Singapore Post

OCBC on 16 Oct 2015

Singapore Post (SingPost) announced that it is acquiring 96.3% of TradeGlobal Holdings, Inc from TradeGlobal Parent LLC, which is owned by the private equity firm, Bregal Sagemount for US$168.6m (~S$236m). TradeGlobal is a provider of integrated e-Commerce enablement solutions, including fulfillment, customer care, logistics, web development, software and marketing services for the fashion retail industry; it is currently profitable on the EBITDA level. This move will boost SingPost’s eCommerce reach and capabilities, but time will be needed to see how fast and successful the integration will be to enjoy the benefits of its expanded e-Commerce operations. We currently have a BUY rating with S$2.19 fair value estimate on SingPost.

Acquiring 96.3% of TradeGlobal for S$236m
Yesterday, Singapore Post (SingPost) announced that it is acquiring 96.3% of TradeGlobal Holdings, Inc from TradeGlobal Parent LLC, which is owned by the private equity firm, Bregal Sagemount for US$168.6m (~S$236m). This will be funded by cash; as at end 1QFY16, SingPost was in a net cash position of S$329m.

Acquisition target and the deal
TradeGlobal is a provider of integrated eCommerce enablement solutions, including fulfillment, customer care, logistics, web development, software and marketing services for the fashion retail industry. It is valued for its customer networks, technology and other intangibles – a significant amount of the consideration will go towards the acquisition of intangible assets, as SingPost’s NTA (as at 31 Mar 2015) would drop from S$1,164.8m to S$946.3m after the transaction, based on a proforma analysis. NTA/share would drop from S$0.54 to S$0.44. According to SingPost, TradeGlobal is profitable on an EBITDA level and is generating positive cash flows. Valuation of the deal was in line with industry, based on EBITDA.

Taking a “one world” approach in e-Commerce
SingPost expects its e-Commerce revenue to increase significantly post the transaction; it is currently about 28% of the group’s revenue. SingPost’s clients can expand their businesses into the US, and TradeGlobal’s clients will have access to the e-Commerce landscape in Asia Pacific. Clients can also leverage on integrated technology and fulfillment capabilities, creating a one-stop global solution. 

Time needed to integrate e-Commerce capabilities
Given the insufficient details on hand, we believe that any synergies from this deal will likely be longer term in nature although it will complement its existing operations in the e-commerce area, especially to widen its customer networks, technology and fulfillment capabilities. However, time will be needed to see how fast and successful the integration will be to enjoy the benefits of its expanded e-Commerce operations. We currently have a BUY rating with S$2.19 fair value estimate on SingPost.

Keppel DC REIT

OCBC on 16 Oct 2015

Keppel DC REIT (KDCREIT) reported its 3Q15 results which met our expectations but its DPU of 1.64 S cents was 2.5% above management’s IPO forecast. Its occupancy rate was lifted from 94.0% to 95.1%, attributed to a 4.8 ppt increase in occupancy at Citadel 100. However, it experienced a hiccup at S25, as one of its tenants failed to secure a project and thus gave up space at the property. In 3Q15, two renewal leases, two expansion leases and four new leases were signed, with positive rental reversions recorded. We continue to like KDCREIT for its long portfolio WALE (8.9 years) and proxy to the data centre industry, which we opine has robust growth potential. Management has also managed its risks well. Backed by an attractive FY15F distribution yield of 6.5%, we maintain our BUY rating and S$1.24 fair value estimate on the stock.

3Q15 results within our expectations
Keppel DC REIT (KDCREIT) reported its 3Q15 results which met our expectations but was slightly above management’s IPO forecast. Gross revenue came in at S$25.7m, which was 1.8% above its IPO prospectus forecast. This was underpinned by contribution from the newly acquired Intellicentre 2, higher-than-expected other income and stronger variable rental income mainly from its Singapore properties, but partially offset by lower rental income in Europe, Australia and Malaysia due to FX translation impact. DPU of 1.64 S cents was 2.5% above KDCREIT’s forecast. For YTD 2015 (period from 12 Dec 2014 to 30 Sep 2015), KDCREIT’s gross revenue of S$82.9m and DPU of 5.20 S cents came in 2.9% and 1.8% above its IPO projection. The latter formed 76.1% of our FY15 forecast.

Portfolio occupancy grew slightly
KDCREIT raised its occupancy rate from 94.0% to 95.1% in 3Q15, attributed to a 4.8 ppt increase in occupancy at Citadel 100 to 80.3%. However, the increase came largely from more work space being occupied, rather than data centre space. The latter commands much higher rental rates than the former. KDCREIT experienced a hiccup at S25, as one of its tenants failed to secure a project and thus gave up space at the property. Nevertheless, management updated us that it will find an optimal mix for the building by either marketing the area or offering it to existing tenants for their expansion plans. In 3Q15, two renewal leases, two expansion leases and four new leases were signed, with positive rental reversions recorded. 

Maintain BUY
We continue to like KDCREIT for its long portfolio WALE (8.9 years) and proxy to the data centre industry, which we opine has robust growth potential. Client enquiries remain healthy, while there are also inorganic growth opportunities in the market. Management has managed its risks well, fixing 100% of its interest rate exposure for long-term loans and hedging 100% of its forecasted foreign-sourced distribution up till 1H17. Backed by an attractive FY15F distribution yield of 6.5%, we maintain our BUY rating and S$1.24 fair value estimate on the stock.

Soilbuild Business Space REIT

OCBC on 15 Oct 2015

Soilbuild Business Space REIT (Soilbuild REIT) reported an in-line set of 3Q15 results, with gross revenue and DPU growing 22.4% and 5.1% YoY to S$20.7m and 1.625 S cents, respectively. This was largely fuelled by acquisitions. Its occupancy rate came down slightly from 99.8% to 98.7%, but positive rental reversions of 4.5% and 1.4% were secured for renewal leases and new leases, respectively. Singapore’s economic growth continued to soften in 3Q15, with the drag coming from the manufacturing sector, but we believe Soilbuild REIT has managed to stay resilient. Reiterate our BUY rating and S$0.93 fair value estimate on Soilbuild REIT. The stock offers an attractive FY15F distribution yield of 7.8%. Key risks to our projections include renewal risks from 8.5% of its NLA which is expiring for the remainder of the year.

3Q15 results within our expectations
Soilbuild Business Space REIT (Soilbuild REIT) reported an in-line set of 3Q15 results, with gross revenue and DPU growing 22.4% and 5.1% YoY to S$20.7m and 1.625 S cents, respectively. This was driven largely by contribution from three properties (KTL Offshore, Speedy-Tech and Technics) which were acquired between Oct 2014 and May 2015. NPI jumped 25.3% YoY to S$17.8m, resulting in a 2.0 ppt expansion in its NPI margin to 85.9%. We note that this was the fourth consecutive quarter in which Soilbuild REIT increased its NPI margin on a QoQ basis. For 9M15, gross revenue accelerated 16.7% to S$58.9m, while DPU increased 5.8% to 4.873 S cents. These constituted 73.9% and 75.9% of our FY15 forecasts, respectively.

