M1

OCBC on 15 Apr 2014

M1 Ltd posted 1Q14 revenue of S$240.2m, though down 1.2% YoY and 13.8% QoQ, it still met about 23.4% of our FY14 forecast; net profit grew 4.3% YoY and 5.6% QoQ to S$42.8m, or about 25.8% of our full-year forecast. Going forward, management continues to believe that it can continue to achieve moderate earnings growth (within the single-digit range). It is keeping capex guidance at S$130m due to ongoing upgrades to its mobile network. As the earnings were mostly in line with our forecasts, we opt not to adjust our numbers at this stage. Although post-paid acquisition cost came down, we believe it could rise again with the launch of the Samsung S5 in 2Q and possibly the new Apple iPhone 6 in 3Q. As we are retaining our DCF-based fair value at S$3.30, we see limited upside from here. Maintain HOLD.

Decent start to FY14
M1 Ltd posted 1Q14 revenue of S$240.2m, though down 1.2% YoY and 13.8% QoQ, it still met about 23.4% of our FY14 forecast. Thanks to an improvement in service EBITDA margin to 40.0% from 38.2% in 4Q13 and 39.5% in 1Q13, net profit grew 4.3% YoY and 5.6% QoQ to S$42.8m, or about 25.8% of our full-year forecast. Besides lower handset costs, M1 also benefited from lower traffic expenses. But wholesale costs of fixed services increased due to higher customer base and management expects these costs to rise further as it continues to grow its customer base.

No change to moderate earnings growth outlook
Going forward, management believes that it can continue to achieve moderate earnings growth (within the single-digit range), aided by increased mobile data usage as customers upgrade their smartphone plans. Management notes that already 54% are on tiered pricing, while 16% of them exceeded their data bundles, which now cost twice as much per GB with a higher cap of S$188 versus S$94 previously. M1 has kept its capex guidance at S$130m as it upgrades its network to LTE-Advanced by end-2014. It also plans to launch VoLTE (voice over LTE) in the coming months. In addition, M1 believes that the declining ARPU in its fixed services segment is not "structural", but mainly due to promotions (quarterly due to the trade shows). 

Maintain HOLD with unchanged S$3.30 fair value
As the earnings were mostly in line with our forecasts, we opt not to adjust our numbers at this stage. Although post-paid acquisition cost came down, we believe it could rise again with the launch of the Samsung S5 in 2Q and possibly the new Apple iPhone 6 in 3Q. As we are retaining our DCF-based fair value at S$3.30, we see limited upside from here. Maintain HOLD.

Lian Beng

OCBC on 15 Apr 2014

3QFY14 PATMI came in at S$33.6m – up 178% YoY – mostly due to a boost from the TOP of M-space, a 55%-owned industrial development. This is within expectations, and 9MFY14 PATMI now makes up 78% of our FY14 forecast. Management announced plans to grow its recurring income base to ~S$20m p.a. (est. 31% of FY15F PATMI) through its ready-mix concrete, asphalt and dormitory businesses. Already we have seen the ready-mix concrete business contribute S$5.8m last year and also expect its new asphalt pre-mix plant, in which it has a 40% stake, to be operational by end 2014. We value Lian Beng using a sum of the parts (SOTP) methodology in line with peers: 1) for its construction/materials-related segment, we apply a 5x PE to FY14/15F blended earnings and, 2) for its real estate development segment, we apply a 30% RNAV discount. Downgrade to HOLD, on valuation grounds, with a higher value estimate of S$0.65 (versus S$0.58 previously).

M-Space boost within expectations
3QFY14 PATMI came in at S$33.6m – up 178% YoY – mostly due to a boost from the TOP of M-space, a 55%-owned industrial development. This is within expectations, and 9MFY14 PATMI now makes up 78% of our FY14 forecast. Topline for the quarter is S$257.5m, up 122% similarly from M-Space’s impact. The construction order book currently stands at a healthy S$1.1b as at end Feb-14. Looking ahead to FY15, we expect contributions from key development projects, Spottiswoode Suites and Midtown Residences, to flow in as progress recognition begins.

Target: S$20m recurring income per annum
Management targets to grow its recurring income base to ~S$20m p.a. (est. 31% of FY15F PATMI) through its ready-mix concrete, asphalt and dormitory businesses. Already we have seen the ready-mix concrete business contribute S$5.8m last year and also expect its new asphalt pre-mix plant, in which it has a 40% stake, to be operational by end 2014. In addition, its 55%-owned Mandai dormitory is anticipated to contribute ~S$7m in earnings every year. We believe this strategic direction is sound, given growing uncertainties in the private construction space as we enter a housing downturn.

Fairly valued here; downgrade to HOLD
After updating for latest datapoints and acquisitions, our FV estimate increases to S$0.65 from S$0.58 previously. We value Lian Beng using a sum of the parts (SOTP) methodology in line with peers: 1) for its construction/materials-related segment, we apply a 5x PE to FY14/15F blended earnings and, 2) for its real estate development segment, we apply a 30% RNAV discount. Note that, just two months ago, we had reiterated Lian Beng (at S$0.52) as a buy in our special situation piece “Anticipating Earnings Spikes” but now see the shares to be fairly valued after appreciating 28% after. That said, its price volatility has spiked over the last weeks; while its share price could run ahead of fundamentals in the near-term, we would refrain from adding exposure here. Downgrade to HOLD.

CapitaMalls Asia

OCBC on 15 Apr 2014

CapitaLand (CAPL) announced that will make a voluntary conditional cash offer of S$2.22 per share for all remaining CMA shares that it does not already hold. Note that CAPL currently owns 65.3% of CMA and would require another 24.7% acceptances to cross the 90% threshold for the offer to be declared unconditional. In that event, CAPL will compulsorily acquire all shares not acquired under the offer and delist CMA. The offer document will be dispatched within 14-21 days and the closing date will be around end May to June 2014. We believe that the offer price is fairly decent, given that it represents a 21% premium to book and a reasonable 8% discount to RNAV. CMA’s shares have mostly traded below its IPO price (S$2.12) since its listing in 2009, due to various structural and macro-economic headwinds, and this provides an opportunity for investors to exit at a reasonable valuation. Our recommendation: ACCEPT the offer.

Voluntary conditional cash offer of S$2.22 per share
CMA’s parent, CapitaLand (CAPL), announced that it will make a voluntary conditional cash offer of S$2.22 per share for all remaining shares that it does not already hold. Note that CAPL currently owns 65.3% of CMA and would require another 24.7% acceptances to cross the 90% threshold for the offer to be declared unconditional. In that event, CAPL has stated that it intends to compulsorily acquire all shares not acquired under the offer and delist CMA. In addition, there will be no downstream offer for CapitaMalls Trust and CapitaRetail China Trust, in which CMA holds deemed interests of 27.6% and 37.1%, respectively. The offer document will be dispatched within 14-21 days and the closing date will be around end May to June 2014.

Expected to be earnings and ROE accretive to CapitaLand
The privatization of CMA will simplify CAPL’s organizational structure and enable more flexible capital allocation across business segments, therefore enhancing its capabilities in integrated developments. This action also allows CAPL management to deploy significant capital to already well-understood assets, and accrete to earnings and ROE meaningfully – the latter is now a key strategic focus for management. On a post-transaction pro-forma basis, CAPL’s FY13 EPS would have increased from S$0.20 to S$0.24 and ROE from 5.4% to 6.7%. 

ACCEPT the offer
We believe that the offer price is fairly decent, given that it represents a 21% premium to book and a reasonable 8% discount to RNAV. CMA’s shares have mostly traded below its IPO price (S$2.12) since its listing in 2009 due to various structural and macro-economic headwinds, and this provides an opportunity for investors to exit at a reasonable valuation. The delisting will likely succeed, in our view. Alternatively, we note that CAPL reserves the right to reduce the conditional acceptance level below 90%; if that happens, residual minority shareholders of CMA may find themselves in a situation with reduced trading liquidity and a smaller float. Our recommendation: ACCEPT the offer.

