STX OSV

OCBC on 26 Dec 2012

Italian shipbuilder Fincantieri has agreed to acquire STX Group’s 50.75% stake in STX OSV, at S$1.22 cash per share - representing a 12.9% discount to pre-acquisition closing price of S$1.40. The transaction should complete within the first four months of 2013, after which Fincantieri will make a General Offer (GO) for the remaining shares under the same terms. We feel that the GO is unlikely to succeed. In our view, the low offer price undervalues STX OSV business and could possibly be motivated by STX Group’s desperation to raise cash. While we continue to like the counter, we lowered our FV to S$1.52 after applying a 10% discount (to previous FV of S$1.69), to account for near term uncertainties arising from (i) Fincantieri being the new controlling shareholder and (ii) the possible GO. Maintain BUY.

Fincantieri to acquire 50.75% stake
Italian shipbuilder Fincantieri has agreed to acquire STX Group’s entire 50.75% stake in STX OSV at S$1.22 cash per share, representing a 12.9% discount to the pre-acquisition closing price of S$1.40. The transaction should be completed within the first three months of 2013, after which Fincantieri would make a General Offer (GO) to acquire the remaining shares under the same terms. Supposing the acquirer receives 90% acceptance, it may delist STX OSV. According to Fincantieri, this acquisition is a strategic long-term investment and helps enrich its offshore oil and gas product portfolio. The total value of the acquisition, including the GO, would amount to EUR900m (S$1.45b) and will be financed from Fincantieri’s internal resources and syndicated loans. 

What’s the risk to non-controlling shareholders? 
Clearly, one key risk to non-controlling shareholders is the possibility that STX OSV shares may be delisted at an unfavourable price. However, we feel that the GO is unlikely to succeed. In our view, the low offer price undervalues STX OSV business and could possibly be motivated by STX Group’s desperation to raise cash. Other associated risks include (i) Fincantieri’s unproven track record in managing the offshore business, (ii) possible changes to STX OSV’s business model and (iii) vulnerability to political interference (as Fincantieri is ultimately owned by the Italy government). 

Lower fair value to S$1.52 on uncertainty
While we continue to like counter, we lowered our FV to S$1.52 after applying a 10% discount (to previous FV of S$1.69), to account for near term uncertainties arising from (i) Fincantieri being the new controlling shareholder and (ii) the possible GO. Maintain BUY.

SIA Engineering

OCBC on 20 Dec 2012

Despite the pressures on the aviation industry, we note that the current longer term outlook for MRO service providers such as SIAEC remains positive, with the global passenger aircraft fleet set to grow by 3.8% p.a. from now till 2030 to 32,551, as forecasted by Airbus. According to Team SAI Consulting, for 2012-2022, Asia’s MRO market will see CAGR growth of 6.1%, versus 2.9% for Europe and only 0.9% for the Americas. With its Singapore MRO base and regional JVs/associates, SAIEC can benefit from the geographic distribution of the growth, although we also note that the strong SGD may affect its margins. Using a higher P/E peg of 17.1x (one standard deviation above the 4-year average of 14.6x) and our basic EPS forecast of 26.2 S cents for 3QFY13F-2QFY14F, we increase our fair value estimate from S$4.14 to S$4.48 but maintain our HOLD rating on SIAEC on valuation grounds.

Stable outlook in near term
The ongoing contraction in air freight volumes (usually a leading indicator of air travel) and poor consumer confidence have continued to weigh on the outlook for the aviation sector. If the poor sentiment persists, growth in the global fleet could take place more gradually and this would affect the future growth track of maintenance, repair and overhaul (MRO) service providers. The management of SIA Engineering (SIAEC) expects that demand for the company’s core businesses will be sustained in the near term.

Growth over the LT in MRO
We note that the current longer term outlook for MRO service providers such as SIAEC remains positive, with the global passenger aircraft fleet set to grow by 3.8% p.a. from now till 2030 to 32,551, as forecasted by Airbus. According to Team SAI Consulting, for 2012-2022, Asia’s MRO market will see CAGR growth of 6.1%, versus 2.9% for Europe and only 0.9% for the Americas. With its Singapore MRO base and regional JVs/associates, SAIEC can benefit from the geographic distribution of the growth, although we also note that the strong SGD may affect its margins.

1HFY13 financials in line with expectations
To recap, 1HFY13 financial results were generally in line with our expectations. Revenue climbed by 6.4% YoY to S$585m, attributable mainly to revenue from materials, fleet management program and line maintenance. Operating margin declined 1.4ppt from 1HFY12 to 11.1% in 1HFY13 because of higher material cost, exchange loss, and increase in subcontract and staff costs. The share of profits from associated and joint venture companies increased 1.4% YoY to S$78.8m, accounting for 51% of SIAEC’s pre-tax profits.

Raise FV to S$4.48; maintain HOLD
Using a higher P/E peg of 17.1x (one standard deviation above the 4-year average of 14.6x) and our basic EPS forecast of 26.2 S cents for 3QFY13F-2QFY14F, we increase our fair value estimate from S$4.14 to S$4.48 but maintain our HOLD rating on SIAEC on valuation grounds.

SATS Ltd

OCBC on 20 Dec 2012

Since the release of its 2QFY13 results, SATS Ltd (SATS) has rallied by more than 4% to reach peak levels this year. On a YTD basis, SATS is up almost 35% and is poised to close out the year at highs last seen in Jan 2011. For 2H13, we expect SATS to continue posting strong growth figures on the back of sustained increases in passenger and commercial flight movements in Changi Airport. Coupled with effective cost management, operating margin should remain stable. Incorporating the seasonal uplift in 3Q13, our fair value estimate increases from S$2.65 to S$2.70 whilst maintaining a P/E multiple of 15.5x. Although we maintain our HOLD rating, we highlight the possibility of a special dividend similar to last year on account of its healthy cash balance (S$325m as of end 2Q13).

Strong stock appreciation belies upbeat market outlook
Since the release of its 2QFY13 results, SATS Ltd (SATS) has rallied by more than 4% to reach peak levels this year. On a YTD basis, SATS is up almost 35% and is poised to close out the year at highs last seen in Jan 2011.

SATS to enjoy positive 2H13
As a recap, SATS’s aviation-related segments led revenue growth for the group in 1H13 with an 11.1% YoY improvement. This trend is likely to continue unabated in 2H13 with the following support factors: i) SATS’s dominant market share in Changi Airport will allow it to benefit from the sustained monthly YoY increases in passenger and commercial flight movements, ii) TFK’s stabilization following the recovery from last year’s natural disasters to remain top-line supportive, and iii) ongoing efforts to win new and extend existing contracts (recent big renewals include Singapore Airlines).

Weakness in Asia-Pacific notwithstanding
Although the Asia-Pacific region has experienced weaknesses stemming from slower economic growth in China and a persistent decline in overall cargo traffic for large parts of the year, SATS has been relatively unaffected. The growth in regional traffic and network enhancement by airlines – particularly in the low-cost carrier segment – has largely benefited SATS.

Effective cost management to continue
Despite incurring higher operating expenses due to headcount additions and workforce-related statutory fees, we do not foresee an erosion of operating margin in 2H13 with the group maintaining its emphasis on productivity enhancement and cost saving initiatives e.g. the procurement of raw materials directly from suppliers, reduction in wastage and better menu deployment.

Valuations raised; possibility of special dividend
Incorporating the seasonal uplift in 3Q13, our fair value estimate increases from S$2.65 to S$2.70 whilst maintaining a P/E multiple of 15.5x. Although we maintain our HOLD rating, we highlight the possibility of a special dividend similar to last year on account of its healthy cash balance (S$325m as of end 2Q13). 

