Yangzijiang Shipbuilding

DBS Group Research, Feb 27

YANGZIJIANG registered strong Ebit in Q4, rising 45 per cent y-o-y and 29 per cent q-o-q, on the back of record gross margins of 42 per cent.

This was offset by the high tax rate of 46 per cent in the quarter. As a result, net profit was in line at 746 million yuan (S$154 million). We believe the strong margins were attributable to the delivery of the last batch of high margin pre-crisis orders.

Yangzijiang secured US$511 million contracts, comprising two units of 36,000 deadweight tone (dwt) bulkers, three units of 64,000 dwt bulkers, three units of 82,000 dwt bulkers, three units of 208,000 dwt bulkers, two units of 1,100 twenty foot-equivalent unit (TEU) containerships and one unit of 10,000 TEU containership.

Second consecutive quarter of orderbook growth is commendable, rising from US$3.87 billion three months ago to US$4.6 billion as of end-December, signifying the end of its orderbook decline since Q1 2012.

This translates into a healthy 2.7 times book-to-bill ratio. With 11 options worth US$0.83 billion on hand and favourable shipping dynamics, we expect more contracts to be finalised in the near future.

As the new yard is full till 2016, Yangzijiang intends to re-commence the Changbo yard in Q1 2014, which will be able to take on an additional 6-7 small-medium sized vessels for delivery by 2015. This could lift FY2014 revenue by about 5 per cent.

Upstream reported at end-January that Yangzijiang has bagged 2+2 semi-submersible drilling rigs contracts, to be built to Moss CS50 design. If effective, this will be Yangzijiang's second rig deal. Positives of this deal: estimated contract value of US$1.7 billion would be a boost to orderbook; we can expect economies of scale from the 2+2 orders for similar designs; and customer PrimePoint is an established drilling company.

However, although Yangzijiang has demonstrated an impressive track record in shipbuilding, scepticism could remain until Yangzijiang delivers its first jackup on time and on budget by August 2015.

Reiterate "buy" on the most competitive and profitable listed shipbuilder in China. At current 1.1 times P/B, earnings and margin downtrend in the next two years are largely priced in. We believe investors should look beyond near- term earnings, to order win momentum and quality alongside the shipping recovery.

Yangzijiang remains our preferred pick to play the shipbuilding recovery, given its excellent track record, reputable management, and balance sheet strength. We maintain our sum-of-the-parts- based target price of S$1.33.

BUY

Yangzijiang

UOBKayhian on 28 Feb 2014

FY14F PE (x): 8.0
FY15F PE (x): 6.8
4Q13 earnings declined 8% yoy on higher tax rate. 4Q13 revenue was Rmb3.38b (-5%
yoy), of which shipbuilding revenue was Rmb3.00b (-7% yoy). The decline in
shipbuilding revenue was a result of less vessels delivered (6 in 4Q13 vs 12 in 4Q12).
Overall gross margin (including investment business) improved to 42% from 4Q12’s 31%
due primarily to a surge in shipbuilding gross margin, which reached 43% in 4Q13
compared to 24% in 4Q12 and 24% in 3Q13. For container vessels that were delivered
in 4Q13, there was a write-back of an earlier 8% provision, and YZJ saved 2% in steel
cost, as a result of down-payment to steel suppliers. 4Q13 PBT increased 36% yoy to
Rmb1,355m. Effective tax rate soared to 46% in 4Q13 and 33% in 2013 from 16% in
4Q12 and 19% in 2012 respectively, due to a) expiry of tax holiday for New Yangzi; and
b) tax adjustment on the impairment provision of Rmb345,7m, resulting in an 8% yoy
decline. The 2013 full-year profit was Rmb3,077m, down 14% yoy, also dragged by the
increase of tax rate. YZJ proposed a final cash dividend of S$0.05 per share,
representing a consistent 30% dividend payout ratio.
Maintain BUY with target price of S$1.39 unchanged, based on 1.3x 2014F P/B. YZJ
has proven its leadership among non-SOE shipyards throughout the past years with its
strong order winning/project execution capability and robust balance sheet. Continuous
recovery in newbuild prices would be the major earnings driver in the long run.

ST Engineering

UOBKayhian on 28 Feb 2014


FY14F PE (x): 19.5
FY15F PE (x): 18.9

In line with consensus but surprises with a cut in dividend. Despite a lower guidance for full-year earnings in 3Q12, ST Engineering (STE) showed record revenue in 4Q13 with broad-based growth across all four segments. Orderbook for 2013 was at a record S$13.2b, of which S$4.3b (2013: S$44.3b) would be delivered in 2014. STE declared a final dividend of 12 S cents vs 13.8 S cents in 2013, translating into a payout of 79.4%, vs 89.3 previously. Upgrade to HOLD. While STE has been traditionally viewed as a dividend stock, its lowered payout now holds the prospect for additional growth. Given the change in dividend policy, we now move from a DDM-based valuation to a PE-based valuation. We value STE at +1SD to long term mean or 20.6x 2014F earnings and derive a fair value of S$4.03. At our fair value, STE will trading at just 0.95x orderbook, below mean P/orderbook of 1.22x.

Ho Bee

UOBKayhian on 28 Feb 2014

FY14F PE (x): 15.1
FY15F PE (x): 12.0

Results in line with expectations. Ho Bee Land (Ho Bee) reported a 4Q13 net profit of
S$505.3m, 580% yoy bringing 2013 full-year profit to S$591.8m (up 216.3% yoy). The
sharp increase in attributable profits was due mainly to the revaluation gain of S$493.1m
with bulk coming from The Metropolis project, divestment gain of S$47.0m gain of its 9%
stake in Chongbang Holdings and S$25.9m gain on the disposal of Hotel Windsor.
Excluding these one-off items, the core earnings of S$69m is in line with our
expectations. Maintain BUY with an increased target price of S$2.68. We have raised
our RNAV by 9% to S$3.58/share (from S$3.27) mainly factoring higher valuation for
Metropolis. We maintain our BUY recommendation with a raised target price of S$2.68
(from S$2.45) pegged at a 25% discount to RNAV.

City Developments

UOBKayhian on 28 Feb 2014

FY14F PE (x): 12.4
FY15F PE (x): 10.9

Results in line with expectations. City Developments (CDL) reported a 4Q13 net profit
of S$221.0m, down 11.4% yoy and bringing full-year 2013 net profit to S$683m, +0.7%
yoy. The full-year results included the following one-off items: a) divestment gains of
S$190.6m from the sale of its non-core industrial assets (100G Pasir Panjang, strata
units in Elite Industrial Building I, Elite Industrial Building II and Citimac Industrial
Complex) and a subsidiary in China and India, b) impairment losses of S$27m mainly
from its overseas hotel and investment properties, and c) writebacks, fair value changes
and exchange differences totalling S$3.4m. Excluding these one-off items, the core
PATMI of S$529.7m is in line with our expectations and accounts for 98% of our full-year
forecast. Upgrade to BUY with an unchanged target of S$10.84/share, pegged at a 20%
discount to our RNAV of S$13.55/share. CDL’s share price has corrected by 25% from
its high last year, underperforming the market by 10% yoy. At these levels we believe
that market has overdiscounted the negative prospects. The stock is trading at a steep
31% discount to RNAV.

ROTARY ENGINEERING

UOBKayhian on 28 Feb 2014

VALUATION

•  Maintain BUY and target price of S$0.88, based on a 3-year average PE of 10.6x on 2015F EPS of 8.3 S cents. We also expect the company to pay out a dividend of 2.9 S cents/share providing investors with a dividend yield of 4.6% for 2014.

FINANCIAL HIGHLIGHTS

•  Rotary reported a stronger set of results for 2013. Net profit rebounded to S$20.7m from a loss in 2012, mainly due to higher revenue and lower profit recognition from the negative-margin SATORP project. Total revenue rose 34% yoy to S$595m (2012: S$444m) and gross profit improved to S$68.5m (2012: S$110m gross loss). Gross profit margins also grew to 12% which was within management's guidance.
• Orderbook remained strong at S$694m as at 31 Dec 13, of which 69% is from Singapore and ASEAN and 31% from the Middle East. Balance sheet is also healthy with the company recording a net cash of S$134m, 37.5% of the current market cap. Rotary is also proposing a dividend of 1.5 S cents, providing investors a dividend yield of 2.4%.

