Sakari Resources

OCBC on 31 Oct 2012

Sakari Resources posted 3Q12 revenue of US$270.4m, +21% YoY and 14% QoQ, aided by higher production at both its mines at Sebuku and Jembayan. Despite the lower coal ASPs, better efficiency led to an improvement in operating margins; but it was a tax credit of US$31m which led to its net profit jumping 52% YoY and 135% QoQ to US$56.3m. However, if we strip out the tax credit, we estimate that core earnings would have come in at around US$25.3m, or down 32% YoY (+6% QoQ). Separately, PTT has increased its stake to 90.2% by the end of the offer on 22 Oct. However, PTT has not acquired sufficient shares and acceptances to enable it to proceed with a compulsory acquisition of the remaining shares. But in light of the reduced liquidity, we are ceasing coverage on the company.

3Q12 earnings boosted by tax credit
Sakari Resources posted 3Q12 revenue of US$270.4m, +21% YoY and 14% QoQ, aided by higher production at both its mines at Sebuku and Jembayan. Despite the lower coal ASPs (US$83.7/ton versus US$94.5 in 2Q12), better efficiency (lower cash cost) led to an improvement in operating margins; but it was a tax credit of US$31m which led to its net profit jumping 52% YoY and 135% QoQ to US$56.3m. However, if we strip out the tax credit, we estimate that core earnings would have come in at around US$25.3m, or down 32% YoY (+6% QoQ). 9M12 revenue came in at US$697.2m, meeting 75% of our FY12 forecast, while core net profit would be around US$63.7m, or 74% of full-year estimate.

Near-term outlook remains muted
Although both its mines are on track to hit their production targets this year, management notes that the near-term coal sentiment remains weak as global growth forecasts are revised down. Supply is also moderating significantly at this time as most coal mining operations have curtailed production in response to stagnant demand and weaker pricing levels. As a guide, international coal prices fell 7% QoQ in 3Q12. Nevertheless, Sakari will continue to target improvements in both its operating performance and coal control measures to maximize margins in the current tough pricing conditions. 

PTTML has 90.2% stake in Sakari Resources
Separately, PTTML (PTT Mining Limited) has increased its stake to 90.2% by the end of the offer on 22 Oct. However, PTT has not acquired sufficient shares and acceptances to enable it to proceed with a compulsory acquisition of the remaining shares. As such, the company notes that PTT is still evaluating its position and has not made any decision to lift the suspension of trading in Sakari shares. 

Ceasing coverage
But in light of the reduced liquidity (free float in the market), we are ceasing coverage of the company.

Fortune Reit

OCBC on 31 Oct 2012

9M12 DPU grew 23.1% YoY, representing the highest rate of growth in the REIT’s nine-year history. The results are in line with our expectations, with 9M12 DPU of 23.98 HK cents forming 74% of our prior FY12 DPU estimate. 9M12 revenue increased by 21.1% to HK$822.1m. The 20.7% increase in 9M12 NPI to HK$581.4m can be broken down into an 11.6% increase from the two new properties acquired in mid-Feb and a 9.1% increase from the original portfolio due to strong reversion and AEI. The average rental reversion clocked was impressive at 20.1%, among the highest level in years. At an NAV per unit of HK$8.32, FRT is trading at 0.7x NAV, significantly below the retail S-REITs average of ~1.1x. Gearing remains fairly low at 24.6%. Rolling forward our DDM model to FY13, we raise our fair value from HK$6.49 to HK$6.63 and maintain our BUY rating on FRT. We believe that the FY13F DPU yield is attractive at 5.6%.

Good growth in 3Q12
9M12 DPU grew 23.1% YoY, representing the highest rate of growth in the REIT’s nine-year history. The results are in line with our expectations, with 9M12 DPU of 23.98 HK cents forming 74% of FY12 DPU estimate. 3Q12 revenue climbed by 22.6% YoY to HK$284.7m and NPI rose 22.9% YoY to HK$199.3m. 9M12 revenue increased by 21.1% to HK$822.1m. The 20.7% increase in 9M12 NPI to HK$581.4m can be broken down into an 11.6% increase from the two new properties acquired in mid-Feb and a 9.1% increase from the original portfolio due to strong reversion and AEI.

Strong rental reversion
Despite AEI at Fortune City One and Jubilee Square, portfolio occupancy only declined slightly from 96.5% as of 30 Jun to 96.1% as of 30 Sep. The average rental reversion clocked was impressive at 20.1%, among the highest level in years. The fraction of tenant’s trade mix attributable to non-discretionary retail sector remains constant at about 60%, giving the portfolio resiliency. Management indicates that even tenants who are in discretionary consumption may also renew leases at substantially higher rents, e.g. real estate companies are willing to accept paying double the rents they signed on for in 2010.

Price can appreciate further
We believe that there is room for further appreciation of FRT’s unit price. As we have written about in our report dated 8 Oct 2012, FRT can see further dividend yield compression (from unit price increases). Relative to the average yield for HK physical retail property (currently around 2.7%), FRT’s FY12F yield of 5.4% is above the historical average. At an NAV per unit of HK$8.32, FRT is trading at 0.7x NAV, significantly under the retail S-REITs average of ~1.1x. Gearing remains low at 24.6%. 

Raise FV to HK$6.63
Rolling forward our DDM model to FY13, we raise our fair value from HK$6.49 to HK$6.63 and maintain our BUY rating on FRT. We believe that the FY13F DPU yield is attractive at 5.6%.

SIA Engineering

OCBC on 31 Oct 2012

SIA Engineering Co Ltd’s (SIAEC) 1HFY13 financial results were generally in line with our expectations. Basic EPS for 1HFY13 was 12.47 S cents, 49% of our FY13F estimate of 25.6 S cents. 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. 1HFY13 PATMI declined 1.5% YoY to S$137.2m chiefly because profit for the period a year ago included a S$3.1m write-back of tax provision. Rolling our valuation forward, we increase our fair value estimate from S$4.04 to S$4.14 and maintain our HOLD rating on SIAEC.

1HFY13 financials in line with expectations
SIA Engineering Co Ltd’s (SIAEC) 1HFY13 financial results were generally in line with our expectations. Basic EPS for 1HFY13 was 12.47 S cents, 49% of our FY13F estimate of 25.6 S cents. 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. 1HFY13 recorded an exchange loss of S$3.7m versus an exchange gain of S$8.6m a year ago. 

Increase in contribution from associates and JVs
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. 1HFY13 PATMI declined 1.5% YoY to S$137.2m chiefly because profit for the period a year ago included a S$3.1m write-back of tax provision. To achieve a better balance between the interim and final dividends, SIAEC has declared an interim dividend of 7 S cents, an increase of 1 S cents per share over last year.

Sustained demand in near term
Management expects that that demand for the company’s core businesses will be sustained in the near term. SIAEC acknowledges that the operating environment poses challenges as the global economy continues to affect the aviation industry. Management will continue to be vigilant about cost control and productivity improvements.

Maintain HOLD
Rolling our valuation forward, we use 3QFY13-2QFY14 basic EPS of 26.2 S cents and a P/E multiple of 15.8x (half a standard deviation higher than the 4-year average of 14.6x). We increase our fair value estimate from S$4.04 to S$4.14 and maintain our HOLD rating on SIAEC.

Tiger Airways

OCBC on 30 Oct 2012

Tiger Airways’s (TGR) 2Q13 results came in below expectations. Revenue rose by 78.9% YoY to S$196.7m while its net loss narrowed to S$18.3m, from S$49.9m a year ago following an increase in services from Tiger Australia to pre-suspension levels. In a separate announcement, TGR announced the proposed divestment of 60% of Tiger Australia to Virgin Australia and the entering of a joint venture between both parties to manage Tiger Australia. The move will allow TGR to dispose a substantial chunk of the loss making entity whilst allowing it to retain a presence in Australia and leverage off Virgin’s 30% domestic market share. In a related move, SIA – the parent company of TGR – will invest a 10% stake in Virgin Australia, which will help counteract Qantas’s ambitions of competing within the Asia-Pacific premium market by shifting focus back onto the domestic Australian market. Although our 2H13 estimates point to a modest return to profitability for TGR, a potential downside risk lies in higher associate losses in the second half. Maintain our HOLD rating with an unchanged 2.9x P/B derived valuation of S$0.81.