ST Engineering

OCBC on 20 Dec 2012

STE has been having a good run, and YTD its share price has climbed 44%, outpacing the STI Index, which climbed only 19%. In the uncertain economic environment, investors have been seeking defensive businesses with good dividend yields and STE fits these criteria. Apart from its aerospace segment, which contributes the most to its top-line and bottom-line, the other business lines are fairly defensive in nature, due to a large, stable stream of revenue coming in through government-related projects. We maintain our fair value of S$3.90 on STE but downgrade it to a HOLD, since the share price has run up a fair bit already. We would be buyers at S$3.66.

Good price performance for 2012 YTD
STE has been having a good run, and YTD its share price has climbed 44%, outpacing the STI Index, which climbed only 19%. In the uncertain economic environment, investors have been seeking defensive businesses with good dividend yields and STE’s share price has benefited. The growth in air passenger traffic has supported the earnings of MRO providers. For 9MCY12, the aerospace division registered 9.3% YoY growth in pre-tax profit to S$226.7m. Apart from its aerospace segment, which contributes the most to its top-line and bottom-line, the other business lines are fairly defensive in nature, due to government-related projects. Commercial sales formed 65% of total sales in 3Q12 (versus 62% in 3Q11).

Overall solid results, as expected
To recap, 9M12 results were in line with our expectations, with earnings per share of 13.79 S cents (on a fully diluted basis) forming 76% of our FY12F estimate of 18.2 S cents. As of end-Sep, STE's order book stood at S$12.5b, of which about S$1.4b is expected to be delivered in 4Q12. STE expects to achieve higher revenue and PBT for FY12, compared to FY11.

Order book has been growing over the LT
As we noted in our 28 Sep report, STE’s order book (as at the end of each year) has on average grown faster than the following year’s annual revenue. The order book grew 16% p.a. between end-2005 and end-2010, from S$5.38b to S$11.5b, while annual revenues grew 6% p.a. between FY06 and FY11. This trend suggests that the average tenure of order book contracts has been increasing. The fact that the order book has been growing faster than revenue implies increasing earnings visibility into the future.

Downgrade to HOLD
We maintain our fair value of S$3.90 on STE but downgrade it to a HOLD, since the share price has run up a fair bit already. We would be buyers at S$3.66. 

Ezion Holdings

Kim Eng on 19 Dec 2012

Vote of confidence. EDB Investments (EDBI) has given its vote of confidence to Ezion with a proposed subscription of new shares in the latter. Other than providing financing, we believe that EDBI could open gateways for Ezion to secure more contracts from prominent oil and gas players, given its extensive network. Reiterate BUY and with target price lowered to SGD1.81 as we adjust for dilution from new shares.

Financing is secured. We highlight that financing for Ezion’s announced projects have been secured. Ezion has put in the required ~30% equity and the rest would mainly come from project financing. It has utilised about 60-70% of the SGD125m perpetual securities raised. With the remainder of its financial resources, we estimate that Ezion can take on another two USD80-90m type service rig contracts. Following EDBI’s proposed investment, Ezion will have additional equity of SGD18.9m, and with better cashflows next year, Ezion will have greater capacity to take on more projects

Prelude to more contract wins. Traditionally, Ezion secures its financing before announcement of any contracts. We view EDBI’s investment in Ezion not only as a positive sign of endorsement but also as a prelude to more contract wins.

Mexican wave rising. Recent offshore orders wins saw rigbuilders, Keppel and Sembcorp Marine securing jackups built to work for Mexican NOC, Pemex. The last two service rig contracts secured by Ezion were also for the latter, reflecting Pemex’s aggressive drive in offshore activities. Given Ezion’s good track record with Pemex (5 secured contracts), this could be a channel where new contract wins would come from in the near term.

Potential for earnings upgrade. We are increasingly confident that Ezion would continue to deliver in 2013 with more contract wins. We lower our TP to SGD1.81, which is pegged to 10x FY13F PER, as we account for dilution from new shares. However, we see room for earnings upgrade as Ezion announces more contract wins in FY13F. Reiterate BUY. 

Noble Group

Kim Eng on 20 Dec 2012

Most leveraged China economic activity. We see Noble as most leveraged to an improvement in China’s economic activity in 2013, especially industrial output. Excluding its oil & gas business, China is its single biggest market, which we estimate account for more than 30% of total group tonnage. Its importance as a commodity supplier is also likely a key consideration when China Investment Corp (CIC) took up a substantial stake in 2009.

Important supplier of coal, iron ore. While on-ground assets in China are quite light (limited to oilseed crushing and storage), Noble is one of the largest supplier of hard commodities such as coal and iron ore into China, sourced from other countries. Improved demand in 2013 could mark a significant turnaround in profitability.

Diversified portfolio is more resilient. Noble has a business and asset footprint across the world, and is involved from energy to soft commodities. We believe this should allow them better opportunities to deploy capital profitably. Its earnings over the past twelve months have also been generated through lower VARs (0.52% in 3Q12), which may imply upside if 2013 turns out to be a conducive year for commodities demand.

Improving balance sheet strength. Amongst its peers, we believe Noble has the most robust balance sheet and debt structure in our opinion. We estimate net-debt/ equity will go down from 87% to 80% (adjusted net-debt/ equity from 35% to 28%) if we account for the expected cash proceeds from the Yanzhou-Gloucester deal in January 2013. Furthermore, the debt structure is also long-term in nature, with Noble holding investment grade ratings from S&P, Moody’s and Fitch (BBB- negative watch).

Upgrade to BUY. Given the difficult environment in 2012 for some of its key products and low VAR deployed, we believe profitability is likely not far from structural bottom. We now peg our TP of SGD1.48 to 12x FY13F, which is still lower than historical mean. Upgrade to BUY, with 26% upside from current levels. 

Viz Branz Limited

OCBC on 7 Dec 2012

In a surprise development, Viz Branz (VB) announced that its appointed auditors, Ernst & Young (EY), will not express an audit opinion for its recently concluded FY12 financial statements. After reviewing the auditor’s note and speaking with management, we deem this development to be a non-issue for VB. The disclaimer stems from earlier allegations of impropriety over a series of payments involving the company, which have since been unreservedly withdrawn. In addition, there was no commencement of CAD investigations at all. Management stands by their FY12 financial statements and stress that the figures present a “true and fair view” of the company as at end-FY12. VB operations will continue unhindered in the meantime. While this development may cause some short-term weakness in VB’s share price, we stand by our assertion that an impending GO is likely. A possible dip in the counter should open up buy-in opportunities for investors. We maintain our BUY rating with an unchanged fair value of S$0.74.

Non-issue for VB
In a surprise development, Viz Branz (VB) announced that its appointed auditors, Ernst & Young (EY), will not express an audit opinion for its recently concluded FY12 financial statements. The basis for this disclaimer of opinion stems from earlier allegations of impropriety over a series of payments involving the company made by VB’s former CEO and current top shareholder, Mr. Chng Khoon Peng, which have since been unreservedly withdrawn. After reviewing the auditor’s note and speaking with management, we deem this development to be a non-issue for VB.

Lack of access to CAD investigations, if any, cited as cause
EY cites the lack of access to the earlier complaints lodged with the Commercial Affairs Department (CAD) as one of the reasons for this disclaimer. In addition, EY stated they were unable to perform audit procedures to “ascertain the nature of transactions” alleged to have been irregular, and if the transactions were properly recorded and presented.

But CAD investigations did not even commence
From our understanding – and confirmed with management – investigations into the allegations were not even initiated by the CAD nor was there any indication that it was in the process. Furthermore, the allegations were about “irregular” payments to the CEO and not fraudulent revenue/profit recognition procedures. 

Management stands by financial statements
Since its establishment in 1988, this is the first instance where a disclaimer has been issued. Management stands by their FY12 financial statements and stressed that the figures present a “true and fair view” of the company as at end-FY12. VB operations will continue unhindered in the meantime. 

Focus still on GO; maintain BUY
While this development may cause some short-term weakness in VB’s share price, we stand by our assertion that an impending GO is likely. A possible dip in the counter should open up buying opportunities for investors. We maintain our BUY rating with an unchanged fair value of S$0.74.

