ST Engineering

CIMB Research, Aug 28

WE see a buying opportunity from the recent pullback of ST Engineering's (STE) share price. Business fundamentals remain strong, but we see STE benefiting from the strengthening of the US dollar with positive translation of earnings. Dividend yield has also become more attractive at 4.8 per cent.

Maintain "outperform" and target price of S$4.70, still based on blended valuations (PE, discounted cash flow, dividend yield). Given expected earnings growth of 10 per cent for FY2013, we view the current valuation of 17.5 times as unjustified, as it is below its pre-GFC range of 20-22 times (with steady earnings growth of 11 per cent). Key catalysts include sustained US dollar strength and stronger margins from aerospace.

OUTPERFORM

Healthcare Sector

Maybank Kim Eng Research, Aug 29

PRIME Minister Lee Hsien Loong's healthcare measures in his recent National Day Rally speech are supportive of our positive view on the private healthcare sector. While the primary aim is to tackle ongoing concerns of Singaporeans about the affordability of healthcare, the other underlying trend is that the private healthcare sector will play an increasingly significant role, in our view. In particular, we see two key changes which will benefit providers:

Medisave

Key change: To extend Medisave usage for outpatient treatments.

Impact: Medisave is a compulsory national saving scheme which puts aside 7 to 9.5 per cent of Singaporeans' income for medical requirements. For hospital services, this was previously restricted to inpatient costs and very limited outpatient treatments. This change would benefit private hospitals as Medisave claims can now support patients for outpatient treatments, which in itself is a growing trend.

Community Healthcare Assist Scheme (CHAS)

Key change: Removal of minimum age limit of 40.

Impact: CHAS is a scheme which subsidises lower-income Singaporeans seeking treatment at private clinics, which would otherwise be more expensive than the crowded public clinics. We estimate this change would double the number of eligible participants from 0.7 million currently to around 1.5 million. This will drive traffic towards private clinics.

Raffles Medical Group and IHH Healthcare are the winners. The increased ability of patients to pay for healthcare services will benefit Raffles Medical and IHH, the largest private healthcare providers in Singapore.

Other than hospitals, they are also expected to benefit from the CHAS reform stated above with their extensive clinic networks in Singapore, which contribute around 35 and 10 per cent of their revenues respectively.

We are neutral on the Singapore healthcare sector, with positive industry dynamics weighed against possible short-term demand dampening from the currency uncertainty in the region.

Singdollar strength is a negative, given that foreign patients, mostly from the region, make up 30 to 50 per cent of hospitals' load.

Raffles Medical is our top "buy" due to its long-term earnings resiliency; its hospital expansion plans, which will drive earnings growth and valuations, are lower than its peers. We have a "hold" call on IHH as we are cognisant of the execution risk from a very ambitious international expansion plan and the currently steep valuations.

Sector - NEUTRAL

AusGroup

DMG & Partners Research, Aug 29

AUSGROUP's FY2013 revenue was 8 per cent lower than expectations at A$582.7 million (S$664.2 million), while profits tumbled 58 per cent to A$9.7 million, coming in 9 per cent below our forecast. If not for the sale of scaffolding in Q4 FY2013, AusGroup would have reported a loss for the quarter.

AusGroup has suffered two consecutive quarters of receivables buildup, which dragged its balance sheet from net cash to a 10 per cent net gearing. While the KML issue is showing signs of being resolved (change of chief executive and some progress payments), the low cash holdings have prompted management to omit giving dividend. We see a chance of an interim dividend when AusGroup collects KML's receivables in full and returns to net cash.

The minerals sector is slowing down. With most of the jobs in its major projects segment completed, AusGroup has little work left in this segment. While the oil-and-gas sector remains active, cost overruns have resulted in massive delays in order flow and cancellations of some projects. While the company's A$260 million orderbook will provide work for two more quarters, the downtrend in revenue and margins - combined with high operating leverage - will continue to pressure its bottomline for a few more quarters.

While the stock has retraced by 27 per cent since our downgrade in May, there is still room to fall due to softer earnings and a weakening Australian dollar, which may also dilute AusGroup's value to Singdollar-based owners. Our S$0.30 target price is pegged to 0.7 times FY2013 P/B, given that the cost of equity exceeds ROE. Risk-loving investors may buy into the ASX-listing angle, but we caution that the light at the end of the tunnel may be that from an oncoming train.

SELL

Oil and Gas Sector

OCBC on 29 Aug 2013

YTD, the FTSE Oil and Gas index has generally tracked the broader market, though there have been instances of a divergence in performance. Besides the exploration and production segment garnering more investor interest, we are increasingly positive on the OSV segment, while prospects of the rig market remain bright, underpinned by the sustained high oil price environment. Still, the relatively high-beta O&G sector is very much sensitive to macroeconomic events. The possibility of increasing capital flows from Asia to the US remains, and investors may want to look beyond the short term volatility and focus on the positive longer-term growth prospects of the sector. Maintain Overweight with a one-year horizon, with Ezion Holdings [BUY, FV: S$2.90], Keppel Corp [BUY, FV: S$12.53] and Sembcorp Marine [BUY, FV: S$5.64] as our preferred picks. For investors seeking less volatility in terms of earnings but with O&G exposure, Sembcorp Industries [BUY, FV: S$6.48] is a worthy candidate.

Broader sector in-line with divergent individual stock performance
In the latest results season, companies in the sector reported mostly in-line results, with some disappointing the market. The exploration and production (E&P) sector has garnered more investor interest, but it is imperative that the companies deliver in terms of value to shareholders going forward, or the interest in this sub-sector may start to dwindle. 

Increasingly positive on the OSV segment; rig market remains strong
Looking ahead, we are increasingly positive on the offshore support vessel segment, which has seen improving charter rates and vessel utilisation levels. The rig market remains strong in terms of demand for high spec rigs, as reflected by the firm day rates and healthy enquiry levels. Activity in the sector as a whole will be underpinned by the sustained high oil price environment. 

