. We have ranked all the stocks under our coverage by expected FY1 dividend yield. Our high dividend yield plays are Cache, CDLHT, CMT, M1 and SingPost.
Uncertain environment for Europe continues
The win of the pro-bailout parties in Greece this past Sunday has been overshadowed by concerns about Spain and Italy. On Monday, Spain’s benchmark 10-year bond yields reached record highs above 7% despite the recent EUR100b bank bailout. Italy's 10-year bond yields rose above 6%. The crisis in Europe is likely to take years to resolve.
Asia still fragile
The slow recovery in the US and the reduced consumer demand in Europe are affecting Asian countries with significant export-exposure. Earlier this month, the People’s Bank of China made its first rate cut since 2008, reducing key rates by 25 bps. The surprise move was read as a sign of how poorly the Chinese economy has been performing. Yesterday, the commerce minister of China said that the country is heading for a rebound this month following government measures to promote growth, but it remains to be seen if China has indeed bottomed out.
Hunt for yields
With the mixed and fluid global economic backdrop, investors are still cautious and we expect a risk-off environment to persist. High dividend yield stocks have performed well this quarter, with the Telcos and REITs being two of the three top performers among the 14 FTSE ST sector indices. The FSTTC Index (Telecoms) and the FSTREI Index (REITs) moved 2.4% and -0.4% respectively since the end of Apr. The other top performer was the FSTTC Index (Technology), which climbed 0.8%. The STI has declined 4.6% over the same period. We believe that high dividend yield stocks will continue to show strength.
Strong financial positions for our dividend picks
After ranking the stocks under our coverage by estimated FY1 dividend yield, we further screened for preferred stocks which have good financial positions and high quality earnings. We are still OVERWEIGHT on the Telecommunications and REITs sectors. Our high dividend yield picks are Cache, CDLHT, CMT, M1 and SingPost .
STX OSV
OCBC on 20 June 2012
Following our report “Market Rumours – Caveat Lector” issued last week, in which we argued that the market has overreacted to market rumours involving a supposed Fincantieri/Carlyle deal, STX OSV has announced three contracts worth an estimated NOK2.5b. This underscores the buoyancy of the offshore market and validates our investment thesis that investors should take the opportunity to gain exposure into the premium offshore builder at a reasonable valuation. Year-to-date, we estimate STX OSV has secured about NOK6.7b of contracts. This forms about 60% of our FY12F estimate (NOK11b). As such, we are keeping our forward estimates unchanged. Maintain BUY with S$2.00 fair value estimate.
Three contract wins within six days
Following our report “Market Rumours – Caveat Lector” issued on 13 June 12, in which we argued that the market has overreacted to market rumours involving a supposed Fincantieri/Carlyle deal, STX OSV has announced three contracts worth an estimated NOK2.5b (USD400m). This underscores the buoyancy of the offshore market and validates our investment thesis that investors should take the opportunity to gain exposure into the premium offshore builder at a reasonable valuation.
One OSCV and three PSVs
On 14 Jun 2012, STX OSV announced it has signed (i) a contract for a large, advanced Offshore Subsea Construction Vessel (OSCV) and (ii) a LOI for a Platform Supply Vessel (PSV). The first contract - worth about NOK1.4b - is with Ocean Installer and Solstad Offshore. It is subject to board approval from Norwegian Guarantee Institute for Export Credit (GEIK), expected to be received around 20 Jun 2012. The second order was awarded by Troms Offshore for an undisclosed amount. Based on its specifications (94.5m by 21m, and deadweight of 5,700 tonnes), we estimate the contract size to be around NOK350m. The contract is expected to be entered into by end Jun 2012. The third contract, announced last evening, was with Farstad Shipping for two PSVs worth a total NOK700m. The vessels will be scheduled for delivery in 2Q-3Q14 from Langsten (Norway) and Vung Tau (Vietnam) yards.
Maintain BUY with S$2.00 fair value estimate
Year-to-date, we estimate STX OSV has secured about NOK6.7b of contracts. This forms about 60% of our FY12F estimate (NOK11b). As such, we are keeping our forward estimates unchanged. Maintain BUY with unchanged S$2.00 fair value estimate.
Following our report “Market Rumours – Caveat Lector” issued last week, in which we argued that the market has overreacted to market rumours involving a supposed Fincantieri/Carlyle deal, STX OSV has announced three contracts worth an estimated NOK2.5b. This underscores the buoyancy of the offshore market and validates our investment thesis that investors should take the opportunity to gain exposure into the premium offshore builder at a reasonable valuation. Year-to-date, we estimate STX OSV has secured about NOK6.7b of contracts. This forms about 60% of our FY12F estimate (NOK11b). As such, we are keeping our forward estimates unchanged. Maintain BUY with S$2.00 fair value estimate.
Three contract wins within six days
Following our report “Market Rumours – Caveat Lector” issued on 13 June 12, in which we argued that the market has overreacted to market rumours involving a supposed Fincantieri/Carlyle deal, STX OSV has announced three contracts worth an estimated NOK2.5b (USD400m). This underscores the buoyancy of the offshore market and validates our investment thesis that investors should take the opportunity to gain exposure into the premium offshore builder at a reasonable valuation.
One OSCV and three PSVs
On 14 Jun 2012, STX OSV announced it has signed (i) a contract for a large, advanced Offshore Subsea Construction Vessel (OSCV) and (ii) a LOI for a Platform Supply Vessel (PSV). The first contract - worth about NOK1.4b - is with Ocean Installer and Solstad Offshore. It is subject to board approval from Norwegian Guarantee Institute for Export Credit (GEIK), expected to be received around 20 Jun 2012. The second order was awarded by Troms Offshore for an undisclosed amount. Based on its specifications (94.5m by 21m, and deadweight of 5,700 tonnes), we estimate the contract size to be around NOK350m. The contract is expected to be entered into by end Jun 2012. The third contract, announced last evening, was with Farstad Shipping for two PSVs worth a total NOK700m. The vessels will be scheduled for delivery in 2Q-3Q14 from Langsten (Norway) and Vung Tau (Vietnam) yards.