Banking Sector

OCBC on 7 Dec 2012

With the cautious mood for economic recovery and corporate activities, earnings growth projections are modest, with the street expecting both DBS and UOB to post average earnings growth of 3% in 2013. We are going for almost 6% growth, and expect earnings could possibly surprise on the upside when business activities pick up further in 2H 2013. We have an Overweight for the sector. The FTSE ST Financials Index (FSTFN) has outperformed this year, up 31% so far till Nov 2012, versus the STI’s gain of 16%. Valuations for the banks are undemanding at current price levels and we continue to have medium term BUY ratings for both DBS [BUY, Fair Value of S$15.94] and UOB [BUY, Fair Value of S$21.30].

Banking – A sector poised to surprise on the upside
With the cautious mood, we believe that most of the negatives have been priced into the stock prices of the local banks, and there is a strong likelihood that the banks could exceed expectations in 2013. We are going for average earnings growth of 5.5% in 2013 for both banks under our coverage, DBS and UOB, and the street is going for growth of only 3.3% (based on estimates from Bloomberg), effectively pricing in almost flat growth in 2013. However, with the more optimistic Purchasing Managers Index (PMI) and improving economic numbers, there is a good likelihood of better earnings, especially in 2H 2013. 

Overweight the sector – entering 2013 on firmer footing
Despite the still lingering issues from 2011-2012 carrying into 2013, especially the European debt situation and the slowdown in the US, we believe that the local banks are entering into 2013 on firmer footings and are well positioned to differentiate from the US or European banks, with earnings growth, albeit modest in 2013, as well as strong balance sheets. The weakness in margin and slowing loans growth have already been discounted in both earnings projections for 2013 as well as in the current share prices. Asia remains the core base for the three banks, and there are still opportunities to cross-sell and leverage on their existing products and services, translating into better fee and other income. We expect corporate activities to also pick up in line with the more optimistic outlook. 

BUY for both DBS and UOB
The worst appears to be over for most key economies, although full recovery could take longer than expected. We see increased optimism, and expect business activities to rise in tandem. The FTSE ST Financials Index (FSTFN) has outperformed this year, up 31% so far till Nov 2012, versus the STI’s gain of 16%. Valuations for the banks are undemanding at current price levels and we continue to have medium term BUY ratings for both DBS [BUY, Fair Value of S$15.94] and UOB [BUY, Fair Value of S$21.30].

Healthcare Sector

OCBC on 7 Dec 2012

As we move into 2013, we remain sanguine on the growth prospects of the healthcare sector, as robust industry fundamentals are structural and entrenched in nature. This implies that the underlying drivers such as a growing and fast-aging population, rising affluence, increasing incidence and morbidity of diseases and burgeoning medical tourism activities would likely persist in the long run. The healthcare sector offers investors a unique investment proposition, given its resilient and defensive earnings, while growth opportunities are also favourable in light of the aforementioned factors. The sector also saw the high profile IPOs of IHH Healthcare Berhad and Religare Health Trust in 2012, thus giving investors more options to gain exposure to the thriving regional healthcare scene. We reiterate our OVERWEIGHT rating on the healthcare sector, and recommend Biosensors International Group [BUY; FV: S$1.69] as our top pick, given its superior stent technology, healthy financial position and compelling valuations. We also like Raffles Medical Group [BUY; FV: S$2.82] for its capable management team and strong track record.

Year in review
The FTSE ST Health Care Index (FSTHC) has turned in a muted showing this year thus far, declining 7.4% YTD and underperforming the broader market. We believe this was caused by the drag from Biosensors International Group’s (BIG) weak share price performance, which carries a substantial weight in the index (prior to the listing of IHH). Nevertheless, we believe that the strong sell-off in BIG’s stock since Apr has been overdone. We expect the group to continue its market share gains, underpinned by its technologically superior drug-eluting stent (DES) platform, which should mitigate the challenges in the DES industry. Meanwhile, the healthcare sector also saw the high profile IPOs of IHH Healthcare Berhad (IHH) and Religare Health Trust (RHT) in 2012. We opine that these listings have created additional limelight on the sector and also offer investors a proxy to the thriving regional healthcare scene.

Robust fundamentals to drive growth ahead
We are still sanguine on the growth prospects of the healthcare sector as we move into 2013, as robust industry fundamentals are structural and entrenched in nature. This implies that the underlying growth drivers such as a growing and fast-aging population, rising affluence, increasing incidence and morbidity of diseases and burgeoning medical tourism activities would likely persist in the long run. 

Maintain OVERWEIGHT; BIG our top pick for 2013
We opine that the healthcare sector offers investors a unique investment proposition. This is because healthcare companies in general are relatively more resilient in nature due to their defensive earnings, while growth opportunities are also favourable given the aforementioned factors. This has allowed the healthcare sector to command a valuation premium to the broader market, in our opinion. We thus reiterate our OVERWEIGHT rating on the healthcare sector. However, we are cognisant of certain risk factors which could impact the margins and earnings of healthcare companies, such as rising staff and consumables cost (healthcare service providers) and price cuts (medical device and pharmaceutical companies). Within the sector, we recommend BIG [BUY; FV: S$1.69] as our top pick, given its healthy financial position and compelling valuations. We also like Raffles Medical Group [BUY; FV: S$2.82] for its capable management team and strong track record.

China Minzhong

Kim Eng on 10 Dec 2012

Olympus Capital passed the baton. Olympus Capital, a private equity fund, has sold its entire stake of 57m shares in China Minzhong through a private placement last Thursday at SGD0.80 per share. The shares were snapped up by a group of institutional funds and high net wealth investors. Top management also raised their stakes. In our view, this placement is a positive for Minzhong as it removes a long-term share overhang on the company without adding too much selling pressure in the open market.

Senior management raises holdings. In a show of solidarity, management took advantage of the vendor share placement to increase personal stakeholdings. CEO Lin Guorong raised his stake from 6.35% to 6.37% while CFO Siek Wei Ting’s total stake went up from 5.46% to 5.49%. This clearly signals management’s confidence in the company’s fundamentals and the attractiveness of its share price.

Share overhang fades. Olympus has invested in China Minzhong since 2006. Given the closed-end nature of private equity funds, it is a natural progression for private equity firms to liquidate their investments post-IPO and return capital to their investors. More importantly, last week’s placement has helped resolve the issue of share overhang Minzhong has been grappling with, not to mention the new institutional investors it has brought on board. Prior to the placement, Olympus and CMIA, two of Minzhong’s pre-IPO investors, together held 16% of total shares outstanding. The placement drastically reduced this holding to only 5.74% for CMIA alone.

Reiterate BUY. We continue to like Minzhong for its growth prospects. Given the difficulties Europe is facing, the company has striven to expand its revenue base by seeking out new customers abroad and leveraging the growth potential in Chinese domestic consumption. We are looking at an average of 15% EPS growth for the next three years. As it stands, Minzhong’s share price is deeply undervalued at the current 2.9x FY13F PER. Reiterate BUY with the target price unchanged at SGD1.16.

Singapore Telecoms Sector

OCBC on 6 Dec 2012

Going into 2013, with the global economic outlook still looking somewhat shaky, we believe that investors may continue to favour stable yield plays for recurring income in their portfolios. We think that the telecommunication stocks will continue to be good candidates as their defensive earnings and strong ability to generate free cashflow should continue to sustain their relatively attractive dividend yields. As such, we maintain our OVERWEIGHT rating for the sector. Among the three telcos, we have a slightly preference for M1 (BUY, FV: S$2.89).

Modest ARPU uplift likely
While the Singapore mobile services market has hit penetration rates of nearly 150%, the proliferation of smartphones and tablets should continue to drive growth, especially for mobile data usage. And with the faster-than-expected switch from 3G to 4G, we are also likely to see a gradual and modest uplift in ARPU (average revenue per user) in 2013.

