Hyflux

OCBC Investment Research, June 27

HYFLUX Ltd recently saw a massive correction in its share price, plunging nearly 13.1 per cent from a high of $1.37 on June 10 to a low of $1.19 on June 24.

Besides the slowing economic growth in China, sentiment is also likely spooked by the recent reports of credit tightening in the mainland, which alone probably resulted in the sharp 6.7 per cent drop on June 24.

No doubt these concerns are valid, given that waste water treatment projects require very large capital investments, but we believe that they may be overwrought. For one, industry watchers believe that water scarcity and pollution of water sources are two of the most serious problems for China and the government is likely to put in more effort to tackle these issues.

Secondly, Hyflux, being an "international" company, should be able to access other sources of funds besides the usual "local" project financing. And this may work in Hyflux's favour when it comes to bidding for projects against local Chinese companies.

Separately, the company's Tuaspring desalination project is progressing along nicely. Management notes that the desalination portion is on track to deliver water by Q3 2013.

It had also recently signed a US$138.7 million export credit financing agreement with KfWIPEX Bank GmbH to finance the purchase of key components for the 411MW combined cycle gas turbine plant, where construction work is also progressing well (likely to be completed by end-2014).

Nevertheless, as the market appears to be taking a more "risk off" approach, we now use a lower 20 times peg (versus 22 times previously) against our FY2013F EPS, which results in our fair value easing from $1.44 to $1.30.

However, value is starting to emerge, especially closer to its recent $1.19 low; hence we maintain our "hold" rating on the stock.

HOLD

Singapore Transport Sector

Maybank Kim Eng Research, June 27

THE impact of haze will not last long; we stay positive on SIA Engineering Company (SIAEC), SATS and ComfortDelGro. The haze, while a yearly affair and the worst ever so far this year, is still likely to be a near-term bump on the road for transportation sector stocks.

Historically, investors have been unfazed by the haze, and we believe that any negative reaction to this presents opportunities to accumulate the undervalued transportation sector stocks that we favour. We reiterate our positive stance on SIAEC ("buy", target price: $6.16), SATS ("buy", TP: $3.90), and ComfortDelGroup ("buy", TP: $2.33).

Indonesia sent Singapore the unwanted "gift" of the worst-polluted air ever last week. The Pollutant Standards Index (PSI) shot up to hazardous levels of more than 400 points on June 21, surpassing the previous peaks of 226 points (September 1997) and 128 points (October 2006).

However, the smoke has subsided just as quickly as it came on the back of shifts in wind direction and, perhaps, prompt government-to- government action. At the time of writing, the pollution index has fallen to 38 and the horizon is visible again.

But what if the haze returns and stays? Bush fires in Indonesia typically occur at this time of the year due to aggressive land clearing operations by local farmers, but the impact this year has been much worse than in previous years.

The air has cleared this week but we have reviewed our earnings forecasts for the transportation stocks in case the situation takes a turn for the worse again.

Singapore Airlines (SIA), SIAEC and SMRT are most exposed. For the land transport stocks, we estimate SMRT and ComfortDelGro would suffer a weekly earnings impact of $2 million and $1.4 million (or 2.0 per cent and 0.5 per cent of annual profit), respectively, for every 15 per cent reduction in fare revenue.

SIA and SIAEC too would be exposed as Singapore is their main operating base, but it is not possible to assess the impact on aviation stock earnings, as there are too many moving parts. Inbound traffic could be hit but this could be compensated for by more outbound traffic.

Historically, there is no impact on stocks as long as haze lasts less than a month. We observed no material adverse reaction during the more severe hazy days of September 1997 and October 2006, which generally lasted about a month.

We remain sanguine about the situation as long as the haze does not last for more than a month this time round too. Using a far worse example to gauge downside, the Sars epidemic impacted aviation stocks by almost 20 per cent at the worst, but land transport stocks were unscathed.

Starhill Global REIT

OCBC on 27 June 2013

Starhill Global REIT (SGREIT) announced that its convertible preferred unit (CPU) holders have notified the REIT manager of their intention to exercise their rights to convert a total of 152.7m CPUs into new units on 5 Jul. With the conversion, we estimate that the distribution to CPU holders will drop from an average of S$2.4m to just S$0.3m per quarter, leaving a larger distributable amount available to unitholders. However, as the unit base is expected to increase by 10.8% upon the conversion, the net impact is likely a marginal dilution of ~1.1% to pro forma FY12 DPU, according to management. We now factor in the impending CPU conversion into our forecasts. We also update our CAPM assumptions to incorporate the continued increase in risk-free rate. As a result, our fair value eases from S$1.00 to S$0.95. Nevertheless, we continue to like SGREIT for its strong growth potential, robust fundamentals and attractive valuations. Maintain BUY.

Impending conversion of CPUs
Starhill Global REIT (SGREIT) announced that its convertible preferred unit (CPU) holders, namely YTL Hotels & Properties Sdn Bhd and YTL Corporation Berhad, have notified the REIT manager of their intention to exercise their rights to convert a total of 152.7m CPUs into new units on 5 Jul. Following the conversion, the total units outstanding is expected to increase from 1,943.0m to 2,153.2m units, while the number of CPUs will decrease from 173.1m to 20.3m CPUs.

