NOL

OCBC on 28 Mar 2013

The Shanghai Containerised Freight Index has exhibited relative stability since the start of the year, and this should provide a good base for upcoming generate rate increases such as those enacted under the TSA for Apr. Although there is a possibility of a supply outpacing demand, several liners have expressed confidence in the resilience of rates this year and continue to push through GRIs beyond Apr. Nonetheless, the major liners acknowledge potential threats to profitability and have reiterated the need for the industry to strike a balance between competition and sustainability. Although some liners have taken heed – such as the G6 and CKYH alliances who have cancelled their planned Asia-Europe service launches this year – there remains some routes that are particularly susceptible to rate fluctuations, and we adjusted our estimates downwards for NOL accordingly. Regardless of this adjustment, our view on NOL’s turnaround in FY13 remains intact and we maintain our BUY rating with a fair value of S$1.38.

Overall 1Q rates were okay despite jitters
Despite the constant reminders of lingering economic uncertainty, the Shanghai Containerised Freight Index has stayed within a tight band (1,073-1,246) since the start of CY2013. This relative stability should provide a good base for the upcoming rate hikes from Apr 1, where members of the Transpacific Stabilization Agreement (TSA) have applied for across-the-board general rate increases (GRI) of between US$400/FEU to US$600/FEU on all dry and refrigerated cargo. 

Liners quietly confident on CY2013 rates
Although container ship capacity is estimated to increase by at least 10% this year, several liners are quietly confident of a better CY2013 showing in terms of rates. Senior executives from Maersk Line’s have signalled expectations for rates on eastbound transpacific routes to increase by 10% while Hapag-Lloyd continues to push ahead with GRI announcements beyond Apr and into May on the anaemic Asia-Europe trade routes.

Downside risks still present so industry action still needed
While we view the optimism over CY2013’s prospects positively, there is still the likelihood of supply outstripping demand, especially on certain routes such as the transpacific trade lane. That said, several senior executives from various major liners have reiterated publicly the need for a balance between competition and sustainability, and fortunately, some liners have taken heed. For instance, both the G6 and CKYH alliances have cancelled their planned Asia-Europe service launches this year.

Adjusted our estimates, but turnaround still intact
We are encouraged by these developments and maintain our view that NOL will have a turnaround year in FY13. Nonetheless, we adjust our estimates downwards as we feel the transpacific route, which is NOL’s main revenue contributor, to be especially susceptible to rate fluctuations. However, even with this adjustment, our BUY rating with a fair value of S$1.38 remains.

OKP Holdings

OCBC on 27 Mar 2013

To recap, 4Q12/FY12 results were generally in line with our expectations. While FY12 net income of S$104.5m (-5% YoY) was 5% lower than our estimate, PATMI of S$12.4m (-53% YoY) was 6% higher than what we expected. The lacklustre results were due to a weak economy, price competition and climbing labour costs. OKP declared a first and final dividend of 1.5 S cents/share, lower than the 2 S cents that we and the street had expected. FY12 dividend translates into a yield of 2.9%. We believe that management is conserving cash to increase its flexibility to tender for government projects. Following a change in analyst, we have adjusted our forecasts for OKP’s FY13 and FY14 performance. Applying a P/E multiple of 11x to FY13F EPS, we derive a FV of S$0.48/share, slightly higher than our previous FV of S$0.46/share. We maintain our HOLD rating on OKP.

4Q12 in line
To recap, 4Q12/FY12 results were generally in line with our expectations. While FY12 net income of S$104.5m (-5% YoY) was 5% lower than our estimate, PATMI of S$12.4m (-53% YoY) was 6% higher than what we expected. The lacklustre results were due to a weak economy, price competition and climbing labour costs. OKP declared a first and final dividend of 1.5 S cents/share, lower than the 2 S cents that we and the street had expected. FY12 dividend translates into a yield of 2.9%. We believe that management is conserving cash to increase its flexibility to tender for government projects.

Solid order book
OKP’s extensive experience in public-sector construction and maintenance projects and its reputation for on-time delivery has secured it an order book of around S$377m (as of Feb), which stretches till 3Q 2015. However, we expect that, going forward, OKP gross profit margin will shrink below the 22% it registered for FY12, due to increasing manpower costs and growing competition.

Found partner for MRT jobs
Management indicated that it has found an established foreign partner with which it can jointly compete for work on the new MRT lines, an attractive source of construction demand over the next few years. Having noted that there is increasing foreign competition in the MRT job space, management also expressed that demand for other public construction work in Singapore is strong enough to sustain OKP’s revenues for at least the next few years, even if it does not win any MRT contracts. 

Maintain HOLD
Following a change in analyst, we have adjusted our forecasts for OKP’s FY13 and FY14 performance. Applying a P/E multiple of 11x to FY13F EPS, we derive a FV of S$0.48/share, slightly higher than our previous FV of S$0.46/share. We maintain our HOLD rating on OKP.

Noble Group

Kim Eng on 28 Mar 2013

A leaner Noble. We are positive on Noble’s new strategic direction to become a leaner version of its former self. We think the key drives over the next 12-24 months will remain 1) strengthening its balance sheet, 2)
reducing overhead costs and 3) refocusing on its role as an independent middleman between commodity producers and customers. We believe some of these will bear fruits in the near-term, which may provide an upward lift to earnings.

Cheaper financing is already evident. The pricing (3.8% yield-tomaturity) and takeup on Noble’s recent 5-year USD400m MTN issuance is evidence that the company’s healthier balance sheet and removal from the negative watchlist for its debt ratings will have immediate positive impact on bottomline. Debt cost averaged 7.3% last year. We estimate a 50 basis point reduction in average debt cost will increase our FY13F and FY14F estimated earnings by 5%/4%.

Overhead costs are already trending down. Including financing, Noble is aiming to reduce overhead expenses by USD100m. We believe this is a healthy streamlining exercise, given the years of massive expansion and should not be wrongly read as downsizing. We already see signs of SG&A cost discipline in recent quarters and expect even more bottomline impact for FY13.

Asset lighter strategy. We are positive on Noble emerging as a more focused and independent middleman from this exercise, which is its core competency in our view, and fills a competitive niche in light of Glencore’s move upstream to merge with Xstrata. In line with this strategy, we are likely to see more partnership deals like the recent JV with Wilmar for Palm Oil plantation in Papua. Similarly, it also increases
the likelihood of JVs with potential asset-owners such as its major shareholder China Investment Corp.

