Silverlake Axis Limited

PHILLIP SECURITIES RESEARCH, Aug 28

SILVERLAKE Axis Limited's (SAL) Q4,14 revenue gained 25 per cent y-o-y, from higher software licensing and maintenance and enhancement services. Full-year revenue increased 26 per cent y-o-y at RM500.7 million (S$198.08 million), above our estimate by 2.8 per cent.

Full-year gross margin was lower y-o-y at 61.3 per cent, due to lower margins from certain projects and drag downs in first and third fiscal quarters.

Quarterly and full-year net profits were higher at 24 per cent y-o-y and 27 per cent y-o-y, respectively. FY14 earnings was at RM248.9 million, above our estimate by 3.7 per cent. Final dividends of 1.2 Singapore cents per share were declared, along with special dividends of 0.6 Singapore cents.

Growth in all segments apart from software project services contributed to strong FY14 revenue gain. The project services segment is guided to pick up on execution of software implementation projects secured for fiscal year 2015. Management also guided for revenue to grow at mid-teens.

The enhancement services segment is set to grow with more enhancement projects expected to come from Malaysia on software upgrades to be GST-compliant, following the Malaysian government's announcement to introduce goods and services tax (GST) from April 2015.

The insurance processing business is also expected to have strong growth, mainly from increase in general insurance and health claims processing activities in Indonesia.

Current project backlog gained to about RM280 million. Special dividends were declared to reward shareholders as a result of strong FY14 performance and high net cash balance.

We remained positive on SAL on the back of favourable trends towards upgrading and modernising of core banking systems and regionalisation of banks in Asean. SAL would benefit from additional recurring maintenance revenue and future enhancement services with every successfully completed software implementation project.

We also see SAL gaining from post-merger integration projects coming from OCBC-Wing Hang merger and possibly, merger between CIMB, RHB and MBSB.

We continue to like Silverlake Axis for its excellent growth potential, solid balance sheet and growing recurring revenue streams. We revised our FY15 forecasts to reflect management's guidance and maintained our "Accumulate" rating with a target price of S$1.320 (implied FY15 forecast PE of 27.0 times)

ACCUMULATE

Hotel Reits

CIMB RESEARCH, Aug 27

WE expect hotel revenue per available room (RevPAR) to gain ground in H2,14 on the back of i) lower supply of new hotel rooms than previously forecast, ii) the recent opening of the Singapore Sports Hub, and iii) stabilisation of the rupiah.

We think hotel Reits are becoming attractive as fundamentals strengthen. Our top pick is OUE Hospitality Trust (TP: S$0.96).

Stronger H2 expected

Although visitor numbers to Singapore have been weak during the first half of the year (-2.8 per cent y-o-y), this can mainly be attributed to the lower Chinese visitor arrivals (-29.8 per cent y-o-y for H1,14). However, we note that Chinese spending rose one per cent in Q1,14 when corresponding arrivals dropped 14 per cent.

Moving into H2, we believe the sector should perform better as the Indonesian rupiah stabilises with the completion of the presidential election. Our expectations are further reaffirmed by Reit managers' recent guidance for stronger occupancy in July and more corporate bookings and activities in August.

In addition, our sensitivity study on tourism arrivals (based on data since 2004) pointed that even if Chinese visitor arrivals do not rebound in H2, visitor arrivals in H2,14 should still grow by about 2.8 per cent versus H1,14.

This, coupled with the recent opening of the Singapore Sports Hub and lower supply of new hotel rooms (1,622 versus previous forecast of 3,234) in FY14 bodes well for a recovery in the hotel space here.

Valuations still attractive

Meanwhile, the sector's valuations have fallen to dividend yields of 7.1 per cent for FY14 and 7.3 per cent for FY15 and 1.0 times P/BV versus CDL Hospitality Trusts' trading range of 5-6 per cent yield and 1.4 times P/BV in 2010/11.

CDL-HT is currently trading at a yield spread of 5.1 per cent versus its historical average of 3.6 per cent. Should RevPAR stabilise, getting back to the average is not far-fetched.

Risks are on demand

The risk in taking a bullish view is that if visitor arrivals remain weaker than expected, the sector's RevPAR could encounter another speed bump and valuations may fall back to the current lower bands.

CDL Hospitality Trusts: CDL-HT is expected to benefit from a recovery in corporate spending as the global economy recovers. Additional contributions from the Maldives are also expected in 2014.

Far East Hospitality Trust: FY14 RevPAR is expected to be flat as potential upside from sturdier corporate spending is likely to be offset by strong competition, the result of a high supply of hotel rooms. FEHT is trading in line with the sector average, offering 6.8 per cent FY14-15 dividend yields at 1.0 times P/BV.

OUE Hospitality Trusts: OUE-HT is our top pick among the hospitality Reits on the back of its stable outlook, high proportion of income secured under fixed rates and room for RevPAR growth from AEI at MOS.

Sector: OVERWEIGHT

IHH Healthcare

UOBKayhian on 29 Aug 2014

FY14F PE (x): 52.6
FY15F PE (x): 40.7
Results in line. IHH Healthcare (IHH) reported strong performance at its existing
hospitals and the continuous ramp-up of new hospitals. Parkway Pantai, Acibadem and
IMU Health reported 2Q14 revenue growth of 12% yoy each on a constant currency
basis, and EBITDA growth of 18%, 13% and 17% respectively. 1H14 revenue and net
profit represent 47-48% of our full-year forecasts.
Valuations lofty; downgrade to SELL. We have a higher target price of S$1.60 after we
adjusted for a higher peer-average EV/EBITDA multiple. Nonetheless, we think
valuations are rich with the stock currently trading at a 2015F PE of 41x vs the peer
average of 25x. Within the Singapore-listed healthcare space, we prefer Raffles
Medical and QT Vascular for those with a more aggressive risk appetite.

