CHINA Animal Healthcare

DMG & Partners Research on 27 Sept 2012

CHINA Animal Healthcare (CAL) announced that it entered into a conditional subscription agreement with Themes Dragon International and SEB SICAV 2- SEB Listed Private Equity Fund to raise around S$48 million, to be primarily used to partly fund its possible de-listing from SGX.

The subscription agreement includes 53 million subscription shares at an issue price of S$0.30 and 106 million warrants at an exercise price of S$0.30, and is conditional upon the company obtaining approval from its shareholders at a general meeting for the possible de-listing exercise and for the listing of new shares by March 31 next year.

Although CAL has high cash-generative characteristics that would warrant better valuations comparable to regional consumer counters, uncertainty over its de-listing plan and a paltry dividend payout despite a hefty 821 million yuan (S$159.9 million) cash pile would likely continue to weigh in the near-term. Maintain "neutral" at TP of S$0.30, pegged to 3.6x blended FY12-13F EV/EBITDA.

NEUTRAL

Thai Beverage

CIMB Research on 27 Sept 2012

THAI Bev/TCC Assets announced that they will vote against the proposed capital reduction at today's Fraser & Neave (F&N) EGM. We believe this is a strategic move. The move might seem strange as Thai Bev can receive $1.2 billion of proceeds and bring down its current 1.4x net gearing to 1.0x. Voting down the move is a negative for de-gearing, but we believe there are two possible motivations behind the nay-vote.

First, Charoen could be trying to "force" shareholders into accepting his $8.88 offer. With Thai Bev/TCC Assets's vote against the capital reduction, F&N shareholders are left with accepting his $8.88 offer to realise returns or run the risk of F&N's share price collapsing (without the backing of a capital reduction) if they let his offer lapse. This could encourage F&N shareholders to accept his offer when the offer documents go out soon.

Second, Charoen could be eyeing a greater portion of the cash from the Asia Pacific Breweries (APB) sale. If the capital reduction goes through today, he stands to receive only 30.4 per cent of the cash ($1.2 billion). However, if TCC Assets successfully mops up more F&N shares or gains control over F&N, he will be entitled to a greater proportion of this cash and could even propose a larger payout, which would go some way in financing the F&N takeover.

We remain positive on the stock as Thai Bev stands to reap strategic benefits if TCC Assets succeeds with its F&N offer. We highlight that the current share price, even after the run-up year to date, does not fully reflect the value of its spirits business, let alone the full sum-of-parts.

We maintain "outperform" with no change to earnings estimates or our target price of $0.60. The successful takeover of F&N by TCC Assets is the next catalyst.

OUTPERFORM

ST Engg

OCBC on 28 Sept 2012

A safe haven in turbulent times, STE has outperformed the STI significantly since the beginning of the year, rising 29.0% versus the 15.6% increase by the index. The stock reached its 52-week high of S$3.55 last Friday. The counter is trading at a historical P/E multiple of 20.1x and should still have room to climb. With the win of S$179m worth of contracts by ST Marine announced in 3Q12 so far, we think that STE’s order book may be greater than S$13b by the end of 3Q12. We note that the order book has been growing faster than annual revenues, implying increasing earnings visibility into the future. Rolling forward our valuation to blended 2H12/1H13 EPS and increasing our P/E multiple from 20.0x to 20.5x, we raise our fair value from S$3.50 to S$3.81 and maintain a BUY.

Share price can climb further

A safe haven in turbulent times, STE has outperformed the STI significantly since the beginning of the year, rising 29.0% versus the 15.6% increase by the index. The stock reached its 52-week high of S$3.55 last Friday. The counter is trading at a historical P/E multiple of 20.1x and should still have room to climb (about half a standard deviation above 10-year average). STE’s earnings are fairly stable given its four main diversified businesses, which help to reduce its exposure to sector-specific risks. With an attractive FY12F dividend yield of ~4.8%, STE should continue to perform in today’s uncertain but liquidity-rich global economic environment.

ST Marine wins S$179m worth of contracts
It has recently been announced that ST Marine has secured shipbuilding and repair contracts worth ~S$179m. These wins include a contract to build two additional Offshore Support Vessels (OSVs) for Hornbeck Offshore Services, LLC, as well as a series of repair and upgrading projects. With STE’s order book standing at S$12.9b as of end-1H12, we think that it may be greater than S$13b by the end of 3Q12 and expect continued order book growth.

Looking further into the future
We think it is worthwhile noting that STE’s order book clocked 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 probably 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.

Raise fair value to S$3.81
Rolling forward our valuation to blended 2H12/1H13 EPS and increasing our P/E multiple from 20.0x to 20.5x, we raise our fair value from S$3.50 to S$3.81 and maintain a BUY.

SingPost

OCBC on 28 Sept 2012

The steady climb of Singapore Post’s (SingPost) stock has continued since the start of the year when we upgraded the stock to BUY. Cautiously improving market sentiment and the flood of liquidity searching for safe havens with respectable yields has supported performance, along with greater expectations of further growth opportunities in SingPost after the issuance of perpetual capital securities in Feb. Though spectacular gains are unlikely to be enjoyed by investors in the stock, SingPost’s total return has been attractive since 2010 in an uncertain environment. The group has launched new initiatives over the years and diversified into other business areas, but the next leg of growth is heavily dependent on management’s astute use of the group’s cash pile. We update our valuation assumptions (lower cost of equity: 6.49%, terminal growth unchanged: 1.5%), and our DDM-derived fair value estimate rises from S$1.14 to S$1.20. Maintain BUY.

Continues its upward march
The steady climb of Singapore Post’s (SingPost) stock has continued since the start of the year when we upgraded the stock to BUY. Cautiously improving market sentiment and the flood of liquidity searching for safe havens with respectable yields has supported performance, along with greater expectations of further growth opportunities in SingPost after the issuance of S$350m perpetual capital securities in Feb this year.

Total returns since 2010 attractive for a “dividend” stock
As we noted in our initiation report in Jan 2009, spectacular gains are unlikely to be enjoyed by investors in the stock. This is evident by the STI’s significant outperformance against SingPost in 2009 when global equities rebounded from beaten-down valuations in Mar 2009. However, we note that SingPost’s performance in 2010, 2011 and 2012 YTD has been commendable – it outperformed the STI in 2010, slightly lagged the STI in 2011 and is now ahead of the market so far this year (Exhibit 1). This has allowed investors to ride on the upturn in the last few years while collecting dividends (Exhibit 2). Looking at 2012, this year is likely to be a good one for SingPost’s investors too. 

Upside still available; maintain BUY
We like SingPost for its stable operating cash flows and consistent dividends. At the same time, the group has launched new initiatives over the years and diversified into other business areas as well. However, the next leg of growth is heavily dependent on management’s astute use of the group’s cash pile (S$668.6m as of Jun 2012). With changing market dynamics (lower risk free rate and market return), we update our valuation assumptions (lower cost of equity: 6.49%, terminal growth unchanged: 1.5%). Based on our dividend discount model, our fair value estimate rises from S$1.14 to S$1.20. Maintain BUY.