Maintain BUY. We see company-specific reasons to be positive on earnings outlook. Noble’s lower gearing should also find favor with investors. We adjust FY13-FY15F earnings up by 1-2%, with TP of SGD1.53 remaining pegged to 13x FY13F. Potential catalysts include divestment gains and announcement of JVs with strong partners.

Halcyon Agri

UOBKayhian on 27 Mar 2013

Valuations

·      Halcyon Agri (Halcyon) is trading at 9.5x 2012 PE and 3.6x P/B. Its 2012 net profit jumped by about 130% yoy to reach US$10m.

Investment Highlights

·      A solid midstream natural rubber player.Halcyon operates in the midstream segment of the natural rubber supply chain. This involves: a) procurement of raw rubber, b) processing into technically specified rubber, and c) selling to vehicle tyre manufacturers. It had a production capacity of 92,380mt p.a. as of end-12 and is set to expand its capacity by 65% within the next three years. Halcyon owns and operates two processing facilities in Palembang, Sumatra, while its merchandising and marketing office is in Singapore.

·      Risk model protects against rubber price volatility. Halcyon touts a robust risk management model that allows it to reference its raw material prices to market movements. In a typical cycle, Halcyon purchases the amount of raw materials needed one month in advance at a cost that is pegged to the current market rubber price. TheUS$/Rp rate is also fixed simultaneously. At month-end, Halcyon locks in the selling price and prepares for delivery. This approach allows it to consistently secure its target gross material profit of at least US$350/mt and to effectively manage its forex exposure.

·      Better margin from a specialised product. The SIR20-VK (Standard Indonesia Rubber-20 Viskositas Konstanta) is a premium variant of natural raw rubber. Its technical properties lower tyre manufacturers’ cost of production (lower energy costs, higher throughput), which makes it highly in demand. This product commands an extra margin of 1.25% to Halcyon’s other products, and comprises 67% of total sales.

·      Sound credit profile due to concentrated blue-chip customer base. To manage credit risk, Halcyon only services companies that have a strong credit track record. Its top three customers are Cooper Tire, Bridgestone and Sri Trang, which contributed a combined 65% of 9M12 revenue. In spite of this concentration, Halcyon’s credit profile remains sound as it is able to keep payment terms within seven days. Contracts span 3-12 months.

·      Early momentum points to a positive 2013 outlook. For 2013, Halcyon has already received committed orders for the delivery of 42,730mt with customers’ option to increase by 12,701mt. This compares to a total delivery of 67,046mt in 2012. It has completed the addition of 10,500mt new capacity (+11%), positioning it for another year of growth.

·      Strong cash flow to support potential M&As.Halcyon generated FCF of US$7m in 2012 and this boosted its cash balance by 42% yoy to hit US$12m. We see the potential for M&As in the upstream segment, which would enhance Halcyon’s position in the natural rubber supply chain, expand its earnings potential and capture better margins.

CapitaCommercial Trust

DMG Research, March 26

WE VISITED CapitaGreen's showroom on Monday morning and were wowed by its 40th-floor sky garden and restaurant, innovative technology which directs cool air inwards, and unique dual facade that cuts solar heat, among others. Set to be CapitaCommercial Trust's (CCT) next growth driver, it offers about 700,000 square feet (sq ft) of Grade-A office space and is scheduled to receive its temporary occupation permit by Q4 2014.

Due to a dearth of immediate drivers, however, CCT is still a "neutral" and its $1.70 target price remains unchanged as the contribution from CapitaGreen would only stream in by FY2015.

CapitaGreen's unique features include a high ceiling, sky terraces on the fifth, 14th and 26th floors, a gym and pool on level 38, column-free efficient floor plates that range in size between 12,000 sq ft and 26,000 sq ft, and a cool void at the top of the building that draws in cool air from the "sky forest" on the top floor.

Not only is the cool void a unique architectural feature, previous studies have shown that the cool air it draws in could reduce the average temperature in the building by two degrees. Through this, we expect CapitaGreen's utility cost to be lower than that of other office towers.

CapitaGreen is located in the heart of Singapore's CBD, and is served by the Raffles Place and upcoming Telok Ayer MRT stations. In addition, CCT has indicated that tenants of CapitaGreen will have priority access to the Golden Shoe car park which currently features 1,053 parking lots.

CapitaGreen is a joint development by CapitaLand, CCT and Mitsubishi Estate Asia. In this project, CCT owns 40 per cent equity interest as well as a call option to acquire the remaining 60 per cent within three years upon receiving its temporary occupancy permit. We expect the building, involving a total development cost of $1.4 billion, to generate a forecast yield of 5.1 per cent-6.3 per cent when occupancy stabilises.

NEUTRAL

Global Palm Resources

OCBC on 26 Mar 2013

Global Palm Resources (GPR) continues to see a rise in its inventory of CPO (crude palm oil), this time more than doubling to 7.7k tonnes from 3.4k tonnes at end 3Q12 (also up 19% YoY). And with the continued high production of CPO (which is likely to continue into Mar as company expects FFB production to increase some 11% this year), GPR may see its stock pile inching even higher going into 2Q13. Meanwhile, new planting has been slow – GPR only added 331k ha last year – and plans to plan 300-400ha this year, citing tough negotiations with the local population. Recent FY12 results were slightly disappointing – GPR reported a net loss of IDR39.8b; but if we strip out the bio-asset fair value losses, core earnings would have come in at IDR51.5b, or 10% below our forecast. In view of the still muted outlook for CPO, we cut our FY13 forecast for revenue by 13% and core earnings by 12%; this also brings our fair value down from S$0.19 to S$0.17, still based on 10x FY13F EPS. Maintain HOLD.

Rising inventory remains a concern
Global Palm Resources (GPR) continues to see a rise in its inventory of CPO (crude palm oil), this time more than doubling to 7.7k tonnes from 3.4k tonnes at end 3Q12 (also up 19% YoY). We believe that the recent volatility in CPO prices may have kept buyers on the sidelines, as some market watchers believe that CPO prices have not bottomed. And with the continued high production of CPO (which is likely to continue into Mar as company expects FFB production to increase some 11% this year), GPR may see its stock pile inching even higher going into 2Q13.