Maintain BUY with S$2.00 fair value estimate
Year-to-date, we estimate STX OSV has secured about NOK6.7b of contracts. This forms about 60% of our FY12F estimate (NOK11b). As such, we are keeping our forward estimates unchanged. Maintain BUY with unchanged S$2.00 fair value estimate.
Intraco Limited
Kim Eng on 21 June 2012
Background: Intraco was founded in 1968 to open up export markets for Singapore manufacturers and to promote external trade for the fledgling local economy, a mission that was vital in the early stages of Singapore’s industrialisation. In 2003, food and provisions supplier PSC Corp, now called Hanwell Holdings, gained a controlling 29.9% stake. A PSC-led turnaround followed and Intraco built up a nice little cash pile. Its net cash currently accounts for 54% of its market value. However, it appeared that PSC has reached the limit of what it could do, and its 29.9% stake was sold to TH Investments, the investment company of the family that controls crane operator Tat Hong.
Why are we highlighting this stock? Business tycoon Oei Hong Leong has surfaced as a substantial shareholder of Intraco with a 21.1% stake just five days after TH bought into it at SGD0.62/share. Living up to his reputation however, Mr Oei’s average cost was only SGD0.50/share, way below TH’s cost. Not surprisingly, talk of a possible tussle between TH and Mr Oei has started, as have enquiries into the true value of Intraco. What did these two investors see in Intraco, which may still prove to be a value trap or an undervalued gem?
Personal background may be behind TH’s entry. As the controlling shareholder of a company that is heavily involved in construction, building materials and natural resources including mining, Intraco’s core business of trading in metals, minerals, building materials, food and fertiliser may explain TH’s interest. In the past two years, it was clear that only Intraco’s trading division has seen improvement in sales and profitability.
Our armchair analysis leads us nowhere for now. Without actually visiting Intraco, we cannot really pinpoint any hidden value in the company. But it appears to be in good health with an NAV of SGD0.70/share with cash making up the largest portion at 64%. TH may be able to inject new assets or new businesses in future.
But Oei Hong Leong may have spotted a good deal. Based on Intraco’s ex-cash market cap, Mr Oei is valuing Intraco at less than 3x earnings. Based on our coverage of CWT, which in mid-2011 bought over base metal trader MRI at 6x earnings, this may mean he has spotted a significantly undervalued company with a similar pedigree. However, note that Hanwell has yet to seek shareholders’ approval, unless it obtains a waiver from SGX.
Background: Intraco was founded in 1968 to open up export markets for Singapore manufacturers and to promote external trade for the fledgling local economy, a mission that was vital in the early stages of Singapore’s industrialisation. In 2003, food and provisions supplier PSC Corp, now called Hanwell Holdings, gained a controlling 29.9% stake. A PSC-led turnaround followed and Intraco built up a nice little cash pile. Its net cash currently accounts for 54% of its market value. However, it appeared that PSC has reached the limit of what it could do, and its 29.9% stake was sold to TH Investments, the investment company of the family that controls crane operator Tat Hong.
Why are we highlighting this stock? Business tycoon Oei Hong Leong has surfaced as a substantial shareholder of Intraco with a 21.1% stake just five days after TH bought into it at SGD0.62/share. Living up to his reputation however, Mr Oei’s average cost was only SGD0.50/share, way below TH’s cost. Not surprisingly, talk of a possible tussle between TH and Mr Oei has started, as have enquiries into the true value of Intraco. What did these two investors see in Intraco, which may still prove to be a value trap or an undervalued gem?
Personal background may be behind TH’s entry. As the controlling shareholder of a company that is heavily involved in construction, building materials and natural resources including mining, Intraco’s core business of trading in metals, minerals, building materials, food and fertiliser may explain TH’s interest. In the past two years, it was clear that only Intraco’s trading division has seen improvement in sales and profitability.
Our armchair analysis leads us nowhere for now. Without actually visiting Intraco, we cannot really pinpoint any hidden value in the company. But it appears to be in good health with an NAV of SGD0.70/share with cash making up the largest portion at 64%. TH may be able to inject new assets or new businesses in future.
But Oei Hong Leong may have spotted a good deal. Based on Intraco’s ex-cash market cap, Mr Oei is valuing Intraco at less than 3x earnings. Based on our coverage of CWT, which in mid-2011 bought over base metal trader MRI at 6x earnings, this may mean he has spotted a significantly undervalued company with a similar pedigree. However, note that Hanwell has yet to seek shareholders’ approval, unless it obtains a waiver from SGX.
Business Trusts
Kim Eng on 21 June 2012
Trust rekindled. Reliance Communications, India’s second-largest telecom operator by subscriber numbers, received approval from the Singapore Exchange (SGX) last week to list its undersea cable network as a business trust (BT). This followed Fortis Healthcare’s announcement last month to spin off its non-core businesses into a business trust as well. The duo are among the business trusts that have announced plans to list on the SGX in recent times, rekindling interest in such a listing structure.
Beware of mispricing. A closer examination of three Singapore-listed BTs unveils a common theme – projected yields based on the IPO price appear to have fallen short. Take, for example, Hutchison Port Holdings Trust (HPHT), whose projected yield was 5.8-6.5% at its IPO price of USD1.01. However, price levels have since fallen closer to USD0.70, and as a result, yields have surged to 9-10% pa. For us, gearing remains a salient concern because business trusts are not bound by explicit restrictions as opposed to REITs.
Locking in success post-IPO. Hong Kong’s PCCW chairman Richard Li successfully listed his telecommunication assets in the territory’s first-ever BT in Nov 2011 and performance post-IPO has so far been encouraging. By contrast, Singapore BTs have generally disappointed post-IPO. Our case study highlights two factors that could tip the scales in favour of success, namely, sponsor shareholding and projected yields at the time of IPO.
A study of three Singapore-listed business trusts
The BT trio. We take a closer look at Hutchison Port Holdings Trust, CitySpring Infrastructure Trust and K-Green Trust, which all hold mainly infrastructure assets in their portfolio.
A clear case of mispricing. All three BTs appeared to have yields pegged at approximately 6-7% at the time of their IPO. However, following recent unit price declines, they have forecasted yields of between 8% and 9%. This begs the question: Should one invest in BTs post-IPO when yields turn attractive at more than 8% pa? As things stand, perhaps so.