Volatility due to macroeconomic events; focus on longer-term prospects
Despite robust industry fundamentals, the relatively high-beta oil and gas sector is very much sensitive to macroeconomic news. As a cyclical sector, it also remains vulnerable to concerns of a recession or liquidity squeezes. However, the sector would also be among the first to benefit should there be clearer signs of the global economy finding its footing. The possibility of increasing capital flows away from Asia to the US remains a concern and investors may want to look beyond short term volatility and focus on the positive longer-term growth prospects of the oil and gas sector. Maintain Overweight with a one-year horizon. 

Preferred picks
We look for companies with promising earnings growth and visibility, and sufficient financial strength to weather near term headwinds, given the still-fragile state of the global economy. These would include Ezion Holdings [BUY, FV: S$2.90], Keppel Corp [BUY, FV: S$12.53] and Sembcorp Marine [BUY, FV: S$5.64]. For investors seeking less volatility in terms of earnings but with exposure to the oil and gas sector, Sembcorp Industries [BUY, FV: S$6.48] would be a worthy candidate.

Retail Reits

OCBC on 29 Aug 2013

Local retail landlords ended 2Q13 on a positive note, with results mostly in line with our expectations. Aggregate leverage for the quarter has also improved sequentially across the board. Notably, a significant portion of the REITs’ existing borrowings are either based on fixed rates or hedged. This will likely limit the impact of rising interest rates on the REITs’ DPUs and yields. Looking ahead, we are maintaining our positive view on the local retail REITs due to AEI activities and better rental rates for the leases due for renewal. In addition, the local retail landscape has remained largely stable. According to Jones Lang LaSalle (JLL) 2Q13 Singapore property market review report, the growth in rents island-wide is likely to range between 0% and 0.2%, while capital values grow by 2.7%-3.8% in 2013. We are keeping our OVERWEIGHT rating on the local retail REIT subsector. Starhill Global REIT remains as our preferred pick, due to its apparent growth drivers, higher-than-average yield of 6.8% and compelling valuation (0.88x P/B).

Robust 2Q13 performance as expected
Local retail landlords ended 2Q13 on a positive note, with the majority benefitting from higher secured rents and occupancy rates following the completion of asset enhancement initiatives (AEIs) at several of their portfolio assets. On the whole, the subsector turned in a 14.6% YoY growth in aggregate NPI and 9.6% YoY growth in DPU. The results were mostly in line with our expectations, except for CapitaMall Trust (CMT) which exceeded our forecasts on stronger-than-expected rental reversions.

Positive operational performance
As we have previously expected, the subsector average occupancy rate improved QoQ in 2Q13 on the back of active leasing efforts by the REIT managers. As of 30 Jun, the subsector average lease to expiry stood at 3.2 years, unchanged from that seen a quarter ago. In addition, positive rental reversions ranging from 6.4% to as high as 42.8% were achieved across the local retail REITs upon renewal – a reflection of continued strong demand in our view.

Likely improvement in debt profile
On the capital management front, we note that the REITs have been very active, possibly in anticipation of potential rise in interest rates in the near-to-medium term. As such, we expect the local retail subsector to post significant improvement in its debt maturity profile and statistics in the coming quarter. Aggregate leverage has also improved sequentially across the board. More notably, a significant portion (74.5%-94.0%) of the REITs’ existing borrowings are either based on fixed rates or hedged via interest rate swaps. This will likely limit the impact of rising interest rates on the REITs’ DPUs and yields, in our opinion.

Outlook remains sanguine
Looking ahead, we are maintaining our positive view on the local retail REITs due to AEI activities and better rental rates for the leases due for renewal. In addition, the local retail landscape has remained largely stable. According to Jones Lang LaSalle (JLL) 2Q13 Singapore property market review report, JLL expects the growth in rents island-wide to range between 0% and 0.2%, while capital values grow by 2.7%-3.8% in 2013. This reaffirms our take that local retail REITs will continue to perform for the rest of 2013. We are keeping our OVERWEIGHT rating on the local retail REIT subsector. With the recent sell-down in the S-REITs sector, we note that the local retail REITs are now trading at undemanding 1.04x P/B and 6.3% forward yield. We retain Starhill Global REIT as our preferred pick, due to its apparent growth drivers, higher-than-average yield of 6.8% and compelling valuation (0.88x P/B).

Eu Yan Sang International

Aug 28 close: S$0.72

DMG & Partners, Aug 27

EU Yan Sang's Q4 FY13 recurring profit of S$1.3 million (-42 per cent y-o-y, -85 per cent q-o-q) was below our S$3 million estimate as the better margins were mitigated by a higher loss in Australia due to the opening of new stores in H2 2013 and inventory write-offs. We expect the Australia unit to post a smaller loss in FY14 and a profit by FY15, helping to lift profit by ~35 per cent per annum. Maintain "buy", at a higher DCF-derived (discounted cash flow) S$0.92 TP.

BUY

Wing Tai Holdings

Maybank Kim Eng Research, Aug 28

WING Tai reported a 102 per cent y-o-y rise in headline FY13 PATMI (profit after tax and minority interest) to S$531.1 million. Excluding revaluation gains, core PATMI is estimated at S$294 million, up 94 per cent yo-y and in line with expectations. The recent launch of The Tembusu is met with encouraging response, with the estimated ASP (average selling price) at a better-than-expected S$1,500 psf (per sq foot). A bumper dividend of 12 cents/share is proposed, implying an attractive 5.9 per cent yield. Reiterate "buy".

Wing Tai's strong earnings were partly contributed by the completion of the Verticas Residences in KL in Q3 FY13. Throughout the FY, Wing Tai managed to achieve S$885 million of residential property sales, mainly from 318 units in Singapore valued at S$725 million and 169 units in Malaysia, valued at S$130 million. UNIQLO, its fast-fashion JV in Singapore and Malaysia, also saw its EBIT contribution grow by a robust 36 per cent y-o-y to S$11.1 million.

In mid-August, Wing Tai launched its 337-unit freehold development The Tembusu, which was met with good response. Options-to-purchase have been issued for 220 units, with ASPs at a creditable ~S$1,500 psf. Wing Tai is in the midst of preparing the Prince Charles Crescent site for launch by Q4 2013.

Meanwhile, we understand that piling works have begun at the Guangzhou Knowledge City site, while the Luodian site in Shanghai is in the planning stage.