Planting bogged down by tough negotiations with villagers
As of end-2012, GPR only added 331k ha of new planting, coming in at the low end of its revised 300-400 ha guidance. According to management, the delay was due to the “increasingly more difficult” negotiation process with the local population. And with the process likely to remain so, GRP is again guiding for a new planting target of 300-400 ha. GPR still has about 2.6k ha available for future cultivation. Meanwhile, management continues to be on the look out for acquisitions in both existing plantations and for land. As of end-2012, GPR has around IDR263.4b of net cash. 

Maintain HOLD with S$0.17 fair value
Recent FY12 results were slightly disappointing – GPR reported a net loss of IDR39.8b; but if we strip out the bio-asset fair value losses, core earnings would have come in at IDR51.5b, or 10% below our forecast. In view of the still muted outlook for CPO, we cut our FY13 forecast for revenue by 13% and core earnings by 12%; this also brings our fair value down from S$0.19 to S$0.17, still based on 10x FY13F EPS. Maintain HOLD.

UE E&C

OCBC on 26 Mar 2013

We met the management of UE E&C last week for an update. Despite the labour crunch in the construction industry and the cooling measures introduced by the government, management remains upbeat. The group has implemented productivity enhancement measures and adopted new technologies to facilitate work processes to help mitigate the tighter manpower constraints and rising costs. Meanwhile, the group has an estimated order-book of S$600-800m, anchored by four key residential developments: Austville EC, Watercolours EC, Prince Charles Crescent and the new Punggol EC. We now roll forward our estimate to FY13F and incorporate projections for the new Punggol EC project. This increases our SOTP fair value to S$0.82 (previously S$0.68). Upgrade to BUY

Headwinds in the construction industry
We met with the management of UE E&C last week for an update. Despite the labour crunch in the construction industry and the cooling measures introduced by the government, management remains upbeat. The group has implemented productivity enhancement measures and adopted new technologies to facilitate work processes in order to help mitigate the tighter manpower constraints and rising costs. Nonetheless, softening prices of new residential units could still adversely impact its unsold development projects. 

Healthy pipeline of projects
We estimate its order-book to be worth around S$600-800m, anchored by four key residential developments: Austville EC (expected completion in 2013-14), Watercolours EC (2015), Prince Charles Crescent (2015-16) and Punggol EC (2015-16). Austville EC is fully sold, while Watercolours EC is about 80% sold (as of end Feb-13). The Prince Charles Crescent project (a co-development with Wing Tai Holdings and Metro Holdings) has not yet been launched, but is expected to feature a “new, differentiated residential development, in response to the highly discerning mid-high segment of the market”. We estimate the break-even price to be S$1,450 psf. As a comparison, the recently launched Echelon condominium at nearby Alexandra View is already 85% sold with a median price of ~S$1,800 psf (for Feb-13). Finally, we expect the new Punggol EC to be launched in the middle of this year at an average selling price of S$740 psf, versus an estimated break-even price of S$650 psf.

Upgrade to BUY
We now roll forward our estimate to FY13F and incorporate projections for the new Punggol EC project. This increases our SOTP fair value to S$0.82 (previously S$0.68). Upgrade to BUY. The strong net cash position of S$91m also provides the group with the flexibility of pursuing inorganic growth opportunities if they arise.

ST Engineering

Kim Eng on 27 Mar 2013

Defence outlook complementing commercial – reiterate BUY. We reiterate our BUY call on ST Engineering (STE), as a positive defence business outlook lends support to the thesis that it should trade at a premium to its historical average. We maintain our target price at SGD4.40, pegged to 21.6x FY2013 PER, 1 standard deviation above its historical mean. STE’s orderbook, expected to reach record heights again in 1Q13 continues to provide clear earnings visibility, together with a healthy dividend yield of 4.4%.

MINDEF and other defence contracts take centre-stage. Two of STE’s largest contracts announced to-date have been derived from its defence business, and both from its Marine arm. The first, an SGD880m contract for 4 naval vessels from the Royal Navy of Oman, followed by a Jan 2013 contract with MINDEF for 8 patrol vessels, which we estimate to be worth ~SGD1.8b. We continue to see healthy defence expenditure trends both in terms of Singapore (CAGR 4%) as well as from STE’s overseas customers (CAGR 4-5%).

Four business segments a formidable mix. We also maintain that each of ST Engineering’s four business segments of aerospace, marine, electronics and land systems have clear skies ahead in terms of business outlook. Commercial contracts (63% by total FY2012 revenue) such as aerospace MRO, electronics’ rail and road systems, marine shipbuilding continue to complement the defence business and maintain a healthy record of contract wins.

Reiterate BUY, 1Q13 orderbook catalyst on the way. We reiterate our BUY recommendation on STE, with a view towards its 1Q13 orderbook setting yet another record (~SGD13b), providing the earnings visibility that would catalyse its share price appreciation. Our target price of SGD4.40 remains pegged to 21.6x FY2013 PER, 1 SD above its historical average. Investors who own the stock before Ex-Div on 26 Apr will stand to enjoy SG 13.8 cts / share of dividends (translating to ~3.3% yield).

BreadTalk Group

Kim Eng on 27 Mar 2013

A prized jewel to be swept up. Primacy Investment, a wholly-owned subsidiary of Minor International (MINT) in Thailand, surfaced as a shareholder in January and purchased an additional 2.58% last week at an average of SGD0.83 a share, reaffirming our suspicions that Minor may just be getting started. As one of the largest hospitality and leisure companies in Asia, MINT has a track record of acquiring established restaurant brands, namely Coffee Club and Thai Express in Singapore. With BreadTalk’s premium reputation as a bread operator, and entrenched position in Asia, this could be the prized jewel which Minor has been waiting for.

Who is Minor International (MINT)? MINT is a hospitality business headquartered in Thailand. It operates over 1,300 restaurants and 80 hotels and resorts in Asia, the Middle East and Africa, and also has 200
retail outlets for lifestyle brands. In recent years, MINT has been steadily building up its restaurant brand portfolio, and recently acquired Riverside & Courtyard restaurant in China in Dec 2012 and Thai Express in Dec 2011.

Highly desirable brands all packaged into one. In our view, BreadTalk offers MINT an excellent portal to extend its cross-selling channels, as well as an opportunity to strengthen and add prominent brands to its growing overseas portfolio. BreadTalk is a leading bakery chain in Singapore, which has restaurants and cafes also figuring prominently in its portfolio. In China, it has acquired a reputation as a premium bakery operator and is poised to take advantage of the country’s rising affluence. BreadTalk’s established ties with local businessmen through franchising and JV agreements have also helped spur its growth in China and facilitate access to domestic resources.