NBN roll-out completed
With Singapore’s Next Generation National Broadband Network (NBN) having achieved 95% island-wide coverage, we expect fiber subscriptions to continue at a healthy clip. The number of fiber subscribers hit >220k at end-Sep and could continue to grow by 10k per quarter as ADSL users make the switch. However, the take-up among corporate subscribers could be slower, given that most of the large corporates are already on fiber plans.

BPL may not matter too much
Lastly, for Pay TV, we expect little change in terms of content and competition. While incumbent SingTel has secured the 2013-2015 Barclays Premier League (BPL) rights on a non-exclusive basis (which means that it is not required to share the content with its rivals), StarHub could still put in a bid. However, we do not believe that StarHub would want to over-pay for BPL rights and we do not think that its Pay TV business would be too badly affected if it does not secure BPL rights again.

Maintain OVERWEIGHT
Going into 2013, with the global economic outlook still looking somewhat shaky, we believe that investors may continue to favour stable yield plays for recurring income in their portfolios. We think that the telecommunication stocks will continue to be good candidates as their defensive earnings and strong ability to generate free cashflow should continue to sustain their relatively attractive dividend yields. As such, we maintain our OVERWEIGHT rating for the sector. Among the three telcos, we have a slightly preference for M1 (BUY, FV: S$2.89). 

TEE International

OCBC on 6 Dec 2012

TEE International plans to unlock the value of its real estate business by spinning it off and listing it separately on SGX. It intends to keep a 70-75% stake in the property business, which TEE sees as a valuable source of future earnings. TEE plans to pay out part of the proceeds raised from the listing as a special dividend and use the rest to fund its expansion into new ventures. We have changed our valuation model to better capture the value of TEE’s real estate business using the RNAV surplus method. This gives us a fair value estimate of S$0.34 per share for TEE (previously S$0.28), implying a potential upside of 7% from its last traded price of S$0.315. We have not factored in any potential gains from the real estate spin-off. TEE could see further upside in the current financial year as more revenue from its property projects is recognised. We maintain our HOLD rating.

Property business spin-off in progress
TEE International plans to spin off its real estate business and list it separately on SGX. At a meeting with us, a TEE executive stressed that it intends to retain a 70-75% stake in the business, as its aim is to unlock the value of its property business and not to cash out of a valuable source of future earnings for the group. TEE plans to pay out part of the proceeds from the proposed spin-off as a special dividend and use the rest to fund its expansion into new ventures such as the cement business that it is exploring in Myanmar. The real estate business accounted for 55.7% (S$134.7m) of the group’s total assets at end-FY2012 (31 May), as well as 8.3% (S$11.9m) of its revenue and 22.3% (S$4.8m) of its operating profit (excl. finance costs and share of associates’ results) for FY2012.

More efficient funding options
TEE would like to rely less on bank loans to fund its property projects as it looks to take on bigger projects, but is reluctant to raise more equity capital by selling new shares at the current price, as it believes that the company is undervalued. Listing the real estate business separately would allow the subsidiary to raise equity capital directly to fund the growth of its property business.

Maintain HOLD, fair value raised to S$0.34 per share
We have changed our valuation model to better capture the value of TEE’s real estate business using the RNAV surplus method. We value TEE’s main engineering business at 5x FY13 projected earnings and add this to our estimate of the property segment’s value to arrive at a fair value estimate of S$0.34 per share for TEE (previously S$0.28). This suggests a potential upside of 7% from TEE’s last traded price of S$0.315. We have not factored in any potential gains from the real estate spin-off. TEE could see further upside in the current financial year as more revenue from its property projects is recognised. We maintain our HOLD rating.

Del Monte Pacific

Kim Eng on 7 Dec 2012

Look to 2014. Since Nutri-Asia of Philippines purchased an 85% stake in Del Monte Pacific (DPML) in 2006, it has been quietly diversifying its business streams and fixing a few legacy issues. In 2011, it renegotiated a previously loss-making supply contract, which resulted in the revival of its sales and earnings growth in Europe. We expect its next earnings boost to occur in 2014, as two more loss-making contracts come to an end.

Multiple growth drivers in place. While DPML has a strangle hold in its home market, the Philippines, with its Del Monte brand, it has been endeavouring to break into new markets with two pillars in place – S&W and FieldFresh. Due to regulatory limitations on the Del Monte brand, DPML has been grooming the S&W brand to break into new markets. At the same time, DPML is looking to replicate its home market success in India with its FieldFresh brand. DPML holds a 46% equity stake in FieldFresh; Bharti Group is the other stakeholder. However, FieldFresh is currently incurring losses due to high start-up fees in distribution outlets and fixed costs from a newly-opened plant. FieldFresh expects to break even by 2015 at the earliest.

Processed beverages to lead. DMPL has enjoyed healthy growth over the past two years. In particular, the Beverage segment has registered sales and operating profit growth of 26% and 487.8% YoY, respectively, in 2011. Main contributors to its performance were improved sales in the fruit juice segment and a jump in concentrate prices to new highs of USD2,000/tonne. Since then, concentrate prices has nearly halved to USD1,100-1,200/tonne. The Group has now shifted focus from concentrates to building new beverage brands, in order to reduce its risk in commodity prices.

Earnings growth coupled with dividend safeguard. While DPML has a minimum dividend payment policy of 33%, it has generously paid out 75% of its earnings over the past 7 years. It is currently trading at its historical FY11 P/E of 14.9x; with 9M12 earnings growth of 33.7% YoY. Its fourth quarter is typically the strongest, as larger shipments of pineapples will be made then. 

Singapore Airlines

Kim Eng on 7 Dec 2012

A big deal? Singapore Airlines (SIA) announced recently that they are looking to divest their 49% stake in Virgin Atlantic (VA), an investment they made for GBP600m some thirteen years ago. While the news itself wasn’t a big surprise, it was intriguing to see a wide range of offer prices quoted by news publications, from SGD200m (The Business Times) to ~USD1.2b (Bloomberg, CNBC). Both quoted Delta as the alleged interested party. Our take: fair value is likely to be closer to SGD1b, and this could result in an attractive special dividend.

One man’s meat, another’s poison. SIA’s investment in VA has been undermined by Richard Branson’s unwillingness to accede control of the airline to SIA, as well as the inking of a Singapore-UK agreement allowing SIA to fly the trans-Atlantic route from Britain. This trans- Atlantic route and prized landing slots at London’s Heathrow are exactly what Delta is after: a lucrative market for premium passengers.

Our view on Virgin’s worth: ~SGD1b. We did a simple comparison with International Airlines Group (IAG), parent of British Airways, Iberia and BMI, to make an educated guess on a fair value for VA’s business.
Sale could result in 8% special dividend yield. SIA has a much- vaunted net cash pile of close to SGD4b, which likely means any significant cash proceeds from a VA sale could be distributed to shareholders via a special dividend. SGD1b in cash proceeds would translate to ~SGD0.85 / share, or a potential 8% yield. Fundamentally, our HOLD call on SIA is maintained, still premised on a neutral outlook for the aviation sector. But things could start to look interesting for SIA.

Potential special dividend if cash sale goes through. Our VA valuation suggests an attractive special dividend should a cash sale be sealed. We do list two criteria for investors to watch for: confirmation of the transaction which is in-line or even exceeding our SGD1b estimates, and for the deal to be paid in cash. 

Sheng Siong Group

OCBC on 5 Dec 2012

We upgrade Sheng Siong Group’s (SSG) FY13/14 revenue growth to 10% (previously 5% and 3% respectively) on the back of full-year contributions from the eight new stores opened in FY12. The absence of further price competition amongst the Big 3 supermarket chains and lingering doubts over the macro-environment will also provide support for this defensive counter. In addition, we anticipate a continuation of the 90% net profit dividend payout policy, which will further enhance its attractiveness in FY13 and beyond. As we roll our projections forward, our discounted cash flow to equity valuation increases to S$0.55 from S$0.49 previously. Maintain BUY.

