Starhill Global REIT

OCBC on 30 Jan 2013

Starhill Global REIT’s (SGREIT) 4Q12 results came in within our expectations. SGREIT’s Singapore properties contributed 63.0% to 4Q revenue, higher than the 62.3% contribution seen in prior quarter. This was partly fuelled by strong performance from Wisma Atria’s retail segment, which saw its NPI jump 23.5% to S$10.3m amid positive rental reversions, and also a 10.5% growth in Ngee Ann City office segment on higher occupancy and higher secured rentals. Looking ahead, SGREIT is exploring the possibility of an asset redevelopment of Plaza Arcade and David Jones Building to reap any potential synergies between the two buildings. On its capital management front, management is in active discussions with banks to refinance its term loan maturing in Sep, which we believe may lead to improved debt profile and interest savings. We now factor in Plaza Arcade acquisition into our model and roll our valuations to FY13. This bumps up our fair value to S$0.95 from S$0.84 previously. Maintain BUY.

Robust growth in DPU
Starhill Global REIT’s (SGREIT) 4Q12 results came in within our expectations. NPI grew by 2.9% YoY to S$37.5m due primarily to strong contribution from its Singapore portfolio. DPU rose at a faster pace of 11.9% to 1.13 S cents on the back of lower interest costs and lower tax expenses. This set of results almost coincides with our quarterly NPI forecast of S$37.1m and DPU projection of 1.10 S cents. We note that ~S$0.6m from the distributable income will be retained for working capital purposes. For the full-year, DPU amounted to 4.39 S cents, up 6.6%. This translates to a FY12 DPU yield of 5.2%.

Local portfolio overcame softness from overseas
SGREIT’s Singapore properties contributed 63.0% to 4Q revenue, higher than the 62.3% contribution seen in prior quarter. This was partly fuelled by strong performance from Wisma Atria’s retail segment, which saw its NPI jump 23.5% to S$10.3m amid positive rental reversions, and also a 10.5% growth in Ngee Ann City office segment on higher occupancy and higher secured rentals. As a result, the strength from the local scene more that offset the weakness seen across all its overseas assets: Japan (-4.7% in NPI due to weaker JPY), Chengdu (-13.9% due to higher competition and weaker retail market) and Australia (-9.0% due to weaker AUD and vacancies between tenancies).

Maintain BUY
Looking ahead, SGREIT is exploring the possibility of an asset redevelopment of Plaza Arcade and David Jones Building to reap any potential synergies between the two buildings. On its capital management front, management is in active discussions with banks to refinance its term loan maturing in Sep, which we believe may lead to improved debt profile and interest savings. SGREIT also updated that valuers’ work on the rental valuation for Toshin master lease at Ngee Ann City is expected to be finalised by 1Q13. We now factor in Plaza Arcade acquisition and roll our valuations to FY13. This bumps up our fair value to S$0.95 from S$0.84 previously. Maintain BUY.

CDL Hospitality Trusts

OCBC on 30 Jan 2013

CDL Hospitality Trusts (CDLHT) reported 4Q12 results that were generally in line with ours and consensus estimates. Revenue grew by 1.4% YoY to S$38.3m, and net property income rose by 0.2% YoY to S$35.6m. RevPAR for the Singapore hotels was flat YoY in 4Q12 at S$205 (excludes Studio M Hotel, which was acquired on 3 May 2011). For 1Q13, management noted that apart from stiffer competition, there will be the absence of the bi-annual Singapore Airshow and additionally, CNY will fall later this year (Feb instead of Jan), possibly delaying the seasonal pick-up in corporate travel. Weaker accommodation demand by corporates and leisure travellers is likely over the next 12 months. We maintain our fair value estimate of S$1.93 and HOLD rating on CDLHT.

4Q12 in line 
CDL Hospitality Trusts (CDLHT) reported 4Q12 results that were generally in line with ours and consensus estimates. Revenue grew by 1.4% YoY to S$38.3m, and net property income rose by 0.2% YoY to S$35.6m. For 4Q12, NPI contribution from the Australia hotels declined 3.0% YoY to S$4.3m due to translation loss arising from the weaker AUD. CDLHT recorded a revaluation gain of S$15.0m on its properties, which was largely due to its Singapore properties. 4Q12 DPU of 2.90 S cents was down 1.4% YoY. FY12 DPU totaled 11.32 S cents, up 2.4% YoY and giving an annualised distribution yield of 5.7% based on the closing price on 29 Jan 2013. 

Full year RevPAR record
RevPAR for the Singapore hotels was flat YoY in 4Q12 at S$205; occupancy was up 0.8ppt at 89.4% while average daily rate fell 1.3% YoY to S$229 (excludes Studio M Hotel, which was acquired on 3 May 2011). Management indicated that travellers remained cautious about their expenditure due to the weak global economic climate, and MICE business was affected too. For FY12, RevPAR excluding Studio M Hotel grew by 3.3% to S$211, a record high. Our assumptions turned out to be fairly accurate; we had assumed 3.2% YoY RevPAR growth for the Singapore hotels.

Quiet outlook for SG hotels
In the first 27 days of Jan 2013, the RevPAR for the Singapore hotels (excluding Studio M Hotel) increased by 0.9% YoY. For 1Q13, management noted that apart from stiffer competition, there will be the absence of the bi-annual Singapore Airshow and additionally, CNY will fall later this year (Feb instead of Jan), possibly delaying the seasonal pick-up in corporate travel. Weak accommodation demand by corporate and leisure travellers is likely over the next 12 months. The proposed acquisition of Angsana Velavaru Maldives is expected to be completed around the end of Jan 2013. Gearing post-acquisition will be healthy at ~27.9%.

Maintain HOLD
We maintain our fair value of S$1.93 and HOLD rating on CDLHT.

United Engineers

Kim Eng on 31 Jan 2013

The fight for gold on Chinese ground. United Engineers has thrown in its bid envelope for WBL and sets the stage up for a counter response from Straits Trading Company as the former’s offer is significantly more aggressive than the latter’s. Even at SGD4.00 however, there could be upside for WBL as our rough table napkin calculation shows a potential SGD5.04-5.59 SOTP value for WBL. Financially, it would appear that STC is better placed than UE to pay more for WBL. Regardless of how things turn out however, OCBC is definitely playing a more aggressive role in unlocking the value of its non-core assets, as originally speculated by us. After a stellar run, UE may consolidate for now until the saga completes but the stock remains a BUY with a long term TP of SGD4.02.

United Engineers takes on Straits Trading for WBL prize. United Engineers has launched a takeover for WBL for SGD4.00 a share, higher by 19% than Straits Trading’s (STC) competing cash offer of SGD3.36/share and 15% above WBL’s book value of SGD3.48. UE is bidding in concert with OCBC, Great Eastern, and Lee Foundation. Together, they own 39% of shares including convertible bonds. UE also specifically highlighted that UE shareholders will still receive a final dividend SGD0.05 a share from WBL, unlike STC’s cash offer which does not include this dividend.