Positive rental reversions
Soilbuild REIT’s occupancy rate came down slightly from 99.8% to 98.7%, but this had already been flagged out by management as a potential issue at the start of the year. Positive rental reversions of 4.5% (200,539 sqft of space) and 1.4% (56,533 sqft of space) were secured for renewal leases and new leases, respectively, in 3Q15. In terms of capital management, Soilbuild REIT has fixed 97.9% of its interest bearing borrowings (as at 30 Sep 2015) for 2.1 years. Its weighted average all-in cost of debt declined from 3.49% to 3.20%.

Maintain BUY
Based on advance estimates released yesterday, Singapore’s economy expanded by 1.4% YoY in 3Q15, but this was a moderation from the 2.0% growth achieved in 2Q15. The manufacturing sector remained sluggish, contracting by 6% YoY, with the drag coming largely from the electronics, biomedical manufacturing and transport engineering clusters. Despite this soft outlook, we believe Soilbuild REIT has managed to stay resilient, which we attribute to management’s proactive approach and asset quality. Reiterate our BUY rating and S$0.93 fair value estimate on Soilbuild REIT. The stock offers an attractive FY15F distribution yield of 7.8%. Key risks to our projections include renewal risks from 8.5% of its NLA which is expiring for the remainder of the year.

SPH

OCBC on 14 Sep 2015

SPH reported that its FY15 PATMI fell 20.4% to $S321.7m mostly due to lower fair value gains on investment properties and the absence of a S$52.9m divestment gain from the partial sale of 701Search to Telenor last year, which were partially offset by smaller losses from the group's share of results of associates/JVs in the current fiscal year. After squaring off one-time items, we judge these results to be marginally below expectations as FY15 operating profit comprises 88.3% of our full year forecast, with a steeper-than-anticipated dip in the media numbers being the key driver for the miss. We update our valuation model for softer assumptions for the media business and our fair value estimate dips to S$3.78 from S$3.85 previously. Maintain HOLD. A final dividend of 13 S-cents was recommended – 1 S-cent lower than last year’s.

FY15 earnings hit by lower one-time gains
Singapore Press Holdings (SPH) reported that its FY15 PATMI fell 20.4% to $S321.7m mostly due to lower fair value gains on investment properties and the absence of a S$52.9m divestment gain from the partial sale of 701Search to Telenor last year, which were partially offset by smaller losses from the group's share of results of associates/JVs in the current fiscal year. After squaring off one-time items, we judge these results to be marginally below expectations as FY15 operating profit comprises 88.3% of our full year forecast, with a steeper-than-anticipated dip in the media numbers being the key driver for the miss. In terms of the topline, FY15 revenues decreased 3.1% to S$1,177.1m due to lower contributions from the media business which dipped 6.3% (S$60.9m) to S$902.5m. This was partially offset by increased property income which increased 12.6% (S$25.8m). Also, due to considerable cost-side discipline, FY15 operating profit increased marginally by 1.3% (S$4.5m). A final dividend of 13 S-cents was recommended – 1 S-cent lower than last year’s.

Unabated pressure on advertising revenues
The advertising numbers continue to look uninspiring in 4QFY15, with total newspaper ad revenues falling 8.4% YoY. (Display and classifieds both fell 7.1% and 11.0%, respectively.) We understand from the group that they have been focused on managing the cost base and as a result, key cost-side items, including material and production costs, staff costs and other operating expenses all showed credible YoY declines. In particular, the cost of newsprint fell 16.1% while other materials, production and distribution costs fell 8.9%. From the real estate segment, FY15 net property income increased 17.3% with a maiden contribution from Seletar Mall; both the Paragon and The Clementi Mall also recorded higher rental income. We update our valuation model for softer assumptions for the media business and our fair value estimate dips to S$3.78 from S$3.85 previously. Maintain HOLD.

First REIT

OCBC on 14 Sep 2015

First REIT (FREIT) reported a steady set of 3Q15 results which met our expectations. Gross revenue and DPU grew 6.1% and 3.0% YoY to S$25.3m and 2.08 S cents, respectively. Siloam International Hospitals announced earlier this month that it had clinched the 2015 Frost & Sullivan Indonesia Hospital of the Year award. This was the fourth year it had won the accolade. Looking ahead, we believe FREIT has a robust pipeline of acquisition opportunities from its sponsor, although it has yet to announce any acquisitions year-to-date (YTD). We retain our forecasts, HOLD rating and S$1.36 fair value estimate on FREIT given this set of in-line results. Valuations do not appear compelling at this juncture, in our opinion, while we are also slightly concerned with the challenges facing Indonesia’s Joko Widodo and Singapore’s negative Singapore Consumer Price Index YTD.

3Q15 results came in within our expectations
First REIT (FREIT) reported a steady set of 3Q15 results which met our expectations. Gross revenue grew 6.1% YoY to S$25.3m, underpinned by contribution from the acquisition of Siloam Sriwijaya in Dec 2014 and organic growth from its other assets. NPI rose 6.8% to S$25.0m, while DPU inched up 3.0% to 2.08 S cents. For 9M15, FREIT’s gross revenue and DPU increased 8.2% and 3.3% to S$75.0m and 6.21 S cents, and this made up 74.7% and 74.9% of our FY15 forecasts, respectively. 

Siloam Hospitals continues to deliver operational excellence
Siloam International Hospitals, the operator of FREIT’s Indonesian hospitals and a subsidiary of FREIT’s sponsor Lippo Karawaci, announced earlier this month that it had clinched the 2015 Frost & Sullivan Indonesia Hospital of the Year award. This was the fourth year it had won the accolade, following successes in 2010, 2012 and 2014. According to Frost & Sullivan, Siloam International Hospitals operates the largest private hospital network in Indonesia, and it is equipped with the latest medical technologies and excellent quality care for its patients. Looking ahead, we believe FREIT has a robust pipeline of acquisition opportunities from its sponsor, although it has yet to announce any acquisitions year-to-date (YTD). 

Maintain HOLD
We retain our forecasts, HOLD rating and S$1.36 fair value estimate on FREIT given this set of in-line results. Valuations do not appear compelling at this juncture, in our opinion, with the stock trading at a forecasted FY15F and FY16F distribution yield of 6.2%. This is more than one standard deviation below its 5-year average forward yield of 7.3%. On a P/B basis, FREIT’s FY15F P/B ratio of 1.33x comes in marginally higher than its 5-year forward mean of 1.31x. We are also slightly concerned with the challenges facing Indonesia’s Joko Widodo; while the negative Singapore Consumer Price Index YTD does not augur well for FREIT’s base rental growth for its Indonesia assets next year. The silver lining is the downside revenue protection inherent in the lease structure.

SPH Reit

OCBC on 13 Sep 2015

SPH REIT reported its 4QFY15 results which came in within our expectations. DPU was flat YoY at 1.39 S cents on the back of a mild 0.6% decline in gross revenue to S$50.8m, although the former was boosted by a distribution from income retained earlier in the financial year. Both Paragon and The Clementi Mall delivered positive gross revenue and NPI growth in FY15. Overall portfolio committed occupancy and rental reversion were solid at 100% and 8.6%, respectively. Rental reversions at Paragon stayed positive at 9.1% for FY15, but continued to moderate. The Clementi Mall’s rental reversion came in at -5.6% for the full-year, but was a big improvement from the -11.4% registered for 9MFY15, implying a robust performance in 4QFY15. We fine-tune our assumptions but maintain our HOLD rating and S$0.99 fair value estimate on SPH REIT as we see limited potential total returns ahead.