Management reiterated that the probability of the Singapore property market turning down is ever increasing and will be selective in land acquisitions. Malaysia is deemed as its most attractive market in the near-term, while it will continue to explore opportunities in China (Tier 1 cities) and in Hong Kong.

We reiterate our "buy" recommendation with a TP of S$2.78, pegged to a 30 per cent discount to RNAV (revalued net asset value). We like Wing Tai for its low gearing and attractive valuations of 0.56x P/B and 0.51x P/RNAV. FYJun13's high yield may be a one-off, but we believe a base yield of 3.4 per cent is still sustainable.

BUY

Goodpack

OCBC on 28 Aug 2013

Goodpack’s FY13 results were in-line with expectations. Revenue grew by a smaller 7.7% YoY to US$190.9m while PATMI improved 13.4% YoY to US$51.3m as its cost saving initiatives helped to offset higher depreciation and financing costs from a larger fleet and increased borrowings respectively. Similar to last year (FY12), management declared a final dividend of 2 S cents and a special dividend of 3 S cents. Although we lower our revenue forecasts for FY14, we still expect growth improvement following the commencement of key clients’ synthetic rubber (SR) operations in Singapore and a new SR contract in Russia. In terms of margins, we only expect a small drop-off as continued cost saving initiatives should keep a lid on logistic and handling expenses. In light of its unchanged fundamentals and recent share price correction, we maintain BUY on Goodpack with a slightly lower fair value of S$1.69 (S$1.80 previously).

FY13 within expectations
Goodpack’s FY13 results came in within expectations. Although revenue grew by a smaller 7.7% YoY to US$190.9m (versus 11.7% YoY in FY12) following a slowdown in the rubber demand, PATMI improved 13.4% YoY to US$51.3m (net margins +0.6ppt to 27.3%) as its cost saving initiatives helped to keep logistic and handling costs in check and offset higher depreciation and financing costs from a larger fleet and increased borrowings respectively. Similar to last year (FY12), management declared a final dividend of 2 S cents and a special dividend of 3 S cents. 

Top-line growth to improve in FY14
Entering FY14, we expect top-line growth to pickup following the commencement of key clients’ synthetic rubber (SR) operations in Singapore and a new SR contract in Russia. In addition, the potential of a boost from the automotive segment remains. 

A lid on opex & financing costs
Despite having a larger IBC fleet, we only expect margins to come off slightly. The group has demonstrated its ability to keep a lid on the main opex component of logistics and handling costs and FY14 should not be an exception. Coupled with the shift towards purchasing a larger proportion of new IBC requirements as well as some existing leases, leasing costs should also taper off gradually. As for financing costs, the bulk of its debts have fixed rates so we are unconcerned over a potential hike in rates. 

Maintain BUY
We lower our FY14F revenue growth forecast to 9% (15% previously) as we temper the pace of new IBC demands. This causes our DCF-derived fair value to lower to S$1.69 (S$1.80 previously). Nonetheless, Goodpack’s fundamentals remain unchanged and its recent share price correction opens up a buying opportunity for long-term investors. Maintain BUY.

Offshore and Marine Sector

Phillip Securities Research, Aug 26

THERE was a mixed bag of results in the second quarter.

Keppel Corp's results were mostly in-line; earnings were down y-o-y mainly due to drop in revenue recognition from sales of Reflections @ Keppel Bay and lower volume of work in its Offshore & Marine (O&M) segment, partially offset by growth in Infrastructure and solid O&M margins. Sembcorp Marine's results were slightly below expectations due to conservative recognition for new design rigs and lower revenue recognition. Ezion's results were solid driven by new projects contributions and steady margin. Ezra's results were disappointing as its subsea segment continues to be a drag due to delays in project execution and additional unexpected costs recognition for certain projects.

Albeit the fundamentals for the O&M sector remains strong, management from both Keppel Corp and Sembcorp Marine sees that competition from the Chinese and Korean yards is beginning to intensify and may put pressure on margins. That said, we think that downside risks to Singapore yards are limited in the near and medium term, due to better pricing secured. Indeed, Singapore yards have managed to raise pricing by about 14-21 per cent for their proprietary designs over the past two years, even though their Chinese peers have aggressively entered the offshore market with lower pricing and attractive payment terms.

We continue to like Keppel Corp ("accumulate", target price: S$12.25) for its stronger operating performance, better execution for its Brazilian projects and attractive dividend yield of 4.6 per cent.

Ezion ("accumulate", target price: S$2.71) is also a strong performer within the small/mid cap space, with good business model and high earnings growth visibility, via its SEU (self-elevating units) fleet expansion with firm contracts already secured.

Albeit Sembcorp Marine's ("neutral", target price: S$4.42) order book spike of 150 per cent last year will see higher revenue growth over the next few years, we continue to see downward pressure for its margin due to recognition for new design rigs, which tend to be conservative at the initial stage, and higher costs on its new yards in Singapore and Brazil. Ezra ("neutral", target price: S$1.00) faces challenging subsea execution issues which may continue to be a drag on margins for the next few quarters.

Saizen Reit

AmFraser Research, Aug 26

SAIZEN's gross revenue and net property income increased by 9.7 per cent and 13.6 per cent, respectively, in FY2013, largely supported by its acquisitions of seven properties. For the six months ending June 30, 2013, Saizen declared a distribution per unit (DPU) of 0.63 cents, amounting to a full-year DPU of 1.29 cents. This is marginally higher than our projected FY2013 DPU of 1.24 cents.

In FY2013, overall rental reversions of new contracts were marginally lower by about 0.5 per cent. This marks an improvement from rental reversions witnessed in FY2012, during which rental reversions were lower by 2.1 per cent. Given our cautiously optimistic outlook on the Japanese residential market, we maintain our assumption of flat rental reversions across Saizen's portfolio.

FY2014 will witness the full-year contribution of Saizen's recently acquired properties. Sitting on a cash pile of six billion yen (S$78 million), Saizen could tap on its cash balance to engage in immediately yield-accretive acquisitions. Moreover, Saizen has unencumbered properties valued at two billion yen, further strengthening its financial clout. We are currently pencilling in 2.3 billion yen of acquisitions at a 6 per cent NPI yield.

