Biosensors International

DBS Group Research, May 29

BIOSENSORS International Group's (BIG) FY2014 core net profit (US$46 million, -65 per cent y-o-y) was 9 per cent below our forecast as revenue and margins fell. Revenue fell 4 per cent y-o-y to US$324 million due to:

1) lower licensing and royalty income (US$44 million, -24 per cent y-o-y) from Terumo Corp in Japan; and

2) lower Interventional Cardiology revenue (US$256 million, -3.4 per cent y-o-y) on lower average selling price (ASP) in China for drug-eluting stents.

Gross and operating margins fell as a result of smaller share of licensing and royalty income (high margin) and higher sales and marketing expenses for Japan and Spectrum Dynamics.

The company did not declare dividends for FY2014 following the maiden payout of two US cents per share (30 per cent payout) for FY2013, citing the need to conserve cash resources.

New CEO

BIG announced organisational changes which involved Jack Wang and newly appointed Jose Calle Gordo.

Mr Gordo will be BIG's chief executive officer from Nov 1, replacing Mr Wang who takes over as chief technology officer from the retired John Shulze. Mr Gordo, 52, has over 25 years of experience in medical devices at Abbott, Eli Lilly and Guidant.

He was responsible for leading, developing and commercialising Abbott's Xience and ABSORB drug- eluting stents. He also managed the international operations of Abbott Vascular outside the US in 2011 and 2012.

Muted growth outlook

We expect revenues and margins to be weak ahead. Selling prices will remain soft in China, while licensing income from Terumo is expected to taper off.

In addition, a changing product mix - declining licensing and royalty income from Terumo and larger contribution from lower-margin Spectrum Dynamics' business - will continue to weaken margins.

Maintain "hold" with S$0.90 target price (sum-of-the-parts matrix). Growth will be muted ahead, but there may be upside risk to our call, including Citic Private Equity making a takeover offer for BIG.

HOLD

Pacific Radiance

UOBKayhian on 30 May 2014

FY14F PE (x): 9.8
FY15F PE (x): 8.6

Sterling performance. Pacific Radiance has appreciated by 38% ytd, thus outperforming the FSSTI (+4% ytd) by 34ppt. It is the best performing stock in Singapore oilfield services sector and second best performing in UOB Kay Hian stock universe, after Olam (+43% ytd) which is pending privatisation by Temasek.

A cut above the rest. Pacific Radiance’s key strength is its superior management’s ability to exploit opportunities to earn an above-industry return on its assets. Industry veteran CEO Pang Yoke Min was previously the CEO of Jaya Holdings (Jaya). He and his team built Jaya into Asia's largest offshore support vessel (OSV) builder. Second time round, Pang has built Pacific Radiance into an OSV owner-operator instead of an OSV builder, as Singapore OSV shipyards are no longer competitive. Pacific Radiance executes a virtuous-cycle business model. It maximises opportunities to squeeze exceptional return on assets by:

a) Building vessels directly in China. Vessel cost is at about 20% lower than buying vessels from middleman yards (eg. Nam Cheong, ASL Marine, etc) and the secondary market. Its ability to manage Chinese shipyards is key.

b) Positioning vessels in high-barrier-to-entry markets like Indonesia, Malaysia, Brazil and high-grown markets like Southeast Asia, Indochina, Australia and Mexico. Pacific Radiance also has a foothold in the subsea segment which is expected to be the largest-growth (300+% in 2013-17 over 2007-12) service segment.

c) Regular fleet rejuvenation and pruning to ensure its efficiency as an operator. Vessels are well thought out to suit future client needs before they are built. Any vessel that no longer fits client requirements is divested while it is still young. Given Pacific Radiance's market intelligence, it can sell vessels at high gross margins of 25-30% vs 15-20% earned by middleman shipyards. Constant dialogue with oil companies is an important feedback in its market intelligence gathering.

Maintain BUY and target price of S$1.55. Target price is based on 11.5x 2015F PE which is about 20% premium to the long-term (2004-current) 1-year forward PE mean of 9.5x for the OSV-owner segment. Looking at the big picture, Malaysian stocks are the most expensive, followed by international peers and then Singapore stocks. Indonesian stocks are still the cheapest but are catching up. Pacific Radiance's PE of 9.8x and 8.6x for 2014 and 2015 respectively are at a discount to international peers' 14.6x and 11.3x, despite its superior financials.