Background on CPU issue
SGREIT had on 28 Jun 2010 issued the CPUs as part of the consideration of its two Malaysia properties, Starhill Gallery and Lot 10 property. All the CPUs in issue now are held by YTL Corporation and its subsidiaries, and are convertible into ordinary units from 28 Jun onwards at a conversion price of S$0.7266 per CPU. The CPU holders are entitled to a discretionary, non-cumulative variable SGD coupon of up to M$0.1322 per CPU, representing a distribution rate of 5.65% per annum on the principal amount of M$405.0m of CPUs.

Impact from CPU conversion
With the conversion, we estimate that the distribution to CPU holders will drop from an average of S$2.4m to just S$0.3m per quarter, leaving a larger distributable amount available to unitholders. However, as the unit base is expected to increase by 10.8% upon the conversion, the net impact is likely a marginal dilution of ~1.1% to pro forma FY12 DPU, according to management. The book value per unit, similarly, is expected to ease slightly from 87.9 S cents to 86.5 S cents, based on our projections.

Maintain BUY
We now factor in the impending CPU conversion into our forecasts. We also update our CAPM assumptions to incorporate the continued increase in risk-free rate. As a result, our fair value eases from S$1.00 to S$0.95. Nevertheless, we continue to like SGREIT for its strong growth potential, robust fundamentals and attractive valuations (0.95x P/B, 6.1% forward yield). Maintain BUY.

Singapore Reits

DMG & Partners Research on 26 June 2013

THE Singapore Reit (S-Reit) market has remained volatile as concerns over US monetary policies continue to spook the market.

Over the last one and half months, the FTSE Straits Times Real Estate Investment Trust Index (FSTREI) has corrected by about 16.8 per cent from its peak while the long-term yield curve has spiked up steeply.

We expect bond yields to stabilise at this level while remaining prudent on the S-Reit market due to the potential of rising debt costs.

Bond yields rise over the last one and half month. Over the last 45 days, the S-Reit market has pulled back by about 16.8 per cent, as yield spreads were compressed on the back of the recent spike in Singapore 10-year government bond yields.

As the global market remains concerned over the unwinding of the quantitative easing (QE) programme in the US, bond yields have risen from 1.4 per cent on April 30 to 2.4 per cent on June 21 (+71 per cent) during this period.

S-Reits are sold off as 10-year Treasury yields rise. Following the recent increase in Singapore 10-year Treasury bond yields, investors seeking to compensate for the compression in the spread between dividend and bond yields have sold off S-Reits.

Prior to the correction that began in the beginning of May, the yield spread between the S-Reits and the 10-year Treasury bond yields stood at 381 basis points. Although the FSTREI has corrected by 16.8 per cent since then, the spread between S-Reit yields and bond yields stood at 356 basis points on June 21, an indication the sector is not any more attractive than it was prior to the correction.

We lower our target prices for the Reits we cover by 11-21 per cent and raise our risk-free rate assumptions by 90 basis points to better reflect the effect of the rise in 10-year Treasury bond yields. At the same time we also assumed a hike in interest rate by 50 basis points each year from 2014-16.

Despite paring down our target prices, we maintain our "neutral" rating on the S-Reit sector. In the short term, some Reits such as A-Reit (currently trading at 6.7 per cent FY2013 forecasted yield) may experience some rebound from the recent sell-off as we believe that Treasury bond yields will settle at around 2.5 per cent.

However, we continue to remain prudent on S-Reits in the long run as we continue to see a flattish outlook in the rental market at this juncture, versus the rising risk of higher interest rates.

Sector - NEUTRAL

Sembcorp Industries

OCBC on 26 June 2013

Sembcorp Industries (SCI) is a major industrial group primarily involved in the businesses of 1) utilities, 2) marine and 3) urban development. The nature of its utilities business is relatively stable, while growth is driven by asset acquisition and construction. SCI’s marine arm is also well-positioned to capitalise on demand from the offshore oil and gas industry, given its market-leading position. Finally, the urban development segment possesses growth potential with its focus on emerging markets. The long-term outlook for its businesses look bright, though the Singapore utilities business may, in the short term, be impacted by an expected increase in competition. The group has been consistent in paying out dividends of at least S$0.15/share each year since 2009, implying a minimum dividend yield of 3.1% at current prices. Initiate with BUY and S$6.48 (based on sum-of-parts method) fair value estimate.

Major industrial group with deep roots 
Sembcorp Industries (SCI) is a major industrial group primarily involved in the businesses of 1) utilities, 2) marine and 3) urban development. A merger of Sembawang Corp and Singapore Technologies Industrial Corp (STIC) in 1998 resulted in the formation of SCI, which was a behemoth then, with businesses spanning a wide range of industries. SCI is now a more focused group today after a streamlining of its businesses. 

Growth potential coupled with relatively stable earnings 
The nature of SCI’s utilities business is relatively stable, as the demand for utilities generally does not vary significantly over a short period of time. At the same time, growth is driven by asset acquisition and construction, so there is growth potential, provided that good investment decisions are made. SCI’s marine arm is also well-positioned to capitalise on demand from the offshore oil and gas industry, given its market -leading position. Finally, SCI’s urban development segment, though small in comparison to the utilities and marine arms, possesses growth potential with its focus on emerging markets.

Under-priced; initiate with BUY 
SCI has had a good track record in its three main business segments, inspiring confidence in the business and investment community. The long-term outlook for its businesses also looks bright, though the Singapore utilities business may, in the short term, be impacted by an expected increase in competition. The group has been consistent in paying out dividends of at least S$0.15/share each year since 2009, implying a minimum dividend yield of 3.1% at current prices. Initiate with BUY and S$6.48 (based on sum-of-parts method) fair value estimate.

