Soilbuild Business Space REIT

OCBC on 15 Jul 2015

Soilbuild Business Space REIT (Soilbuild REIT) reported 2Q15 results which met our expectations. Gross revenue jumped 17.2% YoY to S$19.6m, underpinned by contribution from new acquisitions. DPU grew at a slower pace of 7.7% to 1.615 S cents due largely to an enlarged unit base from a private placement exercise carried out in May this year. Soilbuild REIT’s occupancy rate came down slightly from 100% to 99.8%, but still a healthy level, in our view. Rental reversions of 5% and 1.6% for renewal leases and new leases were achieved, respectively. In terms of capital management, Soilbuild REIT has fixed 97.9% of its interest bearing borrowings. Its average all-in borrowing cost inched up from 3.28% to 3.49% due to more hedges put in place and a maiden MTN issuance. We maintain our BUY rating and S$0.93 fair value estimate on Soilbuild REIT. Soilbuild REIT continues to be our preferred pick within the industrial REITs sub-sector.

2Q15 results within our expectations
Soilbuild Business Space REIT (Soilbuild REIT) reported 2Q15 results which came in within our expectations. Gross revenue jumped 17.2% YoY to S$19.6m, underpinned by additional rental revenue from three new properties acquired in 4Q14 and 2Q15. DPU grew at a slower pace of 7.7% to 1.615 S cents (advanced distribution of 0.628 S cents already paid out) due largely to an enlarged unit base from a private placement exercise carried out in May this year. For 1H15, gross revenue rose 13.9% to S$38.2m and formed 50.9% of our FY15 forecast. DPU of 3.248 S cents represented a growth of 6.1% and constituted 50.2% of our full-year projection.

Occupancy still healthy at 99.8%
Soilbuild REIT’s occupancy rate came down slightly from 100% to 99.8%, but still a healthy level, in our view. Rental reversions of 5% and 1.6% for renewal leases and new leases were achieved, respectively. 11.8% of Soilbuild REIT’s NLA is up for renewal for the remainder of 2015, and we expect management to continue its proactive approach in negotiations with existing and prospective new tenants. In terms of capital management, Soilbuild REIT has fixed 97.9% of its interest bearing borrowings (as at 30 Jun 2015), an increase from a hedge ratio of 81.9% as at end 1Q15, thus mitigating its interest rate risk. Its average all-in borrowing cost inched up from 3.28% to 3.49% due to more hedges put in place and a maiden MTN issuance.

Reiterate BUY
We maintain our BUY rating and S$0.93 fair value estimate on Soilbuild REIT. Soilbuild REIT continues to be our preferred pick within the industrial REITs sub-sector, given its attractive FY15F distribution yield of 7.5% and exposure to the business park segment, which is the bright spot within the industrial space.

SPH REIT

OCBC on 14 Jul 2015

SPH REIT recently reported a flattish set of 3QFY15 results which met our expectations. DPU came in unchanged on a YoY basis at 1.35 S cents, despite a mild 1.6% growth in gross revenue to S$51.2m. Overall portfolio occupancy remained healthy at 99.8%, as at 31 May 2015, while portfolio rental reversion for SPH REIT was 9.2% for 9MFY15 (Paragon: +9.8%; The Clementi Mall: -11.4%). SPH REIT’s gearing remained stable at 26.0%. Management also increased its interest rate hedge ratio from 55% to 85%. This resulted in a higher cost of debt of 2.55% (1HFY15: 2.5%), while finance expenses also rose 15.7% QoQ to S$5.8m due to costs associated with the interest rate swaps. We retain our forecasts, HOLD rating and S$0.99 fair value estimate on SPH REIT. The stock is trading at FY15F P/B ratio of 1.1x and distribution yield of 5.2%, which are largely in-line with its historical averages since its IPO.

3QFY15 DPU unchanged YoY
SPH REIT recently reported a flattish set of 3QFY15 results, with DPU coming in unchanged on a YoY basis at 1.35 S cents, despite a mild 1.6% growth in gross revenue to S$51.2m. Paragon and The Clementi Mall both saw a stronger percentage increase in NPI than in gross revenue, underpinned by lower maintenance expenses and savings in utilities. For 9MFY15, SPH REIT’s revenue came in at S$154.3m (+2.1%), while DPU of 4.08 S cents represented an increase of 1%. The former and latter constituted 75% and 75.9% of our FY15 projections, respectively, and was within our expectations. YTD, management has retained S$2.1m of taxable income available for distribution. This would be distributed to unitholders in the future.

Negative rental reversions at The Clementi Mall
Overall portfolio occupancy remained healthy at 99.8%, as at 31 May 2015, despite an unexpected lease termination of an office unit in Paragon. Paragon has subsequently become fully-committed again. Rental reversions at Paragon continued to stay positive at 9.8% for 9MFY15, but this was lower than the 11.8% achieved in 1HFY15, which implies a moderation in rental renewal growth rates in 3QFY15. This is unsurprising given the soft retail sentiment. The Clementi Mall’s rental reversion came in at -11.4% for 9MFY15, a deterioration from the -8.8% recorded in 1HFY15. We understand that this was partly due to management’s efforts to retain an existing tenant by offering more competitive rental rates. Overall portfolio rental reversion for SPH REIT was 9.2% for 9MFY15.

Maintain HOLD
SPH REIT’s gearing remained stable at 26.0%. Management also increased its interest rate hedge ratio from 55% to 85%. This resulted in a higher cost of debt of 2.55% (1HFY15: 2.5%), while finance expenses also rose 15.7% QoQ to S$5.8m due to costs associated with the interest rate swaps. We retain our forecasts, HOLD rating and S$0.99 fair value estimate on SPH REIT. The stock is trading at FY15F P/B ratio of 1.1x and distribution yield of 5.2%, which are largely in-line with its historical averages since its IPO.

Singapore Post

UOBKayhian on 9 Jul 2015

FY16F PE (x): 24.0
FY17F PE (x): 21.1

In an announcement on 8 Jul 15, Singapore Post (SPOST) and Alibaba Group stated that they would expand their e-commerce logistics cooperation through the following initiatives: a) Alibaba will invest up to about S$92m (US$67.9m) in Quantium Solutions International (QSI) for a 34% stake, b) Alibaba Group will purchase 107.6m new ordinary shares amounting to 5% of the existing share capital of SPOST for S$187.1m (US$138.6m), and c) SPOST and Alibaba have entered into a joint strategic business development framework to further improve efficiency and integration of e-commerce logistics solutions. A shot in the arm. We expect Alibaba’s investment (S$92m for a 34% stake) in QSI to accelerate the build-up of SPOST’s ecommerce logistics infrastructure and capabilities. It is likely to provide a platform for both parties to strengthen collaboration and realise synergies which will include e-commerce warehousing, last mile delivery and other endto-end ecommerce solutions. The remaining 66% stake in QSI will be held by SPOST. We estimate that QSI will contribute 22.7% of SPOST’s FY16 revenue and grow to S$242m. (FY14/15: S$202m) Maintain BUY with a target price of S$2.19, based on DCF model. We have factored in the expected increase in number of shares for the full year of FY16 and note that despite the minimal EPS dilution, we have not yet worked in the entire earnings uplift from Alibaba’s contribution. We expect SPOST’s earnings growth to outweigh the dilution.