Singapore Post

OCBC on 29 May 2014

Following a trading halt yesterday morning, SingPost announced that Alibaba Investment Ltd will be investing S$312.5m in SingPost via a placement at S$1.42/share, following which Alibaba will hold 10.35% of SingPost upon completion. Both companies will also set up a JV in the business of international e-commerce logistics. From SingPost’s point of view, this move will allow it to benefit from Alibaba’s expertise in e-commerce and business volumes, thereby obtaining a scale effect and bringing down cost per unit of good handled, though it is hard to quantify the near term impact given the lack of details so far. We assume a higher terminal growth rate in our FCFE valuation (2.5% vs 2% previously), but after taking into account the dilutive effect of the placement, our fair value estimate drops from S$1.42 to S$1.38. Maintain HOLD, though we note that sentiment on the stock may be strong in the near term due to factors such as the “Alibaba effect”.

Share issuance to Alibaba at S$1.42/share
Following a trading halt yesterday morning, SingPost announced that it has entered into an investment agreement with Alibaba Investment Ltd (wholly owned subsidiary of Alibaba Group Holding Ltd), under which Alibaba Investment will buy 30m existing ordinary shares held in treasury by SingPost and 190.096m new ordinary shares. The total 220.096m shares represent 11.55% of SingPost’s existing issued and paid-up share capital (excluding treasury shares), and upon completion, Alibaba will hold 10.35% of SingPost. The subscription price is at S$1.42/share, translating to gross proceeds of S$312.5m for SingPost. 

What it means for SingPost
Both companies also signed an MOU to allow them to discuss and negotiate a JV in the business of international e-commerce logistics. From SingPost’s point of view, besides the creation of new relationships and opportunities for strategic cooperation with Alibaba, this move will allow it to benefit from Alibaba’s expertise in e-commerce and business volumes. In particular, priority will be given to SingPost’s logistics services (e.g. when Alibaba needs to ship goods to certain parts in SE Asia) based on commercial terms. SingPost will also have to step up on its investment efforts to achieve the full regional value chain of ecommerce logistics that is able to handle Alibaba’s volumes. By obtaining access to more of Alibaba’s volumes, SingPost would be able to obtain a scale effect and bring down cost per unit of good handled, though it is hard to quantify the near term impact given the lack of details so far.

Dilutive effect; FV drops to S$1.38
We assume a higher terminal growth rate in our FCFE valuation (2.5% vs 2% previously) due to a possibly higher growth potential over the longer term, but after taking into account the dilutive effect of the placement, our fair value estimate drops from S$1.42 to S$1.38. Maintain HOLD, though we note that sentiment on the stock may be strong in the near term due to factors such as the “Alibaba effect”.

Goodpack

OCBC on 29 May 2014

Goodpack announced the proposed acquisition by an affiliate of KKR via a scheme of arrangement at S$2.50 cash/share. This will require: 1) the approval by a majority of Goodpack shareholders who are holding at least 75% in value of Goodpack shares held by those present and voting, and 2) sanction by the High Court of Singapore. If this all-or-nothing deal succeeds, KKR will delist Goodpack. Though the offer is only at a 6.8% premium to the last closing price before this announcement, we note that the run up since March has largely priced in a privatisation. Given the above and that our fair value estimate of S$2.61 is just 4.4% higher than KKR’s offer price, we recommend shareholders to accept the offer.

KKR intends to delist Goodpack at S$2.50 cash/share
Goodpack announced the proposed acquisition by IBC Capital, an affiliate of KKR, via a scheme of arrangement (share scheme) at S$2.50 cash/share. The deal values Goodpack at about S$1.4b. The share scheme will require: 1) the approval by a majority of Goodpack shareholders who are holding at least 75% in value of Goodpack shares held by those present and voting, and 2) the sanction of the share scheme by the High Court of Singapore. Unlike General Offer where each shareholder individually decide to sell his share or not, once the share scheme is approved all existing shares will be acquired regardless of individual decisions. Essentially, this will be an all-or-nothing deal for KKR. KKR has stated its intention to delist Goodpack if the deal goes through.

Support representing 32% of shares obtained
IBC Capital has received irrevocable undertakings from founder Mr Lam, representing 32% of total Goodpack shares, to vote in favour of the share scheme. Since the approval only requires support from present and voting shareholders (i.e. those absent/not voting do not count towards the denominator that the 75% is based upon), Mr Lam’s support greatly sways the outcome of the deal towards one that will go through. 

