SEE HUP SENG

UOBKayhian on 20 Dec 2013

VALUATION

• See Hup Seng is trading at 12.0x 2013F PE and 1.4x P/B. Ytd, SHS has outperformed the market, returning +51.2% vs the FSSTI’s -3.1%.

INVESTMENT HIGHLIGHTS

• It was a dramatic year for See Hup Seng (SHS), as the company saw a change in its key management. Founder, Mr Thomas Lim, returned to helm the company, following the resignation of Managing director, Mr Jimmy Tan.
• Business as usual. Executive director, Mr Ng Keng Sing, was tasked to take over the operations at Tat Petroleum (TAT), after the departure of Mr Tan. According to SHS, there was no major impact on operations or the distribution agreements as a result of the change in management. Exxon Mobile remains as TAT’s major supplier of refined petroleum products. Tat Petroleum contributed to 58.9% of SHS’s profit after tax for 9M13. 
• Proposed acquisition of Hetat Holdings. Based on 7.7x Hetat’s 2013F PE, the acquisition price of S$42.4m looks fair when compared with its structural steel peers’ average PE of 8x. The deal includes a profit guarantee of S$5.5m and S$6.3m (+14.5% yoy) for 2013 and 2014 respectively. 
• A third revenue driver. Led by industry veteran Mr Henry Ng, Hetat is a leading structural steel specialist in Singapore. Mr Ng was part of the senior management of Yongnam and Mero Gmbh, playing an influential role in the explosive growth of both companies. For FY10-12, Hetat’s net profit grew at a CAGR of 11.8% to S$4m. Its portfolio also boasts projects such as Resorts World Sentosa, Singapore Grand Prix F1 and structural steelworks at various MRT stations. 
• Complementary business. As a leading provider of corrosion prevention (CP) services to the marine and oil & gas industries, SHS can now cross-sell the structural steel services of Hetat to customers in those industries, expanding its revenue base. Hetat had worked on structural steel work projects for Exxon Mobil Singapore Parallel Train Project (In-refinery facilities) in 2009.

Financial Highlights

•  For 9M13, SHS’s net profit to owners rose 61% yoy to S$7.4m. Revenue growth was seen in both CP and distribution of refined petroleum products. Net profit was also boosted by one-time gains in other income. Excluding the gains in other income, 9M13 profit before tax would have been 40% higher yoy at S8.1m.

RH Petrogas

DMG & Partners Research, Dec 17

RHP announced that current CEO Tony Tan is retiring on Dec 31, but will continue to serve as an adviser to the board. Francis Chang, currently VP exploration & production (E&P), will step into the CEO role. Mr Chang has a strong background in E&P and we expect a smooth transition as he has been with RHP since June 2010.

Maintain "buy" with a S$1.38 target price. The stock trades at 37 per cent discount to its production assets.

For over 35 years, Mr Chang, a geologist by training, has worked in major and independent US-based oil companies such as Amoco, Burlington Resources, Anadarko Petroleum and Texas American Resources. We understand that Mr Chang has been instrumental in planning and executing RHP's drilling programme. We expect RHP to continue executing its strategy of increasing production and investing in low-to-medium risk Asian assets.

We understand that RHP is not considering any share issuance in the near term to fund its upcoming acquisitions. Project financing will be available, as RHP has healthy cash flow and its net cash position offers sufficient debt headroom. We believe that RHP's bite-size is around US$40 million for a production-stage field of a size in between its Basin and Island production sharing contracts' 2P reserves sizes. "2P" denotes proven and probable reserves.

At a 37 per cent discount to its production assets alone, market expectations are low. Our calculation shows that the implied Brent price in the share price is U$70 per barrel. The price also implies a 36 per cent discounted cash flow-value discount rate, which is too pessimistic. RHP's EV/(2P+2C) (enterprise value over proven, probable and contingent reserves) ratio stands at US$4.35 per barrel of oil equivalent (boe) versus U$11.50/boe for KrisEnergy. "2C¨ denotes best estimates of contingent resources.

We believe RHP's fundamental value will become more apparent with greater investor education on valuing E&P companies. Our target price is set at parity to our net present value-and-risking model.

BUY

Singapore Industrial Reits

DBS Vickers Research, Dec 19

THE industrial sector performed better than expected in 2013, as demand growth kept up with supply completions.

As a result, rental and capital values inched up, albeit at a more moderate rate of 5-7 per cent. Looking ahead, we see outlook turning modest, owing to a significant supply pipeline of 51.8 million square feet (+12 per cent supply expansion) of industrial space currently under construction/planning, which is projected to be completed over Q4 2013-15.