Capitaland

OCBC on 15 Apr 2014

CapitaLand (CAPL) announced that it will make a voluntary conditional cash offer of S$2.22 per share for CapitaMalls Asia (CMA), with the intention to delist the company. We see this delisting as a rational move representing low hanging fruit for earnings and ROE growth. This deal allows CAPL management to deploy significant capital (S$3.06b) to already well-understood assets in CMA, and accrete to earnings and ROE meaningfully – the latter now a key strategic focus for management. We believe that the offer of S$2.22 per CMA share, priced at a 21% premium to book and a reasonable 8% discount to RNAV, will be fairly attractive to CMA shareholders. Our base case scenario is that the delisting of CMA will succeed. Our fair value estimate for CMA is S$2.40 per share and CAPL’s offer at S$2.22 is value accretive. After updating our model for latest assumptions and reducing the RNAV discount to 25%, from 30% previously, our fair value estimate for CAPL is raised to S$3.79 per share from S$3.50 previously. Maintain BUY.

Offer to delist CMA at S$2.22 per share
CapitaLand (CAPL) announced that it will make a voluntary conditional cash offer of S$2.22 per share for all remaining shares of CapitaMalls Asia (CMA) that it does not already hold. Note that CAPL currently owns 65.3% of CMA and would require another 24.7% acceptances to cross the 90% threshold for the offer to be declared unconditional. In that event, CAPL has stated that it intends to compulsorily acquire all shares not acquired under the offer and delist CMA. The offer is expected to cost approximately S$3.06b in cash. 

Low-hanging fruit: earnings and ROE accretive deal
In our view, this delisting is a rational move which represents low hanging fruit for earnings and ROE growth. This deal allows CAPL management to deploy significant capital to already well-understood assets in CMA, and accrete to earnings and ROE meaningfully – the latter is now a key strategic focus for management. The group has sufficient balance sheet strength for this deal (net gearing will increase by ~20 ppt to a manageable 59%), and on a post-transaction pro-forma basis, CAPL’s FY13 EPS would have increased from S$0.20 to S$0.24 and ROE from 5.4% to 6.7%. In addition, the privatization of CMA will simplify CAPL’s organizational structure and enable more flexible capital allocation across business segments, therefore enhancing its capabilities in integrated developments.

Maintain BUY – FV raised to S$3.79
We believe that the offer of S$2.22 per CMA share, priced at a 21% premium to book and a reasonable 8% discount to RNAV, will be fairly attractive to CMA shareholders. Our base case scenario is that the delisting of CMA will succeed. Our fair value estimate for CMA is S$2.40 per share, and hence CAPL’s offer at S$2.22 will be value accretive. After updating our model for latest assumptions and reducing the RNAV discount to 25%, from 30% previously, our fair value estimate for CAPL is raised to S$3.79 per share from S$3.50 previously.

UOB Bank

OCBC on 15 Apr 2014

Since the start of the year, UOB has outperformed both its peers in the local banking sector. The stock has gained 3.7% YTD versus -1.5% for the industry average. Earlier in the year, management guided for high single-digit loans growth and double-digit growth in fee income in FY14. UOB will be releasing its 1Q14 results on 30 Apr, and we are expecting net earnings of S$724m, down 6% QoQ and flat YoY. Recently, the market seems to favor quality stocks, a reflection of the flight to quality, and we are increasing our peg back to our historical level of 1.4x now that the political tensions in Thailand and Indonesia have waned. As this level, we are increasing our fair value estimate from S$20.94 to S$22.40. Maintain HOLD.

UOB has outperformed peers
Since the start of the year, UOB has outperformed both its peers in the local banking sector. The stock has gained 3.7% YTD versus -1.5% for the industry average (range from -5.5% to +3.7%). In addition, it has recovered the most from this year’s lows, up 13.5% versus the average of 8.8% for the sector. This means that the stock has also outperformed the Straits Times Index (STI) as well as the FTSE Straits Times Financials Index which recorded +1.5% YTD and +0.0% YTD (flat), respectively. 

Last quarter’s results were ahead of expectations; guidance was positive 
As a recap, UOB delivered better-than-expected earnings last quarter, with net earnings of S$773m, and an improvement in Net Interest Margin (NIM) from 1.71% in 3Q13 to 1.74% in 4Q13. In addition, management guided for high single-digit loans growth and double-digit growth in fee income in FY14. 

Expecting 1Q earnings of S$724m; fair value of S$22.40
UOB will be releasing its 1Q14 results on 30 Apr. We are expecting 1Q net earnings of S$724m, down 6% QoQ and flat YoY. We are projecting slightly stronger 2H than 1H (52% versus 48% of total earnings), and as such, we are expecting both Net Interest Income and Non-interest Income to come off QoQ in 1Q. For the full year, we are expecting higher operating expenses as it grows its income, and this will require further investments into developing its businesses and human capital. We are also expecting FY14 allowances to be slightly off from last year’s level at S$412m. Recently, the market seems to favor quality stocks, a reflection of the flight to quality, and we are increasing our peg back to our historical level of 1.4x now that the political tensions in Thailand and Indonesia have waned. As this level, we are increasing our fair value estimate from S$20.94 to S$22.40. Maintain HOLD.

Cache Logistics Trust

OCBC on 15 Apr 2014

Cache Logistics Trust (CACHE) announced yesterday that it has entered into an agreement with DHL Supply Chain Singapore Pte Ltd to develop and lease a build-to-suit (BTS) ramp-up warehouse. The total cost of the project is estimated to be ~S$123.5m. Temporary occupation permit is expected to be issued by 2H15. Upon completion, DHL Supply Chain will occupy 100% of Block 1 NLA, 50% of Block 2 NLA from year 3 onwards, and 100% of Block 2 NLA from year 5 onwards. All three lease terms will co-terminate at the end of the initial 10-year period, with an option for renewal. According to management, the stabilized NPI yield is expected to be comparable to CACHE’s existing properties in the vicinity, and annual rental escalations will apply throughout the first lease term. We estimate a NPI yield-on-cost of 8.5% and rental escalation of 1.5%, with contribution to start in 2016. Our value fair is now raised from S$1.20 to S$1.25. Maintain BUY.

Development of ramp-up warehouse
Cache Logistics Trust (CACHE) announced yesterday that it has entered into an agreement with DHL Supply Chain Singapore Pte Ltd to develop and lease a build-to-suit (BTS) ramp-up warehouse located at Greenwich Drive, Tampines LogisPark. The development comprises two blocks with a total GFA of ~989,200 sqft and NLA of ~928,100 sqft. The total cost of the project is estimated to be ~S$123.5m, including S$105.1m development costs and S$18.4m non-development expenses.

Arrangements relating to development
Development risk is minimised through a fixed price building works contract with Precise Development Pte Ltd, a qualified and well-established contractor founded in 1983. Recall that CACHE acquired a ramp-up warehouse from the contractor via a sale-and-leaseback arrangement in Apr 2013. In addition, CACHE’s sponsor, CWT Limited, will assist by providing strategic project management expertise. Temporary occupation permit is expected to be issued by 2H15. Upon completion, DHL Supply Chain will occupy 100% of Block 1 NLA, 50% of Block 2 NLA from year 3 onwards, and 100% of Block 2 NLA from year 5 onwards. All three lease terms will co-terminate at the end of the initial 10-year period, with an option for renewal. In our view, the lease with DHL Supply Chain (part of world’s leading logistics solution provider Deutsche Post DHL) will provide CACHE with quality long-term recurring income, while improving its portfolio’s average lease term from 3.1 years to 4.1 years. 

Maintain BUY; fair value raised
According to management, the stabilized NPI yield is expected to be comparable to CACHE’s existing properties in the vicinity, and annual rental escalations will apply throughout the first lease term. We also understand that CACHE has secured a loan facility of S$97.0m to finance the development (remaining costs to be funded by internal sources). We estimate a NPI yield-on-cost of 8.5% and rental escalation of 1.5%, with contribution to start in 2016. Our value fair is now raised from S$1.20 to S$1.25. Maintain BUY.

DBS Group

OCBC on 15 Apr 2014

DBS remains committed to its wealth, SME and transaction banking strategies. The recent acquisition of Societe General’s Singapore and Hong Kong assets under management will complement its wealth strategy. DBS’s share price was dragged down by concern over the potential slowdown in China, but we believe that China’s recent effort to stimulate its economy is likely to achieve the official growth projection of 7.5% for this year. DBS is releasing its 1Q14 results on 30 Apr 2014. We are expecting 1Q net earnings of S$871m, down 8% YoY and 11% QoQ. We expect softer Non-interest Income to be the main drag, down 16% QoQ, while Net Interest Income is likely to remain flat QoQ. We are retaining our full year earnings estimate of S$3785m for FY14. DBS remains our top pick in the banking sector. We reiterate our BUY rating and S$18.08 fair value.