So how much is WBL really worth? The biggest question the market is probably asking now is what could WBL be worth? It is not covered by any broker in the market given its illiquidity and tight float, but it has been known for many years now that its claim to fame is a highly valuable China property portfolio acquired many years ago, and is still held at cost in its books. These property assets include properties under development, raw landbank as well as investment commercial properties in Sichuan and Liaoning provinces as well as Suzhou and Shanghai. Our rough back-of-the-envelope calculation for WBL’s SOTP value ranges from SGD5.04 a share to SGD5.59.

Could Straits Trading counterbid? The second biggest question is would there be a counterbid by STC? STC’s Chairman Chew Gek Khim, the granddaughter of ex-OCBC Chairman Tan Chin Tuan, certainly has shown her determination in wanting to take WBL, going to the extent of teaming up with two long-term funds to wrest control of 43% of WBL. Financially, it possibly has the capacity to raise its offer. Assuming it raises its bid to WBL’s pre-halt price of SGD4.20, STC’s net gearing of 0.44x will rise to 1.14x, which would still be lower than the 1.80x level that UE’s net gearing will rise to if it succeeds with a SGD4.00 offer.

OCBC shows its value-unlocking hand. After a stellar run since we initiated coverage in Dec 2012, UE’s share price may start to consolidate in the short term until the bid is over and the winner is known. In the long run however, this confirms our view that UE is shaking off its former dowdy image and turning more rowdy in raising shareholder value with OCBC’s aid. If it wins WBL, it would have the added allure of the China property angle despite a spike in gearing, and even it does not succeed, OCBC will continue to unveil its value-unlocking hand.

CDL Hospitality Trusts

Kim Eng on 31 Jan 2013

4Q/FY12 earnings inline. FY12 revenue at SGD149.5m (+6%) was 99% of ours and 100% of consensus estimate. 4QFY12 revenue at SGD38.3m (+6% QoQ, +1% YoY) was 25% of ours and 26% of consensus estimate. FY12 DPU at 11.32 SG-cts (+2%) was 99% of ours and 101% of consensus estimates. 4QFY12 DPU at 2.90 SG-cts (+7% QoQ, -1% YoY) was 25% of ours and 26% of consensus estimates. Aggregate leverage inched down to 24.9% from 25.5% last quarter, partly following revaluation gains (Post Maldives acquisition gearing ~27.9%), Average term of debt was also lengthened to 1.8 years (3Q: 1.6 years).

Portfolio review. Singapore 4Q12 hotel occupancy (excl. Studio M Hotel) at 89.4% was up 0.8ppt QoQ and YoY. Average Room Rate (ARR) at SGD229 was down 3% QoQ and 1.3% YoY. The corporate market, in particular, the meetings and conference business, was affected by the economic malaise, leading to the relatively flat performance. Many companies globally, as well as leisure travellers, continue to exercise caution in travel expenditure which will continue to weigh on the attendant accommodation demand in FY13. For FY12, average occupancy rate climbed 1.1 ppt to 89% and ARR increased 2.2% to SGD237. Orchard Hotel, however, suffered a 6% and 9% YoY drop in FY12 revenue and NPI respectively. Management attributed this partly to the loss of weekend crowd to the Marina Hotels. It also guided that 1Q13 performance for Singapore Hotels will be negatively affected by the absence of the biannual Singapore Airshow as well the CNY falling later this year. The corporate travel momentum, which usually picks up in Feb after the holiday season, may be disrupted due to CNY falling in Feb this year as compared to Jan last year.

Expect slower tourism growth amidst a more competitive landscape. CDLHT derived ~81% of revenue from Singapore. We remain cautious of the impending supply of 11,370 hotel rooms (incl. those under construction and with WP/PP; ~26% of gazette stock) in 2013-2016, of which 3,766 rooms will complete in 2013 (~9% of gazette stock). We expect CDLHT’s SG hotel occupancy (excl. Studio M Hotel) to drop to 87% in 2013 and RevPAR to fall to SGD208 from SGD211 last year. We keep our visitor arrivals forecast intact with 14.2m and 16.2m arrivals in 2012 and 2015 respectively.

Maldives acquisition to complete soon. There was a one week delay in getting the Maldives’ Ministry of Tourism approval for the acquisition of Angsana Velavaru. Nonetheless, CDLHT expects the acquisition to complete in the next few days. With its relatively low gearing, management continues to source for acquisitions in attractive overseas markets such as Japan and Dubai. Reiterate HOLD with TP of SGD1.98.

SATS Ltd

Kim Eng on 31 Jan 2013

Downgrade to HOLD on valuations, 3Q a weak peak. SATS reported 3Q results which were slightly below expectations, as 9MFY3/13 PATMI of SGD138.6m comprised only 71% of our full-year estimates. We downgrade SATS to a HOLD premised on its share price run-up, which would have netted investors a cool 52% total return (including SGD0.26 of dividends) following our upgrade just over a year ago, as well as trimmed forecasts which imply a slightly lower Target Price of SGD3.03. We believe SATS is fairly valued at current levels, while existing investors continue to enjoy dividend yields of ~5.5%.

3Q affected by weak freight, cost increases. 3QFY3/13 revenues were only up 2% QoQ, which hardly made for an expected seasonal peak. This was attributed largely to a poor air freight demand environment. 3QFY3/13 PATMI was 7% down QoQ, as cost increases (+3.5% QoQ) outpaced revenue growth.
Margins under pressure, but still holding up. Margins held up in 3QFY3/13: on a YoY basis PBT Margins improved 0.3 ppts, while PATMI margins were relatively flat (increasing 0.1 ppts). 9MFY3/13 margins were still marginally down YoY.

Gaining market share. Another bright spot for SATS was the outperformance in operational indicators versus those of Changi Airport in the 3QFY3/13 period. In terms of passengers, aircraft, and freight handled, SATS performed better in terms of YoY growth which implies a gain in market share.

Decent yield despite price run-up, HOLD. The relatively disappointing 3Q results, in addition to the stellar share price run-up have led us to downgrade SATS to a HOLD based on valuations. We have also trimmed our FY3/13-15 profit forecasts by 6-8%, primarily from cost pressures we think might persist going forward. Target Price is accordingly adjusted to SGD3.03, as we maintain our forward PER valuation pegged at 1 SD above historical mean (17x FY3/14).

Olam

DMG & PARTNERS RESEARCH on 29 Jan 2013

OLAM will be releasing its Q2 FY13 results after the market close on Feb 7, 2013. Indications point to continued good volume growth for the food business.

However, we believe weakness persisted for the industrial commodity space, on the back of weak global economic growth and therefore soft demand for wood and cotton.

With Olam having secured five- year tenure debt funding of US$750 million, debt maturity is extended and liquidity improved. However, this comes with additional interest costs.

We are lowering our FY13 forecast and FY14 forecast earnings by 11 per cent and 18 per cent respectively to reflect the higher interest costs and likely weaker growth from a slower pace of acquisitions.

