Singapore Airlines

OCBC on 19 Dec 2014

We view the slide in oil prices to be positive on Singapore Airlines’ (SIA) profitability since jet fuel makes up ~40% of SIA’s total operating expenses but we believe the effects are visible only in the longer-term, at least from FY16 onwards. Hence, we cut our assumption on SIA’s FY16 jet fuel cost from US$112/barrel to US$100/barrel, which increase its operating margin from 2.8% to 3.5%. While lower oil prices should improve SIA’s profitability significantly, we believe there are several factors at work that negate partly the positive impact. Factoring in the new jet fuel cost assumption and other factors, our FY16 PATMI forecast increases by ~19% to S$524.6m. Consequently, rolling forward our valuations to 0.95x FY16 P/B (0.5 SD below 5-year historical average), we increase our fair value estimate from S$10.12 to S$10.80. Maintain HOLD.

Falling oil prices to improve longer-term profitability
Oil prices had been on a downward trend since Jun-14 on concerns of a supply glut and OPEC’s decision on 27-Nov not to cut supply depressed the prices further. On 12-Dec, oil prices made the headlines once again as International Energy Agency cut the outlook for 2015 global oil demand growth by 230,000 barrels per day (bbl/d) to 0.9m bbl/d on lower expectations for oil-exporting countries. Correspondingly, WTI and Brent crude Jan-15 futures had already fallen more than 40% since Jun-14. We view the slide in oil prices to be positive on Singapore Airlines’ (SIA) profitability since jet fuel makes up ~40% of SIA’s total operating expenses but we believe the effects are visible only in the longer-term. With 65% of its 2HFY15 fuel needs already hedged as at end 1HFY15, the effects will be very much muted on its 2HFY15’s results. However, we believe SIA will still capture the effects from FY16 onwards. Hence, we cut our assumption on SIA’s FY16 jet fuel cost from US$112/barrel to US$100/barrel, which increase its operating margin from 2.8% to 3.5%.

Positive impact negated by several factors
While lower oil prices should improve SIA’s profitability significantly, we believe there are several factors at work that negate partly the positive impact: 1) SIA has always hedge large proportion of each year’s jet fuel needs ahead and the resultant hedging losses offset savings from lower jet fuel costs, 2) yields are likely to be depressed due to overcapacity issues as we continue to see large deliveries of new aircraft due in 2015 for Asia Pacific region, 3) SIA is likely to pass on the savings to consumers through lower fuel surcharges in order to remain competitive in the region, and lastly 4) SIA will record in its books a larger share (from 40% to 55%) of Tigerair’s expected losses for the next few quarters.

Increase FV; maintain HOLD
Factoring in the new jet fuel cost assumption and other factors, our FY16 PATMI forecast increases by ~19% to S$524.6m. Consequently, rolling forward our valuations to 0.95x FY16 P/B (0.5 SD below 5-year historical average), we increase our fair value estimate from S$10.12 to S$10.80. Maintain HOLD.

Singapore Press Holdings

UOBKayhian on 19 Dec 2014

FY15F PE (x): 22.1
FY16F PE (x): 21.4

We expect SPH’s advertising revenue contraction to taper off in FY15. While our page monitor of The Straits Times points to an adspend contraction of 7% yoy in 1QFY15, we expect the contraction to taper off more noticeably in 2QFY15. While we do not see any near-term share price catalysts, the annual dividend yield of 4.9% remains decent.

Maintain HOLD. Target price: S$4.30. Entry price: S$4.00 and below.
Advertising revenue contraction tapers off. We expect Singapore Press Holdings’ (SPH) advertising revenue (AR) contraction to taper off in FY15. Our monthly page monitor of The Straits Times suggests advertising spending (adspend) contracted by 7% yoy in 1QFY15 (Sep-Nov 14). This contraction is less than 4QFY14’s -10% yoy and 3QFY14’s 9% yoy. By 2QFY15 SPH’s AR would see the full negative impact of the total debt service ratio (TDSR) measures imposed by the government at end-Jun 13 to curb property purchases. This caused a major negative impact on property launches and property-related advertising. We expect to see a flat AR by 2QFY15. The total number of pages for each of the last three quarters (3QFY14-1QFY15) has been relatively stable.

Viva Industrial Trust

UOBKayhian on 19 Dec 2014

Viva Industrial Trust is is trading at an attractive yield of 8.8%. VIVA’s 78% exposure to the business park segment will benefit from the spillover office demand. Rental guarantees and master leases provide income stablity. We see good upside potential from Asset enhancement For Technopark at Chai Chee. Long underlying leases mitigate the risk of short-lease titles for Technopark@ Chai Chee and Jacksone Square.

INVESTMENT HIGHLIGHTS

• Upside from Asset enhancement For Technopark at Chai Chee. With the rezoning of Chai Chee property to “Business Park”, management plans to add value by converting the white space (15% of GFA) in Technopark at Chai Chee to retail space (about 210,000 sf of NLA) for F&B, supermarkets and lifestyle retail space. By improving amenities, adding landscaping and rebranding the site from a high-tech to business park space, we see potential improvement in occupancies and rents in the future.
• Stability of income from rental guarantee and masterleases. The company will enjoy guaranteed income from master leases with rental support and step-ups every few years. For instance, the tenancy rate for UE Bizhub’s two business park towers and a 251-room hotel is fixed at S$26m per annum regardless of the occupancy levels of the properties.
• Long underlying leases mitigate the risk of short-lease titles for Technopark@Chai Chee and Jacksone Square as the underlying leases with the Urban Redevelopment Authority (URA) are much longer, which increase the chances of Viva’s leases being renewed if HDB is satisfied with their asset enhancement plans. The weighted average land lease of 41.5 years for the portfolio remains healthy.
• Business parks to benefit from the spillover office demand. VIVA derives bulk 78% of its value from the business park segment. While the present industry wide occupancies for business park spaces are low at mid-85% levels, we anticipate that it will pickup in the medium term as rising occupancies and rentals for office space will lend support to a recovery in the segment.
• Trading at an attractive yield of 8.8%, though gearing is relatively high. Viva is currently trading at an attractive yield of 8.8%, compared with a peer average of 7.9%. However, the gearing is high at 45% levels relative to peers’ average of 33% that would require equity fund raising for acquisitions.

Wilmar

Kim Eng on 19 Dec 2014

• Soybean-crushing margins still biggest swing factor. December’s weakness to be made up by Oct/Nov’s strength, supporting decent 4Q margins.
• Less speculative trading to benefit real soybean crushers like Wilmar, long term.
• Still our top pick. Maintain BUY & SGD4.08 TP, at 15x PER. Catalysts from improving soybean-crushing margins & sugarprice rebound.

Expect still-decent crushing margins in 4Q
We believe soybean-crushing margins will remain Wilmar’s biggest earnings swing factor. December margins could be weak or even turn negative again owing to: 1) higher-than-usual US soybean shipments to China; 2) an 8% drop in soybean meal prices since mid-Nov; and 3) a narrowing premium for China’s domestic soybean prices over CBOT’s. That said, we believe Oct/Nov’s strength can lend support to decent 4Q margins, though 4Q’s margins may not be as good as 3Q’s.

Long-term outlook even better
We believe soybean crushing in China will continue to improve. China’s monthly soybean imports are key to watch. YoY growth has been slowing to single digit since the Jun 2014 Qingdao port scandal. We think this could be blamed on tighter credit for speculative commodity traders. Longer term, though, less speculative trading should benefit real soybean crushers like Wilmar.

Still sector choice
Wilmar is still our top sector pick. Other than improving soybean crushing margins, we think sugar prices could rebound from FY15E, contributing more. TP maintained at SGD4.08, its 5-year 15x  PER average.

Silverlake Axis

Kim Eng on 19 Dec 2014

• Acquires stake in Finzsoft, NZ tech company, at only 6.4x annualised EPS.
• Geographical expansion, earnings upside potential.
•  Maintain BUY. DCF-based TP is SGD1.40 (WACC 9.3%, TG 3%).

Natural alignment of interests in Asia-Pac
Silverlake Axis (SAL) has formed a new 51:49 company, Silverlake HGH, with Andrew Holliday, MD of Finzsoft Solutions, a New Zealand-based financial technology company. Silverlake HGH will make a full takeover of Finzsoft (FIN NZ, Not Rated) at NZD3.00 a share or 48.1% discount to Finzsoft’s last closing price of NZD5.78.

Mr Holliday has committed to accepting the offer for his 65.9% stake in Finzsoft. In its press release, SAL highlights potentially strong synergies and the natural alignment of its target customers in the Asia Pacific.

Three positives
Geographical expansion. This deal will allow SAL to expand beyond ASEAN into Australia and New Zealand. Geographical expansion was highlighted as a key plank of its growth thrust in our recent corporate day (note).

Attractive valuations. The offer price implies 6.4x annualised EPS for FY3/15E or a 48.1% discount to Finzsoft’s last price on 17 Dec. Earnings potential. The earnings impact is currently negligible, in our assessment. However, venturing into a new market with a local partner raises possibilities for SAL from cross-selling. SAL’s 51% stake in the new company implies a cash outlay of NZD8.6m (MYR23.0m) for 65.9% acceptance and up to NZD13.1m (MYR35.1m) for 100% acceptance. It can comfortably fund this with its net cash hoard of MYR421m as at end-Sep 2014. Maintain BUY & DCF-based TP of SGD1.40 (WACC 9.3%, TG 3%).