Tat Hong Holdings

OCBC on 26 June 2013

Since our last upgrade on Tat Hong Holdings (“Poised for Recovery”, 9/1/2012), the group’s crane fleet grew by ~20% (in tonnage), utilization rate by 5 ppt and rental rates by an estimated 10-15%, resulting in a 66% jump in FY13 PATMI. In our view, the easy money has already been made. Investors who have heeded our call would have made 46% return in 1.5 years and should now consider taking some profit. Looking ahead, the macro environment looks increasingly uncertain with sluggish data points coming out of China. Tat Hong’s crane fleet expansion is also expected to slow after a 79% surge in crane tonnage over the past five years. Finally, there is a possible share overhang resulting from private equity AIF Capital’s conversion of convertible preference shares to 53.3m ordinary shares. Downgrade to HOLD with lower FV estimate of S$1.31 (previously S$1.75).

Easy money has already been made
Since our last upgrade on Tat Hong Holdings (“Poised for Recovery”, 9/1/2012), the group’s crane fleet grew by ~20% (in tonnage), utilization rate by 5 ppt and rental rates by an estimated 10-15%, resulting in a 66% jump in FY13 PATMI. In our view, the easy money has already been made. Investors who have heeded our call would have made 46% return in 1.5 years and now should consider taking some profit. Looking ahead, the macro environment looks increasingly uncertain with sluggish data points coming out of China. A prolonged slowdown in China’s economy could potentially lead lower crane rental demand in the country as well as weaker Australia sales due to more subdued mining activities. 

Growth rate to moderate
Following a 79% surge in crane tonnage in the past five years, management believes it is time to slow down its fleet expansion. This would allow its net gearing to improve to a more sustainable level since rising to above 60% from 16% five years ago. Current crane utilization rates are around 70-74% (vs. maximum of 75-80%), implying limited potential upside. As such, we expect a slower FY14-15F PATMI CAGR of ~10%, compared to the 66% increase in FY13. We also think that the consensus PATMI CAGR estimate of 17% for FY14-15F is too high. 

Possible share overhang
Finally, we note that AIF Capital now holds 53.3m ordinary shares (or about 8.4% stake) after converting its convertible preference shares that it invested in since 2009. As AIF Capital is mainly a private equity player, there is a possibility that it may dispose of the ordinary shares in the future. This implies a share overhang. In view of the above-mentioned points, we cut our FV estimate to S$1.31 (previously S$1.75) on lower PER peg of 11x (previously 15x). Downgrade to HOLD.

Dukang Distillers Holdings

UOBKayhian on 26 June 2013

Valuation

Dukang Distillers Holdings (Dukang) is trading at 9.1x FY12 PE and 1.3x P/B. This is in comparison to peers’ averages of 12.3x and 3.9x respectively.

Investment Highlights
Top provincial brand in Henan, China with a 3% market share in a highly  fragmented industry. According to management, Dukang had surpassed  Henan Songhe Liquor Industry Co., Ltd. as of end-12. Its premium Dukang  brand (vs the low-end Siwu) is considered the official baijiu in Henan,  commonly served during local government affairs.

Elevated to first-tier status with endorsement by the Chinese government. The Dukang brand was recently officially designated as one of the appointed baijiu to be served to foreign dignitaries. This places it in the country’s elite list of only less than ten brands. We think the strong support from the national government provides the company with a crucial stepping stone in growing its presence in China.

Almost 40% capacity increase by August. Dukang is set to add 700 (+24%) fermentation pools by August, which is estimated to add 3,000 (+39%) more tonnes in annual capacity of grain alcohol (pure alcohol). This amount of grain alcohol, when converted to Dukang-branded baijiu, could potentially contribute Rmb540m-675m of revenue p,a..

Premium Dukang product line to boost margins further. The company’s overall gross margin has improved significantly in the last 2-3 years as it ramped up its premium Dukang product line. Currently at over 40% (over 30% historically), management believes there is still upside ahead as its most premium product (gross margin of >50%) continues to enlarge its share in the group’s revenue pie. As an indication, sales of the iconic Jiuzu Dukang made up 22% of 3QFY13 revenue; this is in comparison to the typical 50% contribution seen from competitors’ respective iconic products.

Carving a presence outside Henan. Currently, Dukang-branded products are being distributed in over 20 other provinces. Management intends to grow its <1% nationwide market share by targeting the core markets such as Guangdong and Tianjin first. Ad & promo expense will be kept at 12% of revenue while the distribution network for the Dukang brand will be further enhanced. Since 2011, the distributor count outside of Henan has grown more than 50% to reach 85 as of end-March.

Low credit risk with cash-on-order payment scheme for its Dukang product line. This has allowed the group to maintain a low receivables turnover period of 10 days in 3QFY13 (15 days in FY12).

Singapore debut by end-13 through Singapore’s leading baijiu distributor, Oasis Global. The current baijiu market in Singapore is estimated to be worth S$3m in revenue p.a. and this is projected to double by 2015, driven by Chinese businessmen in the country.

Raffles Medical Group

Maybank Kim Eng Research on 25 June 2013

IN recent months, the company has seen expansion plans scuppered, with the unsuccessful tender of a greenfield Hong Kong hospital and failed application to use its Thongsia Building as a medical centre.

In the current market environment, however, we think there is much to love about a company which has been resilient in delivering earnings growth. Organic hospital expansion and a possible China project will add a dose of excitement.

No harm done from these setbacks, as we expect the group to reap a non-operational gain from the sale of Thong Sia Building. Raffles Hospital expansion is still expected to start by this year.