To provide its unitholders with greater visibility on distributions, Saizen has entered into hedging transactions for its upcoming distributions. The distribution payment for the period ended June 30 has been hedged at an average rate of 75.12 yen per S$ and the subsequent distribution is hedged at an average rate of 81.15 yen per S$, which compares unfavourably with the current rate of 77.14 yen per S$. This would inevitably weigh on Saizen's FY2014 DPU in S$ terms.

While we expect Saizen's H1 2014 DPU to grow by 2.8 per cent y-o-y in yen terms, this will be offset by a 8.2 per cent increase in the hedged rate. We currently project Saizen's H1 2014 DPU at 0.63 cents, that is 4.5 per cent lower than H1 2013 DPU.

Accompanying its latest results, Saizen proposed a unit consolidation involving the consolidation of every five existing units in Saizen Reit held by unitholders into one unit, subject to regulatory and unitholder approvals. The motivation behind such a proposed move is to reduce the magnitude of a single tick move on Saizen's share price, and thus its perceived volatility. The share consolidation is expected to be completed in November 2013.

We roll over our estimates and lower our target price to S$0.195 on the back of a higher riskfree rate of 2.7 per cent, implying a capital upside of only 6 per cent. In our opinion, Saizen's current yield level of 7 per cent, which translates into approximately 430 basis points over the risk-free rate, does not yet sufficiently compensate investors for the inherent macro, forex and interest rate risks. Maintain "hold".

HOLD

Suntec Reit

OCBC on 27 Aug 2013

Suntec REIT announced on 15 Aug that it has established a US$1.5b Euro Medium Term Note programme. We believe Suntec REIT may use this to address part of its refinancing needs due in 2014. If so, this will lock in part of its debts into fixed rates, enhance its debt maturity profile and improve its unencumbered asset ratio. Looking ahead, we remain positive on Suntec REIT’s performance. While its 2Q13 NPI and distributable income were down 38.5% and 18.7% YoY respectively due to the concurrent execution of Phases 1 and 2 of the remaking of Suntec City, we believe that the worst is likely over given that Phase 1 enhancement works were completed in Jun and the retail space there has since become operational. At current price, Suntec REIT trades at one of the lowest P/B in the S-REITs sector at 0.73x, while offering a compelling FY14F yield of 6.9%. We are revising our fair value from S$1.85 to S$1.80 due to higher risk-free rate. As valuations remain attractive and outlook is positive, we maintain BUY on Suntec REIT.

Establishment of Euro MTN programme
Suntec REIT announced on 15 Aug that it has established a US$1.5b Euro Medium Term Note programme, with ANZ Bank, Citigroup Global Markets, DBS Bank and Standard Chartered Bank as arrangers and dealers for the exercise. This comes promptly after Suntec REIT has secured a S$500m five-year unsecured loan facility in Jul to refinance all its borrowings maturing in Oct 2013. We believe that Suntec REIT may possibly make use of the programme to issue longer-term unsecured notes to address (part of) its refinancing needs (S$773.5m club loan) due in 2014. This will be a positive development in our view, as Suntec REIT will not only be able to lock in part of its debts into fixed rates, enhance its debt maturity profile but also improve its unencumbered asset ratio. The programme has been assigned a “Baa2” rating by Moody’s Investors Service.

Worst may be over
Looking ahead, we remain positive on Suntec REIT’s performance. While its 2Q13 NPI and distributable income were down 38.5% and 18.7% YoY respectively due to the concurrent execution of Phases 1 and 2 of the remaking of Suntec City, we believe that the worst is likely over given that Phase 1 enhancement works were completed in Jun and the retail space there has since become operational. Committed occupancy for Phase 1 has improved to 99.6% from the pre-commitment of 96.7% achieved in 1Q, whereas passing rent of S$13.99 psf pm was also significantly higher than the rate of S$11.31 for the rest of Suntec City Mall and S$12.59 projected for the whole project. Together with the continued strength and active lease management at its office segment, we are hopeful that any volatility in Suntec REIT’s financial performance is likely to be cushioned as it commences its Phase 3 (last phase) next year.

Maintain BUY
At current price, Suntec REIT trades at one of the lowest P/B in the S-REITs sector at 0.73x, while offering a compelling FY14F yield of 6.9%. We are revising our fair value from S$1.85 to S$1.80 due to higher risk-free rate. However, as valuations remain attractive and outlook is positive, we maintain BUY on Suntec REIT.

Technology Sector

OCBC on 27 Aug 2013

Under our tech sector coverage, Venture Corp (VMS) reported earnings which were in-line with our expectations for the recently concluded 2QCY13 results season. However, core PATMI for ECS Holdings missed due to weaker-than-estimated gross margin. Encouragingly, a number of companies which we spoke to highlighted an improvement in sentiment amongst their key customers, which is in-line with the expected uptick in the global economy. However, we maintain NEUTRAL on the tech sector, as we believe that the economic recovery remains fragile. ECS [BUY; FV: S$0.56] is still our preferred pick within the sector given its cheap valuations (FY14F PER of 5.0x and P/NTA of 0.5x).

2QCY13 results roundup
Under our tech sector coverage, Venture Corp (VMS) reported earnings which were in-line with our expectations for the recently concluded 2QCY13 results season. However, core PATMI for ECS Holdings missed due to weaker-than-estimated gross margin. Within the sector, other notable results came from Hi-P International, which recorded a PATMI of S$10.9m (partly boosted by S$3.8m of fair value and forex gains), as compared to a net loss of S$2.1m in 2Q12. In contrast, Elec & Eltek suffered a 64.1% YoY decline in its 2Q13 PATMI to US$4.2m due to rising minimum wages in China and teething production problems at its new Yangzhou plant.

Still a backend loaded year
Encouragingly, a number of companies which we spoke to highlighted an improvement in sentiment amongst their key customers, which is in-line with the expected uptick in the global economy. Companies such as VMS and Hi-P have new programmes which are scheduled to undergo mass production in 2H13, and this should aid their 2H13 operational performance. Despite this positive development, we note that actual sales and subsequent orders will still have to depend on the actual end-user demand, which remains volatile, especially for consumer electronics products.