Venture Corporation

UOBKayhian on 10 Jul 2015

FY15F PE (x): 14.2
FY16F PE (x): 13.0

Anticipate gradual recovery. Management expects a gradual sequential pick-up in quarterly revenue after a lacklustre 1Q15. Customers have not made significant changes to their forecasts despite heightened uncertainties. We expect revenue to increase 4.5% qoq in 2Q15 and have modelled an 8.6% hoh increase in revenue in 2H15. Venture has built a diversified customer base, which continues to provide the company resilience and stability. Cautiously optimistic. Venture is aiming for mid- to high-single-digit growth in top- and bottom lines for 2015. Disruptions from M&As involving its customers have abated. The depreciation of the Malaysian ringgit and the Singapore dollar will help Venture maintain net margin within the target 6-8% band. Maintain BUY. Our target price is S$9.00, based on 16.5x 2015F PE (Benchmark Electronics: 12.8x, Plexus Corporation: 14.2x), justified by its average forward PE of 16.4x over the past 10 years.

Singapore Press Holdings

UOBKayhian on 10 Jul 2015

FY15F PE (x): 21.6
FY16F PE (x): 21.2

Newspaper advertising revenue down 9% yoy in 3QFY15. Singapore Press Holdings (SPH) reported net profit of S$98.2m (+9.6% yoy) and S$237.2m (-8.7% yoy) for 3QFY15 (Mar-May) and 9MFY15 (Sep-May) respectively. 3QFY15 net profit was 22% or S$18m above our estimate of S$80m. The difference was due to investment income coming in S$9m higher than our estimate as well as lower-than-expected media costs. Flat share price but dividend yield is decent. Share price is expected to be flat but annual dividend yields of 4.6-4.8% for FY15-17 are decent amid a low interest-rate environment. Maintain HOLD and target price of S$4.20 (based on SOTP). Our recommended entry price is S$4.00 and below.

Ezra Holdings Ltd

UOBKayhian on 13 Jul 2015

FY15F PE (x): 4.9
FY16F PE (x): 5.5

Poor performance was within our expectation. Ezra reported a net loss of US$3.0m for 3QFY15. There was a realised loss of US$9.7m on derivative instructions and a doubtful debt write-off of US$3.0m. These were partially offset by a forex gain of US$5.4m. The net impact was a net loss of US$7.3m. Excluding this, Ezra would have posted a net profit of US$4.3m. Nonetheless, Ezra’s profitability is tethering around the breakeven mark. Management expects subsea job awards to resume from October onwards. Ezra’s current orderbook stands at US$1b while its tenderbook is at US$7.7b-8.6b. Job tenders were delayed by the oil price collapse in 4Q14. Based on the current tender activities, management expects contract awards to resume from October onwards. Maintain HOLD with revised ex-all target price of S$0.176. We revise our P/B valuation yardstick to 0.3x 2016F P/B from 0.5x 2016F previously given the marked deterioration of the subsea industry in the last quarter. This translates to a revised ex-all target price of S$0.176.

Ezra Holdings

OCBC on 13 Jul 2015

Ezra Holdings reported a 3% YoY drop in revenue to US$390.7m and a net loss of US$3.0m in the 3QFY15 quarter. Excluding one-off items, we estimate core PATMI to be about US$4.3m. Management expects the operating environment of the subsea division to remain challenging, and this is also the same for the OSV segment. From a contract wins point of view, FY16 could see an uptick in new project awards, should market sentiment recover. However, from a financial standpoint, FY15 and FY16 may be lacklustre years, as time will be needed to execute any newly secured contracts. With the rights issue going as planned, we account for the larger share base in our estimates. After lowering our earnings estimates and switching our methodology to a simple book valuation, our fair value estimate falls to S$0.16 (based on 0.35 FY15/16F NTA to account for the group’s low ROE and peers’ valuations). Maintain HOLD.

Soft 3QFY15 results
Ezra Holdings reported a 3% YoY drop in revenue to US$390.7m and a 30% fall in gross profit to US$45.6m in 3QFY15. Operating profit fell 81% to US$3.7m, leading the firm to sustain a net loss of US$3.0m in the quarter. Excluding one-off items such as loss on derivatives, we estimate core PATMI to be about US$4.3m. Results were below expectations; 9MFY15 revenue and net profit met 66% and 65% of our expectations, respectively. Gross profit margin in the quarter was low at 11.7% vs. 16.3% in 3QFY14 and 13.6% in 2QFY15.

Challenging operating environment 
Management expects the operating environment of the subsea division to remain challenging, and that the operating performance of this segment would decline in 2HFY15 vs. 2HFY14. This is due to the delay in certain projects and slowdown in project wins while fixed costs continue to be incurred. The offshore support and production services segment is also likely to experience lower charter rates and/or decreased vessel utilisation levels. In 3QFY15, utilisation level of the OSV segment was 74%, of which the lowest was seen in the PSV sub-segment at 55-60%; the larger AHTS sub-segment saw better utilisation levels.

FY15 and FY16 likely to be lacklustre years
From a contract wins point of view, FY16 could see an uptick in new project awards, should market sentiment recover. However, from a financial standpoint, FY15 and FY16 may be lacklustre years, as time will be needed to execute any newly secured contracts. Time may also be needed for the group to build up its subsea division, compared to its more established competitors, though much has been achieved within this short span of five years.

Maintain HOLD
With the rights issue going as planned, we account for the larger share base in our estimates. After lowering our earnings estimates to account for the dimmer outlook of the industry and switching our methodology to a simple book valuation, our fair value estimate falls to S$0.16 (based on 0.35 FY15/16F NTA to account for the group’s low ROE and peers’ valuations). Maintain HOLD.

Singapore Press Holdings

OCBC on 10 Jul 2015

Singapore Press Holdings (SPH) reported that its 3QFY15 PATMI increased 9.6% YoY to S$98.2m mostly due to higher other operating income (corporate events and write-back of contingent consideration for an acquired business) and a smaller loss from JV and associates (improved performance from the regional online classifieds business). YTD PATMI now constitutes 88.5% of our full year FY15 estimates and overall we judge this quarter’s numbers to be above expectations due to better than anticipated performances from the group’s non-core segments and regional classified businesses. While the group continued to struggle with declining demand in the advertising market over this latest quarter, cost-side pressures appear to be well-contained by management. 3QFY15 staff costs and “material, production, and distribution” costs both decreased 2.3% and 4.8% YoY, respectively. Maintain HOLD rating with an unchanged fair value estimate of S$3.85.

3QFY15 PATMI up 9.6% YoY to S$98.2m
Singapore Press Holdings (SPH) reported that its 3QFY15 PATMI increased 9.6% YoY to S$98.2m mostly due to higher other operating income (corporate events and write-back of contingent consideration for an acquired business) and a smaller loss from JV and associates (improved performance from the regional online classifieds business). In terms of the topline, 3QFY15 revenues slipped 0.9% YoY to S$306.8m mainly because of a S$13.9m decline (down 5.6% YoY) from the group’s media business; this was partially offset by stronger numbers from the property segment, which was boosted by higher rental income from Paragon and The Clementi Mall and the opening of Seletar Mall last Nov, and higher revenues from the group’s other businesses due to new shows and timing of show dates for the exhibitions businesses. YTD PATMI now constitutes 88.5% of our full year FY15 estimates and overall we judge this quarter’s numbers to be above expectations due to better than anticipated performances from the group’s non-core segments and regional classified businesses.