Offshore & Marine

Kim Eng on 18 Dec 2014

• Oil-price slump worse than feared. Entire value chain now vulnerable. Focus on balance sheets and cash flows.
• Order-cancellation risks. Cut FY15E-16E EPS for asset owners/operators by 8-19% for lower pricing.
• Maintain UNDERWEIGHT with above as de-rating catalysts. For sector exposure, opt for Ezion.

What’s New
As Brent crashes through USD60/bbl, we revisit our estimates, already cut for some on 20 Nov 2014 in our sector downgrade. We cautioned previously that oil services stocks have 25% further downside if Brent sticks below USD80/bbl for a sustained period, which appears to be playing out. Any oil-price reversal would likely be in 2H15, in our opinion. Operators with strong balance sheets and cash flows should be better positioned in the longer term, as the weaker players are weeded out.

What’s Our View
With Brent at USD60/bbl or so, we now believe the entire value chain is vulnerable. Expectations of insulation against oil price dip for certain players are being tested as cracks emerge. Weaker players may start to operate on cash flows over profitability, sabotaging the whole industry’s margins. After scrutinising the balance sheets and cash flows of Singapore O&M stocks, we conclude that most have the financial wherewithal to weather this downturn. We flag Cosco’s and Swiber’s high gearings and weak cash flows, compounded by operational weakness.

Asset owners could favour utilisation rates over pricing. After cutting OSV rates by 4-17%, we lower FY15E-16E EPS for PACC Offshore and Pacific Radiance by 11-19%. As we believe Nam Cheong may lower prices to ensure vessel sales, we cut sale prices by 5% and shipbuilding margins by 2ppts. This results in 11-12% FY15E-16E EPS cuts. Separately, we also cut TP for Vard from SGD0.71 to SGD0.65 due to NOK/SGD currency changes. Valuations look increasingly attractive, justifying our long-term BUYs for well-positioned players. But stocks could take another beating before recovering, as the industry comes to grips with a lower-oil-price environment.

Maintain sector UNDERWEIGHT. For exposure, still prefer Ezion for its stronger earnings visibility. Risks to our views include a sharp bounce in oil prices that could be triggered by: 1) supply cuts by oil producers; and 2) improved demand expectations.

Singapore Reits

OCBC on 19 Dec 2014

2014 has been a relatively solid year for the S-REITs sector in terms of both share price and financial performance. Looking ahead, market expectations point towards a hike in the Fed Funds target rate in 2Q15. This could result in volatility in the share prices of S-REITs. On a positive note, most REITs have buffered up their balance sheets, while hedging strategies have also been put in place. From a valuation standpoint, the FSTREI is trading above historical levels on a P/B basis, while the current yield spread of 4.0% is below the 7-year average of 4.7% (4.3% if we exclude the GFC period). We have OVERWEIGHT ratings on the office and retail REITs sub-sectors, and NEUTRAL ratings on the industrial, hospitality and healthcare REITs sub-sectors. Overall, we maintain NEUTRAL on the S-REITs sector. Our top picks are CapitaMall Trust [BUY; FV: S$2.20], Frasers Centrepoint Trust [BUY; FV: S$2.08] and Starhill Global REIT [BUY; FV: S$0.90].

Year in review
2014 has been a relatively solid year for the S-REITs sector. The FTSE ST REITs Index (FSTREI) has shown an appreciation of 7.8% YTD, outperforming the STI’s 2.4% increase during the same period. Operationally, we note that most REITs under OIR’s coverage have managed to report decent financial results for 9MCY14. Overall NPI, distributable income and DPU growth came in at 7.6%, 6.5% and 2.2%, respectively. From a regulatory standpoint, MAS released a consultation paper in Oct with proposals aimed at fostering stronger corporate governance practices, better aligning the interests of REIT managers and unitholders, as well as to provide REITs with more operational flexibility.

All eyes on interest rate movements
During the most recent FOMC meeting this month, the Fed maintained its dovish stance on monetary policy. Nevertheless, market expectations point towards a hike in the Fed Funds target rate in 2Q15. Consequently, this would likely influence the Singapore Government 10-year bond yield and SIBOR to increase, and could result in volatility in the share prices of S-REITs. On a positive note, most REITs have buffered up their balance sheets to keep gearing ratios at relatively comfortable levels post the Great Financial Crisis (GFC), while hedging strategies have also largely been put in place. Moreover, evidence suggests that over a longer time horizon, there is no clear-cut inverse relationship between the Singapore Government 10-year bond yield and the share price performance of S-REITs. The correlation of the two came in at only -0.11 from Sep 2002 to date.

Maintain NEUTRAL on S-REITs sector
In terms of valuations, the FSTREI is trading above historical levels on a P/B basis (forward P/B of 1.02x is ~0.5 standard deviation above its 7-year mean of 0.93x). The yield spread of the FSTREI over the Singapore Government 10-year bond yield currently stands at 4.0%, which is below the 7-year average of 4.7% (4.3% if we exclude the GFC period). We have OVERWEIGHT ratings on the office and retail REITs sub-sectors, and NEUTRAL ratings on the industrial, hospitality and healthcare REITs sub-sectors. Overall, we maintain NEUTRAL on the S-REITs sector. Our top picks are CapitaMall Trust (CMT) [BUY; FV: S$2.20], Frasers Centrepoint Trust (FCT) [BUY; FV: S$2.08] and Starhill Global REIT [BUY; FV: S$0.90].

Singapore Airlines

OCBC on 19 Dec 2014

We view the slide in oil prices to be positive on Singapore Airlines’ (SIA) profitability since jet fuel makes up ~40% of SIA’s total operating expenses but we believe the effects are visible only in the longer-term, at least from FY16 onwards. Hence, we cut our assumption on SIA’s FY16 jet fuel cost from US$112/barrel to US$100/barrel, which increase its operating margin from 2.8% to 3.5%. While lower oil prices should improve SIA’s profitability significantly, we believe there are several factors at work that negate partly the positive impact. Factoring in the new jet fuel cost assumption and other factors, our FY16 PATMI forecast increases by ~19% to S$524.6m. Consequently, rolling forward our valuations to 0.95x FY16 P/B (0.5 SD below 5-year historical average), we increase our fair value estimate from S$10.12 to S$10.80. Maintain HOLD.

Falling oil prices to improve longer-term profitability
Oil prices had been on a downward trend since Jun-14 on concerns of a supply glut and OPEC’s decision on 27-Nov not to cut supply depressed the prices further. On 12-Dec, oil prices made the headlines once again as International Energy Agency cut the outlook for 2015 global oil demand growth by 230,000 barrels per day (bbl/d) to 0.9m bbl/d on lower expectations for oil-exporting countries. Correspondingly, WTI and Brent crude Jan-15 futures had already fallen more than 40% since Jun-14. We view the slide in oil prices to be positive on Singapore Airlines’ (SIA) profitability since jet fuel makes up ~40% of SIA’s total operating expenses but we believe the effects are visible only in the longer-term. With 65% of its 2HFY15 fuel needs already hedged as at end 1HFY15, the effects will be very much muted on its 2HFY15’s results. However, we believe SIA will still capture the effects from FY16 onwards. Hence, we cut our assumption on SIA’s FY16 jet fuel cost from US$112/barrel to US$100/barrel, which increase its operating margin from 2.8% to 3.5%.

Positive impact negated by several factors
While lower oil prices should improve SIA’s profitability significantly, we believe there are several factors at work that negate partly the positive impact: 1) SIA has always hedge large proportion of each year’s jet fuel needs ahead and the resultant hedging losses offset savings from lower jet fuel costs, 2) yields are likely to be depressed due to overcapacity issues as we continue to see large deliveries of new aircraft due in 2015 for Asia Pacific region, 3) SIA is likely to pass on the savings to consumers through lower fuel surcharges in order to remain competitive in the region, and lastly 4) SIA will record in its books a larger share (from 40% to 55%) of Tigerair’s expected losses for the next few quarters.

Increase FV; maintain HOLD
Factoring in the new jet fuel cost assumption and other factors, our FY16 PATMI forecast increases by ~19% to S$524.6m. Consequently, rolling forward our valuations to 0.95x FY16 P/B (0.5 SD below 5-year historical average), we increase our fair value estimate from S$10.12 to S$10.80. Maintain HOLD.

Keppel Corp

OCBC on 1 Dec 2014

With oil prices taking another tumble since our last update on Keppel Corp around the end of Oct, and oil price forecasts being cut across the board, we deem it necessary to relook at our order win assumptions for the group. We lower our new order estimates to S$5b for this year and S$4.5b for 2015, and with the de-rating of the broader sector, we lower our P/E for the O&M segment from 15x to 13x, such that our fair value estimate is now S$9.89 (prev. S$11.75). However, given the upside potential of more than 10%, we maintain our BUY rating on the stock. Currently, we are still keeping to our dividend forecast of 5.2% for KEP, which should provide a floor to the stock.