Organic and external growth from several areas
Recently, DBS has been in the news. First, there was the acquisition of the Asian private banking business of Societe General in Singapore and Hong Kong for US$220m with assets under management (AUM) of US$12.6b (S$16b) as of 31 Dec 2013 – which will complement its Wealth strategy. More importantly, this acquisition will lift DBS to become one of the key players in Wealth business in Asia. Apart from Wealth, the group has also shared about its global transaction business and SME strategies. For the former, it remains confident of its prospects despite rising concern about a slowdown in China. About 60% of its transaction services revenue is from multinational clients. For its SME, total income grew 12% per year from FY11-FY13, and despite Singapore being a somewhat matured market, income from Singapore grew 17% for the same period. 

Is China a big concern? 
With the recent market concern about the potential slowdown in China, the CSI 300 Index fell almost 11% YTD at the year’s low, but has since rebounded (-3% currently). DBS’s share price has similarly tumbled 8.5% YTD to a year’s low of S$15.65. With China’s just announced effort to boost its economy, having recently announced its first stimulus of 2014 (tax cuts for small and micro businesses, railway construction, etc.), we expect that the economy is likely to achieve the official growth projection of 7.5% for this year. 

1Q14 results on 30 Apr; maintain BUY
DBS is releasing its 1Q14 results on 30 Apr 2014. We are expecting 1Q net earnings of S$871m, down 8% YoY and 11% QoQ. We expect softer Non-interest Income to be the main drag, down 16% QoQ, while Net Interest Income is likely to remain flat QoQ. This will be partly mitigated by marginally lower operating expenses and lower allowances. However, we are retaining our overall full year earnings estimate of S$3785m for FY14. DBS remains our top pick in the banking sector and we expect the share price has already captured most of the negatives linked to the Singapore property market. We reiterate our BUYrating and S$18.08 fair value.

Singapore Telcos

OCBC on 14 Apr 2014

Business Times reported yesterday that M1 could be close to being able to cross carry the coveted BPL and other exclusive content on its fledging MiBox. However, we do not expect the latest development to have much of an impact on the Pay TV market here in the near term. For one, its market share (10k) is hardly significant compared to StarHub’s 533k and SingTel’s 418k subscribers (as of end 2013). Secondly, any revenue from cross carriage will flow back to the exclusive content owner. In the case of both BPL and the 2014 World Cup, that would be SingTel. Last but not least, the main hurdle may be the steep pricing of the sports content itself, which may put it out of reach for the “casual” sports viewer. We continue to maintain our NEUTRAL rating on the sector and choose SingTel (BUY, S$3.74 FV) as our top pick.

M1 close to cross-carriage threshold
According to a Business Times article (M1 set to score on BPL, World Cup turf?) Thursday, M1’s MiBox is close to the 10k subscriber threshold for the telco to be eligible to cross-carry exclusive content such as the Barclays Premier League (BPL) and World Cup matches. M1’s CEO Karen Kool had earlier said that it could be eligible for cross-carriage of content by mid-2014. But M1 would still need to apply for a nationwide Internet Protocol (IP) TV licence before it can be a qualified provider of cross-carriage content. 

MiBox unlikely to rock the boat too much
Although MiBox is available to both M1 fibre subscribers and non-M1 fibre subscribers at S$8.56 and S$12.84 respectively, we do not expect it to have a meaningful impact on the Pay TV market in the near term. For one, its market share (10k) is hardly significant compared to StarHub’s 533k and SingTel’s 418k subscribers (as of end 2013). Secondly, any revenue from cross carriage will flow back to the exclusive content owner. In the case of both BPL and the 2014 World Cup, that would be SingTel. Last but not least, the main hurdle may be the steep pricing of the sports content itself, which may put it out of reach for the “casual” sports viewer. 

StarHub also looking for IPTV 
Separately, Straits Times report Thursday said StarHub is planning to officially launch a new Pay TV service for consumers that runs on the fibre network (NBN) instead of its traditional cable platform. StarHub has not announced the official launch date for TV on Fibre for consumers, although the service was launched for businesses in Mar 2013. We think that migrating customers over to the fibre makes sense as it would not need to invest further in its ageing cable network.

NEUTRAL for now
We continue to maintain our NEUTRAL rating on the sector and choose SingTel (BUY, S$3.74 FV) as our top pick.

SPH

OCBC on 14 Apr 2014

2QFY14 operating income came in at S$53.5m, down 36.8% YoY, mostly due to lower ad contributions, staff costs rising 18.2% (S$15.6m) and a S$9.9m impairment charge. The latter two were related to the cost-saving initiatives implemented last year as management restructured the framework for staff compensation and also optimized printing capacity with the removal of a press line. For the quarter, the group also recognized a S$52.9m one-time gain for the partial divestment of 701Search to Telenor, which resulted in PATMI increasing 7.5% YoY to S$81.3m. Overall, we judge 2Q numbers to be a miss; ad contributions were below expectations and we revise our FY14 operating income forecast down by 16.5% to S$322.7m, after incorporating 2Q’s one-time items as well. Management declared an interim dividend of 7.0 S-cents. We update our valuation model for weaker print assumptions and latest valuations for listed holdings, and our fair value dips marginally to S$4.13 from S$4.14 previously. Maintain HOLD.

Hit by one-time charges from cost initiatives
2QFY14 operating income came in at S$53.5m, down 36.8% YoY, mostly due to lower ad contributions, staff costs rising 18.2% (S$15.6m) and a S$9.9m impairment charge. The latter two were related to the cost-saving initiatives implemented last year as management restructured the framework for staff compensation and also optimized printing capacity with the removal of a press line. For the quarter, the group also recognized a S$52.9m one-time gain for the partial divestment of 701Search to Telenor, which resulted in PATMI increasing 7.5% YoY to S$81.3m. Overall, we judge 2Q numbers to be a miss; ad contributions were below expectations and we revise our FY14 operating income forecast down by 16.5% to S$322.7m, after incorporating 2Q’s one-time items as well. Management declared an interim dividend of 7.0 S-cents.

Difficult outook for ad revenue
The outlook for ad revenue remains difficult, with the decline accelerating to a -7.3% YoY dip in 2QFY14 versus -2.9% in 1QFY14. Management continues to cite tough conditions, particularly in the property space as the number of new launches fell significantly YTD. Material costs remained stable (newsprint unchanged QoQ at US$611/mt) while staff costs rose by S$15.6m. Going forward, management indicated that they would reduce headcount by ~300 from its current level of 4.3k, but expect the staff costs run rate to increase by ~S$10m p.a., given growth incentives embedded in the group’s compensation structure. On the property front, the Seletar Mall is on target to complete by Dec-14. The asset is now ~60% pre-leased and rental rates are likely to be in the low teens. 

Maintain HOLD with marginally lower S$4.13 fair value
We update our valuation model for weaker print assumptions and latest valuations for listed holdings, and our fair value dips marginally to S$4.13 from S$4.14 previously. Maintain HOLD. There could be a mild pull-back after latest 2Q figures but we see the downside likely capped with a fairly attractive yield of 5.7% here.

Ezra Holdings

OCBC on 14 Apr 2014

Ezra Holdings reported a 22% YoY rise in revenue to US$300.4m and a 34% fall in net profit to US$19.6m in 2QFY14, such that 1HFY14 revenue and net profit formed 48% and 59% of our estimates, respectively. However, we note that earnings in 2QFY14 were boosted by a US$16.6m gain on disposal from one of its associated companies EOC. Adjusting for this, we estimate core net profit to be about US$3m in the quarter and US$9.7m in 1HFY14, with the latter forming 28% of our FY14 core estimates. Nevertheless, we expect 2HFY14 to improve sequentially, in line with management’s guidance. This would be driven by a recovery in its Offshore Support Services Division and continued traction in its Subsea Services Division. Hence, we are keeping our forecasts intact. Rolling forward our valuations to 0.9x blended FY14/15F P/NTA, we derive a slightly higher fair value estimate of S$1.05 (prev. S$1.03). Upgrade Ezra to HOLD.