Yields attractive but risks lurk. While distribution yields of more than 8% can be rather attractive especially in a volatile economic environment, it would be prudent to bear in mind some of the key risks of investing in a BT.
Loan refinancing: BTs have no explicit caps to their gearing (see Appendix) and hence, would carry varied levels of debt on their balance sheet. More importantly, many BTs pay out close to 100% of their distributable income, and if they should fail to find affordable refinancing options when loans come due, distribution cuts or cash calls may well result.
Asset write-downs: A BT¡¦s underlying assets could also be subject to write-downs based on market conditions and this would correspondingly affect unit prices. A case in point is the depressed unit price of shipping trusts which significantly eroded investors¡¦ earlier yield gains.
Dismal price performance versus STI. The three BTs in our study underperformed when benchmarked against the Straits Times Index (STI).
Also underperformed against FSTREI. When benchmarked against the Singapore REIT Index (FSTREI), the three BTs again came up short.
Hong Kong case study: PCCW¡¦s HKT Trust
Struggled at IPO, but well-received subsequently. HKT Trust had its IPO price set at HKD4.53, the bottom end of a marketed range, when it listed in Nov 2011. Despite a short trading history, it has gone on to outperform the benchmark Hang Seng Index post-IPO, unlike the case for Singapore BTs (Figure 10).
What it had. We can think of two reasons why HKT Trust succeeded where Singapore BTs failed. They are: attractive forecasted yield at IPO and a strong sponsor shareholding.
9% yield presented at IPO. Because HKT Trust was priced at the bottom end of its indicative IPO range, the implied forward distribution yields of around 8.9% looked rather attractive. This is in contrast to our earlier sample of Singapore-listed BTs which were priced to yield approximately 6.5-7% pa.
Sponsor maintains a 63% stake. The fact that HKT Trust¡¦s sponsor, CAS Holdings, holds a majority stake in the trust might have encouraged investors, who are generally concerned about sponsors divesting overpriced assets to BTs or REITs. A quick scan of sponsor holdings for our sample Singapore BTs show that they fall below 50%, with HPH Trust having the lowest sponsor shareholding of 28%.
Trust rekindled. Reliance Communications, India’s second-largest telecom operator by subscriber numbers, received approval from the Singapore Exchange (SGX) last week to list its undersea cable network as a business trust (BT). This followed Fortis Healthcare’s announcement last month to spin off its non-core businesses into a business trust as well. The duo are among the business trusts that have announced plans to list on the SGX in recent times, rekindling interest in such a listing structure.
Beware of mispricing. A closer examination of three Singapore-listed BTs unveils a common theme – projected yields based on the IPO price appear to have fallen short. Take, for example, Hutchison Port Holdings Trust (HPHT), whose projected yield was 5.8-6.5% at its IPO price of USD1.01. However, price levels have since fallen closer to USD0.70, and as a result, yields have surged to 9-10% pa. For us, gearing remains a salient concern because business trusts are not bound by explicit restrictions as opposed to REITs.
Locking in success post-IPO. Hong Kong’s PCCW chairman Richard Li successfully listed his telecommunication assets in the territory’s first-ever BT in Nov 2011 and performance post-IPO has so far been encouraging. By contrast, Singapore BTs have generally disappointed post-IPO. Our case study highlights two factors that could tip the scales in favour of success, namely, sponsor shareholding and projected yields at the time of IPO.
A study of three Singapore-listed business trusts
The BT trio. We take a closer look at Hutchison Port Holdings Trust, CitySpring Infrastructure Trust and K-Green Trust, which all hold mainly infrastructure assets in their portfolio.
A clear case of mispricing. All three BTs appeared to have yields pegged at approximately 6-7% at the time of their IPO. However, following recent unit price declines, they have forecasted yields of between 8% and 9%. This begs the question: Should one invest in BTs post-IPO when yields turn attractive at more than 8% pa? As things stand, perhaps so.
Yields attractive but risks lurk. While distribution yields of more than 8% can be rather attractive especially in a volatile economic environment, it would be prudent to bear in mind some of the key risks of investing in a BT.
Loan refinancing: BTs have no explicit caps to their gearing (see Appendix) and hence, would carry varied levels of debt on their balance sheet. More importantly, many BTs pay out close to 100% of their distributable income, and if they should fail to find affordable refinancing options when loans come due, distribution cuts or cash calls may well result.
Asset write-downs: A BT¡¦s underlying assets could also be subject to write-downs based on market conditions and this would correspondingly affect unit prices. A case in point is the depressed unit price of shipping trusts which significantly eroded investors¡¦ earlier yield gains.
Dismal price performance versus STI. The three BTs in our study underperformed when benchmarked against the Straits Times Index (STI).
Also underperformed against FSTREI. When benchmarked against the Singapore REIT Index (FSTREI), the three BTs again came up short.
Hong Kong case study: PCCW¡¦s HKT Trust
Struggled at IPO, but well-received subsequently. HKT Trust had its IPO price set at HKD4.53, the bottom end of a marketed range, when it listed in Nov 2011. Despite a short trading history, it has gone on to outperform the benchmark Hang Seng Index post-IPO, unlike the case for Singapore BTs (Figure 10).
What it had. We can think of two reasons why HKT Trust succeeded where Singapore BTs failed. They are: attractive forecasted yield at IPO and a strong sponsor shareholding.
9% yield presented at IPO. Because HKT Trust was priced at the bottom end of its indicative IPO range, the implied forward distribution yields of around 8.9% looked rather attractive. This is in contrast to our earlier sample of Singapore-listed BTs which were priced to yield approximately 6.5-7% pa.
Sponsor maintains a 63% stake. The fact that HKT Trust¡¦s sponsor, CAS Holdings, holds a majority stake in the trust might have encouraged investors, who are generally concerned about sponsors divesting overpriced assets to BTs or REITs. A quick scan of sponsor holdings for our sample Singapore BTs show that they fall below 50%, with HPH Trust having the lowest sponsor shareholding of 28%.