4QFY15 results met our expectations
SPH REIT reported its 4QFY15 results which came in within our expectations. DPU was flat YoY at 1.39 S cents on the back of a mild 0.6% decline in gross revenue to S$50.8m, although the former was boosted by a distribution of S$1.6m from its taxable income available for distribution which was retained in 9MFY15. For FY15, SPH REIT’s revenue came in at S$205.1m, which was 1.4% higher than FY14 (comparative period from 1 Sep 2013 to 31 Aug 2014); while DPU of 5.47 S cents represented an increase of 0.7%. These constituted 99.6% and 101.6% of our full-year projections, respectively.

Portfolio rental reversion of 8.6%; 100% committed occupancy
Both Paragon and The Clementi Mall delivered positive gross revenue and NPI growth in FY15. Overall portfolio committed occupancy and rental reversion were solid at 100% and 8.6%, respectively. Rental reversions at Paragon stayed positive at 9.1% for FY15, but continued to moderate (9MFY15: 9.8%, 1HFY15: 11.6%, 1QFY15: 12.5%), given the challenging retail scene. The Clementi Mall’s rental reversion came in at -5.6% for the full-year, but was a big improvement from the -11.4% registered for 9MFY15, implying a robust performance in 4QFY15. In terms of shopper traffic, Paragon and The Clementi Mall achieved positive growth of 2.0% and 4.7% to 18.8m and 30.8m, respectively, in FY15. Tenant sales for The Clementi Mall rose 3.6% to S$242m, but were down 3.2% to S$657m for Paragon, primarily due to fitting-out works as part of its tenancy revitalisation program. 

Keeping our HOLD rating
SPH REIT’s gearing remained healthy at 25.7%, which we believe is the lowest within the S-REITs universe. 84.7% of its S$850m debt facility is on a fixed rate basis, thus mitigating its risk to interest rate fluctuations. We fine-tune our assumptions but maintain our HOLD rating and S$0.99 fair value estimate on SPH REIT as we see limited potential total returns ahead. The stock is trading at FY16F P/B ratio of 1.02x and distribution yield of 5.7%.

Tat Hong Holdings

OCBC on 12 Oct 2015

With regards to the proposed listing of the Tower Crane Rental business in China on the Taiwan Stock Exchange, the latest update by Tat Hong was that the proposed listing is not considered a chain listing by SGX-ST. We note that this is still in preliminary stages and would typically take a few months to complete. From our last report, we continue to see construction equipment players experiencing a slowdown in China, as Kobe Steel had recently cut its earnings forecast on lower excavator sales in China for 2Q. Nonetheless, new opportunities remain in China, and management expects its Tower Crane Rental business to grow steadily in FY16. At this juncture we have not factored in any potential gains from the spin-off, while we continue to remain cautious of the group’s performance amid weakness in ASEAN and Australia. Maintain HOLD, with fair value estimate of S$0.57.

Spin-off of China business going through regulatory process
With regards to the proposed listing of the Tower Crane Rental business in China on the Taiwan Stock Exchange, the latest update by Tat Hong was that the proposed listing is not considered a chain listing by SGX-ST. We note that this is still in preliminary stages and would typically take a few months to complete. The intention is to spin-off the said business via a listing of shares in Tat Hong Equipment Service Co (THES), which is a 92.7%-owned subsidiary of Tat Hong Equipment (China) Pte Ltd in which the company has 88.4% interest with the remaining 11.6% interest owned by Yongmao Holdings Limited. Thereafter, the group’s holding in the business is expected to reduce by about 20% or more. 

TWSE has attracted eight foreign companies for listing so far 
Including THES, about eight foreign companies have applied for IPO with the Taiwan Stock Exchange (TWSE) this year. The TWSE has been reportedly striving to build ties with a few other markets including Singapore and Japan, coupled with plans to adopt measures to enhance their international competitiveness. According to management, the proposed listing on TWSE would provide another avenue of funding for the capital-intensive Tower Crane Rental business, and allow the group to focus on growing its other businesses (Crane Rental Division, Equipment Rental Division, and Distribution Division), as well as unlock shareholder value.

Construction equipment players experience slowdown in China
The owner of Kobelco Cranes, Kobe Steel, had recently cut its earnings forecast on lower excavator sales in China in 2Q. Nonetheless, new joint ventures formed such as the JV between Sarens Group and Sinotrans Heavy-lift company is testament to the opportunities that China continue to offer. Management also expects the Tower Crane Rental business in China to grow steadily in FY16.

Weak outlook remains unchanged
At this juncture we have not factored in any potential gains from the spin-off, while we continue to remain cautious of the group’s performance amid economic and market weakness in ASEAN and Australia. Maintain HOLD, with fair value estimate of S$0.57.

Ascendas REIT

OCBC on 9 Oct 2015

Ascendas REIT (A-REIT) recently announced its proposal to acquire a portfolio of 26 logistics properties in Australia for a purchase consideration of A$1,013m. This would be financed with Australia onshore loans and perpetual securities. With an expected first year pre-transaction cost NPI yield of 6.4% (or 6.0% yield post-transaction expenses), we opine that the acquisition does not come cheap. However, we see some positives from this deal, as the portfolio’s long WALE (6.1 years) would add stability to A-REIT, while also diversifying its income streams and tenant base. A-REIT would also become the eighth largest industrial landlord in Australia. Taking into account this development, we raise our fair value estimate from S$2.49 to S$2.58. Given an expected potential total return of 17%, we are upgrading A-REIT from ‘Hold’ to BUY.

Recent proposed acquisition of Australian logistics portfolio
Ascendas REIT (A-REIT) recently announced its proposal to acquire a portfolio of 26 logistics properties in Australia for a purchase consideration of A$1,013m (~S$1,013m). Out of these 26 properties, nine are located in Melbourne, the largest industrial property market in Australia in terms of land stock, another nine are in Sydney, seven in Brisbane and one in Perth. All the properties are sitting on freehold land, and total GFA amounts to 630,946 sqm, implying a purchase price of S$1,606 psm GFA. This would be financed with Australia onshore loans and perpetual securities. Management recently priced S$300m of subordinated perpetual securities at a fixed rate of 4.75%. We estimate A-REIT’s gearing to reach 37.6% post acquisition completion.

To become the eighth largest industrial landlord in Australia
With an expected first year pre-transaction cost NPI yield of 6.4% (or 6.0% yield post-transaction expenses), we opine that the acquisition does not come cheap. However, we see some positives from this deal, as the portfolio’s long WALE (6.1 years) would add stability to A-REIT, while also diversifying its income streams and tenant base. A-REIT will also adopt the appropriate risk management strategies. The acquisition is expected to propel A-REIT to become the eighth largest industrial landlord in Australia, giving it the scale to benefit from the long-term growth prospects of the e-commerce industry.

Upgrade to BUY with higher S$2.58 FV
Taking into account this development, we raise our FY16 revenue forecast by 3.1% and DPU estimate by 0.9%. Our revenue and DPU projections for FY17 are increased by a more significant 9.7% and 2.7%, respectively, when a full-year contribution from the portfolio kicks in. Consequently, our DDM-derived fair value estimate is bumped up from S$2.49 to S$2.58. At current price level, A-REIT is trading at 6.6% FY16F distribution yield. Although this is in-line with its 5-year average forward yield, FY17F distribution yield of 7.0% appears attractive, in our view. On a P/B basis, A-REIT’s FY16F P/B ratio of 1.05x comes in favourably at ~1.5 standard deviations below its 5-year forward mean of 1.19x. Given an expected potential total return of 17%, we are upgrading A-REIT from ‘Hold’ to BUY.