We roll over valuation to 10x FY14 EPS (from 12x FY13 EPS previously), and derive our new TP of $1.97. Our target PE is a discount to the historical average of 17x. We remain positive on the long-term prospects for Olam and believe investor interest will return as earnings continue to grow. Maintain "buy".

Higher interest expenses contributed to cut in earnings forecast. The effective bond cost is 8.08 per cent (or US$61 million) per annum, which factors in the 6.75 per cent coupon and 5 per cent initial discount.

We raised our FY14 forecast interest expense by 13 per cent to $626 million to reflect higher interest from this bond as well as possible future issuance of bonds to replace maturing ones.

In addition, we lowered our operating profit forecast to take into consideration a slower pace of acquisitions. All these contributed to our FY14 forecast net profit cut of 18 per cent.

Temasek's presence as a significant shareholder is a major positive. Temasek's stake in Olam equity and in the Olam bonds will go some way to allay investors' concerns on Olam's gearing and liquidity. Some investors are concerned with Olam's net gearing of 2.0x. But we note that the adjusted net gearing is 0.57x (adjustment for liquid assets).

Longer-term growth remains sound. Olam recorded a three-year (FY09-12) net contribution CAGR (compound annual growth rate) of 32 per cent, with the food CAGR of 38 per cent offsetting the weakness for the industrial raw materials. Food continues to form the bulk and accounted for 87 per cent of FY12 net contribution.

We remain optimistic on Olam's growth potential from this food space, which we believe remains unchanged despite the recent spate of developments. This is a key driver to our "buy" recommendation.

BUY

TRIYARDS Holdings

UOB-KAY HIAN RESEARCH on 29 Jan 2013

TRIYARDS Holdings (Triyards) is an offshore fabricator specialising in: (a) advanced construction and offshore support vessels (OSV), and (b) self-elevating units (SEUs), including liftboats.

Liftboats are self-propelled, self- elevating mobile platforms used for servicing fixed offshore installations. Triyards operates two yards in Vietnam and one fabrication facility in Houston, US.

Initiate coverage with a "buy"; target price of $1.11 represents 39 per cent upside. Our target price is pegged at 7.9x FY14 forecast PE, a 10 per cent discount to peers' average of 8.8x FY14 forecast PE, due to Triyards' shorter operating track record and lumpy profit recognition of Ezra's deepwater multi-lay construction vessel Lewek Constellation (Constellation), which comprises 17 per cent of FY14 net profit.

However, we see more room for valuation expansion as Triyards continues to increase profit contributions from third-party contracts. We forecast three-year core net profit CAGR (compound annual growth rate) (2012-15) of 19 per cent, excluding profit from the Constellation.

Triyards was spun out of Singapore-listed oil & gas services company Ezra Holdings (Ezra) via a 1-10 distribution-in-specie. Post listing by way of introduction, Ezra retains a 67 per cent stake in its listed subsidiary.

Triyards will continue to clinch shipbuilding and repair contracts from Ezra. Triyards is a proxy to the growing acceptance of liftboats internationally, being one of the few yards outside the US capable of building such vessels.

In the past, liftboats were used solely in the US Gulf of Mexico, but are now gaining traction internationally as the industry recognises liftboats as a safer and more efficient alternative to traditional work barges.

Triyards will embark on further growth by: (a) developing proprietary third-generation liftboat designs, (b) expanding ship repair capacity, (c) diversifying into new products such as high-speed aluminium commercial and patrol vessels, and (d) growing its equipment business and branding.

BUY

SMRT

OCBC on 30 Jan 2013

Although revenue growth continued unabated, SMRT’s 3Q13 results disappointed as higher operating expenses – namely staff costs and repair and maintenance expenses – hit harder than we had anticipated. With this poor set of results, FY13 is now on track to become the worst performing year in seven in terms of bottom-line performance. Going forward, management continues to advocate caution over weaker profitability to end FY13 as its hiring needs remain unfulfilled, and ongoing repairs and maintenance work will inflate operating expenses. Nonetheless, most of the negativity has already been priced in, and our fair value estimate of S$1.71 stays the same despite lowering our estimates. Maintain HOLD.

3Q13 results disappoint
SMRT’s 3Q13 results disappointed as higher operating expenses hit harder than we had anticipated. Although revenue growth came within our expectations (+5.0% YoY to S$281.7m) on higher ridership figures, a spike in staff and related costs (+18.2% YoY; +5.6% QoQ to S$98.5m) and repair and maintenance expenses (+29.1%; +3.3% QoQ to S$26.9m) eroded operating profit margin by 5.9 ppt from a year ago (3 ppt from 2Q13) to 11.4%. Consequently, net profit fell 31.2% YoY (-23.6% QoQ) to S$25.5m.

4Q13: the weakest quarter for FY13
With SMRT still seeking to add at least 350 more staff by end FY13 – and repairs and maintenance costs will continue to grow as emphasis on service standards and reliability remains paramount – we are likely to see operating expenses increase further to end the year with further compression on operating and net profit margins for 4Q13. 

Rhetoric unchanged
Management continues to caution over weaker profitability for FY13, and we agree wholeheartedly with this assessment. SMRT will also likely experience its worse FY since FY06. While there is some respite in the form of electricity and diesel hedges, there is still the overhang of possible senior management changes – and their impact on operational cohesion – as well as upcoming changes to their wage structure. 

Forecasts lowered but maintain HOLD
We lowered our projections for 4Q13 further on account of the higher operating expenses but our DDM (dividend discount model) derived valuation of S$1.71 remains unchanged. Ultimately, for all its bad press and mismanagement, SMRT still provides an essential service and its revenue growth will stay stable. Coupled with its need to reward shareholder loyalty – barring any drastic changes by its new CEO – we believe our target payout of 60% of PATMI remains achievable. Maintain HOLD.

Ascott Residence Trust

OCBC on 29 Jan 2013

Ascott Residence Trust (ART) has raised gross proceeds of S$150m through a placement of 114.9m new units at an issue price of S$1.305 per new unit. At the FY12 results briefing a few days ago, management stated that it is comfortable with gearing between 40-45%, hence even if the proceeds are used to pay off the debt that is maturing, we think the additional financial flexibility from the placement will likely be utilised over the longer run for yield-accretive acquisitions. That said, we will incorporate future acquisitions into our model if and when they are announced. As a result, we maintain our HOLD rating but reduce our FV from S$1.37 to S$1.36 due to the dilutive effect of this placement.

Private placement
Ascott Residence Trust has raised gross proceeds of S$150m through a placement of 114.9m new units at an issue price of S$1.305 per new unit, representing a discount of ~4.6% on the adjusted VWAP of S$1.3685 per unit for trades done on the SGX-ST on 28 Jan. The placement will increase ART’s free float from 51% to 55%. ART received participation from existing and new institutional investors from Asia, the United States and Europe. 