Core ad business continue to decline
The group continued to struggle with declining demand in the advertising market over this latest quarter, and 3QFY15 total newspaper ad revenues fell 9.0% YoY with classified and display down 12.6% and 7.1% YoY, respectively. On a more positive note, similar to what we saw last quarter, cost-side pressures appear to be well-contained. 3QFY15 staff costs and “material, production, and distribution” costs both decreased 2.3% and 4.8% YoY, respectively. The group’s average headcount was kept flat at 4,298 as at end 3QFY15 (versus 4,290 as at end 3QFY14). While average monthly consumption of newsprint increased to 7,830MT over 3QFY15 (versus 6,811 as at end 2QFY15), the price of newsprint continued its decline to US$546 this quarter from US$573 as at end 2QFY15. Maintain HOLD rating with an unchanged fair value estimate of S$3.85.

SingPost

OCBC on 9 Jul 2015

Singapore Post (SingPost) announced that Alibaba Group Holding will invest up to ~S$92m in Quantium Solutions International (QSI) for a 34% stake, with SingPost holding the remaining 66%. QSI is currently a wholly owned subsidiary of SingPost providing leading end-to-end e-commerce logistics and fulfilment services across the Asia Pacific region, but it will later become a JV between both parties. At the same time, Alibaba will purchase another 5% stake of SingPost for S$187.1m such that its deemed interest on a fully diluted basis in SingPost will rise to 14.51%. The subscription price is S$1.74, which is at an 8% discount to Tuesday’s closing price. This is subject to IDA and SingPost’s shareholder approvals. With these developments, we look forward to greater collaboration between SingPost and Alibaba for mutual benefit. Maintain BUY with S$2.19 fair value estimate on SingPost.

Alibaba to invest up to S$92m in Quantium Solutions
Singapore Post (SingPost) announced that Alibaba Group Holding will invest up to ~S$92m in Quantium Solutions International (QSI) for a 34% stake, with SingPost holding the remaining 66%. QSI is currently a wholly owned subsidiary of SingPost providing leading end-to-end e-commerce logistics and fulfilment services across the Asia Pacific region. Its network spans more than 10 countries and it offers e-commerce logistics solutions and warehousing across Asia Pacific. However, with the investment by Alibaba, it will become a JV and it will ramp up the development of e-commerce logistics infrastructure and services.

Will also purchase another 5% stake in SingPost 
At the same time, Alibaba will purchase 107.6m new shares amounting to a 5% stake in SingPost for S$187.1m such that its deemed interest on a fully diluted basis in SingPost will rise from 10.23% to 14.51%. The subscription price is S$1.74, which is at an 8% discount to Tuesday’s closing price. This acquisition of additional equity is subject to IDA and SingPost’s shareholder approvals.

Rationale for the moves
According to SingPost, the initiatives will allow QSI to accelerate the build-up of ecommerce logistics infrastructure and services, and will also provide a platform for both parties to strengthen the collaboration and realize synergies. This includes ecommerce warehousing, last mile delivery and other end-to-end ecommerce solutions. A joint strategic business development framework has also been set up. 

More details on collaboration with Alibaba
When asked for more details, SingPost revealed that it will be the preferred partner for Alibaba’s foray in Indonesia and Brazil, as well as electronics products in Alibaba’s platform. Amongst the various initiatives they are pursuing, both parties are also looking to build warehouses in and outside of China. In SE Asia, though SingPost is not the only logistics partner with Alibaba, it aims to be a leading partner. Meanwhile we look forward to greater collaboration between SingPost and Alibaba for mutual benefit. Maintain BUY with S$2.19 fair value estimate on SingPost.

Triyards Holdings

OCBC on 8 Jul 2015

Triyards Holdings reported a 16% YoY rise in revenue to US$63.9m but saw a 14% drop in net profit to US$5.4m in 3QFY15, such that 9MFY15 net profit of US$18.7m accounted for close to 70% of our full year estimate, slightly below expectations. This compares to 60% of consensus’s estimates. Despite this, we are keeping our estimates intact as we expect 4QFY15 to be stronger, as certain projects reach an inflection stage in terms of revenue recognition. Following new order wins that were announced in Jan, Mar and Apr this year, the group announced yesterday new contracts worth about US$175m comprising two enhanced BH450 series liftboats. This brings new order wins since the start of this year to US$450m vs. US$170m for CY14. Net orderbook currently stands at about US$520m. Maintain BUY with S$0.60 fair value estimate on Triyards.

Uneventful quarter
Triyards Holdings reported a 16% YoY rise in revenue to US$63.9m but saw a 14% drop in net profit to US$5.4m in 3QFY15, such that 9MFY15 net profit of US$18.7m accounted for close to 70% of our full year estimate, slightly below expectations. This compares to 60% of consensus’s estimates. Despite this, we are keeping our estimates intact as we expect 4QFY15 to be stronger, as certain projects reach an inflection stage in terms of revenue recognition. Gross profit margin remained healthy at 22.1% in 3QFY15 vs 22.4% in 2QFY15 and 22.6% in 3QFY14. 

Clinches US$175m of new orders; YTD wins US$450m
Following new order wins that were announced in Jan, Mar and Apr this year, the group announced yesterday new contracts worth about US$175m comprising two enhanced BH450 series liftboats. The contract excludes owner furnished equipment; we estimate that each unit would cost about US$95m vs US$87.5m if the equipment were included. This brings new order wins since the start of this year to US$450m vs. US$170m for CY14.

Proposed issuance of warrants to Ezion to proceed
The client of the two liftboats was not disclosed, but we understand that it is SE-Asian based, and could have been introduced by Ezion. Do note that there was a separate announcement saying that the proposed issuance of 29.5m warrants to Ezion will proceed, as the exercise conditions have been fulfilled (one of the conditions stipulated that Ezion or another company introduced by Ezion had to bring in work worth at least US$150m within a certain time frame). The warrants will expire on 6 Jul 2018. 

Net order book of US$520m
Including the backlog of Strategic Marine (~US$50m), the group’s net order book stood at about US$520m currently, providing earnings visibility for the company. Looking ahead, Triyards believes there will be continued demand for its offering, as its main business focuses on fabricating assets involved in construction, production and decommissioning, to inspection and maintenance of infrastructure for existing oil fields. Net gearing was low at 0.3x in 3QFY15. Maintain BUY with S$0.60 fair value estimate (based on 5x blended FY15/16 EPS) on Triyards.

Sheng Siong

OCBC on 7 Jul 2015

While Sheng Siong Group (SSG) has been actively seeking opportunities to open more stores, the management had also reiterated their prudent stance whereby they would not succumb to place a bid beyond their comfort level and open stores at the expense of profitability. We like their cost discipline, and believe that the five new stores that were previously announced, will aid in driving SSG’s growth for the next two to three years. We keep in mind that opportunities for potential new store locations lie in the private sector as well. In addition, 2Q and 4Q are usually the periods when SSG would refurbish selected stores, such as their McNair store in 2Q this year. We view such renovations favourably despite some downtime as these stores typically achieve improved sales growth as a result. Given a total upside of 15% at current price level, maintain BUY with an unchanged DCF-derived fair value estimate at S$0.92.