PC sales outlook still weak as mobile devices dominate
Due to the continued cannibalisation of PCs by mobile devices such as tablets and smartphones, industry watcher IDC now expects 2H13 worldwide PC shipments to decline by 7.0% YoY (previously forecasted a 3.2% dip). On the other hand, sales of tablets and smartphones are estimated to grow at 34.7% and 21.4% in 2013, respectively. This growth is expected to moderate to 18.6% for tablets and 12.6% for smartphones in 2014, which we believe is partly attributed to increasing saturation, especially within the high-end smartphones space. 

Maintain NEUTRAL
Despite expectations for a firmer macroeconomic recovery in the second half of the year and 2014, we believe that the global economy remains fragile. Hence we maintain NEUTRAL on the tech sector. ECS [BUY; FV: S$0.56] is still our preferred pick within the sector given its cheap valuations (FY14F PER of 5.0x and P/NTA of 0.5x).

CPO Stocks

OCBC on 26 Aug 2013

Most CPO (crude palm oil) companies reported fairly disappointing 1H13 results recently, no doubt hurt by weaker CPO prices in 2Q13 (CPO prices fell 25% YoY and another 5% QoQ). But going forward, the outlook for CPO prices remains largely muted, given the sluggish economy, as well as the expected rise in production of vegetable oils. While most of the plantation stocks have corrected quite a bit of late, making valuations less demanding, we note that there could still be earnings disappointments for upstream players should CPO prices fall further. We have a SELL on GAR and are reviewing our Hold rating on GPR. While we have a HOLD on WIL, its downstream business may be vulnerable to further economic contraction in China.

1H13 results largely disappointing 
Most CPO (crude palm oil) companies reported fairly disappointing 1H13 results recently, no doubt hurt by weaker CPO prices in 2Q13 (CPO prices fell 25% YoY and another 5% QoQ). Under our coverage, Golden Agri’s (GAR) 1H13 earnings only met about 34% of our full-year forecast. Global Palm Resources (GPR) was even harder hit, as its 1H net profit met just 27% of our full-year forecast. Wilmar International Limited (WIL) fared slightly better, with 1H13 core earnings meeting 40% of our FY13 forecast, as its substantial downstream business helped to mitigate the poorer upstream showing.

Outlook for CPO prices still quite muted 
But going forward, the outlook for CPO prices remains largely muted, given the sluggish economy in China (one of the biggest buyers of CPO and other vegetable oils), while even Indonesia’s economy could be facing increased headwinds due to reduced spending power on the back of a higher-than-expected spike in inflation and a sharp weakening in the IDR . On the supply side, things are not looking too good either – CPO production as well as the other vegetable oil substitutes are expected to increase in 2H13. Based on current estimates, market watchers like Oil World believe that “world production is likely to exceed demand”. The Hamburg-based industry researcher adds that there is little scope for more growth in demand for vegetable oils to make biodiesel, citing unchanged biodiesel mandates in the EU and “hesitatingly” implemented increases in Brazil and Argentina . 

Avoid upstream players for now 
Most of the plantation stocks have corrected quite a bit of late – on average, we estimate that these stocks are down about 17% YTD, versus the STI’s 3% slide, making valuations less demanding. But we note that there could still be earnings disappointments for upstream players should CPO prices fall further. We have a SELL on GAR and are reviewing our Hold rating on GPR. While we have a HOLD on WIL, its downstream business may be vulnerable to further economic contraction in China.

United Envirotech Ltd

OCBC on 23 Aug 2013

United Envirotech Ltd (UEL) has just secured a RMB100m BOT (Build, Operate, Transfer) contract in Shandong Province, China; the 30k m3/day underground waste-water treatment plant is a follow-up to its earlier 100k m3/day drinking water project secured in Yantai last year. Despite the latest contract win, we note that it will only meet around 20% of our new contract wins expected this year; hence, we opt to leave our forecasts unchanged for now. Instead, we could see a large dilution from the move to issue shares to buy over the membrane operations of Memstar Technology Ltd. As such, we are also more inclined to maintain our HOLD rating, although the current upside to our unchanged S$0.975 fair value (13x FY14F) is around 8%.

New RMB100m BOT project in Shandong
United Envirotech Ltd (UEL) has just secured a RMB100m BOT (Build, Operate, Transfer) contract in Shandong Province, China; this to construct and operate a 30k m3/day municipal waste-water treatment plant. Scheduled to be completed by 3QCY14, it will use the company’s membrane bioreactor (MBR) technology and will be built underground, just like the 100k m3/day one it built in Guangzhou City in 2010. 

Funding is not an issue
As before, UEL plans to fund the project using the proceeds from the CB issue and share placement to KKR and bank financing. Based on its usual 40% equity/60% debt split, UEL should have no issues with coming up with S$8m of cash, given its cash balance of S$25.9m as of end Jun 2013. Recall that UEL can also tap on the recently launched US$300m MTN programme. 

Still positive on Shandong region
Noting that the latest project (which will reach 80k m3/day upon completion of Phase 2) is a follow-up of the 100k m3/day membrane-based drinking water project it secured in Yantai last year, management remains upbeat about its prospect there and intends to continue to secure more similar projects in Shandong and other parts of China. 

Maintain HOLD
Despite the latest contract win, we note that it will only meet around 20% of our new contract wins expected this year; hence, we opt to leave our forecasts unchanged for now. Separately, UEL has entered into an agreement to acquire 100% of Memstar Technology Ltd’s (MTL) membrane operations for S$293.4m – paying S$73.354m in cash and issuing 200.055m UEL shares at S$1.10 each. While the move is positive in the longer term, the stock could see a large dilution on the completion of that deal. As such, we are also more inclined to maintain our HOLD rating, although the current upside to our unchanged S$0.975 fair value (13x FY14F) is around 8%.

Yangzijiang Shipbuilding

OCBC on 23 Aug 2013

According to Platts, a number of Chinese firms are seeking older VLGCs, as the country seeks to build its own VLGC fleet. There is talk that China Oriental Energy may look to order more VLGCs, with YZJ as a potential beneficiary, but we note that while the latter’s Xinfu yard has plans to build large vessels and has an annual production capacity of up to 10 VLCCs, YZJ’s capabilities remain primarily in containerships and bulk carriers. As China seeks to reduce its shipbuilding capacity, what is imperative for YZJ is to continue its smooth execution, secure orders (albeit at almost breakeven levels), scale up the value chain by building green vessels and developing its offshore capabilities, while waiting for the industry consolidation to run its course. Should it be one of the few large yards left standing when the dust has settled, YZJ would then find itself in a stronger position than before. Maintain HOLD with S$0.99 fair value estimate.