Wing Tai Holdings

UOBkayhian on 29 Aug 2014

FY15F PE (x): 9.8
FY16F PE (x): 9.3
Results above expectations. Wing Tai reported 4QFY14 net profit of S$153.8m, down
47% yoy, bringing FY14 net profit to S$276.3m (-53% yoy). Core net profit of S$204m
excluding fair-value gains (S$52.1m) and effect of a change in accounting policy
(S$20.9m) was above expectations. The strong contribution from development
properties was underpinned by earnings recognised from Foresque Residences, Le
Nouvel Ardmore, L’VIV, Helios Residences in Singapore as well as Verticas
Residences in Malaysia and The Lakeview in China.
Maintain BUY and target price of S$2.50, pegged at a 30% discount to our higher
RNAV of S$3.57/share (from S$3.33) as we roll forward valuation. The discount has
increased to 30% (from 25%) to factor in the even weak home buying and retail
sentiment and the risk of extension charges. We believe the negatives are more than
priced in.

ECS Holdings

OCBC on 29 Aug 2014

According to IDC, the server market is experiencing the start of an infrastructure refresh cycle as systems that were deployed shortly after the financial crisis are retired and replaced, which is expected to continue into 2015. The top five server vendors holding more than 75% of total worldwide server market share are also vendors of ECS. Since turning its focus from distribution to enterprise segment last year, we believe ECS is poised to capture the growth arising from growing demand for servers alongside with its vendors. Furthermore, with the expected strong pipeline of new Apple products, we believe ECS will see growth. Hence, we revised our FY14 and FY15 PATMI forecast upwards by 2% and 7%, respectively. As we expect the growth to be more significant in 2015, we rolled forward our valuations to 6x FY15F EPS to derive an increased new fair value estimate of S$0.68 (prev. S$0.61), supported by a decent FY14F dividend yield of 3.7%. Upgrade from Hold to BUY.

The right move to focus on enterprise segment
IDC reported server market revenue and shipments increased 2.5% YoY in 2Q14 to US$12.6b and 1.2% to 2.2m units, respectively. The server market is experiencing the start of an infrastructure refresh cycle as systems that were deployed shortly after the financial crisis are retired and replaced, which is expected to continue into 2015. The top five server vendors including HP and IBM are also ECS Holdings’ (ECS) vendors, and make up ~77% of total worldwide server market share in 2Q14. HP led the market for x86 servers and blade servers’ demand which saw revenue growth of 7.8% and 7.0% YoY in 2Q14, respectively. Since turning its focus from distribution to enterprise segment last year, we believe ECS is poised to capture the growth arising from growing demand for servers alongside with its vendors.

Growth from new Apple products’ launches
Apple remains one of ECS’ key products in its distribution segment, especially in China, contributing more than 10% of ECS’ total revenue. With iPhone 6 likely to be unveiled on 9-Sep-14, sales are expected to commence late Sep-14. Apple forecasted its 4QFY14 revenue to see a 3%-7% YoY increase. We believe the demand for the new iPhones will continue into at least 1H15. Furthermore, we think that the thinner and lighter new MacBook, as well as its new 12.9-inch iPad are likely to be released in 1H15. Given the expected strong pipeline of new Apple products, we think ECS will see growth, especially from distribution segment in China. However, we believe this growth is likely to be partially offset by the decline in PCs and printers distribution business.

FV revised upwards to S$0.68; upgrade to BUY
We believe the technology sector outlook is likely to benefit ECS capturing growth alongside with its vendors. Hence, we revised our FY14 and FY15 PATMI forecast upwards by 2% and 7%, respectively, with an unchanged segmental gross margin assumption. As we expect the growth to be more significant in 2015, we rolled forward our valuations to 6x FY15F EPS to derive an increased new fair value estimate of S$0.68 (prev. S$0.61), supported by a decent FY14F dividend yield of 3.7%. Upgrade from Hold to BUY.

ARA Asset Management

DBS Group Research, Equity, Aug 26

THE Business Times reported on Tuesday that the Straits Trading Building, currently owned by Straits Trading Company (STC), may be sold to an overseas party in Asia for about S$450 million, implying S$2,800 per square foot of NLA (net lettable area).

This is understood to be a benchmark pricing for an office block in recent years. The price is understood to imply an exit yield of 3 per cent. The property, which was completed in 2009 and has a NLA of 159,000 sq ft, is currently 100 per cent occupied and anchored by Rajah & Tann, one of Singapore leading law firms and the headquarters of STC.

Will Suntec Reit buy? Earlier in May, we had mooted the possibility that STC could sell the asset to Suntec Reit, given STC's tie-up with ARA, which is also the manager of Suntec Reit.

We see synergies to Suntec Reit's portfolio, given its strategic location within Singapore central business district, which is its core investment strategy.

However, the property's reported selling price of S$450 million is significantly higher than its S$400 million valuation as at Dec 31, 2013. A 3 per cent cap will mean that the deal is likely to be only marginally accretive to Suntec Reit, assuming 100 per cent debt funding which will lift gearing up to about 40 per cent (after computing for future capex for its Australia investments); we believe this is not sustainable in the long term.

ARA AM aims to extract maximum value for its investors.

Although the Straits Trading Building is widely anticipated to be acquired by Suntec Reit, a sale to a third party while having a negative impact on the value of ARA's total AUM, would not be a worse case scenario.

This further reaffirms the group's focus on extracting maximum value from assets under its management, versus simply retaining them for the purpose of generating management fees.

For Suntec Reit, given the high capital value of its office assets in Singapore, we believe that near-term acquisitions will remain limited. However, future earnings will continue to be driven by the completion of asset enhancement works at Suntec City Mall in the near term, as well as the completion of the 177-190 Pacific Highway office development in Sydney in 2016; the Reit had acquired this for S$413 million in November 2013.

We maintain our recommendations for

ARA: BUY (TP: S$2.00)

Neptune Orient Lines

CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS, Aug 27

WE have raised our rating from Underperform to Outperform for Neptune Orient Lines (NOL) as we observe the liner shipping sector displaying the same characteristics as it did in the last four months of 2012, during which time sector stock prices rallied 14 per cent.

• We see port congestion in major ports (especially for large vessels) and potential box shortages constraining supply, combining with demand that is surprisingly on the upside, as being conducive to rate increases ahead of expectations.
• We have lifted our earnings estimates for NOL from a loss of S$12 million to NPAT (net profit after tax) of S$15 million in 2014 and lift our estimate for 2015 38 per cent to S$105 million on better volume and rate expectations in Q314 and their flow through to the following year.
• We have also lifted our target price for NOL from S$0.90 to S$1.15 as a consequence of the earnings improvement, but also because we think both asset values are rising and multiples are likely to expand. Our new TP is based on a target P/B of 1.1 times.