OUR VIEW

•  Keeping a tight control on current projects. Rotary is confident of delivering a very strong set of results for 2014 as most contracts in the current orderbook are in Singapore, where control is tight and execution risks are a lot lower. Gross margins are also expected to normalise after the Group handed over the SATORP project last year. Rotary has also put in place several initiatives to improve productivity and reduce costs such as shifting its production to its Indonesian yard and investing in barges to transport prefab components across the Straits.
• Oil and gas projects outlook remains robust While Petronas is still evaluating the tenders for the RAPID project and will probably announce the results only in 2H14, Rotary re-iterated that there are also several projects out for tender in 2014 such asMalaysia’s petrochemical hub in Pahang, Thailand’s EPC, tankage project in Map Ta Phut and even Fujairah oil terminal phase 2. Chairman Mr Roger Chia urged investors to remain patient as contract wins will come.
• Earnings to double in 2014. Getting off a low base in 2013 and with the current orderbook of S$694m, we expect the company to record a revenue of S$700m and profit of S$40.8m, doubling from the last financial year.

Sino Grandness

UOBKayhian on 28 Feb 2014

Valuation

• Maintain BUY with a higher target price of S$1.06. The company is still trading at an undemanding 4.2x 2014F PE, vs Hong Kong-listed peers’ 25.6x. We see potential upgrade in our target price as the Garden Fresh listing gets closer, and if the listing comes with a lower-than-expected dilution or a higher valuation obtained during the book building process.

Financial Highlights

• Sino Grandness Food’s (SGF) reported 2013 net profit of Rmb401.1m, +38.5% yoy, driven by strong sales in the beverage and canned food segments. Revenue jumped 38.5% yoy to Rmb2.3b as sales of its Garden Fresh bottled juices gained59.5% yoy to Rmb1.4b, while sales of canned products also expanded 14.6% yoy to Rmb879m. Gross profit increased 39.3% yoy to Rmb885.2m with gross margin improving slightly to 39% due to increased contribution from the higher-margin beverage segment.
• Sales and distribution costs escalated to Rmb228.4m, +31.1% yoy, due to increased transportation costs and A&P expenses. Administrative costs also soared 89.1% yoy to Rmb101.6m as the company had to record an additionalRmb10m in depreciation for the new Hubei plant, Rmb10m in IPO expenses andabout Rmb19m in forex losses.

Our View

• We believe the listing of Garden Fresh remains on track With this set of results, the company has also fulfilled the third year of a profit guidance of Rmb250m for Garden Fresh, which signifies that the Rmb370m of convertible bonds (CB) will be converted to a 24.7% (pre-IPO) stake in Garden Fresh. The company targets to complete the listing by October this year and has reclassified these CBs from noncurrent liabilities to current liabilities. But having said that, SGF has to budget another Rmb50m this year as IPO expenses.
• We also expect top-line and bottom line of its exports and snack businesses to continue to grow as its European customers recover from the economic downturn and new products are introduced into the market. The company is working on a new range of beverage products to be launched in the Chengdu trade fair in Mar 14.

ST Engineering

Kim Eng on 28 Feb 2014

Earnings in line with expectations
STE reported net income of SGD580.8m (+0.8% YoY) for FY13, in line with our expectations and management’s guidance for comparable profits for the year. Sales grew by 4%, with the marine  division seeing the largest expansion (+23% YoY). Strong contract wins in 4Q13 took the orderbook to a record high of SGD13.2b (Dec 2012: SGD12.1b, Sep 2013: SGD12.5b). However, DPS was lowered to SGD 15.0 cts (FY12: SGD 16.8 cts) following a cut in payout ratio to 80% from 90% last year. Management expects revenue and PBT for FY14 to exceed FY13’s achievement.

Disappointing DPS
Although STE’s earnings were within our expectations, the lower DPS of SGD 15.0 cts was a disappointment. Management said that as the group’s share of earnings from overseas increase, there will be a cap on its ability to pay out higher dividends, given the need to pay withholding tax on overseas income (it guided for a payout ratio of 75% over the next 3-5 years). It added that overseas
earnings will be retained to fund expansion. Our expectations for higher sales for aircraft engine work failed to materialise due to improved reliability of the CFM56 engines. Management expects upside in engine sales to be delayed to 2016/2017. For its marine business in Singapore, it sees heightened competition from local players for ship repair. We keep our FY14E-16E forecasts largely unchanged but lower our payout ratio to 75%. Consequently, we expect the stock to yield approximately 4% over the next three years. Our TP of SGD4.00 is based on 20x FY14E P/E. Maintain HOLD.

Yangzijiang Shipbuilding

Kim Eng on 28 Feb 2014

What’s New
Stripping out various lumpy and/or one-off items, YZJ’s 4Q13 results beat expectations. Shipbuilding gross margin spiked up to 43.5% (3Q13: 22.3%, 4Q12: 24.1%) due to provision write-backs and cost savings from steel suppliers. We estimate that this added about 10ppt to gross margin and will not recur in subsequent quarters. But the positive effect was offset by (1) impairment of about CNY346m for vessels held by its shipping subsidiaries, and (2) higher effective tax as Jiangsu Newyangzi’s corporate tax rate was raised to 25% in FY13 from 15% in FY12.

What’s Our View
With the successful sea trial of its 10,000TEU containership, YZJ believes Seaspan will likely exercise its options for seven more units. While this would enhance the orderbook, it would also take up yard capacity and withhold YZJ from participating in any price upside (those units are at crisis-level price of USD85-90m each). YZJ has also signed orders for two mid-water semi-subs worth USD825m, with options for two more units as it forays into offshore space to ensure its future competitiveness. We expect learning curve issues in the initial stage to heighten pressure on shipyard margins which are anticipated to decline. The unknown risk of its held-to-maturity assets (CNY14.1b) and venture into property development are added concerns. Excluding the semi-sub  orders, we see lower order wins for FY14E at USD1.5b (FY13: USD2.9b, YTD: USD0.26b). Maintain SELL and SOTP-based TP of SGD1.05.

City Developments

Kim Eng on 28 Feb 2014

What’s New
CDL reported a PATMI of SGD225.6m for 4Q13 (-11.4% YoY, +83.3% QoQ). Excluding divestment gains and a SGD23.7m impairment attributed to a hotel in the US, we estimate core PATMI to be SGD225.6m (+11.2% YoY, +96.1% QoQ). Full-year core PATMI declined by 4.4% YoY to SGD516.9m. A final dividend of SGD 8.0 cts per share was proposed (total DPS of SGD 16.0 cts for FY13).

What’s Our View
CDL achieved creditable residential sales in 2013, selling 3,210 units (+34.0% YoY) with a total value of SGD3.3m (+19.4% YoY). With the property market softening, we expect its new launches to experience some margin compression, coupled with lower sell-through rates.
Full-year PBT from its hotel operations fell 36.1% YoY to SGD160.1m on weaker RevPAR from Singapore and the rest of Asia. Nevertheless, armed with a strong balance sheet, M&C is acquiring a hotel each in London, New York and Rome. Its GBP240m refurbishment is also still ongoing, potentially putting it in a position to benefit when the global economy improves.
As it will take time for the internationalisation push to contribute to the bottom line, CDL remains largely Singapore-centric and we maintain our SELL recommendation.

Ho Bee

Kim Eng on 28 Feb 2014

What’s New
Ho Bee recorded a headline PATMI of SGD506.1m for 4Q13 on the back of a SGD489.6m revaluation gain from The Metropolis. Core PATMI stood at SGD13.0m (-75.2% YoY, +82.0% QoQ), which was sequentially stronger on the back of the tax write-back and increased rental income from The Metropolis in Singapore and Rose Court in London. The proposed dividend of SGD 8.0 cts translates into a fairly attractive yield of 3.7%.