Wednesday, 20 June 2012
CSE Global
UOBKayhian on 20 June 2012
Investment Highlights
· High cash conversion of profit allows for a healthy cash balance. CSE Global (CSE) normally converts 70% of its PATMI to cash over the course of two financial years. As the company has minimal cash requirements, the excess cash balance should allow the company to sustain future payouts, investments for organic growth, and strategic acquisitions.
· Gross margin to be sustained at mid-30%. Around 70% of CSE’s total revenue will continue to come from its automation segment, which provides solutions to a broad range of industrial sectors. CSE intends to continue to increase their greenfield and brownfield projects in this segment, where the gross margins are 15-30% and 40% respectively.
· Expect better overall 2012 performance from healthy orderbook and recurring revenues. As of 1Q12, CSE’s total orderbook stood at S$398m as compared to S$392m in 1Q11. Typically, 45% of the orderbook generates recurring revenue for the company as these consist of maintenance projects. Management is confident that 2012 performance will be better than 2011’s and that it can sustain an overall growth rate of 5-15%.
· Healthcare segment to continue to derive business from the UK. CSE’s healthcare business is unlikely to venture into new markets in the near term as systems have to be highly customised to suit a country’s adopted healthcare platform. Developing new systems for other countries has historically proven to be very difficult with concerns on capital needed, economic soundness, and specifications imposed by the government. As of 1Q12, CSE still had S$75m worth of greenfield contracts to implement until 2016 in the UK.
· Writedown of S$21m in 2011 highlights risk of human error. In 2011, CSE recognised a significant one-off loss of S$21m (40% of 2010 PATMI) from misquotations by their employees in four projects in the Middle East. While measures have been placed to detect such lapses in due process, management notes that human error cannot be fully mitigated. Human error can be brought about by inexperience, lack of skill or expertise, and incorrect decision-making.
· Sustained dividend payout should support share price. CSE has maintained a payout ratio of 40% even in 2011, when its earnings dropped significantly. Management intends to uphold this payout policy going forward.
Valuation
· CSE is currently trading at 14.6x 2011 earnings, versus 8.5x 2009 earnings and 7.4x 2010 earnings. The company reported significantly lower earnings in 2011 because of its one-off loss recognition. Based on Bloomberg’s consensus estimate, CSE has a 12-month target price of S$0.86 and is set to report earnings growth of 110.5% in 2012 to S$58.2m.
· CSE’s 5-year historical average PE of 11.3x and consensus EPS of 11.0 S cents translates into S$1.24/share, representing an upside of 61% from the last traded share price.
Investment Highlights
· High cash conversion of profit allows for a healthy cash balance. CSE Global (CSE) normally converts 70% of its PATMI to cash over the course of two financial years. As the company has minimal cash requirements, the excess cash balance should allow the company to sustain future payouts, investments for organic growth, and strategic acquisitions.
· Gross margin to be sustained at mid-30%. Around 70% of CSE’s total revenue will continue to come from its automation segment, which provides solutions to a broad range of industrial sectors. CSE intends to continue to increase their greenfield and brownfield projects in this segment, where the gross margins are 15-30% and 40% respectively.
· Expect better overall 2012 performance from healthy orderbook and recurring revenues. As of 1Q12, CSE’s total orderbook stood at S$398m as compared to S$392m in 1Q11. Typically, 45% of the orderbook generates recurring revenue for the company as these consist of maintenance projects. Management is confident that 2012 performance will be better than 2011’s and that it can sustain an overall growth rate of 5-15%.
· Healthcare segment to continue to derive business from the UK. CSE’s healthcare business is unlikely to venture into new markets in the near term as systems have to be highly customised to suit a country’s adopted healthcare platform. Developing new systems for other countries has historically proven to be very difficult with concerns on capital needed, economic soundness, and specifications imposed by the government. As of 1Q12, CSE still had S$75m worth of greenfield contracts to implement until 2016 in the UK.
· Writedown of S$21m in 2011 highlights risk of human error. In 2011, CSE recognised a significant one-off loss of S$21m (40% of 2010 PATMI) from misquotations by their employees in four projects in the Middle East. While measures have been placed to detect such lapses in due process, management notes that human error cannot be fully mitigated. Human error can be brought about by inexperience, lack of skill or expertise, and incorrect decision-making.
· Sustained dividend payout should support share price. CSE has maintained a payout ratio of 40% even in 2011, when its earnings dropped significantly. Management intends to uphold this payout policy going forward.
Valuation
· CSE is currently trading at 14.6x 2011 earnings, versus 8.5x 2009 earnings and 7.4x 2010 earnings. The company reported significantly lower earnings in 2011 because of its one-off loss recognition. Based on Bloomberg’s consensus estimate, CSE has a 12-month target price of S$0.86 and is set to report earnings growth of 110.5% in 2012 to S$58.2m.
· CSE’s 5-year historical average PE of 11.3x and consensus EPS of 11.0 S cents translates into S$1.24/share, representing an upside of 61% from the last traded share price.
Office Reits
DBS GROUP RESEARCH on 19 June 2012
A MORE tax-efficient structure for MBFC Phase 1 in place: K-Reit and Suntec Reit announced that they had successfully converted the vehicle which holds Marina Bay Financial Centre Towers 1 & 2 and Marina Bay Link Mall Phase I (collectively known as MBFC Phase I) into a Limited Liability Partnership (BFCD LLP) structure. Under the previous structure, both K-Reit and Suntec Reit pay a 17 per cent corporate tax rate on the rental income generated on the property. Upon conversion, the operational rental income (excluding income support) generated by MBFC Phase 1 will no longer be subjected to corporate taxes. The new structure will take effect from June 16, 2012 and is not retrospective.
FY13 DPU to increase by 3.6-5.1 per cent: Based on our estimates, both Reits should reap tax savings of close to $2.2 million and $4.5 million in FY12 and FY13, respectively. Netting off administration fees, we estimate that FY12 DPU should increase 1-2 per cent and FY13 DPU by about 4-5 per cent. We think this conversion is a positive step as it would also pave the way for the possible restructuring of One Raffles Quay (ORQ) into a similar more tax-efficient LLP structure in the longer term. Currently, the payable tax for ORQ is estimated to be close to $3 million per annum.
