Sembcorp Industries

Kim Eng on 8 May 2015

• 1Q15 missed. Weak on all fronts. Cut FY15-17 by 5-9%. 
• India TPCIL ramp-up slower than expected. New Myanmar power plant to contribute only from 2017. 
• SOTP TP drops from SGD4.16 to SGD4.05. Maintain HOLD for lack of catalysts. 

Weak on all fronts
1Q15 PATMI of SGD142.2m (-23.1% YoY, +40.9% QoQ) missed, at only 17%/18% of our/market’s FY15. Marine disappointed on weak ship repair, as already indicated by SMM’s results on 28 Apr. Intense competition in the power market lopped 42% YoY off Singapore utilities’ net profit, to SGD30.9m. TPCIL did not contribute in 1Q15. Its recently-acquired wind-power asset, Green Infra, in fact booked a SGD1.6m loss from the low wind season which occurs in Oct-Apr. Management said Green Infra usually delivers 75% of its earnings during the high wind season. SCI also suffered from higher depreciation charges for these new assets.

No catalysts yet
We expect Singapore power plants’ as spark spreads slipped further in 1Q15. TPCIL’s ramp-up in India was also slower than expected. While its first 660MW unit was hooked up with the grid in 1Q15, it was shut for rectification work and restarted only on 11 Apr. TPCIL’s unit 2 will be commissioned at end-3Q15 but may take several months to rev up. We see contributions only from 2016. Elsewhere, SCI will be developing and operating a USD300m, 225MW gas-fired power plant in Myanmar. But commercial operations will only commence in 2017. We cut FY15-17 EPS by 5-9% as we factor in weaker Marine and Singapore Utilities. We also account for a SGD50m divestment gain related to Sembcorp Bournemouth Water in the UK in 2Q15. Our SOTP TP drops from SGD4.16 to SGD4.05. Expect any positive catalysts from overseas projects only from 2016. Maintain HOLD.

Wilmar International

Kim Eng on 8 May 2015

• 1Q15 net up 49% YoY, in line.
• Soybean-crushing margins recovered, along with better associate contributions & reversal of huge FX losses last year. Tropical Oils the only weak spot. 
• Maintain BUY & top sector pick. SGD4.04 TP still at 15x FY15 P/E.

 In line; changes in segmental reporting
1Q15 PATMI accounted for 17% of our FY15E. We deem this in line as 1Q is traditionally its weakest quarter. Revenue dropped 8% YoY on lower commodity prices. But net profit leapt 49% YoY from last year’s USD241m low. Growth was spearheaded by strong soybeancrushing margins, better associate contributions and a reversal from huge FX losses last year. Part of this was negated by Tropical Oils weakness. Wilmar changed its segmental reporting format. Palm & Laurics and Plantations have been combined into Tropical Oils. Oilseeds & Grains now includes Consumer Products. Tropical Oils underperformed in 1Q15, from lower upstream yields in Malaysia owing to harsh weather, lower CPO prices and depressed refining margins. Oilseeds & Grains made 11x more PBT as soybeancrushing margins improved in China. Sugar is seasonally insignificant in 1H.

Remains our top pick
We expect crushing margins to remain decent in 1H15. Operating conditions for CPO plantations and refining could remain difficult in the near term but we expect margins to improve as Indonesia implements its biodiesel policies. We believe Wilmar’s integrated business can better withstand commodity-price volatility. It remains our top sector pick. We leave EPS and TP unchanged, at 15x FY15 P/E, its 5-year average.

OSIM

Kim Eng on 7 May 2015

• More than 40 funds packed NDR with top management, following disappointing 1Q15. 
• OSIM still in investing mode & looking for next big M&A
• Expected share buybacks could open up trading opportunities in the short term. Maintain HOLD with SGD2.08 TP still at 18x FY15 P/E. 

Building up base for next leap forward
Management’s key message: OSIM has embarked on preparations for its next leap forward, having grown non-stop for the past six years. Pending completion, performance could be volatile. It will be focusing on its core chair business, TWG and possibly a yet-tobe-identified new business.

OSIM: scaling up products across multiple price points
OSIM already has chair products that cost SGD2k (uDiva), SGD5k (uMagic) and SGD7k (uInfinity). Volume could build up rapidly when their 3-5-year replacement cycle is ready ie when starter-buyers upgrade to their next price points. Those points may not be reached until 2017. Until then, OSIM will be exposed to macro vagaries and consumer acceptance of its new products.

