Macquarie Research on 11 June 2012
Event
At 1.16x trailing PB (for 1Q12), Noble prices in -5% growth, assuming it can return to mid-teens ROE. Recent numbers have underwhelmed, but we think pencilling in a permanent EPS decline is too bearish. We see risk-reward skewed to the upside. 2Q12 should be subdued, but followed by a better 2H12, in our view.
Impact
Our Bull and Bear scenarios are broadly unchanged:
Bull Case, Fair Value of S$ 1.95 (+79%). Here, Noble returns to the ~20%-type ROEs it averaged over the last five years. This is a bull case because Noble’s business mix has changed and ROE has been falling, reaching a low of 8.5% in 2011.
Bear Case, Fair Value of S$0.90 (-17%). Noble’s ROE can no longer exceed its cost of equity, causing the shares to trade below book value.
Base Case: Mid-term ROE in the mid-teens. We see a path for Noble’s ROE to rise over the course of this year and into the future. Argentine crush margins are improving and the new sugar mills are slowly ramping. The merger of Gloucester Coal with Yancoal Australia alleviates that ROE drag. The thermal coal market is set to improve into year end. Noble can also control SAO expenses (includes bonuses). New leadership may yet shift Noble back to its more nimble, asset-light roots.
~1.2x PB has generally been a good entry point. Assuming we do not return to a GFC scenario, we see today’s valuation as compelling. It reminds us of the period post 3Q11’s surprise loss, except that recent results have been better and we can see a clearer path for future improvement.
Earnings and target price revision
We cut medium-term (2012-16E) EPS by 9% following a model review. Lower Agri estimates are offset by higher Energy and lower SAO expenses.
Our TP falls by less than earnings (to S$1.40 from S$1.44) as Noble’s working capital profile has been coming in better than expected. We also lower our capex estimates to better reflect the deconsolidation of Gloucester.
Price catalyst
12-month price target: S$1.40 based on a DCF methodology.
Catalyst: We think 2Q12 will be subdued, but see a better 2H12.
Action and recommendation
Midstream business models have not held up well over the last few quarters. We think the June quarter should remain subdued for all three Singapore peers. For Noble (and Olam) we see daylight from 3Q12. We believe Noble’s valuation prices in too gloomy a long-term scenario. Within the overall sector though, we are more positive on upstream than midstream names.
Tuesday, 12 June 2012
Keppel Corp
Macquarie Research on 11 June 2012
Event
We upgrade KEP to Outperform from Neutral without changing our earnings or target price as the stock has fallen 15% since 20th April ’12 (vs an 8% fall in the FSSTI) and is back in the value zone in our view.
Impact
KEP is one of the top 5 rig builders in the world and a key beneficiary post Macondo accident: KEP has bagged 43% of the global Jack-up orders and 33% of the global Semi-sub orders (all Sete Brasil) since 2010. KEP has become the go-to yard for “High-spec” Jack-ups post the Macondo accident with as many as 30 Jack-up orders in past 2.5 years.
Our recent meeting with management indicates robust outlook: We met KEP O&M’s CFO recently and came back positive on the group’s strategy.
Don’t expect change in demand outlook on short term oil price volatility: KEP doesn’t expect oil rig demand to scale back as long as Brent does not fall below US$75/bbl
Looking at Brazil from a long-term investment standpoint: KEP is the only top 5 rig builder in the world with an operational yard in Brazil. Along with a share of Sete Brasil orders, KEP is looking to supply other top contractors from its Brazil yard. The company also recently made an investment in a new yard to supply support vessels in the future.
Looking forward to more orders in Brazil: While KEP expects the contract for the 5 Semi-subs to be signed soon (LOI signed already), it is also one of the shortlisted bidders for the FPSO contracts from Petrobras.
Dayrates and prices are inching higher; New orders on the way: Our pipeline analysis indicates 2 Semi-sub orders could be on their way from SOCAR to KEP in 2H12. Also, the company sees high enquiries on the Jackup side with prices inching towards US$210-220m/rig.
Earnings and target price revision
No revision in earnings and target price. Stock upgraded to Outperform from Neutral due to 25% upside to our target price now.
Price catalyst
12-month price target: S$12.05 based on a Sum of Parts methodology.
Catalyst: Semi-sub orders in 2H12
Action and recommendation
Stock back in value zone; Trading at discount to mean multiples despite being in the midst of a robust rig-building cycle: We believe the O&M rig building cycle will last another 3-5 years of which KEP will be one of the key beneficiaries. After the recent fall, KEP is now trading at 1.9x P/BV vs 5 year mean multiple of 2.3x with robust support in the form of 4.5% 2013E divided yield and 18-20% ROEs.
Event
We upgrade KEP to Outperform from Neutral without changing our earnings or target price as the stock has fallen 15% since 20th April ’12 (vs an 8% fall in the FSSTI) and is back in the value zone in our view.
Impact
KEP is one of the top 5 rig builders in the world and a key beneficiary post Macondo accident: KEP has bagged 43% of the global Jack-up orders and 33% of the global Semi-sub orders (all Sete Brasil) since 2010. KEP has become the go-to yard for “High-spec” Jack-ups post the Macondo accident with as many as 30 Jack-up orders in past 2.5 years.
Our recent meeting with management indicates robust outlook: We met KEP O&M’s CFO recently and came back positive on the group’s strategy.
Don’t expect change in demand outlook on short term oil price volatility: KEP doesn’t expect oil rig demand to scale back as long as Brent does not fall below US$75/bbl
Looking at Brazil from a long-term investment standpoint: KEP is the only top 5 rig builder in the world with an operational yard in Brazil. Along with a share of Sete Brasil orders, KEP is looking to supply other top contractors from its Brazil yard. The company also recently made an investment in a new yard to supply support vessels in the future.
Looking forward to more orders in Brazil: While KEP expects the contract for the 5 Semi-subs to be signed soon (LOI signed already), it is also one of the shortlisted bidders for the FPSO contracts from Petrobras.
Dayrates and prices are inching higher; New orders on the way: Our pipeline analysis indicates 2 Semi-sub orders could be on their way from SOCAR to KEP in 2H12. Also, the company sees high enquiries on the Jackup side with prices inching towards US$210-220m/rig.
Earnings and target price revision
No revision in earnings and target price. Stock upgraded to Outperform from Neutral due to 25% upside to our target price now.
Price catalyst
12-month price target: S$12.05 based on a Sum of Parts methodology.
Catalyst: Semi-sub orders in 2H12
Action and recommendation
Stock back in value zone; Trading at discount to mean multiples despite being in the midst of a robust rig-building cycle: We believe the O&M rig building cycle will last another 3-5 years of which KEP will be one of the key beneficiaries. After the recent fall, KEP is now trading at 1.9x P/BV vs 5 year mean multiple of 2.3x with robust support in the form of 4.5% 2013E divided yield and 18-20% ROEs.
Goodpack
DBS on 11 June 2012
CLIENT queries on possibility of takeover: A number of clients recently enquired whether Brambles, the world's leading provider of pallet and container pooling solutions, might be tempted to buy Goodpack.
While we are still sceptical of this, we investigate whether there are any synergies between both businesses.
Possible increase in asset turn: Goodpack's current asset turn at about 2.2 times is below that achieved by Brambles' comparable IBC (intermediate bulk containers) and container business of 4.5-6.1 times.
This difference may be due to Goodpack's more globally focused business (that is longer downtime as its IBCs have to be shifted across the globe) and exposure to the rubber industry.
However, if asset turns can be lifted to 2.8 times by cross selling with Brambles' customers, we estimate revenue upside of up to US$61 million per annum.
Transport savings: Based on historical results, Brambles' transport costs, as a percentage of revenue, stand at between 18 and 20 per cent; much lower than Goodpack's 28-29 per cent.
We envisage savings could be achieved if Goodpack were to take advantage of Brambles' existing logistics arrangements.
Maintain Buy: While we doubt Brambles would launch a takeover given its intention to pay down debt and there would be a question mark as to whether major shareholder David Lam would sell, our analysis, however, shows potential synergies between the two businesses and still untapped potential in Goodpack.
We thus recommend investors to BUY Goodpack ahead of delivery of this upside over the next three years (earnings CAGR of 17 per cent).
BUY
Genting Singapore
CIMB on 11 June 2012
NO change to our earnings "outperform" rating or SOP (sum of parts) target price. Genting Singapore is trading at 7.5 times CY12 EV/Ebitda, a 27 per cent discount to its Macau peers.
Catalysts are still expected from potential market share gains and the full rollout of Westzone.
What happened: Genting Singapore confirmed last week that it holds a stake in Australia-listed Echo Entertainment. It remains tight-lipped on the size of its interest, though the press reported that Genting had built up a 4.9 per cent stake in Echo.
What we think
This comes hot on the heels of earlier speculation that Genting Singapore is eyeing Echo. Genting Singapore's current stake in Echo does not necessarily constitute an interest in the ultimate takeover of the company, but we do not rule out this possibility. There are press reports suggesting that Genting Singapore could be interested in striking a deal with Crown's James Packer to secure a foothold in Macau. Backed with net cash of $1.8 billion, Genting Singapore has hinted that its future acquisitions will not be restricted to greenfield projects. It recently raised $2.3 billion in perpetual capital securities at an interest cost of 5.125 per cent. We think it is in its interest to speed up the acquisition process. Among Echo's appeal is its Star City casino which is strategically located in Sydney. Based on its last traded price, Echo is valued at A$3.1 billion (S$3.9 billion). Assuming 1/3 equity financing, Genting Singapore's outlay will amount to about $1.3 billion. But we think the domestic regulatory approval process and Crown's 10 per cent blocking stake in Echo may prove to be challenges.
What You Should Do
Stay invested. Share price fell 4 per cent last Friday, partly due to concerns that its interest in Echo might spark a costly takeover bid. It is now trading at 7.5 times CY12 EV/Ebitda, a 27 per cent discount to its Macau peers. Save for economic headwinds, its long-term fundamentals are intact, meaning visible earnings and strong operational cash flow.
OUTPERFORM
NO change to our earnings "outperform" rating or SOP (sum of parts) target price. Genting Singapore is trading at 7.5 times CY12 EV/Ebitda, a 27 per cent discount to its Macau peers.
Catalysts are still expected from potential market share gains and the full rollout of Westzone.
What happened: Genting Singapore confirmed last week that it holds a stake in Australia-listed Echo Entertainment. It remains tight-lipped on the size of its interest, though the press reported that Genting had built up a 4.9 per cent stake in Echo.
What we think
This comes hot on the heels of earlier speculation that Genting Singapore is eyeing Echo. Genting Singapore's current stake in Echo does not necessarily constitute an interest in the ultimate takeover of the company, but we do not rule out this possibility. There are press reports suggesting that Genting Singapore could be interested in striking a deal with Crown's James Packer to secure a foothold in Macau. Backed with net cash of $1.8 billion, Genting Singapore has hinted that its future acquisitions will not be restricted to greenfield projects. It recently raised $2.3 billion in perpetual capital securities at an interest cost of 5.125 per cent. We think it is in its interest to speed up the acquisition process. Among Echo's appeal is its Star City casino which is strategically located in Sydney. Based on its last traded price, Echo is valued at A$3.1 billion (S$3.9 billion). Assuming 1/3 equity financing, Genting Singapore's outlay will amount to about $1.3 billion. But we think the domestic regulatory approval process and Crown's 10 per cent blocking stake in Echo may prove to be challenges.
What You Should Do
Stay invested. Share price fell 4 per cent last Friday, partly due to concerns that its interest in Echo might spark a costly takeover bid. It is now trading at 7.5 times CY12 EV/Ebitda, a 27 per cent discount to its Macau peers. Save for economic headwinds, its long-term fundamentals are intact, meaning visible earnings and strong operational cash flow.
OUTPERFORM
Singapore Press Holdings
OCBC on 12 June 2012
In the face of an increasingly uncertain macro environment, we expect Singapore Press Holdings’ (SPH) retail mall landlord business to provide a stable counterweight to its core print business which is expected to face pressure from dipping ad demand. The retail business, comprising of the Paragon and the Clementi Mall, contributed S$47.9m of profits before tax (PBT) in 1HFY12, making up a respectable 22% of total PBT. We also expect the commercial development at Sengkang to complete by 2016, which would add another suburban mall similar to the size of Clementi Mall into SPH’s retail portfolio. Moreover, with group investible funds currently at S$0.9b as of end Mar 2012, we believe there is sufficient capacity for SPH to allocate additional capital into its retail strategy ahead. Maintain BUY with an unchanged fair value estimate of S$4.05.
Resilient retail mall landlord business
In the face of an increasingly uncertain macro environment, we expect Singapore Press Holdings’ (SPH) retail mall landlord business to provide a stable counterweight to its core print business which is expected to face pressure from dipping ad demand. The retail business, comprising of the Paragon and the Clementi Mall, contributed S$47.9m of profits before tax (PBT) in 1HFY12, making up a respectable 22% of total PBT. Given the limited retail space pipeline in the Orchard area over FY12-13 (estimated 543k sq ft net floor area), we expect rentals at the Paragon to stay relatively resilient. In addition, we expect the strategic location of the Clementi Mall, now fully leased, at Clementi MRT station and strong foot traffic of 60k daily to underpin rental levels.
Expect growth in retail mall segment
Going forward, SPH’s retail landlord business is set to grow with the expected completion of the Sengkang commercial development by 2016. Won in a tender in Jan 2012 for S$328m, the 99-year Sengkang site is expected to yield a retail mall with ~284k sq ft GFA which would add another suburban mall similar to the size of Clementi Mall into SPH’s retail portfolio. We also believe that SPH’s 70:30 partnership with United Engineers Limited (UEL) would create considerable synergy between UEL’s property development experience and SPH’s suburban mall management capabilities. Moreover, with group investible funds currently at S$0.9b as of end Mar 2012, we believe there is sufficient capacity for SPH to allocate additional capital into its retail strategy ahead.
Maintain BUY at unchanged S$4.05 fair value estimate
For the current fiscal year, however, we expect to see sustained downward pressure on SPH’s core print advertisement and circulation business as demand softens in an increasingly uncertain macro environment. In 1HFY12, we saw newspaper ad revenue dip 2.3%, driven mostly by falling classified ad demand which fell 6.5%. On the other hand, newsprint costs are expected to stay relatively stable ahead and we believe SPH has some flexibility in managing staff costs should the top-line weaken further. Maintain BUY with an unchanged fair value estimate of S$4.05.
In the face of an increasingly uncertain macro environment, we expect Singapore Press Holdings’ (SPH) retail mall landlord business to provide a stable counterweight to its core print business which is expected to face pressure from dipping ad demand. The retail business, comprising of the Paragon and the Clementi Mall, contributed S$47.9m of profits before tax (PBT) in 1HFY12, making up a respectable 22% of total PBT. We also expect the commercial development at Sengkang to complete by 2016, which would add another suburban mall similar to the size of Clementi Mall into SPH’s retail portfolio. Moreover, with group investible funds currently at S$0.9b as of end Mar 2012, we believe there is sufficient capacity for SPH to allocate additional capital into its retail strategy ahead. Maintain BUY with an unchanged fair value estimate of S$4.05.
Resilient retail mall landlord business
In the face of an increasingly uncertain macro environment, we expect Singapore Press Holdings’ (SPH) retail mall landlord business to provide a stable counterweight to its core print business which is expected to face pressure from dipping ad demand. The retail business, comprising of the Paragon and the Clementi Mall, contributed S$47.9m of profits before tax (PBT) in 1HFY12, making up a respectable 22% of total PBT. Given the limited retail space pipeline in the Orchard area over FY12-13 (estimated 543k sq ft net floor area), we expect rentals at the Paragon to stay relatively resilient. In addition, we expect the strategic location of the Clementi Mall, now fully leased, at Clementi MRT station and strong foot traffic of 60k daily to underpin rental levels.
Expect growth in retail mall segment
Going forward, SPH’s retail landlord business is set to grow with the expected completion of the Sengkang commercial development by 2016. Won in a tender in Jan 2012 for S$328m, the 99-year Sengkang site is expected to yield a retail mall with ~284k sq ft GFA which would add another suburban mall similar to the size of Clementi Mall into SPH’s retail portfolio. We also believe that SPH’s 70:30 partnership with United Engineers Limited (UEL) would create considerable synergy between UEL’s property development experience and SPH’s suburban mall management capabilities. Moreover, with group investible funds currently at S$0.9b as of end Mar 2012, we believe there is sufficient capacity for SPH to allocate additional capital into its retail strategy ahead.
Maintain BUY at unchanged S$4.05 fair value estimate
For the current fiscal year, however, we expect to see sustained downward pressure on SPH’s core print advertisement and circulation business as demand softens in an increasingly uncertain macro environment. In 1HFY12, we saw newspaper ad revenue dip 2.3%, driven mostly by falling classified ad demand which fell 6.5%. On the other hand, newsprint costs are expected to stay relatively stable ahead and we believe SPH has some flexibility in managing staff costs should the top-line weaken further. Maintain BUY with an unchanged fair value estimate of S$4.05.
Karin Technology
OCBC on 12 June 2012
We believe that growing macroeconomic headwinds could possibly stifle Karin Technology’s (Karin) Components Distribution segment and enterprise hardware product sales. Nevertheless, we expect this to be mitigated by the group’s new consumer electronics retail business, which offers a full range of Apple products. Karin is likely to be a key beneficiary of Apple’s dominant position in the media tablets space, in our view. We raise our FY12 revenue estimate by 2.9% (FY13 by 2.0%) as we finetune our assumptions for the retail stores contribution but trim our core PATMI forecast marginally by 0.5% (FY13 by 2.8%) to account for higher operating expenses from the running of these stores. Our fair value estimate, which is based on 6x blended FY12/13F core EPS, inches down from S$0.27 to S$0.265. Maintain HOLD as FY12F dividend yield remains attractive at 8.5%.
Macro headwinds have grown in recent months
We believe that increasing macroeconomic headwinds could stifle business sentiment and hence enterprise IT spending. This is likely to have an adverse impact on Karin Technology (Karin). Nevertheless, we are still expecting IT investments to continue in 2012. This is driven by efforts to boost business efficiency and thence competitiveness. Meanwhile, we are expecting Karin’s Components Distribution segment to report a sequential recovery in 2HFY12 as the group experienced a delay in deliveries in 1HFY12. But we are projecting a decline in full-year revenue for this segment due to the weakening macroeconomic situation.