Oil prices have taken another tumble since last update
During its 3Q14 results briefing around the end of Oct, Keppel mentioned it believed that jitters in the oil market has not altered the sound fundamentals of the industry. With regards to capital expenditure cuts by international oil companies (IOCs), management sees this as “kicking the can down the road” and IOCs will at some point need to spend to replenish reserves, while drilling contractors have to replace their fleet with new, safer and technologically superior rigs. However, oil prices have taken another tumble since then, and with oil price forecasts being cut across the board, we think that order flows are likely to slow even further. Still, at current levels oil prices are still supportive of shallow-water exploration and development activities, which should underpin some rig orders. It is also worth noting that Keppel also has exposure to production-related orders, which should be more resilient should oil prices remain volatile. 

Also has exposure to property and infrastructure
We estimate that the offshore & marine division will contribute about 65% of this year’s total net profit, with a quarter from property, and about 10% from infrastructure and investments. Besides positive prospects for Keppel Land, the infrastructure segment also looks poised to benefit from an expected growth in demand for data centres and as well as the larger Keppel Infrastructure Trust.

Lowering new order win assumptions and P/E for O&M segment
With oil prices likely to remain subdued, we lower our new order win a/ssumptions for KEP to S$5b for this year and S$4.5b for 2015, and with the de-rating of the broader sector, we lower our P/E for the O&M segment from 15x to 13x, such that our fair value estimate is now S$9.89 (prev. S$11.75). However, given the upside potential of more than 10%, we maintain our BUY rating on the stock. Currently, we are still keeping to our dividend forecast of 5.2% for KEP, which should provide a floor to the stock.

City Developments

UOBKayhian on 18 Dec 2014

FY14F Dividend yield (%): 1.6
FY15F Dividend yield (%): 1.6
We believe CDL has managed to securitise the Quayside Collection at attractive
valuations, setting precedence of yet another channel to monetise mixed development
projects. CDL's effective stake in Quayside Collection will drop to 37.5% while gearing
will improve to 25%. However, execution risks in diversifying overseas and into other
asset classes remain a concern. Maintain HOLD. Target price: S$10.84. Entry price:
S$8.70.
We believe CDL has managed to securitise the Quayside Collection at attractive
valuations of S$2,400psf for The Residences at W Singapore, about S$1.6m per room
key for W Hotel and over S$2,500psf for the retail component. The deal sets
precedence of yet another channel to monetize mixed development projects.
Developers could take cue from this transaction to explore similar structures for their
portfolio. GuocoLand, for example has an integrated development at Tanjong Pagar.
CDL also has the upcoming South Beach integrated development project.
Maintain HOLD and target price of S$10.84. The impact on RNAV is minimal as the
overall valuation for CDL’s Sentosa portfolio is broadly in line with our expectations.
While Sentosa portfolio has been monetised at attractive valuations, execution risks in
diversifying overseas and into other asset classes remain a concern. Maintain HOLD
and target price of S$10.84, pegged at a 20% discount to our RNAV of S$13.55/share.
Entry price is S$8.70.

BIOSENSORS INTERNATIONAL GROUP

UOBKayhian on 18 Dec 2014

• BIG is currently trading at consensus 2015F and 2016F PE of 14.7x and 12.8x respectively. Consensus’ target price of S$0.66 represents an upside of 32%.
• After a slew of bad results and the 43% decline in the stock price ytd, Biosensors has appointed Mr. Jose Calle Gordo as the group’s new CEO in Sep-14. We met up with the management recently to understand the vision and transformation plans for the group. The following are the key transitions we look forward to over the next coming quarters.

INVESTMENT HIGHLIGHTS

• A possible turnaround starts with consolidating existing strategies and working on product development. Facing an increasingly competitive market, sales volume and prices for the group’s BioMatrix drug-eluting stents (DES) continue to face downward pressures. In an attempt to alleviate these pressures, the group is currently working on CE mark approvals for its next generation BioFreedom polymer-free DES, which allows the product to be introduced into the European market in 2H15. In addition, BIG plans to scale up its own Japanese sales force should Terumo continue its dismal performance.
• Plans to trim cost inefficiencies, instil financial discipline and improve margins. With intentions to streamline R&D projects and reduce sales and marketing expenses as a ratio of total revenue from 35% to about 20-25%, we expect operating margins to gradually improve as the group balances between business expansion needs and cost efficiency.
• Biosensors does not rule out M&A possibilities. With cash balances of US$526m and a net cash position of US$221m as at Sep-14, the group is in a good position to utilise these funds for accretive and inorganic growth avenues. Management has emphasised its focus on technological synergy and has indicated a preference for targets with products designed for peripheral intervention.
• New CEO and a possible mindset shift; but investors expect better results. The new CEO has a vision to transform the group from a start-up to one that has a global presence with a strong diversification in portfolio. To challenge the likes of Medtronic and Boston Scientific will be a tough task but we remain cautiously optimistic for the group’s long term trajectory. However, in the near term, both investors’ and shareholders’ focus should be in the group’s ability to recover from the recent set of dreadful results.

Singapore Airlines

UOBKayhian on 17 Dec 2014

FY15F PE (x): 39.5
FY16F PE (x): 17.2

Weak traffic in peak travel period. November’s pax traffic (RPK) growth was uncharacteristically weak and load factors declined despite a cut in pax capacity. This suggests that the region still faces excess capacity. Singapore Airlines (SIA) indicated that demand to the Americas and Europe remain weak and that it will adjust capacity further to meet demand.

Still very much a play on lower fuel prices. SIA has hedged 60% of its 2HFY15’s fuel requirements at US$116/bbl and assuming that the remaining 40% approximates US$90/bbl, average jet fuel will approximate US$105/bbl, or 13% lower than that of 1HFY15, resulting in a savings of about S$380m. The bigger question is to what extent SIA has hedged its fuel requirements for FY16. Jet fuel currently is below US$80/bbl, while Brent crude is about US$60/bbl. Theoretically, SIA can hedge via Brent crude for longer-term contracts and thus lock in its fuel costs. Couple that with the delivery of more fuel efficient aircraft, FY16’s opex could drop substantially. For FY16, we have assumed an average jet fuel cost of US$100/bbl vs US$112/bbl for FY15. Maintain HOLD. SIA trades at 0.8x P/B, ex-SIAEC. At best, the stock could trade towards its long-term mean of 0.87x, which suggests a potential target of S$12.60 if fuel prices decline further. Suggested entry is at S$10.80.

Olam International

UOBKayhian on 17 Dec 2014

FY15F PE (x): 14.1
FY16F PE (x): 12.2

Expansion focuses on prioritised platforms. Olam recent acquisitions of McCleskey Mills Inc and Archer Daniels Midland Company’s (ADM) cocoa business for US$1.47b will push Olam’s strategic plan objective to see positive cash flows from FY15 to FY16 and gearing for FY15 to be at 2.14x (ie above its strategic plan objective of ≤ 2x). Both acquisitions will strengthen Olam’s presence and market positioning in the areas deemed to be prioritised platforms – peanuts (from the acquisition of McCleskey Mills Inc., the third-largest US peanut sheller) and cocoa (from the acquisition of ADM). Management mentioned that Olam is unlikely to undertake any further substantial acquisitions in FY15 after these two transactions.

Maintain HOLD and target price of S$2.35, pegged to12.7x FY15F PE (1SD below 5- year mean). Entry price is S$2.10. Although the share price dropped below our entry price, it is still not a good entry time yet as the volatility in the commodities market is relatively high, given the sharp decline in crude oil prices while commodity prices historically fall when the US dollar strengthens. We may see higher earnings volatility in the coming 1-2 quarters.

ISEC Healthcare

Kim Eng on 17 Dec 2014

• Large group medical specialist in eye diseases that would affect everyone, sooner or later.
• Steady EPS growth of 16% for FY15E-17E, ex-M&As which will be a future earnings driver.
• Initiate with BUY & SGD0.52 TP, at 33x FY15E core EPS. Catalysts from potential accretive acquisitions.

Caretaker of your eyes
ISEC is a group ophthalmology practice. Demand for eyecare can only grow owing to ageing populations, rising myopia and astigmatism among the young, and insufficient number of trained ophthalmologists.

Steady growth, ex-acquisitions
 We forecast revenue CAGR of 28% and core EPS CAGR of 16% for FY15E-17E. FY14E profit to drop 13% YoY on start-up of two new centres, IPO expenses. Excluding these, core net profit to rise  14%. FY15E growth to be 13% as its Singapore centre breaks even. Forecasts do not include acquisitions, its biggest growth driver. Acquisition-led growth ISEC aspires to a regional stage, organically and by buying other practices. It aims to grow to a size where Singapore and Malaysia will only contribute 20% to revenue and profit in five years’ time, down from 100%. With its Singapore listing as a platform, we believe it should be able to acquire at EPS-accretive valuations. Risks: Key-man, MYR weakness One doctor in Singapore contributes ~50% to net profit. ISEC recognises this risk and has structured its management team to take this into account. Also, this risk should diminish as ISEC grows. Recent MYR weakness is another risk, but mitigated by high Singapore contributions for now.

Initiate with BUY, TP of SGD0.52
We have a TP of SGD0.52 or 33x FY15E EPS, a 10% premium to the 30.5x average for healthcare and eyecare peers in Singapore, Malaysia and China and on par with Singapore-listed healthcare valuation leader Q&M Dental’s 33x. We ascribe the premium for its strong potential for accretive acquisitions.