Double-digit growth to continue
We upgrade Sheng Siong Group’s (SSG) FY13/14 revenue growth to 10% (previously 5% and 3% respectively). Full-year contributions from the eight new stores opened in FY12 – representing an increase of 14% in gross retail space – justify this adjustment. Furthermore, SSG’s strategy of opening stores in under-represented areas (i.e. those with a growing or sizeable resident population) has allowed the group to benefit from the build-up in pent-up consumer demand. This is demonstrated by the success of its Geylang and Bukit Batok stores, which broke-even only after a month of operations. 

Macro-environment remains conducive
Being a counter with defensive qualities, lingering macro uncertainty will continue to prove supportive for the segment as consumers exercise prudence in dining habits. 

Threat of price competition diminished
With rising operating expenses (due mainly to wage pressures), we deem the re-occurrence of price competition amongst the Big 3 supermarket chains to be remote. It is not in the interest of the Big 3 to cut into their margins further by waging an unnecessary price war. Instead, it is likely that a tacit agreement to maintain status quo exists amongst the Big 3. 

90% dividend payout policy likely to remain
FY12 will the last year SSG commits to paying out 90% of its PAT as dividends. However, in our opinion and earnings projections, SSG should have no difficulties if it chooses to persist on its 90% PAT dividend payout commitment. Its cash balances have remained above S$100m since 3Q11 despite a significant increase in its store network, increasing inventory requirements, and no borrowings, which clearly signify that store expansion is unhindered. 

Maintain BUY
While SSG will experience a seasonally weaker 4Q12, it is still on track to finish the year out strongly. As we roll our projections forward, our discounted cash flow to equity valuation increases to S$0.55 from S$0.49 previously. Maintain BUY.

Global Premium Hotels

OCBC on 5 Dec 2012

The economy-tier segment of the Singapore hotel industry is seeing increasing levels of competition given that the hotel room supply for this category is set to grow at 7.2% p.a. over 2012-2014, faster than the other three hotel tiers. Among the economy-tier hotels, Fragrance hotels under Global Premium Hotels (GPH) should perform relatively well, given GPH’s operational experience and market share. We have a cautious outlook for the near-term performance of the Singapore hospitality sector as a whole in 1Q13, but remain optimistic for the longer term. We maintain our fair value of S$0.29 (using a 10% discount to RNAV) and BUY rating on GPH. GPH intends to distribute at least 80% of net profit after tax for FY12; we estimate an attractive FY12F dividend yield of 5.7%.

Subdued performance for hospitality in 1Q13
To recap, Global Premium Hotels (GPH) performed below our expectations in 3Q12. 3Q12 revenue increased by 8.1% YoY to S$14.9m. Gross profit margin declined 1.7 ppt versus 3Q11 to 86.6%. EBITDA margin fell 6.6 ppt to 59.8% (excluding one-off expenses of S$0.5m for 3Q12). We understand that the RevPAR performance for Fragrance hotels which did not open/reopen in 2011 was basically flat YoY for 3Q12. We have a cautious outlook for the near-term performance of the Singapore hospitality sector as a whole. 

Economy hotels to see greater supply growth
By our estimates, economy-tier hotels will see the fastest growth in hotel room supply over 2012-2014 at 7.2% p.a. (versus 7.0% p.a. for Mid-tier, 3.4% p.a. for Upscale and 1.6% p.a. for Luxury). This could apply some pressure on existing economy hotels especially given that new hotels tend to provide discounts in the first few months after opening. However, as mentioned previously, according to hotel consultant PKF, tourist destinations generally start out attracting explorers who tend to have better financial means. As the destinations become well-visited, a wider spectrum of visitors will demand a diversified hotel supply, i.e. more budget hotels. 

A market leader in the economy segment
Among economy hotels, GPH’s Fragrance hotels should perform relatively well, given GPH’s operational experience and market share of ~12.2% by retail value of accommodation in 2010, second only to Hotel 81 Management Pte Ltd (29.2%). We also note that 22 of the 23 hotels run by GPH are wholly owned by the group (including one Parc Sovereign Mid-tier hotel); 19 are on freehold sites, one is on a 999-year leasehold site and two are on 99-year leasehold sites. Given the largely freehold nature of the properties, we believe GPH can be a longer term property play.

Maintain BUY
We maintain our fair value of S$0.29 (using a 10% discount to RNAV) and BUY rating. GPH intends to distribute at least 80% of net profit after tax for FY12 and we estimate an attractive FY12F dividend yield of 5.7%.

Hotel Properties Limited

Kim Eng on 6 Dec 2012

Two big kicks from developers themselves. Two developers are on trading halt this week. High-end property developer, SC Global, has been offered a mandatory cash offer of SGD1.80/share by CEO Simon Cheong, implying a 15% premium to book value of SGD1.56 and 122% discount to our RNAV of SGD4.0. Second would be Hong Kong listed Guoco Group, which is also halted pending a possible privatization offer. We have previously highlighted Hotel Properties’s prime hotel and retail assets on Orchard, which include the Forum, Hilton, and Four Seasons, as well as a long list of investment properties held overseas. We stand by our BUY call and urge investors not to ignore the overwhelming discount of 44% to its RNAV of SGD4.63/share.

Orchard’s demand vs. supply. We have emphasized that Orchard Road retail supply is severely limited – only 0.35m sq ft of retail space can come onstream on Orchard Road (AEI at Atrium and Orchardgateway) in 2012, and even less in 2013 at 0.15m sq ft (268 Orchard redevelopment). Our house view is that demand for retail space CAGR of 2.8% over 2011-15 will outstrip supply CAGR of 2.4% over 2011-15. We currently value HPL’s Orchard assets alone to be worth SGD2.80/share. If redevelopment of the three assets materialises, this would add another SGD0.93/share to RNAV.

Potential buyers in acquisitive mode. Armed with a strong cash position of SGD485.1m, and low debt of SGD70.1m, Far East Orchard (FEOR) is currently in an acquisitive mode for mid to prime hospitality assets. FEOR’s prime hotel, Orchard Parade Hotel, is situated just down the road from HPL’s Hilton and Four Seasons. We value these two assets at SGD743.6m, which is certainly within the reach of FEOR.

Don’t miss out on deep value plays. We reiterate our BUY call on the stock and raise our target price to SGD3.24, pegged to a 30% discount to RNAV of SGD4.63/share. Recent rounds of privatization may continue to stir the pot for deep-asset developers to privatise their assets at a bargain.

Midas Holdings

Kim Eng on 6 Dec 2012

Recovery still at early stage. Following a meeting with management recently, we believe that Midas is on track for recovery in the medium term once it overcomes the lingering difficulties that will persist in the next few quarters. Potential contract wins from upstream customers such as CSR and CNR, China’s two largest train makers, will help restore the company’s profit back to a more normal level. Midas has also been working hard to diversify its revenue base, including moving up the value chain into the fabrication business, strengthening its foothold in the power industry and venturing further overseas. Though such diversification and building of new factories will eat into margins in the short term, they will ensure Midas’s sustainability in the long term.

More years to go for China’s high-speed rail. As far as we know, there are no major changes to China’s original plan to build 16,000km of high-speed rail lines by 2020. The fatal railway accident and corruption scandal in 2011 put a spanner in the works and only about half of the targeted length has been completed so far. This means a reacceleration of construction is possible in the next few years.

Upstream customers’ order wins a key catalyst. CSR and CNR are Midas’s two major customers. In the past two years, the building of new high-speed trains has lagged the construction of rail lines. With the Harbin-Dalian high-speed railway starting operation this month and more lines coming on-stream next year, we do not think the current number of trains is enough to meet demand. Should the Ministry of Railways resume the tender process for high-speed trains next year, we believe Midas will be a major beneficiary given its long-term track record and good reputation.

Expect earnings recovery from 2H13. Assuming the Ministry of Railways issues a new round of high-speed train tenders early next year, we expect Midas may be able to record earnings recovery in 2H13 or 1H14, give and take six months for delivery. In our view, Midas’s current share price will be supported by 0.8x FY13F P/BV. Maintain BUY and TP of SGD0.48.

