Singapore Telecoms Sector

OSK-DMG Research, July 30

SINGAPORE's Ministry of Communications and Information has rejected SingTel's appeal for an exemption from cross-carrying the Barclays Premier League (BPL).

The expected outcome will not hurt SingTel much in the short to medium term as viewing habits take time to change and viewers would want to compare the new bundled packages that StarHub will be unveiling very soon.

That said, SingTel would have to reassess its strategy on iconic sports content (such as the upcoming 2014 World Cup) going forward, as this development has thrown a spanner into its bundling proposition.

The decision by the Media Development Authority (MDA) to cross-carrying the BPL benefits StarHub as its subscribers would have access to the content without having to buy a second set-top box (STB), thus mitigating pay-TV churn.

BPL will cost 72 per cent more on its own. SingTel has fixed the price for standalone BPL content at $59.90 a month, the same rate that StarHub subscribers would have to pay to watch it on the latter's platform. This is 72 per cent higher than the retail price for the sports pack during the 2011 season, with BPL bundled in.

While the cost of BPL rights has skyrocketed over the years, it would appear that cross-carrying the content does not result in lower subscription fees (on a standalone basis).

SingTel's bundled Gold Pack (over 80 channels including BPL), being retailed for only $64.40 a month, is the telco's tactic to "persuade" StarHub subscribers who may be put off by the standalone BPL price.

We expect StarHub to up the ante shortly by unveiling attractive content bundles now that SingTel has made its pricing known.

It has to do this before the Aug 1 date for subscribers to start signing up for the BPL, which commences broadcast on Aug 17.

Coincidentally, M1 chose to introduce MiBox, an over-the-top Android STB, over the weekend, offering 116 TV channels and more than 18,000 video-on-demand channels.

We think M1's service, which is available to non-M1 fibre customers, will have niche appeal as it does not come with premium content. The current 1Box, launched in 2010, will be retired.

We are still "neutral" on the sector. Our top pick for exposure to Singapore's telecoms sector is M1 ("neutral", fair value: $3.25), as it is in a sweet spot of not having to contend with expensive content and offers the strongest revenue upside potential from next-generation network fibre services.

Sector - NEUTRAL

SMRT

UOBKayhian on 31 Jul 2013


Well below market expectations. 1QFY14 net profit of S$16.3m (- 55% yoy) was due to a collapse in EBITDA margin to 21.8% from 28.9% on rising costs. Key increases in costs include staff (+23% yoy), depreciation (+10% yoy) and repairs & maintenance (+4% yoy).

Earnings and target price slashed. We cut earnings forecasts by 41- 43% to reflect higher costs and no hike in fares. Consequently, our DCFbased target price has been reduced by 19% to S$1.02 (from S$1.26). Following our earnings cut, our net profit forecasts are 29-34% below consensus. We see consensus downgrades as a negative share price catalyst.

SELL. Better yield elsewhere. We maintain SELL with a DCF-derived target price of S$1.02/share. Although a potential fare review or an introduction of a financing framework (for bus and trains) could be favourable, the negotiations with the authorities could be a protracted affair. Meanwhile, we see better high-yield stocks that offer less regulatory risks. Our high-yield picks include Suntec REIT, M1 and StarHub.

(MRT SP/SELL/S$1.43/Target: S$1.02)
FY14F PE (x): 31.1
FY15F PE (x): 29.8

Hutchison Port Holdings Trust

UOBKayhian on 31 Jul 2013

Revenue slid 2.6% yoy in 2Q13 and 1% yoy in 1H13. Revenue was HK$3,032m in 2Q13 (-2.6% yoy) and HK$5.9b in 1H13 (-1% yoy). Throughput in 2Q13 in HIT and Yantian fell 20.1% and 1.3% yoy respectively. The lower-than-expected throughput numbers were mainly due to the contractors’ strike in HIT, and lower transshipment and US/EU cargoes in Yantian. The favourable throughput mix of containers from liners caused the average revenue per TEU for Hong Kong to rise yoy in 2Q13. ASP was flattish yoy at Yantian due to less concessions granted to some liners but offset by output value.

Maintain BUY and target price of US$0.88, based on 3-stage DCF model. Despite the limited DPU growth going forward, our 2013F dividend yield of 7.0% looks attractive among Singapore-listed large-cap trusts/REITs. In addition, there is no asset devaluation risk for HPHT as deep-water coastline is a scarce resource.

(HPHT SP/BUY/US$0.735/Target: US$0.88)
FY13F PE (x): 23.1
FY14F PE (x): 22.4

OSIM International

OCBC on 31 Jul 2013

Despite challenging economic conditions in China, OSIM International Ltd (OSIM) managed to record a 15.9% YoY jump in its 2Q13 PATMI to S$26.1m on the back of a 7.0% increase in revenue to S$165.5m. The former was 4.4% ahead of our forecast while the latter was 2.4% below. An interim DPS of 2 S cents was declared, in line with expectations and brings YTD dividends to 3 S cents/share. As a continuation to its innovative product drive, OSIM launched its new high-end massage chair named uInfinity in Hong Kong. This will also be sold in its other key markets in the coming weeks. We raise our FY13 and FY14 PATMI estimates by 2.5% and 2.4%, respectively, largely to account for higher share of profits of associated companies (mainly from TWG-Tea). Rolling forward our valuation to 16.5x blended FY13/14F EPS, our fair value estimate is raised from S$2.21 to S$2.40. Maintain BUY.

2Q13 PATMI slightly ahead of our expectations
OSIM International Ltd (OSIM) reported a 15.9% YoY jump in its 2Q13 PATMI to S$26.1m on the back of a 7.0% increase in revenue to S$165.5m. In our view, this was a commendable set of results considering the challenging economic conditions in China, OSIM’s largest market. Although revenue was 2.4% lower than our forecast, PATMI came in 4.4% ahead due largely to higher-than-expected financial income and share of profits of associated companies. For 1H13, revenue rose 3.7% YoY to S$316.1m, while PATMI of S$51.3m represented a growth of 14.5%.

Healthy dividend trend continues
OSIM declared a 2 S cents/share interim dividend for 2Q13, similar to our forecast and 2Q12 (which included a special DPS of 1 S cent).This brings YTD dividends to 3 S cents/share and we are forecasting FY13F DPS of 6 S cents, which translates into a yield of 2.9%. We expect this to be financed by its strong free cashflows, which we estimate to be 12 S cents/share for FY13. 

New high-end massage chair launched
Following the introduction of its uAngel Sofa-Tranzformer in 1H13 which saw robust demand from a new target segment group, OSIM recently launched its new high-end massage chair named uInfinity in Hong Kong. This comes with 19 massage programmes, carries a retail price of S$6,988 and will continue to be endorsed by international artiste Andy Lau. uInfinity will be launched next in OSIM’s other key markets in 3Q13. Management’s strategy for its massage chair segment would be to have products with different price points, ranging from S$2-3k (lower-end) to S$4-5k (mid-end) and S$7-8k (high-end). 