Starburst Holdings Limited

OCBC on 8 Oct 2015

Starburst Holdings Limited (Starburst) is an engineering solutions provider of firearms training facilities, and has established its track record in Southeast Asia since 1999 and more recently, in the Middle East. Typically, established track records are needed before these government bodies engage any contractor for defence-related works. In this case, Starburst has accumulated more than 15 years of experience in this niche industry. With the rising threat of terrorism globally, though more evidently in the Middle East, Starburst is expected to benefit from the anticipated increase in defence spending over the next few years. Post-listing on SGX in 2014, it has been able to secure more contracts from governments in the Middle East and we expect this trend to sustain with more and bigger projects. With only a few key players in this niche industry, we think Starburst is certainly undervalued at the current price level. We initiate with a conviction BUY and 12m target FV of S$0.39, implying a 10x FY16F PER (35% discount to peers’ average).

More than 15 years of experience under its belt
Starburst Holdings Limited (Starburst) is an engineering solution provider of firearms training facilities, and has established its track record in Southeast Asia since 1999 and more recently, in the Middle East, post-listing on the SGX. With 61% of FY14 revenue generated from Southeast Asia, we believe its exposure includes that of Singapore, Malaysia, Indonesia and Brunei. Typically, established track records are needed before these government bodies engage any contractor for defence-related works. In this case, Starburst has accumulated more than 15 years of experience in this niche industry and currently engages in three business segments: 1) firearm shooting ranges, 2) tactical training mock-ups, and 3) maintenance services.

Threat of terrorism driving increase in defence spending
The world today is facing increasing threat of terrorism, especially evident in the Middle East, which stems from the rise of the Islamic State or ISIS. Terrorism has led to violent clashes that cost lives of many innocent civilians, as parts of Iraq and Syria are taken-over by the ISIS. While these threats are more prevalent in Iran, Syria and Turkey, we note the expanding presence of ISIS as smaller groups operate out of other Middle-Eastern countries. Closer to home, there are reports of expanding presence of ISIS in Southeast Asian countries such as Singapore, Malaysia and Indonesia, with more cases of radicalization through online videos. Accordingly, data from BMI Research indicates that governments in both the Middle-Eastern and Southeast-Asian regions are expected to step up defence spending over the next few years to better train and equip their military forces.

Initiate with conviction BUY; TP S$0.39
In view of the strong increase in defence spending, which we believe will drive Starburst’s growth ahead, we initiate with a conviction BUY at S$0.39 FV. Our FV implies a 10x blended FY15/16F PER, which is at a 35% discount to peers’ average given its small company size relative to peers and much lower market liquidity.

Roxy-Pacific Holdings

OCBC on 7 Oct 2015

Roxy recently announced that it will acquire a freehold residential site at 26 Sea Avenue for S$21.5m. The land purchase price works out to be S$789 psf per plot ratio and we estimate a breakeven price at between S$1.2k – S$1.4k psf. Despite residential prices being mired in a downtrend, these breakeven levels are well below average transaction prices at comparable residential projects, such as Marine Blue, Coralis and Parc Seabreeze, which are trading at between S$1.5k and S$1.8k psf. In our view, this development, if brought to launch expediently, would likely be profitable and we like the risk-reward here. We note that ROXY’s share price has been fairly resilient over the last twelve months, but believe limited liquidity could pose a challenge for investors. We update our valuation model for softer residential prices and our fair value estimate dips to S$0.52 (versus S$0.55 previously). Maintain HOLD.

Marine Parade acquisition makes sense
Roxy recently announced that it will acquire a freehold residential site at 26 Sea Avenue for S$21.5m. The site has a total land area of 19.4k sq ft (plot ratio of 1.4) and is within walking distance to Katong 112 and a short drive to the ECP expressway. We note that the company knows this vicinity well, given that it has long held investment assets here (Grand Mercure Roxy Hotel and 47 units in Roxy Square) and has previously developed several projects close by as well. The land purchase price works out to be S$789 psf per plot ratio and we estimate a breakeven price between S$1.2k – S$1.4k psf. Despite residential prices being mired in a downtrend, these breakeven levels are well below average transaction prices at comparable residential projects, such as Marine Blue, Coralis and Parc Seabreeze, which are trading at between S$1.5k and S$1.8k psf. In our view, this development, if brought to launch expediently, would likely be profitable and we like the risk-reward here. In addition, the size of this project is relatively small for Roxy (adjusted net asset value of S$916.7m as at end Jun 15), which points to a sensible level of incremental risk exposure.

Lower FV estimate to S$0.52; limited liquidity pose challenge to investors
According to flash estimates, the URA private residential property index declined 1.3% in 3Q15 (versus a 0.9% decline in 2Q15). This will be the eighth consecutive quarter of falling prices since 4Q13, with the index down approximately 8.0% from the peak. As economic uncertainties and a physical over-supply situation in the domestic housing market persist, we continue to forecast for housing prices to dip 5% to 15% over FY15-16. We note that ROXY’s share price has been fairly resilient over the last twelve months, but believe limited liquidity could pose a challenge for investors. We update our valuation model for softer residential prices and our fair value estimate dips to S$0.52 (versus S$0.55 previously). Maintain HOLD.

SATS

OCBC on 22 Sep 2015

Changi Airport’s operating statistics showed sluggish performance for the Jan-Jul period, as the total number of passenger, air freight and aircraft movements came in flat YoY at 0.3%, -0.5% and -0.3%, respectively. That said, Singapore Tourism Board stated last Friday that it continues to expect 0.0% to 3.0% growth in visitor arrivals for CY15. SATS Ltd’s (SATS) growth outlook is positively correlated to the performance and outlook of Singapore’s Changi Airport because SATS generates ~82% (FY15) of its total revenue locally. However, we believe SATS will continue its operational improvements driven by management efforts to increase productivity. SATS’ increasing market share in Singapore’s airfreight business also helps, especially for the higher-margin cargos. For these reasons, we believe SATS is fairly valued at the current price levels, and supported by forward dividend yield of 3.9%, maintain HOLD with unchanged FV of S$3.78.

Expects flat to moderate growth at Changi Airport
According to a recent report by Airports Council International (ACI), the number of passengers that used airports in the Asia-Pacific region in 2014 grew 7.1%, but Changi Airport only registered a weak 0.7% growth as a result of overcapacity in Southeast Asia region. Coming into CY15, Changi Airport’s operating statistics continued to show sluggish performance for the Jan-Jul period, as the total number of passenger, air freight and aircraft movements came in flat YoY at 0.3%, -0.5% and -0.3%, respectively. That said, Singapore Tourism Board stated last Friday that it continues to expect 0.0% to 3.0% growth in visitor arrivals for CY15. SATS Ltd’s (SATS) growth outlook is positively correlated to the performance and outlook of Singapore’s Changi Airport because SATS generates ~82% (FY15) of its total revenue locally. Its core business segments include Food Solutions (FS), which provides inflight meals, and Gateway Services (GS), which provides services such as baggage handling, depend on the number of passenger movements, airfreight movements as well as number of aircraft movements at Changi Airport.