TWG: wants to be in 10 Chinese cities
TWG now has central kitchens in Guangzhou, Beijing and Shanghai. This will not be the end. It wants to be in at least 10 major cities. This means TWG will remain in investment mode for some time, even as its earlier cities turn profitable. It needs 4-5 stores to provide enough revenue to cover costs of investment and overheads of the central facilities.

Still looking for next big M&A
OSIM has not yet seen anything it wants to buy or at the right price. CEO Ron Sim pointed out it is not just OSIM’s cash but also his 60% ownership at stake. Hence, he is willing to wait.

Looking to buy back shares
When queried on share repurchasing, Ron replied he is “happy to buy back”. In the past three years, OSIM has consistently mopped up shares at below SGD2.00.

OCBC

Kim Eng on 30 Apr 2015

• Beats from overheads, allowances, customer treasury flows & Bank of Ningbo masked weak trends. 
• NIM disappointed, down 5bps QoQ & 8bps YoY to 1.62% trough. Weak loan traction. 
• Maintain HOLD for lack of catalysts & SGD11.10 TP, at 11x FY15 P/E. Top sector pick DBS. 

Strong PATMI…
1Q15 PATMI of SGD993.1m beat the market’s SGD911m and our SGD881.8m. Variances were: 1) lower-than-expected overheads of SGD873m vs our SGD960m on lower business-promotion and volume-driven expenses; 2) stronger-than-expected net trading income. This was primarily treasury-related income from customer flows; 3) smaller-than-expected allowances of SGD64m vs our SGD100m; and 4) strong contributions from Bank of Ningbo.

…but weak trends
Loan growth of 0.2% QoQ and 4% YoY, ex-Wing Hang, was softer than expected. SGD/USD loans were down 1.2% and 5.2% QoQ, partially offsetting a sharp 10.2% QoQ jump in HKD loans. Contrary to expectations, NIM contracted 5bps QoQ and 8bps YoY to a trough of 1.62%. This was due to aggressive HKD depositgathering and weaker income from money-market gapping. A large increase in fixed deposits pushed up cost of funds by 4bps QoQ, diluted improved SGD loan spreads. Like its peers, asset quality stayed strong.

Reiterate HOLD We leave our EPS unchanged pending our sector review. Reiterate HOLD with a SGD11.10 TP, at 11x FY15 P/E. This is more than 1SD below its rolling average since 2005

SMRT

Kim Eng on 4 May 2015

• 4QFY3/15 net income marginally below. Trains reported first quarterly loss. Cut FY3/16 EPS by 3% for higher operating & financing costs.
• Details on rail transition still lacking. 
• Maintain HOLD. Lower TP to SGD1.57 from SGD1.60, still at 20x FY3/16 EPS.

Train booked first quarterly loss
4QFY3/15 net income of SGD20.8m was below expectations, with FY3/15 EPS at 92% of our projection. This was because its train division reported its first ever quarterly loss of SGD2.4m. It is expected to remain under pressure. Net fare hikes of 1.9% or gross increases of 2.8% should be offset by higher costs from a larger fleet, the opening of the Tuas West extension and higher maintenance costs. Management said it has made progress in its transition to a new rail-financing framework but declined to elaborate. It attributed its lower bid for the Bulim bus package to cost advantages as the incumbent. A final DPS of 1.75 SGD cts was proposed, bringing FY3/15 DPS to 3.25 SGD cts for a 1.9% yield.

New venture positive; not material near term
On its latest partnership with Consistel (note), management says it has no intention to be the fourth telco and remains committed to the transport business. Rather, it is taking advantage of its extensive commuter reach with this venture.

Awaiting elaboration on rail transition
We lower FY3/16 EPS by 3% for higher operating and financing costs to fund elevated capex. No change to our FY3/17 forecasts. Consequently, our TP drops to SGD1.57, still at 20x FY3/16 EPS, 1 SD above its 10-year average. While its transition to a sustainable rail model is positive, details remain lacking. Maintain HOLD.