What’s Our View
With Ho Bee’s Singapore landbank concentrated in Sentosa Cove, we do not expect much residential contribution in the near future given the softening market. Earnings from its investments in China and Australia will not feature in the near term as well, considering that the projects are in their early stages of construction. Ho Bee’s recurrent income base has strengthened with the completion of The Metropolis, which is ~90% committed. Based on the latest valuations, the office development is valued at ~SGD1,300 psf, which we think is fair. However, if we peg it to the SGD1,900 psf valuation at which Westgate Tower was recently transacted, Ho Bee’s RNAV per share could be as high as SGD4.73. Trading at 0.6x P/BV, valuation is attractive. Maintain BUY; TP of SGD2.55 pegged to a 35% discount to RNAV.

Q&M Dental Group

Kim Eng on 27 Feb 2014

Below expectations due to one-off costs
Q&M’s FY13 net profit of SGD5.2m (+3.4% YoY) was below our expectations for SGD5.6m due to higher start-up and acquisition-related costs in 4Q13. More importantly, FY13 and 4Q13 revenue grew strongly by 25% and 31% YoY respectively. The increase in full-year revenue was driven by the opening of new outlets in Malaysia and Singapore, and the acquisition of AR Dental Supplies in 3Q13.

The real story will play out in China this year
In our view, future growth will be acquisition-driven and will come from China. The latest development is the signing of a binding agreement to buy Qinghuangdao Aidite (Aidite). This will be Q&M’s second-largest proposed acquisition to date after Aoxin Stomatology Group (Aoxin). Adding in Aoxin (to be completed soon) and Aidite, we expect EPS growth to ramp up to 84% in FY14E (27% from the existing business, 29% from Aoxin and 28% from Aidite). Organically, we expect Q&M to achieve 27% EPS growth as its new outlets in Malaysia and Singapore move past their gestation phase and newly-acquired AR Dental Supplies start to contribute a full year’s profit (vs six months in FY13).

Completion of Aidite deal will lift TP to SGD0.54
For now, we maintain our TP at SGD0.48 (which includes Aoxin’s 9 nine month earnings contribution since the acquisition is largely complete). But if both Aoxin and Aidite were factored into our FY14E forecasts, it would raise our target price to SGD0.54, thus justifying the 34x P/E multiple we have used to arrive at the SGD0.54 all-in value. Note that at 34x, this is still 0.5 standard deviation below Q&M’s historical mean since Dec 2009.

Sino Grandness

Kim Eng on 27 Feb 2014

Slight miss on non-operating expenses
Sino Grandness reported slightly lower-than-expected 4Q13 results, with revenue up 36.3% YoY to CNY553m but net profit sliding 8.3% YoY to CNY59m. The strong top-line growth reflected the underlying strength of the business, namely, the beverage segment which met its full-year net profit target of CNY250m. This segment grew 56.7% YoY in 4Q13 and 59.5% on a full-year basis. 4Q bottom line missed market expectations by about CNY20m, weighed down by non-operating costs such as a net forex loss of CNY14.7m and Garden Fresh spinoff-related expenses of around CNY10m. Excluding such expenses, net profit was in line with our estimate.

Garden Fresh IPO update
Sino Grandness has engaged investment bankers and legal counsel in 4Q13 to commence work related to the proposed Garden Fresh spinoff. We believe due diligence is currently being conducted by the Hong Kong Stock Exchange and the company aims to submit the official application in the next few months. Management is confident that the IPO will be completed by 19 Oct 2014, the maturity date of the first tranche of convertible bonds.

Our view
We believe the risk of a significant IPO delay is very small. The stock’s risk/reward profile remains good and we maintain our BUY rating. We slightly raise our TP to SGD1.06.

Nam Cheong

Kim Eng on 26 Feb 2014

What’s New
Adjusting for MYR12.6m of tax reversal, Nam Cheong reported 4Q13 PATMI of MYR57.8m (+17.2% YoY, -2.3% QoQ), beating our and consensus expectations. However, on a PBT level, the number was in line with our estimate. Shipbuilding gross margin was sustained at above 20% level for the quarter. We attribute the stronger YoY performance to the higher number of vessels delivered and the ensuing positive tax effects. A dividend of SGD 1.0 cent per share (0.5 first and final plus 0.5 special) was declared.

What’s Our View
Management said the 2015 shipbuilding programme will consist of 35 vessels worth a total of USD700m. These include built-to-order (BTO) vessels as well. Our initial forecast, however, takes into account 28 vessels worth USD560m, but they exclude the BTO vessels. Adding all in, the value of the shipbuilding programme is marginally higher (~USD10m) than our initial forecast. Current orderbook, which consists of 24 vessels, stands at MYR1.5b.
So far, Nam Cheong has sold 16 of the 30 vessels scheduled for delivery this year. With demand for offshore supply vessels (OSV) recovering, management expresses confidence in winning new orders, a viable trend for the next 2-3 years in our view.
We adjust our FY14E/15E earnings by -1%/5%. We expect earnings to be sustained at 20% above FY13 levels for the next three years, driven by sustained OSV demand. We value the stock on 9x FY14E P/E, yielding a TP of SGD0.41. Reiterate BUY.

CWT

Kim Eng on 27 Feb 2014

4Q13 results beat expectations
CWT reported a strong set of 4Q13 results, with revenue soaring 100.6% YoY and net profit climbing 90.8% YoY. On a full-year basis, however, net profit marked a 1.8% YoY decline, dragged down by poor performance in the first three quarters. Commodity trading revenue grew by more than 120% YoY, spurred by robust naphtha trading volume during the quarter. A final DPS of SGD 3.5cts was proposed, exceeding last year’s SGD 3.0cts.

What’s Our View
The growth in CWT’s logistics business in the next two years will largely be driven by capacity increase. The new warehouse, now under construction, will raise its total warehouse space by 20%.
For its commodity trading business, we think copper trading in China could remain tough if the tight credit situation persists this year. Nevertheless, we expect this segment to record 20% revenue CAGR over the next three years as CWT continues to diversify its trading portfolio. Naphtha, for example, though a relatively new product in its portfolio, has been the main growth driver in the past two quarters. We also expect bottom-line growth to further strengthen on reduced start-up/restructuring costs this year.
We raise FY14/15E net profit by 14% as we factor in higher contribution from the commodity trading business. Maintain BUY with a higher TP of SGD1.50 (previously SGD1.47).

Venture Corporation

Kim Eng on 27 Feb 2014

Within expectations
Venture’s FY13 net profit fell 6% YoY to SGD131m against our forecast of SGD134m, with the variance entirely due to a higher tax provision. 4Q13 net profit rose 8% QoQ to SGD38m on a 6% QoQ/5% YoY increase in revenue to SGD623m. Two things were notable – quarterly revenue was the highest since 4Q10 and net margin of 6.1% was the highest since 2Q11. In our view, this is the start of a recovery for Venture. Lastly, the final dividend of SGD0.50 per share was never in doubt.

The turning point is here
We believe 4Q13 was a turning point for Venture’s transformation, marking its return to sustainable growth. There are still challenges but a full two-thirds of its customer base is seeing a recovery while Venture is gaining more traction with new customers and new products. For FY14E, management anticipates better growth in Test & Measurement, Life Sciences and Industrial Products, segments that also promise higher margins. Longer term, Venture is positioning itself at the forefront of new and exciting technologies, eg, 3D printing and genetic sequencing.

FY15/16 forecasts raised, maintain BUY
We see more meaningful contributions from 3D printing and Life Sciences by FY15E and lift our FY15E/16E earnings by 4%/5% to factor in a higher contribution from these new areas. We note that Life Sciences revenue was broken out as a separate category for the first time in 4Q13, suggesting that the segment could become very important within the next two years. We trim our FY14E forecast slightly by 0.6% to account for a higher tax rate.