With current bed utilisation at around 60 per cent, we believe there is further room to grow hospital revenue at current trajectory (up around 15 per cent y-o-y in past 12 months).

The company is still in active discussions for the Shekou, Shenzhen hospital. Given the timelines involved upon signing the letter of intent in February 2013, we believe a more concrete development could materialise over the next two months.

We examine the China healthcare industry in more depth and conclude that potential returns from this 200-bed international hospital is comparable to existing matrixes, while the long-term potential is significant for Raffles Medical.

Our primary estimate is that this hospital alone will add around $18.5 million a year in profit (or 30 per cent of current bottomline and 3.4 Singapore cents EPS) once it turns operational.

More aggressive expansion is on the cards. In targeting China, management sees the potential beyond a single hospital, and will likely kick on from there. The company also appears to be adopting a more aggressive stance, after years of conservative organic growth.

Based on our estimates, the company can easily fund both the Raffles Hospital expansion and the potential new Shekou project without going into debt.

There is much to love about this company. Profitability has grown for 16 years in a row and this resiliency is much prized in the current environment.

We upgrade the stock to a "buy", with a new target price of $3.80, factoring in higher cash flows (still based on a three-stage discounted cash flow methodology). This implies 28.8 times FY2013 estimate, which is comparable to Asian-listed peers.

BUY

CapitaLand Limited

OCBC on 25 June 2013

We believe recent PMI and interbank liquidity datapoints from China point to increasing macro uncertainties as authorities attempt to engineer a more sustainable albeit slower tempo of growth. This being so, we see heightened downside risks for CAPL’s Chinese residential sales and rental outlooks. In Singapore, increasing visibility of a QE exit scenario have moved bond yields to recent highs and a trend of rising mortgage rates would likely ensue from here, in our view. Our judgment is that while rising rates alone are unlikely to trigger dramatic residential price downside, it would likely weigh on primary sales volumes ahead. We lower our fair value estimate to S$3.77 but maintain a BUY rating as we consider CAPL shares to be likely oversold at this juncture at a 45% discount to RNAV. Note that 36% of CAPL’s value is constituted by its stake in listed CapitaMalls Asia (CMA) which has dipped only 8.2% YTD versus CAPL’s whopping 19.5% correction. Moreover, we highlight that CAPL continues to hold a strong balance sheet (S$5.4b cash, 44% net gearing) which would buttress its businesses through potential headwinds.

Chinese authorities gunning for sustainable growth
Last week, the flash Chinese PMI reading for May came in below view at 48.3 – a nine-month low and the second consecutive month of a below-50 reading (signalling contraction). Moreover, Chinese credit conditions have been tight over Jun so far with the overnight repo rate touching 11.7% last Thursday. While these datapoints point to significant discipline from Chinese authorities in curbing economic excesses, we see increasing uncertainties creeping into the macro picture as the government attempts to engineer a more sustainable albeit slower tempo of growth. This being so, we see heightened downside risks for CAPL’s Chinese residential sales and rental outlooks.

Rising mortgage rates in Singapore could weigh on sales
In Singapore, while the Fed fund rate is seen to be kept low till 2015, increasing visibility of a QE exit scenario have moved bond yields to recent highs. Going forward, we believe a trend of rising mortgage rates would likely ensue from here. From our sensitivity analysis, for a S$1m loan, an increase of 50 bps would increase monthly mortgage payment by around 7%. Our judgment is that while rising rates alone are unlikely to trigger dramatic residential price downside, it would likely weigh on primary sales volume ahead. 

Maintain BUY on lower S$3.77 fair value estimate
We update our RNAV valuation model with softer cap rates and ASP assumptions and hence lower our fair value estimate to S$3.77 with a higher RNAV discount of 30% versus S$4.29 (20% RNAV disc.) previously. However, we maintain a BUYrating as we consider CAPL shares to be likely oversold at this juncture at a 45% discount to RNAV. Note that 36% of CAPL’s value is constituted by its stake in listed CapitaMalls Asia (CMA) which has dipped 8.2% YTD versus CAPL’s whopping 19.5% correction. Moreover, we highlight that CAPL continues to hold a strong balance sheet (S$5.4b cash, 44% net gearing) which would buttress its businesses through potential headwinds.

Neptune Orient Lines

OCBC  on 25 June 2013

We downgrade Neptune Orient Lines’s (NOL) to HOLD in light of weaker than expected freight rates and poorer industry-wide action on capacity management. According to the SCFI, average freight rates have declined by more than 13% QoQ as compared to an increase over the same period last year. This downward trend could reduce the impact of the upcoming general rate hike on 1 Jul – enacted by the Transpacific Stabilisation Agreement – unless greater effort on reducing capacity is undertaken by carriers ahead of the peak-season. While the low-fuel cost environment and ongoing cost-saving initiatives will benefit NOL, we lower our forecasts in anticipation of a slightly disappointing peak season. Lowering our P/B peg to 1.1x (1.3x previously), our fair value estimate falls to S$1.17 (S$1.38 previously).

Freight rates take a tumble
According to the Shanghai Containerised Freight Index (SCFI), average freight rates for 2Q13 have fallen by more than 13% QoQ with the decline more pronounced in certain sectors (mainly Europe and South America: -35.4% QoQ % -34.5% QoQ each). The sole sector that registered marginal improvements was Intra-Asia (+4.1% QoQ). This was in stark contrast to the figures over the same period last year where overall average freight rates improved by 31.2% QoQ as carriers collectively enforced capacity cuts and rate hikes.