Technics Oil & Gas

DMG & Partners Research on 4 Dec 2012

A NEW substantial shareholder of Technics Oil & Gas has emerged in the form of Eversendai Corporation Bhd, a Malaysian-listed integrated structural steel turnkey and power plant contractor with a market cap of RM1.0 billion ($400 million). We believe that having secured a 13.6 per cent stake in Technics, Eversendai will continue to purchase more shares for a 20 per cent stake.

Maintain "buy" with target price of $1.20. Our valuation remains at 12 times FY2013 forecast EPS, a somewhat higher multiple than other companies in the sector due to the value-unlocking catalyst of the Norr Offshore Group listing.

BUY

Mapletree Commercial Trust

CIMB Research on 4 Dec2012

WHILE an acquisition of Mapletree Anson by Mapletree Commercial Trust (MCT) is likely less accretive than one involving Mapletree Business City, we take comfort in the fairly "in-line" acquisition pricing and accretion without the need for income support (albeit with a higher resultant asset leverage).

We tweak distributions per unit (DPUs) but keep our dividend discount model-based target price (discount rate: 6.9 per cent) of $1.39, factoring in the acquisition assuming a 75:25 debt-equity funding. Maintain "outperform" on MCT. We see catalysts from stronger-than-expected rental reversions on VivoCity.

MCT has announced the proposed acquisition of Mapletree Anson, a 331,854 square feet (net lettable area) grade-A office property for $680 million ($2,049 per sq ft), a 0.7-1.3 per cent discount to independent valuations. It expects the acquisition to be both DPU and NAV-accretive without income support. It has yet to confirm the optimal funding mode but maintains that the resultant asset leverage on revalued asset base ($3.1 billion, +7 per cent against last valuation) will stay within its internal target of 40-45 per cent. The acquisition circular has yet to be released. The deal is still subject to EGM approval.

With leases locked in mainly during/after the global financial crisis, passing rents are about $7.30 psf (versus comparable signing rents of $8 psf). This translates into implied cap rate of 3.0-3.4 per cent for the acquisition. Capital value of $2,049 psf compares well to CapitaCommercial Trust's acquisition of Twenty Anson at about $2,200/ $2,100 psf (with/without income support) in February 2012, but with the bulk of under-rented leases expiring later in FY2015/6.

We expect the deal to just break even in DPU accretion on assumed 75:25 per cent debt-equity funding and cost of borrowing of 2.0 per cent. Asset leverage post-acquisition should rise to about 43 per cent from 38 per cent as at end-Q2 FY2013.

While the potential acquisition of Mapletree Business City had been more widely expected, management noted that it is seeking the authorities' approval for redevelopment of nearby Comtech before any strata-titling of the site can be done for a potential acquisition (if any).

OUTPERFORM

Swiber Holdings

Kim Eng on 5 Dec 2012


Riding on the oil and gas upcycle. We initiate coverage on Swiber with a BUY rating and target price of SGD0.82, pegged at 8x FY13F PER. We expect EPS to grow at a CAGR of 18% over FY12-14F, supported by recognition of its USD1.4b offshore construction orderbook and sturdy contract win momentum. Swiber is establishing a stronger presence in the offshore construction space, garnering a clientele of international oil and gas players and is thus in a sweet spot to ride the offshore oil and gas upcycle.

Enlarged fleet to take on bigger roles. Fleet size increased from only 10 vessels in 2006 to more than 50 currently, including 15 construction vessels. This allows it to handle more sophisticated jobs, have lesser
dependence on third-party vessels, and therefore greater flexibilities in fleet deployment. The results would be better cost controls, margin improvements and the ability to bid more aggressively for contracts.

Record contract wins with more to come. Strong contract wins is an early testament to the success of its fleet expansion plans and also a reflection of the robust contract award environment. Outstanding orderbook stood at USD1.4b as at Nov 2012 which would provide support for its topline for the next 2 years. 2012 has been a bountiful year of contract wins with YTD orders received in excess of USD1.7b (USD733m in 2011). Swiber is confident that bidding environment in 2013 would be even better.

Overhang from high gearing and cash needs. Capex needs for fleet expansion necessitated Swiber to incur a large amount of debt. Net gearing stood at 1.0x as at 9M12 but should trend down to 0.8x by end-FY12. It also issued SGD80m of 9.75% perpetual securities recently. Fleet expansion is at its tail end but we foresee that cash needs are still tight as Swiber intends to repurchase more sale-and-leaseback vessels for better economics.

Relative laggard, low valuations, limited downsides. The stock is a relative laggard, trading at only 5.8x FY13F PER and 0.6x P/B. While gearing and cash needs are valid concerns, at current valuations, downside is limited and supported by our RNAV valuation of its assets which comes up to SGD1.11 per share. Initiate with BUY.

Olam International Limited

OCBC on 4 Dec 2012

Olam International Limited (Olam) is planning a rights issue consisting of US$750m worth of 5-year bonds with a 6.75% coupon (but effective yield closer to 8% due to 95% issue price) with stapled warrants (up to US$500m if fully converted at US$1.291 each after three years). Besides being fully underwritten (by Credit Suisse, DBS, HSBC and JP Morgan), Temasek Holdings will not only undertake to subscribe to its pro-rata entitlement of the rights, but the sovereign fund is also committed to take 100% of the rights not subscribed by existing shareholders. While we think that there could be some near-term boost to its share price, we note that the outlook for the next six months remains quite muted. As such, we are maintaining our HOLD rating and S$1.44 fair value for now.

Rights issue of bonds with stapled warrants
Olam International Limited (Olam) is planning a rights issue consisting of US$750m worth of 5-year bonds with a 6.75% coupon (but effective yield closer to 8% due to 95% issue price) with stapled warrants (up to US$500m if fully converted at US$1.291 each after three years). The bonds and warrants will be offered as one package, fully renounceable, until fully paid and listed; but post listing, the bond and warrants will be detachable and traded separately. Each board lot of 1000 shares will get 313 bonds of face value of US$1 each and 162 warrants. 

Vote of confidence from Temasek
Besides being fully underwritten (by Credit Suisse, DBS, HSBC and JP Morgan), Temasek Holdings will not only undertake to subscribe to its pro-rata entitlement of the rights, but the sovereign fund is also committed to take 100% of the rights not subscribed by existing shareholders. According to Olam, the move is a “strong vote of confidence” and also demonstrates the company’s continued ability to access both equity and debt capital markets under current market conditions. Last but not least, Olam believes the proceeds will further strengthen its balance sheet and liquidity – management intends to use part of proceeds to repay existing bonds and also reduce debt, thus keeping its net gearing little changed; but it stresses that none will be used for fixed investments.

Hopes to shore up bond and share prices
In a nutshell, management hopes that the confidence boost will help to dispel any lingering doubts about its viability and solvency, and thus shoring up its bond and share prices. While we think that there could be some near-term boost to its share price, we note that outlook for the next six months remains quite muted. As such, we are maintaining our HOLD rating and S$1.44 fair value for now.

Biosensors International Group

OCBC on 4 Dec 2012

We project Biosensors International Group (BIG) to report revenue and core EPS CAGR of 17.6% and 10.9% from FY12-14F, respectively. In our opinion, growth would be underpinned by its superior drug-eluting stent (DES) technology, which would enable BIG to continue its market share gains from competitors to mitigate the challenges in the industry. BIG’s healthy financial position would also enhance its ability to weather the vagaries of the global economy, finance its R&D and clinical trials, and provide it with ample ammunition for share buybacks and M&A activities. BIG currently trades at 12.1x blended FY13/14F core EPS, which is approximately one standard deviation below its 3-year average forward core PER. Maintain BUY with an unchanged DCF-derived fair value estimate of S$1.69, which implies a potential upside return of 48.2%. We are recommending BIG as our top healthcare pick for 2013.