Maintain BUY
We raise our FY13 and FY14 PATMI estimates by 2.5% and 2.4%, respectively, largely to account for higher share of profits of associated companies (mainly from TWG-Tea). As we roll forward our valuation to 16.5x blended FY13/14F EPS, our fair value estimate is raised from S$2.21 to S$2.40. Maintain BUY.

SMRT

OCBC on 31 Jul 2013

SMRT's 1Q14 results came in below our expectations as revenue growth slowed while higher staff and depreciation expenses caused operating and net profit to decline 49.4% YoY to S$22.2m and 55.2% YoY to S$16.3m respectively. In the coming quarters - and in the absence of fare adjustments - we expect this trend to persist as higher operating expenses continue to compress margins. In addition, recurring service disruptions suggest elevated repair and maintenance expenses. With the lack of any immediate catalysts (a switch to the new rail financing framework within FY14 is unlikely in our view), we lower our FY14 forecast figures yet again and our DDM-derived fair value estimate falls to S$1.30 (S$1.45 previously). Downgrade to SELL.

Higher staff costs bite hard
SMRT's 1Q14 results came in below our expectations. Revenue growth (+3.5% YoY to S$284.8m) continued to slow in line with the moderation in train and bus ridership while higher staff costs (+23.4% YoY to S$112.7m) and depreciation expense (+10.4% YoY to S$42.3m) caused operating profit to decline 49.4% YoY to S$22.2m. As a result, net profit fell 55.2% YoY to S$16.3m.

More of the same for coming quarters
We expect operating expenses to remain elevated in the coming quarters with staff costs and repair/maintenance expenses as the main culprits. Repeated occurrences of service disruptions suggest that repair/maintenance work will only increase further while higher staff costs related to increased wages and headcount raise the baseline cost figure for FY14. 

Possible asset impairments?
SMRT continues to experience sustained competitive pressures for its domestic bus operations and the Shenzhen Zona investment, and further asset write-downs could follow. For the former, unless the fare review committee announces their recommendations within the next two months and its implementation is immediate, the bus operations could log its twelve consecutive quarter of operating losses, while the latter saw goodwill entirely wiped out in the previous quarter. 

Lack of catalysts; downgrade to SELL
With the lack of any immediate catalysts and higher opex for FY14, we lower our FY14 forecast figures yet again and our FY14 operating and net profit fall by almost 30% and 34% respectively. Maintaining a reduced payout ratio of 50% for FY14/15, our DDM-derived fair value estimate falls to S$1.30 (S$1.45 previously). Downgrade to SELL.

Telco Sector

OCBC on 30 Jul 2013

SingTel will have to offer its BPL content to rival StarHub customers after the Ministry for Communications and Information (MCI) rejected its appeal for a stay of the Media Development Authority (MDA) ruling for the cross-carriage of the closely followed football content. However, the subscription comes with a price – new subscribers will have to fork out S$59.90 (before GST) for the stand-alone package, while existing mioTV subscribers can continue with the existing pricing of S$34.90 (before GST). While we may see some migration of subscribers from mioTV to StarHub’s cable TV platform, we do not expect a huge number. We maintain our NEUTRAL rating on the sector. While we also maintain our HOLD rating on SingTel, we downgrade StarHub to SELL.

Stay on cross-carriage of BPL rejected
The Ministry of Communications and Information (MCI) has rejected SingTel’s appeal against the Media Development Authority’s (MDA) directive to cross-carry Barclay’s Premier League (BPL) live matches for the 2013-2016 seasons. Recall that SingTel had negotiated for the BPL rights on a non-exclusive basis; but MDA deemed the conditions made it onerous for StarHub to negotiate for its own rights, thus triggering the Cross Carriage Measure. As such, SingTel is required to make the necessary arrangements for the content to be carried on StarHub’s cable TV network. Understandably, StarHub has hailed the decision, calling it a “significant outcome”.

New pricing of BPL
Meanwhile, SingTel has just unveiled its pricing for BPL at S$59.90 (before GST) per month for new subscribers (both SingTel and StarHub) for its standalone, nine-channel package. mioTV does not have to cross carry channels included in its BPL Gold Packs which are currently being maintained at S$64.90 (includes BPL, sports, movies and family entertainment). We also understand that existing mioTV subscribers are not affected and they will continue to pay S$34.90 (before GST) for the stand-alone package as well. 

Minimal impact on SingTel
In light of the latest pricing announcement, we do not expect to see a significant migration of subscribers away from mioTV to StarHub’s cable TV platform, given that it will still be cheaper for existing subscribers to continue to watch BPL on the mioTV platform. While many perceive StarHub’s platform as being more stable in its delivery, the price hurdle may prove to be quite a stumbling block; there may also be implementation issues still to be worked out. And even if there are migrations, StarHub subscribers will be paying the fees directly to SingTel. 

Maintain NEUTRAL on sector
Overall, we continue to remain NEUTRAL on the sector, as dividend yields are decent but not attractive at current levels. We also maintain our HOLD rating in SingTel with an unchanged fair value of S$3.83; but we downgrade StarHub to SELL, given that the stock has rallied way above our fair value of S$3.82 in recent weeks.

StarHub

OCBC on 30 Jul 2013

StarHub Ltd will be able to cross carry the widely-followed BPL (Barclays Premier League) live matches for the upcoming 2013 to 2016 seasons. However, with a seemingly steep price point of S$59.90/month (before GST) for new subscribers (while existing mioTV subscribers continue to pay the current S$34.90 (before GST)), we suspect that any migration of subscribers from mioTV to StarHub’s cable TV platform would be quite muted. In light of the likely muted boost from the BPL cross carriage and recent strong run-up in share price (9.5% after our upgrade on 3 Jun), we feel that the stock may have run ahead of its fundamentals. As we are also keeping our DCF-based fair value unchanged at S$3.82 (already accounted for a higher risk-free rate), we foresee more downside risk from here. Hence, we downgrade our call back from Hold to SELL.

BPL cross-carriage likely non-event
StarHub Ltd will be able to cross carry the widely-followed BPL (Barclays Premier League) live matches for the upcoming 2013 to 2016 seasons; this after rival SingTel’s appeal against the MDA’s (Media Development Authority) direction was rejected. However, with a seemingly steep price point of S$59.90/month (before GST) for new subscribers (while existing mioTV subscribers continue to pay the current S$34.90 (before GST)), we suspect that any migration of subscribers from mioTV to StarHub’s cable TV platform would be quite muted. And even if there are migrations, StarHub subscribers will be paying the fees directly to SingTel. 