Expects steady operational improvements
While we do not expect exciting revenue growth in the near-term, we believe SATS will continue its operational improvements driven by management efforts to increase productivity, investing in automation to allow for sustainable reduction in staff costs, which also leads to increase in operating leverage. Even though overall airfreight industry growth is still relatively muted, SATS has been recording an increase in its market share in cargos which commands higher margins (i.e. cold chain facility). Another area that helps SATS in its top line is the contribution from its Japanese subsidiary, TFK, which is expected to increase with the contract win to support all of Delta’s flight operations in Tokyo. 

Fairly valued; maintain HOLD
On these reasons, we believe SATS is fairly valued at the current price levels, and supported by forward dividend yield of 3.9%, maintain HOLD with unchanged FV of S$3.78.

ST Engineering

OCBC on 6 Oct 2015

Singapore Technologies Engineering’s (STE) share price fell some 13% after posting its 2Q15 results on 14 Aug 2015 to hit a 52-week low of S$2.70 on 25 Aug 2015. We believe that the fall was sparked by the general market sell-off (the STI fell 7.3% over the same period) as well as rising interest rate concerns. Although STE’s share price has since recovered somewhat to around S$3.00, we believe that valuations around current levels are looking more interesting and less demanding. We upgrade our call from Hold to BUY with an unchanged S$3.33 fair value (still pegged at 19x blended FY15/FY16F EPS), also supported by 5% dividend yield.

13% tumble after 2Q15 results
Singapore Technologies Engineering’s (STE) share price tumbled 13% after posting its 2Q15 results on 14 Aug 2015 to hit a 52-week low of S$2.70 on 25 Aug 2015, despite its results being within our expectations. Instead, we believe the fall was sparked by the general market sell-off (the STI fell 7.3% over the same period) as well as rising interest rate concerns; this was not surprising given that many view STE as a defensive yield play. 

Valuations are less demanding
Although STE’s share price has since recovered somewhat to around S$3.00, we believe that valuations around current levels are looking more interesting and less demanding. Management appears to think so too - it has been actively buying back its own shares since 19 Jun. To date (1 Sep), it has accumulated around 8.75m shares at an average price of S$3.00 by our estimate; this making up for about 14% of the 62.19m shares it can buy back under the share repurchase mandate. 

Outlook still modestly upbeat
Although 1H15 numbers were slightly weaker than the street’s estimates, STE has guided for a HoH improvement in both revenue and PBT for 2H15, such that it still expects revenue and PBT to be comparable to FY14. This is not surprising given its current order book of S$12.4b (as of end Jun), of which it expects to deliver about S$2.3b in the remaining months of 2015. 

CEO-designate to take over in a year’s time
Separately, STE recently announced that President and CEO Tan Pheng Hock will be retiring in about a year’s time and his position will be taken over by CEO-Designate Vincent Chong. We do not see any leadership disruption as Mr Tan will be working closely with Mr Chong to ensure a smooth leadership transition. 

Upgrade to BUY with unchanged S$3.33 fair value
In view of the recent correction as well as the sharp dip in the 10-year bond yields, we feel that value is emerging for STE; hence we upgrade our call from Hold to BUY with an unchanged S$3.33 fair value (still pegged at 19x blended FY15/FY16F EPS), also supported by a 5% dividend yield.

Sheng Siong Group

OCBC on 5 Oct 2015

Managing margins has always been a challenge for the grocery retailing industry. Food retailers in the U.S. have been known to squeeze their suppliers by charging them additional fees for the use of distribution centres and the like. This could inspire grocery retailers in Asia to go to similar extents to increase their margins but they may face challenges in leveraging against suppliers. We like that in Singapore, grocery players like Sheng Siong Group continue to engage in productivity efforts. Also on the e-commerce front, we understand that the major grocery players here still have room for improvement in their e-commerce technology platform as well as order fulfilment rates. Nevertheless, SSG’s management has been strong in their execution, and given their longer-term growth plans in China and the e-commerce space, as well as productivity efforts, we think they will be able to stay competitive for the long run. Maintain BUY, with fair value estimate of S$0.95.

Industry players remain focused on productivity efforts 
Managing margins has always been a challenge for the grocery retailing industry. Earlier this year, an article by Bloomberg News revealed that Walmart was squeezing their suppliers by charging them additional fees for the use of distribution centres, warehouses and the like, but vendors were recently reported to be refusing these charges. While these practices are not new in the U.S., this could inspire grocery retailers in Asia to go to similar extents to increase their margins but they may face challenges in leveraging against suppliers. In Singapore, we like that the grocery players such as Sheng Siong Group (SSG) are engaged in productivity initiatives such as enhancing their warehousing systems or retail formats, and these are supported by the government as well. The second Retail Productivity Plan was launched last month, whereby retailers have been encouraged to adopt manpower-saving technologies such as automated and “cashier-less” stores, as well as invest in upgrading operational capabilities in areas like inventory management. 

Growing importance of e-commerce in driving sales growth
The above-mentioned plan also highlighted e-commerce as a key driver for organic revenue growth. The grocery retailing industry in particular continues to evolve with the e-commerce space and technology advancement in logistics. While the major grocery players have their own online platform, we understand that they are generally trailing behind for their technology platform as well as order fulfilment rates, in comparison to RedMart. SSG’s management is cautiously monitoring their e-commerce performance by controlling their distribution reach to selected neighbourhoods for now, while working towards the desired scale to be cost effective.

Staying competitive in the long term
In addition, with SSG’s China project in mind, we believe these positive longer-term developments coupled with strong management execution will enable SSG to remain a relevant competitor in the industry. Maintain BUY, with fair value estimate of S$0.95. Current price levels offer an expected dividend yield of 4.0% and a total return of ~19%.

Citic Envirotech Ltd

OCBC on 2 Oct 2015

Citic Envirotech Ltd (CEL) saw its share price tumbling as much as 26%, from an intraday high of S$1.835 on 14 Jul 15 to an intraday low of S$1.355 on 30 Sep 15; this likely due to the recent tumble in HK-listed water treatment companies like Beijing Enterprise Water, which also saw its P/E fall from a peak of 35x to ~20x currently. But with orders starting to flow in once again, we believe that the valuations for the water industry should start to recover. Hence we maintain HOLD on the stock, albeit with a lower S$1.40 fair value (now based on 23x versus 28x FY16F EPS previously).

26% tumble since mid-Jul 2015
Citic Envirotech Ltd (CEL) saw its share price tumbling as much as 26%, from an intraday high of S$1.835 on 14 Jul 15 to an intraday low of S$1.355 on 30 Sep 15; this despite putting out a relatively decent set of 2Q15 results in Aug. We think that the main reason for the sell-down is probably due to the recent tumble in HK-listed water treatment companies like Beijing Enterprise Water, which also saw its P/E fall from a peak of 35x to ~20x currently (Refer to Exhibit 1).

Limited impact from new 17% VAT from 1 Jul 2015
We believe another reason behind the recent tumble could be due to news that water treatment companies in China would need to pay a 17% VAT from 1 Jul 2015 onwards, which will impact both EPC and treatment income. However, management believes that the impact is likely minimal, given that there is now a system of rebates in place to offset the VAT. For municipal projects, CEL says that the effective tax is less than 5% on tariffs after rebates; CEL adds that there is no impact on industrial projects as the VAT is directly passed on to the end users. 