Jul 1 boost may be temporary
Members of the Transpacific Stabilisation Agreement (TSA) – of which Neptune Orient Lines (NOL) belongs to – have agreed to hike rates by US$400/FEU for the transpacific route and by US$600/FEU for all other destinations, effective 1 Jul. This increase will hopefully help to boost rates ahead of the peak-shipping season. However, carriers continue to be plagued by over-capacity issues and the impact from this increase could only be temporary in nature.

Efforts to control capacity wavering?
Aside from the substantial capacity adjustments back in late 2011, efforts to control capacity since then have waned despite initiatives by alliances to reduce routes, and this has led to a negation of general rate hikes implemented in Jan and Apr this year. Although there has been the recent formulation of a P3 alliance between the world’s three largest container liners (Maersk, CMA CGM and Mediterranean Shipping Company), it will only commence from 2Q14 and impact mainly the Asia-Europe trade route (of which NOL has ~15% top-line exposure). 

Reduce forecasts and valuation
While the low-fuel cost environment and ongoing cost-saving initiatives will benefit NOL, we opt to lower our forecasts in light of weaker freight rates and anticipation of a slightly disappointing peak season. Lowering our P/B peg to 1.1x (1.3x previously), our fair value estimate falls to S$1.17 (S$1.38 previously). Downgrade to HOLD.

Vard Holdings

Maybank Kim Eng Research, June 24

REITERATE "buy". Order intake to gather pace in H2 2013. Vard's share price is off its low of $1.015 following an unwarranted selldown previously.

While there are some easing of concerns over margins and order intake, further re-rating would need to be triggered by real order wins which we believe would gather pace towards H2 2013. Vard has the most attractive valuations among the O&M stocks under our coverage, trading at 5.8x FY2014F PER, 5-6 per cent forward dividend yields and FY2013-2015F ROEs of more than 25 per cent. Reiterate Buy and TP of S$1.65.

Optimism expressed by leading offshore support vessel (OSV) owners following their Q1 2013 results generally support our view that high-end OSV newbuild ordering is on the verge of picking up again in H2 2013. GulfMark Offshore remarked that North Sea fixtures are being set at higher-than-expected levels. Tidewater Inc's recent acquisition of Troms Offshore to expand into the Norwegian market reflects their view on the long-term attractiveness of the North Sea market.

Average utilisation and charter rates for AHTSs and PSVs are generally rising although there are still occasional bouts of volatility. An oversupplied order backlog may still hinder new orders but that should ease as most vessels get delivered in 2013. Solstad believes that there are opportunities for anchor handling tug supply vessel and platform supply vessel orders to surprise on the upside this year.

New rigs entering the market warrants more support vessels. A common notion brought up by the OSV owners is that a large number of rigs entering into service over the next 12 months would warrant the need for more support vessels. We concur with this view which is consistent with rig-delivery schedules of Singapore rigbuilders under our coverage.

The subsea construction market is still strong and Solstad believes that it is underpinned by solid fundamentals and limited availability of modern and large construction vessels.

A batch of pipelay vessel orders from Petrobras potentially worth three billion Norwegian kroner (about S$625 million) is still in the cards which would be a bonus to our expectation of 11.5 billion Norwegian kroner in new order wins for Vard this year.

The award could be near as Petrobras has recently been returning to the market to issue tenders which have been outstanding since 2012.

BUY

Wilmar international

OCBC on 24 June 2013

Wilmar international Limited (WIL), with its large exposure to China via its oilseeds crushing and consumer pack businesses, is certainly feeling the impact from the recent slew of sluggish economic data out of the mainland. As such, stock price has been particularly volatile over the past week or so, rising by as much as 7.1% to a recent S$3.31 high before retreating by 6.3%. Going forward, we continue to expect more volatility in share price, especially if market adopts a less “risk on” approach. In view of this, we reduce our valuation peg from 15x to 12.5x, which in turn reduces our fair value from S$3.90 to S$3.25. Downgrade to HOLD for now.

China sees potentially slower growth
Economic data out of China continues to remain sluggish, with the HSBC’s flash PMI number falling sharply to 48.3 in Jun from 49.2 in May, which was not only weaker than expected (consensus of 49.1), but it also shows that the contraction in manufacturing is much faster than expected. Although Bloomberg still has consensus GDP forecast for China at 7.8%, market watchers believe that further downgrades are likely, and China could potentially see a GDP growth of 7.5% this year or lower.

Volatile price swing over last two weeks
As a result, Wilmar international Limited (WIL), with its large exposure to China via its oilseeds crushing and consumer pack businesses, certainly felt the impact, given the recent wild swings in its share price over the last week or so. From a low of S$3.11 on 14 Jun, the stock jumped 7.1% to hit a high of S$3.33 on 18 Jun before sliding back 6.3% to almost where it started before recovering slightly to end at S$3.25. 

Likely still more volatility ahead
Although CPO (crude palm oil) prices have been fairly stable (modest uptick over the past week), industry watchers note that soy prices could come off sharply due to a more bountiful harvest. Note that WIL had also previously guided for crushing margins in China to ease in 2Q13 as a large quantity of beans will be arriving in China now that the port congestion in Brazil has cleared. Furthermore, lower sugar prices could also weigh on its sugar operations. 

Downgrade to HOLD
While we are maintaining our FY13 and FY14 estimates, the less “risk on” approach taken by the current market will result in our valuation peg easing from 15x to 12.5x and our fair value dropping from S$3.90 to S$3.25. Downgrade to HOLD.