TP to rise by 7.9-8.6 per cent, upgrade K-Reit to 'buy': Adjusting for the tax savings, Suntec Reit's TP (target price) is raised by 8.6 per cent to $1.58. We continue to like Suntec Reit for its strong balance sheet and we believe the tax savings should help to partially offset the income vacuum of Suntec City Phase 1 AEI works that began in Q2 FY12. We have also upgraded K-Reit to "buy" from "hold". We like K-Reit for its quality assets and we believe the tax savings would help to strengthen its balance sheet. Net of the tax adjustment and factoring in a higher withholding tax for its Australian property, our new TP of $1.21 (up 7.9 per cent) offers investors a total return of 30 per cent.
A MORE tax-efficient structure for MBFC Phase 1 in place: K-Reit and Suntec Reit announced that they had successfully converted the vehicle which holds Marina Bay Financial Centre Towers 1 & 2 and Marina Bay Link Mall Phase I (collectively known as MBFC Phase I) into a Limited Liability Partnership (BFCD LLP) structure. Under the previous structure, both K-Reit and Suntec Reit pay a 17 per cent corporate tax rate on the rental income generated on the property. Upon conversion, the operational rental income (excluding income support) generated by MBFC Phase 1 will no longer be subjected to corporate taxes. The new structure will take effect from June 16, 2012 and is not retrospective.
FY13 DPU to increase by 3.6-5.1 per cent: Based on our estimates, both Reits should reap tax savings of close to $2.2 million and $4.5 million in FY12 and FY13, respectively. Netting off administration fees, we estimate that FY12 DPU should increase 1-2 per cent and FY13 DPU by about 4-5 per cent. We think this conversion is a positive step as it would also pave the way for the possible restructuring of One Raffles Quay (ORQ) into a similar more tax-efficient LLP structure in the longer term. Currently, the payable tax for ORQ is estimated to be close to $3 million per annum.
TP to rise by 7.9-8.6 per cent, upgrade K-Reit to 'buy': Adjusting for the tax savings, Suntec Reit's TP (target price) is raised by 8.6 per cent to $1.58. We continue to like Suntec Reit for its strong balance sheet and we believe the tax savings should help to partially offset the income vacuum of Suntec City Phase 1 AEI works that began in Q2 FY12. We have also upgraded K-Reit to "buy" from "hold". We like K-Reit for its quality assets and we believe the tax savings would help to strengthen its balance sheet. Net of the tax adjustment and factoring in a higher withholding tax for its Australian property, our new TP of $1.21 (up 7.9 per cent) offers investors a total return of 30 per cent.
SPH
CIMB on 19 June 2012
WE raise our EPS (earnings per share) marginally on property rental adjustments and our SOP target price after rolling one year forward. We also raise DPS on less conservative payout assumptions. Upgrade from "neutral" to "outperform". We see catalysts from higher-than-expected ad growth.
Retail malls for growth: With a stable and mature print business, we expect SPH's growth to come increasingly from its retail malls. Revenue CAGR for SPH's gem asset, Paragon, had been an impressive 8.3 per cent over 2006-11, outstripping that for comparable assets under retail S-Reits. We expect similar success for its Clementi Mall during its first renewal cycle; with the success extending to its Sengkang Mall on completion.
Stable media business to underpin cashflows: We expect its newspaper and magazine segment to remain dominant and underpin SPH's cashflows. We expect a seasonally stronger Q3 FY12, as strong property, auto and telco display ads mitigate lukewarm GSS ad demand and weaker recruit and classifieds.
Pseudo retail Reit: With typical payouts of more than 90 per cent, we believe SPH is akin to a retail Reit. Against retail Reits, SPH stands out for its stronger balance sheet and thus limited cash-call risks, in our view. Q2 12 net gearing is low at 35 per cent with property asset values booked at historical costs less depreciation. With a growing property arm, we do not dismiss the possibility of a spin-off or sale of assets to a Reit over the longer term.
Cheaper alternative: SPH has underperformed retail S-Reits YTD and during the recent flight to safety. Yields are now 6.4 per cent versus an average of 6.1 per cent for retail S-Reits. We see SPH as a cheaper alternative for investors seeking exposure to retail S-Reits.
OUTPERFORM
WE raise our EPS (earnings per share) marginally on property rental adjustments and our SOP target price after rolling one year forward. We also raise DPS on less conservative payout assumptions. Upgrade from "neutral" to "outperform". We see catalysts from higher-than-expected ad growth.
Retail malls for growth: With a stable and mature print business, we expect SPH's growth to come increasingly from its retail malls. Revenue CAGR for SPH's gem asset, Paragon, had been an impressive 8.3 per cent over 2006-11, outstripping that for comparable assets under retail S-Reits. We expect similar success for its Clementi Mall during its first renewal cycle; with the success extending to its Sengkang Mall on completion.
Stable media business to underpin cashflows: We expect its newspaper and magazine segment to remain dominant and underpin SPH's cashflows. We expect a seasonally stronger Q3 FY12, as strong property, auto and telco display ads mitigate lukewarm GSS ad demand and weaker recruit and classifieds.
Pseudo retail Reit: With typical payouts of more than 90 per cent, we believe SPH is akin to a retail Reit. Against retail Reits, SPH stands out for its stronger balance sheet and thus limited cash-call risks, in our view. Q2 12 net gearing is low at 35 per cent with property asset values booked at historical costs less depreciation. With a growing property arm, we do not dismiss the possibility of a spin-off or sale of assets to a Reit over the longer term.
Cheaper alternative: SPH has underperformed retail S-Reits YTD and during the recent flight to safety. Yields are now 6.4 per cent versus an average of 6.1 per cent for retail S-Reits. We see SPH as a cheaper alternative for investors seeking exposure to retail S-Reits.
OUTPERFORM
Pacific Century Regional Developments Limited
Kim Eng on 20 June 2012
Background: Pacific Century Regional Developments Limited (PCRD) has interests in telecommunications and media, financial services, property and infrastructure investment and development. It is 75.8%-owned by the Pacific Century Group, a private vehicle of Hong Kong tycoon Richard Li. The company’s main asset is a 21.3% stake in Hong Kong-listed PCCW Limited (8 HK).
Recent corporate exercises: Pacific Century Group has been buying shares on the open market since May this year, following PCCW’s successful spin-off of HKT Trust late last year. This may be a hint that corporate restructuring may be in the works.