Growing demand and high pre-commitments will limit downside in rents. While supply growth is significant, we believe that earnings downside is mitigated by an estimated 70 per cent of the space already pre-committed or to be filled given a brighter economic outlook.

Demand for space will likely come from firms looking to consolidate or expand operations to a single base, with an aim of improving production efficiency. In addition, firms that invested significantly in capital expenditure are likely to prefer to renew leases. This is expected to limit declines in spot rents to 3-5 per cent over 2014-15, amid a 2-percentage point rise in vacancy rates.

Industrial landlords see minimal earnings risks as reversions to remain positive. We expect landlords to be realistic in their rental expectations and thus, retention rates should remain fairly high. Rental reversions are likely to remain positive, buffered by low expiring rents which are estimated to be about 7-15 per cent below market levels. This being so, we believe that earnings risk is minimal and forecast industrial Reits to deliver FY2013-15 forecast DPU (distribution per unit) growth of about 3 per cent.

Acquisition growth will moderate. On the inorganic growth front, competition for assets is expected to remain with eight listed industrial Reits, while recent new policy measures by JTC to tighten selling restrictions for industrialists and Reits mean that the pool of investable assets will shrink but transactions, if any, will be of stronger asset and tenant quality. Industrial Reits are likely to focus on development or asset enhancement activities to optimise returns.

Across the industrial Reits, we expect Mapletree Industrial Trust to deliver higher growth of 5 per cent compounded annual growth rate over FY2013-15 forecast (versus sector's average of 3 per cent). Cache Logistics Trust continues to offer visible and high yields of close to 8.2-8.5 per cent.

Singapore Banks

Maybank Kim Eng Research, Dec 18

WITH the odds of the US Federal Reserve tapering its quantitative easing programme on the rise, interest rates are set to rise. The implications will manifest in banks' net interest margin (NIM), asset quality and loan growth. In this report, we conduct a sensitivity analysis on earnings assuming a one percentage point change in loan growth, a 5bps rise in NIM and a 5bps increase in credit charge (as a proportion of net loans).

Based on our estimates, every 5bps increase in NIM will raise FY2014-15 forecast EPS of our universe by 4 per cent on average. The earnings uplift is significant after the past few years of depressed NIMs ...

DBS is our top sector pick. Of the three Singapore banks under our coverage, we believe DBS is best positioned to take advantage of a rising interest rate environment, given its liquid balance sheet and strong deposit franchise with cheap funds accounting for 58.4 per cent of total deposits. We have a "buy" call on DBS with S$19.70 target price, based on one time FY2014 forecast core EPS, a slight premium to its rolling PE average since 2005.

Sector - OVERWEIGHT

Singapore Consumer

DBS Vickers Research, Dec 18

FOLLOWING disappointing Q3 results, we have reduced revenue and net profit growth for consumer companies under our coverage.

We now expect FY2013/14 forecast revenue growth of 4 per cent/7 per cent, from 6 per cent/8 per cent, previously. Coupled with expectations of weaker margins, we project a slower net profit growth of 4 per cent/9 per cent (from 18 per cent/14 per cent), for FY2013 and FY2014, respectively.

Singapore consumer stocks under coverage are not cheap. The sector had re-rated and traded above its historical average mean since early 2012, which in our view was supported by robust topline growth and the market's positive longer- term consumption outlook.

Following concerns of the Fed's tapering and Q3 earnings' disappointment, average valuations have corrected down to +1 SD (standard deviation) above mean, from +2 SD which was seen in early 2013.

Given the lowered growth outlook and slower private consumption growth, de-rating could continue for some stocks should they miss earnings expectations in 2014.

We advocate a selective stance on the Singapore consumer sector for 2014. Amid expectations of slower private consumption growth in 2014, we look to pick stocks for company-specific factors, to outperform within the Singapore consumer space.

We have selected stocks with: 1) stronger fundamentals and better resilience to softening revenue and margin compression; 2) oversold companies at attractive valuations; and 3) stable earnings and dividend payout.

We like OSIM ("buy", target price or TP: S$2.60) for its growth profile and exposure to the North Asia market, Courts ("buy", TP: S$0.77) on expectations of recovery in 2014, and Del Monte ("buy", TP: S$0.82) for being oversold and the uncertainty of its proposed acquisition being priced in. We also like Sheng Siong ("buy", TP: S$0.80) for its defensive traits and yield profile.

AusGroup

DMG & Partners Research, Dec 18

WHILE AusGroup has sufficient cash today to meet its present needs due to the sale of its Singapore property in July 2013, the A$21 million (S$23.5 million) gross loss in Q1 2014 is a strong indicator of high ongoing cash burn. As such, we continue to see heightened insolvency risk compared with its healthier operating peers.