Management maintains prudence in opening new stores
Local supermarket players have been looking to expand their presence in untapped, suburban areas, and likewise, Sheng Siong Group (SSG) is actively seeking opportunities to open more stores. But the man-agement had reiterated their prudent stance whereby they would not succumb to place a bid beyond their comfort level and open stores at the expense of profitability. Referring to Singapore HDB’s HBiz website, SSG had earlier bidded for store space in Seng Kang and Punggol but there were higher bidders. We like their cost discipline, and believe that previously announced new stores in Tampines (9.8k sq ft), Penjuru (4.0k sq ft), Bukit Panjang (5.2k sq ft), Punggol (3.4k sq ft) and Pasir Ris (3.2k sq ft) will aid in driving SSG’s growth for the next two to three years. We keep in mind that opportunities for new store locations lie in the private sector as well. Moreover, we understand that the group does not expect lease renewals or rental reversions to be of a significant issue.

Store refurbishments seek to improve performance 
2Q and 4Q are usually the periods when SSG would refurbish selected stores, for example, its McNair store (4.1k sq ft) was renovated in Apr and re-opened in May this year. We note that SSG reviews their stores’ performances constantly, and we view such renovations favourably despite some downtime as the stores typically achieve improved sales growth as a result. 

Maintain BUY 
SSG’s share price had slightly corrected to a recent low of S$0.81 amid a tepid environment, partly due to Singapore’s Apr retail sales data for supermarkets, which rose 1.4% MoM but fell 0.5% YoY. Given a total upside of 15% at current price level, we maintain BUY with an unchanged DCF-derived FV estimate of S$0.92. For this year, SSG would gain extra rental income from existing tenants in Block 506 Tampines Central (e.g. an estimated S$0.55m in 1Q15). SSG could also see continued improvement in bottom line through ongoing cost reduction strategies, and the stock offers a projected FY15F dividend yield of 4.0%.

Oil & Gas

OCBC on 7 Jul 2015

A Joint Comprehensive Plan of Action regarding Iran’s nuclear program could be reached as early as tonight, paving the way for the lifting of sanctions in Iran. However, important implementation details are still subject to negotiation, and the US Congress would also require time to review the deal. The immediate impact on the oil market is likely a release of stocks that Iran has, weighing on oil prices in the near term, though some degree of expectations for a successful nuclear deal has already been priced in the market. Amidst this, we search for oil and gas related companies that may stand to benefit from a lifting of sanctions in Iran, though we highlight that positive earnings contribution may not be immediate. On the global level, we find that Eni, Total and Royal Dutch Shell are companies that had very close ties with Iran in its history. We also look for SGX-listed companies that have established a foothold in the Middle East, the only remaining bloc that has reaffirmed its intention to maintain oil and gas production during this environment of lower oil prices. These companies may also be able to leverage on their working knowledge and relationships in the Middle East to capitalise on opportunities in Iran. We see that SBI Offshore, Vallianz Holdings, Atlantic Navigation and KTL Global are offshore & marine companies that have significant exposure to the region. What may happen A Joint Comprehensive Plan of Action regarding Iran’s nuclear program could be reached as early as tonight, reflecting the significant progress that has been made in discussions between the P5+1, the EU, and Iran. US and EU nuclear-related sanctions (which include oil-related sanctions) would be suspended after the International Atomic Energy Agency verifies that Iran has complied with key nuclear-related steps. However, important implementation details are still subject to negotiation, and the US Congress would also require time to review the deal.  What it means for oil prices The immediate impact on the oil market is likely a release of stocks that Iran has, which market watchers estimate to be about 40-45m barrels of oil stored on crude tankers. Hence oil prices may weigh in the near term, though some degree of expectations for a successful nuclear deal has already been priced in the market. In the medium term, the IEA believes that a 20-25% increase in the country’s oil exports to 3.5m bbl/day may be achieved months after which sanctions are lifted.  Searching for companies with the right exposure Amidst these developments, we search for oil and gas related companies that may stand to benefit from a lifting of sanctions in Iran, though we highlight that positive earnings contribution may not be immediate. We specifically look for companies whose contracts had ran into an impasse due to the imposition of sanctions.  On the global level, we find that Eni, Total and Royal Dutch Shell are companies that had very close ties with Iran in its history. Over the last three months, executives from these three companies held talks with Tehran to discuss about oil deals. We also look for SGX-listed companies that have established a foothold in the Middle East, the only remaining bloc that has reaffirmed its intention to maintain oil and gas production during this environment of lower oil prices. These companies may also be able to leverage on their working knowledge and relationships in the Middle East to capitalise on opportunities in Iran.  We see that SBI Offshore, Vallianz Holdings, Atlantic Navigation and KTL Global are offshore & marine companies that have significant exposure to the region.

Genting Singapore

OCBC on 6 Jul 2015

Genting Singapore’s (GS) share price continues to languish around the S$0.90 region, just off fresh 52-week low of S$0.895; but around current levels, we believe that most of the pessimism is likely priced in. Despite the near-term challenges, we continue to see GS as a 2017 story and one with a strong overseas angle. The first being the opening of its integrated resort on Jeju Island, South Korea and the second will be the building of IRs in Japan. For these reasons and also on valuation grounds, we maintain our HOLD rating on the stock with an unchanged fair value of S$0.95.

Pessimism likely priced in
Genting Singapore’s (GS) share price continues to languish around the S$0.90 region, just off fresh 52-week low of S$0.895, likely weighed by the lackluster VIP business outlook over the medium term, as well as the recent outbreak of MERS (Middle East Respiratory Syndrome) in the region, especially in South Korea. However, we believe that most of the pessimism should already been priced in. Note that GS’s EV/EBITDA is now trading at more than 1x SD below its 5-year average. 

Sluggish VIP numbers well flagged
On the muted VIP business, GS has already warned for some time that VIP volumes are likely to remain sluggish in the medium term, as Chinese high rollers are still affected by the ongoing anti-graft campaign in China. While the collection of debt from these players remains challenging, management has taken steps to tighten its credit; it is also targeting more on the mass premium market.

MERS unlikely to have long-lasting impact
Also of concern is the spread of MERS in the region, which could affect air travel, and therefore, visitor numbers at RWS and USS. However, so far, international tourist arrival numbers have remained fairly stable at 1.2m in Apr. And as more people avoid going to South Korea due to the MERS outbreak there, some of these holidaymakers may eventually find their way to Singapore. While GS is currently building an IR on Jeju Island, it would only be ready by mid-2017; this should give the global health authorities plenty of time to contain the outbreak. 

Be patient; 2017 will be better 
As before, we believe the GS is really a 2017 story and one with a strong overseas angle. The first being the opening of its integrated resort on Jeju Island, South Korea, and the second will be the building of IRs in Japan. For these reasons as also on valuation grounds, we maintain our HOLD rating on the stock with an unchanged fair value of S$0.95.