Loss narrows further
Tiger Airways (TGR) 2Q13 financial results came in below expectations as we were anticipating a small net profit instead of another loss-making quarter. TGR’s 2Q13 revenue rose by 78.9% YoY to S$196.7m while its net loss narrowed to S$18.3m, from S$49.9m a year ago. In terms of its segments, Tiger Singapore continued to perform well with revenue outpacing increases in operating costs (+14.4% YoY to S$128m) but Tiger Australia remained weak despite registering a lower operating loss of S$20.0m for 2Q13 (2Q12: -S$27.2m). 

Divestment of Tiger Australia
In a separate announcement, which we view positively, TGR announced the proposed divestment of 60% of Tiger Australia to Virgin Australia and the entering of a joint venture between both parties to manage Tiger Australia. The deal (worth a potential S$119.8m gain for TGR) will allow TGR to dispose a substantial chunk of the loss making entity whilst allowing it to retain participation in Australia’s domestic market. 

Competition heats up in Australia
Virgin Australia also announced that it is planning a A$98.7m takeover offer for Skywest Airlines, a regional carrier in Western Australia, which will give it access to any increases in travel and charter flights related to the mining boom. To round off the hat-trick of deals, SIA will take up 10% of Virgin for A$105m as it attempts to counteract Qantas’s ambitions of competing within the Asia-Pacific premium market by shifting focus back onto the domestic Australian market.

Maintain HOLD on potential losses from associates
Incorporating the potential one-time gain of S$119.8m from the 60% sale, we adjust our FY13 projections accordingly. Nonetheless, excluding this gain, our second half estimates point to a modest return to profitability for TGR as we envision strong 2H13 revenue growth from the traditional peak season travel months and jet fuel prices to sustain at current levels. However, any unexpected increase in losses from TGR’s associate airlines could derail TGR’s recovery process. In light of this probable outcome, we maintain our HOLD rating with an unchanged 2.9x P/B derived valuation of S$0.81.

Singapore Post

OCBC on 30 Oct 2012

Singapore Post (SingPost) reported a set of in-line results with revenue rising 9.1% YoY to S$153.7m and net profit increasing 7.3% to S$32.9m in 2QFY13, such that 1HFY13 net profit accounted for 49.3% and 52.5% of ours and the street’s full year estimates, respectively. Revenue grew in all three business segments of mail, logistics and retail, but rental and property-related income declined. Margins are slightly lower, and we expect them to be weighed down by cost pressures and the lower-margin logistics business. However, this may be offset by cost management measures. In line with its usual practice, the group has declared an interim dividend of 1.25 S cents/share for the quarter. At current price levels, we expect a dividend yield of 5.4% in FY13F. Rolling forward our valuations, our fair value estimate rises slightly from S$1.20 to $1.23. Maintain BUY.

No surprises from results 
Singapore Post (SingPost) reported a set of in-line results with revenue rising 9.1% YoY to S$153.7m and net profit increasing 7.3% to S$32.9m in 2QFY13, such that 1HFY13 net profit accounted for 49.3% and 52.5% of ours and the street’s full year estimates, respectively. Revenue grew in all three business segments of mail, logistics and retail. Rental and property-related income, however, declined by 7.0%.

Margins likely to continue to weigh
As expected, margins are slightly lower; operating margin decreased from 28.5% in 2QFY12 to 28.1% in 2QFY13 while profit margin before tax slipped from 27.3% to 26.5%. Looking ahead, we expect margins to be weighed down by cost pressures and higher revenue contribution from the lower-margin logistics business. However, the group also recognises this and has been managing inflationary cost pressures with cost management and optimisation measures. For instance, it is seeking to increase productivity by investing in new sorting machines and new technology. Non-strategic costs are also cut by outsourcing certain operations such as customer service hotlines to India and the Philippines.

Stock to hold amidst uncertain environment
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 (net cash position of S$125.1m in 2FY13), including M&A opportunities. In line with its usual practice, the group has declared an interim dividend of 1.25 S cents per share for the quarter. At current price levels, we expect a dividend yield of 5.4% in FY13F. Rolling forward our valuations, our fair value estimate rises slightly to S$1.23 from S$1.20 previously. Maintain BUY.

CDL Hospitality Trusts

OCBC on 30 Oct 2012

CDL Hospitality Trusts (CDLHT) reported 3Q12 gross revenue of S$36.1m, down 0.8% YoY. Net property income contracted 1.1% YoY to S$33.6m. CDLHT’s Singapore hotels saw a slowdown due to the weak global economic environment and the fixed rent contribution from the Australia hotels was slightly lower YoY due to translation loss arising from the weakening AUD. 3Q12 RevPAR for the Singapore hotels declined 0.9% YoY to S$209. 9M12 income available for distribution per stapled security, after deducting income retained for working capital, is 8.42 S cents, 71% of our prior FY12 estimate of 11.9 S cents, which we will have now lowered to 11.3 S cents since we expect 4Q12 to be weak too. A major local hotelier we spoke to is also viewing early 2013 demand with caution. While we had expected 3Q12 to be poor for the hospitality sector, the results are below our expectations. We maintain a HOLD rating on CDLHT and adjusting our model, we reduce our fair value from S$2.06 to S$1.91.

3Q12 weakness for SG hotels
CDL Hospitality Trusts (CDLHT) reported 3Q12 gross revenue of S$36.1m, down 0.8% YoY. Net property income contracted 1.1% YoY to S$33.6m. CDLHT’s Singapore hotels saw a slowdown due to the weak global economic environment and the fixed rent contribution from the Australia hotels was slightly lower YoY due to translation loss arising from the weakening AUD. Income available for distribution per stapled security, after deducting income retained for working capital, declined by 1.8% YoY to 2.72 S cents. 3Q12 average room rates for the Singapore hotels stayed flat at S$236 but occupancy fell from 89.5% in 3Q11 to 88.6%. RevPAR declined 0.9% YoY to S$209. 

9M12 misses expectations
9M12 income available for distribution per stapled security, after deducting income retained for working capital, is 8.42 S cents, 71% of our prior FY12 estimate of 11.9 S cents, which we will have now lowered to 11.3 S cents as we expect 4Q12 to be weak too. 9M12 gross revenue of S$111.2m was up 7.6% YoY, underpinned by a 4.5% YoY growth in RevPAR to S$213. CDLHT has a healthy gearing of 25.5% and says it continues to source for acquisition opportunities in the next 12 months.

Challenges for the industry
According to CDLHT, the first 24 days of Oct showed an indicative RevPAR growth of 1% YoY for the Singapore hotels. We recently spoke to a hospitality industry contact and understand that hotel room bookings have been quite lumpy for 4Q12, with pockets of days with less occupancy. Given that many MICE events are held one every two years, specifically with more being held in even-numbered years, 2012 could provide a challenging comparison for 2013. A major local hotelier we spoke to is also viewing early 2013 demand with caution. 

Lower FV to S$1.91; maintain HOLD
We have adjusted assumptions in our RNAV model, rolling it forward to FY13. We lower our fair value from S$2.06 to S$1.91 and maintain a HOLD rating on CDLHT.

CapitaLand

OCBC on 30 Oct 2012

CAPL reported 3Q12 PATMI of S$148.5m, up 85% YoY mostly due to gains from the divestments of Ascott Guangzhou and Ascott Raffles Place and stronger operating income. Excluding one-time items, we estimate core PATMI at S$89.8m which is mostly in line with expectations. CAPL sold 911 new Chinese homes in 3Q12 – a positive sign, in our view, that the uptick in pace of sales last quarter (812 units sold) has been sustainable thus far. In Singapore, home sales remain muted with only 70 units sold in 3Q12, down significantly from 202 units in 2Q12. Retail mall subsidiary CMA reported 3Q12 PATMI of S$62.4m, increasing 70.8% YoY mostly due to Minhang and Hongkou contributions and increased management fees. We continue to see value in CAPL’s price share (0.9x book and 0.7x RNAV) and maintain our BUY rating with a higher fair value estimate of S$3.67 (25% discount to RNAV), versus S$3.32 previously, mostly due to higher valuations of listed holdings.