We understand that AusGroup is exploring options to raise cash for working capital purposes and a share placement is a likely choice. This will dilute the existing shares held by shareholders, but this may have been priced in after the share's recent sharp fall.

We also see risk to the company's book value owing to A$27 million in goodwill and intangible assets on its books today. If AusGroup continues to operate at a loss, the value of such intangibles may be impaired and a charge may have to be taken, further eroding its A$158 million book value.

AusGroup's A$219 million of orders on hand are insufficient to meet our A$323 million revenue forecast for FY2014 alone. We have also assumed a return to gross profits through the rest of FY2014, as well as a 10 per cent cut in overheads.

As these represent a fairly optimistic view, there is potential downside risk to our estimates.

Investors with high risk appetites may wish to start to bottom-fish for opportunities, although we caution more conservative investors to steer clear given the minuscule margin of safety.

AusGroup has fallen 61 per cent since we downgraded it to a "sell" in May 2013, but since most of the risks are priced in, we now upgrade the stock to "neutral", at a target price of S$0.18, pegged to 0.7 times FY2014 forecast NTA (net tangible assets).

NEUTRAL

S-Reits

OCBC on 13 Dec 2013

The recent respite in the unit prices of S-REITs resulting from the delay in the US Fed tapering was short-lived. Looking ahead, we believe mounting risks from an impending reduction in bond purchases will continue to spook interest-rate sensitive equities such as S-REITs, leading to a potential share overhang or even further downward pressure from here. However, we note that S-REITs are now fundamentally stronger, as they have been capitalizing on the low interest rate environment to embark on asset enhancement works to rejuvenate their assets and acquire quality assets. In addition, S-REITs have been very prudent on their capital management, in anticipation of the potential rise in interest rates spurred by the QE taper. This is expected to limit the impact of rising interest rates on the S-REITs’ DPUs over FY14-15 in our view. Given that S-REITs are better positioned for, but not insulated from the impending QE tapering and ensuing market volatility, we are keeping our NEUTRAL view on the S-REITs sector. Among the subsectors, we continue to favour only the domestic retail and office REIT subsectors, as the rental outlooks and valuations still look appealing. Our top picks are CapitaCommercial Trust [BUY, S$1.61 FV], Starhill Global REIT [BUY, S$0.95 FV] and Suntec REIT [BUY, S$1.90 FV].

Expected US stimulus reduction loomed large on prospects
The recent respite in the unit prices of S-REITs resulting from the delay in the US Fed tapering was short-lived. After the US Central Bank surprised the market with its decision not to scale back its bond purchase programme on 18 Sep 2013, the FTSE ST REIT Index recovered 3.8% to reach a high of 750.27 on 30 Oct, outperforming the 1.6% growth in STI over the same period. However, in the weeks that follow, the S-REITs sector started to lose ground again, as talks on the potential QE reduction (as early as Dec) resurfaced amid stronger-than-expected US economic data. Looking ahead, we believe mounting risks from an impending reduction in bond purchases will continue to spook interest-rate sensitive equities such as S-REITs, leading to a potential share overhang or even further downward pressure from here.

Fundamentals remain sound
Nevertheless, we note that S-REITs are now fundamentally stronger, as they have been capitalizing on the low interest rate environment to embark on asset enhancement works to rejuvenate their assets and acquire quality assets. For FY14, we still expect the S-REITs under our coverage to register a robust DPU growth of 6.2% on average, hence enhancing the sector yield. In addition, S-REITs have been very prudent on their capital management, in anticipation of the potential rise in interest rates spurred by the QE taper. For example, most S-REITs have actively refinanced their borrowings over a longer term, thereby extending their debt maturities and lowering their financing costs. More importantly, a major portion of their existing borrowings have been locked into fixed rates through the issuance of fixed-rate notes or interest rate swaps. This is expected to limit the impact of rising interest rates on the S-REITs’ DPUs over FY14-15 in our view.

Slightly more compelling following price correction
In addition, the yield spread between the S-REITs sector and Singapore 10-year government bond yield – a proxy for attractiveness – has widened to 450bps from 425bps since 18 Sep, as the correction in S-REITs’ unit prices more than offset the rise in the government bond yield. To-date, S-REITs remain the market with highest yield spread as compared to the other major geographies. Should there be further pull-back going forward, S-REITs may turn more compelling and prompt some investors looking for yield plays to re-visit the sector.

Retain NEUTRAL view on S-REITs sector
Given that S-REITs are better positioned for, but not insulated from the impending QE tapering and ensuing market volatility, we are keeping our NEUTRAL view on the S-REITs sector. Among the subsectors, we continue to favour only the domestic retail and office REIT subsectors, as the rental outlooks and valuations still look appealing. We also reiterate our focused selection process, preferring S-REITs with clear growth potential, strong financial position and compelling valuation. In this regard, we choose CapitaCommercial Trust [BUY, S$1.61 FV], Starhill Global REIT [BUY, S$0.95 FV] and Suntec REIT [BUY, S$1.90 FV] as our top picks.