What Minor could offer to BreadTalk in return. We believe if BreadTalk wants to achieve greater success in China, it may have to join hands with large F&B conglomerates. The support of strong parent companies offers leverage and better expansion opportunities for bakery chains. For example, Saint Honore Holdings was privatised by Convenience Retail Asia (CRA), one of Li & Fung’s subsidiaries, for 15.6x 2006 PER. Maxim Caterers Hong Kong, an equally strong competitor, is 50% owned by Dairy Farm International.

Deserving of more premium valuations. Current valuations of BreadTalk are below peers with a forward consensus P/E of 15.6x against 16.5x. Granted BreadTalk’s valuation is not too far off its peers. One reason may be MINT believed that BreadTalk’s profits are understated by its expansion costs and the stock will look cheap once the expansion phase slows. We believe BreadTalk deserves a more premium valuation for its multi-country success in growing its bakery chain.

Ying Li International Real Estate

UOBKayhian on 26 Mar 2013

Valuation

·      Maintain BUY with a target price of S$0.65, pegged at a 21.8% discount to our RNAV of S$0.83/share, in line with the average discount for Chinese developers under our coverage.

Investment Highlights

·      Sell-down unwarranted due to Ying Li’s limited exposure to residential properties.Ying Li’s share price has declined 9% after Chinaannounced several cooling measures for its residential property sector. These measures include higher downpayment, increase in residential land supply and accelerated development of social housing. The company’s current portfolio of developing properties comprises less than 15% in residential properties (mainly International Plaza, where more than 95% is sold in all the four phases); the policy risk to Ying Li is considered low.

·      New CEO to raise the profile of Ying Li. We are excited about the company’s recent appointment of Mr Ko Kheng Hwa as Group CEO. Mr Ko was previously the CEO of Singbridge International Singapore Pte Ltd, which is wholly-owned by Temasek Holdings and invests in and master-develops large-scale integrated townships in China. Currently, he remains as the Senior Advisor of Singbridge Corporate Pte Ltd, advising the company on the Guangzhou Knowledge City and the TianjinEco-city projects. With such deep experience inChina, we believe Mr Ko can assist Ying Li to pursue new opportunities in China perhaps out ofChongqing.  

·      We expect share price to be driven by strong earnings. Ying Li will recognise the entire sales proceeds from International Plaza and book in the profits this year. Currently, more than 96% of all four phases have been sold with pre-sales proceeds of Rmb914m as of 31 Dec 12. With the possible sale of more office units in Ying Li International Financial Centre, we expect the company to record revenue of Rmb1,475m and core earnings of Rmb309m excluding revaluation gains.

·      Spin-off of the retail malls into a REIT to recycle capital. Ying Li has plans to transfer its retail malls into a trust vehicle for listing to monetise the assets and recycle the capital. Management believes in the long-term growth prospect of Chongqing and sees several opportunities in securing good land parcels for commercial property developments.

·      RNAV surprises will come from Wuyi Rdproject and San Ya Wan phase 2. We have yet to receive the breakdown in the type of properties in Wuyi Rd project from management. As a recap, Ying Li bought a plot of land adjacent to their Wuyi Rd project in Dec 11 and boosted the project GFA from 160,000 sqm to 240,000 sqm. Depending on the type of properties in the project configuration, Ying Li may be able to build a greater portion of higher value retail component. Similarly for San Ya Wan, pending final approval from local authorities, the plot ratio for the entire project (Phase 1, 1A and 2) may increase from 1.5x to 1.9x. This will lift the undeveloped phase 2 plot ratio to 3x from 1.5x previously.

Mapletree Logistics Trust

OCBC on 25 Mar 2013

Mapletree Logistics Trust (MLT) announced last Friday that it has entered into an option to purchase agreement for the divestment of 30 Woodlands Loop in Singapore at a sale price of S$15.5m. This represents a significant premium to its purchase price of S$10.3m in 2007 and its valuation price of S$11.0m in Mar 2012. The divestment is expected to be completed by May, and is expected to generate a net disposal gain of ~S$5.0m, which will be distributed to unitholders (subject to clarification on tax treatment). We re-jig our forecasts to take into account the divestment and the potential distribution of the net disposal gains in FY14. However, our fair value remains unchanged at S$1.25. We maintain our BUY rating on MLT.

Divestment of 30 Woodlands Loop
Mapletree Logistics Trust (MLT) announced last Friday that it has entered into an option to purchase agreement with Advanced CAE Pte Ltd, a subsidiary of SGX-listed Advanced Holdings Ltd, for the divestment of 30 Woodlands Loop in Singapore at a sale price of S$15.5m. This represents a significant premium to its purchase price of S$10.3m in 2007 and its valuation price of S$11.0m in Mar 2012. The divestment is expected to be completed by May, and is expected to generate a net disposal gain of ~S$5.0m, which will be distributed to unitholders (subject to clarification on tax treatment). Assuming the disposal gain is tax-exempt, we estimate an additional DPU of 0.2 S cents in FY14 due to the divestment.

Second capital recycling attempt
30 Woodlands Loop is a four-storey factory building with a build-up area of ~89,340 sqft and a leasehold tenure of 60 years from 1 May 1995 (42 years remaining). The property was first put up for sale in Aug 2012 at the same price tag of S$15.5m to Accenovate Engineering Pte Ltd. According to the initial announcement, the decision to divest the property came as a result of limited growth potential (building specifications no longer suitable for modern warehousing requirements) and attractive offer on hand. However, as the buyer’s application to purchase the property was not approved by JTC Corporation after failing to meet its evaluation criteria, the transaction did not proceed further. In the current case, we understand that JTC has already granted in-principle approval for the transaction subject to the fulfilment of stipulated conditions. Hence, we expect the divestment to go through.

Maintain BUY
We re-jig our forecasts to take into account the divestment and the potential distribution of the net disposal gains in FY14. However, our fair value remains unchanged at S$1.25. We maintain our BUY rating on MLT.