Mapletree Commercial Trust

Kim Eng on 24 Apr 2015

• FY3/15 DPU in line. 
• Interest costs well managed but rising, nonetheless. 
• Maintain HOLD with unchanged DDM TP of SGD1.43 (CoE 7.7%, LTG 2%). 

Doing its best to keep tenants
FY3/15 revenue was SGD282.5m (+5.7% YoY) while NPI was SGD211.7m (+8.4% YoY), smack in line with our expectations of SGD282m and SGD212m respectively. Full-year DPU was 8 SGD cts, ahead of our 7.7 cts. Management said NPI could have been stronger if not for higher-than-expected property expenses. As retail demand remains weak, MCT is helping its tenants. Measures include sharing some property-operating costs with tenants. Retail rental reversions remain robust at 17.5%, testament to Vivocty’s unique positioning as a tourist mall with exclusive local catchment. On the office front, Mapletree Anson’s occupancy dropped from 93.8% to 87.5%, given strong supply in the CBD/Tanjong Pagar. Thankfully, the dropped space has since been pre-committed. Occupancy for the rest of its assets was also stable.

Interest costs rising
MCT refinanced SGD288.6m of debt in April, which raised its all-in interest costs to 2.28% from 2.18% in Dec 2014. The move wipes out refinancing needs for FY3/16. For FY3/17, SGD354m debt coming due may be refinanced at higher costs yet again. We have already incorporated this.

Maintain HOLD; upside risk from acquisitions
Though we are positive on MCT’s management and portfolio, valuations are rich at <5% yield. Maintain HOLD with an unchanged DDM TP of SGD1.43 (CoE 7.7%, LTG 2%). Upside risks could include acquisitions from its sponsor’s attractive pipeline of assets – Mapletree Business City, Harbourfront Centre and Towers 1 & 2.

Ascendas REIT

Kim Eng on 24 Apr 2015

• FY3/15 DPU slightly below on lower than expected warehouse contributions. Reduce FY3/16 DPU by 2%. 
• Occupancies for factories and warehouses dropped QoQ. 
• Maintain SELL on soft occupancy and weaker rental reversions. DDM TP SGD2.27 unchanged (CoE 8.5%, LTG 2%). 

DPU slightly below
FY3/15 revenue was SGD673.5m (+9.8% YoY) and NPI, SGD462.7m (+6.1% YoY), vs our respective SGD677.3m and SGD462.3m. Full year DPU was 14.6 SGD cts vs our 14.9 cts, slightly below. Occupancies for factories and warehouses (60% NPI) dropped QoQ – hi-spec 88.9% to 88.5%, light industrial 93% to 92.5%, and warehouses 86.5% to 85.8% - underscoring our concerns of oversupply/weak demand. Business parks (35% NPI) occupancy improved from 88% to 88.7%. Integrated development segment contributed strongly as Aperia ramped up occupancy from 54% to 80%. Portfolio rental reversions have trended lower third year running, from 14% to 10%, now 8.3%.

Challenging times
Factories and warehouses are likely to continue to see soft occupancies and weak rental reversions. Business parks had a solid quarter but as 2016 supply is largely uncommitted, this segment could waver. Integrated segment looks set to increase NPI contribution from 4.4% to 7.4% powered by Aperia’s high quality specs and good location.

Consensus could be disappointed; Maintain SELL
We do not expect business parks or the Aperia to be adequate buffers for factories and warehouses. Also, we expect NPI margin compression as A-reit’s proportion of multi-tenanted buildings has increased from 62% to 71%. We reduce our FY3/16 DPU from 15.1 SGD cts to 14.8, no change for our FY3/17-18 forecasts. Maintain SELL with a DDM TP SGD 2.27.

Mapletree Industrial Trust

Kim Eng on 23 Apr 2015

• 4Q15 beat marginally. BTS-Equinix contributed earlier than expected. FY3/16-18 DPU raised by up to 3.3%.
• Two BTS projects to drive DPU, compensating supply risks. Reiterate BUY. Attractive 7.7% FY3/18 yields. Raise DDM TP to SGD1.77 from SGD1.74.