Consumer electronics products pivotal to growth
We opine that there would still be bright spots for Karin despite the current uncertain outlook. This stems largely from Karin’s new retail consumer electronics products stores, which sell a full range of Apple products and accessories in Hong Kong. Research firm Gartner estimated that global sales of media tablets to end users would increase by 98% in 2012. Within this space, Apple is projected to constitute 61.4% of the market share, highlighting its dominant market position. We expect Karin to leverage on this trend to expand its sales volume, although a downside to this would be higher operating costs incurred to run the stores. With the launch of Apple’s next version iPad/iPhone later this year a possibility, we expect Karin to subsequently secure its distribution rights, given its long-standing relationship with Apple. This would correspondingly increase Karin’s revenue growth trajectory, although contribution would only take place in 1HFY13.
Maintain HOLD
We raise our FY12 revenue estimate by 2.9% (FY13 by 2.0%) as we finetune our assumptions for the retail stores contribution but trim our core PATMI forecast marginally by 0.5% (FY13 by 2.8%) on lower net margin assumptions, arising from an increase in our operating expenses forecast. Our fair value estimate, which is based on 6x blended FY12/13F core EPS, inches down from S$0.27 to S$0.265. Maintain HOLD as FY12F dividend yield remains attractive at 8.5%.
We believe that growing macroeconomic headwinds could possibly stifle Karin Technology’s (Karin) Components Distribution segment and enterprise hardware product sales. Nevertheless, we expect this to be mitigated by the group’s new consumer electronics retail business, which offers a full range of Apple products. Karin is likely to be a key beneficiary of Apple’s dominant position in the media tablets space, in our view. We raise our FY12 revenue estimate by 2.9% (FY13 by 2.0%) as we finetune our assumptions for the retail stores contribution but trim our core PATMI forecast marginally by 0.5% (FY13 by 2.8%) to account for higher operating expenses from the running of these stores. Our fair value estimate, which is based on 6x blended FY12/13F core EPS, inches down from S$0.27 to S$0.265. Maintain HOLD as FY12F dividend yield remains attractive at 8.5%.
Macro headwinds have grown in recent months
We believe that increasing macroeconomic headwinds could stifle business sentiment and hence enterprise IT spending. This is likely to have an adverse impact on Karin Technology (Karin). Nevertheless, we are still expecting IT investments to continue in 2012. This is driven by efforts to boost business efficiency and thence competitiveness. Meanwhile, we are expecting Karin’s Components Distribution segment to report a sequential recovery in 2HFY12 as the group experienced a delay in deliveries in 1HFY12. But we are projecting a decline in full-year revenue for this segment due to the weakening macroeconomic situation.
Consumer electronics products pivotal to growth
We opine that there would still be bright spots for Karin despite the current uncertain outlook. This stems largely from Karin’s new retail consumer electronics products stores, which sell a full range of Apple products and accessories in Hong Kong. Research firm Gartner estimated that global sales of media tablets to end users would increase by 98% in 2012. Within this space, Apple is projected to constitute 61.4% of the market share, highlighting its dominant market position. We expect Karin to leverage on this trend to expand its sales volume, although a downside to this would be higher operating costs incurred to run the stores. With the launch of Apple’s next version iPad/iPhone later this year a possibility, we expect Karin to subsequently secure its distribution rights, given its long-standing relationship with Apple. This would correspondingly increase Karin’s revenue growth trajectory, although contribution would only take place in 1HFY13.
Maintain HOLD
We raise our FY12 revenue estimate by 2.9% (FY13 by 2.0%) as we finetune our assumptions for the retail stores contribution but trim our core PATMI forecast marginally by 0.5% (FY13 by 2.8%) on lower net margin assumptions, arising from an increase in our operating expenses forecast. Our fair value estimate, which is based on 6x blended FY12/13F core EPS, inches down from S$0.27 to S$0.265. Maintain HOLD as FY12F dividend yield remains attractive at 8.5%.
Metro Holdings
Kim Eng on 12 June 2012
Background: Metro Holdings is a property development and investment group, backed by an established retail business. Its property arm not only owns and manages several prime retail properties in first-tier cities in China, but also holds significant investments in a number of property businesses in China, including stakes in listed companies such as Shui On Land and Top Spring International Holdings.
Why are we highlighting this stock? Metro recently reported bumper earnings for FY3/12 with net profit up 12.2% YoY to SGD91.9m. The group now has a healthy net cash position of SGD392.1m (or 47.4 cents per share) and has proposed a dividend per share totalling 6 cents (including 4 cents of special dividend) to reward shareholders.
Benefiting from portfolio reconstitution. Metro has been divesting a number of non-core commercial assets, the most recent being the sale of its 50% stake in Metro City Beijing, which resulted in a pre-tax divestment gain of SGD98.7m. Parts of proceeds have been redeployed into new investments, such as a 5% stake in Hong Kong-listed Top Spring. The group’s current property portfolio continues to perform well, with occupancy rates of its five key properties averaging at 92.5% as at Mar 2012.
Strategic tie-ups for new opportunities. Besides Top Spring, Metro can also list Shui On Land and TESCO as potential partners for future collaboration in China. With its expertise in retail, we expect Metro to increase its exposure to retail assets in China to tap on the growth in domestic consumption. This could either be in the form of further JV investments in new commercial properties or expanding its retail operations into China from just Singapore and Indonesia currently.
Healthy cash position offers flexibility. With SGD392.1m in net cash, Metro can theoretically acquire nearly another ~SGD400m worth of assets (assuming 50% LTV) while maintaining net gearing at zero. Alternatively, with the stock currently trading at just 0.6x P/BV, management could perhaps consider doing a capital reduction instead.
Background: Metro Holdings is a property development and investment group, backed by an established retail business. Its property arm not only owns and manages several prime retail properties in first-tier cities in China, but also holds significant investments in a number of property businesses in China, including stakes in listed companies such as Shui On Land and Top Spring International Holdings.
Why are we highlighting this stock? Metro recently reported bumper earnings for FY3/12 with net profit up 12.2% YoY to SGD91.9m. The group now has a healthy net cash position of SGD392.1m (or 47.4 cents per share) and has proposed a dividend per share totalling 6 cents (including 4 cents of special dividend) to reward shareholders.
Benefiting from portfolio reconstitution. Metro has been divesting a number of non-core commercial assets, the most recent being the sale of its 50% stake in Metro City Beijing, which resulted in a pre-tax divestment gain of SGD98.7m. Parts of proceeds have been redeployed into new investments, such as a 5% stake in Hong Kong-listed Top Spring. The group’s current property portfolio continues to perform well, with occupancy rates of its five key properties averaging at 92.5% as at Mar 2012.
Strategic tie-ups for new opportunities. Besides Top Spring, Metro can also list Shui On Land and TESCO as potential partners for future collaboration in China. With its expertise in retail, we expect Metro to increase its exposure to retail assets in China to tap on the growth in domestic consumption. This could either be in the form of further JV investments in new commercial properties or expanding its retail operations into China from just Singapore and Indonesia currently.
Healthy cash position offers flexibility. With SGD392.1m in net cash, Metro can theoretically acquire nearly another ~SGD400m worth of assets (assuming 50% LTV) while maintaining net gearing at zero. Alternatively, with the stock currently trading at just 0.6x P/BV, management could perhaps consider doing a capital reduction instead.
Ezion Holdings
Kim Eng on 12 June 2012
Reiterate BUY; depressed valuations unjustified. Trading at only 6.7x FY12F and 3.9x FY13F PER, Ezion is easily the cheapest offshore and marine stock under our coverage. Yet, its earnings growth potential is one of the strongest at 33% CAGR over the next three years, underscored by clear visibility from secured deals with further upside on additional new contracts. The depressed valuations therefore seem unjustified to us. Reiterate BUY with target price of SGD1.38.
A new contract each month. Since January this year, Ezion has announced at least one contract win a month. Last week, it won a USD86.3m contract to provide a service rig for four years to a national oil major in Central America, believed to be Pemex. We estimate that this would add USD7.0m pa to its net profit over FY13F-16F. With two Australian LNG marine logistics contracts in the bag, Ezion is gunning for a third one under the Australia Pacific LNG (APLNG) project. The tender results should be known by next month. Ezion’s robust contract win momentum suggests that demand for its services remain intact.
Rising gearing not a major worry. Gearing is set to rise to 1.04x in FY12F from 0.35x last year as we expect more draw-downs on its newly established SGD500m multicurrency debt issuance programme (it drew down SGD100m recently) to fufill our estimated capex of USD450m this year. But the strain on the balance sheet should ease as operating cash flows increase on deployment of its units. Asset sale-and-leaseback is an option, but this would reduce overall profitability.
Equity fund-raising not necessarily negative. In our view, even if Ezion decides to raise equity to take on additional projects, this should not be deemed a negative move. Its previous equity fund raising resulted in total dilution of about 18%, but FY10 and FY11 EPS growth of 135% and 45% respectively have more than compensated for this.
Raise TP to SGD1.38. Our target price, which is based on 0.3x PEG, is raised to SGD1.38 as we increase our net profit forecasts for FY13F-14F by about 5% to factor in last week’s new contract. Reiterate BUY.
Reiterate BUY; depressed valuations unjustified. Trading at only 6.7x FY12F and 3.9x FY13F PER, Ezion is easily the cheapest offshore and marine stock under our coverage. Yet, its earnings growth potential is one of the strongest at 33% CAGR over the next three years, underscored by clear visibility from secured deals with further upside on additional new contracts. The depressed valuations therefore seem unjustified to us. Reiterate BUY with target price of SGD1.38.
A new contract each month. Since January this year, Ezion has announced at least one contract win a month. Last week, it won a USD86.3m contract to provide a service rig for four years to a national oil major in Central America, believed to be Pemex. We estimate that this would add USD7.0m pa to its net profit over FY13F-16F. With two Australian LNG marine logistics contracts in the bag, Ezion is gunning for a third one under the Australia Pacific LNG (APLNG) project. The tender results should be known by next month. Ezion’s robust contract win momentum suggests that demand for its services remain intact.
Rising gearing not a major worry. Gearing is set to rise to 1.04x in FY12F from 0.35x last year as we expect more draw-downs on its newly established SGD500m multicurrency debt issuance programme (it drew down SGD100m recently) to fufill our estimated capex of USD450m this year. But the strain on the balance sheet should ease as operating cash flows increase on deployment of its units. Asset sale-and-leaseback is an option, but this would reduce overall profitability.
Equity fund-raising not necessarily negative. In our view, even if Ezion decides to raise equity to take on additional projects, this should not be deemed a negative move. Its previous equity fund raising resulted in total dilution of about 18%, but FY10 and FY11 EPS growth of 135% and 45% respectively have more than compensated for this.
Raise TP to SGD1.38. Our target price, which is based on 0.3x PEG, is raised to SGD1.38 as we increase our net profit forecasts for FY13F-14F by about 5% to factor in last week’s new contract. Reiterate BUY.
Monday, 11 June 2012
CapitaRetail China Trust
OCBC on 11 June 2012
China's May retail sales grew 13.8% YoY, lower than economists' expectation of a 14.2% rise but still reasonably strong. We believe that domestic demand could show improvement starting in 3Q12. On another note, China’s online retail sales grew 54% in 2011 to RMB783b, accounting for 4.3% of total retail sales of consumer goods. Signaling the growing importance of online retail, Walmart, Neiman Marcus and Macy’s have made acquisitions this year into Chinese online retail sites. However, even if online retail sales continue to grow at 50% p.a. through till 2015 and total retail sales grow at a conservative 10%-15% p.a., we calculate that physical retail sales can still grow at a healthy 7-12% p.a. Quality of execution is key as competition intensifies and we believe that CRCT has the operational capability. We maintain our BUY rating on CRCT and S$1.44 fair value.
Reasonable May retail sales
Data released on Saturday shows that China's retail sales grew 13.8% YoY in May to RMB1.67t, slightly down from the 14.1% growth in April and lower than economists' expectation of a 14.2% rise but still acceptable. Adjusted for inflation, May's figure was up 11% YoY. For the first five months of this year, retail sales totaled RMB8.16t, up 14.5% YoY (10.9% YoY in real terms). China's rate cut last Thursday had already caused many to anticipate disappointing economic data over the weekend. Inflation slowed to 3.0% in May from 3.4% in April, which should give the central bank more leeway to enact further interest rate cuts. We believe that domestic demand could be boosted starting in 3Q12.
Growth in online retail...
According to the Ministry of Commerce, China recorded 194 million online shoppers and RMB782.56b in online retail trade last year. The sales were 53.7% higher YoY and accounted for 4.3% of China's total consumer goods retail volume in 2011. The importance of the online channel is increasingly recognized by retailers. In Feb, Walmart increased its stake in Yihaodian, the biggest online grocery retailer in China, to 51%. Department store retailer Neiman Marcus invested in the Glamour Sales site in March. In May, Macy’s invested in online retailer VIPStore, which operates jiapin.com.
...but physical retail will do well
Even if online retail sales continue to grow at 50% p.a. through till 2015 and total retail sales grow at a conservative 10%-15% p.a., physical retail sales can grow at a healthy 7-12% p.a. Among real estate investments, retail is quite heterogeneous, whereby differentiation and strong execution are key. We have confidence in CRCT's operational capability given its manager is a wholly-owned subsidiary of CapitaMalls Asia.
Maintain BUY
We maintain our BUY rating on CRCT and S$1.44 fair value. CRCT is trading at an attractive FY12F dividend yield of 7.4%.
China's May retail sales grew 13.8% YoY, lower than economists' expectation of a 14.2% rise but still reasonably strong. We believe that domestic demand could show improvement starting in 3Q12. On another note, China’s online retail sales grew 54% in 2011 to RMB783b, accounting for 4.3% of total retail sales of consumer goods. Signaling the growing importance of online retail, Walmart, Neiman Marcus and Macy’s have made acquisitions this year into Chinese online retail sites. However, even if online retail sales continue to grow at 50% p.a. through till 2015 and total retail sales grow at a conservative 10%-15% p.a., we calculate that physical retail sales can still grow at a healthy 7-12% p.a. Quality of execution is key as competition intensifies and we believe that CRCT has the operational capability. We maintain our BUY rating on CRCT and S$1.44 fair value.
Reasonable May retail sales
Data released on Saturday shows that China's retail sales grew 13.8% YoY in May to RMB1.67t, slightly down from the 14.1% growth in April and lower than economists' expectation of a 14.2% rise but still acceptable. Adjusted for inflation, May's figure was up 11% YoY. For the first five months of this year, retail sales totaled RMB8.16t, up 14.5% YoY (10.9% YoY in real terms). China's rate cut last Thursday had already caused many to anticipate disappointing economic data over the weekend. Inflation slowed to 3.0% in May from 3.4% in April, which should give the central bank more leeway to enact further interest rate cuts. We believe that domestic demand could be boosted starting in 3Q12.
Growth in online retail...
According to the Ministry of Commerce, China recorded 194 million online shoppers and RMB782.56b in online retail trade last year. The sales were 53.7% higher YoY and accounted for 4.3% of China's total consumer goods retail volume in 2011. The importance of the online channel is increasingly recognized by retailers. In Feb, Walmart increased its stake in Yihaodian, the biggest online grocery retailer in China, to 51%. Department store retailer Neiman Marcus invested in the Glamour Sales site in March. In May, Macy’s invested in online retailer VIPStore, which operates jiapin.com.
...but physical retail will do well
Even if online retail sales continue to grow at 50% p.a. through till 2015 and total retail sales grow at a conservative 10%-15% p.a., physical retail sales can grow at a healthy 7-12% p.a. Among real estate investments, retail is quite heterogeneous, whereby differentiation and strong execution are key. We have confidence in CRCT's operational capability given its manager is a wholly-owned subsidiary of CapitaMalls Asia.
Maintain BUY
We maintain our BUY rating on CRCT and S$1.44 fair value. CRCT is trading at an attractive FY12F dividend yield of 7.4%.
Cache Logistics Trust
OCBC on 11 June 2012
Cache Logistics Trust (CACHE) appears to be on track to deliver a sturdy set of results for FY12. In addition to strong and predictable income streams from its existing portfolio properties, the REIT had announced two new acquisitions YTD that are expected to contributive positively to its financial performance. We also observe that CACHE had announced the redemption of its S$35m 3.5% fixed rate notes due 2016 on 31 May. This is somewhat unexpected in our view, as the date of maturity is still four years away and as CACHE clearly need the capital for growth. This leads us to believe that CACHE may be in the process of injecting new capital via borrowings at more favourable terms. Should this turn out to be true, we expect CACHE to benefit from interest savings. Maintain BUY with unchanged fair value of S$1.11.
Expecting sturdy FY12 performance
Cache Logistics Trust (CACHE) appears to be on track to deliver a sturdy set of results for FY12. In addition to strong and predictable income streams from its existing portfolio properties, the REIT had announced two new acquisitions YTD that are expected to contributive positively to its financial performance. We note that the acquisition of Pan Asia Logistics Centre, announced in Jan, was completed on 30 Apr and is expected to give an initial NPI yield of 7.7%. On 7 May, CACHE proposed a sizeable acquisition of Pandan Logistics Hub from its sponsor CWT Limited at S$66m (~8.5% of total asset valuation as at 31 Dec 2011). This property incorporates a 2.5% annual rental escalation and has an initial NPI yield of 7.6%, based on details on the master lease arrangement with CWT. As the implied portfolio NPI yield stood at 7.3% for FY11, both acquisitions are expected to be accretive to its earnings.
Possibility of lower borrowing costs
We also observe that CACHE had announced the redemption of its S$35m 3.5% fixed rate notes due 2016 on 31 May. This is somewhat unexpected in our view, as the date of maturity is still four years away and as CACHE clearly need the capital for growth. This leads us to believe that CACHE may be in the process of injecting new capital via borrowings at more favourable terms (equity issue is probably an unlikely scenario at this juncture given its comfortable aggregate leverage of 27.7% as at 31 Mar). Should this turn out to be true, we expect CACHE to benefit from interest savings.
Maintain BUY
We continue to like CACHE for its resilient portfolio (100% occupied; master lease arrangements), long WALE of 4.4 years and attractive FY12F DPU yield of 8.1%. We are currently holding off adjusting our estimates for the Pandan Logistics Hub acquisition as it is still subject to unitholders’ approval on 19 Jun. Maintain BUY with unchanged fair value of S$1.11.