Raffles Medical Group

OCBC on 25 Mar 2013

Raffles Medical Group (RMG) announced last Friday that its resubmission for the change of use of its commercial podium at 30 Bideford Road to a medical centre had been unsuccessful. This is the second setback faced by RMG in as many weeks as it had only recently lost out on a land tender for the development of a private hospital in Hong Kong. Management could now possibly seek to sell the property, retain it for rental purposes, or keep it for partial use and partial rental. Meanwhile, we expect RMG to continue to grow its Singapore business and to step up its negotiation efforts with regards to its recent non-binding Letter of Intent for a proposed integrated international hospital development in Shenzhen, China. Maintain HOLD on RMG, with an unchanged fair value estimate of S$3.01.

Resubmission for medical centre conversion unsuccessful
Raffles Medical Group (RMG) announced last Friday that its resubmission for the change of use of its commercial podium at 30 Bideford Road to a medical centre had been unsuccessful. We believe that concerns over traffic congestion in the area were the main impeding factor again. This is the second setback faced by RMG in as many weeks, as it had only recently lost out on a land tender for the development of a private hospital in Hong Kong to its competitor IHH Healthcare Berhad [NON-RATED]. We believe that management would explore the following options: 1) sell the property, 2) retain the podium as a commercial space and continue renting it out to supplement its income streams, or 3) open some clinics in the podium and rent out the remaining space. Given that the property is located at a prime location in the Orchard area, we do not foresee much difficulty should RMG decide to sell it. 

Concentrate on Singapore operations and China expansion
We now expect management to step up its negotiation efforts regarding its proposed collaboration with China Merchants Shekou Industrial Zone to develop an integrated international hospital in Shenzhen, China (recently entered into a non-binding Letter of Intent). This negotiation process would likely be completed within the next six months. Should both parties reach an agreement, it would provide an avenue for RMG to tap into the high-end healthcare market in the Pearl River Delta region. Total capex could amount to ~S$150m. Meanwhile, RMG would continue to grow its business in its core market, Singapore.

Reiterate our HOLD rating
We retain our estimates as we had not incorporated any contribution from RMG’s proposed new medical centre. Our PATMI forecasts for FY13 and FY14 are currently 3.3% and 8.0% below Bloomberg consensus average, respectively. Looking ahead, we foresee possible earnings cut by the street given this latest development. Maintain HOLD on RMG, with an unchanged fair value estimate of S$3.01, which is pegged to 27x FY13F EPS. The stock is currently trading at 30.2x FY13F EPS.

KSH Holdings

OCBC on 22 Mar 2013

KSH recently conducted a placement for 30.9m new shares and 4.1m existing treasury shares at 40.8 S-cents per share. This was at a 5.2% discount to the weighted average traded price of 43.0 S-cents on 11 Mar 2013 and raised S$13.9m of capital for the group. Shortly after the placement, KSH deployed S$1.9m to increase its stake in its Beijing condominium project (Liang Jing Ming Ju, Phase 4) from 26.24% to 45.00%. Pending further visibility on capital deployment, we are overall neutral on this placement but note it would increase the size of the public float and possibly improve the counter’s trading liquidity, which has been low historically. Maintain BUY on KSH. Our fair value estimate dips mildly to S$0.61 from S$0.62, due to a mild dilution effect, but our forecast for buoyant earnings growth over FY13-14 remains unchanged.

35m share placement at 5.2% discount
KSH recently conducted a placement for 30.9m new shares and 4.1m existing treasury shares at 40.8 S-cents per share. This is at a 5.2% discount to the weighted average traded price of 43.0 S-cents on 11 Mar 2013 and would raise, on a net basis, S$13.9m of capital. Management plans to use 70% of the proceeds to support the growth of the company in Singapore, the PRC and Southeast Asia, and the remaining 30% for working capital needs.

Increased stake in Beijing condominium project to 45%
Shortly after the exercise, KSH deployed S$1.9m to increase its stake in its Beijing condominium project (Liang Jing Ming Ju, Phase 4) from 26.2% to 45.0%. We understand that this project, with estimated sellable area of ~31.4k sqm residential space and 8.1k sqm retail, is likely to commence construction and sales this year. We currently value this project conservatively at book and assume no accretion in our valuation model, pending more clarity on sales later this year.

Overall neutral on placement exercise
Pending further visibility on capital deployment, we are overall neutral on this placement exercise but note that it was conducted at a premium to book (39.9 S-cents per share as at 31 Dec 2012). This exercise would also increase the size of the public float and possibly improve the counter’s trading liquidity, which has been low historically. Finally, we note that no vendor shares were placed (aside from treasury shares bought back earlier at significantly lower prices), which likely points to management’s continued confidence in the group’s prospects. 

Maintain BUY
Maintain BUY on KSH. However, pending further visibility on capital deployment, our fair value estimate dips to S$0.61 from S$0.62 due to a mild dilution effect. Our SOTP methodology values the construction segment at 4x FY13E earnings and applies a 40% discount to RNAV for the property segment. Our forecast for buoyant earnings growth ahead for KSH over FY13-14 remains unchanged.

Ezion Holdings

OCBC on 22 Mar 2013

Ezion Holdings (Ezion) announced that it has secured a charter contract worth about US$48.2m over a three year period to provide a service rig for an international oil and gas major for work in the Arabian Gulf. The unit will be deployed before end 2013 after refurbishment and upgrading in a Middle Eastern yard. We estimate a good ROE of slightly more than 55% for this project, vs a forecasted ROE of 22% for Ezion in FY13. Ezion’s stock price has appreciated by about 18% YTD vs the STI’s 3% rise over the same period. However, we still see an upside potential of more than 15% over a one-year time frame. We tweak our earnings estimates, and based on 12x blended FY13/14F core earnings, our fair value estimate rises from S$2.33 to S$2.35. Maintain BUY.

Secures US$48.2m service rig contract
Ezion Holdings (Ezion) announced that it has secured a charter contract worth about US$48.2m over a three year period to provide a service rig for an international oil and gas major (IOC) for work in the Arabian Gulf. We understand that the IOC is in collaboration with a national oil company. The unit will be deployed before end 2013 after refurbishment and upgrading in a Middle Eastern yard, and will be used primarily for accommodation purposes. We assume revenue contribution of US$16m/year from Jan 2014.