Slightly better than expected
MIT reported a 5.6% and 4.9% YoY rise in quarterly and full-year revenue to SGD79.4m and SGD313.9m respectively, while respective NPI rose 8.4% and 6.5% to SGD57.8m and SGD228.6m. DPU for the year was 10.4 SGD cts, up 5.1%, exactly our forecast. However, core occupancy fell to 90.2%, its third straight quarter of decline. This underscored oversupply/weak demand in the industrial space. Interest cost rose 10bps to 2.3%, mainly from 13% of loans as variable pegged to the SOR. Gearing was down to 30.6% from 32.8% on property revaluation gains of SGD197m.

BTS projects phase in earlier than expected
BTS-Equinix attained TOP much earlier than expected and contributed a month of revenue. We therefore look forward to full year contribution in FY3/16. BTS-Hewlett Packard Phase 1 should also be completed by end-2016 and Phase 2, by mid-2017. MIT’s BTS projects are pre-committed buildings with long leases and annual rental step-ups.

Reiterate BUY
While we remain Underweight on industrial SREITs due to strong supply and a weak economy, MIT remains a BUY as it phases in its BTS earnings. This should more than offset vacancy risks and provide DPU growth visibility. Fully operational, we expect both projects to contribute SGD38m or 10.3% to revenue by FY3/18. Maintain BUY with TP raised from SGD 1.74 to SGD 1.77 (DDM, CoE 8.5%, LTG 2%) after raising our FY3/16-18 DPU by up to 3.3%.

CapitaCommercial Trust

Kim Eng on 23 Apr 2015

• 1Q15 DPU in line at 24% of FY15E. Better portfolio occupancy. 2% rental uptick. CapitaGreen now 76.4% committed at better rents.
• Option to acquire remainder of CapitaGreen priced in. Most expensive office REIT.
• Maintain HOLD with DDM-based TP of SGD1.77. Prefer Keppel REIT in office sector. 

1Q15 in line
1Q15 DPU of 2.12 SGD cts (+3.9% YoY) met at 24% of our FY15E. Occupancy improved to 97.0% from 96.8% in 4Q14. Average office rents were up 2.0% to SGD8.78 psf. Leverage remained low at 29.9% with debt headroom of SGD1.2b to a 40% ratio. This implies it can comfortably purchase the remaining 60% of CapitaGreen without raising equity. Average interest cost climbed to 2.4% from 2.3% in 4Q14. Still, the trust has low exposure to rising interest rates as 83% of its borrowings are on fixed rates.

CapitaGreen 76.4% committed
As of 21 Apr, 76.4% of CapitaGreen has been committed. Committed rents of SGD12-16 psf were broadly higher than 4Q14’s SGD9-16 psf and market rents of SGD11.40 psf for Grade A office space, as estimated by CBRE.

Most expensive office REIT
Maintain HOLD and DDM-based (COE 7.7%, TG 2.0%) TP of SGD1.77. While its option to acquire the rest of CapitaGreen from its JV partners is positive, the deal can only be assessed after the determination of its transaction price. Moreover, we believe the market has priced in potential positives at 1.0x P/BV and 5.2% FY15E yields. CCT is the most expensive office REIT. We prefer laggard Keppel REIT (BUY, TP SGD1.32) in the office sector.

Cache Logistics Trust

Kim Eng on 23 Apr 2015

• No surprises with 1Q15 NPI and DPU in line.
• Interest costs fell on prudent debt management.
• Reiterate BUY with catalysts from resilience & clear DPU growth in 2016. DDM TP still at SGD1.33 (CoE 8.5%, LTG 2%). 

In line
1Q15 revenue was SGD21m (+1.6% YoY, +1.9% QoQ). NPI was SGD19.7m (+0.6% YoY, +1.6% QoQ). NPI growth lagged revenue on rising property-operating expenses, as landlords do more for tenants in a tough leasing environment. Respectively, revenue and NPI were 23.7% and 23.6% of our FY15. Australian acquisitions will contribute a full quarter from 2Q15, which should put it on track for our full-year expectations. Annualised DPU of 8.7 SGD cts almost matches our projection of 8.6 SGD cts.

Prudent interest-cost management
All-in interest costs dropped from 3.3% in 4Q14 to 2.77% in 1Q15 after refinancing. Cache also hedged more debt with fixed rates, up from 61.7% to 71%. It has no refinancing needs till 2017 when SGD97m will come due, at about 20% total debt.