Little surprises in 3Q12 numbers
CAPL reported 3Q12 PATMI of S$148.5m, up 85% YoY mostly due to gains from the divestments of Ascott Guangzhou and Ascott Raffles Place and stronger operating income. Excluding one-time items, we estimate core PATMI at S$89.8m which is mostly in line with expectations. 3Q12 topline came in at S$686.9m - a 13% YoY increase mainly attributable to higher development recognition and stronger contributions from the retail mall and fee-based segments. 

Sustaining pace of Chinese home sales
CAPL sold 911 new Chinese homes in 3Q12 – a positive sign, in our view, that the uptick in pace of sales last quarter (812 units sold) has been sustainable thus far. 3Q12 sales, in terms of units sold, were up 180% YoY and management reports demand from first time home buyers and up-graders. In 3Q12, 257 and 120 units were launched at The Loft, Chengdu, and The Pinnacle, Shanghai with healthy take up rates of 81.3% and 67.5%, respectively. In Singapore, home sales remain muted with only 70 units sold in 3Q12, down significantly from 202 units in 2Q12. As of end Sep 12, The Interlace, d’Leedon and Sky Habitat were 71%, 58% and 73% sold respectively, and we see sales likely staying slow ahead given limited catalysts over the near term.

Chinese retail conditions still firm
Retail mall subsidiary CMA reported 3Q12 PATMI of S$62.4m, increasing 71% YoY mostly due to Minhang and Hongkou contributions and increased management fees. Retail conditions in the key Chinese market appear healthy: 9M12 shopper traffic, tenant sales and same-mall NPI in China were up 8.4%, 10.7% and 18.4% YoY, respectively. 

Maintain BUY with higher S$3.67 FV
We continue to see value in CAPL’s price share currently trading at 0.9x book and 0.7x RNAV. Balance sheet remains sturdy with S$6.3b cash and 31% net gearing. Maintain BUY with a higher fair value estimate of S$3.67 (25% discount to RNAV), versus S$3.32 previously, mostly due to higher valuations of listed holdings.

Starhill Global REIT

OCBC on 30 Oct 2012

Starhill Global REIT (SGREIT) turned in an encouraging set of 3Q12 results yesterday. While we have expected Wisma Atria retail mall to put on a good showing following the completion of asset redevelopment works, the 24.3% increase in NPI for the segment came in stronger than expected, thanks to positive rental reversions and full committed occupancy at the mall. Wisma Atria office segment, we note, also performed well, raking up 15.2% growth in NPI. In addition, overall portfolio occupancy remained very healthy at 99.4%, with a weighted average lease term (by NLA) of 7.3 years. As mentioned in our Sep report, SGREIT had secured the refinancing for its existing A$63m term loan which matures in Jan 2013. With that, SGREIT has no debt refinancing requirement until Sep 2013. We are tweaking our forecasts to factor in stronger rentals at Wisma Atria. This lifts our fair value from S$0.79 to S$0.84. Maintain BUY.

3Q12 DPU within expectations
Starhill Global REIT (SGREIT) turned in an encouraging set of 3Q12 results yesterday. NPI and distributable income were up 5.7% and 11.0% YoY to S$36.4m and S$21.6m respectively, driven by stronger performance at its Singapore properties. DPU for the quarter similarly grew by 11.0% YoY to 1.11 S cents. Together with 1H12 DPU of 2.15 S cents, 9M12 distribution tallied 3.26 S cents, up 4.8%. This is largely within our expectations, given that it formed 75.1%/75.8% of our/consensus full-year DPU projections.

Wisma Atria surprised on upside
While we have expected Wisma Atria retail mall to put on a good showing following the completion of asset redevelopment works, the 24.3% increase in NPI for the segment came in stronger than expected, thanks to positive rental reversions and full committed occupancy at the mall. Wisma Atria office segment, we note, also performed well, raking up 15.2% growth in NPI. This more than offset the weakness in NPI at its Chengdu (-14.1%) and Australia properties (-3.2%), which were impacted by the softening of the Chinese retail market and higher operating expenses respectively. As a result, its Singapore portfolio contributed 62.3% of 3Q NPI, higher than 61.2% seen in 2Q. Nevertheless, overall portfolio occupancy still remained very healthy at 99.4% (office: 97.9%, retail: 100%), with a weighted average lease term (by NLA) of 7.3 years. 

Maintain BUY
As mentioned in our Sep report, SGREIT had secured the refinancing for its existing A$63m term loan which matures in Jan 2013. With that, SGREIT has no debt refinancing requirement until Sep 2013. Its gearing currently stands at a healthy 31.2% (30.5% in 2Q), with financing costs at 3.13%. Regarding the Toshin master lease at Ngee Ann City, SGREIT provided little details except that the President of the Singapore Institute of Surveyors and Valuers is still in the process of designating three independent valuers for the rent valuation. We are tweaking our forecasts to factor in stronger rentals at Wisma Atria. This lifts our fair value from S$0.79 to S$0.84. Maintain BUY.

CapitaLand

Kim Eng on 31 Oct 2012

3Q12 results were in line. CapitaLand’s 3Q12 PATMI came in at SGD148.5m, taking 9M12 PATMI to SGD667.6m (83.9% of our full- year forecast). Excluding revaluation gains, 3Q12 core PATMI was up 85% YoY, but declined by 17% QoQ, boosted by divestment gains from Ascott Raffles Place and Ascott Guangzhou. Removing these, core earnings were largely in line with expectations.

CMA was a growth driver. CapitaMalls Asia (CMA SP) accounted for 31% of CapitaLand’s reported EBIT, mainly on the back of higher contribution from the four Japanese malls acquired earlier this year and higher management fees. We expect the retail property business via CMA to be a key growth driver for CapitaLand. 

Improved home sales in China. In 3Q12, CapitaLand sold 911 homes in China, up from 812 units in 2Q12 and 325 units in 3Q11, with demand coming mainly from first-time buyers and upgraders. YTD, CapitaLand has sold 1,978 homes in China valued at RMB4.2b, with around another 800 units ready for launch. In Singapore, management feels that the latest measures to cap home loan tenure will not have significant short-term impact on new home demand. CapitaLand still plans to launch 70 new units at Sky Habitat and 300 units at d’Leedon by the end of this year. 

Gearing inching up, but balance sheet is still healthy. CapitaLand’s net gearing edged up to 0.46x as of 3Q12, which in our opinion is still healthy. Cash position stood at SGD5.4b, providing ample financial buffer. We also think there could be opportunities for monetizing some assets, particularly at the CMA level for assets such as Queensbay Mall in Penang and ION Orchard in Singapore.

Buy for its diversity. We have raised our target price to SGD4.21 on the back of a higher RNAV for CMA, higher DDM valuation for CCT and higher market values for the other listed entities. Maintain BUY.

Wing Tai Holdings

Kim Eng on 31 Oct 2012

Solid quarter. Wing Tai posted a 1QFY Jun13 net profit of SGD72.1m, which is a 187% YoY increase and 43% QoQ improvement (excl. revaluation gains in the last quarter). 1QFY Jun13 net profit already accounted for 44.5% of our full-year estimate, but we are keeping our forecasts unchanged for now due to the lumpy earnings from the completed projects. The solid first quarter validates Wing Tai as our top pick amongst the residential developers. Reiterate BUY.

Benefitting from sales of completed units. The earnings growth in Q1 was attributable to additional units sold in Belle Vue Residences and Helios Residences. Since the projects have already been completed, profits can be immediately recognized whenever additional units are sold. Progressive recognition of profits from Foresque Residences and L’VIV also contributed to the profits.