Sembcorp Industries

Kim Eng on 27 Feb 2014

No major surprises in 4Q13 results
Sembcorp Industries’ (SCI) 4Q13 PATMI of SGD223.8m (+9.3% YoY, -12.0% QoQ) met expectations, after stripping out the SGD39.6m tax credit (mainly from the Marine segment). Utilities net profit dipped in 4Q13 (-6.2% YoY, -55.8% QoQ) due to: 1) lower electricity sales and HSFO prices in Singapore, and 2) scheduled maintenance in two of its China plants. SCI declared a final DPS of 17 cents.

What’s Our View
SCI communicated a shift in its Utilities business strategy to one skewed towards the developer model as opposed to an owner-operator model. SCI intends to take a higher stake upfront as a developer in future projects and pare down its stake after project completion. We believe that this would allow it reap a portion of return upfront while still participate in long-term recurring income of utilities project (eg. the Sembcorp Salalah IPO)
SCI did not provide an indication of the extent of domestic power spread decline for 4Q13 (which dipped ~19% YoY in 3Q13), but suggested that some players are contemplating to scale back on capacity expansion to defend industry profitability. This could provide some relief to an expected decline in power prices in FY14E. Nevertheless, we believe that the key upside for the SCI still lies in its pipeline of Utilities development projects.
Our forecasts and SOTP-based TP are left largely unchanged. Maintain Hold on concerns on power spread decline in Singapore.

Sembcorp Marine

Kim Eng on 27 Feb 2014

What’s New
Top US driller Transocean has placed orders for two ultra-deepwater drillships, worth USD540m each, with Sembcorp Marine (SMM). It also has options to purchase three more units, to be exercised within 12/18/24 months. The drillships are of the same design as the seven units SMM is building for Sete Brasil. This big contract follows yesterday’s order win for a USD214.3m jackup unit from Marco Polo. It immediately bumps up SMM’s YTD order win to USD1.3b/SGD1.6b, about 32% of our full-year forecast of SGD5.1b.

What’s Our View
We see the order wins as a very positive development for SMM. Although there are execution risks as it ventures into building of drillships in Brazil, they also present opportunities for SMM to enter the drillship market. This market has traditionally been dominated by Korean shipbuilders and the order from Transocean is a strong endorsement for SMM’s design.
SMM would not provide guidance on potential margins, except to say that it is a “good price” for them. At USD540m each, the price tag is lower than the USD806m each for the Brazilian units, but given that the drillships would be built in Singapore, costs should be lower as there are no local content requirements. Based on Transocean’s announcement, it has stated a total price of USD1.24b which included project management and owner-furnished equipment. This would imply that the actual cost is close to the USD600m price tag in Korean yards. We believe operating margins could be in the 12-13% level. Maintain BUY.

Sembcorp Industries

OCBC on 27 Feb 2014

Sembcorp Industries (SCI) saw FY13 revenue rising 6% to S$10797.6m, or about 3% above our forecast (met consensus). Reported net profit climbed 9% to S$820.4m. However, excluding exceptional gains of S$35.5m (S$117m gain from the IPO of Salalah and S$48.5m impairment of Teesside being the main items), we estimate that core earnings would have been around S$784.9m, which is almost spot on our forecast (2% above consensus). SCI declared a final dividend of S$0.15/share as well as bonus dividend of S$0.02, bringing the total payout to S$0.17 versus S$0.15 last year. In light of the results and the guidance, we made some very minor tweaks to our FY14 estimates – all less than 1% change. We also maintain our BUY rating on the stock. But to reflect our recent adjustment in SembMarine’s fair value (from S$5.68 to S$5.26), our SOTP-based fair value slips from S$6.67 to S$6.42.

FY13 results within expectations
Sembcorp Industries (SCI) saw FY13 revenue rising 6% to S$10797.6m, or about 3% above our forecast (met consensus), driven by the 25% growth in its marine segment to S$5522.7m, which also negated the 9% drop in utilities revenue to S$5095.3m. Reported net profit climbed 9% to S$820.4m; but excluding exceptional gains of S$35.5m (S$117m gain from the IPO of Salalah and S$48.5m impairment of Teesside being the main items), we estimate that core earnings would have been around S$784.9m, which is almost spot on our forecast (2% above consensus). SCI declared a final dividend of S$0.15/share as well as bonus dividend of S$0.02, bringing the total payout to S$0.17 versus S$0.15 last year.

Sustainable long-term growth 
In 2014, SCI expects its utilities’ underlying core business to deliver a steady performance compared to 2013; also sees continued growth from its overseas operations. SCI adds that it should have made sufficient provisions for Teesside in 2013. For its marine segment, SCI highlights the net S$12.3b order book which offers visibility out to 2019; but also notes that margins remain challenging in anticipation of the tight labour supply situation in Singapore. Lastly, for its urban development business, SCI expects to see a better performance in 2014, underpinned by land sales in new urban developments in China and Vietnam. As such, SCI believes it is well-positioned to deliver sustainable long-term growth. 

Marginal tweaks to our FY14 forecasts
In light of the results and the guidance, we made some very minor tweaks to our FY14 estimates – all less than 1% change. We also maintain our BUY rating on the stock. But to reflect our recent adjustment in SembMarine’s fair value (from S$5.68 to S$5.26), our SOTP-based fair value slips from S$6.67 to S$6.42.

BreadTalk

OCBC on 27 Feb 2014

BreadTalk’s FY13 revenue met our expectations as it increased 19.9% to S$536.5m, forming 99.6% of our forecast. PATMI came in slightly below our expectations, up 13.3% at S$13.6m, making up 96.3% of our forecast. In order to reach the S$1b sales target, a CAGR of 23.1% is required between FY14 to FY16, which we think has to be driven by new stores more than organic growth of recently opened stores. We think that expansion will become more challenging as BreadTalk gets larger and assume a lower growth of 15% for FY14. While lower than the implied CAGR of 23.1%, our assumed figure is still healthy by any measure. Given the growth prospects, we value BreadTalk with 16.6x PER, which is 1 s.d. above its five year historical average. We obtain a fair value estimate of S$0.85 (previous S$0.77) and maintain SELL as the stock seems overvalued now.

FY13 growth driven by outlet expansion
BreadTalk’s FY13 revenue met our expectations as it increased 19.9% to S$536.5m, forming 99.6% of our forecast. PATMI came in slightly below our expectations, up 13.3% at S$13.6m, making up 96.3% of our forecast. Segmental sales growth is led by Food Atrium at 29.2%, followed by Restaurants at 19.1% and finally Bakery at 16.4%. In line with its aggressive expansion plans, total outlets increased by 21.9% to 836. A final cash dividend of 1.3 S-cents is proposed, bringing the full year dividend to 1.8 S-cents, or 1.9% yield based on yesterday’s closing price. 

Margins stabilising but gearing higher
Between FY09 to FY12, BreadTalk’s performance was characterised by double-digit growth but declining margins, which raised concerns about the expansion’s sustainability. This trend is bucked in FY13 with operating and net profit margins stabilising at 4.3% and 3.0% respectively. Nevertheless, net gearing continues to increase from 39.0% in FY12 to 94.8% in FY13. We think that other than higher risks, this raises questions about how the management is planning to achieve its stated goal of S$1b sales by 2016 and 2000 outlets by 2018. In order to reach the S$1b sales target, a CAGR of 23.1% is required between FY14 to FY16, which we think has to be driven by new stores more than organic growth of recently opened stores. In turn, we expect net gearing to increase substantially and we have doubts on whether the risk-reward is justifiable, noting that key risks ahead include China slowdown and political unrest in the region.

Expect further growth but overvalued
We think that expansion will become more challenging as BreadTalk gets larger. Hence, we are assuming a 15% growth in FY14 instead, which is still healthy by any measure. Given the growth prospects, we value BreadTalk with 16.6x PER, which is 1 s.d. above its five year historical average. However, we obtain a fair value estimate of S$0.85 (previous S$0.77) and maintain SELL as the stock seems overvalued now.