2QFY14 PATMI boosted by one-off gain
Ezra Holdings reported a 22% YoY rise in revenue to US$300.4m and a 34% fall in net profit to US$19.6m in 2QFY14, such that 1HFY14 revenue of US$640.3m and net profit of US$25.9m formed 48% and 59% of our estimates, respectively. However, we note that earnings in 2QFY14 were aided by a US$16.6m gain on disposal from the sale and leaseback of Lewek Champion under EOC which boosted Ezra's ‘share of profit of associated companies’ line item. Adjusting for this, we estimate core net profit to be about US$3m in the quarter and US$9.7m in 1HFY14, with the latter forming 28% of our FY14 core estimates.

Expecting turnaround in 2HFY14
Nevertheless, we expect 2HFY14 to improve sequentially, partly due to seasonal strength, in line with management’s guidance. During 2QFY14, Ezra’s Offshore Support Services (OSS) Division suffered due to unplanned maintenance schedules which resulted in larger-than-expected expenses. This consequently impacted its utilisation rates and gross margins (2QFY14: 13-15%). Management expects OSS gross margins to normalise to the high-teens level in 2H14. We also expect Ezra’s Subsea Services Division to gain traction in 2HFY14 with a ramp up in the execution of projects. Hence, we are keeping our forecasts intact.

Share price has corrected sharply YTD, upgrade to HOLD
Ezra's order book remains above US$2.0b, with more than US$800m of orders secured since the start of FY14. It is bidding in excess of US$8b of subsea work, and has historically seen a win-rate of ~30%. Management is confident of bringing its subsea order backlog to above US$1.5b in 2014. It just won a LOA from Noble Energy for a subsea project in the Gulf of Mexico which will involve its flagship Lewek Constellation vessel. As for the stock, after dropping to a low of S$0.93 in early Feb this year, its price has recovered and has been within the range of S$1.05-S$1.10 so far this month (YTD still down 22%). Upgrade Ezra to HOLD, with a slightly higher fair value estimate of S$1.05 (prev. S$1.03) as we roll forward our valuations to 0.9x blended FY14/15F P/NTA.

Singapore Exchange

OCBC on 11 Apr 2014

Singapore Exchange (SGX) has just announced lower clearing fees, which will take effect from 1 June, to boost trading activity. Clearing fees will come off from 0.04% to 0.0325% of contract value and the cap of S$600 for contracts of S$1.5m and above will be removed. However, this development is likely to be over-shadowed by yesterday’s announcement by China’s Premier Li Keqiang of mutual market access between the stock markets at Shanghai and Hong Kong. SGX is releasing its 3QFY14 results on 23 Apr and we expect a rather flat quarter. We are projecting net earnings growth of 2.5% to S$74.3m for 3QFY14, anticipating a better 4Q to generate our full year earnings projection of S$336.1m. While the latest announcement is positive, we believe that trading activity will still be largely dictated by global market developments, and on this front, the outlook is fairly muted. At current yield of 4%, we are maintaining our HOLD rating and fair value estimate of S$7.22.

STI rebounded from recent low
The benchmark Straits Times Index (STI) has rebounded from recent lows, after slipping into negative territory YTD as market concerns mounted over the outlook for emerging markets. Recent gains have brought the STI back into the black for the year, but trading volume on the local bourse remained dismal. While average daily traded volume was relatively flat in 1QCY14, it was down almost 49% YoY. Of concern is that average daily traded value has also come off, down 37% YoY. 

Aiming to improve trading, but dampened by mutual access between HKEx and Shanghai
SGX has just announced new securities market fee structure which will kick in from 1 June 2014. The key change is a reduction in clearing fees from 0.04% to 0.0325% of contract value. In addition, the cap of S$600 for contracts of S$1.5m and above will be removed. This will help to reduce transaction costs and also to encourage more trading activities. In addition, SGX is also in discussions with 8-10 market makers, including high-frequency traders, in another initiative to boost trading activity. Meanwhile, China’s Premier Li Keqiang yesterday expressed his support for mutual market access between the stock markets at Shanghai and Hong Kong. This is likely to give the Hong Kong Exchange (HKEx) a major boost. 

3QFY14 results on 23 Apr
Singapore Exchange (SGX) is releasing its 3QFY14 report card on 23 Apr 2014. While there were several recent positive announcements including better commodity activities in Mar, we expect overall trading value in the quarter to be almost flat QoQ – in line with our expectations post the 2Q results. We are projecting net earnings growth of 2.5% to S$74.3m for 3QFY14, anticipating a better 4Q to generate our full year earnings projection of S$336.1m. While the latest announcement is positive, we believe that trading activity will still be largely dictated by global market developments, and on this front, the outlook is fairly muted. At current yield of 4%, we are maintaining our HOLD rating and fair value estimate of S$7.22.

Oil and Gas Sector

OCBC on 10 Apr 2014

YTD, the FTSE ST Oil & Gas Index has slipped 3.3%, versus the STI’s 1.3% gain. We believe investors should take opportunity of the share price correction in the sector to accumulate quality stocks, as the softness in the exploratory drilling market is largely seen as a ‘momentary pause’. The long-term fundamentals of the oil and gas sector remain favourable. Maintain OVERWEIGHT on the sector, with Ezion Holdings [BUY, FV: S$2.57], Keppel Corp [BUY, FV: S$12.25], Nam Cheong [BUY, FV: S$0.42] and Sembcorp Marine [BUY, FV: S$5.26] as our preferred sector picks.

Lacklustre share price performance YTD
YTD, the FTSE ST Oil & Gas Index has slipped 3.3%, versus the STI’s 1.3% gain. We believe this has been driven by increasing concerns over a slowdown in offshore activities, as major international oil companies such as ExxonMobil, Chevron and Royal Dutch Shell have earmarked lower capex plans this year in a bid to reduce costs. Recent comments by offshore drillers suggest there may be some softness in the offshore drilling market, but this is largely seen as a ‘momentary pause’ and also more prominent within the ultra-deepwater (UDW) space. Singapore rig-builders Keppel Corp (KEP) and Sembcorp Marine (SMM) are well-versed in the design and construction of high-specification jack-up rigs which is still seeing robust demand, in our view. 

Demand and supply dynamics for OSV segment still positive
Despite concerns over a slowdown in offshore exploration and production (E&P) activities, we believe the demand and supply dynamics for the offshore support vessels (OSV) segment remains positive. Previous years of successful exploratory drilling have resulted in more fields reaching the development and production phase, which requires more support from OSVs. The OSV/rig ratio has stabilised at 4.34 in Mar 2014 (Feb 2014: 4.36), while the ratio of OSVs under construction to rigs under construction has been gradually declining from 2.28 in Aug 2012 to 1.96 in Mar 2014 due to stronger growth in rig orders, thus alleviating concerns over oversupply issues. We also expect the replacement cycle of older OSVs to pick up pace going forward, as 25% of the global OSV fleet is more than 25 years old.

Stick with quality
We believe investors should take opportunity of the share price correction in the sector to accumulate quality stocks which we believe will outperform once the industry gets over this cyclical short-term patch. The long-term fundamentals of the oil and gas sector remain favourable. We like KEP [BUY, FV: S$12.25] and SMM [BUY, FV: S$5.26] for their strong order books and market leadership positions. We likeEzion Holdings [BUY, FV: S$2.57] for its stellar earnings growth potential and its dominant position within the service rigs market, especially in Asia. Although Nam Cheong’s [BUY, FV: S$0.42] share price has already appreciated 11.1% YTD, we still recommend it as one of our preferred picks given its compelling valuations (FY14F PER of 7.8x, a steep 39% discount to its closest peer Coastal Contract’s FY14F consensus PER of 12.9x). Maintain OVERWEIGHT on the broader sector.

SPH

Kim Eng on 14 Apr 2014

• SPH reported a set of weak 2QFY8/14 results with flattish revenue and a 12.8% YoY drop in core operating profit.
• We trim our revenue and net profit forecasts for FY8/14E-16E by 1-3%. Earnings growth expected to stay weak as core media business continues to languish.
• Share price may be supported by its decent dividend yield of almost 5%. Maintain HOLD with a lower TP of SGD4.10.