Silverlake Axis

UOB Kay Hian Research, Dec 12

AFTER its outperformance year to date, we think the stock's current valuations reflect its solid fundamentals and good prospects. FY2014 will be a year of new contract wins and full-year contributions from Merimen Ventures and Cyber Village. Its Chinese associate's listing could take place in the medium term when China resumes IPOs in 2014.

Downgrade to "hold" and maintain target price at S$0.91. Entry price is S$0.80.

HOLD

Yeo Hiap Seng

CIMB Research, Dec 11

WE think that there is a possibility that Far East Organization, Yeo Hiap Seng's (YHS) major shareholder, will privatise the company to facilitate its sale to a strategic buyer. The other alternative is to maintain the status quo and reallocate resources to develop the F&B brands.

We think that there is significant untapped potential in YHS's beverage brands, given that its sales growth and profitability trail F&N's despite their similar brand heritage and access to consumers.

Both YHS and F&N dominate the beverage sectors in Singapore and Malaysia, with brand histories that began before the founding of modern Singapore.

Unsurprisingly, their products occupy the best shelf spaces today. However, YHS's market share is now less than half of F&N's, although it was on a par in the early 2000s. Yeo's F&B business is operating at close to breakeven levels in terms of operating profit.

YHS's property development arm contributes the lion's share of group profit today and not its well-known F&B brands. Far East Organization, Singapore's largest private developer, won control of YHS in the mid-1990s.

We believe that its sole focus was to develop the prime piece of land that YHS's factories occupied.

Today, that piece of land is fully developed and the last of YHS's residential properties were sold in Q3 2013.

YHS is on the cusp of becoming a pure F&B player again, pushing Far East Organization to make a strategic decision on its majority 84 per cent stake.

We think that YHS's current share price does attribute value to the Yeo's brand but it does not reflect the brand's full potential. We think that it is a possibility that Far East Organization would buy the remaining 16 per cent stake and negotiate a private sale to a strategic buyer.

Alternatively, Far East Organization could also maintain the status quo and choose to unlock YHS's earnings potential on its own.

UNRATED

Keppel Corp

DMG & Partners Research, Dec 12

KEPPEL Corp said its unit, Keppel FELS, is going ahead with the construction of the Can Do drillship without a contract in hand. The drillship is expected to be completed in 2016.

Management has received positive feedback from customers as the drillship is designed for broader capabilities, including performing development and completion drilling.

As Keppel has shown strong risk management in the past, we believe the decision to build ahead of a firm order suggests the company's confidence in its design.

The value of the drillship was not disclosed, but based on recently transacted drillship prices, we estimate that it could be sold for US$720 million to US$800 million.

While the risk is higher due to the build-to-sell model, we are positive on this development as the success of this maiden project could lead to long-term market recognition of its Can Do design.

We expect the sale of the drillship to fall into our FY2014 new order forecast of S$6.5 billion. Keppel won S$6.8 billion in new contracts in FY2013 - within our upgraded forecast of S$7 billion - and we estimate that its net orderbook has reached S$15.7 billion.

We expect strong orders flow in 2014, with potential orders of five jackup options from Transocean (RIGN VX, NR), one option from ENSCO (ESV US, NR), the sale of the drillship, and the floating liquefied natural gas conversion project from Golar LNG (GLNG US, NR).

Maintain "buy" with a target price of S$12.65. We maintain our FY2013-15 EPS estimates as we expect the drillship to make up part of our S$6.5 billion new order forecast for FY2014. We also expect FY2014 margins to stay above management's long-term guidance of 10-12 per cent in view of the large number of Keppel FELS' jackup rigs due to be recognised.

BUY

ECS Holdings

OCBC on 13 Dec 2013

ECS Holdings’ (ECS) share price has surged 37.5% since we highlighted it as our top tech sector pick on 15 Jul 2013, strongly outperforming the STI’s 5.5% decline during the same period. While we like ECS for its strong management team and long-standing relationships with a number of leading IT principals, we believe its share price has outrun its fundamentals. Moreover, margin pressure remains a concern, and some of its major addressable markets also recently saw their 2014 GDP growth forecasts lowered by IMF and ADB. We thus downgrade the stock from buy to SELL, with an unchanged fair value estimate of S$0.585, pegged to 6x FY14F EPS. Despite these uncertainties, ECS will continue to deepen its relationship with its major IT principals, while targeting to expand its product range.