Actively marketing Foresque Residences. In the quarter, Wing Tai launched the second phase of Foresque Residences and managed to sell another 115 units at an ASP of around SGD1,100 psf. To date, more than 80% of the 496-unit project has been sold. We expect Wing Tai to continue its marketing efforts to sell the remaining units by the end of the year.

Replenishing landbank. In September, Wing Tai also joined hands with Metro Holdings and United Engineers to secure a 2.4ha condo site at Prince Charles Crescent via the Government Land Sales Programme for SGD516.3m. We estimate the breakeven at around SGD1,450 psf and the ASP is likely to be around SGD1,750 psf. For Wing Tai’s 40% stake, we expect an RNAV accretion of 6 cents/share.
Valuations remain compelling. Wing Tai remains attractively valued at 0.6x P/B, 0.5x P/RNAV, underpinned by a forecast dividend yield of nearly 4%. We reiterate our BUY recommendation, with a slightly raised target price of SGD2.14, pegged at a 40% discount to RNAV. 

Singapore Post

Kim Eng on 31 Oct 2012

 Decent results as expected. Singapore Post announced its 2QFY3/13 results yesterday morning. The results were in line with consensus and our estimates. 1HFY3/13 revenue increased by 7.8% yoy to SGD305m, representing 50.6% of our full-year forecast and net profit excluding one-off items was slightly down by 0.6% to SGD69m. We maintain our HOLD rating and target price of SGD1.10 unchanged as we think the upside is very limited after recent strong share price performance.

Transformation only improves the top line. We appreciate Singapore Post’s transformation effort as we saw positive revenue growth momentum in recent quarters. In the first half of FY3/13, SingPost recognized revenue growth in all business segments (Mail sector up 8.0% yoy; Logistics sector up 7.8% yoy and Retail sector up 8.7% yoy) despite the continuous decline in letter volumes. The growth was mainly driven by consolidation of new acquired subsidiary Novation Solutions as well as the revenue growth in Quantium Solutions and Speedpost.  

Still too early to see significant bottom line improvement. Despite respectable top line growth, net profit failed to make any growth (down by 0.6% yoy) in 1HFY3/13 compared with a year ago. In our view, we are not likely to see significant bottom line growth in short to medium term because of inflationary cost pressure and gradual shift to lower- margin Logistics business. 

Property assets divestment? SingPost’s post offices island-wide are precious assets to shareholders. Although the management is open to listening to any offer, we don’t think it will sell their property assets given SingPost’s big net cash position unless the price is too good to say no. However we will appreciate such divestment practice to unlock the hidden value to shareholders. 

Wait for a better entry point. SingPost is more of a yield play. However its current dividends yield of 5.4% is no longer attractive relative to its historical average of 6.0%. We recommend that investors take profit and wait for a better entry point. 

CDL Hospitality Trusts

Kim Eng on 31 Oct 2012

3Q/9M 12 earnings inline. 3Q12 revenue at SGD36.1m (-1% QoQ, -1% YoY), was 24% of ours and consensus estimate. 9M12 revenue at SGD111.2m (+8% YoY), was 74% of ours but only 68% of consensus estimate. Management attribute this to slightly lower RevPAR (SGD209 in 3Q12, -4% QoQ, -1% YoY) achieved by the Singapore Hotels, as a result of the weaker macroeconomic environment impacting Singapore’s economy and hospitality sector. 3Q12 DPU at 2.72 SG-cts (-7% QoQ, -2% YoY) was 23% of ours and consensus estimates. 9M12 DPU at 8.42 SG- cts (+4% YoY) was 72% of ours and 68% of consensus estimates 

Portfolio review. Singapore 3Q12 hotel occupancy (excluding Studio M Hotel) at 88.6% was down 1.1ppt QoQ and 0.9ppt YoY. Average Room Rate (ARR) at SGD236 was down 2.5% QoQ and flat YoY. The corporate market, in particular the meetings and conference business, was affected by the economic malaise, leading to the relatively flat performance. Copthorne King's Hotel (second consecutive qtr of decline), Orchard Hotel (third consecutive qtr of decline) and M Hotel are all showing signs of moderation this quarter, with gross revenue down 6.4%, 1.7% and 3.7% QoQ respectively. Overall 3Q12 portfolio revenue has also softened, down 1.5% QoQ.  

Expect slower tourism growth amidst a more competitive landscape. CDLHT derived ~80% of revenue/NPI from Singapore. We expect tourist arrivals to register 5.2% CAGR over 2011-15 but hotel room supply (measured in terms of available room nights) will grow at 6.1% CAGR, outstripping demand growth of 5.9%. ARR growth is project to slow from 15% in 2011 to 6% this year and 2%-3% over 2013-2015. We keep our visitor arrivals forecast intact with 14.2m and 16.2m arrivals in 2012 and 2015 respectively.  

Reiterate HOLD. With more hospitality trusts onboard (At FY12F P/B of 1.2x, scarcity premium likely to compress) and more hotel rooms coming on-stream, we would advise investors to stay cautious. The stock has run up 25.6% YTD and at FY13F DPU yield of 6.2% and yield spread of 490bps vis-à-vis historic average of 499bps, the stock has limited upside ahead in our view. Reiterate HOLD with unchanged TP of SGD1.97. 

Micro-Mechanics Holdings

OCBC on 29 Oct 2012

Micro-Mechanics Holdings (MMH) reported 1QFY13 results which fell short of our expectations. Revenue declined 4.6% YoY to S$9.9m, or 8.0% shy of our forecast. Net profit slid 5.6% to S$1.2m and was 12.4% lower than our projection. Sequentially, revenue and net profit fell 4.3% and 13.4% respectively; despite first quarter fiscal year being one of MMH’s seasonally stronger quarters. Its Custom Machining & Assembly division proved to be the main drag on its earnings for 1QFY13, although a bright spot came from a fifth consecutive quarter of steady gross margin increment for its Semiconductor Tooling division. Looking ahead, MMH highlighted the lack of visibility in the near-term; although it would continuously work to improve its product cycle time to enhance its competitiveness. We pare our FY13 and FY14 revenue forecasts by 5.8% and 4.8%, and our PATMI projections by 10.5% and 5.2%, respectively. Maintain HOLD, but with a lower S$0.29 fair value estimate (previously S$0.325).

Y13 results below our expectations

Micro-Mechanics Holdings (MMH) reported 1QFY13 results which fell short of our expectations. Revenue declined 4.6% YoY to S$9.9m, or 8.0% shy of our forecast. This was MMH’s sixth consecutive quarter of YoY sales decline. Net profit slid 5.6% to S$1.2m and was 12.4% lower than our projection due to weaker-than-estimated revenue and higher effective tax rate, although this was partially offset by better-than-expected gross margin. Sequentially, revenue and net profit fell 4.3% and 13.4% respectively; despite first quarter fiscal year being one of MMH’s seasonally stronger quarters. 

CMA division the main drag
Both of MMH’s core segments registered YoY decline in revenue, with its Custom Machining & Assembly division causing a bigger drag once again. Sales for this division dipped 18.4% YoY to S$1.3m, but what surprised us was the -2.4% gross margin recorded during the quarter (1QFY12: 4.8%). Nevertheless, there was a positive which came from its Semiconductor Tooling division, which reported a fifth consecutive quarter of steady gross margin increment. Hence overall gross margin of 49.0% in 1QFY13 (1QFY12: 45.1%) for MMH came in above our 48.1% estimate. Management attributed this to efforts to improve its productivity and manufacturing process, thus resulting in a reduction in its direct labour requirements.

Maintain HOLD given tepid near-term outlook
Looking ahead, MMH highlighted the lack of visibility in the near-term, while cost pressures are also expected to exacerbate the challenging operating environment. Management would continuously work to improve its product cycle time to enhance its competitiveness and responsiveness to its customers. We pare our FY13 and FY14 revenue forecasts by 5.8% and 4.8%, and our PATMI projections by 10.5% and 5.2%, respectively. However, we believe that MMH would still report growth in both its topline and bottomline for FY13 given the low base in 2Q and 3Q FY12. Maintain HOLD, but with a lower S$0.29 fair value estimate (previously S$0.325), still based on 9x FY13F EPS.