What’s New
SPH reported a set of weak 2QFY8/14 results. Revenue was in line, slightly down by 1.3% YoY, due to continually weak media business.  The major miss resulted from higher-than-expected operating costs (+13.7% YoY), attributed to two one-off charges: a SGD9.9m impairment charge on removal of one of its press lines, and a SGD10.4m special bonus. This was offset by a SGD52.9m gain on divestment of 701Search, an online classified website, which lifted PATMI by 7.5% YoY. However, 2QFY8/14 core PATMI collapsed 39.6% QoQ, dragged down by weak top-line growth (-15.1%). An unchanged interim DPS of SGD0.07 was declared.

What’s Our View
As a result, we trim our revenue and net profit forecasts by 1-3% for FY8/14E-16E. Our SOTP-based TP thus falls to SGD4.10 from SGD4.18. We expect SPH’s core media business to continue to languish given the modest outlook for the economy and our negative view on the property market. The property division is likely to remain the only growth driver, albeit a weak one. Paragon and The Clementi Mall remained fully occupied and their revenue contribution grew 4.2% YoY in 1HFY8/14. While a 4.7% dividend yield may cap share price downside, SPH’s unexciting growth profile with core EPS CAGR of 1.2% over FY8/14E-16E supports our HOLD recommendation.

M1

Kim Eng on 10 Apr 2014

• M1 may be on the verge of securing a key condition for its Pay TV service MiBox to take off. Reiterate BUY.
• MiBox is reported to have almost 10,000 subscribers, which M1 needs to cross-carry exclusive content from other telcos.
• This could jump-start its Pay TV service and bring in new users to its network.

What’s New
The Business Times reported today that M1 may be close to the 10,000 MiBox subscribers it needs to be able to cross-carry exclusive TV content such as the BPL and World Cup. In our 2014 telco strategy report early this year, we flagged this as a wild card that, if it succeeds, could jump-start M1's fledgling Pay TV service and bring in new users for its mobile and broadband services.

What’s Our View
It looks like M1 is aiming to cross-carry mainly exclusive content from the other two telcos with very little content that it purchases itself, which it cannot afford to buy given its small size. You could call this a freeloader strategy but that does not mean it will not be a good deal for price-sensitive consumers because the service is priced rather low (SGD8.56 for M1 subscribers and SGD12.84 for everyone else), which makes it the most inexpensive way to watch BPL, World Cup or any other exclusive content from StarHub and mioTV in future. It costs SGD26.75 and SGD29.90 for an entry-level family combo from StarHub and SingTel, respectively.
It was also reported that 67% of the MiBox subscribers are not existing subscribers of StarHub or mioTV, information the Business Times obtained not from M1 but from its set-top box provider Vodoke. This is very interesting. It would appear at first that M1’s Pay TV strategy is targeted at a niche market, namely, sports fans. But we think this segment of users could be growing as more become indifferent to linear TV (ie, schedule-based) and plug into on-demand TV (ie, anytime and interactive) made possible by fast Internet connections and content providers such as Hulu or NetFlix.

Keppel Corp

Kim Eng on 11 Apr 2014

• Maintain BUY, SOTP TP of SGD12.48 following announcement of Titan Quanzhou Shipyard management agreement.
• Service agreement to manage Titan Quanzhou Shipyard in China is for 30 years.
• Opportunity to tap into closed offshore market in China and addresses issue of rising competition from the Chinese yards.

What’s New
Keppel has signed a management service agreement to manage Titan Quanzhou Shipyard (TQS) in China for 30 years. This is conditional upon the successful debt restructuring of TQS’s distressed parent, Titan Petrochemicals Group (Titan), and the latter’s trading resumption on the Hong Kong Stock Exchange. Strategically located in Quanzhou in Fujian Province, TQS is one of the largest shipyards in China occupying an area of 110ha with 3,600m of coastline. TQS will undertake offshore projects using Keppel’s proprietary designs under Keppel’s supervision.

What’s Our View
We see this as a long-term strategic move by Keppel to tap the closed Chinese offshore market which has been exclusive to state-owned yards, and to populate its proprietary designs in the Chinese market. It also addresses the issue of rising competition from Chinese yards. While concerns were raised on its ability to protect its proprietary rig designs, Keppel assures that measures to protect key design parameters are in place.

Detailed financial aspects of the partnership were not disclosed but we understand that the basic structure will be based on a fee income plus a component of economic sharing. The move is consistent with Keppel’s strategy of “Near Market, Near Customer” and an extension of its recent forays into key markets like Mexico and the Middle East. We do not expect to see any near term impact but it reflects the company’s active approach in responding to market changes and tapping opportunities to secure future growth. Maintain BUY with SOTP-based TP of SGD12.48.

Ezion Holdings

Kim Eng on 10 Apr 2014

• Maintain BUY and TP of SGD2.90, pegged to 13x FY14E P/E following equity entry into AusGroup. 
• Ezion to take 6.9% stake in AusGroup and enter MOU with the latter for collaboration in Australia.
• A synergistic and mutually beneficial arrangement that could create more opportunities for both parties in Australia.

What’s New
Ezion took a 6.9% (39.9m shares at SGD0.355/sh) stake in AusGroup and subsequently entered into an MOU with the latter to explore opportunities for collaboration in Australia. Ezion would also acquire 110m share options, which when fully exercised (ex. price of SGD0.3675) could lift its stake in AusGroup to 18.9%. In totality, Ezion may need to fork out SGD54.6m (6.8% of FY13 equity) and will nominate two new directors to AusGroup’s board.

What’s Our View
We see strong mutual benefits in the potential collaboration due to the synergies between the businesses of both parties. AusGroup fabricates modules and structures for the oil and gas and resources sector, while Ezion provides offshore logistic support services for oil and gas projects in Australia. AusGroup saw a sequential turnaround in 2QFY6/14 net profit to AUD2.3m (from a AUD15.2m loss). With Ezion currently developing Port Melville in Northern Territory of Australia, we believe that the port could be used as a logistic base to support AusGroup’s future projects.

In our view, there is an inherent longer term strategy, especially in the development of Port Melville. With Ezion now the single largest shareholder of AusGroup, the latter could be roped in to help develop the port, so that Ezion could concentrate on growing its core liftboat business. AusGroup’s announcement states that it is looking to raise SGD25.7m through placement of 70m new shares to expand into onshore and offshore marine logistic services and related support services in Australia.

We continue to like Ezion for its lucrative liftboat business. The potential from its Australia business could serve as a long term catalyst. Maintain BUY, TP SGD2.90 pegged to 13x FY14E P/E.

SPH REIT

OCBC on 9 Apr 2014

SPH REIT reported 2QFY14 DPU of 1.39 S cents, ahead of its prospectus forecast of 1.33 S cents by 4.5%. Together with 1Q distribution, 1HFY14 DPU amounted to 3.25 S cents. This met 50.8% of our FY14F DPU, which we deem to be consistent with our expectations. We note that SPH REIT’s portfolio continued to exhibit resilience. For 1HFY14, SPH REIT achieved positive rental reversion of 10.8% for its portfolio, driven by rental uplift of 13.6% at Paragon and 5.1% at Clementi Mall. In addition, shopper traffic has held steady at Paragon, while that at Clementi Mall increased 2.7% YoY. Looking ahead, SPH REIT is keeping its view that it will continue to deliver steady performance. We are keeping our forecasts and S$0.99 fair value unchanged, as the results were in line with expectations. Maintain HOLD.

2QFY14 results within expectations
SPH REIT turned in a sturdy set of 2QFY14 results last evening. NPI came in 8.6% higher than the pro forma figure in previous year at S$38.8m, while distributable income grew 9.4% YoY to S$34.9m. The positive variance was due to higher rental income from both Paragon and Clementi Mall, and lower utilities expenses. As a result, DPU for the quarter rose by a similar 8.6% YoY to 1.39 S cents, ahead of its prospectus forecast of 1.33 S cents by 4.5%. Together with 1Q distribution, 1HFY14 DPU amounted to 3.25 S cents (+5.5% YoY), 3.2% above prospectus forecast. This met 50.8% of our FY14F DPU, which we deem to be consistent with our expectations.