Capacity drives rates, rates drive stock prices, and we see capacity coming down at the same time as demand is rising, laying the foundations for a very firm Q3 peak season.

Demand growth averaged 7 per cent in Q214 among the liner companies we cover and had risen robustly in figures to June (EU box volumes +7 per cent YTD, US imports up 2 per cent, Asian exports +6 per cent). The factors driving demand (employment, housing starts and inventory levels) look set to maintain demand growth momentum in H214.

While vessel deliveries continue apace, congestion levels, especially in ports handling large vessels, have exceeded these. Congestion in some of Asia's feeder ports is also playing to this theme. Meanwhile, operators are identifying box shortages as another potential supply-side constraint.

Combined with better demand, we see a robust Q3 peak in both volume and rate terms, with earnings expected to exceed Q312, given the effects of large vessel and alliance efficiencies together with lower bunker prices.

Liner stocks gained 14 per cent from early September 2012 to end-December 2012 and we feel that they are well placed to repeat that gain as 2014 closes.

NOL's earnings are expected to hit consistently positive territory starting from Q314, as improved Transpacific spot rates benefit it, as will increases in some of its short sea markets.

As a large proportion of its rates are contract-based, NOL's earnings lift is not expected until next year when Transpacific rates re-set, but meanwhile, we anticipate that it will trade back to the 1.1 times P/B levels that characterised Q3/Q412, and which remain still at a discount to the company's post GFC mean of 1.2 times.

When marked to market, desk-top valuations show NOL at a slight premium to the market value of its assets. However, the youth of its fleet and its logistics business' potential value (as much as US$1.1 billion) suggest that this is really a discount.

OUTPERFORM

Silverlake Axis

Kim Eng on 28 Aug 2014

• Mid-teens revenue or PATMI growth pa guided for next five years. Order book of MYR280m offers visibility for next 15 months. Maintain BUY and DCF-based TP of SGD1.40 (WACC 9.3%).
• Opportunities from Malaysian bank mergers and OCBC’s recent acquisition of Wing Hang Bank.
• Strong finish to FY6/14. Core EPS beat by 12% on higher-than-expected sales. FY15E-17E EPS refined by -2% to +3%.

Guidance positive
Management painted a rosy outlook in today’s analysts’ briefing. A potential merger of CIMB, RHB and MBSB should present opportunities. Outstanding orders of MYR280m will be delivered over the next 15 months. Management believes mid-teens revenue or PATMI annual growth is achievable over the next five years.
4QFY6/14’s robust PATMI was fuelled by software licencing sales (+42%). We see this as a positive indicator of recurring maintenance work.
Maintain BUY and TP of SGD1.40
We adjust our EPS by -2%/+3%/+3% for FY6/15E-17E, for a moderation in near-term expectations to reflect its latest guidance. The impending CIMB-RHB-MBSB merger implies medium-term earnings will improve on a higher workload for the combined entity.
We maintain our DCF-based TP of SGD1.40 (WACC 9.3%, TG 3%). With its entrenched market position, SAL should benefit from rising IT spending in the Asia-Pac’s banking market. Ongoing upgrading of ageing core banking systems should continue to drive sales of its flagship product. In particular, we expect SAL to participate in projects related to OCBC’s recent acquisition of Wing Hang Bank.

OSIM International

OCBC on 28 Aug 2014

OSIM International Ltd (OSIM) announced that it has issued S$170m in principal amount of zero-coupon unsecured convertible bonds (CBs) to institutional and accredited investors, maturing in Sep 2019. The initial conversion price is S$3.525 per new share, representing a 25% premium over its closing price of S$2.82 prior to the announcement. The yield to maturity of the CBs is 2% per annum. Including an upsize option, the maximum dilution is 7.28%. This fund raising exercise comes as a surprise to us, given OSIM’s strong financial position. We believe it is likely that OSIM could be building a war chest for future acquisition opportunities. The CBs issuance also appears to come with better terms as compared to the CBs exercise which OSIM carried out in Jun 2011. Maintain BUY and S$3.21 fair value estimate on OSIM.

Announced S$170m zero-coupon convertible bonds
OSIM International Ltd (OSIM) announced that it has placed out S$170m in principal amount of zero-coupon unsecured convertible bonds (CBs) to institutional and accredited investors. The CBs have an initial conversion price of S$3.525 per new share, which represents a 25% premium over its closing price of S$2.82 prior to the announcement. The maturity date is on 18 Sep 2019, but there are redemption options for both the issuer and bondholders, subject to certain terms and conditions. The yield to maturity of the CBs is 2% per annum. Assuming full conversion, 48.2m new shares will be issued, which is equivalent to 6.19% of OSIM’s outstanding shares in issue, as at 26 Aug 2014. If an upsize option of up to S$30m worth of CBs is fully subscribed, it would represent an additional 1.09% of OSIM’s issued share capital. 

Fund raising exercise comes as a surprise to us
OSIM has a strong financial position, with a net cash balance of S$238.5m as at 30 Jun 2014. Hence, this round of fund raising exercise comes as a surprise to us. According to OSIM, the net proceeds raised will be used to roll out and enhance its well-being and lifestyle business in Asia and beyond (35% of net proceeds), finance potential strategic acquisitions (35%) and for general working capital purposes (30%). We believe OSIM’s organic growth can be easily funded by its strong operating cashflow generating abilities. Hence, it is likely that OSIM could be building a war chest for future acquisition opportunities. 

Maintain BUY
It is interesting to note that this round of CBs issuance appears to come with better terms as compared to the CBs exercise which OSIM carried out in Jun 2011. The CBs issued back in 2011 had a coupon rate of 2.75% and no dividend protector for existing shareholders (meaning conversion price would be adjusted downwards each time OSIM paid a dividend). We maintain our BUY rating and S$3.21 fair value estimate on OSIM.

CapitaCommercial Trust

OCBC on 27 Aug 2014

Earlier this week, S&P announced that it had upgraded CCT’s long-term corporate credit rating from ‘BBB+’ to ‘A-‘ with a stable outlook. The rating agency had reassessed CCT’s appetite for expansion and believes that the trust would likely “remain disciplined in using debt to fund new investments.” CCT has significant capital headroom for acquisitions ahead; by our estimates, the trust has a debt headroom of S$1.3b it hits a 40% gearing level. Looking ahead to FY15, we believe that management will likely exercise its call option to purchase the remaining 60% of CapitaGreen that it does not already own. Assuming a valuation of S$2.5k to S$2.8k psf NLA, this will cost S$1.1b – S$1.2b which CCT can wholly fund using debt and yet land under a 40% gearing ratio post-transaction. Maintain HOLD with unchanged fair value estimate of S$1.67.