BUY for DPU resilience
Some 74% of NPI remains tied to single-tenanted master leases. These provide income predictability in an environment of strong supply/weak demand. Cache has the lowest tenant lease expiries among industrial SREITs under our coverage: 9%/15%/3% for the next three years. Annual rental step-ups of 1-3.5% provide certain organic growth, while next year’s BTS project for DHL should contribute to DPU growth of 5.7%. Maintain BUY with DDM TP intact. We consider Cache undervalued to peers as its earnings quality is high and risks, lower.

Midas Holdings

Kim Eng on 22 Apr 2015

• Huge discounts to A-share & HK-listed peers unjustified.
• Cheaper exposure to China’s rail sector. HSR orders could bump up utilisation to 75% from 70%, with good operating leverage. 
• Reiterate BUY with SGD0.50 TP still at 1x FY15 P/BV. Catalysts from stronger contract momentum. 

 Underperformance to peers…
Following the Chinese government's "One Belt, One Road" initiative and the merger of CNR/CSR, A-share and HK-listed railway companies have been re-rated dramatically. CSR’s and CNR’s A shares have catapulted 759/716% respectively in the past 12 months. The contagion has spread to CSR’s/CNR’s suppliers in the market’s search for proxies. Nanshan Aluminum (600219 CH), one of CSR’s key suppliers, has rallied 142% in the same period. Midas, however, has fallen behind, trading at huge discounts to peers.

… unjustified
We believe investors’ misgivings about potential market-share losses and margin squeeze after the CSR/CNR merger are unwarranted. This is because: 1) the entire industry is in good shape; 2) we believe Midas’s ability to bag contracts from its longterm customers is uncompromised; and 3) it should be able to protect its margins as aluminium alloy extrusion profile products make up only 3% of a train body’s value. Midas has gained 32% in the past month but is still trading at 0.7x FY15 P/BV. Reiterate BUY with catalysts expected from contract wins. We believe it provides cheaper exposure to China’s rail sector, with downside limited by its 0.7x FY15 P/BV. Our TP is set at conservative 1x FY15 P/BV.

CapitaMall Trust

Kim Eng on 21 Apr 2015

• 1Q15 in line. Still wary of competition for six of its 16 malls.
• DPUs flat for two years as we factor in competition, weak retail sales & rising interest rates.
• SELL with unchanged DDM TP of SGD1.87. De-rating catalysts from potential DPU misses. 

No surprises
1Q DPU was in line, at 25% of our FY15 forecast. Revenue was flat at SGD167m, up 1% on a same-mall basis and 1.6% YoY. Property expenses moderated from its seasonal marketing push at year-end. They were down 16.2% QoQ and 1.6% YoY. Net property income rose 11.1% QoQ and 3.0% YoY to SGD117.7m. DPU was 2.68 SGD cts (-6.3% QoQ, +4.3% YoY).

Still wary of competition
 We maintain that six of its 16 malls will soon face stiff competition. About 566k sf of new retail space from Capitol, Marina Square AEI, South Beach and Suntec AEI is bound to give Raffles City tenants some bargaining power, we reckon. Funan’s foot traffic could also be further diverted as the property is not integrated with its surrounding new developments. In Jurong, IMM and JCube are both not linked to the nearest MRT station or Jurong’s new hospital. Newer competing malls, Westgate-Jem-Big Box, are. In 1Q16, Hillion Mall will emerge in-between Bukit Panjang Plaza and the LRT. Meanwhile, retail sales remain tepid owing to a lacklustre economy and foreign-worker.

Flat DPUs;
SELL DPU is expected to decline 1.2% this year as we factor in the competition, weak retail environment and rising interest rates. DPU yields and P/BV are at -1SD and +1SD of their 12-year means respectively, which could be hard to maintain if DPU disappoints. SELL with a DDM TP of SGD1.87 (CoE 7.7%, LTG 2%).

Singapore Banks

Kim Eng on 20 Apr 2015

• Incipient unease over credit risks & slower loan growth from rising SIBOR/SOR unwarranted. 
• Fatter NIMs should plug gap. Safety nets to protect loan quality. 
• Maintain OVERWEIGHT with catalysts from higher interest rates. DBS our top pick, followed by UOB. 