Olam International

Kim Eng on 17 Dec 2014

• Paying USD1.3b or 9.5x EV/EBITDA for cocoa business of ADM.
• Expect synergies but also more volatile earnings.
• Adjust EPS by -2% to +17%. TP cut to SGD2.07 from SGD2.52, now on 11x FY15E EPS, from 13x. Maintain HOLD for lack of near-term catalysts. Prefer Wilmar in sector.

What’s New
Olam is acquiring the cocoa business of Archer Daniels Midland (ADM) for USD1.3b EV. It will take over eight factories, exindustrial chocolates, with 600,000 MT of processing capacity, 10 warehouses, ADM’s deZaan®, Joanes® and UNICAO® brands, a global consumer franchise and an experienced management. The transaction is valued at 9.5x historical EV/EBITDA and will be funded by cash and debt. Olam’s net gearing could rise from 1.85x to 2.14x upon deal completion.

What’s Our View
Olam has footprints in all major cocoa origins except Brazil and is No. 1 in cocoa-bean sourcing. Cocoa is a niche commodity where it has competitive advantages and it is keen to develop this  business. ADM’s cocoa EBITDA averaged USD137m pa in the last five years. Olam expects its new assets to contribute 86-95% or USD180-200m to its Confectionery & Beverage Ingredients EBITDA and 25% to group PATMI by FY6/18E when the business reaches a steady state. We adjust FY6/15E-17E EPS by -2% to +17% for acquisition costs and contributions. While there could be synergies from a combination of Olam’s sourcing ability and ADM’s project development, R&D and processing strength, ADM’s cocoa processing margins have been highly lumpy in recent years owing to industry overcapacity. As such, we expect Olam’s earnings to become more volatile. For this, we lower our target from 13x PER, its 5-year average, to 11x, -1SD. Accordingly, we cut our TP to SGD2.07 from SGD2.52. Maintain HOLD for lack of near-term catalysts.

Swiber Holdings

Kim Eng on 16 Dec 2014

• Secures USD710m contract for offshore field development in West Africa, a new market.
•  Bumps up YTD new orders from 4-year low of USD315m to USD1.03b. Cut FY15E net loss to USD5.9m from USD15.8m. TP up slightly to SGD0.35 from SGD0.34, still at 0.3x P/BV trough.
• Maintain HOLD pending evidence of order sustainability or successful execution in Africa.

What’s New
Swiber broke its long order drought by announcing a new contract of USD710m. This is for Engineering, Procurement, Construction, Installation and Commissioning services for an offshore field development in West Africa, awarded by a Houston-based oil company. It bumps up its YTD new contracts from USD315m to USD1.03b and order book from a 4-year low of USD526m as at
3Q14.

What’s Our View
The contract marks the group’s maiden foray into West Africa and comes at a crucial time of fast order-book depletion. Still, its order-win ability is questionable, especially with weakening oil prices. There might also be risks of executing this large contract in a new market.

After factoring in conservative estimates for this contract, we are still looking at a net USD5.9m loss for FY15E, albeit smaller than our original loss forecast of USD15.8m. FY16E net loss of USD1.8m has been transformed to a net profit of USD28.7m. With the adjustments, our TP climbs to SGD0.35 from SGD0.34, still at a 0.3x FY15E P/BV trough.

Maintain HOLD pending evidence of order sustainability or successful execution in Africa.

Riverstone Holdings

Kim Eng on 16 Dec 2014

• 70-80% of revenue & 40-50% of cost of sales in USD. Strengthening USD/MYR to benefit Riverstone.
• Cheaper crude & natural rubber to keep input prices in check. Benefits passed on but raise EPS by 1-2% for higher cleanroom glove volume.
• Maintain BUY & SGD1.21 TP, at 15x FY15E EPS. Catalysts from higher-than-expected cleanroom glove volume.

Mild impact from strengthening USD/MYR…
Riverstone is expected to benefit from a strengthening USD/MYR as 70-80% of its revenue (c.50% hedged) and 40-50% of its cost of sales (73% of revenue) is denominated in USD. This translates into
positive net exposure of 3-6%, where its PBT can gain or lose 0.3- 0.6% for every 1% movement in USD, ceteris paribus. While the USD/MYR has strengthened 4.1% YoY in 4Q14E, the earnings  impact is minor as the benefits are usually passed on to its customers. Still, we raise FY14E-16E PATMI by 0.7-1.6% for higher cleanroom glove volumes, which lift overall ASPs and margins. Our earlier assumptions were too conservative after speaking to management. …and cheaper raw materials; Maintain BUY

About 90% of Riverstone’s gloves are nitrile gloves. Its main raw material, nitrile butadiene, is a substitute for latex and by-product of crude oil/natural gas. Butadiene prices are expected to remain
low, along with latex and crude oil prices. Latex prices are expected to stay low in 2015 on account of a natural-rubber surplus. We estimate an earnings sensitivity of 0.4% for every 1% change in its raw-material prices. However, the benefits are usually passed on to customers. We also see limited downside for butadiene prices due to tight supplies.

Riverstone’s 12x FY15E EPS trails peers’ 15x average, although it has the strongest EPS growth prospects. Maintain BUY and SGD1.21 TP, at 15x FY15E EPS, on par with its peer average.

Aviation & Shipping Sectors

OCBC on 5 Dec 2014

In 2014, airlines continued to face intense competition and as a result of overcapacity, yields remained depressed, affecting profitability. The aviation service providers’ revenue growth is positively correlated to air traffic growth and the drop in air travel demand resulted in muted performances throughout the year. The shipping sector also saw disappointing results as the overcapacity issue continued to put downward pressure on freight rates. We are of the view that the aviation sector will continue to face headwinds from overcapacity in the Southeast Asia region, putting a downward pressure on yields in 2015. Hence, on these grounds, we maintain our UNDERWEIGHT rating on both the Aviation and Shipping Sectors.

2014 has been a poor year
In 2014, airlines continued to face intense competition and as a result of overcapacity, yields remained depressed, affecting profitability. To make things worse, the unrest in Thailand and the two aircraft incidents further slowed air travel, as fewer Chinese passengers travelled to South-East Asian countries. Singapore Airlines’ (SIA) [HOLD; FV:S$10.12] 9MCY14 PATMI plunged 56% YoY, dragged down by lower yields, loss making subsidiaries, as well as from its associate, Tiger Airways Singapore (Tigerair). For Tigerair [SELL; FV:S$0.21], it went through an extremely rough year as it divested stakes in loss-making overseas ventures, while charging record high provisions, which led to a ~14x YoY increase in its 9MCY14 net losses. The aviation service providers, SIA Engineering (SIAEC) [SELL; FV: S$3.80], SATS Ltd [HOLD; FV: S$2.92] (SATS) and ST Engineering (STE) [HOLD; FV: S$3.47], also saw a lackluster 2014. Their revenue growth is positively correlated to air traffic growth and the drop in air travel demand resulted in muted performances throughout the year. SATS’ 9MCY14 PATMI declined 6% YoY on weaker performance from subsidiaries, weakening Japanese Yen and rising labour costs. SIAEC fared worse as 9MCY14 PATMI dropped 22.9% YoY due to fewer aircraft checks. In the shipping sector, NOL [HOLD; FV: S$0.84] also posted disappointing results as the overcapacity issue continued to put downward pressure on freight rates.

Maintain UNDERWEIGHT on Aviation Sector
We are of the view that the aviation sector will continue to face headwinds from overcapacity in the Southeast Asia region, putting a downward pressure on yields in 2015. While the recent slide in oil prices is likely to result in an improved global economy with higher growth in 2015 than IMF’s forecast of 3.8%, we think the depressed yields will outweigh the resulting pick-up in air travel demand in 2015. Also, we estimate SIA to be ~30-35% hedged for 2015 while Tigerair to be even lesser, and any cost savings arising from lower jet fuel prices should be more evident in Tigerair’s operations. However, cost savings will also be limited by the lower fuel surcharges. Hence, on these grounds, maintain UNDERWEIGHT rating on Aviation Sector.

Maintain UNDERWEIGHT on Shipping Sector
Logically, containerships should see tremendous savings on lower bunker expenses, which historically makes up ~25% of NOL’s cost base. However, note that NOL’s sales contract includes bunker adjustment factor which is an adjustment to shipping companies' freight rates to take into account fluctuations in the cost of fuel oil (bunkers) for their ships. As such, we believe NOL will not enjoy much savings on lower bunker prices, being neutral to oil price fluctuations. In addition, while the global economy may grow more than IMF’s forecasted 3.8% in 2015 on lower oil prices, the incoming supply of new vessels is expected to grow 8.0% in the same year, putting even more pressures on freight rates. Hence, we believe the operating environment of the sector will remain challenging. Maintain UNDERWEIGHTon the Shipping Sector.

Regional Plantation

UOBKayhian on 16 Dec 2014

At a crossroads. We believe the crude palm oil (CPO) market has yet to find an
equivalent point and is waiting for a clearer indication on supplies disruption from the
bad weather and biodiesel demand risks after the sharp fall in crude oil prices. We
believe the current CPO price trading range is supported by the potential tightening of
global edible oilseeds and edible oil supplies in 2015.

Maintain MARKET WEIGHT as there is no strong catalyst to send CPO prices to the
recent high of RM2,900/tonne due to ample edible oilseeds supply. Maintain BUY on
First Resources (FR SP/Target: S$2.80), Bumitama Agri (BAL SP/Target: S$1.40) and
Sarawak Oil Palm (SOP MK/Target: RM6.75).