Deeply undervalued on paper. PCRD has no other significant asset or earnings stream other than its stake in PCCW, making it effectively a holding vehicle. On paper, the deep value is obvious; this stake is worth SGD747m vs its own current market capitalisation of SGD539m. Its balance sheet carries no debt, with another source of value being SGD104m in financial assets. All this would imply almost a 40% discount market value for PCRD.
What ‘Superman’ said. In the first clear statement of intent with regard to succession plans, Li Ka Shing, dubbed “Superman” by the Hong Kong media for his ability to generate returns, announced this year that elder son Victor will take over Cheung Kong Holdings and Hutchinson Whampoa, while he will now bankroll younger son Richard’s future ambitions, which will be centred on PCCW. Restructuring scenarios could entail Richard Li either taking PCRD private to tighten his control over PCCW, or using PCRD as his
alternative vehicle for expansion.
HKT spin-off implies even more value. Having failed to privatise/sell off PCCW several times, Richard Li appears to have finally found an acceptable solution by spinning off PCCW’s traditional telecom assets into HKT Trust and using the cash proceeds/ dividends to fund PCCW’s more exciting media and IT solutions businesses. This implies deep value even on the PCCW level .
Background: Pacific Century Regional Developments Limited (PCRD) has interests in telecommunications and media, financial services, property and infrastructure investment and development. It is 75.8%-owned by the Pacific Century Group, a private vehicle of Hong Kong tycoon Richard Li. The company’s main asset is a 21.3% stake in Hong Kong-listed PCCW Limited (8 HK).
Recent corporate exercises: Pacific Century Group has been buying shares on the open market since May this year, following PCCW’s successful spin-off of HKT Trust late last year. This may be a hint that corporate restructuring may be in the works.
Deeply undervalued on paper. PCRD has no other significant asset or earnings stream other than its stake in PCCW, making it effectively a holding vehicle. On paper, the deep value is obvious; this stake is worth SGD747m vs its own current market capitalisation of SGD539m. Its balance sheet carries no debt, with another source of value being SGD104m in financial assets. All this would imply almost a 40% discount market value for PCRD.
What ‘Superman’ said. In the first clear statement of intent with regard to succession plans, Li Ka Shing, dubbed “Superman” by the Hong Kong media for his ability to generate returns, announced this year that elder son Victor will take over Cheung Kong Holdings and Hutchinson Whampoa, while he will now bankroll younger son Richard’s future ambitions, which will be centred on PCCW. Restructuring scenarios could entail Richard Li either taking PCRD private to tighten his control over PCCW, or using PCRD as his
alternative vehicle for expansion.
HKT spin-off implies even more value. Having failed to privatise/sell off PCCW several times, Richard Li appears to have finally found an acceptable solution by spinning off PCCW’s traditional telecom assets into HKT Trust and using the cash proceeds/ dividends to fund PCCW’s more exciting media and IT solutions businesses. This implies deep value even on the PCCW level .
Singapore Telcos
Kim Eng on 20 June 2012
Buy StarHub to hedge rising cost of BPL TV rights. British soccer fans have just agreed to hand over GBP3b to the Premier League, the richest soccer league in the world, as the 2013-2016 UK TV rights were recently sold at a 71% premium over the last three seasons. In Singapore, soccer fans will have no choice but to tighten their belts yet again. However, we think StarHub will be the ultimate winner, even if SingTel decides to throw caution to the winds and bids aggressively. BUY StarHub to hedge against the rising cost of watching your favourite team; SingTel remains a SELL.
BPL scores huge TV rights win at home. The world’s richest soccer league, Premier League, just got a billion pounds richer. British pay TV broadcasters BSkyB and BT recently agreed to fork out GBP3.04b over the next three years for the UK domestic live TV broadcast rights for the 2013-2016 seasons, a 71% rise over the cost of the rights for the 2010-2013 seasons. BPL stars Yaya Toure and Mario Balotelli (despite his goal drought) can look forward to even more lavish pay hikes.
What will happen to Singapore? The worst case scenario is both telcos and Premier League walk away from the negotiation table, which we think is unlikely. Given the presence of cross-carriage laws this time round, it is more plausible that Premier League will allow a joint bid between SingTel and StarHub that will result in it receiving a sum more than the estimated SGD425m SingTel paid for the 2010-2013 seasons.
No good news for soccer fans. Whichever the scenario, there is unlikely to be any good news for soccer fans; just various degrees of bad. Assuming a joint bid is possible and a 30% rise in TV rights cost over the 2010-2013 seasons, as mooted in Hong Kong-based reports, our best case scenario suggests that subscribers will still need to pay between SGD27 and SGD35 more a month to watch BPL, which we think is still reasonable.
Odds are with StarHub. In the final analysis, we think StarHub will watch the dollars and cents and refrain from harming its generous dividend policy by bidding too aggressively, even if it does bid jointly with SingTel. If SingTel decides to be as aggressive as it was in 2009 and clinches the rights to the three seasons, the cross-carriage law will work to StarHub’s advantage. In such a tactical strategy game, we think the odds (and investors’ favour) are with StarHub.
Buy StarHub to hedge rising cost of BPL TV rights. British soccer fans have just agreed to hand over GBP3b to the Premier League, the richest soccer league in the world, as the 2013-2016 UK TV rights were recently sold at a 71% premium over the last three seasons. In Singapore, soccer fans will have no choice but to tighten their belts yet again. However, we think StarHub will be the ultimate winner, even if SingTel decides to throw caution to the winds and bids aggressively. BUY StarHub to hedge against the rising cost of watching your favourite team; SingTel remains a SELL.
BPL scores huge TV rights win at home. The world’s richest soccer league, Premier League, just got a billion pounds richer. British pay TV broadcasters BSkyB and BT recently agreed to fork out GBP3.04b over the next three years for the UK domestic live TV broadcast rights for the 2013-2016 seasons, a 71% rise over the cost of the rights for the 2010-2013 seasons. BPL stars Yaya Toure and Mario Balotelli (despite his goal drought) can look forward to even more lavish pay hikes.