S-Reits

Kim Eng on 28 Sept 2012

UK Road Show: Feedback & Response UK Marketing. We heard from a total of 14 UK-based fund houses spanning three days. 

Positive response on S-REITs.
• Most UK clients view S-REITs positively as it has one of the highest yield spreads amongst its peers, outperforming even major REITs markets such as US, Australia and Japan.  This was primarily attributed to the low risk-free rate environment in Singapore (10-year government bond trading at 1.44%) and the relatively higher physical cap rates (net property income that can be extracted per annum for each S$ dollar invested in investment properties), compared to other developed markets. 
• This year, we have seen many pension, insurance and income funds switching into REITs to pursue higher returns for the sheer fact that the yield-curve is almost flat. This is further aggravated by the almost “zero-bound yields” which meant that yields have no more room to fall, erasing any prospects of fixed income capital gains for investors. In the quest for returns, many such funds had to turn to slightly riskier asset classes such as REITs, Infrastructure Trusts and Master Limited Partnerships (MLPs) etc for stable recurring distributions.      
• We believe that with the latest round of QE3 Infinity, ECB’s unlimited bond-purchase program and BoJ’s yen-asset-purchase program, coupled with the low interest rate environment and a yield-spread of 440 bps over the 10-year government bond with low earnings risk, would warrant further yield compression of 56-73bps, translating to 11%-14% upside for the S-REITs sector. 
• Most funds do not expect any significant interest rates hike until end of 2015, following the US Fed’s intent to keep short-term interest rates near zero till then.       
• Given the macro-environment, strong SGD and lack of investable alternatives in the market, funds will continue to chase yields with underlying assets that are defensible. For those funds that are already vested, most stated that they will not be switching out of S- REITs as there are not many other options in the market. 

Focus shifting to Industrial and Retail REITs
• Most clients concur that Office REITs are staring to look expensive, having run up 42% YTD and 0.9x PBr. With the macro-environment looking uncertain and office landlords not thriving in an environment of falling rentals, many are turning to the more defensible Industrial and Retail REITs.
• Amongst the Industrial REITs, we prefer those with exposure to logistics/warehouse and business parks space for the fact that: average historic demand from 2011 onwards (net addition per annum) outstrip average supply. 
• We are, however, downbeat on the industrial/flatted space because of supply-demand shortfall and their close affiliation with the manufacturing sector (manufacturing output is down 2.2% YoY in Aug 2012. Excluding biomedical manufacturing, output fell 2.7%). Reiterate BUY on A-REIT (TP: SGD2.45) and MLT (TP: SGD1.17).
• Retail REITs are also deemed more defensible because tenants hold inventory and some are backed by necessity shopping. Our retail picks are SGREIT (TP: SGD0.81) and CMT (TP: SGD2.25). 

 Iskandar Development not a near-term threat
• Some clients raise concerns about the Iskandar Development at South Johor posing a pricing threat to Industrial landlords in Singapore. 
• We take the view that it may still take a while for Iskandar Malaysia to build up the whole ecosystem before it can erode Singapore’s competitive advantage.
• For example in the Logistics/Warehouse space, most of the storage assets are located strategically near our airport or sea-ports (PSA and Jurong Port). Singapore has been known for years as a entrepot port and transshipment hub. It is unlikely that Iskandar Development can replicate all this in the near term.

Ausgroup Limted

UOBKayhian on 27 Sept 2012

Valuation
·      Investors should exercise caution after Ausgroup jumped 24.4% upon releasing a circular that it is seeking a listing on the Australian Securities Exchange (ASX). Currently, Ausgroup is trading at 8.15x FY12 PE, which is at a significant discount to its Australian and Singapore peers’ average of 14.0x. Such a listing will unlock value for current shareholders.
·      ASX is also the world's largest mining and resources exchange and this will help raise its profile within Australia, expand its client base and improve its ability to tender for large projects.
What’s New
·      The Board has agreed a de-merger of its subsidiaries into a group headed by its key subsidiary, AGC Australia Pty Ltd (AGC) and list the AGC on the Australian Securities Exchange. Management will also commence identification of a suitable asset to enable a reverse takeover of Ausgroup Limited so that it will remain listed on the Singapore Stock Exchange.
·      Upon completion of the transaction, current Ausgroup’s shareholders will receive shares in ASX-listed AGC under the distribution in-specie and still retain their shares in the Ausgroup. In our view, this would definitely boost the valuation of Ausgroup as it has been trading at a significant discount to its peers in Singapore and Australia.
·      A$324m orderbook should keep them busy for the rest of this year. Ausgroup has a strong track record in securing contracts and has won A$792m worth of projects in FY12. Despite the rate of success in tendering projects having declined from 50% to the current 20-25% due to increased competition, it still has an orderbook of A$324m as of 29 August that will be completed in the next 6-8 months.
·      Improved efficiency boosts bottom-line. NPAT jumped 88% yoy to A$23.3m despite a mere 5% increase in revenue. This is due to continuous efforts by management to increase productivity that led to a 2.7% improvement in EBIT margin to 6.1% in FY12. Going forward, Ausgroup is confident of maintaining EBIT margins at this level.
·      Momentum in the construction industry may slow down. Although a recent survey by the Australian Bureau of Statistics showed that private businesses plan to invest A$115.8b in the mining industry in 2012/13, we know that several projects are being put on hold or have been cancelled as demand from China is waning and banks are becoming less willing to lend. We are also cautious that the recent rebound in commodities prices will be able to spur capital expenditure going forward. The CRB index has gained 20% since the low made in June this year.

Singtel

OCBC on 27 Sept 2012

Temasek Holdings has entered into an agreement to sell 400m shares in SingTel as part of its portfolio rebalancing, likely done at S$3.20 each according to newswires, or 3.9% discount to Tuesday’s S$3.33 close. As expected, the news resulted in a negative knee-jerk reaction, causing SingTel’s share price to open some 5.1% lower at S$3.16. But we believe that investors should not read too much into the share sale. Instead, we continue to like its defensive business and relatively decent dividend yield of ~5%. Maintain BUY with an unchanged S$3.61 fair value.

Temasek selling 400m shares
Temasek Holdings has entered into an agreement to sell 400m shares in SingTel as part of its portfolio rebalancing. We understand that it has a upsize option to sell another 100m shares. According to newswire reports, the share sale was done at S$3.20 each, which is a 3.9% discount to Tuesday’s S$3.33 close, and also at the lower end of the indicative S$3.20-3.25 range. As expected, the news resulted in a negative knee-jerk reaction, causing SingTel’s share price to open some 5.1% lower at S$3.16.

Not indicative of SingTel’s business prospects
Meanwhile, Business Times reported that the sale was a result of a “reverse inquiry” from bankers, suggesting that the move is more opportunistic (given that the share price has risen 6.7% YTD) rather than a direct reflection of SingTel’s business prospects. In any case, we note that Temasek will be barred from selling more shares for 120 days after completing the sale. Temasek will hold a 51.3% stake in SingTel (assuming 500m shares are sold), and the telco will remain the largest company in its portfolio by market capitalization.