Strong recovery after our upgrade
Meanwhile, StarHub has seen a strong recovery after we upgraded our rating from Sell to Hold on 3 Jun, with the stock rising some 9.5% to a recent S$4.39 high. Back then, we note that the dividend yield has risen back to around 5% (or 5.2% based on our fair value), but based on current price, the yield has fallen back to 4.7%, which is just decent. However, with 10-year SGS bond yields back to around 2.5%, we feel that further upside from here may be capped, especially with consensus siding towards further rate increases in the future.

Downgrade to SELL
In light of the likely muted boost from the BPL cross carriage and recent strong run-up in share price, we feel that the stock may have run ahead of its fundamentals. Recall previously that StarHub has guided for a lower single-digit revenue growth while maintaining its service EBITDA margin at 31%. As we are also keeping our DCF-based fair value unchanged at S$3.82 (already accounted for a higher risk-free rate), we foresee more downside risk from here. Hence, we downgrade our call back from Hold to SELL.

First Reit

OCBC on 30 Jul 2013

First REIT’s (FREIT) 2Q13 results were within our expectations. Revenue and DPU (after stripping out a special distribution in 2Q12) rose 43.4% and 16.4% YoY to S$20.1m and 1.85 S cents, respectively. Only 0.86 S cents will be paid to unitholders (on 29 Aug 2013) as FREIT had already made an advance distribution of 0.99 S cents on 26 Jun 2013 (prior to the issuance of new units for part payment of its acquisitions). FREIT is in the process of refinancing ~S$92m of its floating-rate debt to a 4-year fixed-rate unsecured bank loan. Upon completion, its floating rate exposure will be reduced from 72% to 46% of its total borrowings, which we view as a positive development. We retain our forecasts, HOLD rating and DDM-derived fair value estimate of S$1.20 on FREIT.

2Q13 results within our expectations
First REIT (FREIT) reported its 2Q13 results which were within our expectations. Gross revenue surged 43.4% YoY to S$20.1m due largely to contribution from its four newly acquired properties in Indonesia (two acquired in Nov 2012 and two in May 2013). Distributable amount to unitholders rose 4.0% YoY to S$12.7m but DPU fell 4.1% to 1.85 S cents. However, if we strip out an exceptional distribution in 2Q12, FREIT’s distributable amount to unitholders and DPU would instead have increased by 26.6% and 16.4%, respectively. As FREIT had already made an advance distribution of 0.99 S cents on 26 Jun 2013 (prior to the issuance of new units for part payment of its acquisitions), only the remaining 0.86 S cents will be paid to unitholders on 29 Aug 2013. For 1H13, gross revenue rose 34.2% to S$37.6m and constituted 45.2% of our full-year projection. DPU (after stripping out the special distribution highlighted earlier) increased 12.9% to 3.59 S cents, or 45.5% of our FY13 forecast. We expect 2H13 to be stronger on a HoH basis due to a full-quarter of contribution beginning 3Q13 from the two hospitals acquired in May this year.

Plans to refinance debt a positive
Management updated us that it is in the process of refinancing ~S$92m of its floating-rate debt to a 4-year fixed-rate unsecured bank loan. The all-in cost of debt for this loan is expected to be ~3.7% and will likely be finalised by Aug this year. Upon the completion of this refinancing exercise, FREIT’s next earliest refinancing need will come in 2016 (S$166m principal amount), while ~46% of its borrowings will be based on a floating rate structure (previously 72%), based on our estimates. We are positive on this as short-term interest rates in Singapore are likely to see an increase in late 2014 or early 2015, which would affect the cost of borrowing for floating rate loans.

Targeting AEI; maintain HOLD
Meanwhile, FREIT has plans to carry out asset enhancement initiatives on three of its Indonesian properties, although details have yet to be finalised. We retain our forecasts, HOLD rating and DDM-derived fair value estimate of S$1.20 on FREIT.

Sheng Siong Group

UOBKayhian on 30 Jul 2013

Valuation

• Sheng Siong Group (SSG) is trading at a forward PE of 24.1x, 21% discount below its peers’ average. Based on Bloomberg’s estimate (9 brokers), SSG has a 12-month target price of S$0.78 with a 2013F dividend yield of 3.6%. Management remains committed to distribute up to 90% of their net profit for 2013 and 2014 as dividends. Investment highlights 

 

• SSG reported a 20.8% yoy increase in net profit to S$8.5m driven by higher revenue and better gross profit margin. Revenue increased 8.7% yoy to S$159.8m due to contribution from new stores, but this was negated by a contraction in comparable same-store sales (SSS) of old stores as keen competition eroded sales. Revenue from the group’s Bedok Central store declined as a nearby carpark was closed while the one at The Verge were also impacted by ongoing construction works in the vicinity. Gross profit margin for 2Q13 

 

• improved 0.7% to 23.2% from improved sales mix and cost efficiencies derived from the Mandai Distribution Centre.

• Management re-iterated that competition is likely to remain keen after competitor Dairy Farm rebranded its “Shop and Save” stores to Giant and Giant Express, reducing prices for some key products in order to
  gain market share. 

 

• Going forward, SSG remains focused on developing in-house brands where margins are better. In-house brands currently only contribute 5% in revenue and management sees room for expansion. On the operating margins, SSG is targeting to maintain them at the higher end of 6% although they face cost pressures from higher wages and foreign workers’ levy in the near term. 

 

• SSG will also transform some of the stores into 24-hour operation and another five will open round-the-clock on Saturdays and eve of public holidays. As they have to keep most of the power-guzzling refrigerators on throughout the night, with just a marginal higher staff costs, they would be able to cater to more customers at night. 

• To expand retail space, they are currently in negotiations on approximately 32,000 sqf of space, one in the east and the other in an estate where SSG does not have a presence. As at 30 Jun 13, SSG has a total retail area of 400,000 sf, a growth of 8.7% yoy.

KSH Holdings

UOBKayhian on 30 Jul 2013

We initiate coverage with a BUY with a target price of S$0.71, representing a 29.1% upside. With locked-in sales from its successful property launches, KSH is likely to enjoy good earnings visibility over the next five years. As an established contractor, KSH continues to replenish its orderbook with consistent contract wins with a comparative favourable margin compared to peers. Strong earnings and free cash flow (FCF) support KSH as a dividend play with a current dividend yield of 4.5%.

Investment Highlights

• Strong earnings visibility. Through its JVs, KSH has interest in 13 local property development projects. Based on KSH’s existing (eight launched) projects and current sales, we conservatively estimate KSH to recognise a profit of about S$124.6m (S$0.32/share) over the next five years. In addition, KSH’s 45% interest in its Beijing property development project, Liang Jing Ming Ju (LJMJ) Phase 4, is expected to contribute very positively to earnings for FY16. We estimate a profit of S$32m (S$0.08/share) for a fully sold LJMJ, which is expected to be launched by 3Q13. 