Orders are flowing in again
In any case, management remains upbeat about its prospects in China, now that orders are starting to flow again; this after drying up drastically in the wake of the anti-graft move. In Aug, CEL announced three contract wins worth a total of RMB263m, which it intends to finance using its usual 30/70 mix of internal funds and bank financing. We further understand that CEL has recently tendered for several projects and the results of these tenders would be announced sometime this month. In addition, CEL is upbeat about membrane sales, citing the growing demand for membrane-based water treatment solutions in China. 

Lower S$1.40 fair value
Nevertheless, to account for the lower valuation accorded to the water industry, we reduce our peg from 28x to 23x, which in turn lowers our fair value from S$1.71 to S$1.40, still based on FY16F EPS. Maintain HOLD.

Ezra Holdings

OCBC on 1 Oct 2015

There was some interest in the market when it was revealed on Monday that Norwegian-based DNB Bank had acquired 207m shares in Ezra at S$0.12/share, such that it now holds a 7.04% stake in Ezra. It was later revealed that this was actually part of a forward agreement executed by DNB and a unit of Akastor AS, and we do not dismiss the possibility of it being a form of share pledge agreement for financing. In Ezra’s latest binding share sale and subscription agreement with Chiyoda, it also appears that there are still plans for a sale and leaseback of the Lewek Constellation, on terms and conditions acceptable to both parties. Looking ahead, given the dim industry outlook and that there a few positive catalysts in sight, we maintain our HOLD rating and S$0.16 fair value estimate on the stock.

Akastor’s subsidiary and DNB enter into forward agreement
There was some interest in the market when it was revealed on Monday that Norwegian-based DNB Bank had acquired 207m shares in Ezra via an off-market deal for S$24.84m on 25 Sep 2015, translating to a price of S$0.12/share. DNB originally did not have any shares in Ezra, but now holds a 7.04% stake, becoming the next largest shareholder after Mr. Lionel Lee, Ezra’s CEO. On Tuesday, it was revealed that DNB and Frontica Global Employment (a unit of Akastor AS) had executed a forward agreement, giving Frontica the right to buy 207m Ezra shares at a forward price on a specified settlement date. Having scarce details of the agreement, we do not dismiss the possibility that Frontica actually has the obligation (rather than right) to buy the shares in the future, should this be a form of share pledge agreement for financing. Recall that Ezra had acquired Aker Marine Contractors from Aker Solutions in 2011, following which Aker Solutions had a stake in Ezra due to a cash-stock-bond consideration. Last year, Aker Solutions split into two companies- a “new Aker Solutions” and “Akastor”. 

Still exploring sale/leaseback of Lewek Constellation 
It was also recently announced that Ezra has entered into a binding share sale and subscription agreement with Chiyoda after the earlier binding MOU in relation to the subsea business. In the agreement, it appears that there are still plans for a sale and leaseback of the Lewek Constellation, on terms and conditions acceptable to both parties. The vessel is now mobilized to lay the pipeline and umbilicals on the Noble Energy-operated Gunflint development project. 

Maintain HOLD 
After rising about 15% since the announcement of the proposed sale of a stake in the subsea business to Chiyoda, Ezra’s share price has trended slightly downwards since its recent peak of S$0.132. Given the dim industry outlook and that there a few positive catalysts in sight, we maintain our HOLD rating and S$0.16 fair value estimate on the stock.

SMRT

OCBC on 30 Sep 2015

A major market concern over SMRT is now finally out of the way. LTA announced last week that a financial penalty of S$5.4m will be imposed on SMRT for the 7 Jul system-wide disruption on North-South and East-West Lines (NSEWL). After thorough investigations, LTA concluded that the disruption could have been prevented if not for SMRT’s maintenance lapses. Coupled with the fine, we believe SMRT has learned its lesson and expects it to ramp up maintenance processes to prevent future lapses. Also, with a common interest of ensuring minimal rail services disruption going forward, rail reform will free up SMRT’s free cash flow by removing SMRT’s capex obligation and allows it to focus on ramping up maintenance processes. In our view, with Singapore’s GE15 over and the new transport minister appointed, we do not rule out the possibility that the rail reform could potentially be accelerated. Keeping our forecasts unchanged, we reiterate BUY with FV of S$1.45.

LTA to fine SMRT S$5.4m for train breakdown on 7 July
A major market concern over SMRT is now finally out of the way. LTA announced last week that a financial penalty of S$5.4m will be imposed on SMRT for the system-wide disruption that affected more than 400k commuters on North-South and East-West Lines (NSEWL) on 7 Jul 15. After thorough investigations, LTA concluded that the 7 Jul disruption could have been prevented by SMRT if it had rectified immediately the water seepage detected in mid-Jun, since the water leakage dripping onto trackside equipment was the root cause of the breakdown. As a result of SMRT’s maintenance lapses, LTA found SMRT fully responsible for this serious incident. While the market had been concerned that LTA may hit SMRT with the maximum fine at 10% of its FY15 revenue (S$64m), we highlighted previously (15 Jul) that a lower penalty is more likely and went on to incorporate a potential fine amount closer to S$20m for FY16. Coupled with the fine, we believe SMRT has learned its lesson and expects it to ramp up maintenance processes to prevent future lapses.

Rail reform may potentially come sooner than expected
Again, we highlight that both LTA and SMRT have a common interest of ensuring minimal rail services disruption going forward. Hence, it makes logical sense for LTA push for the rail reform as it frees up SMRT’s free cash flow by removing SMRT’s capex obligation to buy new trains to meet ridership growth. In addition to improved finances, it rail reform also allows SMRT to focus on getting its preventive maintenance processes on track to prevent future occurrence of massive disruption. In our view, with Singapore’s General Election 2015 (GE15) over and the new transport minister appointed, we do not rule out the possibility that the rail reform could potentially be accelerated. However, note that we have yet to factor in the impact of the rail reform.

Forecasts unchanged; reiterate BUY
We believe our conservative assumptions (i.e. potential fine and higher repair & maintenance expenses) last updated on 27 Aug is more than adequate for now. Hence, we opt to keep our forecasts unchanged and reiterate BUY with FV of S$1.45.

OSIM International

OCBC on 29 Sep 2015

As previously guided, we have seen more marketing initiatives from OSIM International Ltd (OSIM) that might likely help to improve sales traction, particularly for their flagship massage chair, uMagic. The company continued with its strategy of using celebrity endorsements for uMagic, and we note that more A&P was done for its smaller products uHip and uAlpine as well. On a macro level, retail scenes and macro environment for its core markets such as China and Singapore remain soft, with the latter seeing a slightly weaker consumer confidence level. Separately, OSIM’s CEO Mr Ron Sim has been purchasing shares, while the company has resumed its share buybacks from 17 Sep onwards with the most recent done yesterday evening. Note that the stock has been trading ex-dividend from 28 Sep, with DPS of 2 S-cents declared. Maintain HOLD, with fair value estimate of S$1.52.

Sales traction for flagship chair may improve 
OSIM International Ltd (OSIM) had previously mentioned that we would see more marketing initiatives for their new flagship massage chair, uMagic in the second half of this year. The company has recently revealed its brand ambassadors to be Singapore’s celebrity couple Fann Wong and Christopher Lee. More A&P was done for its smaller massage product, uHip for the local market as well. We note that OSIM also took good advantage of the current haze situation to promote its air purifier uAlpine (worth S$699), which has been featured under the National Environmental Agency’s list of portable air cleaners and suppliers. Such A&P initiatives may likely improve sales traction, particularly for their flagship chair in 4Q. 