Good demand for iPhone 5
Separately, demand for the new iPhone 5 over the weekend has been very positive. We visited several SingTel outlets – including some of its competitors – and the queues were very long indeed. While the higher subsidies for the iPhone 5 may initially weigh on margins, the new contracts with less generous data bundles and the faster LTE access speed should eventually bump up ARPU and margins. SingTel has also made several acquisitions in the mobile service space – the latest being a S$3m stake in mobile game firm – and this should allow it to add value to its mobile business.

Maintain BUY with S$3.61 fair value
Despite the negative knee-jerk reaction, we believe that investors should not read too much into the share sale. Instead, we continue to like its defensive business and relatively decent dividend yield of ~5%. Maintain BUY with an unchanged S$3.61 fair value.

Industrial REITs

OCBC on 27 Sept 2012

Industrial landlords continue to be very engaged in their capital management activities. For 3Q to-date, we note that a number of industrial REITs have launched several debt facilities, where the proceeds will be used to refinance part of their existing borrowings. This is in line with our view that the industrial REIT subsector’s debt maturity profile will remain healthy, with limited refinancing risks in the near term. We also observe that there was a pickup in investment activity during the period. We estimate that the total subsector acquisition value for 3Q will be at S$182.9m. This significantly exceeds the S$66.0m acquisition size clocked in 2Q, albeit still lower than the S$678.2m value registered in 1Q. We are currently maintaining our view that the subsector acquisition activity is likely to be skewed more towards smaller REITs. Reiterate OVERWEIGHT view on the industrial REIT subsector. Cache Logistics Trust remains our preferred pick, given its robust portfolio, healthy financial position and attractive forward DPU yield of 7.1%.

Active capital management
Industrial landlords continue to be very engaged in their capital management activities. For 3Q to-date, we note that two industrial REITs, namely AIMS AMP Capital Industrial REIT and Mapletree Industrial REIT, had announced the issuance of fixed-rate notes, while Sabana REIT had entered into a financing agreement for S$258.6m additional Commodity Murabaha facilities. Based on our understanding, the proceeds from these issuances will be used to refinance part of their existing borrowings. This is in line with our view that the industrial REIT subsector’s debt maturity profile will remain healthy, with limited refinancing risks in the near term.

Pickup in acquisition activity
We also observe that there was a pickup in investment activity during the period. The most active REIT was Cambridge Industrial Trust, which announced the proposed acquisitions of Teban Gardens Crescent, 30 Marsiling Industrial Estate Road 8, and 11 Woodlands Walk for an aggregate consideration of S$97.3m. With just days to the close of 3Q, we estimate that the total subsector acquisition value for 3Q will be at S$182.9m. This significantly exceeds the S$66.0m acquisition size clocked in 2Q, albeit still lower than the S$678.2m value registered in 1Q. We are currently maintaining our view that the subsector acquisition activity is likely to be skewed more towards smaller REITs. We also believe that further acquisitions in the industrial space may possibly involve a combination of debt and equity, given that the subsector aggregate leverage is set to increase after funding committed acquisitions. In addition, some REITs (e.g. Ascendas REIT and Mapletree Logistics Trust) have also turned to capital recycling via divestments to enhance their portfolio returns, in line with our expectations.

Maintain OVERWEIGHT
We are retaining our OVERWEIGHT view on the industrial REIT subsector due to its high yields (7.0-7.1% for FY12-13F) and growth potential. Cache Logistics Trust remains our preferred pick, given its robust portfolio, healthy financial position and attractive forward DPU yield of 7.1%.

Far East Hospitality Trust

OCBC on 26 Sept 2012

Far East H-Trust's portfolio consists of 11 properties in Singapore, including seven hotels and four serviced residences, giving a total of 2,531 rooms/units. The trust has the largest diversified hospitality portfolio in Singapore by asset value, equaling S$2.14b. With a mix of hotels and serviced residences, the portfolio is able to ride on the up-cycle in the hotel industry, while the serviced residences would provide downside protection during economic slowdowns. The Sponsor is part of Far East Organization, which is the largest private property developer in Singapore. Three hotels and four serviced residences have been identified by the Sponsor as Sponsor Right of First Refusal (ROFR) properties which could be offered to Far East H-Trust. These properties could significantly increase the number of hotel rooms/serviced residence units in the trust by 1,242 rooms/units, or 49.1%, to 3,773. We initiate with BUY and a RNAV-based fair value of S$1.08.

Largest diversified hospitality portfolio by asset value
Far East H-Trust's portfolio consists of 11 properties in Singapore, including seven hotels and four serviced residences, with 2,531 rooms/units in total. The trust has the largest diversified hospitality portfolio in Singapore by asset value, equaling S$2.14b. With a mix of hotels and serviced residences, the portfolio is able to ride on the up-cycle in the hotel industry, while the serviced residences would provide downside protection during economic slowdowns due to the longer average stay. We note that the hotels have good locations, with the majority located in the Core Central Region. Five of the hotels are close to private hospitals, enabling them to benefit from anticipated growth in Singapore's healthcare tourism.

Positive outlook for the Singapore hospitality sector
For 2012-2014, we estimate that the overall hotel room demand in Singapore will grow at 6.4% p.a., outstripping expected hotel supply growth of 4.8% p.a. On a combined basis, we see Mid-tier and Upscale hotel room supply growing at 4.8% p.a.

Credible and experienced sponsor
The Sponsor is part of Far East Organization, which is the largest private property developer in Singapore. Far East Organization has developed real estate in the residential, hospitality, commercial, medical and industrial sectors. It has substantial experience managing hospitality assets and its total hospitality portfolio (including the initial portfolio of the Far East H-Trust) comprises 18 properties valued at more than S$3.0b as at 31 Dec 2011. The hospitality operations have also established three in-house brands - Village, Oasia and Quincy.

Visible and substantial pipeline
Three hotels and four serviced residences have been identified by the Sponsor as Sponsor Right of First Refusal (ROFR) properties which could be offered to Far East H-Trust. These properties, if acquired could increase the number of hotel rooms/serviced residence units in the trust by 1,242 rooms/units, or 49.1%, to 3,773.

Ezion Holdings

CIMB Research on 26 Sept 2012

EZION is on a roll, having secured 12 contracts worth more than US$1 billion in 10 months. Its latest US$200 million contract is the biggest to date, underscoring its growing traction with Asean national oil companies (NOC). Factoring in the latest contract and perpetual securities, we lower our core EPS by 3 to 12 per cent. Maintain "outperform" with a higher target price, still based on blended P/E and P/BV, but rolled forward to one year. Catalysts could come from more contract wins, in our view.

Ezion has sealed a five-year charter contract worth US$201 million for the bareboat-chartering of a service rig to an Asean NOC, believed to be Malaysia's Petronas. The rig will be deployed in the Caspian Sea by Q4 2013 after refurbishment and upgrade. Project costs (rig, upgrade and mobilisation costs) will be US$155 million, to be funded by US$116 million of borrowings and US$39 million of equity (proceeds from recently-issued US$100 million subordinated perpetual securities).