Cache Logistics Trust (CACHE) appears to be on track to deliver a sturdy set of results for FY12. In addition to strong and predictable income streams from its existing portfolio properties, the REIT had announced two new acquisitions YTD that are expected to contributive positively to its financial performance. We also observe that CACHE had announced the redemption of its S$35m 3.5% fixed rate notes due 2016 on 31 May. This is somewhat unexpected in our view, as the date of maturity is still four years away and as CACHE clearly need the capital for growth. This leads us to believe that CACHE may be in the process of injecting new capital via borrowings at more favourable terms. Should this turn out to be true, we expect CACHE to benefit from interest savings. Maintain BUY with unchanged fair value of S$1.11.
Expecting sturdy FY12 performance
Cache Logistics Trust (CACHE) appears to be on track to deliver a sturdy set of results for FY12. In addition to strong and predictable income streams from its existing portfolio properties, the REIT had announced two new acquisitions YTD that are expected to contributive positively to its financial performance. We note that the acquisition of Pan Asia Logistics Centre, announced in Jan, was completed on 30 Apr and is expected to give an initial NPI yield of 7.7%. On 7 May, CACHE proposed a sizeable acquisition of Pandan Logistics Hub from its sponsor CWT Limited at S$66m (~8.5% of total asset valuation as at 31 Dec 2011). This property incorporates a 2.5% annual rental escalation and has an initial NPI yield of 7.6%, based on details on the master lease arrangement with CWT. As the implied portfolio NPI yield stood at 7.3% for FY11, both acquisitions are expected to be accretive to its earnings.
Possibility of lower borrowing costs
We also observe that CACHE had announced the redemption of its S$35m 3.5% fixed rate notes due 2016 on 31 May. This is somewhat unexpected in our view, as the date of maturity is still four years away and as CACHE clearly need the capital for growth. This leads us to believe that CACHE may be in the process of injecting new capital via borrowings at more favourable terms (equity issue is probably an unlikely scenario at this juncture given its comfortable aggregate leverage of 27.7% as at 31 Mar). Should this turn out to be true, we expect CACHE to benefit from interest savings.
Maintain BUY
We continue to like CACHE for its resilient portfolio (100% occupied; master lease arrangements), long WALE of 4.4 years and attractive FY12F DPU yield of 8.1%. We are currently holding off adjusting our estimates for the Pandan Logistics Hub acquisition as it is still subject to unitholders’ approval on 19 Jun. Maintain BUY with unchanged fair value of S$1.11.
Mapletree Industrial Trust
Kim Eng on 11 June 2012
Background: Listed in Oct 2010 and sponsored by Mapletree Investments, a wholly-owned subsidiary of Temasek Holdings, Mapletree Industrial Trust (MIT) invests principally in income-producing real estate used for industrial purposes. As of 31 Mar 2012, its portfolio of 81 industrial assets has an appraised value of SGD2.7b and net leasable area (NLA) of 1.3m sqm. MIT has a tenant base of more than 2,000 MNCs, listed companies and local enterprises.
Why are we highlighting this stock? MIT’s pure-Singapore portfolio is stable with a reasonably strong occupancy rate of 94.9%, providing the trust with a steadfast income stream. The subpar rentals of its portfolio – 18-30% of its flatted factory rents are still below market rates – should also help lift revenue growth in the short term through increasing rents to market levels and reconfiguring its tenant mix to include high-growth sectors. In addition, the right of first refusal granted by Mapletree Investments would allow the trust access to its development capabilities.
Stable yield, steady growth. MIT’s current portfolio is well diversified with a reasonably strong occupancy rate of 94.9% and lease expiry profile of 2.5 years. Retention rate was strong at 76.1% in 4QFY11/12, providing the trust with a steadfast income stream. Performance should remain relatively stable given that 18-30% of its flatted factory rents are still below market rates (from our estimates) and 23.2% of topline is up for renewal in FY12/13.
Healthy financial metrics. MIT’s balance sheet is healthy with interest coverage ratio of 6.1x and aggregate leverage at 37.8%. This implies a comfortable debt headroom of SGD99-365m for additional growth initiatives based on guided target gearing levels of 40-45%. Its weighted average debt tenure is three years and ~85% of total borrowings of SGD1.07b have been hedged to fixed rates. Blended interest cost remained low at 2.3%.
Growth and risks. On a relative basis, forward yields of 7.4-7.6% in FY12/13-13/14 are still attractive in our view, backed by pure-Singapore assets, a diversified portfolio and a strong sponsor. Further upside may come from acquisitions, build-to-suit projects (MIT can undertake up to SGD270m of development activities) and asset enhancement initiatives. Key downside risks include (1) weaker-than-expected rental reversions, (2) management’s inability to grow the portfolio in the long run, and (3) rise in defaults and arrears ratio in the event of an economic downturn due to a high concentration of SME tenants.
Background: Listed in Oct 2010 and sponsored by Mapletree Investments, a wholly-owned subsidiary of Temasek Holdings, Mapletree Industrial Trust (MIT) invests principally in income-producing real estate used for industrial purposes. As of 31 Mar 2012, its portfolio of 81 industrial assets has an appraised value of SGD2.7b and net leasable area (NLA) of 1.3m sqm. MIT has a tenant base of more than 2,000 MNCs, listed companies and local enterprises.
Why are we highlighting this stock? MIT’s pure-Singapore portfolio is stable with a reasonably strong occupancy rate of 94.9%, providing the trust with a steadfast income stream. The subpar rentals of its portfolio – 18-30% of its flatted factory rents are still below market rates – should also help lift revenue growth in the short term through increasing rents to market levels and reconfiguring its tenant mix to include high-growth sectors. In addition, the right of first refusal granted by Mapletree Investments would allow the trust access to its development capabilities.
Stable yield, steady growth. MIT’s current portfolio is well diversified with a reasonably strong occupancy rate of 94.9% and lease expiry profile of 2.5 years. Retention rate was strong at 76.1% in 4QFY11/12, providing the trust with a steadfast income stream. Performance should remain relatively stable given that 18-30% of its flatted factory rents are still below market rates (from our estimates) and 23.2% of topline is up for renewal in FY12/13.
Healthy financial metrics. MIT’s balance sheet is healthy with interest coverage ratio of 6.1x and aggregate leverage at 37.8%. This implies a comfortable debt headroom of SGD99-365m for additional growth initiatives based on guided target gearing levels of 40-45%. Its weighted average debt tenure is three years and ~85% of total borrowings of SGD1.07b have been hedged to fixed rates. Blended interest cost remained low at 2.3%.
Growth and risks. On a relative basis, forward yields of 7.4-7.6% in FY12/13-13/14 are still attractive in our view, backed by pure-Singapore assets, a diversified portfolio and a strong sponsor. Further upside may come from acquisitions, build-to-suit projects (MIT can undertake up to SGD270m of development activities) and asset enhancement initiatives. Key downside risks include (1) weaker-than-expected rental reversions, (2) management’s inability to grow the portfolio in the long run, and (3) rise in defaults and arrears ratio in the event of an economic downturn due to a high concentration of SME tenants.
China Minzhong
Kim Eng on 11 June 2012
Sell-off overdone, maintain BUY. The recent sell-off of China Minzhong following its announcement of the 3QFY6/12 results appears overdone in our view. To be clear, the company is still exposed to Eurozone headwinds, but our worst-case scenario analysis suggests that the negatives have all been priced in. We would watch its next quarterly results for signs of recovery. While we lower our earnings forecasts in a nod to lingering concerns over its European exposure, we maintain our BUY call with a target price of SGD1.16 based on 4.7x FY6/13F PER (25% discount to historical average of 6.3x PER).
Asset quality unlikely to deteriorate. The sharp increase in Minzhong’s trade receivables in 3QFY6/12 is worrying. After all, seasonality can only be part of the reason. We suspect that the other reason is the difficult financial straits its European end-customers are in. That said, we do not think its asset quality will necessarily be adversely affected any time soon.
Cut earnings forecasts for FY6/13 and FY6/14. Our base-case scenario assumes that Minzhong will be able to collect its receivables over time. However, it is also possible that the financial position of its European counterparts continues to worsen, thus leading to a decline in its export orders. We lower our revenue forecasts by 15% for FY6/13F and 20% for FY6/14F, with the net profit forecasts correspondingly cut by 18% and 22%.
Long-term outlook still intact. Vegetable consumption will stay resilient through the economic cycles and we remain confident that Minzhong’s cost advantage will serve as a long-term shield against domestic producers in the European market. The company’s gradual shift towards higher-margin produce such as asparagus, king oyster mushroom and black fungus will also help to mitigate some cost pressures.
Sell-off overdone, maintain BUY. The recent sell-off of China Minzhong following its announcement of the 3QFY6/12 results appears overdone in our view. To be clear, the company is still exposed to Eurozone headwinds, but our worst-case scenario analysis suggests that the negatives have all been priced in. We would watch its next quarterly results for signs of recovery. While we lower our earnings forecasts in a nod to lingering concerns over its European exposure, we maintain our BUY call with a target price of SGD1.16 based on 4.7x FY6/13F PER (25% discount to historical average of 6.3x PER).
Asset quality unlikely to deteriorate. The sharp increase in Minzhong’s trade receivables in 3QFY6/12 is worrying. After all, seasonality can only be part of the reason. We suspect that the other reason is the difficult financial straits its European end-customers are in. That said, we do not think its asset quality will necessarily be adversely affected any time soon.
Cut earnings forecasts for FY6/13 and FY6/14. Our base-case scenario assumes that Minzhong will be able to collect its receivables over time. However, it is also possible that the financial position of its European counterparts continues to worsen, thus leading to a decline in its export orders. We lower our revenue forecasts by 15% for FY6/13F and 20% for FY6/14F, with the net profit forecasts correspondingly cut by 18% and 22%.
Long-term outlook still intact. Vegetable consumption will stay resilient through the economic cycles and we remain confident that Minzhong’s cost advantage will serve as a long-term shield against domestic producers in the European market. The company’s gradual shift towards higher-margin produce such as asparagus, king oyster mushroom and black fungus will also help to mitigate some cost pressures.
Friday, 8 June 2012
KSH Holdings
OCBC on 8 June 2012
The BCA is forecasting a 16% to 34% dip in total construction demand to S$21b-S$27b in 2012, with the bulk of the dip expected to come from lower private demand (S$8b – S$12b in 2012 versus S$16.8b in 2011). KSH has historically been focused on private projects given higher margins, and the weakened outlook would likely put downward pressure on its construction business over the mid-term. With net gearing at a low 4.1% and its expertise in construction, we see KSH well-poised to add value as a JV partner with larger developers. Already we have seen KSH taking stakes in the redevelopment of Hong Leong Garden Shopping Centre, Seletar Garden and 11 King Albert Park. We see execution at KSH’s redevelopment projects to be key drivers for the share price ahead and could offset, to an extent, the weaker private construction outlook. Maintain HOLD rating at an unchanged S$0.25 fair value estimate.
Private construction outlook continues to look weak
While KSH Holdings’ (KSH) order book is currently relatively strong at S$467.0m, we believe the rate of book replenishment could be uncertain ahead. The Building and Construction Authority (BCA) of Singapore is forecasting a 16% to 34% dip in total construction demand to S$21b-S$27b in 2012 from S$32b in 2011, with the bulk of the dip expected to come from lower private construction demand (S$8b – S$12b in 2012 versus S$16.8b in 2011); public demand would only fall marginally to S$13b-S$15b in 2012 from S$15.2b in 2011. This is in line with our view that the domestic residential sector could soften somewhat going forward given persistent macro headwinds from Europe and potentially more property curbs from the government. Since KSH has historically been focused on private construction projects given the higher profit margins involved, we believe that the weakened outlook would likely put downward pressure on its construction business over the mid-term.
En-bloc opportunities to feature ahead
KSH has a strong balance sheet with net gearing at a low 4.1%, and cash and equivalents of S$65.2m. Together with its expertise in construction, we believe KSH is well-poised to add value as a JV partner with larger developers, particularly for those with higher leverage. Already we have seen KSH taking stakes in the redevelopment of Hong Leong Garden Shopping Centre, Seletar Garden and 11 King Albert Park. Looking ahead, we believe en-bloc opportunities for mixed developments with retail components could be interesting propositions for value accretion. We see execution at KSH’s redevelopment projects to be key drivers for the share price ahead and could offset, to an extent, the weaker private construction outlook.
Maintain HOLD at unchanged S$0.25 fair value estimate
Management continues to execute favorably and we understand that KSH is actively seeking order book replenishment. However, given a weaker outlook in the private construction segment and macro headwinds from an uncertain global environment, we maintain our HOLD rating at an unchanged S$0.25 fair value estimate.
The BCA is forecasting a 16% to 34% dip in total construction demand to S$21b-S$27b in 2012, with the bulk of the dip expected to come from lower private demand (S$8b – S$12b in 2012 versus S$16.8b in 2011). KSH has historically been focused on private projects given higher margins, and the weakened outlook would likely put downward pressure on its construction business over the mid-term. With net gearing at a low 4.1% and its expertise in construction, we see KSH well-poised to add value as a JV partner with larger developers. Already we have seen KSH taking stakes in the redevelopment of Hong Leong Garden Shopping Centre, Seletar Garden and 11 King Albert Park. We see execution at KSH’s redevelopment projects to be key drivers for the share price ahead and could offset, to an extent, the weaker private construction outlook. Maintain HOLD rating at an unchanged S$0.25 fair value estimate.
Private construction outlook continues to look weak
While KSH Holdings’ (KSH) order book is currently relatively strong at S$467.0m, we believe the rate of book replenishment could be uncertain ahead. The Building and Construction Authority (BCA) of Singapore is forecasting a 16% to 34% dip in total construction demand to S$21b-S$27b in 2012 from S$32b in 2011, with the bulk of the dip expected to come from lower private construction demand (S$8b – S$12b in 2012 versus S$16.8b in 2011); public demand would only fall marginally to S$13b-S$15b in 2012 from S$15.2b in 2011. This is in line with our view that the domestic residential sector could soften somewhat going forward given persistent macro headwinds from Europe and potentially more property curbs from the government. Since KSH has historically been focused on private construction projects given the higher profit margins involved, we believe that the weakened outlook would likely put downward pressure on its construction business over the mid-term.
En-bloc opportunities to feature ahead
KSH has a strong balance sheet with net gearing at a low 4.1%, and cash and equivalents of S$65.2m. Together with its expertise in construction, we believe KSH is well-poised to add value as a JV partner with larger developers, particularly for those with higher leverage. Already we have seen KSH taking stakes in the redevelopment of Hong Leong Garden Shopping Centre, Seletar Garden and 11 King Albert Park. Looking ahead, we believe en-bloc opportunities for mixed developments with retail components could be interesting propositions for value accretion. We see execution at KSH’s redevelopment projects to be key drivers for the share price ahead and could offset, to an extent, the weaker private construction outlook.
Maintain HOLD at unchanged S$0.25 fair value estimate
Management continues to execute favorably and we understand that KSH is actively seeking order book replenishment. However, given a weaker outlook in the private construction segment and macro headwinds from an uncertain global environment, we maintain our HOLD rating at an unchanged S$0.25 fair value estimate.
OSIM
OCBC on 8 June 2012
We expect OSIM International’s (OSIM) earnings momentum to continue in FY12, underpinned by innovative product launches and its strong focus on improving productivity and operational efficiencies. We believe that OSIM is on track to deliver earnings that would exceed consensus’ expectations of S$81.2m in FY12. OSIM has also developed a stronger brand equity and is in a better financial health since the last financial crisis, in our opinion. This would enable to group to withstand the current macroeconomic uncertainties. Recent share buyback activities would also enhance shareholder value and lend support to its share price. We retain our forecasts, BUY rating and fair value estimate of S$1.61, which implies total potential returns of 42.8%.
Expecting earnings momentum to continue
We expect OSIM International’s (OSIM) earnings momentum to continue in FY12, following its recent solid 1Q12 performance. During our meet up with OSIM recently, management updated us that demand for its uDivine massage chair and uPhoria leg massager continued to remain robust. We expect the launch of new products such as the uSoffa Runway and uDivine App to further drive its sales growth. In addition, the rationalisation of non-performing outlets and focus on improving its productivity underpins our forecast for OSIM to expand its net margin from 12.5% in FY11 to 13.7% in FY12. We believe that OSIM is well-positioned to deliver earnings that would exceed consensus’ expectations of S$81.2m in FY12, if it manages to sustain its current growth trajectory and operational efficiencies.
Healthy balance sheet to weather the macro uncertainties
While the macroeconomic environment continues to be with fraught with volatility and uncertainty, we expect OSIM’s healthy balance sheet (net cash of S$52.7m as at 31 Mar 2012) and strong free cashflow (FCF) generating ability to buttress its financial resilience. In our opinion, OSIM has transformed itself into a stronger entity with a healthier financial position and better brand equity since the last financial crisis. We forecast OSIM to generate S$80.8-89.5m of FCF over FY12-13F. This would bolster the group’s capacity to pay out decent dividends. Meanwhile, we believe that OSIM’s share buyback activities in recent weeks would enhance shareholder value, lend support to its share price and send a positive signal to investors.
Valuations undemanding, maintain BUY
We retain our forecasts, BUY rating and fair value estimate of S$1.61. This implies total potential returns of 42.8%, including a 3.0% prospective dividend yield. In our opinion, valuations are undemanding, with the stock trading at our FY13F PER of 9.1x, versus a projected EPS CAGR of 11.3% from FY11-13F, while offering an ROE of 36.0% (our FY13F estimate).
We expect OSIM International’s (OSIM) earnings momentum to continue in FY12, underpinned by innovative product launches and its strong focus on improving productivity and operational efficiencies. We believe that OSIM is on track to deliver earnings that would exceed consensus’ expectations of S$81.2m in FY12. OSIM has also developed a stronger brand equity and is in a better financial health since the last financial crisis, in our opinion. This would enable to group to withstand the current macroeconomic uncertainties. Recent share buyback activities would also enhance shareholder value and lend support to its share price. We retain our forecasts, BUY rating and fair value estimate of S$1.61, which implies total potential returns of 42.8%.