Nam Cheong

OCBC on 27 Feb 2014

Nam Cheong Limited delivered a record set of results for FY13, with revenue and PATMI growing 43.5% and 50.6% to MYR1,257.5m and MYR205.6m, respectively. The latter exceeded our FY13 forecast by 9.8%. This was partly due to a one-off reversal of deferred tax, excluding which Nam Cheong’s FY13 profit before tax (PBT) of MYR199.2m (+43.8%) would have been 2.0% above our PBT forecast. Management guided that it is targeting to deliver 35 vessels worth a total of US$700m in FY15, ahead of our estimate for 32 vessel deliveries, and also higher than its FY14 target. We lift our target PER peg from 8.5x to 9.5x in recognition of Nam Cheong’s solid execution track record and robust industry outlook. Applying this to our FY14F EPS estimate which has also been raised by 4.9%, we derive a higher fair value estimate of S$0.42 (previously S$0.37) on Nam Cheong. Maintain BUY.

Record results delivered
Nam Cheong Limited reported 4Q13 revenue of MYR406.2m, representing a YoY increase of 7.1%. PATMI jumped 42.8% to MY70.5m, such that FY13 revenue and PATMI grew by 43.5% and 50.6% to MYR1,257.5m and MYR205.6m, respectively. This was a record high for the group. The latter exceeded our FY13 forecast by 9.8%. This was partly due to a one-off reversal of deferred tax, excluding which Nam Cheong’s FY13 profit before tax (PBT) of MYR199.2m (+43.8%) would have been 2.0% above our PBT forecast. A special dividend of 0.5 S cent/share was declared, on top of a first and final dividend of 0.5 S cent/share, bringing total FY13 DPS to 1 S cent, and translates into a yield of 2.9%.

Guidance on 35 vessels for FY15 shipbuilding programme
Nam Cheong saw record order wins of 24 vessels in FY13 which amounted to ~US$500m, surpassing its 2012 record order win of 21 vessels. 20 vessels were delivered to its customers in 2013. Its order book value stood at MYR1.5b, as at 26 Feb 2014, of which MYR1.4b remains unrecognised. Management guided that it is targeting to deliver 35 vessels worth a total of US$700m in FY15, ahead of our estimate for 32 vessel deliveries. This was also higher than FY14’s target of 30 vessels with an aggregate value of US$600m.

Maintain BUY
Looking ahead, we expect Nam Cheong to be a key beneficiary of Petronas’ aggressive capex plans; while the global replacement cycle of aging OSV fleet will also aid Nam Cheong’s order wins momentum. We lift our target PER peg from 8.5x to 9.5x in recognition of Nam Cheong’s solid execution track record and robust industry outlook. Applying this to our FY14F EPS estimate which has also been raised by 4.9%, we derive a higher fair value estimate of S$0.42 (previously S$0.37). Maintain BUYon Nam Cheong, which remains as one of our top picks within the oil and gas sector.

Venture Corporation

UOBKayhian on 27 Feb 2014

FY14F PE (x):
FY15F PE (x):

Venture reported net profit of S$38m for 4Q13, above our forecast of S$35.7m. Venture
registered a sequential expansion in revenue of 5.8% qoq, benefitting from pick-up in
Test & Measurement/Medical, Retail Store Solutions/Industrial and Computer
Peripherals & Data Storage. The broad-based recovery is an early sign of recovery.
The Printing & Imaging segmented contracted due to poor end-demand for printers.
Venture saw its net margin climb back to 6.1%, within target range of 6-8%. New
customers and new products provide better margins. The better net margin was
achieved despite higher effective tax rate of 9.5%. Venture has declared final dividend
of 50 S cents/share.

Slight strain from working capital. Venture experienced strain from working capital.
Receivables have been stretched from 66 to 82 days. This is an industry-wide
phenomenon as customers are asking for more flexible payment terms. Venture will
work on securing better payment terms from suppliers to improve working capital
management.

Maintain BUY. Our target price for Venture is S$8.85, based on 2014F PE of 16.5x
(Benchmark Electronics: 16.1x, Plexus Corporation: 15.6x), justified by its average
forward PE of 16.5x over the past 10 years.

Sembcorp Industries

UOBKayhian on 27 Feb 2014

FY14F PE (x): 13.7
FY15F PE (x): 12.4
Within our expectation. Sembcorp Industries (SCI) reported a net profit of S$224m
(+9% yoy) and S$820m (+9% yoy) for 4Q13 and 2013 respectively. 2013 net profit was
in line with forecast of S$817m. The utilities segment registered a 20% yoy increase in
net profit to S$450m in 2013, primarily due to strong performance in China and gains
from the IPO of Salalah in Oman. However, there was a provision S$48.5m in the UK
operation. While the marine segment’s total revenue increased by 25% yoy to US$5.5b
on higher rig building revenue, net profit grew only 3% to S$337m due to lower profit
margins.

Target price lowered from S$6.00 to S$5.95. Our target price is pegged at 10%
discount to our sum-of-the-parts valuation. We have reduced our target price for SMM
from S$4.60 to S$4.23. However, this was partially offset by a higher valuation for SCI’s
utilities segment, which has been rolled over by one year and is now pegged at 2015F
PE of 12x. We lower our 2014-15 net profit forecasts marginally by 2-3%, primarily due
to lower earnings forecasts for Sembcorp Marine. We initiate our 2015 forecast at
S$1b.

Pacific Radiance

UOBKayhian on 27 Feb 2014

FY14F PE (x): 9.0
FY15F PE (x): 7.5

Above our expectation. Pacific Radiance reported a net profit of S$56.8m (+76% yoy)
for 2013. This was above our forecast of S$55m, primarily due to higher-than-expected
gains from vessel sales. Pacific Radiance registered gains of US$15.7m from vessel
sales in 2013, of which US$3.7m was made in 4Q13. We had assumed zero gains in
4Q13. The full-year gains of US$15.7m are in line with management's guidance on
sustainable annual gains of US$15m-20m from vessel sales. We are also pleasantly
surprised by the declared final DPS of 2.0 S cents.

We raise our target price from S$1.19 to 1.22, pegged at 9.5x 2015F PE, in line with the
long-term (2004-current) 1-year forward PE mean of 9.5x for the OSV-owner segment.
However, with Jaya’s businesses sold at 13-14x 2014F PE and a strong possibility that
POSH listing may be executed at higher valuations, this may justify a higher PE
multiple than 9.5x for Pacific Radiance

Nam Cheong

UOBKayhian on 27 Feb 2014

FY14F PE (x): 8.0
FY15F PE (x): 6.5

4Q13 net profit above estimates on one-off tax credits and higher other income. 4Q13
net profit of RM70m (+42% yoy) was well above ours and consensus expectations due
to tax credit of RM12m higher other income of RM5m (+424% yoy) and higher
shipbuilding revenue. Management noted that tax credits are one-off due to difference in
treatment of accounting profits and taxable income for 2007-12.

Maintain BUY with a higher target price of S$0.41 (prev S$0.36), as we roll forward our
valuations and peg it to 8.0x 2015F PE. Our target PE is 15% premium to peers’ longterm
mean of 7.0x, which we think is justified given Nam Cheong’s dominant 50-75%
market share in a high barriers-to-entry Malaysian OSV shipbuilding market. We also
raise our 2014-16F dividend pay-out assumptions to 27% similar to 2013’s.

PAN UNITED

UOBKayhian on 27 Feb 2014

VALUATION

• Maintain BUY but with a lower target price of S$1.09 as we roll forward our SOTP valuation to 2015.