Downgrading ECS from Buy to SELL
ECS Holdings’ (ECS) share price has surged 37.5% since we highlighted it as our top tech sector pick on 15 Jul 2013, strongly outperforming the STI’s 5.5% decline during the same period. While we like ECS for its strong management team and long-standing relationships with a number of leading IT principals, we believe its share price has outrun its fundamentals. Moreover, margin pressure remains a concern for 2014. We thus downgrade the stock from Buy to SELL, with an unchanged fair value estimate of S$0.585, pegged to 6x FY14F EPS. Although FY13F dividend yield appears decent at 3.3%, our fair value implies potential total returns of -8.0%.

GDP growth expectations eased
Concerns over the prospective tapering of QE by the U.S. Federal Reserve took its toll on the financial markets of emerging economies in the region. During the latest updated projections from IMF and ADB, both organisations pared their growth expectations on China, Indonesia and Malaysia for 2014. These are countries which ECS has a strong presence in. Meanwhile, Thailand, another of ECS’s addressable markets, is currently facing mass anti-government demonstrations and we believe this would impact her economy adversely and dampen domestic consumption. 

Focus on expanding its product range
Despite the ongoing uncertainties, ECS will continue to deepen its relationship with its major IT principals, creating value for them via its network of more than 23,000 active channel partners. We expect ECS to benefit from new product launches from these IT vendors, such as Apple’s iPad Air and iPhone 5S. It will also aim to grow its higher-margin Enterprise Systems division, which includes networking hardware, servers, software products and enterprise storage.

Technology Sector

OCBC on 13 Dec 2013

The prospects of the cyclical tech sector are strongly intertwined with the global macroeconomic trends and outlook. Looking ahead to 2014, global economic growth is expected to outshine that of 2013. Hence, worldwide semiconductor sales, overall IT spending and the revenue of major EMS/ODM players are expected to experience positive growth in the coming year. Nevertheless, we believe uncertainties and downside risks remain, which may continue to affect business and consumer sentiment and thus the earnings visibility of tech companies. In light of the aforementioned factors, we maintain our NEUTRAL rating on the tech sector. Under our coverage, we downgrade ECS Holdings from buy to SELL, with an unchanged fair value estimate of S$0.585, as we believe its share price has outrun its fundamentals. Venture Corp [BUY; FV: S$8.50] is our new top pick in the sector, given its diverse customer base, strong balance sheet and sustainable dividend yield (FY13F: 6.7%).

Economic recovery to boost prospects, but fragility remains
The prospects of the cyclical tech sector are strongly intertwined with the global macroeconomic trends and outlook. Looking ahead to 2014, most of the major economies are expected to deliver growth at a faster pace as compared to 2013, with the exception of Japan and China, based on projections from IMF. Global semiconductor sales, overall IT spending and the revenue of major EMS/ODM players are expected to experience positive growth in 2014. Notwithstanding this optimistic outlook, we believe uncertainties and downside risks remain. This may continue to affect business and consumer sentiment and thus end user demand, resulting in cloudy earnings visibility for major tech companies and their suppliers. 

Maintain NEUTRAL
In light of the aforementioned factors, we maintain our NEUTRAL rating on the tech sector. Over the longer-term, we are still positive on the sector, as technology will continue to play an integral role in business processes and people’s lifestyle. Spending on IT will trend up more robustly once the global economy recovers on a firmer footing.

Venture Corp our new top pick in tech sector
Under our coverage, ECS Holding’s share price has appreciated 37.5% since we highlighted it as our top tech sector pick on 15 Jul 2013, strongly outperforming the STI’s 5.5% decline during the same period. We now downgrade ECS from buy toSELL, with an unchanged fair value estimate of S$0.585, as we believe its share price has outrun its fundamentals, while margin pressure remains a concern for 2014. With this downgrade, we replace ECS with Venture Corp (VMS) as our new top pick in the sector. We like VMS [BUY; FV: S$8.50] for its diverse customer base, strong balance sheet and sustainable dividend yield (FY13F: 6.7%).

Hospitality Sector

OCBC on 12 Dec 2013

The dreariness that characterized the Singapore hospitality industry over 2013 looks set to continue into 1Q14 with the subdued global business sentiment, a strong Singapore dollar and increasing competition with an expanding supply of hotels. Our channel checks indicate that hotel bookings up to Feb 2014 are still weak, despite an expected pickup to the number of MICE events for 2014. We project that for end-2012 to end-2015, hotel room demand will grow at a CAGR of 5.4%, while hotel room supply will expand at a CAGR of 6.5%. Given this, the industry is facing a mild oversupply situation. We project that 2014 RevPAR growth for the industry will be in the low single-digit percentages at best, and do not rule out another year of contraction. We are maintaining our NEUTRAL rating on the Singapore hospitality sector and do not see any significant growth catalysts in the short-term. Our top pick is Global Premium Hotels [BUY, FV: S$0.33]. The 1H14 opening of its second mid-tier hotel, Parc Sovereign Tyrwhitt, could boost GPH’s net income by ~17% in 2014.