Ezion has also secured a five-year letter of intent worth US$82.1 million for the bareboat-chartering of a liftboat (new build) to the same customer. The service rig is expected to be deployed in Asean waters by Q4 2014. As the economics of the contract has not been ironed out, we have not incorporated it in our forecasts. The Caspian contract is Ezion's biggest to date and reinforces our belief that Ezion is gaining traction with Asean NOCs. We think this is aided by Ezion's growing track record (five service rigs/liftboats are expected to be deployed in Asean waters by end-2013), its management's networking (gleaned from Australia and Denmark contracts) and its resourcefulness in securing funding.

We believe more contracts could follow. Factoring in the latest capex and funding, we estimate a net gearing of 0.8x for FY12 and 0.9x for FY13. Assuming a 1.0x cap on net gearing and 30:70 equity-to-debt financing, Ezion could order five more 320ft liftboats next year.
OUTPERFORM

Office Reits

OCBC on 26 Sept 2012

Due to limited supply coming online and better than expected demand, we believe office fundamentals are more benign than expected. In our view, office rentals are likely to show a more subdued dip in 3Q12 after three consecutive quarters of declines since 3Q11. In addition, core CBD vacancies also showed a reversal from a rising trend in 2Q12 to register a 0.9 ppt dip to 8.4%, and expect a similar trend for vacancies ahead. Note that since our upgrade of Office REITs to OVERWEIGHT on 21 Aug 2012, our top pick CCT has appreciated 4.0% versus the STI’s 0.2% gain. Maintain OVERWEIGHT on Office REITs. Our top picks in the sector are CCT [BUY, FV: S$1.53] and FCOT [BUY, FV: S$1.23].

Office rentals decline likely to slow in 3Q12

We believe the office rentals are likely to show a more subdued dip in 3Q12 after three consecutive quarters of declines since 3Q11. Over 2Q12, Grade A office rentals fell 4.7% QoQ to S$10.10 which cumulated in an 8.7% decline over three quarters. Core CBD vacancies, however, showed a reversal from a rising trend in 2Q12 to register a 0.9 ppt dip to 8.4%. A similar picture was seen for island-wide vacancy rates which declined 0.9 ppt to 6.4% (end 2Q12) from 7.3% (end 1Q12). We expect a similar trend for vacancies in 3Q12 which would likely contribute to a muted rate of rental decline. 

Office absorption coming in above expectations
The 2Q12 decline in vacancies was mostly due to net absorption coming in at ~470k sq ft – in line with our forecast but markedly above market expectations which had anticipated a softer demand on macro-economic weaknesses. Grade A capital values also dipped an estimated 2% QoQ marginally to $2,450 psf in 2Q12 (1Q12: S$2,500 psf) as investment sales slowed and market players adopted a wait and see attitude in light of the residual uncertainty in the macro-economy.

Limited supply till 2H13
Looking ahead to the remainder of FY12, it is likely that a situation of limited office pipeline completion would ensue with only ~70k sq ft of office space slated for opening – a mixed use development in Upper Pickering St – which has been fully pre-leased to AGC. We see this dynamic continuing until mid 2013 when Asia Square T2 and The Metropolis T1&2 are slated for completion.

Maintain OVERWEIGHT on Office REITs
We note that, since we have upgraded Office REITs to OVERWEIGHT on 21 Aug 2012, our top pick CCT has appreciated 4.0% against the STI’s 0.2 gain%. We maintain an OVERWEIGHT rating on Office REITs. Our top picks in the sector are CCT [BUY, FV: S$1.53] and FCOT [BUY, FV: S$1.23] .

Super Group

Kim Eng on 27 Sept 2012

Regional growth traction better than expected. We see evidence in recent quarters that sales growth for its branded consumer products will be better than expected. This is a testament to Super’s defensible market share and the potential of a fast growing ASEAN consumption market. 2Q12’s flat sale in this category is not indicative of underlying growth, due to unusual seasonality in its biggest market, Thailand last year. We expect 2nd half sales growth to be much stronger and sales CAGR of 12-15% over the next three years.   

Rebranding exercise to spur sales in 2013. This is expected to roll out in early 2013, which we believe will freshen the brand and provide immediate tangible uplift to sales. The most recent example is the rebranding of the OWL brand in 2H11, which is estimated to have experienced sales growth of 10%.  The Group currently employs a multi-brand strategy and a clearer distinction of customer segment through this exercise will allow them to compete more effectively.

Achieving good margins for ingredients sale. One of our earlier concerns was the lower margins for ingredients sale, which may drag down overall gross margins as their contribution increase. However, with a combination of higher value-add and customization, we understand this segment has actually seen significantly improved gross margin this year to 23-28%, closer to overall group levels. 

Attractive M&A target. Given its position as a market leader across fast-growing ASEAN markets, with a fully-integrated model from manufacturing to distribution, we believe Super may become an attractive M&A target for other F&B players. With Yeo Hiap Seng in the midst of restructuring, we think its 12% stake in Super may become a non-core investment up for sale. This may attract strategic investors or even trigger a possible tussle for control down the road.    

Upgrade to BUY. We adjust our FY12-FY14F estimates upward by 10- 12% to account mainly for stronger sales growth. We also expect heightened M&A interest within the F&B space to provide a re-rating catalyst above Super’s historical PER range. Upgrade to BUY, with a TP of SGD2.85, pegged to 20x FY13F. We note that recent M&A transactions within this space have been in the range of 20-35x PER.

Yongnam Holdings

Kim Eng on 27 Sept 2012

Caught the right break. As a structural steelwork specialist, Yongnam Holdings was a key beneficiary of the buildup of Marina Bay area between 2007 and 2011, with a surge in net earnings CAGR of 21.8%. Regionally, Yongnam has received kudos and won contracts. To date, it has commanded strong earnings growth, coupled with improving margins. Despite recording less earnings contribution without higher margin private sector projects in 1H12, Yongnam still commands the largest orderbook amidst its peers and is set to further benefit from the healthy pipeline of public contracts coming up. 

Major player in infrastructure industry. Yongnam is a structural steel contractor and specialist civil engineering solutions provider. It owns two steel fabrication facilities in Singapore and Malaysia with a capacity of 78,000 tonnes p.a.. It has an unbeatable track record of winning contracts in all MRT and expressway projects in Singapore. YTD, Yongnam has won SGD137m worth of contracts, with a net order book of SGD496m, up 7.4% since end-2011, of which about 34% is expected to complete this year. 

Margin contraction to be expected. Going forward, margins are expected to normalize without contribution from iconic projects such as Marina Bay Sands. Compare to peers, Yongnam still commands more attractive gross and net margins of 26.3% and 15.5% as of 2Q12 as it deals with the downstream processing, compare to steel traders and suppliers. (Gross: 16.3% and net: 8.7%).

Warrants expiring in December. Yongnam’s share price has lagged the sector due to 3-for-10 warrants issued at SGD0.03 in 2007. It has an outstanding balance of 364.3m warrants which will expire on 14 Dec 2012, with a conversion price of SGD0.25. Full conversion of the warrants will result in a 29% dilution to EPS.