CapitaMalls Asia

OCBC on 29 Oct 2012

CMA reported 3Q12 PATMI of S$62.4m - up 70.8% YoY mostly due to Minhang and Hongkou contributions and increased management fees. We judge this set of results to be above consensus and our expectations, and 9M12 core PATMI, excluding extraordinary items, now make up 83% of our FY12 forecast, driven by faster than expected revenue growth at Minhang and Hongkou and a S$7.3m QoQ dip in admin expenses as mall-opening costs eased. We expect increased visibility of recurring earnings, as a larger component of CMA’s portfolio becomes operational, and relatively firm retail outlooks in China and Singapore to be positive drivers of its share price ahead. Maintain BUY with an increased fair value estimate of S$2.16 from S$1.85 previously as we update for valuations of REIT holdings and reduce the RNAV discount to par (from 10% previously).

Operational traction driving earnings surprise
CMA reported 3Q12 PATMI of S$62.4m – up 70.8% YoY mostly due to Minhang and Hongkou contributions and increased management fees. No one-time gains were booked during the quarter, and we judge this set of results to be above consensus and our expectations. 9M12 core PATMI, excluding extraordinary items, now make up 83% of our FY12 forecast, driven by faster than expected revenue growth at Minhang and Hongkou, and a S$7.3m QoQ dip in admin expenses as mall-opening costs eased. 3Q12 topline came in at S$102.1m – similarly up 52.6% YoY and above expectations.

9M12 Chinese tenant sales up 10.7% YoY
Retail conditions in China remained at healthy levels over 3Q12 though we note signs of mild deceleration in growth. CMA reported that 9M12 shopper traffic and tenant sales were up 8.4% and 10.7% YoY respectively and that, excluding Tier 1 cities, tenant sales were up 14.2%. 9M12 same-store NPI in China was up 18.4% YoY. 9M12 shopper traffic in Singapore was down 0.8% YoY, continuing a similar trend seen earlier this year due to construction works and competitive pressures. We note, however, that tenant sales still managed a 1.7% YoY uptick. 

Key projects on schedule 
Key projects were kept on schedule, with Star Vista opening in Sep 2012 (~90% of NLA committed) and the Bugis+ AEI completing in Jul 12 as planned. CMA also opened six new malls over 3Q12: CapitaMall Taiyanggong (Beijing), CapitaMall Rizhao (Rizao), CapitaMall Wusheng (Wuhan), CapitaMall Xuefu (Harbin), Raffles City Ningbo (Ningbo) and Raffles City Chengdu (Chengdu). This tracked closely to our expectations. 

Maintain BUY with higher S$2.16 fair value
We expect increased visibility of recurring earnings, as a larger component of CMA’s portfolio becomes operational, and relatively firm retail outlooks in China and Singapore to be positive drivers of its share price ahead. Maintain BUY with an increased fair value estimate of S$2.16 from S$1.85 previously as we update for valuations of REIT holdings and reduce the RNAV discount to par (from 10% previously).

CapitaCommercial Trust

OCBC on 29 Oct 2012

CapitaCommercial Trust (CCT) reported 3Q12 distributable income of S$57.9m - up 11.6% YoY mostly due to contributions from Twenty Anson, higher revenues from portfolio assets and yield protection income from One George Street (OGS). This is mostly in line with expectations and we note 9M12 distributable income now makes up 75% of our FY12 forecast. As indicated in our last two reports, we have been expecting an uptick in office fundamentals and believe this was mostly validated by CCT’s 3Q portfolio data-points: 1) occupancy edged up QoQ to 97.1% in 3Q12 from 96.2% in 2Q, and 2) average portfolio rent increased to S$7.53 psf – the first increase seen after seven consecutive quarters of decline from 4Q10. Maintain BUY with an increased fair value estimate of S$1.70, versus S$1.62 previously, as we update our model for firmer rental numbers and cap rates.

3Q12 distributable income in line
CapitaCommercial Trust (CCT) reported 3Q12 distributable income of S$57.9m - up 11.6% YoY mostly due to contributions from Twenty Anson, higher revenues from portfolio assets and yield protection income from One George Street (OGS). This is mostly in line with expectations and we note 9M12 distributable income now makes up 75% of our FY12 forecast. 3Q12 distributable income translates to a distribution per unit (DPU) of 2.04 S-cents for the quarter, translating to an annualized distribution yield of 5.1% on the last closing price (S$1.58 per unit). 3Q12 topline came in at S$95.5m, increasing 7.0% YoY – again generally within expectations. 

Sector fundamentals driving healthy portfolio performance
As indicated in our last two reports, we have expecting an uptick in office fundamentals from 3Q12 till at least 2H13 and believe this was mostly validated by data-points from CCT’s 3Q12 performance: 1) portfolio occupancy edged up QoQ to 97.1% in 3Q12 from 96.2% in 2Q12, and 2) average portfolio rent per square foot increased to S$7.53 – the first increase seen after seven consecutive quarters of decline from 4Q10. We expect this to continue ahead - note that a third of CCT’s office net leasable area is up for renewal in FY13 and that current market rents currently stand at S$9.80 psf.

Maintain BUY
Since we have upgraded CCT to a BUY on 21 Aug 2012, the REIT has appreciated 14% over this time (significantly outperforming the STI which is down marginally -0.1%). At this juncture, we continue to like CCT for its prime assets, relatively stable portfolio drivers and strong execution from management. CCT recently announced a S$34.7m upgrading at Raffles City while OGS’s AEI and CapitalGreen’s construction progression remains on track. Maintain BUY with an increased fair value estimate of S$1.70, versus S$1.62 previously, as we update our model for firmer rental numbers and cap rates.

Suntec REIT

OCBC on 29 Oct 2012

Suntec REIT delivered a good set of 3Q12 results, in our view. Despite the partial closure of Suntec Singapore and Suntec City Mall for Phase 1 of the asset enhancement works (AEI) and divestment of Chijmes, DPU only showed a 7.2% YoY dip to 2.35 S cents. For 9M12, DPU totalled 7.164 S cents (-3.9%), forming 78%/77% of our/consensus full-year DPU forecasts. We note that office segment continued to be the star performer in 3Q, registering a 10.3% YoY growth in revenue to S$31.4m amid positive rental reversions. In particular, Suntec City Office achieved its second consecutive quarter of full occupancy. Leasing demand had also been strong, as evidenced by the average contracted rent of S$8.96 psf pm secured for the quarter (vs. S$8.71 in 2Q). On its Suntec City AEI, Suntec REIT reiterated that the Phase 1 works is on schedule for completion by 2Q13. We understand that pre-commitment for Phase 1 NLA improved to 71.2% from 58.5% in 2Q, and projected ROI of 10.1% remains on track. We are upgrading Suntec REIT to BUY with a revised fair value of S$1.70 (S$1.45 previously).

Better-than-expected 3Q results
Suntec REIT delivered a good set of 3Q12 results, in our view. Despite the partial closure of Suntec Singapore and Suntec City Mall for Phase 1 of the asset enhancement works (AEI) and divestment of Chijmes, NPI and distributable income showed only a 19.5% and 6.3% YoY decline to S$38.4m and S$52.8m respectively. DPU, on the other hand, dipped 7.2% to 2.35 S cents, coming in ahead of our projection. For 9M12, DPU totalled 7.164 S cents (-3.9%), forming 78%/77% of our/consensus full-year DPU forecasts. No proceeds from Chijmes sales, we note, were used to cushion the fall in 3Q DPU.

Sturdy scorecard from office segment
The office segment continued to be the star performer in 3Q, registering a 10.3% YoY growth in revenue to S$31.4m amid positive rental reversions. In particular, Suntec City Office achieved its second consecutive quarter of full occupancy. This helped to maintain the overall office occupancy at 99.9%. Leasing demand had also been strong, as evidenced by the average contracted rent of S$8.96 psf pm secured for the quarter (vs. S$8.71 in 2Q). With only 1.6% and 19.7% of its total office leases expiring in FY12 and FY13, we expect its office performance to remain positive, which should alleviate the weakness at its retail segment (-25.3% in 3Q revenue).