What ails thee…
2013 has not been an easy year for Singapore hoteliers, with revenue per available room (RevPAR) for 10M13 falling by 1.1%. While the decline does not look significant, note that the figures may have been skewed upwards by the continued strong performance of the IRs’ hotels (e.g. MBS experienced RevPAR growth of ~10% for 9M13), which account for ~8% of the total stock. CDL Hospitality Trusts’ Singapore hotels experienced a RevPAR decline of 7.7% for 9M13 and FEHT’s Singapore hotels have been missing their IPO revenue forecasts. Key reasons for the challenging hospitality environment include: 1) growing hotel room supply, 2) a strong SGD relative to most regional currencies and 3) negative business sentiment, especially regionally, leading to smaller travel budgets. 

Oversupply situation for 2013-2015
The Singapore Sports Hub is scheduled to open in Apr 2014, and a marquee event on its calendar will be the Women’s Tennis Association Championships to be held yearly in Oct from 2014 to 2018. We forecast that events held at the Sports Hub could add around 2% to hotel room bookings on a stabilized annual basis, e.g. after 1-2 years of gestation, by pulling in ~310k visitor arrivals. However, this would be just to support the growth in room demand that we are anticipating. Specifically, we project that for end-2012 to end-2015, hotel room demand will grow at a CAGR of 5.4%, while hotel room supply will expand at a CAGR of 6.5%. This mild oversupply situation will continue to place pressure on RevPAR. 

Substantial supply growth for Mid-tier hotels
For 2013, we expect the growth in hotel room supply to be 5.8% YoY. For 2014, YoY growth is expected to be even higher at 7.1%. Breaking down the projected growth in hotel room supply for end-2012 to end-2015, we note that the 52% of the new room supply is from the Mid-tier: Economy (+3.6% p.a.), Mid-tier (+10.9% p.a.) and Luxury and Upscale (+4.7% p.a.). Note that CDLHT and FEHT have substantial exposure to Mid-tier/Upscale hotels and Global Premium is mainly an Economy-tier play.

Maintaining NEUTRAL for 2014
While 2014 should see more MICE events YoY given that biennial events are generally held in even-numbered years, our industry sources indicate that hotel bookings up to Feb 2013 are still soft, with limited visibility beyond that. With no significant catalysts in sight over the short-term, we continue to anticipate a weak outlook for Singapore tourism in 2014. We project that 2014 RevPAR growth for the industry will be in the low single-digit percentages at best, and do not rule out another year of contraction. We are maintaining our NEUTRAL rating on the Singapore hospitality sector. Our top pick is Global Premium Hotels [BUY, FV: S$0.33]. The 1H14 opening of its second mid-tier hotel, Parc Sovereign Tyrwhitt, could boost GPH’s net income by ~17% in 2014.

Industrial REITs

OCBC on 11 Dec 2013

Industrial REITs continued to turn in firm results in 3Q13. However, subsector portfolio occupancy encountered a marked sequential decline of 2.9ppt to 94.8%. For 2014, we are keeping our cautious view on the industrial REIT subsector, as we believe industrial rents may stay relatively flat amid the influx of industrial supply and scale back in leasing enquiries for factory space. We also highlight again the possibility that industrial REITs may continue to face difficulties in acquiring industrial properties that are yield-accretive. Nevertheless, more industrial REITs are turning to asset enhancement initiatives/(re)developments to grow their income, and this should help to cushion the moderating growth trend. We are maintaining our NEUTRAL view on the industrial REIT subsector. We choose Ascendas REIT [BUY, S$2.45 FV] and Cache Logistics Trust [BUY, S$1.30 FV] as our preferred picks due to their strong earnings visibility, robust financial position and compelling yields.

Firm 3Q13 results, with some positive surprises
Industrial REITs continued to turn in firm results in 3Q13, still benefiting from higher rents and contribution from completed acquisitions and development projects. Ascendas REIT and Soilbuild REIT surprised with better-than-expected results. However, subsector DPU growth was rather modest at 4.3%, partially impacted by divestments and a larger unit base.

Subsector occupancy saw a marked decline
Leasing activity was healthy in 3Q, with positive rental reversions still achieved by some of the industrial landlords. However, subsector portfolio occupancy encountered a marked sequential decline of 2.9ppt to 94.8%. Looking ahead, we believe portfolio occupancies at some of the REITs may continue to face downward pressures, as a number of REITs have guided for non-renewal of tenants and conversion of master leases/single-user asset into multi-tenancies. 