Good times do last. With a solid track record on infrastructural projects, Yongnam will continue to thrive in the resilient public sector. It now trades at FY11 PER of 4.6x and P/B of 1.0x compared with sector hist. P/E of 5.3x. Although it does not have a dividend policy, it has an average payout ratio of 16% 

AusGroup

DMG & Partners Research, Sept 25

GAME-changing news. AusGroup announced yesterday that it is moving ahead with its April-2011 plans to list on the Australian Securities Exchange (ASX). The key change is that instead of dual listing, it now plans to spin off its operating subsidiaries on the ASX and distribute shares in this new Australian-listed (entity) to the current shareholders of AusGroup.

If this plan goes through, AusGroup shareholders stand to gain as the industry average forward P/E on the ASX is 10x versus AusGroup's 5.4x. This represents a clear near-term catalyst.

If the deal is blocked by SGX, AusGroup will still be worth $0.755, based on 9x FY13F EPS. It will definitely have benefited from the increased market attention as a result of this action, which should help the stock re-rate on its successful operational turnaround and strong earnings growth profile.

The intrinsic value of this business will not be affected. All operations will continue whether or not this plan goes through. As such, our valuation of $0.755 remains unchanged, and we maintain our "buy" call.

BUY

Tiger Airways

DBS Group Research on 25 Sept 2012

TIGER Australia's operations are improving. With the addition of an 11th aircraft to its fleet, it will be flying 64 sectors a day from next month, compared to 60 pre-suspension. Load factors have also been encouraging in recent months.

However, earnings recovery may be dampened and delayed by the ongoing fare war in Australia between Qantas and Virgin, though this will affect business and premium class more than budget and economy fares. However, taking this into consideration, we now expect a larger net loss of $7 million in FY13, and a lowered FY14F net profit by 7 per cent to $61 million.

Its appointment of a new CEO is a positive. Although Koay Peng Yen's substantial management experience lies outside the airline industry, his permanent appointment and strategic skills should further stabilise the Group's operations, and provide a fresh perspective. In recent meetings with the media and sell-side analysts, Mr Koay said that Tiger Airways should be flexible in exploring new growth avenues, including introducing new products and services and offering enhanced connectivity to improve customer experience. Given Tiger's recent history, fresh ideas could give a fillip to the Group's expansion prospects.

Turnaround story intact, maintain "buy" call.

Despite some near term challenges, Tiger's recovery story is intact.

On this note, we expect the stock to re-rate towards our $0.90 target price, pegged to 12x FY14 PE, as fundamentals continue to improve and management delivers better earnings reports.

BUY

Rotary Engineering Ltd

OCBC on 25 Sept 2012

Rotary Engineering Ltd (Rotary) issued a profit warning of net losses for the coming quarter and FY12F. According to management, losses were mainly due to the SATORP project. This should not come as a total surprise as Rotary had previously reported that it faced “major challenges” in its execution and warned that “additional costs … will be incurred to rectify” certain issues. The group’s ability to manage the cost over-run issue may be limited given the shortage of subcontractors in Saudi Arabia market and the tight deadline for completion. We now project a net loss of S$2.5m in FY12F and a subsequent recovery in FY13F. We also lowered our P/B peg to 0.8x (previously 1.0x) and fair value estimate to S$0.43 (previously S$0.50). Downgrade to SELL.

Profit warning
Rotary Engineering Ltd (Rotary) announced yesterday that it expects to record net losses for the coming quarter and FY12, although no guidance was given on the quantum. According to the management, losses were mainly due to the SATORP project. This should not come as a total surprise as Rotary had previously reported that it faced “major challenges” in its execution and warned that “additional costs … will be incurred to rectify” certain issues. 

Cost over-run at SATORP
As a brief recap, the group had reported cost over-run of S$46m relating to SATORP in 2Q12. As the losses were mainly incurred on its 51%-owned joint-venture, Rotary’s share of losses was effectively S$23m. The cost over-run situation stemmed from several inter-related issues. The original civil subcontractors responsible for the construction work were unable to cope with the schedule, and additional subcontractors had to be appointed at higher costs. There were also changes to engineering design that resulted in major civil re-work. In addition, piping and electrical and instrumentation activities were also affected due to work sequencing. The latest profit warning implies that these issues may have worsened. Indeed, work sequencing issues can be severe and delays along a project “critical path” can quickly cascade downwards resulting in multiple logjams. 

The clock is ticking…
Rotary’s ability to manage the cost over-run issue may be limited given the shortage of subcontractors in Saudi Arabia market and the tight deadline for completion (Dec 2012). In addition, it may also need to inject more capital into the JV company. We now project a net loss of S$2.5m in FY12F and a subsequent recovery in FY13F. We also lowered our P/B peg to 0.8x (previously 1.0x) and fair value estimate to S$0.43 (previously S$0.50). Downgrade to SELL.

Ezra Holdings

OCBC on 25 Sept 2012

As tendering activity in the subsea market continues to be buoyant and the industry outlook is set to remain positive, we increase our FY13 subsea new order wins estimate for Ezra Holdings to US$900m, increasing our fair value estimate from S$1.35 to S$1.48. At the same time, we are positive on the impending listing of Ezra’s engineering and fabrication arm, Triyards, as this will allow the latter to tap the debt and equity capital markets independently from Ezra to pursue future growth opportunities. The move may also allow Ezra and Triyards to leverage on each other for business opportunities. Finally, an equity carve-out increases information transparency, improving investors’ understanding of the parent’s firm value. Assuming Triyards trades at 9x FY13F earnings with a share price of S$0.78, we estimate that this would lower our fair value estimate for Ezra from S$1.48 to S$1.40. Shareholders’ approval still has to be sought at an EGM this week. Maintain BUY.

Listing fabrication business via dividend in specie
Ezra Holdings (Ezra) recently announced that Triyards, its engineering and fabrication division, has received conditional eligibility to list on the Main Board of the SGX. The listing will be by way of an introduction whereby Ezra is proposing to distribute Triyards shares by way of dividend in specie to Ezra shareholders. In particular, Ezra proposes to distribute 33% of TRIYARDS’ issued ordinary shares (or up to 107.2m shares) on the basis of one Triyards share for every 10 Ezra shares.

Positive on corporate restructuring
Over the years, Ezra has grown from a pure play offshore vessel charterer to a group which also has FPSO operations, engineering and fabrication capabilities, as well as a subsea business. An equity carve-out increases information transparency, improving investors’ understanding of the parent’s (i.e. Ezra) firm value. Meanwhile, Triyards would also be able to tap the debt and equity capital markets independently from Ezra to pursue future growth opportunities. As Triyards expands into new markets, Ezra’s offshore support division may also be able to use Triyards as a platform to expand its operations in these new markets.

Fluctuation in Triyards’s price does not have a great impact on Ezra
Assuming Triyards trades at 9x FY13F earnings with a share price of S$0.78, we estimate that this would lower our fair value estimate for Ezra from S$1.48 to S$1.40. A fluctuation in Triyards’s share price would not impact Ezra’s share significantly; a 1x change in Triyards’s PER would only impact Ezra’s share price by about S$0.01. 