Rising rates a boon, not bane
Some clients are apprehensive about the recent interest-rate spike, fearing that slowing loan growth and weaker credit quality could overwhelm fatter NIMs. While recent rate hikes could indeed weigh on loan demand, we estimate the incremental net interest income from a 50bp rate increase at 3-4x the potential revenue loss from a 1ppt shortfall in loan growth. And while banks may cut their loan-growth guidance during this results season, we expect 3ppt cuts to 4-5%, at most. Moreover, our loan-growth projections are conservative, at 7% for the year vs +9.5% last year. The Street is also not that aggressive, anticipating around 7-8%.

Asset quality shielded
Higher rates typically impair repayment ability. But we expect asset quality to be shielded by a string of macro-prudential and pre-emptive measures rolled out since 2009. Stress could start to emerge if the 3M SIBOR hits 3.5% in one fell swoop from 1%. In such an event, SME loans are most vulnerable, given their smaller balance sheets. But the saving grace is banks’ proportions of unsecured SME loans have shrunk in recent years. We also do not foresee any further rapid ascent to 3.5% before the Fed makes its next interest-rate move.

Maintain OVERWEIGHT
DBS remains our top pick. We believe it is best positioned to take advantage of rising interest rates. Our second choice is UOB.

Keppel Corp

Kim Eng on 23 Jan 2015

• Excluding one-offs, FY14 results missed. 4Q14 O&M operating margins down 1.8ppts QoQ to 13.2%. Trim FY16E EPS by 3%.
• Stock on trading halt, watch for corporate actions.
• Maintain HOLD. Lower SOTP-based TP to SGD8.60 from SGD9.00. Support from final DPS of 36 cts for a full-year 48 cts or 5.9% yields.

Below, after adjusting for one-offs
Adjusting for SGD436m in one-off gains, FY14 PATMI of SGD1,449m (+2.6% YoY) missed expectations, at 94%/95% of our/consensus forecasts. Unexpectedly, 4Q14 O&M margins dipped 1.8ppts to 13.2% (3Q14: 15.0%, 4Q13: 14.2%), suggesting weaker execution.

Property was weighed down by soft Singapore sales although sales in China were modestly higher in 4Q. If not for the one-offs, overall performance would have been uninspiring.

Challenging times; watch for corporate actions
O&M secured in-line orders of SGD5.5b in FY14, bringing its net order book to SGD12.5b, down from record of SGD14.2b in FY13. We further lower our win assumptions for FY15E/16E to SGD4.2b/3.8b, from SGD4.4b/4.2b. This is to reflect a further deterioration in the offshore rig market. Property markets remain insipid while infrastructure faces electricity-market competition. Keppel’s diversification should help it tide over the challenging times.

Maintain HOLD with yield support. Our SOTP-based TP drops to SGD8.60 from SGD9.00 mainly on marginally lower O&M valuation following our cuts in order win assumptions. FY16E EPS is cut by 3% and we also introduce FY17E forecasts. Things which could change our mind are: 1) positive corporate developments; 2) improved drilling dynamics triggering a new rig-ordering cycle; 3) higher
O&M margins; and 4) a property-sector revival.

Singapore Land Transport

Kim Eng on 22 Jan 2015

• Fare hike of 2.8% for rail & bus rides largely within expectations. Together with cheaper oil, could provide some relief to operators’ bottom lines.
• Land Transport not good mid-term proxy for oil-price movements because of fare-adjustment formula. Fares could be lowered by 1% next year.
• Remain Neutral on sector.

2.8% fare hike from Apr 2015
The Public Transport Council has announced a fare hike of 2.8% for bus and MRT rides from 5 Apr 2015. It arrived at this based on a 0.6% contraction in the sector’s fare-formula output plus a positive 3.4% carried over from its previous year’s exercise. Singapore’s two public-transport operators are also required to contribute a combined SGD13.5m to the Public Transport Fund: SGD5.5m from SBST (Not Rated) and SGD8.0m from SMRT. The money will be used for the needy. With a fare revenue pool of SGD1.7b pa, this fare hike will translate into higher gross revenue of SGD48.5m for the sector. It implies net benefits of SGD35m, SGD16.4m accruing to SBST and SGD18.6m to SMRT.