What will happen to Singapore? The worst case scenario is both telcos and Premier League walk away from the negotiation table, which we think is unlikely. Given the presence of cross-carriage laws this time round, it is more plausible that Premier League will allow a joint bid between SingTel and StarHub that will result in it receiving a sum more than the estimated SGD425m SingTel paid for the 2010-2013 seasons.
No good news for soccer fans. Whichever the scenario, there is unlikely to be any good news for soccer fans; just various degrees of bad. Assuming a joint bid is possible and a 30% rise in TV rights cost over the 2010-2013 seasons, as mooted in Hong Kong-based reports, our best case scenario suggests that subscribers will still need to pay between SGD27 and SGD35 more a month to watch BPL, which we think is still reasonable.
Odds are with StarHub. In the final analysis, we think StarHub will watch the dollars and cents and refrain from harming its generous dividend policy by bidding too aggressively, even if it does bid jointly with SingTel. If SingTel decides to be as aggressive as it was in 2009 and clinches the rights to the three seasons, the cross-carriage law will work to StarHub’s advantage. In such a tactical strategy game, we think the odds (and investors’ favour) are with StarHub.
Tuesday, 19 June 2012
Wilmar
OCBC on 19 June 2012
Wilmar International Limited (WIL) recently saw its share price hit a new 52-week low of S$3.41 on 14 Jun 2012, down 32% from 30 Dec 2011. At its 52-week low, the stock is down 27% since the release of its disappointing 1Q12 results on 10 May; it is also 43% off its 52-week high of S$5.99. while WIL may have been a tad oversold after its 1Q12 results, with current valuations looking pretty inexpensive, we do not see any immediate price catalyst. This as crush margins are likely to remain depressed for the next few quarters. As such, we continue to maintain our HOLD rating and S$3.87 fair value.
Hits new 52-week low
Wilmar International Limited (WIL) recently saw its share price hit a new 52-week low of S$3.41 on 14 Jun 2012, down 32% from 30 Dec 2011, likely still spooked by the continued uncertainty over the global economic outlook and also weak economic data coming out of China. At its 52-week low, the stock is down 27% since the release of its disappointing 1Q12 results on 10 May; it is also 43% off its 52-week high of S$5.99. Since then, the stock has managed to put on a rebound of just 3% recently, likely buoyed by hopes that China would introduce more measures to simulate the sluggish domestic economy.
China to stimulate economy
Recent economic data suggests that the economic growth is slowing much faster than expected, leading many to expect Beijing to introduce measures to revitalize the economy. Nevertheless, industry experts do not expect China to dish out a massive stimulus package, which it did to the tune of RMB4t during the previous global financial crisis. Instead, the emphasis would be more on a structural overhaul of the economy; this is also to avoid driving up inflation as was the case previously.
Crush margins still a concern
With inflation likely to remain tame, WIL should also have slightly more leeway to raise the ASPs (average selling prices) of its cooking oil products in China. And given the recent dip in CPO (crude palm oil), margins at its Consumer Pack division should continue to recover. Having said that, channel checks suggest that weak crush margins in China are likely to persist over the next few quarters. Previously, management also said it expects the over-capacity situation to persist in the next two to three years
Maintain HOLD with S$3.87 fair value
In a nutshell, while WIL may have been a tad oversold after its 1Q12 results, with current valuations looking pretty inexpensive, we do not see any immediate price catalyst. As such, we continue to maintain our HOLD rating and S$3.87 fair value.
Wilmar International Limited (WIL) recently saw its share price hit a new 52-week low of S$3.41 on 14 Jun 2012, down 32% from 30 Dec 2011. At its 52-week low, the stock is down 27% since the release of its disappointing 1Q12 results on 10 May; it is also 43% off its 52-week high of S$5.99. while WIL may have been a tad oversold after its 1Q12 results, with current valuations looking pretty inexpensive, we do not see any immediate price catalyst. This as crush margins are likely to remain depressed for the next few quarters. As such, we continue to maintain our HOLD rating and S$3.87 fair value.
Hits new 52-week low
Wilmar International Limited (WIL) recently saw its share price hit a new 52-week low of S$3.41 on 14 Jun 2012, down 32% from 30 Dec 2011, likely still spooked by the continued uncertainty over the global economic outlook and also weak economic data coming out of China. At its 52-week low, the stock is down 27% since the release of its disappointing 1Q12 results on 10 May; it is also 43% off its 52-week high of S$5.99. Since then, the stock has managed to put on a rebound of just 3% recently, likely buoyed by hopes that China would introduce more measures to simulate the sluggish domestic economy.
China to stimulate economy
Recent economic data suggests that the economic growth is slowing much faster than expected, leading many to expect Beijing to introduce measures to revitalize the economy. Nevertheless, industry experts do not expect China to dish out a massive stimulus package, which it did to the tune of RMB4t during the previous global financial crisis. Instead, the emphasis would be more on a structural overhaul of the economy; this is also to avoid driving up inflation as was the case previously.
Crush margins still a concern
With inflation likely to remain tame, WIL should also have slightly more leeway to raise the ASPs (average selling prices) of its cooking oil products in China. And given the recent dip in CPO (crude palm oil), margins at its Consumer Pack division should continue to recover. Having said that, channel checks suggest that weak crush margins in China are likely to persist over the next few quarters. Previously, management also said it expects the over-capacity situation to persist in the next two to three years
Maintain HOLD with S$3.87 fair value
In a nutshell, while WIL may have been a tad oversold after its 1Q12 results, with current valuations looking pretty inexpensive, we do not see any immediate price catalyst. As such, we continue to maintain our HOLD rating and S$3.87 fair value.
Suntec REIT
OCBC on 19 June 2012
Suntec REIT announced last Friday that BFC Development Pte Ltd, which owns MBFC Properties, had been successfully converted from a private limited company to a limited liability partnership. As a limited liability partnership is tax transparent for Singapore tax purposes, Suntec REIT will enjoy tax transparency on its share of income from MBFC Properties going forward. This is positive for unitholders as the distributable income is likely to be higher now that the income generated will no longer be subject to corporate tax. We now factor in the DPU uplift from higher contribution from MBFC Properties following the conversion. This in turn raises our DDM-based fair value to S$1.23 from S$1.20 previously. However, as Suntec REIT appears to be fairly priced at current level, we retain our HOLD rating.