Good ROE from project
Ezion had acquired a cold-stacked rig which is more than 20 years old (estimated cost is about less than US$20m). Hence a considerable amount of refurbishment work is required, which will be done at a Middle Eastern yard. The total project cost is estimated to be about US$40m for Ezion, and will be funded by debt and internal resources under a 70-30 split. With a 5% interest cost, 10 year depreciation period and US$3-3.5m annual operating cost, we estimate a good ROE of slightly more than 55% for this project. This compares with a forecasted ROE of 22% for Ezion in FY13. 

Expecting higher leverage
With Ezion’s growing balance sheet, we expect the group to pursue a higher gearing in the future for funding of additional contracts. Net gearing stood at 0.76x as at 31 Dec 2012. There is a possibility that net gearing may hit 1.0x in FY13, after which we expect it to come off.

Maintain BUY
Ezion’s stock price has appreciated by about 18% YTD vs the STI’s 3% rise over the same period. However, we still see an upside potential of more than 15% over a one-year time frame. We tweak our earnings estimates, and based on 12x blended FY13/14F core earnings, our fair value estimate rises from S$2.33 to S$2.35. Maintain BUY.

Dukang Distillers

Kim Eng on 25 Mar 2013

A new player in China baijiu market. We visited Dukang’s production plant in Luoyang where we were introduced the production process of baijiu, the Chinese national liquor. During the trip, we also learnt some history of baijiu and the “Dukang” brand. Dukang brand is named after the inventor of baijiu, which holds a special position in Chinese culture. Although being a new player in China baijiu market, Dukang has achieved
quite impressive progress in the past two years and has gradually become the No.1 Henan home-grown brand.

Gradually gaining market share in Henan province. There used to be two factories in Henan province that claimed the right to use the Dukang brand. Since the merger of the two Dukang brands in 2010, Dukang has
increased its market share in Henan to around 3%. Management is targeting a market share of 10% by way of capacity expansion, distribution network development and marketing efforts.

Strong market presence and government support. Dukang has a strong market presence in the key cities of Henan and enjoys strong support from local government. We observed that Dukang’s products occupied a large amount of retail shelf space at hypermarts, and were aggressively marketed as a top home-grown brand. Henan government also seems quite supportive to Dukang and has played a prominent role in
promoting this brand.

Regulatory risk is the key right now. We think the biggest risk for Dukang is that downward pressure on price and consumption of premium baijiu brands, such as Moutai and Wuliangye, due to the restriction on
luxury baijiu consumption by government and army officials might pass down to mid-end brands in the future.

Could potentially worth more. Dukang’s current valuation of 4.4x 12m trailing PER and 0.6x PB is quite attractive when compared with its Ashare listed peers. The undemanding valuation is perhaps due to the low
brand recognition and poor acceptance by overseas investors. We bring investors attention to this company because we think further enhancement in the brand value would probably narrow the valuation gap between Dukang and other top brands. The rich cultural heritage within Dukang name could also makes it attractive for acquisition.

CapitaMall Trust

Kim Eng on 25 Mar 2013

Expect more positive news flows. CapitaMall Trust (CMT) has used the bulk of the SGD250m raised via a private placement last November to partially finance the redemption of the SGD300m 2-year retail bonds which matured in February. Nonetheless, we still expect more positive news flows in the following months on new AEI plans, which are most likely to involve Tampines Mall and/or Funan. CMT remains one of our top picks amongst the S-REITs. Reiterate BUY, target price SGD2.36.

Well-managed capital structure. CMT has been diligently trying to smoothen and extend its debt maturity profile following the Global Financial Crisis. Via its MTN programmes, CMT had raised long-term debt of as long as 12 years tenure. After the redemption of the 2-year retail bonds, we estimate the average term to maturity of CMT’s outstanding debt at ~4.2 years, which is one of the longest within the SREIT universe. Its healthy cash position of ~SGD800m will be more than enough to fund future AEIs.

The incumbent’s advantage. The importance of Jurong Lake District as a regional commercial hub has been re-emphasized in the recent Population White Paper and Land Use Plan and CMT remains wellpositioned to capitalize on the area’s accelerated development via its three malls – Jcube, IMM and Westgate. In the longer term, the three strategically-located malls will further benefit from a larger catchment area with the development of Tengah New Town, facilitated by greater connectivity from the future Jurong Region MRT Line.

Hunt as a pack. Under the Government Land Sales Programme, sites slated for pure retail use are few and far between. However, we see more opportunities for integrated developments, particularly those near or integrated with MRT stations. We believe this is where the “Westgate model” can be replicated, i.e. CMT joining up with CapitaLand and CapitaMalls Asia, where CMT will take an initial minority stake during the development phase.

Reiterate BUY. We expect AEI plans pertaining to Tampines Mall and/or Funan to be announced soon, while ION Orchard remains a medium-term acquisition possibility following its recent round of rental reversions. Maintain BUY with a DDM-derived target price of SGD2.36.

Silverlake Axis

UOBKayhian on 22 Mar 2013

We initiate coverage on Silverlake Axis (SAL)with a BUY recommendation and a street-high, DCF-based target price of S$0.91, implying a 45.6% upside from the current price. SAL’s dominance in the Southeast Asia (SEA) market will enable it to ride the positive trends in Asia Pacific’s banking sector. Its strong financials are backed by visible earnings, a recurrent revenue stream and superior margins. Healthy cash flows (FCF of 3.0-4.3 S cents/ share) will support its dividend distributions and open up the potential for earnings-accretive M&As. We also note the possibility of a re-rating should its Chinese associate successfully complete its Shenzhen listing.

·Industry stronghold with sticky client base.SAL is a provider of banking IT solutions and services with a 100% execution track record that has given it market leadership in SEA. It currently enjoys strong loyalty from over 40% of the top 20 largest banks in the region. We expect SAL to maintain this dominance in the high barrier-to-entry IT software and services industry as banks continue to rely on their preferred IT vendors. SAL will also benefit from the financial services industry’s increasing investment in IT infrastructure.

·Visible earnings and a growing recurrent stream. An existing orderbook of about RM400m gives SAL earnings visibility until FY14. Maintenance & enhancement services revenue continues to build up as existing and new clients avail of necessary maintenance works and upgrades. We expect this segment to be resilient and to grow at a 27.8% CAGR over FY13-15.

·Superior margins and ROE on cost competitiveness. SAL’s operating margins are at least 10ppts higher than its global peers, which we attribute to its lower wage cost (12% of revenue vs 40-50% for its peers). SAL’s net margins are above 40% and we project its bottom line to grow at a 3-year CAGR of 16.3%. As a result, its ROE of 46-58% is also superior to its peers.