Expecting earnings momentum to continue
We expect OSIM International’s (OSIM) earnings momentum to continue in FY12, following its recent solid 1Q12 performance. During our meet up with OSIM recently, management updated us that demand for its uDivine massage chair and uPhoria leg massager continued to remain robust. We expect the launch of new products such as the uSoffa Runway and uDivine App to further drive its sales growth. In addition, the rationalisation of non-performing outlets and focus on improving its productivity underpins our forecast for OSIM to expand its net margin from 12.5% in FY11 to 13.7% in FY12. We believe that OSIM is well-positioned to deliver earnings that would exceed consensus’ expectations of S$81.2m in FY12, if it manages to sustain its current growth trajectory and operational efficiencies.
Healthy balance sheet to weather the macro uncertainties
While the macroeconomic environment continues to be with fraught with volatility and uncertainty, we expect OSIM’s healthy balance sheet (net cash of S$52.7m as at 31 Mar 2012) and strong free cashflow (FCF) generating ability to buttress its financial resilience. In our opinion, OSIM has transformed itself into a stronger entity with a healthier financial position and better brand equity since the last financial crisis. We forecast OSIM to generate S$80.8-89.5m of FCF over FY12-13F. This would bolster the group’s capacity to pay out decent dividends. Meanwhile, we believe that OSIM’s share buyback activities in recent weeks would enhance shareholder value, lend support to its share price and send a positive signal to investors.
Valuations undemanding, maintain BUY
We retain our forecasts, BUY rating and fair value estimate of S$1.61. This implies total potential returns of 42.8%, including a 3.0% prospective dividend yield. In our opinion, valuations are undemanding, with the stock trading at our FY13F PER of 9.1x, versus a projected EPS CAGR of 11.3% from FY11-13F, while offering an ROE of 36.0% (our FY13F estimate).
Yamada Green Resources
UobKayhian on 8 June 2012
Investment highlights
· We see value emerging from the recent price weakness and re-iterate our BUY recommendation but with a lower target price of S$0.24. Earnings are expected to remain robust despite a short blip in weather and we do see a bumper dividend payout when they report their full-year earnings in August this year.
· The target price translates to 3.0x 2012F PE, pegged to Singapore-listed peers’ average. Yamada Green Resources (Yamada) is currently trading at 3.0x FY11 PE and 2.1x FY12F PE vs an earnings growth of 50.0%.
Our view
· 9MFY12 revenue and earnings had exceeded FY11’s full-year results but share price slumped 37.5% yoy Yamada had reported 9MFY12 revenue of Rmb494.8m and net profit of Rmb158.9m, registering a growth of 58.5% and 49.5% respectively. This was driven by the enlarged land base as the group had almost doubled its shiitake mushroom cultivation base to 5,134mu from 2,614mu previously. Although output/mu has dropped due to the exceptionally wet weather in 3Q12, we think the group will still be able to meet our FY12 earnings forecast of Rmb169m, registering a growth of 50% yoy.
· The company had also provided an update on the production of synthetic logs. Yamada is facing delay in obtaining the logging license to harvest eucalyptus trees due to the new initiatives from the government to suspend all harvesting of natural forests. Although the group’s plantations should not be covered by the directive as they are planted/ man-made, Yamada will co-operate with the local government and continue to pursue its application. Yamada had plans to use the self-owned eucalyptus trees to fulfill 20% of the synthetic logs requirement in order the mediate rising raw material prices and ensure consistency in the quality of their edible fungi. As the group has yet to receive relevant license, Yamada would source the synthetic logs from the existing suppliers in the meantime.
· Yamada had postponed dividend payment for half a year when they changed the close of the financial year from 31 December to 30 Jun last Aug 11. In the financial year ended Dec 2010 previously, Yamada declared a dividend of Rmb0.043/share or a dividend payout of 16.8%. Although this was slightly lower than the 20% recommended in the prospectus during listing, we should still expect a decent dividend payment of 1.3 S cents/ share or 8% yield if we peg the dividend payout ratio at 16.8%.
Investment highlights
· We see value emerging from the recent price weakness and re-iterate our BUY recommendation but with a lower target price of S$0.24. Earnings are expected to remain robust despite a short blip in weather and we do see a bumper dividend payout when they report their full-year earnings in August this year.
· The target price translates to 3.0x 2012F PE, pegged to Singapore-listed peers’ average. Yamada Green Resources (Yamada) is currently trading at 3.0x FY11 PE and 2.1x FY12F PE vs an earnings growth of 50.0%.
Our view
· 9MFY12 revenue and earnings had exceeded FY11’s full-year results but share price slumped 37.5% yoy Yamada had reported 9MFY12 revenue of Rmb494.8m and net profit of Rmb158.9m, registering a growth of 58.5% and 49.5% respectively. This was driven by the enlarged land base as the group had almost doubled its shiitake mushroom cultivation base to 5,134mu from 2,614mu previously. Although output/mu has dropped due to the exceptionally wet weather in 3Q12, we think the group will still be able to meet our FY12 earnings forecast of Rmb169m, registering a growth of 50% yoy.
· The company had also provided an update on the production of synthetic logs. Yamada is facing delay in obtaining the logging license to harvest eucalyptus trees due to the new initiatives from the government to suspend all harvesting of natural forests. Although the group’s plantations should not be covered by the directive as they are planted/ man-made, Yamada will co-operate with the local government and continue to pursue its application. Yamada had plans to use the self-owned eucalyptus trees to fulfill 20% of the synthetic logs requirement in order the mediate rising raw material prices and ensure consistency in the quality of their edible fungi. As the group has yet to receive relevant license, Yamada would source the synthetic logs from the existing suppliers in the meantime.
· Yamada had postponed dividend payment for half a year when they changed the close of the financial year from 31 December to 30 Jun last Aug 11. In the financial year ended Dec 2010 previously, Yamada declared a dividend of Rmb0.043/share or a dividend payout of 16.8%. Although this was slightly lower than the 20% recommended in the prospectus during listing, we should still expect a decent dividend payment of 1.3 S cents/ share or 8% yield if we peg the dividend payout ratio at 16.8%.
Ezion Holdings
DMG & Partners Research on June 7 2012
EZION Holdings has secured a new four-year charter for a service rig from a national oil major (believed to be Pemex) valued at US$86.3 million. The rig is expected to be delivered in December 2012 and will be the third unit to be deployed in the Sonda de Campeche field. We estimate that the latest project will add about US$6.4 million net profit a year. Following the new contract, we raise our FY2013-14 earnings forecasts by 11 per cent and 10 per cent, respectively. Consequently, our target price is revised upwards from S$1.25 to S$1.31, based on an unchanged target PE of 10 times based on blended FY2012/13 forecast fully diluted EPS. Maintain "buy".
Ezion will spend US$23 million to purchase an old rig from the market and US$32 million to upgrade and refurbish the rig. The project cost will be depreciated over 10 years. Agreements are in place to buy ENSCO 59, a 30-year-old jack-up rig, from Ensco and also major equipment for the upgrade. The project will be funded by 30 per cent equity (US$16.5 million) and 70 per cent bank borrowings (US$38.5 million). Under the contract, Ezion will provide the rig and take care of the workers on board and maintenance. They will not be involved in the drilling process.
The annual operating cost is expected to be in the range of US$4.5 million-US$5.0 million a year. Ezion will also incur a 10 per cent withholding tax of around US$2 million. All in, we estimate the latest project to contribute US$6.4 million in net profit to Ezion's FY2013 net profit.
Year-to-date, Ezion has secured six long-term charters valued at US$524 million from various oil majors and one Chinese state-owned company. The total value is 4.9 times Ezion's FY2011 revenue. Ezion is eyeing more rig charters and is also bidding for logistics work at the APLNG in Australia. Tender results for APLNG should be out in July.
We expect Ezion's fleet of liftboats and service rigs to grow from four units to 14 units by Q3 2013. The fleet expansion will be the key driver for earnings growth as all assets have secured long-term charters. Key risks are cost overrun and failure to deliver the rigs.
BUY
EZION Holdings has secured a new four-year charter for a service rig from a national oil major (believed to be Pemex) valued at US$86.3 million. The rig is expected to be delivered in December 2012 and will be the third unit to be deployed in the Sonda de Campeche field. We estimate that the latest project will add about US$6.4 million net profit a year. Following the new contract, we raise our FY2013-14 earnings forecasts by 11 per cent and 10 per cent, respectively. Consequently, our target price is revised upwards from S$1.25 to S$1.31, based on an unchanged target PE of 10 times based on blended FY2012/13 forecast fully diluted EPS. Maintain "buy".
Ezion will spend US$23 million to purchase an old rig from the market and US$32 million to upgrade and refurbish the rig. The project cost will be depreciated over 10 years. Agreements are in place to buy ENSCO 59, a 30-year-old jack-up rig, from Ensco and also major equipment for the upgrade. The project will be funded by 30 per cent equity (US$16.5 million) and 70 per cent bank borrowings (US$38.5 million). Under the contract, Ezion will provide the rig and take care of the workers on board and maintenance. They will not be involved in the drilling process.
The annual operating cost is expected to be in the range of US$4.5 million-US$5.0 million a year. Ezion will also incur a 10 per cent withholding tax of around US$2 million. All in, we estimate the latest project to contribute US$6.4 million in net profit to Ezion's FY2013 net profit.
Year-to-date, Ezion has secured six long-term charters valued at US$524 million from various oil majors and one Chinese state-owned company. The total value is 4.9 times Ezion's FY2011 revenue. Ezion is eyeing more rig charters and is also bidding for logistics work at the APLNG in Australia. Tender results for APLNG should be out in July.
We expect Ezion's fleet of liftboats and service rigs to grow from four units to 14 units by Q3 2013. The fleet expansion will be the key driver for earnings growth as all assets have secured long-term charters. Key risks are cost overrun and failure to deliver the rigs.
BUY
Sino Grandness
Kim Eng on 8 June 2012
Background: Sino Grandness is a food and beverage company based in Shenzhen, China. It is principally involved in the production and sales of canned fruits and vegetables (OEM basis), as well as fruit juices (in-house brand). Canned food is its traditional business and the company is one of China’s largest canned food exporters for vegetables such as long beans and mushrooms. Its beverage business is new, albeit rapidly growing.
Why are we highlighting this stock? In our view, the effort that Sino Grandness is making right now to boost their in-house branded beverage business is worth monitoring. The company now is expanding its production capacity of loquat juice in China. Loquat (pipa in Chinese) is a relatively exotic fruit whose juice is not commonly consumed by the majority of the population. But if this new product should become a hit with consumers, Sino Grandness would have a huge first-mover advantage and a market share that competitors would find hard to match.
Fast-growing beverage business. The beverage segment is the largest contributor to Sino Grandness’ revenue (56% in 1Q12) and its fastest-growing business (98% YoY in 1Q12) in terms of revenue. It also enjoys a higher gross margin (41%) than the rest of the company’s business (around 30%). In our view, boosting its own-brand beverage business should help the company enjoy greater pricing power and hence, higher margin in the long term.
Aggressively expanding loquat juice capacity in China. We think that the aggressive expansion of its loquat juice capacity is worth monitoring because if this strategy turns out well, Sino Grandness has the potential to multiply its size from current level. The key issue is whether loquat juice can be accepted by the majority of consumers in China because the fruit is usually eaten fresh rather than consumed in juice form. Moreover, it is not a well-known fruit in northern China where Sino Grandness is trying to tap into.
Possible listing of Garden Fresh brand in HK. If this eventuates, it will be positive for the shareholders given that the beverage sector commands higher multiples and valuations in Hong Kong are also higher than in Singapore (average PER of 17x for beverage sector vs only 3.5x for Sino Grandness).
Negative cash flow poses concern. Rapid expansion and burgeoning advertising costs have caused Sino Grandness to post negative free cash flow for the past four quarters.
Background: Sino Grandness is a food and beverage company based in Shenzhen, China. It is principally involved in the production and sales of canned fruits and vegetables (OEM basis), as well as fruit juices (in-house brand). Canned food is its traditional business and the company is one of China’s largest canned food exporters for vegetables such as long beans and mushrooms. Its beverage business is new, albeit rapidly growing.
Why are we highlighting this stock? In our view, the effort that Sino Grandness is making right now to boost their in-house branded beverage business is worth monitoring. The company now is expanding its production capacity of loquat juice in China. Loquat (pipa in Chinese) is a relatively exotic fruit whose juice is not commonly consumed by the majority of the population. But if this new product should become a hit with consumers, Sino Grandness would have a huge first-mover advantage and a market share that competitors would find hard to match.
Fast-growing beverage business. The beverage segment is the largest contributor to Sino Grandness’ revenue (56% in 1Q12) and its fastest-growing business (98% YoY in 1Q12) in terms of revenue. It also enjoys a higher gross margin (41%) than the rest of the company’s business (around 30%). In our view, boosting its own-brand beverage business should help the company enjoy greater pricing power and hence, higher margin in the long term.
Aggressively expanding loquat juice capacity in China. We think that the aggressive expansion of its loquat juice capacity is worth monitoring because if this strategy turns out well, Sino Grandness has the potential to multiply its size from current level. The key issue is whether loquat juice can be accepted by the majority of consumers in China because the fruit is usually eaten fresh rather than consumed in juice form. Moreover, it is not a well-known fruit in northern China where Sino Grandness is trying to tap into.
Possible listing of Garden Fresh brand in HK. If this eventuates, it will be positive for the shareholders given that the beverage sector commands higher multiples and valuations in Hong Kong are also higher than in Singapore (average PER of 17x for beverage sector vs only 3.5x for Sino Grandness).
Negative cash flow poses concern. Rapid expansion and burgeoning advertising costs have caused Sino Grandness to post negative free cash flow for the past four quarters.
Ascendas REIT
Kim Eng on 8 June 2012
Goldin Logistics Hub sold for SGD32m. Ascendas REIT (A-REIT) recently entered into a put and call option agreement with Chasen Holdings for the sale of Goldin Logistics Hub for SGD32m. This marks its first divestment in 9.5 years since listing and represents a 42.2% premium over the original purchase price of SGD22.5m in 2007 and a 33.3% premium over the last valuation of SGD24m as at 31 Mar 2012.
Targeting end-June completion. The hub is located at 6 Pioneer Walk within the Jurong Industrial Estate and
has a remaining land tenure of about 24 years. It is a two-storey warehouse with a ramp-up driveway and a four-storey ancillary office, as well as a single-storey workshop and a container yard with a gross floor area of 216,300 sq ft. The transaction is subject to JTC’s approval and is expected to be completed by end-June 2012. The existing lease will expire in Dec 2017 and will be assigned to Chasen upon completion of the sale.
Adjustments to our estimates. We raise our FY3/13F DPU by 2.2% in view of the divestment gains (assumed paid out) but lower our FY3/14F-15F DPU by 0.6% pa. We expect FY3/14F-15F gross revenue to decline by 0.3% pa due to the loss of rental income. Following this sale, A-REIT will now own 100 properties in Singapore and one business park in China.
Conviction BUY among industrial REITs. We continue to like A-REIT for its stable DPU yield, healthy lease expiry and debt maturity profile, underpinned by a diverse portfolio (business/science parks, hi-tech industrials, flatted factories, light industrials, logistics and distribution centres and warehouse retail). Based on our forecasts, business/science parks currently constitute 40% of our FY12F GAV, followed by hi-tech (23%), logistics and distribution (19%), light industrial (15%) and warehouse retail facilities (3%). Potential acquisitions overseas could provide further upside for DPU growth. Importantly, A-REIT is also less vulnerable to asset erosion, with its defensive properties located primarily in Singapore. The stock currently trades at 6.8% FY3/13F yield and 1.1x P/BV. Reiterate BUY with a DDM-derived target price unchanged at SGD2.23.
Goldin Logistics Hub sold for SGD32m. Ascendas REIT (A-REIT) recently entered into a put and call option agreement with Chasen Holdings for the sale of Goldin Logistics Hub for SGD32m. This marks its first divestment in 9.5 years since listing and represents a 42.2% premium over the original purchase price of SGD22.5m in 2007 and a 33.3% premium over the last valuation of SGD24m as at 31 Mar 2012.
Targeting end-June completion. The hub is located at 6 Pioneer Walk within the Jurong Industrial Estate and
has a remaining land tenure of about 24 years. It is a two-storey warehouse with a ramp-up driveway and a four-storey ancillary office, as well as a single-storey workshop and a container yard with a gross floor area of 216,300 sq ft. The transaction is subject to JTC’s approval and is expected to be completed by end-June 2012. The existing lease will expire in Dec 2017 and will be assigned to Chasen upon completion of the sale.
Adjustments to our estimates. We raise our FY3/13F DPU by 2.2% in view of the divestment gains (assumed paid out) but lower our FY3/14F-15F DPU by 0.6% pa. We expect FY3/14F-15F gross revenue to decline by 0.3% pa due to the loss of rental income. Following this sale, A-REIT will now own 100 properties in Singapore and one business park in China.
Conviction BUY among industrial REITs. We continue to like A-REIT for its stable DPU yield, healthy lease expiry and debt maturity profile, underpinned by a diverse portfolio (business/science parks, hi-tech industrials, flatted factories, light industrials, logistics and distribution centres and warehouse retail). Based on our forecasts, business/science parks currently constitute 40% of our FY12F GAV, followed by hi-tech (23%), logistics and distribution (19%), light industrial (15%) and warehouse retail facilities (3%). Potential acquisitions overseas could provide further upside for DPU growth. Importantly, A-REIT is also less vulnerable to asset erosion, with its defensive properties located primarily in Singapore. The stock currently trades at 6.8% FY3/13F yield and 1.1x P/BV. Reiterate BUY with a DDM-derived target price unchanged at SGD2.23.
Thursday, 7 June 2012
Ascendas REIT
OCBC on 7 June 2012
Ascendas REIT’s (A-REIT) share price performance has clearly attested to its resilience, gaining 10.4% YTD as opposed to a 4.3% increase in the broader market. The strength, in our opinion, is mainly attributable to its diversified portfolio of 102 properties, healthy lease profile, strong sponsor and quality management. Outlook is also expected to remain sanguine, with recent acquisitions and developments likely to contribute positively to its performance. We also note that A-REIT’s financial position had been fortified by the recent private placement and divestment of Goldin Logistics Hub. This is likely to provide it with greater financial ability to capitalize on growth opportunities, as well as secure borrowings at potentially more competitive terms to fund its committed investments. We maintain our BUY rating with an adjusted fair value of S$2.22 (S$2.31 previously) on A-REIT, after factoring in the developments.