Venture Corp

OCBC on 24 June 2013

Our conversation with Venture Corp (VMS) highlighted that sentiment among its customers has largely remained cautious given the still uncertain macroeconomic conditions. This is in line with tepid macro data points which were released recently. We now expect VMS’s 2H13 recovery strength to be weaker than our previous expectations. Hence, we pare our FY13/14F revenue forecasts by 5.4/1.6%, even as we take into account the recent appreciation of the USD vis-à-vis the SGD. Our FY13/14F PATMI estimates are lowered by 7.8/6.6%, respectively. While we like VMS’s strategy of continuing its acquisition drive for new customers and growing its market share with existing customers by leveraging on its strong design and engineering capabilities, we prefer to wait for clearer signs of a rebound in the global economic conditions before turning more positive on the stock. Maintain HOLD with a lower fair value estimate of S$7.37 (previously S$8.00) due to our reduced forecasts.

Cautious sentiment still prevalent among customers
Our recent conversation with Venture Corp (VMS) highlighted that sentiment among its customers has largely remained cautious given the still uncertain macroeconomic conditions. This is in line with the World Bank’s revised growth forecasts for the global economy, with global real GDP projections trimmed by 0.2ppt and 0.1ppt to 2.2% and 3.0% for 2013 and 2014, respectively. Manufacturing data emanating from China has also illustrated sluggishness, with the latest China HSBC Manufacturing June PMI flash estimate falling to a nine-month low of 48.3. Singapore’s electronics NODX also disappointed, slipping 13.2% YoY in May, representing a tenth consecutive month of YoY decline and was below the street’s 10.5% median forecast. 

Lowering our estimates as a prudent measure
We now expect VMS’s 2H13 recovery strength to be weaker than our previous expectations in light of the aforementioned factors. Hence, we see the need to pare our FY13/14F revenue forecasts by 5.4/1.6%, even as we take into account the recent appreciation of the USD vis-à-vis the SGD. Our FY13/14F PATMI estimates are lowered by 7.8/6.6%, respectively. 

Waiting for a firmer economic rebound
VMS’s strategy in current uncertain times is to continue its acquisition drive for new customers and improve its product and service quality as a means of differentiating itself from its competitors. This also involves a targeted approach to increasing its market share with existing customers given its strong design and engineering capabilities. This would position the group for a future uplift in orders when the economic environment improves on a firmer footing, in our view. Although VMS’s share price has dipped 11.5% since its disappointing 1Q13 results, we prefer to wait for clearer signs of a rebound in the global economic conditions before turning more positive on the stock. Maintain HOLD with a lower fair value estimate of S$7.37 (previously S$8.00) as a result of our reduced forecasts.

Mapletree Logistics Trust

OCBC on 21 June 2013

Mapletree Logistics Trust (MLT) has entered into a sale and purchase agreement with supply chain management company, Oakline Co. Ltd, for the acquisition of The Box Centre in South Korea. Oakline will lease back the property for a period of six years with built-in rental escalation from second year onwards. At a purchase consideration of KRW28.75b (~S$32.0m), the property is expected to provide an initial NPI yield of 8.4%. Management expects to fund the acquisition fully by debt, which is expected to increase its aggregate leverage marginally from 34.1% as at 31 Mar to 34.6%. This is likely to add ~0.03 S cents to FY14 DPU, based on our projections. We now factor in the acquisition into our forecasts, with the assumption that it will be completed in Jul. However, we reduce our fair value from S$1.34 to S$1.15 on higher cost of equity to reflect a higher risk-free rate, higher beta and reduced market risk appetite for interest-rate sensitive stocks. We maintain HOLD on MLT due to valuation grounds.

Proposed acquisition of The Box Centre
Mapletree Logistics Trust (MLT) has entered into a sale and purchase agreement with supply chain management company, Oakline Co. Ltd, for the acquisition of The Box Centre in South Korea. This will be MLT’s second transaction with Oakline, after the purchase of Yeoju Centre from Oakline in 2008. Oakline will lease back the property for a period of six years with built-in rental escalation from second year onwards. At a purchase consideration of KRW28.75b (~S$32.0m), the property is expected to provide an initial NPI yield of 8.4%. This is likely to add ~0.03 S cents to FY14 DPU, based on our projections.

Details on the property
The Box Centre is a modern warehouse facility comprising a three-storey dry warehouse and an ancillary office block with a total GFA of 27,015sqm. The facility is completed in Mar 2012 and has a floor loading capacity of 15kN/sqm, floor-to-ceiling of 9.8m as well as direct ramp access to all floors and dual-layer walls to reduce dew condensation. Located in Gyeonggi-do, South Korea’s largest logistics cluster, the property is well served by major highways and is in close proximity to the West Icheon Interchange and Deokpyung Interchange. 

Maintain HOLD
Management expects to fund the acquisition fully by debt, which is expected to increase its aggregate leverage marginally from 34.1% as at 31 Mar to 34.6%. In our view, the acquisition is largely in line with MLT’s strategy to focus higher growth markets and strengthen its presence in South Korea’s logistics sector. We now factor in the acquisition into our forecasts, with the assumption that it will be completed in Jul. However, we reduce our fair value from S$1.34 to S$1.15 on higher cost of equity to reflect a higher risk-free rate, higher beta and reduced market risk appetite for interest-rate sensitive stocks. Maintain HOLD on valuation grounds.