Poised for further growth
We project Biosensors International Group (BIG) to report revenue and core EPS CAGR of 17.6% and 10.9% from FY12-14F, respectively. Growth would be underpinned by deeper market penetration, supported by robust clinical evidence which highlights the safety and efficacy of its drug-eluting stent (DES) products, in our view. BIG has continued to deliver healthy sales growth in the EMEA and APAC regions, especially in Europe and China, which is in contrast to some of its peers. However, Latin America and India has seen some weakness but we understand that BIG is undergoing some restructuring of its operations in Latin America such as diversifying its distributor base in a bid to increase its penetration and concentration in the region. 

Challenges apparent, but BIG still standing strong
While challenges are apparent in the DES market (price and competitive pressures), we see positives from BIG’s superior stent technology, which has enabled the group to maintain its robust growth by capturing market share away from its competitors. Strong volume growth has also led to economies of scale and this has been reflected in BIG’s gross margins (1HFY13: 84.3%; +3.4ppt YoY). BIG also generated healthy free cashflows of US$52.3m for 1HFY13, thus allowing it to end the Sep quarter with a net cash position of US$331.7m. BIG’s healthy balance sheet would enhance its ability to withstand the vagaries of the global economy, finance its R&D and clinical trials which is critical for future growth, and provide it with ample ammunition for share buybacks and M&A activities. 

Maintain BUY on attractive valuations
BIG is currently trading at 12.1x blended FY13/14F core EPS, which is approximately one standard deviation below its 3-year average forward core PER. Stripping out its net cash balance, BIG trades at a compelling blended FY13/14F ex-cash core PER of just 9.1x. Maintain BUY with an unchanged DCF-derived fair value estimate of S$1.69, which implies a potential upside return of 48.2%. We are recommending BIG as our top healthcare pick for 2013.

Viz Branz

OCBC on 4 Dec 2012

Viz Branz’s (VB) former CEO has unreservedly withdrawn all his previous allegations of impropriety about a series of payments involving the company. We view this development as a positive event that coincides with the possibility of a general offer (GO) by Lam Soon Cannery. Taken together, the resolution of an outstanding family dispute and the absence of a dividend declaration for FY12 suggest that preparations are being made for an impending offer. While the counter has fluctuated in recent trading, we urge investors to keep the faith and reiterate our stance that a GO will materialise. In addition, the investment case for VB remains sound with its strong fundamentals and FY13 growth projections. We maintain BUY with an unchanged fair value estimate of S$0.74.

Allegations dropped
Viz Branz (VB) announced on Friday that former CEO and current top shareholder Chng Khoon Peng has unreservedly dropped all his earlier allegations of impropriety over a series of payments involving the company that prompted him to lodge a complaint with the Commercial Affairs Department (CAD) in Mar 2012. Mr Chng will now withdraw his complaints with the CAD and will no longer pursue them further. He acknowledges that he has "no further basis nor concerns for his allegations" after being provided with explanations and supporting documents by VB.

Another distraction wrapped up
The withdrawal of the complaint concludes another chapter (the last, it is hoped) of the feud between Mr Chng and his son, VB’s current CEO. Previously, the two had a long-running dispute over a 15% stake in the company, which was ultimately resolved in favour of the elder Mr Chng.

All eyes on GO 
We deem this latest development as a positive event that coincides with the possibility of a general offer by Lam Soon Cannery Pte Ltd, which now has an estimated 20.06% stake in VB (after increasing its stake from 19.8% with open market purchases when the price dipped). All signs now point to an impending offer for VB from Lam Soon – there are no more public family disputes outstanding; its current CEO’s stake has been reduced, suggesting his intent to exit the business; and VB did not declare a dividend for FY12. 

Just a waiting game
The recent share-price appreciation of consumer-related companies such as Super Group and Food Empire [both not rated] has caused some fluctuations and sell-offs in VB as investors become impatient and disappointed with the lack of progress. We urge investors not to be disheartened and reiterate our belief that a general offer is approaching. Furthermore, the fundamentals for VB remain unchanged in the medium-term and its FY13 growth projections are strong. Maintain BUY with a fair value of S$0.74.

Oil & Gas

OCBC on 3 Dec 2012

The FTSE Oil and Gas index delivered a strong performance in the first quarter of the year and held steady before slipping in Apr. From mid Jun, however, the higher beta index recovered on hopes that central banks would step up efforts to bolster the global economy injected optimism in the markets. Almost like a mirror image, the index lost steam in Oct before embarking on a recovery again, and we note that despite short to medium term fluctuations, investors who kept the faith during periods of uncertainty were rewarded as the sector would always return into favour. A focused stock-picking strategy would have fared relatively well, and we advocate a similar style in 2013, overweighting companies that are operating in sub-sectors with more favourable demand-supply dynamics. Going into 2013, we remain OVERWEIGHT on the oil and gas sector, preferring Keppel Corporation [BUY, FV: S$12.49], Sembcorp Marine [BUY, FV: S$5.84], Ezion Holdings [BUY, FV: S$1.70] and Nam Cheong Ltd [BUY, FV: S$0.28].

Almost a mirror image in 2H12
The FTSE Oil and Gas index delivered a strong performance in the first quarter of the year and held steady before slipping in Apr. From mid Jun, however, the STI recovered after hopes that central banks would step up efforts to bolster the global economy injected optimism in the markets. Along with better news from the Eurozone, this propelled the higher beta FTSE Oil and Gas index to post a ~20% gain from early Jun to mid Sep. Almost like a mirror image, the index lost steam in Oct before embarking on a recovery again, and we note that despite short to medium term fluctuations, investors who kept the faith during periods of uncertainty were rewarded as the sector would always come back into favour. 

Understand the sub-sectors’ dynamics and pick the winners
A focused stock-picking strategy would have fared relatively well in 2012, and we advocate a similar style in 2013, overweighting companies that are operating in sub-sectors with more favourable demand-supply dynamics, and those with strong balance sheets and order books. Stepping into 2013, we expect the local rigbuilders to continue securing orders, albeit at slower pace. The offshore support vessel sub-sector should also see continued recovery as the market situation gradually tilts in favour of vessel owners. Meanwhile, subsea tendering activity remains firm but the downstream EPC players are expected to remain mired in a difficult environment.

Solid long-term fundamentals; near term driven by macro events
We believe that the offshore sector has strong long-term fundamentals as countries have an interest in fulfilling as much domestic demand as possible in order to boost energy security. Investors should be mindful, however, that macro events remain a key driver of the broader sector in the near term. Going into 2013, we remain OVERWEIGHT on the oil and gas sector, preferring Keppel Corporation [BUY, FV: S$12.49], Sembcorp Marine [BUY, FV:S$5.84], Ezion Holdings [BUY, FV: S$1.70] and Nam Cheong Ltd [BUY, FV: S$0.28].

UE E&C

OCBC on 3 Dec 2012

Going into 2013, we expect the outlook for UE E&C to be fairly mixed. While the group has a strong order-book (estimated S$400m) and a good pipeline of residential development projects, it also faces increasing risks from a tighter labour market and a potential EC glut. As the government tightens the foreign labour supply, the group may have to grapple with higher manpower costs, resulting in lower profit margins. The EC market could also be facing a potential supply glut as the government intends to roll out a record number of EC sites. In addition, the government may introduce measures to rein in EC prices. Meanwhile, we note that UE E&C’s share price has risen close to our target price of S$0.68. Given the limited upside, we downgrade to HOLD with an unchanged fair value estimate.

Mixed outlook for 2013
Going into 2013, we expect the outlook for UE E&C to be fairly mixed. While the group has a strong order-book (estimated S$400m) and a good pipeline of residential development projects, it also faces increasing manpower costs and a potential supply glut in the EC market – which could lead to some margin compression over FY13-14F. 