Resilience proven by unit price performance
Ascendas REIT’s (A-REIT) unit price performance has clearly attested to its resilience, gaining 10.4% YTD as opposed to a 4.3% increase in the broader market. The strength, in our opinion, is mainly attributable to its diversified portfolio of 102 properties, healthy lease profile (high occupancy of 96.4% and WALE of 4 years), strong sponsor and quality management. Outlook is also expected to remain sanguine, with recent acquisitions and developments likely to contribute positively to its performance. Despite market concerns that the industrial rents may ease slightly in 2012, we still see potential for A-REIT to register positive rental reversions, as the passing rents for the area due for renewal are currently 16-32% below the spot market rates. This should provide support to our FY13F DPU yield of 6.9%, which is attractive in our view.
Enhanced financials with proactive capital management
A-REIT has also been very proactive in its capital management. Riding on its sturdy share price performance, the REIT strategically issued out 150m new units at S$1.99 apiece (6.0% premium to NAV) via a private placement in May. All the net proceeds, amounting to S$296.9m, had since been used to repay its outstanding borrowings, which effectively pared down its aggregate leverage from 36.6% as at 31 Mar to 32.1%. In addition, we also note that A-REIT has announced the divestment of Goldin Logistics Hub at 6 Pioneer Walk for S$32.1m, representing a respectable 36.2% premium over its latest disclosed valuation of S$23.5m in Mar 2011. As a result, A-REIT’s fortified financial position will likely provide it with greater financial ability to capitalize on growth opportunities, as well as secure borrowings at potentially more competitive terms to fund its committed investments.
Maintain BUY
We now factor in an enlarged unit base following the placement and an expected loss in income from the divestment, partially balanced out by lower interest expenses from lower borrowings. Our fair value is now adjusted to S$2.22 in effect (S$2.31 previously). Maintain BUY.
Ascendas REIT’s (A-REIT) share price performance has clearly attested to its resilience, gaining 10.4% YTD as opposed to a 4.3% increase in the broader market. The strength, in our opinion, is mainly attributable to its diversified portfolio of 102 properties, healthy lease profile, strong sponsor and quality management. Outlook is also expected to remain sanguine, with recent acquisitions and developments likely to contribute positively to its performance. We also note that A-REIT’s financial position had been fortified by the recent private placement and divestment of Goldin Logistics Hub. This is likely to provide it with greater financial ability to capitalize on growth opportunities, as well as secure borrowings at potentially more competitive terms to fund its committed investments. We maintain our BUY rating with an adjusted fair value of S$2.22 (S$2.31 previously) on A-REIT, after factoring in the developments.
Resilience proven by unit price performance
Ascendas REIT’s (A-REIT) unit price performance has clearly attested to its resilience, gaining 10.4% YTD as opposed to a 4.3% increase in the broader market. The strength, in our opinion, is mainly attributable to its diversified portfolio of 102 properties, healthy lease profile (high occupancy of 96.4% and WALE of 4 years), strong sponsor and quality management. Outlook is also expected to remain sanguine, with recent acquisitions and developments likely to contribute positively to its performance. Despite market concerns that the industrial rents may ease slightly in 2012, we still see potential for A-REIT to register positive rental reversions, as the passing rents for the area due for renewal are currently 16-32% below the spot market rates. This should provide support to our FY13F DPU yield of 6.9%, which is attractive in our view.
Enhanced financials with proactive capital management
A-REIT has also been very proactive in its capital management. Riding on its sturdy share price performance, the REIT strategically issued out 150m new units at S$1.99 apiece (6.0% premium to NAV) via a private placement in May. All the net proceeds, amounting to S$296.9m, had since been used to repay its outstanding borrowings, which effectively pared down its aggregate leverage from 36.6% as at 31 Mar to 32.1%. In addition, we also note that A-REIT has announced the divestment of Goldin Logistics Hub at 6 Pioneer Walk for S$32.1m, representing a respectable 36.2% premium over its latest disclosed valuation of S$23.5m in Mar 2011. As a result, A-REIT’s fortified financial position will likely provide it with greater financial ability to capitalize on growth opportunities, as well as secure borrowings at potentially more competitive terms to fund its committed investments.
Maintain BUY
We now factor in an enlarged unit base following the placement and an expected loss in income from the divestment, partially balanced out by lower interest expenses from lower borrowings. Our fair value is now adjusted to S$2.22 in effect (S$2.31 previously). Maintain BUY.
CDL Hospitality Trust
OCBC on 7 June 2012
On a worldwide basis, Singapore commands fairly high hotel room rates, but still has substantial room to grow in comparison to other quality destinations worldwide. Travelers from China, India, Australia, HK and the UK, which form half of the top ten places of origin for travelers to Singapore in 2011, are willing to pay 24-61% more for a hotel room in the most expensive destinations versus Singapore. Regional low-cost carriers will continue to further enhance the relative affordability of Singapore hotels and increase their ability to raise rates. We maintain a BUY rating on CDLHT and our fair value of S$2.04.
How expensive are Singapore room rates?
On a worldwide basis, Singapore commands fairly high hotel room rates. To study the relative affordability of Singapore hotels we have examined the average hotel room rates paid by travelers from different places of origin to destinations worldwide. Travelers from China, India, Australia, HK and the UK, which form half of the top ten places of origin for travelers to Singapore in 2011, are willing to pay 24-61% more for a hotel room in the most expensive destinations versus Singapore. For example, travelers from China paid an average of 40% more for a hotel room in London in 2011 versus one in Singapore.
Rates can continue rising
As Singapore continues to become a more attractive travel destination, especially for its trio of MICE, gaming and medical tourism, the premium that the most expensive hotel destinations command over it could shrink substantially with time. Additionally, the nine out of 10 top places of origin for visitors to Singapore are located in Asia-Pacific. With the continued rise of low-cost carriers (LCCs) in this region, intra-Asia travel will increase and people can afford to spend more on hotel rooms. For many, traveling to Singapore is already a lot cheaper than travelling to New York or Venice.
Welcoming long-haul LCC visitors
Singapore’s first long-haul LCC, Scoot, will be making daily flights to Tokyo and Taipei from 3Q12. Scoot just completed its maiden flight to Australia and will begin flights to Gold Coast next week. The supply-demand dynamics for Singapore hotels remains positive. We project that hotel room supply will increase by 3.7% p.a. for 2012-2015 while hotel room demand will grow faster at 6.4% p.a.
Maintain BUY
CDLHT is one of the few highly liquid, close-to-pure-plays for the Singapore hotel sector. We maintain our BUY rating on CDLHT and our RNAV-derived fair value estimate of S$2.04.
On a worldwide basis, Singapore commands fairly high hotel room rates, but still has substantial room to grow in comparison to other quality destinations worldwide. Travelers from China, India, Australia, HK and the UK, which form half of the top ten places of origin for travelers to Singapore in 2011, are willing to pay 24-61% more for a hotel room in the most expensive destinations versus Singapore. Regional low-cost carriers will continue to further enhance the relative affordability of Singapore hotels and increase their ability to raise rates. We maintain a BUY rating on CDLHT and our fair value of S$2.04.
How expensive are Singapore room rates?
On a worldwide basis, Singapore commands fairly high hotel room rates. To study the relative affordability of Singapore hotels we have examined the average hotel room rates paid by travelers from different places of origin to destinations worldwide. Travelers from China, India, Australia, HK and the UK, which form half of the top ten places of origin for travelers to Singapore in 2011, are willing to pay 24-61% more for a hotel room in the most expensive destinations versus Singapore. For example, travelers from China paid an average of 40% more for a hotel room in London in 2011 versus one in Singapore.
Rates can continue rising
As Singapore continues to become a more attractive travel destination, especially for its trio of MICE, gaming and medical tourism, the premium that the most expensive hotel destinations command over it could shrink substantially with time. Additionally, the nine out of 10 top places of origin for visitors to Singapore are located in Asia-Pacific. With the continued rise of low-cost carriers (LCCs) in this region, intra-Asia travel will increase and people can afford to spend more on hotel rooms. For many, traveling to Singapore is already a lot cheaper than travelling to New York or Venice.
Welcoming long-haul LCC visitors
Singapore’s first long-haul LCC, Scoot, will be making daily flights to Tokyo and Taipei from 3Q12. Scoot just completed its maiden flight to Australia and will begin flights to Gold Coast next week. The supply-demand dynamics for Singapore hotels remains positive. We project that hotel room supply will increase by 3.7% p.a. for 2012-2015 while hotel room demand will grow faster at 6.4% p.a.
Maintain BUY
CDLHT is one of the few highly liquid, close-to-pure-plays for the Singapore hotel sector. We maintain our BUY rating on CDLHT and our RNAV-derived fair value estimate of S$2.04.
Downstream oil and gas companies
OCBC on 6 June 2012
DOWNSTREAM oil and gas companies reported weak results for the first three months of calendar year 2012 (Q1 2012) that were below expectations. Rotary Engineering disappointed with lower gross margins and a steep $4.6 million foreign exchange loss.
PEC Limited barely broke even with net profit of just $1.3 million against revenue of $106.7 million. Outside our coverage, Hiap Seng Engineering and Mun Siong Engineering reported quarterly net losses of $2.2 million and $0.1 million, respectively.
Rotary, PEC, Hiap Seng, and Mun Siong are mainly involved in engineering and maintenance services for the downstream oil and gas sector. They are highly dependent on the pricing and volume of work it secures.
As we have discussed in earlier reports, the recent shortage of project and maintenance work has resulted in severe pricing pressure. With the dismal results, we now fear that some downstream companies are operating at near or below break-even rates.
We are not expecting a quick recovery for the downstream oil and gas sub-sector. First, uncertainty over the eurozone situation may continue to discourage investments by oil companies. Second, the downstream companies lack the scale and bargaining power (against oil companies) to push prices upwards.
In addition to that, Rotary and PEC will require time to fine-tune their overseas operations. To date, Rotary has encountered unexpected delays on its Fujairah project and PEC has unresolved claims on its Rotterdam joint venture. As long as the companies continue to pursue overseas projects, such risks cannot be ruled out.
Meanwhile, the share prices of Rotary ("hold", fair value: $0.50) and PEC ("hold", FV: $0.64) have fallen to near historical lows.
While we have an "overweight" rating on the broad oil and gas sector, we think that investors should wait for clearer signs of a recovery before buying into downstream counters such as Rotary or PEC.
Rotary Engineering - HOLD
PEC Limited - HOLD
DOWNSTREAM oil and gas companies reported weak results for the first three months of calendar year 2012 (Q1 2012) that were below expectations. Rotary Engineering disappointed with lower gross margins and a steep $4.6 million foreign exchange loss.
PEC Limited barely broke even with net profit of just $1.3 million against revenue of $106.7 million. Outside our coverage, Hiap Seng Engineering and Mun Siong Engineering reported quarterly net losses of $2.2 million and $0.1 million, respectively.
Rotary, PEC, Hiap Seng, and Mun Siong are mainly involved in engineering and maintenance services for the downstream oil and gas sector. They are highly dependent on the pricing and volume of work it secures.
As we have discussed in earlier reports, the recent shortage of project and maintenance work has resulted in severe pricing pressure. With the dismal results, we now fear that some downstream companies are operating at near or below break-even rates.
We are not expecting a quick recovery for the downstream oil and gas sub-sector. First, uncertainty over the eurozone situation may continue to discourage investments by oil companies. Second, the downstream companies lack the scale and bargaining power (against oil companies) to push prices upwards.
In addition to that, Rotary and PEC will require time to fine-tune their overseas operations. To date, Rotary has encountered unexpected delays on its Fujairah project and PEC has unresolved claims on its Rotterdam joint venture. As long as the companies continue to pursue overseas projects, such risks cannot be ruled out.
Meanwhile, the share prices of Rotary ("hold", fair value: $0.50) and PEC ("hold", FV: $0.64) have fallen to near historical lows.
While we have an "overweight" rating on the broad oil and gas sector, we think that investors should wait for clearer signs of a recovery before buying into downstream counters such as Rotary or PEC.
Rotary Engineering - HOLD
PEC Limited - HOLD
RH Petrogas
UOBKayhian on 7 June 2012
What’s New
· Proposes debt conversion. On 22 May, RH Petrogas (RHP) announced that the group has entered into a debt conversion deed with Sharptone Investments Limited, Surreyville Pte Ltd and RH Capital Limited, which are entities held by RHP chairman Tan Sri Datuk Sir Tiong Hiew King. RHP will issue an aggregate of 157.5m new shares as full and final settlement of an aggregate sum of US$61.5m of debt outstanding at the conversion price of S$0.492. RHP’s trading range in May was between S$0.425 and S$0.520.
· Aims to raise S$132m. RHP has also proposed the allotment and issue of up to 262.3m new shares with up to 87.4m warrants at such price to be determined by the board of RHP at its discretion which shall not be less than S$0.36 per share. Through this fund-raising exercise, RHP aims to raise about S$132m.
· Opportunities to grow asset portfolio. In our view, RHP is likely to deploy the capital to increase production capacity under the group’s existing production sharing agreements in Indonesia and China, as well as to acquire new oil and gas concessions.
Stock Impact
· Improved balance sheet strength. After the proposed equity fund raising, RHP will have a net cash of 59.1% from a net gearing of 35.5%.
· Approvals expected by end-12. RHP has submitted a revised Overall Development Plan (ODP) for the Fuyu-1 Block (Yongping Field) in China. The ODP is expected to be approved by 3Q12 which will allow the group to start production in 2H12.
· Production growth. RHP produced 4,600 boed in 2011, and targets to grow production by 900 boed in 2012. The group is targeting capex of US$29m in 2012 to develop 5 exploration wells, 18 development wells, 2 appraisal wells and 16 well pilot tests.
Valuation
· EV/2P ratio higher than peers’. We use an enterprise value to 2P (proven and probable) reserve (EV/2P) ratio to assess the value of RHP, in comparison to London-listed exploration and production companies. We note that RHP’s EV/2P ratio of US$17.0m/mmboe is higher than most of its peers. However the 2P number does not include potential oil reserves from the Fuyu-1 Block.
What’s New
· Proposes debt conversion. On 22 May, RH Petrogas (RHP) announced that the group has entered into a debt conversion deed with Sharptone Investments Limited, Surreyville Pte Ltd and RH Capital Limited, which are entities held by RHP chairman Tan Sri Datuk Sir Tiong Hiew King. RHP will issue an aggregate of 157.5m new shares as full and final settlement of an aggregate sum of US$61.5m of debt outstanding at the conversion price of S$0.492. RHP’s trading range in May was between S$0.425 and S$0.520.
· Aims to raise S$132m. RHP has also proposed the allotment and issue of up to 262.3m new shares with up to 87.4m warrants at such price to be determined by the board of RHP at its discretion which shall not be less than S$0.36 per share. Through this fund-raising exercise, RHP aims to raise about S$132m.
· Opportunities to grow asset portfolio. In our view, RHP is likely to deploy the capital to increase production capacity under the group’s existing production sharing agreements in Indonesia and China, as well as to acquire new oil and gas concessions.
Stock Impact
· Improved balance sheet strength. After the proposed equity fund raising, RHP will have a net cash of 59.1% from a net gearing of 35.5%.
· Approvals expected by end-12. RHP has submitted a revised Overall Development Plan (ODP) for the Fuyu-1 Block (Yongping Field) in China. The ODP is expected to be approved by 3Q12 which will allow the group to start production in 2H12.
· Production growth. RHP produced 4,600 boed in 2011, and targets to grow production by 900 boed in 2012. The group is targeting capex of US$29m in 2012 to develop 5 exploration wells, 18 development wells, 2 appraisal wells and 16 well pilot tests.
Valuation
· EV/2P ratio higher than peers’. We use an enterprise value to 2P (proven and probable) reserve (EV/2P) ratio to assess the value of RHP, in comparison to London-listed exploration and production companies. We note that RHP’s EV/2P ratio of US$17.0m/mmboe is higher than most of its peers. However the 2P number does not include potential oil reserves from the Fuyu-1 Block.
Global Palm Resources
OCBC on 7 June 2012
We have recently spoken with management of Global Palm Resources (GPR) to get an update after releasing its 1Q12 results which were mostly in line with our expectations. The group has kept its new planting target for 2012 at 1k ha; and it has planted some 166 ha in 1Q12. According to management, it still has around 2.7k ha available for future cultivation. It intends to spend IDR15.6b on plantation expenditure this year and another IDR35.9b on other capex – unchanged from its earlier guidance made after its 4Q11 results. While we are maintaining our HOLD rating with an unchanged fair value of S$0.19 (10x FY12F EPS), key risks include bigger-than-expected fallout from Europe and sharper-than-expected fall in crude oil prices.
1Q12 mostly in line
We have recently spoken with management of Global Palm Resources (GPR) to get an update after releasing its 1Q12 results which were mostly in line with our expectations. As a recap, revenue grew 12.0% YoY and 24.8% QoQ to IDR98.918b, meeting 27.3% of our full-year forecast. Net profit though fell 13.1% YoY and 76.8% QoQ (which also includes biological asset gains) to IDR12.9b, or around 23.4% of our FY12 forecast. However, we note that gross margin eased from 30.5% in 1Q11 and 31.3% in 4Q11 to 25.7%; this probably due to lower ASPs.
Watching cost pressures
In addition, cash cost has also risen in 1Q12 to IDR3277/kg, up from the average of IDR2489/kg in FY11; this mainly due to higher indirect material used (fertilizers), higher cost of upkeep and harvesting and increased cost of fuel. We note that it was also higher than management’s earlier forecast of IDR3087/kg for FY12. As such, we will continue to monitor the situation and make any adjustments in our margin assumptions later.
No change to 1k ha planting target
The group has kept its new planting target for 2012 at 1k ha; and it has planted some 166 ha in 1Q12. Currently, GPR’s plantation size is around 10.5k ha, with 58.6% at the peak production stage (7-18 years). According to management, it still has around 2.7k ha available for future cultivation. It intends to spend IDR15.6b on plantation expenditure this year and another IDR35.9b on other capex – unchanged from its earlier guidance made after its 4Q11 results. Meanwhile, GPR is sitting on a net cash hoard of IDR225b (as of 31 Mar), which is intends to use for M&As.
Maintain HOLD with S$0.19 fair value
While we are maintaining our HOLD rating with an unchanged fair value of S$0.19 (10x FY12F EPS), key risks include bigger-than-expected fallout from Europe and sharper-than-expected fall in crude oil prices.