Long-term corporate credit rating upgraded to A- (stable)
Earlier this week, Standard and Poor’s Rating Service (S&P) announced that it had upgraded CCT’s long-term corporate credit rating from ‘BBB+’ to ‘A-‘ with a stable outlook. The rating agency had reassessed CCT’s appetite for expansion and believes that the trust would likely “remain disciplined in using debt to fund new investments.” In addition, the trust’s risk profile has been reinforced by its stable business performance, consistent cash flows, high occupancies and an expanded asset portfolio with CapitaGreen’s anticipated completion by end-2014. We note that CCT currently enjoys one of the highest credit ratings in the S-REITs sector – only below that assigned to CapitaMall Trust (A2) by Moody’s.

Significant debt headroom of S$1.3b to 40% gearing
CCT’s gearing stood at a healthy 28.8% as at end 2Q14 – down 1.2 ppt QoQ from 30.0% as at end 1Q14 – which is the lowest amongst its peer group of office S-REITs (average gearing of 36.0%). Recall that MAS regulations stipulate S-REITs without a credit rating are required to cap their gearing below 35% while those with a rating are allowed to go as high as 60%. CCT has significant capital headroom for acquisitions ahead; by our estimates, the trust has a debt headroom of S$1.3b before it hits a 40% gearing level. 

Likely to exercise call option on remaining 60% of CapGreen
Looking ahead to FY15, we believe that management will likely exercise its call option to purchase the remaining 60% of CapitaGreen that it does not already own (50% owned by CapitaLand and 10% by Mitsubishi Asia). Assuming a valuation of S$2.5k to S$2.8k psf NLA for CapitaGreen, this will cost S$1.0b – S$1.2b which CCT can wholly fund using debt and yet land under a 40% gearing ratio post-transaction. Maintain HOLD with unchanged fair value estimate of S$1.67.

Parkson Retail Asia

HSBC RESEARCH, Aug 26

PARKSON Retail Asia (PRA) posted a revenue decline of 2.3 per cent y-o-y in Q4 ended June 2014 (-2.8 per cent y-o-y for the full year) on the back of negative same store sales growth (SSSG) of -0.8 per cent and -5.4 per cent in Malaysia and Vietnam, respectively. Discretionary retail spending in both countries stayed weak, with consumer sentiment remaining subdued.

Despite the revenue decline, gross profit grew by 3.9 per cent y-o-y (+0.5 per cent y-o-y for the full year) to S$65 million as the gross margin expanded to 62.6 per cent in Q4, FY14 from 58.8 per cent in Q4, FY13 due to reduced discounting and less stock shrinkage. However, operating expenditure grew at a faster pace - at 5.1 per cent y-o-y (+3.3 per cent y-o-y for the full year) to S$56 million - primarily due to costs attributable to new store openings.

As a result, Ebit declined by 9.6 per cent y-o-y in Q4, FY14 (-11.4 per cent y-o-y for the full year) to S$3 million and NPAT (net profit after tax) decreased by 35.9 per cent y-o-y to S$3 million (-12.5 per cent y-o-y for the full year) due to lower net interest income.

The full year results were broadly in line with our estimates as we had anticipated a weak FY June 2014. In line with our expectations, PRA's dividend yield jumped to 6.5 per cent as it paid out 108 per cent of its earnings (as it believes the level of cash on the balance sheet is more than adequate).

Fiscal year 2015 is likely to deliver better results.

FY June 2014 marked the second consecutive fiscal year of profit decline for PRA. While we anticipate that the retail environment will remain weak in Malaysia and Vietnam for the remainder of the calendar year, we think the second half of FY June 2015 could mark a turning point for the company's performance.

We raise our revenue forecasts by 2 per cent and our NPAT estimates by 6 per cent for FY June 2015-16. We believe our FY June 2015 estimates are conservative as we only forecast a 3.4 per cent y-o-y increase in revenue and a 12.9 per cent y-o-y rise in NPAT. Our NPAT estimates are in line with Thomson Reuters Datastream consensus forecasts.

We reiterate our overweight call and raise our DCF (discounted cash flow)-based TP to S$1.12, from S$1.10, on the back of the above forecast changes as well as a DCF roll-forward. The key catalyst would be improving y-o-y performance, most likely in H2, FY15. PRA is currently trading at a 14.7 times FY15 estimated PE against a sector average of 26.3 times.

OVERWEIGHT

LANTROVISION

UOBKayhian on 27 Aug 2014

VALUATION

• Downgrade to HOLD but with a slightly higher DCF target price of S$0.70.

FINANCIAL RESULTS

• FY14 net profit to owners jumped 52.6% yoy to S$13.9m (103.6% of our forecast) due to higher revenue and lower allowance for impairment loss. Excluding allowance for impairment loss, adjusted profit before tax would have risen 44% yoy.
• Strong free cash flow, as net cash position increased from S$75m in FY13 to S$83m (S$0.31/share) in FY14, forming 48% of the current market cap.
• 4.7% dividend yield as S$0.03 dividend was declared, representing a 58% payout (FY13 DPS: S$0.02; 54% payout).