Suntec REIT

OCBC on 11 Dec 2014

We expect Suntec REIT to be a beneficiary of the robust momentum in Singapore’s prime office sector, although rental growth is likely to moderate from 2015. The situation appears less sanguine for its retail segment, in our view, underpinned by industry headwinds. This has resulted in the relatively lacklustre committed occupancy rate of 60% (as at 30 Sep 2014) for Suntec City Mall’s Phase 3 development. We see downside risks to our FY15 gross revenue and DPU forecasts if the situation remains sluggish. Following Suntec REIT’s strong share price outperformance YTD, we believe the potential for further yield compression could be limited at this juncture. Hence, we downgrade Suntec REIT to HOLD, with an unchanged fair value estimate of S$1.90.

Suntec REIT to benefit from positive office momentum
The momentum for prime office space in Singapore remains robust, as illustrated by the 3.3% QoQ and 14.7% YoY increase in Grade A rentals in 3Q14, based on data from CBRE. We expect Suntec REIT to be a beneficiary of this trend, as approximately 69% and 68% of its NPI and NLA are contributed by the office segment, respectively. Notwithstanding this positive environment, we believe the pace of rental increase would moderate next year. Growth is expected to ease further in 2016, given the large pipeline of supply coming on stream (~3.9m sq ft). Market watcher Knight Frank has projected a 6%-7% YoY rise in rental rates for prime office space by 4Q15, before softening to overall rental growth of less than 6% per annum in 2016 and 2017.

But retail headwinds pose challenges
The situation appears less sanguine for Suntec REIT’s retail segment, in our view, underpinned by headwinds facing Singapore’s retail sector. This has resulted in the relatively lacklustre committed occupancy rate of 60% (as at 30 Sep 2014) for Suntec City Mall’s Phase 3 development. We see downside risks to our FY15 gross revenue and DPU forecasts if the situation remains sluggish. 

Share price performed well; downgrade to HOLD
Suntec REIT’s share price has appreciated 26.0% YTD, outperforming the STI and FTSE ST REIT Index by 21.0 ppt and 17.3 ppt, respectively. We believe the potential for further yield compression could be limited at this juncture, as the stock is now trading at FY14F and FY15F distribution yield of 4.8% and 5.6%. The latter is close to one standard deviation below its 5-year average forward yield of 6.2%. In terms of yield spread over the Singapore Government 10-year bond, the current value of 3.4% is 0.8 ppt below the 5-year average of 4.2%. Given the aforementioned factors, we downgrade Suntec REIT toHOLD, with an unchanged fair value estimate of S$1.90.

CapitaLand

UOBKayhian on 15 Dec 2014

FY14F PE (x): 20.4
FY15F PE (x): 18.0
CapitaLand is trading at an attractive 36% discount to our RNAV, which is 1SD below its
historical trading discount of 11%. Reversion to the long-term trading discount of 11%
implies a 38% upside.
Site visits resonate “One CapitaLand” strategy. We visited some of CapitaLand's
residential, retail, serviced residences and mixed development projects in Shanghai and
Chengdu. CapitaLand staff from ground up to senior management level reflected the
leveraging on the “One CapitaLand” strategy. Management is planning a Raffles City
portfolio listing (potentially in 2016). CapitaLand’s edge in managing retail malls and its
malls’ appeal to younger generation was evident though there seemed to be ample retail
mall choices. The standoff between developers and homebuyers has started to ease on
the residential segment with a slight pick-up seen in the potential homebuyers visiting
showflats. CapitaLand is on track to deliver ROE target of 8-12% in the next 3-5 years.
The streamlining of operations post CMA’s privatisation would help to enhance
CapitaLand’s competitive strengths in integrated developments, and thus narrow the
holding company discounts.
Maintain BUY and target price of S$4.08, pegged at a 20% discount to our RNAV of
S$5.11/share. The stock is currently trading at a deep 36% discount to our RNAV, which
is 1SD below its historical trading discount of 11%.

Singapore Banks

Kim Eng on 12 Dec 2014

• Banks have manageable exposure to oil & gas.
• Selective lending in Malaysia. Most O&G players can ride through this patch.
• Maintain OVERWEIGHT. Catalysts from further earnings deliveries. DBS still our top pick, followed by UOB.

… for oil & gas, not banks
After several good years, the oil & gas sector is in for some rough times, as E&P spending is likely to be scaled back following plunging oil prices. There are concerns about banks’ exposure to this sector, which could be heading towards a shakeout. While there is no specific disclosure, we understand most oil & gas loans are classified under “others”. If so, banks’ maximum exposure works out to 8.3% for DBS, 5.6% for OCBC and 4.7% for UOB vs 5.5% for industry.

Risks are mitigated
Combing through the latest annual reports of Singapore’s and Malaysia’s major oil & gas players, we find that: 1) other than a handful of small players, our universe should be able to withstand this trial; 2) Cosco’s finances could be shored up by its deeppocketed largest shareholder, Cosco Group; 3) Swiber’s finances look shaky with its net debt at 6.5x its market cap; and 4) Singapore banks have been selective, only lending to Malaysian companies with solid balance sheets.

Maintain OVERWEIGHT. We expect the banking sector’s re-rating to continue in 2015 on further earnings deliveries. Waning interest in oil & gas may just benefit banks, through sector rotations. DBS is our first choice, followed by UOB. We remain cautious on OCBC over its ability to extract synergies from Wing Hang Bank.

Pacific Radiance

UOBKyahian on 12 Dec 2014

FY14F PE (x): 5.4
FY15F PE (x): 4.8
Opportunity vs catching falling knives. The OPEC appears to be supportive of Brent oil
price at US$60-70/bbl for a while in order to have stability in the years ahead at
US$80+/bbl. The short-term weak oil prices should flush out high-cost oil production and
thus return the oil market to an even demand-supply keel. The OPEC’s median
budgetary breakeven is about US$100/bbl. Nonetheless, the market is fearful oil prices
could overshoot and continue to fall, with stock prices falling in tandem. Investors are
aware of a compelling investment opportunity, but at the same time are fearful of
catching falling knives.
We have not revised our earnings forecasts. Our channel checks suggest different
companies are seeing different impact. Efficient and shrewd operators are the least
impacted while selected shipbrokers are forecasting an average 10-15% reduction in
Asia’s vessel charter rates over the next 1-2 years.
Maintain BUY and target price of S$1.57, which is pegged to the OSV-owner segment’s
long-term 1-year forward PE mean of 9.5x.

First Resources

UOBKayhian on 9 Dec 2014

FY14F PE (x): 13.2
FY15F PE (x): 12.0
Reiterate BUY for its ability to sustain good productivity yield and keeping production
cost relatively low to stay profitable in a low CPO price environment. First Resources’
(FR) share prices corrected 30% from its 52-week high of S$2.60 on the back of CPO
price weakness and relatively weaker 1H14 earnings vs peers’. The price correction
makes FR one of the cheapest high-growth plantation stocks, at 1-year forward PE of
12x vs peers’ 11-14x. This is a good opportunity to accumulate positions in a wellmanaged
plantation company with good earnings prospects.
Better profitability supports higher PE multiple. During the last CPO price correction in
2008/09, FR traded at the lowest PE of about 3x (-2SD from mean), then recovered and
stabilised at 6-8x PE (-1SD from mean). Given improving profitability, FR’s valuation is
unlikely to go back to its previous trough. Back in 2009 when FR traded at its trough
valuation, its reported EBITDA/CPO tonne was US$328 vs an estimated US$410 for
2014. The higher profitability was largely attributed to better oil yields since then as
more oil palm trees move into prime production age.
Maintain BUY and target price of S$2.80, based on 15x 2016F PE. FR remains one of
our top picks in the plantation sector due to its attractive profile age, cost-efficient
estates and hands-on management. We forecast EPS of 10.4 US cents, 11.5 US cents
and 14.2 US cents for 2014-16 respectively.

Singapore Telecommunications

UOBKayhian on 10 Dec 2014

FY14F PE (x): 16.2
FY15F PE (x): 15.5

Telkomsel: Maximising revenue through smart pricing. Competition has eased since the industry consolidated to four players with XL Axiata completing the acquisition of Axis in Mar 14. Telkomsel has raised its pricing for voice and SMS. It utilises smart pricing whereby pricing is adjusted based on the quality of its network and competitive intensity in 206 separate micro clusters. Average revenue per minute (ARPM) for voice inched up by 2.5% yoy to Rp176 in 3Q14 due to the reduction of free bonus minutes. We estimate that average rate per SMS has also increased 8.8% yoy to Rp57.

Re-iterate BUY. SingTel will benefit from growth in Indonesia and India through Telkomsel and Bharti. Regional mobile associates, including contributions from AIS and Globe Telecom, accounted for 45.3% of group pre-tax profit.

SingTel has declared an interim dividend of 6.8 S cents per share. The ex-date for the interim dividend is 19 Dec 14. The stock provides an attractive dividend yield of 4.6%, which is almost 1SD above long-term mean.

CordLife Group

Kim Eng on 11 Dec 2014

• Unorthodox masterstroke to break into China. Convinced this is right move after meetings with CCBC.
• CCBC/Cordlife partnership in China mutually beneficial. 10% stake in CCBC should become more valuable.
• Maintain BUY & SOTP TP of SGD1.30. Catalysts from possible maiden dividends from CCBC, better sales traction in China.