We have recently spoken with management of Global Palm Resources (GPR) to get an update after releasing its 1Q12 results which were mostly in line with our expectations. The group has kept its new planting target for 2012 at 1k ha; and it has planted some 166 ha in 1Q12. According to management, it still has around 2.7k ha available for future cultivation. It intends to spend IDR15.6b on plantation expenditure this year and another IDR35.9b on other capex – unchanged from its earlier guidance made after its 4Q11 results. While we are maintaining our HOLD rating with an unchanged fair value of S$0.19 (10x FY12F EPS), key risks include bigger-than-expected fallout from Europe and sharper-than-expected fall in crude oil prices.
1Q12 mostly in line
We have recently spoken with management of Global Palm Resources (GPR) to get an update after releasing its 1Q12 results which were mostly in line with our expectations. As a recap, revenue grew 12.0% YoY and 24.8% QoQ to IDR98.918b, meeting 27.3% of our full-year forecast. Net profit though fell 13.1% YoY and 76.8% QoQ (which also includes biological asset gains) to IDR12.9b, or around 23.4% of our FY12 forecast. However, we note that gross margin eased from 30.5% in 1Q11 and 31.3% in 4Q11 to 25.7%; this probably due to lower ASPs.
Watching cost pressures
In addition, cash cost has also risen in 1Q12 to IDR3277/kg, up from the average of IDR2489/kg in FY11; this mainly due to higher indirect material used (fertilizers), higher cost of upkeep and harvesting and increased cost of fuel. We note that it was also higher than management’s earlier forecast of IDR3087/kg for FY12. As such, we will continue to monitor the situation and make any adjustments in our margin assumptions later.
No change to 1k ha planting target
The group has kept its new planting target for 2012 at 1k ha; and it has planted some 166 ha in 1Q12. Currently, GPR’s plantation size is around 10.5k ha, with 58.6% at the peak production stage (7-18 years). According to management, it still has around 2.7k ha available for future cultivation. It intends to spend IDR15.6b on plantation expenditure this year and another IDR35.9b on other capex – unchanged from its earlier guidance made after its 4Q11 results. Meanwhile, GPR is sitting on a net cash hoard of IDR225b (as of 31 Mar), which is intends to use for M&As.
Maintain HOLD with S$0.19 fair value
While we are maintaining our HOLD rating with an unchanged fair value of S$0.19 (10x FY12F EPS), key risks include bigger-than-expected fallout from Europe and sharper-than-expected fall in crude oil prices.
Hutchison Port Holdings Trust
Kim Eng on 7 June 2012
Background: HPH Trust’s (HPHT) assets comprise mainly deep-water container port facilities in Hong Kong and Shenzhen, namely, Hongkong International Terminals (HIT), COSCO-HIT Terminals (COSCO-HIT) and Yantian International Container Terminals (YICT). In addition, HPHT also has interests in smaller river ports and ancillary services which complement its main terminal operations.
Why are we highlighting this stock? HPHT’s share price has slid by 15% since the beginning of this year from a high of USD0.80 (IPO at USD1.01), in tandem with the decline in regional indices, despite the relatively resilient nature of the container port business. Container throughput during the financial crisis years of 2008 and 2009 fell only marginally by 1% and 4% YoY, respectively, before posting a more than 10% CAGR recovery in 2010 and 2011. Company-projected DPU payouts look enticing, notwithstanding current uncertain economic times.
A decent 1QFY12 on throughput growth. HPHT reported 1QFY12 NPATMI of HKD463m, in line with management’s projections in the IPO prospectus. This came on the back of a 5% YoY increase in throughput, which was underpinned by 9.4% YoY growth in HIT following stronger-than-expected growth in transhipment cargo.
FY12 DPU projection maintained. HPHT maintained its FY12 DPU projection of HK51.2cts, and said it will manage cash flow to maintain DPU levels, possibly deferring capex.
Risks ahead, but yield enticing. HPHT is not fully insulated from the risk of possible global economic turmoil ahead. With a third of its projected throughput comprising transhipment volumes and the remaining being “local”, its fortunes are tied to both global and domestic demand trends. However, its throughput volumes do seem resilient from a historical perspective even in times of crises, and its company-projected DPU of HK51.2cts (US6.6cts) might prove too enticing to pass up for investors looking for a forward yield exceeding 9%.
Background: HPH Trust’s (HPHT) assets comprise mainly deep-water container port facilities in Hong Kong and Shenzhen, namely, Hongkong International Terminals (HIT), COSCO-HIT Terminals (COSCO-HIT) and Yantian International Container Terminals (YICT). In addition, HPHT also has interests in smaller river ports and ancillary services which complement its main terminal operations.
Why are we highlighting this stock? HPHT’s share price has slid by 15% since the beginning of this year from a high of USD0.80 (IPO at USD1.01), in tandem with the decline in regional indices, despite the relatively resilient nature of the container port business. Container throughput during the financial crisis years of 2008 and 2009 fell only marginally by 1% and 4% YoY, respectively, before posting a more than 10% CAGR recovery in 2010 and 2011. Company-projected DPU payouts look enticing, notwithstanding current uncertain economic times.
A decent 1QFY12 on throughput growth. HPHT reported 1QFY12 NPATMI of HKD463m, in line with management’s projections in the IPO prospectus. This came on the back of a 5% YoY increase in throughput, which was underpinned by 9.4% YoY growth in HIT following stronger-than-expected growth in transhipment cargo.
FY12 DPU projection maintained. HPHT maintained its FY12 DPU projection of HK51.2cts, and said it will manage cash flow to maintain DPU levels, possibly deferring capex.
Risks ahead, but yield enticing. HPHT is not fully insulated from the risk of possible global economic turmoil ahead. With a third of its projected throughput comprising transhipment volumes and the remaining being “local”, its fortunes are tied to both global and domestic demand trends. However, its throughput volumes do seem resilient from a historical perspective even in times of crises, and its company-projected DPU of HK51.2cts (US6.6cts) might prove too enticing to pass up for investors looking for a forward yield exceeding 9%.
Singapore Telcos
Kim Eng on 7 June 2012
Step forward for telcos. SingTel’s decision to cut data caps for smartphones is a big step toward better data monetisation opportunities for Singapore telcos. That said, the short-term impact will be minimal as the majority of 3G data users do not exceed 2GB of data a month. Over time however, it will encourage more data usage, especially on the video front, and this should lead users to adopt LTE as well as upgrade their plans, thus benefiting the telcos’ data revenue and margins. We retain our BUY calls on StarHub and M1, and SELL on SingTel.
SingTel reins in generous data caps. SingTel’s new 4G plans were significant not because it is the first telco to launch 4G smartphone plans, but because it has slashed data caps for both its 3G and 4G plans. From a two-tiered 12GB and 30GB (although not unlimited, these caps were still very generous), SingTel now offers four tiers of 2GB, 3GB, 4GB and 12GB. Monthly subscription prices have remained the same but SingTel has also increased the number of bundled SMS.
StarHub and M1 likely to follow suit. Now that the giant has stepped forward to lead the way, the other telcos are likely to follow. According to the media, StarHub will soon cut its single-tier 12GB smartphone and iPhone plans to tiers of 1GB, 2GB and 5GB to match its Multi-SIM plans for tablets and mobile phones. Similarly with M1, although it has said it will only unveil its plans in 2H12. Also, we think both smaller telcos will take the opportunity to do away with their unlimited plans.
Churn could rise in rush to lock in larger data caps. SingTel’s churn rate could rise in 3Q12, as its out-of-contract subscribers may switch to the other two telcos to lock in their still-generous data caps for another two years. This is especially so if StarHub and M1 hold off on dumping their higher data caps for a couple more months. We reckon this is probably why StarHub warned it would also be cutting caps soon but provided no other details.
Gradual adoption. The decision to cut down on data caps should be positive for ARPUs further out but the short-term impact will likely be minimal as the majority of data users do not exceed 2GB of data a month. Over time, more 4G handsets will become available, and the faster speeds will encourage more data usage and prompt users to upgrade their plans, thus benefiting data revenue. Higher adoption of tablets will also drive more data usage. More importantly, data margins will also benefit.
Prefer StarHub and M1 to SingTel. This development does not change our calls, which stand at BUY on StarHub and M1 and SELL on SingTel. We still like StarHub and M1 for their attractive yields of about 6%. In fact, StarHub’s yield could get more attractive as we believe its balance sheet can support a higher regular dividend. While the cut in data caps will benefit its domestic business, SingTel faces significant risks from overseas, particularly on the currency and regulatory fronts.
Step forward for telcos. SingTel’s decision to cut data caps for smartphones is a big step toward better data monetisation opportunities for Singapore telcos. That said, the short-term impact will be minimal as the majority of 3G data users do not exceed 2GB of data a month. Over time however, it will encourage more data usage, especially on the video front, and this should lead users to adopt LTE as well as upgrade their plans, thus benefiting the telcos’ data revenue and margins. We retain our BUY calls on StarHub and M1, and SELL on SingTel.
SingTel reins in generous data caps. SingTel’s new 4G plans were significant not because it is the first telco to launch 4G smartphone plans, but because it has slashed data caps for both its 3G and 4G plans. From a two-tiered 12GB and 30GB (although not unlimited, these caps were still very generous), SingTel now offers four tiers of 2GB, 3GB, 4GB and 12GB. Monthly subscription prices have remained the same but SingTel has also increased the number of bundled SMS.
StarHub and M1 likely to follow suit. Now that the giant has stepped forward to lead the way, the other telcos are likely to follow. According to the media, StarHub will soon cut its single-tier 12GB smartphone and iPhone plans to tiers of 1GB, 2GB and 5GB to match its Multi-SIM plans for tablets and mobile phones. Similarly with M1, although it has said it will only unveil its plans in 2H12. Also, we think both smaller telcos will take the opportunity to do away with their unlimited plans.
Churn could rise in rush to lock in larger data caps. SingTel’s churn rate could rise in 3Q12, as its out-of-contract subscribers may switch to the other two telcos to lock in their still-generous data caps for another two years. This is especially so if StarHub and M1 hold off on dumping their higher data caps for a couple more months. We reckon this is probably why StarHub warned it would also be cutting caps soon but provided no other details.
Gradual adoption. The decision to cut down on data caps should be positive for ARPUs further out but the short-term impact will likely be minimal as the majority of data users do not exceed 2GB of data a month. Over time, more 4G handsets will become available, and the faster speeds will encourage more data usage and prompt users to upgrade their plans, thus benefiting data revenue. Higher adoption of tablets will also drive more data usage. More importantly, data margins will also benefit.
Prefer StarHub and M1 to SingTel. This development does not change our calls, which stand at BUY on StarHub and M1 and SELL on SingTel. We still like StarHub and M1 for their attractive yields of about 6%. In fact, StarHub’s yield could get more attractive as we believe its balance sheet can support a higher regular dividend. While the cut in data caps will benefit its domestic business, SingTel faces significant risks from overseas, particularly on the currency and regulatory fronts.
Wednesday, 6 June 2012
Tiger Airways
DMG Research on 5 June 2012
TIGER Airways has finalised its acquisition of a 40 per cent stake in Southeast Asian Airline (SEAir), which will be acquired from existing foreign shareholders at US$7 million, less liabilities to be confirmed at a due diligence review. Under the terms of the agreement, US$2 million is to be paid on closing and the remainder minus liabilities and the retention sum are to be paid within five business days from the final determination of the liabilities.
We note that Tiger has made a S$7 million provision for SEAir in Q3 FY2012 which largely stems from the two A319 aircraft currently leased from Tiger under the Tiger Partner Airline programme. While the group expects no change in net tangible assets post-acquisition, there will be an additional loss of 1.21 Singapore cents per share if accounts had been consolidated for the financial year ended March 31.
We believe that Tiger will write off its investment in SEAir once it is completed; hence, losses should not be reflected on its income statement. We are also relieved that Tiger will have another avenue to offload its new capacity other than Indonesia. Tiger intends to expand SEAir's fleet to five aircraft by FY2013 and will be deploying three more aircraft to the Philippines. Pending a discussion with management, we maintain our "buy" call and target price of S$0.75 pegged at 2.5 times FY2013 P/B.
BUY
BUY
Singtel
CIMB on 5 Jun 2012
GIVEN the lack of catalysts, SingTel remains a "neutral" with a sum-of- parts based target price of S$3.36. While we are concerned about the falling regional currencies, the share price downside should be ring-fenced by its modest dividend yield of 4-5 per cent. StarHub remains our top Singapore telco pick.
SingTel is refreshing its smartphone plans by bundling less data but more SMS. It now offers between 2GB and 12GB of data compared to a flat 12GB across all plans previously, and 25-45 per cent more SMS. SingTel also launched an LTE (long-term evolution) service for smartphones, the first telco in Singapore to do so.
This is a step in the right direction but earnings impact is minimal. We take a positive view of SingTel's lower data bundle but are not surprised as the telco has said that it wanted to better monetise the rising data usage. SingTel noted that 90 per cent of users do not use more than 2GB per month, which means that it is only able to monetise 10 per cent immediately. Nonetheless, average revenue per user for these LTE users should be higher than for 3G plans. Also, as usage rises over time, more users will be compelled to upgrade their plan.
SingTel is bundling more SMS but this is unlikely to resonate with users given the waning usage in favour of data messaging. Under its new plans, SingTel now bundles more SMS but substantially less data than its rivals. LTE take-up will be gradual and will improve when more handsets with better battery life become available.
Switch to StarHub for its more attractive dividends of over 6 per cent, which have upside potential given its low net debt/Ebitda of 0.5 times. SingTel's overseas units, which contribute 75 per cent of its earnings, risk being diluted by weaker regional currencies.
NEUTRAL
GIVEN the lack of catalysts, SingTel remains a "neutral" with a sum-of- parts based target price of S$3.36. While we are concerned about the falling regional currencies, the share price downside should be ring-fenced by its modest dividend yield of 4-5 per cent. StarHub remains our top Singapore telco pick.
SingTel is refreshing its smartphone plans by bundling less data but more SMS. It now offers between 2GB and 12GB of data compared to a flat 12GB across all plans previously, and 25-45 per cent more SMS. SingTel also launched an LTE (long-term evolution) service for smartphones, the first telco in Singapore to do so.
This is a step in the right direction but earnings impact is minimal. We take a positive view of SingTel's lower data bundle but are not surprised as the telco has said that it wanted to better monetise the rising data usage. SingTel noted that 90 per cent of users do not use more than 2GB per month, which means that it is only able to monetise 10 per cent immediately. Nonetheless, average revenue per user for these LTE users should be higher than for 3G plans. Also, as usage rises over time, more users will be compelled to upgrade their plan.
SingTel is bundling more SMS but this is unlikely to resonate with users given the waning usage in favour of data messaging. Under its new plans, SingTel now bundles more SMS but substantially less data than its rivals. LTE take-up will be gradual and will improve when more handsets with better battery life become available.
Switch to StarHub for its more attractive dividends of over 6 per cent, which have upside potential given its low net debt/Ebitda of 0.5 times. SingTel's overseas units, which contribute 75 per cent of its earnings, risk being diluted by weaker regional currencies.
NEUTRAL
Sheng Siong Group
Kim Eng on 6 June 2012
Supermarket trio ensures controlled competition. Sheng Siong Group is one of the top three supermarket operators in Singapore with a market share of 18%, behind NTUC FairPrice and Dairy Farm International (Cold Storage & Shop’N’Save). Together, the trio controls 83% of the domestic market, a predominance which we believe helps ensure stable and controlled competition while barring new entrants which lack economies of scale.
The most efficient player. Sheng Siong may be the smallest player in this tripartite situation but it is the most efficient of the trio, with revenue per sq m 40% higher than NTUC FairPrice. Its asset-light business model carries no debt and enjoys positive cash return cycles. With capex already incurred for a recently completed 543,000 sq m distribution centre, shareholders can look forward to further improvements in operating margins and faster capacity expansion.
Dividend payout to be sustained after FY12. Although Sheng Siong’s 90% dividend payout commitment (for its IPO) ends in FY12, we strongly believe that it will be sustained. The group has a strong net cash position of SGD149m, a defensive business model with positive working capital cycle, free cash flow yield of 8.7% and no major capex requirement in sight.
Growth secured for 2012. Management has secured two outlet spaces which has commenced operations this quarter. They would increase the group’s current store space of 367,800 sq ft by 3.6%. We estimate FY12F-14F recurring net earnings to grow at 8.5% CAGR, driven by steady outlet growth, better utilization in new outlets and improving margins. Given its target of low-to-mid-end mass market, it is also a recession-resilient business.
Initiate with BUY and TP of SGD0.52. We initiate coverage on Sheng Siong Group with a BUY rating and target price of SGD0.52, based on 18.8x FY13F earnings, pegged to Dairy Farm International and applying a 25% discount. Assuming 90% dividend payout, our target price would imply a sustainable forward dividend yield of 4.8-5.4% p.a.
Supermarket trio ensures controlled competition. Sheng Siong Group is one of the top three supermarket operators in Singapore with a market share of 18%, behind NTUC FairPrice and Dairy Farm International (Cold Storage & Shop’N’Save). Together, the trio controls 83% of the domestic market, a predominance which we believe helps ensure stable and controlled competition while barring new entrants which lack economies of scale.
The most efficient player. Sheng Siong may be the smallest player in this tripartite situation but it is the most efficient of the trio, with revenue per sq m 40% higher than NTUC FairPrice. Its asset-light business model carries no debt and enjoys positive cash return cycles. With capex already incurred for a recently completed 543,000 sq m distribution centre, shareholders can look forward to further improvements in operating margins and faster capacity expansion.
Dividend payout to be sustained after FY12. Although Sheng Siong’s 90% dividend payout commitment (for its IPO) ends in FY12, we strongly believe that it will be sustained. The group has a strong net cash position of SGD149m, a defensive business model with positive working capital cycle, free cash flow yield of 8.7% and no major capex requirement in sight.
Growth secured for 2012. Management has secured two outlet spaces which has commenced operations this quarter. They would increase the group’s current store space of 367,800 sq ft by 3.6%. We estimate FY12F-14F recurring net earnings to grow at 8.5% CAGR, driven by steady outlet growth, better utilization in new outlets and improving margins. Given its target of low-to-mid-end mass market, it is also a recession-resilient business.
Initiate with BUY and TP of SGD0.52. We initiate coverage on Sheng Siong Group with a BUY rating and target price of SGD0.52, based on 18.8x FY13F earnings, pegged to Dairy Farm International and applying a 25% discount. Assuming 90% dividend payout, our target price would imply a sustainable forward dividend yield of 4.8-5.4% p.a.