Upgrade to BUY
Suntec REIT also updated that it had completed all its refinancing needs for 2012, having obtained a 5-year facility to refinance its S$200m loan due Oct 2012. On its Suntec City AEI, Suntec REIT reiterated that the Phase 1 works is on schedule for completion by 2Q13. We understand that pre-commitment for Phase 1 NLA improved to 71.2% from 58.5% in 2Q, and projected ROI of 10.1% remains on track. We now incorporate the positive developments into our model. Rolling our valuation to FY13, our fair value rises from S$1.45 to S$1.70. Upgrade Suntec REIT to BUY from Hold on attractive upside. The stock is also trading at the lowest P/NAV of 0.81x among its comparable peers in the S-REIT sector, which we view is unwarranted given its quality assets, strong management and growth potential.

Frasers Commercial Trust

OCBC on 29 Oct 2012

Frasers Commercial Trust (FCOT) reported a strong set of 4QFY12 results that were within our expectations. FCOT also announced the completion of divestment of its Japan properties, after months of market anticipation. We view the transaction positively because the divestment would improve its portfolio occupancy and weighted average lease to expiry. More importantly, gearing ratio is expected to drop from 36.8% to 28.6%, with no debt maturing until FY15. This will significantly strengthen its financial position and flexibility, and aid FCOT in seeking the release of two properties from its securitized pool. Regarding the space vacated by MMC at China Square Central (CSC), FCOT also updated that 76% of the space has been re-leased, including 49,000 sqft by GroupM starting Apr 2013. Going forward, FCOT intends to embark on Phase 2 of refurbishment works at CSC by end-2012, which should further enhance its positioning. We are positive on FCOT’s transformation, strong execution and growth potential in FY13. Maintain BUY on FCOT with an unchanged fair value of S$1.31.

Strong 4QFY12 results
Frasers Commercial Trust (FCOT) reported its 4QFY12 results last Thursday. NPI grew by 8.7% YoY to S$26.5m, while distributable income jumped 17.3% to S$11.3m. The strong growth came on the back of higher rental contribution from Central Park and an increased stake in Caroline Chisholm Centre. DPU for the quarter stood at 1.75 S cents (+15.1% YoY) and is consistent with our 4Q estimate of 1.76 S cents (consensus: 1.86 S cents). For FY12, DPU amounted to 6.69 S cents (+16.3%), translating to a 5.6% yield. Starting from FY13, FCOT will commence quarterly distributions. Hence, unitholders will receive its final semi-annual distribution for 2HFY12.

Divestment of Japan properties
FCOT also announced the completion of divestment of its Japan properties, after months of market anticipation. Total consideration was a nominal JPY4 as the holding vehicles for the properties were at an aggregate net liability of S$4.9m. Nevertheless, we view the transaction positively because 1) the Japan properties have been recording weak performance, 2) the divestment would improve portfolio occupancy to 94.9% from reported 93.8%, and 3) weighted average lease to expiry would be extended to 5.0 years from 4.7 years. More importantly, gearing ratio is expected to drop from 36.8% to 28.6% (including partial prepayment of its AUD and SGD loans), with no debt maturing until FY15. This will significantly strengthen its financial position and flexibility, and aid FCOT in seeking the release of two properties from its securitized pool.

Maintain BUY
Regarding the space vacated by MMC at China Square Central (CSC), FCOT also updated that 76% of the space has been re-leased, including 49,000 sqft by GroupM starting Apr 2013. Going forward, FCOT intends to embark on Phase 2 of refurbishment works at CSC by end-2012, which should further enhance its positioning. We are positive on FCOT’s transformation, strong execution and growth potential in FY13. We re-jig our forecasts to incorporate the developments, but our fair value is unchanged at S$1.31. BUY.

Neptune Orient Lines

OCBC on 29 Oct 2012

Neptune Orient Lines (NOL) finally reported a profitable 3Q12 after six consecutive quarterly losses. Its revenue grew 4.0% YoY to US$2.3b (vs. +6% forecast) on higher volumes while its core EBIT improved to US$74m – a much better showing versus–US$72m in 3Q11 and marginal gains of US$16m in the previous quarter. The better performance came largely on the back of significant cost savings from its Efficiency Leadership Programme (ELP) as freight rates remained lacklustre despite the peak season impact. With this improved result, we narrow our net loss projections for FY12 as we anticipate 4Q12 rates to hold up well, capacity management efforts by the industry to continue, and bunker fuel rates to remain capped at current levels. Maintain BUY with an unchanged fair value estimate of S$1.38.

Back in black
Neptune Orient Lines (NOL) finally reported a profitable 3Q12 after six consecutive quarterly losses. Its revenue grew 4.0% YoY to US$2.3b (vs. +6% forecast) on higher volumes while its core EBIT improved to US$74m – a much better showing versus–US$72m in 3Q11 and marginal gains of US$16m in the previous quarter. The better performance came largely on the back of significant cost savings from its Efficiency Leadership Programme (ELP) as freight rates remained lacklustre despite the peak season impact. NOL announced a US$50m PATMI, against a loss of US$91.1m the same period a year ago. 

Cost savings at 72% FY12 target
On a YTD basis, NOL's ELP has saved the Group US$360m, well on its way to achieve its US$500m target for the year. Although the bulk of the programme (~44%) is targeted at bunker-related costs, it is - in itself - a capacity issue as well. For instance, by utilizing fewer but larger and more fuel-efficient vessels, NOL reduced fuel consumption cost by 8% even with a 3% increase in volume for 9M12. 

Sale of HQ to Fragrance
In a separate announcement, NOL agreed to sell its building at Alexandra Road to the Fragrance Group for S$380m, slightly below estimates from initial media reports of ~S$400m. The sale is expected to be completed by Feb 2013, and NOL will lease back the property till end-Jun 2014. Including transaction fees, the gains from this sale is approximately US$196m.

Still net loss for FY12 but signs promising; maintain BUY
As demand remains weak, managing container shipping capacity is still the main driver for maintaining profitability, and collective efforts thus far - e.g. withdrawal of routes - are paying off slowly. With 29 chartered vessels expiring between 4Q12 and 2014, NOL is in an optimal position to manage capacity more effectively. As for rates, although NOL is now in the seasonally weaker 4Q12, recent data from the Shanghai Containerized Freight Index has been encouraging with only slight dips in freight rates across the main trade routes (with the exception of Asia-Europe). Maintain BUY with an unchanged fair value estimate of S$1.38.

Ezra Holdings

OCBC on 29 Oct 2012

Ezra Holdings reported a 49% YoY rise in revenue to US$326.3m but saw a 41% decrease in net profit to US$7.3m in 4QFY12, such that full year net profit of US$65m was ~15% below our full year estimate. Core net profit of US$15.7m accounted for 90% of our estimate. This was partly due to higher administrative expenses and a higher tax rate. We expect admin expenses to remain elevated going forward. On a more positive note, management expects an increase in margins in FY13 as offshore support and subsea vessel utilisation rises, along with higher margins for new contracts. The group has a total bid book of US$4.4b, in which a significant portion is expected to be awarded in FY13. After adjusting our estimates and accounting for the listing of Triyards, our fair value estimate for Ezra drops to S$1.30. Maintain BUY.

Earnings below; impacted by admin costs and tax
Ezra Holdings reported a a 49% YoY rise in revenue to US$326.3m but saw a 41% decrease in net profit to US$7.3m in 4QFY12, such that full year net profit of US$65m was ~15% below our full year estimate. Core net profit of US$15.7m accounted for 90% of our estimate of US$17.4m. This was partly due to significantly higher administrative expenses in the quarter – the group incurred US$43m admin costs in 4QFY12 vs US$28m in 4QFY11. The tax rate of 25% in FY12 was also higher than 18.1% in FY11 due to withholding tax expenses incurred by vessels in certain geographical regions.