 

• Quality contractor with a sturdy portfolio. KSH is a Building and Construction Authority (BCA) A1 graded main contractor with over 30 years of operating history. With an established track record, KSH has been able to command a higher PBT margin from its construction arm (12.7% vs peers’ average of 10.2%) and constantly replenishes its orderbook. As at 30 Apr 13, KSH maintained a strong orderbook of S$446m, of which more than half (S$233.6m) was awarded in 2013.

• A potential source of firepower. KSH’s principal investment property is Tianxing Riverfront Square (TRS), a 36-storey retail and grade A office building at the heart of Tianjin’s CBD. While rental yield for TRS is at market rate, we believe KSH’s 69% stake in TRS may become a potential source of firepower for the company’s future developments. As at 31 Mar 13, TRS had a fair value of S$97.6m. Given TRS’s ideal location and proven occupancy track record, we believe KSH can easily monetise the property when the opportunity arises. 

• Dividend payout that has more room to grow. KSH has a laudable history of rewarding shareholders with dividends. Given its strong FCF and low payout ratio, we believe KSH is capable of maintaining or increasing its dividends going forward. In the past five FYs, KSH has a payout ratio of 21.8-44.0%. Assuming a conservative payout of 25% for FY14, it will translate to a dividend of 2.7 S cents and an attractive yield of 4.9%.

SATS Ltd

DBS Group Research, July 26

SATS Ltd's net profit grew 11.9 per cent to S$46.2 million while revenues dipped 0.8 per cent to S$434.5 million.

There was a S$3.8 million tax writeback in the quarter and it booked S$1.7 million impairment charge on assets held for sale.

Excluding these items, net profit would have registered lower 6.8 per cent y-o-y growth to S$44.1 million.

Q1 FY2014 revenues were affected by lower contribution from food solutions (down 5.6 per cent), partly offset by higher gateway contribution (up 7.9 per cent).

The weaker food solutions contribution was due to a 22 per cent drop in TFK's revenues as a result of a weaker yen and lower load factor amid strained Sino-Japan relations.

Food solutions revenue was also affected by a 6.6 per cent dip in unit meals uplifted, largely a result of Qantas moving its European flights to Dubai, from Singapore.

Qantas has redrawn about 52 flights a week, which accounts for about 2 per cent of total flights handled by SATS.

The dip in revenue was mitigated by lower operating expenses (down 1.2 per cent).

The drop in operating expenditure was led by lower raw material costs (down 2.8 per cent), depreciation (down 14.7 per cent), premise and utilities expenses (down 7.6 per cent), and others down 2.5 per cent).

Q1 FY2014 earnings were in line at about 22 per cent of our FY2014 forecasted profit, similar to the year-ago quarter.

There is little scope for share price upside in view of moderating passenger traffic growth and declining airfreight volume.

However, this should be mitigated by its commitment to manage costs, as well as relatively attractive yields.

SATS is currently trading at above one standard deviation of its historical PE band, in line with regional/global peers' average.

We call a "hold" on SATS Ltd. Our target price (S$3.29) is the average of the values derived from our discounted cash flow model and PE valuation model (16 times FY2014/15 EPS).

HOLD

Tee International

OCBC on 29 Jul 2013

Summary: TEE reported 4Q13 PATMI of S$6.4m, down 45% YoY mostly due to a S$4.1m increase in administrative expenses. Due to this, FY13 PATMI of S$13.1m was judged to be somewhat below our full year expectations. The order book of the Engineering segment now stands at S$215.4m, which remains fairly stable on a YoY basis. We like management’s active stance on seeking accretive acquisitions; note that TEE recently announced an MOU to invest in a waste-water treatment plant in Huzhou, China and also formed a JV for a S$8.6m 3-year contract for a water management project near Chao Phaya River, Thailand. We currently have a HOLD rating on TEE with a fair value estimate of S$0.38. However, given the attractive dividend of 2.50 S-cents ahead, which translates to a yield of 6.8% on the last closing price of S$0.37, we believe the downside may be capped from here.

Hurt by bump in administrative expenses
TEE reported 4Q13 PATMI of S$6.4m, down 45% YoY mostly due to a S$4.1m increase in administrative expenses. Tee reported that these expenses were incurred for marketing property development projects and also included administrative expenses for its newly acquired integrated turnkey material handling subsidiary. Due to this, FY13 PATMI of S$13.1m was judged to be somewhat below our full year expectations. We note, however, that FY13 top-line increased 51% to S$216.4m as the group recognized higher levels of contributions from engineering and property development projects. The order book of the Engineering segment now stands at S$215.4m, which remains fairly stable on a YoY basis. In addition, TEE also proposed a final dividend of 2.5 S-cents per share.

Successful listing of property segment - Tee Land Limited
Over the last quarter, the group successfully listed its property development segment on the SGX Mainboard as Tee Land Limited. We believe this will yield a few key benefits. First, a separate listing structure will allow the equity market to value the property segment alongside similar property peers. Second, this IPO raised significant capital for the group which will be key for further growth for the engineering, infrastructure and property development businesses.

Attractive dividend of 2.5 S-cents per share
We are impressed with management’s active stance on seeking accretive acquisitions; note that TEE recently announced an MOU to invest in a waste-water treatment plant in Huzhou, China and also formed a JV for a S$8.6m 3-year contract for a water management project near Chao Phaya River, Thailand. In addition, we understand that management is keen to increase its recurring income component and grow its infrastructure business in the region. We currently have a HOLD rating on TEE with a fair value estimate of S$0.38. However, given the attractive dividend of 2.50 S-cents ahead, which translates to a yield of 6.8% on the last closing price of S$0.37, we believe the downside may be capped from here.

Golden Agri-Resource

OCBC on 29 Jul 2013

Summary: Golden Agri-Resources (GAR), being one of the largest palm oil plantation owners in the world, is likely to remain vulnerable to further pullbacks in CPO prices, which had recently hit their lowest levels since Nov 2009. In view of the more muted outlook for CPO, we deem it prudent to lower our 2013 forecast to US$700/ton from US$750 previously. This results in our FY13 revenue and core earnings estimates easing by 2%. Our fair value also drops from S$0.63 to S$0.57 as we are also lowering our valuation peg from 12.5x previously to 11x. Given the limited upside and still uncertain outlook, we downgrade our call to HOLD. (Carey Wong)

CPO prices turning lower again
Crude palm oil (CPO) prices have started to turn lower recently, where the front month futures contract has just hit MYR2170/ton, probably the lowest level since Oct 2009, amid concerns that stockpiles (both CPO and soy) are expanding to record levels as production continues to climb even as global demand (especially out of China and India) remains weak. More worrying, market watchers expect to see further softening in CPO prices on supply concerns, given that production of CPO tends to improve in the second half of the year. 