No surprise, limited reprieve
The quantum of the hike was expected, having been flagged by Transport Minister, Lui Tuck Yew, during a recent parliamentary reply. Allied with lower oil prices, this hike should provide some near-term margin relief for operators. However, we do not think Land Transport is a good proxy for oilprice movements in the medium term. This is because the sector’s fare-adjustment formula^ already takes into account changes in energy prices. In fact, in the same parliamentary reply, Minister Lui signalled that fares could be reduced by 1% in the next review.

This could mute benefits for the operators.
Remain Neutral on the sector.
^Fare adj. formula = 0.4*cCPI + 0.4*WI + 0.2*EI – 0.5%.
cCPI= Core Consumer Price Index, WI= Wage Index, EI= Energy
Index.

China Everbright Water

Kim Eng on 21 Jan 2015

• Placing 120.7m new shares to IFC and RRJ at SGD0.94 each, 9% discount to last closing price.
• Positive on the deal. CEW could receive cheaper debt from IFC to fund future growth.
• Still our sector top pick. Maintain BUY, EPS & SGD1.26 TP for now. Catalysts from capacity expansion.

New share placement to IFC and RRJ
China Everbright Water (CEW) announced an issue of 120.7m new shares to IFC (49.7m) and RRJ (71m) at SGD0.94 apiece. This represents a 9% discount to its last closing price. The new shares are equivalent to 4.8% of its existing share base. This exercise will cause a small 5% EPS dilution.

Cash-rich, hungry for growth
We view this deal positively. Given its strong balance sheet and low gearing, CEW is not in dire need of capital. But this deal could give it two strategic investors. IFC and RRJ are not new to the  company. IFC is an existing lender to CEW. RRJ is active in the water sector and is a minority shareholder of China Everbright International (257 HK) and SIIC. Although the placement price is at a big discount, we think CEW could benefit from potentially cheaper debt from IFC to fund its future growth. CEW remains our top sector pick. After a 12-month M&A lull, it is cash-rich and hungry for good assets. We expect acquisitions this year and have factored in an additional 1m tonnes/day of  capacity for FY15E-16E each. Maintain BUY with capacity expansion as key catalysts. Pending
SGX and shareholders’ approval, we keep our EPS and TP.

Sarine Technologies

Kim Eng on 21 Jan 2015

• Breaking up two founding holding companies and distributing shares downwards.
• Voluntary lock-up till Aug 2015. Mechanism to limit subsequent sale of shares to preserve enterprise value.
• Maintain BUY & DCF TP of SGD3.18.

What’s New
Sarine has announced the break-up of the shareholding structures of Sarin R&D (28.7% stake) and Interhightech (12.7%), as we anticipated in our 27 Mar 2014 report. Sarin R&D comprises seven manufacturing and trading holding companies and Interhightech, four personal-holding companies. Following their dissolution, their shares will be distributed down to the next holding levels.

What’s Our View
Following the above restructuring, only two founding entities, Hargem Ltd and Stark Hanoh Holdings, both originally under Sarin R&D, will appear as substantial shareholders, with about 7.0% and 7.3% stakes respectively. Executive Chairman, Mr Daniel Glinert, and CEO, Mr Uzi Levami, both originally under Interhightech, will hold about 3.5% each. The shareholders have agreed to a lock-up period till Aug 2015. Sarine will implement a mechanism to limit the sale of these shares after the lock-up.

While some investors may fret that the above move was made to facilitate the exit of its founding shareholders, we believe it had been well-flagged and will not affect Sarine’s share price. It should allow the founding shareholders to monetise their investments for retirement and wealth distribution. Many of them are getting on in years and are no longer involved in the business. The restructuring is also unlikely to have any adverse impact on the business. On a more positive note, it could improve the stock’s trading liquidity. Maintain BUY and DCF-based TP of SGD3.18 (WACC 9.6%, terminal
growth 2%).

Ezion Holdings

Kim Eng on 21 Jan 2015

• Top conviction BUY in sector. Improving FCF & earnings stability in FY15 not contingent on oil prices.
• Liftboats may expand into other offshore jobs. Contract wins near-term catalysts.
• Higher SGD/USD mitigates our 1-4% cut to FY14E-16E EPS for contract timing adjustments. This results in an unchanged TP of SGD1.93, still at 9x FY15E P/E.