Use of proceeds
The proceeds will be used to fund potential future acquisitions, finance AEIs, repay existing debt and for general working capital. Assuming that the net proceeds of S$147.9m are used to repay existing debts, the private placement is expected to reduce ART’s aggregate leverage from 40.1% to 34.9%. As of 31 Dec 2012, S$167.8m of debt was due to mature in 2013 for ART. At the FY12 results briefing a few days ago, management stated that it is comfortable with gearing between 40-45%, hence even if the proceeds are used to pay off the debt that is maturing, we think the additional financial flexibility from the placement will likely be utilised over the longer run for yield-accretive acquisitions. That said, we will incorporate future acquisitions into our model if and when they are announced.

Advanced distribution
There will be an advanced distribution of between 0.59 cents and 0.63 cents per unit to existing unit-holders. The advanced distribution is taken from ART’s distributable income from 1 Jan 2013 to 5 Feb 2013, which is the day before the date on which new units will be issued. The next distribution will be for 6 Feb to 30 June 2013 and semi-annual distributions will resume thereafter.

Reduce FV to S$1.36
We maintain our HOLD rating but reduce our FV from S$1.37 to S$1.36 due to the dilutive effect of this placement.

Sheng Siong Group

OCBC on 29 Jan 2013

Despite having no significant developments since our last update report issued on 10 Dec 2012, Sheng Siong Group’s (SSG) share price has soared by more than 25%. We view this amazing appreciation as a result of the street playing catch-up ahead of SSG’s FY12 results release. While we expect a strong set of FY12 results – and have also adjusted our forward expectations accordingly to reflect our optimism, SSG’s recent price action has been far too exuberant and unsustainable (TTM PE of 33x), in our view. Even after fine-tuning our DCF model, our fair value only increases slightly from S$0.55 to S$0.58. Therefore, we urge caution in trading SSG at this point and recommend investors take some profit around current levels. Downgrade to HOLD.

Amazing start to the year
Despite having no significant developments since our last update report issued on 10 Dec 2012, Sheng Siong Group’s (SSG) share price has soared by more than 25%. We view this amazing appreciation as a result of the street finally factoring in SSG’s successful store expansion phase last year, and playing catch-up by raising its expectations for the company ahead of its FY12 results release.

FY12 results preview – a good year for SSG
SSG closed out FY12 with 33 stores (Gross Floor Area: +50K sf to 400K sf). SSG is on-track to at least match its best net-profit performance back in FY10, which included a S$9.4m gain from investments. Although its 4Q12 will experience a decline due to seasonal weakness and year-end stock count, we do not expect a stock count write-off of last year’s magnitude (a S$1.7m inventory write-off reduced gross profit margins by 1.2ppt). 

Forward projections already positive
We had previously upgraded SSG’s FY13/14 revenue growth to 10% on account of full-year contributions from the eight new stores opened in FY12. In addition, we factored in gross profit margin stability – as a result of minimal price competition amongst the Big 3 supermarket operators – and effective management of operating expenses i.e. salaries and wages through the introduction of more variable components. 

Downgrade to HOLD on valuation grounds
Even after fine-tuning our DCF model, our fair value estimate only increases slightly to S$0.58 from S$0.55 previously. Therefore, we downgrade SSG to HOLD on valuation grounds. While we continue to favour the company’s management and its growth prospects, its recent price action has been far too exuberant and unsustainable (TTM PE of 33x), in our view. We recommend investors take some profit around current levels, and wait patiently to re-enter at lower levels around S$0.55.

Marco Polo Marine

OCBC on 29 Jan 2013

Marco Polo Marine (MPM) reported a 38% YoY drop in revenue to S$15.2m but saw a 3% rise in net profit to S$4.5m in 1QFY13, such that the latter formed about 20% of our full year net profit estimate, within our expectations. The fall in revenue was mainly due to slower progress in newbuild orders, resulting in lower shipbuilding revenue. This was offset by higher ship repair turnover. Overall gross profit margin also increased from 25% in 1QFY12 to 39% in 1QFY13 with a higher proportion of ship repair revenue. Demand for larger AHTS vessels in Indonesia is expected to grow, and MPM is set to capitalise on this market opportunity. The group is still upbeat on the outlook for the ship repair business for the next 12 months, and growth is also expected from the offshore support vessel segment. Maintain BUY with S$0.56 fair value estimate.

1QFY13 results in line
Marco Polo Marine (MPM) reported a 38% YoY drop in revenue to S$15.2m but saw a 3% rise in net profit to S$4.5m in 1QFY13, such that the latter formed about 20% of our full year net profit estimate, within our expectations. The fall in revenue was mainly due to slower progress in newbuild orders, resulting in lower shipbuilding revenue. This was offset by higher ship repair turnover, which grew 75.5% to S$8.6m in 1QFY13. Ship chartering revenue fell by 5.2% to $5.5m with the mandatory docking of an offshore vessel. Overall gross profit margin, however, increased from 25% in 1QFY12 to 39% in 1QFY13 with a higher proportion of ship repair revenue (generally commands higher margins compared to ship building). 

Demand for larger AHTS vessels in Indonesia to grow
Indonesia currently has only five AHTS vessels that have at least 8000BHP – two belong to Wintermar Offshore (year built: 2011), two belong to Marco Polo Marine (year built: 2011), and the remaining one is more than thirty years old. According to management, there are increasingly more tenders of oil plots in certain areas of Indonesia such as Sulawesi where the waters are rougher and where demand for 8000BHP AHTS vessels is likely to be higher. 

Ship repair and OSV as growth drivers
The group is still upbeat on the outlook for the ship repair business for the next 12 months. Utilisation rates of its yards remain healthy; we believe it may be higher than the industry average of 80+%. Growth is also expected from the offshore support vessel segment – MPM is currently constructing a unit for its fleet, with plans for a second one. Maintain BUY with S$0.56 fair value estimate, still based on 8x FY13F EPS.

Starhill Global REIT

Kim Eng on 30 Jan 2013

4Q/FY12 earnings inline. SGREIT's FY12 DPU beats street estimates of 4.30 SG-cts with an upbeat payout of 4.39 SG-cts. FY12 revenue at SGD186m (+3%) was 100% of ours and consensus estimate. 4QFY12 revenue at SGD47.4m (+2% QoQ, +3% YoY) was 26% of ours and consensus estimate. FY12 DPU at 4.39 SG-cts (+7%) was 101% of ours and 102% of consensus estimates. 4QFY12 DPU at 1.13 SG-cts (+2% QoQ, +12% YoY) was 26% of ours and consensus estimates. Gearing inched down to 30.3% from 31.2% last quarter, following revaluation gains and depreciation of JPY. Net financing costs for 4QFY12 averaged 3.16% (3Q: 3.13%) with an average term of debt of 1.7 years (3Q: 1.5 years).

Wisma Atria retail 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 +1.7% QoQ and +21.4% YoY increase in 4Q12 retail revenue on strong rental reversion, and almost full occupancy (99.5%). According to our estimates, average passing rent continues to scale from SGD35.04 psf/mth last quarter to SGD35.82 psf/mth.