But increased concerns on a macro level
Soft retail scenes and macro environment remain in the group’s other core markets such as China, and latest data on Singapore suggests a similar picture. OCBC Treasury Research & Strategy suggests that the SG50 Jubilee celebrations in August may not have helped much to boost domestic consumption, and they see an increased risk of a technical recession in 3Q15 for Singapore following a disappointing NODX performance. Mirroring the concerns on the local economy is the slightly weaker consumer confidence level in September according to the ANZ-Roy Morgan Singapore Consumer Confidence Index.

Engaged in share buybacks again
The company had continued its share buybacks from 17 Sep onwards with the most recent done yesterday evening. Shares were acquired within a price range of S$1.50 to S$1.64/share. Amid the equity market rout, OSIM's CEO Mr Ron Sim has purchased shares at about S$1.50/share or lower since the company's release of 2Q15 results in August. Note that the stock has been trading ex-dividend from 28 Sep, with DPS of 2 S-cents declared. Maintain HOLD, with fair value estimate of S$1.52. Meantime, we would also await updates on the on-going legal disputes.

Memtech International Limited

OCBC on 29 Sep 2015

Memtech is a precision components manufacturer serving Tier 1 suppliers in the automotive, consumer electronics, and telecommunications space. We recently visited Memtech’s Dongguan plant and were introduced to various aspects of its tooling and manufacturing process. We note Memtech’s tooling capabilities and its high dividend yield, but also expect economic headwinds and order consolidation ahead. Memtech is currently trading at 3.3x P/E and 0.5x P/B. We do not have a rating on Memtech.

Plastic and rubber component manufacturer based in China
We recently visited Memtech’s Dongguan plant. The company produces components for automotives (climate & audio controllers, key fobs, etc.), consumer electronics (Kindle light guides, keyboard, routers, remotes, etc.), and telecommunication devices (keypads). In FY14, the company showed strong results as revenue grew 18% to S$137.6m, and net profit turned positive to S$17.6m. For FY15, the first half-year financial results reflect weakness in the market. 2Q15 revenue dropped 2.6%, while net profit decreased 12.75% YoY. The gross profit margin is currently low (17.5% in FY14 and 17.7% in 2Q15); management is seeking to grow it by supplying higher-margin, functional automotive products (margin of ~20-25%) and being more selective when choosing customers. 

Competitive edge: Tooling capabilities and technical know-how 
Memtech’s in-house tooling capabilities allow the manufacturer to fashion appropriate molds for sophisticated components such as functional plastic components found within the automotives. Furthermore, Memtech invests in R&D (expected capex of ~US$10m/year) to develop ways to treat rubber and plastic materials to meet customer specifications, and to design conductive pills that can deliver low contact and corrosion resistance.

High dividend yield, economic headwinds, order consolidation
Memtech offers a high dividend yield (12 month yield of 5.17%). However, we note that the automotive industry in China is showing signs of weakness, and more than half of Memtech’s automotive products are used in cars sold in China. Meanwhile, it is noteworthy that a large proportion of Memtech’s contracts with automotive clients were made 1-2 years ago; they are now due for volume ramp-ups, a trend that may help offset weakness in the automotive sector going forward. Management expects the consumer electronics division to show more resilience in the weak economic environment, and sales are expected to improve in the next two quarters as part of a cyclical trend. Memtech has also recently obtained design approval for the component of next generation product line under Beats by Dr. Dre. For this product, Memtech expects to supply 400-500K components per month at US$3-4 each. Memtech is currently trading at 3.3x P/E and 0.5x P/B. We do not have a rating on Memtech.

CapitaLand Commercial Trust

OCBC on 25 Sep 2015

We lower our FY16 forecast for Grade A rentals and now expect a 0% to -5% dip in 2015 (unchanged) and a -10% to -20% correction in 2016 (versus -5% to -10% previously). Overall office demand from financial institutions and commodities firms have weakened and 2Q15 island-wide net absorption of 296k sqft came in significantly below the 5-year average of 459k sqft. In particular, we are concerned about the 2.79m sqft glut of CBD supply over 2H15 to 2016 and the growing trend of companies relocating outside the CBD to regional centres and business parks, which has yielded up considerable secondary supply. As at end Jun 15, CapitaGreen was 80.4% committed; despite weaker than anticipated conditions, we still see management achieving an occupancy rate above 90% by the end of this year given their strong execution ability, but operating in a challenging market likely points to below-forecast rentals over the current reversion cycle. Our fair value estimate dips to S$1.39 from S$1.54 previously due to lower overall rental assumptions in our valuation model. Maintain HOLD.

Lowering FY16 forecasts for Grade A office rentals
Due to mounting external uncertainties, the government recently downgraded its 2015 GDP growth forecast from 2.0%-4.0% to 2.0%-2.5% and private economists have similarly lowered their consensus from 2.7% to 2.2% in the latest quarterly MAS survey. In the Grade A office space, our channel checks indicate that overall demand from financial institutions and commodities firms have softened and 2Q15 island-wide net absorption of 296k sqft came in significantly below the 5-year average of 459k sqft. In particular, we are concerned about the 2.79m sqft glut of CBD supply over 2H15 to 2016 and the growing trend of companies relocating outside the CBD to regional centres and business parks, which has yielded up considerable secondary supply. Given a weaker outlook, we lower our FY16 forecast for Grade A rentals and now expect a 0% to -5% dip in 2015 (unchanged) and a -10% to -20% correction in 2016 (versus -5% to -10% previously). In 2Q15, Grade A rentals fell 0.9% QoQ to S$11.30 psf/mth after peaking at S$11.40 psf/mth in 1Q15. While capital values remain stable for now, we see a mix of falling rentals and rising rates likely putting downward pressure on valuations ahead.

Fair value estimate dips to S$1.39; maintain HOLD
As at end Jun 15, CapitaGreen was 80.4% committed. Despite weaker than anticipated conditions, we still see management achieving an occupancy rate above 90% by the end of this year given their strong execution ability, but operating in a challenging market likely points to below-forecast rentals over the current reversion cycle. We understand that passing rentals are currently below the forecasted S$12-$14 range. The trust had continued to report higher valuations on their office portfolio in 2Q15, with discount rates dipping 25 bps and higher rental assumptions, but further gains appear increasingly unlikely ahead given market conditions. Our fair value estimate dips to S$1.39 from S$1.54 previously due to lower rental assumptions in our valuation model. Maintain HOLD.

Wilmar International

OCBC, 23 Sep 2015

Wilmar International Limited (WIL), after reporting a slightly lower-than-expected set of 2Q15 results on 5 Aug, saw its share price tumbling from an intraday high of S$3.20 on 6 Aug to an intraday low of S$2.51 on 8 Sep, or down about 22%; the stock has also fallen some 19% YTD. Besides the results, we suspect that the growing uncertainty of China’s economic growth and the recent devaluation of the CNY have also been weighing on the stock; this is not surprising since WIL derives a significant part of its revenue from China. However, some believe that concerns over China may be overdone. In addition, management remains cautiously optimistic that its 2H15 performance will be “satisfactory” as well; this as it expects crush margins to remain positive for the rest of the year; consumer products to continue its strong performance. Still, to account for the lower risk appetite of the market, we lower our peg to 12x blended FY15/FY16F EPS (versus 13x previously) and our fair value dips from S$3.43 to S$3.17. Maintain BUY.