Setting record straight
We returned even more positive from meetings in Beijing with the CFO of China Cord Blood Corporation (CCBC), China’s leading cord blood bank. In our view, Cordlife’s sell-down following its CCBC convertible-note purchase and loan to Magnum Opus reflects a lack of understanding and appreciation of the motivation behind the deal and risk measures in place. We hope to set this straight.

Mutually-beneficial partnership
Cordlife’s 10% stake in CCBC — 14.2% upon conversion of CBs in 2017 — should only become more valuable over time, in our view. New products from Cordlife are being pushed out via CCBC’s vast China network. We observe close working and personal relationships between the managements of both companies.

Unorthodox masterstroke to gain China foothold
While its loan to Magnum Opus was unorthodox, it was necessary to cement its relationship with CCBC. We view the loan as a proxy for a direct equity investment in CCBC. By controlling the debtor, Cordlife can control the equity part of the equation as well. Despite its mere 10% stake, Cordlife has been able to punch far above its weight.

Multi-layer risk measures in place
Auditing procedures for Chinese companies have been strengthened considerably since the Sino-Forest accounting scandal in 2011. CCBC believes this has not been sufficiently appreciated by investors. External auditors can now check bank balances independently every quarter, while budget-busting cash transfers would need the entire board’s approval and three senior signatories.

Singapore Banks

Kim Eng on 9 Dec 2014

• 10% MYR depreciation vs SGD could hurt EPS by as much as 2.3%. OCBC’s the most. DBS’s the least.
• USD appreciation to cushion MYR weakness.
• Maintain OVERWEIGHT with catalysts from further earnings deliveries. DBS still our top pick, followed by UOB. Remain cautious on OCBC.

MYR weakness against SGD
Since end-September, regional currencies have weakened against USD. SGD is no exception. Still, SGD has held up better than others. Amid a weakening MYR vs SGD and with Malaysia being the largest overseas market for OCBC at 26% of FY13 PBT and UOB at 15%, this is negative. DBS has negligible exposure to Malaysia.

What if MYR depreciates by 10%?
MYR could remain under pressure in 2015 as Malaysia’s economy is weighed down by low commodity prices and GST starting 1 Apr 2015. However, we estimate a 10% depreciation against SGD would only lop off less than 3% of banks’ earnings, ceteris paribus. OCBC will be slightly more affected by lower translated profits in SGD terms. However, this could be compensated by a USD which has gained 3.6% against SGD since end-September. All three banks are net beneficiaries of a rallying USD given their USD lending, paced by DBS at 35% of its loans. OCBC is next with 27% and UOB, 16%. In sum, we think recent currency volatility would be too mild to deflect 4Q14 results.

Maintain OVERWEIGHT. We expect the sector’s re-rating to continue in 2015 on further earnings deliveries. On top of that, waning interest in the oil & gas sector may benefit banks, through sector rotations. DBS is our first choice, followed by UOB. We remain cautious on OCBC over its ability to extract synergies from Wing Hang Bank.

Sheng Siong Group

OCBC on 10 Dec 2014

Looking ahead, 4Q14 will see contribution from Sheng Siong Group’s new ~4.0k sq ft store in the Penjuru area that recently started operations. The acquisition of Block 506 Tampines Central 1 will also likely follow through despite a delay, thus we have included the associated capex of S$65m into our assumptions. Some upside could be seen if management succeeds in opening this store (~9.8k sq ft) before the next Chinese New Year to reap the benefits of higher sales during the festive season. Store expansion within the next two years will play a significant role to ensure the closure of its ~42k sq ft Woodlands store in 2017 will not adversely affect financial performance. At this juncture, we expect steady growth albeit at moderated levels and revise our assumptions for revenue growth in FY14F/FY15F to 5.5%/5.2% (previous: 6.5%/6.0%). Due to a change in analyst coverage, we derive a new FV estimate of S$0.77 (previous: S$0.78) and maintain BUY.

Expect new stores to contribute in FY15
Sheng Siong Group (SSG)’s new ~4.0k sq ft store in the Penjuru area that is targeted at residing foreign workers has started operations for 4Q14, bringing the total number of stores in Singapore to 34. SSG also met with a delay in relation to its acquisition of Block 506 Tampines Central 1 due to regulatory approvals, but it will likely follow through thus we factor the associated capex of S$65m into our assumptions. Some upside could be seen if management is successful in its push to open this new store (~9.8k sq ft) before the next Chinese New Year to reap the benefits of higher sales during the festive season. We keep in mind that the remaining ~26.2k sq ft of retail space suggests any eventual expansion would translate to higher revenue contribution from the Tampines store. 

Growth may see moderation
We would like to highlight that the eight new stores added in 2012 could be reaching normalised growth rates. Looking ahead, in view of the expected closure for its ~42k sq ft Woodlands store in 2017, we note the importance of store expansion in the next two years for SSG. The ~19k sq ft Yishun J9 store slated to open in 2017 would partially offset the loss in resulting revenue contribution but clearly effects would be marginal as a new store needs time to achieve optimum contribution level. While holding a significant cash balance, SSG has to show that they are readily capturing opportunities to ensure its business continue to achieve growth in the coming years. At this juncture, we expect steady growth albeit at moderated levels and revise our assumptions for revenue growth in FY14F/FY15F to 5.5%/5.2% (previous: 6.5%/6.0%).

Maintain BUY with new S$0.77 FV
Store expansion in Singapore will remain as SSG’s key growth driver. With regards to its plans in e-commerce as well as extending presence in China, we believe good planning and execution will take time and do not consider these to be catalysts yet. Due to a change in analyst coverage, we derive a new FV estimate of S$0.77 (previous: S$0.78) and maintain BUY.

Kim Heng Offshore & Marine

OCBC on 9 Dec 2014

During its recent 3Q14 results briefing, Kim Heng Offshore & Marine mentioned that 2H14 would be a stronger period due to delays in arrivals of drilling rigs and offshore support vessels from customers in 2Q14, but given the industry slowdown, work flow may not be as forthcoming as expected earlier. Oil prices have taken another tumble since then, and with oil price forecasts being cut across the board, we think that order flows are likely to slow even further. The ongoing requirement for rig maintenance and repair means that Kim Heng’s business is less cyclical than the newbuild business, but with the de-rating of the broader sector, we lower our P/E from 10x to 7x, lowering our fair value estimate to S$0.16. Downgrade to HOLD.

Oil prices have taken another tumble since last update
During its recent 3Q14 results briefing, Kim Heng Offshore & Marine mentioned that 2H14 would be a stronger period due to delays in arrivals of drilling rigs and offshore support vessels from customers in 2Q14, but given the industry slowdown, work flow may not be as forthcoming as expected earlier. Oil prices have taken another tumble since then, and Brent is now trading at a five-year low of about $68/bbl. With oil price forecasts being cut across the board, we think that order flows are likely to slow even further. 

More enquiries for warm-stacking of rigs
In our earlier report, we highlighted that management believes that more rigs may be coming to Singapore to be warm or cold stacked; according to a 1 Dec 2014 report by Reuters, Kim Heng mentioned that it has received enquiries to stack dozens of rigs over the past few weeks. Rigs in warm stack maintain basic operations and crew as owners monitor the market situation for signs of recovery. If more rigs start getting cold-stacked, that would mean owners expect the downturn to be a prolonged period of time.

Lower FV to S$0.175
Looking ahead, oil prices are likely to remain subdued for at least the first half of next year. Meanwhile, risks are tilted more to the downside as any further oil price volatility would affect the rate at which projects are being awarded, compounded by the renewed focus by international oil companies on shorter term shareholders’ returns. The ongoing requirement for rig maintenance and repair means that Kim Heng’s business is less cyclical than the newbuild business, which may be more affected during a downturn. However, with the de-rating of the broader sector, we lower our P/E from 10x to 7x, lowering our fair value estimate to S$0.16. Downgrade to HOLD.

Nam Cheong

OCBC on 9 Dec 2014

Last week, Petronas announced that it is looking to cut capital expenditure for new projects by 15-20% next year should oil prices remain low. Though Nam Cheong has enjoyed a more diversified customer profile over the years such that Malaysian customers accounted for only about 20-30% of YTD vessel sales, the fall in oil price is a global event and should impact all of Nam Cheong’s customers. Moreover, should an industry downturn be worse than expected, the group would face higher risks on margins and even the possibility of unsold vessels. Order cancellation risk for its RM1.4b order book look low for now, but with the broader industry slowdown and sector de-rating, we deem it necessary to lower our P/E for Nam Cheong from 9.5x to 7x, and based on FY15F earnings, our fair value estimate drops to S$0.37. Downgrade to HOLD.

Petronas looking to cut capex by 15-20% in 2015
Last week, Petronas announced that it is looking to cut capital expenditure for new projects by 15-20% next year should oil prices remain low. The earlier RM300b capex planned for 2011-2015, or RM60b a year, was made on the assumption of oil prices at $80/bbl. Though Nam Cheong has enjoyed a more diversified customer profile over the years such that Malaysian customers accounted for only about 20-30% of YTD vessel sales, the fall in oil price is a global event and should impact all of Nam Cheong’s customers.