Subsea market outlook positive; increase new order wins to US$900m
Meanwhile we estimate Ezra’s subsea net order book currently stands at around US$1.05b, and tendering activity remains buoyant. Given the positive outlook of the industry, we increase our FY13 new order wins estimate to US$900m, raising our fair value estimate from S$1.35 to S$1.48. Maintain BUY.

Singapore Telcos

Kim Eng on 26 Sept 2012

Slower 2H ahead. We are maintaining our SELL calls on SingTel and StarHub as we expect them to be hardest hit by the higher subsidies and longer clawback periods of the iPhone 5 in 2H12. However, M1 is likely to see a more muted impact due to its accounting treatment which brings forward part of future revenue to offset the cost of the subsidy. As such, M1 remains a HOLD, and is our top telco pick in Singapore.

iPhone 5 trumps iPhone 4S. Apple’s iPhone 5 started selling around the world last Friday, including Singapore, and demand is much stronger than the 4S model. Apple has reported that pre-orders for iPhone 5 topped 2m units in 24 hours, more than double the amount of pre-orders it took for the iPhone 4S, reflecting strong pent-up demand for this new model. In Singapore, all the telcos sold out online 90 minutes after opening for booking.

Subsidies rise sharply. Based on the telcos’ iPhone 5 plans, they are stretching their subsidies out over a longer period for iPhone 5 compared to the iPhone 4S. At the sweet spot of the two cheapest plans, which have a minimum contract period of 24 months, the telcos will need almost 1.5 months more to recoup their subsidy cost for the iPhone 5 than the iPhone 4S. 

Margin impact likely to be worse than iPhone 4S. EBITDA margins are likely to be affected in 3Q12. Based on past trends, we expect a larger impact (3-4ppt) for SingTel and StarHub, but a more muted impact on M1 (1-2ppt) due to its accounting treatment for iPhones where future revenue is brought forward to cover the cost of subsidies. Based on current reported iPhone sales however, we think our existing forecasts are still in the money.

Hopefully, higher data usage can offset higher subsidy. iPhone 5 is an LTE handset, and the faster LTE speeds should drive up data usage as it would be much easier to consume data, particularly when viewing video and using FaceTime for video chats. We are not assuming a significant rampup in data revenue yet because we think there will be a period of adjustment, where telcos need to improve their app and content offerings, and users need to adjust their consumption patterns.

Banking Sector

CIMB Research on 24 Sept 2012

EXCESS liquidity is ebbing away. Domestic banking unit loan-to-deposit ratio has crept up to 92 per cent. S$-deposit growth year to date is a sluggish 3.2 per cent versus loan growth of 9 per cent. UOB has been bleeding deposits for over three quarters now and DBS lost 9.5 per cent of its S$-fixed deposits in Q2 2012. Previously unfazed by deposit competition, DBS recently raised time deposit rates to match peers.

No doubt, the local banks still hold the lion's share of S$-deposits but competition from large foreign banks is chipping away the deposit franchises.

An extensive branch and ATM network used to be the key to attracting deposits. In a world of increasing digital banking transactions and sustained low interest rates, branches have lost their value. Instead, attractive rates and customised lifestyle benefits are the new battleground for deposits.

We believe that Singapore banks will see further net interest margin (NIM) pressure in H2 2012 as they react to deposit competition.

Higher inflation expectations post QE3 has led to a steeper US treasury yield curve and consequently, a slightly steeper Singapore Government Securities yield curve. A steeper yield curve gives banks the opportunity for gapping profits. This could mitigate slightly the margin pressure and boost treasury profit.

But we do not think this will be a major boost as banks will be reluctant to push up duration risk in the current environment.

Singapore banks trade at 1.06-1.26x 2013 P/BV. DBS ("outperform", TP S$17.21) now regains its position as top pick for its relatively cheap valuations and anticipated pickup in capital markets-related fees in Q3.

UOB is downgraded to "neutral" (TP $22.47) from "outperform" on potential NIM erosion and its outperformance post Q2 2012 results. OCBC ("underperform", TP $10.24) is least preferred for its full valuations.

NEUTRAL

Lian Beng Group

Kim Eng on 25 Sept 2012

In a sweet spot. Prospects for the construction sector in Singapore remain positive. Despite a cut in a construction forecast, the segment continues to outperform overall GDP growth estimates. Lian Beng will begin its property launches as scheduled with Hong Leong Gardens in October, and Dragon Mansion and Hougang Plaza following that. Its strong position as a contractor and successful venture into property development makes it our top pick in the construction sector. Reiterate BUY.

Launches to start in October. Lian Beng has received the outline planning provision for its respective stakes in property development, and we expect the launch of Hong Leong Gardens to take place in October. The group holds a 10% stake in Hong Leong Gardens with Oxley Holdings leading the consortium. It is zoned for mixed use, and we expect selling prices for residential and retail space at SGD1,500psf and SGD3,000psf respectively.

Divestment of stake in Emerald Hill. Lian Beng has fully divested its 10% stake in 111 Emerald Hill for SGD16.9m. We did not account for this project in our forecasts, as earnings from the project are fully dependent on units sold after its TOP in August, thus there is no impact on our FYMay12 estimates. Lian Beng’s remaining active project, Lincoln Suites, has an 81% take-up rate and is expected to TOP in late 2014.

Secured contracts. Construction remains the core business, accounting for 75% of sales. Lian Beng has secured a 50% stake in a contract worth SGD169m for 361 units in Thomson Grand with Paul Y C&E. Works started in August and this job has boosted its construction order book to SGD736.4m, which will be recognised through to 2015.

Steamrolling ahead. We like Lian Beng for its superior construction order book with an even mix of public and private projects, as well as a slew of properties slated for launch over the next few months. Maintain BUY with a target price of SGD0.63 pegged at 6x FYMay13 PER, backed by an attractive dividend yield of 5.1%.

Global Premium Hotels

OCBC on 24 Sept 2012

Global Premium Hotels (GPH) develops, owns and operates Economy-tier and Mid-tier hotels, and is the second largest operator of Economy-tier hotels in Singapore. GPH currently operates 23 hotels in Singapore with a total of 1,738 rooms under the well-known "Fragrance" brand (Economy-tier - 22 hotels) and the "Parc Sovereign" brand (Mid-tier - 1 hotel). Out of the 23 hotels, 22 are wholly owned by the group, and 19 of them are on freehold land. From 2006 to 2011, GPH grew its portfolio of rooms by an impressive CAGR of 10.9% p.a. from 1,034 rooms to 1,738 rooms. GPH will continue its expansion with the development of a ~260-room Parc Sovereign hotel at the Tyrwhitt Road site which it has recently acquired from its parent, Fragrance Group. The hotel will expand the total room count under GPH's management by ~15% and based on third party valuers' and management's estimates, could potentially result in a S$42m accretion. We initiate with a BUY and a fair value of S$0.29.