Portfolio review. Singapore properties contributed 63% of 4Q12 and FY12 revenue. Wisma’s retail and office occupancy were at 99.5% and 98.7% from 100% and 97.7% last quarter respectively. Ngee Ann City retail maintained at full occupancy while Ngee Ann City office occupancy remains flat at 98%. Despite 100% occupancy, Renhe Spring Zongbei's 4Q12 revenue was down 13% YoY, mainly due to lower revenue amidst increased competition and softening of retail market (esp. mid to high-end luxury segment).

Toshin rental review. With regards to the master lease in Ngee Ann City, three international licensed valuers have been appointed according to directions prescribed by the Court of Appeal. The valuers’ work on the rental valuation is expected to be finalised by 1Q13. Toshin constitutes 85.3% of NAC retail gross rent as at 31 Dec and is SGREIT’s largest tenant (18.8% of portfolio gross rent). 4Q12 average passing rent at NAC retail stays at depressed levels of SGD13.68 psf/mth from our estimates.

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. We also incorporated the Plaza Arcade acquisition (Perth), which we expect to complete by 31 Mar 2013, with yield-on-cost of 7.8%-8.6% from FY13-FY18 into our forecast. At 5.5% FY13F yield and 413bps yield-spread, we reiterate BUY with a DDM-derived TP of SGD0.90.

SMRT

Kim Eng on 30 Jan 2013

3Q results below expectations; SELL call reinforced. SMRT Corp (SMRT) reported 9MFY3/13 PATMI that comprised less than 70% of ours and consensus’ full-year FY3/13 estimates, as 3QFY3/13 PATMI fell 31.2% YoY to SGD25.5m. We had forecast cost increases to continue plaguing SMRT, led by staff, repair and maintenance costs, but not to the magnitude reported this quarter. SMRT remains a SELL, as its core transport business continues to be a drag on company profitability. Our Target Price is trimmed to SGD1.34, implying 20% downside.

No let-up on escalating operating costs. SMRT’s operating costs featured heavily in the disappointing profitability shown by the company this quarter. Repair and Maintenance costs led the way with a 29.1% YoY increase to SGD26.9m, caused by a larger transport fleet and increase in scheduled maintenance. Staff costs followed closely with an 18.2% YoY increase to SGD98.5m attributed to increased train and bus hiring as well as wage adjustments.

Only Taxis, Rentals showed profit improvement. The only bright spots in SMRT’s business segments this quarter were its taxi and commercial space rental businesses. The Taxi business was boosted by a 16% increase in revenues from a newer and larger hired-out fleet, improving operating profit by SGD1.9m (+174.7% YoY). The commercial space rental business improved SGD1.3m (+8.3% YoY) as a result of new and redeveloped spaces at various stations.

No light at end of tunnel yet, reiterate SELL. As SMRT’s core transport woes still see no sign of letting up, we reiterate our SELL call pegged to 15x FY3/14 PER. Our target price is trimmed to SGD1.34 as we adjust our FY3/14 forecasts downwards by 3% to account for further operating expense increases. We advise investors looking for transport-related yield plays to consider switching to other sectors like aviation services where industry fundamentals present a rosier environment than that currently facing the Singapore land transport operators.

Micro-Mechanics

UOBKayhian on 29 Jan 2013

Valuation

·          Micro-Mechanics (Holdings) Ltd. (MMH) is trading at 14.29x FY12 PE and 1.73x FY12 P/B.

·          CEO Christopher Reid Borch has a deemed and direct interest of 52.75% while COO Low Ming Wah has a deemed and direct interest of 5.13% in the group.

·          Share price catalysts include high dividend yield of 6.67% (based on last traded price) and positive contributions from its Custom Machining & Assembly (CMA) business.

Investment Highlights

·          Recovery of semi-conductor sector. Since the bottoming of chip sales in Feb 12, the semiconductor sector has seen a gradual recovery in sales. Yoy growth in chip sales also turned positive in Nov 12 after dropping into the negative territory in Jun 11.

·          Investment in CMA is ready to be reaped. Capex in CMA is near its final stages with no further investment expected in 2HFY13. The investment in the 24/7 machining line for CMA is expected to improve quality, reduce cycle time and reliance on skilled personnel. This will help to reduce cost and improve MMH’s competitiveness in this increasingly consumer-driven market. Management expects the 24/7 machining line to help improve CMA’s margins from 12.0% in 3QFY12 to as high as 30%. CMA currently contributes 13% of MMH’s total revenue.

·          Diversified customer base. With nine different markets representing 96% of MMH’s total revenue, MMH’s revenue stream is well-diversified. China andMalaysia remains the largest market for MMH, contributing 44% of the group’s total revenue. Sales growth in Europe, Thailand and Philippines are expected to continue driving MMH’s growth and further diversify its revenue stream.

·          High dividend yield. While the group does not have a dividend policy, it is committed to rewarding its shareholders. In FY09, despite being near breakeven, MMH paid out a dividend of 2 S cents per share. To date, MMH has distributed close to 30 S cents worth of dividends. MMH has announced an interim dividend of 1 S cent per share for 1HFY13. If MMH continues with its dividend payout of 3 S cents per share this financial year, this will translate to an attractive dividend yield of 6.67%.

·          Future plans. The group is planning to establish a 24/7 manufacturing line in Asia to increase productivity and reduce cost.

Financial Highlights

·          Although revenue has remained relatively stable for 1HFY13, the group recorded an 8.4% yoy increase in net profit. This is mainly due to an increase in level of automation and improvement in manufacturing processes.

Parkway Life Real Estate Investment Trust

CIMB RESEARCH on 26 Jan 2013

Q4/FY12 NPI (net property income) and DPU (distribution per unit) grew 6.1 per cent/7.6 per cent and 9.5 per cent/7.5 per cent y-o-y respectively, propped up by Japan and Malaysia acquisitions and rent review on Singapore hospitals.

Singapore and Japan NPI margins inched up last year to 95 per cent and 87 per cent (FY11: 94 per cent and 86 per cent), supported by higher rent from existing properties.

Forty-nine point seven million dollars of revaluation gains on investment properties were booked on incorporation of the latest consumer price index (CPI) increase on Singapore hospitals (+6 per cent revaluation gain to Singapore assets).

A weaker yen resulted in circa -14 per cent downward revaluation to Japan assets, but offset by matching yen-denominated liabilities.

The management continues to embark on Japan asset enhancement initiatives (AEIs), with the sixth AEI completed in Q4 generating ROI (return on investment) of 10 per cent.

We expect more of this to come, a positive, but for growth to be largely underpinned by rent adjustments on the back of inflation pressures in Singapore and on acquisitions.

While trading at a steep 1.5 times P/B, the stock is supported by the certainty of revaluation gains on the Singapore portfolio on the back of strong rental adjustments for the CPI-pegged leases for the next two to three years and normalised inflation rates thereafter.