FINANCIAL RESULTS

• 4Q13 net profit grew 37% yoy to S$12.0m due mainly to increased contribution from Changshu Xinghua Port (CXP) as Pan United (PUC) increased its stake in the port from 51.3% to 85.5% during the year. Excluding one-off items (provision for doubtful debt of S$2.2m and vessel disposal gains of S$2.2m in 2012), pre-tax profit for FY13 would have grown 5.3% yoy to S$66.6m.
• Gearing to rise. PUC moved from net cash position (-3.4% net debt/asset) in 2012 to 8.5% net gearing in 2013 with the drawdown of bank loans for the acquisition of the additional stake in CXP. Gearing ratio is expected to increase further as the acquisition of Changshu Changjiang International Port (CCIP) for Rmb436.5m (S$91.3m) is expected to be partially financed by debt at the CXP level, and with PUC consolidating CCIP’s debt into its balance sheet.

Investment Highlights

• Outlook. With the BCA projecting construction output to remain strong (S$34b-36b) in 2014, management expects its Basic Building Resources (BBR) segment to remain steady in 2014. PUC is also looking to scale up its port business after increasing its stake in CXP and with the recent acquisition of CCIP. While CCIP recorded a loss of about S$5.1m for 9M13, management plans to cut CCIP’s losses by at least half in 2014, with port operations expected to remain profitable in 2014.
• As the acquisition of CCIP will be partially financed by debt (estimate S$46m) and with the consolidation of CCIP’s debt (estimate S$60m) into its balance sheet, we expect PUC’s gearing to increase from its current net gearing of 8.5% to about 27%.
• Despite a constructive outlook expected for the BBR segment and continued growth in CXP, we expect the positive impact to be negated by rising interest expense and slight losses from CCIP. As such, we lower our 2014 and 2015 net profit forecasts by 12% and 11% to S$48.4m and S$54.9m respectively.
• Our View. PUC is likely to see a flat performance in 2014 with growth resuming from 2015 onwards. Positive dynamics from the local construction sector leading up to the Singapore’s election in 2016 coupled with decreasing financial costs as PUC pare down its loans are likely to boost future earnings. With a dividend yield of 4.6%, we believe PUC still offers value to investors who have a longer investment horizon and is willing to stand by PUC through 2014.

Nam Cheong

DMG & Partners Research, Feb 26

NAM Cheong (NCL)'s FY2013 profit after tax and minority interests (Patmi) was RM205.6 million (S$79.5 million), including a one-off RM12.6 million tax writeback on deferred tax liabilities provisioned in FY2007-12, now no longer necessary.

Core Patmi thus surged 41 per cent y-o-y to RM193 million, beating consensus forecast.

Shipbuilding margins were 21 per cent in Q4 2013, ahead of consensus, which had predicted the margins to fall.

NCL declared 0.5 cent of ordinary dividend and a 0.5 cent special dividend, thus doubling the dividend from FY2012 and fulfilling the promise of a "happy dividend" made in Q3 2013.

Given the strong earnings growth profile, we expect dividend increases over the next few years, bringing the yield to 3.5-4.2 per cent.

FY2015 shipbuilding programme above trigger-point, expect a wave of upgrades. The company revealed that its FY2015 shipbuilding programme will comprise 35 vessels worth US$700 million, up from FY2014's 30 vessels worth US$600 million, which is also the consensus forecast.

We raise FY2014/2015 forecast estimates by 7 per cent/16 per cent accordingly, and expect a wave of street upgrades on the new information.

Based on this new forecast, we see NCL delivering 34 per cent/22 per cent earnings growth over the next two years and continuing its track record of delivering 25 per cent ROE per year.

We continue to like NCL for its strong growth, low valuations, high ROEs, strong order win momentum and orderbook, and asset-light strategy and business model.

The growing income component of the dividend yield adds another attraction to this stock. Maintain "buy" on the stock, which is one of our top picks in the offshore & marine space, with a higher S$0.48 target price (from S$0.45) based on a 10 times FY2014 forecast PE.

BUY

First Resources

DBS Group Research, Feb 26

FIRST Resources (FR) reported Q4 2013 net profit of US$64 million (+36 per cent y-o-y; +25 per cent q-o-q), excluding US$1 million of foreign exchange gains and US$30 million gains from biological assets revaluation.

This was 33 per cent higher than our Q4 2013 core earnings forecast of US$48 million; and brought FY2013 earnings of US$217 million or about 8 per cent above our expectations.

The difference came from about 40 per cent higher biodiesel volume (which yielded better margin than RBD Olein) and higher forward average selling price (ASP). The group had also drawn down about 20,000 metric tonnes (MT) of crude palm oil (CPO) inventory as of end-December 2013.

But fresh fruit bunch (FFB) yields have dropped. FR produced 590,503 MT of own FFB (+14 per cent y-o-y; -4 per cent q-o-q) and 173,218 MT of CPO in 4Q13 (+19 per cent y-o-y; flat q-o-q). FFB yield dropped to 5.7MT/ha for the quarter, while oil extraction rate (OER) eased to 23.1 per cent from 23.2 per cent in the previous quarter.

New planting came in at 4,700 ha in Q4 2013 - bringing total expansion to 15,000 ha for the full year, excluding 8,634 ha from acquisition of Lynhurst in February 2013.

Balance sheet remains strong. Cash conversion cycle shortened to 72 days from 81 days at the end of previous quarter, given the drop in inventory days. Total borrowings (excluding derivative financial liabilities) declined to US$490 million at the end of December 2013 (from US$493 million at the end of September 2012), translating into debt/total equity ratio of 21 per cent - from 24 per cent booked at the end of previous quarter - mainly on account of a higher cash level.

FY2014/2015 earnings forecasts are tweaked by -3 per cent/-4 per cent to impute lower ASP on refined products (given expiry of forward sales) and slightly higher FFB output (after imputing FY2013 yield).

We also raised the group's biodiesel output to 108,000-112,000 MT over the next three years from 75,000 MT - given better-than-expected output in FY2013. These changes, alongside updated beta, led to discounted cash flow (DCF) estimate of S$2.22.

We recommend "hold" for 2 per cent dividend yield. We believe FR's superior performance (considering a weak CPO price environment) has already been priced-in in recent rally. We caution that expiry of forward sales may show normalised ASP, while the dry weather since end-January 2014 may adversely affect output in Q1 2014.

Currently strong CPO ASP may be weakened by volume recovery in H2 2014. Pending further analysis, we are maintaining our CPO price forecasts.

HOLD

Vard Holdings

OCBC on 26 Feb 2014

Vard Holdings Limited’s (VARD) FY13 revenue came in flat (+0.2%) at NOK11.2b, while PATMI slumped 55.6% to NOK357m. The latter was in line with our expectations, but fell short of Bloomberg consensus forecast. Another negative surprise came from VARD’s decision not to declare any dividends in FY13. Losses continued at its Brazilian shipyards, but operations were stable in Europe and Vietnam. Looking ahead, management remains optimistic on its new order wins outlook in 2014. We bump up our FY14 revenue projection by 8.5% on higher order win assumptions. However, we are keeping our PATMI forecast intact, as we deem it prudent to adopt more conservative margin assumptions, given the uncertainties remaining over VARD’s Brazilian operations. Maintain HOLD and S$0.84 fair value estimate, pegged to 8x FY14F EPS.

FY13 results were within our expectations
Vard Holdings Limited (VARD) reported a 8.9% YoY decline in its 4Q13 PATMI to NOK113m despite a 22.5% jump in revenue to NOK3.1b. For FY13, revenue came in flat (+0.2%) at NOK11.2b and was 3.7% above our forecast. PATMI slumped 55.6% to NOK357m, but was within our expectations (1.0% below our FY13 estimate). However, this fell short of Bloomberg consensus forecast by 7.1%. Another negative surprise came from VARD’s decision not to declare any dividends in FY13. We were expecting a S$0.02 first and final DPS. Management attributed this to an extraordinarily high dividend payout in FY12, record high investments in 2013 and a sharp fall in profitability. 

Continued losses in Brazil
VARD highlighted that its Niteroi shipyard in Brazil continued to face further delays and cost overruns, due to manpower and supplier issues. Although the loss quantum at this yard was not disclosed, we estimate that it could fall within a ballpark range of NOK100-200m. Its other yard in Brazil, Promar, still experienced start-up losses, but we believe losses have narrowed as operations are ramping up. Meanwhile, operations were stable at its shipyards in Europe and Vietnam.