Hyflux

OCBC on 3 Jul 2015

Hyflux Ltd and Tuspark Technology Services will jointly set up an investment company to hold strategic investments in water projects in China. For a start, Hyflux will divest equity interests in five water treatment plants to the investco for a consideration of RMB 890m (~S$195m); we estimate that it will book a one-time profit of S$42m in 2Q15, although Hyflux would need to pay ~S$49m for its share of the investment. Besides the one-time gain, we think that the co-operation with Tuspark bodes well for Hyflux, and should go some way in addressing the company’s seemingly lack of progress made in China over the past few years. Still, other near-term catalysts look a bit lacking for now, although we expect activities to pick up from 3Q15 onwards, driven by full-scale development of the Qurayyat Desalination plant. As such, we opt to maintain our forecasts unchanged, and we keep our HOLD rating and S$0.96 fair value on the stock.

Forms strategic investment company collaboration in China
Hyflux Ltd – through its wholly-owned subsidiary Hyflux Capital (Singapore) Pte Ltd – has entered into a shareholders’ agreement with Tuspark Technology Services Investment Ltd to set up an investment holding company (investco). Hyflux Capital will have a 25% shareholding interest in the investco, which intends to hold strategic investments in water projects in China.

Divestment of water assets to investco
Separately, another wholly-owned subsidiary of Hyflux – Spring China Utility Ltd – has entered into a S&P agreement with the investco to eventually divest its entire equity interests in five water plants in China, with a total designed capacity of 265m litres/day. The aggregate consideration for the deal, payable in cash, is around RMB890m (~S$195m), determined on an arm’s length basis. We understand that the consideration is payable in tranches, subject to fulfillment of certain conditions, including regulatory approval among others. 

Likely to book S$42m profit in 2Q15
According to Hyflux, the book value of these assets (including associated costs) is about S$153m; and as Hyflux would account for the transaction in 2Q15, we can expect to see a one-time gain of S$42m. We also believe that Hyflux would need to pay out around S$49m for its share of the transaction, although this is likely to be in tranches.

Maintain HOLD with S$0.96
Besides the one-time gain, we think that the co-operation with Tuspark bodes well for Hyflux, and should go some way in addressing the company’s seemingly lack of progress made in China over the past few years. Still, other near-term catalysts look a bit lacking for now, although we expect activities to pick up from 3Q15 onwards, driven by full-scale development of the Qurayyat Desalination plant. As such, we opt to maintain our forecasts unchanged, and we keep our HOLD rating and S$0.96 fair value on the stock.

Singapore Offshore & Marine

UOBKayhian on 2 Jul 2015

We set our Brent oil price estimates for 2015 and 2016 at US$61/bbl and US$72/bbl respectively. We change our house estimates for average Brent crude oil price (Brent) to US$61/bbl (from US$65/bbl) for 2015 and to US$72/bbl (from US$70/bbl) for 2016. Our estimates are derived from the mean forecast of 38 agencies, comprising 37 international brokers/banks and one US oil agency. We have only included forecasts published in 2015 as estimates prior to 2015 do not reflect the current environment and would have skewed our average. Our estimates will be updated at the end of each month going forward and be raised/lowered accordingly if the deviation exceeds 5%. Oil prices appear to have found some stability with Brent at above US$50/bbl. Oil price up 12% ytd on product demand. Brent has risen 12% ytd, touching a low of US$46.59/bbl in Jan 15 before rebounding to close at US$63.59/bbl on 30 June. According to the International Energy Agency (IEA), demand was due to three temporary factors - economic growth, colder-than-year-earlier winter conditions in Europe and lower prices. Oil analysts shared similar sentiments, commenting that the “surging demand” seen was not what it was. They highlighted China’s crude imports for May, which fell 1.9 million barrels per day (mb/d) from its April record-high of 7.4mb/d, was potentially opportunistic stockpiling. Maintain MARKET WEIGHT. We retain our stock recommendations and maintain MARKET WEIGHT on the sector. The global O&G industry faces poor earnings visibility as capex and operating costs are being cut. An austerity drive now permeates the entire industry − among oil companies, service providers and shipyards. 4Q14 and 1Q15 saw a fall off the cliff. While activities are returning, oilfield services companies are expected to post poor earnings performance for 2Q15. A meaningful recovery might be seen only in 2H15. In the meantime, stock prices of mid- and small-cap oil service stocks have fallen close to cyclical trough valuations of 0.5x. Our top stock picks in the Singapore offshore & marine sector remain Sembcorp Industries (SCI), Ezion and Triyards

ComfortDelGro

OCBC on 2 Jul 2015

A series of positive developments within the Land Transport sector reinforce our view that ComfortDelGro will continue to enjoy its smooth ride into 2H15. There are three key things to note: 1) Downtown Line (DTL) phase 2 that was initially scheduled for opening in 1Q16 will now open ahead of schedule in Dec-15 (CDG’s management target breakeven on DTL between DTL phase 2 and phase 3), 2) adjustment to method of computing taxi availability standards, which we think allows greater flexibility for CDG to manage their taxi fleet, and lastly, 3) CDG’s announced intention to seek opportunities in London’s rail business. In our view, these three developments are positive and encouraging but did not come as a surprise. Hence, we keep our forecasts unchanged and maintain HOLD with FV of S$3.07.

DTL phase 2 will open in Dec-15
Initially scheduled to open in 1Q16, LTA recently announced that the Downtown Line phase 2 (DTL 2) will open ahead of schedule in Dec-15. DTL 2 comprises one depot and 12 stations, of which four are interchanges linking the DTL to the North-East Line, North-South Line, Circle Line and Bukit Panjang LRT, respectively. According to LTA, construction works for DTL 2’s stations are currently more than 95% complete, while Mechanical & Electrical installation works are in the final stages for all the 12 stations. Testing of train operations are also underway since Apr-15 and will continue into 3Q15. Recall that CDG’s management guided for breakeven on DTL between opening of DTL 2 and DTL phase 3. Hence, in our view, this is certainly a positive development for ComfortDelGro (CDG).

Positive change to method of computing taxi availability
Being the largest taxi operator in Singapore, CDG had been subject to LTA’s Taxi Availability standards (TA) since 2013. The two main criteria of the TA are meeting stipulated percentage of taxis: 1) on the roads during peak periods, and 2) minimum daily mileage of 250km. Previously, the TA were computed based on registered fleet, which does not account for each taxi company’s unhired fleet at any one time for valid reasons such as maintenance purposes. The new TA computation will thus be based on the company’s hired-out fleet, which more accurately measures the availability. We believe this change will ease pressures on taxi companies’ ability to meet the TA standards. While CDG has been the only one to consistently meet the criteria since the inception of the TA standards, we think this change is still positive as it provides greater flexibility for CDG to manage its fleet of taxis.

Seeking opportunities in London’s rail business
CDG’s recently announced intention to seek opportunities in London’s rail business is encouraging, seeing that management is taking actions in expanding CDG’s overseas businesses. As we think these recent developments are positive but not unexpected, we keep our forecasts unchanged. Maintain HOLD with FV of S$3.07.