Overhang on GAR
Golden Agri-Resources (GAR), being one of the largest palm oil plantation owners in the world, is likely to remain vulnerable to further pullbacks in CPO prices. Over the past three years, GAR share price has shown a strong 0.7 correlation to CPO prices. Hence, further weakness in CPO prices could also lead to downside risk for GAR, both in terms of profitability and share price. To date, GAR has underperformed the broader market, falling 15% versus the STI’s 2% rise. 

2Q performance likely muted
Despite the brief spike in CPO price in 2Q, we note that the average CPO price has actually come off some 5% from 1Q, suggesting that its performance is likely to be quite muted. At the topline, we are expecting around US$1.28b (down 6% QoQ) and a core net profit of US$100.7m (down 11%). 

Downgrade to HOLD, S$0.57 fair value
In view of the more muted outlook for CPO, we deem it prudent to lower our 2013 forecast to US$700/ton from US$750 previously. This results in our FY13 revenue and core earnings estimates easing by 2%. Our fair value also drops from S$0.63 to S$0.57 as we are also lowering our valuation peg from 12.5x previously to 11x. Given the limited upside and still uncertain outlook, we downgrade our call to HOLD.

CDL Hospitality Trusts

OCBC on 29 Jul 2013

CDL Hospitality Trusts reported a 4.4% YoY fall in net property income in 2Q13 to S$32.6m. Income available for distribution contracted 6.4% YoY to S$29.4m. 2Q13 RevPAR for the Singapore hotels fell 8.5% YoY to S$193, affected by increased competition, weaker corporate demand and the absence of the biennial Food & Hotel Asia event in Apr. The results were in line with our expectations, but missed the street’s. Estimating the financial effect of the planned closure of most of the Orchard Hotel Shopping Arcade for AEI (excluding the Galleria) from late 2013, and adjusting our assumptions for the non-Singapore hotels, our FY13F DPU falls to 10.4 S cents from 10.9 S cents. Incorporating a risk-free rate of 2.5% (versus 2.2% previously) into our model, our FV drops to S$1.73 from S$1.79. We maintain a HOLD rating on CDLHT.

Misses street's expectations
CDL Hospitality Trusts reported a 2.9% YoY decline in 2Q13 gross revenue to S$35.6m and a 4.4% YoY fall in net property income to S$32.6m. Income available for distribution contracted 6.4% YoY to S$29.4m. The results were in line with our expectations, with 1H13 DPU of 5.41 S cents forming 50% of our prior FY13 estimate. 2Q13 results missed the street’s expectations with 1H13 DPU forming only 47% of the mean FY13 estimate. 

Weak quarter from SG as expected
The weak performance was chiefly due to lower gross revenue from the Singapore hotels, which was mitigated by a S$1.9m revenue boost from Angsana Velavaru (Maldives), which was acquired in Jan 2013. 2Q13 RevPAR for the Singapore hotels fell 8.5% YoY to S$193, affected by increased competition, weaker corporate demand, the absence of the biennial Food & Hotel Asia event in Apr, and a mild impact from the haze. Contribution from the Australian hotels in Brisbane and Perth was slightly lower YoY, affected by the slowing Australian economy and a weaker AUD.

Reducing FY13 RevPAR growth assumption
We understand from management that the performance of CDLHT’s Singapore hotels in July was still weak, although numbers a bit firmer for Aug and Sep. Our checks suggest a similar trend for the overall industry. However, we remain concerned about a mild oversupply situation, with expectations that hotel room supply will grow at 5.8% p.a. from 2013 to 2015, while room demand will only grow at 5.4% over the same period.

New FV of S$1.73
Estimating the financial effect of the planned closure of most of the Orchard Hotel Shopping Arcade for AEI (the Galleria will be kept open) from late 2013, and adjusting our assumptions for the non-Singapore hotels, our FY13F DPU falls to 10.4 S cents from 10.9 S cents. Incorporating a risk-free rate of 2.5% (versus 2.2% previously) into our model, our FV drops to S$1.73 from S$1.79. We maintain a HOLD rating on CDLHT.

CapitaLand

OCBC on 26 Jul 2013

Summary: CAPL’s 2Q13 PATMI decreased 0.7% YoY to S$383.1m. We judge this to be within expectations; 1H13 PATMI now cumulates to S$571.3m which makes up 65% of our full year forecast. The group sold 736 Chinese residential units in 2Q13, which is respectable but somewhat slower than the 955-unit pace in 1Q13. Management guides that Chinese sales would likely fall to around 3.3k units for FY13, pointing to c.1.6k units in 2H13 – still healthy but below the 1.9k-unit pace in 2H12. In Singapore, residential sales slowed to 139 units in 2Q13 in the aftermath of a blowout 1Q13 (544 units sold) driven by discounts. Mall subsidiary CMA continues to report firm operating statistics: same-mall NPI in China and Singapore in 1H13 is up 12.1% and 2.0% YoY, respectively. We believe CAPL’s strategy of growing competitive scale in six geographic clusters is sound and well thought out, and we continue to see value in CAPL shares at current levels. Maintain BUY with an unchanged fair value estimate of S$3.77.

2Q13 earnings within expectations
CAPL’s 2Q13 PATMI decreased 0.7% YoY to S$383.1m. We judge this to be within expectations; 1H13 PATMI now cumulates to S$571.3m which makes up 65% of our full year forecast. 1H13 topline is S$1,844.6m, up 22.7% YoY mostly due to higher recognitions from residential projects in Singapore and China and stronger contributions from CMA and Ascott. However, we note that group-wide gross margins dipped significantly QoQ from 40% in 1Q13 to 28% in 2Q13 due to slimmer margins at projects booked over the quarter. No interim dividend is announced by the group.

Chinese sales likely to hold steady in 2H13

CAPL sold 736 Chinese residential units in 2Q13, which is respectable but somewhat slower than the 955-unit pace in 1Q13. Management guides that Chinese sales would likely fall to around 3.3k units for FY13, pointing to c.1.6k units in 2H13 – still healthy but below the 1.9k-unit pace in 2H12. In Singapore, residential sales slowed to 139 units in 2Q13 in the aftermath of a blowout 1Q13 (544 units sold) driven by discounts. Unsold pipeline as of end Jun-13 consists of 883 units at The Interlace, d’Leedon and Sky Habitat, and the group aims to launch Marine Point (124 units) and Bishan St 14 (694 units) in 2H13.

CMA’s business model gaining traction
Mall subsidiary CMA reported 2Q13 PATMI of S$245.6m, up 5.9% YoY mainly due to higher fair value gains for Chinese assets and ION Orchard, and profit recognition at Bedok Residences. We continue to see firm operating statistics: same-mall NPI in China and Singapore in 1H13 is up 12.1% and 2.0% YoY, respectively.