Hard to fight the tide
Nam Cheong has been a standout performer in terms of order wins and earnings this year, but it will not be immune to any industry slowdown. To date, it has sold 27 vessels out of the 30 vessels that are scheduled for delivery this year. For 2015, it is looking to deliver 35 vessels, and 14 have been sold. Should an industry downturn be worse than expected, the group would face higher risks on margins and even the possibility of unsold vessels. On a more positive note, the group’s vessels operate in shallow waters which are more resilient to any cutbacks in capital expenditure. So far, we have not seen any production-related cutbacks. As such, risks of order cancellations for Nam Cheong’s RM1.4b order book look low at the moment.

Downgrade to HOLD
During an upcycle, we estimate that the group is able to sell its vessels nine to 12 months prior to delivery, and about four to six months during “normal” times. During the previous downturn, the worst the group experienced was a sale one month prior to delivery – the group has not been stuck with unwanted vessels yet. Still, with the broader industry slowdown and sector de-rating, we deem it necessary to lower our P/E for Nam Cheong from 9.5x to 7x, and based on FY15F earnings, our fair value estimate drops to S$0.37. Downgrade to HOLD.

Golden Agri-Resources

OCBC on 8 Dec 2014

Golden Agri-Resources’ (GAR) share price tumbled some 13.7% to an intraday low of S$0.44 on 1 Dec; this after posting its worst set of quarterly results since 1Q09 on 12 Nov. Although its share price has fallen to our fair value of S$0.44, we do not think that the worst is over yet. For one, the uncertainty over crude prices could continue to weigh on CPO (crude palm oil) prices, mainly due to the bio-diesel link. In addition, the demand for CPO is also expected to decline going into the winter months. In view of the recent development, we are paring our FY15 CPO assumption to US$700/barrel (also driven by the stronger USD/MYR rate); while this would lead to a 3.3% reduction in our FY15 earnings forecast, our fair value remains unchanged at S$0.44 (still based on 13.5x FY15 EPS) due to the higher USD/SGD assumption. Nevertheless, we keep our SELL rating for now as the stock could slip to S$0.40 before stabilizing.

Tumbled to our fair value
Golden Agri-Resources’ (GAR) share price tumbled some 13.7% to an intraday low of S$0.44 on 1 Dec; this after posting its worst set of quarterly results since 1Q09 on 12 Nov, which saw its reported NPAT plunging some 86% YoY (-84% QoQ) to just US$4.4m in 3Q14, despite revenue rising YoY (-10% QoQ) to US$1844.1m. Although its share price has fallen to our fair value of S$0.44, we do not think that the worst is over yet.

Weaker crude may continue to weigh on CPO prices
For one, the uncertainty over crude prices could continue to weigh on crude palm oil (CPO) prices, mainly due to the bio-diesel link. Since 21 Nov, crude prices have tumbled nearly 15% from over US$80/barrel to a 5-year low of US$68; but industry experts believe prices could fall further to US$60/barrel – a level that Saudi Arabia is said to be comfortable with . Over the same period, CPO prices slipped by a smaller 2.7%, suggesting that prices could have more to fall. 

Lower CPO demand during winter months 
In addition, the demand for CPO is also expected to decline going into the winter months; this as palm oil solidifies at much higher temperatures compared to other vegetable oils, making it less “attractive” to consumers in temperate countries. As such, we do not see much positive catalysts for CPO prices in the near term. We note that GAR – the third largest palm oil plantation owner globally – has a 0.8 correlation with CPO prices over the past two years. 

Maintain SELL for the near term
In view of the recent development, we are paring our FY15 CPO assumption to US$700/barrel (also driven by the stronger USD/MYR rate); while this would lead to a 3.3% reduction in our FY15 earnings forecast, our fair value remains unchanged at S$0.44 (still based on 13.5x FY15 EPS) due to the higher USD/SGD assumption. Nevertheless, we keep our SELL rating for now as the stock could slip to S$0.40 before stabilizing.

Aviation & Shipping Sectors

OCBC on 5 Dec 2014

In 2014, airlines continued to face intense competition and as a result of overcapacity, yields remained depressed, affecting profitability. The aviation service providers’ revenue growth is positively correlated to air traffic growth and the drop in air travel demand resulted in muted performances throughout the year. The shipping sector also saw disappointing results as the overcapacity issue continued to put downward pressure on freight rates. We are of the view that the aviation sector will continue to face headwinds from overcapacity in the Southeast Asia region, putting a downward pressure on yields in 2015. Hence, on these grounds, we maintain our UNDERWEIGHT rating on both the Aviation and Shipping Sectors.

2014 has been a poor year
In 2014, airlines continued to face intense competition and as a result of overcapacity, yields remained depressed, affecting profitability. To make things worse, the unrest in Thailand and the two aircraft incidents further slowed air travel, as fewer Chinese passengers travelled to South-East Asian countries. Singapore Airlines’ (SIA) [HOLD; FV:S$10.12] 9MCY14 PATMI plunged 56% YoY, dragged down by lower yields, loss making subsidiaries, as well as from its associate, Tiger Airways Singapore (Tigerair). For Tigerair [SELL; FV:S$0.21], it went through an extremely rough year as it divested stakes in loss-making overseas ventures, while charging record high provisions, which led to a ~14x YoY increase in its 9MCY14 net losses. The aviation service providers, SIA Engineering (SIAEC) [SELL; FV: S$3.80], SATS Ltd [HOLD; FV: S$2.92] (SATS) and ST Engineering (STE) [HOLD; FV: S$3.47], also saw a lackluster 2014. Their revenue growth is positively correlated to air traffic growth and the drop in air travel demand resulted in muted performances throughout the year. SATS’ 9MCY14 PATMI declined 6% YoY on weaker performance from subsidiaries, weakening Japanese Yen and rising labour costs. SIAEC fared worse as 9MCY14 PATMI dropped 22.9% YoY due to fewer aircraft checks. In the shipping sector, NOL [HOLD; FV: S$0.84] also posted disappointing results as the overcapacity issue continued to put downward pressure on freight rates.

Maintain UNDERWEIGHT on Aviation Sector
We are of the view that the aviation sector will continue to face headwinds from overcapacity in the Southeast Asia region, putting a downward pressure on yields in 2015. While the recent slide in oil prices is likely to result in an improved global economy with higher growth in 2015 than IMF’s forecast of 3.8%, we think the depressed yields will outweigh the resulting pick-up in air travel demand in 2015. Also, we estimate SIA to be ~30-35% hedged for 2015 while Tigerair to be even lesser, and any cost savings arising from lower jet fuel prices should be more evident in Tigerair’s operations. However, cost savings will also be limited by the lower fuel surcharges. Hence, on these grounds, maintain UNDERWEIGHT rating on Aviation Sector.

Maintain UNDERWEIGHT on Shipping Sector
Logically, containerships should see tremendous savings on lower bunker expenses, which historically makes up ~25% of NOL’s cost base. However, note that NOL’s sales contract includes bunker adjustment factor which is an adjustment to shipping companies' freight rates to take into account fluctuations in the cost of fuel oil (bunkers) for their ships. As such, we believe NOL will not enjoy much savings on lower bunker prices, being neutral to oil price fluctuations. In addition, while the global economy may grow more than IMF’s forecasted 3.8% in 2015 on lower oil prices, the incoming supply of new vessels is expected to grow 8.0% in the same year, putting even more pressures on freight rates. Hence, we believe the operating environment of the sector will remain challenging. Maintain UNDERWEIGHTon the Shipping Sector.

Singapore Residential Property

OCBC on 4 Dec 2014

We forecast residential home prices to dip 10%-15% over 2015 - 2016 and expect primary residential sales in 2015 to stay muted at between eight and ten thousand units sold. A heavy physical over-supply situation ahead, coupled with anticipated interest rate hikes from the Fed in 2H15, will likely keep buyers on the back foot going forward. While the TDSR framework, introduced in Jun 2013, is likely here to stay, other measures such as the sellers’ stamp duties and additional buyers’ stamp duties are possible candidates for review when residential price declines approach a meaningful threshold of ~10%, which could happen by 2H15 or after. We prefer large developers with strong balance sheets, diversified regional presence and portfolios with significant investment asset exposures. Our top picks in the space are Keppel Land [BUY, S$4.09], CapitaLand [BUY, S$3.79], Wheelock Properties (S) Ltd [BUY, S$2.38], and Hotel Properties Ltd [BUY, S$5.32].

Demand likely to stay muted in 2015
We forecast residential home prices to dip 10%-15% over 2015 - 2016 and expect primary residential sales in 2015 to stay muted at between eight and ten thousand units sold. A heavy physical over-supply situation ahead, coupled with anticipated interest rate hikes from the Fed in 2H15, will likely keep buyers on the back foot going forward. That said, a price crash in excess of 20% is improbable, in our view, given the high price elasticity of demand in the housing market; that is, we will likely see significant buyer demand coming into the market at lower price points.

Review of measures possible after meaningful price declines
While we believe that the TDSR framework, introduced in Jun 2013, is here to stay, other measures such as the sellers’ stamp duties and additional buyers’ stamp duties appear to be possible candidates for review if the authorities potentially look to reverse curbs ahead. However, this scenario comes into play only when residential price declines approach a meaningful threshold of ~10%, which could happen by 2H15 or after. As indicated by Deputy Prime Minister and Finance Minister Tharman in late Oct 2014, the authorities see “some distance to go in achieving a meaningful correction.”