Overseas Education

UOBKayhian on 30 Jun 2015

FY15F PE (x): 15.1
FY16F PE (x): 11.5

Share price has risen 5% since our stock upgrade in March. We see further scope to increase our earnings forecasts and target price. Overseas Education (OEL) has received temporary occupation permit (TOP) from the Building and Construction Authority (BCA). It has also raised school fees for the new term starting Aug 15 by a significant 9.1-30%. Positive adjustment to earnings forecasts. Given the higher school fees, we increase our 2015 and 2016 net profit estimates by 5.4% and 2.3% to S$23.4m and S$30.8m respectively. Maintain BUY with a higher target price of S$1.02 to account for the higher-than expected increase in school fees. Our target price is based on a two-stage DCF valuation (cost of equity: 8%, terminal growth: 1%), which implies 18.0x 2015F PE. We believe investors would appreciate OEL’s sustainable business (30-year lease for the new building), strong cash flow generation (fees are collected before term starts) and inelastic client demand (parents are most likely to let their children go through the entire curriculum regardless of fee adjustment).

Singapore Airlines

UOBKayhian on 1 Jul 2015

FY16F PE (x): 16.6
FY17F PE (x): 13.2

SIA’s load factors to Europe fell for two consecutive months, with Europe showing the largest yoy decline. Singapore Airlines’ (SIA) overall pax load factor fell 1.3ppt in 2MFY16 (Mar-Apr 15), with pax load factor to Europe declining by an average of 5.6ppt. Europe accounts for 28% of SIA’s (parent airline) capacity and is also a key market for business travels. The decline in Europe’s load factor could be due to Qatar Airways’ introduction of the new Airbus A350 aircraft on 11 May. Qatar Airways is also increasing its flight frequency to Doha to thrice weekly, from twice weekly, by August. According to the Centre for Asia Pacific Aviation, this will result in a 67% rise in Qatar Airways’ capacity out of Singapore. For SIA, this will lead to increased competition on Europe and North America routes as the Middle East is an important connecting point to these regions. Both load factors and yields are likely to ease in the coming months. We believe the market is aware of the risk of the lower yields but may not be aware of the cause. In addition, there is a real risk of yields deteriorating in the coming months. This is likely to be reflected in SIA’s 1QFY16 results in August. Much of the optimism we had for SIA stemmed from six consecutive months of yield improvement from Sep 14 as well as the likely cost efficiencies from new deliveries. However, Qatar Airway’s latest move has raised the ante for SIA. Maintain HOLD but lower our target price from S$12.40 to S$11.60. We also lower our fair value P/B multiple for SIA’s core business from 0.9x to 0.85x. Core ROE ex- SIAEC is estimated at 5.1% due in part to its net cash of S$3.6b. Suggested entry level is S$10.30, which is -1SD on P/B.

OUE Commercial REIT

OCBC on 1 Jul 2015

OUE Commercial REIT (OUECT) has announced an underwritten renounceable rights issue to acquire an indirect interest in One Raffles Place (ORP) from its sponsor for S$1,062.2m - S$1,178.3m. Nine rights units for every 20 existing units will be issued at a price of S$0.555 per unit with an ex-date of 3 Jul 2015. The ~S$218.3m raised from the rights issue, together with a debt drawdown of S$333.3m - S$399.3m and S$500m - S$550m of CPPUs issued to the sponsor, will be utilized to acquire an effective stake of 61.16% to 67.95% in ORP. We understand that the NPI yield of ORP is marginally below 3.5% and the acquisition is not expected to be yield-accretive at the onset. That said, there is ample scope for operational improvement and the acquisition is expected to be yield-neutral or better as OUECT improves the occupancy rate to the mid-90% levels from current mid-80%, and passing rents to S$10.20 - S$10.50 from current levels slightly below S$10. Given the dilutive impact to DPU over FY15-17 in our model, our fair value estimate slips to S$0.84 from S$0.88 previously and our rating is downgraded to HOLD on valuation grounds.

9-for-20 rights at S$0.555 per rights unit
OUE Commercial REIT (OUECT) has announced an underwritten renounceable rights issue to acquire an indirect interest in One Raffles Place (ORP) from its sponsor OUE Limited. Nine rights units for every 20 existing units will be issued at a price of S$0.555 per unit with an ex-date of 3 Jul 2015. The total cost of the acquisition will be S$1,062.2m - S$1,178.3m; ~S$218.3m raised from the rights issue, together with a debt drawdown of S$333.3m - S$399.3m and S$500m - S$550m of convertible perpetual preference units (CPPUs) issued to the sponsor, will be utilized to acquire an indirect interest of 75.0% - 83.33% in OUE Centre Limited which in turn owns 81.54% of the beneficial interest in ORP. After the transaction, OUECT will have an effective stake of 61.16% to 67.95% in ORP. 

Scope for improving occupancy and rental rates
The cost of the debt facility is ~1.8% with tenure of three years. The CPPUs will have a coupon of 1.0% and a conversion price of S$0.841 per unit, representing a 15.0% premium to the theoretical ex-rights price of S$0.731 per unit. There will be a restriction period of four years, and only 1/3 of the CPPUs initially issued can be converted each year after the restriction period. We understand that the NPI yield of ORP is marginally below 3.5% and the acquisition is not expected to be yield-accretive at the onset. That said, there is ample scope for operational improvement and the acquisition is expected to be yield-neutral or better as OUECT improves the occupancy rate to the mid-90% levels from current mid-80%, and passing rents to S$10.20 - S$10.50 from current levels slightly below S$10. Given the dilutive impact to DPU over FY15-17 in our model, our fair value estimate slips to S$0.84 from S$0.88 previously and our rating is downgraded to HOLD on valuation grounds.

PACC Offshore Services

OCBC on 30 June 2015

Cost cutting plans by oil and gas companies have led to falling rig utilisation rates and in turn impacted the demand for offshore support vessels. For Pacc Offshore Services Holdings (POSH), the impact has been even greater as it faced country-specific challenges in Mexico and Brazil. Looking ahead, the Mexico JV losses are likely to be stemmed as POSH has transferred the vessels to its OSV fleet as they pursue international charters. Meanwhile, the group is also likely looking beyond Brazil for its 2nd SSAV (POSH Arcadia), given the difficulties of operating in the country. With the dim outlook of the industry, we lower our estimates and also push our earnings contribution for the 2nd SSAV (POSH Arcadia) to 2Q16, such that our fair value estimate drops from S$0.50 to S$0.44 (8x blended FY15/16 EPS). Maintain HOLD; we may be buyers at S$0.395 or lower.

Looking at other markets
Cost cutting plans by oil and gas companies have led to falling rig utilisation rates and in turn impacted the demand for offshore support vessels. For Pacc Offshore Services Holdings (POSH), the impact has been even greater as it faced country-specific challenges in Mexico and Brazil. Its JVs in Mexico continued to incur losses in 1Q15, and this amounted to US$5.3m, similar to 1Q14. Looking ahead, the Mexico JV losses are likely to be stemmed as POSH has transferred the vessels to its OSV fleet as they pursue international charters. Meanwhile, the group is also likely to look beyond Brazil for its 2nd SSAV (POSH Arcadia), given the difficulties in operating in the country.

Set-back in Brazil?
According to Upstream , Holland’s Sea Trucks had won a flotel job to carry out maintenance and upgrade work on Saipem’s FPSO that is chartered to Petrobras. The group had beat POSH, GranEnergia and Axis Offshore to secure the contract. Recall that POSH Arcadia had been looking for opportunities in Brazil, and given the tough environment there currently, we believe it may take some time before this SSAV contributes meaningfully, though we do not rule out any short-term jobs that may come up in the meantime (in or outside Brazil). 