China building up a VLGC fleet?
According to Platts , a number of Chinese firms are seeking older Very Large Gas Carriers (VLGCs). China does not have a VLGC fleet, but with imports expected to rise along with developments of several propane dehydrogenation plants, China may seek to cut costs by developing its own fleet for long-distance trips. For instance, China Oriental Energy (Donghua Energy) is building a 1.2m mt/year PDH plant for producing propylene at Zhangjiagang and is said to have placed orders for six VLGCs, with up to 16 options at a Chinese yard. 
Potential orders for YZJ? But could be early days yet

Platts’s sources said that discussions between China Oriental Energy and Yangzijiang 
Shipbuilding could be restarted, but a final agreement has yet to be reached. Meanwhile, we note that while YZJ’s Xinfu yard has plans to build large vessels and has an annual production capacity of up to 10 Very Large Crude Carriers (VLCCs), the group’s capabilities remain primarily in containerships and bulk carriers. Currently, China’s top VLCC yards are mainly held by China State Shipbuilding (CSSC) and China Shipbuilding Industry Corporation (CSIC), which are state-owned firms. 

Aiming to be amongst the select few left standing 
With more than 1,500 yards in China, YZJ’s CEO expects that more than half of the country’s yards will have to be closed down, and of the remainder, only 20% are likely to be profitable. In our view, what is imperative for YZJ is to continue its smooth execution, secure orders (albeit at almost breakeven levels), scale up the value chain by building green vessels and developing its offshore capabilities, while waiting for the industry consolidation to run its course. Should it be one of the few large yards left standing when the dust has settled, YZJ would then find itself in a stronger position than before. Maintain HOLD with S$0.99 fair value estimate.

Lippo Malls Indonesia Retail Trust

OCBC on 22 Aug 2013

The IDR has weakened some 7.4% against the SGD since 28 Jun, with SGD1 buying IDR8558.25 as at 21 Aug, compared to IDR7922.96 on 28 Jun (Bloomberg). We understand that only ~65% of the cash flow from the properties for 2H13 are likely hedged for depreciation of IDR against SGD. In addition, the weakening of the IDR against the SGD does not bode well for the valuation of LMIRT’s properties in SGD terms, which means that NAV would likely be affected negatively. To reflect a higher risk profile for LMRT, especially given the outflow of funds from emerging markets, we incorporate a higher cost of equity of 10.8%, versus 9.7% previously, and trim our DDM-based FV to S$0.44 from S$0.49. Maintain HOLD.

Concern over FX movement
The IDR has weakened some 7.4% against the SGD since 28 Jun, with SGD1 buying IDR8558.25 as at 21 Aug, compared to IDR7922.96 on 28 Jun (Bloomberg). We understand that only ~65% of the cash flow from the properties for 2H13 are likely hedged for depreciation of IDR against SGD. In addition, the weakening of the IDR against the SGD does not bode well for the valuation of LMIRT’s properties in SGD terms, which means that NAV would likely be affected negatively.

No surprises in 2Q13
To recap, LMIRT posted 2Q13 gross rental income of S$40.1m, up 30.2% YoY. The increase was mainly due to the acquisition of the six new malls in 4Q12, and positive rental reversions of 15.5% for the existing malls. Total revenue (equivalent to gross rental income in 2Q13) fell 12.5% YoY due to the inclusion of service charge and utilities recovery income from the malls’ operational activities in 2Q12. Such activities have been outsourced to a third party operating company with effect from 1 May 2012 and there is also a related decrease in expenses registered in 2Q13. Distributable income increased by 19.5% YoY to S$20.5m and DPU climbed 17.7% YoY to 0.93 S cents. Results for the quarter were in line with our expectations and consensus’. 1H13 DPU of 1.82 S cents forms 50.6% of our FY13 estimate of 3.6 S cents, which we maintain for now. 

Plans to acquire property this year
Gearing remains healthy at 24.2%. LMIRT may refinance the S$147.5m term loan due Jun 2014 as early as late 2013. Approximately 68% of LMIRT’s S$1.77b portfolio remains unencumbered, providing LMIRT with financial flexibility for future acquisitions. Management hopes to acquire at least one property this year. 

Maintain HOLD
To reflect a higher risk profile for LMRT’s unit price, especially given the outflow of funds from emerging markets, we incorporate a higher cost of equity of 10.8%, versus 9.7% previously, and trim our DDM-based FV to S$0.44 from S$0.49. MaintainHOLD. We estimate a FY13F yield of 7.9%.

ECS Holdings

OCBC on 22 Aug 2013

We met up with the management of ECS Holdings following its recent 2Q13 results. Revenue and PATMI rose 23.5% and 11.0% YoY to S$1,017.5m and S$9.0m, respectively. However, after adjusting for forex and other exceptional items, we estimate that core earnings declined 7.3% YoY from S$7.4m to S$6.9m, which was below our expectations. On a positive note, ECS managed to lower its net gearing ratio from 59.4% (as at end 2Q12) to 38.5% (as at end 2Q13) due to good working capital management. Looking ahead, we expect ECS to be a beneficiary of new product launches by major IT vendors such as Apple. We trim our FY13 and FY14 core PATMI forecasts by 6.2% and 3.9%, respectively. But as we also roll forward our valuations to 6x blended FY13/14F core EPS, our fair value estimate only declines marginally from S$0.57 to S$0.56. Maintain BUY.

2Q13 core earnings below expectations
We met up with the management of ECS Holdings following its recent 2Q13 results. It reported a 11.0% YoY increase in 2Q13 PATMI to S$9.0m on the back of a 23.5% hike in revenue to S$1,017.5m. However, if we exclude forex and other exceptional items, we estimate that core earnings would have decreased 7.3% YoY from S$7.4m to S$6.9m. This was below our expectations due largely to a lower-than-estimated gross margin, which came in at 3.6%, as compared to 4.5% in 2Q12 and 3.7% in 1Q13. For 1H13, revenue increased 22.2% to S$2,107.8m, forming 50.1% of our FY13 forecast. Estimated core PATMI rose 9.6% (reported PATMI jumped 21.0%) from S$14.1m to S$15.4m, or 44.5% of our full-year estimate. 