Building competitive scale
We believe CAPL’s strategy of growing competitive scale in six geographic clusters (Singapore, Beijing/Tianjin, Chengdu/Chongqing, Shanghai/Hangzhou/Suzhou/Ningbo, Guangzhou/Shenzhen, and Wuhan) is sound and well thought out, and we continue to see value in CAPL shares at current levels. Maintain BUY with an unchanged fair value estimate of S$3.77.

SATS

OCBC on 26 Jul 2013

SATS’s 1Q14 results came in slightly under our expectations as revenue slipped 0.8% YoY to S$434.5m following declines in the food solutions segment and EBITDA fell 2.6% YoY to S$60.5m. Qantas’s move to Dubai and lower business volumes from TFK were the main culprits for this decline. Only with a write-back of prior-year’s tax provisions was the group able to record an 11.9% YoY improvement in PATMI to S$46.2m. For the coming quarters, we expect some softness in growth trends for passenger traffic and moderate our forecasts for the remainder of FY14 accordingly. While our fair value lowers to S$3.12 (S$3.15 previously) – suggesting limited upside at this juncture – we expect SATS’s defensive qualities i.e. earnings stability and healthy dividend attractiveness to provide some support for its share price. Maintain HOLD.

1Q14 results fall a little short of expectations
SATS’s 1Q14 results came in slightly under our expectations as revenue slipped 0.8% YoY to S$434.5m following declines in the food solutions segment. EBITDA also fell 2.6% YoY to S$60.5m as a result of higher staff costs (from bonus and performance payouts) and lower depreciation. Only with a write-back of prior-year’s tax provisions was the group able to record an 11.9% YoY improvement in PATMI to S$46.2m. 

Qantas withdrawal and TFK declines to blame
SATS was hurt by Qantas’s move to Dubai from Changi Airport, which resulted in a drop in gross and unit meals produced during the quarter (-7.9% YoY and -6.6% YoY). The move saw an overall reduction of 50-plus flights weekly on the Kangaroo route. In addition, a combination of seasonality factors and demand drop-offs from TFK saw top-line contribution from Japan dropped 4ppt over a year ago to 12.6%. 

FY14 growth could moderate
Previously, we had expected the sustained growth of Intra-Asia passenger traffic to provide a conducive environment for the group in FY14. However, recent data from Changi Airport suggests a slight moderation in that growth trend. For the quarter ending Jun 2013, passenger movements only grew 3.9% YoY, which was the lowest since 2011. Furthermore, quarterly air freight movements remained weak with the fifth straight YoY decline. 

Some weakness ahead; lower fair value
While we believe that management will continue to manage costs through productivity and automation initiatives, we temper our growth forecasts for the remaining quarters accordingly to reflect the recent uncertainty emanating from China and SEA. Nonetheless, new route additions and network expansion from airlines and the counter’s earnings stability and healthy dividends should provide some support for the share price in the interim. Maintain HOLD with a slightly lower fair value estimate of S$3.10 (S$3.15 previously).

Singapore Airlines

OCBC on 26 Jul 2013

Excluding one-off items, Singapore Airlines’s (SIA) 1Q14 results came in below expectations. Revenue would have fallen slightly while PATMI was inflated by exceptional items and aircraft/parts disposal gains. ). SIA remains plagued by intense competition within the premium carrier space and passenger yields continue to stay depressed. With the outlook for FY14 still expected to remain lacklustre, we anticipate an extension of selling pressure on the counter for the interim. Based on a peg of 0.8x P/Book, we maintain SELL on SIA with a fair value estimate of S$9.50 (S$10.00 previously).

One-off items boost 1Q14 results
Excluding one-off items, Singapore Airlines’s (SIA) 1Q14 results came in below expectations. Revenue – sans a S$75m settlement related to changes in aircraft delivery slots – would have fallen slightly by 0.3% YoY to S$3,765.2m and resulted in a much smaller operating profit while PATMI (+56.2% YoY to S$121.8m) was inflated by S$18.4m in exceptional items and S$13.9m from aircraft disposal gains. 

Yields continue to slide for parent airline
In terms of operating statistics, both the parent airline and SilkAir suffered from declining passenger load factors (PLF) as capacity expansion outpaced increases in passenger carriage. However, greater competition and unfavourable currency movements affected SIA more as yields fell for the second straight quarter to 11.1 S¢/pkm from 11.4 S¢/pkm in 1Q13 and 11.2 S¢/pkm in 4Q13. 

Outlook remains weak
The operating environment in the coming months remains challenging for the group and we expect yields to stay depressed. Although SIA has indicated healthy forward passenger bookings for the next few months, the expansion of SIA’s flight network could lead to capacity continuing to outpace passenger carriage. In addition, the reprieve from lower fuel prices in 1Q14 seems to be temporary in nature with crude oil prices increasing over the past three weeks, which could result in a similar catch up for jet fuel prices. Lastly, the cargo segment is also likely to stay weak given the persistent weakness in global manufacturing activity and tepid consumer demand. 

Maintain SELL
Given the weak set of core operating performance and a lack of positive catalysts ahead, we expect selling pressure to remain and reduce our fair value to S$9.50 (S$10.00 previously), based on a peg of 0.8x P/B. Maintain SELL.

Frasers Commercial Trust

OCBC on 25 Jul 2013

Frasers Commercial Trust (FCOT) reported a 28.8% YoY jump in 3QFY13 DPU to 2.19 S cents. This was due to lower interest costs and distribution savings following the redemption of 319.7m Series A Convertible Perpetual Preferred Units (CPPUs) this year. As at 30 Jun, we note that the portfolio occupancy improved by 2.8ppt QoQ to 98.1% , while the weighted average lease term remained strong at 4.6 years. Positive rental reversions ranging from 0.5% to 17.4% were also achieved for leases commencing in the quarter. More importantly, FCOT has successfully completed the renewal of 511,000 sqft of the underlying leases at Alexandra Technopark (ATP) ahead of expiry in FY14-15, hence substantially improving its lease expiry profile (excluding the ATP master lease, FY14 lease expiry would fall from 27.7% to 7.1%). These efforts, together with the completion of the Precinct Master Plan and asset enhancement works at China Square Central, are set to enhance FCOT’s operational performance and position FCOT for further growth in future, in our view. We are leaving our forecasts largely unchanged for now, but we revise our fair value from S$1.60 to S$1.58 due to a marginally higher risk free rate. Maintain BUY.

3QFY13 results broadly in line
Frasers Commercial Trust (FCOT) reported 3QFY13 gross revenue of S$30.0m and NPI of S$23.1m, down 16.1% and 13.4% YoY respectively due to a weaker AUD and divestments of KeyPoint and Japan properties. However, income available for distribution to unitholders rose by 31.2% to S$14.4m as a result of lower interest costs and distribution savings following the redemption of 319.7m Series A Convertible Perpetual Preferred Units (CPPUs) this year. This led to a similar jump of 28.8% in the quarterly DPU to 2.19 S cents. For 9MFY13, DPU tallied 5.76 S cents, up 16.6%. This is in line with our expectations, given that the 9M DPU have met 78.9% of our FY13F DPU (consensus: 73.8%).