Accept the offer
The offer of S$2.50/share represents a premium of 23.2% to the closing price on 18 Mar 2014, or 34.3% to the 6-month volume weighted average price to 18 Mar 2014 (18 Mar 2014 is the day prior to an announcement by Goodpack in respect of a possible transaction). Though the offer is only at a 6.8% premium to the last closing price before this announcement (S$2.34 on 23 May 2014), we note that the run-up since March has largely priced in a privatisation. Furthermore, newswires have reported that other suitors, Blackstone Group and Carlyle Group, have dropped out. Given the above and that our fair value estimate of S$2.61 is just 4.4% higher than KKR’s offer price, we recommend shareholders to accept the offer.

Biosensors International

OCBC on 29 May 2014

Biosensors International Group’s (BIG) 4QFY14 core PATMI dipped 63.7% YoY to US$10.8m, falling short of our below-consensus expectations. Another disappointment came from its decision to not declare any dividends. Looking ahead, management did not provide any revenue guidance for FY15 given the weak visibility. Meanwhile, BIG also announced the appointment of a new CEO, and this will take effect from 1 Nov 2014. We pare our FY15 revenue and PATMI forecasts by 8.0% and 18.0%, respectively, and introduce our FY16 projections. We also switch our valuation methodology from FCFE to PER given the uncertainty over BIG’s future licensing agreements with Terumo. Applying a target peg of 20x (in-line with its peers’ forward average) to our revised FY15 forecasts, we derive a new fair value estimate of S$0.85 (previously S$0.77). However, we maintain our SELL rating on BIG given its rich valuations and unexciting near-term outlook.

4QFY14 core earnings below expectations
Biosensors International Group’s (BIG) operational performance took another hit in 4QFY14, with revenue and core PATMI dipping by 8.0% and 63.7% YoY to US$81.6m and US$10.8m, respectively. For FY14, revenue slipped 3.7% to US$323.8m, forming 97.9% of our forecast. Core PATMI fared worse, slumping 59.2% to US$45.5m, missing our forecast of US$48.2m, which was the second lowest on the street. Another disappointment came from BIG’s decision to not declare any dividends (FY13: maiden DPS of US$0.02) despite its strong balance sheet (net cash balance of US$222.2m as at 31 Mar 2014). 

No revenue guidance provided
Contrary to BIG’s previous practice of providing topline guidance, management decided against doing so for its FY15 outlook. This was attributed to the weak earnings visibility as market conditions are expected to remain challenging in the near-term given price pressures and intensifying competition. 

New CEO appointed
Meanwhile, BIG also announced that it has appointed Mr. Jose Calle Gordo as its new CEO, and this will take effect from 1 Nov 2014. Mr. Calle has over 25 years of broad business and management experience in the medical devices industry, having served in various vice president and managerial roles at Abbott, Eli Lilly, and Guidant. BIG’s current CEO Dr. Jack Wang has been re-designated as the new Chief Technology Officer. 

Maintain SELL
We pare our FY15 revenue and PATMI forecasts by 8.0% and 18.0%, respectively, and introduce our FY16 projections. We also switch our valuation methodology from FCFE to PER given the uncertainty over BIG’s future licensing agreements with Terumo. Applying a target peg of 20x (in-line with its peers’ forward average) to our revised FY15 forecasts, we derive a new fair value estimate of S$0.85 (previously S$0.77). However, we maintain our SELL rating on BIG given its rich valuations and unexciting near-term outlook.

KSH Holdings

OCBC on 28 May 2014

KSH Holdings reported 4QFY14 PATMI of S$11.0m, down 28% YoY mostly due to weaker contributions from the property development segment. Full year FY14 PATMI cumulated to S$44.5m, which increased 18% and constituted 92% of our full year forecast. While FY14 earnings reflected decent growth, it is slightly below our expectations due to slower-than-anticipated progressive recognition at development projects over the fourth quarter. In terms of the topline, FY14 revenues increased 40.1% to S$324.5m as we saw stronger contributions from the construction segment (up 38.6%), the development segment (up 62.9%) and rental income from investment properties (up 13.5%) as well. The group also proposed a final dividend of 1.75 S-cents. Maintain BUY. After updating our model for latest assumptions, our fair value estimate slips to S$0.71 from S$0.73 previously.