Tuesday, 5 June 2012
MTQ Corporation
UOBKayhian on 5 June 2012
Investment Highlights
· We met with CEO Mr Khaw Boon Wee recently and toured the yard in Pandan Loop.
· MTQ Corporation (MTQ) specialises in the repair and reconditioning of oilfield equipment for drilling and exploration of oil & gas. It has OEM-authorised repair facilities for Cooper Cameron, Varco BJ and QVM Valves. The company has over 30 years of experience in oilfield engineering, servicing customers in Asia, Middle East and the US.
· MTQ also supplies turbochargers and diesel fuel injection in Australia, distributing brands such as Bosch, IHI, Garrett, Denso and Schwitzer.
Company’s Outlook
· Management remains cautiously optimistic on the company’s outlook with adequate orders for the quarter.
· With crude oil prices slumping 15% in May, this will not dampen oil exploration activities in the region due to strong demand, especially in India and China.
· Operations in the Bahrain facility remain robust with increased refurbishment and reactivation works in the Middle East. The company expects to break even at end-FY13 or early-FY14.
· For FY12, MTQ’s revenue grew 40% yoy to S$128.4m with net profit excluding write-back of tax provisions increasing 5.6% to S$11.2m, mainly due to the contributions from newly-acquired Premier Group. Premier provides oilfield equipment primarily used in drilling applications in Southeast Asia.
· MTQ bought Premier for its complementary offerings and the vast business network in the region.
Financials Highlights
· Revenue contribution from the Oilfield Engineering division jumped 75.7% yoy to S$74.1m, driven by the 9-month contribution from Premier. Revenue from the Engine Systems division rose 10.2% yoy to S$54.6m.
· However, gross profit increased only 25% yoy to S$47.0m with gross margin falling from 40.9% for FY11 to 36.6% for FY12 due to the high start-up costs from the new operations in Bahrain.
· The group is also facing higher labour costs due to additional foreign workers and hence, accommodation expenses.
· MTQ declared a final dividend of 2 cents/share, giving an annualised dividend yield of about 5%.
Valuation
· The stock is trading at 7.0x FY11 PE.
Investment Highlights
· We met with CEO Mr Khaw Boon Wee recently and toured the yard in Pandan Loop.
· MTQ Corporation (MTQ) specialises in the repair and reconditioning of oilfield equipment for drilling and exploration of oil & gas. It has OEM-authorised repair facilities for Cooper Cameron, Varco BJ and QVM Valves. The company has over 30 years of experience in oilfield engineering, servicing customers in Asia, Middle East and the US.
· MTQ also supplies turbochargers and diesel fuel injection in Australia, distributing brands such as Bosch, IHI, Garrett, Denso and Schwitzer.
Company’s Outlook
· Management remains cautiously optimistic on the company’s outlook with adequate orders for the quarter.
· With crude oil prices slumping 15% in May, this will not dampen oil exploration activities in the region due to strong demand, especially in India and China.
· Operations in the Bahrain facility remain robust with increased refurbishment and reactivation works in the Middle East. The company expects to break even at end-FY13 or early-FY14.
· For FY12, MTQ’s revenue grew 40% yoy to S$128.4m with net profit excluding write-back of tax provisions increasing 5.6% to S$11.2m, mainly due to the contributions from newly-acquired Premier Group. Premier provides oilfield equipment primarily used in drilling applications in Southeast Asia.
· MTQ bought Premier for its complementary offerings and the vast business network in the region.
Financials Highlights
· Revenue contribution from the Oilfield Engineering division jumped 75.7% yoy to S$74.1m, driven by the 9-month contribution from Premier. Revenue from the Engine Systems division rose 10.2% yoy to S$54.6m.
· However, gross profit increased only 25% yoy to S$47.0m with gross margin falling from 40.9% for FY11 to 36.6% for FY12 due to the high start-up costs from the new operations in Bahrain.
· The group is also facing higher labour costs due to additional foreign workers and hence, accommodation expenses.
· MTQ declared a final dividend of 2 cents/share, giving an annualised dividend yield of about 5%.
Valuation
· The stock is trading at 7.0x FY11 PE.
Sakari Resources
OCBC on 1 Jun 2012
Sakari Resources Limited (SRL) saw its share price taking a big hit, falling some 31% after reporting a dismal set of 1Q12 results. We believe that the continued fall in global coal prices have also spooked investors, especially since coal prices have also fallen below what management had earlier believed to be the floor of around US$100. In view of the grimmer outlook, we cut our FY12 earnings forecast by 48% even though the cut in revenue is only 10% (FY13F earnings by 23% and revenue by 5%). And as we are also expecting to only see a gradual recovery in coal prices over the next few years at best, our DCF-based fair value also falls from S$2.29 to S$1.45. Downgrade our rating from Buy to HOLD as valuations currently are not demanding. We would consider collecting around S$1.30.
Tumble in stock price
Sakari Resources Limited (SRL) saw its share price taking a big hit, falling some 31% after reporting a dismal set of 1Q12 results; this despite the management assuring investors that things should start to improve from 2Q12 onwards. Instead, investors are likely spooked by the continued fall in coal prices as the situation in Europe becomes increasingly uncertain; a major coal producer in the US has also expressed a pretty muted outlook .
Coal prices below US$100
According to Bloomberg data, the Newcastle coal futures prices have now fallen below the 3.5-year average (refer to Exhibit 1) to hit US$91.7; it has also fallen some 34% from its high in early 2011. More importantly, we note that the coal prices have also fallen below what management had earlier believed to be the floor of around US$100. And if coal prices continue to remain depressed or drift lower, this would further jeopardise the company’s targeted ASP of around US$85-90/ton for this year.
Price-sensitive earnings
In light of the tumble in global coal prices and also the increased uncertainty in Europe, we deem it necessary to further pare our coal price assumption by 10% to US$76/ton. And because cash cost is unlikely to fall as fast, margin compression is likely to kick in quite sharply. As such, we cut our FY12 earnings forecast by 48% even though the cut in revenue is only 10% (FY13F earnings by 23% and revenue by 5%).
Lowering fair value to S$1.45
And as we are also expecting to only see a gradual recovery in coal prices over the next few years at best, our DCF-based fair value also falls from S$2.29 to S$1.45. Downgrade our rating from Buy to HOLD as valuations currently are not demanding. We would consider collecting around S$1.30.
Sakari Resources Limited (SRL) saw its share price taking a big hit, falling some 31% after reporting a dismal set of 1Q12 results. We believe that the continued fall in global coal prices have also spooked investors, especially since coal prices have also fallen below what management had earlier believed to be the floor of around US$100. In view of the grimmer outlook, we cut our FY12 earnings forecast by 48% even though the cut in revenue is only 10% (FY13F earnings by 23% and revenue by 5%). And as we are also expecting to only see a gradual recovery in coal prices over the next few years at best, our DCF-based fair value also falls from S$2.29 to S$1.45. Downgrade our rating from Buy to HOLD as valuations currently are not demanding. We would consider collecting around S$1.30.
Tumble in stock price
Sakari Resources Limited (SRL) saw its share price taking a big hit, falling some 31% after reporting a dismal set of 1Q12 results; this despite the management assuring investors that things should start to improve from 2Q12 onwards. Instead, investors are likely spooked by the continued fall in coal prices as the situation in Europe becomes increasingly uncertain; a major coal producer in the US has also expressed a pretty muted outlook .
Coal prices below US$100
According to Bloomberg data, the Newcastle coal futures prices have now fallen below the 3.5-year average (refer to Exhibit 1) to hit US$91.7; it has also fallen some 34% from its high in early 2011. More importantly, we note that the coal prices have also fallen below what management had earlier believed to be the floor of around US$100. And if coal prices continue to remain depressed or drift lower, this would further jeopardise the company’s targeted ASP of around US$85-90/ton for this year.
Price-sensitive earnings
In light of the tumble in global coal prices and also the increased uncertainty in Europe, we deem it necessary to further pare our coal price assumption by 10% to US$76/ton. And because cash cost is unlikely to fall as fast, margin compression is likely to kick in quite sharply. As such, we cut our FY12 earnings forecast by 48% even though the cut in revenue is only 10% (FY13F earnings by 23% and revenue by 5%).
Lowering fair value to S$1.45
And as we are also expecting to only see a gradual recovery in coal prices over the next few years at best, our DCF-based fair value also falls from S$2.29 to S$1.45. Downgrade our rating from Buy to HOLD as valuations currently are not demanding. We would consider collecting around S$1.30.
Rotary Engineering
OCBC on 5 June 2012
Rotary Engineering Limited (Rotary) share price has fallen by 22% in May and is now at a three-year historical low of S$0.50, representing almost 1x P/B (one standard deviation below its 5-year average). We believe that this was mainly due to its disappointing 1Q12 results, continued uncertainty in the global economy and investors’ preference for defensive non-cyclical counters. That said, we do not see any clear near-term catalysts. Moreover, we believe that there could be more downside than upside risks at this juncture. Therefore, we lowered our valuation peg to 1x (previously 1.2x) and fair value to S$0.50 (previously S$0.61). Maintain HOLD.
Share prices near historical lows
Rotary Engineering Limited (Rotary)’s share price plunged by 22% in the last month (May 2012) against STI’s 7% and FSTOG (STI Oil & Gas Index)’s 9% declines. We believe that this was mainly due to its disappointing 1Q12 results, continued uncertainty in the global economy and investors’ preference for defensive non-cyclical counters. As of 4th June 2012, Rotary’s share price has again fallen to a three-year historical low of S$0.50, representing almost 1x P/B (one standard deviation below its 5-year average).
Headwinds from all directions
Rotary’s business model is highly dependent on the profitability and volume of the project work it secures. Recently, it faced severe headwinds from several fronts: (i) fewer contracts awarded by oil companies, (ii) rising political risks in the Middle East, and (iii) a severe pricing competition. This has resulted in falling gross margins (1Q12: 14.5%; FY09-11: average gross margin of 22.2%) and net order-book (1Q12: S$0.6b; FY09-11: average order-book of S$0.9b).
More downside risks
We also see more downside risks for the group, arising from (i) additional costs on the SATORP project due to stricter-than-expected requirements, and (ii) further delays on the Fujairah project due to engineering design variations. For the Tanjung Piai oil terminal project, we note that it is still at a preliminary stage (i.e. feasibility studies) and is unlikely to be cash generative over the near and medium term horizon.
Lower fair value of S$0.50
Although Rotary’s share price is near historical lows, we do not see any clear near-term catalyst. Moreover, we believe that there could be more downside than upside risks at this juncture. Therefore, we lowered our valuation peg to 1x (previously 1.2x) and fair value to S$0.50 (previously S$0.61). Maintain HOLD.
Rotary Engineering Limited (Rotary) share price has fallen by 22% in May and is now at a three-year historical low of S$0.50, representing almost 1x P/B (one standard deviation below its 5-year average). We believe that this was mainly due to its disappointing 1Q12 results, continued uncertainty in the global economy and investors’ preference for defensive non-cyclical counters. That said, we do not see any clear near-term catalysts. Moreover, we believe that there could be more downside than upside risks at this juncture. Therefore, we lowered our valuation peg to 1x (previously 1.2x) and fair value to S$0.50 (previously S$0.61). Maintain HOLD.
Share prices near historical lows
Rotary Engineering Limited (Rotary)’s share price plunged by 22% in the last month (May 2012) against STI’s 7% and FSTOG (STI Oil & Gas Index)’s 9% declines. We believe that this was mainly due to its disappointing 1Q12 results, continued uncertainty in the global economy and investors’ preference for defensive non-cyclical counters. As of 4th June 2012, Rotary’s share price has again fallen to a three-year historical low of S$0.50, representing almost 1x P/B (one standard deviation below its 5-year average).
Headwinds from all directions
Rotary’s business model is highly dependent on the profitability and volume of the project work it secures. Recently, it faced severe headwinds from several fronts: (i) fewer contracts awarded by oil companies, (ii) rising political risks in the Middle East, and (iii) a severe pricing competition. This has resulted in falling gross margins (1Q12: 14.5%; FY09-11: average gross margin of 22.2%) and net order-book (1Q12: S$0.6b; FY09-11: average order-book of S$0.9b).
More downside risks
We also see more downside risks for the group, arising from (i) additional costs on the SATORP project due to stricter-than-expected requirements, and (ii) further delays on the Fujairah project due to engineering design variations. For the Tanjung Piai oil terminal project, we note that it is still at a preliminary stage (i.e. feasibility studies) and is unlikely to be cash generative over the near and medium term horizon.
Lower fair value of S$0.50
Although Rotary’s share price is near historical lows, we do not see any clear near-term catalyst. Moreover, we believe that there could be more downside than upside risks at this juncture. Therefore, we lowered our valuation peg to 1x (previously 1.2x) and fair value to S$0.50 (previously S$0.61). Maintain HOLD.
STX OSV
Kim Eng on 5 June 2012
Background: STX OSV is a builder of offshore and specialised vessels used in the offshore oil and gas, as well as exploration and production industries. It focuses on AHTS, PSV, OSCV and other specialised vessels. The company has nine shipbuilding facilities worldwide, spread across Norway, Romania, Brazil and Vietnam. STX OSV was listed in November 2010 and is part of South Korea’s STX Corporation.
Recent developments: News of a possible sale of its parent’s 50.75% controlling stake in the company in January this year has propped up STX OSV’s share price. Industry sources suggest that a preferred bidder for the stake could soon emerge and could likely be Italian shipbuilder Fincantieri and PE firm Carlyle Group. A mandatory general offer could be triggered and market buzz has pointed to a price close to SGD1.60 per share.
Decent fundamentals. Putting aside the news on the stake sale, fundamentals for STX OSV are decent, with net cash of NOK437m and positive operating cash flows. Though 1Q12 performance was a tad lower on a YoY basis, it was largely due to timing of recognition. On a more positive note, EBITDA margin showed a slight improvement. Trading at consensus forward PER of 6.7x, the stock is hardly expensive.
Possible rebound in order activities. STX OSV anticipates a rebound in order activities for high-end offshore support vessels on the heels of increased activities in the subsea area. But if the markets remain jittery and oil prices continue to fall, a rebound may take longer than expected to occur.
Orderbook at healthy level. Notwithstanding the aforesaid, STX OSV’s orderbook is still at a healthy level with positive order win momentum in the first quarter of the year. Outstanding orderbook currently stands at NOK16.0b with NOK2.3b in new orders secured in 1Q12. These orders would likely keep its yards well utilised throughout 2012.
Background: STX OSV is a builder of offshore and specialised vessels used in the offshore oil and gas, as well as exploration and production industries. It focuses on AHTS, PSV, OSCV and other specialised vessels. The company has nine shipbuilding facilities worldwide, spread across Norway, Romania, Brazil and Vietnam. STX OSV was listed in November 2010 and is part of South Korea’s STX Corporation.
Recent developments: News of a possible sale of its parent’s 50.75% controlling stake in the company in January this year has propped up STX OSV’s share price. Industry sources suggest that a preferred bidder for the stake could soon emerge and could likely be Italian shipbuilder Fincantieri and PE firm Carlyle Group. A mandatory general offer could be triggered and market buzz has pointed to a price close to SGD1.60 per share.
Decent fundamentals. Putting aside the news on the stake sale, fundamentals for STX OSV are decent, with net cash of NOK437m and positive operating cash flows. Though 1Q12 performance was a tad lower on a YoY basis, it was largely due to timing of recognition. On a more positive note, EBITDA margin showed a slight improvement. Trading at consensus forward PER of 6.7x, the stock is hardly expensive.
Possible rebound in order activities. STX OSV anticipates a rebound in order activities for high-end offshore support vessels on the heels of increased activities in the subsea area. But if the markets remain jittery and oil prices continue to fall, a rebound may take longer than expected to occur.
Orderbook at healthy level. Notwithstanding the aforesaid, STX OSV’s orderbook is still at a healthy level with positive order win momentum in the first quarter of the year. Outstanding orderbook currently stands at NOK16.0b with NOK2.3b in new orders secured in 1Q12. These orders would likely keep its yards well utilised throughout 2012.
Keppel Land
Kim Eng on 5 June 2012
Keeping its powder dry. Despite sitting on a healthy cash hoard of approximately SGD1.6b, Keppel Land (KepLand) has not been actively bidding for land in Singapore and China. We believe that it is being prudent amid global uncertainties, focusing first on clearing its inventory and bidding for attractive sites only if they become available. We remain optimistic about KepLand’s balance sheet strength. Maintain BUY.
Absent from Sengkang tender. The tender for a 2.2ha residential site beside KepLand’s The Luxurie at Sengkang Square closed on 31 May, drawing five bids in all. KepLand was a notable absentee among the bidders. The top bid of SGD383.3m translates to SGD527.6 psf ppr, 5% higher than KepLand’s land cost for The Luxurie, which may then lend support to The Luxurie’s current ASP of SGD1,000 psf.
Monitoring the Chinese market. In China, KepLand has earmarked three new projects for possible launch in 2H12, depending on market conditions. They are the Nanxiang project in Shanghai, Park Avenue Heights in Chengdu and The Lakefront Residence in Nantong. As various cities continue to fine-tune policies to support end-user demand, KepLand will do well to time its launches to coincide with the seasonal peak periods, such as in September/October.
MBFC Tower 3 divestment likely to be deferred. MBFC Tower 3 had obtained its TOP in 1Q12 with a committed leasing rate of 67%. We reckon that KepLand will now bide its time to sell its one-third stake (valued at SGD1.0b) to K-REIT Asia, until it is able to raise the commitment level to above 90% and until more RNAV-accretive acquisition opportunities surface for its capital to be redeployed.
Plenty in reserve. As uncertainties continue to plague global markets, KepLand is in a position of strength to navigate through the mediumterm volatilities and possibly pick up attractive assets for future growth, which could be a positive catalyst. Maintain BUY with a target price of SGD3.65, pegged at a lower 35% discount to RNAV and incorporating our DDM-valuation for K-REIT.
Keeping its powder dry. Despite sitting on a healthy cash hoard of approximately SGD1.6b, Keppel Land (KepLand) has not been actively bidding for land in Singapore and China. We believe that it is being prudent amid global uncertainties, focusing first on clearing its inventory and bidding for attractive sites only if they become available. We remain optimistic about KepLand’s balance sheet strength. Maintain BUY.