Robust orders outlook
On a positive note, VARD closed the year with a healthy order book value of NOK19.4b (end FY12: NOK15.1b), after clinching NOK14.2b of new orders in 2013. This was VARD’s highest order intake since 2007. Management remains optimistic on its new order wins outlook in 2014, driven by higher value vessels, especially within the subsea support and construction vessel segment. 

Maintain HOLD
We bump up our FY14 revenue projection by 8.5% on higher order win assumptions. However, we are keeping our PATMI forecast intact, as we deem it prudent to adopt more conservative margin assumptions, given the uncertainties remaining over VARD’s Brazilian operations. Maintain HOLD and S$0.84 fair value estimate, pegged to 8x FY14F EPS.

Noble Group

OCBC on 24 Feb 2014

Noble Group (Noble) reported its FY13 results, with revenue rising 4% to US$97.878b, or just 1% below ours and street’s forecast, while reported net profit tumbled 48% to S$243.5m. But if we exclude the non-cash charge of US$103m from its share of Yancoal's loss, Noble noted that its core earnings would have come in around US$349m, or about 15% above our forecast (8% above consensus). Noble declared a final cash dividend of US$0.0091/share, versus US$0.0181 last year; but still around 25% of its earnings. For now, we are largely keeping our FY14 estimates unchanged; although we expect better margin improvements in FY15. Our fair value remains at S$1.03, still based on 11x FY14F EPS. Maintain HOLD.

FY13 core earnings above forecast
Noble Group (Noble) reported its FY13 results, with revenue rising 4% to US$97.878b, or just 1% below ours and street’s forecast, as it achieved another record tonnage of 233.4m tons, buoyed by QoQ improvement during 2013 in both operating income from supply chains and net income. Although reported net profit tumbled 48% to S$243.5m, it was largely due to the non-cash charge of US$103m from its share of Yancoal's loss. Excluding that charge, Noble noted that its core earnings would have come in around US$349m, or about 15% above our forecast (8% above consensus). Noble declared a final cash dividend of US$0.0091/share, versus US$0.0181 last year; but still around 25% of its earnings. 

Agriculture business continues to improve 
While the Energy business was still the top performer in terms of revenue and tonnage in 4Q13, we note that its Agriculture segment has continued to improve, with its operating margin back at 0.7% (versus 0.3% in 3Q13 and -2.1% in 2Q13). Another surprising development was the strong rebound in its MMO business, with tonnage almost doubling QoQ to 16.4m tons in 4Q13; operating margin also jumped to 1.3% from 0.5% in 3Q13. Noble said the improvement was due to the broadening of its franchise away from its cargo by cargo trading roots and also buoyant showing by its Aluminium business.

Achieved cost savings of >US$100m
As before, management says it will continue to focus on long-term efficiency gains made from recent initiatives to reduce SAO and finance cost; this after achieving its targeted reduction in SAO and finance cost by >US$100m in 2013. Other strategies include being “Asset-Light”, having a “Strong Balance Sheet”, and “Best-in-Class Platforms”.

Maintain HOLD with S$1.03 FV
For now, we are largely keeping our FY14 estimates unchanged; although we expect better margin improvements in FY15. Our fair value remains at S$1.03, still based on 11x FY14F EPS. Maintain HOLD.

Sheng Siong Group

OCBC on 24 Feb 2014

Sheng Siong Group’s (SSG) FY13 results came in within our expectations. Revenue increased 7.9% to $$687.4m and forms 99.9% of our FY13 forecasts. Core net profit increased 18.6% to S$38.9m, or about 99.2% of our FY13 forecasts. A final dividend of 1.4 S-cents per share is proposed, bringing the total dividend to 2.6 S-cents per share in FY13, or a yield of 4.3% based on Friday’s closing price. We expect stable margins but slower growth in FY14 as the 11 stores opened in FY11 and FY12 mature. We look favourably upon management’s prudence in opening of new stores and execution of e-commerce. We maintain our BUY with a new fair value of S$0.68 (previous: S$0.70) as we roll forward our model.

FY13 results in-line 
Sheng Siong Group’s (SSG) FY13 revenue increased 7.9% to S$687.4m and forms 99.9% of our forecasts. Gross margin improved from 22.1% to 23.0% due to better sales mix and utilisation of distribution centre. Core net profit increased 18.6% to S$38.9m, or about 99.2% of our forecasts. A final dividend of 1.4 S-cents per share is proposed, bringing the total dividend to 2.6 S-cents per share in FY13, or a yield of 4.3% based on Friday’s closing price.

Expect stable margins and slower growth in FY14
We expect revenue growth in 2014 to be slower at 5%, which is to be mainly driven by the maturing 11 new stores opened in FY11 and FY12. SSSG is expected to be relatively flat as benefits of 24h operations have been reaped in FY13. Management guided that the Bedok Central and the Verge stores continue to be affected by the construction activities, which we think have bottomed out and could provide upside surprise if normalcy resumes soon. We expect operating profit margins to be stable around 7%. We think gross margin will improve through higher warehouse utilisation, direct sourcing and better sales mix. But these are likely to be negated by higher labour costs from foreign worker levies and wage inflation as competition for local service staff intensifies amidst foreign labour tightening policies. 

Prudent expansion and execution
Management revealed that they had a few options in FY13 to open new stores but did not as the price was not right. They also emphasised that they would want to see success in the pilot e-commerce project first before scaling up to the whole island. Instead of chasing short-term performance numbers to show the market, we think the demonstrated prudence in expansion and execution are essential decision-making processes for long-term growth and preservation of net profit margins. We maintain our BUY call with a new fair value of S$0.68 as we roll forward our DCF model.

Sembcorp Marine

OCBC on 25 Feb 2014

Sembcorp Marine (SMM) reported better-than-expected FY13 results. Revenue of S$5525.9m (+25%) was about 8% above our forecast (6% above consensus). Reported net profit came in at S$555.7m, +3%, while core earnings rose 11% to S$553m, which was 7% above our estimate (5% above consensus). SMM declared a final dividend of S$0.06/share and a special S$0.02 dividend, bringing the total payout to S$0.13 (unchanged from last year). Overall, management maintains a pretty upbeat outlook, backed by a net order book of S$12.3b with visibility stretching out to 2019. While we are largely keeping our FY14 estimates unchanged, our SOTP-based fair value slips from S$5.68 to S$5.26. Maintain BUY.

Better-than-expected FY13 showing
Sembcorp Marine (SMM) reported better-than-expected FY13 results. Revenue of S$5525.9m (+25%) was about 8% above our forecast (6% above consensus). According to management, revenue growth was driven by the 38% increase in rig revenue in 4Q13 (also up 51% in FY13). Reported net profit came in at S$555.7m, +3%, while core earnings rose 11% to S$553m, which was 7% above our estimate (5% above consensus). SMM declared a final dividend of S$0.06/share and a special S$0.02 dividend, bringing the total payout to S$0.13 (unchanged from last year). 

Net order book stands at S$12.3b
SMM secured contracts worth some S$4.2b in 2013, while not quite matching the huge spike of S$11.0b in 2012, the contract wins were quite a bit higher than what it had secured in 2011 (S$3.7b) and 2010 (S$3.0b). According to management, jack-up rigs made up the bulk (62%) of the new orders. As at end 2013, net order book stood at S$12.3b, with visibility stretching out to 2019. Management notes that enquires continue to remain pretty strong for jack-up rigs, which comes as no surprise, given the wide range of jack-ups that SMM has to offer. 

Still conservative on drill-ship accounting
Overall, management maintains a pretty upbeat outlook, noting that the demand remains strong for its big docks, including the four VLCC drydocks that started operations at its new 73.3ha facility in Aug 2013. Adds that construction on its Brazilian yard continues to progress well and remains on track to commence initial operations in 2H14 (SMM will be sending its first drill ship there in Jun). Speaking of which, SMM notes that it will continue to use "prudent approach" for the revenue/cost recognition for all seven drill ships; hence it says the market should not focus too much on the operating margin. 