OUR VIEW

• The rise of the internet of things. As the world gets increasingly connected (from smartphones to computers, lamps etc), there is an increasingly large quantity of data that will need to be processed and analysed in real time, thus generating an increase in workload and demand for data centres. According to Gartner, by 2020, the internet of things (IoT) will include 26b units installed and help generate incremental revenue of more than US$300b for IoT product and service suppliers.
• Beneficiary of increasingly smart cities. Besides benefiting from the rising number of data centres in the region, there is also scope for expansion in the use of structured cabling systems. For eg. Data can be collected and sent through structured cabling to be analysed for more efficient planning and use of office space, resulting in rent savings for business owners.
• More shareholder-friendly. We applaud management for its dividend payout (S$0.03) this year as it shows commitment to rewarding shareholders. This is the third consecutive year Lantrovision had paid out dividend (FY12: S$0.01; FY13: S$0.02). In addition, with greater visibility over Lantrovision’s blue chip clientele, we think it also increases the level of investor confidence in the company.
• Our previous valuation is based on very conservative assumptions of a discount rate of 13% and 0% growth rate. With a display of greater commitment to rewarding shareholders with dividends coupled with increased visibility of its blue chip clientele, we believe the company deserves a lower risk premium. We lower our discount rate to 11% from 13% previously.
• Downgrade to HOLD with a slightly higher target price of S$0.70. Lantrovision is currently trading at 7.6x ex-cash FY15F PE. We continue to like Lantrovision for its strong balance sheet, attractive dividend yield (4.7%) and positive industry outlook as it rides on the data centre boom in the region. However, with the recent price surge (the stock has gained 34% since our initiation in May), we think the risk and reward balance has become less attractive. Recommend entry at S$0.58.

Sabana Shari'ah Compliant REIT

UOBKayhian on 27 Aug 2014

FY14F DPU (S$ cent): 7.6
FY15F DPU (S$ cent): 7.8
S$55m acquisition of 10 Changi South Street 2 will be mildly accretive given that it will
be financed through a mix of debt and equity. We factor in further dilution from the
ongoing DRP and remain watchful for the 58% of the portfolio under masterleases which
are due for renewal in the next 15 months.
Maintain SELL with a lower target price of S$0.98 (from S$1.02), based on DDM
(required rate of return: 8.1%, terminal growth: 1.8%). We have lowered our 2014-16
DPU estimates by 1-2% factoring in dilution from the DRP, offset against the mild
accretion from the new acquisition. Downside risks would be nonrenewal of masterleases
or multi-tenanted leases.

CordLife

Kim Eng on 27 Aug 2014

• FY6/14 core EPS (+23% YoY) below by 8%. Minor miss. Maintain BUY. SOTP TP raised to SGD1.50 from SGD1.43.
• Numerous positives await in FY6/15E. More new products in more markets. Stronger contributions from China.
• Raises China bet by buying CCBC’s CBs. May raise some eyebrows but there are strategic reasons.

Strong topline delivery; Minor miss
FY6/14 core earnings met 92% of our forecast. The slight miss was due to a higher-than-expected tax rate and lower-than-expected recognition of Stemlife licensing fees. Full-year revenue growth was an impressive 42% YoY, driven by the Philippines, India and Indonesia. These were growth markets it acquired last year. Hong Kong returned to profitability in 4QFY14 after a restructuring to adapt to the maternity ban on mainland Chinese women in 2013. We cut FY15E-16E EPS by 4-7% for higher tax rates.
Numerous positives await
The first is the rollout of new products (Metascreen, umbilical cord tissue storage) across the region even as its growth markets gain critical mass. The second is our expectation that Singapore’s birth rate will climb in 2015, in conjunction with its Golden Jubilee celebrations. Third, we expect maiden royalty income from China Cord Blood Corp (CCBC) and StemLife as they ramp up cord tissue storage services in China and Malaysia.
Buying more into China
Cordlife is also raising its investment in China via its accretive in-the-money acquisition of CCBC’s convertible bonds from Golden Meditech. We are optimistic on its China expansion in collaboration with CCBC, which monopolises the market. A loan facility given to a related party to buy the same CBs may appear unusual but does not change our positive view on the stock as we view this as a strategic investment. Maintain BUY. Our SOTP-based TP has been raised to SGD1.50 from SGD1.43 after incorporating the CBs’ value and some housekeeping adjustments.

HanKore Environment Tech

Kim Eng on 27 Aug 2014

• Stripping out accounting changes and one-offs, underlying business solid in 4QFY6/14. FY6/14 normalised PBT growth in line. 
• Change from SFRS to IFRS to hurt short term but benefit longer term.
• Maintain BUY with slightly lower TP of SGD1.14 (30x FY6/15E P/E) from SGD1.23, after EPS adjustments.

Affected by new accounting rules and one-offs
A change in accounting rules and one-off items muddled HanKore’s FY6/14 results. Stripping these out, its underlying business remained solid in 4QFY6/14. Full-year revenue grew 63.3% YoY, on higher construction revenue and water-treatment fees. After adjusting for one-offs, including fair-value losses on warrants (CNY34m), its acquisition of Tongyong (CNY85m) and cross-currency swaps (CNY1m), normalised PBT grew 35% YoY. This was in line with our forecast of 37%.

Catalysts intact
We maintain our long-term positive view as we believe HanKore will benefit from China’s water-tariff revisions and industry consolidation. Its merger deal with China Everbright (CEI) is also pending shareholders’ approval in an EGM, likely in November. If materialised, it could be a game-changer. With the backing of CEI, we expect HanKore to acquire more aggressively.
The change in its accounting standard from SFRS to IFRS will hurt its short-term earnings but benefit its longer-term financials, we believe. We lower our FY6/15E/16E net profit by 2.9/8.0% to factor in the accounting changes. This trims our TP to SGD1.14 from SGD1.23, still at 30x FY6/15E P/E, peer valuations.

Ascott Residence Trust

OCBC on 26 Aug 2014

Ascott Residence Trust (ART) announced last week that it has completed the acquisitions of the serviced residence property (SR) in Malaysia and two SRs in China for a total property value of S$173.9m. With the completion of these acquisitions, we note that ART’s earning base will not only be strengthened, but its asset size and portfolio would also be broadened. Looking into 2H14, we also believe a seasonal uplift, coupled with the completion of its asset enhancement initiatives at several of its SRs such as Ascott Raffles Place Singapore, is likely to drive ART’s RevPAU upwards. We maintain our BUY rating and S$1.33 fair value on ART.

Completion of asset acquisitions
Ascott Residence Trust (ART) announced last week that it has completed the acquisitions of the serviced residence property (SR) in Malaysia and two SRs in China for a total property value of S$173.9m. Recall that management estimates the blended EBITDA yield to be 5.1% and the acquisitions to increase its FY13 DPU by 1.2% on a pro forma basis. With the completion of these acquisitions, we note that ART’s earning base will not only be strengthened, but its asset size and portfolio would also be broadened to S$4.0b and 10,000 apartment units respectively.