FY14 PATMI up 18% YoY
KSH Holdings reported 4QFY14 PATMI of S$11.0m, down 28% YoY mostly due to weaker contributions from the property development segment. Full year FY14 PATMI cumulated to S$44.5m, which increased 18% and constituted 92% of our full year forecast. While FY14 earnings reflected decent growth, it is slightly below our expectations due to slower-than-anticipated progressive recognition at development projects over the fourth quarter. In terms of the topline, FY14 revenues increased 40.1% to S$324.5m as we saw stronger contributions from the construction segment (up 38.6%), the development segment (up 62.9%) and rental income from investment properties (up 13.5%) as well. The group also proposed a final dividend of 1.75 S-cents.

Firm order book of S$410m
As at end FY14, the group has an outstanding order book of S$410m. Given headwinds in the domestic residential sector, we understand that KSH expects private construction demand to slow ahead but aims to further diversify their order book with more public projects over the longer term. The last two contracts won were worth S$42.5m (United World College of South East Asia) in Dec-13 and S$76.9m (KAP Residences) in Feb-14.

About 200 units sold at Sequoia Mansions
At KSH’s 45%-owned Sequoia Mansions (Beijing, China), about 200 units out of 373 residential units have been sold to date. Average selling prices have been healthy, at ~ RMB 25k sqm, and we understand the commercial components will be launched after the project’s anticipated TOP in mid-2015.

Maintain BUY with lower FV estimate of S$0.71
KSH now holds S$142.4m in cash and equivalents with a low net gearing of 1%, and management continues to seek accretive acquisition opportunities. Already, the group has acquired land bank in Negeri Selangor, Malaysia and a 28% stake in Prudential Tower in Raffles Place. Maintain BUY. After updating our model for latest assumptions, our fair value estimate slips to S$0.71 from S$0.73 previously.

China Water Sectore

Kim Eng on 30 May 2014

• Our meetings with over 20 clients in Singapore and Hong Kong suggest high interest in China’s water sector; high stock valuation is the major pushback. 
• We foresee ample organic and inorganic growth opportunities; stay Overweight on the sector.
• Maintain BUYs on Hankore Environment and SIIC Environment; reiterate HOLD on United Envirotech.

Great interest in Hankore and SIIC
We met over 20 clients during our recent marketing trips in Singapore and Hong Kong. Broadly, investors agreed with our investment thesis amid buoyant interest in China’s water sector. There was greater interest in the municipal water players versus industrial water players, based on our deeper discussions on Hankore Environment and SIIC Environment. Discussions focused on room for further expansion in sector ROE and how sustainable would industry consolidation be. With stocks trading in excess of 20x one-year forward P/E, it was hardly surprising to note that the main pushback from investors was their high stock valuations. Arguably, current high valuation can be justified by robust EPS growth and potential for more EPS-accretive M&As.

Maintain Overweight on the sector
In our view, the sector is poised for a golden era in the next three years, with rising water tariff, strong government policy support and industry consolidation fuelling rapid growth. We believe sector ROE is on a structural uptrend supported by a 15% sector EPS CAGR over FY14E-16E. We continue to prefer companies with high-quality assets that generate recurring income stream such as Hankore Environment (TP adjusted to SGD1.74 due to recent 10-for-1 share consolidation) and SIIC Environment. We have a HOLD rating on UENV (TP unchanged at SGD1.43). Maintain our BUY rating on HanKore (TP adjusted to SGD1.74 due to recent 10-for-1 share consolidation) and SIIC (TP unchanged at SGD0.22). We have a HOLD rating on UENV (TP unchanged at SGD1.43).

Singapore Post

UOBKayhian on 29 May 2014

FY14 PE (x): 23.0
FY15F PE (x): 24.1

Hot on the tail of our e-commerce piece, Alibaba puts a stamp of approval on SingPost’s initiatives with a proposed investment and collaboration for an ecommerce logistics platform in Southeast Asia. This will accelerate SingPost’s growth and offset the potential dilution. We see more upside to S$2.00 assuming 30-50% e-commerce contribution to the bottom-line in FY17. Maintain BUY. Target price: S$1.73.

Maintain BUY and target price of S$1.73, based on a 3-stage DCF model. The implied FY16F PE is 24x. While we may see some light profit-taking in reaction to the discount on Alibaba’s subscription price and a potential dilution, we take a medium- to longer term view on the stock and remain buyers. As more traditional postal operators venture into ecommerce logistics, we think the valuation gap with e-commerce-related players will narrow.