Good working capital management
On a positive note, ECS generated healthy net operating cashflows of S$50.6m in 2Q13 (2Q12: -S$32.2m), which helped to lower its net gearing ratio from 59.4% (as at end 2Q12) to 38.5% (as at end 2Q13). We believe ECS remains on track to meet our S$0.022 DPS forecast for FY13, which translates into a dividend yield of 4.5%.

New Apple product launches could be re-rating catalyst
Apple, one of the key vendors for ECS, is likely to launch new products in fall this year. This could come in the form of the iPhone 5S, iPad 5 and iPad Mini 2, according to media reports. In addition, there is also market talk that Apple may introduce a low-end smartphone, although whether this is true remains to be seen. We expect a product refresh cycle by Apple to benefit ECS, although a flip side would be lower margins carried by such mobile devices.

Lower FV marginally, but maintain BUY
We trim our FY13 and FY14 core PATMI forecasts by 6.2% and 3.9%, respectively. But as we also roll forward our valuations to 6x blended FY13/14F core EPS, our fair value estimate only declines marginally from S$0.57 to S$0.56. Maintain BUY, as ECS trades at 0.54x and 0.50x FY13 and FY14 P/NTA, respectively, which we view as cheap.

Singapore Telcos

OCBC on 22 Aug 2013

All three telcos reported 2QCY13 results that came in with our expectations. But going forward, the outlook is generally more muted, given that the key mobile market is already quite saturated (growth is likely to come from tariff hikes rather than the addition of new subscribers). As before, the spectre of rising interest rates is making the telcos’ yields less attractive (currently their forecast yields are around 4.7%), although these stocks should still have a place in any portfolio for their defensive earnings. We also do not see any potential growth drivers in a pretty saturated mobile market. Hence we maintain NEUTRAL on the sector.

Results were mostly in line
All three telcos reported 2QCY13 results that came in with our expectations. M1’s core 1H13 earnings met 52% of our full-year forecast and StarHub’s 1H met 53%; SingTel’s 1QFY14 met 24%. M1 declared an interim dividend of S$0.068/share, versus S$0.066 last year. StarHub declared a quarterly dividend of S$0.05/share, as guided.

Review of Singapore mobile operations
Core post-paid mobile subscribers grew by 1.0% QoQ to 4.36m in the Apr-Jun quarter, led by StarHub (+1.3% QoQ), SingTel (+1.0%) and M1 (+0.8%). But overall subscriber growth seems to be slowing as the market is already 151.9% penetrated. Nevertheless, monthly ARPUs ticked upwards for all three telcos, boosted by more subscribers switching over to the new tiered-pricing plans with less generous data bundles; the number of subscribers who exceeded their free bundled data also grew, as more people moved onto the faster 4G network.

SingTel cuts outlook for rest of the year
While M1 expects to see moderate earnings growth this year and pay out at least 80% of earnings as dividends, both SingTel and StarHub are more muted in their outlooks. In particular, SingTel now expects group revenue to decline by mid single-digit level and EBITDA to decline by low single-digit level, citing the persistently weaker AUD. StarHub continues to expect low single-digit revenue growth with an unchanged EBITDA margin of 31%. 

Yields are not that attractive
As before, the spectre of rising interest rates is making the telcos’ yields less attractive (currently their forecast yields are around 4.7%), although these stocks should still have a place in any portfolio for their defensive earnings. We also do not see any potential growth drivers in a pretty saturated mobile market. Hence we maintain NEUTRALon the sector.

Hankore Environment Tech Group

UOBKayhian on 22 Aug 2013

Investment Highlights

• New management, new beginning. With the appointment of a new management team in May 11, Hankore underwent a major restructuring and rebounded from a loss of Rmb407m in FY11 to a profit of Rmb103m in FY12. The group was also awarded one of China’s top ten new pioneer enterprises in the water industry for 2011 and one of the top ten fastest growing water companies in 2012. Hankore’s executive chairman, Mr Chen Dawei, is the largest shareholder with a 16.5% stake at a cost of S$0.04/share.
• Simple business model with a recurring income base. Hankore’s principal business is in the operation of waste water treatment plants in China. In FY12, Hankore derived 70% of its revenue and 94% of its profit through water tariffs from waste water treatment plants. With a minimum water tariff guarantee and supply undertake by the local governments, Hankore enjoys a stable recurring income from its water treatment plants. 
• Growing recurring income. As at 31 Mar 13, Hankore had invested in 11 water treatment plants with a total capacity of up to 1.57m tons/day when fully completed. With the S$14.7m proceeds from the share placement to Mr Wang and S$50m from the recent issuance of fixed-rate notes, we believe Hankore is looking to acquire more water plants to grow its bottom line. It reported a 70% jump in net profit for 9MFY13.

Our View

• With the new management, Hankore enjoyed an earnings turnaround and was identified as one of China’s fastest growing water companies. However, marred by its controversial past, valuation has remained depressed at 13.1x PE vs its peers’ average of 24.5x. We believe the management’s major stake in the company is a show of confidence in Hankore. Mr Chen’s cost of investment at S$0.04/share will likely serve as a price support for the stock.

Kori Holdings

UOBKayhian on 22 Aug 2013

Valuation/Recommendation

• Maintain BUY but with a lower target price of S$0.525, based on 4.9x 2014F PE. We have lowered our 2014F EPS due to the dilutive effects of the convertible shares. We believe the stock may see downside pressure in the near term, as dilutive effects of the convertible bond reduce Kori’s attractiveness to its peers. However we remain upbeat on Kori in the longer term as its growth story remains intact. 

Investment Highlights

• Proposed issuance of S$5m convertible bond to Keong Hong, at an interest rate of 5% p.a.. The bond may be converted at a conversion price of S$0.42/share, anytime till the maturity date in 2016. The convertible shares will represent 10.71% of Kori’s enlarged share capital. Proceeds from the convertible bond will be used for M&As, which is in line with Kori’s plans to enter the private sector and increase its capacity to meet rising demand. 
• Significant war chest. With the proceeds from the convertible bond, Kori will have a cash war chest of S$14.3m. 