Second largest operator of Economy-tier hotels in Singapore
Global Premium Hotels (GPH) develops, owns and operates Economy-tier and Mid-tier hotels, and is the second largest operator of Economy-tier hotels in Singapore. GPH currently operates 23 hotels in Singapore with a total of 1,738 rooms under the well-known "Fragrance" brand (Economy-tier - 22 hotels) and the "Parc Sovereign" brand (Mid-tier - 1 hotel). Out of the 23 hotels, 22 are wholly owned by the group, and 19 of them are on freehold land.

Positive outlook for the Singapore hotel sector
The Singapore Tourism Board projects tourism arrivals to increase at CAGR of 6.6% p.a. till 2015. Based on our estimates, overall hotel room demand will grow at 6.4% p.a. from 2012 to 2014, and will be underserved by an expected hotel supply CAGR of 4.8% p.a. over the period. In particular, Economy and Mid-tier hotel room supplies are estimated to expand at 7.2% p.a. and 7.0% p.a. respectively for 2012-2014, partly reflecting the continued attractive growth in budget tourism, given that much of the visitor arrival increase in recent years has come from developing countries Indonesia, China and India.

Strong track record of market-beating growth
From 2006 to 2011, GPH grew its portfolio of rooms by a CAGR of 10.9% p.a. from 1,034 rooms to 1,738 rooms. This is significantly stronger than the overall sector CAGR of 6.6% over the same period, based on Euromonitor International’s figures.

Initiate with BUY
GPH will continue its expansion with the development of a ~260-room Parc Sovereign hotel at the Tyrwhitt Road site which it has recently acquired from its parent, Fragrance Group. This hotel will expand the total room count under GPH's management by ~15% and based on third party valuers' and management's estimates, could potentially result in a S$42m accretion. We initiate with a BUY and an RNAV-based fair value of S$0.29.

UE E&C

OCBC on 24 Sept 2012

A consortium comprising Wing Tai’s Wingstar Investment, Metro Australia Holdings and UE E&C’s Maxdin put in a top bid of S$516.3m, or S$960 psf ppr, for a 99-year leasehold residential site at Prince Charles Crescent, beating the next closest bid by a mere 1.45%. Based on our estimates, the break-even price for the new development would be around S$1,450 psf ppr and the selling price S$1,650 psf ppr. We also expect UE E&C to provide construction services (worth an estimated S$150-200m) for the new development. We expect URA to announce the winning bid in the coming weeks. In the meantime, we are keeping our projections and S$0.71 fair value estimate unchanged. Maintain BUY.

Top bid for leasehold site
A consortium comprising Wing Tai’s Wingstar Investment, Metro Australia Holdings and UE E&C’s Maxdin put in a top bid of S$516.3m, or S$960 psf ppr, for a 99-year leasehold residential site at Prince Charles Crescent, beating the next closest bid by a mere 1.45%. The second and third highest bids were from Intrepid Investments, Verwood Holdings and Hong Realty (S$508.9m) and Keppel Land’s Sherwood Development (S$488.2m). Given that both Wing Tai and UE E&C are established players within the local property industry, we believe the Wing Tai – Metro - UE E&C consortium should have a high chance of winning. We also estimate UE E&C’s stake in the JV to be around 20-30%, similar to its previous development projects.

Estimated selling price of S$1,650 psf
Based on our estimates, the breakeven price for the new development would be around S$1,450 psf ppr and the selling price S$1,650 psf ppr. We note that units in the nearby Ascentia Sky condominium are also fully sold and transacted around S$1,500 psf ppr. As the new development is located within District 10, unlike Ascentia Sky in District 3, a price premium could be achievable.

S$150-200m in construction services
Like its previous property projects, we expect UE E&C to provide construction services (worth an estimated S$150-200m) for the new development. Recall that the group’s order-book looked weaker in 2Q12 as majority of its projects are due for completion within a year. Supposing the consortium wins the bid for the leasehold site with UE E&C providing construction services, UE E&C’s project pipeline for 2H13 and 1H14 should be lined up nicely.

Maintain BUY with S$0.71 unchanged FV
We expect URA to announce the winning bid in the coming weeks. In the meantime, we are keeping our projections and S$0.71 fair value estimate unchanged. Maintain BUY.

Epicentre

UOBKayhian on 24 Sept 2012

What’s New
· iPhone 5 launched. Epicentre launched the iPhone 5 in Singapore on 21 September. According to The Straits Times, all stocks at Epicentre’s eight outlets were sold within hours. This is the first time that the iPhone is sold on launch day at retailers other than telcos, allowing customers to buy without signing up for a new mobile contract.
· New business initiatives. Epicentre has rolled out several new initiatives, including: a) a mobile-commerce initiative enabling customers to make purchases using mobile phones via a Quick Response code (QR code) displayed on posters in shopping malls, and b) a new customer relationship management (CRM) database which will improve customer service and drive recurring sales.
· Renegotiates purchasing terms. From 2H12, Apple products sold in Singapore will be purchased in Singapore dollars instead of US dollars. This will reduce Epicentre’s foreign exchange risk and margin volatility. However, under the new terms, we believe Epicentre could receive lower fixed margins in return for lower risk. In Malaysia, Apple products will still be purchased in US dollars.

Stock Impact
· China operations will continue to weigh on earnings. In FY12, Epicentre’s China operations made a pre-tax loss of S$1.2m. Going forward, we do not expect an immediate turnaround in China as Epicentre’s stores are located in new shopping malls which have low foot traffic. We also expect profitability to be hit by rising labour and rental costs.
· Store expansion. Epicentre is set to open one store in Jurong and 2-3 stores in Malaysia by 2013. No new stores are expected to open in China. Epicentre currently has eight stores in Singapore, six in Malaysia and three in China.

Earnings Revision
· Slash profit forecast. We slash our FY13 net profit forecast by 71% due to continued losses in China and lower-than-expected sales forecast.
· 4.2% dividend yield. Assuming a payout ratio of 80%, we forecast FY13 dividend yield of 4.2%.

Valuation/Recommendation
· Maintain SELL with a lower target price of S$0.33 (previously S$0.43), implying a downside of 18.5%. Our target price is pegged at 10.3x FY14F PE, a 20% premium to Challenger’s trailing 12-month PE of 8.6x. Valuation is not attractive at this juncture, with the stock currently trading at 19.1x FY13F PE. We also expect more negative catalysts from Epicentre’s China operations.

Venture Corporation

Kim Eng on 24 Sept 2012

Don’t fret over the lack of growth yet. We forecast only 1% growth in 2012 due to tough economic conditions. However, Venture is actively preparing for growth that should come through in 2013 (+13% forecasted earnings). By focusing only on high-quality customers, we believe its target of achieving double digit growth with industry-leading margins, is achievable in the next three years. Until then, the attractive yield of almost 7% will support the stock’s appeal to the right investor.

Putting itself into the right light. To pump up the growth part of the equation, Venture is aggressively penetrating some promising accounts. The transfer of manufacturing from Shenzhen to Malaysia for networking & communication (N&C) customer Oclaro is progressing for a sooner than expected rampup and could contribute up to 5% of revenue in FY13. We note that Oclaro’s growth story has also started to catch the eye of US investors. N&C accounts for 25% of revenue.