Healthy net gearing
Despite its challenges, POSH’s financial position remains strong, and its net gearing stood at a healthy 0.5x as at end Mar 2015. It has been relatively conservative in terms of its vessel newbuild programme, and we believe the PaxOcean yard in China offers some flexibility in terms of adjusting newbuild schedules and specifications.

Lower FV to S$0.44
Given the dim outlook of the industry, we tweak our estimates and also push our earnings contribution for the 2nd SSAV (POSH Arcadia) to 2Q16, trimming our FY16 earnings estimates by ~20%. After rolling forward our valuations to 8x blended FY15/16 earnings, our fair value estimate drops from S$0.50 to S$0.44. Maintain HOLD; we may be buyers at S$0.395 or lower.

CapitaLand

OCBC on 29 Jun 2015

CapitaLand (CAPL) reported that the conditions precedent to acquire Danga Bay A2 Island in Iskandar, Johor Malaysia, has been fulfilled. CAPL is expected to take a 51.0% stake in the project, alongside Malaysia’s Iskandar Waterfront Holdings (40.0%) and Temasek (9.0%), and the group has reiterated that this is a long term project that will be executed in phases over the next 10 to 12 years according to market conditions. We have an overall neutral view on this acquisition; while near term headwinds will likely prevail given the current over-supply situation and slow sales in Iskandar, this acquisition will give CAPL a meaningful foothold in the Iskandar region over the long term and has fairly limited impact on the group’s balance sheet (<2% of the group’s equity). Maintain BUY with an unchanged fair value estimate of S$4.07 (25% discount to RNAV).

Fulfillment of conditions precedent to acquire Danga Bay
CapitaLand (CAPL) reported that the conditions precedent to acquire Danga Bay A2 Island in Iskandar, Johor Malaysia, has been fulfilled. The group is expected to take a 51.0% stake in the project, alongside Malaysia’s Iskandar Waterfront Holdings (40.0%) and Temasek (9.0%). To recap, the acquisition site will be located in Danga Bay, one of the five flagshop zones in Iskandar earmarked for special development, which is 10km from the Johor Causeway to the north-east and 29km from Legoland and EduCity in the west. The site lies on 71.4 acres of freehold land known as A2 Island in Danga Bay, which is expected to be developed into a mixed project comprising residential homes, retail malls, offices and serviced residences with an estimated total GFA of 11m sq ft and GDV of S$3.2b.

Project to be executed in phases over 10-12 years according to market conditions
It was earlier announced that the JV will contribute RM1.05b (~S$404m) in equity with the reminder financed through debt and sales proceeds, and CAPL’s share of the equity is expected to be RM535.5m (~S$206m). The group has reiterated that this is a long term project that will be executed in phases over the next 10 to 12 years according to market conditions. We understand the group’s earlier plan was to sell and build ~900 residential units but, given the slow sales in Iskandar now, we believe it will be challenging to raise meaningful pre-sales proceeds over the nearer term to fund development costs, and the development plan is likely to be under review. That said, we have an overall neutral view on this acquisition; while near term headwinds will likely prevail, this acquisition will give CAPL a meaningful foothold in the Iskandar region over the long term and has fairly limited impact on the group’s balance sheet (<2% of the group’s equity). Maintain BUY with an unchanged fair value estimate of S$4.07 (25% discount to RNAV).

SATS Ltd

OCBC on 26 Jun 2015

SATS Ltd (SATS) recently announced that its 59.4%-owned Japanese subsidiary, TFK Corporation (TFK), won a multi-year inflight catering contract from Delta Air Lines (Delta), estimated to worth ~JPY30b or ~S$325m. Assuming the initial term is five years with an option to renew an additional three years, we estimate ~S$41m in annual contribution to SATS revenue. In our view, margins will continue to be pressurized on intense competition and contribution to bottom-line at group level is likely not material. While STB expects modest growth in number of visitors between 0-3% for 2015, we remain cautious as we note that Chinese visitors to Southeast Asia has shrunk YoY for 1Q15. Incorporating TFK’s contract and revising our initially conservative forecasts, we bump up FY16F/17F PATMI slightly by 3.7%/3.0%. We remain cautious as we opt to wait for stronger indications of air traffic growth. Consequently, our FV increases from S$3.11 to S$3.22 (still based on 16.5x FY16F EPS). Maintain HOLD on SATS.

Contract win likely not material on group level
SATS Ltd (SATS) recently announced that its 59.4%-owned Japanese subsidiary, TFK Corporation (TFK), won a multi-year inflight catering contract from Delta Air Lines (Delta), estimated to be worth ~JPY30b or ~S$325m, assuming that the contract gets renewed upon expiry of its initial term. Post transition to TFK, Delta will close down its own inflight kitchen, when catering services to Delta at two international airports in Tokyo commence by Oct 15. While SATS is tight-lipped over contract details, we assume the initial term is five years with an option to renew an additional three years, deriving ~S$41m in annual contribution to SATS revenue. In our view, margins will continue to be pressurized on intense competition, but the increase in scale should result in improved operating efficiency at TFK, though contribution to bottom-line at group level is likely not material.

Tourism outlook in Singapore to remain modest
SATS’ core businesses in food solutions and gateway services are directly affected by tourism growth in Singapore, which is the main driver for air traffic growth. For the first four months of 2015, arrivals by air declined by 5.2% YoY. However, we expect these statistics to improve as Singapore: 1) hosted the 28th SEA games over the month of Jun 15, and 2) is engaging in aggressive marketing for SG50 celebrations, which may drive up visitor arrivals. STB expects tourism numbers to grow modestly between 0% and 3% for 2015. However, according to a recent report by CAPA, the number of visitors coming to Southeast Asia ex-Thailand shrunk between 2013 and 2014, as well as between 1Q14 and 1Q15, as Chinese tourism preferences are shifting from Southeast Asia to Northeast Asia. Chinese visitors made up a substantial ~16% of Singapore’s total visitor arrivals in 2014.

Revision to our conservative forecasts; maintain HOLD
Incorporating TFK’s contract and revising our initially conservative forecasts, we bump up FY16F/17F PATMI slightly by 3.7%/3.0%. We remain cautious as we opt to wait for stronger indications of air traffic growth. Consequently, our FV increases to from S$3.11 to S$3.22 (still based on 16.5x FY16F EPS). Maintain HOLD on SATS.

Noble Group

OCBC on 25 Jun 2015

Noble Group (Noble) continues to buy back its own shares – the latest was a chunk of 14m shares at S$0.69445 each; it has bought back some 119.7m shares to date and has a mandate to buy back another 574.2m shares if it so decides to. Separately, Noble announced that it has appointed Mr Yu Xubo (Patrick) – President of COFCO Corporation – as a non-executive director of the company to replace Mr Li Rongrong. Also in the announcement, Mr Xie Ping – EVP of CIC – was quoted as saying “as a major shareholder of Noble Group, we will continue to support its business.” While the verbal confirmation is a positive boost, we suspect that the market will be looking for CIC to put its money where its mouth is and increase its stake in Noble. In light of the recent share buybacks, we believe that the share price will remain supported for now. As such, we bump up our fair value from S$0.61 to S$0.69, now based on 9x FY15F EPS (8x prev.). But as the medium-term outlook remains somewhat muted, we retain our HOLD rating on the stock.