Keppel Land

OCBC on 20 June 2013

KPLD announced that it has acquired a 17.5ha residential site in Shanghai’s Seshan area for RMB1.33b (S$266m) on which it would develop ~200 landed homes with 250-350 sqm GFA each. The site is 20km away from Shanghai Hongqiao International Airport and 32km from the city centre and is KPLD’s ninth project in the city of Shanghai. Assuming a total net saleable area of 60k sqm and construction costs of RMB6k psm, we estimate an RNAV accretion of 3.5 S-cents per share. We update our model for this acquisition and latest assumptions and our fair value estimate increases marginally to S$4.59 (25% discount to RNAV) from S$4.53 previously. Maintain BUY.

Acquires Shanghai landed site
Keppel Land’s (KPLD) announced that it has acquired a 100% stake in a 17.5ha residential site in Shanghai’s Seshan area on which it would develop ~200 landed homes with 250-350 sqm of net saleable area each. The acquisition cost is RMB1.33b (S$266m), including RMB584m of outstanding debt held by the acquired entity, Shanghai Jinju Real Estate Development Co., Ltd. This site is 20km away from Shanghai Hongqiao International Airport and 32km from the city centre. It also enjoys convenient access to the A9 expressway and views of the Sheshan National Forest Park. It is KPLD’s ninth project in the city of Shanghai. 

Has experience in this region and product format
We note this site is about 11km southwest of Villa Riviera in the Qingpu district – the group’s first villa project in Shanghai – which comprised 168 landed homes and is 100% sold. Given KPLD’s experience with this region and product format, we are positive on this acquisition and believe it would likely be accretive. Assuming a total net saleable area of 60k sqm and construction costs of RMB6k psm, we estimate an RNAV accretion of 3.5 S-cents per share. While KPLD currently has a strategic alliance with Vanke to collaborate in the Chinese and Singapore markets, we understand that KPLD is likely to retain a full stake in this project ahead.

Raise fair value estimate to S$4.59
We favor KPLD for its strong balance sheet (S$1.1b cash, 31% net gearing), diversified portfolio exposure and the potential divestment gains from MBFC T3 as the asset stabilizes. In addition, group enjoyed a positive launch in May 13 at Corals at Keppel Bay with 132 units sold out of a total of 366 units while land-banking continues unabated in key markets Singapore and China, including the Kim Tian site recently acquired in Apr-13. We update our model for this acquisition and latest assumptions and our fair value estimate increases marginally to S$4.59 (25% discount to RNAV) from S$4.53 previously. Maintain BUY.

ComfortDelgro

OCBC on 20 June 2013

We are upgrading ComfortDelgro to BUY as its share price has shown signs of stabilising since the partial stake sale by the SLF about a month ago. In our view, the group remains a high-quality counter with unchanged fundamentals and positive growth drivers from its overseas operations. Furthermore, while the group continues to face domestic challenges in the absence of a fare increase, we view the recent fare review delay as an indication of a more sustained and beneficial fare review structure in the long-run. We leave our fair value estimate of S$1.95 unchanged.

Share price stabilising since stake sale
ComfortDelgro’s (CDG) is showing signs of stabilising after the partial stake sale by the Singapore Labour Foundation about a month ago (at its lowest, CDG fell by more than 20% from when the sale was completed). At this juncture, we believe that it is a good opportunity to pick-up a high-quality counter on the cheap and, potentially, on the rebound. 

Fundamentals unchanged
Domestic challenges aside, the group’s overseas growth prospects, which have been its key growth driver, remain unchanged. As a recap, CDG recently made an acquisition for its UK operations that expanded its fleet size by 41% - along with additional service routes – and increased its market share to joint-second in the city. (This deal should become income accretive beyond FY13). In addition, CDG is in the process of tendering for additional bus routes in New South Wales (Australia) – as well as re-submitting its bid for its existing routes - and we are hopeful for positive results come Jul this year. More importantly, its UK and Australian bus segments are operated on a cost-plus model, which significantly limits its downside risks. 

Positives from fare review delay
Although the Fare Review Mechanism Committee (FRMC) announced earlier in the month that it has delayed the submission of its findings by a few months, the likely outcome of a fare increase remains on track, in our view. Furthermore, the delay should be viewed as a strong political will to devise a fare review structure that will be sustainable and more beneficial to the public transport operators in the long-run, rather than a one-off fare increase to paper current deficiencies. 

Time to accumulate 
Given its recent share stability and unchanged fundamentals, we upgrade CDG to BUY with an unchanged fair value estimate of S$1.95.

Hengyang Petrochemicals Logistics

UOBKayhian on 20 June 2013

Valuation

·         Discount to peers’. Hengyang is trading at a forward 12-month PE of 17.4x, or a 19% discount to its tank terminal peers’ average of 21.5x.

Investment Highlights

·         Hengyang Petrochemical Logistics (Hengyang) transports and stores liquid petrochemical products such as phenol, fuel oil, acetic acid and ethylene for blue-chip customers, including BP, BASF, CNOOC, Shell and Sinopec. The group operates in the Yangtze River Delta and has operational facilities in Deqiao, Jiangyin.

·         New facilities to boost storage capacity. The group is currently developing new facilities in Wuhan, Chongqing and Yueyang at the middle and upper reaches of Yangtze River. These facilities are located within chemical and industrial parks near the operations of its existing customers. With these facilities developing in phases,Hengyang will boost its current storage facility from 265,000 cubic metres to 962,600 cubic metres in 2014 and up to 1.39m cubic metres by 2016.