Consistent set of 2Q14 results
For 2Q14, ART delivered a 13.8% YoY increase in revenue to S$88.1m and 8.3% rise in distributable amount to S$33.5m. This was due mainly to incremental contribution from its acquisitions over the past year and stronger performance from its existing properties, especially those in United Kingdom, Spain and Belgium. DPU for the quarter was down 10.6% to 2.19 S cents, but was expected given the larger unit base resulting from the Dec 2013 rights issue and one-off item amounting to S$4.0m in 2Q13. For 1H14, DPU of 3.94 S cents formed 49.3% of our full-year forecasts, well within our expectations.

Improvement expected in 2H14
Looking into 2H14, management expects its portfolio to improve from 1H. We believe a seasonal uplift, coupled with the completion of its asset enhancement initiatives at several of its SRs such as Ascott Raffles Place Singapore, is likely to drive ART’s RevPAU upwards, which stood at S$137 (down 3.5% YoY) in 2Q14. Beyond this, we understand that plans for the upgrading of Somerset Ho Chi Minh City and several properties in China are currently underway, which should also command better daily rates post renovation. We now tweak our FY14 projections to factor the most recent results. However, there is no change to our fair value of S$1.33. Maintain BUY on ART.

Singapore Airlines

OCBC on 25 Aug 2014

The recent progress on Singapore Airlines’ (SIA) partnerships with TATA and Air New Zealand (Air NZ) seems hopeful, but we remain cautious on SIA’s future growth. We believe the recent approval of Air NZ-SIA alliance allows SIA to leverage on its access to Air NZ’s passengers for top line growth but with plans to commence operations only in late October 2014, it is too early to tell whether the increased capacity will find the right balance between passenger load and yield. On TATA-SIA alliance, although India’s aviation market is growing in both domestic and international flight segments, we believe growth from the alliance will be suppressed by the rule that restricts only Indian airlines from operating international flights out of India until they have accumulated five years of domestic flight operation and have a fleet size of at least 20 aircrafts. Given the long-term nature of these partnerships, we do not expect to see significant impact in SIA’s FY15 results. Maintain HOLD with an unchanged fair value of S$9.97.

Recent development on TATA-SIA
The new proposed new airline of TATA-SIA will be called Vistara and is expected to improve SIA’s coverage of India’s aviation market. According to Airports Authority of India, total passenger traffic registered a 5.8% YoY increase in May-2014 to 16.13m. The progress to obtain AOP is still on track with Vistara to only launch commercial flights in October-2014. However, as the current political situation stands, the 5/20 rule states that Vistara still has to satisfy the criteria of operating five years of domestic flights and having a fleet of at least 20 aircrafts in order to operate international flights out of India. We believe this current rule is unlikely to change due to the intensifying lobbying by the group of airlines including Air India and Jet Airways. With the strong domestic competition to further suppress the yield, we do not expect profitability in its initial years of operation. Hence, we think Vistara will not be a growth driver for Singapore Airlines (SIA) in at least the next few years.

Clear potential from Air NZ-SIA
The recent approval of an Air NZ-SIA alliance will see the two airlines cooperating through codeshare travel on their routes. SIA will commence its first A380 flight from Singapore to Auckland in October-2014, and with five extra weekly flights using B777-300ER, SIA will operate 12 flights weekly to Auckland. We believe the reciprocal codeshare relationship presents a potential for SIA to capture the market for passengers travelling between New Zealand and SIA’s global network, given that passenger arrivals from South-East Asia to New Zealand grew 18% over last 12 months. However, we remain cautious on its impact over the nearer term as it is still too early to tell whether the increased capacity of an estimated 100,000 seats per year will find the right balance between passenger load and yield. We do not expect any significant impact in SIA’s FY15 results though we believe this alliance could contribute to growth going forward.

Significant impact unlikely in the short-term
We believe the current pressure in yields due to competition and the long-term nature of these alliances will not provide any significant impact on its results in FY15. The regulations in India also remain a key concern. Maintain HOLD with an unchanged fair value estimate of S$9.97.

Genting Hong Kong

Uobkayhian on 26 Aug 2014

FY14F PE (x): 20.4
FY15F PE (x): 17.0
Still looking for its new groove. We expect Star Cruises will post a sequentially
narrower but continued operating loss in the seasonally stronger 2H14 as it continues
to fine-tune its fleet deployment strategy in preparation for the delivery of its two
newbuilds costing around US$900m each (scheduled for Oct 16 and Oct 17). The
strategy of deploying more capacity in the Hong Kong-China market raises costs
significantly which currently outweighs the revenue enhancement.
Maintain HOLD with a lower target price of US$0.40 (from US$0.43), after applying a
narrower 15% discount (previously 20%) to our RNAV/share, which already accounts
for muted earnings at Star Cruises (valuing Star Cruises’ at around the book value of
its vessels). Our target price implies 9.3x 2014F EV/EBITDA (adjusted for GENHK’s
stakes in Travellers and NCL). We note the valuation gap between our RNAV and the
implied market values has narrowed substantially with Travelers’ share price having
fallen 29% since its IPO.

Singapore Banks

Kim Eng on 26 Aug 2014

• Singapore banks may soon be able to issue covered bonds. Additional source of long-term funding. 
• Issue size could be SGD26b, or 3% of their interest-bearing liabilities. Positive on liquidity with marginal EPS impact.
• Sector still a Neutral. DBS our top pick, with catalysts from higher interest rates, followed by UOB.

Low-cost and stable funding source
Singapore banks may soon be able to issue covered bonds (CBs). These are already popular in Australia, Europe and the US. CBs are secured against a specific asset pool, primarily residential mortgages. Given the regulatory cap on the amount of assets backing the bonds at 4% of a bank’s assets, the size of CBs that can be issued by our three Singapore banks works out to SGD26b, or 3% of their total interest-bearing liabilities.
Two features are: 1) a minimum 3% overcollateralisation of the face value of all CBs; and 2) the requirement for adequate risk-management processes and internal controls by the issuers.
Positive on liquidity with marginal EPS impact
In our view, CBs are a low-cost and stable funding alternative for Singapore banks, coming at a time of tightening local liquidity. Secured against a specific asset pool, they may be considered liquid assets under Basel 3. They could be introduced as early as year-end. Though it is too early to quantity their NIM impact, this is likely to be miniscule.
Neutral; DBS our top pick. DBS remains our top pick as it should be best-positioned to benefit from rising interest rates.