Higher manpower costs
UE E&C is highly dependent on foreign workers due to the limited supply of domestic construction labour force. As the government tightens the foreign labour supply, the group may have to grapple with higher manpower costs and find ways to increase its productivity (although it may not be possible to automate certain labour-intensive construction activities). This may result in higher manpower costs and lower profit margins. 

Higher risks in the EC market
According to media reports, the EC market could be facing a potential supply glut as the government intends to roll out a record number of EC sites. By end-2013, some 5,600 units are expected to come on stream. This translates into an annual average supply of 4,500 units compared to an average take-up of 3,300 units. In terms of pricing, the government may introduce measures to rein in the escalating EC prices. Noting a news report that an EC penthouse had recently been sold for S$1.77m, MND Minister Khaw said that EC developers, in exercising the flexibility in pricing and design, should heed the EC policy’s spirit. He also said that ECs were conceptualized for Singaporean families earning within S$12,000 a month, to enable them to own a condominium-style home at below market prices.

Downgrade to HOLD
Meanwhile, we note that UE E&C’s share price has risen close to our target price of S$0.68. Given the limited upside, we downgrade to HOLD with an unchanged fair value estimate.

Land Transport Sector

Kim Eng on 4 Dec 2012

Pair trade: staging a revival. Our pair trade call since April this year has been doing well, and looks set to stage a revival as the differential of 15% between a Long-ComfortDelGro (CDG), Short-SMRT strategy has been maintained since our last update (Fig 1). Since our call, CDG now counts BlackRock, the world’s largest asset manager, as a new significant shareholder. We urge investors not to miss this opportunity as our Target Prices suggest a further 30% differential still to surface. Reiterate BUY CDG, SELL SMRT.

SMRT bus drivers’ protests a wake-up call. Top of the news recently were reports on SMRT’s mainland-Chinese bus drivers staging a sit-in protest on an alleged pay dispute. While the news itself had more political ramifications than impact to company fundamentals, this wake-up call simply cannot be ignored, as PTOs start to feel the pressure from the Bus Services Enhancement Programme (BSEP) rollout that has exacerbated the scarcity of available bus drivers. This fallout has also resulted in SMRT’s CEO Mr Desmond Kuek recognising ‘deep-seated issues’ that need addressing within the company.

SMRT: overvalued vs peers. While dividend yields are comparable between CDG and SMRT (~4% p.a.), we highlight that SMRT’s valuations look rich on both a forward P/E and P/B basis, which further supports a compelling SELL recommendation for the company. Its forward P/E of ~19x, while comparable to HK-listed MTR, is significantly higher than that of CDG (at ~14x P/E). Its investment case looks similarly unappealing on a P/B basis, where its 3.0x P/B multiple looks significantly inflated versus CDG (1.7x P/B) and MTR (1.3x P/B).

CDG: still our pick. CDG remains our pick of the sector for its diversified land transport business across international borders. Not only does this present steady growth opportunities, it also shields the company from country-specific concerns such as those currently being experienced in Singapore.

Reiterate: BUY CDG, SELL SMRT. Our Long-CDG, Short-SMRT strategy remains intact, premised on our projection of a further 30% differential widening between these two companies. Our target prices for CDG (SGD1.94) and SMRT (SGD1.37) are pegged to 16x and 15x forward PER respectively, with CDG deserving its premium valuation based on its diversified global land transport business.

Olam International

Kim Eng on 4 Dec 2012

Temasek comes to the rescue again. Olam announced a capital raising exercise of up to US1.25b, which will be fully underwritten by substantial shareholders, Temasek. This is a very swift and decisive action, which will ease pressure on the company’s financial health, following the rising debt yields on the back of Muddy Water’s allegations. However, we think this may come at a price of eroding minority shareholders’ confidence in the longer-term.

Rights issue of bonds and warrants. For each 1,000 Olam shares, existing shareholders will have the right to subscribe for 313 Bonds (Par value USD1, issue price USD0.95, coupon 6.75%), which will come stapled with 162 free warrants to subscribe for Olam shares at current price of SGD1.575 within the next 3-5 years. The effective yield on the bonds is therefore 8%, with a free warrant sweetener.

To combat rising debt yields. Following Muddy Waters’ allegations, Olam’s share price is down 9.5%, but more importantly bond yields spiked to 10-14% which implies a much higher and arguably unsustainable cost of borrowing going forward for the company. We believe management’s intention is to combat this by 1) Relieving pressure on having to refinance debt within next 12 months 2) Set 8% as a lower benchmark yield for the debt market.

Other terms. The warrants will have a tenor of 5 years, but non-exercisable for 3 years. Upon full exercise, the 387 million shares represent 16% of existing share capital or 14% of enlarged. The legal department will see whether there is a need for an EGM, which would require a simple majority of shareholdings ex-Temasek and the exercise is expected to be completed around Feb 2013. Temasek’s share would go up to 28-29% assuming they take up all warrants.

Downgrade to SELL. This exercise may also hurt short-sellers, as script lenders will have to call for borrowed stock in order to participate. However, management’s earlier stance that it could easily survive 12-18 months even in a credit market seizure may now sound hollow and minority shareholder confidence may be eroded. Given the uncertainty, we downgrade our recommendation from a HOLD to a SELL with a TP of SGD1.42 (1x P/B).

Fortune REIT

OCBC on 30 Nov 2012

We believe that FY13F DPU yield for Fortune REIT (FRT) is attractive at 5.0%, especially compared to that of its closest HK peer, The LINK REIT, which has a consensus FY13F DPU yield of 3.7% (Bloomberg). It should be noted that HK’s 10-year government bond yield is 0.56%, versus 1.33% for Singapore. This means that the average FY13F DPU yield for 5.5% for local retail REITs implies a spread of 4.2%, tighter than the 4.4% spread for FRT. At an NAV per unit of HK$8.32, FRT is trading at a P/B of 0.80x, at a good discount to the overall local retail S-REITs' P/B of 1.15x and The LINK’s P/B of 1.52x. Adjusting our DDM model assumptions, which were previously conservative, we raise our fair value from HK$6.63 to HK$7.28 and maintain our BUY call on FRT. FRT is one of our top two picks among the retail S-REITs.

Impressive 9M12
To recap, 9M12 DPU grew 23.1% YoY, the highest rate of growth in the REIT’s nine-year history. The performance was due to a three-pronged growth strategy: active lease management, yield-accretive acquisitions (e.g. FRT acquired Provident Square and Belvedere Square in mid-Feb) and asset enhancement initiatives with ROIs of at least 15%. Given stable retail space supply in the vicinity of its malls, we believe FRT has a positive operational outlook.

Yield compression versus physical property
As first analysed in our report dated 8 Oct 2012, FRT can see further dividend yield compression from unit price increases. On average, for the period 2003-2011 (excluding 2008), FRT's DPU yield has been at 1.4x relative to the yield for HK physical retail property. Based on 1.4x, and given that the 2012 average annualized yield for physical retail property in HK is 2.7% (based on 9M12), this implies a possible yield of ~3.8% for FRT's FY12F. At FRT's current unit price, FY12F DPU yield is 4.9%. As such, there is potential upside for FRT’s unit price.

Yield compression versus peers 
We believe that FRT's FY13F DPU yield is attractive at 5.0%, especially compared to that of its closest HK peer, The LINK REIT, which has a consensus FY13F DPU yield of 3.7% (Bloomberg). It should be noted that HK’s 10-year government bond yield is 0.56%, versus 1.33% for Singapore. This means that the average FY13F DPU yield of 5.5% for local retail REITs implies a spread of 4.2%, tighter than the 4.4% spread for FRT. At an NAV per unit of HK$8.32, FRT is trading at a P/B of 0.80x, at a good discount to the overall local retail S-REITs' P/B of 1.15x and The LINK’s P/B of 1.52x. Gearing is low at 24.6%. 

Raise FV to HK$7.28
Adjusting our DDM model assumptions, which were previously conservative, we raise our fair value from HK$6.63 to HK$7.28 and maintain our BUY call on FRT. FRT is one of our top two picks among the retail S-REITs.