Pointing the way to higher sales. Retail Store Solutions (31% of revenue) is likely to be another bright spot for Venture in 2013. In fact, we think the recent bleak outlook given by electronic payment solutions provider Verifone (the acquirer of Hypercom) could actually accelerate its desire to work with Venture on cost cutting. Venture’s entry into Verifone came by way of the latter’s acquisition of Venture’s existing customer Hypercom in 2011.

Minimal savings from factory purchase. Venture is acquiring a factory in Singapore from Ascendas REIT for SGD38m or SGD196psf, which is below our valuation of SGD203psf. With SGD227m in net cash, the deal is affordable and should not affect its annual dividend. Venture intends to consolidate its Singapore operations in this factory, following which it should save about SGD1.1m in after-depreciation rental cost, boosting 2014 earnings slightly.

7% yield to provide support till growth reignites. Venture’s annual DPS of SGD0.55 currently provides almost 7% yield. While a twice-yearly dividend was not announced last year, management assures us they are not against the idea and this could be implemented next year. We continue to like Venture, first for the yield support and second for the growth potential that should start to rev up in 2013.

KSH Holdings

OCBC on 21 Sept 2012

Due to a rapid sales pickup at a key project, Cityscape@Farrer Park, we now forecast for FY13 (ending Mar 13) earnings to surge 68%. Similarly, we expect FY14 earnings to increase 73%. We see sustained earnings growth as a key price catalyst ahead, particularly as continued market liquidity seeks out deep value laggards like KSH (0.6x trailing PB, 3x FY13E PE). We also note KSH has been actively buying back shares near current levels – which management views as severely undervalued – and has a mandate to purchase up to a quarter of its free float, with ample cash (S$53m) to do so. Finally, we see a major re-rating as likely imminent given KSH’s transition, over the last two years, from a cash-hoarding contractor to an property player actively managing shareholders’ capital – deploying capital into accretive site acquisitions and returning excess cash via dividends and share buy-backs. Upgrade KSH to BUY as our key small-cap conviction idea. Our FV increases to S$0.50, from S$0.26 previously, as we lower the RNAV discount to 50% to reflect active capital management, better-than-expected real estate execution, and a still resilient construction order book.

Key catalyst: FY13 earnings expected to increase 68% YoY
Due to a rapid pickup in sales at a key project, Cityscape@Farrer Park, from 22% sold as of end Jun12 to ~45% currently, we now forecast for FY13 (ending Mar 13) earnings to surge 68% as progressive recognition begins. Similarly, we expect FY14 earnings to increase 73% to S$53.0m. We see sustained earnings growth as a key share price catalyst ahead, particularly as continued market liquidity seeks out deep value laggards like KSH (0.6x trailing PB, 3.0x FY13E forward PE).

Likely limited downside here: share buybacks and rich dividend
From current levels, we see compelling risk-reward as the price downside appears likely limited. First, KSH has been actively buying back shares near current levels – which management views as severely undervalued – and has a share buy-back mandate to purchase up to a quarter of its free float, with ample cash (S$53m) to do so. Secondly, KSH would likely keep up its dividend, which we see underpinning its share price given an expected yield of 6.1%.

See major re-rating ahead: from cash hoarding to active capital management
Finally, we see a major re-rating as likely imminent given KSH’s transition, over the last two years, from a cash-hoarding construction contractor to an property player actively managing shareholders’ capital – deploying capital into a portfolio of accretive real estate acquisitions and returning excess cash to shareholders via dividends and share buy-backs. In last 12 months, we estimate KSH has deployed an estimated S$160m to six JV projects, of which three we note are led by JV partner Oxley Holdings – a developer with a sharp execution record.

Upgrade to BUY: our key conviction small-cap idea
Upgrade KSH to BUY as our key small-cap conviction idea. We see a confluence of multiple tailwinds ahead for the share price, and our FV increases to S$0.50 from S$0.26 previously, as we lower the RNAV discount for the property segment to 50% to reflect active capital management, better-than-expected real estate execution, and a still resilient construction order book.

ASL Marine

OCBC on 21 Sept 2012

Announcement of QE3, while long-expected, has helped buoy sentiment across the board. However, amidst the rising tide, investors are well-advised to pick stocks that can stand the test of time. In the small-mid cap space, ASL Marine’s (ASL) diversified business model means it is positioned to capitalise on the recovering newbuild market (driven by offshore support vessels), while still being supported by its healthy shiprepair and chartering operations. Management has turned more positive but more importantly, we also expect the group to double its capex to about S$115m (mainly to expand shipcharter fleet and deepen waterfront) in FY13 compared to just S$67m in FY12. With an upside potential of about 27%, we maintain our BUY rating on the stock with S$0.82 fair value estimate.

Ahoy the rising tide, but pick the worthy ones
Announcement of QE3, while long-expected, has helped buoy sentiment across the board. However, amidst the rising tide, investors are well-advised to pick stocks that can stand the test of time, to avoid holding a stock that has been “swimming naked” when the tide goes out. In the small-mid cap space, ASL Marine (ASL) is positioned to capitalise on the recovering newbuild market (driven by offshore support vessels), while still being supported by its healthy shiprepair and chartering operations.

Group’s diversified business model has served it well
Unlike many other shipyards, ASL has a much more diversified business model – its shipbuilding, shiprepair & conversion as well as shipchartering segments have all been significant contributors to total gross profit. This has served it well over the years. Recall that new order flows dwindled after the 2008 credit crunch and yards that had a heavy dependence on shipbuilding operations were very much affected. Meanwhile, ASL weathered the crisis better than its peers partly due to its business model.

Turning more positive, in words and in action
Due to the difficult market environment, we had a Hold rating on the stock for the most of 2010 and 2011, during which the stock had a lackadaisical performance. With the gradual return of newbuild orders, ASL has also replenished its order book. We upgraded the stock to BUY in mid Feb this year due to the improving outlook, and the stock price has appreciated by about 18% ever since. Management has turned more positive but more importantly, we also expect the group to double its capex to about S$115m (mainly to expand shipcharter fleet and deepen waterfront) in FY13 compared to just S$67m in FY12. With an upside potential of about 27%, we maintain our BUY rating on the stock with S$0.82 fair value estimate.

China Fishery Group

DBS Group Research on 20 Sept 2012

WHILE China Fishery Group (CFG) trades at a cheap valuation, there are fresh uncertainties in the form of regulatory risks from Russia that can affect its earnings. Russian authorities are investigating foreign companies establishing control over Russian fishery companies. Russia accounts for about 54 per cent and 64 per cent of the group's revenue and earnings before interest and taxes, respectively, in FY2011.

CFG operations do not infringe on Russian laws under its current supply agreements and are undisrupted currently. However, in the event that the related Russian fishing companies are penalised, there can be an impact on supply of fishes to CFG.

We estimate that a 10 per cent drop in fish volumes or sales could have a 9.5 per cent impact on FY2013 earnings, all things being equal. Thus, we downgrade the stock to "hold" from "buy" with target price at $0.72 from $1.15, based on five times FY2012/13 forecast earnings.

HOLD