Oxley Holdings

VOYAGE RESEARCH, Aug 25

OXLEY Holdings Ltd (Oxley) posted full year revenue and PAT (profit after tax) of S$1.07 billion and S$307 million, forming about 92-93 per cent of our full year forecasts. Over the last few months, the company announced:

• the launch of The Bridge in Cambodia, which is approximately 81 per cent sold,
• higher sales in Royal Wharf Phase 1 which is almost fully sold,
• more units sold in Singapore projects despite the slow market,
• the appointment of Accor for the hotel development along Steven Road and
• the termination of some Malaysian MOU (memorandum of understanding) agreements as some of the conditions were not met.

The robust overseas projects sales have prompted us to be more optimistic about the company's outlook. The company is likely to launch the phase 2 of Royal Wharf and Naga 2 project in Q4 2014 as Oxley rides on the sales momentum. We continue to expect Oxley to finish selling its remaining projects in Singapore and the hotel development along Steven Road will generate valuation surplus of about S$360 million. Recommend "invest" with an intrinsic value of S$0.885.

INVEST

RH Petrogas

DMG & PARTNERS, Aug 25

ON Aug 4, 2014, Fosun International Ltd made an A$474 million (S$551 million) all-cash offer for Roc Oil, which was accepted by management. Roc Oil's asset portfolio includes producing areas in China, Australia and Malaysia, with 2P (proven and probable) reserves of 17.4 million barrels of oil equivalent (mmboe) and 2C (best-estimate contingent) contingent resources of 33.7 mmboe. The oil/gas split is approximately 92 per cent/8 per cent. Stripping out net cash of US$67.2 million, the acquisition EV/(2P + 2C) (enterprise value to the sum of 2P and 2C) multiple is circa US$7.315/barrel of oil equivalent (boe).

RH Petrogas' 81.6 mmboe of assets are also heavily weighted towards oil, with a 71 per cent/29 per cent oil/gas split. The market currently only values these assets at en EV/(2P + 2C) of US$5.84/boe. We note that 47.5 mmboe of RH Petrogas' assets relate to its two production sharing contracts in Indonesia which will expire in 2020. We expect 30-year extensions into service agreements (KSOs) before the expiry, which will then allow the company to recognise more reserves and resources. Our TP values RH Petrogas at US$8.54/boe.

RH Petrogas also appears undervalued relative to its SGX-listed peers, based on an EV-to-undiscounted-working-interest-value measure of 7.0 per cent, compared with 10.2 per cent for Kris Energy and 21.0 per cent for Rex International.

The corruption trials in China appear to have held up the approval of the Fuyu-1 Overall Development Plan. We factor in a six-month delay by lowering our risking percentage by 5 percentage points to 95 per cent, resulting in a marginal adjustment of our TP to S$1.19 (from S$1.21). Maintain "buy". We continue to see the eventual approval of Fuyu-1 plan, potential M&As, as well as increasing production from its new development wells as near-term catalysts.

BUY

TIONG WOON

UOBKayhian on 25 Aug 2014

VALUATION

• Maintain BUY and target price of S$0.455, pegged to 0.8x FY14 P/B FINANCIAL RESULTS
• FY14 net profit rose 25% yoy to S$22.1m. During the year, Tiong Woon also completed the disposal of its discontinued operations (fabrication segment) and recorded a gain of S$3.2m.
•  Profit from continuing operations rose 2% yoy to S$18.7m (99% of our 2014 estimate) as gross margin expanded to 33.9% (2013: 29.5%) after the engineering operations were scaled down. Going forward, we expect margins to maintain at the current levels.

OUR VIEW

• Asset play at 0.6x P/B. As highlighted in our initiation report, the major selling point of Tiong Woon is the stock trading at a steep discount to its book value and undervalued property, plant and equipment (PPE) (which consists mainly of the crane fleet) held at cost in the balance sheet. Our channel checks confirm the hidden value of crane assets (due to the difference in book value and market value under the depreciation policy).
• Continued strong gains from undervalued PPE. Tiong Woon continues to record strong gains on disposal of its PPE in 2014. Based on the back-of-the-envelope calculation, we estimate Tiong Woon to record an 89% gain from the disposal of PPE. (2013: 50% gain on disposal of PPE)
• M&A activity on the rise in the industry. According to sources, Tat Hong, one of the largest crane rental companies in the world, has been engaging private equity firms for a possible privatisation offer. Affinity Equity Partners had earlier put together an offer for Tat Hong, that valued it at S$1.30/share (1.2x P/B), but did not proceed further. While we do not see Tiong Woon being privatised in the near term, a rise in M&A activity in the industry may shed light on Tiong Woon’s undervalued assets.
• Slow and steady 2015. While there have been some concerns over the delay in the awarding of contracts or tendering process in the oil and gas (O&G) sector, demand from the O&G sector is expected to remain resilient due to a rise in maintenance jobs. We estimate a 20% increase in demand for maintenance jobs from the O&G industry for 2015. Major infrastructure projects,  such as the airport and rail network, are also expected to support demand for heavy lift and haulage.
• With the gradual scale down in engineering operations, we cut our revenue forecasts by 18% and 20% for 2015 and 2016 respectively but maintain our profit forecasts as there had been minimal contribution from the engineering segment. Engineering contributed S$1,000 to pre-tax profit in FY14.

Shipyard- Different strategies, diverging fortunes

UOBKayhian on 25 Aug 2014


Globally, lower rig orders. After roaring rig orders in 2011-13, less rig orders are placed in 2014. Ytd, we have seen total orders for 27 drilling rigs (2013: 104) globally, comprising 18 jack-ups (2013: 80), 5 semis (2013: 8), 4 drillships (2013: 15) and 0 tender rigs (2013: 1). Of these, Singapore rig builders have secured 6 jack-ups (33% market share) and 2 drillships (50% market share) but no semis. Rig orders are significantly lower in 2014.

But Singapore shipyards’ contract wins remain healthy. Keppel Corp’s (Keppel) O&M contract wins in 1H14 totalled S$3.2b (of which S$1.3b were secured in 2Q14). Net orderbook as at end-June 14 was S$14.1b (1Q14: 14.4b) with earnings visibility extending to 2019. As for Sembcorp Marine (SMM), it won new contracts worth S$2.5b ytd. SMM currently has a net orderbook of S$12.7b (1Q14: S$12.9b), also with completion and deliveries stretching into 2019. We maintain our contract win projections of S$7b p.a. for 2014-16 for Keppel, and S$4b for 2014 and S$5b each for 2015 and 2016 for SMM.