·Cash-generative business to support decent yields. We project SAL’s operating cash flow to hit RM200m by FY14 with cash yields of 5.2-7.2% in FY13-15. Looking ahead, we think SAL could easily sustain its 60% payout in FY12 and forecast dividends of 2.0-2.4 S cents/share in FY13-15. Capital spending is mostly for software development, which amounts to RM10m annually.

·Opportunities for earnings-accretive M&As.Earlier this month SAL announced the potential acquisition of an 80% stake in Merimen Ventures (Merimen), an internet-based solutions provider for the insurance industry in Asia Pacific and Middle Eastand North Africa (MENA) region. We expect this to form another source of recurring income for SAL. We view this and future similar strategies positively as it would yield synergies that could further unlock SAL’s value.

·Potential re-rating on Chinese associate’s listing. SAL intends to leverage on its current presence in China through a Shenzhen listing of its 27% associate, Global InfoTech Co. (GIT). We see a potential upside to our fair value estimate givenChina’s scale (project sizes 4-5x bigger) and underpenetrated market (90% of IT systems are still in-house). We estimate that should GIT successfully scale up its business, its earnings could double by FY15.

·Key risks include a) a reliance on skilled labour, b) technical and execution risk, and c) foreign exchange risk.

Offshore and marine sector

CIMB Research, March 20

This week, Chinese shipyards took centre stage after Shanghai Waigaoqiao and China Rongsheng Heavy Industries secured orders for a total of three jack-up rigs. However, these rigs are either heavily financed or have lower specifications.

We are not overly concerned by the competition posed by the Chinese for Singapore yards. Traditional drillers with stronger cash flows should still find comfort in Singapore and Korean yards, unwilling to take on risks in quality and delivery. No change to our EPS.

Maintain "overweight" on Singapore rig builders with catalysts from: (1) stronger-than-expected orders; and (2) a breakthrough in drillships from non-Petrobras clients. Our top pick is Keppel Corp.

OVERWEIGHT

Ezion Holdings

DMG & Partners, March 20

Ezion secured its fourth charter contract of 2013, lifting its YTD new charters to US$290 million. The latest contract to provide a refurbished service rig for three years in the Persian Gulf is valued at US$48.2 million.

The charter is expected to start in Q4 2013. We believe Ezion can easily fund the US$12 million equity portion from its internal cash flow, but net gearing will increase to 1.05x by end-FY13 (from 0.95x).

We have revised FY13-14 forecast EPS by -0.1 per cent and +3.6 per cent respectively on the new contract. Maintain "buy" with a TP of S$2.48, which is based on 16x FY13 forecast PE.

Ezion secured a three-year charter contract from an international oil company to provide a service rig in the Persian Gulf. The contract came from an existing customer. The service rig will be a refurbished unit and is expected to be deployed in Q4 2013. The service rig will be used by the client as an accommodation unit.

We estimate this contract to generate an annual net profit of U$7.1 million based on (i) US$40 million project capex funded by US$28 million debt and US$12 million equity; (ii) an annual revenue of US$16 million; (iii) a 10-year depreciation profile which is equivalent to US$4 million per annum; (iv) an annual operating cost of US$3.5 million; and (v) an annual interest expense of US$1.5 million. The ROE and ROA (return on assets) are estimated at 59 and 17 per cent respectively.

We factor in one month revenue from the new charter in FY13 and full contribution in FY14. The changes reduced FY13 forecast EPS by 0.1 per cent due to interest incurred to fund the refurbishment but lifted FY14 forecast EPS by 3.6 per cent. We estimate net gearing will increase from 0.95x to 1.05x by end-FY13.

Valuation: Maintain "buy" with an unchanged TP of S$2.48. Our TP is based on 16x FY13 forecast EPS. We like Ezion for its high earnings visibility, strong net profit growth of +82 per cent and +58 per cent for FY13-14 forecast respectively and ability to capture the rising demand for liftboats and service rigs. Key risks are project delays, cost overruns and inability to renew charter contracts for older rigs.

BUY

Hospitality REITs

OCBC on 21 Mar 2013

We understand that players in the local serviced residence industry believe that demand for 2013 will remain flat, with average daily rates staying flat or declining. This corroborates our view that 1H13 is challenging for the Singapore hospitality industry. In the near term, acquisitions may be positive price catalysts. CDLHT completed the acquisition of Angsana Velavaru (Maldives) on 31 Jan and now the attention is on FEHT, which may buy the 298-room Rendezvous Hotel from Straits Trading around end 2Q13. We remain NEUTRAL on hospitality REITs. We have HOLDs on Ascott Residence Trust [FV: S$1.36], CDL Hospitality Trusts [FV: S$2.11] and Far East Hospitality Trust [FV: S$1.05].

Recap of 4Q12s
For 4Q12, CDLHT performed in line with ours and the street’s expectations. RevPAR for its Singapore hotels was flat YoY at S$205, leading NPI to stay roughly constant at S$35.6m (+0.2%). ART performed slightly lower than our expectations but higher than the street’s. 4Q12 NPI fell by 3.7% YoY to S$38.5m. FEHT’s operational results for the period 27 Aug-31 Dec 2012 was not impressive, with its Singapore hotels registering RevPAR of S$171, missing its IPO prospectus forecast of S$174. Net property income of S$38.8m was 0.2% higher than the forecast as a result of lower operating expenses. Active management of finance costs and other trust expenses helped to lift FEHT’s DPU 4.5% above its forecast to 2.09 S-cents.

Challenging environment
We have learnt that players in the local serviced residence industry believe that demand for 2013 will remain flat, with rates staying flat or declining. This corroborates our view that 1H13 is challenging for the Singapore hospitality industry. For 2013-2015, we forecast that hotel room supply will grow 5.8% p.a., faster than hotel room demand growth of 5.4% p.a. We believe that the average length of stay per visitor is declining, at least partially due to the strong SGD, and this means fewer hotel room nights. Singapore is facing a potential oversupply situation for its local lodging industry over the medium-term.

Acquisitions in FY13
CDLHT completed the acquisition of Angsana Velavaru (Maldives) on 31 Jan and now the attention is on FEHT, which may buy the 298-room Rendezvous Hotel from Straits Trading around end 2Q13. An acquisition could serve as a positive price catalyst.