FY12 dividend yield of 4.5 per cent and the potential for DPU growth of 6 to 8 per cent over FY13/14 warrants holding on to the stock, in our view. We maintain our "neutral" call on limited upside.

NEUTRAL

Singapore Post

OCBC on 28 Jan 2013

Singapore Post (SingPost) reported a 14.5% YoY rise in revenue to S$171.0m but saw a 5.1% fall in net profit to S$39.5m in 3QFY13. Excluding one-off items, underlying net profit rose 2.5% to S$39.8m in the quarter, in line with our expectations. The group saw strong revenue performance in international mail, logistics and retail; notwithstanding the fact that 3QFY13 was the festive season, it is still encouraging to see the 11.2% QoQ growth (vs average of 7.0% in 3QFY12, 3QFY11 and 3QFY10). As a stock, SingPost has rewarded shareholders with handsome returns while providing stability and ease of mind. As it is now trading close to our fair value estimate of S$1.23, we downgrade it to HOLD due to limited upside potential, unless earnings growth from its acquisitions proves to be better than expected.

3QFY13 results in line
Singapore Post (SingPost) reported a 14.5% YoY rise in revenue to S$171.0m but saw a 5.1% fall in net profit to S$39.5m in 3QFY13. Excluding one-off items, underlying net profit rose 2.5% to S$39.8m in the quarter. Results were in line with our expectations, such that 9M13 net profit accounted for 76.7% of our full year estimate. 

Strong revenue performance 
In the mail division, domestic mail volume continued to decline, registering the fifth quarter of lower mail volumes. However, strong growth in international e-commerce packets and contributions from Novation Solutions helped to boost mail revenue by 20.5% YoY. Excluding Novation Solutions, growth was still good at 15.1%. Logistics and retail also saw growth of 10.9% and 19.8%, respectively. Notwithstanding the fact that 3QFY13 was the festive season which generally brings in greater revenue, it is encouraging to see the 11.2% QoQ growth (vs +6.0% in 3QFY12, +7.9% in 3QFY11 and 7.2% in 3QFY10).

Focus on growth and cost pressures
We expect the focus going forward will still remain on cost management to contain inflationary pressures and rising labour related expenses, while pursuing growth initiatives. The group has been increasingly active in the M&A space, having spent a total of S$97m in its acquisition of General Storage Pte Ltd (which runs the Lock+Store self-storage business) and a 62.5% stake in a sea freight consolidator and freight-forwarder in the last two months.

Stock has done well; downgrading to HOLD
SingPost has done well after we upgraded it to BUY in early Jan last year. As a stock, SingPost has rewarded shareholders with handsome returns while providing stability and ease of mind. As it is now trading close to our fair value estimate of S$1.23, we downgrade it to HOLD. We look forward to SingPost’s transformation as it seeks more growth opportunities, but till then, we see limited upside potential unless earnings growth from its acquisitions proves to be better than expected.

Frasers Commercial Trust

OCBC on 28 Jan 2013

Frasers Commercial Trust (FCOT) delivered 1QFY13 DPU of 1.5832 S cents, up 4.6% YoY. This is congruent with our expectations, as the DPU met 22.2% of our full-year projection. Portfolio occupancy remained stable at 94.6% compared to 4QFY12 occupancy of 94.9%. For the rest of FY13, we note that 13.7% of its leases are due for renewal, with China Square Central (CSC) forming the bulk of lease expiry (8% of total income). As the average passing rent at CSC is lower than the spot market rents, we believe positive rental reversions may be achieved upon renewal. Going forward, we maintain our view that FCOT’s DPU will get further uplift going forward as it benefits from lower funding costs post refinancing of its debts and partial redemption of its CPPUs. We maintain BUY on FCOT with a higher fair value of S$1.48 (S$1.31 previously).

Consistent 1QFY13 showing
Frasers Commercial Trust (FCOT) released its 1QFY13 results last Friday. NPI fell by 6.9% YoY to S$22.9m due mainly to the disposal of KeyPoint and three properties in Japan. However, higher contribution from additional 50% interest in Caroline Chisholm Centre and lower interest costs helped to offset the loss of income from the divestments. As a result, distributable income and DPU grew by 6.9% and 4.6% YoY to S$10.3m and 1.5832 S cents respectively. The results were congruent with our expectations, as NPI and DPU met 25.2% and 22.2% of our respective full-year projections.

Healthy portfolio performance
Australia properties surpassed Singapore properties as the biggest income driver in 1Q, contributing 53.7% to NPI (Singapore: 45.1%). Portfolio occupancy remained stable at 94.6% compared to 4QFY12 occupancy of 94.9%. ~95k sqft of space was contracted, reflecting healthy tenancy activities within the office space. For the rest of FY13, we note that 13.7% of its leases (by gross rental income) are due for renewal, with China Square Central (CSC) forming the bulk of lease expiry (8% of total income). As the average passing rent at CSC (S$6.20 psf pm) is lower than the spot market rents, we believe positive rental reversions may be achieved upon renewal.

Further improvements expected; maintain BUY
Management updated that the Precinct Master Plan initiatives and asset enhancement works for CSC office tower are on track for completion and are expected to rejuvenate the area and make CSC an even more attractive office accommodation. FCOT now boasts a healthy gearing of 29.2% and improved financing costs of 3.3% (3.5% in 4QFY12) following the partial prepayment and refinancing of its debts. Together with the successful 47.6% redemption of CPPUs on 2 Jan, we maintain our view that FCOT’s DPU will get further uplift going forward. We keep our forecasts unchanged but bump up our fair value to S$1.48 from S$1.31 on lower cost of equity of 7.0% (7.8% previously) as we factor in an anticipated increase in investor risk appetite and the current low interest rate environment. Maintain BUY.

United Engineers

Kim Eng on 29 Jan 2013

Shaking off the past. Having further studied United Engineers’ acquisition of 79 Anson, a fully-tenanted commercial building that it announced in Dec last year, and its first foray into the CBD, we remain convinced that this is a good deal for UE, despite market concerns that it paid more than it should have for an older property when compared to Mapletree Commercial Trust’s recent acquisition of Mapletree Anson. UE can either raise below-market rental rates once a major lease expires in 2016, which would generate 17% upside to 79 Anson’s current rental income (11.8% of FY13 group EPS) or in a more adventurous scenario, redevelop the under-utilised building for more upside. More importantly, this is a major deal accounting for 42% of market cap, and it shows UE is waking from its sleep and making more market-savvy moves. BUY with RNAV-based TP of SGD4.02.

First foray in to the CBD. In December 2012, UEL announced that it has entered into a sale and purchase agreement with CPF Board and SEB Asset Management to purchase 79 Anson for SGD410m, or SGD2,028.8psf. With 19 floors of offices and 3 levels of parking, the freehold property has a total NLA of 202,092 sq ft. It is currently 99% tenanted, with Kellogg Brown & Root Asia Pacific (KBR) holding 33% of NLA. The building will be renamed UE Bizhub Tower.