Maintain BUY with new S$5.26 FV
While we are largely keeping our FY14 estimates unchanged, our SOTP-based fair value slips from S$5.68 to S$5.26. Maintain BUY.

Raffles Medical Group

OCBC on 25 Feb 2014

Raffles Medical Group’s (RMG) FY13 revenue and core PATMI growth of 9.4% and 14.5% to S$341.0m and S$60.6m, respectively, were both within our expectations. A final dividend of 4 S cents/share was declared, bringing full-year DPS to 5 S cents (FY12: 4.5 S cents/share). Once RMG’s local expansion plans are completed in 2016, we believe it will enhance its position as a leading healthcare services provider. We trim our FY14 EPS forecast marginally by 1.5% due to an enlarged share base. Given that management has implemented a concrete plan to deploy its cash in a more efficient manner which is expected to enhance shareholders’ return in the longer-term, coupled with RMG’s continued solid execution track record, we assign a slightly higher PER target peg of 30x (previously 29x) to our FY14F EPS. This raises our fair value estimate from S$3.61 to S$3.68. Maintain BUY.

FY13 core PATMI grows 14.5%
Raffles Medical Group (RMG) reported its FY13 results which were within our expectations. Revenue rose 9.4% (one third driven by volume growth and two thirds by higher patient acuity and prices) to S$341.0m and was 1.9% below our forecast. This single-digit growth was partly due to the absence of the Ministry of Home Affairs’ medical services contract, which expired in end 2012. Excluding this, RMG’s overall revenue would have grown by 13.1%. PATMI surged 49.3% to S$84.9m, but was partly boosted by fair value gains of investment properties (S$3.9m) and a disposal gain from its Thong Sia building divestment (S$20.4m). Excluding these items, we estimate that core PATMI rose 14.5% to S$60.6m, forming 99.8% of our core earnings projection. The improved performance was attributed to growth from both RMG’s Hospital Services and Healthcare Services divisions, which registered an increase in revenue of 12.4% and 6.2%, respectively. This was in turn driven by higher patient loads and increased depth of medical specialties offered. A final dividend of 4 S cents/share was declared, bringing full-year DPS to 5 S cents (FY12: 4.5 S cents/share). 

Looking forward to an enlarged healthcare network
Although RMG’s new Raffles Hospital expansion and Holland Village development project will only come on-stream in 2016, we believe it will enhance its position as a leading healthcare services provider when operations eventually commence. Management is targeting a double-digit ROI for this hospital expansion. As hiring for new staff will take place progressively over the next two years in preparation of its enlarged operations, we expect some cost pressures in the near-term.

Maintain BUY
We trim our FY14 EPS forecast marginally by 1.5% due to an enlarged share base. Given that management has implemented a concrete plan to deploy its cash in a more efficient manner which is expected to enhance shareholders’ return in the longer-term, coupled with RMG’s continued solid execution track record, we assign a slightly higher PER target peg of 30x (previously 29x) to our FY14F EPS. This raises our fair value estimate from S$3.61 to S$3.68. Maintain BUY.

Vard Holdings

Kim Eng on 26 Feb 2014

What’s New
Vard reported 4Q13 PATMI of NOK113m (-8.9% YoY, +48.7% QoQ), even lower than our below-consensus forecast. Cost overruns and delays in its Niteroi yard in Brazil continued to plague the quarter. We are surprised by the magnitude of the loss - estimated to be at least NOK100m. EBITDA margin shrank to 5.1% vs our forecast of 7.3% where we assumed breakeven for Niteroi yard vessels. No dividend was declared for the year despite the company’s long-term policy of 30% payout.

What’s Our View
Notwithstanding management’s assurance that sufficient provisions were made, Niteroi yard continued to incur losses in 4Q13. We cut FY14E/15E EBITDA margin to 7.9%/9.8% (9.1%/10.5% previously) in order to be conservative. Unrecognised revenue at Niteroi yard is estimated to be NOK0.5-0.6b, with four more vessels yet to be delivered, the last in 1Q15.
But there are bright spots, eg, the record order intake of NOK14.2b in FY13 and strong order win momentum (NOK2.2b YTD), which would likely be buoyed by improving OSV demand. We estimate that EBITDA margin would have been at least 8.3% had Niteroi yard broken even. This demonstrates the underlying strength of its other operations. In our view, earnings have bottomed out and we forecast NOK12.8b worth of new order wins for FY14E, which should spur earnings recovery. In view of potential earnings risk from Niteroi yard, we switch to P/BV valuation methodology. Applying a 1.4x P/BV multiple (-1 SD) on FY14E BVPS yields a TP of SGD1.07 (from SGD1.04) Maintain Buy.

First Resources

Kim Eng on 26 Feb 2014

What’s New
First Resources’ (FR) FY13 core net profit of USD217m (+3% YoY) met 108% of our and consensus full-year forecasts. The earnings outperformance was mainly due to high CPO forward sales locked-in in early 2012, which led to a relatively high (net) CPO ASP of USD861/t for 2013, higher than Indonesia’s benchmark price of USD717/t.

What’s Our View
In 2014, we expect FR to post a 6% decline in PATMI as all its forward sales were delivered in 2013. We also assume that it will achieve our industry-wide CPO ASP forecast of MYR2,600/t (or USD748/t net of Indonesia’s export tax), which is lower than what it enjoyed in 2013. However, the lower CPO ASP will be mitigated by our 14% FFB growth projection for 2014.
In our view, investors should not be disheartened by possibly lower FY14E earnings given a high base due to the outstanding performance in FY13. Instead, they should look forward to a 10.8% EPS growth in FY15E and value FR’s proven management capability.
We continue to like FR for its long-term value proposition, backed by its plantable reserves of 100k ha, young tree age of eight years (average) which will sustain a projected 11.8% FFB output CAGR (2013-2016), and low cost of production. We raise our FY14E-15E forecasts slightly on housekeeping. Maintain BUY with a higher TP of SGD2.70, based on 15x FY15E P/E (previously SGD2.39 on 15x FY14 P/E), as we roll forward our valuation base year.

Sheng Siong Group

OCBC Investment Research, Feb 24

FY2013 results were in-line. Sheng Siong Group's (SSG) FY2013 revenue increased 7.9 per cent to S$687.4 million and forms 99.9 per cent of our forecasts. Gross margin improved from 22.1 per cent to 23 per cent due to better sales mix and utilisation of distribution centre.

Core net profit increased 18.6 per cent to S$38.9 million, or about 99.2 per cent of our forecasts. A final dividend of 1.4 Singapore cents per share is proposed, bringing the total dividend to 2.6 S-cents per share in FY2013, or a yield of 4.3 per cent based on Friday's closing price.

Expect stable margins and slower growth in FY2014. We expect revenue growth in 2014 to be slower at 5 per cent, which is to be mainly driven by the maturing 11 new stores opened in FY2011 and FY2012.

SSG is expected to be relatively flat as benefits of 24-hour operations have been reaped in FY2013. Management guided that the Bedok Central and the Verge stores continue to be affected by the construction activities, which we think have bottomed out and could provide upside surprise if normalcy resumes soon.

We expect operating profit margins to be stable around 7 per cent. We think gross margin will improve through higher warehouse utilisation, direct sourcing and better sales mix. But these are likely to be negated by higher labour costs from foreign worker levies and wage inflation as competition for local service staff intensifies amidst foreign labour tightening policies.

Management revealed that they had a few options in FY2013 to open new stores but did not as the price was not right.

They also emphasised that they would want to see success in the pilot e-commerce project first before scaling up to the whole island. Instead of chasing short-term performance numbers to show the market, we think the demonstrated prudence in expansion and execution is essential decision-making processes for long-term growth and preservation of net profit margins.

We maintain our "buy" call with a new fair value of S$0.68 as we roll forward our discounted cash flow model.

BUY