Our View

• Expansion plans reinforces Kori’s growth story. While the dilutive effects of the convertible bond have reduced Kori’s attractiveness to its peers (Kori’s 2013F PE of 6.8x based on diluted earnings vs its peers’ average of 7.9x), it reinforces the company’s growth story as management raises funds to expand operations. Earlier in July, Kori had announced the acquisition of a new storage yard in Malaysia, as it tries to free up more labour in Singapore to meet rising demand. 
• Synergies with Keong Hong. Keong Hong (KH) is a main contractor whose clientele are in the private sector and include major developers like Keppel Land. With plans to enter the private sector, we believe Kori will be able to tap on KH’s extensive network and grow its business. As an auxillary service provider to main contractors, there are also direct synergies between KH and Kori (eg structural steelworks for underground carparks). 
•  Growth story still intact. Kori’s compatible structural steel and tunneling business segments continue to position it as an ideal partner for main contractors of the Thomson Line. Net profit for Kori had grown at an impressive 3-year CAGR of 29.6% from 2009 to 2012. Underpinned by the robust local construction demand and expansion plans into the private sector, we forecast a 3-year CAGR of 16.7% in net profit to S$12.5m in 2015.

Consumer Sector

OCBC on 21 Aug 2013

For 2HCY13, we expect consumer-related companies under the FTSE Straits Times Consumer Services Index (FSTCS Index) to experience lower-than-expected revenue growth as sentiment turns bearish both domestically and abroad. With weaker economic data points (e.g. Indonesia’s GDP and China’s slowdown) re-affirming lingering economic uncertainty, consumer companies are likely to face challenges as consumers shift away from discretionary spending. As we expect sell-offs of the sector to continue in light of these headwinds, we maintain our UNDERWEIGHT rating on the sector. Within the sector, we favour counters with defensive qualities such as Sheng Siong [BUY; FV: S$0.82] over counters with high exposure to emerging Asia consumer demand like Petra Foods [HOLD; FV: S$3.95] and counters with wafer-thin operating margins like BreadTalk [SELL; FV: S$0.77].

2Q earnings: revenue below expectations 
According to Bloomberg, consumer-related companies under the FTSE Straits Times Consumer Services Index (FSTCS Index) reported lower-than-expected top-line figures for 2QCY13 (below estimates by 6.6%). Fortunately, a favourable cost environment during the quarter helped to improve earnings per share (EPS), which fared better at +11.5% over forecasts.

What does this mean? A weaker 2HCY13
Despite the decent bottom-line performance, we are likely to see a continuation of lower-than-expected revenue growth in 2HCY13 as consumer demand face headwinds in the respective domestic and overseas markets. The favourable cost environment is also likely to reverse in light of rising fuel costs and inflation concerns, which pose potential challenges to operating margins and hinder the ability of companies to pass on price increases to consumers. 

Muted domestic outlook
Domestically, SG retail sales are still remain tepid and uninspiring, in our view. Inflation and economic uncertainty remains the top two concerns for consumers, who have indicated in a series of surveys conducted that they intend to cut back on discretionary spending. Given this sentiment, we expect domestic spending to taper off in most categories except supermarkets, where we anticipate a continued shift in spending patterns towards dining-in. On a positive note, tourist spending could help to cushion the drop-off, especially with the upcoming F1 event in Sep.

EM Asia data points turning bearish
Looking abroad, the recent economic data points such as the reduction of Indonesia’s GDP forecast, falling consumer confidence, possible slowdown in China etc have suggested that the regional retail outlook is also turning a tad bearish. Coupled with the weakening regional currencies against the US and Singapore dollar, consumer companies with regional exposure could face greater headwinds in the coming months. 

Maintain UNDERWEIGHT; favour defensives
We maintain our UNDERWEIGHT on the sector in light of the overhang of macro-uncertainty, and the sector to continue de-rating with investors locking-in profits from before. Within the sector, we favour counters with defensive qualities such asSheng Siong [BUY; FV: S$0.80] over counters with high exposure to emerging Asia consumer demand like Petra Foods [HOLD; FV: S$3.95] and with thin margins like BreadTalk [SELL; FV: S$0.77].

Pan-United Corporation

CIMB Research, Aug 19

PAN-UNITED Corp (PUC) intends to boost its revenue across the region by increasing its stake in Changshu Xinghua Port Co Ltd (CXP). This decision is probably the most important one that management has to make in recent times to lock in the company's longer-term prospects.

Its latest stake upsize in CXP has the potential to add 14-15 per cent to our FY2014-15 EPS, after accounting for interest costs from any debt taken. Our target price accordingly climbs to $1.08, still based on residual income.

Upgrade to "outperform" from "neutral", with catalysts expected from earnings contributions from very chunky MRT projects in the BBR segment and its improved earnings profile.

CXP is an integral part of PUC, being its second-largest source of earnings. CXP contributed 9 per cent to group revenue and 16 per cent to group Patmi (profit after tax and minority interests) in FY2012. Its operating momentum is expected to continue in the next few years.

We previously argued that PUC could raise shareholders' value by optimising its capital structure. Its latest stake acquisition is the first step towards that, we believe, and is the clearest manifestation of management's deviation from its usual conservative style.

Assuming that cash is upstreamed from Singapore Changshu Development Company (estimated at $10 million) which owns 95 per cent of CXP, the implied cost of its stake upsizing is $91 million.

We think PUC could fund this by borrowing $60 million and using $31 million from its cash hoard.

If PUC were to fund its entire acquisition with debt, its net gearing would only increase to 0.12-0.14 times in FY2013-2014. This should still be comfortable for management, we believe, with PUC's highest-ever gearing being 0.2 times in 2004.

This latest deal is meaningful and can add to earnings. Projected dividend yields of 4.6 per cent are not in danger. Apart from the consolidation of CXP's financials, other catalysts for the stock could include earnings contributions from very chunky MRT projects (Downtown lines 2 & 3 and the new Thomson line).

OUTPERFORM