Rental market likely muted in 2014
For 2014, we are keeping our cautious view on the industrial REIT subsector. The rental market has essentially been on an uptrend since the trough in 3Q09. However, we are skeptical of the sustainability of the growth momentum in the factory and warehouse market. Leasing enquiries for factory space has tapered, according to property consultant CBRE. The influx of factory and warehouse supply from 2013-2016 is also expected to cap the growth in rents or even exert downward pressures in our view. On a more positive note, demand for business park space has held steady in 3Q13 and is likely to remain positive in the short to medium term, with potential upside in the rents over the next 6-12 months. We maintain our view that the industrial property rents, on the whole, will remain stable in 2013, while rents in 2014 may likely be flat to slightly downside biased.

Increasingly difficult to find yield-accretive properties
We also highlight again the possibility that industrial REITs may continue to face difficulties in acquiring industrial properties that are yield-accretive. Singapore warehouse and factory prices have recently witnessed yet another set of record highs in 3Q13. Furthermore, the Singapore government has been imposing a number of cooling measures over the year. All these developments serve to dampen the market sentiment and transaction activity in our view, as industrial REITs are likely to be more selective on their acquisition targets. 

Maintaining our cautious stance
With the potential reduction of the US stimulus programme and accompanying hike in cost of debt funding, we believe earnings accretion from investments may also be eroded, while the existing portfolio assets may be susceptible to devaluation. Nevertheless, more industrial REITs are turning to asset enhancement initiatives/(re)developments to grow their income, and this should help to cushion the moderating growth trend. We are maintaining our NEUTRAL view on the industrial REIT subsector. We choose Ascendas REIT [BUY, S$2.45 FV] and Cache Logistics Trust [BUY, S$1.30 FV] as our preferred picks due to their strong earnings visibility, robust financial position and compelling yields.

Singapore Aviation Support Services

Uobkayhian om 11 Dec 2013

The three companies within aviation support services will face higher labour costs due to
upcoming increases in labour levies and a lower dependency quota. SIAEC and SATS
will be most impacted. In addition, government bond yields have risen on expectation of
the Fed tapering and this has pressured ST Engineering (STE) and SIA Engineering
(SIAEC). Among the three, we still favour SATS due to its relatively higher yield, and are
now less negative on STE. Maintain UNDERWEIGHT. 

SIA Engineering (SIE SP/SELL/Target S$4.65). While management is optimistic of
long-term prospects, we are concerned over its weak revenue growth. Wage costs are
elevated and growing faster than revenue, highlighting an inability to pass on cost
increases. Additionally, we expect stiffer competition in the line maintenance segment
(accounted for 76% of 1HFY14 operating profit) as it has recently ventured into the
segment. We value SIAEC on a DDM basis (COE: 6.9%, terminal growth: 1%). 

SATS (SATS SP/HOLD/Target: S$3.24). Operationally, SATS faces the highest risk
from rising labour costs. However, it is diversifying its operations and we are enthused
by the potential for catering revenue from the Singapore Sports Hub, which is expected
to be operational in Apr 14. There is a high likelihood that SATS may form a tripartite
cargo handling JV with Oman Air and Oman International Airport, which would give it
access to the fast-growing Middle Eastern aviation market. Our DDM-based valuation is
based on required return of 7.0% and terminal growth of 1.5%. SATS currently has the
most attractive yield spread within the sector, at 2.73%, vs STE’s 1.90% and SIE’s
2.24%. 

ST Engineering (STE SP/SELL/Target: S$3.65). We expect earnings over the next two
quarters to be impacted by the political gridlock in the US and concern over imminent
tapering of quantitative easing by the Fed. About 27% of STE’s revenue comes from the
US. Our target price is based on COE of 6.6% and terminal growth of 1.5%. The
relatively low premium to the 10-year SGS could be due to the fact that it is AAA-rated,
majority owned by Temasek and that about 40% of its revenue is driven by defense
works, which carry little default risk. At S$3.83, we envision a 4.7% downside risk.

Midas Holdings

DBS Group Research, Dec 10

MIDAS won its first HSR contract (168 million yuan, S$34.6 million) in more than two years in October, as China resumed its high-speed railway (HSR) development programme, with more likely to come.

We believe the group could win a substantial order arising from the recent second rolling stock tender for 314 train sets, or about 2,500 train carriages.

Over the next two years, we believe more than 700 train sets could be further tendered for, resulting in further wins for Midas in the HSR segment.

At the same time, we expect (China) metro orders to continue flowing in and overseas orders, which have grown substantially in 2013, to continue to be robust as Midas looks to maintain a more diversified earnings base.