Staff costs to remain elevated, but there are other positives too
The high administrative expenses were mainly due to geographical expansion of the subsea services division and higher personnel cost to support Ezra’s growing business. Management believes that admin expenses will stay around the US$40-45m range going forward, higher than previously guided. On a more positive note, the group expects an increase in margins in FY13 as offshore support (FY12: 90%, FY13F: 95%) and subsea (FY12: ~70%, FY13F: ~89%) vessel utilisation rises, along with higher margins for new contracts compared to those secured previously.

US$4.4b total bid book; 30-40% hit rate
Ezra’s subsea net order book stands at about US$700-800m, excluding new projects won but not yet announced due to client agreements. The group has a total bid book of US$4.4b, in which a significant portion is expected to be awarded in FY13. Management expects a success rate of 30-40%. Meanwhile the listing of Triyards resulted in our fair value estimate for Ezra to drop from S$1.48 to S$1.40 previously. After tweaking our estimates to account for higher administrative costs (~US$46m/quarter in FY13) and incorporating a tax rate of 17% (higher than management’s guidance of 15%), our fair value estimate slips further from S$1.40 to S$1.30. Maintain BUY.

Starhill Global REIT

Kim Eng on 30 Oct 2012

3Q/9M 12 earnings inline. 3Q12 revenue at SGD46.3m (flat QoQ, +5% YoY), was 25% of ours consensus estimate. 9M12 revenue at SGD138.6m (+3% YoY), was 75% of ours consensus estimate. 3Q12 DPU at 1.11 SG- cts (+2.8% QoQ, +11% YoY) was 26% of ours and consensus estimates. 9M12 DPU at 3.26 SG-cts (+5% YoY) was 76% of ours and consensus estimates. 

Wisma Atria harvesting upside. Wisma’s AEI is completed in 2Q12 with all Orchard road fronting stores commencing business. It was officially relaunched on 6 Sep and enjoyed a +2.7% QoQ and +18.6% YoY increase in retail revenue on strong rental reversion and full committed occupancy. According to our estimates, average passing rent continues to scale from SGD34.29 psf/mth last quarter to SGD35.04 psf/mth.  

Portfolio review. Wisma’s retail and office occupancy were at 100% and 97.7% from 99.5% and 99% last quarter respectively. Ngee Ann City retail maintained at full occupancy while Ngee Ann City office occupancy remains flat at 98%. In Kuala Lumpur, H&M has opened its first flagship store of 35,000 sq ft in Lot 10, bringing new excitement to the mall. We also noted that the Renhe Spring Zongbei’s revenue was down 12.3% QoQ and 11.1% YoY. Management attributed this to the softening of the retail market in China for the mid to high end luxury segment.   

Toshin rental review.  The Court application had concluded with the Court of Appeal judgment announced on 28 Aug. The President of the Singapore Institute of Surveyors and Valuers is in the process of designating the 3 independent valuers required for the rent valuation. In the meantime, Toshin has exercised its option to renew NAC retail for another 12-year term, expiring in 2025, thus lowering the lease expiry in 2013 from 89.6% of gross rent in 1Q12 to current 3.8%. The next rent review will be in 3-years time. Toshin constitutes 85.2% of NAC retail gross rent as at 30 Sep 2012 and is SGREIT’s largest tenant (18.8% of portfolio gross rent). 3Q12 average passing rent at NAC retail stays at depressed levels of SGD13.69 psf/mth from our estimates. We expect marginal increment until the next rent review.

Investment thesis intact. SGREIT’s key assets are in the coveted Orchard Road area, where tight supply and the entry of new international retailers should give it greater bargaining power in terms of leasing its space. We continue to like SGREIT for the rental upside at Wisma Atria  and income stability in Malaysia and Australia. At 5.7% FY13F yield and 395 bps yield-spread, we reiterate BUY with a DDM-derived TP of SGD0.85. 

Courts Asia

Kim Eng on 30 Oct 2012

Familiar household name. Courts Asia, a leading electrical and IT products and furniture retailer in Singapore and Malaysia, has relisted on Singapore’s main board after being privatised a few years ago. The group has some big plans up its sleeve. It plans to grow retail space by 11.6% pa, or 140,000 sq ft on average, in Singapore (ie, one store on average) and Malaysia (ie, six stores on average). It also aims to break into a new market by 2014, namely, East Jakarta in Indonesia. Interestingly, Courts Asia has reinvented itself not only as an electronics retailer, but also a short-term financier.

Solving a credit problem. Asia Retail Group, backed by Baring Private Equity Asia and Topaz Investor Worldwide, took Courts Singapore and Courts Malaysia private separately between 2007 and 2009. According to management, Courts was then grappling with credit collection woes in Malaysia. Courts Asia solved the problem by implementing a stringent credit approval system and successfully slashed the delinquency rate in its Malaysian companies to 9.6% in 2012 from 15.4% in 2007.

Undertaking securitisation. Through its in-house credit facility, Courts Asia is able to internalise the service fees. These charges accounted for 16.5% of total sales in FY3/12. To keep risks to a minimum and improve cash flow, the group has undertaken a securitisation programme each in Singapore and Malaysia. In Singapore, 70% of the eligible receivables will be securitised after a stringent check by the bank. In Malaysia, Courts Asia will send its accounts receivable statement to both a bank and a credit rating agency. Typically, 53% of the eligible receivables will be allowed to be drawn down. Currently, SGD106m are drawn down in Singapore and SGD104m in Malaysia, with overall net gearing at 65.2%.

Fair valuations. The stock is trading at a historical FY3/12 PER of 10.2x and P/BV of 1.8x. Courts Asia has committed to a fixed dividend payout of 30% of its net profit for two years, distributed on a semi- annual basis. This translates to a 2-3% dividend yield.

Singapore Banks

Kim Eng on 30 Oct 2012

Maintain Underweight. Bank stocks have done well thus far, with the FSTFN (FTSE Straits Times Financials Index) up 28% YTD vs FSSTI’s 16% gain. This undoubtedly flies in the face of our Underweight on the sector, but as it stands, our call has been a macro one and we continue to believe that headwinds will continue to buffet the economy, increasing risk to banks’ earnings amid a challenging environment. A near-term bounce in share prices is likely due after recent sell-offs but we would recommend that investors continue to lighten their load and maintain our SELL calls on UOB and DBS, and HOLD call on OCBC. 

Reporting starts. DBS kicks off the 3Q12 season with its results release on 1st Nov. This will be followed by UOB and OCBC on 7th Nov and 9th Nov respectively. Our current forecasts assume an aggregate 4% QoQ dip in 3Q12 earnings, but YoY growth would still be a decent 16%. This would lift aggregate 9M12 growth to 16% YoY as well. We expect NIMs to compress domestically on higher funding costs, while regionally, OCBC and UOB could see NIM pressure in Malaysia. We think UOB’s non-interest income may come in weaker in 3Q after two particularly strong quarters, and thus expect a larger 7% QoQ decline in 3Q earnings vs -2% QoQ for DBS and -4% for OCBC.

Challenging. Latest economic data point to a sluggish economy buffeted by exogenous factors, with the IPI in Sep contracting YoY & MoM for the second consecutive month. On the operating front, persistently low interest rates will likely cap any improvement in NIMs while loan growth domestically is likely to continue slipping, particularly as the impact from recent mortgage rulings begins to filter through.

Economic fundamentals still have a bearing on share prices, in our view, despite distortions from strong liquidity flows. We find a high 0.75x correlation between the YoY change in the IPI (3-month moving average) and the YoY change in the FSTFN (moved 3 months forward). This is indicative of a still strong relationship between Singapore’s economic fundamentals and movements in the financial index.

Valuations wise, Singapore banks trade at a prospective P/BV of just 1.2x, but this is very much reflective of the low 11.3% ROE that we project for 2013. 2013 average PER of 10.7x is just slightly lower than the ASEAN ex-Singapore average of 11.2x, despite earnings growth of just 6.1% in 2013 (down from 10.2% in 2012) vs 14.5% for the regional banks. Dividend yields of 3.8%-4.0% for this year are decent but a higher premium is warranted, in our view, given the risk of higher volatility to earnings ahead.