Robust operational performance
SPH REIT’s portfolio continued to exhibit resilience during the quarter. Both retail malls saw improvements in NPI YoY and remained fully leased. For 1HFY14, SPH REIT also achieved positive rental reversion of 10.8% for its portfolio, driven by rental uplift of 13.6% at Paragon and 5.1% at Clementi Mall. In addition, shopper traffic has held steady at Paragon, while that at Clementi Mall increased 2.7% YoY. The only slight disappointments for an otherwise robust performance were the 1) slight decline in recent tenant sales at Paragon in tandem with the softening of the luxury market; and 2) continued tight labour market which may hamper expansion plans by retailers. However, management shared that the situation is still far from worrying and that the strong lease commitment by its tenants is a strong testament to its quality portfolio properties. 

Maintain HOLD on valuation grounds
Looking ahead, SPH REIT is keeping its view that it will continue to deliver steady performance. We understand that the development of its ROFR property, The Seletar Mall, is on track for completion in Dec 2014. Its balance sheet remains strong, with gearing at 26.9% and cost of debt at 2.33%. This gives SPH REIT ample debt headroom for growth. We are keeping our forecasts and S$0.99 fair value unchanged, as the results were in line with expectations. Maintain HOLD.

Midas Holdings

Kim Eng on 4 Apr 2014

• China’s new round of high-speed rail investment and other impending developments in the industry bode well for Midas. 
• Our projected three-year EPS CAGR of 73% and steadfast ROE expansion will be driven by operating leverage. The earnings turnaround story, starting from FY13, looks set to continue.
• Maintain BUY. Current low valuation of 0.9x FY14E P/BV provides a good entry point.

What’s New
Change is afoot in China’s railway industry following the government’s recent announcement of five railway construction projects worth CNY142.4b. Also brewing are a possible reform of China Railway Corp’s (CRC) funding structure, strong order win momentum for Midas’s upstream clients and better-than-expected high-speed train pricing. All this augurs well for Midas.

What’s Our View
We find the potential reform of CRC’s funding structure the most encouraging among the impending developments. CRC’s high debt level has created a bottleneck in the industry, stalling railway construction and disrupting train purchase schedules. In our view, this bottleneck could be resolved by introducing social capital into the industry. After all, the railway industry has the lowest level of marketisation compared with other local industries and we think CRC has the tools, eg, granting land use rights along the railways, to attract social capital participation.

In our view, the recent price weakness (-9.0% in the past three months) offers a good buying opportunity. In our view, Midas presents a compelling earnings turnaround story with EPS CAGR of 73% over FY14E-16E, helped by operating leverage. Maintain BUY and TP of SGD0.75, pegged to 1.5x FY14E P/BV, which conservatively placed it at the lower end of its trading range during the last high-speed rail cycle (FY08-11).

Singapore Airlines

Kim Eng on 8 Apr 2014

• Upgrade to BUY with higher TP of SGD12.00 on sustained EPS growth over FY3/14E-17E (51% CAGR).
• Overcapacity in home base should ease as Singapore-based carriers scale back aggressive fleet expansion plans.
• We project moderate seat capacity growth of 4.3%/3.7% in 2014E/2015E for Singapore-based carriers.

Upgrade to BUY, valuations should rally off trough
Singapore Airlines (SIA) has endured considerable pressure on its profitability in recent years as Singapore-based carriers embarked on aggressive fleet expansion. But there are signs of a pullback. We revise our FY14E/15E/16E by -11%/+11%/+15% and see sustained EPS CAGR of 51% over FY3/14E-17E. We see limited downside risk given the near-trough valuations and SIA’s solid net cash position (SGD3.50 per share, 34% of market capitalisation). Upgrade to BUY with a higher TP of SGD12.00 (from SGD10.00) based on 1.05x FY3/15E P/BV.

Aggressive fleet expansion spawns overcapacity
Surging demand for air travel in recent years propelled Singapore-based carriers to expand their aircraft fleet aggressively. Last year alone, seat capacity grew 8% YoY, leading to overcapacity. This surplus was acutely felt by short-haul carriers as they watched their earnings tumble. Profitability at SIA’s mainline services also came under pressure because of the surplus in its home base.

Glut set to ease, moderate expansion to come
The good news is Singapore-based carriers are keenly aware of the supply glut and are taking steps to scale back their expansion plans. Qantas has announced that Jetstar Asia will put its fleet growth plans on hold and Tigerair Singapore’s decision to cancel nine aircraft due for delivery in 2014/2015 should reduce capacity growth by 3.5%. We therefore project moderate seat capacity growth of 4.3%/3.7% in 2014E/2015E for Singapore-based carriers.

Singapore Telcos

Kim Eng on 9 Apr 2014

• Maintain NEUTRAL on sector with BUY on StarHub and M1unchanged. M1 preferred for likelihood of special dividend.
• Lower handset subsidies for popular models such as Samsung Galaxy S5 and HTC One M8 should see telco margins benefit.
• Government cut on SIM cards from 10 to three per sub could hurt prepaid mobile revenue.

What’s New
The higher prices of three new major handsets launched last week confirmed our view that handset subsidies would decline this year. For basic plans, the Samsung Galaxy S5, for example, received the lowest level of subsidies yet, ie, SGD369-380, down by 21-22% from SGD469-490 for the S4 (in 2013), and lower still from the S3, when the subsidy was as high as SGD550 (in 2012). Similarly, subsidies for the just-launched HTC One M8 fell by 24-28% to SGD320-360 from SGD420-499 for the original HTC One, launched in 2013.

What’s Our View
We think there could be upside to EBITDA margins from the trend towards lower subsidies. Subsidies had already been reduced last year for the Galaxy S4 and even the most premium of handsets, the iPhone 5S, saw a slight reduction of 1-5%, down to SGD471-483 from SGD475-508.
We estimate that 2013’s subsidy reduction benefited SingTel and StarHub’s EBITDA margins by 2ppts. For both telcos, it was quite clear that margins improved in the quarters the Galaxy S4 and the original HTC One were launched compared to previous models. For M1, the picture was not so clear, perhaps due to its accounting treatment for iPhone subsidies, but we believe its underlying profitability should also have improved.

This year’s subsidy reduction is the highest yet in recent years. We therefore maintain that margin guidance by the telcos, in particular StarHub, is conservative and anticipate further upside. On a less positive note, the government’s cut in the number of prepaid SIM cards allowed to be purchased from 10 to three per subscriber could have a negative impact on prepaid revenue, as many foreign worker agencies buy up to 10 cards each time for their workers. Prepaid revenue accounts for 13%, 19% and 25% of M1, StarHub and SingTel’s Singapore mobile revenue, respectively. We maintain BUY on StarHub and M1, with a preference for M1 as we think there could be another special dividend this year. Usually, M1’s special dividends would equal the final dividend.

City Development

OCBC on 8 Apr 2014

We judge CityDev’s share price to be fairly rich here, given a deteriorating outlook for its core development business, and opt to take profit at this juncture. Downgrade to SELL with a lower fair value estimate of S$8.72 (30% RNAV disc.), versus S$9.17 previously, as we incorporate softer residential ASPs and lower valuations for listed holdings into our model. From latest data-points and channel checks, we anticipate increasing headwinds in the domestic residential space as both primary and rental markets continue to suffer from weakening supply-demand dynamics. 1Q14 URA flash estimates for the private residential property index showed a 1.3% decline, indicating downward price momentum after a 0.9% dip in 4Q13. We also note the weakness was fairly broad-based, with prices in the Outside Central Region (mass-market), Rest of Central Region (mid-tier) and Core Central Region (high-end) falling 0.3%, 2.8% and 1.3% respectively. In addition, we expect pressure on rental rates ahead as the physical market heads deeper into an over-supply situation.

Downgrade to SELL with lower S$8.72 fair value estimate
From latest data-points and channel checks, we anticipate increasing headwinds in the domestic residential space as both primary and rental markets continue to suffer from weakening supply-demand dynamics. We judge CityDev’s share price to be fairly rich here, given a deteriorating outlook for its core development business, and opt to take profit at this juncture. Downgrade to SELL from hold with a lower fair value estimate of S$8.72 (versus S$9.17 previously) as we incorporate softer residential ASPs and lower valuations for listed holdings into our model. 