·         Strategic investor MEGCIF5 took up a 35% stake in Hengyang Holding Pte Ltd (HHPL). Macquarie Everbright Greater China Infrastructure Fund Investments 5 Ltd (MEGCIF5) has agreed to invest Rmb271.25m for a 35% stake in HHPL, with Hengyang owning the rest. HHPL is the holding company for all storage facilities assets in the company. This transaction values Hengyang’s stake in HHPL at Rmb504m, or about S$100m.

·         MEGCIF5 is a global infrastructure fund managed by Macquarieand Everbright. According to the official website, the fund has a total committed capital of US$870m and specialises in infrastructure project investments, such as toll roads, airports, water treatment facilities, ports, and renewable energy projects in Hong Kong andChina.

·         We view the transaction as positive as it may reflect the true market value of Hengyang’s net assets at S$100m vs a market capitalisation of S$67.1m. With the cash in hand, the group may be able to speed up the construction and commissioning of the storage facilities in order to drive revenue and boost net profit going forward.

Far East Orchard Ltd

Maybank Kim Eng on 19 June 2013

AFTER repeated bidding attempts, Far East Orchard has finally won the HDB government land sale (GLS) tender at Fernvale Close (99-year leasehold), jointly with Frasers Centrepoint (FCL) and Sekisui House for S$256.98 million (or S$533 per sq ft).

The land parcel sits on a site with an area of 161,000 sq ft and has a gross floor area of 482,000 sq ft, with estimated capacity of 495 dwelling units.

Far East Orchard's capital contribution is 30 per cent while that of FCL and Seikisui will be 40 per cent and 30 per cent, respectively.

We estimate breakeven cost at $860 psf and average selling price of $1,000 psf. This is comparable to the nearby H2O Residences (total 521 units) by CDL, which has an ASP of about $939 psf.

The new development adds 4 cents to our RNAV. According to the Urban Redevelopment Authority, H2O Residences is about 94 per cent sold as at May 2013.

We are expecting Fernvale Close to be launched in 2014 and completed by 2017.

Year-to-date, Far East Orchard's share price has lagged the STI index by about 8 per cent because of the overhang of the Australian acquisitions.

Far East Orchard announced in April that it is looking at acquiring five Australian Hospitality assets and the hospitality management business of Toga Group (50 per cent stake) for $285 million and three Australian Hotels and existing hospitality management business of Straits Trading Company (STC) under a 70-30 JV (issue price of $236.2 million for 70 per cent stake).

Clients we spoke to remain concerned about the viability of the Australian hospitality business, and the weakening prospects for Australian commodities following China's slowing economic growth.

The Singapore government 10-year bond yield has risen sharply by more than 70 basis points to 2.10 per cent in a month's time, partly driven by Federal Reserve chairman Ben Bernanke's congressional testimony on May 21.

The S-Reits market has so far corrected by about 11 per cent since then, and we expect the resulting rate hikes to cause physical cap rates to expand moving forward.

We thus ascribe a larger 35 per cent discount (previously 25 per cent) to our residential RNAV, given that Far East Orchard's developments are primarily onshore and it is a mid-cap developer.

Maintain "Buy" with a reduced TP of $2.28 (previously $2.50).

BUY

Ezion Holdings

OCBC on 20 June 2013

The recent market sell-down has highlighted the resilience of the stock of Ezion Holdings. YTD, the STI has given up its gains this year, while the FTSE Oil and Gas Index is down about 1.2%. However, investors of Ezion are still sitting on gains of about 35.5%. Possible reasons behind this good performance include 1) good earnings visibility from its secured contracts, 2) limited risk of contract cancellations with its well-diversified and established customer profile, and 3) upside risk as Ezion leverages on its scalable model to continue to expand its presence in various parts of the world. Our fair value estimate of S$2.62 is based on Ezion’s existing contracts; contracts secured in the future that impact FY13F and FY14F earnings may be further price catalysts. Maintain BUY.

Resilience shows during times of volatility
The recent market sell-down has highlighted the resilience of the stock of Ezion Holdings– the STI has lost about 6.8% from its 52-week high of 3464.79 on 22 May 2013, while the FTSE Oil and Gas Index has slipped about 3.5%. In contrast, Ezion’s share price has dropped by about 3.4% over the same period. YTD, the STI has given up its gains this year, while the FTSE Oil and Gas Index is down about 1.2%. However, investors of Ezion are still sitting on gains of about 35.5% YTD. 

Possible reasons behind good performance
What could account for this show of relative stability? Ezion’s earnings are backed by secured contracts for a fleet of 27 liftboats and service rigs, five out of which contribute to the share of associates/JV line. Earnings from its first liftboat started to flow in 1Q10, and the group currently has contracts extending till 4Q18, not counting options that may be exercised by the customers in the future. The group’s customers are also established players in the oil and gas industry and are usually national oil companies from various parts of the world, providing good diversification. As such, we see limited risk of contract cancellations, especially with oil prices expected to remain elevated in 2013 and 2014. Indeed, there is currently more upside risk as Ezion leverages on its scalable model to continue to expand its presence in Asia, the Gulf of Mexico, and the North Sea. 

Still has upside; fair value based on existing contracts
Our fair value estimate of S$2.62 (12x FY13/14F core earnings) is derived from the expected contributions of Ezion’s existing contracts. Contracts that the group secures in the future that will have an impact on FY13F and FY14F earnings may be further price catalysts. Despite the good stock price performance YTD, we still see an upside potential of about 14% over a one-year time frame. Maintain BUY.