Frasers Commercial Trust

UOBKayhian on 29 Oct 2012

Results

·      Results in line. Frasers Commercial Trust (FCOT) reported 4QFY12 DPU of 1.75 S cents/ unit, up 15% yoy and in line with our forecast. 4QFY12 gross revenue was S$35.6m, up 17% yoy, due to higher revenue recognised from China Square Central (CSC) following the expiry of the master lease and higher contribution from Caroline Chisholm Centre (CCC) due to the completion of the other 50% interest in the property. 4QFY12 net property income (NPI) was S$26.5m, up 9% yoy due to higher income contribution from Central Park and CCC, slightly offset by lower income from CSC and Galleria Otemae.

·      Divests Japanese assets. FCOT has entered into a share transfer agreement with Yugen Kaisha Aoyama Sogo Accounting Office for the sale of 100% of the issued and outstanding shares of Frasers Commercial Tozai No.2 TMK (Tozai TMK) for JPY2 (less than S$1). Tozai TMK wholly-owns three properties in Japan, namely Galleria Otemae Building, Azabu Aco Buildingand Ebara Techno-Serve Headquarters Building.

Stock Impact

·      Japanese assets contributed 5.6% of NPI. The Japanese assets were divested as they no longer meet the long-term investment strategy of FCOT. Going forward, FCOT will exit from the Japan market and will focus primarily on the Singapore andAustralia markets. In 4QFY12, the three Japanese assets contributed 5.6% of FCOT’s total NPI. Based on FCOT’s financial statements as at 30 Sep 12, gearing will be reduced from 36.8% to 33.7% post divestment.

·      Partial debt repayment. Following the completion of the sale of KeyPoint, S$159.5m, or 44.6% of the total net proceeds of S$357.8m has been utilised to partially repay FCOT’s Singapore dollar- and Australian dollar-denominated term loans. We forecast expect FCOT’s gearing to decrease from 36.8% in FY12 to 33.1% in FY13.

·      CPPU redemption on the cards? In our view, FCOT could utilise the remaining S$198.3m from the sale of KeyPoint to partially redeem outstanding convertible perpetual preferred units (CPPUs), which are yielding 5.5% p.a.. 

Earnings Revision

·      Increased DPU forecast. We have increased our FY13F DPU forecast by 1.3% to 7.7 S cents. We have factored in interest savings from a partial redemption of CPPUs, which is offset by a decline in NPI due to the divestment of the Japanese assets.

Valuation

·      Re-iterate BUY with higher target price of S$1.35 (previously S$1.17), implying 12.5% upside. We reduce our required rate of return by 50bp from 8.2% to 7.7%, due to yield compression in the S-REIT sector and improving office dynamics.

CapitaRetail China Trust

OCBC on 25 Oct 2012

CRCT has announced the private placement of 57m new units, raising gross proceeds of ~S$86.1m. The private placement was upsized from the original offer of S$75.0m, due to strong demand. In connection with the private placement, the manager of CRCT intends to declare an advanced distribution of CRCT’s distributable income for the period from 1 Jul to 1 Nov 2012, the day immediately prior to the date on which the new units will be issued, to existing unitholders of CRCT. The new units will not be entitled to the advanced distribution. The issue price of S$1.51 per new unit represents a discount of ~5.8% to CRCT’s adjusted volume weighted average price of S$1.603 per unit on the full market day on 24 Oct 2012 and subtracting the advanced distribution of approximately 3.22 S cents per unit. We reduce our fair value from S$1.71 to S$1.56 and downgrade CRCT from Buy to HOLD.

Private placement 
CRCT has announced the private placement of 57m new units, raising gross proceeds of ~S$86.1m. The private placement was upsized from the original offer of S$75.0m, due to strong demand from over 30 existing and new investors from Asia, the United States and Europe. The issue price of S$1.51 per new unit represents a discount of ~5.8% to CRCT’s adjusted volume weighted average price of S$1.603 per unit on the full market day on 24 Oct 2012 and subtracting the advanced distribution of approximately 3.22 S cents per unit (as explained below). The 57m new units will bring the total number of issued and issuable units up to ~749m.

Advanced distribution of ~3.22 S cents
In connection with the private placement, the manager of CRCT intends to declare an advanced distribution of CRCT’s distributable income for the period from 1 Jul to 1 Nov 2012, the day immediately prior to the date on which the new units will be issued, to existing unitholders of CRCT. The new units will not be entitled to the advanced distribution. The next distribution will comprise CRCT’s distributable income for the period from the day the new units are issued, being 2 Nov, to 31 Dec 2012. Half-yearly distributions will resume thereafter. The books closure date for the advanced distribution is 1 Nov 2012 at 5 p.m. and the advanced distribution will be paid on or around 30 Nov 2012.

Increasing strength of balance sheet 
The manager of CRCT says that the private placement strengthens the balance sheet and provides greater capacity for potential growth opportunities. With the placement, the debt-to-asset ratio declines from 30.6% as of 30 Sep 2012 to ~29%. 

Downgrade to HOLD
We adjust our model for the private placement and roll forward our DDM valuation to FY13. We reduce our fair value from S$1.71 to S$1.56 and downgrade CRCT from Buy to HOLD on valuation grounds. We estimate a FY13 distribution yield of 5.4%.

Lippo Malls Indonesia Retail Trust

OCBC on 25 Oct 2012

LMIRT has announced the proposed acquisitions of two retail properties, Pejaten Village, located in Jakarta, and Binjai Supermall, located in Binjai, North Sumatra. The purchase consideration for Pejaten Village is IDR748.0b (~S$96.0m). The purchase consideration for Binjai Supermall is IDR237.5b (~S$30.5m). Apart from the financing the acquisitions from the proceeds raised from the issuance of S$250m worth of notes in early Jul, LMIRT will need to raise additional funds. These two proposed acquisitions come shortly after the announcement of the proposed acquisitions of four properties on 10 Oct. The completion of the acquisitions of Palembang Square Extension and KJI took place on 15 Oct, half a month earlier than what we expected. Adjusting our model, we raise our fair value from S$0.45 to S$0.47, and maintain our HOLD rating on LMIRT.

Two more properties
LMIRT has announced the proposed acquisitions of two retail properties, Pejaten Village, located in Jakarta, and Binjai Supermall, located in Binjai, North Sumatra. As at 30 Jun, the occupancy rates are 95.2% and 91.4% respectively. The purchase consideration for Pejaten Village is IDR748.0b (~S$96.0m), a 12.6% discount to the average of its independent valuations. The purchase consideration for Binjai Supermall is IDR237.5b (~S$30.5m), 5.2% less than the average of its independent valuations. Binjai Supermall is the only mall in Binjai City, which serves as a transit point between Medan, the largest city in Sumatra, and Aceh, where both have high population densities. These two transactions would be interested party transactions.

Slew of acquisitions
The two proposed acquisitions come shortly after the announcement of the proposed acquisitions of four properties – Palembang Square, Palembang Square Extension, Tamini Square and Kramat Jati Indah Plaza (KJI) – on 10 Oct. The completion of the acquisitions of Palembang Square Extension and KJI took place on 15 Oct, half a month earlier than what we expected. We continue to expect that the acquisition of Palembang Square and Tamini Square will be completed on 1 Nov 2012. Including the aggregate purchase consideration of ~S$180.7m and the acquisition fee payable to the manager, as well as professional fees and other expenses, the total acquisition cost for these four properties is expected to be S$188.1m. 

Adjusting our model
Apart from financing the acquisitions from the proceeds raised from the issuance of S$250m worth of notes in early Jul, LMIRT will need to raise additional funds. We assume ~S$60m in debt fundraising on 1 Jan 2013 and assume that the proposed acquisitions of Pejaten Village and Binjai Supermall will be completed on the same day. We had previously assumed that any new acquisitions would be completed on 1 Apr 2013.

Raise FV, maintain HOLD
Adjusting our model, we raise our fair value from S$0.45 to S$0.47, and maintain our HOLD rating on LMIRT.