1Q14 flash estimate: price decline gaining momentum
Our forecast is for mass-market and high-end home prices to dip 10%-15% and 5%-10%, respectively, over FY14-15. Over 1Q14, URA flash estimates for the private residential property index showed a 1.3% decline, indicating downward price momentum after a 0.9% dip in 4Q13. The weakness was fairly broad-based, with prices in the Outside Central Region (mass-market), Rest of Central Region (mid-tier) and Core Central Region (high-end) falling 0.3%, 2.8% and 1.3% respectively. Also, we note primary transactions over Jan-Feb 2014 has fallen 56.7% YoY, highlighting difficult conditions for developers as buyers’ demand were curtailed by loan restrictions and weaker price expectations. Finally, we also expect pressure on rental rates ahead as the physical market heads deeper into an over-supply situation; note that island-wide vacancy rates had increased 1.0 ppt from 5.2% to 6.2% from 1Q13 to 4Q13. 

Meaningful repositioning of portfolio will take time
With a weak domestic outlook, management’s strategy of accelerating its diversification into overseas growth markets, such as US, Japan, Australia, China and London, is a sound and timely one, in our view. Already, the group has acquired 28 Pavilion Road in Knightsbridge last year and is actively pursuing further acquisition opportunities. However, given the size of CityDev’s balance sheet, a meaningful repositioning of its business portfolio would take some time and the market would likely look for more color and execution ahead before a re-rating occurs.

Singapore Airlines

OCBC on 7 Apr 2014

The Indian civil aviation ministry has cleared Tata SIA Airlines Limited (Tata SIA), the India JV between SIA and Tata Sons. The final hurdle is approval from Directorate General of Civil Aviation (DGCA). We think Tata SIA will be crucial in growing SIA’s market share in India’s international flight, which is estimated by CAPA to be 4% in FY13. Tata SIA can value-add to SIA on two fronts: 1) serving India domestically from its home market, and 2) using India as a base to serve the region. However, we are cautious of regulatory hurdles given two previous failed collaboration attempts. Additionally, there are issues such as frequency of flights that will determine the JV’s success. Until there is more colour on the operation permit, we maintain our HOLD call with S$9.50 fair value.

Tata SIA cleared by civil aviation ministry
The Indian civil aviation ministry has cleared Tata SIA Airlines Limited (Tata SIA), the India JV between SIA and Tata Sons, and issued a no-objection certificate. There remains only one last hurdle - a formal airline licence from Directorate General of Civil Aviation (DGCA), the industry regulator. This can take months and is meant for the airline to showcase its technical capabilities to start operations. In AirAsia India’s case, a JV between AirAsia Bhd, Tata Sons and businessman Arun Bhatia, they have waited for over six months since receiving the no-objection certificate in Sep-13. 

JV as inroad into India’s growing air travel market
CAPA estimates that SIA only has 4% market share of India’s international flight in FY13, leaving much room for growth. We think Tata SIA can value-add to SIA on two fronts: 1) serving India domestically from its home market, and 2) using India as a base to serve the region. Since the JV can serve India domestically as well, SIA’s coverage will be extended and become more convenient for passengers as a one-stop service. In addition, airline is a regulated industry whereby usually only third/fourth freedoms are given (i.e. only Singapore-India route allowed but not from India to other destinations). Hence, having this JV will allow flights between India and other parts of the world, thereby allowing SIA to tap on India’s growing air travel volume. 

Third time lucky?
In 2000, the dual gave up a joint attempt to buy a 40% stake in Air India. An earlier attempt to start an Indian airline was also aborted. In both cases, political resistance and corporate rivalries were cited. We are thus cautious of history repeating itself in this third collaboration. Even after DGCA’s approval, there are issues such as the frequency of flights that determine the JV’s success. Though we think the JV could contribute significantly, it is pre-mature to re-rate until regulatory hurdles are cleared. We maintain our HOLD call with S$9.50 fair value.

Midas Holdings

OCBC on 4 Apr 2014

We believe Midas Holdings' weak share price performance YTD (-10.8%) has been driven by its dearth of order wins thus far. Nevertheless, Midas’ order wins can be lumpy in nature. More importantly, we believe the rail transport industry outlook remains buoyant, and this has been reinforced by recent positive measures highlighted by China’s Premier Li Keqianq during a State Council meeting. Looking ahead, we understand that Midas is targeting to win ~CNY400-500m and ~CNY500m of metro and international rail contracts this year, respectively. We are also expecting Midas to clinch CNY325-380m of high-speed railway contracts within the next two months. Reiterate BUY on Midas, with an unchanged fair value estimate of S$0.66.

Share price performance has been weak YTD
We believe Midas Holdings' weak share price performance YTD (-10.8%) has been driven by its dearth of order wins thus far. Midas has only managed to secure CNY71.9m of metro contracts for two China projects YTD, which is a pale comparison to the CNY292.4m contracts secured during the same period last year. Nevertheless, we note that order wins can be lumpy in nature. 

Industry outlook remains robust; new initiatives highlighted
The important focal point is that the rail transport industry outlook remains buoyant, in our view. In line with recent media reports that China will implement measures to support its economy following recent tepid economic data, it was reported that China has now outlined a number of key initiatives during a State Council meeting chaired by Premier Li Keqianq. Zeroing in on the railway sector, it was highlighted that at least 6,600 km of additional railway lines is estimated to be added this year, an increase of over 1,000 km from 2013. The financing will partly come from the issuance of CNY150b of bonds this year and the establishment of a Railway Development Fund, with a targeted size of CNY200-300b per annum. Other railway initiatives include encouraging banks and other financial institutions to actively support railway construction projects and strengthening oversight to ensure the acceleration of railway construction and steady increase in railway investments.

Awaiting new contracts; maintain BUY
We understand that Midas is targeting to win ~CNY400-500m and ~CNY500m of metro and international rail contracts this year, respectively. The quantum of high-speed railway (HSR) order wins would have to depend on the timeline of the tender exercise by China Railway Corporation (CRC). We are expecting Midas to clinch CNY325-380m of HSR contracts within the next two months. It is not uncommon for Midas to work on the aluminium extrusion profiles even before the actual contract is signed, given its long standing and solid relationship with its customers. This will help to expedite the delivery schedule once the contract is eventually signed. Reiterate BUY on Midas, with an unchanged fair value estimate of S$0.66.

Noble Group

OCBC on 3 Apr 2014

Noble Group Limited has entered into a share sale agreement with COFCO (Hong Kong) Limited to dispose its 51% stake in Noble Agri Limited (NAL) for an initial payment of US$1.5b. The closing amount will be adjusted after completion so that the final consideration is equal to 1.15x of 51% of the audited book value of NAL Group for FY14. As before, we see the proposed disposal as being consistent with Noble’s asset-light strategy, where it does not have to own upstream assets as long as it can secure the off-take. Anyway, it is still too early to make any drastic estimate changes, given that the deal is subject to several conditions with a long stop date of 31 Dec 2014 (unless mutually extended or terminated). Nevertheless, our fair value improves from S$1.03 to S$1.26 as we are raising our valuation peg from 11x to 13.5x FY14F EPS to reflect the improved investor sentiment towards commodity plays in general. Maintain HOLD.

Disposing 51% stake in Agri business
Noble Group Limited has entered into a share sale agreement with COFCO (Hong Kong) Limited to dispose its 51% stake in Noble Agri Limited (NAL); this for an initial payment of US$1.5b, but the closing amount will be adjusted after completion so that the final consideration is equal to 1.15x of 51% of the audited book value of NAL Group for FY14. As of end FY13, the audited book value of NAL Group was ~US$2.8b and net debt was ~US$2.5b. 

Capital recycling exercise
According to Noble, the deal will create a JV that will be COFCO’s principle base for sourcing food materials globally, which effectively combines Noble’s broad origination base and pipeline and risk management capabilities with COFCO’s leading access to the Chinese consumer. Noble adds that the deconsolidation of third party debt of NAL as well as the release of the capital currently invested in the business will significantly improve the group’s credit profit and financial metrics. As before, we see the proposed disposal as being consistent with Noble’s asset-light strategy, where it does not have to own upstream assets as long as it can secure the off-take. 

Positive pro-forma impact but we see it as one-off
According to Noble, it will receive ~USS$1.49b of net proceeds, which it will use to repay existing debt and for working capital purposes. In addition, the excess over book value is US$47.6m; the estimated gain on disposal is ~US$64.8m. And on a pro-forma basis, the disposal would have contributed some US$302.8m to its FY13 bottom-line. While we would see these gains as being one-off items, we believe there could be significant interest savings down the road.