Stock tumbled 22% after 2Q15 results
Wilmar International Limited (WIL), after reporting a slightly lower-than-expected set of 2Q15 results on 5 Aug, saw its share price tumbling from an intraday high of S$3.20 on 6 Aug to an intraday low of S$2.51 on 8 Sep, or down about 22%; the stock has also fallen some 19% YTD. Besides the results, we suspect that the growing uncertainty of China’s economic growth and the recent devaluation of the CNY have also been weighing on the stock; this is not surprising since WIL derives a significant part of its revenue from China. 

How bad is China’s slowdown?
No doubt China’s economy has recently hit some rough spots - in Aug for example, industrial production rose 6.1% YoY versus Bloomberg’s 6.5% consensus growth; fixed asset investment rose 10.9%, versus street’s 11.2% consensus, and was also the slowest pace in 15 years; only retail sales met expectations, growing 10.8% versus 10.6% expected by the street. However, most economists have kept their GDP growth forecast for 2015, likely on expectation that the central government would announce more pump priming measures to sustain economic growth at 7% this year. 

China concerns likely overdone
Even though some economists are looking at even slower GDP growth in 2016 and 2017 of around 6.5%, others believe that the slower pace of growth is in line with the country’s switch from an industrial-driven economy to a more of a services-driven one. In fact, the China Beige Book international recently noted that global investors have adopted an excessively negative view of China’s prospects, adding these investors have a history of over-reacting to problems in China . 

2H15 likely to be satisfactory
Recall that management remains cautiously optimistic that its 2H15 performance will be “satisfactory” as well; this as it expects crush margins to remain positive for the rest of the year; consumer products to continue its strong performance. Still, to account for the lower risk appetite of the market, we lower our peg to 12x blended FY15/FY16F EPS (versus 13x previously) and our fair value dips from S$3.43 to S$3.17. Maintain BUY.

Sembcorp Industries

OCBC on 21 Sep 2015

The stock market, including SCI’s stock, has been relatively volatile. However, it is still business as usual for SCI. In fact it has been expanding its operations, with the groundbreaking of its seventh Vietnam Singapore Industrial Park (VSIP) on 16 Sep and the commencement of full commercial operations for the second 660MW unit in its Indian power project, TPCIL. Currently, the implied utilities stub is trading at about 7x P/E, close to one s.d below its historical average. Considering that utilities is a less cyclical industry (and a growing one for the overseas segment due to rising emerging market demand), as well as SCI’s demonstration of its capabilities in developing and executing large-scale greenfield projects over the years, we believe that the utilities segment has been underappreciated. Meanwhile, as we recently lowered our fair value estimate for SMM, we update it in our sum-of-parts valuation for SCI, whose fair value now drops from S$4.31 to S$4.03. Maintain BUY.

Unfazed by volatile stock market; continues to expand
The stock market, including SCI’s stock, has been relatively volatile; SCI’s share price dropped by about 34% from its 21 Apr peak to as low as S$3.08 on 24 Aug, before recovering ~14% to its current level. However, it is still business as usual for SCI. In fact it has been expanding its operations, with the groundbreaking of its seventh Vietnam Singapore Industrial Park (VSIP) on 16 Sep and the commencement of full commercial operations for the second 660MW unit in its Indian power project, Thermal Powertech Corporation India (TPCIL). 

Develops 7th VSIP project in Vietnam
The first VSIP was established in 1996 in Binh Duong province near Ho Chi Minh City, and about 20 years later SCI is now developing its seventh VSIP project (VSIP Nghe An). VSIP has attracted US$7.9b in total investment capital from over 583 companies in Vietnam, and the total gross area of the seven developments (including phase one of VSIP Nghe An) is 6,153ha. 

Completion of SCI’s first coal-fired power plant in India
Another significant development is the recent commencement of full commercial operations for the second 660MW unit in TPCIL. The ~US$1.5b coal-fired power plant investment (total capacity 1,320MW) has been operating steadily since Apr 2015 after completion of its first 660MW unit. 

Utilities underappreciated; stub trading at about 7x P/E
The implied utilities stub is trading at about 7x P/E, close to one s.d below its historical average. Considering that utilities is a less cyclical industry (and a growing one for the overseas segment due to rising emerging market demand), as well as SCI’s demonstration of its capabilities in developing and executing large-scale greenfield projects over the years, we believe that the utilities segment has been underappreciated. Meanwhile, as we recently lowered our fair value estimate for SMM, we update it in our sum-of-parts valuation for SCI, whose fair value now drops from S$4.31 to S$4.03. Maintain BUY.

QAF Limited

OCBC on 18 Sep 2015

QAF Limited (QAF) is primarily engaged in bakery manufacturing and distribution with leading brands Gardenia and Bonjour, while it also owns the largest fully integrated pork production business in Australia under Rivalea. The group holds dominant positions in the broader baked goods segment (i.e. bread, cakes, pastries) in its core markets, Singapore, Malaysia and Philippines. In addition, Rivalea produces an estimated 17-20% of total pork produced in Australia. Their strengths lie in strong branding, new value-added products, extensive distribution reach as well as continued productivity initiatives. Given the recent improvement in estimated core profitability, and on further expansion plans and favourable outlook for its industries, we think this inexpensive stock deserves more attention. We also expect the group to at least maintain its dividend pay-out of S$0.05/share, offering a dividend yield of ~5%. Using sum-of-the-parts methodology, we initiate coverage with a BUY rating and TP of S$1.27.

Established market leader in baked goods and pork production 
QAF Limited (QAF) is primarily engaged in bakery manufacturing and distribution with leading brands Gardenia and Bonjour, while it also owns the largest fully integrated pork production business in Australia under Rivalea. The group’s bakery brands command 60% of market share under the packaged loaf bread segment in Singapore. Within a broader baked goods segment (i.e. bread, cakes, pastries), they are leaders in their core markets with market share of 26%, 18%, and 11% in Singapore, Malaysia and Philippines respectively.

Profitability expected to continue improving
We note that both of the group’s core businesses hold competitive strengths such as branding power, value-added product portfolio, as well as extensive distribution networks in its core markets. The group leverages on its knowledge and research capabilities to launch new products as well as productivity initiatives to garner better margins. We estimate that core PATMI on a group level has been relatively steadier since FY11, vs. a seemingly bumpy net profit performance. Both core business segments are recording gradual signs of recovery in terms of EBIT and they continue to improve as of 1H15. Expansion of facilities coupled with extension of its distribution reach in other markets would help to drive growth ahead. Favourable industry trends for both operations coupled with expectations for lower global wheat prices this year bode well for the group. 

Initiate with BUY; S$1.27 TP
QAF is currently trading at 10.6x FY15/16F, below its peers’ averages for both consumer goods (22x-26x) as well as integrated food producers (12x-18x). In addition to the above, the stock has been offering a stable dividend payout of S$0.05/share since FY11, which gives a dividend yield of ~5%. We think this inexpensive stock deserves more attention. Using sum-of-the-parts methodology, we have derived a TP of S$1.27, implying a total return potential of 33%. Initiate coverage with BUY.