Room to grow rental. Annualised FY12 EBIT of SGD11.1m implies a net rental of SGD4.60psf and net yield of 2.7%. In our view, there is room for rental growth. While it is unlikely for 79 Anson to reach MapleTree Anson’s rental rates at SGD7.30psf, CCT’s Twenty Anson just across the road commands a passing rent of SGD6.20psf and gross yield of 3.5%, which implies a possible 17% upside. Looking at a broader base, the Tanjong Pagar area’s market rate is commanding an average gross rental rate of SGD8psf.
Can also redevelop the whole building. Currently, 79 Anson’s NLA implies a 70% efficiency usage. The lease of 79 Anson’s anchor tenant, KBR, will expire in 2016, which may offer room for more possibilities of redevelopment then. For now, UEL has expressed intent to keep it as a long-term interest in building a more stable base of rental income.

Reiterate BUY. This purchase reinforces our view that UE is shaking off its past legacy headaches and is steamrolling ahead to build up its investment property portfolio, now worth over SGD2b. Maintain BUY with a TP of SGD4.02 (from SGD4.11 due to increased leverage to make this acquisition).

First REIT

OCBC on 25 Jan 2013

First REIT (FREIT) reported 4Q12 results which were within our expectations. Distributable income to unitholders in FY12 rose 4.8% to S$46.0m, and formed 98.8% of our forecast. DPU for FY12 was 7.26 S cents, versus 7.01 S cents in FY11, and translates into a yield of 6.8%. Looking ahead, we expect FREIT to aggressively seek inorganic growth opportunities in Indonesia, its core market. We raise our fair value to S$1.00 (previously S$0.98) as we incorporate lower discount rate assumptions for FREIT’s Indonesian assets in our model. But we maintain HOLD given FREIT’s rich valuations.

4Q12 results within expectations
First REIT (FREIT) reported 4Q12 results which were within our expectations. Gross revenue rose 10.7% YoY to S$15.4m, driven by maiden contributions from two new properties which were acquired in Nov 2012 and higher rental income from its remaining portfolio. Distributable amount to unitholders declined 8.7% YoY to S$11.1m, but this was due to a special distribution of S$2.2m in 4Q11. Excluding this, distributable amount to unitholders would have increased by 11.3% instead. For FY12, gross revenue rose 6.7% to S$57.6m and was just 0.2% below our full-year projection. Distributable income to unitholders rose 4.8% to S$46.0m, and formed 98.8% of our FY12 forecast. DPU for FY12 was 7.26 S cents, versus 7.01 S cents in FY11, and translates into a yield of 6.8%. 

An eye for inorganic growth opportunities
Following FREIT’s recent acquisitions, its gearing (debt-to-assets) ratio increased from 15.0% in 3Q12 to 25.7% in 4Q12. We believe this is a manageable level as it is still one of the lowest in the S-REITs space. Looking ahead, we expect FREIT to aggressively seek inorganic growth opportunities, which are likely to be financed by both debt (leverage on low interest rate environment) and equity (trading at 30% premium to NAV), in our view. Indonesia would remain as its key market, given the nation’s robust healthcare dynamics and visible pipeline of acquisition targets from its sponsor Lippo Karawaci. Management has identified five potential targets in areas such as Bali, East Kalimantan and East Sumatra and will assess the feasibility of each potential investment. We expect acquisition terms to be largely similar to the two assets purchased in Nov last year.

Maintain HOLD
We make some minor adjustments to our estimates and also incorporate lower discount rate assumptions for FREIT’s Indonesian assets in our model, given improving economic fundamentals in Indonesia. This lifts our fair value estimate from S$0.98 to S$1.00. But we maintain our HOLD rating as we view FREIT’s valuations as expensive, with the stock trading at 1.3x FY13F P/B, a rich premium to its peers’ average.

Fortune REIT

OCBC on 25 Jan 2013

FRT's had a solid FY12, with revenue climbing 22.5% YoY to HK$1.11b and NPI rising 22.8% YoY to HK$788.3m. The two properties acquired on 17 Feb 2012 accounted for 12.4% of NPI growth. The remaining 10.4% of NPI growth from the original portfolio of 14 properties was from strong reversion and AEI results. Overall rental reversion was high at 19.8%, partially because of the low base in 2009 when the leases due to be renewed were signed. We understand from management that, since 2010 provides a higher base, 2013's rental reversions are likely to be in the mid-teen percentages. FY12 DPU of 23.35 HK cents was up 23.0% YoY, representing the highest growth trend in the REIT's 9-years history. The results were in line with ours and consensus expectations. We are maintaining our fair value of HK$7.28 and a BUY rating on FRT.

Rental reversions likely to be in mid-teens
FRT's had a solid FY12, with revenue climbing 22.5% YoY to HK$1.11b and NPI rising 22.8% YoY to HK$788.3m. The two properties acquired on 17 Feb 2012 accounted for 12.4% of NPI growth. The remaining 10.4% of NPI growth from the original portfolio of 14 properties was from strong reversion and AEI results. Passing rent for the original portfolio was up 8.3%. Overall rental reversion was high at 19.8%, partially because of the low base in 2009. Management indicates that 2013's rental reversions are likely to be in the mid-teen percentages. FY12 DPU of 23.35 HK cents was up 23.0% YoY, representing the highest growth trend in the REIT's 9-years history. The results were in line with ours and consensus expectations.

More AEI opportunities
Portfolio occupancy climbed from 96.1% as of 30 Sep 2012 to 97.7% as of 31 Dec 2012, reflecting good recovery upon AEI completion. 2013 sees significant portions of occupied GRA for FRT's three largest assets by valuation, i.e., Fortune City One (FCO), Ma On Shan Plaza (MOSP) and Metro Town, up for expiry (43.1%, 41.4% and 69.9% respectively). For FCO, 2013 will see the first reversion of leases from the AEIs that were completed in 2010. Following the completion of HK$100m AEI in 4Q12 (ROI of over 20%), management is considering a HK$10-20m AEI at FCO to improve the wet market and increase occupancy. At MOSP, FRT will explore getting back some space from the supermarket to bring in some higher yielding trades (e.g. another AEI at HK$10-20m). At Metro Town, there is mark-to-market upside because of improvement in foot traffic. One of the Feb acquisitions, Belvedere, may see a ~HK$80m AEI starting end 2013. 

Solid balance sheet 
The portfolio valuation increased by 4.9% to HK$20.2b between Jun to Dec 2012; capitalisation rates stayed the same. The valuation of the original portfolio climbed 5.0% to HK18.0b. FRT has a low gearing of 23.4% and no refinancing needs till 2015.

Maintain FV
We are maintaining our fair value of HK$7.28 and a BUY rating on FRT. FRT is one of our top REIT picks and has an attractive P/B of 0.75x.