Made more share buybacks 
Noble Group (Noble) has continued to buy back its own shares – the latest is another chunk of 14m shares at S$0.69445 each for a total of S$9.75m. To date, the company has bought back a total of 119.71m shares, or around 1.78% of its outstanding share base. Based on the company announcements, Noble bought back these shares between S$0.6692 and S$0.7138, or at a weighted average of S$0.6926/share. Note that Noble has a mandate to buy back no more than 693.95m shares; the latest purchase means that the company has used up 18% of that mandate.

CIC will continue to support Noble’s business
Separately, Noble announced that it has appointed Mr Yu Xubo (Patrick) – President of COFCO Corporation – as a non-executive director of the company; this as the replacement for Mr Li Rongrong whose term has expired. According to Noble, Patrick played a key role in the formation of the JV between COFCO and Noble Group via Noble Agri, and that the group will benefit from Patrick’s unique breath of business and industry knowledge. Also in the announcement, Mr Xie Ping – EVP of CIC – was quoted as saying “as a major shareholder of Noble Group, we will continue to support its business.”

Eyes will be on CIC’s next move
While the verbal confirmation is a positive boost, we suspect that the market will be looking for CIC to do more i.e. put its money where its mouth is and increase its stake in Noble. Recall that CIC had previously pared its stake from nearly 15% to ~9% by selling 300m shares at S$1.32 each on 30 Sep 2014 (it had paid S$2.11 for its stake in 2009, or S$1.37 after adjusting for the 6-for-11 bonus issue). 

Revising FV to S$0.69
In light of the recent share buybacks, we believe that the share price will remain supported for now. As such, we bump up our fair value from S$0.61 to S$0.69, now based on 9x FY15F EPS (versus 8x previously). But as the medium-term outlook remains somewhat muted, we retain our HOLD rating on the stock.

Sembcorp Industries

OCBC on 24 Jun 2015

Since our downgrade to Hold in early May, SCI’s stock price has corrected ~14% to settle near its 52-week low of S$3.87, likely due to 1) more downbeat guidance by management regarding the local power business, as well as 2) later-than-expected earnings contribution of the Indian plant (TPCIL). Poor sentiment on SembMarine’s stock probably also weighed on its parent’s stock as well. Though the group is currently facing headwinds, we remain sanguine about its prospects over the longer term, given its pipeline of projects in developing countries where demand for utilities is expected to grow. At ~9.4x forward P/E and 1.2x P/B, valuations are undemanding. As concerns on the stock have already been well-flagged by the market, and we now see a ~16% upside potential (includes 4.1% forecasted dividend yield) from our revised fair value estimate of S$4.40 (prev. S$4.72), we upgrade our rating to BUY.

Share price has corrected 18% from peak
Since our downgrade to Hold in early May, SCI’s stock price has corrected ~14% to settle near its 52-week low of S$3.87. This is also 18% from its recent peak. We believe that the main reasons for this weak share price performance was due to 1) more downbeat guidance by management regarding the local power business, as well as 2) later-than-expected earnings contribution of the Indian plant (TPCIL). Poor sentiment on SembMarine’s stock probably also weighed on its parent’s stock as well.

Not just the power business in Singapore
We remain concerned about the challenging operating environment of the local power business, given the capacity expansion in the industry, but we also note that this segment accounted for only a fifth of the Singapore utilities net profit in FY14, with the rest coming from the natural gas, water and solid waste treatment and management segments. In total, Singapore utilities accounted for about half of total utilities in FY14, and the rest is from overseas assets. We still expect steady growth from the overseas business.

Undemanding valuations; look beyond current headwinds
Though SCI is currently facing headwinds, we remain sanguine about longer term prospects, given the pipeline of projects in developing countries where utilities demand is expected to grow. We believe SCI’s proven track record in identifying, securing, financing and executing projects puts it in good stead for more to come. Currently, the stock is currently trading at ~9.4x forward P/E, (greater than 1 s.d. below its 5-year historical average) and 1.2x P/B, a historical low.

Upgrade to BUY; FV S$4.40
We lower our P/E for the utilities business from 11x to 10x due to the dimmer outlook of the domestic power segment which remains competitive, and we are also cognizant of lower vesting levels that would affect earnings in this segment. These concerns have, however, been well-flagged by the market, and with the recent price correction, we now see a ~16% upside potential (includes 4.1% forecasted dividend yield) from our revised fair value estimate of S$4.40 (prev. S$4.72), we upgrade our rating to BUY.

CSE Global Limited

OCBC on 19 June 2015

CSE Global Limited (CSE) recently disposed its 66% stake in Power Diesel (PD), for ~S$15.5m. We estimate that PD contributes annual revenue of about S$18-20m and annual PATMI of ~S$2m. Going forward, these contributions will cease following the completion of the disposal on 12 Jun. As at 31 Mar, the book value of PD is ~S$8.8m, while the net consideration from the sale after deducting all transaction costs and fee is ~S$11.0m. This results in a net gain of ~S$2.2m and will be recorded in 2Q15. Even without contributions from PD going forward, we do not expect any change in CSE’s earnings outlook for FY15 and FY16. In fact, post disposal, we think the increase in cash holdings gives CSE even greater financial ability to acquire companies to further grow its business. As we were conservatively forecasting for flat FY15 PATMI and a modest 5% growth for FY16, we opt to keep our forecasts unchanged. Supported by a decent FY15 dividend yield of 4.4%, maintain HOLD with the same FV estimate of S$0.62.

Net gain of ~S$2.2m arising from disposal of subsidiary
CSE Global Limited (CSE) recently disposed its 66% shareholding in a subsidiary, Power Diesel (PD), for ~S$15.5m. PD is mainly involved in the business of inspection, maintenance, repair and overhaul of diesel and marine engines/equipment on onboard vessels while CSE’s key focus is on system integration works on offshore platforms. We estimate that PD contributes annual revenue of about S$18-20m and annual PATMI of ~S$2m. Going forward, these contributions will cease following the completion of the disposal on 12 Jun. As at 31 Mar, the book value of PD is ~S$8.8m, while the net consideration from the sale after deducting all transaction costs and fee is ~S$11.0m. This results in a net gain of ~S$2.2m and will be recorded in 2Q15. However, note that the net gain at completion date (12 Jun) would be lower as CSE continues to account for profits from PD for the period up to the completion date.

No change in earnings outlook; stronger balance sheet
Even without contributions from PD going forward, we do not expect any change in CSE’s earnings outlook for FY15 and FY16. Management’s previous guidance of flat to 5% growth in FY15 PATMI remains unchanged. We believe management’s strategy is to look for and secure smaller projects amidst capital expenditure reduction of big projects by the big players is likely to help cushion the impact during this difficult period in the oil & gas (O&G) industry. A check with management also gives us the confidence that CSE is on track in terms of meeting its guidance. In fact, post disposal, we think the increase in cash holdings gives CSE even greater financial ability to acquire companies to further grow its business.

Keep forecasts unchanged; maintain HOLD
While we view this disposal positively as it results in deeper pockets for M&A activities, we prefer to remain cautious given the uncertain outlook of the O&G industry. As we were conservatively forecasting for flat FY15 PATMI and a modest 5% growth for FY16, we opt to keep our forecasts unchanged. Supported by a decent FY15 dividend yield of 4.4%, maintain HOLD with the same FV estimate of S$0.62.