Maintain NEUTRAL 
Based on the above and with no near term catalysts for improvement in RevPAR, we expect the industry to face continuous challenges to sustain margin with a tight labour work force and high operating costs. As such, we maintain our NEUTRALrating on the Hospitality REITs. We have HOLDs on Ascott Residence Trust [FV: S$1.36], CDL Hospitality Trusts [FV: S$2.11] and Far East Hospitality Trust [FV: S$1.05].

OSIM International

OCBC on 21 Mar 2013

We expect OSIM International’s (OSIM) business to remain resilient despite concerns resurfacing over China’s economic growth. This would be driven by continued efforts by management to enhance its product appeal through innovative new products such as the recently launched uAngel Sofa-Tranzformer and productivity gains to boost its margins. Although similar concerns over China’s economy also transpired last year, OSIM still managed to deliver positive YoY growth in its topline and bottomline for all four quarters of 2012. We maintain our BUY rating on OSIM with an unchanged fair value estimate of S$2.19, still pegged to 16.4x FY13F EPS. The stock is trading at 14.2x FY13 and 12.8x FY14 EPS, while offering FY13F dividend yield of 3.2% and ROE of 42.8%.

Concerns resurface over China, but OSIM to remain resilient
Jitters over the economic growth of China, which is OSIM International’s (OSIM) largest market (~25% of revenue), recently resurfaced again, following disappointing industrial production and retail sales figures. The latter grew 12.3% YoY for Jan-Feb 2013, which trailed the street’s expectations (Bloomberg consensus average: 14.9%). Nevertheless, we note that last year, there were also concerns over the impact of China’s economic slowdown on OSIM. However, OSIM still managed to deliver positive YoY growth in its topline and bottomline for all four quarters of 2012. We believe this reflects the efforts put in place by management to enhance its product appeal through innovation and productivity gains to boost its margins, which also showcases the resilience of OSIM’s business. In addition, we believe that our revenue forecast for FY13 has already taken into account the uncertainties over China’s economic growth, as it is 2.8% below Bloomberg’s consensus forecast. We do, however, remain cognisant that there could be downside risks to our estimates should economic conditions and sentiment deteriorate further.

Expect at least two major product launches in 2013
The uAngel Sofa-Tranzformer, one of OSIM’s new flagship products for 2013, was first launched in Malaysia and Hong Kong at the start of the year. It was recently launched in Singapore and Taiwan, and will next be sold in China. We view this as an important development for OSIM as uAngel allows management to capture a new target group of young working female adults and thus provides a platform for OSIM to diversify its customer base. OSIM’s next product pipeline would be a new high-end massage chair (selling price likely to be comparable to uDivine), and we expect this to be launched in 2Q or 3Q 2013 and endorsed by international artiste Andy Lau.

Maintain BUY
OSIM is trading at 14.2x FY13 and 12.8x FY14 EPS, while offering FY13F dividend yield of 3.2% and ROE of 42.8%. Maintain BUY with an unchanged fair value estimate of S$2.19, still pegged to 16.4x FY13F EPS.

S-REITs

Kim Eng on 22 Mar 2013

Reiterate NEUTRAL for S-REITs following uninspiring risk-reward profile as: (1) Yield spreads against ten-year bond yields continue to tighten with rising bond yields. (2) Downward pressures on rentals with slowing growth in Singapore.(3) Risk of asset-price declines in the event that monetary tightening is not conducted gradually (a case in point: Japan’s “lost decade” after the Finance Ministry sharply raised interest rates in late 1989). Our top picks remain only with the Retail REITs, in which the mismatch between rentals and physical prices have not proved unnerving. Reiterate BUY for CMT (TP: SGD2.36), SGREIT (TP: SGD0.95), SUN (TP: SGD1.85).

Gravity defying, but will QE-inflated asset prices sustain? S-REITs have registered an impressive price return of 5% YTD and 43% since end-2011. Their stellar performance in FY12 outshone even the major REITs markets in the US and Australia. Nonetheless, the rapid step-up in asset values (fuelled in the past years by quantitative easing [QE] policies) and the gradual creep-up in risk-free rate have skewed risks to the downside.

Let the buyers beware. Fundamentally, we believe that S-REITs stock price performance should be a function of forward DPU growth and physical asset prices. The almost 60% returns generated by S-REITs in 2005-2006 were buttressed by similarly outstanding DPU growth rates of 19-43% pa over 2005-2008 and strong growth in rents and capital values in 2005-2007 (in short, fundamentals-driven growth). However, the recent S-REITs 2012 rally was primarily fueled by QE-inflated asset values and ample liquidity, and not so much driven by underlying fundamentals such as strong DPU growth or rental upside, in our view.

Overheating asset prices but rentals not catching up. Post-GFC, retail and office properties have appreciated but rentals have been slow to catch up. This has in turn caused retail and office cap rates to compress from 5.9% and 4.4% in 2010 to 5% and 3.7% in 2012. Moving forward, we think it is unlikely that rentals will ever catch up in the near-term, given that the growth outlook in Singapore is expected only at 1-3% this year. Tenants are increasingly feeling the heat from escalating business costs and declining profit margins. Limited rental upside means that S-REITs are unlikely to have significant organic DPU growth anytime soon.

Rational Temperance. Unlike the “fundamentals-driven growth” experienced by S-REITs in 2005-2006, we expect the current “QE-inflated growth” to run out of steam once the “artificially compressed” interest rates in the US, and hence Singapore, start normalising sometime next year or early 2015. However, as markets are typically forward-looking, we expect S-REITs prices to rationalise probably in 2H13 or 2014.

ComfortDelgro

DMG & Partners 20 March 2013

THE news: 20 LRT passengers got out of an LRT train carriage to walk on the tracks on Tuesday. The carriage stalled at 4.30pm and resumed at 5pm. SBS Transit runs LRT services in Sengkang and Punggol, and mentioned that investigations are going on to determine the cause of the fault.

Our thoughts: This disruption is not expected to have any material impact on ComfortDelGro's (which owns a 75 per cent stake in SBS Transit) earnings. The local land transport industry continues to be plagued by cost pressures from higher wages and repair and maintenance costs and we continue to favour ComfortDelGro ("buy", TP S$2.10) over peer SMRT for the former's 46 per cent overseas Ebit exposure and cheaper valuations.

BUY