Keppel Corporation

OCBC on 25 Jan 2013

Keppel Corporation (KEP) reported a 38.5% increase in revenue to S$13.96b and a 15.0% rise in net profit to S$2.24b in FY12. Excluding revaluations gains from the property segment, the group turned in net profit of S$1.9b, in line with our expectations. Operating margin in the O&M segment also remained stable at 12.9% in 4Q12. The group’s O&M net order book stood at S$12.8b as at end Dec. Looking ahead, we are expecting new order wins of about S$5b in 2013. Meanwhile, KEP has proposed a distribution of 72.4 S cents/share for the year; this includes a dividend in specie of Keppel REIT units. After incorporating a higher fair value estimate of S$4.53 for Keppel Land and the proposed dividend in specie, our fair value estimate rises slightly from S$12.49 to S$12.68. Maintain BUY.

FY12 results in line with expectations
Keppel Corporation (KEP) reported a 38.5% increase in revenue to S$13.96b and a 15.0% rise in net profit to S$2.24b in FY12. Excluding revaluations gains from the property segment, the group turned in net profit of S$1.9b, in line with our expectations. Revenue from the O&M division was 40% higher due to higher volume of work, while turnover from the infrastructure division was flattish. Revenue grew the most in the property division with a 106% jump, but this was due to lumpy contributions from Reflections at Keppel Bay which will not be repeated in FY13.

O&M operating margin remains stable
Operating margin in the O&M segment was stable at 12.9% in 4Q12, similar to 3Q12 but expectedly lower than 4Q11’s 21.0%. Management is guiding margins of 10-12%, though we believe that there is room for productivity and efficiency gains which may result in better-than-expected margins.

Regional yards garnering confidence of established customers
As mentioned in our earlier reports, KEP has started to improve the competencies and productivity of its regional satellite yards so that more work can be outsourced to them in the future to free up space in the Singapore yards. Results are starting to show – the Philippines yard recently won a contract from Shell to build a depletion compression platform, adding to its growing offshore track record.

Proposed dividend in specie of Keppel REIT units
The group’s O&M net order book stood at S$12.8b as at end Dec. Looking ahead, we are expecting new order wins of about S$5b in 2013. Meanwhile, KEP has proposed a distribution of 72.4 S cents/share for the year; this includes a dividend in specie of Keppel REIT units. After incorporating a higher fair value estimate of S$4.53 for Keppel Land from our property analyst and the proposed dividend specie of Keppel REIT units, our fair value estimate rises slightly from S$12.49 to S$12.68. Maintain BUY.

Singapore Post

Kim Eng on 28 Jan 2013

Results slightly better than expected. SingPost 9MFY3/13 results were better than expected. 9MFY3/13 revenue increased by 14.5% yoy to SGD476.3m and net profit excluding one-off items was slightly up by 0.5% to SGD109.1m. However due to rich valuation, we maintain our HOLD rating but slightly upgrade our target price to SGD1.21.

Top line grew strongly. We appreciate Singapore Post’s transformation effort as we saw positive revenue growth momentum in recent quarters. In 9M FY3/13, SingPost recognized revenue growth in all business segments despite the continuous decline in letter volumes. The growth was mainly driven by consolidation of new acquired subsidiary Novation Solutions as well as e-commerce volumes.

Cost pressure prevented bottom growth. Despite respectable top line growth, net profit hardly made any growth (up by only 0.5% yoy) in 9MFY3/13 compared with a year ago. We expect further improvement in revenue following recently announced M&As. However inflationary cost pressure, gradual shift to lower-margin Logistics business and the cost for transformation will continue to weigh on margins and prevent significant net profit growth.

Still early to judge recent M&As. SingPost announced a few M&A deals recently including SGD60m for 62.5% stake in Famous Holdings, a sea freight consolidator and freight forwarder as well as SGD37m for 100% in General Storage, a self-storage provider in Singapore. We understand that those new subsidiaries are currently profitable and acquisition costs were also reasonable. But since those new acquisitions are bigger than previous M&As, in our view much more effort must be put in to fully merge the new subsidiaries with existing business to create real synergy.

HOLD for rich valuation. SingPost’s current dividends yield of 5.2% is not very attractive relative to its historical average of 6.0%. On PER basis, current 17.2x PER is also approaching historical high. We slightly upgrade our earnings forecast to reflect better-than-expected results and recent acquisitions but maintain our HOLD rating.

Global Premium Hotels

UOBKayhian on 25 Jan 2013

Valuation

·      We initiate coverage on Global Premium Hotels (GPH) with a BUY recommendation and a target price of S$0.34, pegged to our dividend discounted cashflow model (DDM). Currently, the stock is trading at 14.2x 2012F consensus earnings with a dividend yield of 5.5%.

Investment Highlights

·      Buoyant tourism to drive hotels demandSingapore experienced a strong growth in tourist arrivals and tourism receipts between 2004 and 2011, registering a CAGR of 6.8% and 12.4% respectively. This was driven by new attractions such as the Integrated Resorts (IR), F1 Grand Prix and major MICE events. We have assumed tourist arrivals CAGR at 6% in 2013-15. For the longer term, the Singapore Tourism Board (STB) has set a tourist visitor arrival goal of 17m and tourism receipts of S$30b by 2015. This is likely to drive demand for hotel rooms.

·      LCC carrier to bring in a new segment of tourists Low-cost carriers (LCC) have gained much popularity in Singapore and we expect these airlines to bring in a new group of budget travellers, in particular from neighbouring countries such asMalaysia and Indonesia. We think GPH’s portfolio of economic hotels will also complement the sector and cater to budget travelers in the region.

·      Resilient portfolio with strong track record.We view that the economy-tier hotels are more resilient in any downturn. For example, during the global financial crisis, we saw average room rate and occupancy levels decline 22.3% and 10% respectively to S$191 per night and 77%, as travellers became more cost-conscious in terms of accommodation. GPH’s group of hotels’ average room rates only declined 18.6% to S$87.50, outperforming the general market in 2009.

Financial Highlights

·      GPH’s net profit after tax grew at a CAGR of 11.9% over 2008-11 to S$22.6m in 2011 as the group added Fragrance Hotel-Bugis, Royal in 2010, and Parc Sovereign and Fragrance Hotel- Riverside in 2011. We expect GPH to report a net profit of S$19.9m in 2013, backed largely by improvement in average room rates and occupancy rates, but eroded by higher interest expenses.

Risks

·      Largely dependent on the Singaporehospitality industry As GPH runs a chain of hotels, financial performance will be dependent on demand of rooms and the average occupancy rate. Some of the risks pertaining to the hospitality sector mainly include changes in the domestic, regional and global economies, environmental conditions and viral epidemics threat of terrorism and natural disasters etc.

·      High debt financing for its hotels The current net debt to equity remains high at 1.42X with interest cover at 4.7X. As GPH is able to obtain bank financing secured by its properties, interest rates remain low ranging from 2-3% p.a.. However, any increase in the interest rate and interest payment is likely to erode their profits. We estimate that a 0.5 ppt rise in interest rate will reduce profit by 10%. However, we do expect any rate increase till 2015.