SMM’s conservative accounting prevails. SMM is undertaking the building of nine drillships with progressive deliveries between 2Q15 and 2019. Two drillships are under construction and SMM is already recognising revenue from these two drillships. However, it continues to adopt a conservative accounting towards profit recognition. Profit from the first unit will be assessed upon its completion. While the experience garnered from the construction of the first unit will have some bearing on the profit accounting of the second unit (and henceforth), overall, management will remain prudent in profit recognition in the building of the nine drillships. We reckon the full impact of these drillships on SMM’s margins will be felt by 1H15 when first revenue recognition is achieved for the fourth unit. In the meantime, share price will remain range-bound. Construction on Estaleiro Jurong Aracruz, SMM’s wholly-owned shipyard in Brazil, continues to progress well and the yard remains on track to commerce initial operations in 2H14.

For Keppel, going global is an effective competitive strategy, given the proliferation of local content requirements in major oil-producing markets. Keppel has more than 20 shipyards globally. It has signed an agreement with China’s Titan Petrochemicals Group (TPG) and Titan Quanzhou Shipyard (TQS) to manage the TQS shipyard. Commodity- trading SOE-conglomerate Guangdong Zhenrong Energy (GDZR) is a major shareholder of TPG. TQS is wholly-owned by TPG which is a provider of
logistics, transportation, distribution and marine services for petrochemical products in Asia. TQS will only build rigs and offshore vessels according to Keppel's proprietary designs. This is an opportunity to populate Chinese waters with Keppel's proprietary designs (>20).

Raffles Medical

Kim Eng on 25 Aug 2014

• Maintain HOLD with slightly lower DCF-based TP of SGD3.93 (WACC 8%), from SGD3.94.
• Competition from new private and public hospitals in next few years and the region for medical tourists.
• Price gap with leading hospitals narrowed to less than 10%. Limited room for fee hikes.

Rising challenges
Raffles Medical could face rising competition from new private and public hospitals in the next few years, as well as competition from neighbouring countries for medical tourists. So far, it has done a good job in raising service quality. This has lifted the prices it can command for its procedures. As its prices now approach those of the top providers in the industry, room for further price hikes is limited, in our view. Maintain HOLD with DCF-based TP (WACC 8.1%, LTG 2%) slightly down to SGD3.93 from SGD3.94. We trim FY14E-16E EPS by 0.2-2% for a slight delay in new rental income.

More competition looming
Official data suggests many more private and public hospital beds could be rolled out in 2014-20, after the completion of the 220-bed Farrer Park Hospital this year, five new public hospitals and three integrated developments housing medical suites, apart from Connexion. Public hospitals could  increasingly become a threat, as higher government healthcare subsidies and rising costs of living prompt more Singaporeans to turn to public healthcare services.

Limited price upside
Management has always assured investors that it has room to raise prices, given Raffles Hospital’s  (RH) 20% price gap with the leading private hospitals. However, with its improving quality, that  price gap has narrowed to less than 10%, according to the latest data from the Ministry of Health. With this, its room for further fee hikes may be curtailed.

Singapore Property

OCBC on 21 Aug 2014

Over the last week, the authorities highlighted their various plans to transform the Jurong Lake District into a key regional center and also announced a new Thomson-East Coast line (TEL) that will connect neighborhoods along the East Coast stretch to the MRT grid. We believe that these initiatives to further enhance the outer regions in terms of infrastructure and mix of use will underpin the long-term attractiveness and potential for appreciation of real estate in Singapore. In particular, we see the transformation of the Jurong Lake District to be positive for CapitaLand and CapitaMall Trust, which operates three large retail malls (IMM, J-Cube and Westgate) in the area with a combined retail NLA of 1.0m sq ft. We also highlight that UOL’s Seventy St. Patrick’s condominium project (~186 units), located near the upcoming Marine Terrace MRT station, is ready for launch and could benefit from the TEL announcement. We have BUY ratings on CapitaMall Trust and CapitaLand with fair value estimates of S$2.20 and S$3.79, respectively. We also have a BUY rating on UOL with a fair value estimate of S$6.95.

The transformation of the Jurong Lake District
During the National Day Rally last Sunday, PM Lee highlighted the Jurong Lake District as an area in Singapore which he planned to further transform. The new Jurong Lake Gardens will be formed by integrating the Chinese and Jurong Gardens and Jurong Lake Park, with an area size of more than 70 ha. The Jurong Lake District neighborhood will also see enhancements with the addition of more developments, such as a new Science Centre, which will be located near Chinese Garden MRT and expected to be ready by 2020. We believe the transformation of the Jurong Lake District will be positive for developers with real estate exposure in the area. In particular, we highlight that CapitaLand and CapitaMall Trust operates three large retail malls (IMM, J-Cube and Westgate) in the area. Together, these assets comprise a whopping 1.0m sq ft of operational retail net leasable area, and we believe the group finds significant synergies in positioning these three assets as a “3-in-1” retail proposition that caters for a wide range of shoppers in Singapore’s largest regional hub. We have BUY ratings on CapitaMall Trust and CapitaLand with fair value estimates of S$2.20 and S$3.79, respectively.

Improving MRT connectivity in the East Coast
The authorities also recently announced a new Thomson-East Coast line (TEL) that will connect the East Coast stretch to the MRT grid and significantly reduce travel times to the town area. We believe that the announcement of the TEL could trigger interest for residential assets in the area and would be beneficial to developers with projects ready for launch near the upcoming MRT stations. One potential beneficiary is CapitaLand’s upcoming Marine Blue project (~124 units; acquired for S$100.7m or S$1,056 psf GFA in 2011), which is near the planned Marine Parade MRT. UOL’s Seventy St. Patrick’s condominium project (~186 units), located near the upcoming Marine Terrace MRT station, is also ready for launch. UOL’s site was acquired through an en-bloc process for S$172m in Jul-12 and we estimate break even prices around S$1,250 psf. We have a BUY rating on UOL with a fair value estimate of S$6.95.