Hence, we project Midas's earnings to improve from RMB 61 million in FY13 to RMB 209 million in FY14, on higher revenue as well as better margins.

With 2013 at its end, and having introduced FY15F estimates, we roll over our valuation multiple for the stock to 1.2 times FY14F P/BV to derive a new TP of S$0.64.

Trading at just one time FY13 P/BV, we believe current valuations are attractive for a stock whose earnings are poised for a strong rebound into FY14F and FY15F.

BUY

Oilfield Services

UOB KayHian, Dec 10

INVESTORS can no longer ignore oilfield services in 2014. New sizeable market-cap OSV (offshore support vessel) stocks will place this sector firmly on investors' radar screen.

Apart from Pacific Radiance (PacRa SP), these stocks include:

(a) soon-to-be-listed Robert Kuok's PACC Offshore Services Holdings (POSH),

(b) Jaya Holdings (Jaya SP), which is likely to make a comeback with a probable new industry-operator major shareholder at its helm, and

(c) a potential listing of Miclyn Express Offshore (MIO AU) on Singapore Exchange (SGX), after its delisting from the Australian Stock Exchange (ASX).

Pacific Radiance (not rated; market cap: S$653 million). Recently listed on SGX, Pacific Radiance has two principal businesses: (i) offshore support services (OSS); (67 per cent of H1-13 turnover), and (ii) subsea services (26 per cent of H1-13 turnover).

The group has a fleet of 131 OSVs, of which 60 are wholly-owned and 71 are operated by associates and joint ventures (JVs). There are 17 new vessels pending delivery.

As of end-3Q13, NBV of its own fleet was US$466m (including US$58m relating to vessels under construction).

Pacific Radiance is managed by a team of industry veterans, headed by executive chairman Pang Yoke Min who was the co-founder of Jaya and its managing director from 1981 to 2006.

POSH (pending listing in 1Q14; expected market cap: >S$1 billion). POSH, the oilfield services arm of the Robert Kuok group, is targeting for a listing on SGX in Q1-14.

POSH is an OSV provider. It also handles transportation, towing, mooring and installation services as well as services for oil spill and salvage operations. POSH has a fleet of 114 vessels, while 14 vessels are on order.

As of end-2012, its fleet NBV (net book value) was US$767 million (including US$166 million relating to vessels under construction).

POSH operates mainly in Asia, but has presence in Africa, Europe and India.

Jaya Holdings (not rated; market cap: S$521m). According to industry sources, a new industry-operator major shareholder is likely to emerge. Australia's Mermaid Marine (MRM AU; market cap: A$728 million) is rumoured to be the successful bidder for Deutsche Bank's 53 per cent stake in Jaya. Jaya has gone through numerous major shareholder changes in the last decade (Sime Darby in 2004, Nautical Offshore Services in 2006, and Deutsche Bank in 2011).

A new industry-operator major shareholder should augur well for the group. Jaya is an OSV provider as well as a shipbuilder. It has a fleet of 28 OSVs, while seven vessels are pending delivery. It also operates two OSV shipyards.

As of end-Jun 13, NBV of fleet was US$406 million (of which US$45 million related to vessels under construction). Geographically, Asia contributed 64 per cent of OSS revenue, Africa per cent,and others 16 per cent.

Telecommunications sector

Phillip Securities Research, Dec 9

THE telecommunications sector under our coverage consists of SingTel ("Accumulate", target price $3.61), StarHub ("Accumulate", target price $4.52) and M1 ("Accumulate", target price $3.55). StarHub and M1 are pure plays to the Singapore market, while SingTel has exposure to the Asia-Pacific region through its regional mobile associates.

M1 replaces SingTel as our most preferred stock in the sector. We like M1 over SingTel and StarHub as M1 stands to gain the most from improving mobile dynamics in Singapore, and benefits from growth in its fibre broadband. Mobile accounts for a higher revenue proportion for M1 than for its peers. With its fibre broadband offering, M1 continues to grow its fixed services revenue.

Adverse foreign exchange movements continue to have a negative impact on SingTel's earnings.

However, its earnings remained stable y-o-y in the last quarter because of effective cost-management strategy.

We remain cautiously positive on the sector as the telco stocks continue to provide attractive dividend yields and stable earnings growth.

We see data monetising gaining good traction in Singapore and expect it to continue into FY2014. More subscribers have taken up 4G tiered plans and are increasingly exceeding their data allowances.

SingTel and M1 reported improvement in Ebitda margin on service revenue while Ebitda margin for StarHub remained stable in the last quarter.

Earnings growth was stable across the three telcos in the current FY. Despite expectations of the Fed tapering in the near term, we think the telcos continue to be attractive investments, providing earnings as well as dividend growth potential.