Prefer large diversified developers with strong balance sheets
Looking ahead, we see prices in the mass-market segment to be more at risk versus the mid-tier and high end, and shoebox units (<50 sqm) to be more at risk versus larger format units. We prefer large developers with strong balance sheets, diversified regional presence and portfolios with significant investment asset exposures. Our top picks in the space are Keppel Land [BUY, S$4.09], CapitaLand [BUY, S$3.79], Wheelock Properties (S) Ltd [BUY, S$2.38], and Hotel Properties Ltd [BUY, S$5.32].

Land Transport Sector

OCBC on 3 Dec 2014

The journey for Singapore’s Public Transport Operators (PTOs), namely ComfortDelGro Corporation Limited (CDG) and SMRT Corporation Limited (SMRT), has been smooth thus far in 2014. CDG showed stable growth while SMRT exceeded expectations for all three quarters to date for the year. Looking at the fundamental factors for the growth and improvements in operating margins, we believe both CDG and SMRT are on track to meet our 4QCY14 projections. We believe the momentum seen in 2014 will sustain into 2015 based on both near-term and longer-term factors. However, the key idea to take note is the potential increase in Singapore’s bus and rail fares in 2015. Coupled with the continued efforts put in by the PTOs to manage costs and increase productivity gains, we think the outlook for the PTOs remains positive going into 2015, as we think profitability will improve further. Hence, we maintain OVERWEIGHT on land transport sector, while reiterating BUY rating on both CDG (FV: S$3.03) and SMRT (FV: S$1.70).

PTOs to end 2014 with a smooth ride
The journey for Singapore’s Public Transport Operators (PTOs), namely ComfortDelGro Corporation Limited (CDG) and SMRT Corporation Limited (SMRT), has been smooth thus far in 2014, at least based on what we saw from their first three quarters’ results. CDG continued to show stable growth as its results for all three quarters of 2014 came in within our expectations. 9M14 PATMI grew 8.1% YoY on higher revenue. Its operating margins for 1Q14 through 3Q14 remained stable between 10% and 12% as labour expenses stabilized at ~33% of total revenue. Separately, 2014 had been a year full of pleasant surprises from SMRT as its results for all three quarters for the year exceeded our expectations. After six consecutive quarters of operating losses, fare business finally turned profitable driven by higher ridership and higher average fares in 2QFY15 (3QCY14). The key factors for profitability were disciplined cost management, productivity gains as well as lower electricity and diesel costs, which boosted overall operating margins from 7.6% in 4QFY14 (1QCY14) to 10.6% in 2QFY15. In all, we believe both CDG and SMRT are on track to meet our 4QCY14 projections.

Several factors to sustain momentum in 2015
We believe the momentum seen in 2014 will sustain into 2015 based on both near-term and longer-term factors. The potential near-term catalysts are: 1) the high likelihood that the Public Transport Council (PTC) will grant further fare increase in 2015, 2) lower energy prices which will benefit SMRT more, 3) ridership growth expected to improve, and 4) CDG to benefit from higher growth in taxi rental income as it is the only taxi operator in Singapore allowed to grow its taxi fleet by 1% in 1H15. The longer-term factors are: 1) the announcement of concrete details on the new rail financing model, and 2) the shift of bus operating model to the new bus government contracting model. Note that the impact of the new rail financing framework will have minimal impact on CDG since SBS Transit already does not own any train assets. Under the new bus government contracting model, we expect core bus operations for CDG and SMRT to turn profitable, but CDG is expected to experience more positive impact as it has 75% market share of the bus operations in Singapore.

Maintain OVERWEIGHT
Overall, the expected fare increase along with increasing ridership will continue to drive growth while lower energy prices will further help ease increasing costs pressures. Coupled with the continued efforts put in by the PTOs to manage costs and increase productivity gains, we think the outlook for the PTOs remains positive going into 2015, as we think profitability will improve further. Hence, we maintainOVERWEIGHT on land transport sector, while reiterating BUY rating on both CDG (FV: S$3.03) and SMRT (FV: S$1.70).

SembCorp Marine

OCBC on 1 Dec 2014

Following the sell-down on Sembcorp Marine since early Sep, our rating upgrade to Buy in Oct proved too optimistic. Oil prices took a tumble in 2H14 this year, taking many on the street by surprise. As oil prices settle weaker, lower capital expenditure is expected to be seen in oil sands projects, certain US shale oil projects and certain deepwater and Gulf of Mexico/North Sea projects. This should impact new order wins for oil and gas players, and Sembcorp Marine is unlikely to be spared as well. Meanwhile, the widening corruption probe at Sete Brasil is threatening to impair its ability to finance its investments plans, and while existing contracts still seem to be going on, this could impact new project awards from Brazil. With few visible positive re-rating catalysts in the near term, we lower our P/E for our SOTP-based fair value from 14x to 12x, as well as our 2015 new order win assumption for the group from S$4.5b to S$2.5b, resulting in a fair value estimate of S$3.24 (prev. S$4.18). As such, we downgrade Sembcorp Marine to HOLD.

Working in a subdued oil price environment
Following the sell down on Sembcorp Marine (SMM) since early Sep, our rating upgrade to Buy in Oct proved too optimistic. Oil prices took a tumble in 2H14 this year, taking many on the street by surprise. At the earlier part of the year, oil price forecasts for 2015 were generally higher than US$100/bbl, and the US Energy Information Administration mentioned in as recent as its early Oct report that Brent crude oil prices may average $98/bbl in 4Q14 and $102/bbl in 2015. But with OPEC’s latest announcement to keep output unchanged, oil prices have fallen even further to its lowest in four years with Brent at $72/bbl and WTI at $68/bbl.

Order flows likely to slow
As oil prices settle lower, producers on the margin are impacted, reducing spending for projects that become uneconomic at the upper end of the cost curve. Lower capital expenditure is expected to be seen in oil sands projects, certain US shale oil projects and certain deepwater and Gulf of Mexico/North Sea projects. This should impact new order wins for oil and gas players, and Sembcorp Marine is unlikely to be spared as well.

Petrobras faces problems of its own
SMM has a net order book of S$12.6b with deliveries till 2019, and about half of this comprises drillships from Brazil. The widening corruption probe at Sete Brasil is threatening to impair its ability to finance its investments plans, and while existing contracts still seem to be going on, this could impact new project awards from Brazil. Any more negative news on this front could affect sentiment on Brazil-related plays. On a more positive note, SMM may still see production-related work such as FPSOs and fixed platforms from other parts of the world.

Downgrade to HOLD
With oil prices likely to remain subdued and few visible positive re-rating catalysts in the near term, we lower our P/E for our SOTP-based fair value from 14x to 12x, as well as our 2015 new order win assumption for the group from S$4.5b to S$2.5b, resulting in a fair value estimate of S$3.24 (prev. S$4.18). Downgrade SMM to HOLD.

Ezion Holdings

OCBC on 1 Dec 2014

With the recent fall in oil prices, one may wonder how low would be too low for Ezion’s business. Brent crude is currently hovering around $72/bbl and WTI around $68/bbl, and we believe that demand in liftboats would only fall when oil prices fall below $40/bbl or so, as this is the typical breakeven price of shallow water oil fields. All of Ezion’s liftboats and service rigs have secured a charter contract, and the group does not undertake in speculative building. With charter tenures ranging from 2 to 5+2 years, we see that most of FY15 and a large part of FY16 earnings are already locked in. We also see low contract cancellation risks. Among the oil and gas related plays under our coverage, the group has one of the best earnings visibility going forward, but despite positive company-specific factors going for it, we deem it necessary to lower our P/E valuation from 11x to 10x with the de-rating of the broader sector, resulting in a lower fair value estimate of S$2.04. Maintain BUY.

Stock not spared from recent rout
With the recent sell-down in oil and gas related plays, Ezion Holdings has not been spared – its share price has fallen by about 30% since its recent high of $1.91 in mid Sep, although there has not been any significant negative news on the company besides the fall in oil prices. 

What oil price would be too low?
Brent crude is currently hovering around $72/bbl and WTI around $68/bbl, and we believe that demand in liftboats would only fall when oil prices fall below $40/bbl or so, as this is the typical breakeven price of shallow water oil fields. However, investors should note that at this low price, most of the ultra-deepwater and shale oil projects would be unprofitable, constraining oil supply growth. Unless there is a global economic crisis like in 2008, we do not think that the chances of $40 oil look high for now.

Downside risks to earnings are low
All of Ezion’s liftboats and service rigs (including those yet to be delivered) have secured a charter contract, and the group does not undertake in speculative building. With charter tenures ranging from 2 to 5+2 years, we see that most of FY15 and a large part of FY16 earnings are already locked in. We also see low contract cancellation risks due to the group’s diversified customer base and it will also be relatively punitive for customers to walk away from existing contracts.

Maintain BUY
Going into 2015, there are four units coming off hire and re-contracting at similar charter rates would boost investors’ confidence, in our view. Meanwhile, with the disposal of the marine supply business to Ausgroup, Ezion will also have more resources to focus on its core liftboat/service rig business. Among the oil and gas related plays under our coverage, the group has one of the best earnings visibility going forward, but despite positive company-specific factors going for it, we deem it necessary to lower our P/E valuation from 11x to 10x with the de-rating of the broader sector, resulting in a lower fair value estimate of S$2.04. Maintain BUY.