Executing well
As at 30 Jun, the portfolio occupancy improved by 2.8ppt QoQ to 98.1% (2Q: 95.3%), while the average lease term remained strong at 4.6 years (2Q: 4.8 years). Positive rental reversions ranging from 0.5% to 17.4% were also achieved for leases commencing in the quarter and these includes tenants from diverse sectors. More importantly, FCOT has successfully completed the renewal of 511,000 sqft of the underlying leases at Alexandra Technopark (ATP) ahead of expiry in FY14-15, hence substantially improving its lease expiry profile (excluding the ATP master lease, FY14 lease expiry would fall from 27.7% to 7.1%). These efforts, together with the completion of the Precinct Master Plan and asset enhancement at China Square Central, are set to enhance FCOT’s performance and position it for further growth ahead, in our view.

Maintain BUY
On the capital management front, we note that FCOT’s average borrowing rate has also improved from 4.0% in 3QFY12 to 2.8% after refinancing its loans over the past year (2Q: 3.2%). In addition, FCOT shared that 51.0% of its borrowings are hedged into fixed rates, which should provide some certainty to its financing costs. However, gearing has crept up to 39.5% from 31.7% after the CPPU redemption, thus possibly posting some restriction to its financial flexibility. We leave our forecasts largely unchanged, but revise our fair value from S$1.60 to S$1.58 due to a marginally higher risk free rate. Maintain BUY.

Starhill Global Reit

Maybank Kim Eng Research, July 25

WE reiterate our preference for retail Reits in the current uncertain yield environment, especially as Starhill Global Reit's key assets are in the coveted Orchard Road area, where tight supply and the entry of new international retailers give it greater bargaining power in terms of leasing its space.

Looking ahead, the new rental rate from master tenant Toshin at Ngee Ann City Retail, continued repositioning of Wisma Atria and rental uplift from Malaysia portfolio master leases will drive Starhill Global's income in H2 2013 and keep the stock supported for now.

At 5.7 per cent FY2013 forecast yield and 330 basis points yield- spread, we reiterate "buy" with a dividend discount model-derived target price of $0.95.

BUY

Cache Logistics Trust

DMG & Partners Research, July 25

WITH its properties rented out under a master lessee (except APC Distrihub, which has two key tenants), Cache is able to enjoy a stable 100 per cent occupancy rate with a long-term weighted average lease to expiry profile of 3.7 years.

Coupled with a low portfolio lease expiry profile of 0 per cent and 6 per cent forecast for FY2013 and FY2014 respectively (despite some 27.4 million sq ft and 20.1 million sq ft in industrial space coming online in 2013 and 2014 respectively), we expect the Reit to be able to deliver stable yet sustainable income to investors over the next few years.

Cache reported a Q2 FY2013 dividend per unit (DPU) of 2.15 cents (+8.4 per cent y-o-y). Revenue for this period grew to $20.4 million (+16.5 per cent y-o-y) while net property income rose by 17.0 per cent y-o-y, mainly attributed to additional contribution from a full quarter's rental income from the Reit's Pandan Logistics Hub (acquired in July 2012) and the recent acquisition of Precise Two in April.

In the subsequent quarters, we expect to see decent growth from Cache as the latter property will continue to contribute to its earnings growth.

We believe that Cache will be able to achieve stable and long-term growth, thereby benefiting its unitholders, given: i) the high occupancy rate and the superior profile of its assets, ii) strong support from its sponsor, and iii) no debts due for renewal until 2015 and 70 per cent of total debt tied to a fixed rate.

Currently trading at 6.8 per cent and 7.2 per cent of FY2013 and FY2014 forecast dividend yields respectively, Cache is one of Singapore's highest-yielding Reits.

We initiate coverage on the Reit with a "buy" and a dividend discount model-based (cost of equity: 9.1 per cent, terminal growth: 2.0 per cent) target price of $1.42.

BUY

Cache Logistics Trust

OCBC on 25 Jul 2013

Cache Logistics Trust (CACHE) turned in a firm set of 2Q13 results last evening. NPI grew 17.0% YoY to S$19.6m and distributable income increased 19.8% to S$16.6m. DPU for the quarter came in at 2.147 S cents, representing a rise of 8.4% YoY. This brings the 1H13 DPU to 4.381 S cents (+7.7% YoY), meeting 52.0%/50.9% of our/consensus FY13 DPU projections. As at 30 Jun, the overall portfolio occupancy was maintained at 100%, with a weighted average lease to expiry of 3.6 years. CACHE’s aggregate leverage also held steady at 29.2% compared to 1Q. This, we note, is the second lowest gearing level among the industrial REITs listed in Singapore. While CACHE has kept mum on any likely acquisition asset, we judge that its robust financial position will put it in good stead for any attractive opportunities. Management also reiterated that there is no debt refinancing needs in the next two years, as its term loans will mature only in 2015 and 2016. In addition, 70% of its debts is hedged, thereby giving CACHE considerable certainty over its financing costs. We maintain BUY with unchanged fair value of S$1.40 on CACHE.

2Q13 performance within view
Cache Logistics Trust (CACHE) turned in a firm set of 2Q13 results last evening. NPI grew 17.0% YoY to S$19.6m and distributable income increased 19.8% to S$16.6m. The better performance was chiefly driven by rental escalations from its existing portfolio assets and full-quarter contribution from Precise Two following the completion of acquisition on 1 Apr. DPU for the quarter came in at 2.147 S cents, representing a rise of 8.4% YoY. This brings the 1H13 DPU to 4.381 S cents (+7.7% YoY), meeting 52.0%/50.9% of our/consensus FY13 DPU projections. Based on the last closing price, annualised current yield stands at 7.1% – attractive in our view.

Portfolio maintained its resilience
As at 30 Jun, the overall portfolio occupancy was maintained at 100%, with a weighted average lease to expiry of 3.6 years. Notably, CACHE’s lease expiry in 2013 has already been fully addressed, while only 6% of total portfolio GFA is due for renewal in 2014. Hence, we believe that there should be limited leasing risk over the period, and that income stream would remain stable and predictable.

Strong financial standing
CACHE’s aggregate leverage also held steady at 29.2% compared to 1Q. This, we note, is the second lowest gearing level among the industrial REITs listed in Singapore. While CACHE has kept mum on any likely acquisition asset, we judge that its robust financial position will put it in good stead for any attractive opportunities. Average all-in financing cost in 2Q improved marginally from 3.52% in prior quarter to 3.48%. Management also reiterated that there is no debt refinancing needs in the next two years, as its term loans will mature only in 2015 and 2016. In addition, 70% of its debts is hedged, thereby giving CACHE considerable certainty over its financing costs. This is consistent with our view that the impact of rising interest rates on its DPU will likely be limited. We are keeping our forecasts unchanged as the results have panned out according to our expectations. Maintain BUY with unchanged fair value of S$1.40 on CACHE.