Liftboats don’t hinge on oil’s recovery
We expect Ezion to secure at least two liftboat contracts in 1Q15, going by industry newsflow. Our confidence was lately reinforced by signs of positive regional demand for liftboats despite oil’s rout. Modern liftboats may start to contend for other offshore jobs, thanks to their improved capabilities, versatility and efficiency.

Strongest visibility & stability
Ezion is our top sector pick. We believe its 42% slide from its peak of SGD2.02 has priced in prior concerns of deployment delays. Among asset owners under coverage, it arguably offers the strongest FY15E-16E job visibility and earnings resilience on strong contract coverage and exposure to more-stable maintenance demand. We understand most of the five vessels that are due for renewal this year can be recontracted at similar or higher rates. We see upside from potential new contracts, as opposed to risks for the rest of our stocks. Such near-term catalysts do not hinge on an oil-price recovery.

High headline net gearing of 1.0x as at end-3Q14 should be addressed by improving cash flows from the deployment of nine additional units in FY15E. These could swing Ezion to positive FCF. For now, we trim FY14E-16E EPS by 1-4% for minor contract adjustments. This is mitigated by a higher SGD/USD exchange rate of 1.30 vs 1.25. All in all, our TP is unchanged at SGD1.93, still at 9x FY15E P/E, its 5-year mean. Reiterate BUY.

Singapore Banks

Kim Eng on 19 Jan 2015

• Household sector poses no threat
• Household balance sheets solid. Leverage comfortable. Cash & cash equivalents exceeding debt.
• Values of homes, shares & securities would need to halve for peak leverage to return. Remote.
• Maintain OVERWEIGHT with earnings deliveries as short-term catalysts. DBS our top pick, followed by UOB.

Bright spots…
Household wealth hit a new record of SGD1,454.7b (+1.4% YoY) or SGD266,000 per capita in Sep 2014. QoQ, it contracted 0.2%, on lower values of homes, shares and securities. While higher, household leverage remained a comfortable 16.6%. Household financial liquid assets, comprising cash & deposits and shares & securities, were up 4.4% YoY to SGD513.0b, topping household debt of SGD290.3b.

… and safety nets
Based on our estimates, the combined value of homes, shares and securities would need to halve for household leverage to revisit its previous peak of 21.1%. With the labour market expected to remain tight, consumer loan quality is unlikely to deteriorate much, in our assessment. Furthermore, macro-prudential measures targeting housing, car and unsecured personal loans should provide some protection against soaring interest rates and weaker economic prospects.

Maintain OVERWEIGHT. We expect banks to be re-rated further, from continued earnings deliveries. Waning interest in the oil & gas sector could also benefit them through sector rotations.  DBS is our first choice, followed by UOB. Remain cautious on OCBC over its Wing Hang Bank integration risks.

United Overseas Bank

Kim Eng on 8 Jan 2015

• UOB sues Lippo and seven others for “conspiring” to get inflated home loans of SGD181m.
• Classified as NPLs since Jun 2014, with some provisions. Little EPS impact.
• Maintain BUY & 12x FY15E PER TP. Catalysts from strong SGD deposit growth and improving housing NPLs. Top sector pick still DBS.

Files lawsuit for loan defaults
According to The Straits Times, UOB is suing Lippo Group’s subsidiary and seven others over SGD181m in housing loans for the purchase of 38 condominium units at Marina Collection in Sentosa. Loans for 37 of these have defaulted. It said it was not informed of the 22-34% discounts offered for the units and that the buyers had secured inflated home loans from the bank.

Largely accounted for, little EPS impact
We understand from management that these loans were already classified as NPLs in 2Q-3Q14. Cross-checks with disclosed financials indicate a net increase of SGD169m in UOB’s housing NPLs during these two periods (Figure 1). Management does not expect more to be recognised. Some specific provisions have been made and not much more is expected. This is because the loans have LTVs of 75%, based on current market valuations. No unit has been auctioned off. As we suggested in our 5 Jan sector note, “Xenophobia” unwarranted, UOB should be the most exposed to Sentosa. But as much of its mortgage growth occurred during the early housing boom, its NPL risks should be limited.

Reiterate BUY; DBS preferred
TP still at SGD26.70 or 12x FY15E PER, slightly below its rolling mean since 2005. For exposure, prefer DBS (BUY, TP SGD23.50).