MBFC properties holding company obtains LLP status
Suntec REIT announced last Friday that BFC Development Pte Ltd (BFCD PL), which owns MBFC Properties, had been successfully converted from a private limited company to a limited liability partnership with the name BFC Development LLP (BFCD LLP). Suntec REIT had held one-third interest in BFCD PL. Following the conversion, the REIT now holds one-third interest in BFCD LLP as a partner.
Positive impact from the conversion
As a limited liability partnership is tax transparent for Singapore tax purposes, this means that Suntec REIT will enjoy tax transparency on its share of income from MBFC Properties going forward (adjustments are not retrospective). This is positive for unitholders as the distributable income is likely to be higher now that the income generated will no longer be subject to corporate tax. We understand that dividend income (cash flow) and share of profits will benefit from the conversion, whereas income tax for income support will still be ongoing. Based on our estimates, FY12-13F DPU may get a boost of 0.11-0.17 S cents, or 1.2-1.9% increase. This, together with the GST refund from income support expected in the coming quarters, will likely cushion a temporary dip in DPU from the asset enhancement works at Suntec City, which began at the start of Jun.
Maintain HOLD on valuation grounds
We factor in the DPU uplift from higher contribution from MBFC Properties. This in turn raises our DDM-based fair value to S$1.23 from S$1.20 previously. We note that Suntec REIT’s unit price has outshone both the STI (+6.7%) and S-REIT Index (+12.7%) with a 23.3% gain YTD as a result of better-than-expected financial performance and excellent execution by management. At current level, however, we believe that Suntec REIT is fairly priced on a total return basis. As such, we retain our HOLD rating.
Suntec REIT announced last Friday that BFC Development Pte Ltd, which owns MBFC Properties, had been successfully converted from a private limited company to a limited liability partnership. As a limited liability partnership is tax transparent for Singapore tax purposes, Suntec REIT will enjoy tax transparency on its share of income from MBFC Properties going forward. This is positive for unitholders as the distributable income is likely to be higher now that the income generated will no longer be subject to corporate tax. We now factor in the DPU uplift from higher contribution from MBFC Properties following the conversion. This in turn raises our DDM-based fair value to S$1.23 from S$1.20 previously. However, as Suntec REIT appears to be fairly priced at current level, we retain our HOLD rating.
MBFC properties holding company obtains LLP status
Suntec REIT announced last Friday that BFC Development Pte Ltd (BFCD PL), which owns MBFC Properties, had been successfully converted from a private limited company to a limited liability partnership with the name BFC Development LLP (BFCD LLP). Suntec REIT had held one-third interest in BFCD PL. Following the conversion, the REIT now holds one-third interest in BFCD LLP as a partner.
Positive impact from the conversion
As a limited liability partnership is tax transparent for Singapore tax purposes, this means that Suntec REIT will enjoy tax transparency on its share of income from MBFC Properties going forward (adjustments are not retrospective). This is positive for unitholders as the distributable income is likely to be higher now that the income generated will no longer be subject to corporate tax. We understand that dividend income (cash flow) and share of profits will benefit from the conversion, whereas income tax for income support will still be ongoing. Based on our estimates, FY12-13F DPU may get a boost of 0.11-0.17 S cents, or 1.2-1.9% increase. This, together with the GST refund from income support expected in the coming quarters, will likely cushion a temporary dip in DPU from the asset enhancement works at Suntec City, which began at the start of Jun.
Maintain HOLD on valuation grounds
We factor in the DPU uplift from higher contribution from MBFC Properties. This in turn raises our DDM-based fair value to S$1.23 from S$1.20 previously. We note that Suntec REIT’s unit price has outshone both the STI (+6.7%) and S-REIT Index (+12.7%) with a 23.3% gain YTD as a result of better-than-expected financial performance and excellent execution by management. At current level, however, we believe that Suntec REIT is fairly priced on a total return basis. As such, we retain our HOLD rating.
Hutchison Port Holdings Trust
DMG & PARTNERS SECURITIES on June 18 2012
LATEST throughput data released by Cosco Pacific for Yantian and COSCO-HIT contained no major surprises and YTD volume growth were within our estimates. Yantian saw stronger growth of 5.1 per cent year-on-year (y-o-y) in May 2012, lifting its YTD May volume growth to 2.1 per cent y-o-y. At COSCO-HIT, throughput rose 1.7 per cent y-o-y in May 2012, slightly higher than the overall throughput growth at Kwai Tsing terminals, which came in at 0.6 per cent y-o-y. Maintain "neutral" on HPH Trust with an unchanged discounted cashflow-derived TP of 78 US cents. Our FY12F DPU estimate (6.07 US cents) is 8 per cent below management's guidance and implies a yield of 8.37 per cent based on its last closing price.
Solid throughput growth in May from Yantian in China: May 2012 throughput volumes at Yantian grew 5.1 per cent y-o-y, bringing YTD May 2012 volume growth to 2.1 per cent y-o-y. The robust growth is consistent with management's guidance in its Q1 FY12 results briefing. YTD throughput growth is still running below our full-year estimate of 3 per cent in FY12 for Yantian but we believe a stronger rebound in the subsequent months will lift growth in line with our expectations.
Slower growth at Kwai Tsing but HIT should perform better: Throughput volumes at Kwai Tsing terminals grew at a slower pace of 0.6 per cent y-o-y in May (compared to 6.8 per cent in February, 6.5 per cent in March and 0.7 per cent in April). YTD May 2012 throughput rose 2.9 per cent y-o-y. We believe HIT should perform better than other ports in Hong Kong given its strong market position: in Q1 FY12, HIT registered 9.4 per cent y-o-y throughput growth versus 4.6 per cent for Kwai Tsing. We maintain our estimate of 6.0 per cent throughput growth for HIT in FY12.
Valuation: Maintain "neutral" with a TP of 78 US cents. We made no changes to our throughput volumes and earnings estimates. Our DCF-derived TP is based on 8 per cent weighted average cost of capital (WACC) and 2 per cent long-term growth until the expiry of the concessions.
NEUTRAL
NEUTRAL
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