Too early for drastic estimate changes
Anyway, it is still too early to make any drastic estimate changes, given that the deal is subject to several conditions with a long stop date of 31 Dec 2014 (unless mutually extended or terminated). Nevertheless, our fair value improves from S$1.03 to S$1.26 as we are raising our valuation peg from 11x to 13.5x FY14F EPS to reflect the improved investor sentiment towards commodity plays in general. Maintain HOLD for now.

Goodpack

OCBC on 2 Apr 2014

We draw investors’ attention back to fundamentals as speculation about possible share offer for Goodpack wanes. Since our last BUY call in Feb-14, the share price has gained 15%. We keep our fair value estimate of S$2.17 intact and downgrade to a HOLD. We acknowledge that Goodpack continues to hold compelling value propositions: its global presence and ~20% cost savings over alternatives. There are also barriers to entry from IBC design patent, stickiness of existing clients, and large capex spending. We believe Goodpack is among the top choices for any new synthetic rubber (SR) plant, as exemplified by Goodpack being the supplier for Singapore’s new SR plants, including the latest Sumitomo Chemical plant opened in Mar-14. Further catalysts for rerating could be 1) current trial-stage auto parts manufacturers switching over fully to IBCs before 2QFY15 as assumed in our base case, and 2) another upside risk is higher-than-expected demand from rubber industry.

Return to fundamentals as speculation eases

Goodpack recently announced that it has been approached by parties in connection with a possible transaction and discussions are on-going. Brambles, which also offers intermediate bulk containers (IBC) leasing among other packaging solutions, subsequently said it has approached Goodpack previously but it is not currently in talks. Instead of betting on whether there will be further upside through share offer, we prefer to draw investors’ attention back to fundamentals.

Competitive advantages and upside risks remain
Goodpack’s most compelling value propositions to its clients are its global presence and unique IBCs that yields ~20% cost savings over alternatives. On the other hand, there are barriers to entry in the forms of: 1) IBC design patent with 15 years remaining, 2) stickiness of existing clients, and 3) large capex spending of ~US$900m to match Goodpack’s current fleet size. Hence, we believe Goodpack’s business model is still sound and will continue to grow. We believe Goodpack is among the top choices for any new SR plant given its ~30% market share and track record. For instance, Goodpack has the supplier for new SR plants in Singapore, including the latest Sumitomo Chemical plant opened in Mar-14. We think a major upside surprise is current trial-stage auto parts manufacturers switching over fully to IBCs before 2QFY15 as assumed. We note that this is the third year of engaging auto parts clients, a relatively mature stage of the sales process. We re-iterate that accelerated growth in auto parts segment would follow due to the network effect whereby others adjacent to clients in the supply chain will switch over to minimise logistics handling system. Another upside surprise is higher-than-expected demand from rubber industry, from either existing accounts or new synthetic rubber (SR) plants. 

HOLD after 15% return
The share price has gained 15% since our BUY call on 5 Feb-14, briefly hitting an all-time high of S$2.28. We continue to like the company but are keeping our S$2.17 fair value estimate. Hence, we deem Goodpack fairly priced and change our call to a HOLD.

CapitaLand

OCBC on 31 Mar 2014

CapitaLand (CAPL) announced that it has acquired a 60% interest in two adjacent prime residential sites in Chengdu, China for RMB752m (S$155m). The project will yield ~4,600 residential units and the first phase is expected to launch by end 2014. The group has already successfully developed and launched Raffles City Chengdu, The Loft and The Botanica in the city, and we like CAPL’s strategy of deepening its presence in key sub-markets in which they have experience and expertise. The Chinese credit markets are experiencing increasing stress as authorities opt to let weaker companies go into financial default, and we believe this could throw up acquisition opportunities for CAPL as its Chinese peers grapple with tightening credit conditions and rising cost of debt. We note that the group enjoys a strong balance sheet with an estimated S$6.9b in cash and net gearing of 29%, after its recent AustraLand divestment. Maintain BUY on CAPL. Pending completion of these acquisitions, we opt to keep our fair value unchanged at S$3.50.

Acquires 60% interest in two Chengdu sites
CapitaLand (CAPL) announced that it has acquired a 60% interest in two adjacent prime residential sites in Chengdu, China for RMB752m (S$155m). These two land parcels have an est. GFA of 479,850 sqm, and are located within the central core of Chengdu’s Tian Fu New Area, which is focused on advanced manufacturing and high-end service industries. These sites are nestled in a mature, good class residential area and are well connected to landmarks such as New Century Global Centre (the world’s largest commercial building by floor space), No. 7 Middle School (one of China’s top secondary schools) and other retail, F&B and leisure facilities.

Deepening its presence in Chengdu
The acquisitions are subject to approval from authorities and are expected to be completed by 2Q14. The project will yield ~4,600 residential units and an anticipated 133k sqm will cater to first-time homebuyers and upgraders. Construction will begin in 2Q14 and the first phase will launch by end 2014. The group has already successfully developed and launched Raffles City Chengdu, The Loft and The Botanica in the city, and we like CAPL’s strategy of deepening its presence in key sub-markets in which they have experience and expertise. 

More acquisition opportunities could come from credit crunch
The Chinese credit markets are experiencing increasing stress as authorities opt to let weaker companies go into financial default, and we believe this could throw up acquisition opportunities for CAPL as its Chinese peers grapple with tightening credit conditions and rising cost of debt. Note that Chinese developer Zhejiang Xingrun Real Estate Co. has declared insolvency last week, and the yield on five-year AA- corporate bonds has leaped 129 basis points YoY to 7.75%. In the meantime, CAPL enjoys a strong balance sheet with an estimated S$6.9b in cash and net gearing of 29%, after its recent AustraLand divestment. Maintain BUY on CAPL. Pending completion of these acquisitions, we opt to keep our fair value unchanged at S$3.50.

CSE Global

OCBC on 28 Mar 2014

Following the successful divestment of CSE Global’s entire stake in Servelec Group in Dec last year, we believe management will focus on driving its growth largely from the oil and gas sector. CSE has significant exposure to the Gulf of Mexico (both the U.S. and Mexico side), and we expect it to benefit from positive trends arising from this area. Looking ahead, we also do not expect CSE to make any further provisions for cost overruns for its Middle-Eastern project, which would aid its margins recovery. We re-work our assumptions following a change in analyst coverage, and now forecast CSE to register core PATMI growth of 18.7% and 9.3% in FY14 and FY15, respectively. Applying a 9x target PER peg to our FY14 EPS forecast, we derive a fair value estimate of S$0.63 (previously S$0.96 before the Servelec Group divestment). Maintain BUY.

Focusing largely on the oil and gas sector
Following the successful divestment of CSE Global’s entire shareholding interest in Servelec Group in Dec last year, we believe management will focus on driving its growth largely from the oil and gas sector. This sector contributed 75% of CSE’s total revenue from continuing operations in FY13. Oil and gas related activities remain at healthy levels in most regions, in our view. CSE has significant exposure to the Gulf of Mexico (both the U.S. and Mexico side), and we expect the group to benefit from the on-going recovery following the ill-fated Macondo oil spill incident and the imminent liberalisation of the Mexican oil and gas market. There is also positive sentiment within the subsea sector. Market watcher Infield Systems has forecasted subsea capex to grow at a robust 15% CAGR from US$19b in 2013 to US$33.3b in 2017. CSE provides control systems for its subsea customers. Its order book stood at S$227.2m (as at 31 Dec 2013), a decline of 18.4% as compared to end FY12. However, management highlighted that this consists of higher quality projects and hence could augur well for its FY14 gross margins.

No further provisions for project cost overruns expected
CSE’s FY13 bottomline took a hit as it made provisions for project cost overruns amounting to S$8.1m. Looking ahead, management is hopeful that it will not have to make further provisions for this Middle-Eastern project in 2014, as it has provided some buffer in terms of assumed project completion timeline when making its provisions. 

Maintain BUY
We re-work our assumptions following a change in analyst coverage, and now forecast CSE to register core PATMI growth of 18.7% and 9.3% in FY14 and FY15, respectively. We are expecting a backend-loaded FY14 due to the timing of certain key projects and expectations of new order wins in 2H14. Applying a 9x target PER peg to our FY14 EPS forecast, we derive a fair value estimate of S$0.63 (previously S$0.96 before the Servelec Group divestment). Maintain BUY.