Absent from Sengkang tender. The tender for a 2.2ha residential site beside KepLand’s The Luxurie at Sengkang Square closed on 31 May, drawing five bids in all. KepLand was a notable absentee among the bidders. The top bid of SGD383.3m translates to SGD527.6 psf ppr, 5% higher than KepLand’s land cost for The Luxurie, which may then lend support to The Luxurie’s current ASP of SGD1,000 psf.
Monitoring the Chinese market. In China, KepLand has earmarked three new projects for possible launch in 2H12, depending on market conditions. They are the Nanxiang project in Shanghai, Park Avenue Heights in Chengdu and The Lakefront Residence in Nantong. As various cities continue to fine-tune policies to support end-user demand, KepLand will do well to time its launches to coincide with the seasonal peak periods, such as in September/October.
MBFC Tower 3 divestment likely to be deferred. MBFC Tower 3 had obtained its TOP in 1Q12 with a committed leasing rate of 67%. We reckon that KepLand will now bide its time to sell its one-third stake (valued at SGD1.0b) to K-REIT Asia, until it is able to raise the commitment level to above 90% and until more RNAV-accretive acquisition opportunities surface for its capital to be redeployed.
Plenty in reserve. As uncertainties continue to plague global markets, KepLand is in a position of strength to navigate through the mediumterm volatilities and possibly pick up attractive assets for future growth, which could be a positive catalyst. Maintain BUY with a target price of SGD3.65, pegged at a lower 35% discount to RNAV and incorporating our DDM-valuation for K-REIT.
Monday, 4 June 2012
Roxy-Pacific Holdings
OCBC on 4 June 2012
Despite increasing market uncertainty from European macro concerns, we believe that ROXY’s earnings continue to be underpinned by significant progress billings of about S$780m and highlight this is more than five times of FY11 development revenue (S$132.6m). We also note that ROXY’s recently launched projects, such as Eon Shenton, The Millage and Natura@Hillview, are converting well into sales, and also expect the MKZ to launch later this year. We continue to like ROXY for its ability to seek accretive land acquisitions, quick turnaround time for projects and efficient sales conversion at recent launches. Execution at Jade Towers would likely be an important catalyst for ROXY’s share price ahead. We maintain our BUY rating at an unchanged fair value estimate of S$0.45 with a RNAV discount of 25%.
Visibility from progress billings
Despite increasing market uncertainty from European macro concerns, we believe that ROXY’s earnings continue to be underpinned by significant progress billings of about S$780m.
This is from units already sold at launched projects, for which revenue would be recognized as project construction proceeds into FY12-14. In our view, this visibility of earnings ahead could buttress the share price even as the market decreases its risk appetite, and highlight that current progress billings stand at more than five times of FY11 development revenue (S$132.6m).
Execution at Jade Towers to be a key catalyst
We also note that ROXY’s recently launched projects, such as Eon Shenton, The Millage and Natura@Hillview, are converting well into sales, and also expect the MKZ to launch later this year. As we progress into FY12, we estimate that unsold residential exposure could decline into only about a quarter of the total gross development value of ROXY’s current residential portfolio. This would comprise of primarily Jade Towers, which is expected to launch in 2012. Being a key project, we believe that execution at Jade Towers would likely be an important catalyst for ROXY’s share price ahead.
Recurring earnings from Hotel segment
ROXY’s hotel segment, comprising of its ownership of Grand Mercure Roxy Hotel (GMRH), continues to put up strong numbers and would provide a steady source of recurring cash flow for the group even as we enter into an increasingly uncertain environment. For the domestic hospitality sector, however, we continue to hold a positive outlook and expect ROXY’s hotel segment to contribute approximately S$17m in profit before tax in FY12.
Maintain BUY at S$0.45 fair value estimate
We continue to like ROXY for its ability to seek accretive land acquisitions, quick turnaround time for projects and efficient sales conversion at recent launches. We maintain our BUY rating at an unchanged fair value estimate of S$0.45 with a RNAV discount of 25%.
Despite increasing market uncertainty from European macro concerns, we believe that ROXY’s earnings continue to be underpinned by significant progress billings of about S$780m and highlight this is more than five times of FY11 development revenue (S$132.6m). We also note that ROXY’s recently launched projects, such as Eon Shenton, The Millage and Natura@Hillview, are converting well into sales, and also expect the MKZ to launch later this year. We continue to like ROXY for its ability to seek accretive land acquisitions, quick turnaround time for projects and efficient sales conversion at recent launches. Execution at Jade Towers would likely be an important catalyst for ROXY’s share price ahead. We maintain our BUY rating at an unchanged fair value estimate of S$0.45 with a RNAV discount of 25%.
Visibility from progress billings
Despite increasing market uncertainty from European macro concerns, we believe that ROXY’s earnings continue to be underpinned by significant progress billings of about S$780m.
This is from units already sold at launched projects, for which revenue would be recognized as project construction proceeds into FY12-14. In our view, this visibility of earnings ahead could buttress the share price even as the market decreases its risk appetite, and highlight that current progress billings stand at more than five times of FY11 development revenue (S$132.6m).
Execution at Jade Towers to be a key catalyst
We also note that ROXY’s recently launched projects, such as Eon Shenton, The Millage and Natura@Hillview, are converting well into sales, and also expect the MKZ to launch later this year. As we progress into FY12, we estimate that unsold residential exposure could decline into only about a quarter of the total gross development value of ROXY’s current residential portfolio. This would comprise of primarily Jade Towers, which is expected to launch in 2012. Being a key project, we believe that execution at Jade Towers would likely be an important catalyst for ROXY’s share price ahead.
Recurring earnings from Hotel segment
ROXY’s hotel segment, comprising of its ownership of Grand Mercure Roxy Hotel (GMRH), continues to put up strong numbers and would provide a steady source of recurring cash flow for the group even as we enter into an increasingly uncertain environment. For the domestic hospitality sector, however, we continue to hold a positive outlook and expect ROXY’s hotel segment to contribute approximately S$17m in profit before tax in FY12.
Maintain BUY at S$0.45 fair value estimate
We continue to like ROXY for its ability to seek accretive land acquisitions, quick turnaround time for projects and efficient sales conversion at recent launches. We maintain our BUY rating at an unchanged fair value estimate of S$0.45 with a RNAV discount of 25%.
Fortune Real Estate Investment Trust
OCBC on 4 June 2012
HK retail sales grew at 11.4% YoY for April to reach HK$35.7b. While this is slower than the 17.1% YoY increase for March (revised figure), the moderated pace could be partially attributed to the inaugural nationwide Consumption Promotion Month on the Mainland for most of April, which could have reduced average spending by Mainlander tourists in HK. Private retail rents and prices set new highs in March. New Territories, where the majority of Fortune’s suburban malls are located, outperformed both HK Island and Kowloon with rents climbing 31% MoM and 24% YoY. We maintain our BUY rating and fair value of HK$5.22.
Rents in New Territories grow the fastest
The HK private retail rent and price indexes set new records in Mar, after the previous highs in Feb. The rent index was 0.9% higher than in Feb, while the price index showed a 2.4% MoM improvement. Perhaps more instructive is the rental rates for the different regions. New Territories, where the majority of Fortune’s malls are located, saw average private retail rents climb 31% MoM and 24% YoY, outperforming both HK Island (3% MoM, 0% YoY) and Kowloon (20% MoM, 22% YoY). The continued strength in the New Territories rental market bodes well for positive rental reversions at Fortune’s suburban malls.
Retail sales climb slower
For April, retail sales in HK climbed 11.4% YoY to HK$35.7b. While this is slower than the 17.1% YoY increase for March (revised figure of HK$36.6b), we note that the Chinese government had its first ever nationwide Consumption Promotion Month on the Mainland, which may have temporarily reduced average spending by Mainland tourists in HK. A HK government official expressed cautious optimism, with the still buoyant labour market and inbound tourism continuing to lend support.
Importance of the Chinese tourist
Visitor arrivals to HK continued to be strong in April, with the total number of arrivals growing 14.4% YoY to 3.8m. Arrivals from Mainland China climbed 23.9% to 2.6m. In 2011, the latest period for which data is available, the average overnight tourist spent HK$4,430 per trip on shopping (an overnight tourist is one who stays for at least one night in HK). Overnight Mainlander tourists spent an even greater amount, HK$5,795, on shopping every trip.
Maintain BUY
Fortune is trading at a P/B of 0.6x (NAV per unit of HK$7.81) and an estimated FY12 dividend yield of 7.2%. We maintain our BUY rating and our fair value of HK$5.22.
HK retail sales grew at 11.4% YoY for April to reach HK$35.7b. While this is slower than the 17.1% YoY increase for March (revised figure), the moderated pace could be partially attributed to the inaugural nationwide Consumption Promotion Month on the Mainland for most of April, which could have reduced average spending by Mainlander tourists in HK. Private retail rents and prices set new highs in March. New Territories, where the majority of Fortune’s suburban malls are located, outperformed both HK Island and Kowloon with rents climbing 31% MoM and 24% YoY. We maintain our BUY rating and fair value of HK$5.22.
Rents in New Territories grow the fastest
The HK private retail rent and price indexes set new records in Mar, after the previous highs in Feb. The rent index was 0.9% higher than in Feb, while the price index showed a 2.4% MoM improvement. Perhaps more instructive is the rental rates for the different regions. New Territories, where the majority of Fortune’s malls are located, saw average private retail rents climb 31% MoM and 24% YoY, outperforming both HK Island (3% MoM, 0% YoY) and Kowloon (20% MoM, 22% YoY). The continued strength in the New Territories rental market bodes well for positive rental reversions at Fortune’s suburban malls.
Retail sales climb slower
For April, retail sales in HK climbed 11.4% YoY to HK$35.7b. While this is slower than the 17.1% YoY increase for March (revised figure of HK$36.6b), we note that the Chinese government had its first ever nationwide Consumption Promotion Month on the Mainland, which may have temporarily reduced average spending by Mainland tourists in HK. A HK government official expressed cautious optimism, with the still buoyant labour market and inbound tourism continuing to lend support.
Importance of the Chinese tourist
Visitor arrivals to HK continued to be strong in April, with the total number of arrivals growing 14.4% YoY to 3.8m. Arrivals from Mainland China climbed 23.9% to 2.6m. In 2011, the latest period for which data is available, the average overnight tourist spent HK$4,430 per trip on shopping (an overnight tourist is one who stays for at least one night in HK). Overnight Mainlander tourists spent an even greater amount, HK$5,795, on shopping every trip.
Maintain BUY
Fortune is trading at a P/B of 0.6x (NAV per unit of HK$7.81) and an estimated FY12 dividend yield of 7.2%. We maintain our BUY rating and our fair value of HK$5.22.
SembMar
OCBC on 1 June 2012
Though oil prices have corrected, we opine that at current levels, oil prices are still elevated and we expect continued capital expenditure in the sector which takes a long term view. Recent comments by offshore drillers in the latest quarterly results also reflected their belief in the strong fundamentals of the industry. Sembcorp Marine (SMM) has a net order book of S$7.4b with deliveries stretching till 2Q15, and this provides good earnings visibility at a time when uncertainties are still prevalent in the global economy and there is a general lack of clarity in terms of corporate earnings outlook. Its share price has fallen by 15.1% since we downgraded it to Hold a few months ago. With an expected upside potential of 14.8% (excl dividends) now, we upgrade our rating to BUY with an unchanged fair value estimate of S$5.12.
Easing oil prices, but still above threshold
Though oil prices have corrected, we opine that at current levels (WTI: US$88/bbl, Brent: US$105/bbl), oil prices are still elevated. As deepwater offshore projects typically need a threshold level of US$70-75/bbl for a safe cushion to be viable investments, we expect continued capital expenditure in the sector which takes a long-term view due to strong industry fundamentals and the long lead time required for offshore projects.
Offshore drillers remain upbeat
The difference between new and older assets has also been accentuating over the years, evidenced by a divergence in utilisation and day rates. Recent comments by offshore drillers in the latest quarterly results also reflected their belief in the strong fundamentals of the industry and companies such as Seadrill are keen on more newbuilds.
Strong outstanding order book provides defensiveness
Sembcorp Marine has a net order book of S$7.4b with deliveries stretching till 2Q15, and this provides good earnings visibility at a time when uncertainties are still prevalent in the global economy and there is a general lack of clarity in terms of corporate earnings outlook. The group has secured orders worth about S$3b YTD, accounting for 34% of our full year estimate which includes orders from Petrobras.
Stock has eased quite a bit; upgrade to BUY
SMM’s share price has fallen by 15.1% since we downgraded it to Hold a few months ago in our report “Looking beyond FY11”, 24 Feb 2012. This compares with the STI’s 6.9% drop over the same period. At current price levels, we see value emerging in SMM’s stock. With an expected upside potential of 14.8% (excl dividends) now, we upgrade our rating to BUY with an unchanged fair value estimate of S$5.12.
Though oil prices have corrected, we opine that at current levels, oil prices are still elevated and we expect continued capital expenditure in the sector which takes a long term view. Recent comments by offshore drillers in the latest quarterly results also reflected their belief in the strong fundamentals of the industry. Sembcorp Marine (SMM) has a net order book of S$7.4b with deliveries stretching till 2Q15, and this provides good earnings visibility at a time when uncertainties are still prevalent in the global economy and there is a general lack of clarity in terms of corporate earnings outlook. Its share price has fallen by 15.1% since we downgraded it to Hold a few months ago. With an expected upside potential of 14.8% (excl dividends) now, we upgrade our rating to BUY with an unchanged fair value estimate of S$5.12.
Easing oil prices, but still above threshold
Though oil prices have corrected, we opine that at current levels (WTI: US$88/bbl, Brent: US$105/bbl), oil prices are still elevated. As deepwater offshore projects typically need a threshold level of US$70-75/bbl for a safe cushion to be viable investments, we expect continued capital expenditure in the sector which takes a long-term view due to strong industry fundamentals and the long lead time required for offshore projects.
Offshore drillers remain upbeat
The difference between new and older assets has also been accentuating over the years, evidenced by a divergence in utilisation and day rates. Recent comments by offshore drillers in the latest quarterly results also reflected their belief in the strong fundamentals of the industry and companies such as Seadrill are keen on more newbuilds.
Strong outstanding order book provides defensiveness
Sembcorp Marine has a net order book of S$7.4b with deliveries stretching till 2Q15, and this provides good earnings visibility at a time when uncertainties are still prevalent in the global economy and there is a general lack of clarity in terms of corporate earnings outlook. The group has secured orders worth about S$3b YTD, accounting for 34% of our full year estimate which includes orders from Petrobras.
Stock has eased quite a bit; upgrade to BUY
SMM’s share price has fallen by 15.1% since we downgraded it to Hold a few months ago in our report “Looking beyond FY11”, 24 Feb 2012. This compares with the STI’s 6.9% drop over the same period. At current price levels, we see value emerging in SMM’s stock. With an expected upside potential of 14.8% (excl dividends) now, we upgrade our rating to BUY with an unchanged fair value estimate of S$5.12.
Singapore REITS
Kim Eng on 4 June 2012
Track record matters. The myth that S-REITs are good income-yielding instruments for retail investors has generated much debate. On the one hand, REITs proponents like the recurring distributions paid out from steady streams of rental income. On the other hand, naysayers argue that whatever REITs managers pay out in dividends, they will likely take back in the form of rights issues. We examined the total rate of return of the 10 largest S-REITs since their listing, namely, those with a trading history of at least five years, and put forward our pristine picks to ride through the impending economic down cycle.
Industrial and retail REITs top of the league. REITS in the more resilient subsectors like industrial and retail topped our league table, with CDL Hospitality Trusts, Frasers Centrepoint Trust and Ascendas Real Estate Investment Trust the best performers. K-REIT Asia was the worst performer, given the numerous equity cash calls it made to fund acquisitions. While past performance may not guarantee future returns, we take the view that our league table does provide some insights into the track record of the individual S-REITs.
Good mix of stability and growth potential. Rental income resilience, total rate of return, accretive distributions and stable payout track record are some of the parameters we scrutinised by delving into the operating history of the S-REITs since their initial public offering. Barring a full-blown European debt crisis, we also think that it is unlikely that S-REITs will be de-rated to the levels seen during the global financial crisis (GFC) due to stronger balance sheets and the absence of credit tightening.
Four S-REITs to ride through turbulence. S-REITs currently trade at an average of 0.94x P/BV and 6.8% yield compared to their trough valuations of 0.34x P/BV and 17.2% yield seen at the height of the GFC. Our top four S-REITs are CapitaMall Trust and Frasers Centrepoint Trust in the retail subsector, and Ascendas REIT and Mapletree Logistics Trust in the industrial subsector. Our top SELLs are K-REIT Asia and CapitaCommercial Trust as we see further downside risk in their DPU which would render valuations unattractive.
Track record matters. The myth that S-REITs are good income-yielding instruments for retail investors has generated much debate. On the one hand, REITs proponents like the recurring distributions paid out from steady streams of rental income. On the other hand, naysayers argue that whatever REITs managers pay out in dividends, they will likely take back in the form of rights issues. We examined the total rate of return of the 10 largest S-REITs since their listing, namely, those with a trading history of at least five years, and put forward our pristine picks to ride through the impending economic down cycle.
Industrial and retail REITs top of the league. REITS in the more resilient subsectors like industrial and retail topped our league table, with CDL Hospitality Trusts, Frasers Centrepoint Trust and Ascendas Real Estate Investment Trust the best performers. K-REIT Asia was the worst performer, given the numerous equity cash calls it made to fund acquisitions. While past performance may not guarantee future returns, we take the view that our league table does provide some insights into the track record of the individual S-REITs.
Good mix of stability and growth potential. Rental income resilience, total rate of return, accretive distributions and stable payout track record are some of the parameters we scrutinised by delving into the operating history of the S-REITs since their initial public offering. Barring a full-blown European debt crisis, we also think that it is unlikely that S-REITs will be de-rated to the levels seen during the global financial crisis (GFC) due to stronger balance sheets and the absence of credit tightening.
Four S-REITs to ride through turbulence. S-REITs currently trade at an average of 0.94x P/BV and 6.8% yield compared to their trough valuations of 0.34x P/BV and 17.2% yield seen at the height of the GFC. Our top four S-REITs are CapitaMall Trust and Frasers Centrepoint Trust in the retail subsector, and Ascendas REIT and Mapletree Logistics Trust in the industrial subsector. Our top SELLs are K-REIT Asia and CapitaCommercial Trust as we see further downside risk in their DPU which would render valuations unattractive.
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