Starhill Global REIT

OCBC on 25 Jul 2013

Starhill Global REIT (SGREIT) announced 2Q13 DPU of 1.19 S cents, up 10.2% YoY. Together with 1Q DPU of 1.37 S cents, 1H13 DPU totaled 2.56 S cents, up 19.1% YoY. This forms 52.1%/51.2% of our/consensus full-year DPU forecasts, well within expectations. The positive performance was mainly due to strong contribution from its Singapore and Australia portfolios. For 2Q, we note that SGREIT’s Singapore portfolio contributed 63.7% of total revenue, largely unchanged from 66.3% in 1Q. Overall occupancy also stayed stable at 99.6%, compared to 99.7% seen in previous quarter. Looking ahead, management believes the new renewal rate (+6.7%) for Toshin lease, 7.2% rental uplift from the Malaysia master leases, and continued repositioning of Wisma Atria will help to bolster SGREIT’s income in 2H13. On its capital management front, SGREIT also expects its debt duration to improve from 1.2 years to 3.5 years and the percentage of its debts fixed/hedged to increase from 81% to over 90%, having secured loan facilities to refinance all its debts due in 2013. We maintain BUY with unchanged fair value of S$0.95 on SGREIT.

In line 2Q13 results
Starhill Global REIT (SGREIT) announced 2Q13 NPI of S$39.1m and distributable income of S$26.7m, up 5.2% and 14.7% YoY, respectively. While the number of units outstanding was enlarged post conversion of 152.7m convertible preferred units (CPUs) into 210.2m ordinary units, income to be distributed to CPU holders declined 88.2% YoY to S$0.3m. As a result, distribution to unitholders was up 22.1% to S$25.6m (S$0.9m retained), while DPU was up 10.2% YoY to 1.19 S cents. Together with 1Q DPU of 1.37 S cents, 1H13 DPU totaled 2.56 S cents, up 19.1% YoY. This forms 52.1%/51.2% of our/consensus full-year DPU forecasts, well within expectations.

Strong numbers from Singapore and Australia portfolios
The positive performance was mainly due to strong contribution from its Singapore and Australia portfolios. Both Wisma Atria (WA) and Ngee Ann City (NAC) benefited from higher occupancies and positive rental reversions (15.1-15.6% increase for office segment and WA retail leases committed from Jul 2012 to Jun 2013). In addition, NAC saw its NPI grow 9.8% YoY due to a 10.0% rent increase for Toshin master lease. This led to a 6.9% YoY growth in Singapore portfolio’s NPI. Australia portfolio NPI also jumped 32.7% YoY as a result of incremental income from its recently acquired Plaza Arcade, despite a weaker AUD (down ~5%). This has more than offset the soft performance at the other overseas portfolios. For 2Q, we note that SGREIT’s Singapore portfolio contributed 63.7% of total revenue, largely unchanged from 66.3% in 1Q. Overall occupancy also stayed stable at 99.6%, compared to 99.7% seen in previous quarter.

Full potential not unleashed yet
Looking ahead, management believes the new renewal rate (+6.7%) for Toshin lease, 7.2% rental uplift from the Malaysia master leases, and continued repositioning of WA will help to bolster SGREIT’s income in 2H13. On its capital management front, SGREIT also expects its debt duration to improve from 1.2 years to 3.5 years and the percentage of debts fixed/hedged will increase from 81% to over 90%, having secured loan facilities to refinance all its debts due in 2013. We maintain BUY with unchanged fair value of S$0.95 on SGREIT.

Sheng Siong Group

Maybank Kim Eng Research, July 24

H1 2013 revenue of S$339.2 million (10.6 per cent y-o-y) and core net profit of S$19 million (26.7 per cent y-o-y) come in-line with our and consensus expectations. An interim dividend of 1.2 cents was announced (87 per cent of H1 payout), up by 0.2 cent from last year's interim dividend. We downgrade the counter on the grounds of valuations appearing toppish.

The 10.6 per cent H1 2013 sales growth is largely driven by bumper store openings from last year of S$42.8 million, but this was offset by a contraction in the older stores. SSG declined by one per cent due to higher competition, and decline in sales from the older stores ...

There are signs of margin pressure ahead. Gross margin continues to show signs of improvement on the back of improved sales mix, lower input costs, and lack of price wars with competition. This was offset by higher depreciation costs from the fitting out of new retail stores and Mandai centre. While staff costs increase was in line with store growth, Sheng Siong cautions on cost pressures from difficulties to hire and higher foreign levy, with the recent hike in service sector by 9 per cent on July 1 ...

While Sheng Siong commands strong historical margins and ROEs against its regional supermarket peers, we are concerned about competition overrunning and possible risk of Sheng Siong losing market share. We downgrade the counter to a "hold", with target price unchanged at S$0.74, pegged to 25.8 times FY2013 forecast PE.

HOLD

Singapore Exchange

DBS Group Research, July 24

EXCLUDING the one-off impairment loss on AFS investment in Bombay Stock Exchange (S$15 million), underlying net profit was S$103 million in Q4 2013 and S$351 million for FY2013.

Securities revenues were stable q-o-q driven by robust securities daily average values (SDAV) of S$1.6 billion in Q4 2013 versus S$1.7 billion in Q3 2013.

Market velocity fell to 55 per cent (from 59 per cent in Q3 2013) as the high volumes generated from active trading in penny stocks in Q3 2013 was not sustainable - daily average volumes fell from five billion in Q3 2013 to 2.7 billion in Q4 2013. Trading volume for derivatives contracts continued its upward momentum while open interest volumes remained strong. Other revenues were lifted by depository and issuer services. Funds raised in the capital markets were flat q-o-q but higher y-o-y.

Expenses rose in tandem with revenue, and were mainly due to higher staff costs. Dividend per share was 28 Singapore cents for FY2013 (one cent higher than FY2012's 27 cents). FY2013's payout ratio of 89 per cent is above its dividend payout policy of 80 per cent.

Sustainable SDAV and derivative activities are crucial to momentum. Our profit forecasts are under review. Upside risks to our earnings forecast would be continued revival in SDAV and strong momentum in derivatives. Based on our estimates, every 10 per cent increase in derivatives revenues could lift earnings by 4 per cent.

Higher capital expenditure (capex) is expected. Capex is expected to be S$35 million to $40 million in FY2014, driven by technology-related capex.

Maintain "hold", with S$7.15 target price based on dividend discount model, implying 20 times FY2014 EPS. Downside for the stock should be limited, supported by dividend yields of 4 per cent. We have imputed 90 per cent dividend payout in our forecasts.

HOLD